That was an Apocalypse?

by JDH on June 27, 2009

Last week I wrote, somewhat in jest, about The Coming Apocalypse. I was referring to the impending collapse of the U.S. dollar, and the markets in general. Monday and Tuesday were significant down days, but the rest of the week saw a recovery, and the markets ended the week essentially flat. I didn’t expect an Apocalypse this past week (more likely later in the summer or early fall), and obviously it didn’t happen this week.

But it turns out I may have been more prescient than I realized, for this week the headlines blared about the deaths of Ed McMahon, Farrah Fawcett, and Michael Jackson.

For the record, I never knew any of them, and I was never a particularly big fan of any of them. Ed seemed like a jovial enough guy, and Farrah was beautiful. Michael was just weird, and given his numerous problems with the law I am somewhat surprised by the attention his death has garnered.

Most striking for me are the numerous commentators who said, if I may paraphrase, “we saw it coming; we are not surprised Michael Jackson died young.” His ex-wife, Ann Marie Presley, says that while she loved him, she left him because she knew he would one day end up like her famous father. Even Michael’s Rabbi knew he would die young. Sometimes you can just see it coming. Sometimes great riches do not prevent an untimely end. In fact, in many cases, great riches lead to an untimely end.

Sort of like the stock market, eh?

We have had the greatest boom in history, but all good things must end. The question, of course, is did the end happen in 2008 and we are now in the recovery phase, or do we have more down to come? As you know, I am of the view that there is more down to come, and I am not optimistic about the summer.

I believe this partly because of the history of the markets, particularly the experience of the Great Depression.

In his book The Great Crash of 1929, John Kenneth Galbraith tells the story of the time leading up to the great crash. Speculation was rampant. Buying on margin was widespread. The Big Boys made sure that down days were followed by up days.

Margin trading was defended as necessary for an efficient market, and Wall Street made sure that everyone heard the argument that rampant speculation was good for everyone. But, in a lovely turn of phrase, Galbraith says:

Wall Street, in these matters, is like a lovely and accomplished woman who must wear black cotton stockings, heavy woolen underwear, and parade her knowledge as a cook because, unhappily, her supreme accomplishment is as a harlot.

Wow. Was it really that bad in 1929? Yes, apparently it was.

The sad part, when you read Galbraith’s book, or when you read the news reports of Michael Jackson’s life and death, is that a few people saw it coming, but those few people were powerless to stop the impending disaster. Lisa Marie knew Michael would die young, but there was nothing she could do. A few astute observers in 1928 and 1929 could see that a crash was inevitable, but when everyone believes that the good times were here to stay, there was no need for prudence.

I may be wrong. The massive stimulus efforts of governments around the world may stimulate the economy and create enough jobs that we can spend our way out of this recession. It has never happened before, but perhaps this time debt will truly be our salvation. If I am wrong, the cash I have on the sidelines will not turn into profits. So be it.

I prefer the prudent approach of watching the crash from afar, safe in the knowledge that if it happens, my personal losses will be minimized.

It is a beautiful summer day here in my corner of Southern Ontario, so I will cease my incessant pessimistic babbling and go and enjoy the weather. My father, JDH Sr., is coming up for a bike ride, so three generations of JDH’s will be taking to the bike trails, and then relaxing with a swim after our ride. That, my friends, is the solution to the great depression.

Thanks for reading, and see you next week.