The Simple Accountant

5 Reasons Why the Market Is About to Change Direction

We have been shown charts of various ETFs as proxies for the major equity indexes, gold and the US dollar. What is missing? How about charts of IEF and TLT? The above charts may not be saying much, but these are shouting rather loudly. December has been nothing but ugly for the longer maturity treasuries. Now, reconsidering the above in the light of this new information, how do the markets look?

Odd Signals from Financial Markets: Who's Wrong Here?

It is not necessary for anyone to be "wrong" at this juncture. Putting together a study of behavioural economics and history may suggest a changing paradigm for the financial markets, but this would be a very inexact science with little predictive validity for portfolio management purposes. Or it could be, as Mr. Zurbrugg and many others suggest, as simple as an all asset classes rally (except treasury bonds) representing short term mean reversion from an extraordinary all asset classes sell-off.

This appears to me to be a market in which exceptional vigilance is called for. No heroic stands, and a willingness to change outlook and allocations at the first sign of an emerging trend. Blue chip global equities are drifting and trendless, while US small caps are staging a modest rally. Investment grade bonds and treasuries are correcting together with commodities and precious metals, which is a bit odd.

My read: the bond markets fear monetary inflation, while the commodity markets fear insufficient demand. The stalemate between the deflationist and inflationist scenarios grinds on. Therefore my allocation remains quite neutral and overweight cash. At some point the markets will signal the move. Until then, as I often advise, sometimes the best move is to do nothing.

Are We Heading Toward a Market Crash by Jobless Recovery?

I am also in favour of infrastructure investment, but admit that there are caveats. One of the problems with the process is that it happens in a political way. In other words, capital is not allocated in the same way a corporate financial manager would evaluate competing projects, and select the best candidates based on some measure of expected return (NPV, IRR, EVA, etc.).

Just on the grounds of that inefficiency, one might prefer that the government instead reduce its consumption of capital and allow the private decisions of its citizens and businesses to handle the investment allocation. Remember, there is more than one way to put money into people's pockets; that can happen by simply taking away less in taxes.


On Dec 18 09:51 AM TripleG wrote:

> One of the only things I agreed with from the Obama campaign was
> "shovel ready projects". We, the U.S. need new infrastructure and
> existing infrastructure repair. We are ready for it now. Where is
> it?

Another Reason Why America's Glory Days Are Over

Disturbing but not surprising. Market forces and in particular global labour arbitrage have held down wages in private industry. Governmental employment has felt little such constraint - yet. Shrinking tax revenues and expanding deficits, however, make it seem unlikely that this will continue.

Overly indebted nations with excessive public sector payrolls, such as Ireland and Greece, and states such as California and New Jersey which are comparable to these nations, may not be able to sustain those payrolls much longer.

On a macro level, restoring a sensible balance between private industry and public services is a key to a dynamic economy going forward. In the near term, however, what happens to aggregate demand if significant numbers of public employees join their private sector brethren on the unemployed lists? Score one more point for the deflatonists, and keep a watchful eye on that long commodities/short bonds trade.

Stimulus Spending and Lost Hope for Markets

Thank you Prof. Morici, for another thoughtful and well written article.

The thesis here, and comments above, reflect an understanding (correct in my opinion) that the globalisation process in general, and labor arbitrage in particular, are devastating to the US working middle class.

The difficult part, as I see it, is how to create a trade policy response that is both effective and appropriate. Let us say, for the sake of argument, that the US government is able to persuade the Chinese government to take actions that have the effect of reducing the cost advantage of Chinese goods in the US market. Would the production of these goods not then shift to Indonesia, Egypt, or some other location, requiring the same sort of actions to be taken serially in successive countries?

Alternatively, let us assume the US policy makers, seeing the difficulty of the above course of action, instead opt to impose effective general limits on the importation of goods, via tariffs, quotas, or some other mechanism. What happens to the price of imported goods, and by extension the living standards of the working class in whose name they are imposed?

Large corporations and their investors have benefited from the profit margins gained through international trade. Workers have arguably benefited from lower cost of goods (though this is offset by wage losses).

My intent in this is not to naysay the desirability of some way to stabilize the middle class standard of living in the US (and other western nations), just to point out the difficulty in actually doing it via governmental policy initiatives. In a global economy, from which there is no turning back, all of the alternatives have serious consequences which cannot be ignored. So I ask, seriously, what is to be done?

The domestically produced energy initiatives Prof. Morici and other suggest appear to be a good place to start, and rebuilding the dilapidated US energy and transportation infrastructures has merit, but how much of this is actually practicable? There have been well reasoned criticisms of ethanol and solar subsidies. What would happen if we protect or offer subsidy to other domestic industries? Would we arrive at a better place than if we allowed the market forces to complete their work of global leveling? I, for one, am unsure.

Recession, Depression, Deflation, Inflation, Collapse or Recovery?

Really now, you're going to cite Bob Chapman, conspiracy theorist extraordinaire, and try to pass it off as serious economic analysis?

Why omit these other gems of wisdom from the cited article?

"...banks are being told to obtain secure storage for new currency-dollars. They expect official devaluation by the end of the year."

"As you can see, the Illuminist [the dreaded Illuminati - SA] program is going to come quicker than we anticipated."

"The game as we know it today began in 1694 when the Rothschild’s [sic] formed the privately owned Bank of England..."

This is supposed to be a site for serious investment oriented discussion. I have no problem with anyone making a bear case from the observed data, indeed, I'm a market skeptic myself at this juncture, but there is no place for this kind of nonsense.

How Come Good Macro Policies Are Political Losers?

Mr. Chapman is a conspiracy theorist (which does not , in itself, discredit him). In addition to a wild claim regarding replacement of the currency stock, the full article excerpted above refers to an accelerated "Illuminist program," mentions the Rothschild-Bank of England connecton, etc. The highly placed sources, of course, go unnamed. That sort of thing does not suggest to me the work of a serious economic analyst.


On Nov 29 02:33 PM Kimball Corson wrote:

> To conceptwizard:
>
> very troubling, if true.
>
> Our difficulty in assessing the article's veracity arises from the
> lack of transparency and full disclosure of its programs and agendas
> by our governement. It is hard to evaluate something like this in
> those circumstances.
>
> However, for what bearing it has, Bob Chapman, the driving force
> behind the International Forecaster is a 72 year old doom and gloom
> ex-gold broker who thinks we should all be holding a lot of gold
> and preparing for the worst. He appears to have no special education
> or training in economics.

How Come Good Macro Policies Are Political Losers?

Prof. DeLong, since you have asked a political question, rather than an economic one, let me hazard a very broad guess: there is political opposition (other than the disingenuous and self-serving kind you described), because at bottom the policy response represents a change in the nature of American self-perception.

The policies following the crisis make it plainly obvious to any reasonably informed observer, that the deeply meaningful ideals of free enterprise, governmental fairness, and preservation of the essential role of the working middle class have been compromised in fact if not in rhetoric. To be fair, this has been a bipartisan effort.

You may argue that the policy responses were correct, and the best available under the circumstances. This may be true, and you are certainly far more competent to make that judgement than I am, but all of that is beside the point. Americans understand that through all of this, their country has changed in fundamental ways and that something has been irretrievably lost. They are resentful. Astute politicians sniff out this public mood as surely as trained pigs finding truffles in a French forest. The more cynical among them play this to their advantage, while the more conscientious will share this concern and want to bring it into the policy discussions.

I would also like to commend here the remarks of Mr. Corson, who has recently taken up a line of thinking that is difficult for Americans to discuss honestly, but important if they are to remain the type of Democracy that they are taught to revere.

The Distorted Shape of Our Emerging Recovery

The current economic situation is not IMO a discrete event resulting from identifiable policy errors and analytical failures, although they certainly have accelerated and deepened the problems.

The macro trends have been in place for decades, and would play out over time even without the near collapse of the global financial system. Global capital mobility, accelerated technological displacement of established industries, excess labour supply in developing markets, etc.

These would eventually constrain the ability of industrialized nations to maintain standards of living for large segments of their populations, absent significant investment in human capital; even then there is no clear programme and no assurance of success. These nations have, however, proven to be remarkably creative and resilient, so I tend not to worry so much as Mr. Corson.

A New Economic Indicator?

OK, lets see...
Gold run - check
Ammo run - check
Canned goods must be next?

Are we supposed to think the US proletariat is arming itself against...what?
Does this explain all the empty seats at recent NASCAR Cup races too?
What does Ted Nugent have to say about all of this?

America Uncoupled: Wall Street and Main Street at a Fork in the Road

Seen in historical perspective, the United States is internally returning to something more like the "robber baron" era. The establishment of what a previous commentator refers to as "Middle class centered participative democracy" was in reality a transient phase created by two primary elements: the hard won gains of the working class through organized labor action, and the US supplanting of Britain as the dominant world economic power. There are many volumes of labor and economic history which document these.

In both of those developments was contained the seeds of their own undoing. The very success of American labor in winning a solid middle class lifestyle for industrial workers led to their their abandonment by relatively unconstrained capital mobility, with de-industrialization beginning much earlier than most of us realize (the population of Detroit peaked in the early 1950s).

The burden of being the world's dominant power has severely constrained the policy options of the government. In the macro process of globalization, the US has had much to lose, and its industrial, financial and political elites have not provided particularly good leadership. They have too often sold the nation down the river for their own short term gain.

Seven Reasons Doug Kass Is Wrong About the Economy

The author does make some valid points. To hit on some of his seven reasons quickly:

1. Business cost cuts are sustainable, but driving earnings growth by additional cost cuts is not. It really does all depend on when top line growth returns.

2. Job destruction is not a grave economic threat at 10-12% U/E, but may be a political one. We were discussing this with a VP in my employer firm; it seems probable that we could have another "jobless recovery" and this would be fine for most everyone but the unemployed. Europe, for example, has had (slow) growth with persistently higher levels of unemployment for decades.

5. This point should be easy to measure; how much fiscal stimulus has been applied, and how much GDP growth has resulted? Is the latter a multiple of the former or a fraction?

6. Let's see what happens with the muni bond market and default rates. So far the market doesn't appear to be discounting catastrophe, but if it's on the horizon, we can be certain that the bond traders will be making some noise.

7. Agree that large tax increases are unlikely, and suspecting Republican gains in the Senate at the midterms, they aren't going to be attainable politically.

Overall, the most likely scenario still appears to be John Mauldin's "muddle through" for a few years. Not a return to the salad days but not a grinding depression either. We didn't get here overnight and won't get out overnight. We work our way out of the problems gradually

The Disappearing Private Sector Job Market

Neil, it might be more accurate to say both parties are buying votes, just with different levels of openness and from different constituencies.

I agree with the general concensus view here that this broad trend must be reversed, sooner rather than later. Rebuild industries that create value added output. In other words, create value, rather than shuffling it around and giving a cut to every hand through which it passes. Question: is that a policy driven action (revolution from above), or a market driven one (revolution from below)?

Sucker's Rally Approaching an End

Short term market moves are better analyzed on technical indicators, and they pointed to a rally. Yes, the underlying economic fundamentals are still weak, and that should cause investors to be cautious over the longer term, but significant interim moves present profitable opportunities for nimble traders. As so many have noted, it's not a market that favors the buy and hold approach.

Market Watch: Beware the Ides of February

New Year rally following tax loss selling seems like a sensible near term forecast.