So this is a pattern I spotted by studying past crisis.
In my previous idea I showed how 2020 crisis compared to 8 other crisis, and that given the monetary and fiscal response from govt and FED it was more likely to stay above the pink line (6 cases stayed above versus 2 below, being these two the 1970 crisis and the 2008 crisis), favouring the bull case. However, I'm starting to favour the bear case, the reason being the similarities on the technical set-up.
As you can see, the set-up starting in 2018 perfectly mirrors that starting on 1965, at least until point C. Both cases form a megaphone pattern with very similar, incremental drops: -11%, -20%, -35%. The last drop, -50% would arrive at the end of the megaphone and would touch the red line (being this red line the line that joins the historical lows of SP, including 1929 and 2008, again just look at my previous post to see this in detail).
At the end of the day if you look at the macro context, you have to assess just to variables to understand where we are heading: growth and inflation.
In both cases 1970 and 2020 we face a lack of growth, being inflation the parameter that we have to figure out.
In 1970 case, according to Wikipedia: "At the end of the expansion inflation was rising, possibly a result of increased deficit spending during a period of full employment. This relatively mild recession coincided with an attempt to start closing the budget deficits of the Vietnam War (fiscal tightening) and the Federal Reserve raising interest rates (monetary tightening)."
Now in 2020 we will have a huge deflationary event, with drops in GDP similar only to the crisis of 1920s (I'll compare both crisis in another post), so there are two questions here:
1) Do we need inflation as a pre-condition to have another bear leg that will end with a -50% drop?
2) If, so how will this inflation be created?
So regarding the first question, we don't really need inflation for stocks to fall. With this huge drop in GDP, equity earnings will fall, and money could move into other asset classes.
Just as the same way money moved from stocks to bonds in the 1970s as Paul Volcker rose interest rates to 18% (Volcker could be considered as a hero, as he avoided hyperinflation in the US), this time money could move onto other asset classes (bonds no longer pay interests), being these classes "hard assets" such as gold and real state (given that real state prices will probably collapse in lots of areas in the coming months).
Regarding second question, we could also have huge inflation after deflation if you see the timeline (2021-2022). If economic situation does not improve US could implement policies such as minimum vital income (look at Spain) which would cause no growth but would cause bad inflation in real economy (food and oil prices), producing money to move from stocks to hard assets or fixed income assuming that FED could rise interest rates just as in the 1970s to fight this inflation.
So based on this, I would favour bear case, but just slightly than bull case (maybe 60% vs 40%). I mean, it is really impressive how both technical setups look so similar to think this is just a mere coincidence.
In my next post I'll analyze the 1920s similarities.
Thanks for reading.
Stay safe.
In my previous idea I showed how 2020 crisis compared to 8 other crisis, and that given the monetary and fiscal response from govt and FED it was more likely to stay above the pink line (6 cases stayed above versus 2 below, being these two the 1970 crisis and the 2008 crisis), favouring the bull case. However, I'm starting to favour the bear case, the reason being the similarities on the technical set-up.
As you can see, the set-up starting in 2018 perfectly mirrors that starting on 1965, at least until point C. Both cases form a megaphone pattern with very similar, incremental drops: -11%, -20%, -35%. The last drop, -50% would arrive at the end of the megaphone and would touch the red line (being this red line the line that joins the historical lows of SP, including 1929 and 2008, again just look at my previous post to see this in detail).
At the end of the day if you look at the macro context, you have to assess just to variables to understand where we are heading: growth and inflation.
In both cases 1970 and 2020 we face a lack of growth, being inflation the parameter that we have to figure out.
In 1970 case, according to Wikipedia: "At the end of the expansion inflation was rising, possibly a result of increased deficit spending during a period of full employment. This relatively mild recession coincided with an attempt to start closing the budget deficits of the Vietnam War (fiscal tightening) and the Federal Reserve raising interest rates (monetary tightening)."
Now in 2020 we will have a huge deflationary event, with drops in GDP similar only to the crisis of 1920s (I'll compare both crisis in another post), so there are two questions here:
1) Do we need inflation as a pre-condition to have another bear leg that will end with a -50% drop?
2) If, so how will this inflation be created?
So regarding the first question, we don't really need inflation for stocks to fall. With this huge drop in GDP, equity earnings will fall, and money could move into other asset classes.
Just as the same way money moved from stocks to bonds in the 1970s as Paul Volcker rose interest rates to 18% (Volcker could be considered as a hero, as he avoided hyperinflation in the US), this time money could move onto other asset classes (bonds no longer pay interests), being these classes "hard assets" such as gold and real state (given that real state prices will probably collapse in lots of areas in the coming months).
Regarding second question, we could also have huge inflation after deflation if you see the timeline (2021-2022). If economic situation does not improve US could implement policies such as minimum vital income (look at Spain) which would cause no growth but would cause bad inflation in real economy (food and oil prices), producing money to move from stocks to hard assets or fixed income assuming that FED could rise interest rates just as in the 1970s to fight this inflation.
So based on this, I would favour bear case, but just slightly than bull case (maybe 60% vs 40%). I mean, it is really impressive how both technical setups look so similar to think this is just a mere coincidence.
In my next post I'll analyze the 1920s similarities.
Thanks for reading.
Stay safe.