Babson’s Warning

“A crash is coming, and it may be terrific…The vicious circle will get in full swing and the result will be a serious business depression. There may be a stampede for selling which will exceed anything that the Stock Exchange has ever witnessed…Wise are those investors who now get out of debt.”

The above words could easily have been stated by me or another of the (very) few others who currently predict the coming of crashes in the markets.

But, they were not. The statements above were made by investor Roger Babson, at a speech at the Annual Business Conference in Massachusetts on 5th September, 1929. 

Mr. Babson’s prediction was not a sudden one. In fact, he had been making the same prediction for the previous two years, although he, in September of 1929, felt the crash was much closer.

News of his speech reached Wall Street by mid-afternoon, causing the market to retreat about 3%. The sudden decline was named the “Babson Break.”

The reaction from business insiders was immediate. Rather than respond by saying, “Thanks for the warning – we’ll proceed cautiously,” Wall Street vilified him. The Chicago Tribune published numerous rebuffs from a host of economists and Wall Street leaders. Even Mr. Babson’s patriotism was taken into question for making so rash a projection. Noted economist Professor Irving Fisher stated emphatically, “There may be a recession in stock prices, but not anything in the nature of a crash.” He and many others repeatedly soothed investors, advising them that a resumption in the boom was imminent. Financier Bernard Baruch famously cabled Winston Churchill, “Financial storm definitely passed.” Even President Herbert Hoover assured Americans that the market was sound.

But, fifty-five days after Mr. Babson’s speech, on 29th, October, 1929, the market suddenly went into a freefall, dropping 12% in its first day.

Today, most people have the general impression that on Black Friday, the market crashed and, almost immediately, there were breadlines. Not so. In the Great Depression, as in any depression, the market collapsed in stages. The market did not reach its bottom of 89% losses until July of 1932. 

Along the way, some 400,000 banks and lending institutions went belly-up. Thirteen million jobs disappeared.

And of course, the political leaders of the day did their bit. They implemented knee-jerk “solutions” that actually worsened the situation. Restrictive tariffs, gold confiscation and a more dominant government were employed, just as they will be this time around.

So, as the market tumbled, we would imagine that Babson came to be praised by Wall Street for his insight, but in fact, the opposite occurred. Having accused him of being utterly incorrect in September, they later accused him of having caused the depression.

So, was Babson’s prediction a lucky guess? Did he simply observe the bull market and arbitrarily predict the opposite of the trend of the day to see what would happen? Not at all.

Such predictions are not guesswork, nor are they attributable to a vision seen in some crystal ball. Such crashes are entirely predictable. When any major bull market becomes oversold; when too many investors begin buying on margin because they can’t come up with the purchase price for stocks; when they then become even more obsessive and borrow money to buy on margin, the market has become a house of cards, waiting for the slightest breeze to come along.

So, what do we take away from this? First, we can be certain that, as the present-day house of cards begins to shake, there will be no warnings from Wall Street. In fact, quite the opposite. Their bread gets buttered by buyers. They will be adamant (and even, in many cases, truly believe) that the sky is the limit and investors should buy, buy, buy, as there are fortunes to be made by doing so. And investors, watching the rise, will fall all over each other, just as in 1929, buying with both hands.

This time around, the crash and its by-products will be more extreme than in 1929, as the bubble itself is more extreme. And Wall Street can count on television and a media that has a vested interest in keeping the charade going as long as possible. It will also be more extreme, as the governments of much of the world are now broke and can only worsen their respective economies through the customary “solutions” that governments always employ – tariffs, confiscations, greater government control, etc. 

Finally, the aftermath will be more extreme, as, unlike in 1929, when most people actually believed in the government, this time around, there will be dramatic unrest. 

Just as in 1929, those who are declaring the “The Emperor has no clothes” are few in number, and their viewpoint is most certainly not put forth in the conventional media. For this reason, it’s understandable that the great majority of people invariably ignore the Babsons of the world as Chicken Littles and blithely charge toward the cliff like lemmings.

Those who do think independently and become convinced that history is repeating itself, are focusing their attention on finding a way out of being a casualty in the train wreck that’s coming. This is difficult to do, as, invariably, the closer the event becomes, the more difficult it is to swim against the tide. For this reason, even many who conclude that the end is near often fail to act to save themselves and their families.

Internationalisation is both time-consuming and costly. Additionally, it’s lonely, as it’s considered foolish and unnecessary by more than 99% of the population.

The great temptation is to decide, “Maybe it won’t be so bad. Maybe I can live with it.” And, in fact, for most people, this will be the prevailing view – that, although their personal situation will be diminished in many ways, the crashes will be tolerable. 

The question is whether we wish to make the pre-emptive effort to create a life that is far better than tolerable, and possibly even improved, whist the opportunity for doing so still exists.

[http://www.newswise.com/articles/the-man-who-predicted-the-crash-of-29

http://www.theguardian.com/business/2008/oct/04/useconomy

Investor’s Digest 29th August – Investing 101]