5 Things To Ponder: Cash, QE, Investing & 1929

Tyler Durden's picture

Submitted by Lance Roberts of STA Wealth Management,

The market correction that begin in January appears to be subsiding, at least for the moment, as Yellen's recent testimony gave markets the promise of the continuation of Bernanke's legacy.  A synopsis of her "accommodation supportive" comments (courtesy of Bill King) is below:

* The recovery in the labor market is far from complete.


* The hope is that by stimulating more borrowing and spending, lower interest rates can jumpstart the economy.  [Of course, we are still waiting for that to actually happen]


* QE tapering is "not on a preset course. The Committee's decisions about their pace will remain contingent on its outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases."


* Asset prices are not at "worrisome levels." [This statement caused the midday surge.]


* The Fed will have to keep rates near zero "well past the time" that unemployment crosses below the 6.5 percent threshold; and the Fed will be an active participant in increased bank regulation, specifically focusing on avoiding the too-big-to-fail problems

With the markets back into rally mode, for the moment, this week's "Things To Ponder" focuses on some of the bigger issues concerning the effectiveness of QE, investing and that chart of 1929 that has been making the rounds.

1) QE Is A Mistake - A Big One by Allan Meltzer of E21

If you review the Yellen's comments above, she stated that the "hope" of QE was to stimulate more borrowing and spending.  Unfortunately, as shown in the chart of M2V below, it has simply not been the case.


Allan Metzer wrote a terrific article for E21 driving home this point:

"The Fed deserves high praise for the first round of QE in 2008. However, the benefits ended long ago. More than 95 percent of the reserves that the Fed supplied under QE 2 and 3 sit idle on bank balance sheets. M2 money growth for the year to the end of January 2014 is less than 5.5 percent. There is no mystery about why inflation remains low.


The mistaken results of QE policy include Federal Reserve financing of outsize budget deficits. No one should require a tutorial about the longer-term consequences of using central banks to finance government deficits. Sooner or later the results are inflation, always and everywhere."

2) The Cash On The Sidelines Myth by Pater Tenebrarum via Zero Hedge

In a recent interview by JP Morgan's Tom Lee, he asserted that:

“This could be only the middle innings of what could be one of the longest bull markets in history," Lee said in a "Squawk Box" interview. "There is a lot of firepower to fuel this rally. There is a lot of cash on the sidelines, consumers have delevered."

Pater dismantles this very ill-founded argument, a pet peeve of Cliff Asness as well, in great detail.

"Let us think about this statement for a moment. What is 'cash on the sidelines' even supposed to mean? We submit that it is a meaningless concept. All stocks are owned by someone at all times, and all cash is held by someone at all times. When people trade stocks, all that happens is that the ownership of stocks and cash changes hands. There is as much 'cash on the sidelines' after a trade concludes than there was before. There are no owner-less orphan stocks flying about in the Wall Street Aether, waiting to suck up cash.


In other words, the 'cash on the sidelines' argument is a really bad argument, or rather, it's not an argument at all."

3) Can Earnings Get Better Than This? by Tom McClellan via Pragmatic Capitalist

"The conventional stock market analysis world revolves around earnings.  'Earnings drive the stock market,' they say.  This myopic view is akin to the belief that carbon dioxide is the driving force behind the greenhouse effect (water vapor actually accounts for 90-95% of it, but you don’t hear that).  People believe that earnings are everything because they have been told that it is so, and everyone thinks so,  therefore it must be so.  Circularity of logic and contradictory evidence do not seem to be significant impediments to the acceptance of this belief system.

This week’s chart looks at the BEA’s data on corporate profits.

Corp Profits per GDP

Why doesn't everyone look at earnings this way? My answer is that Wall Street has a fascination with its own forecasts of earnings, and with the reported earnings of listed companies stocks. But those are a pair biases which excluded private company earnings, and which also accept earnings estimates which are notoriously subject to revision. I prefer to deal in hard data. The next BEA report on earnings is not due out until Feb. 28, so using these data means accepting the inherent reporting lag.


What we see now is an indication that the reading for overall corporate profits as a percentage of GDP is at one of the highest levels of recent years. And when it cannot get higher, it can only get lower. It is true that this measure has been higher in the distant past, but that was back in the 1960s and earlier, when GDP was a bit different than it is now, and when accounting standards for measuring profits were also different. The current high reading has only been exceeded once in the past 46 years, and that was at the real estate bubble top for earnings back in 2006. And we all know how that ended."


4) Everything I Know About Investing I Learned From Drivers Ed by Jason Zweig

Jason's articles are always a must read as he has a brilliant ability to very complex issues into an understandable, and enjoyable, format.  His recent piece on investing is no exception and well worth your time to read.

"Only recently did I realize that his messages apply at least as much to investing as they do to driving. Here are the pithy expressions Mr. Terry taught us about driving – and how I think they apply to investing as well.


Put Your Head on a Swivel - Risk is all around you, and the likeliest places to look for it are the places that appear to be the safest. That’s where the next danger will come from – just where and when nobody is looking.


Edge On, Edge OffMaking a sudden change in your plan is usually a mistake. Making a sudden, big change in your plan almost always is.



Get in the Ground-Viewing Habit - It’s what is beneath eye-level that matters


Give Him Room and Let Him Zoom - People who try to get rich quick don’t end up any farther along – and take a lot more risk, and incur a lot more cost, to get there. You don’t get bonus points in investing for arriving at your destination ahead of time. The only thing that matters is getting there in one piece."

5) The 1929 Scary Chart via Bill King, The King Report

The chart below, which compares the 1929 stock market to today, has been making the rounds stirring up quite a bit of angst.  I thought Bill did a good job of dispelling some of these concerns.

"There is another factor that drove stocks higher on Tuesday – some of the 1928-1930 algorithm followers are now covering their shorts. [Especially after the S&P 500 blew threw 1800]"


"In our missive on Monday we stated: We believe that the current stock market will now diverge from the 1928-1930 algorithm. For the near future we cannot see or fathom a catalyst for a stock market crash. Plus, it's the wrong time of the year for a dramatic decline in stock prices.


PS- Several people voiced irritation with our forecast that stocks would not tank in coming days.


Apparently a critical mass of traders now realize that stocks are diverging from the 1928-1930 algorithm. This unleashed massive short covering on Tuesday.


This story by Mark Hulbert appeared yesterday on Drudge: Scary 1929 market chart gains traction


There are eerie parallels between the stock market's recent behavior and how it behaved right before the 1929 crash...


Tom Demark [has a huge hedge fund and institutional following] added in interview that he first drew parallels with the 1928-1929 period well before last November.


'Originally, I drew it for entertainment purposes only,' he said—but no longer: 'Now it's evolved into something more serious.'"

I agree with Bill.  Statistically speaking, the odds are high that the markets will diverge from the pattern.   While history does indeed rhyme, it often does not repeat exactly.  Do I think that eventually the markets will have another major reversion?  Absolutely.  The natural ebb and flow of market dynamics tells us this will be the case.  Unfortunately, we just don't know when or what will cause it.

Bonus Reading:  77 Reasons You Suck At Managing Money by Morgan Housel

"People usually get better at things over time. We're better farmers, faster runners, safer pilots, and more accurate weather forecasters than we were 50 years ago.


But there's something about money that gets the better of us. If you look at the rate of personal bankruptcies, financial crises, bubbles, student loans, debt defaults, and savings rates, I wonder whether people are just as bad at managing money today as they were in previous generations, maybe even worse. It's one of the only areas in life we seem to get progressively dumber at."

Yes, there are indeed 77 charming nuggets of wisdom contained within the article, all of which are worth every minute you spending reading them.  They are funny, enlightening and humbling with insights like:

"You get upset when you hear on TV that the government is running a deficit. It doesn't bother you that you heard this on a TV you bought on a credit card in a home you purchased with a no-money-down mortgage."

He concludes with the most salient point:

"You nodded along to all 77 of these points without realizing I'm talking about you. That goes for me, too."

Have a great weekend.

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Wait What's picture

QE is not a mistake. It's a lie. And everyone knows lies can move populations for very long periods of time, which is what it was intended to do. move everyone into risk assets. "we can cross the consequences bridge when we come to it."

Headbanger's picture

Five things to ponder???  Scotch, more guns to get, the $500 my buddy owes me, fixing my truck and do I nail the 22 year old bar maid with two kids??

kaiserhoff's picture

Good priorities, but if she already has two kids at 22, there's your sign.

Put a helmet on that soldier;)

Keyser's picture

One of my Grandfather's pearls of wisdom went something like this, "if someone gave you a can of worms, why would you open it?"

Charles Nelson Reilly's picture

22 yr old bar maid w/ two kids.... sounds fun for about 25 minutes and then the rest of your life is fucked.

walküre's picture

Some of the best and honest advise we can give a young man with balls for brains. We've all been there. Man, I got lucky but in some cases, I wish I had that older dude at my side hitting me sideways with a 2x4.

Sudden Debt's picture

you can fuck the barmaid but don't sleep over or let her sleep over.
And after 4 times, never pickup your phone from her number or a anonim number (never pick that up anyway because if somebody takes the time to hide their number I take the time not to pick up)
and avoid that bar for 2 months.

Second, never give a buddy $500. You'll lose friends if you do that.

westboundnup's picture

"2 months" is why I gave it a Vote Up.

Wait What's picture

4 times? unless what flows from her girly parts is made of platinum, gold, or silver, there's no way she gets a call back. that's why she has 2 kids with no daddies, no one ever calls back.

starman's picture

Tick tock tick tock

kaiserhoff's picture

This fellow has a mind, but the Fed is deliberately making investment decisions difficult, by nailing interest rates to the floor, and screwing up pricing of all durable goods.

It's never easy to be a good investor, but without rule of law and honest money, it's almost impossible.

BandGap's picture

So, I hear that the stock market is diverging from the 1928-30 pattern. Then I hear that stocks don't follow patterns exactly as would be the case if we had a crash now.The clincher is that "this is the wrong time of the year". This is being on both sides of the discussion.

How's this - stocks will follow this pattern AND crash at the wrong time of the year (the next few months instead of this fall). That satisfies all requirements of this argument.  Stocks do rhyme (they follow the pattern) but do not repeat (they crash at what many consider the wrong time of the yearly cycle).

Fixed it for ya.


walküre's picture

What's the right time of the year? Markets went down or even crashed in April several times for various reasons. "Sell in May" go away is still true to a degree if they can keep plugging the holes that long. China is stopping their crazy building expansion. They already stopped the credit expansion. Where is demand going to come from? North Korea?

kaiserhoff's picture

Demand will come from the kids in Mom's basement buying Stompy Feet's health insurance, because:

Because Obama.

Because Doctors aren't rich enough.

Because Americans can never get enough meds.

/sarc.  I need a drink.

Obchelli's picture


ArkansasAngie's picture

No possible reason for stocks to tank.


Honestly ... I see no reason for stocks to go up.  And ... in fact ... the idea that they are going up is beginning to piss me off.  Is there no one with honor in DC?  Anybody?

LawsofPhysics's picture

"Is there no one with honor in DC?  Anybody?"

Are you fucking kidding?  No, no, there is not.  They are all 100% fully owned.


halfawake's picture

It's really debt on the sidelines.


In other words, the 'cash on the sidelines' argument is a really bad argument, or rather, it's not an argument at all."

TheRideNeverEnds's picture

So next week when the DOW breaks to new all time highs are we just going to slide it down and to the left in that picture or will that be the end of it?  I will kinda miss seeing that comparison; laughable as it may be I enjoy the hyperbole.  

vote_libertarian_party's picture

I don't know...that 1929 comparison looks like we have 1-2 weeks until the plunge.



My fearless prediction: New debt ceiling raise finally gets 1 or 2 US bond downgrades and that gets the bond sell off/crash started.  That then crashes the stock market.

westboundnup's picture

If you monkey around with the x and y axis on a graph, any data set can resemble the 1929 stock market crash.

BTW,  100 years from now financial commentators will be pulling the same shenanigans with the 2014 DJIA.

Spungo's picture

My original prediction for a crash was around April-May, and I still stand by it because we've already seen bonds and gold crash hard.

Uber Vandal's picture

If one were to take today, 2014 and subtract 7 years from today, one gets 2007. Subtract 7 years from that, one gets 2000, and so forth.

Just for fun, I decided to see how far back this lucky 7 goes, and though there are large data holes prior to 1790, the 7 year cycles DO land exactly on 1720 and 1636 from 2014 as a starting date.

It appears that at least 11 of the 34 dates line up exactly, and 8 more line up within a year of the date.

Does this mean anything. Of course not..... Right?


2014 TBD??????

2007 https://en.wikipedia.org/wiki/Great_Recession

2000 https://en.wikipedia.org/wiki/Dot-com_bubble

1993 (Note, happened around 1990 – 1992) https://en.wikipedia.org/wiki/Early_1990s_recession

1986 (Note, stock market crash on 1987) https://en.wikipedia.org/wiki/Black_Monday_%281987%29

1979 (Note, did not occur until about 1980) https://en.wikipedia.org/wiki/Early_1980s_recession

1972 (Note, was in 1973 due to OPEC, etc https://en.wikipedia.org/wiki/1973%E2%80%9374_stock_market_crash / https://en.wikipedia.org/wiki/1973%E2%80%9375_recession

1965  Clad coinage began in the US, but no Recession Noted

1958 https://en.wikipedia.org/wiki/Recession_of_1958

1951 (Note, was in 1953) https://en.wikipedia.org/wiki/Recession_of_1953

1944 (WWII)

1937 https://en.wikipedia.org/wiki/Recession_of_1937%E2%80%9338

1930 https://en.wikipedia.org/wiki/Great_Depression

1923 (Note, there was a mini-Depression from 1920 -21) https://en.wikipedia.org/wiki/Depression_of_1920%E2%80%9321

1916 (WWI)

1909 (Note, was in 1907, helped set up the Federal Reserve) https://en.wikipedia.org/wiki/Panic_of_1907

1902 (Note, there was a huge drop in the DJIA in 1903, but not much to be found on it) http://www.dailyspeculations.com/wordpress/?p=4808

1895 (Note, was in 1893) https://en.wikipedia.org/wiki/Panic_of_1893

1888 Blizzard of 1888, but no Panic noted. 

1881 President Garfield Assassinated, but no Panics noted.

1874 (Note, was in 1873) https://en.wikipedia.org/wiki/Panic_of_1873

1867 (Civil war reconstruction time) (Note, Black Friday happened on 1869) https://en.wikipedia.org/wiki/Black_Friday_%281869%29

1860 (Civil war was brewing)

1853 (Note, was in 1857) https://en.wikipedia.org/wiki/Panic_of_1857

1846 (Note, was in 1847) https://en.wikipedia.org/wiki/Panic_of_1847

1839 http://www.anb.org/articles/cush/e0411-article.html

1832 http://thehistorybox.com/ny_city/panics/panics_article3a.htm

1825 https://en.wikipedia.org/wiki/Panic_of_1825

1818  (Note, was in 1819) https://en.wikipedia.org/wiki/Panic_of_1819

1811 First Bank closes its doors (an early version of the Federal Reserve) http://philadelphiafed.org/publications/economic-education/first-bank.pdf

1797 https://en.wikipedia.org/wiki/Panic_of_1796%E2%80%9397

1790 (Note, happened in 1792) https://en.wikipedia.org/wiki/Panic_of_1792

1720 https://en.wikipedia.org/wiki/Mississippi_Company

1636 Dutch Tulip Mania https://en.wikipedia.org/wiki/Tulip_mania

theliberalliberal's picture

#65 / 77 is bullshit

If you are your average bloke that isnt a health freak, smoked a bit in ur 20's,  still drink, eat shit etc  good luck living past 75.

i am not working so my wife can live happily banging the some 76 year old thats doing the rounds at the retirement village

billw's picture

If you don't see anything causing a crash in the near future then you have taken your eyes off of China. It appears that their new leader is preparing to begin the process of devaluation ( or restructuring ) right now. That is what we should have done back in 2009 and did not. The writer covering this topic did not explain the reason , but my best guess would be self preservation. If China tackles restucturing now , the new leaders can blame the problems on the old leaders. However if they put it off for a year or more and then have to do the inevitable it is going to be blamed on them with ugly consequences to follow.

d edwards's picture

Re: 1929 and current DJIA charts:


Look at the massive head-and-shoulders formation on the black line (1929) not long befor the crash.

Now, look at the red line (current)-is it not in the process of making a big head-and-shoulders?


It's said that history doesn't repeat, but it rhymes. 

screw face's picture

Quantum computing dictates .......MOAR DATA!


Where is that Mike Morgan grandson of J.P. Morgan!