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EJ
03-27-09, 02:16 PM
http://www.itulip.com/images/bouncing.jpg Debt Deflation Bear Market: First Bounce

In a recession, a recovery in personal consumption, incomes, and retail sales signals the start of recovery. The virtuous cycle of credit growth--and its corollary, debt growth—combine with rising incomes as the rate of unemployment growth slows. Credit expansion leads the economy out of the cycle, followed by incomes. That is what many stock market participants think they are seeing now, as previous experience has trained them to see. But they are wrong.

In an economy where household expenditure accounts for 71% of GDP as in the U.S. in 2008, if household cash flows from wage income declines, retail spending falls. Government through interest rate cuts and tax cuts stimulates the economy by increasing credit cash flows. This approached effectively to end every recession in the U.S. since the end of WWII. Keep in mind that each recession was created by monetary policy, by the tightening of credit in order to reduce inflation expectations, real or imagined.


http://www.itulip.com/images/creditflow.gif


Think of a consumer-dependent economy as a waterwheel, with household cash flow from wages and credit driving the wheel, and the wheel driving the creation of new jobs, income, and credit, pumping money into the economy. If either the credit flows or the income flows dry up, the wheel slows. If they both dry up, one after the other, the wheel slows a lot. In a recession, the government tries to get the wheel moving again by making up for private credit flows and private income flows with government credit and government jobs.

A depression, on the other hand, happens when debt levels are so high that there is not enough cash flow from incomes or new credit creation in the economy to service the interest on the debt. The result is debt deflation and economic depression. Debt deflation started in 2006 for households when the price of their homes began to fall.

A depression, unlike a recession, is not induced by government raising interest rates to combat inflation. On the contrary, a depression occurs in spite of all efforts by government to expand credit; interest rates are cut to zero yet the debt deflation goes on.

Debt deflation cannot be stopped by government credit expansion because that effort only increases debt levels that are already excessive as a result of decades of previous interventions to re-start the already over-indebted economy. As the economy shrinks, there is even less income available to repay debt, and a vicious cycle sets in. The wheel not only stops, it begins to run backwards and pumps money out of the economy.

Debt deflation at first withdraws household purchasing power from credit. Later households experience a decline purchasing power from loss of wage income as layoffs increase and savings are consumed in debt repayment. Government, by pouring vast sums of government money into the economy in an attempt to restart the virtuous credit cycle can produce a small “bounce” in the decline in aggregate demand that shows up as consumer spending, but cannot restart the wheel as it can during a recession. Debt levels continue to fall, and soon consumer expenditures as well.


http://www.itulip.com/images/personalincomeexpend1999-2009.gif


Stock market participants are trained by previous recessions since WWII to expect a recovery after consumption expenditures turn around in response to fiscal and monetary stimulus. They are not wired to comprehend the wholly different dynamics of a debt deflation as we identified it in Dec. 27, 2007 and forecast a 40% decline in the DJIA in line with the first year decline that the Japanese stock market experienced in the first year of Japan’s debt deflation (see Time, at last, to short the market (http://www.itulip.com/forums/showthread.php?t=2774) $ubscription).

U.S. re-inflation policy has been far more aggressive than Japan’s, and the recent announcement by the Fed to begin buying Treasury bonds farther out the yield curve is motivating investors to move out of government bonds, and some of that money moved into stocks.

This rally does not reflect an improvement in the underlying economy but the response of market participants to short term government policy in the context of a widespread misperception of the current depression as a recession.

The stock market rally is a disconnect between investor expectations and the economy. How disconnected?


http://www.itulip.com/images/stockspcecpi.gif
CPI peaks lag peaks in the PCE/S&P ratio by one year in each cycle until
the beginning of the FIRE Economy in 1980s. Over the duration of the disinflationary era
starting in 1981 until the peak of the technology stock asset price inflation in 2000, both
the PCE/S&P ratio and inflation declined, with periods of high correlation between the
PCE/S&P ratio and CPI inflation one year later. The correlation turned negative for the first
time following the extreme asset price reflation measures undertaken in 2001 that
boosted both consumption and the S&P. The extreme negative correlation between the
PCE/S&P ratio and CPI inflation is unique over the 50 year period.


Japan’s experience with managing debt deflation via fiscal stimulus has been similar to that of the U.S. in the 1930s; whenever government spending was cut, the economy slumped back into depression. The U.S. finally escaped debt deflation when WWII. There is no evidence to support the belief that fiscal stimulus can end a debt deflation, but that is the belief that governments are following worldwide.

We claim no special debt deflation bear market rally timing skills. Even after the DJIA approaches our target of 5000, we have no idea how long it will remain trading in a low range. The duration of the downturn depends on the political response to global economic contraction. The flawed philosophy and ideology of curing the debt deflation illness with further exposure to the debt disease, as the U.S. attempted in the 1930s and Japan has tried since the early 1990s, do not encourage optimism but point to a prolonged and painful period of global economic contraction.

iTulip Select (http://www.itulip.com/forums/showthread.php?t=1032): The Investment Thesis for the Next Cycle™
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rjwjr
03-27-09, 02:44 PM
The duration of the downturn depends on the political response to global economic contraction.


Isn't the likeliest response to be another round of protectionism and isolationism? Even if you agree, that still doesn't help determine duration, does it?

magicvent
03-27-09, 02:48 PM
When will you be publishing your post on portfolio allocation?

ricket
03-27-09, 03:11 PM
This whole situation is funny, because it's amazing how ridiculously stubborn some of the entities are.

JUST FORGIVE THE DEBT ALREADY SO WE CAN BEGIN A MEANINGFUL RECOVERY!

We all knew the banks made mistakes in how they "created" all this money, so what? Now that we know alot of the loans were bad and the actors involved were corrupted and were bribed or coerced in the process, the solution is quite simple. Remove those in power from making any more decisions, prevent them from ever doing so as long as they live, forgive all the debt, and never let people go into so much debt any more.

The most practical solution is to address who controls the money supply and the reality is it should be NO ONE. If I want to create my own currency and I can convince enough people that they should use it as a medium of exchange, what's the big deal? Oh yeah, that's because you want the POWER to control, manipulate, and leech off the currency without actually providing any real service. That's called Usury and it is immoral.



When will you be publishing your post on portfolio allocation?

Sheesh, he made one mention of a post thats only delayed a few days, and now that's all everyone can think about? If you know iTulip and read through it enough, you should probably already have a least a better idea of what he's going to suggest. There shouldnt be any "suspense" built up in me enough to make me ask. I can wait patiently, although I am curious what he's actually going to write.

vanvaley1
03-27-09, 03:16 PM
How quickly would the economy turn around with a coordinated debt forgiveness policy to the general public?

I know it's not going to happen. In my vocation we've had occasion to meet some folks with a lot of money. Those with substantial assets are adamant about not losing money on investments. They'll unhappily accept the idiosyncracies of their investments when they do lose money knowing that they'll probably get it back in one way or another.

But the idea of 'giving' it up to debtors is their 'Thou shall not....' 11th commandment. I suspect the banks would agree with this attitude with the caveat that it should become the first commandment with the others moving down the list as per their lesser importance.

cbr
03-27-09, 03:26 PM
maybe I am really dense, but this sentence was a whammy to me:

A depression, on the other hand, happens when debt levels are so high that there is not enough cash flow from incomes or new credit creation in the economy to service the interest on the debt.


is that really a prime issue in such a straighforward fashion? I just have not viewed it in that way before, and need to go back and look at fundamental data to see if that is even where we are.

frankly, if that is the case, inflation and soon is one way to deal with the issue, so I guess poom here we come. It lines up with my other thoughts.

serge_oc
03-27-09, 03:40 PM
In an economy where household expenditure accounts for 71% of GDP as in the U.S. in 2008, if household cash flows from wage income declines, retail spending falls.



My boss just called me (after doing annual reviews in which I got the best grade, 'Master' level) to tell me that this year my salary will be 1% less than last year. I know that company (high-end software company) is doing well, better than expected.

I guess I was expecting a meager 1-2% increase, but not the decline .

On one hand, I am happy to have a job and income.

But on the other hand, I can say for sure my consumption will decline.

I kind of expected this though. This is why I bought some necessities earlier this year (in larger quantities), simply knowing that I won't feel good about all that just a bit later.

And guess what, now is 'a bit later', and I don't feel good about any of it at all.:mad:

Starving Steve
03-27-09, 03:59 PM
For Eric Janzen: What will oil stocks and oil sands income trusts do during a period when everything goes to hell in a stock market massacre (down to DOW 5000) owing to a worldwide debt deflation? Give me the bottom-line.

Translation: Will Starving Steve starve-to-death?

The Outback Oracle
03-27-09, 04:09 PM
The stock market rally is a disconnect between investor expectations and the economy. How disconnected?


http://www.itulip.com/images/stockspcecpi.gif


I am having trouble with this graph. The PCE/S&P is rising vertically and looks to be above average but not extremely so. The rise in the ratio is largely due to S&P falling. While PCE has declined it is yet of minor importance in this ratio. There is a somewhat similar 'disconnect' in 2001-2 although not of quite the same magnitude. Presumably, in response to the latest rally the ratio has turned down a bit. Just looking at past patterns on the graph it looks entirely possible that the ratio turns down a bit and stabilises (relatively speaking). That means PCE stabilises and the S&P stabilises (more or less). Maybe PCE can stabilise with all the low interest rates? Maybe the ratio then turns back down as the share market rises and steadily continues that way for years?
I can't see that the graph indicates that it is axiomatic that we are in a bear market rally and the S&P collapses.
Sorry, I just don't "get' the significance of this graph. Maybe someone can help me here?

analog2000
03-27-09, 04:29 PM
Hi Eric,
You have compare USA with Japan, but as Warren Buffett implied that Japan has 0 immigration while USA enjoys very robust immigration influx from all over the world. This means that USA is growth oriented much more than Japan.
Don't you think comparing with Japan's economy is apples and oranges ?
Please comment
Best Regards
analog2000

labasta
03-27-09, 05:27 PM
Japan’s experience with managing debt deflation via fiscal stimulus has been similar to that of the U.S. in the 1930s; whenever government spending was cut, the economy slumped back into depression. The U.S. finally escaped debt deflation when WWII. There is no evidence to support the belief that fiscal stimulus can end a debt deflation, but that is the belief that governments are following worldwide.


I don't get this bit.

It seems like a contradiction.

First this:


whenever government spending was cut, the economy slumped back into depression. The U.S. finally escaped debt deflation with WWII.

Sounds like government fiscal stimulus does work historically. Then you say:


There is no evidence to support the belief that fiscal stimulus can end a debt deflation, but that is the belief that governments are following worldwide.

Do you mean that superficially government fiscal stimulus kept the economy afloat, but didn't do enough fundamentally to get the economy going (no more debt) as when the fiscal stimulus was removed, the economy tanked.

You mean, the only thing that fundamentally worked was a world war.

If the government left things alone, the economy would eventually recover or at least bottom out as the bankruptcies cancel the debt. The nations might not survive the unrest though. I believe bankruptcies aren't bad in the medium term though. I heard another crystal company is being started in Ireland to take the place of Waterford crystal. So, some of employees will be taken on again. New company won't have any or not the same amount of debt as Waterford crystal. As the company grows, more ex employees are taken on again.

Why did WWII make the slate clean to start the cycle all over again? Whatever factor did this, can this factor be achieved in peacetime?

zoog
03-27-09, 05:38 PM
Hi Eric,
You have compare USA with Japan, but as Warren Buffett implied that Japan has 0 immigration while USA enjoys very robust immigration influx from all over the world. This means that USA is growth oriented much more than Japan.
Don't you think comparing with Japan's economy is apples and oranges ?
Please comment
Best Regards
analog2000

I wouldn't count on that "robust" immigration continuing.

After a Long Climb, Foreign-Born Labor Declines (http://economix.blogs.nytimes.com/2009/03/26/for-first-time-in-over-a-decade-foreign-born-labor-falls/?hp)


Today the Bureau of Labor Statistics came out with its annual report (http://www.bls.gov/news.release/pdf/forbrn.pdf) on foreign-born workers in the American work force. It showed that, after more than a decade of steady growth, the portion of employed workers who were foreign-born fell slightly in 2008.
Unemployment is rising. What kind of economic growth are you expecting if people can't find work? How many people from elsewhere will decide to not come here as they realize there may not be a source of income?

FRED
03-27-09, 05:48 PM
Hi Eric,
You have compare USA with Japan, but as Warren Buffett implied that Japan has 0 immigration while USA enjoys very robust immigration influx from all over the world. This means that USA is growth oriented much more than Japan.
Don't you think comparing with Japan's economy is apples and oranges ?
Please comment
Best Regards
analog2000

Where does the article say that the U.S. and Japan are apples and oranges? We have written dozens of articles over 10 years that state precisely the opposite, summarized below.
Japan's starting point (1990) advantages over the USA (2009) in a debt deflation


Large pool of national savings, high savings rate
Median net worth > $100,000
Median household debt < 10% of net worth
Government a net creditor
Economy 80% productive (profits-based), 20% financial (capital gains and interest based)
Expanding global economy creating high demand for Japanese exports

Japan's starting point disadvantages over the USA in a debt deflation


Stagnant population with little immigration and low birth rates
Oldest median age of any developed country, producing an internal demand deficit

U.S. starting point (2009) disadvantages over the Japan (1990) in a debt deflation


Gross external debt 95% of GDP
Median net worth < $50,000
Median household debt 40% of net worth
Economy 50% productive (profits-based), 50% financial (capital gains and interest based)
Global depression, shrinking external demand

Japan today after 19 years of debt deflation


Gross public debt up from 49% of GDP in 1990 to 195% of GDP
Diminished pool of savings, low savings rate
High personal debt levels

Moral of the story: deflating debt against the incomes of households and businesses while moving private debt to public account does not work.

Two alternative approaches:
1. Debt restructuring


Requires creditors to cooperate with debtors to lower debt principle across a wide range of types of debt, from mortgages to student loans to credit card debt

2. Inflation


For net debtors, an eventual "market-based solution" is that foreign creditors devalue the currency and cost-push inflation sends prices up throughout the economy, and debt is paid down via inflated cash flows

Ka-Poom Theory posits that because #1 has never occurred in a modern economy that #2 is more likely in the U.S. after the Japanese approach of deflating debt against wages and moving debt from private to public account is tried and fails.

bpr
03-27-09, 06:38 PM
Ka-Poom Theory posits that because #1 has never occurred in a modern economy that #2 is more likely in the U.S. after the Japanese approach of deflating debt against wages and moving debt from private to public account is tried and fails.

That would be really encouraging, if not for this:


The duration of the downturn depends on the political response to global economic contraction. The flawed philosophy and ideology of curing the debt deflation illness with further exposure to the debt disease, as the U.S. attempted in the 1930s and Japan has tried since the early 1990s, do not encourage optimism but point to a prolonged and painful period of global economic contraction.

This could likely go on for years, which does not bode well for anyone in the U.S. It doesn't matter how inflation-prepared you are if it doesn't happen for 10 years and all of your income sources dwindle over that time.

jk
03-27-09, 07:02 PM
The stock market rally is a disconnect between investor expectations and the economy. How disconnected?


http://www.itulip.com/images/stockspcecpi.gif


I am having trouble with this graph. The PCE/S&P is rising vertically and looks to be above average but not extremely so. The rise in the ratio is largely due to S&P falling. While PCE has declined it is yet of minor importance in this ratio. There is a somewhat similar 'disconnect' in 2001-2 although not of quite the same magnitude. Presumably, in response to the latest rally the ratio has turned down a bit. Just looking at past patterns on the graph it looks entirely possible that the ratio turns down a bit and stabilises (relatively speaking). That means PCE stabilises and the S&P stabilises (more or less). Maybe PCE can stabilise with all the low interest rates? Maybe the ratio then turns back down as the share market rises and steadily continues that way for years?
I can't see that the graph indicates that it is axiomatic that we are in a bear market rally and the S&P collapses.
Sorry, I just don't "get' the significance of this graph. Maybe someone can help me here?

i agree that there is no earth shaking message in that graph. you'll note that there are no depressions over the interval of the graph - until today. i think all it's showing is that current conditions are unlike previous post-war periods. as you point out, in general pce/s&p500 will get almost all its volatility from the stock market. the red line is high when stocks were low. in the period covered that correlates with and tends to lag high inflation- stocks dropped because of fed tightening. current conditions look different.

llanlad2
03-27-09, 07:05 PM
http://www.itulip.com/images/bouncing.jpg Debt Deflation Bear Market: First Bounce

In a recession, a recovery in personal consumption, incomes, and retail sales signals the start of recovery. The virtuous cycle of credit growth--and its corollary, debt growth—combine with rising incomes as the rate of unemployment growth slows. Credit expansion leads the economy out of the cycle, followed by incomes. That is what many stock market participants think they are seeing now, as previous experience has trained them to see. But they are wrong.



Another way of determining if earnings are going up or down is just to ask the bosses.

http://i44.tinypic.com/jzi71d.jpg%5B/IMG%5D

And the direction of the S and P. (good forward indicator)

http://i44.tinypic.com/1fek5v.jpg%5B/IMG%5D

They also expect to lay off another 6% of their workforce. No recovery here.

For detailed info from the CFO survey you can download directly from http://www.cfosurveyeurope.org/
http://www.itulip.com/forums/%5BIMG%5Dhttp://i44.tinypic.com/jzi71d.jpg%5B/IMG%5D

The Outback Oracle
03-27-09, 07:20 PM
i agree that there is no earth shaking message in that graph. you'll note that there are no depressions over the interval of the graph - until today. i think all it's showing is that current conditions are unlike previous post-war periods. as you point out, in general pce/s&p500 will get almost all its volatility from the stock market. the red line is high when stocks were low. in the period covered that correlates with and tends to lag high inflation- stocks dropped because of fed tightening. current conditions look different.

Thanks JK. I worry that I am a bit dense and that i must have missed something important.

gwynedd1
03-27-09, 09:32 PM
I am not one of those who believes that the government will involuntarily lose control of the dollar at least for now. Looking at Japan's mortgages in the 2 percentile range we may have another cycle to go, or at least it possible. Now that they are buying long term treasuries they can still prop up housing. The other thing I look for is government loan guarantees to give banks the risk free interest bearing loaning they seek. It will not be a monetary collapse but a political one that take down the dollar IMHO. They do have control of the supply if they so choose.
What is near its end is the consumer based money supply growth which was driven by consumer selection of good and services. That will fade into centralized planning and bank financed projects with government loan guarantees. We are a dead free market economy at this point. We are just a notch up from a Soviet system with a choice of a few colors.

rjwjr
03-28-09, 01:21 AM
I am not one of those who believes that the government will involuntarily lose control of the dollar at least for now. Looking at Japan's mortgages in the 2 percentile range we may have another cycle to go, or at least it possible. Now that they are buying long term treasuries they can still prop up housing. The other thing I look for is government loan guarantees to give banks the risk free interest bearing loaning they seek. It will not be a monetary collapse but a political one that take down the dollar IMHO. They do have control of the supply if they so choose.
What is near its end is the consumer based money supply growth which was driven by consumer selection of good and services. That will fade into centralized planning and bank financed projects with government loan guarantees. We are a dead free market economy at this point. We are just a notch up from a Soviet system with a choice of a few colors.

gwynedd1,

I hear what you're saying about banks and the "risk free interest bearing loaning they seek", but they still need borrowers...and as you say later in the post, "What is near its end is the consumer based money supply growth". If consumers aren't the ones doing the borrowing, who will it be? I think all borrowers are tapped out. That leaves the Federal gov't to pick up the slack, but I read EJ's point to be that gov't spending doesn't kick-start a recovery, it only sustains the economy for so long as they apply stimulus...which they can't do forever. So, we are left with war, which we know worked to end the Great Depression, or ????? There is no precedent for a solution so no one knows what will work. At least that's how I read the situation and the article, and that's why this is a dead cat bounce, not a sustainable rally.

vanvaley1
03-28-09, 01:54 AM
Where does the article say that the U.S. and Japan are apples and oranges? We have written dozens of articles over 10 years that state precisely the opposite, summarized below.
Japan's starting point (1990) advantages over the USA (2009) in a debt deflation


Large pool of national savings, high savings rate
Median net worth > $100,000
Median household debt < 10% of net worth
Government a net creditor
Economy 80% productive (profits-based), 20% financial (capital gains and interest based)
Expanding global economy creating high demand for Japanese exports

Japan's starting point disadvantages over the USA in a debt deflation


Stagnant population with little immigration and low birth rates
Oldest median age of any developed country, producing an internal demand deficit

U.S. starting point (2009) disadvantages over the Japan (1990) in a debt deflation


Gross external debt 95% of GDP
Median net worth < $50,000
Median household debt 40% of net worth
Economy 50% productive (profits-based), 50% financial (capital gains and interest based)
Global depression, shrinking external demand

Japan today after 19 years of debt deflation


Gross public debt up from 49% of GDP in 1990 to 195% of GDP
Diminished pool of savings, low savings rate
High personal debt levels

Moral of the story: deflating debt against the incomes of households and businesses while moving private debt to public account does not work.

Two alternative approaches:
1. Debt restructuring


Requires creditors to cooperate with debtors to lower debt principle across a wide range of types of debt, from mortgages to student loans to credit card debt

2. Inflation


For net debtors, an eventual "market-based solution" is that foreign creditors devalue the currency and cost-push inflation sends prices up throughout the economy, and debt is paid down via inflated cash flows

Ka-Poom Theory posits that because #1 has never occurred in a modern economy that #2 is more likely in the U.S. after the Japanese approach of deflating debt against wages and moving debt from private to public account is tried and fails.


Thanks. Just as a matter of curiousity...would the economy turn around quicker with 'debt restructuring' than inflation? And...aren't the insolvent banks really getting debt restructuring?

ThePythonicCow
03-28-09, 02:22 AM
... and that's why this is a dead cat bounce, not a sustainable rally.
Marty Chenard, over at StockTiming.com, describes an unusual and scary buying pattern in the stock market bounce of the last week or two. Beware. I have already faded the short term speculative long positions that I took in mid-March.

The other technical analysts I enjoy reading the most, such as Captain Hook at treasurechestsinfo.com, Sy Harding at streetsmartreport.com and Steven Hochberg at ElliottWave.com, are less scary, at least by my reading of them, in the time frame of a few weeks or months.

Two of the afore named four analysts are rather gloomy longer term; the other two comment less on that scale.

(As usual, I prefer to remain vague about content from other paying sites.)

Contemptuous
03-28-09, 03:02 AM
Pythonic - thought you might be interested in this. Barton Bggs thinks we've seen important lows in the markets. FWIW here's the interview.

I'm also getting this read from a guy I follow - Robert McHugh of Mainline Investors. He thinks we've already past the confirmation of a "complex multimonth rally", although he is intensely bearish for the sequel to that. Biggs is more cautious, suggesting a short sharp rally has yet to play out. Of course EJ does not buy any of this but then EJ does not have anything remotely resembling a trader about him (to the credit of his sober "sit tight and do little or nothing" investing style).

Here's Biggs (the guy has a pretty decent resume of market calls?).

http://www.bloomberg.com/avp/avp.htm?clipSRC=mms://media2.bloomberg.com/cache/vlD.9oFxWj9I.asf

OK sorry - I just realised Bigg's call is stale news. This was from earlier in March and may well have already largely played out.

ThePythonicCow
03-28-09, 05:28 AM
Biggs is more cautious, suggesting a short sharp rally has yet to play out. ...

OK sorry - I just realised Bigg's call is stale news.

Now you tell me :rolleyes:.


Of course EJ does not buy any of this but then EJ does not have anything remotely resembling a trader about him
Yup.

Rajiv
03-28-09, 07:05 AM
Debt deflation at first withdraws household purchasing power from credit. Later households experience a decline purchasing power from loss of wage income as layoffs increase and savings are consumed in debt repayment. Government, by pouring vast sums of government money into the economy in an attempt to restart the virtuous credit cycle can produce a small “bounce” in the decline in aggregate demand that shows up as consumer spending, but cannot restart the wheel as it can during a recession. Debt levels continue to fall, and soon consumer expenditures as well.

Well to highlight this fact, there is ---- Hidden homeless emerge as U.S. economy worsens (http://www.reuters.com/article/domesticNews/idUSTRE52P64M20090326)


Emergency shelters brimming with homeless people in California's capital are quietly turning away more than 200 women and children a night in a sign of the deteriorating U.S. economy.

The displaced individuals on waiting lists at St. John's Shelter and other facilities often turn instead to relatives or friends for temporary living quarters, perhaps moving into a spare room, garage or trailer. The less fortunate might sleep in their cars or a vacant storage unit.

They are the hidden homeless. And their ranks appear to be growing as rising joblessness and mortgage foreclosures take their toll in Sacramento and other U.S. cities, experts say.
.
.
.
.
.
"I think there's a slight trickle of people who've been at risk of homelessness who are winding up in tent cities or knocking on shelter doors," said Michael Stoops, director of the National Coalition for the Homeless in Washington. "I expect a tremendous increase in homelessness over the next couple of years."

Stoops, who has worked with the homeless for 35 years, said the newly dispossessed often retain some income and seek initially to downsize or find cheaper accommodations.

WORST NIGHTMARE

"Their worst nightmare would be winding up on the streets, in a tent city or a shelter," he said. "That's the last stage. They will do everything they can before that happens to them."

Maria Romero, 52, who held a series of low-paying jobs over the years before steady work became hard to find, said she lived out of her automobile for a year before reluctantly moving to St. John's Shelter in January.

FRED
03-28-09, 07:53 AM
Thanks. Just as a matter of curiousity...would the economy turn around quicker with 'debt restructuring' than inflation? And...aren't the insolvent banks really getting debt restructuring?

Inflation is a horrifically destructive process. Work-outs that include debt forgiveness -- reduction of principle amounts -- are far less destructive, but the government has done everything to prevent this, stepping in to ensure the stream of debt payments is maintained. The opposite is needed. What is needed is for the aggregate of debt payments across the economy that are consuming cash flows be reduced.

Quincy K
03-28-09, 10:16 AM
Inflation is a horrifically destructive process. Work-outs that include debt forgiveness -- reduction of principle amounts -- are far less destructive, but the government has done everything to prevent this, stepping in to ensure the stream of debt payments is maintained. The opposite is needed. What is needed is for the aggregate of debt payments across the economy that are consuming cash flows be reduced.

Debt foregiveness cannot be allowed as it destroys the integrity of the System. Once people get wind of it, many will elect to game the System.

If one is led to believe that credit worthiness will no longer be a factor in the game and unsecured credit lines are to become non-recourse, then there is no penalty to "cash out".

If this behavior where to occur on a wide scale(25+ percent of population)...the Bonar could hyperinflate. For many unfortunate Americans, this scenario(cash out) has already happened and will continue to happen as the debt deflation proliferates into other sectors of the economy.

Chomsky
03-28-09, 11:22 AM
Debt foregiveness cannot be allowed as it destroys the integrity of the System. Once people get wind of it, many will elect to game the System.

If one is led to believe that credit worthiness will no longer be a factor in the game and unsecured credit lines are to become non-recourse, then there is no penalty to "cash out".

If this behavior where to occur on a wide scale(25+ percent of population)...the Bonar could hyperinflate. For many unfortunate Americans, this scenario(cash out) has already happened and will continue to happen as the debt deflation proliferates into other sectors of the economy.


As if the "integrity of the System" isn't already utterly destroyed.

Forgive the debt, choke off credit only to those who are worthy, and adjust to the new lower-credit paradigm.

cjppjc
03-28-09, 12:43 PM
As if the "integrity of the System" isn't already utterly destroyed.

Forgive the debt, choke off credit only to those who are worthy, and adjust to the new lower-credit paradigm.


Yes, The integrity of the system. Even those who are not benefiting from the current system, and recognize the lack of integrity of the system, have a hard time conseptualizing any good that would result of major changes to the system. It appear things will have to get a lot worse for a lot longer, for the bigger questions to be debated honestly.

Starving Steve
03-28-09, 02:06 PM
As if the "integrity of the System" isn't already utterly destroyed.

Forgive the debt, choke off credit only to those who are worthy, and adjust to the new lower-credit paradigm.

The best thing that has happened in recent months is that banks have shut-off the credit supply. Why lend when risks are unknown and economic conditions are horrid? And even if a bank could lend, why would it lend when interest rates are ridiculously low and determined by economic planners in central banks? Why would a bank lend when interest rates for loans are no longer determined by common sense and the free market?

So let Bernanke and the other morons running the central banks around the world continue to drop money out of helicopters. Let them horse-around and keep interest rates near zero..... Now the entire world knows that central banking is a complete failure. The post-1971 ( post- Bretton Woods Agreement ) dollar standard for the world economy is nearing an end.

These days are horrid, and they may get worse yet. So enjoy. At least when this calamity is finished, we might be rid of fiat money, the dollar standard, and central banking forever.

Quincy K
03-28-09, 02:07 PM
As if the "integrity of the System" isn't already utterly destroyed.

Forgive the debt, choke off credit only to those who are worthy, and adjust to the new lower-credit paradigm.


I read about five months ago(I do not have the link) that statistically if the S&P hit 500 and the median house value dropped another 20 percent(already has) that 30 percent of all Americans would be theoretically BK(liabilities exceed assets). I would venture to say that a large percentage of these Americans would not be classified as "worthy". The majority of these people are a Chapter 7 waiting to happen and will have no access to private capital. Personally, I would never ever rent to someone whose liabilities(other than student loans) exceed assets under today's economic conditions.

You want close to 30 percent of all Americans cut off from bank credit?

That... is Armageddon.

Chomsky
03-28-09, 02:13 PM
How is it any different having 30% of Americans as zombie consumers, doing nothing but paying down debt?

Retired Commish
03-28-09, 02:56 PM
Eric:

"Japan’s experience with managing debt deflation via fiscal stimulus has been similar to that of the U.S. in the 1930s; whenever government spending was cut, the economy slumped back into depression. The U.S. finally escaped debt deflation when WWII. There is no evidence to support the belief that fiscal stimulus can end a debt deflation, but that is the belief that governments are following worldwide."

Comment: WWII obviously raised employment levels. Millions were employed in the military and at home in the huge war materials production. At the same time, savings had to be climbing with bond sales and forced savings on the home front because of rationing. People had the necessaties without the luxuries.
I think many in Gov't today falsely believe Gov't spending on a huge level can duplicate Gov't in the war era. Employment by these expenditures can't ever reach the real levels that WWII created. The cost to hire millions at todays rates would expand debt levels enormously beyond where they are headed.
Lastly, much of the up-tick in spending your chart refers to was the consumer taking advantage of the liquidation pricing available after a terrible Christmas season. Many of those spent dollars simply stole from future sales. Retail outlets will continue to shrink in numbers so as to reflect the fact that consumption will fall back to a sustainable number around 60% of GDP or less, the longer this goes on.

WDCRob
03-28-09, 04:05 PM
I read about five months ago(I do not have the link) that statistically if the S&P hit 500 and the median house value dropped another 20 percent(already has) that 30 percent of all Americans would be theoretically BK(liabilities exceed assets).

Which is exactly why Fred and other realists, who see that the system is already destroyed, are calling for debt to be forgiven.

c1ue
03-28-09, 04:13 PM
I can't see that the graph indicates that it is axiomatic that we are in a bear market rally and the S&P collapses.
Sorry, I just don't "get' the significance of this graph. Maybe someone can help me here?

Outback,

Not to be flip...well...actually to BE flip...what the graph is saying is that "its different this time" :eek:

RetiredCommish's point is also worth considering:

The consumption sacrifices made by the US people in WW II were because there was a widespread belief that the US' course of action was necessary and just.

Even disregarding the rebuilding Europe/Japan economic benefit to the US after WW II - merely the faith in government and inspiration from victory itself was beneficial.

In contrast today we have a race to the bottom between politicians, bankers, and regulators.

Anyone out there feel that what is happening is necessary and just?

I don't.

rjwjr
03-28-09, 05:23 PM
I read about five months ago(I do not have the link) that statistically if the S&P hit 500 and the median house value dropped another 20 percent(already has) that 30 percent of all Americans would be theoretically BK(liabilities exceed assets). I would venture to say that a large percentage of these Americans would not be classified as "worthy". The majority of these people are a Chapter 7 waiting to happen and will have no access to private capital. Personally, I would never ever rent to someone whose liabilities(other than student loans) exceed assets under today's economic conditions.

You want close to 30 percent of all Americans cut off from bank credit?

That... is Armageddon.

Armageddon?? Sounds more like forced discipline and responsibility to me. Something most iTulipers already do on their own and something we wish the rest of the population would heed. I don't think it would be bad if more than 30% of all Americans were cut-off from bank credit. We need to re-set our mentalities as much as re-setting the system.

The Outback Oracle
03-29-09, 02:20 AM
Anyone out there feel that what is happening is necessary and just?

I don't.

It doesn't matter whether it is necessary. It was just inevitable.

GeraldRiggs
03-29-09, 08:40 AM
Steve:
I am sorry but I disagree with you about one thing. Yes, fiat money and central banking is a failure. However, don't think for a minute that it's going anywhere. Have you read "The Creature from Jekyll Island"? If not, you need to. CB's will not go quietly into the sunset and let governments take over coining their own money. Remember, the banksters run the government. They have for a very long time. It's sad, but true.

cjppjc
03-29-09, 09:37 AM
Anyone out there feel that what is happening is necessary and just?

I don't.

It doesn't matter whether it is necessary. It was just inevitable.


In search of the miraculous (http://www.amazon.com/exec/obidos/ASIN/0156445085/deeshthemeditati) by P.D. Ouspensky.


Everything is dependent on everything else,
everything is connected, nothing is separate.
Therefore everything is going in the only way it can go.
If people were different everything would be different.
They are what they are, so everything is as it is.



The crowd neither wants nor seeks knowledge, and the leaders of the crowd, in their own interests, try to strengthen its fear and dislike of everything new and unknown. The slavery in which mankind lives is based upon this fear.
One thing alone is certain, that man's slavery grows and increases.
Man is becoming a willing slave. He no longer needs chains.
He begins to grow fond of his slavery, to be proud of it.
And this is the most terrible thing that can happen to a man.

Chris Coles
03-29-09, 12:45 PM
The stock market rally is a disconnect between investor expectations and the economy. How disconnected?


http://www.itulip.com/images/stockspcecpi.gif


I am having trouble with this graph. The PCE/S&P is rising vertically and looks to be above average but not extremely so. The rise in the ratio is largely due to S&P falling. While PCE has declined it is yet of minor importance in this ratio. There is a somewhat similar 'disconnect' in 2001-2 although not of quite the same magnitude. Presumably, in response to the latest rally the ratio has turned down a bit. Just looking at past patterns on the graph it looks entirely possible that the ratio turns down a bit and stabilises (relatively speaking). That means PCE stabilises and the S&P stabilises (more or less). Maybe PCE can stabilise with all the low interest rates? Maybe the ratio then turns back down as the share market rises and steadily continues that way for years?
I can't see that the graph indicates that it is axiomatic that we are in a bear market rally and the S&P collapses.
Sorry, I just don't "get' the significance of this graph. Maybe someone can help me here?

The secret is the graph, up to the turn of the century shows that the two sets of data track each other out of sequence by about a year. If you moved them , they would correlate but now, in this new phase, they are not out of sequence by a year but strongly running away from each other. One going through the roof the other through the floor, but in step, with the correlation no longer out of step by a year.

The Outback Oracle
03-29-09, 05:44 PM
In search of the miraculous (http://www.amazon.com/exec/obidos/ASIN/0156445085/deeshthemeditati) by P.D. Ouspensky.


Everything is dependent on everything else,
everything is connected, nothing is separate.
Therefore everything is going in the only way it can go.
If people were different everything would be different.
They are what they are, so everything is as it is.




The crowd neither wants nor seeks knowledge, and the leaders of the crowd, in their own interests, try to strengthen its fear and dislike of everything new and unknown. The slavery in which mankind lives is based upon this fear.
One thing alone is certain, that man's slavery grows and increases.
Man is becoming a willing slave. He no longer needs chains.
He begins to grow fond of his slavery, to be proud of it.
And this is the most terrible thing that can happen to a man.


Years ago I was watching an interview with James Herriott the author of the book "All Creatures Great and Small" on which the TV series was based. From memory the story was set in the late 1930's. For those in the USA who never saw it, the story was about a small contry town Veterinary Practice in rural England, and the various divergent characters who lived in the surrounding area. There were many entertaining and interesting characters.
Herriott was asked if his characters were real. He said they were, but that a character in the series might be made up from several actual life characters. When asked if he thought that these divergent 'characters' still existed he opined that they had largely disappeared under the influence of Television. He said that we tended to mimic the behaviour of role models on TV and this tended to make us all the same. I thought it was as astute observation and applied across a whole range of thinking and behaviour.

ThePythonicCow
03-29-09, 06:45 PM
... When asked if he thought that these divergent 'characters' still existed he opined that they had largely disappeared under the influence of Television. He said that we tended to mimic the behaviour of role models on TV and this tended to make us all the same.

That's some kinda scary.

I grew up as a kid in the New England community immortalized in Norman Rockwell's paintings. I can personally recognize some of the characters in them. Most of them had a heck of a lot of fun being whatever odd and unusual being they turned out to be.
http://www.ciaccess.com/%7Etoveza/rockwell/gossip.jpg
Most people seem a whole lot more bland nowadays. TV has been an enormous drug on humanity.

cjppjc
03-29-09, 10:15 PM
Years ago I was watching an interview with James Herriott the author of the book "All Creatures Great and Small" on which the TV series was based. From memory the story was set in the late 1930's. For those in the USA who never saw it, the story was about a small contry town Veterinary Practice in rural England, and the various divergent characters who lived in the surrounding area. There were many entertaining and interesting characters.
Herriott was asked if his characters were real. He said they were, but that a character in the series might be made up from several actual life characters. When asked if he thought that these divergent 'characters' still existed he opined that they had largely disappeared under the influence of Television. He said that we tended to mimic the behaviour of role models on TV and this tended to make us all the same. I thought it was as astute observation and applied across a whole range of thinking and behaviour.


That's very interesting. I had never thought about that.

Mango
03-30-09, 01:46 AM
Eric:

"Japan’s experience with managing debt deflation via fiscal stimulus has been similar to that of the U.S. in the 1930s; whenever government spending was cut, the economy slumped back into depression. The U.S. finally escaped debt deflation when WWII. There is no evidence to support the belief that fiscal stimulus can end a debt deflation, but that is the belief that governments are following worldwide."

Like Labasta said in an earlier comment, (for which he's still waiting for an answer) the statement above looks like a contradiction to me. Wasn't WWII just the Mother of All Stimulus Packages--albeit with fantastic motivation?

The Outback Oracle
03-30-09, 02:15 AM
Re WWII and fiscal stimulus there seems to me to be a very large and important difference. The stimulus was applied to the production of goods that could not be produced offshore. Then any excess money supply was being mopped up in War Bonds etc
The same sort of stimulus, if applied now, even if applied to large Infrastructure projects, would result in a substantial leakage into your External account resulting in more massive indebtedness to China, Mid East et al.
If you tried to limit this 'leakage' you would have to apply high interest rates which, conceivably, would result in nullifying the effect of the stimulus by contracting other sectors of your economy.
Then again, what the hell! Noone seems to worry about it anyway...except the Chinese are starting to sound downright agitated.

Sharky
03-30-09, 03:17 AM
Wasn't WWII just the Mother of All Stimulus Packages--albeit with fantastic motivation?

WW II stimulated production in the US: lots of factories and millions of new workers (women).

The stimulus packages of today, on the other hand, are intended to stimulate spending. They are more like the opposite of WW II in terms of their impact on the economy.

Even a war today wouldn't help as WW II did, as I explained in another thread:

http://www.itulip.com/forums/showthread.php?p=84723

Jay
03-30-09, 08:57 AM
Like Labasta said in an earlier comment, (for which he's still waiting for an answer) the statement above looks like a contradiction to me. Wasn't WWII just the Mother of All Stimulus Packages--albeit with fantastic motivation?
From what I understand, part of the recovery that occurred after WWII was based on getting rid of world over capacity.

ThePythonicCow
03-30-09, 10:46 AM
Marty Chenard, over at StockTiming.com, describes an unusual and scary buying pattern in the stock market bounce of the last week or two. Beware. I have already faded the short term speculative long positions that I took in mid-March.
The above was written over this last weekend. This Monday morning the market gapped down :( on the open. So far (one hour now) so good on this warning :).


The other technical analysts I enjoy reading the most, such as Captain Hook at treasurechestsinfo.com, Sy Harding at streetsmartreport.com and Steven Hochberg at ElliottWave.com, are less scary, at least by my reading of them, in the time frame of a few weeks or months.
Over on another thread (Gene Inger (http://www.itulip.com/forums/showthread.php?t=8953)) in the post Re: Gene Inger (http://www.itulip.com/forums/showthread.php?p=87590#post87590) I just provided an annotated list of the other financial sites I enjoy reading.

Mashuri
03-30-09, 03:42 PM
What's the best way for us to get out of this depression? I guess "debt forgiveness" is pretty close: BANKRUPTCY!

No government intervention and letting all the bad investments liquidate as fast as possible will get us through this mess faster and better than any other way. We have 1 and 2 year depressions in our history because they went down with little to no intervention.

brucec42
03-30-09, 11:22 PM
Why the response that sounds like it contains 'attitude' toward a reader who couldn't understand a column?

"clearly stated" and itulip columns are not always highly correlated. I thought maybe I was just losing IQ points. Then I spoke with a couple of other readers who had the same response i did. I've come to the conclusion that the primary goal here is not really to educate but to demonstrate knowledge, perhaps for ego gratification. Education just happens to be the method used. So it's no wonder the message often gets lost. Some have the heart of a teacher, some are just smart guys who want to show everyone how smart they are.

You have valuable and occasionally unique information worth hearing. It's too bad actually imparting that information isn't the real motivation for the existence of the site. But if it makes you feel good, yes, you guys are really smart about money.

rjwjr
03-30-09, 11:34 PM
Why the response that sounds like it contains 'attitude' toward a reader who couldn't understand a column?

"clearly stated" and itulip columns are not always highly correlated. I thought maybe I was just losing IQ points. Then I spoke with a couple of other readers who had the same response i did. I've come to the conclusion that the primary goal here is not really to educate but to demonstrate knowledge, perhaps for ego gratification. Education just happens to be the method used. So it's no wonder the message often gets lost. Some have the heart of a teacher, some are just smart guys who want to show everyone how smart they are.

You have valuable and occasionally unique information worth hearing. It's too bad actually imparting that information isn't the real motivation for the existence of the site. But if it makes you feel good, yes, you guys are really smart about money.

This should kill any further discussion, whether educational or not. Bruce, are you also the guy that complained about bad punctuation?

CanuckinTX
03-30-09, 11:34 PM
I think we're reading the response completely different Bruce. The question posed put Fred on the defensive by asking 'Don't you think...' and then Fred spent a lot of time summarizing the points that refuted the 'Don't you think' premise.

That seems like a decent attempt at education to me.

rjwjr
03-30-09, 11:42 PM
This should kill any further discussion, whether educational or not. Bruce, are you also the guy that complained about bad punctuation?

Oh yeah. And upon a quick search, you have also complained about posts that are too long and spelling "intelligent" incorrectly. It's unfortunate the site and the typical iTulip-er is not up to your standards of decorum, manners, and grammarical professionalism.

I happen to find the site exhilarating, the characters knowledgeable, the discussion stimulating, and the punctuation and spelling errors a complete non-issue. But, hey, I'm also a NASCAR fan.

CanuckinTX
03-30-09, 11:46 PM
Great, you're the NASCAR fan, I'm the hockey fan. If we could just find a swamp buggy racing fan we'd have all the redneck sports covered!

goadam1
03-31-09, 11:52 AM
Sometimes gamblers make for good packaged bonds.


http://www.bloomberg.com/apps/news?pid=20601109&sid=agWb8ARDXSPQ&refer=home
March 31 (Bloomberg) -- In the smoky Maruhan gambling parlor near Tokyo’s Shinjuku station, Shunichiro Nagasawa feeds a 1,000-yen ($10) bill into a “pachinko” machine, helping Japan’s biggest gaming industry beat the recession and Las Vegas.

“It’s exciting -- usually, after I lose many times, I win big the next time,” said Nagasawa, a 29-year-old systems engineer, pushing a button and watching hundreds of small steel balls pour down through the machine. “I do worry about the economy, but I still have a job.”

As Japan’s economy shrank at an annual 12.1 percent pace in the last quarter and revenue slumped at Las Vegas casino companies like MGM Mirage and Las Vegas Sands Corp., the 23 trillion-yen pachinko industry is on a roll. Sales from the machines, which resemble upright pinball games, rebounded 0.5 percent in last quarter, reversing a six-year decline, and rose 0.9 percent in January, according to government statistics.

“There are many companies in the red -- automobile makers, electronics and so on,” said Hirohito Niji, an analyst at Standard & Poor’s in Tokyo. “Against that, pachinko hasn’t really felt the effects.”

That’s good news for holders of “pachinko bonds” -- debt backed by securitized gambling revenue -- and for equipment makers including Mars Engineering Corp., the best performer in the 124-stock Topix Machinery Index in the past six months.

Brooks Gracie
03-31-09, 01:35 PM
WWII brought the economy back to life not because of spending government dollars on the war effort. The economy recovered and eventually boomed because all of Europe's factories were decimated, and we were the only producers of many goods. Detroit boomed during the immediate post-war time period--no one else was selling cars in competition with it.

A war not would just be a collossal waste of resources that are needed here at home. What the US needs to compete worldwide is a payroll tax on outsourced labor. This would generate plenty of revenues for the treasury, while giving companies a large incentive to keep jobs in this country. Otherwise, we are going to be a nation where the only jobs are in the domestic service sector, which, other than healthcare (and formerly finance), don't pay a whole lot.

And I am absolutely disgusted with this bailout of the bondholders and bank shareholders--another giveaway to the very wealthy, at everyone else's expense. As if the Bush tax cuts wasn't enough, now they want direct subsidies. The wall street banks should be allowed to fail. My local bank is doing fine right now--they have no exposure to the causes of this crisis.

Chris Coles
03-31-09, 03:24 PM
Why the response that sounds like it contains 'attitude' toward a reader who couldn't understand a column?

"clearly stated" and itulip columns are not always highly correlated. I thought maybe I was just losing IQ points. Then I spoke with a couple of other readers who had the same response i did. I've come to the conclusion that the primary goal here is not really to educate but to demonstrate knowledge, perhaps for ego gratification. Education just happens to be the method used. So it's no wonder the message often gets lost. Some have the heart of a teacher, some are just smart guys who want to show everyone how smart they are.

You have valuable and occasionally unique information worth hearing. It's too bad actually imparting that information isn't the real motivation for the existence of the site. But if it makes you feel good, yes, you guys are really smart about money.

The primary content comes from EJ and Fred and their invited commentators. After that, if any of us see something that may be of interest, we post it on news. After that it is open for anyone to make any comment they wish, within reason. As the members seem to come from every corner of the planet and every age and income group, there is often a lively discussion, but tempered by the particular interests in the particular thread. May I suggest that you have every possibility to change threads when the discussion is not to your particular taste, as we also do.

IMHO, This by far and away the very best site for an open discussion of any matter related to the ongoing disintegration of the worlds financial system. We all have to adjust to the realities of a wide range of individuals and related backgrounds. But surely, that is the real strength of any successful group, regardless of the subject.

Finster
04-01-09, 03:25 PM
... Think of a consumer-dependent economy as a waterwheel, with household cash flow from wages and credit driving the wheel, and the wheel driving the creation of new jobs, income, and credit, pumping money into the economy. If either the credit flows or the income flows dry up, the wheel slows. If they both dry up, one after the other, the wheel slows a lot. In a recession, the government tries to get the wheel moving again by making up for private credit flows and private income flows with government credit and government jobs.

A depression, on the other hand, happens when debt levels are so high that there is not enough cash flow from incomes or new credit creation in the economy to service the interest on the debt. The result is debt deflation and economic depression. Debt deflation started in 2006 for households when the price of their homes began to fall.

A depression, unlike a recession, is not induced by government raising interest rates to combat inflation. On the contrary, a depression occurs in spite of all efforts by government to expand credit; interest rates are cut to zero yet the debt deflation goes on.

Debt deflation cannot be stopped by government credit expansion because that effort only increases debt levels that are already excessive as a result of decades of previous interventions to re-start the already over-indebted economy. As the economy shrinks, there is even less income available to repay debt, and a vicious cycle sets in. The wheel not only stops, it begins to run backwards and pumps money out of the economy...

... The flawed philosophy and ideology of curing the debt deflation illness with further exposure to the debt disease, as the U.S. attempted in the 1930s and Japan has tried since the early 1990s, do not encourage optimism but point to a prolonged and painful period of global economic contraction...

FWIW, emphatically agreed. It's tempting to speculate on why, despite enormous unpopularity with the public (bailouts ... etc.), the government nevertheless pursues such flawed measures. It may be in part rationalized through this flawed ideology. And it also may in part be due to the outsized impact on the government's own financial viablity. Deflation is like death to a debtor, who wants to repay his obligations in the future with cheaper money. And who is a bigger debtor than the US government? My guess is that an important prime mover behind the government's frantic exertions is its own financial survival. It desperately wants to get inflation going again, so much as to subordinate both economic sanity and the will of its electorate to that end.

stockman
04-03-09, 05:25 PM
Looking at both sides. The bounce (in stocks) should be respected IMHO. Is it at least POSSIBLE that the global margin call compressed a cyclical bear (within a secular bear) in time? In effect cutting the duration in 1/2?

1335

Even a cyclical bull can wipe out an overly confident short. In 2003 for example.

1337

Speaking of which that 1st quarter looks familiar.

1336



Entering the 2nd quarter in the 2nd year of a multiyear decline is a good time to expect weakness in equities.

Entering the 2nd quarter in the 1st year of recovery is a good time to expect strength in equities.

Until proven otherwise the current rally appears to favor recovery. If it deviates from the path... that would be an opportune time to consider alternative strategies.

I am not suggesting to anyone that they should rush out and buy stocks. However that survey with only 2% expecting a more enduring rally makes me think there may be folks here wanting to (or are already) short this rally. That could prove hazardous to your wealth... even if the long term picture is just as negative as most here except.

Speaking of that lonely 2%. THEY are taking the contrary position today. Even Taleb recently pointed out that the 'black swan' today is betting that things actually work out and we avoid catastrophy. In the most recent AAII numbers cash levels shot UP in spite of the little rally we've seen- TO THE HIGHEST LEVEL EVER (data since 1988). Mutual fund cash levels are also higher than 2002/2003 levels. So you may not want to be long, but being short is a dangerous game to play here IMHO. As they say- 'there are buyers higher, sellers lower'... and they have a very large wad of cash in their pocket.

Contemptuous
04-03-09, 05:37 PM
I've been sounding the possibility of this theme for six months here. Saying that we'd see a market turn going into March / April that would steadily change the entire complexion of the "US Depression". These are just the glimmerings of the baby steps. Do a position check on this theme in late 2009 and a lot of people may already then have forgotten how "John Steinbeck-ish" this entire community was sounding in the winter of 2008-2009. We ain't there yet - but I'm sticking to that thesis. Nobody here is willing to countenance this idea - but perhaps the ridicule is just a little fainter now than it was six months ago. Not by any means saying the US can't have very depressed conditions, but it can unfold against a highly anomalous stock market action, as the stock markets do their usual squirrely and apparently irrational thing - acting as one of the earliest anticipators of the future.

ThePythonicCow
04-03-09, 05:48 PM
I've been sounding the possibility of this theme for six months here. Saying that we'd see a market turn going into March / April that would steadily change the entire complexion of the "US Depression". These are just the glimmerings of the baby steps. Do a position check on this theme in late 2009 and a lot of people may already then have forgotten how "John Steinbeck-ish" this entire community was sounding in the winter of 2008-2009. ..Might well happen (stocks rising in the next several months) but if so, I would predict that it will be a bear market rally, and (in later 2009) one of the better shorting opportunities of our lifetime.

ThePythonicCow
04-03-09, 05:59 PM
Looking at both sides. The bounce (in stocks) should be respected IMHO. Is it at least POSSIBLE that the global margin call compressed a cyclical bear (within a secular bear) in time? A big time margin call, quite likely. See the article at http://zerohedge.blogspot.com/2009/03/exclusive-aig-was-responsible-for-banks.html, Zero Hedge: AIG Was Responsible For The Banks' January & February Profitability.

If I understand that article correctly, AIG was unraveling its CDS insurance contracts on terms favorable to its customers, some big banks, figuring that Uncle Sam would soon have to cover the resulting losses. This apparently causes AIG to have to close out the hedging shorts it had on the underlying asset, the entity referenced in the CDS "insurance" policy.

Marty Chenard, over at StockTiming.com ($$), has been reporting extremely high inflows to the stock market from "institutional investors" as a major driving engine of this rally over the last couple of weeks. I wonder if that is that relates to AIG's unwinding.

(http://zerohedge.blogspot.com/2009/03/exclusive-aig-was-responsible-for-banks.html)

pksubs
04-05-09, 12:21 AM
The secret is the graph, up to the turn of the century shows that the two sets of data track each other out of sequence by about a year. If you moved them , they would correlate but now, in this new phase, they are not out of sequence by a year but strongly running away from each other. One going through the roof the other through the floor, but in step, with the correlation no longer out of step by a year.

The cause of the run away divergence (which is what I think OO was referring to) may simply be the drop in equities. The drop being sharper due to higher weightage of FIRE stocks in the index(denominator), and quicker transmission of information in the internet based economy. CPI : which is based on actual buying of stuff, may just be a slower responding indicator. You can't sell zillions of TVs with a flick of a switch in internet time, but you can sell stock like that..

So I guess I don't know what the chart tells me about the bear market bounce and why/when it should fall back.

jk
04-05-09, 03:11 PM
i think it is possible but unlikely that we are entering a multi-year cyclical bull, such as that from '03-'07, within a longer term, secular bear market. my portfolio attempts to nod to all the possibilities.

why do so many here try to attain certainty when it is impossible?

luke, i remember when you were equally insistent banging the drum for silver.

metalman
04-05-09, 04:48 PM
I've been sounding the possibility of this theme for six months here. Saying that we'd see a market turn going into March / April that would steadily change the entire complexion of the "US Depression". These are just the glimmerings of the baby steps. Do a position check on this theme in late 2009 and a lot of people may already then have forgotten how "John Steinbeck-ish" this entire community was sounding in the winter of 2008-2009. We ain't there yet - but I'm sticking to that thesis. Nobody here is willing to countenance this idea - but perhaps the ridicule is just a little fainter now than it was six months ago. Not by any means saying the US can't have very depressed conditions, but it can unfold against a highly anomalous stock market action, as the stock markets do their usual squirrely and apparently irrational thing - acting as one of the earliest anticipators of the future.

debt deflation bear markets have rallies... sure. but the nikkei is trading off 80% from its bubble peak 19 years ago. if that happens to the usa that's djia 2600 in the year 2027. now... we all don't think the usa gets to play the deflation game so it's inflation ho! starting late 2009 or early 2010 as 'supply shock meets money supply boom meets dollar devaluation'. if you are playing inflation with stocks, you'd better time it carefully. the djia rallied strongly for a few months in 1975 and fell for years after, even in nominal terms... in real terms stocks were decimated.

Contemptuous
04-05-09, 05:03 PM
Looks like our dollar devaluation is gonna kick in soon enough then, as I intuit a bull market in equities running all over again in our proximate future.

Seems clear to this reader, that this can unfold also with all the other world currencies acting real tame vs. the USD meanwhile. So people can see a soaring stock market along with no "apparent" devaluation in the USD. That's enough to make the mainstream financial media start to get positively giddy with their bullish calls! :rolleyes:

I'm sticking to this call. We are looking at the tiny and much doubted beginnings of DOW 30K to be achieved within 5 years from now. Nominal or real misses the point - if it's merely nominal, it will be acting as a very hefty hedge against inflation, as that is a 400% rise matey, vs. a likely 100% dollar inflation.

At that point all one needs to ask is whether equities gain a premium as an inflation hedge, when very high inflation comes along. If they gain a premium, then the market can even rise in real terms during the major inflexion point of the inflation. May rise for a while quite a bit more than the USD inflation.

You heard this false and foolish sounding call so many times it's now an automatic "don't believe it - it's rubbish" (especially in this environment!). How sweet it will be then to gaze upon iTuliper's stunned comments two years from now as this unfolds.

We do have another crash ahead - but the trick to actionable intelligence here is whether that is a tactical or a strategic insight.


debt deflation bear markets have rallies... sure. but the nikkei is trading off 80% from its bubble peak 19 years ago. if that happens to the usa that's djia 2600 in the year 2027. now... we all don't think the usa gets to play the deflation game so it's inflation ho! starting late 2009 or early 2010 as 'supply shock meets money supply boom meets dollar devaluation'. if you are playing inflation with stocks, you'd better time it carefully. the djia rallied strongly for a few months in 1975 and fell for years after, even in nominal terms... in real terms stocks were decimated.

metalman
04-05-09, 05:08 PM
Looks like our dollar devaluation is gonna kick in soon enough then, as I intuit a bull market in equities running all over again in our proximate future.

Seems clear to this reader, that this can unfold also with all the other world currencies acting real tame vs. the USD meanwhile. So people can see a soaring stock market along with no "apparent" devaluation in the USD. That's enough to make the mainstream financial media start to get positively giddy with their bullish calls! :rolleyes:

I'm sticking to this call. We are looking at the tiny and much doubted beginnings of DOW 30K to be achieved within 5 years from now. You heard this false and foolish sounding call so many times it's now an automatic "don't believe it - it's rubbish" (especially in this environment!). How sweet it will be then to gaze upon iTuliper's stunned comments two years from now as this unfolds.

We do have another crash ahead - but the trick to actionable intelligence here is whether that is a tactical or a strategic insight.

so you don't believe this is a debt deflation bear market then...

Contemptuous
04-05-09, 05:22 PM
Metalman - maybe that read is a little inflexible - When all this latent inflation inflation really starts to rise - assets like equities traditionally react sharply, and IMO most certainly can exceed the inflation rate at various stages - maybe even a lot. If this were Zimbnabwe the currency would disintegrate as fast or faster than it's equity bourse. But it's not - it is the USD, fading global reserve currency.

The alternate read therefore is that the USD inflation is an event that gets "muffled" by dragging down all the major currencies with it. Just think of the scale of stresses a hyperinflating USD casts upon the rest of world GDP if those currencies remained at their original valuations. Not acceptable. What if the principal alternative currencies, even in a basket "new" hard(er) currency unit, just don't concede to the USD anything like it's real rate of collapse? If that happens, you've got very large "implied" inflation fanning out worldwide, with not a whole lot of action in any fiat currency vs. the dollar.

When the US equities (traditionally preferred less volatile markets) start to feel the hot levitating gas blowing of serious dollar units proliferation, IMO they most certainly have the room to outpace the USD inflation numbers, in the short and medium terms - and "medium term" can be *years*? We've maybe travelled from 1996 to 2007 or 2009, with a DOW that's gone nowhere inflation adjusted, but the inflation to date in the USD has been quite sedate still. Taking an inflationary event and mapping it from A to B to get an "averaged" net gain at the end, does not describe the full trajectory.

Seems to me the DOW or S&P can do some real acrobatics relative to the USD at various different times along the way, and several multiples of the 90% USD notional collapse would be an understatement of their reaction to the upside once this asset group regain even a scrap of acceptability as inflation hedge. If the USD cannot fully express it's inflating against other currencies because they are all tracking it down hard, it is going to have to show up in some other asset group and likely with suppressed force.

Look at gold and silver. They don't "track inflation" short or even medium term. Too linear. So we've got two things here. A large inflation in full bloom within five years, and a stock market which recently disintegrated. Regarding USD inflation - how large should the devaluation of the world's fading senior currency be? 1000% devaluation, let alone the trillions witnessed in Zimbabwe, are just numbers out of whack for the dollar - still occupies largest position among the global monetary units. I disbelieve 500% inflation for the USD. I disbelieve 250% inflation for the US. And so forth.

Maybe you even agree - USD inflation is going to be a "muffled hyperinflation" in fiat currency terms, because a unilateral USD 90% devaluation / inflation would clearly be unacceptable to all world trade as we attempt to get through the crisis. Or my imagination fails miserably and we are headed for the Mad Max scenario and trading in bottles of Vodka and Cigarettes here. Suppose instead, it's going to be a tamed hyperinflation - a supposedly runaway, but actually tamer, 90% devaluation against the next strongest currency in the worst scenario. That appears huge already. I think I am more partial to the notion the major currencies will track each other down and "muffle" the dollar's fall quite a bit.

I'm therefore suggesting that if the broad US indexes gained 400% from an inflation which has found no ready expression in the currencies, that would not be all that surprising. The stock market will more likely not lie inert as currencies accelerate their race to the bottom. I am in a minority here, but I don't expect a spectacular USD collapse against rival fiat currencies in the next five years. Or rather, make that "fall may be spectacular, but heavily muffled".


so you don't believe this is a debt deflation bear market then...

cjppjc
04-05-09, 05:37 PM
Wow! Dow 30,000 in 5 years. That's some call.

Contemptuous
04-05-09, 05:47 PM
Yes and all you kind hearted guys and gals can roast me on a spit if I'm wrong. Rack of Lukester ribs, roasted on a spit. Tasty. Will I have an apple in my mouth too like the roasted pigs do? :rolleyes:


Wow! Dow 30,000 in 5 years. That's some call.

Chris Coles
04-05-09, 06:08 PM
Yes and all you kind hearted guys and gals can roast me on a spit if I'm wrong. Rack of Lukester ribs, roasted on a spit. Tasty. Will I have an apple in my mouth too like the roasted pigs do? :rolleyes:

I will expect the Fiver before you get carved up.... :D

Contemptuous
04-05-09, 06:16 PM
"Fiver? What Fiver would that be? I don't remember any Fiver".

No but on a more responsible note Chris, a guy about to get roasted would doubtless be eager to pay all his worldly obligations, if only to appease the angry goddess called "Finding Virtue in Prudence While Eschewing All Equities". Therefore I am bound to honor our wager on the EURO/USD price in 2015. I'll gladly repay you the Fiv0r I so imprudently wagered back in early 2009. I remember those handsome British currency notes. Stately looking Crown Treasury notes with a portrait of Lizzy and Five P0unds" written on them? Much more sophisticated looking than our pedestrian Greenb0cks. I have found a little meagre consolation in the thought that the P0und and the Greenb0ck will likely be both in the dumpster in five years time in terms of today's currency unit. After which, you and I will have a pint of ale, which will cost us a princely Tw0nty P0und note in 2015? :D.


I will expect the Fiver before you get carved up.... :D

stockman
04-06-09, 12:21 AM
"the djia rallied strongly for a few months in 1975 and fell for years after, even in nominal terms... in real terms stocks were decimated"

1373


This is the S&P, small caps did much better than the S&P from 1974 forward. Rising inflation is not toxic to all companies. Most of my experience relates to investing in small caps over the past 30 years - a return to the 70's would not be as worrisome as some suggest.


I don't have ready access to data but this article http://rareinvest.blogspot.com/2007/12/investing-in-1970s.html gives an idea how big the moves were in small caps following the 1974 lows-

Year /Small Stocks /Large Stocks /Long Bonds /Short Bonds
1970 /835 /1,041 /1,127 /1,065
1971 /989 /1,189 /1,324 /1,111
1972 /982 /1,416 /1,397 /1,154
1973 /584/1,207 /1,417 /1,233
1974 /410 /888/1,495 /1,331
1975 /696 /1,219 /1,622 /1,408
1976 /1,077 /1,512 /1,802 /1,480
1977 /1,314 /1,402 /1,818 /1,555
1978 /1,607 /1,493 /1,742 /1,666
1979 /2,314 /1,774 /1,900 /1,840

FRED
04-06-09, 12:32 AM
"the djia rallied strongly for a few months in 1975 and fell for years after, even in nominal terms... in real terms stocks were decimated"

1373


This is the S&P, small caps did much better than the S&P from 1974 forward. Rising inflation is not toxic to all companies. Most of my experience relates to investing in small caps over the past 30 years - a return to the 70's would not be as worrisome as some suggest.


I don't have ready access to data but this article http://rareinvest.blogspot.com/2007/12/investing-in-1970s.html gives an idea how big the moves were in small caps following the 1974 lows-

Year /Small Stocks /Large Stocks /Long Bonds /Short Bonds
1970 /835 /1,041 /1,127 /1,065
1971 /989 /1,189 /1,324 /1,111
1972 /982 /1,416 /1,397 /1,154
1973 /584/1,207 /1,417 /1,233
1974 /410 /888/1,495 /1,331
1975 /696 /1,219 /1,622 /1,408
1976 /1,077 /1,512 /1,802 /1,480
1977 /1,314 /1,402 /1,818 /1,555
1978 /1,607 /1,493 /1,742 /1,666
1979 /2,314 /1,774 /1,900 /1,840

Period CR2 is ending (collapse of FIRE Economy V2.0) and period X2 is beginning. It will not be like X1 but will have elements of D1.


http://www.itulip.com/images/PeriodX.gif

stockman
04-06-09, 01:02 AM
Does ITULIP have a position on small caps?

We were about 1/2 way through that D1 (valuation contraction) period by the end of 1974... about 8 years... comparable to current secular valuation contraction. A pretty serious 50% clip to large cap equities... comparable to current dip. From that point in 1974 the nominal price of small caps AND commodities took off. Not JUST gold.

1374

FRED
04-06-09, 10:01 AM
Does ITULIP have a position on small caps?

We were about 1/2 way through that D1 (valuation contraction) period by the end of 1974... about 8 years... comparable to current secular valuation contraction. A pretty serious 50% clip to large cap equities... comparable to current dip. From that point in 1974 the nominal price of small caps AND commodities took off. Not JUST gold.

1374

We are looking into this as part of reallocating our large Treasury bond position. The difference this time from the 1975 to 1980 inflation is that household and business debt levels are much higher and the credit crunch much more severe, and hitting smaller cap businesses even harder than large caps.

stockman
04-06-09, 11:02 AM
Certainly not suggesting that history repeats exactly... but interesting that off the '32 lows small caps also outperformed. Even though following both 1974 and 1932 nominal market lows- economic deterioration and valuation contraction continued to be problematic.

I don't have good data on 30's as far as gold goes but that stock rally off the '74 lows (which lasted over a year) was coincidental with a substantial pull back in gold. FWIW.

I'll be interested to see what itulip comes up with on the review.

grapejelly
04-06-09, 10:02 PM
This time around, quite a few large caps have huge pension and health care retiree problems that are solvency busters. Small caps do not have defined benefit plans as a general rule. I think this is why large caps are kinda doomed in this depression...

ThePythonicCow
04-06-09, 10:10 PM
We are looking into this as part of reallocating our large Treasury bond position. How about in cartons of cigarettes (fits your avatar ;)).

It might be a while before any of the usual investments alternatives usually considered by those with moderately large sums of liquid wealth are a good deal.

metalman
04-06-09, 10:21 PM
How about in cartons of cigarettes (fits your avatar ;)).

It might be a while before any of the usual investments alternatives usually considered by those with moderately large sums of liquid wealth are a good deal.

cigarettes are the perfect fiat money. they go stale in a couple months... spend 'em or smoke 'em.

ThePythonicCow
04-06-09, 11:09 PM
cigarettes are the perfect fiat money. they go stale in a couple months... spend 'em or smoke 'em.
I didn't realize they went stale. Thanks for the information. You just saved me from a bad investment. Once again, iTulip comes through :D.

Toilet paper holds up better, but it's bulky and I'm running out of space. Perhaps I should start taking an interest in the whiskey and ammo markets.

doom&gloom
04-10-09, 02:32 PM
That's some kinda scary.

I grew up as a kid in the New England community immortalized in Norman Rockwell's paintings. I can personally recognize some of the characters in them. Most of them had a heck of a lot of fun being whatever odd and unusual being they turned out to be.

http://www.ciaccess.com/%7Etoveza/rockwell/gossip.jpg
Most people seem a whole lot more bland nowadays. TV has been an enormous drug on humanity.

I dunno, some days I just feel like Tony Soprano...

doom&gloom
04-10-09, 02:37 PM
I didn't realize they went stale. Thanks for the information. You just saved me from a bad investment. Once again, iTulip comes through :D.

Toilet paper holds up better, but it's bulky and I'm running out of space. Perhaps I should start taking an interest in the whiskey and ammo markets.

I dunno, you could reall 'clean up' in theat TP position, especially in a shitty market.

Contemptuous
04-14-09, 03:58 PM
EJ - does iTulip track with Jeremy Siegel regarding any potential valuation distortions in the conventional S&P valuation methodology?

______________________

HOW CHEAP IS THE MARKET?

by Jeremy Siegel, Ph.D. (http://finance.yahoo.com/expert/archive/futureinvest/jeremy-siegel/1)

<SCRIPT src="http://fe01.livewords.search.sp1.yahoo.com/script?fr=csc_fin_pf" type=text/javascript></SCRIPT><!--Yahoo! Finance expert article module-->Posted on Wednesday, April 8, 2009, 12:00AM

On February 25 I published an op-ed piece in the ‘Wall Street Journal' entitled, "The S&P Gets Its Earnings Wrong (http://online.wsj.com/article/SB123552586347065675.html)." In that article I said that, although the S&P weights each individual's stock by its market capitalization to compute the return on the S&P 500 Index, no such methodology is used to compute aggregate earnings of the index.

As a result, the billions of dollars of losses racked up by, say, AIG, whose market value is extremely low, is added dollar for dollar to the earnings of the profitable firms, such as Exxon Mobil, whose market value is more than 20 times larger. I maintained that S&P's methodology gave far too much influence to firms with big losses and low market values, and thereby gave a distorted valuation to the S&P 500 Index.

A Challenge to Standard & Poor's

I proposed an alternative methodology for computing aggregate earnings: Weight the earnings of each company by its current market value, in a fashion identical to the way the return on the S&P 500 Index is computed. This alternative methodology leads to substantially higher earnings for the index than does the S&P methodology.

According to Standard & Poor's, total reported earnings on the S&P 500 index for calendar year 2008 was a mere $14.97, the lowest in many decades, primarily because of the huge losses of a few financial firms. S&P reports that, at the index's level on March 31 of 798, the S&P was selling at an extraordinarily expensive 53.3 times last year's earnings.

Yet S&P's own Web site says that "AIG's record setting Q4 '08 'As Reported' loss of $61.7 billion, or $22.95 per share, took $7.10 off the index." AIG's quarterly loss was so massive that it more than canceled out the entire year's income of Exxon Mobil, which earned $45 billion in 2008. For the full year, AIG lost over $99 billion, more than twice the total profits of Exxon Mobil.

Where the Distortion Comes In

Here is where the distortion comes in. Exxon Mobil has a market value of $350 billion, while AIG's value is now a mere $15 billion (and it was only $5 billion a month ago). That means that the average investor owns more than 20 times as much Exxon Mobil stock in their portfolio as AIG stock, so that for the average portfolio of those two stocks, the oil giant has over a 95 percent share and AIG has less than a 5 percent share.

S&P says that an investor holding 95 percent of his portfolio in Exxon Mobil and 5 percent in AIG has negative aggregate earnings and an infinite price-to-earnings ratio because the losses of AIG are greater than the profits of Exxon Mobil, no matter how much you hold in each. S&P would say this even though 95 percent of your portfolio is in Exxon Mobil, a stock that sells for less than 8 times its earnings.

My methodology would weight the $45 billion earned by Exxon Mobil by 95 percent and the $99 billion loss of AIG by 5 percent to obtain a weighted average earnings of $39 billion for the portfolio. With a weighted average market value of AIG and Exxon Mobil of $335 billion, this would lead to approximately a 9 P/E ratio for the portfolio, not the infinite P/E computed by Standard & Poor's.

With a few firms sporting huge losses, weighting the gains and losses by market value gives a much better picture of the market's current valuation. Instead of reported earnings of $14.97, the market-weighted earnings is a much higher $71.50, which gives the market a P/E ratio of just over 11 instead of 53.3, as reported by S&P.

The big losses in the financials impact operating as well as reported earnings. S&P reports that total operating earnings for the S&P 500 was $49.49 in 2008, giving the Index a 16 P/E ratio. Once the earnings are weighted by market value, operating earnings rise to about $79.40, giving the market a very cheap P/E ratio of 10.

S&P's Response

After my article appeared, a flood of emails and phone calls came not only to my office but also to Standard & Poor's. David Blitzer, the managing director and chairman of S&P's Index Committee, posted a letter on their Web site defending their methodology and claiming that my methodology "failed the simple tests of both logic and index mathematics. A dollar earned or lost is the same, irrespective of whether it is earned or lost by a big index constituent or a smaller one."

S&P continued, "To use an analogy, we could hypothetically view the S&P 500 as a single company with 500 divisions, with each division having earnings and an implicit market value. The smallest of these divisions could have an outside loss that wipes out the combined earnings of the entire company. Claiming that these losses should be ignored or minimized because they came from a less valuable division is flawed."

What is completely flawed are the logic and economics of the above paragraph. The independent corporations that make up the S&P 500 Index are valued completely differently than if they were divisions of one company. The losses of one company do not cancel the profits of another. Exxon Mobil's shareholders are not impacted by AIG's losses. In fact, AIG's losses are now taken by the bondholders -- or, to the extent the government bails out the bondholders, we, the taxpayers, shoulder AIG's loss. Liabilities do indeed cross the divisions of a single firm, and that is why the New Products Division of AIG tanked the many other profitable divisions of the insurance giant. But these losses do not cancel the earnings of profitable firms.

A Point Well Taken

My good friend and colleague Prof. Robert Shiller of Yale University, who has used S&P earnings extensively in his work, agreed that my point was very well taken. He said that the basic economic principle comes from the theory of options. The value of a firm's equity can be viewed as an option on the total value of the firm, after the bondholders and other claimants have been paid. It is a fundamental theorem of option theory that the sum of the option prices on individual firms is worth more than a single option on the value of all the firms. In other words, the sum of stock prices of 500 stocks must be worth more than "a single company with 500 divisions," as David Blitzer claims the S&P 500 Index represents. This is particularly true if one or more of the divisions has extreme losses, as do AIG and many of the other financials.

Prof. Shiller did say that the theory does not lead directly to my methodology of value weighting, and probably the "true" earnings of the S&P is a far more complicated function of the individual firms' earnings. The true earnings may in fact lead to even higher values than I have calculated. My calculations on historical data show that, in most years, it makes little difference whether earnings are calculated by market value or by using the simple sum as S&P does. This is because when earnings are positive, the two methodologies give similar results.

But as option theory indicates, when the earnings of a few companies turn sharply negative, there is a big difference between the two methodologies. Back in 2002 the aggregate earnings of the S&P 500 Index also plummeted when a few firms, such as AOL and JDS Uniphase, took huge writedowns on some of their Internet investments. Reported P/E ratios soared into the 60s in the second quarter of 2002, yet rather than being overvalued, the market was just approaching its bear market low.

Final Word

The true valuation of the market is no where near as dismal as the aggregate earnings reported by Standard & Poor's suggest. When portfolios of stocks are weighted by market values, the market is cheap by historical standards. No one can say for sure whether March 9 will mark the bottom of this dismal bear market (I personally think it will), but I am sure that investors who hold a diversified portfolio of stocks today will be rewarded by above-average returns.

The Outback Oracle
04-14-09, 04:55 PM
In a nutshell

A dollar earned or lost is the same, irrespective of whether it is earned or lost by a big index constituent or a smaller one."

S&P continued, "To use an analogy, we could hypothetically view the S&P 500 as a single company with 500 divisions, with each division having earnings and an implicit market value. The smallest of these divisions could have an outside loss that wipes out the combined earnings of the entire company. Claiming that these losses should be ignored or minimized because they came from a less valuable division is flawed."

The options argument is irrlevant to the issue. An indidual option is higher because it is determined by individuals who each think they can see something better in that company than the overall market.

RE the AIG Exxon issue, each individual may have the same NUMBER of shares but as their values changed the value of AIG in the portfolio decreased.
Lukester maybe I have missd something. You're pretty sharp but this looks to me like a monumental bunch of tripe
This bloke is just talking to hear his own noise.

Contemptuous
04-14-09, 05:02 PM
I leave it up to other iTulipers to chew to pieces. My take on it is that the S&P argument is the less likely. Surprised you are reading it otherwise as the point to this reader appeared quite clear. I'm certainly not one of the more competent ones here to argue this case, but this was what became apparent to me. I would in fact have picked out exactly the same quote as you have, to evidence why the S&P argument is the invalid one. "The market" is definitely not a single corporation. "The S&P 500 market" is solely made up of 500 individual corporations, and many of these may be of sharply cheaper a real price without this argument's specious overlay (appears so without undue struggle to comprehend it - to this reader anyway).

S&P QUOTED: S&P continued, "To use an analogy, we could hypothetically view the S&P 500 as a single company with 500 divisions, with each division having earnings and an implicit market value. The smallest of these divisions could have an outside loss that wipes out the combined earnings of the entire company. Claiming that these losses should be ignored or minimized because they came from a less valuable division is flawed."

This excerpt comment of Siegel's, is pointing out a valuation inefficiency in progress:

SIEGEL QUOTED: What is completely flawed are the logic and economics of the above paragraph. The independent corporations that make up the S&P 500 Index are valued completely differently than if they were divisions of one company. The losses of one company do not cancel the profits of another. Exxon Mobil's shareholders are not impacted by AIG's losses. In fact, AIG's losses are now taken by the bondholders -- or, to the extent the government bails out the bondholders, we, the taxpayers, shoulder AIG's loss. Liabilities do indeed cross the divisions of a single firm, and that is why the New Products Division of AIG tanked the many other profitable divisions of the insurance giant. But these losses do not cancel the earnings of profitable firms.



In a nutshell

A dollar earned or lost is the same, irrespective of whether it is earned or lost by a big index constituent or a smaller one."

S&P continued, "To use an analogy, we could hypothetically view the S&P 500 as a single company with 500 divisions, with each division having earnings and an implicit market value. The smallest of these divisions could have an outside loss that wipes out the combined earnings of the entire company. Claiming that these losses should be ignored or minimized because they came from a less valuable division is flawed."

The options argument is irrlevant to the issue. An indidual option is higher because it is determined by individuals who each think they can see something better in that company than the overall market.

RE the AIG Exxon issue, each individual may have the same NUMBER of shares but as their values changed the value of AIG in the portfolio decreased.
Lukester maybe I have missd something. You're pretty sharp but this looks to me like a monumental bunch of tripe
This bloke is just talking to hear his own noise.

ThePythonicCow
04-14-09, 07:09 PM
EJ - does iTulip track with Jeremy Siegel regarding any potential valuation distortions in the conventional S&P valuation methodology?

______________________

HOW CHEAP IS THE MARKET?

by Jeremy Siegel, Ph.D. (http://finance.yahoo.com/expert/archive/futureinvest/jeremy-siegel/1)

<script src="http://fe01.livewords.search.sp1.yahoo.com/script?fr=csc_fin_pf" type="text/javascript"></script><!--Yahoo! Finance expert article module-->Posted on Wednesday, April 8, 2009, 12:00AM

On February 25 I published an op-ed piece in the ‘Wall Street Journal' entitled, "The S&P Gets Its Earnings Wrong (http://online.wsj.com/article/SB123552586347065675.html)." In that article I said that, although the S&P weights each individual's stock by its market capitalization to compute the return on the S&P 500 Index, no such methodology is used to compute aggregate earnings of the index.

As a result, the billions of dollars of losses racked up by, say, AIG, whose market value is extremely low, is added dollar for dollar to the earnings of the profitable firms, such as Exxon Mobil, whose market value is more than 20 times larger. I maintained that S&P's methodology gave far too much influence to firms with big losses and low market values, and thereby gave a distorted valuation to the S&P 500 Index.

A Challenge to Standard & Poor's

I proposed an alternative methodology for computing aggregate earnings: Weight the earnings of each company by its current market value, in a fashion identical to the way the return on the S&P 500 Index is computed. This alternative methodology leads to substantially higher earnings for the index than does the S&P methodology.

Sometimes one has specific uses in mind for a statistic and depending on just what one is doing, either of these two methadologies might be better suited.

But otherwise and for most purposes, this nice article looks to me like it came from Taleb's Mediocristan (he of Black Swan (http://www.amazon.com/Black-Swan-Impact-Highly-Improbable/dp/1400063515) fame.)

Contemptuous
04-14-09, 11:16 PM
Yes didn't someone post a link to a chart evidencing an S&P market PE in the 80's? That's shocking stuff. Siegel's saying that stat alone is an artifact derived from an incorrect distribution of market losses and has the unintended corollary of obscuring a few quite large valuation discrepancies out there.

I just wondered if iTulip separate into discrete segments their S&P valuations, to either confirm or negate the existence of pockets of marked low valuations in this market. Add just a tiny handful of other mega-cap stocks of Exxon's size, sporting PE's of 8-9, and you get at least a discrepancy of market segment valuations worth a passing comment.

Do "we here at iTulip" acknowledge any "valuation discrepancies" worth mentioning, as part of the 2009 market environment? It's a messy corollary to include, as it gums up the certainty that the entirety of the markets is nowhere near a sustainable floor. Makes the market's valuation become annoyingly ambiguous, doesn't it?

stockman
04-15-09, 08:02 AM
On valuation I like the Shiller methodology of using 10 years earnings.

1412

1413

Like Lukester I think it would be interesting to see historic valuations broken out- by industry group and/or by market cap. Not sure reliable data is readily available.

Chris Coles
04-15-09, 09:18 AM
One of the interesting aspects of the Shiller graph above is the prediction of Robert Beckman in his book The Downwave which centred upon the idea that Disaster Theory posits a graph that climbs for some decades and then hits a double top, as above; and then drops right back to the beginning.

http://www.amazon.co.uk/Downwave-Surviving-Second-Great-Depression/dp/0903852381