Friday, February 26, 2010

What has been will be again, what has been done will be done again; there is nothing new under the sun.

"There may be a recession in stock prices, but not anything in the nature of a crash."
- Irving Fischer, September 1929

"A severe depression like that of 1920-21 is outside the range of probability. We are not facing protracted liquidation."
- Irving Fischer, November 1929

'For years it has been an article of faith with the normal American that America, somehow, was different from the rest of the world. The smash of 1929 did not, of itself, shake this serene conviction... because it was so spectacular and catastrophic, like a shooting star disconnected with the fundamental facts.'
-M.A. Hamilton, In America Today (1932)

'We thought American business was the Rock of Gibraltar. We were the prosperous nation, and nothing could stop us now. A brownstone house was forever. You gave it to your kids and they put marble fronts on it. There was a feeling of continuity. If you made it, it was there forever. Suddenly the big dream exploded. The impact was unbelievable.'
- Yip Harburg, as interviewed by Studs Terkel in Hard Times (1970)

'The shadow banking system is still in trouble, it has not recovered. We are still in a severe recession. I'm suffering from this, I have two houses, I can't sell one. The shadow banking system that supported it is no longer operating as it did before.'
-Frederic Mishkin, this morning

'As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth -- not of existing wealth, but of wealth as it is currently produced -- to provide men with buying power equal to the amount of goods and services offered by the nations economic machinery. Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.That is what happened to us in the twenties. We sustained high levels of employment in that period with the aid of an exceptional expansion of debt outside of the banking system. The time came when there were no more poker chips to be loaned on credit. Unemployment further decreased the consumption of goods, which further increased unemployment, thus closing the circle in a continuing decline of prices.This then, was my reading of what brought on the depression.'
-Marriner S. Eccles

'Other than Herbert Hoover’s memoirs, I have yet to read any analysis of the Great Depression attribute anything internationally other than the infamous US Smoot-Hawley Act setting in motion the age of protectionism in June 1930. It was the financial war between European nations attacking each other's bond markets openly shorting them that led to all of Europe defaulting on their debt. Even Britain went into a moratorium suspending debt payments. This is what put the pressure on capital flows sending waves of capital to the United States that to some degree was kind of like the capital flow to Japan into 1989. This put tremendous pressure upon the dollar driving it to new record highs that were misread by the politicians who did not understand capital flow. They responded with Smoot-Hawley misreading the entire set of facts.'
-Martin Armstrong

'The euro is now, for the first time since its introduction, in a difficult situation, but it will come through. Now, to some extent, there is speculation against countries ... this development combined with an unfavorable starting position and unsolved structural problems. That is dangerous."
-Angela Merkel

'The big bets are emerging amid gatherings such as an exclusive "idea dinner" earlier this month that included hedge-fund titans SAC Capital Advisors LP and Soros Fund Management LLC. During the dinner, hosted by a boutique investment bank at a private townhouse in Manhattan, a small group of all-star hedge-fund managers argued that the euro is likely to fall to "parity"—or equal on an exchange basis—with the dollar. "This is an make a lot of money," says Hans Hufschmid, a former senior Salomon Brothers executive.'

At this point at the end of the trend - 2009 low besting the 2002 low breaking a line of lower lows from 1897 up- our prosperity is now in the hands of Fleck's battle of unarmed combatants (currencies) where the U.S. is the dealer (reserve), at least for the near term.

Have always held firm to the thesis that deflation is the midwife to hyperinflation. A real deflation, not just disinflation, requires liquidity evaporation due to multiple sovereign crises, where the backstop is called into question.

Deflation is the dollar bid, hyper-inflation is the downgrade of America's citizenry commensurate with a currency devaluation .

Would suggest that the quantity of liquidity evaporation will very much define the quality of any hyper-inflation.

We have a free skate while there are troubles in Euroland (should stretch over months not weeks) and then we'll find out just how thin our ice really is.

The debate is not inflation versus deflation it is debasement versus deflation. Your money Mr. Federales has no velocity here for the band of The Hand can only conjure a Potemkin demand. Organic wage growth, absent for the last decade, comes from ... wait for it ... the productive allocation of capital when a free market pins winners and chooses losers. (AM Rule #8)

What has been will be again, what has been done will be done again; there is nothing new under the sun.

(Dan Henniger, WSJ op-ed) :Finally, after a nonstop, nearly 80-year upward climb, government spending has hit a wall. It didn't seem possible but this is a big wall. It's the American voter. This has been an unforgettable year in the history of American spending… We've been grinding toward this moment since 1932. It has always been a question of political physics just how high government could go in the U.S. before it arched over and down.

CARPE DIEM blog: 'A few weeks ago, the New York Fed released its latest "Probability of U.S. Recession Predicted by Treasury Spread," with data through June 2009, and the Fed's recession probability forecast through June 2010. The NY Fed's model uses the spread between 10-year and 3-month Treasury rates (3.54% spread in June, the highest since May 2004) to calculate the probability of a recession in the United States twelve months ahead. The Fed's data show that the recession probability peaked during the October 2007 to April 2008 period at around 35-40%, and has been declining since then in almost every month. For June 2009, the recession probability is only 1.27% and by June 2010 the recession probability is only .06%, the lowest level since May 2005. Further, the Treasury spread has been above 2% for the last 15 months, a pattern consistent with the economic recoveries following the last six recessions. The pattern of the recession probability index so far this year (going below double-digits and declining monthly) is very similar to the pattern starting in March 2002 that signalled the end of the 2001 recession.' (See chart above. -AM)

AM here: Our current situation and prognosis : If inflation expectations are unanchored, then a severe recession can lead to a deflationary spiral. The logic is as follows: In the early stage of recession, the emergence of slack causes the inflation rate to dip. The resulting lower inflation rate prompts people to reduce their future inflation expectations. Continued economic slack causes the inflation rate to fall still further. If the recession is severe and long enough, this process eventually will cause prices to fall and then spiral lower and lower, resulting in ever-faster deflation rates. The deflation rate stabilizes only when slack is eliminated. And inflation turns positive again only after a sustained period of tight labor markets.

The second model is one where inflation expectations are "well anchored" in the sense that they are consistent with the goals and policies of the central bank. In this case, even in a severe recession, people expect the central bank to take policy actions, it is of course at all times just a confidence game, that will restore a positive rate of inflation, and this expectation acts as a magnet pulling prices up. Although deflation will occur if the extent of slack is sufficiently large, a deflationary spiral only develops in the direst circumstances in which monetary policy is incapable of righting the economy.

The first model says you believe your lyin' eyes.

The second model says you believe in wizards.

Such magicians they are with models they built that show no chance of fail when the money is easy and free. It is merely a matter of scale not design. These models rate the probability as 100% that our blessed leaders can manufacture the economic consent of consumers by getting them to add more debt because same consumer will believe that prices will be higher in the future.

These models and the besotted following are both trading without respect to fundamentals.

Inflation expectations were well anchored in the Great Depression.

They also were well anchored in Japan which is presumably the Federales highest probability target ... flat beer for everyone.

If you believe in the adage 'as above, so below', then one might suggest that the real damage yet to come will be caused by the Federales pushing the pedal again too hard. The rubber band pulled up snaps back, its' pulled harder up and snaps back even harder and then paging ... Dr. Faber, Dr. Grant, Dr. Faber.

What we need is a Holden Caulfield to scratch, 'it is a consumer in debt stupid', on each computer terminal housing such models.

Merrily, we rhyme along.

Thursday, February 25, 2010

Human sacrifice, dogs and cats living together, mass hysteria and Greenspan as an intemperate, disregarded blogger...

'Ask yourself whether the dream of heaven and greatness should be waiting for us in our graves - or whether it should be ours here and now and on this earth.'
-Ayn Rand

'In retrospect, I see nothing that we did that was inappropriate in terms of policy. I do not deny that many appear to have succeeded in a material way by cutting corners and by manipulating associates, both in their professional and in their personal lives. The fact that our economical models at The Fed, the best in the world, have been wrong for fourteen straight quarters, does not mean they will not be right in the fifteenth quarter. History has not dealt kindly with the aftermath of protracted periods of low risk premiums. I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I've said. The true measure of a career is to be able to be content, even proud, that you succeeded through your own endeavors without leaving a trail of casualties in your wake.'
-Alan Greenspan (compilation)

'He slimed me.'
- Dr. Peter Venkman

Ah let's see, WSJ above the fold, 'Lending falls at Epic Pace', first line, U.S. banks posted their sharpest decline in lending since 1942.

Cross-referencing Jimmy 'Zip-a-dee-doo-dah' Grant : 'Loans and leases were flattish in the opening months of the recoveries from the recessions of 1981-1982, 1991 and 2001, but in no case was there weakness on the scale of today's. There is a risk too, that debt destruction, or de-leveraging, might get rolling again, crushing jobs and incomes as it proceeds. There has only been one sustained de-leveraging since the 1920s.'


Hmmmm, any nuggets from Bill 'Red Pill' King? King Report:' The Commerce Department reported on Wednesday that new home sales dropped 11.2% in January to 309k units (360k was expected). This is the lowest level on record, which goes back to 1963.'

Ah no worries blame it on the snow... Anything else?

Yesterday's WSJ, Professor Robert Barro, 'viewed over five years, the fiscal stimulus package is a way to get an extra $600 billion of public spending at the cost of $900 billion in private expenditure. This is a bad deal.'

Guess zero hour has passed but heck he's from Hahvahd. Elitist smartypants, don't he know that stupidity is cupidity here on Sugar Mountain?

Guess nothing really earth shattering to pierce the pablum narrative du jour ...


'Former Federal Reserve Chairman Alan Greenspan said the financial crisis was “by far” the worst in history and called the recovery from the global recession “extremely unbalanced.”

The world economy has undergone “by far the greatest financial crisis globally ever,” Greenspan said today in a speech to the Credit Union National Association’s Governmental Affairs Conference in Washington.

Greenspan said that while the economy was in worse shape in the Great Depression, the recent financial crisis was potentially more harmful than that in the 1930s.

Greenspan said he wants the subprime mortgage market to return. I hope we can find a way of resurrecting the subprime market," because it was working well until those mortgages were widely securitized.'

Crickets chirping... er... actually they're laughing hysterically.


'LOL, no, he didn't really, did he??? You gotta be kidding me... He is just stunning in his arrogance... It(the world economy has undergone by far the greatest financial crisis globally ever)has, and he caused it, period.'

What he said. Mr. Greenspan please tear down your wail and go away.

Wednesday, February 24, 2010

The Band of the Hand can only create a Potemkin demand

Originally posted on Monday February 9, 2009, Don't Task Don't Smell:

My grandmother, who will turn 101 this year (add-on, this year will be 102! Go Grandma! -AM), eloped in 1928. Her father was a successful businessman in Chicago who owned a number of cosmetology schools. A year later she was back home ... a couple years after that her father went bankrupt. My father grew up in poverty on the South Side, his career choices were be a priest, be a cop or join the army. After halfheartedly attempting the first two he opted for the last.

When the Summer of Love hit Chicago, my Dad was one of those guys in the white short sleeve shirt from Sears with black-rimmed glasses. My parents bought their first home on the North Side and ran such a tight budget that they had to ration out the pieces of bread they used for sandwiches in order to make the loaf last through the week.

One of the main goals my father held to was that his children would all be able to graduate from college ... later on he too got his degree by going to night school.

I am a card-carrying member of the liberal 'establishment', wealthier than the aggregation of all my descendants since they came off the boat, but cognizant of the days when, in my struggles, I carried my net worth in my wallet and wondered how I could pay my bills.

Life has taught me that hardship breeds opportunities, that only in tough times can you determine your true character, and that the blessings of America give all of us the promise that you can accomplish anything if you set your mind to it.

My family story is partially written as a generational battle from 'rags' to riches ... hopefully to be continued by my children as my current financial stability should allow them to broaden their aspirations towards a more global stage.

To achieve my success, I was never given a hand-out, but I was at several times given a hand-up. The recognition that life comes down to a few moments and that when you are tasked the integrity of your response determines your ultimate success was a lesson learned through trial and error. I learned in a fashion sometimes 'vainful' and sometimes painful that embracing your failures whilst accepting your mistakes and resolving to learn from both separates the winners from the sinners.

The election of Barack Hussein Obama as President of the United States was such a potentially game-changing event that it was hard not to feel great optimism and admittedly joy at the promise of actually turning a page in reality as opposed to pablum narrative.

Unfortunately it appears that this page-turning window of opportunity is quickly closing.

Preliminary indications are that, despite the apoplexy of the arch conservatives, Soros isn't Barry's puppetmaster. The Soros plan would necessitate the doctor cutting off the patient's morphine and instead performing elective surgery. The Obama plan would appear to be nothing more than increasing the dosage.

What is called for here is a program I've called the Mendacity of Hope and the Urgency of Not.

Failure to liquidate the insolvent banks through adjusting their capital structure so that they can be viewed as fairly valued by the free markets will end up liquidating a majority of the productive economy.

It's the demand stupid. You cannot fix a dam with more water. In a debt crisis only debt destruction can take you to the promised land.

The Obama plan will rely heavily on guarantees, which in the end will only guarantee that there will be more 'emergency' measures needed down the road.

The Obama plan will neither have the desired effect nor be implemented in such a way that it doesn't result in both gaming by the pirates and hedgies as well as covering as opposed to discovering the true folly of rich folks' bad speculative bets.

The Federales have determined that they don't want to take the risk of putting assets on their books so instead they will take the same risk by writing a put and give any potential return to the same folks that are causing the taxpayers to bear this burden. Heads they win ... tails we lose ... and unless the coin lands on its' side we'll be back to the bailout well in short order.

What is needed is simple. Dip the banks in the acid of price discovery. Let the chips fall where they may. Governments role here is to provide a safety net for capitalism's excesses. For the financial system, I call genius in the Soros 'side pocket'. For the household balance sheet, strengthen existing unemployment programs to mitigate the damage and offer a 'tax holiday' that will spur demand by restoring balance sheets. Demand won't be restored tomorrow ... it will take time and price. But unless we pay the price NOW all we're going to do is extend the time ... but make no mistake the devil will be paid his due.

Don't task (take your medicine) and don't smell (price discovery) is doomed to fail.

Tuesday, February 23, 2010

Indeflation special at the Red Pill Diner

'Oh, to live on Sugar Mountain
With the barkers and the colored balloons,
Though you're thinking that
you're leaving there too soon
-Neil Young

'Fractional-reserve banking systems are historically prone to runs and deflationary contraction. Paper-money systems are inherently prone to inflation. Our modern financiers have devised a paper-money-cum-fractional-reserve-banking-system(with yet another credit structure, also highly leveraged, lurking in the shadows) that is prone to inflation and deflation at one and the same time. The greatest generation? In devising infernal financial machines, we're the one.'
-James Grant

The King Report
Monday February 22, 2010
Issue 3701

A month ago, we noted that the BLS had increased the waiting of ‘owners’ equivalent rent’ in the CPI because home prices were declining. If anything, the weighting should decline because housing is consuming less of a person’s income (18.8% per Visual Economics). In 1975, the housing debt-to-income ratio was 23.21 percent. In 1980, the housing debt-to-income ratio was 39.26 percent. In 1985, the housing debt-to-income ratio was 32.59 percent. In 1990, the housing debt-to-income ratio was 26.17 percent. In 1995, the housing debt-to-income ratio was 22.69 percent. In 2000, the housing debt-to-income ratio was 23.43 percent. In 2005, the housing debt-to-income ratio was 26.83 percent. In 2009, the housing debt-to-income ratio was 18.84 percent.

On Friday, the usual suspects heralded the great CPI and the negative Core CPI. Headlines proclaimed that Core CPI was negative for the first time since 1982. This is a totally invalid, if not ignorant, statement because CPI methodology has been altered something like 10 times since 1982.

And if one actually believes the Core CPI is a valid metric, the return of deflation, after the trillions of dollars in stimulus, credit creation, nationalization, etc. should scare the CNBC out of you.

(Roger that.-AM)

But we digress. Once again the CPI methodology has been changed. In fact, there are two changes to the January CPI. The BLS has changed its seasonal adjustments and the BLS has increased the weighting again of OER by including secondary home ownership in the metric.

For the vast majority of Americans, there is no cash benefit for falling housing prices in the CPI. The BLS has increased the weighting of housing, probably because housing prices are in retreat. Your home price can fall while you pay more for the necessities of life and the Ministry of Truth will tell you that prices are going down even though your checkbook says the opposite. And Street Shills will yell ‘hallelujah’ and implore the Fed to pump more credit.

But wait, there’s more chicanery. Second home ownership is listed as ‘unsampled’. If we understand the English language correctly, this means the BLS does not sample to procure the particular data. Logic dictates that if one does not sample, then they are manufacturing the data by guessing.

(Guessing is such an innocuous term for widespread manipulation.-AM)

How else did the BLS craft a benign CPI when PPI jumped 1.4% in January? Somehow the BLS got electricity prices falling 1.1% despite record snow storms and severely cold weather. All other energy prices soared. The BLS has the price of electricity and natural gas (energy services) declining 4.7% NSA over the past 12 months.

We have maintained for years that CPI is constructed to NOT show inflation because: 1) It is used for COLAs, 2) It fosters the overstating of GDP, and 3) Provides cover for the Fed to paper over declining US living standards. CPI minus PPI shows PPI is at its largest gap (1.20) to CPI since 1980.

(See graph above from, link is to the right. -AM)

And there are other changes to CPI. Medical care commodities, because they are inflating, will also have ‘unsampled’ factors in their compilations.

The BLS has healthcare costs up only 3.4% for 2009. This is a way to keep inflationary expectations well anchored. More proof of CPI fraud and the scheme to understate inflation is the weighting of ‘medical care’ in CPI. Healthcare spending is estimated to be 17.6% of GDP in 2009 per the Kaiser Family Foundation. So what weighting does the Ministry of Truth assign to ‘medical care’ in CPI? 6.513% BLS will say its estimate is out-of-pocket expense. But someone, the government or business, pays the balance. And those costs are passed on to someone.

AM Here: As posted on this blog on November 25, 2008 -' Remember the movie, 'It's a mad,mad,mad, mad, mad world'? At the end of the movie that generation's inglorious bastards were all gripping a fire ladder as the motor blew up and the ladder lurched viciously throwing them 'akimbo'. The vicious movements from left (inflation) to right (deflation) best mirror our market action.We are at the cusp of being at the most volatile period (per volatility indexes) ever. As in ever since we've had a stock market. This volatility is mostly driven by shifting perceptions of inflation and deflation. The compression of time frames within which this inflation/deflation switch gets flipped on and off can only result in one name for our current economic malaise : Indeflation.'

The indeflation special is still a top seller at the Red Pill Diner. This struggle 'tween virtue and vice is writ large as the debate between deflationistas and debasionistas. Ones' lens depends on what one means by ones' ends. The deflationistias mean that deflation is the midwife of hyperinflation. The debasionistas mean that America's resilient wealth exporting machine will import higher asset values. The former pines for reason before farce, the latter embraces the tragedy.

Never have so many been so confident of so little (flat at best) done with so much (trillions of meatballs.)

The Unbearable Brightness of Doing Nothing is your humble blogger's call.

AM Rule #6,'The cold hard fact of our age is that the bankrupt ideology of the rich that had greatly succeeded in drafting the inner monologue of regular folks so that they would vote against their self-interests is colliding head-on with a Mr. Market that is a bit pissed off that we've inflated it out of the business cycle for the last quarter century', or the 'What just Happened Crisis', has given us Rule #7, 'Failure to liquidate the insolvent banksters has led to the liquidation of a large part of the productive economy. A taxpayer financed bailout of rich folks' bad speculative bets has resulted in zombie banks and zombie customers... a fiscal tide that lifts no boats', 'The I Can't Believe it's not Capitalism' plan.

We're kicking the 'creative destruction' can down the road trying to avoid the Deadhead Economy on the other side of Sugar Mountain. We are fighting a war with the future using the armaments of the past.

Monday, February 22, 2010

Anonymous Monetarist Bromance : I Heart Benoît

(In the Parthenon of the Gods of Finance, Benoît B. Mandelbrot should be cast on the throne. Taleb is an amuse bouse, Mandelbrot is a five star feast. When he was a pup he was tutored by his uncle who saw rote learning as an anathema. At the age of 20 he found himself hiding in Lyon, France(1944) staring at an instructor who was expounding on algebra. The words and numbers meaning nothing to him, he boldly declared, "Sir, you don't need to make any calculations. The answer is obvious."

As further described in the book The Misbehavior of Markets:

'He{Mandelbrot} described a geometrical approach that yielded a fast, simple solution. Where others would have used a formula, he saw a picture. The teacher skeptical at first, checked: Correct. And Mandelbrot kept doing the same thing, in problem after problem, in class after class. As he relates it, 'It happened so fast I was not conscious of it. I would say to myself: This construction is ugly, let's make it nicer. Let's make it symmetrical. Let's project it. Let's embed it. And all that, I could see in perfect 3-D vision. Lines, planes, complicated shapes.'

Thinking in shapes, just like Einstein. Time and space/price and form .... oh my! -AM)

Written by Staff
February 17, 2010 10:32 AM Professor Mandelbrot, it’s nearly fifty years since you published your study of the variability of cotton prices, showing that they did not follow the bell-shaped curve of the normal distribution and were subject to jumps. Yet academic finance theory is still largely based on assumptions of continuity in price movement and the bell curve. Why do you think it’s taking so long for the plentiful evidence of wilder market behaviour to be reflected in accepted theory?

Mandelbrot: This is a very complicated story. Early on it was simply a matter of the relative difficulty of my work. Bachelier’s 1900 model of financial stock price movements (which assumes a “random walk” and underlies classical finance theory – comment) is quite easy to understand for people who have elementary statistics. The 1973 Black Scholes model of option pricing is largely a restated version of Bachelier, who was a great man and did not receive the acclaim he deserved as he wrote terribly.

What I introduced was more complicated and, although my initial publication met with great enthusiasm, I found that academic interest moved away from me, and so I also moved to different problems entirely in my work. Nobody was around to pick up the torch and fight. For my work to have been taken up would have required either a strong personality or, more likely, a major upheaval in the markets. So the timing was wrong. At that time finance was being studied by people who had an undergraduate background in English or French or literary economics, so they could not do much in the new direction which I was proposing.

After a number of years, particularly after the October 1987 crash, I returned to the subject and published several papers, and since then a number of people have come into the game. But it certainly requires more preparation and the mathematics is less easy than that which underlies Bachelier’s theory. What do you think financial theorists in 50 or 100 years’ time will be using as their measure of risk? Will they have moved away from standard deviations, Sharpe ratios, efficient frontiers?

Mandelbrot: I certainly hope so. But young people are very free with predictions. I’m an old man and so I make no predictions about what might happen! During my career I’ve often seen that ideas which deserve to be taken seriously are ignored for a long time. Having said that, I think that things are looking up: a number of books on the subject have appeared and it’s a pleasure to see that this is happening. And the followers of the 1900 Bachelier theory have a lot of explaining to do when they claim that the world is as simple as the random walk principle suggests – that successive price movements are independent and normally distributed. In your book, “The Misbehaviour of Markets”, you propose a measure called alpha, which measures how wildly prices vary, and an H-exponent (or Hurst exponent), which measures the dependence of price changes on past price changes. How have these ideas been taken up?

Mandelbrot: As you probably know, books on “fat tails” have become numerous, so many people are looking at measures of wildness or roughness in price movements. There are also books coming out that use my suggested notation, which is rewarding for me to see.

Even when Bachelier’s model was widely accepted, many brokers and non-academic students of the market were making fun of it, saying that the world is not that simple. The theory assumed continuous price variation, which I found utterly unbelievable. With the enormous expansion of computing power, it’s obviously possible to analyse vast amounts of data. Is it a question of people just spending more time looking at the empirical evidence, trying to find out what the characteristics of a particular market are, and then developing new theories based on the evidence?

Mandelbrot: Science is more complicated than that. However, it’s astonishing how easy it is to do today what I did with great pain 50 years ago. And the only reason I could do my work then is that I was working at IBM and they allowed me use of their computers over holidays (at Christmas, for example).

Science requires certain tools but also an idea and an acceptance of change, something that is interesting to define. All the scientific innovators saw something interesting where others saw only confusion. The tools to conduct the analysis – for example, high-powered computers – are necessary, but not sufficient.

It’s very subtle how scientific research progresses differently in different areas. In some of the areas I’ve worked in, the reaction was very positive, other people jumped in, the area became extremely widely known, high school students would write papers about it and the simple ideas were soon exhausted. In other fields it’s been an uphill struggle, often because there is a group of individuals who don’t want new-fangled ideas. They want to continue in their way and there is no authority to push them aside. What are the implications of your work for the way in which the financial system has been allowed to develop and, in particular, for the amount of debt in it, which presumably increases the risk of a catastrophic failure if market movements are wilder than conventional theory supposes?

Mandelbrot: I’ve heard this remark several times. I’ve been very much an interloper in several fields. I was not trained as an economist at all, although I did an economics course during my Masters studies in France. I paid no attention to it as the course wasn’t examined and it was very theoretical but not mathematical. I try to keep to things that I understand and not go onto shaky ground in general questions that I don’t know much about and where I don’t feel I have any competitive advantage.

However, what you say are things that I fully realise and I hope that people are going to pick them up. There’s a big question over how academia is going to react to recent events. Over the last few years there’s been much more openness to ideas that fall outside Bachelier’s classical finance theory, but these ideas are still outside official doctrine and off the syllabus that is taught in business schools. I hope that these ideas will spread but I have no idea how fast this will happen. And now I’m retired from teaching I have very little day-to-day influence over what’s happening.

Even when I was Sterling Professor at Yale, although I was in the maths department I had many students from other faculties, including economics. Even then it was clear that there was a very strong establishment within the university that found my ideas to be disturbing to daily routine. On a personal level, I’ve seen you quoted as saying that your family history, your changes of country and the fact that you were forced to study both outside formal education systems and in different disciplines actually helped you to have an outsider’s view of things and to look at mathematics from a different perspective. If you were advising a young person now, what areas apart from mathematics might be studied productively by someone interested in your theories of roughness?

Mandelbrot: In mathematics there are some areas that study roughness, but the fact that the word “fractal” had to be invented strongly suggests that mathematicians had not previously considered this to be an area of great importance. There were individual ideas that I put together into fractals that were already studied, however.

But I’m very struck that now in mathematics literature “fractal” has become a very common word. It has brought together in pure mathematics ideas that are very fruitful and many people are occupied with them. The Fields prize in mathematics, which is awarded to those aged under forty, has now been given to three different people who have developed my work.

I’ve had a long and complicated life and I’ve repeatedly seen people who knew very well what should be done next fail, and I’m not eager to become a prophet to be falsified!

When I came up with fractals, this was contemporary with a major decision of an international committee in applied mathematics, made up of very distinguished but narrow-minded people. They said that the difficulties involved in discontinuous functions or the “wild things” I was studying were such that one shouldn’t even mention them in the context of engineering or economics, because they would confuse people.

By fluke I had an advance copy of the statement of this society and was passing through Zurich, where the head of the committee was teaching. I went to see him and said, “I think you shouldn’t publish this, since the things you want to throw out of the applied mathematics curriculum are central to studying many things of great importance, like stock markets or earthquakes.” I never heard of this proposal again.

So although I’m daring in having fought for the ideas I’ve worked on, I’m uncomfortable making predictions. I’ve seen so many of them get nowhere.

(Mandelbrot saw finance as an interesting field of study because of the exhaustive nature of longitudinal data sets such as cotton prices. He was able to show that discontinuous market movements exhibited scalability, i.e., fractal behavior, when plotted on engineering graph paper - the kind with logarithmic scales in both directions. This was prima facie evidence of a power law behavior within markets. Power law merely describes the nature of a logarithm. The logarithm of a number to a given base {base 10 describes of course what most of us are familiar with)is the power or exponent to which the base must be raised in order to produce the number. So, for example, the base 10 logarithm of 100 is 2, because 2 is the power to which 10 must be raised to produce 100. Although this alone should have resulted in Bachelier's theory of the random walk being consigned to the dustbin of history, to quote Henry Miller, 'A man can get to love shit if his livelihood depends on it, if his happiness is involved.' -AM)

Saturday, February 20, 2010

I'll play you a little tune on my violin

'Such harmony is in immortal souls;
But, whilst this muddy vesture of decay
Doth grossly close it in, we cannot hear it

'Cycles are meaningful, and all science that has been developed in the absence of cycle knowledge is inadequate and partial. ...any theory of economics, sociology, history, medicine, or climatology that ignores non-chance rhythms is as manifestly incomplete as medicine was before the discovery of germs.'
-Edward Dewey

'Ed Dewey, who formed the Foundation for the Study of Cycles, made a life long study of cycles in everything that he could. After producing, collecting and collating several thousand reports of cycles he reached a number of conclusions. First,everything studied by man that can be made into a time series has cycles in it. Second,there are common cycle periods that exist in many seemingly unrelated fields of study. Third, these cycles with common periods exhibit cycle synchrony, meaning that they reach their peaks and troughs at the same time.Fourth, many of the commonly reported cycles exhibit simple ratios of 2 and 3 (and their products) between them. Fifth,some of the observed cycles that fit these patterns are outside the earth.
When I discovered a whole set of cycles in 44 years of weekly corn prices I realised that they had frequencies that were in exactly the same ratios as the white notes on the piano plus two black notes (Eb and Bb). Then I noticed that the 4:5:6:8 frequency of the original cycles was a major chord in music. At the time this was altogether too weird - was God playing major chords in the NZ economy and scales in corn prices? I didn't mention it to people because it seemed that I would get laughed at
-Ray Tomes

'My calculations are based on the cycle theory and on mathematical sequences. Mathematical science, which is the only real science that the entire civilized world has agreed upon, furnishes unmistakable proof of history repeating itself and shows that the cycle theory, or harmonic analysis, is the only thing that we can rely upon to ascertain the future. Mathematics is the only exact science. All power under heaven and on earth is given to the man who masters the simple science of mathematics. After exhaustive researches and investigations of the known sciences, I discovered that the Law of Vibration enabled me to accurately determine the exact points to which stocks or commodities should rise and fall within a given time. The working out of this law determines the cause and predicts the effect long before the Street is aware of either. By knowing the exact vibration of each individual stock I am able to determine at what point each will receive support and what point the greatest resistance is to be met. Those in close touch with the market have noticed the phenomena of ebb and flow, or rise and fall in the value of stocks. At certain times a stock will become intensely active, large transactions being made in it; at other times this same stock will become practically stationary or inactive with a very small volume of sales. I have found that the Law of Vibration governs and controls these conditions. Thus, I affirm, every class of phenomena, whether in nature or in the stock market, must be subject to the universal law of causation and harmony. Every effect must have an adequate cause. If we wish to avert failure in speculation we must deal with causes. Everything in existence is based on exact proportion and perfect relationship. There is no chance in nature, because mathematical principles of the highest order lie at the foundation of all things. Faraday said: `There is nothing in the Universe but mathematical points of force.' Vibration is fundamental; nothing is exempt from this law; it is universal, therefore applicable to every class of phenomena on the globe. After years of patient study I have proven to my entire satisfaction as well as demonstrated to others that vibration explains every possible phase and condition of the market. Every movement in the market is the result of a natural law and of a Cause which exists long before the Effect takes place and can be determined years in advance. The future is but a repetition of the past, as the Bible plainly states: `The thing that hath been, it is that which shall be; and that which is done is that which shall be done, and there is no new thing under the sun.' Every stock makes a top or bottom on some exact mathematical point in proportion to some previous high or low level.There is nothing mysterious about any of my predictions. If I have the data I can use algebra and geometry and tell exactly by the theory of cycles when a certain thing is going to occur again.' -W.D. Gann (quote compilation)

'The stars in the heavens sing a music if only we had ears to hear.'-Pythagoras

Had the pleasure of visiting the Chicago Board of Trade the other day. Three general observations were drawn. First, Rick Santelli is a chainsmoker. Second, should one be concerned by the proliferation of screens turned to YouTube and Facebook within this cathedral to, if the not the last bastion of, capitalism? And third, is there actually some fundamental aspect that ties together all of the disparate activity occurring within that kaleidoscope of commerce?

By fundamental aspect, your humble blogger means cycle or vibration or harmony or fractal, the antithesis of 'random-walk', a theory that has been debunked by Mandelbrot, Taleb, and the 'universe-squared' sigma of recent events.

One of the heavyweights of cycle analysis Edward Dewey developed a table of commonly occurring cycles, namely, .33,.49,.66, .74, .99, 1.48, 1.97, 2.96, 4.44, 5.92, 8.88, 17.75, 35.5, 53.3, 106.5 and 142. (Measured in years).

Let's consider the first 5.

33%, 50%, 66%, 75% and 100% are interchangeable per sacred geometry with these cycles. Market moves in eights and thirds are established tenets within Dow and Gann theory. The similarity of the Fibonacci 38.2% and 61.8% with Gann's 37.5% and 62.5% as well as the similarity between Dewey's 49%,74%,99% with 50%,75%,100% are perhaps why cycle analysis, Gann, Dow, and Fibonacci adherents are all able to translate their wiggles and squiggles, with the alchemy of confirmation bias, into 'proofs.'

But what of the next 6?

Interestingly, 14.8%, 19.7%, 29.6%, 44.4%, 59.2% and 88.8% are quite familiar to folks that have taken the time to examine the writings of the venerable John Needham, proprietor of

29.7%, 44.5%, 59.3% and 89% are retracement levels per Mr. Needham's theories. Expressed in fractions, 59.3% and 89% are 16/27 and 8/9. These fractions can be seen on the picture of the 'Pythagoras guitar' above. The inverse ratios of 9/8 and 27/16 are the frequency ratios of D and A as they relate to the fundamental tone of C.

The major scale based on C (fundamental tone) obtained from Pythagorean tuning is based on a stack of perfect fifths each tuned in the ratio 3:2 the next simplest ratio after 2:1 which is the ratio of an octave.

The frequency ratios of D and A as you ascend by perfect fifths are 9/4 and 27/8 respectively. These two fractions are the inverse ratios of 4/9(44.44%) and 8/27(29.63%).

What of 14.8% and 19.7%?

Well 74.2, the last Danielcode retracement level unaccounted for is an interchangeable fractal of 14.8% (148 also, as advanced by Mr. Needham, being the vibration of equities.) For 19.7%? That is an interchangeable fractal of 64/81, see guitar above(.7901).

(.7901) divided by 4 is .19753.

The only string left unplucked, as it were, is the fraction 128/243.

Now that's all fine and good you say, but to quote a canucklehead on Hee-Haw or Bubblevision, is it actionable? Or to put it more crassly... can you show me the money?

To that can only respond, good things come to those who wait, when the student is ready(and am trying my best to prepare) the teacher will arrive, or to put it succinctly and in the vernacular of this post: stay tuned.

Friday, February 19, 2010

Repost: Think outside the cave: In chaos theory outliers are 'first movers'

A group of astonomers eager to map the vastness of space, were allotted time on the Hubble Space Telescope reported National Geographic several years ago, and they were stunned to develop pictures of what they thought were empty space.

I remember staring at the pictures the Hubble revealed to them of galaxy after galaxy and thinking ... reality doesn't look real.

Galaxies look like strange attractors, ironic since both represent reality's order flow.

And strange attractors, mathematical portraits of order within a chaotic environment, solution spaces that traces the behavior of a complex system over time, revealing how it is attracted to an ideal state - essentially revolving around it.... why strange attractors seem to be like the Forms articulated by Plato in the Allegory of the Cave.

History rhymes and in complex systems patterns repeat.

WIKI: 'Plato imagines a group of people who have lived chained in a cave all of their lives, facing a blank wall. The people watch shadows projected on the wall by things passing in front of a fire behind them, and begin to ascribe forms to these shadows. According to Plato, the shadows are as close as the prisoners get to seeing reality. He then explains how the philosopher is like a prisoner who is freed from the cave and comes to understand that the shadows on the wall are not constitutive of reality at all, as he can perceive the true form of reality rather than the mere shadows seen by the prisoners. The Allegory is related to Plato's Theory of Forms, wherein Plato asserts that "Forms" (or "Ideas"), and not the material world of change known to us through sensation, possess the highest and most fundamental kind of reality.'

And so Plato would opine the chair you sit in is just a representation of the perfect form of a chair.

Quantum physicists would opine that the perfect form is a probabilistic wave function and the chair you are sitting in as but one of all possible representations.

The first picture above is an updated version of 'the birth of a star' the second picture is a few galaxies hangin' out in close proximity and the last picture, which excuse my geekness... is totally cool... is described as:

Nat'l Geographic: 'Albert Einstein predicted that the gravity of massive objects could actually bend light, creating an optical illusion. Hubble's newly updated Advanced Camera for Surveys (ACS) captured a dramatic example of this phenomenon, known as "gravitational lensing.

In a set of four photographs released September 9, 2009, the massive galaxy cluster Abell 370 bends the light of galaxies behind it, creating funhouse mirror-like reflections in space.

One such effect, the "Dragon" (top left), is actually several reflections of a background galaxy overlapping one another, Hubble science oversight chair Bob O'Conner explained.'

The point of this posting is to reflect a moment on this third picture.

From his earlier relativity theory, Einstein had related mass and energy in the famous equation: -E = mc²

From this concept, he described the curvature or distortion of space-time as due to the total sum of mass-energy present within the region of distorted space. It is the curvature of space-time we call gravity. review of Einstein, The Real Story of the Man Behind the Theory: 'The year was 1907, and Einstein was about to challenge two centuries of scientific belief. According to the scientific mastermind, Sir Isaac Newton had it all wrong; gravity was not pulling us towards the Earth, but massive celestial bodies like the sun and the planets were constantly bending time and space, around us, pushing us towards the ground with every movement. But scientists weren't convinced, so in order to prove his theory Einstein surmised that we would need to take a photo of a solar eclipse. He theorized that light from a distant star, while traveling around the sun, would be bent by the sun's gravitational pull. In the aftermath of that announcement, astronomers across the globe raced to photograph an eclipse in order to verify or debunk Einstein's claim. But getting that photograph was no simple task, because in the years that followed war, weather, and mathematical mistakes undermined the astronomers' efforts at every turn. When the photo was finally taken in 1922, Einstein's theory was proven correct, elevating him to the status of global icon.'

The point being that one of the most fascinating aspects about Einstein is that he was generally shocked to discover that people did not think in shapes like he did.

Einstein rarely thought in words.

'I simply imagine it so, then go about to prove it', he said. 'Imagination is more important than knowledge. I rarely think in words at all. The words or the language, as they are written or spoken, do not seem to play any role in my mechanism of thought. The physical entities which seem to serve as elements in thought are certain signs and more-or-less clear images which can be `voluntarily' reproduced and combined.'

Time and space/price and form .... oh my!

Think outside the cave.

Thursday, February 18, 2010

The Anonymous Monetarist Round Table : Believe what your Eyes see

Jeff Cooper
Feb 18, 2010

On August 24th, 1987, there was a major planetary convergence that coincided with a major top in the stock market. I am not an astrologer but I recall the convergence well because it was well publicized in such mainstream publications as Time.

When the worst crash since 1929 occurred less than two months later, many saw it as a sign. There was a sense amongst many that the crash was the sign of a second great depression to follow.

According to Jose Arguelles interpretation of Mayan cosmology, the August 1987 date defined the end of 22 cycles of 52 years each or 1,144 years total and the Harmonic Convergence of 1987 also began the final 26 year countdown to the end of the Mayan Long Count in 2012 where a new 5,125 year cycle would begin.

Just as many world changes began a few years prior to the Convergence, a crisis and many world changes began a few years prior to the presumed cycle turning point in 2012.

What has all this got to do with the stock market today? Not much perhaps except as offered previously, in the fall of 1987 there was a correction that mirrored the shape of the correction 5 to 6 months before and I recall well at the time that the overwhelming majority of market participants at the time believed that another bullish correction that mimicked the last correction was playing out. In fact, in early October of 1987 prior to the crash, the largest point rally in history occurred (to that point in time). There was no follow through. Many traders, awaiting for that sign of strength to reappear continued to greet weakness as an opportunity---until the Mother Of All Weakness swept over them on October 19th, 1987. The crash began 49 calendar days from the August high and ran through the 55th day from high, a period Gann referred to as the Death Zone. This is the same pattern that played out in 1929 with the crash beginning 49 days (7 squared) from high and running through the 55th day.

Tuesday, the largest rally in three months occurred. The prior largest correction since the March low occurred in June/July with the S&P tracing out an apx 9% decline. The recent correction from the January 11th peak was also an apx 9% decline, once again mirroring the correction from 5 to 6 months prior, just as in 1987.

Today is the 49th calendar day from the January 11th top. Moreover, we are also in the 49th WEEK from the March 6th, 2009 low.

It is worth considering that waterfall declines don’t occur from highs, they occur from a lower high. They occur after a reflex rally, after a backtest of resistance.

Walter Murphy
February 17, 2010

Stocks: Even if a rally through 1104-1105 were to occur, we do not believe that would change the big picture outlook as described in our January “Year Ahead” piece. We continue to believe that a challenge of the January high would result in more numerous and more important negative divergences than those that already exist. It would be a condition not unlike the divergences that appeared in October 2007 as the market penetrated the July 2007 high.

John Needham
February 12, 2010

(Posted 02/09/10): On the DC "monthly" chart (24 trading days), the month ending 02/08 closed at 1056.74 basis the index and this is outside the regression channel which had a lower boundary of 1067. That gives us a Sell setup on the monthly chart. A monthly close(on 03/12) below 1044 will confirm.

(Posted 02/12/10): On the 12 Day Regression Channel, the trend is up. a conditional sell signal has been made. A close on 02/24 below 1044 will confirm.

AM here: The 24 trading day chart above shows the Danielcode monthly trend indicator that per Mr. Needham is'a proprietary but unsophisticated mix of largely traditional market studies. In this chart we can see a whipsaw in the trend in 1994; thereafter it stayed on a buy signal (blue) until November 2000; switched to a Sell signal at that time and remained on the bear side until September 2003. From there it signalled a resumption of the bull market until February 2008, when it again alerted us to the impending bear market about 90 days after the market top in October. The notable feature of this chart (24 trading days is a Danielcode “month) is the stability in its signals. The indicator showed one dominant trend for long periods of time, with no whipsawing since December 1994.On the 12 day chart (also shown above-AM)we now get some whipsawing in the signals for the 2002-2007 Bull market, but precious few considering the time span, and the regression channels are barely changed.'

Arch Crawford
January 11, 2010

It would be considered a ‘done deal’ or a high probability that World Markets will Crash again during 2010. The point of greatest exactitude of the general ‘meanness’ will show itself in late July and early August. During that period Mars will conjoin Saturn, both opposing Jupiter conjoining Uranus (you can joke all you want, but THIS is no laughing matter). Pluto will form a square angle to all four, making a T-Square pattern of extreme animosity.

The dichotomy arises from the Bradley Model showing the Crash period as down from March and culminating with this configuration. On the other hand, our Mars/Uranus Crash Cycle portion of their synodic period, which has contained Every Crash for the last 100 years, bodes the Crash period AFTER the completion of the massive alignment.

We will do everything but guarantee you that stocks will crash worldwide within three months of August first (that is between May 1 and November 1). It is expected that technical market analysis of data generated by current market action will assist in pinpointing most danger/opportunity as critical moments approach.

Wednesday, February 17, 2010

The intermediate term prognosis ...
By Andrew Hough
Published: 7:30AM GMT 16 Feb 2010

The international team of researchers based at Newcastle University have reportedly unlocked the secret as to how and why living cells grow old by discovering the biochemical pathway involved in ageing.

They added, however, that it will unlikely provide an elixir of eternal life in the near future.

They investigated why cells become senescent, a state in which cells stopped dividing and their tissue revealed physical signs of deterioration, from a failing heart to wrinkling skin.

The results, published by the journal Molecular Systems Biology, also showed that when an ageing cell detects serious DNA damage that could be caused by general wear from life it sent out internal signals to the brain.

These distress signals trigger the cell’s “mitochondria”, or its tiny energy-producing power packs, to make “free radical” molecules.

This in turn informs the cell to either destroy itself or stop dividing which is aimed at avoiding damaged DNA that can cause cancer.

AM Here: In the body politic, the recognition of the aging process, i.e., demographic shift, is also sending out distress signals. The choice is analogous, destroy ourselves or stop entitlement growth. This Malthusian analysis is countered by folks that suggest mankind's industrial and technological revolutions, educational growth, and evolving economic freedom have mitigated being caught in such a trap.

In the long run perhaps. No one knows what alchemy the future holds, although the math of a 300% increase in the world's population aged over 60 will most certainly require some type of straw spinning. In the intermediate term resource scarcity will no doubt be a recurring theme with a particular focus on the declination of the most valuable resource of all when hoping for red-blooded economic growth, namely able-bodied labor.

Comfortable shoes and larger typeface can only take you so far.

Recently, Barclays compared, from 1950, the ratio of 35-54 year olds in the general population with cyclical P/E ratios on US equities. The results were chilling showing both metrics bottoming in the early 80s at the beginning of the bull market, and rising over the next 18-19 years to peak at the dawn of century. Since then both metrics have done not only a fairly good imitation of a double black diamond ski slope but are also suggesting that we are only halfway down the hill.

For your humble blogger, this cycle looks eerily familiar to what some have attributed as W.D Gann's 'greatest market discovery', his Financial Table which completes a full cycle every 18.6 years and as Daniel T. Ferrera once pointed out appears to be entirely based on the moon's north node. The North Node is where the Moon crosses the ecliptic going toward the north hemisphere, nearly always moving in retrograde, meaning they travel backwards through the Zodiac, completing a circle in the forementioned 18.6 years.

Paging Jeremy Siegel, Reality on Line 1.

Monday, February 15, 2010

Time Pundits

In 1909, in an interview with Ticker Tape Magazine W.D. Gann said. "In going over the history of markets and the great mass of related statistics, it soon becomes apparent that certain laws govern the changes and variations in the value of stocks and there exists a periodic or cyclic law, which is at the back of all these movements."

In Gann's introduction to his 1919 stock market forecast he stated that "History repeats itself in the stock market as in the lives of men... {my annual forecasts are based} on a time factor which I discovered."

In his first book entitled, Truth of the Stock Tape (1923), he says, "The most important thing of all is the Time Factor which I use in making up my annual forecasts. It is not my object here to give away that secret."

In his later years he revealed the cycles as 10, 15, 20, 30, 50, 60, 82-84, 90, 100, 120 and 150 years and further stated that "The Great Time Cycles are most important because they record the periods of extreme high or low prices. These cycles are: 90 years, 82-84 years, 60 years, 45 years, 30 years and 20 years."

Countless observers have commented that these 'Great time cycles' correspond to astronomical relationships:

90 year - First Order Recurrence Saturn-Uranus Conjunct (in this case the first order recurrence is an octave, or doubling of, the Saturn-Uranus fundamental tone of 45 years, the fundamental tone being a 360 degree move, as measured by the angle between the sun and a planet along the ecliptic. Translation: on a 360 degree wheel, planets are in conjunction when they are 0 degrees apart, the fundamental tone or harmonic of this planetary relationship being defined as the time in between the planets next 'lining up' at 0 degrees relative to the sun.)

84 years - Uranus Revolution Around Sun. The exact measurement is 84.3 Earth Years.

60 years - First Order Recurrence Jupiter-Saturn Conjunct (in this case the first order recurrence is a twelfth, or tripling of, the Jupiter-Saturn fundamental tone of 20 years.)

45 years - Saturn-Uranus Conjunct

30 years - Saturn Revolution Around Sun. The exact measurement is 29.7 years.

20 years - Jupiter-Saturn Conjunct

Financial astrology is an industry to itself, and from time to time more 'respectable' venues have commented on its' effects. For example here is a link to a pdf recently posted on Jesse's blog : , where the authors comment that 'We find strong empirical support in favor of a geomagnetic–storm effect in stock returns after controlling for market seasonals and other environmental and behavioral factors. Unusually high levels of geomagnetic activity have a negative, statistically and economically significant effect on the following week’s stock returns for all US stock market indices. Finally, this paper provides evidence of substantially higher returns around the world during periods of quiet geomagnetic activity.' Tying this to the planets is simple when one considers that the gravitational pull and ebb of the planets effects geomagnetic storm activity. A simple analogy would be that just as the moon affects tidal flows so too do the planets affect solar flows.

Vibrations, waves, cycles, whatever term you choose to use, adherents of Gann still struggle to discern what the fundamental unit or tone of these structures is. Even Gann, foreshadowing Colonel Jessup suggested that we couldn't handle the truth.

This posting does not attempt to prove what the fundamental unit of time is, but rather to offer, in conclusion, a rather startling similarity between theories offered by today's time pundits, namely the venerable John Needham and the incarcerated Martin Armstrong.

First Mr. Needham. Proprietor of the, this fine fellow has over the course of the last couple years offered a rather provocative theory developed after years of seeking the truth behind what makes markets tick.

In his own words: 'Many have dedicated large parts of their life in the search for the twin Grails of trading: price and time. That they are the same thing juxtaposed on different axis is not a new concept. WD Gann, under the tutelage of his mentor, the British astrologer and numerologist “Sepharial” advanced this proposition in 1935. But Sepharial camouflaged his observations by claiming that they were related to astrological cycles. Indeed they are, but he scrupulously avoided saying that all of these cycles are of Biblical origin. What do you think the wise men, sages and prophets of Biblical time were looking at on those myriad of long nights as they sat outside their tents? They observed the stars and the heavens. And they wrote down, sometimes in code and sometimes openly, the great cycles of the heavenly orbs. Sepharial used that knowledge but fudged naming the source because it wasn’t cool.'

John posits that the intricacies of time can be discerned through application of the following 2 excerpts from the Book of Daniel.

First he directs us to Daniel 12:12: 'Blessed is he that waiteth, and cometh to the thousand three hundred and five and thirty days.' and states 'In sacred geometry, numbers and sequences have multiple meanings. The number 7 can mean 7 days, weeks, years etc. It can also mean 70 or 700 so the decimal point can slide. The square root of 1335 is 36.537. If we slide the decimal point we get 365.37 which is an astonishingly accurate measurement of a calendar year.'

This, he surmises, was written as a timing mechanism for the Jewish people.

Second, he directs us to Daniel revealing 1290 as the 'time of abomination', the difference with 1335 being 45, which he suggests represents degrees on a circle.

Price and time movements of eights, corroborating Gann's teachings, are then deduced as well as movements per ratios that are had by noting the discrepancy between 365.37 and the actual circle of Earth's orbit around the sun, 365.25 days.

The secret to Gann's sauce was the revelation that time and price are equivalent albeit on different axis and when they come in balance a turn may result. Needham shares this assertion, the struggle though, as previously noted, is to discern what is the fundamental unit of time that allows us to see this balancing?

Both Gann and Needham see time and price movements in terms of the degrees of a circle as well as the fractal geometry of markets. For Gann this is articulated by 'history repeats' and references to vibrations. For Needham's part he transparently lays out the fundamental unit of time as a six day week, per the Bible.

A fractal was popularized by Benoit Mandelbrot, advancing that natural law, a phrase oft repeated by Gann, is based upon a "fractioning" of a larger structure into smaller structures that have not only the features of the larger structure but if scaled up will look identical to the larger structure. He showed this scalability by graphing long-term financial data that appeared to be discontinuous on logarithmic paper revealing a fractal relationship in markets that,at least to this fella, blew 'random walk' right out of the park.

John Needham asserts that true time is nothing more than a fractal of a six day week. By looking at any market wearing your 'polarized time glasses' that break down temporality into fractals of 6 trading days you can see the turns where time and price are balanced, the holy grail of Gann theory.

The difference between Gann and Needham though is that John lays out not only this theory transparently on his website but also each week produces dozens of graphs as well as dozens of buy and sell signals based on it. Empirically speaking after following his calls for the last few months, your humble blogger has to admit it looks spot on.

Now let's consider Martin Armstrong.

Like Gann and Needham, circular movements, premised on fractals, and back-tested with considerable data forms the basis of his grand theory. Upon reviewing 26 panics spanning a 224 year period (1683 to 1907), Mr. Armstrong noted that the average number of years between panics was 8.6 years. He came about this, purportedly, in an effort to disprove cycles. Instead he was stunned to see turning points, expressed in markets, the rise and fall of governments and even natural disasters like earthquakes, defined by this fractal of a 8.6 year fundamental tone/wave/vibration. He furthered deduced that this 8.6 year tone builds up into groups of 6 producing a 51.6 year major wave that itself scales up by 6 to a larger 309.6 year wave.

He latter was stunned to discover that 3141 days(a fractal of Pi, the ratio of any circle's circumference to its diameter in Euclidean space)is 8.6 years.

As promised, the startling similarity between these two theories? Well John's is based on a six day week and Martin's is based on a seven day week.

What is the ratio equating these two 'time' theories?

6 divided by 7 equals .86 ; which is, per the fungibility of the decimal point in sacred geometry interchangeable with 8.6.

Très cool.

Friday, February 12, 2010

Beware the Trojan Hoax

Let me get this straight...

The country of Greece, where a third of the economy is underground, where over the last 175 years the country has been in default about half the time, will now be monitored by the EU to insure that all future government statistics are accurate, will give the EU the power to audit its' books, and will have to follow the austerity measures laid out by the EU?

Are you kidding me?

There is no chance in Hellenic that Germany will support anything other than a Potemkin bailout.

Oh and might you suppose that the EU, once follow up reports from Greece show that there are -harumph- still ongoing 'discrepancies', will fine Greece for its' transgressions?

Other EU members probably won't be too terribly willing to gnaw at the horsehair holding the Damocles sword dangling above them also.

The canaries are chirping this morning as Dubai CDS, measured by bps, explode by over 17%.

And the dominoes are being set up as witnessed by the Spanish consortium scurrying to London to meet with its' 'bondholders'.

As mentioned on this blog in December of 2008 :

'A bank holiday where the Federales liquidate insolvent banks' capital structures (with the burden of proving solvency emphasized) per a crazy concept called price discovery is in the national security interest of the United States.

Fiscal initiatives that mandate and hold steadfast to the goal of increasing incomes on a generational basis are the greatest challenge in front of us.

Although it grieves me to say it, both given the implications for human suffering and the rapscallions throughout history that have parroted such a view but ... sometimes to solve a problem you have to make it a bigger problem.

If we can accomplish the Houidini-esque stunt of funding this debt at manageable levels it will only be by literally defining AAA as anything American (i.e. if America becomes AA then literally AA is the new AAA, with the assumption that the reasons for our 'downgrade' would serve as deleterious to all others, except maybe Mr. Gold.)'

I believe this vision is playing out. We are the last canary, and the biggest domino. But given the magic of our reserve currency, our 'downgrade' will only occur within the context of the world being downgraded first.

I've always held firm to the thesis that deflation is the midwife to hyperinflation. A real deflation, not just disinflation, requires liquidity evaporation due to multiple sovereign crises, where the backstop is called into question.

Deflation is the dollar bid, hyper-inflation is the downgrade of American's citizenry commensurate with a currency devaluation .

Would suggest that the quantity of liquidity evaporation will very much define the quality of any hyper-inflation.

We have a free skate while there are troubles in Euroland (should stretch over months not weeks) and then we'll find out just how thin our ice really is.

Beware the Trojan Hoax.

Thursday, February 11, 2010

Popcorn, guns and butter

On September 17, 2009 Gallup reported that 46% approved of Obama's handling of the economy and 38% approved of Obama's handling of the deficit.

Last Monday, Gallup reported that approval for the handling of the economy and deficit had fallen to 36% and 32% respectively.

Main Street, it would appear, does understand that the demand restoration project is not working yet.

Probably because Main Street consists of humans, and as Larry Bummers noted on the ski slopes recently 'tis a 'human recession'. Translation: we can fudge the stats but it's harder to get folks to discount their lyin' eyes.

And those eyes are transmitting that it's getting worse not better. Gallup also recently reported for the Week of January 25-31, 57% surveyed believed that the economy is getting worse, versus 51% a month ago.

Trillions of meatballs gets you, even with your V shaped lens, flat at best?

Inventories may bring you recessions but they sure as heck don't deliver recoveries. Only red-blooded organic income growth resulting in real private sector demand delivers real growth.

And where oh where will this great nation generate growth weaned from the Federales teet?

Manufacturing? Heck, we couldn't create manufacturing jobs over the last two 'recoveries'.

Finance, real estate, insurance? Helicopter bucks for these constituencies are what caused the over-consumption and misallocation that put us in this mess.

Technology? Well this humble blogger thinks of tech as the greatest enabler of deflation ever created.

Biotech and 'green' industries should make a marginal contribution but other than popcorn(Hollywood), guns(military) and butter(agricultural) the only way out of this would seem to be currency devaluation and a lot of service jobs supporting the folks that come to America to shop half-off.

It could be worse. We could be France which is going through an existential crisis. As 'gauling' as playing second fiddle to the Yanks has been, a future where China moves the ball? Quelle horreur!

And the Brits? They're praying for the next North Sea or as the FT recently stated 'something will come along, it always has.'

As noted previously on this blog, inflation expectations were well anchored in the Great Depression. We had disinflation, not deflation. Currency devaluation brought us out of the muck. The first country to leave the gold standard was Australia in 1930 and their economy recovered soon thereafter. The next year New Zealand and Japan took the same action with the same results. Several more countries replicated this action over the next few years. The United States devalued the dollar by over 40% in 1934. France and Italy waited until 1936 so too did their economies wait to recover.

Clearly those countries that have the ability to devalue their currencies today will have the pleasure of seeing their economies recover 'tomorrow'. This obviously does not bode well for Euroland but is very promising for the Brits.

For us Yanks it's a real conundrum.

To devalue the currency we need to be able to overcome the groundswell to rein in spending and relative calm internationally so de-risking isn't 'carried' back to the dollar. Notwithstanding whether we have reached zero-hour where adding debt to our current burden has no positive contribution to GDP, notwithstanding whether 'austerity' or 'kicking the can' wins the day, it would appear that the only 'stimulus' that will pass short-term is the type that Adam Smith once described:

'Great nations are never impoverished by private, though they sometimes are by public prodigality and misconduct. The whole, or almost the whole public revenue, is in most countries employed in maintaining unproductive hands... Such people, as they them-selves produce nothing, are all maintained by the produce of other men's labour... Those unproductive hands, who should be maintained by a part only of the spare revenue of the people, may consume so great a share of their whole revenue, and thereby oblige so great a number to encroach upon their capitals, upon the funds destined for the maintenance of productive labour, that all the frugality and good conduct of individuals may not be able to compensate the waste and degradation of produce occasioned by this violent and forced encroachment.'

It's a Deadhead Economy ... hey don't bogart my check dude!

Wednesday, February 10, 2010

The Deadhead Economy


1. A person who uses a free ticket for admittance, accommodation, or entertainment.
2. A vehicle, such as an aircraft, that transports no passengers or freight during a trip.
3. A person regarded as dull-witted or sluggish.
4. A partially submerged log or trunk.

Spirit of the Times: A Chronicle of the Turf in New York City (1841): "The house on Tuesday was filled as far as $300 could fill, barring the 'dead heads.'" Two years later, with regard to a less successful performance, the Knickerbocker, also of New York City, noted "tickets numbered as high as twelve hundred, and not fifty persons in the room?--and half of those 'dead heads.'" Who were these dead heads who lived more than a century before the Grateful Dead played their first note? They were free-loaders--whose heads did not count in the receipts.

No one knows who first invented the word. But it met an evident need for an expression that was both descriptive and sarcastic, to be used by proprietors who got no income from deadheads and by paying guests envious of those who got in free. And soon deadheads were spoken of everywhere, not just in the theaters of New York City. In an 1848 glossary of American words, John Russell Bartlett explained: "Persons who drink at a bar, ride in an omnibus or railroad car, travel in steamboats, or visit the theatre, without charge, are called dead heads. These consist of the engineers, conductors, and laborers on railroads; the keepers of hotels; the editors of newspapers, etc."

The meaning of deadhead as "one who gets something for nothing" was extended before long to include "one who is good for nothing, an idler, a shiftless person." Or, to use another American term of the time, a deadbeat (1863). In the later nineteenth century, deadhead took on the technical meaning of "a trip by train, truck, or other vehicle without cargo or passengers."

AM Here :It was a day at Wrigley in 08 with the brother-in-law. He was describing how he was nibbling on Bank Of America in the 30s and how it was ridiculous that BAC had got down so low.

My reply was that the bank, like all of 'em, was insolvent, but would most probably survive. I offered that the real question would be what would we do after we spend trillions to end up in the same place or worse.

From today's FT:

By Matthew Garrahan in Los Angeles
Feb 10 2010

An index that measures the health of the US economy by analysing real-time diesel consumption of trucks has cast doubt on the strength of the economic recovery after recording a sharp decline in January.

The Pulse of Commerce Index was created by Ceridian, which processes electronic card transactions, and the UCLA Anderson School of Management. It receives data every time a commercial driver fills up a truck with diesel, generating a picture of manufacturing and retail traffic.

The index, which launches on Wednesday, has data going back to 1999. Its performance closely tracked rises and falls of gross domestic product. But while the PCI and GDP both rose in the last quarter of 2009, the PCI stalled in January.

The decline in the PCI suggests US economic activity slowed in January after the index fell at an annualised rate of 36.8 per cent.

The new index provides a window into the economic health of the US, said Edward Leamer, chief economist for the PCI and director of the Anderson Business Forecast: “Inter-state freeways that criss-cross the country are the arteries of the US economy and goods that are transported on them are the lifeblood.”

The three-month moving average PCI grew 7.3 per cent in December, mirroring the recently announced 5.7 per cent last-quarter GDP growth figure.

The US economy needed a strong January, said Prof Leamer. “But it just didn’t happen. The economy is a lot softer than the GDP numbers suggest.”

Recoveries from past recessions often have GDP growth nearing 5 per cent, which is why the data from the final quarter of 2009 was received so positively, mainly because it suggested the job market was set to rebound.

But while US unemployment fell slightly dipped from 10 per cent to 9.7 per cent in January, the overall jobs picture has failed to improve significantly. Professor Prof Leamer said the weak performance of the PCI in January supported those forecasting lower rates of GDP growth in 2010.

The movement of lumber from the Pacific north west to California may also provide some early clues about a rebound in commercial construction and housing, which will show up in the PCI, Professor Leamer added. “Goods have to be transported for an economy to grow, so it will be important to monitor this index to see if the economy really is on the move,” said Craig Manson, senior vice-president and index analyst with Ceridian.

AM Here: In hindsight it wasn't just that our solons turned out to be Nancy Capitalists, they also were rather insidiously cynical as they pushed the pablum narrative of the day, be it pre-crisis, or post-crisis.

These folks are like arsonists who push for the bomb-making material and then, after planting the bombs and lighting the fuses, extort the firemen and get a tax on the water.

The 'What Just Happened Crisis' gave us the 'I Can't Believe it's not Capitalism' plan which is now morphing into the Deadhead Economy.

Balancing bubbles with troubles as the economy limps rather than trucks along.

Hope the spring thaw comes soon, hedgie Paulson may need to start jogging five miles a day again.

His only hope is if the Chinese dollar denominated asset dumping picks up - the West has no clue as to how combustible a declining Chinese economy is with a leadership afraid of Ma losing in 2012 and looking at using Taiwan unification as a diversion.