1/2/22
John Kenneth Galbraith published an excellent account of the 1929 Crash. He covered the period preceding the crash, the crash itself and the immediate aftermath.
This book is often cited in high regard by many, including Warren Buffet, and why this is so becomes evident once you delve in. Galbraith never blurs the line between what can and what cannot be drawn as conclusions from the period. He openly admits that he does not have all the answers, an attitude that was not prevalent in most who commented on the crisis. Galbraith sees this over confidence as weakness, stating “When people are least sure they are often most dogmatic”.
As many are aware, what makes 1929 so distinctive was that the length and depth of the depression that followed. By most accounts, it lasted nearly 10 years.
In the years preceding the 1929 crash, it was evident that speculative mania was rife. Credit was in plentiful supply, facilitating speculation on margin, which only added fuel to the fire. It is often believed everybody was in on the speculation, but this is not quite right – “The cliché that by 1929 everyone was in the market is far from the literal truth”. More important was the degree to which those involved were involved, “Only in the case of the rarest of individuals can speculation be a part time activity”. As ever, new devices were developed to meet this full time, insatiable demand. One prime example was the investment trusts, trust companies set up with no clear plan in investing their capital other than to complicate ownership structures. However, he is clear to state that supply of credit alone is not sufficient explanation for speculation as it assumes that people will always speculate should the credit be available. A statement he knew to be true and has been proven numerous times since. Rather it was the mood at the time, everybody was under the impression that the stock market, the economy and the world were entering into a new era.
Prior the eventual crash, the market was extremely choppy. Large daily swings were becoming the norm. Eventually, in September 1929, these swings finally ceased. What replaced them was a persistent decline. The cycle was self-perpetuating, particular because of the high margin trading involved. Everybody rushed to unload, which in turn spurred others on through choice or requirement (margin calls).
What eventually caused the bubble to pop is unclear. Anything of any size can ultimately pop a bubble, so there were numerous possibilities. Rather than being bogged down in the minutia, the larger, underlying issues present in the economy should be in focus. As Galbraith states, “Cause and effect run from the economy to the stock market, never the reverse”.
Galbraith highlighted 5 weaknesses with the economy:
1. Bad distribution of income
2. Bad corporate structure
3. Bad banking structure
4. State of foreign balance
5. Poor state of economic intelligence
Following the crash, sweeping changes were made by administration. One such change was the introduction of the Securities and Exchange Commission (SEC), which is known by all investors today. Galbraith did believe these changes were effective and strengthened the system. He also knew that there is only so much impact these can have – “As a prescription against financial illusion or insanity, memory is far better than law.”. The memory has faded many times since, something he knew would undoubtedly occur – “The chances for a recurrence of a speculative orgy are rather good.”
Naturally, given the length of the current bull period, excluding the COVID rebound, there are always question marks over the stability of the stock market. The following similarities look particularly apt to me:
– The large daily swings seen in the market. Over the past months, particularly more recently, there have been huge daily price movements. This was originally limited to a section of companies, but it is now impacting all, including the megacaps.
– SPACS are of a very similar nature to investment trusts. SPACS were often set up with no intended acquisition target.
– Speculation is present and increasing, with Crypto & NFTs providing a perfect platform.
– There is a huge increase in the overall availability of funds, in part caused by the unprecedented stimulus that has been introduced.
– COVID has exacerbated the already unequal distribution of income. The stock market rise has in turn furthered this is an extremely self-reinforcing cycle.
Along with it being futile to predict the timing of a market crash, it is as futile to claim to know how the aftermath and recovery will play out. COVID was a prime example of this, with an immediate rebound nobody saw coming. Although there is evidently pattern recognition in the events preceding a crash, I do not believe such patterns can be drawn concerning the recovery. There is no set recovery playbook, with numerous factors playing a role. The next crash and associated recovery could be another 1929, or it could be anything but. The only thing we can know for certain is that there will be a crash at some point in the future.
This book is a fantastic read, and I would highly recommend. I think any new investors, like myself, should strive to educate themselves on the history of the markets. This will widen their knowledge of investment outside of solely the experience of today and the recent past.