Financial topics

[dan123]

I'd like to draw your attention to the following research activity http://www.er.ethz.ch/fco
The theory is described under the Highlighted Papers titled Dragon-Kings. The final paper is due to be published on May 1, 2010.

It occured to me that this forum might be best equipped to address two questions. What would be a suitable Generational Dynamics time series that could be superimposed on the experiment? And, what is your view, would that only provide further correlating information to the results, or even point to completley different results?

On a more humerous note, it occured to me that if I were the professor and truly believed in my rock solid theory, I would a least try to make some money out of it before I publish the "science". So I can only assume the professor came to the conclusion that he needs the worlds input to this problem and he is only seeing the tip of the iceberg today.

Looking forward to a lively discussion,
Best regards Daniel

[Higgenbotham]

I'd like to draw your attention to the following research activity http://www.er.ethz.ch/fco
The theory is described under the Highlighted Papers titled Dragon-Kings. The final paper is due to be published on May 1, 2010.

It occured to me that this forum might be best equipped to address two questions. What would be a suitable Generational Dynamics time series that could be superimposed on the experiment? And, what is your view, would that only provide further correlating information to the results, or even point to completley different results?

On a more humerous note, it occured to me that if I were the professor and truly believed in my rock solid theory, I would a least try to make some money out of it before I publish the "science". So I can only assume the professor came to the conclusion that he needs the worlds input to this problem and he is only seeing the tip of the iceberg today.

Looking forward to a lively discussion,
Best regards Daniel

I'm not the owner of this website, but there had been some discussion here that I had brought up this Summer about Sornette's prediction that the bubble on the Shanghai Stock Exchange would burst around the end of July. My work with historical cycles indicated the stock market bubble would most likely burst in early August. Since it was my belief that the bubble was worldwide, my thoughts were that all major exchanges were in a bubble that would burst simultaneously, say within a month of each other.

Obviously, that didn't happen. Shanghai did correct, but remains close to its Summer high while the US exchanges hover near highs that have exceeded the Summer levels. Let's look at why from a historical/generational standpoint.

Past generational bubbles were focused on one thing - tulip bulbs, stock shares, etc., and these objects were not an integral part of the economy. To some extent, these objects became money, but that did not seem to overshadow the rest of the economy. Today's bubble(s) seems more extreme in that regard. There appears to be a general belief that bubbles are necessary in today's economy and a "bubble industry" has sprung up which justifies and supports these bubbles. Those who control the levers are a part of that industry (basically the large US money center banks and investment houses like Goldman and their reps who have burrowed their way into high positions in the US government) and their world view is that what they do to support these bubbles is absolutely necessary and essential, which of course is utter nonsense. Going back to the past generational bubbles, that "bubble industry" either did not exist or existed to a more limited extent (say post 1929 for example). In the examples of Tulipmania and the South Sea Bubble, the populace or the government realized at some point that these bubbles were harmful and took active measures to pop them. The Chinese, being in a similar situation, also took active measures in early August to deflate their stock market bubble, right on schedule, but the US authorities did not. It had been my stance that the US authorities could not maintain the bubble in the face of natural deflationary forces for more than about a month beyond historical outcomes, especially given that the Chinese were successfully deflating their bubble. That turned out not to be true.

Accounts of past generational bubbles focus on one bubble where the securitization of debt (basically printing of money) occurred. We seem to have that in multiple forms today, but real estate is the area where this bubble was focused and I think history will show that the rest of these bubbles are side shows even though they seem significant at this time. Since the real estate bubble was so large, its bursting has allowed the "bubble industry" to shuffle some of the money around and create "sub-bubbles" in other areas with less money, and that makes it look like they are really doing something when in fact they are not in the big picture. Bernanke et al are feeding on the remnants of a bubble that has already burst and can only be resurrected in lesser and lesser forms until all forms of the bubble disappear. Therefore, it's my belief that any bubble timeline from a generational perspective would be centered on the real estate bubble, which has already burst. But because of its immense size relative to other historical bubbles and the existence of the "bubble industry" its bursting has propagated minor bubbles that will die out over time and, in my view, die out rather quickly, likely when the economy makes a turn for the worse.

[dan123]

Thanks for your reply this will take me at least a day to digest (very interesting food for thought), but here my humble initial thoughts
- "integral part of economy" I assume tulips could be used during the tulip economy to pay for a house or livestock. So in my view during the bubble an integral financial part of the economy
But I fully agree on the gist of your answer, my thoughts were more on constallations of generations leading to such things as
-Hitler
-financial crisis
-Roman Empire
My feeling is that Sornette is engaging in very worthwile scientific exploration of the subject, his theories are deemed insoluble by him and his team without wide publication and very broad deep scrutiny and discussion (otherwise he would use the competitive advantage of benefiting from his insight and therefore not publish his knowledge). Or he is charitable by nature to share his secrets with us. No, I believe he knows only very broad interaction will shine the light on some further definate surprises in his quest to solve the riddle by means of physics, maths and socio modelling. But the core of what he publishes in his description of the theory remains notable given the diverse examples of systems he describes.
As said this is only a first impression on your reply, and there is much more to contemplate so I will come back later, thanks

[Higgenbotham]

- "integral part of economy" I assume tulips could be used during the tulip economy to pay for a house or livestock. So in my view during the bubble an integral financial part of the economy

I agree that tulips could be used during the tulip bubble to pay for things.

The difference I see and what was meant by integral (and I probably should have said "already intergral") is that prior to the bubble real estate was a large part of our existing economy (materials, construction, furnishings, sales, financing and so on). Also, those who didn't work in the real estate or allied industries owned a home and a home is probably the largest investment anyone can make and a greater percentage of income goes into housing than any other expense. Therefore, when the real estate bubble took off, nearly everyone in the country received a windfall either in their job if they already worked in the industry or in the value of the home they already lived in. In many or most cases (I don't know the percentage) people tapped into readily available lines of credit on their homes to buy furnishings, pay for vacations, or send their kids to college. I think this also implies that the bursting of the real estate bubble will be more devastating than the bursting of previous bubbles.

PS The way I understand Sornette's theory is that the formation and bursting of bubbles show certain price behaviors that can be modeled mathematically and that these patterns occur due to herding behavior. I guess how that might relate to our discussion so far is in determining how to define the price and the herd. It's my guess that with regard to the stock market and the herd currently it is primarily a worldwide interdependent phenomenon so maybe a composite model of stock prices should be used instead of one exchange like the SSE. Since oil is a worldwide market maybe that is why the model may have better predicted the bursting of the oil bubble vs stock market bubbles in individual countries. In other words, more specifically, the continued reflating of the US bubble caused the incipient bursting of the SSE bubble in China this Summer to turn around and reflate. Just a thought.

[gerald]

I've referred to the Dubai development as the most extravagant real
estate project since the ancient Pyramids.

I wonder how many Pharoahs went bankrupt building the Pyramids? There
were tens of thousands of laborers, who all had to be housed and fed.
Many of the laborers would have to have been "borrowed" from other
regions of Egypt, and so there were enormous prices that had to be
paid in one way or another. With all those huge amounts of resources
sloshing around, the level of corruption must have been enormous. I
wonder if some kind of ancient credit bubble was created by the Nomad
generation of the time, possibly involving some kind of ancient
securities market. I wonder what happened when the market crashed?


Or maybe the Pyramids were built by Martians. Gerald?
http://www.outerworlds.com/likeness/aliens/aliens.html

John

John,
My comments regarding the "pyramids" and " Martians " are in "other ideas" under the "Science , Technology and the Singulary" section of the forum.

http://generationaldynamics.com/forum/v ... 4512#p4512

[John]

-- CNBC interview with Art Cashin, 12/17/09, 8:55 am

Joe Kernigan: There's an old expression, "Never short a dull market."
This is so dull. We've done nothing for about six weeks. Is that a
good sign for the bulls or a bad sign for the bulls?

Art Cashin: It's an inconclusive sign. When we break out of this,
one way or another, it probably is going to be very dramatic. The
fact that we've had this kind of compressed consolidation, either
side, with not a big amplitude in range, this is telling us that
something's building up here. It's like a coiled spring. So we'll
find out which way it's gonna go.

Kernigan: Spring's don't go down. They booiiiiing and they go up.
But you mean it could go either way.

Cashin: This is the kind of spring that is bought by Wile E Coyote
from the Acme Manufacturing Company. So you don't know how it's
gonna work.

Kernigan: Typically things don't go well for him. How does this work,
Art? What goes on on the floor that keeps the amplitude so narrow for
the last couple of weeks? People aren't there? Is no one around?

Cashin: No, they're here. Maybe it's the customers who are starting
an early vacation. We've seen a slowdown in almost all sectors -
retail buying, retail interest, and even institutional. We've had
some of the derivatives, the program trading people - they're keeping
the tape moving - they're scalping pennies either side and not making
a big deal out of things. And that's what's kept it in such a narrow
range. Indecision I think is the main factor.

John

[JLak]

Sorry for not being attentive to this forum any longer. Here's a quick update on the DJIA corrected for monetary base inflation. If you don't understand why this is important, I'm sorry, but I'm not going to explain it again right now. As you can see, investment of available capital continues to sink to new all-time lows despite the rising dollar value of the index. If anyone has 100-year data for stock index and monetary base of other countries, please let me know. Thanks.

[Higgenbotham]

Sorry for not being attentive to this forum any longer. Here's a quick update on the DJIA corrected for monetary base inflation. If you don't understand why this is important, I'm sorry, but I'm not going to explain it again right now. As you can see, investment of available capital continues to sink to new all-time lows despite the rising dollar value of the index. If anyone has 100-year data for stock index and monetary base of other countries, please let me know. Thanks.

Given how the Fed defines and has expanded the monetary base, it would probably be useful to break that down and analyze it. The monetary base consists of currency in circulation plus bank reserves. A better link:
http://www.federalreserve.gov/releases/ ... 3hist1.txt

An increase of currency in circulation can actually be deflationary. The reason is if the amount of currency in circulation is increasing because bank customers are withdrawing their money, then the potential multiplier effect is going into reverse. When the crisis hit, the Fed doubled the monetary base to about $2 trillion. I don't know the exact numbers. Most of the bloggers seem to think the monetary base quantifies what the Fed somehow threw as currency into the system and we are going to get a big inflation as a result. Actually, the crisis sucked reserves out of the banking system and the Fed partially replaced them, so the additional $1 trillion is mostly bank reserves that are sitting on deposit at the Fed rather than (paper) currency in circulation. This money is effectively quarantined because the Fed is paying interest on it and the banks probably need it to meet requirements.

As far as what the banks actually have for lending potential, there is something called bank credit on the Fed's H.8 release, which is what the banks have available for expansion of lending. Bank credit has been falling all year, but I'm not sure what it did before that as I can't find any readily available data.

Amazinglhy, this guy got it right in 2008 as far as explaining what changes in the monetary base mean, but he was unable to see the deflationary crisis unfolding right in front of him:

http://blog.mises.org/archives/007999.asp

As he describes, when times get tough, like in the 1930's, demand for cash increases and more reserves are required than during boom times. Plus, there's the recent trend toward a cashless society he describes. People have less and less inclination to use and hold cash at the top of a boom because even teenagers and the unemployed can get credit cards. We talked about all this stuff over a year ago in this thread before the crisis hit with full force.

Fundamentally, this economy is a mess, in my opinion, because the cost structure has been too high due to its parasitic nature and a 10% or even 20% cut in costs is not enough to be worth talking about. They have to be drastically reduced if the US is to pull out of this and maintain leadership. It's too hard to start a business without getting eaten alive by taxes, bureaucrats, lawyers, and other parasites who don't produce anything. There are plenty of opportunities that are ready to emerge and plenty of entrepreneurs waiting on the sidelines to take advantage of them if the government and the Fed will give it up and let the economy crash so as to starve out the parasites and wring the excess costs out of the system. Of course, doing so would put the clamp down on the government and the Fed itself and what is happening is a desperate attempt to mantain "business as usual". In the meantime, stocks are being bid up because there is nothing to compete with them as it is too expensive to start a new business in this environment, so no bank capital gets deployed into lending for new business or expansion of existing business and the reserves just sit.

As far as bank credit, I was able to find this gem of a chart from the December 11, 2009 "Breakfast with Dave" article. That's Dave Rosenberg, who John has quoted often.

http://thebullishbear.blogspot.com/2009 ... tract.html

Paradoxically, if the contraction of bank credit can't be reversed, there is only one way to make the available bank credit go further and "get a bigger bang for the contracting bucks" in the credit system, and that's deflation. That way, the entrepreneurs who borrow can actually get more for the money they borrow. The way I see it is as long as bank credit continues to contract, nothing can be turned around no matter how much the Fed adds to the monetary base. By adding to the monetary base, Bernanke is fiddling while bank credit is burning and the deflationary spiral required to get the engine started will be that much more severe.

[aedens]

Hello all I been reading and on vacation. Interesting dialog and the obeservations noted will take time to discern
other than the GD dynamics we observe every day. Higgy is spot on the aspect of proper Capital formation and utilization from interferences. On the Business scene we are subject to consolidation issues on many facets and hopefull for the spark not to be smothered out from Governmental agency's. Overall I see a long LEAN Business model fostered in the mindest to metric's only. For a extended amount of time the fear and praise elements of managament are creating a gulf between labor and capital based on cultural facts other than business models.
I can see the aversion issues since resources to be allocated leave and hollow disconnects as the Soviets struggled with issues they could not fathom in a pagan mindset. Since we are all consumers and investors I am sidelined until spring as noted in the forums other than fixed contracts to preserve capital. I did close a position since mentioned if you do not know a stock better than your wife you are a speculator and not a investor. I did not like what the pervasive attitude was and walked away. Being in the Business areana as many have for decades and a Austrian Economic bent of mind I will seek ethos over profit long term. Sarting the new year I will reread the forums since only here you feel the facets that matter and build lucidity and regard for the common good and independant men subject to avarice we averted to build the future in reason. Happy Holidays.... Aeden

[John]

Steve Lieseman on CNBC was genuinely stunned this morning, when the
news came in that revised Q3 GDP growth was 2.2%. There were actually
10-20 seconds of total silence as Lieseman stared at the report,
trying to figure out what was going on.
http://www.bloomberg.com/apps/news?pid= ... eAMaVRygoM

The financial community almost universally believes that the worst is
over, and that GDP growth will reach 4% in either Q4 or Q1. As a
consequence, they believe that the economy will start ADDING jobs by
Q2, while they've been losing jobs for two years now.

Another thing I've been watching that's really startling is the
following from CNBC Earnings Central:

> EARNINGS STATS: BY THE NUMBERS

> As of Monday, December 21st:

> The blended earnings growth rate for the S&P 500 for Q3 2009,
> combining actual numbers for companies that have reported, and
> estimates for companies yet to report is currently -14.1% versus
> an estimated earnings growth for Q4 2009 of 196.1%. Of the 498 S&P
> 500 companies who have reported Q3, 79% beat estimates, 7% were
> in-line, and 14% were below estimates. As of October 1st, the
> earnings growth rate was at -24.7%. (Data provided by Thomson
> Reuters)
> http://www.cnbc.com/id/15839135/site/14081545/

If you read the above carefully, you'll see that analysts expect
earnings growth of 196.1% in Q4!!!!!!!

This is actually pessimistic -- I've been following this figure for a
few weeks, and it used to be up to 250%.

You know, all my life I've been reading about how foolish people were
after the 1929 crash. Herbert Hoover said that "Prosperity is just
around the corner." All kinds of analysts predicted that the market
had bottomed and would start going up again.

That whole story has always been something of a joke, ever since I
first encountered it when I was in school in the 1950s.

But now we see it playing out again. It's absolutely astounding to
see this joke replayed before our eyes.

This morning I posted a story on China's real estate bubble. Once
again, this is absolutely astounding.

I know I keep saying this, but the insanity keeps getting worse every
day. How can these people be more insane every day than they were
the day before?

John