Financial topics

[Gordo]

Fred - I don't care about what anyone thinks with regard to my personal investments. I posted when I bought. I posted when I sold. None of the quotes you made are of me saying I bought, or I sold, now are they? Also I don't trade the DOW (or other equity indexes). Recently I've been trading commodity funds almost exclusively (GDX, RSX, KOL, UYM, and recently UNG).

I haven't told you about my losses, because I haven't had any in 2009 (unless you are talking about brief unrealized losses which quickly turned to profits, something that happens frequently when you always early). I didn't buy at the exact low, or sell at the exact high. Of course I had both losses and gains in 2008 and every other year... does anyone care?

What I care about right now, from a finance perspective, is preparing for the carnage that is coming later this year, and personally maximizing my benefit from it.

I do feel sorry though for the suckers who bought the 2x leveraged inverse s&P 500 funds and lost their shirts. Don't say I didn't warn you...

[Higgenbotham]

What I care about right now, from a finance perspective, is preparing for the carnage that is coming later this year, and personally maximizing my benefit from it.

That sounds like a plan.

I haven't traded at all yet this year, but if we see a setup somewhat like the following it might get me interested: A retest of the recent high that occurred about May 8 followed by a retest of the recent low that occurred about May 15, followed by about an ~20 trading day run to a new post March high somewhere around Dow 10,000. This is all approximate. If we see something like this, I may dust some of my money off and short the S&P futures.

[John]

Dear Gordo,

> Fred - I don't care about what anyone thinks with regard to my
> personal investments. I posted when I bought. I posted when I
> sold. None of the quotes you made are of me saying I bought, or I
> sold, now are they? Also I don't trade the DOW (or other equity
> indexes). Recently I've been trading commodity funds almost
> exclusively (GDX, RSX, KOL, UYM, and recently UNG).

The problem is, Gordo, that you present yourself as having the
infallible ability to call the top and the bottom of the market -- you
always seem to buy at the bottom, and you always seem to sell at the
top.

On its face, that seems to be impossible. (It's reminiscent of
Bernie Madoff's secret algorithms to make all his investors rich.)

So my question is: How did you know a month ago that the market
hadn't reached a top?

How do you know that the market has reached a top now?

How do you know today that the market won't reach a top for another
1-3 months? What's your strategy?

Sincerely,

John

[John]

Dear Fred,

> Nearly everyone I talk with has the sense that we are at some
> critical point in our economic and national paths, not just in the
> US but in the world. One path will lead us back to relative growth
> and another set of choices leads us down a path which will put a
> very real drag on economic growth and recovery. For most of us,
> there is very little we can do (besides vote and lobby) about the
> actual choices. What we can do is adjust our personal portfolios
> to be synchronized with the direction of the economy. The question
> is "What will that direction be?"
> http://www.investorsinsight.com/blogs/j ... ratio.aspx

I like John Mauldin, and I once characterized him to a web site
reader as "on a scale of 1 to 10, a 5, where everyone else is a 1."
I've also written about him a couple of times:

** President Obama's smashing fiscal stimulus victory contrasts with Geithner's TARP disaster
** http://www.generationaldynamics.com/cgi ... 16#e090216

** Blogger watch: Mish Shedlock goes gloomy, while John Mauldin gets muddled.
** http://www.generationaldynamics.com/cgi ... 04#e080204

My issue with John Mauldin is that he's one of the few people who
understand things like P/E ratios and Mean Reversion, but he doesn't
draw the correct conclusions. And naturally, I suspect venal motives
-- if he understands what's coming, and he tells his clients about
it, then he'll lose his clients. And so he hides the truth.

> John, I would be interested in your opinion of what Generational
> Dynamics has to say about how this direction will be decided.

> I recall reading something by you just the other day that
> suggested that even the movers and shakers are basically just
> pawns in what is an almost predestination because of factors such
> as Generational Dynamics, that there is not much that can change
> the direction of where we are headed.

> It is amazing to me, as we watch California quickly sliding into
> bankruptcy, that the vast majority of people and investors don't
> seem to notice the domino efftect that has begun; that will likely
> be the next, or one of the next shoes-to-drop as first the states
> go under and then our federal government must default on its
> obligations after bailing them out.

> Months ago you where talking about how we were throwing more and
> more money at this and while we had a bit of a respite, we now
> begin in earnest, once again, as states and cities find they are
> insolvent.

I wrote about this stuff in my new paper, "International business
forecasting using System Dynamics with generational flows"
http://www.GenerationalDynamics.com/ww2 ... asting.pdf

Some things are baked into the cake. You've been doing a lot of work
with P/E ratios, so surely you must understand this -- if the S&P 500
P/E ratio index is above 60 right now, then it has to fall pretty far
to compensate. The historical average is about 14, and if it's been
above average continuously since 1995, with a 25 average, then it has
to be below average an equivalent amount (0-5 for 14 years or so).

If the long-term average has been 14 in the past, then unless you
believe that "this time it's different," then it has to average 14
over the long-term in the future, and that means that it has to
compensate for the last 14 years. (Law of Mean Reversion.)

This also has a generational explanation -- the lethal combination of
greedy, nihilistic Gen-Xers and greedy, incompetent Boomers. I won't
go into this again now.

There is only one relevant question: Are all the bailouts and
stimulus packages doing any good? Or are they making the inevitable
fiscal disaster worse?

My intuition tells me that they're making things worse, by
creating new economic distortions. But there's an argument in the
other direction -- that they're buying time, giving people and
businesses the chance to deleverage and pay off debts, so that when
the real crisis comes, it won't be as bad.

I don't know which it is, but there are some things that are certain:
There will be huge, massive waves of homelessness, bankruptcies, and
starvation, in the US and around the world. This has been in the
cards for decades, and there's nothing that any politician can do
about it.

Sincerely,

John

[aedens]

http://www.bea.gov/newsreleases/nationa ... dp408f.htm

Corporate profits in 2008

Profits from current production decreased 10.1 percent in 2008, compared with a decrease of 1.6 percent in 2007. Domestic profits decreased 16.0 percent, compared with a decrease of 7.4 percent. The rest-of-the-world component of profits increased 12.2 percent, compared with an increase of 28.9 percent.
Taxes on corporate income decreased 18.6 percent in 2008, compared with a decrease of 4.0 percent in 2007. Profits after tax with inventory valuation and capital consumption adjustments decreased 6.9 percent, compared with a decrease of 0.6 percent. Dividends increased 5.5 percent, compared with an increase of 12.3 percent; current-production undistributed profits decreased 31.1 percent, compared with a decrease of 18.9 percent.

John I forwarded your link to my Senator also. I will forward when I hear something. Indeed the hour is getting late and Washington
not helping with proper capital management.

[John]

John I forwarded your link to my Senator also. I will forward when I hear something. Indeed the hour is getting late and Washington
not helping with proper capital management.

No politician, Republican or Democrat, could ever acknowledge that he
reads my web site, unless he wants to sign his political death warrant.

Sincerely,

John

[malleni]

...

I don't know which it is, but there are some things that are certain:
There will be huge, massive waves of homelessness, bankruptcies, and
starvation, in the US and around the world.
...

1. Probably true.
BUT - with some addition regarding "around the world".

2. Its going together with this comment:

...
I can't even imagine a scenario leading to US dollar inflation.
...

I can not understand why you can not imagine it?
It is even more difficult to understand why you are still insisting on the obviously absolutely wrong statements... (like "monetary deflation"... "strong dollar"... "safe US Treasuries"...etc...)
It is also obvious that Gordo has much more sense than you for these events and find the best solution even without GD "theory".

Gordo - congratulations and I wish you success even in the future.


John, you developing a complicated model of some "theory" - but naked small historic "story" explain it in couple sentences.
Of course I am talking about small story about "17th Century private goldsmith banker".

This short story has every aspect of the US story today.
Just imagine US as "17th Century private goldsmith banker" - but "World banker".
I already try to imagine what happened with "goldsmith banker" at that time:

I could imagine that in the "Goldsmith time" when the people loose confidence in Goldsmith notes - they realized that:
1. The paper they have in their hands rapidly loosing value EVEN if paper notes (AND credit!) amount increased.
2. The "things they needed" suddenly increased in "value" measured with Goldsmith notes. AND besides "things they needed" MOSTLY and which were short on the market - increase enormously.
3. after this realization - they killed Goldsmith and probably took some gold from his treasury (if he had any)... but "investors" in his bank - loosed money.
...

It is simple story of paper money destruction.
The "17th Century private goldsmith banker" - had just a small amount of notes and influence - perhaps on the couple of villages.
The US "banker" - has huge amount of notes and influence on the whole Planet.
BUT - the RESULT will be the same:
1. paper currency destruction (US dollar in this case and currencies in strong interconnection with it - i.e. "slave currencies" as British pound);
2. Massive disorder and unrest MAINLY in the United State of America and states in strong subordination to the falling Empire). There is influence of the Empire "around the world", no doubt, BUT not every country is "subordinated" to the falling dollar Empire.
3. "dollar Empire" is rapidly collapsing due to massive fraud and massive loss of confidence in "paper" which Empire "produced & guaranteed" will cause collapse of the entire monetary system based on dollar. EVEN now - it is obvious that other forces are preparing for the "NEW World monetary system":
http://www.ft.com/cms/s/996b1af8-43ce-1 ... ck_check=1
http://ftalphaville.ft.com/blog/2009/05 ... lar-bonds/

With simple words:
The dollar Empire collapsing rapidly and with it - the present monetary system....
... and you are absolutely right:
"... This has been in the cards for decades, and there's nothing that any politician can do
about it."


PS.
ALL similarities with "17th Century private goldsmith banker" are purposely.

[Higgenbotham]

This short story has every aspect of the US story today.
Just imagine US as "17th Century private goldsmith banker" - but "World banker".

The US as a country, though, is a lot more than just a bank. It has a military, productive capacity, and the authority to tax. The "17th Century private goldsmith banker" couldn't do any of that.

But let's go back to the 17th Century and consider a system boundary. Instead of describing the system as one 17th Century goldsmith bank as you did, let's consider a system of ten 17th Century goldsmith banks. Then let's imagine that 5 of those goldsmith bankers were issuing notes above the amount of bullion in reserve and the notes issued by those 5 bankers became worthless. At the same time, the notes issued by the other 5 goldsmith bankers were not affected. By drawing a system boundary around the territory where the notes for all 10 goldsmith bankers were issued, there is less money in that system and hence deflation took place.

That's still likely to be the outcome today, as most of the money in the system has been issued by private bankers. I keep giving the example of the money markets issued by affiliates of the banks where debt is securitized by running it through SIVs and SPVs.

The private banks have issued many times more money based on just this one process than the total value of all Federal Reserve Notes in the entire world!!!

[mannfm11]

That is funny John. Politicians don't like to acknowledge cycles beyond their control. I have been reading some stuff by a guy that claims to be in prison named Martin Armstorng. Armstrong wrote a book called the Greatest Bull Market in history, but he also claims to have developed a time cycle kind of like Kondratief (sp) that appears to be very precise. He claims he is in jail because the SEC had him arrested for manipulating the market with his predictions. IN any case, he said STailn had Kondratieff killed because his theory would prove communism would fail.

I used to debate Mauldin with my windy and lengthy emails. I thought the title of his book in light of the times back in 2002 and 2003 was kind of funny, bullseye investing. Mauldin is what I call a bull/bear. He is also a guy interested in earning a lot of fees and selling books. I should have made an attempt to meet Mauldin since he lived within 30 miles of me. I was invited to have Sunday lunch with Doug Noland, who has predicted this mess way ahead of guys like Roubini who was at least 5 or 6 years behind Doug. In any case, I have some Mauldin stuff in my email that I need to read. He has started putting a lot of guest stuff in there. It is really hard to find people that have much of a clue as to what is going on, as I find over and over again that most dodge the idea that we have reached the point of maximum debt service capacity.

What brought me here tonight other than hoping to read something good on the home page is a good article I read today. I know you would like it John. Here is the link. http://www.prudentbear.com/index.php/th ... t_id=10229 It is by a guy named Martin Hutchinson. I don't like a lot of what he writes because I get the feeling he is a British elite, but from time to time he writes stuff right down the line. Here he brings up all the Nobel economics prize winners who won for designing faulty models that were based on the fallacy of random events that could be quantified. Clearly the Nobel prizes are falling into the hand of those that want to control finance and politics. Make a guy a genius, an Einstein and then his theories have legitimacy to be used to launch rocket ships, create bombs and blow up financial system. The Prudent Bear home page has a link to Doug Noland, who puts together the pertinent news from week to week and when he has time, writes commentary. Doug is an Austrian economist and had FNMA and FRE nailed back in 2000 or earlier. I believe he has testified on more than one occasion in front of Congress. He is also an inflationist, which I believe is where he and I parted when I communicating with him and cutting my writing reputation on Prudent Bear. I write about what I can comprehend, combined with what I have understood out of my education and reading I have done, so it is a viewpoint, not an opinion or an academic pursuit.

If it will make Gordo feel any better, I cut my teeth online making accurate calls on the market in the 2001 to 2003 period. I couldn't trade it worth a damn, mainly because I am compulsive and I was trading whipsaws, which generally turn you around just about the time you are about to get even. I will be 50/50 that the next downturn, once it gets going, will leave most traders without access to their accounts and broke. Wave 3 will be either a point fibonacci multiple of wave 1 or a percentage multiple. 89% is probably more likely than 10000 plus points, but both are fairly equal targets if the market gets to a normal retrace. Remember, since this rally started, we have made steady progress, even if it has whipsawed. In an a-b-c zigzag of cycle degree, we could easily make it to 10,000 or more. All prior rallies, March-May 2008, July-Aug 2008 have been rapid 2 or 3 day moves incapsuled in a 2 month period. There wasn't a real bull trade between October 2007 and March 2009, other than a day trade. Even now, the moves happen overnight, so you have to be in. I have done the work on monthly gains and in real terms, March and April have been the only 2 months since this started where there was anything more than a marginal monthly gain, despite some 10% or greater rallies. A bear like this is nothing but a bull turned upside down.

[Gordo]

Hig - what I saw yesterday was good enough for me to open new short positions (SDS, SRS, short MBIA). VIX/VXO dove to the mid 20's showing massive complacency despite the fact that we haven't been able to make new highs since May 8. The S&P 500 on May 8 reached its 2009 zenith of 930.17, yesterday's mid-morning high was 924.60, a nice failed "test" after which it closed down 4.66 at 903.47. Anytime the market delivers me a 5% profit on the first day of a new trade, I become pretty confident that I'm on the "right side"...

Good luck to all.

p.s. I STILL suspect that after a 2-4 week sell off, we will resume the course higher, reaching new index highs by late Summer, but who knows at this point, I will wait and see. I plan to go more heavily short in late Summer early Fall, and it would be nice to short from much higher levels.

What I care about right now, from a finance perspective, is preparing for the carnage that is coming later this year, and personally maximizing my benefit from it.

That sounds like a plan.

I haven't traded at all yet this year, but if we see a setup somewhat like the following it might get me interested: A retest of the recent high that occurred about May 8 followed by a retest of the recent low that occurred about May 15, followed by about an ~20 trading day run to a new post March high somewhere around Dow 10,000. This is all approximate. If we see something like this, I may dust some of my money off and short the S&P futures.