No matter what side of government intervention you're on, it's agreed that it has an affect on the market. Whether that effect is a shorter bear market or simply a prolonged slide is debatable. Today's guest blogger is Tony of KhronoStock.com. Tony is going to share what he thinks the similarities between the great depression and the current state of the economy means for the markets. Be sure to comment and let us know what you think.
There are four most important factors that caused the Great Depression during the early part of the 20th century.
1. Stock market crash that went from October of 1929 to summer of 1932. Stocks dropped over 80% during this period.
2. Massive bank failures – regional and community banks failed by the thousands. The remaining banks were reluctant to write any new loans due to the collapsing financial system.
3. Production levels were much higher than consumption levels causing significant economic slowdown. Americans were in fact leveraged and lived beyond their means by buying things and pay them off in installments. As unemployment skyrocketed over 20%, people could not even pay off their existing debt let alone buying new products.
4. American economic protectionism – American trade with Europe was significantly reduced due to policies that were aimed to protect American companies, manufacturing and jobs.
All of these four factors are well established in today’s economic recession.
1. Stock market crash officially kicked off during October of 2008 and has lasted for almost 8 months now.
2. Major financial institutions are on the brink of collapse despite multi-trillion dollar federal bailouts. Regional and community banks are slowing collapsing due to their excessive exposure to commercial real estate loans.
3. Consumer demand continues to fall due to an already leveraged and tapped out American consumer base.
4. The American people are calling once again for protection of American jobs and manufacturing. Return to protectionism is looking very possible.
Perhaps the major difference between the current economic recession and the Great Depression is the unprecedented intervention from the Federal government and the Federal Reserve. However, it is our view that such actions will only prolong the inevitable 2nd Great Depression rather than solving it. Thus, in this unique environment, traditional value based investing must be abandoned and investors should learn how to build an effective long short actively managed portfolio that contains both day trading and effective macro based bets.
It is our opinion that the greatest “inefficiency” in stocks can be found within a prolonged bear market because the market is constantly driven by false hopes and wrong realizations. In addition, when everyone jumps onto the same wagon, there is bound to be massive opposite effect in play. The rally from March till now is a perfect example of what happens when everyone begins to short the market and soon we will see how devastating it is going to be when everyone realizes that perhaps betting that economy is turning around is just another false hope.
Investment Team at KhronoStock.com
KhronoStock.com is an investment site dedicated to macro, long and short equity strategies. Through its subscription service KhronoStock PRO, KhronoStock.com provides investment strategies as well as trade suggestions.