Peak Stimulus

Peak Oil refers to the peak of production of oil (getting it out of the ground), not the peak of oil (in the ground). "Peak Stimulus" refers to the peak of stimulus spending, not the peak of total stimulus.  On that basis, we appear to be at Peak Stimulus.  This is a good as it gets.  This chart courtesy Zerohedge shows this quarter is the peak of stimulus spending.  The analysis from Sprott goes on to outline how this quarter is also the peak of Chinese stimulus; two Chinese banks announcing on July 29 that they would limit loans in the second half of the year was the proximate cause to break the China Bubble.  

The purpose of stimulus is not to put the economy on life support, but to jumpstart the private sector. On this score the worldwide stimulus appears to have failed.  Any slight green shoots are due to seasonal factors (housing) or government life support.  

I have written on this here about the US and here about China.  The amount of US stimulus should have given us a 3% boost to GDP last quarter (see chart): instead it was a bare 0.2%, less than 10% of what was expected.  (The math is that in a $13T economy, a 1% increase is $130B, or $33B on a quarterly basis; hence the $100B of stimulus in Q2 should have caused a 3% rise annualized, just as this chart shows.) Similarly, the Sprott report says that China has injected a whopping 64% of their first-half GDP in 2008 in the first half of 2009.  Instead of showing up in the Chinese economy, even given how China counts GDP more favorably than the West does, it has instead spilled over into stock and commodities speculation, or simply been mal-invested and lost.  

We should be seeing a 4% pop this quarter, and it seems possible that GDP will be slightly positive when the Q3 numbers come out - but nowhere close to the expected impact of stimulus.  We seem to be hitting the point of diminishing returns of stimulus via debt.  This is a known problem; see chart.  It comes from a number of factors, including banks not lending and people/business not borrowing; using the tax rebates for paying down debt; and poorly spending the shovel of sudden money.  

We end up with gimmicks like Cash For Clunkers, a classic example of the Broken Window Fallacy. And gimmicks like C4C fizzle into confusion and political spin.  The reality of that program is "eight of the ten top-selling vehicles are foreign-made cars, while U.S. cars occupied all top 10 spots on the trade-in list." It put people into debt who could have used the money or credit on better decisions.  

BTW the Clunker program created a controversy when DOT put out a chart of the top 10 cars - almost all Japanese and small.  Turns out they may have not properly counted US cars with same design but different models, such as Ford Escape two-wheel drive vs. four-wheel drive.  It may be the most bought car was a truck - the large Ford Escape SUV! Also high on the list would be other SUVs (the small Jeep Patriot and the huge Chevy Silverado).  This is what happens with government gimmicks: they are followed by government spin to attempt to "prove" that the purported purpose was achieved.  

What was accomplished?  If the purpose was global warming, why was the top car (in the real list, not the DOT spin) an SUV and why were two other SUVs in the top 10?  If the purpose was helping American car makers, why were most cars Japanese?  If the purpose was to jumpstart the economy, why are dealers expecting a sharp drop in sales?  Most likely the purpose was desperation - anything to get a green shoot.  I think what was accomplished was to make the W-Shaped Recession more likely.  

In the Greenspan Indian Summer from 2002-2007, we only got 40c on the Dollar: $10T cumulative GDP growth for $24T of new debt. Now it appears that the Stimulus is getting less than 10c per Dollar.  We are rapidly approaching a point of disaster where every new attempt to stimulate simple destroys GDP. See chart.

Comments

[Miguel]

always very interesting information in this blog. Thanks.
Now Yelnick and others , with this chart in mind , and other i ndicators, i would like to ask you something about your wave count.
There is no doubt in my mind that an important turning point is coming in say 2 weeks or so, but even why do you count the waves on sp500 since march as ABC ? Why not a 5 wave? THat would bring us in 2 weeks an important corrective 4th wave but we would still have a fifth wave coinciding with the (overblown)"positive" results expected of the 3rd trimester , with a top in gold and then the abyiss in march or so? Same question for SHANGHAI? Why not a fifth wave after the present correction?

[Brian]

Great post. Out of curiosity, how deep do you anticipate the second leg of the 'W' to go? Will it be symmetrical?
Also, I noticed the EWSTU is getting serious about putting the 2 circle on their charts. It appears in the very near future.

[tallyho]

So what's the bottom line. Fix our current account and pay down debt? We could go into GDP winter for 5-7 years while we dig our way out and then come out a conservative nation of consumers? It seems like Zero hedge is foretelling the end, reminiscent of the movie Fight Club (for which the blogger Tyler Durden affectionately assumes an identity). Not dogging ZH, but sometimes I have to believe the glass is half full...even though it is empty.

[yelnick]

tallyho, the inevitable consequence of the debt bubble is the wrote-down of excessive debt, the destruction of malinvestment, and a fairly large drop in GDP to make up for the 'pulling it forward' from the bubble. The longer the government tries to roll this forward the longer we stay in a twilight zone (like Japan for 20 years). Pundits decry Hoover for being laisse faire, but he was anything but. He doubled Federal spending as a percent of GDP, the greatest spending increase in US history. He meddled in the economy. He tried to keep wages up in the face of deflation, increasing unemployment. It would be better to provide a safety net for people instead of companies and let the free market wash out the problem areas quickly. The sooner we bottom the shorter the pain period will be. The safety net can protect the citizenry during the process of "creative reconstruction" of the economy.

[yelnick]

Brian, I think it will be a tilted and curvy W, meaning the second leg down will be slower and longer as well as deeper.

[yelnick]

Miguel, it is hard to count five waves up from Mar9. And volume was not increasing as it normally does in an impulse wave. This wave looks corrective. If you count Jun11-Jul8 as 2, then the Jul8-current rally is too short in distance and time to be a normal 3. It would mean that a 4 to follow soon would have a very short 5. The type of five-waver that would fit is a rare ending diagonal, which I don;t think this has the look or shape of.

[Puravida]

Yelnick, you always have a clear and insightful view. Thanks for being the gracious host for this group. I admit to being fooled by this rise that has no logical underpinning, stocks rising on vapor by dint of electronic manipulation gone wild.

The problem with this country is thinking of the short term at the expense of long term. Like fast food, we want fast returns, and we reward those who give us instant gratification over those that provide a fiscally conservative but safer outlook that may not have the peaks, but also not the deep valleys.

The solution worked in the past, and we must return to it. Serious regulation of industry and markets with meaningful penalties. We need muckrakers and whistle blowers.

Financial blogs are rife with castigating Obama for his lack of action in prosecuting whoever is deemed the cause of our predicament. But no one person is capable of fighting the money bags. Blaming Obama is an excuse for ourselves not taking responsibility to stand against this blatant manipulation of markets.

What Obama has said, and what he is waiting for, is for us to reach a point of protest against these white collar criminals so intense that we demand justice so much that we "make him do it" - change can only come when the pressure from the public is such that he has to act.

The other thing necessary is true campaign reform so that business corporations can no longer buy legislation as they did throughout the Bush years without even attempting to hide the fact.

Campaign reform will eliminate corporations and their influence from buying politicians. Even the latest protests at Democratic Town Hall meetings are financed by political operatives. This has to stop. And yes, I know both parties are guilty of accepting money for influence. The system needs to change by a complete overhaul, just like the healthcare system needs a complete overhaul. We cannot have a safe and secure country if 50 million people do not have health care, so it is vital to our national interest.

When Congress is forced by limited campaign funding to listen to this public mandate for a return to normalcy and away from volatility and mayhem in the markets and the politicians self interest is affected, then Obama would be able to take the steps and have the backing to withstand the heat those steps will generate. Serious regulation of industry and markets with meaningful penalties.

I know the odds are slim and none, but this seems the only way to improve our situation. Change will only come when we can admit what is not working and take meaningful action to address the problems. We know now that whatever they may say, corporations do not care about people, only profits. The cut people when they cut costs to raise profits. The eventual outcome of the continuation of that policy is that there will be no more people.

I am not anti-business, but we cannot survive as a country unless business is regulated because it simply will not regulate itself because that means less profit. As I said in the beginning, we need to start thinking of the long term instead of the short term profits. That course will benefit business best over time because it will become more stable.

The masses are easily fooled by those who repeat a lie often enough that it sounds like truth, but the truth eventually will come out. We have to learn to listen better and know the facts for ourselves rather than what is told us by others.

[big foot]

The long term correction currently underway could be a W but more likely a slighly contracting triangle with the next down wave not ready to start for another 3 to 4 months.

Those positioning for the downside fireworks earlier than that better bring plenty of water, a comfortable sleeping bag and tight stops...

[KRG]

Y : Crude could be completing the corrective phase!!
any thoughts there?
http://sites.google.com/site/krgishere/Home/Crude-Aug-09.gif?attredirects=0

[Miguel]

Thanks Yelnick for your comment on the 5 wave vs ABC in the correction we are now witnissing.
I think your point concerning the volume is the final argument that would proof your ABC scenario.
Now if this present surge would be the final leap could it be that this last wave will be again longer than we are anticipating here.?( as all the recent movements took longer time than originally anticipated).
I did not see a minor 2 yet. Did you? SO do you think it is possible to have to wait for beginning october?
I know that the are really a lot of technical scenario's that point at 10 to 15th of september, but do these match with the action of the last days?

[Tom CZ]

DSI:

http://www.dailyindexsentiment.com/dismooasym.png

correction or S/T uptrend break close...

Tom CZ

[Upstart]

"The e-minis will reach the 1120 level by the end of October." - Carl Futia

[majestic tiger]

when carl futia says we might as well listen.a great technician who knows his markets.

[a great technician]

a great technician

what kind of technical analysis does he use? what's his track record?

[tallyho]

Then I am taking the other side of this trade because Futia was calling for a crash about a month ago that headed into a big rally. I don't know about anyone else, but his short-term record has some tarnish...

[Mike McQuaid]

NDX respected 50% retrace line of the Oct '07 high to Nov '08 low as resistance for 16 days in July and August. The last 4 days that resistance is now support. This support is coincidental with breaking the upper trendline originating at the '07 high. This is a noteworthy crossroads.
The uptrend is intact until as yet unseen technical negatives emerge.

[Mike McQuaid]

SPX showed a shooting star yesterday so todays action will be responsive and indicative of near term direction. This chart is using 38% retrace of the '07 high to March '09 low as support. Trend is up on this one too, yet subordinate to the NDX for bullishness so the NDX should turn before the SPX when that happens at a distant date.

[Mike McQuaid]

BKX wave 1 and running correction to July 10 puts the current large volume rally on the weekly chart into wave 3 territory. The selling climax shows in March for the reversal. As this chart busts 50 and holds it, count it as confirmation.

[technical negatives]

The uptrend is intact until as yet unseen technical negatives emerge.

A shooting star is not a reliable indicator.

What are unseen technical negatives to you?
You would not believe any technical negatives, though.

[Mike McQuaid]

DJ Transport Index $TRAN June '08 high to March '09 low reversed and corrected at 38% in May and 50% now in August. Discount the wicks on the daily chart to draw the upper trendline off the '08 high and you see price intersecting now. So we see some similarity to the NDX chart.
If The March reversal was simply originating wave 4 zig-zag of the downtrend it's A wave is out of character, being too tall. The C wave would have to be truncated to fit proportionally back to the '07-'08 highs. Thats not usually the case. The A waves are quick and small and the C wave extends. If it turns out to be wave 4 zig-zag it'll be king sized, a trader could make a kings ransom being long off the March low.

[majestic tiger]

carl futia uses simple channelling and price behaviour logic.
he makes good trending trades which is more than what most traders and analysts make.
and he knows his stop losses which is a good thing.

tallyho, you can wish to be whichever side of the trade since it is your money.
carl futia has come from where we all have so he can have his good and not so good days.

[simple channelling]

majestic tiger

explain how simple channelling and price behaviour logic project
1120 level by the end of October?

It won't be channelling that projects 1120 level. so what's his price behavior logic ?

[DG]

Here is a list of gurus and their track records:

http://cxoadvisory.com/gurus/

Everyone will need to decide individually if it's a good assessment or not.

[tallyho]

m-tigger:

Whoa big daddy...don't pretend to think I am a noob here to trading, I made an observation on his recent call. If you like his calls, feel free to follow him.

[majestic tiger]

tallyho all u said was "Then I am taking the other side of this trade because Futia was calling for a crash about a month ago that headed into a big rally"
is that how you will take a trade..
an observation to his call should be backed by some analytical comment and not just a mock.

[tallyho]

Thank you DG for that link. MJ, I am going to bow out, my humor was not well received by you, and I guess time will tell. I am not going to analytically disect Carl's forecast either. It is what it is. You and I differ in opinion as much as Mike McQ and DG do. Good luck trading MJ (and I mean that for real).

[October]

majestic tiger

Unless you can understand/explain his price behavior logic, October timing sounds like Carl's personal opinion, not technical analysis.

[yelnick]

miguel, we seem to be in minor wave 2, which began Mon and has continued to this am. Makes it problematic whether I will win my bet (10K by Aug31). It is breaking as a flat which suggest wave 4 will be a triangle.

[yelnick]

Puravida, thanks for your long and thoughtful comment. I can only add that we should be cautious about the power of regulation to effect the change we want. Campaign finance reform has not worked; the money finds a way to flow around the blockages. Wall Street has become more Demo than Repub, and has had four big boondoggles in the past 15 years (IPOs, housing/MBSs, commodities, bailouts); the re-regulation proposed by Obama is essentially just a reshuffling of what is already there, so their campaign contributions were well spent. The census bureau says we have 45M uninsured, but this is not the same thing as 45M without healthcare, and a lot of the 45M are either on transition between one plan and another; could afford health insurance but decide not to buy; or are covered by existing programs but are not pursuing coverage.

We have ended up with government by crisis, where the crises are grossly overblown and the solutions are so rushed the bills are not even read by the legislators.

Instead of a crisis being a terrible thing to waste, it is a terrible thing of waste.

[DaveT]

Awesome blog. Provides insight that is hard to find elsewhere.

The Steve Keen video at this link backs up your analysis with a couple of its charts:
http://globaleconomicanalysis.blogspot.com/2009/08/global-debt-bubble-causes-and-solutions.html

I specifically refer to the charts which show how we always got out of past recessions by levering up. Then look at the debt chart which is now going exponential and the other charts which show that there is not an attendant economic increase.

[Miguel]

Yelnick and others: if what we are witnessing is the (very) minor E, then the 3 wave which should begin tomorrow or the day after tomorrow and should give gold the final chance to go through the 1000 mark (or reaching it and give the honour to the final minor 5th wave).
If this fails to materialise, we will have to wait for another sprint later and gold will retract to the support 870 or so.
Do you agree on this scenario?

[Miguel]

please read very minor 2 instead of "E"

[DaveT]

Yelnick, re: your comment "I can only add that we should be cautious about the power of regulation to effect the change we want."

Let me go one step further. If economic regulation is needed then something is basically wrong with the system because a free market system is self correcting. Regulated economic limits are only needed in our economy because of fractional reserve banking. If this cancer was excised from our lives then none of these systemically significant bubbles could ever occur. People tend to be a lot more careful when they are spending their own money than when they are borrowing OPM to spend.

That is not to say there would not be fads like pet rocks which would suck money away from the real economy into something useless and unproductive. It is also not to say there would not be fraud. But both of these things would be naturally limited by a reduction in the money supply that must come when the artificial multiplier effect associated with fractional reserve lending is eliminated. People would not longer go around saying "cash is trash". The currency would regain respect and people would think twice about how much they paid for things and indeed how many things they were buying.

Get rid of fractional reserve lending and you can get rid of most of the rules and all of the bureaucrats, paperwork, fines and other hidden taxes on the economy that accompany the need to control legalized counterfeiting.

Of course we would still need environmental laws because there is always some ass who will destroy the planet for his short term gain but we do not need global programs like cap and trade which, after close analysis, care nothing about environmental concerns and are indeed simply a sneaky method for taxation.

[yelnick]

DaveT, the financial sector is unusual in that it needs regulation even within a free market paradigm. It plays a different role than other industrial sectors since it provides the fuel for commerce. I would prefer a two tier system: safe banks highly regulated but backed by the Fed and FDIC; and unsafe banks who are free to play but no bailouts to depositers or shareholders. We almost had that with the shadow banking system but we let the two sorts of entities mingle & engage in off balance sheet (off the regulated books) shenanigans. As to environmental issues, there is the huge problem of accounting for externalities in the market price, and there again a regulatory scheme is required (or an insurance scheme). What free marketeers tend to forget is there is a role for government to police the chicanery and protect the weak from the strong. Sadly, the strong usually capture the regulators and plague the weak within a context of claims of righteousness.

[DaveT]

Yelnick,
"safe banks highly regulated but backed by the Fed and FDIC; and unsafe banks who are free to play but no bailouts to depositers or shareholders."

I think that is essentially what Glass Steagall tried to do with the separation of commercial and investment banks. But, since it was control via regulation vs. control via the natural self limitation of a free market, the Ponzi scheme of fractional reserve banking took control as it must lest it collapse. The political pressure was just too great to resist. Each time the economy tried to right itself the Ponzi was reinforced.

This is why government economic guarantees and regulations simply don't work. If government sticks to its own rules (i.e. Glass Steagall) then when the economy hits the eventual rough patch they cannot debt their way out of it. When this happens then people, who have been trained to believe that government is in charge of the economy, vote those out who do not produce "growth" even if it is a fake, debt infested unsustainable growth. So what you are left with is a game of economic musical chairs which seems great until the music stops and then there is panic and many good people get screwed for having no sin short of being ignorant about the nature of the Ponzi.

Fractional reserve banking simply pulls future demand forward. It does not create net additional demand. In fact, it reduces it in aggregate because the banksters get to scurry out the back door with hundreds of billions for doing what should essentially be clerical work. FRB allows a small segment of the population to gamble its way into massive money and concentration of power that they simply do not deserve based on the economic value add of their labor. It is so obviously a scam that it blows me away how few people seem to get it.

In our economy, credit is far bigger than the monetary base. Thus, credit IS money, or nearly so. If money is the root of all evil then credit is the Devil incarnate. Get rid of the ridiculous credit and a whole host of problems just evaporate. Whatever problems are left after that I would consider regulating.

-DaveT.

[Mamma Boom Boom]

>>>If economic regulation is needed then something is basically wrong with the system because a free market system is self correcting.<<<

That is 'exactly right'!

Problem is: when it came time correct the excesses, Bush, Paulson, and Chopper-Ben intervened, with trillions of dollars of tax payer money, so that their friends could get their multi-million dollar pay checks. And the mostly conservative congress went along with it.

It was painfully clear, at that moment, that we do not live in a free market society, or a democracy. Very painful!

Ned