November 2013 – History Always Repeats Itself

market-expectation-logoOne thing as human beings we can all agree upon is that history always repeats itself. As investors we can profit from understanding this fact of life. To profit from it we need to understand at what point in history we are repeating.

Mass media and governments around the world would be lead us to believe that we on the other side of a catastrophic economic implosion like we saw in the 1929. According to the world economic brain trust, economies around the world have seen the worst of it and are on a path of recovery.

History tells us though that economic disaster does not right itself in a matter of a couple of years, for example the Dow Jones Industrial Average did not reach the levels it saw in 1929 before the crash until 1954 a full 25 years later. Economic impact leaves its mark on main street for a generation as most of us grew up hearing stories of the great depression from our grand parents. So then where are we in history?

In my opinion we are in the roaring 1920s and here are a few reasons I believe this:

  • Today, as in the roaring 1920s, main street seems more interested in connecting with other people then making technological advances as seen with social media companies grabbing the lions share of venture capital.
  • Companies are borrowing significant amounts of money to buy their outstanding stock back thereby improving their earnings by reducing their floating shares as occurred in the late 1920s, which ultimately was a primary cause the great crash in 1929. Carl Icahn recently sent a letter to Apple’s CEO suggesting they borrow $150 billion dollars to buy back shares thereby improving their price to earnings ratio and adding stock value .
  • The US government is coordinating its recovery with Europe and other large countries. Today the US Federal reserve is providing an economic back stop to half of the world. During the 1930s it was every country for itself, they had to worry about their own first because how dire it was.
  • In 1920 Charles Ponzi was convicted and sentenced to 5 years for mail fraud as a result of his famous $20 million dollar scheme. In 2009 Bernard Madoff was sentenced to 150 years for his $65 billion dollar Ponzi scheme. Large scale investment frauds like the above mentioned appear in history when trust and risk appetite are high.

The above are just a few of the similarities between today and the roaring 1920s. The question one might ask then is whether we are in the beginning, middle or end of that time in history.

Today expectations remain low, according to the Expectations Indicator, providing the environment for the market to continue higher. Unfortunately I believe we are nearing the end of the roaring 1920s making this time in the markets a very dangerous place to be, so tread lightly and expect volatility.

The above and below represents the opinion of the author and do not constitute a recommendation to buy or sell any financial products.

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