Australian (ASX) Stock Market Forum

The Great Depression (Causes & Your Thoughts)

Thanks for the comments Duc.

How long could we expect for the highly inflationary period?

Hey look at this

Hungary is lifting rates to save the dollar!

http://business.smh.com.au/business...ate-bid-to-defend-currency-20081023-572i.html

Hungary lifts rates in desperate bid to defend currency

Hungary's central bank has raised the benchmark interest rate by 3 percentage points, after a series of earlier measures to prop up the forint failed to halt the flight of investors from local assets.

The Magyar Nemzeti Bank lifted the two-week deposit rate to 11.5% yesterday, the highest since July 2004. The first emergency increase in five years came after policy makers left rates unchanged at their scheduled meeting two days ago.

Stocks, bonds and the forint plunged in the past two weeks on concern that the country will face Iceland-like difficulties in financing its current account and budget deficits with global credit drying up.

Lining up help from the European Central Bank and the International Monetary Fund, along with moves to increase liquidity, failed to stem the slide...

The thing is Australia is cutting rates (and lowering AUD to lower levels as per artilce below) but will that fuel inflation out of control?

http://business.smh.com.au/business/dollar-tipped-to-drop-to-50-us-cents-20081023-573a.html

thx

MS
 
Thanks for the comments Duc.

How long could we expect for the highly inflationary period?

Snake,

Who really knows.

However it is illustrative to distinguish twixt a "cost-push" inflation, which due currently to globilization has not been a feature, and a pure monetary policy inflation. Should the current financial crisis however drive protectionist policy from various governments, that might change, though Trade Unions the world over are weak.

As the function of an inflationary policy is primarily to devalue debt, we could take a stab at a time estimation simply by calculating the level of debt, extrapolate GDP growth, and look at longer term ratios of Debt/GDP

The figures will be somewhat imprecise, but will give you a ball-park figure.

jog on
duc
 
Snake,

Who really knows.

However it is illustrative to distinguish twixt a "cost-push" inflation, which due currently to globilization has not been a feature, and a pure monetary policy inflation. Should the current financial crisis however drive protectionist policy from various governments, that might change, though Trade Unions the world over are weak.

As the function of an inflationary policy is primarily to devalue debt, we could take a stab at a time estimation simply by calculating the level of debt, extrapolate GDP growth, and look at longer term ratios of Debt/GDP

The figures will be somewhat imprecise, but will give you a ball-park figure.

jog on
duc

Hm yeah, it will be good to keep an eye on GOLD

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thx

MS
 

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Thanks for the comments Duc.

How long could we expect for the highly inflationary period?

Hm, its hard to believe but sometimes when peopel say it wont happen, it happens :(


A repeat of the Great Depression is highly unlikely, largely because of the massive rescue plans now in place, Organisation for Economic Co-operation and Development (OECD) chief economist Klaus Schmidt-Hebbel says.

In an interview with the OECD Observer magazine, Mr Schmidt-Hebbel said he expected many OECD countries would slip into recession and that recovery would likely be slower than in recent economic downturns.

Mr Schmidt-Hebbel said an economic depression was an "ambiguous concept'' and that some people thought of it as a very deep and drawn out recession.

"Of course, this is the worst financial crisis in decades, but a repeat of the 1930s Great Depression is highly unlikely, thanks in large part to these massive rescue plans now in place,'' he said.

The OECD will release its next economic outlook on November 25 in which it will lay-out how it sees the global financial crisis unfolding.

"Our base scenario is built on the premise that the current freeze in short-term financial markets will be resolved in a relatively short time span,'' he said.

But he said rebuilding trust in financial markets would take much more time, and could mean a more protracted period of restrictive financial conditions, affecting loans and access to funding.

"We expect a significant weakening in the world economy, with many OECD economies slipping into recession sooner or later,'' he said.

"It is likely that recovery will depend largely on how quickly financial markets resume transactions and lending, even if that lending remains restricted, at least compared with 2002-07.''

But he said macroeconomic policy should also play an important role in cushioning the recessionary impact of the crisis.

"As economies quickly weaken and inflation recedes there will be room for interest cuts in some OECD economies, not to mention timely, temporary, and targeted fiscal stimulus as well.''

However, he sees two major risks for the outlook.

One is that the freeze in financial markets and lending could take more time to thaw out with more severe effects on spending, output and employment.

"This would lead to a deeper and more persistent recession,'' he said.

The other risk comes from yet unknown budgetary costs associated with rescue plans undertaken by various governments.

"When the financial crisis and recessions are behind us, fiscal adjustment will be called for to maintain confidence in public debt and currencies, particularly in those countries that have had to foot high costs in bailing out their banks,'' he said.

But he said there was a prospect of some favourable outcomes from a weaker world economy - an easing in oil, food and other commodity prices.

"If the downward trend proves larger than we currently envisage, this would bring still lower inflation and gains in real incomes for commodity importers, as well as providing more room for further monetary policy easing,'' he said.

AAP

http://business.smh.com.au/business/world-depression-unlikely-oecd-20081027-59j8.html
 
Personally i believe that as long as their is a monetary system there will always be greed/power as money incentifies people.

After doing a fair bit of research into the 1930's i believe alot of things are happening here. The only difference is we have many more emerging markets than before......

Its good that Warren Buffet is lookign at the current financial mess in perspective etc

http://www.kitco.com/ind/Turk/turk_oct272008.html

Mr. Buffett's Market Call

In an article published in The New York Times on October 16th, Warren Buffet tells us that he has “been buying American stocks”. He has one of the best performance records of anyone, and has generated stunning investment results over the past four decades. For this reason, we should take notice of what he is doing.

Mr. Buffett’s reasons for buying are summed up in the following comment: “A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.”

In all likelihood, he’s right of course, but he warns: “Let me be clear on one point: I can’t predict the short-term movements of the stock market.” Clearly, Mr. Buffett is a savvy investor and buys bargains when he sees them, which apparently is right now. But just as clearly, he is focusing on the long-term.

In explaining this inability to predict short-term movements in the stock market – or perhaps his indifference to them – Mr. Buffett refers to history to make his point. “During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend.”

oct272008_1.gif

The moments in time he chooses are interesting. With the benefit of hindsight, we know that they were important turning points. I have numbered these three moments on the following chart, which presents the month-end price of Dow Jones Industrials Average measured in weights of gold.



Mr. Buffett’s three turning points have a common thread. As we can see from the above chart, all of them are near the green horizontal line, a marker denoting that the DJIA was relatively cheap when measured in terms of gold’s purchasing power. The DJIA was 64.4, 84.7 and 40.0 goldgrams at points 1, 2 and 3 respectively. Keep in mind too that these are month-end prices. During these months, even lower prices were reached.

In comparison, the price of the DJIA at September 30th in the above chart was 384.6 goldgrams. As of October 16th when Mr. Buffett’s article was published, the price of the DJIA had fallen to 348.5 goldgrams, which is still approximately the same price as I write.

Clearly, from this perspective, the DJIA is not as good a value as it was at the three turning points referenced by Mr. Buffett. So perhaps Mr. Buffett is focusing on certain undervalued stocks which he doesn’t name, and not the broad averages. As the old saying goes, it is a market of stocks, and not a stock market. Any average like the DJIA or S&P 500 cannot possibly identify those individual stocks that today may offer exceptional value. After all, Mr. Buffett does warn us that “investors are right to be wary of highly leveraged entities or businesses in weak competitive positions.”

Nevertheless, it is reasonable to ponder whether Mr. Buffett is making his market call too early. In fact, when prices are viewed from a gold perspective, it seems he may be way too early. But there is another important observation made by Mr. Buffett in his article that further explains his thinking.

“Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts. Equities will almost certainly outperform cash over the next decade, probably by a substantial degree.”

This paragraph makes clear that Mr. Buffett is looking at the stock market solely from a dollar perspective. He is in effect, telling us to own stocks instead of dollars, which is I think good advice given the way the dollar is being rapidly debased by being created at extraordinarily high rates and at levels that far exceed economic growth. Also, the interest one can earn on dollar denominated assets is far less than the inflation rate. In other words, as Mr. Buffett notes, the dollar is “a terrible long-term asset…that pays virtually nothing and is certain to depreciate.”

So from the perspective of the dollar, stocks are the better choice. But in my view gold still remains the better alternative, which is a point of view that I have held for several years. See for example, the following three articles that I have written and posted on this site:

May 15th, 2006 - Hold Gold, Not the Dow

October 4th, 2006 - Gold Is Still the Better Choice

June 4, 2007 - What New Record?

In summary, there are times to be in stocks, and times to be in cash. Right now cash is the better choice, but not dollar-cash as Mr. Buffett warns. Stocks are cheap in dollar terms. The Dow industrials finished last week at a new closing low for 2008, as did the Standard & Poor's 500 index. So far this year the DJIA is down 37% while the S&P 500 has lost 40% and the Nasdaq 41%. At these price levels, Mr. Buffett advises that stocks are a better choice than dollars, but in my view, stocks are not yet a better choice than gold. If history is any guide, and I believe it is and so does Mr. Buffett given that he used historical examples, the price of the DJIA measured in terms of gold has much further to fall.

Consequently, investors should stay out of the DJIA and other major indices while they continue to hold gold, thereby keeping their money safe and sound until stock prices fall to more reasonable levels when measured in terms of gold.

by James Turk

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Thx

MS
 

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