Sunday, April 01, 2007

1927-1933 Chart of Pompous Prognosticators



Chart locations are an approximate indication only

  1. "We will not have any more crashes in our time."- John Maynard Keynes in 1927
  2. "I cannot help but raise a dissenting voice to statements that we are living in a fool's paradise, and that prosperity in this country must necessarily diminish and recede in the near future."- E. H. H. Simmons, President, New York Stock Exchange, January 12, 1928
    "There will be no interruption of our permanent prosperity."- Myron E. Forbes, President, Pierce Arrow Motor Car Co., January 12, 1928
  3. "No Congress of the United States ever assembled, on surveying the state of the Union, has met with a more pleasing prospect than that which appears at the present time. In the domestic field there is tranquility and contentment...and the highest record of years of prosperity. In the foreign field there is peace, the goodwill which comes from mutual understanding."- Calvin Coolidge December 4, 1928
  4. "There may be a recession in stock prices, but not anything in the nature of a crash."- Irving Fisher, leading U.S. economist , New York Times, Sept. 5, 1929
  5. "Stock prices have reached what looks like a permanently high plateau. I do not feel there will be soon if ever a 50 or 60 point break from present levels, such as (bears) have predicted. I expect to see the stock market a good deal higher within a few months."- Irving Fisher, Ph.D. in economics, Oct. 17, 1929
    "This crash is not going to have much effect on business."- Arthur Reynolds, Chairman of Continental Illinois Bank of Chicago, October 24, 1929
    "There will be no repetition of the break of yesterday... I have no fear of another comparable decline."- Arthur W. Loasby (President of the Equitable Trust Company), quoted in NYT, Friday, October 25, 1929
    "We feel that fundamentally Wall Street is sound, and that for people who can afford to pay for them outright, good stocks are cheap at these prices." - Goodbody and Company market-letter quoted in The New York Times, Friday, October 25, 1929
  6. "This is the time to buy stocks. This is the time to recall the words of the late J. P. Morgan... that any man who is bearish on America will go broke. Within a few days there is likely to be a bear panic rather than a bull panic. Many of the low prices as a result of this hysterical selling are not likely to be reached again in many years."- R. W. McNeel, market analyst, as quoted in the New York Herald Tribune, October 30, 1929
    "Buying of sound, seasoned issues now will not be regretted" - E. A. Pearce market letter quoted in the New York Herald Tribune, October 30, 1929
    "Some pretty intelligent people are now buying stocks... Unless we are to have a panic -- which no one seriously believes, stocks have hit bottom." - R. W. McNeal, financial analyst in October 1929
  7. "The decline is in paper values, not in tangible goods and services...America is now in the eighth year of prosperity as commercially defined. The former great periods of prosperity in America averaged eleven years. On this basis we now have three more years to go before the tailspin."- Stuart Chase (American economist and author), NY Herald Tribune, November 1, 1929
    "Hysteria has now disappeared from Wall Street."- The Times of London, November 2, 1929
    "The Wall Street crash doesn't mean that there will be any general or serious business depression... For six years American business has been diverting a substantial part of its attention, its energies and its resources on the speculative game... Now that irrelevant, alien and hazardous adventure is over. Business has come home again, back to its job, providentially unscathed, sound in wind and limb, financially stronger than ever before." - Business Week, November 2, 1929
    "...despite its severity, we believe that the slump in stock prices will prove an intermediate movement and not the precursor of a business depression such as would entail prolonged further liquidation..." - Harvard Economic Society (HES), November 2, 1929
  8. "... a serious depression seems improbable; [we expect] recovery of business next spring, with further improvement in the fall." - HES, November 10, 1929
    "The end of the decline of the Stock Market will probably not be long, only a few more days at most." - Irving Fisher, Professor of Economics at Yale University, November 14, 1929
    "In most of the cities and towns of this country, this Wall Street panic will have no effect."- Paul Block (President of the Block newspaper chain), editorial, November 15, 1929
    "Financial storm definitely passed."- Bernard Baruch, cablegram to Winston Churchill, November 15, 1929
  9. "I see nothing in the present situation that is either menacing or warrants pessimism... I have every confidence that there will be a revival of activity in the spring, and that during this coming year the country will make steady progress." - Andrew W. Mellon, U.S. Secretary of the Treasury December 31, 1929
    "I am convinced that through these measures we have reestablished confidence." - Herbert Hoover, December 1929
    "[1930 will be] a splendid employment year."- U.S. Dept. of Labor, New Year's Forecast, December 1929
  10. "For the immediate future, at least, the outlook (stocks) is bright." - Irving Fisher, Ph.D. in Economics, in early 1930
  11. "...there are indications that the severest phase of the recession is over..." - Harvard Economic Society (HES) Jan 18, 1930
  12. "There is nothing in the situation to be disturbed about." - Secretary of the Treasury Andrew Mellon, Feb 1930
  13. "The spring of 1930 marks the end of a period of grave concern...American business is steadily coming back to a normal level of prosperity." - Julius Barnes, head of Hoover's National Business Survey Conference, Mar 16, 1930
    "... the outlook continues favorable..." - HES Mar 29, 1930
  14. "... the outlook is favorable..." - HES Apr 19, 1930
  15. "While the crash only took place six months ago, I am convinced we have now passed through the worst -- and with continued unity of effort we shall rapidly recover. There has been no significant bank or industrial failure. That danger, too, is safely behind us." - Herbert Hoover, President of the United States, May 1, 1930
    "...by May or June the spring recovery forecast in our letters of last December and November should clearly be apparent..." - HES May 17, 1930
    "Gentleman, you have come sixty days too late. The depression is over."- Herbert Hoover, responding to a delegation requesting a public works program to help speed the recovery, June 1930
  16. "... irregular and conflicting movements of business should soon give way to a sustained recovery..." - HES June 28, 1930
  17. "... the present depression has about spent its force..." - HES, Aug 30, 1930
  18. "We are now near the end of the declining phase of the depression." - HES Nov 15, 1930
  19. "Stabilization at [present] levels is clearly possible." - HES Oct 31, 1931
  20. "All safe deposit boxes in banks or financial institutions have been sealed... and may only be opened in the presence of an agent of the I.R.S."- President F.D. Roosevelt, 1933
List created by Colin J. Seymour, June 2001
http://www.users.dircon.co.uk/~netking20 June 2001

31 comments:

Youngandmoneyignorant said...

After doing some research on the current state of our economy I’m even more confused as to what one should do with their money.

Mohican, do you have thread where you discuss current investment strategies?

-Youngandmoneyignorant

domus said...

Brilliant! Excellent lesson in modern history.....

rentah said...

Thank you, thank you, thank you.
You gotta love it.

freako said...

Great stuff. What I really like is the you can hear these almost verbatim today. Just as VHB's collection of 1980's Vancouver RE quotes (care of Bellagio).

It's as if some of the gentlemen quoted in 1929 returned as ghosts and took over David Lereah's mouth.

I also like the progression of the denial.

-There is no bubble, so there won't be a crash. (flat denial)

-The crash won't impact the economy because those are paper losses and won't affect the real economy (the grasping for straws denial)

-We have reached bottom and recovery is on its way (the its all uphill from here denial, made famous by Lereah)

-People who can afford to should buy because good ivnestments are now cheap (the good investment trumps bad environment denial, frequently used by a local blogging realtor)

-We have reached a permantly high plateu (The "it's different this time" denial, aka "a paradigm shift"

I wonder if that was the first time "permanently high plateau" argument was used. As foolish then as it is today.

I also wonder if these clowns believe their own folly. I think they do. It is human nature to dig in. The funny thing is that most bears are accused of doing just that. However, as long as fundamentals keep worsening, it is more and more obvious to me that bears merely underestimated the quantity, stubborness, and folly of stupid money.

freako said...

young, how about cash? ING pays something like 3.5% right now. Beggers can't be choosers. Higher returns entails taking on higher risks, and IMHO, now is not a good time to do so.

Unknown said...

It's reminiscent of the citizens of Pompeii that decided to stay behind to 'wait out' the disaster....

Youngandmoneyignorant said...

Freako,

I currently get 4% in a GIC. Also my banker at RBC just informed me that they’ve come out with a new 4% savings account to compete with ING (you have to sign up for it online). I guess after watching that video posted a couple of threads ago I'm not so sure even cash is a good idea anymore.
I couldn't quite understand the charts posted. Are yield rates going to fall? Or will banks pay out higher rates to get their hands on real money in the face of an imploding credit bubble?

freako said...

"I couldn't quite understand the charts posted. Are yield rates going to fall? Or will banks pay out higher rates to get their hands on real money in the face of an imploding credit bubble? "

Short term rates are set by the BoC based on achieving their mandate of low inflation. Longer term rates are set by the market, which CONTAIN expectations about future interest rate movements.

If there is a very nasty RE crash here and in the U.S., the economy will tank. The Fed/BoC will likely lower rates in response. It is likely that longer term debt has at least parially priced in such a scenario, which is likely why the yield cure is almost inverted (short term rates higher than long term).

If we knew better than the bond market where interest rates are going, we would be busy making bilions rather than fret about RE prices. Having said that, I think risk premia are about to return, so I don't think the inverted yield curve will last. If short term rates fall, long term rates may not follow, or if short term rates stay flat, long term will rise. IMHO opinion of course. It does appear to me that the equities and bond markets are underestimating the risk of RE collapse, so I'd limit equities exposure. Again, cash seems like a good option.

Paul said...

Powerful post M. Good work!

It's funny but I expected people to sound far less experienced and savvy compared with todays economists yet all 1930's comments sound just as current. The bulls the cheerleaders and the shills are there in full force.

tulip-Mania2 said...

Most excellent, Mohican, but it's different this time.

patriotz said...

If you think that short term rates will fall or at least stay flat, take a look at XSB (Canadian short-term bond ETF)currently yielding 4%. Same as a GIC, but you can sell it any time you want.

Warren said...

E-Trade has a cash account rate of 4.15%. Your money is also right there for a bargain stock buy if you see one. :)

Clarke said...

One of J.K. Galbraith's books on the great crash of 29 included a lot of these sayings. I remember his comments on how bubbles are a fairly regular occurrence. Prior to the dot com crash, he wrote an article to the effect that whenever you hear phrases like "permanent new plateau", "new business paradigm" or asset that "cannot devalue" it is a good sign that it is time to run for the hills.

With the whole RE thing, you could substitute a lot of what was written in the mainstream media back in the dot com time, substitute "RE" for Nortel or whatever, and it would sound like something written in the MSM over the last few years.

mohican said...

Good discussion here, I have a couple comments:
1) Investing today - I like the cash idea - try to get at least 4% on any cash - I do also think that there are selected stock based investments that are suitable, even today. I personally hold them and recommend them to my clients. Please see my previous posts about value investing for my thoughts in this area.

2) History is a great teacher for the willing learner and I love these retrospective trips because they help me gain a valuable perspective that can be difficult to see amidst the daily chatter. I hope it did the same for you.

freako said...

Not all talking heads from the era were out to lunch or drunk on greed.

I have a soft spot for Roger Babson who not only publicly questioned the overheating market for three straight years, no doubt being subject to the "even a broken watch is correct twice a day" cliche. Let's just say that the watch was right when it mattered. Not only did he foretell the impending crash, he had a part in setting it in motion. The market reacted to one of his comments, an event known as the Babson Break. This set in motion the chain of events which led to up to the moment when the dam burst, Black Monday.

http://tinyurl.com/ysc85u

"The great bull market of the late 1920s rested on this ephemeral foundation of credit known as margin buying rather than on the sound foundation of cash. In the words of historian Charles Geisst, "Excessive speculation was creating inflated wealth and a sense of prosperity built upon borrowed money."

For almost three years, noted economist Roger Babson watched this situation develop with great alarm. The New Era notwithstanding, Babson's August 24 statement that he expected a 60 to 80 point stock market crash unsettled many people. During the shortened Labor Day week Babson's forecast caused what became known as "the Babson Break." This break or drop in the market bounced back the following week, broke again, and bounced back again; nevertheless, the general direction was down.

Aaron said...

I'll second the President Choice bank account approach. 4% and readily accessible (4.1% if you have more than 50K). Watch the banking deposit insurance limits (50K?) if you have concerns about the bank.

E-Trade sounds pretty good as well.

Warren said...

PC is backed up by CIBC so I wouldn't worry about that too much.

I was a big ING fan and signed up with them years ago, but competitors have crowded the market and they are still at 3.5%. With RBC's new account, I'm sure the other big banks will follow if they haven't already.

Swirlyman said...

The last quote sounds ominous.
What is the possibility that Canadian banks could block access to safety deposit boxes at some point?

Warren said...

What is the possibility that Canadian banks could block access to safety deposit boxes at some point?

I'd like to think the era of blocking access and seizing gold is behind us. However they can inflate the hell out of the currency... but doubtful.

Actually, did the Canadian government ever seize gold or declare it all "property of the government" as was done in the US?

domus said...

Funny that Mohican post was on April 1st: most of those quotes look very much like jokes. On the other hand they were not very funny for those thousands who lost their shirts....

For those interested in the arcana of 'rational bubbles' (as well as the more earthy comparative housing data of many OECD countries) I suggest the following article:

http://www.ucd.ie/economics/staff/
mkelly/papers/housing.pdf

(Hope the link works.)

It has some long-term statistics: all point towards a long period of depreciation for housing over here.

mohican said...

Jesse said: "You are effectively saying that cash at 4% will outperform stocks and bonds in the near term. That is a very narrow line to take but maybe you can explain further. i.e. what would cause both equities and bonds to underperform?"

Bonds will likely do no better than 4% since rates are not likely to decrease too much this year and current yield on AAA bonds is around 4% right now. Not too attractive. This isn't to say that there are no opportunities in the bond market but it just isn't in AAA gov bonds.

I believe that cash at 4% will likely outperform 'the market' in 2007. We are entering a 'stockpickers' environment in the equity markets and I would stay clear of stock index funds or mutual funds that mirror the index. I would, and I do, recommend investing in solidly managed mutual funds with managers who have a proven ability to pick stocks and succeed in a stockpicking environment. Or, for a more active investor, focusing on undervalued names in the mega-cap / large-cap space. Focusing on dividend yield or dividend funds is also a worthy and proven strategy in more volatile markets.

M- said...

CDIC insures deposits up to $100,000 at member institutions. Money must be held in Canadian dollars, at a member institution (they have a list), and must be a chequing account, savings account, or GIC.

www.cdic.ca

freako said...

"i.e. what would cause both equities and bonds to underperform?"

Stocks: Housing related economic problems that hit earnings.

Bonds: Insufficient liquidity/risk premia.

"I was a big ING fan and signed up with them years ago, but competitors have crowded the market and they are still at 3.5%."

Noticed that. I recently opened a PC bonus savings account. My gut feeling is that it is a bit of a promomtional stunt, I don't expect the spread between PC and ING to last, but in the meanwhile, I'll take it.


"I'd like to think the era of blocking access and seizing gold is behind us. However they can inflate the hell out of the currency... but doubtful."

If they do, long term rates will explode upwards, and NOBODY with an outstanding mortgage will be able to renew with anything except variable. Hence real prices will go into the toilet.

domus said...

"If they do, long term rates will explode upwards, and NOBODY with an outstanding mortgage will be able to renew with anything except variable. Hence real prices will go into the toilet."


Freako:

that's an excellent point that you have made.

Popular wisdom is that inflation might be good for people who bought at the top.

However, as you say, long-term rates (on which mortgages are based) will go up if the Fed decides to "accommodate".

You deduce that this rise might strangle people who have to re-finance.

I don't follow on this point: the real rates would be the same (more or less) and people's (nominal) earnings would adjust.

I suspect those who would be seriously screwed up in that scenario are those "savers" holding cash in their hands.

It would be a highly redistributive policy by the Fed: give to those who gambles and take away from those who patiently (and prudently) waited.....

freako said...

"I don't follow on this point: the real rates would be the same (more or less) and people's (nominal) earnings would adjust."

Rather than explaining it, here is some hypothetical math:

Pre-hyperinflation:
Inflation: 2.5%
5 year rate: 5%
Payment on $500K principal: $2,922.95
Income: $5,000 pretax

Post-hyperinflation (let's assume the process takes 1 year)
Inflation: 15%
5 year rate 18%
Payment on $500K principal: $ 7,587.15
Income: $5,900 ($5,000*1.18)

They have a wee bit of a problem.

As I think you have deduced by now, since houses are 10 times income and since the percentage increase in payments is huge, payments will dwarf incomes.

"I suspect those who would be seriously screwed up in that scenario are those "savers" holding cash in their hands. "

Not as bad as those who hold property, which will plummet in nominal, but much more in real terms.

mohican said...

freako: Being in cash in your scenario doesn't seem that bad to me. It would allow the cash holder to snap up long bonds yielding 18%. That sounds like a pretty good situation.

bc locust said...

I feel more comfortable investing in recreational properties. Prices keep rising and some places are at the bottom of their cycle because they are switching from some local industry (e.g. forestry) to tourism. The last census is a good way to spot cheap spots.

The Provincial Gvmt plans to multiply the number of tourists from 20 millions/year to 40 millions by using the Olympics for worldwide advertisement. Main targets: European and Asian markets.

A number of new ski resorts are underway (Kicking Horse, Canoe Mountain, etc) and plans to advertise worldwide (US, Asia, Europe).

One cannot build in Parks, so land around them is increasing in value. They are advertised as "identical scenery but all facilities are less expansive."

Infrastructure is expanding. There are plans to expand small airports to fly tourists from Alberta,to increase the number of passenger trains and enlarge highways.

You can find more and more realtors trying to attract retiring baby boomers from Europe, specially Germany and Austria.

Also condos in GVRD are becoming so small that some people can be tempted to own a cabin in the wild.

Last but not least, after the next IPCC report(May) or next summer (hottest in history?) demand for seasonal dwellings in cool regions might increase. A friend of mine posted his cabin on FSBO and received 5 offers in 4 weeks around Xmas time... I also know of a small place that saw all lots sold in three months, all bought by big developers.

I am even thinking that by next year we might be able to take advantage of the BC surplus of lumber.

patriotz said...

However, as you say, long-term rates (on which mortgages are based) will go up if the Fed decides to "accommodate".

Earth to Domus: the Fed does not determine Canadian interest rates. The BOC and the Canadian bond market do.

One huge difference in the bond markets: foreign governments are not buying Canadian bonds to try to prop up our currency. This means that the BOC must be very careful about holding back inflationary expectations or our bond market will tank.

If we see a 1982-style recession (which seems increasingly likely IHMO) we will surely see some reduction in short-term rates by the BOC, but there is no way they would pursue an inflationary policy. The blowback would be deadly.

You can find more and more realtors trying to attract retiring baby boomers from Europe, specially Germany and Austria.

Great fantasy writing, Locust. Germany and Austria don't have baby boomers because they didn't have a baby boom. Also I thought the big EU retiree destinations were supposed to be places like Bulgaria. Little quibbles like immigration, medical care, etc. Lot closer to home too.

domus said...

Freako:

there is one thing I still do not understand.

If inflation was 18% as in your example, take the following scenario:
Suppose you have $100,000 cash. In real terms this is worth 18% less. In one stroke a big chunk of your net worth is cancelled. Of course, that is true of a house as well but it has a relevant difference: for a borrower, 18% of his real debt is suddenly erased! He cannot be sad about that one......

Yes, as Mohican points out, you could get 18% interest on bonds. But at the same time all other prices would be going up at the same pace (including, maybe, house prices).

I am still missing why holding cash would be preferable.

I usually agree with you. However I think in that scenario (which I very much hope will not happen) I'd rather hold on to any real assets, rather than paper money....

Having said that, I also am reluctant to believe that the BoC would pursue the inflation route.

I still believe in many ways allowing inflation would be a way to bail out inconsiderate borrowers. If you do it once, you lose credibility for the future: this would be giving all the wrong incentives to the market. They can't be that stupid.

patriotz said...

Look, inflation isn't going to happen. David Dodge and company know full well it was the cause of the slow growth of the 1970's (aka stagflation) and the severity of the 1982 recession.

Not only that, but any appearance of inflation would result in greatly increased interest rates (as already pointed out) and hurt both private sector investment and the government's fiscal position.

I might also add that the housing crash in the US is going to take a lot of consumer demand off the table, which is deflationary for commodities (like lumber, you know) as well as for assets. And wages.

freako said...

"However I think in that scenario (which I very much hope will not happen) I'd rather hold on to any real assets, rather than paper money....
"

We are talking about UNEXPECTED inflation. Clearly todays longer term rates contain market expectations about inflation and deflation.

If unexpected inflation were to occur due to massive BoC/FED stimulus, no cash is not the best place to be.

-Cash in mattress -down 18
-Cash in savings account down alot, depending on short term rates.
Real estate - down nominally because of affordability constraints. This is the counter counterintuitive point I was trying to make. Tim argued over and over again that housing would be saved by "Heli Ben". But the flawed assumption was that RE prices would simply follow CPI.

Stocks- A little harder to say. The higher long term rates could be worrying. Nominal earnings may be up.

Gold, stamps etc - Likely up all else being the same. However, if the economy is in the toilet (that is why we are inflating, remember), cosmetic and industrial demand for gold will plummet.

If I knew with certainty that hyper inflation would occur, no, I would not sit in cash. Nor real estate. Mohican's suggestion assumes that markets are inefficient and misprices bonds. They may, but right now bonds are overpriced IMHO, so it would have a long way to go to swing the other way.

But I think hyperinflation is unlikely, so by balance of probabilities, I prefer cash.