Saturday, Mar 17, 2007
Parallels with 1974 DJ
Zeal Speculation and Investment: Eve of a Bear?
Check out the graphs of the DJ and see how it compares to to the early 1970's
The 34 year cycle is still looking good.
Posted by sold 2 rent 1 @ 11:12 AM (203 views) Add Comment
9 Comments
- If you do not have an admin password leave the password field blank.
- If you would like to request a password allowing you to add comments and blog news articles without needing each one approved manually, send an e-mail to the webmaster.
- Your email address is required so we can verify that the comment is genuine. It will not be posted anywhere on the site, will be stored confidentially by us and never given out to any third party.
- Please note that any viewpoints published here as comments are user's views and not the views of HousePriceCrash.co.uk.
- Please adhere to the Guidelines
1. paolo88888 said...
You need to consider interest rates. If we are in the same situation as 1973 then we will see interest rates rise from 5.94% in January 1973 to 10.78% in September! See http://www.federalreserve.gov/releases/h15/data/Monthly/H15_FF_O.txt
for a full list. The stock market recovered in 1975 as interest rates headed back down to 5% and then fell again in 78/9 as they went back up over 10%. The authors graph shows the stock market finally breaking 1050 in 1983 as interest rates stabilised around 9%. I also note that the PE fell from 18.7 to 8.5 between the two peaks of 1973 and 1983, from which we can infer that the earnings of the companies had more than doubled.
How far can we trust technical analysis? The graphs may be similar (actually not that similar) but the events driving the graphs then - oil crisis, Vietnam war, cold war, industrial unrest are different to now.
Has property not become the the new gold? An asset which can never become more plentiful and whose utility value will always remain. Perhaps that is the reason for HPI - admittedly however, if interest rates were to vary as they did in the 1970's it is difficult to see how todays stretched borrowers and the lending institutions will cope.
2. sold 2 rent 1 said...
paolo88888,
What needs to be recognised here is that although the times are very different, human collective behaviour hasn’t changed.
These guys have seen a 33-36 year cycle in shares.
17-18 years of secular bear followed by 17-18 years secular bull
If you read their other articles they also document this same cycle in commodities.
Commodity secular bear from 1980–1998 (18 years)
I also think the same cycle is present in the housing market
http://www.telegraph.co.uk/money/graphics/2006/10/02/cnhouse02big.gif
A long period of affordable housing 1961–1975 and 1993-2007. In between these periods were rough times when property was not very affordable. Each time property crashed it became more unaffordable than the last crash.
As seen in the graph we are about to enter another turbulent patch with property, which will see many peak and troughs over the next 18 years
3. paolo88888 said...
I think you may have linked to the wrong graph - which shows house price affordability being "fair" right now, which means that either they will continue to go up to become unaffordable or they will become very affordable. "Each time property crashed it became more unaffordable than the last crash." - doesn't this imply that prices are going to go really high?
My point, which is acknowledged by the article, is that the FTSE PE is around 13 which means the earnings yield is approaching 8%. That gives equities a risk premium of 2-3% over gilts and cash. So for a stock market crash we need high interest rates which will only come about if there is high inflation. In the UK RPI went from 9% in April 1973 to the teens and twenties in the late seventies. Most commentators are predicting only one or two more rises of 0.25%, before they start to come down, and that inflation will fall.
The article is comparing the graphs without acknowledging that the factors present at one time, which should clearly be expected to affect share prices, are not present in the other graph. And the graph only presents one cycle for comparison, not a series of cycles. If I believed it I would take action but I am not convinced. Is cash a good asset to hold in inflationary times? A spread of assets, including stocks and property may do better.
Gold - a hedge against turbulent times only if the population continues to treat it as an ultimate store of value. But we have witnessed the gold price falling over long periods in very recent memory. So gold can go down as well as up, as can property. But whatever hapens economically, we must live in houses, so they always have some value. Thats why I suggest that it has become the new gold.
4. sold 2 rent 1 said...
HP affordability graph.
As interest rates creep up to 6% and HPI continues at > 10%, the graph will slip heavily into the danger zone during this year. I believe we will only need to hit 80 points for a crash (same as 1974). The next Lombard Street Research report is out in 2 weeks. (This graph is 6 months old)
“Each time property crashed it became more unaffordable than the last crash."
This coming crash is the first in the 18 year “turmoil” phase. It is at the end of a huge economic expansion (same as the 1960’s). The 2nd and 3rd crashes in this phase (1980 and 1990) reflect just how much household budgets have been squeezed over 20 years from the huge debt taken on during the 60’s and early 70’s
“So for a stock market crash we need high interest rates which will only come about if there is high inflation”
I think this stock market crash will be lead by consumer demand slowing down and won’t need extremely high interest rates. It will be like Japan in the 1990’s
“the graph only presents one cycle for comparison”
True but there are similarities with the previous cycle.
Compare DJ in 2000 and 1929
And again in 2007 and 1937
7-8 years after a major stock market peak (1929, 1966, 2000) we have a secondary crash (1937, 1974, 2007?) (or will it be 2008???)
This previous cycle was 36 years before 1966 peak
“Property is the new gold.“ – I disagree
It is an asset class that is currently close to its peak of a bubble.
Property reached a peak in 1974.
After this peak gold took over as the favoured class (from stocks and property)
5. magnifico said...
Sold 2 Rent, you say that human behaviour doesn't change. I feel that behaviour is influenced by knowledge. Today the masses are a lot more informed about Finance than they use to be in the past, thanks primarily to the Internet.
Even complete novices, like myself, can take an interest by, for example reading a Forum such as this, and form their opinion.
Do you think that in 1970 people had easy access to information from sources such as the Federal Reserves?
I said it before, we are finding ourselves in uncharted territory where trends and graphs which followed a certain pattern are difficult to predict: a typical example is the graph on the homepage of this site (that steadily rising plateau following a couple of downturns just doesn't make sense)
Yes I believe a correction is on the cards and that economics fundamentals encourage the reckless, but I think the call on when this happens is extremely hard.
6. sold 2 rent 1 said...
Magnifico,
I agree that the amount and availability of info is unparalleled in history.
The people who actually read this specialised info are still very few.
Most people get their info from the mass media (TV, newspapers and mainstream websites)
Look at the similarities between the 1929 crash and 2000 crash. Someone on this website documented that this week.
There are also big similarities between the 2000 bubble and the 1890’s bubble in the US railroad expansion.
Was it Winston Churchill who said, “The further you look back into history the further you can see into the future”?
7. sold 2 rent 1 said...
I am not sure that the stock market will begin its bear now or in 6-9 months.
We may well see one more high.
Here is some analysis of how stock and housing markets behave in a similar fashion in a secular bear/turmoil period
See 2 graphs
Housing affordability graph
http://www.telegraph.co.uk/money/graphics/2006/10/02/cnhouse02big.gif
Look at the “turmoil” period of 1974-1992
Dow's 15-year normalized P/E ratio
http://seekingalpha.com/wp-content/seekingalpha/images/PEratio_01.jpg
Look at the secular bear period of 1966-1982
See how the affordability of stocks and housing have 3 lows, each one lower than the last.
Once hitting an all time low, a “glorious” period of 17-18 years emerges.
The property turmoil period lags the stocks secular bear by 8 years. In am still in for a 2008-10 HPC
8. lvmreader said...
@Sold2Rent
Dow's 15-year normalized P/E ratio
9. lvmreader said...