Riding the yield curve and compounding decades of dividends. Practicing the faith of Ben Graham’s margin of safety, and honoring the Prudent Man Rule. I still write daily. You’ll find me on our family websites, so don’t miss out.

• www.youngsworldmoneyforecast.com
• www.youngresearch.com
• www.richardcyoung.com
• www.yoursurvivalguy.com

Roger Babson, entrepreneur und business theorist from Massachusetts, between 1905 and 1945. Photo by Harris & Ewing, courtesy of the Library of Congress.

After successfully predicting the crash that led to the Great Depression, Roger Babson was vilified as though he were its cause. At Doug Casey’s International Man, Jeff Thomas explains the history of Roger Babson, founder of Babson College, which I attended.

“[A] crash is coming, and it may be terrific. …. The vicious circle will get in full swing and the result will be a serious business depression. There may be a stampede for selling which will exceed anything that the Stock Exchange has ever witnessed. Wise are those investors who now get out of debt.”

The above words could easily have been stated by me or another of the (very) few others who currently predict the coming of crashes in the markets.

But they were not. The statements above were made by investor Roger Babson at a speech at the Annual Business Conference in Massachusetts on 5^th September, 1929.

Mr. Babson’s prediction was not a sudden one. In fact, he had been making the same prediction for the previous two years, although he, in September of 1929, felt the crash was much closer.

News of his speech reached Wall Street by mid-afternoon, causing the market to retreat about 3%. The sudden decline was named the “Babson Break.”

The reaction from business insiders was immediate. Rather than respond by saying, “Thanks for the warning—we’ll proceed cautiously,” Wall Street vilified him. The Chicago Tribune published numerous rebuffs from a host of economists and Wall Street leaders. Even Mr. Babson’s patriotism was taken into question for making so rash a projection. Noted economist Professor Irving Fisher stated emphatically, “There may be a recession in stock prices, but not anything in the nature of a crash.” He and many others repeatedly soothed investors, advising them that a resumption in the boom was imminent. Financier Bernard Baruch famously cabled Winston Churchill, “Financial storm definitely passed.” Even President Herbert Hoover assured Americans that the market was sound.

But, 55 days after Mr. Babson’s speech, on 29^th October, 1929, the market suddenly went into a free-fall, dropping 12% in its first day.

Today, most people have the general impression that on Black Friday, the market crashed and almost immediately, there were breadlines. Not so. In the Great Depression, as in any depression, the market collapsed in stages. The market did not reach its bottom of 89% losses until July of 1932.

Along the way, thousands of banks and lending institutions went belly-up. Thirteen million jobs disappeared.

And of course, the political leaders of the day did their bit. They implemented knee-jerk “solutions” that actually worsened the situation. Restrictive tariffs, gold confiscation, and a more dominant government were employed, just as they will be this time around.

So, as the market tumbled, we would imagine that Babson came to be praised by Wall Street for his insight, but in fact, the opposite occurred. Having accused him of being utterly incorrect in September, they later accused him of having caused the depression.

So, was Babson’s prediction a lucky guess? Did he simply observe the bull market and arbitrarily predict the opposite of the trend of the day to see what would happen? Not at all.

Such predictions are not guesswork, nor are they attributable to a vision seen in some crystal ball. Such crashes are entirely predictable. When any major bull market becomes overbought; when too many investors begin buying on margin because they can’t come up with the purchase price for stocks; when they then become even more obsessive and borrow money to buy on margin, the market has become a house of cards, waiting for the slightest breeze to come along.

Read more here.

By zobaair @ Adobe Stock

UPDATE 10.14.24: In September, the Federal Reserve did cut rates by 50bps and signaled another 50bps in cuts by the end of 2024. I’ve updated my Payday Indicator chart below so you can see the diminishing yield investors can expect on their money. 

Originally posted August 2, 2024.

The market believes the Federal Reserve is poised to cut rates in September and that the Fed could cut them by 75 basis points by the end of the year. Of course, this analysis comes after the market completely misjudged the Fed’s intentions about cuts in December 2023. So, take all predictions with more than a grain of salt. But comments from Jerome Powell and other Fed officials indicate they may be more seriously considering cuts now than last year. 

Long-time readers will remember my Payday Indicator, an indicator based on stock and bond yields that gives an approximation of the yield on a balanced portfolio. I have used this basic calculation as my guide since I graduated from Shaker Heights High School, listening to Chuck Berry in the late ’50s. I’ve watched this number for over six and half decades, and for most of the last two, investors weren’t getting paid nearly enough. Historically low Federal Reserve rates sapped the yield investors could expect to earn on their money. Only since 2022 has my indicator returned to something remotely normal, though nowhere near what it was in the 80s or even the early 90s. 

For now, you’re still getting paid to invest, but with the Fed poised to potentially cut rates, that may not last for long. Act accordingly. Click here to find your port in a storm and sign up for my email alert. 

On July 15, 2024, Chair Powell participated in a discussion at the Economic Club of Washington, D.C.

At the Ron Paul Institute for Peace and Prosperity, former congressman and presidential candidate Dr. Ron Paul explains that the “desire to monetize the federal debt is one reason, if not the main reason, why the central bank keeps interest rates low.” He writes:

Politicians favor an “easy money” policy because it creates an (illusionary) economic boom. The Fed-created boom helps the politicians remain in office. A reason politicians favor low interest rates is they facilitate government spending and debt, thus enabling politicians to aid powerful special interests via government spending. The desire to monetize the federal debt is one reason, if not the main reason, why the central bank keeps interest rates low.

The policy of perpetually low interest rates favored by politicians will hasten the inevitable collapse of the fiat money system.

He concludes:

Since Congress created the Fed in 1913, the US dollar has lost over 97 percent of its purchasing power. This proves Donald Trump is right about the need for drastic changes in monetary policy. However, he is wrong to think that he, or any politician, bureaucrat, or businessperson, is capable of knowing the “correct” interest rate. Instead of giving politicians greater ability to influence the Federal Reserve, the next president should work with Congress to pass legislation legalizing competing currencies, forbidding the Fed from purchasing federal debt, and auditing and ending the Federal Reserve.

You can see what Paul is referring to in the charts below. The first is the total marketable and non-marketable public debt of the United States.

The second chart is a visual of the plight of the American dollar since the creation of the Federal Reserve. As Paul said, you can see that the dollar has lost around 97% of its value. That calculation uses the generous, government-massaged inflation numbers of the CPI.

Read more from Paul here.