Stocks suffer a temporary “flash knockdown”...
Key lessons from the Forgotten Depression of 1921…
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Dear Reader,
I have often referred to the “bad news is good news” market dynamic.
Wall Street thrills to poor economic data because poor economic data foretells Federal Reserve laxity.
And Federal Reserve laxity — as a rule — prospers Wall Street.
The perverse phenomenon most recently manifested itself last month… when stocks were up and away on poor labor data.
About which, Mr. Simon White of Bloomberg:
At the end of a stock-market rally, just before a consolidation or a correction, there is typically a period where the market reacts positively to bad news. That’s a regime we just entered.
Just a Flash Knockdown
Put to one side Friday’s trade-centered flash knockdown.
By “flash knockdown” I refer to a boxing term.
It denotes a sudden, unexpected blow that temporarily floors an opponent, yet from which that opponent rapidly recovers.
Stocks have already regained the vertical… and returned to punching.
Before long, I hazard, the stock market will make all of Friday’s losses good.
Thus I return to Mr. White.
We can be confident that the market is nearing an apex. Not certain that it is nearing an apex… but confident that it is nearing an apex:
Calling a precise top is a mug’s game, but it is often quite clear when a market is in the process of making a top. There are several reasons to think that is the case today, and we now have another one to add to the pot.
Towards the end of uptrends, stocks typically start to react positively even to bad economic news. This is generally due to the reaction function of the Federal Reserve, where the market assumes it is more likely policy will be loosened as the economy weakens so, somewhat perversely, the equity market ignores the slowdown and rallies on the expectation of looser financial conditions.
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Now Gilder says an October 16th announcement will confirm his latest prediction - one he believes will create more millionaires than we've seen in decades.
The Joke’s on Main Street
The supreme irony of Federal Reserve laxity— or the supreme jest of Federal Reserve laxity — is that it fails to benefit its supposed beneficiary, Main Street.
Its principal beneficiary is Wall Street.
In these pages, I have cited hard proof upon hard proof of it.
Wall Street has vastly outpaced Main Street since Nixon banged shut the gold window in 1971.
And as I have argued recently:
The theory that Federal Reserve laxity prospers Main Street is Wall Street’s self-serving moonshine.
It finds very little excuse in the facts.
In proof thereof, I am fond to cite the Forgotten Depression of 1921.
The Triumph of the Do-Nothing Fed
As I have written before:
United States industrial production plunged 31% between 1920 and 1921. Stock prices plummeted 46%.
And corporate profits? wrecking 92%.
Unemployment summited an economically depressed 19%. Storefronts nationwide gaped empty.
It was the grand bellyache of the day. How did the Federal Reserve react?
Did it hacksaw interest rates down to nothing? Did it flood the economic system with credit?
The answer is no and no. It did neither.
Instead the Federal Reserve leaned backwards, interlocked its fingers behind its head, rested its wing-tipped shoes upon its mahogany desk… and yawned as the economic machinery seized.
Why?
The Fed Raised Interest Rates in a Depression
Despite the Progressive Era’s encroachments and WWI’s assaults, laissez-faire still had roots in American soil — roots both deep and wide.
In the America of 1921 the stock market looked after itself… and buried its own dead.
Business pushed along on its own steam. And banishing the business cycle was not the work of the central bank.
Just eight years old, the Federal Reserve was still in knickers.
Its role at the time was simple and it knew it — to supply the banking system with liquidity in event of banking crisis.
And if you can believe it — you may not believe it — the Federal Reserve actually increased interest rates as the economic machinery halted.
That is correct. The Federal Reserve raised rates straight into the teeth of depression.
Angels of mercy, no! Raising interest rates against economic depression?
Well friends, the facts are the facts. Here are additional facts…
“No More Primitive or Counterproductive Policies Could Be Imagined”
Economic recovery was underway by the summer of 1921.
Unemployment sank to 6.7% by the following year… and a vanishing 2.4% the year after.
Industry was once again on the jump.
Not until 1922 — after the recovery was far along — did the Federal Reserve reduce rates.
Financial author Mr. James Grant authored a book on the Forgotten Depression of 1920–1921. From which:
By the lights of Keynesian and monetarist doctrine alike, no more primitive or counterproductive policies could be imagined.
It is true. No more primitive or counterproductive policies could be imagined today.
Anyone who suggested them would be declared an angel of Satan and the common enemy of mankind.
I concede at once that I cannot prove it…
Yet I hazard he may even be jugged on charges of treason against the United States.
In 1921 these policies nonetheless proved so primitive and counterproductive… the country rose from depression’s depths within 18 months.
Again, the facts are the facts.
They Want the Forgotten Depression to Remain Forgotten
Let us hear no more talk, then, that only frantic Federal Reserve intervention can keep the economy up and going.
Let us hear no more talk that Main St. is its beneficiary.
The Forgotten Depression of 1921 wars very successfully against the theory.
Yet that is precisely why today’s drummers of activist central banking wish to keep the Forgotten Depression of 1921 forgotten.
Activist central banking prospers them.
Few pound a louder drum for activist central banking than Wall Street — and for that precise reason.
Regards,
Brian Maher
for Freedom Financial News
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