Thursday, January 10, 2019

The 1929 Crash. Revisited.

What we learn from history is that an Idiocracy doesn't learn from history. So far, this crash is uncannily similar to 1929/1930s...

The U.S. stock market made a blow-off top in September 1929 following Herbert Hoover's election in 1928, capping off a decade-long run. The market crashed in October 1929, but began to recover into 1930. Then came the Smoot-Hawley tariffs which attended global recession leading to global depression and a -90% decline in stocks.

The rally off the 1929 lows was the greatest sucker rally in history. Until now.

Contrary to ubiquitous and obligatory belief, the tariffs themselves did not CAUSE the Great Depression, although they certainly contributed. U.S. exports as a % of GDP were roughly 6% in 1929 and fell by only a few percentage points. Whereas the drawdown in GDP during the 1930s was on the order of -25% at the nadir. Free trade zealots need us to believe that tariffs cause depressions, so they revised history accordingly.  

Most likely what caused the Depression was monetary policy that was too loose for too long followed by tightening, the ensuing asset crash, and then even more tightening for good measure, into global synchronized slowdown. Similar to now...

Monetary Policy And The 1929 Crash:
"In the late 1920s, the Fed was also reluctant to raise interest rates in response to soaring share prices, leaving rampant bank lending to push prices higher still. When the Fed did belatedly act, the bubble burst with a vengeance."

"...the depth of the contraction in economic activity probably had less to do with the magnitude of the crash and more to do with the fact that the Fed continued a tight money policy after the crash"

Deja vu, in this cycle, the Fed delayed tightening for too long. And now they are tightening on both ends at the same time for the first time in history. Which led to the 2018 October crash. As of this writing, the casino has recovered back to where it was just prior to the Fed rate hike in December. The scene of the crime per se.

This is the new Wall Street groupthink consensus:
The "correction" is over, and a new bull market has begun. Which is exactly what bulls believed in 1930 just prior to the real crash.

Needless to say, the stakes are high, albeit it's not their money. I see the recent breadth thrust merely as confirmation that post bonus payout, Wall Street bulls have now committed substantial other people's money back into the market. And now they're talking their own book again.

Here below we see option skew. Wall Street was (correctly) betting on a crash in October, with record high skew. Subsequently, they've been monetizing their hedges, because why hedge at the beginning of the year?

Which means they can't afford to be long and wrong.

As the article states, the last successful breadth thrust was in early 2016, which has now become the obligatory analog on Wall Street. Of course there are substantial divergences between then and now which I've covered in other posts, here also is a handy list via Zerohedge:

ZH: Here are the seven key distinctions from 2016 according to BMO

The biggest difference between now and 2016 is somehow not even mentioned, which is that during the intervening period, debts have grown massively while interest rates have increased.

In particular corporate debt (quarterly change, $billions):

The other key difference not mentioned is that money markets are now yielding more than the S&P 500 which is why the smart money is getting out of the casino. And why liquidity has been dropping like a rock during the past several months.

To recap from Davos last January:
The (over) commitment of capital was made. The blow-off top occurred. The initial crash took place. Global Central Banks stepped in to reduce liquidity, a la 1930s. The Smoot-Hawley trade war escalated. Deflation ensued.

Wall Street said don't worry, be happy. The sheeple believed them. 

"We will keep tightening until the crash. Then we'll stop"

Speaking of deflation, Utilities peaked first one year ago during the reflationary blow-off then they peaked very late (December) during the deflationary blow-off phase, as leadership changed over from reflation to recession. 

Now, there is no leadership