I recently read an article that was warning about a repeat of the 1929 Depression. While I believe the author correctly believes that we are approaching the end of a long-term bullish market cycle, his theory is that we will continue to see inflation due to further money printing through quantitative easing (QE).
However, that really evidences a lack of understanding of how QE works. You see, QE is merely a machination through which more debt is made available in the system, which is an indirect manner to increase the money supply. It is not actual printing of dollar bills, which would directly increase the money supply.
Therefore, if more debt is made available, the only way you will get inflation is if there is public demand for that additional supply of debt. Without the matching demand for the additional debt supply, QE becomes a failure. One can actually look at it as the government playing chicken with the public.
As a small example, if we look at the following chart, we see that the government attempted to make debt more readily available during the Covid Crash. Yet, it did not help until the S&P 500 bottomed in the 2200SPX region.
And, of course, many of you will view that chart and claim that it “eventually” worked. However, we should look at this within an appropriate relative context, as the market actually dropped 1300 points (37%) before it finally bottomed, despite all the attempts by the Fed.
Allow me to present you with a similar example of this phenomenon. When my eldest children were 3 and 5 years old, and we were stopped at a traffic light, they would look at the traffic light, and say “now,” as they try to time the light changing back to green. And, if it did not change at their first attempt, they again would yell out “now.” And, this goes on for maybe another 10 to 15 times, depending on how long the light takes to change. Yet, when the light finally changes at one of their “now’s,” they proudly assume that they caught that timing ever so perfectly and caused the light to change colors.
Does this not compare to those who maintain the belief that the Fed “eventually” caused the market to bottom? Eventually, the market turned up just like the traffic light eventually turned color. While we know that the traffic light has an internal mechanism that changes the color of the light at specific intervals, most people do not understand that the market works in somewhat of a similar manner.
You see, before the market even turned down in February of 2020, I was posting public analysis in the 4th quarter of 2019 which was calling for a 30% decline, likely beginning in the 1st quarter of 2020. And, this is before anyone even heard the word Covid. Moreover, I had an ideal target of 2200SPX for that decline, and the market bottomed at 2187, within 13 points of my ideal target set many months before.
Of course, many will dismiss my analysis as me getting lucky with not just the market call for a 30% decline, but in also getting lucky with the call that the market should bottom in the 2200SPX region. And, of course, anyone who has tracked me over the course of my 13+ year career in providing public analysis knows that I am very lucky person many times over. (smile).
It is all simply from understanding that exogenous factors are not as important as many tend to believe. And, as more and more studies are conducted on the stock market, the more and more we understand this truth to be evident. For example, in a paper entitled “Large Financial Crashes,” published in 1997 in Physica A., a publication of the European Physical Society, the authors, within their conclusions, present a nice summation for the overall herding phenomena within financial markets:
“Stock markets are fascinating structures with analogies to what is arguably the most complex dynamical system found in natural sciences, i.e., the human mind. Instead of the usual interpretation of the Efficient Market Hypothesis in which traders extract and incorporate consciously (by their action) all information contained in market prices, we propose that the market as a whole can exhibit an “emergent” behavior not shared by any of its constituents. In other words, we have in mind the process of the emergence of intelligent behavior at a macroscopic scale that individuals at the microscopic scales have no idea of. This process has been discussed in biology for instance in the animal populations such as ant colonies or in connection with the emergence of consciousness.”
And, I think Alan Greenspan also provided the appropriate context to us many years ago when he noted:
“It's only when the markets are perceived to have exhausted themselves on the downside that they turn.”
In other words, when the market runs out of sellers, it finally bottoms and begins to turn up. And, it is not due to any actions of the Fed. In fact, we saw the exact same scenario back in 2008, despite the many failed attempts made by the Fed at that time to end that decline.
So, now that we got that out of the way, I hope it is clear that inflation will only take hold during QE periods if the market has demand for the additional debt supply the Fed is making available. However, if there is no demand for that debt, in other words, if we head into a contractionary period, then we will be facing another period of deflation. And, that is what I am expecting.
Yet, at the same time, I also believe that rates will be moving higher over the long term, which will also likely have a negative impact upon demand for debt. The main reason I believe that many will blame is the world will begin to distrust the United State’s ability to pay its debts. Currently, interest on debt is approximately 13% of the total government budget. As rates rise, the interest on debt payments will increase significantly. And, this will likely result in a snow-ball effect over the coming decades.
This now brings me to my own view as to how the Greater Depression may take shape. In Elliott Wave analysis, Ralph Nelson Eliott provided us with his theory of alternation. Within this perspective, he suggested that waves 2 and 4 (the counter-trend waves) within the 5-wave structure take shape quite differently. For example, if the 2nd wave of a structure takes shape as a strong, straight-down decline, then the 4th wave of the 5-wave structure will take shape as a much more drawn out and up/down structure.
In our case, the 2nd wave of the long-term cycle we are tracking was the market crash which began in 1929 and lasted approximately 3 years, while the market lost almost 89% of its value during those 3 years. And, since the impending bear market that we expect will be a 4th wave of the same degree 5-wave structure, based upon the theory of alternation, this bear market will likely be a long and drawn-out event. In fact, since the 4th wave of one lesser degree was the 2000-2009 bear market (a Fibonacci 8-year bear market), my expectation is that the impending 4th wave bear market will likely last longer than that, with an expectation that it can take a Fibonacci 13-21 years.
Now, whereas the 1929 crash led to one 3-year 89% market crash, I believe we will see many smaller degree crashes during the impending bear market.
So, to summarize my views again, I believe that QE will be “overall” ineffective during the upcoming bear market I expect. Yet, there will be periods during the 13-21 year-long bear market that we will see counter-trend multi-year rallies, which will make many believe that it is actually working. But, it will be relatively short-lived, as it will be followed by a crash when the multi-year corrective rally completes. And, this will likely play over and over throughout the course of the long-term bear market, as the market makes its way lower and lower through the years.
Furthermore, I believe we will be involved in a long-term rising yield environment at the same time. Therefore, I am expecting a long-term rising yield deflationary period to be taking hold of our markets, and destroy a lot of investment accounts as this is not an environment for which people are preparing or within which they have any experience.
And, this brings me full circle to the title of the article. Whereas the Great Depression was the result of one stock market crash and lasted approximately a decade, I believe the upcoming bear market has the potential to last twice as long and cause many crashes along the way.