When there is no vision, the people cast off restraint.
Solomon
I have been re-reading an excellent diarised account of daily life in 1929, during the years of the Great Depression in the US. This followed in the aftermath of the excess of the Roaring Twenties. The author Benjamin Roth, a lawyer with a practice in Youngstown, Ohio, a prosperous steel town, showed up for work until his death at the age of 83. He promised to publish his diary when he retired. He never did! After his death, his son published his diaries. The book makes insightful reading.
In the terrible economic depression from 1929 to 1932, stocks lost 90% of their value. There were few winners during those years. It took several generations for the confidence in stocks and risk assets to return. Irrational exuberance lead again to several major crashes, including notable ones in 1987 (Black Monday), the 2000 dot-com bust, the 2008 financial crisis, and the 2020 COVID-19 crash, all marked by severe drops and significant investor panic.
Stock prices are again very high by historic standards, and to revert to the mean US stock prices, they need to decline sharply. Given the USD 2 trillion interest on US public debt, many believe we are heading into a depression similar to that of 1929.
The late Chairman of the US Central Bank, Bernanke, wrote his PHD thesis on the Great Depression. During his term in office, he ramped up the printing press. Most students of the Great Depression acknowledge that a lack of liquidity caused the economic disaster. However, the effect of printing money is devaluation of the paper being printed or the coins being minted. What struck me when I read the diaries was the number of bank closures and the effect on businesses. Credit and cash disappeared. Many people were reduced to barter to survive. It made harrowing reading. Perfectly good teeth were removed to relieve pain, because people were unable to afford treatment. Investors with insufficient liquidity were forced to become sellers to pay the bills. People dressed in rags or expensive clothes flocked to soup kitchens to survive.
An entry from February 7, 1933
Bankruptcy, receiverships and foreclosures are rapidly cutting down the mountain of debt created during the boom. In this process many holders of stocks and bonds are seeing their investments wiped out. Real estate lies abandoned or is demolished to avoid paying maintenance and taxes. During the boom of 1928 businessmen scorned to leave their money in safe investments yielding 4 –5%. They sold securities and bought common stocks. The average man today would place enough money in government bonds, so that in an emergency income from this source alone would provide for bread and butter.
When prices are going up, the tide lifts all boats. It is quite another matter when the tide goes out, and we see who has been swimming naked.
Owning what we know and knowing what we own with sufficient liquidity will put the odds in our favour to avoid being forced to sell in a crisis.
Jeremy Blatch TEP