Excellent article from market ticker.

[Misthos]

I read somewhere that Bernanke said we need 2.5% annual GDP gowth just to maintain employment, let alone grow it.

So... assuming that G can only replace C for so long... what does that mean? I think a huge correction in GDP is in order. Unemployment is far from bottoming out - and that will also create a feedback loop of greater deleveraging and thus GDP contraction.

Here's another chart I keep posting here:

But wer're actually over 370% to GDP right now, so the chart needs updating. So KD is right, the standard of living we have enjoyed, the growth in GDP and the bull market are all derived from growing debt that started accelrating in the early 80s.

At what point does it slow down? Where should it contract to? Obviously the government cannot keep on taking on the shrinking private sector debt forever.

Here's my take, or at least one of my views borrowed from several off the wall economists:

We have reached peak employment. With advances in robotics, farming, fertilizers, computers, etc... there is less of a need for people to work. Productivity and efficiency is how we increase margins, and thus profits. Which in turn requires fewer people to create things. We adopt new technologies not because they hire more people - but because they require FEWER people.

We reached this in the early 1980s. How did we maintain employment despite this? Two things. We created a FIRE economy - based on asset values and trading paper (debt). This brought on a slew of attorneys, mortgage brokers, financial advisors, traders, title companies, real estate agents.... etc... And we also increased it by increasing discretionary income with additional debt - credit cards, HELOCs.. etc...

In effect, the money supply through credit expansion grew so much that it structurally altered our economy. Offshoring and outsourcing kept CPI in check by keeping the prices of many goods low. It masked the inflation we should have experienced.

It wasn't sustainable. Leverage, as a percentage of GDP, cannot go up forever. The chart above explains the bull market and increased consumption. Sure people will always need to eat and dress up and live in a house. But wearing gucci, living in a McMansion, having two beamers,and eating till we burst are things that the middle class historically rarely did - it only happened with the credit bubble.

The other thing I want to mention is cheap oil. Without it, our world would be very different. That too will change soon. I'm surprised people here rarely discuss peak oil.

Doomsday, if we define it as a world that looks very different to what we are currently accustomed to, one which involves higher levels of unemployment, less energy usage, and consumption, is inevitable.

You and I may make a lot trading, or have high paying professional jobs. But keep this in mind. If it were not for the consumer buying flat screen tvs, McMansions, jetskis, etc... we would not have the money we do now.

A GIANT reset is in order. And we will ALL be impacted. Much of what was bought and much of what was invested and saved, should not have existed.

 

[xenix]

Those are all good points. I might even meet you more than half way as to some of your interpretations of the facts.

BUT, the worst disease you can have as a trader is tunnel vision. You think you've got a handle on some fundamental truth and being a man of conviction, act on that belief. The problem is that if you are not acutely aware of the limits of your own sagacity and that of others whom you respect, you are surely doomed.

We evolved exquisitely sensitive peripheral vision to guard us from unexpected threats that slither up from the back or side. But if you become a 'true believer' in a particular interpretation of what you BELIEVE is economic reality, you may as well strap on blinders and a feed bag.

 

[bozwood]

Quote from xenix:

Those are all good points. I might even meet you more than half way as to some of your interpretations of the facts.

BUT, the worst disease you can have as a trader is tunnel vision. You think you've got a handle on some fundamental truth and being a man of conviction, act on that belief. The problem is that if you are not acutely aware of the limits of your own sagacity and that of others whom you respect, you are surely doomed.

We evolved exquisitely sensitive peripheral vision to guard us from unexpected threats that slither up from the back or side. But if you become a 'true believer' in a particular interpretation of what you BELIEVE is economic reality, you may as well strap on blinders and a feed bag.

I understand you are probably playing devil's advocate somewhat, but at some point a decision has to be made as an investor or trader. You seem to know what you are talking about, so what do you believe about our situation right now? You make good points, but constant worry of threats to our thesis can also cause paralysis.

 

[dozu888]

Quote from bozwood:

I understand you are probably playing devil's advocate somewhat, but at some point a decision has to be made as an investor or trader. You seem to know what you are talking about, so what do you believe about our situation right now? You make good points, but constant worry of threats to our thesis can also cause paralysis.

articles like this is exactly why the small investors should go the technical route than a fundy one.

for every bearish 'expert', there is a bullish one... like they say, opinions are like assholes, everybody has one.

who cares if fundys are pointing up or down... you be spinning yourself endlessly trying to figure this out.

isn't it much easier just to look at the chart.

hence... there is no such thing as 'excellent' article... people vote with their money.. and all that is on the chart.

 

[xenix]

That's an astute observation in as much as I didn't consciously realize that's what I was doing.

I'm sort of like yin and yang on tap. Too much of one and I tend to dispense the other. It's partly a compulsion but also a living testament to proposition that balance is everything.

I believe that on the continuum of evil there are lies, statistics and economic data. Just like quoting scripture, you can interpret virtually any economic "fact" to support whatever conclusion you've preordained. The only limiting factors are one's creativity and mastery of the necessary argot.

But as you say, traders and investors require a level of confidence that will necessarily exceed the reliability of the information on which that confidence is based. It's hard to make progress if you're always looking over your shoulder.

But in keeping with the paradigm of 'balance', there is such a thing as being overly confident. And that is the sort of thing I've seen a lot of over the past several months. There are lot of people who are very well respected who seem to have an unshakable believe in the way events will unfold. My point is that once you cross the line from having a little false confidence to having what amounts to a full religo-nomic belief system, then you are on the path to destruction. In the best case, you're proved wrong and the next several times around the block you're a bit more cautious. In the worst case, you luck out and call the market precisely. Then you have an inflated sense of your forecasting abilities which require many painful beat downs before you reconsider.

So, what the fuck is it that I'm trying to say? Have strong opinions, but not so strong that you become oblivious to information that doesn't "fit." Look for and follow trends, but don't read even the inconsistent data as supporting your theories simply because you can't even imagine alternate scenarios.

I don't have any strong opinions about this market but I do have a couple of odd ideas.

1. People in government want to do the right thing and want to make things better not worse. About 1-2 years ago when everyone was saying there was going to be a return to a barter economy, I said that if necessary, the govt would print money and hand it out on every street corner before they would let that happen. Even I didn't think those words would be prophetic, but, dumb luck, it turned out to be so. The point is that while Ben and Timmy may have a gallon bottle of K-Y in their closets, it's not there for the reasons you probably think.

2. The best possible outcome and the worst possible outcomes are equally unlikely. If they subtend only 5% of the bell curve but you're spending 95% of your time worrying about them, then you need to reevaluate.

 

[wartrace]

Quote from dozu888:

articles like this is exactly why the small investors should go the technical route than a fundy one.

for every bearish 'expert', there is a bullish one... like they say, opinions are like assholes, everybody has one.

who cares if fundys are pointing up or down... you be spinning yourself endlessly trying to figure this out.

isn't it much easier just to look at the chart.

hence... there is no such thing as 'excellent' article... people vote with their money.. and all that is on the chart.

That's why I posted it in "economics" forum rather than the trading forum. Of course it has no bearing on day to day trading, it does offer an opinion of the long range outlook. Also, I tend to agree with the author that calling an end to the recession at this point is foolish.
Relying on what the market is doing right now as an economic indicator is foolish as well. I have heard "Oh, the market is forward looking"- what was it saying in late 2007? Why didn't it predict the start of this mess?

 

[bozwood]

Quote from xenix:

That's an astute observation in as much as I didn't consciously realize that's what I was doing.

I'm sort of like yin and yang on tap. Too much of one and I tend to dispense the other. It's partly a compulsion but also a living testament to proposition that balance is everything.

I believe that on the continuum of evil there are lies, statistics and economic data. Just like quoting scripture, you can interpret virtually any economic "fact" to support whatever conclusion you've preordained. The only limiting factors are one's creativity and mastery of the necessary argot.

But as you say, traders and investors require a level of confidence that will necessarily exceed the reliability of the information on which that confidence is based. It's hard to make progress if you're always looking over your shoulder.

But in keeping with the paradigm of 'balance', there is such a thing as being overly confident. And that is the sort of thing I've seen a lot of over the past several months. There are lot of people who are very well respected who seem to have an unshakable believe in the way events will unfold. My point is that once you cross the line from having a little false confidence to having what amounts to a full religo-nomic belief system, then you are on the path to destruction. In the best case, you're proved wrong and the next several times around the block you're a bit more cautious. In the worst case, you luck out and call the market precisely. Then you have an inflated sense of your forecasting abilities which require many painful beat downs before you reconsider.

So, what the fuck is it that I'm trying to say? Have strong opinions, but not so strong that you become oblivious to information that doesn't "fit." Look for and follow trends, but don't read even the inconsistent data as supporting your theories simply because you can't even imagine alternate scenarios.

I don't have any strong opinions about this market but I do have a couple of odd ideas.

1. People in government want to do the right thing and want to make things better not worse. About 1-2 years ago when everyone was saying there was going to be a return to a barter economy, I said that if necessary, the govt would print money and hand it out on every street corner before they would let that happen. Even I didn't think those words would be prophetic, but, dumb luck, it turned out to be so. The point is that while Ben and Timmy may have a gallon bottle of K-Y in their closets, it's not there for the reasons you probably think.

2. The best possible outcome and the worst possible outcomes are equally unlikely. If they subtend only 5% of the bell curve but you're spending 95% of your time worrying about them, then you need to reevaluate.

I know what you are saying. It's a balancing act.

You may be right that gov't wants to or says it wants to do the right thing, but I have come to the conclusion that the incentives lead to the wrong thing.

I also agree that the best and worst outcomes may only happen 5% of the time, but the 5% could encompass many times the risk or reward of the normal environment, so it probably makes sense to spend a big part of time thinking about them.