the social scientist.

Indicator Update

You are probably familiar with Fosback's high/low Logic Index. He took the number of weekly 52-week highs and lows on the NYSE (all issues traded I think), and calculated the lowest of the highs or lows as a percentage of total issues traded. If the 10 week average of these percentages fell below 1% that was a bullish signal. It didn't matter if the low number was highs or lows. At the beginning of a bull market the percentage of stocks making new highs is extremely low, and when the bull market lifts off, the percentage of stocks making new 52 week lows is very low. He wasn't publishing in 2002; so I don't how the indicator did in forecasting the bottom of that bear.

I have calculated the indicator for myself since 2004, and it is getting close to a bull signal, although I suspect it is wise to wait until there are very few new lows.

If the 10 week average is above 5% that is a bearish signal. The Hindenburg omen seems to be a variant of Fosback's indicator. The sell signal failed at the end of 2005, but forewarned of weakness in May 2006. It issued a sell on 8/17/07 at the intermediate bottom. It has not come to signaling a buy until this month. As of Friday the 10 week average was at 1.62% and falling.

This Recession Will Be Anything but Deep

I tend to agree with pretzel logic. I don't know of any significant occurrences of asset price deflation that didn't also have product price deflation succeed it.

As for Peng's idea that the financial losses are not as bad as they appear because the prices of the debt instruments may go up, I would point out that US financial firms are understating their losses, because as the price of their debt drops below par, they record that price drop as profit. The accounting principle is that they can buy the debt back cheaper than they sold it for.

There are also a lot of companies with defined benefit pension plans, who assume an annual profit on those plans, even in a year like this, which are in their earning statements. And finally, the companies that are losing money, get to record future tax credits as profit now, even though they have to make a profit to collect that tax savings. Remember GM? They finally had to write those imaginary profits off, because they weren't going to make a real profit in time to collect the tax credit.

My point - the reported losses are actually much bigger than reported.

Depressionary Tales

The problem with trying to analyze why a depression occurred is that we only had one with reasonable data to analyze. You can't therefore investigate it scientifically. Science is based on variables. You vary something and see what happens to a response variable. This can't be done in the case of a one time historical event.

Prior to the last depression there was no consumer price inflation. Technology was creating productivity gains where there was actually excess production capacity in the US holding down prices. There was asset price inflation but nothing like the current housing bubble. The Feds raised interest rates in 1929 to slow the asset price inflation. That worked well. Deflation in all prices became very apparent in 1930, and was at its worst in 1931 and 1932.

The economists today figure you provide liquidity to prevent this (helicopter Ben), to make people spend (better to spend than save when interest rates are low and there is inflation), and to relieve a credit crunch. But, how do they know that it would have worked then? They don't. How do they know that it will work this time, with a fundamentally different financial structure that provides credit to the economy? We don't know if it will work. So we try it, and see if it will work this time. The fact that interest rates are so low with the CPI at 5%, and that the Fed and Treasury are doing their utmost to relieve the credit crunch by providing it to more than just the banks, is an indicator that they truly fear a Depression. On the other hand, are they really doing what it takes to provide liquidity? The interest rate on the loans to AIG are really steep, and the government gets 80% of the equity in the company. And interest rates could be reduced to zero now. Inflation is not a worry. The danger is deflation.

The politicians on both sides can do little, except to keep the stimulus coming, but the government has to borrow that money they give to us and so place further demands on credit. In turn, if we spend it, which is what they want, a lot gets spent on imports benefitting other countries. No problem - they lend it back to us. Our government increases it debt; the common folk don't decrease there's. Nothing is solved. We just stay on the treadmill, the dollar drops and there is severe inflation or there is a depression, or both. In the both scenario, the inflation precedes the deflationary depression, or has that happened already?

I don't think there is a way out, until most of this debt is unwound, by way of bankruptcies or high inflation. So root for high inflation policies. Incidentally this is all began with the Reagan administration - cut taxes on the rich; so they have the capital to lend it back to the government, to lend it to the not so rich so they can consume all that unnecessary crap, and to build factories in other countries. They invested that money really well didn't they.

The Death of Consumption?

The drop in import prices in August, which should continue in September, will greatly reduce reported GDP for the third quarter also. That's right - reduce. The drop in export prices will also reduce GDP, I think.

The markets will probably react positively to a contraction in GDP. It's the old lore, that when the recession is announced, the market looks forward to recovery. Can't see how economic recovery could occur, myself. If it does occur, oil prices will go back up, and kill it.