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Post# of 36150
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Culmus

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Culmus

Re: wahz post# 5840

Saturday, 10/04/2003 6:40:23 AM

Saturday, October 04, 2003 6:40:23 AM

Post# of 36150
"echo bubble after 1932"

Just because the Nasdaq had a comparable percentage decline to the Dow during the period of 1929 to 1933 does not mean that the two periods are similar and that the aftermath will pan out in a similar way (as the Dow Jones Industrial Average indeed quadrupled from 1934 to 1938).

The bubble of the late Twenties was followed by a total collapse of American industry.

The U.S. Index of Manufacturing Production declined by 47% (!!!) from the peak in 1929 to the trough in 1932:

http://www.nber.org/databases/macrohistory/rectdata/01/a01007b.dat

On a monthly basis the decline was 57% from June 1929 to March 1933:

http://www.nber.org/databases/macrohistory/rectdata/01/m01054.dat

Production of machinery was down a staggering 75% peak to trough. Index of US machinery production:

http://www.nber.org/databases/macrohistory/rectdata/01/m01277a.dat

"CAPITAL EXPENDITURES FOR MANUFACTURING PLANT AND EQUIPMENT" were down by 84% (!!!) from the peak in 1929Q2 to the trough in 1933Q1 (in $ millions):

http://www.nber.org/databases/macrohistory/rectdata/10/q10096.dat

In fact, National Income (!) in Current Prices more than halved from 1929 to 1932/33 ($ millions):

http://www.nber.org/databases/macrohistory/rectdata/08/a08167.dat

Sure enough disposable personal income of US households also halved between 1929Q3 and 1933Q1 (seasonally adjusted, in $ billions):

http://www.nber.org/databases/macrohistory/rectdata/08/q08282a.dat

...as US nonagricultural employment declined by 27% from 1929 to 1932 (in million persons):

http://www.nber.org/databases/macrohistory/rectdata/08/a08170.dat

While the US manufacturing industry as measured by "U.S. Net Profits of Manufacturing Corporations" was bleeding red ink for almost three years from 1930Q4 to 1933Q2 ($ millions):

http://www.nber.org/databases/macrohistory/rectdata/09/q09025b.dat

Corporate profits in the finance business were down by almost 90% between 1929 and 1933 (in $ millions):

http://www.nber.org/databases/macrohistory/rectdata/09/a09024.dat

In 1932 just four in ten US companies (in manufacturing, mining, trade and services) were turning a profit:

Data description:

http://www.nber.org/databases/macrohistory/rectdata/09/docs/q09079.txt

Time series:

http://www.nber.org/databases/macrohistory/rectdata/09/q09079.dat

The losses of the companies that were bleeding red ink exceeded the profits of the profitable companies by about three times in 1933.

Peak to trough the net dividends of US industrial corporations declined by 86% between January 1930 and August 1932 (in $ millions):

http://www.nber.org/databases/macrohistory/rectdata/08/m08239.dat

What you had in the aftermath of the burst bubble following 1929 was a catastrophic collapse of the economy, employment, investments, personal income, corporate profits and dividends. The decline of stock prices about matched the declines of corporate investments, profits and dividends in percentage terms. At the same time you had a total disillusionment among investors as JP Morgan for instance exited the asset management business altogether in 1934 after losing 70% of customer assets (which actually was above average).

In stark contrast total US industrial production declined a mere 6.7% peak to trough from September 2000 to December 2001. Employees on nonfarm payrolls declined from 132.6 million in February 2001 - the last peak - to 129.8 million this last August, if that should be the trough. A similar decline comparable to the 1929 burst would have cost about 36 million jobs today!

According to S&P profits for the S&P 500 Index components declined by 39% peak (2000Q2) to trough (2001Q2) and for the current fourth quarter are expected to only be 3% below peak earnings. That decline was exaggerated as companies during the bubble included financial income in regular income (for Intel financial income reached 40% of reported profits in 2000 for instance) while they are now excluding eventual write downs. Excluding financial income also in 2000 the decline was much more muted.

In the "real bubble" we had a total collapse of the economy, corporate earnings and valuations. The quadrupling of the Dow Jones from 1934 to 1938 started from a PE ratio of less than 6 based on depressed earnings while the S&P now trades at a PE ratio of about 20 with much less earnings upside percentage wise than in the Thirties.

Back then stocks were considered just about the most speculative thing there was, nobody wanted to own stocks, while today investor optimism is higher than it was in 1987.

In my humble opinion you are comparing apples to oranges when assuming that we are in for a repeat of the post 1934 bubble burst rebound.

Culmus


Culmus

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