There is a lot of commentary on the prior few posts about Neely having to change his count if the Jun11 high is exceeded. Here is what he had to say about it this morning (emphasis added):
It’s amazing the number of emails I’ve received lately trying to talk me out of my bearish scenario or asking what it means if June’s high is exceeded (which means they think I’m wrong). That alone favors my preferred scenario, but a move above June’s high is not a good thing, it’s a horrible thing. It means the bear market will last for years and economic conditions will get much worse than originally thought.
This would put him in more alignment with Prechter's view, of a bottom in 2014 (+/- a year or so, with 2012 at the earliest); or if the government continues to intervene like FDR did in the '30s, this might stretch even longer, to 2017 - 2020. Currently Neely expects a rapid drop to the long term bottom, maybe as early as Jan 2010 (six months!).
As an historical note, the last three deflationary depressions that followed a credit bubble all ended their first phase down in around 3 - 4 years: 1837-1841, 1873-1875, 1929-1932. Hence 2007- 2010/11 would have been consistent. This reflects the rapidity which a market can adapt to changing realities. A lot of ink has been spilled over why the 1930s lasted so long; but it was clear that by the time FDR took over in 1933 a recovery was in progress, and a quite strong one (given how far we had fallen). The policy question is why we went back down.
- Keynesians such as Krugman continue to argue that we did not stimulate enough, and that while FDR caused the recovery due to deficits, an attempt to go back to normal in 1937 (due to the apparent recovery) by lowering the deficit sent us back down. This argument is relatively easy to disprove, since the last two Hoover budgets (FY32 and 33) got us to around a 5% deficit per year, and FDR's first three budgets continued at around that level. In what respect were Hoover's stimulus insufficient and FDR's heroic? And even in 1937 spending continued to go up, albeit at a lower pace. More likely something else was going on, and a recent UCLA study found it in the ill-guided attempts by both Hoover and FDR to keep wages and prices high in the face of deflation. This prevented the market from clearing; high wages kept unemployment high, and high prices kept capacity underutilized. In any event, the record of massive stimulus is that it does not work and may deepen the problem if done poorly; just look at Japan twenty years after their credit collapse in 1989.
- Monetarists such as Bernanke continue to argue that the Fed failed to provided sufficient liquidity. This comes out of Milton Friedman's trenchant work that blamed the prolonged and deep fall in the '30s on failures of the Fed. Yet in the heart of the recent crisis, Friedman's co-author criticized the policy reaction as fighting the wrong war: the problem back then may have been liquidity, but the problem today is bank insolvency. Liquidity helps avoid bank runs; but does not repair insolvency, which is due to overleverage and bad loans. At 30:1 leverage, a mere 3.3% of bad loans means you go insolvent. In this case, as asset values collapsed (real estate in particular), banks found they had insufficient collateral for their loans. The problem is much worse in Europe than here: while our bank assets (loans) are around 2:1 of GDP, according to John Mauldin it is 4:1 in the Eurozone, 5:1 in the UK and an incredible 7:1 in Switzerland. We clucked at the "zombie banks" in Japan after their 1989 collapse, and yet have left our money center banks in the land of the living dead.
Yves popped over some thoughts which he might prepare in a guestblog later this week. He notes that markets outside the US are not confirming this rally, nor are currency or bond markets.
Regardless, if we break the SP956 pivot point, look for an enthusiastic piling on and a sharp rally. We almost hit it today. Potential turn dates for a summer peak center around the second week of August, after the coming lunar eclipse in the first week of August that follows an Asian solar eclipse this week. That eclipse cuts across a huge swath of people - around half the world population - and may cause superstitious panic across India and China. A prediction of doom by an astrologer in Myamar (Burmese) may compound the normal skittishness that comes with such an unusual and rare event. This will be a fairly long total eclipse that starts at sunrise in India, runs across Shanghai and southern Japan, and continues out into the Pacific.
I do not expect bank failures or if you like the second wave of the crisis that quickly, but as the next wave of real estate problems begin hitting - option ARMs repricing, HELOCs and other second mortgages coming due, commercial real estate collapsing - we should see an eclipse of banks beginning in Europe and moving around the world. Ironically it might start in Austria, which is over-invested in Eastern Europe, where bank problem first began in earnest in April 1931. Austria as a country defaulted, which was hugely embarrassing to the former head of a major empire. Others followed, including England going off gold in September, also hugely disruptive since they had managed the reserve currency for the world for over 100 years. Germany repudiated their war reparations, and the dominoes fell rapidly after that. The US to its credit (literally) held out the longest before FDR devalued 40% when he repriced gold from $20 to $35/oz.
If we ponder the US response to the crisis, it is not that compelling. Banks remain zombies. Various attempts to deal with bad loans have foundered: the initial mortgage relief in the summer of 2008 has had no apparent impact; the original TARP was changed quickly as it failed to buy out any toxic assets; the recent PPIP proposal is a null set so far. The major initiatives of Obama - healthcare, global warming and education - are orthogonal to the financial crisis and should make it much worse due to incurring massive new debt and new taxes. The Fed seems to have hit the wall in new initiatives. And overall we seem to be in a high level of denial over the problems, seeing green shoots where none exist and jawboning to increase consumer confidence. We have even spent for billboards to attempt to argue that the recession is soon to be over, as if touting the fantasy will make it a reality! Shades of President Ford's hapless Whip Inflation Now! buttons of 1975.
At the moment we see upside surprise in earnings, which may fuel the sharp summer rally. This appears to be due to rapid cost reduction not improving business conditions; or in the case of Intel, due to the China bubble echo driving more chip sales. TI reported a 56% slump, although painted a rosy outlook for Q3. And so it goes this week with more reports tumbling in and showing optimism amidst severe results.
We night even see a blip in GDP to positive in Q4 or Q1, especially if stimulus spending gets released. (Other than tax credits to poor folk, it has been largely held up or entangled in red tape.)
Neither of these positive indicators are suggestive of a trend change. Instead, they will be the calm before the second wave of the storm.
Recent Comments