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What happens when they print money and what you can do about it



April 06, 2009 – Comments (6) | RELATED TICKERS: GLD , SLV , SPY

There's been some discussion on GoodVibe4Ever's hopefully hoax-free blog lately about the parallels between the 1929 crash and the 2008 crash. It's worth reading - the chart shapes are eerily similar to the first phase of the 1929-1930 bear market where the Dow took a similar 50% -ish loss to the one it's taken lately. Between '30 and '33 the Dow lost ANOTHER 80%. A repeat peformance would see the S&P at 130 or so.

I don't think comparing to 1929 is useless, like some have compared it to the French generals fighting the last war. Tanks, machine guns etc. changed the whole game, the whole structure of warfare. The game, the fundamental structure of stock trading is not changed in the same way by programmatic trading, new instruments etc. - ultimately human psychology is what programs the computers and designs the instruments. Lessons can be learned, although you can't expect it all to play out as before, and NOBODY wants to see 133 on the S&P so let's all hope we're not replaying 1930 just now.

The big difference between now and 1930 is that Bernanke can play with the dollar by printing money unlike in '29, because it is not on the silver standard any more. But he didn't invent printing money. Take a look at what happened on the German stock market when the German govt. started printing money in the mid 1920s. This is not easy to find on the internet but there is a nice article by Bittlingmayer of UC Davis in the Journal of Finance for those that can get it (53:2243, 1998).

WARNING: I am not an expert on this area by any means and would welcome input from those that are. I'm fascinated by this period in history and would welcome comments from anyone who has studied it in detail.

A few points I'd like to make nonetheless:

1) German stock prices fell by TWO LOGS - 99% - from 1914 to 1924. With another repetition of a similar chart pattern to 1929-30 and 2008-2009 in the US.

2) When money printing began in earnest and hyperinflation started, stocks started to do much better, even in real terms. In currency terms they were a spectacular investment, because while stocks retained much of their value, the Mark was worth approximately one-trillionth of its former value by the time it was withdrawn. So in cash terms stocks rose about a trillion fold.

3) While stocks were flat to up in real terms during the hyperinflation, there was a truly colossal volatility spike.

Now I really hope we don't get another USA 1929-1944, but I've got to say I'd much prefer that to Germany 1929-1944. The political consequences of all this are too well known for me to repeat. I think Bernanke is smart enough to avoid a Germany (or a Zimbabwe) but I think it would suit many interests to have /some/ inflation, which is what we will get by printing money. Say 10-20% annually for the next 5-10 years. That would really help erase all those nasty debts.

A couple of points that spring to mind that I've taken from this for my investing strategy:

1) You don't want to be in cash when they are printing money.

2) You certainly don't want to be short.

3) Gold might outperform stock, but gold can plummet after the recovery and stock is not too bad (the stock market rose overall during the inflation and fell significantly in real terms after the end of the hyperinflation. This might partly be due to investors preferring to be in stock than in cash while they printed money, then cashing out).

4) Long term or LEAP options with a strategy such as collar spreads might outperform stock investments given the volatility trends and uncertain direction (again though they did not have these instruments then, and they might have helped iron out volatility by providing a hedge).

5) Any kind of index-linked or inflation-proof bond would be good if you can get it (I believe the UK has something like this).

6) Yes, there were ultimately catastrophic consequences to world peace, but the German economy did survive a 99% fall in stock values and the following hyperinflation. What we have now is very mild in comparison. Hopefully a modern economy could survive a repeat of the 1929-1933 US performance of about a 90% drop without massive disruption to civilization or a retreat to totalitarian government.

Trying not to be too bleak here, but the clear message I'm getting is that we might be in a bear market rally at the moment but we sure are not out of the woods yet, however the real cost of the downturn will be hidden by reinflating assets. Part of the reason Germany survived is that this problem was restricted to one country, while other nations profited by Germany's problems in the '20s (leading, partly to the boom that lead to the Depression). Global downturns are harder to fix.

6 Comments – Post Your Own

#1) On April 06, 2009 at 9:17 AM, russiangambit (28.69) wrote:

Yes, in case of inflation all real assets rise, including stocks. Even including houses. Still, it is better to be in commodities. But  the dollar is not worthless yet, so that game is not on yet. The short game has very good chances for the next few months.

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#2) On April 06, 2009 at 9:30 AM, arboretum (28.44) wrote:

I agree. Short term we are still in a deflationary spiral, which is what they are trying to fix. But this is changing. There are signs that real estate prices are stabilizing - that's dollar prices, not necessarily real prices.

The problem with inflation is you, me, the stock market often don't know it has started until it has been happening for a while. So stocks may continue to fall while the value of your dollar is also falling - then short is better than long, and gold is your best hedge.

Commodity prices are dependent on the economy providing demand for commodities. So they will only really take off when there is recovery, although they will outperform if we get inflation. But personally I don't have anywhere to put a bunch of corn, soybeans, pork bellies etc., and commodity STOCKS don't necessarily follow the underlying commodity, especially if they have other issues such as debt.

Your other option is something like an oil tracking ETN. I have money in one of those. But do you really want all your money in an ETN when banks are in the shape they are in?

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#3) On April 06, 2009 at 1:12 PM, Jimmy2008 (< 20) wrote:


I fully agree with you about EFNs. However, I do have a question on RJI and RJA. The institution issuing them is owned by Swedish government. Are RJI and RJA safe (without much credit risk)?

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#4) On April 06, 2009 at 4:20 PM, walt373 (99.84) wrote:


Your other option is something like an oil tracking ETN. I have money in one of those. But do you really want all your money in an ETN when banks are in the shape they are in?

There are also some commodity ETFs like DBC if you don't like ETNs. Report this comment
#5) On April 06, 2009 at 6:59 PM, arboretum (28.44) wrote:


I don't know too much about the Swedish Export Credit Corporation or its creditworthiness. As with most ETNs I would be OK with buying it for a short term speculative play but reluctant to buy and hold for years.

I would be cautious about assuming a government owned company is guaranteed to be OK, after what happened in Iceland and Ireland (and rememer that FNM, FRE and now AIG are also government owned now...).


I did have some money in the commodity ETFs such as they are, but there are none that focus on the commodities I like most (oil and natural gas). I think there may be more correction to come in grain markets which may skew total commodity ETFs to the downside.

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#6) On April 14, 2009 at 4:45 PM, ERoger11 (< 20) wrote:

Some advice on gold buying and selling from the Stock Research Portal: “It is much more sensible to speculatively trade and take profits if the trader is a non-taxed entity than if he/she/it is taxable on profits taken.”



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