Wednesday, November 3, 2010

What people DO.....

True believers in a massive deflationary wave are few and far between.  In fact, among professional analysts and more "renowned" forecasters, you can count the number of real deflationists on one hand - maybe two if you stretch things.

The large majority of forecasters, and more importantly the investors who listen to them, are predicting inflation.  Hyperinflation is a fairly common term these days, one can hear it frequently by flipping on a major financial station.

However, talk is talk and talk is cheap.  It requires no investment other than a few breaths or clicks on a keyboard.  The place to watch is where people are moving their money.

I have mentioned in this space before about the fallacies of "efficient market theory" and also about "market manipulation" (one of the most commonly used excuses by traders and investors alike for why they lose money).  The market is a singularly interesting composite of activity - millions of people gather together every day with their excess (or not so excess) capital to find a place to compound it.  They do so via a foggy window, in that the information on what they are buying is extremely limited and the things they are buying are intangible. With such a limited amount of information, people naturally revert to the same mechanism that most do when seeking safety or advantage in physical life - they follow what other people are doing.

Most investors and traders are not aware of this phenomenon.  It is a totally natural impulse, the same type of impulse that organically makes humans form lines or walking-lanes in busy foot-traffic.  This is why such a small percentage of traders can be successful over the long term.  Objectivism and discipline are two keys to successful trading.

But I'm not here to talk about successful trading in the aggregate.  I've found a few interesting tidbits that I believe might be setting up the market for its next wave down (and in response to the market downturn, the next serious bout of monetary deflation - right in time for "QE2").

For the first time in 6 months, net inflows into US Equity markets were positive for two weeks in a row.  US Equity markets took in just under $2.8 BIllion dollars last week.  This is the first time two consecutive positive inflows have occurred since, you guessed it, just prior to the April 26 market top.  That in and of itself is not a damning piece of data for market behavior, however within the context of the past several months it is very pertinent.

The story of municipal, regional, and corporate high-yield debt continues to play out and is, quite simply, a ticking time bomb.  Since markets are still yielding a very bearish low dividend in a historical context, investors have been flocking to Junk Debt in order to start getting some kind of return on their money.  The obsession with yield and the flagrant disregard for the security of their principal investment shows that the underlying acceptance for highly-speculative "investments" is still engrained in the mind of the average investor.

Bond Up/Downgrades are at a bearish extreme seen only just prior to the Dow:Gold peak before the turn of the century.

Sentiment measures are extremely one-sided across all markets.  90%+ Bullish readings on the short and long term DSI are spread across commodities like Gold, Silver, Copper, Sugar, Cotton, currencies like the Euro, all 3 US Equity markets, US Treasury bonds, etc.

Meanwhile the US Dollar's DSI is flailing to stay above 10%, and has experienced one of the longest periods on record with a DSI reading below 15%.  Internals on each subsequent high in stocks, bonds, speculative currencies, commodites, et al are weakening at each new wheeze higher.

All markets are lined up as a massive one-sided trade.  Double-speak on commodities runs rampant, including things like "x will go up if the economy improves because people use it more and demand will increase." and "x will go up if there is a depression because people run to it as a safe-haven".  There is a host of reasons people cite.  The most popular reasons generally encountered are:

  • Inflation - ' "money printing" by central banks will cause the price of commodities to go up.' - Ignoring the fact that in a wave of pessimism no amount of QE, or whatever label people like to put on it, will change the fact of total monetary contraction, this is one of the most commonly cited reasons for commodities' (especially precious metals) perpetual rise in price
  • Central Banks are Buying Gold - central bank buying increases demand and therefore drives up prices.
  • Investment Demand - while investment demand has certainly increased, this demand is speculative - Buying for the sake of investment is buying with the expectation that someone else will be willing to pay you more for what you purchased at a later time.  Since the price-demand curve of finance is the mirror opposite of the tangible economic world, this does not bode well for future participation.
  • The "Mania" Stage is not here yet (Mostly cited for Gold) - The expectation of average investors and even those newly entering the gold market is that at some point in the not-too-distant future flocks of thus-far-non-participants in gold's 9 consecutive annual up-closes will drive gold into the stratosphere.  While this may or not be the case, the one-sided expectation that there will in fact be a gold mania, just as there was a tech-stocks mania, a real estate mania, a commodities mania, etc. is generally a precursor to something drastic happening that is the mirror opposite.
Inflation fears are so rampant right now that TIPS Treasuries actually traded up to a negative yield recently - this means that people are so worried about protecting their cash against future losses via inflation that they are willing to pay a small percentage just to insure against that chance.  With the DSI on Treasuries hitting 98% recently, they are one of the ripest short opportunities on the market.  What people are DOING is raising a massive red flag to me that expectations on inflation are in the red zone, meaning the probability of seeing $5000.00 gold in the near future is extremely slim.

 Gold appears to have put in its major top, although with the non-confirmation of silver being erased after 2 weeks we could see yet another stab upward above the upper channel line on both metals.  It's movement patterns thus far suggest it is the first asset to have topped out and should soon be followed by a plethora of others.  I have not accumulated any physical metal since gold was below $900 and silver below $12.00 and I will not be purchasing any more until they are well on the way into their downtrends.

As for stocks, there are quite a few good shorts out there now.  Some of the "Darlings" of the recent rally, including Amazon and Google are extremely overvalued and have seen hugely optimistic readings for the past 2 months.  The entire market is elevated and stretched and barely wheezing along.  If I see a definitive turning patter play out I will post it as soon as I can.

I apologize for the lack of updates for the past 6 months.  I have been doing a lot of consulting work on the side lately and only made a few multi-week swing trades in the interim outside of my core positions (Long USD/short Euro and short US Treasuries long term via Put Options.)  I'll try to pick up the volume of my posts through winter as the markets become more volatile.

I hope all my readers are doing well.



  1. Thanks for your update, I am sure many will be pleased that you are still alive and kicking.
    However, I have one or two comments to start the ball rolling. To quote: “..... they follow what other people are doing. Most investors and traders are not aware of this phenomenon.........”

    I would say that most market participants are aware that people en mass behave like sheep. They have even coined a word -'sheeple'. It is just that they do not always see themselves as belonging in the group. They do not heed what they know.

    It is mostly because people's behaviour is so predictable that those in a position to manipulate them are able to do so, and It is especially true where large sums of money permeate.

    It is nothing new it goes back to the early days. It is so easy for the manipulators, it would be hard to resist if they wanted to. I mean, no matter how many such manipulations are disclosed, the mass fall for the same game over, and over, again. 

    I don't think you need me to list them all, starting with the great rip off by Rothschild after Waterloo. He used two items of knowledge to do it – advanced knowledge of the result of the battle, and knowledge of how to get the crowd to behave like a cattle stampede in the wrong direction.

    What is important is not whether the market is manipulated or not – even manipulation – PRODUCES A VISIBLE TREND. FOLLOW IT!

    Markets do not stand in isolation to world events, international 'real' economics (as opposed to Academias brand) and any manipulation which goes on is not arranged just to rip off the little guy, any more than wars are started just to kill the enemy's people.

    You can never win if you don't see the reality, and apply logic. It is living in a fools paradise.

    Seeing the game for what it is helps you to win (or, at least not to lose big), and keep your head while you are doing it.

  2. Gold at $5000? For this to be possible you would have to see oil at over $300 dollars a barrel. Possible, but not probable (yet!)

    Inflation/deflation: To the common man it refers more to the 'affect', than the 'effect'. By that I mean how the economy is affecting his/her cost of living.

    Many things are at work here that are affecting the cost of living. We do not have today a large area of the world locked in communism where prices, and wages are highly controlled. We have had that
    condition for the life of all alive today, so we cannot see things in the light of what we have experienced in the past.

    China is over four United States in size with a fast growing economy. This country does not waste its money on wars, but invests its money wisely for its future. Though the US government and media don't like you to see this. No, it is not a country to be feared, It knows that it can only continue to grow by doing the right things, and that we live in a shrinking world where we all sink or swim together.

    But the days of 'gunboats up the Yangste' are long gone, and will not come back in our lifetime.

    But there are other long dormant areas growing. Africa too is on the move, slowly, but surely.All this is affecting markets, and will continue to do so. What I am saying is that it is a mistake to look around our own countries and what is happening then to assume that is happening in the rest of the world'

    The world is slowly evening out its imbalances.

    If you want to know if there is price inflation – do the shopping and pay the bills, don't listen to analysts.
    Regards to all

  3. One thing i will note in regards to the Rothschild stock market crash is that one-sidedness in perception played a massive role in the crash of the day.

    In 1814 (one year before the incident), England experienced a peak in total aggregate money (credit) at 68% of GDP (for the era this was huge, and had run up over 100% in less than a decade). This was also accompanied by a significant rally in the price of british stocks.

    The specific time in which Rothschild pulled his misinformation stunt was a rare instance in which this soft of behavior would have already worked - the markets had already turned down and were impulsively working their way lower. The point of time in which the market crashed was already a point in time in which the probability of such a massive move down was the highest.

    If the stunt had been tried 10 years earlier or 10 years later, it would have resulted in maybe a small blip in the larger scheme.

    The common misconception is that events affect markets, when in fact the empiriral data shows that in larger degrees the markets always effect events, since they are measurements of aggregate mood - i.e. a rise in positive aggregate mood always, with no exceptions, accompanies a rise in overall credit. This is because when people are feeling more positive about the future (i.e. my business will do well, my job will still be here, my stocks will go up, etc.), they are more likely to take out credit (risk) agains the future.

    In negative times/bear markets, the opposite always occurs. The other thing to take into account are time cycle relationships of aggregate mood activity, as measured by markets. 1813 was a 50-60 year cycle peak monetary expansion and positive mood.

    Could someone possibly use this data to their advantage if they knew markets worked like this? Of course - this is how a successful trader makes money in the short term - hopping on a fresh trend or cycle or counter-trading a maximum extreme. The degree of success would simply rely on the means of the participant.


  4. “............ is that one-sidedness in perception played a massive role in the crash of the day.”

    Derek, I am not sure just what that means in this context, so forgive me if I misinterpret.

    The mass always perceive from 'one side' – 'from THEIR' perception. That is from their belief of truth or reality. To control human behaviour all you need is to control perception, you don't have to change reality. This is at work constantly. It is behind all scams and manipulations, markets or otherwise. It is working constantly – right this minute.

    It is long said that if the mass ever saw reality of its politics, and/or economy, its government could never stand and its overthrow would be swift and bloody..

    What Rothschild pulled off was by manipulation of people's perception. Only the 'events' used ( in this case, a crucial battle in Europe), change. That method is as old as man, and has been used throughout history, in, or out of, the markets. IT IS 'THE KEY', to their success.

    As for 'timing'. to obtain the greatest impact (result in one's favour) the timing has to be right. It becomes more difficult to get the mass to perceive a market surge when the market is already
    at a high – not impossible, but more difficult. You time a 'crash', therefore, when it is high. And also, in the Rothschild manipulation, it had to be BEFORE the result of the battle was known by the mass.

    The excuses given to explain merely have to be ones that can be 'perceived' as being the truth, or , at least, to confuse the analytical (doubting) mass mind. To some up – 'Perception trumps Truth (reality).'

    This is my view, though all are entitled to theirs and will have them whether I care or or not..

  5. Sorry, ...To sum up....My computer's corrector 'perceived' the wrong intended word from my typo, and I failed to observe the reality of its choice.

  6. Today should drive home why I say, it is too early to short. If a down turn develops there will still be time to make money in a 'safer' environment.

    There is a lot going on behinds the scenes which you should have observed if you have been taking a much wider view of what affects markets

    I am completely at variance with Derek in that 'events' (contrived, and natural) affect markets, not the other way around - NO WAY!

    As I have said, there is much going on behind the scenes which I do not want to detail from what I believe as you would not believe me and would invite unnecessary conflict.

    The trend up has not yet been broken, and the oil price is rising - over $86 a barrel (give you any clues?)
    Take great care

  7. Well ED, your SPG has finally topped 100. Are you still now going to short it?

  8. Hi Derek,

    good to see you are back and still a contrarian.
    Personally I love a contrarian view when it has some substance, especially when it involves Gold and Silver.
    I can trade Long or Short, but a sharp reversal/decline is faster and more profitable. Especially when you have beaten "the crowd". But I have doubts that you can beat the FED.

    You say in your blog update "Gold appears to have put in its major top". I would like to believe that. But where is the evidence ?
    There are reasons Gold SHOULD have peaked.

    1. De-hedging (buying back Gold contracts) by mining/producer companies for the last five years is virtually over. The huge tonnage silently purchased by Barrick, Anglo etc has taken the Gold price $400 higher than it would oherwise have been. In theory, this should mean the 5th wave has ended with this underlying buying support ended.

    2. Gold moves in 9 year cycles, usually from bottom to bottom. But this last nine years Gold has moved from a bottom to a high but maybe not a top? Will the 9 year cycle hold this time ?

    Yes, all the usual indicators point to Gold reaching a top. But a determined inflator in control of the Federal Reserve does change things, as a linked article points out at:

    With a money printing lunitic determined to devalue the US Dollar, the ONLY way for precious metals is UP. You cannot fight the FED !

  9. I have covered the concept of the Fed printing "money" in detail in previous posts. The Fed is only effective during bull markets with a psychological back-drop that is optimistic towards the future and therefore towards credit. The Federal Reserve increased its reserves by less than $2 Trillion (less than 0.2% of total money + credit worldwide) and there was huge political backlash including the introduction of a bill to audit the Federal Reserve with almost unanimous support.

    However the bull market erased much of the animosity - a reflationary period of optimism has carried the stock indexes to new recovery highs and with it allowed temporary acceptance towards the Fed's next attempt at inflation. Once markets roll over and pessimism becomes more negative, the blame will (rightly) fall on the Fed as being the cause of so many financial problems as opposed to the current "savior overlord" view.

    With metals, as often occurs with commodities, gold and silver are in what appears to be a blow-off top stage. Blowoffs are extremely hard to pinpoint - the only way to play them long is get in fast and get out fast. As I have written previously, I have not added anything to my metals holdings and have accumulated cash in the meantime. I have no long exposure to the markets and my only open position is an extremely recent short on Google and my long-term short on US Treasuries.

    This elevated optimism is actually MORE pervasive than at the 2007 market top on many counts, including long term DSI readings, AAII investor surveys, etc. This is not an environment in which one wants large exposure with one side of the trade crowded to an unprecedented level.


  10. Thanks Derek,
    for your reply. I hope you are right !

    I have heard nothing but inflation talk, the Dollar trashed and "gold and silver to the moon".
    I would love to see the reverse happen and those "know it all" gold perma bulls to eat humble pie. But time will tell.

    I am hedging Gold and Silver, but cautiously favouring the downside.

    I look forward to your future upates.

  11. Derek You wrote
    "....The common misconception is that events affect markets, when in fact the empiriral data shows that in larger degrees the markets always effect events, since they are measurements of aggregate mood - i.e. a rise in positive aggregate mood always, with no exceptions, accompanies a rise in overall credit. This is because when people are feeling more positive about the future (i.e. my business will do well, my job will still be here, my stocks will go up, etc.), they are more likely to take out credit (risk) agains the future........"

    This is too important an area of market action to allow it to go not properly addressed.

    As a business psychologist, and trader, semi retired, I have given it much attention.

    Life itself is one of integrated links of 'cause and effect'. But we also have to accept that in its widest reach we always come to the unanswerable -
    Did the arrival of the egg cause the chicken, or was it the other way round?

    The markets, however, exist because we (man) created them. They did not happen naturally.

    Yes, they respond to human behaviour caused by their perceptions, but who, and what, put those perceptions there? People are what they think, not what they eat.

    But when events, or the manner (interpretations) of their reporting which influences the perceptions of the masses produces the effects (and affects to the mass) then they also become causes of further effects (and affects).

    This is why I harp so much (which infuriates some here) and plug the seeing of something as a whole.

    If we truly want to understand, and put our money at risk, we cannot just take pieces of the whole, we must fit them into the context A cause produces an event, but that event then produces a cause; ad infinitum

    This is where so many (almost all) analysts go wrong, they attempt to give prognosis based too much on one event.

    They are beginning to realise the folly, but can't extract themselves because they, and media conditioning, has taught the mass ( their followers) to think 'small'. It is simpler to do this. But life and human behaviour is full of complexities. It is fickle, irrational, and lacks patience to understand.

    Hope the reader gets the drift. I try my best to keep a complex subject simple.

  12. Hi Derek & Ray,

    I have put a Link to a very good article called
    "Seven Bullish U.S. Dollar Charts You Should See" at:

    Just copy and paste into web browser.

    Derek, these charts give strength to your future scenario of a strong (not collapsing) US Dollar.

    Ray, the US Dollar is central to any investment strategy at this time. It is, as you were saying a big part of seeing the market "as a whole".

  13. Goldbug,

    I will look at those links.
    However =

    What is really 'central' is the 'destination'to which we are being moved, because ALL roads lead to there, Hope you can understand without detailed explanation.

    Any 'causes' that are introduced will be to produce the 'effects' that take us nearer the ultimate goal.

    Having said that, yes the dollar (reserve Fiat) is a key player, but only in its relationship to Gold (the real money opon which all 'macro' trade is based
    especially OIL (energy).

    See them as the three caballeros - Dollar, gold.oil. Life, that is OUR life as we know it, on Earth is totally dependent on oil, without it, we go back almost overnight to the stone age where all we needed was food, clothing (skins) and shelter (a cave.

    But even those who may long for what they see as the 'simple' life would not be able to take what we would swiftly have to go through to get back there.

    There would be a lot less of us when we got there.

    Before anyone decries this to put me down THINK about it.

  14. Today Oil is over $87. As gold moves, so does the dollar. (Or is it the other way round. I mean which is the cause, and which is the effect?

    Could be both' acting and reacting on each other.

    The OIL producer 'cabal' don't care, they always ensure that they get the average of one ounce of gold for 15-16 barrels of crude – whichever way the dollar (the currency they are forced to use to trade, bounces)

    But both are inanimate, so they can't act independently of the human hand (and mind). Someone is providing the cause to produce a desired effect.

    And whatever happens, it will continue until the desired effect is achieved.

    The junior gold mines are starting to move, that means the 'little guys' are moving in. Or does it?

    Here's how things change from the past. Big money could not enter these smaller individual mines as it would move the market against itself (like bidding against yourself at an auction. But what is more, it couldn't extract itself the same way, either.

    But now we have EFT's And we have one for the juniors
    - GDXJ. These ETF's do permit big money, to a certain extent, to enter the game. So we can't say, today, 'Oh the Juniors are moving, time to get out, the little speculators are raiding their piggy banks to get in on the act. @ Well, you can say it ..but..... Take care, if you are a bear.

    Oh these 'Buts'. They make this guessing game oh so troublesome.

    Wars don't change, but the way we fight them does.
    Markets don't change, but the way we have to play them does.

    There were no cannons at Agincourt. There were no machine guns, and trenches at Waterloo.

    There were no hedge Funds with over $500 billion in assets in the 1930's

    There were no ETF;s in the US in 1980 (the last gold rush) And home computer were only just about to hit the market. Online brokers didn't really appear until early 1990's.

    The British army went to WW2 with WW! equipment and
    fighting methods. They got a bloody nose. (Americans, don't laugh, you did the same, TWO years
    later, even after witnessing the Brit experience).

    What history really teaches is -
    DON'T MAKE PAST MISTAKES by IGNORING CHANGE, Even what may appear the smallest change must be considered.