Monday Morning Ramblings

21 years ago yesterday the Great Crash occurred - the Dow Jones Industrial Average dropped 22% in one day, culminating a 33% drop in six weeks. Why did that occur ?

1. Stocks were greatly overvalued.
2. The prior weeks had major news events - all bad - dollar dropping, Congress intervening in takeovers, Fed raising rates, Reagan shelled a Persian Gulf Iranian oil rig, and another I can't remember now.
3. A financial innovation - portfolio insurance - was rampant, but not tested.

After the Crash, stocks went up for many moons. On long term charts the uptrend appears to have lasted almost 13 years until 2000.

This crash was spread over a couple of weeks. Stocks were not overvalued. The Fed was somewhat accomodative, having lowered interest rates. Oil prices had been falling. The ultimate crash was triggered by Congress failing to act on the Paulson plan. But financial innovation was there again: hedge funds and credit default swaps. Those two "innovations" have almost no connection to the "real economy" of real buyers, manufacturers, lenders, and borrowers.

Perhaps this Crash was triggered by the oil market bubble of the Spring and Summer bleeding more purchasing power from strained consumers, hence analogies with the 1973-75 bear market are proper. But that was caused by hedge funds, oil swaps and pension fund speculation in commodities.

Well, I suppose the "ultimate" root cause was speculation in residential housing, cheered on by Elmer (aka Alan Greenspan), but hedge funds played an important, unnoticed role there, too, by funding the subordinated classes of those subprime mortgages securities. And credit default swaps, did, too.

Now we all know that "liquidity" is a double-edged sword. Let's just turn the clock on financial innovations back to about 1981 when lenders were lenders, and equity was equity.

Historically, the market makes major bottoms in October more often than not.

China industrial production grew 11% in Q3 despite the Olympics slowdown. China GDP grew 9%.

Actions

Today I hope to buy more stocks with new cash in Krypto Fund, IFF they clear the check. Vanguard seems rather slow in doing this - I might have to call them. I'll be buying the Vanguard Total Market Index Fund probably after the first hour, or I might wait until the usual lunch pullback.

Word of the Day

"Babbit" - noun [$10] a Mencken word.
Babbit means a materialistic, complacent businessman [from George Babbitt, a character in the novel, "Babbitt (1922) by. S. Lewis]. Mencken says the term properly fits those who also blather and preach about "service" cf. Rotary, Kiwanis, etc.
Also - babbitt - short for babbitt metal - 1. any of a group of soft alloys of tin, antimony, copper, and usu. lead used for lining bearings, etc. to diminish friction; 2. a bearing lining made of this.
Sentence: The Babbitts of America might be shocked by a lurch to the left if Obama wins and gains a filibuster-proof Senate to ram socialism into the American system.