How Far Is DOWn?

Thankfully, we have a weekend to cogitate on the next moves of the financial markets because like a mathematical permutation, every data point seems to lead to another, such that on Saturday mornings like this, the balance of the weekend could be spent with calculations that ultimately culminate on little more than an educated dart throw. 

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We start with just the most basic of reports: The Dow closed under the psychologically significant 12,000 mark on Friday.  Some of the angst was no doubt caused by the weaker than expected jobs report (see yesterday's discussion) but there are other metrics popping up adding to the jitters; things like the declines being evidenced in Las Vegas at the tables.

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A very alert reader called my attention to an error in Friday's column, which I need to explain to you because it's somewhat complicated.  I wrote that...

“So now let's go to the intraday lows which we hit in January and have a look at them: The intraday (*during the session) low back then was 11,508.74. Again, the intraday low would have to fail - and by a few points to make me anything approaching a believer, before I'd get panicky.”

The reader, however, offered this important 'reality check':

"YAHOO shows theoretical low.

Look at a candle chart. The DOW never got below 11,600 on that day.

Theoretical low is what the LOW would have been if all the DOW stocks when they were trading at their lows would have been on the average."

Sure enough, I went back to my daily close notes from back then and sure enough, the lowest shown was around 11,634...so yet another lesson learned. 

If you're getting the feeling that there are literally thousands of rules involved in tracking stocks and making forward projections, you're right.  In the knowledge engineering field such things are called 'rule sets' and it's the life work of the 'quants' - the quantitative analysts who figure up this rule set or that, and then bushel baskets of first algorithms, then spreadsheets, then trading code, then calls to the code repair experts to keep their particular mechanistic view of the future working.

Zooming Out A Ways

We must be getting close (*within a year or less) of the ultimate top and then collapse of the global(ist) economy.  Why?  Because my mailbox over the past month or two has picked up a significant increase in emails from past contributors to the old University of Colorado Longwave economic discussion group. 

A project of the school's Center for a Sustainable future, there were a lot of us [academics and interested parties] through the mid and late 1990's worked on gaming out whether the Long Wave (http://en.wikipedia.org/wiki/Kondratiev_wave) would come to a catastrophic end this way or that.  There was even one fellow who maintained (*and I think to this day still maintains) that the micro-crash of 1987 was "It" - the replay of 1929's Great Crash.

Most of us who were part of the group back when, don't think so.  One of the requirements of a Kondratiev Long Wave Collapse is that the 'sins of the past' must be reset such that the entire game can be restarted again and another 50-80+ year cycle of inflation/boom/and bust can commence.

I think it's safe to say that most of us who looked at the events of '87 concluded that there was not sufficient 'damage done' to reset the debt clock in a meaningful way.  Instead of a recognition of 50+ years of malinvestment and the repudiation of huge amounts of debt from said malinvestment, all we got was Alan Greenspan's boyz turning on the printing press and printing out way though the crisis.

In the intervening years, one might discern an increase in the economic work-arounds that have kept the global(ist) economy going:  There was Gulf War One, the Asian Contagion, the LTCM near-global-meltdown, the internet bubble, followed by the terror boom (which as I've explained many times has been a marvelous economic driver, not only wiping ouit lots of financial records in the Towers, but also giving government a new economic stimulus (the anti-terrorist industries) and with that, an excuse for a continuing series of foreign wars and occupations which are modulated this way or that in order to keep the economy perking along.  And the late, great, Housing Bubble, of course. Which has resulted in banks being (linguistically) 'flipped off', if I may.

War Bets

With the Dow dropping below 12,000 Friday, the odds of a greatly expanded Middle East shooting war have increased.  Not only is the Cole headed for Lebanon, the IDF in Israel cracking down on the Gaza where things haven't been so bad since 1967, but this morning, we see reports in the Israeli press that "Egyptian Official: Syria may be behind Jerusalem attack" and "Egypt official: Gas conflict serves Syrian interests" which puts Damascus right in the sights for the next escalation in fighting.

I trust you remember the old military planner's adage: No one ever gave a war that couldn't be seen coming" or, as another reader wrote, "The Russians never go to war until the crops are in..."  Couple of good nuggets there.

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Returning to the Longwave Group, it's interesting to see where some of the contributors have ended up.  One, who manages serious money (where $serious starts with a b) is writing an insiders account of what this period is like - I just wish we could read it along the way. 

Another, is a top bond trader - and expert on generational economics (we've got more from him for Monday's report) along with others: One,  known as 'simple country lawyer',  has steadfastly maintained that market moves aren't complete until the pain stops.  And for now, it hasn't:

"George,

 

More and more reports of FORCED liquidations due to margin calls to various entities. NO BOUNCE has staying power UNTIL the margin calls are FINISHED.

 

I have seen this a few times over the years and support levels just get taken out, taken out, taken out since the forced selling overwhelms the market buyers who come in at the various support levels. 10:1 that is what happened today [*Friday]  near the close.

 

Your expected bounce is NOT going to occur ... until this round of margin calls is complete. There will be NO bounce into the 22nd unless the margin calls are completed by mon/tues, which I doubt since more entities need to square up their accounts for their banks for the quarter's end on Mar 31. In fact it could get very very ugly as March goes on if more and more players are forced to DE-leverage.

 

As Kit Webster [Another extraordinarily bright LW contributor - G] has been saying, any surprises will be on the downside ....

 

Anyway a few comments from one board that I noted on this issue:"

This gets us to the issue of malinvestment across a wide variety of time scales. 

In the very short term (pun intended) we see things like margin calls while in the longer term, we see the continuing spread of malinvestment pain.  From subprime to ALT-A, to SIV, SWF's. and now commercial real estate, and bundled consumer debt.  Credit card renunciations and walk aways are rising fast.

As often happens, information seems to cluster in the inbox.  Another ex LW contributor who has been eyeing things (from Australia) is Bryan Kavanagh who sent this:

Hi George,

I saw a reference to your “Degrees of Panic” which I visited and enjoyed. Yours remains a great website, George! It’s been a while since the Longwaves site, eh? And most enjoyable days they were - apart from the rabid excesses of a couple of people whose ignorance drove out people the likes of Peter Eliades. [sigh!]

[Peter has remained active in economic analysis and has a site www.stockmarketcycles.com - G]

 

Would this not be the most inevitable, relentless, and slowest-motion train wreck in history, George? And the ineffectualness of highly-paid analysts, risk-managers and policymakers is rife and complete. Did I not assert that it would be real estate excesses, rather than stocks, that would be the final coffin nail, George? Of course, the share market must come into play its final, integral part in our denouement. The role of taxes in killing off productivity and directing people into real estate remains unknown, or, at least, understated, and I was most surprised to see Mike Huckerbee call for the abolition of income tax! How right he was – but, of course, it won’t happen because we love to inflate our costs with that WW1 ‘temporary’ tax in order to handicap ourselves, so that we are unable to compete with China, India ..... (place name of next emergent nation here).

I trust that most primary of elements remains safely stashed away you-know-where, me hearty?

Best regards George,

Bryan Kavanagh   www.lvrg.org.au 

There's a simple explanation for what's wrong with the economy, as Kavanagh sees it and it all starts with a very simple formula explained at his "Land Values Research Group" web site.

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Standing back you can see the outline of the investment continuum changing shape.  On one side, the decline of real estate evolving, and with that comes the collapse (*readjustments always go to excess) of real estate debt.

Always seeking the highest possible return, this has forced 'hot money' into the commodity side of things where Elaine and I are playing now.  While this is going on (real estate down, commodities up) we can also notes that the stock markets are in a sort of 'holding action' somewhere in between.

This is what sets up my expectation for the short (6-month) term - I mean besides the linguistics from the www.halfpasthuman.com studies.

As the stock and commodity markets put in 'final highs' this summer, the inexorable decline begins, which would be where the linguistic crisis of the first week or two of October comes from, and then a general depression lasting through to spring of 2010.

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As I've got it penciled out, we're now inside a 9-month window that leads to economic collapse - and it will be commodities that lead the final leg of the collapse that will change how you live for the rest of your life.  I'll explain...step up to the white board here:

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Before an earth-shattering collapse, you get a huge spike up in commodity prices.  Let me show you some headlines pointing in this direction:

• "Commodity futures can spice up your holdings" advises the Globe & Mail.

• "Copper hits record as interest in commodity surges..." says Forbes.

• "Commodities boom to keep breakfast hot for a while" says the Guardian.

Is it all peaches, cream, and short term gains?  Yes, but only for a while.

An article in the Financial Times today suggests (as would I) that the "Commodities' rally may signify trouble." 

Their explanation is too long a read to distill down into a sentence or tow, so this note from a reader in response to my "Cotton Question" in the Coping section of Friday's report says it all quite neatly:

 "I posted it on www.investorvillage.com  at the fnm site and this is one response....the others were similar...commodities have a lot of spectators in them..I think you might have said that as well....anyway from the fnm board:

 

I think your husband and his boss are way off base with their conclusion.......

" a few big buyers that are trying to manipulate the market to bring the price way down."

In reality the reason no one is buying is that a few large "Speculators" have bid the price so far up that there are NO BUYERS that actually want to take DELIVERY of the Commodity........ IN other words those who actually MAKE SH*T with Cotton aren't BUYING..... The Stupid Speculators have now bid it up so far that its too damn expensive to actually make shit you can SELL with Cotton........

 

The commodity asset bubble is going to end very badly....... Same as always..... Tulips anyone?

 

No one is buying the cotton because its TOO EXPENSIVE........ How your husband and his boss came to any other conclusion is kind of Baffling....... More so since they are actually involved in the business........

 

IMO, a lot of these commodities that have been bid up by speculators as a response to the falling dollar never had any intention of taking delivery......... The People who actually need the commodity to produce products with it can no longer afford to purchase many of these and make a profit selling it to the consumer....... As a producer your not going to be able to pass a lot of these costs on to a consumer who simply no longer has the ability to spend more then they make in Wages....... The ATM is closed for business...... This flight to commodities into what is prolly going to be the worst recession in my lifetime is the most Absurd Investment strategy ive ever seen......... Its as if no one sees a parallel with the Housing Bubble of a few years ago.....

They are pricing the BUYER / PRODUCER OUT OF THE MARKET........ "