Thursday, January 31, 2013

Hedge Funds Are Selling Stocks As Foolish Retail Investors Plunge In.......

Hedge Funds Are Selling Stocks As Foolish Retail Investors Plunge In

Stocks have headed higher without respite to start 2013.

Many strategists are warning that a sell-off is in order, especially given a wide range of indicators that suggest investor sentiment is at historical highs.

Hedge funds are now selling stocks – and they're selling them to private investors, who are picking up their pace of buying.

Below is a chart showing that BofA "private clients," or individual investors, have been buying stocks since mid-January:

BAML private client equity flows


Meanwhile, hedge funds are doing the exact opposite:

BAML hedge fund client equity flows
Net buys were $1.22bn, the largest since November, and continued to be led by private clients. Private clients have now been net buyers for four consecutive weeks, a sharp reversal from their large net sales ahead of the Fiscal Cliff late last year. FOOLS AND THEIR MONEY!

Hedge funds were the sole net sellers. Pension funds, a subset of institutional clients, were net sellers for the fourth consecutive week as well.  CAVEAT EMPTOR!





The dollar's huge head and shoulders top formation is maturing. The target is 72. It will be activated when the dollar closes under 78, for two consecutive days. A breakdown under 78 should be accompanied by gold breaking above $1800.

The long term outlook for the dollar is not good. 

Printing a trillion digital dollars a year, via QE, is the main catalyst causing the creation of this huge top pattern.

By the time the government gets into the act of speculation, the top is usually way past having occurred .......

By the time the government gets into the act of speculation, the top is usually way past having occurred 

Government is the ultimate crowd, every decision being made by committee. It is always acting on the last trend, the one that is already over.

For example, the Federal government passed securities laws to prevent the 1929 1934.)

In November 1999, the government demonstrated the usefulness of this socionomic precept when the Glass-Steagall Act -- the post-1929 crash statute the U.S. government adopted to "purportedly protect" the financial industry from itself -- was effectively repealed. Citing the government's role as "the ultimate bag holder," The U.S. government provided one of its greatest-ever demonstrations of this principle." That was four months after the all-time high in the Real-Money Dow (Dow/gold), and two months before the all-time high in Dow/PPI. Both indexes have been in a bear market ever since. THESE TWO INDICES'S ARE HOW YOU SHOULD MEASURE YOUR WEALTH IF YOU WANT THE TRUTH. 


On Sept. 1, 2012, the U.S. Federal Reserve upped the ante in the latest test of our "ultimate crowd" theory when it introduced QE3, an "open ended" $40-billion-a-month mortgage-buying program. The U.S. central bank further stated that it intends to keep the Fed Funds rate at effectively zero for the next three years. In time, the Fed's herculean effort to stimulate the financial markets and the economy, with the sanction of government, will illuminate the authorities' role as the last believer in the old trend even more brilliantly than Congress' passage and repeal of Glass-Steagall, at the beginning and end respectively, of a Supercycle-degree bull market. To understand how social mood's long-term positive trend influenced the Fed's actions, we need to travel back to the central bank's creation, which occurred in the wake of a major downside reversal in mood.

The Federal Reserve was established (not at all coincidently near a major bottom in 1914) at least partially as a response to the Panic of 1907. In an effort to prevent financial panic from ever happening again (pipe dream #1), the Fed was mandated to restrain the "undue use" of credit in the "speculative carrying of or trading in securities, real estate or commodities." (Sound like a familiar mix?) When runaway financial speculation burst forth in the late 1920s, the Fed rose to the challenge, or at least tried to. 

In "The Stock Market Boom and Crash of 1929," economist Eugene White wrote, "The Federal Reserve had always been concerned about excessive credit for speculation. Its founders hoped the new central bank's discounting activities would channel credit away from 'speculative' and towards 'productive' activities. Although there was general agreement on this issue, the stock market boom created a severe split over policy." According to economist Murray Rothbard, Herbert Hoover and Federal Reserve Board Governor Roy Young "wanted to deny bank credit to the stock market." In August 1929, within days of the Dow's ultimate peak, the Fed acted, raising the discount rate to 6%.

As our opening quote notes, government moves by consensus only, so it did not make structural changes deemed capable of preventing another crash until 1934, two years after social mood ended its negative trend and the stock market bottomed. In a bid to strengthen the government's capacity to curtail "over trading," the Securities Act of 1934 also gave the Fed power over brokerage firms' margin requirements. 

In the early stages of the bull market, the Fed did not wait long to use its authority. In April 1936, it raised the initial margin requirement on NYSE shares from a range of 25 to 45%, to 55%. Considering that the unemployment rate at the time was 15% -- nearly double its current level -- this act represents an exceptionally conservative stance. Stocks retreated for a time, only to race back to new highs three months later. The Fed responded by "doubling reserve requirements (against deposits) from August 1936 to May 1937," right up to and briefly past the March 1937 Cycle wave I stock peak. Economists Christina and David Romer state that the Fed was "motivated by fear of speculation and inflation."

In February 1966, a speculative binge accompanied the Dow's double top in 1968-1969. The Fed felt compelled to act again in June 1968 by raising margin requirements to 80%, once again "to curb speculation." The Fed also pushed the discount rate to 6% in April 1969. In 1970, then-Fed Chairman William McChesney Martin famously stated that his job was "to take the punch bowl away when the party is getting good."  NOW THEY ARE SPIKING THE PUNCH, PRETTY INTERESTING CHANGE IN THINKING! 

By 1974, with the DJIA touching the bottom channel line, the Fed acknowledged the bearish trend of the Cycle by reducing NYSE margin requirements for stock purchases to 50%, where they remain today.

In 1984, a Fed study "cast significant doubt on the need to retain high initial margins to prevent excessive fluctuations of stock prices." When the Great Asset Mania finally pushed the Dow through the top of its channel line in 1996, Fed-mandated margin hikes were taken completely off the table. In December 1996, after the Dow made its first decisive break through the top of the channel, then-chairman Alan Greenspan issued his famous "irrational exuberance" comment, citing "unduly escalated asset values." 

Yet, unlike his predecessors, he did nothing to change margin requirements. A margin debt explosion in early 2000 "prompted some policymakers to debate the idea of changing margin requirements to stem possible speculative excess," but a Federal Reserve paper issued the day after the S&P's March 23, 2000 peak ("Margin Requirements as a Policy Tool") quashed the idea: "The bulk of the research indicates that changes in requirements do not have a significant permanent effect." Ultimately, though, the Fed stayed true to its historical pattern of raising the cost of credit near the end of upside extremes along the trendline, hiking the discount rate to 6% in May 2000.

In 2006, with the Dow once again pushing to new highs above the top of the trendchannel and the real estate mania at peak pitch, the Fed raised the discount rate one notch higher, to 6.25%. In a critical change, however, it did not wait for the Dow to reverse course before easing again. In the first stage of a bear-market prevention effort that continues to this day, the Fed reduced the discount rate to 5.75% in August 2007, two months ahead of the Dow's October peak.

Various government-sanctioned financial bailouts also coincided with the developing stock market reversal. The almost instantaneous impulse to "do something" represented a historic departure from previous behavior. Government bailouts generally "appear successful because they tend to come at lows," and added that the 2007 bailouts were "too close to the market's peak" to work. The word "appear" is actually the key to that forecast, because it is a reference to the actual cause of the market's reversal: a change in the direction of social mood. This change is far more powerful than any action the Fed might take to induce a desired market outcome. What matters is not the specific action that the Fed may take, but the fact that it feels compelled to act by virtue of the social pressures under which it operates.  RIGHT OR WRONG, THE PUBLIC WANTS WHAT THE PUBLIC WANTS AND THE FED FEELS COMPELLED TO GIVE IT TO THEM. THAT SHOULD SCARE THE ^%&* OUT OF YOU! 

In the case at hand, the Fed's long-standing objectives have been reversed. DESPERATION! Instead of exercising its original mandate to restrict excessive speculation, the Fed is doing everything in its power to keep buyers' animal spirits alive, even as the Dow is at its 75-year upper trendline. A MASSIVE WIPEOUT IS COMING AND SOCIAL UNREST WILL FOLLOW BECAUSE PEOPLE ARE GOING TO BE REALLY PISSED!

The open-ended nature of the promise to provide quantitative easing indefinitely and the stated objective of creating a wealth effect in the form of higher stock prices are unprecedented. "Fed Aims to Drive up Stocks," says a September 14 Washington Post headline.

Here's the basic plan in Bernanke's own words: "If people feel that their financial situation is better because their 401(K) looks better, they're more willing to go out and spend, and that's going to provide the demand." Never mind the foolishness of the demand-theory of economic growth.

The Fed is getting into the act of speculation with the top long past. It will pay a steep price for goosing the old trend near its end and for fighting the new trend as it begins.

The Consumer, the Debt, and Competitive Devaluations.........

The Consumer, the Debt, and Competitive Devaluations


The stock market is continuing to rally and may soon test the two major resistance levels of 2000 and 2007 (1555 and 1575 on the S&P 500).  We do not believe the market will be able to break through those levels in any significant way since they were established after two major financial bubbles (dot-com and housing) and peaked after multi-year gains followed by collapses in the market.  The current move up over the past 4 years is being driven by the Fed's loose monetary policies (just as other global markets have been driven by their Central Banks).  Most bulls believe the loose polices will stimulate enough consumer demand to lead to a significant U.S. economic recovery.  We, however, continue to believe the debt- laden consumer, along with the still other unresolved debt burdens, will be a major drag on the U.S. economy, and that will have negative affects on the global economy.

The consumer is the main driver of the U.S. economy, and there are many pundits who believe the consumer will significantly help the U.S. recovery.  They believe that consumer spending has quite a few tail-winds that should help the recovery starting this year.  They cite the turnaround in the automobile market ( up 19% in 2012) as well as the housing market (prices up 6% in 2012), . They also cite the 4 year rally in the stock market which is up over 100% in all the major indices, and the recent decline in gasoline prices at the pump.

On the other hand, we believe the headwinds of the real wage decline of about 8% over the past 12 years, the enormous consumer debt that is in the process of being deleveraged, and the overall U.S. debt will offset all of these consumer tail-winds.  The government debt of $16 trillion (tn) is just the beginning of our debt problems. The private debt of about $40 tn has to be added to the government debt to put a better perspective on the total debt.  But the total debt of $56 tn still understates the true debt of our country since we have promised so much to so many of our citizens.  These promises have left us with unfunded liabilities from Medicare, Medicaid, Social Security, and government employee pensions which range from $70 tn to $122 tn depending upon the discount rate used and how far out we can assume that they won't be addressed.  Therefore, total debt is at least $125 tn, and that has got to put a damper on this latest bull market that started in 2009. We are convinced that the market will turn down and make a triple top at levels below the peaks made in 2000 and 2007 while we resume the secular bear market that started in 2000.

How will our country resolve the enormous amount of debt we've built up over the past 30 years?  The obvious answer is to drastically cut the spending and raise taxes enough to balance the budget or at least bring the deficit down to about 3% of GDP vs. the present 7-8%.  However, the problem with raising taxes and cutting spending too drastically is that this will lead our country into a severe recession or even a depression.  

The U.S. economy is made up of 4 categories:  
1. Consumer Spending--> 71% 

2. Business Investment-->13% 

3. Government Spending--> 22% 

4. A negative Trade Balance.

So what is the answer to this dilemma?  There doesn't seem to be a clear answer but a letter signed by many CEOs (a group dubbed "Fix the Debt") was just sent to the lawmakers to push a plan forward to gradually raise the eligibility age to 70 years for both Social Security and Medicare.  Other potential remedies would be to means test both Social Security and Medicare and phase this in over the next few decades.  The demographics have changed so much since these plans were established in 1965 (Social Security Act adjustment and start of Medicare).  Forty seven years ago the life expectancy was 67 for males and 74 for females , and now the life expectancy for men is close to 80 years of age while women's life expectancy is over 80.  It is clear that even more adjustments have to be made to the cost of Medicare since the government outlays were $565 bn in 2011 and are projected to be over $1 tn in 2022 (if you add Medicaid and Social Security these entitlements will absorb much of the projected revenue).  The problem with relying on spending cuts and revenue generated from taxes raised are the unintended consequences of much lower growth, which could possibly drive us into a recession or even a depression.

If we are correct in our assessment of the U.S. entering a recession in 2013, we expect the U.S. downturn to spread globally and probably lead to a global recession.  It will drive the countries that will be most affected by the downturn to be forced to lower their currencies in order to export more goods and services to their trading partners.  As many of our long-term followers have seen over the past dozen years, we have shown a chart we named the "Cycle of Deflation" showing what results from too much global debt-"Competitive Devaluations".  We have been in this segment of the "Cycle of Deflation" now for the past decade, but it will be most apparent next year if we enter the global recession we expect.

We have witnessed a tremendous central bank easing over the past few years, with virtually every country attempting to devalue its currency with a total of 335 central bank easings. Well, we also witnessed this when our Fed brought rates down to 1% in mid 2003 and started the wild housing bubble that almost brought us to our knees.  And  just recently  the new prime minister in Japan made a clear move to "competitive devaluation."  The yen has been fluctuating during Japan's deflation since 1989, but the trend has been up, and the new Prime Minister Sinzo Abe believes that the only way Japan will be able to extricate themselves from 23 years of deflation will be to get the yen down relative to their trading partners like China, the U.S. and Europe.  Their goal is to stimulate now, but aggressively starting in 2014, until the inflation rate rises to their goal of 2%, from a slight deflation presently.  However, the U.S. and Europe will do whatever they can to not allow this to take place-and that is why we call this "competitive devaluation"!  And if we continue along this path the next step is "beggar-thy-neighbor", which is the next stage of the Cycle of Deflation.  It is similar to competitive devaluation, but is just more severe since it essentially means that in order to keep plants and businesses from closing down, exports are sold below cost to their trading partners.

The Fed's balance sheet expansion has resulted in the U.S. dollar declining about 11% against a basket of world currencies since Quantitative Easing (QE) started in 2009.  Stocks, bonds, and commodities have also risen, but the recovery has been very sluggish and inflation has remained tame.  The Japanese stimulus may get the yen down relative to their trading partners, but with their heavy debt load (even more than the U.S.) and aging demographics, getting to their goal of 2% inflation will not be as easy to achieve as they hope.

Japan has been in the same "liquidity trap" as the U.S.  They can print money and drive interest rates down (and boost stocks, bonds, and commodities), but real inflation only comes about by borrowing and spending.  Neither the U.S. nor Japan can lower rates enough to encourage its citizens to borrow and spend.  As the saying goes, "You can lead  a horse to water, but you can't make it drink."  Japan has been using different forms of QE for many years, and in fact, they even bought Japanese stocks to reverse the deflation to no avail.  We believe the new Prime Minister , Shinzo Abe's present significant stimulus plan will fail again.

In summary, because the U.S. consumer is over burdened with debt we don't believe there will be enough consumer demand to spark business spending or hiring.  The consumer had increased household (H/H) debt every single quarter since World War II (including the severe recessions of the early 1970s and 1980s).  H/H debt averaged around 65% of Personal Disposable Income (PDI) and 50% of GDP for decades (50s, 60s, 70s and 80s) before taking off in the 1990s to double this average by 2008 (130% and 100%).  However, in 2008 when the Great Recession hit the U.S. and because H/H debt rose so much, H/H debt declined for 15 out of the last 17 quarters. 

Some would think this deleveraging would be a positive for the U.S. economy and stock market, but because the H/H debt to PDI is still 110% and 100% of GDP, the total H/H debt is still close to $13 tn and would have to drop by another $3 tn or so to get back to the normal relationships to PDI and GDP.  This continued deleveraging will dampen consumer borrowing and spending which, in turn, will effect business spending and hiring not only in the U.S. but globally.  If we are correct, the U.S. and global economies will contract and there will be a race to the bottom with "competitive devaluations" rampant.  All the countries that need exports for economic growth will be very aggressive in the race to the bottom, as the global economy struggles, and drives these same countries into the next stage of the "Cycle of Deflation" ---"Beggar-thy-Neighbor."  

Wednesday, January 30, 2013


It's been a great 2013 so far for risk-assets right? Wrong! 

Credit markets have hardly budged (spreads, as opposed to yields) as stocks have surged. 

We have seen this 'risk' disconnect a couple of times in the last few years and it didn't end well for stocks... but the fools always think that this time is different.

In 2009/10, stocks surged as credit stalled... stocks collapsed...


In 2011/12, credit's highly correlated rally stalled and within a month the equity market had topped and rapidly fell back below the decorrelation level...


and now in 2013, HY and IG credit spreads have not partaken of this rally in risk at all...


It appears, as we have noted before, that credit anticipates and equity confirms. And just for clarity, this is credit spreads (not yields) and therefore does not represent a 'rotation' from bonds to stocks - these are apples to slightly different apples comparisons of two different markets' perspectives on market risk...

The sheep are getting set up to be slaughtered again. It's hard to leave the table once an addiction has set in. This final wealth transfer will be epic.

This stock market is just like APPLE last year....everyone 

is buying into it.....all of it, it will end just like APPLE has!


US Stocks reached their peak in 1999, and have clearly been in a bear market since 2001. From a high of 1400, they have fallen to the 250-260 level, a drop of 81%.

From 2003 through 2007, stocks appeared to perform well when priced in dollars, roughly doubling in value. Because virtually all of this gain was due to depreciation of the dollar, however, the gold price of the stocks actually declined slightly over the same period. During 2008 and early 2009, stocks gave up all of their gains since 2003 when measured in dollars. Priced in gold, they declined from about 800 grams to 220 grams, a 70% loss from 2003 levels.

Since the bottom in March of 2009, prices have risen strongly when measured in dollars, seen by many as proof that the recession is over and recovery has begun to take hold. Yet when priced in gold, we see that all of the "robust recovery" was the result of more dollar debasement, as trillions of dollars created by the Fed's "quantitative easing" and bailout programs flood into the market. In reality (aka priced in gold), stock prices have remained fairly flat from 2009 until July of 2011, when they began falling to levels well below their 2009 lows.

DOW's 14 Year Performance:

DOW's Performance Since 1985

DOW's Performance Since 1900

DOW's Recent Performance:

The Fed is in a panic..........

The Fed is in a Panic

Think about one of those movie scenes when the leading man does all he can to defeat the big, bad enemy -- punches, kicks, slams, stabs, shoots -- but the bad guy just won't go down. In fact he doesn't even look fazed.

That's when the protagonist really starts to worry.

In real life, that's where the Federal Reserve finds itself today.

The central bank has thrown everything in its arsenal at the economy, but most key economic metrics have barely budged.

In the epic struggle, the Fed's policy has been turned upside down.

The Fed has changed its policy, and it has done so in dramatic fashion. Look at this history of what the Fed has done. THEY ARE DESPERATE!

You can go all the way back to 1929, and the Fed was doing what its job is supposed to be, which is to put dampers on exuberance and only make money easier when the markets are down and the economy is contracting.

Following that plan, the Fed raised the discount rate in 1929 to 6%. Here at the 1937 high, it raised margin requirements and bank reserves. In the 1968 bull market, when the public was excited about stocks, the Fed raised margin requirements and raised the discount rate to 6%. In 2000, right at that high, the Fed again raised its discount rate to 6%. In 2006, when the housing market was topping, and a year before stocks topped, it raised it to 6¼%.

What is it doing now? The market is right back in the rarified areas that it was when the Fed dampened speculation, but now the Fed is doing the opposite. Not only has the Fed not raised the discount rate to 6%, or even to 1%, but it is keeping the Fed funds rate at zero, and it is promising a 0% Fed-funds rate through 2015, three whole years.

This 180-degree turn tells me that the Fed is in a panic.

If the Federal Reserve itself is frightened about the financial future, perhaps you should be concerned too.

SURE THE EURO CRISIS IS OVER.........Spanish Youth Unemployment Is On The Verge Of Breaking 60%


Labor Minister Says France Is "Totally Bankrupt"

The French labor minister, Michel Sapin, made the gaffe in a radio interview, as he accidentally let the truth come out. This sent the country into a state of shock on Monday after he described the nation as "totally bankrupt."

Spanish Youth Unemployment Is On The Verge Of Breaking 60%  

According to a new report from Spain's Institution Of National Statistics, youth unemployment is about to break 60%.

Specifically, youth unemployment is at 59.8%, according to the report.

It was merely at 50% early last year.

It's a totally cliched thought at this point, but turning around the actual Eurozone economies is a huge and urgent challenge, which if not addressed will destroy the legitimacy of all these governments.

It appears that facts, once again, get in the way of a good story.


How to Fight Excessive Doubt

Questioning yourself

Should you really question everything? Here's a simple tip for those prone to over-thinking...

A little critical, analytical thinking is a good thing. Without doubting ourselves sometimes we'd find it difficult to make good decisions.

Too much doubt, though, can stop us living our lives to the full. Some people can never make up their minds about their careers, their love lives or much else.

Unfortunately that sense that you're not quite sure can leave you living in permanent limbo, never taking that final decisive step.

The problem is that we can we never really know what the outcome of our decisions will be, that's the nature of life. But the person who never takes a risk, however small, never gets anywhere. At some point, after a little looking, you've got to leap.

Psychologists have found that people who doubt themselves too much end up engaging in excessive information processing which leads to procrastination and self-handicapping.

Self-doubters are also more likely to suffer from depression and social anxiety. Some soul-searching and self-analysis can be useful, but too much is a recipe for stagnation.

Shake your head

A recent study, though, points to a possible path for escaping the doubt habit.

For their research Wichman et al. (2010) recruited people who were chronically uncertain. They were then given a test which unconsciously encouraged them to be uncertain about their uncertainty. This was done by getting them to unscramble sentences which were related to uncertainty, like: "her speaker doubt I explanations" (you're allowed to drop one word, in this case 'speaker').

Ironically it didn't increase their uncertainty further but reduced it. This suggests that doubting your doubt can be useful. Of course this wasn't a permanent solution, but it did momentarily reduce their levels of uncertainty.

Just the same effect could be seen when participants in a second study shook, rather than nodded their heads. The physical action of shaking their head while thinking about their uncertainty caused one to cancel out the other. Through this they temporarily reduced  their doubts.

Doubt your doubt

This is a fascinating counter-intuitive case when lack of confidence in your own thoughts is beneficial. For some people having confidence in their doubts just leads to more procrastination, self-handicapping and worse.

Perhaps learning to doubt the doubt more will offer one way of helping to escape from some of the crippling effects of excessive self-doubt.

While shaking your head can't be considered a miracle cure, it is interesting that doubting your doubt can work to dispel the original doubt.


French Special Forces to Protect Niger Uranium Mines

As France continues its ground assault into Mali, it's seeking to protect its investments in the West Africa region. The uranium mines in Niger are of tremendous importance to France, as they represent a significant portion of France's uranium supply. Given that France produces most of its electricity through nuclear power, any disruptions in Niger could prove disastrous for the French economy.

Ukraine and Russia's Gas Wrangle Ignites Again

Seems like Ukraine and Russia are at it again. Ukraine's state gas company has said that it cannot pay a $7 billion bill it has received from Gazprom, and the case could very well end up in international arbitration. Previous disagreements between these two countries spilled over into the rest of Europe through the form of gas disruptions, again highlighting the need for Europe to have an energy renaissance.

Egypt Resorts to Emergency Law

Egypt's situation continues to worsen, and in what seems to be an ironic twist, Egyptian President Mohammed Morsi has imposed emergency law in three cities in Egypt. Opposition to this law was one of the main reasons that former president Hosni Mubarak was ousted a few years ago. Over the past few weeks, Egypt has seen some extremely violent street protests which have left dozens dead. It will be interesting to see just how far Egypt will be destabilized in this round of violence and whether Morsi can keep his country under control.

US and Canadian Mints Rationing Silver Coin Sales

Sales of silver coins have been so strong in January that the US Mint temporarily suspended sales of Silver Eagles and will only be able to supply authorized dealers again on a rationed basis. The Royal Canadian Mint has announced that it, too, has to ration sales of its popular Silver Maple Leaf coins.

Sales of Silver Eagles reached six million within the first two weeks of January before being suspended. Analysts suggest that this rapid pace was driven by "the typical rush to acquire the most recently dated coins, as well as pent up demand following three weeks of unavailability (in December 2012)." The situation with the Royal Canadian Mind is perhaps a knock-on effect of the US suspension, as dealers in North America scramble to source coin supplies from mints in which customers have full confidence.

Tuesday, January 29, 2013


Last year, 11 commodities rose in value, with wheat rising as the top crop after seeing a significant decline in 2011. It was a similar rags-to-riches story for the next few leaders, including lead, zinc, natural gas and platinum, which all climbed double digits in 2012 after falling in 2011.  EXCEPT FOR PRECIOUS METALS THESE ARE TRADES, NOT LONG TERM INVESTMENTS! 

Only three commodities declined over the year: Crude oil fell by 7 percent after rising 8 percent the previous year. Nickel declined for the second year in a row. In 2012, the metal lost 9 percent and in 2011, nickel fell another 24 percent.

Coal was the worst-performing commodity in 2012, falling nearly 17 percent. Coal's been going through a rough spell lately; in fact, the commodity has not been king for five years (although it did record a 31 percent increase in 2010). Natural gas provided more electricity and power than coal did.

As you can see from the table linked below, commodities often have wide price fluctuations from year to year due to the many factors affecting supply and demand, such as government policies, union strikes, and currency volatility. 


The Secret Word: Deflation - And the Next Five Years of Financial Turmoil........AN ABSOLUTE MUST READ!

The Secret Word: Deflation - And the Next Five Years of Financial Turmoil

In the first five months of 2012, there were 20 times as many Google searches on "inflation" as there were on "deflation." This is down from a ratio of 50 times in June 2008. If any theme has been overdone over the past six years, it is the theme of inevitable inflation if not hyperinflation.

Inflation reigned for 75 years, from 1933 to 2008. People are so used to it that they cannot imagine the opposite monetary environment. Bullish economists have been calling for recovery, which means more inflation, and bearish advisors have been calling for a crash in the dollar, which means hyperinflation. No wonder those are the terms on which most people have been searching.

But only one word allows you to make sense of what's going on in the world, and inflation is not it. The secret word is deflation.

Deflation explains:

why interest rates on highly rated bonds are at their lowest levels in the history of the country;
why the velocity of money is the lowest since the 1930s;
why huge sectors among investment markets are down over 40%;
why the Consumer Price Index (CPI) just had its biggest down month since 2008;
why Europe is in turmoil.

Here are some details: Ten-year Treasury notes pay out less than 1.5% annually, their lowest rate since the founding of the Republic. Treasury bills yield essentially zero, their lowest level ever. The velocity of money failed to rise during the past three years of partial economic recovery, and it recently made new lows. 

Real estate prices have fallen 45% in the past six years. 

Commodity prices -- as measured by the CRB Index -- are down 39% over four years. 

This group includes oil and silver, two of the most profitable investments of the past decade. Remember in March when articles quoted analysts calling for $5, $6 and $8-per-gallon gasoline? In just three months since then, gas prices have fallen 15%, knocking the CPI into negative territory.

Deflation also explains why European loans are at risk, why Germany is tapped out, why Greeks are protesting in the streets, and why U.S. corporations' overseas profits are down. Deflation lets you make sense of the world.

What is deflation? Economists define it three different ways, but I find only one definition useful: 

Deflation is a contraction in the overall supply of money and credit.

Why must deflation occur? Answer: There is too much unpayable debt in the world.

It ultimately does not matter what the authorities do; they can't stop deflation. 

This prediction is being borne out. Since 2007, the Fed has monetized $2 trillion worth of debt; the federal government has borrowed another $7 trillion; and it has pumped out $1 trillion worth of student-loan credit. Yet real estate and commodities slumped 40% anyway.

These drunken-sailor-type policies have indeed succeeded in nearly maintaining the overall volume of money and credit. But in the long run you can't fight a systemic debt overload by piling on more debt. 

The Fed and the government are shifting the burden of trillions of dollars' worth of debt obligations from reckless creditors onto innocent savers and hapless taxpayers. The ploy might work if the public's resources were infinite, but they aren't. This policy temporarily prevented a series of big institutional disasters, but it will only be at the ultimate price of a gigantic public disaster and an economic crisis.

Such actions have become politically less palatable. Some observers realize that the student-loan program of lending at below-market rates is exactly the model the government used for housing loans, which ended in a spectacular bust. 

Others know that the government cannot continue to borrow at the current pace and expect to stay solvent. Politicians on both sides of the aisle are tired of the Fed's bailing out of highly leveraged financial-speculation institutions. But whether these policies continue or are curtailed is irrelevant to the outcome. If the government slows its borrowing, the overall value of debt will fall. If the government maintains or increases its present pace of borrowing, interest rates will eventually turn up, and the overall value of debt will fall. There is no escape from deflation.

Ironically, investors in the past decade have been doing exactly the opposite of preparing for deflation. Convinced of perpetually rising prices, like fools, they have bought every major investment. They chased real estate up to a peak in 2006. They bought blue chip stocks into the high of 2007. They pushed commodities up to a peak in 2008. And through spring 2012, they continued to buy stocks and commodities on any rumor that promised inflation: European bank bailouts, Operation Twist, the Greek election, Group-of-8 summits, Fed meetings, Bernanke press conferences, improved economic numbers, predictions of QE3, central-bank interest-rate cuts, you name it. During deflationary times, wise people know that cash is king, and by far most investors have chosen to own anything but cash.

Deflation is still not obvious to the majority. Even now, most economists expect continued recovery, mild inflation and a rising stock market.  There's still time to learn how to sidestep the worst of the crunch.

People will be using the secret "d" word much more often over the next five years. By the end of that time, they will also be using its cousin "d" word, depression.

4 Important Facts About Gold Investing ...........

4 Important Facts About Gold Investing

1. Gold Has Been A Consistent Performer Over The Decade

While the precious metal did not shoot the lights out in 2012, gold's bull rally goes on. It ended the year up 7 percent, making it a phenomenal 12th year in a row that gold rose in value. In a special gold bar version of the Periodic Table below, you can easily see gold's rotation among the commodities from year to year.

What's fascinating is the three-year rising pattern relative to other commodities that emerges when you focus on the bars. Over the past 10 years, gold has risen in position compared with the others for three years in a row, then fallen in relative position in the fourth year before repeating the cycle. Will it follow the same pattern and be in the top half of the Periodic Table in 2013?

2. Gold Should Remain A Hot Commodity In 2013

Considering the global easing cycle and the continuous running of monetary printing presses, I believe the Fear Trade will continue to be a driver of gold over the next several months. Take a look at the projected rise in the balance sheets as a percent of GDP from the European Central Bank, the Bank of Japan, the Federal Reserve and the Bank of England over 2013. The ECB is estimated to have a balance sheet that is nearly 50 percent of its GDP by the end of the year. The Bank of Japan is right behind the ECB, with its balance sheet projected to be nearly 35 percent of GDP. As Mike Shedlock of Mish's Global Economic Trend Analysis said, "The race is on to see which central bank can load up its balance sheet with the most garbage the fastest." PEOPLE QUITE RIGHTLY FEAR MANIPULATED CURRENCIES, STOCK MARKETS AND POLICIES DESIGNED TO SUPPORT A FAILED CREDIT PARADIGM THAT HAS CREATED FAR TOO MUCH DEBT. THESE ARE NOT SOLUTIONS, THEY ARE LIFE PRESERVERS THROWN FROM A SINKING SHIP.   

Gauging from the panicky actions of the major central banks, I would still prefer to own gold than their paper. With the monetary printing presses warm and real interest rates in the red, gold will likely glimmer and gain until central banks are brought to their knees, their economies collapse and chaos reigns. The biggest move in gold is still very likely ahead of us.  

3. Gold Is The Least Volatile Commodity On The Table

Given the fact that every gold move is analyzed and dissected by the media, it may surprise you that this precious metal was actually the least volatile of the 14 commodities. Its rolling 12-month standard deviation (sigma) over the past 10 years has been 14 percent, compared to the most volatile commodity, (nickel), which has a rolling 12-month sigma of nearly 60 percent.

Here's another way to look at the surprisingly low volatility of gold. Take a look at the frequency of 10 percent moves up or down over any 20 trading days. The metal is only slightly more volatile than the S&P 500. Gold companies, crude oil and the MSCI Emerging Markets Index have all experienced more up and down moves than gold.

Over 2013, you can count on gold moving in either direction, so even if the metal experiences extreme volatility to the downside, regardless of what the headlines report, smart gold investors know in this environment, that any dip in price offers potential buying opportunities. 

4. The Last 4 Years Were Better Than You Thought

Gold bullion has significantly outperformed the iShares Core Total US Bond ETF. Many investors asked about gold stock performance. As you can see below, the NYSE Arca Gold BUGS Index (HUI) experienced quite a gain, increasing more than 50 percent on a cumulative basis since the beginning of 2009. Both considerably outperformed the bond investment. STOCKS HAVE MOVED UP ON CENTRAL BANK MANIPULATIONS AND DELUSION WHILE GOLD HAS MOVED UP ON THE REALITY OF THE CHAOS TO COME.  GOLD INVESTORS HAVE BEEN RIGHT, STOCK AND BOND INVESTORS HAVE BEEN WRONG WITH SUBSTANTIAL PAIN STILL TO COME FOR BOTH OF THESE ASSET CLASSES.

Metals have digested a decade's worth of large gains, they've built a very strong base…as tough as it is for some who struggle with this, the fact is that the longer the base is built, when the inevitable breakout to the upside comes, the bigger that move will be. 

That move is coming very soon, the longer the Fed delusion continues the bigger the move in gold will be. When it happens we will see a mountain of money flow into gold like we haven't seen in years. So many technical buy signals will be triggered and pure momentum players who really don't care about the fundamentals of the story…will all flow into the metals and other real assets. They will all realize the same thing at the same time, the emperor is naked! 

Everyday somebody sends me an article, predicting the end of the gold bull market. Those are the type of things that I like to hear because, the fact that we go sideways despite this onslaught of negativism, tells me the market still wants to go higher. 

And with the recent German repatriation of gold, we're probably in the early stages of a gold backed currency.

We are currently going through a retest of recent highs in stocks. In the next short while things will turn. The DOW and S&P are going to tumble; gold and interest rates are going to rocket. Everyone loves the DOW, loves the S&P and hates gold. Everyone thinks the Fed can't lose. Everyone is usually very wrong!

That's really good for those that can think for themselves.

It's not rocket science. Remember the Nasdaq, Real Estate and Credit episodes, everyone was certain then as well!


How and Why We Lie to Ourselves: Cognitive Dissonance........VERY IMPORTANT FOR INVESTORS AND TRADERS

How and Why We Lie to Ourselves: Cognitive Dissonance

Understanding this experiment sheds a brilliant light on the dark world of our inner motivations.

The ground-breaking social psychological experiment of Festinger and Carlsmith (1959) provides a central insight into the stories we tell ourselves about why we think and behave the way we do. The experiment is filled with ingenious deception so the best way to understand it is to imagine you are taking part. So sit back, relax and travel back. The time is 1959 and you are an undergraduate student at Stanford University...

As part of your course you agree to take part in an experiment on 'measures of performance'. You are told the experiment will take two hours. As you are required to act as an experimental subject for a certain number of hours in a year - this will be two more of them out of the way.

Little do you know, the experiment will actually become a classic in social psychology. And what will seem to you like accidents by the experimenters are all part of a carefully controlled deception. For now though, you are innocent.

The set-up

Once in the lab you are told the experiment is about how your expectations affect the actual experience of a task. Apparently there are two groups and in the other group they have been given a particular expectation about the study. To instil the expectation subtly, the participants in the other groups are informally briefed by a student who has apparently just completed the task. In your group, though, you'll do the task with no expectations.

Perhaps you wonder why you're being told all this, but nevertheless it makes it seem a bit more exciting now that you know some of the mechanics behind the experiment.

So you settle down to the first task you are given, and quickly realise it is extremely boring. You are asked to move some spools around in a box for half an hour, then for the next half an hour you move pegs around a board. Frankly, watching paint dry would have been preferable.

At the end of the tasks the experimenter thanks you for taking part, then tells you that many other people find the task pretty interesting. This is a little confusing - the task was very boring. Whatever. You let it pass.

Experimental slip-up

Then the experimenter looks a little embarrassed and starts to explain haltingly that there's been a cock-up. He says they need your help. The participant coming in after you is in the other condition they mentioned before you did the task - the condition in which they have an expectation before carrying out the task. This expectation is that the task is actually really interesting. Unfortunately the person who usually sets up their expectation hasn't turned up.

So, they ask if you wouldn't mind doing it. Not only that but they offer to pay you $1. Because it's 1959 and you're a student this is not completely insignificant for only a few minutes work. And, they tell you that they can use you again in the future. It sounds like easy money so you agree to take part. This is great - what started out as a simple fulfilment of a course component has unearthed a little ready cash for you.

You are quickly introduced to the next participant who is about to do the same task you just completed. As instructed you tell her that the task she's about to do is really interesting. She smiles, thanks you and disappears off into the test room. You feel a pang of regret for getting her hopes up. Then the experimenter returns, thanks you again, and once again tells you that many people enjoy the task and hopes you found it interesting.

Then you are ushered through to another room where you are interviewed about the experiment you've just done. One of the questions asks you about how interesting the task was that you were given to do. This makes you pause for a minute and think.

Now it seems to you that the task wasn't as boring as you first thought. You start to see how even the repetitive movements of the spools and pegs had a certain symmetrical beauty. And it was all in the name of science after all. This was a worthwhile endeavour and you hope the experimenters get some interesting results out of it.

The task still couldn't be classified as great fun, but perhaps it wasn't that bad. You figure that, on reflection, it wasn't as bad as you first thought. You rate it moderately interesting.

After the experiment you go and talk to your friend who was also doing the experiment. Comparing notes you found that your experiences were almost identical except for one vital difference. She was offered way more than you to brief the next student: $20! This is when it first occurs to you that there's been some trickery at work here.

You ask her about the task with the spools and pegs:

"Oh," she replies. "That was sooooo boring, I gave it the lowest rating possible."

"No," you insist. "It wasn't that bad. Actually when you think about it, it was pretty interesting."

She looks at you incredulously.

What the hell is going on?

Cognitive dissonance

What you've just experienced is the power of cognitive dissonance. Social psychologists studying cognitive dissonance are interested in the way we deal with two thoughts that contradict each other - and how we deal with this contradiction.

In this case: you thought the task was boring to start off with then you were paid to tell someone else the task was interesting. But, you're not the kind of person to casually go around lying to people. So how can you resolve your view of yourself as an honest person with lying to the next participant? The amount of money you were paid hardly salves your conscience - it was nice but not that nice.

Your mind resolves this conundrum by deciding that actually the study was pretty interesting after all. You are helped to this conclusion by the experimenter who tells you other people also thought the study was pretty interesting.

Your friend, meanwhile, has no need of these mental machinations. She merely thinks to herself: I've been paid $20 to lie, that's a small fortune for a student like me, and more than justifies my fibbing. The task was boring and still is boring whatever the experimenter tells me.

A beautiful theory

Since this experiment numerous studies of cognitive dissonance have been carried out and the effect is well-established. Its beauty is that it explains so many of our everyday behaviours. Here are some examples provided by Morton Hunt in 'The Story of Psychology':

When trying to join a group, the harder they make the barriers to entry, the more you value your membership. To resolve the dissonance between the hoops you were forced to jump through, and the reality of what turns out to be a pretty average club, we convince ourselves the club is, in fact, fantastic.

People will interpret the same information in radically different ways to support their own views of the world. 

When deciding our view on a contentious point, we conveniently forget what jars with our own theory and remember everything that fits.

People quickly adjust their values to fit their behaviour, even when it is clearly wrong or immoral. 

Those stealing from their employer will claim that "Everyone does it" so they would be losing out if they didn't, or alternatively that "I'm underpaid so I deserve a little extra on the side."

Once you start to think about it, the list of situations in which people resolve cognitive dissonance through rationalisations becomes ever longer and longer. If you're honest with yourself, I'm sure you can think of many times when you've done it yourself.

Being aware of this can help us avoid falling foul of the most dangerous consequences of cognitive dissonance: believing our own lies.

Monday, January 28, 2013

GRAPHIC TRUTH..............

Does this really look like a market you want to buy?........AN ABSOLUTE MUST READ!

The S&P 500 is trading at 1501 and faces very strong 13-year resistance at 1550 as well as the all-time high at 1576. 

And don't forget that margins are at record highs and therefore corporate earnings have likely peaked. At the same time, the typical trader has hopped on board the trend yet can't rationalize his long position beyond the idea that "it's going up." I guess they forgot about the ominous economic headwinds, stagnant earnings and the blatantly obvious massive resistance at 1550. Stupid is as stupid does!

Look really hard at the chart below. 

Consider first all the unusual circumstances of the past few years such as all of the Fed's manipulations and injections and still the market has failed to breakout. Trillions and still no breakout.  

Does this really look like a market you want to buy?

Especially on declining volumes. 

How in the world will the market break past 13-year resistance, much less even sustain a breakout move after a four-year rally?  

Below is the NAAIM survey of manager sentiment. This data results from money in the market and not opinion. At 86, the NAAIM survey is only points away from a five-year high. The sheep are all herded into a very tight bunch.

If we look at the classical indicators of positioning and sentiment, it is quite clear that the current juncture is eerily similar to the situation near major historical market peaks. For instance, if we combine NYSE margin debt ,which is only a smidgen below its 2007 all time high with the net speculative long position in stock index futures (close to an all time high as well), it looks like market participants are 'all in' and then some. This is also reflected in record low cash holdings. Hedge fund cash reserves are at a record low as well.
cash holdings

Finally and perhaps most importantly yields of so-called 'safe haven' (ha!) bonds continue to remain extremely low. It may well be possible that the yields on US treasury bonds are suppressed by the Fed's buying. However, experience actually says that this is not a good explanation – after all, yields rose markedly during 'QE1' and 'QE2', a sign that rising inflation expectations normally trump the Fed's buying. In any case, no such argument can be forwarded in the case of Germany's bond yields. Yes, they have risen a little bit – but not by a whole lot. If everything is hunky-dory, why is the market not putting more pressure on these bonds?

Here is the crucial question: can central banks remove all risk from the market? I sincerely doubt it, and so should you!

After all, the artificial low interest rate distorts prices across the economy and malinvestment and capital consumption therefore continue apace. At some point the economy will have to readjust no matter how much money is printed.

In spite of abundant central bank provided liquidity lending support to the stock market, there continue to be plenty of reasons to be very wary. If one dismisses the data presented above, one is in effect saying 'it is different this time'. That has invariably turned out to be a very costly attitude.


A fish always rots from the head!.......THERE IS NO DOUBT THAT THIS ONE IS ROTTING!

The President's supporters and America's elite have finally taken leave of any kind of reality-based thinking and abandoned all consideration of leadership and replaced it all with wishful magical thinking and the warm, toasty feeling engendered by incantations and the rah, rah of, go team, youth, drive, diversity, openness and a we can do it spirit, reality be dammed.

Cognitive dissonance and ignorance have been embraced as organizing principles by this administration. Obama's token nod to limited government, "Through it all, we have never relinquished our skepticism of central authority, nor have we succumbed to the fiction that all society's ills can be cured through government alone" is followed by an affirmation of government without limit, "Our journey is not complete until all our children, from the streets of Detroit to the hills of Appalachia to the quiet lanes of Newtown, know that they are cared for and cherished and always safe from harm."

Please remember that a fish always rots from the head!

Can We Make It Through Four More Years?........AN ABSOLUTE MUST READ!

Can We Make It Through Four More Years?

by Martin Hutchinson

Obama's intransigence on economic matters is increasingly clear, so compromise seems unlikely and a succession of tax increases and wasteful spending programs seems inevitable. Meanwhile Ben Bernanke's Fed enables this dangerous course by massive "quantitative easing." Assuming Bernanke is succeeded by a like-minded colleague (more on that below) we will thus suffer this economically poisonous combination of policies until January 2017. 

The U.S. economy is unlikely to make it that far in anything considered good shape.

Neither Obama's nor Bernanke's damaging policies would be possible without the cooperation of the other. If the Fed was maintaining short-term rates at above the rate of inflation, without buying large quantities of Treasuries, the Treasury would have great difficulty financing endless $1 trillion deficits without pushing up long-term interest rates to intolerable levels and loading future years with huge debt interest payments. Without Obama and his deficits Bernanke would have great difficulty purchasing $1 trillion of long-term Treasuries and Agency securities annually, since new Treasury bonds would only be issued to replace retiring bonds. The distortions he created by doing so would disrupt the bond market, feeding rapidly into a level of consumer price inflation that he would have a statutory duty to address.  

Both Obama and Bernanke appear determined to continue pursuing their ruinous policies. Obama has announced he will not permit spending cuts in connection with a debt ceiling hike, while Bernanke on January 14 said the "worst thing the Fed could do" would be to raise rates "prematurely." Had we gone over the "fiscal cliff", more than three quarters of the federal deficit would have been eliminated, and further deficits could have been prevented by the Republican House of Representatives. However the GOP House leadership wimped out, and as a result we are left in a position where taxes on the rich have already been raised substantially, but the deficit has been left almost unaffected – indeed it has been increased in the first year by the disgraceful $60 billion of tax breaks granted to politically favored corporations and scam artists.

Obama is with us until January 2017, but Bernanke has indicated he may retire next January when his term of office is up. In general Bernanke's is the scalp lovers of sound policy should seek. Obama's damage has already been done, and while he may prevent any near-term attempt to address the deficit, Republican control of the House means he cannot increase spending more than marginally. Every extra month of Bernankeism, on the other hand, distorts the economy further.

It was not difficult to determine before his appointment that Bernanke would be a disaster as Fed chairman; this column said so in a piece published a week before he was appointed, remarking that "Bernanke's approach to monetary policy, in which all economic problems can be solved by creating money, is that of the 1919-23 Weimar Republic, which achieved in September and October 1923 inflation rates of 2,500% per month." This column can claim only partial credit for prescience; in the event we got the policy, but did not suffer the predicted inflation, being rewarded by an exceptionally deep and prolonged recession instead. 

Next time around, there are few candidates who might move to a tighter policy, although former Fed Vice Chairman Roger Ferguson, currently CEO of the pension fund TIAA-CREF, is eminently qualified and as a registered Democrat is at least a plausible appointment for President Obama. More likely however is the current Fed Vice chairman Janet Yellen, whose published views suggest that she would favor even more easing. 

However as a known liberal Democrat without Bernanke's long service she might find it more difficult to attract a majority on the Federal Open Market Committee than has Bernanke. A Yellen Fed would thus probably be a modest improvement over the current one. One disquieting suggestion I have seen recently is that New York Mayor Mike Bloomberg might want the job; his combination of primitive Keynesianism and proven tendency to meddle obtrusively in everybody's lives would be truly frightening in a job with such power.

Thus it is highly unlikely that Bernanke's successor will be much of an improvement. Hence we are for the next four years likely to be subject to ultra-loose monetary policy and trillion-dollar budget deficits.

One area where my crystal ball is now unclear is whether this will cause an outburst of inflation. By monetarist theory it should; M2 money supply has risen at an annual rate of 9.9% in the last 6 months while the St Louis Fed's MZM, the nearest proxy we have to M3, has risen at 10.6% in the same period. With output rising at only 2%, that should produce inflation of around 8%.

Milton Friedman said "Inflation is always and everywhere a monetary phenomenon," so where the hell is it? Leads and lags are all very well, but even taking into account a flat stretch between mid-2009 and mid-2010 M2 has been growing at an annual rate of 7.2% since the end of 2007, far in excess of the feeble 2.3% growth in nominal GDP. Monetary "velocity," that elusive concept, has dropped like a rock (mathematically, it had to given the data), but its ability to do so without any reasonable explanation in itself makes monetary theory look increasingly chimerical.

More likely than a sudden resurgence of Weimar-like inflation is a massive market crash. 

Global sub-zero real interest rates have boosted corporate profits to record levels (in terms of US GDP) as well as the value of bonds, commodities and other assets. The Dow Jones index remains about 6,000 points higher, in terms of U.S. GDP, than when Greenspan began easing monetary policy in February 1995. Gold is at double its 1980 high. Global foreign exchange reserves have been increasing at 16% annually since the Asian crash of late 1997.

For the current market to be sustainable for another four years the value of capital assets would have to have moved to a permanently higher level in terms of the value of everything else. Capital assets have become the destination for the world's excess money supply, but it doesn't seem likely that even Ben Bernanke and his colleagues can sustain this disequilibrium forever. 

Most likely, like tech stock prices in 1997-2000 and house prices in 2004-06, the overvaluation will persist long enough for a substantial body of dozy opinion to decide it's permanent and put all their money on it continuing, doubtless leveraging up to the eyeballs to do so.

Once the silly money has piled in, as with housing in 2007 and tech stocks in 2000, valuations will start to slip. Most likely this will be seen first in the Treasury bond market, where even Bernanke's trillions will prove insufficient to keep the 10-year yield below 2% forever. That will cause a price collapse similar to that of 2007, where previously unassailable financial institutions will be found to have eroded their capital base by overinvestment in T-bonds. Since the Treasury bond market is so huge this in turn will cause a sell-off in the world's equity markets, with corporate earnings being eroded by the rise in interest rates.

Another example of such a slow-motion collapse is Japan after 1990, where eventually a high percentage of Japan's most admired corporations were found to have speculated excessively in short-term "tokkin" funds. In that case, the major banks propped up the loser corporations, wrecking the banking system, filling the country with zombie corporations and causing a 20-year period of economic sluggishness. In the early years of that period, Japan's policy responses remained fairly orthodox, but since Ben Bernanke's visit to the country in 1998, dispensing truly awful advice, it has been plagued by misguided Keynesian "stimulus" and money-printing by the central bank, prolonging the downturn more or less ad infinitum. On the Japan analogy, if U.S. policy remains as bad as Japan's has been, we are due a downturn lasting until 2035 or so.

If the Obama/Bernanke policies do not cause inflation, but instead produce a collapse of markets and a major recession, we will finally have an answer to the century-old battle between monetarists, Keynesians and the Austrian school of economists. Keynesian economists will be discredited by the failure of $1 trillion annually of deficit "stimulus" to stimulate anything beyond an asset bubble, with unemployment remaining stubbornly high. Monetarists will be discredited by the failure of Bernanke's gigantic monetary stimulus to produce economic recovery, and by the corresponding absence of a serious burst of inflation. 

The winner in the intellectual battle will be the Austrian school, in its pure Ludwig von Mises form, which will have seen monetary and fiscal expansion produce only a mountain of "malinvestment," the collapse of which will take several years and a major depression to work out. Of course, that economic victory will be of little consolation to those of us forced to live through the depression, although we can hope that the next such episode in 2070 or so will be solved more effectively, with Keynes and Friedman relegated to the sidelines.

As for the timing, I have said before that I don't think 2013 will be the year in which the bubble bursts – there is as yet insufficient speculative frenzy, although the market temperature is certainly rising. Moreover, it would be a pity to have such a record-breaking blow-off without a serious speculative bubble in gold similar to that of 1978-80 – which if the $1500-1900 gold price of the past 15 months is regarded as a base, suggests a gold price peaking certainly above $3,000, very possibly above $5,000.  

Equally likely, it would seem impossible for the present bubble to outlast President Obama, and fairly unlikely for it to be prevented until the election year of 2016. The 18-month period between July 2014 and December 2015 would thus be my best guess for the onset of collapse, with a prolonged rolling crisis lasting for the greater part of that period being the most likely outcome. 2016 and 2017 would then be years of grinding depression, benefiting the 2016 electoral prospects of both Republicans and extremist on both ends of the spectrum.





Rome wasn't built in a day, but it did burn down in a day! So it is with Apple and so it will be with our overvalued, manipulated market! 

NOMURA: Apple Is Moving Into Its 'Ex-Growth' Phase, And The Stock Could Go As Low As $336

Nomura, which declares that the company is now in its "ex-growth" phase, which is very ominous sounding.

The weak Q2 dynamics seem to support our view that Apple is moving into an ex-growth phase in which unit growth is likely to come increasingly at the expense of gross margin declines. The net effect is limited earnings growth, EPS that likely tops-out at $50, which is likely to attract a multiple little better than comparable ex-growth peers such as Microsoft and Cisco. An 8x ex-cash multiple on our EPS forecast of $50 plus $89 in excess cash drives our fair value of $490.

This table shows how Nomura values the stock:


And in a real ice age scenario, it could get even worse. Potential downside risk to $336. 

If we exclude the excess cash, as some investors may do, then there is downside to the stock to $400. Moreover, if iPhone gross margins fall to 40% vs. our 47% forecast, then EPS could fall to $42 and fair value could decline further to $336.


Jeff Gundlach Warns Apple Could Go As Low As $300

After Apple missed analyst earnings expectations this afternoon, bond guru Jeff Gundlach, the CEO of DoubleLine Capital, joined the folks on CNBC's "Fast Money" to discuss his $425 price target on the stock.

He said the if the stock closes below $483 tomorrow, it could fall to $425 very quickly.

"I think it's coming this year for sure," he said.  "That's an awfully long time window, I realize that.  The ways it's looking now, it should probably happen this quarter."

What's more is he said it could go to the $300 range.

Gundlach has been shorting Apple since April 2012.  He has said repeatedly that he sees the stock going to $425.