Financial topics

[malleni]

...
I understand that you are espousing the viewpoint that there is nothing left of the US economy or the dollar system besides confidence and the confidence is rapidly eroding. Very little productive capacity, no ability to support the military, very little ability to tax, and not enough to maintain the dollar as international reserve currency. Therefore, in your view, a little bit of confidence is all that remains. That will soon evaporate and the dollar will become worthless very quickly.

My opinion is that the US is just not to the point yet where you believe it is. There is more left than just confidence. It is mostly a problem of corruption, which you've also discussed, and it's not known yet whether that can be turned around in time to save the country and the currency. Obviously, everyone is very nervous about this. It does seem unbelievable that the Congress and executive branch of the US could be so derelict in their duties.

Perfect conclusion.
That is exactly the point.
And that was the reason that I was confused reading your discussions... Sometimes, it looks that your explanations perfectly fit, but sometimes I could not understand what you are talking about.
Simply, the "timing" of events in your and my model are not "in phase" jet.
OK.
Lets see what happened.

Thanks for good discussion.

Best regards

[Higgenbotham]

From John's most recent blog entry:

There are technical measures you can use, but the problem is that people use technical measures for predicting things, instead of understanding things.

When you take your blood pressure, whether it's high or low, it doesn't necessarily tell you anything about your health going out six months. We use a variety of indicators such as moving averages to sort of give us some help. But if you don't try to do more with them than they're meant to do, then you won't get in trouble. Where people have problems is when they try to predict what's going to happen with the levels, and so forth.

So we have found, for example, that the spread between the 50 day moving average and the stock price is a pretty good indicator. So we're focusing more on technical and market approaches than we are on fundamentals.

The VIX is very mixed [in value as a technical indicator]. It hasn't had a very good record recently, and we've found that it gives off too many false signals, and furthermore we're more interested in individual stocks. This is a market where you have to pick stocks. So these macro items are as big in our process as they might have been five years ago. ...

We're confident we're in a bull market, and when you look at the historical perspective, we think this market will go to 1500 or 1700 on the S&P over the next 2-3 years. It's not going to be a straight line, and it's not necessarily a prediction that I wouldn't want to update on occassion, but for some sort of a parameter or game plan going forward, that works. ...

This quote truly is bizarre.

First, but not in this particular quote, Biryini says that all fundamental information is irrelevant.

Second, Biryini says that technical measures do provide some information, but they should not be used to predict things.

Third, after some discussion of technical measures, Biryini goes on to predict that the S&P will go to 1500-1700 over the next 2 or 3 years. He even calls it a prediction. The only conclusion I can draw is that his prediction must be based solely on the fact that he feels pretty good about where things are headed.

Then why not pull somebody in off the street to have this discussion?

Thinking back to some of the quotes I've read over the years from the 1930's, these were exactly the types of sentiments echoed at the top of the April 1930 rebound high before the long grind down to July of 1932 started. Whether the market can suck more people in first, I have no idea.

[John]

Dear Fred,

> Thanks for that post on Birinyi Associates, John. The corruption
> or incompetence shown by The Wall Street Journal in publishing
> their fanatasy P/E ratios is startling. I assume that Bloomberg is
> also getting their data from Birinyi Associates and that means
> they're reaching a lot of people.

> Many will just say, "But that's just one source..." but most
> investors don't do much, if any research. I post the link to the
> S&P spreadsheet all over Seeking Alpha and yet the same people
> keep quoting the bad PE data put out by Bloomberg, The Wall Steert
> Journal and CNBC, as well as the majority of pundits. I believe
> that most people don't take the time to learn how to read such
> data or dismiss it if they do because they can't think critically
> enough to recognize the difference between real data and someone
> lying to you because he has an ulterior motive.

Thanks for putting me on to him in the first place. I really think
that Biryini is a lunatic. If he's not a lunatic, then he knows what
he's doing and he's a total sleaze. Either way, what does all this
say about the Wall Street Journal?

On the other hand, I really can't blame ordinary investors for
believing what they read in WSJ. I talk to people all the time who
tell me, "You can't possibly be right. If you were, then it would be
big news, and would be in every newspaper."

Sincerely,

John

[John]

Dear Higgie,

> Third, after some discussion of technical measures, Biryini goes
> on to predict that the S&P will go to 1500-1700 over the next 2 or
> 3 years. He even calls it a prediction. The only conclusion I can
> draw is that his prediction must be based solely on the fact that
> he feels pretty good about where things are headed.

> Then why not pull somebody in off the street to have this
> discussion?

That's very funny, and, once again, what does this say about the Wall
Street Journal?

> Thinking back to some of the quotes I've read over the years from
> the 1930's, these were exactly the types of sentiments echoed at
> the top of the April 1930 rebound high before the long grind down
> to July of 1932 started. Whether the market can suck more people
> in first, I have no idea.

This is very interesting, and it got me to thinking.

From the point of view of Generational Dynamics, I'm always looking
for changes of attitude in the masses of people. Sometimes these
changes are subtle, and sometimes they're obvious, but they always
tell you what's really going on (as opposed to what the journalists
and politicians tell you).

As you suggest, I believe that there's been a major change in
attitude since the March 9 low.

Prior to August 2007, the general attitude could be characterized as
"total obliviousness," meaning that the assumption that the stock
market would always go up was simply assumed, just as everyone
assumed that 2+2 would always equal 4.

After August 2007, particularly with the Bear Stearns, Lehman
Brothers and AIG collapses, people had a shock equivalent to
discovering that the value of 2+2 had suddenly changed to 5, and they
became highly desperate and risk-averse. This happened over a 19
month period (Aug 2007 to March 2009).

Then, starting in March, something happened. There was a major
change in attitude, the desperate anxiety turned to desperate hope,
and a new stock market bubble was born. This change in attitude was
triggered by the $11 trillion bailout and stimulus plans, and by the
view that this "recession" has gone on so long that it HAS to end
this year.

Now, two months later, the new bubble mentality is firmly entrenched,
just like in 1930, as you suggest.

So what happens next? The new bubble mentality is VERY fragile, and
it will take very little to derail it. I think it's very likely that
when "something" happens, the correction will be very sharp, and it
may even turn into the generational stock market panic and crash that
I've been predicting.

One person who I think agrees with this is Art Cashin, the UBS floor
manager at the New York Stock Exchange. I see him most mornings on
CNBC around 8:50 am, and I could swear that in the last two months
he's aged 20 years.

Last year, he seem very complacent about predicting "capitulation,"
claiming that there would be a big correction, but then the worst
would be over, and the market would grow again.

His predicted capitulation has never occurred, and my feeling
watching him all these months is that he considers this to be a very
dangerous development. His complacency seemed to me to disappear as
the weeks went by, and now, as I said, he looks like death warmed
over.

This morning he said something about the market possibly falling
below a support level of S&P 820, after which the plunge might get a
lot worse.

He's also been recently quoted as saying, "When the market starts to
disbelieve something, the selling can turn violent."

This is exactly the kind of thing that can be expected from a
generational analysis.

Now, maybe I'm misreading him, and he's simply developing a stomach
ulcer or something, and that's why he looks sickly. But I think that
he's suspecting the worst.

Sincerely,

John

[Higgenbotham]

So what happens next? The new bubble mentality is VERY fragile, and
it will take very little to derail it. I think it's very likely that
when "something" happens, the correction will be very sharp, and it
may even turn into the generational stock market panic and crash that
I've been predicting.

This is what I'm thinking will happen--the deflationary jolt. My best guess is that it will be seen in August (in other words before Fall) which will increase the shock value. So far, the Fed and Treasury Dept have held it back but the potential panic dynamics have been made worse as the escape route of long term Treasuries has now been closed off before the real panic has had a chance to occur. Now there can be simultaneous panic in the stock and long bond markets. In my opinion, that was incredibly stupid on their part because there will be fewer doorways to get through when the real panic does occur. Plus, as you guys have pointed out, stocks have become more overvalued, so not only do we have lingering and new problems in the credit markets, we also have exponentially higher stock market valuations.

[Higgenbotham]

Here's an interesting commentary that touches on some of the ideas posted yesterday.

One thing, though. Our debt to GDP ratio is much higher than it was in the 1930's. If I remember right, it was around 20% in the early 1930's. Today it is closer to 100%. Therefore, any panic in the bond market has the potential to drive interest rates much higher than the little blip which occurred in the early 1930's. And with private sector debt levels higher as well, the results will be excruciatingly painful.

I have an old paper from the Fed which shows rates on the 10 year bonds going back to the 1920's. After April 1930, 10 year bond rates edged up to just under 4%. Today they are already getting close to 4%. And there hasn't even been a panic yet.

That's why I'm guessing that our equivalent post April 1930 collapse is going to include another stock market crash (worse than last Fall) followed by a grind lower, whereas the actual post April 1930 collapse was a steady grind lower until July 1932.

And exactly as in the 1930s, we will wind up in the same place with "The Fed" being blamed for the "loss of liquidity" when in fact the truth is that it was the government attempting to spend more than it made, and finding the market unwilling to support insane deficit spending, that led to the bond market dislocation, much higher interest rates, and the second phase of the economic collapse.

We are following the precise same path we went down in the 1930s.

http://market-ticker.denninger.net/arch ... nough.html

[John]

Dear Higgie,

> This is what I'm thinking will happen--the deflationary jolt. My
> best guess is that it will be seen in August (in other words
> before Fall) which will increase the shock value. So far, the Fed
> and Treasury Dept have held it back but the potential panic
> dynamics have been made worse as the escape route of long term
> Treasuries has now been closed off before the real panic has had a
> chance to occur. Now there can be simultaneous panic in the stock
> and long bond markets. In my opinion, that was incredibly stupid
> on their part because there will be fewer doorways to get through
> when the real panic does occur. Plus, as you guys have pointed
> out, stocks have become more overvalued, so not only do we have
> lingering and new problems in the credit markets, we also have
> exponentially higher stock market valuations.

I know what a stock market crash is. But what's a "deflationary
jolt," and how does it differ?

> One thing, though. Our debt to GDP ratio is much higher than it
> was in the 1930's. If I remember right, it was around 20% in the
> early 1930's. Today it is closer to 100%. Therefore, any panic in
> the bond market has the potential to drive interest rates much
> higher than the little blip which occurred in the early 1930's.
> And with private sector debt levels higher as well, the results
> will be excruciatingly painful.

I'm not sure whether or not this makes any difference.

In the 1930s we were a "creditor nation," and today we're a "debtor
nation." However, in the 1930s there was no chance we would recover
the amounts we were owed (see The Bubble that Broke the World), and
today there's no chance that we'll pay the amounts we owe. So in each
case, the amount owing/owed is effectively zero.

If we now relate this to Richard Koo's "balance sheet recession," the
only thing that matters is stimulus. Being a creditor or debtor is
irrelevant, since the only thing that matters is the money injected
into the economy through quantitative easing. And then, according to
Koo, that all comes back to the Treasury anyway.

If being a "creditor nation" in the 1930s was really worth anything,
then the 1930s should have been relatively painless, but in fact
there was massive unemployment, bankruptcies, homelessness and
starvation.

In all these discussions, I keep coming back to the same point: The
only thing that really matters is that two years ago the world was
swimming in liquidity, and since then the amount of liquidity has
been steadily disappearing, like the ocean going into low tide.
Central bankers can run around filling up various tide pools as they
go along, but in the end it can't keep up, and all the liquidity will
disappear.

Sincerely,

John

[Higgenbotham]

I know what a stock market crash is. But what's a "deflationary
jolt," and how does it differ?

In 1929 there was a stock market crash but the payment systems still held together. In other words, so far as I know, everyone who sold stock in 1929 received payment. My guess is that we still have another stock market crash coming due to these high valuations but this time the payment systems are going to fail. For example, we could see payment for stocks or other assets drawn on a bank that was supposedly liquid the day payment was made, but suddenly becomes illiquid and the check bounces. Or payment from a money market that held the buck in the morning but broke the buck that afternoon. This time around, instead of the stock market forecasting illiquidity sometime in the future, a stock market crash and a liquidity crisis could occur simultaneously because of the way the house of cards has been held together.

I'm not sure whether or not this makes any difference.

In all these discussions, I keep coming back to the same point: The
only thing that really matters is that two years ago the world was
swimming in liquidity, and since then the amount of liquidity has
been steadily disappearing, like the ocean going into low tide.
Central bankers can run around filling up various tide pools as they
go along, but in the end it can't keep up, and all the liquidity will
disappear.

My thoughts on this are twofold. First, there is the end point at which liquidity dries up, which I think is what you and Denninger are looking at, as Denninger seems to agree with you when he says this will be an exact replay of the 1930s. What I get out of your comment is that what happens (the specific path that is taken) before the liquidity dries up really doesn't make any difference because we still get to the same final state no matter what. Second, there is the possible damage that occurs to the economy during the time that the government is pilfering money from the private sector through bailouts and excessive borrowing. This second aspect is a matter of opinion. As you said in one of your blog posts, some would guess that time is being bought to repair the economy while others would be of the opinion (as I am) that the bailouts are causing further damage and that damage will have irreversible future impacts. I can't prove this, but it's my opinion that higher government debt levels have weakened borrowers to the point that, when the liquidity does dry up, there will be more defaults than otherwise would have occurred at lower debt levels.

Turning to the first aspect, when that blip up in interest rates occurred in the early 1930s, there were a certain percentage of private sector defaults that would have been triggered by the higher rates and no other cause, as private sector borrowing rates would also have increased. If the US government had been further in debt and interest rates in the early 1930s had spiked higher than they did, would there have been more defaults? Maybe not. My assumption was yes, but maybe interest rates just spike to the point where lending grinds to a halt and that point is mostly independent of how much debt the US government has incurred.

As I said earlier, the second aspect is mostly a matter of opinion. It appears that a lot of measures like profitability and employment levels are worsening, but it's impossible to say that bailouts and excessive US government borrowing are the cause.

Some of what I wrote here may not be articulated in the best way because these are only thoughts I have had and there hasn't been any discussion anywhere on this topic that I know of.

[Gordo]

The media are quite helpful in giving major buying and selling signals for commodities. Whenever any commodity should be bought, you will hear repeated stories about how the commodity is “in global surplus”; when it should be sold, you’ll hear about “acute shortages” or that “hedge funds will have to keep buying it”.

On rare occasions, reality will become even more absurd than the media’s distortion of it—because media hype will affect otherwise rational human behavior. Whenever this happens, you should aggressively take action in the opposite direction of that hype.

A classic example occurred in April 2008. The media hyped the notion that rice had hit a multi-decade price peak because there was a worldwide scarcity. Not knowing the actual situation, and believing the media nonsense, several countries forbade the export of rice. This, of course, caused some real hardship both for potential buyers and sellers. The reality did not become apparent until it was reliably reported that tons of rice were literally rotting in warehouses in India and elsewhere because they were not legally allowed to export it. Even then, due to the usual bureaucracy and public skepticism of a claim which directly countered the accepted daily brainwashing, it took several weeks in most instances before these countries once again permitted rice to be exported.

While there are many advantages to globalization and the rapid dissemination of information, the sad truth is that there were many deaths due to malnutrition which would not have happened without a media-induced worldwide frenzy. The insanely high levels of the Shanghai “A” Index and the Bombay Sensex in October 2007 and January 2008 respectively, among similar bubbles, were actively encouraged and promoted by the media—as were the equally ridiculously low levels for Russian, Brazilian, and similar equity indices earlier this year.

The greater the number of absurd extremes, the greater will be the number of opportunities to double or triple your money within a short period of time at relatively low risk. The greatest danger when taking the opposite side of frenzy is almost always in the short run, as any wacky extreme often goes to an even wackier extreme before it reverses. As long as you act incrementally with gradual purchases or sales, you can take advantage of this tendency by continuing to add progressively to your position as prices become increasingly irrational.

The media have a pathetic track record, but that can be used to your advantage. Whenever any given asset class is discussed most heavily, you can be certain that a trend change is imminent in that asset class. Learn who the most consistently wrong analysts are, and act in the exact opposite direction of their recommendations. This is often even more valuable than having intelligent advice, if you learn to employ it properly.

[aedens]

The maximum ruin will apply I am sorry to say. I feel to many will be crushed in six monthish since as we are reminded we can see the weather but few can see the sign's of the times. I have seen some author's I never would of assumed to the grass roots are arming as a predispostion to history's lessons. This context was warranted to the furthering spread to vital information the central government does not comprehend. Getting past the polemics of dialog in the main body politic's today the affiliation's are dropping to a large extent. The current momentum appears that the blue and the red party's are running out of verbiage to encompass this growing discontent as we logged and moniter here. The vital difference here we do not care about politic's here since the truth has never been a blue or red party line of concern. Foremost we discern the faceted input from some of the leading minds from abroad and geocorporate entities circumstances to whit. This does not mean this is not an essential factor given the scope and preponderances. Given the lucid conveyances from this site and a few quality others the sample rate here is like a door handle. It is painfully to be drawn out since name any level of so called civilazation to be subject to truth and acountability. As we continue with our lives pushing the boundry's of progress the only problem I see is a government detached from reality and the direction back is a longer painfull one as the process back to lucid decisions take more time in addition to the pit we where put in.

The grass roots see a pattern that is protected only by the people from those who dispocess the frame work that this is about in this country. Other elements inside or outside the boundry's do understand this or will, since if our lamp is extinguished or trimmed to long they will enter a darkness and day that some say is already written.

Commentary is changing to party semantics and they may indeed be to late unless the average person is to polluted and is indeed already leaning on his shovel with power willing to cover the patriots. Mr. Obama will utter what direction verbally, and if he was the President the path would be already be clear would it not? Other times and leaders have conveyed only when the last option is used America will choose. I feel to many things are different today and yes its possible in the long run. I feel so many are doing the right thing the Hill should have better eyes since indeed the President is keeping the pickforks at bay. A Trend can be bent but being spared is a different study.

Heraclites: “You can not step twice in the same river.”

At the annual banking structure and competition conference of the Federal Reserve Bank of Chicago inMay 1987, the buzzword heard in the corridors and used by many of the speakers was “that which can be securitized, will be securitized.”

http://www.voxeu.org/index.php?q=node/3513

http://www.levy.org/pubs/pn_08_2.pdf

http://action.firedoglake.com/page/s/Fed1207

http://faculty.chicagobooth.edu/john.co ... ch/Papers/

Google attacks: http://www.capitalism.net/articles/news_men.htm