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Yet another reason why I don't think this cyclical bull is over

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August 28, 2011 – Comments (16)

Corporate Profits.

Corporate profits and Corporate Profit Margins still remain at cycle highs. Despite all of the problems in Europe, all of the debates about the National 'Debt', GDP revisions, Unemployment, etc. Corporate Earnings are still very good.

Remember, the Stock Market and the Economy are not the same thing.

Earnings expectations are the primary driver for equity performance.

Macro and balance sheet fundamentals are secondary, but important. They are related, but not coincident. And calling these 'leading indicators' is only partially accurate.

If earnings are increasing at 10% YoY and analyst expectations are increasing only 5-10% YoY, equities will be in a strongly rising environment . Because not only are earnings growing but they are beating estimates (mid 2009-beg 2011).

If GDP is growing, then it means the sales are growing -> orders are growing -> inventories are building -> expansion. So the macro is supportive of this rising environment for stocks.

This is key: the stock market is *not* the economy. Just because GDP is growing doesn't mean stocks will rise, and just because GDP is falling doesn't mean stocks will fall. Stocks care about earnings, and more importantly, earnings expectations.

So the macro is important with respect to equity pricing, but only insofar as it allows a continued earnings expansion cycle.

The macro will often top before equities do, as equities can still drive earnings by drawing down inventories built up during the previous up cycle. But this is unsustainable, GDP can't be going down and earnings going up indefinitely because eventually reduced economic activity -> reduced revenue -> reduced sales -> inability to sustain earnings.

And that is what we see over and over. We see analysts miss macro turning points because they are focused on earnings to the exclusion of everything else (even revenues). And we see at the top of all major cycles that analysts continue to issue strong earnings guidance after the earning cycle peaks and the macro has already since turned down, being unsupportive of a continued earnings expansion.

It is that lag between analyst earnings expectations and actual earnings performance that is one of the key factors in determining whether an equity top occurs.

And that is not what we see right now. Since the 2009 low, Corporate earnings growth continues to be strong and is making higher highs along side price. If this were a "major top", then we should have seen corporate earnings peak a few quarters ago.

Combined with my other observations regarding the macro environment, and the fact that it is not 'dire', I still think this pullback represents a buying opportunity, since I think this cyclical bull market is not over.

ENLARGE

Please see the following post for a source chart and discussion:

Earnings, GDP and Equity Valuation
Joshua M Brown  August 28th, 2011

http://www.thereformedbroker.com/2011/08/28/earnings-gdp-and-equity-valuation/

16 Comments – Post Your Own

#1) On August 28, 2011 at 1:00 PM, Frankydontfailme (27.71) wrote:

Nice post.

However, you overthink things.

The USDX is up against a wall and can't get any lower with the current (reasonable) aversion to the euro. Without the dollar getting weaker, aggregate profits will not get stronger. They have definitely peaked.

Unfortunately you will be proved right when Bernank acounces QE3 (or op twist or whatever), allowing the dollar to weaken significantly.

I get it, Quantitative Easing isn't directly printing money. It does result in a weaker dollar. This may be entirely due to psychological effects but nonetheless..... that's what it does. 

http://www.oftwominds.com/blogaug11/corp-profits-doomed-8-11.html 

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#2) On August 28, 2011 at 1:12 PM, TSIF (99.96) wrote:

Binve, good analysis as always. Unfortunately, I think we have global, governmental actions, fear, etc all melding in.  We appear to be flattening and I don't think it would take much to tip corporate earnings. Many tech/miliatry/health care company's are refusing forward guidance during this period of "governmental uncertainty" on what/when will be cut.  More governement stimulus seems possible from the Fed and the Legislature that might offset this in the short term while we stabilize. I don't necessarily believe stimulus will help us in the long run, but it might help with confidence which would be useful to avoid "death by negativity". Overall, I agree with your analysis, but I'm cautious!  (As we always should be).

 Thanks!

TSIF

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#3) On August 28, 2011 at 1:42 PM, binve (< 20) wrote:

Frankydontfailme,

Nice post. However, you overthink things.

Uh, thanks?

The USDX is up against a wall and can't get any lower with the current (reasonable) aversion to the euro. Without the dollar getting weaker, aggregate profits will not get stronger. They have definitely peaked.

Don't tell me you subscribe to the 'everything moves inversely with respect to the Dollar' theory.

I get it, Quantitative Easing isn't directly printing money. It does result in a weaker dollar.

I don't think there is any evidence to substantiate this claim:

ENLARGE

TSIF

Thanks TSIF.

We appear to be flattening and I don't think it would take much to tip corporate earnings. Many tech/miliatry/health care company's are refusing forward guidance during this period of "governmental uncertainty" on what/when will be cut.

From the post above, I show that corporate earnings peak a few quarters *before* the price peaks. This has been true for the last several decades. So if earnings peak now, then it will be coincident with stock prices. Which is unusual. Which means that either this time its different, or it is not a major top.

Regarding the macro and fiscal environment, like I wrote in this post: http://marketthoughtsandanalysis.blogspot.com/2011/08/update-on-long-term-projection.html:

My position remains that this is not the 'Top'. However, I would have seriously considered changing my opinion if the US Government had gone into balanced budget mode, as either a compromise or because of lack of one (if there was no compromise, then the Treasury would have gone into its own balanced budget mode, since it can't make discretionary spending choices, those have to be approved by Congress). If that would have happened it would be the largest anti-stimulus measure likely ever seen. Trillions of dollars would have been sucked out of the economy. See this post for more: Regarding the Myth that Austerity promotes Fiscal Expansion.

And perhaps the worst problem is that mainstream economists and politicians still don't understand our monetary system. The idiotic debt ceiling debate absolutely proved that. Everyone (except those of us in the tiny minority) seems to think that "Federal Government deficits = bad, Government surplus = good!" as a blanket statement, without any consideration to what is happening in the other two sectors of the macroeconomy. And so it seems to me that in the next couple of years a "balanced budget" or (God forbid) a "balanced budget amendment" will be passed before the economy is cleaned out. Those who advocate austerity to 'avoid a depression' will be the ones to cause it. Perhaps this isn't a foregone conclusion for the next decade, but it seems like an awfully big risk. (See this post).

but I'm cautious!  (As we always should be).

Me too. I don't think this will be the 'buy of a lifetime', but I think the upside risk is higher than the downside risk at this spot in the SPX on a two-year timeframe. Which is all I am really getting at with this post. My $0.02. Thanks!..

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#4) On August 28, 2011 at 2:51 PM, DarthMaul09 (29.75) wrote:

Binve, I wish to offer another view:

Even though I am invested in the stock market I don’t believe that it follows any logical assessment of companies or the economy.  Or at least I don’t believe that it does anymore.  The reason is that interventions by governments, hedge funds, exchanges, banks and a few wealthy individuals can influence the market direction both in the short and intermediate term.  Examples include the: 1% - 2% gold rule, the long metals – short miners hedge fund play (see charts on Jesse’s Café Americain), the monthly COMEX options expiration for metals, JPM and silver, Fed and QE 1, 2, …n,, and the begger thy Beggar thy neighbor policies that most countries now employ as the basis for their economic plan (if they even have one).

 

The point that I am trying to make is that the traditional idea of investing in stocks to grow wealth is now more myth than reality.  Even large companies that pay dividends like XOM and JNJ may not grow their value fast enough to beat the under reported real inflation rate, which may be more than 10%.

 

So the reason that I am still in the market is that I am no longer an investor, but a speculator.  And the reason that I choose to be a speculator is that trying to save and invest in the traditional sense appears to lead to a guaranteed loss of wealth.  I should qualify this last statement by excluding saving in gold bullion, which will actually preserve buying power, but not increase absolute wealth, although relative to those who save in fiat currencies it may appear that gold savers have increased their wealth.

 

I do hold a significant percentage of my assets in gold and silver bullion, which I believe will return as the world reserve currency when the US dollar reaches its intrinsic value.

 

I speculate that the seasonal rise in gold between September and December will raise not only CEF but also the HUI and with it the silver stocks as well.  This is not really a hard call to make given that the trend in gold and silver over the last 10 years is pretty obvious.  What is different now is that most other investments lack the stimulation that was present in the housing and technology bubbles.

 

Timing the market also helps, especially when investing in gold and silver related stocks.  An easy rule to follow is to wait for the COMEX expiration week and pick a day when gold or silver are taken down hard to make your purchases, then wait for the next month and do the same.  This seems almost too easy but it may not last forever, as the big banks appear to be losing their control of the metals' rise.

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#5) On August 28, 2011 at 3:44 PM, binve (< 20) wrote:

DarthMaul09,

The point that I am trying to make is that the traditional idea of investing in stocks to grow wealth is now more myth than reality.

I don't agree with this statement in principle. And I only vaguely agree with it on a 10-year timeline. I think we are still in the middle of a secular bear market. I also think we are in the middle of a cyclical bull market within said bear market. I think if looking at the past ratios of cyclical bulls and cyclical bears (like here: http://caps.fool.com/Blogs/lessons-to-be-learned/538330) and the real drivers that move the stock market (earnings and earnings expectations), we should expect a few more years in this cyclical bull market. But the reason why like I said above to TSIF that I don't think this is the 'buy of a lifetime' is that I think there will be one more cyclical bear to end this secular bear. That one will be the buy of a lifetime (at least as long as most of us are likely to live).

Even large companies that pay dividends like XOM and JNJ may not grow their value fast enough to beat the under reported real inflation rate, which may be more than 10%.

I don't agree with that at all.

Maybe you don't agree with the BLS report of the CPI. Fair enough. I actually look at a wider range of inflation indicators. Doug Short has a good one, so does the Pragmatic Capitalist, and you also have MITs Million Points Project. All of those are I think a little more realistic. And all of them, while slightly higher than the BLS metric, are usually within 0.5-1.0% of the BLS numbers. None of them are near the ShadowStats number. I think the ShadowStats inflation metric is not even remotely representative of observable inflation rates.

I should qualify this last statement by excluding saving in gold bullion, which will actually preserve buying power, but not increase absolute wealth, although relative to those who save in fiat currencies it may appear that gold savers have increased their wealth.

I differ with you on this point. I disagree with the 'Gold as a hedge against inflation' argument. Here are my thoughts on Gold (which I continue to be a large investor of): http://caps.fool.com/Blogs/gold/621044.

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#6) On August 28, 2011 at 4:13 PM, MoneyWorksforMe (< 20) wrote:

Respectfully disagree. 

Stocks, in general are not cheap, and still pose large downside risks in my opinion. I think this rally ends very ugly, and at that point I will resume heavily buying equities...Sure we could rally another 1000 points or so on the dow, but I certainly would NOT be sleeping well with high U.S. equity exposure at this juncture...

U.S. corporate profits, I believe have already begun to lose some steam...I think if this post was written the beginning of this year or at some point late last year, following that severe summer correction, you'd have a very valid point, but not now...  

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#7) On August 28, 2011 at 4:57 PM, whereaminow (< 20) wrote:

Hi binve,

I'll be nicer this time (and now you know what it's like to deal with a maniacal split personality... just like my fiancee, lucky you =D).

I found some things to agree and disagree with in the post and comment section.  For example, it is absolutely true that the stock market is not the economy.  It can't be, since portions of the economy are neither represented in the stock market, nor could be.

Historical/empirical data can never prove a theory.  When it comes to human interaction, with billions of people exchanging and shifting value scales constantly, there is simply no way to empirically prove any theory.  I highly doubt it is even possible to come close.  The best an economist can do is attempt to explain historical events and data through the use of theory. 

I wish I had the complete story in front of me, but I will have to dig for it.  I remember hearing about a monetary relationship that the Chicago School had identified that held true for many decades. It was one of the cornerstones of their understanding of money in macroeconomics.  It all fell apart right under their noses in the late 1980s, and the great irony of it was that the relationship was caused by a government rule that, once removed, destroyed the entire framework of their theory.  And these guys were free market supporters!  I enjoy irony :)

There is definitely a relationship between rising stock prices and money creations.  This was proven through the use of theory by the great Fritz Machlup and detailed in The Stock Market, Credit, and Capital Formation.  There is also empirical support (not proof) of the theory.  Economist Frank Shostak has shown the correlation between rapid increases (and then stagnation/decrease) in the money supply and stock market booms (and then busts).

Theory always trumps.  When I look at the USDX during QE1 and QE2, it makes perfect sense.  The dollar's value is subjective, like anything else.  It declined rapidly during the start of QE1 and rose as it drew to an end.  With the launch of QE2 even the most ardent Fed supporter was forced to admit the possibility of many rounds of easing and many years of artificially low rates.  In what other way could dollar holders view the events?  It is only natural that adding new dollars to their holdings will drop lower on their value scales (lower marginal utility) while exchanging it (e.g., for gold or foreign currencies) would more up (higher marginal utility).

I found DarthMaul09's comments very interesting.  But I would make the point that whatever insider tricks the big boys are using right now (and certainly there are many), the way to beat them remains the same: your time frame must be longer than theirs.  Economic law always prevails despite the valiant efforts (in a bizarro sense) of economic hit men to delay the day of reckoning.

David in Qatar

 

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#8) On August 28, 2011 at 6:10 PM, binve (< 20) wrote:

MoneyWorksforMe,

Stocks, in general are not cheap, and still pose large downside risks in my opinion.

There is a problem and a (potential) implied fallacy here. Just because stocks aren't cheap doesn't mean they have to go down. Stocks can remain mispriced for a long time. If they weren't then the EMH would be correct and we would never see mean reversions. But the EMH is not correct and we see mean reversions all the time.

My point is, just because stocks might be overvalued here doesn't mean they will sell off, particular if earnings do not substantially break down. See comment #5 above.

I think this rally ends very ugly, and at that point I will resume heavily buying equities.

I think this cyclical bull ends ugly because I think there is one last cyclical bear to end the secular bear (again see comment #5). The real drivers that move the stock market (earnings and earnings expectations), we should expect a few more years in this cyclical bull market. But the reason why like I said above to TSIF that I don't think this is the 'buy of a lifetime' is that I think there will be one more cyclical bear to end this secular bear. That one will be the buy of a lifetime (at least as long as most of us are likely to live).

So I agree with you, in principle, but I don't agree wiht you in timing and cyclical market phasing.

U.S. corporate profits, I believe have already begun to lose some steam...I think if this post was written the beginning of this year or at some point late last year, following that severe summer correction, you'd have a very valid point, but not now.

See comment #3 above: From the post above, I show that corporate earnings peak a few quarters *before* the price peaks. This has been true for the last several decades. So if earnings peak now, then it will be coincident with stock prices. Which is unusual. Which means that either this time its different, or it is not a major top.

whereaminow ,

Hi David,

I'll be nicer this time (and now you know what it's like to deal with a maniacal split personality... just like my fiancee, lucky you =D).

:) I don't mind a discussion. But I am not remotely interested in a shouting or derision match.

Historical/empirical data can never prove a theory.  When it comes to human interaction, with billions of people exchanging and shifting value scales constantly, there is simply no way to empirically prove any theory.  I highly doubt it is even possible to come close.  The best an economist can do is attempt to explain historical events and data through the use of theory. 

Agree in the main point of this statement: Historical/empirical data can never prove a theory.

However any theory must agree with emprical observations. As such, any theory must agree with emprical evidence.

Imagine a physicist comes up with a brand new theory to govern motion. The physicist never looks at any data and never includes any observational measurement in the formulation of the theory. It simply proclaimed from self-reasoned axioms.

Is the theory any good?

And that is the key. How do we evaluate if a theory is any good? A theory is only useful if it helps to explain observations in the real world.

If the theory predicted that the motion of a planet was some way and observations clearly disagreed with those preditctions, we would say the theory was 'bad'. But if the theory ended up agreeing with measurements, then the axioms that led to the theory can provide more physical insight to how our world behaves.

As such, empirical observations are vitally important to the evaluation of all theories. Since a bad theory is not only incorrect, but can lead to extremely erroneous planning (lets say a rocket was launched based on the incorrect physical theory and the rocket heads to deep space instead of rendezvousing with the planet).

So I agree that emprical observations don't 'prove' the theory (every theory is ultimately 'unproveable', because each theory is necessarily a model/simplification of the real world [human or physical] and is incomplete and based on some underlying assumption).

As such any theory (Gravitation, Dynamic Equilibrium, Electromagnetism, Austrian Business Cycle Theroy, MMT, etc.) is just a model and is only as good as its predictions match up with real world observations. Models and theories are simplifications and are not substitutes for the real world. 

Theory always trumps.

I don't know what you are implying here. But a theory is only as good as its predictions being consistent with real world observations.

When I look at the USDX during QE1 and QE2, it makes perfect sense.  The dollar's value is subjective, like anything else.  It declined rapidly during the start of QE1 and rose as it drew to an end.  With the launch of QE2 even the most ardent Fed supporter was forced to admit the possibility of many rounds of easing and many years of artificially low rates.  In what other way could dollar holders view the events?  It is only natural that adding new dollars to their holdings will drop lower on their value scales (lower marginal utility) while exchanging it (e.g., for gold or foreign currencies) would more up (higher marginal utility).

Dollar holders could also speculate based on the misunderstanding that QE adds more dollars to the system, which it doesn't. This would be an attempt to front run the Fed based on the perceived anticipation of inflation of the money supply (which is based on views such as the Quantity Theory of Money being a description of how our monetary system works, which I think is incorrect). There is also quite a lot of data to support that view: http://caps.fool.com/Blogs/margin-debt-the-stock-market/619644 ...

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#9) On August 28, 2011 at 6:51 PM, whereaminow (< 20) wrote:

binve,

I don't know when, if ever, you have felt that I shouted at you, but I assure you it was never my intention (but with several other people it absolutely has =D).  As for the ribbing I gave you recently, it was a thought that popped in my head and gave me a chuckle (the gov spending/mmt torture example).  I don't think you should take it seriously.

If the theory predicted that the motion of a planet was some way and observations clearly disagreed with those preditctions, we would say the theory was 'bad'. But if the theory ended up agreeing with measurements, then the axioms that led to the theory can provide more physical insight to how our world behaves.

Allow me to clarify :)

It's kinda worrisome that you fell back on a physics example.  Physics involves objectively measurable movements, not actions based on choice and subjective values (which cannot be measured objectively).  In physics, the researcher can hold variables constant to isolate the effect of a change in another. No such thing can be done in economics.  Even attempting to do so, whether it's through equilibrium theory or the Evenly Rotating Economy, is a theoretical construct that cannot in any way match reality.  (In the case of the ERE, at least Mises notes that such an economy cannot and should not exist, whereas General Equilibrium theorists actually use the concept as if it can exist).  Copying the methods of the physicists is exactly what got economics into the troubled mess it finds itself.  Again, I worry that MMT is just the "Pert Plus" to mainstream's "Pert shampoo."

In economics no amount of empirical evidence can ever disprove or prove a theory. 

Allow me to quote economist Laura Davidson:

"It should be mentioned that economic theory involves deducing nonquantitative laws a priori of the type, ceteris paribus if A then B, without reliance on the use of empirical data. Provided the reasoning is correct, such propositions are always apodictically certain because the theorist—that is, the economist qua economist—assumes all other exogenous variables are held constant. Explaining economic events, on the other hand, is the work of the economist qua historian or forecaster. It involves selecting the appropriate data, and then using chains of reasoning that employ the relevant economic laws, to arrive at a plausible argument.

The conclusions drawn by the economic historian or forecaster can never be absolutely certain. Even though the laws they apply must be absolutely true, the inclusion of specific causal factors, and the assessment of their relative importance, rests on personal judgment and understanding.

Moreover, while the historian has a set of existing data available to him, the forecaster has no certain knowledge of the future external influences that will be brought to bear. Anticipating these influences lies well outside the realm of economics, relying on an understanding of such things as the political, psychological and technological conditions of the market."
(Davidson, Fundamental Economic Principles the Deflationists* Have Ignored, Libertarian Papers Vol. 3, Art. No. 13 (2011)

In other words, we absolutely can falsify predicted movements of inanimate objects in the physical sciences using observation.  We cannot falsify economic theory by observing data (which of course must be selected at preference over other available data by the economic historian, itself a subjective action).  The only way to defeat a theory about human action is to show the logical chain of reasoning is incorrect. 

David in Qatar 

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#10) On August 28, 2011 at 8:06 PM, hhasia (62.84) wrote:

HI Binve

It would be nice to see the real unemployment chart for "non-public jobs" included in your chart.

I've always maintained that simple is best.  So along those lines.  Corporate earnings grow because companies are pushing the bar to produce the same amount out of 3 workers instead of 5. Slash payroll, earnings go up.

Demand is actually shrinking, its the prices which have gone up.

Debt is being reduced, lowering interest costs.  This is the biggest change, as companies build on leverage are forced to hoard cash.  2008 was a milestone year. Not since the 1920's, had there be a mass deleveraging.  The recession that followed is a result of producing based on real $, not the extra spending that leverage creates.  Your comment on earnings expansion cycle is correct but with this added twist. they are not just drawing down inventories, they are drawing down debt as well.

An expansion of the credit markets fuels the business growth. The credit markets are shrinking, fundamentally. I would contend that America never got out of the recession, it is ongoing. The financial sector never got out of trouble, just kicked the junk under the rug, it never went away. Failures continue to mount up as those securties are still toxic.

Growth in GDP as measured by the goverment is  just that, the government.  The expansion of government, a huge expansion, to compensate for the private sector deleveraging.  So, while the private sector is trying to keep afloat giving the illusion of earnings growth ( not real), the government prints and borrows giving the illusion of a prosperous growing economy, trying to restore confidence.  The credit of the private sector drying up is nothing compared to the drying up of credit for the public sector which is dependent upon foreign, let me say that again, Foreign buyers of the debt. With 50% of the workforce in the public sector, those jobs would be in jeapordy. In fact they already are in many cities.  Corporate earnings, particularly in the consumer sectors would dissapear if the US credit card is cut up. The Fed would be the lone buyer and that would be an epic nightmare.

Of course, coke,KO, would survive. Oh and toothpaste makers too.

Will corporate earnings continue rise? My bet is yes, but it is temporary as workers are replaced with gadgets, and debt is reduced.

 HHASIA

 

 

 

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#11) On August 28, 2011 at 8:23 PM, binve (< 20) wrote:

David,

and gave me a chuckle (the gov spending/mmt torture example).  I don't think you should take it seriously.

.... hmm.

Your comment contains a lot more vehemence than you are ascribing to it. But okay.

It's kinda worrisome that you fell back on a physics example.

It's kinda worrisome to me that you think that there are no corollaries between real world physical phenomena and economics.

Humans build constructs and applications based off of the understanding of real world physical phenomena.  The marketplace, economy, stock market, etc. are also human constructs. It is not surprising at all that movement of economic quantities display physical characteristics.

I am not saying that economic models and theories are one-to-one applicable with physical theories (precisely economics deals with values and each person assigns different values to different things, like I have discussed here: http://caps.fool.com/Blogs/regarding-economic-debates-and/305849). But saying there is no applicability between economic systems and physical systems seems incorrect.

In economics no amount of empirical evidence can ever disprove or prove a theory.

Half of my response in comment #8 was spent saying that same thing. I already said that I didn't disagree with you on this point.

The only way to defeat a theory about human action is to show the logical chain of reasoning is incorrect.

Wow, that does not seem right at all. 

You say that economics cannot be compared to physical systems because economics is based on subjective human decisions and actions.

Then you say that a logical chain of reasoning that is the basis of a theory describes human action. And it is that basis that gives validity to the theory.

You have a catch-22.

If human decisions and actions are subjective, then any blanket statement about human action is incorrect. To assume otherwise means that two people who have the same stimulus applied will respond always in the same way.

But we know that is not true. Each person responds differently to stimulus because each person has a different value system, which is subjective (as you said above). 

So how can any blanket statements on the logical reasoning of human action apply equally to everybody at all times? 

To go back to a physical example (because I think it is relevant, although I am sure you will disagree):

Consider the quantum state of an unbalanced molecule (like water). It's quantum state is unknowable. It has thermodynamic degrees of freedom at an infinite number of translational positions. It also has several discrete (but unknowable for any single atom) rotational energy states, it also has several unknowable vibrational energy states, it also has several unknowable electronic energy states, etc. There is nothing in physics that can fully describe the exact quantum state of a single atom or molecule. 

So because the quantum state of a single atom is unknowable, then how can we know anything? If the rest of the universe is made up of collections of atoms, and individual atomic states are unknowable, then how can we measure systems made up of multiple atoms?

Because *collections* of atoms behave very differently than individual atoms. In aggregate, collections of atoms display pressure and density, electrical and thermal conductivity. Depending on how they are arranged they might display elasticity or resistance to shear forces. In fact even though the individual quantum state of an atom is unknowable, the aggregate quantum state can be theoretically determined and real life observations agree with these theories. This is the basis of the science of Gas Dynamics which is useful for Compressible Fluid Mechanics.

My point is that individuals are like single atoms. Their quantum state of individual subjective scales is unknowable. Trying to come up with some sort of axiom that describes those subjective states seems like a very big stretch to me. Because not everybody logically behaves the same. 

Constrast that to aggregations of individuals. With a sufficient number of people engaging in activity (and to borrow a gas dynamics terminology: when you move from a free moleular regime to a continuum regime), then you herding behavior that does display observable patterns.

And in my opinion, the study of ecnomics and macroeconomics is useful if it describes the continuum state (what people tend to do in aggregate when engaging in economic activity. 

Trying to come up with a description of what happens at the individual level (which I would argue is not fully applicable anyways because it would assume the all actions taken by people always have the same purpose, which I think is a *very big assumption*) and scaling it up to the macro level is highly problematic.

We see evidence of this quantum fallacy of composition at the macro level with regard to atoms. And we also see many well known economic fallacies of compostion.

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#12) On August 28, 2011 at 8:36 PM, binve (< 20) wrote:

hhasia,

You note a number of problems, and while I don't agree with all of them, your comment seems to imply that I am ignoring problems.

I am not, please read comments #3 and #5 above.

However, just because we have economics problems doesn't mean the stock market will go down. That is my fundamental point. Earnings are still good and have been increasing with prices.

Maybe you want to make an argument that this is the 'top' for earnings. Fine. But the chart above shows that historically earnings top *before* prices, and not usually with equity prices. Hence I don't think this cyclical bull market topped in May. That's all I'm saying.

I doesn't preclude the possibility of another cylical bear market sometime in the future. See comment #3 and #5..

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#13) On August 28, 2011 at 9:43 PM, hhasia (62.84) wrote:

Binve

I'm not implying you are ignoring problems.  There is a fundamental difference.

You state that earnings and earnings expectations drive stock prices.  I cannot agree.  The availability of $ determines prices going up or down.  When you shrink the availability of $- deleveraging- prices fall not because earning are poor, but because there is less cash to invest in those companies.  Even if companies are doing great, and warrant the premium price, with fewer $, it will not be there.  The recent huge mutual fund redemption is an example. This deleveraging is outside the normal business cycle of all previous recessions since the 1920's. In fact I would contend the deleveraging which began in 2008 has a long way to go.  Not until we get back to the 1/12 ratio ( pre-1999 levels) interms of credit supply.  Remember, the availability of funds went from 1/12 to 1/25 overnight. a huge portion of that fuels the market. What we see now is a reversal, but with the added hickup that the extra funds created are now worthless but were counted as assets, what a nightmare.  On top of that the division of those funds 4 or 5 times,with the explosion of the derivities market creates a mind blowing problem.

Will stock prices peak higher from here? Perhaps. But with fewer funds available we will be hard pressed to see a top exceeding prior levels. (IMHO)

HHASIA

 

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#14) On August 28, 2011 at 10:59 PM, whereaminow (< 20) wrote:

binve,

Your comment contains a lot more vehemence than you are ascribing to it. But okay.

I don't think you understand my humor.  If there was any vehemence at all, it was directed toward Prof. Mitchell, who is clearly insane if he defines economic growth as an increase in net financial assets, which is exactly what he did.  That's not your fault. That's his.

But obviously you did take it all very seriously, so I apologize to you (but to Prof Mitchell... NEVER =D).

But saying there is no applicability between economic systems and physical systems seems incorrect.

I am not saying that either.  I am only saying that economic data (historical data) does not prove or disprove a theory, no matter how much of it you supply.

You say that economics cannot be compared to physical systems because economics is based on subjective human decisions and actions.

I did not.  I said that the methods used by the physical sciences are not applicable to economics.  Economics, is and should be causal realist, but that does not mean you can observe human action and measure it in the way you observe and measure the movements of planets or gases.  I explained why above.

Then you say that a logical chain of reasoning that is the basis of a theory describes human action. And it is that basis that gives validity to the theory.

It the correctness of the logical chain of reasoning that gives it validity, not simple the act of engaging in reason.  One can reason faulty.  We all often do.  Reasoning alone doesn't give us any valid theories.  Of course, if logical reasoning is never taught and no one understands it (pretty much describes modern America), it's going to be difficult to have debates about the validity of logical chains of reasoning.  

(Being unable to use logical analysis is beneficial to the state, btw.)

So because the quantum state of a single atom is unknowable, then how can we know anything? If the rest of the universe is made up of collections of atoms, and individual atomic states are unknowable, then how can we measure systems made up of multiple atoms?

You can measure them because you have objective reference points.  What is your objective reference point for economic utility (satisfaction or happiness)?

Constrast that to aggregations of individuals. With a sufficient number of people engaging in activity (and to borrow a gas dynamics terminology: when you move from a free moleular regime to a continuum regime), then you herding behavior that does display observable patterns.

I suppose, the more you are herded, the more you will act like you are in a herd, but I don't know that mob behavior is quantifiable either. (Though I have never really heard of economic aggregates being couched in those terms, so I never really thought of it.)

David in Qatar

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#15) On August 29, 2011 at 11:35 AM, Frankydontfailme (27.71) wrote:

Yes Binve, it is all inverse to the dollar (in this environment)

:)

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#16) On September 03, 2011 at 12:05 PM, kirkydu (92.32) wrote:

Fortunately you will be proved right when Bernanke announces QE3 (which I think might be buying strips from banks on new loans), growth continues globally, we decide to rebuild our infrastructure in full while flattening deficit spending and the sky in fact does not fall.

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