May

27

1907 Panic on Wall streetOf course every man with a dollar's interest in the market was broke, tied up or disgusted. The large traders, who made money on the way down, got the big head, over-sold, and were caught on the rallies. The little ones, chronic bulls, had lost stocks, money and nerve somewhere in the avalanche, and The Street was full of wreckage, lost hopes and lame ducks.

Following these ebb-tide conditions, there was a see-saw market wherein stocks swung within a narrow range, "a period of rest and recuperation" which financial physicians assure us is so "beneficial to the market".

But the whip-saw market offered no rest and recuperation to the traders who wanted to get their money back where they dropped it, nor to the bankers who looked wearily up toward Trinity Church, expecting to see its green lawn extended through Wall and Broad streets.

I believed, even after what had happened, stocks were only half way down to where they belonged.  Things had gone on this way till June 1904 […]

Suddenly the bearishness in me got a jar that made it sit up and take notice. The City of New York offered an issue of bonds and they were heavily over subscribed!

Anxious to be away from the ticker in order to think clearly and accurately, the next day, Saturday found me at a little house down the creek. As soon as I could I jumped into a row boat, pulled up stream and finding a quiet nook and pushed her nose into the rush covered bank. […] For an hour I lay in the bottom of the boat staring at the blue sky and thinking hard. Then sitting up and taking pad and pencil I put down without prejudice the following principle factors bearing on the financial situation. […]

On calling the attention of a few of my friends to it they bought some high dividend players, and then gave the figures to the press. The stock[s] rose, the public bought. US Steel selling at 10 having in its long decline from 55 ruined or crippled more people than any other stock in history was now in the hands of people who could hold it. As most brokerage houses insisted upon payment for it in full, there was little held anywhere except by those who owned it outright.

from magazine of wall street, circa 1905. Nothing has changed.

Douglas R. Dimick adds:

Researching 1903, I came across a good read to recommend: “The Big Board, History of the New York Stock Market,” by Robert Sobel.

The velocity of price action and depth of directional mass does not necessarily support 1903 and 2008 comparisons. However, one may ponder two issues apparent then and now. First, upon post-downward movement of the market, a question remains as to whether markets remain overvalued via concentration of economic and political interests at regional and national levels of commerce. Second, the since evolving ruse played on the individual investor; then garnering (veto) power contra the now rumored relegation to proverbial outsiders relative to the economic reality (i.e., big gets bailed and small gets foreclosed) a la the 401k magic show of the derivatives shadow economy – defer tax on one bird in the hand (or retirement savings) so you can be taxed two birds (or currency fueled inflation and federal fiscal debt) beyond poor-and-middle-class-grasp when the economy throws you out into the bushes of unemployment.

At least this time it did not take a whole generation to figure out how “they” stole it…

“Although he appeared more like a court jester than a ruler, Bet-A-Million Gates was one of the leaders of the Street. He went on a European business trip and vacation in 1902, and returned just in time for the 1903 panic.

"I am surprised at the condition of the stock market," he told reporters who met his ship. "It is not natural. The causes are purely artificial, and they rest on a false basis. I do not believe there was ever a better time to invest in reasonable securities. I have come back stripped for the fray, and I am going down into Wall Street."

Gates immediately plunged into the market, forming a syndicate to buy up those shares he felt were underpriced. Nevertheless, the market collapsed in the spring and fell heavily through early summer.

This so-called Rich Man's Panic was over by late August, and J. P. Morgan’s return from his annual European art-collecting expedition helped restore confidence. By October, prices were on the way up.

The Rich Man's Panic was merely a brief interlude in the bull market, but it was of great significance. The upper class, the insiders, suffered in 1903, not the small investors.

Early in the year the latter went on a "buyers' strike," having decided that prices were too high. They sold in the early spring — along with the astute managers of the Standard Oil Empire — while Gates and most professionals bought. It was the first example of the new power of the small investor, a power which would not be fully recognized by the usually sensitive Wall Streeters for another generation.

After 1903 the investment bankers consolidated their positions, destroyed competition, and expanded into new fields. The titans were not power hungry; rather, their expansion was a necessary part of the investment picture of the period. The huge combines formed by Morgan, Schiff and others rested on the market's ability to absorb new securities.

The 1903 panic demonstrated that the small investor could not be relied upon completely, so the bankers turned to new sources of funds, and found them in banks, trust companies, and insurance companies, which were growing rapidly during the early twentieth century. In 1900 total bank assets were $10.79 billion and assets of life insurance companies stood at $1.74 billion. By 1907 these figures had risen to $18.15 billion and $2.93 billion, respectively.

If an investment banker could gain control of a large bank or insurance company, he could sell it his undigested securities and maintain a market for other offerings as well. Thus, the investment bankers took control of the financial and insurance firms during the early years of the century.”

With the repeal of Glass-Steagall and lax regulatory oversight via political dressage, have we not returned to similar times and places of an inverted market history?
 
For quoted text, see http://www.alexanderhamiltoninstitute.org/lp/Hancock/CD-ROMS/GlobalFederation\Wo rld%20Trade%20Federation%20-%2095%20-%20The%20Big%20Board.html.
 


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4 Comments so far

  1. George on May 27, 2010 1:32 pm

    http://www.zerohedge.com/article/hugh-hendry-i-would-recommend-you-panic

  2. Andre Wallin on May 27, 2010 2:05 pm

    I hope us young guys can offer old timers a different perspective. Just kidding, dailyspeculations is my favorite blog on the web and I share mine below.

    Hypothesis I thought of the otherday daydreaming:

    A test of lows or highs is similar to how when you break up with a lover you always go back for a second try to probe to see if you made the right decision. Both parties are usually willing (bulls/bears and man/woman or etc/etc. If test falls short, low/high rejection a new trend is formed or new high/low is formed and trend is resumed. If two partners give it a second try either their relationship moves to new deeper levels of intimacy or they split up and look for new partners.

    of course break out failures and failed failures happen but at least the scenarios can be confined to a limited set of outcomes.

    pure5minbar.blogspot.com

  3. Gary Rogan on May 28, 2010 12:29 am

    But how could this be resolved without decisive government action? Markets recovering on their own, without the Federal Reserve even existing? Impossible!

  4. dave whitesel on May 29, 2010 10:11 am

    Nash Equilibrium describes the present situation. For a review this link suffices. http://en.wikipedia.org/wiki/Nash_equilibrium

    As one who moved to Market systemics years ago as foundational as descriptor of primary trend, one must understand the temporal state as duration within any equalibrium. When a boundary condition applies such as that which exists between disconnect Supply and demand, and the arrival of applied Nash Equalibrium, one must decide for oneself, which function prevails.

    Present day Alternation algorithms, provide little in the way of rational insight, because of the omission of Valuation within the parts of the distiguishable sums.

    Present conditions call for overt rejjjection of Nash equilibrium under the awareness of Prices as artifacts, contain no information about value.

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