Crash Signatures

If you have been a long term reader here you know that I have something called a 'Crash Signature.'

One of the key components of this is a significant decline from a new all time high, that rallies substantially so that the fear subsides and most believe there is a return to 'normal' bubble conditions.

Unfortunately, IF this is a rally that fails, in that it fails to set a new high, but tops out and then falls sharply again, we have a higher potential of a crash in which confidence is shattered and a new lower low is set.

I have a correspondent in France who also does trend tracking such as this. While I have normally been using a composite model of several crashes from US market history (1929, 1974, 1987, 2001, 2008) he is concentrating lately on a comparison to the year of 1937.

It should be noted that the 'crash' of 1937 pales in comparison to the Crash of 1929. And it was largely caused by an egregious policy error by the Fed.

If you look at it carefully it does follow the 'crash signature.'

Here is the latest chart which he has sent to me. I think if we fail once again to take out 'The Wall' on my SP 500 chart, and drop to a lower low, there will be a higher than normal probability of a 'crash.'

Although I have to add that we are in the days of organized support, and mobilization of the entire country's money mechanisms, to support stock prices for the benefit of their primary constituents.

The next few months could be memorable.

Update on the Comparison with Prior Notable Declines

The next few weeks will be interesting.

This is just the Dow Industrial Average, such as it is today.

By 'such as it is' I mean a grossly modified artifact of a dead theory that is pretty much useless.

We would have to see confirmation in the broader indices, rathern than the narrow DJIA and NDX, like the SP 500 and the Russell 2000.

What Is Missing To Complete a 'Crash Signature' for 2018

"Life is a school of probability."

Walter Bagehot

Here is a little more to expand on the posting I made last night here.

We have had a long run up, with only a few corrections, to new all time highs.

The market has finally broken and corrected significantly.

You can see comparisons to 1929 and 1987 in the first chart below.

This was forwarded to me by a long time friend with whom I discuss these things.

As I suggested to him and attempted to show in the posting last night, what is required now is a break below the current low, decisively.

That takes the possibility of an inverse head and shoulders bottom off the table, and gives us the 'failed rally' scenario.

As you can see in 1929 there was a decline from the top of 17+ percent, followed by a rally back of 11+%, that nevertheless failed to make a new high, and rolled back over.

Once the new low was set, the market started its slide.

But I cannot stress enough that until and unless the inverse H&S bottom is taken out and a legitimate signature is given this remains a low probability event.

One issue in the current situation is the calendar. The Thanksgiving holiday is fast approaching.

This is traditionally a period of very light stock market volumes with a bias to a drift higher in preparation for the year end tape painting known as the Santa Claus rally.

Therefore timing is a bit of a headwind to the failed rally. It may require more of a 'trigger event' but that is very hard to forecast.

So let us be watchful for a market break lower here to a new low.

A Retrospective and Signature In Charts of the Crash of 1987

"Life is a school of probabilities."

Walter Bagehot

And, now and again, gravity.

After a long ramp higher, marked by a narrowing rally driven by the concept of portfolio insurance and program trading, the market began to correct lower in the latter part of the year.

The first chart shows the hallmarks of what I had identified as a 'crash scenario' some years ago.

It begins with a long inflation of the financial asset to some high mispricing of risk, in a rally that I call The Ramp.    The Ramp tends to be an unusually regular progression higher, as the financial asset rises steadily and without the usual corrections along the way that one might expect.  This is a facet of its artificiality and non-market driven genesis.

Over time the asset price rises to a new high that seems almost remarkable looking back over its long progression to new highs that seem divorced from any real fundamentals.   There will always be apologists who will try to justify the price through some means, some of which are often a bit tortured in their reasoning and historical soundness.

A correction ensues that may be unusually volatile given recent history, but does not acquire the other characteristics of a panic.

This first correction is often driven by things that may seem not all that significant, which I call a trigger event.

The first correction is most often led by selling in some of those narrow components that took the asset prices higher in the first place.   It exhausts itself fairly quickly, and traders and investors are rather quick to come back into the market to buy the dip.  This behaviour can be almost reflexive and unthinking, because buying the dip has always paid off with gains as the asset price quickly recovered.

And in a non-event driven top, the asset prices do indeed recover quickly, based on the buying of the dip, to a level equal to or less than the prior top.  A very narrow segment of the market may even set new highs.  These are those components that are the heart of the new era thinking, or mispricing.

As prices hit this second high, the enthusiasm of the narrowing market trade, often driven by automatic buying based on momentum indicators and algorithms, fades.

The usual progression higher is now clearly broken, and asset prices correct again, often to an equal or greater drop to a second low, breaking the longer term trendline.  The confidence of the dip buying automatic buying becomes a bit shaken.

It should be said that support of the asset bubble, which can come from those who wish to 'save' this unsustainable asset mispricing, may be required to shoulder the burden of the market rally almost on its own.    But this time it does not invoke the support of broader market purchasing.  Buyer have now left the market, and the market supporters and algorithms are left largely standing against the new market trend alone.

This results in the rally that failed.  This is the final push higher, which upon its turning lower causes many market participants to being capital protective selling, that causes almost all assets involved to be sold in the hopes of avoiding more losses.   And a panic ensues.

The crash of 1987 was particularly sharp, and its recovery into the end of the year was remarkably good, recovering much of the losses.  This was an engineered recovery by the Fed under Alan Greenspan, who had the latitude to re-inflate the bubble.

It is interesting to see what 'worked' in this particular crash of 1987.   And what declined along with most of the financial assets.

I have included a number of charts that show this below.

I have also added at the very end several charts that show the pattern which we have seen in this long post-election rally to date.    The rally has been led, once again, by a narrowing group of big cap tech stocks and certain financial asset companies.

Only one of the assets shown in the charts below stood up in the panic selling in the Crash of 1987.  Can you spot which one that was?

The reasons for this bubble are several, but primarily through the increase in liquidity that was almost exclusive funneled to those who were involved with the financial asset markets.  This has been abetted by fiscal government policy that is supportive of a continuing narrow wealth bubble, by crippling or removing regulatory safeguards and favoring asset price manipulators through rules and rulings.

It should be noted that the core of the insiders are generally not only out of the market rally, but have placed many bets against it, to profit to the downside, when it fails.  No where in recent memory was this more pronounced than in the collapse of the housing bubble economy in 2008, and the many financial instruments that were just flat out vehicles for a control fraud.

That there were so few consequences for this illicit activity has left us with a moral hazard that makes another crisis almost inevitable.  It is not that those who are in positions of power and influence do not know this;  it is that compared to its value to them personally, they just do not care, and can easily hide behind a lack of accountability and false complexity.  Who could have seen it coming?

We will know more about our current situation of the next week or so.  It is too early yet to identify it, except to say that the situation appears fragile.   So far I would think of this as a market break rather than a crash unfolding.

I suspect that the support activity will center on the buying of the SP 500 futures.  This has been the 'go to' remedy for organizational stock market support in the US for some time.   But that will only be successful if the tech stocks can join in the rally, and the market support be handed off to a broader set of participants.

A key feature of the stock market today besides all the automatic momentum trading is the huge stock buyback activity by some of the market behemoths, who have been allowed to grow far beyond the constraints against antitrust and monopolist considerations.  While this has provided fabulous riches for some, it has concentrated risk in a manner that few really comprehend completely.

A market break is a loss of confidence in this momentum based buying that is able to recover, often through the actions of professional market participants and institutions.  It is a symptom, and a portent of greater things to come, if reforms are not taken to stabilize the asset prices and re-establish a firmer connection between risks and returns.

I created most of these charts when I began studying asset mispricing in the prelude to the tech stock bubble and crash, at the end of the 1990's.

Depending on where this goes I may also post a similar retrospective on the more profound crash of 1929 which unfolded and recovered over a much longer time periods.   Each asset bubble and collapse has its own characteristics and peculiarities, even though they may share the same signature and many essential aspects.

Also as food for thought, there is a similar but opposite pattern with asset prices that break out higher after a long period of official and semi-official suppression.  One generally looks to see this in certain key commodities and currencies that have been long 'managed' for any number of reasons.   That pattern breaks out with a ferocity that is similar to but in the opposite direction of a meltdown.  Indeed, it can be thought of as a meltup with a large store of potential energy behind it.

No one can forecast a singular event like a market crash with any certainty.   Some make a cottage industry of it, but don't count their misses, which are plentiful.  They manufacture forecasts to sell them, and the more attention getting the forecast, for good or ill, then the more that they can sell.

Can you tell me what Trump, the Fed, the Chinese, Mother Nature, etc will do next week?  No, then how can anyone say what the market may do likely in some response to these sorts of exogenous variables.

But we can assess the mispricing of risks, and look for more fragile times when the required force of any necessary trigger become so slight that the probability of a mishap becomes unusually high.  And what I am saying it that we are now there, and unless we do something to change our current trajectory in policy and regulation, that a major market crash can become ever more likely..

Where we are now.

Stocks and Precious Metals Charts - An Apéritif to a Banquet of Consequences - Dow Industrials Drop 700+ Points

"What is most offensive is not their lying— one can always forgive lying— lying can be a delightful thing, for it leads to truth.  What is offensive is that they lie, and worship their own lying."

Fyodor Dostoevsky, Crime and Punishment


“A true opium of [worldly] people is a belief in nothingness after death— the huge solace of thinking that for our betrayals, greed, cowardice, and murders that we are not going to be judged.”

Czesław Miłosz

Stocks continued selling today. What was particularly discouraging for the bulls is that there was no afternoon rally.   In fact, the selling accelerated in the last hours of trading, and the major indices went out on the lows, and on heavier volume.

One might point to the new tariffs to come on China, and fears of a trade war. Earlier this week one would look to the Fed, and talk about the rising interest rates, probably the most carefully telegraphed monetary decision in history.

Perhaps it was the latest antics of Facebook, in the general growth of the abuse of privacy of the public by government and their corporations. One might also look to the dysfunction in Washington, and the misguided policies that have been crippling the middle and lower classes to the advantage of the one percent.

Let's skip the usual bullshit exercise of identifying the reasons for this sell off for the moment shall we?

Certain financial assets, like the major stock indices, led narrowly by the FANG tech stocks and the financials, had been lifted to new heights by what certainly looked like the utter mispricing risks.

And as we have seen in the last two asset bubbles and subsequent financial crises, prices continued rising to even greater over-valuations.  They were lifted on a cloud of misrepresentations and  the purposeful weakening of transparency and regulation, from the purveyors of stocks and their many purveyors of the big lie designed to support the economic status quo.

As I have cautioned,  when this mispricing of risk continued to expand,the 'trigger event' needed to knock the market off its blocks would decrease in required magnitude, until something incidental, or a cluster of rather minor incidents, would be enough to send prices down, and with a vengeance.

So far this latest market decline is what I would call a 'market break' and not a 'crash.'   As a reminder, there was a disquieting market break in March 1929 that was quickly forgotten, until the market breaks of September, culminating in a bloody October.

The Father of Lies

It will not take much for some semi-official group to turn the markets around by buying the SP 500 futures at a key moment.  There is not much fundamental stock picking in this market;  it is all index ETFs and narrowing momentum.

Buying the futures to turn things around could be done by the Fed or some other NGO that is working with their compadres of the revolving door.   One group wants to get rich, and the other wants to not be run out of town on a rail. 

That has been a 'go to' solution since the mid-1990's. It is very possible that stocks will find a bottom, perhaps in a true selling capitulation, and then turn and run back up to perhaps a new high later this year, led by the usual suspects and their aficionados.

But if there is no financial reform, if there is no return to good governance and honesty in the major mechanisms of the financial system which, after all, is the capital allocation heart of any capitalist economy, there will once again be a crash, a staggering correction in prices, for the third time since the year 2000.

There was a very minor flight to safety today. The US Dollar managed to drift slightly higher within its recent trading range. And in the usual manner of the recent currency trading of the precious metals, gold and silver were off a bit in response.

And let us not forget that there will be an option expiration for gold and silver on Monday.

Government bonds caught a bid, which was a bit odd in this interest-raising environment needed because things are just that good in the real economy right?   We certainly don't want any overheating, as in higher wages for working people.

Wall Street will be dropping another IPO into the markets tomorrow in Dropbox, unless they call it off for reason of market conditions.    I suspect that they will try to stabilize the markets while Wall Street squeezes this latest creation out.

This is not going to end well. But if we get another rally, all of this gloom will be forgotten, and it will be bread and circuses and the latest scandals of the rich and frivolous all over again.

And when it really hits the wall, when the financial system is thoroughly knackered, we can always blame Trump, or Russia.

Have a pleasant evening.

Remembering the Summer of 1929

This is one of the best documentaries on the Crash of 1929 if you wish to get a feel for the times.   You may find it interesting to watch the whole thing below.

I have posted the entire documentary twice before:  once, on the 80th anniversary of Black Thursday in 2009, and once before in December of 2007.

I remember the Summer of 1929 being described as unusually hot, with the stock market going up and down like a roller coaster, making investors and pundits almost dizzy.  That is, until the great push up to the very height of the market in early September.

It was the laissez-faire abuses of the 1920's, the reign of supply side economics,  the institutionalized political corruption of easy money, an oversized,  overly influential and powerful financial/industrial sector that set the stage for the terrible Depression of the 1930's.

It also gave rise to the many reforms introduced by the FDR administration.

Most of which have been steadily overturned, one by one, by the big money interests who care for nothing but themselves, and would do it again, and again, if allowed to do so.

Most of the scams of the moneyed interests are remarkably simple, and the same over time.  At least they are once you scrape away the jargon, the bells and whistles, and paid for policy theories of pedigreed prostitutes.

The titans of Wall Street are no smarter than many smart people who do much more difficult jobs and lead simple, honest lives. But they are driven, they are insatiable, and they are shameless.

Enough people are easily fooled in each generation by well scripted ideological PR campaigns, clever revisions and misrepresentations of history, and the steady drumbeat of slogans and propaganda to allow the same old scams and abuses to come back again.  And unfortunately even very smart and powerful and greatly advantaged people are always willing to do anything for money.

Here is a link to the transcript of this documentary.

Narrator: At sea and on land, everyone seemed to be making money. It was a stampede of buying. And major speculators like John Jacob Rascob whipped up the frenzy. He told readers of The Ladies’ Home Journal that now everyone could be rich. September 2nd, Labor Day. It was the hottest day of the year. The markets were closed and people were at the beach. A reporter checked in with astrologer Evangeline to ask about the future of stock prices. Her answer: the Dow Jones could climb to heaven. The very next day, September 3rd, the stock market hit its all-time high.

Ben Karol, Former Newspaper Delivery Boy: My father and I had an ongoing discussion about the stock market. And I used to say, “Pop, everybody’s getting rich but you. You know, you work so hard and you’re never going to make a nickel. All you do is you keep delivering these newspapers and that’s about it. The guy who’s shining shoes is in the stock market, the grocery clerk is in the stock market, the school teacher’s in the stock market. The teller at the bank is in the stock market. Everybody’s in the stock market. You’re the only one that’s not in the stock market.” And he used to sit and laugh and say, “You’ll see. You’ll see. You’ll see.”

Narrator: On September 5th, economist Roger Babson gave a speech to a group of businessmen. “Sooner or later, a crash is coming and it may be terrific.” He’d been saying the same thing for two years, but now, for some reason, investors were listening. The market took a severe dip. They called it the “Babson Break.” The next day, prices stabilized, but several days later, they began to drift lower. Though investors had no way of knowing it, the collapse had already begun

Narrator: In the weeks to follow, the market fluctuated wildly up and down. On September 12th, prices dropped ten percent. They dipped sharply again in the 20s. Stock markets around the world were falling, too. Then, on September 25th, the market suddenly rallied.

Reuben L. Cain, Former Stock Salesman: I remember well that I thought, “Why is this doing this?” And then I thought, “Well, I’m new here and these people” — like every day in the paper, Charlie Mitchell would have something to say, the J.P. Morgan people would have something to say about how good things were — and I thought, “Well, they know a lot more about this market than I do. I’m fairly new here and I really can’t see why it’s going up.” But then, when they say it can’t go down or if it does go down today, it’ll go back tomorrow, you think, “Well, they really are like God. They know it all and it must be the way it’s going because they say so.”

Narrator: As the market floundered, financial leaders were as optimistic as ever, more so. Just five days before the crash, Thomas Lamont, acting head of the highly conservative Morgan Bank, wrote a letter to President Hoover. “The future appears brilliant. Our securities are the most desirable in the world.” Charles Mitchell assured nervous investors that things had never been better.

Craig Mitchell, Son of Charles E. Mitchell: Practically every business leader in America, and banker, right around the time of 1929, was saying how wonderful things were and the economy had only one way to go and that was up.

"Running for President under the slogan "Rugged Individualism" made it difficult for Hoover to promote massive government intervention in the economy. In 1930, succumbing to pressure from American industrialists, Hoover signed the Hawley-Smoot Tariff which was designed to protect American industry from overseas competition. Passed against the advice of nearly every prominent economist of the time, it was the largest Tariff in American history. (at that time the US was a large export economy with a trade surplus).

Believing in a balanced budget, Hoover's 1931 economic plan cut federal spending and increased taxes, both of which inhibited individual efforts to spur the economy.

Finally in 1932 Hoover signed legislation creating the Reconstruction Finance Corporation. This act allocated a half billion dollars for loans to banks, corporations, and state governments. Public works projects such as the Golden Gate Bridge and the Los Angeles Aqueduct were built as a result of this plan.

Hoover and the RFC stopped short of meeting one demand of the American masses — federal aid to individuals. Hoover believed that government aid would stifle initiative and create dependency where individual effort was needed. Past governments never resorted to such schemes and the economy managed to rebound. Clearly Hoover and his advisors failed to grasp the scope of the Great Depression."

Roger Babson's Ten Commandments For Investing

Some friends and I were discussing Roger Babson earlier today.  Several of us have a feeling that the markets may be approaching a critical juncture, and we were wondering how that might express itself, given today's Fed and government activism as opposed to the more ad hoc to stabilizing markets in Babson's day.

As you may recall he was an MIT trained engineer who became a famous stock market analyst and financial theorist. I have acknowledged in the past that my own particular style of charting was in part inspired by his approaches to force and resistance. He never really codified his techniques, so they are not all that well understood. But he used them to some great personal advantage.

I see in reviewing some of these fossilized chart remains that I used to put a great deal more energy into them when I was more actively trading.  On my old site I used to update charts several times per day and look at ten minute intervals, which may be appropriate to futures trading in size.

As a point of interest Babson helped in the creation of a 'business engineering' course at MIT, a first for an American University. Babson founded Babson College among other things.  I have written about Babson several times when discussing the events of 1929, but also about 'The Boulders of Dogtown' which are typical of the man.

But Babson is most well known for his prediction on 5 September 1929, "sooner or later, a crash is coming, and it may be terrific."

Roger Babson had ten commandments he followed in investing and encouraged his readers to do the same.  I was reminded of them when I looked up the exact date of his crash forecast that triggered 'the Babson Break.'

It pleased me that I had arrived at several of those commandments through personal experience but that lesson always involved the loss of capital, alas.  One hears these things, and they are sayings.  And then you encounter them in practice, and you learn them.  And so it is with most sound principles and advice.  And quite often whole peoples must relearn the principles of the past.

They are all valuable, but I have placed asterisks behind those that have served me most well, and some which bear the most vivid memories. lol

One thing Babson does not overtly mention is to follow the money, and understand who stands to gain what from any deal or transaction, but I think it is implied.  I would also urge one to never confuse reliable performance with luck, unless you aspire to be soundly lashed by the tails of probability.

One thing that did strike me oddly in reviewing this is to ask, 'is anyone except for a few old codgers like me investing anymore?'  It almost seems archaic to say, when everything is just a bet and most everyone is just a player.  It must have seemed that way to Babson as well, in the Autumn of 1929.

These were:

• 1. Keep speculation and investments separate. **
• 2. Don't be fooled by a name. **
• 3. Be wary of new promotions.
• 4. Give due consideration to your market ability.
• 5. Don't buy without proper facts. **
• 6. Safeguard purchases through diversification. **
• 7. Don't try to diversify by buying different securities of the same company.
• 8. Small companies should be carefully scrutinized. ***
• 9. Buy adequate security, not super abundance.
• 10. Choose your dealer and buy outright (i.e., don't buy on margin.) **

Unfettered Capitalism and the Great Crash of 1929

“The man who is admired for the ingenuity of his larceny is almost always rediscovering some earlier form of fraud. The basic forms are all known, have all been practiced.

The manners of capitalism improve. The morals may not...

When the modern corporation acquires power over markets, power in the community, power over the state and power over belief, it is a political instrument, different in degree but not in kind from the state itself. To hold otherwise — to deny the political character of the modern corporation — is not merely to avoid the reality. It is to disguise the reality.

The victims of that disguise are those we instruct in error. The beneficiaries are the institutions whose power we so disguise. Let there be no question: economics, so long as it is thus taught, becomes, however unconsciously, a part of the arrangement by which the citizen or student is kept from seeing how he or she is, or will be, governed...

The conventional view serves to protect us from the painful job of thinking.”

John Kenneth Galbraith

"To allow the market mechanism to be sole director of the fate of human beings and their natural environment, indeed, even of the amount and use of purchasing power, would result in the demolition of society.

For the alleged commodity "labor power" cannot be shoved about, used indiscriminately, or even left unused, without affecting also the human individual who happens to be the bearer of this peculiar commodity. In disposing of a man's labor power the system would, incidentally, dispose of the physical, psychological, and moral entity "man" attached to that tag.

Robbed of the protective covering of cultural institutions, human beings would perish from the effects of social exposure; they would die as the victims of acute social dislocation through vice, perversion, crime, and starvation.

Nature would be reduced to its elements, neighborhoods and landscapes defiled, rivers polluted, military safety jeopardized, the power to produce food and raw materials destroyed...

Undoubtedly, labor, land, and money markets are essential to a market economy. But no society could stand the effects of such a system of crude fictions even for the shortest stretch of time unless its human and natural substance, as well as its business organization, was protected against the ravages of this satanic mill."

Karl Polanyi, The Great Transformation, 1944

The Great Crash of 1929: Remembering the 80th Anniversary of Black Thursday

This is a 55 minute video from the award winning "American Experience" PBS series that covers The Great Crash of 1929.

It contains many 'first person' stories and interesting tidbits not normally covered in standard documentaries. The music and contemporaneous movie clips create a wonderful sense of the atmosphere of the times. The insights into some of the great personalities from that era like Jesse Livermore and Charlie Mitchell are unique.

It may be ironic that this film was produced by a company based in the UK, and not an American company. It is based in part on a book by William Klingaman. It also is worth reading, and is not heavy like some of the more didactic works. Galbraith's book is short and is a good start of course. After that everyone has their favorites.

The quality of this online video copy detracts a bit from the piece, but the price is right.

It is remarkable how, despite the technology and the sophistication, the basic schemes and pitfalls of Wall Street have changed so little in their substance over these many years.

It is well worth watching as we approach the 80th anniversary of Black Thursday, October 23, 1929. As they did not know what they before them, so we also do not realize what the future will bring. As surely as it was then for the great credit and equity bubble, it is for us now in our own credit, financial assets, and currency bubble: the party is over.

Direct link to The Great Crash of 1929

The Great Crash of 1929 Redux

Here is the Stock Market of 1929 in brief. Yes, its different this time. We are now under a fiat currency limited only by the acceptibility of our dollar and our bond debt. And no, its not. The limitations may be more flexible, but human nature is still the same. We don't expect this to change anyone's mind about the future, because their minds are running on beliefs, and not factual analysis. But perhaps this will help illuminate some things to watch for as this economic crisis unfolds. What is the primary bubble this time? Some think it was tech. Some think its housing. We think they are symptoms, and the bubble is perhaps the US dollar itself this time around, enabled by its role as the world fiat reserve currency. In the end, all bubbles are based on excess credit and speculation.

"...people believed that everything was going to be great always, always. There was a feeling of optimism in the air that you cannot even describe today."

"There was great hope. America came out of World War I with the economy intact. We were the only strong country in the world. The dollar was king. We had a very popular president in the middle of the decade, Calvin Coolidge, and an even more popular one elected in 1928, Herbert Hoover. So things looked pretty good."

"The economy was changing in this new America. It was the dawn of the consumer revolution. New inventions, mass marketing, factories turning out amazing products like radios, rayon, air conditioners, underarm deodorant...One of the most wondrous inventions of the age was consumer credit. Before 1920, the average worker couldn't borrow money. By 1929, "buy now, pay later" had become a way of life."

"Wall Street got the credit for this prosperity and Wall Street was dominated by just a small group of wealthy men. Rarely in the history of this nation had so much raw power been concentrated in the hands of a few businessmen..."

"One of the most common tactics was to manipulate the price of a particular stock, a stock like Radio Corporation of America...Wealthy investors would pool their money in a secret agreement to buy a stock, inflate its price and then sell it to an unsuspecting public. Most stocks in the 1920s were regularly manipulated by insiders "

"I would say that practically all the financial journals were on the take. This includes reporters for The Wall Street Journal, The New York Times, The Herald-Tribune, you name it. So if you were a pool operator, you'd call your friend at The Times and say, "Look, Charlie, there's an envelope waiting for you here and we think that perhaps you should write something nice about RCA." And Charlie would write something nice about RCA. A publicity man called A. Newton Plummer had canceled checks from practically every major journalist in New York City... Then, they would begin to -- what was called "painting the tape" and they would make the stock look exciting. They would trade among themselves and you'd see these big prints on RCA and people will say, "Oh, it looks as though that stock is being accumulated. Now, if they are behind it, you want to join them, so you go out and you buy stock also. Now, what's happening is the stock goes from 10 to 15 to 20 and now, it's at 20 and you start buying, other people start buying at 30, 40. The original group, the pool, they've stopped buying. They're selling you the stock. It's now 50 and they're out of it. And what happens, of course, is the stock collapses."

"The pools were a little like musical chairs. When the music stopped, somebody owned the stocks and those were the sufferers. If small investors suffered, they would soon be back for more. They knew the game was rigged, but maybe next time, they could beat the system. Wall Street had its critics, among them economist Roger Babson. He questioned the boom and was accused of lack of patriotism, of selling America short."

"Roger Babson warned of the speculation and said, "There's going to be a crash and the aftermath is going to be quite terrible." And people jumped on Babson from all around for saying such a thing, so that people who were cautious about their personal reputation, who did not want to call down on themselves a lot of calumny, kept quiet."

"Politicians came and went, but in the 20s, the businessman was king."

"With everyone trying to borrow money to cover the falling value of their stocks, there was a credit crunch. Interest rates soared. At 20 percent, few people could afford to borrow more money. The boom was about to collapse like a house of cards."

"...the National City Bank would provide $25 million of credit...immediately, the credit crisis was alleviated. In fact, within the next 24 hours, call money went from 20 percent to eight percent and that stopped the panic, then, in March [1929]"

"Everything was not fine that spring with the American economy. It was showing ominous signs of trouble. Steel production was declining. The construction industry was sluggish. Car sales dropped. Customers were getting harder to find. And because of easy credit, many people were deeply in debt. Large sections of the population were poor and getting poorer."

"Just as Wall Street had reflected a steady growth in the economy throughout most of the 20s, it would seem that now the market should reflect the economic slowdown. Instead, it soared to record heights. Stock prices no longer had anything to do with company profits, the economy or anything else. The speculative boom had acquired a momentum of its own."

"It was this nature of mass illusion. Prices were going up, people bought. That forced prices up further, that brought in more people. And eventually, the process becomes self-perpetuating. Every increase brings in more people convinced of their God-given right to get rich."

"The 20s was a decade of all sorts of fast money schemes. Three years earlier, everyone was buying Florida real estate. As prices of land skyrocketed, more people jumped in, hoping to make a killing. Then, overnight, the boom turned to bust and investors lost everything."

"On September 5th, economist Roger Babson gave a speech to a group of businessmen. 'Sooner or later, a crash is coming and it may be terrific.' He'd been saying the same thing for two years, but now, for some reason, investors were listening. The market took a severe dip. They called it the "Babson Break." The next day, prices stabilized, but several days later, they began to drift lower. Though investors had no way of knowing it, the collapse had already begun."

"...the market fluctuated wildly up and down. On September 12th, prices dropped ten percent. They dipped sharply again on the 20th. Stock markets around the world were falling, too. Then, on September 25th, the market suddenly rallied."

"Reuben L. Cain, Stock Salesman, 1929: I remember well that I thought, "Why is this doing this?" And then I thought, "Well, I'm new here and these people" -- like every day in the paper, Charlie Mitchell would have something to say, the J.P. Morgan people would have something to say about how good things were -- and I thought, "Well, they know a lot more about this market than I do. I'm fairly new here and I really can't see why it's going up." But then, when they say it can't go down or if it does go down today, it'll go back tomorrow, you think, "Well, they really are like God. They know it all and it must be the way it's going because they say so."

"As the market floundered, financial leaders were as optimistic as ever, more so. Just five days before the crash, Thomas Lamont, acting head of the highly conservative Morgan Bank, wrote a letter to President Hoover. "The future appears brilliant. Our securities are the most desirable in the world."

"Practically every business leader in American and banker, right around the time of 1929, was saying how wonderful things were and the economy had only one way to go and that was up."

"There came a Wednesday, October 23rd, when the market was a little shaky, weak. And whether this caused some spread of pessimism, one doesn't know. It certainly led a lot of people to think they should get out. And so, Thursday, October the 24th -- the first Black Thursday -- the market, beginning in the morning, took a terrific tumble. The market opened in an absolutely free fall and some people couldn't even get any bids for their shares and it was wild panic. And an ugly crowd gathered outside the stock exchange and it was described as making weird and threatening noises. It was, indeed, one of the worst days that had ever been seen down there."

"There was a glimmer of hope on Black Thursday...About 12:30, there was an announcement that this group of bankers would make available a very substantial sum to ease the credit stringency and support the market. And right after that, Dick Whitney made his famous walk across the floor of the New York Stock Exchange.... At 1:30 in the afternoon, at the height of the panic, he strolled across the floor and in a loud, clear voice, ordered 10,000 shares of U.S. Steel at a price considerably higher than the last bid. He then went from post to post, shouting buy orders for key stocks."

"And sure enough, this seemed to be evidence that the bankers had moved in to end the panic. And they did end it for that day. The market then stabilized and even went up."

"But Monday was not good. Apparently, people had thought about things over the weekend, over Sunday, and decided maybe they might be safer to get out. And then came the real crash, which was on Tuesday, when the market went down and down and down, without seeming limit...Morgan's bankers could no longer stem the tide. It was like trying to stop Niagara Falls. Everyone wanted to sell."

"In brokers' offices across the country, the small investors -- the tailors, the grocers, the secretaries -- stared at the moving ticker in numb silence. Hope of an easy retirement, the new home, their children's education, everything was gone."

"At the end of 1929, as they celebrated New Year's Eve, all that lay in the future. Nobody knew that the Great Depression was coming -- unemployment, bread lines, bank failures -- this was unimaginable. But the bubble had burst. Gone was that innocent optimism, the confidence, the illusion of wealth without work. One era had ended. They toasted the coming of the 30s, but somewhere, deep down, they knew the party was over."

Brokers Believe Worst Is Over and Recommend Buying of Real Bargains

Wall Street in looking over the wreckage of the week, has come generally to the opinion that high grade investment issues can be bought now, without fear of a drastic decline. There is some difference of opinion as to whether not the correction must go further, but everyone realizes that the worst is over, and that there are bargains for those who are willing to buy conservatively and live through the immediate irregularity.

-- New York Herald Tribune, October 27, 1929

We suspect the Dow/Gold ratio will go back again below 2. Whether that happens at Dow 6000 or Dow 60000 is really a matter of how the Fed navigates the propping of the financial system, and the inflation of the US dollar.

American Experience: The Great Crash of 1929 Transcript