The Great Crash – Lessons from History

The stock market is falling and it may continue to do so, with the odd bounce along the way. The reason is partly because when confidence is destroyed that investing in shares is bound to make you money, which has been a rule for the last ten years, then it takes a real change of heart to move the market in the opposite direction. Confidence, or lack of it, is contagious just like the coronavirus which has probably contributed to the market collapse. The classic example of a market crash is still the 1929 collapse on Wall Street. That was so extreme that it wiped many people out and prompted a number of suicides. It was not until 1932 that the market stabilised and many years after that until it recovered to its previous levels. Or for 2020’s speculators in the words of Al Jolson: “You ain’t seen nothing yet”.

The 1929 crash was created by cheap money where everyone was buying on margin and there were pyramid schemes of trusts that invested in other trusts. Even shoe shine boys were giving share tips and people were drawn into the stock market who had no financial experience at all. When the markets started to fall, margin calls were invoked which drove the market down further. Banks that had lent money for punters to invest in the market went bankrupt when the margin calls were not paid. One result was economic collapse and a fierce depression in the USA which echoed around the world in the 1930s. The real world of business activity mirrored the stock market which is not always the case. That was partly due to poor Government responses.

One very amusing slim volume on the Wall Street crash is a book entitled “Caught short!” written in 1929 after the initial crash by Eddie Cantor. He describes himself in the book as a comedian, author and victim. It’s recommended to those who need some light relief from the recent debacle.

Cantor was both “in the market, and under it” as he says. After one of the worst market days he was too frightened to go home so he checked into one of New York’s largest hotels and asked for a room on the nineteenth floor. The desk clerk asked him if it was for “sleeping or jumping”.

This time around the Bank of England has reacted to the collapse of the market and concerns over the economy from the virus impact so that after a long period of very cheap money it is making it even cheaper. We are again at the lowest bank base rate in history in the UK and other countries are also doing things to boost their economies which may transfer into their stock markets.

But will that revive confidence in the stock market? Only for a short time I suspect because shares, particularly US ones, still do not look particularly cheap. And bear in mind that most markets including the UK’s are highly correlated with the USA’s.

How the actions of Governments will work out remains to be seen, but hopefully they have learned something from previous market crashes. The only difference from 1929 is that the speed of trading in the market and the volumes of trades have increased exponentially. We also have many more index-tracking funds which promote herding behaviour. These two factors might not help.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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