The conditions that led to the October market crashes of 1929 and 1987 simply aren't there today. But that doesn't mean a wipeout couldn't happen again.
In a few days, we will commemorate the 80th anniversary of the most searing event in the financial history of the United States: the great crash of October 1929. Many observers will contend the four-day collapse in share prices, which sparked the Great Depression like a match in a can of gasoline, could never happen again due to improvements in information flow and technology. Others will say it may recur any day now.
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So why not now?
Market crashes occur in the wake of extreme informational disequilibriums, which is a fancy way of saying big surprises. If a lot of people are expecting a crash, ipso facto it can't happen.
Though it may seem as if major surprises happen all the time, that's not exactly true for modern securities markets. Thanks to 24/7 news broadcasting, social networking, international commodity exchanges, central bankers' powwows and Group of 20 meetings, so much is known about business conditions, trade flows, interest rates and government policies today that price discovery -- the heart and soul of smoothly functioning markets -- occurs around the clock. More from MSN Money5 steps to losing your moneyWhy saving is for suckersGlobal money thaw becomes a torrentGet ready to party like it's 1991Will Dow return to 14,000? Bet on itNothing in common with '29 Today is quite unlike 1929 or even 1987, when government and corporate information was bottled up in each country and company, and dispensed thinly. The more information seeps out and oozes into the public for investors' rumination and consumption, the less likely surprises will occur.
In the 1920s, you see, corporate-disclosure rules were limited to a short list of balance-sheet line items. Today, rules set forth in seven decades of securities legislation, ranging from the Securities Act of 1933 to the Sarbanes-Oxley Act of 2002, have stampeded companies into issuing a news release practically every time their chief executives catch colds.
Video: We dodged a second Great Depression
Pre-announcements of earnings, same-store sales reports, presentations at investor conferences, detailed Securities and Exchange Commission filings, executives' TV appearances, Twitter messages and blog posts all serve to release billions of data points and nuances into the infosphere for alert investors' eyes and ears. There's surprisingly little chance for highly engaged market participants to be blindsided.
Moreover, virtually every major crash of the past century has started in October when a) stock markets were within inches of their all-time highs, b) public bullishness was at a peak, c) borrowing to buy stocks was at a peak and yet d) a smaller number of stocks was climbing. Three examples:
Continued: No new crash in the cards -- yet
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Markman is telling us "the trend is our friend -- until it isn't." I think the Dow is way ahead of the economy and faces up to a 20% correction sooner rather than later because GDP forecasts will have to be shaded as early as 1Q 2010.
The basis for a larger leg down by 2012 will be the Fed's empty toolbox when it comes to paying back our foreign debt. Barron's demand (this week's issue) to raise the Fed rate to 2% now might be the last gasp before the dollar is devalued.
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