Weekend Sept 9 2012
It was 1972. I had completed my MBA that August as well as two years with the CIty of Austin. That's another story of a missed opportunity but it will wait for another time. I was restless to put some of this great potential UT Austin Assured me that I possessed to work. And so I heard that Ross Perot was taking over a major brokerage firm. Back then computer tech was such that the Street was unable to cope with even a ten million share day. In fact trading hours were shortened at least two days a week to curb volume in the hopes the Street could catch up on its paperwork and DKs -Don't Know the other side of the transaction.
Perot's firm EDS had been brought in to straighten out the back office at duPont Glore Forgan, formerly F I duPont, a play toy of the Delaware duPonts. duPont was sent packing as the Nixon administration was concerned a major firm might collapse on their watch. In retrospect that's hilarious considering what did happen to Dick Nixon but...a collection was taken among the Wall Street firms and $100 M was injected to keep duPont afloat.
Now let me take you back to the Fall of 1973. Back then
Ross Perot was the brash billionaire that had taken EDS public at a 191 P/E ratio, holding back 85% of the stock for himself. He had captured national attention by making a public issue of delivering Christmans presents to our POWs in North Viet Nam. No one had heard of Warren Buffet who was just then forming Berkishire Hathaway. John Templeton could be seen on Wall Street Week but who watched? The US claimed to have reached the moon in 1969, there was no such thing as a personal computer. the Canadian financial newspaper was printed just once or twice a week. There was no CNBC or FNN or Bloomberg or cable tv stations for that matter. Information or quotations was the closely guarded ward of Wall Street, you had to be at a brokerage office to know what was going on. Perot decided as per usual, that Wall Street had it all wrong. He would stage the most expensive training program ever. We would spend six months in Los Angeles, as far from NYC as possible. Did I mention that commission rates were fixed, and high, and there was no such thing as a discount broker.
Back then one had to be employed for six months before the firm could unleash the broker on the public. The usual routine was for a newbie to help in the 'wire room' run errands and such, and spend a few weeks in New York visiting the Exchange and undergoing a cram course to pass the Series Seven Exam.
Not at duPont. No, Ross would interview each trainee personally, flying us to Dallas, TX from around the country. With 100 some odd offices scattered across the USA, that in itself was an expensive proposition.
Nixon had just been re elected in a landslide over McGovern who only took two states. He and Kissinger had a 'plan' to solve the Viet Nam impasse.
The Dow Jones had just vaulted past 1,000 to regain its 1966 high. I mean what could go wrong?
Well, as it turned out, just about everything.
Nassim Taleb has become famous with his fooled by randomness mantra of the Black Swan. As it turned out Ross and the rest of us were attacked by an entire gaggle of Black Swans, a veritable D Day Invasion of them. And they would not relent for two years taking the Dow down from over 1,000 to a mere 577 by December 1974. Extreme social mood occurs at the very end of a market move. It is simply amazing that the DOW would be a mere 180 points over its 1929 peak some 35 years later but that is what happened. Indeed that era of stagnation rocked along with the Dow still mired at 800 by 7/301982. The Dow jumped 100 points that following month and the bull market was on.
the Reader's Digest Condensed Version went like this
-Nixon was quickly engulfed in the Watergate Scandal
-Congress lost all interest ni supporting the troops in Viet Nam, we would leave the US Embassy clinging to helicopters
-the Arabs began an oil embargo sending gasoline prices over one dollar, unheard of at the time, well, over a dollar when one could find some for sale, gasoline was rationed by odd and even plate license plate numbers on certain days.
-smelling blood in the water the Democrats threatened impeachment, the first such real threat since Andrew Johnson after the Civil War
Socionomics holds that extreme social mood is present at the end of market moves, no kidding, this was an example for the record books. I got thrown out of some of the best offices in Houston trying to make cold calls.
It was clear duPont could not make it by itself. As the market declined the better brokers left, rebelling at Ross's rules for dress and office attendance. The rookies and has beens left could not support the massive overhead of those days. Perot managed to get the SEC to wait to calculate duPont's capital ration until after the end of the quarter, July 3 not June 30 if 1973 yep that's right. All this did was put the employees of both firms aboard the same sinking ship. The firm would close its doors months later with various offices taken over by other firms.
I left for Paine Weber two weeks before that final collapse but was unable to transfer most accounts with me again the paperwork problems were more than the computers could handle at the time.
Now the reason I told you that story....is my sense that we are right there again. The markets approach a high amid world wide economic difficulty and outright war in many places. No doubt
-the student loan crisis will be come a full fledged national disaster just as sub prime mortgages did
-Club Med Europe collapses moving the real productive engine to East Europe and Turkey and Asia, France is already trading at 2009 levels
-speculation in real estate brought on by cheap Bernanke money leads to collapse and deflation
-then horrific inflation eventually follows as a result of all the cheap money flooding the markets, we are seeing that already in this commodity rally.
-North Africa and the mid East achieve true Chaos Stan extremes, as if they were not doing so already with 5,000 dead last month in Syria
I thought this might be a good time to prepare you, all of this will happen no matter who wins the election. One last thing, there never was a market crash then per se, just a long dogged decline, and on low volume. Elmer Kelton's famous novel is titled, The Time it Never Rained. This was
the Time it Never Rallied.
Come to think of it, it is not raining now either