MARKET TALK: It’s 1931

DOW JONES NEWSWIRES

5:20 (Dow Jones) “I have been complaining for some time now that Reinhart and Rogoff think that the time is always 1931 and that we are always Austria,” Brad DeLong writes on his blog, “that the great fiscal crisis is about to erupt and send us lurching down toward Great Depression II. Well, right now guess what? The time is 1931, and we are Austria. The Federal Reserve needs to buy up every single European bond owned by every single American financial institution for cash before the increase in eurorisk leads American finance to tighten credit again and send us down into the double dip.”

(paul.vigna@dowjones.com) (http://delong.typepad.com/sdj/2011/11/time-to-spread-foam-on-the-runway-the-federal-reserve-needs-to-act-now-to-firewall-off-the-eurocrisis.html)

I thought Mr. Market was finally coming to his senses in the third quarter, only to see him lose his mind again in October. Was that the last hurrah? The world is in too precarious a position to have equity markets rally as they did. And, we as contrarian value investors need Mr. Market to come back to reality (and perhaps get depressed again) before we can become net buyers. Today was a good day in that regard, but there is a long way to go.

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…MIT Sloan School of Management professor Simon Johnson didn’t equivocate on the perils of the current global economic environment. “We have built a dangerous financial system in the United States and Europe,” said the former chief economist at the International Monetary Fund….

Professor Johnson cited alarming parallels with October 1931, when “people thought the worst was behind them, but the smart people were wrong and instead the crisis just broadened.”

Later he echoes a sentiment that I wrote about recently:

“Building our societies on debt is very dangerous,” says Johnson. “The asset side fluctuates whilst liabilities are fixed. We need to restructure away from debt and towards greater equity capital.”

http://europe.cfaconference.org/2011/11/02/“we-are-looking-straight-into-the-face-of-a-great-depression”-says-simon-johnson/

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