Financial topics

[Higgenbotham]

For sure, so this was NOT my question, my question was: what did you observe special on Thursday on the Dow?
Apart the fact there was a recent non-confirmed Dow non-confirmation, point which doesn't mean anything yet, I haven't seen anything, so for my own culture, and if you agree, could you explain.

That's correct, this has nothing to do with Dow Theory. Dow Theory only says the market has turned down after it has already happened. I'm looking at what markets do and when they do it before they crash. What they do has to do with the patterns they make on a day to day basis. On Thursday a pattern was completed that is similar to the pattern that was completed before the 1929 and 1987 crashes. In some ways, it is a mirror reflection of 1929 and 1987 because when markets show signs of panic, they can change polarity as a short covering panic occurs, then reverse polarity as a selling panic starts. On Thursday the Dow also completed a a cycle in time that was within one day of the completion of the Tulip Mania in 1637. To study this, it would be best to use a daily candlestick chart of the Dow from 1929 and 1987 and study what happened before the crash. It would also be best to not only study it on the basis of our calendar system but other calendar systems as well.

I think another important thing to think about is whether any of this is being confirmed by other observations. An easy one would be going back to May 5, 2010, there was rioting in the streets of Athens, Greece and the flash crash occurred the next trading day. On Friday, we saw similar in Cairo, Egypt which could set up another crash in the US exchanges on Monday. That may be the fundamental situation that is showing up in the chart pattern. Rioting is an action that may be similar in some respects to stock market panic.

Another point for my own culture, why do you say the market shouldn't delay 2 months more. Because you follow some theory about the cycles? I followed theory on cycles in the past, but for the short term (I mean between 1 week and 3 month) I havn't found there anything very usefull. Mabe I took the wrong references or didn't study hard enough.

Regards

That's not really what I was thinking of, but there was a cycle I observed that might merit some consideration. The number of days between the 2002/2003 (July to March) bottoms is very close to the number of days between the 2007 (February to October) highs. Likewise, the number of days between the 2008/2009 (October to July) bottoms is very close to the number of days between the April 26, 2010 high and last week. But the real reason I'm thinking that is not because of the cycles. It's because of all the various things we are seeing that indicate the periphery is once again beginning to collapse. This would be the same type of thing I wrote about in this forum on April 26, 2010 but instead of involving just Greece it involves many more areas on the periphery and it is spreading very quickly and unpredictably (small countries, states, local governments, and individuals). In order to keep the center of the system afloat, resources are being sucked from the periphery of the world into the center. As the periphery collapses, the center can't hold either because it runs out of resources to suck in. However, with the heavy government involvement in the markets, it's a lot harder to read the situation. It's like trying to monitor a backyard pond that had fish in it and now there is a whale in it.

[burt]

Thank you, it is a pleasure reading you, it becomes concrete, "down to earth", now I have to think a bit more and to learn more

Regards

[Higgenbotham]

One of the best ways to learn about the stock market is to study the long term charts and see what the market did from significant points. As an example, there were 2 very important highs in the last century. They were the September 3, 1929 bull market high and the February 9, 1966 bull market high. There was also a very important low on December 9, 1974. Using these highs as reference points, it seems like the month of June 2011 might be very important.

September 3, 1929 (HIGH) to October 29, 1973 (high) = 16,127 days
October 29, 1973 (high) to October 4, 1974 (low) = 340 days
October 29, 1973 (high) to December 9, 1974 (LOW) = 406 days

February 9, 1966 (HIGH) to April 26, 2010 (high) = 16,147 days
April 26, 2010 (high) to April 1, 2011 (?) = 340 days
April 26, 2010 (high) to June 6, 2011 (?) = 406 days

After doing this work, reading that Martin Armstrong has a long term cycle date of June 13, 2011 which he is pointing to as possibly an important low in the stock market makes sense. The fact that Armstrong derived this date using completely different methods gives confirmation to the projection. Also, looking at the daily chart from October 29, 1973 to December 9, 1974 and comparing it to the chart from April 26, 2010 to date gives additional confirmation. The earlier chart showed the most weakness in the months of November 1973 (corresponding to May 2010) and August/September 1974 (corresponding to February/March 2011). That alone doesn't mean weakness should be expected in February and March of 2011 but given everything else that is going on it seems like a good possibility.

[vincecate]

As the periphery collapses, the center can't hold either because it runs out of resources to suck in. However, with the heavy government involvement in the markets, it's a lot harder to read the situation. It's like trying to monitor a backyard pond that had fish in it and now there is a whale in it.

This is well put.

The total dividends of all US public companies came to $263 billion in 2010 (1.74% yield on $15.5 trillion). Bernanke is printing about $1 trillion per year, or 4 times as much money as is paid out by all US public companies combined. Talk about a whale flopping around and sucking in resources. As Bernanke prints he steals value from dollar holders all around the world (also people with long term contracts to sell resources in dollar prices). The world just can't support this level of theft forever.

http://howfiatdies.blogspot.com/2010/11 ... geese.html

[OLD1953]

Vince, the Fed is not the totally independant entity they'd like you to think they are. If Bernake keeps on printing, he's going to get his collar yanked. Moreover, it's been years since we had enough inflation to be noticable, as many prices have dropped and are dropping, exceptions being food and fuel, both of which have come under shortage situations in some regions, partly because of manipulation, partly because of hoarding and partly because of regional problems that have a magnified impact due to the importance of some relatively small regions in production of these resources. Oil in particular is having a supply problem due to the low cost of production supplies being already taken under development, so the next layer of demand has to be made up with more expensive product simply because of added development costs.

Back to my last post and the replies:

I think Hussman must be graphing times when high interest rates matched high inflation. I would expect the opposite reaction if interest rates went up and inflation was low or we were actually deflating. The effective rates would be prohibitive. Ten percent interest in a time of twelve percent inflation means the borrower is the smart guy, two percent interest in a time of slow deflation means the borrower is getting soaked. People generally avoid getting soaked.

Moreover, investment rates are pretty bad right now. Mattress stuffing due to worries about banks is ongoing, and has the potential to become a major drag on the economy by itself.

The arguement about money not being destroyed when someone defaults is only true in very simple cases involving no leverage. Leverage creates money from nothing, and that money IS spendable in the economy.

Example: A builder builds a home in 2002 and sells it for 250K. The "buyer" gets a note from a bank and starts paying it off. He pays it down by 25K and then mails the keys back to the bank. The bank sells the house for 125K and takes a bath for 100K. Now, by theory, the builder has that 100K, so everything is still even? NO, because this is real world, not perfect world, and the bank sold that house loan as an asset in a bundle of loans, and those loans are used by another entity as capital to issue loans AT A RATIO. Say the ratio is ten to one, then covering that 100K of capital requires pulling back TEN TIMES that amount, a million dollars in loans, to cover that 100K loss of capital. The economy lost not 100K but 1M from the total money supply. If you want to say 900K because the builder has that 100K (or someone else does), fine, but the banks pulled the rest from the economy to cover the loss of capital. As long as loans are assets and assets are allowed to be leveraged, losses are multiplicative, not additive.

And that is why Bernake is like the little kid crying because he poured a bucket of water in the ocean and the tide didn't rise. LOANS create 90% of money, not the Fed. To have inflation requires loans in the amount equalling or exceeding the losses plus any increases in productivity since the losses began. Ain't happening on any short term scale short of helicopter drops, and that won't happen because politics won't allow it.

To cap all that off, we've got a percentage of employment vs population that's hitting a low comprable to the ratio of the late 70's early 80's. How do you get this consumer driven mess of borrowing and excited spending when that many people are just not working? Don't wave your hands, WHERE IS THE MONEY COMING FROM? Despite politics and BS, people who don't work don't have spending money. And they can't get loans.

How you get inflation from those facts is beyond me.

The "everyone could stop using US money for commodities" statement is certainly and self evidently true, and what of it? There is no real evidence of a move in that direction. The only real alternative, the EURO, becomes more unthinkable by the minute as country after country reports they've been lying like hell about their economies.

Denomination of international trade in Chinese money? Umm, that's the country that is willing to use commodities as weapons to smack down others (like Japan) for relatively minor international matters. Dream on in that direction if you wish, but China put any possibility of that one WAY into the future with their actions in the rare earth metals markets last year.

A market basket of currencies? Which ones? Given that you are excluding the EURO and the dollar. And the Chinese have excluded themselves. Just what does that leave that a sane person would trust? Gold? Gold is as subject to manipulation as any other commodity, and gold as the major denominator in international trade would leave someone on top of the heap, the country with the largest stockpiles and very high current production of gold. Guess who that is?

http://www.responsiblegold.org/gold_production.asp

Seems like a lot of shuffling for nothing, IMHO. Moving away from the US dollar dominating international trade to the US gold dollar dominating international trade seems to be a change for the sake of semantics.

As I've said before, inflation is actually a measure of growth in spendable money over and above increases in production. Anything else is simply price comparisions, and far too much is dependant on the shopper and the attitude for that to be really meaningful. Zero inflation does not mean no price will ever change.

Right now, everyone is holding fast to "the way things were supposed to be". When the crisis hits, it'll all be working on "the way things HAVE to be", and there will be vast changes. And nobody knows what those changes will be.

[vincecate]

How do you get this consumer driven mess of borrowing and excited spending when that many people are just not working? Don't wave your hands, WHERE IS THE MONEY COMING FROM? Despite politics and BS, people who don't work don't have spending money. And they can't get loans.

How you get inflation from those facts is beyond me.

The Federal government is borrowing and spending about $2 trillion extra into existence per year. Part of this is off-budget so it looks like only $1.4 trillion or something (student loans and social security don't show up).
Any reduction in private debt and spending is small compared to rapidly expanding Federal government debt. This is not even counting state and local government debt which is also expanding fast.

Moving away from the US dollar dominating international trade to the US gold dollar dominating international trade seems to be a change for the sake of semantics.

If the world ran on gold coins minted by the US government the difference would be they could not print another $2 trillion worth out of nowhere each year. It means that the US could not steal value from money while it was in someone's pocket. This is not just "for the sake of semantics" but a real difference.

[John]

Dear Vince,

> If the world ran on gold coins minted by the US government the
> difference would be they could not print another $2 trillion worth
> out of nowhere each year. It means that the US could not steal
> value from money while it was in someone's pocket. This is not
> just "for the sake of semantics" but a real difference.

LOL! That's a good one Vince. How many tens of billions of gold
coins would it take to run the world? Thanks for the chuckle.

Really, Vince, "fiat currency" is a 19th century fantasy.

John

[vincecate]

If the world ran on gold coins minted by the US government the difference would be they could not print another $2 trillion worth out of nowhere each year. It means that the US could not steal value from money while it was in someone's pocket. This is not just "for the sake of semantics" but a real difference.

LOL! That's a good one Vince. How many tens of billions of gold coins would it take to run the world? Thanks for the chuckle.

Glad I could make you laugh.

Gold does not have to go up that much for the value of all the gold to be more than the value of all the US dollar base money. After the US destroys the value of its paper money I doubt we will ever see any other paper money replace it as the international reserve currency. Within a country they can force people to use the local paper currency. But internationally I really expect we will see more pricing and settlement in gold, silver, and oil. Of course most transactions will still be done on computers, not with guys passing gold coins around anymore than they currently pass suitcases full of dollar bills. But I bet we will see prices for oil and other international commodities in gold more than in US dollars within the next 5 years.

Really, Vince, "fiat currency" is a 19th century fantasy.

Did you mean "gold currency" is 19th century fantasy? Or what? Fiat money has been tried many many times in the past and they have always failed eventually. Not sure why you think the US dollar will be any different.

[Higgenbotham]

Old is making the right point about Hussman's article. In either an inflationary or deflationary environment, rising short term rates will direct pure cash toward vehicles that pay interest; however, in a deflationary environment, that effect will be muted. As I mentioned earlier, in order for that effect to become significant, the deflationary forces must continue to remain at a standstill, meaning that consumer and municipal/state debt levels remain constant and there's no further default stress. It's difficult to imagine that happening in an environment where these entites are as vulnerable as they are. In an inflationary environment, by definition, the actors have the ability to absorb the interest rate increases. There is no such ability now.

I've mentioned such concepts as making the money equally junky or things needing to be well mixed in order for Bernanke's inflation scheme to work. The market will probably recognize that the conflagration in the Middle East is adequate proof that the scheme is failing. Reiterating something from last year, back when I was an intern at a large chemical manufacturer I was given the assignment of looking at why they blew up a building every few years in their glass lined batch chemical manufacturing operation. Had the glass lined vessels been well mixed this would not have happened. We found that the domino effect of "hot spots" created due to imperfections on the surface of the glass caused the reactors to blow up. The world economy is in much the same boat. The inflation theory says essentially that we can turn the heat up on the reactor and increase the agitator speed and out will pop more economic output with no ill effects. That's only true to the point that it can be done without creating significant micro stresses in the system. The facts seem to indicate that Bernanke's inflation scheme is creating additional stress on small entities everywhere. This has the potential to create a domino effect as, for example, stress in the Middle East could result in an oil price spike, which then sends many more US consumers to the wall.

[John]

Dear Vince,

> Did you mean "gold currency" is 19th century fantasy? Or what?
> Fiat money has been tried many many times in the past and they
> have always failed eventually. Not sure why you think the US
> dollar will be any different.

I meant that the entire fiat/gold/gold-backed currency concept
is a 19th century fantasy. In the 21st century, any bank
in the world - ANY BANK -- can "print money" by issuing debt.
Talking about gold-backed currency in the 21st century is
total, utter fantasy.

With all due respect, Vince, the only place where I hear this nonsense
from is gold salesmen. There are many ways you can sell gold -- as a
store of value, as a hedge against inflation (if you're a believer),
as a backup for emergencies, because it feels good, or as an
investment -- without having to resort to nonsense.

John