Didier Sornette from ETH Zurich uses one of the world’s largest supercomputers to track bubbles in the market; Brian Pretti of Contrary Investor says stocks corrected because global central banks are dropping the QE baton; Eric Hadik warns a massive number of cycles are converging between now and 2017; and Puru Saxena questions whether we are still in a bull market.
Here are a few excerpts from this week’s set of interviews, which recently aired to our subscribers in full (click here for more info).
Didier Sornette on positive feedback and tracking financial bubbles with one of the largest supercomputers in the world:
“One of the key mechanisms and signatures of an impending crisis—bubbles and crashes—is…pro-cyclicality. In science, more generally, we refer to it as positive feedback. What is interesting and what I stress to my students who take a course here at ETH Zurich is that most of finance deals with negative feedbacks. [However], the message that I stress to my students is that…most of the market functions according to positive feedbacks; for a while that is, on time scales up to years or sometimes decades and then, of course, on the very long-term, the market goes back because it cannot be 100% disconnected from economic laws on the very long-term. So the positive feedback is a key mechanism that we mathematized and operationalized into a number of algorithms...to actually implement buying and selling options with the underlying asset exhibiting [bubble-like behavior]. And we did very well and we showed that indeed it could be implemented concretely…what we do is we watch 25,000 assets at all times on a daily basis...then we launch a stream of thousands of algos on our supercomputer, which has close to 30,000 cores (so it's one of the biggest clusters in the world)…"
Brian Pretti on how the ECB and BOJ are dropping the QE baton:
“The market...has been relying on the Bank of Japan and the ECB to grab the baton from the Fed. We know that the Bank of Japan is printing a lot of money, but...they kind of came out and said, 'You know what, we're not really ready to accelerate that printing.' And that might've been what the markets have been anticipating: an acceleration in the BOJ as the Fed came to an end. And then likewise, with our friends in Europe, we've had more talking and more promises...but we haven't had much money printing and that doesn't seem like it's going to be on the horizon anytime soon. So, maybe what's getting into the market now is a little bit of a let-down of, 'Hey, wait a minute! We knew the Fed was going to stop, but we really thought that the BOJ and the ECB would pick up the baton and crank those presses up even faster to make up for what the Fed wasn't going to do.' Well, maybe now that's not going to be the case..."
Eric Hadik on the 40-year cycle and other cycles converging from 2014-2017:
“There’s a convergence of many longer-term cycles, ranging from things as short as 7-years up to…80-years in duration. The real significance to me is that they are all coming into play, all converging, in the same timeframe: primarily between 2014 and 2017. And one of those cycles that I found so intriguing, so uncanny, was the 40-year cycle and how it has timed momentous events in America's history since its founding; and each time they are very similar in what goes on: dealing with the currency; dealing with financial panics and crashes; and really you could distill it down to a battle over what our currency is going to mean, what our economy is going to look like…”
Puru Saxena questions whether stocks are still in a bull market:
“Investors and traders are positioning themselves for another deflationary scare as they did after the end of QE1 and also QE2. No doubt we are now in an old mature bull market, if we are still in one. It's not a young bull market because if you see over the last few months, a lot of the stocks were not participating in the advance; a lot of the industry sectors which we follow had already broken down quite badly. The momentum stocks, the growth stocks, of this particular bull market had already topped out and the breadth of the market was getting narrower and narrower. Even now you can find some good stocks, which are still holding above their 52-week highs…but by and large I would say the 60-65% of the stocks traded in the NYSE are now in a bear phase…”
Our market technician this week is Craig Johnson from Piper Jaffray who believes stocks are close to a bottom and will rally strongly the last two months of the year. His interview will appear on the Newshour Podcast page on Saturday along with Jim’s Big Picture segment where discusses the fundamentals behind stocks vs. bonds and also looks at stock valuations of the 30 companies making up the Dow in comparison to the year 2000. Be sure to tune in through our site or in iTunes!
