Financial topics

[vincecate]

Silver had a bigger percentage drop than the S&P today. Gold had a little smaller percentage drop. But the S&P is now down to levels of last year, while gold and silver just backed up 2 or 3 days.

As Higgie explained (thanks!), people might be selling gold and silver because they are leveraged and need liquidity. If they get a margin call because of their stocks going down they might sell some gold or silver, which would help push those down as well. To me that does make sense as the news did not seem so bad for gold and silver.

[Higgenbotham]

Silver had a bigger percentage drop than the S&P today. Gold had a little smaller percentage drop. But the S&P is now down to levels of last year, while gold and silver just backed up 2 or 3 days.

As Higgie explained (thanks!), people might be selling gold and silver because they are leveraged and need liquidity. If they get a margin call because of their stocks going down they might sell some gold or silver, which would help push those down as well. To me that does make sense as the news did not seem so bad for gold and silver.

I see there was a high volume day in GLD with about 40 million shares traded. There have only been a handful of days with that much volume in the past few years. I think that confirms our suspicions about where traders found themselves today.

By my calculations, stocks are now down about 83% in terms of gold since 2000, a new low today. That's getting close to the 89% loss that occurred from 1929 to 1932 while the US was on the gold standard.

If there is another crisis similar to 2008 and gold falls 30% as it did then, that would imply Dow 5000 at an 89% loss. That seems like a reasonable way to look at it in all its various permutations.

[aedens]

If a good suit costs a ounce of gold in history the compass is indeed screwed up.
Who has a currecy that a suit cost a ounce today?

selling gold and silver because they are leveraged and need liquidity.

So much for market fundamentals.

If there is another crisis similar to 2008 and gold falls 30% as it did then, that would imply Dow 5000 at an 89% loss. That seems like a reasonable way to look at it in all its various permutations.

Well guys bears are a beast as we know but the phases of the bear market are identified not by rates of decline nor by P/E ratios, but rather a condition in investors' psychology. The three phases of a bear market are: Denial, Hope, and Capitulation.

[OLD1953]

Well, if an inflation proof measure of the market is desired, all that is required is to divide the value of stocks (which is in dollars) by something else denominated in dollars, and voila', a dimensionless number. Since that number has no dimension, it's not susceptible to inflation and shows the market sans inflation - providing you choose to divide by something that doesn't remove the market value, but does remove the dollars.

Um, divide by total number of dollars in trillions at that time, perhaps? Or by GDP? Or even by the average value of the stock over the last five years? Or since creation?

Just something to think about.

[Higgenbotham]

Well, if an inflation proof measure of the market is desired, all that is required is to divide the value of stocks (which is in dollars) by something else denominated in dollars, and voila', a dimensionless number. Since that number has no dimension, it's not susceptible to inflation and shows the market sans inflation - providing you choose to divide by something that doesn't remove the market value, but does remove the dollars.

Um, divide by total number of dollars in trillions at that time, perhaps? Or by GDP? Or even by the average value of the stock over the last five years? Or since creation?

Just something to think about.

Gold is a tradable asset class whereas money supply and GDP aren't. The stocks to gold ratio is similar to Tobin Q; it's a measurement of the ratio of paper assets to hard assets and their fluctuation through the cycles. The stocks to gold ratio has tended to increase over time as man has advanced. In this fiat cycle gold is subject to inverse extremes with stocks as speculators can compress gold while bidding stocks up (in 2000 when the ratio reached an all time high) or expand gold as stocks plummet (maybe some future date). Therefore, it seems possible that what may be different in this cycle is the ratio of stocks to gold is likely to lose more than 89%. How that will happen (stocks down or gold up) seems harder to predict but if the loss got into the low 90s I probably wouldn't want to be any combination of long gold or short stocks.

http://www.sharelynx.com/chartstemp/DJAUTobinsQAH.php

http://valueinvestingcenter.com/2011/06 ... ds-report/

Another way to show the market is overvalued as we know. Tobin's Q seems to be showing similar behavior to the late 1930s rebound. Also, I would wager the statements of book value are wildly overinflated at this juncture.

If a good suit costs a ounce of gold in history the compass is indeed screwed up.
Who has a currecy that a suit cost a ounce today?

Question would be whether gold should buy more over time as manufacturing technology improves. If mining technology improves at the same rate as manufacturing technology, then what gold buys should hold constant. If gold is getting scarcer and harder to extract to a greater degree than other inputs, gold may buy more. Other factors being equal.

[OLD1953]

I seriously doubt the average person has less gold in their possession than they had when gold was money, it's just worn or used in devices now. There is quite a bit of gold locked up in VLSIC's. Not much per each, granted, but when production is in billions per year, it adds up.

Most metals swing according to industrial demand, gold is a vanity item and a counter on certain trades, but I don't see it as money now. If we come through this saecalum without returning to gold backed money, then I'll presume it's dead as money forever, at least on this planet. It's worth noting there are Arab nations pushing for a gold dinar for religious reasons, the Koran defines what money should be in terms of gold.

[John]

S&P has just lowered America's credit rating from AAA to AA+.

As Perry Mason used to say, the fat's in the fire now.

John

[aedens]

I meant it as a Value today question not to be misleading. We all remember when money failed and when in History.
Like many here the phenomena of value relative to time does have an GD which was my basic interest here some time ago.

[OLD1953]

Reading the S&P statement:
http://www.standardandpoors.com/servlet ... lue3=UTF-8

They seem to call for raising taxes/removing tax cuts twice, once in the body of the report where they note "no new revenues were included" and once down in the outlook section where they discuss lapsing of the 2001 tax cuts as a positive thing.

Think they are saying what my analysis a couple months ago pointed up, cutting isn't enough, you've hit the wall and have to raise taxes now AND cut spending or default. (Point of clarity here, I'm not ticked at the notion of SS cuts per se, I'm ticked at the idea of establishing a class of bonds owned by SSA that can't ever be redeemed, which seems to be a very popular idea in DC right now.)

[Higgenbotham]

I recently mentioned the Ohio Life and the Credit Anstalt events. Looking at the US downgrade now being official, in the big picture we have:

Public vs Private Assets
Domestic vs Foreign Assets
Degree of Prior Knowledge of the Event

as variables to look at to possibly gauge the after effects.

The 1857 Ohio Life event was the failure of a Private Domestic Asset where there was no prior knowledge.

The 1931 Credit Anstalt event was the failure of a Private Foreign Asset where there were hints of upcoming default (to what degree I am not aware - others may know much more).

The 2011 US Downgrade is the partial failure of a Public Domestic Asset that was well telegraphed to the market 8 months in advance.

To what extent the US Downgrade can be considered comparable to the other events is questionable. Lehman and AIG were comparable but the ensuing after effects were then backstopped with the AAA credit rating of the US government. This in my view is only comparable to the 14th Century collapse - there is no modern precedent. Still, there are differences like the FDIC and electronic fiat.

As to what happens short term, the market already knew the US was most likely going to be downgraded. The response, I believe, was to ignore that and focus on the weak economy which favors selling stocks and buying bonds. As the downgrade became imminent yesterday, there was a switch to buying stocks and selling bonds. Also, the favored stocks were the blue chip Dow stocks which came off the bottom and closed higher. We may hear a phrase in the coming weeks that "blue chip Dow stocks are the New Triple A". Another chance for the smart money to create a CNBC type chant that moves some of the public into the assets they want to unload. I don't know - it may be good for 2 or 3 weeks or the public may not bite at all. But I would rest assured it will be attempted. Never let a good crisis go to waste.

Longer term, there is problem with that thinking. One is the US credit rating was used to backstop corporations and create a temporary earnings boost which is no longer available. Public and private assets are really two sides of the same coin as many corporations rely on government "welfare" for their earnings.

The "New Triple A"
Note what closed green in advance of the downgrade and watch that for further clues.
http://www.marketwatch.com/investing/index/DJIA