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  • A Financial Market Crash is a Process, Not an Event

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    A Financial Market Crash is a Process, Not an Event

    Liquidity dries up. Truth is revealed.

    by Eric Janszen

    A financial crash is not sudden, singular event. The way the Crash of 1929 is commonly misunderstood, the market crashed on Monday, October 31, 1929 and soup lines formed Tuesday.

    A financial crash is a process lasting as long as a year, punctuated by a few notable grip-and-grin market events that make it into the history books. Underlying the process is the dissolution of a fallacious belief system that developed over a period of many years. Fallacies floated on an ocean of cheap credit. As the credit dries up, facts are revealed under the harsh light of reality.

    Multiple fallacious beliefs now show under the light of evidence for all to see. The complicity of the ratings agencies in creating the housing bubble, while notable, is a minor revelation compared to the big three.

    Financial Risk is Buried and Gone

    False Belief: Risk spreading instruments disperse financial risk, creating greater financial market stability and resilience.

    Fact: Underwriters, mostly investment banks, sold exotic credit derivatives and externalized the risk, dumping it mostly on foreign pension funds. Risk spreading instruments create Risk Pollution, causing financial risk to disappear from sight for a time, where it concentrates in the weakest parts of the financial system only to reappear later like PCBs at Love Canal. The subprime mortgage market is the beginning of the discovery of hundreds of Credit Love Canals. A multi-trillion dollar Risk Pollution Superfund will have to be developed, at taxpayer expense, to clean up over ten years of Risk Pollution.

    The Housing Bubble Collapse is Benign

    False Belief: The Housing Bubble Correction will not seriously damage the economy.

    Fact: Every aspect of the economy on which rising home prices depended, from the market for mortgages to furniture to autos, is in decline. The collapse of the housing bubble will cause a recession in the U.S. by Q4 2007.

    Deficits Don't Matter

    False Belief: Deficits don't matter. An economy can be continuously stripped of its industrial capacity and its assets inflated and traded for profit continuously, and imports can be paid for with borrowed money forever.

    Fact: No economy in history has ever survived long running large trade and fiscal deficits. The entire economy needs to be overhauled, from the tax system to the monetary system, to re-build capacity for capital formation, saving, and capital investment in productive industries. USA, Inc. needs to be restructured.

    There is very little that the Fed can do to stop the dissolution of fallacies process now that it is underway. Rate cuts will further weaken dollar and create even higher inflation, which is one of the causes of the crash. The Fed will keep the discount window open to prevent cascading debt defaults and bank failures.

    Here's how it went down last time. You will notice a few parallels.
    Wave of Buying Sweeps Over Market as Stocks Swing Upward

    Radio Flashes High; General Motors and Steels Soar
    By Laurence Stern

    The atmosphere of doubt and caution which Wall Street in recent weeks has come to regard almost as habitual on Thursdays was swept away yesterday in a rush of buying...

    Perhaps the market's own strength weighed as heavily with speculative minds as the logic of the situation, since the tape is the one institution Wall Street does not argue with. At any rate, the market appeared entirely confident from the opening gong. It was a firm, almost buoyant, opening, many initial transactions involving large blocks at sizable price advances...

    The advance was one of the most vigorous of the year, amounting to a net gain of 6.97 points in the Dow Jones "average" of thirty representative industrial issues...

    - The World, March 15, 1929

    _____

    Stocks Soar As Bank Aid Ends Fear of Money Panic
    By W. A. Lyon

    The stock market strode out from under the shadow of a panic in call money that so lately threatened, revived in all its old strength yesterday. Assured that the New York banks were ready with their boundless resources to prevent a money crisis, the public and the professional trader set out to repair the damage done to prices on Monday and the major part of Tuesday.

    Stocks in the aggregate, though bucking a 15 per cent rate for loans, enjoyed the greatest advance they have known in a single day in the last two years. Not even the surging bull markets of the memorable year 1928 saw such a day of heavy buying.

    - New York Herald Tribune, March 28, 1929

    _____

    Banker Says Boom Will Run Into 1930

    That at least a part of the great amount of money in the securities market may represent temporary employment of funds eventually finding their way into business uses, and that the prosperity of the present business cycle will probably not end in 1929, is the belief expressed by the J. Henry Schroder Banking Corporation in the quarterly review of the London house of Schroder.

    - The World, March 30, 1929

    _____

    Public Liquidation Spurred by Bears, Hits Low Market Scare Orders From All Over Country Halt Ticker an Hour in Feverish Day
    By Laurence Stern

    With speculative nerves rubbed raw under the persistent hammering of bearish traders, a renewed wave of public liquidation swept over the stock market yesterday, depressing prices severely and hopelessly clogging the quotation ticker...
    ...To the majority of the market's followers, who now must be counted in millions, the most significant aspect of the decline is that it has carried the average level of the list to a lower point than was reached on Oct. 4 in the sharp break that climaxed a month of gradual recession.

    This raises a pertinent question, whether the bull movement of the last five years has definitely given way to a liquidating market...

    -The World, October 20, 1929

    _____

    Brokers Believe Worst Is Over and Recommend Buying of Real Bargains

    Wall Street in looking over the wreckage of the week, has come generally to the opinion that high grade investment issues can be bought now, without fear of a drastic decline. There is some difference of opinion as to whether not the correction must go further, but everyone realizes that the worst is over, and that there are bargains for those who are willing to buy conservatively and live through the immediate irregularity.

    -New York Herald Tribune, October 27, 1929

    _____

    Gigantic Bank Pool Pledged To Avert Disaster as Second Big Crash Stuns Wall Street
    Largest Financial Powers in the City Meet After Day of Hysterical Liquidation Sinking Prices Below Thursday's
    By Laurence Stern

    After the stock market had come crashing down again in a veritable deluge of forced and hysterical liquidation, word sped through the financial district last evening that the largest banks in the city were prepared to exert their organized power this morning to prevent further disaster.

    Arrangements described as "fully adequate" were completed at a conference at the offices of J. P. Morgan & Co. at Broad and Wall Streets...

    Although no formal statement was issued, it was the consensus of those at the meeting that the worst of the liquidation is over and that a natural demand for investment stocks now available on the bargain counter should go far toward an immediate restoration of trading stability.

    -The World, October 29, 1929

    _____

    Stocks Up in Strong Rally; Rockefellers Big Buyers; Exchanges Close 2-1/2 Days
    By Ferdinand Lundberg

    Revived by spontaneous investment buying and declarations of large extra cash dividends by leading companies, and free of the delirium that has recently gripped share owners, the stock market yesterday received a fresh start and scored a record comeback. Volume on the Stock Exchange totaled 10,727,320 shares, the third largest day on record.

    The high spot of the day from a stock market viewpoint was the statement by John D. Rockefeller that there was no need to destroy values and that he and his son, John D. Rockefeller Jr., had been heavy buyers of stocks for investment in the last few days, and would continue to buy at present prices...

    -- New York Herald Tribune, October 31, 1929

    _____

    Very Prosperous Year Is Forecast
    Guenther Analyzes the Report of Mellon Covering 1929

    That 1930 may be a very prosperous year, industrially and otherwise, without the peak conditions that made 1929 and exceptional year for business prosperity, is an observation made by Louis Guenther, publisher of the Financial World, in a statement based upon Secretary Mellon's fiscal report...
    "To grow too fast is often unhealthy because of the suddenness with which a readjustment must be met. By far and large the country would be better off were further progress made along more normal lines...

    Fortunately, we have returned to a more normal mind in appraising prospects. We are not looking for the Midas touch on everything to which we turn. That makes us more satisfied with normal incomes and normal profit returns."

    -The World, December 15, 1929



    The 2007 version of the story, in video, with humor!




    But the process is not done. We are still in the early stages. Not until Q1 2008 are we likely to see the main event.

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    Last edited by FRED; 03-14-08, 01:07 PM.
    Ed.

  • #2
    Re: A Financial Market Crash is a Process, Not an Event

    I'm rivetted. How does it end?

    Seriously, I remember hearing that people who held onto their stocks instead of selling in the panic ended up doing okay. Is that true? How did the Rockefellers do on their buys in late October?

    Comment


    • #3
      Re: A Financial Market Crash is a Process, Not an Event

      Originally posted by Andreuccio View Post
      I'm rivetted. How does it end?

      Seriously, I remember hearing that people who held onto their stocks instead of selling in the panic ended up doing okay. Is that true? How did the Rockefellers do on their buys in late October?
      Depends on your time frame.
      Ed.

      Comment


      • #4
        Re: A Financial Market Crash is a Process, Not an Event

        Originally posted by Andreuccio View Post
        I'm rivetted. How does it end?

        Seriously, I remember hearing that people who held onto their stocks instead of selling in the panic ended up doing okay. Is that true? How did the Rockefellers do on their buys in late October?
        If you are referencing the 1987 debacle, go to stockcharts.com or bigcharts.com and look at the long term charts for DJI and SPX to see the shape of the recovery.
        Jim 69 y/o

        "...Texans...the lowest form of white man there is." Robert Duvall, as Al Sieber, in "Geronimo." (see "Location" for examples.)

        Dedicated to the idea that all people deserve a chance for a healthy productive life. B&M Gates Fdn.

        Good judgement comes from experience; experience comes from bad judgement. Unknown.

        Comment


        • #5
          Re: A Financial Market Crash is a Process, Not an Event

          Originally posted by Andreucchio
          Seriously, I remember hearing that people who held onto their stocks instead of selling in the panic ended up doing okay. Is that true? How did the Rockefellers do on their buys in late October?
          If you mean held onto stocks for 25 years, then yes.

          According to wiki: http://en.wikipedia.org/wiki/Wall_Street_Crash_of_1929

          the Dow recovered to pre-1929 level in 1954.

          But this does not include about 57% inflation - even with the deflation of the Great Depression years.

          So actual purchasing power equivalent recovery was not until pretty much the 1960s.

          I don't know about you, but its hard to sit on the goose egg for 30+ years.

          Comment


          • #6
            Re: A Financial Market Crash is a Process, Not an Event

            Here's the money quote from the Wikipedia article:

            "Anyone who bought stocks in mid-1929 and held on to them saw most of his adult life pass by before getting back to even."

            Comment


            • #7
              Re: A Financial Market Crash is a Process, Not an Event

              Originally posted by Andreuccio View Post
              Here's the money quote from the Wikipedia article:

              "Anyone who bought stocks in mid-1929 and held on to them saw most of his adult life pass by before getting back to even."
              I don't believe that includes survival bias.

              Our dot com portfolio, purchased near the top of the dot com bubble was off 85% last we checked. Some, like ebay and amazon, went on to be big stocks. However, many of the companies in our portfolio went out of business.
              Ed.

              Comment


              • #8
                Re: A Financial Market Crash is a Process, Not an Event

                Originally posted by Fred View Post




                A Financial Market Crash is a Process, Not an Event

                Liquidity dries up. Truth is revealed.

                A financial crash is not sudden, singular event. The way the Crash of 1929 is commonly misunderstood, the market crashed on Monday, October 31, 1929 and soup lines formed Tuesday.

                A financial crash is a process lasting as much as a year, punctuated by a few notable grip-and-grin market events that make it into the history books. Underlying the process is the dissolution of a fallacious belief system that developed over a period of many years. Fallacies floated on an ocean of cheap credit. As the credit dries up, facts are revealed under the harsh light of reality.

                Multiple fallacious beliefs now show under the light of evidence for all to see. The complicity of the ratings agencies in creating the housing bubble, while notable, is a minor revelation compared to the big three.

                Financial Risk is Buried and Gone

                False Belief: Risk spreading instruments disperse financial risk, creating greater financial market stability and resilience.

                Fact: Underwriters, mostly investment banks, sold exotic credit derivatives and externalized the risk, dumping it mostly on foreign pension funds. Risk spreading instruments create Risk Pollution, causing financial risk to disappear from sight for a time, where it concentrates in the weakest parts of the financial system only to reappear later like PCBs at Love Canal. The subprime mortgage market is the beginning of the discovery of hundreds of Credit Love Canals. A multi-trillion dollar Risk Pollution Superfund will have to be developed, at taxpayer expense, to clean up over ten years of Risk Pollution.

                The Housing Bubble Collapse is Benign

                False Belief: The Housing Bubble Correction will not seriously damage the economy.

                Fact: Every aspect of the economy on which rising home prices depended, from the market for mortgages to furniture to autos, is in decline. The collapse of the housing bubble will cause a recession in the U.S. by Q4 2007.

                Deficits Don't Matter

                False Belief: Deficits don't matter. An economy can be continuously stripped of its industrial capacity and its assets inflated and traded for profit continuously, and imports can be paid for with borrowed money forever.

                Fact: No economy in history has ever survived long running large trade and fiscal deficits. The entire economy needs to be overhauled, from the tax system to the monetary system, to re-build capacity for capital formation, saving, and capital investment in productive industries. USA, Inc. needs to be restructured.

                There is very little that the Fed can do to stop the dissolution of fallacies process now that it is underway. Rate cuts will further weaken dollar and create even higher inflation, which is one of the causes of the crash. The Fed will keep the discount window open to prevent cascading debt defaults and bank failures.

                Well put together EJ, I hope the day traders read it over and over and wake up to smell the real cycle their in.

                Many US public assets and resources will have to be sold off (or use of PPP) just to maintain a some what orderly cycle down. At some future point America will be described as on sale, resulting from years of dollar down and asset restructuring. It will get to a point were we will be priced as a global market competitor as foreigners flood the place establishing a 3rd world labor pool for factories. For housing it will go something like this “Get your Immigration Visa and Title at the close”.



                I can’t wait to read iTulip day trader members response to the first bounce, it should be similar as below. Next couple weeks?

                Brokers Believe Worst Is Over and Recommend Buying of Real Bargains

                Wall Street in looking over the wreckage of the week, has come generally to the opinion that high grade investment issues can be bought now, without fear of a drastic decline. There is some difference of opinion as to whether not the correction must go further, but everyone realizes that the worst is over, and that there are bargains for those who are willing to buy conservatively and live through the immediate irregularity.

                -New York Herald Tribune, October 27, 1929




                Last edited by bill; 08-17-07, 01:56 AM.

                Comment


                • #9
                  Re: A Financial Market Crash is a Process, Not an Event

                  Originally posted by Fred
                  Our dot com portfolio, purchased near the top of the dot com bubble was off 85% last we checked. Some, like ebay and amazon, went on to be big stocks. However, many of the companies in our portfolio went out of business.
                  Speaking of short opportunities, the latest jump by Amazon sure looked like a slam dunk short/put buy to me.

                  Perhaps someone can explain their business model to me; I've never understood how any company that ate so much capital with so little ROI, ridiculous P/E, etc could be at $70+/share.

                  Talk about selling at a loss but making it up in volume.

                  Mostly what Amazon seems good at is putting out new initiatives which look good - whether it is enabling internet stores a la Ebay and 'Long Tail', or Amazon payment a la Paypal, or selling excess computer time/capacity a la Akamai, or any of a number of other initiatives.

                  I've made some good money on them by bottom fishing at $12 given a rising market tide, but sold out before the latest earnings report as the buy was giving me the shakes.

                  Anyone?

                  Comment


                  • #10
                    Re: A Financial Market Crash is a Process, Not an Event

                    Funny, reading these headines from 1929 as in the other room a triumphant Cramer on TV touts stocks to young'uns on his show Friday night Aug. 17...My grandfather lost a lot in the Crash, I'm told, and never bought stocks again...luckily he remained well employed..."Shouldn't you be buying companies on the cheap?" Cramer is asking...

                    Comment


                    • #11
                      Anyone rethinking their Gold/Silver stance?

                      On a day when the financial markets were in question and we would expect to see a flight to safety,

                      the Dow dropped 300/13000
                      Gold dropped 40/660

                      Silver?

                      Comment


                      • #12
                        Re: A Financial Market Crash is a Process, Not an Event

                        It's great to hear EJ's distilled analysis again ...like in the old days.

                        And yes, what a great thing to remember ....the time these things take to play out. I remember a quote by someone who lived thru the 1929 crash era saying:

                        "nothing changed, it was a slow motion event and life went on just like normal. UNTIL THE BOTTOM and a decade afterwards."
                        ----
                        But, will things be different now with a 100% fiat world? Or, as Dr. Michael Hudson informs, does the fact that we are living in a 99% FIRE economy make it very similar?

                        Comment


                        • #13
                          Re: A Financial Market Crash is a Process, Not an Event

                          Fred posted Eric's "Market Crash" commentary late Thursday morning--~ 48 hours it's been up.

                          It has drawn 17,111 views, which from what I can determine is way more certainly than anything else posted in the same time-frame.

                          I also noted just now there are 24,876 Currently Active Users, which I think may be the most users ever online.

                          What all this suggests to me is there is a lot of nervousness amongst investors.

                          It sure would be nice if some of them would post remarks regarding what are their concerns.
                          Last edited by Jim Nickerson; 08-18-07, 02:23 PM.
                          Jim 69 y/o

                          "...Texans...the lowest form of white man there is." Robert Duvall, as Al Sieber, in "Geronimo." (see "Location" for examples.)

                          Dedicated to the idea that all people deserve a chance for a healthy productive life. B&M Gates Fdn.

                          Good judgement comes from experience; experience comes from bad judgement. Unknown.

                          Comment


                          • #14
                            Re: A Financial Market Crash is a Process, Not an Event

                            Originally posted by Jim Nickerson View Post
                            What all this suggests to me is there is a lot of nervousness amongst investors.

                            It sure would be nice if some of them would post remarks regarding what are their concerns.
                            Concerns? Here's a few of mine:
                            • That the coming economic contraction falls disproportionately on people who did not partake and derived no benefit from the credit bubble insanity. For example the vaporising of administered pension plan assets and the loss of future compounding of same will never be recovered, so someone's gonna take a haircut.
                            • That the caps on Fannie and Freddie will be lifted - nothing like rewarding the wrong behaviour.
                            • That the Fed continues to bail out the most politically influential imprudent lenders - the troubled hedge funds may be allowed to expire, but Chuck "Dancin' Fool" Prince over at Citi is in the too big-to-let-fail category. As Martin Mayer pointed out it's the lender who can't afford not to be repaid that threatens the system.
                            • That elected officials succumb to inevitable voter pressure and squander tax dollars on a futile and very public hunt for scapegoats. I feel nauseous just thinking about the hearings.
                            • That the trauma from the credit implosion and subsequent political and economic fallout causes the USA to re-discover it's natural Wilsonian tendency to isolationism. I am no fan of recent amplified militarism, but if you want to imagine a world without US influence just have a look at Darfur (I am not a US citizen).
                            • That the voters will turn to their government looking for security at a time of great uncertainty, as they did after 9/11, and the official response is yet more authoritarian curbs on personal liberty in the "land of the free".

                            Comment


                            • #15
                              Re: A Financial Market Crash is a Process, Not an Event

                              The one difference between now and "then" is that we were not the world's largest debtor in the history of capitalism.

                              There will be no choice but to inflate the dollar beyond the point of no return, yet it will do no good.

                              Weimarica, here we come.

                              Comment

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