I am a believer in Apple’s products (and I also own a few shares), but le Stock Market doesn’t like it when a string of “beat every estimate” quarters is suddenly interrupted by something they quantify as a “miss”.

It’s also worth noting that AAPL is not just the hot name du jour. It is the 2nd highest weighted component of the S&P 500 Index at 2.4% of the index’s market-cap based weighting.

If traders needed any reason to sell off from the top of the current trading range, this certainly qualifies…

The largest risk to AAPL in my opinion is the greater economy and broad stock market risk preference. If we are entering another recession, then fewer people will have the appetite for an upgraded iPhone, or high monthly phone bills for a smart phone data plan.

On the flip side, AAPL is hardly in trouble. They have over $80 billion in cash now, and are expecting to sell more iPhones and iPads next quarter than I thought were possible. Despite the large daily percentage, it’s worth noting that this is probably an overblown after-hours reaction, and a 7% decline only wipes out the price gains from the last 6 or 7 trading days.

The key insight is that Gibson’s Paradox never went away. It still exists, just in a different form. I got this idea from a 1988 paper by Larry Summers and Robert Barsky, “Gibson’s Paradox and the Gold Standard.”

Where I differ from Summers and Barsky is that I focused on short-term interest rates while they focused on long-term rates. Well, with Operation Twist we got a perfect test of who’s right.

The Fed’s new plan is to sell short-term Treasury bills and buy long-term Treasury bonds. This means that long-rates will be pushed down and short-rates will be pushed up. If gold rises, then Barsky and Summers are right; if gold falls, then I’m right.

At this point Elfenbein is only talking about correlations. But as he continues to discusses his model, he seems to take a causal stance:

I said in my original post that the price of gold is basically a political decision. The Fed can change the game anytime they want to. I can’t say whether this will lead to a long-term decline in gold. That will depend on inflation and interest rates. But for now, the gold market is clearly observing the short end of the yield curve.

I don’t want to presume too much about Elfenbein’s belief about any potential causation. But it’s still an interesting question: is there any evidence of causation? If so, in which direction does it run?

Looking at the chart in Elfenbein’s post, I can see a few places were gold clearly seems to lead the model. Visual inspection may be good for forming an initial hypothesis, but I wanted something less prone to human error. There are several statistical tools that test for causality in time series. A popular one (making it readily available in software packages) is the Granger causality test.

Here are the results of running Elfenbein’s data* through the test:

Granger causality test

Model 1: Model ~ Lags(Model, 1:5) + Lags(Gold, 1:5)
Model 2: Model ~ Lags(Model, 1:5)
  Res.Df Df      F   Pr(>F)
1    221
2    226 -5 3.4034 0.005543 **

Model 1: Gold ~ Lags(Gold, 1:5) + Lags(Model, 1:5)
Model 2: Gold ~ Lags(Gold, 1:5)
  Res.Df Df      F Pr(>F)
1    221
2    226 -5 1.0924 0.3654

---
Signif. codes:  0 ‘***’ 0.001 ‘**’ 0.01 ‘*’ 0.05 ‘.’ 0.1 ‘ ’ 1

From this, I can conclude that gold Granger-causes the model but not the other way around. Gold returns provide statistically significant information about future values of the model, and thus short-term real interest rates’ movement around 2%. I used a lag of 5 months here (where the relationship was strongest), but it holds for many other lags.

We would not expect this result if “the gold market is clearly observing the short end of the yield curve.” It’s important to note that “Granger causality is not sufficient to imply true causality. If both X and Y are driven by a common third process with different lags, one might still accept the alternative hypothesis of Granger causality. Yet, manipulation of one of the variables would not change the other.”

So does “The Fed can change the game anytime they want to”? Maybe. But this test casts doubt on the idea that they do so by changing interest rates to affect the price of gold or that we can look at something like Operation Twist and expect that a fall in gold prices is the likely result.

Interestingly, Jehu Eaves, a Marxian blogger responding to my results on Twitter, thinks these results fit with Marx’s theories, placing The Fed in the laggard position:

This would be logical. Marx’s observations was that as prices denominated in gold increase so do interest rates. This would mean, fundamentally, gold lease rates are driven by the inverse of gold dollar price. Dollar interest rates then react to gold lease rates as the absolutely riskless form of saving over treasuries. Essentially, gold prices is driving Fed policy, not the other way around. It also means the real economy is reflected in the price of gold: as gold price increases, the economy contracts.

* I used normalized monthly returns of gold and the model.

“Those who would point to low servicing costs should remember that market interest rates can change like the weather. Debt levels, by contrast, can’t be brought down quickly. Even though politicians everywhere like to argue that their country will expand its way out of debt, our historical research suggests that growth alone is rarely enough to achieve that with the debt levels we are experiencing today.”

— From “Debt Endangers Growth” by Reinhart and Rogoff

Also…

“Perhaps the most abhorrent bit of chicanery has been the threat that if a deal is not reached to increase the debt by August 2nd, social security checks may not go out. In reality, the Chief Actuary of Social Security confirmed last week that current Social Security tax receipts are more than enough to cover current outlays. The only reason those checks would not go out would be if the administration decided to spend those designated funds elsewhere. It is very telling that the administration would […] frighten seniors dependent on social security checks…”

–Ron Paul

In the article, he highlights this chart as The Menu of anticipated returns based on his models for different asset classes.

Quoting Hussman,

Note that all of the figures in the chart below are prospective returns based on data that was available at the time (though it should be clear from the chart above that actual subsequent market returns have closely tracked the projections from our standard methodology, which is described in detail in numerous previous market comments). Again, for securities with maturities up to 10-years, prevailing yields-to-maturity are sufficient. For the S&P 500 and 30-year Treasury, the chart uses prospective returns based on existing valuations. So the figures for the S&P 500 below, for example, map to the expected returns from the model presented above.

Note that the blue line near the bottom of the expected returns is the current market environment.

Silver has dropped more than 30% only three times previously in the current bull market (since 2001).

I don’t think the bull market is over, but I also don’t think the correction is over. The previous times that silver dropped more than 30%, it took much longer than 5 days for the correction low to be in place.

From the NY Times.

David Kotok put together an easily readable explanation of the problem. The short version — when a bank doesn’t maintain the chain of title on a mortgage, that legal document is no longer valid. The consequence is that the borrower is no longer required to make payments on the mortgage.

Barry Ritholtz (who is a lawyer) introduced the above linked article with some caution. A single legal point (the mortgage not is no longer valid) will not necessarily result in a windfall for the home buyer.

The Kotok message also made its way into John Mauldin’s weekly email, where he adds his take on it too.

From Zero Hedge.

(click for bigger version)

More from WaPo.