200 Years of Stock Market History

Geopolitics: For 200 years the stock market has only flourished when an Anglo-Saxon superpower has either a genuine or perceived grip on global hegemony. Either Britain or America has presided over all the secular bull markets over that time period, which encompasses the entire history of the modern stock market and industrial capitalism. At its peak in the 19th Century Britain directly controlled 20-25% of the Earth’s landmass and 100% of the ocean. It could raise huge native armies from its countless colonies and call up advanced modern armies from Australia, Canada, Ireland, New Zealand, and the 2 Boer Republics in South Africa. It ruled the seas so it could put these armies anywhere except the heart of Europe where a host of advanced armies resided cheek-to-jowl. No power could stand against it. And this military colossus loved free markets and capitalism. No wonder stock markets boomed throughout the early and mid-19th Century. But this changed in the early 1870s when Prussia linked itself with several other German states and demolished France in the Franco-Prussian War. Up until that war, France had the strongest single army on Earth. In the blink of an eye dozens of separate little countries that spoke German somehow joined together to form one gigantic country that unexpectedly possessed an army much stronger than any other single standing army in the world. Kaiser Wilhelm became the king of the newly created German superpower and he wanted colonies badly.
1875 was the worst single year in stock market history. The 1870s were as bearish as the 1970s. But as the decade faded investors realized that Kaiser Wilhelm could not stand up to his grandmother, England’s Queen Victoria. A combination of love and fear of the English Queen kept the Kaiser from using his incredible military machine. And besides, Victoria would carefully dole out colonies to Willy when he grew too grumpy and talked of using his new battleships. “Settle down, Willy, I’m giving you Tanzania and if you’re good I’ll give you Namibia.” So the market boomed again.
In 1902 Britain lost a civil war with its two strongest subject nations, The Boer Republics. This Vietnam-like defeat is recorded in history books as a British victory but it was a crushing blow to the empire. At about the same time Queen Victoria died. Over the next two years the Dow Jones was cut in half for fear of an unleashed Germany, one of the worst bear markets ever. The early years of the 20th century were very bearish, much like the 1970s. The markets didn’t truly boom until WW I was over and investors perceived that Britain had beaten Germany and a pro-capitalism superpower would rule forever. Hurray! The charts for the 1920s are like the charts for the 1990s; a huge but fragile bull market. And the two decades reflected the same geopolitical belief, Britain had beaten Germany, America had beaten the USSR, a new mono-polar world will last forever. The beliefs were false and that may be why the bulls were so fragile.
Britain was not a global superpower in the 1920s, it was only an illusion. In 1931 Japan invaded Manchuria, something a superpower would never allow. This is the true start to WW II.
The stock market crash of 1929 was not triggered by a geopolitical event. Fundamentals started the Great Depression and the 30s bear market. But the downturn was given legs by geopolitics, the slow steady formation of a powerful and ultra-aggressive Axis Alliance throughout the 30s hurt investor confidence and that in turn hurt fundamentals. In a way it is impossible to separate fundies and geopolitics at junctures this critical. The 30s bear is similar to the bear market that started in 1999. The 9/11 Al-Qaeda attack didn’t trigger the 1999 bear market but made it longer and more severe.
That takes us up to the start of the Cold War, which we’ve already covered in other news letters. So there it is 200 years of geopolitics trumping fundies.