2009 and 1930 are a match

General theory:

Both are credit collapse depressions and not typical inventory/business cycle recessions. The fault lies in the build-up of the bubble itself. No subsequent effort can prevent the collapse after the bubble gets going, but various efforts can propel the bubble longer and/or higher and make the subsequent collapse even more catastrophic. Examples...the 1920's was a bubble that last for about a 5 year period and was set to end in early 1929. There was a bit of a panic in the bond market in early 1929. The Federal Reserve responded by juicing the market, and the Super Bubble of Summer 1929 followed. The collapse could not be prevented, but Federal Reserve policy made the bubble worse.

Our bubble, believe it or not, did not start in 2003. It started in 1982. The 1980's and 1990s were the larger equivalent of 1924-1929. The markets started going parabolic as early as the mid-1980's. The bubble tried to burst itself several times (Crash of '87, S&L Crisis 1990, Nikkei Crash 1990, Asian Crisis in late 1990's, Long Term Capital 1998) but the government was always there to bailout the system, continuously adding to moral hazard that started in the 1980s and has lasted for more than 2 decades now. We then had the recession in the early 2000's that was the equivalent of early 1929. The Federal Reserve and the U.S. Government then intentionally created the housing bubble as a means of staving off the inevitable collapse, but only made the situation far worse, creating the Super Bubble of the 2000's.

The point I'm trying to make is that the collapse cannot be prevented. It is inevitable from the time the bubble was created in the first place. It is revisionist history and completely false to suggest that easier monetary policy can prevent a deflationary collapse. I have looked through the Wall St. Journal reports of 1930. They show that, contrary to popular belief, the Federal Reseve's monetary policy was extremely lax in 1930 and the big banks all had more than enough excess reserves even as the rally ended and the markets broke to new lows. The banking system was so oversupplied with money that Wall St. banks could not buy up securities and U.S. Treasuries fast enough. Yet the market continued to decline.

Why? Because the shadow banking system disappeared. The 1930 rally was only a technical one, and after the top, the declines continued relentlessly. Sound familiar?

Technical Analysis:

A-wave breakdown came in Sept-Nov 1929 and Oct 2007 - March 2009:

Wave 1 of 3 marked the decline from the top to a mini-panic and in both markets can be labeled as an ABC move. The selling continued to the "orgy of speculation" diplomatic cris during the first week of October 1929 and the Bear Stearns bailout in March 2008. Both times, the government had to step in and calm markets to prevent a total crash. A 50% retrace followed these short term bottoms. Memorable in the Bear Stearns case because it was thought by some that it would be the lone casualty in the credit crunch and that the bailout gave implicit government backing to all financial firms and hence an end to the recession.

Wave 2 of 3 saw the selling resume (again it can be labeled as an ABC move) to panic levels. This is the crash wave. In both instances it started with an "insider's crash" mid/late October 1929 and Summer 2008. A bailout followed both times. In October 1929 the heads of the Wall St. banks and the President of the NYSE personally went onto the floor, pooled together the equivalent of billions of dollars in today's money, and bought up stocks at overpriced value to end a crash. We too were beginning our crash in June and July 2008 when the government started to intervene with bailouts (and hinted at future bailouts) of IndyMac, Fannie and Freddie, Lehman, AIG, Wachovia, Washington Mutual, and others.

In both 1929 and 2008, a crash followed despite the bailout efforts. In 1929 the following week saw the Crash of '29 and despite our bailouts we still witnessed the Crash of 2008. It's important to note that it is a fallacy to suggest the Crash only occurred because Lehman was allowed to fail. Sure, the govt. could have stepped in and saved them if they had wanted to. But then it might have been AIG or GS or Merrill Lynch or any other number of banks that might have been the one. Even if all of them had been bailed out, it would have either been the failure of one on a cash flow basis or eventually the failure of U.S. bonds. At some point, the crash would have occurred no matter what.

After another correction, Wave 3 of 3 (ABC) was capitulation selling in November 1929 and February-March 2009. This was public panic only as the banks and government intentionally drove down prices. If you remember Geithner's speech last February where he essentially announced he had no plan...it was on purpose. If you remember Dodd and others going on talk shows and talking about bank nationalizations and then bank stocks collapsing...it was on purpose. The goal was to intentionally drive down stock prices in order for the banks to buy them up cheap and sell back at a profit. A recapitalization via the public. Both in November 1929 and February-March 2009 the declines went from what would eventually be the 23.6% fibonacci level to the 1929 and March 2009 lows.

It can be confirmed that the drop in share prices last winter was intentional because it is marked by the head of an inverse head and shoulders formation.

Corrective B Wave:

Wave 1 of 3 (ABC) was marked by an aborted head and shoulders formation in both markets. Both markets quickly rallied off the lows back to the 23.6% fibo retrace level, erasing in the intentional drops that preceded. These rallies marked the left shoulder. At that point, massive recapitalization occurred, especially for the banks. Nobody envisioned the kind of rally we've had, the only goal was to get money as quickly as possible and there was massive secondary issuance in May and June. Not so coincidentally corresponding with the Stress Tests, and a similar move happened in late 1929 as banks and businesses recapitalized themselves expecting large losses in 1930.

A correction then put in the right shoulder on the aborted head and shoulders formations in both markets. Both times, the neckline was roughly the 23.6% fibonacci retrace level. Neither time did the market break down, instead explosive earnings rallies followed in January 1930 and July 2009.

Wave 2 of 3 (ABC) is characterized by an explosive earnings based rally that took the market from the 23.6% to the 38.2% fibonacci retrace level in January 1930 and Summer 2009. The explosive rallies were both surprising yet welcomed by the markets, and it is at exactly this point in time that capital market stress began to dissipate considerably. This wave completed when the 38.2% fibo resistance was turned into support.

A correction occurred both times with one last dip down to the 38.2% fibo support. The important thing to note is that the explosive earnings rallies and corrections really formed the left shoulder on a MUCH more massive head and shoulders formation. Left shoulders are bubbles, and the ones formed in early 1930 and Summer 2009 were both the result of easy Fed monetary policy.

Wave 3 of 3 (ABC) puts in the head on the MUCH more massive head and shoulders formation. It is a distribution rally from the 38.2% to the 50% fibonacci retrace levels. This happened in March-April 1930 and started for us in October, with a dip ending in early November, and the last rally to the top since then. In April 1930 the market moved above the 50% resistance but without impetous and the move failed. I am forecasting that the same is occuring for us right now.