Olduvaiblog: Musings on the coming collapse

Home » Posts tagged 'Equities'

Tag Archives: Equities

UPDATE February 2012 — The Food Crises: Predictive validation of a quantitative model of food prices including speculators and ethanol conversion | NECSI

UPDATE February 2012 — The Food Crises: Predictive validation of a quantitative model of food prices including speculators and ethanol conversion | NECSI.

Cite as: M. Lagi, Yavni Bar-Yam, K.Z. Bertrand, Yaneer Bar-Yam,
arXiv:1203.1313, March 6, 2012.

Abstract

Increases in global food prices have led to widespread hunger and social unrest—and an imperative to understand their causes. In a previous paper published in September 2011, we constructed for the first time a dynamic model that quantitatively agreed with food prices. Specifically, the model fit the FAO Food Price Index time series from January 2004 to March 2011, inclusive. The results showed that the dominant causes of price increases during this period were investor speculation and ethanol conversion. The model included investor trend following as well as shifting between commodities, equities and bonds to take advantage of increased expected returns. Here, we extend the food prices model to January 2012, without modifying the model but simply continuing its dynamics. The agreement is still precise, validating both the descriptive and predictive abilities of the analysis. Policy actions are needed to avoid a third speculative bubble that would cause prices to rise above recent peaks by the end of 2012.

NECSI Food Price Update Warns of Crisis by 2013

CAMBRIDGE (March 6)–According to a new study from the New England Complex Systems Institute the next food price bubble will occur by 2013.

“The food price bubble of 2011 caused widespread hunger and helped trigger the Arab spring. In 2013 we expect prices to be even higher and may lead to major social disruptions.” said Professor Bar-Yam President of NECSI, who has just returned from Davos where he presented his findings on speculation in global commodity markets. His paper “The Food Crises: A Quantitative Model of Food Prices Including Speculators and Ethanol Conversion” was called by Wired magazine one of the top 10 discoveries in science of 2011.

In 2008 and 2011 increases in global food prices triggered hunger, food riots and social unrest in North Africa, the Middle East, and elsewhere, at a cost to global stability which policy makers can no longer ignore. Over the past decade, world unrest has sharply increased at time of peak food prices; now the long-term price trend is getting close to what used to be episodic peaks.

According to the new study, the next food price peak will take place in about a year. The results will be dramatically higher prices than we have encountered thus far. The study warns that should ethanol production continue to grow according to multiyear trends, even the underlying trend will reach social-crisis levels in just one year.

NECSI’s latest findings reveal that the model from their 2011 paper still fits food price price trends. Their update reveals one important shift, however, in price trends, which might add to, not lessen, global instability. “The current trend of prices suggests that in the immediate future market prices may become lower than equilibrium,” says the study, “consistent with bubble and crash market oscillations.”

Lower prices at first may seem like good news as a reprieve from the extremely high food prices seen in the past, but the study says that the drops are likely to be short-term.

To examine what is driving the rises in food prices, researchers at the New England Complex Systems Institute (NECSI) performed a detailed study in 2011. The Institute, which uses mathematical modeling to reveal social and political trends, drew from the FAO Food Price Index from January 2004 to March 2011, and investor movements—shifting among commodities, equities and bonds. The analysis discovered two key drivers behind the rise: investor speculations and the rush toward conversion of corn to ethanol. The study was presented by invitation at the World Economic Forum in Davos and featured as one of the top 10 discoveries in science in 2011 by Wired magazine.

This month, NECSI is publishing the results of its study update, in which the institute extends its food price model to January 2012, entering no modifications to the model and continuing to use its dynamics.

NECSI’s researchers said the model they have used to examine food prices has proven to be robust and consistent with ongoing behavior of food prices.

Bar-Yam, who co-authored last year’s food-price study as well as the latest study update, said that the fit with the FAO Food Price Index is still “strikingly quantitatively accurate, validating both the descriptive and predictive abilities of the model.

“To extend NECSI’s earlier model ten months out and to still witness a fit is important,” he added. “This means we have validated it for data that was not around when we first made the model. It predicted the burst of the 2011 food bubble at the exact time it happened, when many were saying that high food prices were there to stay. Success in predictive validation is remarkable. The conclusions are reinforced greatly that high food prices are due to ethanol and speculators–with all the relevant policy implications.”

“The current equilibrium value is about 50% higher than the prices prior to the impact of the ethanol shock. And the projected time until the next food price bubble is about a year.” The results will be dramatically higher prices than encountered thus far.

Press contacts

Karla Bertrand, Press Relations
karla@necsi.edu, 617-547-4100

Clare Froggatt, Program Coordinator
clare@necsi.edu, 617-547-4100

Why the Stock Market May Crash in the Next Few Months | Peak Prosperity

Why the Stock Market May Crash in the Next Few Months | Peak Prosperity.

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.

Click here to access Part II of this report (free executive summary; enrollment required for full access).

 

Stock Market Crashes Since 2006: Trading Bots | Zero Hedge

Stock Market Crashes Since 2006: Trading Bots | Zero Hedge.

 

Stock Market Bubbles And Record Margin Debt: A (Repeating) History Of Ignoring All Warnings | Zero Hedge

Stock Market Bubbles And Record Margin Debt: A (Repeating) History Of Ignoring All Warnings | Zero Hedge.

 

Is This The Greatest Stock Market Bubble of All Time?

Is This The Greatest Stock Market Bubble of All Time?.

 

Stock Market Crashes Through the Ages – Part I – 17th and 18th Centuries | Zero Hedge

Stock Market Crashes Through the Ages – Part I – 17th and 18th Centuries | Zero Hedge.

 

Japan Stock Market Crash Leads To Global Sell Off | Zero Hedge

Japan Stock Market Crash Leads To Global Sell Off | Zero Hedge.

 

%d bloggers like this: