I wasn't too interested in early commentary today as for all intents and purposes, today is an almost irrelevant day except for the fact that China is back after last week's holiday due to the Chinese Lunar New Year that saw China out of the market all last week, I believe it's the year of the snake.
While I find things like the StockTrader's Almanac and such historical correlations interesting, for the most part it stops there. I recall quite a bit of bad press for the Year of the snake, for instance, according to Capital-IQ, of the 12 Lunar New Years, the year of the snake is the only one that the S&P has a losing record.
So is this some tin-foil hat conspiracy theory or is there something to a 66% losing track record?
So far China's Ministry of Commerce said that spending during the week long break grew at the slowest pace since 2009; well of course that's only one data point and in my view, far, far removed from Technical Analysis, but I do wonder about mass psychology? After all, there would be no Stock Trader's Almanac if there weren't these incredible similarities that are useful enough that they are worth noting, which brings me to the question of a self-fulfilling prophecy in the most populace nation on the planet?
I don't mind people thinking whatever they like about what I'm about to say, but I do believe 100% that we absolutely have control of events via our perceptions. Most of you know I'm not shy about sharing my personal experiences, probably because I feel like so many of you are as close as family or really great friends so I'll offer a couple of examples that I have witnessed in my own life and if it has no practical use for you in the market, perhaps it will be of use to you in a much more important way, your health.
Example #1 I had a grandmother who was teased, harassed or whatever you might call it by my grandfather, he told her nearly every single day, "Louis, when I die and they autopsy me, they're going to find a brain tumor and you are giving it to me".
At the age of 55, guess what my grandmother died of? Yes, of all the things it could have been it was none other than a brain tumor.
Example #2 Several years back some of you remember we had a small family cafe, my mother worked there 7 days a week (she's incredible, one of the hardest working people I've ever seen and I'm so proud of her), but she started saying, "This place is going to give me cancer". My wife and I begged her to stop saying that as I truly believe we have some measure of control over our health through our mind/body/soul connection.
After about a year and a half we decided to sell the Cafe, and a month before we found a buyer, guess who got cancer for the first time in her life? Luckily it was removed and she's healthy to this day, but we all kind of just share silence when it comes up and have the same thought.
I have a lot more examples, but I think the point is made and there's no reason to go on and on, so is the Stock Trader's Almanac a form of self-fulfilling prophecy? Or how about the year of the snake? I wouldn't give it that much credit alone, but I do think it will have some effect.
Europe...
I wouldn't have written this bit alone if it were not for the next story being what I wrote last night about bubbles, the F_E_D and the notion of, "This time it's different".
Overnight, which is about 3 a.m. EDT as the European markets open, Germany's Central Bank, the Bundesbank (the German Central Bank has more influence inside the ECB than any other) board member Andreas Dombret said the ECB must begin to withdraw its emergency policy measures as soon as an exit is justified, and warned that leaving interest rates low for too long can fuel asset-price bubbles.
This last line is ironically exactly what most of last night's post was about in a few conversations with member's over the weekend regarding the nature of bubbles. Bubbles never seem to strike twice consecutively, for example after the Tech Bubble (which may have been the most justified bubble of all-can you imagine life now without the Internet or your smart phone?) wasn't followed up by another Tech bubble, but was followed by an out of left field "Housing Bubble". On an interesting side note, I can and have shown charts of the Home Builders under massive accumulation during the 2000 bear market, someone knew the next big things was going to be housing and they knew it years in advance.
I'd argue that we are in another bubble right now, it's less specific, it's an asset bubble fueled by the very things Dombret warned of and that's what I was pointing out last night.
We know that the market has overtaken the 2007 highs in almost every average, the market is well above the 2005 highs which was a time when the market and economy were expanding due to consumer spending (much of it from appreciating home values, but expanding nonetheless).
So when we look at the market where it is today, we have to ask the question, "Are we in an asset bubble?". The obvious answer is yes, nearly every metric proves that.
Many in the market can tell you the unemployment rate as released by the BLS, few though are aware there are 6 different categories of unemployment tracked by the BLS and the one that is the headline release is the U-3 category defined as,
" People who are without jobs and have actively looked for work within the past four weeks."
And there's the slight of hand, if you haven't looked in the last 4 weeks (as many are discouraged and have given up, but would like to work), you aren't counted as unemployed.
Even using the headline U-3 number, take a look at the employment picture since 2007...
Using the BLS's broadest measure, U-6 defined roughly as, "Part-time workers who want to work full-time, but cannot due to economic reasons ". In other words, if you would like to work a 40 hour week, but can't find a job to provide it, and you work for even 1 hour a week, you are in the U-6 category which also includes U-3 through U-5.
The U-6 rate is at about 14.4% while U-3 is roughly at 7.9, however... as Shadow Government Statistics points out, the rate is likely much higher as they track the rate with the additional, "Estimated long term discouraged workers who were defined out of official existence in 1994."
Additionally, just like nothing in the market is static, it's the same for statistics and since 2007 the US has added 16 million people to the population...
What does this mean? It's another statistical gimmick to make the unemployment rate look better than it is...
I'm not going to get in to all of the economy charts, but I think we can take the GDP trend as a proxy as well as the employment picture.
The plain, simple and obvious answer...
F_E_D assets ince 2007 in billions.
While many things about the situation since 2007 are new territory, there are some old familiar themes playing out in this cycle that may help you understand the market moving forward and the economy, one thing I found interesting was the announcement of QE3 didn't spark a rally, it seems much of it was priced in before hand, but as you'll se there are additional factors in play that make every dollar of new QE less effective than previous Easing cycles.
I have been asked by friends and family if the 10, 20 and 30 year bonds they bought and still hold will see a default, my answer is, "Not likely", as a practitioner of Keynesian economics, the US has no gold standard, nothing backing up the value of the $USD except, "The Full Faith and Credit of the United States", a default would be devastating, but that doesn't mean those investments were wise or will even break even. First, those investments not only need to keep up with taxes and normal inflation, they need to survive the debasement of the Dollar. Say your Aunt Mildred bought $5000 worth of treasuries 30 years ago, the government was figured out a simple way to make the investment whole, but still rob the bank, debasement of the currency. Putting the interest aside because I don't think it can compare, look at it this way. The first house I bought had neighbors who had been there for well over 30 years, while we payed $95k for the house, they had bought the same homes 30 years ago for $3500 to $5000. When your Aunt bought those bonds, they could have bought a small, brand new house. Because of dollar debasement (even more than inflation), what can she do with the $5,000 paid back at maturity? She couldn't even use it as a down payment, but 30 years ago that money was worth a lot to the government, today they get to pay it back at a value that is near worthless; this is why I say the interest income is almost a moot point when taking this big of a loss in purchasing power.
So, "No, I don't think the US will default as it's reputation is the only thing backing the debt, but they've worked out how to pay it back at near worthless values".
Where are we in the cycle?
1) When massive private and public sector debts result in a credit collapse and recession, the efforts to pare down the debt is deflationary. I think the housing bubble brought us to the credit collapse and QE brought us to the deflationary stage, at least as the value of government debt/$USDs go.
2) Financial institutions are willing to lend to only the strongest borrowers…This is called a “liquidity trap” and it is very difficult to extricate from. I think we've already seen several stages of this.
Now we can get some idea of where we are in this cycle and this weekend's dealings with the Japanese at the G20 are a perfect milestone on this chart's cycle.
As mentioned last night, the race to the bottom in devaluation of a nation's currency as we are seeing right now, is a form of trade war, so what comes next, the actual trade wars and Protectionism has already been noted in the Euro-zone, what is supposed to be a free trade zone has already seen border controls put in place, most of it having to do with labor thus far, but just wait. When we pass below the dotted line is when deflation sets in and economic pain becomes unbearable. Several EU nations are a bit further down the line here, but it is a path that has been set long before the credit implosion even began.
This is in part why the F_E_D's efforts to do more will accomplish less and F_O_M_C members are already aware of that as was clearly stated in the last minutes released, this week we will see the most current minutes. Members are realizing that they are at the point where additional asset purchases have less and less of an effect, while the build up that must be unwound through the normalization of policy is now taking on excessively dangerous levels of balance sheet expansion that will not produce more pain when policy is normalized than gain in the present environment. In essence, the payoff now of policy accommodation is not equal to the pain in the future as policy is normalized, this is why F_O_M_C members discussed this very topic in the minutes from the previous meeting and discussed the benefit vs the cost as well as going so far as to look at the option of ending the asset purchases sooner and making them smaller.
This was all becoming plainly evident on Sept. 13, 2012 when the F_O_M_C started to move from date guidance to the much less predictable "Economic Conditions" policy adjustment, it introduced uncertainty and that was the start of what thus far culminated in the last release of the minutes in which they were talking about the benefits of QE vs the costs.
Without getting in to all the specifics which are what I would call the , "This time is different" rationalizations, just think back to the market in 2005 or so, everything was humming along, the general public wasn't aware of any major emergencies unfolding, things were good and the SPX was in the 1200 area, now consider the economy not just in the US, but pretty much worldwide and remember the SPX is above 1500, just from a common sense point of view, does that make sense?
I know why we are here, I know what all the, "This time its different" reasonings are, but for over 400 years of bubbles, every one had a "This time it's different" and it seemed reasonable, it held water for a while, until it didn't.
