“Men occasionally stumble over the truth, but most of them pick themselves up and hurry off as if nothing had happened.”
Winston Churchill
I have commented on public sites for now 15 years, offering views, opinions based upon fact.
In 2000 the day I heard two respected US market commentators early March and the US NASDAQ had hit 5,000- for the first time and both were talking about how long it took to hit 10,000- I knew its days were numbered. For some time the rally had defied comprehension for someone who was fundamentally based, being told the new way to value stocks was not off profits but off sales, was to me idiot. It however did not last long this foolish view. The NASDAQ actually doubled in the last year and 1999-2003 and whilst it did go a few % higher, after seeing and hearing this, like so many times in the past the end was near.
In 2012 as one of the people who I watched with morbid fascination debate the NASDAQ going to 10,000- just having passed 5,000- and she telling the 2012 commentator she in fact was bearish the NASDAQ correction, I was astounded by this, because she was NOT bearish and in fact over the 4,000 stocks on the NASDAQ at the time in March 2000 there were how many sells from all the brokers on Wall St ? There were 7 single sells.
History of course now can tell us the correction and the fall of 75% on average of all stocks on that index.
In 2007 watching as I do economic indicators and other things people rarely watch, the bubble in housing was clear to see. What actually tipped the whole scale for me is late 2007 the USA announced a GPD increase of 5.3%. What makes up a GDP number is a deflator which removes inflation from the equation and makes it a REAL after inflation number. In this release late 2007, the CPI had been released a week prior to this and it was 2.8%. I had severe problems with the CPI as it was understating inflation in 2007 in the USA by about half late 2007. Petrol prices in the USA were up 34% to the consumer at the bowser but the CPI had a mere 8% of it showing. House prices had gone nuts, but the largest CPI component had it ALL removed. Hence I thought the CPI was a lot higher than the reported 2.8%.
What tipped the scales for me in 2007 was when I looked and examined the reported GPD number and looked for the inflation number they used, the deflator I found instead of using 2.8% or a number higher, the BEA the US Bureau Of Economic Activity used a number of 0.8%, deflator which as its a negative on GDP if you use a smaller number it overstates the GDP size. In 2007 as has always been the case the BLS measures the CPI in the USA and the GDP is measured by the BEA. Prior to 2000 for 50 years there was over that period of time nearly a zero difference between the two measures of inflation, in 2007, there was a 2% difference and worse than that, the CPI itself was clearly showing NONE of the doubling of house prices 2000-2007 in 9 different cities in the USA and it was showing less than 20% of the increase in the oil price from $25- to $80- at that point in time.
This coupled with an already crumbling credit market, a housing market in extreme trouble and an economy being reported as growing strongly, but likely barely marking time after inflation, the equity side at all time highs was clearly incorrect.
About lying, eventually if you tell so many lies you loose some grip on reality, what is true, what isn't and if your cant see or hide the problem until its too late, it ends badly.
What they did during the GFC from banning shorts, to proclaiming early 2008 it was all over and all was ok actually I suspect made the problem worse rather than better. An opinion but, once you go down the slippery slope of lying, people will be less willing to believe you when your even telling the truth.
Strange things for me, as a market person since 1982, people used to end up in jail for the types of activities that went on and led to the GFC. In the early 1990's USA had another crisis which was the first of the housing led GFC's and the S+L crisis is what it was called. Similar lending practices and I believe 1,100- people were charged and went to jail over what happened then. In 2007-2010 I am not sure a single person went to jail other than a few who were running ponzi scheme's. None of the writers, or sellers or insurers of the Mortgages or backed securities went anywhere near jail. Citibank almost destroyed, their CEO got a $50- million payout as he left.
It is all about risk, respecting risk and in the post 2000 era being able to identify risk and reality from what is presented to you.
Post 2000, humans are no longer in control of trading, most is done by idiot savant trading computers which trade faster and faster and faster and learn from direction and spot trends and follow them with little or no reference to anything other than the direction of that trend.
“There is no truth. There is only perception.”
Gustave Flaubert
I wouldn't and don’t agree with this. There is fact which is close to the truth and then there is perception.
In 2000, people were not that worried about stocks on an index going up 100% in a year and were talking about it doubling again. The conclusion of these idiot analysts was it would take 2 years for it to go from 5,000- the NASDAQ to 10,000-. It is not their fault. It is in fact their role.
In 2007, we are now told by the NEW US Fed Chief she missed the housing crisis. She lived in San Fran, Janet Yellen and he husband a winner of a Nobel prize in economics which is a social science as opposed to a real science. A theory in Science such as physics is backed up by facts and many facts and experiments which prove this theory. In economics a theory in 2013 is a hunch or even a hope. Even when clearly the QE1/2/3/4 has not created a single job, rather than admit defeat the participation rate is altered in effect taking 5% OFF the unemployment number so the reported 7.2% unemployment is in reality well over 11% if EU methods are used.
Again this is the US Federal reserves role as well as any government.
The role of the analysts talking about the NASDAQ is in reality to sell stocks. They are paid by the investment banks for selling stocks and promoting stocks so they will always have a bias on the upside. ALWAYS. If your an analyst and come out with a sell on a stock and your company is trying to do a debt issue or share placement, the company if you put a sell on it would go to another investment bank which would put a BUY on the stock even knowing it was worthless to get the 100 million fee. This is a fact of life. Even an honest analyst and there are some out there, they don’t last, for the simple fact that if your put a sell on a company, they are less inclined to speak to you, take your calls or invite you to briefings. This does not forgive of course the analyst trying to rewrite history but its an aside. Talking about 10,000 when it fell to 1,250- is factual and reality.
Part of the mess with the current credit rating system and whole overblown asset bubble in 2007and in 2013 comes from this. A ratings agency such as Moody s, or S+P earns its income from being paid by investment banks and banks to put a credit rating on assets and debt. It bundles sometimes worthless ones, gets an insurer who cant possibly repay if it goes bust to guarantee it for a fraction of the real risk and then sells it to the debt market. For the credit rating agency the person doing the work is a lowly paid analyst who dreams of an entry-level job at an investment bank where they will be paid 2-3 times their current salary. The credit rating agency itself it its too harsh and doesn't apply the better credit rating for the paper or bond the investment bank is trying to sell, next time they may go to someone else, they may even NOT pay the credit rating agency when they find the credit rating applied is going to be too low. Its all about money, motivations and when you pay 1% more for every 3 big steps in credit ratings, if you can buy assets at one level, package them and sell them as sweet-smelling bonds with an insurance policy and they have an average life of 20 years, the 1% difference equates to 20% in price. If you sell 100 million this way the profits are huge.
In the end, perception is altered. The underlying risk is little changed by any action they undertake. What is changed is the value. The RISK is still the same and examining the RISK v the Value you still come up with the same outcome. What of course is changed is the PRICE they are sold at. They are sold as sweet-smelling bonds when in reality they are still steaming piles of doo doo.
Government sand central banks, their role in the market has been from the same standpoint for over 100 years if not always. The government is there to protect its citizens and their interests first and foremost. Central banks have similar objectives but mainly they are for decent GDP growth and stable prices. That is low inflation with full growth. Added to this of late the US Federal reserve has had the mantra of stable financial markets.
So in 2013, like in 2007, I have highlighted the fact the last release by the US government about 204,000- jobs being added tot he market is a fiction. In fact 820,000- were added to NO LONGER attached to the workforce and the participation rate fell by 0.4% which I believe is the largest move ever. Of course some of this had to do with the government shut-down but removing the 450,000- from that the REAL number is it appears 270,000- people LOST their jobs or disappeared from the workforce not anyone gaining jobs.
If the USA used the same methods as France just downgraded for this reason its unemployment rate would be 11.2% NOT the reported 7.2%. Its debt would be now 107% of GDP v Frances 86% in 2015, by 2015 I believe USA will have a Federal debt of 116% of GDP v France at 86%. In other words 30% higher.
I highlighted this anomaly in the PDF previous post named the China Syndrome.
Its not a conspiracy theory it is just how things work. How markets work, how government work and it still does not change the course of markets longer term.
In 1932 when FDR was going for re-election his campaign was run on the song “Happy Days are Here Again”. In 1932 the market eventually hit a low of 44 on the DOW v a high of 380. Unemployment had not hit its low and did so in late 1933 at an estimated 24% unemployed so a lot worse than 2007 even using real numbers. It does no one any good reporting the grim facts sometimes and I do understand this.
My dilemma is in 2013 is that humans have little input into trading decisions any-more. The computer driven systems rule the roost. The systems that too a 40 billion dollar company with shares trading at $37- and 10 minutes latter it was trading at $1- and then 30 minutes latter at $35-. No announcement came out, no customers were lost, nothing had changed.
Several people have won noble prizes for efficient market theory and arguing that the market will always reflect all know information and is efficient. I say total BS to this and I would invite you to look at the richest persons list and see who is there. One thing almost without FAIL these people know is not the price of something, any dummy knows the price. They in fact know the value of things.
Buffett at the top of the list, as always, has made his life about this. A long list of M+A experts who buy things, but buy things knowing the VALUE of those items and buy them for $100- and sell them for $200-.
Knowing the US reported 204,000- jobs created, but likely 270,000- were lost is a thing of value. Knowing if the US reported like any EU nation its debt and fiscal outlook and real employment numbers I suspect they would not be chasing equities higher. The game would unravel.
Perception and creating an alternate reality is nice. Sadly eventually reality bites and the gap between fantasy and reality is larger than it was in 2007. The eventual outcome will be the same. On is factual, one is fiction. Price is being driven by perception and reality is factual. Economics in itself is a useful tool. Applying strict valuation techniques to reported statistics allows you to compare where reality is. It is not me being mean to the USA or any other nation that chooses to delude themselves, it is merely using the same techniques to report these numbers the USA produces and use the same methods on the EU or UK or Australia.
This is the last of the big papers I did of late on this topic. It may be out there but sadly eventually reality hits. Demographics is what is going to drive the fiscal hole looking forward in the USA more than anything. US trade balance and US debt issues secondary. China and its currency overvalued by 50% third. Eventually these bubbles will either explode or be let down. The only way for the USA to let this bubble down on debt is to tax more and tax I believe 100%more than where they are. Unlikely if not impossible. Draconian cuts to benefits. The trade issue and China with 3 trillion in USD and Japan with similar amounts supporting a currency whilst feeding the USA imports at a overinflated value for the US dollar has been going on for a very long time. I suspect it ends, not with steam being let out of one of 6 or 7 bubbles but with them bursting.
In 2013, with even more computer driven trading going on, little if any real analysis of actual numbers going on and people, humans going, that number is BS, like in 2007 the two trains are on the single track and one driver is saying to the other, I think the other one will swerve !!
Time will tell, the computer systems following the trends will continue, until they don’t. The factually based look at the real picture will be clouded via illusion and altering peoples perceptions. Here is the last one.
Cheers Mark M
US DEBT CLOCK IS BROKEN
View attachment US DEBT CLOCK IS BROKEN October 15th 2013.pdf