Financial topics

[vincecate]

One of the latest doom indicators for the stock market is a "Hindenburg Omen". Look it up through Wikipedia; found this in ZeroHedge.

[...] "Looking back at historical data, the probability of a move greater than 5% to the downside after a confirmed Hindenburg Omen was 77%, and usually takes place within the next forty-days."

When was this Hindenburg Omen first published? If it has predicted ahead of time several crashes then it is much more impressive than if it is just afterward.

[JonLaw]

John,

The next market to experience a severe dislocation will more likely be the corporate bond market rather than the stock market. I seem to recall that Taleb is looking to this market for the next "Black Swan" event. Although it's not really a Black Swan, it's more like a White Swan, it's just a "Black Swan" with respect to the timing.

If you take a look at any of the comparisons with respect to the previous secular bear market, such as Mike Alexander's recent note on the progress of the Secular Bear Market (he's posting again at safehaven.com) or the comparisons on Doug Short's website (www.dshort.com), you can see that everything is progressing nicely, so to speak.

As I've noted before, the stock market has already crashed as much as it did during the Great Depression.

The focus of this economic crisis is within the debt market, not the equity markets. Specifically within the soverign debt markets.

You may want to look over at Karl Denninger's website, The Market Ticker at market-ticker.org to see what is happening with respect to the economy. What the government has done is essentially "sold the car crash (in 2008) and bought the cancer" in the words of Todd Harrison over at Minyanville. If you look at some of Karl's recent posting on GDP, you can see that what has occurred is that the government has replaced private demand witt government demand, essentially expanding the deficit to keep everything afloat. We are essentialyl experiencing a major depression, however it is being filled in, so to speak, with the issuance of soverign debt.

The "crash" you are looking for will most likely be focused on the debt markets. Again, the stock markets are essentially a sideshow, having gone absolutely nowhere for an entire decade. People are becoming less and less interested in the stock markets becaus the excitement of the mania is finally gone.

Pensions are all underfunded because there is literally no place to go to get any yield. All good securities are paying very little in terms of yield and the pensions need the 8% returns that no longer exist in the financial world.

As long as the government can issue debt at will, everything can continue to be covered up.

Japan should be interesting to watch with respect to the problem of soverign debt.

The debt has to be defaulted upon through either inflation or actual default. The debt cannot be paid back.

- Jon

[John]

As I've noted before, the stock market has already crashed as much as it did during the Great Depression.

You're certainly correct that there's bond market crisis coming, but it's not true that the
stock market has already crashed as much as it did during the Great Depression.
The DJIA fell 90% between 1929-33, and nothing like that has yet happened this time.

** Great Depression and Dow Jones Industrial Average
** http://www.generationaldynamics.com/cgi ... 010.i.djia


John

[JonLaw]

John,

I'm talking about comparing where we are in the secular bear market - 10 years in - to where we were in the secular bear market in the 1930's in terms of real, not nominal, dollars.

Per Doug Short's charts, we ended up worse than in the 1930s for a brief period a year or so ago.

- Jon

[Higgenbotham]

The next market to experience a severe dislocation will more likely be the corporate bond market rather than the stock market.

I agree that bonds will get hit first, similar to how the problems in the mortgage market appeared first in 2007. But I think this will spill over into the stock market and quite severely. My guess is July 2007 is equivalent to April 2010 from the standpoint of comparison to the debt markets but it's a very difficult comparison to make. I wrote this a few weeks ago in another thread:

"Compounding this problem will likely be a widening of credit spreads (added note - in other words, the interest rate differential between higher risk bonds and lower risk bonds will widen) back out toward 2008 crisis levels, which will have the effect of choking the economy harder than ever under the pressure of the increased debt load. Corporate profits and the stock market will likely plummet to below Q4 2008 levels (in other words, the S&P 500 as a whole will be losing money again). Unemployment will likely soar, but this time there will be no means for the government to borrow 10% of GDP as a placeholder and GDP will drop like a stone."

I guess what it comes down to is whether the gap can continue to be filled in with sovereign debt. I think all of the arguments pro and con have been covered or at least mentioned in passing by the forum. The Fed took some baby steps toward what essentially amounts to monetization (as I understand it) by saying they will purchase government bonds with what rolls off their MBS holdings, keeping their balance sheet constant instead of reducing it. I haven't seen any figures on that, but would guess it amounts to $10-20 billion per quarter. Has anyone seen any figures on that?

[OLD1953]

There's an elephant over there in the corner, that nobody seems to be paying attention to. I'll admit, he's nearly invisible, but he's pretty damned big.

I'm talking about the "private" market. Yeah, those guys, the ones you never hear anything about, the "sophisticated" markets where it takes 100 million to sit at the table.

http://informationarbitrage.com/post/69 ... lo-chooses

I could pick that apart a bit at a time, but what's the point? The "sophisticated investor groups" cheered the housing bubble, they cheered on the dot com bubble, they cheered for the bailout. Do I need to say anything else?

The companies that are listed on these exchanges don't have to report public data, they can make up their own rules, they can do whatever they damn well please for all intents and purposes.

Plus, there's a built in assumption that "sophisticated investors" will never try to cheat, lie or steal from each other. Oh, yeah.

Just MHO, but I truly believe there are a bunch of these private companies on the ragged edge, and when the first one can't pay its bills, the dominos will fall. And the next sound you hear will be the REAL destruction of capital.

[vincecate]

China's holdings of US treasuries are down about $100 billion over the last year. There is an amazing number of smart people who think that China is forced to buy treasuries, which is just not true. Once this becomes clear, it may then become clear there is nothing to support the dollar. Unlike any other currency, the dollar has no reserves backing it up. The end is near.

http://www.treas.gov/tic/mfh.txt
http://pair.offshore.ai/38yearcycle/#keepbuying

[Higgenbotham]

China's holdings of US treasuries are down about $100 billion over the last year. There is an amazing number of smart people who think that China is forced to buy treasuries, which is just not true. Once this becomes clear, it may then become clear there is nothing to support the dollar. Unlike any other currency, the dollar has no reserves backing it up. The end is near.

http://www.treas.gov/tic/mfh.txt
http://pair.offshore.ai/38yearcycle/#keepbuying

I don't have a clue as to whether the following is correct, but this is what the so-called experts have been saying about these figures.

http://www.washingtontimes.com/news/201 ... indicated/

But these numbers don't tell the whole story.

"The U.S. Treasury data almost certainly understate Chinese holdings of our government debt because [the U.S. figures] do not reveal the ultimate country of ownership when [debt] instruments are held through an intermediary in another jurisdiction," Simon Johnson, an economics professor at the Massachusetts Institute of Technology, told the U.S.-China Economic and Security Review Commission, a bipartisan forum established by Congress in 2000 to monitor the security implications of the U.S. economic relationship with China.

Mr. Johnson told the commission last week that "a great deal" of last year's $170 billion increase in Treasury holdings by the United Kingdom "may be due to China placing offshore dollars in London-based banks" and then using the funds to purchase Treasury debt.

Mr. Johnson, a former chief economist for the International Monetary Fund, estimated that China owns about $1 trillion in U.S. Treasury securities, or nearly half the $2.37 trillion stock of Treasury debt held by "foreign official" owners.

The amount of U.S. debt held by China is even higher than that, said Eswar Prasad, an economist at Cornell University.

Under the widely held assumption that 70 percent of China's $2.4 trillion in foreign exchange reserves is invested in dollar-denominated bonds, Mr. Prasad told the commission that China probably holds about $1.7 trillion in U.S. government debt.

That would include the more than $400 billion in debt issued by U.S. government agencies, such as Fannie Mae and Freddie Mac, whose obligations are liabilities of the U.S. government, Mr. Prasad said.

Derek Scissors, a China scholar at the Heritage Foundation, described as "unusable" the official U.S. government data on foreign holdings of Treasury debt.

Etc., Etc.

[John]

From the point of view of Generational Dynamics, China's bonds will never be redeemed.
So it really doesn't matter whether the Chinese hold $1 trillion, $2 trillion, or
$200 trillion in US Government bonds.

John

[vincecate]

From the point of view of Generational Dynamics, China's bonds will never be redeemed.
So it really doesn't matter whether the Chinese hold $1 trillion, $2 trillion, or
$200 trillion in US Government bonds.

It looks like they have already redeemed a net of $100 billion over the last year (around 10%). How does generational dynamics figure they will never be redeemed?
You mean that after a US vs China war starts the US will just stop paying on treasuries that China holds, so the amount does not matter? China probably understands this, so they would hurry to redeem their treasuries before any war starts, and cause the dollar to crash. This would also make the US a much weaker opponent in a war. If the US can not afford oil etc. it becomes harder to fight a war.

I know at least Texas and Japan had trouble with getting their US located assets during war with the US. China probably knows this and much more.

Also, I am not really saying the exact amount that China hold matters, I am saying that the notion that the dollar is supported by all the countries that peg to the dollar having to buy dollars is not true, and China proves that. It may not even matter if China unloads treasuries or not, but the point is that other countries can get cash as their short term treasuries come due, so they can reduce their holdings. If the other countries no longer buy up dollars, what will support the dollar? The US central bank does not have any real reserves, unlike any other currency issuing central bank.