August 12, 2011
STOCK MARKET VOLATILITY AND THE ELITE
The Dow Jones Industrial Average fell 635 points on
Monday, August 8. On Tuesday, it rose 430 points. On
Wednesday, it fell 520 points. On Thursday, it rose 423
points.
Volatility is a bad sign. It indicates that experts
who allocate trillions of dollars worth of stocks are not
remotely sure what lies ahead. At any point in time, bulls
and bears are evenly matched. The markets clear, after all.
There is a seller for every buyer. But this week's
matching, day by day and sometimes on the same day, has
involved far greater uncertainty than normal.
World stock markets have been in decline for two
weeks. There are bad days and flat days. There are no good
days, if by good we mean strong upward moves. Hardest hit
has been Germany's DAX, down 20%. This index is made up of
30 major blue chip companies. That the strongest economy in
the West has suffered this big a drop in its major stock
index is very bad news.
An indication of how shaky the European stock markets
are is this. At about 1 p.m., August 11, British time, all
of the European markets shot up. There was a reason. There
was a rumor that Spain and Italy would ban short selling
after markets closed. Then a rumor said Germany would, too.
(http://bit.ly/ShortBan) So, short sellers covered their
positions by buying long contracts. That pushed up prices.
If governments are so foolish as to do this, it will
disrupt orderly pricing. That's what futures markets do:
smooth out fluctuations. Bureaucrats, being economic
ignoramuses, do not understand this. They have a bias
against going short. They do not want honest pricing. They
are like a demented physician who prefers to break a
thermometer rather than treating fevers.
The United States government's debt was downgraded
from AAA to AA+ by Standard & Poor's on Friday, August 5.
This was announced after the stock market had closed. That
triggered the 635-point decline on Monday.
The downgrading was important symbolically: this was
the first downgrade in post-World War II history. It was
not a major factor in terms of the government's solvency.
It was a timid warning by one credit-ratings agency. The
other two major ratings agencies, Moody's and Fitch,
earlier in the week had left their ratings unchanged.
Again, the experts do not agree.
The question is this: What is the trend? The answer is
easy: down.
A LONG-TERM BEAR MARKET
It is easy to identify the peak of the U.S. stock
market: the first quarter of 2000. It was downhill after
that. A Wikipedia entry describes this history accurately.
The International Monetary Fund had expressed
concern about instability in United States stock
markets in the months leading up to the sharp
downturn. The technology-heavy NASDAQ stock
market peaked on March 10, 2000, hitting an
intra-day high of 5,132.52 and closing at
5,048.62. The Dow Jones Industrial Average, a
price-weighted average (adjusted for splits and
dividends) of 30 large companies on the New York
Stock Exchange, peaked on January 14, 2000 with
an intra-day high of 11,750.28 and a closing
price of 11,722.98. In 2001, the DJIA was largely
unchanged overall but had reached a secondary
peak of 11,337.92 (11,350.05 intra-day) on May
21. (http://bit.ly/StocksPeak2000)
What about the S&P 500, a broader index of stocks?
Citing another article on Wikipedia:
The index reached an all-time intraday high of
1,552.87 in trading on March 24, 2000, during the
dot-com bubble, and then lost approximately 50%
of its value in a two-year bear market, spiking
below 800 points in July 2002 and reaching a low
of 768.63 intraday on October 10, 2002 during the
stock market downturn of 2002. The S&P 500
remained below its year 2000 all-time high
somewhat longer than the popular Dow Jones
Industrial Average and the more comprehensive
Wilshire 5000. However, on May 30, 2007, the S&P
500 closed at 1,530.23 to set its first all-time
closing high in more than seven years. The
highest point reached was 1,565.15 on October 9,
2007. (http://bit.ly/SP500performance)
It is now under 1,200. I would call this history volatile.
If you want to know where they are today, visit
www.bigcharts.com. Then click "major market indexes." The
NASDAQ remains a pale imitation of itself: under 2500: down
over 50%. The Dow is under 11,200: down 5%. The S&P 500 is
under 1,200: down 25%.
Then discount this for price inflation. The U.S.
government offers a convenient inflation calculator. Note:
the bureaucrats do not call this a "CPI calculator." They
know what the trend has been ever since 1914, when the
calculator begins: the year the Federal Reserve System
began operations. It is here: http://bit.ly/USinflation.
Consumer prices are 13% higher than in 2000.
There should be no question: the US stock market has
been a bear market for over 11 years.
"Bear market." When was the last time you heard this
phrase applied to the 21st century by any regular
commentator on Tout TV or the mainstream financial
journalism outlets? The next time will be the first. Yet
that is what the U.S. stock market has been.
Here is what every interviewer asks the visiting fund
manager: "What are the best stocks to buy in this market?"
Wrong question. The question should be: "What are the best
stocks to short in this decade-long bear market?"
BIG MONEY AND AVERAGE PEOPLE
According to Vilfredo Pareto's findings in 1897, about
20% of the population in any society owns 80% of the
wealth. In the USA, this is now closer to 20%-85%.
This is an anomaly: a little too concentrated. With respect
to stock ownership, the figure is even more skewed: 10%-
80%.
http://clicks.dailyreckoning.com//t/AQ/AAacIQ/AAapRQ/AASGXA/AQ/Axcnng/RKR9
My guess is that actions by the Federal Reserve System
over the past quarter century have skewed the capital
markets in favor of the rich. But there have been no
detailed studies on this, as far as I know. The existence
of the Pareto distribution has been deliberately ignored by
economists from 1897 until today, since they cannot explain
it. So, they prefer to ignore it. The recent anomalies in
the USA's asset allocation are ignored with the same
fervor.
This means that the average American is not directly
affected by the wild swings in the stock market. He
probably does not have a pension. If he does, he has little
control over it. There are bonds in it if it is managed by
a professional team. If he has decided to put it in stocks,
he has lost a decade. He is closer to retirement than he
was in 2000. He is losing the race to price inflation.
With respect to stocks, the average American is on the
sidelines. He is bothered by the wild volatility of the
stock market, meaning the Dow. He is not an investor in
Asian or European stocks. He knows nothing about them. But
the Dow ought not to do this, he thinks. It should be going
up steadily, like the tortoise racing against the hare.
Instead, he sees stocks going up and down wildly, so
he thinks: "This does not sound good. Why are things so
confused? Are we facing another recession?"
Two weeks ago, the commentators were talking about a
slowdown in American economic growth. Today, the phrase
"double-dip recession" is common. The columnists are asking
whether we are facing such a prospect. There are a lot of
them who are answering "yes."
Here are three underlying questions.
If the stock market is falling, is the economy
worse than I thought? If it's worse than I
thought, should I be cutting back on spending? If
I cut back on spending, should I just put my
money in the bank, even though it pays almost no
interest?
The average Joe is asking these questions. So is the
Average Joe's banker. The banker's bank is the Federal
Reserve System. Banks now have about $1.6 trillion sitting
in accounts at the FED. These excess reserves pay
essentially no interest -- not enough to cover costs of
bank operations. So, banks pay low interest rates to
depositors. But depositors are content, because they fear
the loss of their money. So do their bankers.
When the evening TV news shows feature stock market
reports as the lead stories, they do this because they
think viewers care. Viewers do care, but only indirectly.
They want some sense of what is causing a major increase or
major decline. They want reassurance that things are going
to go well for them. A falling stock market can't be good
for them, they assume. They assume -- correctly -- that
when sophisticated investors start selling shares at lower
prices, there has to be a good reason. A good reason is bad
expectations.
PADDLING UPSTREAM ECONOMICALLY
This economy is in trouble. The more stocks fall, the
more articles we read that explain the falling market. They
go into greater detail on what is going wrong in the
underlying economy.
The bulls -- who have been dead wrong for 11 years --
tell us that these underlying negatives are deceptive. The
underlying positives are stronger. But, for this or that
technical reason, the underlying negatives have prevailed
in the thinking of investors. Then we are treated to a
discussion of how these technical factors in the past were
a prelude to big upward moves in the stock market.
These people do not deal in depth with the underlying
negatives. They assume that previous technical upswings
point to deliverance: a looming return of the bull market.
They never deal with the main question, which is this: "Why
is the US stock market lower today than in 2000?"
Why do they refuse to deal with this? Because
technical factors cannot explain it. Fundamental factors
can. The fundamental factors are negative. More than this:
they are getting worse.
The clearest sign of the problem is the increase in
the Federal Reserve System's monetary base. It went from
about $800 billion in August 2008 to close to $2.7 trillion
today. If things were hunky-dory -- or even merely hunky --
the FED would not have bought this many Treasury bonds and
IOUs issued by Fannie Mae and Freddy Mac. Similarly,
commercial banks would not have increased excess reserves
to $1.6 trillion.
The FED is not just paddling upstream; it installed a
rocket engine and ignited it. Yet the economic results have
been not much better than a used outboard motor.
Unemployment is high. Economic growth never got anywhere
near what has been common in all post-War economic
recoveries from a recession. It is now slowing, despite
QE2.
This was not supposed to happen. The technical
indicators have been superseded by this anomaly: balance
sheet losses. They would be much worse except for the fact
that the scheduled new accounting rules were blocked in the
spring of 2009 by the Financial Accounting Standards Board.
This change has enabled banks to conceal the extent of
their commercial mortgage losses from the public and also
from the bank regulators.
Bankers know how bad their balance sheets really are.
So, they have increased their holdings of excess reserves
at the FED. These excess reserves are their ace-in-the-hole
for another recession, which will produce havoc in the
commercial real estate markets, which are already in a
recession-era condition.
The US economy is struggling. Small businessmen know
this, which is why they are not hiring any of the 14
million unemployed people. The National Federation of
Independent Business represents these people. It surveys
their opinions monthly. They publish this as the Small-
Business Optimism Index. These days, it is not optimistic.
For the fifth consecutive month, NFIB's monthly
Small-Business Optimism Index fell, dropping 0.9
points in July--a larger decline than in each of
the previous three months--and bringing the Index
down to a disappointing 89.9. This is below the
average Index reading of 90.2 for the last
two-year recovery period.
http://clicks.dailyreckoning.com//t/AQ/AAacIQ/AAapRQ/AASGXQ/AQ/Axcnng/qUOG
The unemployed obviously know how bad it is for them.
They have been unemployed longer on average than at any
time since the Great Depression. There is no way to hide
this from anyone. The number of Americans applying for
unemployment insurance for the first time has been steady
at about 400,000 each week. Technically, the recession
began in November 2007. In January 2008, the unemployment
claims figure was a little over 300,000. It started up as
the recession deepened. By the spring of 2009, it was
around 650,000. We have seen improvement, but we are still
in recession conditions with respect to this statistic.
This is the weakest recovery in the post-War era. It
is now fading.
The stock market does not reflect Main Street. The
companies have positive earnings -- profits -- but their
managers are hoarding cash, i.e., putting it into very
short-term loans to top-rated firms.
CONCLUSION
Stocks are held by the elite for the elite. The elite
do not know what they are doing. They have remained in a
bear market for 11 years. Meanwhile, gold rose from about
$250 an ounce to $1,750. Asian stocks soared (not Japan's).
If they're so smart, why aren't they richer? They are
rich, but they have not gotten richer in the 21st century.
They rode the rocket of equity and debt from 1982 until
2000, but then the rocket fizzled.
Volatility is a long-term problem for the elite. The
richest 10% of the population trade ownership of stocks
with each other. It's like a bunch of washerwomen who make
a living by taking in each other's washing. In the larger
picture, the rich are in stagnation mode. Their real estate
is down. Their stocks are down.
The super-rich expected the euro to be the wave of the
future. It is: shaky.
They thought the U.S. government would run surpluses
forever back in 2000. Now they are paid pittances on their
Treasury investments, while U.S. government debt has been
downgraded.
The elite have hit an economic wall. They think they
can get over it, or around it, or under it. So far, they
haven't.
This indicates that they are losing control. New
elites are appearing in Asia.
Note: Over the last eight years, 72 Chinese
billionaires have died, most of them under
strange circumstances. Numbers: 15 were murdered,
17 committed suicide, 7 died from accidents, 19
died from illness, and 14 were executed. There
are 115 alive today. This may not be a good club
to get into.
STOCK MARKET VOLATILITY AND THE ELITE
The Dow Jones Industrial Average fell 635 points on
Monday, August 8. On Tuesday, it rose 430 points. On
Wednesday, it fell 520 points. On Thursday, it rose 423
points.
Volatility is a bad sign. It indicates that experts
who allocate trillions of dollars worth of stocks are not
remotely sure what lies ahead. At any point in time, bulls
and bears are evenly matched. The markets clear, after all.
There is a seller for every buyer. But this week's
matching, day by day and sometimes on the same day, has
involved far greater uncertainty than normal.
World stock markets have been in decline for two
weeks. There are bad days and flat days. There are no good
days, if by good we mean strong upward moves. Hardest hit
has been Germany's DAX, down 20%. This index is made up of
30 major blue chip companies. That the strongest economy in
the West has suffered this big a drop in its major stock
index is very bad news.
An indication of how shaky the European stock markets
are is this. At about 1 p.m., August 11, British time, all
of the European markets shot up. There was a reason. There
was a rumor that Spain and Italy would ban short selling
after markets closed. Then a rumor said Germany would, too.
(http://bit.ly/ShortBan) So, short sellers covered their
positions by buying long contracts. That pushed up prices.
If governments are so foolish as to do this, it will
disrupt orderly pricing. That's what futures markets do:
smooth out fluctuations. Bureaucrats, being economic
ignoramuses, do not understand this. They have a bias
against going short. They do not want honest pricing. They
are like a demented physician who prefers to break a
thermometer rather than treating fevers.
The United States government's debt was downgraded
from AAA to AA+ by Standard & Poor's on Friday, August 5.
This was announced after the stock market had closed. That
triggered the 635-point decline on Monday.
The downgrading was important symbolically: this was
the first downgrade in post-World War II history. It was
not a major factor in terms of the government's solvency.
It was a timid warning by one credit-ratings agency. The
other two major ratings agencies, Moody's and Fitch,
earlier in the week had left their ratings unchanged.
Again, the experts do not agree.
The question is this: What is the trend? The answer is
easy: down.
A LONG-TERM BEAR MARKET
It is easy to identify the peak of the U.S. stock
market: the first quarter of 2000. It was downhill after
that. A Wikipedia entry describes this history accurately.
The International Monetary Fund had expressed
concern about instability in United States stock
markets in the months leading up to the sharp
downturn. The technology-heavy NASDAQ stock
market peaked on March 10, 2000, hitting an
intra-day high of 5,132.52 and closing at
5,048.62. The Dow Jones Industrial Average, a
price-weighted average (adjusted for splits and
dividends) of 30 large companies on the New York
Stock Exchange, peaked on January 14, 2000 with
an intra-day high of 11,750.28 and a closing
price of 11,722.98. In 2001, the DJIA was largely
unchanged overall but had reached a secondary
peak of 11,337.92 (11,350.05 intra-day) on May
21. (http://bit.ly/StocksPeak2000)
What about the S&P 500, a broader index of stocks?
Citing another article on Wikipedia:
The index reached an all-time intraday high of
1,552.87 in trading on March 24, 2000, during the
dot-com bubble, and then lost approximately 50%
of its value in a two-year bear market, spiking
below 800 points in July 2002 and reaching a low
of 768.63 intraday on October 10, 2002 during the
stock market downturn of 2002. The S&P 500
remained below its year 2000 all-time high
somewhat longer than the popular Dow Jones
Industrial Average and the more comprehensive
Wilshire 5000. However, on May 30, 2007, the S&P
500 closed at 1,530.23 to set its first all-time
closing high in more than seven years. The
highest point reached was 1,565.15 on October 9,
2007. (http://bit.ly/SP500performance)
It is now under 1,200. I would call this history volatile.
If you want to know where they are today, visit
www.bigcharts.com. Then click "major market indexes." The
NASDAQ remains a pale imitation of itself: under 2500: down
over 50%. The Dow is under 11,200: down 5%. The S&P 500 is
under 1,200: down 25%.
Then discount this for price inflation. The U.S.
government offers a convenient inflation calculator. Note:
the bureaucrats do not call this a "CPI calculator." They
know what the trend has been ever since 1914, when the
calculator begins: the year the Federal Reserve System
began operations. It is here: http://bit.ly/USinflation.
Consumer prices are 13% higher than in 2000.
There should be no question: the US stock market has
been a bear market for over 11 years.
"Bear market." When was the last time you heard this
phrase applied to the 21st century by any regular
commentator on Tout TV or the mainstream financial
journalism outlets? The next time will be the first. Yet
that is what the U.S. stock market has been.
Here is what every interviewer asks the visiting fund
manager: "What are the best stocks to buy in this market?"
Wrong question. The question should be: "What are the best
stocks to short in this decade-long bear market?"
BIG MONEY AND AVERAGE PEOPLE
According to Vilfredo Pareto's findings in 1897, about
20% of the population in any society owns 80% of the
wealth. In the USA, this is now closer to 20%-85%.
This is an anomaly: a little too concentrated. With respect
to stock ownership, the figure is even more skewed: 10%-
80%.
http://clicks.dailyreckoning.com//t/AQ/AAacIQ/AAapRQ/AASGXA/AQ/Axcnng/RKR9
My guess is that actions by the Federal Reserve System
over the past quarter century have skewed the capital
markets in favor of the rich. But there have been no
detailed studies on this, as far as I know. The existence
of the Pareto distribution has been deliberately ignored by
economists from 1897 until today, since they cannot explain
it. So, they prefer to ignore it. The recent anomalies in
the USA's asset allocation are ignored with the same
fervor.
This means that the average American is not directly
affected by the wild swings in the stock market. He
probably does not have a pension. If he does, he has little
control over it. There are bonds in it if it is managed by
a professional team. If he has decided to put it in stocks,
he has lost a decade. He is closer to retirement than he
was in 2000. He is losing the race to price inflation.
With respect to stocks, the average American is on the
sidelines. He is bothered by the wild volatility of the
stock market, meaning the Dow. He is not an investor in
Asian or European stocks. He knows nothing about them. But
the Dow ought not to do this, he thinks. It should be going
up steadily, like the tortoise racing against the hare.
Instead, he sees stocks going up and down wildly, so
he thinks: "This does not sound good. Why are things so
confused? Are we facing another recession?"
Two weeks ago, the commentators were talking about a
slowdown in American economic growth. Today, the phrase
"double-dip recession" is common. The columnists are asking
whether we are facing such a prospect. There are a lot of
them who are answering "yes."
Here are three underlying questions.
If the stock market is falling, is the economy
worse than I thought? If it's worse than I
thought, should I be cutting back on spending? If
I cut back on spending, should I just put my
money in the bank, even though it pays almost no
interest?
The average Joe is asking these questions. So is the
Average Joe's banker. The banker's bank is the Federal
Reserve System. Banks now have about $1.6 trillion sitting
in accounts at the FED. These excess reserves pay
essentially no interest -- not enough to cover costs of
bank operations. So, banks pay low interest rates to
depositors. But depositors are content, because they fear
the loss of their money. So do their bankers.
When the evening TV news shows feature stock market
reports as the lead stories, they do this because they
think viewers care. Viewers do care, but only indirectly.
They want some sense of what is causing a major increase or
major decline. They want reassurance that things are going
to go well for them. A falling stock market can't be good
for them, they assume. They assume -- correctly -- that
when sophisticated investors start selling shares at lower
prices, there has to be a good reason. A good reason is bad
expectations.
PADDLING UPSTREAM ECONOMICALLY
This economy is in trouble. The more stocks fall, the
more articles we read that explain the falling market. They
go into greater detail on what is going wrong in the
underlying economy.
The bulls -- who have been dead wrong for 11 years --
tell us that these underlying negatives are deceptive. The
underlying positives are stronger. But, for this or that
technical reason, the underlying negatives have prevailed
in the thinking of investors. Then we are treated to a
discussion of how these technical factors in the past were
a prelude to big upward moves in the stock market.
These people do not deal in depth with the underlying
negatives. They assume that previous technical upswings
point to deliverance: a looming return of the bull market.
They never deal with the main question, which is this: "Why
is the US stock market lower today than in 2000?"
Why do they refuse to deal with this? Because
technical factors cannot explain it. Fundamental factors
can. The fundamental factors are negative. More than this:
they are getting worse.
The clearest sign of the problem is the increase in
the Federal Reserve System's monetary base. It went from
about $800 billion in August 2008 to close to $2.7 trillion
today. If things were hunky-dory -- or even merely hunky --
the FED would not have bought this many Treasury bonds and
IOUs issued by Fannie Mae and Freddy Mac. Similarly,
commercial banks would not have increased excess reserves
to $1.6 trillion.
The FED is not just paddling upstream; it installed a
rocket engine and ignited it. Yet the economic results have
been not much better than a used outboard motor.
Unemployment is high. Economic growth never got anywhere
near what has been common in all post-War economic
recoveries from a recession. It is now slowing, despite
QE2.
This was not supposed to happen. The technical
indicators have been superseded by this anomaly: balance
sheet losses. They would be much worse except for the fact
that the scheduled new accounting rules were blocked in the
spring of 2009 by the Financial Accounting Standards Board.
This change has enabled banks to conceal the extent of
their commercial mortgage losses from the public and also
from the bank regulators.
Bankers know how bad their balance sheets really are.
So, they have increased their holdings of excess reserves
at the FED. These excess reserves are their ace-in-the-hole
for another recession, which will produce havoc in the
commercial real estate markets, which are already in a
recession-era condition.
The US economy is struggling. Small businessmen know
this, which is why they are not hiring any of the 14
million unemployed people. The National Federation of
Independent Business represents these people. It surveys
their opinions monthly. They publish this as the Small-
Business Optimism Index. These days, it is not optimistic.
For the fifth consecutive month, NFIB's monthly
Small-Business Optimism Index fell, dropping 0.9
points in July--a larger decline than in each of
the previous three months--and bringing the Index
down to a disappointing 89.9. This is below the
average Index reading of 90.2 for the last
two-year recovery period.
http://clicks.dailyreckoning.com//t/AQ/AAacIQ/AAapRQ/AASGXQ/AQ/Axcnng/qUOG
The unemployed obviously know how bad it is for them.
They have been unemployed longer on average than at any
time since the Great Depression. There is no way to hide
this from anyone. The number of Americans applying for
unemployment insurance for the first time has been steady
at about 400,000 each week. Technically, the recession
began in November 2007. In January 2008, the unemployment
claims figure was a little over 300,000. It started up as
the recession deepened. By the spring of 2009, it was
around 650,000. We have seen improvement, but we are still
in recession conditions with respect to this statistic.
This is the weakest recovery in the post-War era. It
is now fading.
The stock market does not reflect Main Street. The
companies have positive earnings -- profits -- but their
managers are hoarding cash, i.e., putting it into very
short-term loans to top-rated firms.
CONCLUSION
Stocks are held by the elite for the elite. The elite
do not know what they are doing. They have remained in a
bear market for 11 years. Meanwhile, gold rose from about
$250 an ounce to $1,750. Asian stocks soared (not Japan's).
If they're so smart, why aren't they richer? They are
rich, but they have not gotten richer in the 21st century.
They rode the rocket of equity and debt from 1982 until
2000, but then the rocket fizzled.
Volatility is a long-term problem for the elite. The
richest 10% of the population trade ownership of stocks
with each other. It's like a bunch of washerwomen who make
a living by taking in each other's washing. In the larger
picture, the rich are in stagnation mode. Their real estate
is down. Their stocks are down.
The super-rich expected the euro to be the wave of the
future. It is: shaky.
They thought the U.S. government would run surpluses
forever back in 2000. Now they are paid pittances on their
Treasury investments, while U.S. government debt has been
downgraded.
The elite have hit an economic wall. They think they
can get over it, or around it, or under it. So far, they
haven't.
This indicates that they are losing control. New
elites are appearing in Asia.
Note: Over the last eight years, 72 Chinese
billionaires have died, most of them under
strange circumstances. Numbers: 15 were murdered,
17 committed suicide, 7 died from accidents, 19
died from illness, and 14 were executed. There
are 115 alive today. This may not be a good club
to get into.
No comments:
Post a Comment