MarketInsight | Life is mostly froth and bubble
There is this story, and it is probably made up, but it is a good story. The story goes that JP Morgan got his shoes shined every Wednesday at the same stand. One day, Morgan overheard the shoeshine boy, who had been polishing Morgan’s expensive shoes for years, giving stock tips to a fishmonger. Morgan ran back to his office and sold every stock that he owned, reasoning that “If the shoeshine boys are buying stocks, who else is left?”
The following Monday, the stock market crashed, beginning a multi-year decline that would wipe out fortunes and lead to the Great Depression. Whether or not the Morgan story is true, it is true that it is a story, and one that has been oft repeated to illustrate a belief that small investors enter the market late in the game. One of the reasons the Morgan story seems unlikely is that as the crash began, Morgan and four other major bankers bought stock in an effort to prop things up. Morgan’s father had done the same thing during the October Panic of 1907.
The JP Morgan in the story is the son of the JP Morgan who became famous for creating trusts like General Electric, AT&T, and US Steel. Morgan realized that by creating a monopoly, you could charge whatever you liked and make more profits. Morgan created a lot of trusts. The public noticed and so did Teddy Roosevelt, who would go down in history as the “Trust Buster.” Roosevelt activated a long dormant law called the Sherman Antitrust Act. Passed in 1890, the Sherman Act was named for its sponsor, Senator John Sherman, brother of William Tecumseh Sherman, who ravaged Georgia during the Civil War.
The first suit brought by Roosevelt as a “Trust Buster” was launched against a Morgan-owned railroad monopoly. JP went to visit the president and said, “If we have done anything wrong, send your man to my man and they can fix it up.” The President did not want to fix it up. Roosevelt sued his fellow socialite; the government won. The case went to the Supreme Court and is remembered today for an Oliver Wendell Holmes dissent that “great cases…make bad law.”
The stock market crash of 1929 was precipitated by massive speculation in stocks. The Panic of 1907 by manipulation of the copper market. Today, we see many of the same signs. From crypto currencies to silver to GameStop, speculation is again rampant. Daily, friends on social media dispense market advice to each other.
This is what a bubble feels like. The sad part is that knowing we are in a bubble may be information that is difficult to use. Bubbles have a tendency of lasting longer than anyone imagines. During the dot.com bubble of the late ‘90s, professional investors began to warn the market was bubbling as early as 1997. That bubble did not finally burst until the year 2000, precipitating a devastating three-year market decline. So, when will this bubble burst? When we least expect it.
Scott A. Grant is a local author, historian, columnist, and speaker. He is president of Standfast Asset Management in Ponte Vedra Beach. He welcomes your comments or questions at firstname.lastname@example.org.