A brief look at history – the crash of 1929: September – the slide begins

After reaching its then all time high of 381,17 on September 3, 1929, the Dow Jones Industrials Average began what was at first a fairly slow slide. From the beginning of June to the first trading day of September, the average had gained 79 points – almost as much as in all of 1928, which was already a fairly spectacular year. Margin credit exploded during the summer of 1929 by an average of $400 million per month, then a huge sum.

 

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Photo credit: Bettmann / Corbis

 

There was heavy trading volume throughout the summer, with about 5 million shares changing hands daily at the NYSE, which represented about 60% of all trading volume in those days (the remainder of trading took place at the ‘curb’ and exchanges in other cities; curb traded shares avoided the NYSE’s listing requirements). Not surprisingly, after such a heady summer, which capped several years of steady gains, no-one thought the September pullback remarkable. After all, the market had suffered quite a few pullbacks in the course of the bull market, some of which had been a great deal more scary. The progress during the summer months had been steady, with pullbacks mild and never lasting longer than two or three days in a row.

During September, the market’s character underwent a subtle change. In the first half of the month, pullbacks still only lasted two days in a row at most, but that changed later in the month. A string of five down days in a row, then one small up day, followed by another three down days ended the month – the DJIA was suddenly back at its level of late July, having lost all the gains made in August.

An interesting feature of the summer months as well as September was the attention broker loans received. Due to the high interest rate these margin loans paid and the presumed safety of the collateral behind them, they attracted funds from all sorts of sources. Speculators in turn didn’t worry about the high interest rate – a 9% annual rate could not deter someone seeing gains of 25% in a mere three months, as had happened during the summer (and of course those gains had been magnified due to the liberal use of margin).

Nevertheless, there were numerous critics expressing worries about the growth of margin lending, but the financial press tended to play their arguments down, even going as far as charging the critics with trying to undermine confidence for ulterior reasons (Barron’s and the Wall Street Journal both published editorials to that effect). Economics professors from Princeton to Yale also lent their optimistic voices in support. The main argument was naturally that stock prices were actually not overvalued; after all, prosperity was deemed certain to continue to increase. Thus the bearish argument that ‘margin loans will become a problem if and when stock prices should fall’ was not to be given credence, because there was no reason for stock prices to fall. Alan Greenspan, when defending central bank inaction in the face of the 1990’s bubble, was – perhaps unwittingly – going to repeat an argument first forwarded by Professor Lawrence of Princeton in 1929, in defense of the 1920’s bubble.

 

Professor Lawrence had said:

 

‘The consensus of judgment of the millions whose valuations function on that admirable market, the stock exchange, is that at present, stock are not overvalued. Where is that group of men with the all-embracing wisdom that will entitle them to veto the judgment of this intelligent multitude?’

 

Alan Grenspan’s words were:

 

‘For a central bank to identify a bubble involves pitting its own assessment of fundamentals against the combined judgment of millions of investors.’

 

It is interesting to note in this context that neither Alan Greenspan nor any other central banker thinks it odd that the central bank should know better than this ‘multitude of investors’ at which level interest rates should be set. The skeptics were few, and in addition, the seemingly unstoppable upward march of stock prices served to discredit them. Banker Paul Warburg was one of the few financial professionals daring to voice doubt. Alas, his stern warning came in March of 1929, when the market had just endured a temporary break, and the subsequent rally relegated him to the stable of ‘obsolete bears’. The pessimists, it was often speculated, had financial motives for their pronouncements, such as being short the market.

It was in this spirit that the late September decline was greeted. Two days after the high print of September 3, there had been a memorable one day break of 2,6%, which later became known as the ‘Babson Break’. The multi-talented entrepreneur, business cycle theorist and investor Roger Babson, an early proponent of technical analysis, had held a speech at the Annual National Business Conference in which he boldly predicted that ‘Sooner or later a crash is coming, and it will be terrific.’ Not only that – he also predicted that a vicious cycle of liquidation and a serious business depression would ensue. The financial press lost little time in denouncing him (a Barron’s editorial pointed to his ‘many inaccurate predictions in the past’), and Professor Irving Fisher of Yale declared a crash all but impossible.

The news backdrop deteriorated somewhat in late September of 1929. On September 20, the business empire of Charles Clarence Hatry in Britain collapsed, among allegations of fraud. It turned out Hatry had forged stock and bond certificates and cooked his company’s books to boot. His undoing was triggered by an unsuccessful attempt to merge a number of steel foundries into United Steel, which would then have emerged as one of the largest British steel producers. The coup was too big for him, and he got caught trying to pass off GBP 1 million worth of forged municipal bonds in an effort to obtain the necessary funds. This invited scrutiny of his corporate accounts, and the Hatry Group promptly collapsed ($30 million were lost due to the collapse of Hatry shares alone). British investors then began withdrawing fund from elsewhere, including Wall Street. This probably contributed to the 7,4% loss in the DJIA from September 20 to October 1. Concurrently, the Federal Reserve reported a slightly worrisome deterioration in business conditions, specifically, a marked decline in industrial production. Nevertheless, as a measure of the confidence that continued to reign during most of September, broker loans increased by a record $670 million during the month.

 

October 1929 – the appearance of ‘organized support’

On October 3, the day the Kingdom of Yugoslavia was established by merging Croatia, Serbia and Slovenia, the market endured yet another big break. The DJIA took an near 15 point nosedive, equivalent to a decline of 4,23%. It closed at 329 points, a level last seen in late June of 1929. No particular reason accounted for the sell-off – it simply appeared to be a continuation of the late September malaise. No-one was worried yet however, and the market recovered in the following week to 352 points. Professor Irving Fisher achieved a dubious immortality by stating on the evening of October 15: ‘Stocks prices have reached what looks like a permanently high plateau’.

October 16 was another weak day however, with the DJIA losing over 11 points. It regained about half of that loss the next day, but then came Friday October 18 and Saturday October 19. In those days, the exchange was open on Saturdays for a shortened session. Ominously, a large price break occurred with volume the heaviest ever recorded in the short session – nearly 3,5 million shares. The Dow lost a cumulative 18 points, or 5,26% in those two trading days – landing at 323,87 – a new low for the move. Rumors that margin calls had gone out began circulating (the rumors were true), and the Sunday papers uneasily reported about the ‘wave of selling’ that had engulfed the market on Saturday.

A more reassuring note was however sounded insofar as the papers – specifically the financial press – almost all concurred that ‘the worst is over’. This was when the phrase ‘organized support’ first appeared. The idea was that the major banks and Wall Street houses, as well as the highly leveraged investment trusts, would not ‘allow’ the market to fall further. Frequent mention was made of what we nowadays know as ‘cash on the sidelines’, as the investment trusts were (correctly) thought to hold large cash reserves.

Monday October 21 was an uneventful day in terms of price movement, with the Dow declining another 2,96 points to 320. However, it sported what was then the third-largest trading volume in history, 6,09 million shares. Intra-day the market had been down a much larger 8,5 points, and due to the frantic trading volume, the ticker tape for the first time in the course of the decline failed to keep track of prices in a timely fashion. In hindsight, this technological snag probably contributed greatly to what happened next. The problem for the many margined speculators was that they could not tell anymore where prices were at a given point in time, and had to fear the worst. This created a ‘sell before it’s too late’ mentality.

On Monday October 21, the tape was 1 hour and 40 minutes behind actual events. This had of course happened before, but only in a rising market, not a falling one. The psychological difference between being late in finding out how much richer one has become as opposed to being late in finding out whether one has been ruined is considerable. That Monday, Professor Fisher again declaimed his confidence, by stating that merely ‘the lunatic fringe had been shaken out’ of the market, and that stocks were now undervalued, because inter alia, they did not yet reflect the beneficent effects of prohibition, which had made ‘American workers more productive’.

The chairman of National City Bank (known today as Citigroup), Charles E. Mitchell, a.k.a. ‘Sunshine Charley’, announced that ‘the decline has gone too far’, and in a refrain familiar to the newly minted veterans of the 2008 market crash, declared that the country’s ‘business fundamentals are sound’. Furthermore, the attention paid to margin lending volumes was entirely unwarranted in his opinion. It appears that Citi has attracted ‘late dancers’ in major bubbles throughout history. Similar to today’s version of the bank that financed massive speculation in mortgage backed securities through its SIVs (‘structured investment vehicles’) under the leadership of former CEO Chuck Prince (who once famously stated: ‘When the music stops, in terms of liquidity, things will be complicated, but as long as the music is playing, you’ve got to get up and dance. We’re still dancing.’), its predecessor organization in the 1920’s financed a great deal of stock market speculation – with similarly ill-chosen timing – under Sunshine Charley Mitchell.

Tuesday October 22 brought a recovery in stock prices, with the Dow rising 5,6 points, or roughly 1,75%. Mitchell and Fisher had managed to restore a small modicum of confidence for one day. Babson however seemed not to share their optimism. He let it be known that ‘investors should sell stocks and buy gold’ – prescient advice as it turned out. It is strange in retrospect that Wednesday October 23 never got designated ‘black Wednesday’. This was certainly the day when the first truly chaotic and indiscriminate wave of selling hit the market. Apparently the public had begun to put more stock in Babson’s predictions than those of his expert contemporaries wearing rose-colored glasses.

The market opened quietly that day, but shortly before noon, selling started in car supplier stocks, and from there began to spread through the entire tape. The plunge became especially pronounced in the last hour of trading, with 2,6 million shares traded, at the time an unheard of amount for a single hour. The DJIA ended the day a full 20,66 points lower, at 305,85 points, only two points above the day’s low. Slightly less than the entire gain of the year 1929 had been erased (the DJIA began 1929 with an opening price of 300 and a closing price of 307 points on January 2). Once again the ticker fell behind, with cross-country communications additionally hampered by a storm in the Mid-West. A large number of margin calls went out.

Organized support made its entrance the next trading day. Thursday October 24 is nowadays widely regarded as the real beginning of the crash, and it has in fact been designated a ‘black’ day. Similar to today’s magical thinking about government agencies supporting the market at will, there was a strong faith at the time that a consortium of New York bankers could achieve the same. This faith was nurtured by the famous ‘market rescue’ ascribed to J.P. Morgan in the panic of 1907. A little bit of skepticism about these claims would probably have been in order.

For one thing, Morgan’s intervention could not stem the stock market crash, which happened in spite of his efforts to prop up banks suffering runs by depositors. The proximate cause of the 1907 crash was a mistimed attempt to corner short speculators in a copper stock, United Copper Company. The trust financing the corner – the Knickerbocker Trust Company – promptly went bankrupt alongside Augustus and Otto Heinze and Charles Morse, who had attempted the corner. The action was mistimed as it happened while an economic contraction was underway, and the people attempting the corner in addition misread the market. They forced United’s stock up from about 30 to about 50 points, but short sellers were able to borrow sufficient stock to counter the corner, and the stock promptly collapsed all the way to $10.

A typical chain reaction set in, with the collapse of the Knickerbocker Trust causing bankers to restrain their lending, and depositors starting to fear for the health of the banking system. There were many moments in this crisis when things were deemed to be ‘touch and go’ – inter alia NY City itself was close to bankruptcy at one point, and got a loan commitment from Morgan to avert this calamity. The point though is that while Morgan was definitely instrumental in knocking heads together and ultimately finding a private market solution to the banking crisis, he could not avert the stock market crash.

In 1929, the ‘organized support’ of the NY banks was thought to be able to do just that – and it actually worked, for exactly two and a half trading days – which is oddly reminiscent of the two trading days for which the SEC’s short selling restrictions seemed to ‘work’ in mid September of 2008, when the DJIA was driven up by nearly 1,000 points just prior to the October crash.

‘Black Thursday’ initially continued where Wednesday had left off – prices just fell into a bid-less void. Trading volume exploded to 12,9 million shares, more than double the previous record. After an uneventful open during which prices actually rose a tad, volume suddenly began to swell, and with it, prices began to sag. The rest of the morning hours was characterized by a blossoming panic. Once again the ticker tape was far behind the action, but word of an enormous collapse in prices got out anyway. This was accomplished via the bond ticker, which contained sporadic updates on stock prices that were more up-to-date than the ticker tape’s. Margined speculators contributed heavily to the selling frenzy, often involuntarily. Shortly before noon the DJIA had plummeted to an intra-day low of 272 points, down a huge 33,5 points from Wednesday’s close.

That was when the ‘organized support’ went to work. A meeting was convened at the Morgan offices, with the presidents and chairmen of the biggest NY banks present (Sunshine Charley of National City, Albert Wiggin of Chase, William Potter of the Guaranty Trust Co., Seward Prosser of Bankers Trust, and Morgan senior partner Thomas Lamont). After the meeting, Lamont met with reporters, stating that ‘there has been a little bit of distress selling on the stock exchange’ but that this was only ‘due to technical conditions’, and of course, the ‘fundamentals remained sound’ and the situation was clearly prone to ‘betterment’. The agency about to procure the betterment was the consortium of NY banks.

Prices immediately began to firm when word of Lamont’s interview reached the exchange. Shortly after noon, Richard Whitney, vice president of the NYSE and floor trade for Morgan, went to the post for US Steel and left a limit order for 200,000 shares. He then proceeded to leave similar orders for other key stocks at their respective posts. It was clear that the banks had moved in to support the market, and prices shot upward for most of the remainder of the afternoon. The fear of losing everything had been replaced by the fear of missing the rally. A small selling wave appeared again shortly before the close, but all in all the operation was deemed a great success. The DJIA closed with a relatively tame loss of 6,38 points, just under 300 at 299,47. The ticker tape was over 3 hours behind that day, and many margined speculators had been sold out at the lows, so the recovery meant nothing to them. In the evening, the press was informed by the cast of usual suspects that the situation was well in hand, the fundamentals sound, and the ‘technical break’ over. A contemporary account of these events can be found in this article by Time Magazine, ‘Bankers vs. Panic’.

On Friday October 25, prices actually rose a tad, with the DJIA closing up 1,75 points. They softened again slightly in Saturday’s shortened session with the DJIA closing at 298,97. In terms of price movement, these two days were quite uneventful. In terms of trading volume they were anything but. Over 6 million shares traded on Friday, and over 2 million in Saturday’s short session. The weekend following the bankers’ market intervention is an interesting curiosity for students of market psychology. Apparently, the previously predominating feelings of fear had almost entirely evaporated. It was as if someone had thrown the ‘maximum optimism’ switch.

A veritable who’s who of the banking and industrial elite sounded off on the ‘sound fundamentals’ and the fact that ‘stocks were now cheap’. Even president Hoover chimed in, insisting that ‘the fundamental business of the country’ was on a ‘sound and prosperous basis’. The papers were full of stories about ‘buying orders piling up at the brokers for Monday’s open’ and exuded strong conviction that speculation could be resumed forthwith.

A few articles spoke of divine retribution that had been visited upon speculators, a warning shot that had done its sad, but necessary work. The CEO of Associated Gas and Electric, Howard Hopson, likewise sung from this hymn sheet, declaring that ‘it is without a doubt beneficial to the business interests of the country to have the gambling type of speculator eliminated’. Several brokers joined in a concerted advertising campaign in Monday’s papers, urging people to buy. This, so they said, could now be done ‘with the utmost confidence’. The banking consortium seemed to have succeeded – faith in the stock market was restored.

 

Late October, the crash continues anyway

As it turned out, the weekend before October 28 was one of the biggest exhibitions of wishful thinking in market history. On Monday October 28, stocks went into free-fall – losing more on that single day than in the entire week before. Volume was once again very heavy at 9,25 million shares, with 3 million traded in the last hour alone. Once again the ticker tape was way behind the action, but it was clear to everyone that things had to be bad. Shortly after 1 p.m., Sunshine Charley was observed entering the Morgan office, which the news ticker duly reported.

A brief recovery in prices ensued, but Richard Whitney didn’t appear on the floor this time. The market finally closed about 4 points off its lows, but the DJIA had lost over 38 points at the end of the day, a decline of 12,8%. Similar to what we have seen in modern day crashes, the decline of the big averages didn’t tell the whole tale. The more speculative and illiquid issues were hit far harder. It was an unprecedented debacle. The bankers met again for a pow-wow that evening. Afterwards, Lamont once again met with journalists, only this time, he had no firm assurances for them. The most he would commit to was that the ‘situation retained hopeful features’, but he wouldn’t be drawn on what those were. He did however state that the banks did not see it as their duty to support stock prices at a certain level or protect people from losing money. Foreshadowing a phrase we often hear nowadays when the market plunges, he said they were merely concerned with maintaining an ‘orderly market’.

This is of course a bit like when CNBC’s Bob Pisani nowadays announces that ‘yes, the Dow has plummeted by X hundred points, but the interesting thing is that the decline was very orderly’. The translation for investors and speculators is: ‘you’re losing your shirt, but let’s be glad it’s happening in an orderly manner’. One supposes it would be worse if it happened in the form of a disorderly panic, although the profit and loss statement presumably doesn’t care about the distinction. Thus the ‘potent directors’ myth was shattered by Mr. Lamont on the evening of October 28 1929, only a few hours after it had still informed the hopes of thousands of traders and investors. The market reacted with yet another plunge on Tuesday, October 29, and there could be no doubt this time it was as ‘disorderly’ as they come.

Volume swelled again, although some stocks went bid-less for hours. A number of stocks were actually down by 90% during the day’s trading, a fact that could only later be ascertained by dint of some people putting in ‘spoof orders’ well below the market that ended up getting filled. At the end of the day, volume was recorded at over 16,4 million shares, a new record high, and the DJIA had closed down 30,57 points at 230,07 – a loss of 11,73% on the day. This close was actually well off the day’s low, which was at about 212 points. The market had been helped by short covering late in the day. Prices were now back at the level of August 1928, but the crash was still not over.

There was a large recovery over the next two trading days, with the DJIA snapping back to 273 points by the close of October 31, but between November 4 and November 13 a string of harrowing losses drove the average back down all the way to 198,69 points. Thus the crash had erased roughly 180 Dow points from the high, and bankrupted the bulk of margined speculators. Between October 24 and October 30, broker loans fell by $1 billion. Incidentally, the bankers who had provided the ‘organized support’ were by way of rumors suddenly suspected of organizing bear raids, and Thomas Lamont was forced to defend them against this allegation in statements to the press. The presumed ‘saviors’ had turned into widely despised pariahs within a week’s time. Many of the people involved in the rescue effort were in later years hauled before congressional investigation panels and blamed for the crash and its aftermath. Several were convicted for fraud and/or tax evasion (inter alia Sunshine Charley and former NYSE vice president Whitney).

 

The potent director’s fallacy in modern times

One thing I often hear is that ‘the Fed will do this or that to support the market’. In fact, the Fed has already done quite a bit. Contrary to what commercial or investment banks can do, there is in theory no limit to the Fed’s operations – it can print up money at will, although this will of course always be done in the context of the buying of securities, be they treasury bonds or, as has recently been the case, mortgage-backed bonds.

Similarly, the treasury department is thought of as possessing near unlimited power to run up debts in support of ‘stimulus spending’ and endless bail-outs. And yet, in spite of this near limitless fount of ‘organized support’, the stock market has crashed just as badly as in 1929. In fact, lately, the stock market has done even worse. After the crash of ’29 ended on November 13, the market managed a steady recovery into late April of 1930. Recently, the market has by contrast experienced the ‘worst January in all of history’ as CNBC informed us last Friday. There is of course still a very good chance that a recovery will arrive with a delay, and the market has not yet breached its crash lows of November 2008.

While the Fed or the treasury have never said that they are aiming to support the stock market directly, there can be little doubt that this is one of the hoped for outcomes of their interventions. There is no more obvious barometer of the financial and business mood than the stock market. The hope is that by directing support at the center of the financial troubles, namely the credit markets, the stock market can also be induced to shake off its funk.

So how come the ‘potent directors’ are once again failing? The reason becomes clear when one thinks things properly through. The economy and its underlying production structure are what they are. There is nothing the government can possibly add to to the economy in terms or real resources. By intervening on a grand scale in what appears to be a distinctly ad hoc manner, it merely introduces what is known as ‘regime uncertainty’. The main question investors are faced with these days is not ‘is the economy sound’ (it isn’t) or ‘will earnings improve’ (some day they will). The main question is ‘what will these bozos do next’. And yet, there is this almost touching, widespread faith that government holds the solution to our problems.

People have to believe in something – the idea that the ‘wealth increase’ of the bubble years was entirely illusory is still not fully embraced. It is simply unacceptable – everybody, even many former bears, hopes that the downturn, while likely bad, will prove to be just another brief slump after which a return to ‘business as usual’ will surely follow. This is to say, everybody secretly prays for the bubble to return.

There are now debates between economists in the pages of the Financial Times over whether the downturn deserves to be called a ‘depression’ or not. Note that the person refusing to countenance the thought is Stephen Roach, who for many years has warned of the bubble’s excesses. Apparently not even he can imagine that the downturn will be a mirror image of the boom.

News flash: industrial production and capacity utilization are in free-fall all over the world; trade is suffering its biggest contraction in decades; unemployment is increasing by leaps and bounds (according to shadowstats.com, the US unemployment rate would already be at roughly 17% if it were measured the same way as in the 1930’s) ; even the former polyannas of the ‘Goldilocks club’ are forced to admit that the downturn already looks like the worst of the entire post WW2 era.

 

Chart by shadowstats.com

 

The annual economic summit in Davos was overshadowed by the gloomy reality, but at the same time brimming with incantations and assurances of government intervention being capable of saving the day (eventually). The fact that financial markets are apparently in violent disagreement with this view is generally put down to their inbuilt tendency to act in an irrational manner. Sure enough, financial markets are not entirely rational. Their movement is best explained by herding and the constant feedback loop between observers and participants. This is however not to say that there is no connection between the deteriorating fundamental underpinnings and the action of the markets. The common denominator is economic man, and his liquidity preferences. As to the ‘potent directors’ – today’s version of them is more ‘potent’ than anything we have had before – and yet, reality is limiting the efficacy of their actions.

The government’s actions are predicated on the notion that malinvestment can be given a shot in the arm once again (although of course no government bureaucrat would ever put it that way). This has after all worked before. There is a difference to ‘before’ though. For one thing, securities prices can not rise without limit, and neither can the prices of other assets. The only way to induce a near limitless rise in asset prices is to utterly destroy the currency in which they are denominated, but then they would still decline in real, purchasing power terms (as measured by their price ratio to gold). More importantly though, there was never a chance to properly correct the earlier excesses when the great boom was interrupted by financial and economic crises previously. Every time the central banks and governments of the world managed to restart bubble-type activities (activities that would not be profitable absent a credit boom) before a correction could proceed to properly repair the world’s increasingly misaligned production structure.

In this manner, error was heaped upon error – an assessment that the nowadays insolvent banking giants would probably have to concur with, given that they were a focal point of this accumulation of economic errors. This can only be done up to a point – the point at which real resources are not able to support the consumption and production patterns of the bubble anymore. We seem to have passed this ‘point of no return’ in the sense that not even the most massive monetary pumping exercise in human history seems able to rekindle bubble activities. This in turn makes the faith in the potent director’s a dubious proposition, regardless of their indubitably great powers. Imagine for a moment that the central banks and treasuries of the industrialized nations were to decide to go well beyond their current ‘all in’ posture, committing to prop up asset prices at all costs, as demanded by the Keynesians at Pimco (link broke on August 5th 2010).

In short, imagine the effort to keep markets from reaching clearing prices would be expanded to whatever extent deemed necessary. Such an effort would likely be shipwrecked by the very markets it was designed to manipulate. The idea that governments are free to completely ignore market discipline is mistaken. Either the currency or the bond markets or both would veto the attempt – these markets can only be strung along to the extent that they remain confident that governments will be able to acquire the resources necessary to pay back their debts via future taxation. Once this confidence wanes, the game is over.

Similarly, the central banks can not inflate willy-nilly. At present, a strong private sector credit contraction is a countervailing force to the inflationary policies, and traditional channels of monetary expansion – specifically the expansion of credit money – are clogged by dint of an insolvent banking system. However, central banks can always go the route of crediting the government for debt it issues to them, and they can expand such activities to the point where they overwhelm the private sector credit contraction.

An example for this is the situation in Zimbabwe. Naturally, the country was in a position that was prone to such an outcome to begin with – many years of crass economic mismanagement culminated in the government’s de facto insolvency, and massive inflation was the regime’s ‘last resort’ in order to be able to continue to pay those that kept it in power. It would be an error to necessarily draw the conclusion that this is the path we are on. Zimabwe merely serves as a very good example as to the limitations the ‘potent director’s’ eventually must face, even if there is no legal limit to their ability to issue currency or debt.

 

Conclusion:

We should be just as skeptical about the current government and central bank directed efforts at influencing market prices as investors in the late 20’s and 30’s should have been regarding the efforts of the potent director’s of their time – first in the form of the banking consortium that vainly attempted to stop the crash, and later in the form of the government and the central bank, neither of which could stop the depression from playing out. Instead, their ministrations ended up making it worse. Not coincidentally, the liquidation in the stock market took a long time to play out, and prices eventually reached levels no-one would have considered remotely possible when the contraction began. This is why even now, one must resist the idea that an allegedly ‘cheap market’ is once again fit for long term investment. At the moment, it is a market for nimble traders at best, for as long as it takes for the contraction to play out. Notwithstanding all the hopeful incantations at Davos, we can not rely on the bureaucrats to pull our chestnuts out of the fire.

 

Note: The historical information was sourced from John Kenneth Galbraith’s book ‘The Great Crash of 1929’ (link broke on August 5th 2010). While I’m no fan of him as an economist, this monograph is an excellent synopsis ot the events surrounding the crash.

 

 
 

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One Response to “The potent director’s fallacy”

  • Floyd:

    With the benefit of some hind sight, as of 3/13th/2011, the Fed QE1+2 and USG deficit (40% of its revenue) seem exceedingly potent, at least if measured by the price increase of the major stock indexes.
    It is interesting that some key markets abroad become rather gloomy – if not bearish – as of late.

    However, with $1.5T annual deficit (40% of revenue, 10% of inflated GDP) it is hard to believe in soft landing (i.e. manageable graduation out of debt without sever ramifications).
    I wonder whether the USG is beyond to point of no return…
    If it cuts drastically, it will depress GDP and tax revenue.
    If it increases taxes it would depress economic activity (reducing the taxes).
    If it keeps QE-ing it would eventually get people nervous about the USD and USTs, raising interest rates and depressing the USD.

    Thoughts?

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      Mutating Promises We are less than one week away from the EU referendum, the moment when the British people will be called upon to make a historic decision – will they vote to “Brexit” or to “Bremain”? Both camps have been going at each other with fierce campaigns to tilt the vote in their direction, but according to the latest polls, with the “Leave” camp’s latest surge still within the margin of error, the outcome is too close to call.   The battle lines are...
  • MACAU, CHINA - JANUARY 28: Buildings of Macau Casino on January 28, 2013, Gambling tourism is Macau's biggest source of revenue, making up about fifty percent of the economy.What Could Possibly Go Wrong?
      A Convocation Of Gamblers The Wall Street Journal and BloombergView have just run articles on the shadow banking system in China.  This has put me in a nostalgic mood. About 35 years ago when I was living in Japan, I made a side trip to Hong Kong.   Asia's Sin City, Macau Photo credit: Nattee Chalermtiragool   I took the hydrofoil to Macau one afternoon and the same service back early the next morning.  On the morning trip, I am sure that I saw many of the...
  • tree removal permit-1The Real Reason We Have a Welfare State
      From Subject to Citizen BALTIMORE – June 5th, the Swiss cast their votes and registered their opinions: “No,” they said. We left off yesterday wondering why something for nothing never works. Not as monetary policy. Not as welfare or foreign aid. Not in commerce. Not never, no how. But something for nothing is what people most want.   The future Switzerland just managed to dodge... for now   The Swiss voted against awarding all citizens a “universal basic...
  • junkThe Problem with Corporate Debt
      Taking Off Like a Rocket There are actually two problems with corporate debt. One is that there is too much of it... the other is that a lot of it appears to be going sour.   Harvey had a good time in recent years...well, not so much between mid 2014 and early 2016, but happy days are here again! Cartoon by Frank Modell   As a brief report at Marketwatch last week (widely ignored as far as we are aware) informs us:   “Businesses racked up debt in the...
  • saupload_loves-me-loves-me-notA Darwin Award for Capital Allocation
      Beyond Human Capacity Distilling down and projecting out the economy’s limitless spectrum of interrelationships is near impossible to do with any regular accuracy.  The inputs are too vast.  The relationships are too erratic.   The economy - complex and ever-changing interrelations. Image credit: Andrea Dionne   Quite frankly, keeping tabs on it all is beyond human capacity.  This also goes for the federal government.  Even with all their data gatherers and...
  • nails-in-a-bed-of-nails-new-yorker-cartoonGoing... Going... Gone! The EU Begins to Splinter
      Dark Social Mood Tsunami Washes Ashore Early this morning one might have been forgiven for thinking that Japan had probably just been hit by another tsunami. The Nikkei was down 1,300 points, the yen briefly soared above par. Gold had intermittently gained 100 smackers – if memory serves, the biggest nominal intra-day gain ever recorded (with the possible exception of one or two days in early 1980). Here is a picture of Haruhiko Kuroda in front of his Bloomberg monitor this...
  • queen_gold-840x501Rule Britannia
      A Glorious Day What a glorious day for Britain and anyone among you who continues to believe in the ideas of liberty, freedom, and sovereign democratic rule. The British people have cast their vote and I have never ever felt so relieved about having been wrong. Against all expectations, the leave camp somehow managed to push the referendum across the center line, with 51.9% of voters counted electing to leave the European Union.   Waving good-bye to...

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