Ray Dalio On The 1937 Market Crash And Why It Matters Today
Ray Dalio recently wrote a book named Big Debt Crises, that analyzes the stock market crashes in the early 20th century and how they relate to today.
His research team found that there where many patterns that repeated themselves and they all eventually lead to a stock market crash.
What they realized was shocking, the stock market crash of 1929 was very similar to the one we had during the 2007 debt crisis, and the patterns that lead up to the stock market crash of 1937 are showing up today.
From 1922 to 1927 the stock market rose about 150% in value which was amazing, and from ’27 to ’29 it rose again 100%! Unbelievable, it looked like there was an endless profit to be made there.
But as the value rose, so did inflation. In 1929 the government stepped in with higher interest rates to combat this, and the market’s value dropped fast in a matter of days which scared a lot of people who had all their money invested.
These people didn’t want to put more money in something they see losing value everyday (but in reality the market was just being corrected to it’s true value), so they started taking all their money out, and they stopped spending it. This lead to even more value being lost and a vicious downward spiral in the economy began. This was the start of the great depression.
It was the first huge stock market crash in U.S. history and authorities didn’t know how to handle it so it was prolonged for quite sometime.
Eventually the government started printing money and buying assets to kick start the economy but it wasn’t over just yet…
From 1932 to 1937 the authorities lowered the interest rate to 0, and the stock market’s value rose back up by a whopping 400%!
But again we have the same problem, inflation is quickly starting to creep in so the authorities tried to raise the interest rates up from 0, but since there was such a high rise in value in only a period of 5 years, as soon as they did that, it had an absolutely devastating impact and the stock market imploded.
After 1937 the stock market’s value sank by 60% and didn’t recover until 1954.
During the debt crisis of 2007, the government also decided to do “quantitative easing” and started printing money, buying assets, and lowering the federal interest rate to 0, this stimulated the economy and the stock markets value rose by about 400% again from 2007 to 2019.
Another similarity is the wealth inequality that arose from the recession.
In both instances, rich people who bought assets when the market was down became even richer when the markets value increased by 400%, so this is how the rich became disproportionately wealthy compared to the rest of the population.
Why Wealth Inequality Is Bad For The Economy
If there is a big wealth inequality in an economy, that means that there will be a large amount of people on the bottom of the system who are having financial troubles and they will blame the rich for it.
So even though the vast majority of the rich obtained their wealth through legal means, the poor of a society will attempt to destroy the capitalistic systems that lead to such inequality. This is very bad for the economy because wealth is getting redistributed instead of being created.
So what we are seeing now is a lot of cries for change and a massive call for fixing this inequality. This same pattern occurred in the late 1920s to early 30s and like I said earlier the economy didn’t recover until the 1950s.
Dalio also says that many nations are going to have huge political changes as a result of this wealth inequality and the political parties will become more polarized which leads to mass volatility in those countries.
Due to the rise in interest rates, the value of long term government bonds will go down because their returns will be diminished compared to newer bonds. That is the first sign Dalio seeing happening in the near future.
The second sign of the financial apocalypse is that the price of gold will skyrocket, Dalio says that the rising price of gold is directly linked to rising inflation.
The final sign is the actual stock market crash, Ray Dalio believes that like in the 30s and 40s the market will continue to go down and won’t climb back up for a very long time. The last time it was 25 years until the market returned to 1929 levels.
The first thing you can to do prepare for a massive recession, is to invest in companies that are managed very well, and have a track record of being resilient during economic downturns.
Dalio also says to invest in gold as it’s value will rise as inflation increases, and when you sell it, you will have a lot of cash to invest with during the recession.
Also during the recession it is important to continue investing as all the stocks will be “on sale” (undervalued) and once the economy picks back up, you will see an immense increase in your overall net worth.
So make sure to hold on to some cash for the eventual crash.