Elon Musk Says Current Crisis Has “Similarities” To 1929 Crash

Key Takeways

• Elon Musk believes that there are a lot of current similarities to the 1929 stock market crash which lead to the Great Depression
• The ‘Roaring Twenties’ experienced soaring economic growth and social advancement, ending in a 90% fall in markets and an unemployment rate of 25%
• While there are some similarities between now and then, the world is obviously a very different place.
• Even so, investors can take lessons from the 1929 crash, and help put in place protections for their portfolio

The last few weeks have been a rocky one for investors. The volatility really kicked off when rumors began to spread about Silicon Valley Bank (SVB), and within the space of a few short days the company had gone from supposedly stable and safe to shut down by the regulators.

But SVB shareholders haven’t been the only bank investors to lose their shirt since then. Crypto-focused Signature Bank was also shut down the same weekend as SVB, and now it’s Credit Suisse who have received an emergency buyout.

The challenges for Credit Suisse have been around for many years. Over the past 5 years, the stock price is down 88.23%. But the price was up and down like a yoyo last week as their biggest investor, the Saudi National Bank, announced they wouldn’t be providing any additional funding.

A lifeline was offered by the Swiss National Bank and now a fire sale buyout has been negotiated with UBS.

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With all of this happening in the background, Elon Musk has given his 2 cents on Twitter (as you’d expect), commenting that there are a “Lot of current year similarities to 1929” on a thread from high profile fund manager Cathie Wood.

So how did the 1929 crash that led to the Great Depression play out, and are there really similarities for investors between then and now?

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Elon Musk’s Twitter warning

The tweet from Elon Musk was a comment on a Twitter thread from chief investment officer at ARK, Cathie Wood. Interestingly, this thread was providing a comparison between the turmoil undergoing the mainstream banking system, and the crypto system.

Wood noted that while all the chaos was unfolding with SVB, Signature Bank, Credit Suisse and all the rest, the bitcoin, ethereum and other crypto networks continued without fuss.

The thread wasn’t necessarily stating that crypto is the future, but Wood was making the point that we’re now seeing some impacts of points of failure of a highly centralized system.

She comments that regulators should have focused more on this, rather than spending time aiming to block decentralized systems that aren’t going through these same issues.

The final tweet in her thread states that the biggest issue that was ‘hiding in plain sight’ was the asset and liability duration mismatch that caused the downfall of SVB. She finished this comment by saying that bank deposits have fallen year on year for the first time since the 1920’s.

To this last point, Elon Musk tweeted “Lot of current year similarities to 1929.”

What happened in 1929?

Because it wasn’t just a hiccup in deposits in 1929, but a major stock market crash that led to the Great Depression. And Musk isn’t necessarily wrong. While the world is very different now than it was almost 100 years ago, there are definite similarities.

The years leading up to the 1929 stock market crash were known as the ‘Roaring Twenties’. Economic growth was high and there was rapid social change, particularly around women’s rights.

Despite the fact that prohibition was in force, it seemed as if the 20’s were one big party. Until the music stopped.

The Dow Jones went up over 600% between 1921 until late 1929. But by late October, the tide turned and the market experienced some of its worst declines in history.

The Dow fell 29% on October 24th, 1929, before falling a further 13% on October 28th and another 12% on October 29th. But it didn’t end there. Markets continued to bleed for years, until 1932, at which point the market had fallen by almost 90%.

This crash kicked off the Great Depression, over which time US GDP fell by over 36%, the unemployment rate hit 25% and many banks failed.

It took until 1954 for the Dow Jones to recover back to its pre-1929 crash.

So, it wasn’t awesome. Many investors were wiped out completely, and even those who could afford to hold their losing positions took years, sometimes decades, to get their money back.

Are there similarities between and and now?

Yes. But don’t panic, because the world is also very different than it was back then. The level of protection and globalization in the financial system is far, far different than it was back then.

We’ve experienced the level of government intervention that’s available to ensure that a widespread economic collapse like the Great Depression doesn’t happen again. While we have seen economic crises and bank failures, many steps have been taken by the Fed, the government and other regulators to avoid massive unemployment and widespread corporate bankruptcies.

Even so, we are experiencing some similarities from then to now. We’ve gone through a period of sustained economic growth, where tech companies in particular have seen huge gains in their stock prices.

Like the 20’s when stock market investing became a hobby for many of the general population, we’ve seen the explosion of trading apps like Robinhood making investing easier than ever.

Surprisingly, many stocks back in the 20’s were being bought on margin and with little thought given to the fundamentals of the companies.

Still, there were also a lot of differences too. To start with, the turnaround that caused the initial economic shock was an oversupply of goods with a lack of demand. We’ve been experiencing the opposite problem, with global supply chains grinding to a halt during Covid and not being able to keep up with consumer demand.

The bottom line

Should investors be worried?

The chance of an economic crisis as bad as the Great Depression is probably pretty unlikely, but at some point we will see another economic crash. It’s part of the deal when it comes to investing, and investors should understand that it’s not a matter of if, but when.

With this in mind, investors don’t need to be worried if they are structuring their portfolios in the right way. The number one way to do this is to ensure that they have sufficient diversification.

This doesn’t just mean diversification with a few different stocks, but diversification across asset classes, economic sectors and even geographic regions.

A great example of this diversification is the AI-powered Global Trends Kit from Q.ai. This Kit uses the power of AI to predict the performance of a range of different companies and asset types all across the world, automatically rebalancing this Kit every week based on those predictions.

As well as investing in mainstream assets like stocks and bonds, Global Trends also offers exposure to alternative assets like gold, oil, forex and the VIX.

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