Financial topics

[OLD1953]

Lily, I'm not trying to get you or anyone else angry, but I've heard this "doom" for so many years that it has really worn on my nerves. When did I first hear it? Way back in the 50's, when I was just a kid. I've heard it constantly since then, and it's been wrong every time. I could post 100 pages of scholarly articles, books, official documents and so forth, all "proving" at one time or another that the human race was just about to die off, that nobody and nothing could prevent Malthusian catastrophe, that all soil nitrogen would be exhausted by 1900, that oil would totally run out by 1990, that the world would die of ice or fire, there would be no metals, we'd die of metal poisoning, and on and on and on. A very great deal of this material was produced by people who had no credentials or qualifications to produce such "facts" and most of their facts were made up nonsense or purposeful obfuscation of the truth - and I could give many examples of this. Good Lord, I've got boxes full of books relating to these exact subjects. I honestly haven't seen a new argument in at least a decade. First time I saw the "soil will wear out in less than 20 years" argument would have been about 1963 or 64. The demise of the dollar has been around even longer.

Of course I believe humans can ruin their environment, I'd be a fool not to know that, I was born just a decade or so after the dust bowl was brought under control. But note what I said there, it did not just "stop" it was "brought under control"! People did that, not some miracle of nature, and they did it by correcting bad practices and bringing irrigation to certain areas. In some parts of the western US, I'm told that it's still legal for your neighbor to plow over your land correctly with the contour, to prevent wind erosion, and then bill you for time and fuel spent.

It is equally true that natural change can alter the environment in a means unfavorable to human life, as witness the variations in the treeline in the Scandinavian parts of Europe. Those treelines show a regular cycle of rise and fall for over ten thousand years, generally related to the Milankovitch cycles: http://www.homepage.montana.edu/~geol44 ... lankov.htm

The last cycle trough coincided with the drying of the Mid East. While climate is based on a fundamentally chaotic phenomena (weather), it is somewhat more predictable, and it's highly possible that the current warming will return sufficient rain to the Mid East to cause the return of farming without irrigation. (Side note, a LOT of irrigation is being built in Iraq now, I had occasion to fly over the Iraqi countryside at low level a couple of months ago, and the new irrigation machinery was the most obvious change in the countryside. The water is being returned to the delta region as well, I do assure you, the Marsh Arabs are very happy to get their swamps back. And there are two examples of humans improving the environment to their benefit.)

What you and others are seeing is part of the generational cycle. There is a generation of crisis and then recovery, a generation of living on the fat, a generation of squabbling and then another crisis. We are at the tail end of the squabbling and moving into the crisis. But the crisis passes. There will be changes. But there have always been these changes and challenges, and always will be.

In 1960, we were constantly told that unless the world population was restricted below a certain figure (usually three billion) that starvation and poverty would be the absolute ruler of 99% of the earth forever. Yet here we are nearly half a century later, with nearly seven billions, and MORE THAN THAT THREE BILLION FIGURE HAVE A HIGHER STANDARD OF LIVING THAN PERTAINED TO THE AVERAGE IN THE USA IN 1960. That's a fantastic fact. And you simply can't ignore it.

[Lily]

You can believe what you want, Old. I've been researching these topics intensely for quite a while, and the science is overwhelmingly on my side. You are flat-out wrong about this. Period. I posted seventeen citations, several of them linking to hard data. You ignored all of them and posted one citation, which is completely irrelevant to the main issues and doesn't refute a single thing I've said. Do I perhaps detect the archetypal Boomer traits of arrogance, ideological rigidity, and stubbornness in the face of contrary evidence?

If you want to believe Rush Limbaugh over basically all scientists, feel free. I have a 'misleading agenda'? I'm just trying to help you educate yourself, man. Don't shoot the messenger. The facts are what they are, and if you want to ignore them, that's your business. I don't really see much further profit in discussing it with you, since you're clearly more interested in stamping your foot on your own already-established beliefs than examining the available evidence objectively. Just because we weren't in danger in the 60's and 70's doesn't mean we aren't now. The elliptical cycles aren't putting all that plastic in the ocean, nor are they burning away earth's forests, or trawling the ocean floor. These things are new.

If you'd like a further introduction to climate and environmental science, I'd be happy to point you in the right direction. If you just want to rail against hippies and liberals, you're on your own.

[thomasglee]

You can believe what you want, Old. I've been researching these topics intensely for quite a while, and the science is overwhelmingly on my side. You are flat-out wrong about this. Period. I posted seventeen citations, several of them linking to hard data. You ignored all of them and posted one citation, which is completely irrelevant to the main issues and doesn't refute a single thing I've said. Do I perhaps detect the archetypal Boomer traits of arrogance, ideological rigidity, and stubbornness in the face of contrary evidence?

If you want to believe Rush Limbaugh over basically all scientists, feel free. I have a 'misleading agenda'? I'm just trying to help you educate yourself, man. Don't shoot the messenger. The facts are what they are, and if you want to ignore them, that's your business. I don't really see much further profit in discussing it with you, since you're clearly more interested in stamping your foot on your own already-established beliefs than examining the available evidence objectively. Just because we weren't in danger in the 60's and 70's doesn't mean we aren't now. The elliptical cycles aren't putting all that plastic in the ocean, nor are they burning away earth's forests, or trawling the ocean floor. These things are new.

If you'd like a further introduction to climate and environmental science, I'd be happy to point you in the right direction. If you just want to rail against hippies and liberals, you're on your own.

I usually butt out of stuff like this, but your arrogant, condescending and immature reply really speaks volumes.

[Higgenbotham]

I read the news on those reactor construction issues several days ago, and it does open a can of worms for Japan, especially since the engineer in question was breaking open the entire scandal several years ago. It well illustrates why you should not allow government agencies to become captive to the industry they are supposed to regulate. Japan's nuclear regulatory group has been captive of the industry since it was created. This has allowed a host of problems at Japan's nuclear plants to be swept under the rug.

Long ago, I worked as a regulator for 8 years in an engineering capacity with a state agency (federally delegated program). I would say it was the most difficult and distasteful job I've ever had. Being a regulator is fine I suppose if you want to spend your days doing your laundry or watching porn, but to do the work is a nightmare as currently structured.

In most cases, the industry, which is where the technical expertise lies, actually writes the regulations. I can't vouch for the fact that the nuclear industry operates that way, but I can vouch for many others. This comes as a shock to most people (I don't know about the people here; maybe you know) and creates a host of problems, such as stifling competition, as the regulations are often written so as to be too specific or cumbersome for less able (ie smaller) competitors to implement. An easy to understand example would be the landfill industry. Notice how there are no longer any city dumps or small trash collectors nowadays, but rather Waste Management, Browning-Ferris and maybe one other. Any landfill constructed today has many highly technical and costly operations on site such gas collection systems, energy plants and particulate monitors.

Most regulatory agencies are set up nowadays in such a way that a politician has control of the agency and the head of the agency is appointed by the politician. In no way do these people understand the regulation, nor do they want to. The government employee who has the responsibility of ensuring compliance is faced with the possibility of triggering a phone call from the regulated entity's attorney to the politician's office if he attempts to enforce the regulation, which is usually a black and white proposition (either the entity is in compliance with such and such regulation or it is not). Most employees end up spending a large percentage of their time and effort trying to determine what is politically OK to do or not do so as to not offend the regulated entity and become a thorn in the politician's and his appointee's sides. Employees who are unable to master this fine art of accumulating "beans" while not really doing their jobs are subject to smear campaigns from law firms hired by corporations for that purpose or insane internal bureaucratic tortures. Employees are told by agency lawyers that certain entities have a pipeline to the politician's office and that smear campaigns are a fact of life and to live with it. That type of thing can include, for example, one instance I heard about (from an ex-management person - did not witness myself) where a former employee had information placed in his file indicating that he was a homosexual who frequented gay bars.

To get an idea of what that really means, two cases that come to mind are David Graham (FDA) and Sibel Edmonds (Homeland Security). For the cases that never see the light of day, it can be worse. I know one guy who ended up mentally disabled from years of such abuse and the state currently pays him several thousand dollars per month plus his medical, and this settlement was given to him without the aid of any legal representation on his part - the state lawyers determined the settlement and gave it to him.

[Lily]

I usually butt out of stuff like this, but your arrogant, condescending and immature reply really speaks volumes.

Yeah, and your own humility and maturity is so clearly made evident by your pithy-yet-insulting style, right? He responds to a bevy of scientific data that empirically establishes my point and refutes his by blithely contradicting me without even trying to address a single point that I made, and *I'm* the immature one? I have in fact heard his exact line of argument multiple times from Limbaugh and other talking heads, so he wasn't even original about it.

You want to argue this point with me on the basis of scientific evidence, then step right up, buddy. I ended the conversation with Old that way because there's no point in shouting matches, but I love debate. Perhaps it would be better to make a new topic in that case, however?

I'll start with the big picture. First, this should help put your mind at ease, but I think you're way off on the cyclical expectation of this being anywhere near 1940. I think I understand how and why you got there though (1929/2000, 1932/2003, 1938/2009, 1940/2011).

Well, I do like that pairing of years you have there; it seems evocative. But I'm not necessarily certain yet that it makes sense; it seems reasonable to say that the current US generational crisis period began in 2000, but if you start the previous cycle's crisis period in 1929 then it only lasts 16 years instead of 20. Perhaps the atom bomb ended the war ahead of schedule?

Anyway, perhaps what is really the confusing point to me is figuring out what exactly is the ultimate empirical basis for the comparison of the stock markets today with those of analagous points in the previous cycle? And how do we know when two markets are actually analagous?

My assumption has been that there is no direct connection, and markets are never precisely analagous. However, they take the shape they do at any given time because of a psychological process that is playing out over time amongst the market participants, in the context of what is happening on the globe. My guess is that stock market charts from very different times show similarities because the underlying psychological processes are similar.

So perhaps all I'm saying is that the graph of the 1940 stock market and surrounding years shows an example of what it looks like over time when people slowly realize, over the course of a year or so and against the headwinds of regime propaganda happytalk, that their private-sector economy is complete crap, while at the same time the government has assumed a huge economic roll that it can barely sustain, and the administration decides to massively inject economically useless money into the system to make up for the gap. (At least Roosevelt was getting tanks and bombers in return for the money he was printing! All Bernanke is getting are bigger numbers at the casino.) Because investors base their behavior on the behavior of other investors, the process of this realization shows similarities across multiple cases where it occurs. And I think our case may be similar in many broad ways.

I've talked a lot here about what Bernanke has gotten wrong. There is at least one thing he got right, though, and that is the Fed did exacerbate the 1932 collapse and that brought in an early stock market low. You will notice a lot of people work off that 1932 low in doing their cyclical work and it took me years to figure out that's wrong, or at least it needs to be understood that the 1932 low came in early and it did come in unnaturally deep. The fact that it came in early and deep does affect future behavior though.

So what happened in the 1930's resulted in lows in 1932 and 1938, where there ideally should have been one low in 1935. By contrast, the 1929 high came in right on time. Whether by design or not (if the Fed actually understands this and did it deliberately then I will proclaim them to be geniuses), the Fed has actually reinverted the cycles back into their natural forms. So the October 2007 high came in right on time with the September 1929 high. The July 2010 low was a reverberation off the unnatural July 1932 low, and with QE2 Bernanke has inverted the unnatural February 1933 "double bottom" low around Dow 50, which was nearly as low as the July 1932 low that had taken the Dow from 386 in 1929 to 41 in July 1932. If QE2 is the last QE, ideally the market will drop until October 2013 and that may well be the generational stock market low.

I'm not certain that I fully understand your methodology, Higgenbotham, so perhaps I can try to restate this and you can correct me if I'm mangling your argument?

First, you're saying that the 1929 high and subsequent crash were in some sense 'on time' or natural, whereas the lows in 1932 and 1938 were caused by government policy, especially that of the central bank? That sounds right to me, and that is what Milton Friedman would say. What I'm not sure I understand is the connection between the September 2007 high and the 1929 high.

If there were a 'natural' point for our markets to crash this cycle, might that have been in 2001 rather than 2008 when it did happen? After 2001, Greenspan responded very decisively by lowering interests rates and generally engaging in easy money policy. It seemed likely at the time that there might have been a serious economic problem if he hadn't done that. Of course this is precisely the opposite of what the Fed did in 1929, and because of it the market drop and subsequent recession were incredibly mild - and the Bubble was kicked off. Can you imagine what would have happened in 2001 if Greenspan had dramatically contracted the money supply? Or what would have happened if Roosevelt could have borrowed nigh-unlimited funds from China?

I guess what I'm not clear on is whether the boom leading up to the 1929 crash is more similar to the boom leading up to 2001 or the one leading up to 2008, or if there are any interesting similarities between the recessions of 2009 and 1938 compared to the pairing of 2009 with 1930. How much of a role did federal and monetary policy as opposed to private sector reality play in the downturns between 1929-1932 versus 2008-2011 versus 1937-1940? This is a hard topic to find good data on, and I'm not sure I'd know where to start. It is true that after the 1938 collapse of industrial activity in the US, the federal government responded by massively increasing the role of government spending in holding up the economy, with consequences for the private sector a few years later that would have been disasterous if the state hadn't been picking up the slack with its increased economic role. This is what Obama did, but unlike in 1940 the state is now pulling back its spending as it runs of money and credit, setting the stage for a much worse collapse. Even though we aren't militarizing like Roosevelt was, with all the various QE's we've spent enough money to fight two or three major global wars, but we're just giving it to banks and investors instead of using it to build things. That is NOT what China is doing, by the way.

My pairing of 1940/2011 isn't necessarily mutually contradictory to what I think you are saying, however. If the shape of the stock market post-2008 crash has been more a reflection of State policy than economic reality, especially including Bernanke's policies - which were deliberately intended to get the opposite result from the ones used after the 1929 crash, after all - than those factors might temporarily overwhelm cyclical factors as well. It might be that the post-2008 markets look like an inversion of the post-1929 markets because that is the ghost Bernanke is fighting. But just because he thinks it's now 1932 doesn't mean he'll be lucky enough to find that reality's challenges match his intellectual preparations...

Anyway, aside from cylical concerns, it seems that we agree on what to expect at least until the middle of the year. I still think you are likely to be right about a market low near April 18th, after the current rally looses steam and the bottom falls out. QE should then pump it right back up to a high in May or June. On this much, we seem to agree.

What about after that? I imagine that in maybe the latter parts of June, but certainly by July and August, we should see another serious downturn in the markets, possibly amid a short sharp deflationary spike. Stocks should be tumbling quite badly by August. Given how overpriced the entire market is, the bottom is probably about another 30% below where we were in November 2010 when Bernanke started QE2. I don't think we'll make it that far down by September, so some kind of halfhearted rally should be exepcted to kick in around that time, no? It might last a month or two, but given how bad the fundamentals are and how clear that will be by then I can't see how we can avoid a precipitous decline this winter.

If the market does weakly rally in the fall, the Fed will have a chane to come up with a policy response. The only useful thing I can see that Bernanke or Obama could do would be to allow corporations to bring in money they're holding in offshore accounts tax-free. That would bring in some $200 billion, which might be enough to buy another season or so before the market figures out what's going on. I don't think Bernanke is willing to do QE3 yet, and other than that he's pretty much outta bullets.

I can't think of anything else that the regime could do to stave off the inevitable any longer, and I don't think even that offshore currency trick would really work, given how deeply perceptions of systemic risk will have penetrated by then. The market will have to come back to reality once the market participants are compelled to recognize that they are dangerously exposed to risk. And that means a crash, even if it happens over weeks instead of hours.

So if we do indeed get a downturn for much of the remainder of spring, followed by another mid-year peak, then another drop, then a weak rally in autumn, I can't see how we can avoid a crash in late autumn or winter. Too many people are figuring out that they should be scared. If that is how it plays out, it will definitely have some similarities to 1940, no?

And that bit about regulation is both horrifying and unsurprising. The EPA and BLM are about that bad, I know, and I'm sure lots of regulatory agencies are basically like that.

[John]

In my view, the "crash" of 1920-21 corresponds most closely to
crash of 2000.

John

[Lily]

May I ask why? I'm honestly not certain that I understand where all the dividing lines between the generational periods are...

[Higgenbotham]

Well, I do like that pairing of years you have there; it seems evocative. But I'm not necessarily certain yet that it makes sense; it seems reasonable to say that the current US generational crisis period began in 2000, but if you start the previous cycle's crisis period in 1929 then it only lasts 16 years instead of 20. Perhaps the atom bomb ended the war ahead of schedule?

Anyway, perhaps what is really the confusing point to me is figuring out what exactly is the ultimate empirical basis for the comparison of the stock markets today with those of analagous points in the previous cycle? And how do we know when two markets are actually analagous?

OK, I was guessing what you may have done. I'll just first mention some rough guidelines. Roughly, I would say the economic cycles that correspond to the generational cycles average somewhere in the area of 75-80 years. They seem to be lengthening a bit. Of course, there are lots and lots of cycles and they overlap at various times in different ways and the lengths can vary and it's all almost infinitely debatable. But one thing I'm pretty sure most would agree on is that the late 1920s were generationally equivalent from a market standpoint to the late 2000s. And in talking just from a generational standpoint, it's a bit of a stretch for me to say that 2007 was "right on time" compared to 1929. Really, I have other reasons for saying that and can explain it.

As an aside, Vince has frequent links to his 38 year cycle, so 2 of these would be 76 years. I agree with that. My work shows that over the past 5 centuries or so, the cycle has averaged 76 years. That led me to predict that the real estate bubble would burst in 2005, which turned out to be a year or two off.

I'll discuss the essence of why 1929 is equivalent to 2007. Both in the late 1920s and the late 2000s, there were real estate bubbles. The difference was that in the late 2000s the main action was in real estate, not in stocks. So if you do some research, you will find there was a wild real estate bubble in the 1850s and a real estate bubble that peaked around 1925 (I can't remember the exact year) and popped and fizzled out. That didn't happen to our real estate bubble this time around because most of the debt was pouring into real estate and being securitized, so our recent bubble went on and on beyond what someone would consider "normal" timelines compared to the 1920's real estate bubble. I suppose somebody could conclude the cycle there is 82 years, but that wouldn't really be right. In the 1920s, the object of speculation and consequent target for ridiculous prices and debt levels (or margin) was the stock market. Stocks could be controlled on 2% margin versus 50% in our recent bubble. That doesn't tell the whole story though because nowadays we have other ways to increase leverage so as a whole our bubble became much much larger overall.

Getting back to the cycles and how they're sort of analogous but not really, one of the main identifiers in my mind (and John's) are those points in time where the securitization of debt becomes the most extreme, debauched, etc., from a generational standpoint regardless of the object of speculation and those years (we think, we hope) were 1929 and 2007. An interesting aspect of this comparison that to date I'm not aware of anyone discussing (not just here I mean, but anywhere) is the fact that a stock has a price that is unequivocal. So when a stock bubble pops, there is an account and a price of what is in the account and if the funds aren't there then the margin clerk liquidates the account. Today we have banks and real estate on the books with phony prices attached and the equivalent of the margin clerk is feeding money into the bank and helping to obfuscate the liquidation process instead of helping to bring it about. And those debt securities are being passed around like hot potatoes still and their contents and value being obfuscated to the point where the Fed has placed $1 trillion of them on their balance sheet and some would like an audit.

[Higgenbotham]

A few days ago I outlined some possible patterns for the stock market. I mentioned the 1929/1987 patterns and said the market could set up in a similar way - it was possible, but it hadn't yet. As of today, it has. The chart below shows the 1929 crash with today's market pasted in for comparison. Sorry, I could not equalize the time axis. The main features in common are:

A fast and large percentage runup to a high.
A quick loss from the high which occurs over a period of about 20 trading days (1929 was 23, 1987 was 18, and 2011 was 17).
A recovery of about 70% of that loss in just a few days (5 in 1929, 8 in 1987 and 7 so far in 2011).
A daily bar at the top of the rebound which opens and closes near the same level, indicating indecision.

The setup is here from a pattern standpoint. My take on these kinds of setups, though they aren't seen all that often, is that it usually needs to be assumed that the market will NOT crash. But I'd like to hear what people think. Does it seem to you that the stock market can crash next week and the week after? Any more likely than normal? I saw where John had stated there's so much going on now that he can't keep up. Maybe that's an indication a crash really can be just around the corner.

http://oi56.tinypic.com/2ugo1uq.jpg

[Higgenbotham]

I'm not certain that I fully understand your methodology, Higgenbotham, so perhaps I can try to restate this and you can correct me if I'm mangling your argument?

First, you're saying that the 1929 high and subsequent crash were in some sense 'on time' or natural, whereas the lows in 1932 and 1938 were caused by government policy, especially that of the central bank? That sounds right to me, and that is what Milton Friedman would say. What I'm not sure I understand is the connection between the September 2007 high and the 1929 high.

If there were a 'natural' point for our markets to crash this cycle, might that have been in 2001 rather than 2008 when it did happen?

You're right, I didn't explain the methodology used to determine what I referred to as being "on time". This is simply a stock market pattern I discovered that nobody else so far as I know has.

To see it, divide a piece of paper into 4 columns. Label the columns LOW, HIGH, LOW, LOW.
In the first column, write: 10-1857, 10-1896, 10-1935, 10-1974.
In the second column: 10-1890, 10-1929, 10-1968, 10-2007.
In the third column: 10-1896, 10-1935, 10-1974, 10-2013.
In the fourth column: 10-1935, 10-1974, 10-2013, 10-2052.

After you have done this, you will see that heading down the columns, all those dates are 39 years apart and heading across the columns those dates are 33, 6, and 39 years apart. All of the dates in the columns correspond to a major stock market high or low except for 1935 and 1968. Had the Fed not botched up and created two lows in 1932 and 1938 (about equidistant from 1935) instead of one in 1935, the 1968 high probably would have come in "on time" and there was an attempt to make a high in 1968 that came pretty close to being "the" high for that time period. Several of these highs and lows hit precisely to the month (10-1857, 10-1974 and 10-2007) while others are only one or two months off from the actual (8-1896, 9-1929) and one is 5 months off (5-1890).

I'm guessing that the natural point for our markets to crash was in 2009. The 2008 "crash" had to do with real estate and I believe created a first wave down in the stock market which liquidated the excess out due to the bursting of the real estate bubble. But believe it or not, I haven't given a great deal of thought as to whether there was a time at which the stock market "should" have crashed, so I would need to think about that some more.