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In 1932, the Dow nearly doubled, giving weary investors something of an “all clear” signal – and then plummeted back to Earth again. But what does 1932 have to do with today? More than you think…

Taipan Daily: Caution Warranted by Lessons of 1932




So 2009 is finally over. A new year, full of promise and peril, stretches out ahead. Now what? The Dow Jones Industrial Average (DJIA) – to use a commonly cited barometer – is up roughly 65% (as of this writing) from the ugly depths of the 2009 March lows. Going off that data point alone, it is no real surprise that investors are optimistic. Trouble being, investors had even more cause to be optimistic in 1932, if stock market rallies are the measure du jour.

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In a matter of months, the Dow rocketed a most impressive 94% – almost a clean double – off its 1932 lows. After a stunning, multi-year fall from the heights of 1929, some surely thought that rally to be the “all clear” signal. With the benefit of hindsight, we know that the Great Depression was not over in 1932, however. It was just rolling up its sleeves. And as for the Dow? After its near-doubling in 1932, the next major move was a sickening lurch downward... of almost 37%. What does that mean for 2010, you ask? Are we in for a 1932-style drubbing? Maybe... or maybe not. Or maybe not until later in the year. There are far too many crosscurrents to say with precision exactly what will happen next. One thing we can be sure of is this: It would be crazy to be complacent – to assume that all is sunshine and roses. Market history urges caution, or at least awareness, of what can happen in environments like this one. So, too, does the rotten state of the real economy (versus the chipper state of Wall Street).

Dancing With the Dollar

Long-term resistance levels are another thing to consider. For the past decade, the Dow has struggled mightily with the 11,000 barrier. True, the DJIA was able to smash through in late 2006 and kiss the sky (i.e. 14,000) before falling, Icarus-like, back to Earth. But consider what the dollar was doing during the Dow’s big breakout run. The Dow’s epic sprint to 14K corresponded with a drop in the greenback to multi-decade lows... lows that have not been exceeded since. In other words: The last time the Dow broke free of its erstwhile 11K ceiling, it had a dive-bombing dollar as fuel. When the value of paper fiat currency declines, it’s easier for nominal asset prices (i.e. stock prices) to rise. (This is why Zimbabwe registered stock market gains of tens of thousands of percent in recent years... those gains were recorded in a confetti currency.) Look again at the monthly $USD chart above. See the giant spike in 2008? That was the global financial crisis unfolding in earnest. With the world in panic, investors piled into U.S. Treasuries and money market funds (and thus the dollar) as a last resort. Gold came in second as a safe haven option. For a time, gold and the greenback went up simultaneously. After the spike came the sigh of relief. You can see on the chart how, after going on a rocket-ride in 2008, the dollar slid relentlessly in 2009, funding a new “carry trade” as governments wrote huge stimulus checks and investors piled back into risky assets. And yet, even with all the “dollar goes down forever” talk, the previous lows in the dollar – the ones that helped power the Dow to 14K – were never really tested. Which brings us to our final point of note on the monthly $USD chart... the surge in volume (as circled on the chart). The dollar can no longer be written off as a basket case. It shot up in December. And it did so on major volume. That volume surge gives further indication that the dollar’s recent “trend change” could be the real deal... which further bodes ill, or at least caution, for equities in 2010.

The Mother of All Double Tops

“The Dow is too concentrated in a handful of industrial-type stocks,” some of you might remark. “What about something more representative of the broader economic picture, like the S&P?” It’s not a pretty picture either... With a multi-year perspective, the S&P does not look like such a juggernaut. And really, if we look back to the late ‘90s, the giant “double top” formation makes sense. It was circa 1999 when the tech bubble was really getting in full swing... fueled, investors later realized, by a combination of cheap money (courtesy of Alan “The Maestro” Greenspan), crazy stories and corporate chicanery. The nasty drop from 2000 to 2002 came with the bursting of the bubble and the draining of the swamp, as all kinds of horrid disasters like Enron, WorldCom and Tyco came to light. By 2002 Greenspan had entered full panic mode, convinced that the best thing to do was flood the markets with yet another round of cheap money (taking interest rates down to 1% and leaving them there for over a year). And then, courtesy of the serial bubble-blowers in Washington and all those egging them on, a new housing bubble rose, phoenix-like, from the ashes of the previous debacle. You know how that one turned out. It popped too, giving us the worst ordeal since the Great Depression... and here we are, post-2009, having cheerily applied the exact same medicine that worked so well before.

More Pain, Less Gain

The trouble with the old playbook is that it grows less effective as time goes by. Propping up the market is like propping up a junkie – you have to keep using bigger and bigger doses. Without a detox and a genuine period of healing, the bad old ways are guaranteed to fail at some point. Two other things to keep in mind for 2010 are the state of the real economy and the limits of government largesse. To a certain degree, a “jobless recovery” is an oxymoron. It is the sort of thing that can work on paper – or otherwise encourage hopeful investors for a while – but does not actually exist in the real world. If the 1932 analogy holds, we’ve got a long ways to go. And as for stimulus, there may be no practical limit to the output of a printing press… but there is certainly a limit to what constitutes an acceptable sovereign debt burden. Not just the United States, but Europe and Japan too seem determined to find out – the hard way – just where that limit lies. How to Protect Your Hard-Earned Money… 
And Even Grow It During These Turbulent Times There’s no doubt in my mind that Washington is leaving us high and dry. But no matter how bad the news is from Obama’s White House… how long the recession lasts… or how well your portfolio is performing – you could boost your portfolio’s bottom line with the potential for triple-digit gains… many times over. Learn how in our Free Report, 5 Hot Stocks for 2010. It’s yours free… all you have to do is tell us you want to receive a copy. And as a bonus, we’ll also make sure that you’re receiving Taipan Daily, the free e-letter I write for… the investment e-letter that’s easily the most profitable five minutes of your day. Join Us Today… It’s All Free! Justice Litle is Editorial Director for Taipan Publishing Group and Taipan Daily – a free investing and trading e-letter – as well as the editor of Justice Litle’s Macro Trader. If his name sounds familiar, it’s because Justice is regarded as one of the top trading experts in the world. While pursuing a Ph.D. at Oxford University in England, Justice began his financial adventure that includes researching and investing in trading and commodities. Because of his trading expertise, Justice has been quoted in The Wall Street Journal... written multiple articles for Futures magazine... given regular market commentary to the likes of Reuters and Dow Jones, and contributed to the book Trend Following. In fact, under his guidance, Outstanding Investments, a world-class natural resource newsletter, delivered a top-rated performance two years in a row. You can read more from Justice in Taipan Daily. Simply sign up, and you’ll start receiving Taipan Daily… plus you’ll receive the Free Special Report, 5 Hot Stocks for 2010. Register Now!


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Guest Column Justice Litle -- Bio and Archives

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