market history


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Totally ignoring all of the media stories, fundamentals, anything other than the 3 charts, the charts would suggest that for a long while since 2000, the market has gone essentially nowhere until the current breakout.

The charts would suggest that the breakout has a long way to run yet. In fact, it is just getting started.

I’ve blogged about the eventual breakout previously and recommended hanging on, which I still would advocate, purely on a chart basis.

The important thing is that the ‘news’ around the breakout, as it was historically, is usually bad. There are all manner of problems. Hang on, somehow.

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The Dow Jones Index has broken 20,000. Pretty impressive. Historic. Will it hold? Typically there is a bit of a pull-back and then the market moves forward.

 

 

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The whole problem with the world is that fools and fanatics are always so sure of themselves, and wiser people are full of doubts”

–Bertrand Russell

I always have admired the writings of British philosopher Bertrand Russell, who died in 1970, 14 years before the Russell 2000 Index was created and compiled.

The Russell Index, his “namesake,” now may be priced to perfection.

Nothing moves in a straight line, especially in the markets.

Fade the Trump small-cap rally, as hope seems to be triumphing over experience.

In “Donald Trump, You Are No Ronald Reagan (Part One)” and “Yell and Roar … and Sell Some More,” I struck a cautionary tone about economic and market cycles, political partisanship leading to delays or more modest tax reductions, and the leadership skills and avowed policies of President-elect Trump compared to those of President Reagan. I also compared the current market advance with the honeymoon the markets delivered 35 years ago. (I will be expanding on my thesis and concerns this week).

This morning, in “How Long Will We Ignore the Negatives of This New Presidency, ” Jim “El Capitan” Cramer voices and adds to many of my concerns.

While respecting the strength of the last month’s stunning and almost parabolic move (see Bertrand Russell’s quote above) and recognizing that the only certainty is the lack of certainty, the markets to this observer are overvalued on almost every basis and the reward versus risk is substantially tilted toward the downside.

My pal David Rosenberg, chief economist and strategist with Gluskin Sheff, shares my view that the market is being over optimistic:

“If you were to do a fair-value estimate of the multiple against where it is today, you could actually then back out what the implicit earnings forecast is. And right now, it’s 30%. That is the implicit earnings increase that is priced in. So if you’re buying the equity market today, just know that you’re buying an asset class writ large that is expecting a V-shaped +30% bounce in earnings growth over the course of the coming year. Trouble is, that it is a 1-in-20 event — and normally that 1 in 20 happens early in the cycle, not late in the cycle …. Actually, six quarters of negative comparisons. I mean, if the earnings recession is behind us and if there are Trump tax cuts ahead of us — even if I allow for the full brunt of corporate tax cuts — and if I allow for whatever nominal GDP growth is going to be, I still can’t get earnings growth much above 10%. 15% is a stretch, but you might still get there. But even that doesn’t get you to a 30% earnings expectation.”

–Welling on Wall Street: An Interview with David Rosenberg

So, what is the best short? Perhaps it’s the Russell Index.

“When all the forecasters and experts agree, something else is going to happen.”

–Bob Farrell’s Rule #9

In keeping with my negative market outlook for 2017, I am making Direxion Daily Small-Cap Bear 3x ETF (TZA) , at $18.78, my Trade of the Week. Here’s why:

* Over the last year the Russell Index has materially outperformed the broader indices: Since mid-December 2015, the Russell Index has doubled the performance of the S&P Index (up 24% compared to 12%). As Bertrand Russell noted, “extreme hopes are born from extreme misery” — at least if you have been short iShares Russell 2000 ETFIWM! (Note: In its history, the Russell Index never has been as extended relative to the Bollinger Bands.)

* The recent widening in relative performance (Russell vs. S&P) may be a function of the president-elect’s policies toward protectionism and against globalization; the timeliness and extent of impact might be overestimated.

* The Russell Index is more richly valued than the broader indices. The 2016 price/earnings multiple for the Russell Index is 32x and 25x 2017 estimates (before any new effective tax rate) on non-GAAP earnings. The S&P Index is trading at 19x 2016 non-GAAP and 17.5x 2017 estimates. However, the S&P multiple of GAAP is 26x — there is no currently available GAAP multiple of the Russell.

* As interest rates gap higher, the cost of capital is rising for small and medium-size companies: This is occurring at a speed far faster than many previously thought. Large, multinational companies have better and cheaper access to capital through the markets and/or on their cash-rich balance sheets. (Note: This morning’s move in the 10-year U.S. note yield to more than 2.50% may be a tipping point).

* The rate of growth in the cost of commodities and services is starting to accelerate. This hurts smaller domestic companies that are less diversified compared to the larger companies. Remember, mono-line smaller companies often have less pricing power than their larger brethren. (Note: This morning’s $2.35 rise in the price of crude oil to nearly $54 also may be a tipping point).

* Smaller capitalized, domestically based companies are not beneficiaries of possible repatriation of overseas capital. As Russell wrote, “Sin is geographical!”

* The president-elect’s infrastructure plans likely will be slow to advance. There will be some opposition from both parties, members of which will be looking for a revenue-neutral and not “budget-busting” fiscal jump-start. At best, this is a 2018-2019 event. Moreover, the build-out could benefit some of our larger companies (e.g., Caterpillar(CAT) and United Rentals (URI) ) over smaller companies. In the broadest sense, however, infrastructure build-outs rarely contribute to sustained prosperity; just look at the sophisticated and state-of-the-art infrastructure in Japan.
That build-out has failed to bring sustainable economic growth to that country. The same can be said for Canada, which is mired in a 1% Real GDP growth backdrop despite Prime Minister Trudeau’s large infrastructure spending of years ago.

* The president-elect’s immigration policy — building a wall, limiting in-migration and exporting those who are in our country illegally — are not pro-domestic growth and could hurt small to medium-size companies.

* The president-elect’s China policy and broader protectionism policy could end up hurting the sourcing (impacting availability and cost) of many smaller companies, potentially squeezing profits by lowering margins and reducing sales.

Bottom Line

“All movements go too far.”

–Bertrand Russell

My view is that the Russell may soon stop crowing and I am moving toward a more aggressive short of that Index.

 

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I’ve highlighted that the 2 bond Kings are less than impressed with the move in stocks. The majority of articles however are very bullish for stocks moving forward. They are also bullish on the economy generally.

I haven’t really had time to sit down and really think my way through the issues, so I’m just reading the articles at the moment.

From a purely historical/technical perspective, this current market resembles somewhat the market of the 1970’s into the early 1980’s. The obvious difference however is that the interest rate environment is inverted.

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Ignoring the headlines, as headlines are headlines, the prolonged ‘nowhere’ finally broke out into a massive bull market. This coincided with a fall [for 30 years] of interest rates.

We have the massive ‘nowhere’ pattern. We don’t have an interest rate environment that can fall any lower. The only new direction is up, or a continuance of low interest rates.

‘Low’ would be anything up to 7%. As long as interest rates gradually move up to, and do not exceed that sort of number, we could have another bull market leg.

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One metric has accurately predicted the outcome of every presidential election since 1984 — the strength of the S&P 500 Index.

And right now, the S&P 500 is pointing to a Donald Trump victory on Election Day.

Bloomberg and CNBC noted this week that the stock market’s decline does not bode well for Hillary Clinton, the nominee for the incumbent Democratic party.

“Going back to World War II, the S&P 500 performance between July 31 and October 31 has accurately predicted a challenger victory 86% of the time when the stock market performance has been negative,” Sam Stovall, chief investment strategist at CFRA, told CNBC.

When stocks are going up, the incumbent party tends to win the White House. But the S&P 500 is down 2.2% since the last trading day of July.

Still, this election has hardly abided by historical standards. And the downturn in the stock market could actually be a result of election anxiety.

“This time around if the Democrats retain the White House, I will come up with two responses,” Stovall told CNBC. “One is that history is a guide but never gospel, and two, the negative performance by the market could be a reflection of the worry of domination that a Democratic sweep would bring.”

As Business Insider’s Elena Holodny noted this week, when it comes to markets, the past does not predict the future.

Daniel Clifton at Strategas Research Partners gave Business Insider additional context about this indicator earlier this year:

“Intuitively, this trend makes sense. If the economy is weakening, stocks should be declining and the incumbent party will likely suffer. Moreover, should it look like a new party is to take control of the White House, the change in control could add uncertainty to investors until the new President gets his or her rhythm.”

“In fact, we have found that ‘open’ election years, a year in which no incumbent is up for re-election have been tougher for stocks than presidential reelection and non-presidential election years. Interestingly, stocks have rallied in the past two (and rare) instances when a political party has received a 3rd term.”

“The S&P 500 increased 30 and 27% respectively in the year after Harry Truman won in 1948 and George H.W. Bush won in 1988. Sometimes the devil you know is better than the devil you don’t know.”

Other unconventional indicators have also indicated a Trump win on November 8.

An artificial intelligence system that has correctly predicted the past three presidential elections as well as the Democratic and Republican primaries said Trump will likely win, and a professor who has accurately predicted the outcome of every presidential election since 1984 came to the same conclusion last month based on a model he developed that uses a series of true/false statements to determine who is best positioned to take the White House.

And after the FBI announced that it’s reopening its investigation related to Clinton’s use of a private email server during her time at the State Department, the polls started tightening, putting Trump within striking distance of Clinton.

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Always difficult to predict consistently the market. Generally, due to inflation being constant, the nominal value of the market moves higher. There will still be crashes, bear markets etc and the real value may take extended breathers, but, ultimately, it’s better to be a bull than a bear.

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After Lehman Brothers fell over in September 2008, equities slumped, then rallied back to their previous levels within a week. Brexit isn’t Lehman, but the stock market is behaving similarly. The S&P 500 remains a little lower than it was immediately prior to the British vote to leave the European Union, but it has also snapped back.

Is this the right reaction to Brexit?

The lesson from unexpected failures is that due to the interconnectedness of trading world-wide, an unexpected result can place market participants on the wrong end of a trade.

Other traders will hold either that same trade, or a similar trade that can be impacted by the former.

The problem is increased and becomes unstable with how much leverage is contained in those trades. Zero leverage, then no-one is forced to sell and prices remain less volatile. Lots of leverage equals forced selling, which puts downward pressure on prices, an increase in volatility, which can [will] force additional selling….and so on.

Add in the problem of ‘liquidity’ and then you have a real problem.

Liquidity always…..always disappears just when you need it. If you also have fairly illiquid investments, then the problem is magnified.

How much leverage is in the system?

Depends on the strategies being pursued. Strategies, convergence strategies tend to use a lot of leverage and are especially prone to exogenous shocks, such as Brexit. Fixed income tends to be most conducive to convergence strategies. Look for spreads widening between Treasuries and Corporates. Spreads that continue to widen…suggest too high of a leverage in the system.

Banks usually provide the loans [finance] that leverages the system. Italian banks are under pressure by all accounts currently.

Bank customers most likely to crash the system….hedge funds, who have over leveraged.

For the fall out from Brexit, it is still early days yet. Maybe nothing of any consequence will occur, but then again, a significant number of major players were leaning the wrong way.

In the UK…which is a liquidity issue

A gigantic property fund is stopping people taking out money out for the first time since the credit crisis of 2008.

Savings and investment giant Standard Life froze withdrawals from its £2.9 billion ($3.8 billion) UK real estate fund after a flood of people tried to pull money out in the wake of the Brexit vote.

The Scottish-headquartered company suspended trade of the fund on Monday, blaming “exceptional market circumstances,” according to a statement emailed to Business Insider.

Standard Life says: “The decision was taken following an increase in redemption requests as a result of uncertainty for the UK commercial real estate market following the EU referendum result.”

Most funds will keep at least some of their holdings in cash so they can repay investors who wish to take their money out at any time. But Standard Life’s decision suggests this buffer has been overwhelmed. Property takes a relatively long time to sell so Standard Life is unable to quickly meet demands by simply selling off its investments. If it has to sell off a lot, that also means it could get a bad deal as it is in a hurry to offload.

Standard Life says in its statement:

“Unlike investing in equities, the selling process for real estate can be lengthy as the fund manager needs to offer assets for sale, find prospective buyers, secure the best price and complete the legal transaction. Unless this selling process is controlled, there is a risk that the fund manager will not achieve the best deal for investors in the fund, including those who intend to remain invested over the medium to long term.”

Standard Life, which has over 4 million customers worldwide, says the freeze is “to protect the interests of all investors in the fund” and will end “as soon as practicable.” The freeze lets it work on getting more money and stops investors panicking as at least they know where they stand.

‘2016 is shaping up to be a rerun of 2007’

It is the first time Standard Life or any other UK property fund has stopped investors withdrawing cash from a fund since the 2008 financial crisis and its aftermath, the BBC reports.

Investment bank Jefferies writes in a note to clients on Tuesday that while this year is unlikely to bring a re-run of the 2008 financial crisis for banks, “2016 is shaping up to be a rerun of 2007, with real estate open-ended funds having switched from monthly to weekly valuations and cut pricing by -5% last week given the uncertainty of real estate valuation since the Brexit vote.”

Jefferies’ Mike Prew and team warn that not only do Standard Life and other funds face a sellers market and a liquidity crunch, people also just don’t know how to value property in the uncertain post-Brexit world.

Prew and his team write:

“No one knows how this phony war in real estate markets will end up, but valuers are not inserting an ‘uncertainty clause’, instead adding a lower level of caveat with an ‘advisory note’. Brexit has affected the real estate market but there is no transactional evidence that the UK’s valuation methodology can rely on. The likelihood is a one-off Article 50 devaluation when enacted, but it could be delayed until 2017, and the market is left with the high-water valuation mark. Until then, there is no certainty of commercial property valuations.”

Put simply, until Britain agrees its new relationship with the EU, people don’t know how much an office block in Aldgate should cost.

The UK’s commercial property market, which the Standard Life fund is involved in, has been one of the quickest to take a hit from Britain’s decision to exit the European Union. The Financial Times reports that London property deals worth £650 million ($856.3 million) have collapsed in the wake of the Brexit vote two weeks ago.

Other commercial property funds have also been writing down the value of their investments in the wake of the Brexit vote — in effect saying the building they own aren’t worth as much as they were a few weeks ago now that Britain is on course to leave the European Union.

Aberdeen Property Trust has written off £128 million of value, the Telegraph reports, whileHenderson’s UK property fund wrote off £160 million of value last week.

 

 

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Harry Dexter White was one of the chief architects of the Bretton Woods system, indeed the person most responsible for the conference itself. All throughout World War II, it was White working at Treasury directly under Secretary Morgenthau who set up all the predicate conditions for the dollar achieving global currency status. He argued that American servicemen should use the dollar and only the dollar as they spread across the globe, overvaluing each local currency so that local populations might find nothing but tradition to block acceptance of the US dollar upon its arrival. For the Axis countries, there was to be only a dollar until such time as they had been politically transformed likely long after the war was over.

White had completed a draft plan for the postwar monetary world in March 1942. It was revised and “polished” before being presented to Secretary Morgenthau on May 8 of that year. In his letter to the Secretary, he gave equal treatment to the specifics of his intended arrangements but was careful to note that none of it would do any good if it were to languish within politics. In other words, what he wanted done would have to be subordinated for a time to how it could get done. To White, the only way forward was an international monetary conference.
To even get that far, however, Treasury had domestic American politics to overcome. There was some debate as to protocol: should Morgenthau go directly to President Roosevelt with the idea, or approach Secretary of State Cordell Hull first. Having sat in that office for almost a decade by then, Secretary Hull was not accustomed to being circumvented. When asked his thoughts on how to proceed, White apparently said, “hit them both at the same time”, meaning to inform FDR and Secretary Hull simultaneously.

Morgenthau ultimately decided to deliver his policy draft to the President first, to which FDR responded (as Morgenthau predicted) in seeking Hull’s input. From the President’s perspective, this could not be only a Treasury idea as it would have to have significant development and ownership among State, the Federal Reserve, and even the Board of Economic Warfare.

According to the book, The Battle of Bretton Woods by Benn Steil, the first meeting to address the postwar monetary paradigm was held on May 25, 1942, and it did not go well from the start. State’s representatives at the meeting Leo Pasvolsky and Herbert Feis argued matters of protocol and turf, forcing Morgenthau to the position that rivalry was the chief danger. He responded by holding another meeting only with more friendly faces (to Treasury’s side). Among them was a White House economist, indeed the first ever White House economist, Lauchlin Currie.

Morgenthau’s invitation to Currie was particularly blunt, asking him directly, “want to get in a fight?” The Treasury Secretary told the economist that he was convinced the State Department was already against the conference because, “we’ve got an idea and State hasn’t, and they don’t want anybody else to have any ideas.”

Lauchlin Currie had ended up at the White House via Harvard and a series of policy papers and a book all published in the first half of the 1930’s. His ideas were set widely against prevailing opinion, even at such a “conservative” institution as Harvard was in those days. In a January 1932 memo, Currie, along with co-authors Paul Theodore Ellsworth (who was best known for pioneering what would become the IS-LM framework of understanding Keynes’ General Theory concepts) and, who else, Harry Dexter White, advocated “vigorous” open market operations at the Federal Reserve to expand the level of bank reserves. Even that was deemed by the authors likely insufficient to get the US out of the depression, so in addition Currie, White, and Ellsworth advocated aggressive fiscal action to go with it.

Beginning in 1933, Currie wrote several articles and in several publications that further clarified his expansionary positions, including the great monetary distinction between money and credit. He wrote in 1934, “The merit of the proposal here set forth lies, in the writer’s view, in the fact that it divorces the supply of money from the loaning of money.” From that he accused the modern (as separate from the classical) version of economics at that time for confusing money and credit via what he called “an historical accident.”

In his 1933 article Money, Gold, and Incomes in the United States, Currie, a devoted follower of quantity theory, computed the first velocity variable not of transactions or money, but rather from national income. He argued that monetary control should be literal, and that only credit is left to banking. That led to his 1934 book The Supply and Control of Money in the United States where Currie theorized an ideal, as he saw it, monetary regime for the American system. Because the government was, in his view, responsible for the depression due to “almost complete passivity and quiescence” that somehow led him to believe the monetary answer lay in total government control. It wasn’t the government so much he objected to, rather the impeded and constrained government.

Shared in conjunction with Harry White, both of them at the time working at the US Treasury, Currie demanded that only government should control the quantity of all money and close money substitutes including demand deposits. He envisioned a government agency or several agencies that would all across the land buy and sell government securities in order to “precisely” expand and contract the level of deposits. Currie believed this was nothing like nationalizing the banking system because, again, money and credit were and are separate; only the functioning money supply within banking would be nationalized leaving banking otherwise undisturbed.

He correctly envisioned that most objections to his ideal system would be political, a fact that was realized in the New Deal era more than anyone might have imagined. But it also opened tremendous opportunity for those who saw the chaos as an opportunity not to be wasted. Currie would get his chance in 1934 after catching the attention of Marriner Eccles. When Eccles ascended to the Chair of the Federal Reserve Board, he brought Currie with him as his private secretary. That position at exactly that time in history allowed him to essentially draft the Banking Act of 1935 that set out the modern Federal Reserve System; which is why you can see Ben Bernanke/Janet Yellen in the positions he advocated seven decades before they did.

In a speech given by then-Chairman Bernanke to the Fourth ECB Central Banking Conference in November 2006, the Fed Chair noted the durability of a good part of Currie’s emphasis in modern monetary policy:

“In any case, the Federal Reserve began to pay more attention to money in the latter part of the 1930s. Central to these efforts was the Harvard economist Lauchlin Currie, whose 1934 treatise, The Supply and Control of Money in the United States, was among the first to provide a practical empirical definition of money. His definition, which included currency and demand deposits, corresponded closely to what we now call M1. Currie argued that collection of monetary data was necessary for the Federal Reserve to control the money supply, which in turn would facilitate the stabilization of the price level and of the economy more generally.”

With Currie’s contributions, as Bernanke credited, the Federal Reserve began in 1939 its first serious project on quantifying money and monetary statistics. By 1943, around the time White and Currie were reuniting to plan out what would become Bretton Woods (actually what would become the political battle over the plan deciding how the conference for the planning for Bretton Woods would go), the Federal Reserve published its first catalog on money and banking statistics.

Though measurement was a primary issue in the “ideal” monetary policy, there was just as much emphasis on politics. Currie often asked some variation of the question, “what good is precision if there is no legal authority or political will to use it?”

A good part of the Banking Act was devoted to politics by necessity. The Federal Reserve is solely an institution of Congress; it is not in the Constitution. By definition, the Fed is political. One of the causes he identified of the Great Depression was that, “America possesses one of the poorest, if not the poorest, monetary system of any great country.” It did not act as a “maladjustment-compensating factor” but rather a “maladjustment-intensifying factor” because of its contradictions. Currie identified, correctly, the hybrid system of, “the compromise of private creation of money with government control.” In his view, this vital and basic power must not be shared; therefore he had it destined to the enlightened few of “independent” government rather than the “imprecision” of the marketplace.

Up until that time, the Federal Reserve Act had given the Federal Reserve the mission to “accommodate the monetary and credit needs of commerce, agriculture, and industry.” Rather than a powerful institution of control and prestige, the central bank was a backwater instrument of the 19th century mechanics. Currie, along with Eccles, felt it necessary to deliver a broader mandate that would be specific enough to leave out political influence. Eccles wanted the Fed’s mandate changed to, “promote business stability and moderate fluctuations in production, employment, and prices.” In other words, he, like Currie, wanted the Fed out of the business of running nothing more than the seasonal flow of money from NYC to the interior and back again and into the business of running the whole economy (and doing so from only DC rather than in 12 districts).

Ironically, Currie and Eccles believed that this new mandate would, “resist political pressure for the use of its [the Fed’s] authority for purposes inconsistent with the maintenance of stability.” Currie expressly explained that such a mandate would actually strengthen the Fed since every Board action would be evaluated and judged by this objective; any attempt to interject partisanship into the monetary and economic affairs of the Fed would lead to impeachment of any Board member attempting it.

The new mandate did not, however, make it into the 1935 Act because of the strong objections from Senator Glass (despite, ironically, the heavy backing from Congressman Steagall). Senator Glass charged the mandate, “did violence to Jefferson democracy, since the effect of the change would be to give the central government too much power.” Senator Glass was right but also wrong, however, as Currie and Eccles were correct in that “too much power” would not be vested in the “central government” but in the independent body of the Federal Reserve Board – just as they wanted it. Glass was right only about what would be given not where it would be given.

None of Currie, White, nor Eccles were thinking about any of this in terms of power, specifically, but rather precision. They believed total government control over the money supply would lead to stability of credit and banking in the marketplace. That would further deliver stability in prices and overall economy. And to do it, they would in parallel design the new “science” of monetarism and quantity theory.

As anyone with any basic, common sense engineering knows, any system so deliberate with such raw inflexibility is destined to operate successfully only within the narrowest of tolerances. Deviate just that much and there is no incorporated ability to adapt. The whole arrangement would follow upon only one factor; that by politics and by economic “science”, the economy would only be stable if economists were right in both economics and now “their” money. It was a possibility none of them ever contemplated, enshrined in the basis for the Banking Act of 1935, further augmented in the Treasury-Fed pact of 1951, that shifted the Fed permanently toward economic management. As Eccles wrote in 1937,

“The economics of the system as a whole differ profoundly from the economics of the individual; that what is economically wise behavior on part of a single individual may on occasion be suicidal if engaged in by all individuals collectively; that the income of the nation is but the counterpart of the expenditures of the nation. If we all restrict our expenditures, this means restricting our incomes, which in turn is followed by further restrictions in expenditures.”

The Fed would be thus ever forward devoted to socialism (small “s”). Further, the Fed would also be not merely Platonic in its aims for the perfect economic republic, stripped by legal right of politics so that it could be empowered into perfect science and precision, it would be god-like in its execution and delivery; it would have to be. The one thing missing from all of this is anyone, other than Senator Glass, asking, “what if we are wrong?”

The system they envisioned did not permit such flexibility, a fact that Bretton Woods was forced to confront from its earliest days. Convention assigns 1971 as the end of it, but in reality the US defaulted on its gold obligations eleven years before in the creation of the London Gold Pool. The origins of the eurodollar itself around 1955 was due almost entirely to the cracks in the global reserve system that neither Currie nor White ever foresaw. Theirs was a static system of perfect knowledge somehow supposed to be applicable through all time despite the constant change and innovation all around everywhere.

Furthermore, these enlightened few never seem to grasp that inflexible systems only become more inflexible as they are challenged; and they are always challenged. It seems a blindspot always attached to centralized socialism that human nature can be perfectly expressed as if these great scientists will respond in purely scientific fashion and correctly to each trial; it is more than the pretense of knowledge, it is the pretense that socialists actually seek only knowledge rather than power.

Indeed, as Ben Bernanke himself noted in that same 2006 speech, though Currie and White were long gone (both accused of being Communists, though it isn’t clear whether either ever was) M1 was too well before Nixon slammed the gold window shut:

“However, during the 1960s and 1970s, as researchers and policymakers struggled to understand the sharp increase in inflation, the view that nominal aggregates (including credit as well as monetary aggregates) are closely linked to spending growth and inflation gained ground. In 1966, the Federal Open Market Committee (FOMC) began to add a proviso to its policy directives that bank credit growth should not deviate significantly from projections; a similar proviso about money growth was added in 1970. In 1974, the FOMC began to specify “ranges of tolerance” for the growth of M1 and for the broader M2 monetary aggregate over the period that extended to the next meeting of the Committee.”

So much for precision. Congress responded in 1977 by amending the Federal Reserve Act to direct the Federal Reserve to “maintain long run growth of monetary and credit aggregates…so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.” Though it echoes Currie’s Depression-era recommendations as far as the socialism of the Fed, it defiles the manner in which he suggested it be done. Credit and money were now lumped together in, as Bernanke and modern economists call them, “aggregates”; thus stripping modern monetarism from its necessary nuance, the only matter that actually explained both the rise and fall of the economy before and after the Great Crash. Currie in the 1930’s foresaw a permanent institution dedicated to precise handling; the Fed by the 1960’s and the 1970’s rather didn’t care anymore about such exactitude, operating more so on a standard of “good enough.”

That was once again the standard by which these economists in the 1930’s were initially seeking to overcome. Currie has observed that one of the most pernicious feedbacks of the Great Depression collapse was in the quest for liquidity itself. Writing, “One of the most disastrous developments in the whole depression was the scramble for liquidity on the part of thousands of individual banks and by their very scramble effectively precluding the possibility of liquidity”, he correctly observed the modern notion of liquidity; it isn’t contained in the monetary “aggregates” of money stock but in the action of individual financial actors to either supply it or deny it. Liquidity is an action that lies beyond any of the M’s.

This process does not just apply in the simple monetary factors of the Depression era; in fact, this was again observed in 2007 and 2008 in many other places that the inflexible, independent Fed never bothered to look. From credit default swaps to repo collateral, liquidity was impaired in such a way that no matter what mainstream or “extraordinary” policy the Federal Reserve undertook it made no difference whatsoever. The Fed failed on every count because it was institutionally incapable of success in any world except one that remains static for all history; “good enough” wasn’t even close.

Princeton economist Stephen Goldfeld deemed the monetary mystery of the Great Inflation the case of the “missing money.” As noted above, the Congressional power under the 1977 amendment to the Federal Reserve Act amounted to nothing because the adoption of targeting “aggregates” was not in any way an actual constraint, mostly because the economy is not obliged by monetary policy targets in the way that monetary theory believed. That statutory regime change was not imposed upon the monetary scientists at the Fed; far from it, the political influence was originated by them to tie more into their control. They never bothered to ask, “what if we are wrong?”

The stagflation of that period left no mistake about that question. In a way, that shows just how much better the 1970’s were than the 2010’s (actually the whole of the 21st century). It is often said and written that though we might experience stagnation now, it is at least absent the huge consumer price increases of the “missing money” age. This is false; the declaration simply assumes that the stagnation portion is equal between now and then, leaving the lack of “inflation” now the deciding factor. The stagnation we currently experience is far more nefarious and challenging, leaving the economy far worse off not just in outlook but more so in how to get out of it.

In the 1970’s, there was no argument as to what was wrong; that much was clear. Debate centered on how to stop inflation, not whether there was inflation in the first place. In the 2010’s, economists won’t even admit there is a problem, and spend all their time and effort trying to convince everyone that there isn’t. By every economic measure, the economy now is far, far worse than even the worst of the Great Inflation in the late 1970’s. From GDP to individual economic accounts, including the labor statistics, there is every reason to want to go back to the 1970’s than stay here. From cyclical peak to cyclical peak, 1973 to 1980, the BLS’ index of total hours worked increased by 12.1%, or 1.93% annualized. From 2007 to the latest update for Q1 2016, total hours worked barely increased at all, up just 1.31% total, or 0.15% annualized.

There may have been inflation at that time to erode wages and wreak downstream economic havoc, but at least the economy was producing at its most basic level. In this economy, the lack of basic production is taken for success by economists that are so inflexible that they force themselves to see the world entirely upside down. Monetary independence was never a virtue, it was the removal of all accountability as is the common theme of all socialism. When a small group of people are handed the unshakable ability to determine what is “good for you” it isn’t long before they determine everything they do is “good for you” even if they have to alter the standards for judgment. They couldn’t do it in the 1970’s, but now they can because the depth of disorder is more opaque and complex, reflective of the evolution of money itself.

Lauchlin Currie and Harry Dexter White saw the inherent flaw in a hybrid monetary system, part government control, part marketplace genesis, and determined to resolve it by imposing total government. What they actually did was foist a narrowed gaze upon the government agencies that believed in the socialist principle. All monetary policy from that time until now has been spent on “proving” its preconceptions about what it could do rather than asking the only relevant question, “what if we are wrong?”

Only once in recent history did the Fed actually confront such doubt, in June 2003, but only for the briefest of moments. As Bernanke’s speech just three years later showed, such doubt never lingered; his major theme was to suggest that monetary policy had learned from all its mistakes and the constant change. That obviously wasn’t true, proved beyond all doubt just nine months later, and still isn’t to this day; all the FOMC learned was that no matter how much it fails time and again, and how much words are warped beyond all actual meaning (recovery, money, stimulus), political independence is all that ever mattered or ever will. Not for the economy, of course, but the socialist principle that people can’t ever be trusted with it even if the central bank regularly removes a decade or two of healthy progress. And it didn’t even prevent another crash.

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Earnings recession history and market reaction.

Energy, which is in [large] part to blame for this current series of earnings’ misses has always been a significant component in the over-all market’s capitalisation.

Weakness in energy, is then almost a weakness in the market…in respect to earnings.

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CHAPEL HILL, N.C. (MarketWatch)—Might a recession be averted after all? The odds that it might got a major boost earlier this week, when the Conference Board reported its index of leading economic indicators rose in March, breaking a three-month downtrend.

The Conference Board concluded the economy for the rest of this year would experience “slow, although not slowing, growth.”

Even so, corporate profits remain in a serious earnings recession that shows no signs of abating. Even if Wall Street analysts’ forecasts are correct (they’re usually too optimistic), earnings per share for the S&P 500 SPX, +0.00% over the four quarters through the end of March will be 16.2% below than where they were in the third quarter of 2014.
Furthermore, those forecasts (if correct) will show that the first three months of 2016 are the fourth consecutive quarter of lower year-over-year earnings for the S&P 500. The last time that happened was in 2008 and 2009, and I need not remind you of the Great Recession that accompanied that earnings downturn.

Why wouldn’t the same thing be happening now?

Realizing that “this time is different” are the four most dangerous words in the investment lexicon, I searched the historical record for any prior instances of an earnings recession that wasn’t accompanied by an economic recession. Surprisingly, I found several.

This time might not be all that different, after all.

Take a look at the chart at the top of this page, which plots corporate profits since 1980; economic recessions are shaded. Notice that while economic recessions are reliably accompanied by earnings recessions, the reverse isn’t always the case.

One stark example occurred between the third quarter of 1985 and the fourth quarter of 1986, during which total corporate profits fell by 26%. Yet, as you can see from the chart, a recession was nowhere in sight.

Perhaps even more surprising is what happened earlier this century: Corporate profits bottomed out in the fourth quarter of 2000 and thereafter began to rise at an impressive pace. Just one quarter later, they were already 5% higher. And, yet, according to the National Bureau of Economic Research, a recession began in March of 2001—after corporate profits had begun growing.

Why might the current earnings recession be one of these occasions in which an economics recession doesn’t occur? One obvious possible explanation is the extent to which recent quarters’ earnings losses have been concentrated in just one sector: energy.

After excluding that sector, Standard & Poor’s data reveal that earnings per share in the first quarter would be at an all-time high. This means the recent earnings recession is far different than those in the past in which earnings declined across all sectors—as they did, for example, in 2008 and 2009.

To be sure, this doesn’t guarantee that a bear market isn’t imminent. As the historical record also shows, many past bear markets have occurred unaccompanied by a broad economic downturn.

But you should think again if you were bearish on stocks because you believed the recent earnings recession would inevitably lead to an economic recession.

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