In my most recent article for Future Money Trends, I made the bear case for the S&P 500 not solely based on current fundamentals or technicals, but rather, from the pages of American history. During the panic of 1819, financial speculators were caught with their pants down when the bull market they had essentially engineered through frenzied buying of equity shares, commodities and bank notes suddenly collapsed. The ensuing deflation adversely affected employment opportunities and quickly made paupers out of those unwise and unfortunate enough to be left holding the bag.
One of the major catalysts for the panic was monetary policy. Although banks were largely decentralized as compared to the modern American financial system, individual banks were allowed to issue their own banknotes. In order to fuel economic development and the broader securities bull market, several banks — operating without the benefit of historical precedent — artificially bloated the money supply. However, when the markets collapsed, the banks quickly shriveled up, calling in loans and restricting the money supply.
The sudden shift from hot to cold contributed greatly to the widespread depression that followed the panic of 1819. The monetary lesson — which would take nearly 200 years to learn — was that large-scale adjustments done quickly would upset a very fragile balance.
Unfortunately, the U.S. Federal Reserve seems ready to raise short-term interest rates, surely spelling the end for the record-breaking bull market in domestic equities. However, while Fed chair Janet Yellen flirts with economic disaster, many other global regions — particularly the European Central Bank — are dead-set on accommodative monetary policies. The ongoing Greek debt drama all but assures that Europe will be guided by inflationists.
In theory, this is great news for American investors of German stocks and indices. The German DAX Composite index — their equivalent of the Dow Jones — is a hard-charging bull, up nearly 18% year-to-date. In contrast, the anemic S&P 500 is up less than 1% YTD, a fairly pronounced indictment of the peek-a-boo game played by the Fed on interest rates.
Against a technical analysis framework, the DAX is charting a bullish pennant formation in which a run up in the markets is followed by a consolidation phase before yet another run up. Presently, the DAX is “resting” just above the 50 and 200 day moving averages, waiting for the igniting spark.
Critics will argue that if the American indices collapse, so too will the rest of the world’s markets. However, if the forecasted decline in U.S. stocks was one of a controlled correction, we can easily see a situation where money shifts from the underperforming sector to one that is outperforming.
In such a scenario, European markets could be a major home to capital flight given the recent consolidation — or in Greece’s case, outright collapse — that has occurred.