In part 5 of our discussion of bubbles and crashes. "This has all happened before and it will happen again," is a re-occurring theme in the re-imagined version of the TV series Battlestar Galactica, now in it's fourth and final season. We continue our discussion of history repeating itself in regards to bubbles and crashes.
Economically things are bad right now. We have been in an recession now for a good year and it will probably drag on a little longer. The longest recessions we have had since the Great Depression have lasted 16 months. Once in 1973-1975 and then again in 1980-1981. So either we are going to hit bottom in the next few months or we are going to beat the record. Barbara Deseor from Bank of America says they have done lots of research and believes we will see 3 quarters of negative growth and is forecasting a turnaround in late 2009.
But if you think things are bad now, nothing yet compares to the Grand Daddy of them all the Great Depression of 1929, which lasted 12 years.
A string of terrible days October 21, 24 and 29 led to a drop of more than 40% in the market. The market actually continued to to drop until July 1932 when it finally bottomed out and ended up being down as much as 90% from its 1929 highs.
Even after the Florida Crash, Which we discussed in part 4, American's were bullish as ever. As the first World War had been won Americans were confident that the Stock Market was guaranteed to make everyone rich. The industrialization was resulting in previously unimaginable luxuries. It was a great time to be an American.
Many people put all their savings into the stock market. Since the Stock Market was believed to be a no risk no brainer and expected to only go up. No one bothered to learn about the system or the companies they were buying into. At times traders, brokers, investment bankers, and company owners got together to manipulate stock prices and then get out with gains. Whenever consumers would notice a stock going up everyone would buy the stock (We of discussed this herd mentality before and we will see it again). On and on this cycle would continue.
The less an investor knows the more likely he will be swept into the popular opinion or herd mentality, which is studied in behavioral finance. This also has the opposite effect because uneducated investors are also easily spooked into panic. The herd just follows the cows that run the fastest and in turn trample the market.
The depression only ended with a declaration of war. As of yet this has been the worst economic blow to the United States.
Up next: The Crash of 1987
[This post is written and copyrighted by Financial Elite (http://financialelite.blogspot.com/ ).]
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