Table Of ContentPreface
forms of kings to govern him? Let history
When I began this project, the name I answer this question." I believe this book is
originally selected the "The Dow & The perhaps one among many which answers
Future." The more I explored the past, the the words of Thomas Jefferson.
more it became clear that is was impossible Just as politics cannot be ignored when
to discuss purely the stock market without reconstructing a historical review of eco-
involving not merely economics, but also nomic events, it is also true that we our-
foreign exchange and commodity price selves have a difficult time ignoring our
movement as well as the events within the preconceived notions of various relation-
eternal sea of politics itself. ships which the markets have with one an-
No matter who takes up the crusade to other. These numerous relationships
write of events long since past, they often between various markets and interest rates
begin with some preconceived notion of are but one aspect of this study and what
what may have taken place. Others often you are about to read will change your pre-
select facts which only support their own conceived notions as it did my own. I will
distorted or personal views. I should state give you a clue here at the outset. The most
for the record that when I began this pro- definitive relationship that the stock mar-
ject, I was under several false assumptions. ket has is not with interest rates, but with
The preconceived ideas that I had at the foreign exchange movement! Beyond the
outset, were completely destroyed in the mere exploration of the various relation-
final conclusion. The compiling of all these ships, the one major revelation which will
facts and statistics has taken what often jump out at you as you travel from year to
seemed to be a lifetime, but in the end I year reading first hand the contemporary
have emerged with a more clear under- fundamental explanations of the day, per-
standing of how and why we are now in the ceptions of why and how markets move, has
position that we so sadly find ourselves to- been altered and shaped by the strange
day. events of this century. What you may be-
The political topics which rise to the lieve right now, tomorrow you may ask how
surface throughout this work are the facts it is possible others could still believe such
as they remain. My personal political phi- things.
losophies have been enhanced and reborn As a lover of history, I have explored
by this research and it is not the other way countless records of these events far be-
around. Although some of the commentary yond what is normally taught as part of any
will undoubtedly be controversial from the formal educational program. Early in life, I
political impact of this work, let me state for became fascinated with ancient cultures
the record that I emerged with a clear un- and the origins of civilization itself. The
derstanding for the concerns of our forefa- more I read and explored the archives of the
thers of these United States which is so past, the more I became startled by the
amply stated by the words of Thomas Jef- amazing parallels from an economic per-
ferson: "Sometimes it is said that man can- spective. It became clear to me that money
not be trusted with the government of himself. and trade were the two greatest driving
Can he, then, be trusted with the governments forces which had shaped man’s destiny.
of others? Or have we found angels in the
Events and circumstances on the sur- eventually collapsed in the aftermath.
face merely appear to change, but under- There are no survivors, no exceptions! The
neath, the reality of the causes and effects great bull market of the Roaring ’20s was
remained constant from one century to the not unique to man’s record of follies, nor is
next. I was compelled to discover the de- the Great Depression and the collapse of
tails, delving perhaps deeper into the past the Dow Jones Industrials from 386 to 40
than most would have considered worth- points in 1932 a freak in the archives of
while. I was impressed with the manner in man’s economic past. Such things are NOT
which Julius Caesar handled a major debt abnormal, but completely NORMAL! They
crisis by calling a moratorium on all interest are not the by-product of shoe shine boys
payments. The consumer debt, so to speak, scrambling for tips on the stock market, and
had risen substantially, driving interest they are not the by-product of an unsophis-
rates even above the 100% level at times. ticated economic order which we have so
His actions were undoubtedly the real mo- ingeniously overcome.
tive for his assassination since many of the What took place during the Roaring
noble Roman Senators who had thrust their ’20s and during the aftermath, will one day
daggers deep into his being were the very take place once again. No matter how many
moneylenders of the day. I studied the vari- laws governments may try to write and en-
ous monetary reforms of many emperors of force, it is man’s nature to speculate upon
Rome and read with amusement how the the future. There were many mutual funds
Emperor Diocletian in 286 AD instituted that collapsed during the 1930s. The rise in
wage and price controls in an attempt to commodity prices into the mid 1970s and
curb runaway inflation. As a result, this the precious metals which carved their
study also embodies government and its monumental high during 1980, were both
actions to control the economy of its peo- similar events which took place during the
ple, which is a battle that began at the very Panic of 1919 preceding one of the Greatest
dawn of civilization. What was true of Bull Markets in History. As long as man
Rome has been true of modern society as retains his human nature, great waves of
well. The parallels are but their waiting to speculation will engulf the world peri-
be seen. What you are about to read is the odically. The only questions are how, when
triumphs, trials and tribulations of an era and why! The greatest driving force behind
riddled with debt, saddled with inflation the bull market was the exodus of capital
and crushed by warring trade factions. from bonds into stocks. That was sparked
Throughout history, man has specu- not by show shine boys, but by governments
lated on one thing or another. IT is his very who overextended. The defaults of South
nature to do so. He has bought and sold America, much of Europe and the aban-
everything from slaves and real estate to donment of the gold standard by Britain all
tulips under such a speculative fever. Real had their impact in the sage of the 1920s and
estate speculation spread throughout 1930s. That is what this book is all about.
Rome when news of Pompey the Great’s
defeat by the hand of Caesar came.
Throughout my studies of both modern and
ancient economies, I could not find even
one period which was void of some kind of
speculative fever. All things which have
risen during waves of speculation have
Acknowledgements
No book can be written without countless supportive people and of course source materials. I am
extremely grateful to Isabelle Ring and Diane Burroughs for their relentless pursuit in the editing of
this project. I am deeply grateful to Donna Carrol who assisted me in collecting data for many long
and tedious hours in the hallow halls of Princeton University. It is to her that I am also indebted for
assembling the relative mementos that appear throughout this project which she extracted from
contemporary newspapers and magazines of the era. I am also indebted to Susan Greenberg for her
support, assistance and loyalty throughout this ordeal which often seemed as if it would never end.
I am also grateful to Princeton University, the London School of Economics, Oxford University
and the British Newspaper Library for the use of their facilities through which much of the research
was accomplished making this dream a reality.
I am also grateful to Adam Smith and Joseph M. Schumpeter for their devotion to the understanding
of economic movement and the invaluable reference works which they have left behind and for their
influence upon my own economic thought.
The foreign exchange charts that are provided throughout this study have been constructed by
taking the quotations from the Wall Street Journal. The quotes which appear in these charts on a
monthly basis are the closing of each month in question.
The various indexes on consumer prices, producer prices, business inventories, population, trade,
gross national product etc. have been taken with permission from "Economic Statistics 1900-1983,"
published by the Economist magazine of London, England unless otherwise stated.
The advertising that appears throughout this text is not paid for. It is advertising which appeared
during the year in which it has been incorporated within this work. This has been done to provide
readers with a sense of the period so that they may read for themselves what those of the era would
have also been influenced by at that time. Some of the companies whose advertisements appear in
this work no longer exist. Other are still alive and well. The coupons, I assure you, are no longer valid
offers!
I have refrained from employing footnotes throughout this project, electing instead to embody
directly within the text the sources which have been utilized and why. I have written this work in a
style which is intended to be different; I have provided the sources and then offered by own
commentary thereupon. This is intended to allow you to discover what I myself read holding nothing
back and in so doing, perhaps your mind will also be enlightened as to the real causes and effects.
Martin A. Armstrong
The Greatest Bull Market In History
INTRODUCTION
Many stories have been written about the the 1980s is only the beginning of a situation
the famous Stock Market Crash of 1929, but similar to that which took place in 1929.
I am aware of none that have delved into But they should go back in history and un-
the bull market beyond the last few months derstand what took place. If they look at a
before the crash. Countless people have simple chart they would see that the col-
been fascinated with the crash and have lapse from 381 to 40 points on the Dow
made all sorts of false assumptions that the Industrials took place in the span of three
speculative fever was intensified by margins short years. Such disasters have always
which are only 1O%. That statement is come without warning and the process has
completely false and, in fact, many stocks never dragged out over a period of four to
were not available on margin at all. Others six years. Normally the pain has always been
paint the picture that a vast portion of the swift and to the point and panics are just
population was involved, right down to shoe that, panics which take their toll in the
shine boys. Again, we will see that this was course of one to three years.
a gross exaggeration. One book, "The Day
The Bubble Burst," is an excellent account- It is a widely known fact that nearly 90%
ing of the social impact of those trying of money managers have been unable to
times. The cast of characters is unsurpassed beat the Dow or the S&P in performance.
and provides a look into the private lives of It is always easy for someone on the outside
some of the people who were the biggest to look in and criticize a money manager for
players. his performance. When it comes right down
to it, most managers are damned if they do
But from an analytical perspective, the out-perform by critics who say they have
atmosphere that surrounded the market at been too aggressive. If they perform less
that time is a very important area to ex- than the Indexes their critics say that if they
plore. Far too often, economists and market had just bought the Dow stocks they would
analysts assume that such catastrophes are have been ahead of the game.
freaks in the marketplace and that they will
never happen again. Others try to inject the Trading any market is difficult to say the
famous Kondratieff cycle into the stock very least. Judging someone’s performance
market and proclaim that the end is near. on the surface tells little about his system or
Some have been calling for a devastating his analysis. For example, take two mana-
collapse ever since 1982 and each year they gers who both made money on the stock
crawl out from under their rocks to pro- market rally between September 1985 and
claim that this is the year that the market April 1986. One bought the market because
will collapse to 10 cents on the dollar as that he felt that the economy was going to heat
infamous month of October approaches. up and he realizes that inflation brings with
it growth for many industries. The other
Other hard-money advocates beat their manager bought the market because he
chests, warning that everyone must buy gold thought there was going to be a discount
and claiming that this deflationary wave in rate cut. Both may have made money, but
1
The Greatest Bull Market In History
the gains were based on two totally differ- While some argue that 1929 is knocking
ent fundamental principles. at our door, others laugh insisting that such
events are not possible in this day and age.
The difference between the two managers Economists, in their efforts to support their
may eventually show up only when the fun- biased Keynesian conclusions, attack the
damental long-term ideas of one trader or protectionism acts as the cause of the Great
the other prove to be wrong. Then one will Depression. Others blame the massive col-
continue to make money and the other will lapse on the over-speculation that pre-
suddenly become a net loser. The loser will ceded it. In all, most accounts are totally
chase the market, inevitably getting inaccurate and others lack the details of the
chopped up back and forth while the other real events during that era because they
will consistently do well if his long-term have merely skimmed the surface.
concepts remain in the proper perspective.
On the contrary, the events which took
Therefore, we find that trading managers place between 1921 and 1929 are very im-
come and go not merely for small private portant. The fundamentals in many areas
accounts, but for the big institutions as well. are the same as we see today and there are
People have a tendency to judge managers undoubtedly many parallels between the
on a short-term basis and many scrutinize past and the present. However, was the
each and every trade, when, in fact, it is the blame for the Great Depression justifiably
long-term that counts the most. put on the stock market? In fact, is the stock
market the almighty leading indicator to
The short-term trading or analysis of the the economy as it was believed then and as
stock market has always been the worst. it is still perceived today? Should we be
Sure, some analysts have done quite well listening to the "warnings" of impending
calling the market for short-term moves, disaster or are we on the verge of a new era
but eventually it turns out to be periodic where the Dow industrials will soar to 3500
and lacks consistency. The long-term is or beyond? How does one get a feeling for
something that most people vacillate over, what the future holds? Should we wait and
switching their opinions on a short-term watch for moves in the discount rate? Does
basis from bullish to bearish. How can an the first up tick in interest rates mean dis-
investor achieve consistency, or at least aster cannot be avoided?
make sure that if he misses a short-term
move, he is not caught on the wrong side of One of the best ways to get a grip on the
Wall Street? situation is to clearly define what the mar-
ket has done under what conditions. Analy-
If you want to know what the future holds, sis is supposedly the art of taking a known
you need a map of the past to at least pro- relationship or a proven technical method
vide a guide as to what is or is not possible. from past performance and projecting what
Far too many people fail to look at the the future performance may be. If this is the
events of the past as a whole, but single out only means by which we can objectively
only an isolated period to support an un- take a shot at the future, then perhaps it is
warranted assumption to arrive at a fore- best to sort out those fundamental relation-
gone conclusion. ships and make certain that the stock mar-
ket does react in the manner that
2
The Greatest Bull Market In History
"generally" accepted beliefs would have us ously not! So under what conditions will the
assume. stock market rally when higher rates exist?
This is just one vital question that needs to
One huge problem for most people is an be answered.
understanding of just which fundamentals
truly move the market. At times you find The past has a tremendous amount of
analysts cheering for deflation and lower knowledge to offer if one merely takes the
interest rates, which, in their minds, will time to study what took place. For example,
entice people to buy stocks. But just think did you realize that foreign loans were also
about it for one minute. If deflation is the a major concern in the 1920s? Did you also
situation and the economy cools down, realize that the economy has always ex-
doesn’t business in general also cool off, panded only during inflationary times and
thereby reducing corporate income? never during periods of deflation? But then
why do most people say that the stock mar-
The generally accepted relationship of the ket doesn’t do very well against inflation if
stock market to interest rates has been true industrial expansion takes place during
higher rates mean lower stocks. The inflationary periods? Is the stock market
thought behind this is that higher rates in- overbought because it stands at its all-time
crease the cost of margin. Accordingly, highs or is it in fact the best buy in 50 years?
people will buy fewer stocks and therefore What about all the takeovers? Is that good
stocks must go down. The emphasis has or bad for the market? There was a tremen-
been placed upon the speculation and not dous number of takeovers and mergers be-
the true economic impact. During the early tween 1927 and 1929 just before the crash.
1920s prior to the crash, the generally ac- Does that parallel mean it is a warning of
cepted fundamental relationship was that impending disaster?
stocks rise with higher rates and decline
with lower rates. Many people are trying to forewarn of a
massive collapse in the stock market. Oth-
It is true that interest rates collapsed be- ers say it will remain bullish as long as inter-
tween 1929 and 1932 along with the market. est rates decline. Still others have honestly
Interest rates collapsed from 1919 to 1921 projected that interest rates will continue to
and so did all commodities and stocks as drop into 1989 and the Dow will reach in
well. Each depression had been marked by the "thousands." A few doom and gloom
a decline in interest rates and each bull guys crawl out from under their rocks every
market took place when business expanded year to proclaim that October will collapse
and borrowed more to fund their expanded just like 1929. Widows and orphans will be
levels of business. It is true that interest cast into the streets and suicides will be-
rates bottomed in 1976 and rose into 1981 come a common everyday event on your
while the stock market held the 1974 low local street corner. Earthquakes will strike
and moved up with the inflationary cycle Wall Street itself and man will be punished
into 1981, peaking only slightly ahead of for being so presumptuous as to have ever
interest rates. There was no direct relation- taken the Dow above 1,000 in the first
ship to the contrary. place.
So what is the answer? Does the market Well perhaps if those people (who are just
rally with lower rates all the time? Obvi- outright mad at the rest of the world for
3
The Greatest Bull Market In History
making any profits when they have been new high in July, the CPI stood at 322.8. If
short every step of the way up) keep crawl- we adjust the 1929 high for inflation, we find
ing out every year, one of these days they that the 1929 high in 1985 terms would be
may be right during that fatal October. But 6,064. The CPI has increased 629% since
perhaps they should go back and read the 1929. Boy, talk about being a poor invest-
newspapers from 1869. Then it was Sep- ment over the long haul!
tember 24, 1869 which became known as
"Black Friday." So maybe they had better Just for the hell of it, let’s see how the Dow
hedge their bets and not let everything ride held up to the expansion in the money sup-
on October every year. And those people ply. Money supply (M1) stood at $26.5 bil-
who foolishly think that interest rates will lion in 1929 compared to $595.8 billion in
continue to ease beyond 1986 had better 1985. That comes out to be a 2,248% in-
read each page of this report twice and crease. If the Dow had appreciated in com-
commit it to memory! parison to the growth in money it should be
8,574.77! Well, so it’s lagging a little, big
Is the Dow really in lofty heights? How deal.
does one measure such territory where
charts have never before dared to enter? A How about a comparison of the Dow to
little exercise in comparisons might shed public debt? In 1929, the public debt stood
some light on the subject. But then again, it at $16.9 billion and in 1985 it has grown up
might not mean anything at all. Neverthe- quite impressively to $1.823 trillion, which
less, it’s certainly worth exploring. works out to be a 10,787% increase. Obvi-
ously, if the Dow had kept up with govern-
The Dow Jones Industrials reached a peak ment spending it should be 41,145. Boy that
of 381.44 in September of 1929. The CPI certainly makes 2,500 seem awfully cheap.
stood at 51.3. In 1985, when the Dow hit a
4
The Greatest Bull Market In History
Well, these comparisons might be the 1929. The Dow would have to stand at 6,183
revelation of a lifetime, but then again put in order to maintain parity with the GNP.
them alongside a dollar and they just might
buy you a $1 cup of coffee around Wall Quite frankly, trying to find something
Street these days. against which the Dow has performed ap-
preciably better is simply not so easy. If we
Is there something in this world which one compare the price of gold to the Dow, we
can measure anything against to render a find that in 1929 gold was $20 and in 1985
fair comparison of worth from one day to at the end of July, when the Dow had
another? Ever since we abandoned the gold reached its new high, gold closed the month
standard and moved on to this politically at $327.10 on spot in New York. This is a
backed paper monetary standard, compari- gain of 1635.5%, while the Dow from the
sons seem to be far more difficult to come 1929 peak to the July 1985 peak had appre-
up with. There is a huge imbalance from ciated only 361%. The truth of the matter is
what everything used to be and where it that the only thing I was able to find that
now stands. lagged behind the Dow was the increase in
the civil labor force, which stood at 49.2
Since we are looking at industrial stocks, million in 1929 and currently stands at 115.3
perhaps we should use the GNP to compare million, an increase of merely 234%.
their performance with the production ex-
pansion to which these companies contrib- Why has the Dow performed so miserably
uted. GNP, expressed in constant 1972 in comparison to just about every other
dollars, stood at $103 billion in 1929. In indicator and to gold itself? Is there some-
1985, it stood at $1,671.6 billion ($3.8 tril- thing we are missing? Is there something
lion in current dollars). Therefore, in con- the Dow has to offer to vindicate itself for
stant terms GNP had grown 1621% since such a terrible long-term performance? To
5
The Greatest Bull Market In History
Dow Jones Industrial Average: 1937-1982
Book Value as % of DJIA High
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
1937 1942 1947 1952 1957 1962 1967 1972 1977 1982
some degree the answer to that question is
yes. Since 1929 the total amount of divi- When we look at the Dow from book
dends paid on the Dow Industrials has been value, CPI, GNP or its performance against
1305.42 at the end of 1984. If one were to gold, it comes up shy every time. Recent
add this to the July 1985 high, it would be rallies are not trading at the same heights as
equivalent to nearly 2700.00. Although this they have during the past 56 years. By such
is still a far cry from 6000.00, it is at least fundamental comparisons, it is extremely
bringing it up a little closer. difficult to imagine that the Dow is over-
priced and in jeopardy of a major panic
Let us look at the Dow in comparison to collapse.
the composite book value. In 1937, the
book value was 88.30 while the Dow had If we look once again at the chart of the
reached a peak on March 10 at 194.40. This Dow Industrials on a percentage basis over
meant that the Dow was trading at better book value, it becomes distinctly clear that
than double the book value. At the end of 1978 was the LOWEST point in recent his-
1984, the composite book value was 916.70, tory. If we look at the annual chart provided
while the Dow closed out the year at for the Dow Industrials from 1890 to date,
1211.57. Obviously, a comparison of this we find that the 1978 low was substantially
rally to the rally of 1937 still shows the Dow above that major sharp correction which
lagging behind. On the 1973 rally when the took place back in 1974. Even the 1982
Dow closed at 1051.70 on January 11, the correction, when almost everyone was call-
book value stood at 690.23. Again, this rally ing for an impending collapse and the Dow
was shy of the levels achieved during 1937, was unquestionably moving down to 500, it
but the 1985 rally has still not reached the was still trading on a percentage basis over
heights of the 1973 rally in comparison to book, above the low which had been estab-
book value trading ratios.
6
The Greatest Bull Market In History
Dow Jones Industrial Average: 1937-1982
Earnings as % of DJIA High
14.00%
13.00%
12.00%
11.00%
10.00%
9.00%
8.00%
7.00%
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
1937 1942 1947 1952 1957 1962 1967 1972 1977 1982
lished during 1978, as well as on the index rose from 62 to 381, which was a 515% rally
itself. in seven years? Or perhaps the doom and
gloom boys are correct and the Dow will
What is this book value we speak of? It drop 50% or maybe 88% as it did between
represents cash and the depreciated value 1929-1932.
of all assets, including real estate and other
subsidiaries. This is what the takeover boys There are some who argue that we are
are looking at. They look for companies about to collapse. Others suggest that the
that are selling for $30 a share and they famous Kondratieff cycle is upon us and
calculate that if they were to sell off all the that the market will collapse under its
assets they might end up with $75 a share. mighty influence. Joseph Granville became
We all know that these situations have been perhaps one of the most famous analysts of
numerous. So why is it a fact that so many our time because of his strong opinions.
companies are selling far below book Most other analysts envy the attention he
value? Doesn’t this suggest that perhaps the gained back in 1982 and love to kick his
market is under-priced? If so, then why all name about like a football. But in his recent
the doom and gloom every time the market book entitled "The Warning," Joe admits:
turns downward? "Probably more than anything else, I by-
passed the August 1982 upturn because of
A case can undoubtedly be made for the how the market looked against the tem-
market being overpriced or underpriced. plate of the Kondratieff Wave...In relation
Obviously one or the other is eventually to the 1982 bottom I had made a timing
going to be right. But which one? What error, but I knew my basic analysis was
does the future really hold in store for the right."
stock market? Are we in a phase similar to
1921-1929 when prices soared and the Dow
7
