The 1937 Analogy is at the Top

The WSJ ran an update to its July piece on the 1937 analogy. The chart shows we would be at the secondary top before the big drop if the analogy holds:

The 1937 has been the most robust of all these historical analogies, and was pushed by EWI as far back as March 2009 when they noticed that the end of the big drop in 2008 and beginning of the Hope Rally was a fractal with a similar bounce in 1937. 

Like all analogies, they are curiosities unless backed by similar causal factors.  Pattern recognition without causation is not predictive. The original WSJ piece, which I discuss in 1937 all Over Again, pointed to a number of similarities, including the potential double-dip. Those similarities still obtain, and the new piece adds two more:

• Smoot-Hawley redux, the bubbling rise of protectionism, especially due to the brewing Currency Wars; supporting this fear is a lead story in today's WSJ, Americans Sour on Free Trade
• Taxes, the coming expiration of the Bush tax cuts that political maneuvering has left alive, which the piece estimates will reduce GDP in 2011 by -2.3%

Comments

[Anikitos]

Every bear is expecting this.. So, its not going to happen. But then every bull is expecting bear to expect this, hence it might happen. I hate this mind frak.

[Alison]

Yelnik,"Pattern recognition without causation is not predictive." Thank you!! Of course then again systems as complicated as the global market lends itself to crazy emergent properties (something like the global ecosystem or te human mind), so hang on tight. That means if you have any hope of understaning what is going on you need to look at how things are different from 1937 too, like globalization and other major changes to our economic system that are supposed to prevent repeats of 1937. I am liking the Elliot wave tool and your toolkit more all the time. I took everything out of the market at the end of the month for two reasons: your discussions, and the fact my Gov TSP only allows me to do two transactions per month, with an added opportunity to move everything into the G fund (safe, low interest rate) as a third move if I get worried. I figured if stocks looked good at the beginning of the month I'd jump back in, if not I kept more options open for teh rst of the month. Speaking of the TSP, Someone in one of our retirement seminars once told me that the TSP is actually an influential force in the market because all Gov employees have it; in particular there is a spike of activity when the investment goes in (bi-weekly, next should be around Oct 26), regardless if the participants are personally managing it (like me) or not. Not sure if that is relevent Too busy myself right now to do much more analysis, but I'm wondering what your thoughts are on differences between today's market forces and 1937 that might come into play, and if you have any thoughts on the TSP playing a role in the US stock market? Thanks

[Alison]

BTW, I have to say, for someone who seems to be putting so much weight on correlation (yes, you are talking causation, but still in terms of historical correlates), you don't seem to make the same big-picture connection with regard climate change and correlation with greenhouse gas emissions etc. Had to poke you on that dude. At least climate system behavior isn't largely driven by another unpredictable complex system (human minds, and even if scientists are only human, they are supposed to be the least biased ones), so it seems like climate science should be more believable than stock market science. The FUTURE climate system/predictions IS influenced by human minds IF you believe in anthropogenic influence (and the climate can influence the market, wild ride ahead baby), but the past is not. Many parallels, one important difference. I'm not so great when it comes to connecting the dots for others, and don't have time for a lengthy explanation, so if that doesn't make sense, feel free to say so and ignore it. Cheers

[Chuang Tzu]

Check out Bill McLarens 1975-1976 analogy....1975-1976 also fits with the Neely view.

[yelnick]

Alison, I hope you looked much farther afield than my little blog to make a decision! I try to report on the ewave positions, and do not due the deeper analyses they do to arrive at their opinions. So please be careful. 

Good news for you may be that the pundits are in momentary alignment: Prechter thinks are topping today or tomorrow; Neely thinks we have a deep correction starting imminently (although not to now lows, nor even below the July level at 1011). 

I think the 1937 period provides reasonable guidance to what we are going through, although it is not perfect and we should not expect a precise match to a 1937-8 market pattern. The three biggest differences are: 
we are not seeing the world prepare for war, as was becoming clear in 1938; we are prepared to engage in more aggressive monetary policies such as QE2; and we are not suffering the traumatic after-effects of WWI, which shattered European civilization and led to much darker policies between countries. 

Instead, US leadership has driven to make markets much freer and to encourage globalization of a sort we had in in the 1880 - 1910 period but not between 1920 -1950. This should give us all hope that we can work our way out of the current problems without suffering a global depression followed by a global war.

The problem we still face is the massive overhang of debt, much of it not capable of being paid off or even worked off. Some sort of debt write-down is inevitable. We have shoved massive liquidity into the system to postpone that reckoning. We have tried to build a bridge over the chasm of the debt-deflation spiral we saw in the 1930-33 period. We seem poised to launch QE2 to double down on that policy. The longer we postpone, the worse the eventual problem will be. I do not think we can build that bridge; instead it is a pier that drops us into the chasm when we stop trying. 

Stocks can continue to rise under QE2 for two reasons: the excess liquidity goes into asset inflation, not monetary inflation; and the Dollar will likely drop faster than other currencies, making the Dow cheaper in foreign currency terms. 

Dos TSP have an impact? Indeed yes! The interesting question is where the pension managers put the money. I don't specifically know how they are investing, but in general the public pension managers have stretched for yield. CalPERS got into deep trouble by over-investing in real estate to stretch for yield. I read that across the board the State plans are stretching, going into High Yield bonds for example. This adds to the speculative asset inflation, and spills over into stocks. 

To put simple: QE2 causes commodities, stocks and bonds to rise, and the drop in rates from fixed income causes pensions to stretch for higher yield elsewhere, diving into more speculative instruments. When QE2 ends and this asset inflation reverses, there will be hell to pay. 

[Dsquare]

Of course with climategate, anthropogenic global warming is man made.

If We Had Some Global Warming
http://www.youtube.com/watch?v=qJUFTm6cJXM

Hide the Decline
http://www.youtube.com/watch?v=WMqc7PCJ-nc

[Alison]

Hmm. Saw your Hitler note after I wrote that first comment, so I see you did note one difference. Took a break from reading cuz my funds were locked for a few days. Nice, anything else? Seems to me our economic woes started with 9/11 (fear factor drop that popped a bubble then we recovered from, but contributed to the housing bubble we are still struggling with when investors looked for a safer market). 9/11 fear is analagous to Hitler's invasion (but worse, because WE were attacked), then Pearl Harbor actually pulled us OUT of the market hole (analagous to our invasion of Afghanistan and Iraq?). The great depression only ended with our entry into WWII, but the "great recession" started after we dove in to the "war on terrorism." Food for thought- but no time, no claim to know what I'm talking about. ;-) Gotta go.

[yelnick]

Alison, I used to believe in GW, but became skeptical when satellites and the ARGO sea temperature readings showed a cooling trend and yet the small cabal at the center of the US and British global temperature reports continued to show temperatures rising. As it turned out with ClimateGate and the Mann Hockey Stick, a small group at the center of GW has been manipulating both the peer review process and the surface temperature record.

The science of GW is not established, and since ClimateGate more peer reviewed articles have come out showing that the core premises of run-away GW are unsound.

This doesn't mean that human activity doesn't affect global climate, nor does it mean that the world isn't warming up. It just means he scare-mongering is overblown.

Climate is a classic example of a nonlinear chaotic system which is extremely hard to predict. We can see a longer temperature wave since 1850, when we came out of the Little Ice Age, that has a slope of 0.6C degrees per century, and rolls up and down over a 60 year cycle that seems to be driven by oceans. It so happens that we had a minimum in 1910 (bottom of the 60-yr cycle), a maximum in 1940 when US temperatures were warmer than today, a bottom in 1970 when Global Cooling was the rage, and a maximum in 2000 (top of the cycle), so the overall increase in the last century looks like 1.2C degrees. But we are now in the down side of the 60 yr cycle, and in 2090 it will be at a minimum again, which means if nothing changes, the temperature in 2090 globally will be the same as 2000.

The 60 year cycle also means we will be cooling from now until 2030.

Neither a cool2030 nor a cool 2090 means the 0.6C degree per century warming has ended, but it seems to me difficult to imagine that political forces can keep GW alive for the next 20 years in the face of a temperature decline that is already visible in the non-manipulated readings.

Will human CO2 change this? Looks very unlikely. CO2 is such a trace gas it has little impact on warming by itself. A double in CO2 is only expected to produce perhaps a 1 - 2C degrees of warming, and at the current rate of 2 ppm/yr increase (net of absorption) we would need 200 years to double CO2 levels. It is not going to matter much at all between now and 2030.

The climate models all assume that more CO2 gets amplified by other factors, most likely increased humidity. Water vapor (humidity) absorbs much more IR than CO2. The new peer-reviewed papers that have escaped the attempts by the ClimateGate folk to suppress show convincing evidence that increased CO2 is NOT increasing humidity; in fact the opposite. This means that more CO2 does not lead to runaway warming, but the climate system has negative feedback loops which keep global temperature relatively constant.

All this means that the Planet is much better at controlling global temperatures that our models suggest. There is more to heaven and earth than dreamed up in our science, Alison.

[yelnick]

Chuang Tzu, to build on your point, the STU is also showing a fractal back to the 1974-75 period, but it shows a deep drop dead ahead.

[Dsquare]

If silver is in a long term 4th wave triangle, b of E has hit the B-D line and should now reverse hard. http://www.mexicomike.ca/php/phpBB2/viewtopic.php?t=13597

[yelnick]

Alison, you are raising interesting points. 9/11 does have parallels to Pearl Harbor. The bubble had burst before it, and stocks rallied very strongly after - almost getting back to the 2000 top! I think our reaction to both 9/11 (war) and the bubble (easy credit) sparked the Housing Bubble and all of its consequences. Talk about over-reaction ...

[Dsquare]

"All this means that the Planet is much better at controlling global temperatures that our models suggest. There is more to heaven and earth than dreamed up in our science, Alison."

Amen. That the EPA can call CO2 toxic is scandelous. Like their saying the 9/11 air is fit to breath (meanwhile first responders are now dying). They (the EPA) definately have a political agenda.

[Dsquare]

Now how do I get out of this italic mode?

[Dsquare]

"9/11 does have parallels to Pearl Harbor"

Doesn't it?, Gore Vidal recommends A New Pearl Harbor: http://www.youtube.com/watch?v=iF4wmDwVLkc

[yelnick]

D2, use "/i" in a post to kill the "i" command .. you ended "anthropogenic" with another "i" instead of "/i". I corrected it. And then had to correct this comment!

BTW your first comment was a great pun!

[K.D.]

Bulls rule.
Remember Mr. P. and the go 200% short 13 months ago?
What did that buy you?

[dogismyth]

"Instead, US leadership has driven to make markets much freer and to encourage globalization of a sort we had in in the 1880 - 1910 period but not between 1920 -1950. This should give us all hope that we can work our way out of the current problems without suffering a global depression followed by a global war."

Huh? Is this the Yelnick site? Are you serious or did we catch you right after the 3 martini lunch?

[yelnick]

dogismyth - I have been fairly steady in that I do not expect P3 down but a rolling style correction into 2016 or so. Call it a muddle through. But I do expect a double-dip. The open question is whether policy mistakes will make this much worse than it needs to be. The longer we hold onto ZIRP and the more we do QE the more we crush the middle class. ZIRP destroys capital formation, squeezing out middle class jobs and ruining middle class retirement. The sooner we reverse course the better, but people in power are loathe to take the pain. so they kick the can down the road.

[Alison]

Wow, thanks for the extended replies. Also forgot to thank you for the Evil Speculator tip earlier. like that! I do look at more than your blog, but I always consider it, and I have to go by my gut when I'm short on time (which sometimes means listening to you). That hasn't always worked for me, but don't worry, I don't blame you if it fails. That's why you are called "Yelnick," right?

Also appreciate the thoughtful replies on climate. Ha ha. "Climate is a classic example of a nonlinear chaotic system which is extremely hard to predict," hear you! There is WAY "more to heaven and earth than dreamed up in our science," couldn't agree more!! So is climate science less of a mind f**k than market science?? Really? Anikitos may not think so. That was my point, anyone who belives studying the markets is not a waste of time should feel even better about climate studies. But I'm not defending that thesis, more of a thought.

[yelnick]

Alison, your latest comment gives me great relief! I am glad you get the reason for "yelnick." Applies even more to climate science, since we cannot even predict weather a few days out, and every climate model has constantly over-predicted actual warming. The difference in the two systems comes down to this:
the markets give very accurate feedback based on money, something people hold dearthe climate readings are quite inaccurate and easy to manipulate; what is a 'global temperature' anyway?

On the last point, a satellite senor went haywire and gave readings this summer of 650 degrees in the Great Lakes. The climate database used that to find an average temperature in the upper midwest! Nuts. They claim 2010 as one of the warmest years ever based on a absolutely huge 4 degree higher reading above 80 degrees north (ie the Arctic) than last year, but they have no thermometers up there! No one knows where they got their readings from. The Nordic countries maintain thermometers above 80N degrees but the US does not use them in their global temperature database. The Nordic readings say it was an unusually cold summer up north, at least in the lower half of all summers since 1980. 

I would prefer to focus on stock markets, despite plunge protection teams and other manipulators. 

[Roger D.]

The financials look to be rolling over here. The REIT's are saying the end is near along with AXP and MA. Some serious downside is possible especially if the Euro has made top. The bears are hoping and the bulls need to be watching.

Roger D.

[Zendo]

Yelnick, don't forget about the sunspot activities is also extremely low. That's another cycle for your prediction.

[Alison]

OK, we can leave climate behind for now. Don't confuse climate with weather though. Weather is like daily changes in the S&P, climate is like a couple of years worth of trend. Like, you would never use the bond yield curve to try and figure out what tomorrow's trading will look like (I wouldn't), and you wouldn't use climate models to predict the weather. We will have to agree to disagree on climate. The thing about complex scientific theories is they are never perfect, and constantly refined, but usually never completely wrong. Anyone arguing to "disprove" an entire theory like human influence on climate is hacking at trees to destroy a forest. Don't forget one of the major predictions is increased severity and frequency of extreme storm events- hows about those tornadoes in NYC? Ha now I'm breaking my own rule, that's weather. Seriously though, if you have any citations on the peer reviewed literature that contradicts warming I could use those refs (playing catch-up by about 10 months)!! Please?

[yelnick]

Alison, agree on weather vs climate. the GW crowd oops Climate Change crowd oops Global Climate Disruption crowd constantly point to random weather events as "proving" their theory, which simply proves that in the hands of its loudest proponents it looks more like a pseudo science than a real science. This is not to impugn the many serious climate scientists doing good work, but they are being let down by their leadership. Cooling is Warming! Give me a break.

You can find a bunch of cites over in my other blog at:

http://yelnick.typepad.com/politick/global_warming/

I used to highlight Global Warming as a topic of interest in my menu bar, but took it down as the issue is really done. The "peak" in GW was several years ago. Now Gore is no longer playing in major cities; soon he will be a tired act in Vegas. Gore in sequins! He gets mocked and booed when he speaks today.

Just a few days ago, the climate leadership screwed up again with the incredibly tasteless 'exploding student' ad. Sometimes I wonder if these people are simply delusional, like Nancy Pelosi arguing that we will like Obamacare once we know what is in the bill. She must have really believed that, and it shows how totally out of touch she is.

[Alison]

K thanks. Gore in Vegas. Ha. probably more like a videoconferencing speaker for institutions like National University online (apologies to any alums).

I can tell you what happened to the "climate crowd." Many serious climate scientists doing good work in the early 90's (the original climate crowd) became severly disillusioned with the undermining of their work, with the double standard of those who were SO politically and commercially biased attacking them, but still holding them to an unbiased standard. For example, selective funding of research, false "grass roots" organizations like Greening Earth, etc. I was involved in CO2 research during the 90s (not the climate angle, but still exposed to it) and I saw what was happening. like tobacco reserach all over again. Scientists are only human, and they were very concerned for the earth and humanity, so many decided to fight back by stepping out of the Ivory Tower. Hence the rise of UCS etc. Note UCS now accepts anybody and required dues for membership. That's why I am no longer a member. The science got diluted and the appearance, and maybe the reality in some cases, of impartiality was lost. Scientists are only human, and they can only get attacked unfairly for so long- especially with what started happening with science under Bush (if you doubt that, check out what happened with Julie MacDonald and the FWS), before they start losing it. We made this mess, it was hard enough to interpret climate science before every clown and his dog jumped into the fray arguing one side or the other. You can't just blame the scientists. Curse you PETA! Curse you whatever that San Diego weatherman's name is. aaaaahh- OK. I'm done. Thanks again.

[yelnick]

alison, like your perspective on climate science. It got corrupted by politics & money. And then Bush didn't help by overlaying a "faith
perspective and goig after stem-cell research. I would prefer scientists to do science. It is naive to expect them to be outside the ebb and flow of politics, but the overt politicization has been a huge disaster (from both ends of the political spectrum). This leads me to believe that we need to pull-the-plug on all the direct and indirect politicized govt funding of science. How to do this is unclear since it is pervasive and largely hidden.