Investors seem to be the last to know that the economy is a disaster. It is true that the downturn in the stock markets can trigger negative reactions in the economy, but those reactions are an acknowledgment of existing problems, such as low wages, overextended on loans, etc. In every case of an economic downturn, the stock market was a symptom of the larger economic failures and not the cause of the downturn.
Post-Great Depression Life
Investor Greed-Based Denial
Investors are notorious for lying to themselves. The primary motivation of an investor is to make more money and that motivation compromises his ability to make informed judgments. Most investors and the computer-based programs they use are focused on what the crowd is doing. Investors review and respond to company and industry issues, but even if the facts indicate a problem that might threaten the future of the stock value, most investors will follow the actions of the rest of the market over any contrary information.
Stock Market: It’s About Buying Stupid
Stock markets are ruled by buyers. If most investors want to buy a stock the value goes up. If most investors don’t want to buy the stock the value goes down. Individual stock values are driven by buyers.
However, when investors realize that major economic factors and/or significant world events will have a negative impact on all stock values, the markets collapse. A market crash occurs when sellers of stocks can’t find any buyers at any price. That is why some market collapses have been stalled by a major investor buying up stock to prop up the values of the larger market.
Economic Factors of the Great Depression
The major underlying economic causes of the Great Depression were low wages, weak consumer buying, high consumer debt, and depressed agricultural prices. Despite these warning signs investors continued to speculate on higher and higher stock values. They figuratively ran off the cliff unaware that there was no ground underneath them.
The Dow Jones Industrials 1929 Crash
The irony is that investors had multiple warnings before the big crash on 29 October 1929. In March and May of that year, the stock markets experienced mini-crashes that were warned of economic dysfunction; however, by June investors were back to rampant speculation. By September the stock markets began to stumble leading to Black Thursday (24 October) and Black Monday (28 October) and finally Black Tuesday (29 October.) After that, no one held any delusions of the state of the economy.
Market Crash Indicators: Rapid Advances, Wild Speculation
It is consistent that rapid growth and high exchange volumes in the stock markets are the best predictors of an impending crash. As the key indicators warn of economic downturn investors seem to move into a frenzied state of buying and selling. This behavior suggests that investors are aware of the coming downturn and are attempting to pass around stock as fast as possible to make money at a high value, but then selling off the stock before its value collapses.
2017 DJIA indicates a frenzied feeding event
2018 Looks Familiar
The economic situation of 2018 has many similarities to the 1929 pre-Depression environment. Wages have been stagnant for decades. Consumer debt is high and consumer savings is low. Multiple economic factors such as housing prices are out of touch with reality.
The scariest indicator predicting a downturn is the frenzied volume of shares being bought and sold. It indicates that investors are attempting to play ‘hot potato’ stocks in an attempt to harvest their value while the market is going up, but sell the stock quickly to avoid being caught before the stock market crashes. The current markets have no confidence in the future of our economy and that is more revealing than anything investors actually say in public.
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