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Start with an epic disaster. Enjoy the first stage of the recovery. You don't even need to see much improvement, just the lack of additional disasters would suffice. This is nearly a sure thing. There's almost no volatility. The stock market only goes up. It won't feel like it at the time though, since most investors are still so shell-shocked. This phase lasts one year.
Phase Two: A Return to Normal
There is a wall of worry to climb. Investors can still remember the epic disaster. Volatility is back as investors aren't quite sure what will happen next. It pays to be an investor for those with the stomach for it though. This phase lasts two years.
Phase Three: The Calm Before the Storm
The market's been rising and all risk is seemingly gone. All thoughts of the previous epic disaster are forgotten in the name of greed. Since the market only goes up over time again (and everyone knows it), volatility disappears as investors buy all dips and congratulate each other profusely on the easiest money they've ever made (while chastising the bears for being so incredibly stupid, who in turn begin to capitulate in droves). This phase lasts two years.
Phase Four: The Storm
25-sigma event! WTF! Nobody could have seen this coming! The very foundations of our economic society are called into question. Mechanisms are put into place so that "the unexpected" never happens again!
Hey, it's just a theory. Perhaps I can present some evidence that backs the theory though. (I actually used the evidence to help create the theory.)
The following chart shows the complacency in the stock market in the 6 years following recent epic stock market disasters (the 1970s, the dotcom bust, and the housing bust).
Click to enlarge.
Each data series shows the amount the inflation adjusted S&P 500 index monthly average is below the bull market monthly average peak.
As seen in the green data line (starting in July of 1982), investors were way too complacent heading into the crash of 1987 (and the early 1990s recession that followed).
As seen in the blue data line (starting in February of 2003), investors were way too complacent heading into the Great Recession.
As seen in the red data line (starting in March of 2009), investors may be way too complacent right now. Just look at that lack of volatility (and the downward trend in it).
"History doesn't repeat itself, but it does rhyme." - Mark Twain
Other than to strongly suggest that there are no sure things (especially at this stage of the recovery), this is not investment advice.
Source Data:
St. Louis Fed: Custom Chart
14 comments:
If the Fed is data-driven wrt "policy" now, they can throw more gasoline in the general direction of the fire.
Like Japan's relationship between the BOJ and the Finance Ministry, the Fed can literally give our Treasury Department a blank check.
All this requires is the will of Congress to deposit it.
It won't bounce, even if Congress wrote in one "CASH" as the payee and "one quadrillion dollars and no/100" as the amount.
This is where the general Westminster system of Japan is more efficacious, in that the executive and legislative are run by the same people (and after Abe put his guy in charge of the BOJ, everybody's working together).
Policy-wise, I don't expect anything positive from this Congress or the next. Looks like the outright negative stuff has been taken away from the mischief makers at least.
I'll be watching the data, LOL.
Mark Twain is the best American writer by such a vast distance. Hell, he's good enough to be mentioned in civilised company.
Troy,
It won't bounce, even if Congress wrote in one "CASH" as the payee and "one quadrillion dollars and no/100" as the amount.
Just for the sake of a theoretical thought experiment, let's work through this extreme idea.
If one quadrillion dollars instantly appeared, what would happen to nonfarm payrolls over the following year?
I believe the unintended consequences would far outweigh the intended consequences. I would therefore claim that nonfarm payrolls would actually fall.
I'm being dead serious. No sarcasm intended.
dearieme,
Mark Twain is the best American writer by such a vast distance.
Not H.P. Lovecraft (my favorite author)?
Hell, he's good enough to be mentioned in civilised company.
Civilised company? Bah! Damn you and your disclaimers! You might have me there, lol. Sigh.
The most merciful thing in the world, I think, is the inability of the human mind to correlate all its contents. We live on a placid island of ignorance in the midst of black seas of infinity, and it was not meant that we should voyage far. The sciences, each straining in its own direction, have hitherto harmed us little; but some day the piecing together of dissociated knowledge will open up such terrifying vistas of reality, and of our frightful position therein, that we shall either go mad from the revelation or flee from the light into the peace and safety of a new dark age. - H.P. Lovecraft
Now you know why I am drawn to exponential trend failures of the day. ;)
If one quadrillion dollars instantly appeared, what would happen to nonfarm payrolls over the following year?
That's just it though, government has to "appropriate" the money and then cut the checks.
There are ways they can more or less 'sterilize' this money injection such that it hits the paycheck economy dead-center, inducing more consume demand and not just inducing producer input inflation or higher land values.
The most suitable injective flow I fear is not taxing the top 10% of the economy the ~$1.5T they currently owe the SSTF, instead I suspect the Fed will just monetize this special bonds on an as-needed basis, around $50-$100B a year I guess.
$100B/yr funds 6 million boomer social security checks. 6 million retirees opens up 6 million jobs for Gen Y.
You are right that retirees don't consume as much as working folk, but that's OK, since Gen Y will take their place at the wheel and the Gen Y + Boomer combo will present more demand in our economy, demand to get more people working again fulfilling it.
http://research.stlouisfed.org/fred2/graph/?g=sS2
shows we're about 10M workers below the late 90s employment level.
It is true that most of this gap is missing mfg and construction jobs, and the former are probably gone for good, but since we can't import housing I think the Fed can do a lot for the nation in this area, funding new construction with printed money.
This actually gives us wealth-accretion for the printing and thus isn't inflationary (the added housing supply is deflationary).
The Fed funding zero-interest student loans with more forgiveness options would also be another injection point of Fed money.
I don't think any of the above are going to happen, but it's a possibility if and when the system gets serious about putting people back to work (a la the 1930s) here.
Troy,
It is true that most of this gap is missing mfg and construction jobs, and the former are probably gone for good...
It is my belief that the rapid advance in technology is not going to limit itself to manufacturing jobs (not even close).
Jobs in general are being attacked from all sides by rapid advancements in technology. This should be a very, very good thing but for reasons we have both discussed at length, it is not the good thing it is advertised to be if people cannot find work (and are not compensated in some other way).
The Future of Drawing Blood; A Robot Phlebotomist
In the United States alone, there are a billion blood draws a year. That's a potential $9 billion market for robot phlebotomy.
My girlfriend's training to be a Phlebotomist as a stepping stone to a nursing degree. She better hurry along!
Picture the retiring boomer phlebotomist who is simply replaced by a robot rather than that job going to the next generation. What's the next generation supposed to do to come up with the income to buy their first house? And if they cannot buy one, then what is that going to to do construction jobs?
It's just one big cluster@#$%.
You might both be right. From a practical stand-point we might need another market crash and money velocity seizure to induce TPTB to go full retard, er, full WPA.
AllanF,
I'm picturing Janet Yellen's first verbal response to the money velocity seizure.
"For the love of all that is holy, deploy the TTDS™ (Tropic Thunder Dome of Safety)!"
It will be interesting to see how effective the dome will be if we're already in ZIRP when it is deployed.
And when I say interesting, I actually mean terrifying, lol. Sigh.
Gallows humor.
At the risk of sounding like a Commie, (sheesh, what is wrong with the world!?! -- I found myself defending Putin against Obama at another blog this evening) that's the problem with income disparity.
When the only velocity is coming from the top 10%, and their income growth is entirely dependent on an asset bubble, a prick to that asset bubble causes the whole system to seize up.
I was just reading CP's blog where in the comments he asks, I assume rhetorically, why the worsening booms & busts. I reckon I'll point him at this. Funny how the two blogs have converged. He isn't your alter ego is he. All this talk about EE's and I-bonds and not even stocking up on nickels, while he's buying impaired bonds from shorted common stock. I'm starting to think you're the same guy. ;)
AllanF,
When the only velocity is coming from the top 10%, and their income growth is entirely dependent on an asset bubble, a prick to that asset bubble causes the whole system to seize up.
Yeah. And that top 10% are always trying to figure out the newest invention that will eliminate high paying jobs. Some might argue that they are getting especially good at it lately (cyclical recoveries notwithstanding).
Funny how the two blogs have converged.
Helix
Attempts at quarantine result in mutiny and attempted escape, and communication with the outside is mysteriously cut off. It is unclear at first whether the goal is a bio-weapon or to transform humans in some way, and there are two variants of the virus. The first is immediately fatal with no cure. Those infected with the second virus become dangerously violent, spreading the infection to others, with a small percentage eventually regaining some normality if treated as it seems several characters have already been infected and cured. Those cured seem to have the ability to control the infected.
Don't even know why I bring it up. Neither of us are violent near as I can tell, lol. Sigh.
Just more gallows humor. ;)
Eliminating jobs, high paying or otherwise, is a symptom.
The disease is that the Fed's only schtick to restore the economy after a recession is to blow another asset bubble. Yet, after each pop, assets get more and more concentrated and the people holding those assets have to move faster and faster to beat the other survivors. The Fed is breeding super-bugs in the petri dish of capitalism.
(When not doing gallows humor, I'm sometimes good for overwrought metaphor. Hey it's better than puns. IMHO. ;) )
AllanF,
The Fed is breeding super-bugs in the petri dish of capitalism.
Oh, that's rich. Hahaha! :)
Hey it's better than puns.
Hay! Don't knock the pun door of opportunity!
Just as oil is high, so too are our fertile grass planes of the heartland. That's assuming we still have some pot to piss in of course. ;)
Can you post an update of this chart?
CP,
Unfortunately...
1. This chart died when my computer did. No plans to buy a new computer or the software. I could partially recreate it on our laptop but it would be a lot of work.
2. The FRED website now points out that this particular dataset (historical S&P 500) is copyright protected. I therefore don't feel comfortable making new charts that use it (and would be quick to delete this chart if anyone complained).
Sorry! :(
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