The 1929 & 2007 Bear Market Race to the Bottom
Week 55 of 149
"Policy Makers" to Banks - Lend Money!
Banks to "Policy Makers" - To Who?
31 October 2008
Here is the BEV chart for the Bear Race.
The Bear’s Eye View (BEV) results for week 55 in the Dow Jones’ 1929 & 2007 bear market’s race to the Bottom are as follows:
1929 : -36.59% from its all time weekly closing high price of 380.33
2007 : -33.83% from its all time weekly closing high price of 14,093.08
Note of interest for the 1929 bear, it was in week 55 that the market tripped over the edge and into the abyss. The current Dow Jones bear took a step back from the brink on its 55th week.
The “policy makers” are upset with the banks. It seems that after sending $700bil into the banking system’s coffers, the banks are slow in making new loans. This current whining at the “policy maker” level sounds a bit like FDR in the 1930s. Seventy five years ago, he too was in a fight against deflation. Both the current “policy makers” and FDR knew that making money available to the banks can’t alone reignite inflation. What’s needed is for the banks to lend each dollar increase in Total Fed Credit out to 10 or more people to achieve a “positive inflationary bias.” The increase in Total Fed Funds provides a base for a huge amount of new loads. With a 10 to 1 gearing, an additional $7 trillion dollars in new bank loans is possible. But like the 1930s, banks in October 2008 are reluctant to make loans. So what is the problem?
During the 1920s the Federal Reserve overdosed the economy with repeated “liquidity injections” until the banking system liquidated their customers. It was one thing to lend money to a successful businessman in 1927, and quite another when that same successful businessman’s 1933 mailing address was a tin shack in NY City’s Central Park. Now in week 55 of our race of the bears, how many people in 2008 are living in a house that for every $1 in real world resale valuation, they carry $2 or more dollars in mortgage debt? Are the banks to make new loans to these people? It seems not. Maybe businesses will welcome additional debt.
And then maybe not.
With the exemption of the DJ Transport’s, from 1985 to November 2007 credit creation and corporate earnings were coupled together. But then the credit crunch came in December 2007. Since then corporative earnings and Fed Credit trends have clearly decoupled. It is not hard to understand why. Many of these companies’ as well as their customers are struggling with the effects of past central bank “liquidity injections.” In other words, after making their monthly interest and principle payments to past loans, most participants in the economy have no money left to pay for additionally banks loans. The Federal Reserve can increase the means of debt effortlessly, but the ability of debtors to pay interest and principle is bound by their income or profits.
The “policy makers” operate in the realm of economic modeling where they pick and chose their preferred parameters. That’s a nice job, if you can get it. Few can. You and I, as well as the companies we work for have only our pay checks or profits to move us from week to week. Money means work for us. In our world we are not afforded the option of choosing which bills we pay. The “policy makers” seem incapable of understanding that the banking system’s customers are maxed out; broke. All too many people don’t know how they will pay for their utilities bills. So how are these new reserves to be converted into interest and principle paying loans when the world is currently drowning in debt made manifest by past “policy?”
I don’t know. But, as we are often reminded, the “dismal scientists” who craft “policy” have learnt much since the 1930s. Also in 2008, they have many “tools” at their disposal that were not available in the 1930s. One of these tools was the unregulated OTC derivative market where professional money managers in the hedge fund “industry” use to thrive. But there is no need to dwell on that now. Trust me, after the election, pending disasters like, but not limited to AIG and the State of California will be rescued by Washington with further “liquidity injections.”
In a system based upon patronage, the patron must be accommodating if he expect help in the 2010 elections. I expect the “policy makers” will find some ill-advised use for this huge increase in Total Fed Credit that we will all regret later.
Week 56 Bear Market Race Report will be the first after the 2008 American election. I may be sticking my neck out, but I predict that the market will either be higher, lower or about the same. In other words, I’ll tell you all about it next week. But long term I am not optimistic about the stock market’s ultimate prospects. Old problems have not yet been solved, and there are new problems still undetected on our radar scope. State and local governments are in terrible financial shape. I expect all market rallies for in the foreseeable future will prove to be bear market rallies on the way down to the final bottom.
Note For the Record: Mark Lundeen does not want a devastating bear market in the next two years. However, in full view of Congressional Market Oversight Committees and under the supervision of Government Regulatory Agencies, things were done that I believe will make a historic bear market inevitable. If you have a problem with this bear market, contact Washington, not Mark Lundeen.
Dow Jones -40% Declines From 1885 to 2008 is the article that inspired this race of 1929 & 2007 Bear Markets. You may want to read that article to understand my “BEV Chart” Above.
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