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Business Cycle, Debt Cycle... And Now Printing Cycle
Submitted by Nic Lenoir of ICAP
Today's PMI data was very strong. There are experts in econometrics much more knowledgeable than I will ever be calling for further strength in production numbers that will lead to a turn in unemployment into Q1 2010. I don't dispute their models or the indicators they look at. However I can't come to terms with it. I think this is in great part because the business cycle which is supposed to lead us out of this recession is at odds with a much longer and bigger cycle: the debt cycle. I know this flies in the face of 50 years of econometrics that has made people a lot of money trading, but this is mainly due to the fact that the debt cycle is so long and stretched over time that we don't really have data to measure its impact on previous cycles. It coincides in a sense with the Kondratieff cycle, but transposed into today's financial markets, the burst of the debt bubble is a lot more pronounced. Basically modern technology and financial engineering has made it very easy to securitize credit and source funding or financing globally, so that the extent of the debt bubble has been allowed to grow far beyond what could have happened 50 years ago. There is also obviously the global aspect of it. Because financial markets are more and more global, so is the crisis.
Albert Edwards had a great piece the other day discussing the renewed importance in a post-bubble environment of the business cycle. This line of thought has also been outlined by the Global Macro Investor in the past. It relies a lot on the example given by Japan, or the 70s. One could argue that unlike the case of Japan which benefitted of the strong economy of the 90s to have a more robust business cycle due to exports, our current global economy will lack an engine to drive the cycle. The risk is that the consumer has retrenched enough in the US and in Europe that the business cycles becomes a restocking of shelves carrying products there is not necessarily much demand for. I will not even entertain the argument regarding China and the rest of Asia becoming the leading engine of growth for the rest of the world. China has about 40% over-capacity. While there is no doubt that most of the growth in this "new world" will come from emerging markets, and especially Asia, production capacity is already far above demand so growth there can be digested without employment. That's especially bad since we have to turn around tax receipts and deficits, and many assets that have been re-inflated via excessive liquidity need a strong underlying economy to justify current valuations.
That leaves only two choices for governments: let the debt cycle take its course. Bankruptcies will rise further, real estate will devalue another 30%, equities will lose 65%, and we will start with a clean sheet. That will wipe out the baby-boomers who are the main asset holders. Note by the way that the correlation between the number of 45/55 year-olds in our society and equities is historically positive. The other solution is to print as much as needed to prevent that from happening. It will be very difficult because leverage will only find people with sound balance sheets who will pour the resources into assets, driving asset inflation at the expense of sound economic recovery. Also despite what politicians may think asset inflation is a lot worse for the lower and middle class than is the debt cycle, or maybe they are just cynical. In the end, there is little chance that governments will be able to coordinate their actions like they did last fall, because fear then was a lot greater than now, when consequences of today's actions can in fact be more dramatic than they were then... In the end I think we will experience cycles of injection and draining of liquidity trying to dance between the two evils.
That bring us to today's markets. Part of what has driven the sell-off recently is the fear of a pull-back in liquidity. China is trying to move away from excessive lending which has been out of control in the first half of the year, Brazil is talking about taxing foreign investments, Europe is oscillating between hawkish rhetoric and the fear of a strong Euro, and we have the FOMC next week, though I think it's a non-issue for now. We are obviously in a phase were authorities try to give the impression that liquidity will be controlled or pulled. More important than liquidity, it's the sentiment of infinite liquidity they are trying to squander. After testing the resistance on the Dax yesterday we had the follow through sell-off expected. The AUDUSD is very similar which is why I have added the chart today. S&P is back close to the bottom of the short-term bearish channel is breaking the key 1,032 support. After such a powerful move, I think we finally bottom between 1,025 and 1,012 in the S&P future for the short-term, before consolidating between 1,025 and 1,065. During that consolidation one would observe subdued strength on the upside compared to the recent sell-offs, and momentum indicators retracing around 60 for RSIs, before we accelerate and go test the main intermediate support highlighted on the daily chart around 942.
Good luck trading,
Nic
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This sums it all up perfectly, and for some reason is why traditional fundamentalists cant see the bearish argument: "I know this flies in the face of 50 years of econometrics that has made people a lot of money trading, but this is mainly due to the fact that the debt cycle is so long and stretched over time that we don't really have data to measure its impact on previous cycles."
!+! Ty;er
tj3
No Robo post today.
I'm battling a headcold...
Just the same old change in direction of the Wildebeests.
Today they were flying into dollars, bonds, and LQD, and some gold, which presents somewhat of a fly in the ointment the Robot Programmers will have to examine this weekend..
LOL...
Robo
According to the Wall Street Journal, one of the main reasons for the selloff was the delay in NYSE quotes early in the day. There always has to be an excuse on a down day.
There's been whispers of dollar intervention.....
On a lighter note its FDIC Friday.....
:-)
There was no doubt the dollar was headed for the moon and the market in the opposite direction. Then, out of the blue, the hand of Almighty God reached down and smite that damnable dollar, stopping it in it's tracks with a mighty blow. Not once, not twice but thrice times did God smack the dollar, staying it from it's appointed round with reality.
Hey Robo, did you get the H1N1 vaccine yet?
Rest up dude, next weeks gonna be a roller coaster.
Monday will likely open with a big bang short squeeze.
War or rumors of war will boost oil higher.
you're the best robo...hope you feel better soon.
Get some Vitamin D3, fluids, electrolyes and rest. Catch you next week for more extreme-ring-side-action!
That is a very good suggestion. Especially the Vitamin D3
Short video
http://www.youtube.com/watch?v=--NqqB2nhBE
Put down the joysticks, take a break Robo. Take your time, we need you at 100%. Thanks and get well soon.
Stop watching CNBC. Its catered to Wall Street....the recession is Over in the eyes of bankers. If you want to know the true extent of the economy, just take a look in your neighbourhood. I am going to start filming everywhere I go, and show you the world the truth. In the eyes of Main Street, the recession looks to be getting worse. But no one cares because Main Street are uneducated dolts while Wall Street is where the smartest people go. Unfortunately its all driven by their motivation to get rich quickly and retire and not think of the long term consequences.
Btw, I saw Turbo Tim testifying yesterday and I could have sworn his nose is growing bigger and bigger. Kind of like Pinnochio's where for every lie he tells the American citizens, his nose gets bigger and bigger.
Post your vids on youtube and let us know here. I've seen a few vids by people doing same and reality flies in the face of Wall Street's lies.
Simple as that. Reality tends to do that to liars.
http://money.cnn.com/POLLSERVER/results/48938.html
This is not a scientific poll, but when 64% of the respondent say that there is 'no recovery here', then all should sit up and pay attention. This more so from readers of CNN, one of the most liberal of the MSMs out there. The coming winter could get really dark and cold.
Y'all remember Eddie Haskel, dontcha?
Timmy's demeanor with Congress is the
same as Eddie's demeanor when slinging
a big line of horseshit to Walt and
Barbara Cleaver.
He even looks like him.
Nic, I join you in your skepticism of the view of the econometrics camp. I happen to believe that the forces, some of which you address so well will overwhelm whatever efforts are made to stem the process of the debt cycle that I now view as inevitable. Have a great weekend.
All The Best
Yeah, I agree with the sentiment-- and it's beginning to appear that the Fed is going to try to cycle between liquidity flooding and liquidity tightening as a way to dance though this nasty debt cycle.
The implication is a return to recession (or stagnation) when liquidity is pulled out of the system-- and brief economic growth when liquidity comes flooding back in.
I just don't think today's econometic models were designed to accurately predict outcomes, as the weightings of the factors have likely changed under a debt downcycle. As a result, my sense is that there will coninue to be a lot of material misses from economic forecasts going forward... as if that really means anything.
Ok, watch the P/F sell signal in the S/P and NASD. If that happens more damage.
Still seems to me that the Powers That Be do not want this to go down too much, so there will be a whip-saw action. If it does there will be hell to pay accross the board to Dearest Leaders rep. as a hipster that is.
The PMI strength is real but it is not sustainable. My business (manufacturing) has exploded over September and October. As money comes in though, I'm putting everything into FAZ and DRV because I'm confident that a vacuum will occurr in the Dec/Jan/Feb timeframe. Two things are driving this: 1) massive insider selling and 2) the low dollar. The insiders have already sold out and are now on a bit of a spending spree. I expect the dollar to have a short term correction with the equity markets crashing. Long term Faber is right - it will be worth toilet paper.
But with massive inflation, surely the real estate short positions will get creamed as real estate inflates with every other asset?
"That bring us to today's markets. Part of what has driven the sell-off recently is the fear of a pull-back in liquidity. China is trying to move away from excessive lending which has been out of control in the first half of the year."
______________
By attributing stock price movements to economic developments, you make the same false assumptions as those in the mainstream media.
Had this "fear" not existed, the market still would've opened, today. How do you know it woudn't have done the exact same thing?
Even with all the modern day technology, the market is the same game it was 100 years ago. It's all about accumulation, mainly by insiders, at wholesale, then selling (and selling short), mainly to the public, at retail.
I look at the market as a car dealership, with one difference: when he sells out, the car dealer orders new inventory from a manufacturer. The stock dealer must get his inventory back from his customers.
"There are " (childern in elementary school) " much more knowledgeable than I will ever be"....
Great call on the GDP numbers, Cornelius.
Another great piece from Nic. Thanks for posting his work, ZH.
"MARK IT ZERO, DUDE"
Also despite what politicians may think asset inflation is a lot worse for the lower and middle class than is the debt cycle.
This may hold true for even the baby boomers because taking the hit now allows economic recovery. Asset prices tend to recover better when the economy is stronger so in the long term even the baby boomers might be better off if we recognize the problems now.
There is one body however which needs those asset prices to remain high and that is government. The lower and middle class now need to pay for the cover up that politicans have made a mess of things.