I love forecasting. I suck at it personally tho. Guess most people do. There are a handful of people who have gotten really rich playing the markets, but I think most people are in my boat and think it’s purely a crap shoot. The reason I suck at economic forecasting is because it gets so complicated, with so many aspects, that by the time I’ve tossed in all the variables and impactors, the event has passed. Therefore, I rarely make economic forecasts. They just more often than not make me look stupid. Some people are not so wise. They have the balls to stick their gonads out there let fate take a swipe at them. Graham Summers is one of those peeps.
Now, Graham has a method to his madness. Most nuts do. However, some methods I agree with, others I don’t. Some work, some don’t. Some make sense mathematically, others don’t. So, I like to look at what their logic is and parse the logic moreso than say they’re nuts or not. Graham lays it out very methodically at Seeking Alpha.
- High Frequency Trading Programs account for 70% of market volume. – I’ve complained about this one for a while. HFTP’s could care less which way the market goes. They make their money purely on the volume of trades. I hate short sells. For a while they were illegal. They should always be. Selling something you don’t have for a loss totally defies all free market logic. However, in October 2008 the ban was lifted. The market was in full meltdown and it was felt that that shorting was not affecting this downward pressure. How in the hell they came to that conclusion is beyond me. But, they did. Graham waits to get to the nuts and bolts of why HFTP’s are dangerous in October 2009, so I will as well.
- Even counting HFTP volume, market volume has contracted the most since 1989 – That doesn’t seem to be playing out on the other markets, but it does specifically on the S&P large caps. This is the crux of Graham’s biscuit. He gets very ballsy by stating at this point, “I am officially going on record now and stating that IF the S&P 500 hits 1,000, we will see a full-blown Crash like last year.” Monday, August 3, S&P 500 hit 1,000. It’s dancing around 1,000 right now. That means Graham is now on record as asserting there will be a full blown crash. He doesn’t say exactly when, but he gives more clues.
- This Latest Market Rally is a Short-Squeeze and Nothing More - “To date, the stock market is up 48% since its March lows. This is truly incredible when you consider the underlying economic picture: normally when the market rallies 40%+ from a bear market low, the economy is already nine months into recovery mode. Indeed, assuming the market is trading based on earnings, the S&P 500 is currently discounting earnings growth of 40-50% for 2010. The odds of that happening are about one in one million.” I have kind of pondered this aspect myself already. The benefit of the doubt in my mind was the panic was over and the market was returning to a fundamental level. I don’t mean that in an ecominc sense. I mean that in a purely individual business sense. Some entities are going to trade stocks just to make money. We’ve heard of them before. So, you’re going to have a certain value created by the practice of bouncing stock values around just to make trades. The weak of heart such as myself had already bailed and were waiting for the bottom. Comfortable it’s at bottom, people are slowly getting back in. The pessimist in me echoes Graham word for word. The naked short ban of Fall 2008 forced a ton of shorts out of the market. As they’re getting back in, they increase volume, they push up the price. They’re simply waiting for the kill. If they made their moves at 48% ago, the last bottom, then one would think in a short while they’ll make their move and push it at the very least back to where it was. I’m gonna go along with Graham on this one to a large degree.
- 13 Million Americans Exhaust Unemployment by 12/09 – Here Graham paints the dire picture of the fact that the huge number of unemployed haven’t fully hammered the economy yet because they have been receiving unemploymenty benefits the entire time. However, those benefits will expire by December 2009 and you’ll have a huge drain on the economy as those people become destitute. As they become destitute, they won’t be spending money buying stuff. This will hammer the economy. Logically, it would for sure. Realistically, we’ve got a President who has a handout for every conceivable excuse. Allowing millions of people to go without food, medical care, or housing is not an Obama option. Not only will he make sure they have the necessities such as food, housing, and medical care, he’ll toss in a free mortgage, a new energy efficient car, a line of credit, and whatever they dream up. So, contrary to Graham’s fears, the worse the economy gets, the better off the lower income people are. ( That’s sarcasm for sure, but politically it’s unreasonable to expect Congress to allow millions of people to have no means of support whatsoever. ) I have to totally disagree with Graham on this point. I will concede the long-term economic damage done will be something that will weigh on the markets, but the immediate impact will be mitigated.
- The $1 QUADRILLION Derivatives Time Bomb – This one is best understood by people like Graham. To put it simplest the way I understand it, derivatives have been used to create artificial value in something. The net result is that it artificially boosts the value of something to be used to create equity to balance loan values. If a derivative loses value, it creates a debt to equity crunch at the institution holding the derivative. In other words, it creates a credit crunch exactly how it happened last fall. The assumption Graham is making here is that the Feds learned nothing from the 21st century version of a stock market crash of ’29. What did happen last Fall is that the Feds did figure out a plan to mitigate the derivatives collapse. They simply bought some of the failing derivatives and infused cash to prop up those institutions until the markets in theory stabilized. So, based on that assumption, I have to once again disagree with Graham. But, that comes with a caveat. Have the markets truly stabilized or are they simply taking a breather? My personal guess is they are taking a breather. I’m going to jump off of Graham’s post at this point.
I have a lot more faith in the feds than Graham does. He has a disconnect between the actions of the Feds and the volume of last Fall. It was the short sale ban that did a lot to curb the volume. It was the discouragement of a lot of individuals waiting this whole thing out that kept the volume slower than normal. In other words, it’s the actions of the last crash that have set the numbers to look like the next one is pending soon, based on what he’s laid out. However, I’ve got other issues. Let’s look at some economic variables and how they’ve changed from last October till now:
- Unemployment has gone from 6.6% to 9.5%, most are saying it will get higher.
- Employment shed 385,000 jobs last October, it is projected to shed 467,000 jobs in June.
- The Misery Index was at 6.5 last October, it’s 9.5 in June. It’s most likely going to hit double digits for the first time since 1983 either this month or next.
- The Gross Domestic Product lost 5.4% last quarter of 2008. It continues to shed value at .8% at the end of June. To put things in perspective, the second quarter of 2009 was the first time since GDP began being measured in 1995 that it lost value. All bets mathematically are off. There is no history to play with. However, the 3rd quarter of each year can give some indication. The years the quarter was positive saw an average of 2.88% growth. The years of declining third quarters saw an average of 2.49%. However, the problem I see is that we are almost twice as likely to see a decline as we are an increase. The declining years outnumber the growth years 9 to 5.
- And lastly, politically, conservatives never liked the bailouts. Moderates are being attacked verbally across the nation over government expansion. Bottom line, Bush had an excuse for TARP I. His excuse was not handing a mess to Obama. It was a mess anyway. Obama’s excuse for TARP II was things were too big to fail, we needed to kick-start the economy “he inherited”, and, he won by a mandate. However, the but feeling I’m sensing is Obama has squandered most of his mandate on health care reform, the moderates are squeemish over trillion dollar deficits, and people are wondering exactly how these bailouts are helping them as they head to the unemployment office in droves. Bottom line, the politics of bailouts isn’t going to be on Obama’s side next time. He’ll have the muscle of existing laws, but Congress won’t blindly sign trillion dollar checks next time. For a quick fix, the money needs to go the private sector, something Obama’s been loathe to do.
So, I see neither the economic fundamentals or the political willpower there to put in place what needs to be done to cut this situation off before it gets in place. So, most likely, it will take some cataclysmic economic event to trigger the economic fixes after the fact. So, although I discount a couple of Graham’s thoughts, I think both the economics and politics weigh very heavily in his favor. One other thing weighs heavily in his favor as well:
- Monday, October 19, 1987 2164.16-1738.74 -19.66%
- Monday, October 28, 1929 295.18-260.64 -11.70%
- Tuesday, October 29, 1929 252.38-230.07 -8.84%
- Friday, August 12, 1932 68.9-63.11 -8.40%
- Wednesday, November 06, 1929 252.2-232.13 -7.96%
- Friday, July 21, 1933 96.26-88.71 -7.84%
- Wednesday, October 15, 2008-9301.91 8577.91 -7.78%
- Monday, October 18, 1937 136.3-125.73 -7.75%
- Monday, December 01, 2008 8826.89-8149.09 -7.68%
- Thursday, October 09, 2008 9261.69-8579.19 -7.37%
- Monday, October 27, 1997 7715.41-7161.15 -7.18%
- Thursday, September 24, 1931 115.99-107.79 -7.07%
- Thursday, July 20, 1933 103.58-96.26 -7.07%
- Monday, September 29, 2008-11139.62 10365.45 -6.95%
- Friday, October 13, 1989 2759.84-2569.26 -6.91%
- Friday, January 08, 1988 2051.89-1911.31 -6.85%
- Wednesday, October 05, 1932 70.92-66.07 -6.84%
- Monday, August 31, 1998 8078.97-7539.07 -6.68%
- Thursday, July 26, 1934 91.32-85.51 -6.36%
- Wednesday, October 23, 1929 326.51-305.85 -6.33%
Half the Top 20 worst days in NASDAQ history fall in the month of October. He’s simply hedging his bet by citing complex economics.
Comments
Comments:
Leave a Reply
Graham Summers thinks the markets will crash, again. « acc3ss.info on 08.05.2009
[...] Read more: Graham Summers thinks the markets will crash, again. [...]
paul on 10.01.2009
Your Bowie link requires something called silverlight but I won’t install more Microsoft crapware.
Yeah the Stooges were the original punks.
Moonage on 10.03.2009
I use Silverlight because Youtube and the other hosting services tend to persecute first and ask questions later. With this arrangement, I am basically hosting and controlling the videos.
Inell Hart on 12.16.2011
I’m glad that should be one of the visitors about this outstanding web site (:, thankyou for posting.