Markets to tank Monday?

[blazespinnaker]

Re: Markets to tank Monday?

Gold futures up almost 1% too...

Yeah, at this rate the US markets will probably be flat.

Perhaps the new strategy is that the Fed is going to hold the line with negative real rates while Obama starts to cut spending / increase taxes.

[jimmygu3]

Re: Markets to tank Monday?

The S&P 500 is overextended and ripe for a correction. BUT...there will likely be quite a few Would-be-Longs who are anxious to get onboard, so we might see a trading range develop between now and May. Two things are likely to happen by then:

(1) The Fed is set to end its Quantitative Easing by March 31st, but who is going to buy the more than $1 Trillion in Treasuries that Obama/Pelosi/Reid/Geithner want to sell? That's the portion that foreigners are most unlikely to take. If they do end their counterfeiting then long rates will rise; in that case we only think housing is in trouble - that should send it careening into another down-leg.
If they reconsider and continue their counterfeiting it would seem likely for the Bernanke Bonar to begin another leg down, breaking to new all-time lows; given that outcome it would seem that gold should begin another leg up just about the time that its seasonal turns bullish (late Summer); (2) All of this should coincide with the end of favorable stock market seasonality in May.

The "sugar high" of massive Fed counterfeiting should face a huge test very soon. As John Mauldin recently commented:
"As I wrote in my 2010 forecast, this year is a waiting game. There are so many choices we must make, and the paths we will take from those choices vary wildly. But make no mistake, we are coming close to the end game. Some countries and economies are closer to that point than others, but the entire developed world is lurching, in almost drunken fashion, towards our economic denouement".

So, FRED: how does this chart look to you?

That chart is awesome, Raz. It equates the 2000 tech-led crash with the top of the NIKKEI, whereas iTulip lines up the 2008 DDBM crash with the 1990 NIKKEI DDBM. I don't know exactly what the logic is for the 2000/1990 overlay, but the charts sure correlate. I suppose in both cases it was the end of "irrational exuberance" and a "new era", followed by long bounces propped up by government intervention and the 'optimism of the invested', with each new bottom breaking through the previous low.

Jimmy

[jpatter666]

Re: Markets to tank Monday?

I am reluctant to see a crash coming until:

a ) We have definite confirmation the money taps from the Fed have been turned off (i.e. no QE 2)
b ) Some black swan hits

Looks like EJ is going to call for another market swan song. I'll be interested whether this is a side call (like last time) or a true "iTulip recommends" posting.

In the meantime, PMs are good, and I'm watching and waiting.

[Raz]

Re: Markets to tank Monday?

That chart is awesome, Raz. It equates the 2000 tech-led crash with the top of the NIKKEI, whereas iTulip lines up the 2008 DDBM crash with the 1990 NIKKEI DDBM. I don't know exactly what the logic is for the 2000/1990 overlay, but the charts sure correlate. I suppose in both cases it was the end of "irrational exuberance" and a "new era", followed by long bounces propped up by government intervention and the 'optimism of the invested', with each new bottom breaking through the previous low.

Jimmy

My take on the overlay: it is almost a certainty that the US Stock Market ended a Secular Bull in early 2000,
with the 2002 - 2007 upswing being a Cyclical Bull within a Secular Bear.

There is absolutely no doubt whatsoever that the Nikkei entered a Secular Bear Market in December 1989, and as of today there's little or no evidence that said Secular Bear has ended.

[sishya]

Re: Markets to tank Monday?

This is consistent with our analysis, to be published tomorrow. We expect that in year three of the U.S. debt deflation, U.S. markets will behave more or less like the Nikkei in year three but for the reasons that occurred in year six: an election that forced politicians to execute on fiscal reforms when the economy was still dependent on government spending. The economy went back into recession a year later, but the stock market saw it coming. It produced a decline from 22,500 at the end of 1991 to 16,800 at the end of 1992. An equivalent decline would bring the DJIA down to 7700.

I saw the following chart and here both the time and amplitude matches between Nikkei and S&P

[Quincy K]

Re: Markets to tank Monday?

This is consistent with our analysis, to be published tomorrow. We expect that in year three of the U.S. debt deflation, U.S. markets will behave more or less like the Nikkei in year three but for the reasons that occurred in year six: an election that forced politicians to execute on fiscal reforms when the economy was still dependent on government spending. The economy went back into recession a year later, but the stock market saw it coming. It produced a decline from 22,500 at the end of 1991 to 16,800 at the end of 1992. An equivalent decline would bring the DJIA down to 7700.

If I am reading this correctly, iTulip has just called a top in this bear market rally.

[FRED]

Re: Markets to tank Monday?

If I am reading this correctly, iTulip has just called a top in this bear market rally.

Remember, we first made the comparison between the Nikkei and the DJIA in Dec. 2007.

Remember the principle behind it: If you understand the process, you understand the outcome. We put our energy into understanding the underlying process.

The Nikkei/DJIA comparison defined a PROCESS that was specific to the U.S. at that time. It was particularly relevant in the first year, in 2008, less so in 2009, and even less so in 2010 and subsequent years, reflecting differences between the U.S. and Japanese political economies, and differences in the circumstances of the global economy.

Focus on the PROCESS not on the charts that depict the result of the process.

As you will see from the upcoming analysis, the Nikkei vs DJIA charts only serve to remind us that the stock markets of economies that run on government money are prone to accidents, either self-inflicted or--in the case of the U.S. as a net debtor and not the case for Japan--inflicted from without.

[goadam1]

Re: Markets to tank Monday?

Remember, we first made the comparison between the Nikkei and the DJIA in Dec. 2007.

Remember the principle behind it: If you understand the process, you understand the outcome. We put our energy into understanding the underlying process.

The Nikkei/DJIA comparison defined a PROCESS that was specific to the U.S. at that time. It was particularly relevant in the first year, in 2008, less so in 2009, and even less so in 2010 and subsequent years, reflecting differences between the U.S. and Japanese political economies, and differences in the circumstances of the global economy.

Focus on the PROCESS not on the charts that depict the result of the process.

As you will see from the upcoming analysis, the Nikkei vs DJIA charts only serve to remind us that the stock markets of economies that run on government money are prone to accidents, either self-inflicted or--in the case of the U.S. as a net debtor and not the case for Japan--inflicted from without.

Is this a Koan?

[Jim Nickerson]

Re: Markets to tank Monday?

Quotes are from Jeremy Grantham 1/21/2010

So all investors should brace for the chance that speculation
will continue for longer than would have seemed remotely
possible six months ago. I thought last April that the
market (S&P 500) would scoot up to 1000 to 1100 on a
typical relief rally. Now it seems likely to go through
1200 and possibly higher. The market, however, is worth
only 850 or so; thus, any advance from here will make it
once again seriously overpriced, although the high quality
component is still relatively cheap. EAFE equities seem
a little overpriced, emerging markets more so, and fi xed
income seems badly overpriced, especially cash, which is
awful. Exhibit 2 shows our current 7-year forecasts.

The real trap here, and a very old one at that, is to be
seduced into buying equities because cash is so painful.
Equity markets almost always peak when rates are low,
so moving in desperation away from low rates into
substantially overpriced equities always ends badly.

So this is a dilemma. In 2010, value purists will have
to struggle increasingly with the Fed’s continued juicing
of the markets. In order to control real risk – the risk of
losing money – they will be forced to take the increasing
career and business risk of lagging a rising market.

Grantham is not bullish, but he does consider that the equity markets could go higher over the next six month, such odds are 50/50

For the longer term, the out performance of high quality
U.S. blue chips compared with the rest of U.S. stocks is,
in my opinion, “nearly certain” (which phrase we at GMO
traditionally defi ne as more than a 90% probability).

[LargoWinch]

Re: Markets to tank Monday?

Quotes are from Jeremy Grantham 1/21/2010

Grantham is not bullish, but he does consider that the equity markets could go higher over the next six month, such odds are 50/50

50/50 huh? Wow.

Count me in!

[flintlock]

Re: Markets to tank Monday?

50/50 huh? Wow.

Count me in!

That made me laugh out loud.

[Jim Nickerson]

Re: Markets to tank Monday?

Lw and flintlock, you guys are quick readers.

To me the importance of Grantham's opinions, if one believes he probably knows more than the three of us combined, is that it should open the eyes of there possibly be no tanking of the market today (and there wasn't) or maybe not even for perhaps 6 months 50%; on the other hand somewhere in here or in the next six months it may tank--50%.

I still don't know of too many people that are stating they are outright short overall on the US equities, but then I don't read everything.

[ST]

Re: Markets to tank Monday?

A notable Grantham excerpt from that issue:

My Part in the Debate

I will try to make the case that our economy has a painfully
overdeveloped financial sector.

Let’s start with the Investment Industry component. It
is so obvious in this business that it’s a zero sum game.
We collectively add nothing but costs. We produce no
widgets; we merely shuffle the existing value of all stocks
and all bonds in a cosmic poker game. At the end of each
year, the investment community is behind the markets in
total by about 1% costs and individuals by 2%.

And the costs have steadily grown. As our industry’s
assets grew tenfold from 1989 to 2007, despite huge
economics of scale, the fees per dollar also grew. There
was no fee competition, contrary to theory. Why?

a. Agency problems – we manage the other guy’s money,

and

b. Asymmetric information – the agent has much more
information than the client.

Clients can’t easily distinguish talent from luck or risk
taking. It’s an unfair contest, nothing like the fair fi ght
assumed by standard Economics. As we add new products,
options, futures, CDOs, hedge funds, and private equity,
aggregate fees per dollar rise. As the layers of fees and
layers of agents increase, so too products become more
complicated and opaque, causing clients to need us more.
As total fees in the past grew by 0.5%, we agents basically
reached into the clients’ balance sheets, snatched the 0.5%,
and turned it into income and GDP. Magic! But in doing
so, we lowered the savings and investment rate by 0.5%.
So, we got a short-term GDP kick at the expense of lower
long-term growth.

This is true with the whole financial system. Let us say
that by 1965 – the middle of one of the best decades in U.S.
history – we had perfectly adequate financial services. Of
course, adequate tools are vital. That is not the issue here.
We’re debating the razzmatazz of the last 10 to 15 years.
Finance was 3% of GDP in 1965; now it is 7.5%. This
is an extra 4.5% load that the real economy carries. The
financial system is overfeeding on and slowing down the
real economy. It is like running with a large, heavy, and
growing bloodsucker on your back. It slows you down.

For 100 years the GDP Battleship grew at 3.5%. (Even
the Great Depression did not change that trend.) But after
1965 the GDP growth rate ex-finance fell to 3.2% a year.
After 1982 it fell to 3.1%, and after 2000 to 2.5%, with
all of these measurements to the end of 2007 before the
current crisis.

From society’s point of view, this additional 4.5% burden
works like looting or an earthquake. Both increase short term
GDP through replacement effect, but chew up capital.
All of the extra financial workers might as well be retirees
or children, in that they are supported by the rest of the
workforce, but they are much, much more expensive.
Economists have not studied the optimal size for finance.
Indeed, a leading finance journal recently rejected a paper
on this topic, saying “Finance cannot comment on social
utility.” That is perhaps why it has so little!

The underlying problem in the recent crisis was a
touching faith in capitalism. This faith was based on 50
years of a dominant economic theory that was shockingly
not based on facts but rather on unproven assumptions:
rational expectations and the Efficient Market Hypothesis
(EMH). Believe them and you don’t have to regulate new
instruments or, indeed, anything. Capitalism will look
after itself. So Greenspan, Rubin, Summers, and Levitt of
the SEC could beat back Brooksley Born when she dared
to suggest regulating the new instruments.

But as Keynes knew by 1934, markets are behavioral
jungles wracked by changing animal spirits that can mock
the best laid plans. It is a world of agency problems and
the “beauty contest.” The EMH has proven to be the most
wildly mis-specified theory in the history of finance, and
the most expensive. Without it, we would have recognized
market dysfunctionality and instituted more controls to
help limit the wild expansion of the financial business. We
might easily have steered clear of the three-sigma (100-
year) bubbles in tech and U.S. housing that led to our
present crisis. We might not even be debating this topic.
With perfect timing, my friend and former partner, Paul
Woolley, started a center for the study of “Capital Market
Dysfunctionality” at the London School of Economics.
They have recently concluded in academese, with lots of
math, that the growth of the financial world has become
a rogue element, and that the overmatched clients have
allowed the agents to move toward accruing all the rents
or benefits of new financial instruments.

One-minute Summary
I will try to make the case that our economy has a painfully
overdeveloped financial sector.

1) Beware the financial-industrial complex: they are
eating your lunch. (And to be honest, I’ve eaten more
than my fair share. It was a good lunch.)

2) Do not underestimate the scale of the disaster caused
by the fancy new instruments combined with the belief
in market efficiency. It was cosmic and may indeed
not be over yet. There was such loss of confidence
that, left to our own devices – real capitalism – more
than Citi and Bank of America would have failed.
This was a real run on the banks; Morgan Stanley and
dozens of other banks would almost certainly have
gone quickly, perhaps even Goldman Sachs (leaving
us at the mercy of a truly giant J.P. Morgan?).

3) The client world pays up precisely in proportion to
how bamboozled it is by unnecessary complexity and
this, among other negatives, is what the fancy new
instruments were offering: confusion, doubt, and
bamboozlement.

4) As for our opponents: academics so badly want their
theories to be right that they assume them to be so,
and with no proof. They assume not only that market
participants are efficient and well-informed, but also
that they are good and worthy citizens. But they’re
all self-serving, and many are slightly wicked. As for
mutual funds: they need complexity coupled with
a client’s lack of confidence, or more clients would
invest on their own. So, for them, the status quo is
just fi ne. Finally, I urge you to vote the spirit of this
issue and not the letter of the rather badly worded
proposition.

PS: I would have mentioned Paul Volcker’s opinion that
the only financial innovation useful to the country in the
last 20 years is the ATM, but at the time of this debate he
hadn’t made that compelling point.

[charliebrown]

Re: Markets to tank Monday?

OK, what about China? Or is this a different thread?

China is now down roughly 18% from the peak. Recent days have seen 2 - 3% losses. China lead the way out of the equity sell off, low was hit in October of 2008. China was seen as the hope of pulling the world economy out this recession. Will China lead the next leg down?

I sold half of my postion today, to lock in a profit. Long term trend is still intact but getting weak.

[LargoWinch]

Re: Markets to tank Monday?

Lw and flintlock, you guys are quick readers.

To me the importance of Grantham's opinions, if one believes he probably knows more than the three of us combined, is that it should open the eyes of there possibly be no tanking of the market today (and there wasn't) or maybe not even for perhaps 6 months 50%; on the other hand somewhere in here or in the next six months it may tank--50%.

I still don't know of too many people that are stating they are outright short overall on the US equities, but then I don't read everything.

Jim, I was pulling your proverbial "leg", but forgot my little ";)" or even better ":p".

You know too well, I would prefer follow your calls anyday before mine, let alone Grantham's.