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Ghost of 1929 crash reappears

Discussion in 'Financial Cents' started by tulianr, Dec 10, 2013.

  1. tulianr

    tulianr Don Quixote de la Monkey

    Market Watch
    The Wall Street Journal

    Dec. 6, 2013, 11:43 a.m. EST

    They say those who forget the lessons of history are doomed to repeat them.

    As a student of market history, I’ve seen that maxim made true time and again. The cycle swings fear back to greed. The overcautious become the overzealous. And at the top, the story is always the same: Too much credit, too much speculation, the suspension of disbelief, and the spread of the idea that this time is different.

    It doesn’t matter whether it was the expansion of railroads heading into the crash of 1893 or the excitement over the consolidation of the steel industry in 1901 or the mixing of speculation and banking heading into 1907. Or whether it involves an epic expansion of mortgage credit, IPO activity, or central-bank stimulus. What can’t continue forever ultimately won’t.

    The weaknesses of the human heart and mind means the swings will always exist. Our rudimentary understanding of the forces of economics, which in turn, reflect ultimately reflect the fallacies of people making investing, purchasing, and saving decisions, means policymakers will never defeat the vagaries of the business cycle.

    So no, this time isn’t different. The specifics may have changed, but the themes remain the same. Read Mark Hulbert’s take: The chart that’s scaring Wall Street.

    In fact, the stock market is right now tracing out a pattern eerily similar to the lead up to the infamous 1929 market crash. The pattern, illustrated by Tom McClellan of the McClellan Market Report, and brought to his attention by well-known chart diviner Tom Demark, is shown below.

    Excuse me for throwing some cold water on the fever dream Wall Street has descended into over the last few months, an apparent climax that has bullish sentiment at record highs, margin debt at record highs, bears capitulating left and right, and a market that is increasingly dependent on brokerage credit, Federal Reserve stimulus, and a fantasy that corporate profitability will never again come under pressure.

    On a pure price-analogue basis, it’s time to start worrying.

    Fundamentally, it’s time to start worrying too. With GDP growth petering out (Macroeconomic Advisors is projecting fourth-quarter growth of just 1.2%), Americans abandoning the labor force at a frightening pace, businesses still withholding capital spending, and personal-consumption expenditures growing at levels associated with recent recessions, we’ve past the point of diminishing marginal returns to the Fed’s cheap-money morphine.

    All we’re doing now is pushing on the proverbial string. Trillions in unused bank reserves are piling up. The housing market has stalled after the “taper tantrum” earlier this year caused mortgage rates to shoot from 3.4% to 4.6% between May and August. The Treasury market is getting distorted as the Fed effectively monetizes a growing share of the national debt. Emerging-market economies are increasingly vulnerable to a currency crisis once the taper finally starts.

    U.S. adds 203,000 jobs; unemployment rate falls to 7%
    U.S. employers continued to add jobs at a steady pace and the unemployment rate fell in November to a five-year low.

    The Fed knows it. But they’re trapped between these risks and giving the market — the one bright spot in the post-2009 recovery — serious liquidity withdrawals.

    But the specifics of the run up to the 1929 crash provide true bone-chilling context for what’s happening now.

    The Bernanke-led Fed’s enthusiasm for avoiding the mistakes that worsened the Great Depression—- a mistimed tightening of monetary conditions — has led him to repeat the mistakes that caused it in the first place: Namely, continuing to lower interest rates via Treasury bond purchases well into an economic expansion and bull market justified by low-to-no inflation.

    (Side note here: As economist Murray Rothbard of the Austrian School wrote in America’s Great Depression, prices dropped then, as now, because of gains in productivity and efficiency.)
    Here’s the kicker: The Fed (mainly the New York Fed under Benjamin Strong) was knee deep in quantitative easing in the late 1920s, expanding the money supply and lowering interest rates via direct bond purchases. Wall Street then, as now, was euphoric.

    It ended badly.

    Fed policymakers felt like heroes as they violated that central tenant of central banking as outlined in 1873 by Economist editor Walter Bagehot in his famous Lombard Street: That they should lend freely to solvent banks, at a punitive interest rate in exchange for good quality collateral. Central-bank stimulus should only be a stopgap measure used to stem panics, a lender of last resort; not act as a vehicle of economic deliverance via the printing press.

    It’s being violated again now as the mistakes of history are repeated once more. Bernanke will be around to see the results of his mistakes and his misguided justification that quantitative easing is working because stock prices are higher, ignoring evidence that the “wealth effect” isn’t working.

    Strong died in 1928, missing the hangover his obsession with low interest rates and credit expansion caused after bragging, in 1927, that his policies would give “a little coup de whisky to the stock market.”

    Ghost of 1929 crash reappears - Outside the Box - MarketWatch
    Quigley_Sharps likes this.
  2. Brokor

    Brokor Live Free or Cry Moderator Site Supporter+++ Founding Member

    It will crash when

    A.) The FED can no longer get away with their usury scheme.
    B.) There is no longer an incentive to continue the current monetary system and a new one must be introduced to take its place.
    C.) The amount of interest on every "dollar" borrowed can no longer be easily brushed under the carpet. The rest of the world refuses to accept U.S. currency.

    Public opinion matters. The media does a great job at telling YOU what to think every day. Never mind the DEBT, just listen to these experts talk about Bernanke and Obama using a jet to vacation and interest rates and mortgages and...your eyes are getting heavy...

    The only way to keep this scam going is to continually create more debt, because debts are assets and the goal is to establish a single global economy --destroying as many nations as is needed, corrupting politicians and empowering the corporate cartel syndicate. As soon as we get embroiled in "quantitative easing" and "stimulus plans", the "experts" will claim they have more knowledge and try to sooth you with complicated sounding rhetoric and stories about how "complicated" it all is. The truth is, it's surprisingly simple.
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