The 11th Hour, Moments Before A US Economic Meltdown
James Bibbings, July 28th, 2009
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Rather than write one or two lengthy posts this week I'm going to lay out a summary. From there I'm going to support each of my points and explain how I think the US financial markets have gotten to where they are today. Through this summary I hope to reveal some new insights into the recent market rally and possibly find a way for bears to enjoy trading it. Rest assured I have not defected from my bearish sentiment, and the days ahead will explain my feelings. So stay tuned, have an open mind, and you just might realize a thing or two along the way.
Just Like Helium, Up-Up and Away
Over the past couple of weeks more and more people are beginning to believe the great recession has ended. I have been considering this and trying to decide whether or not the current market run up is just a strong bear market rally or something more. Like all bears, over the last couple of weeks I have been squeezed in my trading (as well as in my thinking) and it has been growing increasingly uncomfortable. When faced with this type of pressure almost everyone steps back, and takes a second to re-evaluate things. For me, while trying to regroup, I came up with some new ideas and deeper thoughts into what may be really happening in our markets. So perhaps by reading this I'll be able to shed some newfound insight into how to trade the market over the coming weeks.
Before getting started a couple of quick things: Over the last 12 sessions the markets have been run by trading bots, have gained ground, have traded at low volumes, and most importantly have neither considered technical nor fundamental levels as being important. Thus, the information I'm putting out is from a macroeconomic perspective, though it is likely not the type of analysis you're probably used to reading. Although my thoughts may be a little unorthodox; sometimes when the economy and the market are working in an unknown manner unorthodox thinking is all that makes sense. Seeing as my feelings are a bit bold I will support each of my points with as many details and factual data points as possible over the coming days. So without further adieu...
10 Step Economic Recovery Plan
Let's say you are the US government and you need to get the economy going again. What do you do?
1. GDP = (A) Private Consumption + (B) Gross Investment + (C) Government Spending + ((D) Exports - Imports))
2. The US Government directly controls letter C from above and thus 25% of GDP inputs.
3. To further influence GDP the government must control more of the equation. By controlling debt, or the means by which most gross investment comes from, the government could control 50% of the GDP equation. Since private banks are failing, in order for banking to survive, these banks "must" be bailed out. Through the first bailout a large portion of letter B also falls under government oversight.
4. When originally deciding on the GDP equation, the Government wisely includes part D. Exports less Imports are included as any decline in imports (during a recession) helps to assist overall GDP. Conversely (during boom times) import gains will be offset by the other three components of GDP. Thus including letter D benefits GDP much more than it can hurt it and the equation becomes self moderated for long term growth.
5. Now that the Government has control of Parts B and C, and since Part D doesn't really matter, in order to move GDP they need to influence consumption. Knowing that part A can't be controlled, at the beginning of the recession the government uses "stimulus" to encourage private consumption (lowering interest rates, rebate checks, making cash available to banks etc.) in order to lead GDP forward.
