Ghost Of 1929 Re-Appears - Pay Attention To The Signals

Tyler Durden's picture

Submitted by Anthony Mirhaydari via The Burning Platform blog,


 

Crowd of people gather outside the New York Stock Exchange following the Crash of 1929.

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.

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.

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.”

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TeamDepends's picture

Dang it, Tyler.  We were going to look like geniuses with our 1/14/14 prediction yesterday!  Oh well, it is probably best that everyone knows.

Occident Mortal's picture

I dont think it will repeat 1929, but I'm hppy to take a short position here based on the technical chart

DaddyO's picture

The prudent see danger and take refuge,
    but the simple keep going and pay the penalty

Well, is this chart indicative of the need to be prudent and prepare?

DaddyO

Occident Mortal's picture

 

Here is the chart.

 

http://i44.tinypic.com/zmh16s.png

 

18 years of DJI history.

 

For me it's a sell at this level and no matter what the news or the fundamentals or whatever is going on in the background. This chart is a bonafide sell.

Occident Mortal's picture

The DJI basically trades in a rising channel.

 

http://i40.tinypic.com/2z3ov1l.png

 

The rallys are very regular. It could go higher with channel of course, but I think momentum has died and the market is now rangebound and has been since May. This recent spike merely tags the trendline.

chumbawamba's picture

Any sufficiently advanced [integral] is indistinguishable from magic.

Take a number.  Any number.  Multiply it by 9.  Add up the digits and if necessary keep adding them until you end up with a single digit, which will always be 9.  In the same vein, any number where the digits added together result in 9 is divisible by 9.

History doesn't so much repeat as it rhymes.

I am Chumbawamba.

TheRideNeverEnds's picture

I just tried that and it works.

a..are you a wizard? 

NoDebt's picture

Anytime you multiply something by 9 (the second step in the instruction series) that's true.  It's just that they give you the red herring of choosing a number at the beginning (I've also seen it done where you add two numbers of your choice together), which makes it seem like you could have some affect on the outcome, which you can't.

A more useful little "9 rule" that you can actually use every day is to check for transposition errors (flopping 2 digits backwards anywere in a number- 1s, 10s, 100s, 1000s- doesn't matter).  If the difference is divisible by 9 into a whole number, you've probably made a transposition error.  Helpful when you add up a long column of numbers but your sum isn't what it should be.

ex:  3921 vs. 3291  

3921 - 3291 =  630

630 / 9 = 70

No wizardry.  I just stayed at a Holiday Inn Express last night.

AlaricBalth's picture

We are attending a great party tonight here in West Egg at some man named Gatsby's house. 1929 again.....naaaaa!!!!

Skateboarder's picture

I've been waiting for that date, 1/14/14, since since 08. Fucking finally. Catharsis!

MeMadMax's picture

My money is on febuary, when the holidays end and the numbers come out. This is also when the temp workers get axed, goosing unemployment, causing a snowball effect going into march.

GetZeeGold's picture

 

 

OK......this just looks bad.

 

It's not like today.......those guys back then were just idiots.......unlike us.

 

I'm sure everything will be jiiiiiiiiiiiiiiist fine.

 

Citizens of Rome.....UNITE!

clymer's picture

according to this site, maybe something bigger happens about 10 days sooner ?

http://jahbulonian.byethost7.com/

The Mist's picture

How's the stock market gonna crash if the FED increases QE to 200 a month?

Stuck on Zero's picture

The President promised us: "If you like your stock market bubble you can keep your stock market bubble."

 

qqqqtrader's picture

well... you didn't build that!

brettd's picture

won't surprise me....

giggler321's picture

It's not just 9.  It's any number of radix-1.  Decmial is radix 10, 10-1=9.  For hexidecimal example, has digits 0-9 and A-F to give 16, so 16 is F.  Given hexidecimal (any number) 1EAC, multiply by radix-1 (F) we get 1CC14, as in your comment, repeat if over radix-1, 1+C+C+1+4 = 1E, 1+E = F.   Try in your OS calculator.

GetZeeGold's picture

 

 

Where the hell did I put my aspirin? Oh yeah.....it's next to the vodka....duh!

Ralph Spoilsport's picture

Decimal 15 is F in hex. Decimal 16 is 10 in hex.

zerozulu's picture

No, actually any number you add the answer will be C+H+I+N+A= 1+4=5  Thats five more months. Hint is I+R+A+N agreed Six months and one is already passed.

cbaba's picture

You should multiply by 9 first :
If you think the magic number you found 630 doesn't work then 630*9= 5670 .
If you add 5+6+7+0=18 and keep adding 18 = 1+8 = 9
So it works.

chumbawamba's picture

What is it that hath been? that that shall be: and what is it that hath been done? that which shall be done: and there is no new thing under the sun. - Ecclesaistes 1:9 (1599 Geneva Bible)

I am Chumbawamba.

lewy14's picture

I get it now... the answer lies in...

Integral Studies...

Thanks Chumba!

GetZeeGold's picture

 

 

 

and there is no new thing under the sun

 

There are only four things certain since Social Progress began:---

That the Dog returns to his Vomit and the Sow returns to her mire,

And the burnt Fool's bandaged finger goes wabbling back to the Fire;

And that after this is accomplished, and the brave new world begins

When all men are paid for existing and no man must pay for his sins,

As surely as Water will wet us, as surely as Fire will burn,

The Gods of the Copybook Headings with terror and slaughter return

- Rudyard Kipling

 

I would have posted the whole thing.....but I didn't want to scare anyone.

Those guys knew about Social Progress back then? No worries...it's probably not Social Progress as we think of it today....just remember the three magic words.....yes we can!

 

MetalFillBoy's picture

Chumba,

Strange how one day someone can make a Biblical reference, and get no responses, while others get a flurry of posts.  This is one of my favorite verses when it comes to understanding what we are going through.  It has happened before and will happen again.  Maybe not exactly, but it sure will rhythm!

 

MFB

 

Raging Debate's picture

Explore and correlate Pythagoras and Benoit Mandelbrot's fractals yet?

Sudden Debt's picture

I would agree with you completly but now there's 10 trillion extra in the game which wasn't in those last 2 peaks

Occident Mortal's picture

So what?

 

It's flow that moves the market.

Beam Me Up Scotty's picture

How much money does the Plunge Protection Team have up their sleeve?  I bet they will arrive just in time to give you some "flow".  And the Dow would still be over 12,400, hardly a crash like 2007.  But it would be just the excuse that BernYellen would need to open the QE spigot even further.

HardlyZero's picture

The physical Gold Team supports the PPT thesis.   And, BenYellen will do their Ctrl-P thing.

I am more equal than others's picture

 

 

 

This time it is different.  The money that moved the market prior to the 29 crash is not the same source that moves the market now.  Its hard to leverage a printer. 

Occident Mortal's picture

It's always different this time.

 

2008 was all about loose money too.

 

It's not just Central Banks that have the power to create money. Before 2008 commercial banks were the source of the vast majority of new money, check out an M1 chart.

 

http://research.stlouisfed.org/fred2/graph/?s[1][id]=MULT

 

Yes the Fed is creating new money now, but they are merely plugging the massive hole that is commercial bank money origination following the collapse of retail and commercial credit expansion.

 

It's just a different spigot this time.

Occident Mortal's picture

Oh and the reason why M1 is crashing is because the banks aren't lending the money out...

 

http://research.stlouisfed.org/fred2/data/EXCRESNS_Max_630_378.png

 

They are keep it as reserves.

 

Where are they depositing it?

http://research.stlouisfed.org/fred2/data/WRESBAL_Max_630_378.png

At the Fed of course.

 

$2.5 trillion of QE is already back at the Fed.

AbbeBrel's picture

Minor bug fix - the last part of your URL somehow didn't make it into the link - copy and paste works, but FWIW

 

 

http://research.stlouisfed.org/fred2/graph/?s[1][id]=MULT

That is the full link with the missing bits...   -AB

Drifter's picture

TARP and QE didn't exist in '29. 

If it didn't exist in '09 there would have been another '29, but far worse due to far more leverage.  Trillions of dollars of secondary derivatives didn't exist in '29.  In '09 they did and they all would have crashed.  Wall Street would never have recovered.

So yes it was different this time.  Same causes, different response. 

In '29 massive wealth disappeared from financial markets and Fed wasn't willing to pump new wealth back in.  Wall Street had to bear their losses.  

In '09 Fed was willing to pump new wealth back in (wealth stolen from the American people via currency printing and resulting debasement).

The '09 collapse hasn't stopped.   Bonds and derivatives are still collapsing.  MBS are still collasping just like they did in '09.  It's why QE keeps going, and will keep going till Fed buys up the entire MBS market.

Something else is different in '09.  Huge govt deficits and borowing.  Fed has to print and buy up all that stuff too to prevent treasury bond market collapse.

The '09 collapse has no end.  America no longer has the manufacturing capacity to generate massive wealth needed to pull out of it.  Wealth stolen from the American people will keep Wall Street (and govt) afloat long as possible until it runs out  (American people are destitute).  Then the '09 collapse will actually happen, and that's the end of America.

 

VD's picture

the DOW at 1300 is by no means a crash or even a legit correction. the DOW at 8k is about fair value sans QE. so under that and then some is a genuine crash.

MsCreant's picture

You are an odd bird. All of it is fiction otherwise I would be upset with your proclamation. Yours is no more or less legit than the Fed. This is no compliment. No insult either. There is no spoon, VD. There is no spoon.

The Mist's picture

You forget that it's valued ágainst the dollar. 

The dollar has lost enough value since the previous crash for a higher plateau to be normal.

Own stocks, you own a business. Own dollars, you don't own shit.

Neo's picture

if the Dollar goes to zero........it all goes to zero

Jeff Lebowski's picture

The prudent have thrown up their hands at the lunacy and left long ago.... There's nothing new here in the form of fundamentals, signals, and omens from what was present when Tyler started ZH 5 years ago.

DaddyO's picture

You're right, but normalcy bias is a bitch.

The markets are so distorted, that short a major reset/correction, we have no way of knowing where reality lies.

Besides, what the heck would we post about, real trades with matching TA, real charts and such?

DaddyO

GetZeeGold's picture

 

 

Normalcy bias......makes my brain hurt.

Teddy Tenpole's picture

 

 

Not true Jeff, the new new thing is just how many more Douches keep showing up.

DaddyO's picture

Ya, some douches showed up here about 11 weeks and 20+ hours ago...

DaddyO