Financial topics

[John]

The Dow Industrials index has fallen some 400 points this morning,
and is well below 10000, for the first time in years.

Asian and European stock markets have fallen 6-7% today as well.
(Let's not forget that the Europeans, in particular, have been just
as stupid and greedy as the Americans these last few years.)

The Fed has expanded its liquidity program this morning. European
central banks are doing the same. They've already done so much, I
didn't think that was possible. But it's not helping. Investors have
finally caught on to the fact that the psychological boost of a
liquidity injection doesn't last more than a day or two.

It's been amazing to watch this, since I set up the Generational
Dynamics web site in 2002. I couldn't foresee the details of what
was going to happen, but I applied generational theory to the
situation, as well as well-established laws:

-- The Law of Exponential Growth
-- The Law of Mean Reversion
-- The Law of Diminishing Returns

I didn't make up these laws, but I've been applying them ruthlessly
for years, to predict what's happening now. And, not surprisingly,
the predictions derived from these laws have all turned out to be
brutally true.

And the fall has much farther to go. Here's Friday's chart of the
S&P 500 Price/Earnings index:



Incredibly, the P/E index hasn't even gotten as low as it was back
prior to March. It's been at astronomical levels since 1995, and now
appears to be the time when the Law of Mean Reversion is applying
itself. That means that it's going to be falling well below 10.

All this is lost on the pundits, however. Many of them see this
selloff as good news, because it's a "capitulation" event that will
cause the market to "snap back" quickly. There's just no limit to
the stupidity of these people.

Sincerely,

John

John J. Xenakis
E-mail: john@GenerationalDynamics.com
Web site: http://www.GenerationalDynamics.com
Forum: http://www.GenerationalDynamics.com/forum

[malleni]

Dear John,
Additionally, when I looking on this diagram:




.... It does not look for me as "the dollar is increasingly valuable"
What IS behind the piece of paper?
That is the question?

Additionally, I think that even this message from today morning is not so favourable to dollar, as you predict:
http://money.cnn.com/2008/10/05/news/ec ... 2008100516

"...Massachusetts looks into federal aid, as well as California..."

I appreciated your announcements, but I think that a good discussion would clear much more the situation.

How much money has FED? - That is the question.


Best regards
Malleni

[John]

The things you're referencing are TOTALLY IRRELEVANT to the value
of the dollar on international currency markets, especially as
compared to the euro.

John

[malleni]

Sorry John,

I am not the expert.

But as I understand it - if something have value, than something must stay behind it.

So from the first diagram (Non-Borrowed reserves of US depository institutions (1950 – 02/2008)) - I can understand that FED - has NO money.
In fact the curve going to the minus, which I understand as - borrowed money.

From the other link (from CNN) - I could understand that some State treasurer - would like to borrowed money on the similar conditions as the private banks.

If I understand correctly - The FED has NO money, and the some States anyway desperately need money.
I do not know if this logic is totality irrelevant on the currency market, but for my not so intelligent mind it looks like the FED must - borrowed or print money.
You also mentioned couple times that nobody will borrowed now.
So it remains - only printing.

If printing is irrelevant or good for currency on the currency market - I do not know.

Perhaps I missed something.
I would appreciate if you could in short explain why this facts would be irrelevant for value of the currency on the market?

Perhaps ECB printing money with higher speed, or something else is behind of currency value?


Thank you very much for answer,
Malleni

[John]

You're right that the Fed has no money, as I've said many times.
Its balance sheet is pretty depleted.

In fact, you could even say that the U.S. has no money, inasmuch as
we owe China, Japan and other foreign countries far more money than we
can ever pay back.

But that's not the issue. The dollar has been the reserve currency
since at least the 1930s, and there are huge amounts of dollars in
countries around the world.

In the case of the Weimar Republic, few people outside of Germany
owned marks. In the case of Zimbabwe, no one outside of Zimbabwe
owns Zimbabwe dollars.

But there are huge amounts of dollars outside of America -- Europe,
China, the Mideast -- and all of those holders are as committed to
the value and integrity of the dollar as America is.

Forget about the dollar as an American currency. Think of the dollar
as a world currency. Even if America no longer had any dollars
whatsoever, the dollar would still be valuable on international
markets as a world currency.

People have accused me of being "nationalistic" when I write this
about the dollar, but that has absolutely nothing to do with it.
It's not nationalistic to say that the dollar has become an
international world currency, whose value no longer even depends on
how many dollars America has. America is just one holder of dollars,
among hundreds of other countries, and the value of the dollar is
determined by the collective value assigned to it by all those
hundreds of countries.

John

[malleni]

Thank you, John.
I need to think little bit about it.

[Higgenbotham]

The non borrowed reserves of depository institutions are reserves of the banks. The banks have borrowed reserves from the Fed to make up for their shortfall.

The Fed still has some good collateral on its balance sheet--somewhere around $400 billion. They have loaned out about half of their good collateral. The Fed's balance sheet is shown at the Federal Reserve web site. The assets on the balance sheet are the Fed's collateral such as t-bills and t-bonds, as well as the junk paper they have taken from the banks as part of the TSLF and all that. The liablities of the Fed's balance sheet are the Federal Reserve Notes you carry in your wallet.

If you want a simple analogy think of the money as like people. Some of the money has become diseased so it is useless--in effect there is less money because it is locked up or quarantined (illiquid). It would be like if there were a record population, but half of it was all of a sudden quarantined in leper colonies or something like that and was not able to do anything productive. So in effect, while the population is large, the effective population is shrinking. But when they do the census, they still count a record population, as they still count all this junk money in the money supply.

So that is why the dollar has become more valuable. If there were a similar situation with people, able bodied people might become more valuable too, as happened after the Black Plague swept through Europe. If they piled up the dead bodies and still counted them as being equivalent to living people, then you would have the same situation you have with the money supply today.

[Timon]

The DJ index plummeted more than 750 points at the mid-day, but finally manages to rally 400 points. That amazes me. There is no single good news on the market. No much short selling covers because many of stock are still forbidden for that. What happened? Is there really some PPT (Plunge Protection Team) working?

[John]

The DJ index plummeted more than 750 points at the mid-day, but finally manages to rally 400 points. That amazes me. There is no single good news on the market. No much short selling covers because many of stock are still forbidden for that. What happened? Is there really some PPT (Plunge Protection Team) working?

The recovery occurred because pundits and investors believe in the
so-called "capitulation" fantasy.

** The origins of the hare-brained 'capitulation' fallacy
** http://www.generationaldynamics.com/cgi ... 05#e081005

John

[Gordo]

The recovery occurred because pundits and investors believe in the
so-called "capitulation" fantasy.

You get recoveries when buyers become more aggressive than sellers. That tends to happen after a weekend of everyone including the mainstream media talking about the great depression we are already in, and people aggressively dump all their shares to the point of at least temporary exhaustion.

I could not be more pleased with what I saw today from a traders perspective. We got a beautiful key reversal on massive volume. VXO (fear index) spiked to 69, the highest its been since the ’87 crash. Down volume at various times throughout the day was at 99%.

What happens over the next few weeks should be fun.