The first big market boom of the 1900s happened right at its start. 1901 would become “the bubble” everyone referred to until 1929 replaced it.
To say the bull market had seeped into the public mind would be an understatement. Speculation was rampant.
The year before, the market bottomed in late September, then took off on a 34% run to end the year. The market picked up right where it left off in 1901.
Seven days into the new year, a record 2,127,503 shares were reportedly traded. It was the first 2 million share day on the NYSE (to put that number into perspective, only 85,807 shares traded on August 22, 1900).
U.S. prosperity drove the boom initially but the first merger wave to hit the stock market pushed it to heights never seen before. One of the biggest was J.P. Morgan’s orchestrated buyout of Carnegie’s empire by his newly created U.S. Steel. It’s newly issued shares played right into the boom.
Merger rumors did the rest. The speculative frenzy inflated prices in everything.
But it was the battle over the Northern Pacific railroad that would end it. A war over control of the company played out in the open market. Edward Harriman on one side. James Hill and J.P. Morgan on the other. Both sides bought shares to seize control.
The panic began on May 9. In four days, Northern Pacific stock ran from $110 to $1,000. It quickly became obvious a corner was in. Both sides controlled so many shares that volume dried up. Short sellers scrambled to close positions in the stock at any price. It was beyond impossible. Shorts could do nothing but watch their losses climb as a looming deadline to deliver stock certificates neared.
Finally, at the last minute, firms postponed the delivery of Northern Pacific stock. It offered a brief relief to short sellers and the price eventually settled at $325. But the damage was done. It was enough to stoke panic throughout the market.
A month earlier Edwin Lefevre wrote a word of warning on the economic laws of markets. The market pendulum swings from depression to prosperity, fear to greed, and it always swings back. His timing was impeccable:
Obeying economic laws, which are more or less clearly understood, there come periodic recurrences of commercial and industrial — and consequently also financial — depression, known as “hard times.” These often culminate in “panics” — really outbreaks of acute commercial cowardice. one man fails, for good and sufficient reasons; his neighbor, exhausted by the prolonged, unprofitable activity, grows apprehensive of yet worse things to come, and he, too, gives up the struggle for no good reason. And then his neighbors, one after another, throw up their hands before the highwayman Panic, and fail — for no reason at all. To be sure, specific causes, like the failure of a crop or of a big bank, a Homestead strike or a Venezuelan message, may precipitate a panic; but they are not of themselves responsible for the prolonged periods of depression that make panics possible.
Obeying the same economic laws, there comes the reaction. The commercial pendulum swings in the other direction — towards prosperity. Industry and commercial activity, increasing daily, result in such widespread well being that the principal beneficiaries grow to believe it will last forever. In lieu of an epidemic of commercial cowardice, there is a carnival of financial fearlessness. Intoxicated by success, forgetting the lesson of the lean years, men lose their normal business prudence. They increase the output of their factories or of their mines without duly considering the demand for their goods; they buy much and produce more. They have seen their friends acquire wealth in a few lucky prosperous months; they would do likewise, whether it is in dry goods or pig iron or rawhides or stocks. Greed, a species of moral malaria, fills their system, poisons their blood, and colors their thoughts with the jaundice hue of gold.
As the fever rises, they cease to think calmly. They abandon logical processes, they scorn dispassionate analyses of conditions and probabilities. All about them they behold the faces of gold stricken fellow madmen. They know that a final crash is inevitable, because such periods always lead to disastrous overproduction; but they think the end is so far away, and coming so slowly, that they can prepare for it in time. It is the egotistical delusion of men whom the dazzle of gold has blinded — men who fancy that they are not gambling, but merely making aureate hay while the sun of prosperity shines. It means “boom days” — an era of exaggerated values, of over-stimulated business, of excessive output, which lasts months, possibly even years.
The economic pendulum swings back and downward.
It has happened before. It will happen again. That is the law.
Boom Days in Wall Street
- A Few Rules – M. Housel
- Top or Flop – Klement on Investing
- Was “Value” Just a Hot Hand Thing? – Albert Bridge Capital
- Sounding Good or Doing Good? A Skeptical Look at ESG – Musings on Markets
- There Is No Size Effect: Daily Edition – C. Asness
- What’s in an Equity Return? – Verdad
- How to Fraud – Net Interest
- Shrinking Alpha: Larry Swedroe on Alpha and Value (video) – Acquirers Podcast
- The Cognitive Biases that Make Us All Terrible People – Mark Manson
- Why Everything Is Sold Out – The Atlantic