Thursday, May 28, 2020

Paul Krugman Confirms My Spectacular Stock Market Forecast

Paul Krugman
On March 24, I wrote here at EPJ:
I have seen many stock market analysts state that they expect the rebound in the stock market to be similar to what occurred after the 1987 stock market crash or the 2008 financial crisis or what occurred after the 1929 stock market crash.

But none of these periods fit the model of the current COVID-19 inspired crisis. There is another period, however, that will show exactly what I expect the upside will look like and I haven't heard anyone mention it---no one.

In tomorrow's EPJ Daily Alert, I am going to discuss that period and why the rebound from the lockdown will most likely look like that period... 
I have been writing the EPJ Daily Alert for years but I have never written an Alert like the one I am going to write on Wednesday.

I think it may well be THE CALL of my career.
This is what I wrote in the EPJ Daily Alert the next day:
The stock market is getting pummeled day after day. It is seemingly non-stop. At least in 1987 and 2008, the carnage slowed after the Fed started to intervene There was one more low, in both periods, a couple of months out and that was it.
The current Fed money printing hasn't slowed the carnage at all. The market continues to get hit and hit. The way the market is getting hit reminds me of the Paul Volcker years before August of 1982.

Specifically, before of August of 1982, the market was just getting hit and hit in early 1982 as Paul Volcker was keeping interest rates high to fight off inflation and everybody knew it. Then in August of 1982, Paul Volcker's Fed decided to change course and ease up when that happened all hell broke lose to the upside.

Starting in the middle of August 1982, the stock market shot up day after day. It was a buying panic.

After bottoming, the market fully recovered its prior peak just 83 days (2.8 months) later on November 3, 1982.

From an August low of  777 the Dow closed the end of 1982 at 1,046!

There was no churning of months before the explosion.

The key was, there was a specific event that everyone understood would end the pummeling in the stock market. If the Fed was no longer pushing interest rates higher, the worst for the economy was clearly over.

There is an even clearer specific event this time, when the lockdown is over everyone will know the worst is over and I expect the same kind of advance as in the second half of 1982.

The lockdowns may end by regions but at some point it is going to be understood the worst is over. It will be a trigger event, 1987 and 2008 didn't have such trigger events. The current perod, like 1982, does.
I then concluded (highlight in original):
I believe the end of the lockdown trigger event will be recognized by investors sooner than later. I am now advising to go ALL IN in the EPJ Model Portfolio. Take the remaining cash and add it to the SPDR S&P500 ETF (Symbol SPY) position.We may not be at the exact bottom but we are very close and I will just ride out any bumps because once the spike comes it is not going to stop. 
Since I wrote that edition of the ALERT the stock market, as measured by the Dow Industrials averages, is up more than 35%. The bottom actually occurred roughly 48 hours earlier. There was plenty of panic at that time.

A lot of investing when you have the Fed and other government agencies manipulating the economy is to figure out how the manipulations will impact the stock market (up or down). Anyone trained in mainstream Keynesian economics has no clue how to do this in a timely fashion and Austrian-lites just don't get the nuances of the theory.

This one looked kind of obvious to me especially with the money being pumped into the economy and which I report on in the Alert every Friday.

Now the Krug, who does watch the data closely but is a Keynesian, finally, two months later sees what I saw when panic was in the air.

Yesterday, he generally confirmed the forecast that I made at a time when there was still complete panic. He told Bloomberg yesterday:
I’ve been trying to get a handle on this by looking at recessions over the past 40 years. Until now we’ve had two kinds: 1979-82-type slumps basically caused by tight money and the 2007-09 type caused by private-sector overreach. The first kind was followed by V-shaped “morning in America” recoveries; the second by sluggish recoveries that took a long time to restore full employment.

My take is that the Covid slump is more like 1979-82 than 2007-09: it wasn’t caused by imbalances that will take years to correct. So that would suggest fast recovery once the virus is contained. But some big caveats.
Please note: Past spectacular forecasts do not mean future spectacular forecasts.


1 comment:

  1. I think you both are living in a dream. There are too many DOA market sectors that will be the anvil around the neck of any "real" recovery.

    Dont get me wrong the FED could rig the market a while longer but that wont do anything remotely related to real world recovery growth.

    The US titanic is sinking anyway.