What's the Difference?

Small investors need to recognize the differences between today's economics and the past. Identifying false indicators is key to successful investing and preservation of net worth.

The economy undergoes innovation to maintain control over the determinants (the indicators) of value and the distribution of the value. The innovation is largely driven by gamma risk--public sector intervention that affects value and its distribution (see the article, "Assessing the Value," and "Indications of Recovery" at griffithlighton.blogspot.com).

Gamma risk innovation occurs mainly to avoid and recapture payment of the retributive value (the distribution of capital that relieves liquidity crisis and reverses a deflationary trend). For example, the dip in the price of crude oil, oversold to nearly $30/bl signaled a recovery. The recent spike in the price, overbought over $50/bl reverses the trend.

The causal relationship between the price of the energy benchmark and the directional trend of the economy is quite clear. In spite of political measures to infuse liquidity to cause a sustained distribution that will stop and reverse the deflationary trend, the price of crude is being used to effect (command) the trend posteriori. The gamma risk is being effectively managed by the private sector.

As the retributive value is politically infused, energy prices increase, consolidating the infusion and reversing the trend. The portion of the capital infusion that does trickle down inches the economy toward recovery with a highly measured pace determined by the private sector.

The political element of the political economy can claim being in control to satisfy the demand for public action while, at the same time, the private sector commands the pace of recovery. The gamma risk has then been successfully managed and the distribution of value (the retributive value) legitimately conserved both publicly and privately. It is an ingenius application of the Hamiltonian model of power and political economy that maintains a strict class distinction as the result of the naturally endowed freedom of each individual to equally pursue life, liberty, and happiness without intervention of the sovereign (government).

Equal pursuit does not ensure equal results, thus the need to manage the retributive value and the gamma risk to the reward.

Self-determination of "The People" (the legal sovereign) obtains by a long and complex process of illusion in which both wealth and power are consolidated and conserved with the force and legitimacy of public authority.

The Hamiltonian model survives by innovative means. The main threat to its success is a progressive tax code that will not allow the capital infused to pluralize the economy to be consolidated and the elitist model conserved. Changing the model is not mere normative sentiment, but a descriptive analysis that accouchers the practical understanding of trend indicators and predictive utility.

Identifying what the difference is, the innovation, that gives meaning to the old adage, "past performance is no indication of future performance," and why economic data and trends are too often reported as "unexpected" by analysts, allows the small investor to manage the risk with the certainty of current means to ends that must predictably conform to old legitimacies (normative legal parameters).

Buying an oil futures contract is certainly not illegal, but if capital is allowed to consolidate and massively move into futures contracts, the effect determines the direction of the economy. The cause-effect relationship lacks the normative pluralistic legitimacy of free market economics. Technically correcting for it (the gamma risk) is where the innovation occurs and the predictive utility of the difference obtains.

Notice that the recent rise in the price of crude correlates with the "unexpected" trend back to deflation. It is a causal relationship that will keep the economy in a stagnant state (see the previous article, "Crude Indicator" at griffithlighton.blogspot.com).

Until there is a more progressive tax code in place, rising energy prices will falsely indicate a definitive SAR recovery point as long as it is a speculative means of directing it by reversing the trend.
A more progressive code will make pluralism more profitable. Energy prices will then rise on the health and wealth at the fundament (on demand and not command). The recovery phase will otherwise be weak and stagflationary with a strong deflationary tendency that will appear unexpectedly only by those that do not know the difference.

The precipitous drop in the price of crude late last year signaled the beginning of the recovery phase of the current business cycle. Recovery will be expressed with a positive, long and linear slope when the noise (the deflationary tendency: the short-term effect of the recovery indicator) is regressed from the oscillation.

At this point, falling energy prices is a means of controlling the depth and breadth of the deflationary trend and the amount of retributive value accrued, manageably spreading the gamma risk on that value over time. Each peak above or below $50/bl is a short term accumulation and distribution within a stagflationary macro model.

The cycle of boom and bust is innovated into more frequent, short-term events favorable for arbitrage and leverage finance that cultivates a take-the-money-and-run mentality. A more progressive tax code is a sure cure with a level of certainty that can be measured by the level of resistance to it if not the carefully deliberate ignorance of it.

Crude Indicator

With the current deflationary trend, oil is overbought above $50/bl.

Since the energy sector is a primary determinant of the current macro trend, the speculative volatility indicates that future trends will be strongly determined by this sector while pop analysts are focusing on the financial sector to indicate trends.

While the popular analysis is to focus on the probability of recovery, small investors need to keep in mind that this deflationary phase of the business cycle is a fully intended economic event that consolidates wealth and capital. It will be fully applied. Recovery will not occur until the capital is so consolidated that economic growth cannot occur without a distribution from the private sector. Public sector infusions tend to prolong the deflationary cycle with more capital to be consolidated, which will abate when the private sector supplies the liquidity with a return decided by the private sector alone.

Energy prices will indicate the intent to capitalize the recovery phase of the business cycle (a buy indicator). Financials will only serve to indicate a confirmation of the effect. Small investors will make more money and minimize the risk monitoring the causal factors rather than the effect indicators. That's why pop analytics tends to focus on the effects as leading indicators.

Rising energy prices dampens public sector infusions of capital to effect the recovery phase. Thus, the recent run up in crude prices. It allows the private sector ultimate command and control of cyclical timing. For the trageur, timing is everything, and on the macro scale, our economy is being shorted (classically arbitraged), setting it up to go long (see the article, "Shorting the Economy" at griffithlighton.blogspot.com).

Volatility of energy prices is a means of controlling the macro cycle. It also indicates the intent to keep the economy in a highly speculative, rather than a pro-growth, mode. Financials will profit and distribute the proceeds to shareholders. This "effect" will keep the economy in a stagflationary trend that analysts are currently identifying as indicating a protracted recovery phase. The long term effect will look like a long stagflationary period (high profit with low growth) on the long-term macro chart.

The buy-and-hold investor needs to realize that stagflationary economics will once again cycle to a deflation (consolidation) of accumulated value. The investor must be able to detect the macro indicators to sell and avoid once again being victim of a punctuated devaluation of net worth.

Chief among the macro indicators is energy prices..."crude" indications of classic economic modeling with highly predictable (low risk) results for those that can read the signs.