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I am the youngest economist at My Yield Curve. Since spring of 1994 I have been working on economic depressions. I am writing The Tract The Religious Interpretation of Employment, Interest, and Money.. It explains the nature and causes of economic depressions. After a period of Irrational... More
My business:
My Yield Curve
My blog:
My Yield Curve - The New Economic Order.
My book:
The Religious Interpretation of Employment, Interest, and Money..
  • The [Good] Economic Conditions That Precedes a Liquidity Trap.

    The Age of Turbulence:
    Plea for a New World Economic Order.
    Chapter II.
    Keynes' Liquidity Trap: A Theoretical Curiosity.

    Paragraph 2:
    The Economic Conditions That Precedes a Liquidity Trap.
    "The slowdown in economic activity, together with high interest rates, was in all likelihood the most important source of the stock market crash that followed in October.

    In other words, the market crash, rather than being the cause of the Depression,as popular legend has it, was in fact largely the result of an economic slowdown and the inappropriate monetary policies that preceded it.

    Of course, the stock market crash only worsened the economic situation, hurting consumer and business confidence and contributing to a still deeper downturn in 1930."

    Governor Ben S. Bernanke
    Money, Gold, and the Great Depression.
    At the H. Parker Willis Lecture in Economic Policy, Washington and Lee University,
    Lexington, Virginia.
    March 2nd, 2004

    Abstract:

    People usually believe that a Liquidity Trap occurs as a result of worsening economic condition. That can be a costly mistake.

    Investments:

    It is widely believed that economic conditions are bad or worsening before a Liquidity Trap. They hence conclude that they will wise enough and be able to unload their position in long-term assets before the Crash.

    This is due to the fact that man usually thinks in a linear manner a small change in one parameter producing a small change in another.  If after the Crash the economic conditions are bad they had to be bad before the Liquidity Trap.

    However the Liquidity Trap is a non linear event that is caused by a discontinuity of the shape of the yield curve. What is known in te general public as a butterfly effect.

    Moreover the Liquidity Trap being caused by an excessive amount of savings the yields the mount of Investments is particularly high.

    Because the long-term yields are very low the rate of unemployment [workers compete with capital.] is at an all time low.

    Because of the wealth effect, people feel rich as a result of the high price of long-term assets, this economic euphoria is reinforced.

    So the Asset Price Bubble caused by low long-term yields, an inverted yield curve and low risk spreads is reinforced by better and better economic conditions.

    Given these excellent economic conditions monetary authorities might be tempted to rise their target interest rate, and trigger the Liquidity Trap!

    Conclusion:

    Not only the economic conditions don't worsen before a Liquidity Trap they are even better than they ever were! Watching the macro economic indicator and any measure of risk are of no help in predicting a Liquidity Trap. On the contrary they give a false sense of security.


    "The clear evidence of underpricing of risk did not prod private sector risk management to tighten the reins.

    In retrospect, it appears that the most market-savvy managers, although conscious that they were taking extraordinary risks, succumbed to the concern that unless they continued to "get up and dance",
    as ex-Citigroup CEO Chuck Prince memorably put it, they would irretrievably lose market share.

    Instead, they gambled that they could keep adding to their risky positions
    and still sell them out before the deluge. Most were wrong.

    ....

    That is mission impossible. Indeed, the international financial community has made numerous efforts in recent years to establish such oversight, but none prevented or ameliorated the crisis that began last summer.

    Much as we might wish otherwise, policy makers cannot reliably anticipate financial or economic shocks or the consequences of economic imbalances.

    Financial crises are characterised by discontinuous breaks in market pricing the timing of which by definition must be unanticipated - if people see them coming, then the markets arbitrage them away."

    Alan Greenspan
    The Age of Turbulence: Adventures in a New World [Economic Order?].

    The Economy Feels Good!

    All of This Stays True Until the Poor Becomes Richer Relatively to the Rich.
    It Will be Proved by The Crash.

    My Political Orientation According to Nolan Chart Survey!
     
    As Liberal as John Maynard Keynes!
    As Libertarian as Friedrich August von Hayek!

    Extreme Economic Conditions Call for Radical Solutions.
    The Provocative & Controversial Innovation
    Since John Maynard Keynes and Friedrich August von Hayek.

    It is of the Uttermost Importance That, When the Crash Comes, Which It Will Inevitably Do, we Restore as Fast as Possible the Economy by Implementing our Plausible Alternative Solution as to Minimalize the Economic Sufferings of the People. Immediately after the Crash I will then start an operation whose purpose will be to
    quickly implement my Adjusted Credit Free, Free Market Economy.
    To That Order I am Building Redundant Social Networks. Please Grow the Networks!

    "Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than on a mathematical expectation, whether moral or hedonistic or economic.

    Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as a result of animal spirits—of a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.

    Enterprise only pretends to itself to be mainly actuated by the statements in its own prospectus, however candid and sincere. Only a little more than an expedition to the South Pole, is it based on an exact calculation of benefits to come.

    Thus if the animal spirits are dimmed and the spontaneous optimism falters, leaving us to depend on nothing but a mathematical expectation, enterprise will fade and die;—though fears of loss may have a basis no more reasonable than hopes of profit had before."

    John Maynard Keynes, 1st Baron Keynes of Tilton
    June 5th, 1883 – 21st April 1946
    The General Theory of Employment, Interest, and Money.
    Chapter 12: The State of Long-Term Expectation, Paragraph VII.
    13tn December 1935
     
    Read the Publisher Agreement.

    The Tract will be available from September 17tn, 2009 and I will then retire it from the Internet.
    Buy The Tract Now.

    © 1994-1995 Shalom P. Hamou.

    Long Stocks, Treasury Minerals, Spread Treasuries/Corporate
    Tags: Irrational Exhuberance, Economy, Bernanke, Liquidity Trap, MarketCrash
    Jul 28 10:26 am | Link | 2 Comments
  • Preparing for The Crash, The Age of Turbulence. Updated Tuesday 27th,2009.

    Plea for a New World Economic Order.

    Preparing for The Crash,
    The Age of Turbulence.
    Monday 27    th,2009.

    "Prediction is very difficult, especially about the future."
    Niels Bohr Danish physicist (1885 - 1962)

    Executive Summary:

    It is necessary that Minutes Before the Crash that we have a bout of extreme irrational exhuberance. 

    I am short 100% of my allocated position of long-term yields when the yield on the 30 Years US TBonds get to 4.610% then short till it gets to 3.5605%. I will square the position and if TYX transgresses 46.30 [No short selling.].

    I am long stock  with a first objective of 1017.64  on SP500 with later a possible new all time high. I will update my final objective when TYX transgresses 41.42 I will square the position if TYX transgresses 46.30 [No short selling.]. I am long 100% of my total allocated position for stocks.

    Reminder: the market Crash comes with low long-term yields and a deeply inverted yield curve and very low risk spreads hence with a high level of Irrational Exhuberance and global euphoria. Because of the fantastic amounr of liquidity in the system I expect the Mother of the Bubbles.

    I am long minerals (100% of my allowance.) with a first objective of $89 on Oil with later a possible all time high. I will update my final objective when TYX transgresses 41.42. I will square my position and go if TYX transgresses 46.30. For the same liquidity reason I expect explosive mineral prices.

    I am short the spread of the yields Corporate Bonds / Treasury Bonds with 100% of my allocated portfolio.

    I time the crash with the yield on USTBonds getting at 3.5605%.

    The crash will be later then I previously anticipated. However I expect that timing it will be easier.

    Abstract:

    My strategy is continuously evolving as Market gives me more information. 

    My strategy relies on my analysis of the Market: "Plea for a New Economic Order." However I explain there that there is no way of predicting mathematically the Crash. Hence the hypothesis I make here about the future behaviour of the Market  is based solely on my 24 years experience of the behaviour of financial Markets, hunch and intuition. I believe it is reliable.

    My strategy concerns only the Markets I have superior knowledge of:  fixed rates, yield curve, stock indices and minerals.

    It is highly advisable to play a portfolio in these different segments (as we have no superior knowledge of individual specific risk which, hence must be diversified. Off course if I had a superior knowledge in one segment of these Markets I would use it). It is also advisable to play a portfolio of those different Markets giving some weights to fixed incomes, stock indices and minerals.

    Th ideal portfolio, for those who know what it is, is build by running an analysis of Principal Components on the historical values of the financial products and using the first component.

    For those who don't know what an analysis of Principal Components a sub optimal portfolio is made by using a weighting inversely proportionate to the implied volatility of the financial products.

    The ideal weighting are modified with the results of technical analysis.

    As I said it is impossible Mathematically to predict the Crash. Chairman Alan Greenspan said it was "Mission Impossible.":

    "That is mission impossible. Indeed, the international financial community has made numerous efforts in recent years to establish such oversight, but none prevented or ameliorated the crisis that began last summer.
     
    Much as we might wish otherwise, policy makers cannot reliably anticipate financial or economic shocks or the consequences of economic imbalances. Financial crises are characterised by discontinuous breaks in market pricing the timing of which by definition must be unanticipated - if people see them coming, then the markets arbitrage them away."
    Alan Greenspan
    The Age of Turbulence: Adventures in a New World [Economic Order?].

    First, although Alan Greespan is the economist that understand best systemic risk he oversees one thing: the real problem with systemic risk is not that you can't foresee it it is that you can't avoid it and insure against it. It means the system can't avoid it. Anyway you will be adversely affected by the depression, it doesn't mean that you can't analyse it and foresee it. It means also that when the Market foresees it we are already in the Crash. So although the Market can't foresee it individuals can.

    The problem lies with my model which says that the Crash is the result of an unstable equilibrium due to an inverted yield curve which resolve by a discontinuity of the yield curve as it gets to its stable equilibrium and normalizes.

    A Liquidity Trap [Confer: Keynes' Liquidity Trap:  A Theoretical Curiosity.] supposes a small shock. History remembers that what triggered Black Thursday was the failure of a small Austrian bank nothing close to a Lehman Brother or a Bear Stearn!

    For a description of a Crash Confer: Chapter III.Greenspan Conundrum and Bernanke Global Saving Glut.Paragraph 3: Bubbles & Bursts.s.

    As with any mission impossible, for those who watched that television series as did Alan Greenspan, it is possible for the Impossible Missions Force (IMF no kidding) to accomplish. We are going to use a special toolbox and use it in a smart way. As usual “Should you, or any member of your I.M. force, be caught, or killed, Alan Greenspan will disavow all knowledge of your actions. This tape will self-destruct in five seconds.”.

     
    "New Forces" that were not yet understood were likely behind the unusual environment of low long-term interest rates around the world, he said. "I do think the most relevant likely reason why we are dealing with what we are dealing with are new forces ... in the international market," "Their nature and their behaviour is not something we are going to fully understand, if ever; certainly except in retrospect."

     Chairman Alan Greenspan
    Central Bank Panel Discussion.
    To the International Monetary Conference.
    Beijing, People's Republic of China
    (via satellite)
    June 6th, 2005

    Mæstro, The Forces Be With You!

    "But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?
    And how do we factor that assessment into monetary policy?

    We as central bankers need not be concerned if a collapsing financial asset bubble does not threaten to impair the real economy, its production, jobs, and price stability. Indeed, the sharp stock market break of 1987 had few negative consequences for the economy.

    But we should not underestimate or become complacent about the complexity of the interactions of asset markets and the economy. Thus, evaluating shifts in balance sheets generally, and in asset prices particularly, must be an integral part of
    the development of monetary policy.     "

     Chairman Alan Greenspan
    The Challenge of Central Banking in a Democratic Society.
    At the Annual Dinner and Francis Boyer Lecture of
    The American Enterprise Institute for Public Policy Research,
    Washington, D.C.
    December 5th, 1996 

    My special tool is a curiosity of Markets that makes it a special mathematical function of time: it encounters technical supports and resistances which give them small discontinuities in the derivative of the value of financial instruments. These shocks, I pretend, will be sufficient to cause the return of the yield curve to its normal configuration if, of course, the resistance or the support is sufficiently strong. On the other hand when the financial instruments are not on these support or resistance the kinetic energy of the Market would render the yield curve immune to random shocks.

    Another condition is that the yield curve be sufficiently inverted: the force needed to take it away from its unstable equilibrium is inversely related to the distance between the yield curve and its normal configuration.

    Strategy:

    Hypothesis:

    I am going to use only the three Markets I have superior knowledge of: Treasuries, Stock Indices and Minerals.

    The long-term yields will continue their downward secular trend. Hence the yield curve will get more inverted.

    The volatility of interest rates will go down till the Liquidity Trap. As will the volatility of any Market we are concerned with (Experience tells us that when Market go up the implied volatility goes down, when a Market goes down its implied volatility goes up.).

    The lower long-term interest rates will be favoured by their lower volatility [Confer: Chapter I: Model of the Yield Curve.].

    Because in a configuration of inverted yield curve bankers chase yields I anticipate that the inversion of the curve will increase and every risk spreads will shrink (That favours stocks and corporate bonds.).

    The Market will get some stability from the talks about a second round of stimulus package whether it finally emerges or not.

    However the inversion of the yield curve will be soon unsustainable. Our hypothesis, given my empirical knowledge of the yield curve is that, in order to be sufficiently inverted the yield on the 30 years US TBonds needs to be below 3.90%.

    We will see that a key level for the yield of the 30 US TBonds is 3.62% after reachingto 4.60% Until I change my mind this is the support we are going to use now.

    We will see also that key level on the SP500 is 1017.63.  However my final objective can be much higher and I don't exclude now a new all time high.

    We will see that a key level for Oil is $89.00. However my final objective can be much higher and I don't exclude now a new all time high.

    In case I change my mind based on my intuition, feeling or hard facts I will twit.
    http://assets0.twitter.com/images/twitter_logo_header.png
    Except in Case of Emergengy.
    I never twit more than once a day!
    at 07:00 UT before the start of European trade hours.


    The Full Strategy is at Preparing for the Crash, The Age of Turbulence.

    Mission Accomplished, Mæstro!

    All of This Stays True Until the Poor Becomes Richer Relatively to the Rich.
    & Will Be Proved by the Coming of the Crash.

    My Political Orientation
    According to Nolan Chart Survey!
     
    As Liberal as John Maynard Keynes!
    As Libertarian as Friedrich August von Hayek!

    Extreme Economic Conditions Call for Radical Solutions.
    The Provocative & Controversial Innovation
    Since John Maynard Keynes and Friedrich August von Hayek.

    It is of the Uttermost Importance That, When the Financial Market Crashes, Which It Will Inevitably Do, we Restore as Fast as Possible the Economy by Implementing our Plausible Alternative Solution as to Minimalize the Economic Sufferings of the People.To That Order I am Building Redundant Social Networks. Please Grow the Networks!

    You Can Comment on This Article Here.
    I Will Incorporate Any Meaningful Contribution Into my Tract and Credit the Author.
    If you Believe you can Make a Significant Contribution to my Work Please Apply Here.

     Read the Publisher Agreement.

    The Tract will be ready to go to for edition on September 1st, 2009. It will have to be published on September 17tn,2009. I am looking for an editor.
    Jul 25 04:09 pm | Link | Comment!
  • Of the Justification of Interest Rates & Credit.

    Plea for a New World Economic Order.
    Chapter III.
    Greenspan Conundrum and Bernanke Global Saving Glut.

    Paragraph 7: Of The Justification of Interest Rate and Credit.

    "Man [credit] first of all exists, encounters himself, surges up in the world – and defines [justifies] himself afterwards."

    Jean Paul Sartre
    L'Existentialisme Est un Humanisme.
    1946

    Abstract:

    This paper shows that interest rates are the sum of an arbitrary rate, an unjustified rate and an morally unacceptable rate.

    Interest Rates:

    Prevailing theory about the cost of capital, CPAM: Capital Asset Pricing Model., states that it is the sum of risk free rate, systemic risk return, default risk return and liquidity risk.

    Arbitrary Risk Free Rate:

    We will see in Chapter IIX: The Adjusted Credit Free, Free Market Economy. that this arbitrary rate could be set at a very low price and that its only justification is the necessity to create some scarcity of Capital in order to maximize the return on Bank's Capital.

    Unjustified Systemic Risk Premium:

    I will show in Chapter III: Greenspan Conundrum and Bernanke Global Saving Glut. Paragraph 7: Systemic Risk. That this return was either to insure an non-existent risk or rewarded a risk the insurer can't assume.

    Morally Unacceptable Risk of Default Premium:

    This rate is morally unacceptable on several ground:

    It is discriminatory:

    Its price varies according to the customers, as such in any democratic capitalist state it is unconstitutional.

    It discriminates against the poor:

    When any civilised country should favour the poor.

    It is a collective punishment:

    It is set according to the economic class you belong to. Moreover who pays for that risk of default? Precisely those who didn't. Those who did default obviously didn't pay that risk premium. Imagine that a teacher punish all his pupil because several of them did make something wrong and punish those who precisely didn't do it.

    Morally Unacceptable Liquidity Premium:

    Its justifications are similar to the previous.

    Conclusion:

    Apart from causing Market instability and the inevitable destruction of the economy, the only justification of interest rates are their Market price. We conclude that Market can justify morally unacceptable behaviours and mathematically unsound results. The only way to suppress these unwanted results is to do what we do with drug dealing: make it illegal.

    Credit Leave Me A Loan!

    All of This Stays True Until the Poor Becomes Richer Relatively to the Rich.

    My Political Orientation According to Nolan Chart Survey!
     
    As Liberal as John Maynard Keynes!
    As Libertarian as Friedrich August von Hayek!

    Extreme Economic Conditions Call for Radical Solutions.
    The Provocative & Controversial Innovation
    Since John Maynard Keynes and Friedrich August von Hayek.

    It is of the Uttermost Importance That, When the Crash Comes, Which It Will Inevitably Do, we Restore as Fast as Possible the Economy by Implementing our Plausible Alternative Solution as to Minimalize the Economic Sufferings of the People. To That Order I am Building Redundant Social Networks. Please Grow the Networks!

    You Can Comment on This Article Here.
    I Will Incorporate Any Meaningful Contribution Into my Tract and Credit the Author.
    If you Believe you can Make a Significant Contribution to my Work Please Apply Here.

     Read the Publisher Agreement.

    The Tract will be ready to go to for edition on September 1st, 2009. I am looking for an editor.
    Tags: Alan Greenspan, Bernanke, Bonds, Corporate Bonds, Crash, Credit, Economy, Federal Reserve System, Finance, Great Depression, Income, Interest Rates, Macro Economy, Monetary Policy, Treasuries, Wealth
    Jul 24 07:00 am | Link | Comment!
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  • I suggest switching from Corporate Bonds to Treasuries for SPX=1015 AGG AGZ BBK BHD BHK BIV BWX BWZ EDV GKB GKD IEF IEI IGOV ISHG
    Jul 07, 2009
  • I suggest being long on minerals: SLV, UGL, OIL, JJC, GLD, PHPT, GBS Inverted yield curve http://tinyurl.com/mz6dul
    Jul 02, 2009
  • I suggest selling all long positions for SPX = 1015 Strong chart resistance and unstable yield curve. http://tinyurl.com/mvaa5x SPX and QQQQ
    Jul 02, 2009
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  1. Side Effects, Collateral Damages, and Unintended Consequences. (2 Comments)
  2. The [Good] Economic Conditions That Precedes a Liquidity Trap. (2 Comments)
  3. Resolution 49-1: Market Crash Security Measures for the Peace of Mind. (2 Comments)
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