Financial topics

[freddyv]

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...

Hig - what I saw yesterday was good enough for me to open new short positions (SDS, SRS, short MBIA)

For the record, anyone who bought SRS this morning got hit as it gapped much higher at the open and is actually down so far. That's the problem with this type of "follow the market" tarding where you're more concerned with how you look than with what is real. One rarely picks the exact top or bottom. You need to have the courage of your convictions and build positions even when others are cutting and running. Unlike most I have become more convinced of these short positions over the past weeks, not less.

Here are some prior comments I have made on one of my favorite trading vehicles, SDS:

"I wouldn't suggest owning it on a buy-and-hold basis..."

"I have been using SDS, a 2x inverse of the S&P 500 since late 2007 and its performance has been a blessing for my portfolio. You really do not want to hold it long-term..."

It's pretty simple: build positions when it's down and don't be a greedy pig when it's up. Don't hold too long. Live to trade another day. Don't let your ego be your guide.

--Fred

[freddyv]

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.

It's so nice to hear you make a comment with a bit of humility, Gordo.

But I disagree with this position, largely because I have seen a clear pattern of lows every 4 months like clockwork and I don't expect them to end until the decline finally bottoms out sometime next year. This rapid climb is just the markets' way of faking us out, IMO.

Another reason is that almost everyone now suggests that the market will go up into July, (after a correction here, at some point) even the people I respect and pay to listen to. There are times when I simply ignore everyone and listen to myself and so far in this bull market that has paid off. The times I have turned and ran with the crowd resulted in trades I regret. I believe the crowd is saying almost exactly what they were saying back in December- that a rally was due before the next decline.

I do agree that we are headed for a real fall this fall but I believe that we are going to drop into July just like last year and then the fear will begin to build as people recall last year and then see the "real" phase on this despression begin to bear down on them. It could get ugly and I hold to my prior predictions of Dow 5,000 sometime this year with a low of 3,000. I am actually becoming convinced that we might see 1,500 sometime in the next decade but I truly hope that we can quit making the types of mistakes (as a nation) that would bring that to fruition.

As for the 4 month pattern, it seems to be visible on stock charts in two instances: 1929-1932 and now. Most people don't really see it but it's clear as day to me. It has not failed me yet since I noticed it but I realize the such patterns may "hide themselves" if too many people pick up on them, only to return when those same people lose faith. The lows are: March 2008; July 2008; Nov 2008, March 2009 and are very clear. The fact that everyone and his brother seems to think we will actually rally into July suggests to me that the pattern continues.

BTW, the pattern was not as strong in 1929-1932 and I believe that is because there is more downard pressure now. We have MORE long term pressures to the downside and therefore the market does not need to "hide" as much as it goes to where it needs to go. Also, volume is much greater with a greater diversity of participants, which I believe tends to keep anyone, even the government, from corrupting the market and altering these natural patterns.

Another thing: LEI's and such have already shown a lot of strength, relatively, and I think that this is over and priced in to the market. Oil has had its rebound and if that stagnates or fades the market will have no support going forward as most everything else is overpriced. Examples: Do YOU think a low growth, poorly run company like Wal-mart deserves a 14 P/E in times like these? Even a perfectly positioned company like Google has slow growth and a P/E of 30. Both could easily be cut in half and that goes for most of the better stocks I see. As for the worse stock out there, many will not be around in a few years.

--Fred

[Higgenbotham]

Hig - what I saw yesterday was good enough for me to open new short positions (SDS, SRS, short MBIA).

The action of the past 2 days does make it look likely that a top is in. I won't trade here unless the market negates this action by turning around at around S&P 880 and moving higher.

But I disagree with this position, largely because I have seen a clear pattern of lows every 4 months like clockwork and I don't expect them to end until the decline finally bottoms out sometime next year.

I'm following an approximate 42 trading day high-high-high cycle which would top in July if it continues. Therefore, one of these cycles is going to invert. Which one I don't know. My long term cycles have a top between now and late July. That could be the high for decades or forever. The way I will play this is to put on shorts only if the market can top in this time window at about the 50% retracement level of the entire drop from October 2007 to March 2009, or Dow 10,000 or so. In my view, playing it any other way is too risky, although my feeling is the high has passed.
___________________________________________________________________

I'm picky about what I trade and have gotten more picky over time. Having known a few people who've worked in the back offices of futures brokerages, the long term retail winners are few and far between. My feeling is that this bear market is going to wipe out the long term profits of nearly every buy and hold investor of the past few decades and therefore has a long long way to go. It's just the nature of markets--very few win. John calls it mean reversion--same idea. In the course of reverting to the mean, the market will do a lot of convoluted things to make sure it wipes out darn near every bear too. John calls that The Principle of Maximum Ruin--same idea.

Another thing I've learned over time is that right around the next corner there may be someone who is smarter but, if not, there may be someone who is luckier. That's why there is a saying among traders, "Would you rather be smart or lucky." It's not a question.

[malleni]

...
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.

Higgenbotham,
Again, I am surprised that in general, I agree with you - BUT your conclusions are different even if based on same premises as my...

I like always to look at "extremes".
On this way you can try to imagine what could happen (or not btw...)
That is the reason to look "just at one banker".
Actually I would like to see the already "viewed in the history"... Namely, I am talking about fiat money destruction and this "phenomena" is much older than "17th Century private goldsmith banker".... (In China the same "phenomena" happened at least 5 century before!)
So, the only reason I would like to understand "phenomena" of "17th Century private goldsmith banker" is because it is near in time and place (even if on the end - with same results as everywhere!).

As said - I think - you are correct (partly):
"...US has...a military, productive capacity, and the authority to tax"...
1- Lets start from "productive capacity"...
It is the shortest.
US "productive capacity" is depleted today and presented NO force which can defend US notes i.e. USD.
The GS banker had probably too a "productive capacity" - since we can imagine that he WAS a goldsmith before he started a bank.
So his "productive capacity" perhaps remained or perhaps was depleted during the time too - BUT obviously that "productive capacity" is not relevant for money destruction.

2- the GS banker - had no military in this meaning - BUT I think that it would not be difficult to imagine - that he had some kind of "security guards" for his vaults.
Those guys could not only protect bankers vaults - but also forcefully drive in a possible "not payed in time" debt from villager.
If you compare to US - that is exactly the same situation.
US military is ONLY force today (unfortunately) which defending USD based monetary system.
Same as in situation of "GS banker" - when money destruction reached a point of no return - I can imagine that exactly his "security guards" - turn AGAINST him...
Simply - "the security guys" would like to be payed!... Of course in REAL money!... At this moment "the real money" was gold - NOT GS bankers notes!
I can imagine that those guys beat the banker - first, and probably took all remind gold in the vaults (if there WAS any).

That is the point of concern.
About 70% of US citizens are strong dependent of the US military today! (I pick up this in some article before.)
If US state try to get "the security guys" (US military!) to act i.e. "to punish a defiant" nation (similar as punishment of the defiant Sadaam Husein) - be sure that "the security guys" would like to be payed in REAL money too... NOT in the USD notes in which nobody has a "confidence" (and even the military).
That is potentially - very dangerous situation.

3- "the authority to tax"
It is also correct, but situation is not much different as it looks at first.
This "the authority to tax" - enabled the "banker" to accumulate "US gold" i.e. US treasuries (US debt).
Since this ability constantly reducing - the "feeling" that US "bankers" vaults are empty - is just stronger and stronger!
You can easily imagine what happened at the "point of no return".

Higgenbotham,
I try, in simple comparison, to understand the movement today.
I agreed that history repeated itself and GD theory is (I am sure) is correct. Only this repetitions are NOT the same! They are just similar.
Unfortunately the outcome is similar too.

Sorry for long discussion.
That is the first part of it.
I will try to answer even the other part of your discussion too with little more facts.

[malleni]

...
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!!!

"Deflation took place"
I suppose that you mean monetary deflation.

And it could be - correct... in your model.
Of course the under assumption that notes of these 10 bankers were - changeable...
That means automatically that - you had a system.
In this system - it is imaginable that notes from remaining 5 bankers become more "worthy" since the other 5 are "worthless".
We are again at "confidence" that remaining 5 bankers did NOT print too much.

AND again - it is obvious that the notes of 5 bankers who "print too much" - become worthless, NOT of the other who "print too less".

If you compare with today situation - even with your more (unnecessary) complicated model - the outcome is simple:
- the notes of banker which print massively (i.e. USD notes) - will be worthless!

[malleni]

Generally in this discussions - "inflation vs. deflation" - I think that very often appear a huge mistake:
Namely - an assumption that JUST central banks (FED as the strongest base of the USD monetary system) - is ONLY reason for fiat money destruction.

It is not.
The main cause for fiat money destruction is - lack of confidence in this system.
That was always (through the centuries!) being the main reason.

If we talking now with some "facts" and events from the last couple days...

We were already discussed the counterfeiting regarding US treasuries, US stocks, and even "paper gold" options.
Obviously that "free" market under the supervision of the USD based "internationally institutions" - is strong and hard - manipulated!
(I am sure that "17th century GS banker" tried to do similar)

Lets measure the famous "confidence" now - in the USD based monetary system.
As I mentioned earlier - the big game is between China and US... but not only them...
China is just the simplest exemplar...
China, namely, accumulate a huge amount of the USD notes (US debt) and every Anglo-Saxson journalist will say - "China is currency manipulator".
They never ever would think little bit different.
Namely the USA is the biggest currency manipulator - and under the present "international monetary system" backed with "international community" and "international organizations" as IMF and World Bank - it exported rapid inflation (money creation) to the other nation of the World... Of course - with impunity.

China refused to play this game. Simple. They pegged Yuan to USD and stop import of US inflation!
Yuan become NOT stronger to dollar with time, and Chinas people remained pressured and continue to work - "cheep" in USD measured.
Even so - the China had a huge inflation at home with steady attempt of China central bank to - PRESS it!
In meat time:
- China accumulated enormous amount of USD!
- Enormous industrial capacity!
- Increasingly qualified labor...

Now - time is changed... and China feeling it very vulnerable with so much USD denominated assets... (simply because it is more that obviously that US "banker" is going bankrupt... and with it - even his USD notes!)
It is obvious that China now "unchained" inflation and try to get people - to spend.
(With some success - as you can find on the earlier link here)
It is obvious that only remind force which keeping USD "flying" is China "confidence".
It is obvious also that China is very concern for its assets and that it in situation between:
1. to "save" the present USD based monetary system (Almost every Anglo-Saxon journalist believe in this story... probably they believed in story about "Little Red Riding Hood" too...)
2. to save the own regime and avoid possible riots based on the economy and pressure under "dollar peg" and dump dollar in emergency situation.

I have difficult to believe in story of "Little Red Riding Hood" (and I am sure Chines authorities too) - so for me it looks much more probable that China choose the option2.

In the last couple days you could find flowed news between others:
- Brazil and China eye plan to axe dollar...
http://www.ft.com/cms/s/996b1af8-43ce-1 ... ck_check=1
- Gold Price Rises On China Reserves Increase
http://online.wsj.com/article/BT-CO-200 ... 06416.html
even this:
http://www.glennbeck.com/content/articl ... 5279/?ck=1
http://www.gata.org/node/7428

You can even read very good article on Bloomberg from yesterday:
-Dollar Is Dirt, Treasuries Are Toast, AAA Is Gone
http://www.bloomberg.com/apps/news?pid= ... st_gilbert
even this:
-Alan Greenspan's fears ring true as Florida’s BankUnited collapses:
http://www.telegraph.co.uk/finance/fina ... apses.html
USD "slave currency" and authority which is highly involved in counterfeit in present USD monetary system:
-Standard & Poor's cuts U.K. outlook to negative from stable
http://www.marketwatch.com/story/sp-cut ... rom-stable
And this (obviously not only China is concerned!):
-Russia Dumps the U.S. Dollar for Euro as Reserve Currency
http://www.marketoracle.co.uk/Article10755.html
-Samurai-ed: Japan ‘would avoid dollar bonds’
http://ftalphaville.ft.com/blog/2009/05 ... lar-bonds/

And if you looking this:
-Tracking Stimulus Spending May Not Be as Easy as Promised
http://www.washingtonpost.com/wp-dyn/co ... 03535.html

... That is very hard for me to believe that ANY "confidence" in USD remained.
With this
- the currency destruction is already started.
- it is inevitable and NO force (or attempt to start "black swan") could stopped it. (perhaps make it slower - yes, but the end is - known...)

Again, sorry for long discussion, but I feel it necessary because of the other view on the situation.
What I can read on these pages (and on John site) is plain denial of the facts - and some "wander" about "monetary deflation" and "strong dollar", when it is obvious that has nothing to do neither with history, nor with reality.

[freddyv]

Thanks for that post on Birinyi Associates, John. The corruption or incompetence shown by The Wall Street Journal in publishing their fanatasy P/E ratios is startling. I assume that Bloomberg is also getting their data from Birinyi Associates and that means they're reaching a lot of people.

Many will just say, "But that's just one source..." but most investors don't do much, if any research. I post the link to the S&P spreadsheet all over Seeking Alpha and yet the same people keep quoting the bad PE data put out by Bloomberg, The Wall Steert Journal and CNBC, as well as the majority of pundits. I believe that most people don't take the time to learn how to read such data or dismiss it if they do because they can't think critically enough to recognize the difference between real data and someone lying to you because he has an ulterior motive.

To say the system is corrupt does not do it justice. It is corruption built on incompetence. These people (including most investors) lie so much, to each other and themselves, that they really don't have a clue what the truth is, IMO.

--Fred

[Higgenbotham]

1- Lets start from "productive capacity"...
It is the shortest.
US "productive capacity" is depleted today and presented NO force which can defend US notes i.e. USD.
The GS banker had probably too a "productive capacity" - since we can imagine that he WAS agoldsmith before he started a bank.
So his "productive capacity" perhaps remained or perhaps was depleted during the time too - BUT obviously that "productive capacity" is not relevant for money destruction.

Some have talked about the difference between what the US produces and what the US consumes as being the primary reason that the dollar will fall in value (Warren Buffett for example). Maybe as an average over the past 5 years, the US consumes about 5% more than it produces. That's just a guess from what I've read; I don't have the figures in front of me. At a 5% differential per year, if it were to continue, US dollar notes would lose about 5% of their value each year due to this differential. Although the trade deficit is not a positive force, US dollar notes are unlikely to become worthless in a short time because there is enough productive capacity within the US economy to underpin the dollar. If the 17th Century goldsmith banker was the government for the territory that his notes covered, then in my mind there would be a similarity. But the productive capacity of the 17th Century goldsmith banker only represented a small fraction of the productive capacity for that territory and it was only the gold that he had in storage that gave the notes any value.

2- the GS banker - had no military in this meaning - BUT I think that it would not be difficult to imagine - that he had some kind of "security guards" for his vaults.
Those guys could not only protect bankers vaults - but also forcefully drive in a possible "not payed in time" debt from villager.
If you compare to US - that is exactly the same situation.
US military is ONLY force today (unfortunately) which defending USD based monetary system.
Same as in situation of "GS banker" - when money destruction reached a point of no return - I can imagine that exactly his "security guards" - turn AGAINST him...
Simply - "the security guys" would like to be payed!... Of course in REAL money!... At this moment "the real money" was gold - NOT GS bankers notes!
I can imagine that those guys beat the banker - first, and probably took all remind gold in the vaults (if there WAS any).

Here, there are two things. First, enforcing the dollar standard worldwide, as you stated, and, second, enforcing the legal tender laws within the borders of the US, which gives the US government a monopoly on legal tender inside the US. Assuming the 17th Century goldsmith banker was not the government for the territory covered, then he had no legal authority to establish his notes as legal tender or any means of defending it.

3- "the authority to tax"
It is also correct, but situation is not much different as it looks at first.
This "the authority to tax" - enabled the "banker" to accumulate "US gold" i.e. US treasuries (US debt).
Since this ability constantly reducing - the "feeling" that US "bankers" vaults are empty - is just stronger and stronger!
You can easily imagine what happened at the "point of no return".

This is an odd situation. In the current system, if economies are expanding, central bankers around the world need more US Treasuries as reserves to expand their money supply to support their expanding economies. Therefore, the US can get away with running deficits and expanding the debt. So it is actually by cutting taxes that the US can issue more US Treasuries to facilitate an expanding worldwide economy. It would seem that just from this standpoint alone, that in a contracting worldwide economy there would be less need for US Treasuries as central bank reserves so the US would really need to raise taxes and pay off some of the debt. But the US is going to the opposite extreme and in my opinion that is one of the main problems facing the monetary system today. Where I think this will lead is where I've stated recently. There will be a run out of long term (i.e. 30 year) Treasuries. Long term interest rates will skyrocket and the US economy will essentially shut down. There will be debt defaults in the private markets and investors will run to the safety of Treasury bills. The dollar will rise in value. But that will only be the first part of the process. If the underlying problems are not corrected then, yes, in the long run the US dollar will lose value or could even become worthless.

[Higgenbotham]

If you compare with today situation - even with your more (unnecessary) complicated model - the outcome is simple:
- the notes of banker which print massively (i.e. USD notes) - will be worthless!

I'm not sure what you're referring to here, but if it's the "notes" of the private bankers who today have created vast sums of junky electronic US dollars, then I agree with this statement.

The main thing I see here is to compare something like Treasury bills (which are dollars) to something like the money market funds (which are also dollars) issued by the affiliates of the banks. Or any of the other trillions in junk money that have been created by private banks who have securitized junk debt by running it through SIVs and SPVs and other securitization processes. That all works fine as long as the economy is expanding and most everyone can pay off their debt.

The trillions of dollars that have been created by these private banks have the potential to evaporate at any time. This stuff is a lot "junkier" than Federal Reserve Notes. It's based on things like whether people can pay off their credit cards or auto loans. And more and more people are defaulting on their credit cards right now.

So that's why I brought up the analogy of ten 17th Century goldsmith bankers instead of just one. We have a lot of really bad "goldsmith bankers" today who have created "electronic junk money" that is likely to become worthless sooner rather than later. And when a lot of folks finally sell their stocks to get what they think is a little good money, this "junk money" is what they will get, which could become even more worthless than the stocks they sell.

[Higgenbotham]

Generally in this discussions - "inflation vs. deflation" - I think that very often appear a huge mistake:
Namely - an assumption that JUST central banks (FED as the strongest base of the USD monetary system) - is ONLY reason for fiat money destruction.

It is not.
The main cause for fiat money destruction is - lack of confidence in this system.
That was always (through the centuries!) being the main reason.

If there's nothing left of a system, then confidence is all that remains and will probably be the last thing to support the system before it collapses.

I understand that you are espousing the viewpoint that there is nothing left of the US economy or the dollar system besides confidence and the confidence is rapidly eroding. Very little productive capacity, no ability to support the military, very little ability to tax, and not enough to maintain the dollar as international reserve currency. Therefore, in your view, a little bit of confidence is all that remains. That will soon evaporate and the dollar will become worthless very quickly.

My opinion is that the US is just not to the point yet where you believe it is. There is more left than just confidence. It is mostly a problem of corruption, which you've also discussed, and it's not known yet whether that can be turned around in time to save the country and the currency. Obviously, everyone is very nervous about this. It does seem unbelievable that the Congress and executive branch of the US could be so derelict in their duties.