Financial topics

[Trevor]

I'm referring to the stock market bubble, the housing bubble, and the credit bubble.

[Marc]

I do agree, John (aka jdcpapa), that securities trading today seems to be essentially a speculation enterprise, including if one hopes to succeed at it. While buy-and-hold may still work, this would be for very-long-range planning (and do make sure your kids or grandkids cash out maybe midway within the next Third Turning if they buy-and-hold, of course ). Some interesting research I'm doing (and I'm really going about this as an academic-research enterprise as opposed to doing live investing myself) is looking at ultra-short trading coupled with many layers of underlying derivatives which can be captured from the market at special-discount opportunities (and all of this couched within systems/memes/graphics which makes it understandable to the average Joe and Jane). This sort of strategy may well be what "the 99 percent" needs to survive in this crazy, volatile investing environment if they insist on investing. But again, it's an ongoing academic exercise: I haven't found the holy grail of investing nirvana yet Thanks for sharing! —Best regards, Marc

[Trevor]

Unfortunately, there are a lot of people that are going to end up losing everything, rich and poor alike. There might be people who disagree, but I think 2012 is going to be a very bad year economically.

[vincecate]

Unfortunately, there are a lot of people that are going to end up losing everything, rich and poor alike. There might be people who disagree, but I think 2012 is going to be a very bad year economically.

People are going to be wondering how those Mayans called it so long ago.

[Trevor]

My expectation for 2012 is Greek defaulting and setting off the chain reaction. The bitter political fighting will continue and likely get worse, and the United States economy will start falling again.

[jdcpapa]

I'm referring to the stock market bubble, the housing bubble, and the credit bubble.

Good morning Trevor,

I think it can be said that the housing bubble was created in part by easy credit. When credit dried up the housing and credit bubbles burst. The stock market bubble on the other hand is quite interesting. I recently dug out my "college days" investment text books. It was the late seventies. The market was a few years away from breaking out. The text included information about the Holmes Study. John Holmes essentially studied the market from 1871 to 1971 and concluded the following: 4.8% is the likely dividend yield, that 13.9 times earnings is a "fair" price, stocks are not necessarily inflation hedges and pointed out that two of the three great bull markets of the past (1890's and 1920's) occurred during periods of deflation. He also concluded that 8% is the rate of return to expect from the market. (jr holmes "100 years of investment experience with common stocks").

The market was around 1,000 then and is now around 12,000. 13.9 was considered a "fair price" in 1971? The market has been flat for almost 15 years now. Just saying.

Regards,

[jcsok]

Can't stand the pressure of being flat for a few days; went 100% short at 1253.

[Higgenbotham]

Can't stand the pressure of being flat for a few days; went 100% short at 1253.

There are some very interesting mathematical relationships I'm seeing in the S&P.

January 7 is 1 month from the December 7 high.
January 8 is 2 months from the November 8 high.
January 4 is 3 months from the October 4 low.
January 8 is 5 months from the August 8 low.
January 2 is 8 months from the May 2 high.
January 6 is 34 months from the March 6 low.

These are all fibonacci numbers. There's something else interesting about this - the only numbers that are missing in this sequence are 13 and 21. Going back 13 months from early January is December 2010 and going back 21 months from early January is April 2010. QE1 and QE2 were occurring during April 2010 and December 2010, and the market continued to grind higher.

I noticed something similar to this as the stock market ground up to the 2007 high. That time, as I recall, the market vibrations decayed geometrically from low to low. In this case, the turns are random, but the turns are decaying in somewhat predictable fashion from turn to turn. The only major turn that's missing from the past 8 months is October 27. Thus, in theory, it could be said that the market has begun to revert to some kind of "order" since QE2 ended, but we can also notice that while it's orderly in time, it is disorderly in direction.

In theory, the market turns could decay from 1 month down to days and then hours, etc., with a theoretical end point in early February, but I don't believe that will happen. At some point, perhaps early January, this cycle is going to break. In other words, something big is going to happen in the next few weeks that will set market direction and probably settle the inflation/deflation debate and the other debates that have been going on.

The fact that these market turns have become orderly in time, but disorderly in direction is, I think, problematic.

[Higgenbotham]

Looking at silver as another example, since Vince and I and others are interested in this market. We saw silver strike a high around $50 in late April. Silver then made another attempt at $50, failed, then moved down to $26. $26 was noted as a very important level, with silver still having a chance to make a long term bottom at that level. Yesterday it seems like silver once again made a low near $26, but now has come up to near $28. I believe that silver is trying to decide whether it is going to move below $26 and set a deflationary course or whether to double bottom at $26 and set an inflationary course. This outcome may also be known in the next few weeks, along with the direction that the stock market will set.

The monkey wrench here in my mind is, due to the disorder that QE2 apparently created in the markets, whether the markets can straighten themselves out and create any sort of order at all, or whether they have been damaged too much and will gyrate until the economy out and out fails. I still believe this is a strong possibility and that the markets themselves will provide a lot of clues over the next several weeks. Probably the best thing that can be seen for everyone is some sort of clear direction, whether it be inflation or deflation, an up stock market or a down stock market, and so on.

Looking at the March silver futures, we see April 25 and 28 highs near 50, a September 26 low near 26, and a December 29 low near 26. There are possible fibonacci relationships here also, with the September low being 3 months back and the April high being 8 months back. We can also notice that in April and September, silver led the stock market by a few days with both making important highs and lows. Now silver is making a low while the stock market is at a relative high. This does not pass the "smell test" along with many other indications I am seeing. In order to be consistent with past behavior, either silver needs to rally hard or stocks need to crash down to about the October level.

[vincecate]

Probably the best thing that can be seen for everyone is some sort of clear direction, whether it be inflation or deflation, an up stock market or a down stock market, and so on.

Lets look at what happens if we get a clear direction of inflation. Bonds start dropping in price and interest rates will go up. Interest rates went down from about 1980 till now or 31 years. If people think interest rates are going to go up for a long time (and starting at 0% that is a reasonable guess) they are going to want to get out of bonds. If the Fed does not step in to buy from all these sellers then interest rates will go up. The Fed has indicated that interest rates will stay down for an extended period still. So imagine the Fed buys hard to keep the bond prices up and interest rates down. This means there will be a flood of new money, since the Fed buys bonds with new money. This will make inflation worse, which will make holding bonds paying less than inflation even worse. Which will make more sellers. So Fed has to buy more if it is going to keep the interest rate down. And you get a cycle where something has to break eventually.

So it might break with the Fed getting more worried about inflation and putting the interest rate above the inflation rate. But even at 4% inflation it might take 7% to get people to hold bonds. Given that we are at 1% for 5 year now, this would be a huge increase, basically bankrupting the Federal government.

So imagine the Fed keeps trying to hold interest rates down and prints money like crazy. Then we have the hyperinflation positive feedback loop that will destroy the currency.

So if inflation becomes the clear trend I think things will fall apart fast.

It is probably a good time to keep an eye on the billion prices index:

http://bpp.mit.edu/usa/