Lessons from the 1929 Black Tuesday Event - Introduction
A while back, I spent a whole weekend studying the great depression. I was inspired to do so by Ben Bernanke, who has spent decades studying the period.
My findings were startling when you compare it with the period we are in. Today, in the United States, we have a president who is so similar to Calvin Coolidge who was the president before the crisis. In his state of the union speech, in 1928, he spent some time praising the economy and the stock market.
He was right to do so. At that time, the U.S economy was booming. The unemployment rate was decreasing, more people were working, and the technological advancement was in top gear. This was the period when the radio was developed.
In addition, the stock market was experiencing a boom. In August 1929, the stock market reached an all-time high.
At the time, as a result of more jobs, people were spending most of their money on stocks. They borrowed heavily to buy the stocks. In fact, 1 in every 3 bank loans was used to buy stocks.
Fast forward to today. Each week, the main market indices in the United States and around the world are hitting a new high. This year, the Dow, NASDAQ, and the S&P have gained by 26%, 28%, and 22%. Past the crisis, all the major indices in the developed countries have gained by more than 100%.
Today, we are at an era of huge technological advancements with companies like Amazon, Google, and Facebook changing how people do things. We are at an era of nano technology, augmented reality, artificial intelligence, and machine learning among other things.
In addition, companies that were not in existent 15 years ago have accumulated so much in valuation. For example, Facebook is just 13 years and yet, it has a market capitalization of more than $500 billion while Uber, a private company has a valuation of more than $60 billion.
The complacency does not end there. Today, cryptocurrencies are worth more than $500 billion yet, most people who own them don’t understand what they are.
Yet, in all this, the volatility index is at an all-time low. The number of consumer debt in the United States has soared and delinquencies have increased.
On Black Tuesday, the day started normally. On Thursday, the previous week, the sell-off started but bankers and the president assured investors. On Friday, the stock market had some recovery. On Monday, the sell-off started again but ended after bankers bought more stocks. On Tuesday, everything came to a stop. At the end, more than $25 billion was lost. Today, that would be about $325 billion.
This was the beginning of the great depression, which lasted for more than 10 years.
Since the start of the Bull Run, many analysts and economists have been calling a top. Technical indicators are flashing sell (or overbought).
It is impossible to call a top especially when interest rates are so low and the government has just started rolling out a massive tax cut process.
The truth is, one day, reality will set in and there will be a correction. As a trader, in every trade you initiate, you should have in mind this reality. You should have all the risk management tools in all trades you initiate. You should size your trades wisely and always have a stop loss.
Lessons from the 1929 Black Tuesday Event - Useful Tips
- Another interesting reading on History.