Stock-Market Crashes Through the Ages – Part V – 21st Century

As the 21st century ushered in a new era of further inter-linked living between nations around the world and heightened levels of communication, technology became the tool that was at the finger-tips of everybody in real-time around the world. Governments were and still are mistrusted both by their people and by other states (and the Edward Snowden whistleblowing-surveillance scandal by the National Security Agency serves as a prime example). Consumerism became the order of the day. Buy, buy and buy again! Don’t bother selling, because people don’t buy second-hand anymore. The only time it’s worth selling is when it’s something you have produced. Selling then becomes the order of the highest priority and even ethics and morals can be overridden in such cases (with Russia’s recent refusal to intervene in Syria simply because they sell arms in lucrative deals to that country). People only buy new these days. They don’t repair, they replace. This is the millennium of the throw-away, changing world. Boundaries in society have become liquids that flow in and out of each other. Man has become liquid. He changes form. The Digital Revolution, now when we look back with hindsight, seems nothing more than prehistoric antiquated technology.

The dawning of a new era of this third millennium resulted in seeing the USA as the only viable superpower that existed in terms of economic growth and force in the world. Russia was still devastated from years of communism and China had not grown to the capacity that it is today. But, all of that was rebalanced. All of that changed as Russia and China, along with India and Brazil built the foundations of the economic growth of the 21st century. The BRICS had been born and power was shifted from the West to other places on the globe. There was redistribution! But with redistribution, there was dependence!

21 was once the coming of age in our societies. The 21st century truly saw the coming of age of related knock-on effects from one country to another in terms of economic growth. But, with economic growth, there comes the downside too. When one country trips, the others are dragged down. The 21st century represents the constant battle between one country and another as to the economic superiority that we believe that we might hold or even use to destroy the others in a constant race for the pole-position. It’s a strange dawning of a new millennium that brought in the idea that being the ‘best’ was no longer enough. Imitating rivals was no longer good enough. That wasn’t going to bring anything but a struggle for power. The thing that epitomizes the 21st century is the idea that we have to be the first to do it. The first to invent. The first to build. The first to create. But, creation means destruction. In the process of creating in the never-ending race to be number one and the first at the same time, there is the destruction of others in the world. That means the destruction of their economies. The trouble is that we get dragged in and suffer losses too now that we have up-to-the-minute connection and interconnectedness.

So, the 21st century has seen its increased share of stock-market crashes probably more than any other period in history. There have been more stock-market crashes around the world in the past decade than there were in the last 50 years probably. They are closer and closer together and the answer why is simply to be found in the competitive aggressive struggle for greater and greater economic prosperity in the nations that are seeing populations increase to world totals of over 7.128 billion (with increases of 67 million a year). At the same time there is a growing shortage of the natural resources that we have at our disposal. 1.8 billion people live in regions where there is absolute water scarcity today. We have estimated oil reserves for 46.2 years. There are 58.6 years of natural gas at our disposal. Our resources have become the object of all desires on the planet and the race is on to get our hands on them. Those that have them are courted and wooed until they provide what we want. Sometimes we just take what we believe to be rightful ours, regardless of whether they want it to be taken or not.

The following stock-market crashes are the major crashes that have taken place since the start of the 1st century of this new millennium. How did they happen and what were the effects? It seems like we have been in more stock-market crashes in the past ten years than we have actually been out of them!

1. 9/11 Crash

Crash! 9/11

Crash! 9/11

There were principally two problems that arose as a direct consequence of the 9/11 terrorist attacks in the USA. The first was the financial problem which was caused and the damage to the economy. The second was with regard to the cost that the insurance companies had to pay out for.

On the day of the terrorist attack perpetrated on the USA and the Western World symbolized by the World Trade Center Towers in New York, the NYSE first decided to delay trading. When the second plane crashed into the South Tower, it took the decision to cancel all trading that day as did the NASDAQ. The London Stock Exchange was also closed. The NYSE was closed until September 17th 2001.

The Federal Reserve injected $100 billion in liquidity into the US economy each day for three days after the attacks. Gold immediately rose from $215.5 to $287 in a bid to find a safe haven when the crash happened.

  • In New York City alone there were 430, 000 jobs that were lost.
  • GDP for the city fell by $27.3 billion from September 11th 2001 until December 2002.
  • The Federal government gave over $20 billion in financial aid to the city to deal with development and infrastructure issues.
  • When the NYSE opened on September 17th the Dow Jones Industrial Average immediately fell by 7.13% (down by 617.78 points), which was the worst one-day drop in history!
  • 18, 000 companies were either destroyed completely or had to be displaced to other locations to continue working causing major disruption.

The insurance losses that were incurred were enormous in the wake of the attacks:

  • Businesses lost $11.1 billion after being closed.
  • Property damages amounted to $9.6 billion.
  • Worker compensation accounted for insurance costs to the tune of $1.8 billion.
  • Insurance companies lost an average of 10% in share values as a result (Swiss Re and Baloise Insurance Group).
  • Swiss Life Insurance lost 8%.
  • Very few decided to continue insuring for terrorist attacks afterwards despite the fact that they held the deposits in reserve to be able to make the payments.

Perhaps the biggest cost incurred however for the US was the consequence of what followed and the War on Terror that was launched. According to analysts, the cost of that war stands at approximately $5 trillion today and it is still mounting.

The knock-on effect around the world caused a 4.6% drop in the Stock Exchange of Spain. The DAX fell by 8.5% in Germany. The FTSE 100 fell by 5.7%.

2. Dot-com Crash 

Crash: 2002

Crash: 2002

While the immediate effects on the world’s stock markets after the 9/11 terrorist attacks were relatively short-lived, they had a direct impact on the 2002 stock crash, which is also known as the internet bubble burst. Investors were unsure and wary of economic activity in a climate that was tense due to terrorist attacks. They were uncertain that it was the right time to invest, in particular since insurance companies were now refusing to insure against terrorism. This caused a downturn in the market, but only in part. The other reasons were due to false accounting and overspending by dot-com companies that believed that it was impossible for their bubble to burst. Their rapid growth meant rapid decline. In the early years they expanded their customer-base so rapidly that they invested far too much money and thought that the upturn would never end. But, of course it did!

Between 1987 and 1995, the Dow Jones Industrial Average had expanded at a rate of 10% per year. Between 1995 and 2000 that rose to 15% per year. The DJIA hit the peak on January 14th 2000 closing at 11, 722.98. The peak was reached on March 10th 2000 with the NASDAQ hitting 5, 048.62.

  • By September 2002, the DJIA had suffered a loss of 27% in comparison with its 2001 value.
  • That meant a loss to the value of $5 trillion.
  • At the peak, the NYSE had a valuation of $12.9 trillion, while the NASDAQ amounted to $5.4 billion.
  • This represented total value for both of $18.3 billion.
  • By 2002 the NASDAQ had lost 80% of its market value and stood at only $1.8 billion. The NYSE had a value of $7.2 billion.
  • That meant a total loss of $9.3 trillion.

3. 2007/2009 Bear Market

Crash: Bear Market

Crash: Bear Market

The bear market of 2007-2009 was officially recognized in June 2008. The Dow Jones Industrial average had by that time dropped by 20% from October 2007 and it didn’t look like it was ever going to go up. In fact, it got much worse.

  • The DJIA reached its peak on October 9th 2007, closing at 14, 164.53.
  • There was a second peak at 14, 198.10 on October 11th 2007.
  • September 29th 2008 saw the largest drop of 777.68 points (to 10, 365.45).
  • It reached its low on March 6th 2009 (losing 54% of its market value in comparison with October 9th 2007).

When things go wrong we tend to look for scapegoats as usual. There are principally three areas where people decided to lay the blame for this stock-market crash. Some analysts said it was nothing more than the economy going wrong. Others believed it was Bush’s administration and then because it straddled the arrival of the Obama administration, there were those that thought he was to blame. So, take your pick! Or even better, maybe it was all three!

The economy was to blame because of an expanding debt bubble, lack of sales in the automobile industry and the housing bubble. The Economist called the housing bubble the “biggest bubble in history”. Housing prices reached a peak in 2006 in the US (as in many other places in the world at the same time), after which they declined rapidly. The credit-crisis is considered to be the major factor that caused the 2007-2009 bear market. The credit-crisis was the result of the inability to meet mortgage repayments since their mortgage rates which were low-interest ones changed into regular interest rates. House prices were largely overvalued due to the bubble, and trillions of dollars ended up being lost in property values.

Those that blame the policies implemented by the Bush administration cite the following as factors of this bear market:

  • Return to deficit spending under Bush.
  • The war in Iraq and its financing.
  • The strong encouragement of consumer spending.
  • Tax cuts for the wealthier echelons of society.

Obama was blamed for the following reasons:

  • The stock market continued to drop, despite the injection of $787 billion into the economy under the Obama administration.
  • The DJIA fell by 20% from Inauguration Day until March 2009 (which was the largest drop under a newly-elected President for 90 years).
  • Between January 2009 and March 2009, $1.6 trillion had been wiped off US equities.
  • There was increasing unemployment and heightened bank losses.

You choose who was to blame, but it is probably not one, but a combination of factors.

4. 2008/2012 Financial Crisis

Crash: Subprimes

Crash: Subprimes

The financial crisis of 2008-2012 is also known as the Global Financial crisis and it is considered as the mother of all crises since the Great Depression. The causes?

  • The housing bubble that burst after 2006.
  • The fall in security-values of US real estate pricing.
  • The collapse of financial institutions around the world.
  • Speculation in the housing market (22% of homes purchased in 2006 were as investments and 14% for vacation homes).
  • The Federal Reserve lowered the federal funds rate (6.5% to 1%) and credit at low-interest rates became easier.

Policies had been implemented by banks during the housing bubble to enable easy access to home-ownership through subprimes, essentially based upon the belief that housing prices would always continue to rise.

  • 90% of the subprimes were based on adjustable-rate mortgages in 2006, for example meaning that millions were unable to pay back their loans when the rates took a hike.
  • Securities that were backed by these mortgages became almost worthless as the number of people unable to meet mortgage repayments increased.
  • Nearly 9 million people lost their jobs in the US at the start of the crisis (6% of the workforce).
  • Housing prices fell by 30% and the US stock market saw falls of 50% (by 2009).
  • 1.3 million properties had had foreclosure orders put upon them by 2007 (a 79% increase on the 2006 figure).
  • There were 2.3 million foreclosures in 2008 (+81% on 2007)
  • 2.8 million foreclosures in 2009 (+21% on 2008).
  • 9.2% of all mortgages in the US were either being defaulted on or had had foreclosures put on them (by August 2009).

5. 2010 Flash Crash

Flash Crash

Flash Crash

The Flash Crash is also known as the Flash Crash of 2:45 and it took place on May 6th 2010. The Dow Jones Industrial Average plummeted by 9%, but managed to recover within a few minutes. It was the biggest one-day point decline (-998.5 points).

There were worries regarding the EU sovereign debt crisis and in particular the economic situation of Greece. The DJIA was already trending down but at 2:42 in the afternoon it plunged over 300 points.

The Securities and Exchange Commission report cited the following as the cause: “with a backdrop of unusually high volatility and thinning liquidity a large fundamental trader (a mutual fund complex) initiated a sell program to sell a total of 75,000 E-Mini S&P 500 contracts (valued at approximately $4.1 billion) as a hedge to an existing equity position."

$1 trillion (temporarily) disappeared from the value of the market in just a few moments because people were selling left right and center. The cause was the cause system and algorithms.

6. 2011 Crash

Crash: AAA

Crash: AAA

Standard and Poor’s downgraded the US credit-rating from AAA to AA+ on August 6th 2011, and that was the first time ever for the US which had held that rating since 1941. There was also a suggestion that it might even go lower than that level.

  • The Dow Jones Industrial Average dropped 2, 000 points in just two weeks.
  • Bank stocks were affected the most, with the Bank of America losing 50% of its share value in 2011.
  • The S&P financial sector saw losses of -23% between for the first two quarters of 2011.
  • Gold rose to over $1, 800 in August 2011.
  • $2.8 trillion had been wiped off share values.

Around the world the same thing happened as a knock-on effect:

  • France’s Cac40 lost 20% in two weeks, falling 5.5% on August 18th 2011 alone.
  • The DAX in Germany lost 5.8% on the same day.
  • The UK FTSE 100 lost 4.5% on August 18th 2011 and 4.7% again in September 2011.

The 21st century has seen some of the worst stock-market crashes in history, with very little time to see an upturn. It would seem when we look back up them that they are so close together, that they have all run into one. Governments are reticent to admit that we are in recession, that we are suffering from a downturn in the market, but bury your head in the sand as much as you like, it certainly looks like they have just melded into one big mess over the past decade. When will it get better? Who knows! Will Quantitative Easing help matters or make them worse?

One thing might be certain: the next ten years will either be damn bad or time to get the bunting out. I’ll be hoping for the latter. As we look back over the past articles in this series, the 21st century seems like it has already been bad enough. Who votes for an improvement? Maybe all of us! The question is: How?

 

Stock Market Crashes Through the Ages – Part I – 17th and 18th Centuries.

Stock Market Crashes Through the Ages – Part II – 19th Century.

Stock Market Crashes Through the Ages – Part III – Early 20th Century.

Stock Market Crashes Through the Ages – Part IV – Late 20th Century.

 

 

 

 

 

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tothetick

Professional team of writers/analysts analyzing the financial markets.

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