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Stability Trend Only a Fair-Weather Friend


The forecast is bound to change.

Thoughts on the Continuing Crisis

The consumer is shell-shocked. The 401(k)s are now 201(k)s. People are trying to figure out how to go forward. In this article, I'll go back and look at how we got here and what the landscape looks like, and what I think the future will look like.

In the beginning there were banks, and the banks were without form or regulation. That lack of regulation begat panics: You had the panic of 1807, then the panic of 1827 when Andrew Jackson got rid of the Bank of the US. Then you had the panic of 1873 and the panic of 1907. And over time, the powers that be -- not wanting to have any more panics -- created first the Federal Reserve and then the FDIC. After World War II, there were basically no more worries about bank deposits. The FDIC covered them, and we entered a new era of "stability." This didn't repeal the business cycle and prevent recessions, but it did stop major bank runs and banking panics. We can clearly have financial crises, but they'll be different than those of the Depression.

The Trend Is Your Friend (Until the End of the Trend)

Stability, though, as we were taught by Hyman Minsky, leads to instability. The more stable things become (and the longer things remain that way), the more unstable they'll be when the crisis hits. This is because human beings learned to trade and invest by dodging lions and chasing antelopes on the African savannah. We now chase momentum and dodge bear markets. We're hardwired to look around at our circumstances and predict trends far into the future.

We take the current trend and we project it forever. But the one thing we know about trends is that they're eventually going to end, and the trend is only your friend until it ends. Trends are notoriously fickle. That stability breeds instability. Calvin Coolidge said in early 1929 that "In the domestic field, there is tranquility and contentment and the highest record of prosperity in years." The trend ended. "Apres moi, le deluge."

So what happened in 1929, after this era of stability? The bubble burst and the stock market crashed.

I thought one of the great headlines in the papers from those days was, "The deluge of panic selling overwhelms the market. Nineteen million shares changed hands." Nineteen million shares changing hands caused the crash in 1929! That's about a minute today. Before the Great Depression, Coolidge was telling us at the end of his presidency that everything was okay - and then we got Hoovered. They tried to balance the budget, and they didn't really provide any stimulus. We got Smoot-Hawley. Given the massive implosion of capital and the closing of banks, there clearly wasn't enough growth in the money supply. Government and the Fed just did a lot of things wrong.
No positions in stocks mentioned.

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