The 1st quarter is now officially over and what a quarter it has been so far! The stock market rise which started with the Santa Rally did not look back and kept rising. The bear camp including many famous names have been obliterated and ridiculed. But it was a rally which nobody loved. The bears hate it because it destroyed them. Bulls hate it because they were not fully prepared for it and could not get enough of it. Those on the sideline hate it because they never got a chance to join it after a pull back. Because there was no pull-back.
While I correctly predicted the start of the rally, I jumped down too early based on Technical Analysis while my cycle analysis and fund flow analysis were still positive. But in the Fed manipulated world no TA or fancy chart works. To get an idea of how the stock market really works just take a look at the following chart.
Question is where we go from here. The answer possibly lies in the Fed action as well. The Operation twist is ending in June and there is no sign of more free money as yet. Combine the need of the Banksters with that of the politicians and we will get an answer which is fairly close. The Presidential election campaign will kick off in earnest from June. If there is no further liquidity pumping, the stock market will surely decline. If the stock market does not do well, that is bad news for an incumbent president.
So the Banksters and TBTF banks want more free money without which they cannot keep the ponzi scheme going and Obama need the Wall St. to keep pumping the stocks to get re-elected. There is no chance that the stock market will be allowed to perform on its own free will based on fundamentals till November. Bernanke has no option but to provide free money to the Wall St. even when he is aware that ZIRP is destroying the country and excess liquidity needs to be drained. They are boxed in a corner. (This is my theory and I may be wrong).
You may ask that if the above is correct and Operation Twist is still in operation why then the stock market should ever correct even remotely. Once again it is a matter of timing. If the stock market continues to operate at this present level till June / July, what justification Bernanke will have to pump more money. And if the stock market tanks in July / August, it may be too late to repair the damage from Obama re-election standpoint. So they have to start pumping the market again at least from the beginning of the 3rd quarter to have meaningful and positive impact on consumer confidence and voter behavuior. They do not want to take any chances. At the same time, they are banking on the theory that American Voters have the memory span of a goldfish. Take everything into consideration and my take is that we will get the correction in the 2nd quarter which will give Bernanke opportunity to start another QE.
So we are going into 2nd quarter and already there are signs that the blow-off top is starting soon. May be from as soon as this coming Monday. I think SPX will top between 1450-1460 and by April OpEx will be the top in terms of time. But the majority of these gains will come in the next 4 trading days. Take a look at the following SPX chart.
There is a pattern from last December which I have circled. The index goes down for about 3 days and then shoots up making a new high. This is not TA. Just simple observation. Combine that with the cycle analysis and seasonality and odds are high that what I said above is going to happen. From now till April OpEx there are three weeks. If the market will listen to my plan, then the 1st week of April is when the market shoots up. 2nd week it retraces somewhat and goes back and forth. 3rd week it re-test the high and fails. The roll over comes thereafter. Let us see how it unfolds but I do not see many other alternatives. If you have a better plan please let me know.
That the people in the know are preparing for that final melt up can be judged from the action of the treasury market. Friday, TLT had one of the biggest one day drops in recent history.
However, those who think that end of the bond market is here, are probably jumping the gun little ahead of time. If we are going to see correction in equities, bond bubble will not burst now. Also Bernanke cannot afford to let the rates rise now unless he himself initiates it. The time for that is around November.
Apple most likely has had its share of correction for now.
The US $ ETF UUP is breaking down the trend line and if we see the final surge in equities, that may well correspond will the down-move in UUP.
Remember the market always inflict the maximum pain on maximum number of people. In the coming weeks, people will be convinced that the bond bubble has burst, that US$ is going lower and SPX is going to 1550. They are going to be so disappointed. When the correction comes, dip-buyers will buy again, only to give up all the gains of these months. The bears will not venture forth initially because they have been burnt so badly. It is a game where the house always wins.
Thank you for reading my blog. I wish you all a very good week end. Please forward it to your friends and family and ask them to visit http://bbfinance.blogspot.ca/ and follow me on Twitter (@BBFinanceblog). You can post your comments in the blog or email me directly at email@example.com. I look forward to hearing your thoughts.
Is it possible to move from an all-hardwood floor fully-furnished 3500 sq. ft. house to a 2400 sq. ft. house and find that you need to buy another rug?
Spiegel Says "Even a 1-Trillion Euro Firewall Wouldn’t Be Enough"; Mish Says "The Bigger the Bazooka, the More Money Will be Lost"
Meanwhile, the entire idea that firewalls can accomplish anything is ludicrous, given the key point that currency unions in the absence of fiscal unions cannot and will not work.
I suspect Merkel understands this, merely wanting to get Germany so deep into bailouts step by step, that it will be reluctant to leave the Eurozone.
It is high time the German Supreme court step in and stop this nonsense.
However, nothing can stop Greece, Portugal, and Spain from leaving, and eventually they will. In the meantime, rest assured that every increase in firepower will be additional money of German citizens' pockets. The end-game will be a currency or banking crisis at the worst possible time.
For now, please consider 'Even a 1-Trillion Euro Firewall Wouldn't Be Enough'
European finance ministers meeting in Copenhagen on Friday agreed to boost the euro-zone firewall to over 800 billion euros. The move marks another U-turn on the part of the Merkel administration, which recently dropped its opposition to increasing the fund. German commentators warn that even the new firewall may still be too small.No Amount is Enough
German Chancellor Angela Merkel and her finance minister, Wolfgang Schäuble, have been accused of crossing many of the "red lines" that they have set for themselves over the course of the euro crisis, making U-turn after U-turn as the crisis escalated. They officially stepped over the latest red line on Friday, when European Union finance ministers meeting in Copenhagen agreed to boost the scope of the euro zone's firewall to over €800 billion ($1 trillion). Berlin had long rejected such an expansion out of hand.
The Nuclear Option
On Thursday evening, in the run-up to Friday's summit, German Finance Minister Wolfgang Schäuble had said he was prepared to combine the existing bailouts with the new permanent mechanism. He said that the €800 billion capacity was "convincing" and "sufficient."
But not everyone shares his view that the sum is enough. On Thursday, French Finance Minister François Baroin called for the permanent euro bailout fund to be increased to €1 trillion, to shore up market confidence and prevent contagion in the euro crisis. "The firewall, it's a little like the nuclear option in military planning, it's there for dissuasion, not to be used," Baroin said in a radio interview.
'Shifting Sand Dunes'
Opposition parties in Germany were quick to make political capital out of the Merkel administration's many U-turns during a debate on the euro rescue fund and the European fiscal pact in the German parliament, the Bundestag, on Thursday. "Your red lines have, in reality, become shifting sand dunes," Frank-Walter Steinmeier, floor leader for the center-left Social Democratic Party (SPD), said to widespread applause.
In December, Merkel argued, entirely convincingly, that boosting the euro bailout fund was the wrong course to take. After all, she said, it would reduce the pressure on crisis-stricken states to push through reforms. There was also the question of whether the creditor countries, including Germany, were in danger of being overwhelmed by ever-higher guarantees." "Now, the fund is indeed being expanded, and the coalition government's former concerns have suddenly disappeared. Instead, the administration is attempting to conceal its own U-turn with highly flawed arguments.
The left-leaning Die Tageszeitung focuses on the calls to boost the ESM to €1 trillion:
"One trillion euros is a lot of money, and yet even this huge sum will not be enough. But again, that's nothing new. For months, calculations have been doing the rounds that show that at least €1.5 trillion will be needed. The only interesting question left is how long it will take France and Germany to acknowledge this reality."
For reasons noted at the top, no amount of money (that can reasonably be provided) would be sufficient. After all, there is a limit to what German citizens and taxpayers can stand. Besides, money alone cannot fix structural problems.
Finally, the "nuclear" option is nothing more than former US treasury Hank Paulson's "Bazooka" theory in disguise.
Bazooka Theory vs. Actual Results
"If you have a bazooka in your pocket and people know it, you probably won't have to use it." Paulson said at a Senate Banking Committee hearing. The reference was in regards to Fannie Mae and Freddie Mac.
Paulson believed that if he had the power to bailout Fannie Mae, the market would react to that possibility and no bailout would be necessary.
Now taxpayers have wasted close to $200 billion bailing out Fannie and Freddie bondholders (mainly PIMCO and foreign banks).
Flashback February 12, 2010: EU Leaders Deploy ‘Bazooka’ to Repel Attack on Greece
German Chancellor Angela Merkel and her counterparts yesterday pledged “determined and coordinated action” to support Greece’s efforts to regain control of its finances. They stopped short of providing taxpayers’ money or diluting their own demands for the country to cut the European Union’s biggest budget deficit.How Well Did That Idiotic Bazooka Move Work Out?
“It’s like Paulson’s bazooka,” said Nielsen, Goldman Sachs’s chief European economist in London. “It’s a difficult balancing act -- saying something comforting to the market without committing money and hoping the market will take their word for it.”
After a three-month long plunge in Greece’s bonds amid speculation it was facing the threat of default, euro-region leaders yesterday ordered the country to slash its budget deficit and warned investors they would be willing to defend the country from speculative attack if necessary.
“This is not money for free,” said Luxembourg Prime Minister Jean-Claude Juncker, who heads the group of euro-area finance ministers. “This is a strong commitment imposed on Greece.”
Bazooka theory does not work, nor did threats to investors that the ECB and EMU would be willing to defend the country from speculative attack if necessary.
The same holds true today. The Bigger the Bazooka, the More Money Will be Lost.
Mike "Mish" Shedlock
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One more quick one from the airport -- Richard Thaler attempts to nudge people away from the idea that the president can control gas prices (and he calls for an increase in the gas tax):
Why Gas Prices Are Out of Any President’s Control, by Richard Thaler, Commentary, NY Times: Everyone knows it’s dangerous to ingest gasoline or to inhale its fumes. But I am starting to believe that merely thinking about the price of gasoline can damage cognitive processing. Thus I may be risking some of my precious few remaining brain cells by writing about that topic.
Here is a one-item test to see whether you are guilty of cloudy thinking about gas prices: Do you believe that they are something a president can control? Many Americans believe that the answer is yes, but any respectable economist will tell you that the answer is no.
Consider a recent poll of a panel of economists conducted by the University of Chicago Booth School of Business, where I teach. ... The 41 panel members were asked whether they agreed with the following statement: “Changes in U.S. gasoline prices over the past 10 years have predominantly been due to market factors rather than U.S. federal economic or energy policies.”
Not a single member of the panel disagreed with the statement.
Here is why: Oil is a global market in which America is a big consumer but a small supplier. ...[continue reading]...
MyFoxLA Google+ Hangouts On Air w/ Kevin Smith & Maria Quiban
hat tip boingboing
Not an April Fool: There is an app…. [C]omputer journalist John Brownlee wrote an essay…. First, a quote from John's essay….
"Girls Around Me" is a standard geolocation based maps app, similar to any other app that attempts to alert you to things of interest in your immediate vicinity…. [O]n the bottom left is a button that allows you to specify between whether you're interested in women, men or both. It's when you push the radar button… Girls Around Me went into radar mode, and after just a few seconds, the map around us was filled with pictures of girls who were in the neighborhood. Since I was showing off the app on a Saturday night, there were dozens of girls out on the town in our local area…
Now, here's the point. What "Girls Around Me" does is simple: it looks up your GPS location, then queries Facebook and FourSquare for people matching a simple search criterion (are they female?) who have checked in (or been checked in by their friends) in your vicinity. It then makes it really easy to pull up their publicly visible information--stuff such as age, occupation, favourite sports, what school they attended, and so on…. [Y]ou don't need a special purpose tool like "Girls Around Me" to do this, if you have a reasonably powerful Facebook query tool and know how to use it. I can't stress this strongly enough: the problem was not invented by SMS Services O.o.o. of Russia, who wrote the app. And banning the app will not make the problem go away.
What "Girls Around Me" does is make clear just how useless Facebook's security settings are…. [O]rdinary people are not all Bruce Schneier. Ordinary people with Facebook accounts tend to over-share… our social instincts encourage us to share information with everyone we can see, and to discount abstractions (such as the possibility that software bots thousands of miles away might be harvesting the photographs and information we put online in order to better target advertisements at us—or worse).
The problem is this: all social networks run on the principle that if you're not paying for the product, you are the product…. There's no point marketing bacon to Jews or Muslims, so religion is relevant. There's no point marketing turkey to vegans or wheat products to coeliacs, so dietary preferences and medical conditions are relevant. If a user is a member of a subculture associated with a distinctive clothing fashion, that information is relevant to garment vendors. And so on. So Facebook, Orkut, G+ and so on all attempt to induce their users to maximize their self-disclosure and to tie their accounts to as many useful third-party information sources as possible.
You may have noticed that Facebook provides privacy controls…. [But] it is not in Facebook's commercial interest to promote the use of privacy controls…. Moreover we are actively discouraged from maintaining any separation of spheres of identity…. Real human beings live complex lives in which they occupy different roles which are exposed to different people….
Look at Iran and imagine an app written for the Basij to make it easy to identify dissidents and form ad-hoc goon squads to proactively hunt them down….
But as I said earlier, the app is not the problem. The problem is the deployment by profit-oriented corporations of behavioural psychology techniques to induce people to over-share information which can then be aggregated and disclosed to third parties for targeted marketing purposes.
• Summary for Week Ending March 30th
The key report for this week will be the March employment report to be released on Friday, Apr 6th. Other key reports include the ISM manufacturing index on Monday, vehicle sales on Tuesday, and the ISM non-manufacturing (service) index on Wednesday. The FOMC minutes for the March meeting will be released on Tuesday.
Note: Reis is expected to release their Q1 Office, Mall and Apartment vacancy rate reports this week. Last quarter Reis reported falling vacancy rates for apartments, a slight decline in vacancy rates for regional malls, and a slight decline in the office vacancy rate.
10:00 AM ET: ISM Manufacturing Index for March.
Here is a long term graph of the ISM manufacturing index. The consensus is for a slight increase to 53.0 from 52.4 in February.
10:00 AM: Construction Spending for February. The consensus is for a 0.7% increase in construction spending.
All day: Light vehicle sales for March. Light vehicle sales are expected to decline to 14.7 million from 15.0 million in February (Seasonally Adjusted Annual Rate).
This graph shows light vehicle sales since the BEA started keeping data in 1967. The dashed line is the February sales rate.
TrueCar is forecasting:
The March 2012 forecast translates into a Seasonally Adjusted Annualized Rate (SAAR) of 14.5 million new car sales, up from 13.1 million in March 2011 and down from 15.1 million in February 2012Edmund.com is forecasting:
Edmunds.com estimates that 1,451,956 new cars will be sold in March, for a projected Seasonally Adjusted Annual Rate (SAAR) of 14.9 million units. The projected sales results would be a 26.4 percent increase over February 2012 and a 16.5 percent increase over March 2011.10:00 AM: Manufacturers' Shipments, Inventories and Orders (Factory Orders) for February. The consensus is for a 1.5% increase in orders.
2:00 PM: FOMC Minutes, Meeting of March 13th. The minutes might include a discussion of possible easing options.
4:05 PM: San Francisco Fed President John Williams speaks on the economy to students at University of San Diego.
Early: Reis Q1 2012 Apartment vacancy rates.
7:00 AM: The Mortgage Bankers Association (MBA) will release the mortgage purchase applications index. This index has been weak this year, although this does not include all the cash buyers.
8:15 AM: The ADP Employment Report for March. This report is for private payrolls only (no government). The consensus is for 208,000 payroll jobs added in March, down from the 216,000 reported last month.
10:00 AM: ISM non-Manufacturing Index for March. The consensus is for a decrease to 56.7 from 57.3 in February. Note: Above 50 indicates expansion, below 50 contraction.
This graph shows the ISM non-manufacturing index (started in January 2008) and the ISM non-manufacturing employment diffusion index.
Early: Reis Q1 2012 Office vacancy rates.
8:30 AM: The initial weekly unemployment claims report will be released. The consensus is for claims to essentially unchanged at 360,000.
Markets will be closed in observance of Good Friday.
Early: Reis Q1 2012 Mall vacancy rates.
8:30 AM: Employment Report for March. The consensus is for an increase of 201,000 non-farm payroll jobs in March, down from the 227,000 jobs added in February.
The consensus is for the unemployment rate to remain unchanged at 8.3%.
This second employment graph shows the percentage of payroll jobs lost during post WWII recessions through February.
The economy has added 3.45 million jobs since employment bottomed in February 2010 (3.94 million private sector jobs added, and 490 thousand public sector jobs lost).
There are still 4.9 million fewer private sector jobs now than when the recession started. (5.3 million fewer total nonfarm jobs).
3:00 PM: Consumer Credit for February. The consensus is for a $12.0 billion increase in consumer credit.
Hi Dr. Mankiw,
Thanks for giving a shout to musical theater in your recent post about Smash! My writing partner Leah (an econ major) introduced me to your blog several years ago and I've been a regular reader and huge fan ever since. We develop musicals and license the performance rights to college, high school, and community theatres. We're currently working on an adaptation of It's a Wonderful Life set in the recent recession, and it features some economics-inspired songs that you might get a kick out of. Here are a few you might enjoy:
Potter (a female in our version) and Sam Wainwright reflect on the economy. Inspired by a Rogoff article you linked to: Game We Play
Asleep at his desk, George has a Schumpeterian dream: Steve Jobs
Violet reflects on opportunity costs: Live for Today
Anyway, I want to thank you for contributing so much to my education through your blog and for helping to inspire an interest in economics. Maybe someday I'll write a musical explicitly about economics. "The Dismal Science" would make a great title, don't you think? :)
knzn explains why he is a Keynesian:
Bullish It, by knzn: ...Smith’s blog leads me to think about the issue of macroeconomics as a field. It seems (especially from the comment thread) that the Old Keynesians and the New Monetarists are at each other’s throats (but, interestingly, the newly christened Market Monetarists – who have some claim to being the legitimate intellectual heirs of the Old Monetarists – basically seem to be on the same side as the Old Keynesians on the major issues here; and the New Keynesians can break for either side depending on whether they’re more Keynesian or more New). Obviously I’m more sympathetic to the Old Keynesians than the New Monetarists, otherwise maybe my pseudonym would be “dsge” instead of “knzn.”
Here’s my take: to begin with, economics is basically bulls**t. I mean, it’s necessary bulls**t, sometimes even useful bulls**t, but I’m extremely skeptical of people who think economics is a science or that it could be a science. We have to make policy decisions (and investment decisions and personal consumption decisions etc.), and we have to have some basis for making them. We could just use intuition, and we often do, but it’s helpful to use logical thought and empirical data also, and systematic study using fields like economics can help us to clarify our intuition, our logical arguments, and our interpretation of the empirical data. The same way that bulls**t discussions that don’t make any pretense at being science can help.
Economics is bulls**t because it relies on the premise that human beings behave in a systematic way, and they don’t. Once you have done enough research to convince yourself that they behave in a certain way, they will change and start behaving in another way. Particularly if they read your research and realize that you’re trying to manipulate them by expecting them to continue behaving the way they have. But even if they don’t read your research, they may change the way they behave just because the zeitgeist changes – cultural sunspots, if you will.
The last paragraph may vaguely remind you of the Lucas critique. Lucas basically said that macroeconomics (as it was being practiced at the time) was bulls**t, but he held out the hope that it could receive micro-foundations that wouldn’t be bulls**t. The problem with Lucas’ argument, though, is that microeconomics is also bulls**t. And Noah Smith, writing some 36 years after the Lucas critique and observing its unwholesome results, takes it one step further by saying, if I may paraphrase, “Yes, the microeconomics upon which modern macro has now been founded is indeed bulls**t, but if we do the micro right, then we can come up with non-bulls**t macro.”
Yeah, I doubt it. Maybe we can come up with slightly better macro than what we’ve got now, but the underlying micro is never going to be right. Experimental results involving human subjects are inevitably subject to the micro version of the Lucas critique: once the results become well-known, they become part of a new environment that determines a new set of behavior. And the zeitgeist will screw with them also. And so on. And in any case, even if the results were robust, I’m skeptical that we can really build them into a macro model or that it would be worth the trouble even if we could. Economics will always be bulls**t.
Now there’s a case for doing rigorous bulls**t, at least as a potentially useful exercise. That’s what I think DSGE modeling is: it’s a potentially useful exercise in rigorous bulls**t. And I don’t begrudge the work of people like Steve Williamson: I think there's some rigorous bulls**t there that may be worth talking about. But in general, when it comes to bulls**t, there is not a monotonic relationship between rigor and usefulness. And to put all your eggs in the rigorous bulls**t basket – not only that, but in one particular type of rigorous bulls**t basket, because rigor does not live by rational equilibrium alone – is something that not even Pudd’nhead Wilson could advocate.
So I’m going to stick with sloppy Old Keynesian models as my main mode of macroeconomic analysis. They’re bulls**t. They’re not rigorous bulls**t. But as bulls**t goes, they’re pretty useful. A lot more useful than unaided intuition. And they’re easy enough to understand that we can have a reasonable idea of where their unrealistic assumptions are likely to lead us astray. Of course all economic models have unrealistic assumptions, but hopefully our intuition allows us to correct for that condition when applying the models to the real world. If the model is too complicated for the typical economist to understand how the assumptions generate the conclusions, then the unrealism becomes a real problem.
When you need an answer fast to a question that the newer models don't address sufficiently, and there are many important questions that fall into this category, and when you don't have time to build a new model before needing to answer -- a situation policymakers face constantly -- then the Old Keynesian IS-LM/MP model can fill the void. It is very easy to use for most questions, in part because it has been explored so thoroughly over the decades. I suspect knzn faces this situation often in his job in finance, i.e. he needs an answer today, wants a model for guidance, doesn't have time to build a full blown dsge model, simulate it, etc. and the IS-LM/MP model can fill the void.
But if this approach is adopted, I think it's important not to forget the lessons of the more modern models. For example, the old and new IS curves differ by how they handle expectations of the future. The new model accounts for this, the old models don't. If changes in expectations about the future are arguably unimportant, and other important differences in the models are similarly unimportant, then the old IS-LM/MP model can provide a good approximation. But when these expectations are important, using the old models can cause you to miss important feedback effects from the expected future to the actual present.
The best of both worlds is, I think, better than either alone. The art is knowing what is "best" in each of the two models.