Stock Inefficiency is best found During Times of Hardship

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 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

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15 thoughts on “Stock Inefficiency is best found During Times of Hardship

  1. Tony,

    In six months time this is going to look like hysteria, but worse still hysteria after the bottom was in place. I think you will live to regret this one!

  2. I am for some of the Government's initiatives, but enough is enough. Did anyone see Dr. Pepper Snapple yesterday? The stock fell hard and fast.

    I will be the first to tell you that I am not that involved in politics. I always thought the job of the President of The United States of America was to run the Country, keep us safe and be involved with foreign affairs.

    Since when does the President have to be on television daily and get involved with everything? The President's office is turning our country into a socialist society and hand cuffing innovation, and in the long run, we will suffer for this.

    I would normally never send an email out like this, but I had enough.

    Did anyone see Dr. Pepper Snapple's stock price today?

    At 3:30 or so DPS (Dr. Pepper Snapple) fell 10%. Why? There was a rumor that the Government needs to raise money for everyone they are bailing out, and they may start to tax sweet drinks. Now whether this will happen or not I have no clue, but the thought of it makes me very angry.

    Some of you are businessmen/woman, when you made a bad mistake did you ever get bailed out? The Government is picking and choosing who to bailout, and who is going to pay for these bailout's? We are, WE ARE !!! I do not want to pay for someone elses mistakes, why should I.

    Is bailing out everyone better? I do not think so. Let's take an example, lets look at Dr. Pepper Snapple. If the Government starts to tax sweet drinks what will happen? Dr. Pepper will make less money, as less people will use their product. When they make less money, they need to lay people off. When they lay people off, unemployment goes up. Those people that are laid off at Dr. Pepper, spend less, default on payments, do not fix their cars up, do not travel, etc. Now the things that those people used to do, and are no longer, starts to affect other people. And so on and so on.

    The point is, if the Government would stop spending tax payer money and let more companies go bankrupt, yes the short run could be ugly, but now the long term will be uglier.

    Stock market corrections, although painful, are healthy. When a company that is not doing well, or makes bad mistakes goes out of business, new companies are born to fill the void. Innovation is born and we benefit from the new vision. If companies do not go out of business, innovation does not take place.

    I am a strong believer that what is going to be is going to be. The economy will get to wherever it is going, and by doing what the Government is doing now, it will just take longer for the economy to bottom out.

    In the end, it is going to be the masses that will be left paying for other people's mistakes, and not the people who made the mistakes.

  3. Hence the best trade out there is short spx and long gold.
    Stocks can rise with inflation (hyper or otherwise) so the gold is a hedge which should outperform in the face of a devaluing fiat currency.
    On the other hand if its deflation, gold will hodl its value as stocks fall.

    The question I cant get to grips with is there is talk about falling USD. I get it and understand it. But I dont get against what it would fall. I thought it was all relative. And lets face it most of the world is mashed. Would you really buy China ccy if you could? All that massaging of their numbers.......Then factor in US as reserve currency.

    Take a simple eg. GBP/USD. UK is even more mashed than US. So you'd expect USD to rise against it. (Fair value alone is 1.45 on it).

    So thats what I dont get what does USD fall against? That is what led me to gold. A real asset (a reserve or store of value even) priced in USD has to rise if you believe USD should devalue. Maybe other commodities to but they are so demand / supply oriented it would be hard to pick the right one.

    1. Hi Ram,

      Because the market will have violent swings, long term short on SPX is probably not a good idea if you are using leveraged instruments. I am not so positive about gold. First, gold is heavily manipulated. Second, there are clear signs that people are dumping gold to exchange for cash needs. The most important concern is that the government can confiscate gold and fix its price.

  4. It's classic overleveraging that caused the bubble in the 1920's that culminated in the crash. Leveraged money was chasing the market higher not real money. As soon as the party stopped the market crashed.
    Thereafter it was classic deleveraging. The banks were tapped out on their equity and so could do nothing but call in loans. This made the deleveraging problem worse because the bubble they helped inflate now had to be deflated. Off course there is then the problem that there were few buyers left - rendering markets illiquid.

    the same has / is happening now. It began in 07. the Banks were fully tapped out. By late summer 07 they knew it ans the rest of the market began to realise it too.
    Our authorities probably knew it, but had to keep confidence high to avert disaster.
    problem with that was it would be fine if the Banks could lend. but they couldn't. So even if investors were still confident back then in 07 they couldnt back their convictions because the Banks couldnt lend to them.
    The Lehamans collapse was just a catalyst. It had to happen (the deleveraging) one way or another.

    Now even if the Banks can lend, the consumer doesnt want to borrow. So growth is stalled regardless.

    Now, in my opinion, is the great debate. Do we do it the inflationary way (1970's) or the deflationary way (1930's).

    1. The answer in my opinion is neither. What we are going to have is a hyperinflationary depression. The hyperinflation is caused by a total loss of confidence in US currency as well as the devaluing of the US treasury causing yields to skyrocket. In many ways, a 1920 style Weimar Germany scenario is not out of the question.

      The bottomline is that in many cases throughout history, ground shaking changes in social values of our society and power shifts between nations all happen after significant economic stress and financial chaos. The reason is simple; it is easier to mobilize people and make them to do something when there is fear, desperation and chaos.

  5. It's definitely a trader's market. Right now, the market is getting once again too complacent with VIX finally below 30. It looks alot like July through early September of last year right now.

  6. The great credit bubble that led to the current worldwide economic slump developed over the course of a decade of massive greed, stupidity and overindulgence at all levels. It is foolish to assume that this situation will resolve itself in such a short time or that the Obama administrations left wing policies have the wisdom or wherewithal to fix matters by throwing additional debt fuel to the raging economic fire. There are still plenty of other shoes to drop. There is considerable deleveraging that still needs to occur before the economy can sustain a healthy recovery. This is a trading market, tread carefully!

  7. Ron,

    We maintain a long/short portfolio that places emphasis on day trading as macro as long term macro bets. I only have limited amount of space with this article. If you seriously want to see some deep analysis, you should consider reading the free articles on our website.

    Also, what do you mean the media is negative?? Everything is telling me the opposite.


  8. Dacian,

    I disagree. The stock market crash of 1929 preceded the Great Depression. The actual "Depression" didn't really take place until early 1930 and it just continued to worsen until the summer of 1932. Also I want to note that during this period, the first bear market rally, stocks actually rallied over 50% from its low before resuming its primary downtrend.

  9. Selective comparables as opposed to a studied analysis of 1929-1932. I have yet to see any significant comparables when 1929 is referenced. Hopefully we can move on from this "current flavour" endlessy repeated almost verbatim in the media.

    Simply, he is SHORT this market and I BELIEVE he is wrong.

  10. We need answers to age old questions such as why did the crash happen.
    But please consider this, would the crash have happened if people did not borrow to finance their excessive lust for money?
    Would this have happened if lenders did not put a hold on their excessive lust for money?
    Market crash and depression are results of actions.
    The crash and resulting depression seems then to have had a cause based on a moral issue.
    Love of or lust for money, riches, wealth.
    All of this is a lack of self control and failure to appreciate more does not always almost never equates with happiness and contentment of life.
    Sadly many just do not learn from these lessons of life.
    The consequenses are very real for the victims of this misunderstanding. Read what the creator says about this and learn.
    1Timothy 6:6,7,8.
    1Timothy 6:9,10.
    Regards to you all.

  11. I just thinks this is wrong; it's not the stock market crash which caused the Depression, is vice-versa. And the Depression came because of credit problems as today.

    1. Dacian,

      I disagree. The Stock Market Crash of 1929 preceded the Great Depression. The actual "depression" didn't happen until early 1930 and it just continued to worsen until the economy bottomed during later part of 1932.

      1. Tony, why did the market crash this time? Because of a recession coming? Or the problems started to pile seriously since 2006 (defaults on payments), summer of 2007 some hedge fund at Bearn Stearns went down and the economy started to destroy jobs? Market really crashed on September-November 2008, so months/years after all these signs were coming from the economy!

        In 29 was the same; it's not because the pain was started to be felt in the 30s that in 28/29 there were no already problems! In the beginning, problems are isolated here and there, but the signs appear before market crashes.

        I know the old adagio with markets anticipating everything, but I don't really believe it; one of the 5 rallies is the good one, and it will definitely precede the recovery. But with the crash is the opposite (the markets don't just crash in the middle of a rising economy, except if unsurprised events happen - ie 9/11 or things like that). Well, at least this is how I see it...

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