Financial topics

[Higgenbotham]

I've noticed the people that are hurt the most during a major recessions, such as the one in the 1980's, are the people who are just starting to enter the labor force. That's 2-3 years you can never get back and it'll affect you, since if you're 21-22 and you can't get a job, employers will be less likely to hire you. That was also just when the first members of Generation X were entering the work force.

Even if you can get a job, entering the work force during a major recession still puts anyone at a disadvantage. The mood inside the workplaces will be terrible. Most will be paranoid about being laid off and some will backstab their coworkers to try to look good in order to avoid a possible layoff. Management will make demands that are unreasonable because they know they can. You may be told to work a Sunday or a holiday and if you don't like it, you may be fired to provide an example for the next person who is told to work a Sunday or a holiday. When the economy recovers, brand new employees may be hired in at a higher pay rate.

[Higgenbotham]

Growth rate time lag. It does not match there level of complexity.
H, how does this match your feedback loop?
It does not match the feds growth rate since logistics are limiting facts
in finite models.

http://ocw.mit.edu/courses/biology/7-01 ... growth-ii/

Her concept of the population feedback loop lag times matches my feedback loop:

But if you have a short lag, what you get is an actual overshoot of the carrying capacity in the near term because the feedback hasn't kicked in. But then, it will come back and it will level off at the carrying capacity. If you have a medium lag, you will often see something like this where you get a couple of oscillations in here. But it levels off at the same carrying capacity. And, a long lag, you can end up with behavior that ultimately ends up in the population crashing.

The above quote is almost halfway down on her transcript of the lecture.

There isn't any way to know if I am right but using her language and concepts my theory is: Bernanke has introduced a long lag time into the system response with the repeated QE programs. In my view, a short lag time would have been, say, the Fall 2008 rescue and to then allow the system to adjust. A medium lag was created with the first QE program that ended in 2010, and maybe the second that ended in 2011 but probably not. There may have been some severe bumps worse than the Great Depression if the lag time had stopped there. Now the system is in a long lag where I believe there is overshoot above the capacity of the economic system to adjust back to equilibrium. I believe this will result in an uncontrollable crash of the economic system and a new Dark Age. Along with that, there will probably be a minimum 30% reduction in world population which would make the Dark Age more severe than that following the collapse of Rome.

She talks about physical limits to carrying capacity and also the fact that carrying capacity has increased due to innovations. It's important that the integrity of the financial system be maintained in order to maintain carrying capacity as that can be the weak link. I believe Bernanke's actions (and that of the European Central Bank) have created a long time lag condition where once a crash occurs the integrity of the financial system will not be able to be restored quickly enough.

This model is probably better than the 2 models I discussed (organ failure and suspension bridge failure) because it introduces time dependency and overshoot. Though each model seems to have its own strengths in describing the situation. In all the cases we see that while the system in question may appear on the surface to be stablized, it is in fact being destabilized and subjected to the risk of catastrophic failure.

[Higgenbotham]

There is something I should add separately to this discussion.

If my theory about a coming Dark Age is true, then the general pattern of the stock market should be to make deeper and faster crashes, and higher and faster recoveries from those crashes until catastrophic failure occurs. This has happened to some degree, but not absolutely. For example, on the S&P, the August 2011 crash was deeper and faster in some respects than the May 2010 crash but it did not reach a lower price.

To illustrate this idea using the S&P 500 index and the recoveries from the crashes:

In October 2008, the S&P crashed down to 850, then recovered to a 1220 high in April 2010.
The rate of ascent was 21 points per month over 18 months.

In May 2010, the S&P crashed down to 1060, then recovered to a 1370 high in May 2011.
The rate of ascent was 26 points per month over 12 months.

In August 2011 the S&P crashed down to 1100, then recovered to a 1420 high in April 2012.
The rate of ascent was 40 points per month over 8 months.

These numbers are somewhat subjective. After every crash, the market has made a lower low some weeks later. Generally, each rally is faster per unit time but of shorter duration. Since the extent of the 2012 rally isn't really known yet, the above numbers may or may not hold. If it does hold, though, the duration of the subsequent ascents will both be 2/3 of the previous.

I should add that someone could argue that the first crash lasted until March 2009 to the 670 low, then rallied for 13 months to 1220 for a rate of a bit over 40 points per month. That would be a judgement call based on looking at the chart. I wouldn't disagree, but am looking more at the actual crashes. Like most things, it's not clear cut.

[aedens]

You just are not allowed to play with the paint.
One maybe two days to get out as the setup pans out.
I often wondered how the es futures was gamed.
I never trade the passover - easter

[Trevor]

Even if you can get a job, entering the work force during a major recession still puts anyone at a disadvantage. The mood inside the workplaces will be terrible. Most will be paranoid about being laid off and some will backstab their coworkers to try to look good in order to avoid a possible layoff. Management will make demands that are unreasonable because they know they can. You may be told to work a Sunday or a holiday and if you don't like it, you may be fired to provide an example for the next person who is told to work a Sunday or a holiday. When the economy recovers, brand new employees may be hired in at a higher pay rate.

Depends on the boss. Some will treat you decently even today, but you're right, others will use it as a full opportunity to take advantage of others. Whatever the case, it's not good to just be entering the work force during a recession.

[Trevor]

These numbers are somewhat subjective. After every crash, the market has made a lower low some weeks later. Generally, each rally is faster per unit time but of shorter duration. Since the extent of the 2012 rally isn't really known yet, the above numbers may or may not hold. If it does hold, though, the duration of the subsequent ascents will both be 2/3 of the previous.

Remember, there were numerous rallies during the Great Depression. Admittedly, not as big as these have been, but it wasn't a one-day event. With the economy slowing down yet again (the amount of jobs created being much lower than expected) and the housing market still bottoming out, I don't see how it can last.

[Higgenbotham]

Remember, there were numerous rallies during the Great Depression.

The rallies during the Great Depression weren't like these except for the one that started on November 13, 1929 and ended on April 17, 1930. That rally took the Dow from a 50% loss from its 1929 peak to a 25% loss. The bear market then resumed, taking the Dow below the 1929 low by the Fall of 1930. Once the Dow had a loss of over 50% from the peak (and the 1929 valuations were not as extreme as those of 2007) the brief hope rallies could be considered normal. These recent rallies are not hope rallies from low levels. They are greed rallies that are occurring because people cannot accept consequences for actions and that is why the system can be lost for good.

Depends on the boss.

Probably depends more on the company but you haven't seen things really start to bite. When you see things like people scrounging in trash cans for food and sleeping outside on park benches with newspapers for covers you'll know we're there. I saw all that in 1982 and we just haven't seen things like that yet. When that happens most all companies will be in survival mode and the mood will be black. Profits will be way down or nonexistent and there will be bankruptcy after bankruptcy.

[Trevor]

The rallies during the Great Depression weren't like these except for the one that started on November 13, 1929 and ended on April 17, 1930. That rally took the Dow from a 50% loss from its 1929 peak to a 25% loss. The bear market then resumed, taking the Dow below the 1929 low by the Fall of 1930. Once the Dow had a loss of over 50% from the peak (and the 1929 valuations were not as extreme as those of 2007) the brief hope rallies could be considered normal. These recent rallies are not hope rallies from low levels. They are greed rallies that are occurring because people cannot accept consequences for actions and that is why the system can be lost for good.

I think this time around, it fell in 2009 to around DOW 8000. You're right, this has been a much stronger rally than we saw the last time around. The self-delusion has returned and I think that this is why the cycle continues to repeat. Seems like businesses and investors cannot truly learn unless there is a complete collapse, not just a recession.

[Higgenbotham]

The Dow made a high of 391 in 1929. At the April 1930 rebound peak, it got back up to 297. It didn't get back above 297 (or 391) until 1954. The US government and the Fed have borrowed trillions of dollars from the future to keep the Dow within 25% of its high for the 3-4 years following the 2008 crash. Viewed in this way, stock market behavior at this time would be comparable to a population that keeps growing above its natural limits because feedback mechanisms have been shut off. If conditions are really as bad as the 1930s, when the feedback mechanisms can no longer be shut off, the crash will therefore be worse than it was in the 1930s and it will take the stock market more than 25 years to recover its old highs.

http://www.zerohedge.com/news/did-jpmor ... oan-bubble

[Trevor]

One thing that's different is that we haven't done anything as stupid as Smoot-Hawley. Of course, since there's plenty of support in both political parties for such a move, I would expect that to change in the future.