An age-old saying on Wall Street advises, “No one rings a bell at the top (or bottom) of the market.” This metaphorical bell is often perceived as the distinctive signal to sell at market peaks. However, we dare to challenge this notion. In reality, bells do ring at market highs, yet only a few can hear them, as many remain distracted by the allure of quick wealth.
Bull markets can give rise to frenzies, where intrinsic values fade away in favor of the expectation that overpriced assets can be sold later to even greater fools. This irrational pricing, which feeds off the notion of a greater fool, can often serve as the bell’s ringing sound, though it can persist for years.
Currently, the total market capitalization to GDP ratio has soared to over 200 percent, clearly ringing the bell for cautious investors. In addition, MicroStrategy’s recent issuance of $500 million in junk bonds, aimed exclusively at acquiring bitcoin at an attractive 6.125 percent coupon rate, serves as another warning signal.
How will MicroStrategy manage its coupon payments if bitcoin’s value declines? Will they resort to selling more junk bonds? And if they do, will anyone be willing to buy them?
Can you hear the bells ringing?
At this juncture, as the market nears its peak, few are truly listening. Tragically, these alarming signals often only become evident in hindsight, after the market has taken a significant downturn.
In stark contrast, the sound of a bell at a market bottom is a dire one. At this stage, despair reigns, leading some individuals to take their own lives. This is when grand deceptions are revealed, and former industry leaders are exposed as fraudsters.
Today, we delve nearly a century back in time to highlight one of the most notorious swindlers on Wall Street, seeking parallels that might offer guidance for today’s investors while helping them to evade similar pitfalls.
The “Swedish Match King”
On March 12, 1932, just months before the Great Depression’s market bottom, Ivar Kreuger took his own life in a Paris hotel room. This shocking act raised countless questions: Why would a man hailed as a savior of Europe and revered as one of the world’s most esteemed businessmen commit such an act?
Many modern investors may not be familiar with Kreuger, the “Swedish Match King,” but understanding his story could be vital in safeguarding their savings in the uncertain times ahead.
Kreuger was a Swedish civil engineer and entrepreneur who began his career in construction. He co-founded Kreuger & Toll in 1908, which enjoyed early success, constructing the Stockholm Olympic Stadium and laying the groundwork for Stockholm City Hall.
Shifting his focus, Kreuger built a global empire in match manufacturing between 1913 and 1932. His company operated in 36 countries, monopolizing production in 16 of them and accounting for two-thirds of worldwide match output.
Kreuger expanded his empire by lending money to governments across Europe, Latin America, and Asia in exchange for national match monopolies. This model demanded that he continually find larger pools of funding, leading him to transition from a moderately ethical businessman to a sly stock promoter between 1923 and 1924.
What drove this transformation remains a subject of speculation. In a three-part series published in Fortune during 1933, writer Archibald MacLeish offered insights into Kreuger’s motivations:
“In 1923, Kreuger, with his fervor for power, discovered the gold surplus in New York and its insatiable appetite for stocks. He then realized the stock market’s prowess surpassed that of the match factory as a means to achieve his ambitions.”
“If such a realization indicates a weakening of the mind, it seems many Wall Street fools shared this fate during the ‘20s. Others before Kreuger held their misguided beliefs that their schemes were foolproof, often with less justification than he possessed.”
“Kreuger, however, entertained a vision that the Swedish Match Monopoly would inevitably evolve into a global monopoly, thereby legitimizing all his dubious claims and actions.”
Indeed, stock promotion and financial machinations can beckon with seductive promises of easier wealth, overshadowing the essence of genuine production.
Confidence in Confidence
Kreuger relied on capital markets to fuel his various acquisitions and monopoly agreements. As a result, American investors eagerly sought out the high returns associated with his companies.
By 1929, Kreuger’s stocks and bonds, some offering staggering annual dividends of 25 percent, were among the most widely held securities globally. However, following Kreuger’s unexpected suicide, Price Waterhouse conducted a forensic audit, unveiling that he had orchestrated a massive Ponzi scheme.
His financial records were riddled with fictitious assets, concealed within a labyrinth of over 400 shell companies. By late February 1932, Kreuger could no longer sustain his elaborate scheme, leading to his final act of escape weeks later.
Following their investigation, Price Waterhouse succinctly remarked:
“The manipulations were so straightforward that anyone with a basic understanding of bookkeeping could tell the accounts were fabricated.”
What lesson can we draw from this?
We are now 12 years into a bull market, and many investors, much like those of the 1920s, believe that the stock market’s rise will persist. They place their faith in financial strategies, many of which were once pioneered by Kreuger, and believe that this time things will be different.
However, history suggests otherwise; it’s likely that we will uncover another similar scheme.
In his 1960 introduction to “Kreuger: Genius and Swindler,” John Kenneth Galbraith noted:
“Kreuger thrived during the booming twenties; amidst such confidence, those who trust without questioning regard skeptics with unease. It stands as a steadfast principle that where confidence burgeons, conmen will inevitably emerge to exploit it.”
Do You Hear the Bells Ringing?
At Economic Prism, we remain vigilant. Our faith in confidence men is tenuous. We pose questions, not suggesting fraudulent behavior but instead seeking clarity:
- Why is Tesla trading at more than 200 times earnings?
- Why is the total issuance of collateralized loan obligations anticipated to grow to $850 billion by year-end?
- Why was JPMorgan’s CEO Jamie Dimon awarded $31.5 million in 2020?
- Why is the Cyclically Adjusted Price Earnings Ratio (CAPE Ratio) for the S&P 500 at 37.84, more than double its long-term average of 16.82?
- Why did the Federal Reserve’s reverse repurchase operation reach a record $813.573 billion on Wednesday, a rise from $791.6 billion just a day earlier? What is happening?
- Why is the yield on the 10-Year Treasury note merely 1.5 percent while consumer price inflation is purportedly rising at a 5 percent annual rate?
- Why have the NASDAQ and S&P 500 indices reached new all-time highs?
- Why has the U.S. national debt exceeded $28.4 trillion?
- Why do many policymakers harbor an aversion to gold?
- And many, many more…
Numerous bells are ringing. Can you hear them?
Sincerely,
MN Gordon
for Economic Prism
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