This the trading-price of a synthetic (well, so synthetic it does not exist, except as a simulation - a randomness experiment). This fake price chart was created by the little APL function below it, as part of an experiment in randomness assessment. Note the perfect "Elliot Waves" and the beautiful "head-and-shoulders" pattern. This research has honestly quite rattled me. The "price movement" patterns that this simple randomness experiment yields is surprising. This simple simulation starts with an IPO price of 70, and tracks forward for 5000 periods (this might be thought of as roughly 20 years of daily price observations..) to reach a price of 115 and change.

I seed the ⎕RL (the start data-point of the pseudo-random number generator) with a times-reduction of the last four elements of the timestamp (this multiplies the hours, minutes, seconds and milliseconds values together, and that big number is used to start the pseudo-random number generation.) Then, we generate 20 random numbers between 1 and 20, and take the first one, subtract 10.5 from it, multiply it by 0.1, and add that to the last price, to get the next price.

What is so interesting is the runs and patterns that this simple random model generates.

It creates charts that *REALLY* look like stock prices, and have *ALL THE TRADITIONAL TECHNICAL PATTERNS*. I've run hundreds - and the number 10.5 was critical - at that value, the trends will either move up or down - and sometimes sideways. If that number is any different, you will get charts that show consistent trends either up or down.

This was a favourite chart, as it has a perfect "Elliot Wave" (with a little Elliot in the primary 3 to 5, of the first main wave), and also a perfect head-and-shoulders, followed by a price breakdown, a period of consolidation, and an impressive (and rapid) recovery, right around the middle. The recovery fades down to the second Fibonacci, and then begins a trend-channel style climb up to 125, at which point the price breaks down to around 107, but then stages a recovery right back to almost 125, where and when it breaks down, and begins to form a "pennant".

Seriously, this whole thing came from the little APL program below, with the pseudo-random values from the library program inside the GNU-APL.

This chart - with all it's technical patterns - is a complete head-fake of randomness.

I am a bit surprised by this.

Is market-price action really random? Are we all just getting lucky? I've read "Fooled by Randomness" and hundreds of other books on the great "efficient markets" debate - but this little APL program really brings it home. We *know* markets are sometimes not very efficient at all. But yes, I think we also generally underestimate the awesome power of the rolling-dice. God does not *roll* dice. God *is* the rolling-dice. That's all that's needed. The rolling-dice, and a few simple rules, and a system with memory from one period to the next - and you can create the entire universe, given enough rolls of the big dice. This is the truth, regardless of how it makes you feel.

50 Years of Canadian Inflation - the Core Canadian CPI, from January 1971 to January 2021. Core CPI excludes 8 high-volatility items, including fuel prices. But it catches most of the pain. Do you see a trend here? The bottom X-axis is just an index vector of the 601 monthly datapoints, with June 2002 (index position 378) being equal to CPI index value 100 (when the CPI was "re-based").

One can see, it is around index position 140 (August 1982), when Canada's inflation curve shifted from being an exponential growth curve, to a linear growth regime. It took interest rates of 20% in the early 1980's to make that painful but necessary transition. But it worked.

What makes the most recent inflation numbers interesting, is that the Core CPI number for December 2020 was 135.3, and the number for January 2021, has been revised upwards (sharply), to 136. That does not seem like much - but consider - it is 0.7 % change. If prices are really tracking upwards at 0.7 % per month, then that implies an annual inflation rate of over 8%. And that actually feels about right. We - here in Canada - are seeing *hard-core* prices increases for *everything* - especially food and groceries. There are imported items which are unavailable. Gasoline is back over $1.21 per *LITRE*, which is jump of almost 20% from last years price. And of course, this is happening just as incomes and returns for conservative investors are being hammered.

Note the logarithmic growth of this curve at the first part, which corresponds to the first "Trudeau Years" back in the 1970's. There is every indication we are setting up a second similar scenario under the leadership of his offspring.

What is deeply concerning, is the way equity prices performed in the 1970's. Stocks are often thought of as an inflation hedge - but the data shows that stocks do not like inflation, and tend to drift lower or at best flat-line. Some analysts refer to the ugly inflation-impacted markets of the 1970's, as the "silent crash" that was not seen as being as harsh and brutal as it actually was. The Dow Jones Average moved from the 1000 level, down into the high 600's, and the drop was attributed to the (*accurate*) view that many had, that inflation was seriously distorting the economic operation of many industrial sectors.

And note: Historically, bond prices tend to turn down *before* stock prices do. The rising yields we are seeing now, suggest that the equity markets are nearing or at a top. Of course, anything can happen, and no one can know for sure. But we caution that inflation is a deep, dangerous and pathological economic phenomenon - vastly worse and more destructive to financial assets, than is deflation. But the nation-states and the central-banks are serious hooked on the need for inflation, to keep the economic engines humming, the noses to the grind-stones, and the lab-rats on their running wheels. For salary-men (and women) and government workers, inflation is part of the game. But for investors, it is a silent, often almost invisible, economic equivalent of a toxic poison that kills portfolio values as it destroys the value of wealth set aside in youth. Central banks should aim for *zero* inflation and positive, stable interest rates. But the poor confused lads have somehow got this concept backwards.

If this curve jumps back to the regime that it shows evidence of in the first 50 or 60 datapoints, then we are all in very big trouble. And we here with our little computer models are having trouble figuring out any sort of viable scenario where this does *not* happen.

[GEMESYS Ltd. Chart created using GnuAPL, directly from monthly Core CPI data from Statistics Canada webpage: https://www150.statcan.gc.ca/ ]

This is one of the more useful, somewhat under-the-radar indicators we've noticed. When markets are *really* frothy, it tends to get down around the levels we are seeing now - just like it did back before the year 2000 first Dot-Com market meltdown. Interesting now that the whole world is now aware of this useful data-series. We have an associate - an old fellow who makes money consistantly - who swears by (not at!) this indicator. This chart was lifted from the Reuter's news story, URL below on the Feb. 19th, 2021.

107.9 million pounds book value. Divide 107.9 by .212012 (all amounts in millions), and you get a book value per share estimate of 508.93 pounds per share. So that 775 pounds per share price from August 31, 1720, divided by 508.93, works out to 1.52. The "South Sea Company" was just a big bank, and it was selling at roughly 1 and 1/2 times book - which actually is pretty much about right. So this is hilarious - the "Irrational Bubbles" of history may not have been quite as nutty irrational as historical hindsight suggests. The entire "South Sea Company" project was simply brought down by a trans-national liquidity crisis - a whole bunch of other bogus and not-so-bogus company's stocks went hard south, when the crazy-greedy British Parliament passed the "Bubble Act of 1720" and started enforcing it in August of that year. The whole "South Sea Company" was actually not as extreme as it appears at all. One and a half times book value - that is generally seen as a reasonable valuation. Private business entities often turn over at twice book - just like the peak price of the South Sea Company (just over 1000 pounds per share). But once liquidity dried up, everyone who had speculated had to rush around and raise cash. What do you do? You sell assets - and the best stuff you hold, will typically fetch the highest price, so that tends to be what gets shifted first. What we are looking at here - with Global debt running up the way it is - this is way worse and more bubble-crazy than any of the historical bubbles ever were. See, it is clear as shattered glass that this debt above will never be paid down with real money. Some sort of scheme will be required to bring the Big Global Money System back into balance, we suspect. John Law's use of "rentes" was interesting. Everyone views his scheme as a great fraud now - but seen thru the eyes of the Government of France, it actually worked out pretty well, and reduced French national debt to a fraction of what it was before he tried to monetize it all. All these big debt-management schemes require some method by which the debt is made to be "securitized", sold off to wealthy folks, and the the securities discounted in value down to a much smaller number. Some folks will get left holding a very big bag, we suspect. But if the "Bubbles" in history were not really what they seemed - then what the heck is this? What we may have here, is really: "The Great Bubble" - an actual, real bubble that may provoke the greatest rush for liquidity ever seen in all of human history, when it finally collapses. What could cause this? Maybe USA simply repudiates all the USA debt the Chinese hold? Or a small nuclear war begins, several cities taken out, and then reparations have to be paid by the loser? Or a virus that kills like the 1918 Spanish Flu did (roughly 1/2 billion would die now). Something will have to break, somewhere, we suspect, if patterns hold. The resulting response then provokes a liquidity crisis ("The Mother of All Liquidity Crisis Events?"), and national currencies are re-priced and re-valued? Floating exchange rates abandoned? Truly, we know now that really, anything can happen. " has-arrows="False">

The entire operation of the World is being funded with "printed" funny-money (no printing actually required - it's just digits in a computer now) and ramped-up borrowing. We suspect that the bonds being issued will almost certainly never by paid down with money that has any useful purchasing value. The numbers are becoming quite insane - regardless of how you look at them - as absolute US dollars, or as percentage of GDP of respective national economies.

I've been trying to figure out why this is making me so uneasy - and so I did a detailed review of three historical "bubbles" - or supposed periods of speculative excess. The "tulipmania" in Holland in 1637 was both negligable and probably justified - for the rare varieties. In any case, it caused no serious market harm. The John Law 1719-1720 experiment in France, with the creation of the Banque Royale succeeded in reducing the unsustainable war debt of Louis XIV.

The South Sea Company "Bubble" in England (1720), was actually quite a viable scheme, simply brought down by the Company getting Parliament to pass the "Bubble Act of 1720", which prohibited other joint-stock commercial ventures, and provoked a liquidity crisis that cratered the 775 pounds per share South Sea equity price on August 31st of 1720, down to below 200 pounds per share, by October of 1720.

But it gets interesting if you look at the numbers: The South Sea Company had 212,012 shares outstanding, and the Company had essentially purchased long-term Government bonds worth roughly 40 million pounds (at a long term 4% discount rate). Liabilities were 7.1 for the purchase of the annuities it took on, and 6 million pounds owed for bonds and bills. The tangible net asset value was estmated at 40 - (7.1 + 6) = 26.9 million pounds. The company had made loans of 11 million pounds, and was owed 70 million pounds by subscribing shareholders - who had bought shares on installment. So, 26.9 net asset value, plus loans outstanding & receivables of 11 + 70 => 107.9 million pounds book value. Divide 107.9 by .212012 (all amounts in millions), and you get a book value per share estimate of 508.93 pounds per share. So that 775 pounds per share price from August 31, 1720, divided by 508.93, works out to 1.52. The "South Sea Company" was just a big bank, and it was selling at roughly 1 and 1/2 times book - which actually is pretty much about right.

So this is hilarious - the "Irrational Bubbles" of history may not have been quite as nutty irrational as historical hindsight suggests. The entire "South Sea Company" project was simply brought down by a trans-national liquidity crisis - a whole bunch of other bogus and not-so-bogus company's stocks went hard south, when the crazy-greedy British Parliament passed the "Bubble Act of 1720" and started enforcing it in August of that year. The whole "South Sea Company" was actually not as extreme as it appears at all. One and a half times book value - that is generally seen as a reasonable valuation. Private business entities often turn over at twice book - just like the peak price of the South Sea Company (just over 1000 pounds per share).

But once liquidity dried up, everyone who had speculated had to rush around and raise cash. What do you do? You sell assets - and the best stuff you hold, will typically fetch the highest price, so that tends to be what gets shifted first.

What we are looking at here - with Global debt running up the way it is - this is way worse and more bubble-crazy than any of the historical bubbles ever were.

See, it is clear as shattered glass that this debt above will never be paid down with real money. Some sort of scheme will be required to bring the Big Global Money System back into balance, we suspect.

John Law's use of "rentes" was interesting. Everyone views his scheme as a great fraud now - but seen thru the eyes of the Government of France, it actually worked out pretty well, and reduced French national debt to a fraction of what it was before he tried to monetize it all.

All these big debt-management schemes require some method by which the debt is made to be "securitized", sold off to wealthy folks, and the the securities discounted in value down to a much smaller number. Some folks will get left holding a very big bag, we suspect.

But if the "Bubbles" in history were not really what they seemed - then what the heck is this? What we may have here, is really: "The Great Bubble" - an actual, real bubble that may provoke the greatest rush for liquidity ever seen in all of human history, when it finally collapses.

What could cause this? Maybe USA simply repudiates all the USA debt the Chinese hold? Or a small nuclear war begins, several cities taken out, and then reparations have to be paid by the loser? Or a virus that kills like the 1918 Spanish Flu did (roughly 1/2 billion would die now). Something will have to break, somewhere, we suspect, if patterns hold. The resulting response then provokes a liquidity crisis ("The Mother of All Liquidity Crisis Events?"), and national currencies are re-priced and re-valued? Floating exchange rates abandoned?

Truly, we know now that really, anything can happen.

"The Great Non-Linearity" - USA Labour Force data shows a perfect example of a data-series engaging a chaotic jump to a new orbital "phase--space". Source: USA BLS (US Bureau of Labor Statistics).

Where are we now? I'll tell you: Roughly 40% - almost half - of Americans are simply not working. If you look at unemployment claims, the discontinuity in the data is even more extreme. No amount of "seasonal adjustment" can hide what has happened. This data goes a long way to explaining the "Age of Rage".

And flat-lined interest rates asymptotic to zero - essentially the rate-of-return on capital - are not likely going to help folks get jobs. Think like a business-man: If right now, capital has no generative value, then the objective is to preserve and cherish and protect it until such time as it can be useful again - not to squander it on wages for entitlement-addicted youngsters who feel they are owed everything gratis. Employees burn wealth before they create it. Sometimes quite a lot of it.

Since capital deployed does not yield anything - unless you are Microsoft or Google or Facebook, and you have a lock on a process whereby you've "cornered a market", and have monopoly-pricing power - your objective is to SAVE and not to SPEND. You wait for the demand-dry-season to end. But to get people HIRED, you need to create an economic environment where SPENDING can yield something positive - instead of what we now see as this forest of red-lights, each flashing a warning of a big NEGATIVE looming ahead.

Asking business agents to hire folks in this kind of economic environment, is like telling moms that their kids should go play in the traffic. Anyone with any sense, sees that the posted prescription implies a high-risk of avoidable self-harm.

But Government agency folks typically have so little understanding of commerical economic reality, and such well-funded-arrogance, that their lack of sense often translates into an astonishing policy-blindness.

"The Great Non-Linearity" - USA Labour Force data shows a perfect example of a data-series engaging a chaotic jump to a new orbital "phase--space". Source: USA BLS (US Bureau of Labor Statistics).

Where are we now? I'll tell you: Roughly 40% - almost half - of Americans are simply not working. If you look at unemployment claims, the discontinuity in the data is even more extreme. No amount of "seasonal adjustment" can hide what has happened. This data goes a long way to explaining the "Age of Rage".

And flat-lined interest rates asymptotic to zero - essentially the rate-of-return on capital - are not likely going to help folks get jobs. Think like a business-man: If right now, capital has no generative value, then the objective is to preserve and cherish and protect it until such time as it can be useful again - not to squander it on wages for entitlement-addicted youngsters who feel they are owed everything gratis. Employees burn wealth before they create it. Sometimes quite a lot of it.

Since capital deployed does not yield anything - unless you are Microsoft or Google or Facebook, and you have a lock on a process whereby you've "cornered a market", and have monopoly-pricing power - your objective is to SAVE and not to SPEND. You wait for the demand-dry-season to end. But to get people HIRED, you need to create an economic environment where SPENDING can yield something positive - instead of what we now see as this forest of red-lights, each flashing a warning of a big NEGATIVE looming ahead.

Asking business agents to hire folks in this kind of economic environment, is like telling moms that their kids should go play in the traffic. Anyone with any sense, sees that the posted prescription implies a high-risk of avoidable self-harm.

But Government agency folks typically have so little understanding of commerical economic reality, and such well-funded-arrogance, that their lack of sense often translates into an astonishing policy-blindness.

USA Fed-Fund Rate - from 1971 to early Feb. 2021. Mr. Powell says rates will have to stay low for a while, to help the US Labour market recover. Really? This will help the labour market? Are you sure?

S&P-500 Price/Earnings ratio - using reported 12-month trailing earnings. This chart is from "macrotrends.net", but has been corrected to actually show the years on the X-axis. It has a log-scale for P/E on the Y-axis, and shows we are in the 38 to 39 times earnings level on the SP-500, which historically (going back to 1928) has typically been associated with an ongoing downturn, which is the case now.

Going forward, everyone expects earnings to improve, but with Biden now talking about internal travel restrictions in the USA itself, to curb Covid-19 infections, we suspect this downturn might only be getting started.

Many stocks are selling at or near record highs, and one way for the P/E ratio to come back to its historical range - somewhere around 20 times - which implies an earnings yield of 5% (just E/P instead of P/E) - would be for the price of stocks to get dialed back to somewhat more reduced levels. And as one can see from the long-wave picture of USA stock prices related to earnings here, this typically happens.

Consider a $120 stock, generating $3.00 per share annually in earnings. 120/3 = 40. This market is pricing stocks like that 3 is going to become a 6, real quick, and we get a P/E back down to 20. But how often do companies double their profits? Not too often, really. A much more likely scenario, is for the current storm to continue, and that $3.00 in earnings stays roughly the same, and the $120 equity value gets re-priced over time, down to $60. And we converge on a 20 times earnings valuation as we revert to historical norms. Maybe we even overshoot a bit, as often happens with markets. That phenomenon seems to occur a lot more often, doesn't it?

Consider: Mr.&Mrs. Investor: => "We bought at $120, and now, the stock is selling at $60! Oh my!" That seems to happen more often than: Company Boss:=> "Ho ho! We doubled our profits! And we will double them again, next year! We are so clever!"

Which scenario is more likely to play out over the next 18 months? See, the data tells us pretty clearly, that one way or the other, stock prices, on average, will get back to between 15 to 20 times earnings.

The website "quandl.com" reports the most recent S&P-500 P/E at 38.42 times for Feb. 1, 2021. Most other estimates (for current, latest, reported 12-months earnings and prices) are in the high 30's also.

Of course, these high stock-price valuations are supported by the very low level of interest rates. But given the substantial price-inflation that is now being seen in energy and food prices (which are not subject to bogus 'hedonic adjustments'), we suspect that the near-zero rates cannot be sustained too much longer either. We all risk a very serious, non-linear instability developing, otherwise.

So beware of falling stocks. Re-pricing is easier than genius-generation - it always is, and always will be. :)

M1 Money-Supply of USA. (from Federal Reserve Bank of St. Louis). Note the acceleration from $4 trillion to almost $7 trillion in the last 13 months. The chart is a perfect (and dangerous) "hockey stick". Game on. We wonder if and when this Game might someday stop.

C_Machine Fcst is positive. This is a cheesy image captured using the cellphone camera, but it gets the point across. This mechanical AI-approach seems to be curiously effective over time. For our experimental testbed equity, we note the high-frequency trend and the longer-term trend are now both positive. FD: [Update: Feb 4, 2021. Full disclosure: Three other models all turned negative, so we closed our position. We are almost entirely in cash.]


This approach seems a bit like the N2 Transverse-Excited Atmospheric (TEA) Laser - mostly it does not work, until you carefully adjust things until you reach a small region where it does work, and you get a bright beam-spot. All other locations (capacitor plate size, dielectric thickness, beam-rail positions, inductor values) do not produce any laser-action at all, and any minor movement of the electric-discharge-rails, extinguishes the laser-action. There is exactly one set of parameters where the N2 population inversion phenomenon will occur and you will get laser action, and no-where else. Any minor change to parameters, and the phenomenon disappears.

This is a *huge* problem in basic science. Often, attempts to replicate an experimental result will be unsuccessful, unless the researchers duplicate *exactly* the methodology and machinery of the original experimenters who discovered the result. And this is sometimes quite difficult to do.

Scientists and other researchers will fail to replicate the results of an initial experiment, and may rush to declare the results invalid. If enough scientists "pile on", then an entire area of research can be politically "poisoned", as happened with the electrolytic experiments called "cold fusion" for example, many years back. Something seemed to be happening - it might not have been fusion, or it might have. We may never know. Artificial intelligence and machine-learning was also initially ridiculed and viewed as "crackpot" science by semi-educated, uncreative researchers. And those skeptics & critics were just wrong.

I still don't know if the technique here is on to something real, or perhaps I am just getting lucky. It is possible to flip a coin and have it come up heads 5 times in a row. The probability of that is 3 and 1/8th times out of 100, or 0.5 to the exponent 5. Luck happens. But if you get 10 heads in a row, you start to wonder about the coin... Or the coin-flipper! Or the data. And here, I just don't have enough data yet... :)

This shows a "Benner-Fibonacci" projection, we did back in 2016, which calls for a "Major Trough" in 2021. I found this inside an old copy of "Elliot Wave Principle", circa 1978, reprinted 1984, which I had on the bookshelf.

This projection was based on the Benner-Fibonacci analysis, contained in Frost and Prechter's "Elliot Wave Principle", and basically, I just took the books chart which covers 1954 to 1987, and projected the cycles forward to 2041. It caught the 2003 trough, but missed the 2009 "Housing/Financial Crisis" trough, and projects 2021 as a major trough - but of course missed the Covid-19 meltdown last year. These sorts of "long-wave" cycle analysis are not to be trusted as viable, rational predictions. But one cannot deny that market and business cycles do exist, and appear to occur regularly throughout market history. Our current period of massive government spending, and central-bank money-creation - yet without serious inflationary pressure being evident (yet), is certainly unusual, and we suspect represents an extreme situation. The recent wild swings in the market price valuations of what are clearly low-value stocks also seems to suggest we are nearing a "top". I know an old investor who has been successful, who remembers the 1960's, and commented that "at the end of a major market cycle, just before a downturn, the junk starts to move." And well, we are certainly seeing this. The "junk" is moving quite well now - and this cannot be denied either.

Our point here is that this is not just "Robinhood" and the "Reddit Rally" at work. This kind of market-action was absolutely evident at the end of the 1920's boom, and also at the end of the 1960's boom. It was also evident in other markets at the end of a speculative run-up - the two famous examples being the John Law "Mississippi Scheme" experiment in France with paper currency, and the "South Seas Bubble" in England, both in the mid 1700's.

We are deeply concerned that everyone is assuming that Covid-19 crisis is essentially behind us now, and that "stimulus cheques" will address the issues facing major Western economies, and re-ignite long-term economic growth. We caution that this outcome just does not seem to be in the data we are looking at. Where we live, a strict lockdown and "State of Emergency" remains in effect. Travel is restricted, many stores are closed, vaccines are unavailable except for politically-connected folks or special-interest groups, and infection and death-rates continue to rise. We know many folks who have cancelled projects which would have required significant expenditure. These projects may never be undertaken, and a "new-normal" of reduced level of economic activity may become evident and last for several years.

I was surprised to find this little "back-of-an-envelope" cycle-projection, calling for a major downturn in 2021. It was done 5 years ago in 2016, and knew nothing about Covid-19. But we wonder if Covid-19 will become the "Big Excuse" for all sorts of economic change. We are already seeing it being used to justify an astonishing level of service-quality reduction in an number of areas. To create a serious market trough, all that has to happen is for the current speculative "bubble" to continue (and then "burst"), and then a majority of people to reduce expenditure, and simply cancel or delay (for years) economic and business plans they had previously in place.

We don't actually need "Covid-19" to trigger a Depression. Just a rise of a couple of points in interest-rates, some tax increases (to fund the massive government expenditures being carried out), and some sort of further economy-wide inducement to avoid spending money or engaging in business activity - and then we have all the conditions needed for a solid, self-re-enforcing downturn to get rolling.

I think the current stock-market price levels are not supported by underlying valuations - at all. Electric vehicles - even a modest sized Tesla SUV - cost over $100,000 in Canada. The conversion of an oil-based economy to one that uses EVs - Electric Vehicles - will be very expensive, and will seriously impoverish those who need to purchase the things.

The current crop of "Green Politicians" are lying to us, when they suggest that a "Carbon Tax" will create economic opportunity. It is just not true. It is just more tax-cost for the average economic agent, who is already under severe stress - both as business person and as a consumer. A few rich Toronto lawyers and high-paid Government workers are doing alright - but even they cannot travel, and so are not spending like they used to .

This is just not an economic environment that motivates a heavy run-up in equity valuations and stock prices.

This just looks like a really serious bubble - and seems to have the characteristics of all bubbles - fueled by massive cash stimulus, borrowed money, and young folks shouting "Hey, man, I want MINE! Let's light this candle! Wheee!"

Predicting the outcome here is not really too difficult, is it?

John Law - Dutch Cartoon from 1730's - Law is being fed gold coins by French Royalty - to be turned into bank-notes crapped out of his backside - and grabbed by those seeking quick profit! Rather like "digital currency" perhaps? The idea was to inflate away the French national debt, and it worked. The scheme was successful - except it bankrupted many who stayed at the party too long. :)