"It's a racket. Those stock market guys are crooked."
Mobster Al Capone
We thought we were in a "New Era." We thought the party would never end.
Saving was out. Why save when stock prices were going up so fast. For almost eight straight years the stock market knew only one trajectory and that was up. "Buy now and pay later" defined not just a financial strategy but a lifestyle. And not only for the rich and well-off. Everybody was convinced that they could get rich.
Of course Wall Street was getting all the credit. And a big part of Wall Street's success was enticing great swathes of the population into buying stocks for the first time.
A lot of these investments were hugely leveraged. When you win, you win big. (Of course, when you lose, you can easily lose all your money and then some.)
It didn't matter that much of it was pure speculation. Many of the stock prices had little to do with a company's profits. The economy had peaked years before.
Nobody seemed to notice or care. A sense of euphoria had overtaken the market. The head of Morgan Bank wrote the President, "The future appears brilliant. Our securities are the most desirable in the world."
And Tom McCormick, a stock sales clerk, described it this way: "Geez, I'd go to get a shoeshine and they'd say, "How's the market?" You'd go to the barber to get a haircut, "How is the market?" Everybody was in the market."
Where was the SEC in all this? On the sidelines. With everything going so great, they weren't about to spoil the party.
The SEC was merely following the lead of the Republican President who was convinced that unfettered capitalism was the foundation of our prosperity. He ran an administration determined not to interfere with the "magic" of the free market.
Of course, all this couldn't take place without the hype of the financial media. Wall Street may have made the hot dog. But it was the journalists who heaped on the mustard.
This is how bubbles are formed. Unfortunately, we've been witnessing a series of huge bubbles bursting. As the old saying goes, "the bigger they are, the harder they fall."
But the "New Era" where everybody has the God-given right to be rich wasn't the 1990s or earlier this decade.
It was the roaring '20s.
And the bursting bubbles didn't just happen this past year. It happened in the Great Crash of 1929.
The similarities are many. Before the crash, it was commonly believed that America had entered into a period of "permanent prosperity."
The euphoria that elevated the market up in the late '20s until it came crashing down in a two-day spasm of falling prices in October 1929 mirrored the euphoria that drove the market to record highs in 2007 (well after housing had imploded).
The market lost $30 billion that week in 1929 – ten times more than the annual budget of the U.S. government and far more than the U.S. had spent in all of World War I.
By July 1932, the Dow was 89 percent off its peak.
Credit immediately dried up. And the economy went into a tailspin, leading to the Great Depression. Automobile sales in America fell from 4.5 million in 1929 to 1.1 million in 1932 (and didn't climb above their previous peak for 20 years).
In both bubbles, regulators were disabled.
In both bubbles, personal debt levels spiked. The credit problems weighing on consumers today originated in the 1920s.
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You see, consumer credit came of age in the 1920s. Before then, the average worker couldn't get credit. And individual investors were allowed (even encouraged) to invest by putting only 10 percent down. With $1,000, they could buy $10,000 worth of stocks.
Instead of George Soros, T. Boone Pickens and Warren Buffet, the 20's had its own investment legends.
… William C. Durant who founded General Motors. It was said he managed between two to five billion dollars (an enormous sum for that day) and in a bullish period, he was the bull of bulls.
… Charles Mitchell, who as president of National City Bank, virtually invented the idea of mass-marketing stocks and bonds to the general public.
…and one of the greatest market manipulators in U.S. history, Michael Meehan. In 1929 he made $100 million (equivalent to about $115 billion in today's money) in one week from pushing up the stock of RCA.
And then there's the similarity between President Hoover and Bush. Both espoused a laissez-faire approach to the economy.
Hoover was a terrible steward of the economy, but a great cheerleader. He stayed on message with the best of them, saying how wonderful times were and how prosperous everyone was going to be.
As late as October 25, 2008, in his weekly radio address, Bush said "the American people have reason for optimism" about the country's economic outlook.
The great lesson of the Great Crash supposedly lies in the time it took the market to recover. The Dow did not return to pre-1929 levels until late 1954.
Anyone who bought stocks in mid-1929 and held onto them saw most of his or her adult life pass by before getting back to even.
Will this be the last of the similarities between the two periods?
I have another lesson for you…
If you had invested around the bottom of the market in 1932 with the Dow at about $42 and got out in 1937 at $190, you would have made 350%.
As you can imagine, stocks were practically being given away in 1932, just like many stocks today.
Admittedly, after 1937, the market went flat for the next decade and then tripled in price in the 1950s. The ride up (and down) is never smooth.
I can't tell you how the market will zigzag its way up this time around. But I do know that this is an historical opportunity to buy stocks of fundamentally strong companies at ridiculously low prices.
If you've been in the market, chances are you've taken some hard hits. This is your big chance to get up off the canvass and secure your financial future. Who knows when an opportunity like this will roll around again?
Market crashes represent historical disasters, but also historical opportunities to score big.
Invest well,
Andrew Gordon
P.S. The crash left Charles Mitchell $12 million in debt. But he paid off his debts and became a highly respected investor on Wall Street.
William Durant filed for bankruptcy in 1936. He ran bowling alleys and sold cures for dandruff. Nothing took. He died broke in 1947.
Al Capone invested his money in a $100-million bootleg liquor business. Business was good until 1931 when he was convicted of income-tax evasion and sent to jail. He had a stroke in 1947 and died a few days later of cardiac arrest.
[Ed. Note: With a bear market looming, it's more important than ever to select safe investments that produce monthly dividend income. CLICK HERE to learn about Andy Gordon's INCOME service that selects the best dividend-paying stocks available.]
P.S.S. To let me know what you thought of today's article, send an e-mail to: feedback@investorsdailyedge.com.
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