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Wednesday, October 14, 2009

HIS MASTER'S VOICE


I never believed old Joe Kennedy’s story about getting a stock tip from a shoe shine boy in 1929. Joe told the story that when he a kid offered him insider info on a stock Joe knew that if the kid knew, then everybody knew. And that meant that the good times were over. So, Joe said, he sold most of his stocks just before the Black Friday crash of October 29, 1929. And that was why, Joe said, when the market bottomed out he still had the cash to pick up stocks for a song just before they went back up, and that was how he made his fortune. It's a good story. It makes him sound very smart. But it was a load of Irish manure.

In 1929 Joe’s fortune was already estimated at $4 million. He had just sold out most of his stock portfolio, not because of some tip from a shoe shine boy but as part of the game of stock manipulation that was the standard practice on Wall Street during the 1920's. In fact Joe used to tell friends they all had to cash in on the game, because someday, soon, it would be made illegal. In fact Joe and most of the other insiders knew a crash was inevitable. All of them just figured they were smart enough to get out in time. But smart turned out to have nothing to do with it.

That the market crashed just as Joe was heavily liquid (short on stocks and long on cash) was his sheer blind luck. Still, like most successful moguls, in retrospect Joe’s luck became, in his self justification version of reality, a shrewd investment move. And by 1935, feasting on the financial corpses of his unlucky competitors, the Kennedy fortune was said to be worth $180 million. Of course if his timing had been a little bit slower or faster Joe would have been wiped out like all those other shrewd Wall Street investors. The only time people truly get in trouble on Wall Street is when they start thinking their master's voice is their own genius and not the collective carcophony of fools.

The classic example of the games played in those days was the RCA stock pool, formed by the brockerage house M.J. Meehan and Company. Joe was part of this game. In the modern vernacular the process is called “a pump and dump”. In the slang of 1929 it was “painting the tape”, as in ticker tape. First the stock was quietly accumulated by the pool members, who also sold the stock “long”, meaning they made a behind the scenes bet that the price would go up. Then the reputation of the stock was made to look better than it actually was by well publicied sales between pool members at inflated prices, and by articles planted in newspapers and magazines.

This attracted buyers from outside the pool who were either fooled by the games or who suspected what was actually happening and gambled they could follow the “smart money” and get out before the dump. Of course the pool members were already quietly selling the stock short, betting it would go down, which, of course, they were about to insure that it did. In the final act the pool members would suddenly dump all their stock, making the insiders richer, and the outsiders poorer.

The RCA pool started pumping on Saturday March 9, 1929, (the NYSE met for half day sessions on Saturdays at the time). Shares of RCA were selling at $93 each. Two weeks later, Saturday March 30, the stock was selling for $109.75 a share. It was time to pull the dump. Almost overnight the stock fell to $80 a share. And for what was in essence two weeks work the pool members made $5 million ($60 million in todays value).

The only problem was that the $5 million the “smart money” had just squeezed out of the market had to come from someplace. Lots of the “suckers” who had bought RCA on a standard 10% margin were suddenly caught short by the switch to the “dump” mode. They would now either have to pay the 90% they still owed for the stock at the pumped price (which most could not afford to do) or come up with another 10% to maintain their margins.

The rush to raise cash to meet the margin calls did two things at once. First, as people sold other stock to meet their short calls on RCA, that drove down the price of lots of other stocks. The New York Daily News called it a “selling avalanche”. And two: as those who either could not or chose not to sell other stocks to avoid the “margin calls” on RCA, looked for the cash to meet their raised margins. Their demand for cash drove the price of loans (the interest rates charged) higher and higher. It was an instant liquidity crises - sound familiar?

In a single day, Monday, March 25th, the market abruptly dropped 4% across the board. What stopped Monday, March 25, 1929 from becoming Black Monday was that on Tuesday, March 26, 1929 at about 1:30 in the afternoon, as the panic was still spreading across the floor of the stock exchange, Charles "Sunshine Charley" Mitchell, president of CitiBank and a member of the Federal Reserve Board, boldly walked onto the trading floor and placed a loud “buy” order for U.S. Steel at higher than the then depressed market price. He also announced that he had $25 million to stabilize the market ($300 million in today's value). Immediatly the panic on Wall Street stopped, and conservative Democratic Senator Carter Glass called for Mitchell’s resignation because he had violated "purity" of the market.

The famous “Sleeping Prophet” Edgar Cayce would write a letter in the first weeks of April 1929 famously predicting the October collapse of Wall Street. In fact the near collapse at the end of March was repeated again with another 4% drop in value on May 22 and again on May 27 and yet again on August 9 and yet a fifth 4% drop on October 3, followed by a 6.3% plummet on October 23. And all of these drops preceded the infamous Black Monday collapse, when in a single day the market dropped 12% of its total value. You would have had to been deluded not to have seen the market collapse was just around the corner. But if you were looking for some genius to believe in, and the mystic attracts you, then you will choose to follow Edgar Cayce.

Or, if you were of a mercenary mindset, you could choose to listen to the voice of Joe Kennedy and his fellows. Joe continued to believe that he was smart enough to avoid getting caught in the next market downturn. He wasn't, of couirse. But fortunately for Joe, Wall Street was filled with desperate, deluded people who for lots of reasons refused to see the approaching abyss any better than Joe did. Ever since the October 1929 collapse of Wall Street Edgar Cayce has been making converts, based on his mystical prediction that doesn’t seem so mystical in retrospect. The same can be said of Joe Kennedy. The list of the well connected and well informed experts who continued to predict that all would be well on Wall Street was almost endless.

On Friday, October 18, the editor of the Wall Street Journal said in a speech that stock manipulations on Wall Street were “impossible”. Yale Economics professor Irving Fisher observed that “Stock prices have reached what looks like a permanently high plateau”. And every time one of these “experts” predicted that the dark skies were going to clear up, the market would bounce back from the brink of disaster, reaching its all time peak index on September 3 of 381.17. Then came the crash.

After the 1929 crash the NYSE would not return to the 300 level again until 1954. In the immediate aftermath of the debacle of 1929 Senator Carter Glass helped fashion legislation (The Glass-Steagall Act) that divorced commercial banks from intimate ties with brokerage houses, the source of a lot of the cash used in speculation and one of the primary fuels in the collapse. That was a major violation of the purity of the market, and it was designed by Carter Glass. And Joe Kennedy helped write new rules that banned “insider trading”, such as the RCA pool he had profited from.

And "Sunshine Charley, the man who saved the market in March of 1929, died flat broke in 1955. His was just one more of the millions of lives ravaged and destroyed by the Great Depression, in America and worldwide; hunger, lost education opportunities, violence, even World War Two. It seems a very high price to pay to make Joe Kennedy a little richer.

The Glass-Steagall Act was largely repealed in 1999, because the mystics on Wall Street are still selling the idea that secret knowledge and mystical skill can trump luck on Wall Street. Ten years later came proof that the mystics were wrong again. And yet there are still those who want to believe and are willing to pay for their faith.

And where ever he is at this moment, in heaven or hell, Old Joe Kennedy must be having a very good laugh about the “spike” in oil prices that the experts assured us was certainly not the product of speculation, and now their assurance that the financial collpse of 2008 will never happen again if we just have faith in the purity of the market.

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