Financial topics

[freddyv]

This is my first post here, but I've been lurking for months, reading up on Generational Theory and the various articles, as well as perusing the forum. John, I want you to know that I think you've got some good stuff here, and it's really opened my eyes. I'm a history buff and so it's always interesting to gain some new perspective on historical forces at work. I just have a few, relatively minor, quibbles.

1. I don't subscribe to determinism/fatalism. While I believe that GD has a lot of merit, it's best used to understand what has happened before and a general guideline of what can happen in the future. But to accept that what has happened before must happen again is a logical fallacy. Just because something happens over and over again doesn't guarantee it will happen again. Will the sun rise tomorrow? Probably. One day it won't. Eventually GD will fail because human societies evolve. Until then, though, it's a good model to use, but one thing I take issue with is the notion that, because, for example, it's highly probable we're headed for a generational panic and crash, that there's no point trying to fight it. History has shown there are always anomalies that defy expectation, and to accept defeat without even trying, because it's pointless, is something I can't abide for myself. It's called defeatism. Sure, maybe all attempts to prevent the panic and crash will fail, but one day, somewhere, a solution may be found. I'm an optimistic realist. I may know doom is coming, and I'll try to prepare for it as best I can, but I'll still also hold out hope, and I'd rather go down swinging.

2. You mention the so-called Law of Mean Reversion. As a student of statistics and research methods (specifically a grad student in experimental psychology), I must admit that it drives me a little batty to see this fallacy over and over again. There is no such law. It's really something called Regression to the Mean. Regression doesn't require that something that exceeds the mean for a given time must inevitably spend an equivalent amount of time at the same distance on the other side of the mean. All it means is that when something exceeds the mean, it is statistically probable that later scores will revert back toward the mean. It may rebound completely back to the mean, or regress below the mean. Similarly, anything below the mean will also, subsequently, regress up toward the mean. It's a statistical model and also used to explain various experimental results, but by no means at all is this a law. This article sums it up nicely:

http://www.ddnum.com/articles/index.php

...

Here's an informative article on Reversion to the Mean that I found useful because it caused me to question my beliefs:
http://homepage.mac.com/j.norstad/finan ... sting.html

In the end I realized that I had a better understanding of Mean Reversion but that the conclusion of the article was flawed in that it assumed that we can't predict the future based on past data and that simply isn't true when it comes to a system such as the stock market that is based on human nature, which is quite predictable when measured in large numbers and over long periods of time.

I don't think that anyone will ever be able to accurately predict what the market will do on any given day, week or month based on mean reversion but it is possible to determine "pressures" that have built up and must be released at some point. Mean reversion, coupled with objectivity, a historic perspective and knowledge of the current economic conditions, can provide an excellent means for predicting the future of the stock market.

--Fred

[Barion]

> You mention the so-called Law of Mean Reversion. As a student of
> statistics and research methods (specifically a grad student in
> experimental psychology), I must admit that it drives me a little
> batty to see this fallacy over and over again. There is no such
> law. It's really something called Regression to the Mean. ...
> This article sums it up nicely:
> http://www.ddnum.com/articles/index.php

I'm glad that you're studying "experimental psychology." Perhaps you
could do a study on how feeding misinformation like this to airhead
investors causes them to do stupid things.

Mean Reversion and Mean Regression are two completely different
things, almost totally unrelated. Mean Regression applies to
independent random variables. Stock indexes are not independent random
variables: The DJIA on Tuesday is not independent of the DJIA on
Monday.

Ha, whoops, I hate it when I fail to research something fully and end up making a mistake. I failed to research the origins of the term "mean reversion" and therefore missed the connections to the stock market. I thought, based on the first part of that article I linked, that mean reversion was simply a misunderstanding of regression to the mean, which is what we use in statistical science to explain things like why the children of exceptionally tall parents will tend to be shorter...because they are regressing toward the mean. Or why a really low or high test score will often be followed by a score closer to the mean. We're obviously talking apples and oranges here. Still, I have a hard time accepting the notion of a Law of Mean Reversion because it's too deterministic...too much providence, like it's destined, or ordained, to happen. Laws must be obeyed. I come from a scientific background, so when I see terms like that, I approach it with a very different perspective. Economics is somewhat scientific in nature, with its usage of complex math, but ultimately can't be studied with any scientific precision because you can't establish any controls. Maybe microeconomics can be studied with some level of precision, if you can control for all the variables, but macroeconomics is out of the question. We can't just tinker and experiment on the macro scale because it affects our own existence. The best we can do are quasi-experimental studies and non-experimental studies, with low or no internal validity, and to a scientist like me, that plain sucks.

[The Grey Badger]

Oh. it IS a bull market. He just forgot the next logical word after 'bull'.

[Gordo]

Hey, I've been real busy and haven't had time to read the posts or even John's articles but I just wanted to drop in for a minute. I previously had said I was expecting a big counter-trend rally. I think I missed the bottom by 2 days. Since then the stuff I bought has done well, but the major indexes have not rallied nearly as much.

COMMODITIES seem to be leading the market right now. Since the day the $25/barrel oil calls came out, oil has gone up 20%, that’s now significant in my opinion, something to keep an eye on anyway. KOL (coal sector) is up 60% from its low - that’s significant by any measurement. GDX (gold sector) is up 100% from its low – perhaps the most significant thing of all to keep an eye on (could "gold fever" hit next year??). Many of the shippers are now also up over 100% from their lows, which is fascinating considering half of them will be bankrupt next year if rates do not climb substantially.

Those sectors were all strong again yesterday despite the down market.

Countertrend rallies were common during the '29-'32 period, often lasting 3-6 months and rallying as much as 50%. I think we are in one of these counter-trend moves right now, and it could go for another 1-2 months. That said however, I have officially taken my profits. Its been a very good investing year for me...

I think at some point people will start to think they are "missing out", they will want to put money back into stocks, and that is going to mark the short term top. We aren't there yet.

Best of luck to you all!

-Gordo

[Gordo]

By the way John - I just read your latest article. I see a graph that you describe (multiple times) as the ratio of public debt to GDP. I don't know exactly what that graph is, but it isn't public debt to GDP. The total public debt right now is $10 trillion. US GDP is just under $14 trillion

Total public debt represents about 65-70% of GDP.

Wikipedia has correct graphs of US debt/GDP:
http://en.wikipedia.org/wiki/United_States_public_debt
(note they are wildly different from what you posted)


We could blow another $10 trillion on "bailouts" and Obama's NEW NEW DEAL and still remain below the debt to GDP level of Japan!

[aedens]

As I wrote a couple of days ago, investors are pouring money into
Treasury bills as a safe place to keep their money. This increased
demand is driving prices up and yields down -- so far down that
yields (interest rates) are now negative. That is, investors are
paying the government to hold their money for them.

margin debt ~233 billion http://suddendebt.blogspot.com/
a way to go, or deflate to hold, to call in yoy return call it cheap insurance as scdo blow up.
permabear how long- until margin and mr. markets crushes hedge leverages i hope to be sooner than later. It's not that government has lacked information needed to fix the problem. It is institutionally incapable of bringing about the desired result, since the principles of profit and loss, private property and contract, enterprise and entrepreneurship, do not exist in government. Government operates with an eye to its own short-term survival, and those of its connected interest groups, and nothing else. Globalising capitalism is opposed by two major groups - the cultural nationalists in the third world, who fear the westernisation it may bring and the New Dirigistes, proponents of the “third way’” in the West who bear the ancient hatred of capitalism on their sleeves. Capitalism was aptly defined by the great Austrian economist Joseph Schumpeter as a system of ‘creative destruction’. Its instruments are entrepreneurs. They and the institutions through which they operate - entrepots, commercial houses, banks, firms - have been ubiquitous since the development of Eurasia’s sedentary civilisations, and from Assyrian tablets go back at least to the Karum in ancient Mesopotamia of the 20th and 19th centuries BC. Though these ancient merchant capitalists became rich, they were at best tolerated as a necessary evil and held in low esteem, with their accumulated wealth continually subject to predation by the state.

[Gordo]

John also wrote in his latest article: "The great mass of these ARMs are going to reset in 2009 and 2010, and a homeowner's $1000 a month mortgage will suddenly go to $4000 a month"

This is another error. The largest number of resets has already occurred - so from that perspective, the worst really is behind us. Also in case you have not noticed, we've experienced an EPIC treasury bubble - this has also had the affect of pushing down 30 year fixed rate mortgages - so anyone that is capable of qualifying for and can afford a 30 year fixed at this point is in good shape. Of course 10 million homes are currently underwater (more owed than they are worth) so the housing situation is still very bad, and many will not be able to refinance (though to keep things in perspective, 10 million homes is less than 10% of all US households - and certainly only a fraction of these underwater owners are going to default, unemployment is still quite low and even if it moves much higher the default rate might be manageable, especially if new home supply continues its historic plunge).

Please see:
How Far Through the Mortgage Crisis Are We?

[freddyv]

Still, I have a hard time accepting the notion of a Law of Mean Reversion because it's too deterministic...

Ignoring something because you don't like what it tells you is not good policy.

Knowing that there are patterns or that bubbles are followed by busts is not only a way to be deterministic it is also the only way we have of hoping to keep the cycle from getting out of hand the next time.

It's unlikely we could ever stop bubbles from happening but if more people are more aware of this tendency and when they are likely to happen then the system can become self correcting. After all, a bubble blown up only a little will not burst, it will just leak.

Of course if we stop a bubble the next one is likely to be even worse because the next generation will look back in history and not see a problem.

--Fred

[wtf]

John also wrote in his latest article: "The great mass of these ARMs are going to reset in 2009 and 2010, and a homeowner's $1000 a month mortgage will suddenly go to $4000 a month"

This is another error.

This is the data I've been seeing for the past year or two. It looks like it goes a little further in the future than your graph. It also looks like we're in for another whammy and the economy is worse

ARM Resets

resets.jpg (24.5 KiB) Viewed 7168 times

[John]

Dear Gordo,

> Hey, I've been real busy and haven't had time to read the posts or
> even John's articles but I just wanted to drop in for a minute. I
> previously had said I was expecting a big counter-trend rally. I
> think I missed the bottom by 2 days. Since then the stuff I bought
> has done well, but the major indexes have not rallied nearly as
> much.

Actually, what you wrote was the following:

> Well today we got the infamous "capitulation" that John loves to
> poke fun at. Besides an “almost too perfect to be true” textbook
> test and bounce off the bottoms on heavy volume (another big key
> reversal day), today was also notable for the shellacking in
> treasuries (a very good sign that the market goes higher for a
> while). My guess is that a powerful new counter-trend rally has
> begun which will probably last for 3-6 months.

When you wrote this, the Dow Industrials index was at 8835. This
morning it opened around 8600. So that's not any kind of rally that
I'm familiar with.

I wouldn't be so unkind as to even mention this, if it weren't for:

> I don't know exactly what that graph is, but it isn't public debt
> to GDP.

Well, since the graph was posted on the Financial Times Alpha site,
and since several sources were provided, I feel safe in claiming
that, contrary to your statement, it IS public debt to GDP.

Obviously there are two different definitions of public debt
involved, and instead of just taking a pot shot at me, you have an
obligation to explain the differences between the two definitions.

> John also wrote in his latest article: "The great mass of these
> ARMs are going to reset in 2009 and 2010, and a homeowner's $1000
> a month mortgage will suddenly go to $4000 a month" This is
> another error.

Once again, I was referencing a claim made on the 60 Minutes segment.
And once again, instead of just taking a pot shot at me, you have an
obligation to explain why your graph differences from the 60 Minutes
source.

So that's three postings, and three statements that are, to be as
kind as possible, misleading. Furthermore, I've known you for
several years, and I know you to be intelligent enough to know that
your statements are misleading, so it's not an accident.

What's your purpose in coming to this forum and doing this? I'm
serious - what is your objective? Are you trying to convince me of
something? Are you trying to convince other posters of something? Or
are you just being a reflexively nihilistic Gen-Xer?

Sincerely,

John