Finally…I understand the stock market.

And no, this is not some sarcastic screed on the “Wall Street Casino”. I finally found somebody who could explain the mysterious vagaries of the waxing and waning of the market terms that even an artist can understand. Probably because there are lots of pictures. And because the meat of the “book” is only about 50 pages long… in large type.

It’s more of a detailed pamphlet really.

The author, Daniel Arnold, is just a smart guy who wanted to know how to make his money work for him after he retired. He was an electrical and bio-mechanical engineer who had worked for GE for a number of years. He was good at understanding process and the importance of how the pieces fit together. So, with some time on his hands, he started looking at basic, publicly available economic information and began utilizing the data in a way that developed into a very interesting theory.

He started from the assumption that you always hear brokers and stock houses hammering home to investors. One shouldn’t look at how a stock does over a short period of time. Instead, they should look at the long range performance. But the people he listened to or read weren’t talking about long range trends. They were all focused on short term trends and short term results.

When one looks at long term economic flux, there are a lot of theories to choose from. One of my favorites is a long-range theory from a Russian economist named Nikolai Kondratiev. He was tasked with “proving” capitalism could not last because it was a flawed system. What he found instead was that the economies of capitalist countries waxed and waned; although he did not or could not offer a suitable explanation as to why this occurred.

These findings were seen as having the potential to undermine Stalin’s plans for the Soviet Union, so he was sent to the Gulag and sentenced to death. But, his findings align with Arnold’s findings quite nicely. But, Arnold’s prime cause for the fluctuations are a far simpler, more elegant and intuitive explanation than the ones offered by economists trying to find an explanation for the Kondratiev “Wave”.

Any artist or scientist or mathematician will tell you that there in a beauty, a “rightness” to certain solutions. The pieces all fit; like a puzzle. As I read this pamphlet, I kept having those “Ah, that makes sense.” moments that never came while I was studying other economic theories.

So I’ll give you the most basic and important part of his theory here and if you want to read more you can go to his website: The Great Bust Ahead

Let me say first though, as an artist, I will tell you now, the site screams “SCAM”, and if I had seen the site first it would have been easy for me to dismiss the pamphlet as sleazy profiteering. But I’ll give him a pass. He’s an engineer and may not realize how visual cues lead people to certain unconscious conclusions.

The data he presents is easily accessed through public files at the Bureau of Labor Statistics, the CIA fact files and the INS. So if you have doubt, get the information and crunch the numbers yourself.

Finally down to the nub of it.
In a nutshell:

  • The GDP (gross domestic product) is, in the simplest definition, You and I spending money.

Here he uses Fully Industrialized Democratic Nations (FIDN) as the basis of this data point. The more people, the more they spend, the higher the GDP. And it holds true.

  • If there is a group within the given population of a country that spends more money, they are the main driver of a “good” economy.
  • The age group comprising the biggest spenders in these FIDN is the 45 to 54 year olds.

Why? We are at our peak earning power at this age. We buy cars, we buy houses, we have kids with the attendant school, medical, college expenses. So we are also at the years of our peak expenditures.

  • The strength of the economy rises and falls as generational cohorts come into or move out of this peak earning/expenditure age.

He takes birth data and census data back to the 1920’s and follows the 45-54 year old cohort, correlating it with the rise and fall of the stock market. He has to make adjustments for inflation, but there is an incredibly tight correlation between the peak earning 45-54 demographic and stock market performance.

Until the 1960’s. It took him a while to suss out why the shift occurred. It was the Pill. It allowed women to forestall childbearing. And keeping it basic here, we won’t go into the economic ramifications. Suffice it to say that he adjusted for the data and the correlation resumed its lockstep behavior.

He found he also had to adjust for immigration. He notes that the average age of immigrants to this country is 30 years of age. And once they are assimilated, earning money, making families, they contribute to the upward trend of the stock market in the same way as a birth cohort.

This chart shows the correlations, but there seems to be some divergence in the data. My guess is that if he could find a way to account for illegal immigrants, who contribute to the economy as much as any other worker, it would, once again fall back into alignment.

Sorry about the smudge in the lower left....

I’d like you to notice that after 2010 there is a precipitous drop in the number of people in the 45-54 year old cohort. The Baby Boomers are busting. They are no longer at peak earning power, the kids have gone to college (and come home) and there is a gap of quite a few years until another peak earning demographic comes into prominence.

So, what does that mean? Well, if the trend holds, it means a precipitous drop in the market. It means a long depression. It means a very long, very tough road for people over 50.

So, now that you understand how the stock market works, you can see that we have been trying to put the cart before the horse. Jobs and wages create disposable income. Disposable income creates a thriving economy. And that is simply all there is to it.

No magic. No fractal Elliot Waves. No Wall Street Wizards or brokers who can earn you lots of cash. If you want to get rich in the stock market, make sure people have jobs and money to spend. Then when a generational cohort hits age 40, get in the market. When they hit 50+, get out.

Simple.

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The Mafia Model

In mid-2007 I finally revealed to the Spousal Unit that, over the past year, I had been developing an increasing anxiety over the state of the economy. By any measure available to the layman the economy looked healthy; robust even. High-end developments were blossoming like endless fairy rings on open meadows and newly deforested woodland. This meant construction trades and every sector associated with them were booming. The Mister was working for an architecture office as the job captain for the home office and resident code wonk for both branches of the firm.

But deep in my gut something was wrong. It just wasn’t adding up. In part, because the Mister and I kept looking around us and saying: You can’t build houses forever. At some point there has to be market saturation. Then what happens? Has a history replete with Tulip Mania and Beanie Babies taught us nothing?

We kept trying to have rational conversations on the subject with our social circle, but most of them were in the trades to some degree and didn’t want to hear it. And you know what happened to Cassandra. One theory was she didn’t bring cookies.

Someone once described me as having “a tinker-toy model of the universe” in my brain. I will chance upon a quandary and somehow, I can’t let it go until the pieces fit. They don’t have to fit perfectly or beautifully, they just have to fit. The effect is like having a hangnail in your consciousness. Or like those pop ditties with a hook that runs mercilessly through your head, and nothing short of a near overdose of prescription sleeping pills can shake it.

So at some point in 2006 I started cruising business and economic sites on the Internet. MSNBC, Wall Street Journal, Bloomberg and various political sites that included economic fora. I read, I researched and what I didn’t understand I plugged directly into a search engine. I wasn’t going to chance asking tenderfoot questions on an open internet forum. No0bi3s are often targets of derision and harassment, even when they ask sensible questions. I wasn’t inclined to add the humiliation of virtual swirlies to the very real anxiety I was already experiencing.

After a year of lurking and researching I knew just enough to be dangerous. And I had learned enough to know that the Mister and I had not been too far off base in our concerns. The way it looked, the housing market was probably going to tank and tank badly.

The pieces of my tinker-toy model had re-arranged themselves to the point that I could now future pace what was likely to happen in the broader economy when housing slowed down. In my head it looked like beautifully crafted concentric rings of Dominoes, with the housing market as the center starting point and staggered sectors like overlapping petals surrounding it.

When housing reached saturation, I theorized, all the trades associated with it would slow as building slowed. This only made sense. Framers can’t frame, plumbers can’t plumb, roofers can’t roof and electricians can’t…electrify, if they don’t have new construction. So the basic trades would be forced to cut employees. Interestingly, some of those jobs would not even show up as losses in employment because a number of the crews working in North Carolina consisted entirely of illegal aliens with an English speaking foreman. Yet the loss of those “non-jobs” would impact other sectors of the business economy.

The next ring of Dominoes to fall would be the businesses that supplied materials to the building trades, including the literal tons of heavy equipment used to clear the lots. Services like landscaping, painting crews, concrete and paving companies would find themselves with too much equipment, too many employees and not enough work to go around.

People buying new quarter million dollar homes see an opportunity to “try something new” with their “look”. For that reason, businesses providing everything from décor to guest room linens on to basic pots and pans would find fewer customers buying their (frankly overpriced) products.

Now because the Dominoes aren’t perfectly aligned, we have to move back to our first ring which has secondary effects on the wider market. Yes, the high-priced homes, the services and all the 2nd ring attendant purchasing have fallen because the market has stalled. But so have the 3rd ring blue-collar jobs supporting those trades and businesses. This means the laborers like linen store workers, paint mixers, people who make furniture, the lawnmower repairman; all these people have been forced to cut back on spending. The same holds true for 4th ring business supplying finished goods and supporting 3rd ring stores and laborers. Best case scenario for most, a reduction in hours with a tighter spending budget. Worst case: they have been laid off due to the slowdown in the housing market and have no money to spend.

And those ripples affect the “petals” food stores, restaurants, mid to low priced clothing stores, white goods (appliances) luxury items like electronics, toys and games and most surprising to me in hindsight, spending on healthcare.

In another way, the effect is completely un-like Dominoes. It’s more like being on the freeway, going home at 5 o’clock on Friday during a horrific thunderstorm. The freeway is packed with cars, covered in water, saturated. One car slows down to avoid hydroplaning. Then, traffic jam. Standstill. It’s that quick. And if you aren’t paying attention, it can be devastating.

So, early one Saturday morning in mid 2007 I call the Mister to the table and ask him to hear me out. I proceeded to lay everything out as calmly as I could. I explain that my main cause for concern was, once the trades and supporting businesses slowed down, so would new business construction; hotels, shopping centers, travel centers. These were businesses his firm looked to for clients. As a last hire, I was afraid his job wasn’t entirely secure. For that matter, based on the range of possibilities I had come across in my research I wasn’t entirely sure we weren’t in for an economic collapse.

The Mister gets a certain look when his brain is processing a chunk of novel information. It’s not exactly “deer in the headlights”. It’s more like a young indoor cat seeing a mouse for the first time. There is initially, a blank incomprehension; a vague fog, lasting from a few seconds to minutes. Then comes a danger assessment. Then cogs begin to turn; possibilities and strategies come into play.

And that almost instinctive understanding of strategy is one of the many reasons I love the Mister; his understanding of game theory is phenomenal.

We began to discuss possibilities in earnest. After a year of silent fretting, I am sitting at the table, practically vomiting stored up anxiety.  The Tinker Toy model in my brain is limited in its ability. I need concrete facts, pieces to fit into the model. No pieces, no clarity. Beyond that it’s down to conjecture. I suck at conjecture.

The Mister is now on his feet. He thinks best when he’s doing something. He goes to the kitchen and begins to clean. And as he comes to understand the depth of my fears surrounding an economic collapse, he uses a phrase so succinct and yet so descriptive that the clear genius of it is startling to me. “They won’t let America’s economy collapse.” he says, “It’s the Mafia Model.”

“What?” The incongruity of the phrase has kicked me out of my physical anxiety and back into my head.

“The Mafia Model. You know…. ‘It’s bad for business.’.” He turns to face me from the kitchen. “Back in the 30’s and 40’s the turf wars between the mob bosses had gotten out of hand. Drive by shootings, bombings, murders. Civilians getting killed. Finally, the Feds along with local police agencies started cracking down on them, interrupting their ability to do business. The mob bosses started losing money.”

“So they get together, decide that the all out wars are ‘bad for business’ and the way to make money is to make peace. Support each other. Syndicate”

“If America goes down, it’s not good for anybody else’s economic health. They literally can’t let it happen. It’s bad for business. And by the same token, we can’t let any other large economy go bust either.”

In a perverse sort of way, I found the thought comforting; even a little heartening. The economic ecosystem was in the midst of its own crisis. It seems they were being forced to take a lesson from that other struggling ecosystem: Adapt or Die.

And so far, the Mister has been right. Over the past 2 years I’ve been watching them; the world leaders, the financiers, the billionaires. Now, I see them clearly, as they are; all tethered as one, clinging to the side of a cold, heartless mountain of money, while the storm of a century rages around them.

As they struggle to gain purchase, I can only image that they pray fervently to what gods they comprehend. Because they surely know what we know; if one falls, the rest will surely follow.

GAO Suggests Limiting Internet Access (for Market’s sake) During Pandemic Crisis.

GAO Report in PDF format

If they shut down the tubes, wing-nuts will scream that the New World Order is about to be imposed.

Or if you are on the Naomi Wolf side of “Shock and Awe”, then they are protecting the market (connected, rich, powerful) from close scrutiny in order to finish the pillaging.

Or if you are on what ever side is suggesting that it’s all to the benefit of the rich and to the detriment of the poor, I’d have to say that’s probably closest to what I think, whether there is malign intention or not.