Thursday, July 23, 2009

Talk of Green Shoots = Higher DJIA. Always?

Megan McArdle references headlines from the summer after the last deflationary crash in 1929. From July 23rd 1930:

[Hoover] Administration members reported telling Wall Street that business has turned corner, and should curve slowly upward until winter, becoming clearest in October. No forecast beyond that ventured. However, administration strenuously denies rumors of using "its influence to bring about organized support for the stock market."

Irving Trust July review says we may be entering "ultimate pit of the depression;" sees mostly bad news in June, including declines in most lines of business, lower commodity prices, stock market declines, and possible tariff reprisals. Nevertheless, advises remembering that "It is always darkest before dawn."

Sentiment improved by market support yesterday. Conservative observers still advise buying on dips and selling rallies, but if market can get above previous resistance, would be considered confirmation of uptrend and convert many observers to the bull side.

Banks reported deposit increase by $257M in past week, to $21.317B; most of money not employed; increase of $37M in loans and $82M investments.


Technical analysis: Next week is crucial to determining whether the current rally was due to fundamental factors or just technical. As of last Friday market had recovered about 50% of the June break. Bear test on Saturday and Monday then wiped out about a third of the rally gains. New support yesterday was encouraging; if market continues up, this indicates rally is due to fundamental reasons (increased business confidence).

Current month is the anniversary of the business slowdown; October will be anniversary of the stock decline. "Every succeeding day means we are just that much nearer a definite turn for the better." Meanwhile a Canadian broker points out: In the 1907 panic March 14 was the low, and the nearest low afterwords was 224 days later. Likewise in the 1929 panic, Nov. 13 was the low and the nearest low afterwords was 224 days later (on June 25)!

There's more, and you can go to her website for more newspaper quotes from July 23, 1930: Business improving, cash on the sidelines, technical improvement, fundamental improvement... yada, yada. We can relate the summer of 1930 to today, using Mamis' view of market bottom's. Traders and investors had all the same lingo we hear today and I'm sure were all "cautiously optimistic" and nobody wanted to miss the "recovery" which was just around the corner. I'll add the charts annotated with the Mamis points:

So, let's look to see what the intervening couple years had in store for all those investors' "green shoots". Ouch.

Of course this is a new century and the political and monetary minds may have learned something in the intervening 80 years; the Hoover administration was all about balanced budgets, fiscal restraint, and tight monetary policy and ignored the huge deflationary influence of increased capacity and rising unemployment. Thus we saw bank failures and a massive abrupt deleveraging of our indutrial and financial industries. Today, arguably we have a looser monetary policy and are flooding the market with liquidity. Will it have a material effect?

Investors and traders likely learned something as well and may be less giddy this time around. But all this is doubtful.

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