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Stocks gain on horrible economic news

Wednesday, November 26, 2008, 6:17 PM

US stocks gain, economic data falls.

Over the past four days, US stocks gained the most (percentage wise) since 1933. On the surface this is significant, because 1933 marked a significant turning point for stocks even though the economic crisis had a ways to go yet.

But is that a valid linkage to make?

Now, the stock market is sometimes called “the great discounting machine” for its supposed ability to sniff out great changes in trend well before those changes are obvious elsewhere. In times past, stocks have made a habit of rising months in advance of job gains, economic activity, profit gains, and other such economic data.

However, I will note that the stock market has gotten a bit off the rails lately and it completely missed the warning signs of an impending credit crunch that were given off more than a year ago. The stock market carried on and made new highs even as the financial underpinnings of our entire system were collapsing into the bay. So in some circles (mine included), “the great discounting machine” has lost some of its utility and impartiality along the way.

Today the economic news was horrible.

October durable orders down 6.2%, transportation orders fall

WASHINGTON (MarketWatch) -- The faltering economy was reflected in government data Wednesday that showed dwindling demand for U.S.-made durable goods in October, along with weaker capital spending by nervous companies.

Orders for U.S.-made durable goods fell 6.2% in October, the largest decline in two years, the Commerce Department estimated, as orders for transportation goods fell 11.1%. Economists surveyed by MarketWatch had expected an overall decline of 2.5%. Excluding transportation, orders fell 4.4%.

Ouch. That’s really bad. Fortunately, I guess, the US does not manufacture a lot of stuff anymore, so the -6.2% drop does not have as large an impact on the overall economy as it would have in times past. Still, it is a very, very weak report. Normally, this should have resulted in a pretty good stock market and dollar decline. But this news was completely shrugged off, as was this next report.

New House Purchases, Consumer Spending Tumble

Nov. 26 (Bloomberg) -- Americans cut spending by 1 percent in October, the biggest drop since the last recession in 2001…A U.S. Commerce Department report showed orders for durable goods slumped twice as much as forecast as domestic and foreign demand dried up.

``It's about as bad as the 1970s and 1980s,'' said David Hensley, director of global economic coordination for JPMorgan Chase & Co. in New York. ``We're looking at back-to-back very deep'' slump in the global economy this quarter and next.

The number of Americans filing first-time claims for unemployment benefits fell to 529,000 last week, while remaining close to the highest level since 1992, Labor Department figures showed. The four-week moving average for claims reached a 26-year high.

Purchases of new houses dropped 5.3 percent to an annual pace of 433,000, lower than forecast and the fewest since January 1991, the Commerce Department said today in Washington. The median sales price decreased to a four-year low.

"We're going from bad to worse,'' said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York, who accurately forecast the drop in consumer spending in today's report. "The recession is deepening.''

Normally with news that bad, you’d expect a rout of both the stock market and the dollar, but the opposite happened in each case.

What gives?

There are two possibilities. The first is that stocks and the dollar are signaling that US recovery is right around the corner and that the US will lead the world.

The second is that both markets are no longer sending useful price signals to investors.

These are wildly divergent positions and I’ll be exploring both for subscribers in an upcoming report.

I will leave you with this.  After the initial stock market rout of 1929, which saw the market drop 48%, stocks rallied back 47% from there over the next six months before beginning the long slide to the bottom in 1932.

1929_Stock_Market_rebound_11-26-2008.jpg

Sometimes stocks know what they are doing, and sometimes they don't. 

So I guess the great discounting machine has been broken before.  In that sense, we might decide to put more weight on other economic data than stock market performance, and that's why I keep linking in the basic data.

But make no mistake, sooner or later the trillions of dollars of new liquidity will "hit the streets," and we'll see a return of consistent stock price increases.  Whether those will outpace the attendant inflation remains to be seen.

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25 Comments

wdstk46's picture
wdstk46
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Re: Stocks gain on horrible economic news

Markets don't go straight up or straight down.  A lot of traders have been looking for a perceived bottom to take some profits from their shorts.  They seem to have found it.  A lot of investors have been praying for the drop to end so they can play "Warren Buffett" and buy the values.  The market looks cheap to them.

The fact is that nothing has changed and this rally will most likely turn into yet another leg down.  We probably have several weeks of counter-trend rally first.  If you want to play it, keep one foot out the door.  If you were looking for an opportunity to short this market, you'll probably get a great one before too very long.

I wish everyone a Very Happy Thanksgiving. 

jdb123's picture
jdb123 (not verified)
Re: Stocks gain on horrible economic news

And the US Gov't is fighting this battle very similiarly like they are fighting the war on terror...aimlessly and against an undefined enemy lacking  a tangible grasp ( although the financial situation should be somewhat tangible to honest and humble thinking men )

Nonetheless, they're firing bullets aimlessly hoping to hit this "undefined" target....meanwhile the casualties rise and costs skyrocket....

A similiar irony from my perspective....

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Re: Stocks gain on horrible economic news

"But make no mistake, sooner or later the trillions of dollars of new liquidity will "hit the streets" and we'll see a return of consistent stock price increases.  Whether those will outpace the attendant inflation remains to be seen"

 Are you suggesting that stocks might be a good place to park your money in an inflationary event?  Moreso than precious metals? 

gak's picture
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Re: Stocks gain on horrible economic news

I think that what you are seeing is investor confidence in $4.7 Trillion in backstops, bailouts, liquidity (whatever term you want to use) being used to prop up a very shaky financial system. Short term longs are winning the day (if you call regaining 16% of a 40% drop winning) in a snapback rally in  an oversold market.

Next week will be very interesting as we will see whether Americans understand that borrowing to consume is not real smart (which is why our gov't is enamoured with it). Watch the retail numbers for Black Friday for clues as to whether the liquidity injections are enough to keep the charade going.

I am long skf (again)...

 

Gak

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Re: Stocks gain on horrible economic news

There could be some betting that Obama will turn the economy around. A bad bet of course.

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Re: Stocks gain on horrible economic news

There could be some betting that Obama will turn the economy around. A bad bet of course.

mainecooncat's picture
mainecooncat
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Re: Stocks gain on horrible economic news
hewittr wrote:

There could be some betting that Obama will turn the economy around. A bad bet of course.

Well, we're in agreement on this one, hewittr.

By the way, what's with your double posts as of late? I believe you even had a triple in there the other day.

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Re: Stocks gain on horrible economic news

Chris opined:

"There are two possibilities. The first is that stocks and the dollar are signaling that US recovery is right around the corner and that the US will lead the world."

With great interest, mild confusion and utter sincerity I ask the question: How on Earth could a US recovery be right around the corner? (Now I realize Chris is not predicting this nor even saying that the chance is 50/50.) Aside from today's paradoxical "rally," what data are out there that suggest anything but further unraveling ahead?

switters's picture
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Re: Stocks gain on horrible economic news

What if the market must also go through the Six Stages of Awareness, just like most people do when they find out about PO, climate change or the true depth of the economic crisis?

I'm not serious, really, but it's interesting to think of it that way.  The market seems to be responding just as many individuals respond.  First comes denial.  This is what was going on when the market reached new highs in spite of deteriorating fundamentals.  Second comes anger.  We saw some of that when the first bailout was initially proposed, as some citizens and Congress folks spoke out against the excesses of the banking and financial industry.  But the market quickly moved through that phase to the next, bargaining (or wishful thinking, as I like to call it).  Perhaps this is where we are now, with investors large and small buying up equities with their fingers crossed and heels clicking together three times.

What's next?  Depression.  We'll get there soon enough, when the next phase of the market collapse begins and the Dow drops under 7,000.  

Finally, we reach acceptance.  That's when even the clueless mainstream media and average Joe/Jane on the street clearly understands that the way of life we've taken for granted for so long has come to an end.  I think we've got a ways to go before we reach this stage on a collective level, and perhaps some never will.

 

krogoth's picture
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Re: Stocks gain on horrible economic news

Chris M said- The second is that both markets are no longer sending useful price signals to investors.


I believe this is what is happening because the current and coming cabinet will do everything they can to keep consumer spending up, while Trillions go unchecked out the back door to shore up the banks. This is causing conditions that make the market signals distorted and usually insulting to be honest. To see some of these stocks rallying makes me wonder about 2 things-

 

1) Are the masses taking what little they have left and dumping it into the market hoping for a lotto ticket?

2) Where are the shorters? You would think they would be all over some of these distressed companies after quarterly reports

Regardless of my view, Chris is right. If this kind of news came out and hit with so many cannon's at the same time 4 years ago, I think the signals would be a little more honest then today. I still struggle with the data being an investor, and a lot may also be historic conditions we have not seen yet as a singular event or multiple events combined.

 

 

 

 

 

Headless's picture
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Re: Stocks gain on horrible economic news

Switters offers the "six stages of awareness";

Chris offers "two possibilities";

Maincooncat observes "today's paradoxical "rally";

Gak offers respect to "liquidity," but puts the money where the heart is (buying the SKF);

Metalmongrol acknowledges Gak's observation, but subtely cheers for the "precious metals";

and wdstk is thinking about left-over turkey...

 

What is one to make of such an intelligent group of observers and their conflicting outlooks? Such a spectrum of thoughts sends me on a reminiscal journey of my days as a student of physics; a worshipper of Einstein, who, among a million other things, said:

"Two things are infinite: the universe and human stupidity; and I'm not sure about the the universe.

We can't solve problems by using the same kind of thinking we used when we created them.

All of us who are concerned for peace and triumph of reason and justice must be keenly aware how small an influence reason and honest good will exert...

Any man who can drive safely while kissing a pretty girl is simply not giving the kiss the attention it deserves.

Great spirits have often encountered violent opposition from weak minds."

My point in quoting Einstein: Even the greatest of minds ever to exist is schizophrenic.

Hundreds of lives were forever changed this afternoon (pacific time) by a group of our fellow humans who were rendered to a life devoid of possibility, who will always be known as criminals, but who were born just as you and I--with infinite possibility. I, for one, don't give the government of our country a pass; I don't believe that our actions as citizens who elect politicians who allow policies of unwarranted international intervention and exploitiation are without guilt; I believe that a nation that continues to disregard Noam Chomsky and his informed--not precient--warning of trespass (even after 911) is not worthy of surviving; most of all, I believe that Chris Martenson has a message that is profound, yet hollow without the addendum of a call for social responsibility on a worldwide scale...

Perhaps it is too late. However, having spent a decade living overseas, I find that people can and do differentiate between a (corrupt) government and the People: most cultures have a similar story that is no more than a genreation or two removed--and not forgotten...

Those people in India this afternoon (Pakistanis?) were responding--at least in part--to the net actions allowed by a government We the People elected...

We need to do better. We need to take some responsibility for the heathens we have called our politicians. The world will forgive We the People, but not if we don't speak up...

This current sacking of the world's middle-class (40% of Britons, including my best friend, blame us) has set the US back a generation. This will not be easily forgotten. It's time to get to work, to find those culpable, and to put them on stage in a court of law for what they have done to We the People of the Pale Blue Dot...

We shall overcome--if we get off our asses and say something!

Chenopodium's picture
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Re: Stocks gain on horrible economic news
switters wrote:

What if the market must also go through the Six Stages of Awareness, just like most people do when they find out about PO, climate change or the true depth of the economic crisis?

I sometimes wonder if the entire network of humans (expressed in the internet, stock market etc) is developping a sort of "consciousness" on it's own (like the borg :-), like a new "organism", and thus responding similar to an individual (although not a very smart one yet :-).

Just like our brain composed of billions of individual cells, so is the human species composed of billions of humans.

 In a way, things like the stock market or the "most popular links" (such as in diggs) can give us an idea of the current "thoughts" and "opinions" of this organism (the stock market displaying emotions like fear, surprise, happiness).

Our individual actions influence this organism, but it takes a lot of similar such actions to actually make it to the "consciousness" of the collective. So for instance PO is still not part of the collective consciousness, whereas global warming probably is. I wonder what will happen once PO reaches this consciousness, how this collective organism will "respond" (in terms of emotions as expressed in the stock market, for instance).

 

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Re: Stocks gain on horrible economic news

Hi Switters,

There maybe some hope as far as the main stream media - stories are starting to percolate into it and be reported that actually make sense (from a reader of this site perspective). When this changes from an occasional "Wow, I can't believe that story as on ABC, CNBC, FOX, etc.) to the main message coming from the main stream media, it will be interesting, to say the least, to see how the "regular person" responds.

- Septimus

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Re: Stocks gain on horrible economic news

 

Right now, things are moving sideways with great volatility.  Current fundamental news doesn't seem to have the impact it once did.  Today the news screamed, "wow, we're in a bad recession" but the market went up.  How can that be?

Well, I would interpret that as, "bad recession" is already baked into current prices.  So news that says "bad recession" isn't really news at all, it's just confirmation that things are pretty much how we expect them to be.  "More of the same" doesn't move the market, only surprises do that.

The market is also saying, you'd better enjoy $50 oil while it lasts, because it won't last long.  The oil market seems to believe in peak oil at this point.

It also thinks we might not be done with deleveraging, and it oscillates between predicting recession and depression.  Plus, it also indicates a continued lingering faith in the Fed and the Government's ability to manage the crisis, evidenced by the pop we got from Geithner's appointment as well as the latest 800 billion to buy up mortgages providing lower mortgage rates.  That little item resulted in a 30% rally in homebuilder stocks.  Anyone here think we need to build more homes?  Faith in the Fed + short covering is my only explanation of why that happened.

Here's a prediction: if holiday sales on Friday are less than horrible, we could have a nice end of year rally, perhaps even lasting through January.

Perhaps that's why the market popped this week: short covering going into Thanksgiving and Black Friday.

 

Headless's picture
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Re: Stocks gain on horrible economic news

Chenopodium,

You said: 'I sometimes wonder if the entire network of humans (expressed in the internet, stock market etc) is developping a sort of "consciousness" on it's own (like the borg :-), like a new "organism...'

Have you ever read any Edward O. Wilson? If not, you might find Robert Wright's Three Scientists and Their Gods a pretty interesting read. Wilson poses a theory similar to yours ([a single] "organism) about the planet (going beyond the obvious connections), and Wright makes it pretty interesting reading.

switters's picture
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Re: Stocks gain on horrible economic news

I just realized that I used the "five stages" of Kubler-Ross, instead of the "six stages" that Chris adapted from her model.

In Chris's model, after bargaining comes fear.  This occurs when folks really start to wake up to the fact that we're headed for serious turmoil.  This will likely sink in on a broad scale as the economic crisis deepens and understanding about peak oil and its implications permeates the mainstream.

It's important to remember that although these stages are presented in a linear fashion, in reality they are often cyclical.  The market has been bouncing back and forth between denial (stage one) and fear (stage four) for a couple of months now.  I'd expect that to continue even after we go into depression and acceptance.  

krogoth's picture
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Re: Stocks gain on horrible economic news

I agree with your statement on Black Friday.

If consumer spending for this and the holiday season is low or sets new records for slow sales, the market will react harshly to this. If we have good sales through this or the holiday season, we are back to a resemblance of some sort of stability.

I still believe these factors are putting incredible pressure on the market in whole, and it's not going to take much to break it.

krogoth's picture
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Money for good or bad results

The fundamental problem with a economic situation like we are seeing, historic in its proportions, makes data analysis very difficult if not impossible.

The structure of the market makes money on success or failure, and we will always have individuals or organizations making money somehow as long as the system exists in it's present form.

Any stages of anything are meant for the general educated or informed masses. The sharks are still in the water, and they will eat regardless of any economic situation regardless of good or bad news. They have one stage, greed. They will just continue eating and swim to the next opportunity.

 

 

 

 

gak's picture
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Re: Stocks gain on horrible economic news

Nonzeroone,

Sorry for any confusion. I was simply commenting on my latest position in respect to SKF. I exited the market 10/07 and have been slowly getting back into certain spots at certain times and then exiting. I got back into precious metals (both physical and GLD, GDX and SLV) after the first wave of deleveraging by the Hedge Funds (HF).  I think that we might see another one, but I don't know. The HF had to liquidate by Nov 15th, and prob 75% are seeing their last Thanksgiving this year. Will there be more forced selling as they continue deleveraging? I just don't know, and that activity (or non activity as the case may be) will drive quite a bit of market activity.

This a classic bear market rally, fueled by *MORE* tremendous gov't debt and fed injected liquidity. I am choosing not to play it since it can change at *any* time ,and change swiftly. I thought that we would see 7200 on the Dow, but now I am not so sure. I think we may break through the "bottom"  and get into the 5200 on the Dow before we start a *real* climb back up. But as Chris says, "the next 20 years will be nothing like the last 20", so expect that climb to be more sideways than V shaped.

Longer term, the effects of pumping 4+ Trillions of dollars into the economy will *ultimately* be inflationary,but as Mish says we are in the midst of an *incredible* deflationary time, the like of which will prob equal (if not surpass the 30's). Once that works its way through the system, we might skip inflation and just head into hyper inflation. When? No idea. Watch the Housing starts in CA, FL and AZ. Those will be the leading indicators IMO. 

Happy Thanksgiving for those in the states!

 

Gak 

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Re: Stocks gain on horrible economic news
gak wrote:

...we might skip inflation and just head into hyper inflation. When? No idea. Watch the Housing starts in CA, FL and AZ. Those will be the leading indicators IMO. 

Happy Thanksgiving for those in the states!

 

Gak 

 

@gak...

Your comments convey a knowledge of the markets.   Could you expand on your rationale to the above statement.  Believe I catch generally what your saying.   But the specifics of your reasonaing in our situation could be helpful in wrestling with the "Big Picture".

Thx.

Nichoman 

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Re: Stocks gain on horrible economic news

There is this relentless will by all the nations to print more money in to the system as fast a possible.  

Nov. 26 - The European Commission unveils a 260 billion dollar scheme to revive the bloc's struggling economies. Oil is pushing, Russia is cutting production. BP, ESSO and OPEC do not want deflation of oil to fall any further. It is almost like a lot of stock traders are in denial. Yet there are no other options open here, you cannot just down tools and walk away every one is in a place of anxiety waiting and willing.

To quote Gak "we might skip inflation and just head into hyper inflation" this looks possible. Deflation is not going to happen.

 

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Re: Stocks gain on horrible economic news

Lemma 1(from the Principia Economica de Philosophy UnNaturno)  " The kind of profit you may find in your shorts is not one that will be accepted by a bank", wdstk46, and much of our business now seems to be supported by deposits made on the banks of the Nile. Incidentally, since the erection of the Aswan high dams, the Nile is not allowed to overflow its banks and therefore there are no yearly deposits made on the banks-which makes this an ironic commentary, allegorical of the condition of our U.S. Banks where the lack of savings deposits has definitely eroded our banks, and the flood of cheap money will destroy any hope of growth in most of our fields of business.

The disconcerting linkages of the worlds fiat currencies seems to be turning all to fahrt currencies i.e. they are highly inflatulated, are beginning to smell very bad, and will dissipate into thin air once released.

Most first year economics students, will soon realize that supported currencies suffer from the same delusion; the almost universal adoration of noble metals by human beings, and the concomitant limited practical value, and unreliable minimal distribution in the earth’s crust. But no! You say, this very scarcity generated value and served as a break to run-away economic expansion. Q.e.d, which is why paper money, was supported by the noble metal illusion for so long. BUT, the lack of specie led to piracy in the Americas during the 17th & 18th centuries and currently around the Horn of Africa. AND will do so in the rest of the world should all paper currencies be devalued due to inflation. The toughest Burmese Bandit will most definitely understand it.

Furthermore, the mounting lack of species is putting all our little dreams @ risk, and in mortal danger, because of the devilish interconnectedness of ALL ecologies (all Biomes interact at any distance, over time) Yes Virginia, sandstorms in the Sahara subvert your Turkey stuffing at Thanksgiving.

A fine kettle of fish say I, and not from Marseilles. Both the Ludic and Gaussian fantasies (errors) prevent most economists from using the proper mathematical tools to view economic conditions accurately. There is nothing sacred about mathematical results. Garbage in: Garbage out! Mathematics, is a deductive discipline; it is useful only to the degree it mimics reality (i.e. Nature, conditions, dynamics etc..) In the physical sciences (Chemistry, Physics, Geology, Astronomy) it is more usefull because it reflects the laws governing large numbers moving more or less randomly. BUT only over limited ranges with specific applications intended. Einstein failed in his general theory (quantum mechanics not withstanding) and so will you if you try to generalize economics. The human element is chaotic. It is more likely to follow fractured geometry than fractal geometry’s (apologies to B. Mandelbrot) but may follow both. (Do " Fractured Fairy Tales" ring a bell?)

I take issue with CM's definition of money as "a claim on human labor” While this implies WORK and work requires energy (in any sense) it suffers by pandering to a Marxian view (Karl not Groucho) of the value of work. Most of you readers grew up in a world where you had to work (do recognized valued activities) to earn money. You were most often paid for the time you spent doing "useful " work rather than being paid for the result of your labor (i.e. a freshly painted house, a repaired car a new set of cloths). Hence, the impression that work-time has value and leading to the statement " time is money"

THIS IS COMPLETELY TRUE IF AND ONLY IF, WORK (YOUR WORK) YEILDS VALUBLE (GENERALLY ACCEPTABLE BY MOST VIEWERS) RESULTS FOR ALL SUBDIVISIONS OF TIME. 

Before you have finished reading the above short statement you must see the error in this assumption. You counter with " we don't need to nit-pick". Ah, but the devil is in the details. For instance, for a poor impoverished farmer, many place in the world, a whole years worth of work becomes valueless if his crops are destroyed before he can use them or sell them. Unlikely? Not at all. Is it then that time be money only in 1st world nations? In world trade, goods are more often valued than services, and the amount of human labor attached to these goods is ignored. Conversely, Clinton (either one) is paid large sums of money for prattling, gibbering, babbling, prating and braying to an audience of enraptured oafs for an hour or less. Unlikely C.M.? I think not. Where is the work (mass through distance) in the second example? "There ain't none" unless you consider breathing "useful" work. Getting muddy isn't it? Both of my examples are not outlandish. So then, is the key, value? The value we assign to things, which determine cost in generally, accepted media of exchange? And Bingo, we have come full circle. So, the tea is in the pot and the pot is in the tea eh?  The medium has an assigned value for goods and services and debt, and intangibles and ..and ..And is a book then a purveyor of ideas or a lump of macerated, pressed dried and printed on poly beta 1-4 glucosyl glucoside linked by fillers, binders and whitening agents? Or a set of images on a TFT LCD screen?  or..

And we are left with accepted value, generally recognized.

Confederate paper money became valueless in an instant after surrender of RE Lee and the capture of Jefferson Davis. Gold and silver retained their value in the south-accepted value, generally recognized; even though both require human input to have value and would be valueless to a raccoon who would never the less recognize the value of a beef steak. (And would undertake great risk to steal it from you if he were starving, as will starving people)

So despite the over printing of any treasury, any money can retain value as long as it is generally accepted and generally recognized.

Is it then periods of inflation that inflate the cost of goods and services because there are too many buyers and not enough sellers (easy money)?

And are deflationary periods necessary to regain balance, at unfair cost to the poor and disadvantaged?    

I think, therefore that money management must incorporate all aspects of supply, demand, the necessity of capital concentration, and the realistic redistribution of "wealth" with a human face and incorporating group needs irrespective of the wishes of the rich, the powerful, the greedy, and the all too many stupids, not withstanding the enormous complexities of our global financial systems.(Nonzero1=nonzerosum)

The responsibility is yours and mine to the exclusion of the sociopaths. We will probably never again have such an opportunity.

Vestri servus, (your {pl.pos.}, servant)

gsmolk

SALVO PLANETAE SUPRIMA LEX ESTO

 

 

 

 

 

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Re: Stocks gain on horrible economic news


RubberRims & Nichoman,
I don't claim any special knowledge of the markets. I can  lose (and have lost) money with the best of them. I have been invested in the markets since the 70's (thanks Uncle Raymond!) and have been studying them and trying to learn their ways ever since; I am still as confused today as I  was back then :)
With that said, my reasoning goes like this:
1. Mish is right. We are in the late beginning early middle of a *MASSIVE* deleveraging episode. Its epicenter is in housing markets *across the country*. As an example, look at one community in CA. The Case Shiller report that came out this week (http://globaleconomicanalysis.blogspot.com/2008/11/case-shiller-and-car-analysis-november.html ) showed that Monterey County has recorded a *65%* drop in housing prices, from $800K to $300K. 
That is huge. Please think about the implications of that for a second. Pretend you "own" that house. Feel like buying *anything* when your net worth just took a $500K drop in less than 2 years. This is an example of course, but this type of loss is happening in markets *across* the nation. 
2. As a result of one above, you (generic you) have two choices in your microeconomic situation and both are *Extremely* deflationary to the economy as a whole:
a. If you are one of the people in this situation (or if you live in  a neighborhood that has this happening) then you are feeling it directly. Does owing more than $500K than it is worth on a house make you want to go out and spend? Take on new debt? If you have altered your behaviour because of the the housing situation in your neighborhood and you are not spending like you used to, then you are contributing to the deflation.
b. For those of you that live in neighborhoods that are *NOT* directly impacted by this activity, do you feel like taking on new debt? Or spending some $$ to buy whatever from HD? If you answered no to these questions, then again you should see how our microeconomic behavior is impacting the macro economic environment. But make no mistake, not being able to use your house as an ATM, and seeing 65% drops in housing worth is *hugely* deflationary.
3. But it gets worse than that, and this part is what has destroyed our banking system in the span of 2 months. Those stupid loans mentioned elsewhere (Liar loans, No docs, 125% financing, option interest, etc) were sold off to buyers (who were assured that it was *AAA* debt by Moody's, Fitch, etc). And this gets worse. These loans were split up so that portions of a *single* loan is now owned by 25 or 500 different investment groups in  different investment packages. This is the slicing and dicing that you  hear about and it is the Mortgage Securitization that you hear about. 
Those financial institution that underwrote this and have huge exposure have taken huge hits. Whoops!! My bad. I am wrong!!! We, the US taxpayer and the citizens from China that are buying US T-Bills are taking those hits because our brilliant govt (both Bush and Obama) decided that the banks couldn't go down, so they decided to shift the TRILLIONS of dollars of bad debt from them to us. BRILLIANT!
All of those losses are being absorbed right now by the US gov't (Treasury, FDIC, etc) and the Fed as accounting entries. There really is not any new liquidity represented as cash that is in the average Joe's bank account. Banks aren't lending. The velocity of money is slowing down dramatically. Unemployment is on the rise w/ no sign of letting up. Commercial Real Estate is about to hit the crapper too. Because of all of the above, I think that the evidence is there to prove w/o question that we are in a massive deflationary episode now.
So what happens when the deflation cycle stops?
Well that is a tough one and it depends on the gov't. I know, not very comforting. But if I had to speculate, then here it is:
If Obama/Geidner continues down the path set by Bush/Paulson, then we turn into Japan Inc. We lose 5-10 years to deflation and we have Zombie companies because we didn't allow capitalism to run its course and flush out the weak companies. Instead we keep bad companies alive on life support and they reward us by producing horrible numbers quarter after quarter. 
I think this happens until the  gov't borrowing reaches a level when no one wants to buy a T-Bill. Once that happens, then the hyper inflation sets in as they have no choice but to debase the currency to pay the bills. Granted $100, will be worth $1 in the beginning, but they will still be able to stay solvent and not renege on their debts.
And then the currency collapses, and we start WWIII.
Happy Thanksgiving.
Gak
kcim67's picture
kcim67
Status: Member (Offline)
Joined: Aug 19 2008
Posts: 13
Re: Stocks gain on horrible economic news

Hear Here for Nonzerone! So how do we go about getting this noticed? I for one what to get up off my Ass!

Davos's picture
Davos
Status: Diamond Member (Offline)
Joined: Sep 17 2008
Posts: 3620
Re: Stocks gain on horrible economic news

I think Faber's tennis ball analogy was at or about the 6-7 minute point

http://seekingalpha.com/article/100771-throwing-cold-water-on-today-s-rally-mark-faber 

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