rigorousintuition.ca

The Kubrick market crash theory supposes the market will begin its final plunge beginning on the 4th of July 2021.

This theory has no analytical basis other than a theme of history repeating itself in Kubrick's The Shining, and that mysterious photograph dated 4th of July 1921 empathized at the end of the film. In the photo there is a man, who is very likely Owen D. Young. He was J.P Morgan agent sent to Europe to over see the terms of German reparation payments. You may be familiar with the Young plan. Sometime in July 1921 the Weimar stock market finally collapsed after being blown up with fiat reichsmarks. This triggered a final hyper-inflationary period which eventually led to a currency reset onto the rentenmark in 1923.

Anyhow, oil prices and meme stocks have just begun crashing. Of course, they could recover, and the SPX & DJI have hardly fallen, but i thought this would be a good time to create a place to follow the red candles into the future, whenever that arrives.

VIX up 25% everything else down. A storm brews patiently ahead.

Thanks for doing this, I was going to do the same Tuesday but life got away from me. It will be good to have markers down in advance. Here is what I had worked up:


Crashes traditionally happen in the Fall, which is poetry.

Also symmetry, since many observers expect (or claim to expect; we all talk our book unless we don't have one) the Fedfathers to start tapering around September. "Tapering" in this case means cutting down on their massive bond purchasing program, and it's significant that in terms of market impact, there is little difference between announcing their intentions to do this and actually implementing the change. Either way, all eyes are on Jackson Hole, as ever.

And as ever, This Time Will Be Different:

The coming reduction in the Federal Reserve's bond purchases may bear little resemblance to the "automatic pilot" tapering exercise the U.S. central bank conducted seven years ago, as officials grapple with volatile data - on inflation in particular - during the rebound from the COVID-19 pandemic, a Fed official said on Friday.

"In the 2013-2014 taper we went on automatic pilot and didn't do much," St. Louis Fed President James Bullard said in an interview on CNBC.

"This time around, I mean look at this data," he said. "Look at how outsized all these numbers are and how volatile everything has been. I think we're going to have to be more state-contigent than we have been in the past."

The Fed currently holds nearly $7.5 trillion of Treasuries and mortgage-backed securities (MBS) within its $8.1 trillion balance sheet and is adding to those holdings at a rate of $80 billion and $40 billion, respectively, each month as part of its extraordinary measures to support the economy during the pandemic.

"Didn't do much" is a glib understatement glossing over the most central concern of the central banker set: even as their toolkits have proliferated, the effectiveness of their interventions has diminished. It was one thing when the "big banks" knew better than to believe Fed bluster about discipline, exuberance and consequences, but after the GFC bailout, pretty much every actor on the battlefield knows all threats are hollow threats. (Including the IRS and SEC.)

What's less noted about the Fed balance sheet is the fact they're buying mortgages like crazy. (This is both descriptor and diagnosis.) $40 billion per month is one hell of a stimulus, especially when it is ostensibly being done to stabilize a housing market that is absolutely on fire. Underwriting a market that is undergoing record profitability and demand seems like a clear-cut case of government waste. That's fucking crazy.

It would also be fucking hilarious if the next crash began in the housing sector, again. Not just for the sheer stupidity of it, but because it would be a cold & total repudiation of both current economic theory and current economic leadership. There could be no failure more thorough than expending trillions only make the same thing happen on a bigger scale. Of course, that's been the macro-story of everything since Bretton Woods, so don't expect any consequences or changes in leadership as a result.

What would trigger the next crash? There is a comically broad bouquet of available answers here, and people have been calling "the big one" for a long time. The team at Zero Hedge makes a living doing this every single week, but even more serious analysts have been sounding alarms over the past five years ... well, the past decade, really. Things are clearly irrational, but on balance, that's been true for most of the past century.

Indeed, thinking over my own thinking, my skepticism about a crash this year is shaped by fatigue as much as facts. And there are almost too many facts: rampant over-valuations, zombie corporations, faulty fundamentals, geopolitical risks, ETF bottlenecks, overnight repo shortages, currency & commodity options ... but no matter where the match gets struck, what truly defines the crash is a liquidity implosion. The margin calls that really matter are between counterparties, and eventually, those have to come.

I'm also on record here predicting that "shale will be much bigger than subprime." I'm less certain now since there's been ample time and ideal conditions to unwind the really bad bets, but there's still a tsunami of leverage there and, frankly, should be. If oil prices spike again and stay there, those "bad bets" suddenly become going concerns, not to mention critical to national security for a system that still mostly runs on oil.

It's instructive to consider that 1) shale is one of dozens of parallel bubbles so it's hard to predict which one will take the crown, but 2) a collapse in any given sector may only lead to yet another round of "unprecedented" interventions, stimulus and bailouts, which will 3) not only serve to stabilize that sector, but further galvanize the over-valuations in every other sector, as both corporate boards and institutional investors rightly assume they will receive the same treatment, and continue to raise debt and throw good money after bad.

There's been a lot of commentary, especially in the conspiratainment field, about how "The Fed" is essentially underwriting the gains of the stock market. On one level, sure. It's absolutely true that the perception that central banks will always intervene to suppress volatility has been the foundation of market psychology. This is the bedrock bet that shapes the calculations of both individual and institutional investors.

But on the literal level, it's harder to make that case. When you look at daily trading volume, most of the transactions are automated or institutional -- there's already been a lot here at RI about HFT shenanigans -- but there's been record inflows from individual investors getting brokerage accounts, or more likely, getting a "no fees" app that sells them options and passes their trades to dark pools who front-run them and execute their own trades to capitalize on that volume.

In June, so-called retail investors bought nearly $28 billion of stocks and exchange-traded funds on a net basis, according to data from Vanda Research’s VandaTrack, the highest monthly amount deployed since at least 2014. That even trumped the amount retail traders spent in January during the first meme-stock frenzy.

...individual investors have grown in number: More than 10 million new brokerage accounts are estimated to have been opened in the first half of this year, according to JMP Securities. That is around the total for all of 2020.

Retail investors’ enthusiasm is in contrast to professional money managers’ growing unease about the market’s outlook. This has risen as markets on the surface appear placid, but volatility has grown around individual stocks.

...

retail traders’ sentiment currently shows that the group is nearly 70% confident that U.S. stocks will keep rising over the next three months. Meanwhile, professional traders are only about 44% confident that stocks will rally during that period.

So in terms of your dumbest relative making money day trading, overall market activity in equities is little different from WallStreetBets was doing to Gamestop.

Now, "crypto" and "meme stocks" are great headline fodder for their novelty, yet neither is particularly new. Markets are churning out new asset classes every year, and equity fads have been greasing the wheels for as long as Wall Street has been publishing daily valuations. Only the names change.

It's also notable that central bankers running out of ammunition is another old story with a new suit. Before "qualitative easing" entered the lexicon, it was known as "the Greenspan put," and you'll note that the concept is exactly the same: a bet on volatility suppression that always wins short-term and loses long-term. It's interesting to speculate whether this was intentional or just a desperation play that everyone is now stuck with.

Both individual and institutional investors are rarely where big systemic problems start. Before the big Corona Crash, you saw huge problems in currency swap markets. And months before that, indeed, months before anyone had a global pandemic as an excuse, there were severe liquidity shortages in the overnight repo system, something that went little remarked upon outside of wonk / paranoid circles but required massive, sustained interventions.

And I think that's instructive in terms of what to expect from "taper tantrums" or any sweeping consequences from a reduction in stimulus: more stimulus. Some day that will finally stop working and everything will be on the line, but I don't believe it will happen this year, especially with economic growth picking back up and creating enough income for both debt service and dividends.

We could -- and should -- see multiple, spectacular, paroxysms over the next six months and it still won't be The Big One. That is pretty much my expectation but I am definitely not living my life or running my personal finances based on that expectation, and I would advise anyone reading this to keep hardening, keep preparing for hard times, and keep building for resilience.

Wouldn't it be funny if it was just mortgage backed securities again.

The Market never crashes.... For them. Kinda like war isn't meant to be won... it's meant to be continuous.

"Don't forget the real business of war is buying and selling. The murdering and violence are self-policing, and can be entrusted to non-professionals. The mass nature of wartime death is useful in many ways. It serves as spectacle, as diversion from the real movements of the War. It provides raw material to be recorded into History, so that children may be taught History as sequences of violence, battle after battle, and be more prepared for the adult world. Best of all, mass death's a stimolous to just ordinary folks, little fellows, to try 'n' grab a piece of that Pie while they're still here to gobble it up. The true war is a celebration of markets."

- Gravity's Rainbow, Thomas Pynchon

Wombaticus Rex wrote:no matter where the match gets struck, what truly defines the crash is a liquidity implosion.

Curious for your take on this:

https://citeseerx.ist.psu.edu/viewdoc/d ... 1&type=pdf

Working Paper No. 681
Lessons We Should Have Learned from the Global Financial Crisis but Didn’t

by L. Randall Wray
Levy Economics Institute of Bard College
August 2011


Abstract

In this paper, I first quickly recount the causes and consequences of the global financial crisis (GFC). Of course, the triggering event was the unfolding of the subprime crisis; however, I argue that the financial system was already so fragile that just about anything could have caused the collapse. I then move on to an assessment of the lessons we should have learned. Briefly, these include: (a) the GFC was not a liquidity crisis, (b) underwriting matters, (c) unregulated and unsupervised financial institutions naturally evolve into control frauds, and (d) the worst part is the cover-up of the crimes. I argue that we cannot resolve the crisis until we begin going after the fraud. Finally, I outline an agenda for reform, along the lines suggested by the work of Hyman P. Minsky.


Keywords: Global Financial Crisis; Subprime Crisis; Hyman P. Minsky; Galbraith and the Great Crash; Control Fraud; Underwriting; Deregulation; Financial Reform

And a later Wray piece, from 2018:

http://www.levyinstitute.org/publicatio ... sky-moment

Policy Note 2018/1 | February 2018
Does the United States Face Another Minsky Moment?

It is beginning to look a lot like déjà vu in the United States. According to Senior Scholar L. Randall Wray, the combination of overvalued stocks, overleveraged banks, an undersupervised financial system, high indebtedness across sectors, and growing inequality together should remind one of the conditions of 1929 and 2007. Comparing the situations of the United States and China, where the outgoing central bank governor recently warned of the fragility of China’s financial sector, Wray makes the case that the United State is far more likely to “win” the race to the next “Minsky moment.” Instead of sustainable growth, we have “bubble-ized” our economy on the back of an overgrown financial sector—and to make matters worse, he concludes, US policymakers are ill-prepared to deal with the coming crisis.

Thanks for the Wray link, I'm glad I read it although I am unpersuaded on the liquidity point. Nice to see an economics wonk write like a human being, too.

"The total subprime “universe” was less than two trillion dollars (not that much); it wasn’t that big relative to US GDP or total debt, and the number in default weren’t that high."

This is essentially argument by assertion -- something I am deeply fond of -- but these assertions don't seem tenable. US GDP in 2007 was 14.4t, so the total subprime universe was more than 10% of GDP. You can say that a system shock of that size is "not that much" but it doesn't budge those numbers one bit. His own argument later hinges on the default numbers becoming intolerably high, too.

"Some analysts blame the Fed—supposedly it kept the interest rate too low and that promoted speculation. I think that this is mostly wrong: low interest rates do not necessarily fuel speculation—a point made by Galbraith in his analysis of the great crash."

I should, perhaps, defer to the eggheads on this but it does not square in any way with the real world economics I am familiar with. Maybe the implied argument is that speculation is so inherent to the human animal that low interest rates merely enable, rather than fuel, speculation but this seems to be parsing English into mighty thin gruel. And this, I think, is indicative of his larger reasoning here.

"This culminated in his development of the stages theory—the evolution from Hilferding’s “finance capitalism” (that failed in 1929), the rise of “managerial welfare-state capitalism” after WWII with its New Deal protections, and finally to what he called the current stage “Money Manager Capitalism” (Wray 2008a, 2009)."

Very apt & useful, and squares with drstrangelove's work here: http://thehotstar.net/controlownership.html

The core of his argument is more or less what I expected:

What actually happened is that default rates on
risky mortgage loans rose sharply while home prices plateaued. Megabanks took a look at their
balance sheets and realized they were not only holding trashy mortgage products, but also lots
of liabilities of other mega financial institutions. It suddenly dawned on them that all the others
probably had balance sheets as bad as theirs, so they refused to roll-over those short-term
liabilities. And since the Leviathans were highly interconnected, when they stopped lending to
one another the whole Ponzi pyramid scheme collapsed.

To label that a liquidity crisis is misleading. It was massive insolvency across at least the
largest financial institutions (both banks and shadow banks) that led to the “run on liquidity”
(really, a refusal to refinance one’s fellow crooks—criminal enterprise always relies on trust,
and when that breaks down, war breaks out). The banks had an insufficient supply of good
assets to offer as collateral against loans, just trashy real estate derivatives plus loans to each
other, all backed by nothing other than a fog of deceit. All it took was for one gambling banker
to call the bluff.

I agree that fraud is fraud is fraud, but saying that a liquidity implosion created by fraud isn't a "real" liquidity implosion just seems weird. Then again, since he's the economics chair and I'm the peanut gallery, I suppose I am the asshole in this scenario.

His overall take is hard to quibble with, though:

As of mid 2011, all the big banks are probably still insolvent. It is only the backing
provided by Tim Geithner and Ben Bernanke as well as the “extend and pretend” policy adopted
by regulators and government supervisors that keeps them open.

Things are little different a decade later; if anything far worse. It is sad that there hasn't been any military intervention given the national security dimensions here, but I reckon that institution is just as hollowed out as any other at this point. No messiahs in sight except for the globalist rhizome that has been patiently awaiting our miraculous times for over a century now.

Thanks for the reasoned reply, asshole.

I think Wray might mean that banks had access to liquidity but just chose not to exercise it.

It was massive insolvency across at least the
largest financial institutions (both banks and shadow banks) that led to the “run on liquidity”
(really, a refusal to refinance one’s fellow crooks—criminal enterprise always relies on trust,
and when that breaks down, war breaks out).

I think this is why they let Lehman Brothers die; nobody liked the guy and Lehman's collapse provided a wonderful scapegoat: all of the ten-year retrospectives on the GFC emphasized the Lehman story while ignoring the #1 instigator Goldman Sachs and the rest of the bandwagon. Lehman's got pushed off and run over, but the impression left with the so-well-informed readers of financial articles was that it was all their fault.


With regard to the notion that "domestic world currencies started to be removed from their pegs to gold, monetary policy started to become inflationary", I don't think that's borne out by the data, at least with the US dollar.




(P.S. to hotstar author: check spelling of separation; the repeated misspelling doesn't inspire confidence.)

The greek rationalists would be proud of that chart:
- arbitrarily begins the gold standard period in 1880. 52 years of data.
- lops out 40 years of the post gold standard period.
- incorrectly begins the fiat period in 1973 and ends it 11 years short of the period it's being compared with.
- doesn't distinguish between the new and previous methods of how price inflation was/is calculated.

this is actually a great example of how data is used to deny reality. it's how covid had a 3% fatality rate and the vaccines +90% efficacy, data points eventually exposed by reality.

this isn't even getting into the decline in quality of goods used to hide modern price inflation:
- decreased quality in clothing. instead of two shirts a year, you buy three. this = price inflation.
- chemicals used to increase food quantity at the expense of food nutrition. this = price inflation.
- shrinkflation. instead of raising prices, portions are decreased. this = price inflation.

I'm not even a proponent of the gold standard. There were legitimate reasons for going off it. But the inflationary monetary policy of the fiat system that replaced it has become the prime mover behind the largest transfer of wealth in human history.



you may begin to notice a seperation between the lines grow, as the second fiat era begins to take off into the 80s.

drstrangelove wrote:- arbitrarily begins the gold standard period in 1880. 52 years of data.
- lops out 40 years of the post gold standard period.
- incorrectly begins the fiat period in 1973 and ends it 11 years short of the period it's being compared with.

What is your timeline for gold standard period(s) and fiat period?

It can be said that it's "all fiat" since goverments have routinely exceeded any agreed ratios under commodity money regimes. That's one big reason Bretton Woods folded in 1973.

drstrangelove wrote:you may begin to notice a seperation between the lines grow, as the second fiat era begins to take off into the 80s.

Increasing income disparities of the 1970s & '80s (continuing to the present day) followed the ascendancy of Milton Friedman monetarism, fraudulent trickle-down ideology, unilateral corporate profit-taking and the systematic crushing of labor market power.

It wasn't an accident or a central bank scheme, it was a business plan to extract working & middle class wealth. Because, you know, "Communism!"

Gold standard was removed from domestic currencies 1932(give or take a year depending on the currency). gold standard was removed from the US dollar in its role as a reserve currency in 1973.
1932-1973: private citizens and institutions could not exchange paper currency for gold. but world central banks could exchange US dollars for gold reserves.
1973-*: central banks could no longer exchange US dollars for gold.

drstrangelove » Tue Jul 13, 2021 7:47 pm wrote:Gold standard was removed from domestic currencies 1932(give or take a year depending on the currency). gold standard was removed from the US dollar in its role as a reserve currency in 1973.
1932-1973: private citizens and institutions could not exchange paper currency for gold. but world central banks could exchange US dollars for gold reserves.
1973-*: central banks could no longer exchange US dollars for gold.

I don't think this is disputed by anyone.

CORRECTION TO EARLIER POST: I posted the wrong graph The graph I posted is labeled Annual GNP Growth, 1880-2016.

Here's the inflation graph from the same page, with the explanation given:

The following chart plots annual U.S. consumer price inflation from 1880, the beginning of the post-Civil War gold standard, to 2015. The vertical blue line marks 1933, the end of the gold standard in the United States. The standard deviation of inflation during the 53 years of the gold standard is nearly twice what it has been since the collapse of the Bretton Woods system in 1973 (denoted in the chart by the vertical red line). That is, even if we include the Great Inflation of the 1970s, inflation over the past 43 years has been more stable than it was under the gold standard. Focusing on the most recent quarter century, the interval when central banks have focused most intently on price stability, then the standard deviation of inflation is less than one-fifth of what it was during the gold standard epoch.

Annual Consumer Price Inflation, 1880 to 2016

US inflation 1880-2016 - Minn Fed.png

I suspect the graph makers didn't indicate the average & deviations for the interval 1933-1973 because they're using 1967 as the base year.

Data for the inflation graph is apparenty gathered from a Federal Reserve Bank of Minneapolis page that no longer exists, at least at that URL; archive is here: https://archive.is/5tAKn

Consumer Price Index (Estimate) 1800-
Source:
Handbook of Labor Statistics
U.S. Department of Labor
Bureau of Labor Statistics
Indexes from 1800 to 1912 and 2015 estimated by splicing the following series:

1800 to 1851 - Index of Prices Paid by Vermont Farmers for Family Living;
1851 to 1890 - Consumer Price Index by Ethel D. Hoover;
1890 to 1912 - Cost of Living Index by Albert Rees;
1890 to 2014 - Consumer Price Index;
2015 - An estimate for 2015 is based on the change in the CPI from second quarter 2014 to second quarter 2015.

To calculate the change in prices, use the formula from the example below:

What is $1 in 1850 worth in 2015?
2015 Price = 1850 Price x (2015 CPI / 1850 CPI)
2015 Price = $1 x (711.1 / 25)
2015 Price = $28.45
$1 in 1850 is worth $28.45 in 2015.
CPI-U
1967 = 100

But that's price stability. The reason to go off the gold standard was to stabilize prices, which it did by making them stable but inflationary, as opposed to deflationary and unstable. But prices inflated.

The only point I was trying to make in relation to the gold standard is that going off the gold standard inflates the money supply, which is bad for creditors, and why the banks have been selling their loans to pension funds since then, which is the reason why middle class savings get periodically wiped out, and the wealth gap increases. And the banks make all these loans in fiat. Meanwhile to compensate for price increases by expanding the money supply to do this, the quality of goods produced must be lessened to increase the quantity of them, this being done to artificially met the rate of economic growth required to offset the rate of inflation.

so you got banks:
- printing fiat, loaning it out reckless, selling those loans to pension funds, which then default when they come due like '88, '00, '08.

then you got corporations:
- destroying quality of goods to meet the rate of growth required to keep prices from being too noticeable.

and finally you have consumers:
- losing their savings in cycles
- buying worse and worse quality goods at gradually increased prices.

On top of that the people behind all this also probably behind the increase of kidnappings in the lead up to christmas.

.

Related.

https://www.reddit.com/r/wallstreetbets ... urce=share

Why the Housing Market is Likely Fucked


TL;DR: Almost all the key signs that caused the housing market crash in 2008 are back stronger than ever. Mortgage debt is at ATH, consumer debt is 2x higher than ever, lumber futures are down 60% but physical lumber isn't moving, unemployment is still 50% higher than in 2009, housing starts are double what they were in 2008, and median house prices just broke $300,000 for the first time ever, inflation adjusted. All of which are bearish indicators for the economy.

​1.) Mortgage Debt and Consumer Debt is at an All Time High

Having high mortgage debt makes your house a debt and not an asset. It is sitting right above 10 trillion dollars. If it goes any higher, we are at an extreme risk for higher foreclosures. However, consumer debt may be a greater issue. It is currently nearing 2x what it was in 2008.

https://www.newyorkfed.org/microeconomics/hhdc.html

​
2.) Lumber Futures Have Fallen, Physical Has Not

Another way to tell if we are in a bubble is by comparing the futures market to actual prices. When there is a large gap in these two, it usually indicates people are still willing to pay much higher prices for a large supply. It doesn't make any economical sense. People still feel that lumber is in extremely high demand, and will buy lumber (which isn't in high demand), and buy as much as they can anticipating the price to continue going up. It's artificial price increases.

https://www.nasdaq.com/market-activity/commodities/lbs

​
3.) Unemployment is Still Extremely High After COVID Restrictions Lifted

Unemployment numbers are still 50% higher than they were in 2019. There's no reason to go back to work for ~2% of the population, because the stimulus checks and unemployment add up to more than minimum wage. This money has to come from somewhere, a.k.a money printing. This in turn adds up to more inflation, which is my next point.

https://www.macrotrends.net/1316/us-nat ... yment-rate


4.) Inflation is the Highest it has been in 31 Years

Jpow, our lord and savior, announced today inflation was above expectations of 5%. This has not happened since 1990. Hmm. AP article:
https://apnews.com/article/inflation-ec ... GTON%20(AP

https://www.macrotrends.net/2497/histor ... te-by-year


5.) Housing Starts are Double What They Were in 2008, Nearing 2005 (Peak) Levels

Housing starts measure how many houses are being built. It is currently at around 1,500 a month. They are still recovering from 2005 but quickly approaching 2005 levels. More houses being built means that there is more supply flowing in.

https://www.macrotrends.net/1314/housin ... ical-chart

​
6.) Median House Prices are at $300,000, Up Nearly 100% From 2012

Although the housing crisis ended around 2009, the bottom for housing prices was in 2012. Since then, housing prices are well above their 2008 levels, even adjusted for inflation. This is a bad sign for the housing market. Having high housing prices means more debt, which leads to more defaults.

https://dqydj.com/historical-home-prices/

​
7.) 30 Year Fixed Mortgages are at an All Time Low

This is not necessarily a bad sign for the housing economy, but it means if we were to have a recession, it could be really bad. To fix recessions, the fed usually lowers interest rates, which is like turning the economy off and on again. It works most of the time. The grey bars in this picture are recessions. Notice how about halfway through each recession, the interest rates decrease, and the recession shortly ends.

Interest rates are already incredibly low, so this may not be an option for the next recession without making interest rates negative. Having negative interest rates triggers more panic buying houses people can't afford, which results in more defaults. It will quickly become a chain reaction of hell.

https://www.macrotrends.net/2604/30-yea ... rate-chart


Edit: due to the high number of comments, I will not be able to respond to most of them. I did not expect this post to get this popular. I was anticipating being called a retard (which around half of you are).

What I've learned:

1.) This housing market is not really like 2008. It's more secure today, or at least what we know is.

2.) Lumber prices really indicate a bullish position on the housing market. I was wrong about the gap between the futures and physical. I have also been told that was worded poorly.

3.) When you really put effort into a post, it does well. I spent well over 3 hours on this post, and it's the first one that hasn't been removed by the mods.

A few noteworthy comments to the above take: