Sunday, November 02, 2008

Parallels from 1929

When the stock market collapsed in 1929 it didn’t just fall off a cliff. There was a large drop October 24th, some more the 28th and then the major plunge October 29th. The market recovered somewhat in the following few weeks. From there on out it was a slow death spiral until 1932 to where most stocks had lost 90% of their value. An investor buying the dips, lost all the way down. When the dust settled, no one was interested in stocks. It doesn’t mean that no one owned them; every stock still had an owner at this low price. The mood in the country changed. Any sort of investment was considered a scam. A dollar invested in the market had returned a dime. The average worker knew his savings weren’t going anywhere stuffed in a mattress.

In the 1929 crash, stock market trading volume tripled. The dramatic increase in trading was a sign of capitulation; people had thrown in the towel and given up. This hasn’t happened in today’s market. Volume ranges just around 5 to 7 billion shares a day. A high volume day of about 20 to 25 billion shares with a dramatic drop in prices hasn’t happened yet. A 900 point swing last week on average volume makes you wonder if the shorts are just being squeezed big time. If you had been short VW you got eaten alive.

The stock market could be compared to a large herd of Buffalo on the run. Go with the flow. When times are good everyone wants a piece of the action. Even if the cliffs are ahead, the herd is not going to stop, greed has blinded them.

To separate the stock market from the other markets, the economy, the housing bubble and the banking fiasco, won’t work for long. It is all interrelated. 401K’s have lost 40% of their value. When the chairman of General Motors proclaimed 60 years ago, “What’s good for GM is good for America.” I don’t think he was referring to bankruptcy.

Markets world wide are dropping and the news is getting worse. What we are looking for in a market crash is extremely high volume and a large drop in the DJIA to say 6000 and then a quick recovery that recaptures 3/4th ‘s of the loss. From there, prices and volume should drop slowly over a protracted period of time.

The present period in time differs from the 1929 era. Real estate had started collapsing in Florida after the 1926 hurricane and was trashed by 1927. The whole country had interest only 5 year renewable home loans (sound familiar). The market crash of that time imploded the investment trusts like the Shenandoah Trust and the Blue Ridge Trust (both created by Goldman Sachs) (these were the equivalent of a mutual and hedge fund combined). From there it got worse.

Look at the visual aid from my April 6, 2008 article. If we compare the 1929 Depression with today,there was one difference; they didn’t have the big green bubble.

I tend to think that Ben and Hank are right, "It's going to be different this time around." The green bubble needs more air.

Copyright 2008 All rights reserved


frakrak said...

It seems to be factual that all major stock market corrections emanate from the month of October. Is this correct? And do you have any insight into this phenomenon? Jim I have searched your blog before making this comment, can't seem to find anything on this!

I would agree that the situation seems to be different now. The world has had two or three decades of prosperity with minor recessions. The collective consciousness may not be able to consider a point where the stock market will not rebound. I noticed in recent previous posts that hope is still maintaining optimism.

Work colleagues (nearly at retirement) are still not selling share portfolios, in the hope ...

A large portion of the investment into the stock market, are of managed accounts from superannuation, unlike the 29 debacle. I am fairly sure 5% plus, of all income in this country get more or less diverted to the S/M.

Most investors are by proxy, and may fuel the current ignorance? It may dampen the knee jerk reaction some what, or the inevitable spiral? Clearly there are subtle differences in how investing has happened this time 'round.

Look forward to any comment ...

Anonymous said...

Jim, your prediction of Dow 6000 will probably happen due to an unexpected cause this week; Chrysler. I bet when they announce their bankruptcy (perhaps Tuesday so it is mitigated by the election news cycle?), that'll send the market into a dive. Mr. Nardelli tanks yet another American icon; he's like a professional corporation destroyer.

John in Texas

Jim in San Marcos said...

Hi Frakrak

I think that October is just a coincidence for 1907, 1929 and 1987. There was a mini crash in June of 1928 that wiped out a lot of investors that is never mentioned much.

My wife and I both have 401K's and have left them alone. It's part of being diversified. Mine is 100 percent in short term bond and it is chugging along making 3%. The redemption charges make it prohibitive to cash out in a lump sum.

Its easier to play the superannuation game from the bond market rather than the stock market. If memory serves me right, the bond market is about 5 times the size of the stock market. Retirement funds will regularly lock in a 30 year bond at 5% for current payouts. Funds not being called for redemption can be more aggressively invested as you suggest in the stock market.

After the crash in 1929, the investment trusts collapsed because they couldn't meet redemptions. Those two funds I mentioned started by Goldman Sachs held 250 million dollars. They were both wiped out. The equivalent in cash today would be 250 billion.

The current place to look for trouble is in the 10,000 mutual funds world wide. I would hazard a guess that half are insolvent. There is no real government regulation. No problem is even apparent as long more money is flowing in than is going out. Its quite legal to start a fund and pay yourself a ridiculous salary and run the fund dry.

I think that the biggest factor at play here is the Kondrattif wave theory.

The next week or two will have some excitement, I'm sure.

Kristina said...

This seems to be a very interesting finding, Jim. This should give us more reasons to choose the right one to lead us out of this crisis.
BTW, I found this survey about the current economic downturn and I think it’s helpful to get involved.

Jim in San Marcos said...

Hi Kristina

I think that some of the best surveys are those where people use money to vote ie Cars, homes vacations, stock purchases.

Too many people have an ulterior motive for surveys--like the elections.

Plus if you have every gotten you name on a survey list, the phone never stops ringing. If you do answer the surveys, make sure to open your junk mail, sometimes they mail you a couple of dollars back. So there is a good side to some of it.

Thank you for your commnets