Jackson Hole 1982: The Fed meeting that caused a historical bullish market

Last week, I started the two dramatic Friday 13^th (August) Markets, the first is the time when President Nixon gathered his brain confidence in Camp David to devalue and close the window.

The second dramatic Friday, August 13^th, It arrived in 1982, after the United States suffered 140% in the 11 years after that devaluation of gold to dollar. On Friday, August 13, 1982, a morbid market suddenly returned upwards, in the strongest bull wave of the modern era, after a 777 boat closure the previous day.

August 1982 also marked the first meeting of Fed economists, Wyoming, a tradition that continues this week (August 21-23)In another retirement for the main global central bankers in the advanced Western position further from the Fed district of the city of Kansas. The first (1978) KC Fed Symposium met in Kansas City, followed by excursions to Vail and Denver, Colorado, but in 1982, the event moved to Jackson Hole, mostly since the then fed chair, Paul Volcker, liked to enjoy some relaxing fly fishing in the area.

It turns out that Missouri is the headquarters of two of the 12 districts of the Fed. The second is the great champion of the monetary economy, the Fed of St. Louis, which specializes in statistical studies and historical graphics, using its FRED database. (The Kansas City district is more a district oriented to the west medium farm).

Since three years between his induction as president of the FED in August 1979 and the 1982 Jackson Hole meeting, the High and Commander President of the Fed, Paul Volcker, conquered the two -digit hyperinflation by raising the Fed above 20%. In August 1982, we faced deflation and a deep recession, so KC’s Fed decided to attract Volcker to Jackson Hole appealing to his love for fly fishing and the impressive views.

Since 1982, there have been many dramatic ads in Jackson HoleAbove all, the debut of the apparently endless statements of President Ben Bernanke of more “quantitative flexibility” (QE), in each year of the meetings of Jackson Hole 2010 to 2013. Specifically, Bernanke announced qe1, qe2, qe3 and “capeing”, which caused a conical tantrum in 2013. Then came the introduction of modern monetary theory (mmt) BCE Mario Draghi at the 2014 meeting. In that long period of monetary flexibility, the Fed also had a zero interest rates policy (ZIRP) with rates of 0.25% from 2009 to 2015. It was as if the Fed would like President Obama to enjoy easy money “training wheels” during his full eight years.

The Fed is so powerful that it can kill the markets, and then resurrect them

Obviously, it affects the markets, since the 1970 inflationary under the president of the Fed Arthur Burns, then the deflationary medicine of Volcker and the mania that Bernanke, but Volcker made a positive and negative history in his eight -year career. First, he killed the market and the economy, causing two deep consecutive recessions, 1979-82. Then he rose the markets and the economy, a miraculous job!

During the first half of his mandate in the Fed, Volcker fed three years of net negative growth. The prefantic rate reached 21.5%; Unemployment reached 11.2%, and inflation exceeded 13% in 1980, an “expanded misery index” of 45%, but inflation had fallen to less than 4% in 1982, so in August 1982, the president of the Fed who kills inflation began to facilitate the discount rate. Its first cut was a giant step, by a complete point, from 12% to 11%.

By 1985, the dollar had recovered its mojo, requiring a special “square agreement” to limit the new power of the dollar. Gold also retired in the 1980s, along with inflation rates and our highest interest rates.

In total, the FED reduced the discount rate six times in the second half of 1982, from 12% to 8.5%. The short -term T invoices (90 days) decreased from 13.3% to 7.8% in the third quarter of 1982, and the banks reduced their pretending rate from 21% to 13%.

Why such dramatic fall? After Penn Square Bank in Oklahoma City failed in August 1982, along with many other banks, Paul Volcker’s Fed was determined to flood the market with a new liquidity, because the economic indicators of August 1982 were uniformly deflationary:

(1) Industrial production had fallen for 12 of the last 13 months as of August 1982.

(2) raw material production was reduced for 16^th Straight month.

(3) Orders of durable goods fell 4%.

(4) The Mexican stock market fell 80% in terms of the US dollar in the first nine months of 1982.

(5) Inflation rates were triple digits in Argentina (130%), Israel (104%) and Brazil (100%).

The economic discomfort of the United States seemed chronic at that time. After 200 years of growth, the United States seemed in decline. From 1973 to 1982, inflation doubled, generating a new word: stagflation: stagnation + inflation.

How do we avoid another depression of the 1930s? Simple: we remember the 1930 and did otherwise. Instead of drowning the economy, as in the 1930s, the Fed turned on the spikes. Instead of cutting world trade, we open it. We learned from history … But the multitude of the Doomsday did not learn much.

In 1982, The Doomsday Press predicted a repetition of the 1930s – The dreaded wave of Kondratieff. What did not realize is that the exiled Soviet economist Nikolai Kondratieff was right: the 1929-32 parallels were almost perfect in 1979-82, but This time we make the right decisions to avoid deeper depression.

Consider these 50 -year parallels from Kondratieff Wave, precise but misunderstood by the multitude of the Doomsday:

• The American economy contracted dramatically from 1929 to 1932 … and from 1979 to 1982.
• The stock market tripled from 1932 to 1937 … and from 1982 to 1987.
• There was another great accident in the market in October 1937 … and in October 1987.
• The market rally intensified after the war broke out in 1941 … and in 1991 (the Gulf War).

So, Kondratieff was right, but his followers were wrong, because they ignored the details of his theory.

However, some in 1982 had the forecast:

(1) John DesigningEditor and editor of “Desssauer’s Journal” (later, “Investor’s World”), predicted a “purchase panic” at the end of 1982. At the beginning of the year (January 6, 1982), he predicted “a new record in the Dow … before the sun rises in 1982”. On August 4, 1982, a week before the change, he wrote (in bold, all layers, like this) “,”, “The risk at this point is a dramatic improvement… A sudden explosion of optimism that carries the prices of the highest shares without prior notice … When the race arrives, shares prices will increase rapidly. ”The market increased 30% in the next two months, to establish new historical maximums at the end of the year.

(2) In a more general sense, in 1981 and 1982, Mark Skouseneditor of Forecasts and strategiesIt was against the grain of the gold-oriented newsletter community, predicting that “Reaganomics will work”, that is, the implications of the supply of the Kemp-Roth tax invoice would boost a dramatic rally of the United States stock market.

The result of the 1982 change was an upward market for agesWith the Dow and S&P they increase 15 times, and Nasdaq double those profits, more than 3,000% in 17.5 years, an average of +18% per year.

Why did most of the analysts miss the background of 1982? They were slaves of trends and past wavesignoring a key aspect of human nature: “What we fear most is less likely to happen.”