What 99% of Market Pundits Get Wrong

Most pundits compare the 2008-2009 market collapse to the 1980s or the 1970s or even the 1960s and come up with anachronisms such as "if history can be a guide, the current market will go up" or "if history can be a guide, whatever silly conclusion..."

Unfortunately, they forget that their history didn't start after the WWII. 

On the cart below, you can see if one must take history as a comparison guide, the only time that is relevant to compare with is the 1930, which had seen an massive credit bubble, followed by a massive bust.

As you can see on the cart above, we have had a once in a generation/lifetime credit bubble that dwarfs even the 1920s one. Note that in the 1920s, the gold standard didn't prevent the massive inflation, because even though printing dollars was not allowed, partial reserve banking was, which so it allowed for a gigantic credit bubble.

Today, we are headed for a deflationary collapse of a far much grander scale than the 1920s and on top of that, governments are insolvent, while they were barely carrying any debt in during the roaring 20s.

We have not seen anything yet. The Greater Deflation is here for good, and will be with us for probably a couple of decades.


Dave Narby said...

I think you underestimate TPTB.

Every single scrap of debt will be paid for with freshly printed cash, and the bill dumped on the taxpayer's doorstep.

So while we may get deflation, it will only be in terms of gold, not fiat.

Tiho said...

"Today, we are headed for a deflationary collapse of a far much grander scale than the 1920s and on top of that, governments are insolvent, while they were barely carrying any debt in during the roaring 20s."

I completely agree with the post above. You are way to naive my friend. There is no way in hell that general Bernanke will let that happen. We will do what every single government has almost always done throughout history. Print money, devalue currency and pay of the debt in worthless fait paper. The Bernank studied the Great Depression so well, that his number one goal is not to let deflation happen. That is why he holds the job.

He will print and print and print... and you will keep calling this bull market a bear market rally forever and ever as it goes higher and higher in years to come. Besides, we are now in an inflationary cycle according to the Kondrtiev Wave. The deflationary cycle from 1980 to 2007 is over in my opinion...

pej said...

@Dave Narby: As you can see, debt is deflating. We are deflating. In dollar terms. Period.

And The Bernank is only exchanging debt for new dollar bills, but the debt is not cancelled. There's only so much governments can borrow before becoming another Greece.

@Tiho: You make me laugh mate. Remember has not been right on a single of his forecasts. He failed miserably on every target his fixed for the Fed. And you believe he can control the markets? Give me a break pal :-)

Dave Narby said...

@ both of you:

You are both half right. But you are missing a critical piece of the puzzle.

You need to price all the various markets int terms of gold.

E.g. in Stockcharts, punch in $SPX:$GOLD. Does that chart look bullish to you?

Check each asset class. You will see in real terms, the stock markets have gone down, while commodities have been essentially flat.

If this was a true dollar deflation, then all the stock markets would have gone in real terms, while commodities would have gone down.

But it hasn't, so it isn't. The system is deflating vs. real assets.

The only way out of this is devaluation of the dollar, and to recapitalize the system using gold (and perhaps silver as well, although I doubt the central banks will do that, seeing as how they no longer own silver).

Check out the latest win for Liberty at http://libertyiswinning.blogspot.com/ !

pej said...

Fair point about gold. But it doesn't mean that gold will not fall neither.

Good to see you have a blog. I will follow it as well.

Dave Narby said...

Thanks Pej, and if you see a win for Liberty, please post it in the comments!

If you study gold, you will see that it does well under inflation OR deflation... But poorly under low, steady inflation - which we won't have until the system is 'reset'.

I expect gold to take a hit, but it will be similar to 2008. It will fall less than everything else and then outperform everything else.

pej said...

Dave your comment about gold is self-defeating. Look at the chart on this very post: since the late 70s there has been a massive inflation lead by credit, and yet, gold collapsed from the early 80 to the early 2000. 20 Years of very high inflation, and gold falling.

Dave Narby said...

It's slightly more complicated than that.

Derivatives (paper claim on physical gold and silver) have been used since the '80's to suppress their price. There isn't room to provide evidence for that here

Another thing happened in the '80's, check http://home.earthlink.net/~intelligentbear/com-dow-au.htm

You will notice that the DOW:GOLD ratio plummeted in 1980. The dollar was crashing, and there was fear of an American default.

To save the dollar Paul Volker increased base interest rates to 20%.

I personally do not think that it is probable Bernanke will do the same. So he has two options: Default (deflate) or print (inflate).

The mistake those believing deflation will occur is in believing that TPTB will "play by the rules". The debts will not be allowed to deflate. The Fed will buy every last scrap of debt and dump it on the taxpayer's doorstep.

The most likely scenario is there will be deflation sufficient to give Bernanke enough political cover to print, after which there will be strong inflation, leading to dollar repudiation.

The system will eventually be recapitalized using gold. It is the path of least resistance.

pej said...

One thing people tend to forget when talking about any ratio, is that a ratio can plummet with both the numerator and denominator falling. It just needs that the denominator falls less.

Dave Narby said...

Totally agree Pej, it's possible we will see gold drop to 1100, and the DOW go to 660!

However, I think the odds are greater for gold to go to (e.g.) 25000 and the DOW to 15000.

Printing doesn't hurt the bondholders nearly as much as the poor and middle class, so it will be employed to preserve the system.

All IMO, of course.


Check out the latest win for Liberty at http://libertyiswinning.blogspot.com/

pej said...

Yes, indeed. We'll see how it wounds up. My guess is gold between 300-400 hundred bucks and the Dow at say 3000-4000. This is probably too optimistic though :-)
I wouldn't be surprised if the real bottom is at gold 250 and dow at 2500...

Dave Narby said...

Have to disagree with you there... Looks to me you have it backward.

But, we shall see!