Crash Comparison 2009/12/30

This was looking way too positive for my taste, but extending it about two trading months makes it look scary again. To be clear, however, the predictive value at this point is very low.


Socionomics Watch—Finance is the Enemy

The Public's New Fear of Finance
Too many of the leaders of the world's largest banks, brokerage houses and other financial powerhouses don't get it.

They don't understand why the public is so angry at them and their paychecks. They cannot comprehend why elected politicians who used to court them are now so hostile. They don't see that they are widely seen as the ones who drove the world economy frighteningly close to the abyss of a second Great Depression.

Oh, they know they have a problem. They are, slowly, learning to sound grateful in public that taxpayer money was used, for good reason, to arrest the collapse of the financial system. "All banks are benefiting," says Robert Diamond, president of Barclays PLC, which didn't take government capital. They decry "excesses." But some act as if the past 18 months were a bad dream from which they have awakened; now they can go back to making money much as they did before.


Crash Comparison 2009/12/02

This isn't much of a comparison anymore...though the monthlies may still have some merit.

Forget Gold, Buy Garlic

Garlic beats gold as China's hot new asset
Shao Mingqing was a jobless young man from Shandong province with only a junior high school diploma when his luck turned around a few months ago with the skyrocketing price of garlic.

The 22-year-old Shao now drives an 180,000-yuan Toyota he bought with the money he made on the garlic market. Shao's face was lit up with joy when he talked about his recent success.

"I borrowed some money and decided to buy 100 tons of garlic at the price of 3.2 yuan per kilogram (kg) in September," Shao said. "I made a profit of 400,000 yuan from selling it at the price of 7.2 yuan a month later."
Is there a garlic bubble?
The soaring garlic prices are creating a frenzied mood among market speculators as they seek new opportunities to buy and store as much garlic as possible, betting the price will surge to a new high in coming days.

Rich coal mine bosses, according to some media reports, have also joined the garlic market, hoping to reap huge profits.

Some real estate speculators, who have earned big money in China's overheated property market, also are gambling on garlic, according to media reports.
Yes, there is a garlic bubble. The article mentions possible demand due to the health effects of garlic (garlic heavy dishes were popular during SARS) in light of H1N1 fears. But prices also fell to 0.08 yuan per kg last year, roughly the equivalent of $0.01, so farmers cut back production.

Still, I'm going to say that this is a decent indicator that China has plenty of credit.

S&P 500 Index in terms of Gold

We're back to levels seen last April. What does it mean? While I still lean towards deflation, this clearly illustrates what I'd expect to see in a high inflation environment: gold rising faster than stocks. Precious metals are the best asset to hold during hyperinflation.


It isn't the U.S. Dollar that's pushing gold higher. Maybe it's the North Koreans, who just saw their currency devalued 100:1?

Rich with gold sound bite


November Performance


Nov. %


S&P 500 TR






上海 Shanghai




Entertain. Trends



Green Dragon



Best of Funds



Pharma & Dogs



China Fund



Software Security



Yield to Me



Catch a Falling Knife




Socionomics—Social Mood Turns on Dubai

Dubai presents a crystal clear example of a change in social mood.

In Counter Trade Dubai, Bruce Krasting posts some Wall Street Journal headlines from Monday, November 23, about the Dubai debt problem. He goes on to comment:
There are dozens of examples of press reports that Dubai was in arrears for a long time. So I do not buy that this is a nexus for the market.

I think that by next week market focus will again return to those that were steering markets on Wednesday. A weak dollar, strong gold and busted monetary policy. Dubai is a side show that was aggravated by our holiday and an overreaction in Asian markets. We will revert back to the main event.
Dubai isn't a sideshow, it's a window onto the main event, the social mood.

Robert Prechter moved to 200% short on Monday, November 23.
When one goes 200% short, there is no room for error, so Prechter must have had a very, very strong belief that markets were about to turn.

The changing attitude towards Dubai is a result of the shift in social mood. The Dubai story didn't change, the social mood changed.

Elliott Wave International asks whether Dubai will cause similar effects as Lehman Brothers (I'd lean more towards Bear Stearns at the moment). That will also depend on the social mood.

Bear Stearns bankruptcy was followed by a rally into May. Fannie and Freddie's major problems sparked a small market sell-off in July 2008 (though prices started moving lower in June) and Barron's warned that bigger problems were ahead, but the market didn't crash until September.

Whether the reaction to Dubai is a short-term overreaction or a sign of a greater turn in social mood will be evident in the coming days and weeks.


OTB Portfolio Update 2009/11/20

Obama-Turbo-Bernanke Portfolio lost 1.09% today and is down 22.88% since inception. Too bad we can't add the Federal Housing Administration, FHA. That's another winner, as per this NYTimes story, which features this quote:
“It was kind of crazy we could get this big a loan,” said Mr. Rowland, 27. “If a government official came out here, I would slap him a high-five.”

Crash Comparison Update 2009/11/20

Protectionism is expensive

Block on Minsheng deal costs US $1.7bn
US authorities blocked Minsheng, the Chinese bank, from acquiring a Californian lender in a deal that could have saved almost $300m of taxpayers’ money and $1.4bn from an industry insurance fund, say people familiar with the matter.

Minsheng had asked the Federal Reserve for permission to acquire UCB, a San Francisco bank, but the application was not approved before the struggling US lender had to be seized two weeks ago by the Federal Deposit Insurance Corporation.
The U.S. and China signed a memorandum of understanding to allow increased Chinese investment in U.S. banks, but I'll believe it when I see it.


Socionomics Watch—Women's Eyes

I'm unsure what this represents socionomically, but it seems worth noting.
See Eyes Wide Cut, for a series of book covers with women in various poses, all of which cut off just above the nose...
From Eyes Left, the article linked to in the above post:
And knowing there are platoons of marketers who focus group this kind of stuff—novel titles, and the color and texture of book jackets—I’m sure this fad is the most intentional of things. That is, it’s not why I myself would do it this way: because eyes are hard to draw. No. They must be on to something; this must be a good idea, sales-wise.

But how come? I decided that eyes give too much away; they’re too committal. These books all seem intended to reserve an air of mystery, of exoticism: “if you want to know me, you must pay twenty-five dollars for the hardcover, and still you’ll only scratch the surface.”

Has there been some Madison Avenue calculus that determined women who can afford hard covers like faces, but only at a certain reserve, with a certain psychological density implied? (there are, of course, covers depicting full faces, but those must target a different demographic).

Too, there’s a disconcerting impression caused by these headless—or at least crownless—women of Sleepy Hollow; something a little threatening and kinda spooky. Which implies the converse: that eyes, when shown, are comforting, humanizing. Even when they menace, they assure us that it’s at least something mortal we’re dealing with—not something less or something more.
I note that more men sported beards during the last bear market, the 1970s, and beards suggest less openness because the face is hidden.

Given the subject of fiction and women, there's also the disturbing trend...
Were-seal power!
The best part is the titles. The Demon's Librarian. Submission. Sinful Treats. Seducing the Wolf. I wonder why we never hear pastors or anti-porn political activists inveighing against the family-destroying problem of textual porn? Say what you will about the male fixation on visual stimulus, but you have to admit that it seldom involves the seduction of forest creatures.
Romance novel heroes:
Bull market: Fabio.
Bear market: Were-seals and vampires.


Deflation, Chinese yuan, gold and other connections

I've been busy lately and haven't had as much time to post, but the financial markets continue to behave in a manner that has me planning rather than acting.

If you read nothing else, check out Hugh Hendry's latest letter to investors. He's still in the deflation camp and he raises some interesting points, such as the under-ownership of U.S. Treasuries by Americans, financial institutions and individuals. He compares it to Japan, which saw government debt ownership increase following the 1989 asset bubble peak.

Also see this from ZeroHedge, whither depegging. It's a good summation of the Chinese point of view on yuan revaluation and why one shouldn't expect it any time soon. And on that score, the China Banking Regulatory Commission (CBRC) Chairman Liu criticized U.S. government policy for creating new asset bubbles and following in the steps of Japan.

The yuan could be the critical currnecy. As the "whither depegging" article discusses, if the yuan started appreciating now it could cause an acceleration away from the U.S. dollar. That would cause gold and other commodities to gain and give the Federal Reserve a huge headache. Perhaps a terminal aneurysm.

Also see Mish Shedlock on unemployment "Unemployment Projections Through 2020 - It Looks Grim" and an FHA bailout.


Crash Comparison Update 2009/11/13

At first, it looked like November was setting a new pattern, but now it looks like it might be converging with the September and October pattern.

OTB Portfolio Update 2009/11/13

OTB had a mild 0.75% drop today, bringing the return since inception to -23.29%.
Fannie Mae and Freddie Mac have caused the bulk of the losses, down 45.95% and 44.33%, respectively, since inception. These government run companies are really sucking wind.


SPDR S&P 500 in terms of SPDR Gold Shares

How does the rally look?

Real estate bubble in China?

Here's a look at Ordos in Inner Mongolia.

Socionomics Watch—Race relations

Prof busted in Columbia gal 'punch'
A prominent Columbia architecture professor punched a female university employee in the face at a Harlem bar during a heated argument about race relations, cops said yesterday.
Negative social mood on the rise.


A little tariff here, a little tariff there...

China brands US ‘protectionist’
“China resolutely opposes such protectionist practices and will take steps to protect the interests of our domestic industries,” Yao Jian, ministry spokesman, said on its website.

“The US should give objective consideration to the fact that the fundamental problem of the US industries in question is the fall of demand brought about by the financial crisis.”

The decision by the US Commerce Department, which imposed tariffs of up to 99 per cent on some Chinese steel pipes, follows a move earlier in the week by the US, European Union and Mexico to file a formal complaint at the World Trade Organisation against Beijing’s restrictions on exports of specialised raw materials. Last month the Obama administration levied 35 per cent tariffs on tyres made in China.

In response, the Chinese have opened probes into US exports of poultry on grounds of safety and into cars and car parts because of the state aid those industries have received.
Protectionism is growing and it will continue to grow. This is still in the early stages.



Mr. Practical asks a question...

Strange Days
What if the government/Fed realized the most efficient way right now to "print" dollars and "reflate" the economy was to get stock prices up? What better way to do that than print dollars to buy stocks?

There's ancillary evidence that stocks are acting "artificial". Stocks aren't only climbing a wall of worry, they're scaling the Mt. Everest of bad fundamentals. Tick data is extreme, especially when the stock market is down. We constantly see 1000+ tick prints when stocks are down; this is very strange indeed. Volumes are down at least 20% from normal levels (and much more if you discount for high-frequency trading), making it easier to get stocks up.

Under TARP, the fine print allows dealers to REPO stocks to the Fed as collateral (holy cow is right).

What if there were an arrangement where large dealers buy stocks and stock futures through the day and REPO them to the Fed at the high closing prices? The dealer would book the profits derived from the difference at no risk.

If you look at the trading patterns of the largest dealers, one in particular lost money trading in only one day last quarter. Statistically that's like finding a needle at the bottom of the ocean.

Crash Comparison 2009/11/06

OTB Portfolio Update 2009/11/06

AIG and Fannie Mae (FNM) fell 9.7% and 7.1%, respectively, today.
The portfolio lost 3.97% and is down 23.35% since inception.


Gold hits new high, dollar up

When gold moves higher along with the U.S. dollar, that means its moving higher in just about every currency in the world. Gold peaked at 780 euros per ounce earlier this year, as the strong rally in the U.S. dollar lifted the price of gold in euros. Gold is above the 730 euro level today, placing it about 6% away from a new all time high. Note that can come via a combination of a dollar rally plus a move in the gold price. At this moment, gold is up 2.4% in terms of USD. In terms of euros, gold is up 3%. Below is GLD divided by FXE, to show this move.

Below are gold in the yen and Australian dollar, as measured by their respective ETFs. The AUD chart looks particularly good.


Is Japan the short of the Century?

Several gurus have called the U.S. Treasury the short of the Century, but Japan is in a far worse position. See It is Japan we should be worrying about, not America
The IMF expects Japan's gross public debt to reach 218pc of gross domestic product (GDP) this year, 227pc next year, and 246pc by 2014. This has been manageable so far only because Japanese savers have been willing – or coerced – into lending for almost nothing. The yield on 10-year government bonds has been around 1.30pc this year, though they jumped to 1.42pc last week.

"Can these benign conditions be expected to continue in the face of even-larger increases in public debt? Going forward, the markets capacity to absorb debt is likely to diminish as population ageing reduces saving," said the IMF.

The savings rate has crashed from 15pc in 1990 to near 2pc today, half America's rate. Japan's $1.5 trillion state pension fund (the world's biggest) has become a net seller of government bonds this year, as it must to meet pay-out obligations. The demographic crunch has hit. The workforce been contracting since 2005.

Japan Post Bank is balking at further additions to its $1.7 trillion holdings of state debt. The pillars of the government debt market are crumbling. Little wonder that the Ministry of Finance has begun advertising bonds in Tokyo taxis, featuring Koyuki from The Last Samurai. If Japan's bond rates rise to global levels of 3pc to 4pc, interest costs will shatter state finances.

No one knows exactly when a country tips into a debt compound trap. But Japan must be close, even allowing for the fact that liabilities of the state Loan Programme (FILP) have fallen by 40pc of GDP since 2000.

Russell 2000 continues to underperform

A comparison of iShares S&P 500 (IVV) and iShares Russell 2000 (IWM).


The only trade in existence today—short U.S. dollar

Roubini is worried about it. Mother of all carry trades faces an inevitable bust
Let us sum up: traders are borrowing at negative 20 per cent rates to invest on a highly leveraged basis on a mass of risky global assets that are rising in price due to excess liquidity and a massive carry trade. Every investor who plays this risky game looks like a genius – even if they are just riding a huge bubble financed by a large negative cost of borrowing – as the total returns have been in the 50-70 per cent range since March.

People’s sense of the value at risk (VAR) of their aggregate portfolios ought, instead, to have been increasing due to a rising correlation of the risks between different asset classes, all of which are driven by this common monetary policy and the carry trade. In effect, it has become one big common trade – you short the dollar to buy any global risky assets.
That's why I'm happy to mostly wait out this market until the bust starts rumbling...

Note that Roubini is late to this realization. Robert Prechter referred to the simultaneous rally in all assets during the 2000s as "all one market".


China's GEM market launched

ChiNext's Dazzling Debut
The average p/e for the 28 companies (diluted) is 55.7 times. Shanghai Bestway's p/e is 40 times, the lowest, while Dinghan Technology's is the highest at 82.2 times. The average P/E of 24 small and medium-sized enterprises listed on the Shenzhen Market this year is 37.68 times. Analysts believe that the high issuing P/E ratio of some companies has overdrawn the performance for the next one to two years, or even three years.

In order to prevent heavy first day speculation, the Shenzhen Exchange stipulates that if transaction prices rise or fall over 20%, trading in the stock will be temporarily suspended for 30 minutes; more than 50% fluctuation would lead to 30 minutes more trading suspension. Once prices fluctuate more than 80% , the Exchange will suspend trading the stock until 14:57, that is, three minutes before the end of the trading day.

As of the closing at noon Friday, 16 stocks had been "stir-fried" (heavily speculated) after trading resumed and suspended for the second time. Five stocks rose by more than 200%, and the rest rose by over 100%. The prices of three stocks, Ultr@power, Chase Sun, and Siasun, are over one hundred yuan, and the price of Geeya is the lowest at 35 yuan, still an increased by 211.95%.

As the marekt closed, the trading of all of 28 stocks more than doubled, ranging from 120% to 226% compared with their IPO prices.
If the Keynesians believe animal spirits are the problem with the economy, then China clearly has no problem. On the other hand, it does look a tad bubbly.

October Performance


Oct. %


S&P 500 TR






上海 Shanghai




Entertain. Trends



Green Dragon



Best of Funds



Pharma & Dogs



China Fund



Software Security



Yield to Me



Catch a Falling Knife



Going short and defensive has hurt the past couple of months, but if the market over the past six trading days is more indicative of the future, then the portfolios should begin to outperform. To give an idea of how fast performance can switch, the Best of Funds was down 4.70% versus a 0.98% gain in the S&P 500 Index in the month through Thursday, but Friday's move left the final number of down 2.89% versus down 1.86% for the S&P 500 Index. I was behind the S&P 500 Index by 5.86%, but finished behind 1.03%.

Short candidates via ETF include China, Russell 2000, real estate, emerging markets, Nasdaq, financials; while Catch a Falling Knife is loaded with retailers, consumer goods and services, solar, financials and REITs.

Crash Comparison Update 2009/10/31

September looks flat at the end due to one less trading day, not because it was a flat day in the market. I added the day to sync up the two series of data.

OTB Portfolio Update 2009/10/31

Obama, Turbo, Bernanke portfolio slides 5.80% on Friday as their attempt to get Americans to go deeper into debt to buy consumer goods seems to have hit a wall.

Portfolio now down 24.31% since inception.


Tell the Emperor What He Wants to Hear

Especially if he's really, really stupid. Right and left are slightly off in this story, if its about the U.S. The center-right and center-left support the finance industry and bailouts, whereas the far-right and far-left oppose the bailouts. Politics makes strange bedfellows, but the financial allegories all hold:
Smooth talk and convoluted solutions magically appear when a monkey in an allegorical kingdom runs a failing banana bank.

Russia wants cash for gold

Russia considering gold sale
Finance Minister Alexei Kudrin said Wednesday that Russia is considering selling gold on world markets to cash in on high prices as the government faces its first budget deficit in a decade.

Kudrin's remarks follow a report last week that the Gokhran precious metals depository was planning to sell up to 50 metric tons, or 1.6 million ounces, of gold in London by the end of the year.

With gold prices reaching record highs of over $1,000 per ounce, the sale could bring Russia some $1.7 billion.
Why isn't Russia selling U.S. dollars? Maybe they don't want to sell low...


Sing it Andy Xie

Central Banks, Arsonists and Playing with Fire
Every party ends sooner or later, and I see two scenarios for the next bust. First, every trader is borrowing dollars to buy something else. Most traders on Wall Street are Americans, British or Australians. They know the United States well. The Fed is keeping interest rates at zero, and the U.S. government is supporting a weak dollar to boost U.S. exports. You don't need to be a genius to know that the U.S. government is helping you borrow dollars for speculating in something else.

But these traders don't know much about other countries, particularly emerging economies. They go there once or twice a year, chaperoned by U.S. investment banks eager to sell something. They want to think everything other than the U.S. dollar will appreciate; Wall Street banks tell them so. Since there are so many of these traders, their predictions are self-fulfilling in the short-term. For example, since the Australian dollar has appreciated by 35 percent from the bottom, they now feel very smart while sitting on massive paper profits.

When a trade like this one becomes too crowded, a small shock is enough to trigger a hurricane. There must be massive leverage in many positions, but one just never knows where. When something happens, all these traders will run like mad for the exit, and that could lead to another crisis.

Surging oil prices could be another party crasher. This could trigger a surge in inflation expectation and crash the bond market. The resulting high bond yields might force central banks to raise interest rates to cool inflation fear. Another major downturn in asset prices would reignite fear over the balance sheets of major global financial institutions, resulting in more chaos.

Twice in recent years, oil prices surged into triple-digit territory, wreaking havoc on financial markets and the global economy. In 2006, surging oil prices toppled the U.S. property market, debunking the story that property prices never fall -- a premise upon which subprime lending was based. Oil prices fell sharply amid the subprime crisis period while the market feared collapse in demand. The Fed came to the rescue and, in summer 2007, began cutting interest rates aggressively in the name of combating the recessionary impact of the subprime crisis. Oil prices surged afterward on optimism that the Fed would rescue the economy and oil demand. It worked to offset the Fed's stimulus, accelerated the economic decline, and pulled the rug out from under the derivatives bubble. The ensuing fear of falling demand again caused oil prices to collapse.

Oil is a perfect ingredient for a bubble: Oil supplies cannot respond to a price surge quickly. It takes a long time to expand production capacity, and oil demand cannot decrease quickly due to lifestyle stickiness and production modes. Low-price sensitivities on both demand and supply sides make it an ideal product for bubble-making. When liquidity is cheap and easily obtained, oil speculators can pop up anywhere.

Oil speculators are no longer restricted to secretive hedge funds. Average Joes can buy exchange traded funds (ETFs) that let them own oil or anything else. Why not? Central banks have made clear their intentions to keep money supplies as high as possible, debasing the value of paper money to help debtors. It seems no good deed is unpunished in this world. If you speculate big, governments will offer a bailout when your bets go wrong and cut interest rates and guarantee your debts, allowing bigger bets. People who live within their means and save some for a rainy day see dreams shattered. Central banks can't wait to break their nest eggs.

It is better to be a speculator in this world. The powers that be are with you. Maybe everyone should be a hedge fund; ETFs give you this opportunity. As the masses are incentivized to avoid paper money while buying hard assets, the price of oil could surge to triple-digit territory again. Oil bubbles are easy to come and quick to go because the oxygen needed for its existence disappears after it kills other bubbles.
The boom-bust cycle, in a nut shell.

A word of caution for all would-be speculators: You'll want to run for your life as soon as the bond market takes a big fall. And the case for a double dip in 2010 is already strong. Inventory restocking and fiscal stimuli are behind the current economic recovery, and when these run out of steam next year, the odds are quite low that western consumers will take over. High unemployment rates will keep incomes too weak to support spending. And consumers are unlikely to borrow and spend again.

Many analysts argue that, as long as unemployment rates are high, more stimuli should be applied. As I have argued before, a supply-demand mismatch rather than demand weakness per se is the main reason for high unemployment. More stimuli would only trigger inflation and financial instability.

Stagflation in the 1970s discredited a generation of central bankers. They thought they could trade a bit more inflation for a lot more economic growth. Today's crisis will discredit a generation of central bankers who ignore asset inflation by sometimes trading asset inflation for a bit of economic growth. Those who play with fire often get burned, even when the arsonists don't.

Credit and deflation

Frank Shostak explains it in Does a Fall in Credit Lead to Deflation?
Note that when Joe lends his $100 to Bob via the bank, this means that Joe (via the intermediary) lends his money to Bob. On the maturity date, Bob transfers the money back to the bank and the bank in turn (after charging a fee) transfers the $100 plus interest to Joe. Observe that here money never disappears or is created; the original $100 is paid back to Joe.

Things are, however, quite different when Joe keeps the $100 in the bank warehouse or demand deposit. Remember that by keeping the money in a demand deposit, Joe is ready to employ it at any time he likes.

Now, if the bank lends Bob $50 by taking it from Joe's demand deposit, the bank will have created $50 of unbacked credit, out of "thin air." By lending $50 to Bob, the bank creates $50 of extra demand deposits. Thus, there is now $150 in demand deposits that are backed by only $100.

So in this sense, the lending here is without a lender. The intermediary, i.e., the bank, has created a mirage transaction without any proper lender. On the maturity date, when Bob repays the money to the bank, that money disappears. The money supply falls back to $100, dropping by 33%.

Hence an increase in credit out of thin air, all other things being equal, gives rise to an expansion in the money supply. A fall in credit out of thin air, all other things being equal, results in a contraction of the money supply.

So in this sense it is valid to argue that a fall in bank lending out of thin air contributes to the decline in the rate of growth of the money supply and thus to deflation.

Note that what matters here is not credit as such but credit that was created out of nothing. A fall in normal credit (i.e., credit that has an original lender) doesn't alter the money supply and hence has nothing to do with deflation. For instance, if Joe directly lent Bob his $100, when Bob repays the money we will have a fall in credit with no change in money supply.
He goes on to say that inflation of the money supply offset deflation in credit out of thin air, but that a slowing pace of money creation may lead to deflation as the decline in credit becomes the dominant factor.

Read the whole article for a good explanation of money supply.

Positive surprise for GDP

There goes that predictive model, at least based on the advance number.


WaMu had two bank runs last year

Calculated Risk posts. Report: The WaMu "Bank Run" Rumors were True

Negative GDP surprise tomorrow?

Vox Day, author of the Return of the Great Depression, discusses credit fueled growth:
It is becoming increasingly obvious that equating economic growth with GDP is not a reasonable thing to do. Since 1973, nominal U.S. GDP growth has averaged 6.8 percent. So-called “real” GDP has averaged 3 percent, but this result is achieved by applying a different measure for inflation, known as the GDP deflator, than is normally used. The GDP deflator understates the changes in price levels that are reported for the rest of the economy by the Consumer Price Index. Because the CPI-U has averaged 4.6 percent growth in the last 37 years, real GDP growth has been closer to 2.2 percent than the three percent reported by the BEA. However, correcting for inflation does not account for another contributing factor which is nearly as significant, the expansion in commercial bank loans and leases. TOTLL, as this statistic tracked on a weekly basis by the Federal Reserve is known, accounts for about half of present U.S. GDP, and more significantly, accounts for more than 100 percent of GDP growth since 1973, as it has increased at an annual rate of 8.4 percent over the same period. The chart below shows this in graphic detail; all bank credit expansion (red) and GDP growth (green) that is above the blue line indicates a real increase that is not the result of a reduction in the value of the U.S. dollar.

The 2009 decline in TOTLL, which in inflation-adjusted terms now exceeds seven percent, is a strong indication that the debt-deleveraging process expected by those who anticipate large scale economic contraction has begun. The decline is unprecedented, as there has been no annual decline of more than one percent since the data was first tracked in 1947. This is why “getting the banks lending” has been the foremost priority of the monetary authorities in the USA, UK, and other countries. It should also be kept in mind that at $6.7 trillion, TOTLL only accounts for 12.7 percent of total U.S. market credit debt.
Click through to see the chart he created. It's worth checking out some other posts as well. Anyway, keeping that last sentence in the extreme forefront of my mind, I decided to plot GDP growth against TOTLL growth, for the past two years. Keep in mind that GDP is only through July, tomorrow will see the release of advance GDP for Q3. Here's the graph:
For the record, Yahoo! currently says the market expects 3.2% GDP growth and the Briefing Forecast is for 2.5% growth. And I see Goldman Sachs just cut its forecast from 3.0% to 2.7%


Depew on debt crisis and deflation

Kevin Depew has another good article out today, on the debt crisis and the inflation/deflation debate. Five Things: The Debt Crisis Is Not a Conspiracy I suggest reading the whole thing, but here's number five, the conclusion:
5. Will it Work?

Federal Reserve Chairman Ben Bernanke has been even more explicit than Fisher, who was writing more than 70 years ago, in the types of policies he believes the Federal Reserve should pursue in attempting to reflate and, it is hoped, avoid a deflationary depression.

Unless we're intent on debating specific monetary transmission mechanisms and the intricacies of trying to force feed more credit into the system, we can leave the actual mechanics to the armchair central bankers. What's important from our standpoint is one thing: Will it work?

Looking at the market through the lens of complex systems theory, the problem is actually one of time. On short-term time scales, the Fed and Treasury think they are rock stars, "The Committee to Save the World"... indeed. But on longer-term time scales we know they have simply made the problem worse. The question, then, becomes: How much longer?

Going back to Fisher's Debt-Deflation Theory, the dollar is the real canary in the coalmine because during aggressive debt deflation the value of the dollar "swells," to use Fisher's term. And I suppose that's what keeps me up at night. When I look at the dollar with long-term DeMark indicator studies applied, they're pointing to a high probability of multi-scale alignment by the first quarter of 2010 and a major bottom for the US dollar. Currently, there's a weekly TD Buy Setup that has been perfected, so the next four weeks for the US dollar look higher, after which we need one more move lower, preferably below 72.509, for a major bottom.

If the dollar does bottom, then it will become quite clear that reflation attempts have failed, and then we face the heart of the debt deflation where the swelling of the dollar competes simultaneously with debt destruction and where debt levels increase in dollar terms faster than they can be paid down.

Make no mistake, debt-deflation will conclude with an inevitable sharp rise in inflation as monetary policies designed to battle deflation remain in place even as excessive debt is eventually destroyed, but the outlook for the dollar says that isn't today's business. Be careful which scenario you're preparing for because those who anticipate inflation before the debt-deflation has fully run its course will find themselves digging out of a deep and painful hole.
The scenario described is the one I see playing out, as of now. My opinion could change, and I won't remain stubborn in the face of a market moving against me, but I expect another major deflationary period and then, when the dust is settled, the Fed's policies will lead to much higher inflation, but by that time no one will believe it is possible.

OTB Portfolio Update 2009/10/27

Down 2.21% today, led by a 6% drop in AIG.
Overall, down 22.45% since inception, led to the downside by the 42% decline in Fannie Mae (FNM).

Crash Comparison Update 2009/10/27

Market fractals losing juice

Is there anything to this? It appears the energy in this rally is dissipating.

And now for the real economy

My previous post discussed the simulacra, the simulation of the real economy. Ambrose Evans-Pritchard picks up on Jim Rogers' agricultural theme and runs with it: Food will never be so cheap again
Barack Obama has not reversed the Bush policy on biofuels, despite food riots in a string of poor countries last year and calls for a moratorium. The subsidy of 45 cents per gallon remains.

The motive is strategic. America is weaning itself off imported energy at breakneck speed. It will not again be held hostage by oil demagogues, or humiliated by states that cannot feed themselves. Those Beijing students who laughed at US Treasury Secretary Tim Geithner may not enjoy the last laugh. The US is the agricultural superpower. Foes will discover why that matters.

The world population is adding "another Britain" every year. This will continue until mid-century. By then we will have an extra 2.4bn mouths to feed.
China and Southeast Asia are switching to animal-protein diets as they grow wealthy, as the Koreans did before them. It takes roughly 3-5kgs of animal feed from grains to produce 1kg of meat.

A report by Standard Chartered, The End of Cheap Food, said North Africa and the Middle East have already hit the buffers. The region imports 71pc of its rice and 58pc of its corn. It lacks water to boost output. The population is growing fast. It will have to import, and cross fingers.

The UN says global farm yields must rise 77pc, which means redoubling Norman Borlaug's "green revolution". It will not be easy. China's trend growth in crops yields has slipped from 3.1pc a year in the early 1960s to 0.9pc over the last decade

"We've all heard the stark anecdotes: precious topsoil weakened by over-farming, dust clouds darkening the Asian skies, parched land becoming desert and rivers running dry," said Mr Grice.
Later in the article, he lists some stocks:
Mr Grice remains an optimist, believing that human ingenuity will rescue us. You can trade the "Ag" rally by investing in exchange traded funds (ETFs), but this amounts to speculation on food. There are ancient taboos against this practice.

Or you can invest in the bio-tech, fertiliser, and land services companies that will both make money and help to solve the problem. Monsanto, Syngenta, and Potash are popular, but trade at high price to book values. Golden Agri-Resources, Yara, Agrium, and Bunge are at better multiples.

Kingsmill Bond at Moscow's Troika Dialog suggests the Baltic company Trigon Agri as a way to play the catch-up story in the Eurasian steppe. He likes sunflower processor Kernel, grain group Razgulay, and fertiliser firm Uralkali.
There are some agricultural stocks listed in Hong Kong that look attractive as well, and there's always the option of farmland itself.

Support for Prechter & Deflation

Check out this article by Adrian Ash: Gold's Big Secret - No One's Actually Buying
No one's actually Buying Gold right now. Not the physical metal (and not the exchange-traded trusts either), not at anything like the rate they were buying a year or six months ago. Instead, this rush differs in kind from the surge of autumn '07 or the panic of late '08. Because it's a rush almost solely in leverage.

Hedge funds and prop desks have been buying Gold Futures and options with virtually free finance. Hence the surge in stocks, bonds and commodities too, of course. Because anything traded on margin looks a safe bet when finance costs you 1% or less per year. And especially when your major funding currency – the long mighty but now tired and emotional Dollar – is universally condemned to fall further.

John Hathaway of Tocqueville Asset Management called a similar rush into gold a case of mistaken identity back in late 2006. "Perhaps hundreds of billions of new institutional money has flowed into the commodity sector," he wrote. "Gold was caught in the cross fire..."

Here in late 2009, however, the institutional money is borrowed, not cash, and the prime brokers (formerly known as investment banks) are doing the lending with government-guaranteed finance. Since the end of August, open interest in Comex gold contracts has swollen by more than one third...the fastest jump since late 2007, back when the Fed began slashing rates, oil vaulted towards $150 per barrel, and the run on the banks really got started.
There's a difference between inflation in assets and inflation in physical assets. The lack of buying signals that the inflation scenario has yet to take hold, and until it does, the threat of deflation remains. Asset inflation, as we saw in 2008, can be wiped out in a matter of months, taking the spillover inflation in real goods and services with it.

I classify cash as a physical asset as well. Note that most of the stimulus is taking place in the form of digital money, not physical money. There hasn't been a huge wave of money printing that will exist no matter what the economy and financial markets do. The money that has been created can and will be destroyed by a deflationary wave.

Kevin Depew has written insightful articles about the simulacra, such as Five Things You Need to Know: The Crisis of the Real, based on Simulacra and Simulation, by Jean Baudrillard. There are four stages in the process of simulacra:
1) Era of the Original
2) Era of the Counterfeit
3) Era of the Produced, Mechanical Copy
4) Era of the Third Order of Simulacra, where the reproduction displaces the original
In the case of money, the real is gold or precious metals. Then comes the counterfeit, the gold notes. Then comes the produced, mechanical copy, fiat currency. In the final stage, the copy displaces the original.

In the digital age, currency traders swap digital conceptions of pieces of paper that do not even exist. As Depew describes it in another article on the topic,Five Things You Need to Know: New Home Sales, (en)Durable Goods Orders, Breadth, The Price Simulacra, Socionomics of Camouflage in the final stage, the simulacra:
has no relation to any reality whatsoever; it is its own pure simulacrum, a copy without a model (perhaps this is where we find ourselves today given the decoupling of paper money and the continuous supply of liquidity and credit to market participants with no underlying attachment other than the promise of a central bank).
To bring it home to the gold article, what are the hedge funds and institutions swapping? Most futures contracts are not delivered, they are settled and new contracts are opened. The central bank pushed a button on a computer and made some 1s and 0s, and that money, which bears no relation to gold or even physical paper dollars, is then swapped between financial institutions who are placing bets on the movement of the price of gold as measured in those 1s and 0s.

People are not buying physical gold, they are buying copies of gold. They are not investing in businesses, they are trading copies of those businesses (stocks). Even GDP is itself a shadow of the real economy.
Due to the way GDP is measured, there are a variety of ways that GDP can increase and perceived economic growth can show up in the statistics without an improvement in the labor market. As I explained in a previous column, imports count against GDP, so if Americans stopped buying imported Mercedes and Nintendos for some reason, this would be reported as incredible economic growth and a vast increase in societal wealth. The reality, of course, is that a complete cessation of import buying would indicate that something has gone seriously wrong with the American economy and the American consumer's ability to purchase goods and services.
Barry Ritholtz has the figures for the second quarter of 2009:
According to Bloomberg, Decreasing Exports subtracted 0.76% from GDP. At the same time, falling Imports added 2.14%. Net contribution of the fact that Imports are free falling twice as fast as Exports are = 1.38%.

If they were both falling at the same rate — if Europe and Asia’s consumers were hurting as much as ours – GDP would have been -2.38%.

If it seems weird to you that the ratio of domestic and overseas shrinking economies and their reduced consumption somehow turned into a positive GDP contributor, well, welcome to the wonderful world of government statistics.

So, a drop in exports:

Plus a bigger drop in imports:

Leads to a smaller trade deficit:

Which equals, in terms of GDP, a growing economy.

Update: I can best sum up my thinking as follows: there is simulated inflation in the simulated economy.

Update 2: Bill Gross' November 2009 commentary is out. These words popped out, given what I wrote earlier today:
Let me start out by summarizing a long-standing PIMCO thesis: The U.S. and most other G-7 economies have been significantly and artificially influenced by asset price appreciation for decades. Stock and home prices went up – then consumers liquefied and spent the capital gains either by borrowing against them or selling outright. Growth, in other words, was influenced on the upside by leverage, securitization, and the belief that wealth creation was a function of asset appreciation as opposed to the production of goods and services. American and other similarly addicted global citizens long ago learned to focus on markets as opposed to the economic foundation behind them.[emphasis mine] How many TV shots have you seen of people on the Times Square Jumbotron applauding the announcement of the latest GDP growth numbers or job creation? None, of course, but we see daily opening and closing market crescendos of jubilant capitalists on the NYSE and NASDAQ cheering the movement of markets – either up or down. My point: Asset prices are embedded not only in our psyche, but the actual growth rate of our economy. If they don’t go up – economies don’t do well, and when they go down, the economy can be horrid.
Read the whole thing.


Socionomics Watch—Mini Skirts?

The rise and hemlines are a clear socionomic signal, but this may simply be the cultural collapse of Western civilization. Women staying in mini-skirts for longer: report
British women are happy nowadays to wear mini-skirts up until the age of 40, according to research by Debenhams department store.

Just 20 years ago, few women would dare to wear a mini-skirt after the age of 33, the store said.

"It shows that women now have an increasing confidence in their bodies and are happy to dress accordingly," it added in a statement.

"If this trend continues, there's no doubt that, within the next decade, women in their mid 40s and early 50s will rightly regard a mini-skirt as an essential part of their everyday wardrobe."
There's even an age theory:
Skirts get shorter between the ages of 16 and 19, reducing in size from 46 to 36 cm before reaching their shortest, a mere 32 cm, at the age of 23.

Skirt length increases slightly between the ages of 23 and 27, rising to 37 cm, possibly due to girls being in their first stable relationship, with no desire to attract attention, the store said.

However, it found short skirts suddenly zoom in popularity between the ages of 27 and 34, as those early relationships break down, and new relationships are formed.

The move into longer skirts begins irreversibly at 40 years old, when 46-cm skirts, still slightly above the knee are the norm.

From then on, skirt length increases dramatically, falling below the knee for the very first time since school days at the age of 42

Another step to full convertibililty for the yuan

Shanghai eyes free exchange of yuan and New Taiwan dollar
Shanghai has applied to regulators to launch a free exchange between the yuan and the New Taiwan dollar to enhance financial cooperation, the head of the Shanghai Financial Service Office said Sunday.

"With growing trade between Shanghai and Taiwan in recent years, we hope that a free exchange between the yuan and the New Taiwan dollar can be conducted in Shanghai as a trial," said Fang Xinghai at the 6th China International Finance Forum.

"We have applied to the regulators and expect it will be approved soon," Fang said at the two-day forum which ended Sunday.

Shanghai has recently launched a cross-border currency clearing system and Fang expects that it will be extended to Taiwan soon.

Kremlin Wars from Stratfor

Stratfor has put out a series on Russia.
Kremlin Wars Intro
Kremlin Wars Part 2
Kremlin Wars Part 3
Kremlin Wars Part 4 (Out on October 27)
Kremlin Wars Part 5 (Out on October 28)

After reading parts one through three, you'll understand this news item: Kremlin warns against wrecking Russia with democracy
Kremlin Deputy Chief of Staff Vladislav Surkov said it was clear Russia was falling behind in many areas of economic development and that the country could not simply continue being a "resource power."

But in answer to calls from opponents for democratic reforms to liberalize the political system built under former President Vladimir Putin, Surkov warned that the resulting instability could rip Russia apart.

"Even now when power is rather consolidated and ordered, many projects are very slow and difficult," Surkov was quoted as saying by the Itogi weekly magazine.

"If we add any sort of political instability to that then our development would simply be paralyzed. There would be a lot of demagoguery, a lot of empty talk, a lot of lobbying and ripping Russia to pieces, but no development."

As the Kremlin's point man on domestic politics, Surkov rarely speaks in public.

Crash Comparison Update 2009/10/26

The comparison of 2009 and 1930 from their initial crash bottoms has broken down, but the September 2009 and October 2009 comparison remains robust. If it sticks to the model, the market will rebound tomorrow and then fall for the rest of the week. This week's wildcard data point is 3rd quarter advance GDP, out on Thursday.

Socionomics Watch—Hairy Crabs

A good indicator of social mood is the appearance of conspicuous consumption in foods, such as $100 hamburgers. In China, there's a food that doesn't need to be souped up and that fluctuates with the economy, hairy crabs (大闸蟹). (The best crabs come from Yang Cheng Lake north of Suzhou and not far from Shanghai, spawning the creation of "washed" crabs (洗澡蟹), where crabs from a different location are placed in the lake and then sold for a much higher price. To combat counterfeiting, the crabs have an ID number laser etched onto the shell.)

SCMP reports that hairy crab sales are up in Better times see diners willing to shell out on hairy crabs again
In a city obsessed with the stock market, the taste of the crabs is examined as closely as price and earnings ratios, with local folklore attributing a connection. During a market-rally year, the crab quality is generally not good, but when the market is troubled, the crabs are top-notch.

The collapse of US investment bank Lehman Brothers at the start of the crab season last year dealt a blow to consumption. Sales dropped by 20 per cent, said Cheung Wing-kai, manager of the Hong Kong Lao Shanghai Restaurant, one of the city's most popular crab restaurants. "The resulting crash in the stock market meant many customers cancelled their tables or ordered cheaper crabs."

With the economy on the mend this year, people are once again turning to crabs. Cheung says sales are back to the volumes seen in the boom year of 2007.
I see my hairy crab dinner in Shanghai last November was well timed! The story here is that social mood is positive and people are spending on status foods once again.

SMCP also has a video:


Tracking the Chinese real estate bubble

A link to this site landed in my inbox: Beijing Anjuke. It has rents and apartment prices all over Beijing. Google Life is another good site which has many Chinese cities. You can check out rents or prices for new and existing apartments. Here are Google translate links for Anjuke and Google Life for you lazy illiterates out there.

One thing that pops out is that you can rent a place for very reasonable prices, but buying is very expensive—a situation that has lasted at least as long as decade.


Socionomics Watch—Wolfman

On page 10 of Pioneering Studies in Socionomics, Prechter is in the midst of discussing horror movies and bear markets. After mentioning the string of hits in the early 1930s, he goes on to say:
Ironically, Hollywood tried to introduce a new monster in 1935 during a bull market, but Werewolf of London was a flop. When film makers tried again in 1941, in the depths of a bear market, The Wolf Man was a smash hit.
The Wolfman
In theaters: February 12, 2010.
Inspired by the classic Universal film that launched a legacy of horror, The Wolfman brings the myth of a cursed man back to its iconic origins. Oscar® winner Benicio Del Toro stars as Lawrence Talbot, a haunted nobleman lured back to his family estate after his brother vanishes. Reunited with his estranged father (Oscar® winner Anthony Hopkins), Talbot sets out to find his brother…and discovers a horrifying destiny for himself.


Let's get contrarian

Robert Prechter is probably the most famous dollar bull. Now let's add Ambrose Evans-Pritchard to the list. He has his own arguments in: Dollar hegemony for another century
Let me stick my neck out.

The dollar will still be the world’s dominant reserve currency in 2030, sharing a degree of leadership in uneasy condominium with the Chinese yuan. It will then regain much of its hegemonic status as the 21st century unfolds. It may indeed end the century even stronger than it was at the start.

The aging crisis in Asia — and indeed the outright demographic implosion in Japan and China, not to mention China’s water crisis — will soon be obvious to everybody. Talk of Oriental supremacy will start to sound overblown at first, and then preposterous.
He cites European and Asian demographics, and the currently weak U.S. dollar. He does add the caveat that Obama and the Dems could totally destroy a strong economic recovery that may be building in the United States with their reckless spending.

One thing is that all the notes he hits are facts. When the dollar recovers, suddenly it will be obvious that Europe and Japan are in worse shape, that China's yuan is not ready to take on the U.S. dollar, etc.

For the opposite view, see Niall Ferguson's interviews.

Crash Comparison 2009/10/21

OTB Portfolio Update 2009/10/21

Fannie (FNM) and Freddie (FRE) had big rebounds and pulled the portfolio into positive territory, up 1.57% on the day. OTB Portfolio down 14.64% since inception.

The Fed's Mexican Standoff

Mish Shedlock highlights a Carolyn Baum article in Fed Sponsored Feedback Loops and the Fed Uncertainty Principle Revisited. Here's an excerpt from Baum's article, Bernanke Frets Over Sherlock Holmes’s Next Stop.
If I have this right, we’re waiting for the Fed to do or say something to help us decide whether we should hoard cash (because we expect the dollar to buy more tomorrow if prices are falling) or buy and hoard hard goods (if we expect inflation to diminish the dollar’s purchasing power).

The Fed, in turn, is waiting for us to do something so it can decide what to do: either raise the volume on its anti- inflation rhetoric with talk of exit strategies and price stability; or talk softly to allay fears of premature rate increases to keep market rates from rising.

This is hard enough for your average MBA graduate on Wall Street to understand. And the Fed expects the average Joe on the auto-assembly or unemployment line to have a well-formulated view of inflation expectations?

It’s not that people aren’t rational; they are. It’s that they lack perfect information.
Baum's main point is that the Fed creates inflation. Period. Full stop. The public cannot create inflation because the public doesn't control the money supply. (There are some who believe money creation by the Fed backfills the credit creation by private firms, which widens this debate, but I'll ignore that for now because the Fed can always refuse to print money.)

Baum focuses on the public view of inflation, who have a tenuous at best grasp of inflation and the current inflation rate. I'm more interested in the financial markets view. The smart money is watching the Fed to see if it will inflate or deflate, while the Fed is watching them to see if they hoard dollars or hoard assets. It results in a Mexican standoff with both sides waiting for the other to move.

In any event, I don't see how the Fed can pursue a "sane" policy of inflation with everyone watching, since it would drive up commodity prices and interest rates beyond their "equilibrium" as it created new bubbles, which would then lead to another crash as the Fed tried to tame "inflation expectations", or simply by the higher prices acting as a tax on consumers, as we saw with the oil bubble in 2008.

Socionomics Watch—Political Discontent

Check out the Rasmussen poll numbers:
he Rasmussen Reports daily Presidential Tracking Poll for Wednesday shows that 27% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as President. Forty percent (40%) Strongly Disapprove giving Obama a Presidential Approval Index rating of -13. That’s just a point above the lowest level ever recorded for this President. It’s also the sixth straight day in negative double digits, matching the longest such streak.

Just 31% of voters believe that Congress has a good understanding of the health care proposal.

Thirty-nine percent (39%) of Republicans have a favorable opinion of their party’s national chairman, Michael Steele.

The Presidential Approval Index is calculated by subtracting the number who Strongly Disapprove from the number who Strongly Approve.

Overall, 47% of voters say they at least somewhat approve of the President's performance. Fifty-three percent (53%) disapprove.
Neither party has attempted to tap voter anger because they do not agree with the policy implications. This suggests an outsider has a shot at the presidency in 2012. And if Prechter is right on his wave calls, these numbers will look awesomely good in a year or two.