Financial topics

[Lily]

"The Federal government is borrowing and spending about $2 trillion extra into existence per year. Part of this is off-budget so it looks like only $1.4 trillion or something (student loans and social security don't show up).
Any reduction in private debt and spending is small compared to rapidly expanding Federal government debt. This is not even counting state and local government debt which is also expanding fast."

I feel like I should point out for the sake of clarity that this conclusion is numerically incorrect. The amount of money being sucked from the economy due to the ongoing credit crunch is much larger than the amount of new debt that the government is creating or even could create, as John argues here.

http://www.generationaldynamics.com/cgi ... 27#e081027

This effect will get much worse when the full extent of the crappiness of the US economy is further unveiled by the next crash and systemic melt-down, which should be within a few years.

Paul Krugman also talks intelligently and at length about the risks and nature of deflation, though given his polarized ideological perspective you have to take him with a grain of salt. He's a smart guy though, and knows what he's talking about on economics even if his biases can cause him to sometimes miss parts of the big picture.

Anyway, this is Bernanke's problem. There is not enough money in the entire world to re-inflate the bubble, by several orders of magnitude. He has enough to artificially jack up the stock market (for now), cause inflation in commodity and fuel prices, and erode the value of the dollar, but not anywhere near enough to drive actual core price inflation, nor even really enough to stave off deflation for long. This doesn't necessarily mean there can't be a hyperinflationary event, since that would have to be caused by deliberate overprinting of currency to cover debts, and has more to do with the government's debt load compared to its revenues and accepted creditworthiness than the real (i.e, M1) money supply.

China, on the other hand, is getting into the beginning of a serious inflationary phase, which is causing a lot of problems for them and may well have knock-on effects on the larger global economy, especially on food, fuel, and other commodity prices like steel, water, and wood. But we won't see real inflation in core prices in the US unless either we all start making much more money (which can't happen until the underlying structure of the economy is changed via drastic changes in government and the law; right now the system is too sclerotic to increase productivity substantially) or unless the Fed starts running the printing presses an order of magnitude or so faster than they are now, which won't happen unless the markets decide that US debt isn't worth the paper it's printed on. (It isn't, but the markets haven't figured that out yet.) Until then, it's deflation city.

[John]

I thought that the following article would be interesting to people
looking for signposts:

Potential crises may be found in the data

Monday, January 31, 2011

Something unusual happened last year - stock markets in nations
enjoying strong economic growth were not particularly outstanding.

In fact, stocks did better where the risk of a double dip still
existed.

China's gross domestic product growth last year exceeded 10 percent,
but Shanghai failed to make even the top 80 bourses in the world.

Many uncertainties prompted the Federal Reserve to launch a second
round of quantitative easing in the United States. Still, the Dow
Jones Industrial Average gained more than 5 percent.

A "bipolarzing effect" may be developing between a country's economy
and its stock benchmark.

How long will this "effect" last? Bubbles develop as the spread
between stock indexes and the economy becomes unreasonable.

Investors then are prone to lose money due to the sharp correction
that follows. They need to know how to figure out when the bubble will
burst.

Pay more attention to financial data and it will be easy to observe
omens of a potential crisis.

Take US stocks, for example. A drop in the bond market indicated that
capital flowed from bonds to equities recently.

But a rise backed by internal capital and no overseas inflows is not
sustainable. So the slide in the US Dollar Index after peaking on
January 10 may signal that Wall Street is about to change direction
and head south.

Another indicator is the CBOE volatility index. It bottomed on January
14, nearly two weeks before the S&P 500 rose above 1,300 points.

The S&P and other indexes fell on Friday due to Egypt's troubles, but
its is clear the benchmarks would not be able to sustain their rise
without substantial support.

In the days ahead, pay close attention to the Baltic Dry Index, which
may be the next signpost. And be careful as the shipping sector may
have already peaked. Andrew Wong and/or The Standard bear no
responsibility for any investment decision made based on the views
expressed in this column.
http://www.thestandard.com.hk/news_deta ... 0131&fc=10

[Higgenbotham]

One of the best ways to learn about the stock market is to study the long term charts and see what the market did from significant points. As an example, there were 2 very important highs in the last century. They were the September 3, 1929 bull market high and the February 9, 1966 bull market high. There was also a very important low on December 9, 1974. Using these highs as reference points, it seems like the month of June 2011 might be very important.

September 3, 1929 (HIGH) to October 29, 1973 (high) = 16,127 days
October 29, 1973 (high) to October 4, 1974 (low) = 340 days
October 29, 1973 (high) to December 9, 1974 (LOW) = 406 days

February 9, 1966 (HIGH) to April 26, 2010 (high) = 16,147 days
April 26, 2010 (high) to April 1, 2011 (?) = 340 days
April 26, 2010 (high) to June 6, 2011 (?) = 406 days

After doing this work, reading that Martin Armstrong has a long term cycle date of June 13, 2011 which he is pointing to as possibly an important low in the stock market makes sense. The fact that Armstrong derived this date using completely different methods gives confirmation to the projection. Also, looking at the daily chart from October 29, 1973 to December 9, 1974 and comparing it to the chart from April 26, 2010 to date gives additional confirmation. The earlier chart showed the most weakness in the months of November 1973 (corresponding to May 2010) and August/September 1974 (corresponding to February/March 2011). That alone doesn't mean weakness should be expected in February and March of 2011 but given everything else that is going on it seems like a good possibility.

I will now go back one previous cycle from the cycles posted above. In order to do that, I am working with paper charts that do not have the exact day for the high noted and I will have to guess. The guess should be correct within about 3 days, so it's OK for the purposes of this analysis. There was an important high in the stock market in May, 1890. This high was challenged in January, 1893, but was not exceeded. These two highs stand as a long term double top on the averages. March 10, 1937 was the rebound high from the Great Depression low in the stock market.

January 20, 1893 (high) to March 10, 1937 (high) = 16,119 days
March 10, 1937 (high) to March 31, 1938 (low) = 386 days

February 9, 1966 (HIGH) to April 26, 2010 (high) = 16,147 days
April 26, 2010 (high) to May 17, 2011 (?) = 386 days

Both the 1937/1938 and 1973/1974 panics were very severe, with the stock market losing about half of its value.

If someone were to take some of the key dates and words in this post and search for another similar post on the Internet, so far as I know none will be found. Why is that? Why is it that people are unable to connect events that occur 45 years apart? My personal opinion is it is because they don't understand generational behaviors, so they don't know where to look. I believe that what a generation experiences when they are young significantly affects their behavior when they get old. Therefore, for those who control the money and have the money to invest, what happened 45 years ago when they were children has more meaning than what happened 10 years ago. These cycles are remarkably consistent and over a 45 year period vary by no more than two tenths of one percent. Therefore, it seems dubious to me that Bernanke will be able to warp generational behavior beyond the end of this cycle. If he does, and the natural cyclical behavior is not allowed to express itself, I'm not sure that will be a good thing anyway.

Just my opinion, but since this natural cyclical expression has been artificially held off, the panic, when it occurs, will much longer lasting and much more severe than it otherwise would have been.

[vincecate]

I meant that the entire fiat/gold/gold-backed currency concept is a 19th century fantasy. In the 21st century, any bank in the world - ANY BANK -- can "print money" by issuing debt. Talking about gold-backed currency in the 21st century is total, utter fantasy.

So John, is it your prediction that the dollar will continue to be the dominant world reserve currency for at least the next 25 years then? No major change in the world monetary system?

Do you agree that when the US prints money there is a downside and an upside and while the whole world shares in the downside the US gets the new money and so gets the full upside? You think the world will just keep accepting this situation? The rumblings out of China and Russia are never going to amount to anything? All the steps China has taken to avoid using the dollar in trade don't matter? Much of the world blames the US Fed for the booms and busts but you think it won't be able to change anything?

In 1957 the US could force Britain out of Egypt by threatening to sell a bunch of British bonds and crashing the pound. Today China has that kind of power over America. You don't think it will be used?

http://pair.offshore.ai/38yearcycle/#suez

[burt]

In 1957 the US could force Britain out of Egypt by threatening to sell a bunch of British bonds and crashing the pound. Today China has that kind of power over America. You don't think it will be used?
http://pair.offshore.ai/38yearcycle/#suez

This is what I call a fight between Borrowers and Lenders.

The US only wants POWER and nothing else (I'm speaking about its government NOT the people), they helped Europe in WWI and WWII and they came out as the big winner of those 2 wars, then turned themselves against their own "friends".

When you fight for "power" (and this is the case from China yet and within the next 20 years) you use ANY kind of weapon against you old allies.

NEVER Government fighting for POWER, cares about their population, so NO government cares if its population is starving. This is one the reason why stock markets are NOT related to the real economy (the answer is much longer than that, it is only 1 point that, myself, like to emphasise...)

So I agree that China will USE that kind of power, the only trouble is that real power is "law backed by a gun", China in 2020 will have both (gun and bonds), now they sell part of their bonds to buy a lot of commodities, I'm not so sure that they have an immediate interest to go out of the dollar reference, but on the long term yes.

So follow the power of China and the weapons (Guns, Markets and Bonds) that they are have AND are going to have.
And follow how they are going to manage the "House bubble" they actually have.

I'm not convinced that we are going to face a clash of civilization for many practical reasons (one of them is that many countries don't make themselves their bullets for their guns, so they are unable to enter into conflict with the one who makes the bullets).

BUT we are going to face BIG CHANGES and the first logic I can see is a tranfert of power against bonds (as it was the case in Florence in the end of the middle age OR in 1957, which, by the way, I consider as a more important year for Egypt as 1948). The trouble is that US WANTS power and that they are NOT going to give up in a rational way.

Thank you Vince for your remark

[Higgenbotham]

This quote is from a newsletter called Stock Market Cycles published by Peter Eliades. It complements the information I posted above by noting the repetitive time relationships from major lows in the stock market.

This pattern begins in October 1957 at that very important bottom. The main thesis of the pattern is that three of the more important market bottoms recorded in United States securities history led to tops of major importance around 33 years later. The bottom registered in October 1857 led to a top 32 years and seven months later in May of 1890. The important bottom in August 1896 led to the major top in September 1929 33 years and one month later. The major bottom in July 1932 led to the top registered in February 1966. Those prior patterns suggested to the person who sent us the fax in early February 2008 that the October 2007 top which came 32 years and 10 months after the major December 1974 bottom could well turn out to be a top of great importance.

[OLD1953]

Vince, suppose the important gold mining and holding countries got together and decided on a new gold backed currency for international trade, and they called it the goldo. And they decide to set a 5% price increase on gold in goldos yearly, forever.

Gold money, built in inflation.

I can play a dozen different games like that, to allow for gold money with inflation. Rome managed it with hard money, just by adding iron to the gold.

Gold money does not prevent inflation. Nothing can prevent inflation but honest bankers, and no force in the universe can make a banker be honest if he doesn't want to be.

And, speaking of honesty - - - -

http://www.zerohedge.com/article/rust-d ... gold-coins

As I've said before, I'm not a stranger to the PM trade. (BTW, that looks to me like rust that dripped onto a gold coin from a box that wasn't watertight. Gold does not rust, but nobody ever said it doesn't stain. To remove such stains, just wash in acid.)

[burt]

Potential crises may be found in the data

Monday, January 31, 2011
How long will this "effect" last? Bubbles develop as the spread
between stock indexes and the economy becomes unreasonable.
.....
In the days ahead, pay close attention to the Baltic Dry Index, which
may be the next signpost.
http://www.thestandard.com.hk/news_deta ... 0131&fc=10

Thank you for the article.
Again, even if Prechter was mostly wrong in his predictions, he discovered that there is NO link (absolutly NO link) between EEEEconomy and Stock Market, for him Stock Markets are headed by "Social Moods" and it is for me a reasonnable theory (even if not mature yet).

Now we have an article:
http://www.financialsense.com/contribut ... te-profits
If I'm right this means we are at a top, EEEEconomy (profit from companies) sounds good, the market will retrace.
But you can interpret EEEEcomnomy the way you like, "Markets" will go the way they like, not only because they are manipulated, but because it is mostly herding.

It looks like Baltic Index (Whose price does NOT represent the volume of the transactions acrried by sea, but a price relative also to the number of ships) becomes the magic thing to look at some time.... But I studied it years ago and it gives strictly NO information on the evolution of the stock market.

One of the best ways to learn about the stock market is to study the long term charts and see what the market did from significant points...

I stopped using that years ago, but I started agin on your precise idea (but it takes weeks, so i'll not be active on the subject, sorry), may be it hides a human logic that could be interesting.

If I follow the technical analysis I use (and the referenced authors I read, because they were mostly eight on their studies) we should have a correction of 10% and then up gain until May-June or so and then a bear market until the end of the year.
Now I've not yet integreted the analysis of Higgenbotham about panics where he waits for a panic of 400 points on the S&P.

Remarks from anyone?

[OLD1953]

Krugman on inflation.

http://krugman.blogs.nytimes.com/2011/0 ... ing-place/

Looks like it's not just housing.

[vincecate]

Vince, suppose the important gold mining and holding countries got together and decided on a new gold backed currency for international trade, and they called it the goldo. And they decide to set a 5% price increase on gold in goldos yearly, forever.

Gold money, built in inflation.

I can play a dozen different games like that, to allow for gold money with inflation. Rome managed it with hard money, just by adding iron to the gold.

Gold money does not prevent inflation. Nothing can prevent inflation but honest bankers, and no force in the universe can make a banker be honest if he doesn't want to be.

People will not buy gold coins with more than about a 5% premium over the price of gold. So after a couple years nobody will buy more goldos. If nobody is taking more goldos then they get no inflation tax. The real reason there is inflation is that the governments get to spend the new money they make.

The currency symbol for gold is XAU. One unit means 1 troy oz of pure gold. It does not matter who makes the coins as long as they are 1 oz of pure gold.

Gold money went for thousands of years without any real inflation. The standard illustration of this is that 1 oz of gold has been able to buy a nice suit and shoes for a very long time, even back 2000 years to Roman times when 1 oz would get you a nice Toga and sandals.

When you can not count on paper money as a store of value gold has done well. There are many many times in history where paper money has not done well. I think we are coming up on one such time.