Financial topics

[John]

> So I say this to John and others here. Let's look at this
> situation as a cure to a society deprived of the little things
> that make life good: Time with family, laughing with friends,
> trying to craft something by hand (I've always wanted to try
> making my own furniture), doing your own garden work, cooking more
> often, etc. I think we've become so obsessed with our various
> meaningless professions (how many people actually create something
> for a living? - I don't) and with trying to put ourselves on a
> pedestal in front of others (I'm guilty, even if it's unconscious)
> that we have forgotten what is really important.

> Too many of us go through life forgetting that our very existence
> as sentient beings is itself a miracle and is something we should
> not waste for even a second. Life and the things and people in it
> are special because it is all so very fleeting. Even this
> catastrophe happening right before our very eyes can be a blessing
> and we may find that just as people lived through the depression
> we will live through our hard times and come out the better for
> it.

I'm all for remembering what's really important, but I would add the
following:

• Being hopeful and optimistic during a Recovery Era (first
  turning) is good because it's a time when a nation is being rebuilt
  for the future.
• Being hopeful and optimistic during an Awakening Era (second
  turning) is good because society is reevaluating itself and preparing
  to go into new directions in the future.
• Being hopeful and optimistic during an Unraveling Era (third
  turning) is good because there's usually an economic bubble going on,
  and you might as well take advantage of it.

However, being hopeful and optimistic during a Crisis Era (fourth
turning) is bad because it blinds you to what's coming, and encourages
you to fail to prepare for the future.

Sincerely,

John

[John]

> I am looking at a market and an economy like we saw in Japan for
> the 1990's. If you look at the charts on that market, you will see
> it tried to rebound a few years after falling in the first 30
> months or so of the 1990's. It peaked in 1996 and started falling
> from there. Unlike 2000, we now have a stock market bubble and a
> housing bubble and any move to stop inflation is going to collapse
> the housing market, depriving the next downturn and any upturn
> that follows of leveragable collateral and likely threatening the
> credit creating capacity of the banking system that has piled so
> heavily into mortgages this time around. Greenie has his back
> against the wall.

> Japan spent its government out of its credit rating and it had the
> US bubble to prop it as it deflated. This time there won't be any
> big breeze coming from anywhere and in the end the government will
> have to let it collapse to save itself.

I've always felt that Japan's stock market crash was softened by
taking advantage of the US bubbles and possibly even China's bubble.

This would be what happened before: Japan had a major stock market
crash in 1918, but survived the 1920s by exporting silk products to
the US, until the Smoot-Hawley act of 1931 shut Japan's silk industry
down.

Have you found anything that shed's light on any of this?

One more question: A web site reader asked me if some particular day
in 1990 that the Japanese consider to be "the day the stock market
crashed," like Oct 24, 1929?

> There is mention of the housing market and the building
> inventories around the country. This is the tip of the iceberg. I
> am assisting my mother in her rental portfolio, of which I believe
> the peak income from which was about 2002. The recent vacancies
> have been tragic and the applicants we are getting are so beaten
> up credit wise that I am not seeing even honest applications. 3 of
> the last 5 applications I have taken have been people in certain
> stages of eviction. These are older homes, but they are in good
> shape in the North Dallas suburban region. They are not slum
> properties.

Wasn't there a huge housing crash in Texas in the 1980s? Didn't
Texas learn anything from that?

> My point isn't so much to blow my own horn, but to back up what
> John said about Roubini. Roubini was years behind laymen like me
> and I was reading about a lot of this stuff before I started
> writing about it. It took me a long time to realize how the Dow
> fell almost 90% in 1929-1932 and as far as that goes, how it went
> up 400% in 4 or so years prior to 1929 (1993 to 2000 it did the
> same). Few people and that includes Mr. Roubini have a clue how a
> debt bubble works.

I certainly agree, and what continually baffles me is why people like
Roubini don't have a clue. It's not exactly rocket science to
understand it, and you'd think a Professor of Economics, whether at
Stern or Princeton, would be able to figure it out.

I've received a couple of new criticisms lately, asking me why I'm so
"angry." All I can say to them is you wouldn't BELIEVE how furious I
am at the self-inflicted stupidity of these people.

Sincerely,

John

[John]

> This is true. In the Soviet Union (SU), there were those
> individuals called "dissidents" who presented an alternative (and
> more accurate) view of reality from that carefully crafted by the
> State; they pointed out flaws and some even predicted the collapse
> of the Soviet system. In the United States (US), we have coined
> various similar terms such as "whistleblowers" for those who
> happen to exist within the State or corporate apparatus, or
> today's "bloggers" and others who exist outside the apparatus, all
> of whom present an alternative (and in most cases more accurate)
> view of reality. Dissidents and whistleblowers were/are treated
> with extreme cruelty as the SU and US government agencies and
> corporations are really advanced tribal and fascist systems where
> no dissent whatsoever is tolerated, and loyalty to the members
> within the tribe (and not to the public) is the overriding
> concern. Therefore, when reality becomes something that is
> obviously vastly different from that crafted and purveyed by the
> State, as in today's economic situation, the search is on for a
> loyal member of the "tribe" who "got it right" and it's a very
> difficult search in an environment where dissent is not tolerated.
> By definition, that person must come from a government or
> corporate institution, must be a member of the "tribe" in good
> standing and, therefore, the person who is annointed as the one
> who "got it right" with the associated Congressional appearances,
> etc., usually didn't even hit the target. In the meantime, the
> growing numbers of those outside the State and corporate apparatus
> who really did "hit the bullseye" are ignored because giving them
> any credence would delegitimize those within the tribal apparatus,
> further weakening and corrupting an already weak and corrupt
> structure.

I agree with this analysis, but it still never ceases to baffle me.
Krugman and Roubini get everything wrong, and yet each error seems to
make them even more respected. How can that possibly be?

But this is why there HAS to be a big generational stock market
crash. People will go on believing the Krugman's and the Roubini's
until some disaster happens that's so great that believing them any
longer becomes literally possible.

People have written to me to point out that the market has ALREADY
crashed -- down around 40% -- and so we don't need what I'm calling a
generational crash. But until that happens, the politicians will
still make one mistake after another, making things worth.

I've come to think of it as the alcoholic who doesn't believe he has
a problem. He keeps getting drunk, but claims that he can stop any
time he wants. Everything keeps getting worse, and nothing changes,
until he "hits bottom" -- say, finding himself in a gutter reeking of
his own urine.

The generational panic is the financial equivalent of hitting bottom.
And just as an alcoholic MUST hit bottom at some point, a society
must do the same.

Sincerely,

John

[John]

> 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.

If you think about it, you can see that there are many things that
are deterministic.

For example, a population grows exponentially. Isn't that a
deterministic prediction?

In my unpublished book, I gave a partial proof that technology also
grows exponentially.

** Chapter 7 - The Singularity
** http://www.generationaldynamics.com/cgi ... book2.next

That doesn't surprise most people, because they vaguely feel that
technology grows exponentially.

Prior to August, 2007, if someone had told you that the stock market
always goes up, except for an occasional minor blip or two, would you
have accepted that? It was common wisdom till then. Actually, it's
still common wisdom today, only that the blip is a little longer than
usual.

This belief is so embedded in society, that it's also common wisdom
that anyone who sells his stock is just panicking -- or worse.

** Do people with brain disorders make better investors?
** http://www.generationaldynamics.com/cgi ... 25#e080125

It's only when there's a prediction against the common wisdom that
people won't believe it.

During the 1970s, people actually paid attention to P/E ratios, and
would have considered today's valuations to be extremely high. They
would have had no trouble at all accepting "mean reversion" from
these high levels.

At that time, financial advisers would tell young people to take
risks with growth stocks, but would tell older people to stay with
AT&T or IBM, rather than risk your life savings.

In the last ten years, that was all thrown out the window, and
everybody was into high-risk securities -- because the common wisdom
was that there was no risk.

So my response to you as an experimental psychologist is this: Make a
list of "deterministic" predictions that are bullish, and another
list that are bearish, and test different people to see what they're
willing to believe. My expectation is that you'll find that whether
a prediction is deterministic has nothing to do with whether it's
believed; the only thing that matters is whether it's bullish or
bearish.

Sincerely,

John

[John]

Dear Fred,

> 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.

This is very funny, but it's oh so true.

Sincerely,

John

[Gordo]

WTF - that chart you posted of the ARM resets is a bit confusing, the Hussman one doesn't break out Option ARMS separately - which leaves me wondering - did Hussman miss them completely? Or is the chart you posted double counting? Why do those resets only seem to "pop into existince" in the future (i.e. 2009?). I'll have to search for the raw data - this is such a huge difference that it might change my outlook on the economy (not that I'm optimistic as it is).

[Gordo]

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..

John - the DOW hit 7,947 that day, and bottomed 6 days latter (so I stand corrected, I was 6 days early, not 2). It is currently up 12% from that level. You don't have to time the exact bottom to make money. I don't trade the DOW or S&P indexes. When I think the market is close to a bottom, I buy the most beaten up sectors. These are the very sectors that have seen the biggest gains thus far in the counter-trend rally (many 50-100+% gains in individual stocks).

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.

Maybe there is a reason your source didn't call it "public debt" like you did? I think you have confused US total debt with public debt. There is a huge difference (nearly 500%) between the two. As far as I know, there is no "official" total debt - I guess anyone can tally up whatever they want for it, I assume most would include total outstanding mortgage debt (which is a function of interest rates and population dynamics), and then some double count mortgage debt as financial sector debt. Most would include credit card debt in "total debt" which again can be misleading as the majority of Americans actually don't carry a credit card balance, but even if it was paid in full every month it would be still bump up the total debt figure.

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?

Doing what? Having a discussion about the economy? I like discussing finance, do you have a problem with that? Its your site, if you want me to go away that's fine. I don't know why you would want to limit discourse or dissenting ideas though, it would only hurt the value of the site in my opinion...

Not everything is a conspiracy John, you need to chill a little bit. Stop being so furious about everything, its going to kill you.

[Gordo]

Regarding the market right now. How high can it go? I think higher, maybe not tomorrow, but over the next month. People want to get back in but most are still scared. Soon they could be thinking they are missing the boat (the major indexes are already 20% above their lows). There have been some nice recent swings in the investors intelligence numbers (many more bulls, fewer bears) but its probably going to swing much further. Then we top & possibly plunge? I think next year is going to be crazy. Kaplan was recently commenting on the counter-trend rally:

In 1929-1930, there was almost no fiscal stimulus in any country, especially not in the U.S. The Fed kept interest rates absurdly high. Protectionism was rampant and worsening. Worldwide governments were terribly uncoordinated. Even in that equity-unfriendly environment, the S&P 500 rebounded by 48%. So if you're going to tell me that with a ten-trillion-dollar total global stimulus, or whatever higher number it turns out to be, combined with negative real interest rates in most countries, and all kinds of other coordinated efforts, that we are going to get a total gain in the S&P 500 which is less than we had in a similar scenario during the Great Depression, then that is not remotely plausible.

The S&P 500 surged 72% in 1932-1933. That was when FDR became President and initiated the New Deal. President Obama is acting a lot like FDR, so a gain of roughly 72% seems a lot more realistic to me than the 40% or 45% that the unhappy bad-news bears are talking about.

[Gordo]

Regarding the recent comments about Japan. I found the following article by Dr. Hussman kind of interesting:
http://hussmanfunds.com/wmc/wmc081201.htm

After studying Japan myself I came to the same conclusion. Yes, they are in the midst of a 20 year bear market – but guess what? Their valuations have just hit the same level (price/peak earnings) that our market’s have already hit this year! We did in 10 years what it took them 20. How? They went up to astoundingly ridiculous valuations that our US markets never approached even at their bubble peaks (the entire Japanese market was like our nasdaq 100 or dot com bubble of the late 90's). So like Hussman said, we aren’t the NEXT Japan, we already “Japan’ed”.




Japan's graph of price to peak earnings.
"Paying high multiples of peak earnings, regardless of the level of interest rates, is rarely rewarded by anything but sorrow."

[Higgenbotham]

I agree with this analysis, but it still never ceases to baffle me.
Krugman and Roubini get everything wrong, and yet each error seems to
make them even more respected. How can that possibly be?

But this is why there HAS to be a big generational stock market
crash. People will go on believing the Krugman's and the Roubini's
until some disaster happens that's so great that believing them any
longer becomes literally impossible.

People have written to me to point out that the market has ALREADY
crashed -- down around 40% -- and so we don't need what I'm calling a
generational crash. But until that happens, the politicians will
still make one mistake after another, making things worse.

I've come to think of it as the alcoholic who doesn't believe he has
a problem. He keeps getting drunk, but claims that he can stop any
time he wants. Everything keeps getting worse, and nothing changes,
until he "hits bottom" -- say, finding himself in a gutter reeking of
his own urine.

The generational panic is the financial equivalent of hitting bottom.
And just as an alcoholic MUST hit bottom at some point, a society
must do the same.

Sincerely,

John

This whole discussion has reminded me of a few paragraphs from a 2005 essay by Dmitri Orlov entitled Post-Soviet Lessons for a Post-American Century.

http://www.camse.org/andy/oil/Soviet_Advice.pdf

I read Orlov's essay in 2005. Despite having extensively studied what happened in Russia (and I visited Russia in 2006) to get a preview of what we might be facing here I am still surprised that this appears to be what is unfolding (I'll let his words speak for themselves as I can't really think of anything that adds to them):

Loss of Normalcy

An early victim of collapse is the sense of normalcy. People are initially shocked, but quickly forget that such a thing ever existed, except for the odd vague tinge of nostalgia. Normalcy is not exactly normal: in an industrial economy, the sense of normalcy is an artificial, manufactured item. We may be hurtling towards environmental doom, and thankfully never quite get there because of resource depletion, but, in the meantime, the lights are on, there is traffic on the streets, and, even if the lights go out for a while due to a blackout, they will be back on in due course, and the shops will reopen. Business as usual will resume.

The sumptuous buffet lunch will be served on time, so that the assembled luminaries can resume discussion of measured steps we all need to take to avert certain disaster. The lunch is not served; then the lights go off. At some point, somebody calls the whole thing a farce, and the luminaries adjourn, forever. In Russia, normalcy broke down in a series of steps. First, people stopped being afraid to speak their mind. Then, they stopped taking the authorities seriously. Lastly, the authorities stopped taking themselves seriously.

In the Soviet Union, as this thing called normalcy wore thin due to the stalemate in Afghanistan, the Chernobyl disaster, and general economic stagnation, it continued to be enforced through careful management of mass media. In the United States, as the economy fails to create enough jobs for several years in a row, and the entire economy leans towards bankruptcy, business as usual continues to be a topselling product, or so we are led to believe. American normalcy circa 2005 seems as impregnable as Soviet normalcy circa 1985 once seemed.

If there is a difference between the Soviet and the American approach to maintaining a sense of normalcy, it is this: the Soviets tried to maintain it by force, while the Americans' superior approach is to maintain theirs through fear. You tend to feel more normal if you fear falling off your perch, and cling to it for dear life, than if somebody nails your feet to it.

More to the point: in a consumer society, anything that puts people off their shopping is dangerously disruptive, and all consumers sense this. Any expression of the truth about our lack of prospects for continued existence as a highly developed, prosperous industrial society is disruptive to the consumerist collective unconscious. There is a herd instinct to reject it, and therefore it fails, not through any overt action, but by failing to turn a profit, because it is unpopular.

In spite of this small difference in how normalcy is or was enforced, it was, and is being brought down, in the late Soviet Union as in contemporary United States, through almost identical means, though with different technology. In the Soviet Union, there was something called samizdat, or self-publishing: with the help of manual typewriters and carbon paper, Russian dissidents managed to circulate enough material to neutralize the effects of enforced normalcy. In contemporary United States, we have web sites and bloggers: different technology, same difference. These are writings for which enforced normalcy is no longer the norm; it is the truth - or at least someone's earnest approximation of it.