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LAWRIE WILLIAMS: ‘Fake’ equities markets strengthen and gold and silver taken down – again!

The dead cat is bouncing strongly with equities again making a seemingly huge recovery on data which was not as bad as expected, but under normal conditions might still have been seen as disastrous.  It looks to us like 1929 déjà vu all over again – or to use another French phrase plus ça change, plus c'est la même chose.   Investors seem unable to learn from the past, although admittedly the 1929 playbook occurred too long ago to remain in the living memory of almost all today’s equity market investors.  But surely there are lessons to be learned – or at least a reading of stock market history should yet instil a degree of caution.

So what happened in 1929?  The Wall Street Crash happened.  This was the forerunner to the Great Depression of the 1930s. We would argue that a second Great Depression looks to be almost inevitable.

A piece of history from Wikipedia: The Wall Street Crash occurred in September 1929 and ended late in October, when share prices on the New York Stock Exchange collapsed. It was the most devastating stock market crash in the history of the U.S., when taking into consideration the full extent and duration of its after-effects. The crash, which followed the London Stock Exchange's crash of September, signalled the beginning of the Great Depression.

To quote Wikipedia (edited) further: On October 24, 1929 -  "Black Thursday" - the market lost 11 percent of its value at the opening bell on very heavy trading.  On October 28, "Black Monday,” more investors facing margin calls decided to get out of the market, and the slide continued with a then record loss in the Dow for the day of 38.33 points, or 12.82%.  The next day, the panic selling reached its peak with some stocks having no buyers at any price. The Dow lost an additional 30.57 points, or 11.73%, for a total drop of 23% in two days.

After a one-day recovery on October 30, when the Dow regained 28.40 points, or 12.34%, to close at 258.47, the market continued to fall, arriving at an interim bottom on November 13, 1929, with the Dow closing at 198.60. The market then recovered over around five months, starting on November 14, with the Dow gaining 18.59 points to close at 217.28, and reaching a secondary closing peak of 294.07 on April 17, 1930. The Dow then embarked on another, much longer, steady slide from April 1930 to July 8, 1932, when it closed at 41.22, its lowest level of the 20th century, concluding an 89.2% loss for the index in less than three years.

There are so many parallels with today’s market performance it’s uncanny.  This time around the initial Dow crash took the Index down around 30% in March and since then it has fluctuated up and down and has recovered virtually all its March losses by the end of the past week – and may even be poised to move slightly higher.  Yet the Western economies are all hugely depressed and unemployment is at an incredibly high level virtually everywhere despite what some, including President Trump, see as an ‘incredible’ improvement in the latest employment data.  To recap, the U.S. unemployment rate was calculated as having fallen from around 14.7% to a still absolutely unacceptable 13.3%.  And official employment statistics are said to hugely understate the true position.  It should be borne in mind that some economic sectors have collapsed almost in their entirety and many of these will likely take years to recover, if they ever do.  Investors have to be living in cloud cuckoo land to generate market gains in what is in reality a major virus-induced recession or depression.

And, as the Zero Hedge website notes,  with one after another investing legend such as Warren Buffett, Stanley Druckenmiller, David Tepper etc. boycotting what it describes as ‘the artificial rally’, and either selling or pulling out, they have been joined most recently by GMO's Jeremy Grantham who became the latest to bail on what Bank of America recently called a "fake market."  There are many more mega-investors currently keeping out of the markets and poised to pick up bargains as and when they view the inevitable collapse as having bottomed, which may yet be many months away.  That’s how the rich get richer and the poor suckers of individual retail investors who seem to think the equities markets bear no relation to the true state of the economy and will keep on rising, will lose their all!  At the moment these retail investors are dominating the equities markets while wiser heads are steering well clear.

The one major difference, in the U.S, and many other countries, is that this time around central banks, of which the U.S. Fed is perhaps the most profligate, are effectively printing enormous amounts of ‘fake’ money to try and mitigate the downturn for the general public.  But as is the wont with most government handouts this money is not going to those who need it most, but is finding its way into the equities markets.  But how long will it be before this massive ‘confidence trick’ is played out and the reality that the global economic situation is at its worst since the 1930s actually sinks in?

This past week has also seen a major precious metals take-down which has already appeared to have provided an exit point for some major traders who are heavily short gold and silver to allay some of their potential losses which could have made their positions untenable had gold and silver gone on to new interim high levels.  But we think this latest take-down is only postponing the inevitable with precious metals likely to rise into the second half of the year and equities due for the kind of crash the big mega-investors noted above are anticipating.  When markets are driven higher by the day traders of this world, which is what seems to be happening at the moment, the eventual collapse when the realisation at last sinks in as how dire the global economic situation really is, which we see as certain, could be horrendous in its extent. 

Sell equities while you can and buy gold and silver in their place is our strong advice.  Better to get out too early than too late!

07 Jun 2020 | Categories: Gold, Silver

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