Sobering parallels between the 1920s and 1990s

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July 3, 2010

Column by Matt Montgomery

Matt Montgomery Jacksonville Daily Progress The Jacksonville Daily Progress Sat Jul 03, 2010, 04:07 PM CDT

JACKSONVILLE — Periods of history are like snowflakes – no two are ever exactly alike. However, when you compare the decades of the 1920s and 1990s, and the decades of economic instability that followed them, the parallels are quite sobering.

The Roaring Twenties was a whirlwind decade. Radio was the internet of the day. The Industrial Age was maturing. Everyone was buying stocks. Cab drivers and shoe shine boys were giving stock tips. Investors could buy stocks on margin for ten cents on the dollar and borrow the other 90 cents – highly speculative. Any average Joe could (and did) buy stocks. In just seven years, the stock market, as defined by the S&P 500 Index, went from 6.55 in June 1921 to 31.30 by September 1929 – a 378 percent increase.

But cracks began to show in the economy by late 1927 and no one noticed. They were too busy enjoying the stock market and real estate boom. Two years later, stocks crashed. Contrary to popular belief, the stock market crash of October 1929 did not cause the Great Depression. The economy had already started turning down two years prior. The stock market crash was actually just a symptom, not the actual cause, of the Great Depression. Beginning in October 1929, the stock market went on a vicious 20-year secular bear trend.

Today, I believe we may be living in one of those “history repeats itself” moments. Our 1920s decade was the 1990s. The 1990s was all about wealth, accumulation and consumption. The advice of the day was don’t save, borrow. Don’t pay off your mortgage -- take on as much debt as possible because interest rates are at historical lows. Buy real estate and flip it in the next few months for a guaranteed profit. Don’t save money in the bank, put it in the stock market because it always goes up.

Wrong. Just like 1927, cracks began to show in the economy by late 1998. Again, no one noticed. By early 2000, the stock market had peaked. Here we are in 2010 and the stock market has just begun its eleventh year of a secular bear trend.

While we haven’t yet gone into a 1930s depression, the excesses of the 1990s and 2000s have resulted in several economic instabilities. While we may not experience an actual depression like the 1930s, I do expect a very slow economic recovery that may feel “depression-like” to many people.

But there are some positive similarities between the 1930s and the 2000s. While the 1930s crushed America’s economy, many America rose to the occasion. Great discoveries were still made. Major corporations were born. An entire generation of savers learned how to live within their financial means. Debt was minimal. And despite the unending government interventions of the 1930s (just like today) America overcame and grew stronger.

Fast forward to today. As we began the second decade of the millennium, people are becoming more frugal, taking on less debt, saving more, and learning how to do more with less. Just like the 1930s, we’ve seen innovation and achievements despite two stock market collapses, a real estate bust, and a banking crisis.

While I’m still bearish about Washington, the global economy, and the secular bear market trend we’re in, I still believe America will achieve. We are going to see innovation in the next few years like we’ve never seen before.

Unfortunately, this innovation will have to happen during a slow, uneven, and disorderly economy for a while. But that’s what makes America the greatest country in the world to live in --- our ability to adapt, innovate, invent, and overcome during tough economic times.

Securities offered through Royal Alliance Associates, Inc. Member FINRA / SIPC. Advisory services offered through Matt Montgomery, a Registered Investment Advisor, 1504 East Rusk, Jacksonville, Texas, 903-586-3494.

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Sobering parallels between the 1920s and 1990s

Column by Matt Montgomery

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