Framework for Understanding Market Tops and Bottoms

"Today the market shows many of the elements that are present near market tops. In particular, sentiment is extremely bullish, investors are long and leveraged, and valuations are extended on a wide variety of measures. However, leading economic indicators are still not negative, and so far breadth and technicals have not deteriorated. The medium-term stock market returns are likely to be negative due to excessive valuation, but there is no imminent sign of a medium-term market top.

Tops are a process, not a single event. They tend to last a long period of time, and markets whipsaw traders and disappoint bears and short sellers. For example, many signs of a market top were clearly visible in late 1998, but it was not until the end of 2000 that most major market indices started to collapse. Likewise, many elements of a market top were evident in late 2006, but markets didn’t begin to collapse until very early 2008. "

http://globaleconomicanalysis.blogspot.com/2014/04/framework-for-understanding-market-tops.html

Capital Inflows and Booms in Asset Prices

"This is a tidy and useful addition to the literature on how high levels of international capital flows generate financial instability."

"Policymakers have long been concerned that large capital inflows are associated with asset-price booms. This column presents recent research showing that the composition of capital inflows also matters. The association between capital inflows and asset-price booms is about twice as strong for debt-related than for equity-related investment. Policymakers should therefore pay attention to the composition of capital inflows, since debt-related inflows may still undermine financial stability even if they do not result in an overall current-account deficit."

"In general, to monitor the threat of capital inflows, policymakers look at the current-account balance. If it is in surplus (as is the case in Germany today) or the deficit is low, they assume that capital inflows do not pose a risk to financial stability If, on the other hand, the deficit is large, they worry about the potential risk and, only then, they may look at the composition of capital inflows.

Our research shows that this view is misleading."

http://www.nakedcapitalism.com/2013/12/capital-inflows-and-booms-in-asset-prices.html

Anatomy of Bubbles and Crashes

"There is no standard definition of a bubble, but all bubbles look alike because they all go through similar phases. The bible on bubbles is Manias, Panics and Crashes, by Charles Kindleberger. In the book, Kindleberger outlined the five phases of a bubble. (...)

Stage 1: Displacement

All bubbles start with some basis in reality. Often, it is a new disruptive technology that gets everyone excited, although Kindleberger says it doesn’t need to involve technological progress. It could come through a fundamental change in an economy; for example, the opening up of Russia in the 1990s led to the 1998 bubble or in the 2000s interest rates were low and mortgage lenders were able to fund themselves cheaply. In this displacement phase, smart investors notice the changes that are happening and start investing in the industry or country."

http://pragcap.com/anatomy-of-bubbles-and-crashes

In the Mind of the Market: Theory of Mind Biases Value Computation during Financial Bubbles

"The ability to infer intentions of other agents, called theory of mind (ToM), confers strong advantages for individuals in social situations. Here, we show that ToM can also be maladaptive when people interact with complex modern institutions like financial markets. We tested participants who were investing in an experimental bubble market, a situation in which the price of an asset is much higher than its underlying fundamental value. We describe a mechanism by which social signals computed in the dorsomedial prefrontal cortex affect value computations in ventromedial prefrontal cortex, thereby increasing an individual’s propensity to ‘ride’ financial bubbles and lose money. These regions compute a financial metric that signals variations in order flow intensity, prompting inference about other traders’ intentions. Our results suggest that incorporating inferences about the intentions of others when making value judgments in a complex financial market could lead to the formation of market bubbles."

http://www.cell.com/neuron/retrieve/pii/S0896627313005680

The Fleeting Beauty of Bubbles and Bonds

"Here's the beauty of asset bubbles. How do you get trillions of dollars into households without having to borrow the money? You inflate the assets owned by the households: stocks and houses. This magically creates money out of nothing, money that the households can borrow against or sell for cash.

Why not create and distribute cash directly? Two reasons: 1) spreading around trillions of dollars in cash could eventually spark inflation, which would kill the entire project by pushing bond yields higher, and 2) politically, the only cohort the authorities care about are the wealthy who fund the political Elite and the half of the adult populace who votes."

"The problem with neutering the market to mask systemic dysfunction is that the return on the policy diminishes at the same time that risk is transferred to the entire system. Risk cannot be disappeared, it can only be transferred or hedged. Burying immense debts in the balance sheets of central banks doesn't make risks disappear, it simply transfers the risk to the entire system."

http://charleshughsmith.blogspot.com/2013/06/the-fleeting-beauty-of-bubbles-and-bonds.html

Google trends, finanse behawioralne, rynki, informacja,

"W przypadku najbliższych problemów w czerwcu w USA z przekroczeniem limitu długu , znowu będziemy mieli do czynienia paradoksalnie z pozytywną informacją dla rynków. Znowu USA będzie musiało oficjalnie zaprzestać emisji obligacji i przeczekać na odłożonych wcześniej zaskórniakach nawet do września BEZ podaży obligacji. Nie wiem czy ktoś sobie z tego zdaje sprawę ale to oznacza nie turbo a HIPER TURBO w działaniach FED."

http://stojeipatrze.blogspot.com/2013/05/fed-tworzy-nowa-banke-i-przegrzewa-rynek.html

Europe needs a hegemonic Germany

Ciekawe rozważania o roli Niemiec w Europie w najbliższym okresie.

Should Germany then try to emulate America? Germany does not have the capacity to do what the United States accomplished from 1980 to 2008; that is, to operate as a gigantic vacuum cleaner sucking into its territory other nations’ net exports, at the cost of ever expanding deficits. Nor should German taxpayers be expected to reflate the bubbles that burst in 2008 (in their own banks, in and around the Greek state, in Irish and Spanish real estate markets etc.). Burst bubbles should be allowed to remain… burst. But meanwhile a hegemonic Germany would find ways to channel the huge pools of stagnant savings into productive investments in the Periphery where they shall produce the incomes that must pay down debts and maintain the level of intra-European demand German companies need to remain competitive both within and without Europe.

http://yanisvaroufakis.eu/2013/02/22/europe-needs-a-hegemonic-germany/