Financial topics

[Higgenbotham]

Prior to reading your latest post I had planned to short again around July 20, looking for a brief down, and another top around August 5. Although our corrupt Congress will ultimately raise the debt ceiling, and an attendant rally melt up will occur, this, I believe, will be a buy the rumor (which I can't do given the risk) and sell the fact.

Your scenario could very well happen.

The market has also been somewhat repeating the action off the March 16 bottom where there was a rally toward April 6-8 similar to this rally from June 16 to July 7. So once again, we are set up with a potential crash pattern analogous to 1929 and 1987. You may have also noticed the 12 day mini crashes down into the March and June lows. The 1929 and 1987 crashes both lasted 12 days (trading days in all cases). These mini crashes indicated to me that the market "wanted to" crash 1929 and 1987 style but wasn't ready yet. Wednesday through Friday of next week should be the critical days to watch and see if this market wants to start accelerating down.

[RDRUNR]

Thanks for the insights Higgenbotham, you and John (and a few others on here), amazing stuff.

[Higgenbotham]

We had discussed the likelihood of incorrect oil price correlations by the Fed as preliminarily confirrmed by the decline in March traffic volume. This has now been confirmed by a stunning decline in April traffic volume.

http://www.fhwa.dot.gov/ohim/tvtw/11aprtvt/11aprtvt.pdf

Travel on all roads and streets changed by -2.4% (-6.1 billion vehicle miles) for April 2011 as
compared with April 2010.

Year to date traffic volume is at its lowest level since 2004.

2004 937,377
2005 947,230
2006 960,393
2007 964,493
2008 959,767
2009 947,605
2010 946,304
2011 939,163

Traffic on all roads fell in every state except Wyoming and North Dakota.

[Higgenbotham]

ECRI WLI and Interest Rate Correlations 2007/2011

The ECRI WLI (Weekly Leading Index) is showing some interesting behavior relative to 2007 and the stock market. The data can be found here:

http://www.businesscycle.com/resources

In 2007, the WLI peaked on June 8 at 143.8 and declined for 16 weeks to a short term low of 139.8 on September 28, for a loss of 4 points. The stock market made its final high 13 days later on October 11.

In 2011, the WLI peaked on March 4 at 130.8 and declined for 16 weeks to a short term low of 126.4 on June 24, for a loss of 4.4 points. The stock market made a lower high 13 days later on July 7.

In 2007, the interest rates on 10 year and 30 year bonds peaked on June 13. The stock market made its final high 120 days later on October 11. In 2011, the interest rates on the 10 year and 30 year bonds peaked on February 9. So far, the stock market has made its high for the year on May 2 and it is well past the comparable 120 day window of the 2007 high.


Some Better Performing Leading Indicators

The semiconductor book to bill ratio is performing better than during the comparable 2007 period alluded to above.

http://www.semi.org/cms/groups/public/d ... 033815.pdf

At the same time, though, the Semiconductor (SOX) Index has been underperforming the market which may indicate that the upcoming book to bill will not be so good.

The CMI indicators are turning up, but are stil negative and have been for a long time.

http://www.consumerindexes.com/

Used vehicle prices remain strong. In 2007, they began to stall out in advance of the downturn. In late 2008, they bottomed before the rest of the economy.

http://www.manheimconsulting.com/Used_V ... Index.html

Electric power generation remains steady and above March 2010 levels through March 2011.

http://www.eia.gov/cneaf/electricity/epm/epm_sum.html

Flash estimates for April 2011 remain above year ago levels.

http://www.eia.gov/cneaf/electricity/ep ... /flash.pdf


Other Leading Indicators

The employment population ratio has been discussed quite heavily lately as a way of looking past the unemployment statistics to see who really is working in America. What I find most interesting is the fact that it shot up out of all the previous post WWII recessions but is not doing so now.

http://research.stlouisfed.org/fred2/series/EMRATIO

The Restaurant Performance Index just fell below 100. There's a graph at the bottom of the latest release showing this index served as a good indicator when it fell to 99 in November, 2007.

http://www.restaurant.org/pressroom/pre ... e/?ID=2132

http://www.restaurant.org/pressroom/pre ... e/?ID=1539

[Higgenbotham]

http://carolan.org/2011/06/case-shiller ... o-be-king/

Case Shiller Update – It’s Good to be King

The gap between real estate prices in Washington DC and the rest of the country widened sharply in the most recent Case Shiller data released today. There is a separate, healthy housing market for the political elite class and another sickly market for everyone else.

Excellent observation. Money continues to get sucked from the periphery to the center.

[aedens]

Yes, the Beltway effect was conveyed some time back. The latency effects I would draw context on is the carnage of the malinvestment of the denial of Interest rates to reflect reality. Small Business and NFP groups are signaling what we already know. I know the webbots are rampant as we also conveyed.
The amplification process is only think tank policy's we are monitoring here. I talked to older and smarter money and they convey what we are seeing.
I break these down to compass, compassion, and complacency. These core issue I find is compression also. The smaller business is suffering sticker shock imposed from predation of local organic taxations. Basically they convey for leeches of magnatude. City, County, State, Federal. I suffered the same effects until I said NO. I liquidated since I focused decadal trends which was to a extent essentially correct. I feel the historical context is truly correct that they will feed on Corporate since the rhetorical message was accurate from Tactitus. Never attribute to malice what stupidity will explain. In my reading of secular view Thucydides was correct also. Unqaulifed and unlimited until demise by demagogues by the morality and personal worth of failure. Taxes are collected locally for the basic common good so the sheriff, water and sewer are in sound condition at least around here. After that you ponder there self indulgences...

[Higgenbotham]

This news hit the wires at 5:02 Eastern and sent the stock futures down about 1% (after hours). It's on schedule, as mentioned the other day that it's possible, "Wednesday through Friday of next week should be the critical days to watch and see if this market wants to start accelerating down." The market really gave it up after Bernanke's talk this morning.

http://www.bloomberg.com/news/2011-07-1 ... stall.html

Moody’s Investors Service put the U.S. under review for a credit rating downgrade as talks to raise the government’s $14.3 trillion debt limit stall, adding to concern that political gridlock will lead to a default.

[Higgenbotham]

Awhile ago, there was a link to the FCIC site and an interview with Das, who is one of the world's foremost derivatives experts. Here, he explains a specific process by which money can be destroyed. It's how more can become less due to the general deflation issues I listed last year - something to the effect that dollars exist in various forms and the markets can show preferences for some forms of dollars over others as the system becomes stressed. This can result in trillions of dollars disappearing or locking up overnight as Das now describes with specificity as the potential black hole approaches.

http://www.nakedcapitalism.com/2011/07/ ... risis.html

There are numerous channels of contagion. Continued problems of the peripheral economies requiring bailout will lead to the markets becoming reluctant to finance other weak Euro-zone countries, such as Spain and, perhaps, Italy. This may be at the sovereign level or funding for banks, leading to increased reliance to official funding. Concern about access to commercial funding or its cost can quickly become self-reinforcing, resulting in rapid loss of financing ability.

In the second phase, institutions with actual or suspected exposure to the troubled borrower are targeted, with loss of funding access as concern about their financial condition emerges. This process continues until a complete seizure in money markets results.

Some aspects of this feedback loop are already apparent.

This is a list taken from an old post from about a year ago which describes in general how and why the specific contagion Das describes can theoretically happen, with the aspects underlined that a potential seizure in money markets due to contagion concerns directly intersect on.

I would say we have at this point something like Lehman times some number, take your pick. It's still intertwined with the remaining banks even though it's sovereign debt. This probably means that the crisis will erupt either multiples faster, multiples more entities affected, or some combination.

These are the issues we've discussed in this forum that Bernanke does not address in his speech (all of these issues have a bearing on the question of whether he can generate inflation through the creation of electronic dollars):

Effects of Fed actions on profitability and tax collections

Potential for resulting international trade lockups

International political realities

Dual nature of dollar (simultaneously debt and extinguisher of debt)

Multiple terms of dollar debt instruments and changing yield curves

Quality of debt instruments and changing credit spreads

Multiple forms of dollar (currency notes, commercial paper, derivatives, etc.)

Market preferences for various forms of dollars

Exogenous events (BP, terrorism, etc.)

Wage deflation and employment rates

Demographics

Generational dynamics realities with an emphasis on attitudes toward debt

Money velocity

Doing some searches for phrases used in this post (which are pretty rare) brings up a 1982 paper from an NYU economics professor and I'll quote his opinion without much further comment.

http://www.cato.org/pubs/pas/pa008.pdf

Changes in the willingness of the public to hold onto various forms of dollars, or changes in banking practices, may temporarily divert the rate of inflation from its appointed path, but over the longer haul (say, six months to a year) the predominance of the Fed is virtually complete. Other explanations of persistently rising prices simply do not wash.

I would change "six months to a year" to "about three years" but with constant monitoring along the way.

[aedens]

We are thinking in the same contextual path. Also the bottum link confirms the operation.

Three approaches
Bernanke discussed three approaches to further easing in his prepared remarks.
One option, Bernanke said, would be for the Fed to provide more “explicit guidance” to the pledge that rates will stay low for “an extended period.”
Another approach would be another round of asset purchases, or quantitative easing, or for the Fed to “increase the average maturity of our holdings.”
Finally, the Fed could also reduce the quarter percentage point rate of interest that it pays to banks on their reserves, “thereby putting downward pressure on short-term rates more generally.”
Bernanke said Fed officials still believed the unemployment rate would decline to a range of 8.6% to 8.9% by the fourth quarter. The jobless rate has moved up to 9.2% in June from 8.8% in March.
Inflation has picked up so far this year. The price index for personal consumption expenditures (PCE) rose at an annual rate of more than 4 percent over the first five months of 2011, and 2-1/2 percent on a 12-month basis.
The second component of monetary policy has been to increase the Federal Reserve's holdings of longer-term securities, an approach undertaken because the target for the federal funds rate could not be lowered meaningfully further.
June FOMC meeting, it has reached a broad consensus about the sequence of steps that it expects to follow when the normalization of policy becomes appropriate. In brief, when economic conditions warrant, the Committee would begin the normalization process by ceasing the reinvestment of principal payments on its securities, thereby allowing the Federal Reserve's balance sheet to begin shrinking.

http://www.frbsf.org/publications/econo ... 1-08bk.pdf
In contrast to Modigliani and Sutch, we find that Operation Twist had a highly statistically significant effect on longer-term Treasury yields.

The economy which they wish not to confirm "the malinvestment overhang shadow " will take in your reference the same timeline that
was forwaded. The market is hostage so the amplification will appear which conveys our observations.
It will take longer than many will confirm to clear this overhang. The point is what we are seeing here that is a targeting of consumers since they will
just take in loss of purchasing goods a stealth tax again ad nauseum.

It will sum up to calculating the “financial repression tax,” or more specifically, the annual “liquidation rate”
The forums confirm our observations. Numerous people have implied inflation targeting should be conveyed and it is
already and has been in motion but to the Taxpayer. The PPI will disengage more citizens and the effects noted, as we have seen the
disengagement or inclination of capital to reorganise. What I mean is what we are seeing even locally, namely fragmentation to solely Independant services.
Small Business is still being crushed and cannot hire since they are seeing the results in pricing and smothered in unfunded liability.
It was conveyed to bend the trends early in the administration's goal. This has not happened nor can it for some time. It is a predation process since
Government is the derivitive market by a shot gun marrage. We did note tearups on contracts in the forums since they could not funtion under the scope of inquiry in the Legislation process. It is impossible to audit what they wish to ignore since what could it solve. The lingering reality is this. You cannot treat one dollar any different than another in the real world. The issue is Capital flight and as we know tolerated by any age of Government. This was the market in 1931 and is no different today I gather.

[Higgenbotham]

Some possible real world implications of this would be, first, financial institutions refuse checks from, I'll just use Das' words for consistency, "institutions with actual or suspected exposure to the troubled borrower" and that can extend to "all banks". Going back in the forum to 2009 Aedens and I noted payments system lockup.

This can then extend to the retail level where there is a right to refuse checks or credit cards. From a practical standpoint paper cash becomes the dollar payment medium of choice if there is no clearing process.

From that point, it becomes more unpredictable. As Strauss and Howe note, scenarios for how the crisis will start are predictable years in advance but as events unfold they are not.

The economists live in a bubble world where the Federal Reserve Chairman is always king under any scenario.

Aedens posted this link in 2009.
Precautionary Demand and Liquidity in Payment Systems
http://www.newyorkfed.org/research/staf ... /sr352.pdf

A principal reason for giving the payment and settlement systems greater at-
tention from policy makers is the potential for the amplification of problems in the
system arising from the mutually reinforcing effect of actions that are entirely rea-
sonable and prudent from the point of view of individual members of the system,
but whose collective consequence can be disastrous.

There is, however, a drawback to such high velocities that come from the fragility
of overall payment flows to even small disruptions to the system. A key ingredient in
the story is the endogenous onset of freezes in the payment system coming from the
step change in the desired precautionary balances targeted by the constituent banks.

In this section we discuss the possibility that banks delay and cancel payments to
a specific member of the payment system. Suppose, for instance, that news or even
rumors about a bank’s financial position lead to an increasing lack of confidence in
one member. Banks may then decide to postpone payments to this bank. Specif-
ically, we assume bank D is the one hit by the rumor. All other banks queue and
cancel payment orders to bank D while making transfers among themselves as usual.
Initially, bank D sends out payments to every other bank. Let us here consider the
case where bank D is a large player in the payment system (measured both by asset
size and by value of payments transferred).31

Banks’ decision to cancel payments to another bank causes a reduction in the
overall value of payments transferred over the payment system and an increase in
queued and unsettled payments. Also, the bank that receives no payments demands
an enormous amount of intraday credit and ends the business day with a significant
negative balance.

Let us now consider the following situation. A small group of banks in our payment
system becomes suddenly concerned about a liquidity shortage. Suppose, for in-
stance, that these banks want to conserve cash holdings because the conduits, SIVs
or other off-balance sheet vehicles that they are sponsoring have drawn on credit
lines as experienced in credit markets during the recent market turmoil.

During the day, some banks reach their internal caps and become also
concerned about a liquidity shortage and thus set the slope of its reaction function
to 0.2 (Figure 15(c)) and start sending out only reduced payments. As a result,
even more institutions receive reduced payments and may also reach their internal
overdraft limits. Once a significant number of banks sends out reduced payments,
the market freezes.