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EJ
02-22-07, 07:47 PM
http://www.itulip.com/images/crash.gifStocks are headed for a fall (http://biz.yahoo.com/cbsm/070221/fc8b8b150c5e4e1692335597e825e19f.html)
February 21, 2007 (Irwin Yamamoto - MarketWatch)

Market wise, equities are in the midst of the second-longest rally since 1929. Yet there are some serious warning signs -- especially sentiment.

The odds are high that the current advance won't be able to continue. Stocks remain stretched and trade above past market multiples. What goes up must come down.

On the economic front, we are overdue for a recession. The last one occurred in 2000 and 2001. Business expansions don't last forever. The boom-and-bust pattern of an economic cycle has not been repealed.

An inverted yield curve almost always points to a deep business slowdown. The Fed publicly claims there's a 40% chance of a recession. However, a model of the Federal Reserve Bank of New York is essentially forecasting an outright recession.

AntiSpin: The equity markets may be due for a fall, but don't hold your breath. They've been due for many months. Maybe they'll never go down again because there's a new equity buyer on the scene: global central banks.

Before we talk about our new buyers, predictions of an imminent crash have been coming from some unlikely places. Early December we read in Economic storm Brewing in America (http://www.itulip.com/forums/showthread.php?t=678):
Hank Paulson, who made $700 million at Goldman Sachs before taking over the US Treasury this year... has reactivated a crisis team with a command centre in Washington to cope with the "systemic risk" in a market melt-down. His worry? 8,000 unregulated hedge funds with $1.3 trillion at hand, and derivative contracts now worth $370 trillion. "We need to be very careful here," he said.

A well-sourced article in Washington's Weekly Standard says Mr Paulson fears a "serious crisis that would be a body-blow to the US economy".

Average house prices have fallen from $244,000 in April to $221,000 last month, with more violent corrections in Florida, Arizona, and New England. Builders have warned of a "death spiral" as they slash prices to off-load a glut of unsold homes.

"The US needs a trillion dollars a year just to stand still," says David Bloom, currency guru at HSBC. Modern financial crises have always begun on the peripheries of global economy, setting off a chain reaction. Mr Bloom says the seizure this time will be at the heart of the system as the dollar buckles, pressing down on the "aorta of capitalism".
"Seizure ... at the heart of the system," "pressing down on the aorta of capitalism," and "body-blow to the US economy." David Bloom and Hank Paulson certainly have a flair for the dramatic. Might they be preparing us for something?

Meanwhile, the news on the U.S. economy continues to show strength. Yesterday's higher than expected CPI number (http://www.investors.com/editorial/IBDArticles.asp?artsec=5&issue=20070221) and today's lower than expected jobless claims (http://www.mercurynews.com/mld/mercurynews/business/financial_markets/16761125.htm) tell the story of an economy which, if it's heading into a wall, is doing so at top speed.

This story, also quoting Bloom, head of global currency research and strategy at HSBC, appeared without much fanfare a month later, in early January (caught by our jk), Central banks eye asset as well as FX shift (http://today.reuters.com/news/articlenews.aspx?type=reutersEdge&storyID=2007-01-09T142800Z_01_L0945935_RTRUKOC_0_US-MARKETS-RESERVES-DIVERSIFICATION.xml):
Central banks around the world are looking to invest more of their $4.75 trillion foreign exchange reserves in equities at the expense of bonds, but the implications for currencies are far from clear.

David Bloom, head of global currency research and strategy at HSBC in London, notes that central banks are so flush with reserves that they barely know what to do with them. They are buying a wider range of currencies than ever and diversifying across a wider range of asset classes than ever before too.

This suggests a shift by central banks into equities, based purely on these market cap weightings, could benefit the dollar.

Given Japan's relatively low share of global equity market cap, the yen could benefit from, say, the People's Bank of China setting aside investment destined for Japanese stocks, Jen said.

"I don't believe it is a dollar versus euro tug of war, but more a major versus minors and bonds versus equities story," he wrote in a recent note. "Though China has not begun to have exposure to equities, I suspect this may be the next step."

Norway's Government Pension Fund, which saves the country's oil wealth for future generations, grew to 1.712 trillion crowns in the third quarter, or about $265.6 billion. Norges Bank, which manages the fund, has said it wants to shift the allocation of that money to 60 percent equities and increase exposure to property and private equity.
Welcome to the new central banking where the rules are: no rules.

Long term, "diversification of central bank reserves into risk assets" means keeping the equity, real estate and private equity bubbles inflated. The warnings from Paulson et al mean inflate the bubbles, but after they've crashed.

Short term, mere discussion of possible central bank purchases of risky assets is likely to lower the risk premium. Purchases and sales of treasury notes is done for the express purpose of raising and lowering short term interest rates and managing the money supply. By what principle of maintaining price stability does a central bank decide when to buy and sell property, or private and public equities? I don't know about you, but I am loath to bet against them.

Maybe the FIRE (http://www.itulip.com/forums/showthread.php?t=891) economy will go into hyper-drive. But first, the wall.

p.s. If you don't "get" today's picture, check the speedometer.

jk
02-22-07, 08:59 PM
p.s. If you don't "get" today's picture, check the speedometer. that car's got some powertrain! 110mph at only 900 rpm.

Finster
02-22-07, 09:32 PM
that car's got some powertrain! 110mph at only 900 rpm.

Don't look now, but there's a brick wall there that you were supposed to notice ... ;)

EJ
02-22-07, 10:49 PM
that car's got some powertrain! 110mph at only 900 rpm.

KPH not MPH, mid-shift from 4th to 5th. Now that's some very agressive parking!

DemonD
02-23-07, 12:21 AM
EJ -

More great analysis.

This is again why I stay in the stock market as I believe stock markets are "the house" and your analysis again shows me why investing in stocks is investing with the house.

Tet
02-23-07, 12:52 AM
AntiSpin: The equity markets may be due for a fall, but don't hold your breath. They've been due for many months. Maybe they'll never go down again because there's a new equity buyer on the scene: global central banks.


Before we talk about our new buyers, predictions of an imminent crash have been coming from some unlikely places. Early December we read in Economic storm Brewing in America (http://www.itulip.com/forums/showthread.php?t=678):
Find me a period in US history where a stock panic took place when the country was at war, it's never happened and it's not going to happen. Panics always occur right before or right after a war. Hell the Fed got so worried about this they went ahead and signed us up for two wars not just one, just to make sure.

DanielLCharts
02-23-07, 04:03 AM
Um, how about 1987?? 1998 panic???

Secondly, this conditional statement (if no war, then no crash) would be more robust if you could apply it to all stock markets, all the time. And you really can't (example: asian financial crisis).


Find me a period in US history where a stock panic took place when the country was at war, it's never happened and it's not going to happen. Panics always occur right before or right after a war. Hell the Fed got so worried about this they went ahead and signed us up for two wars not just one, just to make sure.

DanielLCharts
02-23-07, 04:06 AM
Okay, EJ, now is this tongue in cheek?

"Maybe (stocks will) never go down again..."

sparki
02-23-07, 06:03 AM
describes wonderful and in great detail what is driving the markets.

really fantastic!

"a new era"

http://immobilienblasen.blogspot.com/2007/02/hall-of-fame-new-era-pimco.html

ratfink
02-23-07, 07:52 AM
Great picture! At least they avoided the cliff.


From my understanding, the US CB would first have to change the rules to legally "diversify" into these riskier instruments. I guess at that point, the "poom" is really on. Are other CBs constrained like that? Or is it all a moot point anyway, that is, are there plenty of ways around those constraints?

EJ
02-23-07, 08:52 AM
Okay, EJ, now is this tongue in cheek?

"Maybe (stocks will) never go down again..."

"Never" is a long time. Before a truly historic correction, the ongoing and experiment with central bank managed financial markets will have to fail. The Japanese experience indicates that may take decades. On the other hand, geopolitics may take it down before that. But where we are and where we are going, eventually, are clear.


http://www.itulip.com/images/NEWRDrecDJIA%5B1%5D.gif


Real DOW (http://www.itulip.com/realdow.htm)

Uncle Jack
02-23-07, 09:00 AM
that car's got some powertrain! 110mph at only 900 rpm.

It had actually slowed down from 200mph. :)

Take your foot off the gas or throw the car into neutral on the highway going at top speed; your RPMs drop to idle but you're still moving at a high rate of MPH.

Correlation to reality?, the economy has slowed but investors/speculators haven't.

DanielLCharts
02-23-07, 09:37 AM
i tend to agree with you. do you think there is a solid argument that risk premia for equities were mispriced for substantial lengths of time and the 90s represents a "catch up" period?



"Never" is a long time. Before a truly historic correction, the ongoing and experiment with central bank managed financial markets will have to fail. The Japanese experience indicates that may take decades. On the other hand, geopolitics may take it down before that. But where we are and where we are going, eventually, are clear.


http://www.itulip.com/images/NEWRDrecDJIA%5B1%5D.gif


Real DOW (http://www.itulip.com/realdow.htm)

Charles Mackay
02-23-07, 09:52 AM
"Seizure ... at the heart of the system," "pressing down on the aorta of capitalism," and "body-blow to the US economy." David Bloom and Hank Paulson certainly have a flair for the dramatic. Might they be preparing us for something?

What is Hank the trickster preparing for us? :rolleyes:

EJ
02-23-07, 11:17 AM
i tend to agree with you. do you think there is a solid argument that risk premia for equities were mispriced for substantial lengths of time and the 90s represents a "catch up" period?
I've annotated the chart for you. Does this help?


http://www.itulip.com/images/realdowNOTES2.gif

Tet
02-23-07, 01:45 PM
Um, how about 1987?? 1998 panic???

Secondly, this conditional statement (if no war, then no crash) would be more robust if you could apply it to all stock markets, all the time. And you really can't (example: asian financial crisis).
You'd have to refresh my memory as to which war we had in 1987 and 1998 because I don't remember anything that required the needed borrowing. I obviously was implying that this refered to the US markets not the Asian markets, Asians aren't smart enough to understand the bennefits of blowing up innocent people like we are. From memory the Panics would include 1857 no war, shortly thereafter though. Panic of 1873 following the War Between the States and end to reconstruction. 1929 Crash and shortly thereafter WWII. I think you find there is a Panic before or after any war of any size. Didn't the Nifty Fifty crash after Vietnam?

Rajiv
02-23-07, 07:32 PM
An article worth reading<a href="http://www.atlanticfreepress.com/content/view/1033/81/">The Second Great Depression</a>

A great picture of the bonar BTW http://www.atlanticfreepress.com/images/stories/whitney/dollar.jpg


There are many similarities between the pre-Depression era and our own. Paul Alexander Gusmorino says:

"The Great Depression was the worst economic slump ever in U.S. history, and one which spread to virtually all of the industrialized world. The depression began in late 1929 and lasted for about a decade....The excessive speculation in the late 1920's kept the stock market artificially high, but eventually lead to large market crashes. These market crashes, combined with the misdistribution of wealth, caused the American economy to capsize.

(The income disparity) between the rich and the middle class grew throughout the 1920's. While the disposable income per capita rose 9% from 1920 to 1929, those with income within the top 1% enjoyed a stupendous 75% increase in per capita disposable income…A major reason for this large and growing gap between the rich and the working-class people was the increased manufacturing output throughout this period. From 1923-1929 the average output per worker increased 32% in manufacturing8. During that same period of time average wages for manufacturing jobs increased only 8% (This ultimately causes a decrease in demand and leads to growth in credit spending)

The federal government also contributed to the growing gap between the rich and middle-class. Calvin Coolidge's (pro business) administration passed the Revenue Act of 1926, which reduced federal income and inheritance taxes dramatically…(At the same time) the Supreme Court ruled minimum-wage legislation unconstitutional.

The bottom three quarters of the population had an aggregate income of less than 45% of the combined national income; while the top 25% of the population took in more than 55% of the national income...Between 1925 and 1929 the total credit more than doubled from $1.38 billion to around $3 billion”. (Just like now, the growing wage gap has spawned massive speculative bubbles as well as a steady up-tick in credit spending. Wage stagnation forces workers to seek other opportunities for getting ahead. When wages fail to keep pace with productivity then demand naturally decreases and business begins to flag. The only way to spur more buying is by easing interest rates or expanding personal credit, and that is when equity bubbles begin to appear. That's what happened to the stock market before 1929 as well as to the real estate market in 2007. The availability of credit has kept the housing market afloat but, ultimately, the resultwill be the same.

On Monday October 21, 1929, the over-valued stock market began its downward plunge. It managed a brief mid-week comeback, but 7 days later on Black Tuesday it plummeted again; 16 million shares were dumped and there were no buyers.

The game was over.

Confidence evaporated overnight. People stopped buying on credit, the bubble-economy collapsed, and the mighty locomotive for growth, the American consumer, hobbled into the Great Depression. Tariffs were thrown up, foreigners stopped buying American goods; banks closed, business went bust, and unemployment skyrocketed. Tens years later the country was still reeling from the implosion.

Now, 77 years later, Greenspan has led us sheep-like to the same precipice. The economic dilemma we’re facing could have been avoided if the expansion of personal credit had been curtailed by prudent monetary policy at the Federal Reserve and if wealth was more evenly distributed as it was in the ‘60s and ‘70s. But that’s not the case; so we’re headed for hard times.

Ishmael
02-26-07, 09:54 AM
Tet there was a significant drop (38.9%) in the market from November 1916 to December of 1917 which was WW1 and also a significant drop (24.7%) drop from February 1966 to October 1966.

Tet
02-26-07, 12:19 PM
Tet there was a significant drop (38.9%) in the market from November 1916 to December of 1917 which was WW1
US doesn't declare war until 1917 and it takes a while to mobilize.

and also a significant drop (24.7%) drop from February 1966 to October 1966.
Troop levels in Vietnam reach 400K by the end of 1966, I'd be more concerned about what happens when these wars end, like the Nifty Fifty crash of 1973. I don't see this war ending any time soon.

akrowne
02-28-07, 09:40 PM
Nice timing.