The Crash Of 1929: "Can It Happen Again?"

Submitted by GnS Economics

In the 4th of February, we published a blog entry detailing the similarities of the current stock market environment with that before the stock market crash in 1987. On February 5th, the Dow Jones Industrial Average (DJIA) experienced the worst daily point decline of its history. Since then, the stock market has recovered, but are we out of the woods?

At the aforementioned entry, we also warned that the situation in the global economy actually resembles more of the time before the Great Depression than that before of the Black Monday in 1987. Worryingly, the same holds for the US equity markets. In fact, almost all of the developments that led to the Great Crash of 1929 are already visible in the US. We may thus be heading towards the worst asset market crash in 90 years.

Prequisites: The ‘Roaring Twenties’

The 1929 crash marked the end of the ‘Roaring Twenties’. The era got its name from consumer and stock market booms driven by the automobile and building sectors. The gold standard and the neutralization of all gold purchases from abroad by the newly created central bank, Federal Reserve or Fed, controlled the consumer price inflation. Due to low inflation, Fed had only limited incentives to intervene on the speculation by increasing the short-term interest rates. The easy credit era was let to persist fueling the boom in the consumer durables, commercial property market, automobile industry and the stock markets.

The tide switched in January 1928. The Fed decided that the boom had gone far enough and started to raise its discount rate and sell its holdings of government securities in effort to stem the speculation. But, rising money market rates made the brokers’ loans viable options for the bank loans because the former were mostly funded by the large balance sheets of corporations. The call loan rates were also clearly higher than the Fed discount rate, which meant that banks were able to borrow cheaply from the Fed and earn a nice margin on loans to investors. The higher interest rates set by Fed thus increased both the bank and non-bank funds available for stock market speculation. Contrary to the aim of the Fed, the financial conditions eased further and the speculation increased. The twenties kept on roaring.

The Great Crash

In 4 December 1928, President Coolidge had given a reassuring State of the Union speech and 1929 started with positive expectations. The stock market kept rising and the consumer boom continued. It was a common belief that earnings and dividends are growing because of the systematic industrial application of the science together with the development of modern management technologies and business mergers. Still, the first half of 1929 was marked with increasing volatility.

By the summer a dubious mood started to creep. The dividend growth was solid but the economy started to look mature. The first hints about the approaching recession arrived in July 1929 as the index of the industrial production of the Fed diminished. Mixed news and rising interest rates in the US and abroad warned of a looming recession. In September, the stock market started to drift downwards. The fear of a recession started to set in.

On Thursday October 24, after a turbulent week, the prices hovered for all while at the start, but then fell rapidly and the stock ticker started to lag behind. The prices kept falling and the ticker fell further behind. The pace of the sell orders grew at an increasing rate and by eleven o’clock a ferocious selling had gripped the market. A few selected quotations given by the bond ticker showed that the that the current values were far below the now seriously lagging tape. Margin calls started to roll in and many investors were forced to liquidate their stock holdings. The increasing uncertainty made the investors even more scared and by eleven-thirty there was a sheer panic. The frenzy of selling could even be heard outside the New York Stock Exchange, where crowds gathered.

At noon, the reporters learned that several notable bankers had gathered at the office of the J.P. Morgan & Company. At one thirty, the vice-president of the New York Stock Exchange (NYSE), Richard Whitney, appeared on the trading floor and started to make large purchases of variety of stocks (starting from the Steel post). This had a clear message: the bankers had stepped in. The effect was imminent. The fear eased and the stocks rallied.

On Friday, the volume of trading was large, but the prices held up. During the weekend, there was a sense of relief. The disaster had been avoided and the actions of the bankers were celebrated. But then came Monday.

On Monday, October 28, the market opened to uneasy tranquility which was quickly broken. The selling started, then accelerated, and by noon the market was in a full panic mode. The bankers gathered again but the savior was never seen on the floor. Heavy selling continued throughout the day, and the market melted down, with the DJIA closing down by almost 13 percentage points for the day. After the close, there was not a word from the bankers or from anyone else, for that matter. During the night, a panic spread through the nation.

On Tuesday, October 29, the selling orders flooded the NYSE in the open. The prices plunged right from the start, feeding the panic. The sell orders from all over the country overwhelmed the ticker and sometimes even the traders. During the day, massive blocks of stocks were sold indicating that the ”big players” (banks, investment funds etc.) were liquidating. During the worst selling periods, there was a countless number of the selling orders but no buyers. This meant that, at times, the markets were in a complete free fall. There was a brief rally before the end of trading but despite this, the ”Black Tuesday” was one of the most brutal days at the NYSE with the DJIA falling by 11 % with heavy volumes.  Within a week, DJIA had lost 29 % of its value.

The daily closing values of Dow Jones Industrial Average during the year 1929. Source: GnS Economics, MacroTrends

Are we in a time loop?

The crash of 1929 marked the end of a long stock market boom fed by several years of easy credit. Because inflation was low for most of the 1920’s, Fed did not bother to curb the speculation by rising rates and when it did, the rise was too little too late. The signals for an upcoming recession broke the highly over-valued stock market in 1929. Actually, for example the dividends grew even in the last quarter of 1929 but the faith for the future of the market was broken and the investors panicked.

Currently, we are in a situation where, according to several metrics, the stock market is the most over-valued in the history of the NYSE. The central banks, with their orthodox and unorthodox monetary policies, have fed the asset market mania for nine years now but, currently, they are in a tightening cycle. Moreover, the global economy is in a risk of a dramatic slowdown.

This indicates that the main components of the crash of 1929: an over-valued stock market, a central bank tightening cycle (higher interest rates) and a slowing economy are almost all present in the US. We will thus soon know how well the history rhymes.

The historical accounts are based on the “The Great Crash 1929“ by John K. Galbraith, “The stock market boom and crash of 1929 revisited” by Eugene White and on “Lessons from the 1930’s Great Depression” by Nicholas Crafts and Peter Fearon.

Comments

1033eruth brushhog Sat, 04/28/2018 - 11:06 Permalink

Exactly Mr. Brushhog - So why is the author of this article given space for his trash and you aren't allowed to express the far more likely scenario?  I'm guessing its because this is just one more fearmongering propaganda article.

The stock market is going to be perpetually propped up by the fed and its proxies to promote consumer confidence and retirement funds as long as possible.  Of course, the elites also get to use it to extract money as well and convert it to help insulate themselves from hyperinflation.  

In reply to by brushhog

gdpetti DownWithYogaPants Sat, 04/28/2018 - 11:01 Permalink

Yes, but it's looking to move... interesting, no? Wonder why they want to move? Ice ages haven't been too kind to that region... and the 'game' of empire is coming to a close in the classic sense as the NWO outs their OWO for the true global one of their wetdream fantasies.... delusional... yes, but very chaotic... can they control the chaos they are creating? what if all it does is push their herd into an organized archetype that runs against the tide of those wetdreams? What happens to a bully when everyone turns against him? In nature, the predators is dependent upon the herd not doing that.... when fiat is useless in any form, what will the Chosen banksters do? How many of them are ready for what the NWO game implies? Have they made The CHOICE? or are they merely puppets themselves, fooling mostly themselves?...

In reply to by DownWithYogaPants

Deep Snorkeler MuffDiver69 Fri, 04/27/2018 - 17:00 Permalink

A Permanently High Plateau of Prosperity

  • permanent wealth for all
  • an absolute abundance of resources
  • tons of jobs and not enough workers
  • buy now, it will never be this cheap again
  • a life of awesome pleasure intensity
  • modern technology assures a healthful life up to age 125
  • freedom and joy
  • don't hold yourself back

In reply to by MuffDiver69

TheRideNeverEnds MuffDiver69 Fri, 04/27/2018 - 17:19 Permalink

No, it’s literally impossible for the market to crash.  The law forbids it, there are many layers of circuit breakers and of course there is the plunge protection team.   

 

The “””market””” could theoretically stair step downward 75-90% but the FED will intervene looong before we are down even twenty percent.   

 

Just close one your eyes and buy stocks, they are going higher from here on out.  

In reply to by MuffDiver69

tgatliff Fri, 04/27/2018 - 16:40 Permalink

No.. It won't happen again.  Central Banks and the companies themselves are the largest buyers of stocks.  Neither will allow a crash for any length of time

Batman11 Fri, 04/27/2018 - 16:40 Permalink

US stock markets are at 1929 levels.

The Chinese have upped the game and have revealed they have solved the riddle of 2008 at Davos.

https://www.youtube.com/watch?v=1WOs6S0VrlA

One of the Chinese regulators was there and they have learnt lessons from 2008 that have escaped us in the West. They have seen their Minsky Moment coming unlike the West in 2008, and they have identified the debt-to-GDP ratio and over inflated asset prices as causes of these financial crises.

https://cdn.opendemocracy.net/neweconomics/wp-content/uploads/sites/5/2017/04/Screen-Shot-2017-04-21-at-13.52.41.png

1929 and 2008 stick out like sore thumbs.

They can see the US problem of 1929 level stock markets.

The West’s experts can’t change the subject fast enough when the Chinese regulator points out this epic blunder (49 mins.)

gregga777 Batman11 Fri, 04/27/2018 - 17:01 Permalink

This crash will hammer the Chinese just like it hammered the United States in the 1930's. That's because the US was a net creditor nation and major exporter during the Great War and the 1920's. The Roaring Twenties was a debt led boom driven by the Great War and subsequent reconstruction expenditures. When the credit collapse began in 1929 and gathered speed into the 1930's it devastated US export markets and many foreign loan assets held by US investors became worthless. China is now a major exporter of deflation today due to massive over-investment in multiple industries. They will suffer disproportionately when this credit boom goes bust. 

In reply to by Batman11

DemandSider gregga777 Sat, 04/28/2018 - 06:41 Permalink

The PRC runs external profit, so it will crash only if they fail to use Keynesian economics to spur growth AND recycle that wealth BACK INTO THEIR ECONOMY, like we did with FDR's New Deal and Hoover's Buy American Act of 1933. If The PRC just throws money at the problem and let's a trade deficit suck it all out, like we have been doing, then they're screwed.

In reply to by gregga777

Batman11 Fri, 04/27/2018 - 16:43 Permalink

There is an inherent flaw in neoclassical economics.

The 1920s roared with debt based consumption and speculation until it all tipped over into the debt deflation of the Great Depression. No one realised the problems that were building up in the economy as they used an economics that doesn’t look at private debt, neoclassical economics.

That's it, it had the same problem it’s always had; it doesn’t look at debt.

The two elements of neoclassical economics that come together to cause financial crises.

  1. It doesn’t consider debt
  2. It holds a set of beliefs about markets where they represent the rational decisions of market participants; they reach stable equilibriums and the valuations represent real wealth.

Everyone marvels at the wealth creation of rising asset prices, no one looks at the debt that is driving it. 

https://cdn.opendemocracy.net/neweconomics/wp-content/uploads/sites/5/2017/04/Screen-Shot-2017-04-21-at-13.52.41.png

The “black swan” was obvious all along and it was pretty much the same as 1929.

1929 – Inflating US stock prices with debt (margin lending)

2008 - Inflating US real estate prices with debt (mortgage lending)

“Stocks have reached what looks like a permanently high plateau.” Irving Fisher 1929.

An earlier neoclassical economist believed in price discovery, stable equilibriums and the rational decisions of market participants, and what the neoclassical economist believes about the markets means can’t even imagine there could be a bubble.

The amount of real wealth stored in the markets becomes apparent once the bubble has burst.

lester1 Fri, 04/27/2018 - 16:46 Permalink

PPT and ESF always step in and buy up stocks and bonds whenever there is a big selloff. These markets are 100% rigged!

 

A 1929 crash will never happen again. The wealthy elites have the most to lose. 

dark fiber gregga777 Fri, 04/27/2018 - 17:31 Permalink

I don't think we will have a crash.  The stock market will just become more and more irrelevant to the point of a total disconnect from the real economy.  It may hover up high like an Albatross but then again who gives a fuck.  There will not be a crash but a split between reality and markets, which will turn violent.  And then the whole thing will collapse.

In reply to by gregga777

GreatUncle dark fiber Sat, 04/28/2018 - 06:19 Permalink

Unlimited FIAT will keep the economy that is so good for them going ... what will likely happen is that western populations will suffer horrendous poverty and depravation though as elites through their greed destroy the economy for ordinary people.

We are seeing it already where an ordinary person will never have a home because they will never be given any FIAT to buy it.

Boomers had already obtained their position and able to tap into the unlimited FIAT from the 70's since then the unlimited FIAT scenario is stripping the affordabilitiy for millennials and snowflakes who will never now get a stake in the game..

That's the future...

 

In reply to by dark fiber

serotonindumptruck lester1 Fri, 04/27/2018 - 16:59 Permalink

Now that New Zealand has greatly restricted foreign land holdings, where will the elite run to once they instigate global nuclear war?

South America? Ecuador? Chile?

The natives despise White people down there, and once the balloon goes up on global thermonuclear war, the indigenous people will eat you alive.

Perhaps Antarctica will accommodate your elitist needs.

In reply to by lester1

gregga777 Fri, 04/27/2018 - 16:49 Permalink

The 1929 crash marked the end of the ‘Roaring Twenties’. The era got its name from consumer and stock market booms driven by the automobile and building sectors.

The 1929 crash was actually driven by a massively huge credit cycle collapse. There were enormous debts incurred by the European warring powers, during the Great War to finance the war, and then afterwards to finance reconstruction. The debts incurred were out of all proportion to their ability to repay, including over a decade of Ponzi loans to enable debtor nations to continue making interest payments. Sound familiar? 

gregga777 Being Free Sat, 04/28/2018 - 00:36 Permalink

pass the Ouzo

Stolichnaya Vodka for me. Though for the life of me I can't figure out how Russians could down drinking glasses full of it. Though the  stuff does makes great paint stripper. True story:

We lived on Plattsburg Air Force Base, New York, in the early 1960's. My father brought back a bottle of vodka for someone on his return home from some overseas USAF Strategic Air Command flight. Unfortunately he dropped the bottle onto the linoleum tile floor of our on-base housing unit. The spilled vodka removed many years of built-up floor wax permanently making it many shades lighter than the surrounding floor. 

In reply to by Being Free

CHX13 Fri, 04/27/2018 - 16:53 Permalink

Well, the question is measured in what? Measured in BTC, it already did crash. Measured in gold, it will. Measured in fiat dollars, maybe, maybe not. Rather not, IMHO, to signal the sheep that all is well and to at least try to prevent the pension plan ponzi that is close to collapse to keep on life support for as long as possible. Who knows, in the end WE will all be dead and will never know what it's going to look like in 100, 200 years. Might be better that way too.

Born2Bwired Fri, 04/27/2018 - 16:59 Permalink

He doesn't complete the story. The intraday high before the crash was 386 and the eventually low was sometime in 1932 and it was 41. This is from memory so don't sue me... 

Of course no PPT, and apparently those connected were told the market was going to be allowed to sell off in the Spring of 1929 already - it wasn't Joe Kennedy talking to the shoeshine boy after all...

 

THE DORK OF CORK Fri, 04/27/2018 - 17:05 Permalink

"The monetary system is not outworn or senile. It is novel, upstart, and imperious, defeating technological progress by turning it into the channels of destruction, and challenging the autonomy not of one nation but of all alike, so that now the original authorities constituted for the preservation of that autonomy needs must fawn upon it to rule at all. Hampered by national frontiers, nothing can satisfy it till the whole world is made safe for banking, that its funda- mental insolvency may defy exposure. Under the specious guise of a unification of humanity, it aims at absolute dictatorship under which none shall be allowed to live save by its favour and for the advancement of its transcendent whims."

 

Frederick Soddy

The Role of Money