Political history repeats, but will the markets follow suit?

Fibonacci Forecaster

Stock index chart, technical analysis Stock index chart, technical analysis

se·ques·ter /sɪˈkwɛstər/ [si-kwes-ter]
1. to remove or withdraw into solitude or retirement; seclude. Ok, so we are sending thousands of workers into solitude? No, we are sending them to early retirement?

Quite frankly, I’m not sure we are doing. I can only hope that like many of you, Congress and the President figure this out in time because if they go through with this band aid of an economic plan to save the country, I think their only accomplishments will be unintended consequences. Instead of joining this debate, I do what I always do. I look back on history. The history for this sort of thing isn’t very promising. Once upon a time a very popular President who had his share of critics caved into political pressure and allowed the opposition to get the upper hand. The man was FDR, the economics was Keynesian and the opposition party demanded a balanced budget.

It shouldn’t surprise any of you that opposition party was the Herbert Hoover budget hawks. See, it was Herbert Hoover who told us back in early 1930 in the dark days after the market crashed the business community would gain a large measure of confidence if somehow they balanced the budget. Yes, that was Hoover’s answer to the stock market crash of 1929. Then he told us in the spring of 1930 while the market was in a monumental bear market rally that “Happy Days Were Here Again.” That led to what is still considered the worst stock market in the history of recorded civilization.

Okay, so Roosevelt comes along and enacts the New Deal. Say what you want about the New Deal. People loved Roosevelt, but many also hated him. There are many who say that Keynesian economics never worked. Anyone can skew the results by form fitting the stats. But here’s what I know. The stock market rallied up from 1932-37. Millions of people went back to work. The nation built the foundation to the modern infrastructure during that era. They did more to help the country compared to the period after the Internet crash and certainly since 2009 where banks have not repented and part of the political establishment believes the solution to our problems is more of the same. Nobody seems to remember the amount of regulation in the New Deal, yet this generation stubbornly refuses to acknowledge the obvious. Everyone needs to work together to reform the entire system, build a new tax code along with setting a vision of how America can regain its form in the 21st century. We should not be thinking of laying off teachers. We should not be thinking about longer lines at airport security check points. What do they want, have nobody on the planes? Remember the mantra post September 11? I went on a business trip and there was a placard in the airport that said “Thanks for Traveling.” I remember thinking how pathetic it all was.

I digress, but to win the 1936 election, Roosevelt put the brakes on the New Deal prematurely because he listened to the very same Hooverites who stood by and watched while Rome burned in 1930. The country ended up in Great Depression II. So at the end of the day, it’s disingenuous for Keynesian detractors to say it’s a failed policy because it was working when enacted but they pulled the plug prematurely.

So what does that have to do with now? EVERYTHING. Those who don’t learn from history are destined to repeat it. I don’t think the stock market is going to like this week one bit. We learned at New Year’s just how temperamental markets can be. I also have studied just about every stock market crisis back to the Great Depression and what I’ve found is that markets tend to sell off leading to the actual event and once the event happens it tends to bottom. For instance, when Hitler invaded France it generally dropped during that sequence until the point came where he captured Paris. Once it came to pass that France indeed was out of the war the market bottomed and turned back up. They sell the rumor and buy the news.

We learned early on the GOP was willing to do a deal on the Fiscal Cliff, let the debt ceiling expand but the fight was going to be on the spending cuts. The fight is here, the battle is joined. This is the week. Coming into the week the risk on commodity trade got hit, markets took it on the chin and the US Dollar broke through levels that could have ended the bounce.

This is the situation on the Greenback. It took out the 200dma and broke through what could have been a bearish triangle situation. This could still be bearish as a complex flat that is ending here but the odds are against it. It ought to back off at resistance but every time this chart has sniffed resistance it stopped as if waiting at a red light but it continues to rev up the engines to blow through to the next part of the journey. The stock market found a small degree low and it has tricked us before. It has turned up and kept going. Will this reversal at the end of the week do the same thing? Anything is possible but I think we have a greater of being lower next week than higher.

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