Stock-Market Crashes Through the Ages – Part II – 19th Century

Stock-market crashes saw the light of day more and more as the world became industrialized. The 19th  century saw a rapid increase in their numbers.

There’s money to be had at any time, whether the market is going up or down. But, it’s avoiding the downs and pulling out before the things start to go haywire that is important. Or, at least, investing in what’s good and what’s going to take a hike. But, how can you believe what people have to say? The only ones who are any good at selling a rise when in actually fact it’s a fall coming are the marketing gurus themselves. They are more common than we might think. It’s no modern invention either. We are past masters of selling what doesn’t exist. Selling make-believe is what makes people happy, until it takes a turn for the worse.

Some might say that predicting the downturn in the market can be done. You can develop algorithms and have sophisticated math, analyzing stock movements in multiple countries at the same time with split-second data churning out.  You can use whacky ways to predict what’s happening  if you can’t tot up the equations and come to a decision, like seeing how many toothbrushes are sold in the economy (as people tend to stop going to the dentist when there is a crisis). Although they are more likely to reveal what’s actually taking place, than what is going to happen just round the next corner.

Use as much economic forecasting as you like but the market won’t react always how you expect it to. We all know that. If it were an exact science, nobody would be poor. If it were a science at all, we would all be damn wealthy, wouldn’t we?

But, looking at what happened in the past sometimes helps us see what we are still doing today. We didn’t invent everything and we might think that we are high-flyers. But, somebody’s been there, done it and seen it all before. The 19th  century was the industrialized world at its first beginnings. Trade, transport, better communication and money-making were high up on the agenda.

Here are the best (or the worst, depending on which side of the fence you are sitting) examples of stock-market crashes of the 19th  century from the mammoth list that could be mentioned. The majority took place in the USA, which was at the heart of industrialized prowess at the time a place where money could be made hand over fist, but where it could be lost twice as quickly. The John-Dos-Pasos world of disillusion and hope of classes in the race to become rich and somebody, a household name:

Panic of 1819

• Americans had been buying up land at rates that had never been seen so as to produce in what looked like a booming industry.
• In 1815, 1 million acres of land were sold off to the people.
• By 1819 that had increased to 3.5 million acres.
• All of it, of course, was purchased via loans. As things took a nose-dive, the people were unable to pay back their loans.  Sounds like the credit crunch and the sub-prime crisis.

• Prices of agricultural products were plummeting while the plantation owners were over-producing due to having bought up too much land.
• Land prices fell and brought the economy down as the banks called in those loans.
• Bank credit was restricted, loans were cancelled and the Bank of the United States started printing money to deal with the lack of funds.

Panic of 1837

• Britain was suffering from a slump in its agricultural production and ended up relying heavily on the USA, especially in terms of cotton and crops.
• The US agricultural industry was booming and so British investors placed their money where they were going to get the best returns.
• However, they didn’t bank on the fact that the  Bank of England  would increase interest rates (from 3% to 5%), in an attempt to replenish their diminishing reserves.
• The money that had been invested in the US by the British investors suddenly flowed back into the coffers of the Bank of England.
• The US was left only with the choice to do exactly the self-same thing in a copy-cat scenario.

Bank of England

Panic of 1857

• The British government in 1857 did (and succeeded) everything in their power to get around the  Peel Banking Act of 1844, requiring that gold and silver back up the money that was in circulation.
• The panic that ensued in Great Britain spread rapidly to the US and it was the Ohio Life Insurance and Trust Company that caused the triggering of the panic in 1857 in the US.
• It was all down to fraudulent activities of the bank’s executives that there was a bank-run in 1857.
• The bank suspended activities after incurring losses of $7 million.
• They had lent too much money to railroads in the conquest of the west.
• However, it was in 1857 that the flow of people to the west had considerably slowed down.
• They had over-lent to railroad companies and they didn’t have enough gold or silver to back it up, just like in Britain.
• The value of land fell, the railroad securities disappeared.
• The banks went into meltdown.

Railroads in the USA

Panic of 1873

• Bank reserves had been put under a great deal of strain from money that had been lost in the construction of railways as well as due to speculative investments and property-sector losses that hit hard. The railways were the dot com bubbles of the 1990s and 2000s. Massive investment, euphoria, then a pin prick, and it all deflated.
• The German decision to stop using silver to mint coins resulted in a fall in prices in the USA, where most of the silver was exported from at the time. Due to the fall in demand, the Coinage Act was passed and meant that the US used the gold standard. Silver lost even more in price.

Otto Von Bismarck

Conclusions

IMF: It Ain’t Over Till The Fat Lady Sings

‘It ain’t over till the fat lady sings’. No, I'm not referring to Mrs. Lagarde and no, I don’t want a law suit on my hands. I’m just saying. The expression is commonly used to infer that people shouldn’t be presuming the final outcome of a situation, until we all get there. It’s not because we are nearing the end of quantitative easing and Mr. Bernanke is probably preparing to take flight, as the heavens open and it doesn’t just rain, but it pours on all of us that we should be saying it’s all done and dusted. The International Monetary Fund made an announcement today that they strongly urged the USA not to backtrack too quickly on quantitative easing that has been set up. It also went on to state that repealing budget cuts (sequestration, which is across the board in the USA due to the inability to come to a decision in Congress) as it would be nothing other than damaging to the US economy. The budget cuts known as sequestration began on March 1^st 2013 in line with austerity fiscal policies of the USA., bringing about $1.2 trillion in debt reduction (through cuts up to $995 billion and reduction of $228 billion in interest savings).

The International Monetary Fund analysts believe that if budgetary cuts are taken away, then it could trim a substantial slice off economic growth in the US. Forecasts could be lower by as much as 1.75%, meaning that growth prospects would be no better than 1.9% in total for this year. That would drag the US economy down or at least keep it from making good gains that might have shown through in recent weeks with unemployment figures falling. Previously in April, the IMF had estimated economic growth for next year to be at the 3%-mark, but they have also revised that, dropping their estimate to 2.7% for the moment.

The IMF reported that " The deficit reduction in 2013 has been excessively rapid and ill-designed" . ‘Hear! Hear!’ some might well retort. Cuts will be made in education and infrastructure spending notably and it’s those areas that might lead to better recovery of the economy in the long-term. Payroll tax cuts that will come to an end will also have a knock-on effect on the economy in adverse terms.

The silver-lining is that the IMF believes that US debt will reach 110% of GDP. It will then be at the peak and will decline after 2015. It’s presently at 101.6% (2012) of GDP. So, we still have more to spend? Or rather we still have more to spend of what we don’t have.

US Debt as Percentage of GDP

The other good piece of news is that the IMF urged the Federal Reserve to maintain quantitative easing until at least the end of 2013. That might put investors in a more peaceful state of mind. But, for how long. The end has got to come sometime. But, just not now, maybe, while the economy is still not doing well enough. Delaying it will only perhaps make the market even more difficult when it comes to weaning it off the cash-pile being thrown at them. The way markets have reacted by off-loading bonds and the volatility of the reactions that have taken place over the past few days, means that crossing that bridge will have to be way before the Federal Reserve actually gets to it.

Whatever happens, it looks like the fat lady has indeed sung. But, it’s not over yet. What was it that someone else said? It ain’t over till it’s over. But, then it’ll probably be far too late. So, this time, it’s probably a good thing that we had to sit through the warbling of Ms. Lagarde at the International Monetary Fund. Now, the question is, will the US federal government and Mr. Bernanke take head from the soprano singer over withdrawing both QE4 and budget cuts? Is that the sound of glass breaking?