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Making Sense Of The Sudden Market Plunge

Are you prepared for further turmoil?
Friday, August 21, 2015, 10:13 PM

The global deflationary wave we have been tracking since last fall is picking up steam.  This is the natural and unavoidable aftereffect of a global liquidity bubble brought to you courtesy of the world’s main central banks.  What goes up must come down -- and that's especially true for the world's many poorly-constructed financial bubbles, built out of nothing more than gauzy narratives and inflated with hopium.

What this means is that the traditional summer lull in financial markets has turned August into an unusually active and interesting month. August, it appears, is the new October.

Markets are quite possibly in crash mode right now, although events are unfolding so quickly – currency spikes, equity sell offs, emerging market routs and dislocations, and commodity declines -  that it’s hard to tell for sure.  However, that’s usually the case right before and during big market declines.

Before you read any further, you probably should be made aware that, at Peak Prosperity, our market outlook has been one of extreme caution for several years.  We never bought into so-called "recovery" because much of it was purely statistical in nature, and had to rely on heavily distorted and tortured 'statistics' to be believed.  Okay, lies is probably a more accurate term in many cases.

Further, most of the gains in financial assets engineered by the central banks were false and destined to burst because they were based on bubble psychology, not actual returns.

Which bubbles you ask?  There are almost too many to track. But here are the main ones:

  • Corporate bond bubble
  • Corporate earnings bubble
  • Junk bond bubble
  • Sovereign debt bubble
  • Equity bubbles in various markets (US, China) and sectors (Tech, Biotech, Energy)
  • Real estate bubbles, especially in the commodity exporting countries
  • Central bank credibility bubble (perhaps the largest and most dangerous of them all)

What’s the one thing that binds all of these bubbles together?  Central bank money printing.

Passing The Baton

Operating in collusion, the world's major central banks passed the liquidity baton back and forth between them, first from the US to Japan, then from Japan to Europe, then back to the US, then over to Europe again where it now resides.  Seemingly endless rounds of QE that didn’t always do what they were supposed to do, and plenty of things they were not intended to do.

The purpose of printing up trillions and trillions of dollars (supposedly) was to create economic growth, drive down unemployment, and stoke moderate inflation.  On those fronts, the results have been dismal, horrible, and ineffective, respectively.

However, the results weren’t all dismal.  Big banks reaped windfall profits while heaping record bonuses on themselves for being at the front of the Fed’s feeding trough. The über-wealthy enjoyed the largest increase in wealth gains in recorded history, and governments were able to borrow more and more money at cheaper and cheaper rates allowing them to deficit spend at extreme levels.

But all of that partying at the top is going to have huge costs for ‘the little people’ when the bill comes due.  And it always comes due.  Money printing is fake wealth; it causes bubbles, and when bubbles burst there’s only one question that has to be answered: Who’s going to eat the losses?

The poor populace of Greece is just now discovering that it collectively is responsible for paying for the mistakes of a small number of French and German banks, aided by the collusion of Goldman Sachs, in hiding the true state of Greek debt-to-GDP using sophisticated off-balance sheet derivative shenanigans. As a direct result, the people of Greece are in the process of losing their airports, ports, and electrical distribution and phone networks to ‘private investors’ -- mainly foreigners harvesting the last cash-generating assets the Greeks have left to their names.

Broken Markets

As we’ve detailed repeatedly, our “markets” no longer resemble markets.  They are so distorted, both by central bank policy and technologically-driven cheating, that they no longer really qualify as legitimate markets.  Therefore we’ve taken to putting double quote marks around the word “”market”” often when we use it.  That’s how bad they’ve become.

Where normal markets are a place for legitimate price discovery, todays “”markets”” are a place where computers battle each other over scraps in the blink of an eye, ‘investors’ hinge their decisions based on what the Fed might or might not do next, and rationalizations are trotted out by the media for why inexplicable market price movements make sense.

Instead, we view the “”markets”” as increasingly the playgrounds of, by and for the gigantic market-controlling firms whose technology and market information have created one of the most lopsided playing fields in our lifetimes.

Signs of these distortions abound. One completely odd chart is this one, showing that the average trading range of the Dow (ytd) was the lowest in history as of last week (before this week’s market turmoil hit).  And that was despite Greece, China, QE, Japan, oil’s slump, Ukraine, Syria, Iran and all of the other ample market-disturbing news:

(Source)

Based on the above chart, you’d think that 2015 up through mid-August was the most serene year of the last 120 years.  Of course, it's been anything but serene.

The explanation for this locked-in trading range is a combination of ultra-low trading volume and the rise of the machines.  There have been times recently when practically 100% of market volume was just machines playing against each other…no actual investors (i.e, humans) were involved. 

As long as there was ample liquidity, then the machines were content to just play ping pong with the “”market””. Which they did, crossing the S&P 500 over the 2,100 line 13 times before the recent sell-off took hold.

But that’s not the most concerning part about having broken markets.  The most concerning thing centers on the fact that things that should never, ever happen in true markets are happening in todays “”markets”” all the time.

One measure of this is how many standard deviations (std dev) an event is away from the mean. For example, if the price of a financial asset moves an average of 1% per year, with a std dev of 0.25 %, then it would be slightly unusual for it to 2%, or 3%.  However it would be highly unusual if it moved as much as 6% or 7%.

Statistics tells us that something that 3 std dev movements are very unlikely, having only a 0.1% chance of happening.  By the time we get to 6 std devs, the chance is so small that what we’re measuring should only happen about once every 1.3 billion years. At 7 std dev, the chance jumps up to once every 3 billion years. 

Why take it to such a ridiculous level? Because those sorts of events are happening all the time in our “”markets”” now. And that should be deeply concerning to everyone, as it was to Jamie Dimon, CEO of JP Morgan:

'Once-in-3-Billion-Year' Jump in Bonds Was a Warning Shot, Dimon Says

Apr 8, 2015

JPMorgan Chase & Co. head Jamie Dimon said last year’s volatility in U.S. Treasuries is a “warning shot” to investors and that the next financial crisis could be exacerbated by a shortage of the securities.

The Oct. 15 gyration, when Treasury yields fluctuated by almost 0.4 percentage point, was an “unprecedented move” that would have serious consequences in a stressed environment, Dimon, the New York-based bank’s chairman and chief executive officer, said in a letter Wednesday to shareholders. Treasuries are supposed to be among the most stable securities.

Dimon, 59, cited the incident as he waded into a debate about whether bank regulations implemented after the 2008 financial crisis exacerbate price declines by limiting the ability of Wall Street banks to make markets. It’s just a matter of time until some political, economic or market event triggers another financial crisis, he said, without predicting one is imminent.

The Treasuries move was “an event that is supposed to happen only once in every 3 billion years or so,” Dimon wrote. A future crisis could be worsened because there “is a greatly reduced supply of Treasuries to go around.”

(Source)

While Mr. Dimon used the event to suggest that bank regulations were somehow to blame, that explanation is self-serving and disingenuous.  He'd use any excuse to try and blame bank regulations; that’s his job, I guess.

Instead what happened was that our “”market”” structure is so distorted by computer trading algorithms, with volume so heavily distorted by their lighting-fast reflexes, that one of those ‘once in 3-billion years events’ resulted.

This simply wouldn't have happened if humans were still the ones doing the trading, but they aren't. All the colored jackets have been hung up at the CME, and human market makers on the floor of the NYSE are rapidly slipping away into the sunset as algorithms now run the show.

The good news about computers is that they allow our trading to be faster and cheaper, presumably with better price discovery.  The bad news is that nobody really understands how the whole connected universe of them interact and that, from time to time, they go nuts.

As Mr. Dimon hinted, they have the chance of taking the next financial downturn and converting it into a certified financial meltdown

How common are these ‘billion year events’?

They happen all the time now. Here’s a short list:

(Source)

All of this leads us to conclude that the chance of a very serious, market-busting accident is not only possible, but that the probability approaches 100% over even relatively short time horizons. 

The deflation we’ve been warning about is now at the door. And one of our big concerns is that we’ve got “”markets”” instead of markets, which means that something could break our financial system as we know and love it.

From The Outside In

One of our main operating models at Peak Prosperity is that when trouble starts it always begins at the edges and moves from the outside in.

This is true whether you are looking at people in a society (food banks see a spike in demand well before expensive houses decline in price), stocks in a sector (the weakest companies decline first), bonds (junk debt yields spike first), or across the globe where weaker countries get in trouble first.

What we’re seeing today is an especially fast moving set of ‘outside in’ indicators that are cropping up so fast it’s difficult to keep track of them all.  Here are the biggest ones.

Currency Declines

The recent declines in emerging market (EM) currencies is a huge red flag.  This combined chart of EM foreign exchange shows the escalating declines of late.

(Source)

Since last Monday, here’s the ugly truth:

Many of these countries have been using precious foreign reserves to try and stem the rapid declines of their currencies, but I fear they will all run out of ammo before the carnage is over.

What’s happening here is the reverse part of the liquidity flood that the western central banks unleashed.  The virtuous part of this cycle sees investors borrow money cheaply in Europe, the US or Japan, and then park in in EM countries, usually by buying sovereign bonds, or investing in local companies (especially those making a bundle off of the commodity boom that was happening).

So on the virtuous side, a major currency was borrowed, and then used to buy whatever local EM currency was involved (which drove up the value of that currency), and then local assets were bought which either drove up the stock market or drove down bond yields (which move as in inverse to price).

The virtuous part of the cycle is loved by local businesses and politicians.  Everything works great.  The currency is stable to rising, bond yields are falling, stocks are rising, and everyone is generally happy.

However when the worm turns, and it always does, the back side of this cycle, the vicious part, really hurts and that’s what we’re now seeing.

The investors decide that enough is enough, and so they sell the local bonds and equities they bought, driving both down in price (so falling stock markets and rising yields), and then sell the local currency in exchange for dollars or yen or euros, whichever were borrowed in the first place.

And thus we see falling EM currencies.

To put this in context, many of the above listed currencies are now trading at levels either not seen since the Asian currency crisis of 1997, or at levels never before seen at all.  The poor Mexican peso is one of the involved currencies, which has fallen by 12% just this year, and almost made it to 17 to the dollar early this morning (16.9950).  Battering the peso is also the low price of oil which is absolutely on track to destroy the Mexican federal budget next year.

Stock Market Declines

In concert with the currency unwinds we are seeing deep distress in the peripheral stock markets.  There are now more than 20 that are in ‘bear country’ meaning they’ve suffered declines of 20% or more from their peaks.

Here are a few select ones, with Brazil being in the worst shape:

All of these signs reinforce the idea that the great central back liquidity tsunami has reversed course and is about to create a lot of damage and suck a lot of debris out to sea.

The Commodity Rout

A lot of EM countries are commodity exporters.  They sell their minerals trees and rocks to the rest of the world, by which we mean to China first and foremost.

Commodities are not just doing badly in terms of price, they are absolutely being crushed, now down some 50% over the past four years.

(Source)

Commodities tells a number of things besides the extent of EM economic happiness or pain – they tells us whether the world economy is growing or shrinking.  Right now they are saying “shrinking” which is confirmed by all of the recent Chinese import, export and manufacturing data, along with the dismal results coming out of Japan (in recession), Europe and the US.

Conclusion Part I

As we’ve been warning for a long time, you cannot print your way to prosperity, you can only delay the inevitable by trading time for elevation.   Now, instead of finding ourselves saddled with $155 trillion of global debt as we did in 2008, we’re entering this next crisis with $200 trillion on the books and interest rates already stuck at zero.  We are 30 feet up the ladder instead of 10 and it’s a long way down.

What tools do the central banks really have left to fight the forces of deflation which are now romping across the financial landscape from the outside in?

If the computers hiccup and give us some institution smashing or market busting 8 sigma move what will the authorities do?  Shut down the markets?  It’s a possibility, and one for which you should be prepared.

Where are we headed with all this?  Hopefully not the way of Venezuela which is now so embroiled in a hyperinflationary disaster that stores are stripped clean of basic supplies, social unrest grows, and creative street vendors are now selling empanadas wrapped in 2 bolivar notes because they are, literally, far cheaper than napkins.  Cleaner?  Maybe not so much.  I wouldn’t want to eat off of currency.

(Source)

But make no mistake, the eventual outcome to all this is captured brilliantly in this quote by Ludwig Von Mises, the Austrian economist:

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.

The credit expansion happened between 1980 and 2008, there was a warning shot which was soundly ignored by ignorant central bankers, and now we have more, not less, debt with which to contend.

Venezuela has already entered the ‘total catastrophe’ stage for its currency, but Japan will follow along, as will everyone eventually who lives in a country that finds itself unable to voluntarily abandon the sweet relief of booms enabled by credit creation.

In Part 2: Prepare Now! we discuss how time is now running short to make adequate preparations in the event the long-overdue market correction arrives in force. Which one should you focus on most?

Click here to read Part 2 of this report (free executive summary, enrollment required for full access)

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26 Comments

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5462
"seven sigma events" - fooled by randomness

Whenever I hear a banker talk about a seven sigma event, I always think back to Nick Taleb, who made the point (at length) in his book Fooled by Randomness that the physical world tends to be Mediocristan, while the financial world exists in Extremistan.

That is, the real world contains people that range in height in a fairly narrow band - maybe 3 ft - 7 ft, with absolutely no 100-foot tall people.  Because of this, statistics works great for "real world" applications.  Markets are not the same.  Sometimes, in some markets, liquidity simply dries up and/or crazy stuff just happens.  As a result of this occasionally really outlandish behavior, the same statistical techniques that are appropriate to apply to the physical world (where 100-foot people don't exist) simply don't provide reliable risk analysis in trading and markets, where every now and then, you get a 1000-foot giant who stomps on your portfolio and then disappears into the mist.  "Wow, that was a 7-sigma event - can't blame me for that, who coulda known?"  You'd think if even one 7-sigma event occurs, they'd start to wonder if their method of risk analysis might actually be wrong, and try something else!

So I'm firmly in the camp of those who imagine "something unexpected - and likely bad" will happen during our next crash.  After all, we've had a lot of structural changes in the market since 2008.  As a software guy, I know the code only works if you've tested it under all conditions - and our last "system test" of the market was 7 long years ago, and we've had a whole lot of "new code" added since then...

 

stevejermy's picture
stevejermy
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Posts: 49
Chris,  Another great

Chris, 

Another great article, but there's a nuance in your very first sentence that I think is worth exploring. Are we about to head into deflation? Or contraction?

I think its a really important distinction, because I associate deflation largely as a currency/pricing issue - a mixture of a rising value of a currency and/or a falling in real price of goods and services, which can be both a cause but also a symptom as of deeper economic woes. 

Whereas contraction is a slow down in economic activity, perhaps caused by deflation but, in the current case, more likely caused by energy issues, not only the relatively high price (until recently) of global energy, but also the fact that more and more energy is being used to extract energy and less and less is available for GDP and growth.

As I see it, we are now entering a long global contraction, which according to my own modeling will see global GDP contract by 9% by 2020, and a further 14% by 2030, i.e. nearly 25% in the next 15 years. The key question for us all is not whether this will happen - it will, for reasons of energy physics - but rather how G7 governments will respond. Which will, I suspect, govern whether or not deflation or inflation or one followed by the other lies ahead of us. 

Steve

Oliveoilguy's picture
Oliveoilguy
Status: Platinum Member (Offline)
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Posts: 578
Extremistan

Always insightful Dave. Thanks for your commentary.

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5462
deflation - what causes it?

sj-

Another great article, but there's a nuance in your very first sentence that I think is worth exploring. Are we about to head into deflation? Or contraction?

I think its a really important distinction, because I associate deflation largely as a currency/pricing issue - a mixture of a rising value of a currency and/or a falling in real price of goods and services, which can be both a cause but also a symptom as of deeper economic woes.

Deflation isn't a currency or a pricing issue.  Deflation is always about a reduction in the supply of money and credit.  Pricing and currency changes are effects of deflation, not causes.

Right now we're experiencing a deflationary impulse because of a large number of carry trades are being unwound

Carry trade: inflationary - money is borrowed into existence, then sent abroad to find a yield.

Unwinding a carry trade: deflationary - money from abroad is repatriated, and the debt repaid.

Repaying debt: deflationary.  Borrowing money: inflationary.

Its that pesky magical ability of banks to create money that is causing all the trouble.  Once again.

 

stevejermy's picture
stevejermy
Status: Bronze Member (Offline)
Joined: Dec 13 2011
Posts: 49
DEFLATION V CONTRACTION

Hi Dave

(Thanks, incidentally, for all gold overviews, they are really excellent!), 

I get all of this, and in particular agree on deflation being about supply of money and credit. But to me this reinforces my point: deflation is essentially a financial phenomena, rather than an economic phenomena.

The distinction I'm making here is between real economic contraction in real economic activity in the real economy, as fundamentally manifest in the use of energy supported by real energy data that cannot be mal-presented through bogus currency-based GDP and growth statistics. As opposed to the apparent changes in economic activity, as seen through the lens of financial statistics that I've largely lost confidence in.

My opinion is that the deflation that is happening - lets agree that its because of the reduction in the supply of money and credit - is a consequence rather than a cause of economic contraction.

I completely agree that debt is also a central global problem - but in my opinion it has become a central problem because debt has been deployed as a (completely unsuccessful) response, together with QE and low interest rates, to the economic contraction in the real economy, and that it is not the fundamental cause of the problem. I see the deflationary impulse, and other apparent financial phenomena, essentially as financial perturbations on the long term downward gradient of real economic activity.

If I'm right, then what happens next is the $64K question, with two key parts. First, what is the most likely response of governments and central bankers to the contraction - my guess will be further neo-Keynsian stimulus, perhaps leading to hyperinflation. Second, is the situation beyond their control, so will events play out in a way that is post-policy.

Steve

Arthur Robey's picture
Arthur Robey
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Joined: Feb 4 2010
Posts: 3936
It strikes me as very simple.

The central banks soaked the middle class to bail out the banks. There is no middle class left to soak again.  They have blown their wad. There is no more meat on the bone. 

This is why the consumer spending is watched so closely for any sign of life.  If it twitches you can be sure that it will be bled again.

It's not called the Vampire Squid for nothing. 

The issue is, will the corpse show any signs of life? If so we can expect the Squid to do what the Squid does. It is not sentient. It is pure instinct.  Go Galt, starve the parasite. Withdraw your services. We have got to regain our sovereign selves. 

This issue is more important than any ism that you hold dear to your heart. 

kaimu's picture
kaimu
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Joined: Sep 20 2013
Posts: 160
DEAF DUMB AND BLIND

Aloha! Deaf, dumb and blind ... yes ... Congress!! Like the Pinball Wizard it is time to reset the financial and economic world to benefit the younger generations. It is the baby boomers with the most to lose now and the elite in charge of economies and wars are all of that age.

This is all just "cycle interruptus"! What we are witnessing is "interventionism" in  modern times, but it is by far nothing new. In his book "Planned Chaos" Ludwig Von Mises explains the ills of interventions by large financial institutions, unions and government back in 1949.

"It is certainly not a merit of governments, politicians and labor union officers that the standard of living is improving in the countries committed to private ownership of the means of production. The increase in per capita consumption in America as compared with conditions a quarter of a century ago is not an achievement of laws and executive orders. It is an accomplishment of businessmen who enlarged the size of their factories or built new ones."

Here he is speaking in 1949 about capitalism ...

"Nothing is more unpopular today than the free market economy, i.e., Capitalism. Everything that is considered unsatisfactory in present day conditions is charged to capitalism."

Who intervenes more than Congress? Look at the Federal Registry over 85,000 pages of rules, regulations and legal dictates. In 1949 the interventionists insist ...

"In the eyes of the interventionists the mere existence of profits is objectionable."

Seriously, practically everything written in Planned Chaos back in 1949 is happening today! Why wouldn't the current system collapse? In fact anyone who thinks it won't hasn't even glanced at historical precedence or even considered cycles. In my opinion the way forward is to either forgive all private debt or abolish income tax. Government, the biggest interventionist, must take a back seat to free markets and unrestrict means of production and allow the middle class(the masses) to recoup losses forced by insane and very poor government and central bank policies. The current government and central bank pathways, if allowed to continue, only leads to war.

Like doing a pinball "reset"!!! Quit wasting time and press the button!!!

 

 

 

mikkel's picture
mikkel
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Posts: 3
Markets have always acted this way

I fully agree with the general point of the post, but strongly disagree with the assertion: "Instead what happened was that our “”market”” structure is so distorted by computer trading algorithms, with volume so heavily distorted by their lighting-fast reflexes, that one of those ‘once in 3-billion years events’ resulted. This simply wouldn't have happened if humans were still the ones doing the trading, but they aren't."

Markets have always exhibited clusters of "once in 3-billion years events," even before there was mechanical communication of any sort -- just like bubbles have existed long before central banks and fiat.

This is because markets are complex systems and exhibit the same behaviors as any complex system. Mandelbrot did enormous historical studies to show this is true. Of course Taleb and others have followed this up with great detail.

This is important for two reasons. First of all, it highlights that what matters most to markets are structural in nature and also that they have severe limitations in terms of planning. The first point is understood to a decent extent by Austrian economist types, but the latter point is always swept aside. Having society structured around systems that are guaranteed to exhibit catastrophic failure is insane and sadistic (and no that doesn't mean central planning works either; that is just a different shade of lipstick on the same pig).

The second reason is because the behavior of markets is the behavior of life. Whether it's social shifts or climate change, clusters of "high sigma" events in an overall period of low (but gradually increasing) volatility is a sure sign that system collapse and shift is about to begin.

Mark_BC's picture
Mark_BC
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Joined: Apr 30 2010
Posts: 492
mikkel wrote: Having society
mikkel wrote:

Having society structured around systems that are guaranteed to exhibit catastrophic failure is insane and sadistic (and no that doesn't mean central planning works either.)

I agree. I think the only hope is to revive the old technocratic movement which aimed to replace politicians and business people with scientists and engineers. While perhaps a bit naive, we definitely need a good shot of science and rationality in the management of today's economy. I can't see that happening unfortunately; we are too far gone.

While most here are well aware that conventional economists are required to have a grand total of zero training in the natural and applied sciences, yet somehow believe they are competent enough to manage the whole world described by those sciences, for some reason Austrian Economists assert that private business people are better versed in rationality and proper allocation of capital.

For a long time I've been reading and participating in the alternative blogosphere, which tends to congregate around the principles of Austrian Economics, but I have yet to find a compelling explanation of why it is that only free markets and unrestricted private production can save us from our current malaise (assuming there even is a way to save us, and also assuming that the lack of free markets and private production is what got us into this mess, which is debatable and overly simplistic). It seems to stem from a faith in the ability of unfettered supply and demand forces operating in free markets to provide an efficient mechanism for allocating private capital ("savings") which results in the optimal production of goods and services for consumption, via the generation of profit for properly allocated capital, or bankruptcy for improper allocation (hence the saying, "greed is good", which many capitalists don't view as a bad philosophy since they believe that the generation of profit is equivalent to the generation of wealth which ultimately trickles down to and benefits everyone). I disagree with this rationale though. The whole rather simplistic theory is predicated on the concept of production and consumption but never do they go into any detail explaining the real-world scientific and engineering processes by which that "production" occurs and then gets allocated throughout society and contributes to tangible "wealth". It's all just assumed. Furthermore, using profit as a metric to allocate economic activity cannot account for externalities. That may have worked a 100 years ago when "the environment" was still providing more and more resources, but not now.

According to von Mises, "It is certainly not a merit of governments, politicians and labor union officers that the standard of living is improving in the countries committed to private ownership of the means of production. The increase in per capita consumption in America as compared with conditions a quarter of a century ago is not an achievement of laws and executive orders. It is an accomplishment of businessmen who enlarged the size of their factories or built new ones.

So it was actually making more and bigger factories, in other words economic growth, that increased per capita consumption. What if the economy can't grow anymore? I wonder if increases in oil production and consumption over that period had something to do with it? Are today's problems in any way related to the US hitting Peak Oil in 1971, yet continuing over most of the time period since to increase GDP based on consuming oil and manufactured goods from the rest of the world to make up the difference via the centrally planned petrodollar military reserve currency? (Interestingly, von Mises died only 2 years after Peak Oil so his entire reference frame was one of generally increasing oil production, punctuated by the wars).

As a kid I lived in Port Alberni, Canada which I believe in the 70's had the highest median income in N America (I could be off a little bit with that stat). This was due to all the logging and paper making. There was a strong union which allocated the wealth to the workers well and the timber companies still made good profit. Ultimately this whole thing was dependent on "productive" forests, not "productive" workers or capitalists. Now, those trees are mostly gone, and the forest industry has been in continual decline from commodity prices. The private financiers can now put up all the factories they want and the unions can band together all they want but it would all be for nothing since that economy is now gone.

Instead now we have private oil men who want to export Canada's oil to the rest of the world via the west coast and essentially avoid any taxation, so Canada would get basically zero benefit from this other a than a few jobs, but all of the environmental liabilities. In order to do this they've bought off the politicians. According to a panel participant who used to head up BC Hydro, who quit the pipeline hearing process in disgust, Canada's energy sector is "captured". Of course that never entered the media.

But I digress.. Back to the topic at hand, why is it that only trees owned by a private individual or corporation are productive? Would they not also grow on public land and provide production for the capitalists' factories as well as the socialists' unions? In BC we have lots of public land and we have great forests, though somewhat diminished from their former glory due to logging. Is it because private individuals grow the trees efficiently to achieve "profit"? Well what is profit? If everything in the economy was privatized and earning profit then wouldn't that require exponential growth in the real economy to provide genuine substance to the growing financial profit? This site explains at length why exponential growth is not possible.

Don't get me wrong, I also think certain attributes of "free markets" are great since they would have prevented the US from doing what it has done, with China's participation, over the last 40 years to distort the global economy so much, but I find this term to be another of the ambiguous economic words (like "production", "consumption", "capital", "wealth") that people throw around but never clearly define. The problem is that different people interpret and understand them differently. Free markets to some mean totally unregulated, unrestricted free-for-alls while others argue they should have strict regulations and controls to keep every participant on his best behavior.

Ultimately I think the problem is that Homo sapiens was never designed (by whatever means your particular belief system says) to live in highly complex societies of millions, with power allocated to a few who have access to control the media, with the technological power to completely dominate the natural world that supports us. It was bound to fail regardless and no economic or social doctrine, left or right, could have really prevented it. It's just not in human nature.

mikkel's picture
mikkel
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Posts: 3
I'd go further than economics

Mark, I used to be a very big proponent of reviving Technocracy ideals too. However, I've since come to understand that it is just a limited in a different way, with its emphasis on engineers and scientists. This won't solve anything since the engineers and scientists embody the same root misperceptions causing our ills.

Ultimately I've come to believe that laws and economics and politics don't have any real bearing on society at its root level. If a group of people live in healthy ways, then they will prosper, and if they don't, they will succumb to their demise. Ascribing effect to the the particular mechanisms that encourage and support collective mentality seems be post-hoc rationalization...in large part because collective psychology will always affect reality far more than abstract ideals.

So now I focus primarily on the wisdom from systems theory, philosophy, spirituality, arts and education. With that wisdom, the approach to science, engineering, politics, economics and the like becomes completely obvious, and honestly, absurdly simple. This is because as Taoism points out, most efforts become unnecessary when in flow with the nature of things.

 

davefairtex's picture
davefairtex
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Posts: 5462
deflation & contraction

SteveJ-

My opinion is that the deflation that is happening - lets agree that its because of the reduction in the supply of money and credit - is a consequence rather than a cause of economic contraction.

Ha, sorry for explaining something you already knew!  I lose track here of who knows what.

You are saying that the real economy is the dog, and credit is the tail.  Try this on:

From the models I've seen, expansion of credit is a huge driver of real economic activity.  "First comes the thought, and then, the action."  In other words, if you take out a loan to buy a new car - the economy responds to produce that car.  Same thing with a new home.  Same thing with a new TV.  Same thing if the government does it to buy a new ship.  Expansion of credit drives production in the real economy.

In that same way, contraction of credit causes contraction of production in the real economy.  It has to.  People have a budget.  If they pay down debt (yielding credit contraction) that's money they aren't spending on things in the real economy.  Demand falls.

Credit isn't the tail here, it's the dog - at least in the short term anyway.

Perhaps the change in credit is simply insight into the heart of the consumer.  Are they feeling expansionary, or contraction-oriented right now?  Its a rubber-meets-the-road survey of the animal spirits of the society.

We agree that change in credit is viewed by the Fed as the cure-all for what ails us, and there's a reason for that: it's been true for a long time.  But they do not look at the liabilities section of the "balance sheet" - they don't acknowledge a limit to total credit.  And of course we're at or near that limit now.

I don't think energy cost/EROEI is as much a driver of activity as it is a global tax on everything.  It just makes everything more expensive - or cheaper, if prices drop.

My models show that change in energy prices are important - right alongside change in credit, payrolls, and the CPI, but that change in credit has the most immediate impact on real economic activity.

 

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Arthur Robey
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Hurray! Mandlebrot.

I'm going to be repetitive. But It looks as though we have Someone who has Read up on chaos. Chaos,  with a capital C.

This is because markets are complex systems and exhibit the same behaviors as any complex system. Mandelbrot did enormous historical studies to show this is true. Of course Taleb and others have followed this up with great detail.

This is how a visual mathematician sees the thing. 

 

Do you see the black looking "eyes"? They are Strange Attractors.  Notice how the variable orbits the STs? The STs are points of stability.  Here is an example of two.  Alive and Dead. 

Here is a much prettier Strange Attractor in 3 Space.

Isn't that pretty?  So is this. 

 

 

Here we see the manner of the bifarcation in 2 Space.

What is noticeable is that the transition from one stable state to another is not " smooth" . It jumps from one Strange Attractor to the other. 

We cannot expect the economy to smoothly go from one stable state to another. Nor can we we expect the population to go from one stable state to a more sustainable one in a smooth line in spite of what the Club of Rome report says.  They did not have the insights of Mandelbrot. 

Mandelbrot's insights are of a general nature.  They can be applied to any non smooth curve, as far as I know. 

Credits Wiki

https://en.m.wikipedia.org/wiki/Chaos_theory

https://en.m.wikipedia.org/wiki/Attractor

https://en.m.wikipedia.org/wiki/Bitis_gabonica

Arthur Robey's picture
Arthur Robey
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The Singularly.

Mark, I used to be a very big proponent of reviving Technocracy ideals too.

Don't write technology off Too soon.

The Boys and Girls are playing around with Quantum computing. It is my intuition that the quantum field is the home of Sentience. (Read up On Sir Roger Penrose's Work with micro tubules In the dendrites of the brain and the quantum field.)

It might be that we have to Prove our sentience to our machines.  If such a quantum machine were to be produced it, is my understanding that it would have the complete "sum-over-histories" and would choose the Best resolution from an infinite selection. 

A truly god-like intellect. 

Jbarney's picture
Jbarney
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Posts: 233
Interesting

Things certainly look interesting this morning.

Dogs_In_A_Pile's picture
Dogs_In_A_Pile
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Posts: 2606
Indeed....

As of this post, the Dow is up 630 points off the lows.  That's a lot of movement on a 34 or 21 minute chart.  Trading that was easier than falling off a log,

davefairtex's picture
davefairtex
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Posts: 5462
victory laps

So Mr Dogs, other than tooting your own horn while taking a victory lap, do you have any revelations for the group as to WHY you felt trading this was easier than falling off a log?

Like a marked-up chart perhaps, and your buy-point, and what caused you to buy at that moment?  :-)

 

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Dogs_In_A_Pile
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Could this be a real question?

Dave -

Hardly a victory lap.  It's a marathon, not a sprint and today is just like hitting the wall at mile 20-22.  Don't change your game plan drastically and just grind through it.  Plus, victory implies an end.  This is not the end, it was just another trading opportunity.

Tooting?  Yup.  I've been 'tooting' market neutral trading since I got here 6ish years ago.  You are maybe the fifth person to ask what it is we do.

I'll try and screenshot(shoot?) the charts tonight.  The only drawback is you will see a closed candle, not what I saw as the red candle blew the bottom out of the bottom Bollinger Band and then started forming a wick as the programmed sells were outpaced by programmed buys.  My buy signal was the instant the wick started forming on the 34.

I bought in the money....no time value loss to sweat if the market wobbled and staggered sideways.  IIRC, the NDX bottomed around 3780, my order took at 3825 and I closed the position at 4095 while it was still going up.

No emotion, just the same old boring trading routine I've been doing for years.

When you fall off a log, it's usually a surprise and you tense up and flail around trying to regain your balance.  That's hard to do and rarely successful at stopping the fall.  And man, have you ever landed on a bristlecone pinecone?  Those suckers hurt.

 

davefairtex's picture
davefairtex
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well now that's better

Dogs-

That's great, I got half the details.  :-)  Would be nice to know what instrument, and the expiration date, and the underlying, and the time of the tick, along with the chart, and (as you say) your particular setup.  Hopefully that will all come with the chart.

I'm always looking for solid reversal indicators.  Your bollinger band blowout plus some sort of wick thing sounds interesting.  Could I assume the same thing works on daily charts as well as it does intraday?  Do you have any sort of tutorial you could point me at?

At the risk of turning this into a trading blog...

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Dogs_In_A_Pile
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The rest of the story....

Dave -

Check your PM.  This kind of trade doesn't work well on a Daily chart as the tradable movement has already happened on shorter charts to start wicking the Daily.  It doesn't happen very often and is not a trade you go looking for as there are plenty of other trade entry opportunities where one of the confirming indicators is a Daily wick forming.

It was the NDX.  I bought time - expiration month was early next year. 

Mark_BC's picture
Mark_BC
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Posts: 492
I can't ignore the nagging in

I can't ignore the nagging in the back of my head telling me we've seen this all before, that this plunge is being allowed to happen. I can't understand how the computers could lose control of the markets when the PPT / ESF can simply print up another trillion and inject it in. I think we're all being led around like sheep, including us alternative onlookers. Just like when silver was allowed to get up to $50 and everyone was shrieking about how the elites were losing control of the market, then they sucker punched everyone and slammed it back down, the whole thing was an orchestrated show designed to destroy the PM stackers' morale for a few years.

But this time I do believe it is the end, IMO they are planning for the much-anticipated September global crash as the 7 year cycle ends, and this is the prelude to it. I believe they are still in control, up until hyperinflation hits. Then their only control mechanism will be the military which has been training in Jade Helm which ends in a few weeks. So IMO this is not unplanned market action getting out of control, they are letting it happen, just like they let the 2008 crash go down 777.7, which suggests they were fully in control back then too (what are the chances of that happening, about the same as Neo's passport expiring on Sept 11, 2001 being a mere coincidence as well?) But hey I could be wrong since no one outside the inner circle really knows what's going on.

KugsCheese's picture
KugsCheese
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Joined: Jan 2 2010
Posts: 1449
DELETE

"The latest available

 

[iPad issues]

KugsCheese's picture
KugsCheese
Status: Diamond Member (Offline)
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Posts: 1449
PBOC has sold at least $106 billion of reserve assets in 2 weeks

"The latest available Treasury data and estimates by strategists suggest that China controls $1.48 trillion of U.S. government debt, according to data compiled by Bloomberg. That includes about $200 billion held through Belgium, which Nomura Holdings Inc. says is home to Chinese custodial accounts.

The PBOC has sold at least $106 billion of reserve assets in the last two weeks, including Treasuries, according to an estimate from Societe Generale SA. The figure was based on the bank’s calculation of how much liquidity will be added to China’s financial system through Tuesday’s reduction of interest rates and lenders’ reserve-requirement ratios. The assumption is that the central bank aims to replenish the funds it drained when it bought yuan to stabilize the currency."

Source: http://www.bloomberg.com/news/articles/2015-08-27/china-said-to-sell-treasuries-as-dollars-needed-for-yuan-support?cmpid=yhoo

If global consumers are tapped out, just how is China going to replenish?

Bankers Slave's picture
Bankers Slave
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Posts: 523
Its an illusion

Cornelius999's picture
Cornelius999
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Joined: Oct 17 2008
Posts: 379
I hope you're not going to

I hope you're not going to tell me Santy doesn't exist!

Bankers Slave's picture
Bankers Slave
Status: Platinum Member (Offline)
Joined: Jul 26 2012
Posts: 523
Santy, otherwise known as the global economy in December!

Santy, what a fantastic peer pressure scam to get people to part with currency they do not have, for crap they do not need.

Jingle bells jingle bells.......

 

Fardin.Elias's picture
Fardin.Elias
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Posts: 3
The Flow of Life

That last sentence of yours inspired an observation about a God that creates something, gets into its own creation and then forgets the nature of both its own being and that of its creation. When creator and creation function on the notion of an inherent and natural unity, I believe we have a harmonious creation. When that knowledge is forgotten, we have a fundamentally split brain that sees separation instead of connectivity.

More and more however, we are beginning to see thoughts that see systems and people as being connected rather than separate from each other, and this web site is a good illustration. And going by the notion that every destruction is a creation, I quite simply think that we have run out our tether which started the evolution of modern man a long time ago, and I see a fork in the road at this point.

I think it is way too late to save our existing systems, and I for one, would welcome a reboot. But I would painstakingly define what that reboot is. It has to be truly revolutionary, something that has never been done or tried before. Or rather, that something that has been tried by the few individuals throughout history, is now needed on a massive and global scale. Yes, I am talking about enlightened self-interest and individualism. And no, I am not talking about Buddhas or Jesuses, but rather individuals who steadfastly work upon themselves first and foremost, that do not seek to intervene in the affairs of others, unless specifically asked to help.

Strong individuals are leaving the systems. The weak ones will collapse with it. The strong individuals will then come together to build improved and better systems, based on the lessons that we are learning in this current cycle. With self government, big government becomes redundant, the military is kept only for self protection. An enlightened population will spell the death of snake oil salesmen and various manners of scam artists and charlatans. Utopia? Sure! But then... The universe is more than 14 billions years old. The human race is a blip on that radar. I think we have barely begun to get out of our diapers.

I believe that there are moments when nature makes a call - grow, evolve or quite simply get out of the game, and I think we are in such a moment. 10 years ago, my old self would be freaking out and panicking. My current self however, is calm and sees myriad opportunities.

Mikkel, I am glad to come across a fellow traveler of the Tao. :)

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