No Easy Cure For Market Or Economy

http://www.fxstreet.com/fundamental/analysis-reports/market-comment/2008-01-25.html

Similarly, the Fed’s sudden reduction of the funds rate by 75 basis points only a week before a scheduled meeting indicates that they, too, are behind the curve. Even in normal times Fed rate cuts have invariably been late since it takes anywhere from 6-to-18 months to boost the real economy. In the post-war period the U.S. has endured ten recessions despite Fed efforts to avert them. Now with financial instruments far more complex than in the past, the Fed has even less control over the economy. As recently stated by former Fed Chairman Paul Volcker, “Too many bubbles have been going on for too long. The Fed is not really in control of the situation.”

In our view the market has entered a major bear trend that has a long way to go. There is no way to discount the impact of future writeoffs, the resolution of the credit crisis or the length and depth of the recession. Furthermore, earnings estimates have only started to come down, and there are a lot more downward revisions in store. In the last two weeks alone Standard & Poor’s’ estimate of S&P 500 reported earnings for 2007 has dropped 3.8%, due entirely to a downward revision of the 4th quarter by 19%

** As we slide into the bear market don’t be fooled into thinking that a new bull market is starting with every rally.

Japan up 500 and wallstreet will probably go parabolic again and again, but as this illusion at the wallstreet casino & circus disconnects from economic reality this will be a relative matter of entropy:

Re: Time’s Arrow

When professors first introduce entropy and the 2nd Law of Thermodynamics, we hear them refer to a term called Time’s Arrow. In the second law dS = dqrev/T, where S = entropy, q = heat, and T = temperature. Time’s Arrow attempts to talk informally about the asymmetry (or anisotropy) of the universe.

For example, if a bottle of perfume were spilt, the molecules would generally diffuse throughout the entire room. However, we can never take a room with diffuse perfume molecules and expect that they would spontaneously congregate into the bottle of perfume. This is an example of a reaction that is asymmetric with respect to time.

One of the most important things to remember about the change in entropy for an equation. If DS is positive for any process, then that process will spontaneously proceed towards the common sense direction1. In other words, if DS is positive, then a kettle will cool down.

Maybe this is another example to ponder: A simple example is the distribution of a pie among three people. The most equitable distribution would assign one third to each person. However the assignment of, say, a half section to each of two individuals and none to the third is also Pareto optimal despite not being equitable, because none of the recipients is left worse off than before, and there are many other such distributions. An example of a Pareto inefficient distribution of the pie would be allocation of a quarter of the pie to each of the three, with the remainder discarded. The origin of the pie is conceived as immaterial in these examples. In such cases, in which a “windfall” that none of the potential distributees actually produced is to be allocated (e.g., land, inherited wealth, a portion of the broadcast spectrum, or some other resource), the criterion of Pareto efficiency does not determine a unique optimal allocation.

http://en.wikipedia.org/wiki/Pareto_efficient