The recession's over

[Bill.L]

WW,

The short correlation of the 2 graphs is very good. Is there any historical evidence that they will stay so closely aligned??

I have tried to use such a correlation in commodity trading in the past. The soybean market of '94 comes to mind . I made money while the correlation with a previous period/graph continued. I thought I was a genius .

Then of course the correlation broke down just as I had a large bet that it would continue.

Considering that government policies and responses are different now to those during the depression, expecting squiggly lines on a chart to continue to act in a similar way as before does not make much sense to me, especially as historic short term correlations seem to quickly break down. In 1987 the DJIA was correlating the '29 crash, but in '88 the correlation was broken.

bye

 

[Sunfish]

Bill. 'Twas you who introduced dodgy statistics in the first place, the post immediately above my "Lies, damned lies...." post.

BillL:On the macro world wide scale, we have just had a massive amount of extra money created for much the same quantity of goods and services. That money, by finding a home has to lead to some things (or services) being more expensive. Which ones and where is the $128 answer.

There is a higher risk of deflation in the short term than inflation, but neither 'flation is good. What you have overlooked is Velocity of money!

For the period of our lives (assuming no-one can remember the depression) there has always been willing lenders and borrowers so that as soon as a debt was repaid someone else was waiting to borrow, thus money circulated and it is Amount of money X Velocity of it's circulation that gives inflation. Lenders are unwilling to lend so the circulation is broken. OK, again I'm talking the US in particular and you don't accept their influence on us saying that our banks are still lending to home buyers, but others may be interested.

 

[investor888]

Do you have reasons for comparing Australia today with a period 100yrs ago, in a different country, with completely different drivers & completely different policy responses ?

You misunderstand keithj.

The comparison to the Great Depression is the market mindset. Like in 1930, we are in the period where everyone thinks that the worst is over after the 1st large market fall, and subsequent rise.

I think there will be another steep down trend in the market come Sep/Oct/Nov (the markets have just risen too quickly without the fundamentals being fixed), and I'm positioning myself more that. You may not think this way. Regardless, by the end of the year, we'll know either way.

As Australia is more linked to the world, what happened in the rest of the world is to be a better indicator of what might happen this time.
Completely different policy responses ? The world had a stimulus, we have a stimulus. The world sharply lowers interest rates, we sharply lower interest rates. The world puts bans on short selling of financial, we follow. The numbers may vary between countries, but lets face it. Australia is a follower of other countries, we do not set the trend.

Be honest. When you log on to Commsec in the morning, you check what the US and UK markets have done the night before. why?, because the trend (less some local volatility) is likely follow the US.

 

[topcropper]

The comparison to the Great Depression is the market mindset. Like in 1930, we are in the period where everyone thinks that the worst is over after the 1st large market fall, and subsequent rise.

I think there will be another steep down trend in the market come Sep/Oct/Nov (the markets have just risen too quickly without the fundamentals being fixed), and I'm positioning myself more that. You may not think this way. Regardless, by the end of the year, we'll know either way.

.

I'm thinking of things a bit differently.

I'm thinking the markets priced in a much worse event than actually happened. Certainly it was bad in financials especially in the US and Europe, and disaster did almost happen, but it didn't. Many super wealthy, old money types over there who were invested into the big financials lost generations of wealth. Too bad.

Life goes on. Asia still wants our resources. People are still spending. Hardly anyone had to sell their houses, except for some finance dudes in the big smoke. People are still eating rib eye fillet and prawns. No ones yet had to trap rabbits to feed their family. Not really anything like what happened in the great depression. We had 25% unemployment here then.

So I see the share markets as getting it wrong. It was a time to take advantage of the mispricing. I'm not expecting markets to get back to the old highs for many years, as everything is different now, but they wont go to the lows again either, because the markets were too pesimistic.

The bulls on here were mostly right all along. Well done to them. I wasn't a bull, but I'll do OK anyway as I've bought some cheap assets, but if things turn pear shaped again I will also do well as I'm still very undergeared.

See ya's.



Not advice. I'm a farmer not an adviser.

 

[keithj]

The comparison to the Great Depression is the market mindset. Like in 1930, we are in the period where everyone thinks that the worst is over after the 1st large market fall, and subsequent rise.

I think there will be another steep down trend in the market come Sep/Oct/Nov (the markets have just risen too quickly without the fundamentals being fixed), and I'm positioning myself more that. You may not think this way. Regardless, by the end of the year, we'll know either way.

I got the impression was that your reasoning was that the todays ASX chart correlated with the Dow chart from 100 yrs ago, and therefore would continue to do so.

I think it's important to remember that we could also be in one of many other periods where everyone thinks the worst is over, .... and IT REALLY IS, and we go on to new highs, just like we ALWAYS have done in the past.

As Australia is more linked to the world, what happened in the rest of the world is to be a better indicator of what might happen this time.
Completely different policy responses ? The world had a stimulus, we have a stimulus. The world sharply lowers interest rates, we sharply lower interest rates. The world puts bans on short selling of financial, we follow. The numbers may vary between countries, but lets face it. Australia is a follower of other countries, we do not set the trend.

Sure, Australia is linked to the world, and the ASX has tended to follow the DOW in recent times. Can you think of any reasons why it would stop following the DOW ?

 

[Bill.L]

Hi Thommo,

What you have overlooked is Velocity of money!

I agree the circulation of all this extra money is slow at present, hence why inflation is benign at present. What do you think will happen as the velocity picks up??

The Bank of England has pdf files showing the history of money supply growth and inflation since 1694. In every instance inflation follows money supply growth with a brief lag time.

http://www.bankofengland.co.uk/publications/quarterlybulletin/qb940201.pdf

http://www.bankofengland.co.uk/publications/workingpapers/wp290.pdf
(graphs p 49 conclusions p 32)

bye

 

[chilliaa]

These days, apart from some local volatility, our markets pretty much match the trend of the global markets. Every dip, every rise, mirrored across most world markets. What happens in the US, will happen in our markets. Check a few graphs. Even the early July market dip was mirrored globally.

When the US falls back, you can be guaranteed we will as well.

Oh really, so when the US markets went up by a factor of 5 odd from 1987 to 2000, did we follow???????

We might well pay attention to the trend in the US, but that doesnt mean we will replicate the magnitude of the trend.

 

[Sunfish]

Bill, I have always said "inflation". Been doing so for years. I have never tried to say when though. The closest I have gone to trying that is to say that it will be after the deflation, or at least the deflationary scare is over. We have not put it behind us yet.

While the numbers put on the stimulus are high they are nowhere near the dollars of wealth written off. Personally, I lost "a house" and many others lost far more. But the young'uns wouldn't care about that, they have not got savings meant to finance retirement as I had.

Anyway, the stimulus packages have done nothing to repair the damage to private balance sheets. Those people are saving like mad again so your V is still some time away. At least two years but I don't wish to be held to that. I have been fooled by the strength of this rally.

 

[willair]

Be honest. When you log on to Commsec in the morning, you check what the US and UK markets have done the night before. why?, because the trend (less some local volatility) is likely follow the US.

quote=investor888;575528]
Be honest. ]

This is where a few go wrong it does not always follow that pattern and is never visible till after it happens,after all Australian Fin history is just a set of numbers over time and you can break those numbers down in what ever you want,Who's to say that the "ASX" breaks above the 5000 mark
by "JAN 2010",all anyone would have had to do 17 weeks ago was buy into the top ends banks,hold, milk the div's, franking credits ,up too 40%cg while everybody was running around thinking the world was in the final stage,how hard can it be...imho willair

 

[Sunfish]

Oh really, so when the US markets went up by a factor of 5 odd from 1987 to 2000, did we follow???????

We might well pay attention to the trend in the US, but that doesnt mean we will replicate the magnitude of the trend.

Of course we didn't. Nor did we drop as badly. But we didn't have the .COM stocks to go up and down. If you take them out of the equation there would not have been too much discrepancy.

These charts mean diddly squat on their own. All they point to is "possibilities" and indicate where human emotions have taken us in the past. Ignore that at your peril.

On the daily charts ASX has often been an indicator of which way NYSE will go at night. Trouble with that is that the BIG swings start in New York. No-one said it is easy.

 

[steveadl]

Even the quantities line up in a 2 year comparison.
It must be different this time....

WW, have to ask - why does the ASX line immediately start at negative 5% when it should start at 0 like the S&P? I use the google charts every now and again, and comparisons always start at 0 with both indices/stocks.

I'm thinking of things a bit differently.

I'm thinking the markets priced in a much worse event than actually happened. Certainly it was bad in financials especially in the US and Europe, and disaster did almost happen, but it didn't. Many super wealthy, old money types over there who were invested into the big financials lost centuries of wealth. Too bad.

Life goes on. Asia still wants our resources. people are still spending. Hardly anyone had to sell their houses, except for some finance dudes in the big smoke. People are still eating food. Not really anything like what happened in the great depression. We had 25% unemployment here then.

So I see the share markets as getting it wrong. It was a time to take advantage of the mispricing. I'm not expecting markets to get back to the old highs for many years, as everything is different now, but they wont go to the lows again either, because the markets were too pesimistic.

Very well said TC, agree completely.

 

[WinstonWolfe]

SF, your point about money velocity is important.

I was going to say the impact of the economic stimuli/money printing/bond issuance, call it what you want, will depend on how much and in what form money makes its way into general circulation.

The way I understand it, it helps to discriminate clearly between fiat money and credit money.

- fiat money should roughly represent the value of past (depreciated) and current income/production. (and I know it doesn't because broad money keeps expanding beyond gdp growth.)

- credit money is an uncapped claim on future income/production.

The $900 deposited into people's bank accounts was fiat money expansion, and quickly circulated. But it's multiplier effect was probably weak because so much of it would have moved to China with the first purchase of plasmas or whatever.

OTOH, credit money, or private bank lending, has a much more powerful stimulus potential due to the fractional reserve multiplier, in addition to money velocity effect.

However, the govt ultimately can't control the supply of credit money, because private banks have to constrain their risk exposure to free market risk tolerance. Hence we have the banks currently restraining release of credit money. i.e. tighter comm and resi LVRs, 120% presales on resi projects, pass through of the higher cost of foreign wholesale capital in fixed interest loans, slower loan appn processing.

Of course the polies love the banks' role in all this. Rudd can run around saying we care and give people $900 and FHB bonuses. While the banks do the dirty work of restraining economic stimulus to acceptable free market risk.

How the inflation/deflation timeline rolls out, will in my view be determined by the flow of credit money into general circulation. That will in turn be dictated by private banks, who will in turn take into consideration risk associated with end consumers servicing higher levels of debt.

Considering growing Australian bank dependence on foreign wholesale funds, it would seem the cost of foreign credit as determined by free markets, will be the primary determinant of the size of govt initiated economic stimulation.

 

[Aaron Sice]

The $900 deposited into people's bank accounts was fiat money expansion, and quickly circulated. But it's multiplier effect was probably weak because so much of it would have moved to China with the first purchase of plasmas or whatever.

this is my point previously - CHINA got our stimulus package - not Australia. Therefore they would be in an even better position.

SF, your point about money velocity is important.

there's the money / physics thing again

 

[WinstonWolfe]

Bill and Steve, regarding the yahoo index comparison feature, I noted both lines on the 2 year plot didn't start on 0, and couldn't find an explanation.

Messing with different time periods reveals both indices start on 0 in some and not in others.

I remember there's actually more validity in charting backwards. i.e. final data points should be zeroed, and then the amount of starting capital required to get to the final common point should be determined....something to do with net present value if I recall correctly. However, I don't know if this applies equally to indexed data.

Bill, ultimately I believe fundamentals must be better understood in today's environment, and probably it has always been that way. However, I think it can take years for the fundamentals to wash clean. In the mean time, govts intervention and dirty pool in the markets can mask the playing out of fundamentals.

Guys like Soros, Roubini, Schiff, Shiller, Rogers, Grant, Gross, Buffett, Dorsch, et al make their calls influenced by TA or Keynsian, Post Keynsian, or Austrian thought.....at the end of the day, they all have a bit of the truth.

What is apparent to me, is many of them are sound in identifying cause and effect, but not in getting the timing right or the relative contribution of each cause.

The globalization of trade, economics, and finance, and the unfolding of this unprecedented GFC is an ongoing dynamic process. To model it with less error, is a difficult thing. And anyone investing the time, intellect, and energy in doing so, won't be sharing the results with the world.

Anyway, debating these issues with you guys stimulates me to read more, ask questions I wouldn't have considered, and be a little more intellectually rigorous in my conclusions. Hopefully through this process of banging egos and information, we'll all end up better informed. Besides, do you know how hard it is to find someone to discuss this stuff with at a bbq?

 

[WinstonWolfe]

there's the money / physics thing again

Unfortunately, the finance industry got all esoteric and abstract, and tried to apply quantum physics to finance......if matter is energy and time can be compressed, then the finance gurus thought we could just keep increasing claims on future income/production.....essentially, borrow ad infinitum against future productivity......

When the drugs wear off, hopefully they'll wake up that the credit limiter is the ability to service debt with current productivity.....

 

[boz]

However, the govt ultimately can't control the supply of credit money, because private banks have to constrain their risk exposure to free market risk tolerance. Hence we have the banks currently restraining release of credit money. i.e. tighter comm and resi LVRs, 120% presales on resi projects, pass through of the higher cost of foreign wholesale capital in fixed interest loans, slower loan appn processing.

Hi WW,
I agree with 90% of your points but not quite agree with this one of government out of control in supply of money. I am pretty sure government can't expand credit beyond certain limit but for sure they can reduce it at any time, an easy way to reduce lending is just increase the reserves banks need to have or with regulation, I think China did it a couple of years ago to cool the economy and reduce banks lending. Also there are 2 players on this matter: central bank and government, in many economy those players are very much linked together but in other economy they are very much independent (like EU).
Lately we are approaching upper limit on lending and central banks are running out of bullets to increase money supply (and that is probably what you mean with out of control of credit), Australia is further from its limit then USA but still not in a very good position.

 

[WinstonWolfe]

I am pretty sure government can't expand credit beyond certain limit but for sure they can reduce it at any time, an easy way to reduce lending is just increase the reserves banks need to have or with regulation, I think China did it a couple of years ago to cool the economy and reduce banks lending.

that's very true Boz. My mind was quite focused on where the world is at now.

but also keep in mind global credit flows are increasingly being determined by factors other than CB rate setting......public debt and deficits...bank and country credit ratings, trade fundamentals, fx, competition for and looseness of global capital.

 

[steveadl]

Besides, do you know how hard it is to find someone to discuss this stuff with at a bbq?

Amen to that.

 

[Aaron Sice]

true that WW. i can't find anyone wanting talk about anythiong other than how long their $900 took them.

 

[kum yin lau]

Hi, it wasn't so long ago we were talking about bouncing cats.

Today watching the stock market felt like the ships coming in one after the other.

Keep quiet about it though, don't want to jinx it.

KY