Friday at the Council of Salamanca

We begin today’s economics discussion with a bit of art history.

Specifically, with a picture of Christopher Columbus arguing his crazy “round the world” idea to the Council of Salamanca, a 1400’s intellectual group in Spain, from which the name is drawn.

The painting was done by Emanuel Leutze who almost no one has heard of, but everyone has probably seen his painting of Washington crossing the Potomac…

This has what, exactly, to do with the market?

Ah…to the point. 

The Council of Salamanca was a kind of intellectual arbitration group.  Things were proposed to the group and voted as fact or fiction and the King and Queen of Spain (usually) took their advice.

So that’s what the Council was.

In the modern world, we have similar such councils, groups, commissions and the like – and all with pretty much the same purpose:  The vote on “what’s real.”

Having written about the Greater Depression that we’re now in for 18 years now, I feel a bit like Columbus at times; arguing rational and science before a herd of sheep.  Occasionally, there will be some head-nodding, but that could just be the herd grazing.

Nevertheless we stand at a very important “do or die” day for the market today.

A major decline (such as the one hinted at by the futures) will indicate the next big leg of the decline could be getting underway.

Regrettably, the line in the sand by my friend Robin Landry’s work is 1990 to 1991 on the S&P 500 index.  In our Trading Model that Peoplenomics readers follow, we have a terribly interesting counterpoint:  Our Global Index has just broken to marginal new highs as of mid-week, compared with 2007’s peaking process, but if global markets drop back enough from Wednesday levels, then it will be a massive double top formation – of the sort spanning 7+ years.

At the larger zoom-out, we could see the declines since 2007 being replayed in short order.  There continues to be a viewpoint (mine) that when the Internet Bubble popped in 2001 (and between 5 and 7 trillion in values blew up) that was really the start of the Greater Depression.

Unlike the 1930’s event, we went promptly to war (albeit with the wrong country and on made-up intel) and the Fed lit off the largest housing bubble ever.  And all they had to do was fall in love with no doc loans and make M3 disappear and no one would notice.

I mean besides this nutjob in the woods.

While it is true that the stock market has more than recovered from the 11723 Dow peak in the spring of 2000, we have to take inflation into account.  Using the Minneapolis Fed calculator, the Dow would only need to beat 16,080 in 2014 to be at technical new highs, even on an “inflation adjusted basis.”

But is this really true?

Perhaps.

The US GDP in 2000 was 10.28 trillion. And this morning we get a fresh report on GDP to look at:

“Real gross domestic product — the value of the production of goods and services in the United States, adjusted for price changes — increased at an annual rate of 2.6 percent in the fourth quarter of 2014, according to the “advance” estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 5.0 percent.

The Bureau emphasized that the fourth-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency (see the box on page 4 and “Comparisons of Revisions to GDP” on page 5). The “second” estimate for the fourth quarter, based on more complete data, will be released on February 27, 2015.

The increase in real GDP in the fourth quarter reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, exports, nonresidential fixed investment, state and local government spending, and residential fixed investment that were partly offset by a negative contribution from federal government spending. Imports, which are a subtraction in the calculation of GDP, increased.

The deceleration in real GDP growth in the fourth quarter primarily reflected an upturn in imports, a downturn in federal government spending, and decelerations in nonresidential fixed investment and in exports that were partly offset by an upturn in private inventory investment and an acceleration in PCE.

The price index for gross domestic purchases, which measures prices paid by U.S. residents, decreased 0.3 percent in the fourth quarter, in contrast to an increase of 1.4 percent in the third. Excluding food and energy prices, the price index for gross domestic purchases increased 0.7 percent, compared with an increase of 1.6 percent.

Where my confidence wanes in the BEA account of reality is when they make claims like this about personal savings:

Personal outlays increased $120.4 billion in the fourth quarter, compared with an increase of $143.4 billion in the third.

Personal saving — disposable personal income less personal outlays — was $601.7 billion in the fourth quarter, compared with $617.2 billion in the third. The personal saving rate — personal saving as a percentage of disposable personal income — was 4.6 percent in the fourth quarter, compared with 4.7 percent in the third.

Damn shame I’m not in Washington DC.  Otherwise I would ask the BEA folks how much of the GDP would simply disappear if the holdings of the Federal Reserve (last time I checked, they had something like $4 trillion on the books but my memory ain’t so good as once was) were discounted at marked to market rates?

The government is our silent partner and we’ve trusted it to do the partnership accounting.

It wouldn’t be the first partnership in history to keep cooked books.

Oh, by the way:  Those Minneapolis Fed numbers are based on BLS data and that includes heuristic adjustments.   Without those, inflation would be much worse than reported.

But we don’t doubt America’s future economic might.  The next time the economy gets in trouble we’ll simply find a convenient war to drop into, thus modulating employment and everything else.  Like Masters of the Universe without the conscience option.

Person of Interest

CNET headlines this morning that Microsoftie Bill Gates is worried about AI.

Rightly so.  It may come with a global BSOD. 

Maybe after another round of beta testing he could believe in RC3?

I’m not worried about AI as much as I am GMOs which are already sterilizing and dumbing down people.  But that is what freedom has come to:  Free to pick your own worry points.

Ruble Rubble, Banks and Trouble

Russia has dropped its central bank prime rate 2%.  That is collapsing the ruble on the Forex markets.

As I said earlier, the sanctions are having an impact and they will push the Russians into internal depressions which will drive them to attack the breadbasket and manufacturing strongholds in Ukraine.

And on the point, they’re already sabre rattling about out-nuking NATO and the USA.

Meanwhile:  Just had a call from Grady who runs our www.nostracodeus.com future-seeking software project and he reports two items that should surface shortly:  Military recruiting ads are up in Canada AND the biggie, a Canadian news report of Canadian forces being in a fire right with ISIS so we will see how deeply Canada wades in…but they seem to be present now.