Thursday, May 31, 2012

Uncharted Territory

We almost fell off the chart today. It would not be the first time. I already had to rescale it once since first creating it (Certainty vs. Uncertainty).

The following chart shows how fast the yellow "You Are Here" point is moving in the first chart.

If this is a fear then...

1. Why are we moving so slowly?
2. Why aren't we moving closer to the deflationary zone?

I would argue that it might not be fear, at least not yet. It may instead be an increasing realization that the era of making easy money off of money is coming to an end. Put another way, I believe that there are too many investment dollars chasing too few good ideas.

Money, again, has often been a cause of the delusion of the multitudes. Sober nations have all at once become desperate gamblers, and risked almost their existence upon the turn of a piece of paper. - Charles Mackay

Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one. - Charles Mackay

Charles Mackay

Charles Mackay (27 March 1814 – 24 December 1889) was a Scottish poet, journalist, author, anthologist, novelist, and songwriter, remembered mainly for his book Extraordinary Popular Delusions and the Madness of Crowds.

Source Data:
FRB: Selected Interest Rates
US Treasury: Interest Rates

Wednesday, May 30, 2012

The Sarcasm Report v.162

May 30, 2012
What's Really Behind Europe's Decline? It's The Birth Rates, Stupid

If Spain, and other Mediterranean countries, cannot pay their bills now, these trends suggest that in the future they will become increasingly unable or even unwilling to do so.

Bills? That sounds an awful lot like debt. I thought birth rates were the problem. Says so right in the title. What's going on? If you have a lot of debt then you will need a lot of children to pay it? Oh, I see. That actually does make some sense.

What's a good annual population growth rate to fix the world's problems then? 1%? Yes! If we can achieve that growth rate over the long-term, then how much prosperity will we have in the year 4000?

2.7 quintillion people (2.7 million trillion people) paying bills! That's gotta be good!

Having a hard time picturing it? Can't blame you. Let me help.

That's 11.6 people per square inch of the earth's land surface. There will be so much prosperity we won't know what to do with it all. I sure hope everyone has a garden attached to the roof of their single-occupancy micro-vehicle as they whisk to and from work. Good times!

January 30, 2009
When Grasshoppers Go Biblical: Serotonin Causes Locusts to Swarm

In the wild, swarms usually appear after a rainy period followed by a time of drought. After rains, populations of grasshoppers explode, Burrows says, because there is food aplenty. But when the land becomes parched and grass scarce, the populations get pushed into smaller and smaller areas, becoming more packed as desirable pasture diminishes, he says. At a certain point of density, the swarm-inducing serotonin gets triggered and the locusts set off en masse to find greener pastures. After that, few things — other than an end to the food supply or an ocean — can stop them.

We're smarter than locusts! Nothing will stop us! Mwuhahaha!

Source Data:
World Population
Area of Earth's Land Surface

The Sarcasm Report v.161

May 30, 2012
Sears shares see mysterious drop

Why are shares of Sears Holdings (SHLD -8.97%) down?

The stock fell nearly 9% Wednesday afternoon, but there wasn't an apparent reason.

I blame pharrisa on the Yahoo message boards. The stock's down 35% since March 19, 2012.

March 19, 2012
Fake uptrend got broken last Friday

All down hill from here!

Without that fear mongering, the stock would be trading on its strong fundamentals.

SHLD Key Statistics

Profit Margin (ttm): -6.73%
Operating Margin (ttm): -1.07%
Return on Assets (ttm): -1.20%
Return on Equity (ttm): -42.49%
Qtrly Revenue Growth (yoy): -2.80%
Operating Cash Flow (ttm): -67.00M
Diluted EPS (ttm): -26.16
Short % of Float (as of May 15, 2012): 47.90%

St. Louis Fed: "This Time, It's Different"

May 18, 2012
The Relationships Among Changes in GDP, Employment, and Unemployment: This Time, It’s Different

During the recent recession, the observed decrease in GDP corresponded to a higher increase in the unemployment rate than Okun’s law would predict.


Our analysis suggests that in recent years there have been changes in the relationship between (i) GDP growth and changes in the unemployment rate and (ii) changes in the employment-to-population ratio and changes in the unemployment rate. These changes cast doubt on using these relationships to predict future unemployment.

Welcome to the party, pal.

March 21, 2012
The 5 Charts I Shared with My Tax Preparer

Jeremy Siegel's 3.5% Real Yields!

It's only a matter of time! Don't be concerned by today's new record lows!

February 2, 2011
More Dangerous Advice from Jeremy Siegel

All this means that Tips investors should beware. Although Tips may compensate holders for future inflation, the interest rate that they offer is far too low to offset the risk of rising rates.

July 11, 2011
The Real Math Behind Siegel's Mythical 3.5% Real Yields

As economic growth recovers and real rates rise, the price of Tips will fall leaving Tips investors with large losses in the face of accelerating inflation.

May 30, 2012
Oil headed for biggest monthly drop since 2008

Prices are falling on expectations that the world won't use as much oil this year as previously thought. Europe's financial crisis is the most immediate concern, but there have been plenty of signs of weaker demand.

See Also:
Sarcasm Disclaimer

Source Data:
FRB: Selected Interest Rates
US Treasury: Yield Curve

Tuesday, May 29, 2012

Hook, Line, and Stinker

The trend in red implies that each $1 in real credit growth helps create $1.15 in real net worth growth.

Unfortunately, a kind of a malaise of some sort has recently appeared and only some of it is understandable.

We are in this kind of malaise of some sort. Some of that is understandable. - Jamie Dimon, CEO and chairman of JPMorgan Chase & Co., June 25, 2011


Hook, Line and Stinker

An elaborate Rube Goldberg-type gag ends the cartoon. The Coyote uses a tiny slingshot to knock loose a stick holding up a watering can suspended on a wooden yardarm. The can tips and water pours onto a plant which has a wooden match attached to it. The plant grows and the match strikes against a rock and lights a stick of dynamite. On top of the dynamite is a boot with a brick in it. The blast sends the boot ontop of a teeter board, which rises and releases a mouse in a cage at the other end. The mouse runs to grab a piece of cheese on a scale. A weight on the other end of the scale falls, pulling the trigger on a rifle attached to a cliff. A bullet from the rifle ricochets off two metal bullseyes and knocks down an upright cannon. The wick on the cannon is lit by a nearby candle, which fires a ball that goes through two funnels and plummets on top of the unsuspecting coyote. After the coyote is bashed into the ground, 'The End' appears on the cannon ball.

Just like our economy, *nobody* could have seen it coming!

The Rube Goldberg-type gag begins at 4:48.


I've added a bonus trend line based on the observations of Anonymous in the comments. It shows the declining bang for the buck as we take on ever increasing amounts of debt.

Source Data:
St. Louis Fed: Custom Chart

The Era of Effortlessly Making Money

How's it looking?

Take personal income and subtract off wage and salary disbursements. In general, that's fairly effortless work. Right? Then adjust by population growth and inflation. That's what the following chart shows.

The "average" person makes just over $20,000 per year in non-wages. In real inflation adjusted terms, this amount has increased roughly $25 per month since 1959. Oddly enough, it isn't exponential growth. As seen in the chart, it is linear growth and it has grown like clockwork (0.995 correlation) for 50 years or more. It's the closest thing to a "sure thing" that I've ever seen.

So, what seems to be the problem? Let's zoom in a bit to show only the most recent years.

Since 2007, the growth rate has been reduced from $25 per month to just $5 per month. Further, it seems to have lost its "sure thing" clockwork status (0.055 correlation).

Some would argue that our problems are cyclical and the long-term trend will therefore resume. If true, expect the economy to recover, real yields to rise, and for volatility to all but vanish. When treated, time heals all wounds.

Others would argue that our problems are structural and the short-term trend will therefore continue. If true, expect the economy to stagnate, real yields to stay low, and for volatility to be the new normal. Left untreated, time festers all wounds.

I have been in the latter camp since the fall of 2004. It is and has been my opinion that the era of making easy money off of money is over.

And lastly, I want to point out a serious problem with the long-term chart. If we extrapolate back to the 1930s, then real non-wages go below zero. That's impossible. It can't happen. Therefore, it is a fact that the chart does not extrapolate well into the distant past. Since this is definitely true, why would we assume that the chart will extrapolate well into the distant future? Just something to think about as you ponder the "sure thing".

This is not investment advice.

See Also:
Trend Line Disclaimer
The "Sure" Thing

Source Data:
St. Louis Fed: Custom Chart

Monday, May 28, 2012

Quote of the Day

May 28, 2012
Treasuries Not Meeting Demand as AAA Debt More Expensive

“The question isn’t ‘I’m necessarily afraid of a bad outcome in Europe,’” Vogel said. “It’s ‘I don’t know how it gets better and so I need to reduce my exposure to Europe until I can make a sensible choice.’”

New York (Musical Tribute)

Source Data:
St. Louis Fed: Custom Chart

Solutions to All of Our Problems! v.5

We just need to step up our game in the 2nd half!

Urban Dictionary: 110%

A mathematically impossible amount to give (unless you borrow 10% from somewhere).

Coach: "I want you to give 110% out there!"

See Also:
Solutions to All of Our Problems!
Solutions to All of Our Problems! v.2
Solutions to All of Our Problems! v.3
Solutions to All of Our Problems! v.4

Source Data:
St. Louis Fed: Custom Chart

The Year 2050

Click to enlarge.

I think we can hit 100% but we'll need to stick to the plan.

1. More wars. More wounded veterans means more veteran benefits!
2. More retirement. Demographics! Social Security!
3. More health care. Medicare!
4. More poverty. Food stamps!
5. More unemployment. Automate! Outsource!

It isn't always about having more though. Sometimes it is about having less.

6. Less interest income!
7. Less space exploration!
8. Less infrastructure!
9. Less education!
10. Less freedom!

And lastly, more sarcasm. Can you really ever have too much?

Source Data:
St. Louis Fed: Custom Chart

Friday, May 25, 2012

Chart of the Day

Click to enlarge.

© 2005 Nina Aldin Thune

Oakland County, Michigan

The county's knowledge-based economic initiative, coined "Automation Alley", is one of the largest employment centers for engineering and related occupations in the United States. Oakland County has shared in the recent economic hardships brought on by troubles at General Motors, Ford, and Chrysler, although it has fared better than Detroit and Flint, as its economy is more diverse and less reliant on manufacturing jobs. All three automotive companies are major employers within southeast Michigan and have a significant presence within Oakland County.

Automation Alley

Automation Alley promotes regional prosperity through entrepreneurial and exporting assistance, workforce development and technology acceleration.

Source Data:
St. Louis Fed: Civilian Labor Force in Oakland County, MI

Apple Bubbles?

Once again, I'm using the following definitions of bubbles.

Potential Bubble = Exponentially Increasing Sales Volume x Exponentially Increasing Prices

Confirmed Bubble = Extreme Exponential Trend Failure of a Potential Bubble

Click to enlarge.

I would argue that the blue trend line shows a confirmed bubble in Apple. The data failed to follow the blue trend line in a most spectacular way. Further, Apple stock traded at $199.83 on December 28, 2007. On January 20, 2009, it hit $78.20. That's a 61% loss from peak to trough.

The story doesn't end there though. As seen in the red trend line, the trading trend has since recovered and has gone on to even greater heights. The stock now trades at $562.29. Kudos to the true believers who rode that pain out.

So what's the risk here? Let's extrapolate forward.

Click to enlarge.

Yikes! Who thinks that monthly Apple stock trading will hit $10 trillion less than 10 years from now? Anyone? It is possible I suppose (thanks to high frequency trading algorithms and/or hyperinflation), but I'm certainly very skeptical.

Apple is currently well above its recent exponential trend as seen in the first chart. Using my definitions of bubbles, I therefore cannot claim that this is a confirmed bubble. All I can say is that it is a potential bubble.

This is not investment advice. There are a few ways this could play out.

1. The growth rate could slow to something more reasonable long-term.
2. The growth rate could fail spectacularly at some point.

Who can say? As a bear, I tend to lean towards the latter. It has already happened twice since 2000 (the crash of 2000 is not shown in the charts), third time might be the charm. In any event, I have no desire to own Apple stock. Too rich for my blood. In my opinion, the lowest lying fruit has already been picked twice (blue and red trend lines). Literally.

And lastly, Happy Memorial Day Weekend! :)

See Also:
Housing Bubble vs. Silver Bubble

Source Data:
Yahoo: AAPL Historical Prices

Housing Bubble vs. Silver Bubble

Let's start with some definitions.

Potential Bubble = Exponentially Increasing Sales Volume x Exponentially Increasing Prices

Confirmed Bubble = Extreme Exponential Trend Failure of a Potential Bubble

If you buy those definitions, then the following charts show two confirmed bubbles (and their aftermath).

Click to enlarge.

In the chart above, I'm multiplying the monthly new one family houses sold by the monthly new home median sales price. Check out that failed 8% long-term exponential trend.

Click to enlarge.

In the chart above, I'm multiplying SLV's daily trading volumes by the daily prices, then summing up a total for each month. Check out that failed 4881% short-term exponential trend. Also note that the SLV fund made it into the same ballpark as the entire new home real estate market ($70-$80 billion per month each in May 2011).

Hey Bernanke, you are doing a heck of a job blowing bubbles. Keep up the good work. *sarcasm*

This is not investment advice.

See Also:
Silver Bubble Construction Set

Source Data:
St. Louis Fed: Custom Chart
Yahoo Finance: SLV Historical Prices

Thursday, May 24, 2012

Charts of the Day

Click to enlarge.

I may want to start firing up the Rubicon machine again. Sigh.


Click to enlarge.

I should probably mention that the "You Are Here" point was April 2012. We've slid a bit to the left since then.

Source Data:
St. Louis Fed: Custom Chart

Wednesday, May 23, 2012

A Managed Future (Musical Tribute)

There was a financial expert on CNBC this morning who said that we should look into managed futures as an alternative to cash and as something that can keep up with inflation.

An Introduction To Managed Futures

CTAs generally manage their clients' assets using a proprietary trading system or discretionary method that may involve going long or short in futures contracts in areas such as metals (gold, silver), grains (soybeans, corn, wheat), equity indexes (S&P futures, Dow futures, NASDAQ 100 futures), soft commodities (cotton, cocoa, coffee, sugar) as well as foreign currency and U.S government bond futures.

Awesome! Packed with all sorts of proprietary zero-sum game derivatives gambling goodness! The financial expert was a bit unclear how zero-sum games can keep up with inflation (for every winner there must be a loser). Let's not let that deter us though.

Let's find a good managed futures fund, shall we? Here's what I'm looking for.

1. Wise.
2. Strategic.
3. Innovative.
4. Award winning.

April 26, 2012
WisdomTree Receives Award for 'Most Innovative ETF' for Managed Futures Strategy Fund (WDTI)

NEW YORK, April 26, 2012 (GLOBE NEWSWIRE) -- WisdomTree (Nasdaq:WETF), an exchange-traded fund ("ETF") sponsor and asset manager, today announced the WisdomTree Managed Futures Strategy Fund (WDTI) has been recognized as the 'Most Innovative ETF in 2011' by a committee of analysts who cover ETFs in connection with Capital Link's 11th Annual Closed-End Fund and Global ETF Forum.

WisdomTree Managed Futures Strategy Fund

Expense Ratio: 0.95%
Cumulative Return Since Inception: -13.46%

Oh, yeah. That's a lot better than cash. Investors are no doubt sleeping like babies. You know, waking up every few hours and screaming for help.

(1-0.02-0.0095)^30 = 41%

That's how much real purchasing power you could have left after 30 years. I'm assuming the zero-sum game gambling gets you nowhere, we average 2% inflation, and the 0.95% annual expenses keep coming. What's not to like? Of course, I may be wrong. The fund appears to be well ahead of schedule.

I can't say for sure that this is sinister, but it could very well be Sinistar.

I am Sinistar
Beware coward
I hunger

There Ain't No Heaven (Musical Tribute)

Click to enlarge.

DJ Champion - No Heaven (Borderlands Credits Theme)

Don't talk about it
Oh boy, don't talk about it
Don't talk about it
If you do, I'll cry

Source Data:
St. Louis Fed: 10-Year Treasury

Romney Pledges More of the Same

May 23, 2012
Romney: I'll get unemployment down to 6%

"Over a period of four years, by virtue of the policies that we put in place, we'd get the unemployment rate down to 6%, and perhaps a little lower," Romney said.

Click to enlarge.

1. Romney understands exponential trend extrapolation.

"It depends in part upon the rate of growth of the globe, as well as what we're seeing here in the United States."

2. Romney understands exponential trend failure risks.

"But we'd get the rate down quite substantially."

3. Romney understands how to twist the English language to appease the voters.

What more could we want from a president?

Source Data:
St. Louis Fed: Unemployment Rate

Quotes of the Day

William Pesek is once again in top form today.

May 23, 2012
Japan's bond bubble grows and grows

The only reason Japan is growing at all is excessive borrowing and zero interest rates.

Good thing that could never happen here! *sarcasm*

Japan has created a kind of singularity in superlow short-term rates that drive longer-term ones to unthinkable levels. This arrangement has the economy walking in place and financial incentives out of whack. It can not last forever.

That is exactly the dynamic that pushed me into long-term US bonds for the better part of a decade. I referred to it as a real yield infection that spreads from the short-term bonds to the longer-term bonds. I would be the first to agree that it cannot last forever. It can, however, last longer than anyone thinks is humanly possible.

Japan's central bank is essentially now there to support bond prices.

I believe it is our bond market that holds the stock market up. At some point our bond market will be too busy holding itself up. There won't be any ability left to prop anything else up. If I am correct to think this way, this would not bode well for long-term stock market investors. In January, our Fed announced a 2% inflation target and I for one believe them. That's a first step at the bond market looking out for itself.

When our government has $15 trillion in debt, it cannot pretend to afford 5% interest payments ($750 billion). It can pretend to afford 2% interest payments though (a mere $300 billion). Behold the power of pretending (i.e., can kicking)!

If we continue to go down Japan's path, then I would not be surprised to see a 1% inflation target someday. If Japan is any indicator, it won't be a very pleasant economy at that point.

Just opinions of course. What's new?

Tuesday, May 22, 2012

Solutions to All of Our Problems! v.4

I know the trend is looking really bad for my solutions so far, but this is it. I'm sure of it!

May 22, 2012
Traders: Not as good as they think

They believe they will do even better -- 62% of the active investors say they expect to beat the market over the next 12 months, and an additional 29% expect to match the index. (That leaves the 9% of active investors who expect to lag the market.)

Don't you see what this means? If active investors are right, then nothing needs to be done to solve our problems. We can simply let nature take its course. The trend is our friend!

Yet the Boston investment giant noted that investors opened more than 6,500 new Fidelity brokerage accounts per trading day during the first quarter, so it's also possible that some of these active investors are novices who are just figuring out this stuff.

In theory, that's 4,030 more sustainable jobs per trading day (62% beating the market x 6,500 new accounts per trading day). That's nearly 1 million new successful traders per year!

It doesn't end there though. I'm clearly underestimating the effect.

1. I'm only counting the growth in the accounts at Fidelity. There may be other investors opening new accounts at TDAmeritrade, Charles Schwab, ChoiceTrade, ETrade, Firstrade, Interactive Brokers, MB Trading, Merrill Edge, Muriel Siebert, OptionsHouse, OptionsXpress, Scottrade, ShareBuilder, SogoTrade, SpeedTrader, thinkorswim, TradeKing, tradeMONSTER, TradeStation, USAA Brokerage, Vanguard, WellsTrade, and Zecco!

2. Sustainable jobs should grow exponentially as successful traders tell two friends, and they tell two friends, and so on, and so on. Prosperity here we come!

Out of curiosity, who helped inspire such confidence?

Barney Frank (2005)

Jim Cramer (2007)

E-Trade Baby (2010)

@#$%! I really thought I had a solution this time. Back to the drawing board. Sorry about that.

See Also:
Solutions to All of Our Problems!
Solutions to All of Our Problems! v.2
Solutions to All of Our Problems! v.3

Wages vs. Aluminum

Click to enlarge.

Here's what hindsight says.

1. 1980 was definitely a commodity selling opportunity.
2. 2001 was definitely a commodity buying opportunity.

What will hindsight someday say about 2010? I'm unwilling to predict that.

On the one hand, Ben Bernanke is doing what he can to turn us all into commodity speculators.

On the other hand, I continue to think that the China story has major plot holes.


Here's a version of the chart that forces zero wages to equal zero aluminum production.

Click to enlarge.

The correlation isn't as high, but it has a certain common sense quality about it.

Source Data:
St. Louis Fed: Wage and Salary Disbursements
USGS: Historical Statistics for Mineral and Material Commodities

Monday, May 21, 2012

Solutions to All of Our Problems! v.3

I must apologize. My last two attempts at solving all of our problems were probably not the best. I really think I've got it this time though.

It stands to reason that if higher oil prices can generate a few oil and gas extraction jobs in America, then dramatically higher oil prices can create an amazing number of jobs. Right?

Click to enlarge.

Oh yes! I can feel it!

It would seem that as the price of oil rises in real terms, the number of employees in the oil and gas extraction industry rises about 50 months later. And how did I arrive at 50 months? It offered the best correlation in the following chart.

Click to enlarge.

Heck, we even have a handy formula now. Let's use it to generate 12.5 million jobs.

What do we need to get the price of oil up to? Easy. We simply plug 12.5 into the equation and solve for x.

y = 0.00122x + 0.11659

12.5 = 0.00122x + 0.11659

x = (12.5 - 0.11659) / 0.00122

x = $10,150

If we want 12.5 million oil and gas jobs, then we'll need oil to cost $10,150 per barrel. Could it get any easier? All we need to do is immediately slap a $10,000 tax on each barrel of oil. Then, we wait. 50 months later comes the prosperity!

Oh oh. I think I just went down the sarcasm path again. Sorry about that.

See Also:
Solutions to All of Our Problems!
Solutions to All of Our Problems! v.2

Source Data:
St. Louis Fed: Custom Chart

Shocking Headline of the Day

May 21, 2012
Poverty Increasing Among Retirees

Growing numbers of older Americans are spending their retirement years in poverty, according to a recent Employee Benefit Research Institute study. The proportion of older people living below the poverty line has been growing steadily since 2005, and many of those people are falling into poverty as they age and spend down their savings.

What seems to be the problem?

1. Astronomical debt?
2. Low interest rates for retired savers?
3. Housing bubble?
4. Unemployment?
5. Pension fund hell?

A recent Urban Institute study predicts that poverty rates for people at age 67 are likely to decline in the future.

Well, that's certainly good news. Let's dig into the study to see if there are any notable disclaimers.

1. Projecting incomes over the next several decades involves much uncertainty, and future developments could lead to outcomes very different from our forecasts. MINT includes historic data through 2008, capturing only the early parts of the recession.

2. The unusually long unemployment spells that characterized the Great Recession could seriously scar workers who lost their jobs and lead to worse outcomes than MINT projects.

3. Furthermore, MINT calculates Social Security benefits under current law. Promised Social Security benefits may change as a result of reforms needed to address long-term solvency.

4. MINT6 projects about 7 percent lower lifetime average earnings for boomers than did MINT3 largely because of lower than expected actual growth in real wages compared with the 2002 Trustees Report assumptions used in MINT3.

5. Asset income is the most volatile component of retirement income, and the roller-coaster path of investment markets makes this a difficult source of income to project.

Ah, good. Nothing much to worry about then. What's the worst that could happen?

Savings and Loan Ad 1973

Hiber Nation (Musical Tribute)

Click to enlarge.

in this land of strangers
there are dangers


Speaking of hibernation...

Click to enlarge.

A new record low for the 20-year TIPS was set today at 0.31%.

(The old record low was 0.36% set on February 27, 2012.)

Source Data:
St. Louis Fed: Chicago Fed National Activity Index
FRB: Selected Interest Rates
U.S. Treasury: Yield Curve

Sunday, May 20, 2012

Vehicle Sales vs. Miles Traveled (Musical Tribute)

Click to enlarge.

We're buying fewer new autos and light trucks per mile traveled. (As a side note, we're currently above trend. One wonders how long that will last.)

Click to enlarge.

We're also traveling fewer miles.

So what could this combination mean long-term?

Source Data:
St. Louis Fed: Custom Chart
St. Louis Fed: Total Vehicle Miles Traveled

Solutions to All of Our Problems! v.2

Forget what I was saying in my last version of this post. Like a trapped politician looking for easy answers, I was just blowing smoke. This time I really do have a solution.

How do we get fired workers back to work? FIRE them!

Click to enlarge.

The government needs to force banks to get back to the trend line. That's 6 million jobs right there!

Much criticism exists on the internet and in the blogosphere for the shifting of the U.S. economy to a FIRE economy at the expense of a manufacturing and export-based economy. As the consumer of last resort, many believe that the United States has eschewed productive elements of its economy in favor of consumption to its long term detriment.

Oh, please. I'm offering a real solution here. What would the 6 million extra FIRE employees do? I say break them into one million teams of six.

Title: NINJA Loan Officer
Responsibilities: Approves loans. Manages team.

Title: Fogged Mirror Specialist
Responsibilities: Verifies that loan applicant is living.

Title: Income Verification Specialist
Responsibilities: Verifies that loan applicant has no income.

Title: Employment Verification Specialist
Responsibilities: Verifies that loan applicant has no job.

Title: Asset Verification Specialist
Responsibilities: Verifies that loan applicant has no assets.

Title: Loan Payment Processor
Responsibilities: Tracks incoming payments (or lack thereof) and prepares foreclosure documents.

What? You think this can't work? You are so cynical! It's already worked once! Well, sort of.

Source Data:
St. Louis Fed: All Employees: Financial Activities

Saturday, May 19, 2012

Quote of the Day (Musical Tribute)

May 19, 2012
The Jeremy Warner essay: days of turmoil

Now that times are bad, the single currency has turned into an unbridled doomsday machine.

Borderlands 2: Doomsday Trailer (1080p)


The Epic Momentum Bubble v.3

In my last two posts (see links below), I offered two momentum strategies that could have made serious money from 1957 to 2000.

I now offer a third strategy using leverage to boost those returns. If you have a "sure thing" winning strategy, then why not always bet twice as much as you have? Genius!

Here are the new rules.

1. If the S&P 500 was up yesterday then it will be up today too. Go double long!
2. If the S&P 500 was down yesterday then it will be down today too. Go double short!
3. If the S&P 500 was unchanged, do nothing.

Let's check the results.

Click to enlarge.

$1 turns into $638 million! Woohoo!

For those keeping track at home, that's a 60% average annual return from 1957 to the peak! Behold the power of leverage!

Oh sure. The exponential trend failure was a bit brutal. Let's not dwell on that though. The strategy clearly worked. (Until it didn't.)

Brace for the sarcasm. It's a doozy.

I really hope our country's investment banks are doing similar things with our money. It's a shame not to take advantage of advanced trading algorithms combined with excessive debt! Can't lose! And even if it does lose, that's what the taxpayers are for!

See Also:
The Epic Momentum Bubble
The Epic Momentum Bubble v.2

Source Data:
St. Louis Fed: S&P 500

The Epic Momentum Bubble v.2

Yesterday, I backtested a simplistic momentum strategy. It once worked. It no longer works.

Today, I offer a more complex strategy.

Here are the new rules.

1. If the S&P 500 was up yesterday and the day before yesterday, then it will be up today too. Go long!
2. If the S&P 500 was down yesterday and the day before yesterday, then it will be down today too. Short it!
3. Otherwise, do nothing.

Start with $1 invested in 1957. Here are the results.

Click to enlarge.

It's not nearly as impressive as the strategy I used yesterday but it did still turn $1 into $147 in just 43.3 years. That's a 12.2% average annual growth rate. Too bad it all fell apart in 2000.

I once again offer you one of the more amusing losing streaks. Watch as the strategy gets whipsawed.

2003-03-27 868.52
2003-03-28 863.50
2003-03-31 848.18
2003-04-01 858.48 Short! Lost 1.2%!
2003-04-02 880.90
2003-04-03 876.45 Long! Lost 0.5%!
2003-04-04 878.85
2003-04-07 879.93
2003-04-08 878.29 Long! Lost 0.2%!
2003-04-09 865.99
2003-04-10 871.58 Short! Lost 0.6%!
2003-04-11 868.30
2003-04-14 885.23
2003-04-15 890.81
2003-04-16 879.91 Long! Lost 1.2%!
2003-04-17 893.58
2003-04-21 892.01
2003-04-22 911.37
2003-04-23 919.02
2003-04-24 911.43 Long! Lost 0.8%!
2003-04-25 898.81
2003-04-28 914.84 Short! Lost 1.8%!
2003-04-29 917.84
2003-04-30 916.92 Long! Lost 0.1%!
2003-05-01 916.30
2003-05-02 930.08 Short! Lost 1.5%!
2003-05-05 926.55
2003-05-06 934.39
2003-05-07 929.62
2003-05-08 920.27
2003-05-09 933.41 Short! Lost 1.4%!
2003-05-12 945.11
2003-05-13 942.30 Long! Lost 0.3%!
2003-05-14 939.28
2003-05-15 946.67 Short! Lost 0.8%!

Ouch. Let's zoom to see the how the strategy has done since 2000.

Click to enlarge.

Note the flat line in recent years (as was also seen in yesterday's strategy). For all intents and purposes, this strategy is now dead.

It took me, a human, at most a few moments to think up these two momentum strategies. High frequency trading algorithms can data mine 24 hours a day each and every day looking for patterns. In my opinion, the little guy doesn't stand a chance. Day traders beware!

Source Data:
St. Louis Fed: S&P 500

Friday, May 18, 2012

The Epic Momentum Bubble

Out of curiosity, I thought up a simplistic momentum system today and opted to backtest it.

Click to enlarge.

Here are the rules.

1. If the S&P 500 was up yesterday then it will be up today too. Go long!
2. If the S&P 500 was down yesterday then it will be down today too. Short it!
3. If the S&P 500 was unchanged, do nothing.

This system starts in 1957 with $1. The chart above shows how the system would have worked. Amazingly well, wouldn't you say? Well, sort of. I must admit that the last decade was a disaster. And to be fair, it really didn't work all that well from 1980 on (compared to buy and hold).

Keep in mind that this system shouldn't technically care if we are in a bull market or a bear market. It bets both ways, like a hedge fund.

Unfortunately, this system fell apart starting in April of 2000. Remember the wisdom of Suze Orman that very month? Reminds me a bit of a "sure thing" system I once tried. It worked great until it didn't.

Check out one of the more amusing losing streaks as momentum day traders apparently went head to head with high frequency trading algorithms.

2002-10-18 884.39
2002-10-21 899.72
2002-10-22 890.16 Long! 1.1% loss!
2002-10-23 896.14 Short! 0.7% loss!
2002-10-24 882.50 Long! 1.5% loss!
2002-10-25 897.65 Short! 1.7% loss!
2002-10-28 890.23 Long! 0.8% loss!
2002-10-29 882.15 Short! 0.9% gain!
2002-10-30 890.71 Short! 1.0% loss!
2002-10-31 885.76 Long! 0.6% loss!
2002-11-01 900.96 Short! 1.7% loss!

For example, the system goes long after seeing 884.39 become 899.72 on October 21st. On October 22nd, it was still long at 890.16, lost, and after seeing a day of losses switches to shorting it. And so on.

That isn't the only way investors lost though. As I sift through the data I see lots of small gains with a big loss every now and then, almost like little carrots are being handed out to get investors near a whack-a-mole hammer. That's a subjective painting the tape opinion at best.

Also note the behavior change in the chart over the past few years. See that flat line? Let me zoom in a bit.

Click to enlarge.

Hello arbitrage.

That's probably indicative of high frequency trading algorithms going head to head with competing high frequency trading algorithms. May the best computer win! Perhaps Jamie Dimon should think about upgrading. The hunter has apparently become the hunted.

And one wonders why I am not content to play in the casino? Seriously? The less I trade the better. I have absolutely no desire to compete with that. The lowest-lying fruit is gone, and probably half the tree with it!

Source Data:
St. Louis Fed: S&P 500

Recession Prediction

They say that predicting the next recession is a fool's game. Well, sign me up. Why not!

Click to enlarge.

I'm going to predict the next recession will hit on or before October 2014.

You are probably wondering why I am using the "or before" disclaimer in my prediction. Well, it's a bit like predicting a volcanic eruption. As seen in the following chart, the pressures are apparently already here. Just can't say exactly when it will blow. Could be tomorrow. Could be October 2014. Who knows!

Click to enlarge.

Check out those downward trend lines in both charts. I also find it interesting how accurately the extrapolation of the trend line in the second chart is matching reality. It's shooting from 1995 through 2000. It hit both 2008 and 2012 right on the targets. Go figure.

And lastly, I assume here that the economy will continue to deteriorate over the long-term. I do run an illusion of prosperity blog though, so if nothing else I am being consistent.


Want scary? Check out real inventories per civilian employed.

Click to enlarge.

Good luck on that one! Got volcano?

Source Data:
St. Louis Fed: Orders Custom Chart
St. Louis Fed: Inventories Custom Chart
St. Louis Fed: Inventories Custom Chart #2

2012's Anti-Bondmageddon!

Click to enlarge.

Behold the anti-mass exodus into nominal treasuries! (New 1.7% low hit yesterday.)

Click to enlarge.

Gaze in wonder at the panic into inflation protected treasuries! (New -0.39% low hit today.)

Click to enlarge.

Gasp in amazement at the violently unchanging inflation expectations! (Inflation expectations locked at Fed's new public target of 2%.)

Click to enlarge.

Tremble in fear at the lack of uncertainty! (The Fed has the yellow dot pretty much right where it wants it.)

Click to enlarge.

Stampede in confusion at the new normal's implications! (And/or quietly capitulate.)

See Also:
Bondmageddon Is Here!
2012's Bondmageddon

Source Data:
FRB: Selected Interest Rates
U.S. Treasury: Daily Yield Curve

Deep Sorrow for Your Loss (Musical Tribute)

May 17, 2012
Mish: My Wife Joanne Has Passed Away; Stop and Smell the Lilacs

Thursday, May 17, 2012

Solutions to All of Our Problems!

How do we create jobs?

I've got to tell you that this has been on my mind for nearly a decade. I finally have a solution. I don't know why I didn't think of it sooner.

Let's just do what worked in the past!

Click to enlarge.

As seen in the chart, all we have to do is follow the red trend line. That's 31.8 million more jobs! There are only 12.5 million unemployed. There would be so many jobs we wouldn't even have enough workers to fill them all! Genius!

How do we pay for it?

Once again, I have a solution.

Let's just do what worked in the past!

You know, like he called the credit card fairy...

Source Data:
St. Louis Fed: All Employees: Government

Savvy Chinese Strike Again!

May 17, 2012
Consumer confidence highest since 2005

China's consumer confidence in the first quarter rose to its highest level since 2005 because of falling inflationary pressure and the government's determination to deflate property bubbles, analysts Nielsen said in a report on Thursday.

Nothing inspires confidence like a popping real estate bubble!

See Also:
Savvy Chinese Know Exactly When Bubble Will Burst!
Savvy Chinese Find Market Top!

The Sarcasm Report v.160

May 16, 2012
Don't Let Debt Weigh Down Your Retirement

You don't have to be totally debt-free before your golden years, to be sure. But financial planners caution that too much red ink, and the wrong kinds, can diminish your standard of living.

This is exactly why financial planners are paid the big bucks!

In particular, try to wipe out credit card balances, advises Cunningham. Plastic usually carries the highest rates, now an average 15%. Since you're unlikely to get as high a return on your investments, you're better off taking a lump sum from savings to pay the bill.

I would bet that the average well above average investor can easily average 15% returns. It's so easy.

We start with some 0.0% I-Bonds. Add in some 2.80% 30-year treasuries and S&P 500 action. And finally, top it all off with some real estate for diversification. What could possibly go wrong?

So if your stash is in equities, you may want to let it ride.

Yes! That's exactly what we should be doing in retirement! Grandbaby needs new shoes!

Let It Ride (film)

Let It Ride is a 1989 comedy film. It stars Richard Dreyfuss as a normally unsuccessful habitual gambler who experiences a day in which he wins every bet he places.

Win every bet! Woohoo!

Let It Ride (card game)

Let It Ride is played at a relaxed pace relative to other casino card games, which has made it attractive to older players and to table game neophytes.

Attractive game for older players! Woohoo!

Urban Dictionary: Let it Ride

After winning money in a casino, taking your winnings and continuing to gamble with them instead of cashing out.

I won a thousand bucks in Vegas last night, but I lost it all after I let it ride.

Lost it all after we let it ride? Not going to happen! Feeling lucky!

They Just Aren't Making Any More... Landlords

The following chart shows "Privately Owned Housing Starts: 5-Unit Structures or More" per capita.

Click to enlarge.

Bull market in rental construction! Hurray!

What? Can't see it in the chart? Let's try again. The following chart shows "Privately Owned Housing Starts: 5-Unit Structures or More" per "Privately Owned Housing Starts: 1-Unit Structures".

Click to enlarge.

See it now? Let's zoom in for a closer look.

Click to enlarge.

0.44! For every two single unit housing starts there is nearly one 5+ unit start. As I was saying, bull market in rental construction! Hurray!

As seen in this last chart, times haven't been this great since the great recession. Before you know it, everyone is going to be a landlord and we can all make great sums of money renting each other places to live. That's real prosperity!

Okay, maybe not real prosperity. It is real sarcasm though. That's something I guess.

See Also:
They Just Aren't Making Any More... Rental Properties
They Just Aren't Making Any More... Phasers

Source Data:
St. Louis Fed: 5-Unit Starts per Capita
St. Louis Fed: 5-Unit Starts per 1-Unit Starts