The Next Bear Phase

[Uncle Festivus]

Are we there yet?

Or, let's see what happens when lot's of people get lot's of margin calls?

 

[Wysiwyg]

Are we there yet?

No. Soon?

Or, let's see what happens when lot's of people get lot's of margin calls?

Interestingly there has been no market decline to coincide with this supposed peak in margin lending as there has been previously.

Future could be :-
a) market continues moving sideways
b) market goes onto higher highs
c) market falls away somewhat more than recent minor corrections

Does probability follow chart pattern?

 

[Uncle Festivus]

No. Soon?
Interestingly there has been no market decline to coincide with this supposed peak in margin lending as there has been previously.

Future could be :-
a) market continues moving sideways
b) market goes onto higher highs
c) market falls away somewhat more than recent minor corrections

Does probability follow chart pattern?

The decline in the market is about 4-5 months after the margin peak, so taking the Feb margin top then June/July would be the start??

Wonder why nobody ever talks about the elephant in the room - oil - as having a major negative impact on the global economy? Boiled frog syndrome?

 

[Knobby22]

I don't think we can have a real crash yet.
Firstly the market is still dominated by traders. Plenty of people on short trades.
Secondly we haven't had a real bull market yet, no real exuberance.

I don't believe there will be a crash before 2016.
If the market did fall back it would just be a flattening, not a decent crash. It needs more time.

 

[Uncle Festivus]

Another view of stretching rubber bands....& inevitability?

 

[Wysiwyg]

Another view of stretching rubber bands....& inevitability?

Looking for the greater fools right now.

 

[Faramir]

Does this article titled "Five reasons to be wary of the markets" in ABC news reinforce the above graph.

http://www.abc.net.au/news/2014-06-...-wary-of-the-markets/5509068?section=business

Maybe an EFT (that I was thinking of) is not a good idea after all???

 

[DeepState]

Wonder why nobody ever talks about the elephant in the room - oil - as having a major negative impact on the global economy? Boiled frog syndrome?

Just FYI, although I am interested in your thoughts.

This is the inflation adjusted price of WTI Cushing. Current prices are pretty flat relative to 2006 levels:




The "Total Gasoline & Other Energy Goods" component of PCE from NIPA is about 3.5% of total expenditure.


In the last year, much of consumption growth has arisen from the oil intensive components:

 

[sydboy007]

Just FYI, although I am interested in your thoughts.

This is the inflation adjusted price of WTI Cushing. Current prices are pretty flat relative to 2006 levels:

I think the flat oil price says more than the fact spending on new cars is up (relatively)

After rising for decades, total vehicle use in the U.S. ”” the collective miles people drive ”” peaked in August 2007. It then dropped sharply during the GFC and has largely plateaued since, even though the economy is recovering and the population growing. The Federal Highway Administration reported vehicle miles travelled during the first half of 2013 were down slightly, continuing the trend.

Even more telling, the average number of miles drivers individually rack up peaked in July 2004 at just over 900 per month. By July of last year, that had fallen to 820 miles per month, down about 9 percent. Per capita car use is now back at the same levels as in the late 1990s.

Possibly the new car sales is helpimg via improved efficiency, but then the New York Times haas some telling info on how the recovery has bypassed the majority of workers in the USA:

http://www.nytimes.com/2014/06/07/upshot/good-news-on-jobswhy-arent-we-happier.html?src=twr&_r=2

And consider wages. The average private-sector worker took home $838.70 a week in April. In January 2008, if you use April 2014 dollars, that was $818.31. In other words, in the last six and a half years, the average private-sector American worker has seen a total inflation-adjusted pay increase of only 2.5 percent, a lousy $20 a week.

Negative real interest rates, falling real wages, I can understand why they're driving less.

 

[sptrawler]

I think the flat oil price says more than the fact spending on new cars is up (relatively)

After rising for decades, total vehicle use in the U.S. ”” the collective miles people drive ”” peaked in August 2007. It then dropped sharply during the GFC and has largely plateaued since, even though the economy is recovering and the population growing. The Federal Highway Administration reported vehicle miles travelled during the first half of 2013 were down slightly, continuing the trend.

Even more telling, the average number of miles drivers individually rack up peaked in July 2004 at just over 900 per month. By July of last year, that had fallen to 820 miles per month, down about 9 percent. Per capita car use is now back at the same levels as in the late 1990s.

Possibly the new car sales is helpimg via improved efficiency, but then the New York Times haas some telling info on how the recovery has bypassed the majority of workers in the USA:

http://www.nytimes.com/2014/06/07/upshot/good-news-on-jobswhy-arent-we-happier.html?src=twr&_r=2

And consider wages. The average private-sector worker took home $838.70 a week in April. In January 2008, if you use April 2014 dollars, that was $818.31. In other words, in the last six and a half years, the average private-sector American worker has seen a total inflation-adjusted pay increase of only 2.5 percent, a lousy $20 a week.

Negative real interest rates, falling real wages, I can understand why they're driving less.

Good point Syd, over the same period our average wage has gone from $850/wk to $1100/wk about 30%.

 

[Uncle Festivus]

Just FYI, although I am interested in your thoughts.

This is the inflation adjusted price of WTI Cushing. Current prices are pretty flat relative to 2006 levels:

It certainly is a story of real prices and relativity. If you had included the data pre the start of your chart it would have shown prices far lower than the $100 average or so. So when you add in stagnant real incomes, oil at $100 is a major 'drag' on the US economy, yet they still wonder why they can't achieve 'escape velocity' from the GFC Depression?

The Sentier Research monthly median household income data series is now available for April. The nominal median household income was down $84 month-over-month and up only $1,420 year-over-year. Adjusted for inflation, it was down $222 MoM and only $409 YoY. The real numbers equate to a -0.42% MoM decline and a 0.78% YoY increase. In real dollar terms, the median annual income is 7.6% lower (about $4,383) than its interim high in January 2008.

The bottom line is that nominal data is not showing the real story (pardon the pun)ie it's actually a lot worse than the stock indices exhuberance would indicate?

Storm Clouds
I see several data set's (long term averages) rolling over now.
The Fed taper will soon have an effect.
Interest rates simply cannot rise without junking a lot of companies who used cheap funds to goose earnings through reducing the free float of shares and paying divs from debt etc.
The Corporate house flippers have hit the yield wall, in fact are starting to offload already
The student loan bubble
Consumer credit at new record high
more..........

 

[brty]

RY,

This is the inflation adjusted price of WTI Cushing

WTI for delivery at Cushing Oklahoma has not been a true indication of oil prices because it is the land locked hub where much of the Canadian oil sands and N Dakota Bakken oil have been sent. There are price distortions in the WTI price because of this.

Using Brent prices are more indicative of overall world oil price. It would be interesting looking at the same inflation adjusted graph for Brent from 1998. I believe such a graph would support UFs statement....

Wonder why nobody ever talks about the elephant in the room - oil - as having a major negative impact on the global economy? Boiled frog syndrome?

 

[DeepState]

It certainly is a story of real prices and relativity. If you had included the data pre the start of your chart it would have shown prices far lower than the $100 average or so. So when you add in stagnant real incomes, oil at $100 is a major 'drag' on the US economy, yet they still wonder why they can't achieve 'escape velocity' from the GFC Depression?



The bottom line is that nominal data is not showing the real story (pardon the pun)ie it's actually a lot worse than the stock indices exhuberance would indicate?

Storm Clouds
I see several data set's (long term averages) rolling over now.
The Fed taper will soon have an effect.
Interest rates simply cannot rise without junking a lot of companies who used cheap funds to goose earnings through reducing the free float of shares and paying divs from debt etc.
The Corporate house flippers have hit the yield wall, in fact are starting to offload already
The student loan bubble
Consumer credit at new record high
more..........

Thanks Uncle. This is great.

There are always risks. I'm not going to debate these with you...largely because I agree they are real (pun again!). People's opinions will vary on the weighting, I guess. It would be a complete freak if I weighted them the same as you. But I'm not here to convince you of anything. Just wanted to whack up some observations and exchange views. Hope that's ok.

The inflation adjusted oil price for earlier years was certainly below the 2006 figure. But the economy grew nicely (too quickly? Unevenly?) despite it. From 2006 to now, a period of 8 years or so, the real oil price has been fairly stable and thus it seems unusual to claim that it is a drag because it has not actually increased materially. If you are saying it's just damned high...then I'm in agreement and a lower price would stimulate demand. But a static (real price) would not generally be regarded as a drag to GDP which is a change in production in real terms.

In relation to the median income...that absolutely reflects the hollowing out of the US middle class. But there is also the concept of average which brings this figure right up. And, in any case, when unemployment was so high, why is it surprising the median household income drops? People within families lost jobs or went part-time. As the rate of unemployment is dropping towards the NAIRU, we would expect to see this rise.

You can see the PCE components and these are growing in heavy oil consuming areas so the relationship between oil and consumption as proposed doesn't seem to play out.

Check this out. It's a chart showing real Personal consumption growth together with the consumer confidence index. Both are recovering and I would hazard a guess that a lot of it has to do with an improvement in labour market conditions across a whole swathe of areas. I am hopeful that we do not see consumption growth reach the level prior to the GFC...that was very credit driven as you clearly know. With high debt loads (as you have pointed out), that type of growth rate is probably not feasible anyway..for private consumers. For companies, hmmm.




And this....from Bullard of St Louis Fed. Shows a polar graph of the labour market conditions and highlights that the market is moving back towards the good ol' days from the depths of despair.



GDP growth (saar) for the rest of 2014, 2015 and 2016 are expected to be above 3% per annum according to Fed dot point forecasts and surveys of professional forecasters. This is above any concept of escape velocity, particularly when long term potential growth is only 2% per annum.

Is the market overvalued? Yeah. But the thing just keeps on going and going. What might we be missing, do you think?

 

[Smurf1976]

Am I the only one who has spotted that the real oil price is basically a wedge?

My explanation - maximum price the economy can support without falling in a heap isn't rising to the extent that production costs are rising. The two lines are about to cross - then what?

The cost of production won't likely drop, indeed it seems that the shale "boom" is already petering out to some extent because prices haven't risen quickly enough to sustain it. So either we get higher prices that are sustained, someone decides to take a financial hit and accepts minimal returns from oil field development, or we get less production of oil. Suffice to say that should this latter scenario occur, well then it's likely to be the single biggest "tipping point" that you or I will live through since it would signal what many have long predicted - an all time peak and decline in production is upon us.

My thought is that we're probably not at the point of a peak in production yet, but that we are likely at the point of a peak in consumption in "developed" countries.

*The developed countries, in general, use oil far less efficiently at the margin than do developing countries.

*Real incomes in developed countries are, in general, not going up to any great extent whereas they are rising rapidly in some large, lesser developed regions.

In short, China and others will be able to outbid American motorists and other large volume / low value consumers for an increasing share of the available oil. If you have a growing economy and a small, efficient engine and are using that oil to produce an income then that's one thing. Completely different if your real income is declining and you've got a V8 that you drive for pleasure. The latter will decline in order to make way for more of the former.

Price rises modestly in nominal terms, production remains roughly flat at best, China imports more oil, countries like the US cut consumption effectively making way for the likes of China. That's pretty much where we've been recently, the only thing that's changing is that the slightly rising price and slightly rising production seems likely to give way to a faster increase in the price and flatter production, thus accelerating the trend of declining consumption in some countries.

 

[DeepState]

RY,



WTI for delivery at Cushing Oklahoma has not been a true indication of oil prices because it is the land locked hub where much of the Canadian oil sands and N Dakota Bakken oil have been sent. There are price distortions in the WTI price because of this.

Using Brent prices are more indicative of overall world oil price. It would be interesting looking at the same inflation adjusted graph for Brent from 1998. I believe such a graph would support UFs statement....

My observations were clearly related to the US only and UF has seen that and returned observations along those lines.

Further, here is a graph showing Brent vs WTI:



Notice:

1. Brent and WTI have converged. I am not going into any depth about reasons. It should be clear the market reacts to such gaps.

2. Brent came from above WTI in the post-crisis period of the GFC, from around when the banking rupture of the Eurozone grew to become acute and had to be stopped by whatever it took and QE2 ended. UF's statement about elephants in the room, given the context of his discussions, related to lack of take-off due to the drag of oil. When an input comes from above...it helps growth rates. As oil prices decline, actually, amazingly, higher growth is supported. Brent declined in real and absolute terms (in USD, with - very hopefully - obvious implications for other localities). At divergence to your assertions/speculations/..., this is not supportive of UFs argument on a world scale. It actually diminishes it relative to the observations drawn from WTI for the US context and beyond. Further, the prices have converged and have become irrelevant in any case.

If UF meant for his observations to go back eight years or so which is very long period to be talking about headwinds from oil especially given strong growth leading into 2008, my statement about real oil prices in 2006 are similar to current levels is accurate and could be taken to refer to either WTI or Brent. It is a wash. If UF means to go back further than that, WTI traded in line with Brent and neither supports UF's view more than the other.

The convergence has occurred, at least partly, because the US is increasingly moving towards energy independence including energy drawn from the same areas that caused the imbalance between WTI and Brent in the first place:

 

[DeepState]

1. what I can't understand is, everyone said inflation would take off with money printing. It didn't.

2. So why can't the Fed remove money, in a controlled manner, as the economy picks up?

3. If anyone had told me, Jeep Grand Cherokees would outsell Toyota Landcruisers and Prados, in Australia. I'd have told them they were dreaming, but they are.

1. Much of the money that was "printed" is created when the Fed and others (it operates differently in some cases like the ECB..which has not printed as yet) buys high quality assets like government bonds (I'm not actually joking), depositing electronic money into the appropriate accounts of the buyer. It's very reasonable to think of it as buying bonds on eBay and getting funds into your bank account via BPay.

The idea behind that was to encourage spending and investment. But much of the money paid to the banks never left the central bank at all. It just sat there. So a powerful transmission mechanism never got started. What did get traction was the fact that the interest rates lowered and this stimulated the economy by making projects cheaper to finance.

It did not lead to inflation because the additional demand created did not yet absorb the huge amount of idle capacity still in the economy, lying dormant. This is in the form of idle factories, unemployed people etc. Prices on these were falling in an effort to find a floor where demand would bite. Hence the problem was more to do with deflation or disinflation than inflation.

Where printing produces high inflation is more like when they are pushing demand beyond the point where supply can adequately respond, or by printing so much that the users of currency think it is a joke and abandon it.

2. They probably will. The next stage is to bring QE3 purchases to a halt in measured steps which will stop he balance sheet from growing. The step after that is to normalize the Fed funds rate. The step after that will be things like not reinvesting bond coupons and - this might be a stretch if done anything like in the next 3 years - letting maturing bonds roll off instead of reinvesting them. There is a chance that they will never shut this facility down in the next forty years. This type of thing already exists on the Fed balance sheet from a bygone era. Obviously it was smaller, but it has been done.

3. I am surprised when I am not surprised.

 

[sydboy007]

an interesting chart I saw this morning. I'm ambivalent as to whether a falling AUD is going to be a benefit or curse for us now that so much manufacturing has been lost and imports have become a far larger part of the manufacturing that's survived.

The bulk commodities chart shows how far the ToT has already turned, but there could still be a long way to go, though I expect that now a lot of new production is more expensive the floor will likely end higher that in the past.

Some analysts are still tipping iron ore juniours

 

[Uncle Festivus]

If UF meant for his observations to go back eight years or so which is very long period to be talking about headwinds from oil especially given strong growth leading into 2008, my statement about real oil prices in 2006 are similar to current levels is accurate and could be taken to refer to either WTI or Brent. It is a wash. If UF means to go back further than that, WTI traded in line with Brent and neither supports UF's view more than the other.

The convergence has occurred, at least partly, because the US is increasingly moving towards energy independence including energy drawn from the same areas that caused the imbalance between WTI and Brent in the first place:

Probably got a bit side tracked there, but for the US consumer on the street it is definately an ongoing higher expense than in the past, no matter which way it is viewed, to which I was mainly alluding to originally. Energy/oil independance does not appear to have flowed through to the bowser in lower prices so essentially means zip to the consumer? Bearing in mind that that very independance is predicated on a continued oil price above something like $90 (I recall) because it's so expensive to extract?

 

[sptrawler]

1. Much of the money that was "printed" is created when the Fed and others (it operates differently in some cases like the ECB..which has not printed as yet) buys high quality assets like government bonds (I'm not actually joking), depositing electronic money into the appropriate accounts of the buyer. It's very reasonable to think of it as buying bonds on eBay and getting funds into your bank account via BPay.

The idea behind that was to encourage spending and investment. But much of the money paid to the banks never left the central bank at all. It just sat there. So a powerful transmission mechanism never got started. What did get traction was the fact that the interest rates lowered and this stimulated the economy by making projects cheaper to finance.

It did not lead to inflation because the additional demand created did not yet absorb the huge amount of idle capacity still in the economy, lying dormant. This is in the form of idle factories, unemployed people etc. Prices on these were falling in an effort to find a floor where demand would bite. Hence the problem was more to do with deflation or disinflation than inflation.

Where printing produces high inflation is more like when they are pushing demand beyond the point where supply can adequately respond, or by printing so much that the users of currency think it is a joke and abandon it.

2. They probably will. The next stage is to bring QE3 purchases to a halt in measured steps which will stop he balance sheet from growing. The step after that is to normalize the Fed funds rate. The step after that will be things like not reinvesting bond coupons and - this might be a stretch if done anything like in the next 3 years - letting maturing bonds roll off instead of reinvesting them. There is a chance that they will never shut this facility down in the next forty years. This type of thing already exists on the Fed balance sheet from a bygone era. Obviously it was smaller, but it has been done.

3. I am surprised when I am not surprised.

Thanks for the explanation, appologies for side tracking the thread.

 

[Uncle Festivus]

Thanks for the explanation, appologies for side tracking the thread.

It's actually very relevant -

"The step after that is to normalize the Fed funds rate."

It's already "normalized" - they simply cant revert to any "normal" rate without the whole lot "recessionizing" again, more so companies with record debt.

There has been a structural degradation in the fed rate for several decades now in order to continually juice & goose the economy - this is the new norm?

You will also notice that nearly every time the Fed finally acted on rates it was too late and a recession ensued?