The end of World War 1 brought a new era into the United States; an era of enthusiasm, optimism, and confidence. This was a time when the industrial revolution was in full swing and new inventions, such as radio and airplanes, made anything seem possible. Capitalism was the economic model and nothing but good times seemed to appear on the horizon. It was this new era of optimism that enticed so many to take their savings and invest in various businesses and stock offering. And in the 1920s, the stock market was a promising favorite. Alexey Kirienko
The Biggest Stock Market Boom in History
Even though the stock market is known for volatility, it didn't appear so risky in the 1920s. The economy was thriving, and the stock market seemed like a logical investment strategy.
Wall Street quickly attracted a lot of investors. As more people invested, stock prices began to rise. The sudden spike in price first became noticeable in 1925. And then between 1925 and 1926, stock prices started to fluctuate. 1927 brought a strong upward trend, or bull market, which enticed even more people to invest. By 1928, the market was booming.
This booming market completely changed the way investors perceived the stock market. No longer were stocks viewed as long term investments, rather a quick way to become rich. Stock market investing had become the talk of the town, from barber shops to parties. Stock market success stories could be heard everywhere, newspapers and other forms of media reported stories of ordinary people - like teachers, construction workers, and maids, quickly getting rich quick off the market. Naturally this fueled the desire among the general population to invest.
Many newcomers wanted in, but not everyone had the money. This in turn led to what is known as buying on margin. Buying on margin meant that a buyer could put down some of their own money, and borrow the rest from a broker/dealer. In the 1920s, a buyer could invest 10-20% of their own money and borrow the remaining 80-90% to cover the stock price.
Now, buying on margin could be a risky endeavor. If the stock price dropped below a certain amount, the broker/dealer would issue a margin call. This meant the investor needed to come up with cash to repay the loan immediately, which often meant selling the underperforming stock.
In the 1920s, many people were buying stocks on margin. They seemed confident in the booming bear market, but many of these speculators neglected to objectively evaluate the risk they were taking and the probability that they might eventually be required to come up with cash to cover the loan to cover a call
The Calm before the Financial Storm
By early 1929, people across the country were rushing to get their money into the market. The profits and road to wealth seemed almost guaranteed and so many individual investors were putting their money into various companies stock offering. Sham companies were also set up with little federal or state oversight. What's worse - even some unscrupulous bankers were using their customers' money to buy stocks - and without their knowledge or consent!
While the market was climbing, everything seemed fine. When the great crash hit in October, many investors were in for a rude awakening. But most people never noticed the warning signs. How could they? The market always looks best before a fall.
For example; on March 25, 1929, the stock market took a mini-crash. This was a mere preview of what was to come. When prices dropped, panic set in throughout the country as margin calls were issued. During this time, a banker named Charles Mitchell announced his bank would continue to make loans, thus relieving some of the panic. However, this wasn't enough to stop the inevitable crash as fear swept across the nation like a raging wildfire.
By spring of 1929, all economic indicators pointed towards a massive stock market correction. Steel production declined, home construction slowed, and car sales dwindled.
Similar to today, there were also a few reputable economists warning of an impending, major crash. But after several months without a crash in sight, those advising caution were labeled as lunatics and their warnings ignored.
The Great Summer Boom of 1929
In the summer of 1929, both the mini-crash and economists' warnings were long forgotten as the market soared to all-time historical highs. For many, this upward climb seemed inevitable. And then on September 3, 1929, the market reached its peak with the Dow closing at 381.17.
Just two days later, the market took a turn for the worst.
At first, there was no major drop. Stock prices fluctuated through September and October until that frightful day history will never forget - Black Thursday, October 24, 1929.
On Thursday morning, investors all over the country woke up to watch their stocks fall. This led to a massive selling frenzy. Again, margin calls were issued. Investors all over the country watched the ticker as numbers dropped, revealing their financial doom.
By the afternoon, a group of bankers pooled their money to invest a sizable sum back into the stock market, thus relieving some panic and assuring some to stop selling.
The morning was traumatic, but the recovery happened fast. By the day's end, people were reinvesting at what they thought were bargain prices.
12.9 million Shares were sold on Black Thursday. This doubled the previous record. Then just four days later, on October 28, 1929, the stock market collapsed again.
The Worst Day in Stock Market History
Black Tuesday, October 29, 1929, was the worst day in stock market history. The ticker become so overwhelmed with 'sell' orders that it fell behind, and investors had to wait in line while their stocks continued to fall. Investors panicked as they couldn't sell their worthless stocks fast enough. Everyone was selling and almost no one buying, thus the price of stocks collapsed.
Instead of bankers attempting to persuade investors to buy more stocks, the word on the street was that even they were selling. This time over 16.4 million shares were sold, setting a new record.
Stock Market Freefall
Without any ideas on how to end the massive panic that gripped society, the decision to close the market for a few days was made. On Friday, November 1, 1929, the market closed. The market reopened again the following Monday, but only for limited hours, and then the price of stocks dropped again. This continued until November 23, 1929, when prices appeared to stabilize. But the bear market was far from over. During the next two years, stock prices steadily declined. Finally, on July 8th, 1932, the market had reached its lowest point when the Dow closed at 41.22.
In 1933 Congress Introduces the Glass-Steagall Act
In the midst of a nationwide commercial bank failure and the Great Depression, Congress members Senator Carter Glass (D-VA) and Representative Henry Steagall (D-AL) inked their signatures to what is today known as the Glass-Steagall Act (GSA). The GSA had two main provisions; creating the FDIC and prohibiting commercial banks from engaging in the investment business.
The Glass-Steagall Act was eventually repealed during the Clinton Administration via the Gramm-Leach-Bliley Act of 1999. Many financial professionals would have you believe the Glass-Steagall's repeal contributed heavily to the financial crisis of 2008. And despite hard lessons once again learned, little was done by congress to restore public confidence and to reinstall safeguards or re-in act the Glass-Steagall Act. The lobbying pressure is just too much to overcome. Just like before the crash of 1929, again, there is no firewall between the major banks and investment firms and with little federal oversight. It's a house of cards ready to fall once again.
However, Noble Prize Winner, Joseph Stiglitz of the Roosevelt Institute, had this to say:
"Commercial banks are not supposed to be high-risk ventures; they are supposed to manage other people's money very conservatively. Investment banks, on the other hand, have traditionally managed rich people's money - people who can take bigger risks in order to get bigger returns."
The truth was that when the Glass-Steagall Act was repealed, it brought investment and commercial banks together for a profitable outcome. There was indeed a market for this style of high returns that required risk taking and high leverage. While some believe that repealing the GSA was a contributing factor of the 2008s financial crisis, one can't help but wonder if the agency was actually hindering the competitive advantages of financial firms.
Allen Greenspan on Irrational Human Behavior in the Stock Market
Allen Greenspan, former Federal Reserve chairman stated in his new book, The Map and the Territory, they did all the economic mathematical calculations during his tenure, but failed to take into account irrational human behavior patterns triggered by strong emotions of fear and panic or desire for gain, which apparently run rampant in the stock market. The flip side of that is euphoria that can drive the market up to unrealistic highs, like now.
Since the financial crash of 2008, Greenspan stated he has been thinking a lot about bubbles. He has been trying to figure out why he along with so many other economic forecasters didn't see the housing bubble that caused the crisis. Today, another housing bubble exists in China far greater in magnitude than any other country, and according to economist, Harry Dent, it's a ticking time bomb poise to create economic havoc around the world when it detonates.
The Approaching Baby Boomer Retirement Bubble (2013 - 2015)?
Consider that 401(k) retirement plans are relatively recent platforms. They were first introduced in the early 1980's and have primarily been funded by the baby boomer generation, which has driven stock prices to current levels.
As of 2013, baby boomers are retiring at the rate of about 10,000 per day. In most cases this means they are no longer working, or contributing to their plans and will be withdrawing from their 401(k) plans, likely already rolled over into Individual Retirement Plans. Could this massive retirement wave put us on the forefront of a record-shattering stock market correction as the last of the baby boomers move into retirement?
High-profile world economist, Harry Dent, most famous for his predicting Japan would suffer a financial correction lasting over a decade; has been publishing this research for years. He not only carefully analyses economic data, but demographic data as well.
Dent's theory of a "baby boomer retirement wave" presents a disturbing reality. With 10,000 baby boomers spending and cashing in on their retirement accounts every day, these numbers suggests that the U.S. is heading down a dangerously similar slope as Japan years ago.
Dent's research shows that when consumers age, their spending patterns change. For example; when baby boomers were starting families, they spent more and the economy flourished. When their children grew and left home, the boomers starting spending less, which led to a decline in the economy.
The same thing happened in Japan, when the working-age population peaked in 1995.
Dent predicts by 2015, we will see a similar scenario here in the United States, when there is a disproportionately high number of older people and a much smaller population of young productive people. With fewer people working and a larger segment of the population in the older age bracket, taxes will most likely have to increase for all segments of our population
Indeed the financial devastation the stock market crash inflicted on the economy in 1929 is almost unthinkable. A great majority of people lost their entire savings. Businesses went bankrupt, and peoples' faith in banks was shattered. Some people jumped to death off of high rises after they lost their savings and were wiped out financially. Some banks went broke also, and people lost the money they had deposited in banks.
Banks foreclosed on numerous businesses and family farms. You couldn't buy a job! Soup lines formed in major cities because no one had anymoney, there were no jobs to have, or money to feed themselves or their families. Fights broke out due to the anger and frustration and dire circumstances.
While certain regulations have added a layer of protection since then, like the federal deposit insurance of accounts up to $100,000. the stock market keeps its risky reputation. The truth is that another crash of a similar magnitude could be right around the corner as the baby boomer generation moves into retirement. The smartest thing an investor can do now is simply understand the shift that the market and economy is going through in order to profit from it.
Alternative Asset Classes Gain Popularity in Spite of Sluggish U.S. Economy
When institutional investors and billionaires like Warren Buffett start adjusting their portfolios and start selling various U.S stock positions it's wise to pay attention. They are careful financial analyst and try to project and re-position themselves at all times. And, they are usually far ahead of the market in doing so. Even more important is finding out just what alternatives they're using to grow their wealth. For example, Buffett has a thriving company, Berkshire Hathaway, and likes to add stability to his portfolio buying Life Settlement contracts, (an alternative asset class) for a total of $400 million dollars' worth.
Major brokers and financial institutions generally don't offer their clients information on these types of investment alternatives, and for a variety of reasons. In fact, less than 15% of financial professionals are even familiar with this asset class.
Since Life Settlements are insurance contracts with no ties to the market or economy, they offer individual investors a strategy to avoid a stomach turning stock market roller coaster ride and unpredictably of their hard earned dollars by offering double digit returns year after year.
As an investor, you can't control the market or economy, but you can control your own personal economy.