A History Lesson
1932-1937 was somewhat equivalent to 2008-2017, but only somewhat. Markets first crashed in 1929. The Dow Industrials lost 90% of its value from its October 1929 peak to the trough in July 1932. This prompted the Federal Reserve to print money which reduced interest rates to near zero. As a consequence, debt soared, though by 1937, markets had recovered part of their losses.
But once money printing ended, the Dow then lost more than half its value over the next 12 months. Ray Dalio of Bridgewater mentioned that 2017 was like 1937, with stock markets teetering on the brink of collapse, but at the time he mentioned this comparison, global central banks were planning to materially reduce levels of QE. In reality as we had guessed throughout 2016 and 2017, it turned out to be more jawboning on the part of central bankers as here markets sit in 2018, and the ECB recently said they may have to not only keep levels where they are at but actually increase levels should economic conditions weaken. The Bank of Japan lowered its flow of QE by the equivalent of $70 mil a month, not even a drop in the bucket, with the possibility of once again increasing the flow of QE should conditions necessitate. The fact remains these major economies are still in the throws of stagnation and even depression despite many years of QE.
Reports about recovering GDP numbers only serve to confuse the situation. The reality of the ultra-low unemployment rate is that most of the jobs pay near the poverty level while others have given up looking for work. The US economy has become bifurcated with the majority of people living subpar while the minority put further distance between the haves and have-nots. Never before has the canyon been so wide between the top 1% and bottom 90%. Such periods equate to intensifying levels of social unrest. Meanwhile, the politically controlled public educational system is one of many factors to blame. But that is for another discussion.
As far as monetary policy goes, the US Fed has been the only central bank to tighten. But the Fed cannot raise rates faster than is discounted in the interest rate curve. The rest of the economically weak world will continue to need easy monetary policy. Since the world is connected, this will ultimately impact the US such that the US Fed will have to increase QE at some point within the next year or two, despite the current and planned rate hikes.
As we have mentioned, global debt levels today far surpass debt levels in the 1930s, and when such onerous levels of debt have emerged throughout history, there is inevitable collapse of fiat currencies, and a massive restructuring takes place. The timeframe is usually on the order of years, but blockchain did not exist during any of those dire times. Bitcoin with blockchain at its core and gold would be the likely beneficiaries of such a situation.
Meanwhile, central banks which continue to print at near record levels have left open the possibility of once again increasing the flow of QE should conditions necessitate. But when that happens, the effect of QE will be even less than before. If there is not an attractive investment relative to bonds, you get pushing on a string, and spreads show major economies are already there as they continue to print without material economic growth.
To solve this issue, major fiat currencies must be depreciated by a material amount given the onerous levels of debt given that interest rates are no longer an effective tool to spur growth. Major devaluations in fiat await which is one reason why Tim Draper said recently, "In five years, if you try to use fiat currency they will laugh at you. Bitcoin and other cryptocurriences will be so relevant ... there will be no reason to have the fiat currencies." Jack Dorsey, CEO of Twitter and Square believes that bitcoin will replace fiat in a decade. In a recent interview, Dorsey said that he is sure that Bitcoin will be the only currency after 10 years to be used globally and there will be no other currency. Strong statements from both Draper and Dorsey, but I have connected the dots for members on how this can occur in some of my recent Crypto-Corner pieces as well as earlier ones under a nom de plume as far back as 2013.
Where is the stock market headed?
In today's market, one question is whether US stock markets continue to fall or rather find a floor sooner than later. Given that many leading technology stocks are now trading below their 50-day lines, it would seem further correction is due. However, QE continues to flow near record levels from major central banks thus remains a formidable force as the money tends to find its way into US stocks. This tug-o-war between a market wanting to correct while QE continues to flow may continue, along with elevated levels of volatility, which could send the market sharply in both directions as has been the case so far over the last several days.
Meanwhile, it remains best to focus on your stocks that provide profitable opportunities such as undercut & rally patterns while keeping stops tight in this highly volatile market.
FAANG stocks remain on the ropes as AMZN continues to weaken on concerns the Trump administration continues to keep the company in focus on tax and delivery issues. Privacy issues with FB remain a deep concern. NFLX is trying to get support at its 50-day while GOOGL is trying to bounce off its 200-day.
Futures are materially lower as China announced tariffs on about 130 U.S. goods, including a 25% penalty slapped on U.S. pork and 15% on fruit. That said, China has said it does not wish the trade issue to escalate.
Market Lab Report - Premarket Pulse 4/2/18 Is 1932-37 like 2008-17?
|Published:||2 Apr 2018 08:22 ET|
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