Echoes Of 1929, It's Looking Really Dangerous Out There

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Includes: DIA, QQQ, SPY
by: Austrolib

Summary

This is not a prediction of a 1929 style crash.

This is a warning that monetary patterns are repeating on the 89th anniversary of Black Tuesday, the generally recognized beginning of the Great Depression.

From 1928 to 1929, stalled monetary growth accompanied an enormous boom in the Dow Jones of 58%. Fuel ran out.

This year is not as extreme, but the lowest monetary growth rate since 2004 has accompanied the strongest annual gains in the S&P 500 in 20 years. Fuel is running out.

Stagnation from here looks to be the best case scenario.

Yesterday was the 89th anniversary of Black Tuesday, October 29th 1929. This day is widely viewed as the start of the Great Depression. The Dow Jones fell 12% that day after falling 13.5% the day before. That was Black Monday. The ensuing bear market lasted until mid 1932, when the Dow hit the lows of 1903. There were some very impressive bear market rallies in that most spectacular of bear markets. The first rally from November 1929 to April 1930 saw 45% gains.

Libraries could be filled by explanations as to why it happened. According to Austrian business cycle theory, it was the money supply, as always. It was still being manipulated back then, even before the gold standard was revoked by Roosevelt in 1933. It was just harder to do because people could redeem their dollars for gold back then. If the Federal Reserve inflated too far, it would threaten a run on the dollar for gold. Ultimately that’s what happened, which is why Roosevelt had to default on the gold standard, in order to help the Fed inflate so it could help fund the New Deal.

History aside, there are some eerie monetary parallels between 1929 and 2018. I’ll lay them out here and you can decide what you want to do about it.

On page 92 of America’s Great Depression, economist Murray Rothbard lays out the hard numbers of the monetary inflation of the 1920’s, from 1921 to 1929.

Rothbard’s thesis is that the end of the inflation (by that he means money supply, not a rise in prices) by June of 1929 is what made the crash of 1929 an inevitability. As you can see on the table above, the annualized change in the money supply from December 31 st, 1928 to June 30 th 1929 was 0.7%. This is essentially 0.

Here is the Dow Jones overlapping this time period, from 1918 to its bottom in 1932.

The following are the general patterns that seem to hold when correlating money supply and stock market movements.

Stocks can decline even with high money growth if a bear market is already in place Stocks can advance even with low money growth, provided they are significantly below previous highs due to an earlier bear market Stocks at new highs cannot be sustained for long if monetary growth is low. Strong advances in stocks at new highs plus low monetary growth tends to immediately precede crashes as monetary fuel runs out

Now let’s match up the bull market of 1921-1929 using these general patterns. I’m changing the growth numbers from Rothbard’s table above by taking out the December 31 st figures. Rothbard multiplied the six-month total inflation rate by 2 in order to get an annualized rate from 6-month data. I’m just using annual data points to get a slightly different rate each year, but the principle is the same. I have bolded numbers that deserve extra attention.

Year (June to June)

Dow Jones Change

Above/Below Highs

Monetary Change

1922

34%

21% below

4.1%

1923

-4.4%

25% below

9.8%

1924

9%

19% below

5.6%

1925

37%

New highs

9.5%

1926

14.6%

New highs

6.3%

1927

10.5%

New highs

5.2%

1928

25%

New highs

6.3%

1929

58%

New highs

3%

Here are the same statistics from 2000 to 2018, this time from October to October each year:

Year (Oct. to Oct.)

S&P 500 Change

Above/Below Highs

Monetary Change

2000

-5.3%

6% below

5.8%

2001

-13.4%

29% below

10%

2002

-18%

47% below

6.9%

2003

13%

22% below

7.4%

2004

10.9%

23% below

3.7%

2005

6.5%

18% below

4.1%

2006

12%

8% below

4.4%

2007

5.8%

At highs

6.7%

2008

-40%

Below

5.5%

2009

22%

Below

7.5%

2010

7.8%

Below

4%

2011

5.7%

Below

9.6%

2012

13.5%

Below

6.3%

2013

23%

New highs

6.9%

2014

14.5%

New highs

6.1%

2015

0%

New highs

5.6%

2016

5.7%

New highs

7.2%

2017

20.4%

New highs

5.3%

2018

0%

New highs

3.9%

The key here is this year, 2018. Money supply increase from last October to this October has been only 3.9% after only 5.3% in 2017. 3.9% is the lowest of any year from October to October since 2004, and in 2004 we were still 23% below all time highs in the S&P 500. True, it could be the case that we will see another 58% explosion higher like we saw from 1928 to 1929, but unless you are an impeccable trader, it looks like a really bad idea to be in stocks right now. That’s not to say that you should short the indexes, but being all in now is just asking for trouble.

As the 89th anniversary of Black Tuesday 1929 came to a close, we swung 4% on the S&P (SPY), closing down 0.66% after being up 1.8%. The FAANG stocks took a savage beating once again. Dip buyers came in at the close but if those gains don’t hold this could be only the beginning. We are just over 4% away from strong support at 2,532 on the S&P, the Volmageddon bottom hit back in March. If that level doesn’t hold we could be in for a long term bear market measuring years.

With all that is ahead of us – a possible no-deal Brexit, the end of the ECB bond buying program, a full blown trade war between the world’s two largest economies, unstable politics in Europe’s most indebted countries and political upheaval in Germany, and interest rates that are generally climbing worldwide, now is the time to get defensive.

Disclosure: I am/we are short QQQ.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.