After the “quickie visit” to the ER last Thursday night, I decided to kick it a bit and put more brain cells on trading.
Looks to me like the market ahead is in a position to really “lose it.”
For a couple of decades, I’ve been using an Aggregate Index – trying to wrap my head around financial markets and bubbles. It’s been a useful adventure.
Data reveals that all 7–to-15-year market run-ups have some degree of self-similarity. The landmark Huberman, Youssefmir, and Hogg work on “event placement” in bubble progression (and demise) has been something of a guiding light around here. I guess in part to it making the point (back in 1998) similar to what I explained last week discussing the short-comings of Nassim Taleb’s Antifragile: Yes, there is an upper bound.
Oh, and don’t look now, but this week we may bounce down from it. Hard.
Recent developments in the global liberalization of equity and currency markets, coupled to advances in trading technologies, are making markets increasingly interdependent. This increased fluidity raises questions about the stability of the international financial system. In this paper, we show that as couplings between stable markets grow, the likelihood of instabilities is increased, leading to a loss of general equilibrium as the system becomes increasingly large and diverse. (Emphasis added)
Decoupling like Sanctions?
Which Impacts the Fed
You see, a lot of the Federal Reserve’s policy planning is “checked against” a large financial model that is supposed to be robust enough to be effectively adaptive in decision-support. However, let’s look at what the Fed says about its own DSGE model:
“FRB/US is a large-scale estimated general equilibrium model of the U.S. economy that was developed at the Federal Reserve Board, where it has been in use since 1996 for forecasting, analysis of policy options, and research projects. The design of FRB/US has in common with the Dynamic Stochastic General Equilibrium (DSGE) approach the view that the actions of many households and firms are based on optimizing behavior in which expectations of future economic conditions play an important role. Compared with DSGE models, however, FRB/US applies optimization theory more flexibly, which permits its equations to better capture patterns in historical data and facilitates modeling the economy in greater detail. For example, FRB/US contains all major components of the product and income sides of the U.S. national accounts. Another distinctive feature of FRB/US is its ability to switch between alternative assumptions about how economic agents form expectations. Since its original development, the model has continuously undergone changes to reflect the evolving structure of the economy, including conceptual revisions to sectoral definitions of the national accounts.”
A kind of “financial airbag” tester.
We don’t believe it takes multi-agent modeling (or migrating computational financial models into hydrodynamical modelspace (though that’s fun, don’t get me wrong!). Instead, we like to just think about things. Which I did while being bumped around the Outback clearing the south field with the tractor Saturday and Sunday. Did a little “recreational logging” with G2, too.
The thought process went something like this:
- U.S. economy was already at/near market highs in our work in late 2019.
- Along came the “scapegoat virus” – which was both real but also exhibiting large aspects of social/govt. control, while at the same time killing economic activity thus creating a scapegoat.
- Then, with runaway neocons promoting war on the back-end of what we’re thinking was a health-crisis “Depression Substitute” (destroying people instead of savings) there’s an ongoing full court press into war. Even nuclear is on the table.
Given this set-up, and given reliance on the DSGE Model, how, exactly, do you expect model stability to perform given that – so far as we know – the Fed was likely never questioned by the Biden administration in advance as to whether energy input collapse (due to Sanctions) might speed up model failure.
Look Ahead Failure Risk
This leads, in my view – although this is not financial advice – to a greater-than-zero chance that we are in a Depression analog’s onset now. And that the next 2-4 years will be economic hell. And then the real fun begins with WW III because as has been demonstrated in the past, a global war is the “final solution” way to “turn over the Earth” to replant a new economic paradigm.
History is Screaming
The risk area right now – and why I mentioned the potential for a 1,000-point Dow decline this week – is the alignment of the two canted arrows in this chart:
This is not scientific. Maybe not even sane. But neither are those “snow poles” on the road up to the ski area, either. Their whole purpose is to keep from “going over the side” which explains our 20-years of work on this approach. Nutter in the woods, you say? Whatever.
A Further Longwave Note
With a lower open today, we are now ready to pencil in the possibility that a major Wave 3 down is in play. Big green numbers below.
The count from the November 2021 highs to March 13 was likely Wave 1 down, we have likely finished the large green 2 rally. Today we’re on the slippery slopes of a possible ass-kicking Wave 3 down:
Our Fate is not sealed (in terms of Wave 3 down) until we bust the yellow support line – which is the bottom of the Wave 5 component of the larger 1 down.
That’s the good news, though.
The bad news is that since the Wave 3’s are usually 1.5 times (or more) of Wave 1, and we see Wave 1 started from, our handy-dandy Wave Estimator spreadsheet (on the Peoplenomics.com side) offers this bummer of an outlook:
We will explain more about what this means to Future in our Wednesday Peoplenomics report. But let’s just generalize that the market could – from today’s modeled pre-open values – drop a further 17.6% (if math ever nails anything).
Which MIGHT be a temporary bottom (Ukraine cease-fire in a month or more?). We are seeing headlines pushing that way. As in U.N. Secretary-General Antonio Guterres headed to meet Putin in Moscow to push for a Ukraine ceasefire.
But even at that, we’d likely be dropping even further to the 26,465 area should China’s timing be late summer for re-unification of Taiwan. Shotgun “un-divorce.”
That would still give president Xi time ahead of his Party Congress to snag ‘Wan. It would give us room for a noisy (*complex) Wave 4, and it says we could drop a thousand this week (maybe into next) depending on news. Earning jits run hard.
A rally on Housing data tomorrow, for example, is possible. But by Thursday, someone will cite the time lag in that data set and still some other knucklehead will figure out systemic instability (to borrow from the great work first cited) is really closer than we think.
The next Fed meeting is May 3 with an announcement of the next hike a week from Wednesday. Like we offered here, DSGE models may be misleading when the Drooler Crew is randomly turning energy inputs on and off. As much to hurt Russia as in reality, hurting America. Thanks, neocons! Thanks Brandon!
Still, there is a counter move afoot: Man Group: Central banks to put rates in pain zone to fight inflation. But with models all awonk?
Again, not financial advice, but very dicey, iffy, and scratchy.
CFNAI to Turn Tide?
You read the report and tell me:
“The Chicago Fed National Activity Index (CFNAI) moved down to +0.44 in March from +0.54 in February. Three of the four broad categories of indicators used to construct the index made positive contributions in March, but two categories deteriorated from February. The index’s three-month moving average, CFNAI-MA3, increased to +0.57 in March from +0.43 in February.
The CFNAI Diffusion Index, which is also a three-month moving average, moved up to +0.45 in March from +0.31 in February. Fifty-nine of the 85 individual indicators made positive contributions to the CFNAI in March, while 26 made negative contributions.”
Love the term “negative contributions.” Wish they would have said something “artier” though. Like “un-given” or something with more pizazz, know what I mean?
Running of the Bears mid-session for a very small Wave [(ii)] or [(iv)]? We shall see.
Systemic Instability Watch
You news, you lose.
Macron – again – leads France: Macron pledges to address voters’ ‘rage’ as police clash with protesters. Two protesters killed overnight.
Sounds like an excuse to dink with our supply chain issues: Beijing kicks off mass testing after spike in Covid cases. Asia port backups still building.
This as issues in Shanghai continue for US bound ships: JB Hunt says Shanghai’s lockdown will spell trouble for US ports — Quartz (qz.com)
How many times have we said: War is the ultimate economic stimulus? World military spending tops $2 trillion for first time: SIPRI. Whee!
Biden on the Brink? Bridget Brink is Biden’s nominee for U.S. ambassador to Ukraine. She was originally a Trump appointee, Blinkin and Brink’in? Nod is who?
Feeling a little old, this morning, are you? World’s oldest person dies in Japan aged 119.
ATR: Ham Radio Exploits
A while back, I bought a small USDX/USDR portable transceiver. Out of China. One of its nice features as a grab and go radio is size – size of a package of Mac and Cheese, right?
Built-in battery, and best of all, a standard SO-239 antenna port. SMA connectors are fine but lack physical strength for an onboard antenna.
Finally got around to working with it a bit. Pulled a 5 by 7 out of Wisconsin (voice/USB on 20 meters) and a 589 out of an op in Cuba (Cesar, CM6CX).
G2 and I have been looking at tiny HFs to stash in our vehicles. this one – with an $80 outboard antenna – might be the closest thing yet to a cheapskate’s manpack. This one is a LOT of fun. Not only does the radio have a built-in microphone (*one less thing to pack) but the red button on it (Push to Talk) can be keyed for Morse code.
Ham radio tastes, at least for me, have varied in a most unusual way. When the Solar Cycle lows are around, I like huge antennas, broadcast tower-sized is best, along with 2 kilowatts output power. (Dialed back to the legal limit, of course.)
But when approaching the upper side of the Solar Cycle? Much more fun to “work the world on five watts.” That’s where the art is.
Let you know how the radio and antenna play in the field.
Rain showers, heavy at times, coming through. Look for tornado stories later today and into tomorrow up Tornado Alley from us.
Off to study for my heart exam in a couple of weeks, lol. 128/58 p48 at click-time. Useful data source here but no substitute for a real stress test.
Write when you get rich,