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11/10/2005
Victor Niederhoffer: Briefly Speaking

Small Change. By some measures, the last four days in the stock market are among the least volatile in history. Four days in a row without a one-point change occurred just once in the last eight years. The market cannot long function with such stasis, because the public would not be induced to lose so much more than they have any right to lose, as Bacon would say. Regrettably, the predictive properties of similar runs of nothingness are not overly interesting.

Population Bomb. Demography papers are coming into style, and the mojo behind it all is that this is why we're heading for Dow 500 real soon. Almost every agrarian is represented on the dismal bandwagon, with the two Chronic professor Ss from Yale and Wharton leading the race to predict the hoped-for debacle. The story is that the proportion of middle-age people in the population is going to decline. And this is, of course, bearish because in some models the middle-aged buy stocks while seniors and juniors consume more they earn.

Comparisons to the Japanese slump and the comparable demographics in Japan and Europe are legion. Of course, the only way to pay for such a shortfall in benefits and entitlements is to raise taxes. But this of course lowers the incentive to have kids because the after-tax cost of having them is so much greater. And that creates the vicious circle that the Chronics love to point to, since a lower birth rate will just lead to the further population decline at the heart of their bearish scenario.

Looking at supply and demand as static flows -- without taking into account prices, incentives or prospective rate of return on holding the existing stock of assets -- is behind most of the grievous errors that flow-of-funds crypto-accountants make when predicting such things as the decline of prosperity in one field or another.  Recall the accountant Henry Kaufmann with his perpetually bearish fixed-income forecasts.

Health Tests. In medicine, the CEA count is a blood test that could save millions of lives annually if performed on a regular basis. Since elevated levels of CEA are only 75% predictive of disease, insurers won't pay for these tests. Individuals won't assume the cost either, because they are induced by our system to lethargy and the belief that others are responsible for their health. Regrettably, this cost-benefit analysis fails to account for the money saved by catching a disease in the early stage.

The foregoing is a preamble to a market study. Are there any tests like the CEA for the market that would tell whether it's in a sick or healthy state? Looking at the plethora of indicators out there -- new highs vs. new lows, advance-decline lines, moving averages, Fibonacci charts, hursts, parabolics, money flows, oscillators, envelopes and stochastics -- I want to turn myself in at the nearest police station like Willie Sutton did when the Dodgers lost, just to get some peace. Too many of these measures are highly correlated with the market's past movements and don't take account of the moves of other markets.

I propose the following as indicators of market health: the extent of prices slightly below the round vs. those slightly above; the number of other stock markets that are outperforming or underperforming; or some of the other things that the Minister of Non-Predictive Studies and his deputies here like to look at.

Sayonara to a Bearish Scenario. It was just a month or two ago that every analyst and media were lionizing the Sage for his bearish dollar scenario based on the twin deficits, and how if you are borrowing constantly then eventually the idiots who hold your unwanted currency through no volition of their own, will have a revulsion that will cause asset prices to fall to zero or below. But now that the dollar is at a two-year high, e.g., 1 euro = $1.1790, the strongest dollar since mid-2003, the Sage is not quite as so lionized. Perhaps his surrogate son will understand now that it is better to study up on things taught in every good introductory economics course and text, and understand that the current account deficits and long-term account balances are jointly determined by the incentives to hold balances and investments in the respective countries, their prospective growth rates and interest rates, their comparative advantages in the provision of goods and services. And perhaps he will not be so willing next year in Davos to play "own man" in the game of "Your own man says it's bearish" to the immense cost of his stakeholders and reputation.

The two major reasons for stock market bearishness in the last few months have been the coming swoon of the dollar and the terrible impact of high oil prices in the $65 a barrel-and-up range. Now that oil is in the 50s and the dollar in the teens, the Chronics will have to turn their attention to something else -- like demography.  The new meme is doubtless going to be the slowing growth of earnings forecasted for next year as compared to such ever-growing assets as the tree and the vine.

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