Market Analysis

1929 Redux

When a house is on fire nobody has time to think about the future. All effort is on extinguishing the fire and save what’s left. That’s the Fed’s role right now dousing the burning economy and market duplex with zero rates and unlimited QE.

Never mind that they greatly contributed to the severity of the fire with their ill advised cheap money policies over the last 10 years.
But let them fight the fire and let’s hope it’s successful to at least extinguish this latest crisis.

But don’t think for a second there won’t be larger consequences. This is not your ordinary crisis. This is a disaster, a medical disaster that has rapidly morphed into the greatest economic crisis of our lifetimes.
And don’t compare it to 2008. That ship has already sailed.

This beast here is much more ferocious in speed and impact than 2008:

The decline so steep and fast we can’t compare it with 2008, 2000 or even 1987.

The economic impact of the virus coupled with the crushing effect of stretched valuations reverting to the mean is so dramatic that we are now seeing stimulus programs and central bank interventions that make 2008 look like child’s play.

And so I have to ask: What’s at the end of this tunnel?

Let’s say we get out of this and the shock can be minimized and the virus disappears and we get a recovery of sorts. What are the long term consequences of the most indebted global economy ever adding even more debt?

What are the consequence of millions seeing their retirement dreams decimated?

You really think a stimulus package is going to bring all these jobs back overnight? No way.

Indeed we already see companies laying off people by the thousands, not just temp jobs but full time jobs. The cost cutting has begun out of necessity:

This is just the beginning. A supply shock is turning into a demand shock by the time this is all done.

And so the structural issues long ignored will not be magically be solved by stimulus or central bank intervention. In fact they were never solved over the past 11 years of this cycle. They were just masked by cheap money and debt.

No, this shock is so drastic that we only really have one comparison. The roaring 20’s of a century ago.

Those were some of the headlines back then:

Replace billions with trillions and there ya go.

The economic fallout back then was a disaster, not for a few months but for several years. Excessive speculation, unrealistic valuations and then a trigger and it was over.

A steep dramatic crash off of all time highs:

That first crash in 1929 was just the beginning not the end. But note that big rally following that first crash. It ran for several months producing a 48% rally into 1930. Bullish right? Well for a nice long trade yes but then it turned into a valley of tears of lower highs and lower lows all the way into 1932.

Think this is all far fetched?

Compare to now:

Oh I know, analogs, to be viewed with caution but structurally that bull market back then ended the same this one just did: Following a period of excess with a final blow-off top. And make no mistake: We just had a blow-off top in that time period between October and February leading up to the 2020 crash.

The 1929 redux tells us a big rally will come, either from here or from lower first still, and this rally will be awe inspiring, it’ll produce technical reconnects in a market that is now widely disconnected to the downside and it will bring back optimism. But then the historical script suggests lower highs to come as the world is then confronted with the consequences of the costs of extinguishing this fire. The bill comes due as the world will be settled with even more debt, but now a much higher unemployment rate, poorer consumers, and companies focused on margin efficiencies.

1929 redux is staring us in the face and it says this won’t be a “V” recovery. This will take years of heightened volatility and wide price ranges to negotiate through and the first really big counter rally may prove itself to be a big fat sell. No matter how much the Fed prints.

But that’s a discussion to be had once we’ve had this rally. For now markets are still in process of finding a bottom and now that the Fed has launched unlimited QE markets are still selling off. Not exactly confidence inspiring. All hope then on that big stimulus package to come.

Best hope that will do the trick:

I mean, what else is left following that? Failure is not an option, but failure is already programmed into the historic script of the 1929 redux. So be aware of that script once that big counter rally emerges and get’s everybody all cheerful and optimistic again.

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Categories: Market Analysis

14 replies »

  1. This is a splendid analysis but it is a civilian’s / banker’s analysis, where consequences are in money and economic terms, and the tools are accounting and ledgers and signing pens. However the real world uses guns and tanks and planes,too. In sum, I think the analogous past is not 1929 but 1937, the echo-crash where the market fell 50%, and the capital destruction led to global war, where those who $lost tried to take from those who $had. (At first the US benefited from selling to England, before it went directly to share in Europe’s spoils.) This time the war will likely be with China. The US needs 5 — 10 trillion, and there’s only one country with this sum. So a reason will be invented, and it will employ the laid off and fill up the factories with war materiel production. War, the great Reflator. I sincerely hope that I am wrong.

    • couldn’t agree more with 1929 analogy, years of buybacks, ETF’s/mutuals back in those days and the economy built around making a capital gain on speculation rather than a genuine return, whilst the real economy was not very good. Lots of differences of course but the reset is on and in the interim people will hope they find a greater fool to sell to. Lets assume there is no war but I also thought if anything is going to rack up tension it’s millions of people around the world that are very unhappy and the virus being labelled the Chinese flu, wu/flu etc is definitely not going to help, also intentionally crashing oil is a bit inflammatory! Hopefully we return to a more sensible form of investing some time. ie put your money in something and get a nice rate of return above inflation – but I doubt that will ever happen! Anyway, none of the analogies of the past are good.

  2. In Europe a guy called Mario D. created the quote: “Whatever it takes.” and he was decorated for his great work. He induced negative interest rates and on top a endless 20 billion per month QE. Anyway, markets crashed. You can’t beat a virus with money. Just sayin’.

  3. One must allow the chance that unlimited capital, aka credit, in unimagined trillions, will work. The theory seems to be that all human suffering has always and only been because of a shortage of money. Maybe they are right and Elon can fly people to Mars. It will be great for mankind they say.

  4. As I said in response to Sven’s post “Collapse” 14th March last:
    “Looking further ahead. There seem to be two forks: systemic collapse or, secondly, extreme measures save the financial system. In latter case what longer term repercussions will the extreme measures have and might they too collapse the system?”

    This financial system is clearly beyond redemption. Three massive resets in just over 20 years must be sufficient evidence for all but a wilfully blind fool. Its basic function needs to be dissected, analysed and rebuilt on different principles. Those principles will likely encompass the social and moral imperatives which govern all humans’ behaviour. The alternative is that our species is unfit to survive and the sooner we exit the stage the better.

    Well, I hope you enjoyed the sharp month end bounce, I don’t think we’ll be revisiting SPX 2400 for a while. Short of directly buying stocks the Fed have no bits of kitchen sink left. There’ll be a massive stimulus bill from Congress sooner or later but, unless it comes tomorrow, I guess US COVID-19 stats will have already taken SPX to the cusp of 2000 before it’s passed.

  5. Expect the Fed to start buying equities…under an assumed name…or 4 letter acronym…PT Barnum is laughing in his grave…

  6. The Dow Jones did not return to the peak closing of September 3, 1929, until November 23, 1954. Possibly another piece of the historical puzzle.

    There’s a dragon with matches that’s loose on the town
    Takes a whole pail of water just to cool him down

  7. We learnt in Australia this past quarter that sometimes, when the conditions are so bad, the only thing you can do is to let the fire burn itself out.

  8. This is as I understand it the Fourth stage of a long drawn out decline of the American and USD hegemony. This process follows an incredible parallel to the Poem in the Bible of Israel’s fall that led to that nations fall and their people being scattered to the ends of the earth. The poem is from Isaiah 9:8-10:4. It is of four exponentially progressing judgments on the nation as they turned away from God and Obedience to Him and sought their increasingly selfish ways.
    Stage one was the crisis that emerged in 9/11.
    On September 12, the leader of the Senate in The US, makes the official response to the calamity of the day before. He unwittingly quotes Isaiah 9:10 from the first stage of this poem. “Our bricks of clay have fallen but we will replace them with quarried stone, our sycamores have been uprooted but we will replace them with cedars.”
    This first section of the poem was titled Judgment on Pride and Arrogance. In response the US government and the Fed began their stimulus policies to try to rebuild confidence and faith in their economic system. Markets close for 6 days and reopen on September 17, 2001. This day results in the biggest stock market crash in the US by points in their history. It happens on the day in the Hebrew calendar set aside for the removal of credit that occurs once every 7 years(Elul 29)
    Phase 2. Judgment on Hypocrisy. 2008
    The policies of incentivizing risk taking by lowering interest rates and making credit easier to get allowed the consumer to chase the markets higher by building the Housing Bubble. As this bubble expands, and ultimately collapses on September 29, 2008, the response is to make the use of stimulus even more important, by adding more tools like QE and massive federal deficits, as well as even lower interest rates to prop up an increasingly unhealthy system. This crash incredibly happens on the same Hebrew calendar date- Elul 29, the date set aside to remove credit in the Bible once every seven years, exactly 7 years from the 2001 crash. This crash becomes the new biggest crash and loss of wealth day in US history.
    Phase 3: 2015. Judgment on Unrepentance. These policies of QE, artificially low interest rates, and government deficits continue to prop up a failing system and the rest of the world increasingly adopts these policies as well, especially other countries originally built on Biblical law and precepts: Europe, Canada, Australia, New Zealand.
    The market reaches a short term peak in 2015, but a coordinated proactive response by the entire First world system of more of these unsustainable and irresponsible but effective policies allow the system to maintain enough confidence to stay propped up.
    God gives us free will, He doesn’t coerce us into obeying Him, but He warns of the consequences that will happen, because He is just.
    Phase 4: Woe to Tyrants: begins then in the fall of 2015 and if like the other 7 year cycles could continue to the fall of 2022. This part of the poem’s commentary written about Israel says, “Corrupt wealth buys helplessness”, and we see in America the election of Donald Trump. He promises to make America great again, and interestingly his greatest support comes from the Christian Right. Humility has a way of finding us out. The exhaustion events that happen to humanity are not new, but they are Daly needed. My hope is we see this current virus and it’s economic consequences as a divine interruption that can cause us to see our need for God and His ways and to recognize how futile our ways have become. Revival almost never happens when times are good.

  9. So in Sept 1981 the 30 year bond was at 14.81% and it has been 39 years of printing money and here we are

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