George Soros and comparing the crash of 1929-30 with 2008-2010

Posted on 12 June 2010 with 1 comment from readers

The parallel between what has happened over the past 21 months with the events of 1929-30 remains very clear, only the length of the rally looks any different.

That phenomenon we can obviously attribute to the success in throwing vast amounts of government money into the system. But has this actually cured the problem or just delayed the inevitable contraction?

Data negative

The jury is still out on that one. Unexpectedly bad US retail sales and UK GDP figures for April might be signs of disappointments to come. With the US stimulus package now wearing off and the UK plumping for austerity and budget cuts you need a good imagination to see how things will turn positive from here.

Where is this upturn going to come from? The overheating Chinese and Indian economies? They now have their own problems to address. Europe? Well, the eurozone is presently the biggest issue of all. George Soros said last week this was the start of the second phase of the crisis.

Still heading down

For stock market investors the question therefore is still when rather than if the downturn will resume and presumably accelerate. This would be the third wave of the downturn and mark the true bottom of this market cycle. Timing these cycles is never easy, and it has not been any different this time.

Consider these two graphs that explain the parallel with the 1929-3 episode:

To get back to the bubble days we have to see either a rapid recovery ahead or an explosion in the money supply. Nothing in current data suggests either. Quite the contrary. Money supply is contracting at the fastest rate since 1930 and the evidence of a recovery from last year’s slump is still lacking.

Total lending by Chinese banks in May shrank by 17 per cent against April to $93.6 billion. Two monthly surveys of industrial activity showed Chinese manufacturing growth slowing in May on slower new orders.

The prudent investor should remain on the sidelines or short this market.