-- Published: Wednesday, 15 March 2017 | Print | Disqus
By Avi Gilburt
As many are celebrating the 8th birthday of the stock market rally which began in March of 2009, there is a common belief that this birthday will usher in a market crash.
The common belief has been that government action has “caused” this 8-year rally, but a closer look at the timing of such government action may dispel the notion that this rally was government driven.
In one of my articles on Seeking Alpha, I provided real world examples of how the central banks have been unable to control or manipulate the FOREX markets, despite their throwing “bazookas” at those markets.
The first example I gave included the US Dollar multi-year 41% rally in the face of all the QE programs thrown at it by the Fed, which “should have” caused the dollar to crash based upon the common market expectations. The second example was the recent 14% YUAN devaluation relative to the USD despite the Chinese government spending 1 trillion US Dollars (a quarter of their FX reserves) over the past 3 years in an attempt to prop up the Yuan.
How one can look at these real-world situations and still believe in the omnipotence of central banks in being able to control a market just makes me scratch my head.
But, I did get several comments to this article which went along the lines of the following comment:
“Avi, can you really deny that the epic run since '09 was made possible by the relentless purchase of assets by central banks? If they wouldn't have done anything, you think the market would have done what it did anyway? If so, that's beyond insane.”
You see, common assumptions are not always based upon realities. Let’s consider when the government started throwing one program after another at the market to “save” the market, and create the epic run, as noted in the comment. And, then maybe, just maybe, you may not think I am insane.
I have linked below to a chart put together by Elliott Wave International, which I found in Bob Prechter’s new book, The Socionomic Theory of Finance. I personally owe a tremendous debt of gratitude to Bob for opening my mind and my eyes as to the true realities of market dynamics.
One would imagine that when the government began its bailouts and liquidity injections, the market should have bottomed and begun rising again. In fact, this is the commonly held belief about how we bottomed in 2009. Yes, the almighty Plunge Protection Team certainly must have saved the market. Right?
But, as you can see from EWI's chart, none of the government action was able to stop the largest stock market crash seen in over 70 years. In fact, after each announcement of yet another bailout measure, the market tanked even further. And, even though this is not what people believe happened, I would suggest you look at the facts, rather than maintain your assumptions about what occurred based upon commonly accepted histrionics.
Let’s go through it step by step.
First, in September of 2008, the government bailed out Fannie and Freddie Mae, along with AIG. Did that prevent the crash? No.
Next, in early October of 2008, the government passed a $700 billion bailout plan to save the market. Did that prevent the crash? No.
Now, remember, the government claimed that these bailouts were necessary to provide stability in the economy and prevent disruption in the financial system. When we now consider that the market still lost 45% even after these “stability” measures, what does that tell you?
Next, at the end of October, the Fed cut its key interest rate to 1%. Did that prevent the crash? No.
Then, in November of 2008, the Fed began its QE programs. But, amazingly, the market still went on to drop another 25% from that time until it struck bottom four months later.
So, let me ask you again, with all the money the government threw at the market, was it able to prevent the largest drop in the stock market since the Great Depression? How much control did the government truly have to prevent this market crash? If you are looking at this honestly, your answer should be “none.” None of these measures prevented or even slowed the crash we experienced in 2008-2009.
In fact, those that know the history of the Great Depression know that the Fed was equally powerless during that period of time as well:
“The Federal Reserve System, from February to December 1931, increased the issue of Federal Reserve notes by 80%. These issues were due to bank failures which made necessary a larger use of cash. Yet, after a wave of bank failures . . . both banks and their depositors began raiding each other in a cut-throat competition which more than defeated the new issues of Federal Reserve notes.” -- Irving Fisher, Booms and Depressions (1932)
But, I am quite certain that many of you will simply discount the true evidence of the government’s inability to stop the 2008-2009 market crash. Many of you will even take the perspective that all these actions “eventually” caused the market to bottom. But, taking such a position is not an intellectually honest perspective since the market was going to “eventually” bottom, especially after a 58% correction, unless, of course, you believe the market was going to ZERO.
Now, these same investors who still believe in the omnipotence of the government and the Fed were certain that once QE ended, the market would crash again. Well, the last I looked, there has been no QE which supported the last 25% market rally of 600 points since February 2016. So, anyone that still believes in this perspective must now turn into a manipulation/conspiracy theorist and believe that there is really a “covert” QE being done by the Fed, which is causing this significant market rally of late.
As for me, I would much rather continue to analyze the market based upon sentiment, as it explains all these movements in a much more consistent and intellectually honest manner, without the need of trying to fit a square peg into a round hole, or believing in an invisible hand based upon conspiracy theorem which has no factual support whatsoever. Moreover, analyzing the market based upon sentiment has kept us on the correct side of the market the great majority of the time, even though we discount the substance of any action or inaction by the Fed or government.
As I have noted in a prior article, I believe the market is setting up for a 2008-2009 type of event, but that is still a number of years away. You see, market sentiment has not reached the point of euphoria which can support such a crash-like event.
When the market eventually crashes again despite the central banks throwing everything they have at it, only then will the public come to recognize that the centrals banks are much less powerful then they currently believe. By then, it will be too late for those who believe in the Fed’s omnipotence. So, for those that expect to live through the 2020’s, I highly suggest you view the market from the perspective of a realist, at least based upon market history, rather than maintain “hope” that the Fed, government, or Plunge Protection Team will be able to save the day. They have proven quite well that they simply cannot.
And, as George Santayana stated: "Those who cannot remember the past are condemned to repeat it."
See our long-term chart on the S&P 500, plus EWI's chart on how the Dow performed in 2008-09 after government rescue programs.
Avi Gilburt is a widely followed Elliott Wave technical analyst and author of ElliottWaveTrader.net (www.elliottwavetrader.net), a live Trading Room featuring his intraday market analysis (including emini S&P 500, metals, oil, USD & VXX), interactive member-analyst forum, and detailed library of Elliott Wave education.
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-- Published: Wednesday, 15 March 2017 | E-Mail | Print | Source: GoldSeek.com