The Great Depression 2.0

As I already pointed out many times, there are a lot of parallels between the current depression and the one from 1929.

Some interesting charts Hussman posted on his blog today compare the current bear market rally with the biggest one from the Great Depression:

Here is a chart of the S&P 500 in weekly data. Note that the market easily and repeatedly breached the lower green bands during the decline, so we should not assume that these bands provide reliable guidance for buying or selling. The recent advance has moved the market the full distance from lower to upper bands, however, which typically does not go uncorrected.

The following chart may look the same as the above chart. But it is from April 1930.

The market recovered by an almost identical percentage following the 1929 crash, peaking in April 1930, after which it suffered a subsequent decline to fresh lows. The point here is not that the same outcome will necessarily follow in this instance, but that we would be remiss not to consider the fact that investors were equally cheerful in early 1930, when the front page of the Wall Street Journal featured an article entitled “A Turn of the Tide Near” assuring investors: “It cannot be imagined that the wholesale failures and interest defaults characteristic of earlier depressions will now be repeated. Confidence in our banking system wholly precludes the money panics of former eras.”

Hussman observes the parallels in the index movement from lower to upper bands, and suggests that the current market might be headed in the same direction. I would recommend to at least seriously consider this possibility in all your decisions.

The key thing to keep in mind in all of this: The recent rally, green shoots, and recovery hopes have been created and/or fueled by massive government expenses, and by a believe in the omnipotence of our leaders in Washington.

But government spending sprees, too, will have to come to an end sooner or later. On top of that, all that the recent government programs have accomplished is to get marginal individuals back to the same flawed habits, such as owning unaffordable homes, buying too many cars, etc.

The interest that the government has to pay on its debts when it runs up sky high deficits, and the taxes it will have to raise in order to make those payments, will be hanging over the recovery like a Damocles Sword. The Federal Reserve, too, will be faced with a similar situation. Let’s assume, for the sake of the argument, that lending activity on homes, cars, etc. were to pick up again. What will the Fed do then? Cut interest rates? Add more bank reserves? Surely not, quite the opposite.

Once existing stimulus programs and credit expansion attempts subside, there won’t be much left to pick up the slack. The consumer won’t be able to go back to business as usual unless he goes through a long period of reduced consumption, deleveraging, and savings, a period during which the majority of production and spending inside the US will have to be focused on capital goods, so as to restore a balanced ratio between the production of consumer goods and the production of capital goods.

At the point when these government stimuli wind down, Keynesian clowns will be jumping out of the bushes left and right, and demand that the government take on more debt and spend more money. But at some point their mindless tirades will no longer appeal to an overtaxed and overleveraged populace. Their ivory tower nonsense will be way too far detached from simple realities.

Any temporary recovery we witness now, is likely to be remembered as just that, a temporary phenomenon. All actions taken so far have set the perfect stage for a double dip recession of enormous proportions, the worst possible prolongation of the necessary correction.

If it was our dear government’s objective to repeat the playbook from the Great Depression one by one, then they have indeed succeeded phenomenally.

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Another Bear Market Rally Comes to an End

The recent bear market rally was kicked off on March 10th with the S&P500 at 676 and has most likely peaked on April 13th at around 858.

The market has been flooded with phoney reassurances, in particular for banks. It started with Citigroup expecting great results for Q1 and went on recently with Wells Fargo and Goldman Sachs. But as explained already, most of these announcements left a lot of doubts:

Citigroup – CEO’s phony statement sparks phony rally
Wells Fargo Needs Another $50 Billion
Goldman’s Orphan Month

Matt Theal at Minyanville writes:

The S&P 500 opened down today but quickly rebounded before selling off with Goldman. The index briefly tagged the 856 level before closing at 841. The market’s inability to get above the 850/860 square out (per Professor Cooper) shows that the level may be a top for the current rally.

Tomorrow will be a big day for economic data. First, traders will be watching the CPI, Empire Manufacturing, Net Long-Term Tic Flows, Capacity Utilization, and Business Inventories. These reports will be due out after the bell. Some market pundits blamed today’s sell off on weak retail sales, if there are any numbers that are worse then expected, watch for the market to sell off tomorrow. Right here I think all the positive data is priced in, it feels as if we are setting up for a sell off.

On top of that, it’s options expiration week. Today is Weird Wollie Wednesday:

“Weird Wollie Wednesday”, created by Don Wolanchuk, references the Wednesday prior to options expiration. The observation made by Wolanchuk stipulates that this day is made up of manipulated price action which is primarily related to the faster deterioration of options premiums during the week prior to options expiration; many traders are rebalancing and rolling their options forward. Using WWW as a guide, it is not uncommon to see strong moves down in the market place on the Wednesday prior to options expiration week.

To pick up on Mish’s S&P 500 Crash Count: In Elliot Wave Terms, we might have seen Wave 4 of 5 down and should now be entering wave 5 of 5 down.

Wave C down, broken down into 5 waves:
Click on image to enlarge.

Wave 5 closeup:
Click on image to enlarge.

According to Elliot Wave theory, Wave C down can extend wave A down by 1.618 times. Wave A was from 1,572 down to 800 which is a drop of about 772 points. This means that wave C down could be as many as 1249 points. Wave B peaked at 1,561, which means that wave C could take the S&P500 as low as 312.

It is questionable whether wave 5 of 5 down will take the S&P that low. It is probably reasonable to assume that it will bottom out somewhere between 312 and 600.

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