There is a very interesting 3 part series at Ticker Sense; It is a collection of charts comparing this market move off of the lows with prior such bull markets.
It is titled "How This Recovery Stacks Up" and its must reading.
I have cherry picked a few charts, which point out some of the odder aspects of this period: weak dollar, strong corporate profits at the top of the historical range, a compressing P/E far more than previous periods, and a white hot rally in gold:
click for larger charts:
What’s so fascinating is how truly unusual some aspects of this cycle are relative to the period since 1960. While other charts in the series show some aspects of this recovery as typical, I have highlighted the peculiar data series.
Given the unusual backdrop: A 78% drop in the Nasdaq, and interest rates cut to 46 year lows (1% Fed Funds Rate), its not surprising that some aspects of this cycle has been rather odd . . .
Agreed, the unusual nature of this recovery may skew things but some things seem very strange indeed. The gold spike in 1975 was probably not related to the recovery alone and the fact that none of the other recent recoveries emulated that spike suggests it could have been an anomaly. Except of course there’s now.
I refer to several sources to try and understand precious metals movements including John Hussman’s work (http://hussmanfunds.com/html/gold.htm) and while an argument for higher gold could certainly be made for the current trend the scenario for a powerful 5-year gold market (and counting) just doesn’t seem to be present, at least as far as my rather limited vision goes. Hussman comments for example that:
“…if we’re looking for a rally in gold, we’re really looking for 1) World inflation, particularly in the U.S., and 2) falling long term Treasury bond yields. This combination is most frequently seen early in a recession. …
…In the rare instances when 1) The rate of inflation has been higher than 6 months earlier, 2) Treasury bond yields have been lower than 6 months earlier, 3) the NAPM Purchasing Managers Index has been below 50, and 4) the Gold/XAU ratio has been above 4.0, the XAU has soared at an astounding rate of 123.63% annualized. In contrast, when none of these have been true, the XAU has plunged at -53.21% annualized.”
So is it simply a mania we’re seeing or is the precious metals market predicting something really wild is coming or is it just something we can’t see yet? Got me.
Not to be too obvious, but initial conditions are important to this type of analysis. I’m thinking especially of P/E ratio’s in this respect. Given historically high P/E ratio’s going into the recession I’m not surprised that, even given the corporate profit growth, P/E’s have contracted. As a matter of fact, take a look at the Grantham chart posted last week for some context.
obviously there was a lot going on in the early 70s that might have spiked gold like today: unpopular war, president w extremely low approvals, coming off gold standard and major realignment of currencies, but i think someone shd do some work on money creation: my recollection is Arthur Burns flooded the US w money to ensure CREEP’s reelection in ’72, much like Greenspan-Bernanke now. liquidity creation is out of control.
Conceptually I see gold booming because of a ‘flight to safety’ for the excess liquidity in the asset markets. You could also consider it the flow of a big bulge of cash that Greenspan flooded the markets with. It started in the equity markets in the late 90’s. As the global economy became more unstable it moved to more safe bonds and real estate. Now it is moving to gold as the last refuge of recent asset inflation.
That’s because this isn’t really a recovery in the ordinary sense, it’s a Ponzi scheme, monetary policy recovery. The CBs have been trying to combat the risk of a deflationary spiral (and in one case just stop the bleeding.) Thus the punchbowl overfloweth, the revelers are drunk and distortions abound.
I second AD’s comments. As soon as I read this BP post, my first thought went to Sherlock Holmes. Eliminating the alternatives leaves you with only one conclusion that makes sense of all this: there isn’t a recovery. Certainly, not one as defined in the past. There are so many distortions, and government-reported numbers have become so twisted and manipulated, that the ‘recovery’ has been overstated. As is often the case these days, the p.r. has supplanted reality. Begin to factor in the Shadow Statistics and the liqidity-debased value of the dollar and things seem much less rosy.
Someone help me out – I see complaints about excess liquidity here, but from Part III of the series, he says,
Money supply growth in the current period has been the second weakest on record, which illustrates a Fed that is being tight with liquidity.
The chart following this quote reflects this – what gives?
M1, the most narrowly defined measure, consists of the most liquid forms of money, namely currency and checkable deposits.
The non-M1 components of M2 are primarily household holdings of savings deposits, time deposits, and retail money market mutual funds.
The non-M2 components of M3 consist of institutional money funds and certain managed liabilities of depositories, namely large time deposits, repurchase agreements, and Eurodollars.
The fastest growing measure has been M3. Go take a look at the banks’ and brokers’ balance sheets… they’re full of repurchase agreements and other stuff…
Thinking it over now could it be that the money growth of M-1 and M-2 being subpar is one of the major distortions of the ultralow interest rate policy? If interest rates are 1% and inflation is higher than that, meaning real interest rates are negative, rationally you should not hold money. Lo and behold, the savings rate has gone to 0 and everyone has been converting their cash into something, anything to avoid losing value. So first they buy equities and then real estate/bonds, now commodities. Whatever is going up and the alternative du jour.
Basically I propose that people have been moving funds out of M-1 and M-2 as fast as the Fed is able to create M-1 and M-2 to avoid the negative real return trap the Fed had engineered (is engineering?).
In case you missed it, you might want to take a look at this WSJ article on who holds the most dollar foreign reserves and what they might do with them: