1929

Guest Post by Ol’ Remus

1929. Silent movies and hot jazz, flappers and bathtub gin, fast cars and dare devil aviators, and a near-parabolic stock market at dizzying heights. Shoeshine boys gave stock tips to grocery clerks who bought on margin. Everyone but the halt and lame made money. Well, except for the farmers. Commodity prices in the ’20s were often at or below the cost of production. But you know. Rubes. In the places that counted, cities dontcha know, the future shone bright and steady.

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One dark day the bottom of the bucket fell through, everyone was suddenly foreclosed and evicted, destitute and skinny, and not dressed very well at all. The Nouveau Broke spent the next decade doing Depression Era stuff like living in shacks by the river or taking up the migrant worker trade in old cars made worse by unsightly dust and grime.

So goes the Hollywood version. Reality was worse.

The market peaked in early September 1929, capping a tenfold gain in nine years. But it was stuttering and oddly reluctant to go higher. Word came of trouble in other places, particularly the London market. Important people said the US market was overpriced by a standard deviation or six. Main Street had bet the rent money and was getting anxious. In October, the weak hands and Nervous Nellies bolted for the door en masse and everyone else followed, perforce. The cascade began.

What became known as “The Crash of 1929” is shown in red on the chart, a catastrophic fifty per cent drop from the September high. But the crash had just begun. A series of declines and partial retracements went on for years, ending in mid-1932 with an 89% loss from the ’29 peak. It should be known as “The Crash of 1929 Through 1932”.

It’s easy to get market arithmetic wrong. If the market drops 50% then goes back up 50%, only half the drop has been regained. Said differently, a 50% drop requires a 100% rise to break even. There were six partial recoveries from 1929 to 1932. Fortunes were made by savvy opportunists who understood the stair-step nature of the debacle and played it like day traders. This drew in camp followers who, convinced they were buying at the absolute bottom, generally sold into the next decline at a loss.

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The crash ended as it began, with a drop of about fifty per cent. Almost no one except buyers noticed, the prices were so small, the prior destruction so vast. Once again market arithmetic is misleading. For shareholders, the loss of half the value of their investment was the same in 1932 as it was in 1929.

Although they cause misfortune, market crashes aren’t a misfortune in themselves, they’re the wringing out of mispricing and malfeasance. The market eventually acts as intended, to discover the present value of stocks through open bidding. The principle is simple, a stock is worth what a buyer will pay, all else is blather. Nor are there truly innocent victims of a crash, people choose to buy stocks rather than, say, bonds or beer or nothing at all.

The crash itself didn’t define the Depression, deflation did. Imagine the dollar buying more as time went on, as not only a store of value but a store of increasing value. Employers cut wages, partly for self-preservation but also because prices fell, lower wages would buy what the higher wages did before, or near enough. This had consequences. The “velocity of money” slowed—money changed hands less often—and as money became literally scarce, commerce slowed. By 1933 the economy of Main Street was so near to paralysis many cities issued their own currency .

A market crash may start like a canoe full of nuns and puppies going over a waterfall, but it takes time to completely play out, partly because it responds to the fluctuations of a contracting economy, partly because it tracks the passing of debt from hand to hand. Debt doesn’t disappear when defaulted or even forgiven, all debt is eventually paid by someone, by the borrower or the lender, or by a third party. When the third party is DC, it offloads debt from its favored clients onto everyone else. And it’s here we find the bad news: like the ’29 crash, the next crash and its follow on depression will linger until debts are settled. You should live so long.

An epic crash is no more predictable than it is preventable. Oddsmakers are now saying late March, others say next year, or when the chart forms a classic head-and-shoulders, or Dow 30,000. Maybe. Watch the bond market, it’s the likeliest proximate cause.

A market crash is America’s boogeyman. Once released into the wild the long-warranted economic implosion follows. The fall into general poverty will be unstoppable, opening the deepest cracks in society. Most cities and many states, already insolvent, will collapse outright, overwhelmed by unpayable debt, unable to maintain essential services much less bribes for urban peace. History says three years from start to bottom. Stay away from crowds.