Government Intervention: Good or Bad?
Posted
Apr 03 2008, 09:11 AM
by
Richard Schwartz
HISTORY VIEW. Looking Back Again in History, to 1938. Yesterday CNBC was highlighting that we have to go back to 1938 to find such a big start (1 day) to the second quarter. Then I watched Liz Ann Sonders, chief investment strategist at Charles Schwab, say on Bloomberg audio/video that we also have to go back to 1938 to find a similar compacted series of very large percentage of days with large 1% or more wild swings up and down in the stock market as we’ve recently experienced. Yep, it’s a comparison to this year’s first quarter as we’ve had some incredible swings up and down, +/- 300 point Dow days the whole first quarter and particularly since the lows on March 10th. Sort of similar to back in 1938 when a one year big bad bear market ended the last day of March 1938. Could we be repeating history to the day? A Valid, Helpful Comparison. I believe looking back at the severe Mama Bear market of 1937 and 1938 whereby stocks lost 50% of their value in one year, March to March, with most of the losses coming in the last seven months, after a bounce-back rally in the middle of 1937, has value because that bear market came after the FIRST bull market after a really big bad bear, the Papa Bear market of 1929-1932. I look at that 1932 to 1937 run up as similar to the five year run up we’ve just experienced which came after the nasty Mama Bear market of 2000-20002. Stocks fell back in 1937/8 before taking out the 1929 highs, just like they’ve fallen back recently before decisively breaking above the S&P 500’s old highs; the S&P today being the pro’s benchmark index and thus the most important measure. And also because both runs up were jumpstarted and fueled along by massive government intervention. In fact my notated chart books about the bear of 1937 and 1938 include the following observation, I believe written by Richard Russell, the current long running editor of Dow Theory Letters: “An impartial study of history reveals that the more government intervenes in an attempt to minimize the severity of cycles, the more extreme and violent they seem to become.” Schwartz View: Sounds about right and still applicable. With all the intervention by the Bush administration to pump up the US economy in the early 2000s, its multiple tax cuts, and then throw in the Fed holding down interest rates for so long between 2002 and 2004 which former Fed chairman Alan Greenspan is coming under such heavy criticism for now, its no wonder that Wall Street was pressing the pedal to the metal in its search for juicy fees available for packaging up and securitizing as many mortgages as they could get their hands on. It’s only a natural, normal capitalistic reaction. The trouble is this pressure for profit and the competition to perform led to Wall Street’s pushing its normal assessment of risk to the far back burner, actually forgetting about risk, since the Street figured they’d all go down together (which they did, all except for Goldman Sachs it seems). Extrapolating forward, the Fed now has gotten so heavily involved into reducing the “severity” of this “cycle” that their proactive moves may ultimately lead to even more trouble down the road of some sort, like maybe causing the US housing woes to drag on and on and on whereby letting the marketplace work on its own would get us past our problems a lot faster. We recommended again and again to Japan to let some of their banks go bankrupt so as to get over its real estate hangover when its bubble burst in 1989 and they wouldn’t. And they’ve never fully recovered, even now. Yet, here we are pursuing the same road as Japan. But, hey, this reaction is only natural as well. America does have a big heart, just like everyone else, when we see our people suffering. What can I say?
Filed under: Principles of the Stock Market, Richard Schwartz, Dow Theory, Keys to the Market, The Fed, Macroeconomics, Historical Perspectve, Perspective, Federal Reserve, Tops, Mama Bears, The Principle of History, Papa Bears, Government Intervention