Historical Omens

May 4, 2013by Hoy Grimm0

Besides being my birthday, May 6th is a memorable day in history. On this day in 1937, the Hindenburg airship crashed as it was docking in New Jersey. Foreshadowing the current era of iPhone cameras and Twitter feeds, the disaster became instantly famous because it was captured on film and broadcasted live by Herbert Morrison over radio.

As the Hindenburg went down in flames, the nation was reeling from the economic flameout that became known as the Recession of 1937-38. Before the crash, the economy had bounced back and nearly recovered to 1929 levels, but by 1938, unemployment jumped from 14 percent to 19 percent, and industrial production (the lifeblood of the economy back then) dropped more than 25 percent.

Consumers who were barely recovering from the first leg of the depression slammed the brakes on their expenditures as unemployment started to rise, which further exasperated the economic decline.

In response, the Roosevelt administration blamed big businesses exercising monopolistic powers for the recession and appointed a new anti-trust Czar to do something about them. Economist Jonathan Catalan offers a convincing argument that the recession of 1937 was a by-product of expansionist Federal Reserve policies and heavy new government regulations.

The historical analogs between 1937 and 2013 may prove to be ominous. The Obama administration is more pro-government than pro-business. Consumers are showing signs of fatigue from the payroll tax increase in January, and no one can explain Obamacare regulations and costs even while businesses are required to start implementing them. The Federal Reserve is printing money as fast as they can in an unprecedented Keynesian effort to stimulate demand, and all they have accomplished is a temporary mirage of opportunity in the stock market.

If you aren’t yet convinced that investors should exercise caution, be aware that a rare technical indicator based on the High Low Logic Index was triggered in mid-April that portends a significant market decline that could happen in the next several months. Along with several other measures, the indicator compares the number of stocks reaching new 52 week highs and those that are hitting new 52 week lows to the rest of the market. This indicator has preceded every NYSE crash since 1985; it was triggered twice in July 2012 two months before the Dow declined more than 10 percent (September-October). When the indicator was back-tested, the probability of a greater than 5 percent decline in stocks was 77 percent.

In the midst of a Fed-induced rally where good news is good news, and even bad news is good news, predicting crashes isn’t politically correct. We thought you would at least appreciate the entertainment value of this historical journey.

Oh, I almost forgot to give you the name of this stock market indicator: The Hindenburg Omen.

Hoy Grimm

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