Special Report by Jim Shepherd

1929 Stock Market Crash
The Great Depression

"There are so many eerie similarities these days to the era of the Great Depression that we must not ignore them".
Jim Shepherd in a Newsletter to subscribers (see complete comment at the end of this article).

The Great Depression was the worst economic slump ever in U.S. history, and one that spread to virtually the entire industrialized world. The depression began following the crash of 1929 and lasted for about a decade. Many factors played a role in bringing about the depression; however one of the main causes was the extensive stock market speculation that took place during the latter part of the 1920's. As we examine some of the causes and ramifications of the Great Depression we must never assume it could not happen again.

At the depth of the depression, the economy came to a virtual stand still. Workers couldn't find employment because employers wouldn't hire them to work; firms wouldn't hire workers because there were no markets for produced goods; and there was no market for goods because workers were unemployed and had no money to spend. Seventy five percent of the US population spent their entire yearly incomes on food, shelter and some clothing. Many sifted through slag heaps to find bits of coal to heat their homes.

What had started as a slow rolling problem quickly snowballed into an economic calamity. Retailers were suddenly forced to cut back plans for further purchases of goods. Factories that manufactured those goods cut back production and those that were out of work, or who feared being out of work, cut back on their purchases.

This forced retailers and manufacturers to reduce prices in an attempt to sell their goods. Prices began falling at ten percent per year and this caused consumers, retailers, manufacturers and investors to rethink their plans for purchases or new investments. It became a popular belief that if prices were falling at 10% per year, any new purchases or investments should be delayed until next year when prices were lower.

The run up to the crash.

The 1920s saw a stock market boom in the US that came as the result of general optimism by businessmen and economists who believed that the newly created Federal Reserve would stabilize the economy and the pace of technological progress guaranteed rapidly rising living standards and ever expanding markets. The "roaring twenties" was an era when the country prospered tremendously even though there was an oversupply of goods that were not considered necessities by many. Since the majority of the population did not have enough money to purchase these goods, the solution to this problem lay in one that would allow those who wanted these goods, to purchase them on credit. The concept of buying now and paying later was quickly adopted and by 1929, 60% of all cars and 80% of all radios were bought on installment credit. By 1929, 80% of Americans had no savings at all. Between 1925 and 1929 the total amount of outstanding installment credit increased from $1.38 billion to over $3 billion. This rapid expansion of credit resulted in a stock market bubble in the U.S. that hadn't been experienced for decades and was not to be repeated until the late 1990s. The current level of debt is relatively much higher and this has ominous implications for the near future.

Stock prices reached levels that were so grossly overvalued that it made no sense to buy except for the reason that investors hoped to sell later at a higher price. RCA Corporation's stock price leapt from \$85 to \$420 during 1928, even though it had never paid a single dividend. Many investors became conditioned to think that stock prices would continue going up because they had always gone up before. The Federal Reserve became concerned that a "bubble" in stock prices was indeed being created and started raising interest rates in 1928 and 1929. Stock prices at  the end of 1999 exceeded the valuation levels reached in 1929 prior to the crash. 

Stock Market Crash of 1929

Industrials Average (Theoretical) (Symbol: __DWI_XD)
Graph courtesy of Global Financial Data Inc.

The stock market crashed on Black Tuesday, October 29, 1929. American common stocks lost almost 13% of their value that day, which was relatively small when compared to a one-day drop of around 22.5% in 1987. However by the completion of the collapse of the Dow Jones Industrial Average it had fallen from 381 to 257, losing one third of its value before investors rushed back in and started buying again at, what they thought were, bargain basement prices. The buying drove the index up to almost 300 before it started falling again. The Dow reached its final low in 1932 after losing almost 90% of its original value to around 40 on the DJIA. In relative terms in today's market, this would mean a NASDAQ of around 500.  After reaching its ultimate low in 1932 the DJIA did not regain its original level of 381 again until 1954

Banking Crisis

The stock market bubble and the highly leveraged purchases made during the roaring twenties had left a banking system with massive loans on its books. Corporations suddenly found that revenues were dropping and expenses were rising. The combination of rapidly rising unemployment, a poor savings rate, and a stalled economy put enormous pressure on the banking system. The banks began declining loans to individual and corporations that needed credit in order to survive. They started demanding payment of outstanding loans, many of which couldn't be repaid. The combination of the demands by the banks and rising interest rates only made the situation for the economy worse. Dis-inflation soon turned into deflation. During The Great Depression, deflation reached levels that had never been experienced before and at the depths, prices had fallen by 50%. This left the banks with loans that were collateralized by assets of insufficient value to repay the loans. Depositors soon realized that many banks did not have recourse to enough collateral to recover loan principals and started withdrawing deposits allowing the banks to collapse. Prices fell farther, causing more deflation; and more deflation caused asset prices to fall even farther making the banking system even more insolvent. We are now seeing signs of a burgeoning deflation that could be devastating considering the record level of debt now in existence. There are billions in shaky loans ripe for default.


What we have come to call The Great Depression had lasted through the decade of the 1930's. It was only after the insolvent corporations disappeared and the bankruptcy process was allowed to cleanse an insolvent system that a recovery in the economy finally took hold. Confidence slowly crept back, consumers started to buy again, the unemployment rate started to fall and consumers again approached bankers who were willing to lend once again. Optimism returned and a recovery was underway. In today's market it will take a "wash out" of the previous excesses to lay the foundation for a new recovery in stocks.

Looking Ahead

Most investors were caught and were wiped out in the 1929 crash because they had no way of knowing what was coming. Then, 50 years later, James A. Shepherd, a young inquiring entrepreneur searched through volumes of old financial records until he found the answers and created a Model that was designed to predict major changes of direction in the US stock markets. It duplicated every major change in direction over the previous 100 years. Then it successfully identified the approaching 1987 collapse a few weeks before it occurred, allowing Shepherd and his clients to prepare for and to profit handsomely from the second stock market crash of the century. Following the crash, Shepherd's Model gave the all clear signal approximately six months later, signaling the resumption of the longest running bull market in history.

From The Shepherd Investment Strategist Newsletter:

Will History Repeat?

There are so many eerie similarities these days to the era of the Great Depression that we must not ignore them. I wish to make it very clear that I am not yet predicting such an outcome - only that it is a possibility that we must be on the alert for. If we continue to see a progression toward an even stronger deflation, it could be signaling an even greater likelihood that a return to "the dirty 30's" is possible. Consider some of the other similarities:

  1. We have had an unprecedented investment bubble that was created by debt that has burst.

  2. It is becoming apparent that a lot of what was happening in the investment business was unethical and illegal, just as was discovered after the crash of 1929.

  3. The first shot in what could be a trade war has just been fired by the U.S. by way of steel import tariffs, and you will recall that it was a trade war that exacerbated the downturn in the 1930's.

  4. Personal, corporate and government debt is now at record levels.

  5. Commodity prices are tumbling.

  6. There is a generalized drought in the agricultural belt.

  7. The entire world is simultaneously in an economic decline.

  8. Many countries are in or near default with respect to foreign loans (it was a banking crisis that began in England that really sparked the beginning of the stock collapse of 1929).

There are other similarities as well, but surely all of these cannot be disregarded out of hand. We will continue to monitor all of these things and be ready to act accordingly. Remember, there is nothing to be afraid of as long as we know what is about to happen. As I always say, even if a deflationary depression does develop, those of us that correctly anticipate it can make fortunes not only as it is emerging but also after it ends as we snap up assets at bargain basement prices. There has never been a situation since the 1929 era, when conditions have been in place for a calamitous downturn in the economy as exists today.

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