Blogging The Bears: A Book Review In 4 Parts (Part 2 – 1929 thru 1932)

In dedication to today’s awesome bear, I continue my Blogging the Bears series. Other parts in the series:

    1929 – 1932 Bear Market: -89% DJIA

    Author Russell Napier begins his analysis of the 29-32 bear by pointing out just how different this crash was from the other 3 major bears (1929, 1949, 1982).  He asserts that investors have a misguided notion on the behavior of bear markets because of the fact that this one occupies such a prominent place in American history.  A summary of the key differences:

    • The other bear markets underwent a slow, decade-long process of moving from overvalued to undervalued, such that eventually, stocks did not reflect the underlying strength of the economy.  This made stocks cheap.
    • The other bear markets did not feature the collapse of the banking system.

    Those are two key differences and readers may note some similarity to our present-day situation.  Readers no doubt have seen an endless stream of pundits come on TV and state that we won’t have a Depression this time around because the Fed isn’t making the same mistakes as the 1929 Fed.

    In this respect, Napier seems to agree.  He implies that the Fed partially caused the Depression by raising interest rates to rein in rampant Wall Street speculation.  Napier states, without much support, that the Fed managed to stop the stock market’s meteoric rise by damaging the economy and thus destroying the underlying basis for market speculation.

    The author also points out the Fed’s inadequate response once a series of banking crises began to unfold.  While the Fed did cut discount rates, they took little action to pump liquidity into the system, thus forcing banks to liquidate and credit to tighten.

    There are some other nifty tidbits buried in his study of the Great Crash: though October 1929 looms large as part of the “Great Crash”, much of the damage to the markets occurred after mid-1930.  In fact, by mid-April, 1930, the market had recovered over 50% of its crash; from there, it would fall another 86%.  Despite the 3-year duration of the bear, investors buying into the market in March 1932, only 3 months before its ultimate bottom, would have seen declines of 54%.

    Other quick notes:

    • Corporate bonds, as in 1921, recovered before equities.
    • Stabilization in commodities and wholesale prices were important indicators of the same in the equity market.
    • Stocks were ridiculously cheap when measured on adjusted 10-year PE & q-ratios.
    • As the market raced ahead of the broader economy in the run-up to the crash, the market also crashed harder than the economy.
    • Market bottomed before any real economic recovery or even credit growth.
    • Investors watching Fed actions, like monetary growth or liquidity actions, were off-target in marking the stock turnaround.

    This chapter reinforced my views on the difficulty of trying to time market bottoms.  Perhaps the more prudent strategy would be to buy in stages, with wide steps between pricing, so that investors will not run out of capital.  This resembles the approach I’m currently employing during this market: identify cheap securities, buy a slug anticipating possible major drops and leave plenty of ammo to keep buying if that happens.  The key, obviously, is to make sure you’re right and the company doesn’t declare bankruptcy.

    In summary,  my brief treatment here hardly represents a comprehensive list of insights revealed in Napier’s chapter (or book, for that matter). I recommend readers pick up the book and read it for themselves (and no, I do not have any affiliation with the author and receive no compensation for sales of the book with the exception of a small payment if you buy through my Amazon link).

    Part 1: Book rating & 1921 bear market.

    Next week: 1949.

    More on this topic (What's this?)
    Understanding The Optimism Bias
    Read more on Wharf (HLDGS), CLP HLDGS at Wikinvest

    3 Responses to “Blogging The Bears: A Book Review In 4 Parts (Part 2 – 1929 thru 1932)”

    1. The Enlightened American » Blogging The Bears: A Book Review In 4 Parts (Part 1 - 1921) Says:

      [...] Blogging The Bears: A Book Review In 4 Parts (Part 2 – 1929 thru 1932) [...]

    2. The Enlightened American » Blogging The Bears: A Book Review In 4 Parts (Part 3 - 1949) Says:

      [...] Part 2 details the 1929 – 1932 bear market. [...]

    3. The Enlightened American » Blogging The Bears: A Book Review In 4 Parts (Part 4 - 1982) Says:

      [...] Part 2 details the 1929 – 1932 bear market. [...]

    Leave a Reply