1929 Revisited?

April 30, 2020

History does tend to repeat itself if left unchecked and that may be what is taking place as of this writing. In 1918, everyone was wearing masks if they went outdoors to protect themselves against the Spanish flu that killed nearly 700,000 Americans and 5 million worldwide. We have learned a lot since then about vaccines and quarantining so that we don't have to pay such a high price in the future. However, we may not have learned much about managing money individually or as a nation.

1929 was the end of the Roaring Twenties. Yale economist Irving Fisher was jubilant. “Stock prices have reached what looks like a permanently high plateau,” he rejoiced in the pages of the New York Times. He was recorded as being a Permabull... i.e. someone who always thinks the market is going higher.

Fisher went broke by the end of that year, when the Dow had lost nearly half its value. Fisher’s reputation soon followed. This mindset led investors to speculate recklessly throughout the 1920s. Amateur speculators borrowed $8.5 billion to buy stocks during the decade leading up to the 1929 stock market crash. What would you do if you had the opportunity to borrow money so cheaply and have it generate wonderful returns in a short period of time?

In retrospect Fisher figured out the problem. Overly liberal credit policies that encouraged Americans to take on too much debt. Milton Friedman, one this countries greatest economists, credited Fisher with highlighting the policies that led to the crash. Cheap or free money, as it turns out, isn't free at all. If it were then why don't we just print as much money as we need? Debt is the reason. Someone has to pay for it in the end....plus interest.

Fast forward to 2019. We have supposedly a booming economy, "the best in history" according to President Trump. In good times the thing to do is raise interest rates to pay down debt and give an opportunity for people to save money in bank accounts. You also raise interest rates to stave off inflation, but supposedly there isn't any. This modern way of measuring inflation goes one step further by removing Food and Energy from the equation.

So what does the Federal Reserve do? They lower already low interest rates further. Money becomes real cheap. Corporations borrow by selling bonds and they initiate a huge buyback of stock propelling the market to historic highs. Kind of sounds similar to 1929 doesn't it?

It wasn't earnings making the market go higher, but rather stock buybacks keeping it artificially inflated. The bond market already crashed and was divergent from the stock market setting off another signal that the bubble was ready to burst, but the rhetoric remained the same. The Roaring Teens were here so let's keep it going.

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Then the CoronaVirus hit. It was the pin that popped the bubble. The bubble was there brushing itself against rough surfaces as it held on with record unemployment lows. The engine was running at high speed, but no one was checking if there was oil in the engine. There was plenty of fuel (cheap money), but no oil and it was ready to freeze up.

So, like 1929, the bubble burst and the market came tumbling down about 37% from its highs. And, like 1929, there was a huge countertrend rally. For six months the 1929 market rebounded Erasing most of the losses that took place for the market high of 350. Then over the next two years the market plummeted 78% from it's highs.

Will this scenario be repeated over the next few years? There is a possibility that it could resemble the past. We are losing millions of jobs every month that goes by with very little signs of opening the economy. The problem is that half the country has no savings. This is the real problem in this country that should have been addressed long ago. People living week to week thinking that life will always continue that way. When I was young, which was a long time ago, my mother saved money in the bank and had a nice nest egg to fall back on if there was ever trouble. Today people are told to put there money in the stock market because there is no respectable returns to be had in the bank. This is 'one nation under God' but we do not listen or help others do what the New Testament teaches. 'Build your house on rock." This means to have resources to fall back on to sustain us through times like these.

Given what has been said, I will now make a pitch for technical trading and the services offered by Norstar Group and Norstartrader.com. Technical trading has the fundamentals built into it. The news is built into the charts. What people are thinking in the current environment can be extracted from the chart. This is why we called the top of this market at nearly the exact right time. This is why we will let you know when we are selling the next time this market heads south which could be any week now.

Fundamentals are great. This is why we use stocks picked from the leading funds. We add to that the ability to time the market. Yes the market can be timed. Don't listen to that old saying that the market cannot be timed. That was created before there were computers analyzing every tick that transpires. Most of this market is traded by computers and they are timing it 24 hours a day.

We are now approaching the 61.8 Fibonacci retracement level that I talked about in the last post. At the same time we have 30 million people unemployed. I find it hard to believe that we are headed back to all time highs anytime soon. But with all this liquidity, over 7 trillion dollars and counting, it can keep a market afloat for a long time.

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The game of the Federal Reserve is to make the dollar cheaper so that the market automatically looks like it is more expensive. Inflation will hit soon as soon as the dollars start circulating. What they are afraid of is deflation. They do not want asset prices of any kind to fall except for the dollar. So they will keep printing themselves and this country into bankruptcy in order to ward off deflation.


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