Chapter 11

Era of Projected Inflation

  • The stock market is referred to as the "era of projected inflation".

  • Enthusiasm for future profits obscured actual earnings.

  • Transition towards an age focused on substantial earning power, reasonable book value, and dividend returns that align with the cost of carry.

Preparation for Market Activities

  • Various actions aimed at preparing for Monday's market opening:

    • Cleaning up books, the Exchange floor, and fragile public confidence.

    • Optimistic statements from banks, Washington, and wealthy industrial and railroad enterprise heads.

    • Media reported optimism after the storm had supposedly passed.

  • Stuart Chase:

    • Conducted a six-month survey on American prosperity, predicting three more years of prosperity before entering a cyclic tailspin.

Headlines and Broker Sentiments

  • "HUGE BUSINESS IN STOCKS READY FOR MONDAY OPENING" - Sunday New York Times.

  • Doubt among brokers led to various responses:

    • Flood of buying orders, with many hedged and some canceled.

    • Exchange's governing committee decided shortened trading hours for the week.

Market Opening/Initial Activity

  • On market opening day:

    • Continued wave of selling drowned buying.

    • Trading volume reached 6.2 million shares.

    • The Dow lost 15.83 points, closing at 257.68.

  • Rumors about banking group being heavy sellers of stocks purchased during Black Thursday.

Market Trends Post-Election

  • Markets remained closed on election day.

  • Post-election: Heavy selling ensued, with the Dow dropping 25.55 points.

  • A brief rally followed by losses before the market closed for a weekend.

Cascade Effects and Trading Decisions

  • Cascade effect led to ongoing selling pressure:

    • Brokerage houses faced belated margin calls.

    • The market required weeks to stabilize as firms sorted paperwork.

    • The governing committee extended shortened trading sessions.

Period of Losses

  • Continued declines in the market over subsequent days:

    • November 11 saw a three-day slide bringing the Dow down 37.84.

    • Average dropping to 198.69, which had not been seen since February 1928.

    • Wall Street Journal noted a bear market was underway.

Factors Inhibiting Recovery

  • Reports of unprecedented declines in the market exacerbated pessimism.

    • Speculative activities and a bear raid discussed as contributing factors.

    • Calls for disclosures on stock borrowed and loaned, reminiscent of actions taken in 1917.

Influences Leading to Market Recovery

  • Market stabilization coincided with positive developments:

    • Significant purchases by Rockefeller interests to peg Standard Oil stock.

    • Government initiatives for tax reductions, aiding business confidence.

  • Federal Reserve Board cut the rediscount rate from 5% to 4.5%.

  • Companies like Standard Oil and U.S. Steel provided emergency loans.

Economic Conditions and Business Sentiment

  • Brokers' loans decreased significantly post-crash, indicating less speculative behavior.

  • Market gradually transitioned from panic to cautious optimism:

    • Increased activity in the latter part of November reflected a return to common sense in the financial community.

Broader Economic Impacts

  • The crash contributed to a perception of gloom on Wall Street:

    • Killing potential mergers and leading to record borrowings against insurance policies.

    • Investment trusts faced criticism as they had not performed adequately during the crisis.

Psychological Impact

  • Perception of a return to old-fashioned values:

    • Moral manual of conservatism gained respect after the crash.

    • Mixed emotions surfaced around themes of wealth and economic power.

New Era Ideology and Economic Speculation

  • Discussion on the likelihood of market depression following the crash:

    • Discrediting of New Era beliefs that stated the economy could never follow the market down,

    • Emphasis on maintaining mass production reliant on mass demand.

Changes in Public Sentiment

  • Shift from optimism to skepticism regarding the economy:

    • Fear and uncertainty permeated the population.

    • Analysts began to warn against viewing the economy too optimistically amid a declining market.

Hoover's Response to the Economic Crisis

  • Herbert Hoover's proactive stance amid the crisis:

    • His vision emphasized immediate action and restoration of confidence.

    • Hoover initiated business conferences to devise proactive measures to stabilize industries and the economy.

  • Action from Hoover aimed at preventing traditional responses to economic downturns:

    • Focused on avoiding layoffs and promoting expansion.

    • Engage the private sector in financial recovery.

December Market Trends and Predictions

  • In December 1929, market activity characterized by instability:

    • Volume remained low, with predictions of improvement later in 1930.

    • Business leaders showed optimism, brushing off doubts of continued recession.

Economic Outlook for 1930

  • Analysts forecast various scenarios for the economic outcomes of the new year:

    • Optimists believed that the industrial base remained strong, but skeptics highlighted underlying consumer debt.

    • The potential for recovery remained amid previous downturn indicators.