Similarities to U.S. 1937, Japan 1998 21 comments
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Do cycles exist in the financial markets?
Take a look at the black line in the graph below. The U.S. stock market had a gigantic bubble back in 2000. When it burst, stocks came crashing down. Over the next several years, policy makers did all they could to get things going again, focusing mostly on monetary policy and increasing homeownership. This had the unintended consequence of creating too much inflation, which caused central bankers to tighten aggressively. Thus began what will almost certainly be declared a recession.
This mimics the US stock market bubble back in 1929 – the red line. When it burst, stocks came crashing down. The next several years, policy makers did all they could to get things going again, focusing mostly on fiscal policy and creating jobs. Over the next several years, this had the unintended consequence of creating too much inflation. In 1937, central bankers began to tighten via reserve requirements. Thus began what was called the Roosevelt Recession.
Japan had its own bubble in the late 1980s which deflated in the 1990s. That’s the blue line.
This is a chart that I first created many years ago. After the NASDAQ crash in 2000-2002, many people made the comparison between the NASDAQ and the 1929-1932 Dow. The interesting thing is, I don’t believe that many people have kept the comparison ongoing. They should, because the similarities — in both events and in price action – are striking. Click to enlarge:
I lined up the peaks along the x-axis, and I chart the graph weekly. The y-axis is the percent change. For instance, +1 equals a 100% gain. The peak in all the markets occurs at about week 400. They bottom around week 540. There’s a huge rally that goes into week 600. From there, things get a little muddled till another decline starts at around week 800. Right now, we’re at week 850, which is about 450 weeks after the NASDAQ peak in 2000. 450 weeks after the 1929 Crash puts us into the 1937-1938. As far as the Nikkei, 450 weeks from the 1990 peak puts us in the August-October 1998 period.
Here’s the good news. About 450 weeks after the Great Depression Crash, the market found its footing and rallied. Around 870 weeks after the Japanese market peak, the Nikkei bottomed out. After the Nikkei bottomed, that market rallied from 12,880 to 20,790 over the subsequent two years. After the Dow bottomed at 100, it rallied up to 150 just a few months later.
Now this analysis is fraught with potential pitfalls. But I have to tell you that I am struck by the similarities, particularly the 1937 analogy. That’s because the run-up prior to the 1929 Crash was in large part caused by enthusiasm over the introduction of a revolutionary new commercial technology: radio. You got a bubble, a devastating crash, followed by a recovery and inflation of another bubble. That’s exactly what happened after our tech crash.
Of course, this could also be the human tendency to find patterns in just about anything. We’ll see.
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This article has 21 comments:
You seem to be skipping over about 4 years. 1929-1933 was a period of severe deflation. The primary government response was to try to balance the budget, which meant spending cuts and tax increases since the tax base was eroding so significantly. This approach worked so badly that Roosevelt was elected to try a new approach.
While the stock charts may look similar, government response was strikingly different than it is today.
Make no mistake that this will be worse than the Great Depression. When the system failed then most of America still had its roots in family farming or, those who lived in cities, had family or friends involved in family farming. To some extent, people could fall back on this resource for the basics. It was austere, for sure, but not life-threating. What may be coming will be different.
As for the rally you speak of, if my memory serves me correctly, I think the Dow took a bit over 25 years to reach the levels of pre-crash, not the 16+ years that you refer to here. Of course, I guess you are referring to a major positive movement in the markets, not recovery.
you are quite the pessimist... don't you know we are going to have Obama at the helm. We'll be passing cap and trade next year! and handing out free healthcare vouchers... it's a RIGHT.
Exactly!
Even worse.... His Pick for Secretary of the Treasury...
Nancy Pelosi!
Hehehehehe
Where's the cliff...
On the other hand, the stock market will not recover until the overleveraged hedge funds go belly up. Contrary to the BS spouted by CNBC, the market is not going down because of "lack of confidence." It is going down because hedge funds are being forced to liquidate to meet investor redemptions and brokers' margin calls.
When the DOW gets to 7000, I might help the bastards out and buy stock. Until then, I'll stand by and watch their pain.
tierneylab.blogs.nytim.../
not all true... there are MANY scared investors calling their bets thusly contributing to the LARGER problem you state..
all in all, I'm with you.
I'm barely in the market now, but I've got many years to watch it recover.... but I like the 6500 point to jump in...
John1, Curbs-In, thedozer: Why are you all so pessimistic towards Obama and "liberals?" It's amazing to me how staunch conservative rhetoric is despite the complete contrary evidence that speaks against the "wisdom" of Reaganomics, trickle-down theory, deregulation, and lowering upper-class tax rates. Are you three for real? Have you been paying attention to the economics of the last 30 years (especially the last 7.5)? The last time we had a balanced budget and improving middle-class wages (which drive our economy) was in the late 90's? Seriously, wake up!
why, you may ask? because i was either in school and working to pay it off or just working to make a better way for myself in this world. politics has nothing to do with my ability to work my ever loving ass off and make my life happen the way i want it to. no excuses here, thank you very much.
as for the 'end of the world' with the stock market...well...it's a grown up game of gambling with some very smart people able to walk away with some hefty rewards. not everyone is a winner. and for god's sake, don't put money on the table if you can't take the good with the bad! lord knows i am self-teaching myself about the market and will wash my own money down the toilet, if i please. i do not enjoy allowing others to do it for me. i will also count the rewards as they come along also!
so, in closing, stop whining everyone. whether we lose everything or not does not kill our spirit to be the best we can all be...no matter what!
that's what this country is about!
when you start with nothing and create it all for yourself, it's easier to see, i suppose.
money comes and money goes...what you learn along the way and pass on makes all the difference.
Haven't you been posting that same comment elsewhere, on a number of financial sites, numerous news sites, and quite a few blogs? I see a pattern here.
THe 1929 events were precipitated by the FED which had raised the FF to 6% in order to address the excessive stock market "speculative activity".
The stock market had imploded causing global markets to implode resulting in the global economic decompression.
Now,all of the U.S agencies have addressed the issues massively but it will take incremental time to see the results.
In the meantime the press contributes to investors psychosis by distorting the facts.
Shortly we will witness a dynamic stock market rebound.
I do feel though ,that the demand for valiums will increase exponentially.
FXP - 50% up today,
SKF, SRS, QID, DXD... many. No need to short individual stocks. No need to short stock at all, you can make huge profit.
There are good comparisons to be made between the bursting of the '29 bubble and the bursting of the Internet bubble, however. Both involved a large number of stocks being valued using ridiculous metrics (who can forgot the number-of-site-visits ratio?!) and speculation on a large scale. The major difference was that basically the entire market was being driven up in the late '20s by speculation; while many companies were overvalued in the Internet bubble, the worst of the speculation was mostly limited to the Internet companies.
I'm also not terribly convinced that the stock market decline after 1937 was the result of a bubble so much as it was the result of continued domestic hardships, global economic conditions, and extreme instability in the world --- particularly the rise of the Nazis in German and Fascists in Italy and Spain. The market didn't rebound for about 9 years primarily because of the Second World War which, primarily to popular belief, was not really good for the economy at the time.
Here's what is indisputable. When you line up the peaks, there's a Crash, then a rebound, then an extended decline that lasts about 2-1/2 years, then a monster recovery that fails to take the asset back to new highs.
The stuff about radio -- probably coincidence as much as anything else. Although RCA did drop 99% during the 1929 crash, kind of like what some internet companies did in 2000-2002.
Last, I should have been more specific when I said "after 1929". I meant after Roosevelt got into office. Sophisse is correct in pointing out that for the 3-1/2 years after the 1929 Crash, the administration felt it was best to let the guilded crowd suffer the consequences of their deeds.
-- Don