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Stephen J. Dubner, NYT journalist and co-author of the book Freakonomics, asks the following question at the Freakonomics/Times blog:

“How Would You Simplify the Financial-Reform Bill?

The rules were simple: 5 suggestions, 500 words.

The other participants are Nassim Taleb, Justin Wolfers (Professor of Business and Public Policy at the University of Pennsylvania), and Raghuram Rajan (Professor of Finance at the University of Chicago, former Chief Economist at the IMF).

My answer began as follows:

“The lessons of this crisis are manifestly obvious: Three decades of “Radical Deregulation” freed banks to engage in all manner of reckless behavior. Leaving the status quo in place guarantees another crisis in the future. Historical patterns suggest the next calamity will dwarf the collapse of 2007-09.

How to fix it? Here are the first 5 ideas out of a longer list in Bailout Nation that not only would have prevented this past crisis, but would also prevent the next one:″

The rest of my answer — and Taleb, Wolfers and Rajan’s — are here . . .

With implied inflation rates in the TIPS moving lower to levels last seen in mid ’09, Fed Pres Bullard (Mr. We’re Turning Japanese) is speaking on the economy. While he currently believes that new QE is now not necessary with “core inflation at low but manageable levels and the economy expected to continue to expand,” he doesn’t want to wait for actual deflation before embarking on another round of money printing. He believes all it will take is “increased disinflation risk” and the “purchase size should be in proportion to the size of any deterioration in the outlook.” “One key goal of the program is to keep core inflation in the US from falling close to levels observed in Japan.” Sorry to beat this horse again but he basically believes that if demand weakens further, the Fed must create inflation to raise the cost of goods and services. The law of supply and demand has a different opinion.

The Aug Philly Fed survey was a big miss at -7.7 vs expectations of +7.0. It’s the weakest reading since July ’09 and is down from 5.1 last month. Every category except Prices Paid was negative. New Orders fell almost 3 pts to -7.1, the lowest since June ’09 and Backlogs also fell 3 pts. Shipments fell 8.5 pts and Employment fell from +4 to -2.7, the weakest since Oct ’09. Inventories fell 15 pts to -11.6. Prices Paid fell 2.3 pts at 11.8 and Prices Received fell 4.1 pts at -12.5. The Avg Workweek fell to a one yr low. The Business Activity outlook over the next 6 mo’s fell to 19.6 from 25, the lowest since Mar ’09 as “optimism has waned notably in recent months” according to the Fed Res Bank of Philly. Bottom line, while very weak, it follows the 1st Aug data point seen on Monday, the NY survey, which was just shy of estimates at +7.1, thus we need to see other regional surveys and then reconcile it with the national ISM to see just how soft things have gotten.

The 56 year cycle mentioned yesterday (“Periods When to Make Money” (© 1883) was picked up by FT Alphaville; we hear it caused some “consternation” in certain circles where the marinating of ice cubes takes place.

I find these approaches quite fascinating, if for no other reason than I consider myself a student of market history. (Whether it is an actionable thesis is an entirely different question). For those of you who are also interested in such things, let’s explore this periodicity, better known as the Benner Cycle.

Samuel Benner was a prosperous farmer who was wiped out financially by the 1873 panic. When he try to discern the causes of fluctuations in markets, he came across a large degree of cyclicality.

Benner eventually published his findings in a book in 1875 — BENNERS PROPHECIES: FUTURE UPS AND DOWNS IN PRICEs – making business and commodity price forecasts for 1876 -1904. Many (but not all) of these forecasts were fairly accurate.

The Benner Cycle includes:

-an 11 year cycle in corn and pig prices with peaks alternating every 5 and 6 years.
-cotton prices which moved in a cycle with peaks every 11 years.
-a 27 year cycle in pig iron prices with lows every 11, 9, 7 years and peaks in the order 8, 9, 10 years.

It makes some degree of intuitive sense that a farmer would recognize longer term cycles. Their entire year is based on the annual sowing/growing/reaping cycle; The 11 year solar cycle would certainly impact their crop yields, revenue, etc. So looking at how the variants of crop yield and prices impacts the overall economy and markets makes lots of sense.

There are two caveats to all of these cyclical variants — Gann, Elliot Wave, Fibonnacci, Benner. First, consider there is insufficient data — we really need 500 years of market history to have a better data set to draw conclusions. Second, the unfortunate tendency to form fit after the fact (I see people doing this with Fibs especially). Mnay of the peaks and valleys are off by a year or two, but it looks close. Some of it might be explained by randomness.

Regardless, I think it is worth thinking about as a general long term framework — and a reminder that the so-called 100 year floods comes along much more frequently than the name implies . . .

Via Google Books

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For those who wish to explore this further, you should check out David McMinn’s THE BENNER CYCLE, FIBONACCI NUMBERS& THE NUMBER 56.

I am not a huge Prechter fan, but I found his book Prechter’s Perspectives very intriguing — it covers the long term political-socio-economic cycles of recession, war, recovery, expansion, bubble, etc. It is intellectually stimulating, but not exactly actionable . . .

Insight on the state of the economy and markets, with Byron Wien, Blackstone Advisory.

At the 7 minute mark, Wien takes Kernan to school.

Airtime: Thurs. Aug. 19 2010 | 8:07 AM ET

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The Congressional Budget Office is expected to release its updated budget and economic outlook for 2010, with Byron Wien, Blackstone Advisory, and Douglas Holtz-Eakin, former CBO director.

Airtime: Thurs. Aug. 19 2010 | 8:17 AM ET

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Final thoughts on the markets, with Byron Wien, Blackstone Advisory.

Airtime: Thurs. Aug. 19 2010 | 8:57 AM ET

Initial Jobless Claims printed 500k for the 1st time since mid Nov ’09, were 22k above expectations and up from 488k last week. The 4 week average rose to 483k from 475k, the highest since early Dec ’09. Continuing Claims were 22k below expected and down 13k from the prior week but Extended Benefits rose a net 310k after a 1.33mm rise in the prior week as the extension of unemployment benefits has brought people back on the rolls. Bottom line, the labor market still remains lame as we move thru another jobless recovery. With the Nov elections just 2 1/2 months away, every single economic data point becomes more of an influence and policy cries of ‘Do Something’ will only intensify. Our response to that should be ‘Do Nothing, Less is More.’ The S&P futures went out well below fair value last night so the SPX cash will open much lower than the move this morning in the futures.

Not Safe for Work — but hysterical!

Hat tip Andy H!

The stock markets of the 2 most economically influential countries in the emerging world, China and India, have modestly broken out. The Shanghai index closed higher by .8% to a 3 month high and the Indian Sensex index traded higher by 1.1%, closing at the highest since Feb ’08. Copper in response is at a 2 week high. European stocks are higher after the Bundesbank raised its ’10 GDP estimate to 3% from 1.9% after the strong Q2 report. July retail sales in the UK were above forecasts. Combining these 2 items with a higher than expected July PPI # in Germany has European bonds modestly lower and Treasuries are following. With 20 yrs of malaise, a Japanese newspaper is saying the BoJ may expand further a credit program and they are still evaluating the economic impact of a stronger yen. From Jan ’03 to Mar ’04, the BoJ spent 35T yen (about $320B) intervening and it failed miserably and the experience will influence what the BoJ may or may not do.

Yesterday, I asked if Bonds Resemble Dot Com Stocks?.  The night before, I mentioned it on Fast Money, so I got to beat a few others who wrote it up. (Note that mine is a nuanced view, and not a full bubble claim).

I could not help but be amused by who is — and is not — in this camp:

In the full blown bubble camp are Nassim Taleb, Doug Kass, Jeremy Siegel and Jack Crook, Fortune and Smart Money;  Disagreeing with this notion is Brad DeLong and Pragmatic Capitalism; Minyanville is somewhat ambiguous, as is Zero Hedge.

In the Bonds are attractive in a deflationary environment are David Rosenberg and Gary Shilling;

According to the latest Commitments of Traders data, net positions in the 10-year and the long bond do not appear to be at extreme levels.  Large Speculators are still net short both of these markets.

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Bonds have been in a 30 year bull market, ever since Volcker broke the back of inflation; The 10 year peaked in Fall 1980 over 15% yield, today they are at 2.6%.

10 year Bond, 1980-2010

via Economagic

With its “don’t be evil” motto, Google would naturally oppose big corporations secretly deciding what you can and can’t see on the Internet.