Wall Street Crash Of 1929: Echoes Throughout Market History

A generation which ignores history has no past and no future.
Robert Heinlein, 1907-1988, American Science Fiction Writer

Wall Street Crash of 1929: A Timeless Tale of Market Cycles and Human Behaviour

Updated April 12, 2024

History repeats itself as the masses never learn; they fall for the same nonsense time and time again. Sol Palha

Introduction: The 1929 Stock Market Crash – A Tale of Exuberance and Catastrophe

The Wall Street Crash of 1929, known as Black Tuesday, marked the end of the prosperous Roaring Twenties and the beginning of the Great Depression. This event unfolded amidst a thriving economy, soaring stock prices, and widespread speculation. Investors, caught in a swell of optimism, engaged in margin trading, propelling prices to unsustainable heights.

The speculative bubble burst on October 29, 1929, sending shockwaves through the financial world. The Dow Jones Industrial Average dropped nearly 25% over two days, and by mid-November, it had lost almost half its value. The slide continued through the summer of 1932.

The 1929 crash is part of a recurring historical pattern. From Tulip Mania to the Dotcom Bubble, themes of greed, speculation, and risk neglect are evident. Each crash followed a period of prosperity and ended in panic selling, but it also presented buying opportunities for contrarian investors who understood intrinsic value .

As legendary trader Jesse Livermore noted, “There is only one side to the stock market, and it is not the bull or bear sides, but the right side.” The 1929 crash serves as a cautionary reminder of the perils of unchecked speculation and the importance of comprehending actual asset value. Simultaneously, it illuminates the opportunities that can arise during crises for those bold enough to swim against the tide.

Events Leading to the Crash of 1929: A Prelude to Financial Turmoil

In the late 1920s, stock market speculation became rampant as credit availability surged. Investors increasingly leveraged borrowed funds to buy stocks on margin, often putting down as little as 10% of the purchase cost. Brokers’ loans skyrocketed from $4 billion in 1927 to $6.4 billion in 1928, a 56% increase in just one year.

Speculation and high-risk investments became the norm. Banks began offering easy credit, allowing people to invest with money they didn’t have. The Florida land boom exemplified this mindset, with investors buying unseen land at inflated prices.

As economist John Kenneth Galbraith noted in his book “The Great Crash 1929,” “The mass escape into make-believe, so much a part of the true speculative orgy, started in earnest.” The stage was set for the eventual crash.

The Crash of 1929: Pivotal Shift Fueled by Easy Money

In 1929, nearly 40% of bank lending was on stock purchases. Even major corporations like Standard Oil and General Motors engaged in stock lending. Banks reported record profits, primarily from market trading rather than traditional lending—a shift resembling pre-crash conditions.

As stock prices plummeted in late October 1929, with Black Tuesday marking one of the darkest days in market history, nearly one-third of the market’s value—$25 billion—evaporated in just six days. Life savings were wiped out, leaving many in substantial debt.

Economist Irving Fisher famously stated just before the crash, “Stock prices have reached what looks like a permanently high plateau.” The crash proved how wrong this sentiment was.

Federal officials, determined to prevent a recurrence, implemented measures to maintain high interest rates and discourage borrowing. But these actions inadvertently deepened the economic downturn, propelling the nation into the Great Depression. As financial historian Charles Geisst put it, “The crash set in motion a series of events that exposed the nation’s economic weaknesses and ushered in the greatest period of economic instability in U.S. history.”

Wall Street Crash of 1929: A Glimpse into Key Events

The narratives below, sourced from the 1930 Blogspot, offer insights into notable moments from the aftermath of the Wall Street Crash of 1929, as the Wall Street Journal reported.

June 2 to 7, 1930 – Wall Street Journal:
– Henry Ford expresses optimism, stating that business is returning to normal and the worst of the economic depression is over.
– Brokers and financiers anticipate an improvement in the business depression, believing that the next turn will be for the better.
The ongoing dull period on Wall Street allows brokers to hone their skills in various games, including golf, bridge, checkers, chess, and ping-pong.

June 13, 1930 – Wall Street Journal:
– Business fails to improve as predicted, leading to decreased market sentiment.
– While business volume remains relatively steady, lower prices impact earnings, with wages not declining as quickly as earnings.
– The market perplexes observers by declining, contrary to the expectations of a rally held by a majority of Wall Street.

June 23, 1930 – Wall Street Journal:
– Col. Ayres, VP of Cleveland Trust, forecasts an uneven recovery in stock and commodity prices by Labor Day, attributing it to current consumption exceeding production.
– Differentiates between two types of depression, namely “V”-shaped and “U”-shaped.
Reducing the rediscount rate to 2 1/2 percent is seen as beneficial, indicating prolonged easy credit and potentially benefiting various industries, including farming, building, and construction.
– Stocks continue to decline, with notable drops in large trading stocks. Some rally on short covering toward the close after hitting new yearly lows.

August 6, 1930:
– The market is viewed as having set conditions for a positive uptrend based on fundamental and technical grounds.
– One year has passed since the start of the downturn, aligning with the typical historical duration of depressions.
– Favorable seasonal factors are noted, and recent range-bound trading is seen as the market building up its technical strength.

Are not many experts already making such comments now?

Many market experts and commentators express views similar to those from the 1930 article, with bulls and bears divided on the market’s near-term direction amidst economic uncertainty. A few key parallels:

– Bulls are encouraged by the market’s resilience and ability to shrug off negative news, seeing this as a sign that the path of least resistance is up. As Christopher Harvey from Wells Fargo recently noted, “The bear market is over, but it is not the great reflation. We see neither a bull nor a bear market, just a market.”

– Bears point to ongoing economic challenges, repeated failures to break through key resistance levels, and the potential for adverse developments to weigh on stocks. Peter Tchir of Academy Securities was a lonely bear recently amidst a sea of bullish Bloomberg Surveillance guests.

– There is debate about whether government intervention, such as taxes, subsidies and regulation, is needed to address potential market failures and externalities or if markets will self-correct over time.

– Concerns persist that speculative excess and easy money policies have driven asset prices to unsustainable levels, drawing comparisons to past bubbles. As economist John Kenneth Galbraith wrote about the 1929 crash, “The mass escape into make-believe, so much a part of the true speculative orgy, started in earnest.”

So, while history doesn’t repeat itself exactly, the divided bull-bear debate and economic crosscurrents driving volatility rhyme with the 1930 market environment to some degree. As famed investor Jesse Livermore said, “There is nothing new in Wall Street. There can’t be because speculation is as old as the hills.” Navigating today’s market requires balancing risks and opportunities with a long-term perspective.

Late August 1930: Bulls Encouraged Despite Economic Challenges

In late August 1930, stocks staged a sensational rally attributed to short-covering, as pessimism over the drought’s economic impact had led to a historically significant short interest. Despite some early pressure on copper stocks, heavy rains in drought areas sparked a short-covering rout, with spectacular rises in recently pressured names like US Steel .

On Friday, bulls found encouragement from President Hoover’s hint at continuing tax cuts, favourable business reviews, and the market’s resilience. While the oil group saw some unsettlement due to declining gasoline prices and high inventories, the weakness was contained.

Major industrials and trading favourites showed strength, reaching their best levels since the July peak. Tobacco, banks, and utilities were strong. Bonds continued to rise quietly, with the Dow 40-bond average hitting a new 1930 high.

Editorial: Short-Selling Bans and Bank Failures

The editorial argues that recent market swings were driven more by reduced earning power than short-selling. It points out that Corn Belt farmland values declined dramatically without any short-selling.

While the recent ban on naked short selling of bank stocks may have been intended to reduce damage, the editorial suggests that weak banks should be allowed to fail or be acquired rather than artificially kept afloat. Time will tell if the short-selling ban was effective or delayed the inevitable.

The debates around short-selling restrictions and bailouts for troubled banks have parallels to more modern market environments. As famed trader Jesse Livermore noted, “All through time, people have acted and reacted the same way in the market due to greed, fear, ignorance, and hope.”

Here is a concise analysis of the key points from the September 1930 market updates and editorial, focusing on the most relevant information and parallels to the current market environment:

September 1930: Bullish Sentiment Despite Mixed Signals

In September 1930, the market was seen as more technically vital after consolidation, with higher volume and the shakeout of weak hands indicated by a shrinkage in brokers’ loans. Encouraging economic data on steel production, retail, and mail-order sales, along with a prominent analyst turning bullish, pointed to potential near-term gains.

However, the consensus view that a “good advance” would be followed by a setback when disappointing Q3 earnings reports emerged was so widespread that the market’s direction was in doubt. As legendary trader Jesse Livermore noted, “The stock market is never obvious. It is designed to fool most people, most of the time.”

The humorous anecdote about the out-of-work broker disguising himself as a circus gorilla highlights the desperation and upheaval many in the financial industry felt during this challenging period.

Speculative Patterns: Dot-Com Bubble to Current Market

The editorial draws striking parallels between the speculative behaviour seen 80 years ago and recent market cycles. Just as easy money fueled excessive risk-taking in the late 1920s, the dot-com bubble of the late 1990s showcased a similar pattern.

While the dot-com meltdown briefly halted speculative fervour, the focus quickly shifted to real estate, inflating another unsustainable bubble. Even after the painful lessons of the 2008 financial crisis, the renewed enthusiasm for stocks in the current market underscores the recurring nature of speculative behaviour.

As the legendary investor Sir John Templeton observed, “Bull markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria.” Identifying the current market’s position in this cycle, while never particular, is critical to navigating the risks and opportunities ahead.

Rethinking Banking: Embracing Risk and Digital Transformation

Today’s significant banks are embracing more considerable risks, with the stock market contributing up to 50% of their revenues and government funds magnifying these risks. Banks must embrace digital transformation to survive and thrive in the current landscape, as the threat faced by FinTechs is significant. Goldman Sachs predicted that these startups could divert upwards of $4.7 trillion in annual revenue from traditional financial services companies.

While the current scenario differs from the past, with aggressive rate reductions and massive liquidity injections characterizing the approach, challenges loom with combined private and government debt exceeding 400% of GDP. The Fed may be compelled to raise rates, relinquishing control to foreign investors.

Inflation remains a lurking problem, and lowered rates and substantial market injections are expected to have a delayed impact, possibly leading to runaway inflation and potential hyperinflation. Sustainable economic success hinges on individuals embracing perpetual debt, but with banks reducing lending and plummeting home values, consumers must cut down on debt or face dire consequences.

The Impact of U.S. Consumer Trends on Global Economies

The change in spending patterns among American consumers is anticipated to have a widespread impact, affecting every nation. As consumers reduce debt and increase savings out of necessity, an economy built on debt recovery may struggle to thrive.

No other country matches America’s purchasing power, and there’s no immediate substitute. While Asia may eventually emerge as a replacement, this transition will take 3-6 years.

As banks navigate these challenges, they must demonstrate conviction and agility to adapt to the evolving landscape. Embracing digital transformation and addressing changing consumer behaviours will be critical for banks to survive and thrive in unprecedented challenges.