REGRESSION TO THE MEAN

All markets are subject to the forces of regression. Newton’s basic laws of motion; Action and reaction.

At current levels both the S&P and Nasdaq 100 are stretched further above the 200 day moving average that virtually any other time in  the last 10 years.

Not surprisingly the further a market stretches in one direction the harder it snaps back in the other once the forces of regression gets its hooks into the market.

The Fed is exacerbating this process with their constant meddling in the markets.

The flood of liquidity unleashed by Greenspan and Bernanke from 2002 to 2007 in the vain attempt to abort the bear market was directly responsible for creating the conditions that led to the market crash of 08/09.

The rally last April was pushed much higher than it would normally have risen by the forces unleashed during QE1. The end result; the correction when it finally came was much more severe than it would have been normally, even including a mini-crash in May.

QE2 has now driven the market even further above the mean than in April. Unless the law of action and reaction has been repealed we should soon see an extreme regression to the mean event .
 

I believe the Fed has put into place the conditions that will bring about the end of this cyclical bull market and usher in the next leg down in the secular bear. 

During the next 3 months we should see the dollar begin to collapse down into the 3 year cycle low unleashing the currency crisis we’ve been expecting. This will drive a massive surge in inflationary pressure that will poison the fragile recovery and send the global economy back down into the next recession. A recession that should be much worse than the last one as it will begin with economic conditions much weaker than in `07.

The last time the Fed did this it produced a brief period of prosperity by creating a real estate and credit bubble. We all know how that ended. This time I expect the party to last two years tops, which means this cyclical bull should top by March. In their ill fated attempt to get something for nothing the Fed is going to cause a currency crisis and a massive surge in global inflation. 

The price we will all pay when the house of cards comes crashing down again will be multiples more expensive than last time.

334 thoughts on “REGRESSION TO THE MEAN

  1. Movax2

    Gary,

    Obviously the market will hit new lows in real terms (priced in ounces of gold for example). What do you think the chances are it will hit nominal new lows?

    Do you think the fed can actually achieve a price level where the debt is manageable, and inflation stabilizes, or does this end in a currency collapse at some point?

  2. Poly

    OK, I’m with you on how stretched we are and the need for a regression to the mean, even for the bulls case.

    But that type of event is a intermediate cycle bottom, which you still have not accounted or planned for.

    I know that’s because of your 3 yr dollar cycle low, but couldn’t equities ignore and decouple from the dollar 3 yr drawdown? Or is such a force to great?

    How about a scenario where we get one ELT equity cycle (to form an intermediate bottom) dropping together with the first ELT dollar cycle. But then the last two ELT dollar cycles into the 3 yr low equities are rallying back in the standard dollar down/equities up correlation?

  3. Bob loves Hawaii

    Gary, that is why I think the “surprise” is a harsh and fast correction now. These stretched moves are distorting your/Our cycles.

    My plan is to average in the rest of my capital over the month of Feb on every down day my target stocks experience.

    My Favs are AG, EXK, GORO, GDXJ and SLW. I currently have postions in all of them. SLW is my version of SLV (I do not like the fraud aspect of that ETF.

  4. Gary

    Movax,
    Only if magic all of a sudden starts working.

    There is no easy way out of this. The Fed is just making a much bigger problem just like they turned the tech bubble crash into a real estate and credit bubble collapse.

  5. Gary

    Poly,
    It doesn’t necessarily have to all occur in the next 2 weeks. We could get a hard correction followed by a failed daily cycle or we could possibly see another mini crash like we did in May.

    While I have my doubts about two market crashes in less than a year it would produce the necessary drop required for an intermediate correction.

  6. catbird

    That chart makes me want to buy a big pile of TZA at the open Monday morning…but I won’t. I want to save every FRN I have for silver.

  7. Movax2

    Gary,

    What I hope for is a possible price level where inflation stabilizes. There would be of course a massive speculative gold phase, but then it would come down and stabilize at some new level, similar to 1980: The cycle there started with gold trading at $35 and hit 800+ and came down to the $300 area before everything started over again.
    This time we start from $300, so if this somehow repeats, perhaps we have another bull market in stocks and gold comes down to $3000 or so from ~$8000.

    There could be confidence in the dollar again, but we live in a world where a loaf of bread costs $500 and minimum wage is $1500 an hour or something.

    Do you think this is possible?

    If this doesn’t happen, then the dollar collapses and hyperinflation makes cash valueless.

  8. Gary

    The problem is debt. Hyperinflation is the result of a government debt spiral. At some point the debt becomes so large that a nation can’t even service the interest on the debt. At that point there are only two options. Either default or inflate.

    Actually both are a form of default.

    Unfortunately debt service by monetary inflation is a road from which there is no return unless the country is prepared to suffer the bitter pill of a deflationary collapse.

    That would lead to a deflationary depression much worse than the Great Depression. So far the US is still in denial and still piling on ever larger amounts of debt in the futile attempt to cure the debt problem.

  9. DG

    Gary: I think we really could have two mini-crashes in a short time. So many things are out of whack because of the fed meddling I am nostalgic for normal trading. We are so stretched and the rise has been so relent;less that it may take a mini-crash to wipe out the excesses. We’ll see. Under normal circumstances I’d agree completely that two near each other in time would be almost impossible.

  10. Gary

    DG,
    Friday turned out to be another 90% down volume day. Usually that will trigger some kind of relief rally the next day, even if it’s only a small bounce.

    If Monday turns out to be another severe down day I may warm to the idea of another mini-crash.

  11. Movax2

    Gary,

    I agree. So if the US can create enough inflation while somehow holding onto the dollar system they can reduce the real value of the debt and stabilize the system at some new general price level. If they can inflate faster than debt is created.

    This is in effect taking value from savings/production and paying down the debt through theft, but if it works, it works.

    The question is whether the massive debt can be payed this way without hyperinflation or massive interest rate increases that crush the whole system.

    Do you have an opinion on if the entire system is screwed? Mad max scenarios? Or do you hope for balance somewhere?

  12. Gary

    There is no way we can print our way out of this.

    In the 80’s we were rescued by Volker’s willingness to put the country through two recessions and the advent of the personal computer and internet.

    This time we’ve let the debt bubble get too far out of control. There will be no coming back from this one. Now we just have to decide whether the depression will be deflationary or hyper-inflationary.

    Unless we get Bernanke out of the Fed it’s looking like it’s going to be of the hyper-inflationary type.

  13. Movax2

    Thanks for your thoughts Gary.
    I am hopeful the system will somehow stabilize, but I doubt it will. Guess I’ll be getting rid of my cash at some point, hopefully pay my mortgage and get the deed to my house in hand.

    Even though I am in Canada and have some protection, if the dollar goes, I expect the loonie will get hurt pretty bad too, compared to real goods.

  14. basil

    Gary,

    while your overall analysis makes sense, it’s all about timing. How, for example, do you explain that Marc Faber – who in principle shares similar view about the money printing, the global economy, and precious metals – comes to the conclusion that this coming correction is not the beginning of a larger downturn in stocks, but rather I buying opportunity. I am not saying one is right and one is wrong, but how do two intelligent people with the same basic analysis come to such different conclusions?
    I would explain it with timing. He probably sees the same results, but further down the road, not after just two years of rally.
    Thanks

  15. Gary

    Basil,
    I come up with that timing based on the next 4 year cycle low coming due in 2012.

    Since bear markets tend to last about a year and a half to two years and they invariably occur during a left translated 4 year cycle that puts the top of this cyclical bull occurring probably this spring.

    Another factor is the dollar’s three year cycle low. The bounce out of that low should usher in the next deflationary event. Just like it did as the dollar rallied out of the 08 three year cycle low.

    My timing predictions are based on cycle theory. The unknown is whether or not the Fed can extend the next cycle.

    Personally I don’t think they can because inflation is already taking a toll on the global economy, especially in emerging markets.

    And of course as the dollar collapse really gets going we will see a much more serious spike in inflation.

  16. Rebecca

    Hi Gary,

    In the 07/08 crash, PM and commodities crashed with the general market. Do you expect the same thing in the next leg down? Thanks much for the excellent works and insights.

  17. David

    Basil,

    Faber sees stocks more as the lesser of two evils vis-a-vis bonds. It’s not a matter of being bullish on the fundamentals of the US economy (he isn’t) as much as considering equities a preferable place to hide in a hyperinflationary scenario. Remember that the stock market did very well in Weimar Germany, at least in nominal terms.

    I’m sure he prefers gold to either stocks or bonds.

  18. Movax2

    BTW

    If anyone finds this stuff interesting beyond a way to invest and make money, that is, as far as the Socioeconomic aspect, and hasn’t seen the following already, please consider:

    Must watch:
    Money as Debt
    Money as Debt 2
    Century of the Self series (excellent)

    Maybe:
    Zeitgeist movies
    Conspiracy Theory with Jesse Ventura series
    Alex Jones is worth a mention too though he is a bit nutty.

  19. Gary

    Rebecca,
    08 was a selling climax on par with the crash of 29 and 87. Those kind of events only happen once or twice a century.

    The next bear market will likely follow the normal bear market grind. I don’t think that kind of bear will exert the kind of selling pressure on gold that the 08 crash did.

    Also 08 was the 8 year cycle low for gold. The next one isn’t due till 2016. I expect that to separate the second phase of the bull market from the third bubble phase.

  20. Keys

    Alright I am a nut case!!!! But none here seem to worry about the potential of anther distress…Really…is even the US investor so blind to realize what is going on…I will take any verbal assault at this point, because you guys are freaking missing the boat right now…Unfricking believable. Do you guys solely look at TA; are we really that stupid?
    Ah Well….maybe it is time for me to leave this blog…..

    As always good luck all…I wish the best for everyone and their families. But I have had enough. With what is going on, I really can’t figure why so many guys are arguing over lines on chart. We are in the mist of creating history, and we are talking about 1265 for gold. My patience is done……sorry!

  21. james r

    Hi Keys,

    Let me take a stab here.

    What we are seeing in Egypt and maybe other countries of the Middle East is instablility because of a weaker dollar. A weaker dollar has caused agricultural products such as wheat and corn to rise considerably. It just so happens that these countries depend on these commodities. These products which were once cheap are no more.

    So will we continue to see further unrest in other countries that are highely dependent on cheap agriculture products?

    You bet.

    The federal reserve that caused this dilema ultimately wants to force our hand at spending. If you knew that food prices were going to soar in the future would you not being buying now? Of course you would.

    So buy spending the fed hopes to create jobs. I think it may work but the trade off is each person will have less worth. (But hey, at least we’re working).

    James

  22. Golden

    ive been loading on s&p put since end of december… now ive got them all on feb expiry… hey guys, how low can we go by feb 19th??? should i ride them to expiry expecting smart money to pull out fat or not??

  23. Golden

    ive been loading up on puts, on s&P feb19th expiry, hey guys, how low is it going to go… should i ride it out to expiry expecting smart money to pull the ;arket down to get the max out of that expiry.. of come out before based on sentimemt…

  24. RA

    Quote from Richard Russell newsletter:

    Gold has risen a fantastic ten years in succession. Gold, of late, has been receiving a lot of interest and publicity and advertising. Gold is probably overdue for a correction in this ongoing bull market. Analysts are talking about “gold correcting down to 1200 or even 1000.” However, I believe that the more important picture is that the gold bull market has much further to go on the upside.

    I’ve been reading the McClellan Market report for years. It’s one of the better and more intelligent reports that I read. McClellan does a good deal of research on cycles, and I must say some of their cycle studies work out quite well.

    McClellan has discovered that there’s a cycle low appears for gold roughly every 12.5 months. The cycle lows have run as follows: Jan 6, ’06, Jan 8, ’07, Jan 7, ’08, Jan 5, ’09, Jan. 4, ’10, Dec. 31, ’10. McClellan puts the next cycle bottom for gold at February 8, 2011. Which means that the cycle low for gold should arrive at any time between now and February 8, give or take a few weeks before or after that date.

    Interestingly, the McClellan cycle bottom for gold is due to arrive amid a good deal of professional bearishness regarding gold (“gold overdue for a major correction”). Thus, many traders have traded out of their gold positions, just as we near the date for the McClellan cycle bottom.

  25. Keys

    Sorry guys for the previous rant!!
    Should have kicked the dog instead….Basically I am just frustrated with what is going on…Really rather obvious if we take a step back. Emotional outbursts are part of being slightly nuts.

    In any regard…people are people…think of a bunch of 5 year olds playing in the sandbox. Some other kids see what the kids in the playground are playing with…they stare at the favourite toys secretly wanting it…Now imagine that the kids in the sandbox start a fight and get a time out…so to speak. Their toys are now left unguarded. The boys that were secretly coveting the toys, now have an opportunity. So they run to get the toys fighting to see who can get them first.

    Ie if the Middle East turns into such a disaster that governments lose their effective power, the countries such as the US, Russia, China, will all dive in to control the region….If governments lose control in the region, the potential for a world-wide conflict is at hand. Again everything is caused by Ben’s arrogance and stupidity. Riots, wars, famine. I don’t know if any of you have friends and family in the regions; as people we tend to think only about what we see outside. I hate gold, and being forced into this trade because the US is unable to or unwilling to do the right thing really bites a little. Once we understand what is really going on with the printing presses, we really can see what a horror has been placed upon the world and its citizens.

    And we have only started. The QE effect on food prices has only just begone. The potential for further riots and population reaction is almost a given at this point; the only thing I am not sure about is the amount and degree of unrest.

    Sorry again for the previous rant!

  26. Movax2

    Keys,

    Are you Alex Jones? Sorry, overall I really like Alex, I just think he can be a bit over the top and loses control of his emotions sometimes.

  27. Steven

    Daniele,

    Where is the TASE index trading today that it is down almost 4%? Does it trade in Asia/Europe, etc? And do you know if this includes the top 25 market cap companies just in the US or worldwide?

    Thanks in advance,

    Steven

  28. Steven

    Ah! Thanks Gary. Why would this lead one to believe that worldwide exchanges will be off tomorrow (although I tend to agree).

    Gary,

    Do you think the situation in Egypt as it ha progresed over the weekend will cause further runs to safety (PMs, Dollar/Irony, etc)?

    And do you think this is a few day wonder or could it be the catalyst to the beginning of the C wave? I read the weekend report but couldn’t tell where you came out on this particular issue.

  29. Beanie

    Just remember that the bears were calling for Dow 4000 or below even as the Fed was printing money. It was only much later when the market kept on rising that the bears attributed the rise only as a result of money printing. Oh, so that is the reason. Now the bears “know” why the market is rising, and that is all they ever talk about these days.

    What is the bears’ next excuse when SPX hits 1500?

    Then 2000?

    Then 2500?

    Well, there will be some other excuse when they can no longer attribute the further rise to money printing. Remember that when Dow was at 7000, people were calling for the next Great Depression and that there was nothing anybody can do about it. Then the Dow rips and roars higher; oh, something could be done in the form of money printing. It’s pretty obvious where the reasoning pattern is going.

    Gary, I think your convictions are way too ironclad strong, for someone who can change his mind rather quickly. Weren’t you the Dow 4000 crowd?

    Other further excuses I see coming up in the bear crowd include:

    – hyperinflation
    – the next tech revolution

    A new tech revolution is a real possibility because technology is advancing at such a staggering pace. It is not a matter of if, but a matter of when. It is to be expected. As such, one should not be too convicted to the secular bear market case, especially after we’ve supposedly been in one for nearly 10 years now.

  30. sophia

    Beanie, stop saying rubbish stuff! What is happening in Egypt is big and far from beingover…Even if Mubarak leaves, there will be riots in Yemen and Mauritania and finally in the Middle East like Jordan, Saudi Arabia etc… If Mubarak stays, there will be a blocade of tge Suez canal and here we go, 1973 again… So please Beanie, don’t talk about a rally here, it won’t happen…

  31. Gary

    Beanie,
    I actually missed the bottom by one day (I had to wait for a swing low).

    I did think the market would turn back down after testing the 200 DMA. When it didn’t it became obvious we were in another cyclical bull market.

    Being a perma anything isn’t good for ones portfolio. Your perma bull stance got you destroyed in 08/09. Many perma bears have decimated their accoiunts since the 09 bottom.

    I don’t know why it’s so hard for some people to understand that markets go both ways.

    In regards to the secular bear market there is absolutely no debating that one.

    Since 2000 the market has just traded in a big roller-coaster spurred on by currency debasement and a series of Fed blown bubbles.

    During the last 10 years PE ratios have contracted from 42 to the current range of about 17. Of course in inflation adjusted terms true stock market value has taken a huge hit.

    That is the definition of a secular bear market. And unless human nature has changed this one will end like every other secular bear market in history has ended, by valuations dropping to ridiculously cheap levels.

    The fundamental driver will be the cleansing of debt from the world.

    We had the chance to solve this problem early in the last decade but instead we decided to make the problem bigger. So now we are going to have to suffer through a very painful deleveraging process.

    We went through this exact same thing in the 30’s. We made the wrong choices then also and the result was a 15 year depression and WWII.

    To think that somehow we can solve a problem of too much debt with more debt defies logic.

    I assure you we can’t so we will continue to have these massive swings in the market just like we did in the 70’s with each collapse being bigger than the last.

    You really should jettison the perma bull stance so you don’t get caught again when the next collapse comes.

  32. daniele

    Steven, i wasn’t meaning that tase can lead market as leader.Just point out sentiment now is absolutely of fear and it can anticipate what presumibily could happen tomorrow on market.

  33. David

    Beanie,

    I was pounding the table for stocks in March 2009. Many longtime bears were. The people who were paralyzed were permabulls who had just lost half their money. Go back and look at Doug Kass, Barry Ritholtz — many bears recognized that stocks had finally become a bargain.

    They’re not a bargain anymore. I just pulled my kids 529 funds out of the S&P last week after doubling them in two years.. I will reinvest when I am assured of an 8%
    annualized return.

    You should really stop congratulating yourself for money you haven’t made yet.

  34. Beanie

    David,

    I can tell you for a fact that just about every single market commentator and blogger, both bull and bear, have claimed that they called the March 2009 bottom. That simply can’t happen. You cannot have bulls and bears all calling the bottom (or top, for that matter) at the same time. It’s just not how the market works. One group is always wrong at one end.

  35. Golden

    Sorry to come back with this, but it’s my view that we won’t get a bottom in miners before the s&p correction has run its coarse… so…ive been loading on s&p put since end of december… now ive got them all on feb expiry… hey guys, how low can we go by feb 19th??? should i ride them to expiry expecting smart money to pull out fat or not??

  36. Beanie

    David,

    You may be confusing a real bottom with a technical bottom. Many have called the March 2009 as bottom. But a few months later, they exclaim, “Get ready for the ride for another collapse!” Ironically, those same guys now all claim they have called the March bottom. That isn’t calling for the bottom, really. What they called was a technical bottom and somehow it morphed into,”I called the bottom.”
    πŸ™‚

  37. David

    Beanie,

    Just look it up. Their calls are on the record.

    Doug Kass, Barry Ritholtz, Marc Faber — all flipped bullish in winter 2008-9.

    The people who were selling at the bottom were the margin clerks liquidating the positions of people who bought the top. That’s how bottoms are made.

  38. Gary

    Golden,
    If you have gone all in on puts you are playing with fire. Every little intra day wiggle will cause gigantic swings in your portfolio. Very few people can make rational decisions in those kind of conditions. No to mention February is way to short. You should be out to April at least so you don’t have to deal with extreme time decay.

    If I was you I would sell as soon as you get back to even and then just take out a modest short position if you want to play the short side.

  39. David

    Beanie,

    The 2009 bottom was a technical bottom.

    Whether it also proves to be a final, never-to-be seen again secular bottom remains unknown to you or anyone else.

    You should also know that true permabears — stopped clocks like Tim Knight who have been shorting this rally all the way up — come in for a fair amount of ridicule on this forum. So do stopped clocks of the bull variety.

  40. Beanie

    David,

    I’m pretty sure i called a technical top back in August 2007, but you will never see me go anywhere saying I called the August 2007 top. (Bulls cannot call real tops, just like bears cannot call real bottoms).

    One of the few handful of bears I know who actually called the bottom was when he said “generational bottom”. But even he didn’t think the market was going to go any higher back in late 2009.

  41. Brian

    David, The fact was Ritholz went bullish, but he also went bearish again and fully cash somewhere around 850-900 range. He went in on a technical basis of support at the 12 year low. To say he was or is bullish on the economy is a misnomer. Beanie being right is rare, but he has this one.

  42. Gary

    The difference is the Ritholtz profits from both bull and bear markets. perma bulls only make money when the market is rising. Then the give it all back during a bear market.

    Perma bears do the exact opposite.

    If one is a perma anything then you have no chance of making and more importantly keeping any gains in the market.

    One has to recognize that the market goes in two directions and they have to be able to recognize secular bull and bear markets.

    Stocks are in a secular bear market. Gold is in a secular bull market.

  43. Beanie

    Gary,

    It is simply not try regarding permas don’t make money. Permabulls do make money even in bear markets; they just don’t get to realize their profits until the bull market returns.

    Permabulls make their money by buying great companies on the cheap in bear markets. Then the profits come when the market gets more bullish. In fact, for the last 100 years or so, the market has been overall bullish. If anything, the market have favored the permabulls.

    It is safe to say that Warren Buffett is a permabull. He rarely rarely shorts stocks and he is always invested even in bear markets. He obviously sees advantage in being a permabull. And he’s right.

    All great super investors like John Paulson, George Soros, Warren Buffett, David Einhorn, Bruce Berkowitz, David Tepper, are invested even in bear markets. All like to scoop up stocks in bear markets. Some also short stocks, but they do have money invested even in bear markets.

  44. Gary

    Not exactly true. In 66 before the secular bear market started Buffett liquidated his fund because he couldn’t’ find any more bargains.

    During the last bear market Paulson made billions by recognizing the broken fundamentals in the financial markets and betting against them.

    The largest gains come during bull markets. Obviously as the most one can make shorting is 100%.

    During a secular bear market one can’t remain constantly bullish or they will throw away 15 to 20 years of time value while their account goes no where. (In reality their wealth gets decimated by the forces of inflation)

    The only time one can go into perma bull mode is during a secular bull market. In those conditions one can buy and hold. You do have to be able to spot the eventual top though or you risk getting caught in the inevitable bear that will follow.

    There will come a time when we will exit all gold positions and look to re-enter the general stock market in preparation for the next secular bull.

  45. Golden

    Gary,
    Thanks for ur advice on s&p puts… i exited 80% PM postion in dec with a high % profit keeping 20% as core… i scaled in 3% portfolio in dec on s&p jan expiry puts… lost it all… then scaled in another 3% of fev expiry s&p puts so far i’ve made a profit… now it’s going down i stop scaling in… my understanding is that the best time to buy is when fear is dominant, which translates to high implicite volatility on puts… i will keep them till impl vol spikes.. regarding the PM miner, i use GDX and GDXj as good proxys… they also harbour an options market… i’ve been reading this post and other about nailing a bottom… a low risk strategy at this stage would be to sell naked puts for an equity value of say 10%porfolio… if i’m wrong i can always get assigned on the puts, cash in the premium and its as if i had a lower buy level… i would do this on the first swing… and add on if i get the sort of confirmation u speak about in ur week end report…

  46. Beanie

    It is true John Paulson made $4 billion for himself by shorting the housing market. But he made $5 billion for himself last year going long the financials, and probably with less effort.

    It’s hard to believe, but the markets have always favored the bulls when you look at the long term scheme of things. Had your grandparents bought just 1 share of KO (and reinvested all the dividends) one hundred years ago, that initial 1 share investment would be worth well over $7 million today. I sure wish my grandparents (or my parents) had the foresight to be a permabull.

  47. pimaCanyon

    Golden,

    Actually the best time to buy puts is when fear is nowhere to be found. And then, if you are very lucky or impeccable in your timing, if the market tanks you make a killing not only because it’s going in your favor but also because the time premium goes way up due to the big rise in fear. That’s the ideal scenario, but very difficult to pull off in real time.

    If you buy when fear is prevalent, then if the market pauses or goes up a little, you could lose a lot because the time value of put options drops off as fear abates. You could even lose a lot of the value of your options if the market only goes sideways, such that the value of the underlying does not actually go against you.

    Options are tough.

    I would read Gary’s suggestions on how to play them if you are going to continue to play them. He has suggested buying deep in-the-money options so that the value of the option nearly matches the value of the underlying. That way there is very little time value, so the option should track very close to the underlying no matter what the underlying does.

    Good luck!

  48. Gary

    Beanie,
    No one will deny that over the long haul stocks always go up. The thing is that in a secular bear market they spend many years doing nothing and if you factor in inflation they lose a tremendous amount of purchasing power.

    If you bought stocks at the beginning of 2000 then you have held for 10 years only to lose 16% in nominal terms and double that in inflation adjusted terms.

    Who in their right mind wants to hold on to something for 10 years only to lose 30% of their wealth, especially when during that time they could have increased their wealth over 1000% by riding the secular bull market in mining stocks?

    One just has to understand how these big long term cycles work and spot the major turning points when they happen.

    We had one of those turning points in 2000.

  49. Bob loves Hawaii

    Other than my gold and silver miner holdings, I trade options.

    First off selling premium is always preferable to buying premium, but if you do, using spreads eliminates much of the volatility crushes and time decay.

  50. Gary

    Beanie,
    Hereis a very good chart sequence of what has happened during secular bear markets and what is happening in inflation adjusted terms during the current bear market.

  51. TZ(5288)

    Silver broke the daily downtrend line this evening. Also put in a swing low (and will appear on the $silver chart tomorrow because, as we already estabilished, it includes overnight/24hr data).

    No swing low in gold yet or downtrend break, but we don’t have far to go up to do so.

  52. David Kafrick

    Gary,

    It is a very common misconception that you can only win 100% on the short side. That is absolutely not true. You can win just as much as on the long side, without ever being leveraged.

    People seem to think that if you short a stock at 100 and it goes to 0, then you make only 100% return. The problem is that when a security goes down in value, you have to short more shares in order to keep your short position at 100%. When you are long, you don´t need to do this rebalancing, because the value of the security goes up together with the value of your portfolio. So if you constantly rebalance your short position, you will make almost an inifinite % as a security goes from 100 to 0.

  53. Gary

    David,
    What you are talking is adding leverage. You are assuming the security continues down. If it doesn’t then you will quickly get a margin call if you keep adding to your shorts.

    The same can be said for the long side. You can continue to add margin to your positions but as soon as the trade goes against you you will get a margin call.

  54. David Kafrick

    Gary,

    I am not talking about leverage. I am talking about keeping your position at 100% invested. If you short 100 shares of a stock when it is priced at 100, you are shorting 10,000 dollars. When the stock goes to 50, you are gonna be worth 15,000 and you will be short only 5,000. So to bring your short position back to 100% you need to short an aditional 200 shares. If you do the math you will see that your gains are not limited on the short side without you ever being leveraged.

  55. Jerred

    the book i recommended multiple times to other traders is now selling on Amazon for 1234.00 new

    thought that was funny

    mind over markets is the book

    hope everybody had a great weekend

  56. Gary

    David,
    Look at it this way. Let’s say you sell short 1,000 shares at $10 per share. The security drops 10% to $9. Your initial position is now worth $11000. You rebalance by selling another 100 shares. Then the security pops back up to $10. You don’t just go back to even you are actually down $100 even though the stock is at the same price you originally sold short at.

    You are actually adding leverage every time you rebalance and if the trade goes against you you can still lose money even if you cover at a lower price than where you sold short.

    For the re-balancing act to work in real time you have to have the trade continue in the right direction. Plus the deeper you go the more risk you incur if you continue to re-balance.

    For instance let’s say the stock drops 90% to $1. You re-balance all the way down till you have 19,000 shares short at $1. If that $1 share price jumps to $2 then you have lost all your money.

    In theory it sounds like a great strategy but in real time it’s going to probably end up being a quick trip to the poor house.

  57. Razvan

    whether it broke the trendline or not is meaningless since today is Sunday night. The price goes up from 7 to 9 pm then it falls back down through the night. Lets see what happens tomorrow morning but my hunch is we will get a pullback tomorrow.

  58. pimaCanyon

    allright, I do see that silver poked very slightly above the TL.

    My chart shows only a very slight penetration of the TL. Note that I use log scale on my charts. If I turn log scale off, the penetration is more pronounced.

    However, as Gary (and lots of other analysts) has said, TL’s, Channel and support/resistance lines and other lines on the chart need to be drawn with a crayon. Maybe even a fat crayon.

  59. Gary

    The cyclical driver of the sector is gold. Silver is a very thin market. Any move not confirmed by gold would be suspect in my book.

  60. Slumdog

    I mentioned the NY Market gap 1334-43 at Kitco, and probably here, in the last 2 weeks. I said it was strange and noteworthy that the market avoided the gap and ran through it up, down and back up, and now the market is parked in that gap.

    This happens over and over in history. The 24 hr ACCESS market does zip to change it. That’s true for computer trading also, now, and 20 yrs ago; they do nothing to change human emotional wiring.

    What should happen next is more gap trading, probably 2 days more (max) with lots of fake outs dashing this way and that, but still ending up in the gap.

    Then the market in 48 hours from now or tad longer, will move dramatically, I think. And the direction you and the many you list is up.

  61. Gary

    My math is off a little bit, but if one were to re-balance a short position after every 10% drop a $10,000 short position would increase to roughly $55,000 if the equity drops 90%.

    The risk is that at any point a 100% bounce will wipeout one’s entire stake. And after a 90% decline a 100% bounce is very easy to achieve as we saw with bank and restaurant stocks after the crash.

    One could pyramid short exposure as a way to increase potential gain but once anything drops 50% or more the risk of a large snap back rally wiping out ones stake starts to increase exponentially.

  62. Jayhawk91

    I’m thinking about this as my position-

    30% SLW
    30% SIL

    40% Mixture of these-

    Majority in SVM, AXU, HL, AG, HL

    Smaller amounts of these XRA, NG, EXK, RBY, GBG

    Overkill? or decent blend on these picks?

  63. RA

    @James,

    The comment on the MacClellan report was part of the Russell quote (4 paras).

    I do not subscribe to the MacClellan report.

    But from the sound of it, it’s based on historical patterns rather than current events like QE2.

  64. Slumdog

    Short term trading today is dancing between a bread slicer, we in our skivvies and the machine looking to cut that bread.

    Today is an international holiday. Only the machines will enjoy today. I’ve fed them too much of my profit hoping for a longer trend than 2-3 points.

  65. TZ(5288)

    Closed my silver futures position after it started going negative this morning. I didn’t get a good entry on fri like I did with the gold futures and we are down almost $1 from the highs. Simple smart risk control.

    Still have very large gold position and will add more (with another tight stop) if we get much more of a drop this morning. I’ll re-estabilish silver position in near future if the gold position pans out.

  66. TZ(5288)

    They are just trying to run stops on anybody who bought friday’s ramp up….so far. But of course the possibility always exists that the whole move was fake and we go lower. Prudent trading dictates that at 5x leverage I can’t get emotional about a position. I *think* we bottomed and am playing things that way, but I will be losing less than 1% net worth if wrong (even if I add this morning).

  67. Dan

    SB,
    I think you are correct. Friday was likely a knee jerk reaction to Egypt and then short covering piled on, just like we saw with N Korea a bit back.
    My money is on gold going lower. Look at SPX futures, not much nervousness there so far.

  68. Shalom Bernanke

    I’m not actually predicting metals go lower or higher from here, I don’t know. At 50% invested, I’m prepared for either event, even though I hope we go lower first so I can add.

  69. Shalom Bernanke

    However, I do know for sure I wouldn’t sell any metals down here even if I thought they had a good possibility of working lower. I try not to put myself in a position where I have to sell weakness (pullbacks) in bull markets. Position size is everything.

  70. Keys

    If the event in Egypt, won’t take the market down, what will? Due for a correction. We have debated severity of a correction, while one hasn’t even transpired. Amazing. You listen to CNBC, and wow at a certain points you actually question yourself…maybe I am wrong….Either way I am of course not bullish, just amazed out how the market is holding up when there was a clear opportunity for it to correct.

    It seems like the trading community has become desensitized to everything….

    In current news, China and Russia go to war with nuclear arms. Dow jones up 300 points as military companies surge. Earthquake in Europe destroys half the population. S&P surges 10%, as homebuilders plan on reinvesting in European projects. Ben Bernanke publicly declares that the US is ready to default, but has come up with the great notion of printing money to buy all existing debt of the US in one great purchase. Dollar surges, as investors realize the US will not go broke sighting that deflation in the States, nearing 10% annually will also be averted.

  71. Poly

    Friday was a sharp 90% down day with losses of 2.5% on the NASDAQ and Russell. On any reversal against the trend, you need to give it time to work against that direction, so expect a bounce today on the S&P of at least 5-8 points on the close and by mid morning it could be up by 1%.

    But she will turn down later this week, don’t be fooled by today’s actions. Also the news out of Egypt today will be subdued. If you do just a little research, you would know that the biggest rally of all is planned for Tuesday, where they are calling for more than a million men to march on the square. It will be plastered all over CNBC for the financial “professional” lemmings to digest.

    Use the top of the market this morning to “lighten your load” or if you’ve been waiting for that short opportunity, today could be your day.

  72. basil

    That’s the irony of a conflicted policy of economics.
    To avoid a deflationary depression the Fed has been printing money; creating inflationary pressure; resulting in higher food prices; leading to protests and political unrest countries with a large lower class such as Egypt; destabilizing the local power, which is supported by the US government; creating a political dilemma for the US possibly destabilizing its own influence in the Middle East.

    Another irony is that the inflation pressure, which the US is exporting to the world by increasing the money supply, is resulting in higher food prices everywhere. Now, wherever there are large low income classes, for which food (and energy) costs take the better part of their monthly income, there is a high chance of social unrest. The majority of the Chines population is grotesquely poor. The elite of people that we talk about when we speak of the Chinese economic miracle is a ridiculously small percentage. Take also into consideration that the Chinese governments influence over the many and vast regions is not unchallenged. The Fed’s money printing might therefore have a very destabilizing effect on China.

    In other words, while the political consequences of Fed’s money printing policy are a possible loss of US influence in certain world regions (Middle East), the money printing also weakens the US competition on the world stage (China), and probably much more than they weaken the US itself.
    Not that I am a conspiracy theorist, but the US government must be contemplating these things. I am sure they are not just blindly printing money. They are aware of all of what we talk about here plus a whole lot more.

  73. basil

    25 countries that will be hit most by a food crisis. Do you see a common denominator among the countries on that list?

    Lebanon (Hisbollah toppled government in January)
    Egypt (Will Mubarak be overthrown?)
    Tunisia (king already overthrown)
    Libya
    Morocco
    Algeria
    Nigeria
    Sudan
    Bangladesh
    Sri Lanka
    Hong Kong
    Azerbaijan
    Angola
    Romania
    Philippines
    Kenya
    Pakistan
    Dominican Republic
    Bulgaria
    Ukraine
    India
    China
    Latvia
    Vietnam
    Venezuela

  74. EricH

    This weakness in gold is very alarming. If the Egypt news was a flight to safety, then we’re not seeing it in the Dollar. Currently the dollar index is back to the lows on this recent leg down.

  75. TZ(5288)

    Guys…at SOME LEVEL of printing, you don’t get the sharp pullbacks anymore that you might expect.

    Israel stock exchange
    http://3.bp.blogspot.com/_Fd_dIsEkgvI/TM4bcIYuswI/AAAAAAAAAxQ/m_4vCxBZWyE/s1600/israel+inflation+vs+stock+prices+in+the+80s.jpg

    Zimbabwe
    http://blog.foreignpolicy.com/files/images/ZimbabweIndustrialIndex.jpg

    At **SOME** level. Are we there yet? Don’t know. But our fed is now monetizing an over $1 trillion deficit. Sounds pretty big to me. We *ARE* in (hyper)inflation and *rapidly* growing despite all those deflationary people. They don’t understand the game and the true definition of those words.

  76. TZ(5288)

    Yes, the fed can slack off the printing and throw us the other way. Then bonds crash cause nobody is there to buy the US debt. Pick your poison, it’s a train wreck either way and you want metals.

  77. basil

    TZ,

    that makes sense. Stocks are an inflation hedge, inferior to PMs, but still a hedge. Not adjusted for inflation their value should go up, and if you are a good stock picker you might do ok. With the constant money stream I just don’t see another deflationary whiff coming. Now it’s all about what will fall the least, adjusted for inflation. And that should still be hard assets. Followed by stocks.

  78. Jayhawk91

    Gold and Silver alert: traders at JPM and other Wall St. firms instructed by Fed/Treasury to attack PM’s – HARD ON MONDAY – to try and boost dollar and reduce food/energy prices – as inflation fueled revolts go global – and regimes in US and UK are now looking vulnerable

    http://maxkeiser.com/2011/01/30/gold-and-silver-alert-traders-at-jpm-and-other-wall-st-firms-instructed-by-fedtreasury-to-attack-pms-hard-to-try-and-boost-dollar-and-reduce-foodenergy-prices-as-inflation-fueled-revolts-go-gl/

  79. TZ(5288)

    PS: despite the fed being able to throw the game either way (which is what they have been trying to do up until now – walk the line) the *preference* is for inflation and not default on debt (which is what stopping printing causes). I don’t want to get into this preference, but it isn’t like an ice-cream flavor preference. When I say preference, I mean an almost certainty even though they COULD go the other way. There are reasons BK collapsing goverments throughout history print and inflate vs. default. So will it be again.

  80. basil

    Jahawk,

    that’s not very convincing. Good old Max Kaiser is unfortunately slightly out of his mind. How would attacking PM prices lower food prices?
    The only thing to support the dollar at this stage is a food crisis. If the poorer part of the world will sink into a food crisis, there might be a flight into the dollar.
    ‘Regimes’ in the US and UK don’t seem vulnerable any more than ever, I’d say.

  81. TZ(5288)

    BASIL,

    Everything of REAL value is an ‘inflation hedge’. They are just better or worse LEVELS of inflation hedge. The best one is gold. There is a reason for the expression ‘gold standard’.

    Chewing gum will rise in value and act as an inflation hedge too. But it is not the BEST inflation hedge. Get it?

  82. Gary

    Do me a favor people. Take the time to proof read your posts before you publish.

    I get tired of having to clean up all these deleted comments because you were in a hurry and didn’t read what you wrote before you hit the publish button.

  83. basil

    The whole point I wanted to make earlier with my posts about the food crisis is this: The US exported inflationary pressure resulting in a food crisis in poorer parts of the world might ‘pay off’ for the US in a cynical way. First of all, the countries and societies that will be hammered are mostly not important to the US politically and economically. Secondly, most of these countries are opposed to the US, which comes in ‘handy’ for the US. And thirdly, the rest of these countries are the biggest threats to the US empire, economically speaking, India and China. So a food crisis ain’t all that bad, for some. I say that polemically. The US will begin to look comparably stable, which might result in a stronger dollar, and the US might even gain more ways of pressuring China and India. How is that for a twist?

  84. TZ(5288)

    Yeah gary, I know you are talking about me. I rolled out of bed too groggy that not only am I messing up posts, but I misfired on some gold orders too.

  85. Movax2

    basil,

    Maybe, but when the ravages of inflation clearly outweigh any remaining benefits for China, they will peg the yuan higher and higher and continue to sell (net) treasuries, until they just outright stop pegging and sell US debt.

    Then the US (dollar) is probably done.

  86. pimaCanyon

    TZ,

    Do you know that you can delete your own posts?

    Gary, you shouldn’t have to delete anyone’s posts for them. They can do it themselves. That’s what the trash can in the lower left of the post is for. It appears only on posts that I have entered, so those are the only ones I can delete. But I CAN delete them.

  87. DG

    Pima: I have some EUO, but every position I have now is small. I am waiting for the dust to settle after Friday’s huge move. If the dollar drops any more today I will buy more EUO. I am mostly waiting for gold to become clear in its intentions, and waiting/hoping for a marginal new high in stocks as (finally a time to get a decent short positions going. Other than that I have no strong opinions right now.

  88. DG

    Gary: What do you mean “clean up the deleted posts?” It seems to me that you don’t have to do anything Do you mean remove the text that says “deleted by author”? Why not just leave those there? Better than you wasting your time on blog housekeeping, no?

  89. TZ(5288)

    BASIL,

    I am deleting my own posts. What gary is doing is going through and removing the “post has been removed by author” leftover. I guess he’s a neat freak
    πŸ™‚

    DAVID,

    There certainly is ‘real’ or ‘intrinsic’ value. A $100 bill has a real value of a fraction of a cent based on the paper(cotton)/ink/and printing.

    The illusionary FAKE value of that piece of cotton is (**CURRENTLY**) equated to about 3 silver oz. But its real value is almost nothing and always has been.

  90. Gary

    Unlikely that it topped in one day. More likely it’s still working it’s way down into the cycle low.

    If it’s this tough to get a bounce one has to wonder what this is going to look like at the three year cycle low.

  91. Steven

    Gary snf Dov,

    Silver seems to have put ina highr high snd s highrt loe. Is this significsn to you. Could silve pddiblu tsaking the lesd in the complex?

    Thsld

  92. Onlooker

    pima

    You can delete the comment contents (i.e. the text) but it leaves a marker that says something like, “this comment deleted by author”, or some such thing. Those then end up cluttering up the comment section. That’s what Gary’s talking about.

    By the way, when you read the comments in emails you see all the comments as they are submitted. So I end up reading (or seeing) TZ’s comments numerous times as he edits them. Though he’s not the only one, just the worst offender. πŸ™‚

  93. DG

    TZ (and others): How about it as a favor to Gary? Slow down maybe? He really has always been quite accommodating for us.

  94. David Kafrick

    TZ,

    What is the real value of something that has real value?

    Value is always a subjective and relative concept. Corn has no more real value than a piece of paper that´s used to exchange goods.

  95. Gary

    AGQ is up because silver is up on the day. the others are down because selling pressure is greater than buying pressure.

    Do you think that just because silver is up that the silver miners have to also rise?

  96. ALEX

    I hired a translater to read stevens comment..

    He said either he was typing that while riding on the bumper cars or he ate something he was allergic too and his fingers are twice a fat today πŸ™‚

    (And now he’ll delete it & noone will know what we’re talking about TZ-so here it is…(WHAT THE HECK???)

    Copy / Paste

    Blogger Steven said…

    Gary snf Dov,

    Silver seems to have put ina highr high snd s highrt loe. Is this significsn to you. Could silve pddiblu tsaking the lesd in the complex?

    Thsld

  97. ALEX

    I just hope we hear from him again, so we know he’s alright ,and wasn’t having a stroke or something. (I’m not joking about strokes…please hold all comments saying I’m insensitive..my uncle had a stroke yrs ago)–

    Please Steve, tell us that was your Arnold Schwarzeneggar impression !!

  98. Bob loves Hawaii

    Basil, I saw your comment on food inflation. I have always thought that this is one of the goals of Fed policy; to break these currency leeches.

    Steven’s wireless keyboard needs a new battery. LOL

  99. ALEX

    funny

    I was JUST looking at the same thing on EXK and AG as you posted that Jayhawks. Was comparing daily volumes up vs down.

    Nothing very conclusive, but definitely nothing negative.

  100. ALEX

    Decent Volume buying just came in after lighter volume morning pullback…see 2day chart of EXK ag hl slw 15 minute interval

    Hey Steve..yes you , even that post is funny. Glad U R Well!

  101. Bede

    Apparently, Steve had a right translated left hand:

    Silver seems to have put ina highr high snd s highrt loe. Is this significsn to you. Could silve pddiblu tsaking the lesd in the complex?

    Thsld

    Translation:

    Silver seems to have put in a higher high and a higher low. Is this significant to you. Could silver pssibly taking the lead in the complex?

  102. Gary

    While this should be the beginning of at least a daily cycle correction I won’t have any desire to short this market until the dollar puts in the three year cycle low.

  103. Tim and Jeanene

    Gary – with all due respect, when you stated “The problem is debt. Hyperinflation is the result of a government debt spiral. At some point the debt becomes so large that a nation can’t even service the interest on the debt. At that point there are only two options. Either default or inflate.” – this is actually wrong.

    I too used to think this, until I began to study the monetary system that we live in. The foundational reason why this is wrong is that we view the sovereign government balance sheet as that of a household. If we as a household tood on too much debt, then yes, we would go bankrupt. The government does not use debt to finance anything though. They also do not use taxes on the federal level to “function”. I would highly encourage you to read a book written 2 decades ago by Randall Wray to help explain this.

    The idea of a US dollar crisis is also not going to happen. The value of the dollar is not left to whether foreigners buy our debt or other types of thinking. The value of a dollar is derived by the governments ability to require taxes be paid in dollars, and they will throw you in jail if you don’t. It has been this way for 4000 years in the world.

    The next down leg in the market probably won’t happen until the end of QE II is upon us. The market may anticipate it by a few weeks, but until we get closer, you should just buy the dips and forget the logic behind why it should go down:

    http://seekingalpha.com/article/248003-the-end-of-america-not-quite

  104. Tim and Jeanene

    Correction – it is wrong for sovereign countries who issue their own currency and don’t peg to anything – but is actually right for countries who don’t fit this profile…..

  105. Tim and Jeanene

    http://bilbo.economicoutlook.net/blog/?p=2905

    This article will go a very long way to explain much better than I do why there is no need to worry about the end of America. I used to be a doom and gloomer – and everything in the article I used to DISagree with. But take the time to think through what it says, and it will help you sleep better tonight, and even spread the wealth outside of the gold only trade.

  106. Gary

    Tim,
    If you think the laws of economics somehow don’t apply to a country I’m afraid you are going to be sadly mistaken.

    Just printing money isn’t magically going to cure our problems.

    As a matter of fact it’s been tried many many times in history and not once has it ever worked. I’m willing to bet it’s not going to work for the United States either.

  107. Avann

    Tim and Jean … I’ve been reading some of this as well lately.
    My question then is … what was different in Germany in the early part of the century and more recently Argentina and Zimbabwe.

  108. Tim and Jeanene

    What laws of economics are you referring to that I am missing?

    I’m telling you – take the time to read MMT. Yes ONLOOKER – it will make your head explode. But if you are able to understand it, you will understand why we haven’t exploded yet. You will understand why Japan is still fighting deflation even though their debt to GDP is 3 times larger than ours.

    Gary – the world has never seen a unified floating exchange rate system, thus their is nothing to compare with history. Often times we like to say that no country has ever printed and survived, but that has more to do with the fact that the rest of the world did not join in it.

    I used to deeply fear money printing myself…… until I learned the truth and accounting behind our monetary system.

    I’ll bet you two burritos that we do not get hyperinflation in the US, and we do not have a currency crisis in the next decade!

    πŸ™‚

  109. David Kafrick

    I tend do agree with Tim. The fear of hyperinflation is overrated and the fear that something bad will happen to the U.S. is also overrated. In my country we´ve had hyperinflation of 30% a month (that´s right) and a few years was all that was needed to fix the problem. The U.S. will be just fine.

  110. Tim and Jeanene

    Gary –

    Can you please point me to the history in which you refer that we have done this before? By that I mean and apples to apples comparison in which the whole world was on a fiat/exchange rate system, and no currency was backed by anything, and then it all fell apart?

  111. Bob loves Hawaii

    I have not read the article yet, but the problem is not government defaulting on the debt, it is the taxation on the people that brings the party to the end. The Federal Reserve prints debt, not currency, the exponential nature of interest rates causes an imbalance that destroys economies.

    What happens if China decides to anchor instead of float, they get to buy all of the resources they need, and the floating currencies are dead.

  112. ALEX

    MMT?

    Methylcyclopentadienyl manganese tricarbonyl (MMT or MCMT)?

    Million Metric Tons?

    Multiple Mirror Telescope?

    Mission Management Team?

    Mobile Medical Team?

    Mood Management Theory?

    Help?? What dont I know here?? THanks!

  113. Tim and Jeanene

    This is from Wray’s book, and I challenge anyone to refute it. I tried and failed, because it just didn’t mesh with what I thought was the truth:

    In all modern economies the government defines money by choosing what it will accept in payment of taxes. Once it has required that the citizens must pay taxes in the form of money (say, dollars) the citizens must obtain money in order to pay taxes. In order to obtain “that which is necessary to pay taxes”, or money, they offer labour services or produced goods to the government and markets. This means the government can buy anything that is for sale for dollars merely by issuing dollars. The government does not “need” the publics money in order to spend (or China’s for that matter); rather, the public needs the “government’s money” in order to pay taxes. Once this is understood, it becomes clear that neither taxes nor government bonds “finance” government spending. Instead, taxes are required to give value to money, while bond sales are a part of monetary or interest rate policy (providing an interest-earning alternative to non-interest-earning currency to be held as a store of value – thus soaking up money in the system and paying people to give up that liquidity)

  114. Bob loves Hawaii

    At any rate it does not matter, own things that have limited supply and pay for it with something that has unlimited supply. you will make money.

    I believe gold, silver, hard assets fit that bill.

  115. Tim and Jeanene

    Alex –

    Modern Monetary Theory

    It’s an eye opener – and I used to be an Austrian Economist who screamed for a gold standard, so I do not approach this subject blindly not knowing the other side of the debate.

  116. DG

    T & J: Is there no level at which printing becomes a problem? Suppose the Fed created a sextillion dollars next year. That would just be absorbed somehow? The price of goods would not go up? People would not start wanting to get out of dollars? Regardless of the “theory” this just does not make sense to me. I have no idea whether something happens next year or not, but saying that there is no level of printing or debt that can cause a problem seems prima facie absurd.

  117. Redwine

    T & J

    You assume that because the US Dollar is the worlds reserve currency, unlike any fiat in history, that hyperinflation will not happen. In reality, the fact that so many dollars exist, paper and electronic, increases the chance of US hyperinflation when this enormous amount of currency floods the US from the worlds reserves in an attempt to buy any and everything denominated in US Dollars (as the dollar is falling off the cliff).

    Hyperinflation is a psychological occurence. In a word, PANIC.

  118. Avann

    T & J … that’s a wonderful explanation but that would only work in a closed system … as soon as you must pay for foreign goods and services it surely falls apart. Why would China, Russia and the rest of the world continue to accept worthless US paper?
    US citizens MUST transact in US$ but the rest of the world surely does not.

  119. Tim and Jeanene

    DG –

    Government spending can lead to inflation, but only when capacity utilization in any market is at a peak. If the US can only produce 10 million cars, but the government and public combined demand through spending 12 million, then the prices will indeed go up, unless productivity/production increases. Right now we sit at something like 70-75% capacity utilization and 10% unemployment. Austerity will kill the chance for 100% capacity utilization. Just look at the UK and how they just reported negative GDP while being on austerity.

    Government deficits offset public savings and exports to the penny. Government surpluses will always lead to the private sector going into debt. Public saving will require the government to run deficits.

    The blogs I posted and Randall Wrays books are earth shattering and much needed to guys like me who used to fear doom and gloom and desire a gold standard again.

    I highly encourage you to get your hands on it and read it with an opened mind. All that has happened the past few years will make a heck of a lot more sense. It will help you understand why Japan will not have a crisis and why we not need to fear China ever stopping the buying of our bonds.

  120. Keys

    Don’t buy that one…Taxes give money value. Really?

    Life is based upon contracts and the appreciation of one’s position after that contract, not the appreciation to increase gov’s holdings. Why do you think most business people leave areas that have higher taxes…it sure ain’t because higher taxes bring a higher value to the currency.

    In order to contract, one wants to know the value of the contract will be maintained. IE a dollar today will be worth the same at the beginning of the contract as at the end. It doesn’t even have to be dollars. Anything that will temporarily store the work done, before that person can spend or will maintain that purchasing power until they can spend it. In the absence of a tradable item that preserves purchasing power, we are stuck with the inefficient bartering system.

    Taxes are the last thing to give value to a currency…Like paying the king is some how my duty…the king can go get its own food.

  121. Tim and Jeanene

    Avann – “that’s a wonderful explanation but that would only work in a closed system … as soon as you must pay for foreign goods and services it surely falls apart. Why would China, Russia and the rest of the world continue to accept worthless US paper?”

    Great points and there is an answer for that. Keep studying the works of Wray and you will get to it.

    One foundational point we must remember is that the US economy is $14 trillion while China is less than half that but growing. If the world’s largest customer is the US – then you can only sell your stuff in US Dollars to that country. Until another country surpasses the US in GDP, we probably don’t need to worry about losing our reserve status. The one who buys dictates to the one who sells what currency they will use.

  122. Tim and Jeanene

    Bob loves Hawaii –

    I challenge you to send the IRS a cold coin instead of dollars to pay your taxes.

    Even the biggest gold bugs HAVE to convert their gold into dollars in order to pay taxes.

    Sure – you might be able to exchange gold for goods and services, but only if you can find a willing barter partner. When is the last time you bought a gallon of milk with gold shavings?

    While it can happen, you have a very limited group of trading partners who will exchange goods and services for gold coins.

  123. Tim and Jeanene

    Keys –

    I hear you, and I know where you are coming from since I was there. The truth is that we are coerced into using dollars that the government created, therefore are we truly free? Free men use barter. Yes a response of taxes is to flee. If we all truly hated the governments system enough, we would all expatriat and move somewhere else. The fact that we don’t means we agree to pay the taxes which we are coerced to pay by threat of prison and fines.

    Read my SeekingAlpha article I wrote. If the government stated tomorrow that they would only accept payment of taxes to be settled in hibiscus flowers, the value of paper dollars would plummet, and hibiscus flowers would skyrocket overnight.

    Sorry to Gary for hijacking this blog, I will refrain from further posting and let things get back on track.

  124. Bob loves Hawaii

    You miss my point, I can sell my gold coin for cash and pay the IRS.

    also what you are seeinf in north Africa and South Asia is the first brushfire of people experience great discomfort of having linked their currencies to ours. Since their per capita GDP is significantly lower than ours, the rise in food and oil (as counterweight assets owned by rich people to protect against monetary inflation) are showing us how the Engel curve works, and these riots will work there way up the nations GDP chain the more Bernanke does this.

    Their program is not benign, and I’ll make a bet with you. I’ll pay for your buritto in dollars I convert from a gold coin in 5 years, you use pay for it with $8 dollars in todays currency.

    Who will buy more burrito for the other?

  125. Tim and Jeanene

    One last thing –

    Daniel – trust me – I used to think that way too. Austrians have it wrong because they don’t realize that money is determined by the government and their ability to throw you in jail if you don’t give it back to them. I used to have Mises as my home page on my browser. Wray does a fantastic job of showing the history of money and the the flaws of tying the money to something like gold or oil.

    Rocked my world.

  126. Tim and Jeanene

    Sure if inflation happens – you will get more burrito. If deflation does, I will.

    You assume that we will have inflation because we are printing money, but forget to factor in capacity utilization.

    Food prices are too high because the markets are stuck in gold standard monetary thinking and speculators are driving it up. It will come down:

    http://bilbo.economicoutlook.net/blog/?p=2562

    http://bilbo.economicoutlook.net/blog/?p=930

    More great articles to get the brain off of the old gold standard.

  127. DG

    T & J; Just for the record, there have been tons of superb theories that were completely airtight…until they weren’t. Science—politics—monetary policy—no subject area has been immune and I suspect MMT won;t be either.

    I noticed you never answered my question about the Fed creating six sextillion dollars next year and what the effect would be. Are you saying that would be fine? I guess they could just raise the tax rate enough so those dollars were needed (?)

  128. sophia

    don’t you think that this market is really boring? It feels like the eye of the storm… It is slowly drifting… Being an ex-trader in a big bank, I am wondering if those banks are really able to make money at this point on time with everybody so confused about the future…Oil just crossed 100$, but the market seems unfazed…Really worrysome

  129. Patrik

    No price for food and energy is high because of QE2. Bernanke and his moneyprinting. If they print more money of course price for food and other stuff will get more expensive.

    But maybe that is to easy to understand.

    And its not onle the dollars fault that food is expensive. We have shortages. USDA early tried to manipulate corn and wheat inventory this summer. But they can not do it anymore. We will for sure have higher prices than this.

    The dollar weakness will not help.

    Its not about speculation..

    Who told you that? US, China, Argentina and almost every country in the world got affected by bad weather. This will be a nightmare with food shortages this spring and summer..It will get worse. Not only because of a weak dollar..

    Who told you that theres speculation? Are we living on the same planet?

    /Patrik

  130. vuvvy

    T&J,
    You wrote” the world has never seen a unified floating exchange rate system, thus their is nothing to compare with history. Often times we like to say that no country has ever printed and survived, but that has more to do with the fact that the rest of the world did not join in it.

    I used to deeply fear money printing myself…… until I learned the truth and accounting behind our monetary system.

    I’ll bet you two burritos that we do not get hyperinflation in the US, and we do not have a currency crisis in the next decade!”

    I’m not the world’s smartest person but anytime someone says this time is different ya gotta pay real close attention. You also said Japan is not a disaster. Have you seen what the Nikkei and Japanese property values have done the last 25 years? I guarantee if you were a buyer in Japan in 1987 you wouild not be saying that.

  131. sophia

    V,

    I lived in Japan for 3 years..I can guarantee you that excess debt and bubble burst is not fun…
    I live now in the UK..It might be just a perception but people seem stretched and a bit down, like 2008/2009…Higher taxes, higher commodities, lower incomes, lower house prices, why do you want to be optimistic?

  132. Patrik

    Damn..Was so close to buy oil this morning but didnt..Was afraid that we would have a bounce back.

    I still think we will have mini crash on the market..This will not last. What will drive this market higher at this point? A weak dollar? No we will go down. Dont know how far.

    I think Polly got i right..Think it will begin tomorrow and the rest of the week at least..Mayby longer..I have a crystal ball..And today the colour is red..Must be a a warning..Its a bad omen for sure..:-)

  133. DXB

    I’d like to add that anyone who has actually READ John Maynard Keynes’ ideas on subjects like money and speculation will inevitably realize that the pervasive view of money and government finances is simplistic at best and, quite frankly, downright idiotic.
    I’m not just referring to Gary’s old song and dance about the Fed and money. I’m also referring to views in the mainstream media and of many people in the banking and finance industry on things like China and others ostensibly financing the US government by buying Treasuries.
    Austrian economics is dated and nowadays best utilized to win over people into the Doomsday Scenario of Money. People need to get over Austrian and accept that fiat money is one of the greatest innovations in human history.
    With whatever standard like gold standard, growth will be constrained and its precludes what the world has witnessed the past 70-80years.
    I’m not a Keynesian and I’m not necessarily a staunch supporter of QE II or QE ad infinitum.
    I just know that people are clueless about things like deficits, future government liabilities like Social Security, and the point of money printing.
    Rogers can afford to be intellectually wrong about something. Faber is Austrian it because he runs a business that depends on his stated doom and gloom.
    People like Wray will be accepted a few decades from now, when the average person get their head out of their ass.
    It’s always like this, the good ideas take decades to take hold of the public, retail or professional.
    The kind of nonsense Gary or Rogers spew out regularly that somehow considers government finances similar to individuals or even companies’ is old baloney that’s been regurgitated by every newsletter writer since the fifties.
    The main problem is that their statements are never substantiated with meaningful data and facts. Also, it’s a “theory” that has zero predictive value.
    Pretty sad state of affairs, if you ask me.

  134. DXB

    sophia, yes to your points, but is life over there in Japan anything like how and what the Gloom and Doomers would make it out to be?
    Life goes on. And you don’t need growth to progress. Japan is still an amazing place that scores great in many human development indexes.
    See Steady State economics.

  135. james r

    Hi T & J,

    Let me ask you, when we start to have real inflation and interest rates starts to rise above 6% or 7%or even 8% how will we be able to pay the interest on our debt?

    What will be our solution?

    Thank you

    James

  136. Tim and Jeanene

    Japan and our own markets blew up with speculation and easy credit. Bubbles in markets will not equate to the collapse of a country though, nor their currency.

    Have you seen what the value of the Yen has done since the peak in the Nikkei?

    It has trended higher – and this in the face of ever increasing “debt”.

    I would agree with you that government spending is not done wisely, but it needs to be done. Needs to go into infrastructure, or maybe even pay people on unemployment to go to college so the talent base of the labor pool increases.

    If we want to fix this mess, we need more regulation in the financial industry (thus de-financializing the country), less taxes, and more government spending.

    Government spending is not wasted as is universally thought. The government could start a new $10 billion a year agency to count leaves on palm trees in hawaii. While we would view this as pure waste (and it is) one has to follow the movement of the dollar. It would go to the employees of this dumb agency first, who would then use it to buy from local businesses, who in turn are productive and create wealth from free resources. Some of it will go overseas, which is why the rest of the world is becoming richer, because US deficit dollars are flowing there. They in turn have the money to now create wealth by turning free resources into goods and productivity. While it would be more efficient for the government to just create wealth by using “free” money they print to take “free” resources given to us by God (oil, iron ore) and convert those resources into goods which require jobs, which requires comsumption.

    The other side of the free money debate is offset by the free resources we have been given which we use. A tree “costs” nothing either, but can be used by people with jobs to create economic activity. People are coerced into this wanting to figure out ways to make trees create wealth because they have tax obligations on their land and possessions.

  137. vuvvy

    I like to keep it real simple. Somebody with big $ has been quietly buying gold for 10 years now, and it is probably a good idea to be on their side:)

  138. Tim and Jeanene

    vuvvy –

    I am not saying this is different – its just reality of the current monetary system. As long as Assets = Liabilities+ equity, the modern monetary system will continue to work.

  139. sophia

    DXB,

    What I meant is that when I arrived in Japan, the Nikkei was at 16500, look at where it is now…I don’t see how we can go on like that…If the American people feel richer because the S&P is at 1300, fine, but as soon as they go to fill their cars wih gas, the will realise that this is not wealth anymore…

  140. james r

    Hi T&J

    Japan has a strong dollar because they are a nation of producers and the debt they owe is to themselves.

    We on the other hand,have been losing our manufacturing edge and we owe debt to other countries.

    So if we as a nation continue on this path of more spending and less producing what is going to happen to us when inflation hits 6,7 or 8%?

    How will we cap it?

    James

  141. DXB

    I was a subscriber for 3 years but I cancelled because I couldn’t understand why Gary is so conspiracy theorist about the Fed’s activities and why he arrogantly thinks he’s so much smarter than the FMOC, a committee of several (over 10 people) Governors who decide monetary policy.
    The FMOC is also dynamic, meaning its members change every now and then.
    What I find absolutely astonishing is that Gary thinks he’s so much smarter than all of these people who are privy to so much information and data, and probably way more educated than he is.
    He also blames the Fed Chairman for meddling and somehow influencing or affecting his favored technical analysis tool, Cycles, whenever it doesn’t work as well he would like it to.
    Gary, rightly, has no time for the Gold and PPT and Manipulation theorists seriously, but his view of the Fed is nothing short of conspiracy theorist.
    Again, I don’t condone QE because I don’t know, and I’m not probably smart enough to understand what it is central bankers do. But to just dismiss them as idiots is plain stupid. Forget about the congressional testimonies where central bankers or Geithner have to deal with the morons in Congress. Listen to them at professional conferences and you know that people like Gary have no business passing judgement on the way they do their job.
    I also really doubt they are all corrupt as people think.
    After so many years talking to people in finance and banking about money I have decided that I actually like Greenspan. He actually understands what is money.
    Most people have this concept of money that comes from pre Bretton Woods.
    Greenie’s come out and admitted maybe he made some mistakes.
    I don’t really know if I’m able or qualified to judge people with big jobs like the President of the USA or the Chairman of the Fed.

    I like the fact that I know that, unlike many of these pundits selling newsletters and subscriptions, who of course know everything.

  142. Avann

    Can I be one of the leaf counters?
    Why would anyone tolerate this?

    Everyone would be lining up for the leaf counting jobs (especially if they’re in Hawaii πŸ™‚ ) … may as well just give people money to sleep 10 hours a day … it would be as productive as leaf counting.

    And that’s the problem … you can’t just give away money for nothing because eventually everyone will just do nothing … which is where the US is heading with all the government and service sector jobs … money for nothing.

  143. DG

    Maybe someone else can ask this as T & J have not answered this twice now:

    “You never answered my question about the Fed creating six sextillion dollars next year [by crediting the banks, let’s say]and what the effect would be. Are you saying that would be fine? I guess they could just raise the tax rate enough so those dollars were needed (?)” Is there no level of money creating that creates a problem?

  144. Tim and Jeanene

    James –

    Interest rates on our debt will never be a problem – trust me.

    I will be you 2 burritos that we will NEVER have a Treasury Crisis.

    If the US Government was a household, then I would agree, bankruptcy would be imminent.

    But it is not, and you will sleep better if you figure out “WHY?”

  145. Redwine

    The FedRes and banking industry are staffed with such wonderful college educated and nobel prize winning people. That must be the reason our economy is in such a beautiful state. Excuse me while I gag.

  146. DXB

    james r
    respectfully,
    what you say is SO tired and cliche’d. People have been saying the exact thing you are saying for decades.
    Everyone under the sun in banking and finance says that, because it doesn’t take a genius or much hard work or study to come up with such statements.
    The global economy is way more complex than this.
    The USA, for example, is the superpower of global agriculture. Only a small minority of Americans, the farmers, are able to outproduce and outclass in terms of productivity, millions of farmers in the rest of the world who are lightyears behind. Just because every decade America lost more and more farming jobs never meant anything.
    Tomorrow, nanotech will do the job of a thousand chinese factories, quite possibly. All technology is deflationary, whether we’re talking about nanotech production methods in the future, new drugs that may cause specialized cancer centers to go out of business, or Chinese methods to build 20 storey buildings in 6 days.
    Deflationary because less people will have to work due to efficiency and productivity increases.
    No gold standard or thinking that compares running an economy to running your personal or household finances to avoid bankruptcy or make investments.
    Such comparisons are blatantly naive.
    I’ve said it before many months ago.
    People say Japanese debt is domestic owned.
    If that’s true, and I don’t have the figures in reach of me now, then it’s because Japanese people have most of the world’s yen. But I doubt it, as there is a lot of yen issues out there (Samurai’s). A lot of it is corporate and goes into JGB’s.
    The USA’s paper is probably more internationaly owned than the yen because most debt and economic activity is denominated in USD.
    With the global reserve currency, the problem if that’s what you want to call it, is that everyone deals mainly in dollars.
    The overwhelming majority of world debt is denominated in Dollars.
    Debt leads to economic activity and consumption, and that usually leads to people earning money in Dollars for the most part.
    That money HAS to go somewhere. It goes into Treasuries.
    People who say countries like Germany or Japan or China must buy stuff like commodities or invest their Dollars in companies, don’t get it. They’d end up releasing their earned dollars for those commodities or investments. What happens to the exchanged Dollars. They usually end up in the US anyway, ultimately T-bills and bonds.
    People need to comprehend that Treasuries and Bills are really bank accounts that pay some interest.
    Do you own your bank if you are the biggest depositor there?

  147. Tim and Jeanene

    No DG – we would not be find.

    There is a limit to the money supply and that limit is the productivity of the economy.

    As productivity and demand increase, we will need more money.

    Giving $6 trillion to every person is more dollars than the economy can absorb through production.

    On the flip side – $600 billion is not nearly enough while we sit facing 25% under-utilization.

    Satisfied?

  148. Avann

    DG … the answer is simple … it does not work!

    Which is why you’re not getting an answer.

    Like I said you can’t just give people money to count leaves …everyone gets $1,000,000. There we go every US citizen is now a millionaire … yeah that’ll work!

  149. Tim and Jeanene

    “And that’s the problem … you can’t just give away money for nothing because eventually everyone will just do nothing … which is where the US is heading with all the government and service sector jobs … money for nothing” – Avann

    You are correct to a point. This is where the idea of capitalism comes in. One has to make the decision, do I take a mediocre life and suck on the teat of the government and live in the ghetto and feed my family on food stamps? Or do I go out and work hard and try to create wealth from the free resources around us so that I can have a better and richer life?

    Capitalism will win out over socialism in the end, because people inherently don’t want to be told where to work or what to do, and they are greedy. If everyone was paid the same money to sit around, there would still be people who would steal from others as they wanted to get ahead. This would require police officers. Unless you were willing to pay them more or giveother incentives, they would not take the job as it is much riskier to their lives than sitting around.

    Until humans stop being greedy and sinning with theft, and until they stop desiring and coveting more, capitalism will be instilled to make sure we never go into an economy as you suggest. Sin will never end.

  150. Poly

    Jeanene,

    You’ve stepped into the wrong blog for this type of talk. πŸ™‚

    Yes you’re correct, the US can never technically default, no matter how much debt is issued and no matter the rate of interest. But the devaluation of the currency would be such that it’s as good as a default! The rest is all theory.

    Now let’s move on.

  151. DXB

    Lots of international companies and banks issue huge debt or “paper” in other currencies, like Swiss Franc and Yen, mainly because those two central banks have kept their rates incredibly low for so long.
    That would mean more of those currencies get printed in the long run and they have to end up somewhere. That somewhere is Japan or Swiss gov bonds.
    Nowadays Japan and Swiss currencies are tremendously overvalued compared to other currencies.

    Needless to say, Swiss and Japanese companies are producing and exporting more, regardless of how stronger their currencies have become.
    People , wake up , and realize that the conventional wisdom is utter bullshit.

    If readers here do a very basic comparative analysis of the USA’s finances with countries like Swiss or Japan they should conclude that the US is actually in better shape. That goes down mainly to USA’s positive demographics. More tax payers will be born at higher rates in the USA than comparable countries.

  152. Tim and Jeanene

    Avann –

    You are imposing a conclusion on my line of thinking that is offbase.

    Require taxes in dollars = providing of those dollars by the government through printing = businesses and banks accepting those dollars in their offering of goods and services in order to get their hands on the dollars to pay the taxes = those businesses and individuals taking resources like lumber that are free and converting it into goods and services they can sell because they are needed by the economy to meet the tax liabilities.

    So – money printing = wealth creation down the line, because it eventually flows into the hands of those who can turn something free, oil, into something useful.

    Too much printing though will create more demand than the producers of wealth can contribute to the demands of the economy.

    Right now, we are a long way from that as a whole. Sure – some areas like food are seeing it, but other areas like housing are not.

  153. DG

    T&J:Getting there. So for you, so long as capacity utilization is not maxed out, there is NO LIMIT to the number of dollars that can be produced without problems. What happens if the money is created, and afterwards utilization goes to 98% because people realize it is in their best interest to get rid of the dollars, fearing inflation as they would? If the Fed just destroys what it created we go into a deflationary tank, no? If utilization were always to remain at 75%, I may be able to buy what you are saying, but that’s a moving target, no?

    If utilization gets to 98%, then we have a problem you are saying. Why? Since we have a floating currency and our debt is in dollars, given what you are theorizing, we’d still be fine, no?

  154. Tim and Jeanene

    “What happens if the money is created, and afterwards utilization goes to 98% because people realize it is in their best interest to get rid of the dollars, fearing inflation as they would?” -DG

    Well hopefully our government will raise taxes to suck currency out of the system through higher taxes at that point, and they will raise interest rates, which is again – another function of sucking out excess liquidity if inflation is starting to be dangerous as a whole. The other option is that all the new money and incentive of the people to get richer will cause them to find new businesses that can absorb more of the funds. If we do not create and go into 98% utilization with the same industries and productivity, then we will have problems as that current economy will have hit its output limit. So far though, America has adapted to the call over the past few decades, and I doubt they won’t answer the bell next time.

  155. Avann

    OK … I think I get it … QE may not destroy the US economy today, tomorrow or next year but it will eventually if it keeps up. We’ll just have to wait and see how much QE the economy can absorb.
    I hope BB and the rest of those “educated bankers” know where that breaking point is.
    I think the point is it definitely cannot go on infinitum … which is I think where we got off on this tangent.
    I’ll keep reading MMT for now … my head still hasn’t exploded.

  156. Poly

    James, A default would only result from not being able to meet or service the “nominal” and not the “real” nominal principal and/or interest on the debt. The US never faces such a threat.
    If defractionalization is devaluation of the currency, then yes we are defaulting on the “value” of our debt.

    I guess their argument is who cares, the issuance of debt is not a requirement to fund government or spending, the greatest misconception is that “they won’t buy our debt”

  157. DG

    Perhaps so, but there are significant time lags to these things. It is not so easy to just instantly create a new business that will suck a trillion wasted dollars into something productive. nor is it easy to tell various voting interest groups “We need to confiscate (tax) your money to prevent a problem. Sorry.” I suspect there will be some resistance there. This is staring to sound like Communism. Great in theory but of no real-world application. “All we have to do is start a multi-trillion dollar group of businesses or confiscate the excess money through taxes.” If this is what MMT relies on to have this current mess work out “fine” I’ll pass.

  158. Bob loves Hawaii

    Interesting argument today. We are not creating dollars, we are creating debt instruments, instruments that get leveraged. This debt is being unevenly distributed to the poor and middle class, yet they are nor spending that money (not enough transfer payments).

    also, we may have 25% underutilization in aggregate, but not where it matters, food production.

    It is these imbalances that will crush our market,as it is in North Africa. If it was so easy those countries are at 70% underutilazation, but they cannot provide the basics for their people.

    The reason is greed, and we have not figured away around that yet.

  159. jeff

    tnj

    hi all , well i finally had $.o2 to throw in.. tnj i would rather have someone principled like gary be in the government, than the harvard crowed running it. They are too smart for my good and if i could turn there rule over to you and for you that would be great. they are a smart crowed, but i would still take a principled man, (and i am sure gary is educated!) any day of the week, to run this country. Happy tradeing all =)

  160. Ben

    I own a proof buffalo from a few years ago — it says $50 on it. I’m sure if I sent it to the gov’t, that’s what I’d get for it.

    Legal: yes! Smart: No!

  161. Wes

    I think sooner or later, someone will ask why gold has been in a bull market ?

    It sure as heck isn’t because of inflation, never has been (recently) and most likely won’t be anytime soon.

    If I owned gold, I think I’d want to know the answer to this question.

  162. james r

    Hi Wes,

    Gold is a future indicator of inflation (if I am not mistaken).

    If you go back to the 70’s you will see gold had topped off a year or so before inflation hit its high.

    Real inflation is not here yet but if you trade in the futures like wheat, soy, corn, cotton, etc. you will see these prices have appreciated handsomely over the last year. (These are the raw materials that will create inflation from higher prices).

    I guess that’s why they call them futures because it’s a precursor of what will be.

    James

  163. Wes

    Poly,

    There may be a real difference of opinion about the direction of the market, tomorrow.

    Jason pointed out (sentimentrader) that a full 94% of 2010’s entire gains came on the 12 first days of each new month.

    In fact, had you bought the close on the last day of the month (think today), and sold the open on the next day, you would have captured 61% of last year’s gain.

  164. DXB

    “Wray: The Federal Budget is NOT like a Household Budget – Here’s Why”

    Something I referred to earlier.

    jeff
    then I urge you to listen to the roundtable discussion I linked to above
    This isn’t about Harvard education. If anything I find Gary’s attitude towards ideas that don’t subscribe to his mom and pops ideas about money and finance quite condescending and arrogant.
    Maybe I would have remained a sub if he wasn’t so dogmatic about his very mainstream economic and monetrary views.
    Nothing contrarian or original about him when it comes to fundamentals.
    I heard the same dogs barking all the way through other bull markets.
    That’s why I don’t dismiss Beanie here.
    Legit viewpoints whereas the guy who claims he doesn’t have a crystal ball is so sure stocks are in a secular bear. How? Based on charts and flawed fundamental views.
    Miners may end up being the crazy mania Gary and many of us think they will be but believe me good money has already been made in other sectors as well.

  165. David

    Wes,

    Gold typically does well during periods when confidence in paper assets — stocks, bonds, paper money — is on the wane. It tends to run counter-cyclically to these assets.

    It is not an inflation hedge. Gold performed well in the deflationary 1930’s but did very poorly from 1980-2000, a period of modest but real inflation.

    I like to think of gold as the “penalty box” for capital. Gold is a form of hoarding in periods when stocks are going through P/E compression, balance sheets are being repaired and capital cannot be deployed effectively in the market.

  166. ALEX

    on another different note

    I bought ROSE in 2009 for $5+ and sold at $8+..thought that was great…today it hit $40 πŸ™

    Along with CHK MEE HK LNG etc etc last 2 months…wish I had believed in the oil/ energy trade a bit more

    hmmm KWK tomorrow?? πŸ™‚

    as for MMT…I do hear Bernanke saying– ‘we’re adding liquidity and will absorb it later’.

    We’ll have to wait and see I imagine ,if its really uncharted territory ..

    but dont lose focus on your markets over it πŸ™‚ added to DNN position after posting about it earlier.

  167. DXB

    Wes
    That’s a question that really interests me.
    I have done a lot of digging, yet I’m not sure why gold or PM’s are in a bull market.
    I also look to offload my gold at a one to one ratio Gold/Dow or even one gold buys 2 Dow, but why should it be this way? Why should we be so sure it should happen?
    I don’t know the answers but I am sure I know that lots of people don’t have any cogent arguments to offer.
    I like gold because of the favorable supply-demand situation and got on board a few years after the bull market began. Clear trend.

  168. Wes

    It’s not likely to happen, James.
    In the 1970’s and early 1980’s, almost everyone’s wages were indexed to inflation. If inflation went up, you got a COLA and then you got your merit raise. And this happened like clockwork twice a year for most people.

    So, if gas went up, it was no big deal as your pay went up at least as much.

    In addition, homeowners were seeing outrageous increases in their equity, and hardly anyone was debt free, because there was a general feeling that money would be worth less in the future, and holding it was downright foolish.

    Not so today. If you have to pay $4 for gas, you will now have less money to buy other things, including gold.

  169. JReality

    Beanie, how did it work out for the folks who were talked into buying either the Nikkei or Nasdaq near the top by the perma-bulls? Buy and hold didn’t save them.

  170. Wes

    DXB,

    It’s because of the gold ETF’s making it so easy for anyone to buy gold. You once had to haggle with someone to buy or sell gold, but not anymore. And, the ETF’s use the proceeds to buy physical, thus creating the real demand.

    If all investors wished to include gold in their portfolios even as a very small percent, there is not enough gold in the world to allow that to happen at today’s prices.

    So, it’s a simple case of supply and demand, and has nothing to do with inflation, except that the false fear of inflation helps create a lot of the demand.

  171. Tim and Jeanene

    DG – if that is your conclusion, you have not taken the time to understand MMT.

    Again – I highly encourage you to take the time. I used to be where you are – trust me.

  172. David

    Wes,

    The ETF’s are not a sufficient explanation. Supply does not create demand in and of itself. We have had raging bull markets in gold when there were no ETF’s.

    A simpler answer is the commodity cycle. Gold is not the only asset in a bull market. Commodities as an asset class have been in a bull market for the past ten years: Oil, gold, steel, copper, etc. They all bottomed in 2000, when stocks topped.

    This is not a coincidence. The commodity cycle tends to run counter-cyclically to stocks. This is because of cycles of over-investment and underinvestment. Overinvestment eventually leads to lower prices, which eventually bottom and lead to higher prices. For instance, in 2000 oil was selling for $17/bbl, and no one wanted anything to do with it. No new wells were being drilled because it was uneconomical to do so. Capital was being misallocated into tech and dot-com stocks. At some point, the overinvestment led to scarcity, which led to higher prices, which leads — gradually — to new investment and conservation. At some point, there will be too much investment in energy, and oil will go into another long-term bear market.

    The same applies to gold. At $275/oz, it cost more to mine an ounce of gold than you could sell it for. As the saying goes, if something cannot continue, it must change, and that’s what happened. Gold began a long-term bull market.

  173. Poly

    WES,

    I live in the “current situation”.

    I’m big on sentiment too, but the type of stats you always throw around that determine your trading remind me a lot of predictions made in the old farmer’s almanac. They’re right often enough to gain following, but only slightly more than random.

  174. DG

    T & J: I have not taken the time, though I have read some. I am going off what you said, that if cap util gets near 100% then we will in fact have a problem unless 1. The gov’t is smart enough to tax the excess away (good luck getting that to pass in Congress!) or 2) new industries form to create enough goods to soak up the excess capital. I wouldn’t think such industry creation is more than a “maybe.” If those things don’t happen after we get near full cap util we will have significant inflation. Again, this is based on what you have already said.

    To be fair, this is too complex for my brain. It seems obvious to me, though, that creating money and taking on massive debt willy nilly must have some effect in the real world, regardless of the theory du jour stating it doesn’t.

  175. Gary

    DG,
    Of course it has an effect. We’ve seen it in action for the last 10 years. All these ridiculous theories are just that …theories.

    Starting in 2001 the Fed began debasing the currency as a way to abort the secular bear market. It temporarily created a real estate and credit bubble both of which collapsed leading to the worst recession in 80 years.

    Now the government is trying to pile on ever larger amounts of debt in order to keep the ponzi scheme afloat.

    It didn’t work from 2002 to 2009 and it won’t work this time either. The simple fact is that just printing money, even if everyone else is also printing, will not create prosperity. It will create inflation.

    We are seeing it right now as food prices are skyrocketing worldwide. It’s leading to social unrest and rioting in poorer countries.

    The last several years has clearly shown these theories don’t work. One can ignore reality if they want. Of course that leads to just repeating the same mistake over and over.

  176. Keys

    Tried given some credence to a shallow reading of MMT. From what I understand gov either steal from the population through inflation, or through taxation….Make people poorer during bad times(inflation), and poorer during good times(taxes). And if the printing is off, taxation and inflation. Slavery is still slavery, and in this model everything we get goes to the king. We also don’t deal with the fact of when the kingdom has no more servants to tax, since they have been taxed to death or they can no longer trade with the currency that the king destroyed.

    I will stick with Gary’s approach and listen to my pockets. Thanks for introducing the material though…nothing wrong with being challenged, I just don’t buy it.

    Alright back to the troll cave…
    See what tomorrow holds..

  177. Patrik

    I Remember the tv show in 2006. Peter Schiff was one of six economy experts..So called experts..Schiff warned them all..They just laught at him..! It was not nice to see..They called him crazy and stuff like that.

    Yeah you all know how it ended..He was right..Now they are doing the same thing again but some people still believe that there will be a different story this time..Its actually very interesting to read the comments..

  178. TZ(5288)

    If you keep your mind open long enough, people like T&J and DXB will start throwing trash in it.

    Good luck to those of you who fall for this. You are going to need it.

  179. Daniel

    Unfortunately Austrian Economists always seem to be ostracized! I assume it is because the world does not want to actually see the truth and (worse) have to implement painful policies to deal with that truth!
    As much as things change they sure do stay the same!!:))

  180. T.J. Rand

    Wray crowd-

    I’ve read through (most of) your arguments, both here and at Seeking Alpha, and I’m struggling. It’s the same as when I hear really cogent sounding words and phrases that, in their entirety, don’t pass the common sense test. To my simplistic mind, you can’t solve a problem of too much debt with more debt – even if it is moved to a different balance sheet.

    And I don’t buy that adding more money to the system won’t create problems- if that were the case, why not make everyone who lost $ in 2008 whole? Just give them the money.

    And the idea of a single capacity utilization figure oversimplifies the fact of different supply/demand dynamics across different sectors.

    Lastly, I don’t know that we can count on the continued productivity gains that have overwhelmed inflation in the past 40 years.

    Maybe it’s my own limitation, but in my experience when a set of ideas are this complex and counter intuitive, they are generally wrong.

  181. Jayhawk91

    Gary may not have the absolute correct macro view down, but he sure does know how to navigate cycles in a bull market (gold/silver stocks. I know he personally did over 100% return last year as did many of his subs. This has been the case the past three years I’ve been watching his trades. Not too shabby..I’d be curious to find out what Tim’s returns have been.

    Now, is it because there are a bunch of nut jobs claiming the world is ending because they are too stupid to understand MMT and the media jumps on this doomsday stuff or is there genuine malinvestment that causing money to move into sectors where there’s no true demand? At this point, the cycles still point towards higher gold and lower dollar, so I’ll take a stab at buying silver stocks.

  182. David

    Interesting and possibly investable information:

    A world valuation heat map, with apples-to-apples valuation comparisons between the world’s nations.

    http://seekingdelta.wordpress.com/2011/01/26/world-market-valuation-heat-map/

    Unsurprisingly, Japan is far and away the most undervalued market in the world, at .53 of book value. The PIIGS are in second place.

    China is valued at 4x Japan.

    This is not surprising. Japan has been through a 20-year bear market with no end in sight. One contrarian sign is that mutual fund companies are now offering Asia funds that specifically exclude Japan. Meanwhile, every idiot I know talks to me about how China is the future. Geez, I had no idea!

    Another contrarian indicator is my stomach. When I think about investing in Japan, I want to puke. This was the same feeling I had in 2000 when someone suggested I buy US Steel. I bought a little at $10, sold at $18, and felt pretty smug. Then US Steel went to $180. Luckily I did the same with gold and silver and rode the bull ever since.

    The next bull market is Japan.

  183. Tim and Jeanene

    That is the problem with the name Modern Monetary Theory.

    A theory: a proposed explanation whose status is still conjectural, in contrast to well-established propositions that are regarded as reporting matters of actual fact.

    MMT should be named Monetary Reality – because it is fact in which we live today, not conjecture and a theory.

  184. Shalom Bernanke

    Sure, there are no repercussions as long as you can keep ripping off a dupe (in this case the people via taxes), but eventually it busts. I bet taxes aren’t going up in Egypt when this situation gets sorted out.

  185. David Kafrick

    TJ Rand said:

    “Maybe it’s my own limitation, but in my experience when a set of ideas are this complex and counter intuitive, they are generally wrong.”

    You can tell that to Quantum Physics, General Theory of Relativity, Theory of Evolution, Heliocentrism, and other such theories that run against common sense and basic intuition.

    I am not endorsing this MMT. But I don´t understand this argument at all. So if a theory is complicated enough so that the common man cannot understand it than it probably is false?

  186. DXB

    From an Amazon review of Wray’s Modern Money:

    “This powerful text is my most valuable. It should be required reading for every macroeconomics 101 class. Wray explains how the monetary system works according to Modern Monetary Theory. Reality proves Modern Monetary Theory (MMT) correct every day. You need to read this book if you ever wondered why Treasury auctions do not fail while pundits wail that nobody will buy US bonds because the debt is too high. The author answers so many questions in this short book. For me, it offers the only credible explanation for the real world.”

    I also agree with David about Japan. I am invested there for the long run.

  187. Gary

    The problem is that it is pure fantasy.

    We all had a ringside seat to how well these so called theories work.

    Austrian economics has predicted everything that has happened.

    Schiff, Rogers, Faber, etc., all proponents of the Austrian school, have been exactly right time after time. I find it amazing that anyone is still willing to take the other side in a debate. They always end up eventually looking like an idiot.

    Seriously how many times can one be proven wrong before the herd quits listening to you?

  188. Shalom Bernanke

    It’s also interesting that DXB and Tim come in together supporting this BS on the same day. Smells like propaganda to me, so I’ll stick with what’s worked for me the last 15 years.

  189. Tim and Jeanene

    Yeah – Shiff has been so right about the collapse of the dollar?

    http://seekingalpha.com/article/106824-being-wrong-for-five-years-makes-peter-schiff-right-now

    Schiff has been wrong for a very long period of time actually.

    Where Austrians do get it right is in observing bubbles and mis-allocation of capital. Never have I denied asset bubbles take place……. but if you are saying the end of America is nigh, it will be you who will look like the idiot when it never happens, yet you keep calling for it AKA Schiff, Faber, etc.

  190. james r

    Hi Wes,

    Inflation will happen.

    Right now we are still experiencing deflation with wages and housing prices being cut, unemployment still high and credit too tight. Once things loosen which will take time (several years maybe) then we will start to feel real inflation. We will see interest rates start to climb well over 6, 7 and 8% then the question is what will the Fed do about it?

    If they continue to debase our currency to pay the interest then I believe we may run the risk of hyperinflation.

    Or how does the Fed raises the short term rate to squeeze out the excess liquidity and yet still service our debt?

    Maybe we can have a fire sale and sell Puerto Rico to China?

    Very interesting times

  191. Patrik

    There will be a lot of demonstrations tomorrow in Egypt.

    There will be over one million people demonstrating in Kario tomorrow. I can read it in the swedish newspaper Aftonbladet..lol!

    Wonder how much further oil can go?

    Schiff and Faber was right the last time. Nothing has changed it actually got worser so i cant understand why some people still looking for answers when its in front of them.

    Can we please talk about gold and stocks now?

  192. Keys

    I am starting to think about Anon1 again and Justin. We haven’t had a good blood bath on the blog for awhile since the anon approach was taken away. This discussion was too civil….lol..

    Anyways the claims about MMT are major….its proposes that national debts don’t matter, and that economic crisis will not result from them. Stating this as fact is dangerous…Moreso, I will state that US debt may have not caused a crisis int he US yet, but it has started in poorer countries…We are already seeing it.

  193. DXB

    james r

    You can do much worse than educate yourself a little and catch the last 15 minutes of that roundtable discussion I posted.

    You’ll learn that your fears are totally based on these false notions of how things work.
    This notion that America is in debt to China is pure horseshit.

    The same fears were echoed prior to the collapse of the Nikkei and the Japanese real estate market.

    Price rises does not necessarily mean lower purchasing power or consumption.
    In many countries lower rents due to collapses in real estate more than offset price rises in stuff.

    My guess is lower rents is one of the reasons we have recovery in most nations.

  194. Keys

    Patrick this is about gold,

    If MMT is correct, we should all sell our gold now. But yes I agree, I think I am done with the subject, reasonably satisfied with my conclusions. I will leave the debate for someone else.

  195. Gary

    I never said it would be the end of America. Great Britain is no longer the world super power, and the pound is no longer the worlds reserve currency, but obviously Great Britain is still a viable country.

    They walked down the path we are walking and it put an end to the global domination of the British empire. The same will happen to America. It happens to all empires throughout history. It has to do with human nature more than any monetary theory.

    Empires just invent these flawed theories as last ditch effort to justify their failing policies.

    It won’t be any different this time.

    Really just a little commonsense is all it takes. If a person or a country spends more than it produces, and if they get trapped in a debt spiral trying to keep the Ponzi scheme intact, eventually the system breaks and the market forces a penalty for their hubris.

  196. basil

    Schiff talks too much and so he’s gotten a few things right and a few things right, like everyone who talks too much.

    Faber’s got it better, because he is more selective with his words and a little more vague with his timing.

    Rogers is the vaguest of them all and that is why is is most right; because he knows it is impossible to figure out a schedule of the future. He just recognizes mega trends, that’s it. That’s why you see him say the exact same thing on every channel.

    Recognizing and following a mega trend and being vague about the rest of it is good, because nobody knows, that’s just a fact, and everything else is called gambling.

  197. Patrik

    Keys:

    So Anon1 is not a nice person? Seems like it has been struggle on this blogg before? lol! But sometimes I like it because its good to here other stories or angles..But the story we got today was not nice. Two people all of a sudden wrote the same BS..This was planned and i dont like it..

    Poly..Still there? What do you think about tomorrow?

  198. Gary

    We aren’t talking timing. We’re talking economics and unintended consequences. Schiff has been exactly right on everything he’s predicted.

    Whether it happened the next day or next year is irrelevant.

  199. T.J. Rand

    David K.-

    I believe that Occam’s Razor is generally the best way to approach any topic…simpler is generally better. And that if something cannot be explained at a high level in fairly simple terms, and if the reduction of an idea to it’s essence does not make sense, it should be viewed with suspicion.

    It is hard for me to crystallize all of the threads of MMT that have been woven in different comments. That alone tells me it is either way above my IQ, or is too complex to easily explain. One core MMT argument I read was “there will always be demand for dollars because we have to pay taxes in dollars hence no really egregious outcomes from money printing/QE2, which isn’t really money printing because it simply adds to the reserves of banks without consideration of velocity.” I’ve run into too much BS in my life to not catch a whiff from what sounds like a verbal rope-a-dope.

    While I am open to being wrong, I do not believe this is the simplest explanation for the events we see.

  200. basil

    Btw, I’ve long been waiting for that 40% drop in the dollar that Schiff predicted. I’m also waiting for China to roar back as he predicted.
    Schiff’s an investment advisor, isn’t he?

  201. Gary

    Shiff was early on his call that the real estate markets would collapse and lead to a terrible recession. Did that make him wrong?

    Not in my book.

  202. basil

    If I remember correctly and my memory isn’t totally clouded, he even recommended to hide out in emerging market stocks just as the market armageddon began to hit, in fall of 08.

  203. Shalom Bernanke

    “As long as Assets = Liabilities+ equity, the modern monetary system will continue to work.”-DXB

    Especially when they change the definition of each every week. πŸ™‚

  204. Gary

    The Chinese market is still up 58% from the 08 bottom. Not the same as gold but certainly not a losing trade.

    Schiff has been calling for the dollar to drop since 2001. The dollar index was down 41% at the 08 low.

    Unless one is just really impatient Peter has been pretty much spot on.

  205. Gary

    LOL Find me anyone who has perfect market timing. I can save you the trouble you won’t find them because they don’t exist.

    Does that mean that everyone is worthless as an investment advisor?

  206. Shalom Bernanke

    I forget which fella (DXB or Tim) said he used to be a subscriber of Gary’s 3 yrs ago, but in any case, it looks like he missed the boat this past 2 years and now wants to justify it.

    Time to put up the troll-meter!

  207. DXB

    james r
    Go and tell the traders at the sovereign bond desks of Morgan Stanley that.
    I told you can click on that link to get some very very basic education.
    I also told you Germany, Japan, and China can all decide to use their reserves to buy non paper assets with their export-earned dollars.
    The people who sell those dollars will have to park them somewhere.
    Yes, they go into Treasuries and Bills. That’s just the way things work, sir.
    Do yourself a favor and try to learn the basics first.

    My devalued Dollars have just recently bought me real estate in Cyprus, Dubai, and Malaysia at effective 1999 prices last year thanks to a killer credit crunch.
    I may buy something in Vegas soon.
    Gary just admit it.
    You are winging it.

  208. basil

    Gary,

    He suggested to invest in foreign stocks all the way through 2007 and 2008, I believe. That was his investment advice. So if you took his advice to invest in foreign i.e. emerging market stocks say in the summer of 2007 or the spring of 2008, where would you be now? Not 58% up, but you would still be way down on your investment. So while his call on the US and gold and the housing was right, his advice where to hide out didn’t help that much to profit from that call, at least as far as EM stocks are concerned.

  209. basil

    And no, everyone who makes the right calls about mega trends is a good investment advisor. Everyone who tries timing the market will likely not do any better, but quite possibly do worse.

  210. DXB

    Shalom Bernanke
    I’m still holding my miners, thank you.

    Go revisit my past comments. I told you I am stricltly Old Turkey.
    Whenever I have cash I buy more miners on weakness.
    Bullion I am in since circa 575 per oz.
    And then bough some more last May.

    So you can eat shit and leave me alone.
    I’m still interested in macro.
    Sorry if you’re not. And delude yourself into thinking you know the fundamentals.

  211. DXB

    Plus, unlike the tinfoil hat crowd. I actually also invest in non PM sectors.

    PM’s and Miners can collapse for all I care. I can still exit at a handsome capital gain.

    Gary was interesting for a while and I learned a lot from his style.
    But he’s obviously achieved Guru status and no longer interests me.

  212. Shalom Bernanke

    “My devalued Dollars have just recently bought me real estate in Cyprus, Dubai, and Malaysia “

    Sure, buddy. You didn’t have to go to Dubai to buy depressed real estate. My buddy in Orlando is buying condos for 20-30k that used to go for 250+ (no exaggeration). And before you get all excited, I don’t think that is such a great trade yet, either. Orlando is a dump if you ask me, but isn’t next door to every country going up in flames lately.

    According to you, you’re so rich you shouldn’t have the time to be here all day.

  213. DXB

    Oh I visit every now and then to check out sentiment.
    I love markets and I look to educated myself continuously.
    My recent real estate purchases were done with the bonus I got from my final year with an investment bank a few years ago.
    I suggest you change your demeanor yourself.

  214. basil

    Hey Bob,

    I’ll check out your link. I think Uranium is great; any investment there certainly needs to be watched closely, but there’s a great opportunity there.
    PMs, Agriculture, Uranium, Rare Earth – That’s my thinking for 2011.

  215. Shalom Bernanke

    LOL! I’m doing fine, but more importantly, nobody cares any longer about your topic in case it isn’t obvious. We know you weren’t in sales, cuz you talked way past the close. πŸ™‚

  216. TZ(5288)

    I added gold at the low this morning. $2 stop.

    Now 7x gold. No silver.

    (Had some silver during day, but got stopped out on whipsaw. Much harder to establish posotion than gold. I’ll have to pick it up higher when I have a profit buffer for stability.)

    My stops still at approx 1-2% net worth loss if hit (my increase this morning was on a stop less than $2).

    I maintain the bottom was thurs/fri and today was just a pullback to blow out people who chased on friday. Soon enough I think the direction becomes clear.

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