September 26, 2021

Commodity Insight: Eerie similarities

During the Roaring ‘20s, the Dow Jones Industrial Average rose to unprecedented heights. The Dow increased six-fold from 63 in August 1921 to 381 in September 1929.

An American economist, Irving Fisher, at the time proclaimed famously that, “stock prices have reached what looks like a permanently high plateau.” It goes without saying he was horribly wrong with such a bold forecast.

From the record high close of 381, the Dow fell 21% going into late October. On Oct. 24, 1929, aka Black Thursday, the Dow fell 11% on heavy trading volume.

On Oct. 28, aka Black Monday, the Dow fell 12.82% as investors and traders were facing huge margin calls. On Oct. 29, aka Black Tuesday, the Dow fell another 11.73%.

Most historians blame the Great Crash of ‘29 as the reason the U.S. and global economies fell into a depression, not a recession. Over the following years, the Dow rallied and declined, bounced higher and slumped lower.

But on July 8, 1932, the Dow finally bottomed at 41, 90% off the high posted in September 1929. And it took 25 years for the Dow to recover and trade above the old historic high of 381.

Needless to say, the Dow dropping 90% was a body blow to investors. But some smart money cashed in before the great tumble took place.

From “When the shoeshine boys talk stocks it was a great sell signal in 1929” in a 1996 Fortune magazine: “Joe Kennedy, a famous rich guy in his day, exited the stock market in a timely fashion after a shoeshine boy gave him some stock tips. He figured that when the shoeshine boys have tips, the market is too popular for its own good.”

Joe Kennedy said: “Taxi drivers told you what to buy. The shoeshine boy could give you a summary of the day’s financial news as he worked with rag and polish. An old beggar who regularly patrolled the street in front of my office now gave me tips and, I suppose, spent the money I and others gave him in the market. My cook had a brokerage account and followed the ticker closely. Her paper profits were quickly blown away in the gale of 1929.”

How does this year’s Dow Jones compare to what unfolded in 1929? To start with, the Dow in September 2015, six years ago, was as high as 16,097 compared to the high a few weeks ago of 35,555. The Dow has more than doubled in the past six years, but has not rallied six-fold as it did going into September 1929.

Another big difference from way back then is the advent of the internet and social media. Shoeshine boys, taxi drivers, old beggars, cooks and so forth now take a backseat to those that pop up daily on social media. And, believe me, there are few that are bearish.

More often, the new social media personalities are stars and the media cannot get enough of all the bug-eyed bullish forecasts for stocks or cryptocurrencies.

For instance, this week from “Two siblings, ages 14 and 9, say they make more than $30,000 a month mining Bitcoin, Ether, and Ravencoin.”

Also this week, a list of Bitcoin billionaires was announced with the following names: Elon Musk, Mark Cuban, Paul Tudor Jones, Mathew Mellon, Peter Thiel, Ashton Kucher, 50 Cent and Jim Cramer.

The amount of media coverage given to cryptocurrencies is breathtaking. And it is all bullish.

My point is that in today’s highly charged and very bullish environment for stocks and cryptocurrencies the general public is bombarded with story after story of gazillionaires making easy money by going long and never getting out.

Yes, the big pitch is not only to be bullish, never bearish and never cash out. Only go long, they scream, and never exit the market if you wish to be rich beyond your wildest dreams. “Don’t cash out,” they yell.

My lean, however, is that the Dow, stocks and cryptocurrencies are woefully overvalued on the upside and long overdue to a meaningful decline. History shows that the most bearish month of the year for stocks is September, and October is when the most severe drops, declines and corrections took place. Last September, stocks fell 10%.

Today, there are eerie similarities to stocks and the cryptocurrency markets compared to what led up to the Great Crash of ‘29. The same can be said about what led up to Black Monday, Oct. 7, 1987, when the Dow fell 22.6%, the largest percentage decline in history — such eerie similarities should be noted, not ignored.