Are We There Yet?

I remember writing somewhat similar headline around the same time last year. More things change more they remain the same. So here we are again, oscillating between breaking higher on hope and promise or breaking down on Euro worries and Global slowdown. The Central Bankers have not yet showed up with the promised money to propel the market to far away galaxy. But that has not exactly stopped the the bulls. We are almost near the high of the year. Will we break it and reach new highs?

There are many reasons for the market to march higher. Almost 50% of the S&P 500 companies have exceeded the earnings forecast. But the bar was set low to start with. With growth in real earning being negative, I do not see what will propel the economy higher. Where the growth will come from if people do not have money to spend in the 1st place?

But we are not here to discuss economics. There are many intelligent folks out there who do a better job of explaining the economics. I simply to try to figure out where the market will go next. Try to read the minds of  TPTB as to what they have in store for the sheeples. It is like reading the tea leave and pray that it works out  as I see it.

So far I have been lucky and I hope that the luck runs a bit further. The formula is to reduce risk and not fall for the temptation that our masters are dangling before us. Last week I expected the action, rather the lack of action from the Fed and ECB. I also saw the immediate market reaction and what is coming next. It is like playing a game of chess and trying to read the mind of your opponent. Only here we cannot see the opponent but he is very much there, in many shape and form, waiting to rob you of your money.

In " Waiting for Mario" I said I will be more comfortable to short if we reach 1400 level. We are almost there. I think even now it is OK to start shorting with a very tight stop, but I want to wait few more days to see if they can push it past 1400. Logically they should make every last effort to cross that landmark. That will convince many that a new bull market is here and jump in. Now that they have killed the bears, their next target is to bring in more bulls to the slaughter house. So I would prefer  to wait a little while more but I think the game is up.

I was looking for the correction by 1st week of August but it got pushed down the time line by factors like FOMC and ECB. Now there is nothing much between earth and hope for at least till  Jackson Hole when Ben will bring in QE3.

So play it safe. Do not chase the bus. And above all, remember, even if we miss this opportunity, there will be many more to come. Markets always go up and come down. But once our capital is gone, it will be very difficult to get it back. I do not have much of fancy charts to show you but I can share what I have learned by mistakes and all the hard punches the market has given me over years. Even if it benefits one person, I will consider that as mission accomplished.

Thank you for sharing my thoughts. Please share it with your friends and if this blog has benefited you in any way, please invite others to join the readership. Right now, that is my only motivation. Have a wonderful weekend folks.

Not Even A Water Bomb.

This is going to be my shorted post ever, so far.

Leave aside bazooka! “Believe me Mario” did not even present a water bomb. And the market dived as I expected. I am sure many were tempted to short it and possibly many did. But the monkeys did cover 12 points back to the close. But the selling is not over yet and we may see some more selling tomorrow to bring in more bears. But I expect the market to rip back to 1380 level +/- few points before the real selling starts. So I will be waiting for next week to unfold.

I am unable to see the market action during the day and I am reviewing everything afterwards. So far things seem to be in line with expectations. We only have to have patience. Just because we can trade does not mean we will have to trade.

That’s it for today. I hope to have something more over the weekend.

Thanks for sharing my take on the market. GLTA.

Waiting on the ECB

Markets are focusing on the ECB this morning, wondering if Draghi really has some plan to resolve the European insolvency crisis.  One thing for certain: whatever plan Draghi can produce will not involve any government expenditure reductions or government revenue increases anywhere in the Eurozone.  Absent either of these two measures, sovereign debt in Europe will only continue to move catastrophically higher.

Shifting the deck chairs on the Titanic is the Draghi model, one supposes.  Having the ECB buy Spanish or Italian debt may spur a one day market rally, but cannot possibly put a dent in the real crisis.  In fact, it only makes matters worse by encouraging the political forces in Spain and Italy to continue to avoid real reform in the vain hope that somehow, somewhere things will improve.  They won't.

The solution to the problems in Europe is obvious:  reform.  But, reform is not on the table -- never has been.  The left is so addicted to entitlement and bureaucracy, both in Europe and in the US, that they refuse to see where this is all headed.  Keep an eye on Illinois and California.  This disaster is headed our way for pretty much the same reasons.

Waiting For Mario.

Another very quick post in-between work.

Well, we got one bother out of the way for another 40 days or so. Next we have to wait for "Believe me Mario" to see whether he delivers on his promised bazooka. My guess, he does not have much of a room to manoeuvre till Sept. when German Supreme court approves ESM. So another disappointment in store for BTFD crowed.

Again, I am not going to front run and short tomorrow morning. In fact I would not be shorting even when the market takes its 1st dive down. That would be the classical mistake to do. From the market thinking point of view, everyone and their grandma will short the market tomorrow when Mario fails to deliver. Because that would be the easiest thing and no-brainer trade. How can anyone not have a wining trade on the short side when the central bankers have failed to deliver on promised free money? Because the market is controlled by monkeys. You may have seen or heard about what happened today morning when the Algo went wrong and NYSE had to cancel trades. There were also some reports of TBTF banks conspiring to rig the derivative market apart from Libor rate.

I expect folks to get heavily in short position tomorrow and day after and I also expect these monkeys to kill those shorts and bears by jacking the market up. SPX 1400 may not be far off just because nobody is expecting it to come, after the disappointment of Bernanke and Mario. So be prepared for the unexpected surprise.

If SPX does reach 1390-1400 level, I would feel more confident to short. If that means waiting for a while more, so be it. After 25 years of trading, I am no more anxious to chase every up or down move and have learned to wait for the opportunity which has less risk. I am not right with all my entry but at least I am working with the primary goal: Do not lose capital!

Thanks for sharing my thoughts. Be safe out there.

How To Destroy Opportunity

Senator Jim Webb of Virginia and others have introduced a bill in Congress to raise the minimum wage from the current $ 7.25 to $ 9.80.  Why stop there?  Why don't they cut to the chase and raise the minimum wage to $ 20 per hour?  After all, people need more money don't they?  In fact, I would think that $ 100 per hour would solve all of our problems.  At $ 100 per hour, we would no longer have to worry about problems like poverty or inadequate income.

We should probably look into other things like guaranteed paid three month leaves of absence for all employees.  Put that on top of guaranteed health care.  How about free transportation to and from the office?  A day care center free for the children of employees?  There must be some more things that we can mandate.  This is very progressive thinking!

Great ideas!  Way to go Jim Webb!!

Crunch Time.

A quick post is in order. Tomorrow is the day the BTFD crowed has been waiting for. Tomorrow is the day when Ben and co. will save the world like Mario saved Europe. But I think it is still early days for QE in USA but who can say for sure. The danger for the bears will come not from Bernanke, but from the other side of the pond. Like it did in last December. Mario started LTRO and most of us under estimated the liquidity effect it could have on the US stock market. If ECB converts that ESF or “whateverthatshitthingsis” as bank which could then guarantee and convert 1 trillion euro to 7 trillion euro , just by magic. It will not solve anything but will definitely buy time.

More I think about it, more I am convinced that the Fed will open a swap line to ECB or do some other shenanigan and provide them liquidity indirectly and ask ECB to ease instead of staring direct bond buying program.  That will be politically correct as well.

It is really risky to be a bear at this time and yet I do not have the courage to BTFD yet. I still think a major correction is due but ECB has been able to buy good deal of time just by talking. Either way, we are in a range and unless I see a break of the range with conviction, it is not good to let our conviction dictate the trade or investment. Return of capital is more important than return on capital. At least that is what I think. If we must take a trade because we are bored, that would be the dumbest thing to do. Also let us not forget that this is the Presidential Election year cycle.

Bottom line, although I am tempted to short, I am holding on. I may miss an opportunity by being cautious, but I do not mind missing that opportunity just to have surety. Because if the market falls, we can be sure of QE and the subsequent up. That will be easy money.

So trade accordingly. I would advice not to front run. It is better to give up some points at the beginning of a move just to avoid whipsaw and mental agony.

I am out of market action till 8^th of August and by that time lots of issues would be clear. I think one more push up is still due before a major correction. I am looking at AUD to top out around 1.07.

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Just how bad is the economy?

The second-quarter GDP numbers came out. The newspapers and Republicans pounced on low growth and anemic job growth. The Democrats rebut growth is growth and tell us of the steady job gains. How bad is the economy?

Economists know that levels matter, and that long-run growth matters more than anything else. I made a few graphs to emphasize these points.

Start with the level (in logs) of real GDP. (This is an update of a graph I saw on John Taylor's blog.)

Looking at levels you see the current awfulness better than by looking at growth rates. GDP declined almost 5% in the recession, but then started growing at a glacial pace, averaging 2.4% since the trough.  We seem stuck in this slow growth trap.


If you distrust trend lines, you are wise. But this one reflects a solid historical pattern. Here is real GDP and the 1965-2007 trend through postwar history.

You can see that the economy has quite reliably returned to the trend line after recessions.The 1950s had a steeper trend, but there too the small recessions were followed by catchup growth.

Here is what the recovery is supposed to look like (Again, idea stolen from John Taylor, except I'm using trends rather than "potential GDP'' which I distrust.) 

To be fair, I fit the trend through 1980, so I would not use ex-post information. You see that after the severe 1980 recession at the even more severe 1982 recession, the economy recovered to trend, by posting a few years of 6% growth.

The tragedy is poorly expressed in growth rates. By 1987, the economy was back on the prior trend line. We are now 14.5% below the trendline, and each year that goes by like this we lose another half a percent. The average person in the economy is producing 14.5% less, and earning 14.5% less, than if we had followed the path following the 1982 recession.

That's a lot -- and a lot more than the litany of quarterly growth rates suggest.

I used trends, rather than the CBO potential output. If you read how they make it, you're likely to do that too. But here is the same graph contrasting my trend and the CBO's potential

This is tragic. The CBO is giving up on us. The CBO potential, which goes towards a 2.35% long run growth rate, says that what we are seeing now is the new normal. All we can hope for is a modest recovery, and then anemic, sclerotic growth forever after that. The difference between 2.3% and 3.0% adds up fast as the years go by. (And the CBO has been bending the trend line down steadily as the recession goes on. Back in 2005, it's "potential" looked like my "trend." They didn't see a permanent downward shift in level or reduction in growth rates. Look for "potential" to keep declining.)

Well, perhaps the CBO is doing its job as forecasters, saying "here is what will happen if you continue down the present policy path," not "here is where the economy would be if you adopted growth-oriented policies."

What about employment? I find employment more significant than unemployment. Unemployment means job search. It means people answer a survey saying they don't have a job, and are actively searching for a job. It does not count all the people who gave up, or went on disability (effectively ending their careers), early retirement, or are just living in Mom's basement and playing video games. (I don't mean to make light of it. That may be the most tragic, as the chance to accumulate skills is lost.)

Here's a good summary measure, the ratio of employed people to the population

This is really tragic. Employment declined by about 7 million people, from 63% of the population to about 58%. And it has stayed there ever since. The "job gains" you hear about in the news are just barely keeping up with population. As we are about 14% below trend and slowly losing ground, we are 7 million jobs short and sitting there too.

The link between employment and output is productivity. To keep the numbers simple here, I made plots of output per worker. Output per hour, and corrections for demographics and capital use are better, but this is simpler and works about as well. Here is a graph of productivity.

I crammed a lot of information in this graph. The first thing to notice is the behavior in the recession and now. There was a dip in productivity -- output fell more than the number of workers fell. But it has since recovered.

In the short run, capital doesn't change much, so as a rough guide you make more output when you hire more workers (or increase hours) and vice versa. So, GDP = Productivity x workers. To get more workers, we need to make a lot more GDP. The lackluster GDP growth is the other side of the terrible employment coin.

There's more in the graph. In the long run, rising productivity is behind everything good in the economy. It's what gives more income per capita. Rising productivity is the only hope for paying for entitlements and getting out of our deficit trap. It's the main hope for long-run GDP growth, after the empolyment-population ratio reverts to where it should be. Rising productivity comes from new ideas, new companies, new ways of doing business. It isn't all pleasant. Lots of incumbents lose out. Rising productivity is the core of a "growth" agenda as economists understand the word. 

You see in the graph that something terrible happened in the 1970s. Productivity, which was behind the large postwar boom, slowed down to a glacial 1% per year. 1982 marked a break in that as well. Productivity  started growing 1.69% per year, producing the boom of the late 1980s and 1990s, and incidentally producing large Federal surpluses.

OK, but the far right of the graph doesn't look so good does it. Here it is, blown up, with a 2003-today trend marked in as well.

This is an economists' horror movie. Yes, productivity did rebound. But it seems to be growing slowly as well.

The trends are an economists' horror movie. Real GDP seems not to be recovering at all -- no period of swift growth to go back to a trend. We seem stuck at 2.4% growth forever. The CBO is giving up on us too. Employment will not recover as a fraction of population until the economy recovers. We seem stuck at low employment forever. And now we seem headed to a 1970s productivity slowdown as well.

I don't view this as contentious, outside of Presidential politics. Paul Krugman thinks the economy is pretty awful too.

What to do? If only it were so simple as to have the Fed print up another two trillion dollars, or have the Treasury borrow another $5 trillion and blow it on stimulus boondoggles. We're stuck in sclerotic growth, and to everyone but a few die-hard extremists, that means growth-oriented policies are the only way out. 


Disclaimer. Yes, I know there are better ways to measure all this, especially productivity. This is an attempt to paint the basic picture using the simplest numbers. The message is, look at the levels and look at the trends. If you do that with better data, you will have gotten the message.

Data are from the St. Louis Fed's wonderful Fred database, series GDPC96, GDPPOT,  EMRATIO.