Could the Weimar Hyperinflation Happen Again in America?

WallStreetHero said:
Stocks Bear Market NOT Over, Stocks WILL Crash this Fall!
Aug 05, 2009 - 01:47 AM

By: Graham_Summers


Yesterday we detailed the different between this current economic contraction, and your usual run of the mill plain vanilla recessions. We also went over the MASSIVE consumer credit contraction that needs to occur before American households have finished de-leveraging.

Today, we’re detailing why stocks will Crash this coming fall. As you know the media is rife with folks calling the end of the recession and the beginning of a new bull market. It’s clear to me that this is a load of nonsense. Today I’ll show you why.

Because a lot of the alleged “analysis” that is backing up the bulls’ claims of a new bull market comes from technical analysis and charts, I’m presenting the below chart from David Rosenberg of Gluskin Shef. It charts today’s bear market over that of 1929-1932.

stocks-crash-5-1.jpg


As you can see, today’s bear market is mirroring that of the ‘30s almost to perfection. Indeed, the correlation between the two charts is an incredible 0.8, meaning it’s 4/5ths perfect. In finance, you’re lucky if you get a correlation above 0.6. (gold and the dollar are only 0.28 inversely correlated). A 0.8 correlation is virtually unheard of. But that’s exactly how closely today’s market is mirroring that of the ‘30s.

I can’t take full credit for this insight. Ron Coby, an investment manager at Coby Lamson in Oregon first started pointing out the similarities between this market and that of 1929 back in February ’09. No one wanted to listen to him then.

They’re listening now.

Coby notes that from October 29, 1929 until November 13, 1929, the stock market collapsed 48% (the 2008 Crash was 52%). Then from November 1929 to April 1930 the market staged a 155-day rally of 50%. Today’s rally (starting in March ’09) has lasted 150 days and the market is up an average of 50% (average of Nasdaq, DJIA, and S&P 500).

Unfortunately for the bulls today, the 1929 market then rolled over and collapsed another 70%. “Bottom callers” INCLUDING legends like Jesse Livermore, Benjamin Graham and others bought ALL THE WAY DOWN, losing entire fortunes.

Ok, so the charts for today and 1929 are identical, what about the earnings? After all, profits are ultimately what drive the stock market: you buy based on expected future earnings of the companies.

stocks-crash-5-2.gif


Earnings today are even lower than they were in the ‘30s during the Great Depression. They’ve fallen 98% from their peak in 2007. Adjusted for inflation, stocks have NEVER been this unprofitable in the last 80 years.

The US was already in a recession in 2008. And 2Q09 profits are actually down 31% even from THAT. Indeed, based on ACTUAL posted earnings, the S&P 500 is trading at a P/E of 700 today. Even if you go by operating earnings the multiple is still 24: hardly cheap.

Looking over this, I can’t see where any claims of a “bull market” are coming from. The people who are saying today is a new bull market probably went long Tech Stocks in 2001, Housing in 2006, and Financials in 2008.

In light of the rampant bullishness, the parabolic rally in the S&P 500, the horrific earnings, and the similarity between today’s rally and that of 1929, I believe the likelihood of another Crash (like 2008) is quite high. In fact, I would not be surprised to see stocks collapse within the next eight weeks.

I’ve put together a FREE Special Report detailing THREE investments that will explode when stocks start to collapse. I call it Financial Crisis “Round Two” Survival Kit. These investments will not only protect your portfolio from the coming carnage, they’ll also show you enormous profits: they returned 12%, 42%, and 153% last time stocks collapsed in 2008.

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Good Investing!

Graham Summers

Gains, Pains, & Capital

Graham Summers: Graham is Senior Market Strategist at OmniSans Research. He is co-editor of Gain, Pains, and Capital, OmniSans Research’s FREE daily e-letter covering the equity, commodity, currency, and real estate markets.

Graham also writes Private Wealth Advisory, a monthly investment advisory focusing on the most lucrative investment opportunities the financial markets have to offer. Graham understands the big picture from both a macro-economic and capital in/outflow perspective. He translates his understanding into finding trends and undervalued investment opportunities months before the markets catch on: the Private Wealth Advisory portfolio has outperformed the S&P 500 three of the last five years, including a 7% return in 2008 vs. a 37% loss for the S&P 500.

Previously, Graham worked as a Senior Financial Analyst covering global markets for several investment firms in the Mid-Atlantic region. He’s lived and performed research in Europe, Asia, the Middle East, and the United States.
© 2009 Copyright Graham Summers - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
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fail to see how that is a .8 correlation..for one the high on the 1930s chart was the 50% retracement of the entire down move..we are no where near that yet
 
The FED announcement on bond purchases ending and the "deflation" figures are designed to bring interest rates down. Risk aversion. This means the US govt see serious problems ahead. They are doing anything they can to get the public spending again, cash for clunkers, help with mortgages etc, but GDP is still negative. Banks are still insolvent despite trillions of dollars thrown at them. Property prices are still collapsing and with option arm resets taking effect they are going to carry on down. Commercial real estate is a disaster now happening. Business lenders are going bankrupt. Bailout and stimuli plans have failed. All markets have been propped up with printed and borrowed money. Its a big ponzi scheme about to unravel.
 
poborsky said:
Cheap oil is a thing of the past. This is one of the reasons that we are not going to see deflation for more than a short period. Supply can no longer exceed demand when it attempts to rise. Consequences do not bear thinking about.
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The peak oil situation doesn't matter yet. We saw a drop in demand in the last year so the supply/demand situation is not critical. Oil markets are pricing in future demand, due to a rise in stock markets, rather than a return to demand.

The inflation v deflation argument is to do with timing- the markets are IN a deflationary situation now so the question is how long. Inflation is an afterthought for maybe a year or two down the line.

Excess capacity is being removed from the system and its too early to know when this will end.
 
SAINT said:
The peak oil situation doesn't matter yet. We saw a drop in demand in the last year so the supply/demand situation is not critical. Oil markets are pricing in future demand, due to a rise in stock markets, rather than a return to demand.

The inflation v deflation argument is to do with timing- the markets are IN a deflationary situation now so the question is how long. Inflation is an afterthought for maybe a year or two down the line.

Excess capacity is being removed from the system and its too early to know when this will end.
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As I have posted before, I believe that the deflationary cycle that we are seeing in the US is a symptom of what is going to happen. Year on year budget and trade deficits. We saw a spike in oil prices which suggests that when push comes to shove the oil producing nations are struggling to meet demand. Most of the easy to remove oil has been used up, thats why Albert tar sands are being mined and the Brazilians are drilling in 7000 meter ocean depths. The developing Asian economies are using more oil than ever before and demand will carry on increasing in these countries. Removing capacity from the system is another cause of inflation. Taking away supply while flooding an economy with cheap money will add to inflationary pressure down the line.
 
poborsky said:
As I have posted before, I believe that the deflationary cycle that we are seeing in the US is a symptom of what is going to happen. Year on year budget and trade deficits. We saw a spike in oil prices which suggests that when push comes to shove the oil producing nations are struggling to meet demand. Most of the easy to remove oil has been used up, thats why Albert tar sands are being mined and the Brazilians are drilling in 7000 meter ocean depths. The developing Asian economies are using more oil than ever before and demand will carry on increasing in these countries. Removing capacity from the system is another cause of inflation. Taking away supply while flooding an economy with cheap money will add to inflationary pressure down the line.
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doubt we will see 100$ oil again for a long time..
 
N Rothschild said:
doubt we will see 100$ oil again for a long time..
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Better chance of seeing 50 first I think, but current production is believed to be at 95% of possible utilization. Lower oil prices mean less investment in current as well as new production. Existing fields are depleted more rapidly and new capacity lags behind.
 
posted this in another thread

"the fed printing up some cash is only a small part of the picture in money creation. and that money will never hit the consumer so it doesn't matter. the world is gona be busy paying down (of defaulting on debt) for the next few years which will result in massive deflation across the board, massive usd strength, falling stocks commodities etc. when so much debt is created, there is only one way to service that debt and the intrest, more debt! you cut off the supply of credit and HGUE amounts of money will be leached from the system to service that debt and intrest. hence deflation. when you create new debt you only create the amount for that debt, not the intrest to be paid as well, so without the continued creation of new credit it isnt possible to pay back all the debt AND the intrest. seeing the entire world economy and every currency in the world is based on the creation of debt"
 
Jason Rogers said:
Funny how both Pimco and Warren Buffett came out the same day with concerns over inflation. Warren Buffett's op-ed is an interesting read on the possibilities of inflation. Here's Buffett's piece http://www.nytimes.com/2009/08/19/opinion/19buffett.html?_r=2&ref=opinion
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Anybody know how much in $bn the war in Iraq & Afghanistan has cost the US???

Summary
With enactment of the FY2008 Supplemental/FY2009 Bridge Fund(H.R. 2642/P.L. 110-252) on June 30, 2008, Congress has approved a total of about $864 billion for military operations, base security, reconstruction, foreign aid, embassy costs, and veterans’ health care for the three operations initiated since the 9/11 attacks: Operation Enduring Freedom (OEF) Afghanistan and other counter terror operations; Operation Noble Eagle (ONE), providing enhanced security at military bases; and Operation Iraqi Freedom (OIF). Congress is currently considering the FY2009


http://www.fas.org/sgp/crs/natsec/RL33110.pdf


The US will remain in Iraq until 2011 and Afghan battle rages on. This begs the question where is the Pentagon - NASA and the war chest get their money from if not the senate?

Last I heard the Democrats were objecting to financing another $100bn through senate for the Iraq war. Where has all this money gone and how will the wars be financed. Alternatively where has all this money come from and how on earth did they / are they financing the damn wars???

Sweep it under the carpet no one will notice. Pass a 4 page Fed request for another $700bn through senate and call it the bank protection fund and bobs your uncle...

No transparency - no accountability - no FT - no comment. Mum's the word... ;)


I must have been a parrot in my previous life...

  1. Vietnam caused the US to move away from the gold standard.
  2. Iraq war will cause the World to move away from the dollar standard.
 
that was bretton woods, not the actual gold standard

if anything the iraw qar insured that the $ would continue on as the worlds reserve currency, through oil
 
N Rothschild said:
that was bretton woods, not the actual gold standard

if anything the iraw qar insured that the $ would continue on as the worlds reserve currency, through oil
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The Bretton Woods agreement set the USD as the world reserve currency with 35 dollars to 1 ounce of gold. Foreign govts, knowing that the USA were running the printing presses, started asking for payment of debts in gold. Richard Nixon suspended the gold standard in 1971, with the US embroiled in the Vietnam war. It never returned. Inflation took off, leading eventually to 20% or so interest rates in the US to bring it under some sort of control.
 
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