Current Market Conditions

0:00This is Jeffrey Tucker, the Mises Institute. I'm sitting here with Mark Thornton, a resident economist, economist in residence, and he's going to take us through the Mises Institute's market page, which is on the site. And I invite you to join us. If you go to the cover of Mises.org and go about to the middle of the front page, you'll see quick links, a second link, Markets and data label the stocks, commodities, money aggregates, and macroeconomic trends and I'm clicking on it now so that Professor Thornton can take us through this thing chart by chart. We begin with the stock market which is down 65 points today.

0:45Yes, so we start with the Dow Jones Industrial Average just for the day and it shows in the color graph at the top that the Dow Jones was down 65 points today. The next graph below that is the Dow Jones Industrial Average over a six-month period. The Dow Jones is in blue, the 50-day moving average is in red, and it shows that the Dow over the last six months is down about 30 percent and it's getting close to its 50-day moving average, which that's just basically an indicator that if your market moves past the 50-day moving average that things may be changing, the trend may be changing. be changing. Why is that? Well, it's just a short period of time versus a long period of time, and it's something that technicians have looked at, and they look at the 50-day moving average that if you go decisively through it, that means there's a change in the short-term trend. If you go decisively through a 200-day moving average, that's an indicator that the

1:53You pay attention to these technical indicators because... Why? I mean, they obviously don't determine human action. It's because traders themselves pay attention to them, right? Well, traders themselves pay attention to them, but they give you an idea of where you are in relationship to where you were, which gives you some feedback in terms of your fundamental model, Theoretical model of what you think the world should look like. Technical apparatus that is used in the marketplace simply gives you some sort of picture of where you are in relationship to where you went, where you've been, so that you can put your own fundamental analysis and your theoretical analysis in perspective of time.

2:46I'm not a technical analyst, but I follow technical analysts and I know some of the basic tools, some of the major things that have been, are just good guides of thinking. The next market is the Nasdaq, again over six months, and this shows the Nasdaq now in about 40% over the last six months. That represents some serious value losses, doesn't it? 40% of your money in six months is a serious loss and that doesn't even represent the loss from the top.

3:37We're not talking about the top, we're just talking about the last six months on these charts. Tell me something, you know, you get the sense that when you're at dinner parties, you're in private conversations with people that report their stock market losses to you. They're pervasive, aren't they? Throughout the whole of society, everybody's looking at their portfolios. Devastation. Right. During the late 1990s, at cocktail parties, everybody was trying to come up with the highest percentage gain possible. Like, I made 400% on this stock trade, or my portfolio is up 60%. And then there's this quagmire of time when people really didn't talk as much about their investments, and it may be up, it may be down, but nobody was really The dollar index represents the value of the dollar against a basket of foreign currencies.

4:51This actually shows that the value of the US dollar has been up 13% over the last 6 months. But at the end, you can see that the value of the dollar has fallen, and it's fallen through that 50-day moving average. Okay, so this chart, the dollar index, shows that the value of the dollar has actually increased by about 13% over the last 6 months. Notice how it's been riding up that 50-day moving average, and now it's broken decisively through that 50-day moving average, which is a good indicator that the trend in the dollar, that upward trend in the dollar, is now over, and that the new short-term trend in the value of the dollar is going to be lower over the next few weeks or months.

5:38And that means less purchasing power abroad, what's that going to mean for the U.S. trade for the U.S. economy generally.

6:17The impact on foreign trade only takes place over a longer period of time, and very much related to this, and you'll see there is an ordering here where you look at one market and it naturally follows into the other, and that's why a lot of members of the Mises Institute and people who are on Mises.org use this as a way to study the market after the close of the deadline,

7:17The commodity index shows over the last six months the index falling from 450 down to almost 200 or actually it's a 50% loss in the value of the commodities the price of commodities over the last six months so there's been a huge deflation of commodity prices over the last six months so there's been a huge deflation of commodity prices over the last six months

8:17Top. It's fallen down to as low as $1.25. So in the summer, euros were very expensive. In the fall, euros have decreased quite a bit, down the value of the euro versus the dollar, down over 20% from peak to trough. This is just more or less an inverse of the dollar chart above. Well, the dollar chart above is versus all currencies, and this is specifically on the and the Euro, which is one of the major ones in the basket, but there is a difference between the Euro-dollar exchange rate and the index, the dollar index, which is a reflection of all the world's major currencies. Right.

9:03Next we come to the astonishing oil price market. Yes, yes. Not many people follow this series over time.

9:43The barrel per oil price was actually below $50, and today it's back above $50. It's very volatile. Why do oil prices spike up? Well, it has a lot to do with the business cycle, and if you look at the chart you'll notice that oil prices per barrel spike up at the end of the boom phase in the economy right before we turn into a recession. As we've sort of stretched ourselves out so thin, as we've pumped all the money and credit where all the producers are trying to complete their projects and they're consuming raw materials and they're consuming vast amounts of energy, both building and using all these new facilities that have been created in the boom, the price of oil spikes up higher. But then three things go into effect.

10:32First of all, there's conservation at higher prices.

11:05The Shaded Areas on the graphs represent recessions. There's a lead-up, a peak in the price, and then the economy moves into recession. You heard some people talking about Dominic Comitano and some others. I think you were talking about an oil price bubble, and really what this represents is the tail end of the boom, a sort of frantic rush to finish projects. That's right. I think it's down put it the economy runs out of gas. It has been a marvelous thing to see and it's just a pure coincidence that the last time gas was this low was when the Democrats were in charge, right?

11:50and you know while everybody else was completely puzzled over this run-up in oil prices and then completely surprised that the price started crashing, you know the people who come to our financial markets page every day and have been looking at the same graph and saw that run-up in the price of oil were expecting the onset of the recession because it's just too obvious, especially if you look at it over and over again. The next page is our very own True Money Supply. This is a product that we're not borrowing from some other site, but that we actually construct ourselves. It's based on Murray Murray Rothbard's definition of money and then Joseph Salerno has helped us put this together and it's we collect data from the Fed where we're looking at cash, we're looking at checking accounts and we're looking at savings account money, any money that's available immediately upon demand is in the true money supply and it's been moving rather slowly or not at all most of this spring and summer but the last couple reports have shown significant

13:12increases in the true money supply as we'll see happens in most of the money supply measures. The next one is MZM or money of zero maturity. This chart takes a similar shape to the true money supply but at a different level. So Austrians in the past used MZM because it The True Money Supply is available on the True Money Supply website.

14:03the impact that money has on economic activity. An absence of that, an absence of the TMS too, like MZM. That's a general consensus about the Austrian economist, yes. Then there's M2 included in the in the site, which is sort of the mainstream view of the money supply, and below that we have the St. Louis adjusted monetary base. and the monetary base is kind of the raw material of monetary inflation. If you have a monetary base which is cash and money deposited in banks on reserve, that's sort of the raw material to use in terms of inflating the money supply and then causing

15:21and jump up in the monetary base. Basically, if you, what has occurred in the last three weeks took, the last three months, excuse me, took an accumulative three years prior to that to increase the monetary base by the same amount. So that's incredible. That's the wild card, you know, what's going to happen to that monetary base going forward. It could Next, we have the effective federal funds rate over the history from the 1950s to the present. You see there's a gradual buildup, an erratic pattern that peaks out in the early 1980s.

16:09Then we get the Monetary De-Control Act and the Monetary Freedom Act and the relaxation of the Old Rules, and there's been a gradual, although erratic, decrease in the effective funds rate over time, and you'll notice again that there's a peeking out of the federal funds rate that occurs right before a recession period. And before the recession is recognized and in the boom phase, basically what you have The first thing we have going on in the economy is that the demand for loanable funds is exceeding the supply of loanable funds and as a consequence the federal funds rate is being pushed up both by the market and by the Fed as well.

16:54and then there's the realization that the correction is going to take place and at this point the supply of money in this market is exceeding the demand for it there's not as much demand because people realize there's a correction going on and there's more supply and as a result the Federal Reserve and the

17:53Interest Rates and Sound Money. What would you expect, effective federal funds rate, if there would be such a thing, what would it do in a recessionary period? That's a good question. If there was no intervention, I would expect the federal funds rate to usually be low, except during times of uncertainty, for that rate to change on a day-to-day basis rather than on a you know on the Fed schedule so there would be a lot of differences we certainly wouldn't have any kind of the chart wouldn't look like this and of course this is also related to the business cycle so the volatility in the series is being generated in large Now this next one, the mortgage rates are a little bit of a puzzle. Why wouldn't we, given the housing crash and the bad loans and everything out there, why wouldn't we see 30-year mortgage rates soaring?

19:03Well, we're not seeing the rates change that much because the Fed is keeping their rates low. But this is a little bit misleading because lending standards have changed dramatically since the beginning of this correction. Prior to this, I mean, they were giving money to anybody they could get their hands on. You had no credit, you had no down payment. Now you need good credit, well we've just gone basically back to the old standards and uh... twenty percent down income history, residency history, all the rest so the interest rate itself does not necessarily reflect completely the availability of uh...

19:49of funds in this marketplace uh... can you trust the next uh... chart personal savings rate? I've heard a lot of people debunking this Well, there are things that you want to consider, but our personal savings rate has declined to zero. A couple of the things that people bring up is that money put into retirement accounts doesn't necessarily go into personal savings, as calculated by this, and also corporate savings, which is another form of savings, is also not including this. This is how much of Money, Money, Money, Money, Money, Money,

21:25and so we haven't needed to save more money. But the key to the correction is to get personal savings back up into the normal range for an extended period of time, the direction is actually going. We now show personal savings rate as positive over the last couple of reports. So that's a good sign and it's predictable too. The savings rates always spike up as you go into an economic correction. Well, actually, you see here that it seems to shoot up to 5% and then it crashes again. Do we see this as a reflection of sort of counter-cyclical policy that initially... Yeah, the 5% I think is the tax rebate period.

22:12Ah, okay. Which that actually kept us out of a recession because without that money, GDP would have been negative during that period.

22:50Macroeconomic Trends, Real Gross Private Domestic Investment, on our page. And that's why you'll probably never hear it mentioned on CNBC or you know business channels and business newspapers and so forth. But we think it's very important. One thing about this is that the reporting on this is delayed significantly. So we're looking at a chart that ends in 2007. It peaks in 2006 and then comes down a little bit in 2007 and we don't show what's happened so far in

24:2018% when we're in a boom economy. The next category is real private fixed investment and this is just business investment what we saw in the previous graph except that we don't include inventory business inventory in that market so that's a little redundant but if you want to look at the numbers And most carefully, changes in inventory are important indicators when we look at changes in the overall business cycle. Now we move on to prices. Yeah, the consumer price index. This is a little bit puzzling. Is the data dated here because it shows CPI for all urban consumers going up and yet there's all this deflationary pressure?

25:09Well, there's a lot of prices that are going up. Commodities are going down, but consumer goods are going up, and it's interesting, this chart takes us all the way back to the founding of the Fed, the blue line goes all the way back to the founding of the Fed, and when you look at the gold standard period under the Fed from 1913 to 1971, the line is fairly flat, fairly stable, there's a lot of dips In the early 1970s, we go off the gold standard completely, and then the line takes off in an upward inflationary spiral.

26:00You can notice either within the graph or you can actually go to the data itself, and with respect to consumer prices, since we went off the gold standard, we have higher prices during the recessions, so you get price inflation during recessions. Prior to when we were still on the gold standard and you went into a recession, consumers got lower prices, so there was price deflation for consumers during recessions which helped them out. Now when we go into recession, consumer prices rise very quickly, which makes it even more difficult for the average person out there to deal with the consequences of a recession. And then we go to the producer price index, showing producer prices, again they tend to spike going into the correction as the boom period has sort of a blow off phase.

26:59prices for producers rise very rapidly and of course that's one of the reason you go into correction because business costs have risen. The next one is the implicit price deflator for gross national product and this is just a more encompassing measure of price inflation and in effect you're taking CPI and PPI into account and looking at overall GDP and Price Increases. Now this is very important, the civilian unemployment rate. And this is something that gives away a nice story too, because we see the unemployment rate takes off at the beginning of the recession or the correction.

27:50Like clockwork. Like clockwork, that's right. And we've kept this up here for years, because we think it's is a good indicator when you start seeing the unemployment rate bottoming or stabilizing and then start to move upward you are pretty well informed that the correction is beginning and of course the NBER people who are supposed to call recessions and the people on CNBC who are telling you to buy stocks unless the recession is officially called they can go and so on with their rosy stories, but if you're looking at the unemployment rate and you're looking at this graph, you can just put those stories in the circular file. And so what we have here is a reallocation of labor resources in the same way that capital is being reallocated to adjust to the new economic realities.

28:44Right, that's right. The change in unemployment, it's given in percentage terms here, 1% unemployment rate represents about a million people. So you can see that the increase in the unemployment rate basically is freeing up a million and a half people who are out there currently looking for a new line of work. So we have a shifting of lines of production, people move from one type of industry into another type of industry, and you also have downward pressure on wages to some extent. That's true, and that's under the gold standard, that downward pressure on wages made this adjustment process rather quick, and that's been diminished by a number of factors to to slow down that adjustment phase.

29:41But even then, you can see from the chart that the adjustment takes place very rapidly. Unions can subvert this to some extent. To some extent. They slow the whole thing down. And we come to imports of goods and services. The general tendency here is for it to increase as world trade is increased. And you'll notice it becomes clear after we go off the gold standard that imports decline during recessions or corrections. This is most noticeable in the recession of 2001. So far we don't show an indication of imports declining, but you can bet with pretty good And this will, to some extent, boost domestic production and create an illusion of recovery?

30:49Recovery in certain industries. Like, oh, look, the great steel industry is making a big comeback. The beef industry is doing as well or whatever. 2007, 2008, our exports, for example, were very strong in certain industries in response to the falling dollar, and so the international aspects are going to be influenced by the value of the dollar and the overall level of economic activity around the world. Although we could see an increase in the number of imports of cars that I would expect, right? This next is a puzzle. I always like to show this to people when they complain about Clinton's big spending habits.

31:45Right. It's really the only substantial budget surplus on the books throughout going back in our history, at least through the 20th century. And again, this chart, you're looking it's a basically a flat line then we have World War two it becomes a little bit wavy but still sticks to that zero level and then we go off the gold standard in 1971 and the thing goes completely unhinged completely erratic with a general tendency towards budget deficits and of course an increasing national debt and one can only imagine where the line is going to end up in the next reporting Period. I guess this is clearly an indication that it's going to go off the charts because it's going to be greater than that level and they're going to have to readjust the size of that chart box. And what a picture the Bush years have left. Oh yeah. What a picture. Yeah, well there's some definite signs so you can analyze this over the eight years of the Bush administration and pick out

32:55about various pieces of data, a gentleman I was talking to yesterday said that, well, I guess FDR is no longer the worst president in U.S. history. I said, well, if you go to Mises.org financial page, you'll find statistical evidence to that effect. Yeah, it's a real shock. It's, what, you know, eight years reduced to one plummeting line, you know, and then And I guess the slight uptick there from $400 billion deficit to $200 billion deficit is a response to some extent a forecaster of the coming recession because you had an increase in tax revenue basically. It wasn't, it certainly wasn't spending cuts. Right.

33:41Yeah. No, it's true. Yeah. Big Data here, gross federal debt, again we have down by the zero line until we go off the gold standard and then a very rapid increase and then you get to 2000, this is where Clinton sort of leveling off getting a budget surplus and then George Bush takes over and it goes up like a skyrocket and basically he increased the national debt by over 30 percent. So we go over 200 years and within eight years he increased the national debt by more than 30%. It's really hard to tell how much it's been increased because we don't really know the implications of what's happened here at the end of this term.

34:26Some historian, some economic historian is going to have to go back and say, what was the real national debt increase under George Bush if we include all of the subsequent money is going to be wasted on account of the policies of his treasury and his Federal Reserve, his FDIC and the whole rest. It's going to be very interesting. Yeah, so in other words, come January, just because we got a new president doesn't mean we're going to be done with Bush. We won't be done with Bush for a few years. No. Or maybe ever. We've got Iraq. We've got the budget in tatters, the economy in tatters. He's destroyed our The Federal Reserve, fiat money, fractional reserve banking, Human Action, Man Economy and State, The Theory of Money and Credit

35:36Reflection of how much is in private hands. And then there's the government expenditures showing us to be at about the $3 trillion level of federal government expenditures, seems like a lot. And then there's government revenues, government revenues fall in recessions in response to The Deficit Feeds the Debt

36:32to monetize that debt away, and of course the end game in all this is hyperinflation. Yeah, bye Mark. So now we come to a very strong culprit of the spending over the last 10 years. National defense, yeah. This shows low defense spending from World War II to the Reagan administration. and there's a big run-up during the Reagan administration and then a curtailment during the Clinton administration and then it skyrockets during the Bush administration, basically George Bush doubled defense spending in eight years and of course the commitments are still out there for all of that spending to be at those high levels and of course we're destroying so much capital, so much equipment that there's no, it's not like we've invested in a lot of equipment that we can now cut back on. We've been out there destroying our own equipment, so you know, essentially if we wanted to maintain our defense, it means only higher levels of spending to put all that.

37:48Sort of makes a mockery of the whole limited government rhetoric of the Republicans, doesn't it? It's almost as if everything is opposite of what it seems. You look at the data, you compare it with the rhetoric. It's two different worlds. That's right, and that's why I always encourage our members to go to the financial page of Mises.org to get the facts. I mean, we're not opposed to facts here, we're big on theory but the best thing to confront these bad ideologies and these bad images that are presented in the media is to go look at the facts and I think, you know, looking at this maybe once a week or even once a month gives you a perspective of actually where we are and what we've done and it doesn't take a high-powered computer to make calculations You can draw lines and things like that on these graphs to see exactly where we are.

38:49Well, you've given us a fantastic tour, Dr. Salerno. Thank you so much. Thank you, Jeff.