Weekend October 13 2012
This is something different. I have gone into some detail to provide those of you who did not live or invest during 1973-74 a bit of historic perspective. Let me know if you find this interesting. Would more historic perspective like this be of interest? I have not gone into the detail of the actual broker school. That actually would provide a lot of insight as to how brokerage firms positioned themselves and how they thought about, as the saying went, The Business.
Dow Industrials 1972-1975 an Historic Perspective
I completed my MBA at the University of Texas at Austin in August 1972. I quit my secure job at the City of Austin, having learned a great deal in two years as an internal auditor and then a budget analyst. Oddly no one at the City urged me to stay though I was in good graces as far as I could tell. But then business rarely values intellectual capital. Yes friends, Ross Perot, back than a Bill Gates and Warren Buffet billionaire rolled into one person, brash self assured and filthy stinking rich was going to show Wall Street how it was done, And I was hired into Broker Group 72-2. Then one had to be in training for six months before being unleashed on the public. All other firms had you as the office go-fer making coffee and running errands, perhaps helping the guy in the wire room send orders. A three week stint in New York would visit the Stock Exchange and feature a crash course in passing the required Series Seven exam.
Ross of course was not doing it that way. As he proclaimed on the Today Show, live and in person no less, we wold see who was better, himself or the Merril Lynch HR department. (Okay so right here the story loses impact as we know how that prediction turned out....but how was I to know then?)
I drove from Houston to Los Angeles, cruising right into the correct apartment complex thanks for extensively mapping the trip. Some 42 of us began a six month training program; 25 would complete the program. it was rather like Officer Candidate School or so those that had been in the military said, and there were plenty of them in the program. We did sales technique half the day and stock and commodity markets the other half. Well to be correct we heard from individuals in banking, brokerage, bonds, etc but never studied the history or patterns of stock market prices, something this blog does with every post.
EDS was running the back office, Ross Perot was at the helm, we would be the best rained broker group in history, Nixon had carried all but two states in the election, he and Kissinger would win the War in Viet Nam, the Dow was back at 1,000, I had won both awards that the UT Finance Dept bestowed at my BBA graduation, both the Wall Street Journal Award and the Finance Faculty Award along with membership in three honorary academic fraternities. (The latter is not indicative of understanding and knowledge, just good grades, as I would soon learn, my real world education lay just ahead). I mention this not to brag on my college accomplishment but to put both my and Ross's level of confidence at the time in perspective). I mean what could go wrong?
The answer to that question is in the graph above. Nixon would become entangled in Watergate, as he put it , a third rate burglary. Congress had no more stomach for the Viet Nam War. Inflation continued out of control. Then as in the 1930s and 2008, Real Estate Investments went south, big time. duPont Glore Forgan was in violation of the then mandatory 10% capital rule. Ross managed to persuade the SEC to 'extend' the June 30 deadline into July of 1973 as he grabbed Walston and Company to rescue the firm. All that did was hasten the demise of both firms. As I have previously noted those two years saw the merger of many old line firms. Merrill gobbled White Weld and finally entered the investment banking business. Even venerable Loeb Rhoades was acquired by Shearson, a mere upstart wire house taking an investment bank, the horror of it all.
In December of 1973 duPont did 3% of all the business on the Exchange one day, and still was losing money. The end came months later. duPont had run through the money put up by Exchange members to keep it afloat. The better brokers had left, leaving those unable to move elsewhere and a few rookies like myself in some 100 offices scattered across America. The overhead was incredible. We occupied a ground floor corner office at Two Shell Plaza in downtown Houston. I moved to Paine Weber. Two weeks later duPont was liquidated, the offices were assigned piece meal to other firms.
Nixon fired those assigned to investigate him, the liberal press loathed him and ran negative articles non-stop on Watergate. He finally resigned after Howard Baker and Goldwater told him it was that or face impeachment. There was never a crash, the Dow just sunk on low volume. It had fallen from over 1,000 in January 1973 to 577 by December 1974. Godfather II and The Exorcist, both negative themed movies, were box office smashes, that was the social mood of the time.
Whew, I hope readers found that interesting. We do not lack for similar analogies 40 years later.
- The country is viciously split politically.
- The country's finances are literally in peril with $16 Trillion in debt.
- The Dow has returned to all time highs.
- Viet Nam and the Embassy takeover 1978 have their parallels in Iraq, Afghanistan and now with the deaths in Libya.
- Stagflation the combination of inflation and the unemployment rate were big news then. Now we have 47 million on food stamps and the slowest 'recovery' on record. Millions have given up looking for work, or work multiple part time jobs. I suspect we have many now in the underground economy juggling various welfare programs with cash only part time jobs.
- Today we borrow 40 cents of every dollar the Federal Government spends. States and cities are on the ropes in many places just as New York City was in 1975. The realtity that entire states are now on the ropes or soon will be heightens the disAster potential just that muchmore.
- Three or four states may determine the election for all of us effectively disfranchising a majority of voters from having a say in what happens.
In the graph above note the bump up in the Dow after the November 1972 election. The same thing could happen now if Romney wins, or I suppose if Obama wins to the extent that uncertainty is out of the way. But the bigger picutre is one of the Fiscal Cliff no matter who wins.
We break down the markets in the prior post, The Fiscal Cliff.
Dennis- what did gold and other commodities do in the 70's?
Posted by: neil master | October 14, 2012 at 10:53 AM
Neal
Bob Prechter's group prefers the 1930s as a parallel to now as it was a period of deflation. The 1970s were a period of big inflation with Gerald Ford sporting a WIN button for Whip Inflation Now, which of course he never did, Volcker did that.
The price of gold and oil and silver skyrocketed but as always at the end of the era. Oil did not get to double digits until the second embargo in 1979. Then in 18 months it was 36. Silver did not trade over $25 until the Hunts tried to corner the market and then it shot to $50, the top in fold and silver was quite short lasting only two weeks before it collapsed back.
I believe the 1970s are a valid comparison to now in that we have hugely inflated real estate prices given the low interest rates. In the 1970s interest rates were the opposite, quite high. And in all three eras we had huge swings in stock prices.
As a further parallel the presidential race is very much like Reagan and Carter. Carter was floundering as obama is, the embassy kidnappings are like the murders now, Reagan had been running for president for years just as Romney has as well. Gasoline prices were high then and now.
Posted by: Dennis Elam | October 14, 2012 at 12:58 PM
To answer your question in the article, yes, particularly as a new investor, historical perspective, especially personal notes from someone experienced and of your level of quality analysis is very much of interest to me.
In terms of parallels, I will first note that no two periods in history are exactly the same, so why can't we have aspects of both those periods today? While you know far more than me about the political parallels, I have to agree with Prechter that the wave count is much more like the Great Depression as the 1970s was mid-pattern whereas we have now completed 5 up and are rolling over, as in the 1920-1930 era.
Posted by: Trader Kid | October 14, 2012 at 05:40 PM
I would agree that we have aspects of both periods. This one is not all deflationary as Bob says, the huge rallies in prices of art, cars both new and collectible, and real estate are different from the 1930s.
and we are rolling over now just as the markets did in 1973.
Posted by: Dennis Elam | October 15, 2012 at 07:41 AM
While it is true that there is not much "deflation" yet, the potential for it is quite high I believe. Though what ultimately results will depend greatly on central bank policy both directly as well as indirectly via politics, not the least of which is who is put in as chairman if/when parties and presidents change, and whether the social mood "permits" continued printing.
I am not familiar with the particulars of art, cars, etc., but I must respectfully disagree that the markets are rolling over in a manner similar to 1973. I know that you do not claim Elliott Wave expertise, but since you follow Prechter, I am assuming you are familiar with his labeling of the 70s? Do you disagree with his assertion that this is a massive topping process, rather than a sideways bear market, implying the next move will be completely different from the 70s, even though they are superficially similar looking on the chart?
Or maybe we need to ensure we are not just talking at cross purposes: It is my assumption that by comparing to the 70s rather than the 30s, you are expecting a correction of maybe 30-50%, then a resumption of a very long term bull market? My opinion is that a Great Depression like 80-90+% drop is more likely, subject to what is "allowed" by the central bank as noted above. Or is your comparison more to do with how you think it will play out, rather than the magnitude of the correction?
Posted by: Trader Kid | October 15, 2012 at 01:57 PM