Keynes, Gold, NBER and Serial Bubbles

Ed Hyman & Dennis Stattman's Outlook for 2011

-------- Original Message --------

Subject:	FW: Surreal Policymakers Are Blowing Serial Bubbles
Date:	Thu, 13 Jan 2011 13:59:53 -0800
From:	Jas Jain

"If the gold standard could be reintroduced in all of Europe, we all believe that the reform would promote trade and production like nothing else, and would stimulate international credit and transfer of capital to the places where they are most useful. One of the greatest elements of uncertainty would be suppressed."~ John Maynard Keynes, Commercial Manchester Guardian, April 20, 1922

Keynes was reasonably lucid until he took a bath in the 1929 crash and sought solace in the "liquidity preference".

 -----------------------------------

Surreal Policymakers Are Blowing Serial Bubbles

By: Bob Hoye | Thu, Jan 13, 2011

 

The above is more a sarcastic observation than a title for this edition. A play on words that is not inaccurate. Also it is descriptive of a mania in policymaking whereby central bankers in their desperation to prove their theories have exaggerated speculation in the All-One-Market (AOM).

In November we noted the ability of a methodical rise to soar to compelling conditions, become unstable and then fail. If it becomes big enough the buying frenzy drives our proprietary Momentum Peak Forecaster (PMF) to a critical high. Anything above 1.21 has been followed by a major high and slump.

It does not matter what the focus of speculation is. Examples since 1970 include credit spreads in 1998 that led to the LTCM disaster and housing in 2006 that led to the 2008 financial collapse.

In early December the "Forecaster" reached 1.25, which prompted our first alert. The implications were reviewed two weeks later when it had reached 1.27, which compares to 1.31 before the 1987 Crash.

This is plotted weekly and the number is now at 1.284 and is running out of momentum. Let's call it 1.28 and conclude that the formal signal has been accomplished. In which case the speculative frenzy in markets and policymaking is about to fail.

Typically, the lead from alert to failure has been within one to two months, which is a rather wide time window. There are some indicators that are confirming that both private and central bank speculators can no longer continue to bull the markets.

Stock Markets

"Get set for a great bull market. The stock market leads the economy."

This was reported in December and it is worth noting that "great bull markets" are different because the culmination does not lead the recession but is virtually instantaneous. Using NBER determinations, the peak in the business cycle and financial mania occurred with a month of each other in the 1929 and 1873 examples. In the 2007 example stocks peaked in October and the recession started in that fateful December.

Lately our view has been that recovery in markets and the economy is the first business cycle out of a fairly typical post-bubble crash. If the AOM (including stock markets) is peaking now we would expect that the business recovery is peaking as well.

Our "Forecaster" has something to add to this. In examples that included big action in commodities the signal occurred close to the start of the recession using the NBER determination.

In 1973 speculation encompassed all commodities and our Forecaster registered on November 23 and the recession started that November. The next sensation in commodities was the 1979 precious metals mania. The Forecaster registered on November 9, the high for gold and silver was on January 21, 1980. That recession started in January 1980.

Over the past six weeks the stock market has reached bullish sentiment numbers associated with previous important highs. One, the Trin, has the most exceptional reading since the 1960s.

Risk on the downside is becoming more obvious and our Forecaster suggests there is only a little time left for the favourable stock market and business cycle.

Ed Hyman & Dennis Stattman's Outlook for 2011