Realty Bites

Q: Does your home price hype cycle theory apply to the stock market?

A: We’ll find out next week.

There was, in fact, a headline on the front page of The New York Times on Sunday, October 12: Those with a Sense of History May Find It’s Time to Invest. To my way of thinking, this is the rough equivalent of The Worst is Over. As you know from my previous post, when The New York Times reports the worst is over, the worst is just beginning. It is entirely possible that the stock market continues to drop sharply next week.

Consider another unattributed article from the Times on the same day. This one was quite clever, comparing today’s news to actual quotes from 1929, just moments before the stock market crash. Here are some excerpts from the piece:

From a “Wall Street Analysis” by Thomas C. Shotwell in “The World Almanac for 1929″:

The market is following natural laws of economics and there is no reason why both prosperity and the market should not continue for years at this high level or even higher.

Irving Fisher, professor of economics at Yale University, in The New York Times, Sept. 6, 1929. He ended up losing much of his wealth in the crash:

There may be a recession in stock prices, but not anything in the nature of a crash.

J.L. Julian, a partner in the financial firm Fenner & Beane, in The New York Times, Oct. 26, 1929:

The worst is over. The selling yesterday was panicky brought on by hysteria. General conditions are good. Our inquiries assure us that throughout the country business is sound.

President Herbert Hoover on Dec. 3, 1929, in a speech before a joint session of Congress:

I am convinced . . . we have re-established confidence. Wages should remain stable. A very large degree of industrial unemployment and suffering which would otherwise have occurred has been prevented.

Treasury Secretary Andrew W. Mellon, Dec. 31, 1929, in a statement issued while he was yachting off Nassau, the Bahamas, on his winter vacation:

I see nothing . . . in the present situation that is either menacing or warrants pessimism. During the winter months there may be some slackness or unemployment but hardly more than at this season each year. I have every confidence that there will be a revival of activity in the spring, and that during the coming year the country will make steady progress.

Sound familiar? Over the next four years, the stock market lost 90% of its value and launched the Great Depression. It took 25 years for the market to recover from the events that began in October of 1929. I wouldn’t invest your child’s college tuition in the markets right now if I were you.

All of this may seem frightening, but don’t worry. There is a limit to how low the stock market can go. That limit is zero.