Interview.
I think the manipulation after QE4 has accelerated the bull market. We now have the necessary conditions for the bubble phase in gold to begin. I was expecting the second phase correction (the correction that separates the second phase of the bull market from the bubble phase) to occur at the next 8 year cycle low due in 2016. However I think the manipulation of the precious metals markets over the last 8 months has probably shortened the bull market.
Contrary to what many believe manipulation doesn't delay a market. Manipulation accelerates and intensifies the secular trend as it creates supply and demand imbalances. Once the market breaks free of the manipulation the trend reverses and ultimately goes much further and much more violently in the secular direction than would have occurred normally.
If the metals had been allowed to trade freely then I think we would have gotten another C-wave advance into 2014, followed by a devastating correction into the 8 year cycle low in 2016. That move into the 8 year cycle low would have marked the transition from the second phase to the bubble phase.
However the metals weren't allowed to trade freely after QE4. They were continually hit with artificial & manipulative selling in the over night and premarket for months. I think this has converted what should have been just a normal correction into the second phase correction, and when gold breaks free it's going to deliver the bubble phase over the next two years instead of in 2017/18 that would have occurred in a natural market.
Whether you think I'm right or not, pretty much every bubble has to have one of these extreme corrections to completely cleanse bullish sentiment before starting. In 2007 oil dipped 37% convincing everyone that the peak oil crowd were idiots. Oil then rallied 200% in the next year and a half vindicating the bulls and making the critics look foolish.
In 1998 the NASDAQ corrected 40%. Everyone was convinced the secular bull had ended. It had not ended, but the correction did clean the slate and prepare the market for tech stocks to rally 300% in the next year and a half.
Gold has just corrected 37%, miners almost 70%. No one even believes that gold will ever see $1900 again, much less many multiples higher than that. Yet gold has now put in place the necessary conditions for a bubble to begin. And all big secular bull markets end in bubbles.Human nature never changes.
The fundamentals driving gold have not changed. In fact I would suggest the supply side has been severely damaged as many tons of physical gold has moved from west to east during the manipulation event. That gold is never coming back. It's going to remain locked up inside eastern central banks, and in the hands of Asians for years to come.
It's always when it looks least likely that major trend changes occur.
Watch gold next week. If the bubble phase is beginning then we should see gold rebound violently as it breaks free of the manipulation. Miners in particular should rally 10-15%.
If gold waffles around coming out of this bottom then the correction isn't done yet. But either way, whether it ended on Friday or the bottom is still ahead of us, I think this correction is creating the conditions necessary for the bubble phase to begin.
I want to be a garbage collector
The story that two garbage cleaners in New York were fined and forced to retire after being caught accepting a tip of $ 5 caught my eye. Not for the reason you might think. This story would provoke hoots of laughter in my country where nothing happens in the public service without a gratuity. Even in NY, this must be an incredulous story - every man and a dog demands tips shamelessly for just existing in the same space as you. But the real reason this story has prompted this post was buried somewhere in the middle.
The two garbage men apparently netted $100,000 each, including overtime. Granted that they had put in long years of service. Granted that they probably earned lots of overtime. But still a wage of $ 100,000 for a garbage collector shows everything that is wrong about the United States. No wonder they lose jobs by the droves to India and China. No wonder unemployment is a stubborn problem.
But this post is not to highlight the completely unrealistic pricing for labour in the US, as compared to the world. This post is instead about a global problem - automatic salary increases every year.
If you spend enough years on any job, even that of a garbage collector, you will reach levels of $ 100,000. If you start at $ 20,000 a year and get a 5% rise every year , you'll land up with a $100,000 salary in 33 years. That is presumably what happened to these two guys. Imagine the situation in India where anything less than a 10% raise a year leads to a strike. If you start at an annual salary of Rs 5 lakhs, an entry level salary for a qualified graduate, and keep demanding 10% salary rises, by the time you retire after 35 years, your salary even staying in the same job, will be Rs 1.4 crores.
Now you see why there is age discrimination in employment and the older you are, the quicker you are fired. Now you see why there are large scale job losses.
Salary levels have to follow some form of a normal distribution over the years, if you stay on the same job. You start low and as you gain more experience and you become more efficient, your salary should increase. It should probably reach a peak when you are say 40, and then begin a slow decline so that you can remain competitive with the younger folks who are trying to displace you. I know this sounds heretic, but I would rather take cuts in my salary than lose my job altogether. The trick is to price yourself, just a shade below the market rate (not go for the highest salary possible). If that involves annual salary decreases, then so be it.
Of course, you can, and should, upskill and move on to a higher value job. But if you stay in the same job, automatic salary increases every year is a one way ticket to losing the job.
So, how about negotiating a salary reduction, instead of a raise. At first read this might seem like an insane idea. But think about it .....
Its an altogether different matter as to why somebody who was earning $100,000 a year, asked and took a $5 gratuity !
QUICK UPDATE
In the weekend report I told subscribers that Bernanke would throw everything he had at the market early in the week to try and abort the market correction. I described it as a war would be fought.
That war is certainly playing out. If the Fed can push stocks back above 1654 then Bernanke is going to win the war, and the parabolic advance in stocks will continue.
On the other hand if the S&P drops below 1560 then the Fed has lost the war and stocks will complete their natural tendency to regress to the mean.
If the S&P closes back above $1600 today than the Fed has won an important battle for control of the market.
That war is certainly playing out. If the Fed can push stocks back above 1654 then Bernanke is going to win the war, and the parabolic advance in stocks will continue.
On the other hand if the S&P drops below 1560 then the Fed has lost the war and stocks will complete their natural tendency to regress to the mean.
If the S&P closes back above $1600 today than the Fed has won an important battle for control of the market.
Three cheers for John Cassidy
Hurray for John Cassidy in being gutsy enough to write clearly about the Edward Snowden situation, as well as the broad and gutless media acquiescence to the "government line," few questions asked. First, some balance from an interview in the Australian media with Thomas Drake, another former NSA employee charged with espionage (felony charges were ultimately dropped):
Cassidy goes on to examine some of the cultural reasons leading almost all US news figures to pretty much toe the government line and to heap slander on Snowden. It's not pretty:INTERVIEWER: Not everybody thinks Edward Snowden did the right thing. I presume you do…As far as I’m concerned, that about covers it. I wish Snowden had followed Drake’s example and remained on U.S. soil to fight the charges against him. But I can’t condemn him for seeking refuge in a country that doesn’t have an extradition treaty with the United States. If he’d stayed here, he would almost certainly be in custody, with every prospect of staying in a cell until 2043 or later. The Obama Administration doesn’t want him to come home and contribute to the national-security-versus-liberty debate that the President says is necessary. It wants to lock him up for a long time.
DRAKE: I consider Edward Snowden as a whistle-blower. I know some have called him a hero, some have called him a traitor. I focus on what he disclosed. I don’t focus on him as a person. He had a belief that what he was exposed to—U.S. actions in secret—were violating human rights and privacy on a very, very large scale, far beyond anything that had been admitted to date by the government. In the public interest, he made that available.
INTERVIEWER: What do you say to the argument, advanced by those with the opposite viewpoint to you, especially in the U.S. Congress and the White House, that Edward Snowden is a traitor who made a narcissistic decision that he personally had a right to decide what public information should be in the public domain?
DRAKE: That’s a government meme, a government cover—that’s a government story. The government is desperate to not deal with the actual exposures, the content of the disclosures. Because they do reveal a vast, systemic, institutionalized, industrial-scale Leviathan surveillance state that has clearly gone far beyond the original mandate to deal with terrorism—far beyond.
Snowden took classified documents from his employer, which surely broke the law. But his real crime was confirming that the intelligence agencies, despite their strenuous public denials, have been accumulating vast amounts of personal data from the American public. The puzzle is why so many media commentators continue to toe the official line. About the best explanation I’ve seen came from Josh Marshall, the founder of T.P.M., who has been one of Snowden’s critics. In a post that followed the first wave of stories, Marshall wrote, “At the end of the day, for all its faults, the U.S. military is the armed force of a political community I identify with and a government I support. I’m not a bystander to it. I’m implicated in what it does and I feel I have a responsibility and a right to a say, albeit just a minuscule one, in what it does.”
I suspect that many Washington journalists, especially the types who go on Sunday talk shows, feel the way Marshall does, but perhaps don’t have his level of self-awareness. It’s not just a matter of defending the Obama Administration, although there’s probably a bit of that. It’s something deeper, which has to do with attitudes toward authority. Proud of their craft and good at what they do, successful journalists like to think of themselves as fiercely independent. But, at the same time, they are part of the media and political establishment that stands accused of ignoring, or failing to pick up on, an intelligence outrage that’s been going on for years. It’s not surprising that some of them share Marshall’s view of Snowden as “some young guy I’ve never heard of before who espouses a political philosophy I don’t agree with and is now seeking refuge abroad for breaking the law.”
Mea culpa. Having spent almost eighteen years at The New Yorker, I’m arguably just as much a part of the media establishment as David Gregory and his guests. In this case, though, I’m with Snowden—not only for the reasons that Drake enumerated but also because of an old-fashioned and maybe naïve inkling that journalists are meant to stick up for the underdog and irritate the powerful. On its side, the Obama Administration has the courts, the intelligence services, Congress, the diplomatic service, much of the media, and most of the American public. Snowden’s got Greenwald, a woman from Wikileaks, and a dodgy travel document from Ecuador. Which side are you on?
Inquilab Zindabad ? No ! _____ (fill in the blanks) Murdabad .
What is common between a park demolition and a raise in bus fares. Well, something profound , I believe. Because in the last one month, I dare suggest that these were the two most important events in the world (NSA be damned ; as if that was a surprise)
The park issue was the first and it happened in Istanbul, Turkey. The government had planned to demolish the Taksim Gezi Park and use the space to reconstruct the historic Taksim military barracks. About 50 environmentalists occupied the Park in protest. The police , predictably evicted them. That snowballed into massive nationwide protests and a huge Occupy Taksim Square movement started. The issue of demolition of the Park has now given way to a protest against all sorts of unrelated issues and drawing crowds numbering in the tens of thousands. It is now an anti government protest without a coherent theme or leaders. A big section of the population is just protesting without a clear understanding of what they are protesting against and what the solution is. This mind you, in a country where the President Erdogan has won repeated elections with a strong mandate.
In Brazil, the government decided to raise some bus , train and metro fares. A few protested, notably the Movimento Passe Livre (Free Fare Movement). The police broke up the protests. Again this has snowballed into a nationwide protest movement, involving millions of people. The government quickly withdrew the bus fare hike, but the protests have snowballed into something bigger - a whole range of issues, including protests against the Football World Cup and the Olympics all scheduled to be held in Brazil in the near future. If Brazilians are protesting against football, something serious is happening. Again this is in a country where Dilma Rousseff won a resounding mandate in the elections and is the chosen successor of the extremely popular Lula.
As of today, both these protests are going on. You can see parallels with the Occupy Wall Street movement in the US and a few other places. In all these protests, there is no coherent theme, there is no leadership organising the protests. But these protests have been massive, cover a whole range of grievances and are significantly aided by social media. They largely cover the middle class, not the poor. They tend to die down because they are not coherent and not "organised". But they are symptoms of a deep underlying problem.
This is a profound sociological change and one that should be researched deeply. I believe the underlying issue is economic. Despite a big economic improvement globally across the last two decades, there is deep resentment. Large swathes of the population do not believe that there is a bright economic future ahead of them. This, despite the fact that the future is significantly brighter than what our parents, grandparents and forefathers ever had. And that is the problem governments and societies cannot ignore. There is no easy solution, and aspects of the solution will be different for different societies. But the root of the solution is economic. We have to have economic growth.
PS - In the title of the post - Inquilab Zindabad means Long live the revolution, in Urdu, a favourite phrase of protests of the past in the Indian subcontinent. Murdabad means "Down with".
CRASH IMPENDING?
It appears the stock market crash/semi-crash may be getting underway. The bond market is certainly coming unraveled. This is what happens when the Fed tries to force the market to do something it isn't meant to do. It will behave for a while, but ultimately everything comes unglued and the end result is much worse than if the market had been allowed to function naturally.
We saw the result of the Greenspan Put from 2002-2007. It ended with the second worst bear market and economic recession in history.
This time will be no different. The Fed has held rates artificially low for many years. I think the market has decide enough is enough and now the reversal is happening much faster and more violently than would have occurred normally. 85 billion a month is not going to be nearly enough to stop the rout in the bond market.
The S&P has already lost all the gains from April & May, if we lose March also the market will be set up for the crash or semi-crash I've been predicting as everyone tries to get out the door at the same time and salvage something before it's all gone.
The crash in bonds and stocks is in my opinion the setup for the next leg of the commodity bull market. Ben is going to have to massively increase QE to try and regain control of the bond market (only temporarily) and reflate the bubble in stocks. The liquidity will find it's way into the commodity markets over the next two years, just like it did in 2007/08 when Ben tried to reflate the real estate bubble.
Once this process begins, I believe it will initiate the bubble phase of the gold bull.
We saw the result of the Greenspan Put from 2002-2007. It ended with the second worst bear market and economic recession in history.
This time will be no different. The Fed has held rates artificially low for many years. I think the market has decide enough is enough and now the reversal is happening much faster and more violently than would have occurred normally. 85 billion a month is not going to be nearly enough to stop the rout in the bond market.
The S&P has already lost all the gains from April & May, if we lose March also the market will be set up for the crash or semi-crash I've been predicting as everyone tries to get out the door at the same time and salvage something before it's all gone.
The crash in bonds and stocks is in my opinion the setup for the next leg of the commodity bull market. Ben is going to have to massively increase QE to try and regain control of the bond market (only temporarily) and reflate the bubble in stocks. The liquidity will find it's way into the commodity markets over the next two years, just like it did in 2007/08 when Ben tried to reflate the real estate bubble.
Once this process begins, I believe it will initiate the bubble phase of the gold bull.
The War on Reality
If you're at all disturbed (I am) by the various recent revelations over massive data trolling by government agencies, you should read this article in the NYT by Peter Ludlow. It looks at the vast and largely invisible ecology of private security and intelligence firms that are not only gathering information on ordinary people, but actively creating and spreading disinformation (otherwise known as "lies") to discredit opponents of their corporate clients. They're information mercenaries who are essentially shaping reality as we see it -- and not with benign motives, you can be sure. Ludlow:
To get some perspective on the manipulative role that private intelligence agencies play in our society, it is worth examining information that has been revealed by some significant hacks in the past few years of previously secret data.
Important insight into the world these companies came from a 2010 hack by a group best known as LulzSec (at the time the group was called Internet Feds), which targeted the private intelligence firm HBGary Federal. That hack yielded 75,000 e-mails. It revealed, for example, that Bank of America approached the Department of Justice over concerns about information that WikiLeaks had about it. The Department of Justice in turn referred Bank of America to the lobbying firm Hunton and Willliams, which in turn connected the bank with a group of information security firms collectively known as Team Themis.
Team Themis (a group that included HBGary and the private intelligence and security firms Palantir Technologies, Berico Technologies and Endgame Systems) was effectively brought in to find a way to undermine the credibility of WikiLeaks and the journalist Glenn Greenwald (who recently broke the story of Edward Snowden’s leak of the N.S.A.’s Prism program), because of Greenwald’s support for WikiLeaks. Specifically, the plan called for actions to “sabotage or discredit the opposing organization” including a plan to submit fake documents and then call out the error. As for Greenwald, it was argued that he would cave “if pushed” because he would “choose professional preservation over cause.” That evidently wasn’t the case.
Team Themis also developed a proposal for the Chamber of Commerce to undermine the credibility of one of its critics, a group called Chamber Watch. The proposal called for first creating a “false document, perhaps highlighting periodical financial information,” giving it to a progressive group opposing the Chamber, and then subsequently exposing the document as a fake to “prove that U.S. Chamber Watch cannot be trusted with information and/or tell the truth.” (A photocopy of the proposal can be found here.)
In addition, the group proposed creating a “fake insider persona” to infiltrate Chamber Watch. They would “create two fake insider personas, using one as leverage to discredit the other while confirming the legitimacy of the second.” The hack also revealed evidence that Team Themis was developing a “persona management” system — a program, developed at the specific request of the United States Air Force, that allowed one user to control multiple online identities (“sock puppets”) for commenting in social media spaces, thus giving the appearance of grass roots support. The contract was eventually awarded to another private intelligence firm.
This may sound like nothing so much as a “Matrix”-like fantasy, but it is distinctly real, and resembles in some ways the employment of “Psyops” (psychological operations), which as most students of recent American history know, have been part of the nation’s military strategy for decades. The military’s “Unconventional Warfare Training Manual” defines Psyops as “planned operations to convey selected information and indicators to foreign audiences to influence their emotions, motives, objective reasoning, and ultimately the behavior of foreign governments, organizations, groups, and individuals.” In other words, it is sometimes more effective to deceive a population into a false reality than it is to impose its will with force or conventional weapons. Of course this could also apply to one’s own population if you chose to view it as an “enemy” whose “motives, reasoning, and behavior” needed to be controlled.
Psyops need not be conducted by nation states; they can be undertaken by anyone with the capabilities and the incentive to conduct them, and in the case of private intelligence contractors, there are both incentives (billions of dollars in contracts) and capabilities.
Several months after the hack of HBGary, a Chicago area activist and hacker named Jeremy Hammond successfully hacked into another private intelligence firm — Strategic Forcasting Inc., or Stratfor), and released approximately five million e-mails. This hack provided a remarkable insight into how the private security and intelligence companies view themselves vis a vis government security agencies like the C.I.A. In a 2004 e-mail to Stratfor employees, the firm’s founder and chairman George Friedman was downright dismissive of the C.I.A.’s capabilities relative to their own: “Everyone in Langley [the C.I.A.] knows that we do things they have never been able to do with a small fraction of their resources. They have always asked how we did it. We can now show them and maybe they can learn.”
The Stratfor e-mails provided us just one more narrow glimpse into the world of the private security firms, but the view was frightening. The leaked e-mails revealed surveillance activities to monitor protestors in Occupy Austin as well as Occupy’s relation to the environmental group Deep Green Resistance. Staffers discussed how one of their own men went undercover (“U/C”) and inquired about an Occupy Austin General Assembly meeting to gain insight into how the group operates.\
Stratfor was also involved in monitoring activists who were seeking reparations for victims of a chemical plant disaster in Bhopal, India, including a group called Bophal Medical Appeal. But the targets also included The Yes Men, a satirical group that had humiliated Dow Chemical with a fake news conference announcing reparations for the victims. Stratfor regularly copied several Dow officers on the minutia of activities by the two members of the Yes Men.One intriguing e-mail revealed that the Coca-Cola company was asking Stratfor for intelligence on PETA (People for the Ethical Treatment of Animals) with Stratfor vice president for Intelligence claiming that “The F.B.I. has a classified investigation on PETA operatives. I’ll see what I can uncover.” From this one could get the impression that the F.B.I. was in effect working as a private detective Stratfor and its corporate clients.
Stratfor also had a broad-ranging public relations campaign. The e-mails revealed numerous media companies on its payroll. While one motivation for the partnerships was presumably to have sources of intelligence, Stratfor worked hard to have soap boxes from which to project its interests. In one 2007 e-mail, it seemed that Stratfor was close to securing a regular show on NPR: “[the producer] agreed that she wants to not just get George or Stratfor on one time on NPR but help us figure the right way to have a relationship between ‘Morning Edition’ and Stratfor.”
On May 28 Jeremy Hammond pled guilty to the Stratfor hack, noting that even if he could successfully defend himself against the charges he was facing, the Department of Justice promised him that he would face the same charges in eight different districts and he would be shipped to all of them in turn. He would become a defendant for life. He had no choice but to plea to a deal in which he may be sentenced to 10 years in prison. But even as he made the plea he issued a statement, saying “I did this because I believe people have a right to know what governments and corporations are doing behind closed doors. I did what I believe is right.” (In a video interview conducted by Glenn Greenwald with Edward Snowden in Hong Kong this week, Snowden expressed a similar ethical stance regarding his actions.)
Given the scope and content of what Hammond’s hacks exposed, his supporters agree that what he did was right. In their view, the private intelligence industry is effectively engaged in Psyops against the American public., engaging in “planned operations to convey selected information to [us] to influence [our] emotions, motives, objective reasoning and, ultimately, [our] behavior”? Or as the philosopher might put it, they are engaged in epistemic warfare.
Robots will take your job
From MIT Tech Review, this article explores an important question: is technology putting people out of work? That simple answer is of course "yes," technology in manufacturing, for example, is clearly replacing human workers on a massive scale. It's true elsewhere too: many of the poorly written finance articles you see today are also written by machines. But technology also creates jobs, and the bigger question is whether it creates more than it destroys. The article looks at the work of MIT researchers Erik Brynjolfsson and Andrew MacAfee who argue based on productivity data that technology is now on balance eliminating jobs, and is in large part responsible for slow growth in employment:
The story is of course more complicated than this. Lots of technology will work along with people and make them more productive. Over time, people can also learn new skills and move into new jobs, so the long term trend isn't clear. But I do find it hard to believe in the simple "the economy will adjust as it always has" argument for the reasons that rates of change and time scales matter. Technological advance is accelerating. The more technology we have, the faster we learn to create still more. The only way people will keep up is if technology deployed on a massive scale also helps them learn new skills in an ever faster way. Is that happening?Given his calm and reasoned academic demeanor, it is easy to miss just how provocative Erik Brynjolfsson’s contention really is. Brynjolfsson, a professor at the MIT Sloan School of Management, and his collaborator and coauthor Andrew McAfee have been arguing for the last year and a half that impressive advances in computer technology—from improved industrial robotics to automated translation services—are largely behind the sluggish employment growth of the last 10 to 15 years. Even more ominous for workers, the MIT academics foresee dismal prospects for many types of jobs as these powerful new technologies are increasingly adopted not only in manufacturing, clerical, and retail work but in professions such as law, financial services, education, and medicine.
That robots, automation, and software can replace people might seem obvious to anyone who’s worked in automotive manufacturing or as a travel agent. But Brynjolfsson and McAfee’s claim is more troubling and controversial. They believe that rapid technological change has been destroying jobs faster than it is creating them, contributing to the stagnation of median income and the growth of inequality in the United States. And, they suspect, something similar is happening in other technologically advanced countries.
Perhaps the most damning piece of evidence, according to Brynjolfsson, is a chart that only an economist could love. In economics, productivity—the amount of economic value created for a given unit of input, such as an hour of labor—is a crucial indicator of growth and wealth creation. It is a measure of progress. On the chart Brynjolfsson likes to show, separate lines represent productivity and total employment in the United States. For years after World War II, the two lines closely tracked each other, with increases in jobs corresponding to increases in productivity. The pattern is clear: as businesses generated more value from their workers, the country as a whole became richer, which fueled more economic activity and created even more jobs. Then, beginning in 2000, the lines diverge; productivity continues to rise robustly, but employment suddenly wilts. By 2011, a significant gap appears between the two lines, showing economic growth with no parallel increase in job creation. Brynjolfsson and McAfee call it the “great decoupling.” And Brynjolfsson says he is confident that technology is behind both the healthy growth in productivity and the weak growth in jobs.
It’s a startling assertion because it threatens the faith that many economists place in technological progress. Brynjolfsson and McAfee still believe that technology boosts productivity and makes societies wealthier, but they think that it can also have a dark side: technological progress is eliminating the need for many types of jobs and leaving the typical worker worse off than before. Brynjolfsson can point to a second chart indicating that median income is failing to rise even as the gross domestic product soars. “It’s the great paradox of our era,” he says. “Productivity is at record levels, innovation has never been faster, and yet at the same time, we have a falling median income and we have fewer jobs. People are falling behind because technology is advancing so fast and our skills and organizations aren’t keeping up.”
Brynjolfsson and McAfee are not Luddites. Indeed, they are sometimes accused of being too optimistic about the extent and speed of recent digital advances. Brynjolfsson says they began writing Race Against the Machine, the 2011 book in which they laid out much of their argument, because they wanted to explain the economic benefits of these new technologies (Brynjolfsson spent much of the 1990s sniffing out evidence that information technology was boosting rates of productivity). But it became clear to them that the same technologies making many jobs safer, easier, and more productive were also reducing the demand for many types of human workers.
....
“We were lucky and steadily rising productivity raised all boats for much of the 20th century,” he says. “Many people, especially economists, jumped to the conclusion that was just the way the world worked. I used to say that if we took care of productivity, everything else would take care of itself; it was the single most important economic statistic. But that’s no longer true.” He adds, “It’s one of the dirty secrets of economics: technology progress does grow the economy and create wealth, but there is no economic law that says everyone will benefit.” In other words, in the race against the machine, some are likely to win while many others lose.
Black yoga pants that "showed too much"
Some businesses I can completely relate to. Most businesses I understand,. But there are some that completely fox me .
Take the case of the quaintly named company, Lululemon. I was, of course, blissfully unaware of its existence until I read a news item that its CEO was leaving (polite term for being fired). Naturally, with a name like that, I couldn't but help read up. Apparently this Vancouver based company is in the business of "yoga inspired" athletic gear , whatever that means. They are fast growing , but reportedly had a product problem recently which led to the CEO's exit.
The "product problem" made further interesting reading, Apparently, their Luon range of black Yoga pants was getting too many customer complaints - the product was too sheer and ,er, "showed too much" ! A particularly sensitive topic when when doing yoga which involves stretching and contortions !! The outcry was so much that they had to pull the product from the shelves in March. The CEO stayed long enough to resupply the product, hopefully this time, not "showing too much", but then had to go.
What amazes me is that this company makes a margin of 50%, selling yoga pants and the like. Products include "Wunder Under pant" priced at $92
and "Om pant" also priced at $ 92
If you want more gems such as the above visit their website here.
What foxes me is this. Who on earth wants to pay $ 92 for a "Om pant". Do yoga by all means, but concentrate on , well, the yoga. Does it matter an iota whether your pant is "om" or "not om" ?? There are many places on earth to make a fashion statement, but I doubt if a yoga session is one of them .
I am a sports nut, as regular readers of this blog would know. I have spent an insane amount of money on sports. But for rackets, bats, balls and the like which help me to play better. Not for looking like an Adonis on court (well, that would be an impossibility anyway, but you get the drift ... ). I thought the purpose of getting on to a training room, or a sports field, is, er, to train or to play.
Yeah, I know lots of people who dress up for the evening walk. This is a disease that especially affects the female of the species. The sight of a Rajalakshmi - she of the ample proportions - trying to look fashionable while huffing and puffing at 1 kmph, I can assure you, is not a sight for the Gods. You can spot a true sportsman or sportswoman from a mile away - just from their dress. Although I admit, that Pete Sampras, one of the all time greats hit new lows in dressing, wearing what I can only describe as a Kachha which a Sardarji would be proud to wear as an underwear !
But seriously, you can run a very successful business by peddling yoga pants at outrageous prices ! While being called Lululemon !!
Now , that's a business I can never understand :)
The media has it backwards: It's not the gold bull that's coming to an end, it's the stock bull
I’ll start off today with the stock market. As most of you probably remember my thesis for months now has been that this parabolic move in stocks would eventually start to stagnate, roll over, and probably at some point crash. As that process plays out I’m looking for liquidity to begin leaking into the undervalued commodity markets. Basically the exact same progression that happened at the 2007 top.
I think that process began with the high-volume reversal on May 22. As you can see in the chart below, after that event the character of the market changed. Before that, every move out of a daily cycle low began powerfully. The initial thrust created momentum with follow-through.
When stocks came out of their most recent daily cycle low, no momentum was generated. Stocks immediately retraced the initial thrust. That was followed by another powerful rally as the dip buyers again tried to push the market higher. But as we saw on Friday it also had no follow-through. While it’s always possible that Bernanke can throw enough money at the market to break it out of this range, and retest or make marginal new highs, I think the odds are better that we have started the stagnation/rollover process that I have been expecting.
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I think that process began with the high-volume reversal on May 22. As you can see in the chart below, after that event the character of the market changed. Before that, every move out of a daily cycle low began powerfully. The initial thrust created momentum with follow-through.
When stocks came out of their most recent daily cycle low, no momentum was generated. Stocks immediately retraced the initial thrust. That was followed by another powerful rally as the dip buyers again tried to push the market higher. But as we saw on Friday it also had no follow-through. While it’s always possible that Bernanke can throw enough money at the market to break it out of this range, and retest or make marginal new highs, I think the odds are better that we have started the stagnation/rollover process that I have been expecting.
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Stupid myths of public versus private
This interview of Mariana Mazzucato on the INET blog is hugely important. We're all influenced by some ideas floating around about how the private sector is sleek and efficient, risk taking etc, while the public sector is slow and wasteful, and almost none of this is based on any sound thinking or evidence. It's propaganda almost entirely. Mazzucato helps dispel these myths and her thoughts should be promulgated far and wide:
The Entrepreneurial State: Debunking Public vs. Private Sector Myths
by The Institute for... on June 13, 2013The public sector is often seen as sclerotic and conservative in contrast with a dynamic and innovative private sector. This assumption lies at the basis of much of the outsourcing of public services to the private sector. In this interview and in her new book, Institute for New Economic Thinking grantee Mariana Mazzucato argues against this assessment and in favour of state-led innovation and economic growth. She maintains that the public sector usually bears the highest risks of funding innovation without then reaping the rewards.
What are the myths about the public sector and private sector that you say need to be debunked?
The myth is of a dynamic, creative, colourful, entrepreneurial private sector, that at most needs ‘unleashing’ from its constraints from the public sector. The latter is instead depicted as necessary for fixing ‘market failures’ (investing in ‘public goods’ like infrastructure or basic research) but inherently bureaucratic, slow, grey, and often too ‘meddling’. It is told to stick to the ‘basics’ but to avoid getting too directly involved in the economy.
Instead, if we look around the world, those countries that have grown or are growing through innovation-led growth are countries where the state did not limit itself to just solving ‘market failures’ but actually developed strategic missions, and was active in directing public investment in particular areas with scale and scope, changing the technological and market landscape in the process. And ironically one of the government’s that have been most active on this front is the US government, which is usually depicted in the media (and by politicians) as being more ‘market oriented’. From putting a man on the moon, to developing what later became the Internet, the US government, through a host of different public agencies, provided direct financing not only of basic research but also applied research and even early stage public venture capital (indeed Apple received $500,000 directly from public funds). In each case it provided funding for the most high risk/uncertain investments, while the private sector sat waiting behind.
What do you say to those who would argue that the government is not good at picking winners? That government spending crowds our private investment?
All this fear about the government trying and failing to pick winners is exaggerated. Both Apple and the technologies behind the iPhone were picked! But picking winners is more probable when the state is described as though it is relevant rather than irrelevant. When government is given a mission, proper funding, and organizes its agencies so they are dynamic and able to ‘welcome’ the exploratory trial and error process that accompanies innovation, it can attract top expertise and dynamism.
Today, we see countries that are growing thanks to a courageous public sector and through mission oriented policies. For example, China is spending $1.7 trillion on five key new broadly defined sectors, including ‘environmentally friendly’ technologies. Brazil’s active state investment bank is spending more than $60 billion just this year on green technology. The economics profession doesn’t adequately account for this kind of state-led activity, but only warns of governments ‘crowding out’ private business or failing at picking winners.
What governments are doing today with regards green technology is not crowding out but crowding in business investment by creating a vision around it, and funding the most capital intensive areas with high market and technological risk. But we must also change the language. To me, ‘crowding in’ still sounds negative, as it is being compared to a benchmark of useless government. In my new book I go into this further, and suggest some new language and images that can really change the way we talk about and imagine the space for the public sector.
Could you elaborate on your argument that modern capitalism is rewarding value extraction over value creation?
The problem is that by not admitting this entrepreneurial risk-taking role that the state provides, we have not confronted a key relationship in finance: the relationship between risk and return. Innovation is deeply uncertain, with most attempts failing. For every Internet there are many Concordes or Solyndras. Yet this is also true for private venture capital (VC). But while private VC is then able to use the profits from the 1 out of 10 successes to fund the 9 losses, the state has not been allowed to reap a return. Economists think this will happen via tax (from the jobs created, and from the profits of the companies), yet so many of the companies that receive such benefits from state funding, bring their jobs elsewhere, and of course we know they also pay very little tax. Thus the return generating mechanisms must be rethought. It could be done through retaining equity, a ‘golden share’ of the intellectual property rights, or through income contingent loans. But currently this is not even discussed. When Google received funding for its algorithm from the National Science Foundation (NSF), is it right that after it earned billions nothing went back to the NSF (which is today starved of funds), or that some of Apple’s profits go into a national innovation fund to fund the next wave of Apples?
What this means is that we have socialized the risk of innovation but privatised the rewards. This dynamic is one of the key drivers of increasing inequality. Because innovation today builds on innovation tomorrow, the ‘capture’ can be very large. This would not be the case if innovation were just a random walk. Policy makers must think very hard how to make value creation activities (done by all the collective actors in the innovation game) rewarded above value extraction activities (in this sense capital gains taxes are way too low). And since the booty from the latter can be very large, redirecting incentives and rewards towards the value creators is essential. The problem is that some of the ‘extractors’ like to sell themselves as the creators.
STOCKS IN DANGEROUS TERRITORY
As I alluded to in my previous report both stocks and gold are due to mean revert. Short-term the stock market is getting significantly oversold and if we get a down day tomorrow I would expect some kind of bounce off of the 1600 level. If that bounce fails and we break below last Thursday's low it should confirm that stocks have begun an intermediate degree correction.
Since I think there is significant risk that the cyclical bull market that started in 2009 is now topping I would take a break of the $1600 level as confirmation that an intermediate level decline has begun.
Based on how artificially far the Fed has driven this rally, this should be a quite significant decline, possibly even filling the gap from January 2.
If one has retirement funds invested in the general stock market I think after four years and a 153% gain it's probably time to say "close enough" and exit this Frankenstein monster of a market that the Fed has created.
Since I think there is significant risk that the cyclical bull market that started in 2009 is now topping I would take a break of the $1600 level as confirmation that an intermediate level decline has begun.
Based on how artificially far the Fed has driven this rally, this should be a quite significant decline, possibly even filling the gap from January 2.
Who won the Cold War
I sometimes wonder, who the real winner of the Cold War was. Traditional wisdom is that capitalism won over communism, right ? The Western world over the Soviet bloc. Freedom and liberty over authoritarianism and government control. Etc Etc. But I wonder if this is really true ?
Take the capitalism versus state enterprise debate. Today capitalism is a four letter word to much of the world. The fastest growing economy in the world and the second largest, China, is significantly state enterprise driven. Government expenditure as a % of GDP is 53% in France (surprise surprise), 47% in the UK, 43% in Germany and in supposedly the bastion of free market capitalism, the United states, 39%. Government spending has propped up the global economy for five years now and bailed out financial institutions when they were mired in the quicksand.
What about freedom and liberty. After the revelations over the last couple of days from a certain Edward Snowden, we may have to redefine the word liberty. If I told you that the government listened to your every word, read every e mail and tracked every movement of yours, you would naturally think that the government in question would be Russia or North Korea. Instead we now know that it is the US of A and that their snooping is not not just restricted to US nationals, but literally everybody in the world (the fact that there are howls of protest in the US about snooping on US citizens , but perfect acceptability of snooping on an Indian citizen like me is an interesting definition of the word liberty in America). That this revelation is met with a big yawn in China, where this is just routine practice further annotates my point.
Force feeding prisoners in Guantanamo, keeping them in detention forever without a trial is not very different from what the gulags did in the Soviet Union. Even at the height of its powers the Soviet Union did not kill citizens of another country from the air with impunity as the US does today with drones. If the Soviet Union brutalised Afghanistan invading it needlessly and tyrannically, you could perhaps make the same point with the US and Iraq.
The citizens of the Soviet Union could never get out and go elsewhere. Those in the West were blissfully free to go where they pleased. Is that really true now ? Anybody from any country who has to get a visa to go to another country , just to visit (forget emigrating), might have a different point of view with regard to freedom of movement.
What about the West over the Communist bloc ? Well, if you define the communist bloc widely enough to include China, the verdict might be closer to a draw than a clear cut victory.
Of course, this post stretches the facts, but only to make a point. The scale of what happened in the Communist Bloc during the Cold War may have been beyond anything you see today. But then, although the Soviet Union collapsed, aspects of its ideology are thriving in many places around the world.Perhaps they lost the battle, but haven't yet been defeated in the war.
Yes, they may never be a winner in the capitalism versus communism debate. As indeed in the democracy versus totalitarian debate. Alas, what a pity, at least in the case of the former.
Nanex: visualizing zillions of trades in a half-second
By way of Naked Capitalism, I learned of the video below produced by Nanex, the market data analysis company in Chicago. It runs for just under 6 minutes and shows all the quotes for Johnson & Johnson stock racing among a network of exchanges over just one half second of real time. Watch the whole thing and then remember -- this is just one half second (the clock, bottom middle, goes up in increments of milliseconds). Below the video, some explanation of what you're seeing from Nanex.
We got the idea after realizing, in face to face meetings with them [the CFTC], they didn’t understand market structure or the importance of latency and the consolidated feed. That was several years ago. We still aren’t sure if they get it, or are just playing dumb.
The bottom box (SIP) shows the National Best Bid and Offer. Watch how much it changes in the blink of an eye.
Watch High-Frequency Traders (HFT) at the millisecond level jam thousands of quotes in the stock of Johnson and Johnson (JNJ) through our financial networks on May 2, 2013. Video shows 1/2 second of time. If any of the connections are not running perfectly, High Frequency Traders can profit from the price discrepancies that result. There is no economic justification for this abusive behavior.
Each box represents one exchange. The SIP (CQS in this case) is the box at 6 o’clock. It shows the National Best Bid/Offer. Watch how much it changes in a fraction of a second. The shapes represent quote changes which are the result of a change to the top of the book at each exchange. The time at the bottom of the screen is Eastern Time HH:MM:SS:mmm (mmm = millisecond). We slow time down so you can see what goes on at the millisecond level. A millisecond (ms) is 1/1000th of a second.
Note how every exchange must process every quote from the others — for proper trade through price protection. This complex web of technology must run flawlessly every millisecond of the trading day, or arbitrage (HFT profit) opportunities will appear. It is easy for HFTs to cause delays in one or more of the connections between each exchange.
MAJOR BREAKDOWN IN THE DOLLAR
Major break in the dollar index today is signalling 15-20 weeks of declines ahead. This should be the fuel to drive gold back to test the old highs by early this fall.
The invisible hand made visible
My latest Bloomberg column just appeared (or will around 6pm EST today). It takes a look at a landmark economics paper from just over ten years ago, one that I am sure (or at least hope) every macroeconomist, indeed every economist, knows fairly well. Given it's fundamental importance, I'm guessing it is by now probably a staple of undergraduate economics education. I'm referring of course to this study by Robert Clower and Peter Howitt which, in comparison with traditional economic theories, took a major step in actually revealing the mechanisms by which Adam Smith's Invisible Hand might work.
To many economists, this probably sounds crazy. What about Arrow-Debreu and all the thousands of later papers in general equilibrium theory in the same tradition? Don't those all establish how a decentralized market can act to organize economic activity in a remarkably efficient way? We'll, actually, no -- because only a very small fraction of those studies have even tried to model the messy dynamic process by which a huge number of independent people might, through trial and error, through learning, come to lead the market to its final organized state. And NONE, so far as I am aware, established by investigation a plausible dynamical story consistent with realistic human behavior. Hence, the nice story and metaphor of the Invisible Hand really has no plausible counterpart in standard economic theory; it remains no more than a metaphor, even if economists seem loathe to admit that.
But this isn't to say that something like the Invisible Hand idea isn't true and really interesting. The insight inspiring (the late) Clower and Howitt is that human economies probably self-organize into functional states coordinating the disparate activities of many individuals in much the same way ant colonies organize themselves. It's not due to the far-sighted rationality of any one agent (ant or person), but due instead to organizing structures that emerge to help us relatively unintelligent individuals cope with a very complex world. In the words of Howitt from this nice paper from 2007:
The idea motivating the approach is that complex systems, like economies or anthills, can exhibit behavioral patterns beyond what any of the individual agents in the system can comprehend. So instead of modelling the system as if everyone’s actions and beliefs were coordinated in advance with everyone else’s, as in rational expectations theory, the approach assumes simple behavioral rules and allows a coordinated equilibrium to be a possibly emergent property of the system itself. The approach is used to explain system behavior by “growing” it in the computer. Once one has devised a computer program that mimics the desired characteristics of the system in question one can then use the program as a “culture dish” in which to perform experiments.What Clower and Howitt showed in their 2000 paper -- and Howitt has expanded upon since in work with other economists -- is that autonomous agents of limited intelligence working on their own in an economic setting can readily self organize their activities into a functioning system with an intelligence far beyond their own. In their model, the coordinating infrastructure is a network of firms that emerges to make it easier for people to find the goods they need, vastly simplifying the problem of matching producers and consumers. I won't spoil the story. See some of Howitt and his colleagues' most recent papers, such as this one, for a nice summary of the original model and developments since then.
Now the first reaction of many economists upon first hearing about this methodology is that all economic models with an explicit micro-foundation, which is to say almost all models that one sees in mainstream macroeconomic theory, are “agent-based”. Some even have a multitude of heterogeneous agents (see Krusell and Smith, 1998 and Krebs, 2003, among others). So what’s the big deal?
The big deal, as Tesfatsion has emphasized on many occasions, has to do with autonomy. An agent in a rational-expectations-equilibrium model has a behavioral rule that is not independent of what everyone else is doing. In any given situation, her actions will depend on some key variables (prices, availability of job offers, etc.) or the rational expectation thereof, that are endogenous to the economic system. These variables will change when we change the agent’s environment, and hence her behavior cannot be specified independently of the others’. The household, for example, in a market-clearing model of supply and demand cannot choose what quantity to demand until told what price will clear the market. Likewise the agent on a Lucas island (a Phelps Island with rational expectors) cannot choose how much to sell until informed of the stochastic process determining aggregate and relative demand fluctuations.
The problem with assuming non-autonomous agents is that it leaves the model incomplete, and in a way that precludes a deep analysis of the coordination problem. For if the model does not allow people to act without knowing the equilibrium value of some variable, then someone must have computed that equilibrium value a priori. In such a model there is no way to describe out-of-equilibrium behavior, and the problem of reconciling peoples’ independently conceived plans is assumed to be solved by some unspecified mechanism that uses no scarce resources...
Now under certain assumptions about common information, someone endowed with enough information could figure out on her own what the market-clearing price is going to be, or what the rational expectation of the price level is, and in this sense could act autonomously even in a rational-expectations equilibrium framework. But an economy full of agents that were autonomous in this sense would not be decentralized in the Hayekian sense, because no market would be needed to aggregate the diverse information of heterogeneous people, each of whom can do the aggregation in her head. Each would be capable of acting as the economy’s central planner, although in this case the planner would not be needed. Moreover, such an economy would have no need for macroeconomists, because everyone would already know as much as could be known about the macroeconomy. The coordination problem would be trivial. So by “autonomous” agents I mean agents that are endowed with behavioral rules that can tell them what to do in any given situation, independently of each others’ rules, even when no one has access to a correct model of the economy.
One of the most important things emerging from this work, in my opinion, is a way to look at the mechanisms behind economic coordination in a much more specific way. When an economy gets hit by a crisis and goes into recession, things happen which cannot easily be reversed, and certainly not instantaneously. Firms go out of business and then do not exist. This leaves gaps in the coordinating network which puts additional stress on other firms or individuals. An economy, like a broken bone, has suffered real damage that requires both time and the consumption of resources to overcome. Of course, you cannot even begin to understand how the key coordinating infrastructure can be damaged, or how it might be repaired, if you have no theoretical apparatus to describe that coordinating structure in the first place -- this is the position of modern mainstream (neo-classical) economics.
Hence, it's important to remember when confronting the rhetorical arguments of the OpEd pages -- for or against "austerity" or "fiscal stimulus" or some other policy -- that the economist you are reading has either based his or her views on a theoretical model that doesn't even try to model the key mechanisms of self-organizing coordination, or has come to a belief for other reasons, perhaps (in the best cases) a deep reading of history. There are other possibilities, of course.
I must say, this whole thing seems amazing to me. I would have thought that Clower's and Howitt's lead would have immediately been picked up by any macroeconomist eager to make progress. It would have swept in a new approach to understanding macroeconomic dynamics, displacing the older approaches; after all, it actually describes how the Invisible Hand works, whereas they do not. Obviously, this hasn't been the case, which in itself says something disturbing about the state of today's economics. It's clearly not all about seeking a better understanding.
REGRESSION TO THE MEAN
There’s a reason why commercial traders are regression to the mean traders. In this business it is the one thing that you can absolutely bank on. It's like death and taxes, it never fails. All markets eventually return to the mean. An appropriate corollary to this rule is that the further an asset gets stretched above or below the mean the more violent the regression is, and the further it will move past the mean during the snapback.
You can see this clearly in the chart below.
Notice that during the bull market from 2002 -2007 the S&P never stretched extremely far above the 200 day moving average (well until the final euphoria phase in 2007). Consequently each intermediate correction halted at or slightly below the 200 day moving average.
This changed when the new cyclical bull market started in 2009. It changed because the markets were not allowed to trade naturally. They were warped by massive doses of quantitative easing. This caused markets to stretch much further above the 200 day moving average than would have occurred normally. The consequences of course were that when the corrections hit they unwound violently and moved much further below the 200 DMA than would have occurred naturally.
This bull market is much more volatile than the previous one because the market is being driven by currency debasement instead of true economic expansion.
Now we are in a situation where the stock market has been stretched ridiculously far above the mean by QE 3 & 4. Trust me, Bernanke has not abolished the forces of regression to the mean. All he has done is guarantee that the regression is going to be many multiples more violent than it should have been.
When this house of cards topples over, I think there is a pretty good chance it’s going to be even more severe than what happened in 2011.
Also notice the red arrows marking major cyclical bull and bear market turning points. Notice the Fed warped the last cyclical bull market much higher and longer in duration than should have occurred naturally (he turned a 4 year cycle into a 6 1/2 year cycle). Consequently the forces of regression responded by triggering the second worst bear market in history. The current cyclical bull market, although not stretched as long in time, is extremely stretched in magnitude so the resulting bear market will almost certainly be exceptionally violent and protracted.
Mean regression rule: Without fail liquidity eventually finds it's way into undervalued assets. An appropriate corollary to that rule would be that liquidity will eventually find it's way out of overvalued assets.
Unless Bernanke has found a way to break the natural law of regression to the mean (he hasn't) then at some point we are going to see liquidity flee the overvalued stock market. When it does it's going to look for undervalued assets to land on. Nothing is more undervalued in my opinion than commodities in general, and precious metals in particular.
Regression to the mean doesn't just apply to assets stretched to the upside. It also acts to levitate extremely depressed assets, and the same rules apply. The further an asset is stretched below the mean the more violently the regression usually is once the selling exhausts. Considering that gold is now stretched about as far below the 200 day moving average as it was in 2008 the rally when it arrives should be every bit as powerful if not more so than we saw in 2009.
In my opinion we now have the setup to drive either another C-wave as large or larger than the one out of the 2008 bottom, or this is the set up to drive the bubble phase of the bull market.
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