Yelnick's great at spotting Bubbles in financial markets, by how does he miss this one in Tech
(1)As the the long wave, we are so clearly in a K-Winter
that it makes me smile at those who denounce the use of such analysis. The long wave folks expected and predicted this disaster; almost everyone else where shocked, shocked! there was gambling going on by the banksters.
Check out Steve Keen's website, debtwatch. He has a really compelling analysis which I have previously discussed that looks at change in debt as the core driver. He starts with this:
- aggregate demand (AD) drives GDP
- AD = consumption + Investment + change in debt
- change in GDP is highly correlated to the change in change in debt
Why change in change in debt? During the bubble, debt increases of course. The second derivative, the change in change in debt, always goes up during a credit bubble, which means investors are piling on at an accelerated pace. It shows a bubble - the signature is acceleration of debt. When it peaks and the bubble bursts, the change in change in debt - call it delta delta debt - plummets. His data shows the rise of delta delta debt prior to 1928/2007 and the drop after are close matches, as is the impact on GDP.
This fits the Long Wave:
- during K-Fall, debt increases, and at the end, it increases at an accelerated rate
- during K-Winter, debt collapses, and at some point at an accelerated rateThis time around the collapse of debt was consistent with 1928-1930, and then we slowed the process with the Stimulus. Delta delta debt is still negative, but the rate of drop has turned up, meaning slower. Yet the debt remains
So under the Long Wave, it will still need to collapse. All we have done is kicked the can down the road.BTW another signature of the bubble is how the use of debt changes from business investment to speculation
. This shows up in the percent of GDP that goes to banksters vs goes to wages. Wages drop as bankster profit rises. This is vivid in the US stats from 2003-2007. Sad,a ctually. As the bubble is used for speculation, wages get compressed. Steve Keen has a model where he plays out the endgame. Wages go south as bankster profits go north. The speculative fever wipes out the middle class.
Posted by: Yelnick | Saturday, November 27, 2010 at 03:29 PM
(2)Mish has a point about choosing to bailout German banks over bailing out Irish citizens,
although it is not clear the Irish could live with it. I sit in Cali-forn-nia and if they stiff the bond market they are dead ducks. Cannot finance any of those exorbitant union contracts ... If the Irish drop the Euro and go back to whatever their currency used to be, their borrowing costs skyrocket beyond that 6.7% coupon. The problem was created when the Irish lived beyond their means & the govt foolishly backed all the private loans to bailout borrowers. Iceland did NOT do that and are better off; also had kept their own currency. My advice to the govt would have been to get a reduction in the debt owed in exchange for some sort of deal. I am sure they tried ...
Fascinating issue of how to restructure the global financial system. The problem with fiat currencies is now obvious: the debt keeps piling on until it cannot be serviced. How to reduce the debt? There is nothing to exchange it for, so the can gets kicked down the road and the problem simmers and gets worse.
1) Under gold, you could at least liquidate debts via a gold exchange. Consider the impact if the Treasury (not the Fed) issued gold-back bonds priced at $8k per oz in exchange for (say) 5x the debt against the current Dollar value. Potentially the whole pile of $50T Dollar debt could be exchanged for $10T of nee Dollar debt, some of which is gold-backed.
2) Keynes had this idea of a Bancor, a synthetic currency as a reserve that was not any individual country. Say we use SDR's for that purpose. ireland floats bonds under its own currency priced in SDRs, and partially backed by SDRs. If the PIIGS persist in bad policies, their currencies drop vs the SDR, as they should, while Germany's goes up. This might work of the SDR is sufficiently backed.
The Bancor could avoid the avoid the Triffin Dilemma, of the reserve currency country exporting its policies. In Europe, it means the austerity of Germany gets exported to all the PIIGS. Worldwide, it means the prolificacy of the US get exported, causing inflation, as is now occurring under QE2.
Posted by: Yelnick | Sunday, November 28, 2010 at 07:47 PM
(3) Dollar Index has clearly bottomed, and it seems to be a major bottom
as we saw in 1978, 1995 or just a couple of years ago. Each time the Dollar rose not because of US strength but other-currency weakness. Dollar just fell slower! Core drivers this time around are Euro, China & QE2:
- Euroland is obviously in a world of hurt, and the Euro could drop a lot more
- China is tightening and suffering a horrific internal inflation, raising a real risk of a huge bubble bursting much like Japan 1989. The yuan would drop against the Dollar, pushing it up
, but a bigger impact would be the peak in emerging-market speculation. Where does the hot money go then?
- QE2 is more complex. It should weaken the Dollar but it is under political backlash and is less aggressive than it could have been. I think the backlash is also intellectual - the initial rush to judgment that it would trash the Dollar turned out to be overblown as market participants figured out what the Fed was actually doing - flattening the middle of the yield curve. If the US economy continues to skip along a bottom, the flat middle won't do much to change business lending, and hence won't be that inflationary. Instead it continues to push liquidity into speculation.
Posted by: Yelnick | Monday, November 29, 2010 at 09:08 AM