Dow Futures Shiver as This Bubble Chart Predicts a Terrifying Crash

My Comments: Make no mistake, I want this economic chaos to end as soon as possible. If there were no attendant pandemic, I’d be all in favor of using rational steps that worked in years past.

You can see and hear the discomfort between those whose focus is the economy and those whose focus is keeping people alive. Another looming threat is the survival of our food supply. Two major food plants in the mid-west have been forced to shut down. What are the odds of more of them going down, along with the farmers whose livelihood comes from supplying those food plants?

It brings to mind my childhood in England during World War II and rationing. It’s one of my earliest memories as my brain went from being two years old to six. Going shopping with my mother with an ever present ration book telling us what we could or could not buy and take home. One memory: a pint of milk and one egg per week per person.

Meanwhile, I discover these comments that add another level of possible pending doom. I’m not enjoying this either, but it is what it is and once again, we have to collectively find our way through this. Stay safe.

by William Ebbs \ 13 APR 2020 \ https://tinyurl.com/y9ntnjwm

The year is 2020. A novel SARS-like disease has spread out of mainland China to infect over 1.8 million people around the world. The United States is the hardest-hit country with over 500,000 infected citizens1,830 of whom have died in the last 24 hours alone.

Experts believe the economy could shrink by a staggering 33.5% in the first quarter as mass lockdowns slow economic activity to a trickle. A collapse in the travel and hospitality sector threatens to create a domino effect of corporate bankruptcies, and unemployment may soon hit 20%.

Meanwhile, the stock market is rising. And if that sounds strange to you, that’s because it is. The stock market now looks identical to the way it looked in the lead up to the great depression. And we may be on the verge of the biggest stock crash the world has ever seen.

The Kindleberger-Minsky Bubble Chart

In 1979, economic historian Charles P. Kindleberger wrote a book titled ” Manias, Panics, and Crashes,” where he outlined the five phases of a financial bubble. Later, Canadian scholar Jean-Paul Rodrigue built on Kindleberger’s findings to develop a more detailed chart of how bubbles tend to unfold.

We are currently at the “return to normal” part of this chart. Research Source: Jean-Paul Rodrigue

Terrifyingly, Rodrique found that after prices reach their all-time high, they collapse into a “bull trap” before “returning to normal” only to resume an even deeper capitulation.

A quick look at the S&P 500’s 12-month performance shows that this pattern is playing out in the U.S markets.

The U.S. market is currently at the “return-to-normal” stage in the bubble chart. Data by Ycharts

A broader look at the S&P 500’s, three-year performance shows that this pattern has been going on for longer than many realize with the “first sell-off” occurring in late 2018 and early 2019.

The first “bull trap” occurred in late 2018 and early 2019. | Source: Data by ycharts.

The bubble seems to have started in 2016 with the election of Donald Trump. But many factors could be at play here, including the Federal Reserve’s historically low-interest rates.

Rates have been held at under 3% for over a decade. And this has allowed companies to use cheap debt to buyback stock. The massive debt loads have also left many companies unprepared for a potential financial catastrophe.

Is This 1929 all Over Again for the Dow?

Today’s chart also shows disturbing similarities with the stock market in 1929, right before the stock market crash that led to the great depression. Then, just like now, stock prices returned to normal for a brief period only to capitulate into one of the worst Dow declines in history.

Stock prices briefly gained-ground only to capitulate into a multi-year long bear market for the Dow. The Dow decline lasted for several years after the initial “crash.” Today’s market seems to be repeating this pattern. Image Source: Business Insider

Will America see the widespread poverty and economic devastation that it experienced during the Great Depression? Some economists believe we might already be there — it just hasn’t hit home yet.

According to David Blanchflower, an economics professor at Dartmouth College, unemployment numbers in the United States and Europe suggest the West faces its most significant economic catastrophe since 1929.

Between 1929 and 1933, the U.S unemployment rate rose from 3.2% to 24.9%, with the number of unemployed Americans soaring from 1.6 million to 12.8 million. Now, U.S jobless claims have already exceeded 16 million in just three weeks, and the crisis is just beginning. When it is all said and done, many experts believe the U.S unemployment rate will exceed the 25% record set in the Great Depression.

What is the Difference Between a Depression and a Recession?

Recessions are periods of economic decline that last or at least two quarters while depressions are economic declines that last for years. With the global economy on lockdown for most of the first quarter, a recession is almost guaranteed.

But it will take an unexpected and devastating economic shock to tip the economy into a full-blown depression — a stock market crash may be the trigger.

7 thoughts on “Dow Futures Shiver as This Bubble Chart Predicts a Terrifying Crash

  1. Tony B

    Dear lord…..I’m glad there are no sharp objects nearby. The problem is….we weren’t in a bubble economy prior to the self-inflicted scuttling of the economy…..this is quite different from 1929….just because the clouds are shaped like duckies like they were in 1929…….
    All this global devastation to the economy is known….i’m not saying surprises won’t happen, and at least a retest of the lows is reasonable…..but we’re talking two years rather than ten for recovery……

  2. I hope you’re right. But hoping is not going to help anyone if it turns out badly. No one, especially me, says we had a bubble economy. You’re missing the point that the economy and the stock market are one and the same. Sure, there is a correlation, but the markets almost always anticipate a bad economy. There is one fundamental driver of stock prices: earnings, earnings, earnings. If more people think they’re going down in the next X months, absent some other force, such as free money from the 2017 tax bill, anticipation says the market will decline. Same the other way round. Once we’ve seen the economy decline, at some point there evolves a collective sentiment that earnings will once again drive prices. Right now we’re a long way away from that.

  3. Tony B

    The thing about the 2017 tax bill….it wasn’t “free money”. It was businesses and individuals getting to KEEP the more of what they earned….that’s what a tax cut is. With that extra money, THEY determined how to deploy it more efficiently, and that was very good for the economy. Thankfully, we have someone in the White House who completely understands this. I doubt anyone in Washington had read Jim Grant’s book “The Forgotten Depression”…but I hope they do soon. The economy was hitting on all cylinders, and we had to scuttle the ship.
    The one thing I don’t think the market is pricing in….the EU can not survive this….it was destined to fail anyway….this is the final nail.

  4. I hope you’re wise enough to realize that so called tax-cut put billions of dollars into the hands of corporate pockets which they used extensively to buy back corporate stock. That artificial pressure to buy drove prices up beyond what was justified by earnings. ie earnings improved but not enough to justify higher stock prices. There had to be another explanation and it was the free money they had. Huge international corporations, generating billions of dollars of profit, are now paying no income taxes. That leaves the burden of paying for things on you and me.

  5. Tony B

    Well, for someone who portends to understand the economy, you are way off.
    1) They got to KEEP money THEY earned.
    2) The money used for stock buybacks? That’s a tax efficient dividend to shareholders.
    3) The money used to buy back stock went directly out into the economy….into the hands of people who SOLD it to them, because the people who SOLD it to them had a more efficient use for it.
    4) This generates business, which generates tax revenue.
    No wonder you’re a lefty….a skinny chef!

  6. Well, I’m becoming convinced my exchanges with you are a waste of time. You clearly have an agenda and I have no intention of playing your game. I received my undergraduate degree in economics and finance almost 60 years ago. I’ve operated on the cutting edge of advanced understanding of the dynamics of economics, finance and retirement since then. For you to tell me I don’t understand the economy is pathetic. I’ll not insult your intelligence to make a point, which you seem happy to do.

  7. Tony B

    Well, I noticed you didn’t disagree with my facts…..they are not a waste of time, I am challenging you to back up your opinions.

    These are not opinions:
    1) They got to KEEP money THEY earned.
    2) The money used for stock buybacks? That’s a tax efficient dividend to shareholders.
    3) The money used to buy back stock went directly out into the economy….into the hands of people who SOLD it to them, because the people who SOLD it to them had a more efficient use for it.
    4) This generates business, which generates tax revenue.

    Certainly for a cutting edge economist, you can brush them aside as Mike Tyson would handle a 3 year old?

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