Home > Uncategorized > Time for another crash?

Time for another crash?

from Lars Syll


On Black Friday 1929 market fundamentalist wet dreams of eternal growth took a serious hit. The stock market bubble exploded and crashed.

Today​ we have a stock market situation much reminding of that in 1929. The Shiller P/E ratio is now even higher than that year. Those of us who know our Keynes-Fisher-Kindleberger-Minsky and have not completely forgotten all about economic​ history are starting to worry …

  1. January 10, 2018 at 10:32 pm

    I was minus six in 1929, too young to remember. But it seems to me that today’s casino capitalism has left us in a breathtaking vulnerable state. The world of global economics seems downright down the rabbit hole. Knowledgeable people speculate about the relationship between the bitcoin bubble and the other, real, bubbles. China is deciding to put bitcoin out of business because of huge electricity demand. Dean Baker posted those amazing Amazon P/E ratios. What on earth is today’s measure of business success, other than unmitigated greed? Have I mentioned the relationship between manmade (gender intentional) climate catastrophe and Wall Street? Or any other street? Is any man anywhere making anything but climate catastrophe?
    Just wondering. Because we seem to be fiddling with numbers while the planet burns.

  2. Rob Reno
    January 11, 2018 at 2:29 am

    I will always be grateful for someone of your stature speaking the truth bluntly and colorfully, for the “market fundamentalist wet dreams of eternal growth” is indeed a reality that is killing our planet. Now I can quote an expert ;-)

  3. January 11, 2018 at 3:43 am

    I don’t think that the P/E ratio (Price to Earnings) is a good indicator for when a crash might happen because this market is purely speculative and not driven by the earnings on companies’ shares based on economic performance.
    The crash comes when a lot of folks get cold feet and run for cover. And that depends on a lot on factors that are unrelated to earnings.

  4. Risk Analyst
    January 11, 2018 at 5:08 am

    In addition to the above, there are issues with this measurement. Shiller’s PE uses an average of the past ten years for earnings so includes the sharp drop in earnings in the last recession. It uses the current price for the numerator. Also the current large corporate tax reduction is ignored so there is a discontinuity which would point to much larger earnings in the near future. These issues suggest the PE is overestimated here and is far overstated as an alarm bell.

  5. Craig
    January 11, 2018 at 8:35 am

    Instead of “the great moderation” we’re most likely to have “the great stagnation” with all of the indebtedness public and private still around, but it also risks an asset/stock market bubble bursting. If we don’t monetarily gift the individual continuously in an abundant enough way and at strategic places and times the economy will never be stable. It’s all so stupid it hurts.

  6. January 11, 2018 at 3:18 pm

    Company P/E valuations in the region of 30x may be a new normal reflecting the increased concentration of capitalism into a few global firms, rather than any sense of optimism. Valuations may drop to the historical 10x to 20x range if markets become more diverse, through a new wave of innovation, global competition, or some destructive event.

  7. Paul Davidson
    January 11, 2018 at 3:34 pm

    Federal Reserve’s QE policy avoided a great crash in 2007. The question is will the new Chair of the Fed know what to do to avoid a great crash??

    • Jan Milch
      January 15, 2018 at 10:07 pm

      I often wonder about that to Paul. But what i know for sure is that Bank of Sweden-The Riksbank, you know the people that every year give the so called “Nobel Prize” to mostly Chicago scholars (about 30%), certainly don´t do anything to avoid it, but just the opposite. They put gasolin on the fire and use the same stupid monetary policies that brought us in to
      the recent recessions and crashes.

  8. January 11, 2018 at 5:12 pm

    Yes Lars, see my posting at the Daily Kos, where I am “billofrights” : https://www.dailykos.com/stories/2018/1/2/1729269/-Capitalist-Ethics-the-Stock-Market-and-Trump

    I’m citing Shiller and company’s “CAPE” index from his late Sept. 2017 cautionary flag.

    Dean Baker and I have different approaches to political economy: he hasn’t found anything as alarming, specific bubbles (Bitcoin, yes) to match 2007-2008 real estate, but Shiller is looking at the whole market dynamic with the longest data base in modern economic statistical gathering. Shiller straddles two camps: a rational data gatherer, who also recognizes the irrationality of market at times. I’m a straddler too, maybe leaning towards the intuitive…sense of “too good” to be true and too long a run without deeper structural reforms to put income and wealth distribution on a broader basis; Baker sees good trends on those parameters but the data are too short and too recent to be structurally convincing.

    So I’m worried too. And worried that if something bad happens, all the practical and theoretical fissures which so occupy us at this site will then have policy relevance, stalemates staring at us in a time of crisis – favoring the Hayekians as interpreted by today’s Republican Right.

    • Risk Analyst
      January 11, 2018 at 7:10 pm

      A longer database is not necessarily a better database. You refer to the CAPE ratio as something that should have added credibility because it goes back a very long way, to 1881 in fact. In other news, in mid-1881 the Indian Wars were concluding with Sioux chief Sitting Bull leading the last of his fugitive people in surrender to United States troops at Fort Buford in Montana. I suspect the structure of the economy and the stock market in particular were enough different during the Indian wars that those CAPE numbers should be suspect. In financial analysis it is probably a good idea to only go back a few decades.

      I very much agree with you, however, in the reaction to recession reference. The tax cut may be nice for the stock market, but the deficit will most likely balloon. In the event of a recession, there might be a huge dogfight over even more fiscal spending or tax cuts, possible quantitative easing and other possible paths.

      • January 11, 2018 at 10:51 pm

        Well, it’s a fair question you raise. I’m reading Herbert Croly’s The Promise of America (1909) which was written then at the end of the Gilded Age, but before the Roaring 20’s: oligopoly galore with JP Morgan exerting power over not just finance but industrial forms. Almost no regulation of financial and industrial activity…isn’t that close to what the Republican Right and Libertarians want today? Pre-Federal Reserve but on the cusp. Therefore it ought to be a good laboratory on the “natural” (predatory) inclination of markets – dare I say based on “natural ratios?” 1909 would be almost as intensely imbalanced in terms of wealth and income at the ultra case in the United States, the 1920’s. British investments in cattle markets, Western lands, farmland and in railroad bonds added a nice “globalized” flavor as well.

        I just finished reading the Section of Croly’s take on reformers themselves: WJ Bryan, Jerome in NY City, Wm Randolph Hearst,, with a discussion of his inflammatory charges that everything was “rigged,” economic and politics, in favor of the Darwinian survival of the fittest.

        “Rigged?” I swear I’ve heard that recently…

        Now that 2007-2008 has driven most small investors out of the stock market, the mood and psychology of the street is determined by the web of connections between the most committed brokers and firms, and their struggle with the contrarians, as Michael Lewis portrayed in “The Big Short.” We just don’t have nominees for those leading roles illuminated for us yet. It’s hard for me to believe with Dean Baker that no one has found the “chink” yet; it’s insider knowledge in the crucial stages, of course…although Dean has always maintained that the great run-up in housing prices was so out of character so as to be there for all to see who looked at – ahem – the long term data and patterns that were being broken. But Dean still doesn’t put much stock in the Achilles heel being located in derivatives, which is where Lewis places his focus, mortgage derivative, to be more precise. In Feb. of 2007 I said the trouble would come in derivatives too, based on the apocalyptic metaphors being used by quite a few close to the action, even in write ups at the Wharton School, metaphors of human and natural catastrophes. I thought that was remarkable, so many who sensed the market, without being very precise was like a volcano about to blow.

        Am I suggesting a new modelling school in linguistic economics, based on the degree of calamity contained in the metaphors from the traders? Perhaps. Don’t know what Shiller would say about that.

      • Risk Analyst
        January 12, 2018 at 12:36 am

        I would not blame mortgage derivatives directly for the crisis so much as provide them an example of Minsky’s Ponzi finance on the path to a crisis. Its the difference between seeing the GFC as part of a systemic pattern versus the result of a dysfunctional financial product.

  9. January 11, 2018 at 11:20 pm

    That should be “The Promise of American Life” by Croly.

  10. January 14, 2018 at 10:57 am

    Several of the comments here mention the importance of history in explaining the activities of the American economy. The American economy remains “stuck” in issues about economics that go back to pre-Revolutionary times.

    In many ways the American Revolution was the outcome of imperial problems arising out of the French and Indian War; though planted long before the seeds of rebellion flowered in the postwar climate. When the UK acquired Canada, this changed the American colonies and then the USA. So long as the French occupied Canada, the colonists were drawn close to the mother country by the threat of an alien neighbor. This changed when the French lost Canada to the UK. But with English control of Canada new controversy arose between the UK and America. Britain, attempted to protect its Canadian trade and remake the Canadian government. Many of these changes proved offensive to the colonials. The events of the French and Indian War also changed administration of trade regulations in ways disadvantageous to colonial merchants. One of the most irksome of these regulations limited trade with the French West Indies. But this trade was very profitable to the northern merchants; it was the foundation of their businesses. So, they continued their illegal commerce with the French (an enemy of the UK). Before the war these violations had usually been ignored, but during they were treated as treason. In fact, it was widely believed in England that the French West Indies would have fallen easily if they had not been illegally supplied by colonial merchants. English rage and resentment over the illegal trade made the English impose stricter laws REGULATION COLONIAL TRADE, a step that inevitably lead to ill-will between the colonies and the UK. But the most acute problem arising from the war was TAXATION. As the culmination of a long series of costly 18th century struggles for empire, these wars left the British taxpayers staggering under a crushing tax burden. The expenses came to £ 82 million (12 billion today), the exchequer now carried a debt of about £ 130 million (20 billion today), and British landowners were already paying about one-third of their incomes to meet it. The old and newly acquired parts of the empire needed to be garrisoned (it was calculated that 10,000 troops would be needed in America alone). The English felt that Americans should be willing proud to share in the costs of this imperial burden. For all their English customs and manners and their professed loyalty to the Crown, the colonials did not accept the idea that PARLIAMENT COULD MAKE LAWS GOVERNING THEIR INTERNAL AFFAIRS or TAX THE COLONIES TO PAY FOR ENGLISH WARS. Colonials had gotten into the habit of managing their home affairs and leaving commercial and diplomatic matters to the Crown. The colonial assemblies learned from experience to ignore rather than to fight over royal instructions defining the extent of their authority. Of 8,563 laws passed by the home assemblies between 1691 and 1775, 469 were vetoed by the British government. But most of these did not reach deep into domestic affairs; they were vetoed because they affected British commercial interests. In short, the ideas of the English and colonials on the power of the mother country (CENTRAL OR FEDERAL GOVERNMENT) over the colonies were not, and had not been, in agreement for over a century. But the long-standing differences had never been argued out. Instead, there had been a system of accommodation by neglect: the English authorities had frequently overlooked colonial violations of parliamentary regulations, and the colonists had preferred to go on quietly breaking these laws rather than openly challenge Parliament’s right to pass them. After 1763, these neglected differences suddenly moved into the center of the political arena and led to a fatal conflict before a satisfactory formula for resolving them could be worked out. English authorities failed to grasp one essential truth: Americans are passionate to manage their own affairs without interference.

    Americans are still fighting these same battles today. With the Federal government often, the Crown that taxes without permission and interferes with state autonomy. That overrides state laws and inhibits citizens in the pursuit of their interests. Resist the Crown is still a common war cry in America today. The US is also the most anti-tax and anti-government regulation nation on Earth. These are peculiar out-of-place actions for any democracy. And particularly so for the richest democracy on Earth. But these are antipathies with a long history in America. The US is also frantically isolationist. And even when it participates internationally, it is usually based on terms set by the US, solely commercial activities – again with rules generally authored by the US – or in times of emergency such as war. These early struggles with the UK also demonstrate that the US considers all other nations on Earth its inferior, or at least unable to function without US leadership. This arises in part from US isolationism, but also flows from its religious history. If Jews were God’s first chosen people, in American eyes the US took over that role after it separated from the UK. This is the US we see today – a paranoid, isolationist, elite nation, that doesn’t want or need taxes or large national government to thrive (to paraphrase Trump, the world will give the US all the money it needs) or control the world. It’s little wonder then that even European nations often find the US “a riddle wrapped in a mystery inside an enigma.” The bigger problem is Americans often have the same experience of their country.

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