In A Time Of Financial Crisis, Bankers Will Do What Any Cornered Animal Will Do To Survive

The last time America experienced a financial crisis of the magnitude of the present one was in the Great Depression era, for about ten years from 1929. During that volatile time in capital markets, there were six complete bear and bull cycles. As history tends to repeat itself, you might be interested to know what happened to the S&P 500 (^GSPC) over that time.

If you are a glass-half-full kind of person, you will look to the Bull periods of the Great Depression where the gains were as follows: (1) 148 days/+46.8% (2) 98 days/+111.6% (3) 344 days/+113.7% (4) 723 days/+106.9% (5) 223 days/+62.2% (6) 200 days/+29.8%.

On the other hand, the duration and magnitude of the six phases of the Bear period were: (1) 783 days/-83.0% (2) 173 days/-40.6% (3) 401 days/-31.8% (4) 390 days/-49.0% (5) 150 days/-26.2% (6) 916 days/-43.5%.

At the beginning, on 11/13/29, the S&P was at 17.66. At the end, on 10/25/1939, it was 13.21, a loss of -25.2%.

On average, the Bear periods lasted 469 days with a loss of -45.7%, and the Bull periods lasted 289 days with a gain of +78.5%.

The bottom line is that through the 1930’s, while there were six Bull runs averaging +78.5%, most investors lost immense wealth. The major bankers and well-connected industrialists cleaned up.

There is something the common person can do to fight back. I have often stated that because of the Great Reflation that is needed to enable economic recovery from any crisis as bad as the present one or the 1930’s, it’s a good time to own gold and gold shares. In fact, for the ten years covered by the data above, the DJIA (^DJI) dropped -61%, but the price of gold lifted +69% and the share price of America’s largest goldminer, Homestake Mining, soared +485%.

It’s important that we keep a perspective on what’s happening today. History in capital market tends to repeat itself because the same drivers are at work.

Moreover, in a time of financial crisis, bankers will do what any cornered animal will do to survive. They will do whatever it takes, including illegal insider trading, illegal naked shorting, front-running trades, stimulating trades by rumor-mongering, pump and dump, misrepresenting their financial condition, obfuscation of important information, invading government to attack the Treasury, and a host of other no-good tricks of their trade.

It was scandalous that, during the present crisis, the leading bankers were (and still are): (i) acquiring assets without any understanding of the extent of the liabilities behind those assets (ii) supporting their peer group bankers with higher stock ratings (iii) hyping real-estate markets and companies they knew were and are in trouble (iv) turning their clients into the enemy by trading against them, as the hedge funds have seen (v) putting their key people into the most powerful positions in the Treasury Department, while covering up the greatest theft of all time, and (vi) too many other bad practices to list here.

The smell test, not the stress test, needs to be applied today. Market stability will return when the people smell fresh air.

Subscribe by RSS Subscribe by Email