Simply put, the US economic recovery will be short lived if it depends on the dollar going to zero. By design the current US political powers wanted exactly what is happening, weak dollar improves exports and large companies overseas earnings. Unfortunately this prescription for recovery reduces the buying power of the largest consumer in the world, the USA.
This plan for recovery unfortunately seems to leave out one all important component, the US Citizen. Wall Street is getting back to their country clubs at the expense of the 10.2 % unemployed (and growing) by shorting the US Dollar and crowding the commodities trade. Remember last year when the political powers vilified investors who shorted bank stocks, well isn’t shorting the Dollar kind of un-American. What percentage of those banks bailed out where owned by foreign investors.
Over the recent quarter large companies have credited a large portion of their recovery to overseas sales. McDonalds over the past week announced sales for last month showing that US sales were down, but overseas sales were up. If you are a US Citizen you may or may not have money invested in the stock market, but you definitely have Dollars.
One thing is for sure, if you are an American, this recovery is hurting you.
The following two charts are disturbingly similar side by side:
First is the Dow Industrial Average over the last from 1928 till 2006:
Dow Industrial Average 1928 till 2006
The second chart is total US debt as a percentage of GDP from 1923 till 2006:
Percentage of Total US debt to GDP 1923 till 2006
In 1930 the total percentage of US debt to GDP was 270%. What this means that for every dollar of GDP there was $2.70 of debt. Notice the percentage soared as debt was accelerated and GDP was slowed in the early 30’s. This over expansion of credit was primarily responsible for the financial crisis of the 1930’s. It took many years for the population to forget about the dangers of too much credit.
In 2006 the total percentage of debt to US debt to GDP was 331%. So again this means that for every dollar of GDP there was $3.31 of debt. The overall consensus feels that we are again in process of deleveraging. The questions remains is where we stop.
The real question is what came first the credit or the growth? Was the United Sates at a standstill from the 1940’s till the mid to late 1970’s? If the country was not willing to assume more debt than about 150% (plus or minus say 10%) of GDP for some 30+ years and now we are assuming over 300%, was it that extra assumed risk what launched the economy over the past 30 years ?
I understand that over the past 30 years there has been great innovation, but let us not forget that in the previous 30+ years we went to the moon. It seems to me also that much of the technology over that past 30 years can greatly be attributed to the 30 years prior to that. Was the growth over that past 30 years attributed to Engineers and Scientists or some funny math created by financial institutions spurred by an increased appetite for risk?
Is it possible the Dow Industrial Average really could descent to 1529? The answer is absolutely yes.
From 1929-1932 the Dow Industrial Average went from a high of 381 to a low of 41 (closing prices). The index corrected 89.2% in about 3 years. So if the Dow Industrial went down 89.2% from its high of 14,164 that would leave us at 1529.
In December of 1903 the Dow Industrial Average touched 44. On September 3rd, 1929 the Dow Industrial reached 381. In 27 years the Dow Industrial Average grew 865%. On April 21rst 1980 the Dow industrial Average was 759. On October 9th, 2007 the Dow industrial average was 14,164. In 27 years the Dow industrial Average grew 1866%.
From September 3rd, 1929 (Dow 381) till April 21rst, 1980 (Dow 759) the Dow Industrial Average grew 199%. So it took over 50 years to grow a little over 199% but in just the last 30 years the Dow was able to grow nearly 10 times that.
So even if the Dow where to go to 1529, that still would be a 201% gain on the Dow Industrial average over 30 years which is not bad considering the last 80 years.
I am not saying that this will happen, but I definitely feel as though the last 3 decades have been somewhat of an anomaly. Remember price is determined not by Wall Street professions, it is determined by demand. If investors are unwilling to accept the risk of equities (stock), then the perceived value is worthless.
Several weeks ago when the US Stock market was selling off with no bottom in sight we heard much of the financial populous using the term “capitulation”. Capitulation is defined by Webster’s dictionary as “surrendering or giving up”, traders characterize it as panic selling typically accompanied by large volume. Many professionals look at capitulation as a way to capitalize on another’s emotional bad decision. If the masses, “mob”, sells out then the market would have nowhere to go but up because all the sellers are gone. The theory is that it pays to contrarian.
Interesting how we really never did get this day of reckoning or “capitulation”. Instead a steady flow of relatively good news has spurred the major average up near 20% in a matter of weeks. With several weeks on a roll we have heard (not from all, but a large majority) from public officials, investment professionals and financial press that we may have seen the worst of this economic crisis.
If it pays to be contrarian then don’t you lose if you are part of the mainstream? Could the market be doing the same as capitulation but on the upside, panic buying for their jobs? Remember Wall Street suffers long term in a bear market.
President Herbert Hoover (31rst President of USA 1929-1933) on May 1, 1930 stated that United States was not through all its difficulties but he believed that United States had been through the worst (taken from The World in Depression 1929-1939 by Charles P. Kindleberger)
Red Circle Indicates End of April Beginning May 1930 Dow Industrial Average
It is believed by many that the one of the founding fathers of Technical Analysis was Charles Dow with his Dow Theory. Charles Dow never wrote a book on his theory, but Robert Rhea did in 1932 which he respectfully named “The Dow Theory”. In Robert Rheas book he basically quotes much of William Hamilton’s writing from in the Wall Street Journal. William Hamilton wrote for the Wall Street Journal for nearly three decades before his sudden death in 1929. He wrote a column giving his insight to the future of the markets using Charles Dow’s theory (which he learned directly from him) which proved rather accurate. William Hamilton wrote a book on the topic in 1922 titled “The Stock Market Barometer”.
It is Funny how interpretation can differ from one person to the next. If you read this book with the notion you will learn a system of predicting the US markets, then you will probably come away with that (not necessarily accurately). The Dow Theory does include a method, but it also includes a reason for the method. Charles Dow did not use his theory to predict the market, more to determine where we were in a specific cycle. He used charts to confirm where we were on the economic map. It is widely accepted that we follow a relatively predictable economic path since we maintain a monetary policy (i.e. if A happens then B is our response and C is typically the result).
You should understand that Charles Dow never used his theory nor did he ever represent it as some sort of system to predicting the markets. My interpretation is that William Hamilton was successful with the theory because he used it to plot the economies location, and then used the relatively predictable economic map (cycle) to determine what was next.
I use technical analysis in my investment practices, but more for a “where are we now” purpose and not an eight ball in decision making. It would seem to me that sometimes technical analysis is a self fulfilling prophecy, the more who believe it the more you have a movement (at least in the short term). For that reason alone I feel you cannot disregard it but understand how one of the Fathers of Technical Analysis viewed it.
I would definitely recommend reading an unabridged copy of “The Dow Theory” by Robert Rhea. The book is only about 100 pages with an additional appendix of 100 plus pages of reprinted articles from William Hamilton’s Wall Street Journal column. The Dow Theory to me is definitely one of the best ways to gauge the market sentiment and where we are in the economic cycle.
At the beginning of the year I was under the impression that US markets were for the most part “Free Markets”. Recently these free markets have been coming under attack by the United States government. Seems lately like every week our government is formulating a new plan for recovery and forgetting the previous weeks plan. Lately I am likening the US Government to a child with ADD. Every week we are told to have patience, but every week those same preachers are no practicing their own advice.
My personal opinion on the government’s role in coping with an economic crisis is to uphold its current laws and not to create laws out of anger. I would wager that there are many responsible individuals (i.e. fraudulent mortgage practices) who perpetuated and fueled this economic mess illegally that we could prosecute and start on the road of closure. Instead we are focused on issues that stir the social unrest pot and steers a nation down the path of emotional and irrational rule.
I would plead to our leaders to start taking their roles as leaders and not as members of the mob. We are all taught that “fighting solves nothing”, it is just simple wisdom.
If you watch any of the popular business networks on cable you will hear one word more than most, “bottom”. The term is used so frequently you could play a drinking game where every time says “bottom” you drink, I would imagine you would collapse after about an hour of playing the game. So what does a bottom look like and why is everyone so anxious to make the call. Here are a couple of bubble market bottoms. One major distinction with these bottoms is that they encompass a full index.
The above is the NASDAQ from the late 1990’s to the early 2000’s. We all remember (well most of us) the hype that engulfed the technology sector that launched the NASDAQ to nearly 5000. The reason the NASDAQ reflects the bubble so well is because most technology stocks that were pumped up to extraordinary heights reside on the NASDAQ exchange. Notice that after the bottom was attained that the index did not rebound in weeks, it was slow and steady. If you had tried to buy as the knife was falling you may still be underwater today. Remember the NASDAQ only recovered to about half of its glory before the latest debacle.
The above is a chart of the Dow Industrial Average from the late 1920’s to early 1930’s. The bubble that burst in the late 1920’s is commonly agreed to be caused by a credit collapse (the world’s economies where in a similar dire straits as the US at that time, sound familiar). Since the US economy is based on expansion and contraction of credit, the Dow Industrial average is a good reflection of the pain felt by the US Industries. Again after the bottom is attained the rebound is slow and steady. Also if you attempted to catch this falling knife it could have been costly. Remember the Dow Industrial average did not return to its lofty heights of 1929 till the mid 1950’s.
My opinion is that the bottom will not feel like an opportunity, it will be a hard decision. You will be a minority among your peers and family when buying in.
So over the past week and a half we have been told by so many so called experts that this could be the bottom. With a few pieces of well placed news and some somewhat better than expected economic data (depending on your interpretation) and off we go to the races. We are being led to believe that the storm is leaving and the rainbow is just over the hill with the greener grass and the pot of gold.
Here is an interesting video of a well know “retired” Hedge fund manager, who explains how Hedge funds can make their own market action:
So are the actions over the last week in a half real or just a large coordinated effort? It really would not have taken much to get those dominos going at that point.
