Guambat's That Was Then, This Is Now (2002)

That Was Then, This Is Now I’ve seen so many pundits comparing our market now with the major declines of the last century that I decided to look back to the times of the prior major bear markets of the 20th Century, with the help of a used book I just bought, which is a newspaper-style account called Chronicle of the 20th Century (Chronicle Publications, Mount Kisco, N.Y. (1987). This edition only goes back as far as 1986. The two comparisons most frequently mentioned are to the crash of ‘29 and the bear market of ‘73-‘74. To see this in pictorial context, here’s a chart for reference:

Looking at the chart, the ‘29 crash is an obvious serious decline. The mid ‘70's crash is not so obvious, but has greater meaning within the context of the market period of the mid-‘60's to early ‘80's. A casual study of the chart reveals that there was a bull run in progress from around 1905 up to the end of 1929, and another bull run from 1942 to around 1965, and the most recent bull run from 1982 to January 2000. The 1987 crash was only a blip in the 1982 bull run, at least in the context of the US market. Looking technically at the chart, and putting it in its most simplistic terms, the period from 1918 to 1942 was basically a diamond shaped consolidation to break the Dow 100 mark, and the period 1965 to 1982 was basically a rectangular consolidation to break Dow 1,000. The point of this study paper is to say, simply, that that was then and this is now and we can draw nothing of predictive value from either of those times to infer what action the market may take in the context of trying to mount Dow 10,000. We can only note that the market did need time to consolidate at those particular levels, that the declines experienced in those times were severe, and that the market recovered to go on to higher levels. Indeed, the market Page 1 of 24

moves up and down within the patterns of those consolidations served as ideal entry and exit points to trade the market profitably during those trying times (which is not to say that anyone could have picked the exact turning points each time, but to say that an astute trader would have had a pretty good guide to know to accumulate stock below the mid-range of the pattern and distribute above the mid-range, until the break-out.) But back to the Chronicles for some more flesh as to why and how those times cannot have much more to offer by way of particular predictive lessons for this consolidation: The ‘29 Crash In Context One thing to bear in mind about the ‘29 crash is that the securities laws that, in spite of recent events, do now provide some prescriptive and prophylactic restraints on market behaviour did not come into place until after the bottom of the ‘29 crash, in 1933 and 1934. Moreover, the social welfare safety network of labour laws, unemployment insurance, and the like did not come into being until the New Deal and other Roosevelt initiatives when he took office in 1933, so the economy at large was more susceptible to greater displacement and consequent volatility than it is now. But also, the world was a much more precariously perched place then than now. May 9, 1901. “In the largest single-day break on Wall Street since 1803, mayhem ruled today as previously rational men punched and kicked each other in the scramble to unload their plunging stocks.... Although this plunge has been predicted by some, it caught many by surprise.” December 2, 1901. The Gillette Company, with one employee, plans to market a disposable razor blade. January 29, 1902. “Of the vast capitalization of $1.4 billion [of US Steel Corp], less than $1 million is outstanding. Some $676 million of the start-up costs represented cash and $726 million was ‘water’ (promoter’s profits, speculation and goodwill). Financier J.P. Morgan, who organized U.S. Steel and other major companies, and has kept control of them through voting trusts, was recently heard to growl, ‘I am not in Wall Street for my health’.” September 20, 1902. “It has been estimated by expert analysts in recent years that nearly twothirds of the United States’ railroad lines are, or are about to be, under the financial control of such giants as the Morgans, Goulds, Vanderbilts, Rockefellers and Harrimans. June 16, 1903. “Henry Ford ... formed his own automobile company in Detroit, Michigan, today.” He owned 255 shares, about a quarter of the stock. Feb 10, 1904. “Japan and Russia are at war. The formal declaration follows the Japanese fleet’s stunning victory in a surprise nighttime torpedo attack on the Russian fleet off Port Arthur.... Yesterday, about 8,000 Japanese infantry disembarked on Korean soil and began a march on Seoul....” By March 31st the Far East Russian naval power “has been virtually eliminated.” Page 2 of 24

March 14, 1904. In a close split-decision, the Supreme Court “holds that Congress has a constitutional right to control interstate commerce” in finding “that Northern Securities so restrained interstate commerce as to violate the Sherman Antitrust Act.” January 30, 1905. “High court rules against beef trust.” June 30, 1905. “The Unites States Steel Corporation and other American rail makers have finalized a pact with steel rail firms in England, France, Germany and Belgium to divide the markets of the world.” September 5, 1905. “The Japanese and Russian empires signed the Treaty of Portsmouth today, ending the war in Korea and Manchuria.” March 24, 1906. “England rules one-fifth of the globe.... While only 41.5 million persons live in the United Kingdom itself, ‘the sun never sets on the British Empire’.” May 10, 1906. “The Standard Oil Company was accused today of stifling competition through intrigue and trickery.” March 14, 1907. “The federal government moved today to ease this week’s dramatic collapse in the stock market, the largest crash since the Panic of 1901.... The overall declines, in fact, were described as even greater than those of the panic six years ago and the so-called Black Friday stock market collapse in the fall of 1869. At the close of the market today, prominent bankers and heavy market investors met in uptown New York clubs to discuss what should be done.” December 2, 1908. “Pu Yi, the three-year-old nephew of the late Emperor of China KuangHsu, ascended the Manchu dragon throne today under the name Hsuan-Tung. The infant’s father, Prince Chun, the bother of the late ruler, will act as regent for the baby Emperor. The passing of the emperor, and especially the Dowager Empress Tsu-Hsi, who has been the real power in China for more than three decades, could be the beginning of great change.” November 7, 1909. “Over 2 million Americans now own stocks... Not too long ago a man who owned securities was considered snooty. Today, he’s considered thrifty.... Stocks and bonds amount to about $40 billion, a third of the nation’s wealth, with stock dividends about $1 billion a year and bond earnings only slightly less. Due to the industrial boom of the last ten years, railroad dividends are thrice what they were in the mid-90's Carnegie Steel’s 63 stockholders of nine years ago are now 100,000 and John D. Rockefeller now has 5,000 partners. Indeed, the boom would not have been possible without this modern method of raising huge amounts of capital.” November 12, 1909. “The national cost of living, which fell after the panic of 1907, has not only bounced back but is close to the highest level ever recorded. The figure represents a 7.9 percent rise in the cost of living since January 1, and a 10.5 percent rise during the past three years.” November 30, 1909. “Corn is the most valuable product in America today. Valued at $1.7 Page 3 of 24

billion, it is worth more than all the gold and silver coin and bullion in the nation.... Cotton and wheat are the second and third most valuable crops.” August 27, 1910. “Thomas Alva Edison tonight demonstrated his latest invention, talking motion pictures.... The self-educated Edison has had a remarkable career. He has invented automatic telegraphic transmitters and receivers (1874), the phonograph (1877), the carbon telephone transmitter (1877-78), and the first commercially successful incandescent lamp (1879). With hundreds of scientific patents in his name, Edison founded the Edison Electric Light Company, which became General Electric in 1982.” May 15, 1911. “The Supreme Court of the United States, in a landmark decision today, found the Standard Oil Company guilty of restraint of trade and ordered its dissolution within six months.” January 1, 1912. “The imperial Chinese government has been replaced by a new republic. Revolutionaries deposed Emperor Pu Yi last month and chose popular leader Sun Yat-sen to be their provisional president. Since that time China has been burdened with two opposing governments, a republican one based at Nanking ... and the traditional Ching, or Manchu, dynasty located at Peking.” October 31, 1912. “War: Balkan powder keg explodes. The Balkan allies – Serbia, Greece, Montenegro and Bulgaria – have unleashed fierce, strategic military actions, plunging the once invincible Turkish army [and Ottoman Empire] into despair.” May 8, 1913. “The way was cleared for imposing an income tax when a constitutional amendment was ratified earlier this year, after an earlier law for an income tax was held unconstitutional by the Supreme Court. The new legislation [passed today by the House] would levy up to six percent tax on those making above $500,000 a year.” July 9, 1913. The German yearbook on naval forces, “Nauticus”, reports “a sharp increase” in the number of fighting ships being built by the Great Powers, Great Britain, USA, Germany, France, Japan, Russia, Italy, and Austria-Hungary. “They are only numbers in a book, but they are disturbing figures that portend new dangers for peace in the world.” October 7, 1913. “Henry Ford establishes first assembly line.” October 10, 1913. “Wilson gives signal; Panama Canal open.” November 30, 1913. “General Francisco ‘Pancho’ Villa says that northern Mexico will be under his control within two weeks. His campaign will then focus on storming the capital.” January 5, 1914. “Ford pays workers $5 day; output leaps. The dramatic moves will affect about 26,000 employees, of whom about 15,000 are now at work in the Detroit factories, while others are in Ford branches throughout the world.” January 1914. “Hollywood [‘a peaceful, unpretentious town outside Los Angeles’] becomes world film center.” Page 4 of 24

March 1914. “All over Europe, countries are arming themselves. And war seems more and more likely.” April 21, 1914. “One thousand United States Marines have seized the Mexican seaport of Vera Cruz....” June 28, 1913. “Heir to Austrian throne assassinated in Sarajevo.” July 31, 1913. “The assassination of Archduke Francis Ferdinand and his wife has destroyed what little equilibrium remained in Europe. The continent is a powder keg. Countries are arming themselves with a speed that is ruining their treasuries and alarming the world.” January 16, 1916. “Eighteen Americans have been killed by Mexican soldiers of Pancho Villa’s army after being taken off a train 50 miles west of Chihuahua City [in Mexico]. The train was bound for mines owned by an American firm for whom most of the victims work.” March 31, 1916. “Two weeks after their arrival in Mexico [4,000] American troops under the command of Brigadier General John J. Pershing have routed Pancho Villa’s army in their first military engagement. The punitive American expedition was ordered into Mexico following border raids by Villa into Arizona and New Mexico.” September 29, 1916. “The boom in Standard Oil stocks yesterday to over $2,000 a share makes John D. Rockefeller, founder and largest shareholder, almost certain a billionaire. In 1907 Rockefeller was shown to own 247,692 shares of Standard Oil, more than three times as much as anyone else and more than six times as much as the next individual shareholder.” January 1, 1917. “While the war continues to rage on the other side of the Atlantic, the United States has just ended its most prosperous year in history. Prices are up, but so are wages. Unemployment is virtually nonexistent.... Foreign trade, too, set an all-time high.... With more money to spend, more and more Americans are investing in an array of luxuries that were far beyond their reach only a few years ago..... There are those who are concerned over the wartime prosperity, who fear that the bubble might burst and leave the nation saddled with debts once the war in Europe draws to an end.” March 16, 1917. “Facing revolt, Russian Czar abdicates.” April 6, 1917. “U.S. Congress votes to enter the war.” June 27, 1917. “Major General John J. ‘Black Jack’ Pershing’s American troops arrived at a French seaport this morning.” November 7, 1917. “For the second time this year, the Russian government has been overthrown. But this time the revolution was organized by the radical Bolshevik Party.” November 2, 1917. “The British government has announced its intention to officially support Zionist aspirations with regard to the establishment of a permanent national homeland for the Jewish people, to be located in Palestine.” Page 5 of 24

December 9, 1917. British troops captured Jerusalem from the occupying Turks. December 16, 1917. “Russia has broken away from the Triple Entente [with France and Britain] and signed a separate armistice with Germany and its allies.” May 31, 1918. “There is no peace in Russia. Foreign powers are making new inroads into the country, and Russian society has been torn apart in a blistering civil war.... And all the gold bullion from the imperial bank of Russia has fallen into the hands of the anti-Bolshevik White army.” August 1, 1918. “Million U.S. women working in factories.... The typical female worker is a young woman stepping up from a lower-paying position. And the nature of the work is not much more challenging than the old; only a handful of women are involved in any aspect of heavy industry. Most labor unions refuse to admit women, and their health and pay go neglected. There is much speculation over what will happen to these women when the war is over. Several employers consider it women’s patriotic duty to leave their pursuits as soon as the men return.” August 15, 1918. “U.S., Russia break ties. Days after President Woodrow Wilson’s decision to join with France, Great Britain and Japan in sending troops to Russia, the American Ambassador has withdrawn from Moscow.” October 31, 1918. Public health officials in the U.S. and abroad estimate that the influenza epidemic now raging across the globe may cause 20 million or more deaths.” It should be noted that the lives lost in WWI was estimated at more than ten million and that genocide throughout the embattles areas took millions more. November 11, 1918. “Armistice signed by Germans.” November 30, 1918. “The death of the Hapsburg Empire this month gave birth to four new nations: Austria, Hungary, Czechoslovakia and a Kingdom of Slovenes, Serbs and Croats. Their frontiers are drawn according to ethnicity....” March 1919. Lenin forms the 3rd Communist International, arguing “that the security of the Russian regime depends upon it sparking revolutionary, and therefore friendly, regimes throughout Europe.” A Russian revolutionary, Bela Kun, seizes control of Hungary. Benito Mussolini founds his own party in Italy. The League of Nations was born. August 14, 1919. With “rampant inflation following the end of the war”, U.S. President Wilson “sought to crack down on profiteering by seizing food in warehouses in Chicago, St. Louis and Birmingham.” January 24, 1920. Sweeping raids on alleged Communists in scores of American cities....” Many of the more than 3,000 suspected Communists arrested so far may be subject to deportation.” February 24, 1920. The German Workers’ Party, led by Adolph Hitler, “released a list of its Page 6 of 24

goals and programs. The party attacks Jews, large property owners and capitalists.” March 17, 1920. “The monarchist coup in Germany has ended almost as soon as it began.” April 7, 1920. “Angry mobs of German civilians are marching through the streets of Frankfurt tonight, taunting French soldiers. The troops, most of them colonial forces recruited from the native populations of the French Empire, are responding with gunfire.” May 26, 1920. “Revolutionary turmoil continues in Mexico with the murder in Vera Cruz of General Venustiano Carranza, Mexican constitutional President since 1917.” July 28, 1920. “Pancho Villa has thrown in the towel.” September 16, 1920. “An explosion, believed to have been caused by a time bomb, ripped through the Wall Street financial district today, killing 30 persons and injuring 300.... Law enforcement officials theorized the explosion was set off by Reds or anarchists ... [or] Italian terrorists.” October 18, 1920. “An otherwise peaceful London parade of some 5,000 unemployed turned into a riot just two days after one million coal miners laid down their tools. Coupled with dockers out of work due to no coal, a possible railroad strike by transport and railroad workers, and 200,000 demobilized, unemployed soldiers, Britain’s postwar recovery faces one of the greatest industrial upheavals in the country’s history.” November 1920. Harding and Coolidge and the Republicans took the trifecta, Hill, House and Senate. Harding “declares U.S. fought war to protect American rights, not to make the world safe for democracy.” December 14, 1920. “Ireland is partitioned.” January 31, 1921. “Europe hit by hunger and unemployment.... Millions have lost their jobs, and women and children are hungry and starving.” Herbert Hoover, as head of the American Relief Administration, said “we will market our surplus corn in relief and take our pay in good will.” February 5, 1921. Germany is balking at paying the war reparations demanded by the European allies. In a manifesto, German trade unions said, “Slavery, which has been abolished in Africa, is to be introduced in Europe. The German people are ready to make good the damage done. But we are not prepared to perish for the benefit of international capitalists.” March 8, 1921. “French and Belgian troops moved into Dusseldorf, Mulheim and two other [German] cities and disarmed their police forces.... The allies say they refuse to suffer greater financial hardship than Germany.” April 15, 1921. “British strikes paralyze entire country.”

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July 19, 1921. “Eight million American women hold jobs.... Of the eight million, 1.9 million are married. Fifty percent of the women are teachers. Presently, only about 8.5 percent of children, ages ten to 14, are in the labor force. It was double that figure only ten years ago. It remains an indisputable fact that, on every level, women earn considerably less than men.” August 4, 1921. “The Russian people are starving to death. More than 18 million are reported to be suffering from a lack of food, and 47,779 cases of cholera have been reported among the hungry.” November 7, 1921. “Mussolini makes himself Duce of Fascists.” May 19, 1922. “The Allies demand the Soviet government make good on the debts of the Czar, compensate foreigners for all the property that was seized during the revolution and agree to participate in an international tribunal that would resolve all future financial conflicts. They are willing to be lenient about Soviet Russia’s war debts.” May 27, 1922. “The United States and Great Britain have reached agreement on a treaty regarding Palestine. The British mandate for civilian rule of that territory... guarantees equal treatment to the citizens of all members of the League of Nations.... The Vatican ... has objected to the proposed mandate on the grounds that it threatens religious equality. The creation of a Jewish national home in Palestine, it argues, gives the adherents of Zionism a privileged position.” July 1, 1922. The Harding administration is battling a strike by 400,000 railroad shopmen and a coal strike. “Wages are the key issue in both labor disputes, along with such other factors as working conditions, including the length of the work day.” August 1922. “Irish government chief killed in ambush” and “Fascists fighting Communists in Italy.” October 1922. Mussolini’s Fascists march on Rome. “About 40,000 of his militia advanced north from Naples, wearing black shirts, carrying bayonets and awaiting the final order to attack Rome.” The Italian King, Victor Emmanuel, “invited Mussolini to form a new government.” October 23, 1922. “An impending financial crisis heightened today when Chancellor Karl Joseph Wirth proposed to his Cabinet that Germany declare bankruptcy.” The price of bread was up 100 percent in a month. January 1923. To enforce their demand for reparations, French and Belgium troops occupy the Ruhr region of Germany. “This is supposed to be a time of peace in Europe, but Germany is beginning to look like an armed camp. Nine French and Belgian infantry and cavalry divisions, 100,000 men in all, are trying to occupy an area filled with more than 3 million Germans. Most of the Germans are still armed from the last war.” January 27, 1923. “Up until now, Hitler’s party has met only in private. This is the first public congress [in Munich], and it is being held with the apparent support of police and Page 8 of 24

military authorities.” June 22, 1923. “Germany’s currency is fast becoming worthless, and German central bankers are throwing their hands up in despair.... The value of the mark is dropping dangerously. In just three weeks, it has lost nearly half its value.... The war damaged Germany’s economy severely, but it si the French and Belgian occupation of the Ruhr which is destroying it.... Since the occupation, protesting miners have cut production dramatically.... Germany is forced to import, and that is costing dearly. Germany also has enormous social welfare expenses, caused by the displacement of thousands of people from the Ruhr. Until April, the central bank had enough reserves to cover these costs. Today, those reserves are gone, and the mark is paying the price.” September 13, 1923. “The Cortes, the Spanish Parliament, was abolished today. The constitution was suspended, and so was the guarantee of civil liberties. The military is in charge of Spain.” September 27, 1923. “German President Ebert has declared a state of martial law following the appointment of Dr. von Kahr as dictator of Bavaria.”

November 15, 1923. “In Germany today, children are making building blocks from bundles of worthless marks.... The fall of the currency has been a nightmare for everyone in Germany.” March 28, 1924. “Attorney General Harry M. Daugherty, the storm center of both the Harding and Coolidge administrations, was forced to resign today. His ouster, at the request of President Coolidge, is the latest episode in what has become known as the Teapot Dome scandal, involving the leasing of federal oil reserves to private interests.... He angered key senators who were unearthing details of the oil leases by ordering federal agents to spy on them.... There have been allegations that Daugherty was directly involved in fraudulent dealings with the office of the alien property custodian and that he opened government liquor warehouses for use by friends.” April 1, 1924. “Adolf Hitler ... was sentenced today to five years in prison for his abortive putsch in a Munich beer hall last November. But the lenient judges also decreed that Hitler would be eligible for parole in six months.” June 10, 1924. The Italian Socialist leader was kidnapped and assassinated by Fascists in Rome. November 11, 1924. “Wall Street remains bullish on President Coolidge. For the fifth consecutive business day following his national landslide victory, the market has surged to ever higher records.” March 12, 1925. On the death of Sun Yat-sen, General Chiang Kai-shek succeeded to leadership of the Kuomintang army.

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July 18, 1925. Hitler published “Mein Kampf”, calling for a national revival and battle against Jews and communists. August 8, 1925. “White-robed Klansmen, more than 40,000 strong, paraded through the streets of the nation’s capital today. It was the largest display of Ku Klux Klan power in history.” January 27, 1926. Scotsman M. John Baird, revealed his invention, television. March 26, 1926. Stock prices collapsed today, the second severe break in prices in less than a month. The new wave of selling affected a broad range of securites, not just rail stocks which tumbled sharply on March 3 in the greatest day of trading on Wall Street on record. That earlier stock decline was in response to the refusal of the Interstate Commerce Commission to ratify the Nickel Plate merger. Factors affecting today’s break in prices included a planned investigation of the oil industry by the government, a decline in commodity prices and a possible cutback in iron and steel production.” July 23, 1926. “Somehow the [French] politicians must find a way to work together, because France is in disastrous financial shape. The franc has fallen daily in recent weeks. Almost all of the state reserves in the Bank of France have been depleted. The Treasury would have closed its doors long ago without the Morgan credits from the United States. And French citizens are angry because the price of bread seems to rise a few centimes every day.” November 28, 1926. “Americans are enjoying the highest standard of living in the nation’s history, says Secretary of Commerce Herbert Hoover. His economic picture was drawn in a government report stating that wages are up and unemployment virtually nonexistent .... And he added that economic conditions abroad have improved, too.” February 22, 1927. “The battle for Shanghai is shaping up as a crucial test in the civil war between the Nationalist and Peking governments for future control of China.” July 15, 1927. “Nationwide revolt breaks out in Austria.... Vienna newspapers are accusing Moscow of inciting the riots. An editorial in Frankfurt says Austria should be annexed by Germany if the troubles continue.” November 10, 1927. Wall Street let out a collective cheer today as General Motors declared the largest dividend in the nation’s history. The total disbursement to those holding the 17.4 million shares of stock was $65,250,000.” December 19, 1927. “With military force and mass executions, General Chiang Kai-shek has crushed a communist uprising in the city of Canton.... Tens of thousands of refugees poured into Hong Kong, carrying tales of wholesale executions. At least 600 Chinese were reported executed in one group, and eight or nine Russians, including a vice consul, were summarily executed.... The National government in Nanking accused Russian agents of fomenting the uprising and demanded the withdrawal of all Soviet officials in China. A Soviet official is threatening China on account of the murders.”

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January 26, 1928. “The Coolidge administration ordered 1,000 more Marines to Nicaragua this month to fight the troublesome guerrilla leader, General Sandino.” March 28, 1928. “Fortunes were both made and lost in yesterday’s record trading on the New York Stock Exchange. The biggest day in Wall Street history.... Even within the space of ten minutes, price swings made the difference of millions of dollars in the open market value of the leading securities. General Motors, whose stock had soared to record highs earlier this month, proved to be the center of attack yesterday, retreating down the ladder in breathtaking jumps. By day’s end, its stock had declined more than eight points from a high of 198.” May 11, 1928. Chinese Nationalist soldiers fiercely fought Japanese occupation troops in Shantung province. May 16, 1928. “Stocks tumbled without warning yesterday in the largest trading volume ever to his Wall Street..., more than half of these changing hands in the final two hours.... Wall Street financial analysts were at a loss to explain why the market had cracked, since nothing had taken place to undermine confidence.” June 25, 1928. “The United States government cannot agree on the exact figures, but the country has an unemployment problem. That may shock the rest of the world, which still views America as the land of bounty. The Commerce Department [headed by Herbert Hoover, who was running for President] says two million Americans are out of work. The Labor Department says it is closer to four million. That means up to ten percent of American workers do not have jobs. They also do not have any government benefits to tide them over until they find work..... Many workers are being squeezed out by high salaries and mechanization. American investors are starting to put their money overseas.” August 11, 1928. Hoover promises “a chicken in ever pot, a car in every garage”. Speaking at Stanford University, he said, “We in America today are nearer the final triumph over poverty than ever before in the history of the land.” October 1, 1928. “Joseph Stalin’s first five-year plan went into effect today in the Soviet Union.... The Communist leader is abandoning the more capitalistic New Economic Policy, begun by Lenin ... to concentrate on its internal problems.” November 7, 1928. Republican Herbert Hoover “won a landslide victory for President in yesterday’s elections”. November 12, 1928. “Stock trading wave sweeps to new peak of 5.7 million shares.” November 16, 1928. “6.6 million share day shatters all records for New York Stock Exchange.” November 23, 1928. “Trading on the New York Stock Exchange has been suspended after the most turbulent buying demonstration ever known on Wall Street... topping [the record] set just seven days ago.”

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December 8, 1928. “Stocks continued their downward tumble yesterday.... It was a day of the heaviest selling ever to take place in just a two-hour period on the NYSE. Stocks were dumped on the market for whatever they would bring and the ticker machines ran more than an hour behind.” March 3, 1929. “Army in revolt in eight Mexican states.” March 26, 1929. “Stocks hit big downturn in 8.2 million share day, then rally as bankers come to aid of market.” April 1, 1929. “Stocks drop heavily with interest rate at 15 percent; traders fear credit curb by [Federal Bank] board.” August 21, 1929. “Chinese-Soviet border fighting breaks out.” August 31, 1929. The Moslem revolt against Jews in Jerusalem has spread to Syria. September 1929. Dow Jones at then all-time high of 386. October 24, 1929. “Black Thursday; Stock market crash. From one end of the United States to the other, financial uncertainty and fear fed on rumor and cascaded into panic today. Frightened investors ordered their brokers to sell at whatever the price, and the stock market crashed.... It is hard to quantify the losses.... Thousands of accounts were wiped out.... Nearly 13 million shares traded hands.... The shocks on Wall Street spread to other exchanges and markets. There was near-panic on the Chicago commodities exchange. One of the primary villains was rumour, on and off the exchange. One report said at least 11 speculators had committed suicide. The market stabilized in the afternoon. That was too late for many smaller investors, but prices did start to rise as soon as word spread that a meeting was being held at J.P. Morgan & Co. Bankers emerged from the meeting to assure investors that the market, despite the unprecedented losses, was essentially sound. They also indicated they would prop up the exchange to prevent it from dropping further.... ‘Severe disturbances in the stock market are nothing new in American experience,’ said Lewis Pierson, Chairman of the Board of Irving Trust. ‘The pendulum always swings widely, and it would seem as though the long-expected break should bring about an equilibrium.’... But the fears of a decline started building several weeks ago, when reports spread that managers of large trusts were liquidating many of their securities. There are a few theories to explain what happened today. Several analysts have been warning that the euphoric buying spree had to stop at some point. They said prices had been pushed too high, and some stocks were selling at 15 to 150 times their earnings. Thousands of foreign investors have sold their portfolios recently and are reinvesting at home as their countries recover from the war. Domestic speculators have also been probing the market for profits. Psychology also played a large role. Investors were hoping for some life in the market yesterday. When it remained in the doldrums, they started calling their brokers with sell orders. No theory is implausible, and some analysts say [cold] weather may even have played a part.” November 11, 1929. “Stocks break again in new selling rush.”

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November 23, 1929. “Hoover is trying to use the power of his office to catalyze the economy and prevent it from crashing as the stock market did one month ago. Hoover is planning to expand federal construction to create new jobs. He will ask Congress for an additional $175 million for new buildings, most of them to be erected outside Washington.” December 4, 1929. “Hoover forecasts big [budget] surplus in message to Congress.” January 5, 1930. “Joseph Stalin ... formally collectivized Russian farms and created agricultural cooperatives. Under the system, land, livestock and all farm equipment become the property of the state cooperative. Farmers are grated free use of the state property, which is managed by a government bureaucrat.” May 27, 1930. “India’s major cities seethed with unrest following the arrest of Mahatma Gandhi and thousands of his followers in the campaign of civil disobedience against British rule.” June 17, 1930. “President Hoover has signed the Smoot-Hawley Tariff Bill, ushering in a new era of protectionism.... Many economists believe the bill will bring retaliatory tariffs. But Hoover and the bill’s authors celebrated the signing and are certain it will stimulate the economy.’ August 11, 1930. “Drought has cut U.S. corn output by 690 million bushels.” October 23, 1930. “Saying that the nation must ‘prevent hunger and cold’ for those in real trouble, President Hoover has announced he has named a committee to draw plans for combatting unemployment. The president’s action came amidst definite signs of a deepening depression in the United States.” December 22, 1930. “The Central Committee decree admits Russia has a labor problem, and it orders that food be used as a weapon to bring workers into line.... Communist leaders are also trying to outlaw the sale of food by privately owned stores and the preparation of food by individual households. Workers should make and serv food at the lowest prices possible. In order to eat, a Russian would have to prove that he is a worker at a factory or business sanctioned by the government.” December 31, 1930. “Hoover asks Congress for more public works money to prop up jobs. The American Federation of Labor estimates that about 4.8 million Americans are now unemployed, and increase of 360,000 in just the past month. In his message to Congress, however, the president put the nation’s jobless rate much lower, at about 2.5 million. While voicing concern, he said that the United States is much better off than the rest of the world.” January 20, 1931. “As the worldwide economic depression deepened last year, European unemployment figures for winter 1930 reached historic levels. Germany and England were hit particularly had; over 2.5 million were without jobs in England and nearly 5 million Germans were out of work. Coupled with prices which did not fall as much as normal, unemployment created the worst economic situation in Europe since statistics have been kept.... And this winter looks even bleaker.” Page 13 of 24

February 24, 1931. The Bank of United States President and five bank officers “are charged with willfully misusing over $27 million from the bank.... The credibility of banks has suffered since the stock market crash of 1929 and the current allegations do little to restore public trust.” April 14, 1931. “The wave of political turbulence sweeping Europe claimed another victim today. King Alfonso XIII was forced to flee from Spain, and country became a republic after 15 centuries of nearly uninterrupted monarchy.” July 14, 1931. “An acute financial crisis has closed all banks in Germany. Capital is fleeing the country, the value of the mark is declining and Germany cannot repay its debts.” September 30, 1931. “Police in London clashed with demonstrators through the day and night as opposition grew to the government’s new austerity program.... The cut in unemployment benefits is not the only step taken by the government. It devalued sterling by 20 percent. And to stop the run on the banks, it abandoned the gold standard and increased interest rates.” January 22, 1932. “President Hoover has signed into law a bill to establish a $2 billion agency to help prop up industry and create jobs. The Reconstruction Finance Corporation, said the president, has been designed to ‘stop deflation in agriculture and industry and thus to increase employment by the restoration of men to their normal jobs.’ With the United States no in the midst of a severe depression, the bill creating the new agency won speedy approval in Congress. It is the first of a series of economic relief bills to become law.” January 31, 1932. Japanese occupation forces are spreading out in Shanghai, and fierce fighting is also reported in Manchuria.... President Hoover is sending more military reinforcements to Shanghai to protect American interests.... Great Britain and France both announced they will send men and ships to Shanghai, and Italy has already landed marines.” February 27, 1932. “Glass-Steagall Act passed, giving Federal Reserve right to expand credit to increase money in circulation.” February 29, 1932. “Protective Tariff Act passed in Britain....” March 25, 1932. “Hoover insists balanced budget is key to business recovery.” July 2, 1932. “Franklin Delano Roosevelt promised a ‘new deal’ for America as he accepted the Democratic nomination for president of the United States today.” July 1932. Dow Jones hits Crash low of 40.56, almost 90% the value of the ‘29 high. July 22, 1932. “Federal Home Loan Act passed by U.S. Congress, allowing regional banks to provide cheap homeowner’s loans.” July 28, 1932. “Acting on orders from President Hoover, federal troops, armed with machine guns and tear gas, evicted the bonus army from Washington tonight, setting fire to their Page 14 of 24

makeshift shanties and tents near the Capitol and along the Anacostia River. By midnight, only a few veterans were still in the city. In calling out the troops, which were commanded by General Douglas MacArthur and Major Dwight Eisenhower, Hoover said the ranks of the bonus seekers had been infiltrated by Communists and persons with criminal records, a fact perhaps unknown to those veterans who had been camped here since May in their drive for a bonus for service in the Great War.” August 22, 1932. “With 11 million still out of work, President Hoover, optimistic that the ‘major financial crisis’ has been overcome, called on the nation’s leaders to attack what remains of the depression. Meanwhile, the Reconstruction Finance Corporation announced loans of over $49 million in the last weeks of July to 450 applicants. Some $32.9 million of that amount went to banks.” October 30, 1932. “A fourth day of rioting rocked the streets of London today as over 15,000 unemployed youths smashed windows, overturned cars and clashed with police. The violence broke out in Trafalgar Square after 2,000 hunger marchers demonstrated against the lack of adequate employment promised by the Labor Party in last year’s election. November 8, 1932. “Franklin D. Roosevelt won a landslide victory for President of the United States today, carrying all but six states by promising ‘to restore this country to prosperity’. January 30, 1933. “Hitler is named German Chancellor.” February 14, 1933. “Detroit defaults on $400 million debt.” March 4, 1933. The day after his inauguration, “FDR orders four-day bank holiday to halt massive withdrawals.” March 23, 1933. “Reichstag hives Hitler power to rule by decree.” March 28, 1933. “Nazis order ban against Jews in business, professions and schools.” March 31, 1933. “Congress passes Reforestation Relief Act, creating Civilian Conservation Corps to relieve rampant unemployment.” April 19, 1933. “FDR takes the dollar off gold standard.... Abandonment of the gold standard sent stock prices up on Wall Street, which had its most active trading day in more than six months.” May 23, 1933. “J.P. Morgan, one of the nation’s richest men, paid no income tax in 1931 and 1932 and just $48,000 in 1930, according to information provided to the Senate Banking and Currency Committee. Morgan, head of the international banking firm that bears his name, has said that his company suffered a loss of $21 million during the depression years of 1931 and 1932 and thus had no tax liability. But the committee counsel contends that the loss was a contrived one, by revaluation of securities.”

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June 23, 1933. “More Americans are back to work. According to American Federation of Labor statistics, over 1.6 million new jobs have been created since the end of March. The Roosevelt administration, which has allocated millions of dollars for jobs, is credited with the improvement.” Discussion By this time, the worst of the Crash of ‘29 was over, and the market was healing, consolidating between 100 and 200, and building the base for the next bull leg. The contrast between the conditions in the world prevailing during that period and the present period could hardly be more stark. Geo-politically, that period witnessed the international version of the musical chairs game that became the beginning of the end of the great colonial powers. Revolutionary instability came right up to America’s southern underbelly. By being the last hold-out in the all-consuming WWI, the US was able to amass and husband extraordinary wealth, and to emerge as the last man standing. As I see it, that is the critical factor that gave rise to both the Roaring ‘20's and the Crash of ‘29. The whole rest of the world was teetering and tottering all through that period, and it is astonishing that the crash took so long to develop in that circumstance. With so much destruction of capital and misdirection of capital to war efforts around the globe, it’s easy to appreciate that our time has, by contrast, been one of broad good fortune and more general enrichment of the material standards of living.1 The Berlin Wall has come down peacefully, the Soviet Union has been dismantled, Russia and China have adopted market economies (more or less), and the “major powers” have avoided out-and-out war with each other for most of the last half of the last century. The European Union has dramatically cut the cost of international trade (at least within its own borders, and to an extent with the rest of the world). All of which means more wealth accumulation, and less wealth destruction. Which means that, however great the pain inflicted by the New Millennium Melt Down, it did not so tragically inflict itself on the dayto-day livelihood of the average person on the street in the same way the ‘29 Crash did, notwithstanding that the average person of today had a greater direct investment in the market than back then. Not being knocked down so hard, it should be expected that today’s market should be quicker to heal. Also, the pre-Keynesian economic models that they had to guide them in that time were text book mistakes that we have since learned from. Raising interest rates to fight unemployment,

1

Indeed, a paper by the International Finance Division of the US Federal Reserve Bank Board, has made the point that the stability of the use GDP in the era 1984 to 20001 was due as much as to the “good luck” of the absence of major international disruptions as to sound economic management. (“Recent U.S. Macroeconomic Stability: Good Policies, Good Practices, or Good Luck”, Shaghil Ahmed, Andrew Levin, Beth Anne Wilson, Board of Governors of the Federal Reserve System, International Finance Division, Number 730, July 2002.) Page 16 of 24

as tried in England, and running budget surpluses in times of deflation and depression, as Hoover did, are obvious blunders to us now. While the business cycle has not been repealed, and while there is still disagreement as to the best management of the economy, we have learned to avoid these ill-advised tactics. Maybe our current economic management tools are no better, but they aren’t as bad as they had then. Which offers hope that we can steer our way through this cycle better than they did then. This is only a superficial comparison of then with now, but it is sufficient, I believe, to debunk any suggestion of any similarity of this crash to that crash, whether with respect to cause, character, consequence, or cure. In terms of severity, the ‘29 Crash saw the Dow Jones Industrial Average lose almost 90% of its value from top to bottom. (So far?) the Millennium Melt Down has punctured the Nasdaq Index (which bore the biggest boom) by 75%, the S&P 500 Index lost 45% and the DJIA lost “only” about 36%. The Bear Of ‘74 The thing about the ‘65-‘81 bear market was its stealth. It was the bear market you have when you’re not having a bear market. It was undramatic. It was unheralded. It was a silent, patient, relentless, grinding down weariness that finished off the last of the bulls before the market finally found the strength to mount Dow 1,000. While the worst of it was seen in 1974, the strength to bust 1,000 did not gather until 1982. On five occasions, from 1965 to 1981, it tried to bust that barrier, only comprehensively achieving that goal on its last attempt. If you had bought the market at 1,000 in 1965, you would not have earned anything until 1982. But, if you had bought the market at 800 in 1965, then sold it at 1,000, bought it again at 800, sold it again at 1,000 and so on, you could have made heaps. But you would have had a scare when it dropped to just under 600 in ‘74. Mainly the market just went sideways for about 17 years. Sort of like the US. Internationally, the world was a much more stable environment than it was in the period of the ‘29 crash. Colonization was replaced with self-determination, with the attendant many “flash fires” but not any major conflagration; many old fires continued to burn, such as Northern Ireland and the Mid-East. The “great powers” were reduced to 2 for all intents and purposes. Fear of nuclear annihilation kept the Cold War pretty much on ice. So US national expansionism was really not on the agenda, although the aggrandizement of global corporate expansionism, led mainly by the US but not restricted to it (see, e.g., Nestle, Toyota, Unilever, HSBC, News Corp) was a nascent private colonial movement not much talked about. During this period, the US was mainly concerned about its image on the world stage, and its affairs at home. On the world stage, it was over and on the moon. That was its glory. Its shame was its failure to convincingly and fairly articulate its purpose and then project its will over the people of South East Asia, mainly Vietnam. At home, there was a major cultural challenge to the old social orders as Blacks and other ethnic minorities, and then young people and women generally, demanded and obtained a place at the table. Community order, composition, values and structure were rearranged, right Page 17 of 24

down to the fundamental make-up of the family. Symbolically, it could be said to have begun in March 1965 when Dr. Martin Luther King and 25,000 others held the Selma to Montgomery Freedom March, while at the same time half way around the globe, the first commitment of combat troops arrived in Danang and the American Embassy in Saigon was bombed. And it could be said to have ended when Nixon resigned in 1973 but was pardoned by his successor in September 1974, the same month in which “President Ford and Secretary of State Kissinger said ... that a continuation of escalating oil prices set by producing countries will lead to a worldwide depression and, in Ford’s words, ‘the breakdown of world order and safety’.” Kissinger told the United Nations General Assembly, “‘ the early warning signs of a major economic crisis are evident. Rates of inflation unprecedented in the past quarter century are sweeping developing and developed nations.... The world’s financial institutions are staggering under the most massive movements of reserves in history. And profound questions have arisen about meeting man’s fundamental needs for energy and food.’” Curiously the “Chronicles” don’t reveal that much about Wall Street and the market during this whole period. It was, as I said, an unremarkable, stealthy bear. Apart from what I have already quoted, the following items give some suggestion of the times: February 14, 1971. “The threat of an oil production stoppage was removed in Iran today with an agreement between 23 oil companies and six Persian Gulf states. The settlement increases the payments by oil companies of a total of $10 billion to Iran, Iraq, Saudi Arabia, Kuwait [who were all the original founders of OPEC in 1960], Abu Dhabi and Qatar. Dr. Jamshid Amouzegar, chief negotiator for the states, said after the signing of the accord, ‘I was so happy I had tears in my eyes.’ So might American consumers when they see the expected gas price hike.” August 25, 1971. “President Nixon has ordered sweeping economic changes in an effort to curb inflation and strengthen the dollar, but organized labor has so far refused to cooperate. Nixon demanded a 90-day freeze on wages and prices, asked Congress to cut taxes and increase business deductions and announced a ten percent surcharge on many imports.... George meany, President of the AFL-CIO, said he had ‘absolutely no faith in the ability of President Nixon to successfully manage the economy of this nation’.” November 6, 1972. “Britain freezes wages and prices to fight inflation.” November 8, 1972. “It’s Nixon by a landslide.... Nixon’s victory was reminiscent of the landslide triumphs of Franklin D. Roosevelt in 1936 and Lyndon B. Johnson in 1964.” February 12, 1973. “U.S. devalues dollar 10% to improve trade balance.” October 21, 1973. “An Arab embargo on oil shipments to the United States became complete today when four Persian Gulf nations joined all the other Middle East oil-producing countries who are protesting America’s support of Israel. Saudi Arabia and other leaders of the embargo also said they would cut production and sales steadily until Israel evacuated the land it captured in the 1967 war. Countries that assist the Arab cause will not suffer from the sales Page 18 of 24

cuts, the Arabs said.” November 30, 1973. “Leading American oil companies today announced large gasoline price increases on the eve of anticipated widespread closing of service stations throughout the country. President Nixon asked gas stations to close voluntarily on Sundays as one measure to reduce oil consumption in response to the oil embargo imposed by Arab nations. Nixon has also ordered a cutback in home heating oil deliveries, a 15 percent cut in gas production and a lowering of speed limits to 50 mph for cars to help conserve oil. The gas price increases announced today ranged from 2 to 3.2 cents a gallon and are expected to push the retail price of gasoline over 50 a gallon fro the most expensive grades. Nixon acted under authority given him by an oil allocation law he had long opposed but which he signed when the embargo became effective. he said the measure he proposed would cut the expected shortage of oil from 17 percent of the nation’s needs to 7 percent. Officials say Americans must cut gasoline consumption, a goal they hope to reach without rationing.”

December 31, 1973. “The Arab oil embargo has led to plans for gas rationing in the United States, crippling oil price increases for industrialized and Third World countries and a threeday work week in Great Britain. The disruption caused by the embargo has led the British government to announce it was shifting from a goal of economic growth to one of survival.... Most oil-producing nations have posted prices over $10 a barrel. The highest price, $18.77 a barrel, has been posted by Libya. The increases are expected to have the most serious effects on development efforts of the poorer countries.” December 6, 1973. “The Arab ‘money war’ with the United States promises to heat up as economists at the Cairo meeting of the Arab league have agreed on a ‘gradual withdrawal’ of funds from Western banks to fund Arab development projects. In total funds the Arabs hold on deposit in Western banks the equivalent of about $10 billion, $1.5 billion of which is in British pounds. With a report that the Arabs were selling pounds as well as dollars, London stocks took their worst losses since WWII. A Western economist mitigated the gloom by observing that ‘the Arabs have a monopoly on oil, but we have a monopoly on where they invest their money’.” January 20, 1974. “Despite obstacles, American women are reaching the higher rungs of the corporate ladder.... Legislation makes in happen. In 1964, Title 7 of the Civil Rights Act forbade sex discrimination in the workplace.” January 23, 1973. “Exxon Corporation, the world’s largest oil company, yesterday reported a profit increase of 59 percent for the 1973 fourth quarter, when the Arab oil embargo against the United States was imposed. ‘I am not embarrassed,’ said J.K. Jamieson, Exxon’s Chairman.” February 11, 1974. “A ‘gasoline gap’ caused by exhaustion of January allocations and blocked deliveries of the February supply because of a drivers’ strike has caused the worst day of the energy crisis for motorists, federal officials say. In New York area, more than half the service stations were closed for lack of gasoline, with lines up t six miles long at open stations. Panic buying has been eased by adoption of a plan that limits gasoline sales to oddPage 19 of 24

numbered days for cars whose [rego] plates end in odd numbers and even-numbered days for even plates.... Many states are limiting purchases to $2 or $3 per automobile.” March 6, 1974. “ Miners end strike [in England], getting 35% pay raise.” March 19, 1974. A ban on Sunday gasoline sales and other restrictions on oil use will be lifted because of the end of the Arab embargo, President Nixon has announced. Arab oilproducing nations agreed three days ago to end their embargo on sales to the United States but rejected a reduction in crude oil prices.... OPEC’s [oil producing] members will earn more than $100 billion this year because of the price increases.” April 3, 1974. “Nixon announces he will pay $432,787 in back taxes.” April 15, 1974. “Report shows drop in U.S. birth rate to lowest point in history.” July 14, 1974. “Inflation has replace energy crisis as the chief concern of Americans, the latest Gallup Poll shows. In the poll, 48 percent of those questioned listed the high cost of living as the nation’s biggest problem. Another 15 percent named ‘lack of trust in government’ and 11 percent cited ‘corruption in government’ or ‘Watergate’. Middle income American, earning between $10,000 and $15,000 a year, expressed the highest degree of concern about inflation. Many of the 1509 persons questioned in the poll expressed puzzlement about why prices have risen so sharply in recent years.” August 12, 1974. “[President] Ford calls for bipartisan effort to cut spending, limit inflation.” August 24, 1974. “Ford signs bill creating special agency to monitor wages and prices.” September 20, 1974. US “Consumer Price Index up record 1.3% in August.” December 6, 1974. The Dow bottomed at 577. “U.S. Dept. of Labor reports jobless rate at 6.5%, highest since 1961.” January 3, 1975. Labor Dept. reports U.S. unemployment up to 7.1%. January 20, 1975. Mired in one of their worst slumps since WWII, the Big Three American auto makers are offering rebates to customers in an attempt to spur sales of new cars.... More than 200,000 auto workers have been laid off because of the sales slump, which is attributed to the companies’ overestimate of the demand for compact and subcompact cars that was generated by last winter’s gasoline shortage.” January 27, 1975. “U.S. Dept. of Labor reports 9.3% jobless rate, highest since [the Great] Depression [of the ‘29 Crash period].” February 5, 1975. “10,000 auto workers rally [in Washington] to demand jobs and end to recession.” March 25, 1975. “The Middle East was jolted today with the news that King Faisal of Saudi Page 20 of 24

Arabia was assassinated in Riyadh. He was gunned down at a palace reception by a nephew with a history of mental illness.” June 13, 1975. “Harold Wilson’s beleaguered [British] government, already under fire because of rising inflation, suffered a further blow today with newly released figures showing a record annual inflation rate of 25 percent, the highest in Europe.” October 29, 1975. “President Ford threatened today to veto any bill proposing that New York City be bailed out of its fiscal crisis by the federal government. Instead, he sent to Congress a proposed bill to enable the city to file for bankruptcy and maintain its essential services, perhaps with some financial aid from the federal government.... His comments were decried by New York officials and by some of the city’s leading bankers and securities officials.” November 3, 1975. “Britain is hoping North Sea oil will be an economic bonanza and free it from the clutches of the Persian Gulf producers. British Petroleum, a nationalized company, is already talking about a new economic era and energy independence in the 1980's. Two years ago, the expense of tapping North Sea reserves did not make sense. Then came the Arab oil embargo.” November 29, 1975. “President Ford toured the trans-Alaska pipeline today and hailed the project as a weapon in the fight to ‘liberate’ the United States from ‘unreliable’ foreign sources of oil.” December 23, 1975. “The Pro-Palestinian terrorists who broke into OPEC headquarters two days ago and captured 11 oil ministers release their hostages today when their demands concerning a jetliner were not met.... The terrorists claimed to represent ‘the arm of the Arab revolution’ and made demands for a Palestinian share in the oil industry and for eradication of U.S. influence.” February 7, 1976. The Census Bureau reports that the metropolitan areas of the South and Southwest were the only ones experiencing substantial population growth since 1970.... This underscores a dramatic reversal in American population trends.... People are shifting away from the Northeastern states, the base of population and power since the nation’s birth, though the industrial North remains a dominant bloc of economic and voting power. Major factors in the emergence of the Sunbelt, consisting of 14 states plus Southern California, are high technology and aerospace installations.” February 29, 1976. “Worldwide recession and inflation have hurt many companies, but one group of entrepreneurs is definitely not in the red. Arms manufacturers are earning vast sums of money. Their profits come from what a new study calls ‘an arms race out of control,’ worth $300 billion a year. Military spending skyrocketed nearly 45% over and above inflation in the past 15 years, and the countries that can least afford to buy arms have some of the fastest growing appetites. The U.S. and the Soviet Union are purchasing 60% of the arms produced, but military spending in developing countries has doubled since 1960. In the Mideast, arms purchases are up 800%.”

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Discussion The ‘74 low on the DJIA was 577, 43% off the 1,000 markand about 45% below its high, and the S&P lost almost 48%; probably not much worse than now, considering the damage done to the Nasdaq and S&P. Other than the oil hostage situation, the world did not have that flavor of flying apart at the center as did the period of the ‘29 crash. While wage and price inflation may have been a problem in any event, the “external” shock of the oil embargo seemed to be the straw that broke the bull’s back this time. Unlike ‘29 and now, inflation was the villain. It is too simple to say that the oil embargo caused the ‘74 Bear, but at least it was a blatantly obvious contributor. Over-valuation was an unmistakable aspect of ‘29, but not so obvious in ‘74. Like ‘29, over-valuation was critical to the Millennium Melt Down. Unlike ‘29 or ‘74, there were no obvious causes of the Millennium Melt Down other than valuation issues (though there is a large body of doomsayers who believe we are on the verge of a credit binge induced deflationary period of gigantic proportion). My own theory of the cause of the MMD is based on the commercial exploitation of “virtual property”. For the first time in history, a company that owned and made nothing of any tangible value became the richest corporation in the world, placing 3 of its owners in the 5 most wealthy individuals on the globe list. It is a company that didn’t exist until the beginning of the ‘82 Bull Run. Microsoft epitomizes the virtual property business. The discovery of virtual property ignited the business world in the same way that California was built overnight by the gold discovery in the mid-1800's. And the virtual property boom was not restricted to (nor necessarily discovered by) the dotcom world of the internet. The exploitation of intellectual property has its roots way back in common law days of copyright and patent. But it wasn’t until recent times that whole industries have rallied to the protection of intellectual property across the globe in the pursuit of the riches that come from licensing property as a business model distinct from the more traditional model of alienating property for profit. The commercial control of ideas rather than things has never before been so commercially valuable, or temporally precious. It has engendered the rally, “content is King”; it has sent the world’s largest companies with the world’s most expensive lobbyists and lawyers chasing after kids in garages running Napster or otherwise sharing their oldies but goodies music over the internet, and after back-alley pirates in way-off third world countries trying to make a few bucks with CD duplicating machines and fake designer labels. It has replaced the traditional business model of discreet sales, to the model of the toll taking gatekeeper. And it has meant that one good idea may beget another that trumps the former and leaves it a goner just as fast as the notion takes hold in the noggin (so long as the latter has not trespassed on the virtual property rights of the former). And there is another form of virtual property that has perhaps contributed even more to the explosion of the wealth from ideas than that form discussed above. This form takes its inspiration from the efficient and rich geniuses who developed the Chicago stock yards to such a state of perfection that when they were through with a cow, there was nothing left but Page 22 of 24

the moo. This virtual property is the domain of the rocket scientists of the big financial institutions, who have been able to so completely tear apart and repackage traditional debt, capital and currency instruments and on-sell them in so many derivative forms that they rival the number of stars in the sky. Today literally untold trillions of dollars worth of these instruments are traded daily across the globe, in streaming electronic hints of matter and meaning. They have the weight of wealth to make or break whole countries in a blink of the eye. And not even the world’s central bankers combined seem to have any real sense of the size or scope of this business. My theory is that the major impetus to the rise and fall of the ‘82 Bull Run has been the discovery of this new world of virtual property, of legally protectable good ideas and bad, and of the inexactitude of the methods available for valuing this newly found, and sometimes fleetingly held, form of property. In this context, it is absolutely no wonder at all that valuations have outstripped traditional analysis. Who is to say when these ideas are over or under valued? Well, the market is. That has always been the market’s job; to put a price on something. That does not mean that the market is always, or even often, right. It overshoots, it undershoots, and it carries on like a madman sometimes, but it is simply trying to do its job of pricing the products it trades in the best way it knows how. So what does this have to do with my assessment of the contours of the MMD? I think until the market again becomes confident that there is virtual property of worth in them thar hills, it is going to be edgy. I don’t know if we have found a bottom yet, and nobody does, and history tells me we won’t know until its over. In the meantime, we have to take comfort in the instructions of Yogi Berra: “it ain’t over ‘til it’s over”. But looking at the time frame of the’29 Crash and the ‘74 Bear through the eyes of the authors of the Chronicles has shown me that the very worst of the crash, as measured by the market low, comes when just about everything else is as bad as its going to get; indeed, the market was already on the way back up (albeit with some tough slog ahead of it) by the time the news reports were noting that the peril of the day was mitigating. And once the bottom was in place, the market weighed on upwards, not looking back. As Warren Buffett said, “in the short run the market is a voting machine, but in the long run it is a weighing machine.” I am not a scholar of the market. There are plenty of people out there who profess to be and many of them are saying, or hinting, that this MMD is the first cyclical bear move in an upcoming secular bear market. Cyclical markets tend to run for a period up to 2 or 3 years, while secular markets tend to mark a consistent trend over a much longer period, say a decade or two, containing various cyclical bull and bear markets. The time frames I have been using in this paper cover secular periods. The ‘82 Bull Run was a secular bull market, marked by various cyclical bulls and bears, such as the ‘87 bear market. If this is the first cycle down, it might be that at some subsequent time we will take out these recent lows. However, if we are at the end of a cyclical move, then we can rationally expect a move up of some substance over an extended period of time within the secular bear. We will have to pay attention to the contours and dynamics of these moves, because, as we have seen Page 23 of 24

from the ‘29 Crash and the ‘74 Bear, the sooner we can identify (to the extent that can ever be ascertained) the pattern that this bear market is taking, the better we can trade it. Of course, we have to admit that we do not know if the store of data we have to try to guestimate market behaviour is a sufficiently large enough sample from which to make statistically valid inferences. We are going on only one century worth of data. Can we conclude anything from that? I hope so. Everyone else is, too.

One last thing. If you plot the Australian market (represented by the SPI) against the DJIA from 1983 to present (which I have done on this chart), you will notice that the SPI had its “bubble” back in ‘86-‘87. It grossly overshot the Dow, and did not recover from that overshot until 1996. The ‘80's were the “cowboy” years for the Australian markets, exaggerated by the absence of any capital gains tax until 1985. It lost over 50% of its value in the ‘87 crash, far exceeding anything the Dow has suffered then or now. So in many ways it has already had its purge, and should not (maybe, perhaps) be expected to take so long to recover from the MMD. Note, in this regard, that it hit a new high just a few months ago, in March. A study by some analysts from the London Business School, commissioned by ABN Amro, supports this idea. This study was reported today in the “Sydney Morning Herald.” Its study says that Australia will like as not recover fully within 2 years, while the S&P will take 8 years. That’s all I’ve got to say for now.

Guambat 31 July, 2002

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