Wednesday, September 30, 2009

Wall Street Meltdown Dead Ahead

The US money supply shrank at an unprecedented rate in July. I expect August, with the massive influx of Cash for Clunkers funny money, will show a better result. That will quickly fade, though. Deflation is here. As a general rule, get your money out of "things" (i.e real estate, commodities, stocks) and into cash, cash equivalents, and ultra safe bonds. Most of all, get out of debt.

Gold thus far is acting like money and not a commodity, meaning it is increasing in value. Keep a sharp eye on it because that assertion is yet to be proven.

The original link to the story can be found here:

Sharp US money supply contraction points to Wall Street crunch ahead

By Ambrose Evans-Pritchard
Published: 12:01AM BST 19 Aug 2008

The US money supply has experienced the sharpest contraction in modern history, heightening the risk of a Wall Street crunch and a severe economic slowdown in coming months.

Data compiled by Lombard Street Research shows that the M3 ''broad money" aggregates fell by almost $50bn (£26.8bn) in July, the biggest one-month fall since modern records began in 1959.

"Monthly data for July show that the broad money growth has almost collapsed," said Gabriel Stein, the group's leading monetary economist.

On a three-month basis, the M3 growth rate has fallen from almost 19pc earlier this year to just 2.1pc (annualised) for the period from May to July. This is below the rate of inflation, implying a shrinkage in real terms.

The growth in bank loans has turned negative to a halt since March.

"It's obviously worrying. People either can't borrow, or don't want to borrow even if they can," said Mr Stein.

Monetarists say it is the sharpness of the drop that is most disturbing, rather than the absolute level. Moves of this speed are extremely rare.

The overall debt burden in the US economy is currently at record levels, raising concerns that a recession - if it occurs - could set off a sharp downward spiral.
Household debt is now 131pc of disposable income, compared with 93pc at the top the dotcom bubble, 79pc in the property boom of the late-1980s, and 62pc at the end of the 1970s.

The M3 data measures both cash and a wide range of bank instruments. It tends to provide an early warning signal of major shifts in the economy, although the US Federal Reserve took the controversial decision to stop reporting the statistics in 2005 on the grounds that the modern financial system had rendered the data obsolete.
Monetarists insist that shifts in M3 are a lead indicator of asset prices moves, typically six months or so ahead. If so, the latest collapse points to a grim autumn for Wall Street and for the American property market. As a rule of thumb, the data gives a one-year advance signal on economic growth, and a two-year signal on future inflation.

"There are always short-term blips but over the long run M3 has repeatedly shown itself good leading indicator," said Mr Stein. He cautioned that the three-month shifts in M3 can be highly volatile.

M3 surged after the onset of the credit crunch, but this was chiefly a distortion caused by the near total paralysis in parts of the American commercial paper market. Borrowers were forced to take out bank loans instead. The commercial paper market has yet to recover.

The University of Michigan's index of consumer sentiment has fallen to the lowest level since the 1980s recession.

The US economy is without doubt facing severe headwinds going into the autumn.
Richard Fisher, the ultra-hawkish head of the Dallas Federal Reserve, warned over the weekend that growth would be near "zero" in the second half of the year.

Tuesday, September 29, 2009

The Top?

By my reckoning, either the top of this rally is in, or there will be one more brief (i.e. less than a month) advance up to exhaustion which will end this rally. Either way, one who has become habituated to discerning mass sentiment can see a subtle shift in mood and tone from the headlines and the way people are talking. It is a calmer, deeper, more settled sense of pessimism, very unlike the sharp but shallow increase in pessimism (and subsequent decline in the markets) that occurred last month.

Anyone who desires to get out of the markets should consider doing so now. You make your own decisions, of course. Do your own due diligence. If I am wrong and the markets are going to continue to rally and the bear market is over, then you can jump on the elevator at the second floor instead of the ground floor.

Gold is holding up well, though it still has not definitively broken out and confirmed that the bull market is intact. It must close over $1030 in order to do that. It was quite overbought, and due for a correction. Thus far it seems like it will work off the excess of positive sentiment with more or less sideways action. $960 is quite possible. I still say that if you see gold go below $920, that it's time to consider selling at least some of your physical gold. Since doing that is often not like selling a stock (i.e. click a mouse and it's done) it would be good to know beforehand how you would like to unload it quickly if you should feel the need to do so.

We are now entering or are about to enter the terminal phase of the bear market. It will be lengthy, relentless, and frightening. The real economic numbers will begin to deteriorate sharply through the Fall and Winter. The subtle deterioration is already present. We will probably get our usual bump at Christmastime (i.e. the Santa Claus Rally) as people ramp up spending a bit in anticipation of the holidays, but that pop in sentiment will exhaust itself in January with the opening of the Visa bills and the layoffs that come after the holiday business rush is over. Take whatever steps are necessary to protect yourself, your family, and your position in the world.

Thursday, September 17, 2009

Frugality and Simplicity Lead to.... Happiness?

We human beings are chronically dissatisfied creatures and can even grow weary of the best things this life has to offer. This is, of course, sin. We must learn to be content in what God has provided and "set our minds on things above, not on earthly things." (Colossians 3:2) Any pursuit of the good things of this world which is "inordinate" (i.e. the thing pursued or the pursuit itself departs from its God-given place and function in our lives and becomes more important or takes a higher place than it should) is also the sin of idolatry. What seems less evident to most people is that it also makes us chronically unhappy.

In his science fiction book, Perelandra, C.S. Lewis creates for us an Eden on the planet Venus, complete with a new, unfallen (and green) Adam and Eve. This Eden is different than ours was. This Eden is a world mostly covered with water, but with floating "islands" which contain fruit-bearing trees and plants, and abundant wildlife. These islands drift from place to place as the waves carry them. The few spots of fixed land which exist may be trod upon by this Man and Woman, but they may not dwell there. They may not even spend the night there. That is the command they must not transgress. Of course, the Devil enters in to the picture (hitching a ride on a demon-possessed professor from an earth which is under heavenly quarantine.) This demon-man tries to get the Woman to transgress the command. Why would God (Maledil) command such a silly thing? After the test has been passed succesfully, and the Woman reflects on her experience she says:

"The reason for not yet living on the Fixed Land is now so plain. How could I wish to live there except because it was Fixed? And why should I desire the Fixed except to make sure - to be able on one day to command where I should be the next and what should happen to me? It was to reject the wave - to draw my hands out of Maledil’s... to put in our own power what times should roll towards us... as if you gathered fruits together to-day for to-morrow’s eating instead of taking what came. That would have been cold love and feeble trust. And out of it how could we ever have climbed back into love and trust again?"

Part of the reason I welcome the Second Great Depression is that the limits it imposes will cause at least some of us to re-evaluate our lives and how we've been spending them. We will rediscover the joy and delight of simple things... plain food, sturdy clothes, an evening in with the children, good books, time spent with friends and loved ones. "Special" things will become special once more because of their rarity. The child in wartime Britain who couldn't get a chocolate bar because of the rationing savored the rare Hershey bar that he did get. Such a chocolate bar might have been his only Christmas present. I, who can have as many Hershey bars as I like (and far more than I need) do not particularly enjoy them. Indeed, I do not consider them a "good enough" chocolate bar. To really enjoy a chocolate bar, now I have to have one made by Ghirardelli or Godiva, which is five times the price. Too many of those and I will cease to enjoy them as well. I will seek something more exotic and expensive. It is a true fact about me that I get less pleasure now out of a cup of Starbucks coffee than my ancestors got out of a cup of Maxwell House, which I will generally refuse to drink and label "mud and not coffee."

We have the opportunity here, if we will but see it, to re-learn the art of enjoying the good things God has gives as he gives them. We must learn to accept the wave that comes and seek neither to control the waves, nor even to seek to erect the experience some especially thrilling wave from our past as the norm to which all other experiences must conform. If we do this we lose the ability to enjoy the experiences we do have. We reject the good that God would give us now and demand that he recreate some other good in its place instead. It is a double curse. We find ourselves unable to enjoy the different goods God does give, and after having built up the past experience as the height of pleasure, we find that it does not satisfy when we do actually manage to re-wrangle it into our lives.

If we see frugality and simplicity as a burden, as something which we chafe against, and long to return to our former spendthrift ways, we will be miserable for the next decade, and perhaps far beyond. But if we accept that our lifestyle is going to be curtailed, and we thank God for the good things that he has already let us enjoy, and we set our hearts to be content wherever we are, and count our blessings and take every good thing as a precious gift from His hand, then we shall be much happier and able to take great delight in the more commonplace gifts all around us.

Below is a story about a family in Chicago who is learning just that.

Battling recession with frugality, positive attitude

By Allan Chernoff
CNN Senior Correspondent

CRYSTAL LAKE, Illinois (CNN) -- Karin Kubacki no longer buys clothing or toys for her 7-year-old son, Max.

She avoids driving her 8-year-old Honda Civic unless absolutely necessary and has no plans to repair a second vehicle, an 11-year-old Ford F-250.

Bubble baths and Hershey bars are now her few luxuries.

These are among the cost-saving measures Kubacki is taking to make her 13 weeks of severance pay last a full year.

Kubacki, the family breadwinner, was laid off July 1 from a job she loved -- software project manager at Accenture, where she had worked for 15 years. At first, she was stunned. "I had this impression that someone had grabbed a big vacuum and sucked all the air out of the room. It was like I couldn't get my breath," she said.

Her husband, a former schoolteacher who is a stay-at-home dad and a woodworker, feared for the family's financial future.

"At first there is the panic, 'Oh my gosh, we are going to lose the house tomorrow and live in a cardboard box,' " Chris Kubacki recalled. VideoWatch the Kubackis discuss how they've handled Karin's job loss »

Yet his wife was determined to make her loss an opportunity to spend more time with the family while taking time to find another job she would love as much as the one she had just lost.

So the Kubackis are trying to make Karin's severance, unemployment checks and some extra cash Accenture provided to pay for an extension of her health insurance last a full year. They are determined to keep paying the mortgage on their home in Crystal Lake, Illinois, a Chicago suburb, and not dig into savings -- all on an expected pre-tax income of $54,000, a little less than half of the family's normal earnings.

"We have been frugal people, and we have tried to save as much as we can, and that is one of the reasons why I have been able to stay home with Max," said Chris, who builds wooden toys for his son.

But never have the Kubackis been as frugal as they are now.

For the first time, the family is living by a strict budget. They are saving by:

• Biking and walking rather than driving, whenever possible

• Rarely going out to restaurants

• Finding enriching community activities for their child that cost little or nothing

• Taking out books from the library

• Purchasing only absolute necessities and buying what's on sale.

"There are no luxuries now. Before, we had a lot more where we could say, 'Let's go do this.' Now it's a lot more careful," Karin said.

"When I had a job, when I shopped, I would make impulse purchases. Now, no way."

Not only is diminished consumption not as painful as it might seem, the Kubackis say, but the change has also brought a fuller and more enjoyable lifestyle than at any time when Karin was earning a regular paycheck.

"We can have all kinds of fun doing things that don't cost anything," Chris said.

Chris concedes he has felt internal pressure to get a job, but the couple agrees that for now, they prefer to avoid that to be able to spend as much time together and have Chris available for Max.

After adopting a frugal lifestyle, the Kubackis say they now really appreciate life's little luxuries.

"If you pick just a couple of luxuries like Hershey bars, then you really enjoy 'em. And if you have a lot of luxuries, then they become necessities. But if you only have a couple, boy are they terrific," Karin said.

Even though neither Karin nor Chris now hold jobs, they are still giving 10 percent of Karin's unemployment check to their church. Living only a few doors from the neighborhood food pantry, they see frequent reminders of their blessings.

"So I don't have a job right now," Karin said. "We've got a house. We've got cars, we've got food. We have nothing to complain about."

Tuesday, September 15, 2009

More Ammo for the Deflationary Case

Ah, I love the British media. They're not nearly the lapdogs, lackeys, and lickspittles that the U.S. media are.

The Telegraph, a British Daily has just published an editorial essay by Ambrose Evans-Pritchard on U.S. economic information which our newspapers have conveniently ignored.

The inflationist case is predicated upon the fact that the trillions of dollars that the Fed is creating will eventually work their way into the economy. There are several paths via which it could do that. One is simply large cash gifts to the U.S. population. But when they tried that, we mostly either saved it or paid down debt. That doesn't help at all. The government can spend money on massive public works programs. This is what the WPA and the TVA and the RFC and all of FDR's alphabet soup was about. But they are very slow to get any cash to these "shovel ready" programs. So far not much has been accomplished. They can offer incentives to go out and purchase things (i.e. cash for clunkers, etc) and that will boost certain sectors temporarily, but it's actually harmful in the long term because it steals from tomorrow's sales and brings them forward to today.

The best way to get things going again, according to generally accepted economic theory, is for consumers to desire to borrow and banks to desire to lend. But the Powers That Be cannot make the banks lend (and they've tried) and they can't make people borrow. So money does not get created and circulate, people don't buy things with their newly borrowed dollars. Store shelves stay full of the goods that people aren't buying, and those manufacturers and retailers lay off staff. The staff who have been laid off and those who are afraid they're about to be laid off go into what we might call "butt-pucker mode" and stop spending on anything but necessities. They certainly don't go out and borrow $20,000 for a shiny new car or $200,000 for a new home.

And so the the process repeats. The economy stagnates in a vicious cycle. Once people get well and thoroughly into butt-pucker mode, they don't come out of it for a long, long time. Known any survivors of the First Great Depression who compulsively save used tin foil and plastic bread bags? I used to pastor a lot of little churches mostly comprised of little old ladies. If you went into the kitchens of these churches it was a lesson in frugality.... "use it up, wear it out, make it do, or do without" was the motto of the place. There were lots and lots of drawers full of plastic bread bags, rolls of string cobbled together, and balls of rubber bands, and used tin foil, cleaned and neatly folded for reuse. I even found a box of Jello from the 1950's. I kid you not.

I knew one old farmer in Ohio who had several 55 gallon drums full of used spark plugs. He said he couldn't afford them in the Depression and he couldn't buy them during the rationing in WWII, and his family almost went broke because they couldn't keep the farm equipment running without spark plugs. So he was never going to be in need of a spark plug again if he could help it. How would you like to be a spark plug merchant and have a few million people just like him to try and sell to? These are the factors, both economic and psychological, which create deflationary events.

Well, we'll get some nice statistical bumps from the various cash for clunker type programs in the coming months, but where the rubber meets the road, in the consumer credit segment, things are far from rosy. Consumer credit has crashed at a rate not seen since (wait for it, here it comes again!) THE GREAT DEPRESSION.

Everything that has been tried before and didn't work after a whole decade of trying is being tried again. It won't work now either. It will probably make things worse. The recession is not over. The Depression is just beginning. Save money. Delay gratification. Learn frugality. Learn to be content with what you have. Get out of debt. Buy a little gold and silver at the next correction, which should be coming soon. You'll be glad you did. If you sign up for Club EWI, they'll give you a free 60 pages primer on how to survive a deflation. All they do is send you an email every once in awhile trying to get you to buy more of their services. They don't sell your address or anything like that. I've been a member for years and it has been helpful.


US credit shrinks at Great Depression rate prompting fears of double-dip recession
Both bank credit and the M3 money supply in the United States have been contracting at rates comparable to the onset of the Great Depression since early summer, raising fears of a double-dip recession in 2010 and a slide into debt-deflation.


By Ambrose Evans-Pritchard, International Business Editor
Published: 11:59PM BST 14 Sep 2009

Comments 114 | Comment on this article
US Federal Reserve on February 12, 2009 in Washington
FedRes: Ben Bernanke has been appointed to a second-term at the helm of the US central bank, the Federal Reserve Photo: AFP

Professor Tim Congdon from International Monetary Research said US bank loans have fallen at an annual pace of almost 14pc in the three months to August (from $7,147bn to $6,886 bn).

"There has been nothing like this in the USA since the 1930s," he said. "The rapid destruction of money balances is madness."

The M3 "broad" money supply, watched as an early warning signal for the economy a year or so later, has been falling at a 5pc annual rate.

Similar concerns have been raised by David Rosenberg, chief strategist at Gluskin Sheff, who said that over the four weeks up to August 24, bank credit shrank at an "epic" 9pc annual pace, the M2 money supply shrank at 12.2pc and M1 shrank at 6.5pc.

"For the first time in the post-WW2 [Second World War] era, we have deflation in credit, wages and rents and, from our lens, this is a toxic brew," he said.

It is unclear why the US Federal Reserve has allowed this to occur.

Chairman Ben Bernanke is an expert on the "credit channel" causes of depressions and has given eloquent speeches about the risks of deflation in the past.

He is not a monetary economist, however, and there are indications that the Fed has had to pare back its policy of quantitative easing (buying bonds) in order to reassure China and other foreign creditors that the US is not trying to devalue its debts by stealth monetisation.

Mr Congdon said a key reason for credit contraction is pressure on banks to raise their capital ratios. While this is well-advised in boom times, it makes matters worse in a downturn.

"The current drive to make banks less leveraged and safer is having the perverse consequence of destroying money balances," he said. "It strengthens the deflationary forces in the world economy. That increases the risks of a double-dip recession in 2010."

Referring to the debt-purge policy of US Treasury Secretary Andrew Mellon in the early 1930s, he added: "The pressure on banks to de-risk and to de-leverage is the modern version of liquidationism: it is potentially just as dangerous."

US banks are cutting lending by around 1pc a month. A similar process is occurring in the eurozone, where private sector credit has been contracting and M3 has been flat for almost a year.

Mr Congdon said IMF chief Dominique Strauss-Kahn is wrong to argue that the history of financial crises shows that "speedy recovery" depends on "cleansing banks' balance sheets of toxic assets". "The message of all financial crises is that policy-makers' priority must be to stop the quantity of money falling and, ideally, to get it rising again," he said.

He predicted that the Federal Reserve and other central banks will be forced to engage in outright monetisation of government debt by next year, whatever they say now.

Sunday, September 13, 2009

You've Got to Admit It's Getting Better, It's Getting Better All the Time

NOT!!!!

This rally is really mature, though it still has a bit more to run IMHO.

I'm starting to get a touch nervous about gold and silver. The COT came out yesterday. Based on the COT (Commitment of Traders Report) the big money boys are heavily short, meaning they are betting on the price plunging. They throw enough money around that they actually have the ability to make their wishes come true, at least in the short term. Gold is overbought, and silver is more so. As I said yesterday, I will not breathe a sigh of relief until gold closes above $1030. I expect a nasty shakeout soon, though. Especially in silver. I'm still holding. Remember my advice. If $920 goes by on the downside, think about getting out. Or, be prepared to be in the red for a period of time.

On the other hand, the seasonals are positive for Gold and China has just advised their citizens to buy gold. The Chinese government is apparently buying it with both fists, trying to trade their paper dollars for something more tangible and useful. They glutted themselves on oil, then copper, now gold and silver and lithium seem to be the next targets. We are witnessing two mighty battles. One between inflation and deflation (I think deflation will win short to intermediate term) the other between those who think gold is a commodity and those who think it is money (I think it's money. That's why I'm one of the few deflationists who is also a gold bug.) We live in interesting times.

Below is an article about an interview with Joseph Stiglitz. He's not a happy camper. The long and short: the banks are in worse shape now than they were before Lehman went belly-up. Not only has the financial system not been saved (as our Dear Leader boasted in his Labor Day speech in Cincinnati) things are worse and we've flushed literally trillions of dollars down the crapper to boot. You'll no doubt enjoy telling your children and grandchildren why we shafted them and saddled them with this monstrous debt. Enjoy!

Stiglitz Says Banking Problems Are Now Bigger Than Pre-Lehman

By Mark Deen and David Tweed

Sept. 14 (Bloomberg) -- Joseph Stiglitz, the Nobel Prize- winning economist, said the U.S. has failed to fix the underlying problems of its banking system after the credit crunch and the collapse of Lehman Brothers Holdings Inc.

“In the U.S. and many other countries, the too-big-to-fail banks have become even bigger,” Stiglitz said in an interview yesterday in Paris. “The problems are worse than they were in 2007 before the crisis.”

Stiglitz’s views echo those of former Federal Reserve Chairman Paul Volcker, who has advised President Barack Obama’s administration to curtail the size of banks, and Bank of Israel Governor Stanley Fischer, who suggested last month that governments may want to discourage financial institutions from growing “excessively.”

A year after the demise of Lehman forced the Treasury Department to spend billions to shore up the financial system, Bank of America Corp.’s assets have grown and Citigroup Inc. remains intact. In the U.K., Lloyds Banking Group Plc, 43 percent owned by the government, has taken over the activities of HBOS Plc, and in France BNP Paribas SA now owns the Belgian and Luxembourg banking assets of insurer Fortis.

While Obama wants to name some banks as “systemically important” and subject them to stricter oversight, his plan wouldn’t force them to shrink or simplify their structure.

Stiglitz said the U.S. government is wary of challenging the financial industry because it is politically difficult, and that he hopes the Group of 20 leaders will cajole the U.S. into tougher action.

G-20 Steps

“We aren’t doing anything significant so far, and the banks are pushing back,” said Stiglitz, a Columbia University professor. “The leaders of the G-20 will make some small steps forward, given the power of the banks” and “any step forward is a move in the right direction.”

G-20 leaders gather Sept. 24-25 in Pittsburgh and will consider ways of improving regulation of financial markets and in particular how to set tighter limits on remuneration for market operators. Under pressure from France and Germany, G-20 finance ministers earlier this month reached a preliminary accord that included proposals to reduce bonuses and linking compensation more closely to long-term performance.

“It’s an outrage,” especially “in the U.S. where we poured so much money into the banks,” Stiglitz said. “The administration seems very reluctant to do what is necessary. Yes they’ll do something, the question is: Will they do as much as required?”

Global Economy

Stiglitz, former chief economist at the World Bank and member of the White House Council of Economic Advisers, said the world economy is “far from being out of the woods” even if it has pulled back from the precipice it teetered on after the collapse of Lehman.

“We’re going into an extended period of weak economy, of economic malaise,” Stiglitz said. The U.S. will “grow but not enough to offset the increase in the population,” he said, adding that “if workers do not have income, it’s very hard to see how the U.S. will generate the demand that the world economy needs.”

The Federal Reserve faces a “quandary” in ending its monetary stimulus programs because doing so may drive up the cost of borrowing for the U.S. government, he said.

“The question then is who is going to finance the U.S. government,” Stiglitz said.

Stiglitz gave the interview before presenting a report to French President Nicolas Sarkozy that urged world leaders to drop an obsession for focusing on gross domestic product in favor of broader measures of prosperity.

GDP’s Shortcomings

“GDP has increasingly become used as a measure of societal well being and changes in the structure of the economy and our society have made it increasingly poor one,” Stiglitz said.

Assessing government’s contribution to economic output, which ranges from 39 percent in the U.S. to 48 percent in France, is one of the shortcomings of the GDP model, as is its difficulty in estimating improvements in quality of products such as cars instead of just quantity, Stiglitz said.

Similarly, increased household debt may drive up output numbers, even though that doesn’t amount to a real increase in wealth, he added.

While Stiglitz doesn’t recommend dropping GDP altogether, he wants governments to consider such matters, along with issues of environmental sustainability, in policy making.

“Most governments make a fetish out of it. If you take one message out of our report, make it avoid GDP fetishism,” he said. “The message is to encourage political leaders away from that.”

To contact the reporters on this story: Mark Deen in Paris at markdeen@bloomberg.netDavid Tweed in Paris at dtweed@bloomberg.net
Last Updated: September 13, 2009 18:00 EDT

Saturday, September 12, 2009

So Far, So Good

Gold is holding up well. It has been as high as $1013 on an intraday basis, and closed Friday above $1000. I will not be truly happy until I see it close above $1030.

It has also completed five waves up, so I look for a pullback next week. The $960-$980 level would be normal, but it could go deeper. As I said before, I wouldn't be alarmed until I saw the $920 level get breached.

The stock markets are also ramping up for the "c" wave of this correction, thus fulfilling my prediction a couple of weeks ago that the bounce was not over. This means we're on our way up towards my 10,500 Dow target. This has the potential to push the advent of the catastrophic final down wave of the bear market into early next year. We'll have to see how it unfolds. It could be a fast and furious rise, over in a month. It could take it's time. But if you buy my arguments, and you're holding stocks that you rode lower through the bear market, and you are trying to get as much of your money back as you can, you will soon have the best opportunity to get out that you will have for the next 10 years, at least. Maybe 20.

As I said before, I got out of my longs two weeks ago. I have basically not been in the stock market for awhile, but waded in in January/February of 2009 purely for the purposes of benefiting from stocks that had been beaten down. I never intended to "buy and hold." Buy and hold will not work in a bear market. It will kill you. Buy and sell when the price goes up is what you want, and you must not be afraid to take your money out of the middle 60% of the rise. Chasing those last few dollars will lead you to chasing them over a cliff if you're not careful.

My strategy is, therefore, to look for stocks or products that are beaten down to an excess. I got a heads up last Friday that there is a natural gas exchange traded fund that I didn't even know about, symbol UNG. When I looked at a chart for the price of natural gas, it shows almost a year and a half of relentless downturn, and the word on the street was that the players in the natural gas market were close to panic. I bought UNG immediately, for the following reasons

1. The market for natural gas is not going to disappear. There's no replacement for natural gas at this point.

2. We are entering the Fall/Winter time frame, where the demand for natural gas as well as all sorts of other fossil fuels, rises due to home heating needs. Rise in demand almost always equals rise in price.

3. People are panicking. The time for panicking would have been when the fund was at $65. At the time I bought it, it was below $10. People always panic near the end of a steep drop. Panic is usually the last sign before you get "capitiulation" and a final low on the prices. Your own panic is very bad and you should never let yourself do it. Other people's panic is an opportunity to make money in the markets.

4. Even though the wave count was ambiguous, when something drops in an almost straight down fashion for over a year, and loses 80+% of its value, it's time for a bounce. Even if the long term prognosis for the underlying asset is not good, (i.e. General Motors or something along those lines) you still almost always get something called a "technical bounce" or an "oversold bounce" or a "dead cat bounce" (because even a dead cat will bounce if you drop it from a high enough level.)

So far I'm up 20%. Might it turn back around and make a new low? Yes. That's okay. So did Bank of America, and I more than doubled my money on that one before I was done. Will I hold this fund forever? No. I'll probably be out of it by next spring sometime and take my money and put it to work somewhere else. Or sit on it and look for the next thing that's beaten down because of panic.

The trick is knowing when to sell. My wife and I bought Merck (MRK) on my recommendation about four years ago when the whole Vioxx thing hit the news and the price plunged. We bought in the low $30's, saw it go into the mid $20's and then start to rise. In January of 2008 I told her we ought to sell it. It was in the low $60's at that time. She, being conditioned by the "buy and hold" mantra, and angry at some of my own past mistakes (which I have learned very valuable lessons from), refused to do so. Since it was in her IRA, I had to comply. Now Merck is just below where we bought it. Net return after four years? Less than zero.

I made up my mind this spring that I was only going to do this with my own money. Being responsible for other people's money, even my wife's IRA, skews my own psychology, makes it harder to make unbiased decisions and makes me more likely to panic myself, and risks harmony in my relationships.

These strategies I am talking about are not "day trading." I cannot hold a position for less than 90 days according to the rules of my IRA. They're more like "month trading" or "year trading." It is a necessary skill in a bear market if you are relying on the financial products industry to finance your retirement. If you do not have the time, temperament, or interest, find another way to finance your retirement. Or get out at the top of the next bounce and stay out until the panic washout which will probably happen sometime late next year. Then it will be safe to wade back in, though stocks probably won't go anywhere for years after that panic washout.

The economic fundamentals are terrible. Unemployment continues to rise. The boost to GDP that will be announced this quarter almost solely due to the government throwing large amounts of money at consumers to buy things they can't afford. Consumer credit was down a record amount in July, and there's a whole wave of new residential mortgage resets coming next year, and we haven't even felt the effects of the decay of commercial real estate yet. The FDIC is going broke quickly and is, as predicted, shifting the burden to healthier banks, which in turn makes them less healthy. The whole system is coming apart at the seams and we see that on the international scene world leaders are quite openly talking about dismantling it and erecting something else.

Geopolitically, we stand almost exactly where Great Britain stood in the late 1800's, theoretically the most powerful nation on earth, but in reality losing ground on almost every front. We are probably also going to emulate Britain's wars from that era, both major and minor. China stands almost exactly where we stood in the 1890's, a bustling hive of industrialization and enterprise (and corruption.) China is the next empire. The 21st century will be the Chinese Century. After China has their Great Depression, and enacts reforms to increase transparency and accountability, buy China.

That's all for now.

Thursday, September 3, 2009

Make or Break Time For Gold

Gold is flirting with the $1000 mark today. It's been as high as $998 on the spot market.

For the gold bull to be intact, we must decisively break $1000, and soon. It would not be unusual for it to hit the old $1007 record level and then correct and consolidate before moving on up to $1250-$1500. But if it goes below $920, I strongly recommend that you think about selling all of your physical gold holdings. Ditto for silver. The price will tank very, very quickly if it goes below $920, knocking off 10-15% in a matter of hours.

You can monitor the action here

Wednesday, September 2, 2009

I Don't Think the Rally Is Over Quite Yet

The general public, and the organs of "information" (i.e. the media) that reflect the opinions and predispositions of the general public back to them, are always wrong on the stock market. They are bullish when they ought to be bearish and bearish when they ought to be bullish. As Warren Buffet said, be brave when everyone is afraid and afraid when everyone is brave.

There is too much fear and too much speculation in the media that the rally from the March lows is over.

The VIX is showing a rise that has fallen into a textbook five wave Elliott pattern, meaning fear is starting to rise. But there's only been a 400 point decline in the Dow. When that pattern completes, the VIX should fall (meaning the fear should abate.)

The pattern from the March lows has met the minimum requirements and could technically turn at any time, but it doesn't look or "feel" complete to me.

Bottom line, I think this is a false alarm. If you're holding on to stocks or mutual funds trying to make back as much of what you lost as you can, and you're contemplating selling out now, I think I'd either wait, or else I'd do it right now if you have a low tolerance for anxiety. Don't wait a couple of weeks and then sell at the bottom of this wave when your fear rises. We may see a 10% correction out of this movement before heading back up. I'm still pulling for Dow 10,500.

Having said that, the bear market is not over. This is just a corrective rally. Corrections take time. Their patterns are complex and hard to read sometimes. Don't get suckered.