This always happens right before a depression starts. The 1929 Great Depression was preceded by a period of economic boom and a stock market rally known as the Roaring Twenties. But it all came crashing down in 1929, leading to the Great Depression and the 1929 stock market crash. The 1929 stock market crash and the Great Depression was not unexpected. There were numerous economic indicators at the time that we are now seeing today, and this is leading some people to wonder if we’ll see an economic depression in 2024. If we do get a great depression in 2024, it would lead to a stock market crash in 2024 also. To understand why we could see a 2024 stock market crash, we need the 1292 stock market crash explained. In order to do that, we need the Great Depression explained, and to save time, we need the Great Depression oversimplified. Once we understand that, we can consider whether or not we’ll see a US depression in 2024, or at the very least a recession in 2024 and a corresponding stock market crash in 2024.
Before the Great Depression in 1929, life was good. The stock market was rallying, the economy was strong, and most economists had bullish outlooks for the future. But then something happened that changed everything. And seemingly overnight, things went from good to devastating. People who were rich suddenly had nothing. Stock market investors lost everything. And the unemployment rate skyrocketed. When things are good, most people don’t want to think about the possibility that things could change in the blink of an eye. But it’s historical reality that some of the most painful times in the economy are preceded by a period of fake abundance.
So if you want to know what happens right before a depression starts, look around, because the same things that are happening right now happened right before the Great Depression in 1929. All of the economic warning signs that showed up right before the Great Depression are showing up again right now.
So how does a period of fake abundance start? Well, fake abundance starts by a lowering of interest rates. When interest rates go down, this spurs economic growth. But that economic growth is built on the backbone of debt. From 1920 to 1928, the interest rates in the US economy decreased significantly, and this led to a period known as the Roaring Twenties. It was a period of huge economic growth. But the problem is, that period of huge economic growth was built on the backbone of increasing amounts of debt. And from 2008 to 2021, the corporate debt yields lowered once again. And this once again spurred a huge period of economic growth for 13 straight years from 2008 to 2021. But just like during the Roaring Twenties, before the Great Depression in 1929, that period of economic growth was built on the backbone of debt.
And as people spend more and more money, this eventually results in something called inflation. Inflation came to a head in 2021 and 2022, with the US economy seeing the highest inflation it had seen since the 1970s. And today, in 2024, inflation remains elevated, well above the Fed’s target of 2%. Now unlike 1929, today the federal government has some tools at its disposal to help prevent another Great Depression. One of those tools is the Federal Reserve. In 1929, the Federal Reserve and Fed interest rates did not exist. But they do today. And so the federal government is able to prevent another Great Depression by artificially keeping the economic growth in check.
And one of the tools the Federal Reserve has is interest rates. When inflation starts to go up today, rather than resulting in another depression, the Federal Reserve is able to raise interest rates in order to get inflation down. And that’s exactly what we’re seeing today. The Fed interest rates are now back to where they were right before the great financial crisis in 2008. As the Fed has increased interest rates, this has had the effect of bringing inflation down somewhat. But what the federal government has done so far proves that they have not yet done enough. And that has shown up in the fact that over the past five months, the inflation rate has increased steadily for each of the past five months.
The Federal Reserve simply has not raised interest rates high enough to slow down the economy and to stop inflation. As a result, the economy continues to grow stronger, and this is still built on the back of debt. It’s still a fake economic growth, despite the 5% interest rates we’re currently facing. This shows up in the fact that the US consumer spending rate has continued to go up. Consumer spending has continued to increase even as the federal government has raised interest rates. But just like in 1929, this period of economic growth is not coming from a true economic growth. It’s coming from consumers spending more and more debt, just like during the 1920s as the economy grew due to companies taking on more and more debt once again. Today, the economy is growing as people take on more and more debt, and consumer spending has been financed by debt.
Today, debt is skyrocketing and is significantly higher than where it was in 2008. The problem with building an economy based upon debt is that eventually that debt has to get paid off. Now so long as consumers have enough money and savings, they can continue to spend and they can continue to pay down that debt. But once consumers run out of money, that is when we see recessions, and sometimes even depressions. And right now the personal savings rate is the lowest it has been since right before the Great Financial Crisis in 2008. The amount of money consumers have saved has been dwindling consistently for the past four years in a row, and consumers are almost out of money.
When consumers ran out of money in 1929, that triggered the Great Depression. That was the catalyst that caused things to seemingly overnight go from a period of exuberance and everything was great, to suddenly everything was terrible. The reason things get so bad so quickly when consumers run out of money is because as consumers are going into debt and they’re buying more and more goods, this pushes the economy higher. Companies start having higher profits and higher revenues. When their revenues and profits are going up, their stock prices go up as well. And in addition, they hire more and more workers because they have more and more money to spend.
But when consumers run out of money, things change overnight. Companies are no longer having as much revenue and they’re no longer having as much profits, because consumers are no longer spending because consumers are out of money. This leads to companies being forced to do layoffs in order to lower their costs and try to keep their profits up. And as more and more companies do layoffs, this causes more and more consumers to have less and less money, which causes even less spending in the economy, which causes even less revenue and less profits for companies, which leads to even more and more layoffs. And all of this balloons to the point where it causes a recession or even a depression.
We saw what happened in 2008 when consumers ran out of money. Had we not had a Federal Reserve Bank in 2008, we more than likely would have seen another Great Depression just like we saw in 1929. But today we do have a Federal Reserve Bank, and they’re able to delay depressions, or at the very least soften them to the point where their only recessions, and not depressions. When everything fell apart in 2008, the Federal Reserve, as well as other central banks around the world, reacted to the deepening crisis by not only opening new emergency liquidity facilities, but also by reducing policy interest rates to close to zero, as well as taking other steps to ease financial conditions.
But the Federal Reserve might not be able to do that today. And the reason for that is once consumers run out of money, the Federal Reserve will be forced to step in and lower interest rates in order to stimulate the economy and prevent another Great Depression. The problem today, though, which is different from 2008, is that we have high inflation. And we have not seen a period of high inflation, with a combined slowdown in the economy, since the late 1970s and early 1980s. And this leads to something called stagflation. Stagflation is the simultaneous appearance of an economic slowdown, combined with high unemployment, and rising prices. Stagflation was once thought by economists to be impossible, but stagflation has occurred repeatedly since the 1970s.
What makes stagflation so hard to fight is the fact that if the Federal Reserve lowers interest rates in order to stimulate the economy and prevent a depression, this has the effect of causing inflation to skyrocket. If the Federal Reserve raises interest rates in order to fight inflation, this has the effect of slowing down the economy and possibly sending us into a depression. And that’s what makes stagflation so difficult to fight, is that the Federal Reserve is screwed no matter what they do.
And now Jamie Dimon, the head of the US’s largest bank, is warning of the possibility of 8% interest rates, along with the likelihood of a recession. Coupled with Dimon’s concerns about the potential for stagflation, he warned that interest rates could soar to 8% or even more. Dimon explained that there are several persistent inflationary pressures which could keep price increases sticky, including the rise in military conflict globally and the lingering effects of an aggressive policy from central banks around the world that came out of the pandemic. Dimon also warned about the potential for carnage for both equity and debt investors should a higher rate scenario play out, noting that stock valuations are already at the high end, and credit conditions are extremely tight.
And this is also what led to the stock market crash in 1929. When this period of fake abundance eventually ends and everything suddenly, seemingly overnight, falls apart, not only does the economy go down, but the stock market goes down also. And Dimon’s warnings come as investor sentiment looks rosy. Market stock indexes sit at record highs as the market eagerly awaits lower interest rates from the Federal Reserve. But what was once a question of WHEN the Fed is going to cut interest rates, is now a question of IF the Fed is going to cut interest rates. Fed President Bowman even sees the risk of another rate hike if the inflation process continues to stall. And options traders also see a risk of the Fed raising interest rates again following the most recent rally in oil.
Oil prices have skyrocketed this year, causing inflation to continue to go higher, and lessening the possibility that the Federal Reserve is going to lower interest rates this year. Bond traders are already pricing in a much lower possibility of the Fed lowering interest rates, as bond prices have also gone up significantly this year. And all of this has led Jamie Dimon, the CEO of the largest bank in the United States, to question the optimism in the financial markets.
And like I said earlier, this fake abundance in the economy, with the increased revenues and increased profits from companies due to consumers spending more and more money on debt, also leads to an increase in hiring. And the brisk hiring over the past few months has also bolstered the Fed’s cautious stance on rate cuts. The Conference Board, which is in charge of predicting the future of the US economy, also says the US is set for more job gains ahead.
But just like in 1929, the job gains that we’re seeing right now are fake. The official US jobs data looks at the total number of jobs created. What it does not look at is whether or not those jobs were full time jobs or part time jobs. And right before the Great Depression in 1929, what we saw were the number of full time jobs starting to go down as more and more companies started to lay off workers, since their revenues and profits were going down as consumer spending started to come to an end. But we also saw an increase in the number of part time jobs, as people who were now laid off and out of work went out and got part time jobs to try to make up for their loss of income. What people ended up doing was going out and getting two and three part time jobs to try to make up for their one full time job income that they lost. This happened in 1929, and unfortunately, it’s starting to happen again.
Over the past five months, we’ve seen a significant decline in the number of full time jobs, with the number of full time jobs actually turning negative over the past few months. And we’ve seen a significant increase in the number of part time jobs, showing that just like in 1929, people are losing their full time jobs and getting laid off, and they’re going out and getting two and three part time jobs to try to make up for their lost income. We also saw the exact same thing happen during the Great Financial Crisis in 2008, where the number of full time jobs started to go down, while the number of part time jobs started to go up. And if we zoom out, we see a repeated pattern that happens every single time there’s a recession in the United States. In 1991, as well as 2001 and 2008, the number of full time jobs started to go down. At the exact same time, the number of part time jobs started to go up. And this is happening once again.
Just like in 1929, we are seeing a fake economy being built on the back of an increasing amount of debt, and we’re seeing the number of full time jobs go down as the number of part time jobs goes up, leading to fake job numbers that look far better than they actually are in reality. But it’s not just the economic data that is so similar to 1929 that has so many people, such as Jamie Dimon, so worried. It’s also the fact that the banks are in trouble.
One of the things that kickstarted the Great Depression in 1929 was a bank run, where people started to get worried that banks were going to run out of money, and people started running to the banks, pulling their money out of the banks. And this very quickly led to the collapse of a large number of banks. And now here in 2024, people are concerned that the US commercial property meltdown will lead to another banking crisis. Last year we saw Silicon Valley Bank collapse, which was followed up very quickly by the collapse of Signature Bank. In fact, last year saw three of the largest bank collapses in the history of the United States. We have not seen this number of bank collapses since 2008.
All of the bank collapses last year were triggered by runs on the banks. Bank runs caused the Great Depression in 1929, they caused a large number of banks to collapse in 2008, and they would have caused another Great Depression in 2023 had the Federal Reserve not stepped in to save the economy. In 2023, just weeks after three of the largest banks in the country collapsed, the Federal Reserve stepped in with a radical bank Band Aid to save the banks and save the economy from a huge depression. But the Federal Reserve did not actually save the banks. All they did was kick the can down the road. What they did was delay an eventual bank crisis.
And now the commercial real estate debt crisis is spreading to more and more banks. The commercial debt crisis that we’re facing here in 2024 is very similar to the housing crisis that banks faced in 2008. In 2007, as property values started to decline, banks ended up with large losses. This led to a huge number of foreclosures in the housing market, and in turn caused the Great Financial Crisis. Well, in 2021, 2022, and 2023, we also saw a significant decline in the value of commercial properties. And as those commercial property loans come due, it should lead to a huge number of foreclosures in the commercial real estate sector. Now, we’ve already seen that in some areas, such as San Francisco, but we have not seen it nearly as much as we thought we would here in 2024. So what happened? Why didn’t we see more of a collapse in 2023 than we were expecting to see?
The reason is because banks extended office loans, meaning they’re just pretending like everything is okay, when in reality it’s not. $214 billion in mortgages slated for maturity in 2023 were not refinanced, nor was there a foreclosure sale of the underlying property. These loans have been granted some short term extension to their maturity dates. For banks, this phenomenon, which critics often dub “extend and pretend”, has added significantly to the 2024 maturities. This is a good news, bad news situation. On one hand, it’s good news because loans aren’t being written off, and losses aren’t crystallizing, which makes bank balance sheets appear good, and delays an eventual crisis in the economy. But it’s also bad news because the loans aren’t being paid off and they’re not being resolved.
A lot of people saw a potential decline in the housing market starting in 2006, and people like Michael Burry started to short the housing market in 2006, expecting a major decline in housing. But that did not materialize. And the reason it did not materialize in 2006 is because banks kicked the can down the road. Banks allowed borrowers a delay on their delinquencies. Banks took over a year to actually foreclose on properties. And that is why we did not see an actual decline in housing until 2007. And we didn’t see an actual decline in the economy until 2008. Once again, people thought that a huge decline in commercial real estate was going to hit in 2023. It did not materialize because banks have simply delayed that. They have allowed the people who have these loans to simply not pay them, and they are delaying foreclosing on these properties, which means instead of everything falling apart in commercial real estate in 2023, it now looks like everything’s going to fall apart in 2024, which might not hit the economy until 2025.
And this is why a 1929 stock market crash could happen again. A huge recession like we saw in 2008, or even a depression like we saw in 1929, has a significant negative effect on the stock market. And once consumer spending ends ,and commercial real estate properties start to go into foreclosure, this eventually causes a significant downturn in the economy, which in turn causes a stock market crash. It is a truism of the investing world that markets move in cycles, with a bull market inevitably ending in a bear market downturn, if not a crash. The current bull market broke records for the longest lasting ever, and for the best performing since World War 2.
Now everyone is waiting for the next big dip. But how do you spot it before it hits? Well one way is by looking at the CAPE ratio, which measures whether a stock’s price is moving up faster than a company’s earnings can justify it. The CAPE ratio for the S&P 500 index in December of 2023, just five months ago, stood at 32. It hit a high of 28 just before the market crash in 2008. But the stock market has rallied significantly since December of 2023. The CAPE ratio was 33 in September of 1929, at the top of the stock market, right before the 1929 stock market crash. Today, the CAPE is even higher than it was in 1929, sitting at 34. The CAPE ratio today is much higher than it was during 2008, right before the stock market crash in 2008. And it’s even higher than it was before the stock market crash in 1929. All of this combined has economists very worried that the US economy is in deep trouble, and that a stock market crash is on the horizon.