Monthly Archives: October 2008

Fun with Numbers 1929 vs Now

Posted on by
4

I thought I’d have a little fun comparing the highs and lows of the crash of 1929 to today.  I’d love to say that I came up with a wonderful prediction, but alas I can’t even read palms (yet).  So, to explain what I’ve done a bit the top section is from 1929, and the bottom from 2007.  What makes comparing the two time series is that we have incomplete data for 2008 as it is still unraveling.  For the 1929+ period I used the weekly timeframe whereas for 2007-2008 I used the daily.  For illustrative purposes this shouldn’t be a problem.

I was mainly curious to see the relationship between time and price descent.  As you can see from the Cumulative Days and % from start it only took 69 days for the Dow to crash (49.39%) starting 1929 and it took 365 days for the Dow to reach a (44.48%) decline starting October 2007.  So, in comparison our crash has been slow and steady with the main sell-off occurring from August through October.  The only reason we aren’t in further decline is because of a few recent rallies, however they are all over a very short period of time.

From about October 14, 2008 we have started to see huge swings in the market creating new highs and lows on a daily basis.  These will eventually be normalized when we have more data, but this is crazy.  Up 24.25% in 4 days, and then down (16.30%) in another 2.  Granted these are from the highs and lows of the session and not the closing, but either way you cut it the market is bouncing all over the place.  

Take the sell-off today during the last 15 minutes… The Dow was at 9358 and then fell off a cliff to close at 8990.96, a difference of 367 points in 13 minutes.  13 minutes and any gain was completely erased and we closed down from the prior session.  WOW

Conclusion?  Basicallly I wanted to demonstate that we are moving at an accelerated pace.  Many think that we are going to see a rally over the coming months.  I’m more in the camp that due to the volatility any gain because it occurs so swiftly will be shortly thereafter followed by another low.  

Time will tell….

Similarities to 1929

Posted on by
Reply

This is a very pertinant watch if you are interested in the similarities of today to the 1929 crash. I keep looking at the charts and percentage changes from prior to 1929 till today. So, far we have almost retraced on the Dow 100% since the October 2002 low. If we cross that level of support I’m concerned that we won’t see another bottom until we hit about 1000 or 500 on the Dow.

Since about 1982 the Dow has taken off with only three decent corrections in 1987, 2002, and the one playing out today. I realize that we have to look at the Dow adjusted for inflation as that is implicit in the numbers, but all I’m trying to get across is that the bottom might be farther away than any of us can imagine.

Anyways, enough for now… Watch the video if you haven’t already.

Purgatory….

Posted on by
Reply

Ever watched a sci-fi movie where the crew goes into stasis while they travel from one end of the galaxy to the other?  Ever contemplated Purgatory where heaven and hell meet?  

I feel as though this is a period of semi-consciousness awaiting judgement…  Last night I was catching up on some news online when I was watching the futures markets turning deeper and deeper shades of red.  The morning was locked limit down and then we had an immediate spike — DOWN.  However, the day is turning out to be mild in comparison to what may have happened.  

The reason I label this as purgatory is because I think we are either going to swiftly swing in one direction or the other.  Emotion is in control at the moment and perhaps irrational.  Once the herd stampedes watch out.  If people want cash watch out markets.  As I said in a earlier post we haven’t really seen an exodus or pure panic yet.  

The news from around the world is to be expected given the size of the credit contraction.  

I think we may see a rally, perhaps not today, but maybe next week as people see bargains.  News will continue to be increasingly gloomy, spreading a shadow around the world.  The contraction will not abate and people in a moment of fear and panic will sell.  Hedge funds will continue to implode sending equity prices down further.  Mutual funds will have to begin liquidating.  The dollar will roar ahead.  

Only problem is that we have never seen such a huge monetary expansion. Once banks decide to start lending again that money they are now hoarding and using to purchase other banks will flow into the system.  Bam!!@! huge credit expansion at a completely unsustainable rate, and thus hyperinflation.  Equities may rebound, but given the recession they will probably be somewhat stagnant as the new capital investment will take time to be realized.  Meanwhile, gold, oil, and food will goto the moon as the dollar plummets.  Interest rates will also soar as the reality of our debt burden takes hold alongside major inflation.  People will want to be compensated for holding a worthless and bankrupt currency.  

My only real complaint with this prognostication is strength in the dollar.  I’m having a hard time comprehending or even believing that this dollar rally will continue.  It is a flawed currency, and has no basis for strength.  Then again what fiat currency really has any value?

 

my2cents

The day of reckoning has arrived…

Posted on by
Reply

 

As I write this the Nikkei is down 580.52 points to 7,880.36.  All of Asia is down across the board.  A sea of red you might say.  It will be interesting to see what happens with the European markets once they open.  I imagine if Asia is down so will be Europe.  None of the fundamentals have changed.

There are various people who are quite knowledgeable that see a reversal in the markets, but I just don’t see it.  If the dollar declines in value, which is on the horizon commodities will probably once again increase in value.  However, we are in a major contraction, with the severity of the recession increasing on a daily basis, which bodes ill for the equity markets.  

Toyota’s sales are down for the first time in seven years reports Bloomberg <article>.  We aren’t just seeing a slowdown in the USA, we are seeing a worldwide contraction.  A recent article in IBD (Investors Business Daily) showed workers outside a toy factory in China protesting for their overdue paychecks.  China the unstoppable growth machine is slowing drastically because demand is falling off a cliff for their exports.  People are consuming fewer items, and banks are hoarding cash.  The entire system is coming to a standstill.  

What amazes me is the rate at which this entire process of de-leveraging, credit constipation, and economic contraction is taking place.  It was only a year ago or so when banks started showing signs of cracking and the markets started their descent.  At every turn there have been reassurances that everything is okay, but it has all been a smoke screen.  I wonder if tomorrow will be the day that will never be forgotten.  

So far we have seen major market swings in the all the equity markets.  Speaking solely of the US markets they tend to go down about 7-8% on a really bad day, which is nothing compared to the 20+% in 1978 on Black Monday.  All in all this decline has been somewhat orderly until we hit the latest consolidation phase where the markets are still moving down, but primarily sideways.  

A beautiful triangle formed, which was recently broken if you follow the charts.  It formed in the Dow, Nasdaq, S&p500, and Russell 2000.  Many believe that the rebound from the 23rd (today) started the next leg up, but I think as many others do that we might (this is hopeful) see a bounce to the underside of the triangle and then a complete meltdown (not hopeful).  

For the worst credit crisis in history the markets really could continue down much further.  All the indicators indicate that the market is oversold and ripe for a bounce.  However, the same was said with the ascent from 1997-2007.  Indicators help with market sentiment and direction, but are no means the definitive measure of what is happening.  At times of extreme volatility and uncertainty indicators may need to be readjusted or ones perception of them need be readjusted.

Let’s say you are a trader and do quite well in makets that are trending either up or down.  However, the markets start consolidating and move sideways.  All of a sudden your gains start to be erroded by your losses.  Why?  How could this happen?  The adept trader would shift their trading style to accomodate the new trend, which is sideaways and no longer trending.  The faithful would keep trading as they would in a trending market, which at the end of the day loses them money.

What happened?  The faithful was unable to see that their system was broken given the new market conditions.  Now it works beautifully given certain macro conditions, but if you system isn’t modified when those conditions change then you are in for a world of hurt.

How many people alive today went through the Great Depression and crash of 1929?  I sure didn’t, and the few who were alive are quite old and few.  Unless you are a student of history, and able to visualize what really happened I think we all may be in for a major shock.  Panic and distaste for the markets has yet to set in.  We may be at act 2 of how many I don’t know.

Banks are lending — NOT

Posted on by
Reply

The theory was beautiful (well in the abstract)…

Give troubled banks more credit and they will lend it out and the economy will stop its free-fall.  Now, that sounds like utopia to me.  Create credit and we will all be saved for unemployement, slowing production, decreased consumer spending, and rising interest rates.

HOLD ON… let’s put a toe back on the plane of reality…

Banks aren’t lending much more than before eventhough they are being handed gobs of cash.  Why wouldn’t banks lend out free money?

What if…

  1. there aren’t any borrowers worthy of getting loans? — Let’s say during a recession!  Oh right the economy slows WAY… DOWN.
  2. there are more troubled banks and unknowns on banks balance sheets.
  3. banks are holding the cash knowing full well that there is another storm on the horizon

I didn’t pull this out of thin air like the Fed does with money.  An article in the NY Times starts with

The banks aren’t lending. And despite what you have heard, they probably won’t start just yet.

Sorry Paulson your plan isn’t working.

“Our purpose is to increase confidence in our banks and increase the confidence of our banks, so that they will deploy, not hoard, their capital,” Mr. Paulson said in a statement Monday. “And we expect them to do so, as increased confidence will lead to increased lending. This increased lending will benefit the U.S. economy and the American people.

Of course, with a $250 billion injection into America’s biggest banks — not all of which were troubled — Mr. Paulson has a political sales job to do. And no requirements to lend were attached to the money. (Some banks may use the money to buy others.)

But Mr. Paulson is making a big assumption about confidence, because until the real economy recovers — which could take more than a year — lending to Main Street is unlikely to return rapidly to normal levels.

“It doesn’t matter how much Hank Paulson gives us,” said an influential senior official at a big bank that received money from the government, “no one is going to lend a nickel until the economy turns.” The official added: “Who are we going to lend money to?” before repeating an old saw about banking: “Only people who don’t need it.”

Again banks don’t want to lend into a very uncertain future.  They want confidence in the economy — there isn’t any and the opposite is occurring.  People are spending less as they become more concerned about the safety of their jobs.  Most Americans have no savings cushion to fall back on.

Roger Bootle and Jonathan Loynes of Capital Economics in London wrote a sobering note on Monday about the cash infusions into European banks that may apply here as well. “We expect rising loan defaults and further asset write-offs over the next couple of years to practically wipe out the governments’ capital injections, leaving banks back at square one,” they said. “Given that banks will need to increase their capital in order to expand their lending book, these measures on their own are unlikely to prevent bank lending from stagnating.”

Wait a minute… all that money being put into the system to restore confidence and spur lending may just vanish?  So at the end of the day more banks fail, the economy continues to contract, available credit continues to contract, unemployment rises, and interest rates eventually rise.  This isn’t what Paulson sold to us with his bailout plan.  Were we duped?

Nah, the individuals responsible for the government’s actions are always in need of votes and making a horrible situation look not so bad or at least feasible to fix.  At the end of the day our failed bailouts will have a disastrous effect.  The consequences are a HUGE debt burden, a larger interest payment on that debt, the world losing confidence in the value of the dollar, and a prolonged recession probably followed by major inflation.  I’ve been singing this song for a while and it will take time to play out, but as you can see this is a VERY rocky road.

Look both ways before crossing the street

Posted on by
Reply

I received an email from a friend and here is my response.  You ought to be able to decipher what the questions were about.  These are my opinions of the present situation, and are by no means recommendations.  

—-
1) Voting for McCain…

I really don’t think voting for A or B is going to matter.  I’m voting for Ron Paul because I believe that change has to come from going against the herd.  I refuse to be partially responsible for either of them being in office.

The odds are in favor of the democrats getting into office and taking over Congress.  I’m actually a bit frightened by this, but either situation is grim. Hopefully it will be better than the last 8 years.

2) Deflation / Inflation
This is tricky and something I’ve been trying to better understand.  There are many many many factors at work here.  We are headed into a MAJOR recession… thus your cutting spending was a wonderful idea.  A recession is a drag on the stock market.  Many think that after a brief rally it is going to drop much further.  I know you are invested at the moment.  One way to hedge against a drop is to invest in a inverse ETF fund such as SDS, QID, DXD, or TWM (these are leveraged 2x FYI).  These ETFs have saved me much pain.  The overall trend in the market is down.  Bear market rallies tend to be severe and swift to the upside, while the markets overall continue to decline.

As for Deflation and Inflation what this means is a decrease or increase in the money supply.  Generally during inflation when the Fed is creating money prices of everything goes up because there is a surplus of money that has to go somewhere.  When the money supply contracts either by the Fed reducing the money supply or debt is paid off.  Then prices decrease.  However, under a fiat monetary system credit and continued inflation are essential to keep it up.  At the moment with the Fed creating TONS of money we are looking at the potential for hyperinflation in the future, which nobody wants.  So, the Fed is walking a tightrope between deflation and inflation.  I imagine they will lean towards inflation over deflation ultimately.  At the moment we are primarily seeing deflation as prices are coming down everywhere (commodities, housing, stocks).

During deflation the market will come down as will all prices.  I think that regardless the markets will continue their descent due to the upcoming recession, decrease in consumer spending, decrease in imports and exports, and increase in unemployment.  Once the recession takes hold and the effects of the monetary inflation occurring now start to be felt we will probably start to see increases in commodity prices across the board.b  With companies facing difficult times I don’t foresee the created money moving into equity markets.

3) War with Iran
The conflict between Iran and Israel is heating up.  I received a report that said Israel won’t be doing anything until after the election, but who knows.  In this case we would see the value of gold skyrocket, oil go through the roof, and the dollar go through the floor.  This is slowly moving from a remote to more plausible reality.  I hope this doesn’t happen as the US can’t afford to be involved in another conflict.  We are already spread so thin.  Because of this and the enormous debt load the US government (its citizens) now carries I fear for the support and longevity of the dollar.  At this point I think it important to own some gold and have some money invested in foreign currencies.  <Thank you Gary North and Chris Martenson>  These are for the long-term and may lose significantly in the short term.  There are many uncertainties at the moment.

Oh and least I forget… At this juncture in the Republicans and Democrats are but different sides of the same coin.

The coming financial storm! Deja Vu

Posted on by
Reply

 

A rotten onion

I watch the markets on a daily basis, and attempt to stay informed as to what is happening in the world.  To be honest it isn’t a easy task as there is so much information to digest.  Alas, that is the beauty of the Internet.  

Anyways, I started to notice a similar feeling that creeps back in every so often.  The feeling has been apparent over the last year or so about the time this whole mess started to unravel.  After the peak of the market in October of 2007 we have had a falling market with a few cliffs and hills along the way.  After every step down there is a period of reprieve when everyone feels safe, though a bit cautious.  October has been a horrible month for equity markets.  We are now moving up slightly and into the future.  Everyone is hoping for a rally and return to a bull market.  

Unfortunately, I think this is just another calm before the storm.  We will probably continue to rally as people on the sidelines jump in hoping to make a gain or get in at a bargain.  What concerns me is that the market fundamentals are not improving, they are looking much more dire.  Take shipping for example.  Imports and Exports are down significantly from last year.  Consumer spending is way down.  Unemployment is rising.  Interest rates are looking to be on the verge of rising.  Housing is still falling.  Manufacturing is down.  

Does it suck to be in a position where all I see is an endless abyss… sure.  However, I think that it is necessary to clean out and let the market clear away all the excesses.  This post isn’t about economic theory, but a gut feeling that is slowly bubbling to the surface.  When someone with major clout such as Warren Buffett makes an announcement that he is buying equities alarm bells start ringing in my ears.  

Why I ask does Buffet need to provide confidence to investors.  For one many of Berkshire’s companies aren’t doing very well this year.  Then again what stock are really booming?  For Buffet to reassure investors makes me think that things may actually be worse than we even know.  On the surface everything is a mess, but what is underlying the mess that we don’t yet know about?

Once this recession goes into full swing, ARMs continue to readjust, and people’s credit cards are maxed out… 

I end this post patiently waiting the next layer of the rotting onion to peel away just to reveal another layer.

Another bailout, more credit… when will we learn?

Posted on by
Reply

It seems that the tune to march to these days is credit o credit we need more credit.  Somehow somewhere we forgot quite quickly that credit got us into this mess.  If credit is expanding much faster than real economic growth the outcome will be instability in the economy.  That is like an individual taking on more debt while their income stays steady or worse is in decline.  At some point in the future the debt will become unmanageable.  Once debt is too great a burden that individual is going to have to either sell assets to pay off the debt, declare bankruptcy, increase their income, or default.  The one thing that makes the government lucky or so it seems is that they can increase “income” through inflating the money supply event hough it is really illusionary.  All they have done is take money from every taxpayer to service the ever growing debt burden.

I find it distressing that Bernake and Co. are talking about further fiscal stimulus to the tune of $150 billion dollars and Democrats want double that.  We are already over $1 trillion in debt for this year.  Where o where are we to find this money?  Perhaps a leprechaun will appear beneath the rainbow and we will be saved.  If the politicians and bureaucrats have their way this is exactly what will happen.  

American’s have no or very little savings to invest in capital goods.  We are laden in debt and attempting to service that debt.  If unemployment rises substantially then servicing that debt will become even more burdensome.  Another stimulus package will probably be used to payoff existing debt, which does nothing for stimulating growth.

So, what do we do…  Many have proposed various solutions.  

Why not reduce the size of the government for one. 
– Yes, people will lose their jobs.  However, with time they will find other jobs as that money can now be used for other things.

Reduce taxes, and the size of the tax code.
 —  Our tax code is way to complicated and confusing.  I would love to know the cumulative hours wasted on tax returns every year by companies and individuals.  Imagine if we had a flat tax of 10-15%…  get rid of tax incentives, credits, exemptions, etc…  Not everyone is going to be happy about it, but a reduction in the tax burden in actual numbers and time would enable people to use their money elsewhere and as they choose versus having someone decide for them where to best put it to use.   

Return our currency to one backed by a physical commodity — GOLD and SILVER
 — The government would hate this, but it would eliminate the major booms and busts and enable constant growth.  Money would again have a true value versus the value instilled by the gov’t.  Money’s value would be returned to the people and taken away from the money printers, and confiscators of our savings.

Bring our troops home
 — We don’t need to be the world’s police.  Occupying over 140 countries is absurd and very costly.  I agree that we need to have an army to defend the country, but it needs to be defensive and not offensive.  Our paws are in too many honey jars.  We are bound to piss off the bees, which we are continually doing and then blame them for getting upset at us.  Ironic don’t you think.

Remove all subsidies and tariffs
 — All they do is distort the market place and what people produce.  For example why do we have corn syrup in our soda, but in the rest of the world they use sugar?  Corn is highly subsidized, while sugar has many tariffs on it.  Corn Syrup is cheaper due to government policy.  Corn farmers love this, while it hurts all of us.  We pay for those subsidies, and also pay high sugar prices.

I’m going to leave it at that, but there are plenty more options.  People say that ignorance is bliss.  NO it isn’t bliss it is being LAZY.  Will you get out of a parking ticket or a speeding ticket if you claim ignorance?  Not unless you are really smooth with words.  

What happened to being responsible? If you take on too much debt then you have a problem.  American’s have a virus, and it is contagious.  We live beyond our means, and then when we get in trouble someone bails us out at the cost of everyone.  The one’s who really pay are the responsible ones who are living within their means.

Why Gold?

Posted on by
Reply

I agree that we are probably going to see a continued decline in commodity prices especially PMs.  However, given the increases in the monetary supply I forsee this trend reversing.  When the trend reverses, which isn’t going to happen immediately because we are headed towards a major recession, with unemployment rising, and more likely interest rates as well, inflation will be severe.

The Money Supply graphs are frightening.  Once that money goes into the system I wouldn’t be surprised if we start to see hyperinflation.   For all of our sakes I don’t want that to happen.

As for investing in PMs I think there are two types of people who purchase them.  The first is the speculator, and the other the long term purchaser regardless of price. (I’m leaving out purchasers for industry and jewelry).  As much as I don’t like to see the value in relation to fiat currency of my PMs decline my intent on owning them is for more of the oh shit situation.   Throughout time gold, and silver to a lesser degree have held up as a store of value.  They aren’t going to be worthless as can a paper currency backed by nothing. Politicians and those involved in the government don’t like PMs as they aren’t easily created.  Having a currency backed by a scarce resource means that they have to control spending as they can’t print money to pay for various expenditures.

So, why gold and silver?  What happens if the fiat currency fails?  All of a sudden you and I have a bunch of roman numerals in our bank accounts.  Sure we can go get paper currency, but it is better to use as heat.  If this happens chaos will ensue until another solution is created or we go back to a currency backed by PMs.  I doubt the latter case would occur as bureaucrats aren’t going to want that option. 

My other concern is war with Iran, which is looking more and more likely.  In this scenario gold and oil will skyrocket.  Oil will also be much harder to obtain and the government will probably institute a rationing scheme instead of letting the price rise.   I’d rather pay $50.00 a gallon for gas then not be able to get it or to have to wait in line for days.  I presume many of you don’t agree, but gas or no gas you pick!  Would I drive much NO… however, if I needed to go somewhere I could get the fuel I needed.   

Lastely, beyond Gold and Oil we all need food and water.  Don’t forget food.

 

-T