FYI: Japan lost about 80% from its stock market peak to its low (so far). And The Great Cycle of 21-32 lost about 90% from its peak to its low. Japan took about 19 years to lose 80%. The Great Cycle took a little under three years to lose 90%. Yes, you heard that correctly both cycles dropped 80% or more from their peak.
Of course, there are those that laugh at this information and say “Yes, but what you don’t understa nd is that we in America can print ourselves out of this mess.” Really?
CAN PRINTING MONEY SAVE US?
Although it is true that we can print more money, what people don’t understand is it is not as simple as it sounds.The British pound was replaced by the dollar as the world’s reserve currency. In the same way the dollar will be replaced in the future if the gov seeks to solve America’s long-term financial problems by printing money. Any country that wants their currency to be valued by the world cannot be so free to print and thereby debase their currency. Not only that, but the citizens of the country would end up revolting against their government because of where that free money goes.
The more they give to the banks or big business, the more upset the citizens become. Especially when they see that the bank elites get million dollar bonuses while the citizens are struggling to pay for the basics. Besides that, pouring money into the banks would not accompish the goal of reinflating the economy. In order for an economy to be reinflated, it is necessary
1 – that the money in the banks gets lent out to the consumer. Then it is necessary
2 – that the consumer takes that money and begins to spend it on products and services. Why? Because …
INFLATION CAN ONLY OCCUR WHEN MONEY CHASES/BUYS PRODUCTS AND SERVICES.
Think about it. The main thing that causes things to go up in value (inflation) is because lots of people are trying to buy those things. This is what happens during the BOOM side of an economic cycle. So let’s be clear, printing money and piling it in a bank vault, in hopes that people will barrow and spend it, does not create inflation. Printed money must create “velocity of money” in a society for inflation to take place. Basically, the more that money is spent on T.V.’s, watches, cars, houses, and margaritas, the more that those things will rise in price (inflation). This is the “Demand” side of inflation. And people must increase spending/purchasing, in order for this money injection by the gov to actually “stimulate” the economy. This is very Basic economics.
Yet people either don’t get it, or those that do get it are not invited to the news programs to explain it to us. Feel free to google “velocity of money” to understand this more fully.
FYI: There are other factors related to the supply side of the economy that can create inflation of certain things. But that subject does not really fit into the current discussion. Usually when speaking of a period ofter a boom, the problem is over supply/under demand. And what the gov is trying to fix is the lack of demand.
So the gov cannot print us out of this mess because the gov cannot force us to borrow and spend. And we will not borrow and spend while we feel we are burried in debt.
Pondering: If the gov were intent on monetizing/printing money, who should they give the money too? If the intent is too stimulate the economy, would it be more stimulative to give to banks or citizens? They say the banks are in serious trouble, so we have to give it to them. Yet isn’t it true that if you gave that same money to the people that it would create a double benefit. Let’s say you gave 800 billion dollars to the middle class, divide it up and sent out the checks. Except for a small percent stuffed into mattresses, the rest would go into banks. Whether those citizens spent, saved, or invested doesn’t matter because all parties involved tend to keep their money in banks. The only difference is you have given the money to those with the power to increase velocity of money in the real world – the people. So this injection not only injects money into the banks but also has a better chance of boosting spending in the economy. So all I’m asking is, if you are going to stimulate / kick the can down the road / make the future suffer so you can keep todays party going / devalue our currency / cause us to loose our status as the worlds reserve currency, then why not give it to the people instead of the banks? Could it be because banks can afford better lobbyists to convince the gov that they need it more than we do?
But the truth of the matter is that gov is focusing on the wrong goal. Govs goal is to keep the party going and not allow the cancerous dinosaurs to die. Sometimes for new life to prosper you have to allow evololution to punish short-sidedness and reward those who are more responsible and less careless. Countries, in order to remain healthy, must live within their means, just as individuals do. All of life goes through cycles. And booming economies are no different. If a man runs too fast and too far and parties without sleep he will eventually passout. If an economy does the same thing, it will also pass out. An economy is a living thing. It is made up of people. It is the peoples running, producing, working, thinking, calculating, and trading, that make up the economy. The money supply is the blood of the economy. The velocity of money is the energy expended by the economy and the people of the economy. Why do people walk so fast in New York and much slower in small towns? Because fast money requires busy people.
Pondering: Since times of economic boom = times of over use of resources, gas, oil, plastics, metals, etc, is it possible that if we don’t force ourselves into a healthier economic pace that the earth itself could force us into that slower pace by reacting more violently to over depletion of its natural resources and balance?
The economy actually acts very much like a person. It runs and rests, gets overly excited, and sometimes gets sick and is bed redden for a period of time. Velocity of money traces out in the true economy how wealthy or poor a population feels. The power of this velocity is not very well understood by the experts.
THE POWER OF MONEY VELOCITY
Guy takes his girl for dinner at beginning of month for $100. Restaurant owner takes his girl out same month using that $100. That restaurant owner does the same and the pattern repeats 3 more times in that same month.
Government gets taxes off $600 from how many time $100 exchanged hands in one month. – velocity of money
Six dinners were sold in one month because six people felt wealthy enough to pass on that same $100 bill. – velocity of money
$600 dollars in sales are reported to shareholders of companys in the U.S. for that month from the same $100 bill. – velocity of money
In this example you can see that power to boom or bust an economy lies in the hands, attitudes, and actions of the people. And that the govs power is actually quite small in comparison.
For the gov can wave as many crisp new $100 dollar bills as it wants in front of the people. But if the people have switched from feeling wealthy to feeling poor and from exuberance to fear, then their spending spree becomes a saving spree. And the velocity of money slows down to a crawl. And the multiplying power of that velocity will not be stopped by a printing press. This is how the economy follows the moods of its people. So once again ..
GOV CAN PRINT ALL IT WANTS BUT IF CITIZENS DO NOT BORROW AND SPEND, STIMULATION WILL NOT OCCUR!
O.k. enough theorizing, let’s see what history can teach us.
DOES GOV SPENDING HELP?
Let’s see how Quantitave Easing or spending injections has helped in the past. And yes it’s not new. It’s been done before. The following chart shows Japan (just like the U.S.) tries every trick in the book to save the economy and stock market from correcting itself. Within a five year time frame Japan cuts the rate it charges banks to borrow money from 6% to an incredibly low 1%. This is a form of attempted stimulus, in that it gives banks incentive to borrow more and consumers incentive to spend more do to lowered interest rates. In a strong economy this would have created a boom. But in an over leveraged economy this keeps the patient alive a few years longer. Later when the market once again seeks correction, the discount rate gun is out of ammo, so they pull out the QE gun. A temporary boost in the stock market once again appears, yet shorly after the injections end, the market then crashes down to its lowest point in the previous 20+ years. The problem was kicked down the road a little further but not solved.
Few people are aware that stimulus was also applied to the Great Depression era.
There does appear to be a nice rise after rock bottom was hit in late 1932. But one also has to notice that this decline from top to bottom was an unprecedented drop in both length of time and depth of drop. 90 percent in 3 years is very extreme. Japan took 19 years to loose 80 percent and may still have more to lose. Any reasonable person could easily assume that the bottoming that occured in 1932 would have been the same with or without any stimulus.
Had the stimulus been applied a year or more earlier, it is quite possible there would have been an interruption in the decline which may have delayed the bottoming another year or so. So it appears that all they did here was to stimulate what looked to be a natural rebound up into a new recovery cycle. Here’s a visual just for the heck of it. For those who study charts they become familiar with the fact that deep drops are usually followed by exuberant rebounds. This got me wondering if other deep drops in the market had similar percentage rebounds. For curiosity’s sake I stretched out three deep drops in the market to the same drop lengths of the 29-32 depression, this gives us a visual on how similar in percentage the rebounds were. Maybe not scientific, but a fascinating visual.
So all three of these drops rebounded in an almost eerily similare fashion and percentage. One had a stimulus, two didn’t. So did stimulus really fix anything. You decide.
CAUSES OF IRREVERSIBLE MARKET FALLS
So if we had to point a finger at just one thing that has the power to cause such an incredible reversal in mood, along with an irreversible crash in stock market and economy, what would it be? Try this ..
THE AVAILABILITY OF SUPER LEVERAGED LOANS MADE AVAILABLE TO THE PUBLIC FOR THE PURPOSE OF INVESTING IN AN IRRATIONALLY EXUBERANT MARKET.
Roaring 20’s in America, pre Great Depression
More people than ever before were getting into the stock market. Brokers began to allow investors to borrow a certain percentage of money based on how much cash was in their account. So at the beginning someone with $1000 in their trading account could actually invest $2000 ($1000 of their own plus $1000 borrowed), this is known today as borrowing on margin. As stock prices continued to rise so did the amount you were allowed to borrow. It got the point where you could borrow $9000 based on having only $1000 of your own money.
Do to the fact that this particular bubble was directly on the stock market itself is, likely, why the rise and crash was one of the most extreme and well remembered stock market crashes. And then came The Great Depression. Japans Super Decade pre “Lost Decade” In the 1980’s people in Japan began to get more comfortable with taking on larger loans for homes do to the fact that home prices seem to keep rising. At the same time banks began to get caught up in the same thinking.
So banks began too loosen their lending standards. Just like in the roaring 20’s in America, both the borrowers and the lenders began to get caught up in the irrationally exuberant thought process that prices would just keep going up. It got to the point that banks were coming up with creative ways to make it so people could borrown more and more for bigger and better homes. They went so far as to come up with, what they called, a three-generation loan. We’re talking a 90 to 100 year loan. That supposedly the kids could take over after the parents passed on.
Imagine how low your monthly payments would be if your loan was stretched over 90 years instead of the more common 30 year loan. Imagine how much more larger an d expensive houses people would by then they would have in a more sane lending environment. I would continue but since the next scenario is so unbelievably similar let’s just get to that.
Modern American Boom, pre ..to be continued
Not everyone is into the stock market, not everyone is an entrepeneur. But just about everyone wants to own their own home. It is thought of as the American dream, as well as a status symbol that one has done well in life. If someone would just make it easy to own a home then just about everyone would try to get one. And that’s just what happened! Basically we started off with common sense rules that said, you can buy a house if you show that you are responsible enough to save 20% as a down payment. Later that turned into 10%. These rules were sensible as they allowed for only the most financially responsible of society to get a home loan. Then as time moved forward the gov started getting involved saying everyone should be able to own a home.
Then the gov began to make banks feel more comfy about loaning out their money by telling the banks not to worry so much about defaults, and that if they got in trouble the taxpayers would absorb more of the risk. Did the gov do this because they are evil? Who really knows. It could very well be that the gov was just not that bright compared to the high paid lobbyists that the banks would send to convince them to see it their way. Hey, money rules! He who has enough money can often make the rules. Not always but often.
So as the banks worried less about risk, they began to lower their standards about who could get a loan. As this continued it got to the point where just about anyone could get a loan, even with no money down. Now that’s a great scenario to get money to start chasing/buying homes. At first everyone and their brother starts wanting to own a home. Now with so many people buying homes, this creates high demand. So the owners begin to raise prices. Then as prices start rising a whole new segment of buyers begins to smell the profit potential.
So now investors jump into the market. They aren’t like the average joe who wants to own one home for themselves and the fam. They want three homes each, maybe more, because this is turning out to be the best investment ever. As they start spreading the word. Everybody wants in. Bada bing! You got a housing bubble in the making.
Now you have all these folks and their cousins owning homes. And these homes are going up in value like crazy. And they all get this letter in the mail saying they can have a home equity line of credit to go on vacation and consolidate all their credit. Everybodys acting like this is the new paradigm. They buy new cars, new clothes, new humdingers, new whatchamacallits. Their home has become a super ATM machine. And baby, life is good!
Modern American Bust?
Only thing is, when that bubble pops all those great feelings pop too! The ATM machine is gone, but all those bills are still there. You now feel more poor than ever. Even if the banks did offer to loan you money, you already feel sick to your stomach from all the debt you are in. So you are not really interested in more debt. You really just want to get out of debt, so your spending habits do a complete 180.
And when you multiply this one persons experience by a large portion of a nation then you begin to see why booms become busts, and why a nations roaring spending turns to conservative saving.
Two examples in America, one in Japan. All three instances you have citizens who can borrow AT THE VERY LEAST, 9 times their initial investment for the purpose of investing in a market. Greed by bankers, greed by borrowers, irrational exuberance by both. The longer the market rises, the looser the restrictions get, the wealthier everyone feels. Bigger buildings are erected, huge cruise ships are built, bigger and better things are purchased at a faster pace then ever before. velocity of money grows exponentially.
We’ve already discussed velocity of money. But when you add the power of super leveraged loans for investing into a continually rising market this velocity turns from the speed of a glider into a rocket ship. Especially in the stock market scenario. Because you can buy and sell stocks much faster than homes.
Roaring 20’s Example
I take my $1000 and borrow $9000 and invest the $10k in a rising market. Upon gaining 30% (.3x$10,000) profit, I sell and now have $3000. I’ve tripled my money using the power of leverage even though my investment vehicle only gained by 30%. Let’s say I rinse and repeat two more times using the same scenario. 2nd time: $3000 becomes $9000 3rd time: $9000 becomes $27,000 How is Mr. $27k that started with only $1000 going to be increasing his velocity of spending? What about that guy that started with $10k? 10 becomes 30, 30 becomes 90. He just turned $10k into $90,000.
But as is the nature of people, they are spending it as fast as they’re making it. And any profit left over they are throwing back in for another round of gains. The math for the housing boom is a little less fast paced, but still devastating. Everyone that overpaid, who lives in a home, now owes twice what the house is worth, plus all the credit card bills they ran up because they felt wealthy.
Then there’s the Investors, who may have multiple properties that are now worth half, so they go from feeling wealthy to poor, and are now in deep debt because they cannot sell these homes at a profit like before. And although you cannot buy and sell houses as fast as stocks, the money borrowed to invest was leveraged by a much greater multiplier than was ever allowed in the stock market. Instead of being allowed to leverage your $1k into $10k as the roaring 20’s allowed, you could leverage $0k into $100k or more in the housing market.
WHERE DOES THAT LEAVE US?
As I said at the beginning, “life happens in cycles, and so does the stock market.” So now is the moment to put on our Anti-Investor hat and ask ourselves some questions that no one else seems to be asking (out loud anyways). Are we in a super cycle that began around 1932 and has yet to reach its final bottom? It is certainly difficult to think such a thing to be true. Our markets been marching on with hiccups here and there for all this time. Human emotion and belief can be quite optimistic. Just look at the psychology of the human in bubbles. At the height of the housing bubble, the majority believed prices would just keep on climbing. They were in a frenzy, no longer thinking with their heads, but driven with the emotional high that their time had finally come. They would finally get rewarded for all that hard wor k they’d put in.
The same feeling was responsible for causing the twentys to ROAR! And in a longer term way, here we are today, stuck in the same thinking. When I recommended my friend move his 401k money from stocks to cash equivalents, I heard the same mantra I’d heard over and over again. “Oh I’m not worried, I’m in for the long term.” There’s that built in assumption that the “long term” is always up.
So why has the market beein climbing for so long. Perhaps we learned some lessons from the Depression era which kept us out of hot water. But that’s the funny thing about lessons. The further away we travel from bad memories, the more we forget them. It is part of the human condition to suppress pain and remember pleasure. Then when we get bit again, the cycle starts over.
So where are we now?
Well if velocity of money by the citizens of the country is truly what gets an economy and its stock market up and running again, then perhaps we should check on the status of the spending health of our citizens. Debt really didn’t mean much when we all felt wealthy as our homes became magical ATM machines, pouring money from the heavens. But when the ATM machines dried up then our debt became very real problem that we must face and deal with. During the Great Depression era our debt as a percentage of GDP rose to a record 260%. Our current debt level at 380%, in comparison, makes the mountain of debt back then look more like a hill.
Also interesting to note is that the distance from the peak of the 1929 stock market to the peak in debt of the same era was about 4 years. As well, the peak in our current stock market was in 2007 and today is about 4 years later. If the same pattern plays out, that would take our market down from here.
GUT vs EXPERTS
Sometimes your gut can tell you more truth than experts can. It was my gut that got me interested in this subject.
I purchased a home a couple years before the housing market peaked out here in Las Vegas. Back then I never thought much about the stock market, economy, housing prices. Then I noticed a buzz in the air. People were talking about homes gaining value at a faster and faster pace. As the buzz got stronger, I started paying attention and looking into how much my place was worth. The quick rise in pricing just felt unnatural to me. So I figured what goes up this fast, must come down. I decided to sell and become a renter. I made a nice 75% profit. Then I proceeded to warn all my friends and aquaintances that housing was in a bubble. But they just wouldn’t listen.
A few months after I sold my place, a very close friend of mine told me she wanted to buy a house. I said “don’t do it!” and explained my reasoning as best I could at the time. She countered with “but it has always been my dream to own my own home. I’m not buying it as an investment, I’m buying it to live in.” I told her that I understood her sentiments, but regardless of what her reasons are, it IS an investment, and it’s one of the biggest investments she will ever make. I recommended that she just rent and save up for a few years. She said she had spoken to many professionals and that everything was going to be fine. I stated my final objection, then gave up.
She asked if I would go with her to help with the loan officer. I ended up debating with him also, but to no avail. He was the professional, not myself. I remember him saying he and his friends were buying up places left and right. I said “why would you do that? do you really think prices can rise like this forever?” It would have been just as well to have said nothing. After all, he was the expert, I’m just an Anti.
Poor girl, she wasn’t too happy a couple years down the road. But she’s still my friend. And we lived happily ever after ..as friends anyway.
I give more credence to the reality around me than to the media and its meriad of opinions. I think about what would be the signs of an economy reversing directions? What would be the signs of societal exuberance reversing itself. I think to myself a good sign of reversal would be a society building the biggest, most amazing things that they’ve ever built, and then those things ending up empty. Here in Las Vegas, they built the biggest, most extravagent project ever. It was called City Center. I’m hearing that a couple of the buildings were never finished on the inside because of the downturn in the economy. I think I saw a discovery channel show talking about the greatest cruise ships ever built, the Liberty of the Sea and, I think, the Independance of the Sea. Extreme exuberance is a great sign of reversal.
WHY AM I WRITING THIS?
I am writing this as a warning. It is my hope that people will open their eyes to changes that are happening now — right before their eyes. It is my strong belief that the stock market super cycle is now in its corrective phase. This means that some of things you used to believe are no longer true. “I’m not worried, I’m it for the long run!” These used to be words of wisdom. Now they will hurt you financially. As I have said before, stimulus and quantitave easing can have a temporary affect on a stock market. But the stock market will finish its cycle sooner or later.
HOWS OUR AMMO LOOKIN’?
What guns do we have left? Can we do as Japan and cut the discount rate from 6% to 1%. No we cannot. That gun has already been fired. The discount rate in the U.S. is currently near zero. Ok then can we use quantitave easing? Yes we tried that too. Instead of looking at Japan and learning a lesson, we looked at Japan and said “Theirs just wasn’t big enough.” So we took out a bigger gun and shot it at the economy. And by golly, we did manage to make the stock market shoot up one more time. And by golly we did get people to get themselves into more debt (just like we did in the great depression) as the previous chart clearly shows. So here we are now. The big guns have been tried. And what does our super cycle look like now?
During almost the entire decline in our stock market from the 2007 peak, we lowered the discount rate from 5% to near 0%. We did this in about a one year time span. Japan went from 6% to near zero in a span of about five years. So we slammed on the breaks as opposed to Japans slowing down to a stop.
We then kicked in QE immediately after reducing rates. We did our, much bigger, QE within about 2.5 years. Japans QE did not even begin until about 5 years after reducing their rates. Then they distributed their QE over about 5 more years. So, in essence, Japan spent all their ammo over a period of 15 years. We spent ours within 3 years. They used a handgun, we used a bazooka.
Are there anymore bullets in our arsenal? It looks like we are pretty tapped out. But who knows what magic bullet they may be able to pull out of their sleeves. Or perhaps they have finally learned the real world lesson that eventually you have to pay for the all night party.
If we had only taken our medicine earlier, the crash and recovery could have been swift. But we refused to learn the lesson. We listened to the experts and they listened to eachother, and here we are now.
So if the market is to make its downward correction, how long would it take, and how far would it go? We have spoken about two examples in history. Japan dropped 80% in about 19 years, and may not be finished dropping. It is taking such a long time because they keep believing that spending money will fix a problem that was caused by over spending. Let’s repeat that again , It’s got a nice ring to it …
THEY KEEP BELIEVING THAT SPENDING MONEY WILL FIX A PROBLEM THAT WAS CAUSED BY OVER SPENDING.
Did that spending fix their problem or just kick it down the road? Or did it create what is now known as “Japans lost decade(s)?” The depression era basically shows us the other end of the spectrum. It shows how quickly a market can recover if you just leave it the heck alone.
Yes, I know they did all that stimulus after the fact, but as I pointed out, it was quite likely to have bounced on its own. The stimulus, most likely, just made the bounce a bit more pronounced. So there are two scenarios on each end of the spectrum that could unfold. The first scenario could be swift and painful, but lead to a faster recovery.
This scenario would require the Gov to discontinue protecting the “Too Big To Fail” banks. If the banks get in trouble again then let them fail. Yes this hurts the stock holders and the stock market in general, but they’re going to get hurt anyways so let’s get it done sooner than later.
The FDIC would come into the banks and move consumer deposits out of the failing banks and into the healthier banks. This is how capitalism was meant to work, companies that make bad choices must suffer the consequences. And the companies that were more prudent, get rewarded.
It is difficult to see the Japan scenario unfolding in America do to the fact that we have already shot our bazooka!
The second scenario is to keep printing and throwing money at it until we simply crash into the wall (Ponzi-style).
Okay how about a third scenario where we pull our heads out of our denial, and recognize the fact that hard times are the only way out of this. If we did this then perhaps we could make a more controlled decent. But this is a fairy tail scenario as everyone would throw the politicians out of office for explaining reality to them.
People tend to want more and if you tell them they need to take less, they will tend to turn on you.
So crashing into a wall appears to be inevitable. So the best we can do is prepare on an individual level. And possibly, through foresight, even prosper in such an environment.