DOW down Nearly 20 Percent from Peak: Lessons from the Great Depression: Part XII. Is the DOW now Tracking with the California Housing Market?

I was watching CNBC on Wednesday morning and they were on a Fed watch with a countdown and all other bells and whistles. As the day went along, these talking heads were talking about good earnings here, the resilient American consumer, and all this other pointless Chihuahua yammering to keep people from asking the hard questions and letting folks realize that those spewing “investment advice” are nothing more than glorified sales people. Well it came as no shock to anyone that the Federal Reserve stood pat and did not move rates. In fact, according to the Fed inflation is only slightly out of whack:

“(Bloomberg) Higher headline rates of inflation have shown only a few tentative signs of embedding themselves in core inflation or in longer-term inflation expectations,” Fed Vice Chairman Donald Kohn said in a speech to a conference today in Frankfurt.”

So with this news which came in the afternoon, the market shot up nearly 100 points as delusional buyers jumped back into the shark tank. But as the day was winding down, the market gave back essentially all the gains to end the day with a push. So much for the Federal Reserve’s power. On Thursday, the gates were opened up and the raging bears came flying out. It was an odd day for the market. The housing sales numbers were better than forecasted and initial jobless claims came right at market expectations. Yet that inflation that is “tentative” came out when oil hit $140 a barrel and sent the market careening to the floor. Do you realize that the DOW is down 9.4% for the month? In fact, the DOW is having the worst month since the Great Depression:

dow-june.jpg

If that isn’t bad enough the DOW is down nearly 20% from last October:

dow-2590.jpg

Does anyone really still believe we are not in a recession? Come on now. And if you arrive at the conclusion that we are in a recession then you need to admit to yourself that the numbers being put out by the government simply do not coincide with reality. The problem that we now face is that we are in need of a paradigm shift. Those that are viewed at least by the overwhelming public as “experts”, the brokers, analysts, paid economists, agents, mortgage lenders, and pundits are to a large degree charlatans. The fact that we now stand with oil at $140 a barrel, the U.S. Dollar tanking, the housing market collapsing, is proof that their belief system is a farce.

It would now seem that we are using parallels from the Great Depression over and over:

“NEW YORK (MarketWatch) — U.S. stocks fell sharply Thursday with the blue-chip index enduring its worst June so far since 1930, and plunging to its lowest finish since Sept. 11, 2006, after getting slammed hard as crude soared to new highs and Goldman Sachs disparaged U.S. brokers and advised selling General Motors Corp.”

“(The Economist) Housing Dropping Like a Brick: House prices are falling even faster than during the Great Depression”

“(Washington Post) The measure marks Washington’s most ambitious response to a housing slump more severe than any since the Great Depression. More than 1.2 million homes have fallen into foreclosure, and home prices are plummeting. Yesterday, the Standard & Poor’s/Case-Shiller Home Price Index of 20 cities reported that home prices fell 15.3 percent in April versus a year ago, the steepest decline since the index was created eight years ago.”

Apparently this Great Depression talk is no longer just part of a historical series on this blog.  I think given what is happening to the markets this month, it is important to remember a bit of history. Today we’ll look at the ever popular Frederick Lewis Allen and contrast how eerily similar market conditions are today. This is part XII in our Great Depression series:

1. Personal Story by a Lawyer from a Previous Asset Bubble. Can we Learn from the Past and How will the Housing Decline Impact You?

2. Lessons From the Great Depression: A Letter from a former Banking President Discussing the Bubble.

3. Florida Housing 1920s Redux: History repeating in Florida and Lessons from the Roaring 20s.

4. The Menace of Mortgage Debts: Lessons from the Great Depression Series: Part IV: Where do we go After the Housing Crash?

5. Business Devours its Young: Lessons from the Great Depression: Part V: Destroying the Working Class.

6. Crash! The Housing Market Free Fall and Client #10 Contagion.

7. Winston Smith and the Bailouts in Oceania: Lessons from the Great Depression Part VII.

8. Sheep Back to the Slaughter: Lessons from the Great Depression Part VIII: All the Change and Bear

Market Rallies.

9. A Bubble That Broke the World

10. The Sham of our Current Unemployment Numbers

11. Understanding the Impact of Asset Deflation and Consumer Inflation.

At a certain point can we drop the façade and accept that things are really bad? Then and only then, can we start confronting the brutal reality that we have a lot of cleaning up to do. Yet it would seem that the mistakes from the past are being repeated once again. Take a look at some of the things going on before the Crash of 1929:

“In view of what was about to happen, it is enlightening to recall how things looked at this juncture to the financial prophets, those gentlemen whose wizardly reputations were based upon their supposed ability to examine a set of graphs brought to them by a statistician and discover, from the relation of curve to curve and index to index, whether things were going to get better or worse.

Their opinions differed, of course; there never has been a moment when the best financial opinion was unanimous. In examining these opinions, and the outgivings of eminent bankers, it must furthermore be acknowledged that a bullish statement cannot always be taken at its face value: few men like to assume the responsibility of spreading alarm by making dire predictions, nor is a banker with unsold securities on his hands likely to say anything which will make it more difficult to dispose of them, unquiet as his private mind may be. Finally, one must admit that prophecy is at best the most hazardous of occupations. Nevertheless, the general state of financial opinion in October, 1929, makes an instructive contrast with that in February and March, 1928, when, as we have seen, the skies had not appeared any too bright.”

I realize that there were many sitting on the sidelines wondering, “this is absolutely insane and is completely wrong” yet kept their mouth shut because they didn’t want to be seen as a doom and gloomer or maybe their business simply did not allow open dissent. But ironically our most prestigious and old institution, Harvard was wrong again this week and was wrong during the Great Depression:

“But if ever such medals were actually awarded, a goodly number of leather ones would have to be distributed at same time. Not necessarily to the Harvard Economic Society although on October 19th, after having explained that business was “facing another period of readjustment,” it predicted that “if recession should threaten serious consequences for business (as is not indicated at present) there is little doubt that Reserve System would take steps to ease the money market so check the movement.” The Harvard soothsayers proved themselves quite fallible: as late as October 26th, after the wide-open crack in the stock market, they delivered cheerful judgment that “despite its severity, we believe that slump in stock prices will prove an intermediate movement not the precursor of a business depression such as would entail prolonged further liquidation.” This judgment turned out, course, to be ludicrously wrong; but on the other hand the Harvard Economic Society was far from being really bullish.

Nor would Colonel Leonard P. Ayres of the Cleveland Trust Company get one of the leather medals. He almost qualified when, on October l5th, he delivered himself of the judgment that “there does not seem to be as yet much real evidence that the decline in stock prices is likely to forecast a serious recession in general business. Despite the slowing down in iron and steel production, in automobile output, and in building, the conditions which result in serious business depressions are not present.” But the skies, as Colonel Ayres saw them, were at least partly cloudy. “It seems probable,” he said, “that stocks have been passing not so much from the strong to the weak as from the smart to the dumb.”

Now let us contrast that with what the Joint Center for Housing Studies put out via the center director in September of 2006:

“The headline hints of catastrophe: a dot-com repeat, a bubble bursting, an economic apocalypse. Cassandra, though, can stop wailing: the expected price corrections mark a slowing in the rate of increase – not a precipitous decline. This will not spark a chain reaction that will devastate home owners, builders, and communities. Contradicting another gloomy seer, Chicken Little, the sky is not falling.”

Now you would think that this is enough but this week Harvard put out another study being overly optimistic on the state of housing. Looks like someone is being set up for another colossal forecast failure.

You know it is important to highlight that during the Great Crash of 1929, even in that horrific month of October there were burst of optimism in the market. It took 3 years before hitting the absolute bottom:

“The New York Times averages for fifty leading stocks had been almost cut in half, failing from a high of 311.90 in September to a low of 164.43 on November 13th; and the Times averages for twenty-five leading industrials had fared still worse, diving from 469.49 to 220.95.

The Big Bull Market was dead. Billions of dollars’ worth of profits-and paper profits-had disappeared. The grocer, the window-cleaner, and the seamstress had lost their capital. In every town there were families which had suddenly dropped ‘from showy affluence into debt. Investors who had dreamed of retiring to live on their fortunes now found themselves back once more at the very beginning of the long road to riches. Day by day the newspapers printed the grim reports of suicides.

Coolidge-Hoover Prosperity was not yet dead, but it was dying. Under the impact of the shock of panic, a multitude of ills which hitherto had passed unnoticed or had been offset by stock-market optimism began to beset the body economic, as poisons seep through the human system when a vital organ has ceased to function normally.

Although the liquidation of nearly three billion dollars of brokers’ loans contracted credit, and the Reserve Banks lowered the rediscount rate, and the way in which the larger banks and corporations of the country had survived the emergency without a single failure of large proportions offered real encouragement, nevertheless the poisons were there; overproduction of capital; overambitious (expansion of business concerns; overproduction of commodities under the stimulus of installment buying and buying with stock-market profits; the maintenance of an artificial price level for many commodities, the depressed condition of European trade.

No matter how many soothsayers of high finance proclaimed that all was well, no matter how earnestly the President set to work to repair the damage with soft words and White House conferences, a major depression was inevitably under way.

Nor was that all. Prosperity is more than an economic condition; it is a state of mind. The Big Bull Market had been more than the climax of a business cycle; it had been the climax of a cycle in American mass thinking and mass emotion. There was hardly a man or woman in the country whose attitude toward life had not been affected by it in some degree and was not now affected by the sudden and brutal shattering of hope. .With the Big Bull Market zone and prosperity going, Americans were soon to find themselves living in an altered world which called for new adjustments. new ideas, new habits of thought, and a new order of values. The psychological climate was changing; the ever-shifting currents of American life were turning into new channels.

The Post-war Decade had come to its close. An era had ended.”

Even though the DOW is down nearly 20% from its peak reached last year, there is still this general sentiment that things are winding down and all will be well. Do people realize that companies have written off about $391 billion in bad loans with some expectations looking at $1 trillion before things are done? What about those pesky option ARMs that are starring us directly in the face? We are quickly approaching the psychological end game. The farce will be up soon because there is simply too much debt floating out in the market. It was never sustainable. The cracks are already being seen in the credit default swap market and derivatives are swimming in a market of multiple trillions, which is so absurd, that once people realize that no one has the Midas touch, the market will start to evaporate.

Cover your assets folks and make sure you are invested wisely for 2008. This is the year when the rubber meets the road. This will happen no matter what the financial engineers have in their Pollyanna models.

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16 Responses to “DOW down Nearly 20 Percent from Peak: Lessons from the Great Depression: Part XII. Is the DOW now Tracking with the California Housing Market?”

  • Not surprisingly, MSM commentary on Thursday’s Dow plunge quickly mention that it hasn’t been this low since March, but conveniently fail to mention that it has now fallen below the high reached **8 Years Ago**. Ponder the implications…

  • In traditional economics wont a weaker currency lead to higher employment sense real earnings would then diminish?

  • Wouldn’t all this get straightened out faster if we truly understood monetary policy?
    Why do we borrow money from a Central Bank and pay interest on it?
    Section 8 of the United States Constitution has 2 very important statements in it:

    First, only Congress has the authority and power: To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures;

    Second, To provide for the Punishment of counterfeiting the Securities and current Coin of the United States;

    Funny, but does no one have a comment on this? The first statement: Is what the Federal Reserve does, not Congress? Why?
    Second statement: The Federal Reserve counterfeits money, they print paper with denomination numbers that have zero value, that’s counterfeiting, right?

    Are we all so caught up in our own pathetic lives, that we have allowed what our forefathers fought so hard, with loss of life, but won our liberty by chasing these thieves and pirates back to England. And, we let them back in??? !
    The Federal Reserve and the criminals behind it are the cause of every war, protest, sickness, economic disaster, the dividing of citizens, and all the unnecessary deaths of the young men and women of this world.

    But we all standby and watch, and argue over the smallest and meaningless things so we can out do the Jones’. All this, as our entire country is being sold out from under us. No one seems to notice, and no one seems to care. Why?

  • Federal Reserve Bank is the criminal element behind all the issues, get rid of the disease.

  • We love the Federal Reserve, don’t we?

  • To echo what the Dr. is saying about optimism:

    It’s Friday, June 27th @ 12:30pm (PST). The market has 30 mins until close.
    KBH just reported a very bad quarter. It beat estimates on the down side – by a lot. The CEO advises tough times ahead.
    Revenues down to $639M (from $1,410M last year)! The loss $256M 2Q alone…

    Yet we have the stock trading close to session highs. Why would you want to own such a stock? Evidently alot of people think it’s at bottom…
    Optimism based on “it must be bottom” mentality and/or the Government bail-out possibility… Who knows.

    Yes – I think hope is the only thing keeping much of the market afloat.

  • Personally, I always think in terms of the DOW’s highwater mark in March 2000 of 11,715. That’s my benchmark, which is now underwater. I got two broadbased mutual funds in about November of 1999 worth $10,000 then. Now they are worth less than $10,000. I think a lot of people are in the same boat. People who have left a lot of money in 401k’s are getting killed. No retirement if their investments are interest negative and their principle is being eaten away by the market. For the last eight years my puny interest at the local credit union has looked good. Nothing like gold though.

  • Every industry has an effect on another. A lot of industries are getting hurt right now and the people on TV saying everything is alright is obviously not looking at the middle class who is definitely struggling to pay bills let alone invest there hard earned money into stocks and real estate. Every industry is hurting.

  • Everybody was loving the Fed when rates were falling pushing there home values up. I saw the enemy and it was us. If it was not for our greed we would all be styling. We all could have refi’d and saved a few hundred bucks on our mortgage payments and gone on our merry way. No, we would have rather saved $600 and got a check for 50 grand in the deal. Home owners had the chance to have a mortgage at historically low rates. I think we should all apologize to the fed for not taking the gift they tried to give us.

  • OPM - Other People's Money

    Know the term OPM? It’s called 401k plans. The popularity is what caused the run-up in the stock market with A-holes gambling with your hard-earned money.

    Why do you think the govt, employers, and financial planners (yeah right) have been pushing people to invest in 401k’s??

    To make the economy look strong, make company stock look strong, and put money in the pockets of bottom feeders.

  • A few years ago I found some old newspapers from the 1930’s in my mother’s attic. I read the headlines of course but what was really mesmerizing were the classified ads. Real Estate. I took them to the local watering hole and enjoyed showing people just what houses in their neighborhood were selling for during the Great Depression. $25,000 was a mansion. $50,000 more bedrooms and fireplaces than fingers on your hands and you had extra space for the servants, if you still had any. Wanna know why ‘turkey’ was a Thanksgiving treat? Those birds were EXPENSIVE. So were electrical appliances. A lamp cost 10 bucks but it was made of brass. Cars too were not cheap compared to real estate. A mid sized sedan was $800. A Cadillac two or three times that. That is what is so
    interesting. Our manufactured goods have declined in price relative to real estate since the ‘halcyon’ ? days of the depression. If we make $800 our baseline for a midsized car, say a Camry, a Mercury Mountaineer, an Altima, a middleclass home in the mid 1930’s only cost about 6-8 times as much. If the same car today costs $25,000 6 to 8 times that would not buy you anywhere near the comparable housing. If you are going to say a 1935 car is not the equal of the modern car I would agree. Batteries, tires and tune ups were regular expenses but, OTOH, would anyone dare argue that 1935 house that cost$6000 new is not superior to the vinyl and particle board construction of a modern $350,000plus dwelling? BTW I think I figured out, at least in part, why the Congress is so hot to bailout homebuyers who bought at the peak of the market. The United States
    has 435 plus Congressman. Senators don’t matter as they are nearly always mega rich or soon to get that way once elected. Since 2002 we’ve had three House elections. Even if only 5% of the seats change hands that is 43 Congressman moving into the Washington area each election cycle. Three elections equal 129 Congressman ( plus staffers) coming to Washington since 2002. They had to buy homes in the DC metro area. They bought during a rampant bull market. Congressman don’t live in Georgetown, by and large, they live in the Maryland and Virginia suburbs where their own home values are crashing. If you got elected in 2002, 2004 or 2006 you very likely bought a home in the DC suburbs in 2003, 2005 or 2007. You very likely bought a house, based on your Congressional salary, a house in the $600,000 to $1,000,000 range. But it is now in the $400,000 to $700,000 range. Ooops! Need some legislation here.

  • Everyone will be shocked by how fast this all goes down… We sit here and want it to go faster, but this is already going at warp speed.

    The personal computer / internet are accelerating everything beyond any talking heads imagination. Only Whitney and a few others seem to get it…

  • oilwelldoctor

    Another good read Dr. Thanks. Our Coffee boys here in Qatar are from Sri Lanka and Pakistan. The make the eq. of $300.00 a month and are happy to get it and work hard for it. Out of that they have to buy their own uniforms and their food. Yes…I know it sucks.

    People in America don’t know how good they got it.

    Keep up the good work.

  • Dr. HB,
    Given that it looks as though 401ks are going to be wiped out, should we reduce the amount contributed to it each month to a minimum? At least then we would see more money in our paychecks which will not be lost in the stock market.

  • Dr. HB,
    With 401ks losing money right now, I think it would be wise to reduce the % of income going into these. What do you think?

  • MIght want to consider putting your 401K , IRA investments into electric utility companies. Many pay dividends above what banks are offering for CDs and, given the cost of steel, copper etc their book value is likely understated. As electricity is essential to modern life people will continue to buy it no matter what and put it at the top of their bills to pay. As electric cars become available demand will only grow and Congress won’t have the guts to force utilities to cut back on coal fired generation and cause even greater rate hikes on their constituents. Can’t think of any sector that is safer including oil and gas.

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