I have been trading stocks since I was eleven, and started trading call-options at age fifteen.  “This time it’s different” are the most dangerous words I have ever heard in fifty years of trading.

Or are they?

Eighty-nine years ago next Wednesday, the stock market crashed and with it came the worst depression in modern history. There were many early indicators of a market wildly over bought in 1929. The bank of England had raised their discount rate in September of that year to 6.5%--higher than the average stock dividend yield or the interest paid on investment grade bonds—causing three brokerage houses in London to fail, while the Chancellor of the Exchequer described the New York Stock Market as “a speculative orgy”.

However, my favorite canary in the coal mine is standard deviation. In 1929, the market was at three standard deviations above the mean. The chart below is of the S&P 500 from 1871 to 1930 with the top red line being the mean, and the bottom red line being the standard deviation from the black line.

Seems pretty clear, the market in 1929 was insane.

Now let’s look at the market from 1871 to September 2018:

It certainly looks like another “speculative orgy” to me.

However, as Harold Bierman, Jr. points out in his brilliant book, The Causes of the 1929 Stock Market Crash (Greenwood Press 1998), member firms had only 1,549,000 customer accounts (just over 1% of the population) and the value of all the companies on the NYSE that September was just $89 billion. Today, half the nation has exposure to the stock market, including through IRAs, 401ks, and pension funds, and the value is over $30 trillion.

Does that make 2018 different from 1929?

In 1929, almost one-third of the U.S. were farmers. Today it is less than 2%. The most devastating war in human history had ended only eleven years earlier. We have lived in peace (i.e., no world wars) for almost 75 years. In 1929 the Federal Reserve was only 15 years old, and the vast majority of the causes of the Great Depression, certainly its severity, were directly due to the Fed’s incompetence and failure in 1928 to curb “the orgy’, and from 1930 on, to not offer any monetary stimulus, as Milton Friedman wrote in 1963.

So how can we compare the U.S. economy and stock market in 1929 to today? For that matter, should we include market data from 1871 to 1945? How does market volatility from the Gilded Age, when corruption and manipulation were rampant, have applicability to today?

I believe that the modern economy began in 1945. I pick the end of WWII because it was the beginning of the jet age, computers, the national highway system, transistors, television and modern communications, the beginning of the modern civil rights movement, and a moderately competent Federal Reserve. In addition, the world was only then coming out of half a century of unfathomable turmoil. Not only had over 50 million members of the military and civilian population died from 1939 to 1945, almost an estimated 100 million people died during the Spanish Influenza from 1917 to 1920, and this on the heels of, in many ways, an even more devastating war from 1914 to 1918.

Lest we forget, on this 100th anniversary of the end of WWI, on that summer morning in August 1, 1914, when Europe went to war, no one thought it would turn into the most devastating war in world history, and most thought, “the boys will be home by Christmas”.  As the armies of the world mobilized, the market rallied, after being down two standard deviations from the mean from 1871 to 1914, up about 22% by 1916. But then the full brutality of the war began to be felt, and like the slow grind of trench warfare, that killed over 1.3 million French soldiers and almost 1 million British, the market dropped and kept dropping, and would continue to fall for four years until December 1920, where after a 54% drop from August 1, 1914, the market began to rally, over 400%, until October 24, 1929.

Here is a chart with the mean and standard deviation of the S&P 500 from 1945 until September of this year:

If 1945 to present day represents the modern economic era, then the market is hardly in “orgy” territory, or even “irrational exuberance”.

However, some may argue that 1945 to present day does not fairly represent the “new-new thing” economy.  Looking at the current standard deviation of the market from 1980 to present day, or from “BRE”, the beginning of the “Reagan Era”, the market seems downright cheap:

With this chart, we are downright cheap!

The words, “This time it’s different”, are still the most dangerous words in investing, but on this 89th anniversary of the Great Crash I have to ask, how far back should we incorporate data, as we project the future?

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