The Stock Market Is Not a Leading Indicator

With the S&P closing above 1000, more and more people are convinced the economy has bottomed and a new bull market is at hand. Apparently, the reflationary efforts of the Fed have been effective in supporting stock prices and keeping consumer prices steady. The mainstream media says good times are here to stay, and that monetizing debt to fund $2 trillion dollars in deficits will not have long-term consequences.

The truth is, monetizing debt has historically been inflationary, which is why I would perceive the S&P at 1500, 2000, or even 10000 as a sign of trouble. While on the surface the current rally looks impressive, the S&P should be viewed in real rather than nominal terms. The S&P is denominated in dollars, so the dollar's relative value against other currencies is of critical importance. Since peaking in March, the dollar has fallen sharply against the Euro. A look at the S&P denominated in Euros reveals a much less buoyant rally:

There's a widely held belief that the stock market is a leading indicator of economic conditions. While this relationship typically holds true, it was proven dead wrong during the Great Depression. After the crash of 1929, the Dow rallied nearly 50% to much celebration. At the time, some of the most respected economic minds were calling for the end of the downturn. We now know in hindsight that the crisis was only beginning. A comparison of the 1930 bounce, and subsequent decline, with the current rally suggests the worst is perhaps not over for stocks and the economy. In other words, the current rally is well in-line with a structural bear market.

The way human psychology works, confidence can turn on a dime and feed on itself. When the inevitable shift in sentiment occurs, I would not want to be long this market unless I was in gold, silver, or resource-related stocks. I expect sell-offs to be brutal, and strongly believe economic events in the next 6-12 months will destroy any hopes of recovery.

Comments

[Roger Knights:]

If the past is prologue, we'll have an A-shaped recovery.

Aug 04 09:18 AM

[Moses Kim:]

With all the government intervention, I wouldn't be surprised by an AAAA-shaped recovery, ala the Great Depression.


On Aug 04 09:18 AM Roger Knights wrote:

> If the past is prologue, we'll have an A-shaped recovery.

Aug 04 10:04 AM

[princeofpersia:]

dude your an idiot. so 1930 is just like 2009. no.

Aug 04 10:47 AM

[McBlogger:]

Goldbugs... ugh. If I hear one more idiot bleat on about inflation I'm going to be beat them to death with my Paul Volcker commemorative plate set.

Aug 04 10:55 AM

[Zmartmoney:]

So, we're going to get the chance for our market to look like China's with boom-or-bust cycles. Ma and Pa Kettle are finally back in, just in time to be taken to the back room of the dry cleaners again. Cash is a position I'm very fond of at the moment. As the author states, "I would not want to be long..." Me either.

Aug 04 11:15 AM

[shank shot ...:]

He's not an idiot with respect to a later deeper drop, ala 1930. Why?

The country WAS recovering in 1930. As New Deal spending kicked in, it sucked activity out of the private sector and resources were allocated inefficiently. Business tanked. Tax revenues did as well. Tax rates were raised to mitigate but that made matters worsened, didn't they. There was no private investment and public investment was pissed away.

And now tax revenues are revisiting their worst levels. rate increases will further deteriorate the ability to spend, especially on the consumer which he are now seeing is under continuing pressure.

Aug 04 11:21 AM

[Benito Camela:]

Dear Prince of Persia, You need to study basic economics to realize that so far the souces of growth are temporary and once it wears off, then you have a crash.

Invest at your own risk.

Aug 04 12:07 PM

[update:]

Moses Kim, keep spreading the truth my friend. It really is all we can do and realize that the clueless pinheads that have proclaimed a bottom based on utter fantasy will be viciously wiped out along with anybody else who actually tries to buy and hold this market.

We are at the beginning of the two year maximum pain just like the first depression. This is when the smart people hold cash and the pinheads lose their shirts.

I think this bear market rally is still capable of rallying for a while however because we know that the Fed bought all those stock shares on the taxpayer dime which they lent to us (isn't that weird).

The actual 'money on the sidelines' that supposedly poured into the market was a total of $400 billion. That is a small fraction of the money that has been sqaundered directly by our government to buy stocks through the Fed and Treasury. When they are not too busy buying up each other's debts of course.

Aug 04 12:35 PM

[Mad_Max_A_M...:]

The DNC won - They will shop till they drop, using your credit, or what's left of it. I see a very possible M shaped landing, that is unless the Blue Dogs can stand fast and that ain't looking good either.

Aug 04 12:50 PM

[jpiretti:]

Bullocks!!!
1930-1933 (New Deal) GDP continued to decline 22%, unemployment went from 8.9% to 25.2%, Real Investment declined 33%, Nominal wages declined 20.6%, From 33-37 GDP up 36%, unemployment 25% to 14% (only private %'s), Real Investment recovers 100% of 30-33 loss, Nominal wages up above 1930 high...what metrics are you looking at?


On Aug 04 11:21 AM shank shot redemption wrote:

> He's not an idiot with respect to a later deeper drop, ala 1930.
> Why?
>
> The country WAS recovering in 1930. As New Deal spending kicked in,
> it sucked activity out of the private sector and resources were allocated
> inefficiently. Business tanked. Tax revenues did as well. Tax rates
> were raised to mitigate but that made matters worsened, didn't they.
> There was no private investment and public investment was pissed
> away.
>
> And now tax revenues are revisiting their worst levels. rate increases
> will further deteriorate the ability to spend, especially on the
> consumer which he are now seeing is under continuing pressure.

Aug 04 01:20 PM

[shank shot ...:]

You've made my point. The economy and the market continued to decline in spite of government spending through '33.

Mr. Ki'm argument is a valid one and caution is warranted.


On Aug 04 01:20 PM jpiretti wrote:

> Bullocks!!!
> 1930-1933 (New Deal) GDP continued to decline 22%, unemployment went
> from 8.9% to 25.2%, Real Investment declined 33%, Nominal wages declined
> 20.6%,

Aug 04 02:31 PM

[whidbey:]

Your forecast is likely. The real issue is what will the administration do if you are correct.

The suicide leap is either into default, or inflation, to attempt to hold the economy together. Yet we know that is Hobsons choice slow death or doing nothing. I think doing nothing might be good policy.

The fall will bring a collapse and it will be major.

Aug 04 03:55 PM

[jpiretti:]

What point? FDR was inaugurated in March of 33'...the New Deal went into effect 2 months after that. Hoover was President as the economy kept contracting from 30-33 during his austerity program. If you folks want to critize the New Deal or FDR or somehow compare Obama to FDR, then please at least know when FDR was President.

On Aug 04 02:31 PM shank shot redemption wrote:

> You've made my point. The economy and the market continued to decline
> in spite of government spending through '33.
>
> Mr. Ki'm argument is a valid one and caution is warranted.

Aug 04 09:02 PM

[Valley Boy:]

He was talking about the short-time bounce which happened in early to mid-1930. It appeared to be a normal recession in mid-1930 with excessive stock speculation burned through until some important banks failed later that year.
A good reference for news stories as they happened would be the
archive search at Time.com. Type in 1931 in the archive search box and scroll backwards through the Time Magazine covers, then scroll down and click on the Table of Contents, then click on any articles in their business section which might be interesting.


On Aug 04 01:20 PM jpiretti wrote:

> Bullocks!!!
> 1930-1933 (New Deal) GDP continued to decline 22%, unemployment went
> from 8.9% to 25.2%, Real Investment declined 33%, Nominal wages declined
> 20.6%, From 33-37 GDP up 36%, unemployment 25% to 14% (only private
> %'s), Real Investment recovers 100% of 30-33 loss, Nominal wages
> up above 1930 high...what metrics are you looking at?

Aug 05 05:05 PM

[Valley Boy:]

President Hoover did not have an austerity program. He increased government spending to where the federal budget was seriously out of balance. The taxes were increased in June 1932 to pay for the increased outlays. That action in turn made the Great Depression much worse.
The Federal Reserve had an austerity program during the Hoover presidency. They increased interest rates in order to fight the inflation and speculation which characterized the 1927-1929 period.
Their actions undermined the president's stimulative efforts and made the Great Depression worse.
The case can be made that Hoover's policies and Roosevelt's policies were similar enough--but much different by degree--to think
that they can be lumped together vaguely as the New Deal. I think
that is where Shank Shot was coming from.


On Aug 04 09:02 PM jpiretti wrote:

> What point? FDR was inaugurated in March of 33'...the New Deal went
> into effect 2 months after that. Hoover was President as the economy
> kept contracting from 30-33 during his austerity program. If you
> folks want to critize the New Deal or FDR or somehow compare Obama
> to FDR, then please at least know when FDR was President.
>
> On Aug 04 02:31 PM shank shot redemption wrote:

Aug 05 05:31 PM

[jpiretti:]

Hoover did not provide govt. stimulus until 1932. "Hoovervilles" are a testament to the non-existent transfer payment programs. Finally in 1932 he provided emergency loans to banks and industry, expanded public works, and helped states offer relief. But it was too little, too late. One can not make the argument that govt. expenditures crowed out private investment from 1929-1932. The private investment levels collapsed in a way that could never be possibly filled by the govt., and were not even remotely attempted.



On Aug 05 05:31 PM Valley Boy wrote:

> President Hoover did not have an austerity program. He increased
> government spending to where the federal budget was seriously out
> of balance. The taxes were increased in June 1932 to pay for the
> increased outlays. That action in turn made the Great Depression
> much worse.
> The Federal Reserve had an austerity program during the Hoover presidency.
> They increased interest rates in order to fight the inflation and
> speculation which characterized the 1927-1929 period.
> Their actions undermined the president's stimulative efforts and
> made the Great Depression worse.
> The case can be made that Hoover's policies and Roosevelt's policies
> were similar enough--but much different by degree--to think
> that they can be lumped together vaguely as the New Deal. I think
>
> that is where Shank Shot was coming from.

Aug 05 05:52 PM

[Valley Boy:]

You are right in the sense that the bulk of Hoover's spending came in after the opposition party won the congressional elections in late 1930. (John Nance Garner, the future Vice President, became Speaker of the House.) Hoover increased the spending with the Congress encouraging him to do so. Yes, the spending was not enough to crowd out the falling private investment demand for the time being in 1931 but it was enough to throw the federal budget out of balance. The economy changed for the worse with the passage of the Revenue Act of 1932. That legislation increased taxes for everybody starting immediately in June 1932 in an attempt to balace the budget. It proved to be a calamity.
I don't have much regard for President Hoover's economic policies
since all he had to do was follow President Harding's previous example of cutting expenditures and taxes to counteract the Post World War One Depression of 1919-1921. Perhaps he could have lobbied the Federal Reserve about providing easier credit as well; that might have occured behind closed doors for all we know.


On Aug 05 05:52 PM jpiretti wrote:

> Hoover did not provide govt. stimulus until 1932. "Hoovervilles"
> are a testament to the non-existent transfer payment programs. Finally
> in 1932 he provided emergency loans to banks and industry, expanded
> public works, and helped states offer relief. But it was too little,
> too late. One can not make the argument that govt. expenditures crowed
> out private investment from 1929-1932. The private investment levels
> collapsed in a way that could never be possibly filled by the govt.,
> and were not even remotely attempted.
>

Aug 06 02:15 AM

[jpiretti:]

You make an excellent point about marginal taxes which were increased from 25% to above 60% under Hoover. FDR did increase the marginal rates, but that was only applicable to one person...Rockefeller (probably unconstitutional) and the metrics still continued to improve markedly. So one can't use the tax rate as a negative variable. Fed policy was a major head wind, but again FDR had to deal with that at the beginning of his term. Maybe it is because both of my parents lived through the depression that I am appalled how many young people quote rhetoric concerning the New Deal that is so uninformed. I challange anyone to interview anyone above 85 years old about the Great Depression and you will find out why FDR served 4 terms...it was not because their lives or the economy got worse. Anytime you wonder whether a right wing nut is telling you the truth about the New Deal, simply google any metric you wish...Dow 30, Industrial Production, Real investment, Unemployment ect...1929-1937 and notice what happens in 3 Qt. 1933 (beginning of New Deal)...put the pitch forks down and do your research.


On Aug 06 02:15 AM Valley Boy wrote:

> You are right in the sense that the bulk of Hoover's spending came
> in after the opposition party won the congressional elections in
> late 1930. (John Nance Garner, the future Vice President, became
> Speaker of the House.) Hoover increased the spending with the Congress
> encouraging him to do so. Yes, the spending was not enough to crowd
> out the falling private investment demand for the time being in 1931
> but it was enough to throw the federal budget out of balance. The
> economy changed for the worse with the passage of the Revenue Act
> of 1932. That legislation increased taxes for everybody starting
> immediately in June 1932 in an attempt to balace the budget. It proved
> to be a calamity.
> I don't have much regard for President Hoover's economic policies
>
> since all he had to do was follow President Harding's previous example
> of cutting expenditures and taxes to counteract the Post World War
> One Depression of 1919-1921. Perhaps he could have lobbied the Federal
> Reserve about providing easier credit as well; that might have occured
> behind closed doors for all we know.

Aug 06 11:22 AM

[Valley Boy:]

Yes, put the pitchforks down and do the research on those presidents who were actually successful at improving the economy.
J.Q. Adams, Jackson, Tyler, Fillmore, Harrison, McKinley, Harding, Coolidge, Truman, Kennedy, and Clinton are good examples.
Then march to the polling booths and vote against the liberals who want to increase our debts and taxes.


On Aug 06 11:22 AM jpiretti wrote:

> You make an excellent point about marginal taxes which were increased
> from 25% to above 60% under Hoover. FDR did increase the marginal
> rates, but that was only applicable to one person...Rockefeller (probably
> unconstitutional) and the metrics still continued to improve markedly.
> So one can't use the tax rate as a negative variable. Fed policy
> was a major head wind, but again FDR had to deal with that at the
> beginning of his term. Maybe it is because both of my parents lived
> through the depression that I am appalled how many young people quote
> rhetoric concerning the New Deal that is so uninformed. I challange
> anyone to interview anyone above 85 years old about the Great Depression
> and you will find out why FDR served 4 terms...it was not because
> their lives or the economy got worse. Anytime you wonder whether
> a right wing nut is telling you the truth about the New Deal, simply
> google any metric you wish...Dow 30, Industrial Production, Real
> investment, Unemployment ect...1929-1937 and notice what happens
> in 3 Qt. 1933 (beginning of New Deal)...put the pitch forks down
> and do your research.

Aug 06 12:29 PM