By Will Hart
1966: Stock market collapse, Vietnam War, protests
1973: Oil embargo (Oct), Yom Kippur war, Stocks collapse, recession
1980: Inflation, Iran-Iraq war, Silver panic, Stocks crash, recession
1987: Black Monday (Oct.), largest single-day crash ever
1994: Bond collapse, DJIA bear market, war
2001: Stock market crash, 911 (Sept.), recession
2008: Stock market collapse 9/29 (Sept.), recession
In 1966, the Vietnam War was escalating and the US-USSR Space Race was also heating up. The economy and the stock market were in a bull phase and LBJ was president. He inherited a growing economy with low inflation, low unemployment and a stock market that was in a long-term uptrend.
Hard to imagine but the national debt was relatively small. Additionally, in 1965 the GDP (4%) was higher than the unemployment rate (3.3%) the reverse of what we've seen in recent years. The FED kept interest rates low (1 to 2.5% range), in the post-WWII years. That fueled both economic and financial market growth through the 1950's and early '60s.
Then as 1966 began the FED started tightening the credit reins by raising interest rates.
Still, everything looked rosy as the year got underway the DJIA hit a new high. Then it pulled back briefly only to rack up another high in March. But thereafter the Dow collapsed some 22% by yearend.
There is no doubt that this was a watershed year. Many stock market analysts and economists claim that 1966 was the start of a bear market that lasted until 1982. In addition to the Viet Nam war, which triggered civil unrest and protests, 1966 saw riots in several urban areas.
We can see that this was a pivot point that was accompanied by rising interest rates, a falling stock market, social tension and chaos.
Seven years later, in 1973, inflation was heating up, 6.1% in the US 8.4% in the UK. 1972 had been a good year and the market was up 15%. 1973 was expected to be another banner year.
But the bear quickly reared its menacing head. Stocks lost 45% when the bear market that began in '73 ended in '74. The UK fared even worse losing 70%. Both countries had their economic growth eviscerated as they fell into recessions.
In addition to the factors mentioned above, low oil prices during the 1950s and '60s had helped keep energy costs down and inflation relatively low. But then the Arab Oil Embargo shocked the world- that occurred in October. Oil skyrocketed 200% in short order. The embargo was brought on by the Yom Kippur War, which preceded the embargo by several weeks.
Those events did not cause the collapse in the stock market, as we saw it began sliding in January and finished the year sharply lower.
Leading up to this period the FED had an easy money policy, as noted above. That may have worked but for two additional factors 1) financing the war in Vietnam and 2) financing larger government (Great Society) entitlement programs. Though the oil embargo is often blamed for the '73 crash, easy money and increasing federal deficits had already triggered inflation.
In late '72 the FED turned from stimulating economic growth to combating "the possibilities of the re-emergence of inflation" (FOMC published minutes). The resultant tightening had a swift impact on the stock market.
Once again, we can readily identify 1973 as a pivotal, tipping point year that brought rising interest rates, a falling stock market, war and then a severe recession.
There is a very important sidebar that must be inserted here. It is called 'the Nixon shock' and for good reason. It is one of the most radical, far reaching Executive Orders ever signed by any president. Yet few Americans understood its significance at the time and fewer still, know about it today.
After World War II, and up until 1971, the US dollar was backed by gold.
That meant that dollars were convertible to gold and it is the sole reason that the dollar was said to be, "as good as gold". Nixon unilaterally cancelled convertibility. Which meant that with a stroke of a pen, and no public input, Richard Nixon instituted the era of fiat money creation that we are still laboring under here in the Brave New World Order, circa 2015.
What that did was to cause an immediate devaluation of the dollar, which in turn caused the 44-year drop in the value of our currency to its current level. That is a part of the backdrop to the events that unfolded in 1973 since the devaluation also boosted the inflation rate.
Then 7 years later, in 1980, inflation was the mass media's favorite buzz-kill word, it peaked at 13.5%. Gold soared to $850. The war between Iran and Iraq began that year. The higher price of oil established in '73 helped push inflation up throughout the decade.
In October 1979, under Chairman Paul Volcker, the FOMC changed its approach to monetary policy and began to target the quantity of money-specifically non-borrowed reserves. Volker essentially slammed on the brakes by ratcheting up interest rates. In one fell swoop the FED funds rate went from 6% in '78 to 10% in '79.
One again the stock market reacted quickly by going into a swoon and falling from near 1000 down to 759 in 1980. In addition the economy fell into a recession that lasted from January to July. The very high interest rate policy was maintained until 1982. (The Reagan Recession years)
Naturally the desired drop in inflation came, and that boogey-man has never returned in any uncontrolled way. But the markets and economy paid the price, in terms of a slumping shares and a stagnant economy, burdened under interest rates between 10 to as high as 20 percent.
Once again it was a tipping point year that brought economic and financial crisis and international warfare.
Next, in 1987, on Oct. 19, the US stock market crashed by 22.6% the single largest, one-day collapse in history. Interesting to note that oil prices dropped sharply in 1986, a signal that we will see again in future collapses. This massive financial tremor shook markets around the globe.
Another point of interest, the Stock Market penetrated 2000 for the first time in January and then above the 2500 mark in July. These were obviously bear trap moves that would eventually ensnare the bulls when the infamous Black Monday slammed everybody to the ground in the fall.
Surprisingly, this massive, global quake did not take down the US economy.
Nonetheless, 1986 to mid-1987 is a prime example of how an outwardly-strong stock market may not be indicative of the actual health of an economy. (We see that today) The Dow Jones in particular was at a record high, but the underlying economy had weaknesses that would be exposed in the coming months.
Oil prices sank from $30 to $20 from late 1985, until the beginning of 1987. This did not serve to boost the US economy which started to falter in '85. GDP fell from a peak of 7.3% growth in '84 down to 4.5% in '85 Then down to 3.5% in '86 and it finished '87 with that same figure as well.
The problem throughout the '80s was that the FED kept interest rates too high. The rate bounced around from a low of about 5% to a high of 14%, after the peak of 20% in 1980. Clearly the FED was intent on choking inflation to death even though it was comatose already. Inflation averaged about 2.5% during the decade.
Nobody predicted the Black Monday financial slaughter once again it came in the midst of a bull market. Furthermore, no one has since given a really convincing explanation of what caused it. All of a sudden, on a dark day in October, everything went down and dropped like a rock to the bottom... everything including the alleged chaos hedge, gold.
The next 7-year wave peaked, in 1994. This year is known for what is called "the Great Bond Massacre". Even though inflation was low, the FED was still fighting it like French Generals do the last war instead of the current one.
In an article dated October 17, 1994 by Al Ehrbar on CNN Money penned an article entitled 'THE GREAT BOND MARKET MASSACRE.
"Fortune estimates that the rise in 30-year Treasury rates from 6.2% at the start of the year to 7.75% in mid- September has knocked more than $600 billion off the value of U.S. bonds. And with long-term rates rising in every major country, the worldwide decline in bond values this year figures to be on the order of $1.5 trillion."
Even though they had already squeezed inflation out of the system, the FED raised rates once again. If you have been keeping track you probably noticed that not only do these shocks-to-the-system occur every 7 years, they seem to strike in Sept. or October.
The next two crises, 2001-2008, will not deviate from this pattern in any way.
It is troubling that the FED ignored the rather high rate of unemployment of 6.2%, which showed that the economy was not overheated at all. Nonetheless, they moved interest rates up 3% in 100 days. This also triggered a stock market selloff and shares dropped 7% from January through May.
The war was going on between Serbia and Croatia this year and the Russians deployed troops in Chechnya in December. For the fifth time we see the 7-year wave bring rising interest rates, conflict and financial calamity.
The wave moved forward another 7 years. In 2001, we have a very explosive example of the underlying dynamics. First, the author will clearly show that the stock market was already sagging in March, long before the disastrous events of 911 triggered another one-day crash.
US stock market investors suffered their greatest ever one-week losses during the week of March 12-16, 2001. The Dow Jones Industrial Average experienced three sharp declines in five days, including a drop of over 400 points on Monday and a 227-point drop on Friday, with a total weekly decline of 821 points-a loss of 7.70 percent. The S&P 500, a broader average of Wall Street stocks, showed a 7 percent decline, while the high tech-dominated NASDAQ index fell 8 percent
The events of 911 need not be repeated here except to note that they, like others in the 7-year wave, occurred in September. Now note the 7.70% decline above, because stocks will lose another 7% on Sept. 17, 2001. The Dow declined 684 points on that day, which was the first trading day after the attack on the Twin Towers.
The FED funds rates in 2000 and 2001 were still high, averaging about 6% from2000 to 4/01. Compare those rates to the near 0- 0.25 over the past 5 years. The board only lowered rates after the stock market got clobbered in March. By Sept. they had cut the rate in half and then in half again by the end of the year.
But do not get confused, the oil embargo did not create inflation, it exacerbated it, and 911 did not trigger the stock market selloff, in fact, that began 6 months earlier. What about oil prices during this period? Once again, oil peaked at about $34 in 2000 and then dropped some 25% by 911 to $24.
Here again we see that sharp declines in oil prices seem to precede similar declines in the stock market. Well, this ought to put us on high alert given what has happened to oil prices since mid 2014. Do not forget that the Dot.com bubble also produced record highs that were quickly sheared off.
In retrospect, the FED kept their anti-inflation policy in place for too long all the way into the early 2000s. But they would soon learn the lesson and get a new religion after the events of 2001 led to the economic slump of 2002. Even more so, after the Great Bubble Collapse of 2008 grabbed them by the throat.
Again, 2001 brought social conflict, financial calamity and it was the pivot point that triggered a cascade of negative events that would go on for years, including the wars in Iraq and Afghanistan.
Another 7- year period would elapse and bring us to Sept. 29, 2008. On this infamous day stocks skidded, with the Dow slumping nearly 777 points, the biggest single-day point loss ever. Approximately $1.2 trillion in market value vanished in a twinkling.
Again, seven years to the month exactly from the 2001 crash. But apparently no one noticed this pattern because the financial presstitute corps never mentioned it. Is it any surprise at this point that after lowering interest rates from 2001 to 2004, the FED started ratcheting them up again?
From 2004 to 2007 they went from 1% back up to 5%. Bam, the brakes were slammed again, and the stock market and economy went through the windshield this time. Well, the FED had not quite learned their lesson yet.
Oh, once again oil prices ran up in 2007 to a $133 peak in June '08 then tanked by almost 30% in the 3 month period to September.
This reporter would advise against getting caught up in the intricate, overly complicated, talking-heads narratives that the government, media and academia spin around these collapses. You are supposed to miss the simple, underlying factors outlined in this article.
That brings us to the next 7-year point in the cycle, 2015.
We are indeed in a Brave New World of globally, interconnected, wildly gyrating economies. From the point of the last collapse until now, the FED has tried to stimulate the economy by essentially keeping interest rates at near 0 for 6 years. (For the first time in history) Yet the once vibrant economy has been acting like a Zombie.
Where is the old GDP growth that much less stimulus used to create? Gone, a thing of the past, but you say, the Stock Market is at all time highs. Did you pay attention to the above?
Oil prices have been cut in half over the past 10 months. The dollar has risen and you are being told that lower oil prices will help the economy and stock market. No they won't. The global economy is in the throes of a massive deflationary wave. Commodity prices peaked in 2011 they have been falling ever since oil was simply the last to fall.
Lately, everything from oil and gold to foreign currencies are down. The last holdout is the Stock Market. Why should it alone stay up? Interest rates have nowhere to go but up. However, the FED is constrained because the strong dollar is already hurting imports and overseas corporate profits.
In addition, none of the most recent economic and business news is positive. Retail sales were down during the 2014 holiday season. The FED has learned -- instead of raising interest rates -- they are jawboning the dollar up by intimating that they will raise rates in June.
In fact, they cannot do that without hitting the kill-switch as they have done in the past as we have seen above repeatedly.
When will the collapse come? I think you have already figured that out at this point...