Pictures From Crashes Past

"The sense of responsibility in the financial community for the community as a whole is not small. It is nearly nil. Perhaps this is inherent. In a community where the primary concern is making money, one of the necessary rules is to live and let live. To speak out against madness may be to ruin those who have succumbed to it. So the wise in Wall Street are nearly always silent. The foolish thus have the field to themselves. None rebukes them."

John Kenneth Galbraith, The Great Crash of 1929


"The fact that these foolish people are often stubborn must not blind us to the fact that they are not independent. In conversation with them, one virtually feels that one is dealing not at all with them as a person, but with slogans, catchwords, and the like that have taken possession of them.  They are under a spell, blinded, misused, and abused in their very being.

Having thus become a mindless tool, the foolish person will also be capable of any evil and at the same time incapable of seeing that it is evil.  This is where the danger of diabolical misuse lurks, for it is this that can once and for all destroy the human soul.”

Dietrich Bonhoeffer, Letters and Papers From Prison

Each financial bubble and collapse has common characteristics, while having their own peculiar character.

This that we are experiencing now is the third in a series of bubbles that started at the turn of the century.

I suspect it may prove to be the most severe, as compared to the last two.

The crash of 1987 was more of a trading anomaly and glitch in the financial system, similar to the panic of 1907.

I think we are in more of a Crash of 1929 scenario.

Let's take this one as it comes.

And be wary of the power of the well phrased lie, the same lies of the moneyed interests and their enablers and apologists, so often repeated in various forms, that have brought us to where we are today.

Comparison of the Equity Market with the Crashes of 1929 and 1987

"Life is a school of probability."

Walter Bagehot

Obviously while they are some similarities, it will take a high volume break to the downside to make a predictive analysis of the equity markets of today match up with the key metrics from two major price breaks fromt he past valid.

And that is a big 'IF' although certainly not impossible.

Wall Street Journal, 20 October 2019,  Financial Markets Face Fresh Wave of Political Uncertainty: ‘There’s Literally Nowhere to Hide’

Market 'crashes' are low probability events.

Many times are the setups.  But it takes the right kind of 'trigger event' to set the ball rolling.z

It is nice to know what the signs of an incoming storm are, and where the nearest safe haven may be, offering a sound harbor and, even better, a warm and cozy bar with good food and drink on dry land.

These charts were made by my friend Dominique.

Stocks and Precious Metals Charts - Ninety Years Ago - Stocks Tumble on Trade War - Golden Week

"There seems little question that in 1929, modifying a famous cliche, the economy was fundamentally unsound. This is a circumstance of first-rate importance. In 1929 the rich were indubitable rich. The figures are not entirely satisfactory, but it seems certain that the five per cent of the population with the highest incomes in that year received approximately one-third of all income. The proportion of personal income received in the form of interest, dividends, and rent – the income, broadly speaking, of the well-to-do – was about twice as great as in the years following the Second World War.

This highly unequal income distribution meant that the economy was dependent on a high level of investment or a high level of luxury consumer spending or both. The rich cannot buy great quantities of bread. If they are to dispose of what they receive it must be on luxuries or by way of investment in new plants and new projects. Both investment and luxury spending are subject, inevitably, to more erratic influences and to wider fluctuations than the bread and rent outlays of the $25-week workman. This high bracket spending and investment was especially susceptible, one may assume, to the crushing news from the stock market in October 1929."

John Kenneth Galbraith, The Great Crash of 1929


"Wall Street got the credit for this prosperity and Wall Street was dominated by just a small group of wealthy men.  Rarely in the history of this nation had so much raw power been concentrated in the hands of a few businessmen.

Everything was not fine that spring with the American economy. It was showing ominous signs of trouble. Steel production was declining. The construction industry was sluggish.  Car sales dropped.  Customers were getting harder to find.  And because of easy credit, many people were deeply in debt.  Large sections of the population were poor and getting poorer.

Just as Wall Street had reflected a steady growth in the economy throughout most of the 20s, it would seem that now the market should reflect the economic slowdown. Instead, it soared to record heights.  Stock prices no longer had anything to do with company profits, the economy or anything else.  The speculative boom had acquired a momentum of its own.

On September 5th, economist Roger Babson gave a speech to a group of businessmen. 'Sooner or later, a crash is coming and it may be terrific.'   The market took a severe dip. They called it the "Babson Break."  The next day, prices stabilized, but several days later, they began to drift lower.  Though investors had no way of knowing it, the collapse had already begun."

The market fluctuated wildly up and down. On September 12th, prices dropped ten percent.  They dipped sharply again on the 20th.  Stock markets around the world were falling, too.  Then, on September 25th, the market suddenly rallied.

Practically every business leader in American and banker, right around the time of 1929, was saying how wonderful things were and the economy had only one way to go and that was up.

There came a Wednesday, October 23rd, when the market was a little shaky, weak. And whether this caused some spread of pessimism, one doesn't know. It certainly led a lot of people to think they should get out.

And so, Thursday, October the 24th -- the first Black Thursday -- the market, beginning in the morning, took a terrific tumble. The market opened in an absolutely free fall and some people couldn't even get any bids for their shares and it was wild panic. And an ugly crowd gathered outside the stock exchange and it was described as making weird and threatening noises. It was, indeed, one of the worst days that had ever been seen down there.

But Monday was not good. Apparently, people had thought about things over the weekend, over Sunday, and decided maybe they might be safer to get out. And then came the real crash, which was on Tuesday, when the market went down and down and down, without seeming limit...Morgan's bankers could no longer stem the tide. It was like trying to stop Niagara Falls. Everyone wanted to sell.

In brokers' offices across the country, the small investors -- the tailors, the grocers, the secretaries -- stared at the moving ticker in numb silence. Hope of an easy retirement, the new home, their children's education, everything was gone."

PBS American Experience, The Great Crash of 1929

Stocks slumped badly today on the news from Bloomberg that the White House is considering limiting US investment in China and Chinese companies.

Chinese companies listed on US exchanges were sold. It will be interesting to watch the open on world markets on Monday.

I have posted the upcoming economic events calendar for next week. There will be a Non-Farm Payrolls report on Friday.

Next week begins 'Golden Week' in China, October 1^st to 7^th.   This may allow more than usual antics with some stocks and commodities as their markets will not be open for this national holiday.

The Dollar was lower, and gold and silver were hit in follow up action to the recent Comex option expiration, driven by the big futures short position holders, the Banks. Those same jokers who helped to fund the long campaign to sell the idea of deregulation to free the markets, and to overturn protections for the public trust like Glass-Steagall.

Need little, want less, love more. For those who abide in love abide in God, and God in them.

Have a pleasant weekend.

Related: Crash Signatures

Crash Signatures

If you have been a long term reader here you know that I have something called a 'Crash Signature.'

One of the key components of this is a significant decline from a new all time high, that rallies substantially so that the fear subsides and most believe there is a return to 'normal' bubble conditions.

Unfortunately, IF this is a rally that fails, in that it fails to set a new high, but tops out and then falls sharply again, we have a higher potential of a crash in which confidence is shattered and a new lower low is set.

I have a correspondent in France who also does trend tracking such as this. While I have normally been using a composite model of several crashes from US market history (1929, 1974, 1987, 2001, 2008) he is concentrating lately on a comparison to the year of 1937.

It should be noted that the 'crash' of 1937 pales in comparison to the Crash of 1929. And it was largely caused by an egregious policy error by the Fed.

If you look at it carefully it does follow the 'crash signature.'

Here is the latest chart which he has sent to me. I think if we fail once again to take out 'The Wall' on my SP 500 chart, and drop to a lower low, there will be a higher than normal probability of a 'crash.'

Although I have to add that we are in the days of organized support, and mobilization of the entire country's money mechanisms, to support stock prices for the benefit of their primary constituents.

The next few months could be memorable.

Update on the Comparison with Prior Notable Declines

The next few weeks will be interesting.

This is just the Dow Industrial Average, such as it is today.

By 'such as it is' I mean a grossly modified artifact of a dead theory that is pretty much useless.

We would have to see confirmation in the broader indices, rathern than the narrow DJIA and NDX, like the SP 500 and the Russell 2000.

What Is Missing To Complete a 'Crash Signature' for 2018

"Life is a school of probability."

Walter Bagehot

Here is a little more to expand on the posting I made last night here.

We have had a long run up, with only a few corrections, to new all time highs.

The market has finally broken and corrected significantly.

You can see comparisons to 1929 and 1987 in the first chart below.

This was forwarded to me by a long time friend with whom I discuss these things.

As I suggested to him and attempted to show in the posting last night, what is required now is a break below the current low, decisively.

That takes the possibility of an inverse head and shoulders bottom off the table, and gives us the 'failed rally' scenario.

As you can see in 1929 there was a decline from the top of 17+ percent, followed by a rally back of 11+%, that nevertheless failed to make a new high, and rolled back over.

Once the new low was set, the market started its slide.

But I cannot stress enough that until and unless the inverse H&S bottom is taken out and a legitimate signature is given this remains a low probability event.

One issue in the current situation is the calendar. The Thanksgiving holiday is fast approaching.

This is traditionally a period of very light stock market volumes with a bias to a drift higher in preparation for the year end tape painting known as the Santa Claus rally.

Therefore timing is a bit of a headwind to the failed rally. It may require more of a 'trigger event' but that is very hard to forecast.

So let us be watchful for a market break lower here to a new low.

A Retrospective and Signature In Charts of the Crash of 1987

"Life is a school of probabilities."

Walter Bagehot

And, now and again, gravity.

After a long ramp higher, marked by a narrowing rally driven by the concept of portfolio insurance and program trading, the market began to correct lower in the latter part of the year.

The first chart shows the hallmarks of what I had identified as a 'crash scenario' some years ago.

It begins with a long inflation of the financial asset to some high mispricing of risk, in a rally that I call The Ramp.    The Ramp tends to be an unusually regular progression higher, as the financial asset rises steadily and without the usual corrections along the way that one might expect.  This is a facet of its artificiality and non-market driven genesis.

Over time the asset price rises to a new high that seems almost remarkable looking back over its long progression to new highs that seem divorced from any real fundamentals.   There will always be apologists who will try to justify the price through some means, some of which are often a bit tortured in their reasoning and historical soundness.

A correction ensues that may be unusually volatile given recent history, but does not acquire the other characteristics of a panic.

This first correction is often driven by things that may seem not all that significant, which I call a trigger event.

The first correction is most often led by selling in some of those narrow components that took the asset prices higher in the first place.   It exhausts itself fairly quickly, and traders and investors are rather quick to come back into the market to buy the dip.  This behaviour can be almost reflexive and unthinking, because buying the dip has always paid off with gains as the asset price quickly recovered.

And in a non-event driven top, the asset prices do indeed recover quickly, based on the buying of the dip, to a level equal to or less than the prior top.  A very narrow segment of the market may even set new highs.  These are those components that are the heart of the new era thinking, or mispricing.

As prices hit this second high, the enthusiasm of the narrowing market trade, often driven by automatic buying based on momentum indicators and algorithms, fades.

The usual progression higher is now clearly broken, and asset prices correct again, often to an equal or greater drop to a second low, breaking the longer term trendline.  The confidence of the dip buying automatic buying becomes a bit shaken.

It should be said that support of the asset bubble, which can come from those who wish to 'save' this unsustainable asset mispricing, may be required to shoulder the burden of the market rally almost on its own.    But this time it does not invoke the support of broader market purchasing.  Buyer have now left the market, and the market supporters and algorithms are left largely standing against the new market trend alone.

This results in the rally that failed.  This is the final push higher, which upon its turning lower causes many market participants to being capital protective selling, that causes almost all assets involved to be sold in the hopes of avoiding more losses.   And a panic ensues.

The crash of 1987 was particularly sharp, and its recovery into the end of the year was remarkably good, recovering much of the losses.  This was an engineered recovery by the Fed under Alan Greenspan, who had the latitude to re-inflate the bubble.

It is interesting to see what 'worked' in this particular crash of 1987.   And what declined along with most of the financial assets.

I have included a number of charts that show this below.

I have also added at the very end several charts that show the pattern which we have seen in this long post-election rally to date.    The rally has been led, once again, by a narrowing group of big cap tech stocks and certain financial asset companies.

Only one of the assets shown in the charts below stood up in the panic selling in the Crash of 1987.  Can you spot which one that was?

The reasons for this bubble are several, but primarily through the increase in liquidity that was almost exclusive funneled to those who were involved with the financial asset markets.  This has been abetted by fiscal government policy that is supportive of a continuing narrow wealth bubble, by crippling or removing regulatory safeguards and favoring asset price manipulators through rules and rulings.

It should be noted that the core of the insiders are generally not only out of the market rally, but have placed many bets against it, to profit to the downside, when it fails.  No where in recent memory was this more pronounced than in the collapse of the housing bubble economy in 2008, and the many financial instruments that were just flat out vehicles for a control fraud.

That there were so few consequences for this illicit activity has left us with a moral hazard that makes another crisis almost inevitable.  It is not that those who are in positions of power and influence do not know this;  it is that compared to its value to them personally, they just do not care, and can easily hide behind a lack of accountability and false complexity.  Who could have seen it coming?

We will know more about our current situation of the next week or so.  It is too early yet to identify it, except to say that the situation appears fragile.   So far I would think of this as a market break rather than a crash unfolding.

I suspect that the support activity will center on the buying of the SP 500 futures.  This has been the 'go to' remedy for organizational stock market support in the US for some time.   But that will only be successful if the tech stocks can join in the rally, and the market support be handed off to a broader set of participants.

A key feature of the stock market today besides all the automatic momentum trading is the huge stock buyback activity by some of the market behemoths, who have been allowed to grow far beyond the constraints against antitrust and monopolist considerations.  While this has provided fabulous riches for some, it has concentrated risk in a manner that few really comprehend completely.

A market break is a loss of confidence in this momentum based buying that is able to recover, often through the actions of professional market participants and institutions.  It is a symptom, and a portent of greater things to come, if reforms are not taken to stabilize the asset prices and re-establish a firmer connection between risks and returns.

I created most of these charts when I began studying asset mispricing in the prelude to the tech stock bubble and crash, at the end of the 1990's.

Depending on where this goes I may also post a similar retrospective on the more profound crash of 1929 which unfolded and recovered over a much longer time periods.   Each asset bubble and collapse has its own characteristics and peculiarities, even though they may share the same signature and many essential aspects.

Also as food for thought, there is a similar but opposite pattern with asset prices that break out higher after a long period of official and semi-official suppression.  One generally looks to see this in certain key commodities and currencies that have been long 'managed' for any number of reasons.   That pattern breaks out with a ferocity that is similar to but in the opposite direction of a meltdown.  Indeed, it can be thought of as a meltup with a large store of potential energy behind it.

No one can forecast a singular event like a market crash with any certainty.   Some make a cottage industry of it, but don't count their misses, which are plentiful.  They manufacture forecasts to sell them, and the more attention getting the forecast, for good or ill, then the more that they can sell.

Can you tell me what Trump, the Fed, the Chinese, Mother Nature, etc will do next week?  No, then how can anyone say what the market may do likely in some response to these sorts of exogenous variables.

But we can assess the mispricing of risks, and look for more fragile times when the required force of any necessary trigger become so slight that the probability of a mishap becomes unusually high.  And what I am saying it that we are now there, and unless we do something to change our current trajectory in policy and regulation, that a major market crash can become ever more likely..

Where we are now.

Stocks and Precious Metals Charts - An Apéritif to a Banquet of Consequences - Dow Industrials Drop 700+ Points

"What is most offensive is not their lying— one can always forgive lying— lying can be a delightful thing, for it leads to truth.  What is offensive is that they lie, and worship their own lying."

Fyodor Dostoevsky, Crime and Punishment


“A true opium of [worldly] people is a belief in nothingness after death— the huge solace of thinking that for our betrayals, greed, cowardice, and murders that we are not going to be judged.”

Czesław Miłosz

Stocks continued selling today. What was particularly discouraging for the bulls is that there was no afternoon rally.   In fact, the selling accelerated in the last hours of trading, and the major indices went out on the lows, and on heavier volume.

One might point to the new tariffs to come on China, and fears of a trade war. Earlier this week one would look to the Fed, and talk about the rising interest rates, probably the most carefully telegraphed monetary decision in history.

Perhaps it was the latest antics of Facebook, in the general growth of the abuse of privacy of the public by government and their corporations. One might also look to the dysfunction in Washington, and the misguided policies that have been crippling the middle and lower classes to the advantage of the one percent.

Let's skip the usual bullshit exercise of identifying the reasons for this sell off for the moment shall we?

Certain financial assets, like the major stock indices, led narrowly by the FANG tech stocks and the financials, had been lifted to new heights by what certainly looked like the utter mispricing risks.

And as we have seen in the last two asset bubbles and subsequent financial crises, prices continued rising to even greater over-valuations.  They were lifted on a cloud of misrepresentations and  the purposeful weakening of transparency and regulation, from the purveyors of stocks and their many purveyors of the big lie designed to support the economic status quo.

As I have cautioned,  when this mispricing of risk continued to expand,the 'trigger event' needed to knock the market off its blocks would decrease in required magnitude, until something incidental, or a cluster of rather minor incidents, would be enough to send prices down, and with a vengeance.

So far this latest market decline is what I would call a 'market break' and not a 'crash.'   As a reminder, there was a disquieting market break in March 1929 that was quickly forgotten, until the market breaks of September, culminating in a bloody October.

The Father of Lies

It will not take much for some semi-official group to turn the markets around by buying the SP 500 futures at a key moment.  There is not much fundamental stock picking in this market;  it is all index ETFs and narrowing momentum.

Buying the futures to turn things around could be done by the Fed or some other NGO that is working with their compadres of the revolving door.   One group wants to get rich, and the other wants to not be run out of town on a rail. 

That has been a 'go to' solution since the mid-1990's. It is very possible that stocks will find a bottom, perhaps in a true selling capitulation, and then turn and run back up to perhaps a new high later this year, led by the usual suspects and their aficionados.

But if there is no financial reform, if there is no return to good governance and honesty in the major mechanisms of the financial system which, after all, is the capital allocation heart of any capitalist economy, there will once again be a crash, a staggering correction in prices, for the third time since the year 2000.

There was a very minor flight to safety today. The US Dollar managed to drift slightly higher within its recent trading range. And in the usual manner of the recent currency trading of the precious metals, gold and silver were off a bit in response.

And let us not forget that there will be an option expiration for gold and silver on Monday.

Government bonds caught a bid, which was a bit odd in this interest-raising environment needed because things are just that good in the real economy right?   We certainly don't want any overheating, as in higher wages for working people.

Wall Street will be dropping another IPO into the markets tomorrow in Dropbox, unless they call it off for reason of market conditions.    I suspect that they will try to stabilize the markets while Wall Street squeezes this latest creation out.

This is not going to end well. But if we get another rally, all of this gloom will be forgotten, and it will be bread and circuses and the latest scandals of the rich and frivolous all over again.

And when it really hits the wall, when the financial system is thoroughly knackered, we can always blame Trump, or Russia.

Have a pleasant evening.