Is A 1929-Style Stock Crash Likely October 2003 ? - Part 4

August 5, 2003

THE TRIGGER(s)

We didn't even define what constitutes a bourse "crash"
Lets try: At least 50%-60% loss of nominal 'value', measured by the index number on Day 1 falling to one-half the Day 1 figure, in no more than 10 days. A real good, fast-acting crash like 1987 can erase nearly 60% in 5 days.

This underlines the 2000-02 'correction' was only a crash by stock market capitalization loss, not at all by its rapidity.

But this brings us back to what was said in Part 1
"1929 was very different to and from the 1987 and 2000-02 crashes". Why and how ? . . . .the 1929 crash transmitted through the various outer sheaths or layers of the Real Economy, impacted it, and through 1929-35 or 1929-36 in some countries of the "civilized world" there was unremitting falls of economic activity in 'key sectors'." These falls easily attained 60%-90% cuts in activity over 1929-36, by sector and by country.

This did not happen in 1987, and only weakly happened in 2000-02 (eg. airlines, tourism, some insurance companies). The Real Economy kept on sputtering along, sucking down 78 Million barrels/day of oil, in a miracle of de-connection with the paper bourse ! Gosh, could it be they aint connected at all, really? Note also the role of worldtrade, which fell like a stone in 1929-31 at the beginning of the crisis. In 1987 there was little or no fall in world (physical trade) volumes. Ditto for 2000-02.

TRIGGERS

Quite simply there is, more often than not, NO single trigger at all. This was the case in 1929, 1987 and 2000. You can check out all the books on 1929 that you like - you will find many trigger explanations, and even descriptions of many so-called 'triggers' - but no one of them stands up to further examination as a worthy candidate for The Trigger.

J K Galbraith in 'The Great Crash' (Houghton Mifflin, 1961), sets up 5 different triggers for 1929, and knocks each one them down as totally inadequate, by itself, to explain all. Conversely, the Oil Shocks of 1973-74 and 1979-81 brought on substantial losses of notional 'value' on world bourses - but were not crashes on our definition of 'at least 60% loss in preferably less than 2 weeks'.

Note the key month of October. Web searches on this will give you thousands of good, bad and ugly 'explanations' for exactly why bourse crashes tend to start in October. To be generous, we could add +1 or -1 months to our forecast date, that is September-November 2003 offering the ripest and best chances for a 'classic' and serious bourse rout.

AN OIL SHOCK IN JULY-SEPT 03 COULD BE A HANDY EXCUSE FOR THE CRASH OF OCTOBER 2003

That is, say an Oil Shock hits by October 2003. The bourse crashes - but it was already Kondratiev-timed to melt down! The crash didnt need the Oil Shock trigger - it had full functional autonomy, it was timed for Oct 03, by a mysterious conjunction of subtle, multivalent factors, just like 1929 or 1987 or the 2000 kick-off to the slowest crash in a long time (given new impetus, of course, by IX/XI). On cyclic grounds, the 2000-01 crash should have stopped by mid-2001, it was 'timed' to stop (on cyclic grounds) by about July-Aug 01. It in fact got overridden by the CIA and their Bearded Loony.

This proves what you all know deep down: any kind of random event can be used to talk down bourse numbers, as well as talk them up. Whether its a bad set of planetary conjunctions at the next Triple Witching Hour, Bush actually and seriously choking on a pretzel (going down and staying down), an asteroid hit, or just frayed nerves and very bad trade figures, anything can set off a bourse crash. This is the finest, most scientific and rational management of the economy that is known! If you are against it, you are for Pol Pot or Stalin. So, if there is an Oil Shock around October 2003, and the bourses crash, nobody will ever believe you, and even less me when or if we waste our breath suggesting that "the Oct 03 crash could have happened anyway, without an Oil Shock trigger".

Oil Shock trigger - what would be needed?

It has to be big, usually gory, anti-American, and cut oil supplies much more than 5%, preferably for several months.

One great candidate for all 4 of those would be The Fall Of the House of Saud. The House of Saud is on shaky foundations, subject to saltwater intrusions like the Ghawar field (or at least Islamist infusions), and pumping like crazy just to stand still in the race against demographic explosion and economic implosion. It could go anytime, but why this October?

Simultaneous outage of Nigeria + Venezuela. Nigeria doesn't need any help to 'disappear' from the oil pumping fraternity for a while. Venezuela would however need plenty of 'help' to repeat last winter's strike - it is highly doubtful the Mussolini-inspired New Rome clowns around Bush would go for the Chavez Ouster number a second time around, those Gulf region States with refineries needing Venezuelan crude will quickly let the Bush Bunch know about that.

Iran being regime changed, by those same sparkling strategy boys (Perle-Rumsfeld-Wolfowitz) might crank up oil prices quite a bit, but not certainly and surely to Oil Shock levels. That said, a few thousand Tomahawks and a few hundred thousand grunts offloaded into I-ran would likely push oil prices up at least $10-a-barrel. We are looking for $20 plus.

Definition of Oil Shock - a rise in oil price by at least 75% in under 2 weeks from the date on which The Market stops listening to cheap oil counter-propaganda, and starts cranking up prices by $1.50 and $2-a-day. From a $30 per barrel base this would give $52-per-barrel. In fact, for wall-to-wall hysteria, $50 will be fine.

One other interesting 'supply pinch' potential, with a low body count, would be a steady rising number of small incidents and outages, with no remittance or recovery, extending over the rest of this Summer, to Oct 03. This could include accidents, some sabotage (in Iraq for sure),maintenance and upkeep problems or incidents, maybe hurricanes and quakes, etc. We can also note - though the OECD's IEA cheap energy watchdog only put this out as a footnote - that the OECD's 3-biggest oil producers (US, Norway, UK) lost a combined 801,000 barrels-per-day of production capacity in June 02/June 03 through the very simple fact of depletion. TOTAL LOSS OF SUPPLY NEEDED IS ABOUT 3.75 - 4.5 Mbd FOR AT LEAST 1 MONTH, and for real impact preferably 2 - 3 months.

The Real Impact of Oil Price Rises

As is getting a little better known, or at least talked about (since price rises are inevitable) oil prices around $50-$60/bbl will explode the lead hood of deflation that drags down economic growth! But the stimulus will take 6 months to 1 year to start acting. This will give plenty of time for a clean out of the bourse casinos. First the panic, and then back to business.

Can an Oil Shock PREVENT bourse crash?

This is a fascinating question! No way can it be thrown out from discussion. The price level attained, how long prices hold up to high levels, the political chemistry surrounding the price rise - all these things will decide yay or nay.

Say oil prices only edged up by smallish day increments (just $0.50/bbl a day, several days each week, for several weeks and without many fallbacks).

Also say the movement stopped around $49.95/bbl, it didn't crash the psychological barrier of $50-per-barrel. Nor did prices fall back.

In such case it would be hard to call if the hooray henrys would feel sufficiently justified, completely gung-ho sure of their destroying mission and tear down the temple, pulling the rug on those stolid and solid oil Consumer Citizen-Investors of Suburbania. Maybe the bourse would just go sideways (like it is right now, around late June 03), the NYSE would be 'trimmed' to say 5000 points over a few weeks, (not by 5k or 6k points) then start inching back. The real Fear & Loathing level for the DJIA, about 4000 points (or 3999) would be avoided. Wall to wall panic wouldn't be necessary.

In terms of impacts on the Real Economy there is no problem at all to state, formally, that oil price levels up to $50/bbl would be good and hardly even inflationary.

China is poised to become world's biggest gold consumer.