Aspire | Action | Acquire
Aspire | Action | Acquire

Hitting the Wall

At a commemoration to mark two hundred years since the birth of Cornelius Vanderbilt, the late Ed Koch, then Mayor of New York, spoke of the powerful vision of the Gilded Age titans who drove America’s early progress and was noticeably needed again[1]. The exercise of personal authority and corruption that he also charged the early titans, however, may have been wrongly attributed with the exception of a few like Jay Gould, Daniel Drew, and James Fisk.

During the depression of mid-to-late 1890s, it was noted in a separate article, that Andrew Carnegie became incensed as a number of his competitors focused on manufacturing stocks and bonds rather than steel.[2]  One of those mills was Homestead which he would acquire at great expense to his personal reputation. Twenty years earlier, rail had attracted investors’ cash, underwritten by banks, at the expense of textile mills; inciting the ‘Long Depression’ of almost five-and-a-half years. Particular to both the stock market crashes of 1873 and 1893 was over-speculation in the railroads.

The flight of financial capital to rail in 1873 can be contrasted with a similar shift of investment in 1907 from railroads to automobiles; that was preceded by J P Morgan’s merger mania. The flight of equity capital would repeat again, from the mass-production era of automobiles to computerization, around the time of the 1987 crash; that was preceded by leveraged junk bond buyouts.

The 1893 stock market can be contrasted with the crash of 2000. Around 14 years elapsed between 1893 and 1907 and between 1987 and 2000. Government monetary intervention, which created a housing-price bubble, may have deferred a more serious recession until the 2008 Global Financial Crisis. If almost on cue, however, the speculative fervor that gripped the second half or the 1920s reoccurred between the crash and the GFC.

Historian Frederick Lewis Allen wrote that “It was the innocent delusion of the American public during the seven fat years [1922-1929] that inordinate profits can come out of thin air.” Profits, also wrote Allen “come out of the consumer, or the worker, or the investor, or the future.”[3] A more recent account, that blames the 1929 crash on financing nascent industry stocks, is found in A History of the United States in Five Crashes, by CNBC contributor Scott Nations. Nations also provides an excellent assessment of the 1987 crash and the role of short selling stocks to a market with no buyers.

During the Great Depression the government bailed out the railroads as it did automobile companies during the post-GFC Great Recession; the nadir point in their respective industrial waves. If history repeats itself again, equity capital will begin its shift away from computer and internet stocks in 2021-22. This is at best speculative because the markers of economic downturns between 1929 and 1987 did not mimic those between 1873 and 1929 due to the 1930s New Deal and World War II.

The potential for a major crash, of 1929 or 2008 proportions, does not appear on the horizon until 2043-45; again, using the time lapses between 1907 and 1929 and between 1987 and 2008, each 21-22 years. Such an event will almost certainly be preceded by excessive speculation in the next industrial wave and spell the nadir point for funding earlier generation technology companies. The shift, when it begins, will almost certainly be to renewable energies and materials. The rise of Tesla is a poignant marker.

[1] Michael Klepper and Robert Gunther, The Wealthy 100: From Benjamin Franklin to Bill Gates – a Ranking of the Richest Americans Past and Present, (Secaucus: Citadel Press, 1996), xvii.

[2] Burton J. Hendrick, The Life of Andrew Carnegie (London: William Heinemann Ltd, 1933), 381.

[3] Frederick L. Allen, The Lords of Creation: The History of America’s 1 Percent, ed. Mark C. Miller (New York: Open Road Integrated Media, 2017), 246.