We’ve recently been treated to two mutually exclusive forecasts: that the Great Bull Market will run until 2016 or 2018, so no worries; and that markets are exhibiting bubble-like characteristics that presage another crash.
So which forecast is more likely the correct one?
Analysts of every stripe—fundamental, quantitative and technical—pump out reams of data and charts to support one forecast or another, and economists (behavioral, macro, etc.) weigh in with their prognostications as well. All sorts of complexities are spun as a by-product of producing research that’s worth paying for, and it all becomes as clear as…mud.
As an experiment, let’s strip away as much of the complexity as possible and look at a few charts of what many observers see as the key components of the U.S. economy and stock market.
Let’s start with a basic chart of the S&P 500 (SPX), a broad measure of U.S. stocks:
Without getting fancy, we can discern three basic phases: what we might term “the old normal,” from the late 1950s to 1982; an amazing Bull Market from 1982 to 1994 that saw the SPX more than double; and a third phase that some consider “the new normal,” a leap to the stratosphere in the 1990s, followed by sharp declines and equally sharp rises to new highs.
This third phase of extreme volatility does not look like the previous phases; that much is clear. Is this a new form of volatile stability; i.e., are extreme bubbles and crashes now “normal”? Or are these extremes evidence of systemic instability? About the only things we can say with confidence is that this phase is noticeably different from the previous decades and that it is characterized by repeating bubbles and crashes.
Let’s zoom in on this “new normal” from 1994 to the present. Does any pattern pop out at us?
Once again, without getting too fancy, we can’t help but notice that this phase is characterized by steeply ascending Bull markets that last around five years. These then collapse and retrace much of the previous rise within a few years.
The reasons why these Bull phases only last about five years are of course open to debate, but what is clear is that some causal factors arise at about the five-year mark that cause the market to reverse sharply.
The ensuing Bear markets have lasted between 2.5 and 1.5 years. We only have three advances and two declines to date, but the regularity of these advances and declines is noteworthy.
Next, let’s consider other potential influences on this “new normal” of wild swings up and down. Some have observed a correlation between the cycles of the sun’s activity and the stock market, and indeed, there does seem to be a close correlation—not so much with the amplitude of the market’s recent moves but with the economic tidal forces of recession and Bull/Bear sentiment.
But there is nothing here to explain why the highs and lows in the stock market have become so exaggerated in the “new normal.”
Many have attempted to correlate key dynamics in the U.S. and global economy to the stock market’s gyrations. Let’s look at a handful that are often offered up as important to the U.S. markets: the bond market (TLT, the 20-year bond index), the Japanese yen, gold, and the U.S. dollar.
If there is some correlation between the SPX and the TLT, it isn’t very visible.
How about the Japanese yen? Once again, there is no correlation to the SPX that is obvious enough to be useful.
Some analysts see the yen and gold as tightly correlated; here is GLD, a proxy for gold:
There is a clear correlation here, but as we all know, correlation is not causation, which means that some underlying forces could be causing the yen and gold to act in a similar fashion. Alternatively, the yen is acting on gold in a causal role.
In either case, the problem with correlations is that they can end without warning. Since neither the yen nor gold correlate with the S&P 500, neither one helps us forecast a continuing Bull or a crash.
Lastly, let’s look at the U.S. dollar (DXY).
As I have noted elsewhere, the dollar doesn’t share any meaningful correlation with the S&P 500, yen, gold, or bonds in terms of trends, highs, or lows. Here is a longer-term view of the Dollar Index, and once again we see no useful correlation to the SPX:
Proponents of cycles (17.6 years, for example) claim a high degree of correlation with actual highs and lows, but these cycles do not exhibit the fine-grained accuracy we might hope for in terms of deciding to buy, short, or sell stocks.
Analyst Sean Corrigan has described a remarkable 33-year cycle of highs and lows in the SPX: lows in 1949, 1982, and (forecast) 2015, and highs in 1967 and 2000, (forecast of next high, 2033). While interesting on multiple levels, these cyclical data points are rather sparse foundations for decisions on whether to sell or hold major positions in the stock market, and they do not provide a forecast of the amplitude of any high or low. Given the extremes of the “new normal,” we would prefer a forecast, not just of time, but also of amplitude.
Though it is unsatisfyingly imprecise, the “new normal” phase strongly implies that future declines will be as dramatic as the advances and that the five-year clock is ticking on the current Bull market. Forecasting an advance that lasts years beyond this five-year pattern is equivalent to forecasting that the “new normal” phase is now ending and a new phase of much longer Bull advances is beginning.
That is a bold claim, and there is little historical data to give it much weight. Stripped of complexity, the charts suggest that the current run will top out within the next few months and retrace most of the advance from 2009; i.e., a crash of significant amplitude.
In Part II: The Case for Cash, we analyze the indicators that help us determine the likelihood of a coming crash similar in magnitude to 2000-02 and 2008-09, and why a strategy of selling risk assets now, and holding the cash until income-producing assets “go on sale” at the trough of the next market decline, seems especially prudent at this time.
Hitler finds out about Peak Oil
Are the Intelligence Committees Being Blackmailed?
During the Vietnam war, the NSA spied on two prominent politicians – Senators Frank Church and Howard Baker – as well as critics of government policy Muhammad Ali, Martin Luther King, and a Washington Post humorist.
A recently declassified history written by the NSA itself called the effort “disreputable if not outright illegal.”
They targeted Sen. Frank Church and Sen. Howard Baker. It could meanthey were trying to get information or dirt on senators involved in the Church committee and Watergate committee investigations respectively — either to learn something about their investigations or to discredit them.
We still need more information about what happened then. But more critically, we need more information about what’s happening now. These revelations raise the obvious question: If the NSA was targeting people like Sen. Frank Church, who were in a position to oversee the NSA — is that happening now? That is, are people like intelligence committee chairs Sen. Dianne Feinstein (D-Calif.), Rep. Mike Rogers (R-Mich.) and other congressional leaders — who are supposed to be providing oversight themselves — compromised in some way by the NSA? If so, as seems quite certain from the recent Edward Snowden revelations, then how can they conduct genuine oversight of the NSA with their committees?”
If I were a member of congress, I would be terrified that NSA would do to them what J. Edgar Hoover did to members back during his time.
Maybe. But remember:
- The NSA has been tracking people’s porn in order to discredit them. The New York Times reportsthat this type of behavior has been going on for a long time: “J. Edgar Hoover compiled secret dossiers on the sexual peccadillos and private misbehavior of those he labeled as enemies — really dangerous people like … President John F. Kennedy, for example”.
- A high-level NSA whistleblower says that the NSA is spying on – and blackmailing – top government officials and military officers, including Supreme Court Justices, high-ranked generals, Colin Powell and other State Department personnel, and many other top officials
- Another very high-level NSA whistleblower – the head of the NSA’s global intelligence gathering operation – says that the NSA targeted CIA chief Petraeus
- Blackmail of Congress members may be common
Postscript: Of course, there’s always the carrot.
If you don’t like the frequency of your air-quality alerts, you don’t have to keep them. That is the message that the Chinese government has made loud and clear as Bloomberg reports, Shanghai’s environmental authority took decisive action to address the pollution – it cynically adjusted the threshold for “alerts” to ensure there won’t be so many. In a move remininscent of Japan’s raising of the “safe” radioactive threshold level, China has apparently decided – rather than accept responsibility for the disaster – to avoid it by making the “safe” pollution level over 50% more polluted (up from 75 to 115 micrograms per cubic meter) – almost 5 times the WHO’s “safe” level of 25 micrograms.
As the smog that has choked Shanghai for much of the last week reached hazardous levels, the city’s environmental authority took decisive action to address the frequent air-quality alerts: It adjusted standards downward to ensure that there won’t be so many.
It was a cynical move, surely made to protect the bureau’s image in the face of unrelenting pollution that only seems to grow worse, despite government promises to address it.At this advanced stage in China’s development, nobody in the country (or elsewhere) — not even the loyal state news media — seems to believe that the problem is solvable, at least not any time soon. Even worse, nobody — not the state and certainly not the growing number of middle-class consumers (and car buyers) — seems ready to take responsibility for the mess.
If you can’t fix it, you might as well try to avoid responsibility for it, the thinking seems to go. It therefore comes as no surprise that Shanghai’s Environmental Protection Bureau decided to lower the benchmark for alerting the public about pollution risks. It will now issue alerts only when the concentration of the most dangerous particulates in the city’s air, known asPM2.5 (particulates smaller than 2.5 micometers in diameter) reach 115 micrograms per cubic meter. The previous standard was 75 micrograms per cubic meter. (The World Health Organization recommends not exceeding 25 micrograms per cubic meter in a 24-hour period.)
The state-owned English-language China Daily explained the decision in tone that almost obscured the absurdity of the maneuver: “The bureau said it believes the original standard is too strict, given that haze is common in the Yangtze River Delta region in winter.”
“On social networks like Weibo and Wechat, Beijingers now show photos of blue skies and white clouds as if they’re on vacation.” This show-off behavior left a bad taste, he concedes, before concluding with a final sentence that ought to serve as a rallying cry in China: “I really hope that someday people will resume reacting to blue skies and white clouds in a ‘normal’ manner.”
That’s a hope that probably won’t be fulfilled in this decade or even the next.
With private sector loan creation in the US and Japan virtually unchanged since Lehman levels (and the US in danger of posting a negative comp in a very months) and Europe loan creation contracting at a record pace, it falls upon the Fed and Bank of Japan (and possibly the ECB soon) to inject the much needed credit-money liquidity into the system. And, as everyone knows, month after month the Fed and the BOJ diligently create $85 billion and $75 billion in new outside money out of thin air (that this “credit” ends up in the stock market is a different topic).
So to help readers get a sense of perspective how the US and Japan compare when matched to China, below we present a chart showing the fixed monthly “money” creation by the Fed and the BOJ compared to the most comprehensive money supply aggregate available in China – the Total Social Financing – for the month of November. The chart speaks for itself.
Basically, while everyone focuses on the breakneck money creation by the Fed and the BOJ, what happened in the past month is that China quietly created some 20% more money. Perhaps most impotantly, between these three entities, nearly $400 billion in liquidity was created de novo in one month! Because when the entire world is a credit-fueled ponzi scheme, these are the kind of numbers that matter.
For those curious, here is a more detailed breakdown of the Chinese numbers from Bank of America.
New bank loans and TSF rebounded notably in November
Despite higher and volatile interbank rates and rising bond yields, credit growth remained quite robust towards year-end. Two most watched data points, new bank loans and Total Social Financing (TSF), rebounded notably to RMB625bn and RMB1230bn respectively in November from RMB506bn and RMB856bn in October. YoY bank loan growth remained unchanged at 14.2%, while yoy outstanding TSF growth moderated to 19.5% from 19.7%. Today’s money & credit data should be positive for markets which have been worried that the PBoC could tighten credit supply to reduce leverage by citing rising bond yields and interbank rates.
Details of TSF: All financing activities accelerated
- New entrusted loans rebounded notably to RMB270bn in November from RMB183bn in October, while new trust loans increased to RMB102bn from RMB40bn.
- New corporate bond rose to RMB138bn in November from RMB107bn in October. We note that government and coporates delayed their bond issuance or scaled down the size after bond yield soared, but the net corporate bond issuance in TSF still rebounded due to a smaller amount of expiry in November from October.
- New FX loan edged up to RMB12bn in November from RMB5bn in October.
- Non-discounted bankers acceptance (BA) increased by RMB6bn in November after falling RMB40bn in October. We think the monthly numbers are particularly volatile, and there is no need to overly-interpret it (This is also the reason why we exclude it from calculating our revised TSF growth.)
Loan details: demand for working capital remained decent
- New MLT corporate loans fell to RMB86bn in November from RMB144bn in October. Concerning seasonality, the number is not low. Note that it dropped to –RMB3bn in November 2012 from RMB169bn in October 2012 despite supportive policies and recovering growth momentum then. We believe policies would remain relative neutral in coming months and there could be no sudden reversal of policies.
- New short-term corporate loans rose to RMB241bn in November from RMB215bn in October. Meanwhile, discounted bills also increased by RMB19bn after falling RMB71bn. It suggests loan demand for working capital remained decent.
- New MLT loans to household (mainly mortgage loans) rebounded to RMB182bn in November from RMB154bn in October, supported by strong home sales momentum in previous months. New short-term loans to households rose to RMB80bn in November from RMB51bn in October, reflecting that SME loans could remain supported.
* * *
So how long before the developed and developing world “have” to create $1 trillion or more in money supply each month to keep the house of cards from toppling?
“The attitudes toward cannabis are shifting rapidly,” says a former DEA-agent-turned-pot-growing-company-lawyer, adding that “the potential social and financial returns are enormous.” As ironic as that maybe, perhaps it is why Uruguay has just become the first nation in the world to allow its citizens to grow, buy and smoke marijuana. As Reuters reports, the pioneering government-sponsored bill establishes state regulation of the cultivation, distribution and consumption of marijuana and is aimed at wresting the business from criminals. “Our country can’t wait for international consensus on this issue,” said one politician as demand is rising globally as the following chart shows…
DEA Agent becomes Pot-growing-firm lawyer… (via The Atlantic):
Patrick Moen is a 36-year-old former supervisor at the U.S. Drug Enforcement Agency, where, until recently, he led a team based in Portland that fought methamphetamine and heroin traffickers.
Now, he is embarking on a career change. A rather dramatic one. The Wall Street Journal reports today in a delightful article that Moen has become the in-house lawyer at Privateer Holdings Inc., “a private-equity firm that invests solely in businesses tied to the budding legal marijuana industry.”
In other words, the revolving door between business and government just made an unexpected, and very druggy, turn.
“The potential social and financial returns are enormous,” Moen told the Journal said of his new business. “The attitudes toward cannabis are shifting rapidly.”
Indeed they are.
As Uruguay appears to show (via Reuters):
Uruguay’s Senate is expected to pass a law on Tuesday making the small South American nation the world’s first to allow its citizens to grow, buy and smoke marijuana.
The pioneering government-sponsored bill establishes state regulation of the cultivation, distribution and consumption of marijuana and is aimed at wresting the business from criminals.
Cannabis consumers would be allowed to buy a maximum of 40 grams (1.4 ounces) each month from state-regulated pharmacies as long as they are over the age of 18 and registered on a government database that will monitor their monthly purchases.
Uruguayans would also be allowed to grow up to six plants of marijuana in their homes a year, or as much as 480 grams (about 17 ounces). They could also set up smoking clubs of 15 to 45 members that could grow up to 99 plants per year.
The bill, which opinion polls show is unpopular, passed the lower chamber of Congress in July and is expected to easily pass the Senate on the strength of the ruling coalition’s majority.
“Our country can’t wait for international consensus on this issue,” Senator Roberto Conde of the governing Broad Front left-wing coalition
Rich countries debating legalization of pot are also watching the bill, which philanthropist George Soros has supported as an “experiment” that could provide an alternative to the failed U.S.-led policies of the long “war on drugs.”
“This development in Uruguay is of historic significance,” said Ethan Nadelmann, founder of the Drug Policy Alliance, a leading sponsor of drug policy reform partially funded by Soros through his Open Society Foundation.
“Uruguay is presenting an innovative model for cannabis that will better protect public health and public safety than does the prohibitionist approach,” Nadelmann said.
But who is “using” the most…
So USA is #1 in something!!
A recent report released by U.S. computer security firm FireEye revealed that Chinese hackers had accessed computers at the foreign ministries of five European countries. The New York Times identified the five countries as the Czech Republic, Portugal, Bulgaria, Latvia, and Hungary. As Nart Villeneuve, a researcher for FireEye, also told the Times, Chinese hacking attempts have in the past targeted Japanese and Indian firms, Tibetan activists, and even the finance ministers of G20 nations. According to James A. Lewis, a senior fellow and director at the Center for Strategic and International Studies, Chinese hackers have also tapped the foreign ministries of Australia, Britain, Germany, France, India, and Canada. FireEye reported that these disparate hacking jobs all used similar code, which was written in Chinese and tested on Chinese-language computers. The report concluded that these “seemingly unrelated cyberattacks” could actually be “part of a broader offensive fueled by shared development and logistics infrastructure.”
The laundry list of hacking targets mirrors the recent avalanche of accusations leveled at the U.S. National Security Agency (NSA). Ever since Edward Snowden fled the country and began leaking evidence of covert NSA cyber-espionage campaigns, hardly a month goes by without new revelations of the depth and breadth of NSA activity. According to Snowden’s documents, the NSA is responsible for monitoring the cell phone and internet metadata of U.S. citizens, tapping into German Chancellor Angela Merkel’s cell phone, and using the embassies of the United States and its allies to conduct covert surveillance operations in foreign countries ranging from Italy to Indonesia.
The lists of alleged hacking by both the U.S. and China are a bit puzzling, in that the reported targets seem of relatively little value. Why, for example, would the Chinese be particularly interested in hacking into the foreign ministries of Eastern European nations? And why would the U.S. be eager to tap the cell phone of Angela Merkel and to spy on Italian leaders? Both China and the U.S. have far more critical security concerns.
This suggests that the targets revealed so far are only part of a far more widespread cybersecurity espionage campaign. If the United States is indeed monitoring the activities of world leaders in Germany, Brazil and Italy, then why wouldn’t it be conducting similar surveillance in countries about which the U.S. has serious strategic concerns — countries like Iran, Russia, and, yes, China? The same logic applies to China. If Chinese hackers (who have not, it should be noted, been definitively tied to the Chinese government) are targeting small Eastern European countries, there is every reason to believe they are also monitoring countries of more strategic interest closer to home, such as Japan, Korea, and the U.S.
Instead of asking themselves why they should conduct cyber-espionage on targets of relatively low interest, the U.S. and China seem to be asking, “Why not?” As James Lewis of CSIS told The New York Times, “It is so easy to hack foreign targets, intelligence agencies can’t resist.” As hacking allegations mount against the U.S. and China, it seems that both countries are disinclined to rein in their intelligence agencies.
China’s Foreign Ministry customarily deflects accusations of hacking by saying that China is also a victim, which is almost certainly true. However, this obviously doesn’t preclude China from also being a perpetrator of such attacks. In his regular press conference, Foreign Ministry spokesman Hong Lei responded to the hacking accusations: “U.S. cyber security companies have long been interested in hyping up the so-called ‘cyber threat from China’ with no solid proof.” Hong Lei also said that “China has been engaged in a wide range of international cooperation to combat cyber crimes.” Despite these denials, there is little disagreement in the U.S. policy community that China is engaged in widespread cyber-espionage.
Meanwhile, the U.S. government has tried to defend its own hacking activities by drawing a line between “acceptable” and “unacceptable” cyber-espionage. According to the U.S.’s formulation, cyber-espionage is acceptable when applied to government or military institutions. In fact, National Intelligence Director James Clapper’s main defense for U.S. surveillance of foreign governments was that such practices are commonplace. He called it “a basic tenet” to monitor foreign leaders and politicians. This type of cyber-espionage falls under the realm of “national security” and is, in the U.S.’s view, tolerable.
However, the U.S. government wants to classify cyber-intrusions against private corporations or institutions as a different type of hacking, one that is “out of bounds,” as Vice President Biden put it in July. Conveniently, the U.S. most often accuses China of this latter type of hacking. Even this defense has worn thin after Snowden’s claims that the U.S. has hacked into private organizations, including universities, phone companies, and telecommunications companies.
As we move further into the 21st century, the U.S. and China will be the major rule-makers for the new global order. As such, the U.S. and China will together help define what is acceptable behavior in the cyberspace. There have already been calls for the U.S. and China to discuss limits on hacking activities and to define clear “rules of the road” for cyberspace. Unfortunately, it seems that (though neither would admit it) the U.S. and China have very similar ideas on cyberspace — anything goes.