About Me 0071: Help Making Money

There is no fiscal crisis. Everyone should be clear on that.

The United States is not bankrupt. Social Security is not about to founder. Wall Street is not on a precipice, the IMF is not standing by demanding massive shifts in our government, and U.S. bonds are not trading 1:1 with Charmin. There is nothing wrong.

Nothing except that the Republican Party is prepared to slice the nation's throat to get its way.

Real crises do exist. There are moments in a nation's history where the government must take abrupt action, either military or fiscal, to prevent disaster. In the collapse of 2008, some might disagree with the exact nature of the action the Bush administration took in bailing out banks that had recklessly overextended themselves, but there's little doubt that there was a real problem and without action there was a chance that it could grow from disaster to catastrophe.

That's not the case this time. Not only does solving the issue at hand not require the launching of a single ship, it doesn't require the expenditure of a single dime. Raising the debt limit does not commit the United States to any debt it has not already incurred. Refusing to raise that limit is no more an act of fiscal prudence than refusing to pay the restaurant for a meal already eaten.

Not only is the money already spent, the Republicans are the ones who spent it. It's not Social Security that drove up the debt over the last decade. Social Security is responsible for 0% of the deficit. Make that 0.00%, to be exact. The deficit that the Republicans are railing against is driven by the cost of the wars in Iraq and Afghanistan, and by the cost of the recently extended Bush tax cuts. You know what'll happen if we cut Social Security? We'll get less Social Security, not less deficit.

It's funny that politicians on both sides of the aisle keep demanding that "everything be on the table," when what they really mean is that "everything not responsible for the problem be on the table." Not that it matters. The truth is that Republicans aren't interested in solving the problem. They're making the problem. They invented it from thin, hot air and they're entirely invested in seeing that the problem gets worse.

Don't think the Republicans would put the nation at risk on purpose? Consider this: the only thing they won't even think about, the only option so odious they'll walk out of the room rather than talk about it, is precisely the only thing that would actually help. If we allow the Bush tax cuts to expire as scheduled—all of the cuts—the deficit will dry up and the nation will return to sound fiscal standing in short order. If we don't allow those unsustainable rates to expire ... then we will. If we go down after making cuts in Social Security and health care, then we'll we'll only succeed in making a lot of people miserable to no purpose. Only returning taxes to viable levels will help.

If Republicans were actually concerned about the fiscal health of the nation, they would sign onto raising the debt ceiling without hesitation or condition. Because there's nothing wrong, and because raising the limit would cost nothing. Instead they've created a completely artificial problem as nothing more than an excuse to extend the damage they've already caused. It's really a wonderful little game they've created: drive the nation so far into debt that there's no choice but to raise the limit, then use raising the limit as an excuse to create more debt. No wonder they call it red ink.

The only crisis we're facing is that one of our nation's political parties has decided to hold its breath until the nation turns red. And the media, the public, and the opposing party are treating this massive tantrum with far more respect than it deserves.

In the lower portion of this chart, there is a modified sine wave pattern to help visualize the behavior of the cycle in the SP500's price movements. The market was following this cycle pattern very nicely up until late 2005, and then it jumped onto a new schedule that just happened to be about a half cycle length off of the original schedule.

So with the knowledge that a phase shift was a possibility with this cycle, it was hard to understand what was happening in early 2008. And this illustrates one of the big pitfalls with doing any sort of cycle analysis: cycles can change, and so while they may give us nice predictions of what should happen at some point in the future, there is no guarantee that the past behavior will remain in effect in the future.

It just so happens that 2007 was when this cycle changed, and it was also the year that the uptick rule for shorting stocks went away. It is hard to understand why a rule change like this could make a difference on a market cycle, but I have an explanation that may help.

Imagine a wave pool in a laboratory, where scientists create waves to study how they travel through the water. Now imagine that you remove all of the water, and replace it with 30-weight motor oil. Because the oil is lighter but more viscous than the water, the behavior of waves in that wave pool would understandably be different.

So thinking of the financial markets, if the regulators were to do something that changes the "viscosity of money", making it flow more or less easily, then we would likely see changes in the way that waves propagate through that medium as well. Such changes might include restrictions on shorting stocks, the advent of money market funds, the introduction of stock index futures and options, leveraged ETFs, etc. All of these affect the ease with which money can flow into and through the stock market.

Now, if you look back at the top chart, you can see that the blue numbers are getting bigger again lately. Those numbers represent the time period between the major lows of this cycle (formerly known as 9-month). The lowest number was 159 trading days in early 2008, and it has climbed back all the way up to 177 as of the latest major cycle price low. It may be that after the initial shock, this cycle is working on getting back up to is "natural" frequency. Or it may be that 159 and 177 are just the widest extremes of a new range of cycle periods that average more like 168 trading days, and that this is the new natural frequency. We won't know for sure for several more cycles' worth of time, and that's the big problem with this analytical technique.

For what it's worth, and to help your planning, 159 to 177 trading days from the most recent major cycle low equates to a timeframe of Oct. 31 to Nov. 25, 2011.

About Me 0071

Monday, August 1, 2011

Help Making Money

Congressional Sources: Republicans and Democrats Reach Tentative <b>...</b>

Obama, Boehner Announce Agreement to Raise Debt Ceiling, Avoid <b>...</b>

<b>News</b> In Brief: Molecules/Matter & Energy - Science <b>News</b>

No comments:

Post a Comment