Click to enlarge.
The following chart shows the period after the Great Depression (using the DJIA in place of the S&P 500).
Click to enlarge.
Note that there was no calm period immediately following the Great Depression. Other than that, the charts are pretty much the same. Few could see the crash of 1937 coming (or World War II shortly thereafter). As seen in the chart, complacency had fully set in (just like it has now).
In summary, it would seem that the 3rd and 4th years after epic investment disasters are periods of great complacency. Perhaps investors assume that the worst is behind us and a whole new era of economic prosperity will soon unfold? If history is a guide, that could not be further from the truth. Serious "unexpected" risks lurk in the 5th year. I would even be so bold to argue that serious "unexpected" risks lurk every time complacency sets in. The popular saying is not, "Hope for the best, plan for the best." That's got optimistic disaster written all over it. (No sarcasm intended.)
For what it is worth:
1. The Great Recession was an epic economic disaster.
2. In its aftermath, we have just experienced two years of great complacency.
3. We're just about to enter the 5th year yet again.
Can we make it a full year without any further economic pain? I have serious doubts. I continue to stand by my prediction that the next recession will hit by October of 2014 (made in 2012). I just don't see much reason to change my mind, especially now that job growth is slowing again and few seem to notice. Sigh.
This is not investment advice.
Source Data:
St. Louis Fed: Custom Chart
I suspect one reason that there was no calm period immediately following the Great Depression had a lot to do with simply not having enough data to make informed decisions.
ReplyDeleteWe're talking pre-computer generation here.
It's just a theory on top of a theory though.
Do investors really make informed decisions? Some must, but herd behavior may be more to the point.
ReplyDeleteIt reminds me of the lottery...when the pot hits a tipping point, say 200 million, the crowds line up to buy tickets, even though the odds of winning worsen.
of course, I'm inching along here with a lot of ibonds and cash, so what do I know. Friends are making bank.
fried,
ReplyDeleteDo investors really make informed decisions?
You make a good point. I better come up with an alternate theory. Hey, I know. In 1929, high frequency trading algorithms revolved around screaming "Sell!" faster than the next guy, lol. Perhaps that put a damper on investor enthusiasm that was not soon forgotten, lol. Sigh.
It reminds me of the lottery...when the pot hits a tipping point, say 200 million, the crowds line up to buy tickets, even though the odds of winning worsen.
Don't even get me started!
December 13, 2013
Alabamians cross state lines to buy Mega Millions lottery tickets
Marco Williams works as a police officer in Alabama and said he had no intention of driving to the Georgia border to buy lottery tickets.
"Me and my friend who I work with just decided to come over here and buy a lottery ticket. She woke me up this morning, cause I worked late. I wasn't going to go, but she talked me in to it," Williams said.
Driving to another state to buy one lottery ticket?
56.5 cents per mile to operate a motor vehicle?
Expected return on investment?
I suspect one reason that there was no calm period immediately following the Great Depression had a lot to do with simply not having enough data to make informed decisions.
ReplyDeleteImo, more than anything it had to do with a lack of Gov't intervention.
The notion that free markets are efficient and self correcting just doesn't square with history.
Successful economies and markets are managed! People like Mish only see mismanagement. Talk about turning a blind eye!
mab,
ReplyDeletePicture one person building one robot capable of doing nearly every mundane task that a human could do.
Now picture that person commanding that robot to do the following:
1. Make a copy of yourself and issue these same commands to it.
2. Apply for a job that you are capable of performing at least as good as the typical human.
3. Point out in the interviews that you'd be willing to work 24 hours per day at half the pay any human would accept.
4. Point out that minimum wage laws don't apply to you as you are not human.
5. When hired, perform that job to the best of your ability each and every day. Never complain.
The free markets don't really have a good answer for that, other than taking great delight in the next super-jobless lack of recovery, lol. Sigh.
Gallows humor.