Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Dow Short-term Stock Market Trend Analysis - 6th Mar 21
Intel Rocket Lake EXPLODE on Launch - 11th Gen CPU's RUN VERY HOT Bad Cinebench R20 Scores - 6th Mar 21
US & UK Head for Post Coronavirus Pandemic Lockdown Inflationary Economic BOOM - 6th Mar 21
FED Balance Sheet Current State - 5th Mar 21
The Global Vaccine Race Against Time and Variants - 5th Mar 21
US Treasury Yields Rally May Trigger A Crazy Ivan Event (Again) In Stock Market - 5th Mar 21
After Gold’s Slide, What Happens to Miners? - 5th Mar 21
Racism Pandemic Why UK Black and Asians NOT Getting Vaccinated - NHS Covid-19 BAME - 5th Mar 21
Get Ready for Inflation Mega-trend to Surge 2021 - 4th Mar 21
Stocks, Gold – Rebound or Dead Cat Bounce? - 4th Mar 21
The Top Technologies That Are Transforming the Casino Industry - 4th Mar 21
How to Get RICH Crypto Mining Bitcoin, Ethereum With NiceHash - 4th Mar 21
Coronavirus Pandemic Vaccines Indicator Current State - 3rd Mar 21
AI Tech Stocks Investing 2021 Buy Ratings, Levels and Valuations Explained - 3rd Mar 21
Stock Market Bull Trend in Jeopardy - 3rd Mar 21
New Global Reserve Currency? - 3rd Mar 21
Gold To Monetary Base Ratio Says No Hyperinflation - 3rd Mar 21
US Fed Grilled about Its Unsound Currency, Digital Currency Schemes - 3rd Mar 21
The Case Against Inflation - 3rd Mar 21
How to Start Crypto Mining Bitcoins, Ethereum with Your Desktop PC, Laptop with NiceHash - 3rd Mar 21
AI Tech Stocks Investing Portfolio Buying Levels and Valuations 2021 Explained - 2nd Mar 21
There’s A “Chip” Shortage: And TSMC Holds All The Cards - 2nd Mar 21
Why now might be a good time to buy gold and gold juniors - 2nd Mar 21
Silver Is Close To Something Big - 2nd Mar 21
Bitcoin: Let's Put 2 Heart-Pounding Price Drops into Perspective - 2nd Mar 21
Gold Stocks Spring Rally 2021 - 2nd Mar 21
US Housing Market Trend Forecast 2021 - 2nd Mar 21
Covid-19 Vaccinations US House Prices Trend Indicator 2021 - 2nd Mar 21
How blockchain technology will change the online casino - 2nd Mar 21
How Much PC RAM Memory is Good in 2021, 16gb, 32gb or 64gb? - 2nd Mar 21
US Housing Market House Prices Momentum Analysis - 26th Feb 21
FOMC Minutes Disappoint Gold Bulls - 26th Feb 21
Kiss of Life for Gold - 26th Feb 21
Congress May Increase The Moral Hazard Building In The Stock Market - 26th Feb 21
The “Oil Of The Future” Is Set To Soar In 2021 - 26th Feb 21
The Everything Stock Market Rally Continues - 25th Feb 21
Vaccine inequality: A new beginning or another missed opportunity? - 25th Feb 21
What's Next Move For Silver, Gold? Follow US Treasuries and Commodities To Find Out - 25th Feb 21
Warren Buffett Buys a Copper Stock! - 25th Feb 21
Work From Home Inflationary US House Prices BOOM! - 25th Feb 21
Man Takes First Steps Towards Colonising Mars - Nasa Perseverance Rover in Jezero Crater - 25th Feb 21
Musk, Bezos And Cook Are Rushing To Lock In New Lithium Supply - 25th Feb 21
US Debt and Yield Curve (Spread between 2 year and 10 year US bonds) - 24th Feb 21
Should You Buy a Landrover Discovery Sport in 2021? - 24th Feb 21
US Housing Market 2021 and the Inflation Mega-trend - QE4EVER! - 24th Feb 21
M&A Most Commonly Used Software - 24th Feb 21
Is More Stock Market Correction Needed? - 24th Feb 21
VUZE XR Camera 180 3D VR Example Footage Video Image quality - 24th Feb 21
How to Protect Your Positions From A Stock Market Sell-Off Using Options - 24th Feb 21
Why Isn’t Retail Demand for Silver Pushing Up Prices? - 24th Feb 21
2 Stocks That Could Win Big In The Trillion Dollar Battery War - 24th Feb 21
US Economic Trends - GDP, Inflation and Unemployment Impact on House Prices 2021 - 23rd Feb 21
Why the Sky Is Not Falling in Precious Metals - 23rd Feb 21
7 Things Every Businessman Should Know - 23rd Feb 21
For Stocks, has the “Rational Bubble” Popped? - 23rd Feb 21
Will Biden Overheat the Economy and Gold? - 23rd Feb 21
Precious Metals Under Seige? - 23rd Feb 21
US House Prices Trend Forecast Review - 23rd Feb 21
Lithium Prices Soar As Tesla, Apple And Google Fight For Supply - 23rd Feb 21
Stock Markets Discounting Post Covid Economic Boom - 22nd Feb 21
Economics Is Why Vaccination Is So Hard - 22nd Feb 21
Pivotal Session In Stocks Bull Bear Battle - 22nd Feb 21
Gold’s Downtrend: Is This Just the Beginning? - 22nd Feb 21
The Most Exciting Commodities Play Of 2021? - 22nd Feb 21
How to Test NEW and Used GPU, and Benchmark to Make sure it is Working Properly - 22nd Feb 21
US House Prices Vaccinations Indicator - 21st Feb 21
S&P 500 Correction – No Need to Hold Onto Your Hat - 21st Feb 21
Gold Setting Up Major Bottom So Could We See A Breakout Rally Begin Soon? - 21st Feb 21
Owning Real Assets Amid Surreal Financial Markets - 21st Feb 21
Great Investment Ideas For 2021 - 21st Feb 21

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Stock and Housing Market Long Waves

Stock-Markets / Stock Market Valuations Mar 25, 2009 - 12:19 PM GMT

By: Andrew_Butter

Stock-Markets Diamond Rated - Best Financial Markets Analysis ArticleI got it - that's why Bernake (and Geithner) are flying the plane into the ground. The most common cause of air crashes is when pilots fly planes into the ground. The reason they do that is that they get confused about where they are. 23rd March 2009 Chairman Bernanke said that if a couple of trillion hadn't been thrown into the fire, then Plumber Joe (and sweet Mary Lou) would have lost 70% of their 401K by now not 40%; (and presumably their house too). Pity he didn't get around to that conclusion in early 2007 and cut rates to zero then, rather than hanging on for ages telling everyone that everything was under control "so as to instill "confidence"", I quote from his presentation to Congress in May 2007: " At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained”.


I'm not trying to score points; all I'm trying to say is that although the Chairman might be great pilot, he doesn't have a great reputation for "navigation".

I just twigged, perhaps he thinks we are in 1930 (equivalent) not 1940 (which was co-incidentally about the time when FDR put the rabid cat of MTM in a box)?

Here is a chart of the DJIA from March 1924 to March 1939 (15 years) and from March 1994 to March 2009 (also 15 Years (i.e. same timescale)).

 

The axis on the right is the axis on the left multiplied by a factor of four.

OK the "pattern" of the '30's/40's and the '90's/00's is different, mainly because after the 1929 crash the government just did nothing. By contrast by 2000 we had "monetarism" so a sharp decline was avoided thanks to "Savior Greenspan", but it's hard to avoid the inevitable when a wave breaks as Big Ben just found out, no matter how many trillions you throw at the problem. (The best strategy by the way is not to let a bubble develop in the first place - more on that later).

• On 6th September 1924 the DJIA was 101, five years later it peaked at 378 (a multiple of 3.75 over five years), and in 1939 it was 150, which was 1.5 times more than it had been 15 years before.

• On 13th January 1995 the DJIA was 3,908 (round numbers), it peaked after five years at 11,724 (a multiple of 2.95), and the again on 12th October 2007 at 14,093 (a multiple of 3.6). What happened was (a) Greespan (belatedly) saw the bubble and pushed up interest rates to cool things down (it worked); then he pushed rates down and "eased" to re-inflate the bubble, and created the housing bubble.

(Then Bernake "noticed" that there was a housing bubble, pushed up rates, and the wave broke, which for housing was about time, except it might have been niceer to have "soft" landing).

Anyway, based on that (and other analysis) I say DJIA bottomed at 6,574, which was (about) 1.7 times more than it had been 15 years before (that's about the ratio of the UP to the start for the Great Depression, which makes sense to me since this fiasco, although it's bad, isn't (quite) that bad.

Of course that could all just be a coincidence.

After all there is inflation (it doesn't change much even if you measure it properly), but in any case what's probably not a coincidence is that the long-term interest rate compounded from 1924 to 1939 was about 150% ("about" because I'm using annual data), and about 180% from 1995 to 2009 (March).

That's another reason why I figure the bottom was 6,574, not to say there won't be a dip, but I would be surprised if it goes down under.

Market Long Waves

When I was younger, thinner and smarter, I used to surf. I was pretty useless, but I learned one thing which is that when you are on your own you need to fix on a landmark on the shore (preferably two, best three) so you don't drift.

I also learned (the hard way) which end of the wave is most dangerous, (it's the bit when it breaks, get that wrong and you can be underwater a long time; and sometimes you run out of air which is inconvenient particularly since you don't actually know which was is up (navigation again)). What I'm trying to say is that it's a good idea to know where you are on the wave.

OK comparing the Great Crash with this one is not particularly scientific; the scientific way is to do an "Other-than-market-Valuation", using International Valuation Standards (IVS); which I have explained ad nauseam in previous articles.

What that tells you is what the price would have been if the market was not in what IVS calls "disequilibrium" which happens typically when either (a) banks lend money stupidly (causes bubbles), or (b) banks go broke (busts).

The theory is that sometimes banks act responsibly and reasonably, or if not they are reckless approximately for the same period of time they are in a state of abject terror (that's what economists call the efficient market hypothesis).


Anyway so divide the "price" (DJIA and S&P Case-Shiller) against the "other-than-market-value" (take away one so it gives a % over-pricing, you get a picture of the cycles of over and under-pricing:

I could talk about that chart all day, but reference the point of this article:

1: The house price bubble after the Great Crash was a result of the drop in economic activity (house prices adjusted slower). The important thing is that the house price maximum disconnect followed the DJIA maximum disconnect.

2: A "wave" above the "line" (that's the line of other than market value which is Zero on the chart), is followed by an equally large "wave" under the line.

So just eyeballing the chart I would say we are about 1940 compared to the Great Depression.

Which means that now would be well over time to take the rabid cat of MTM and stuff it in a box. Fortunately also we now have International Valuation Standards, which are accepted by all valuation institutes of any consequence in the world, which (a) say that rabid cats should be stuffed in boxes and (b) explain how to do a valuation without the help of a rabid cat.

Ah but what happened to the Recession?

Ah you say, that's nonsense, you got to be as crazy as a coot, what about the Depression, or Recession??

Well actually USA went into recession in 2000, just no one noticed because CPI wasn't worked out correctly, and for that reason everyone went on a spending spree they could not possibly afford (which is one reason we have had an uncomfortable landing instead of a soft one).

Mike Shedlock has a good article on that (he references some mysterious person called "TC", http://www.marketoracle.co.uk/Article7651.html ; this however doesn't explain why that happened, so I will explain briefly.

Working out CPI is a valuation, it's an estimate of the market price of stuff today compared to a year ago. Bizarrely in the USA this number which is the corner-stone of "monetary policy", which used to be all the rage, is worked out by the Bureau of Labor.

Why anyone would think that the Bureau of Labor. knows anything more about doing a valuation than for example the Department of Agriculture is beyond me, although one thing is abundantly clear, they don't.

Instead of working out the actual cost to the population of owning houses to live in (too hard), they work out "rental equivalence" which "assumes" that the cost of owning a house is the same as the cost of renting one. To anyone who knows anything about valuation that is simply idiotic.

First: 60% of people in USA are owner-occupiers (and since people who rent are as they say "low rent", that probably accounts for 90% of the money spent on owning houses to live on).

Second: Everyone who knows that when you value say a duck you need to get information on DUCKS (they walk around on two legs and go quack), not donkeys (which have big ears and bite).

The fact that no-one in the administration in USA appears to be able to work that out for themselves, does increase my suspicion that Chairman Bernake and Secretary Geithner, are lets say "navigationally dyslexic".

The Good News

The good news is that it looks like USA is almost out of the cycle of insanity that started in 1995, what happens next depends of course on the pilots (and I do wish they had the right maps).

Here are the options:

1: Bernake and Geithner can grab another trillion or two and throw it into the fire, that is unlikely to achieve anything much, except reduce USA to a 3rd World Country (cheap house anyway); that's the equivalent of flying the plane into the ground, so queasy passengers might like to jump off (if they have parachutes).

What will happen is the dollar will plunge, long term interest rates will go up, and the pain will go on a lot longer.

2: Either way, it looks like the "toxic asset shakedown scheme" won't work, because the banks won't sell at those prices, which is a relief. But at least that served a purpose as a talking shop.

3: With luck they will come to their senses and mandate International Valuation Standards as a way to value toxic assets for the purpose of assessing capital adequacy or solvency (although I'm a little concerned about the fact that although both Bernake and Geithner acknowledge that "valuations are important", they don't apparently appear to have heard of the ONLY valuation standard that is approved and accepted by every valuation institute in the world (back to navigation again)).

If that happens then the banks are probably out of trouble by now so, once mark-to-market is in the bin, they can start lending again.

By Andrew Butter

Andrew Butter is managing partner of ABMC, an investment advisory firm, based in Dubai ( hbutter@eim.ae ), that he setup in 1999, and is has been involved advising on large scale real estate investments, mainly in Dubai.

© 2009 Copyright Andrew Butter- All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Andrew Butter Archive

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


Post Comment

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

6 Critical Money Making Rules