Friday, July 27, 2012

Touching Base.

If you still managed to hold onto the Netflix short, fantastic.  We are now searching for a bottom as the stock has started its C-leg towards the support range that starts at around $42.00/share.  If you close out the position from our $220 short entry, you've locked in about 73% gains to date.  I would recommend doing this as the decline has fulfilled the minimum guidelines of two sequential lows and diverging internal momentum on the latest low.  If you wish to hold on to a portion of your winnings to see if we get into an extended decline (true long-term support is still a ways away, and the long-term trendline from IPO comes in at the low $30's per share through the rest of 2012), I would still be looking to hit the trigger as there looks to be about one good short-term leg left in the downtrend within the next several weeks.  In the meantime, here's an opportunity or two:

There's a perfect place you can take these gains and apply them.  The Ultimate Bubble is sweating out its last few drops of exertion, and the mass exodus is about to begin.  You are lucky enough to be able to grab a seat in the front row to watch the fireworks display, and hopefully churn out a boatload of money at the same time.

The greatest bubble in human history is in sovereign debt.  The swiss yields just hit record negative territory this week, as well as German bunds.  The USofA, the most indebted country in the history of the human race (try some GAAP accounting on those government books, and you'll come in closer to $90 trillion than $15 trillion), just saw bond yields below 1.5% over 10 years while inflation rates are coming in over 2% (CPI basis).  People are literally paying governments to hold on to their money to keep it "safe".  The euro crisis has caused widespread fear and turmoil, the balance sheets of the old players are a zombified mess and will never be sorted out without true bankruptcy and auction-style liquidation by creditors (although for half of the financial instruments in those dark, moldy vaults, nobody could tell you the counter-party as it is).

I recommend a fully leveraged short position on long term US treasuries.   Not only that, if you can find an instrument to do it with or have an investment banking account overseas that allows it, short Swiss bonds at maximum leverage, German bunds at maximum leverage, and Japanese sovereign debt at maximum leverage.  The house of cards will completely crash over the next decade and people who are in position early to benefit from it will be handsomely rewarded.  Think shorting subprime in 2006, but hundreds of times the scale and without any collateral to speak of for debt holders.  The only collateral you have as a bond-holder is that of politicking and central banking, which history has demonstrated time and again is absolutely worthless.

As for gold and silver, they have been dredged pretty hard over the past 14 months.  I would have thought that the dredging would have been even harder (it may be much harder yet for silver if the credit contraction starts sooner than later, as it is more sensitive to economies and doesn't bear the same monetary premium as gold).  I have raised my maximum downside target for gold to $1300, and silver to $18.00.  both could turn earlier than that, as the next 3-4 weeks should show if the technical reset is completed with diverging internal momentum indicators and dollar-weighted volume measurements (momentum "less-down" while prices make a final low).

The HUI has retraced heavily, shedding 40% off its peak at $625 to its recent low at $375.  I recommend opening up smaller positions on established gold miners and purchasing small cap gold stocks who have completed the majority of their operational financing or are newly beginning operations.  Financing might be very hard to obtain through any of the traditional channels in the not-too-distant future, even for gold miners.  This might be a boon for solidly-positioned players who have lots of cash right now, as it will present some excellent buyout opportunities at fire-sale prices that could have hefty long-term payouts. Always do your homework on gold companies as there are hundreds of promises flying out of offices these days while there might be 5 or 10% of the exploration projects that actually end up being viable, and at that point there is still the difficulty of financing (or hoping and praying for a buyout or partial royalty sale).

With the price targets for gold and silver near at hand, I recommend re-commencing cost-dollar averaging into the metals.  A new program offered for gold holdings that is actually allocated and regularly audited, and allows for delivery once you have reached a certain amount, is my top recommendation as a method to acquire precious metals regularly and reliably.  It can be found here, and makes buying small amounts of gold or silver as easy as popping a cheque in the mail or setting up a wire transfer.  The most important aspect of this is serial-number allocation and delivery options, which synthetic instruments like GLD and SLV do not offer.  You can purchase gold, silver, platinum, or palladium, as well as swap holdings (if you are like me and do ratio swaps based on historical averages to increase total metal holdings without paying anything extra).

I am still expecting the US Dollar to rally in a big way over the next 1-2 years as credit contraction continues.  Over at, you can see John Williams' work in compiling M3 data and tracking the other monetary measurements.  It will pay to keep your eyes peeled on the aggregate money measures - the world is awash in a tsunami of debt denominated in USD's, to the tune of hundreds of trillions of digital dollars, with an actual cash base of reserves, including money market holdings, at just over $10 trillion.  Something has to give, and something will.   The world is overleveraged at over 30:1, in USD terms.  Just let that mellow for a little while.

I still recommend holding as much physical cash as possible (do not leave more than you have to at the bank) along with your precious metals holdings, and avoiding the long side in almost anywhere that hot money is headed.  The few exceptions to this are in fertilizer producers with strong balance sheets and price:book of less than 2:1, farmland in cheap locations (saskatchewan, some parts of south america, etc.), uranium holdings that have a lot of cash on their balance sheet and minimal debt, natural gas holdings with lots of cash and low debt levels (emerging technologies as a result of the new abundance of the substance are making it a viable competitor for oil in a host of new areas, which should keep demand steady on the upswing for this much cheaper energy source), and a few technology stocks that have been absolutely crushed in the past 12 months, even while their prospects have improved and revenues have started to come in.  I'm not going to touch on those now, but I may in future.  As far as tech goes, look for actual viability (demonstrated performance as opposed to pipe dreams), anything that can make the physical world cheaper or more capable that poses a challenging to an existing solution to a problem.  This is the place where foresight and optimism can make fortunes.

The next couple of years are going to very interesting.  We've been floating along on a plateau with two giant monsters fighting it out as to which direction markets are going to go (Do we get long-term capital destruction coupled with huge inflation, effectively wiping out savers, producers, and lenders?  Or deflation that wipes out borrowers and hits the reset button on money levels and, hopefully, money itself?).  My money is on deflation, as we are at the tail end of a multi-decade trend of credit expansion and an almost-insatiable hunger for debt that has never been seen before.  Governments are the last onto this trend, as they are the last to any trend (hence the biggest-bubble-in-human-history - bonds).  The US indexes seem to be the last stalwarts of hope in any developed economy, and we'll soon see if hope (and central bank largesse, exacerbating it) is enough to really form a trend.  Or if we've begun to finally slide down the next leg of bear market and are taking a ride down the "slope of hope". 

As I see interesting things I will post on them periodically, and if I come across any good short term opportunities I will let you know.  Otherwise, stay safe out there!

Ed, I decided to write up a response to you, but the character limit on comments is too large for what I typed it up, so here it is:

Hi Ed.

I plan on posting a study I've been putting together over the past few years about some of the misconceptions about the Federal Reserve - one of those being that their rate-setting is done arbitrarily and based on their idea of "stimulating" demand for the economy, focused on total volume of money (and no, this is not a justification in any way for monopolization of money, fiat currency, just trying to bring a greater understanding to investing in the markets we are dealing with NOW)

Their rate actually short-term lags the T-Bill rate, to a correlation of almost a perfect 1:1 with up to 90 days delay. 

Interest is two things.  Time and Risk.  It is affected by the overall supply of loanable money when banks are not insured and have to attract deposits from a limited stock (market based monies like gold and silver), however the principle is similar even within the banking cartel.  If the money supply/base money available to banks is high, the rate of interest will also be low - the value of time is not as high when supply is high.  On the opposite of the chart, if loanable reserves are dried up, banks will price the time-value of money higher.

Risk is the other factor, which plays large roles and lesser roles, based on overall market conditions.

There are currently about $75 Trillion in open debt instruments floating around the world, denominated in USD's.  in order to repay a debt, someone must repay it with cold, hard currency.  There are two things that have kept the debt-system afloat - The issue of new credit, which is converted to deposits (considered as good as cash, since your deposit slip is just a short-term IOU from your bank to redeem the cash if you request it), and the fact that the majority of money sloshes around within the banking system, since most transactions are done electronically these days.  This creates larger overnight and short-term liabilities between institutions than any time in prior banking history (see 2008 for an example of what can happen when overnight markets stall up, even for a short time).  BUT, these deposits or pseudo-deposits (deposits that exist only because a commensurate loan has been issued against them by the same or another financial institution) are still only promises to pay.

Actual physical cash is in an amount around the $2 trillion mark, supporting a system of around $75 trillion (this is not including derivatives and government unfunded liabilities, which put the total amount of debt worldwide at somewhere between the mind-boggling amounts of $500 - $700 TRILLION dollars, or 10x+ the world's GDP).  The system itself is leveraged at over 30:1 against hard currency, which is what everyone will demand once the credibility of borrowers begins to come into question.

What we will likely see as far as the US government and other western governments are concerned is that their ability to repay any debt is mathematically impossible through the normal channels of taxation/seizure/theft of assets.  Especially with the absolute tsunami that all markets have been throwing at them for the past 4 years, which has created the paradoxical effect of allowing for multiple times the typical amount of debt to be serviced and rolled over into extremely low-yielding shorter-term securities.  The maturity rates for western government debt will hit more than 20% of world GDP within the next 2-3 years (assuming a rosy 3-4% increase in world GDP YoY, to boot).  That is 20% of all the world's capital stock just in refinancing issues, not even new issue of debt.

As credit contracts, it is harder and harder to get your hands on cash.  The first phase of deflation usually results in yields diving off a cliff, followed by spikes in yields for anything with a modicum of doubt as to its viability.  The US government is in a mathematically worse position than most of the EU, Japan is in an even worse position than EU or USA.  They are great shorting opportunities, although you have to account for currency loss, especially in regards to Japan.

My personal strategy on Japan is to short the long term government debt, and at the same time hedge against inflation (Japan's bear market is in its final stages, whereas the US's is maybe halfway done) that will come with a rising equity market and real estate market.  Basically - short anything Japanese government, long anything high-quality Japanese business (some of the yields over there are incredible and the cash-flow is far higher than anything you could find here at those prices).

Anyway, this post went on more than a paragraph or two longer than I had originally intended.  Thanks for stopping by.  I apologize to everyone that my updates have dropped off the map.  Trading has been insanely slow and these are the first positions I have opened up in a good, long while from my cash account.  Business in the brick and mortar world has kept me hopping the last 12 months or so, but hopefully as fall rolls around it will slow off a bit and give me a chance to post some of my swing trades and options plays.


  1. Good comments Derek, great to hear from you. You say get a front row seat and maximum position on shorting long term treasuries. I assume you mean TBT for those of us in the states. I am having trouble understanding the upside potential if we do get what you are forecasting - a much stronger dollar, and a downward or deflationary push. Don't both of these drive rates lower and bond prices higher? i.e. a continuation of the trend we have seen for the last 30 years and just stretching the rubber band even further?
    Any thoughts on CMG? After a near $100. drop the other day it appears broken. I'm thinking short oppty if it trends back up to near $335?

    Ed in jersey

  2. I have left off making any comments here in order to show certain cynical site visitors that it was not I who was responsible for any poor responsive interchange activity.

    I have also been busy elsewhere.

    However, I would have thought, David, at least one of your loyal subscribers, and one of my cynical critics deserves a response from you.

    Otherwise it may send a message to others you don't care. Which, seems a shame with all the work you put in on this update, and, what appears the sound of early rumblings that the long market stalemate is about to break any time soon.

    To ALL - Be vigilant, and keep your powder dry.

  3. How long does this short squeeze in Silver and Gold last? Will we touch $40 on silver?

  4. my earlier post on cmg appears to have played out perfectly too bad, I didn't put money on it. I thought the options were too expensive. oh well;range=3m;compare=;indicator=sma(50,200)+volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=undefined;

    Ed in Jersey

  5. This comment has been removed by the author.

  6. Enlightened 1January 20, 2013 at 3:49 AM
    " It is change, continuing change, inevitable change, that is the dominant factor in society today. No sensible decision can be made any longer without taking into account not only the world as it is, but the world as it will be."
    Isaac Asimov

    This applies to how you engage with the markets.

    (What's the matter with this BLOG? It's like a floating 'Marie Celeste' mysteriously abandoned in the ocean of cyber space )

  7. Maybe I can help revive this dead blog. (I said maybe)

    Bank Of England Chief Economist-To-Be Warns: "It's Time To Rethink Everything"

    Submitted by Tyler Durden on 04/24/2014 17:47 -0400

    Andrew Haldane, who is well known as being one of the most outspoken and truthy central bankers in the world, will become Bank of England's Chief Economist in June. That fact is what makes his comments - however factually honest - extremely uncomfortable for the Keynesian status quo DSGE modelers alive and well in every central bank in the world.

    To summarize his thoughts in the following letter - the models are useless and it's time to rethink everything...

    Via Andrew Haldane,

    "....In the light of the financial crisis, those [macro and micro model] foundations no longer look so secure. Unbridled competition, in the financial sector and elsewhere, was shown not to have served wider society well. Greed, taken to excess, was found to have been bad.

    The Invisible Hand could, if pushed too far, prove malign and malevolent, contributing to the biggest loss of global incomes and output since the 1930s. The pursuit of self-interest, by individual firms and by individuals within these firms, has left society poorer.

    ...The crisis has also laid bare the latent inadequacies of economic models with unique stationary equilibria and rational expectations.

    These models have failed to make sense of the sorts of extreme macro-economic events, such as crises, recessions and depressions, which matter most to society. The expectations of agents, when push came to shove, proved to be anything but rational, instead driven by the fear of the herd or the unknown.

    The economy in crisis behaved more like slime descending a warehouse wall than Newton’s pendulum, its motion more organic than harmonic.

    ...we are a co-operative species every bit as much as a competitive one. This is hardly a surprising conclusion for sociologists and anthropologists. But for economists it turns the world on its head.

    ...In this light, it is time to rethink some of the basic building blocks of economics.

    If they keep relying on Marx and Keynes, they'll never get it right ......."

    Some years ago when at the LSE, I wrote a paper on this.......needless to say it did not go down well. I had many personal discussions with my lecturer on this subject. I knew he saw my point, but, certainly at that time he could not openly agree - and even today, no unthinking, die hard, Academia brain washed economist would.

    However, for those with an open mind, and in a position to speak out their views, there is a wind of change.

    Will it stop the Financial Elite? No way. But it will make them change their tack to adjust to that wind.

    And this is why we must look for, observe, and adjust our thinking, and actions, to that change. Or, be forever buffeted, and drift at the mercy of the elements towards the rocks, or wherever.

  8. This comment has been removed by the author.

  9. There are many problems the world faces, but then there always has been.

    However the most serious of all, yet the one almost no one sees is

    We are creating more efficient ways to produce our needs via technology, that we are reducing the need for labor.

    While, at the same time watching the world population grow beyond our means to sustain it.

    No one wants you to talk about it, for the simple reason, there is no benign answer. Therefore they keep it out of the media - the mass don't see it unless the Media in all its genres want to make you aware. Talk about ANYTHING but THAT. Keep your mind focused elsewhere.

    But, until some answer is decided (and I am sure they will have one which will be anything but pleasant when it comes) the world must be sustained and kept from rioting by welfare.and charity.

    There are two ways to provide 'welfare', just keep printing money and food stamps. But then Governments are blamed, and used.

    The other way is for money first be allowed to filter into the hands of wealthy 'entrepreneurs' (and I use that word loosely).

    They can then start business built to run on very cheap labor for which there is a now growing supply. The wages they will receive will, without the little extras they would receive from Government handouts, will be their new 'welfare' supplied by private means.

    To force them into these menial jobs, they are told if the refuse them, they will lose their Government 'assistance'. Therefore the Government acts as a labor recruiter, for the private sector.

    This looks good for labor statistics by seeming to reduce unemployment. But it does not take the mass off a 'welfare' income. Each day, this condition deteriorates.

    Of course, there has to come an end someday, you can only have so many burger flipping emporiums, and the like.

  10. nwo You asked "..nwoDecember 20, 2014 at 5:18 AM
    Any thoughts on USO?
    Oil etf

    And a certain 'clown' responds telling you ........"..... An oil stock ETF might be better for a long term hold....."

    USO IS an ETF, An you knew that yourself, you even told him.

    (Sorry having to tell you here, because of my 'promise'

  11. This comment has been removed by the author.


  12. HERE IS THE KEY to understanding the Financial Markets, and that includes the Economy, yes, and Money.

    Gold is 'Yellow' Oil, and Oil is Black Gold.

    Reason? Because Gold is the ONLY Definitive Money, and has held that title for thousands of years by those who really understood it, and mastered its use over that time.

    Oil: Is 'Today's' Definitive Commodity. It is today the most widely traded, outside that of Fiat Currencies which are merely only a form of IOU medium of exchange (play money for the masses) which provides them with the means to exchange, in return for commodities they deem necessary for their needs.

    Fiat currencies, in whatever form, are only IOU's. Once deposited, at any point, in the banking system they return as property of the bank, and only considered an 'unsecured loan' .

    Therefore, the BEDROCK of the financial system and economy is GOLD (money) and OIL (key commodity).

    For many, it may take some thinking about before that sinks in. And for some, that will be over their heads - unfortunately for them.


    The banking system's only obligation is as with any unsecured lender when there is no money to return to them at the time when demanded.

    (Just hope that there are enough of the mass, including some with some influence, that the banking system, and government would be reluctant endanger themselves, very seriously, by allowing such a predicament to occur.)

    Unfortunately, Cyprus is only a small country, but it set a precedent.

    Think also, on ETF Gold (or silver) where the actual gold is 'deposited' by the Fund and held by the Bank, that too becomes legally an unsecured loan to the bank, and therefore...........well, you work it out.

  14. Glad to see your comments once again Enlightened 1. I wonder what Derek is doing these days??

  15. Hi Anon,
    Only just seen your post. I too am curious to know what happened. He has kept his website open, someone must be paying for it. I have many posts on 'True Contrarian'. I log my thoughts there mainly for myself as a way of driving home to me things I must retain in my mind.

    I learned it from reading certain the 'biogs' of 'great minds' in the markets who used to keep a notebook for the purpose - it was, for them, before the advent of the computer and internet.

    Thanks for calling in. Wish someone would let is know what happened.

  16. I keep hoping will drop in on this site, if only by chance. It's a shame for it to stay unused adrift like a ghost ship in cyber space. Come on board, maybe can encourage Derek back.

  17. Ahoy there - Anonymous....Anyone.......Please! Steve Kaplan (SJK) Has had to shut up shop. He kept touting for three years his portfolio that has bee continually losing money for him and his followers. For THREE WHOLE years.

    Madness. He kept preaching to keep buying more as they started falling - especially his key stock GDXJ.

    Now he has thrown in the towel, perhaps it is a sign that, like Mr Micawber - Something now will begin to turn UP!.