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Fed Fighting to Prevent 1930's Style Financial and Economic Deflation

Stock-Markets / Stocks Bear Market Oct 18, 2008 - 02:59 PM GMT

By: Tim_Wood

Stock-Markets Diamond Rated - Best Financial Markets Analysis ArticleIt Still Ain't Gonna Work Plus A Quick Technical Look at Gold - As the market declined into the 2002 low we began to see more manipulation and efforts to hold the market up than ever before. In the wake of these desperately irresponsible acts, interest rates declined, the money supply expanded, banks embarked on ridiculously irresponsible lending practices and the housing bubble was born as was the commodity bubble. These acts by the Fed were a deliberate attempt to hold back the deflationary wrath of Kondratieff Winter, which is all about the purging of excess credit from the system. So, what do the geniuses in charge do? They promote more credit. Now that really makes sense doesn't it? Just as the economic cycle was trying to naturally deflate and purge itself of the credit excesses in 2001 and 2002, the brainiacs in charge stepped in and flooded the economy with more of what was ailing it. Credit.

I have said all along, in both print and in interviews, that the efforts to hold the market up during the 2003 to 2007 period would only make matters worse. Every time the market would soften during this timeframe they would again step in with more of the insane practices to keep things going. As a result, they were able to stretch the 4-year cycle advance that began in 2002 into the second longest 4-year cycle since the inception of the Dow Jones Industrial Average in 1896. If we think about this it makes sense because we were after all seeing the inflating of the largest credit bubble in history.

Then, in October 2007 a classic Dow theory non-confirmation occurred as the stock market was also pressing into the overdue 4-year cycle top. For the record, I want to make it perfectly clear that cycles have nothing to do with Dow theory. Cycle theory and Dow theory are two totally different disciplines, but they can be used independently to complement each other. As an example of this, I knew that the 4-year cycle top had stretch into 2007 and that 81% of the 4-year cycle tops since 1896 have occurred in conjunction with a classical Dow theory non-confirmation. When I combined this with the other high probability “DNA Markers” that I have developed in relation to 4-year cycle tops and bottoms, this sent a very clear message in regard to a major market top. It was then on November 21, 2007 that a bearish Primary Trend change occurred under classic Dow theory.

Since that time we have seen increasingly more and more drastic measures to rescue the market. However, on November 21, 2007 the Dow theory spoke and according to the great Dow theorist of the 1920's, William Peter Hamilton, the stock market barometer was then forecasting “stormy conditions.” Since the original Dow theory warning that was sounded by the non-confirmation in October 2007 the Industrials have fallen 40%. The Transports have fallen nearly 30%. The S&P 500 has dropped over 45% and China's Shanghai Index has dropped by over 68%. So, yes, the Dow theory has spoken and it has proven correct. Yet, the politicians remain completely clueless about just what is occurring here and they continue to think they can “fix it.” Oh, they have “fixed” things okay. It is because of these idiots that economic conditions have deteriorated to the point that they have. All the while, they continue to think that by throwing more good money on top of bad that some how this economic crisis can be resolved.

Think about this for a minute. We have people trying to fix a problem that never even saw the problem coming and that are too ignorant to understand that they are part of the problem. They are why things have escalated to this point. Them trying to “fix” things is what got us this deep into this mess in the first place. What a joke this is. On top of the politicians we have the mainstream media that is clearly lost as well. Just today I heard on CNBC that we already need yet another stimulus package. Hello, didn't we just have the largest bailout in history less than 2-weeks ago? Haven't we seen countless bailouts from AIG to Freddie and Fannie to mention a few and already we “need another bailout.” Please people! They just don't get it. Now we need a bailout or stimulus package every other week? It Ain't Gonna Work! Just as I have said since 2003 and into the 2007 top, all this is doing is making matters worse and I now think it is checkmate. As I see it, the market is again setting up for another potentially very nasty leg down.

Think about something. Did anyone in the mainstream media warn you about this stock market decline, or the commodity bubble, or the housing top, or the credit crisis? No, and they have never warned of any decline in the past. Rather, the media and the politicians both spout babble about why everything is okay. This was also true during the 1929 decline as well.

Following are a few examples of the 1929 to 1931 babble. Please compare these quotes to the price action in the first chart below.

September 1929

“There is no cause to worry. The high tide of prosperity will continue.” –- Andrew W. Mellon, Secretary of the Treasury.

October 14, 1929

“Secretary Lamont and officials of the Commerce Department today denied rumors that a severe depression in business and industrial activity was impending, which had been based on a mistaken interpretation of a review of industrial and credit conditions issued earlier in the day by the Federal Reserve Board.” –- New York Times

December 5, 1929

“The Government's business is in sound condition.” –- Andrew W. Mellon, Secretary of the Treasury

December 28, 1929

“Maintenance of a general high level of business in the United States during December was reviewed today by Robert P. Lamont, Secretary of Commerce, as an indication that American industry had reached a point where a break in New York stock prices does not necessarily mean a national depression.” –- Associated Press dispatch.

January 13, 1930

“Reports to the Department of Commerce indicate that business is in a satisfactory condition, Secretary Lamont said today.” – News item.

January 21, 1930

“Definite signs that business and industry have turned the corner from the temporary period of emergency that followed deflation of the speculative market were seen today by President Hoover. The President said the reports to the Cabinet showed the tide of employment had changed in the right direction.” – News dispatch from Washington.

January 24, 1930

“Trade recovery now complete President told. Business survey conference reports industry has progressed by own power. No Stimulants Needed! Progress in all lines by the early spring forecast.” – New York Herald Tribune.

March 8, 1930

“President Hoover predicted today that the worst effect of the crash upon unemployment will have been passed during the next sixty days.” – Washington Dispatch.

May 1, 1930

“While the crash only took place six months ago, I am convinced we have now passed the worst and with continued unity of effort we shall rapidly recover. There is one certainty of the future of a people of the resources, intelligence and character of the people of the United States – that is, prosperity.” – President Hoover

June 29, 1930

“The worst is over without a doubt.” – James J. Davis, Secretary of Labor.

August 29, 1930

“American labor may now look to the future with confidence.” – James J. Davis, Secretary of Labor.

September 12, 1930

“We have hit bottom and are on the upswing.” – James J. Davis, Secretary of Labor.

October 16, 1930

“Looking to the future I see in the further acceleration of science continuous jobs for our workers. Science will cure unemployment.” – Charles M. Schwab.

October 20, 1930

“President Hoover today designated Robert W. Lamont, Secretary of Commerce, as chairman of the President's special committee on unemployment.” – Washington dispatch.

October 21, 1930

“President Hoover has summoned Colonel Arthur Woods to help place 2,500,000 persons back to work this winter.” – Washington Dispatch

November 1930

“I see no reason why 1931 should not be an extremely good year.” – Alfred P. Sloan, Jr., General Motors Co.

January 20, 1931

“The country is not in good condition.” – Calvin Coolidge.

June 9, 1931

“The depression has ended.” – Dr. Julius Klein, Assistant Secretary of Commerce.

August 12, 1931

“Henry Ford has shut down his Detroit automobile factories almost completely. At least 75,000 men have been thrown out of work.” – The Nation.

I have also been asked about gold and gold stocks. Well, I have been telling my subscribers for months that the evidence suggests that the 9-year cycle in gold has peaked and through my eyes this is why gold has been declining. As for gold stocks, below I have a monthly XAU/Gold ratio chart along with my Trend Indicator. When price is moving up on this chart it is telling us that gold stocks are out performing physical gold, which is bullish for gold and the gold stocks. When price is moving down, the opposite is, of course, true. As an example of this, let's look at the period between the May 1996 top and the August 1998 top. During this timeframe gold fell from roughly 410 to 271, or 35%.

All the while, the XAU fell from 150 to 51, or 66%. So, as this chart suggested, the XAU was the weaker of the two. If we take the bullish period between October 2000 and May 2002, gold advanced from 266 to 331, or some 24%. But during that same period, the XAU advanced from 41 to 84, which was up some 105%. As this chart suggested during that timeframe, the XAU was the strongest. More recently, the monthly Trend Indicator turned back down in October 2007. This downturn served as a warning of a pending top in gold and gold stocks, which occurred in March 2008 at the 9-year cycle top. Since that time gold is off some 21% and the XAU is off just over 57%. So again, the downturn of price on this chart, along with the downturn of the monthly Trend Indicator, serves as evidence that we have been and so far continue to be in an environment in which gold stocks will be weaker than gold. This is in turn a bearish environment for gold and I do not look for this to change until we see an upturn on this chart that is confirmed by an upturn of the monthly Trend Indicator.

I have begun doing free Friday market commentary that is available at so please begin joining me there. Should you be interested in more in depth analysis that provides intermediate-term turn points utilizing the Cycle Turn Indicator, which has done a fabulous job, on stock market, the dollar, bonds, gold, silver, oil, gasoline, and more, those details are available in the monthly research letter and short-term updates. We have called every turn in commodities, the dollar and the stock market. I have covering the details as to what's next with the stock market, the dollar and commodities with the latest in the October research letter and the short-term updates. Don't be fooled by the hype. A subscription includes access to the monthly issues of Cycles News & Views covering the Dow theory, and very detailed statistical based analysis plus updates 3 times a week. Also see

By Tim Wood

© 2008 Cycles News & Views; All Rights Reserved
Tim Wood specialises in Dow Theory and Cycles Analysis - Should you be interested in analysis that provides intermediate-term turn points utilizing the Cycle Turn Indicator as well as coverage on the Dow theory, other price quantification methods and all the statistical data surrounding the 4-year cycle, then please visit for more details. A subscription includes access to the monthly issues of Cycles News & Views covering the stock market, the dollar, bonds and gold. I also cover other areas of interest at important turn points such as gasoline, oil, silver, the XAU and recently I have even covered corn. I also provide updates 3 times a week plus additional weekend updates on the Cycle Turn Indicator on most all areas of concern. I also give specific expectations for turn points of the short, intermediate and longer-term cycles based on historical quantification.

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