Crash and burn. That’s what happened to the German hot air ship known as the Hindenburg in 1937, an event that rudely dashed false expectations and shocked the entire civilized world.
Now, the aptly-titled “Hindenburg Omen” is looming over the stock market, portending a similar fate. The omen has an over 90 percent accuracy rate since 1975, appearing on the eve of virtually all market crashes and panics, including the big one in October 1987.
As much as it may sound like it, the “Hindenburg Omen” is not hocus pocus, but based on carefully-scrutinized market trends which belie a more general underlying truth.
Without getting too technical, the phenomenon is characterized by a fundamental instability in the markets, the development of a sort of wobble effect that has almost always resulted in a severe downtown.
It is more of a signal than an omen. Identified by market analysts in the 1970s, it is triggered whenever the daily number of 52 week highs on the New York Stock Exchange and the daily number of 52 week lows are both greater than 2.2 percent of the total NYSE issues traded that day. There are four other technical factors that enter in, but you get the idea: it identifies when the market is exhibiting a behavior that is badly out of sync with itself.
This is only one more indicator of the fact that the U.S. economy is in a tailspin with no end in sight, and routinely toying with a panic.
Early Monday morning, such a panic was beginning to set in on the financial markets after U.S. Treasury Secretary Hank Paulson said bluntly in London last week that major U.S. financial institutions “should be allowed to fail.”
Federal Reserve Chair Ben Bernanke sped to the rescue, countering Paulson’s remarks by assuring nervous investors that the Fed will remain poised to intervene with Bear Stearns-style bailouts well into 2009. Another bullet dodged.
We now know, of course, that the Bear Stearns failure could have brought the global economy to its knees virtually overnight. The fact remains that the overall conditions that created that prospect are far from healed.
Political pressure to bite the bullet and take the approach Paulson advocated continues to grow, however, because the consequence of Fed bailouts is inflation run amok. We are already into the worst of all possible scenarios, akin to the dreaded “stagflation” of the 1970s, with rising inflation and stagnating growth.
But the conditions are different now, and worse. Then, it was perpetuated by inflationary and wage hike pressures. The latter is not a factor this time, only energy resource scarcity, something that will not be relieved for the foreseeable future.
Bubbles naturally arise in situations like this, and many analysts believe that there are dangerous bubbles ready to burst in the areas of oil, food and other commodity prices and so-called BRIC (Brazil, Russia, India and China) investments. The BRIC nations are slowing their growth, they observe, and will leave a lot of investors holding empty bags.
Those pension and other retirement funds heavily invested into oil, helping to inflate the cost and add to misery at the gas pump, are also, in the opinion of many analysts, poised to go up in smoke.
The high price of oil is due to the combination of both supply-demand and speculative factors, not one or the other. There has been a speculative run-up, which may burst, dropping the price precipitously. That will be a short term development that could inflict a lot of pain for pension funds, but will not translate into a significant drop in the price of gasoline at the pump.
That’s because there remains the long-term upward pressure on the price of producing oil. It will still not go away, but continue being driven by the realities of “peak oil,” the fact that extracting a finite amount of oil remaining on the planet will become more and more difficult and costly.
In the 1980s, Federal Reserve Chief Paul Volcker had to vanquish “stagflation” by driving interest rates higher than the inflation rate. It was painful but, some argue, effective. The same approach today, as Bernanke senses, would be downright cataclysmic.
The worst thing about the Hindenburg disaster was that none of the 35 passengers who died were wearing parachutes.