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Strategies & Market Trends : Waiting for the big Kahuna -- Ignore unavailable to you. Want to Upgrade?

To: William H Huebl who wrote (44245)	10/27/1999 5:27:00 AM
From: Skeet Shipman	Read Replies (3) \| Respond to of 94695

Bill, interesting and eerie ... eerie similarities to the boom and crash of the twenties, and some differences. An account partially altered from: netside.net The boom of the late twenties was fueled by four sectors of the economy: the automotive industry which in turn fueled others like steel, rubber and gasoline. The building industry because roads were needed and suburbs started developing; and the buildup of the electricity infrastructure. The fourth was the financial sector which brought about the biggest illusion of wealth in history (before now?). Output increased dramatically during the boom of the late twenties; agricultural production rose over 10 percent, industrial production 20.7 and international trade nearly 21 percent. Capital formation was a healthy 18 to 20 per cent of the GNP and the real gross domestic product grew by almost 30%. Technological innovations helped American workers become the most productive worldwide; the US economy accounted for over 40 per cent of world output. During the decade between 1919 - 1929, productivity advanced more than 60 per cent in manufacturing, output per worker 72% and the time to produce a unit of output decreased 30% . Yet, wages advanced only 10% causing per capita income to advance only 1.2 percent yearly. The strength and duration of the boom prompted in many the thought that the economy was immune to turnarounds in the business cycle. The prevailing idea was that the riches were unlimited. Americans lived better than ever and the urge to enjoy all comforts of modern life generalized a boom in credit. As industries turned out millions of units of output, advertising standardized the buyers; mass production joined forces with mass media and a whole new range of goods complemented with new selling techniques became available for the American consumer. Despite the positive outlook, economic growth in the United States was not healthy after 1925. Europe had recovered a great part of its productive capabilities, both agricultural and industrial, and new countries were entering the nations economic concerto, specifically primary producers such as Argentina, Australia and Canada. This increased the current supply of products causing a flood of goods and services worldwide. The producers of raw materials such as coal, the agricultural sector and the older industries such as textiles were specially affected as prices plummeted. Even as the costs of labor and raw materials fell, manufacturers did not lower their prices accordingly. This made industrial profits grow at a rate of 80% during the twenties, rising far more than wages and productivity . The profits were not distributed equally among the shareholders, management, the workers and providers of raw materials. As the decade was ending, farmers and foreign supplier's were unable to purchase the finished products and workers found it impossible to buy the goods they had produced. The purchasing power of the middle class declined. 21.5 out of the 27.5 million families in the US in 1929 earned less than US$3,000 a year, which made it very hard to consume and even harder to save . But sellers had an answer to all those who lacked liquidity: consumer credit. Through monthly payments it was possible to buy from radios and washing machines to cars and houses. 50 per cent of all the cars sold during the decade were paid for by installments . The expectation of a prosperous future made up for the lack of current income and everyone bought on credit thinking that their incomes and businesses will continue to grow indefinitely. Credit was so easy to obtain that by 1929 the population was literally swimming in debts. But the most impressive boom took place in the financial markets. In 1929 one and a half million Americans had invested in the stock market trying to get rich quickly. Many of them bought shares on margin paying only part of the price for the companies shares. Profits were reinvested in the market and that caused prices to rise even higher. During 1928 for example the price of Radio Corporation of America (RCA - AOL) stocks had grown from 85 to 420 even though it had never paid a dividend. DuPont was 525, up from 310. Also the various industries were strongly monopolized, especially utilities, and the big corporations reported huge profits. This helped to fuel the rise in stock prices. In most industries the establishment of trusts (index sector funds) tended to have a severe influence over prices. The increasing economic and financial concentration represented a severe opposition to the free interaction of market forces. Unions were to keeping wages artificially high in selective industries. Stock market related credit and debt impaired the operation of the market forces and Fed intervention. All the above had been interfering with the economic cycles? ability to eliminate the excesses of supply and demand, of production and consumption. The financial system lacked proper regulation and colossal industrial, banking, service and financial conglomerates (mutual funds and trusts) were able to manipulate the markets according to their wishes. Wealth was highly concentrated. The richest 27,500 families had as much wealth as the poorest 12 million . Despite the optimism of the twenties, the economy was developing severe structural problems that later would surface. As the situation progressed, consumption markets began drying up and production started to fall substantially. The first to falter was the construction industry which pulled down related sectors, then other consumption sectors, as transportation. By July 1929, the industrial production index had reached its peak. After three consecutive months of the declining index the crash occurred in October. The advancing declining issues on the stock exchange had been diverging for 18 months. Summarizing the situation that led to the Great Depression, there were large structural imbalances such as the worst agricultural crisis in the history of the United States, the greatest level of income and wealth concentration, a high level of monopolization of industry and services, low salaries and the plunge in purchasing power of the middle classes. It is safe to say that the boom of the late 20ïs was fed by low wages, abundant credit, low raw material costs and a high degree of financial speculation. It was a growth both artificial and unsustainable. By 1929 the Federal Reserve realizing the speculative market and construction bubble began increasing interest rates. With the agricultural crisis over a year old and now investment projects declining the economy was headed into recession. The market bubble economy needed only a minor blow to trigger the inevitable. Skeet