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

Between Scylla and Charybdis: The Odyssey of Ben Bernanke

The Fed is doing a balancing act, and it has been doing so for some time, making its way from bubble to bubble through the uncharted waters of fiat-onomics, the monetary mythology.

On one hand is the US financial system breaking down with the economy in a deep recession. On the other hand is the US dollar and bond in freefall with inflation flying higher than Icarus with a tail wind.

Using a classical Greek metaphor, the Fed is navigating between the Scylla (Σκύλλα)of Recession and the Charybdis (Χάρυβδις) of Currency Debasement.

Greek mythology portrayed Charybdis as lying on one side of a narrow channel of water, which some think was the Strait of Messina. On the other side of the strait was Scylla. The two sides of the strait are within an arrow's range of each other, so close that sailors attempting to avoid Charybdis will pass too close to Scylla and vice versa.

The phrase between Scylla and Charybdis has come to mean being in a state where one is between two dangers and moving away from one will cause you to be in danger of the other. Between Scylla and Charybdis is the origin of the phrase between the rock and the whirlpool (the rock upon which Scylla dwelt and the whirlpool of Charybdis) and may be the genesis of the phrase "between a rock and a hard place".

Scylla is a horribly grotesque sea monster, with six long necks equipped with grisly heads, each of which contained three rows of sharp teeth. Her body consisted of twelve canine legs and a fish's tail.

Charybdis takes form as a monstrous mouth. She swallows huge amounts of water three times a day and then belches them back out again creating whirlpools. Charybdis was originally a naiad, sea-nymph who flooded land to enlarge her father's underwater kingdom, until Zeus turned her into a monster. He was angry that she was taking so much of his land and made it so that she would be incredibly thirsty three times a day and suck in the water.

In the Odyssey, the Argonauts were able to avoid both dangers because they were guided by Thetis, one of the Nereids.

Can Ben Bernanke find Thetis? Can he navigate through uncharted waters on the course that Greenspan has put us upon?

Charybdis Rears Its Ugly Head

Rate cuts will hammer dollar: Chinese official

Flight of capital seeking higher returns in Asia could depress dollar on further rate cuts, China says

December 27 2007: 7:28 AM ESTBEIJING (AP) -- Further cuts in U.S. interest rates would have a "harmful effect" on the dollar and the international finance system, a Chinese finance official wrote in a commentary Thursday in an official newspaper.The dollar's fall against many currencies has prompted investors to sell dollar-denominated assets, Hu Xiaolian, director of the State Administration of Foreign Exchange, wrote in the Financial News, a newspaper published by the central bank. "If the (U.S.) federal funds rate continues to fall, this will certainly have a harmful effect on the U.S. dollar exchange rate and the international currency system," Hu wrote. Financial markets closely watch official Chinese comments on the dollar because Beijing keeps a large portion of its $1.4 trillion in reserves in U.S. Treasury securities and any change in China's investment strategy could affect exchange rates. Despite his warning, Hu wrote, "the U.S. dollar's dominant position in international currency markets is unlikely to change in the near term. "The U.S. Federal Reserve has lowered its federal funds rate, the interest that banks charge each other for overnight loans, to 4.25 percent, a full percentage point lower than it was in September, to ease a credit crunch in the U.S. financial system. Chinese officials have said that cutting the rate could encourage investors to move money to Asia or elsewhere in search of better returns, which could depress the dollar.

Recessions and the SP 500

Paul Kasriel's latest reading of his proprietary tea leaves (a blend known as the Kasriel Recession Warning Indicator) estimates the current probability of a recession in the US economy at 65%. As the chart shows, once his KRWI reaches this critical level its a strong probability that we will see an economic recession call by the National Bureau of Economic Research (NBER). Even the period following the tech wreck of 2000 eventually read out a formal recession, although the financial engineering of the Fed and federal friends did block the traditional back to back quarters of economic contraction, as the inflation reading is subtracted from the nominal GDP number to develop real GDP. Hard as it may be to believe, the government has simply changed the rules of the game for measuring price inflation in the US, and considerably enough that what used to be a recession may no longer be called one. Changing the rules of the game is a traditional method of the privileged and elite in achieving their goals.

We give a lot of credibility to Paul Kasriel in general, as a classic macro economist who seems unaffected by the dark pollution of biased thought that corporatism has brought to an already dismal and confounding science. The Leading Economic Indicators (LEI) are already calling out recession, and as you know, the classic inversion of the Yield Curve (Ten Year Treasury Yield - Effective Fed Funds Rate) is still negative as of the Fed's official numbers last week.

So it bothers us quite a bit that the stock market, that great discounter of the future and unerringly efficient prognosticator of economic things yet unseen, is presumed to be rallying back to new all time highs, even if only on a nominal level, not accounting for inflation. We show the SP deflated by gold in this chart, and as you can see, the rebound in US stocks is a bit of a mirage. If the bad times are when the tide goes out and shows who's naked, then inflation is the hurricane storm surge that pushes the waters back in, to provide cover for those au naturel.

By the way, the perception of inflation, or inflation expectations, is not incidental, but rather is absolutely key to the kind of financial engineering that neo-Keynesian economists that infest the Fed and Treasury wish to embrace as the ripe fruits of a fiat monetary system. Don't think for one minute that what is happening with M3, CPI revisions, etc. are a mere coincidence. Its all about control of the many by the few, after all.

So what about the stock market? We decided to try and plot out Kasriel's indicator of recessions against the SP 500. Since the nominal SP is also a trend child of inflation, we wanted to get a measure of SP that tends to take out the inflationary trend, and show us the purer wiggles that stocks make in response to the anticipation of economic variations.

If in fact we are on the verge of a recession, the SP500 will likely be in the process of making a top. We might see another push higher by the broad stock indices in response to the unprecedented monetary stimulus being applied by the banks. But even with this latest phase in the financial engineering experienment currently in progress, within the next two months we should see a confirming signal from the equity markets that the economy is turning lower in real terms AND has started contracting, even if the current set of official economic measures say otherwise.

We underestimated the Fed and their banker buddies in the great reflation of 2003-2004, finally catching on to the game after some painful soul searching and genuine confusion. The July 2004 working paper from Small and Close of the Fed, which basically tried to set some boundaries in how far the Fed could go in monetizing things non-traditional was a good clue, well before the infamous speech about the Fed's printing press that gave Helicopter Ben his sobriquet.

So we will strive to not be fooled again, and keep an open mind that the fighting of the housing bubble and massive credit fraud by the banks could have a short term second order effect of inflating the stock markets, along with most other commodities, especially gold and oil. One thing we are certain is that the next twelve months may be among the most interesting we have seen, and can only wonder what we all might be saying about things at this time next year.

Investment Performance for 2007

We were curious to see how various investments had done in 2007, after reading some of the information on internet chat boards this evening. Internet chat boards are places where facts and opinions get tossed around like beer bottles at Jerry's Country Playhouse on a Saturday night.

We Trust In God, Everyone Else Shows the Data

We like to check the data. The reason should be obvious, but if not, its because often people deal with the complexities of life by using assumptions, which are a kind of shorthand way of breaking reality down into manageable chunks. Everyone does it. You have to. But every once in a while its useful to check those assumptions you make, and that other people are making, to see if they are still valid, especially if they involve things that are important. Does your wife still love you? Is there a bus coming down the road you are crossing? Do you really still look as hot as you did last year? Are you financially solvent? Those sorts of things.

2007 Returns of Some Major Stock Indices

Let's compare the 2007 year-to-date performance of some of the major stock indices. As always, if you click on the chart you will see a larger, much easier to read version.

Its a little suprising that the Russell 2000 is still not quite positive for the year, not including dividends or subtracting fees and commissions. There was quite a bit more divergence in the gains of the major stock indices. An index after all is just a grouping of things for measurement purposes. The Russell is the broadest, most inclusive of the indexes we normally watch.

It looks like tech was the champ of the broad stock sectors this year, if for no other reason that they are NOT financial and NOT housing. The Wall Street storyboard is that tech is invulnerable to the vagaries of housing and financial bubbles, and actually benefits from the weakened US dollar because the we are the champions, the kings of tech, and are selling it to the rest of the world, although very little of it is actually made here anymore, and what we do invent is copied and pirated shamelessly. Its a revenue concept thing perhaps, moreso than real hard cash, like page views and web searches and collateralized debt obligations.


Let's Get Physical

Let's take a look at a different type of investment. How about something that is supposed to be impervious to inflation, a barbarous relic, the bane of central banksters and financial voodoo? Since the generally transitory, subjective, and vaporous nature of financially engineered products is in the headlines it might not be a bad idea to throw in something with a long track record as a hardened test of monetary value into the mix.

Holy goldaroney, Batman! That is one surprisingly fine performance for gold this year. Even we did not think that it has been this good. The assumption has been, at least lately, that gold's day will come soon, especially when the Central Banks get finished monkeying with it. Well, its been a much better return this year than most would think offhand. We're in that group, and we watch it! See how easy it is to fall prey to your own assumptions, especially when you think you have been watching something for a long time.

The Usual Investment Suspects

Let's widen the data net a little more, and see how different things compare. We apologize for the lack of variation in colors on this chart, but we had to tinker with the charting tool a little to get so many items on a single snapshot.

Well, there you have it. Some real information about how various investments performed during 2007. We new the US dollar was doing badly. We did not know that gold had done so well, and had outperformed most of the other major alternative so handily (don't forget about those dividends guys. Gold does not pay any, just like a high performing tech stock).

Let's have one more look at a sector that we have admittedly been cool towards for the latter half of this year, because of the general reluctance we have had toward equities.

Data Mining

Well, as someone who has not owned miners for the latter part of the year, we're just a little disappointed that we overlooked such a hot performing sector. Its been a wild ride, and keep in mind that with high returns comes higher beta (variability of return aka risk, and lately that includes return of capital). Remember this is the HUI gold bugs index, and if you have been playing the junior miners heavily you might have ground your teeth to a fine white powder trying to ride those bucking beta broncos.

Our personal preference is to find a few well financed miners that have a shot at paying dividends for a long time if the dollar really tanks and stocks gets smacked down. Bennie and Hank and crew are working overtime to make sure this happens, make no mistake about it. They are just trying to push the date of reckoning into the future. We admit to a bias that says the dollar will inflate significantly further, and then at some point deflate. Its just that we think the deflation will be when they knock a couple zeros off buckaroo. It might not happen that way. We'll stay flexible.


When people put forward ideas that might be important to you, ask for the data. People are often afraid to ask, because they don't want to look foolish. Some people like to put forward their ideas with great ceremony and pomp, and browbeat and belittle anyone who disagrees with them. They often speak with great confidence bordering on arrogance. We'll let you in on a little secret. What we have learned over the years is that if someone can't explain their ideas to you, it just might be that they do not understand the idea themselves. Don't get us wrong. There are some very fundamental beginner questions that people must and should as. Its just that they aren't necessarily best directed to the advanced class. But that doesn't mean you shouldn't ask. Just try to ask the right person in the right places in the right way.

Questions can be annoying. But we find that often they provide the kind of impedance that causes us to revisit them and test our assumptions, to try to explain things over again to ourselves. If you put in an honest effort, it makes our assumptions and ideas stronger, more reliable. Some people might even publish their ideas so that they can be tested in an environment of peer review. Just putting ideas down on paper forces one to really thing them through. You might even decide to put them into charts and a blog, to force your own performance to a higher standard. Interesting concept.