Trouble on the way?

Three years ago I did a comparison of the 1929 stock market crash with what was going on at the time.  The similarities were amazing.  A 50% plunge that recovered to about 85% then, after about a year, a total collapse to about 10% of its high point.  Three years ago, we suffered a very similar drop and had a very similar recovery in about the same amount of time.  Where the two situations diverge is in the following year.  We never had the total collapse a year later like they had in 1929.  I began to wonder why and I think I have a good answer.

In 1929, the country was experiencing the “roaring twenties” and almost everybody was dabbling in the stock market.  When trouble emerged, everyone pulled their money out and that sent the market into a tailspin.  Today, it is not so easy for investors to pull their money out, most of it is in mutual funds which are part of many retirement programs and there are penalties for early withdrawal.  Therein we have the saving grace.  If there were no penalties, I’m sure many folks would have withdrawn their money long ago rather than having to sit back and watch account values dwindle to nothing.

 In the crash of October, 1929, the two day drop for the Dow Jones Industrial Average (DJIA) was 23.6%.  In comparison, the 2008 crash on Oct. 10, 2008 was 22.1%, eerily similar.  The total drop for the 1929 to 1932 bear market was 89.2%.  Stock accounts lost almost 90% of their value!  It remains to be seen how long the retirement accounts in mutual funds will buoy the market but sooner or later, the “Piper” will get his money and the outcome will be a similar decline; 90%.  I hope I’m wrong!

Even without this cloud hanging over the Market, most analyst today conservatively estimate that the value of the dollar is being eroded by 13% to 16% every year and eventually, that will translate into a similar level of inflation.  It seems that there is no safe haven for investors and they are all scrambling to salvage what they have left.  Insurance companies, the proverbial “cash cows,” are saving their assets by developing commercial real estate which is being built everywhere, even though many office and warehouse buildings are empty and tenants are dwindling.  Warren Buffet bought a railroad.  The “big boys” are investing in things that will always be there and things that will always be necessary, even in hard times.  Energy and commodities

I remember reading stories of pre-war Germany where prices doubled every two days and people rushed to the grocery stores to spend their paychecks before they lost value!  Can it happen again and can it happen here?  To use a popular catchphrase, “it’s not a matter of if, but when.”  I hope this doesn’t sound too “doomsday-ish,” it is only meant to provoke thought.  It doesn’t do any good to bury one’s head in the sand because the facts will not go away.