There's No Such Thing as a "Permanently High Plateau"
On this day in economic and business history...
Yale economist Irving Fisher offered one of the most notorious stock-market predictions of all time on Oct. 15, 1929. Speaking at the Purchasing Agents Association's monthly dinner in Manhattan, he claimed that stock prices had reached "what looks like a permanently high plateau."
Fisher's statements, as recorded by a New York Times reporter, were detailed, assertive, and wrong in virtually every way:
Mr. Fisher declared realized and prospective increases in earnings, to a very large extent, had justified this rise, adding that "time will tell whether the increase will continue sufficiently to justify the present high level. I expect that it will."
"I believe that the principle of the investment trusts is sound," Mr. Fisher summed up, "and the public is justified in participating in them, with due regard to the character and reputation of those conducting them. ... I do not feel that there will soon, if ever, be a fifty or sixty-point break below present levels."
While the tone of his address was guardedly optimistic, the informal questioning that followed allowed Professor Fisher to lapse into a rather Pollyannaish investing mind-set. In reply to one question, he declared that he expected "to see the stock market a good deal higher than it is today, within a few months."
The Dow Jones Industrial Average closed at 347.24 points on the day of Fisher's speech, 9% lower than the all-time high reached a month earlier. It would not be long before the market fell apart. Fisher was undaunted, expecting no such collapse. He gave a follow-up speech -- ominously titled "Is the Stock Market Too High?" -- at New York's District Bankers Association on Oct. 23, highlighting 15 reasons why the unprecedented bull market would resume in 1930. Most of these boiled down to better technologies, better business-management techniques, and the perception of safer and superior returns in stocks against other asset classes.
Black Thursday hit the market the day after Fisher's follow-up speech. The Dow collapsed by 11% at the opening bell and was only saved from annihilation by the concerted efforts of leading banks to prop up share prices. The following week saw the worst two days in Dow history to that point in time, back-to-back implosions that each decimated the index's value. (The term "decimate" originally referred to a Roman military practice of culling 10% of a mutinous army's soldiers, and these two Black days were the first 10% losses in the index's history.) From the day of Fisher's prediction to the end of October, the Dow lost 21% of its value. Interviewed by Nation's Business in the aftermath of the crash, Fisher waved it away as the backlash of panicky market psychology, citing "an undue eagerness to invest [where] people tried to do business on a shoestring," otherwise straightforwardly known as extreme leverage or margin trading.
By the end of 1929, the Dow was 35% below its peak, but Fisher remained defiantly in the bull camp. On the last day of the year, the Los Angeles Times published an article Fisher had written, which noted that "the increase both in dividend payments and in plowed-back earnings during 1929 over 1928 gave earnest of continuing prosperity for business for 1930." Citing a broad-based measure of 271 large industrial concerns that showed a 27% year-over-year increase in earnings for the first three quarters of 1929 -- utilities saw an 18% improvement, and railroads enjoyed year-over-year growth of 17% for the same period -- Fisher painted the picture of an undervalued market set for a rebound.
None of this ultimately mattered to investors -- one year after Fisher's "permanently high plateau," the Dow had lost 42% of its value. From peak to trough, over the course of three years, the Dow lost more value than it had gained during the entire Roaring '20s. By the time it finally bottomed out in 1932, the Dow had reached lows not scraped since 1897 -- its second year in existence -- when the technologies and processes of the 1920s were still only the ambitions of a few budding industrialists.
Irving Fisher died on April 29, 1947. The Dow, at the time, was still only half as high as it had been on the day of his infamous speech. It would not surpass the value of Oct. 15, 1929, for another decade.
Sinking like a stone
Two weeks after suffering an all-time record nominal decline, the Dow continued its brutal 2008 on Oct. 15 with the second-largest point decline ever recorded. The index's 733-point drop resulted in a 7.9% loss of value, which made it the largest percentage decline since 1987's Black Monday. Weak retail sales combined with Federal Reserve Chairman Ben Bernanke's grim comments to the Economic Club of New York to obliterate an estimated $1.1 trillion of market value, according to CNN Money's daily recap. From the day before the Dow's record point slump to the end of its second-worst slump, 23% of index value was lost, and a stunning 11% pop was completely erased.
The big get bigger
Chevron announced its acquisition of rival Texaco on Oct. 15, 2000, for $35 billion in stock and an assumption of $7.5 billion in debt. The deal, which eventually swelled to a total value of $45 billion when it was completed a year later, was set to create the world's fourth-largest publicly traded oil company. Between them, Chevron and Texaco then accounted for $66 billion in global revenue, more than 12,000 American service stations, and an estimated 11.2 billion barrels of oil-equivalent (BOE) reserves, which the two companies pumped out at a combined rate of 2.7 million BOE per day.
The merger capped a two-year period that saw many of the world's largest oil companies combine to form a smaller group of supermajors. From 1998 to the Chevron-Texaco announcement, 12 massive oil companies became five, reassembling many of the fragmented pieces of the old Standard Oil empire. ChevronTexaco lasted for four years following the completion of its merger in 2001, and then the enlarged company dropped the Texaco half of its corporate identity (although Texaco remains a gas station brand).
The first programmer
Ada Lovelace Day is celebrated each year in mid-October -- it's held at London's Imperial College on Oct. 15 this year -- to honor women in STEM, the fields of science, technology, engineering, and math. Ada Lovelace (her proper name was Augusta Ada King, Countess of Lovelace) is an apt honoree for such an occasion, because in October 1842 she became the world's first-known computer programmer by publishing Sketch of the Analytical Engine. This treatise was based on the designs of Charles Babbage, which described the operation of a successor to the world's first-known general-purpose computer. Babbage was the hardware developer, and Lovelace supplied the software, so to speak.
The Sketch document was partly Lovelace's translation of an Italian transcription of Babbage's speech in that country's University of Turin, but more importantly, it contained extensive notes Lovelace prepared describing complex operations of the Babbage machine. These notes brim over with equations, including most notably the first algorithm ever devised expressly to operate a computer. This algorithm, designed to calculate Bernoulli numbers, makes Lovelace a true programming pioneer, even though the analytical engine was never constructed. The programming language now known as Ada, as complex as its namesake, was created in the late 1970s to run embedded systems at the Department of Defense.
Learning from the Crash of 1929
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The article There's No Such Thing as a "Permanently High Plateau" originally appeared on Fool.com.
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