From time to time, I will post reviews of books that I read as part of my ongoing professional development if I find them applicable to financial planning or investing. The book up for review today, A History of the United States in Five Crashes, illustrates significant stock market panics of the 20th century and the 21st century up to this point. The author, Scott Nations, helps provide context for each event and how they each related to each other, describing the cycle of boom and bust in a detailed yet rapid cadence. This book should be on the wish list for anyone, especially investors, interested in the history of financial markets and how they have changed over time.
As U.S. and world financial markets continue to increase in value nearly nine years after the 2009 lows, the predictions of an impending crash grow louder. Last year Scott Nations released A History of the United States in Five Crashes in an attempt to chronicle the most traumatizing events in U.S. stock market history. While providing a rendition of the well-studied events of 1929 and 2008, he also goes into great detail about the panics in 1907, 1987, and 2010. The latter three events are much lesser known outside of the investing community.
While a quick read, the book can sometimes become monotonous with constant recitations of stock prices and index values as they changed day-to-day, hour-to-hour, and occasionally second-to-second in the case of 2010’s “flash crash.” I most appreciated the context provided for each major event. We learn, for example, that “Black Tuesday” of October 29, 1929, was not a single day crash that kicked off the great depression as we learned in history class. Instead, it was the culmination of a decline in prices that began nearly two months earlier after stocks reached their all-time highs. In fact, October 28th was a day of more significant losses. We see this again in the details of the crash of October 19th, 1987.
The author makes a point to highlight regulatory structures and economic conditions surrounding each event, which also feed his conclusions in the epilogue. Some readers may notice that the technology bubble and resulting bear market are left out of this book. Though I cannot speak for the author, I imagine that excluded that event because stock markets functioned normally in that period. There was no panic or lack of liquidity. Simply, technology stocks lost value as investors realized that many companies had infeasible business models. The recession following 9/11 caused a large drop in stock prices, too.
While the author provides an excellent summary of his conclusions after researching these events in great detail, I want to highlight a few takeaways as well. First, regulation is always a step behind. While non-existent in the panic of 1907 with only slightly more regulation in 1929, the other three crashes all existed with a significant regulatory framework in place. I don’t write this conclusion as a criticism, but more to investors to remember that regulation still does not replace the need for one’s due diligence.
The second lesson is that liquidity dries up in stock market panics, even in today’s era of massive volume and electronic trading. Lack of liquidity exacerbates the panic even more once participants realize they can’t get their money back. (As an aside, we have seen this several times on cryptocurrency exchanges recently, which are unregulated, causing significant rallies and crashes in prices). In many cases, the panic caused by frozen markets causes prices of stocks and other assets to fall well below realistic values, creating real opportunities for investors willing to overcome their fear.
To withstand these panics, investors must shore up their underlying financial position by minimizing personal debts and having a healthy emergency fund. Remember, many job layoffs occur during weak economic conditions which often coincide with a bear market in stocks. To generate real long-term wealth, we must avoid situations that force us to sell our investments at bad times.
In his epilogue, the author concisely summarized the common threads between each of the panics: “a robust stock market rally that pushes stock prices beyond reason, a financial vehicle that will foster selling at the worst possible time, a catalyst that will start the selling.” Given that U.S. stocks are making nearly continuous record highs at the time of this writing, could we be on the precipice of another panic? Some will say yes; others will say no. Beyond stock prices, though, what financial vehicle would cause a panic? What would the catalyst be? Only time will tell.
Command & Signal
A History of the United States in Five Crashes appeals to readers who appreciate new approaches to understanding historical events and readers who have interest in investing. The book illuminates the characters and events that contributed to the various panics and, in some cases, those that staved off disaster. We also gain an understanding of the inner workings of financial markets, especially in the connected world of today. Most importantly, the lessons offered by the author can help investors better understand the context of future events and avoid damaging short-term decisions.
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