Bear-Market Interruptus, But I Do Not Know When

 Well, they finally did it! Last week the bulls took the DJIA up to, and then closed above its 20K line Wednesday, Thursday and Friday. Bravo Zulu to our horned brethren in the market. But we shouldn’t be shocked at seeing the Dow Jones closing over 20K. Since March 2009 in the chart below, the Dow Jones has only seen three periods where it made new 52Wk lows or came near to making one:

No doubt about it; for the past 8 years the bulls have been the trend setters in the stock market in the chart below.

 Should we be surprised? Not if you’re aware of the efforts Washington and Wall Street have gone to, to make all this happen since 9 March 2009. Then, after the November elections, strange things began happening yet one more time. Before the November election, seeing 75 million shares traded for the thirty Dow companies was a very typical day. Then beginning in the first days of December, daily volume has consistently been in the hundreds of millions of shares for weeks now. Exactly where this post-election demand is coming from is a mystery to me. But I doubt retail and institutional investment demand is responsible for most of it. No matter; this doesn’t change my opinion on the stock market. I see a day coming when everyone will look back at late winter 2017 and agree that financial markets were seeing the last good days of a gigantic-mega bubble being inflated on Wall Street by the Federal Reserve. The market from here may go higher. But after it crests comes the deluge. It’s not hard identifying an inflationary bubble blown into the stock market. The difficulty comes in believing it’s not real during the inflationary phase; the period when prices seem only to go up. But all bubbles must deflate, and deflation makes everyone a believer in the uncertainties of life. I like the chart below. Today in January 2017, who can look at the insert for 1900-36 and fail to see the Roaring 1920s bull market was a bubble? Is there any doubt that one day in the mid-1920s, “liquidity” from the then newly created Federal Reserve began flooding into the stock market? From 1900 to 1924, seeing the Dow Jones at 100 told people they were at a market top. Four years later, everyone knew 200 on the Dow was a buy. Who in January 2017 can see the crash following 1929 as anything but expected? Look at the Dow Jones’ July 1932 bottom: 41.22. Mr. Bear clawed back everything the Dow had gained since October 1904; ouch!

But today’s market has few similarities with that of the 1920s. One thing distinguishing the 1920s from today’s market is that the stock market bubble of the 1920s saw only five years of inflation before it began to deflate. Our bubble began inflating four decades ago in 1982. Another is that the Roaring 1920s saw only one peak. That should have been true with the Dow Jones after it peaked in January 2000. But in the aftermath of the 1990s’ high-tech boom (Boom #1 above) Alan Greenspan began practicing what I call “bear-market interruptus”. He and his fellow “policy makers” began inflating an even larger bubble in single-family homes via the government regulated mortgage market; what could go wrong with that? At the time apparently nothing. People were once again getting rich not only in the stock market, but also making the big money in leveraged (no money down) real-estate transactions. Real estate brokers had people lining up around the block to get quarter million dollar mortgages for quick flips in the housing market. A decade ago, in response to unsolicited telemarketer offers for second mortgages to home owners, Congress initiated a no call list to telemarketers. For what seemed like years, I remember getting four to five calls a night from financial companies offering me a second mortgage. I’m sure I wasn’t the only person being pestered by these pesky pushers of cheap credit flowing from the Federal Reserve. So much “liquidity” was slushing around the economy that the Dow Jones experienced its second inflationary boom (Boom #2 chart above). We now all know how that worked out. As the inflationary boom in the real estate market began to deflate, the Dow Jones experienced its second deepest bear market bottom since 1885 as the global financial system ceased up, threatening global commerce with universal bankruptcy. Well that Doctor Bernanke (Fed Chairman) used to teach economics at Princeton. Would they let a blithering idiot do something like that? Of course not! And that Doctor Bernanke was the man with the plan. Taking “bear-market interruptus” to a whole new level, the doctor began “injecting liquidity” into the markets with an enema bag. It wasn’t pretty, but it worked. At its credit crisis bear market bottom in March 2009, the Dow Jones saw record trading volume – unheard of! But the chart below tells the tale. It was in March 2009 that the Federal Reserve “injected” a record 190 billion dollars into the banking system, a massive “injection of liquidity” that ultimately were followed by many others in the years that followed. With “monetary policy” such as this, should we be surprised to see Boom #3 in the Dow Jones chart above?