Saturday, June 25, 2016

Why The Bears Are Acting Rationally And The Bulls Are Not


Why The Bears Are Acting Rationally And The Bulls Are Not

William V. Rapp
Jun 24, 2016

The markets have essentially been moving sideways for over a year as the bulls and the bears seem to be equally convinced that world economic growth will continue or that it is in a period of economic stagnation comparable to the 1970s but without the inflation. Since there are plausible arguments on both sides the two groups appear to have roughly equal financial weight. 

US growth does appear to be moving forward and employment has continued to increase. Indeed the Fed felt confident enough last Fall to raise interest rates for the first time in roughly 7 years. On the other side energy and oil prices remain depressed and according to S&P defaults and issues highlighted for downgrades are now at the highest levels since 2009 with energy, commodities and financials especially vulnerable.

While the Brexit may or may not be related to these events it certainly adds uncertainty and complexity to the analytical brew. Thus the Fed and other central banks are likely to remain cautious in the months ahead at least through the US presidential elections. However even after these events begin to sort themselves out it would be wise to remain conservative because the bears were right all along even before Brexit and the current Presidential circus added their impacts to the global economic and financial market environments. 

This is because global growth for several years has been highly dependent on explosive Chinese growth and a continuation of this growth has been built into the micro and macro DCF models used by a wide range of global financial institutions and investors. Yet these assumptions are now clearly questionable as already identified at the 2014 Leir Bubble Conference and later confirmed at the 2015 Conference. However this view is now more widely accepted. Last year I attended an investor lunch hosted by a major global financial advisor where they forecast that Chinese growth would continue in the six to seven percent range. At this year’s lunch they had revised this forecast to three to four percent. The implications of this changed view are huge as analysts worldwide are forced to revise their DCF models downward.

Further at last year’s Leir Conference Professor Aliber forecast that like Japan after the 1989-90 crash China could experience a serious recession [actual negative growth] in the next three to five years and would then like Japan would have to recapitalize its banks. Whether a similar period of economic stagnation would follow is not clear but should be considered a possibility in any forecast. Thus as financial analysts continue to factor these considerations into their valuations including linkage effects to other countries’ economies, industries and companies in terms of the global economic multiplier we can expect that markets will continue to move sideways or down no matter how Brexit actually evolves.1


1 If China does not buy more iron ore from Brazil or Australia then they will not expand capacity and CAT or Komatsu will sell less mining equipment and will employ fewer people or may even reduce employment. Such reduction in demand has a downward global multiplier effect.

Monday, January 18, 2016

The Impact Of China’s Slower Growth On Global Financial Assets

The Impact Of China’s Slower Growth On Global Financial Assets
Connecting The Dots

Many current market pundits claim that the present reaction to slower Chinese Growth is overblown because there are minimal direct connections between the Chinese Financial System and the Triad [North America, Europe, and Japan] since Chinese banks lend almost exclusively to Chinese firms. Further there is minimal exposure by US firms or banks with the at-risk State-owned Chinese enterprises. Therefore as long as US growth remains steady US markets will be OK.

From their perspective the dramatic recent drops in the US, Japanese and European stock markets in concert with the sharp drop in Chinese markets as well as in oil prices is empathetic and not substantive except in the rare situation such as Yahoo due to their large ownership in Alibaba, the Chinese Amazon. If one accepts this viewpoint US, European and Japanese investors should look at the recent drops as only market corrections and not as something systemic that could impact the global financial system and portfolio values longer-term. 

However, accepting this facile explanation at face value would be a mistake similar to accepting Wall Street’s view that the sub-prime market crisis was manageable because over the long-term US housing prices tended to rise.

Saturday, January 2, 2016

The Enduring Relevance of “Manias, Panics, and Crashes”


Dear Bubblers, 

The following Preview of The New Edition of the KAM Paradigm should be illuminating for all of us. 

Best, Bill Rapp

The Enduring Relevance of Manias, Panics, and Crashes

The seventh edition of Manias, Panics, and Crashes has recently been published by Palgrave Macmillan. Charles Kindleberger of MIT wrote the first edition, which appeared in 1978, and followed it with three more editions. Robert Aliber of the Booth School of Business at the University of Chicago took over the editing and rewriting of the fifth edition, which came out in 2005. (Aliber is also the author of another well-known book on international finance, The New International Money Game.) The continuing popularity of Manias, Panics and Crashes shows that financial crises continue to be a matter of widespread concern.

Friday, December 11, 2015

Highlights of the Chicago Federal Reserve 2015 Forecasting Conference

Highlights 
Chicago Federal Reserve 2015 Forecasting Conference

December 4, 2015

The Conference Participants met at the Chicago Federal Reserve to present, hear and discuss the US and Global Economic outlook for 2016.

The Conference Participants met at the Chicago Federal Reserve to present, hear and discuss the US and Global Economic outlook for 2016.

Forecast – The economic forecast presented by the Leir Bubble Center Director at the Conference sponsored by the Chicago Federal Reserve reflected the views developed during the Leir Bubble Conference in September plus subsequent economic and political events. He has thus projected relatively slow growth in 2016 similar to 2015 including very low growth in the first quarter with a pick-up in the second quarter and a dip in the 3d quarter before ending the year with relatively moderate growth. Overall he has projected 2015-2016 US real GDP growth at 2.5% with the unemployment rate falling to 4.6%. A detailed Excel spreadsheet has been posted along with this summary.


Sunday, September 20, 2015

Highlights of the Leir Bubble Center 2015 Bubble Conference

Highlights Leir Bubble Center 2015 Bubble Conference

Bubbles & Politics: China, 1857, 1929

September 18 -19, 2015


The Conference Participants met at the Leir Retreat in Ridgefield, CT that was formerly the estate of Henry J. Leir to discuss over two days various research presentations related to some issues and concerns that have arisen from an apparent increase since the 1970s of financial bubbles and their impact not only on the global financial system but also politics. The topics covered ranged from the consequences of a dramatically slowing Chinese economy to the historical political and social consequences of major financial crises.

Sunday, September 28, 2014

Highlights of the Leir Bubble Center 2014 Bubble Conference

Highlights Leir Bubble Center 2014 Bubble Conference

Globalization, Bubbles and Too Big To Fail

September 19 -20, 2014

The Conference Participants met at the Leir Retreat in Ridgefield, CT that was formerly the estate of Henry J. Leir to discuss over two days various research presentations related to issues and concerns arising from an apparent increase since the 1970s in the frequency of financial bubbles and their impact on the global financial system. The topics covered ranged from the role of globalization or the reduction since the early 1970s in the barriers to international trade, investment and financial flows in creating bubbles to the creation of mega-banks that are deemed too big to fail when a bubble bursts.


Sponsorships & memberships for 2015 Leir Bubble Conference now available

New Jersey Institute of Technology's (NJIT) School of Management (SOM) 
Leir Center for Financial Bubble Research:

4th Annual Two-day Bubble Conference, September 19-20, 2014: 
"Bubbles and Globalization and the Emergence of Too-Big-to-Fail Financial Organizations"

Held at: The Leir Retreat Center, 220 Branchville Road, Ridgefield, CT 06877

Funded and Supported by: The Leir and Ridgefield Foundations; 
The Leir Retreat Center; and NJIT SOM

2015 Co-Sponsorships / Memberships NOW Available: $5,000, which includes: invitation to the conference, opportunity to present, sponsor research, access to NJIT Academic team, access to research in progress, co-op student programs, and recruiting and speaking opportunities throughout the year.