Share and housing bust

<body topmargin=0 leftmargin=0 marginheight=0 marginwidth=0> <table cellpadding=0 cellspacing=0 border=0><tr> <td valign="top" height=35 BGCOLOR="#000099" TEXT="#F7F7FF"> <div> <B>The Next Great Depression</B></div> <div> <B>Share and housing bust</B>   |   <A HREF="id66.htm" TARGET="_top" TITLE="Crash Index">Crash Index</A>   |   <A HREF="id67.htm" TARGET="_top" TITLE="What to expect?">What to expect?</A>   |   <A HREF="id68.htm" TARGET="_top" TITLE="Biblical Financial Cycles">Biblical Financial Cycles</A>   |   <A HREF="id69.htm" TARGET="_top" TITLE="Conclusion">Conclusion</A>   |   <A HREF="id77.htm" TARGET="_top" TITLE="Barack Obama and Jimmy Carter">Barack Obama and Jimmy Carter</A>   |   <A HREF="id87.htm" TARGET="_top" TITLE="1930s,1970s and Today">1930s,1970s and Today</A>   |   <A HREF="id79.htm" TARGET="_top" TITLE="19731981 and 2007201?">1973-1981 and 2007-201?</A></div> <div> </div> </td> </tr><tr> <td valign="top" height=445 BGCOLOR="#FFFFFF" TEXT="#080000"> <bR> <div> The American Share and Housing Bust - The Second Stage</div> <bR> <bR> <div> <B>Stage 1 - Overview</B></div> <bR> <div> "... there have been simultaneous housing booms in an unusually large number of countries, from America and Britain to France and Spain. <FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B>Measured by the increase in asset values over the past five years, the global housing boom is the biggest financial bubble in history</B></FONT>. <FONT SIZE="2" COLOR="#006600" FACE="Verdana" ><B>A world economy so out of balance is dangerously vulnerable to shocks</B></FONT>" (Pam Woodall, <I>Fragile foundations</I>, The Economist, "The World in 2006", p.15).</div> <bR> <DIV ALIGN="LEFT"></DIV> <div> <B>Dot-com and housing bubble</B></div> <bR> <div> <IMG SRC="139c39f0.png" border=0 width="451" height="415" ALT="Bitmap Image" ALIGN="BOTTOM" HSPACE="0" VSPACE="0"></div> <bR> <div> (Chart from James Stack of investech.com, February 3, 2009)</div> <bR> <div> "The U.S. housing market lost $3.3 trillion in value last year and <FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>almost one in six owners with mortgages owed more than their homes were worth as the economy went into recession</B></FONT>, Zillow.com said... </div> <bR> <div> "<FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B>About $6.1 trillion of value has been lost since the housing market peaked in the second quarter of 2006</B></FONT> and last year's decline was almost triple the $1.3 trillion lost in 2007, Zillow said" (Dan Levy, <I>U.S. Property Owners Lost $3.3 Trillion in Home Value</I>, bloomberg.com, February 3, 2009).</div> <bR> <div> "House prices have fallen in about 70 percent of all metro areas over the past several years and although <FONT SIZE="2" COLOR="#6600FF" FACE="Verdana" ><B>prices in most metro areas declined modestly during this period</B></FONT>, price depreciation from peak exceeded 5 percent in 116 metro areas and exceeded 20 percent in about 50 metro areas.</div> <bR> <div> <FONT SIZE="2" COLOR="#000000" FACE="Verdana" >"</FONT><B>Those metro areas with the most exposure to subprime and investor lending, which consequently exper</B><B>ienced the greatest run-up in prices during the boom, are suffering the greatest declines on the downside of the housing cycle</B><FONT SIZE="2" COLOR="#000000" FACE="Verdana" >...</FONT></div> <bR> <div> "<FONT SIZE="2" COLOR="#FF6600" FACE="Verdana" ><B>Punta Gorda, Florida</B></FONT>, is one of the hardest hit U.S. markets. Its house price declines are expected to reach a bottom in the second quarter of 2010, <FONT SIZE="2" COLOR="#FF6600" FACE="Verdana" ><B>with a peak-to-trough decline forecast at 65.4 percent</B></FONT>. The peak was reached in the first quarter of 2006.</div> <bR> <div> "House price declines in <FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>Stockton, California</B></FONT>, are expected to reach a nadir in the fourth quarter of 2009, <FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B>with a peak-to-trough drop forecast at 67.1 percent</B></FONT>. The peak was reached in the first quarter of 2006" (Julie Haviv, <I>U.S. housing market bottom within sight: report</I>, reuters.com, February 4, 2009).</div> <bR> <div> The above report noted that "prices in most metro areas declined modestly during this period" and that a recovery was "within sight". This implies that the housing price bust will occur in two stages, <B>with</B> <B>the most severe stage to follow the end of the recovery</B> so that prices in "most metro areas", will not be modest declines as in stage one, but severe.</div> <bR> <div> <B>Stage 2</B></div> <bR> <div> "<FONT SIZE="2" COLOR="#6600FF" FACE="Verdana" ><B>Bankers are growing increasingly anxious about the $1.1 trillion of prime mortgage loans and securities, much of which they held on to themselves, assuming it to be bombproof</B></FONT>. This sits on their books at "much more optimistic" values than lower-grade mortgages, says one. Some 70% of prime securities will eventually have their ratings cut, according to a "downgrade-o-meter" produced by JPMorgan Chase. As Guy Cecala of <I>Inside Mortgage Finance</I>, a newsletter, puts it: "<FONT SIZE="2" COLOR="#006600" FACE="Verdana" ><B>The mortgage storm's first wave was subprime</B></FONT>. Now we are being buffeted by Alt-A. <FONT SIZE="2" COLOR="#FF6600" FACE="Verdana" ><B>But a bigger wave is on the horizon, and it cuts across all loan types</B></FONT>"" (The Economist,<I> </I><FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><I><B>Move over, subprime</B></I></FONT>, economist.com, February 5, 2009).</div> <bR> <div> "The delinquency rate on the least-risky home loans, which account for two-thirds of all mortgages, more than doubled last year, showing credit-quality deterioration is spreading through the housing market, U.S. regulators said...</div> <bR> <div> ""We're in uncharted territory; we've never seen the number this high before," said John Dugan, head of the Office of the Comptroller of the Currency. </div> <bR> <div> "Prime loans account for most of the 35 million U.S. mortgages and 553,736 were seriously delinquent, or 60 days or more overdue, in the fourth quarter, the report showed (Margaret Chadbourn and Kathleen Hayes, <I>Overdue prime mortgages soar in '08</I>, Bloomberg, @ nwanews.com, April 4, 2009).</div> <bR> <DIV ALIGN="LEFT"></DIV> <div> <IMG SRC="081f0630.png" border=0 width="496" height="355" ALIGN="BOTTOM" HSPACE="0" VSPACE="0"></div> <div> (<I>Why Your House Could be Worth 43% Less by 2011</I>, http://www.isecureonline.com/Reports/SUR/ESURH530/)</div> <bR> <div> "Research by Shiller shows U.S.<FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" > <B>house prices were virtually unchanged in inflation adjusted terms between 1890 and the late 1990s, before rising a spectacular 71 percent on the same basis from 1997 to 2005</B></FONT>... [85 per cent from 1997 to 2006]" (James Saft, <I>Get uncomfortable, this could take a while</I>, reuters.com, January 30, 2008).</div> <bR> <div> "Yale University economist Robert Shiller ... said <FONT SIZE="2" COLOR="#6600FF" FACE="Verdana" ><B>there's a good chance housing prices will fall further than the 30 percent drop in the historic depression of the 1930s</B></FONT>...</div> <bR> <div> ""<FONT SIZE="2" COLOR="#006600" FACE="Verdana" ><B>I think there is a scenario that they could be down substantially more</B></FONT>," Shiller said during a speech at the New Haven Lawn Club" (John Christoffersen, AP, <I>Economist: Housing slump may exceed Depression</I>, @biz.yahoo.com, April 22, 2008).</div> <bR> <div> <B>The problem</B></div> <bR> <div> "<FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>The housing bubble</B></FONT>, which is now receding,<FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B> is the first nationwide housing bubble in American history</B></FONT>. <FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" >I</FONT>n the past, Americans have been drawn into local or regional housing booms, like the great Florida boom of the 1920s. This time the U.S. boom ran throughout the States.<B> </B><FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B>I think that must have been caused by the universal availability of cheap credit, the same influence as created the boom in hedge funds and private equity</B></FONT>. If the availability of credit is the chief determinant of house prices, then Florida and Chicago are likely to share in the boom and in the recession" (William Rees-Mogg, <I>No Great Slump, but Stagnant Inflation Looms</I>, dailyreckoning.com.au, April 11, 2008).</div> <bR> <div> "... <FONT SIZE="2" COLOR="#6600FF" FACE="Verdana" ><B>t</B><B>h</B><B>e flawed view of the Fed's role in the Great Depression</B></FONT>: <FONT SIZE="2" COLOR="#006600" FACE="Verdana" ><B>If only the Fed had</B></FONT><B> </B>created $5bn and recapitalized the banking system. More money, so they believe, would have provided a ("mopping up") remedy for disastrous boom-time excesses. <FONT SIZE="2" COLOR="#006600" FACE="Verdana" ><B>It wouldn't have worke</B><B>d</B></FONT>.</div> <bR> <div> "<FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>The issue then, as it is today</B><B>, is</B></FONT> not some finite amount of liquidity to keep the banks solvent and markets liquid, but instead <FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>the enormous ongoing Credit Creation and Intermediation </B><B>necessary to sustain levitated asset prices, incomes, corporate earnings and government receipts</B></FONT>" (Doug Noland, <I>Money Market Issues</I>, prudentbear.com, August 24, 2007).</div> <bR> <DIV ALIGN="LEFT"></DIV> <div> <B>Double Bubble for the Corporate and Houshold Sectors</B></div> <bR> <div> "Every movement in the stockmarket, minor, secondary or primary - is ultimately corrected. The "double bubble" that we've experienced under the Greenspan Fed is unprecedented in stock market history... [Greenspan] had succeeded in building <FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B>a bubble in housing</B></FONT>, <FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B>a bubble in consumer debt</B></FONT>, and<B> </B><FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B>a bubble in bonds</B></FONT> and he's succeeded in<FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" > <B>resurrecting the bubble in stocks</B></FONT>"" (Richard Russell, <I>Markets and Gold</I>, dowtheoryletters.com, September 1, 2003).</div> <bR> <div> <B>The real problem</B></div> <bR> <div> Before discussing where we have been, where we are at and where we are going, an introduction to the breaking of a key fundamental financial law is required.</div> <DIV ALIGN="LEFT"></DIV> <div>  <A NAME="credit_market_debt"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="1" ALIGN="bottom" WIDTH="1" HSPACE="0" VSPACE="0" ></A></div> <div> <IMG SRC="136693f0.png" border=0 width="873" height="319" ALT="Bitmap Image" ALIGN="BOTTOM" HSPACE="0" VSPACE="0"> </div> <bR> <div> "The left graph is from Barron's Magazine and shows that to 2004, at 304% of GDP, the U.S. had a ratio of credit market debt to GDP greater than during the depths of the great depression when the U.S. GDP had already declined by 50%. Today, the US credit market debt to GDP ratio is more than 340%" (David Jensen, <I>Distortions hide pending calamity</I>, prudentbear.com, January 9, 2008).</div> <bR> <div> Note: The low in "Total Credit market Debt as % of GDP" occurred in January 1953 at 128.719% of GDP - start of new cycle.</div> <bR> <div> The graph on the right is from Creditwritedowns.com, from an article by James Quinn, <I>Unintended Consequences - 20th Century and Beyond</I>, 321gold.com, January 5, 2009.</div> <bR> <DIV ALIGN="LEFT"></DIV> <div> <B>Overindebtdeness</B></div> <bR> <div> "A depression seems, indeed, to fall upon mankind out of a clear sky. It scorns to choose a moment when the earth is impoverished.</div> <bR> <div> "A few months ago, the unparalleled prosperity of our country was the theme of universal gratulation. Such a development of resources, so rapid an augmentation of individual and public wealth, so great a manifestation of the spirit of enterprise, so strong and seemingly rational a confidence in the prospect of unlimited success, were never known before. But how suddenly has all this prosperity been arrested! That confidence, which in modern times, and especially in our own country, is the basis of commercial intercourse, is falling in every quarter...</div> <bR> <div> "... Amid these present calamities, and these portentous omens of the future, it is not strange that many minds are seeking, and all voices are debating, the cause and remedy.</div> <bR> <div> "A truer picture of 1932 could scarcely be found. Yet this speech was delivered 95 years earlier, on the 21st of May, 1837, by the Reverend Leonard Bacon from the pulpit of Centre Church in New Haven, Connecticut!" (Irving Fisher, <I>Booms and Depressions</I>, London: George Allen and Unwin, 1933, pp.5-6).</div> <bR> <div> Irving Fisher, Professor of Yale University, an optimism in 1929, did not see the coming depression. He therefore "examined the depressions of 1837, 1873 and 1929, identifying a number of common factors, but he found these played a subordinate role compared with <FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B>two dominant factors, namely over-indebtedness to start with, and deflation following soon after</B></FONT>" (Max Walsh, <I>Inflation: No joy, only depression</I>, SMH, January 30, 1992, p.23).</div> <bR> <div> A "clear sky" or a postive social mood is required for a society to take on excessive amounts of debt, through ups and downs, to a point where the economy is so financially "out of balance", that when the unwinding of the debt begins no counteraction will prevent, for very long, a deflationary depression. The extreme in overindebtedness, in a financial cycle, is referred to, in this article, as the 'debt-saturation' point.</div> <bR> <div> "... from our study of market history we do appreciate that it takes years (decades?) for major systemic bubbles to flourish and to create the backdrop for the final climax of excess. Such spectacular market developments require a protracted inflationary period to engender market psychology susceptible to a (aberrational) manic convulsion. It takes, as well, years for the financial system infrastructure to expand and evolve to the point of being capable of furnishing the necessary onslaught of finance, both for leveraged speculation and spending throughout the real economy. And, importantly, it takes survival through a series of mini (appearing that way only in hindsight) bursting bubbles, downturns and "close calls." Bubbles that permeate the entire Credit system are uncommon, and can only be nurtured by repeated intervention and safeguarding by the monetary authorities ("moral hazard")...</div> <bR> <div> "The boom is doomed specifically because of unsustainable Bubble dynamics within the Financial Sphere. Leveraged speculation eventually reaches a degree of manic excess ("blow-off"), destabilizing the system with extreme asset inflation, speculative position growth that is unstable and unsustainable, and resulting unwieldy marketplace liquidity. It is not necessary to dwell on the catalyst for the piercing of the financial Bubble, but only that at some point asset prices will inevitably reverse, speculators will (panic) sell, and deleveraging will commence.</div> <bR> <div> "The downside of the cycle will see reduced credit availability, faltering liquidity, risk aversion, faltering asset markets and rather dramatically different spending habits..." (Doug Noland, <I>Hedge Funds</I>, prudentbear.com, May 13, 2005).</div> <bR> <div> "The doomsayers worry about what will happen if ... debts are repudiated, as occurred in the 1930s.<B> </B>"<FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>All debt must be paid off, refinanced or reneged on. I think we'll see a mixture of all three</B></FONT>,"<B> </B>says Richard Russell, editor of newsletter Dow Theory Letters" (Jonathan Chevreau, <I>Debt loads are soaring</I> <I>$22,000 per capita and counting</I>, nationalpost.com, October 25, 2003).</div> <bR> <div> "The Russell opinion is that following the greatest and most speculative bull market in history, we could have expected a severe and costly bear market which would have taken stocks back to great values. But because of the drastic, almost insane measures taken by the Greenspan Fed to battle the bear, this bear market will end with the death of the dollar as a reserve currency and most likely with the end to the US as the world's sole superpower.</div> <bR> <div> "Before this bear market is over, I foresee paper money being distrusted and discredited and the institution of the Federal Reserve not only despised but rejected. The US, today the world's greatest debtor, will no long be the world's leader, and I foresee US stocks smashed to levels not dreamed of even by the leading pessimists of today" (Richard Russell, <I>Markets and Gold</I>, dowtheoryletters.com, September 1, 2003).</div> <bR> <DIV ALIGN="LEFT"></DIV> <div> <B>Sharemarkets - 'Valuation' highs and 'Nominal' highs</B></div> <bR> <div> <IMG SRC="09d7f190.gif" border=0 width="639" height="281" ALIGN="BOTTOM" HSPACE="0" VSPACE="0"></div> <bR> <div> Chart from Peter Eliades, "Stockmarket Cycles" traders-talk.com, September 5, 2006; Chart and data from Robert Shiller, <I>Irrational Exuberance</I>, Second Ed., (Princeton: PUP, 2005).</div> <bR> <div> It goes without saying that a sharemarket peak may hearld the end of good-times and the beginning of bad-times.</div> <bR> <div> Linking "Total Credit Market Debt" (TCMD) and the "Price Earnings Ratios" (PER) may determine if a sharemarket will be at the beginning of bad times.</div> <bR> <div> The peak in the TCMD and the PER that followed the boom of the 1920s, gave way to the debt-deflation depression of the 1930s.</div> <bR> <div> <FONT SIZE="2" COLOR="#000000" FACE="Verdana" >"The nineteen sixties in Wall Street were the nineteen twenties replayed in a new and different key - different because the nineteen sixties were more complex, more sophisticated, more democratic, perhaps at bottom more interesting" (</FONT>John Brooks, <I>The Go-Go Years</I>, (New York: John Wiley & Sons, 1999),<FONT SIZE="2" COLOR="#000000" FACE="Verdana" > p.25).</FONT></div> <bR> <div> "There are parallels between the 1960s and the 1990s. The monetary stringency of 1989-1990 and 1994 echo the back-to-back recessions in 1957-1958 and 1960. The monetary stimulus precipitated by the Asia crisis, especially starting in fall 1998, echoes the monetary expansion of the mid-1960s, albeit at a milder pace" (Robert L. Hetzel, <I>Monetary Policy in A World of Uncertain Productivity Growth</I>, cato.org, October 19, 2000).</div> <bR> <div> A key difference between the 1920s and 1960s booms was the latter did not push the TCMD to a peak any where comparable with the 1920s boom. It is suggested here that this situation, underindebtedness, contributed to the "stagflation" aftermath to the boom as opposed to a "deflationary" outcome.</div> <bR> <div> The boom of the 1990s contributed to the TCMD and PER being comparable to the 1920s-produced level. But this has not yet led to a "deflationary" aftermath.</div> <bR> <div> John Brooks, above, compared the 1920s with the 1960s and Robert L. Hetzel, also above, compared the 1960s with the 1990s. The PER also contributes to a comparison between the 1920s, 1960s and 1990s; as well as other information below that links the booms.</div> <bR> <div> "<FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>Pittsburgh won an unprecedented sixth Super Bowl title</B></FONT> with a late touchdown in a thrilling 27-23 win over Arizona... <FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B>The Steelers</B></FONT>, who <FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B>won four titles in six years in the 1970s</B></FONT> and triumphed again in 2006, moved ahead of five-time champions San Francisco and Dallas (Martin Gough, <I>Super Bowl XLIII - Arizona v Pittsburgh</I>,  bbc.co.uk, February 2, 2009).</div> <bR> <div> "<FONT SIZE="2" COLOR="#6600FF" FACE="Verdana" ><B>Since the first Super Bowl was contested in 1967, the average annual return for the S&P 500 index has been 25 percent in the six years the Steelers competed, regardless of whether the team won or lost, according to Capital IQ, a division of Standard & Poor's</B></FONT>" (Ros Krasny,<I> Steelers in Super Bowl may bring luck to investors</I>, reuters.com, January 30, 2009).</div> <bR> <div> <FONT SIZE="2" COLOR="#000000" FACE="Verdana" >"</FONT><B>N</B><B>ew England</B><B> ... </B><B>also set an NFL record for most points in a season with 589, eclipsing the 1998 mark of 556 set by the Minnesota Vikings</B><FONT SIZE="2" COLOR="#000000" FACE="Verdana" >" (Larry Fine, <I>Perfect Patriots earn place in history</I>, reuters.com, December 30, 2007).</FONT></div> <bR> <div> Therefore the 1960s/1970s and 1990s will be incorporated into the model to view the future.</div> <bR> <DIV ALIGN="LEFT"></DIV> <div>            History doesn't repeat itself - but it rhymes</div> <div> - attributed to Mark Twain</div> <bR> <div> "With financial profits the key driver of economic performance and the expansive financial sector commanding its own profitability, system "resiliency" is no enigma. In no way, however, has the business cycle been repealed, although it definitely has been grossly distorted and extended" (Doug Noland, <I>More Minsky</I>, prudentbear.com, April 13, 2007).</div> <bR> <div> In comparing "business" or "financial" cycles comparable events and people of each cycle are referred to as rhymes, allowing for "distortions" in the cycles. Using the PER we may say that it has a 'rhyme' in the 1920s, 1960s and 1990s booms.</div> <bR> <div> The PER peaked in 1929 and the greatest recession in America history also started in 1929 and ended in 1933 - The Great Depression.</div> <bR> <div> The PER peaked in 1966 and the greatest recession since the great depression began in 1973 - The Great Recession.</div> <bR> <div> "<FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B>The worst recession of the past 30 years</B></FONT> - that of 1973-75 - counted at its deepest 9% unemployment...  But the recession of 1973-75 was severe enough to shock those businessmen, economists, and politicians who had come to believe that Keynesian economists had tamed the economic cycle" (Edward Cornish, <I>The Great Depression of the 1980s - Could it really happen?</I> <B>The Futurist, October 1979</B>, p.353).</div> <bR> <div> Richard Russell suggested above that the former Chairman of the Federal Reserve Bank, Alan Greenspan, in response to the dotcom bust, "succeeded in building <B>a bubble in housing</B>, <B>a bubble in consumer debt, a bubble in bonds </B>and he's succeeded in <B>resurrecting the bubble in stocks</B>".</div> <bR> <div> This rhymes with the 1960s/1970s. The Dow Jones peaked in 1966 and bottomed in the mild recession of 1969-1970. The subsequent stockmarket boom of 1970-73 was accompanied by a housing bubble.</div> <bR> <div> ""<FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B>Residential investment accounted for 35% of private investment in the past year, a level not seen since the early 1970s</B></FONT>," notes Martin Barnes, the perceptive financial-market observer at Bank Credit Analyst" (Christopher Farrell, <I>A Housing Boom Built on Folly</I>, news.yahoo.com, July 26, 2005).</div> <bR> <div> The stockmarket rally from May 1970 to January 1973 is referred to as a "cyclical" (short) bear-market rally in a "secular" (long) bear-market.</div> <bR> <div> Note: "...the public sees stocks as a visible signal of wealth" (Jim Willie, <I>Garbage Bonds & Bonfires</I>, 321gold.com, July 6, 2007).</div> <bR> <div> It is also a reflection of the social mood of the public. Hence the key focus in this article. But the coming 'bond' bubble bust also needs to be addressed. The wrath of the public, after the crash of 1929, was directed at Wall Street and the Stock Market, while the anger of the public, following the future crash, will be on Wall Street, the Stock Market and the Bond Market:</div> <bR> <div> "Call it the tyranny of capital markets - global markets for stocks, bonds and other financial instruments. Our economy is increasingly under their sway. These markets are, of course, huge.<FONT SIZE="2" COLOR="#008000" FACE="Verdana" > </FONT><FONT SIZE="2" COLOR="#006600" FACE="Verdana" ><B>At last count, the U.S. stock and bond markets alone were worth roughly $18 trillion and $24 trillion, respectively</B></FONT>" (Robert J. Samuelson, <I>Masters of the Economy</I>, washingtonpost.com, August 8, 2007).</div> <bR> <div> <B>Bulls and Bears</B></div> <bR> <div> "The stock market is controlled by people and, as a result, by emotions, among them collective emotions...</div> <bR> <div> "In describing financial market behavior, the largest group of market participants is often referred to, metaphorically, as a herd..</div> <bR> <div> "Investors can be described as having <I>bullish</I> or <I>bearish</I> sentiments..." (<I>Market Trends</I>, en.wikipedia.org/wiki/Bull_market).</div> <bR> <div> "<B>Bull</B>   An investor who believes that sharemarket prices will rise and invests in the hope of eventually selling for a gain.</div> <bR> <div> "<B>Bear</B>   An investor who believes that market prices will soon fall and who is a seller in the market" (The Penguin Macquarie Dictionary of Economics & Finance, Richard Tarif, Editor, (Ringwood, Penguin Books Australia Ltd, 1988), pp. 24 7 34).</div> <bR> <div> <FONT SIZE="2" COLOR="#000000" FACE="Verdana" >"... Robert D. Arnott, chairman of Research Affiliates, an asset management firm based in Pasadena, Calif... says that there are </FONT><FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>two types of bull and bear markets</B></FONT><FONT SIZE="2" COLOR="#000000" FACE="Verdana" >. First, </FONT><B>there are cyclical bulls and bears, which run their course in the span of a few years</B><B>. Then, </B><B>there are longer-term, secular bull and bear markets; those can last for decades</B><FONT SIZE="2" COLOR="#000000" FACE="Verdana" >.</FONT></div> <bR> <div> "Mr. Arnott noted that short-term cyclical bull markets could occur within longer-term secular bear markets. From 1966 to 1982, for instance, the broad stock market went virtually nowhere. But within that period, there were several cyclical bull and bear markets that sent stocks prices up and down.</div> <bR> <div> "Many market strategists say that the current bull market is a cyclical rally stuck within a secular bear..." (Paul J. Lim, <I>Happy Birthday, Bull Market. (Now, Make a Wish.)</I>, nytimes.com, October 1, 2006).</div> <bR> <div> The cyclical bear-market rally from 2002-2??? is 'rhymed' with the 1970-73 cyclical bull, allowing for distortions between cycles.</div> <bR> <div> <B>Secular (long) 'bull' and 'bear' markets</B></div> <bR> <div> Secular bull- and bear-markets may be determined by the peaks and troughs in the PER.</div> <bR> <DIV ALIGN="LEFT"></DIV> <div> <IMG SRC="06d8e6a0.png" border=0 width="654" height="362" ALT="WordPerfect 12 Document" ALIGN="BOTTOM" HSPACE="0" VSPACE="0"></div> <bR> <div> <FONT SIZE="2" COLOR="#000000" FACE="Verdana" >(Adam Hamilton, </FONT><I>Long Valuation Waves 2</I>, <FONT SIZE="2" COLOR="#000000" FACE="Verdana" >zeallc.com, August 5, 2005).</FONT></div> <bR> <div> From the chart above a secular bear market ran from 1929 to 1949, followed by a secular bull-market ran from 1949 to 1966, followed by a secular bear-market from 1966-1982, with a new bull-market from 1982-2000. According to this construct we are presently in a "secular" bear-market.</div> <bR> <div> As a generalization "secular" bull markets are good for "share" investors, and the economy; while a "secular" bear market is bad for share investors, and the economy, as illustrated in next chart.</div> <bR> <DIV ALIGN="LEFT"></DIV> <div> <IMG SRC="09806700.png" border=0 width="518" height="368" ALT="Bitmap Image" ALIGN="BOTTOM" HSPACE="0" VSPACE="0"></div> <bR> <div> (Adam Hamilton, <I>Long Valuation Waves 2</I>, zeallc.com, August 5, 2005).</div> <bR> <div> <TABLE BORDER="2" CELLPADDING="1" CELLSPACING="1" WIDTH="252" BORDERCOLORLIGHT="#C0C0C0" BORDERCOLORDARK="#808080" FRAME="BOX" RULES="ALL" HSPACE="0" VSPACE="0" > <tR> <tD VALIGN=TOP COLSPAN=2 HEIGHT= 16 WIDTH="152"><div> Date</div> </tD> <tD VALIGN=TOP WIDTH="83"><div> DJIA</div> </tD> </tR> <tR> <tD VALIGN=TOP HEIGHT= 16 ><NOBR><div> September 3</div> </NOBR></tD> <tD VALIGN=TOP WIDTH="48"><div> 1929</div> </tD> <tD VALIGN=TOP WIDTH="83"><div> 381.17</div> </tD> </tR> <tR> <tD VALIGN=TOP HEIGHT= 16 WIDTH="101"><div> June 13</div> </tD> <tD VALIGN=TOP WIDTH="48"><div> 1949</div> </tD> <tD VALIGN=TOP WIDTH="83"><div> 161.60</div> </tD> </tR> <tR> <tD VALIGN=TOP HEIGHT= 16 WIDTH="101"><div> February 9</div> </tD> <tD VALIGN=TOP WIDTH="48"><div> 1966</div> </tD> <tD VALIGN=TOP WIDTH="83"><div> 995.95</div> </tD> </tR> <tR> <tD VALIGN=TOP HEIGHT= 16 WIDTH="101"><div> August 12</div> </tD> <tD VALIGN=TOP WIDTH="48"><div> 1982</div> </tD> <tD VALIGN=TOP WIDTH="83"><div> 776.92</div> </tD> </tR> <tR> <tD VALIGN=TOP HEIGHT= 16 WIDTH="101"><div> January 14</div> </tD> <tD VALIGN=TOP WIDTH="48"><div> 2000</div> </tD> <tD VALIGN=TOP><NOBR><div> 11,722.98</div> </NOBR></tD> </tR> </TABLE></div> <bR> <div> The Dow Jones in the secular bear market - 1929 to1949 - was down 58% over a period of 19.8 years</div> <div> The Dow Jones in the secular bull market - 1949 to 1966 - was up 516% over a period of 16.7 years</div> <div> The Dow Jones in the secular bear market - 1966 to 1982 - was down 22% over a period of 16.5 years</div> <div> The Dow Jones in the secular bull market - 1982 to 2000 - was up 1,409% over a period of 17.4 years</div> <bR> <div> <B>Cyclical "bulls" in Secular "bears"</B></div> <bR> <div> In the valuation downturn from 1929, in an economy that had reached its debt-saturation point, the Dow Jones declined from its valuation and nominal high of 1929 and did not breach that nominal high in the secular bear.</div> <bR> <div> In the downturn from 1966, in an economy that was no where near a debt-saturation point, the Dow Jones was able to set a new nominal high some six years later and then did not breach that nominal high in the secular bear.</div> <bR> <div> In the valaution downturn from 2000, in an economy that, with reference to 1929, appeared close to its debt-saturation point, the Dow Jones breached its earlier nominal high some five to six years later.</div> <bR> <div> It is suggested here that the 1990s/2000s boom will eventually be followed by deflation as happened in the 1930s; but that a deflationary outcome will not come until the debt-saturation point is reached when the Dow Jones establishes a new nominal high for the present secular bear, which if it follows the earlier rhymes, the new nominal high will not be breached in the secular bear.</div> <bR> <div> The bear-market rally from 1970-1973, following the valuation peak of 1966, has 'a' rhyme with the present cyclical bull-market following the valuation peak of 2000.</div> <bR> <div> "... despite the apparent complacency of financial markets there is the very real risk that the global economy is in for a hard landing. However, the hard landing is more likely to end in deflation rather than in the inflationary burst of the mid-1970s" (Desmond Lachman, AEI, <I>Lulled into false sense of security</I>, AFR, August 17, 2006, p.63).</div> <bR> <DIV ALIGN="LEFT"></DIV> <div> <B>Double-Boom Decades</B></div> <bR> <div> "<FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>The global equity markets are entering a fifth year advance</B></FONT>, which in and of itself, is rare <FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B>and in U.S. equity market history has occurred only four times</B></FONT>: once in a structural bear market (1932-37); <FONT SIZE="2" COLOR="#006600" FACE="Verdana" >and three times <B>i</B><B>n a structural bull market: 1921-29</B>, 1946-52, <B>and 1990-98</B></FONT><FONT SIZE="2" COLOR="#000000" FACE="verdana" >" </FONT>(Louise Yamada, <I>Technical Perspectives</I>, lyadvisors.com, March 7, 2007).</div> <bR> <div> The stockmarket rally of the 2000s is now longer than its 1970s counterpart. The longevity of the present boom is suggesting that the 1990s and 2000s should also be viewed as "double-boom decades" with rhymes with the 1920s. </div> <bR> <div> A 'severe' recession ended in July 1921, followed by a sharemarket boom, with the Dow Jones Industrial Average peaking on September 3, 1929.</div> <bR> <div> A recession ended in March 1991, followed by a sharemarket boom, with the Nasdaq Composite Index peaking on March 10, 2000. </div> <bR> <div> A recession ended in November 2001, followed by a sharemarket boom, with a present Dow Jones peak in 2007.</div> <bR> <div> The 'severe' recession of 1920-21 may be consided the primary post-WW1 recession. The recession of 1990-91 was the primary post-Cold War recession.</div> <bR> <div> A terror attack on September 16, 1920 in the heart of the financial district of New York, occurred in the recession of 1920-21, with more than 30 people killed and hundreds injured by a horse-drawn-wagon-bomb,</div> <bR> <div> A terror attack of September 11, 2001 in the heart of the financial district of New York,occurred in the recession of 2001, with more than 2,600 killed by commercial-airline-bombs.</div> <bR> <div> <B>Double Bubble - Non- Goverment Sectors - Required</B></div> <bR> <DIV ALIGN="LEFT"></DIV> <div> <IMG SRC="13a04fc0.png" border=0 width="260" height="252" ALT="Bitmap Image" ALIGN="BOTTOM" HSPACE="0" VSPACE="0"></div> <bR> <div> (The Economist, <I>Crash Course</I>, economist.com, February 26, 2009).</div> <bR> <div> "<FONT SIZE="2" COLOR="#006600" FACE="Verdana" ><B>Nothing could have been more ingeniously designed to maximise the suffering, and also to ensure as few as possible escaped the common misfortune</B></FONT>... the man who waited out all of October and all of November [1929], who saw the volume of trading return to normal and saw Wall Street become as placid as a produce market, and who then brought stock would see their value drop to a third or fourth of the purchase price in the next twenty-four months" (John Kenneth Galbraith, <I>the Great Crash 1929</I>, p.130-31).</div> <bR> <div> The "resurrected" share bubble and housing bubble, in a "clear sky", is required so that the debt-saturation point will be reached in the present financial cycle, so that the outcome will not be stagflation but deflation.</div> <bR> <div> "... The popping of the NASDAQ bubble took mom and pop money down the drain, it blew a hole in many a corporate pension fund, and postponed the retirement dates for many an IRA dependent household in the US.<B> </B><FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>But what the popping NASDAQ did not do was impede systemic credit creation</B></FONT>...</div> <bR> <div> "And it's really no secret as to why. <FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B>Quite simplistically, the stock market bubble was not financed by the banks</B></FONT>. It wasn't financed by Fannie and Freddie [Government Sponsored Enterprises]. At least not directly. It was financed by pension funds, mom and pop investors armed with personal, IRA and 401(k) money, and it was financed late in the game by foreign interests unable to avoid the temptation of joining the party. And, yes, in part it was financed by margin debt..." (<I>Different Bubble, Different Outcome?</I><FONT SIZE="2" COLOR="#000080" FACE="Verdana" > </FONT>Monthly Market Observations<FONT SIZE="2" COLOR="#990000" FACE="Verdana" >,</FONT><FONT SIZE="2" COLOR="#800000" FACE="Verdana" ><B> </B></FONT>contraryinvestor.com, August, 2004).</div> <bR> <div> Unfortunately, as society has not learnt from history's lessons about debt management, the financial bear's goal is to saturate society with debt, expecially for inflated share and house prices, so as "to maximise the suffering, and also to ensure as few as possible escaped the common misfortune" when the last bubble bursts. The debt implosion then forces society to take the necessary steps for restructuring for the next cycle to begin. The financial sector is the bear's key instument to wreck havoc.</div> <bR> <div> The real-estate bubble will now be looked at followed by the financial sector and the 'resurrected' stockmarket,</div> <bR> <div> <B>Real Estate</B></div> <bR> <div> "The nationwide housing bubble, the first in the post-World War II era, has been propelled by low mortgage rates, loose lending practices, aversion to stocks after the 2000-2002 bloodbath and conviction that house prices always rise robustly" (Gary Shilling, <I>End of the house party,</I>dailyreckoning.com, September 15, 2006).</div> <bR> <div> "Jeremiah O'Connor, founder and managing partner of O'Connor Capital Partners in New York ... has participated in <FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>three brutal property bear markets: 1974-75, 1980-82 and 1990-92</B></FONT>. Note, he observes, that <FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B>13 years have passed since the last slump, enough time to have erased the institutional memory</B></FONT>" (James Grant,<I> Un-Real Estate</I>, forbes.com, April 25, 2005).</div> <bR> <div> "Paul Samuelson, who was the second recipient of the Nobel Prize in economics ...<FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B> </B></FONT>said rising oil prices and the bursting of the "housing bubble" remind him of the 1970s, when former Fed Chairman Arthur Burns overheated the economy by holding interest rates low through the 1972 presidential election" (Daniel Kruger, <I>Stagflation Deja Vu Prompts TIPS Demand, Loss of Fed Respect</I>, bloomberg.com, April 9, 2007).</div> <bR> <div> "The big difference in the popping of the equity bubble versus the popping of a potential residential real estate bubble at the moment is the financing... the US banking system is a huge player...</div> <bR> <div> "... we have not even mentioned potential impacts on the large GSE's that are holding a good chunk of the remaining mortgage debt in this country..." (<I>Different Bubble, Different Outcome?</I><FONT SIZE="2" COLOR="#000080" FACE="Verdana" > </FONT>Monthly Market Observations<FONT SIZE="2" COLOR="#990000" FACE="Verdana" >,</FONT><FONT SIZE="2" COLOR="#800000" FACE="Verdana" ><B> </B></FONT>contraryinvestor.com, August 2004).</div> <bR> <div> Commercial banks have, at the end of 2008, according to the Federal Reserve Flow of Funds, $3.74 trillion in outstanding mortgages.</div> <bR> <div> Outstanding mortgages represent 44.78% of commerical bank credit.</div> <bR> <div> Agency- and GSE-backed Mortgage pools have $4.96 trillion exposure to mortgages.</div> <bR> <div> Commercial banks and Agency- and GSE-backed Mortgage pools have $8.7 trillion real estate liabilities.</div> <bR> <div> Total credit market debt in mortgages - home, multifamily residential, commercial and farm - outstanding at the end of 2008, is $14.64 trillion.</div> <bR> <div> "... the most serious collateral damage from a housing bust would be a wounded U.S. banking system...</div> <bR> <div> "So what if the U.S. banking system falls on hard times? <FONT SIZE="2" COLOR="#006600" FACE="Verdana" ><B>History suggests that as goes a nation's banking system, so goes its economy</B></FONT>. <FONT SIZE="2" COLOR="#FF6600" FACE="Verdana" ><B>T</B><B>h</B><B>e banking system is the transmission between the central bank and the economy</B></FONT>. When that transmission system breaks or does not function properly, the stimulative effects of monetary policy become dulled. <FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>Central banks cut interest rates to very low levels, which, under normal circumstances, would create a boom in nominal aggregate demand</B></FONT>. <FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B>But when the banking transmission system is not functioning properly, those low interest rates engineered by the central bank don't seem to reach the wheels of the economy</B></FONT>. For example, after the 1929 U.S. stock market crash, the U.S. banking system also crashed. This broken banking system coincided with the worst recession in U.S. history. After the Japanese stock and real estate markets crashed in the early 1990s, the Japanese banking system was put on life support. This coincided with more than a decade of Japanese economic stagnation..." (Paul Kasriel, <I>Collateral Damage From A U.S. Housing Bust</I>, northerntrust.com, July 30, <B>2004</B>).</div> <bR> <div> "The problem with housing, however, is not the frequently heralded increase in subprime delinquencies or defaults...</div> <bR> <div> "<FONT SIZE="2" COLOR="#006600" FACE="Verdana" ><B>It will not be loan losses that threaten future economic growth, however, but the tightening of credit conditions that are in part a result of those losses</B></FONT>. To a certain extent this reluctance to extend credit is a typical response to end-of-cycle exuberance run amok"<I> </I>(William H. Gross,<I> Grim Reality</I>, pimco, April 2007).</div> <bR> <div> <B>Financial and Economic Sectors</B></div> <bR> <div> "<FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>The Economic Sphere never appreciates how its behavior and fortunes are dictated by the Financial Sphere</B></FONT>" (Doug Noland, <I>Digging a Little Deeper into "Financial Sphere" Analysis</I> prudentbear.com, April 29, 2005).</div> <bR> <div> "Much of banking history consists of one speculative bubble after another... Each tends to be fuelled by an explosion of credit, a wave of unwarranted optimism and a subsequent mispricing of risk" (The Economist, <I>Handle with care</I>, October 3, 1998, p.15).</div> <bR> <div> "The U.S. and global financial systems are dysfunctional, and continuing to accommodate financial excess will end in tears, acrimony and the inevitable fanatical hunt for scapegoats...</div> <bR> <div> "The U.S. financial system is the vulnerable "weak link" specifically because of the confluence of unusual marketplace dynamics and the Mortgage Finance Bubble" (Doug Noland, <I>Conundrums</I>, prudentbear.com, May 20, 2005).</div> <bR> <div> "... from our study of market history we do appreciate that it takes years (decades?) for major systemic bubbles to flourish and to create the backdrop for the final climax of excess. Such spectacular market developments require a protracted inflationary period to engender market psychology susceptible to a (aberrational) manic convulsion. It takes, as well, years for the financial system infrastructure to expand and evolve to the point of being capable of furnishing the necessary onslaught of finance, both for leveraged speculation and spending throughout the real economy. And, importantly, it takes survival through a series of mini (appearing that way only in hindsight) bursting bubbles, downturns and "close calls." Bubbles that permeate the entire Credit system are uncommon, and can only be nurtured by repeated intervention and safeguarding by the monetary authorities ("moral hazard")...</div> <bR> <div> "The boom is doomed specifically because of unsustainable Bubble dynamics within the Financial Sphere. Leveraged speculation eventually reaches a degree of manic excess ("blow-off"), destabilizing the system with extreme asset inflation, speculative position growth that is unstable and unsustainable, and resulting unwieldy marketplace liquidity. It is not necessary to dwell on the catalyst for the piercing of the financial Bubble, but only that at some point asset prices will inevitably reverse, speculators will (panic) sell, and deleveraging will commence.</div> <bR> <div> "The downside of the cycle will see reduced credit availability, faltering liquidity, risk aversion, faltering asset markets and rather dramatically different spending habits..." (Doug Noland, <I>Hedge Funds</I>, prudentbear.com, May 13, 2005).</div> <bR> <div> <B>Final Act - The Government Debt Bubble</B></div> <bR> <div> "During this period [end 1995 to end 2007], Household Debt swelled 184% to $8.959 TN; Non-farm Corporate Debt 130% to $3.832 TN; and State & Local Government borrowings 109% to $2.192 TN. <FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>Federal debt expanded "only" 41% to $5.122 TN</B></FONT>" (Doug Noland, <I>A Week of Big Numbers</I>, prudentbear.com, February 27, 2009).</div> <bR> <div> "Despite today's histrionic fixation on 'deflation,' current dynamics have some similarities to the post-tech Bubble period. Granted, the collapse of Wall Street finance is of much greater scope and consequence than the bursting of the tech Bubble. Yet I would counter that<FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" > <B>The Burgeoning Bubble in Government Finance is poised to make the Mortgage Finance Bubble appear tiny in comparison</B></FONT>.</div> <bR> <div> "There has been no run on bank deposit "money," not with the FDIC, Treasury, and Federal Reserve there to backstop confidence. The marketplace's love affair with agency debt runs unabated - compliments of federal government receivership and guarantees. Money market fund assets are right at record levels, confidence bolstered by Fed and Treasury assurances. And despite the prospect of a $1 TN borrowing requirement this year, the Treasury can still tap liquid markets for short-term funds at about 20 bps. The Fed's balance sheet has ballooned, although nothing to compare to the unfolding explosion of Trillions of Treasury borrowings, obligations and guarantees (both implied and explicit).</div> <bR> <div> "<FONT SIZE="2" COLOR="#6600FF" FACE="Verdana" ><B>The Government Finance Bubble is enormous and powerful</B></FONT> - and should be anything but underestimated. <FONT SIZE="2" COLOR="#006600" FACE="Verdana" ><B>Akin to the previous Bubble in Wall Street finance</B></FONT>, the epicenter of this Bubble is here in the U.S. <FONT SIZE="2" COLOR="#006600" FACE="Verdana" ><B>But</B></FONT> I would argue that <FONT SIZE="2" COLOR="#006600" FACE="Verdana" ><B>this unfolding Bubble dynamic has greater potential to engulf the entire world than even U.S.-style mortgages and derivatives did starting back around 2002</B></FONT>. Welcome to the new world of synchronized stimulus, deficits, and reflationary policymaking. I don't believe true systemic deflation (as opposed to collapsing asset Bubbles) is a high probability scenarios as long as the Government Finance Bubble is rapidly inflating. All bets are off, however, if confidence in government debt falters. The worst case scenario - that should be avoided at all costs - is a massive inflation of government claims that sets the stage for a devastating bust.</div> <bR> <div> "It is imperative for policymakers to ensure that the Government Finance Bubble does not follow in the footsteps of the runaway excess associated with Wall Street/mortgage finance. Yet it's clear that policymaking (monetary and fiscal) is setting a course to guarantee just such an outcome. And, as has been the case for some time now, markets are keen to fall in love with - and aggressively accommodate - whatever might be the Bubble of the Day. <FONT SIZE="2" COLOR="#FF6600" FACE="Verdana" ><B>The Wall Street/Mortgage Finance Bubble ran to such incredible extremes that its subsequent implosion has created the near ideal backdrop for the explosion of Government Finance (as the tech implosion did for mortgage finance)</B></FONT>..." (Doug Noland, <I>The Government Finance Bubble</I>, prudentbear.com, February 6, 2009).</div> <bR> <div> "The worst case scenario unfolds when our creditors and the marketplace turn against these government obligations" (Doug Noland, prudentbear.com, March 13, 2009).</div> <bR> <div> <B>Suckers' Rallies</B></div> <bR> <div> "The crash [of the stockmarket] is then followed by a wind-down period, interrupted by <FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B>numerous suckers' rallies</B></FONT>, which absorb cash from optimists expecting an early recovery" (James Dale Davidson and William Rees-Mogg, <I>The Great Reckoning</I>, Revised Edition, (London: Sidgwick & Jackson, 1993), p.146).</div> <bR> <div> <B>1929-30 bear-market rally</B></div> <bR> <div> The Dow Jones closing peak on September 3, 1929 was 381.17 - 1929 being the valuation high for the Dow, in that cycle. The Index declined to a closing low of 198.69 on November 13, 1929. The Dow had dropped 48 percent. Herbert Hoover's 'Keynesian' interventionalist policy of tax cuts and Federal Reserve interest rate cuts contributed to a suckers' rally from the mid-November low to mid-April 1930 for a bear-market rally of 48 percent.</div> <bR> <div> Barron's reported on March 24, 1930, 24 days before the bear-market rally peaked, that:</div> <bR> <div> "The public preference for stock is not only as marked as ever, but also the will to speculate is still a speculative factor not to be overlooked. The prompt return of huge speculation and the liberal manner in which earnings are again being discounted indicate that it will be difficult to quench the fires of stock market enthusiasm for long".</div> <bR> <div> <B>The Most Famous Bear Market Decline - 1930-32</B></div> <bR> <DIV ALIGN="LEFT"></DIV> <div> <IMG SRC="09782680.png" border=0 width="386" height="360" ALT="Bitmap Image" ALIGN="BOTTOM" HSPACE="0" VSPACE="0"></div> <div> Source: LY Advisors and Bloomberg</div> <bR> <div> "<FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>The crash of '29</B></FONT> (down from 381 to 198, off 48%), as terrible as it proved to be (see Figure 1, B), <FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>was </B><I><B>not the decline that wiped out the wealth</B></I></FONT>; the crash was followed by a 50% retracement rally in 1930 <I>that failed </I>(as investors rushed to cash out), and thereafter declined to break below the 1929 low, the key support (see Figure 1, C). <FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B>It was the unrelenting 1930-32 decline that wiped out the wealth</B></FONT> (see Figure 1, D), for a total loss of 83%" (Louise Yamada, <I>Technical Perspectives</I>, lyadvisors.com, March 7, 2007).</div> <bR> <div> In 1930 the Dow Jones experiended its third-worst one-year decline, a fall of 33.7 percent. It was followed in 1931 by the Dow's worst-ever one-year decline, a fall of 52.67 percent.</div> <bR> <div> The Bear Market of 1930-32 lasted 813 days for a decline of 86 percent. A bear market is "defined as a decline in the Dow Jones industrial average of 20 percent or more from its peak" (James M. Pethokoukis and Anne Kates Smith, <I>Buy, Sell, or Sit Tight? </I>usnews.com, September 6, 1998).</div> <bR> <DIV ALIGN="LEFT"></DIV> <div> <B>Foreigners and Second Stage of Collapse - 1931 and the future</B></div> <bR> <div> "<FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>By the summer of 1931 ... the United States was in the grip of a severe depression</B></FONT>. But if recovery had come then, the downturn would have been within the historical range of business fluctuation. It would have been a hard time, but not the disaster of the 1930s. <FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B>The growing depression was turned into the great depression by the Federal Reserve in the fall of 1931</B></FONT>" (Peter Temin, "The Great Depression", <I>The Cambridge History of the United States</I>, (CUP, 2000), p.311).</div> <bR> <div> "Down to early 1931, the American depression seemed lagely to be the prduct of American cases. A decade of stagnation in agriculture, flattening sales in the automobile and housing markets, the piratical abuses on Wall Street, the hair-rasing evaporation of asset vales in the Crash, the woes of the anarchic banking system - these were surely problems enough. Still, they were domestic problems, <FONT SIZE="2" COLOR="#006600" FACE="Verdana" ><B>and no American better understood them than [President] Herbert Hoover, nor was there any leader better prepared to take up arms against them</B></FONT>. <FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>But now Europe was about to add some dreadful, back-breaking weight to Hoover's already staggering burden</B></FONT>. In short order, what was still in 1931 called the depression was about to become the unprecedented calamity know to history as the Great Depression" (David M. Kennedy, <I>Freedom from Fear - The American People in Depression and War, 1929-1945</I>, New York, Oxford University Press, 1999, p.69).</div> <bR> <div> "... foreign financing of U.S. bonds ... hinges largely on demand from dollar-pegged economies of Asia and the oil-exporting nations of the Middle East as they recycle the dollars bought by central banks to maintain those pegs..." (Mike Dolan and Jamie McGeever, <I>World markets unfazed by benign dollar slide</I>, reuters.com, April 26, 2007).</div> <bR> <div> <FONT SIZE="2" COLOR="#000066" FACE="Verdana" >"</FONT><FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B>Six Persian Gulf states now have almost $1,600bn in foreign assets, dwarfing even China's mammoth $1,100bn of foreign reserves, according to a new report from the Institute of International Finance</B></FONT>" (Richard Beales, <I>Gulf states' foreign reserves swell</I>, ft.com, May 29, 2007).</div> <bR> <div> "... Bridgewater [Associates] argues, if foreign sentiment sours, "a vicious cycle of selling of US assets would likely ensue"..." (Barrie Dunstan, <I>$US free fall would sideline investors</I>, AFR, May 23, 2003, p.34).</div> <bR> <div> "In the past I have had the tendency to dismiss the deflationist views of some reputed economists and strategists as unlikely. I now feel the current universal asset inflation and overheated Chinese economy will be followed by a serious bust and asset deflation, which will kill consumption in the US. The only question is when" (Marc Faber, <I>Be braced for a bust as bubbles look set to burst</I>, ft.com, March 29, 2004).</div> <bR> <div> In the future Asia and the Petro-Middle East will play the part Europe played in the 1930s.</div> <bR> <div> <B>Foreign Impact and the End of Eras</B></div> <bR> <div> <B>1930s</B></div> <bR> <div> From May 8 to October 9, 1931 the discount rate was 1.5 per cent, but its was soon to rise.</div> <bR> <div> "The deterioration of the situation in Europe added to the problems of the American authorities. In May 1931 the <I>Credit Anstalt</I> of Vienna was obliged to close and the German banks to which it was heavily indebted were soon in difficulties. They could not meet their short obligations to London, and <FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>this frightened other Europeans</B>, <B>especially the French, into withdrawing their balances from Britain</B></FONT>. By September England had lost so much of its gold reserve that it was forced to devaluate the pound, an action that set off a series of devaluations around the world. This did not solve the balance of payments problems since it left most countries in about the same position relative to others as before" (Margaret Myers, <I>A Financial History of the United States</I>, (New York: Columbia University Press, 1970), p.306).</div> <bR> <div> "In an apt metaphor, Hoover likened the British situation to that of a failing bank, faced with depositors' demands but unable to turn its assets into cash, and thus forced to bar is doors. The difference was that Britain was not a piddling country bank but a central pillar of the global financial structure. When it suspended payments, world commerce shivered to a stop.</div> <bR> <div> "... <FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B>the psychology of fear was rapidly overflowing international frontiers</B></FONT>... <FONT SIZE="2" COLOR="#006600" FACE="Verdana" ><B>It now washed over the United States</B></FONT>. Foreign investors began withdrawing gold and capital from the American banking system. Domestic deposiors, once bitten twice shy, renewed with vengeance their runs on banks, precipitaitng a liquidity crises that dwarfed the panic in the final weeks of 1930... Five hundred twenty-two banks failed in  the single month following Britain's farewell to gold..." (David Kennedy, pp.76-77).</div> <bR> <div> "<FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>In [late 1931 in] an effort to stop the drain, the Federal Reserve Bank of New York raised its discount rate from 1.5 to 3.5 percent, with only temporary effect</B></FONT>. By February 1932 the gold of the Federal Reserve Banks was so close to the legal minimum that the Glass-Steagall Act was passed; it permitted government securities to be substituted for gold as collateral for Federal Reserve notes, above the minimum of 40 percent. <FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B>This made it possible for the Reserve Banks to increase open-market purchases and pump new funds into the market</B></FONT>, <FONT SIZE="2" COLOR="#006600" FACE="Verdana" ><B>but the flood of bank failures continued</B></FONT>" (Margaret Myers, <I>A Financial History of the United States</I>, (New York: Columbia University Press, 1970), p.306).</div> <bR> <div> <B>1970s</B></div> <bR> <div> "<FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>T</B><B>h</B><B>e classical gold standard ended with World War I</B></FONT>. <FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B>After the war it was reinstated as a gold exchange standard</B></FONT> whereby member countries could hold international reserves as gold or in the currencies of the key countries: Britain, France, and the United States. <FONT SIZE="2" COLOR="#006600" FACE="Verdana" ><B>The gold exchange standard was short-lived</B></FONT>. Eichengreen (1992) describes the collapse beginning in 1931 in the face of the Great Depression and attributes it to fatal policy mistakes made by the U.S. and France. <FONT SIZE="2" COLOR="#006600" FACE="Verdana" ><B>The Bretton Woods System established in 1944 was a weak variant of the gold standard</B></FONT>. Under this system, the U.S. maintained gold convertibility at $35.00 per ounce while the other members maintained current account convertibility in dollars. Most of the adjustment mechanism of the gold standard was thwarted and monetary policy was only in part constrained by gold. Gold cover for currency issue was eliminated in the United States in 1968 and the final link with gold was cut in August 1971..." (Michael D. Bordo, Robert T. Dittmar & William T. Gavin, <I>Gold, Fiat Money, and Price Stability</I>, nber.org, Working Paper 10171).</div> <bR> <div> "<FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>In 1971 De Gaulle called upon the US to settle its debt with France by shipping US gold to France instead of US paper</B></FONT>. <FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B>At that point, President Nixon shut the gold window and in so doing took the US and the world off the gold standard and into the world of fiat paper</B></FONT>" (Richard Russell, Dow Theory Letters, <I>...keeping its citizens "stupid"</I>, 321gold.com, October 31, 2006).</div> <bR> <div> <B>Future</B></div> <bR> <div> "As a net debtor, the United States must attract some $3 billion every working day to finance a gaping current account deficit that in 2006 amounted to 6.5 percent of gross domestic product...</div> <bR> <div> "Since Americans also spend more than they save, the money to cover the U.S. deficit must come from foreign lenders such as central banks..." (Steven C. Johnson, <I>Dollar decline tracks U.S. fall from grace</I>, reuters.com, April 27, 2007).</div> <bR> <div> "It is in the interest of the United States, as well as the Asian countries, that <FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>the U.S. dollar maintain its high exchange value</B></FONT>. <FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B>Some American economists like to speak of a "Bretton Woods II" arrangemen</B></FONT>t, which would resemble the international system in effect between the Second World War and 1973. Participating countries supported each other's currencies and thus sustained stable exchange rates.</div> <bR> <div> "<FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>In Bretton Woods I, the member countries supported each other's currencies</B></FONT> -<FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B> in Bretton Woods II, they eagerly support the dollar</B></FONT>" (Dr. Hans Sennholz, <I>An Unstable Dollar Standard</I>, dailyreckoning.com, December 12, 2006).</div> <bR> <div> ""<FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>The glue that holds everything together is Asian central banks continuing to buy dollar-denominated financial assets and having continued faith in the system</B></FONT>," said [Neil] MacKinnon, [chief economist at ECU Group, a London-based hedge fund]..." (Mike Dolan and Jamie McGeever, <I>World markets unfazed by benign dollar slide</I>, reuters.com, April 26, 2007).</div> <bR> <div> "David Tice ...<FONT SIZE="2" COLOR="#A040FF" FACE="Verdana" ><B> </B></FONT>believes the canary in the coal mine will probably be the dollar. He expects the greenback to tank as international investors start to lose faith in the U.S. credit bubble. He also <FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B>predicts the </B><B>Federal Reserve</B><B> </B><B>will respond by jacking up interest rates to protect the dollar from complete collapse</B></FONT>. That, of course, would bring the credit market to a grinding halt" (Brett Arends, <I>Prudent Bear's Tice Says the Plunge Is Coming, </I>thestreet.com, May 4, 2007).</div> <bR> <div> The Gold Exchange Standard collapsed in 1933 despite the earlier efforts of the Federal Reserve raising interest rate to support it in 1931. The Dollar Standard will also eventually collapse even if the Federal Reserve raises interest rates to defend it.</div> <bR> <DIV ALIGN="LEFT"></DIV> <div> <A HREF="id66.htm" TARGET="_top" TITLE="Crash Index">Crash Index</A>            <A HREF="id63_m.htm" TITLE="Share and housing bust">Top of Page</A>            <A HREF="index.htm" TARGET="_top" TITLE="Future Watch">Home Page</A></div> <bR> </td> </tr></table></body>