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David's Macro Blog

Analysis and commentary on business, economics, real estate, financial markets, and other fun topics

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Archive for August, 2010

British humor we can all understand.

Somehow this seems to explain the situation better than CNBC. Why is that?

The belief in a recovery from the global economic collapse in 2008 has gained strength as the unemployment rate has leveled off, the stock market has recovered about 70% and real estate prices have stopped falling.

However, do we really have an organically growing economy or something else?

A great description of our recent economic experience comes from Bloomberg’s Caroline Baum:

“What we had was a government-prescribed course of amphetamines (to keep it up), antibiotics (to prevent infection) and antidepressants (to make it feel better). It endured regular steroid injections from both monetary and fiscal authorities. And it still has no real muscle.”

Here’s a list of things we should expect in a true recovery:

  • Increasing bank lending
  • Growing credit use by consumers
  • Increasing labor participation rate
  • Increasing hours worked
  • Increasing interest rates
  • Decreasing unemployment (yes it is a lagging indicator)

Some far there is “no real muscle” because we don’t see any true signs of rebound in the economic and financial systems. Sure, the stimulus can temporarily bump up retail sales and the stock market, but long term it can’t.

Judge for yourself. Which do we have, an economy on life support or a real recovery?

In my opinion, we’ve been headed for a double dip recession ever since massive amount of stimulus was injected into the economy. Once that stimulus is removed, the double dip will commence. In reality we never left the first dip — we just momentarily suspended the decline.

Jon Stewart, one of the most astute and insightful commentators of our time, explains the May 6th 2010 Flash Crash in this video from the Daily Show: A Nightmare on Wall Street

The Daily Show With Jon Stewart Mon – Thurs 11p / 10c
A Nightmare on Wall Street
www.thedailyshow.com
Daily Show Full Episodes Political Humor Tea Party

If you are a day, swing, or momentum trader, how would you trade in this market? Did trading on May 6th blow through all the sell stops on the order books?

Well, I have one friend who is an accomplished trader and he related his strategy regarding this issue. He refrains from trading if the market moves too violently or if there isn’t a clear reason for the market movement (e.g. a war, terrorist attack, major corporate bankruptcy, etc.)

One supposed benefit of an electronic marketplace and program trading by black box algorithms (algos) is market liquidity that would prevent just this type of collapse. The October 19th 1987 Black Monday crash was supposedly caused by computer program trading. It happened again this time — did we learn anything?

Or, as the saying goes:

History is the same events happening to new people who experience it for the first time as though it never happened before.