Analyst see's 2010 might be the same with 1930 Great Depression

By Ron Coby’s Minyanville

Many well-respected economists and market strategists are talking about a V-shaped global recovery. Some see it as so powerful, they’re calling it a “Capital V” economic recovery — aka “2003 on steroids”.

I agree 100% — the V bottom in global markets is the result of unprecedented steroid injections by the Federal Reserve coordinated with many other Central Banks. But we all know what excess steroids ultimately do to an athlete once the power-enhancing drugs wear off. Just as the illusion of strength dissipates from an artificially pumped up body, so will the global market weaken once the “juice” of coordinated global rate cuts are reversed.

When that happens, economists won’t be talking about the letter V to describe the global economy. Instead, it will be a Capital D for Deflation, Debt contraction, and quite possibly, Depression.

Let me explain. Look at the 54% collapse from October 2007 to March 2009: It was a slow-motion version of the 49.4% collapse in 1929. The Dow Jones Industrial Average rally since the March 2009 bottom has repeated the early 1930 Dow rally. Both periods gained back about half of what they lost from their respective bubble peaks. 2009 gained back 3,864 of the 7,729 it lost in its collapse — bringing the DJIA to a recent high of 10,729. Compare the 2009 gain with the 1929 crash low to the high in April 1930. It’s almost identical. By April 1930 the DJIA gained half of what it had lost . And when it finally topped out the real pain began as deflation took its hold. I believe the same pain is about to make itself felt in a big way.

Traders in early 1930 began singing “happy days are here again” when the market rallied an incredible 52% from the famous 1929 crash. Now in 2010, market strategists and small traders are yet again singing that same song. Investors today may be making the same mistake as traders did back in 1930. Recently, most of the talking heads on TV (and those in Washington) have been saying “the worst is behind”. What this confident bullish crowd doesn’t see today is the worst may be dead ahead.

Is It April 1930 All Over Again?

That last leg up to the very top in April 1930 took on a similar slow-motion grind like the recent top to 10,729. From the top in April 1930, investors and traders experienced 27 months of hell as the Dow completely collapsed until it finally hit the bottom in July 1932.

What’s interesting is the DJIA had several failed rallies (+19.3%, +27%, +31%, +39%, and +28%) on its way to falling 86% from that 1930 top. If the DJIA continues to repeat the 1929-32 sequence of market events, we’re talking about a Dow Jones Industrial Average of 1500 somewhere in 2012.

The first loss of 7729 points on the DJIA from October 2007 to March 2009 will look like an absolute picnic if this final down leg in fact materializes. The good news? From 1929-32 there were several mini bull market moves mixed in with that 86% decline. Deflation’s second coming.

The deflation trade is back on the table when you look at all the charts. After much weakness, both the US dollar and the 10-year bond are at giant bottoms on the weekly charts. The metals and energies have reversed their upside momentum and look like market peaks. In fact, the dollar is likely only weeks away from a very bullish “golden cross” while oil and China are only weeks away from a very bearish “black cross”. I show a chart of the last time China did a black cross in my book, Discover the Upside of Down (on page 153 is a Grail chart that outlines how the black cross — 50-day ma down through a 200-day moving average — preceded a collapse in the Greater China fund). Watch for a coming black cross in the ETF iShares FTSE/Xinhua China 25 Index because if it happens — DUCK! If China crashes it will likely spread to all other global markets. That’s when V becomes D and market losses will again spread like a disease.

Wrapping it all up, the global dominoes are once again starting to fall as investors worry about a world without massive government-injected stimulus. For example, China recently announced the partial removal of some economic steroids and its market topped out and quickly reversed. As China’s stock market falls from its gigantic top, other markets are also starting to fall. Brazil topped and is falling, knocking down several others like Australia, Spain, Italy, Germany, Hong Kong, and even extending over to US markets.

Remember, it’s all happening in a slow-motion fashion. The so-called “Great Recession” might have to be renamed “The New Great Global Depression of the 21st Century” if global dominoes accelerate their fall.

With that in mind, another D word comes to mind; it’s time to be very Defensive. This is especially true if another round of Debt contraction spreads — turning the global recovery into a fiery lava flow of Deflation or Depression. It’s time to get protected in case losses spread and the V becomes D.