Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
Coronavirus is America's "Pearl Harbour" Moment, There Will be a Reckoning With China - 6th Apr 20
Coronavirus Crisis Exposes Consequences of Fed Policy: Americans Have No Savings - 6th Apr 20
The Stock Market Is Not a Magic Money Machine - 6th Apr 20
Gold Stocks Crash, V-Bounce! - 6th Apr 20
How Can Writing Business Essay Help You In Business Analytics Skills - 6th Apr 20
PAYPAL WARNING - Your Stimulus Funds Are at Risk of Being Frozen for 6 Months! - 5th Apr 20
Stocks Hanging By the Fingernails? - 5th Apr 20
US Federal Budget Deficits: To $30 Trillion and Beyond - 5th Apr 20
The Lucrative Profitability Of A Move To Negative Interest Rates - Pandemic Edition - 5th Apr 20
Visa Denials: How to avoid it and what to do if your Visa is denied? - 5th Apr 20 - Uday Tank
WARNING PAYPAL Making a Grab for US $1200 Stimulus Payments - 4th Apr 20
US COVID-19 Death Toll Higher Than China’s Now. Will Gold Rally? - 4th Apr 20
Concerned That Asia Could Blow A Hole In Future Economic Recovery - 4th Apr 20
Bracing for Europe’s Coronavirus Contractionand Debt Crisis - 4th Apr 20
Stocks: When Grass Looks Greener on the Other Side of the ... Pond - 3rd Apr 20
How the C-Factor Could Decimate 2020 Global Gold and Silver Production - 3rd Apr 20
US Between Scylla and Charybdis Covid-19 - 3rd Apr 20
Covid19 What's Your Risk of Death Analysis by Age, Gender, Comorbidities and BMI - 3rd Apr 20
US Coronavirus Infections & Deaths Trend Trajectory - How Bad Will it Get? - 2nd Apr 20
Silver Looks Bearish Short to Medium Term - 2nd Apr 20
Mickey Fulp: 'Never Let a Good Crisis Go to Waste' - 2nd Apr 20
Stock Market Selloff Structure Explained – Fibonacci On Deck - 2nd Apr 20
COVID-19 FINANCIAL LOCKDOWN: Can PAYPAL Be Trusted to Handle US $1200 Stimulus Payments? - 2nd Apr 20
Day in the Life of Coronavirus LOCKDOWN - Sheffield, UK - 2nd Apr 20
UK Coronavirus Infections and Deaths Trend Trajectory - Deviation Against Forecast - 1st Apr 20
Huge Unemployment Is Coming. Will It Push Gold Prices Up? - 1st Apr 20
Gold Powerful 2008 Lessons That Apply Today - 1st Apr 20
US Coronavirus Infections and Deaths Projections Trend Forecast - Video - 1st Apr 20
From Global Virus Acceleration to Global Debt Explosion - 1st Apr 20
UK Supermarkets Coronavirus Panic Buying Before Lock Down - Tesco Empty Shelves - 1st Apr 20
Gold From a Failed Breakout to a Failed Breakdown - 1st Apr 20
P FOR PANDEMIC - 1st Apr 20
The Past Stock Market Week Was More Important Than You May Understand - 31st Mar 20
Coronavirus - No, You Do Not Hear the Fat Lady Warming Up - 31st Mar 20
Life, Religions, Business, Globalization & Information Technology In The Post-Corona Pandemics Age - 31st Mar 20
Three Charts Every Stock Market Trader and Investor Must See - 31st Mar 20
Coronavirus Stocks Bear Market Trend Forecast - Video - 31st Mar 20
Coronavirus Dow Stocks Bear Market Into End April 2020 Trend Forecast - 31st Mar 20
Is it better to have a loan or credit card debt when applying for a mortgage? - 31st Mar 20
US and UK Coronavirus Trend Trajectories vs Bear Market and AI Stocks Sector - 30th Mar 20
Are Gold and Silver Mirroring 1999 to 2011 Again? - 30th Mar 20
Stock Market Next Cycle Low 7th April - 30th Mar 20
United States Coronavirus Infections and Deaths Trend Forecasts Into End April 2020 - 29th Mar 20
Some Positives in a Virus Wracked World - 29th Mar 20
Expert Tips to Save on Your Business’s Office Supply Purchases - 29th Mar 20
An Investment in Life - 29th Mar 20
Sheffield Coronavirus Pandemic Infections and Deaths Forecast - 29th Mar 20
UK Coronavirus Infections and Deaths Projections Trend Forecast - Video - 28th Mar 20
The Great Coronavirus Depression - Things Are Going to Change. Here’s What We Should Do - 28th Mar 20
One of the Biggest Stock Market Short Covering Rallies in History May Be Imminent - 28th Mar 20
The Fed, the Coronavirus and Investing - 28th Mar 20
Women’s Fashion Trends in the UK this 2020 - 28th Mar 20
The Last Minsky Financial Snowflake Has Fallen – What Now? - 28th Mar 20
UK Coronavirus Infections and Deaths Projections Trend Forecast Into End April 2020 - 28th Mar 20
DJIA Coronavirus Stock Market Technical Trend Analysis - 27th Mar 20
US and UK Case Fatality Rate Forecast for End April 2020 - 27th Mar 20
US Stock Market Upswing Meets Employment Data - 27th Mar 20
Will the Fed Going Nuclear Help the Economy and Gold? - 27th Mar 20
What you need to know about the impact of inflation - 27th Mar 20
CoronaVirus Herd Immunity, Flattening the Curve and Case Fatality Rate Analysis - 27th Mar 20
NHS Hospitals Before Coronavirus Tsunami Hits (Sheffield), STAY INDOORS FINAL WARNING! - 27th Mar 20
CoronaVirus Curve, Stock Market Crash, and Mortgage Massacre - 27th Mar 20
Finding an Expert Car Accident Lawyer - 27th Mar 20
We Are Facing a Depression, Not a Recession - 26th Mar 20
US Housing Real Estate Market Concern - 26th Mar 20
Covid-19 Pandemic Affecting Bitcoin - 26th Mar 20
Italy Coronavirus Case Fataility Rate and Infections Trend Analysis - 26th Mar 20
Why Is Online Gambling Becoming More Popular? - 26th Mar 20
Dark Pools of Capital Profiting from Coronavirus Stock Markets CRASH! - 26th Mar 20
CoronaVirus Herd Immunity and Flattening the Curve - 25th Mar 20
Coronavirus Lesson #1 for Investors: Beware Predictions of Stock Market Bottoms - 25th Mar 20
CoronaVirus Stock Market Trend Implications - 25th Mar 20
Pandemonium in Precious Metals Market as Fear Gives Way to Command Economy - 25th Mar 20
Pandemics and Gold - 25th Mar 20
UK Coronavirus Hotspots - Cities with Highest Risks of Getting Infected - 25th Mar 20
WARNING US Coronavirus Infections and Deaths Going Ballistic! - 24th Mar 20
Coronavirus Crisis - Weeks Where Decades Happen - 24th Mar 20
Industry Trends: Online Casinos & Online Slots Game Market Analysis - 24th Mar 20
Five Amazingly High-Tech Products Just on the Market that You Should Check Out - 24th Mar 20
UK Coronavirus WARNING - Infections Trend Trajectory Worse than Italy - 24th Mar 20
Rick Rule: 'A Different Phrase for Stocks Bear Market Is Sale' - 24th Mar 20
Stock Market Minor Cycle Bounce - 24th Mar 20
Gold’s century - While stocks dominated headlines, gold quietly performed - 24th Mar 20
Big Tech Is Now On The Offensive Against The Coronavirus - 24th Mar 20
Socialism at Its Finest after Fed’s Bazooka Fails - 24th Mar 20
Dark Pools of Capital Profiting from Coronavirus Stock and Financial Markets CRASH! - 23rd Mar 20
Will Trump’s Free Cash Help the Economy and Gold Market? - 23rd Mar 20
Coronavirus Clarifies Priorities - 23rd Mar 20
Could the Coronavirus Cause the Next ‘Arab Spring’? - 23rd Mar 20
Concerned About The US Real Estate Market? Us Too! - 23rd Mar 20
Gold Stocks Peak Bleak? - 22nd Mar 20

Market Oracle FREE Newsletter

Coronavirus-stocks-bear-market-2020-analysis

Return of the Stocks Bear Market, Do Central Bankers Lead or Follow the Market?

Stock-Markets / Stocks Bear Market Aug 10, 2011 - 07:19 AM GMT

By: Mike_Shedlock

Stock-Markets

Diamond Rated - Best Financial Markets Analysis ArticleThe bear market is back says Australian economist Steve Keen. I agree. Moreover, the recent action, including the rally, offers sufficient evidence. The biggest percentage gains in history have all been in bear market rallies.


Let's tune in to The Return of The Bear by Steve Keen.

Figure 1: Asset Prices versus Consumer Prices since 1890

Far be it from me to underestimate the stock market’s capacity to pluck the embers of delusion from the fire of reality. However, the crash in the past few days may be evidence that sanity is finally making a comeback. What many hoped was a new Bull Market was instead a classic Bear Market rally, fuelled by the market’s capacity for self-delusion, accelerating private debt, and—thanks to QE2—an ample supply of government-created liquidity.

That Rally ended brutally in the last week. The S&P500 has fallen almost 250 points in a just two weeks, and is just a couple of per cent from a fully-fledged Bear Market.

Figure 2: “Buy & Hold” anyone?


The belief that the financial crisis was behind us, that growth had resumed, and that a new bull market was warranted, have finally wilted in the face of the reality that growth is tepid at best, and likely to give way to the dreaded “Double Dip”. The “Great Recession”—which Kenneth Rogoff correctly noted should really be called the Second Great Contraction—is therefore still with us, and will not end until private debt levels are dramatically lower than today’s 260 per cent of GDP.

The most egregious cheerleader for asset price inflation was Alan Greenspan. That’s why I’ve marked Greenspan on Figure 1 and Figure 4: if his rescue of Wall Street after the 1987 Stock Market Crash hadn’t occurred, it is quite possible that the unwinding of this speculative debt bubble could have begun twenty years earlier.

Figure 4: US Private Debt to GDP since 1920


Instead, Greenspan’s rescue—and the “Greenspan Put” that resulted from numerous other rescues—encouraged the greatest debt bubble in history to form. This in turn drove the greatest divergence between asset and consumer prices that we’ve ever seen.

Debt Deflation vs. Hyperinflation

There is much more to Keen's post, and as usual through the eyes of someone who understands debt deflation. Inquiring minds will want to give his post a closer look.

It is really quite humorous (or do I mean pathetic) to see these repeated calls for hyperinflation when demand for money (the desire to hold it) is soaring.

Negative Interest Rates

Demand for cash is so high that overnight interest rates went negative.

I commented on that demand for cash about a week ago in Bank of New York Mellon to Slap Fees on Big Deposits Following "Global Dash For Cash"; When was Hyperinflation Supposed to Start?

The BNY Mellon apparently does not want money, not to lend, not at all. In a mad dash for cash Mellon has been flooded with it. Overnight lending rates went negative.

Please consider BNY Mellon to Slap Fees on Some Big Deposits Amid Global Race to Cash

Everyone Hoarding Cash

Everyone is looking to hoard cash. Let me ask a simple question.

Does this happen in hyperinflation or does it happen in deflation?

In its grand QE experiment the Fed pushed rates to zero, flooded the world with cash, then expected banks to lend and businesses to expand. Did it work?

Clearly not. No one wants to put that cash to use. If you were a business would you be hiring here? I wouldn't, and neither are businesses. Instead cash sits in banks or short-term treasuries earning zero or even negative percent.

When was hyperinflation supposed to start?

Oh, I just remembered: 2011, a year chosen by at least a couple people. Others expect it next year.

Hyperinflationists simply do not understand the role of credit in a global economy. China has a huge inflation problem and various property bubbles because credit growth is soaring 30% annually.

In the US, banks want credit-worthy borrowers. However, credit-worthy borrowers are parking cash, not asking for more of it.

Do Central Bankers Lead or Follow the Market?

Please consider De-mystifying RBA Setting of Interest Rates also on Steve Keen's blog, but written by Phil Williams.

Williams posts a graph that shows "an almost 100% correlation between the cash rate and the 90-day bank bill rates. However the data also shows that in almost every instance the RBA cash rate FOLLOWS the 90-day bank bill rate, rather than leads it."

Williams asks:

  1. Why do we have the RBA as an interest-rate setting body at all when all they do is follow the market?
  2. Why does the RBA shroud itself in such mysticism when their actions are so transparent to all?
  3. What is the quality of our economists, politicians and financial commentators that we have to go through the “Will They or Won’t They” pantomime each month?
  4. How could any economist get their forecasts wrong, particularly on the up-side?
Fed Uncertainty Principle Yet Again

Regular Mish readers know the answer to this paradox. I covered the paradox in depth in the Fed Uncertainty Principle

Most think the Fed follows market expectations. Count me in that group as well. However, this creates what would appear at first glance to be a major paradox: If the Fed is simply following market expectations, can the Fed be to blame for the consequences? More pointedly, why isn't the market to blame if the Fed is simply following market expectations?

This is a very interesting theoretical question. While it's true the Fed typically only does what is expected, those expectations become distorted over time by observations of Fed actions.

The Observer Affects The Observed

The Fed, in conjunction with all the players watching the Fed, distorts the economic picture. I liken this to Heisenberg's Uncertainty Principle where observation of a subatomic particle changes the ability to measure it accurately.

To measure the position and velocity of any particle, you would first shine a light on it, then detect the reflection. On a macroscopic scale, the effect of photons on an object is insignificant. Unfortunately, on subatomic scales, the photons that hit the subatomic particle will cause it to move significantly, so although the position has been measured accurately, the velocity of the particle will have been altered. By learning the position, you have rendered any information you previously had on the velocity useless. In other words, the observer affects the observed.

The Fed, by its very existence, alters the economic horizon. Compounding the problem are all the eyes on the Fed attempting to game the system.

A good example of this is the 1% Fed Funds Rate in 2003-2004. It is highly doubtful the market on its own accord would have reduced interest rates to 1% or held them there for long if it did.

What happened in 2002-2004 was an observer/participant feedback loop that continued even after the recession had ended. The Fed held rates too low too long. This spawned the biggest housing bubble in history. The Greenspan Fed compounded the problem by endorsing derivatives and ARMs at the worst possible moment.

In a free market it would be highly unlikely to get a yield curve that is as steep as the one in 2003 or as steep as it was just weeks ago when short term treasuries traded down to .21%. In other words we would not be in this mess without the Fed, or if we were, the mess would at least be smaller than the one we are in.

The Fed has so distorted the economic picture by its very existence that it is fatally flawed logic to suggest the Fed is simply following the market therefore the market is to blame. There would not be a Fed in a free market, and by implication there would be no observer/participant feedback loop.

Fed Uncertainty Principle:

The fed, by its very existence, has completely distorted the market via self-reinforcing observer/participant feedback loops. Thus, it is fatally flawed logic to suggest the Fed is simply following the market, therefore the market is to blame for the Fed's actions. There would not be a Fed in a free market, and by implication there would not be observer/participant feedback loops either.

The Fed Uncertainty Principle has 4 Major Corollaries.

Interestingly enough I discussed 3 of the four corollaries yesterday in Trichet's Secret "Dragon Transfer" Letter to Italy PM; Watch France CDS Rates as France is "New Italy"; Trichet Illegally Usurps Judge-and-Jury Power

Inquiring minds who have not yet read those posts are encouraged to do so.

Corollary One, Two, Three, and Four apply to the Fed and ECB and in due time the Reserve bank of Australia as well. Indeed, Corollary Number One already applies to the RBA, the Bank of England, and in general all central banks.

Addendum:

In response to the above post, via Email, Steve Keen writes:

Generally I agree with you regarding the Fed Uncertainty Principle. A lot of market action is simply trying to second-guess the Fed--and they're pretty good at getting it right. In Australia's case though, the RBA tends to take too much time before accepting reality, and then over-reacts afterward.

The market is now pricing in a 75 basis point cut next month, when I think they are likely to either keep them on hold or drop them 25 points. Then after a while when the reality of a stagnant economy hits them, they'll cut aggressively, especially if house prices tank.

A Fed is still needed, but only for its clearing house function: banks need a clearing house through which their own debts to each other can be met. But a Fed that tries to fine tune the economy by manipulating the rate of interest is likely to be a disaster, all the more so when it's staffed by neoclassical economists whose fantasy world doesn't include private debt to begin with!

Those "Down Under" or interested in housing "Down Under" are encouraged to read Secretly Broke in Australia

Mike

By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com .

© 2011 Mike Shedlock, All Rights Reserved.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

dincer
10 Aug 11, 15:58
deflation leads to hyperinflation

The most important fact Mish and other like-mindeds do not want to understand is that "debt deflation is the way to hyperinflation in a fiat currency system" Today nearly all the liabilities of the banks are guaranteed by national treasuries. Banks' liabilities are in fact public. Deflation is reduction in money supply, the only way for deflation to occur is through bank failures and evaporation of deposit accounts. If banks become insolvent national treasuries step in. This means massive budget deficits and excessive debt monetization. Excessive debt monetization = rampant inflation and loss of central bank credibility. If a central bank loses its credibility its fiat currency hyperinflates. No one would want to hold it.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules