Financial topics

[John]

Dear Higgie,

> PS I can't figure out what's going on here. Stocks are going
> parabolic, the dollar is at the low for the year, gold and silver
> are racing higher, yet the 3 month t-bill rate is 0.09own
> 0.03ay. The t-bill rate indicates deflation is actually
> increasing its grip, but that's not consistent with stock and
> silver prices.

I don't really see all these indicators as being linked to one
another. In my view, these trends are all being propelled by
different factors:

• The parabolic stock market rise is based on fairly low volume,
  largely propelled by day traders.
• The dollar is at a low for the year, but there's no longer term
  trend here. The dollar is up from the lows of a couple of years
  ago, and has largely remained within the same trading range.
• The same is true of gold and silver. Gold was up well above
  $1000/oz a couple of years ago, and is currently pushing the top of
  its trading range, but not in any exceptional way. I still expect
  gold prices to plunge from its current bubble price, once people
  realize that there's a deflationary spiral, with no danger of super
  inflation.
• The low t-bill rate is predicted by Koo's theory. People are
  saving money, and banks are using that money to purchase treasuries,
  pushing yields down.

In "normal" times, these different trends may be more closely linked,
as investors move funds from stocks to bonds to commodities to
currencies and back to stocks. One web site reader has written to me
saying that stock prices and the dollar are correlated, and if that's
true then perhaps some large speculators are moving money back and
forth between stocks and currencies. But basically none of the old
rules apply today since nothing makes any sense. You might as well
invest your money in a roulette wheel bet in Las Vegas.

John

[freddyv]

This is being exploited by whom ever is manipulating the market.

I won't say that no one is manipulating the stock market but I think that such thought takes us away from the basis of what is really happening, that being a generational shift of gargantuan proportions. WE are manipulating the markets and have been doing so for decades. Everyone seems to know that GS has their plants in the federal government and that all the politicians are looking the other way because they benefit and at the lowest level the average person can't get too upset because they still have a roof over their head and cable TV and promises that the government is watching out for them.

The manipulation will only end when the system has failed. John believes it fails in a cataclysmic event in which the stock market crashes violently and the world is shocked by a single event or series of events that put the final nail in the coffin of the economic crisis. I believe this is unlikely because there really is no historical precedent. Even the Great Depression took 3 years to reach its full effect and then slowly ground away at our wealth for years afterwards. History books like to suggest that suddenly one week everything changed but careful research shows that death by a thousand blows, over a period of years, is much more accurate. If forced to equate, I would say that we are now in a period of March 1930; the bear rally is likely to continue as we close that gap at around 11,000, and then the market, having relieved the stress of moving so far so fast and having drawn many back into its grasp, will return to its primary trend.

Time will tell.

--Fred
http://www.acclaiminvesting.com/

[aedens]

Dear Higgie,

> PS I can't figure out what's going on here. Stocks are going
> parabolic, the dollar is at the low for the year, gold and silver
> are racing higher, yet the 3 month t-bill rate is 0.09own
> 0.03ay. The t-bill rate indicates deflation is actually
> increasing its grip, but that's not consistent with stock and
> silver prices.

I don't really see all these indicators as being linked to one
another. In my view, these trends are all being propelled by
different factors:

• The parabolic stock market rise is based on fairly low volume,
  largely propelled by day traders.
• The dollar is at a low for the year, but there's no longer term
  trend here. The dollar is up from the lows of a couple of years
  ago, and has largely remained within the same trading range.
• The same is true of gold and silver. Gold was up well above
  $1000/oz a couple of years ago, and is currently pushing the top of
  its trading range, but not in any exceptional way. I still expect
  gold prices to plunge from its current bubble price, once people
  realize that there's a deflationary spiral, with no danger of super
  inflation.
• The low t-bill rate is predicted by Koo's theory. People are
  saving money, and banks are using that money to purchase treasuries,
  pushing yields down.

In "normal" times, these different trends may be more closely linked,
as investors move funds from stocks to bonds to commodities to
currencies and back to stocks. One web site reader has written to me
saying that stock prices and the dollar are correlated, and if that's
true then perhaps some large speculators are moving money back and
forth between stocks and currencies. But basically none of the old
rules apply today since nothing makes any sense. You might as well
invest your money in a roulette wheel bet in Las Vegas.

John

Our Volume is up. As a Business group we do not push the string.

[John]

Dear Freddy,

> The manipulation will only end when the system has failed. John
> believes it fails in a cataclysmic event in which the stock
> market crashes violently and the world is shocked by a single
> event or series of events that put the final nail in the coffin
> of the economic crisis.

This isn't exactly true. It's not that a cataclysmic event is
required. What's required is something that's PERCEIVED as a
cataclysmic event, and causes panic.

When I was growing up in the 1950s, my teachers told me that the
stock market crash on October 28, 1929 (Black Monday) was a
cataclysmic event. As you point out, the real cataclysm occurred in
the three years that followed. But that day, October 28, 1929, was
burned into everyone's mind as the day that a disaster occurred.
Many people panicked on that day, and ended up losing all of their
savings.

So I'm looking for something similar to happen at this time.

Perhaps the perceived cataclysmic event has already occurred, and I
hadn't even realized it. I'm referring to the collapse of Lehman
Brothers, which apparently many people now believe is the CAUSE of
the financial crisis. A few minutes ago, I heard the following on
the BBC: "The Lehman collapse tipped the world into the greatest
finanial crisis in 70 years."

So is that the event that history will perceive as the cataclysm? I
don't think so. I don't believe that the Lehman collapse was
significant enough to ordinary people.

I believe that something is going to happen that will cause people to
panic. It's panic that creates the perceived cataclysm. For
example, even a relatively small fall in the stock market might be
enough to do it.

In generational theory, events themselves are often irrelevant.
What's important are not the events, but people's reactions to them.

The bombing of the World Trade Center in 1993 didn't stir any
concern, but any bombing on American soil today would have a much
larger effect.

Similarly, the "crash" of 1987 did not have much effect, but a
similar event today would be perceived as a cataclysm.

John

[wvbill]

Comments today by Mish fit right in with recent discussions here:

http://globaleconomicanalysis.blogspot. ... -12th.html

Bill

[aedens]

Comments today by Mish fit right in with recent discussions here:

http://globaleconomicanalysis.blogspot. ... -12th.html

Bill

Yes Bill it is a very perception orientated mini bull advancement. I have to be very carefull as we all do in Corporate. The best analogy I have is a train
when it advances the coupling on cars make noise and it can depend where on the train you are located. Some of us are at the caboose. This means we supply the materials in the Global Chain to market. We get the order and given the supply train as the engine of economy adds power it takes some weeks to get to market. All of here are very concerned in these national self inflicted issues and on our honor as men to each other try to care
for each other. Others are not so nice so there we are on limited information.Since data and historical interpetation's are so fragile in the wrong temperment of mind as we all know value added information is not a bull or bear issue but character reference in this political economy we see advancing to the detrimental effects of our nation from avarice. GD is a vital tool and it fits in any toolbox. When I have some more time I can add some texture to the bigger picture as many here do also.

Regards...

[Higgenbotham]

[*] The parabolic stock market rise is based on fairly low volume,
largely propelled by day traders.

True, that is what seems to be going on with regard to buying and selling activity. At the same time there are millions of individuals who own stocks via retirement funds and these prices are not inducing them to sell, as we see no pickup in downside volume as the prices increase. Apparently, these millions of people do not believe their stocks are overpriced.

[*] The dollar is at a low for the year, but there's no longer term
trend here. The dollar is up from the lows of a couple of years
ago, and has largely remained within the same trading range.

In a deflationary environment the dollar should not be priced a mere 5% above its value at the inflation peak ($4 per gallon gasoline, etc.). As stated before, though, it is my opinion that Bernanke has created a (false?) impression that dollar debasement is our future and the market believes it.

[*] The same is true of gold and silver. Gold was up well above
$1000/oz a couple of years ago, and is currently pushing the top of
its trading range, but not in any exceptional way. I still expect
gold prices to plunge from its current bubble price, once people
realize that there's a deflationary spiral, with no danger of super
inflation.

Similar view to the dollar. In a deflationary environment, silver should not be trading close to a 20 year high. Nothing like this occurred during the post 1929 crash, so far as I am aware. Out of curiosity, I will dig up some charts of silver's behavior during the 1930's and take another look. I found some yearly silver price data here:
http://www.kitco.com/scripts/hist_chart ... graphs.plx
In fact, I was surprised to learn that silver prices in 1934 and 1935 were about the same as in 1927 and 1928 with an approximate 50% dip in between.

[*] The low t-bill rate is predicted by Koo's theory. People are
saving money, and banks are using that money to purchase treasuries,
pushing yields down.

I'm not an expert on banking, so someone please correct this if wrong, but it is unlikely that banks are purchasing 3 month t-bills at 0.09% to hold against deposits. Even if they paid 0% on those deposits, the 0.09% margin could not make those deposits profitable. The banks may be purchasing longer term treasury notes at 2-3% though. The only investors I can think of who would purchase short term t-bills at 0.09% are those who believe that the value of all other assets will decrease (including bank deposits that pay higher interest as well as stocks and silver).

After thinking about this some more, it's still my guess that t-bill buyers are looking out further and don't care if they squeeze the last nickel out of these asset plays.

[richard5za]

My condolences to Higgie on taking that knock. It happens to all of us and to the best of us. Its how we learn and needs to be seen in a positive light as a result. Higgie says he won't speculate gain. Well, yes, if thats what you want. But you can speculate as long as you don't confuse it with investing, and also provide yourself with the right tools and rules.

Investing is best done where P/E ratios are below the long term average, there is a clear forward view of economic growth, low and stable levels of inflation, and buy into stock with an excellent economic value and run by honest and well formed management with long term vision. The early 50's and early 80's are good examples of the best times to invest.

The beginning of the bubble in 1995 was also a good time to buy as long as you got out when you saw the bubble form. My daughter works in the Trusts department of a mid-tier Swiss bank and they sold out of all equities in 1998. They saw the bubble form took their profits and got out.

(I was interested in Bernanke's testimony to Congress that you can't see a bubble form - well, he's either incompetent or a liar. Anyone with a knowledge of and sense of financial history can see bubbles form, and he claims to have studied the Great Depression! Have a look at John's long term trend line of his on the Dow; its quite a simple analysis, but clearly shows the bubbles that formed pre Great Depression and from 1995. )

But stock markets are irrational. Global markets have been irrational for a long time, and don't expect their short and medium behaviour to be guided by sensible application of the fundamentals. I have been especially surprised at the strength of the current bear market rally. It may carry on going up for a time but that doesn't change the underlying fundamentals.

So for speculating tools are needed to measure the strength of the sentiment and especially changes in direction of sentiment. Good technical analysis is by no means perfect but in my opinion is absolutely essential. In other words, to speculate you really do need to know what's happening in the mad house on a daily basis, because day by day the inmates may change things radically.

The point that John makes often is that after there's been a generational crash, and people have endured lots of hardship, and perhaps lots of death, sanity eventually returns. And that's the time to invest and at bargain basement prices.

Speculating is risky so there's an important need to manage down the risk. One of my rules is only to go "long"; another is don't be greedy; another is to specialise (I am into speculating gold and gold mining shares only); another is to have stop losses in place; another is to build a mathematical model to understand the quantified implications of the risks you are taking with each investment action in relation to market possibilities; etc

I suspect that the popular areguement in this thread that the environment is essentially deflaionery is probably right. And that gold will probably end up at less than $ 500 / oz is also probably right - but it may go to $ 3000 in the interim. Just depends upon the levels of greed and insanity.

Richard

[Higgenbotham]

My condolences to Higgie on taking that knock. It happens to all of us and to the best of us. Its how we learn and needs to be seen in a positive light as a result. Higgie says he won't speculate gain. Well, yes, if thats what you want. But you can speculate as long as you don't confuse it with investing, and also provide yourself with the right tools and rules.

Some people are cut out to be great investors or speculators (probably not many though). To have success in those areas, I believe the individual must either choose environments that are compatible with their personality or be quite adaptable and flexible if they choose to speculate all the time. The latter doesn't describe me as I really can't orient to bubble environments. Your mention of the level of greed and insanity being unpredictable looking ahead is a great point and trying to adapt to a level of insanity that goes beyond the current level would be incompatible with my personality (I sat out the whole bubble from late 1997 on, similar to your daughter). I expect the upcoming environment may be particularly difficult for even the best investors and speculators. The 6 years that I spent speculating full time were very good years overall with a lot of knowledge gained and lessons learned. My net worth is up 47% over that time. SInce about half of the gains were paid out in living expenses and taxes, that's not too bad. Fighting a bubble for a year could take it all back and speculating on the idea that the bubble will continue would drive me nuts (just watching it will drive John nuts)!

Speculating is risky so there's an important need to manage down the risk. One of my rules is only to go "long"; another is don't be greedy; another is to specialise (I am into speculating gold and gold mining shares only); another is to have stop losses in place; another is to build a mathematical model to understand the quantified implications of the risks you are taking with each investment action in relation to market possibilities; etc

Richard

aedens has also cautioned that he only goes long. Your advice to specialize (ah, you're from England if I'm not mistaken) is where I plan to go from here. Being a chemical engineer, I plan to spend 2 or 3 years studying the biotech field while the economy sorts itself out. If we are moving toward some kind of deflationary bottom at that point as we anticipate, then I will either form a company in that area or go to work for a company in that area that I am well acquainted with and appears to have good prospects. Also, your point about the modeling scenarios is essential. Going into the short trade, I had calculated a limit of 10% max loss at the perceived dividing line between bull and bear. The line is a judgement call, but it seems that many professionals are also in agreement that we just passed it. Naturally, my tendency (being anti-bubble) is to think that it's a fake-out but I can't risk money on that belief being correct. As you said, it depends on the level of insanity. Thanks for the comments.

[Higgenbotham]

I had mentioned the possibility that the treasury bill market is looking further out than the stock market. This recent article over on Yelnick's blog gives a similar view. His conclusion is that the bond market is correct, we are still in deflation, and a stock market crash is coming.

The problem with competing views is that the bond market looks out to the medium and long-term horizon while stocks today are mostly concerned with the day-to-day fluctuations.

http://yelnick.typepad.com/yelnick/2009 ... setup.html