Financial topics

[Gordo]

Did you guys watch the debate last night? I had to turn it off after about 20 minutes or so. Its amazing to me how many people have been brainwashed by the media. I still like what I'm seeing in the market (purely from a traders perspective) even though the market isn't up right now. I continue to see all the classic bottoming signs. The gap down open and move to flat was classic. It is also significant that VIX/VXO is sharply higher even with the indices pretty flat. The public is truly frightened of the market, they are panicked even without an accompanying market decline which is the opposite of what we saw just two months ago, when even several consecutive down days generated no concern whatsoever. I've heard reports in the last 24 hours of people going out and stocking up on massive amounts of canned goods, etc. The questioners at the debate last night speak for themselves.

Professionals bought the gap down open this morning. So at least confidence is coming back in some way, for some people. We shall see if it spreads or not. Things are crazy right now.

[Gordo]

29-32, roughly 3 years to bottom. And there were counter-trend rallies all the way down, about one every 6 months. Some of these were huge, and they last for months not days. Look at some charts. I'm not calling 'THE' bottom, John.

Regarding commodities - substitute the word "housing" and remove the word "China" then read back what you wrote.

That can't possibly happen, Gordo. The bubble has lasted 13 years, and by the Law
of Mean Reversion, the market will take roughly 13 years to recover. I estimate
that the Dow will fall to 1400, equivalent to what happened in 1933.

Also, I strongly disagree with your remarks about commodities being pure
speculation. We've had this conversation before, and you're overlooking
the vast demand generated by China's economy, which itself has been in
a bubble since 1980.

John

[John]

> 29-32, roughly 3 years to bottom. And there were counter-trend
> rallies all the way down, about one every 6 months. Some of these
> were huge, and they last for months not days. Look at some charts.
> I'm not calling 'THE' bottom, John.

OK, fine. Perhaps we're just having semantic confusions here. We've
already had counter-trend rallies since August 2007, so I agree full
that there are more to come.

> Regarding commodities - substitute the word "housing" and remove
> the word "China" then read back what you wrote.

I don't understand this. The housing bubble was not caused by the
Chinese economy bubble, but the commodities bubble was. Also, both
bubbles were related to the entire credit bubble, which poured money
into just about everything -- while it lasted.

John

[Gordo]

The XAU ratio just hit an extreme of a lifetime. If you want to actually make money, you know what to do. So don't whine about it later.

Note that GDX is up 14% right now.
(and treasuries are getting hammered)

[malleni]

You're right that the Fed has no money, as I've said many times.
Its balance sheet is pretty depleted.

In fact, you could even say that the U.S. has no money, inasmuch as
we owe China, Japan and other foreign countries far more money than we
can ever pay back.

But that's not the issue. The dollar has been the reserve currency
since at least the 1930s, and there are huge amounts of dollars in
countries around the world.

In the case of the Weimar Republic, few people outside of Germany
owned marks. In the case of Zimbabwe, no one outside of Zimbabwe
owns Zimbabwe dollars.

But there are huge amounts of dollars outside of America -- Europe,
China, the Mideast -- and all of those holders are as committed to
the value and integrity of the dollar as America is.

Forget about the dollar as an American currency. Think of the dollar
as a world currency. Even if America no longer had any dollars
whatsoever, the dollar would still be valuable on international
markets as a world currency.

People have accused me of being "nationalistic" when I write this
about the dollar, but that has absolutely nothing to do with it.
It's not nationalistic to say that the dollar has become an
international world currency, whose value no longer even depends on
how many dollars America has. America is just one holder of dollars,
among hundreds of other countries, and the value of the dollar is
determined by the collective value assigned to it by all those
hundreds of countries.

John

Thanks John for this explanation.

I tried to understand little about it since I find still something wrong there.

I think that "small model" as you done on your site often would be the best for explanation.



Lets imagine 100+1 man.
Every man has 100$.
Together amount is 10000+100 $.

1 of them is "the BIG" one. Others are subordinated "The BiG".
Everybody has a own currency, but the value "of all" is the BIG currency - lets say $.
Everybody has 100$ as reserve currency AND even currency to buying things (commodities, energy...) between them.
So they do not use a neutral currency (gold) or other but the BIG currency. Simple - it is the "world currency".
Even if that is an agreement - BIG has obvious had the more then good position in this system - but, this currency had something behind as production and brutal force (of course).
That was before (couple years ago).

In the last couple years the BIG spend much more then he earned.
With other words - he borrowed money for different reasons:
- Huge spending on the commodities
- Huge spendings on the housings
- "financial engineering" spendings
- globalization - outsourcings
- Had (still have) a couple huge wars.


If we going back to the complete amount of 10000+100$... the following could be stated:
This is total amount of money.
If BIG one (since only he could do it) increase (print) supply with additional 100$ - the value loss of the BIG currency would be about 1%.
If BiG one decided to increase supply 10 times i.e. 1000 (fresh printed) - the value loss is about 10%.

So it is obviously that this is not favorable for subordinates.

If we forgetting the stocks for a while, and concentrate just on the Total amount of money =10000+100... It looks like your explanation would be OK if amount of printed money is not huge. (under 10 %)
Lets say it BIG do not printing 10 times amount of its part... (BUT he has possibility (!) sine he need not printing machine for it. It is good enough with computer)

In all cases, now when amount of money destroyed on the stocks and due to "financial engineering" is huge the amount of "new printed" money can not "catch" it.
Since subordinates were more or less forced to invest the BIG dept in the "financial engineering". The possibilities to bay for it, for example, BIG harbors - was of the table.

So you explained that other $ holders (lets imagine 100 of them) are interested to keep $ value high!
Yes.
I agree. (Question is how much of this piece of cake has everyone?... but OK)


But - when they will stop tolerate more printing of BIG, and position in they are forced to by "fresh printed" money from BIG in order to by commodities from each other? (As yesterday S. Korea)
Every body new:
- that BIG spent too much
- that BIG did not save
- that the BIG has NO money more
- that money supply coming from printing (NOT from industry for example)
- that BIG has NO production (or very small production less than 15%) anymore
- that BIG has only - brutal force still


I mean - since everybody understand that BIG in treasury for currency covering - has nothing (but brutal force)...
(Even worse - the BIG owe very much REAL money "covered" in commodities and hard work from subordinates)
In short - everybody need to "believe" that $ has some kind of covering by the BIG (similar as 1945) - since even subordinate have much of "nothing" in the treasuries!


How long it can take until subordinates - do not finish this "believe" game?
Shell they just wait until the BIG print "enough" money ("nothing") to cover ALL of his losses?
Or shell they try to organize themselves about another trade system - with for example gold as standard.
And since that BIG has "nothing" but the brutal force - will he just look what happens?

[John]

> How long it can take until subordinates - do not finish this
> "believe" game? Shell they just wait until the BIG print "enough"
> money ("nothing") to cover ALL of his losses? Or shell they try to
> organize themselves about another trade system - with for example
> gold as standard. And since that BIG has "nothing" but the brutal
> force - will he just look what happens?

Perhaps at some point I'll try to develop this theme at greater
length, when I have some time to do it.

But I really think that you can figure it out if you read (or reread)
this:

** The bubble that broke the world
** http://www.generationaldynamics.com/cgi ... rett071009

Take a look at what happened in 1931, and see how the US, Britain and
France did everything they could to save the German currency. At
that time, Germany was a debtor nation and the US was a creditor
nation.

Now move foward to the present day, and replace 1931 US with China
today, and 1931 Germany with the US today.

You'll understand why it's in the interest of China (and Japan and
Europe and the Mideast) to do everything possible to save the dollar.
My expectation, as I've said many times, is that China and Japan and
others will cancel America's debt, for two reasons: (1) The strength
of their own economies will depend on the strength of the American
economy; and (2) They'll realize that the debts will never be repaid
anyway.

So take a look at The Bubble that Broke the World, and think about
how it applies to today.

Sincerely,

John

[JLak]

...My expectation, as I've said many times, is that China and Japan and
others will cancel America's debt...

That is quite a statement. Last week an old lady shot herself and was relieved of her debt. Will the world community be so understanding of Uncle Sam's affliction?

Let's think about this. If the central banks around the world forgive the US debt, their reserves will be annihilated and they'll have to raise interest rates to hold back lending from the state reserve. At the same time, the dollar will deflate and the private banks still holding t-bills in reserve will be swimming in reserves against their currency, which will cause pretty massive inflation and further demand for US dollars. Okay, great! Who wants to be first to forgive the debt? My guess is nobody, but especially not China, who obviously doesn't care about private banks, but might be interested in converting reserves entirely to RMB and gold. At that point the Yen collapses under debt and the Dollar collapses under trade deficit. Admittedly, China may face unemployment as a result of reduced export demand, but the higher prices would pay directly to the party coffers.

Also, why are you picking 1931 Germany? At that point the currency was on a gold standard. Admittedly, I don't know of the history that you mention (US, FR and GB trying to save the currency).

[John]

From a web site reader:

> My home mortgage is an ARM, with the interest rate tied to LIBOR.
> Do you think there is any chance the central banks will have a
> coordinated effort to reduce the LIBOR? Many are in the same boat
> as me, and no doubt cannot get refinanced at a fixed rate, now.

You sent me this message on Sunday, and your prediction was
absolutely right -- there was a huge coordinated effort on Wednesday
to reduce Libor. I wish I had good news for you, but unfortunately,
Libor is virtually unchanged.

Sincerely,

John

[John]

From a web site reader:

> I just discovered your web page(s) last month and it certainly
> looks like the market is still very overpriced. Do you have a
> chart that covers the price/earnings ratios by day or by month.
> I'd love to see that info.

I've been using the following sources for historical data:

• Yale Professor Robert J. Shiller's figures on his web site at
  http://www.econ.yale.edu/~shiller/data.htm , for S&P 500 data
  since 1871.
• Yahoo's historical DJIA page, with DJIA data since 1928.
  http://finance.yahoo.com/q/hp?s=^DJI&a= ... f=2009&g=d

John

[John]

** Market summary, Thur morning, Oct 9, 2008

It looks like another frustrating morning for the pundits and
investors.

They're sick and tired of day after day where the market goes
slightly up and then slightly down, which one analyst referred to as
Chinese water torture.

What they want is either:

• A clear signal that the market is going up again, and that the
  bubble will start growing again. Or,
• A "panic crash" and "capitulation," which they believe will mean
  that the bottom has been reached, and the market will go up again, as
  in 1987.

Not a single pundit ever mentions historical valuations
(price/earnings ratios). Incredibly, they talk about current
valuations as being "historically low," meaning low for the 2000s,
even though they're astronomically high by historical standards, and
have been since 1995.

Not a single pundit ever relates the current stock market to external
events, like the incredible bankruptcy of Iceland, or the massive
plunges in worldwide indexes (Baltic Dry Index, oil prices,
developing country stock market indexes), or the continuing fall in
corporate earnings.

Not a single pundit ever identifies a long-term trend, like "The
market has been going down for a year, and the data indicates that
things are worse than ever, so the market will continue going down."

Instead, they say (in effect), "The market has been going down for a
year, and the data (Iceland, world indexes, earnings) is so bad that
it can't possibly get worse, and so therefore things will get better,
and the market will go up."

When I was a kid watching cartoons on tv, the narrator frequently
repeated the Law of the Universe: "What goes up must come down."

Today's investors must have watched different cartoons. In their
cartoons, "What goes up must continue going up, and if goes down a
little it will always start going up again, but never comes down."

John