Ol’ Remus and SLL are in agreement: it’s going to be bad. From Ol’ Remus at woodpilereport.com:
Imagine a deflation so severe, so catastrophic and long-lasting, with so many banks collapsing that cash all but ceased to circulate. Imagine towns and cities so desperate for physical currency they printed their own . Imagine cash having measurably more buying power with each passing week. Imagine half of all banks closing their doors forever. Imagine surviving banks making a dependable and risk-free real profit from money they didn’t lend. This was the Depression, and it lasted for about a decade.
Before the Crash of 1929 there had been pullbacks, in 1923 and again in 1926, significant but short, each lasting a year, each followed by greater expansion than before. Soon everything that wasn’t agriculture became a bubble. It’s understandable, everything was new—radio, paved highways, movies with sound, refrigerators, air travel and skyscrapers—it was the dawning of a new era with an incandescently bright future.
The forward looking would be the foremost citizens of this new era, which meant buying in. And buy in they did. Mortgages, car loans, time payments—and for 16% of the population, stocks on margin.
If the crash was unimaginable, the follow-on catastrophe was unthinkable. The economy immediately contracted in one memorable spasm. In mere weeks the future went from daydreams of opulent splendor to a search for lost change in the couch cushions. The middle class became the poor, the poor became the destitute. Then it got worse. The gross national product declined by a third. Trust in government and finance crumbled away. Populism ran the table. Regime change was in the air.
Today a dark consensus is forming of a similar debacle, probably in the fourth quarter, possibly sooner. The evidence is compelling: record highs in the stock market supported by inflation* and bubbles and the Plunge Protection Team, a Shiller price-earnings ratio at 29x, negative returns for the bottom 250 of the SP500, accelerating consumer and retail bankruptcies. Major crimes on Wall Street and in DC go uninvestigated, trust in government and finance is in the single digits, unsold new and used cars are constipating the pipeline, real unemployment is far above official numbers, and the middle class is tapped out.
It’s a given the stock exchanges will crash. Beneath the financial highway lies an ever-growing sinkhole and one day the market will be overweight enough to crash through. Price discovery will have been served at last. The prudent are thinking past it to second order events, where the demons live.
More photos from the Crash of ’29 will appear in upcoming Woodpile Reports.
* Inflation since 1929 is 1,330%. This gives an idea of how severe a runaway deflation could be. Using 1929 as the base, if we squeezed the accumulated inflation out of it, a twenty dollar bill would be worth $286 in purchasing power.