A bad case of déjà vu in the markets
Things got worse three years after the Crash of 1929 and there are parallels today, says a U.S. advisory that hangs on to its gold stocks.
A credit crisis is triggered in America. It spreads to Europe, infecting banks and undermining whole nations with a plague of debt.
Has anybody ever seen anything like it?
Yes they have. It’s déjà vu all over again, as the baseball philosopher Mr. Yogi Berra is alleged to have said.
The events of 2007 to 2010 are starting to look more and more like the events of 1929 to 1932, one U.S. advisory warns us.
That doesn’t mean all is lost or that we will be descending into another Great Depression. But we had better have a clear view of what can happen, says Review & Outlook.
This advisory, which is published by a money management firm in Boston (with offices in Montreal and Zurich as well), invariably gives us a broad perspective on the world’s markets.
But before we consider the eerie parallels between the 1930s and the 2000s, we will get our accustomed update on this advisory’s gold stocks. It has held the same four stocks, including two from Canada, for some time.
Substantially higher prices
In the very bad month of May, the advisory says, “gold turned out to be a welcome but not unexpected bastion.” Gold rose above US$1,225 an ounce. (Today, as the markets buckle again, it has risen above $1,245.)
It has been six months since the Dubai crisis broke in November 2009, adds the advisory, and subsequent problems in Greece and other countries “have led to more investors questioning where exactly some degree of safety can be found.”
Gold may suffer another descent later this year, but the medium-term outlook calls for substantially higher prices, in the advisory’s opinion.
Its largest gold holding, Newmont Mining (NYSE-NEM) has underperformed for several years “despite improving fundamentals.” It is about a dollar higher than it was a month ago, at $59.26, and yields 0.6 per cent on its 40-cent dividend.
The advisory still likes Canada’s IAMGOLD (TSX-IMG) “although it has risen a fast 30% since early February and should not be chased upward.” At $19.37, the shares are just where they were a month ago (after a $4 rise in April) and yield 0.3 per cent on the modest $0.06 dividend.
It is just as happy with its two chosen smaller producers, which “offer outstanding value.” Canada’s Orvana Minerals Corp. (TSX-ORV) trades at $1.37, about the same as last month. Australia’s Intrepid Mines (TSX/ASX-IAU) has also held steady at $0.46. Neither pays a dividend.
Panic over solvency
Let us go back eight decades, to the month of May 1931. 20 months after the Great Crash of 1929, Austria’s largest private bank filed for government protection.
It was the first in a series of shock waves. Two months later, major banks in Germany closed down, and British assets in that country were frozen to prevent more runs on continental banks.
“Among the triggers was panic over the solvency of mid-sized European nations such as Austria,” says this advisory, “and therefore, governmental debt of all types was placed on a one-year moratorium brokered by the American president Herbert Hoover.”
Is this beginning to sound familiar?
U.S. banks also suffered large losses, stuck with international assets that now could not be liquidated. And then they had to be re-priced as Britain abandoned the gold standard in September 1931.
More European nations ditched the gold standard, and the dollar value of European assets fell, which sent European depositors scrambling to redeem gold in the U.S. and repatriate it to Europe.
The U.S. was running a huge deficit. Alarmed by this deficit, what we now call “bond vigilantes” were selling into the market and pushing up long-term yields. Banks saw even more capital drain away.
The most ferocious year
The worst was yet to come. Between August 1931 and January 1932, no less than 1,860 U.S. banks holding almost $1.5 billion in deposits suspended operations. Total deposits in the system fell by 17 per cent.
“It was 1932, and not 1929, the year of the Great Crash, that was the most ferocious year of the Great Depression from a financial markets perspective, particularly in credit markets,” says the advisory ominously.
The government tried to stem the panic in many ways. It purchased new assets, drove down interest rates and pulled down bond yields. This reduced the rate of bank failures.
Then Fed Governor George L. Harrison put a stop to the policy, declaring that it had checked deflation and was allowing banks to build “excess reserves.” Had order been restored?
No. Bank failures continued through 1933 until the new Roosevelt administration took further steps. European economies remained in a state of crisis right up to the beginning of the Second World War.
The similarities between the two periods may be frightening, says the advisory, but the differences are important, too. The response to the current crisis has been much more rapid and vigorous than that of 1929. Governments and economies are more stable than they were in the 1930s.
Financial systems are deeper and more complex (for better and for worse) and the absolute wealth of the world is greater. This gives us a greater capacity to weather financial storms.
“Still, history shows us that the realities of calmer times can dissipate during periods of crisis,” says the advisory. Many assumptions about financial security made from 1929 to 1931 were blasted away in 1932.
The lesson is simple. In calmer times, we should always invest as though trouble may be just around the corner — and might hang around longer than we think.
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