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Practically every day I post my observations about what is happening in the markets and larger world for enrolled members in the "Martenson Insider" area and then we discuss it.
Here is yesterday's post (11/5/09).
I'd be delighted if you would consider joining.
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After digging around and sifting through the things both said and not said, I have come to the conclusion that what we are seeing are the likely effects of a rescue operation.
By this I mean a large injection of stabilizing cash to one or more parties, possibly related to the recent large bankruptcies. Two of my friends, who have been actively trading for more than 20 years between them, threw in the towel this week, as their patterns and methods are no longer working.
Their conclusion is the same as mine; this market is not trading like it used to. It is trading chaotically, counterintuitively, and as if there's some sort of distorting influence involved.
First, we might just wonder if this isn't the impact of a rogue firm with entirely too much power moving the market for its own benefit.
When we examine the results of Goldman's latest quarterly trading results, obviously we have a strong suspect.
Goldman Benefits from Trading Bonanza
Traders at Goldman Sachs recorded only one daily loss in the third quarter, highlighting the trading bonanza sweeping Wall Street as central banks continue to pump billions of dollars into the financial system.
The performance – revealed on Wednesday in a regulatory filing – compares with two losing trading days in the previous quarter and confirms that the authorities’ drive to revive markets after the crisis is yielding huge windfalls for some banks.
Before the crisis, banks regularly recorded trading losses on several days in a quarter.
Goldman made more than $100m in profits on 36 of the 65 days in the three months to September and recorded more than $50m in profit on more than eight out of 10 trading days, the filing shows.
Only one day with trading losses out of the entire quarter? A 98.5% win-rate? Sorry folks, this is so far beyond the realm of statistically possible that we must search for other reasons. There can be no doubt that Goldman is enjoying an advantage not shared by the rest of the market.
Goldman is a company largely housed in a single glass building in Manhattan, vacuuming up $100 million in profits on 36 out of 65 trading days. $100 million is a lot of money. It is equivalent to the total earnings of a very successful mid-sized company for an entire year. One that might employ thousands of people.
But somehow we have a system where a few folks in a glass building are able to skim that amount, day after day after day, without anybody from any regulatory body even blinking.
Remember, in trading, one person's gain is another person's losses. It really strains every fiber in my being to imagine that Goldman's services to this country are either that good, that fortuitous, or worth it.
Moving on to the markets, here's what the market has done for the past week, as traced by the S&P 500 futures (which I like because it tells you what's happening 24 hours a day, not just when the cash market is open):
We see the volatility as the market first surged on the GDP report and then slumped the day after. Then there was a spike on the ISM (mfg) data that also gave up the gains shortly thereafter. Then we had the FOMC follies where the market looked like an EKG of a heart attack victim for a while before finally slumping away all the day's gains.
Today's 200 point Dow spree was said to be due to favorable unemployment data and excellent productivity gains, but if you were watching the overnight futures, you noticed that the lift-off actually began at 3:00 a.m. As a trader, I am quite familiar with this pattern. When large futures gains are recorded beginning at 3:00, you can nearly always count on those gains holding through the day.
Inquiring minds would like to know how the future traders seemingly know about the excellent economic news that has not yet been released. Hello, SEC? I have a job for you.
Regarding the excellent economic news today, I might note that the market never sells off on an unexpected rise in initial claims, nor should it. The data is noisy and not worth much week to week. Further we might note that while the number was less than expected it was still over 500,000; a lousy result by any normal measure.
U.S. Economy: Worker Productivity Surges, Costs Drop (Update 1)
Nov. 5 (Bloomberg) -- Worker productivity surged at the fastest pace in six years, labor costs fell and unemployment claims were lower than forecast, signaling companies may be preparing to start hiring again after cutting costs to the bone.
Looking through this data, we might note a powerful contradiction in the logic. Why should companies that have just secured a gigantic gain in productivity seek to hire anybody? I mean a company that has just managed to become more efficient and lean is not about to go out and hire anybody just because. They will hire people when revenues warrant an expansion, and revenues are still quite depressed.
I should point out that the productivity measure is the worst of the worst in terms of usefulness or reliability. I hate how it is constructed. Some of my disdain is probably a holdover from all the years I had to listen to Alan Greenspan trumpet it to rationalize his recklessly loose money policies. I thought it was bunk then, and I do now.
If you want any further proof that this measure is junk, look at what was reported:
Productivity, a measure of employee output per hour, jumped at a 9.5 percent annual rate in the third quarter, exceeding the highest economist forecast, according to Labor Department figures released today in Washington
That's just ridiculous.
At that rate, we'd only need half the workers to accomplish just as much in roughly seven years. It's silly, and instead of spending any time wondering at it, we should instead immediately suspect that it is flawed.
Next, it is is a bad thing that labor costs are going down, if you are depending on consumers coming back to the shopping malls. Lower labor costs means less money going to workers. That's not a good sign at this point.
The expansion of corporate profits has come at the expense of workers, and sooner or later we can expect some sort of a revolt - I would guess that the election next fall will see the emergence of one or more populists.
So at this point, I really have no solid explanation for what I am seeing in the market, besides noting that a lot of liquidity is hitting the tape. Gold remains over $1090 and the dollar is languishing about at ~76; bonds went nowhere today despite a powerful stock market rally.
All in all this adds up to liquidity, and lots of it.
This is one reason that I am not a deflationist yet. While I have complete intellectual sympathy for the deflation argument as that is what should be happening, I am not yet seeing it in the financial markets.
Instead, I am seeing what I presume to be behind-the-scenes injections of liquidity into the markets to complement the wall of in-front-of-the-scenes injections we read about each week.
I have read numerous statements of fact from deflationists that are actually beliefs that really need to be carefully examined. One is, "the markets are larger than the central banks." I used to believe this too, but now I am less certain.
Thinking back, I recall that the Soviet machine was bigger than the market because it was the market. It turned out not to be larger than reality, but that's a different story. The Soviets simply dictated everything from prices to false production figures until the system collapsed.
The tools of persuasion and market interference at the employ of modern central banks are far more sophisticated than anything the Soviets ever dreamt of.
Are the markets larger than the banks? I'd like to think so, but I am growing more and more confident that the answer is "no" and that the distorting effects of untold trillions of fiat money can elevate prices for long enough to change people's minds.
I happen to think that reality is larger than our central banks, but that too is a story for another day. You can review that thesis by re-reading the paired reports on oil that I wrote in April 2009 (here and here).
Again, I just want to caution you to be ready for any outcome. I am open to the possibility of an immediate return of crushing deflation, and I am also open to the possibility that the gigantic wall of fiat money will override the deflationary impulses and whisk us into a fast date with high inflation. Right now the data says that the money masters are winning the battle against deflation.
And not without help from the media - I am simply stunned that Capmark and CIT went belly up and I couldn't find a single article about either today in a major news outlet. It is as if they never happened at all. Sometimes what is not said is just as important as what is said.
This is, without a doubt, one of the most perplexing moments for those interested in wealth preservation.
Take care.
- cmartenson's blog
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Art Cashin at UBS made an enteresting analogy in his written comments this morning. Following up on remarks by Jeremy Grantham comparing the recent financial crisis to the sinking of the Titanic, Art speculated that the people in charge are painting life boats on the side of the ship of state in the hope that the passengers will feel more secure. If you can not afford real life boats I suppose the illusion of life boats is better than nothing, for awhile.
I could not help but notice that Ken Fisher Investment adviser is one of the advertisers on the site isn't he the one that said :
Too Much Debt? Please. We Need More Debt, says Ken Fisher............ Talk about someone painting boats on the side of the Titanic.
Chris,
I don't know whether you saw my posting the other day but I'm still fuming over the Goldman Sachs results.
I've done a quick analysis of the stock index price charts from my spread bet company - I realize thet GS will have been trading a raft of other instruments as well. The figures below are based on 24 hour charts so they may differ from what other people might get and I haven't taken account of the percentage size of each day's move. Days in each month up (UP), down (DN) or no change (NC). I've also included October's figures.
FTSE UP DN NC
July 12 11 0
August 14 7 0
September 14 8 0
October 11 11 0
DOW UP DN NC
July 15 6 0
August 12 9 0
September 11 10 1
October 12 9 1
S&P UP DN NC
July 17 6 0
August 13 8 0
September 11 11 0
October 12 10 0
Is Goldman Sachs REALLY expecting us to believe that for all these moves up and down, they only had ONE day in the quarter where they lost money? And for those days where they DID make money,. they were able to break $100m on 36 of them?
I remain fumed,
DavidC
"and I am also open to the possibility that the gigantic wall of fiat money will override the deflationary impulses and whisk us into a fast date with high inflation." - Chris Martenson
Chris,
High inflation is possible Chris, but I don' think it is likely. I view our present situation as a battle of deflation vs. anti-deflation rather than a battle of inflation vs. defltaion. Bernanke is indeed handing out trillions in federal reserve credit, but that highlights the deflationary forces at play imo. Preventing deflation is not the same as causing high inflation let alone hyperinflation.
Plus, it's not really fiat money, it's credit. Cash, in a gold sense, has no interest due. Credit on the other hand has interest due. I'm of the opinion the majority aren't looking to further impoverish themselves with debt even if creditors are willing too lend. The important metric to watch is private credit as it indicates underlying demand. Over the last few quarters, private credit has been contracting dramatically. Government and Federal Reserve credit is only filling the void left by private credit contraction (and at a lower interest rate to boot). I think the TIPS markets have it right - < 2% inflation over the next decade. BTW, TIPS provide decent inflation insurance and they haven't quadruple in price like gold.
What's interesting to consider is all the future interest that will be flowing into the Federal Reserve's account as a result of the $1.45 trillion in GSE paper they will be holding. At a 4.5% interest rate, that's about $65 billion/year! That's a huge amount of yearly $$$ that will NOT be flowing to the banks. Just wait until the public wakes up to the fact that we don't need Wall St. to have a mortgage market and that we can cut them out of the loop permanently. They never should have been in the loop in the first place - it was a giant giveaway.
Regards,
AS
Or as Bernanke might say, "The illusion of money is better than no money, at least for a while."
Too bad it can't last.
There are five issues that will lead to high inflation/hyperinflation:
1. Currency devalation. Foreign gov'ts are losing patience with America. Most Major countries hold huge dollar reserves that are losing value. All it would take is one major player to dump dollars to send the dollar over the cliff. Consider that the Soviet Union collapsed when the Ruble collapsed, and that the Ruble collapsed happened in a very short period. The US dollar is extremely dependant of Foriegn support to sustain the value of the US dollar. Asia and the Middle east are already in the process of diversify their dollar reserves into other currencies and commodities. At some point the dollar will lose sufficient support causing the dollar to plummet in free fall, as more an more exporters demand payment in non US Dollar currencies or in hard currencies (ie Precious Metals)
2. High gov't debt and irreversable low interest rates. Even at the ridiculous low interest rates, the gov't pays about $450 Billion in interest payments ever year. Imagine what would happen to interest payments if interest rates rose to nominal yeilds of 5.5% to 6.25%. If you plot the US Fed over night interest rate peaks from the 1980s, you can see a clear trend. In 1982-1983, US interest rates Peaked at 14%. In 1990 it Peaked at 8.00%, in 2000 it peaked at 6.25%, and finally in 2006 it peak at a mere 5.25%. I doubt that rates could rise above 4.25% without forcing a federal gov't default on its liabilities.
3. Enourmous, unpayable entitlement programs. The Federal Gov't has promised at least $52 Trillion in entitlement payments for current and future retirees. Already both Social Security and Medicare are in the red, and the boomers are just starting to retire. With in a few short years the numbers of boomers collecting entitlement will soar, and the outlays will be overwhelming. We have yet to determine the additional costs caused by the pending Gov't healtcare plan that will probably pass before the year is over.
4. Disemboument of the US manufacturing base. US laws and policies have strip more than half of its core manufacturing base overseas. The gov't has passed piles regulations from healthcare to pollution, that resulted in tens of millions of manufacturing jobs shipped overseas to countries that did not have these regulations. There is no longer an ample manufacturing base to produce sufficient exports to sustain a export balanced budget. The US will continue to lose manufacturing and even more professional jobs as the gov't continues to pile on ridulous regulations (cap and trade). Global pollution will worsen because countries that have no pollution regulation will absorb lost US production that had some polution control measures.
5. Declining global energy and natural resources. The world is consuming enormous amounts of non-renewable energy and other natural resources. As supplies become constrained costs will rise that trickle down in to all of the global economy. I suspect the decline energy resources will create a whip-saw economic phenomena: Prices quickly soar as demand outstrips supply and then crashes as demand plummets because the high prices out-price businesses and consumers. After the price crashes, demand recovers, causing another run up in prices that repeats the cycle. However each peak will be lower the previous version because energy production will continue to decline, putting a limit on maximum consumption and economic activity.
There are five issues that will lead to high inflation/hyperinflation:
1. Currency devalation. Foreign gov'ts are losing patience with America. Most Major countries hold huge dollar reserves that are losing value. All it would take is one major player to dump dollars to send the dollar over the cliff. Consider that the Soviet Union collapsed when the Ruble collapsed, and that the Ruble collapsed happened in a very short period. The US dollar is extremely dependant of Foriegn support to sustain the value of the US dollar. Asia and the Middle east are already in the process of diversify their dollar reserves into other currencies and commodities. At some point the dollar will lose sufficient support causing the dollar to plummet in free fall, as more an more exporters demand payment in non US Dollar currencies or in hard currencies (ie Precious Metals)
2. High gov't debt and irreversable low interest rates. Even at the ridiculous low interest rates, the gov't pays about $450 Billion in interest payments ever year. Imagine what would happen to interest payments if interest rates rose to nominal yeilds of 5.5% to 6.25%. If you plot the US Fed over night interest rate peaks from the 1980s, you can see a clear trend. In 1982-1983, US interest rates Peaked at 14%. In 1990 it Peaked at 8.00%, in 2000 it peaked at 6.25%, and finally in 2006 it peak at a mere 5.25%. I doubt that rates could rise above 4.25% without forcing a federal gov't default on its liabilities.
3. Enourmous, unpayable entitlement programs. The Federal Gov't has promised at least $52 Trillion in entitlement payments for current and future retirees. Already both Social Security and Medicare are in the red, and the boomers are just starting to retire. With in a few short years the numbers of boomers collecting entitlement will soar, and the outlays will be overwhelming. We have yet to determine the additional costs caused by the pending Gov't healtcare plan that will probably pass before the year is over.
4. Disemboument of the US manufacturing base. US laws and policies have strip more than half of its core manufacturing base overseas. The gov't has passed piles regulations from healthcare to pollution, that resulted in tens of millions of manufacturing jobs shipped overseas to countries that did not have these regulations. There is no longer an ample manufacturing base to produce sufficient exports to sustain a export balanced budget. The US will continue to lose manufacturing and even more professional jobs as the gov't continues to pile on ridulous regulations (cap and trade). Global pollution will worsen because countries that have no pollution regulation will absorb lost US production that had some polution control measures.
5. Declining global energy and natural resources. The world is consuming enormous amounts of non-renewable energy and other natural resources. As supplies become constrained costs will rise that trickle down in to all of the global economy. I suspect the decline energy resources will create a whip-saw economic phenomena: Prices quickly soar as demand outstrips supply and then crashes as demand plummets because the high prices out-price businesses and consumers. After the price crashes, demand recovers, causing another run up in prices that repeats the cycle. However each peak will be lower the previous version because energy production will continue to decline, putting a limit on maximum consumption and economic activity.
@TechGuy: It all seems very plausible what you say there.. good points!
Is there any other way it can play out than hyperinflation? Isn´t it the only way the government can meet its obligations to both retirees and foreign lenders? There will be little value for money, but I don´t think that WS ever cared about that. Those who planned this and played the game on WS have enriched themselves to such an extent that they don´t need to think about that for a second.
Cheap chinese labour and a false exchange rate of the yuan has given us a lot of cheap products and jobs lost in the west.
Why is it that the yuan doesn´t reflect the economic strength of China? Is it not a setup? The dollar going bust should lead to all other western currencies to be devaluated. But what if the yuan is devaluated too? Or would the yuan perhaps gain as an effect of investor money fleeing into yuans? That would improve competiteveness of western labour, wouldn´t it? Except for the depletion of recources and all the damages to Mother Earth, it could play out better for western economies if the yuan became stronger. Or not?
Any thoughts? 
T.J., Norway
Tech Guy,
1. Currency devaluation. The fed is working overtime just to keep the purchasing power of the dollar from increasing.
2. Interest rates. Interest rates are low only compared to recent decades, they are not low by historical standards. It took well more than a decade for long term interest rates to bottom at just under 2% after the Great Depression started in 1929. Moreover, real interest rates are currently very high, ~ 4% on the 10 yr. In the 1970s and early 1980s, interest rates, while nominally high, were negative in real terms.
3. Unpayable entitlements. Big, big problem, but not in the way you frame it. What can't be paid, won't be paid. Inflation/deflation is irrelevant here as costs would rise or fall accordingly. The Government simply can't deliver what it doesn't have. Expectations and actual benefits will be lowered. And here's the worst part. As long as entitlement programs are throwing off surplus $$$ as they are currently, nobody will touch the issue. Right now those entitlements are a goose laying golden eggs for Wall St. and CONgressional boondogles. Once the yearly surplus turns to deficit then the public is going to get a harsh dose of reality. Mark my words. They'll renig on promised benefits, not payments to creditors.
4. Manufacturing jobs and pollution. I agree but would add that the standard of living for many, many Americans will decline in relative and absolute terms.
5. Peak resources. I agree, but am not sure of the timing. My gut tells me we are near the peak, but there is no way to know for sure since key resources like oil are not contolled by transparent governments.
Gold is a seemingly obvious and simple solution to a difficult problem. That's a red flag in my book. I've seen what the market does to obvious investments/solutions.
That's the key. Inflationists make the bizarre mistake of somehow thinking government commitments to citizens are etched in stone...they must be too indoctrinated that american citizens are free, powerful, and control their government. They say "the only way to get out of our situation is to print money or default on our debt." WRONG. The Fed isn't going to fix our problem by destroying its own balance sheet. The Treasury will be forced to fix our problem by fixing its balance sheet. Inflationists simply need to notice what IMF austerity has done to countless countries, resulting in the death of millions in the lower classes. Austerity is coming our way. Look at it as the banking establishment forcing the US government into bankruptcy, i.e. clean up its liabilities, just like it does to corporations or individuals. They will screw lower class and retired americans. They will not screw foreign creditors.
And this is where police state planning and rumors come from. The inevitable result of austerity is violence, riots, revolution. I guarantee that's being planned for. It's not conspiracy...it's system management.
and a false exchange rate of the yuan has given us a lot of cheap products and jobs lost in the west.
Why is it that the yuan doesn´t reflect the economic strength of China? Is it not a setup? The dollar going bust should lead to all other western currencies to be devaluated. But what if the yuan is devaluated too? Or would the yuan perhaps gain as an effect of investor money fleeing into yuans? That would improve competiteveness of western labour, wouldn´t it? Except for the depletion of recources and all the damages to Mother Earth, it could play out better for western economies if the yuan became stronger. Or not?
Any thoughts? 
The yuan is kept artificially low by the Chinese government by making it a fixed fraction of the dollar so it floats in tandem with the dollar. This is to increase their exports.
However in my twisted way I find it funny that the Chinese are taking our worthless paper for their hard assets. They are the marks in our global flim-flam. We are currently pointing at them as wise investors with a strong economy and inflating their gov't bureaucratic egos, while we rob them blind. However, recently they seem to be waking up to the fact that they have been taken. They just haven't found out a way of unwinding their dollar positions while "saving face". Face it: even with our economy in shambles their economy for one billion people is 1/10 our economy with less than 1/3 of their population. Sorry, formidable as they may be with their giant population, they are not the big kid on the block economically and won't be anytime soon. Borrowing from them is kind of like, borrowing from your kid brothers' piggy bank.
Doc -- Purveyor of the Socratic Method and Hemlock