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Thread: more weekend commentary - Diverging Like It's 1929

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    Default more weekend commentary - Diverging Like It's 1929

    this entire article at is worth reading and understanding ... but following are some important snippets


    (snip)"With the financial world fixated on Draghi, Bernanke and endless QE, global markets now wildly diverge from economic fundamentals. Many are content to celebrate, holding firm to the view that financial conditions tend to lead economic activity. Markets discount the future, of course. And, traditionally, an easing of monetary policy would loosen Credit and financial conditions - spurring lending, spending, investing and stronger economic activity.

    Importantly, traditional rules and analysis no longer apply. Monetary policy has been locked in super ultra-loose mode now entering an unprecedented fifth year. Here in the U.S., financial conditions can't get meaningfully looser. The Federal Reserve has pushed corporate and household borrowing costs to record lows. Liquidity abundance will ensure near-record 2012 corporate debt issuance. "Loose money" has already had too long a period to impact decision making throughout the economy - with decidedly unimpressive results. Arguably, previous unfathomable monetary measures some time ago created dependencies and addictions that are increasingly difficult to satisfy.

    Clearly, monetary policy is exerting a much greater impact on the financial markets than it is on real economic activity. In the U.S. and globally, market gains are in the double-digits, while economic growth is measured in dinky decimals. The vulnerability associated with elevated securities markets has tended to only compound the issue of systemic fragility, and policymakers have responded to heightened stress with only more extraordinary policy measures. Recent weeks have provided important confirmation in the Bubble Thesis.

    Amazingly, in the face of exceptionally buoyant securities markets and an expanding economy, the Federal Reserve is apparently at about to embark on yet another round of quantitative easing ("money printing"). Few expect this to have much impact on the real economy, but it is clearly having a major impact on already speculative financial markets.

    I've always feared such a scenario: Severely maladjusted Bubble Economies responding poorly to aggressive monetary stimulus, spurring policymakers into only more aggressive stimulus measures. Meanwhile, financial fragility mounts, as Credit systems continue to rapidly expand non-productive debt. Securities markets become dangerously speculative and detached from underlying fundamentals.

    Students of the late-1920s appreciate how late-cycle policy-induced market and economic distortions laid the groundwork for financial collapse and depression. Especially in 1928 and early-1929, highly speculative financial markets diverged from faltering global economic fundamentals. Our nation's business came to be precariously dominated by "money changers," financial leveraging and market speculation.

    But we don't have to look back to late-cycle "Roaring Twenties" excess for examples of the danger of markets disconnecting from fundamentals. From April 1997 to July 1998 the Nasdaq Composite jumped 90%. The marketplace had turned quite speculative, although excesses began the process of being wrung out during the August-October 1998 Russian collapse and LTCM crisis. Fatefully, the Federal Reserve bailed out LTCM and the leveraged speculating community, while orchestrating a liquidity backstop for financial markets generally. The consequences continue - and they're no doubt momentous.

    Rather than chastened, the speculator community was emboldened back in late-1998. Not surprisingly, loose monetary policy combined with a market backstop had the greatest impact on the fledging Bubble at the time gathering momentum in technology stocks. The Nasdaq Composite rose from about 1,000 in early-October 1998 to its historic March 2000 high of 4,816.

    It's certainly not uncommon for individual stocks - or markets - to enjoy their most spectacular gains right as they confront rising fundamental headwinds. Indeed, whether it was the DJIA in 1929 or technology stocks in late-99/early-2000, deteriorating fundamentals actually played an instrumental role in respective dramatic market rallies. In both case, bearish short positions had been initiated in expectation of profiting from the wide gulf between inflating stock prices and deflating fundamental backdrops. In both cases, short squeezes played a prevailing role in fueling "blow off" speculative rallies.

    Actually, the most precarious backdrops unfold during a confluence of serious fundamental deterioration, perceived acute systemic fragilities, aggressive monetary policymaking and an already highly speculative market environment. This was the backdrop during 1929 and 1999, and I would argue it is consistent with the current environment. Excess liquidity and rampant speculation drove prices higher in '29 and '99, as the unwinding of short positions (and the attendant speculative targeting of short squeezes) created rocket fuel for a surging market. Over time, intense greed and fear and episodes of panic buying overwhelmed the marketplace. Would be sellers moved to the sidelines and markets dislocated (extraordinary demand and supply imbalances fostered dramatic spikes in market pricing and emotions). Market dislocations - and resulting price gains - were only exacerbated when those watching prudently from the sidelines were forced to capitulate and jump aboard.

    The technology Bubble was spectacular - but it was also more specific to an individual sector than it was systemic. Today's Bubble is unique in the degree to which it encompasses global markets and economies. Systemic fragilities these days make 1999 appear inconsequential in comparison. The backdrop has more similarities to 1929 - and, not coincidently, policymakers are absolutely resolved to avoid a similar fate. Thus far, policy measures have notably succeeded in fostering over-liquefied and highly speculative markets on a manic course divergent from troubling underlying fundamentals."(snip)

    (snip)"In previous CBBs I have noted how asymmetrical central bank policymaking and market backstops over the past two decades nurtured a multi-trillion global leveraged speculating community. I have also explained how massive central bank liquidity injections have bypassed real economies on their way into an increasingly unwieldy global pool of speculative finance. I have further noted how global markets have regressed into one big dysfunctional "crowded trade." And now the Draghi and Bernanke Plans have dealt a severe blow to those positioned bearishly around the globe. We can now contemplate the behavior of highly speculative and over-liquefied markets perhaps operating without the typical checks and balances provided by shorting and bearish positioning.

    Draghi and European policymakers must be giddy watching bears get completely run over. The truth of the matter, however, is that the bears are in no way responsible for what ails Europe. Indeed, the deep financial and economic structural deficiencies were created during environments where long-side debt market speculation was rife - and an over-abundance of mispriced finance sowed the seeds of future crises. Regrettably, this process remains very much alive as policymaking ensures Bubble Dynamics further embed themselves around the world.

    From my perspective, the key issue is not whether the ECB finally has a plan that will resolve Europe's debt crisis - its coveted big bazooka. Monetary policy won't solve Europe's deep structural problems anymore than QE will resolve U.S. economic maladjustment and global imbalances. Indeed, there is little doubt that the Draghi and Bernanke Plans are only exacerbating global systemic fragilities. They've bought some more time, but at rapidly inflating costs. We desperately needed global policymakers working assiduously to extricate themselves from market interventions and manipulations. They've again done the very opposite."(snip)

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    Default Re: more weekend commentary - Diverging Like It's 1929

    To me this was the the point.

    "Clearly, monetary policy is exerting a much greater impact on the financial markets than it is on real economic activity."



    The Federal Reserve has abdicated its responsibility to prevent asset bubbles and the their resulting crashes.... The market knows this and bids up prices... Awaiting the next reflation trade.
    The country has been looted.

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    Default Re: more weekend commentary - Diverging Like It's 1929

    ^^^ Indeed ! Today there are tons of commentaries about the strong likelihood of the FED instituting a QE3 program at this week's FOMC meeting. World market prices for oil, gold, corn etc. appear to be 'off to the races', with US stock share prices also rising for no real economic reason ( well one reason ... the US Dollar has arguably lost 5% of its 'purchasing power' over the course of the past few weeks ). Some even point to 'Crack-Up Boom' theory.


    (snip)"Professor David Hackett Fisher in The Great Wave, Price Revolutions and the Rhythm of History writes that for the last eight hundred years, periods of economic and social stability have been intermittently interrupted by waves of rising prices.

    Each of these great waves according to Professor Fisher culminated in the economic and societal collapse of the existing order, bringing to an end the Middle Ages, the Renaissance, the Age of Enlightenment, etc.

    During each great wave: …Food and fuel led the upward movement. Manufactured goods and services lagged behind. These patterns indicated that the prime mover was excess aggregate demand, generated by an acceleration of population growth, or by rising living standards, or both.

    … Prices went higher, and became increasingly unstable. They began to surge and decline in movements of increasing volatility. Severe price-shocks were felt in commodity movements. The money supply was alternately expanded and contracted.

    Financial markets became unstable. Government spending grew faster than revenue, and public debt increased at a rapid rate…Wages, which had at first kept up with prices, now lagged behind.

    Returns to labor declined while returns to land and capital increased. The rich grew richer. Inequalities of wealth and income increased. So did hunger, homelessness, crime, violence, drink, drugs, and family disruption.

    ..Finally, the great wave crested and broke with shattering force in a cultural crisis that included demographic contraction, economic collapse, political revolution, international war and social violence

    pp. 237-238, David Hackett Fisher, The Great Wave: Price Revolutions and the Rhythm of History, Oxford University Press, 1996


    Great waves take 80 to 160 years before they end in the eventual decline and collapse of existing epochs. Today, another great wave is about to crest and break; and the changes could be even more extreme as the amplitude of change is greater than in any previous wave.

    The current great wave began in 1896. That it could crest and break in 2012 could be a coincidence. Or, it may not.

    GOLD AND THE CRACK-UP BOOM

    …[during] the crackup boom...the flight into real values begins, and the whole monetary system founders. - von Mises

    Von Mises’ predicted flight into real values—gold—is now underway despite the best efforts of today’s kreditmeisters to diminish the allure of the only safe haven left to those fleeing paper money’s now burning mansion.

    One of the foremost proponents of the flight to gold is famed stock market analyst, Richard Russell. According to the Hulbert Financial Digest, Russell’s The Dow Theory Letter is tied for top place as a market timer on a risk adjusted basis since 1980.

    A leading financial analyst with a stellar reputation timing stock market trends, Russell’s comments regarding today’s stock markets and gold should be seriously considered and, if appropriate, then acted upon."(snip)

    ... from

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