Bull or Bear?

Can you guess if this is written by a bear or bull thinker?   ....Aivars Lode

Black Thursday

Last Thursday was the 90th anniversary of Black Thursday, the day the Great Crash of 1929 began with a fall of 11%. The following week there was Black Monday (down 13%), and then Black Tuesday (another 12%). After a bear market rally lasting about five months, the market resumed its slide and the Dow Jones Industrial Average bottomed at 41.22 on July 8, 1932 – down 89% from the September 2919 peak.

For those who haven’t read it here are a couple of extracts from the short book “The Great Crash” by Thomas Fleming, which described in dramatic detail what happened on that first day.

“For the first half hour on that fateful Thursday, prices were steady. But good stocks were being offered in large blocks, often a sign of trouble. Six thousand shares of Montgomery Ward changed hands at eighty-three. (A few short months before, it had been selling at 183.) Then came 20,000 shares of Kennecott Copper, 20,000 shares of General Motors, 15,000 of Sinclair Oil, 13,000 of Packard Motors. By eleven o’clock, the ticker was behind more than thirty minutes. Suddenly there was raw panic everywhere, panic wilder than anything ever seen in the long history of the Exchange. “Sell at market” resounded throughout brokers’ offices, as speculators clutched frantically at paper profits that were being shredded before their horrified eyes.

“By 11:30, the ticker was forty-seven minutes late, and the floor of the Stock Exchange was a wild melee. According to the rules, the traders might not run, curse, push, or go coatless. But they could shout their orders, and shout they did, especially around post number two, where steel was traded. It was, according to one eyewitness, “the center of a sort of madness.”

“Those on the floor at least had the cold comfort of knowing what the quotations were. Outside, as the ticker slipped steadily behind, ignorance added to the mounting terror. Ordinarily, the alert speculator was never more than a few minutes away from a ticker during trading hours and could tell at a glance what the magic numbers meant, although the Exchange omitted all.

“More than 700 people soon jammed the Exchange galleries. (One visitor was Winston Churchill, Great Britain’s former Chancellor of the Exchequer, who was touring the United States as a lecturer during one of his political limbos.) At 12:30, officials closed the galleries, in a small attempt to cut off one avenue of panic. It was a feckless gesture. Outside on Broad Street, a “weird roar” rose from an already immense crowd. Police Commissioner Grover Whalen hastily dispatched extra policemen to the scene to keep order. But they were unnecessary. The only thing wild about the crowd was the rumors sweeping it. Supposedly, eleven speculators had already killed themselves. The Chicago and Buffalo stock exchanges had closed. When a workman appeared on top of a nearby building, the crowd immediately surged in his direction, waiting for him to jump.”

A few points to make about all this as it relates to today:

1. Slow tickers adding to the fear are a thing of the past. Slow information was a factor in the crash of 1987, and to a small extent in 2000, but not in 2008. So crashes are still possible in the age of instant digital information.
2. The Dow Jones Industrial Average peaked at 381.17 on September 3, 1929. Five years before that it was 100, so an increase of 281%. In the past five years, the Dow Jones has increased from 17,390 to 26,833 – 54%.
3. The average PE ratio of the market in September 1929 was 32.6 times. It’s currently under 20. Here’s a chart of it:
   
   
4. The Federal Reserve helped cause the crash by raising the discount rate in August 1929 to 6%, but did little to alleviate the crisis afterwards. The New York Fed bought government bonds to maintain liquidity, but it was criticised by the Federal Reserve Board in Washington and other state Feds for exceeding its authority. Apart from that, the Fed did nothing.

Ninety years later, the market is not up very much nor excessively over-valued and the Fed is cutting rates, not raising them. What’s more, the Fed – all central banks in fact – have become activist institutions, prepared to take interest rates below zero and to print trillions of dollars in the event of a crisis to prevent a recession, let alone a Depression.

So yes, it’s different this time.