Socionomics Summit 2012 is coming up; how social mood affects presidential elections

Here's a video featuring Bob Prechter discussing herding, followed by his latest media appearance discussing how social mood affects the presidential election.

(VIDEO) The Only Time You'll Hear Bob Prechter Suggest Joining the Herd

By Jill Noble | March 21, 2012

In this clip Prechter explains why people herd in financial
markets -- and then makes one suggestion to his audience at last
year's inaugural Socionomics
Summit that you may find surprising.

What's especially noteworthy about what you just saw is that almost
every single attendee at the packed-house event really did take
Prechter's suggestion!



Last year's Summit was a sold-out event, and was full of finance
professionals, social mood researchers, Elliott wave analysts and
more.



Yet after the day-long Socionomics Summit ended, these individuals
found themselves all herding together -- as the dialogue continued
downstairs at the Georgia
Tech Conference Center's lobby and bar.



This year's Socionomics Summit: New Initiatives in Social Mood Research
and Application promises to be another fantastic networking opportunity,
with plenty of chances to mingle with an impressive group of like-minded
individuals.



Don't miss your chance to join this growing community at
the 2012 Summit. REGISTER
NOW>>



Editor's note: Additional video from Prechter's presentation
on herding is available here>>

This article is syndicated by The Socionomist, a publication of the Socionomics Institute, and was originally published under the headline (VIDEO) The Only Time You'll Hear Bob Prechter Suggest Joining the Herd. The Socionomist is designed to help readers understand and anticipate waves of social mood. Copyright © 2012 Socionomics Institute.

Interview with Robert Prechter: Forecasting the Presidential Election

Robert Prechter talks to Fox Business News host Neil Cavuto about his latest research on how social mood affects presidential re-election bids. In the interview below, he reveals what is the most reliable indicator in predicting incumbent re-election.

Download and read a landmark academic paper by Prechter, Goel,
Parker and Lampert that identifies the link between stock market
performance and presidential election winners. The research has
been featured by ABC News, CBS News, U.S. News and World Report,
and many more outlets.

Download
the full paper for free >>

Greece on the edge of default; conflict in the streets

Greece nears debt deal with banks but EU clash looms.

The headline says it all. This was always a conflict with origins in social mood and politics. The euro was formally launched at the height of social mood and political unity. Since then, social mood has declined and the chief fault line is political, not economic. The economy and debt are a problem, but it could be solved, as the deal with banks shows. What cannot be fixed is the need for confrontation and conflict that comes with negative mood, which is why we see Greece fighting Germany and France.

The deal will slice €100bn off Greece's debt and leave banks, pension funds, and other bondholders nursing effective losses above 70pc, but it does not in itself avert the risk of a Greek default in March.
Greece must reach a deal over coming days with Troika officials from the IMF, EU, and European Central Bank, who are demanding further austerity cuts equal to 1pc of GDP before disbursing fresh loans.

If you understand the origin of the conflict comes from social mood and that mood is expressing itself via politics, the situation makes perfect sense. No need to wonder why Greece, France, Germany, Italy, Hungary, Spain, Ireland, Finland or Portugal make decisions that appear "irrational" when there are workable solutions; no need to question whether the euro can survive, whether any members will leave. There will be conflict, it will be political in nature, and several nations will exit the eurozone. If Prechter's long-term forecast for the markets is correct, a few years from now this will seem like a happy time in Europe.

Angry Youths Attack House Of Greek President Papoulias with Rocks and Molotov Cocktails

A group of between 30 and 50 youngsters attacked the house of President Karolos Papoulias on Saturday evening.

The result of the attack was some minor damage to the entrance of the house at Asklipiou Street in central Athens and to the car that Papoulias uses.

Social mood and the movies: Santa will kill you!

In 1984, a movie titled Silent Night, Deadly Night starred an axe murderer dressed as Santa Claus.

After his parents are murdered, a young tormented teenager goes on a murderous rampage dressed as Santa, due to his stay at an orphanage where he was abused by the Mother Superior.

The movie was picketed by parents and chased out of the box office. Reviewers as well as the public were critical:

To protest the film, critics Roger Ebert and Gene Siskel read the credits out loud on their television show saying, "shame, shame, shame" after each name.

With the advent of the Internet, media has factured and many independent producers can make unpopular movies and release them through other channels. However, a newer Santa slasher film has received very positive reviews. Rare Exports: A Christmas Tale (2010)

It's the eve of Christmas in northern Finland, and an 'archeological' dig has just unearthed the real Santa Claus. But this particular Santa isn't the one you want coming to town. When the local children begin mysteriously disappearing, young Pietari and his father Rauno, a reindeer hunter by trade, capture the mythological being and attempt to sell Santa to the misguided leader of the multinational corporation sponsoring the dig. Santa's elves, however, will stop at nothing to free their fearless leader from captivity.

The reviews at Rotten Tomatoes are 90% positive, with the audience (at Rotten Tomatoes) rating at 71% positive.

According to socionomics, horror movies are more popular during periods of declining social mood. 1984 was in the midst of a major bull market, 2011 in the midst of a major bear market. Has this influenced the public's attitude towards a slasher Santa? Or, since many people probably haven't heard of this newer movie, is it just a result of changes in the entertainment industry? I for one doubt there would be as much protest had the movie run a big marketing campaign, but that is speculative. Note that in the early 1980s, horror movies were still popular. Also from the page about Silent Night, Deadly Night:

Opened on the same weekend as A Nightmare on Elm Street, and briefly out-grossed the latter by around $161,800 before profits fell about 45% by the second weekend.

However, one can view this as a hangover from the previous era, as industries and social mood do not shift on a dime, but change trend. Perhaps the failure of the slasher Santa signaled the waning of horror. Robert Prechter noted that horror as a genre was waning in 1985 in his Popular Culture and the Stock Market (PDF; sign up for free account with Socionomics.net to access).

Liu Junluo: Gold crash coming

Here's my slapdash translation of Mr. Luo's latest blog post. A few sentences were left out, either because I found it difficult to translate and/or they did not have a major bearing on the main topic. I used Google Translate to speed things up, in some places the English is not fluid, but the hopefully the main ideas come through.

Note that gold is typically priced in yuan/gram in China. Gold is currently about $43 per gram, or about 283 yuan/gm.

Original post in Chinese is available here. 黄金、美国、新年好+公告
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From beginning to end, China's history is filled with "arrogance and destruction," the Ming and Qing dynasties are the model.

2011 has arrived, Goldman Sachs and Chinese economists continue to exhaustively encourage Chinese people to madly buy gold. Now the small problem: the price of gold has surged 500% in 10 years, the global gold market in the region of $ 1,300 has reached an unprecedented scale. A contract must be shared by the long and short side, if there are unprecedented long gold contracts, there must also be unprecedented short-selling. Perhaps in the Chinese market today, I am the only bearish one on gold, and I think it will drop below 300 dollars.

In March 2010, I lectured in Beijing that the time to short gold will be in December 2010. I have a friend who established a short position at 305 RMB in the Shanghai gold futures market contract 1106, all his friends and the managers at futures companies desperately opposed him, and in a panic he closed his short position in gold at 298 RMB. Explaining this small situation, it shows that Chinese peoples' psychological state is not ready for participating in globalization. In Shanghai, November 9, 2010, the 1106 gold futures contract at 310 yuan expanded by 10,000 contracts; December 1, 2010 to December 7, at 303 to 310 yuan, another 10,000 contracts; the same thing from December 27 to December 30, soon after the shorts all won and the longs all lost. Now, nobody would believe that gold will eventually be worthless, but why are there a large number of shorts, moreover shorts that are unknown to the Chinese people.

Now the market value of gold has risen to 6 trillion U.S. dollars; gold futures, paper gold, gold stocks, gold producing countries CDS (credit default swaps), etc. is at least as high as $10 trillion. The gold market could be $20 to 25 trillion in size. Gold is much greater than the U.S. national debt. Chinese economists speak about gold's beautiful future, this logic rests on one idea - the U.S. budget deficit and the U.S. debt. U.S. government debt is now close to 100% of the U.S. economy, at the same time, the Japanese government debt is 200% of GDP, so the U.S. government debt is still normal. Out of control U.S. government debt is the only force lifting the price of gold, this Americans and Chinese economists know. Then, in people's heads should be the idea that a gold crash solves the out of control debt.

Now, Bernanke, Goldman Sachs, and myself, all know that gold is in an unprecedented crash state. Today, we all know the global currency system is the dollar standard. More exactly, global trade or global debt settlement must be in U.S. dollars. During the worldwide Great Depression of 1930, gold soared against all currencies precisely because the world of 1930 was on the gold standard, at the time you had to sell your currency to buy gold, so you could participate in market settlement. Over the past 3 years, global governments and the private sector issued an unprecedented amount of debt, a total size of not less than 20 trillion dollars. More preposterous is that emerging countries, especially China, engaged in large-scale borrowing and inflation.

At 1300 U.S. dollars for gold, the United States has established a worldwide currency reservoir. QE2 U.S. monetary policy has accelerated the rise in inflation in China, the Chinese central bank can only accelerate to keep up with the Americans, in this way the currency in the gold reservoir escapes into agricultural products, coal, oil, the Nasdaq market, at last China's central bank can only desperately hike interest-rate and ultimately resulting in the global outbreak of debt settlement, the crash of the Chinese property market and the gold market. In order to complete this, to solve the U.S. debt with a gold crash, Goldman Sachs and Chinese economists need to create a gold fairy tale.

There are $13 trillion in Japanese savings, if the Japanese take half of the savings, they can put most of the world's gold in Japan. According to the Goldman Sachs' and Chinese economists' logic, that the Japanese do not buy gold now is stupid. But the next 5 years will be the Internet's truly global growth, the Internet will go from 2 billion to almost 4 billion users. After 2012, technology reserves, cultural reserves, human capital reserves and agricultural reserve will create the real boom in America's Nasdaq.

In 2011, everyone in China dreams of getting rich with houses and gold. In 1997, the ASEAN region was also full of dreams of getting rich with houses. In 1998, ASEAN regional house prices collapsed more than 70% and some currencies suffered 1000% devaluation. We Chinese should not be a global financial fool; we see that the Chinese stock market and the U.S. stock market contrast; we look at the global agricultural market and gold market contrast, China's economists are just a group of "idiots and good-for-nothings." In my book "Great Financial World," we also understand these structural problems in Japan's property market after 1992.

This 2011 Chinese New Year, Wall Street and U.S. multinational corporations have got 3 trillion dollars in cash. The most brutal time of the Great Depression was in 1932 when, if you had cash, you were king. If history repeats itself again, Wall Street and U.S. multinational companies have got 3 trillion dollars in cash and will control the world.

The mission of my current book, "Great Financial World", is to record how China was ultimately destroyed by the United States using economics and finance. In the United States now, all the best people are on Wall Street and China's economists tell us that building houses and buying gold can defeat the United States. But America's best talent is working hard to enlarge global indebtedness. It is Bernanke and Wall Street creating the global debt zoom that are idiots! Or its Chinese economists that tell us to build houses and buy gold that are idiots!


Wish My Friends a Happy New Year!

Liu Junluo January 25, 2011

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One thing I've noticed about Liu Junluo's writings and which Chinese readers have also noted, is that he's often right about the direction of things, but doesn't always explain why. There is an existing theory that fits Mr. Luo's prognostications like a glove though—deflation. Robert Prechter has predicted a much lower gold price as well and he is one of the most bearish deflationists on record.

An interesting symmetry also exists in the writings of Liu Junluo and others who share his opinion. Just as one can read about the incompetent U.S. government/economists being defeated by the wise Chinese in some quarters, many Chinese hold the inverse opinion, that incompetent Chinese government/economists are being defeated by the wise Americans.

Monetary policy debate heats up with unintentional comedy

Ron Paul was considered a crank for talking about monetary policy, even in 2008 and into 2009. What a difference a year makes. Now, monetary policy has become a major subject of debate and the leading Republicans have issued rebukes to the Federal Reserve. Of course, one of The Prechter Predictions is that the Federal Reserve will be discredited and abolished. Although too early to call it a correct prediction, note that Prechter issued that prediction in 2003. If this was a momentum trade, Prechter's prediction is definitely looking like a good bet.

While the GOP was opening attacks on the Fed, it's taken a little longer for the left to return fire. The left is naturally inclined to be against Wall Street, but whenever the left is in office, all but the dedicated grassroots abandon principle for power. (Republicans are not much better, but they don't have the same naked pursuit and use of power, see The Lightworker wants to touch your junk) Therefore, I'd say we are now within sight of the discrediting and possibly abolition of the Federal Reserve, because I can use basic political analysis to predict a bad outcome. The natural allies of the financial system are turning against it, while it's natural enemies are defending it. When you've lost your "base" and rely on fair weather friends, the end is in sight.

We can also see that the left is not mounting much of a defense at all. In GOP to jobless: Drop dead

The first efforts to turn Ben Bernanke into a modern day William Jennings Bryan came from those giants of economic thinking, Rush Limbaugh and Sarah Palin. A few days later the mantle was taken up by a group of Republican economists and policy wonks who gathered at the University of Pennsylvania Club in Manhattan to craft a public letter criticizing the Fed.

Then last weekend at the Group of 20 meeting in Seoul, the Republican campaign for "hard money" received aid and comfort from foreign leaders concerned that quantitative easing might substitute American jobs for Chinese and German ones. Also jumping on the bandwagon was Robert Zoellick, the American president of the World Bank, who no doubt hoped to boost his prospects as the next Republican Treasury Secretary by floating the idea of a partial return to the gold standard.

Finally Tuesday, Rep. Mike Pence, the third-ranking Republican in the House, and Sen. Bob Corker, an influential Republican on the Senate Banking Committee, announced a proposal to strip the Fed of its "dual mandate" that would have the central bank focus solely on ensuring price stability without the distraction of also worrying that 15 million Americans are unemployed and underemployed. "The Fed's dual mandate policy has failed," Pence declared, citing the stubbornly high unemployment rate. It's not exactly clear how unemployed workers would benefit from the Fed's benign neglect.

If you want a serious discussion about changing the structure or mandate of the fire department, the time to have it is not when the entire squad is out fighting a three-alarm blaze. That's exactly the situation with the Federal Reserve and the debate over the dual mandate. Only two weeks after the midterm election, it seems clear that the 2012 campaign has begun. For too many Republicans, the aim is to politicize policy, trash the institutions of government and intimidate anyone who might disagree with their radical ideology.

Invoking WJB "cross of gold" speech to defend the Fed...is ironic. Should the Fed reach the economic credibility of WJB, its fate is sealed.

Elsewhere, the New Republic takes a better stab at the issue, but still manages a howler in Fighting the Fed: Sarah Palin is leading conservatives' most sinister campaign to date. The author talks about the divide between the Palin and Paul camps (he dislikes them both) and says, apparently seriously:

The Pauls’ views may be a bit medieval and needlessly cruel—a growing economy requires a growing money supply; relying on gold or silver, as the Pauls propose, would condemn us to periodic deflations and depressions.

A little economic history is in order. While on the gold standard, the money supply was relatively stable (except during periods of increased supply, such as the gold rushes). During a recession, prices would decline. These periodic downturns in the business cycle were termed depressions. After the Great Depression, the term depression fell out of favor and was replaced with the more soothing "recession."

Has the Federal Reserve managed to solve the problem of periodic recessions? And how about the massive deflation started in 2008 and continuing to this day? Is it due to the gold standard? How badly did the Fed screw up if the current economy and deflation is what critics claim as the very worst problem with a gold standard? But he does nail the political situation exactly, in the broad sense that the enemies of the Fed are growing in number and represent a clear and present danger to business as usual:

Don’t get me wrong: I think criticizing the Fed is an entirely healthy thing. I, for one, am sympathetic to the Pauls’ concern that periods of excessively low interest rates can lead to bubbles, and I do worry that quantitative easing may create similar problems. (Though I don’t see many great alternatives.) Likewise, the Fed didn’t exactly cover itself in glory in the run-up to the crisis, and its bailout of AIG was unsavory even to those involved. But what Palin and likeminded politicians are doing now isn’t good-faith criticism. That requires a baseline understanding of what the Fed does, and grappling with it honestly. What’s going on now is a political campaign intended to de-legitimize technocracy. (As exhibit A, I’d direct you to the presence of the esteemed monetary economist William Kristol at the center of the anti-Fed movement.) And it’s reaching further into the government than ever before.

Take one part socionomics and mix in political analysis. Politicians are, for the most part, dedicated to one thing: reelection. They are very rarely leaders and then are even more rarely dedicated to principle. Ron Paul failed to spark a movement until the movement came to him, his dedication to principle outweighed his lack of leadership skills, but paid off in the end.

Suddenly, everyone wants to be like Ron Paul, including neo-conservative weather vanes such as Bill Kristol, who once called Paul a crackpot for favoring a gold standard and holding other views well outside the mainstream of political debate...at the time.

The New Republic author is more right than he knows. The decline in social mood could morph into an attack on all technocracy, in which case the Federal Reserve is just the tip of the iceberg. And if that's the case, the already established and organized movement to abolish the Fed means that a string of anti-technocrat victories will not end with the Federal Reserve, but begin with it.

Fundamental reasons for a stronger U.S. dollar

Even though one factor may be enough to power a trend, I prefer investments that have several factors working in their favor.

In the case of the U.S. dollar, one argument is that there's a bull market based on the charts. Technical analysis is not concerned with the why.

The leading explanation for why the U.S. dollar will rally is that deflation will destroy U.S. dollars and make them more valuable (reduce the money supply through credit destruction). In addition to this "bearish" argument for a U.S. dollar bull market, there are also "bullish" arguments.

In a blog post today, Liu Junluo compares the U.S. economy's growth rate to the European economy's growth rate. He notes that when the U.S. was growing at 3-5% before 2008, Europe was growing at about 50-70% of the American rate. He sees the U.S. growing around 2.8% now, and Europe at 1%, or nearly one-third the rate. The difference is much larger and he believes it will translate into a major U.S. dollar bull market.

2008年前，美国经济年均增长在3%~5%,欧洲经济在2%~3%,那个时期美国经济增长速度高于欧洲经济50%~70%左右。现在美国经济最保守增长不低于2.8%，而欧洲经济最乐观增长是1%，从现在开始美国经济增长速度是高于欧洲经济是以几倍为基数来衡量了，所以美元未来疯涨又是个常识问题。社会不是由笨蛋来决定进步的，如果你相信美国核心层是由笨蛋组成的话，那何以解释中国大地愈演愈烈的移民潮。

Today, Michael Pettis discusses capital flows in The capital tsunami is a bigger threat than the nuclear option

In fact the real threat to the US economy is not the dumping of USG bonds. On the contrary, in the next two years the US markets are likely to be swamped by a tsunami of foreign capital, and this will have deleterious effects on the US trade deficit, debt levels, and employment. Investors and policymakers should be far more worried that China and other capital exporting countries are trying their hardest to maintain and even increase their capital exports, while the capital importing countries are either going to see capital imports collapse, or are trying desperately to bring them down.

Later on he writes

The US, in other words, is not likely to face the “nuclear option” of a Chinese disruption of the US Treasury bond market. It is far more likely to be swamped by a tsunami of foreign capital. This tsunami will bring with it a corresponding surge in the US trade deficit and, with it, a rise in US unemployment. It will also force the US Treasury to increase the fiscal deficit as more of the jobs created by its spending leak abroad.

Therein lies the problem. A reduction in net foreign capital inflows means a welcome decline in the US trade deficit, but the US is likely to see just the opposite. Foreign capital will push desperately into US markets and as an automatic consequence the US trade deficit will surge. So the problem isn’t too little capital inflow or a sudden boycott of USG bonds. On the contrary, the US will see too much capital inflow.

All this may turn out to be very bad for the US economy, but in the past massive capital recycling has usually been very good for asset markets. Might we see a surge in the US asset markets, at least until next year when Congress starts getting tough on the trade deficit? I would be willing to bet that we do.

I suggest reading the whole post if you are interested in speculation about Chinese dumping U.S. treasuries and why that won't happen.

As for a bull market in U.S. assets, I'm not fully convinced that U.S. markets will go up, but I do expect they will be relative outperformers because We are all currency traders now. In this article, Howard Simons concludes:

US mutual fund investors have been pumping their hard-printed pieces of paper overseas more than they've been keeping them home for the past five years, with the prominent exception of late 2008. This behavior has held regardless of the trend in the dollar, which indicates a belief that greater returns are to be had elsewhere. The sad truth is global equities have been homogenized by an efficient market into the current price reflecting future expectations for earnings. All that's left, then, is a currency trade -- and an expensive one at that.

Not far off from Prechter's "All one market" argument.

For the U.S. dollar bulls, there's a little comfort in knowing that the asset bulls and bears both find compelling reasons for a U.S. dollar rally.

Anti-China Rhetoric in Congress

In US anti-China rhetoric at danger level, Benjamin A Shobert discusses the current debate. With socionomics as the frame, the why of the issue becomes clearer than Shobert sees it, but there's lots of specifics in the article too.

During last week's USCC testimony, Senator Charles Schumer (Democrat, New York) provided in written testimony a very specific insight into the grievances of many Americans and, as a consequence, the powerful politicians who represent them: "China's policy of large-scale intervention in the exchange markets and the significant undervaluation of its currency also subsidize Chinese exports to the United States and, at the same time, make US exports to China more expensive. Thousands of US factories have been shuttered and millions of jobs have been lost or displaced over the past decade as a result."

He went on to share that, "There is no question that this is what one might call a 'put-up or shut-up' moment for US lawmakers. American jobs and wealth are flowing out of the US, across the globe to China and other countries with cheap labor, lax environmental standards, and no compunction about flouting WTO rules to gain an unfair competitive trade advantage. This has got to stop."

Americans are angry at Congress and an election is coming up. Schumer has been anti-China for much longer, but he was unable to forge a majority when the economy was growing. He has a much better shot today and that's why we saw China adjust its currency policy over the weekend.

This week, during a separate congressional hearing of the House Ways and Means Committee, Republican Congressman Dave Camp (Michigan), asked whether "enough was doing to push China ... on its egregious economic barriers" specific to its currency manipulation, the country's "Indigenous Innovation" policies, and ongoing intellectual property compliance with WTO rules.

...During this week's House Ways and Means Committee hearing on "China's Trade and Industrial Policies", chairman Sandy Levin (Democrat, Michigan) said simply but forcefully " ... China must change its ways". Straight-forward words certainly, but important coming from an influential congressman long known for his reputation of urging caution and balance in America's relationship with China.

Lots of Michigan in there, as well as Ohio. Manufacturing regions that have lost many jobs. Anti-incumbent sentiment will cross party lines in November and even Republicans in these hard hit states will need someone to point a finger at.

Senator Debbie Stabenow (Democrat, Michigan), provided in testimony to the USCC panel her plan to introduce the "China Fair Trade Act, legislation that will prevent Federal taxpayer dollars from being used to purchase Chinese products and services until they sign on to and abide by the WTO Agreement on Government Procurement, which will allow American companies to export into their government markets." This sort of move, while it remains uncertain as to whether it will be advanced in the House, does represent the sort of escalation between two countries that tends to indicate a looming conflict over trade that could, given the present economy, too easily get out of hand.

During last week's USCC hearing, Congressman Tim Ryan (Democrat, Ohio), a long-time critic of China's currency policy and one of the first to propose legislation attempting to address the matter, echoed the concerns of his colleagues but perhaps most importantly hinted at deeper concerns which are too often glossed over by those who suppose such critics want to simply hit rewind on the global economy: "Several years ago, progress toward further market liberalization began to slow and it became clear that some parts of the Chinese government did not yet fully embrace key WTO principals."

Emphasis mine. Socionomics says bullseye to that comment.

It has been quite literally several decades since the interests of the working class and the ownership class have been so front and center in Washington as they are now. The still-powerful pro-business lobby will push back against bills like those mentioned earlier, but unless the American economy begins to show additional life, even organizations like the critical Business Roundtable may be ineffective at limiting a political retaliation against China.

During last week's testimony, this was communicated most eloquently by James Bacchus, formerly a two-term chairman of the Appellate Body of the WTO and a former Special Assistant to the United States Trade Representative in the Executive Office of the President. "I worry when I hear other Americans describe China as a 'threat' to the United States," he said. "I am reminded at such times of the warning of Thucydides in his history of the Peloponnesian War - that a belief in the inevitability of conflict can become one of the main causes of conflict. Trade disputes between the United States and China are inevitable. Conflict is not."

Here's where the rubber hits the road. It is likely the case that American workers have lost their jobs due to globalization. China is just one piece of the puzzle. Consider this article China lassoes its neighbors

But is the Chinese locomotive really pulling the rest of East Asia along with it, on the fast track to economic nirvana? In fact, China's growth has in part taken place at Southeast Asia's expense. Low wages have encouraged local and foreign manufacturers to phase out their operations in relatively high-wage Southeast Asia and move them to China.

China's devaluation of the yuan in 1994 had the effect of diverting some foreign direct investment away from Southeast Asia. The trend of ASEAN losing ground to China accelerated after the financial crisis of 1997. In 2000, foreign direct investment in ASEAN shrank to 10% of all foreign direct investment in developing Asia, down from 30% in the mid-nineties.

The decline continued in the rest of the decade, with the UN World Investment Report attributing the trend partly to "increased competition from China". Since the Japanese have been the most dynamic foreign investors in the region, much apprehension in the ASEAN capitals greeted a Japanese government survey that revealed that 57% of Japanese manufacturing transnational corporations found China to be more attractive than the ASEAN-4 (Thailand, Malaysia, Indonesia, and the Philippines).

Prechter's call for a sub-1000 Dow hit the media rounds last week. I'm not convinced that it will be as bad as he predicts, but if he's right, then it's obvious where protectionism will lead. Eventually, WTO membership and globalization will be on the table, as it will become clear that China is not the whole problem. Or, if China remains the focus, bilateral relations will deteriorate to their worst in 40 plus years.

For more on Prechter's thinking, last week he did an interview with Jim Puplava on the Financial Sense Newshour.

Is the rally over?

One thing I like to watch in finance is the trend of opinion. There are a few ways to look at it, from the general sentiment indicators (are money managers bullish or bearish?) all the way down to the individual opinions of those with good track records. There's also the socionomic angle, such as why is Bob Prechter showing up now?

In January, Marc Faber said the S&P 500 could drop 20% after a spring rebound. (He expects Bernanke to print money at that point and halt the decline.)

Tim Knight has posted his latest Big Picture review.

A new short sale rule has ominous implications, not because of the policy itself, but because the government always mistimes its policies, such as passing recession fighting programs once the recession is over. (This time we have a depression and they, like Hoover and Roosevelt, do not know how to fight a depression.)

Economically, things are not looking good. The deadline for applying for extended federal unemployment benefits ends today.

And it turns out that 40% of the banking system and 3000 community banks are exposed to the coming commercial real estate crisis. Many warned about the risks of the housing and subprime markets, but most people do not believe something is a crisis until it is unfolding before their eyes. Therefore, despite the years of warnings, this will not affect the market until liftoff. Even if the market tumbles in April or May, commercial real estate will not yet be a concern—though the slide could trigger liftoff since it could damage the developers' ability to raise capital.

If we see a true deflationary crash, expect gold to tumble along with the markets. Prechter's admonition to load up on cash is appropriate. Also, the U.S. dollar is likely to rally against everything except the Japanese yen. At the end of the slide, the yen may be strong enough to put the Japanese economy at the center of international concern.

I've jumped the gun on the end of this rally so many times, however, that I'm waiting for a clear sign of a break. The previous year of market action suggests a bounce and climb to a new 52-week high and the S&P 500 Index is right at its 50-day moving average. The line is about as flat as it can get, suggesting the next move will bend the 50-day average in its direction. A break higher would be bullish, with the previous high of 1150 as the target for now. A break lower would be bearish, but the S&P 500 would need to drop more than 6% before it reached its 200-day moving average of 1033.

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".

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—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.

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.

Excellent Prechter Interview

From the Financial Sense Newshour with Jim Puplava.

Prechter on Deflaton

The Stories Bears Tell

There's no shortage of bearish stories. I briefly mentioned Prechter's take. He sees a multi-year dollar rally and lower prices for just about everything else, including precious metals. His story, and many of the fundamental bear stories, are based on the large debt overhang in the global economy (though this is just a piece of the socionomic argument laid out by Prechter). Anyone predicting lower nominal prices does not expect high inflation in the near term due to debt deflation, but there are bears who expect high inflation to cause nominal price increases, even while causing a loss of value.

Fundamentally based arguments aside, I've come across several technical arguments for a market top. Some of these include a fundamental or socionomic angle.

First up is a David Singer thesis, posted at The Big Picture. He has a chart of the S&P 500 Index along with notes on the number of stocks above their 200-day moving average.

The market continues to go higher and eventually fills the “Lehman gap” up to the high 1100’s, low 1200’s, but that has to be on weakening overall strength and breadth because the market has shot up so insanely already and like I said 457 of 500 are already above their 200 day ma’s. That area is also the neckline that was penetrated long ago and is severe resistance. By that time, the overall rally will be some 85% off the lows and almost everyone will be sure that this is a new bull market. Picture the atmosphere now, but up another 200 points on the S&P. Those 200 points will be the public finally coming back on board as the message that recovery is here gets filtered into everyone’s psyche. As you have noted, the professionals are “all in”. As we move up, the public investor gets in just in time for the market to begin moving lower again in earnest…

See the chart here.

Next up, Tim Knight offers the Arcs of the Covenants. Not as much a thesis as marking a turning point on the chart, to wit:

The head and shoulders pattern we were all obsessed with early in July turned out to be bouncing off arc support as well, yet, as we know, that support was never broken. We are now all the way back to the 50% arc. Given how close we are to my oft-cited 1050 prediction (which I will hasten to add is at the low end of my 1050-1200 range of an ultimate countertrend top), we could be at an interesting inflection point here.

Just for fun, I decided to back far away from the graph and look at the arc extensions. That was just as eye-opening.

At each of the arcs, there's an interesting event. The magenta tint (where the prices cling to the arc fastidiously) shows the kickoff to the secular bull market, which lasted three decades. The arc at the green tint perfectly nails the crash of 1987 (!), and the blue tint kicks off the final parabolic ascent of the tech bubble (the frenetic 1995-2000 period where the angle was sharply higher).

Check out the chart, plus a great "Joe Kennedy Shoeshine Boy" moment.
Joe Saluzzi hits a lot of popular bearish notes in this interview:


Here's a post by someone under the pseudonym "Tyler Durden" on ZeroHedge. (Several contributers use the same pseudonym.) What are the animal spirits saying? Here's the gist:

The current cycle is a complete anomaly relative to past experience. Margin debt balances (current info through June) have increased 8.6% from the lows. But you can see the strength of margin debt growth in prior cycles. Off the charts is the only characterization that fits when comparing this experience to the present. Who knows, maybe margin debt is about to grow parabolically for all we know.

So, the question becomes, when will the true “animal spirits” on Wall Street reveal themselves? It has not happened yet. And that says liquidity and momentum support for the markets is narrow and potentially volatile. Squeezing shorts and running technical stops can work well for a while. But what happens next if animal spirits broadly are not fully engaged? For now, margin debt is telling us animal spirits are very subdued. Very subdued.

(Emphasis mine.)
My interpretation of this last story is that it supports David Singer's theory. Prechter admits he's often early on his calls and there's some corroborating theories here that suggest a possible melt-up before the final meltdown.

Bonus: The original(?) "Tyler Durden" speaking with Pimm Fox of Bloomberg, topic high-frequency trading.

Is this the top?

Prechter says it's time to break out the shorts.

Fannie Mae is broke again, needs $10.7 billion.

China Construction Bank to cut second half loans by 70%

I'm going to begin defensive positioning tomorrow.

Prechter on Deflation

From The Guide to Understanding Deflation.

pg. 9

Because the idea of money is so highly psychological today, the line between what is money and what is not has become blurred, at least in people's minds, and that is where it matters when it comes to understanding the psychology of deflation.

pg. 19, excerpted from 2003, on Bernanke's advice for defeating deflation:

They have met the Wizard of Oz in person, and he is impressive!

He is also delusional. Can you imagine the laughingstock that the Federal Reserve System would become if its "assets" consisted of defaulted mortgages, bonds of bankrupt companies and municipalities, IOUs of shaky foreign governments and stock certificates of companies no longer in existence? Can you imagine the panic that would ensue to escape a monetary system with such assets as its reserves?

The Federal Reserve is halfway to that system today...

pg. 23, from the same excerpt:

There is no way that Fed officials will buy junk paper unless and until the social pain gets unbearable and political pressures force it to choose a terrible policy in response to public demand to "do something."

Been there, done that. Prechter even accurately predicted the "do something" mentality of the American people.

On pg. 26, in an excerpt from 2004, Prechter gives a great example of what would happen if the government decided that a specific good was necessary for economic growth, and if it promoted the production of this specific good (Jaguars in the example), and it resulted in oversupply and overownership, to the point that no one wanted any more, even if they were free. He then compares it to credit:

It may sound crazy, but suppose the government were to decide that the health of the nation depends producing credit and providing it to as many people as possible. To facilitate that goal, it begins operating credit-production plants all over the country, called Federal Reserve Banks.

Eventually, everyone has more than enough credit and they do not want any more...but the economy is built around the industry that...

People are working three days a week just to pay the interest on their debts to the banks so the banks can keep offering more credit. If credit stops moving, the economy will stop. So the banks begin giving credit away, at zero percent interest. A few more loans move through the tellers' windows, but then it ends. Nobody wants any more credit They don't care if it's free. They can't find a use for it.

And that's where the U.S. economy finds itself in 2008, 2009 and beyond.

Good Timing?

On June 29, I made this post 分析金矿股票图表 in Chinese, in which I discussed the signals I was getting from the gold mining stocks. I had several charts, the first of which showed that gold miners signaled a market turn in late February, right about the time that Robert Prechter made his call for a near-term bottom; Marc Faber turned bullish around the same time.

I then showed a chart of 2008 and I highlighted the March and July periods. I've commented before about how I believe 2009 is unfolding similarly to 2008, and I though July might be a period for a downturn similar to the one caused by Fannie and Freddie in 2008. Gold miners started falling in mid-June, along with commodity prices, and I wondered if this wasn't sending the same signal as in 2008, when oil prices peaked in late-June early-July and then went south quickly. I posted this graph on that date:


Here's how things have done since:


Prechter thinks we'll have a rally in late summer, just like 2008. I think my 2009 framework holds up, but then the question is what happens this fall...

Note: if the charts on not visible, try clicking on the post title. If they're still not showing, click through to see them. Sina is spotty with their treatment of hot links.