Friday, April 30, 2010


I’m going to throw out a few ideas for those of you who aren’t emotionally suited to be investors and have to take the traders path. First off realize that miners are volatile. That means position sizes will necessarily have to be small. As a trader you never want to lose more than 1-2% of your total portfolio on any one trade. So you probably aren’t going to be able to trade more than 20% of your account in any precious metal position. Even the ETF GDX can easily swing 10% in the blink of an eye. If you have a 20% position and it goes against you by 10% you have hit your -2% maximum loss on your portfolio. Also be aware that taking 10 mining positions isn’t really diversifying as the sector tends to move in concert.

What you absolutely can not do is take a 100% position with the intent of trading. Locking in 10% losses in a bull market just isn’t going to be a profitable way to make long term money. If you are going to trade then your main concern, actually your only concern will have to be limiting losses (risk control). Let the profits take care of themselves all you care about as a trader is limiting losses.

Next I want to point out something that is or should be obvious but probably isn’t for most traders. Trading isn’t about getting the direction right. Hell that is easy. No trader has any business trading against the cyclical trend. It just doesn’t make any sense to handicap oneself to that extent. This business is tough enough even with all the odds in your favor. Trading against the trend is like playing poker and having to show your hand to your opponents. Sure you might win a few hands now and then but the odds are really high you are going home to tell your spouse you lost the mortgage.

If you are going to be a short seller in a bull market then you better be digging into the fundamentals of the companies you are shorting. If you are shorting in a bull you had better be selling sick or broken companies. Let’s face it that is the only way you are going to get any kind of advantage and even then the pull of the bull can still mask the disease in many unhealthy companies. The financials are an excellent example. Most of them are for all intents and purposes insolvent but because of accounting changes and free money from the government along with implied protection one would have to be crazy to sell short any bank stock.

There were only 10 new lows on the NYSE yesterday. Trying to short high flyers in a bull market is a fools game and as you can see there aren’t a heck of a lot of potential short candidates in bull markets. So unless you are willing to do the due diligence needed to find cancer patients one really should bypass shorting selling. Wait till the bear returns. That is the time to sell short.

No, trading isn’t about getting the direction right, like I said that one is easy. Trading is about getting the timing right. What a trader wants is to time a swing and then get out. If a trade goes against him it’s not because he’s picked the wrong direction it’s because he mistimed the trade. If the trader is willing to be patient the bull or bear will eventually correct the timing error. When a trader stops out he is admitting his timing was wrong not direction, and he thinks he can exit the trade for a small loss and enter another trade where he hopes his timing will be better.

So if one is going to trade understand what you are doing. You aren’t trying to pick direction you are trying to guess timing. Know that history has shown this is very hard to do on a consistent basis and you certainly don’t want to handicap yourself by trading against the large trend unless you have intimate information about the companies you are trading counter trend.

Wednesday, April 28, 2010


I think it may be time for the miners to start outperforming the stock market again. I know when one looks at that semi parabolic chart of the S&P for the last two months it certainly appears that buying miners has been a poor choice. The reality is that miners have matched the gains in the S&P although they admittedly have been more volatile. Of course that's just par for the course in this sector and one of the things precious metal investors just have to accept.

One of the things I've learned over the years is that this sector has a very sneaky way of boring everyone to tears, then just about the time you get fed up and leave the sector shoots straight up for a couple of weeks. If you are out you miss the move. Then about the time everyone panics back in the sector enters another consolidation.

The only way to avoid missing the move is to just stay in. That means you are going to have periods that try your patience but ultimately the reward is worth the wait.

Sunday, April 25, 2010


Here is the problem with trading. Most of the time any market will be in consolidation mode. Gold is a good example.

For the last 5 months gold has done nothing but trade back and forth with no defined trend. It's very tough to make money in those conditions.

Now don't get me wrong somewhere someone will have traded this perfectly. They will have stumbled upon the perfect system to catch each little wiggle. Often they will proclaim their superiority loudly for all the world to hear.

Unfortunately there really is no holy grail of investing and the system that happened to work this time will almost always fail during the next period. It's just how the markets work, conditions change. So unless one is lucky enough to guess what will work before each new period in the market what invariably happens is one ends up giving back all of the gains they made when their system breaks down.

The answer of course is to just stay aligned with the secular trend and accept that there are going to be periods when one will just have to sit and watch other people make money. The last five months have been a perfect example as the stock market has gone up while precious metals and miners have gone nowhere.

Know full well that eventually this too will end as gold is in a secular bull market with a long way to go and the general stock market is in a secular bear market with limited upside potential.

So at some point gold and miners will make another big move up and all the waiting will have been worth it. And at some point the stock market will come grinding back down and all those who held on expecting conditions never to change will lose all of their profits.

So one can trade if they must, but do so knowing that the market is going to take away any and every profitable system at some point whether it be a technical system, patterns, cycles, indicators, sentiment, COT or just intuition.

I've watched it happen to countless "traders" over the years. The really good traders survive these periods because they practice excellent risk management. Unfortunately most retail traders when they get on a hot streak believe they have found the secret to the market and risk management goes out the window. That's just about the time the market starts throwing curve balls.

Friday, April 23, 2010


Let me start off by saying the market should be correcting. Sentiment has reached ridiculous bullish extremes, the kind of extremes that led to the January /February correction.

That correction separated the second leg of the bull from the third. But let’s face it, sentiment has been in this condition for several weeks now and the best we could muster was a minor correction of 30 points on the news the SEC was filing charges against Goldman Sachs for fraud.

We’ve had three opportunities to “sell the news” with the April jobs report and recently with INTC and AAPL earnings. None of them have panned out. The market could use the Greek excuse as a downside catalyst, the same as it did in January. And now Greek short term bonds are tanking as the EU waffles about writing that check in front of the German elections in May.

All in all it boils down to the market has had every chance to correct and it has failed to do so.

Last month I speculated that we were "On the Brink of an Asset Explosion" . Well, we may not be on the brink anymore. We may very well be moving into the heart of the explosion right now.

We’ve just seen one of the most powerful rallies out of a corrective low in many years. Until Friday the market had held above the 10 day moving average 42 days in a row. That’s the longest stretch in over 10 years. Since the February 5th low the market has risen 71% of the time. That’s the kind of stuff parabolic blow off tops are made of.

I don’t really think we are in a parabolic blow off top just yet. What I do think is that we may have entered a runaway move similar to the August 06 to February 07 time frame.

During a runaway move, corrections tend to be uniform in both magnitude and duration. During the 06/07 rally all corrections fell in a range of about 20-35 points.

So far the rally out of the February bottom has followed this script. The February corrective move dropped 25 points in 4 days and the recent pullback on the Goldman news dropped 30 points in three days.

If the S&P and Dow can follow the Russell, Nasdaq, NDX, midcaps and banks to new highs, the odds are going to increase dramatically that the market is now in one of these runaway rallies.

It’s anyone’s guess as to how long one of these moves will last. The rally in 06/07 lasted 7 months. I can tell you that once a market gets drawn into one of these things you can pretty much throw out every trading tool as the mechanics of the rally just roll over any and all trading strategies. Sentiment becomes useless, cycles get stretched to ridiculous lengths, technical analysis and oscillators are worthless.

There are a couple of signs to look for as one of these moves comes to an end and I will keep subscribers updated as the move progresses.

The next question we need to ask ourselves is which sector is likely to see the largest gains if this kind of move takes hold? I expect a rally like this will affect every sector as virtually all assets have been moving in tandem since the March 2009 bottom.

Before I answer that question I think we need to recognize one indisputable fact. And that is that the stock market is undeniably in a long term secular bear market, and has been since March of 2000. And, it’s a bear market the Fed and every central bank in the world has chosen to fight tooth and nail with the one weapon at their disposal. I’m talking about the printing press.

As you can see from the next chart it’s a battle that is only producing temporary periods of false prosperity driven by bubbles. As anyone with a little common sense can understand, you cannot drive an economy by creating bubbles. Bubbles always pop and are followed by periods of economic devastation.

Perhaps our leaders should look at this chart and figure out that it isn’t the size of the dose that’s the problem. WE ARE USING THE WRONG MEDICINE!

Hello, Keynes was wrong! You can’t fix this kind of problem with a printing press. All this does is make the problem bigger and ultimately more painful.

I dread the end result of the current liquidity experiment when the government debt and currency bubbles burst. Unfortunately, there is no short term cure for a currency crisis. I’m afraid the world is going to learn this lesson the hard way, once again.

So the question is where should we be invested if the price explosion unfolds, or maybe I should say continues?

Firstoff, let’s take a look at the stock market.

If, and this is a big if, the S&P does manage to make it back to the old highs one would be looking at a 30% gain from today’s level.

Now that’s certainly not a bad return but we also have to take into account that this is still a secular bear market and as such, it’s probably wishful thinking that the powers that be can force the market back to the old highs on the back of a government debt and currency bubble. Realistically I think we have to expect the upside is probably limited in this area to maybe another 20%, give or take.

Next let’s look at the ‘go to’ sector from the last cyclical bull market – energy.

At first glance there appears to be more potential in this sector than the general stock market. But is there really?

For one thing, the leading sector of the last bull rarely ever leads the next one. We can see from the chart this is, in fact, the case.

Energy is woefully underperforming and there is a reason for this. The world has now moved into a long period of ‘on again off again’ recession. The energy sector has lost a very important fundamental driver which is the demand side of the equation. Demand for energy is going to be permanently impaired during this prolonged period of high unemployment.

Energy also has another strike against it. Unfortunately, spiking oil prices always have and will lead to economic contraction. High oil prices are oil’s worst enemy because they lead to economic collapse and that means even less demand.

I’m afraid the energy sector will probably be on a wild roller coaster ride for years to come as monetary policy drives prices to levels that stymie economies, followed by price collapse as demand evaporates during periods of recession.

So even though it appears the energy sector has a lot of room to run, the reality is that the fragile global economy will collapse long before oil reaches $147 again. I suspect the upside in the energy sector is probably limited to 20-30% at best.

If the stock market isn’t a great place to put our capital and the energy markets are going to be impaired for years to come, which investment sector should we look at, you ask?

That one is easy to answer. We go to the one secular bull market that’s left. The one area where the fundamentals are actually improving. The one and only sector that stands to benefit from these insane monetary policies.

Gold! Precious metals.

This is the one sector where the fundamentals aren’t impaired. In fact, they are only getting better and better as the powers that be continue down their misguided Keynesian path to ruin.

Now let me point out that every secular bull market in history eventually ends in a bubble. Gold will be no different. After it has gone up far enough and long enough we will reach a point where the public comes to believe that gold is a sure thing, just like they thought tech stocks were a sure thing and just like they bought into the housing myth that real estate only goes up in price.

The difference is that the precious metal markets are fairly small markets. When the public finally catches gold fever it will drive a bubble the likes of which none of us have ever seen before. I expect $5,000 gold is probably a conservative estimate for a final top.

Now keeping in mind that this secular bull is far from over, let’s take a look at mining stocks.

Unlike the S&P and energy sector the mining sector has already tested the old highs. As a matter of fact the mining sector has led this bull from the very beginning.

When the rest of the market was putting in a final bottom in March of last year, the miners were already over 100% above their November lows. How’s that for relative strength?

From today’s level back to the old highs would yield miners a 20% gain. That’s probably equal to the best we can expect from either the stock market or the energy market.

However, miners are not limited by impaired fundamentals like virtually every other sector. The mining sector has an incredible wind at its back. Does anyone really believe mining stocks ($HUI) would be trading anywhere close to $519 with gold at $1,500? How about with gold at $2,000?

Before the secular bull is over I expect we will indeed see $5,000 gold. I would be completely dumbfounded if mining stocks don’t have 500-1000% of potential in them during the remainder of this secular bull market.

So one can fight with a secular bear market and impaired fundamentals for small gains or one can just get on board the only remaining secular bull market and hold on for one heck of a ride. This is how millionaires and billionaires are made. Not by trying to trade in and out of impaired markets.

So if we are on the verge of an asset price explosion I want to be invested in the one area best poised to benefit from the fundamental driver of that explosion…gold!

Thursday, April 22, 2010


Still no decision on the stock market as it failed to make new highs yesterday. Until it either drops below Monday's low or breaks out to new highs we're locked in no man's land.

We have the same predicament going on with the dollar. This is the 21st week of the rally. Intermediate cycles usually don't last much longer than 20 weeks on average. So not only has the stock market stretched really long but so is the intermediate dollar cycle.

I think it's safe to say the last daily cycle bottomed at critical long term support (80). If the current daily cycle rolls over before making a new high and moves below 80 I think we would have our fuel for a runaway move in all asset classes.

The dollar is so late in the intermediate cycle that it could top (if it hasn't already) at any time. We do have a potential bear flag forming which if it breaks lower would also form a potential head & shoulders top.

Since I don't think the market will correct at the same time the dollar is falling, any stock market correction would also require a strongly rising dollar. That's tough to bet on 21 weeks into an intermediate cycle.

Tuesday, April 20, 2010


Without going into detail if the market moves to new highs I think the odds are good that we have entered a potential runaway move similar to 06/07.

I can tell you that during one of these moves you can just throw out virtually every tool as they all become pretty much useless.

Sentiment didn't work during this period. Cycles stretched to absurd lengths. The COT failed miserably. Technicals were worthless. Overbought was meaningless.

There are two signs to watch for as a clue to an impending top. Needless to say we don't have either at this point and there's no telling how long this could last if it does indeed turn into a runaway rally. The 06/07 move lasted almost 7 months. This one is already 2 months old.

Virtually all markets have now broken through any and all logical resistance levels. 1200 S&P, 11,000 Dow & 2000 NDX just to name a few.

I don't actually expect the move to continue at the same pace as the last two months but it is showing all the signs of an impending runaway rally.

Needless to say shorting something like this is suicide, although I think by now we've all learned our lesson about shorting this cyclical bull.

Sunday, April 18, 2010


I’ll start off with an analogy.

Let’s say you just bought a business, a small restaurant. You open for business on Monday and after a week you have grossed $6000. You’re feeling pretty good about how things are going. The business is up and running. Dollar signs are floating in your brain.

Then a week later you get bills for your first food order, payroll & rent. Maybe you also have the misfortune to get hit with the gas and electric bills on top of that. By the time you finish writing checks your +$6000 has turned into -$3000.

Now let me ask you this. Would you immediately throw up your hands, lock the doors and walk away?

I dare say most of us would stick it out a little longer than a week. I would hope that most of us have enough common sense to realize that sometimes we have to persevere to get the reward. And after all, a business we researched so carefully before we started it should surely be given more than a week’s chance to succeed.

However, most gold investors do exactly that, they walk away from their “business” after the first minor setback - even if they logically understand there is no fundamental reason to lock the doors.

This is what traders do when they stop out of gold positions. Let’s face it, the bull isn’t even close to being over yet. By stopping out of a position you are just turning a winning trade into a loser because you didn’t have enough patience to wait for the secular trend to correct a timing mistake.

To put it bluntly, the only way to lose money in a secular bull market is by trading.

Now in my opinion, the difference between a strong investor, one who is not easily knocked out of their position, and a weak one, has nothing to do with how deep ones pockets are. Nor does it have anything to do with how much trading experience one has. And it certainly doesn’t matter what one uses to give themselves an edge, whether it be technical analysis, fundamentals, patterns or chicken gizzards.

I can tell you this: everyone, when they enter a position, starts out as a weak hand.

An investor has to graduate to strong hand status. That, my friends, can only be earned with patience. Let me show you what I mean.

Let’s say you bought mining stocks back in early November 2008. Now it’s April 2010 and your positions are up almost 100%. You are now so far into the green that virtually no correction is going to be able to knock you out of your position. You have basically zero chance of those positions ever losing money for the remainder of the bull market. You’ve become a strong hand.

However, when you entered that position you would have immediately suffered a drawdown as the miners quickly tested the lows in December, and unless you had the conviction to hold on to your trade, you would have gotten knocked out right away for a loss. Look what you would have missed.

It’s very rare that an investor will graduate to strong hand status quickly. The market rarely moves that fast and that far in one direction.

90% of the time the only way you are going to move into the strong hand category is with patience. You are just going to have to let your position work long enough to put a lot of green between you and your entry. Eventually though, you will reach a point where you can weather almost any correction unaffected.

Now here’s the problem with trading. You almost never make it into the strong hand category.

An investor who tries to get “cute” and time short term swings with his investments has the same problem. As soon as you sell you immediately become a weak hand again.

Let me describe what happens to most traders, novice and professional alike.

Let’s say you take a position and you time it pretty well so that the trade goes your way immediately. You’re making money and now you’re feeling pretty good about yourself.

The problem then comes if you don’t have a clear cut exit strategy. If you hold too long the market will almost always pull back enough to take your trade back into the red at some point. When that happens, most traders freak out and sell for a loss, often needlessly.

Or, how about this? You enter a trade but you don’t time it well. You enter at a short term top. The market goes against you immediately; you freak out, sell for a loss, and proceed to curse the trading gods.

Of course if you would only hold tight, the reason you took the trade in the first place will usually turn the trade back in your favor. That is certainly true if you buy in the precious metals sector as the secular bull will eventually correct any timing mistakes. Of course if you panicked and stopped out then you will be long gone when the trend resumes. The market already took your money. “Thanks for playing, come back soon”.

In the last scenario (entering at a short term top) you will probably have two periods where the market takes you back into the red. How many of you can hold through that kind of torture?

Short sellers are in the same position. Selling short, just by its very nature, is going to be pretty tough to achieve strong hand status. Let’s face it, there is no way to get 200-300% in the green like you can on the long side. Plus, bear market rallies are violent affairs that can evaporate a profitable short position in a matter of days if not minutes.

Let me stress again that the only way to lose money in a secular bull market is by trading. As long as you are patient and willing to let investments work, it’s next to impossible to take a loss buying a secular bull market.

Now as long as you aren’t leveraged it just doesn’t make a lot of sense to stop out of a winning position simply because it didn’t do what you wanted it to do in the time you wanted it to do it in.

I suspect a great many gold investors panicked and sold positions during the recent January/February correction. At the same time I suspect every one of those traders realized that the gold bull was far from over!

So why sell? As long as the bull is still intact the only reason to take a loss on precious metal positions would be if you believe an alternative trade would make you money rather than just weathering the drawdown while you wait for the secular trend to resume.

The problem is that for about 90% of retail investors (I’m probably being generous), trading isn’t going to be profitable in the long run. By stopping out you are needlessly turning a winning position into a loss because you didn’t have enough patience to let the position work.

Traders will say that they traded a small loss for the opportunity to make a winning trade. But they also traded a loss for the opportunity to make another loss, thus compounding the problem (which is what happens to most retail traders).

If you had just been patient the bull would have eventually turned your positions green. If you are patient enough those positions will end up being huge winners as the secular bull progresses.

Think about this before you put stops on volatile mining positions. That stop is the only guaranteed way to lose money in a secular bull market. Well, barring an individual company bankruptcy – a problem that can be avoided with ETF’s or ETF like baskets of mining stocks.

What next?

Gold and the dollar are now moving into critical periods. Gold is correcting into a daily cycle low that should bottom in the next week or two.

Whether gold drops below $1085 or not should tell us whether gold is still in an A-wave advance or if the A-wave is coming to an end and a B-wave decline is about to start.

There is also a scenario where gold could still be in a C-wave which would lead to another large leg up, possibly to, or above $1,400-$1,500. The future direction of the dollar will determine if that scenario plays out or not.

If gold is moving into a B-wave decline then we want to take positions as close to the bottom of the correction as possible in preparation for the ride to strong hand status and eventually the next C-wave advance.

If gold holds above $1085 then we need to watch the path of the dollar to determine whether we should exit positions when gold approaches the old highs at $1225 (A-waves rarely make new highs) or if the C-wave is going to continue. In that scenario we most definitely want to hold tight and reach strong hand status for the full ride up into the final C-wave parabolic spike.

I will be watching these various possibilities unfold with great interest and updating subscribers daily on my trading strategies as developments proceed.

Thursday, April 15, 2010


INTC beat earnings yesterday and this morning the market is loving it. Cramer is wildly bullish. BUY, BUY, BUY!

Unfortunately INTC has a history of marking turning points. Let's just say that buying the gap up on earnings hasn't been kind in the short term. Buying when INTC has closed at new 52 week highs the day they report has led to losing trades three days later every time.

The trend is clearly up and I doubt that we are at a final top for this cyclical bull but is the reward really worth the risk of taking Cramers advice?

As of yesterday the market had moved higher 71% of the days out of the February bottom. Folks that is verging on parabolic. Those never end well.

I liken the current market to playing musical chairs with 10 people but only one chair. Certainly you might catch more upside but almost certainly we are, at some point, going to go back down and test the breakout at 1150.

When it happens it's going to happen quickly. These kind of extreme momentum moves have a tendency to erase several weeks or even months of gains in just a handful of days. So one has to consider is the minimal upside really worth the risk of getting caught in a vicious correction?

At this point one is better off stepping to the side until the correction occurs and then buying back in.

Keep in mind I'm certainly not advocating going short. Because who knows how much longer this could go on. But the potential reward just isn't worth the risk of pressing the long side anymore.

Monday, April 12, 2010


Several weeks ago I speculated that we were "On the brink of an asset explosion" . So far events are unfolding about as expected. I might even say they are moving more aggressively than I thought. Well actually, there’s no doubt this cyclical bull is unfolding much more aggressively than anyone expected.

Compare the angle of assent of this cyclical bull to the last one.

It’s readily apparent what affect the trillions and trillions of dollars central banks have pumped into the system is having. I think Ben has clearly proved his point that in a purely fiat monetary system deflation is a choice, not an inevitability.

As long as a country is willing to sacrifice its currency there is no amount of deflationary pressure that can’t be printed away.

However, no amount of printing can erase the underlying problems. And those problems are going to persist until they are cleansed from the system. In his mad attempt to avoid the mistakes of the depression Bernanke is going to create a whole new type depression. This time the depression will materialize as a hyper-inflationary storm.

What the powers that be fail to understand is that we are going to suffer a depression that is unavoidable when a credit bubble forms and pops. All we are doing is choosing the form of the depression. In this case the memory of the deflationary depression in the 30’s has sent us down the other track into the beginnings of a hyperinflationary state.

Going back to our charts you can see that the February correction separated the second leg of the bull from the third and almost exactly matched the `04 correction in magnitude if not in time. Remember everything is unfolding faster this time.

I think we have by passed the middle years (2004-2006) of a normal bull market and have now entered the final stages of this cyclical bull. I tend to think we are now in the same state as the runaway move in late 2006 and early 2007.

I don’t really expect this stage to last as long as it did during the last bull though. Everything else is unfolding much faster I don’t know why this stage won’t either. Ultimately these extreme momentum moves usually fail dramatically with a violent correction that gives back several weeks or months worth of gains in just a handful of days. I’m expecting some kind of mini-crash (4-6%) at some point during earnings season.

Once that correction has run its course we should enter the final parabolic stage of the bull. That’s when I expect we will really see asset prices explode higher.

The first two legs of this bull gained 300 and 275 points respectively. I wouldn’t be surprised if the last leg gains another 300+ points before the whole house of cards comes crashing back down.

And what is going to bring it down? The same thing that destroyed the economy in 2008 …oil!

Without exception, every time oil spikes 100% or more within a short period of time (one year or less) it has eventually led to a recession. Well Bernanke’s insane monetary policy has virtually guaranteed that will play out again as oil has now risen over 140% since this cyclical bull began.

Amazingly enough oil has done this in a very low demand/high supply environment. This fact could only be true if the cause for oil’s rise in price is directly attributed to the Fed’s monetary policy.

Once the market corrects I think we can back up the truck in virtually any asset class for the final parabolic move as the Fed completely loses control of money supply. We just need to keep in mind this will be an end game not the beginning of a new secular bull.

Friday, April 9, 2010


The market is heading into dangerous waters. Sentiment has become skewed wildly bullish and historically the market hasn't performed well during earnings season when entering at new 52 week highs.

One of the few principles that never fails is that all market eventually regress to the mean. That one you can take to the bank. Usually the further anything stretches the harder it snaps back.

It looks like the market desperately wants to reach the 1200 level but in doing so it will have stretched further above the 200 day moving average than at any point during the middle and final leg of the prior bull market.

The market is now dangerously stretched and due for some kind of correction to reset sentiment. My guess is that sometime during earnings season we are going to see a violent correction similar to what happened in February 07. That should reset sentiment and set the stage for possibly a final parabolic move higher that will likely cap this cyclical bull.

The catalyst will be the same one that crushed us in 08, spiking energy costs. $100+ oil in a very high unemployment environment is going to be an economy crusher...again!

Tuesday, April 6, 2010


I've looked at these many times in the past but we have another example today that may be worth taking note of.

The Russell 2000 just broke higher out of the recent volatility coil. Admittedly the coil was a bit sloppy which may call into question the validity of the signal. But as I've noted in the past, most of the time the initial move out of one of these coils tends to be a false move followed by a more powerful and more durable move in the opposite direction.

Considering that we are now very late in the daily cycle (among other things) this might be worth watching for a potential reversal as the market moves down into the now due cycle low.

Monday, April 5, 2010


Let me start out by asking a few questions. How many of you were pro-bailout? How many pro-healthcare? How many think borrowing trillions of dollars to “stimulate” will really have any long term effect what-so-ever on the economy? How many realize that borrowing and spending really isn’t the cure for a problem caused by too much debt and too much consumption?

Now let me ask another question. Aren’t our politicians supposed to represent the will of the people?

 I’m going to assume that the vast majority answered no to the above questions and yes to the last one. If that is the case then why in the hell did we hand over billions and billions of dollars to the banking industry? Was that in our best interests? How on earth did the health care bill get passed? And why, why, why are we throwing trillions of dollars down the drain in stimulus that has no earthly chance of having any long term positive effects?

Of course we all know the answer to the question. All these things came to pass because politicians don’t actually represent the will of the people. Politicians represent our desire to avoid short term pain and their own personal desire to get re-elected.

So how did we get in the mess we are in?

Let’s start off with a little history. Let me say that nothing is happening today that hasn’t happened many times in the past. I’m fairly certain human nature hasn’t changed in the last 5000 years or so, and I really doubt it’s going to materially change in the next 5000 either, so I can virtually guarantee we will go through this again…and again, and again.

Historically about every 70-80 years humanity suffers through an economic depression. It takes about that long for society to forget the ravages of the last depression and. And what causes it is a credit bubble.

I know we would like to blame our troubles on the greedy bankers and leave it at that. But that is way too simple. Bankers are just human, no different than anyone else. Trust me, no one is immune to the pull of greed. Sure the financial system should have foreseen that no good could possibly come from loaning half a million dollars to someone with a $30,000 a year job. And what about the speculator that bought that half million dollar house. He knew darn well when he took out the loan he couldn’t afford to make any payments once the teaser rates expired. Isn’t it also his fault when he lied about his income? Or how about the loan originator? Was it really in everyone’s best interest to underwrite a loan for several hundred thousand dollars to a guy sitting on the other side of the table wearing a McDonald’s work uniform? Or was it just the quickest way to make a commission? And what the heck, everyone else was doing it. If they didn’t make the loans they were just going to put themselves out of business while all their competitors were getting rich.

The same could be said for the appraisers. They certainly knew the prices they were quoting had no basis in reality, but then if they tried to act responsibly they would quickly find themselves out of a job.

How about the home owner who annually or biannually refinanced their house so they could take equity out and buy a new Hummer, home theater system, or a swell vacation, etc. Aren’t they also just as much to blame as the bankers?

We’ve coined the term Banksters as a sign of the contempt we feel towards the perceived instigators and originators of our current malaise, but perhaps we need another term, one that is a bit harder to stomach but just as appropriate. Sure, the Banksters were a big part of what went wrong but no more so than the average Americanster. All those folks living on home equity, all those buying houses, sometimes several at a time to flip, all those people lying about their income, were they not also driven by greed? Weren’t they just as much at fault for the mess we are in as any banker?

Next I want to point out that none of this would have been possible without the co-operation of our elected officials and especially the Federal Reserve. After all it was Alan Greenspan and now Ben Bernanke who cut rates to near zero and supplied the free money that was required to get the ball rolling down the hill. No bubble was possible without the consent of the Fed, the very people who are supposed to be looking out for this very thing.

Of course Greenspan has insisted it isn’t possible to spot a bubble before it pops. What a load of baloney. Anyone with half a brain could spot not only the tech bubble but also the housing bubble a mile away.

Amazingly we are now going to give the Fed even more power to regulate and oversee markets. The very people whose monetary policies enabled the credit bubble in the first place. The very same people who couldn’t see it as it formed. The very same people who repeatedly denied it as it imploded.

Do we really want to trust these folks with regulating the system? Let’s face it, their track record leaves a lot to be desired. Why should we think they will get it right this time when so far they are batting zero?

There are right and wrong ways to deal with this kind of problem though. History has shown over and over that the quickest and cleanest solution is to let the market work. Let the system collapse and cleanse. Sure it means hard times. There really is no avoiding that. The countries that have allowed the market to function have suffered 2 or 3 years of extreme pain. Regretable, but unavoidable.

However, every country that buckled down and accepted the cleansing process emerged from the other side much stronger. Brazil in the early 80’s, Vietnam in the mid 80’s and Russia in the late 90’s are just a few examples. And without exception these countries all saw explosive growth after allowing the cleansing process to run its course.

On the other hand the countries that fought the market without exception entered long periods of hard times. In the 1930’s Roosevelt took this path and turned what should have been just a bad recession into the Great Depression. Ultimately all the efforts to halt the depression only made it worse, culminating in World War II.

Japan chose this path and was rewarded with 20 years of on again, off again recessions, culminating in finally bankrupting their country.

Now we are faced with the same problems as Japan in the 1990’s and Roosevelt in the 1930’s and what path have we chosen? The path of least resistance, of course. We’ve decided to kick the can down the road.

We are certainly in good company as almost every major empire in the history of the world has chosen this path to oblivion. And it always starts with currency debasement.

Take a good look at the following chart.

You can clearly see when it began. As the US started to decline the powers that be took the easy way out and started printing. We managed to borrow and print our way to one hell of a party in the middle of the last decade.

Unfortunately, that party was built on a fantasy of credit expansion and real estate speculation. We certainly created a lot of jobs during this period. Jobs in finance, construction and anything related to the housing industry. As a matter of fact, almost all aspects of the economy exploded as it appeared we had true demand for everything from $5.00 for a cup of coffee at Starbuck’s to strip malls on every available corner.

Unfortunately, and like all great parties, there is a price to pay…the hangover!

Our fantasy economy built on a foundation of debt and currency debasement couldn’t continue indefinitely and it didn’t. What followed was the second worst bear market in history and the single worst economic collapse since the Great depression.

Yet amazingly enough, our leaders have learned nothing from this experience.

They are now back at it again printing oceans of money and racking up trillions and trillions of dollars of new debt. This is the exact same recipe that led to the last catastrophe. This is the same government whose leader stood in front of the American population and told us with a straight face that we needed to spend our way out of the recession. Seriously?

Too much consumption and too much debt is what got us into our current mess in the first place. How does it help us to get more bankrupt because let’s face it, the USA is bankrupt.

It’s simply not possible to borrow trillions and trillions of dollars and spend our way out of bankruptcy. The old adage that you never get something for nothing has been conveniently overlooked. I don’t think the laws of economics are going to be magically revoked for a country anymore than they will for an individual. Just ask Greece!

So where is all this leading us?

I’ll tell you where it’s leading. We are going to continue to borrow more and more money. We are going to continue to stimulate and bailout failed companies. And none of it is going to work. It didn’t work for Roosevelt in the 1930’s. It didn’t work for Japan in the 1990’s and it’s not going to work for the USA now.

We are just going to go deeper and deeper into debt. Taxes will continue to rise (by the way does anyone realize how many hidden taxes are buried in the new health care bill)? And inflation (a hidden tax that none of us have any say in) will continue to worsen.

Ultimately none of these ill fated policies will achieve any of their goals. And when these policies fail politicians will do what they always do. They will look for some way to divert public attention away from their inability to solve any of society’s problems.

That invariably means they will look for someone to blame. That almost always leads to wars.

Regrettably all this could be avoided if only our leaders would accept responsibility and choose the right path. Understandably that path is going to be painful and it’s a path that doesn’t lead to being re-elected. But it is a path that leads to a bright future, a path that doesn’t lead to our sons and daughters dying on some battlefield.

If left to their own decisions our leaders are never going to choose the hard path. It’s human nature to avoid short term pain, to push the problem down the road for someone else to deal with even though that choice only leads to a much bigger problem in the long run.

Folks we have mid-term elections coming this year and we have an opportunity to get our message across. If you want a brighter future for your children, if you want politicians to represent their constituents instead of special interests, if you want to put an end to the pork in every bill that’s used to “buy” votes, if you want to stop the bailouts, if you want to send a message that you aren’t happy with the government wasting our tax dollars on stimulus that only benefits a few while it costs the rest of us in higher taxes and higher inflation, if you want to let the congress know you’re mad as hell about the 50% increase in health care that their ridiculous new bill immediately cost each and every one of us (and that’s not even including all the hidden taxes) there is a way.

Simply vote out every single incumbent. If left up to politicians they will never put a limit on terms. They will never end the pork. Big money will continue to “buy” elections. Limiting terms certainly won’t cure all of the problems but if politicians knew going in that they would only be allowed one term they might be more likely to do the right thing.

For one thing, there would be no need to waste money trying to get re-elected. It would never happen. It’s time to take back control of our political system. It’s time we let the politicians know we’ve had enough of the waste and corruption. It’s time we were actually represented by our representatives.

It’s time for a change and I’m not talking about the Obama change, which was really just more of the same. I’m talking about real change. I’m talking about sending our elected officials a reminder that they work for us, not the other way around. It’s time to let them know that when they do a poor job we are going to fire them.

It’s time to just say no!