Shades of 1928

 

Led by these mighty knights of the automobile industry,
the steel industry, the radio industry… and finally joined
in despair, by many professional traders who, after much
sack-cloth and ashes, had caught the vision of progress,
the Coolidge market had gone forward like the phalanxes of Cyrus,
parasang upon parasang and again parasang upon parasang …

— Prof. Amos Dice, from ‘The Great Crash’ John Kenneth Galbraith

Since 2009, Americans have been privileged to participate’ in one of the great Wall Street bull runs in history. It is the longest other than the rally from October, 1990 until March of 2000. There have been other great runs; none quite so bizarre as ours considering the economy of much of the world is coming apart at the seams. Credit the banks and their ability to make magic, to lend enormously into the void, to deny reality.

Figure 1: Dow bull markets compared, Notice the little green line that goes up and down precipitously – the Roaring Twenties: (Schaeffers Research).

Bull markets are both psalms and proverbs of the progress narrative; they are driven by ruthless Ayn Randian ‘innovators’ and risk-taking ‘entrepreneurs’ who become rich by dint of their genius, producing gadgets heretofore only imagined, items revealed in the fullness of time to be indispensible.

The car industry is central to this narrative, its products and dependencies were the ‘tech story’ of the 1920s, as smartphones, and Bitcoin are today. Like today’s gadgets, the auto was disruptive: cars were fun to play with and conferred status on the owners. Driving challenged operators as there were multiple ways for the things to murder- strand or otherwise embarrass those who were unlucky or not paying attention. The challenge was part of the fun: industrial workers generally served the needs of their employers, they were slaves to the machines. Cars worked the other way ’round: the machines answered the desires of the operators, the interactivity between the two was a novelty.

More practically, cars offered an alternative to the grip of railroad monopolies and from the, uh … ‘languidity’ of shoe leather, horse-drawn carriages and steamships. It also promised to transform what up to that point had been an unending liability — distance — into an massively valuable asset. Talk about progress: America was a big country that was largely ‘underutilized’. The auto would convert scruffy backlands and hard-scrabble farms into valuable suburban developments; the farther away they were the greater need for auto ‘tech’! Adding more suburbs meant adding more automobiles. The more automobiles, the more areas to be set aside to accommodate them. Needless to say, the money-making potential of this process appeared to be without limit.

For the car industry, its rise was universally virtuous, coinciding as it did with Wall Street finance, the rise of media and marketing, of oil extraction and processing; of industry itself: steel and radio, heavy manufacturing and construction, tool-and-die making, foundry, precision machinery and materials handling equipment along with incremental automation. Along with millions of new cars, thousands of destinations were needed along with new paved roads to knit them together: all of this offered the promise of millions of new jobs. Also, service stations, refineries, pipelines, terminals and ports: electricity would be needed to power these things, money was needed to pay; in advance, on the barrel-head, borrowed at six percent or better.

During the ’20s, government was oblivious; the freshly elected Hoover regime of 1928 was like all others before or since: a prosperity government. The idea behind modern politics is that the various publics (and their bosses) are entitled as a birthright to live beyond their means. It was and is the responsibility of government to provide … or else a new collection of big-business lackeys government would be installed.

Part of governments’ responsibility is to make necessary resources available to business cartels at the lowest possible cost. Politicians were expected to lightly manage the prosperity that resulted; making certain that those at the bottom of the economic food chain were not over-supplied. The expression of this idea can be found in every kind of government including the dictatorships, republics and monarchies, constitutional and otherwise: all of these are prosperity governments. The various politics functioned more or less because there were always more resources to exploit: apparent resource growth and accompanying gross domestic product was able to race ahead of populations and their advertising- driven expectations.

In 1928, both government and industry were eager to genuflect in the direction of self-serving pieties. The tried-and-true (antiquated) ideologies of gold standard, ‘sound money’ and laissez faire non-interference in private sector affairs were universally embraced. Regulation was an anathema, government borrowing during peacetime was frowned upon, neither of these conformed to the ‘small government’ orthodoxy of the time. Regulation would only stifle innovation. Public sector borrowing could only crowd out private borrowers and starve businesses of funds. Yet, even as the car- and related industries expanded explosively using borrowed money, borrowing at the consumer level — top line business revenue, cash flow — was faltering. Deprived customers, the ‘little fish’ at the bottom of the economic food chain were unable or unwilling to borrow to service and retire the industries’ heavy debts.

The American middle class at the time was enthusiastic but too small to carry the burden assigned to it. Most of America’s 120- or so millions were small farmers or laborers providing services related to agriculture. Returns were meager; farmers swept up relatively inexpensive, durable Fords and retired their horse carts, by doing so they removed themselves from both cart- and car markets. Non-union industrial, service, extraction labor tended to be ‘wage repressed’; only a few could afford to buy a car. Accounting, management, retail, marketing, clerical and other ‘white collar’ employment was paid well enough but represented a modest fraction of the workforce. They filled the big cities’ close in ‘trolley suburbs’; they were not inclined to buy second or third houses … or second and third cars. By the start of the Hoover period, the markets were on their way to becoming saturated. Demand for goods started to decline and then commodity prices. Instead of the once-certain returns from industry, there was a more general turn toward speculation financed with debt ‘on the margin’.

“Mitchell asserts stocks are sound; Banker, Sailing From Europe, Says He Sees No Signs of Wall Street Slump. Predicts more mergers, declares Movement Will Continue With “Fusion of a Number of Big Banking Groups.”

— New York Times. October 16, 1929

By October, 1929, the government had made itself irrelevant almost by habit; business was left to its own devices. Managers appreciated this but did not grasp the consequences: they were marching purposefully into a pit of their own making, there to remain until the rise of a more ‘innovative’, ‘entrepreneurial’ government in Hitler’s Germany … and the world’s necessary response to it.

Dow crosses 24,000 mark as banks climb, techs rebound

(Reuters) – The blue-chip Dow Jones index raced past the 24,000 mark for the first time on Thursday, propelled by further gains for bank stocks and a recovery in technology shares.

The 30-member index has crossed four similar 1,000-point milestones this year on the back of strong corporate earnings, robust economic data and hopes that President Donald Trump’s tax plan would make headway.

Today, the government purposefully aims to do the same thing, to become irrelevant, to shrink itself until it can be drowned in a bathtub; to give free rein to gamblers without heed, to do so in order to answer obsolete ideological concerns. How can this end well? Speculation by nature escapes all bounds, taking on a life of its own. In the late ’20s there was a speculation frenzy in stocks and real estate. Now it’s bonds, stocks, real estate, art … the ‘everything bubble’. The consequences are not grasped: the fact of out-of-control speculation indicates the economy of physical goods and services is kaput: there is no more ‘real economy’: it’s gambling or nothing.

Stock prices have reached “what looks like a permanently high plateau,” Irving Fisher, Yale economist told members of the Purchasing Agents Association at its monthly dinner meeting at the Building Exchange Club, 2 Park Avenue, last night.

After discussing the rise in stock values during the past two years, Mr. Fisher declared realized and prospective increases in earnings, to a very large extent, had justified this rise, adding that “time will tell whether the increase will continue sufficiently to justify the present high level. I expect that it will.”

— New York Times, October 16, 1929

Now as then, bank money flows like a river into speculative assets driving up prices without any change to the nature of the assets themselves. These loans are basically unsecured. Giant firms borrow to buy their own shares, removing them from the float of those publicly available. The resulting scarcity premium is added to ‘fundamental’ share prices. There is nothing else to justify the increase; a market manipulation that has little- or nothing to do with firms’ returns.

The credit flood increases because it must; how else to meet the credit-driven high prices? Going forward, there is no other choice but to lend and to do so without restraint. Industrial business is fundamentally non-productive: it exhausts its capital and ‘manufactures’ entropy as its sole product. Neither the exertions of human labor or the application of new machines can hope to retire industrial debt. Only more loans can do this: lending must continue to expand or the entire enterprise falls off the cliff: ‘once on the debt treadmill it is impossible to step off’ …

While not all land speculating met with success, most investors in the beginning stages of the Florida Land Boom made a profit selling the land to others. An elderly man in Pinellas County was committed to a sanitarium by his sons for spending his life savings of $1,700 on a piece of Pinellas property. When the value of the land reached $300,000 in 1925, the man’s lawyer got him released to sue his children.

— Florida History

Fool me once … fool me over and over again! Even if lending continues without hesitation or restraint, it cannot do so forever as service costs are compounding, at some point marginal lending capacity is directed to debt service: the true ‘Minsky Moment’.

Moas now puts the line in the sand at $20,000 for the split-adjusted price when the new year hits. Looking at how things have gone so far for Moas, a month is a long time, and perhaps $20,000 will be broken before that time.

Tom Lee, rather conservatively, set a Bitcoin growth of 40 percent to happen by the middle of 2018. His prediction put him at $11,500. That prediction was made a week ago, and in that time Bitcoin topped at around $11,300.

Max Keiser has a much more bullish view, but over a longer time frame as the host of Russia Today’s Keiser Report believes that $100,000 Bitcoin is an eventuality.

— Coin Telegraph, 2017

Excess credit inflates the cost of new bitcoins which are basically math puzzles requiring increasingly expensive computing power to solve. Interesting … but to what end? The entire enterprise is the red-headed stepchild of unrestrained leverage: without bank credit, the gambling component and higher ‘bubble’ prices, bitcoin transactions and the infrastructure that supports them would be unaffordable. Like the incestuous/harmonious circular relationship between automobile and suburb, the relation between leverage and the ‘pseudo-currency’ is virtuously self-amplifying … up to a point: more bitcoins => higher prices => more bitcoins. In the end, the regime self-defeating because of the exogenous credit (and electricity) requirements. More suburbs => more cars => more sub … oops! More suburbs means older ones cannot generate the revenue needed to maintain them. More cars means it’s impossible to get anywhere because of the traffic!

The cryptocurrencies are Ponzi schemes, little different from those erected by Clarence Hatry and the ‘Match King’ Ivar Kreuger in the 1920’s. The term ‘currency’ here is simply a narrative flourish intended to shill the Ponzi as ‘innovative’. As with all other schemes of this sort the great majority of suckers who ‘invest’ in cryptos will lose everything, like those who invested in Goldman-Sachs’ Shenandoah- and Blue Ridge Corporations just before the crash:

Most exciting of all were the holding companies and the investment trusts [in the very late 1920s]. Both were companies formed to invest in other companies. And the companies in which they invested, invested in yet other companies that, in turn, invested in yet others. The layers could be five or ten deep. Along the way bonds and preferred stock were sold. The resulting interest payments and preferred dividends took some of the earnings of the ultimate operating company; the remaining earnings came cascading back to the common stock still held by the promoters. Or this happened as long as the dividends of the ultimate companies were good and rising. When these fell, the bond interest and preferred stock soaked up all the revenues and more. Nothing was left to go upstream; the stock in the investment trusts and holding companies then went, often in a week, from wonderful to worthless. It was an eventuality that almost no one had foreseen.

— ‘The Age of Uncertainty’, John Kenneth Galbraith

Nothing lasts forever, particularly bull markets. Hyman Minsky observed periods of prosperity and accompanying bull markets carry with them the seeds of their own destruction. Certainly after almost ten years of credit floods and manipulations the seeds are ripened.

If you see a Swiss banker jump out a window, jump after him. There’s surely money in it.

— Voltaire

Just don’t jump out unless it’s close to the ground, good advice that’s rarely followed. Both manias and crashes are expressions of the ‘Paradox of Thrift’, a condition that ordinarily prohibits one-way markets — one where all are buyers or all sellers (or all are thrifty). One-way markets cannot exist for long without severe consequences. A market where all participants are buyers means a market that is ultimately deprived of them. Everyone who is willing to buy expensive bitcoins, tract houses, Leonardo paintings, Manhattan penthouses, Tesla shares has done so: no one remains able to ‘buy from the buyers’. A market where all are thrifty is one where money is ‘saved’ out of circulation so that day-to-day business becomes impossible. A speculators’ market unravels when the supply of free-spenders is used up, then all are forced by conditions to become sellers at once …

Over time, citizens have been made over into ‘consumers’, investors have been forced into becoming speculators: this is the paradox of non-thrift. Americans are forced into penury on account of it, there is too much ‘stuff’ too much quasi-businesslike nonsense; goods have been over-consumed leaving markets that are saturated. As during 1928, businesses cannot endure periods when there is no consumption and they fail, the outcome is the same as too much thrift. Instead of a shortage of currency, there is the shortage of timely demand.

Unknown photographer, crowd outside the New York Stock Exchange building during Black Thursday, 1929.

Q: How would you describe the economy?

A: It is a system that allows a select few to borrow immense fortunes. The rest of us; you, me, everyone else, repay the debts.

Q: That’s it?

A: That’s it.

Donald Trump’s tax plan may not be perfect but its timing is: The world’s powers have just wrapped up their central banks’ Quantitative Easing giveaway to tycoons and corporations that began in 2009. Now the tycoons look to government with upturned fluttering hearts. In any case there is little but obligations for those at the bottom of the economic ladder. An unhappy consequence of QE was the oil price crash of 2014. As in 1928 the little guys lacked the credit to bid up the price of fuel. Without high prices, oil drillers were, and still are, underwater.

Tycoons and corporations have taken on more than debt than the rest — and their children — can ever hope to repay. Without credit access to those at the bottom of ladder, the tycoons must retire their own loans. By doing so they become non-tycoons just like everyone else. Thrift — whether it’s intentional or not — denies the tycoons funds, they are ruined by their own creditors, the creditors are likewise ruined. This is happening right now, behind the speculative razzle-dazzle; the steady pauperization of those at the bottom. The rise in asset prices offers a false impression, or more likely, gives a warning …

The only market indicator that matters, the price of gasoline: $2.50 per gallon is affordable for most Americans, over $3.50 and ‘problems’ start to appear in various world credit- and currency markets as they did in 2008. A worrying sign is the nearly three dollar price jump for premium gas, the kind required for luxury- and high performance cars. No wonder owners of these cars are begging for a tax cut.

22 thoughts on “Shades of 1928

      1. Reverse Engineer

        “Soon” is a very nebulous time stamp. How am I supposed to short bitcoin with “soon”?

        RE

      2. steve from virginia Post author

        It’s hard to short bitcoin which is a backhanded reason why it’s price is climbing.

        Bitcoin market is doing right now what petroleum markets were doing 2005-2008. With both there was/is a comforting (rationalizing) narrative, a rotation out of markets w/ little more upside and deteriorating fundamentals … plus a lot of dumb money. Bitcoin & other cryptos look like ‘safe havens’ to those who don’t know better.

        Keep an eye on interest rates vs. bond yields.

        12 month Libor is today only a few basis points lower than 10 yr Treasuries.

        https://twitter.com/econundertow/status/939566103486967808

        Libor mkt is not free of manipulation but is a good reflection of rates in commercial paper & repo. BTW, these prices are reflecting default risk and finance system stress rather than inflation. The inflation trade would have the 10 yr rate much higher.

        Put another way, the market forces driving the 10-yr are different from the forces driving repo. If the Fed is ‘in’ the repo market, they have lost control already. Going back over 20 years commercial short-term rates have marched in lockstep w/ policy rates. Over the past year they’ve diverged pretty widely. This- and the flattening of the Treasury yield curve are both warnings.

        Keep in mind, the Libor @ 4% and the finance system is kaput. The system borrows short to lend long, the long term rates are repressed because of the so called ‘race for yield’.

        http://ponziworld.blogspot.com/2017/12/generation-madoff.html

        “Lastly, this was the first week that oil gamblers could “absorb” last week’s OPEC production cut extension. In the event they just increased their net futures exposure to a new record high. Of course, each time they’ve ratcheted up their exposure the wheels come off the bus. The stock sector itself finds a new lower high. Not something one wants to see from the sector contributing almost all of the earnings growth. Compliments of futures gamblers … ”

        The logs have been in the stove for awhile. All that’s missing is the match.

  1. dolf is back

    What you miss Steve is that we no longer have functioning markets, only interventions. Everything you say would be true if we did have markets, and the crashes would be corrective as such. It is the same reason the oil price crash did not result in another official recession. Recessions have been outlawed, we will never again see another official recession in our lifetimes.

    With central banks backstopping everything, there is no reason for prices to fall….ever again. Or until our system hyperinflates. It is not true that everyone is a buyer! Actually, very few are buyers…people are either out of the markets, or passively invested. There are no new buyers right now. Not 5, not 10 years from now, but right now. And the prices keep going up.

    Perversely, the fewer buyers there are, the higher the stock market (or bitcoin, or housing, or anything else) goes. Because the normal price adjustment mechanism never comes from the marginal buyer or seller. The central banks simply create unlimited credit, if need be.

    Similarly, the more buyers of cars and oil there are, the lower price goes. Commodity prices are engineered down in the same way that asset prices are engineered up. They need to do this to maintain absolute confidence in the system, then sometime in the future it will just hyperinflate or be reset.

    This makes your triangle of doom analysis more or less academic. As has already been shown to be the case. I have nothing more to prove. You, Gail, The Automatic Earth, RE, and others have been completely wrong in your analysis.

    I’m not saying I’m right, but what I like to do is take a little bit of information from everywhere and then form an opinion based on how events are playing out. The markets simply don’t go down anymore, that is a fact of life in the year 2017 soon to be 2018. They never correct, and never will. Everybody reading this post is going to die before the stock market or real estate in America goes down again, because they will not go down prior to system reset.

    1. Eeyores enigma

      Dolf said; “Everybody reading this post is going to die before the stock market or real estate in America goes down”.

      Why should we die? Following your logic we have not died yet ergo we will never die.

      1. dolf is back

        Not true. Individually we are subject to death, but the system is not. That’s always been the case.

        If you or I died tomorrow (knock on wood) there would still be some 7.5 billion souls integrated within a vast global industrial casino economy, where the machines, computers, and various algorithms dicate the currency value of everything we have to transact.

        It isn’t going away overnight.

  2. ellenanderson

    Hi Steve
    I am so grateful that I don’t have to follow the tweeting in order to see what you are thinking. I can’t follow tweets, too old, I guess.
    Seems to me that the Owl of Minerva has suddenly taken flight and we can begin to look backwards with some confidence. Your post does that very nicely. The culture of the 20th century is ending right now with these insane red herring political dramas that deflect attention away from the very horrible murder and abuse of millions of innocent people at the hands of western bankers and their mercenaries. It took nearly 20 years for the culture of the 19th century to become obsolete. The question is: will 20th century culture be replaced by something far worse, far better or mostly the same. I am hoping for better understanding though I do see that the whole world is in some danger of the four horsemen coming along right now.
    There should be a name to characterize the people who are still stuck in 20th century narratives. It will eventually be an insult – like calling people medieval. Most people I know are still 20th century folk. It is hard to keep away from endless arguments about Russia and other badly behaved men. But looking back at where we were ten years ago in our conversations the transformation is quite apparent.

    1. steve from virginia Post author

      There is also an entire generation of younger people we haven’t heard from yet.

      They haven’t found their voice … unlike the postwar generations who found theirs early then forgot what it was they were saying.

      What we’re witnessing right now in the West — and in the East as well — is the last hurrah of these now old guys, holdovers of the post-World War Two ideological /slash/ leadership cadres. They are secular versions of the Pope, the last vestige of the long-gone Roman Empire. Theirs is power of the image. I suspect the next generation (w/ ‘voice’ in mind) will find power in the word.

      For instance, there are the (noisy) youngish Nazis here and there but they traffic in throwback symbols, little else besides.These images were clichés long before the ‘Nieuwe Nazis’ even started, whatever potency these symbols might have once had is long gone. Murderous impulses are submerged within ‘pop life’ foppery; a fashion whose only power is to ironically undermine and subvert. The young Nazis, the young ‘whatevers’ are just fakes subverting themselves. They’re dangerous … but harmless at the same time.

      But the next cohort of young people are a hundred million … in America. They aren’t going to be denied.

  3. Eeyores enigma

    We are all buyers and sellers. It has replaced what used to be the meaning of life…to Love and be Loved. Now the meaning of life is to buy and in order to buy you must sell. Few are able to get past buying and selling to realize any of the other 99.9% of what life on this planet has to offer and even if you are wildly successful at buying and selling and make big bank, go on expensive jaunts, live in a dozen castles, you are no closer to what life on this planet has to offer, you are just closer to what can be bought and sold.

  4. Eeyores enigma

    We are all buyers and sellers. It has replaced what used to be the meaning of life…to Love and be Loved. Now the meaning of life is to buy and in order to buy you must sell. Few are able to get past buying and selling to realize any of the other 99.9% of what life on this planet has to offer and even if you are wildly successful at buying and selling and make big bank, go on expensive jaunts, live in a dozen castles, you are no closer to what life on this planet has to offer, you are just closer to what can be bought and sold.

    There is an entire generation that entered the fray (buying/selling) that have not seen a down turn. They believe that everything only goes up. Good news, Bad news, it always goes up. Does this seem like something that can continue forever?

  5. ellenanderson

    “But the next cohort of young people are a hundred million … in America. They aren’t going to be denied.” I think you are correct. Hopefully they have time to develop political consciousness before communication between them becomes more difficult. It feels as though time is running short. The implications of the end of waste-based industrial capitalism are so unthinkable for most 20th century believers.

    1. steve from virginia Post author

      I know, I have problems with that myself.

      I have saws and pipe wrenches but not the ‘tools for understanding’. ‘Strategies for acting’? That’s the hard part.

      1. ellenanderson

        Maybe we turn out the lights before the plug is pulled? But save one little trickle of electricity and enough technology to support a ham radio so we can call our friends and relatives? But seriously – important communication takes place on your blog and on other blogs and in podcasts. The understanding that people need is probably very ancient and has to do with moral codes that are common to all religions. You rightly point out that modernism subverts the values that we need in order to survive physically as well as artistically. That message needs to get out to the people who may survive to rebuild. We may even be among them. Who knows?
        You made a list of books and websites and for awhile there were a lot of people participating. How about we get together a list of podcasts that people might learn from? I am encouraged by ‘Undisclosed’ and 45 (though I don’t agree with all of the latter.) The Intercept has a good podcast, also ‘Reply All’ ‘The Tides of History’. There are a lot of podcasts coming out of the Innocence Projects, in Maryland and Georgia. They combine the elements of true crime with social justice. Of course I like the Kunstler Cast in general but would be happier if he had you back on.

  6. Creedon

    I recently heard Harry Dent talk on the radio. He is predicting that the stock market will go to 5500 within three years. He sees China as a possible catalyst. He looks at things from the perspective of demographics, historic cycles, bubble economics and one other thing which is not energy, I’m afraid. He sees all these cycles coming together within three years to burst the bubble.
    I think Dolph is right, that there is no price discovery in markets and market forces are driving down commodity prices. If I was to predict now, I would say that the black swan will be the price of oil being to low and either producers going off line or bankrupt due to lack of profitability. Central banks will not be able to solve this problem by printing more money. I guess the central banks could fund every producer, but they are already doing that.

    1. dolf is back

      There’s nothing we can do, we are slaves with information.

      Alright, not quite nothing – we can move or change jobs. That’s it. We have no power to systemically affect this outcome, and neither do politicians or business people either, who are all following the script of techno optimism, credit inflation, ponzi grandiosity.

      Music videos, movies, get a thousand, a million times the hits of websites such as these. Who am I to argue with humanity in 2017? They are right, we are wrong. Everything is actually awesome!

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