Tag Archives: depression

Keynes vs. Hayek, Round 2

Posted on by
Reply

I like how at the end Keynes is pulled up to his feet and declared the victor (no matter how obvious a failure, the corrupt system keeps applying his theories). Then the Washington mandarins, Wall Street bigwigs and press all gather around him while the nerds come to congratulate Hayek. The press often implies that the Wall Street crowd loves Hayek and laissez-faire (“unrestrained markets” and all that), when in reality the moneyed political players support intervention since they are successful rent seekers and bailout recipients.

The key point that well-intentioned supporters of government (like most everyone in Europe) often miss is summed up in this phrase from Hayek:

“With political incentives, discretion’s a joke.
Those dials they’re twisting, just mirrors and smoke.”

-

For those who haven’t seen it, this is the first video:

-

And the real Hayek on Keynes:

Thoughts on P3 and the secular bear

Posted on by
5

Hi guys.

Sorry for being so quiet on the blog lately. I’ve been busy trying to take my mining site out of beta among other things, and not following the day-to-day action much.

In response to comments about Elliott Wave and EWI, I actually don’t read EWI anymore except for Prechter’s monthly essays. I don’t see that the short-term stuff offers much of an edge over just following basic technical and sentiment indicators. Trying to force the market into fitting a specific pattern has just not been a good way to go, but the intermediate-term technical indicators have been doing quite well.

For instance, put:call, vix and weakening RSI have nailed the tops in November, January and March-April. The last was just screaming SELL as loud as the market ever does, and we got the follow through we deserved.

Short-term oversold conditions in late May and July were marked by the VIX and weakening selling as indicated by RSI.  Constantly anticipating a hard 1930-style P3 is just a bad way to play. Of course you don’t want to be caught long without protection at any point in this environment, credit crunch and depression that it is, but there is a tremendous degree of speculative enthusiasm and stubborn optimism among traders that is making this a long slog down.

Of course I think this is a secular bear market that won’t end until there is real value restored in stocks and real estate, which means solid after-tax yields high enough to compensate scared investors for the risk of further capital losses. But there is no reason why we have to get there in 3-4 years — this could go more like ’66-’82 in the US or post-’89 in Japan.

That said, we have not had full-on recognition of the extent of the economic problems within the financial community, with most analysts and economists clinging to the hope of Keynesianism. Trading horizons are so short-term among the big players that these considerations hardly matter. The technicals are all that drive the machines and guys like Paul Jones, Cohen, etc.

This is a deflation though, no doubt at all. Credit is contracting hard, and prices of everything not directly traded as futures or set by the government are falling. This includes private sector wages, groceries, capital goods, etc. In this environment we do not have the same set-up as for the rolling sideways market of ’66-’82 (only in nominal terms was that a sideways market – in real terms it was a 75% loss). The ’30s and Japan are still the corollaries to watch.

Also remember that the public sector has gotten itself into huge trouble, which is just starting to take effect with austerity measures in Europe and pending bankruptcies in US municipalities. US states are also broke and will have to finally deal with their union problems. Shrinking government worker salaries, if not payrolls, will put further pressure on demand for goods and leave banks with more bad loans. None of this is inflationary. Remember, in the ’70s private debt was low and growing, and companies were increasing their revenues and profits so that by ’82 Dow 1000 was a bargain. Now we’re in a generational de-leveraging, frugality-restoring mode, Kondratieff winter for lack of a better term.

The last couple of years should give deflationists confidence that we’re able to correctly assess the situation. Where is that dollar crash? What about $200 oil? What, in 2010 China still owns trillions in treasuries? Bernanke has tripled the US base money supply but a dozen eggs is still $1.50 and the long bond yields 4%? Obama spent how much, and unemployment is 17% ?

We make it way too hard on ourselves trying to get every squiggle right. Stocks and real estate are expensive and cash is still the way to go. Gold is still increasing in purchasing power. This is not bizarro world, it’s so far just a very big dead cat bounce after a 60% crash. US stocks are about where they were 12 months ago, and other markets are much lower, so clearly momentum is broken and bears should be confident so long as they’re not over-levered.

-

PS- In response to Roger, upon first glance VXX looks like a fine vehicle for trading volatility. It seems to have tracked the VIX without much error since launch. Of course VIX futures and long-term OTM puts are also fine for going long vol.

Not much between here and Dow 8500

Posted on by
Reply

Many of the world’s stock markets have already retraced large portions of the entire rally from the 2009 lows, but US equities have a long way to go before they give traders a scare. Judging from the sanguine attitudes expressed by various managers on Bloomberg TV, the majority remains firmly convinced that the lows are in and that any sell-off is just a healthy correction on the way to new all-time highs. This is exactly the same attitude expressed from late 2007 to mid-2008 before the crash got underway in force.

Stockcharts.com

Since we are still in the early phase of the credit deflation and most people remain unconvinced of its magnitude and implications, this next decline in asset prices could be very swift and deep, driven by the panic of recognition. Technical support has already been taken out, and dip buyers will be less eager, since they have seen that stocks can indeed crash. We could see an unrelenting slide like the two years from April 1930 to July 1932.

There won’t be another bounce of the magnitude we’ve just seen until real value is restored by attractive dividend yields. A 7% yield on today’s dividends would put the S&P 500 at 350 or the Dow under 4000, but this assumes dividends won’t be cut and that the recent years of extreme overvaluation won’t be matched by an era of extremely low valuations as the culture of financial speculation dies off.

Mish in the morning (audio)

Posted on by
Reply

Here’s a wide-ranging interview of Mish Shedlock on King World News.

A few take-aways:

Even if the US economy adds a steady 100k jobs a month, unemployment will be flat at 10% indefinitely.

The depression is masked by food stamps, extended unemployment benefits and a million census workers.

The best thing for underwater homeowners is often to just stop paying the mortgage — odds are you can stay in your house for ages while saving up to rent the equivalent for less than the monthly mortgage payment.

Chris Christie of NJ is the only decent governor in the US. He’s cutting spending in a real way, taking on the unions and municipalities and cutting programs.

If consumer spending is really up, sales tax receipts should be up, but they are not, even though many states have raised their rates. Same store sales are only up because stores are closing, driving more business to those that remain. Those that are closed aren’t counted.

-

There’s much more on Greece, Iceland, unions, pensions and deflation.

The best idea out of Washington in ages.

Posted on by
Reply

Maybe legislators are finally ditching Keynesianism for some real solutions, while acknowledging the reality of what is likely to be a decades-long slump:

WASHINGTON—In a bold new measure intended to address unemployment among young professionals, lawmakers from across the political spectrum agreed on legislation Tuesday to subsidize the cryogenic freezing of recent college graduates until the job market recovers.

The bill, expected to swiftly pass in both houses, would facilitate the subzero preservation of any graduate of a two- or four-year educational institution. Sponsors of the initiative said that with the national unemployment rate at just under 10 percent, it only made sense for young job-seekers to temporarily enter a state of supercooled stasis.

“Finding employment is extremely difficult for today’s college graduate,” Sen. Kay Bailey Hutchison (R-TX) said. “Our current economy offers few options for the millions of young men and women desperate to join the workforce.”

“Were we to freeze these graduates at the height of vigor and ambition, however, there’s a chance we could revive them during a more prosperous time,” Hutchinson continued. “When the economy finally bounces back—10, 20, even 30 years from now—we’ll have an entire generation thawed out and ready to contribute.”

Continued…

Census employment nonsense

Posted on by
Reply

Bloomberg is reporting that some lame-brain economists are excited about the employment boost of the 2010 census:

Jan. 8 (Bloomberg) — The 2010 census couldn’t have come at a better time for the U.S. economy.

The government will hire about 1.2 million temporary workers in the first half of the year to administer the decennial population count, possibly providing a bridge to gains in private employment later in the year.

The surge will probably dwarf any hiring by private employers early in 2010 as companies delay adding staff until they are convinced the economic recovery will be sustained. Money earned by the clipboard-toting workers going door-to-door to verify the government population survey is likely to be spent, giving the economy an extra lift.

“It’s a short-term stimulus program in which the government’s injecting money into the economy through additional paychecks,” said Dean Maki, chief U.S. economist at Barclays Capital Inc. in New York, who projects that 2.5 million more Americans will be working at the end of the year. “This will support consumer income during those months.”

(cont…) The stimulus bill President Barack Obama signed in February and additional funding by Congress provided enough money to hire 1.4 million Americans in total for the census, almost three times as many as in 2000. About 160,000 were already employed last year to do preliminary work.

The Census Bureau anticipates hiring about 181,000 workers from January through March and about 971,000 in the following three months.

First Five Months

The economy may add about 700,000 jobs in May alone, mostly because of the census, Gault said. Even Maki’s more optimistic assessment of the employment outlook means the U.S. may take years to recover the 7.2 million jobs lost since the recession began in December 2007.

“The bulk of these employees are from the low end of the income distribution; they are cash-constrained,” said Neal Soss, chief economist at Credit Suisse in New York who forecasts the economy will add a little more than 1 million jobs this year. “Having a paycheck is allowing them to spend in a way that they wouldn’t otherwise.”

Hiring for the census may also help lower the unemployment rate early this year, economists said, though the influence will be less than in payrolls. For example, some of the people hired may have other part-time jobs, limiting the impact on joblessness.

-

This is typical mainstream Keynesian hogwash, which always supports government spending, no matter how useless or counterproductive. The less a corrupt government knows about the people who live under its rule, the better. Aside from that, in hard times wasteful programs like the Census should be completely dispensed with or postponed. For goodness’ sake, I bet a private firm could assemble better data for 1/100th the cost (if they haven’t already done so and sold it at a profit).

Keynesians never consider where the capital comes from for all of this useless employment. Capital can’t be created at will by bureaucrats. It has to be produced through intelligently orchestrated labor and saved by not consuming the fruits of that labor. This is what is stolen by the government when it taxes, prints money or issues debt to “create jobs.” It drains the economy of the savings needed to create real jobs and keeps us from building up the capital we need to grow out of depressions. This is what put the Great in the depression of the 1930s.

(Edit: checking Mish just now, I see that he posted on this same topic today)

A decade without job gains

Posted on by
Reply

From Chart of the Day:

-

What was that about credit being the lifeblood of the economy? Well, the 2000s saw the greatest bubble ever, and all it got us was richer bankers. Robert Prechter often says that the depression started with the bursting of the dot-com bubble and deflation of social mood from the euphoria of the late ’90s. This chart, like the Dow:Gold ratio (down to 9 today from a peak of 44), give you and idea of what he’s talking about. After all, there was no net growth last decade — it was all a sham.

Kevin Depew interviews Robert Prechter

Posted on by
2

This is from a month ago, but it is a wide-ranging discussion from a long-term point of view. Depew is a very sharp guy who saw deflation coming himself, so this is one of the best Prechter interviews I’ve seen.


-

-

“Yes, a depression is a period that’s difficult for many many people, but it’s not the apocalypse, it’s not the end of the world. It’s just a tough period that’s gonna last, you know, five to seven years and then we’ll come out the other side.”

For a speculator, “there’s no better time than a bear market — they’re fast, they’re violent, they’re great.”

Doug Casey and Tom Woods on government

Posted on by
2

Video link from Lewrockwell.com

Here’s an excerpt from The Law, by Frederic Bastiat, a French classical liberal (today we would say libertarian) economist:

A Fatal Tendency of Mankind

Self-preservation and self-development are common aspirations among all people. And if everyone enjoyed the unrestricted use of his faculties and the free disposition of the fruits of his labor, social progress would be ceaseless, uninterrupted, and unfailing.

But there is also another tendency that is common among people. When they can, they wish to live and prosper at the expense of others. This is no rash accusation. Nor does it come from a gloomy and uncharitable spirit. The annals of history bear witness to the truth of it: the incessant wars, mass migrations, religious persecutions, universal slavery, dishonesty in commerce, and monopolies. This fatal desire has its origin in the very nature of man — in that primitive, universal, and insuppressible instinct that impels him to satisfy his desires with the least possible pain.

The bears capitulate

Posted on by
28

I usually am not so sure about things, but the markets are looking very stretched at the moment. Sentiment among bears is of capitulation. Everywhere I go on the blogosphere, I see posts and comments about how the market is rigged by Goldman or repo desks or the PPT, and that trading against robots is a no-win situation. I hear that fundamentals don’t matter, that the bulls are in control, that the transports have confirmed the industrials, that China will drive copper the moon and still buy it all, yada, yada, yada. The upshot is that traders seem to think that the bears will be totally crushed no matter what.

Well, what exactly have the bears experienced during the 50% rally from March 6 to today? I’d say that is about as severe a drubbing as you can take in the market, the polar opposite of what the bulls got last autumn and winter. It is time for a reversal, and not a small one. This is Spring 1930 all over again:

Above chart of the Dow Industrials from Yahoo!

-

Everybody has seen these before, but here are a few quotes from that post-crash reprieve:

December 28, 1929
“Maintenance of a general high level of business in the United States during December was reviewed today by Robert P. Lamont, Secretary of Commerce, as an indication that American industry had reached a point where a break in New York stock prices does not necessarily mean a national depression.” — Associated Press dispatch.

January 1, 1930

RESERVE BANK AREAS FORECAST NEW YEAR
Despite the obvious slackening of the pace of business at the close of the year, leaders in banking and industry throughout the country maintain an optimistic attitude toward the prospects for 1930.
January 13, 1930
“Reports to the Department of Commerce indicate that business is in a satisfactory condition, Secretary Lamont said today.” – News item.

January 21, 1930
“Definite signs that business and industry have turned the corner from the temporary period of emergency that followed deflation of the speculative market were seen today by President Hoover. The President said the reports to the Cabinet showed the tide of employment had changed in the right direction.” – News dispatch from Washington.

January 24, 1930
“Trade recovery now complete President told. Business survey conference reports industry has progressed by own power. No Stimulants Needed! Progress in all lines by the early spring forecast.” – New York Herald Tribune.

March 8, 1930
“President Hoover predicted today that the worst effect of the crash upon unemployment will have been passed during the next sixty days.” – Washington Dispatch.

May 1, 1930
“While the crash only took place six months ago, I am convinced we have now passed the worst and with continued unity of effort we shall rapidly recover. There is one certainty of the future of a people of the resources, intelligence and character of the people of the United States – that is, prosperity.” – President Hoover

June 29, 1930
“The worst is over without a doubt.” – James J. Davis, Secretary of Labor.

July 6, 1930

‘BUSINESS CYCLE’ SEEN AT NEW PHASE; Bankers Hold Downward Trend in Markets Indicates Recovery Is Near. DENY ANALOGY TO 1920-21 Economists Point to Superior Credit Conditions Now, Holding Easy Money Points to Revival.

August 29, 1930
“American labor may now look to the future with confidence.” – James J. Davis, Secretary of Labor.

September 12, 1930
“We have hit bottom and are on the upswing.” – James J. Davis, Secretary of Labor.

-

The bears were down but not out in June, and quite a few armchair traders jumped in to have another go at the fast money they found when they jumped on board the sell train in October and February. Well, 100 points in about 12 trading days left them flabbergasted, and toasted more than a couple of levered accounts. When traders are flabbergasted, they tend blame manipulation, and concluding the game is rigged, all but the gamblers bow out.

Well, this trader is not flummoxed. I’ll freely admit traded this rally poorly by thinking I should only buy at 620 and then not jumping aboard when we took off on huge breadth and volume from 666, and then by shorting high-flying junk and starting to buy my long term puts too soon, but I can chalk those up as trading school tuition fees. Nothing that has happened this year should surprise anyone these days, when it is so easy to look at 80 years of daily Dow closes on Yahoo. If this is 1988 and not 1930 I will eat the Tom McKans my wife hates so much and take up a respectable profession like welding.

Speaking of 1987 and expectations for a depression, Trader, the cult documentary on Paul Tudor Jones, is finally up on Youtube. People were recently paying $1000 bucks for this thing on VHS. I can’t say that it is worth that kind of dough, but it is definitely worth an hour of your time to watch one of the contemporary greats in his element as he trades what he thinks is the analogue of 1928-29.

UPDATE: Trader is gone. The producer had it taken down. But, it is still out there if you know where to look… a certain renegade financial site has posted a link. I’ll leave it up to readers to figure out which.