After the tremendous bull run of the 1920's, the stock market became very volatile during its topping process in the fall of 1929. On September 5th, influential economist Roger Babson gave a speech predicting a crash, saying "Sooner or later, a crash is coming and it may be terrific!" He had been saying the same thing -- and been widely ignored -- for the past two years, but on that September day his words finally caught hold. The market fell 3% by the close of trading and market players, forever looking for a scapegoat, called it the "Babson break." Over the next few days, prices stabilized but continued their downward drift, becoming extremely volatile in the latter days of September. Stocks rose and fell like a roller coaster, with neither rhyme nor reason to the fluctuations.
Rubin Cain was a stock salesman in 1929, having started his new job near the all time peak. He shared his experience in the PBS documentary "The Crash of 1929"
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."
You can hear the earnestness in his voice as he speaks, and you can easily imagine him as a young man believing wholeheartedly in the words of the financial powers-that-be of his era. In the end, those Gods of the 1920's were proven to be mere mortals, as the Great Crash melted into the Great Depression.
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Who are our God's today? Alan Greenspan, Ben Bernanke, and the institution of the Fed itself come to mind. "They know it all," we think. They won't let the collapsing housing market kill the economy. We know this to be true "because they say so."
Interestingly, just a few days ago an article came out titled "Greenspan Not Omniscient." Greenspan actually had a terrible forecasting record as a private consultant before taking over at the Fed, as William Rutherford points out in his book Who Shot Goldilocks.
And yet, at the crest of the housing tidal wave and leading edge of a huge recession -- if not depression -- nearly everyone wants to ignore the facts and instead just to believe that Bernanke and the Fed itself can save us from another financial calamity. If Charles Mitchell and JP Morgan were the Gods of the 20's, then the Fed is the God of our era. I cannot count how many times I've heard people tell me, "I don't know anything about all that stock and money stuff." It is the equivalent of young Mr. Cain saying, "I'm new around here," and deferring judgment to the so called "experts."
Some of our current "experts" - the talking heads on TV and pundits in the press - readily tell us that the Fed didn't know what it was doing in '29 and unwittingly caused the Great Depression. But thankfully, today the Fed knows so much more and truly understands economics, making another deflation or a depression impossible.
This reminds me of something Jesse Livermore said about the Mistake family: The Mistake family, he said, is large. So large, in fact, that even if you never meet the same mistake twice, you're certain to meet one of his brothers, cousins or uncles!
Perhaps we do understand economics better today, but today's world is also much more complex than it was in the 1930's. The derivatives market is huge and poorly understood, and no one knows how the collapse in housing will play out worldwide. While we may know more than we did in the 30's, there is also much more that we don't know.
If we learn anything from Mr. Cain, it should be that none of the mortals that walk among us are Gods, and none have the power to stem the tide of a crashing market. You don't need a PhD in economics to listen to your gut follow your common sense. Human nature, after all, has not changed:
Mr. SOBEL (historian): There's an old saying on Wall Street that the two most important emotions are fear and greed, and you go from fear to greed in about a fraction of a second. So you're very, very greedy and you say to yourself, "I want to make more." And then, the market goes down ten points and you get frightened. "I want to keep what I have," so you sell everything. And that's how you have a panic. So you can panic on the upside -- people rushing in to get in before the train takes off -- and a panic on the downside, trying to get off the train before disaster hits.
In a time of panic, people and institutions tend to forget what they thought they "knew." Irrational decisions are made...In 2006 we saw the panic on the upside, soon we're likely to see the opposite. Now is the time to start planning, before the panic sets in.
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Coming in future installments: Memories of 1929 Part III. Also, as the housing market collapses, we're likely to be revisited by the Specter of Deflation. If you would like to be notified when these updates are released, please subscribe to my low volume announcement list