The stock market crash of 1929 is often mentioned during Y2K discussions. A crash of our current overvalued market has been predicted. If the market crashes, will it signal the beginning of another Great Depression?

When the stock market crashed in 1987, there was a one-day decline in the DJIA of 23%, but there was not a depression. Why? Despite the staggering decline of stock prices, the overall wealth of America was far less severely impacted. This is because most of Americas wealth is in assets other than equities. The weakness of an overvalued stock market in 1987 did not reflect the underlying economic fundamentals and thus we shrugged off the correction and entered the longest expansion in recent history.

The price of assets change over time. I am fond of noting that black pepper was once traded, ounce for ounce, for gold. Supply and demand changed. People who value gold as an absolute commodity often overlook this historical evolution.

Value is different than price. A price is a transaction value. In simple terms, how much will the market pay in currency for a given asset? The other component of value is use. Land can be used for habitation, agriculture, commerce, recreation, etc. While land can be sold, it also can be used in the creation of wealth. The same applies to human capital, machinery, information, patent rights, and other factors of production.

Having assets with use value unencumbered by debt is one key to surviving a depression. The best investment is almost always improving ones skills and abilities. A good education is portable and lasts a lifetime. Land varies widely in price, but it does become more valuable in hard times. Unrestricted land allows the owner to grow fruits and vegetables, raise stock, produce modest amounts of power, harvest fuel for heating, etc. More than gold, information has been the most consistently valuable commodity through the ages. It takes information (or skills) to capitalize on assets with use value.

There are two basic types of hard times inflationary and deflationary. In inflationary hard times, it takes more money to buy goods and services. A common example is the savage inflation in 1920s Germany. (See Weimar Republic.) By 1922 the Mark was worth 1/100th of its 1914 value. By 1922, the value of the Mark fell from 162 to the American dollar to 7000 Marks to the dollar. By November of 1923, it had fallen all the way to 4,200,000,000,000 Marks to the dollar. A wheelbarrow of money to buy a loaf of bread.

On the other hand, deflation is the widespread decline in prices. The 1930s U.S. depression was deflationary, as was the post-Civil War period. While one might think falling prices are good (they can be), but think about wages and assets. Leveraged assets are particularly vulnerable. Who wants to pay a $100,000 mortgage on a home worth $50,000?

Modest inflation and deflation are usually manageable, however both phenomena create winners and losers. The Federal Reserve has been liberal with the money supply of late. The global recession, cheap commodity prices and the remarkable absence of wage pressure have kept inflation at bay. With the bias towards higher interest rates (and a weather eye on the speculative market bubble), the Fed is trying to let some air out of the balloon. Frankly, if we move past recession into depression, its a pick em on inflation versus deflation.

The supply of money is important to the economy, but I take a different perspective. In my opinion, the real issue of Y2K is productivity. If Y2K problems cause significant inefficiencies in the economy, productivity falls. So do profits. Reallocating resources to deal with crises is usually inefficient. If productivity falls significantly, we will face a terrible hangover after a decade of economic partying. On the positive side, the free market benefits from an occasional morning after. Weak firms should fail. If we have a serious recession or even a depression, there will be some excellent investment values during the darkest days. Those who are liquid and have the chutzpah to invest will become wealthy on the recovery.

My grandfather's motto: Stay debt free. Have use value assets. In the advice of Rothschild, Buy on the cannon, sell on the trumpets.

L'audace...L'audace..Toujours L'audace

-- Ken Decker (kcdecker@worldnet.att.net), December 03, 1999

Answers

Twelve years later the situation is somewhat different. One can obtain 125% LTV mortgages...the average 'Joe' is often into the market in a big way (at least much bigger than 1987). He wants/needs his 20-30% 'interest' every year. Experience has taught 'him' that the market corrects, but never truly loses. The average broker hasn't lived through a major correction. This is an "easy shootin" barrel that's constantly replenished with tasty fish by Mr. GreasePan. Are you hooked yet?

Wonder how many of those 'super' mortgages went largely into the market. Guess we'll find out if the market ever takes a real dump.

-- Sceptic (STEERclear@oftheBULL.com), December 03, 1999.

Great post Ken. "Its hard to see a BUBBLE when you're inside looking out".

-- Ed (ed@lizzardranch.com), December 03, 1999.

An interesting fact stated in an e-mail I receive(and you can, too, for free, at www.dailyreckoning.com), concerns the fact that at present, in the midst(or end) of the greatest Asset Mania of all time, the average US household NET WORTH is...$35,000!

So, all it would take is a 15% drop in the large averages to wipe out TOTALLY the US household equity, as the ASSETS are $200,000, but remember that ASSETS=DEBTS + EQUITY(NET WORTH). Also remember that there are many out-of-sight investments that people have in the stock markets, like their pension plans, life insurance, etc. It will be the TOTAL ruin of us all.

That is how LEVERAGED the entire US citizenry is to the markets; it has never been this bad ever before, and it will be a VERY LONG time after this balloon pops before history will see this again--in fact, it WON'T be in any of our lifetimes, even for those young reading this.

Just so it can't be said that this is off-topic, here's a thought for Y2K--IF you believe there will be power in 2000, but unstable as to cause blowouts/brownouts/blackouts, then you should consider purchasing SEVERAL UPS INVERTERS(the type that you can buy in computer stores, in various VA ratings up to about 800). Common names are BEST and APC(American Power Conversion). The VA rating is ALWAYS higher than the true WATT output; you must go by the WATT rating of what you are going to plug into the UPS!

Forget about protecting your fridge with one of these; a fridge compressor motor is highly INDUCTIVE, and its power draw is way higher than these UPS units I'm talking about here.

As an example, an APC 650 VA is rated at just about 500 WATTS output.

BUT YOU CAN CHECK SMALLER-SCALE STORES/RESELLERS TO BUY "RE-CONDITIONED" UNITS AT ABOUT 2/3 THE PRICE OF A NEW ONE! THE ONLY DIFFERENCE IS THAT YOU MAY NOT GET A WARRANTY OR A BOX, BUT ALL THEY DO BEFORE RE-SELLING IT IS REPLACE THE INTERNAL GEL-CELL BATTERY! IT WILL WORK 100% AS WELL AS A BRAND-NEW ONE!

Consider one each for say, the TV/VCR/DVD PLAYER, the COMPUTER/MONITOR, and the HOME STEREO/ENTERTAINMENT SYSTEM.

Well worth it, because you WON'T know when the spikes/brownouts will hit, nor how long they will last, and I'm sure that if you add up the things you're protecting, it is at least 10X more than the UPS.

-- profit of doom (doom@helltopay.ca), December 03, 1999.

Decker,

You forgot to mention the real reason "we shrugged off the correction" in 1987:

****

London Telegraph - "Plunge Protection Team" Operates in Shadows of US Treasury by: Ambrose Evans-Pritchard

No loan and no easy way out, Clinton tells Russia IT is known as the "plunge protection team", an emergency council of America's top financial officials that operates with its own special staff in the shadows of the US Treasury.

Since the stock market crash of October 1987, the group has been drawing up contingency plans for the next market meltdown. Its moment may have come. The purpose of the group, known officially as the Working Group on Financial Markets, is to avoid repeating the near-catastrophe of Oct 19, 1987, when the Dow Jones index fell 22.6 per cent in a single day, and then followed with a nosedive the next morning.

At that time, the US financial authorities had no response mechanism in place. The Federal Reserve managed to prevent a total breakdown in the payment and settlement system by injecting huge amounts of liquidity into the banking system, but it was an alarmingly close-run affair. Afterwards, it was agreed that the US government needed something better than last-minute improvisation.

The team is led by the US Treasury Secretary, Robert Rubin. As the crisis gathered pace last week, Mr Rubin was fishing in Alaska but he remained in constant touch with the other key players on a specially equipped cellular phone. He is back at his desk this week monitoring the crisis.

The permanent members include the chairman of the Federal Reserve, Alan Greenspan, and the heads of the Securities and Exchange Commission and the Commodity Futures Trading Commission.

****

Decker says...

"My grandfather's motto: Stay debt free. Have use value assets. In the advice of Rothschild, Buy on the cannon, sell on the trumpets.

L'audace...L'audace..Toujours L'audace"

Speaking of staying "debt free," when are you going to pay YOUR debts you arrogant spineless scumbag?...

Decker is NOT a man of his word, but a lying sack of s**t

-- Hawk (flyin@high.again), December 03, 1999.

Only one comment: The so-called "decade long expansion" is a myth. Has everyone forgotten about the recession (beginning in 1987, by the way) which lasted all the way through 1992 before any anyone dared declare that the "soft landing" had occured, and that we were beginning a recovery?

Here in California, the recovery didn't take hold until mid 1997! Real estate prices here in So Cal have just recently regained their loss in in value from the late '80s.

How the hell is it that most everyone seems hypnotized into thinking we have been in such an incredibly long economic expansion? How sad that most people don't even understand the A/D index, much less how it provides a much more accurate picture of how businesses are doing overall than the hand full of companies representing the DJIA and NASDAQ!

What collective suckers for manipulated media we have become!

-- TA (sea_spur@yahoo.com), December 03, 1999.

TA:

California real estate prices have baffled me. When I was job hunting in 1994, I had an offer from an outfit in Orange County. I did some looking around, and found a house half the size of my current house, on half the land, for nearly triple the price, complete with an average of 3 hours of commuting time per day (compared with 10 minutes where I am). And this at a time when real estate prices were "depressed"! A house equivalent to mine now, considering size, neighborhood, view etc. would have been over a million dollars! With 5 hours of commuting time per day.

Could it be possible that California real estate, like Tokyo's, is overpriced?

-- Flint (flintc@mindspring.com), December 03, 1999.

Flint - Yes indeed, real estate prices here are outrageous -- at least they have been since I first came on the scene in '71. In San Diego, for example, real estate prices are now roughly 16% above the Boulder/Denver area, which is also quite pricey. Nonetheless, for ocean-sports enthusiasts and folks who want a very small spread in daily temps, fresh produce, and palm trees it's a great place to live -- at least most of the area. Back to the point: It's a supply and demand issue - there's only so much land and when we're not in a recession, people flood into the state creating a shortage and driving up property values. Within the last 4-6 months, the influx of people has leveled off and so have the price increases. Next will come the inevitable reversal of the supply and demand imbalance.

Short term property owners here (if they bought pre-1998) would be wise to sell while buyers are somewhat available. Although, I believe the window of opportunity is closing very quickly -- by the day now.

What does this have to do with the stock market? Probably very little, in a physical/direct sense. It's all part of the recovery from he last recession. The pendulum has swung about as far as it can go now.

-- TA (sea_spur@yahoo.com), December 04, 1999.

Ken,

>Frankly, if we move past recession into depression, its a pick em on inflation versus deflation. <

It would do you well to consider economic history. Never in all of recorded economic history has inflation been preceeded by falling commodity prices. Commodities/feedstocks have been falling since the mid 70's. COMMODITIES CANNOT RISE UNTIL SIGNIFICANT DEBT IS REPAID.

Credit has been expanding faster than the ability to deliver goods and services for a long time. This cannot go on forever. It will be adjusted and NOTHING WITHIN THE ABILITY OF MANKIND WILL PREVENT SUCH ADJUSTMENT. That also is a lesson of history.

-- earl (ejrobill@pcpostal.com), December 04, 1999.