Monday, January 13, 2014

Forecast 2014: The Killer D’s

By John Mauldin


It seems I'm in a constant dialogue about the markets and the economy everywhere I go. Comes with the territory. Everyone wants to have some idea of what the future holds and how they can shape their own personal version of the future within the Big Picture. This weekly letter is a large part of that dialogue, and it's one that I get to share directly with you. Last week we started a conversation looking at what I think is the most positive and dynamic aspect of our collective future: The Human Transformation Revolution. By that term I mean the age of accelerating change in all manner of technologies and services that is unfolding before us. It is truly exhilarating to contemplate. Combine that revolution with the growing demand for a middle class lifestyle in the emerging world, and you get a powerful engine for growth. In a simpler world we could just focus on those positives and ignore the fumbling of governments and central banks. Alas, the world is too complex for that.

We'll continue our three part 2014 forecast series this week by looking at the significant economic macrotrends that have to be understood, as always, as the context for any short term forecast. These are the forces that are going to inexorably shift and shape our portfolios and businesses. Each of the nine macrotrends I'll mention deserves its own book (and I've written books about two of them and numerous letters on most of them), but we'll pause to gaze briefly at each as we scan the horizon.

The Killer D's
The first five of our nine macro-forces can be called the Killer D's: Demographics, Deficit, Debt, Deleveraging, and Deflation. And while I will talk about them separately, I am really talking threads that are part of a tapestry. At times it will be difficult to say where one thread ends and the others begin.

Demographics – An Upside Down World
One of the most basic human drives is the desire to live longer. And there is a school of economics that points out that increased human lifespans is one of the most basic and positive outcomes of economic growth. I occasionally get into an intense conversation in which someone decries the costs of the older generation refusing to shuffle off this mortal coil. Typically, this discussion ensues after I have commented that we are all going to live much longer lives than we once expected due to the biotechnological revolution. Their protests sometimes make me smile and suggest that if they are really worried about the situation, they can volunteer to die early. So far I haven't had any takers.

Most people would agree that growth of the economy is good. It is the driver of our financial returns. But older people spend less money and produce far less than younger, more active generations do. Until recently this dynamic has not been a problem, because there were far more young people in the world than there were old. But the balance has been shifting for the last few decades, especially in Japan and Europe.

An aging population is almost by definition deflationary. We can see the results in Japan. An aging, conservative population spends less. An interesting story in the European Wall Street Journal this week discusses the significant amount of cash that aging Japanese horde. In Japan there is almost three times as much cash in circulation, per person, as there is in the US. Though Japan is a country where you can buy a soft drink by swiping your cell phone over a vending machine data pad, the amount of cash in circulation is rising every year, and there are actually proposals to tax cash so as to force it back into circulation.

A skeptic might note that 38% of Japanese transactions are in cash and as such might be difficult to tax. But I'm sure that Japanese businesses report all of their cash income and pay their full share of taxes, unlike their American and European counterparts.

Sidebar: It is sometimes difficult for those of us in the West to understand Japanese culture. This was made glaringly obvious to me recently when I watched the movie 47 Ronin. In the West we may think of Sparta or the Alamo when we think of legends involving heroic sacrifice. The Japanese think of the 47 Ronin. From Wikipedia:

The revenge of the Forty-seven Ronin (Shi-jū-shichi-shi, forty-seven samurai) took place in Japan at the start of the 18th century. One noted Japanese scholar described the tale, the most famous example of the samurai code of honor, bushidō, as the country's "national legend."
The story tells of a group of samurai who were left leaderless (becoming ronin) after their daimyo (feudal lord) Asano Naganori was compelled to commit seppuku (ritual suicide) for assaulting a court official named Kira Yoshinaka, whose title was Kōzuke no suke. The ronin avenged their master's honor by killing Kira, after waiting and planning for almost two years. In turn, the ronin were themselves obliged to commit seppuku for committing the crime of murder. With much embellishment, this true story was popularized in Japanese culture as emblematic of the loyalty, sacrifice, persistence, and honor that people should preserve in their daily lives. The popularity of the tale grew during the Meiji era of Japanese history, in which Japan underwent rapid modernization, and the legend became subsumed within discourses of national heritage and identity.

The point of my sidebar (aside from talking about cool guys with swords) is that, while Japan may be tottering, the strong social fabric of the country, woven from qualities like loyalty, sacrifice, and diligence, should keep us from being too quick to write Japan off.

"Old Europe" is not far behind Japan when it comes to demographic challenges, and the United States sees its population growing only because of immigration. Russia's population figures do not bode well for a country that wants to view itself as a superpower. Even Iran is no longer producing children at replacement rates. At 1.2 children per woman, Korea's birth rates are even lower than Japan's. Indeed, they are the lowest in the World Bank database.

A basic equation says that growth of GDP is equal to the rate of productivity growth times the rate of population growth. When you break it down, it is really the working-age population that matters. If one part of the equation, the size of the working-age population, is flat or falling, productivity must rise even faster to offset it. Frankly, developed nations are simply not seeing the rise in productivity that is needed.
As a practical matter, when you are evaluating a business as a potential investment, you need to understand whether its success is tied to the growth rate of the economy and the population it serves.

In our book Endgame Jonathan Tepper and I went to great lengths to describe the coming crisis in sovereign debt, especially in Europe, which shortly began to play itself out. In the most simple terms, there can come a point when a sovereign government runs up against its ability to borrow money at reasonable rates. That point is different for every country. When a country reaches the Bang! moment, the market simply starts demanding higher rates, which sooner or later become unsustainable. Right up until the fateful moment, everyone says there is no problem and that the government in question will be able to control the situation.

If you or I have a debt issue, the solution is very simple: balance our family budget. But it is manifestly more difficult, politically and otherwise, for a major developed country to balance its budget than it is for your average household to do so. There are no easy answers. Cutting spending is a short-term drag on the economy and is unpopular with those who lose their government funding. Raising taxes is both a short term and a long-term drag on the economy.

The best way to get out of debt is to simply hold spending nominally flat and eventually grow your way out of the deficit, as the United States did in the 1990s. Who knew that 15 years later we would be nostalgic for Clinton and Gingrich? But governments almost never take that course, and eventually there is a crisis. As we will see in a moment, Japan elected to deal with its deficit and debt issues by monetizing the debt.

Meanwhile, in Europe, the ECB had to step in to save Italy and Spain; Greece, Ireland, and Portugal were forced into serious austerities; and Cyprus was just plain kicked over the side of the boat.



There is currently a lull in the level of concern about government debt, but given that most developed countries have not yet gotten their houses in order, this is a temporary condition. Debt will rear its ugly head again in the not too distant future. This year? Next year? 2016? Always we pray the prayer of St. Augustine: "Lord, make me chaste, but not today."

Deleveraging and Deflation – They Are Just No Fun
At some point, when you have accumulated too much debt, you just have to deal with it. My associate Worth Wray forwarded the following chart to me today. There is no better explanation as to why the current recovery is the weakest in recent history. Deleveraging is a b*tch. It is absolutely no fun. Looking at this chart, I find it rather remarkable and somewhat encouraging that the US has done as well as it has the past few years.



As I've outlined at length in other letters and in Code Red, central banks can print far more money than any of us can imagine during periods of deleveraging and deflation. For the record, I said the same thing back in 2010 when certain hysterical types were predicting hyperinflation and the end of the dollar due to the quantitative easing of the Federal Reserve. I remain actively opposed to the current level of quantitative easing, not because I'm worried about hyperinflation but for other reasons I have discussed in past letters. As long as the velocity of money keeps falling, central banks will be able to print more money than we would have thought possible in the '70s or '80s. And seemingly they can get away with it – in the short term. Of course, payback is a b*tch. When the velocity of money begins to rise again for whatever unknown reason, central banks had better have their ducks in a row!

Deflationary conditions make debt worse. If you borrow money at a fixed rate, a little inflation – or even a lot of inflation – helps a great deal. To think that even conservative Republican leaders don't get that is naïve. Certainly it is understood in Japan, which is why the success of Abenomics is dependent upon producing inflation. More on that below.

For governments, there is more than one way to deleverage. You can default on your payments, like Greece. We're going to see a lot more of that in the next five years – count on it. Or you can get your central bank to monetize the debt, as Japan is doing. Or get the central bank to convert your debt into 40-year bonds, as Ireland did. (Brilliant move, by the way, for tiny Ireland – you have to stand back and applaud the audacity. I wonder how much good Irish whiskey it took to get the ECB to agree to that deal?)

Inflation is falling almost everywhere today, even as central banks are as accommodative as they have ever been. Deflation is the default condition in a deleveraging world. It can even create an economic singularity.
Singularity was originally just a mathematical term for a point at which an equation has no solution. Then, in astrophysics, it was proven that a large enough collapsing star would become a black hole so dense that its own gravity would cause a singularity in the fabric of space time, a point where many standard physics equations suddenly have no solution.

Beyond the "event horizon" of the black hole, the physics models no longer work. In terms of general relativity, an event horizon is a boundary in space time beyond which events cannot affect an outside observer. In a black hole it is "the point of no return," i.e., the point at which the gravitational force becomes so large that nothing can escape.

Deflation and collapsing debt can create their own sort of black hole, an economic singularity. At that point, the economic models that we have grown comfortable with no longer work. As we approach a potential event horizon in a deflationary/deleveraging world, it can be a meaningless (and extremely frustrating) exercise to try to picture a future that is a simple extension of past economic reality. Any short term forecast (less than one or two years) has to bear that fact in mind.

We Are in a Code Red World
We need to understand that there has been a complete bureaucratic and academic capture of central banks. They are all run by neo-Keynesians. (Yes, I know there are some central bankers who disavow the prevailing paradigm, but they don't have the votes.) The default response of any present day central banker faced with a crisis will be massive liquidity injections. We can argue with the tide, but we need to recognize that it is coming in.

When there is a recession and interest rates are at or close to the zero bound, there will be massive quantitative easing and other, even more creative injections of liquidity into the system. That is a reality we have learned to count on and to factor into our projections of future economic possibilities. But as to what set of econometric equations we should employ in coming up with accurate, dependable projections, no one, least of all central bankers, has a clue. We are in unknown territory, on an economic Star Trek, with Captain Bernanke about to turn the helm over to Captain Yellen, going where no reserve currency printing central bank has gone before. This is not Argentina or Zimbabwe we are talking about. The Federal Reserve is setting its course based on economic theories created by people whose models are demonstrably terrible.

Will we have an outright recession in the US this year? I currently think that is unlikely unless there is some kind of external shock. But short term interest rates will stay artificially low due to financial repression by the Fed, and there will be an increased risk of further monetary creativity from a Yellen led Fed going forward. Stay tuned.
 
To continue reading this article from Thoughts from the Frontline – a free weekly publication by John Mauldin, renowned financial expert, best-selling author, and Chairman of Mauldin Economics – please click here.
© 2013 Mauldin Economics. All Rights Reserved.


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Saturday, January 11, 2014

23 Reasons to Be Bullish on Gold

By Laurynas Vegys, Research Analyst

It's been one of the worst years for gold in a generation. A flood of outflows from gold ETFs, endless tax increases on gold imports in India, and the mirage (albeit a convincing one in the eyes of many) of a supposedly improving economy in the US have all contributed to the constant hammering gold took in 2013.

Perhaps worse has been the onslaught of negative press our favorite metal has suffered. It's felt overwhelming at times and has pushed even some die-hard goldbugs to question their beliefs… not a bad thing, by the way.

To me, a lot of it felt like piling on, especially as the negative rhetoric ratcheted up. Last year's winner was probably Goldman Sachs, calling gold a "slam dunk sale" for 2014 (this, of course, after it's already fallen by nearly a third over a period of more than two and a half years, how daring they are).

This is why it's important to balance the one sided message typically heard in the mainstream media with other views. Here are some of those contrarian voices, all of which have put their money where their mouth is…..
  • Marc Faber is quick to stand up to the gold bears. "We have a lot of bearish sentiment, [and] a lot of bearish commentaries about gold, but the fact is that some countries are actually accumulating gold, notably China. They will buy this year at a rate of something like 2,600 tons, which is more than the annual production of gold. So I think that prices are probably in the process of bottoming out here, and that we will see again higher prices in the future."
  • Brent Johnson, CEO of Santiago Capital, told CNBC viewers to "buy gold if they believe in math… Longer term, I think gold goes to $5,000 over a number of years. If they continue to print money at the current rate, I think it could be multiples of that. I see a slow steady rise punctuated with some sharp upward moves."
  • Jim Rogers, billionaire and cofounder of the Soros Quantum Fund, publicly stated in November that he has never sold any gold and can't imagine ever selling gold in his life because he sees it as an insurance policy. "With all this staggering amount of currency debasement, gold has got to be a good place to be down the road once we get through this correction."
  • George Soros seems to be getting back into the gold miners: he recently acquired a substantial stake in the large cap Market Vectors Gold Miners ETF (GDX) and kept his calls on Barrick Gold (ABX).
  • Don Coxe, a highly respected global commodities strategist, says we can expect gold to rise with an improving economy, the opposite of what many in the mainstream expect. "You need gold for insurance, but this time the payoff will come when the economy improves. In the past when everything was falling all around you, commodity prices were soaring out of sight. We had three recessions in the 1970s and gold went from $35 an ounce to $850. But this time, gold is going to appreciate when we start getting 3% GDP growth."
  • Jeffrey Gundlach, bond guru and not historically known for being a big fan of gold, came out with a candid endorsement of the yellow metal: "Now, I kind of like gold. It's definitely very non correlated to other assets you may have in your portfolio, and it does seem sort of cheap. I also like the GDX."
  • Steve Forbes, publishing magnate and chief executive officer of Forbes magazine, publicly predicted an impending return to the gold standard in a speech in Las Vegas. "A new gold standard is crucial. The disasters that the Federal Reserve and other central banks are inflicting on us with their funny-money policies are enormous and underappreciated."
  • Rob McEwen, CEO of McEwen Mining and founder of Goldcorp, reiterated his bullish call for gold to someday top $5,000. "We now have governments willing to seize their citizens' assets. We now have currency controls on the table, which we haven't seen since the late 1960s/early '70s. We have continued debasement of currencies. And the economies of the Western world remain stagnant despite enormous monetary stimulation. All these facts to me are bullish for gold and make me believe the price will bounce back relatively soon."
  • Doug Casey says that while gold is not the giveaway it was at $250 back in 2001, it is nonetheless a bargain at current prices. "I've been buying gold for years and I continue to buy it because it is the way you save. I'm very happy to be able to buy gold at this price. All the so called quantitative easing, money printing, by governments around the world has created a glut of freshly printed money. This glut has yet to work its way through the global economic system. As it does, it will create a bubble in gold and a super bubble in gold stocks."
And then there's the people who should know most about how sound the world's various types of paper money are: central banks. As a group, they have added tonnes of bullion to their reserves last year….
  • Turkey added 13 tonnes (417,959 troy ounces) of gold in November 2013. Overall, it has added 143.6 tonnes (4,616,847 troy ounces) so far this year, up 22.5% from a year ago, in part thanks to the adoption of a new policy to accept gold in its reserve requirements from commercial banks.
  • Russia bought 19.1 tonnes (614,079 troy ounces) in July and August alone. With the year to date addition of 57.37 tonnes [second only to Turkey] Russia's gold reserves now total 1,015 tonnes. It now holds the eighth-largest national stash in the world.
  • South Korea added a whopping 20 tonnes (643,014 troy ounces) of gold in February, and now carries 23.7% more gold on its balance sheet than at the end of 2012."Gold is a real safe asset that can help (us) respond to tail risks from global financial situations effectively and boosts the reliability of our foreign reserves holdings," said central bank officials.
  • Kazakhstan has been buying gold every month, at an average of 2.4 tonnes (77,161 troy ounces) through October. As a result, the country's reserves have seen a 21% increase to 139.5 tonnes from a year ago.
  • Azerbaijan has taken advantage of a slump in gold prices and has gone from having virtually no gold to 16 tonnes (514,411 ounces).
  • Sri Lanka and Ukraine added 5.5 (176,829 troy ounces) and 6.22 tonnes (199,977 troy ounces) respectively over the past year.
  • China, of course, is the 800 pound gorilla that mainstream analysts seem determined to ignore. Though nothing official has been announced by China's central bank, the chart below provides some perspective into the country's consumer buying habits.
China ended 2013 officially as the largest gold consumer in the world. Chinese sentiment towards gold is well echoed in a statement made by Liu Zhongbo of the Agricultural Bank of China: "Because gold has capabilities to absorb external economic shocks, growth of its use in the international monetary system will be imminent."

And those commercial banks that have been verbally slamming gold, it turns out many are not as negative as it might seem…
  • Goldman Sachs proved itself to be one of the biggest hypocrites: while advising clients to sell gold and buy Treasuries in Q2 2013, it bought a stunning (and record) 3.7 million shares of GLD. And when Venezuela decided to raise cash by pawning its gold, guess who jumped in to handle the transaction? Yes, they claim the price will fall this year, but with such a slippery track record, it's important to watch what they do and not what they say.
  • Société Générale Strategist Albert Edwards says gold will top $10,000 per ounce (with the S&P 500 Index tumbling to 450 and Treasuries yielding less than 1%).
  • JPMorgan Chase went on record in August recommending clients "position for a short term bounce in gold." Gold's price resistance to Paulson & Co. cutting its gold exposure, along with growing physical gold demand in Asia, were cited among the main reasons.
  • ScotiaMocatta's Sunil Kashyap said that despite the selloff, there's still significant physical demand for gold, especially from India and China, which "supports prices."
  • Commerzbank calls for the gold price to enter a boom period this year. Based on investment demand from Asian countries, China and India in particular, the bank predicted the yellow metal will rise to $1,400 by the end of 2014.
  • Bank of America Merrill Lynch, in spite of lower price forecasts for gold this year, reiterated they remain "longer-term bulls."
  • Citibank's top technical analyst Tom Fitzpatrick stated gold could head to $3,500. "We believe we are back into that track where gold is the hard currency of choice, and we expect for this trend to accelerate going forward."
None of these parties thinks the gold bull market is over. What they care about is safety in this uncertain environment, as well as what they see as enormous potential upside.

In the end, the much ridiculed goldbugs will have had the last laugh.

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Sterne Agee Selects its Four Favorite Oil Services Stocks

Sterne Agee believes non conventional and deepwater drilling will rise steadily during the next few years, and it encourages investors to have exposure to both trends via the highest quality names and in companies with specific catalysts.

The firm thinks WTI crude prices will remain in a fairly stable $85-$95 range over the next two years, rig growth will rise slightly in 2014 and accelerate in 2015, and deepwater drilling visibility will remain strong for several years.

The firm's favorites are Halliburton (HAL), Schlumberger (SLB) and Oceaneering (OII), with Tetra Technologies (TTI) the top pick among sector small caps.


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Friday, January 10, 2014

Commodities Close the Week on a High Note - Crude Oil, Natural Gas, Gold, Corn and Coffee

Crude oil closed higher due to short covering on Friday as it consolidated some of the decline off last August's high. Today's mid range close sets the stage for a steady opening when Monday's night session begins. Stochastics and the RSI are oversold but remain neutral to bearish signaling that additional weakness is possible. If February extends the aforementioned decline, the June 2013 low crossing at 90.05 is the next downside target. Closes above the 20 day moving average crossing at 96.76 would confirm that a short term low has been posted. First resistance is the 10 day moving average crossing at 95.12. Second resistance is the 20 day moving average crossing at 96.76. First support is Thursday's low crossing at 91.24. Second support is the June 2013 low crossing at 90.05.

Natural gas closed higher due to short covering on Friday as it consolidated some of the decline off December's high. The high range close sets the stage for a steady to higher opening on Monday. Stochastics and the RSI remain neutral to bearish signaling that sideways to lower prices are possible near term. If February extends the decline off December's high, the 62% retracement level of the November-December rally crossing at 3.897 is the next downside target. Closes above the 20 day moving average crossing at 4.328 would confirm that a short term low has been posted. First resistance is the 20 day moving average crossing at 4.328. Second resistance is the reaction high crossing at 4.430. First support is today's low crossing at 3.953. Second support is the 62% retracement level of the November-December rally crossing at 3.897.

Gold closed higher on Friday as it extends the rally off December's low. The high range close sets the stage for a steady to higher opening when Monday's night session begins trading. Stochastics and the RSI are neutral to bullish signaling that sideways to higher prices are possible near term. If April extends the rally off December's low, December's high crossing at 1266.70 is the next upside target. If April renews the decline off August's high, weekly support crossing at 1179.40 is the next downside target. First resistance is today's high crossing at 1249.00. Second resistance is December's high crossing at 1266.70. First support is December's low crossing at 1182.30. Second support is weekly support crossing at 1179.40.

Corn closed sharply higher on Friday following today's USDA report. The USDA caught the trade leaning the wrong way after releasing a lower than expected corn crop estimate for 2013's crop production and lower than expected ending stocks. The USDA estimated the 2013 corn crop at 13.925 billion bushels. The USDA juggled its harvested acreage and yields, putting the average for the crop nationwide at 158.8 bpa, which was down 1.6 bpa from its last estimate, though acreage went up 436,000. The USDA came in with a lower than expected figure on Dec. 1st corn inventories, which suggests feed usage in the first quarter of the marketing year was good despite the late harvest. That raised the total forecast for feeding during the marketing year by100 million bushels.

The USDA also increased its forecasted usage for ethanol by 50 million bushels due to strong demand. The increase usage from ethanol was offset by a 50 million bushel decline in other industrial usage, leaving ending stocks at 1.631 billion. Today's key reversal up along with the close above the previous reaction high crossing at 4.30 confirmed that a short term low has been posted. The high range close sets the stage for a steady to higher opening when Monday's night session begins trading. Stochastics and the RSI are diverging but are turning neutral signaling additional strength is possible near term. Closes above December's high crossing at 4.40 3/4 are needed to confirm that a seasonal low has been posted. First resistance is the reaction high crossing at 4.36. Second resistance is December's high crossing at 4.40 3/4. First support is today's low crossing at 4.06 1/4. Second support is weekly support crossing at 3.99 3/4.

Coffee closed higher on Friday and the high range close set the stage for a steady to higher opening on Monday. Stochastics and the RSI are diverging but remain neutral to bullish signaling that sideways to higher prices are possible near term. If March extends the aforementioned rally, September's high crossing at 12.40 is the next upside target. Closes below last Thursday's low crossing at 11.02 would confirm that a short term top has been posted.

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Baker Hughes Announces Fourth Quarter 2013 Well Count

Baker Hughes Inc. (NYSE: BHI) announced today that the U.S. onshore well count for the fourth quarter 2013 is 9,056 wells; down 19 wells from the revised 9,075 wells counted in the third quarter 2013. Compared to the fourth quarter 2012, the well count was up 398 wells or 5%. Due to improved drilling efficiencies, the average US onshore drilling rig now produces 9% more wells compared to the same quarter last year.

Compared to the third quarter 2013, the well count increased most notably in the Eagle Ford (up 75 wells or 7%), Mississippian (up 23 wells or 6%) and Marcellus (up 21 wells or 4%) basins. These increases were offset by reductions in the Fayetteville (down 29 wells or 18%) and Granite Wash (down 22 wells or 13%) basins.

The average US onshore rig count for the fourth quarter 2013 was down 12 rigs from the previous quarter at 1,697 rigs. On average, the US onshore rig fleet produced 5.34 new wells during the fourth quarter, representing a 1% improvement in drilling efficiencies compared to the third quarter.

For more detailed Well Count information by basin, including historical well counts and a map, visit www.bakerhughes.com/wellcount.

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Thursday, January 9, 2014

Mid Week Market Summary - Crude Oil, Natural Gas, Gold, SP 500 and Coffee

Crude oil closed lower on Wednesday as it extended the decline off December's high. Today's low range close sets the stage for a steady to lower opening when Thursday's night session begins. Stochastics and the RSI are oversold but remain bearish signaling that additional weakness is possible. If February extends the aforementioned decline, November's low crossing at 92.10 is the next downside target. Closes above the 20 day moving average crossing at 97.37 are needed to temper the near term bearish outlook. First resistance is the 20 day moving average crossing at 97.37. Second resistance is December's high crossing at 100.75. First support is today's low crossing at 92.26. Second support is November's low crossing at 92.10.

Natural gas closed sharply lower on Wednesday. The low range close sets the stage for a steady to lower opening on Thursday. Stochastics and the RSI remain neutral to bearish signaling that sideways to lower prices are possible near term. If February extends the decline off December's high, the 38% retracement level of the November-December rally crossing at 4.158 is the next downside target. Closes above the 20 day moving average crossing at 4.353 would temper the near term bearish outlook. First resistance is the 20 day moving average crossing at 4.353. Second resistance is December's high crossing at 4.532. First support is last Friday's low crossing at 4.206. Second support is the 38% retracement level of the November-December rally crossing at 4.158.

The March S&P 500 closed slightly higher on Wednesday as it consolidated some of the decline off December's high. The high range close sets the stage for a steady to higher opening when Thursday's night session begins trading. Stochastics and the RSI are neutral to bearish signaling that a short term top might be in or is near. Closes below the 20 day moving average crossing at 1810.91 are needed to confirm that a short term top has been posted. If March renews 2013's rally into uncharted territory, upside targets will be hard to project. First resistance is December's high crossing at 1846.50. Second resistance is unknown. First support is the 20 day moving average crossing at 1810.91. Second support is December's low crossing at 1755.00.

Gold closed lower on Wednesday as it consolidated some of the rally off December's low. The mid-range close sets the stage for a steady to lower opening when Thursday's night session begins trading. Stochastics and the RSI are neutral to bullish signaling that sideways to higher prices are possible near term. If April extends the aforementioned rally, December's high crossing at 1266.70 is the next upside target. If April renews the decline off August's high, weekly support crossing at 1179.40 is the next downside target. First resistance is Monday's high crossing at 1248.20. Second resistance is December's high crossing at 1266.70. First support is December's low crossing at 1182.30. Second support is weekly support crossing at 1179.40.

Coffee closed higher on Wednesday and remains poised to extend the rally off November's low. The high range close set the stage for a steady to higher opening on Thursday. Stochastics and the RSI are diverging but are bullish signaling that sideways to higher prices are possible near term. If March extends the aforementioned rally, September's high crossing at 12.40 is the next upside target. Closes below last Thursday's low crossing at 11.02 would confirm that a short term top has been posted.

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Wednesday, January 8, 2014

This Thursday, John Carters "Voodoo Lines" Webinar

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Tuesday, January 7, 2014

Traders and their Retirement....a Three Part Video Series/Download


Wendy Kirkland reached out to us at The Crude Oil Trader a few weeks ago and shared her "Merit Paycheck" video series with us to review. Our review is in and the results are....All of our readers should watch this video.

She's a very smart lady with some tips for those traders and investors looking at retirement and she has bonus downloads and reports once you start watching to make sure you get the most out of it. In fact, what you learn in this training series can be easily duplicated by you right away without you buying a single thing.

Just click here to hear from Wendy and get her videos

As always we want to know what our readers are thinking so please feel free to leave a message and let us know what you think about Wendys methods.

See you in the markets,
Ray @ the Crude Oil Trader

Traders and their Retirement....a Three Part Video Series/Download


Monday, January 6, 2014

Crude Oil, Natural Gas, Gold and Coffee Market Summary for Monday January 6th

Crude oil closed lower on Monday as it extends the decline off December's high. Today's low range close sets the stage for a steady to lower opening when Tuesday's night session begins. Stochastics and the RSI remain bearish signaling that additional weakness is possible. If February extends last week's decline, November's low crossing at 92.10 is the next downside target. Closes above the 20 day moving average crossing at 97.84 are needed to temper the near term bearish outlook. First resistance is the 20 day moving average crossing at 97.84. Second resistance is December's high crossing at 100.75. First support is today's low crossing at 93.20. Second support is November's low crossing at 92.10.

Natural gas closed slightly lower on Monday. The mid range close sets the stage for a steady opening on Tuesday. Stochastics and the RSI remain neutral to bearish signaling that sideways to lower prices are possible near term. If February extends last week's decline, the 38% retracement level of the November-December rally crossing at 4.158 is the next downside target. Closes above the 10 day moving average crossing at 4.388 would temper the near term bearish outlook. First resistance is the 10 day moving average crossing at 4.388. Second resistance is December's high crossing at 4.532. First support is last Friday's low crossing at 4.206. Second support is the 38% retracement level of the November-December rally crossing at 4.158.

Gold closed slightly higher on Monday as it extends the rally off December's low. The high range close sets the stage for a steady to higher opening when Tuesday's night session begins trading. Stochastics and the RSI are bullish signaling that sideways to higher prices are possible near term. If February extends the aforementioned rally, December's high crossing at 1267.50 is the next upside target. If February renews the decline off August's high, weekly support crossing at 1179.40 is the next downside target. First resistance is today's high crossing at 1247.70. Second resistance is December's high crossing at 1267.50. First support is December's low crossing at 1181.40. Second support is weekly support crossing at 1179.40.

Coffee closed sharply higher on Monday renewing the rally off November's low. The high range close set the stage for a steady to higher opening on Tuesday. Stochastics and the RSI are diverging but turning bullish signaling that sideways to higher prices are possible near term. If March extends the aforementioned rally, September's high crossing at 12.40 is the next upside target. Closes below last Thursday's low crossing at 11.02 would confirm that a short term top has been posted.

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Forecast 2014: The Human Transformation Revolution

By John Mauldin


It is that time of the year when we peer into our darkened crystal balls in hopes of seeing portents of the future in the shadowy mists. This year I see three distinct wisps of vapor coalescing in the coming years. Each deserves its own treatment, so this year the annual forecast issue will in fact be three separate weekly pieces.

The final letter of the series will discuss what I see as potentially developing in the markets this year, but such prognostication has to be framed within the context of two larger and far more important streams. Next week we will examine the larger economic problems facing much of the developed world, and specifically we'll consider the Era of Unfulfilled Expectations. What happens when governments and central banks find it impossible to live up to the promises that they have made to their constituencies? Throw in a mix of frustrating demographics and disastrous economic policy choices, and you have a witch's brew of uncertainties.

Thankfully, an even greater force of progress will ultimately overwhelm the unintended consequences of meddling governments to ultimately deliver a very positive future, even if the the benefits are somewhat unevenly distributed in the shorter term. In this week's letter we'll look at the economic effects of the Age of Transformation, countering the arguments that call for a bleak, low growth future wherein all the marvelous innovations that have occurred in the course of the human experience are behind us. Are we not to see yet again a development with the impact of the steam engine, electrical grid, telecommunications, or combustion engine? I think we will – in fact, fundamental, life-changing innovations are happening all around us today.

We are just looking in the wrong places, expecting the future to resemble the past. If the depressing models of zero future growth are right, then our investment choices should be far different than if we have an optimistic view of the human experiment. Yes, we must balance our optimism with an appreciation of the uncertainties that will inevitably result from the antics of overreaching governments and their hubristic economic and monetary policies; but we must first and foremost have our eyes wide open to possibilities for growth.

It might help to think of the process as one of exploration. I imagine a group of intrepid adventurers (I picture in my mind Daniel Boone) topping one mountain pass after another, each time gazing off into the distance … to the next mountain pass. Between them lie beautiful valleys and rivers – as well as parched deserts and dead-end canyons full of potentially hostile natives. So the path is both uncertain and unending, as we head toward some ultimate destination we can barely even speculate about. Such a journey should not be undertaken without a great deal of thought and preparation, and it helps if you can find an experienced guide to assist in the process.

Before we set off on this week's leg of the journey, since this New Year's Thoughts from the Frontline is normally the most widely read issue of the year, let me welcome new readers and note that this weekly letter is free, and you can subscribe at http://www.MauldinEconomics.com. And feel free to send this letter on to your friends and associates – I hope it will spark a few interesting conversations.

The End of Growth?
There is a school of thought that sees the first and second industrial revolutions as having been driven by specific innovations that are so unique and so fundamental that they are unlikely to be repeated. Where will we find any future innovation that is likely to have as much impact as the combustion engine or electricity or (pick your favorite)?

This is a widespread school of thought and is nowhere better illustrated than in the work of Dr. Robert Gordon, who is a professor of economics at Northwestern University and a Nobel laureate. I have previously written about his latest work, a paper called "Is US Economic Growth Over?"

Before I audaciously suggest that he and other matriculants in his school of thought confuse the products of industrial revolutions with their causes, and thus despair over the prospects for future growth, let's examine a little bit of what he actually says. (You can of course read the original paper, linked above.) To do that we can turn to an article by Benjamin Wallace-Wells that I cited in Outside the Box last June. He explains Robert Gordon's views better than anyone I am aware of.

"The scope of his [Gordon's] bleakness has given him, over the past year, a newfound public profile," Wallace-Wells notes. Gordon offers us two key predictions, both discomfiting. The first pertains to the near future, when, he says, our economy will grow at less than half its average rate over the last century because of a whole raft of structural headwinds.

His second prediction is even more unsettling. He thinks the forces that drove the second industrial revolution (beginning in 1870 and originating largely in the US) were so powerful and so unique that they cannot be equaled in the future.

(A corollary view of Gordon's, mentioned only indirectly in Wallace-Wells's article, is that computers and the internet and robotics and nanotech and biotech are no great shakes compared to the electric grid and internal combustion engine, as forces for economic change. Which is where he and I part company.)

Gordon thinks, in short, that we do not understood how lucky we have been, nor do we comprehend how desperately difficult our future is going to be. Quoting from Wallace-Wells:

What if everything we've come to think of as American is predicated on a freak coincidence of economic history? And what if that coincidence has run its course?

Picture this, arranged along a time line.

For all of measurable human history up until the year 1750, nothing happened that mattered. This isn't to say history was stagnant, or that life was only grim and blank, but the well-being of average people did not perceptibly improve. All of the wars, literature, love affairs, and religious schisms, the schemes for empire-making and ocean-crossing and simple profit and freedom, the entire human theater of ambition and deceit and redemption took place on a scale too small to register, too minor to much improve the lot of ordinary human beings. In England before the middle of the eighteenth century, where industrialization first began, the pace of progress was so slow that it took 350 years for a family to double its standard of living. In Sweden, during a similar 200-year period, there was essentially no improvement at all. By the middle of the eighteenth century, the state of technology and the luxury and quality of life afforded the average individual were little better than they had been two millennia earlier, in ancient Rome.

Then two things happened that did matter, and they were so grand that they dwarfed everything that had come before and encompassed most everything that has come since: the first industrial revolution, beginning in 1750 or so in the north of England, and the second industrial revolution, beginning around 1870 and created mostly in this country. That the second industrial revolution happened just as the first had begun to dissipate was an incredible stroke of good luck. It meant that during the whole modern era from 1750 onward – which contains, not coincidentally, the full life span of the United States – human well-being accelerated at a rate that could barely have been contemplated before. Instead of permanent stagnation, growth became so rapid and so seemingly automatic that by the fifties and sixties the average American would roughly double his or her parents' standard of living. In the space of a single generation, for most everybody, life was getting twice as good.

At some point in the late sixties or early seventies, this great acceleration began to taper off. The shift was modest at first, and it was concealed in the hectic up-and-down of yearly data. But if you examine the growth data since the early seventies, and if you are mathematically astute enough to fit a curve to it, you can see a clear trend: The rate at which life is improving here, on the frontier of human well-being, has slowed.

"Some things," Gordon says, and he says it often enough that it has become both a battle cry and a mantra, "can happen only once."

Gordon has two predictions to offer, the first of which is about the near future. For at least the next fifteen years or so, Gordon argues, our economy will grow at less than half the rate it has averaged since the late-nineteenth century because of a set of structural headwinds that Gordon believes will be even more severe than most other economists do: the aging of the American population; the stagnation in educational achievement; the fiscal tightening to fix our public and private debt; the costs of health care and energy; the pressures of globalization and growing inequality.

Gordon's second prediction is almost literary in its scope. The forces of the second industrial revolution, he believes, were so powerful and so unique that they will not be repeated. The consequences of that breakthrough took a century to be fully realized, and as the internal combustion engine gave rise to the car and eventually the airplane, and electricity to radio and the telephone and then mass media, they came to rearrange social forces and transform everyday lives. Mechanized farm equipment permitted people to stay in school longer and to leave rural areas and move to cities. Electrical appliances allowed women of all social classes to leave behind housework for more fulfilling and productive jobs. Air-conditioning moved work indoors. The introduction of public sewers and sanitation reduced illness and infant mortality, improving health and extending lives. The car, mass media, and commercial aircraft led to a liberation from the narrow confines of geography and an introduction to a far broader and richer world. Education beyond high school was made accessible, in the aftermath of World War II, to the middle and working classes. 

These are all consequences of the second industrial revolution, and it is hard to imagine how those improvements might be extended: Women cannot be liberated from housework to join the labor force again, travel is not getting faster, cities are unlikely to get much more dense, and educational attainment has plateaued. The classic example of the scale of these transformations is Paul Krugman's description of his kitchen: The modern kitchen, absent a few surface improvements, is the same one that existed half a century ago. But go back half a century before that, and you are talking about no refrigeration, just huge blocks of ice in a box, and no gas-fired stove, just piles of wood. If you take this perspective, it is no wonder that the productivity gains have diminished since the early seventies. The social transformations brought by computers and the Internet cannot match any of this.

But even if they could, that would not be enough. "The growth rate is a heavy taskmaster," Gordon says. The math is punishing. The American population is far larger than it was in 1870, and far wealthier to begin with, which means that the innovations will need to be more transformative to have the same economic effect. "I like to think of it this way," he says. "We need innovations that are eight times as important as those we had before." [emphasis mine]

It is hard not to nod your head as you peruse Gordon's work, as it is well-written and speaks to many of our prejudices. But it makes several assumptions that are wrong, in my opinion.

First, we will not need innovations that are eight times as important. We just need eight times as many innovations. And there I bring hope, because we will see many times that number.

Let's go back to James Watt and the steam engine. When Watt was tinkering with the power of steam, there were maybe a dozen scientists in all of Europe who could understand what he was doing and fewer who had access to his tools. Today we routinely throw 1000 scientists and engineers at what are relatively trivial problems. In the grand scheme of things, perhaps most of them are wasting their time. But certainly not all, and the number of scientists and engineers is multiplying at an exponential rate.

Watt was able build his engine precisely because he was (1) building on significant research in a dozen different arenas (including metallurgy, fabrication, and mechanics) and (maybe more importantly!) (2) funded by an entrepreneurial investor who saw the potential for income from the invention. But the steam engine did not really take off until it was introduced to John Wilkinson, who immediately adapted his techniques for boring cannons to creating the cylinder for the steam engine, ultimately enabling the engine to increase its power by orders of magnitude.

Other scientists and engineers tinkered, modified, adapted, improved, and collaborated until we had railroads and steam turbines and so on. The steam engine was not just one invention but a series of inventions. Watt was not really the creator of the steam engine, as the concept had been around for decades. He was simply the first to make an effective, commercially viable apparatus.

The real sources of intellectual fuel and entrepreneurial oxygen that fired the Industrial Revolution were the cumulative mass of information available to scientists and inventors and the ability of entrepreneurs to profit from their own risk taking ventures. Notice that for the vast bulk of human history up to the industrial age, feudal lords and dictators held tight control over the means of production and the ability to truly profit from personal endeavor.

Let me employ a crude analogy but one that I think illustrates the point. If one inch were added to the circumference of the standard ping-pong ball, I think most of us could immediately tell the difference. A competent player could tell the difference if you added one inch to the circumference of the tennis ball. It would take a professional to tell the difference if you added one inch to the circumference of a regulation basketball.

If you added one inch to the circumference of the earth, who would know? Or really even care? Think of the steam engine as adding one inch to the circumference of a tennis ball: the steam engine made a difference that competent inventors and manufacturers of the day definitely noticed! Are there likely to be innovations today that will have similarly profound effects, but on a global scale? I can think of a few, though they are mostly only discussed in science fiction novels now.

Killer Robots
Let's look at one small latter-day innovation, a rather trivial one in the grand scheme of things. Two centuries ago, 90% of American workers labored on farms. Today we are vastly more productive, with only 1.6% of American workers engaged in what we think of as the quintessential American activity, farming. And while agriculture has become highly mechanized, there is still shortage of labor for many activities.

Lettuce has to be thinned. When you grow lettuce, you have to plant a large number of seeds close together and then come back after they germinate and thin them out. This is a labor-intensive process that typically takes 50 workers two days in a 15-acre field. Except now there is a new machine called Cesar that can do the entire process in three hours for a fraction of the cost. (You can watch a fun five-minute video on Bloomberg at Killer Robots.)

In his famous work The Wealth of Nations, Adam Smith marveled at the technological innovation and manufacturing skill that it took to make a pin. The combination of technology and the division of labor made the cost-effective production of pins possible.

Now think of the killer robot that thins lettuce. It is a remarkably complex and ingenious device that performs a very simple activity. How many thousands of inventions were required to make a machine that is so simple in its basic concept? The real-time pattern recognition that lets the machine instantly decide which plants live and which die is itself a technology that required numerous precursor inventions. And yet all this technology and performance is brought to fiscally conservative lettuce farmers at a cost that is compelling.

Is the robotic lettuce thinner a fabulous invention? Absolutely. Will that robotic machine change civilization? No, of course not. It will simply make lettuce a little cheaper for you and me, and I doubt we will even notice the difference.

But this is just one of a thousand innovations that are springing up in every tiny niche of the human experiment every day! We're talking about 10 million entrepreneurs waking up around the world every day trying to figure out how to deliver better products, how to be a little bit more productive, how to create something interesting that people will pay for. Most changes are so tiny or unimportant that they go largely unnoticed or are not even adopted.

There were not many intellects on the level of James Watt's when he seized his opportunity in the mid-1700s. Today there are tens of thousands of James Watt-level minds tinkering in all sorts of fields. I would argue that their cumulative output is adding at least 10,000 inches to our "innovation globe" every day.

Today the cost, per lumen of light, of illuminating an LED bulb is one millionth of what it was in the time of James Watt. And it will be 10 (or will it be 100?) times less expensive in 10 years as we shift to silicon-based LEDs. I've done business in Africa and understand the value and the cost of light. What happens when the production of light consumes miniscule amounts of solar power? How much more productive does Africa become? How do we measure that in terms of the quality and creative capacity of human experience?

It is not just robotics. It is nanotech and biotech and telecommunications and artificial intelligence, all driven by the burgeoning and increasingly important field of information technology. It is the cumulative information from hundreds of thousands of inventions, innovations, and discoveries that allows for the individual creations developed by each of those 10 million entrepreneurs. And as more and more budding Einsteins, Newtons, and Watts gain access to education and information through the internet, the innovations will continue to compound and accelerate.

The end of growth? Hardly. In 100 years we will look back and see the next 20 years as simply the beginning of the real acceleration of growth.

However, classical economics as it is currently formulated will miss the story that is unfolding. With its focus on models and measuring, with its physics envy, economics persistently misses the real story. As George Gilder notes in his groundbreaking book Knowledge and Power:

The central scandal of traditional economics has long been its inability to explain the scale of per capita economic growth over the last several centuries. It is no small thing. The sevenfold rise in world population since 1800 should have attenuated growth per capita. Yet the conventional gauges of per capita income soared some seventeen fold, meaning 119-fold absolute increase in output in 212 years. And this is only the beginning of the story.

The leading economic growth model, devised by the Nobel laureate Robert Solow of MIT, assigned as much as 80% of this advance to a "residual" – a factor left over after accounting for the factors of production in the ken of economists: labor, capital, and natural resources. In other words, economists can pretend to explain only 20% of the apparent 119 fold expansion.

Earlier in his book, Gilder highlights the source of this mystery of the failure of economics.(all emphasis mine):

The passion for finding the system in experience, replacing surprise with order, is a persistent part of human nature. In the late eighteenth century, when Smith wrote The Wealth of Nations, the passion for order found its fulfillment in the most astonishing intellectual achievement of the seventeenth century: the invention of the calculus. Powered by the calculus, the new physics of Isaac Newton and his followers wrought mathematical order from what was previously a muddle of alchemy and astronomy, projection and prayer. The new physics depicted a universe governed by tersely stated rules that could yield exquisitely accurate predictions.

Science came to mean the elimination of surprise. It outlawed miracles, because miracles are above all unexpected. The elimination of surprise in some fields is the condition for creativity in others. If the compass fails to track North, no one can discover America. The world shrinks to a mystery of weather and waves. The breakthroughs of determinism in physics provided a reliable compass for three centuries of human progress. Inspired by Newton's vision of the universe as "a great machine," Smith sought to find similarly mechanical predictability in economics. In this case, the "invisible hand" of market incentives plays the role of gravity in classical physics. Codified over the subsequent 150 years and capped with Alfred Marshall's Principles of Economics, the classical model remains a triumph of the human mind, an arrestingly clear and useful description of economic systems and the core principles that allow them to thrive. Ignored in all this luminous achievement, however, was the one unbridgeable gap between physics and any such science of human behavior: the surprises that arise from free will and human creativity. The miracles forbidden in deterministic physics are not only routine in economics; they constitute the most important economic events. For a miracle is simply an innovation, a sudden and bountiful addition of information to the system. Newtonian physics does not admit of new information of this kind – describe a system and you are done. Describe an economic system and you have described only the circumstances – favorable or unfavorable – for future innovation….

Flawed from its foundation, economics as a whole has failed to improve much with time. As it both ossified into an academic establishment and mutated into mathematics, the Newtonian scheme became an illusion of determinism in a tempestuous world of human actions. Economists became preoccupied with mechanical models of markets and uninterested in the willful people who inhabit them.

Economics in general uses tools to measure growth that are inadequate at best and misleading at worst. As I've written elsewhere, the simple concept of inflation, except in a general sense, is so convoluted and so fraught with assumptions as to render any precise definition laughable. In economics as it is constructed today, we pay attention only to that which we can measure. If we can't measure it, surely it must be meaningless. We cling to our models and theories much as religious fanatics do to their understanding of the workings of God, as if somehow we can understand either.

Some economists become obsessed with market efficiency and others with market failure. Generally held to be members of opposite schools – "freshwater" and "saltwater," Chicago and Cambridge, liberal and conservative, Austrian and Keynesian – both sides share an essential economic vision. They see their discipline as successful insofar as it eliminates surprise – insofar, that is, as the inexorable workings of the machine override the initiatives of the human actors. "Free market" economists believe in the triumph of the system and want to let it alone to find its equilibrium, the stasis of optimum allocation of resources. Socialists see the failures of the system and want to impose equilibrium from above. Neither spends much time thinking about the miracles that repeatedly save us from the equilibrium of starvation and death.

The Primacy of Human Capital
It is not just that Gordon and others miss the importance of information and entrepreneurial effort in industrial revolutions, missing the forest for the trees. It is that they miss the most important factor of all: capital. But not capital in the sense of money. I am thinking of capital in the more important way that Nobel laureate Gary Becker describes it: as human capital.

It is the investments we have made in ourselves that have been the true source of economic growth. Education, training, information sharing, the transfer of knowledge have all been fundamental in the human experiment. The more open a society becomes, the more it shares its information and knowledge and the fruits of its labors, and the more empowered its people and the more productive its civilization become.

As Isaac Newton said, "If I have seen further it is by standing on the shoulders of giants." In Newton's time, there were a handful of giants; today there are thousands. And because of their ubiquity, most go unnoticed. The division of labor, the most significant of Adam Smith's insights, means that there are just so many more small but important realms of human endeavor where giants can roam and have an impact. When was the last time we celebrated the giants of material sciences? Who are the Newtons of the world of ceramics? We may not be able to name them, yet their work has a profound impact on our lives. I daresay that our Killer Robot would not be possible without their seminal work. Or the work of thousands of other innovators.

Yet those insights can walk out of a company at any moment. Ask Shockley Semiconductor (who, you ask? – which is the point) about losing Gordon Moore to Fairchild. Then Fairchild saw Gordon Moore leave to found Intel. It is the human capital that is truly important.

It is human drive and determination and the ability to piece together disparate bits of information, along with the ability to develop and deploy an ever-increasing abundance of new tools, that is driving economic growth. They were fracking shale oil in the Permian Basin in the early 1950s. And fracking went nowhere until George Mitchell worked on the problem in the 1980s and '90s. And there are now hundreds of significant innovations and tens of thousands of scientists and engineers working in just that one small field of human endeavor that was pioneered by Mitchell.

The Age of Transformation
The next twenty years will see more technological change than we have seen in the last hundred years put together. My Dad would hitch up the wagon to drive seven miles to town in the 1920s. In twenty years the way we get around today will look just as quaint, though in different ways. Who was using the internet twenty years ago? Only early adopters had cell phones. The Human Genome Project was seen as an expensive joke unlikely to be completed in less than a few decades. Twenty years ago, robots were still very limited in scope, and AI had lost its mojo in the public eye. Only a few years earlier a serious Stanford physics professor said Qualcomm’s technology violated the laws of physics and was a hoax.

Back then, Paul Krugman told us,

The growth of the Internet will slow drastically, as the flaw in "Metcalfe's law" – which states that the number of potential connections in a network is proportional to the square of the number of participants – becomes apparent: most people have nothing to say to each other! By 2005 or so, it will become clear that the Internet's impact on the economy has been no greater than the fax machine's…. As the rate of technological change in computing slows, the number of jobs for IT specialists will decelerate, then actually turn down; ten years from now, the phrase information economy will sound silly.

Not that I want to pick only on Krugman; he was expressing a widely held sentiment (although it's one I am sure you did not share – just those other guys who had no idea what the future held).

The true power of the internet is not just in human conversation. That is such an anthropomorphic view. It’s also about what machines can communicate to one another for us; it's about distributed computing power. But that power is easy to underestimate or dismiss entirely, because most of us cannot imagine what the increases in processing power or network connectivity and speed or nanotech or (pick a technology) can do for us. But we don’t have to. Those ten million entrepreneurs lie awake nights thinking about those things for us.

Nowhere else is the pace of scientific progress accelerating as fast as it is in the biological sciences. Already, biotech advances have outstripped the media's ability to stay abreast of important breakthroughs. This isn't surprising, as even scientists who work in one area are often unaware of major developments in other areas. One of the problems of the current explosion of information is the difficulty of simply keeping up with what is going on in your own field, let alone others. One of the new and important job descriptions is that of the generalist who can extrapolate and interpolate technological advances among disparate fields.

The gap between public perception and scientific progress will only increase as exponential advances in computer technologies give researchers powerful new tools to solve mysteries long thought unsolvable. Nothing better demonstrates the acceleration of biotechnology than the following chart from the National Human Genome Research Institute. You probably know that the cost of computer processing power is cut in half every two years or so. That is (Gordon) Moore's Law. You may not know, however, that the cost of mapping an individual human genome is dropping at twice that rate.



What does this mean? It means that more and more genomes will be sequenced and matched to individuals' medical histories. As this database grows, advanced mathematical tools running on increasingly powerful computers will reveal genetic causes for diseases as well as individualized solutions. Truly effective personalized medicine will finally displace primitive cookie-cutter therapies.

Today a note came across my desk. A research group at Tel Aviv University has developed a computer algorithm that detects which genes can be "turned off" to create the same anti-aging effect as calorie restriction. Laboratory results confirmed the research done by computers, totally in silicon! This sort of work was not physically possible ten years ago, even in the most specialized labs. Now it is performed inside a computer without anyone even having to reach for a test tube. This is biotech research at the speed of light, powered by Moore’s Law. Today we do in mere days research that required years and massive amounts of money just ten years ago.

Reading and interpreting the DNA found in your cells, however, is only half of the story. The other half is harnessing your own DNA to repair and replace cells damaged by trauma, disease, or aging itself. The most powerful therapies will analyze and utilize your own cells and DNA.

This is why my colleague Patrick Cox (who writes our Transformational Technology Alert letter) and I volunteered to participate in a pilot project conducted by BioTime, Inc. We both donated cells taken from inside our left arms. Those cells were then multiplied many thousand of times.

Some of these cells were used for complete genome sequencing. The results are, in fact, posted here for John and here for Patrick.

This public posting of our genomes is somewhat historic for a number of reasons. One is that our genomes are linked with the world's most comprehensive library of genetic information, GeneCards, which is maintained by BioTime subsidiary LifeMap Sciences, in conjunction with the Weizmann Institute in Tel Aviv. In essence, LifeMap Sciences tracks and integrates all publicly known scientific information about the genome in this searchable database. Just a few weeks ago I was in a hotel lobby with BioTime CEO Mike West here in Dallas, and we were able to look at my genome results and see hundreds of links to research papers and a synopsis of what the research says about my particular genes. The web pages above have partial postings of our genome results today but in time will have full postings.

There were good news/bad news aspects to my genes. The good news is that both Patrick and I have a relatively rare gene associated with Ashkenazi Jews that, along with some other genes, suggests we have a propensity to live a rather long time. (One of the researchers asked if we had such ancestry. For what it’s worth, neither of us do.)

Since my mother is now 96, a gene that is associated with longevity is not much of a surprise. Patrick’s grandfather made it past 100. But the bad news is that I have several genes that are associated with a 3-6 times higher rate of multiple sclerosis and other genes associated with certain types of cancers. I will no longer argue with my doctor about that annoying prostate exam. And there are some weird genes in my mix. Who actually studies whether having a particular gene means you get larger mosquito bites? I apparently have one.

As time goes by, Patrick and I will learn more as LifeMap Sciences posts finds ever more research and links it to their database. Pat good-humoredly asked if I worry about someone cloning me in 100 years, since all the data will be there. I laughed and said, “I really don’t care, but I would suggest they make some serious modifications to the original.”

Given the trouble that 23andMe has recently had with the FDA, it should be pointed out that there are big differences between what that company did and what BioTime has done. First, 23andMe did a partial sequencing based on a saliva test, which is very different from a full sequencing using skin cells. Additionally, BioTime has not issued any statements or made any diagnoses that the FDA has halted. This isn't surprising, as ex-FDA chief Andrew von Eschenbach serves on the BioTime board. Patrick and I are free to use the GeneCards database to research our full genomes, but we would need a doctor or other clinician to make a diagnosis.

By the way, I asked Mike what it cost to run our genomes. He had to think a moment and guessed about $4,000. (I assume that is his cost.) For Mike the cost is clearly not even a consideration in his research. And it is dropping every year, almost monthly. The first human genome was fully sequenced less than a decade ago. The project took 13 years and cost $2.7 billion. That is an almost millionfold reduction in cost in a little over a decade. The first individual’s genome (the previous genome maps had been composites) – Craig Venter's – was sequenced just six years ago, in 2007.

An even bigger difference, and far more important, between BioTime’s model and 23andMe’s is that our cells were not only used to provide the DNA for sequencing, they were also rejuvenated and banked. Our skin cells were turned into induced pluripotent stem cells, which are virtually identical to the embryonic cells that we came from. This means that our cells' telomeres – the actual clock of aging – are completely restored to their full length at birth. If transplanted back to us, the donors, they would function as well as youthful cells and have full, normal lifespans, unlike adult stem cells used in therapies now.

These rejuvenated stem cells have only our DNA, so they would provoke no immune reaction if returned to us. Moreover, they can be stored in this newborn state indefinitely; because until they start down the path to becoming an adult cell type (the process of differentiation), they don't age at all.

To demonstrate the differentiation process, BioTime CEO Dr. Michael West had some of Pat's cells programmed to become heart muscle cells, or cardiomyocytes. He did this because their function is apparent to the naked eye. These cells naturally self-assemble into clumps of beating heart muscle.



It's useful to ponder the fact that these cells are baby-young. Scientists believe, based on successful animal tests, that they could be used to repair damaged heart muscle following a heart attack. BioTime's subsidiary ReCyte is also working on endothelial precursor stem cells. If these cells were to be programmed from your own induced pluripotent stem cells and returned to you, they would form a youthful endothelium – the lining of your cardiovascular system. This would rejuvenate your cardiovascular system and help protect you from heart disease and other life-threatening conditions. Talk about healthcare with a lifetime warranty!

The types of rejuvenated cells that could be used to reverse cellular aging in your body are unlimited. Already, BioTime has learned to engineer hundreds of important cell types from induced pluripotent stem cells.

The knowledge that will be gained from growing numbers of fully sequenced genomes, including ours, will help scientists learn to engineer fixes to problems caused by aging as well as by genetic mutations. The ultimate goal is to rejuvenate all the cells of our bodies. Patrick and I have taken the first step by having our genomes sequenced and our cells rejuvenated and banked in preparation for a time when it is legal in some jurisdiction to perform the regenerative therapies we're waiting for.

Yes, Pat and I are part of *that* group. Can we, as Ray Kurzweil said, "live long enough to live forever"? Neither of us thinks that total regeneration is possible in the next twenty years; but partial, organ-by-organ regeneration will clearly be available. So we may have to settle for rejuvenating one organ at a time as they learn how to get those cells from the lab into our bodies, thereby fixing the problems of aging one by one as they crop up – until we can fix them altogether.

Aging is becoming an engineering problem. So are cancer and other diseases. Patrick introduced me a few years ago to a private company, Bexion, that in a few months will start phase one human trials on a molecule that cures any cancer it comes in contact with in mice. Will the cure work in humans? We’ll see. While that would be nice for me as a tiny investor in the company, the implications for humanity are self-evident. But whether it is Bexion or any of the dozens of other companies seeking a cure for cancer, a cure will be found. In fact, one of the real risks to my investment is not that Bexion is not successful with its technology, but that another company finds a cure that works better and cheaper and makes our research obsolete almost as soon as we get launched.

Patrick and I began to share our enthusiasm for the accelerating nature of change over five years ago, and we have talked weekly if not daily ever since our first conversations. It is hard to contain our excitement about the prospects for our human future. And that future is being created not just in biotech but also in a dozen other fields where we are seeing life-altering technologies turn up every day.

But the personal and economic impacts will be most pronounced as a result of the biotech revolution. It is not just new cures that will be the source of that impact. It is the increase in human capital that will become available to all of us. How many people we know have died from some disease that will become preventable in the next 10-15-20 years – people who, if they had lived, would have added so much more to the human experiment? Living longer is not just about the pleasure that we will gain from having a longer time with our loved ones; it's also about the contributions we can make to society, made possible because we are living longer and healthier lives.

I encounter people all the time who give me the tired old argument that they don’t want to live longer. They see old people in nursing homes and don’t want that sort of life to be their own protracted future. I can certainly sympathize with that point of view. My mother is now totally bedridden; and while she is still mentally active, a great deal of the joy of life is gone. Dad’s time in a nursing home was not fun, either.

If that were our future – just growing ever older and more frail – I’m not sure I would want to sign up for that. But that dreary prospect is not what Patrick and I are talking about. Instead, we are talking about not just increasing our lifespans but increasing our healthspans. We are following (and in some cases participating in) technologies that have remarkable short-term implications for the problems of aging. (For the record, I am 64 and Pat is 63.) As I mentioned above, the implications of advances in computational research on nutraceuticals is simply astounding.

The first human being who will live 150 years is alive today. Pat and I hope that person is somewhat older than we are so they can blaze a trail that we can follow, but we are perfectly willing to be guinea pigs if and when the time comes. I told Mike West (only somewhat jokingly) that I don’t want to be the first person whose body parts he tries to rejuvenate. But I would like to be the 100th when they have the science down. Mike is shopping for a venue for those first procedures even as I write. That he is having to look outside the United States to utilize research done in the United States is testimony to the backward-looking focus of the FDA, which is mired in a history of regulating medical treatments that are quickly becoming antiquated and that are nothing like what we are seeing done today. But I hope even that bureaucratically encumbered and backward-looking regime will change. Japan, for instance has just modernized their regulatory structure and given us a model that we should emulate.

It might be helpful to think of the race to defeat aging as something of a horse race. While Mike West and BioTime may be the lead horse today (and in our opinion they are), we are barely out of the starting gate.
The drive for regeneration is just one of a hundred different life-impacting transformations that we are going to see over the next twenty years. There are a hundred different racecourses with thousands of horses all being jockeyed to some distant finish line.

We are involved not just in an industrial revolution but in a total Human Transformation Revolution. If we limit our focus to the problems created by government and central banks, we may be distracted from the truely epochal events happening all around us today that are going to give us amazing opportunities for investment growth and the creation of wealth. There is more to life than simply watching the Federal Reserve.

We have to be keenly aware of our surroundings as we explore this exciting new world, avoiding dangers and pitfalls as they present themselves, but keeping our eye on the destination.

I’m running long in this letter today, and so I'll close, but the Human Transformation Revolution will be a theme we'll return to from time to time this year.

And if you’ll indulge me for a marketing moment, my regular readers will have noticed that Patrick Cox has come to work with us at Mauldin Economics to write a newsletter called Transformational Technology Alert.

This journey of exploration and greater understanding isn’t always going to be fun or easy. We fully expect to end up exploring a few dead-end canyons as well as finding our share of fabulous and fruitful valleys. But both Patrick and I firmly believe this journey will alter the course of human history. It will, in short, allow us (and you) to live longer, happier, healthier, more prosperous lives. Patrick's new letter is our way of inviting you to join us on the journey. And maybe we can all make a little money along the way.

You can begin reading Patrick’s letter for 50% off the normal price (and lock in that low rate for a very long time) by clicking here. In addition to regular monthly issues, we'll send you several special reports on why we think BioTime is a uniquely promising company, along with reports on other very hopeful technologies and companies that Pat has discovered.

Dubai, Riyadh, Vancouver, Edmonton, and Regina
Next Wednesday evening I'll fly to Dubai (via London) to explore the city for a few days and perhaps visit Abu Dhabi before flying on to Riyadh for a speech. It is my first trip in 25 years to the Middle East, and I’m curious as to what I will see. I then return home for a few days before heading off on a speaking tour for CFA chapters in Vancouver, Edmonton, and Regina. I notice that Regina is -8°F (-22 Celsius) today. I will have to go shopping for a little extra cold-weather gear before I head up there.

My partners Olivier Garret and Ed D’Agostino and other Mauldin Economics associates are flying in Monday and Tuesday for planning meetings on our course for the coming year. On Tuesday evening we will be joined by Jon Sundt and Jack Rivkin of Altegris Investments, along with several other leading investment professionals, and we'll be talking about how best to help you in your personal investment explorations. I will be cooking for 13 of us as we think hard about how a transforming world will affect our businesses and how we can deliver better products and services to you. As I mentioned a few weeks ago, we will soon be launching two new newsletters that focus specifically on portfolio design and construction. This project has been in the works for some time. Watch this space for how you can access these letters, hopefully for free. I am truly excited about the changes in what we will be able to offer; but rest assured, Thoughts from the Frontline will not change. It will be free, as always!

It truly is time to hit the send button, as my yoga instructor will be here in a moment. Sadly, all of our research has turned up no magic pill that will take the place of exercise and a healthy lifestyle. I am beginning to feel positive effects from working with her, although I must hasten to add that what I am doing does not resemble what you think of as yoga. This is more like Remedial Stretching 101 for someone who has sat on too many planes and in front of two many computers for far too long. But the plans we are making here at Mauldin Economics really do need me to be involved for another ten years at least, so I need to make sure my body is up to the task. It will be a long time before we can replace even a small part of it.
Have a great week, and I’ll write you from Dubai.

Your wondering where my flying car is analyst,
John Mauldin, Editor
subscribers@mauldineconomics.com


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Thursday, January 2, 2014

Crude Oil Closes Sharply Lower to Start 2014

Crude oil bulls got slaughtered right out of the gate to get 2014 started as crude oil closes sharply lower on Thursday and below the 20 day moving average crossing at 98.23 confirming that a short term top has been posted. The low range close sets the stage for a steady to lower opening when Friday's night session begins. Stochastics and the RSI have turned bearish signaling that additional weakness is likely. If February extends this week's decline, November's low crossing at 92.10 is the next downside target. Closes above the 10 day moving average crossing at 98.77 are needed to temper the near term bearish outlook. First resistance is the 10 day moving average crossing at 98.77. Second resistance is last Friday's high crossing at 100.75. First support is today's low crossing at 95.34. Second support is November's low crossing at 92.10.

Natural gas closed higher due to short covering on Thursday as it consolidated some of Tuesday's sharp decline. The high range close sets the stage for a steady to higher opening on Friday. Stochastics and the RSI are bearish signaling that sideways to lower prices are possible near term. If February extends Tuesday's decline, the 38% retracement level of the November-December rally crossing at 4.158 is the next downside target. Closes above the 10 day moving average crossing at 4.403 would temper the near term bearish outlook. First resistance is the 10 day moving average crossing at 4.403. Second resistance is December's high crossing at 4.532. First support is today's low crossing at 4.213. Second support is the 38% retracement level of the November-December rally crossing at 4.158.

Gold closed higher on Thursday due to a short covering rally. The high range close sets the stage for a steady to higher opening when Friday's night session begins trading. Stochastics and the RSI are neutral to bullish signaling that sideways to higher prices are possible near term. Closes above the 20 day moving average crossing at 1224.00 are needed to confirm that a low has been posted. If February extends the decline off August's high, weekly support crossing at 1179.40 is the next downside target. First resistance is the 20 day moving average crossing at 1224.00. Second resistance is the reaction high crossing at 1267.50. First support is Tuesday's low crossing at 1181.40. Second support is weekly support crossing at 1179.40.

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