There have been many articles and books written about the cause of the Stock Market Crash of 1929. As in many manmade disasters it can be difficult to determine THE CAUSE because there are in fact multiple causes which combine to generate the eventual catastrophe. Many so-called experts like to point to one cause or another for an event, when in actuality, the whole thing was due to a complex interrelationship of factors, none of which is the sole cause or the sine qua non. There is, however, one thing that is certain about the events that led up to the 1929 disaster – the stock market was being manipulated. At the time there was no law against manipulating the market and small groups of very wealthy people did just that.
The wealthy investors would, as a group, begin buying shares of a single stock and then, through their connections in the news media, the average person would be told that such and such stock was rapidly going up and it looked like a sure bet. Before long a lot of small investors would buy the stock and its price would shoot further upward, thus luring even more small investors to buy in. The big boys would sit on the sideline and watch, waiting for their moment. Then, in one coordinated movement they would sell all their shares at a hefty profit. The stock price would then plummet and the small investor, who fell for the fake news stories about the stock would lose a lot of money, maybe 90% or more.
It was practices like this that caused the Crash and the resulting Great Depression. President Roosevelt created the SEC in order to put an end to these predatory practices. Law were passed. Restrictions put in place. These sorts of schemes must never happen again, everyone said. It is now 80 years since the great stock market crash. During the intervening years laws have been changed. The SEC has fallen asleep at the wheel. Men like Bernie Madoff have prospered. One can only wonder, have some of the old schemes been revived? Have new ones been created? Is the stock market a straight and honest place where stocks are bought and sold without manipulation of any sort?
Consider the past several months behavior of the DOW. There is a curious behavior in the prices of this average. Notice how the DOW tends to increase rather gradually and then periodically drops precipitously. It’s sort of a sawtooth effect. One would expect that if very large groups of investors were buying and selling throughout the day that periodic, abrupt changes in stock prices wouldn’t happen. It seems highly unlikely that everyone would decide to sell at the same time. If they did, wouldn’t they also decide to buy that way?
Today the stock market has taken a steep drop. Yesterday it took a steep rise. The pundits at the various news media all claim to have an explanation as to why the rise and drop occur. The Wall Street Journal quoted one doomsayer who claims that we are headed for a disaster in commercial real estate. Yet, only a few days ago we were exuberantly buying stock and congratulating ourselves that we have finally broken the 10,000 mark. We just heard that the economy has returned to positive economic growth. Despite this wonderful news, CNN posts an article questioning whether things are getting better. Better? Isn’t 10,000 better than 6,500?
While the media are currently broadcasting a message of fear – which can only drive people to sell off their stocks – Nouriel Roubini, the economist who correctly predicted the world economic meltdown doesn’t seem too afraid. He is no longer talking about a W-shaped recovery and seems to have accepted a V-shaped recovery. Mr. Roubini, seems more concerned about the Carry Trade, trading in currency, and its effect on the dollar’s value than anything else. He says we are now in the Mother of All Carry Trades. Even so, the Fed has control of this through interest rates. Dr. Doom is no longer forecasting imminent doom for the world. However, as before the great meltdown, his views don’t get much publicity. He says that the government’s intervention in the economy has led to a recovery. Yet, for many people there is skittishness and resulting volatility in the market – a perfect environment for predators to take advantage of the little investors who will jump to buy at news that a certain stock will rise and who will equally bail out immediately with the slightest hint that a particular stock might drop.
Listen to the so-called analysts who profess to know the cause of the stock market either rising or falling. How often are they actually correct? There are many times when their reasons contradict their story from just yesterday. One can only wonder whether there is more to this than meets the eye. The behavior of stocks, the pattern of steady rise and precipitous drops, both during a single day and over multiple days, might well indicate manipulation by large investors. Of course, it might not. After all, sometimes you can flip a coin and it actually will come up heads ten times in a row.
But you have to wonder.
I like how your blog is laid out. I have bookmark this and look forward to seeing more.
I like how your blog is laid out I have bookmark this look forward to seeing more.
As I have been watching the markets very close for the past 4-6 months, I have found your blog to be on the right track. I do my best to watch the world markest as close as the US market and even if you don’t know the markets, you could always see the trends from Asia to the US and they ALL almost always followed suite (MAED), but this is NOT the trend now. I look forward to reading more of your blogs.