Trouble Continues Brewing
Are We Setting Up Another 1987 Crash
Hope everyone had a wonderful July 4th. Fireworks across the nation, analogous to the problems that besets this country, were if nothing else explosive. It seems to me that we inherently “create our own problems” just to have something to “fix” and in most cases, it’s the actions of government that gets the ball rolling. Why were interest rates kept at such low levels for so long? Why did we over inflate money supply to get us through COVID? Is continuing to raise rates the best solution to bringing inflation under control?
Biden Regulations Cost Households $10,000 Annually
Casey Mulligan, University of Chicago professor and former White House Council of Economic Advisers chief economist, warned of an economic "crisis" not seen in years. "This is an “across-the-board” human capital crisis like we haven't seen for decades," said on "Fox & Friends". "And that's hurting our economy and it hurts regular people in their everyday lives.
Mulligan’s recent report, comparing the fiscal impact between the Obama, Trump and Biden administrations, showed households facing $10,000 worth of extra costs, mostly from automobile, fuel economy and emissions standards. Evaluating what added costs under a second consecutive Trump administration would have been, household were estimated to save $21,000 over eight years. Elections have consequences.
"Workers are not able to be as productive as they used to be. We see it at the school level, the kids aren't learning. Wages aren't keeping up with inflation. That's the other side of the productivity coin," Mulligan explained. "And then a lot of people are dying, and not from COVID, from more than normal deaths, from traffic accidents, diabetes, heart attack. I could go on and on."
If Biden’s regulatory costs continue to rise at their current rate, American households can expect to lose $60,000 if Biden’s re-elected, between telecommunications, health care and more. Not exactly the policies necessary to battle inflation or to revitalize an already tiered and stagnant economy.
The report also notes how President Biden’s resurgence of regulatory burdens may become exacerbated by stagnant economic growth, low productivity and remaining inflation pressures. President Trump had a budget for regulators, he ran businesses. Biden, or whomever is really in command, is running for re-election seeking support from voting segments fearing climate change and seeking debt forgiveness. The next election represents the true inflection point in our society. Happy July 4th; hope you enjoyed the fireworks. There’s more to come but don’t expect the “flashes of light” to just come from actual fireworks.
What Caused the 1987 Crash?
According to a 2006 Federal Reserve paper, a combination of circumstances made the crash possible. Preceding the crash, stocks were supported by new entrants into the market, pension and 401(k) plans, which drove up prices. The Dow bottomed out at 776 in August 1982 and marched up to a high of 2,722 in August 1987.
Equities were boosted by favorable tax treatments, easily financed corporate buyouts, both leading to an increased number of potential takeover targets, pushing their stock prices up. Interest rates were low, but were rising leading up to the crash. Inflation concerns caused fears of further interest rate increases as well. Sound familiar?
Two changes came into play right before the crash. Proposed legislation in Congress to eliminate tax benefits associated with financing mergers. The U.S. trade deficit was worse than expected. The Dollar also dropped raising the threat of increased interest rates. We’re back.
When reviewed about ten years ago, reasons for the stock market crash of 1987 and for the rapid psychological shift of the market participants were:
Anti-Takeover Legislation
Increasing Short Term Interest Rates.
Weakening US Dollar
Deteriorating US Current Account Deficit
Escalating US Government Debt
Very High Price-Earnings-Ratios (P/E)
Low Dividend Yields
Bullish Investor Sentiment
Deteriorating Market Breadth
Looks a little familiar, eh? I’ll leave the shorter term technical analysis to those of you who identify as day, scalp or swing traders. I’ll analyze the “geoeconomics” of today in order to compare them with historical patterns of years prior. All of the conditions we observed in 1987 are on the table. I hope you saw last Sunday’s “The Week That Was & What’s Next” including the “hedging” lesson. Be proactive and buy a little protection.
Back to the courses. I’ve cut back on posting as (1) there’s just not enough hours daily to accomplish everything on my plate and (2) there’s nothing really new to talk about. It seems like "damn the torpedoes; full speed ahead” is the watchword. Hope they are pointed in the right direction, eh?
I’m just a “young” 68 years old looking to help you become the best damn investor or trader you can possibly be. Everyone learns at their own pace. If you pick everything up the first time through, great but if not email me at david@thetickeredu.com so we can further help. Again, let me know what you want to learn, I’m all ears.
Blood Sweat & Tears’ “Spinning Wheel” seems appropriate for this article. Remember, overbought situations often become more overbought before they head lower. I see a lot of direct comparisons to past events that many of you have not experienced. That’s why I post; please take advantage of my 55+ years of watching. Best always and see you Sunday. If time allows I’m going to address “spreading” as it’s worth considering in today’s environment as it minimizes risk.