This week, I’ll add to the similarities between the lead-up to the Great Depression of 1929-39 and the economic situation today.
Gold, Interest Rates, and the Great Depression
At the beginning of the depression, all countries were tied together by the gold standard, if you had high interest rates, people would move their money to your country, as they’d get a better return. But at the same time, money in the country with low interest rates is “cheap” to borrow just as it is today in most countries (in fact, we’re involved in currency wars). It leads to speculation in the stock market. It always does.
We’re not on the gold standard any more, so the value of currencies fluctuate; they’re not tied together (that’s the effect of fiat money). Governments today notoriously inflate to reduce the value of their own money so that their products are less expensive on the international markets. In that way, they sell more, resulting in more money flowing into their country. (If you can lower the price of your products, you sell more and become more profitable).
Because of “a deal” between Bank of England and the Federal Reserve to keep US interest rates artificially low, US dollars were inexpensive to borrow and this fuelled speculation in the stock market, the same phenomenon we have today. However the difference is the gold standard, which allowed manipulation of monetary value between countries. Today, currency rates float, so international market forces have a much bigger hold on currency values.
In spite of the manipulation, US Treasury rates eventually started to sneak up, particularly in 1928 and this forced the Federal Reserve to raise rates.
It’s the same situation today. Exactly. And we’ve seen the Federal Reserve react and pretend that they’re in complete control of the economy. However, they have no idea where the economy is going and are simply reacting to market forces. Obviously, behind the facade, they have to be scared to death.
Politics and the Economy
It’s much like politicians taking credit for the economy. They have virtually no affect on it, but they’ll take credit for it, like President Trump is taking credit for the stock market rally. And when it turns around on him, look out! We always vote leaders out when the economy turns down.
Above is a chart of the US Presidents from 1913 through 2016. You can see the politicians who were liked and are considered “good leaders” by historians (green circles and check marks). The there are those we dislike (red circles and x’s) and threw out of office because “they destroyed the economy.” Well, of course, they didn’t, but if I were a politician, I’d be very careful about when I ran for office.
The chart above shows the impact of the stock market (the DOW is the blue line). There’s an underlying parallel with the climate. You can also see this on the chart. At some point soon, I’ll put together a video on this topic. However, I do have one on how the economy parallels the ups and downs of the DOW. You can find it here.
Interest Rates Before the Great Depression
The above chart comes from New World Economics and tracks the US interest rate during the 1920s, leading up to the Great Depression.
What’s important in the chart above is the fact that the Federal Reserve does not raise rates “on their own.” In fact, when Alan Greenspan was asked on CNBC, “Did you keep the interest rates too low for too long in 2002-2003?” blurted, “We didn’t raise rates. The market did.”
You can see on the chart above that the green Treasury Bond (10yr+) yield began to rise going into 1928. The Federal Reserve was bound to follow (purple line) and, sure enough, it did.
Treasury Rates and the Economy
The U.S. Treasury sells bonds at auction. It sets a fixed face value and interest rate for each bond. If there is a lot of demand for Treasurys, they will go to the highest bidder at a price above the face value. That decreases the yield or the total return on investment. That’s because the bidder has to pay more to receive the posted interest rate.
If there isn’t a lot of demand, the bidders will pay less than the face value. That increases the yield. The bidder pays less to receive the stated interest rate. That is why yields always move in the opposite direction of Treasury prices.
When there’s not much demand, then bond prices drop. Yields increase to compensate. That makes it more expensive to buy a home because mortgage interest rates rise. Buyers have to pay more for their mortgage, so they are forced to buy a less expensive home. That makes builders lower home prices. Since home construction is a component of gross domestic product, then lower home prices slow economic growth.
Rising Treasury rates then, are deflationary. As rates rise in the market we’re currently in, at some point, the market is going to head south. What will that point be? That’s the big question. I don’t know the date, but through Elliott waves, I’ll be able to tell you the market price point.
Low yields on Treasurys mean lower rates on mortgages. Homebuyers can afford a larger home. The increased demand stimulates the real estate market. That boosts the economy. Lower rates also allow homeowners to afford a second mortgage. They’ll use that money for home improvements, or to purchase more consumer products. Both stimulate the economy.
The Current 10 Year Treasury Rate
So rather than watching the Federal Reserve and interest rates, it makes much more sense to watch the TNX chart below and you’ll have a much better idea of what’s going to happen at any of the coming Federal Reserve meetings.
Above is the two day chart of TNX (the 10 year Treasury yield). Treasuries have bottomed and are sporting a very nice motive wave up. We’re currently in a fourth wave of the larger third wave at the moment.
I’m expecting a retrace lower to around 22.00 or so and then a large fifth wave up to a new high. After that, we’ll get a 62% retrace and then a much larger wave (1.618 X the first wave) to an even higher high. Sometime during this process, the pressure is going to grow on the stock market and it will top.
We’ve been there before, we’re here again now, and it’s just a matter of time until the larger market tops … and drops.
What’s important is that it’s not the Federal Reserve that determines the future of the market, it’s actually the market itself. However, humans don’t necessarily think that way and so you can have a really good grasp of the future by keeping an eye on Treasury rates. You’ll be ahead of the market.
Herbert Hoover and the Great Depression
Above is a diagram of the depression era showing some of the major events during President Herbert Hoover’s time in office layered on logarithmic scale chart of the stock market of the day.
Leading up to the 1929 crash, US Treasury rates began to climb and the Federal Reserve raised the discount rate. They doubled them over a two week period in October, 1931.
On June 1, 1930, Hoover famously said in a major speech, “The depression is over.” It was the wrong thing to say and harmed his reputation. He was thought of by many as “out-of-touch” with what was going on in main street America.
The bankruptcy of the the Austrian bank, Credit Anstalt (originally established by Solomon Mayer von Rothschild) was a major blow to the economy as bonds, mortgages, and other loans were negatively affected. It triggered the closing of many more banks in America.
Hoover signed the Smoot-Hawley Tariff Act on June 17, 1930, which raised tariffs on 887 specific products. Hoover called it “vicious, extortionate, and obnoxious,” but signed it anyway. President Trump seems to be heading down the same path.
Franklin Delano Roosevelt came into office in March of 1933. It’s interesting to note that the bottom of the market was already in place by the time he reached the White House. He, of course, had his own problems and there was another stock market crash a few years later.
Britain and most other countries left the gold standard on September 22, 1931 but the US staunchly stayed on it, which was perhaps Hoover’s biggest mistake. This gave him virtually no control over the value of the currency as opposed to other countries, who could inflate their currencies and as a result, came out of the depression much earlier than the US.
Above is the daily chart of ES. Nothing new here. The full wave up looks to be like a triple three (a combination wave) which is almost at completion (or will be with one small final wave up to about 2406—shown in the hourly chart below).
A short-term inflection point: Over the next 24 hours or so, we’re at an inflection point in ES. I expect the current wave down on a 5 minute chart to drop to 2364 and then bounce into the balance of the current wave up to a new high.
However, if we end up below that level, there’s an option that we’ll continue down in a flat and this could lead to the larger fourth wave. However, this is an alternate count, as the larger wave configuration showing a top after 3 waves up strongly suggests we’re going to a new high.
The bottom line is that we don’t want to be below 2364 as it would work against a continuation to a new high.
The larger 4th wave (after the top of 3 this week) will come down in three waves. After we finish the A and B waves, we should be able to project an end to the C wave of the 4th wave. Once we finish the fourth wave , we’ll get a final blow-off wave. I’m making a point of not projecting a final date for a top because the volume is so low, the markets are so erratic, and they’re moving so slowly.
Here are the path predictions going forward:
- Wave 4 will come down in 3 waves with any of the corrective patterns possibly in play.
- Wave 5 is likely to be an ending diagonal. In any event, it will be in 5 waves (not motive).
Summary: We’re at the top of wave 3 of the final larger 5 wave pattern, getting close to a turn-down into four with one more very small wave up to a new high. I expect all major US indices to turn this week. The larger wave 4 should come down in 3 waves (an ABC configuration to the target).
After completing the fourth wave, we’ll have one more wave to go, which could be an ending diagonal as a fifth wave. The long awaited bear market is getting closer.
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