During Oct 2010, Financial Thoughts was concerned whether 2012 will be similar to 1932.
Well, what was the situation in 1932? Gloomier than in 1928/29 when the Great Crash happened in the US. In 1932, the stock markets touched the lowest level, below 1928 (or 1929) crash levels. The US economic conditions deteriorated and the unemployment level reached 25% in 1932. We discussed about the parallels between 1929 Crash and 2009 Crash and discussed some of the common reasons behind downturns i.e. - the structural weaknesses, reckless lending, high leverage, speculation, asset bubbles, massive bank failures, stock market crash, etc. were some of them.
We had also discussed about the parallels of 2009 Crash to the Collapse of Japanese economy after their fantastic economic growth in the 1970s and 1980s, where Japan witnessed fast rise in real estate, stock market and all asset classes fuelled by cheap credit policy. But mainly due to mismanagement of the interest policy regime, the stock market crashed, debt crisis followed, banks collapsed, triggering bailouts by Japanese Govt, which sound so similar to the US story of 2008 end/early 2009.
As we have just begun 2012, it makes worth a look into the comparison to 1932. . Despite the risks of Euro Crisis, which may lead to Greece default or some countries quitting Euro can create 'neo-Lehman' situation, as we stand today, it is highly unlikely that 1932 will get repeated in 2012.
Financial thoughts salute Ben Bernanke for taking actions that prevented a repeat of 1932. In USA unemployment has dropped below 9% instead of shooting up to 25% as in 1932. The consumers still spend unlike in 1932, when consumer spending dropped due to deleveraging, unemployment, erosion in networth due to fall in asset values, traceable to the stock market crash / real estate crash of 1928/29. Lower consumer spending meant lower demand for goods and services. Business dropped leading to more shutdowns and more unemployment, which reached 25% in early 1930s. Stock market crashed below 1929 levels.
Clearly, this is avoided. (Let us take a sigh of relief - for now)
Taking a great risk of fueling asset bubbles, destabilizing prices and eroding the value of the dollar, Bernanke launched a series of Quantitative easing after lowering the fed rates to 0.25%. The risk taking paid off as US avoided another 1932! US was fortunate to have a student of 1928 Crash (Ben took the PhD on this topic) as the Fed governor. Ben fought against the threat of deflation like the Highland Scots in the battle of waterloo! (It is pertinent to note that linked to gold standard, the dollar printing was restricted and US Govt/Fed did not inject liquidity into the economy in 1930s. International trade had dropped due to protectionism. Overall, the deflation set in causing drop in prices, translating into losses for businesses, that managed to survive the Crash. More unemployment. Fed kept interest rates were high. All of the above ensured the recession continued into a decade.)
Of course, the world also acted together. The world leaders met couple of times and avoided the foolishness of too much protectionism.
So far so good!
However, the risks remain. Risks are quintessential. It never goes away. It regenerates in new forms!
1. US economy has shown improvement, but that it is agreed that the pace is slow. Many critics point out that the US economy is artificially popped up with liquidity. It is like a patient on oxygen.
2. Europe debt crisis has not gone away. Greece is still struggling even after some write offs have been agreed. Euro crisis is a political mess in as much as Germany wants to impose austerity on Greece. The effect is that while German standard of living continues to improve, Greece suffers. Portugal and Italy may re-emerge with more debt surprises.
3. USA's rising debt (nearly USD 16 trillion), which is more than 90% of US GDP is considered by many as a huge risk. Historically, debt level above 90% GDP has been seen as a drag on growth.
4. Huge US deficits are a challenge for any future US government. As critics say, a portion of the recovery was possible because of the borrowing from the future generation.
5. Although unemployment improved, there is still a long way to go before the labour market achieve normalcy. Due to losses suffered from the stock/ real estate market crash, many Americans are still struggling to meet both ends meet. Retirees have come out of retirement and still doing two jobs! Young men get frustrated and start protests such as 'Occupy Wall Street' movement.
What this mean to investors? Well Be on Guard. Your hard earned money could be under attack. Remember the best two principles of Warren Buffet (a) Never lose money in investments/savings (b) Always remember the first rule. It is a tough job; but very little alternatives.
Well, what was the situation in 1932? Gloomier than in 1928/29 when the Great Crash happened in the US. In 1932, the stock markets touched the lowest level, below 1928 (or 1929) crash levels. The US economic conditions deteriorated and the unemployment level reached 25% in 1932. We discussed about the parallels between 1929 Crash and 2009 Crash and discussed some of the common reasons behind downturns i.e. - the structural weaknesses, reckless lending, high leverage, speculation, asset bubbles, massive bank failures, stock market crash, etc. were some of them.
We had also discussed about the parallels of 2009 Crash to the Collapse of Japanese economy after their fantastic economic growth in the 1970s and 1980s, where Japan witnessed fast rise in real estate, stock market and all asset classes fuelled by cheap credit policy. But mainly due to mismanagement of the interest policy regime, the stock market crashed, debt crisis followed, banks collapsed, triggering bailouts by Japanese Govt, which sound so similar to the US story of 2008 end/early 2009.
As we have just begun 2012, it makes worth a look into the comparison to 1932. . Despite the risks of Euro Crisis, which may lead to Greece default or some countries quitting Euro can create 'neo-Lehman' situation, as we stand today, it is highly unlikely that 1932 will get repeated in 2012.
Financial thoughts salute Ben Bernanke for taking actions that prevented a repeat of 1932. In USA unemployment has dropped below 9% instead of shooting up to 25% as in 1932. The consumers still spend unlike in 1932, when consumer spending dropped due to deleveraging, unemployment, erosion in networth due to fall in asset values, traceable to the stock market crash / real estate crash of 1928/29. Lower consumer spending meant lower demand for goods and services. Business dropped leading to more shutdowns and more unemployment, which reached 25% in early 1930s. Stock market crashed below 1929 levels.
Clearly, this is avoided. (Let us take a sigh of relief - for now)
Taking a great risk of fueling asset bubbles, destabilizing prices and eroding the value of the dollar, Bernanke launched a series of Quantitative easing after lowering the fed rates to 0.25%. The risk taking paid off as US avoided another 1932! US was fortunate to have a student of 1928 Crash (Ben took the PhD on this topic) as the Fed governor. Ben fought against the threat of deflation like the Highland Scots in the battle of waterloo! (It is pertinent to note that linked to gold standard, the dollar printing was restricted and US Govt/Fed did not inject liquidity into the economy in 1930s. International trade had dropped due to protectionism. Overall, the deflation set in causing drop in prices, translating into losses for businesses, that managed to survive the Crash. More unemployment. Fed kept interest rates were high. All of the above ensured the recession continued into a decade.)
Of course, the world also acted together. The world leaders met couple of times and avoided the foolishness of too much protectionism.
So far so good!
However, the risks remain. Risks are quintessential. It never goes away. It regenerates in new forms!
1. US economy has shown improvement, but that it is agreed that the pace is slow. Many critics point out that the US economy is artificially popped up with liquidity. It is like a patient on oxygen.
2. Europe debt crisis has not gone away. Greece is still struggling even after some write offs have been agreed. Euro crisis is a political mess in as much as Germany wants to impose austerity on Greece. The effect is that while German standard of living continues to improve, Greece suffers. Portugal and Italy may re-emerge with more debt surprises.
3. USA's rising debt (nearly USD 16 trillion), which is more than 90% of US GDP is considered by many as a huge risk. Historically, debt level above 90% GDP has been seen as a drag on growth.
4. Huge US deficits are a challenge for any future US government. As critics say, a portion of the recovery was possible because of the borrowing from the future generation.
5. Although unemployment improved, there is still a long way to go before the labour market achieve normalcy. Due to losses suffered from the stock/ real estate market crash, many Americans are still struggling to meet both ends meet. Retirees have come out of retirement and still doing two jobs! Young men get frustrated and start protests such as 'Occupy Wall Street' movement.
What this mean to investors? Well Be on Guard. Your hard earned money could be under attack. Remember the best two principles of Warren Buffet (a) Never lose money in investments/savings (b) Always remember the first rule. It is a tough job; but very little alternatives.
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