AGD Chapter VIII – The Depression begins: President Hoover takes command

When the Great Depression struck in 1929 and shortly after the stock market crash of 24^th of October, Hoover was ready to act despite opposition in the own administration. Later he would claim to be the first President to do so.

The White House Conferences: Hoover swiftly conducted several of those with financial and industrial leaders. The goal was to induce them to maintain wage rates, cut working hours but not lay-off people and expand investment ‘in a coordination of business and governmental agencies in concerted action.’
The concept was to keep real wages constant (allowing wage rates to fall only after a general price drop, and thus not at the given moment. Railroad, telephone, automobile and steel industry did fall in line amongst others. Henry Ford even announced a wage increase. De-fact, Hoover advocated for a wage floor at present levels, something the unions could only dream of with 7 percent of workers being organized. 

Inflating Credit: At the last week of October, the week of the crash, the reporting member banks of the Federal Reserve increased their deposits by almost USD 1.8 bn – a monetary expansion by 10 % in one week (1.6 USD bn thereof deposited in New York) while the FED doubled its holdings of government securities adding over 150 USD mn and discounting another USD 200 mn for member banks. The discount rate was lowered from 6 to 1.5 % by mid November. Bank reserves declined back to pre-crash levels by mid of November, 1929. But at the end of the quarter, total reserves where almost unchanged compared to mid-October, just the composition had changed. While the FED did its best to inflate, private reserves had fallen at almost the same amount.

Public Works: Hoover swiftly acted on this field, establishing a definite organization at the Dep. of Commerce, funding the Federal Buildings program by additional USD 400mn, grating subsidies to the ship construction industry and asking for further USD 175 mn for public works. 

The New Deal Farm Program: Subsidizing the US farmers had a history reaching back to 1914 and gained speed from 1920 onwards, with Hoover being part of it. Farm groups had formed a pressure group in Congress by 1921, strong enough to influence the outcome of several law acts. (Very nice are the stories for farmer complaining about low feedstock prices, consumers about high meat prices – and the tiniest group with least voting power – the meat packers and stockyards – ending up being regulated.) Page over page the different interventional acts are described: cheap loans to farmers by creating special Federal Land Banks; the Packers and Stockyards Act, prohibitive taxes on trading agricultural goods (Futures Trading Act: unlike today, where traders are the ones to blame for high oil prices, they have been blamed for low ag prices then), loans to food exporters, 10 percent cut in freight rates for agricultural goods enforced on the railroads, exemption of cooperative marketing associations from antitrust laws, …

In June 1929 the Agricutural Marketing Act was passed, establishing the Federal Farm Board (FFB). Hoover appointed the chairman of the board and it was funded with USD 150 mn. As the depression struck, the FFB started to fight falling wheat prices. Those had been heading downward for a year, so the board advised farmers not to send their stock to the market and used its funding to grant loans for the meantime. The Farmers National Grain Corporation was established to centralize cooperative marketing … a wheat cartel. Finally, direct intervention was administrated and wheat just bought from the market. Soon enough the FFB needed more money.
This led to additional acreage in the next year, a drop in export market share of the US farmers and – with the high stocks of the FFB hanging over the price level – finally a further sharp price drop in 1930. When the FFB recognized, that output had to be reduced, tours of FFB members to farmers took place. They should be talked into lowering their acreage but showed little understanding, as they would thus reduce the calculation basis for their subsidies. When the GSC (successor of the FFB) started to dump wheat on international markets, prices came down further. At the end of 1931, trading losses totaled over USD 300 mn and 85 mn bushels had been given for free to the Red Cross.

Rothbard then follows with similar success stories on the cotton market. Full scale intervention did not happen on other markets, but at least 15 are listed (grapes, butter, diary, eggs, apples, …) where the FFB tried to catch ground on smaller scale.

AGD - Chaper VII: Prelude to Depression: Mr. Hoover and Laissez-Faire

The initial chapter of Part III - The Great Depression: 1929-1933 goes back further in American economic history, describing laissez-faire as the dominant political action (or: non-action) in prior depressions. 1929 was different: the ‘Hoover New Deal’ or short the ‘New Deal’ was an anti-depression program marked by extensive governmental planning and intervention. And this set in place despite laissez-faire leading to recoveries after a short period of time – the last recovery from depression happening in 1920-21 after just one year.

Hoover left office with 25 % unemployment, no recovery after three and a half year, and with no recovery in sight. 

The Development of Hoover’s Interventionism - Unemployment: Hoover was never a supporter of laissez-faire, and while rising in the ranks in US government, he supported and initiated several left-wing programs in the 1920 depression. Many programs where initiated as ‘voluntary’ measures that the government desired from companies, with the implicit threat that compulsory measures could follow (sounds familiar today). The kick-off to such policies was the Conference of Unemployment, initiated by president Harding in Sep. 1921 – a proponent of laissez-faire. But the conference was headed by Hoover, and soon new ideas where propagated. As a direct result, twice as many municipal bonds for public works were floated in 1921 and 1922. Still, the interventionist policies gained ground only slowly, the 1920/21 depression gone away in the meantime. Their ideas started to get adopted by some of the US states in 1924. Things changed, when Hoover became President.

The Development of Hoover’s Interventionism – Labor Relations: Hoover fought several battles on social improvements in the 1920s, most important the one against United States Steel to reduce working hours from 12 to 8. (While I happen to work 12 hours a day every now and then, I have some supportive feelings on labor hours below 10 a day. You can start endless discussions on this topic – but just imagine your working hours would be cut by 33 % tomorrow. How can you company sustain that? Why did that moral need arise just now? …)

The second major playing field of Hoover was the railway sector. Controlled by the Federal Government since WWI, he supported a plan for joint operation of railroads by employers, unions and the government. Together with the unions, he achieved the Railway Labor Act of 1926, which granted collective bargaining to the railway unions.

Hoover was trumpeting the ‘new economics’, stating that high income and wages would propel production, as consumption would lead to growth. Therefore high wages would lead to economic growth –and they should not be reduced in times of depression. The idea of real wages being a consequence of higher productivity and capital investment, he put aside.

AGD - Chaper VI: Theory and Inflation - Economists and the Lure of a Stable Price Level

A long time stable level of prices led to the misconception, that inflation was not existent. The argument of the author is, that widespread, increased productivity in the 1920s off-set the inflationary effects of monetary policy for a long time. Ironically, the movement to ‘stabilize the purchasing power of money’ gained ground when prices actually did fall – by the 1920s. Legislative initiatives pressed for the FED being obliged to stabilize price levels by monetary policy, even seconded by international pressure.

DAX30 - has the correction ended?

On May the 13th I did my last post on the DAX30, suggesting that the drop below 6.600 on the day before could indicate the start of an intermediate sell-off.

Today the DAX30 holds ground at 6.340 - I hope you could profit from this 5 % drop during the last fortnight. During the last week we reached a little bit more firm ground. The index holds up above the 200-day-moving-average (MA200), which is currently around 6.200. Several up-days in the last week improved the chart somewhat, but we are still below the other indicators I use: 50-day-moving-average and 15-day and 40-day-exponential-average.

Running through the charts of all 30 member-stocks, none - not a single one - looks like a buy right now. 18 are still above the MA200, but some dropped below that significant support recently (Allianz, Infineon, Dt. Börse). Some have consolidated a little, and might hold ground here or stay just above the MA200 (BASF, Bayer, BMW to name a few). The ones looking most ugly, with little support even on a 5 year chart are Infineon, K+S, Dt. Lufthansa, Metro and maybe ThyssenKrupp.

Whats the macro picture? Greece is still in the headlines - we can expect no improvement until the repeat of the elections their mid June. And whatever the outcome: I do not see how it shall get better afterwards. Leading economic indicators are deteriorating. Companies are guiding for much less earnings growth, than analysts are expecting. And the banks in the PIIGS-countries seem to be under pressure again. The EUR went down close to 1.25 vs. the USD.

What will the next weeks bring? Being one of the European politicians, I guess I would feel urged to react rather sooner than later. Allowing another month of bad political gossip from Greece and other countries might kill the markets and some major south-European banks. Some kind of European QE, some action of the ECB (like buying government bonds again), or a European stimulus program initiated by French Hollande and German Merkel --- such action is going to happen more likely than not during the next 4 weeks. Given that, maybe the markets could be propped up a little. Without such action, I guess the DAX30 is doomed to fall further. Once additional companies and the index fall below the MA200 and stays there for 2 or 3 days, only major intervention avoid a 10 % or more drop.

What to do here and now: I am actually not confident enough, that we will see the big drop in order to keep my shorts open or initiate new ones large scale. But I also do not want to sit in cash for the next month totally. Luckily the German Wirtschaftswoche provided me with a nice idea: reverse bonus certificates. The paper suggested would give a 20 % return if the DAX30 stays below 7.700 until 20th of Dec., 2012. This seems to be a nice way to ride out the troubled waters ahead.

Do you really think German tax autorities are 'morally good' - or how an Austrian informant comitted suicide

If you are able to understand German, go to this page:

Der Standard (derstandad.at)

In short: the hunt German tax authorities are executing leads to people committing suicide and a lot of legal dispute between European countries. How much tax income makes up for a dead person?

AGD: Chapter V - The Development of the Inflation

After describing the instruments used to spur inflation, the chapter on hand lays out how the step-by-step process brought into action. 

Foreign Lending: After the 1920-21 recession, lending to foreign countries was the way of choice to benefit the US export industry. Together with trade restriction and tariffs, this helped to boost US exports to a level far above imports.

Helping Britain: Co-operation between the Bank of England (BoE) and the Federal Reserve Bank of New York began in 1920. Britain was inflating heavily and could not get back to the pre-war gold-standard. Therefore gold was leaving the country – the US being called to help by inflating themselves and thus stop this gold drain. In 1925 Britain returned to the gold standard, aided by 300 USD mn of US credit. The FED pushed interest rates in the US below the London level. The USD weakened compared to the GBP. 

Excursion: One nice sentence here in regard to today’s discussion: Certainly it is absurd, though convenient, to pin the blame for the consequences of a government’s unsound policies upon the relatively sounder policies of another government.

Rothbard explains the difference between gold standard, gold bullion standard and gold exchange standard and shows on the next pages, how the BoE used its monetary power to influence European countries and support British exports. The US government took all this steps more or less in secret, as the public view was not to engage in foreign affairs, not to join the League of Nations and of course also not to collude with foreign central banks.

The Crisis Approaches: Stock markets showed some high gains in the late 1920s, and the FED started to cut monetary expansion on this occasions. Unfortunately, it focused on only a few expansionary items, leaving others alone or even adding to expansion on those fields. In total, expansionary policy keeps going on until 1929, with the FED, the Treasury and the Administration responsible for its creation. And the public being the ones to suffer in the following years.

Down Day on the DAX - how about the DOW?

Yesterday I posted on the DAX, being quite bearish. Today it is down close to 2 % in the after-hours - will all 30 members in the red.

It was also not a particularly good day regarding the news flow. Talks about how Greece could leave the EUR dominate - suggestions are introducing the USD or creating Greek debit notes (I-owe-Us). And - of course: not paying back any debt denominated in EUR. This led to the EUR dropping below 1.285 versus the USD.

In the meantime, we still have no Greek government. Talks are, that Greek parties might agree to form a short term government, continuing the austerity programs just long enough to receive the next tranche of EU-subsidies. Being a German tax payer I can only say: Ich fühle mich verarscht!

Doing the same exercise for the DOW 30 I did for the DAX30 yesterday, I get the following picture:

BUY (8): American Express, At&T, CocaCola, Disney, Kraft, Pfizer, Travelers, Verizon

NEUTAL (12): Boeing, Chevron, Exxon, HomeDepot, INTEL, IBM, J&J, Merck, Microsoft, P&G, Wal-Mart, 3M

SELL (10): Alcoa, BofA, CAT, Cisco, DuPont, GE, HP, JPM, McDonalds, United Technologies

That's a much more balanced picture than at the DAX30. Still a drop below 12,700 on the DOW would look ugly to me. I would carefully what that level - and also around 1,330 on the S&P. If those do not hold, we are either in big trouble of B52-Ben will come to support us again.

Disclosure: I am short the DAX30, Siemens, the DOW30 and might initiate further short positions on DAX30 and DOW30 companies within the next 72 hours.

The big drop - ahead of us?

On April the 29th I posted "We escaped the big drop - for now". Back then, I was pessimistic on the German market, but thought that it might hold up a little longer. After a breakdown below 6.600 (DAX30), it seemed to have recovered.

Today, the DAX is again below 6.600. I will go into details for single stocks later on, but more then 50 % look ugly. We had election in Greece since then (leaving no possibility for any government at all or even more so a stable one), in France (Hollande winning with a very left wing program, demanding top tax rates at 75 %), in Schleswig-Holstein/Germany (leading to hardly any stable government, unless socialists and conservatives can get together), and in Nordrhein-Westfalen/Germany (ending with a slide to the left in the state with highest population).
Economic outlook is worse than it has been weeks ago. Hard landing in China is more prominent in the news now, US economy disappointed on job growth, the PIGS countries once again in discussion in Europe.

Looking at the 30 DAX stocks, my chart filter gets the following result:
BUY: Baiersdorf

NEUTRAL: Addidas, Bayer, BMW, Deutsche Börse, Dt. Post, Dt. Telekom, Fresenius Medical Care, Fresenius, Henkel, VW

SELL: Allianz, BASF, Commerzbank, Daimler, Deutsche Bank, Lufthansa, EON, Heidelberger, Infineon, K+S, Linde, MAN, Merck, Metro, Münchner Rück, RWE, SAP, Siemens, ThyssenKrupp

This gets us to  1 up, 11 sideways, 18 down.

As long as the DAX stays below 6.600, I would stay out of this market or short it.

AGD - Chapter IV: The Inflationary Factors

Having presented the theoretical part, Rothbard now digs into the analysis of the AGD, starting with Part II of the Book, The Inflationary Boom (1921 – 1929). It is clearly demonstrated, that inflation is not as easy a process, as just “printing” money. Instead he lists all the inflationary effects the US government and the FED created in that period of time.

Some general remarks on how difficult it is to do empirical analysis on any economic data open the chapter. Even if you can determine the price development within a certain period, the question what if … (there would have been different politics) … remains open. Focusing too much on what you can measure will not get you ahead in the view of Rothbard.

The Definition of MoneySupply: Next pages focus on what is considered money, and Rothbard includes de facto not only gold, paper (Federal Reserve Notes), but also demand deposits, time deposits, savings deposits and he goes even further and includes shares in savings-and-loan associations and life insurance surrender liabilities.

Inflation on the Money Supply , 1921 – 1929: Total money supply raised from USD 45.3 bn in July 1930 to 73 USD bn in June 1929, with the entire expansion taking place in money substitutes. (The numbers do not look dramatic given where we stand today.) The CAGR was around 7,7 %, the inflation 63 % over the time period. Total dollar claims vs. gold reserves raised from a factor of 17 to 24.

Generating the Inflation, I: Reserve Requirements: Reserve Requirements did not change in the 1920s, and it is also demonstrated, that there was no inflationary effect from a shift between different types of banks, or different regions. Time deposits (with lower reserve requirements of only 3 percent) did increase vs. demand deposits (with reserve requirements between 7 and 13 percent, depending on the location of the bank).

Generating the Inflation, II: Total Reserves: Reserves did rise in the 1920s by 47.5 % (from 1.6 to 2.36 USD bn) and thus provide the major lever for the 62 % increase in money supply (from 45.3 to 73.3 USD bn). So 760 USD mn of reserve increase could lift the money supply by 28 bn USD. (Worried about the world of today???) So, what increased the total reserves?

1) Monetary Gold Stock (uncontrolled – 100% effect): Deposition or withdrawal of gold

2) Federal Reserve Assets Purchased (controlled – 100%): most prominent operation is buying of US Gov. Securities by the FED

3) Bills Discounted by the FED (controlled)

4) Other Federal Reserve Credit (controlled) : checks not collected by the FED (zero interest credit) – not of importance

5)  Money in Circulation outside the Banks (uncontrolled) 

6) Treasury Currency Outstanding (controlled)

7)  Treasury Cash Holdings (controlled)

8) Treasury Deposits at the FED (controlled)
9) Non-member Bank Deposits at the FED (uncontrolled)
10) Unexpended Capital Funds of the FED (controlled)

In the whole period, while uncontrolled items (items the government, FED could not steer) did decline, controlled items did increase. Rothbard then shows the development over 10 sub-segments of the 1920s.

Bills discounted: FED started to keep the rediscount rate below market value. So banks could borrow from the FED, lending out at a higher rate to the public. (Sure you have never heard of that in the 2010s …) Politicians and bureaucrats cited the FED to be an institution that should ensure that the ‘enlarged credit resources demanded by the needs of business and agricultural enterprises will come into existence almost automatically’.

Bills bought-acceptances: Rothbard demonstrates that the FED created and subsidized an artificial acceptance market, and bought whatever was offered to it at an artificially cheap rate. The effect of this action is considered much worse than the discount policy or the stock market loans. Paul M. Warburg seems to have profited most from this policy, being an advisor to the FED and chairman of the board of the International Acceptance Bank of New York himself. Interesting are the change in regulations: from “no purchasing of acceptances allowed for national banks” to “a limit of 50 % of a banks capital and surplus” to 100 %, 150 % …

US Government Securities: FED tripled its stock of government securities during Nov. 1921 and June 1922. This was also the time, when the Open-Market Committee of the Reserve banks was founded. In addition, the government started to use short-term debt on a large scale. Those floating bills had to be refunded on and on. Member banks of the FRS (Federal Reserve System) were encouraged to hold such bonds.