2020—2022 Versus 1929—1932

Current levels of equity markets are not only divorced from their underlying economic and business realities but are repeating the madness of crowds that led to the Wall Street crash of 1929—1932. The obvious difference is in the money: gold-backed dollars then compared with unbacked fiat today.

We can now begin to see how markets and monetary events are likely to develop in the coming months and this article provides a rough sketch of them. Obviously, the financial asset bubble will be burst by rising interest rates, the consequence of rising prices for consumer essentials. Fiat currencies will then embark on a path towards worthlessness because the monetary authorities around the world will redouble their efforts to prevent interest rates rising, bond yields rising with them, and equity values from collapsing; all by sacrificing their currencies.

The ghost of Irving Fisher’s debt-deflation theory will soon be uppermost in central bankers’ minds, preventing them from following anything other than a radically inflationary course regardless of the consequences.

Current views that tapering must be initiated to manage the situation miss the point. More QE and even direct purchases of bonds and equities are what will happen, policies that will certainly fail.

Anyone seeking to survive these unfolding conditions will be well advised to put aside some sound money — physical gold and silver.

Introduction

In the past, I have compared the current market situation with 1929, when the US stock market suffered a major collapse that October. With memories short today, many will have even forgotten that between 12 February and 23 March last year the Dow Jones Industrial Index fell 38.4% top to bottom in less than six weeks, paralleling the 66% fall between 4 September and 13 November 1929 on an eerily similar timescale. Figure 1 shows the Dow of ninety years ago superimposed on top of that of today, shifted so that November 1929 coincides with March last year.

The principal difference is in the money. For this reason, Figure 1 adjusts today’s Dow by the gold price. In 1929-33, no such adjustment was required since the dollar was on a freely exchangeable gold standard at $20.67 to the ounce. But adjusting it by the gold price today tells us that measured in sound money the Dow peaked in April 2019. And following the initial rally after the crash in March 2020, a rise in the gold price has not been sufficient to suppress the Dow on a gold adjusted basis.

There are two possibilities: either the mid-bear market rally in the US stock market is lasting much longer than that between November 1929 and 21 April 1930, or the rise in the gold price has not yet been enough to counter the effect of monetary inflation. We can all have views on which is true. But one thing is certain: given zero interest rates, gathering price inflation, and therefore the prospect of rising interest rates, evolving factors driving markets can only be strongly negative. When it comes this time round the fall in the Dow will almost certainly be catastrophic both in gold and nominal dollar terms. And the difference from 1929—32 is the massive expansion of money and credit that has been feeding into inflated financial assets.

As the background to stockmarket trends, there is enough circumstantial evidence for us to assume that the world is on the brink of a major financial catastrophe. The list of negatives is growing. It started with the US repo market blow-up in September 2019, followed by the Dow losing 35% in nominal points between 10 February and 23 March 2020 (as pointed out above) before the Fed stepped in to rescue the stock market by cutting the funds rate to the zero bound and reinstating QE to the unprecedented extent of $120bn every month, along with several other market-enhancing measures. They worked. At least, that is, if you ignore the costs and consequences.

Long before those mad-March days of last year, the Fed had been in crisis management mode — in fact ever since the Lehman failure. Backed by the goodwill of markets, whose participants still wish to avoid disaster as least as much as the Fed, the Fed succeeded. It prevented the excesses in residential property financing in the late 2000s from turning into a more general rout. But the cost has been a wobbly highwire act ever since, with investors observing central banks threatening at times with losing their precarious balance and falling into a yawning chasm of financial chaos.

With an investment establishment still wishing to believe in gravity-defying factors, such as good old fundamentals and the human right to let others to pay the price for their own follies, economic reality has been completely smothered. The Fed’s prestigitation has been achieved by printing money, increasing its balance sheet from $847bn the month that Lehman failed to $6,042bn today, an increase of over six times.

The Fed got away with its “extraordinary measures” in the wake of the Lehman crisis and along with the other major central banks found that through their careful management several succeeding crises were averted. And when covid came along and the world went into lockdown, the acceleration of monetary inflation to pay for it all was the obvious solution because its principal effect — rising prices — was under control.

Well, that’s not quite true beyond the purely statistical sense. It is more truthful to say the CPI statistic had been tamed to the point of irrelevance. Proof of this statistical legerdemain is there for anyone who cares to look for it, because the eximious John Williams of Shadowstats.com continues to produce the unexpurgated 1980 version, stripped naked from the subsequent adjustments in method deployed by the Bureau of Labor Statistics, all of which just happen to adjust price increases out of their inflation numbers. Williams’s estimates of price inflation, typically in the five to ten percent range for the last ten years but now well above that, were confirmed by the Chapwood index before covid stopped its statistical collection.

While Wall Street has been making whoopee on the back of increased money and credit, Main Street has been suffering. The only offset has been the availability of artificially cheapened finance. The liar loans of the noughties may not be back in actuality, but they certainly are in spirit as an artificial lifestyle support.

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Disclaimer: The views and opinions expressed in this article are those of the author(s) and do not reflect those of Goldmoney, unless expressly stated. The article is for general information ...

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