1929 Stock Market Chart Parallels and Real Private Businesses Investing

Sovereign Man’s Simon Black makes a reasonable case for investing in real private business than to gamble in financial markets by showing this chart. 

Mr. Black eloquently writes:

But as we have pointed out before, world stock and bond markets are heavily manipulated, if not rigged, by central bankers who control the money supply.

Fundamentals no longer matter. If one single person (now Fed Chair Janet Yellen) says she will print, stocks go up. If she says she will taper, stocks go down.

This isn’t investing. It’s gambling. Financial analysis has been replaced by soothsaying and tasseography (reading the tea leaves), hoping to detect some hint in the direction that central bankers are leaning.

This is the chief reason why I seldom participate in public markets anymore; it seems ludicrous to pile on a giant tidal wave of paper currency and entrust central bankers with my investment returns.

Not to mention, it’s uncertain how long they can keep this party going as the following (rather scary) chart shows. There’s an eerie parallel between the market’s performance today and the runup to the crash of 1929.

Financial markets dependent on Central Bank steroids is a real concern.

However, before I deal with investing in real private business, there has been an objection to the above chart.

Stock market bulls at the Businessinsider downplayed the above calling the former “flawed logic” by presenting another chart.

The bulls didn’t address how and why the nominal based chart pattern parallel of the 1929 chart had been “flawed”, but rather shifted their objection by framing another chart in terms of “percentage”. 

This devious way of challenging the original premise is called the alternative substitution—i.e. in behavioral finance, when people are faced with a difficult question, the response would be to  “answer a related but different question, without realizing that a substitution has taken place.”

History is no guarantee of future outcomes. From this premise we understand that patterns may just be patterns, whose outcomes may or may not repeat. I pointed years back how the father of fractal geometry, Benoit Mandelbroit advised people not to trust charts: (bold mine)

And in the fun-house mirror of logic of markets, the chartists can at times be correct...But this is a confidence trick: Everybody knows that everyone else knows about the support points, so they place their bets accordingly. It beggars belief that vast sums can change hands on the basis of financial astrology. It may work at times, but it is not a foundation on which to build a global risk-management system.

And if history does repeat, it will not be in exactitude of the past but rather as American author and humorist Mark Twain says History rhymes. 

And any repetition of history hasn’t just because patterns repeat, but rather such reveals of people’s underlying responses to certain conditions.

The reason “cycles” exists can be imputed or traced to on the admonitions of Spanish born philosopher and essayist George Santayana who wrote “Those who cannot remember the past are condemned to repeat it.”

Essentially what underscores a potential repetition of the 1929 scenario are the ‘real’ fundamentals behind them. 

Since US stocks have been rising driven mainly by massive debt accumulation (record net debt margin and various record bond market issuance), the question is at what or how much degree of additional debt load can the US economy and financial markets absorb in the face of rising yields of USTs just to push up stock market values? What if the capacity to absorb more debt hits the brick wall? What if the rate of return of stock markets will be eclipsed by the rate of increases in the cost of servicing debt, how will all these affect the stock market? 

You see, the mainstream thinks that debt is a free lunch thing that has no repercussions. This kind of thinking is a recipe to a rude awakening. 

Moreover, people hardly realize how the severe distortions from the easy money landscape has influenced earnings and economic coordination. With Fed Chairwoman Janet Yellen’s debut who appear to echo on policy path of  the previous chair Ben Bernanke on “tapering”, how will reduced monetary accommodation impact asset prices whose foundations have been built on easy money? The violent response in emerging markets have been manifestations of the drastically changing environment. What if a periphery to core will occur whose transmission mechanism will simply be higher rates in the face of massive debt?

As you can see these are questions that will determine whether the Dow Jones parallels of the 1929 today will be repeated.

Going back to real business. I don’t deny that investing in business should be a viable alternative. But my concern is that if earnings and the general economy has been massively skewed in favor of bubble blowing activities, putting up a business based on assessment of current conditions may lead to serious miscalculations therefore potential losses.  Besides, the current inflationary boom has already been inflating the cost of doing business. Unstable prices adds to the uncertainty. Compounding such uncertainty has been the equally fickle political environment.

So unless potential businesses would deal with some sort of niche, whose markets are going to be least affected from any downside economic volatility, investing in real business should be thoroughly scrutinized.

Importantly, if 1929 should ever rhyme, then this means shades of the great depression.

Wikipedia describes the post-1929 stock market crash

The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in 1930 and lasted until the late 1930s or middle 1940s. It was the longest, deepest, and most widespread depression of the 20th century.

In the 21st century, the Great Depression is commonly used as an example of how far the world's economy can decline. The depression originated in the U.S., after the fall in stock prices that began around September 4, 1929, and became worldwide news with the stock market crash of October 29, 1929 (known as Black Tuesday).

The Great Depression had devastating effects in countries rich and poor. Personal income, tax revenue, profits and prices dropped, while international trade plunged by more than 50%. Unemployment in the U.S. rose to 25%, and in some countries rose as high as 33%.

Cities all around the world were hit hard, especially those dependent on heavy industry. Construction was virtually halted in many countries. Farming and rural areas suffered as crop prices fell by approximately 60%. Facing plummeting demand with few alternate sources of jobs, areas dependent on primary sector industries such as cash cropping, mining and logging suffered the most.

A rhyming of 1929 stock market crash also means that even real businesses will take a hit.