“There is nothing unique about the crash of ’29. It is something that happens about every 20 to 30 years, because that is the length of the financial memory. It is about the length of time needed for a new set of suckers to come in and imagine that they have a new and wonderful fix on the future.”
John Kenneth Galbraith, The Great Crash of 1929
(Fun Fact: 1987 Crash was 27 years ago)
1929 rallying cry: “Stock prices have reached what looks like a permanently high plateau.” Irving Fisher (Leading economist of the time)
2014 rallying cry: “Don’t worry the Fed has our back.” Everyone on Wall Street
Thank you for all the responses! Some house keeping is in order. I am not a perma bear. I was long stock up until January but I did not sleep well most of last year because we were stretched and the insanity was rampant. I am a bear because the time is right from a cycle perspective and there are not many bears out there right now from a positioning stand point. Trust me, when we arrive at or near a bottom I will trade it. In fact I will trade many bottoms on the way down into the final lows. However, being long at this point in the cycle is just plain silly. I will turn uuber bullish when I see martial law announced and DHS tries to take the guns away from the gun folks. Sell euphoria and buy despair. Seriously, if you are long what exactly are you playing for? The last 10%. The risks right here right now are just insane. Of course most people think that I am insane. When people come around to my point of view we will be down a good bit of the way already. Remember these two points: 1) We are in month 62 of the longest 4 year stock market cycle advance in the history of the DOW and 2) The Fed and China are tightening. Really what else do you need to know? Seriously keep it simple, go to a quite place, close your eyes, breath deeply and meditate on what I just said for 20 minutes. Then hopefully you will be enlightened. If I am a few months early who cares because when this market goes South it has the potential to simply just fall apart.
Now let us look at the echoes.
Fundamentals: In 1929 we had the roaring 20’s. It was a time of fantastic growth in corporate profits. Those profits were fueled by a very dovish Fed, a proliferation of installment credit for the middle class and new revolutionary technologies and advances. The corporations expanded rapidly to meet the rising demand of the newly indebted serfs. The other interesting thing was that the lion’s share of the wealth created went to the top 1% and the average workers wages stagnated in the 20’s and did not grow. So the roaring 20’s were really only roaring for the top 1%. Is this starting to sound familiar to any of you? Also the Fed had very loose monetary policies because we were recovering from the 1920-21 depression. Its funny how no one ever talks about that depression. Kind of reminds me of the 2008-2009 crisis and the subsequent attempt to get things going again by flooding the world with money.
Wait, it gets better.
By the middle of the decade the economy had become sluggish and the Fed wanted to inject more credit into the banking system in the hope that it would find its way into the economy. (Sounds like QE 2 or 3 to me!) Instead the money fueled speculation in stocks and real estate.
Gee…the Fed wanted to stimulate the economy but it went into stocks and real estate instead. Did Ben Bernanke actually write his Phd dissertation on how to set up another Great Depression? Even though corporate profits and revenues began decelerating in 1928 the stock market took off and ripped 43.8% due to rampant speculation and easy money. The multiple on the market expanded while earnings were up single digits for the overall market. Do you see where I am going with this? In 2013 I believe the market revenues were basically flat with single digit eps growth but stocks advanced 30+%. Got to love multiple expansion into a blow off top.
Meanwhile corporations in 1928 had over expanded capacity while the average worker was choking on debt and institutions were levering up to speculate in stocks. Hmmmmm….that sounds very similar to today except substitute China for the excess capacity problem.
Technical/Market Structure BackDrop: Leverage, leverage, leverage! It is the fuel of all speculative bubbles and the ultimate demise. In 1929 we had the public levered 10:1, banks were playing stocks, corporations were playing stocks and newly formed investment trust IPO’s were playing stocks. Where are we today- 1) record margin debt, 2) corporations are borrowing to speculate…oops I mean buy back their stock, 3) banks levered to the gills are likely speculating somehow in the stock market and 4) the mother of all carry trades: the hedge funds with gross leverage as high as 10:1 with most levered more than 2:1.
In 1929, due to excessive stock speculation, the Fed began to tighten while the economy was slowing and the worker was struggling to make ends meet and service their debt. When the selling began it was quick and brutal. The stock market declined 45% from September to the beginning of November.
Today both the Fed and China are tightening. On March 19th Janet Yellen mentioned ever so casually that she might raise short term interest rates in 2015 and high beta growth stocks have been pummeled beyond technical recognition. Can you imagine what will happen if they actually raise rates. We have only just begun this journey into the abyss.
In 1929 we had RCA and GM trading at crazy multiples because they were tech stocks and had appreciated 10X over the course of the bull market. Today we have Tesla, Facebook and AMZN that are the dream stocks. GM and RCA went down 90%. Where do you think TSLA, FB and AMZN are headed?
To make matters worse 40%-50% of our stock market liquidity is provided by HFT’s that will evaporate in the event of actual panic selling. Personally I would rather sell my stock to guys with chalk boards and ticker tapes from1929 than the HFT clowns. Plus you have Dodd-Frank which just decreased Wall Streets ability to provide liquidity to both equity and fixed income markets. This market structure is either a sick cruel joke, incompetence or an illuminati plot.
I hope I am wrong but history while never the same often rhymes. In my next post I will talk about AMZN one of the darling growth stocks of this bull run. I used to love it but now…..”Houston we have a problem.”
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