- In “Rainbow’s End: The Crash of 1929” Maury Klein details the speculative fever that washed over markets ahead of the event.
- The book reveals striking similarities to today’s euphoric market, which has led to soaring prices of stocks, crypto, and other assets.
- No one can predict a market crash with certainty, but everyone can learn from history.
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The market opened “like a bolt out of hell.” A “dreaded tsunami of selling” flooded in as panicked investors jettisoned over 16 million shares, more than triple the normal daily trading volume.
Rules for traders to not “run, curse, push or go coatless” quickly went by the wayside. Mobs formed around the financial district of New York City and police were called in to control a most peculiar group of rioters – stock market investors.
The Dow Jones closed at $230 – down 23% from the opening of $299 and nearly 40% from record highs of $381.17.
The day was “Black Tuesday,” October 29, 1929.
It wasn’t the start of the crash, but it was the nail in the coffin. Fortunes were lost in a matter of hours and the US economy came crashing down hand in hand with the irrational exuberance of the 1920’s.
The great depression began and by July 8, 1932, the Dow fell to just $41.22 as investors lost faith in Wall Street.
In “Rainbow’s End: The Crash of 1929” Maury Klein dissects the 1929 stock market crash, elaborating human stories that reveal the speculative fever of an era, and perhaps even more importantly, illustrate startling similarities to today’s euphoric markets.
Below, Insider details four examples of how history may be repeating itself based on episodes from the 1929 crash described in Klein’s book.
More new listings than ever before
“New listings on the New York Stock Exchange rose from 58 million shares in 1925 to 102 million in 1928.”
In 1929 new listings on the New York Stock Exchange hit record levels as the exuberance surrounding Wall Street reached a fever pitch.
While there are many differences between the era of the 1929 crash and present day, the rise of new listings is a similarity that can’t be denied.
In the first quarter of this year, IPO volumes rose 85% and proceeds jumped some 271% year-over-year, according to the Ernst & Young Global IPO Trends: Q1 2021 report.
The rise of special purpose acquisition companies, or SPACs, has added to the boom in new listings.
SPAC IPO issuance broke records in the first quarter of 2021, with 298 SPACs raising nearly $88 billion, according to data from ICR Capital.
The rise of the inexperienced speculators and traders
“To practiced eyes, they represented a new breed of gambler lured to the market more by hope than experience, like vacationers at a casino trying their luck in a game owned by professionals…Suckers are born every minute. One goes, two come in. Win or lose we get our commissions.”
In the late 1920s, the ranks of investors on Wall Street ballooned to record numbers.
Brokerage houses opened 599 new offices in 1928 and 1929 alone, bringing the total number of New York brokerage offices to over 1600 in the days before “Black Tuesday,” more than double the number that were operating in 1925.
Women, who hadn’t previously been allowed in brokerage houses, also became top customers before the 1929 crash.
One female trader wrote about her reasoning for entering the markets in a “how-to” article that perfectly illustrates the sentiment of the era, “we went for the same reason that most of the other little pigs were going-that is, because we wanted to make some money quickly without working for it.”
In 2021, trading apps like Robinhood, E*trade, and Fidelity, which serve as the brokerage houses of our time, are booming like never before. Charles Schwab added a record 3.2 million new brokerage accounts in the first quarter, more than it did in all of 2020.
Reddit’s r/wallstreetbets, a home for retail traders and the same type of speculative attitude seen in the late 1920’s, has also seen its ranks swell to nearly 10 million members.
Meanwhile, institutional buy-side trading has fallen to just over 25% of total equity trading volume, down from highs of over 40% less than five years ago.
And retail trading volume has gone from around 10% of total equity trading in 2010 to nearly 25% in 2021, according to data from Bloomberg Intelligence.
Record levels of borrowing to invest and trade
“Broker’s loans, which stood at nearly $3.7 billion in march 1928, reached a record $4.56 billion by June 6.”
Broker’s took out loans to fund margin accounts for clients in the 1920’s. It was a great business, at least until it all came crashing down.
In 2021, brokers are again dishing out record levels of debt to traders. FINRA margin debt hit a record-high $813 billion in February, nearly doubling from last years’ $545 billion figure.
Once again, investors are placing bets with the house’s money, however, this time there is one clear difference – savings.
Consumers have stockpiled some $5.4 trillion in savings since the Coronavirus began, per the Financial Times. Still, the similarities between trader’s margin trading habits in 1929 and today are undeniably similar.
The Federal Reserve’s easy money policies
“Benjamin Strong had already advanced the New York’s bank rate to 4.5 percent in May. Two months later it joined eight other Federal Reserve banks in moving to 5 percent, but some thought the reversal of the easy-money policy of 1927 came too late.”
Benjamin Strong was the Governor of the Federal Reserve Bank of New York for 14 years until his death in October of 1928, roughly one year before “Black Tuesday.”
Strong maintained so-called “easy money” low-interest-rate policies for far longer than many economists of the 20’s hoped. The Governor cut the Fed’s discount rate 0.5% in 1927, angering US President Herbert Hoover.
Strong also insisted on purchases of United States government securities by federal reserve banks, which carried their holdings from $300,000,000 in May 1928 to $600,000,000 in December.
Economists like Murray Rothbard have criticized Strong for his “market manipulations” claiming he was a main cause of the Great Depression.
In 2021, Jerome Powell has pledged to maintain ultralow interest rates and continue hefty asset purchases until “substantial further progress has been made” toward employment and inflation goals.
The Fed’s total assets have also increased from $4.1 trillion to nearly $8 trillion since the start of 2020 alone.