Thirty-six years after a largely British market upheaval in 1821, the great American boom of the 1850s was interrupted by the market collapse of 1857. While it might be too strong to say that the Panic of 1857 precipitated the War of 1861-1865, it was undoubtedly a factor in worsening those sectional antagonisms that most certainly precipitated that War. It also undermined the credibility of the Democratic Party, which in those days was clearly the more conservative, and doomed the Buchanan Presidency.
Thirty-six years later, in 1893, we suffered another major market collapse, followed almost immediately by a major political upheaval. The crisis was triggered in part by an irrational inflation in Western Land prices during the previous four years, one almost--but not quite--equivalent to the inflation in the prices of internet stocks during the past year or two.
Prior to the Panic of 1893, the Democratic Party had continued to be the more conservative of the two major parties. It was the party of States Rights and sound money--the party of the Virginia dynasty of Thomas Jefferson. In the wake of the meltdown, which began with a stock plunge in early May, followed by a crash on June 27th, a more liberal populist tide swept across much of America; sound money became a target; in place of the sound principles of Jefferson, the rhetoric of William Jennings Bryan captured the Democratic Party; with the result that Grover Cleveland, the incumbent and first Democratic President since the War of the 1860s, could not even support the nominee of his party in 1896, his last year in office.
Everyone knows what happened thirty-six years later, in October, 1929--and the watershed effect that that economic disaster had on American politics. (It would make an interesting class project, for one of those rare institutions that still tolerate academic freedom, to collect the front pages of major English language newspapers & track the parallel contemporaneous paths by which Adolph Hitler and FDR manipulated crises to play the power game in the 1930s.) In no other period in American History--either before or after the Revolution--did the individual American lose more; nor the awesome power of the Collective grow more rapidly.
It may be instructive to step back in time for a moment, and look at the market psychology which typified the last days of the great bull market that preceded what up until now has been the worst market crash in American history. Harry D. Schultz, in his 1972 book Panics & Crashes and How You Can Make Money Out Of Them summarizes the subject:
The idea of the "new era," which many believed had definitely arrived, was too strongly embedded in the consciousness of the American public. ...Millions of workers and middle-class people who had never seen a bond or a share of stock until the days of the Liberty Bonds and the campaigns for employee stock ownership were now conscious of the stock market. Following the lead of the professional stock market speculators, more and more people entered the market. ...The easy money to be made in speculation as stock prices mounted, stimulated increased interest until speculators talked little about actual values and thought only about the future prices they might get when selling the stock. This could only have one end.
Today, they talk of a "new paradigm!" But perhaps the most revealing comment that Schultz offers is this: A browse through the newspapers of the 1929-1933 era will show how, all the way down, respected analysts maintained that what was occurring was a slight adjustment in a permanent uptrend.
Does any of the above evoke images of the present? The new paradigm then, was such that the New York Stock Exchange took until 1954 to even get back to its 1929 high!
Those who knew this 36 year pattern expected a repetition in 1965--although the level of speculation leading up to it had been a good bit milder; the underlying values a bit more solid. The Dow Jones Industrial average did, in fact, touch a new all time interday high at 1000 in December of that year, backed off, but fought its way back to try again with an all time closing high just under 1000 in early January. It did not get back to that level until the early 1980s; by which time, the dollar had lost two thirds of its value!
The reason that the market top in December, 1965, was not associated with a panic, as the lack of a public perception of the effect of the 36 year cycle, as the sharp fall in the value of the dollar over the following decade and a half (as opposed to the rising purchasing power of the dollar during the period 1929 to 1933); may all be attributed to Lyndon Johnson's slow, studied escalation of the Viet Nam War between 1964 and 1969. From a military standpoint, the war was waged in a manner little short of a disaster. From a moral standpoint, it was outrageous--many would suggest approaching treasonous--to risk the lives of hundreds of thousands of American boys, exposed in a protracted build up, under a no-win strategy. But it masked real problems in the economy, which many have always suspected was Lyndon's real motive. (Otherwise, why not just fire the patently incompetent McNamara and put in someone who knew what he was doing?)
While the 1857 crash had come in August; that in 1893, in June; the 1929 crash had not come until October; with the final long term top (its true severity masked for many years by a contrived inflation) coming in December/January, 1965/1966. Thus the 36 year span between the ends of the great "bull markets" is not quite precisely that. If anything, but for the early crash in 1893, it seems to be lengthening by a couple of months. Yet that is hardly writ in stone. But whether the next crash comes in 2001 or 2002, or some other year close at hand; what is already certain is that you have a pattern of excessive speculation now in place, which probably exceeds the levels two to three years before any of the referenced tops.
There is also more speculation on stock issued by companies without present underlying material assets than at anytime in human history--and those investments have become a quite significant portion of gross market valuations. And there are probably more novices getting into the market for intangibles than at any time in American history.
It is accepted in market circles that primary bull markets seldom end before they are seriously over-bought (major irrational exuberance), and that the ensuing bear markets do not end until they are just as seriously over-sold. The reasons for such phenomena are pretty obvious. There is, of course, the element of "mob psychology," the herd instinct. But there are also powerful tendencies within the conscience of most individuals that provide a complementary impetus.
One is the propensity of man to rationalize, to look for ways to reassure oneself of the soundness of the course--or investment choices--to which one has previously committed. Many of the trading systems, which market regulars employ as a discipline against this very tendency--systems which may work quite well for the individual during most periods--tend at times of crisis (ie. panic buying or selling) to magnify and acerbate the extremes of momentum; to prove, indeed, another contributing factor in the gathering disaster.
Similarly, while under ordinary circumstances the broader the public participation in a Market, the healthier the Market; in moments of panic, the greater the percentage of the public involved, the greater both the damage and the difficulty at amelioration.
It can not be stressed too emphatically that that which causes the great swings in any human market offering a potential for speculation, has nothing to do with economic models or paradigms, new or old. It is a reflection of certain aspects of human nature; actually more analogous to the factors that cause wide swings in the political mood, or in religious sentiment, or in women's fashion--take your pick--than anything which may be actually driving the economy.
No one can predict exactly what will trigger the final phase of a great "bull market," nor what event may burst the bubble. The moment of greatest danger comes when the greatest number of participants believe the market is strongest; a future rise inevitable. The greatest potential for damage will come when the highest proportion of popular "investments" represent relatively the least value; where the greatest number of market players talk about "new eras" or "new paradigms" and expect ever higher prices: When almost everyone is bullish, and fully committed, and there are very few potential new buyers. The bubble buster, then, could be anyone of a virtually limitless number of previously unforeseen events.
For example, visualize what would happen to the present market, were some new Bill Gates to demonstrate a breakthrough technology, so clearly superior to any of the existing systems for organizing, storing and transmitting data, together with the means (browsers, search engines, data banks, etc.) to launch a market basket of related services within a short enough time frame to doom all speculation for the future profitability of the very expensive crop of present day money losers! To be sure, the latter would not disappear overnight. But without the expectation of future glory, the prices of today's high flyers would collapse--not in a year, but overnight. It would not be too much to expect a 90% fall within a week of the suggested development; a further fall to ten times trailing earnings within a month or less for the few that have been profitable--a fall to virtually nothing for the many, which have never had any earnings at all.
We hold no internet stocks; but the above scenario would trigger an implosion of the overall market--with devastating consequences for the entire economy. While stocks on the way up afford engines for general growth, as sellers obtain the benefits of rising prices, with cash proceeds that they can invest more optimally elsewhere; a crashing market destroys value, with no offsetting benefit to anyone. When there are no buyers, prices are marked down dramatically. The result is simply a loss of the personal savings of the investor caught in the mark down. His ability to act in the general economy collapses to the extent of that loss. The potential strength of the whole is reduced thereby. The sell off in the over-extended issues, then, produces a general down draft in the priced values of investments in general. And just as a great bull market feeds upon itself, creating at least paper value; so too a great bear market feeds upon itself, devouring value.
We have suggested one trigger for a market burst. There are innumerable possibilities: The collapse of a major financial institution. Or if you prefer technology; a break through--similar to that projected for the internet facet--in telecommunications, in general; a demonstrated technology, permitting one player to become clearly dominant. (There is a great deal of present value represented in the current prices of telecommunication stocks; a good amount based upon anticipation for future growth.) But take your pick. Once a market becomes caught up in true irrational exuberance, there is only one way for it to end.
The 1930s provide a terrifying example of the rise in demagogues on the Left, seeking to exploit the last great implosion of world economies. We already see how the media in America cater to the Left, when it seeks to exploit even local tragedy, like that at Littleton; and how quick the would be exploiters move, when opportunity presents itself. The 1930s demonstrated also, how few in a general population--even among educated peoples with proud traditions and heroic heritages, like Americans and Germans--are able to think past the immediate economic crises, to even bother to defend those proud traditions and noble heritages. Rather, there seems a great tendency to follow whatever Pied Piper appears on the scene. There is nothing like a depression for providing the opportunity for tyranny!
Already the first, faint rumblings of the New Left are being heard on American campuses, recovering from the collapse of Communism, and adopting the new Utilitarianism of European Socialists. With computer technology, the suggestion will be made, that the centrally planned Society could work. Of course, that is nonsense. A computer has no greater insight than he who programs it. But anyone who discounts the ability of the apostles of discord and envy to sell the concept has learned nothing from the past century.
If--in a time of economic prosperity--the Left can so cavalierly scape goat the tobacco industry for health problems, the gun industry and gun owners for social deterioration and violence; who can doubt the coming frenzy to scape goat and demonize in the next great crisis. And who can doubt that a supine media will still accommodate their demagoguery? The Left have a long list of pet hatreds. They will seize the opportunity to make them more general; to turn class against class, race against race; and, wherever the ethnic mix permits them to get away with it, to pillory the old stock, those rooted descendants of the men who gave us our heritage of liberty, who still espouse the old views.
And they will certainly benefit in this demonization from the frankly appalling display of greed by a large segment of American Corporate management in this decade. You need only contrast the total pay packages --with which much of American top Corporate management has rewarded itself in recent years (presumably for being the beneficiaries of the long term cycle discussed above)--with those taken by their European counterparts, to realize that something is grossly out of proportion. The sad thing is that the actual capitalists--the shareholders--who have had to bear the costs of these excesses, may very well have to suffer again, when the demonization begins. The Socialists, after all--now as in Nazi Germany--need managers. It will be the capitalists that will be demonized; their wealth, which may represent the invested fruits of many generations of hard labor (not generous options) attacked.
If those of us, who honor the ways of the Fathers, who believe in the responsibility of the individual, who believe in limited, Constitutional Government, are not ready for the fray that will come with the end of the present economic cycle; everything the Fathers fought for, everything that traditional America has always stood for, everything of true value that we would vouchsafe to our children, could be lost in a heart beat. Will we be ready?!