Down goes the Dow

long time,

Keep in mind I said all of this is: "Just my thoughts and observations."

Igy

Ghost of Igloi wrote:(1) One of the factors you need to consider on the correlation is trading hours. That is, a up/down close on the Shanghai will be x-hours before the Toronto close and vice-a-versa. How does that influence either market?

(2) My general thought, and I will leave it up to others to do the research, is in the period where global central banks were easing the correlation would be closer to 1.

(3) I think the bigger questions for investors is whether central banks can continue to influence the direction of financial markets.

Igy

(1) Yeah I though ot that, and so I also looked at correlation between TSX and Shaghai the day before and the day after. Still virtually zero correlation. I am going to share some plots.

(2) When would that be? I can pull out a specific data range very easily to look for change?

(3) Is that a BIGGER question, or a SMALLER question? I'm being deliberately and philosophically provocactive, hoping for some deep thought and not a knee jerk answer...

agip wrote:the TSX might be an odd bird recently because of the falling Canadian dollar - I suspect their might be more moving pieces than usual over the last year

Tried to post a bunch of linked images at tinypics, but the post got flagged as spam. I've emailed LR to ask them to post it.

long time,

A couple of thoughts, and just thoughts:

1) Shanghai is probably not the best index to test any theories since it has been influenced by a large number of first time investors and government intervention. TSX more similar to BSX and ASX.

2) I would say central bank policy became more similar in the fall of 2011. At that time we began the Greece/Euro drama and the debt ceiling debate and downgrade of US debt. I would think the correlation of the US with developed international markets would begin to break the other direction in the fall of 2014 with the start of the "taper" and the end of quantitative easing. Emerging markets and resource economies were negatively impacted by the taper and the end of quantitative easing.

3) It is a bigger question to me. I think the reason markets have struggled is the realization that central bank policies have led to mal-investment and driven multiple asset classes to excessive levels. This mal-investment has brought demand forward and it will require a rebalancing of global economies. The process will not be benign as we have already seen.

I will be happy to elaborate on any of these topics.

Igy

long time dumba$$ investor wrote:Tried to post a bunch of linked images at tinypics, but the post got flagged as spam. I've emailed LR to ask them to post it.

Will try to post in a couple of chunks:

Here are some graphics for people to look through.

First, TSX vs DJIA since Jan 2000:

TSX vs. Shanghai:

TSX vs FTSE, Nikkei, Shanghai, DAX, Hang Seng and DJIA from Jan 2000:

Same plot, but with everything indexed to 1 at Jan 2000 for a better intuitive comparison:

Same plot, but indexed to 1 in Oct 2007 around the peak for most of these markets:

So now for the correlations. I looked at daily, 2-day, 7-day, 28-day and 180-day change for each market, and correlated those for TSX and Shanghai. First, the 1-day plot since Jan 2000:

The next image shows pre-2011 and 2011-onward plots to see if there was any tangible difference (per Igy's expectations):

Now 2 day change:

7-day change:

28-day change:

and 180-day change:

Interested to know if anyone sees any meaningful trends. Happy to plot different correlations on a time available basis. For me, I've concluded the TSX (which is where my disappearing money lies...) is not correlated with Shanghai in any real way.

I half wonder if I would find better correlations plotting any of these indices against daily global temperature anomaly? :-) Sorry that's deliberately provocative and deserves no answer...

Summary from Bloomberg of Doubleline's Jeffrey Gundlach market view for 2016:

http://www.bloomberg.com/news/articles/2016-01-12/gundlach-says-stocks-to-struggle-early-before-buying-opportunity

For every bear, there is a bull.

What goes up must come down.

Ghost of Igloi wrote:

What goes up must come down.

huh?

untrue, obviously

otherwise we would be back to being hunter gatherers in Kenya

agip,

Relax. I was just replying something ridiculous to the previous post.

Igy

Flagpole, good move paying off your mortgage, and congratulations.

"there are many things that make me believe we actually could see a bigger drop than that even"

Such as?

Let's talk about recovery period. You suggest 3 years historically, with which I agree, but this next time will be different IMO. I don't think the drop will be quite so violent as it was in 2000 or 2008, which will draw out the time-frame for recovery.

Plus, it is amazing just how much depends on market valuations at the moment. All sorts of funds that have regular beneficiaries absolutely rely on the markets doing well in order to remain solvent over some time-frame, which time-frame has been getting shorter in many instances. If and when these funds are no longer able to successfully meet their obligations/projections, it will be up to the taxpayer to make up the difference, either directly or indirectly, even if the funds are private (actually, quasi-private), through things like the PBGC, etc.

This takes money out of the US consumer's pocket, and that spells gloom, because the US consumer drives a lot of economic activity. That, combined with the rising USD vs basket making foreign earnings worth less, makes US equity performance wane, and exacerbates the circular cycle. Making matters worse, to fight that effect, the fed will raise interest rates and thereby slow things further, because margin and leverage are insanely huge at the moment. Only a handful have successfully deleveraged.

The upshot IMO is that other places in the world MUST successfully develop internal consumer markets. Europe has done the best job of this IMO; China, India, Korea, and the rest of Asia need to do it. Just think if consumers in China, India, and Indonesia actually had some money to spend. Contrary to popular opinion, they don't, on average they are still dirt poor. The rich in those countries have abandoned their people altogether. I hold out no hope for development of those internal consumer markets in the next 15 years.

While South America, including Brazil, showed some promise, they are too chaotic to matter, and those that are decent like Chile and maybe Peru are too small to matter. Brazil leads the way in that region, and the game is up, and it will take a very long time to recover. Those people are too independent to consolidate good economies.

Which is why a great deal of attention has turned to Africa. Sure the richest send their kids to school in europe, but there is more local development there, than anywhere. They actually have resources and arable land, and a huge, young population. People are trying to develop their markets, and actually having some degree of success, especially some euro telecom concerns. It will still take some time, but already businesses like Coke are making inroads.

The upshot is that I don't see any replacement for the US consumer in the next 15 years, meaning that a recovery within a 3-year time period will either require a huge resurgence of the basic US economy, or it will require monkey-business like cheap money, subprime loans, etc. that kick the can yet further down the road. Activity can be stimulated through the easing of restrictions on trade and development, and if Trump gets elected, some of that is likely to happen. If the dems get elected, forget about it.

I think that this will be a rather long malaise, with "investors" resting on their laurels bestowed by rising asset prices. There will continue to be consolidation in many areas, and M&A will be how businesses raise their share price and valuation, but on the whole, it will be tough going, maybe just enough to offset inflation. Call it stagflation if you wish to be trite. We need to look at the Japanese experience and find out how not to fall into the trap, even though we have followed them down the QE road.

Here's the thing: I think that it will be unavoidable. Unavoidable. It is something that needs to happen. Countries and economies have seasons. The newest expectation has been ratcheted down to "capital preservation" from "capital gain", meaning roughly that household wealth, household buying power, will not rise going forward, and could very well decrease due to inflation and increases in taxation.

You, and everybody who thinks as you do, in terms of defined milestones in a personal economic trajectory, need to take these things into account. Those defined milestones only have meaning insofar as the existing context, or something roughly like it, prevails. I don't believe it will. You and I might get lucky with timing, but we are still interested in what happens after 15 or 20 years. That's a L-O-N-G time, Flagpole. I am already effectively retired, and I still worry about it.

I worry most about US capital levies. I have already taken steps to protect against this. You will see tax creep continue. HRC has already suggested lowering the estate tax exemption by around $2M. The next thing you will see, especially if the dems win, will be increases in CG, and more restrictions on what qualifies and at what level.

My advice to you is to have more than 3 years available, and in a form in which you control it and have access to it as you wish.

Also, not sure why Igy feels a ridiculous reply was called for in response to such a reasonable post. Hmmmm.

Maserati,

Well, I posted some information with content and the response was meaningless. I took it as a smarty response and gave back a smarty reply.

In regards to 2000, 2008 and the current environment, here is how it can be worse. The price of the median stock is higher today. Interest rates were considerably higher and this gave the Federal Reserve and other central banks more room to use conventional easing policies. China has been an engine of growth the last two decades, that seems to be fading. Global GDP was higher at the last two market tops. Global debt is $Trillions higher than in 2000 and 2008.

Igy

Long-time

Not sure what your interest is in correlating TSX and Shanghai. Although TSX is commodity-heavy, the TSX has an extremely regional investor base (I could be wrong in my memory of this). Added to that, many of the commodity contracts are in USD, and are geared. Added to that, some significant commodities, like softwood lumber and natural gas, have everything to do with places other than China, like the USA.

The only listed Canadian businesses that have been diversifying meaningfully are the banks, with their forays abroad--but even at that, most of their business is domestic, and mostly residential mortgages for the absurdly overpriced RE (oh, and fees, as I'm sure you're aware).

Also the CAD is tanking, lowering costs. Rather than looking at Shanghai, I would look at oil, and resource exports to the USA.

Eng Phys, good stuff. Me too. I actually wrote the FE for a reason unrelated to engineering, and that was that. I wonder if Eng Phys is unique to Canada or the Commonwealth?

Regardless, IMO you will have a tough time with the TSX, or with anything denominated in CAD. Sincerely, I wish you good luck. Stay away from the US while it is expensive. Look to europe to the extent that you can in Canada, where you can diversify geographically and with currency, and not get burned on the unfavorable (and worsening) CAD/USD exchange. Europe is currently cheaper, and IMO provides comparable value.

Igy, that short post wasn't mine.

Questions: given the downturn and excluding FANG and adjusting for inflation, is the median stock price still higher today, and if so, by how much?

Interest rates, yes, the Fed had more room to maneuver in that dimension.

Yes, China is fading a bit, and I don't see them doing anything fundamentally different than they have been.

I never believe anything about either GDP or unemployment figures.

Agreed about the massive increase in debt, and that demand has been sapped from the future.

So we agree on pretty much everything. The question is, Igy, what will you do based on this information? Going forward, how will you stay ahead of things? Your leveraged short ETF's won't last forever, you will need to have a follow-on strategy. What will it be?

Igy,

BTW the response was not meaningless, it just didn't fit your narrative. You need to open your mind to other possibilities instead of immediately rejecting them. It's called education.

You need not agree, but you should listen to alternate viewpoints. There are some smart people here that we can all learn from.

Maserati,

I think it is reasonable for one to see the DJIA to be around 12,000 and S&P 500 around 1,350 in 2016. At some point in this range I will increase my equity exposure. If the environment changes, for example earnings and market action improves I will be forced to change this view.

Igy