Get Prepared For Recession
by Tom Dyson
June 23, 2006
“The money market is the key to the stock market. They who control the money rate control also the stock rate.” – Daniel Drew
“I want my money within the next fifteen minutes.”
The banker in front of Daniel Drew began to turn white. A greasy sheen formed on his temples. He knew this demand would cause a great deal of hardship and suffering.
Drew didn’t care. This little stunt would net him enough money to retire on...
In the fall of 1867, Drew and his two cronies Jim Fisk and Jay Gould had set out on an audacious ‘bear campaign,’ betting the stock market would fall. They had sold the market short to the tune of millions of dollars – a great fortune in those days.
They made their bets at what had seemed like a foolhardy time. As Drew recalls in his autobiography, government reports showed bumper crops were to be harvested in nearly all parts of the country. The election of President Grant was virtually assured and “money was as easy as an old shoe.”
“When money is easy, stocks go up...” said Drew. “People thought we were fools.”
Those people hadn’t counted on the evil genius of Daniel Drew and his cronies.
Sometime before, the group had quietly deposited fourteen million dollars at a chain of banks. In those days, banks were required to keep a reserve equal to twenty-five percent of total loans outstanding. So a fresh deposit of $14 million gave the banks the power to write loans worth $56 million.
Drew knew this. It was the key to his plan.
“We decided that the time had come to explode our bomb. So all of a sudden we called upon the banks for our greenbacks.”
Drew’s group caused a run on the banking system: the banks needed to come up with $56 million in an instant. Banks recalled loans. To repay the loans, the banks’ debtors had to sell their stocks... the stock market slumped thirty percent and interest rates ran up to 160%!
Men couldn’t get money to carry on their business. Merchants went broke and lost their stores. Farmers couldn’t get money for their crops to pay off their mortgages. They were driven from their homes.
Meanwhile, Drew and his gang made a large fortune.
“People everywhere began to curse us,” wrote Drew. “The air round us three men was fire and sulfur. I hadn’t thought the thing would kick up such a rumpus. It almost looked like our lives weren’t safe.”
There are two lessons to be learned from our story of Daniel Drew today…
Conclusion #1: To make money on Wall Street, calculate what the common people are going to do and then do just the opposite.
Conclusion #2: These days the Fed controls the money and right now, they are tightening. Stocks do badly when money is tight and they do well when money is loose. You need to be prepared for recession. Daniel Drew would be.
Good investing,
Tom
Editor's note: Tom Dyson is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.
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