Friday, November 29, 2013

Silver, Gold & Miners ETF Trading Strategy – Part II

It’s been over a week since our trading partner Chris Vermeulens last gold & silver report which he took a lot of heat because of his bearish outlook. Last Friday’s closing price has this sector trading precariously close to a major sell off if it’s not already started.

On a percentage bases Chris feels precious metals mining stocks as whole will be selling at a sharp discount in another week or three. ETF funds like the GDX, GDXJ and SIL have the most downside potential. The amount of emails he received from followers of those who have been buying more precious metals and gold stocks as price continues to fall was mind blowing.

Precious metals continued to fall on Monday and Tuesday of this week and selling volume should spike as protective stops will be getting run and the individuals who are underwater with a large percentage of their portfolio in the precious metals sector could start getting margin calls and cause another washout, spike low similar to what we saw in 2008.

Here is Chris' updated ETF Trading Charts with Friday’s closing prices showing technical breakdowns across the board....Read "Silver, Gold & Miners ETF Trading Strategy – Part II"

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Wednesday, November 27, 2013

Elliott Wave Forecast: Bull Market Nearing Interim Peak on SP500

Back on September 12th with the SP 500 at 1689 we forecasted a run in the SP 500 to 1829, a very specific number. We use Elliott Wave Theory and Analysis in part to come up with projected pivots for the SP 500 and this was our projection.

Elliott Wave Analysis is based largely on Human Behavioral patterns that repeat over and over again throughout time. It’s really crowd behavior or herd mentality as applied to the broader stock markets. This can also apply to individual stocks, precious metals and more. At the end of the day, an individual stock is worth what investors believe it is worth, and it won’t necessarily reflect what a private valuation may accord it.

With that in mind, the stock market as a basket of 500 stocks can pretty easily be patterned out and then we can apply our Elliott Wave Theory to that pattern and predict outcomes. Back in mid-September, we believed we were in a 3rd wave up of the bull market as part of what we call Primary wave 3. The primary waves are 1-5 and Primary 3 is usually the most bullish of the 5 primary waves with 2 and 4 being corrective. Well, within Primary wave 3 you have 5 major waves… and we projected that Major wave 3 would be running to about 1829.

This projection was based on the 1267 pivot for Major wave 2 of Primary Wave Pattern 3 which was a corrective wave. We then simply applied a Fibonacci ratio to the Major wave 1 and assumed that Major wave 3 would be 161% of Major 1. That brings us to about 1822-1829… and here we are a few months later heading into Thanksgiving with the SP 500 hitting 1807 and getting close to our projection.

What will happen afterwards should be a Major wave 4 correction. We expect this to be about 130 points on the shallow side of corrections, and as much as 212 points.

So the Bull Market is not over, but Major Wave Pattern 3 of Primary 3 is coming to an end as we are in a seasonally strong period for the market. We would not be shocked to see a strong January 2014 correction in the markets as part of Major wave 4.

Here is our September 14th elliott wave forecast chart we sent to our subscribers and you can see we continue now along the same path.....Read "Elliott Wave Forecast: Bull Market Nearing Interim Peak on SP500"

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Fundamentals Rendered Irrelevant by Fed Actions: Probability Based Option Trading

The fundamental backdrop behind the ramp higher in equity prices in 2013 is far from inspiring. However, fundamentals do not matter when the Federal Reserve is flooding U.S. financial markets with an ocean of freshly printed fiat dollars.

As we approach the holiday season, retail stores are usually in a position of strength. However, this year holiday sales are expected to be lower than the previous year based on analysts commentary and surveys that have been completed. This holiday season analysts are not expecting strong sales growth. However, in light of all of this U.S. stocks continue to move higher.

Earnings growth, sales growth, or strong management are irrelevant in determining price action in today’s stock market. In fact, the entire business cycle has been replaced with the quantitative easing and a Federal Reserve that is inflating two massive bubbles simultaneously.

Through artificially low interest rates largely resulting from bond buying, the Federal Reserve has created a bubble in Treasury bonds. In addition to the Treasury bubble, we are seeing wild price action in equity markets as hot money flows seek a higher return. Usually fundamentals such as earnings, earnings estimates, and profitability drive stock prices.

However, as can be here the U.S. stock market is being driven by something totally different......Read "Fundamentals Rendered Irrelevant by Fed Actions: Probability Based Option Trading"

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Monday, November 25, 2013

Hitch a Ride on This Supply Crunch

By Jeff Clark, Senior Precious Metals Analyst

Can you name a commodity that's currently in a supply deficit—in other words, production and scrap material can't keep up with demand? How about two?

If you find that difficult to answer, it's because there aren't very many.

When you do find one, you might be on to a good investment—after all, if demand persists for that commodity, there's only one way for the price to go.

At the end of 2012, the platinum market was in a supply deficit of 375,000 ounces. Much of it was chalked up to the sharp decline in output from South Africa, where about 750,000 ounces didn't make it out of the ground due to legal and illegal strikes, safety stoppages, and mine closures.

The palladium sector was worse: It ended the year with a huge supply deficit of 1.07 million ounces—this, after 2011, when it boasted a surplus of 1.19 million ounces. The huge reversal was due to record demand for auto catalysts and a huge swing in investment demand—going from net selling to net buying in just 12 months.

What's important to recognize as a potential investor is that the deficit for both metals isn't letting up, especially for platinum.

Since platinum supply is dwindling, let's take a closer look…...

Will the Supply Deficit Continue?


According to Johnson Matthey, the world's largest maker of catalysts to control car emissions, platinum supply will decline to 6.43 million ounces this year, largely due to lower Russian stockpile sales. But the company claims the decline will be made up by a 7.4% increase in recycling.
Ha. Projections on scrap supply are almost always wrong. Analysts said in early 2012 that supply from recycling would grow 10-12% that year—but it declined by 4%.

There are critical issues with scrap this year, too…
  • Impala Platinum ("Implats") reported a 17% decline in output, not due to decrease in production but in scrap supply. Other companies have not reported this problem, but Implats is one of the biggest producers of the metal.
  • Recycling of platinum jewelry in China and Japan is falling and is on pace to be 12.9% lower than last year.
  • European auto sales are declining, so one would think demand would be the most impacted. However, this has major implications for supply, too: The average age of a car in Europe is eight years, with more than 30% over 10 years old. When a vehicle exceeds 10 years, the wear and tear on the catalyst is so significant that a substantial portion of the platinum has already been lost. So the jump in supply many are anticipating will be much less than expected.
Some of these declines are offset by scrap from auto catalysts in the US, but this obviously hasn't made up for all of it.

Demand Isn't Letting Up Either


Platinum demand is driven mostly by the automotive industry and jewelry, which account for 75% of world demand. What happens in these two sectors has a significant impact on the metal.
We'll let you draw your own conclusions from the data…...

The Cars
  • Auto industry analysts forecast total monthly sales in the US last month will reach about 1.23 million for passenger cars and light trucks, up 12% from 1.09 million in October 2012.
  • China, the world's largest auto market, saw a 21% rise in passenger car and light-truck sales in September to 1.59 million units, an eight-month high.
  • PricewaterhouseCoopers forecasts that sales of automobiles and light trucks in China will have nearly doubled by 2019. This trend largely applies to other Asian countries too, becoming a constant source of demand for both platinum and palladium.
The Politicians

Both platinum and palladium will benefit from new regulations that take effect in 2014 in Europe and China:
  • Europe's new "Euro 6" emission regulation will force diesel vehicles to have new catalysts going forward.
  • China has already accepted tighter emission standards that will substantially push platinum demand in the country. It's worth mentioning that car markets in China and other emerging countries are at the "Euro 4" level, so they have some catching up to do before reaching US and European levels.
The Investors

NewPlat, a platinum exchange-traded fund, launched in South Africa on April 26 and has already seen an inflow of 600,000 ounces through the end of September. This unprecedented surge is expected to lift platinum investment demand by 68% to a record 765,000 ounces.

The Jewelers

Jewelry is the second-largest use for platinum, representing 35% of overall demand.

China dominates this market, and demand has doubled in the past five years. According to ETF Securities, China is well on its way to make up around 80% of total platinum jewelry sales in 2013—their report calls Chinese platinum demand "a new engine of growth."

Johnson Matthey expects the interest for platinum jewelry to soften in China this year. However, a recent article in Forbes suggests the opposite may be happening:

A good proxy for Chinese platinum jewelry demand is the volume of platinum futures traded on the Shanghai Gold Exchange. Average daily platinum volume on the exchange in 2013 is running near 45% above 2012 levels, recently reaching a new record high this year.
Another indicator of Chinese platinum jewelry demand is China platinum imports. The latest data on China platinum imports for September showed the highest level since March 2011 at 10,522 kilograms (or approximately 338,300 ounces).

And this from International Business Times

Net platinum inflows into China hit their highest levels in two and a half years … China's net imports of platinum rose by 11%, to hit almost 70 metric tons for the first three quarters in 2013, higher than the 62 metric tons from the same period last year.

Overall, platinum demand is expected to be greater than ever before, reaching a record 8.42 million ounces this year. And this while supply continues to decline.

This supply/demand imbalance will likely continue for at least several years, perhaps a decade. Prices haven't moved all that much yet, but that doesn't mean they won't. Prices of commodities with a supply/demand imbalance can only stay subdued for so long before reality catches up. Either prices must rise or demand must fall.

The other metal to take advantage of right now is gold. While there's no supply crunch, the gold price is so low right now that it practically screams to back up the truck.

Learn in our free Special Report, the 2014 Gold Investor's Guide, when and where to buy gold bullion… the 3 best ways to invest in gold… and more. Get your free report now.

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Friday, November 22, 2013

Free webinar: How to Boost Your Returns With One Secret ETF Strategy

Join our trading partner John Carter of Simpler Options this Tuesday evening, December 3rd, for his FREE webinar "How to Boost Your Returns With One Secret ETF Strategy".

It all gets started at 8:00 p.m. eastern but get registered right now as there is limited seating and Johns wildly popular webinars always fill up right away.

If you watched this weeks new video you have an idea of what we are up to. And how we are trading ETF's in such a way that the market makers can not get the upper hand on us. In this weeks class John will be taking his methods to another level. And he is sharing it ALL with you.

In this free online class John will share with you....

    •     A Powerful Simple Strategy for Trading Options on ETFs

    •     The SAFE Levels to Take Trades

    •     How to Minimize Your Risk

    •     The Very Best ETFs to use

    •     Which ETFs You Have to Avoid Like the Plague

           And much more...

Simply click here and visit the registration page, fill in your info and you'll be registered for Tuesdays FREE webinar.

See you on Tuesday,
Ray @ The Crude Oil Trader

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Outside the Box: A Limited Central Bank

By John Mauldin

This week’s Outside the Box is unusual, even for a letter that is noted for its unusual offerings. It is a speech from last week by Charles I. Plosser, President of the Federal Reserve Bank of Philadelphia at (surprisingly to me) the Cato Institute’s 31st Annual Monetary Conference, Washington, DC.

I suppose that if Dallas Fed President Richard Fisher had delivered this speech I would not be terribly surprised. I suspect there are some other Federal Reserve officials here and there whoare in sympathy with this view Plosser presents here, but for quite some time no serious Fed official has outlined the need for a limited Federal Reserve in the way Plosser does today. He essentially proposes four limits on the US Federal Reserve:
  • First, limit the Fed’s monetary policy goals to a narrow mandate in which price stability is the sole, or at least the primary, objective;
  • Second, limit the types of assets that the Fed can hold on its balance sheet to Treasury securities;
  • Third, limit the Fed’s discretion in monetary policymaking by requiring a systematic, rule-like approach;
  • And fourth, limit the boundaries of its lender-of-last-resort credit extension.
“These steps would yield a more limited central bank. In doing so, they would help preserve the central bank’s independence, thereby improving the effectiveness of monetary policy, and they would make it easier for the public to hold the Fed accountable for its policy decisions.”

Some of you will want to read this deeply, but everyone should read the beginning and ending. I find this one of the most hopeful documents I have read in a long time. Think about the position of the person who delivered the speech. You are not alone in your desire to rein in the Fed.

Two points before we turn to the speech. Both Fisher and Plosser will be voting members of the FOMC this coming year. Look at the lineup and the philosophical monetary view of each of the members of the FOMC. Next year we could actually see three dissenting votes if things are not moving in a positive direction, although another serious proponent of monetary easing is being added to the Committee, so it may be that nothing will really change.

I am not seriously suggesting that the reigning economic theory that directs the action of the Fed is going to change anytime soon, but you will see assorted academics espousing a different viewpoint here and there. I think there may come a time in the not-too-distant future when the current Keynesian viewpoint is going to be somewhat discredited and people will be open to a new way to run things. This will not happen due to some great shift in philosophical views but because the current system has the potential to create some rather serious problems in the future. This is part of the message in my latest book, Code Red.

A lot of education and change in the system is needed. I want to applaud Alan Howard and his team at Brevan Howard for making one of the largest donations in business education history to Imperial College to establish the new Brevan Howard Centre for Financial Analysis to study exactly these topics and counter what is a particularly bad direction in academia. The two leaders at the new center, Professors Franklin Allen and Douglas Gale, are renowned for their pioneering research into financial crises and market contagion – that is, when relatively small shocks in financial institutions spread and grow, severely damaging the wider economy. This new center will help offer a better perspective. What we teach our kids matters. I hope other major fund managers will join this effort!

And speaking of Code Red, let me pass on a few quick reviews from Amazon:

“Excellent review of our current economic circumstances and what we can do about it to protect our assets. Even better, it is written with the non-economist in mind.”

“I read this book from cover to cover in 24 hours and was glued to every page. Do I know how to protect my saving exactly? No. But I have the critical information necessary to make informed decisions about my investments. My husband recommended this book to me after reading a brief article, and I'm so glad I impulsively bought it. It will definitely change my investment decisions moving forward and perhaps even provide me with more restful nights of sleep.”

You can order your own copy at the Mauldin Economics website or at Amazon, and it is likely at your local book store.

It is getting down to crunch time here in Dallas as far as the move to the new apartment is concerned. Work is coming along and most of it is done, although some things will need to be finished after I move in. Furniture is being delivered and moved in as I write, and today an the new kitchen is being entirely stocked, courtesy of Williams-Sonoma – they'll be showing up in a few minutes. I am fulfilling a long-held dream (maybe even a fantasy or fetish) of throwing everything out of the kitchen and starting over from scratch. Between my kids and a returning missionary couple, all the old stuff will find a new home, and I will renew my role as chief chef with new relish next week.

I have always maintained that I think I am a pretty good writer but I a brilliant cook. With a new kitchen from top to bottom, I intend to spend more time developing my true talent. Between the new media room and my cooking, I hope I can persuade the kids (and their kids!) to come around more often. Yes, there are a few bumps and issues here and there, but in general life is going well. I just need to get into the gym more. Which we should all probably do!

Your feeling like a kid in a candy store analyst,


A Limited Central Bank


Presented by Charles I. Plosser, President and Chief Executive Officer, Federal Reserve Bank of Philadelphia

Cato Institute’s 31st Annual Monetary Conference, Washington, D.C.

  • President Charles Plosser discusses what he believes is the Federal Reserve’s essential role and proposes how this institution might be improved to better fulfill that role.
  • President Plosser proposes four limits on the central bank that would limit discretion and improve outcomes and accountability.
  • First, limit the Fed’s monetary policy goals to a narrow mandate in which price stability is the sole, or at least the primary, objective;
  • Second, limit the types of assets that the Fed can hold on its balance sheet to Treasury securities;
  • Third, limit the Fed’s discretion in monetary policymaking by requiring a systematic, rule-like approach;
  • And fourth, limit the boundaries of its lender-of-last-resort credit extension.
  • These steps would yield a more limited central bank. In doing so, they would help preserve the central bank’s independence, thereby improving the effectiveness of monetary policy, and they would make it easier for the public to hold the Fed accountable for its policy decisions.

Introduction: The Importance of Institutions


I want to thank Jim Dorn and the Cato Institute for inviting me to speak once again at this prestigious Annual Monetary Conference. When Jim told me that this year’s conference was titled “Was the Fed a Good Idea?” I must confess that I was little worried. I couldn’t help but notice that I was the only sitting central banker on the program. But as the Fed approaches its 100th anniversary, it is entirely appropriate to reflect on its history and its future. Today, I plan to discuss what I believe is the Federal Reserve’s essential role and consider how it might be improved as an institution to better fulfill that role.

Before I begin, I should note that my views are not necessarily those of the Federal Reserve System or my colleagues on the Federal Open Market Committee (FOMC).

Douglass C. North was cowinner of the 1993 Nobel Prize in Economics for his work on the role that institutions play in economic growth.1 North argued that institutions were deliberately devised to constrain interactions among parties both public and private. In the spirit of North’s work, one theme of my talk today will be that the institutional structure of the central bank matters. The central bank’s goals and objectives, its framework for implementing policy, and its governance structure all affect its performance.

Central banks have been around for a long time, but they have clearly evolved as economies and governments have changed. Most countries today operate under a fiat money regime, in which a nation’s currency has value because the government says it does. Central banks usually are given the responsibility to protect and preserve the value or purchasing power of the currency.2 In the U.S., the Fed does so by buying or selling assets in order to manage the growth of money and credit. The ability to buy and sell assets gives the Fed considerable power to intervene in financial markets not only through the quantity of its transactions but also through the types of assets it can buy and sell. Thus, it is entirely appropriate that governments establish their central banks with limits that constrain the actions of the central bank to one degree or another.

Yet, in recent years, we have seen many of the explicit and implicit limits stretched. The Fed and many other central banks have taken extraordinary steps to address a global financial crisis and the ensuing recession. These steps have challenged the accepted boundaries of central banking and have been both applauded and denounced. For example, the Fed has adopted unconventional large-scale asset purchases to increase accommodation after it reduced its conventional policy tool, the federal funds rate, to near zero.

These asset purchases have led to the creation of trillions of dollars of reserves in the banking system and have greatly expanded the Fed’s balance sheet. But the Fed has done more than just purchase lots of assets; it has altered the composition of its balance sheet through the types of assets it has purchased. I have spoken on a number of occasions about my concerns that these actions to purchase specific (non-Treasury) assets amounted to a form of credit allocation, which targets specific industries, sectors, or firms.

These credit policies cross the boundary from monetary policy and venture into the realm of fiscal policy.3 I include in this category the purchases of mortgage-backed securities (MBS) as well as emergency lending under Section 13(3) of the Federal Reserve Act, in support of the bailouts, most notably of Bear Stearns and AIG. Regardless of the rationale for these actions, one needs to consider the long-term repercussions that such actions may have on the central bank as an institution.

As we contemplate what the Fed of the future should look like, I will discuss whether constraints on its goals might help limit the range of objectives it could use to justify its actions. I will also consider restrictions on the types of assets it can purchase to limit its interference with market allocations of scarce capital and generally to avoid engaging in actions that are best left to the fiscal authorities or the markets. I will also touch on governance and accountability of our institution and ways to implement policies that limit discretion and improve outcomes and accountability.

Goals and Objectives


Let me begin by addressing the goals and objectives for the Federal Reserve. These have evolved over time. When the Fed was first established in 1913, the U.S. and the world were operating under a classical gold standard. Therefore, price stability was not among the stated goals in the original Federal Reserve Act. Indeed, the primary objective in the preamble was to provide an “elastic currency.”

The gold standard had some desirable features. Domestic and international legal commitments regarding convertibility were important disciplining devices that were essential to the regime’s ability to deliver general price stability. The gold standard was a de facto rule that most people understood, and it allowed markets to function more efficiently because the price level was mostly stable.

But, the international gold standard began to unravel and was abandoned during World War I.4 After the war, efforts to reestablish parity proved disruptive and costly in both economic and political terms. Attempts to reestablish a gold standard ultimately fell apart in the 1930s. As a result, most of the world now operates under a fiat money regime, which has made price stability an important priority for those central banks charged with ensuring the purchasing power of the currency.

Congress established the current set of monetary policy goals in 1978. The amended Federal Reserve Act specifies the Fed “shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.” Since moderate long-term interest rates generally result when prices are stable and the economy is operating at full employment, many have interpreted these goals as a dual mandate with price stability and maximum employment as the focus.

Let me point out that the instructions from Congress call for the FOMC to stress the “long run growth” of money and credit commensurate with the economy’s “long run potential.” There are many other things that Congress could have specified, but it chose not to do so. The act doesn’t talk about managing short-term credit allocation across sectors; it doesn’t mention inflating housing prices or other asset prices. It also doesn’t mention reducing short-term fluctuations in employment.

Many discussions about the Fed’s mandate seem to forget the emphasis on the long run. The public, and perhaps even some within the Fed, have come to accept as an axiom that monetary policy can and should attempt to manage fluctuations in employment. Rather than simply set a monetary environment “commensurate” with the “long run potential to increase production,” these individuals seek policies that attempt to manage fluctuations in employment over the short run.

The active pursuit of employment objectives has been and continues to be problematic for the Fed. Most economists are dubious of the ability of monetary policy to predictably and precisely control employment in the short run, and there is a strong consensus that, in the long run, monetary policy cannot determine employment. As the FOMC noted in its statement on longer-run goals adopted in 2012, “the maximum level of employment is largely determined by nonmonetary factors that affect the structure and dynamics of the labor market.” In my view, focusing on short-run control of employment weakens the credibility and effectiveness of the Fed in achieving its price stability objective. We learned this lesson most dramatically during the 1970s when, despite the extensive efforts to reduce unemployment, the Fed essentially failed, and the nation experienced a prolonged period of high unemployment and high inflation. The economy paid the price in the form of a deep recession, as the Fed sought to restore the credibility of its commitment to price stability.

When establishing the longer-term goals and objectives for any organization, and particularly one that serves the public, it is important that the goals be achievable. Assigning unachievable goals to organizations is a recipe for failure. For the Fed, it could mean a loss of public confidence. I fear that the public has come to expect too much from its central bank and too much from monetary policy, in particular. We need to heed the words of another Nobel Prize winner, Milton Friedman. In his 1967 presidential address to the American Economic Association, he said, “…we are in danger of assigning to monetary policy a larger role than it can perform, in danger of asking it to accomplish tasks that it cannot achieve, and as a result, in danger of preventing it from making the contribution that it is capable of making.”5 In the 1970s we saw the truth in Friedman’s earlier admonitions. I think that over the past 40 years, with the exception of the Paul Volcker era, we failed to heed this warning. We have assigned an ever-expanding role for monetary policy, and we expect our central bank to solve all manner of economic woes for which it is ill-suited to address. We need to better align the expectations of monetary policy with what it is actually capable of achieving.

The so-called dual mandate has contributed to this expansionary view of the powers of monetary policy. Even though the 2012 statement of objectives acknowledged that it is inappropriate to set a fixed goal for employment and that maximum employment is influenced by many factors, the FOMC’s recent policy statements have increasingly given the impression that it wants to achieve an employment goal as quickly as possible.6

I believe that the aggressive pursuit of broad and expansive objectives is quite risky and could have very undesirable repercussions down the road, including undermining the public’s confidence in the institution, its legitimacy, and its independence. To put this in different terms, assigning multiple objectives for the central bank opens the door to highly discretionary policies, which can be justified by shifting the focus or rationale for action from goal to goal.

I have concluded that it would be appropriate to redefine the Fed’s monetary policy goals to focus solely, or at least primarily, on price stability. I base this on two facts: Monetary policy has very limited ability to influence real variables, such as employment. And, in a regime with fiat currency, only the central bank can ensure price stability. Indeed, it is the one goal that the central bank can achieve over the longer run.

Governance and Central Bank Independence


Even with a narrow mandate to focus on price stability, the institution must be well designed if it is to be successful. To meet even this narrow mandate, the central bank must have a fair amount of independence from the political process so that it can set policy for the long run without the pressure to print money as a substitute for tough fiscal choices. Good governance requires a healthy degree of separation between those responsible for taxes and expenditures and those responsible for printing money.

The original design of the Fed’s governance recognized the importance of this independence. Consider its decentralized, public-private structure, with Governors appointed by the U.S. President and confirmed by the Senate, and Fed presidents chosen by their boards of directors. This design helps ensure a diversity of views and a more decentralized governance structure that reduces the potential for abuses and capture by special interests or political agendas. It also reinforces the independence of monetary policymaking, which leads to better economic outcomes.

Implementing Policy and Limiting Discretion


Such independence in a democracy also necessitates that the central bank remain accountable. Its activities also need to be constrained in a manner that limits its discretionary authority. As I have already argued, a narrow mandate is an important limiting factor on an expansionist view of the role and scope for monetary policy.

What other sorts of constraints are appropriate on the activities of central banks? I believe that monetary policy and fiscal policy should have clear boundaries.7 Independence is what Congress can and should grant the Fed, but, in exchange for such independence, the central bank should be constrained from conducting fiscal policy. As I have already mentioned, the Fed has ventured into the realm of fiscal policy by its purchase programs of assets that target specific industries and individual firms. One way to circumscribe the range of activities a central bank can undertake is to limit the assets it can buy and hold.

In its System Open Market Account, the Fed is allowed to hold only U.S. government securities and securities that are direct obligations of or fully guaranteed by agencies of the United States. But these restrictions still allowed the Fed to purchase large amounts of agency mortgage-backed securities in its effort to boost the housing sector. My preference would be to limit Fed purchases to Treasury securities and return the Fed’s balance sheet to an all-Treasury portfolio. This would limit the ability of the Fed to engage in credit policies that target specific industries. As I’ve already noted, such programs to allocate credit rightfully belong in the realm of the fiscal authorities — not the central bank.

A third way to constrain central bank actions is to direct the monetary authority to conduct policy in a systematic, rule-like manner.8 It is often difficult for policymakers to choose a systematic rule-like approach that would tie their hands and thus limit their discretionary authority. Yet, research has discussed the benefits of rule-like behavior for some time. Rules are transparent and therefore allow for simpler and more effective communication of policy decisions. Moreover, a large body of research emphasizes the important role expectations play in determining economic outcomes. When policy is set systematically, the public and financial market participants can form better expectations about policy. Policy is no longer a source of instability or uncertainty. While choosing an appropriate rule is important, research shows that in a wide variety of models simple, robust monetary policy rules can produce outcomes close to those delivered by each model’s optimal policy rule.

Systematic policy can also help preserve a central bank’s independence. When the public has a better understanding of policymakers’ intentions, it is able to hold the central bank more accountable for its actions. And the rule-like behavior helps to keep policy focused on the central bank’s objectives, limiting discretionary actions that may wander toward other agendas and goals.

Congress is not the appropriate body to determine the form of such a rule. However, Congress could direct the monetary authority to communicate the broad guidelines the authority will use to conduct policy. One way this might work is to require the Fed to publicly describe how it will systematically conduct policy in normal times — this might be incorporated into the semiannual Monetary Policy Report submitted to Congress. This would hold the Fed accountable. If the FOMC chooses to deviate from the guidelines, it must then explain why and how it intends to return to its prescribed guidelines.

My sense is that the recent difficulty the Fed has faced in trying to offer clear and transparent guidance on its current and future policy path stems from the fact that policymakers still desire to maintain discretion in setting monetary policy. Effective forward guidance, however, requires commitment to behave in a particular way in the future. But discretion is the antithesis of commitment and undermines the effectiveness of forward guidance. Given this tension, few should be surprised that the Fed has struggled with its communications.
What is the answer? I see three: Simplify the goals. Constrain the tools. Make decisions more systematically. All three steps can lead to clearer communications and a better understanding on the part of the public. Creating a stronger policymaking framework will ultimately produce better economic outcomes.

Financial Stability and Monetary Policy


Before concluding, I would like to say a few words about the role that the central bank plays in promoting financial stability. Since the financial crisis, there has been an expansion of the Fed’s responsibilities for controlling macroprudential and systemic risk. Some have even called for an expansion of the monetary policy mandate to include an explicit goal for financial stability. I think this would be a mistake.

The Fed plays an important role as the lender of last resort, offering liquidity to solvent firms in times of extreme financial stress to forestall contagion and mitigate systemic risk. This liquidity is intended to help ensure that solvent institutions facing temporary liquidity problems remain solvent and that there is sufficient liquidity in the banking system to meet the demand for currency. In this sense, liquidity lending is simply providing an “elastic currency.”

Thus, the role of lender of last resort is not to prop up insolvent institutions. However, in some cases during the crisis, the Fed played a role in the resolution of particular insolvent firms that were deemed systemically important financial firms. Subsequently, the Dodd-Frank Act has limited some of the lending actions the Fed can take with individual firms under Section 13(3). Nonetheless, by taking these actions, the Fed has created expectations — perhaps unrealistic ones — about what the Fed can and should do to combat financial instability.

Just as it is true for monetary policy, it is important to be clear about the Fed’s responsibilities for promoting financial stability. It is unrealistic to expect the central bank to alleviate all systemic risk in financial markets. Expanding the Fed's regulatory responsibilities too broadly increases the chances that there will be short-run conflicts between its monetary policy goals and its supervisory and regulatory goals. This should be avoided, as it could undermine the credibility of the Fed’s commitment to price stability.

Similarly, the central bank should set boundaries and guidelines for its lending policy that it can credibly commit to follow. If the set of institutions having regular access to the Fed’s credit facilities is expanded too far, it will create moral hazard and distort the market mechanism for allocating credit. This can end up undermining the very financial stability that it is supposed to promote.

Emergencies can and do arise. If the Fed is asked by the fiscal authorities to intervene by allocating credit to particular firms or sectors of the economy, then the Treasury should take these assets off of the Fed’s balance sheet in exchange for Treasury securities. In 2009, I advocated that we establish a new accord between the Treasury and the Federal Reserve that protects the Fed in just such a way.9 Such an arrangement would be similar to the Treasury-Fed Accord of 1951 that freed the Fed from keeping the interest rate on long-term Treasury debt below 2.5 percent. It would help ensure that when credit policies put taxpayer funds at risk, they are the responsibility of the fiscal authority — not the Fed. A new accord would also return control of the Fed’s balance sheet to the Fed so that it can conduct independent monetary policy.

Many observers think financial instability is endemic to the financial industry, and therefore, it must be controlled through regulation and oversight. However, financial instability can also be a consequence of governments and their policies, even those intended to reduce instability. I can think of three ways in which central bank policies can increase the risks of financial instability. First, by rescuing firms or creating the expectation that creditors will be rescued, policymakers either implicitly or explicitly create moral hazard and excessive risking-taking by financial firms. For this moral hazard to exist, it doesn’t matter if the taxpayer or the private sector provides the funds. What matters is that creditors are protected, in part, if not entirely.
Second, by running credit policies, such as buying huge volumes of mortgage-backed securities that distort market signals or the allocation of capital, policymakers can sow the seeds of financial instability because of the distortions that they create, which in time must be corrected.

And third, by taking a highly discretionary approach to monetary policy, policymakers increase the risks of financial instability by making monetary policy uncertain. Such uncertainty can lead markets to make unwise investment decisions — witness the complaints of those who took positions expecting the Fed to follow through with the taper decision in September of this year.

The Fed and other policymakers need to think more about the way their policies might contribute to financial instability. I believe that it is important that the Fed take steps to conduct its own policies and to help other regulators reduce the contributions of such policies to financial instability. The more limited role for the central bank I have described here can contribute to such efforts.



The financial crisis and its aftermath have been challenging times for global economies and their institutions. The extraordinary actions taken by the Fed to combat the crisis and the ensuing recession and to support recovery have expanded the roles assigned to monetary policy. The public has come to expect too much from its central bank. To remedy this situation, I believe it would be appropriate to set four limits on the central bank:
  • First, limit the Fed’s monetary policy goals to a narrow mandate in which price stability is the sole, or at least the primary, objective;
  • Second, limit the types of assets that the Fed can hold on its balance sheet to Treasury securities;
  • Third, limit the Fed’s discretion in monetary policymaking by requiring a systematic, rule-like approach;
  • And fourth, limit the boundaries of its lender-of-last-resort credit extension and ensure that it is conducted in a systematic fashion
  • These steps would yield a more limited central bank. In doing so, they would help preserve the central bank’s independence, thereby improving the effectiveness of monetary policy, and, at the same time, they would make it easier for the public to hold the Fed accountable for its policy decisions. These changes to the institution would strengthen the Fed for its next 100 years.

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Thursday, November 21, 2013

U.S. Dollar Index ETF UUP Trading Strategy

We all know quantitative easing devalues the Dollar but contrary to that general statement it looks as though we could see the dollar index continue to rise for a few more weeks. If we analyze the chart of the Dollar ETF (UUP) it is clear that the short term momentum has turned up. The break above the down trend line and recent bounce off support bodes well for the dollar index.

The bull flag chart pattern that has formed in the past month has a measured move price target of roughly $22.30. The level also happens to be a key pivot point on the chart along with high volume resistance. I expect the dollar to continue to work its way higher over the next week or two with $22.30 being the line in the sand where sellers will jump on price and drive it back down, or at minimum force price to consolidate for a few days.

US Dollar ETF Trading Strategy – Daily Chart Analysis

ETF Trading Strategy

Chris Vermeulen – www.Gold & Oil - Free Trading Ideas

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Wednesday, November 20, 2013

Nine Reasons Why You Should Trade Options on ETFs

Our trading partner John Carter of Simpler Options is back with another great video. And as usual it's a total game changer. One of my favorite aspects of John's new video lesson is that he shows us how we can take advantage of trading ETF's using options. And since the market makers can't control the movement in these tickers...well, simply put..... they can't screw with us!

While there is many "highly capitalized" fund managers using Johns methods these trading techniques still work great for traders with small accounts. This makes it easy for the retail investor to level the playing field. Yet another reason trading ETF's using options has become the favorite of so many home gamers and professional fund managers alike.

Never traded options? Stop shying away from this type of trading. John is going to make this very easy to understand and you'll be able to put this to work on your own favorite ETF's in your favorite sector.

So go ahead and click here to watch John's free video "The Secret Life of ETF Options" 

After watching the video please feel free to leave a comment, we want to hear what you think of John's methods.

Ray @ The Crude Oil Trader

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Tuesday, November 19, 2013

The Unintended Consequences of ZIRP

By John Mauldin

Yellen's coronation was this week. Art Cashin mused that it was a wonder some senator did not bring her a corsage: it was that type of confirmation hearing. There were a few interesting questions and answers, but by and large we heard what we already knew. And what we know is that monetary policy is going to be aggressively biased to the easy side for years, or at least that is the current plan. Far more revealing than the testimony we heard on Thursday were the two very important papers that were released last week by the two most senior and respected Federal Reserve staff economists. As Jan Hatzius at Goldman Sachs reasoned, it is not credible to believe that these papers and the thinking that went into them were not broadly approved by both Ben Bernanke and Janet Yellen.

Essentially the papers make an intellectual and theoretical case for an extended period of very low interest rates and, in combination with other papers from both inside and outside the Fed from heavyweight economists, make a strong case for beginning to taper sooner rather than later, but for accompanying that tapering with a commitment to an even more protracted period of ZIRP (zero interest rate policy). In this week's letter we are going analyze these papers, as they are critical to understanding the future direction of Federal Reserve policy. Secondly, we'll look at what I think may be some of the unintended consequences of long-term ZIRP.

We are going to start with an analysis by Gavyn Davies of the Financial Times. He writes on macroeconomics and is one of the more of the astute observers I read. I commend his work to you. Today, rather than summarize his analysis, I feel it is more appropriate to simply quote parts of it. (I will intersperse comments, unindented.) The entire piece can be found here.

While the markets have become obsessively focused on the date at which the Fed will start to taper its asset purchases, the Fed itself, in the shape of its senior economics staff, has been thinking deeply about what the stance of monetary policy should be after tapering has ended. This is reflected in two papers to be presented to the annual IMF research conference this week by William English and David Wilcox, who have been described as two of the most important macro-economists working for the FOMC at present. At the very least, these papers warn us what the FOMC will be hearing from their staff economists in forthcoming meetings.

The English paper extends the conclusions of Janet Yellen's "optimal control speeches" in 2012, which argued for pre-committing to keep short rates "lower-for-longer" than standard monetary rules would imply. The Wilcox paper dives into the murky waters of "endogenous supply", whereby the Fed needs to act aggressively to prevent temporary damage to US supply potential from becoming permanent. The overall message implicitly seems to accept that tapering will happen broadly on schedule, but this is offset by super-dovishness on the forward path for short rates.

The papers are long and complex, and deserve to be read in full by anyone seriously interested in the Fed's thought processes. They are, of course, full of caveats and they acknowledge that huge uncertainties are involved. But they seem to point to three main conclusions that are very important for investors.

1. They have moved on from the tapering decision.

Both papers give a few nods in the direction of the tapering debate, but they are written with the unspoken assumption that the expansion of the balance sheet is no longer the main issue. I think we can conclude from this that they believe with a fairly high degree of certainty that the start and end dates for tapering will not be altered by more than a few months either way, and that the end point for the total size of the balance sheet is therefore also known fairly accurately. From now on, the key decision from their point of view is how long to delay the initial hike in short rates, and exactly how the central bank should pre-commit on this question. By omission, the details of tapering are revealed to be secondary.

Yellen said as much in her testimony. In response to a question about QE, she said, "I would agree that this program [QE] cannot continue forever, that there are costs and risks associated with the program."
The Fed have painted themselves into a corner of their own creation. They are clearly very concerned about the stock market reaction even to the mere announcement of the onset of tapering. But they also know they cannot continue buying $85 billion of assets every month. Their balance sheet is already at $4 trillion and at the current pace will expand by $1 trillion a year. Although I can find no research that establishes a theoretical limit, I do believe the Fed does not want to find that limit by running into a wall. Further, it now appears that they recognize that QE is of limited effectiveness with market valuations where they are, and so for practical purposes they need to begin to withdraw QE.

But rather than let the market deal with the prospect of an end to an easy monetary policy (which everyone recognizes has to draw to an end at some point), they are now looking at ways to maintain the illusion of the power of the Federal Reserve. And they are right to be concerned about the market reaction, as was pointed out in a recent note from Ray Dalio and Bridgewater, as analyzed by Zero Hedge:

"The Fed's real dilemma is that its policy is creating a financial market bubble  that is large relative to the pickup in the economy that it is producing," Bridgewater notes, as the relationship between US equity markets and the Fed's balance sheet (here and here for example) and "disconcerting disconnects" (here and here) indicate how the Fed is "trapped." However, as the incoming Yellen faces up to her "tough" decisions to taper or not, Ray Dalio's team is concerned about something else – "We're not worried about whether the Fed is going to hit or release the gas pedal, we're worried about whether there's much gas left in the tank and what will happen if there isn't."

Dalio then outlines their dilemma neatly. "…The dilemma the Fed faces now is that the tools currently at its disposal are pretty much used up, in that interest rates are at zero and US asset prices have been driven up to levels that imply very low levels of returns relative to the risk, so there is very little ability to stimulate from here if needed. So the Fed will either need to accept that outcome, or come up with new ideas to stimulate conditions."

The new ideas that Bridgewater and everyone else are looking for are in the papers we are examining. Returning to Davies work (emphasis below is mine!):

2. They think that "optimal" monetary policy is very dovish indeed on the path for rates.

Both papers conduct optimal control exercises of the Yellen-type. These involve using macro-economic models to derive the path for forward short rates that optimise the behaviour of inflation and unemployment in coming years. The message is familiar: the Fed should pre-commit today to keep short rates at zero for a much longer period than would be implied by normal Taylor Rules, even though inflation would temporarily exceed 2 per cent, and unemployment would drop below the structural rate. This induces the economy to recover more quickly now, since real expected short rates are reduced.

Compared to previously published simulations, the new ones in the English paper are even more dovish. They imply that the first hike in short rates should be in 2017, a year later than before. More interestingly, they experiment with various thresholds that could be used to persuade the markets that the Fed really, really will keep short rates at zero, even if the economy recovers and inflation exceeds target. They conclude that the best way of doing this may be to set an unemployment threshold at 5.5 per cent, which is 1 per cent lower than the threshold currently in place, since this would produce the best mix of inflation and unemployment in the next few years. Such a low unemployment threshold has not been contemplated in the market up to now.

3. They think aggressively easy monetary policy is needed to prevent permanent supply side deterioration.

This theme has been mentioned briefly in previous Bernanke speeches, but the Wilcox paper elevates it to center stage. The paper concludes that the level of potential output has been reduced by about 7 per cent in recent years, largely because the rate of productivity growth has fallen sharply. In normal circumstances, this would carry a hawkish message for monetary policy, because it significantly reduces the amount of spare capacity available in the economy in the near term.

However, the key is that Wilcox thinks that much of the loss in productive potential has been caused by (or is "endogenous to") the weakness in demand. For example, the paper says that the low levels of capital investment would be reversed if demand were to recover more rapidly, as would part of the decline in the labour participation rate. In a reversal of Say's Law, and also a reversal of most US macro-economic thinking since Friedman, demand creates its own supply.

This concept is key to understanding current economic thinking. The belief is that it is demand that is the issue and that lower rates will stimulate increased demand (consumption), presumably by making loans cheaper for businesses and consumers. More leverage is needed! But current policy apparently fails to grasp that the problem is not the lack of consumption: it is the lack of income. Income is produced by productivity. When leverage increases productivity, that is good; but when it is used simply to purchase goods for current consumption, it merely brings future consumption forward. Debt incurred and spent today is future consumption denied. Back to Davies:

This new belief in endogenous supply clearly reinforces the "lower for longer" case on short rates, since aggressively easy monetary policy would be more likely to lead to permanent gains in real output, with only temporary costs in higher inflation. Whether or not any of this analysis turns out to be justified in the long run, it is surely important that it is now being argued so strongly in an important piece of Fed research. 

            Read that last sentence again. It makes no difference whether you and I might disagree with their analysis. They are at the helm, and unless something truly unexpected happens, we are going to get Fed assurances of low interest rates for a very long time. Davies concludes:

The implication of these papers is that these Fed economists have largely accepted in their own minds that tapering will take place sometime fairly soon, but that they simultaneously believe that rates should be held at zero until (say) 2017. They will clearly have a problem in convincing markets of this. After the events of the summer, bond traders have drawn the conclusion that tapering is a robust signal that higher interest rates are on the way. The FOMC will need to work very hard indeed to convince the markets, through its new thresholds and public pronouncements, that tapering and forward short rates really do need to be divorced this time. It could be a long struggle.

On a side note, we are beginning to see calls from certain circles to think about also reducing the rate the Fed pays on the reserves held at the Fed from the current 25 basis points as a way to encourage banks to put that money to work, although where exactly they put it to work is not part of the concern. Just do something with it. That is a development we will need to watch.

The Unintended Consequences of ZIRP

Off the top of my head I can come up with four ways that the proposed extension of ZIRP can have consequences other than those outlined in the papers. We will look briefly at each of them, although they each deserve their own letter.

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.

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Monday, November 18, 2013

Silver, Gold & Miners About To Sell Off Again

A couple weeks ago I posted these same charts talking about the pending breakout (in either direction) with silver, gold and mining stocks. Fast forwarding to this week its clear this sector continues its struggle to rally. Key support levels are now being tested and if these levels fail prepare for a sharp correction with mining stocks showing the most downside potential of roughly 25% for the GDX ETF trading fund.

Let’s take a quick look at what is going on.

Gold Trading Chart:
The chart of gold shows price being wedge into the apex of the down sloping resistance trend line and the rising support trendline. Gold was trading below this level but has since bounced. But if gold closes the week below this line in the sand the price could start to fall quickly and test the $1200 per ounce within a week or two.


Silver Trading Chart:
Silver is under performing gold and trading below its support level currently. If silver does not recover by Friday’s closing bell then things could get ugly for a few weeks as investors start to exit their positions. That being said, I need to point out that silver is more of a wild card when using trend lines like this. Both gold and gold miners should be confirming this breakdown in silver if it is the real deal.


Gold Mining Stocks ETF:
The chart of gold miners I like the most. I like it because it’s pointing to lower prices, roughly 25% lower if the breakdown takes place. Gold mining stocks could be a fantastic long term investment if we see the $17.50 level reached on this GDX etf.


Last week I talked about ETF trading strategies and the big picture on gold, silver, miners and bonds. They look to be nearing a major bottom and once they do bottom it should be a great buying opportunity for specific stocks or the entire sector.

The next few weeks are going to be crucial for precious metals and we will keep an eye on them as this bottom unfolds.  

Get more reports like this here: www.Gold & Oil

Chris Vermeulen

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Friday, November 15, 2013

Option Probabilities Spell Possible Trouble for Treasury’s

Our trading partner J.W. Jones is coming at us today with a great post on where he sees the Treasury ETF TLT headed. Great guidance for where the market at large just might be headed.....

The incredible rally in equities in 2013 has begun to stir concern among many that the stock market is now in a bubble. We have entered the euphoric stage of this bull market and equity prices cannot and will not go lower according to some talking heads in the financial punditry.

While chatter is starting to heat up that equities are in a bubble, the real bubble seems to be ignored for the most part. The larger, more concerning bubble is in the Treasury marketplace where the Federal Reserve continues to print money to purchase treasury bonds to help keep interest rates artificially low.

Instead of debating the bubbles in Treasury’s versus equities, or trying to predict when the bubble in either asset class may pop, I want to focus on the near term for price action expectations in longer dated Treasury bonds.

Here is a weekly chart of the Treasury ETF TLT which is supposed to reflect the price action and yield generation of a portfolio of 20+ year duration Treasury bonds issued by the U.S. federal government.....Read "Option Probabilities Spell Possible Trouble for Treasury’s" 

"Wall Streets Best Kept Secret....Now you are in the loop"


Heather Ingrassia: Kinder Morgan Energy Partners: A Few More Reasons Why I'm Staying Bullish

One of our favorite energy writers is Heather Ingrassia. A 28 year old stay at home mom who writes on Seeking Alpha. Today she shares a great article on Kinder Morgan Energy Partners, and yes...we are long. Way long KMP.....

On Tuesday, November 12, a number of Deutsche Bank's MLP analysts pointed out several significant trends which indicate an improved outlook for the natural gas and MLP sectors. According to the analysts at Deutsche Bank, "the annualized rate of dividend growth among the natural gas companies rose to 13.9% from ~12% earlier this year, and the MLPs' annualized rate of distribution growth rose to 8.7% from a previous estimate of 7%".

In the wake of Deutsche Bank's findings, I wanted to highlight a number of the reasons why I remain long on shares of Kinder Morgan Energy Partners LP (KMP), especially since the MLP is considered to be a top pick at DB.

Recent Performance & Trend Behavior

On Wednesday shares of KMP, which currently possess a market cap of $35.09 billion, a beta of 0.39, a forward P/E ratio of 29.32, and a current dividend yield of 6.69% ($5.40), settled at a price of $80.67/share.

Based on their closing price of $80.67/share, shares of KMP are trading 0.56% below their 20 day simple moving average, 1.40% above their 50 day simple moving average, and 2.02% below their 200 day simple moving average. These numbers would normally indicate a short term and long term downtrend for the stock and generally translate into a moderate selling mode for most near term traders and some longer term investors.

That being said, and as a long term investor, I plan on highlighting a number of reasons why I think investors should buck the current trend and establish a long term position at current levels.....Read "A Few More Reasons Why I'm Staying Bullish"


How to Beat the Market Makers at Their Own game

Thursday, November 14, 2013

Exxon Mobil - The Surprising Big Chart Picture

While our trading partner Adam Hewsion was reviewing his energy portfolio this morning, he stopped and looked at the chart for Exxon Mobile (NYSE:XOM). He immediately noticed major resistance coming in at the $95 level. Can Exxon break through this major resistance level and take off to the upside?

He measured from the resistance at $95 all the way down to the low in July of 2010, the difference is around $35. If he then added $35 to the breakout point, it takes us to his target zone of $130 per share for Exxon. Now remember, the market must move over the $95 level for this to happen.

Just Click Here to take a look at Adam's chart work and details for a potential ExxonMobil trade.

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Mid Week COT Market Summary for Thursday November 14th

December Nymex crude oil Stochastics and the RSI are diverging but have turned bearish signaling that sideways to lower prices are possible near term. If December extends the decline off August's high, the 75% retracement level of the April-August rally crossing at 91.54 is the next downside target. Closes above the 20 day moving average crossing at 96.14 are needed to confirm that a short term low has been posted. First resistance is the 10 day moving average crossing at 94.18. Second resistance is the 20 day moving average crossing at 96.14. First support is Tuesday's low crossing at 92.86. Second support is the 75% retracement level of the April-August rally crossing at 91.54.

December Henry natural gas trades lower as it consolidates some of the rally off last Tuesday's low. Stochastics and the RSI are neutral to bullish signaling that a low might be in or is near. Closes above the 20 day moving average crossing at 3.623 are needed to confirm that a short term low has been posted. If December renews this year's decline, weekly support crossing at 3.178 is the next downside target. First resistance is the 20 day moving average crossing at 3.623. Second resistance is the reaction high crossing at 3.835. First support is last Tuesday's low crossing at 3.379. Second support is weekly support crossing at 3.178.

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December gold was higher due to short covering on Wednesday night as it consolidates some of the decline off October's high. Stochastics and the RSI are oversold but remain neutral to bearish signaling that sideways to lower prices are possible near term. If December extends the decline off October's high, October's low crossing at 1251.00 is the next upside target. Closes above the 20 day moving average crossing at 1316.40 are needed to confirm that a short term top has been posted. First resistance is the 10 day moving average crossing at 1294.80. Second resistance is the 20 day moving average crossing at 1316.40. First support is Tuesday's low crossing at 1275.80. Second support is October's low crossing at 1251.00.

The December U.S. Dollar traded higher in Wednesday evenings trading but remains below the 38% retracement level of the July-October decline crossing at 81.41. Stochastics and the RSI are overbought but remain neutral to bullish signaling that sideways to higher prices are possible near term. If December extends the rally off October's low, the 50% retracement level of the July-October decline crossing at 82.14 is the next upside target. Closes below the 20 day moving average crossing at 80.26 would confirm that a short term top has been posted. First resistance is last Friday's high crossing at 81.58. Second resistance is the 50% retracement level of the July-October decline crossing at 82.14. First support is the 10 day moving average crossing at 80.96. Second support is the 20 day moving average crossing at 80.26.

How much lower can COT favorite Coffee go? December coffee closed down 295 points at 102.85 cents on Wednesday. Prices closed nearer the session low and scored a bearish “outside day” down on the daily bar chart. The coffee bears have the solid overall near term technical advantage.

Enrollment in our PowerStocks Mentoring program is open, limited seating so move now

Wednesday, November 13, 2013

Gold is Poised to Rebound Aggressively, Will You Be on Board?

The last time there was a buying opportunity this good in gold was during the financial crisis of 2008. During that year, gold lost 27.7%, only to shoot up 166% over the next three years (from $712.50/oz to $1,895.50/oz). How high it will rebound this time is anyone's guess, but one thing's for sure – you'll kick yourself if you're not on board.

Don't wait for $2,000 gold before you get in – act now to make the most of the raging bull market.

The 2014 Investing Guide from Casey Research tells you all about ways to leverage gold – from bullion to stocks to ETFs and more.

Click here to get it ABSOLUTELY FREE today.

John is Speaking the "Language of Inflation"

By John Mauldin

My good friend Dylan Grice takes a very interesting tack in the latest issue of his Edelweiss Journal, today's Outside the Box. Rather than attacking our macroeconomic problems directly with economic tools, he approaches them from the point of view of what he calls a "subtle but significant devaluation of language." Now, you might think that the words we use to describe and understand the economy are not in themselves very powerful economic determinants, but Dylan lays out a convincing case to the contrary.
Dylan has fun with a Google app called Ngram Viewer, which allows users to search for the occurrence of words or phrases (or n-grams, which are combinations of letters) in 5.2 million books published between 1500 and 2008, containing 500 billion words, in American English, British English, French, German, Spanish, Russian, and Chinese.

Using Ngram, Dylan and colleagues have detected an exponential increase in the past few decades of such phrases as economic crisis, macroeconomic stability, policy intervention, financial engineering, and wealth management, and in such words as leveraged, arbitrage, risk, and growth. Use of the word financial overtook industrial shortly after 1980, he notes, and now far exceeds it. Likewise, spending now outstrips saving.

OK, so there's a lot of funny money floating around these days, and we like to yak about it. But does that mean our language is influencing our economic outcomes? It's a subtle but powerful process, Dylan says. Most of us appreciate that language shapes our ability to formulate, recall, and modulate the concepts that we then implement as world-changing actions; so language really is fundamental. And, Dylan asserts, when we vastly inflate key terms that we use in describing – and in attempting to manage – the economy, we create the dangerous illusion that we are all-powerful.

Dylan sets us straight in his opening paragraph:

Regular readers of our irregular publication will be aware of our thoughts on inflation, but for those who are not we would summarize them thus: inflation is not measurable. We can summarize our views on money with similar succinctness: it is poorly understood. And as for the economy, we know only this: it is a complex system. From these observations can be derived a straightforward corollary on economic policy makers: trying to control a variable you can’t measure (inflation) with a tool you don’t fully understand (money) in a complex system with hidden, unobservable and non-linear interrelationships (the economy) is a guaranteed way to ensure that most things which happen weren’t supposed to happen.

And in his closing paragraph he sums things up more succinctly and pithily than I ever could:

Today’s language of inflation embeds so many of these false ideas that the full rottenness of what passes for financial thinking today is obscured.

I wrote the following note to Dylan upon reading this piece over lunch the other day.

This reads so pure and profound as to make me weep, on one hand for the pleasure of reading your prose and on the other hand for not having written it myself – or maybe more precisely, for not having the skill to write with such beautiful style and clarity. Those sitting around me here at lunch must wonder at my composure and beatitude as I ignore my sushi and pour over your latest. This may be your finest composition; it's at least the best thing of yours I have read. And with such a body of impressive work, that is saying something.

This is a briefer and far more eloquent statement of the driver behind Code Red, that central banks are indeed steering us ever closer to a "monetary trap," an alley, if you will, in which we are very likely to be mugged. This way be dragons.

I believe you will enjoy this piece. Incidentally, I notice that some of Dylan's Ngram curves that were trying to go asymptotic (straight up) have started to roll over since the Great Recession hit.  I do wonder what that means.

Code Red made the Wall Street Journal best-seller list this weekend. Thanks to those of you who have bought the book and made that happen. The reviews are quite positive so far. Fixed-income maven Richard Lehman over at Forbes wrote a very nice piece about Code Red this weekend. I am very pleased that he spoke so well of it:

If you read only one book on finance this year, read Code Red: How To Protect Your Savings From the Coming Crisis by John Maudlin and Jonathan Tepper. It is a recounting of current Federal Reserve Bank’s “Code Red” policies for dealing with its mandate of promoting full employment while maintaining financial stability. The Code Red moniker is intended to draw attention to the unprecedented nature of those policies and the dangers we face when they are finally undone.

He goes on to say,

The book finishes with the most important chapters, what you can do to protect yourself from the almost certain negative fallout these policies will produce. This section alone makes the book a must read…. The authors see the end of a long secular bear market, but on the brink of a new secular bull market. Despite their dour outlook for the short term, they are basically bullish on America.

“But,” he concludes, “No book review is considered complete without saying something negative; so, I think they should have titled it Code Blue.” I’ll accept that, Richard.

I am off to NYC early tomorrow morning to be at the NASDAQ for the closing-bell ceremony, to celebrate the launch of a new ETF called ROBO, focused on robotics, automation, and 3-D printing. Then I'll be on Bloomberg radio from 8-9 with Tom Keene and on other media throughout the day. I'll hang around for the evening to be with my old friend Steve Forbes for an interview Thursday morning before heading back to Dallas to see what progress, or lack thereof, has been made on the new apartment.

Finally, my good friend Reid Walker launched an organization called Capital for Kids that raises money from the Dallas investment community (and their clients!) in order to help kids in all manner of activities. They have their big annual soiree Thursday, November 21 at the F.I.G. here in Dallas. Join me and several hundred fun people to help kids who need it. And bring your checkbook. The silent auction is loaded with cool items. Click on the link and look for me when you get there!

Your thinking about how we use words analyst,
John Mauldin, Editor Outside the Box

The Language of Inflation

By Dylan Grice

Edelweiss Journal, No. 14, November 2013
Regular readers of our irregular publication will be aware of our thoughts on inflation, but for those who are not we would summarize them thus: inflation is not measurable. We can summarize our views on money with similar succinctness: it is poorly understood. And as for the economy, we know only this: it is a complex system. From these observations can be derived a straightforward corollary on economic policy makers: trying to control a variable you can’t measure (inflation) with a tool you don’t fully understand (money) in a complex system with hidden, unobservable and non-linear interrelationships (the economy) is a guaranteed way to ensure that most things which happen weren’t supposed to happen.

One such unintended consequence of the past three decades’ economic experiments with “inflation” targeting has been the unprecedented inflation of credit which today leaves the world burdened with debt as it has never been burdened before. In Issue 12 we wrote about another unintended consequence of this monetary experiment, a redistribution of wealth from the poor to the rich and, relatedly, a growing distrust both within countries and between them. Since money is based on trust, we concluded, devaluing money devalues trust.
Now, with the help of Google’s fabulous Ngram Viewer (which allows users to search word usage in five million digitized books published since 1600) we’ve recently stumbled upon another possibility, which is that the past three decades’ hidden devaluation of money has caused a subtle but significant devaluation of language too.

This might sound abstract. But language is the machinery with which we conceptualize the world around us. Devaluing language is tantamount to devaluing our ability to think and to understand. Inflation, whether credit inflation or otherwise, messes things up because it sends false signals. For the ordinary steward of capital in such an environment the near impossible task of judging what is real from what is not is difficult enough. But what chance does he have if in addition, his linguistic software has coding errors to which he is oblivious? This is a question which is perplexing us here at Edelweiss and what follows is an exploration of some of the issues as best we can untangle them.

We start our journey into the financial imagination at the beginning, by tracing an important idea which has had a profound effect, namely that society and the economy are things to be manipulated by expert policy makers.

As Taleb opines in his wonderful book Antifragile:

Modernity is not just the postmedieval, postagrarian, and postfeudal historical period as defined in sociology textbooks. It is rather the spirit of an age marked by rationalization (naive rationalization), the idea that society is understandable, hence must be designed, by humans. With it was born statistical theory, hence the beastly bell curve. So was linear science. So was the notion of “efficiency”—or optimization.

Supporting Taleb’s idea, the following chart shows how the word “optimal” has steadily gained prominence in the 20th century.

As the Taleb quote alludes to, much of today’s pseudo-science was facilitated by a hijacking of the statistical bell curve distribution, the growing psychic predominance of which can be seen here too.

Meanwhile, the growth in what is quite a modern idea of a controllable society can be seen in the following chart.

This new interventionist idea was brought into the realm of economics through the Trojan horse of macroeconomic theory and, in particular, its defining metaphor that the economy is basically an engine. Originally, this metaphor gave economists an excuse to use the same mathematics physicists had used with such great success in the 19th century. The hope was that such tools would afford them similar acclaim. But by the time of the Great Depression Keynes was explaining the slump as being somewhat akin to failure in a car’s electrical system. More recently, Nobel Prize winning clever-clogs Paul Krugman updated the metaphor by describing the current malaise as “magneto trouble.”

Today, the metaphor gives another kind of comfort. One that allows economists to pretend that like an engine, the economy is something that a well-trained expert, perhaps with a PhD from Princeton, should be in control of, and “do things to.” They can optimize it, fine-tune it, or manipulate it in some other way so as to achieve the outcomes most beneficial to “society.” Such experts think they know how to “drive” the economy the way a well-talented astronaut might fly a space shuttle. You’ve probably heard them talk about the economy reaching “escape velocity” or being stuck at “stall speed.” Now you know where they get it from.

They see their job as to constantly monitor the economic engine, check its gauges and dials, ensure its satisfactory performance while all the time standing ready to intervene should anything untoward happen. Thus, writing in January 2012 Larry Summers claimed that “government has no higher responsibility than ensuring economies have an adequate level of demand,” as though doing so were no more complicated than pouring out the correct measure of fuel into a tank. Should the economy ever become too hot and aggregate demand too high, the engineers are supposed to be able to spot this and put the brakes on before anything bad happens. In doing so, the idea is for economic fluctuations to be smoothed, macroeconomic stability achieved and an otherwise unruly world safely delivered into a “ruly” land of milk and honey. But this too is also a new obsession, only really gaining prominence since the 1980s.

The problem is that the metaphor is wrong, the conclusions derived from its use are misleading, and any attempt to achieve “macroeconomic stability” using its prescriptions is doomed to failure. Or at least, now that the results have come in over the past few decades, there isn’t much supporting evidence. If anything, the more obsessed that economists and policy makers became with stabilizing the economy, the less stable the economy became. Certainly the usage of the terms “economic crisis” and “financial crisis” displays a clear trend. (Note the time series ends in 2008; one would expect subsequent updates to show a renewed interest given what happened then and since).

Also, as a matter of empirical fact, the period during which the frequency of financial calamities has clustered is the very same period during which the idea of controlling through policy intervention became so fashionable. The chart below shows the incidence of financial crises as documented by Charles Kindleberger in his classic Manias, Crashes and Panics and updated for the various fiascos of the past decade. As can be seen, financial crises have noticeably clustered around the very period economists started playing God.

Volcker did a wonderful thing in taming CPI inflation in the early 1980s. But this was a watershed moment. His successors used the platform to launch their great experiment. In the name of macroeconomic stabilization they developed the habit of lowering interest rates at the first sighting of any clouds and keeping them low until the sky was blue again. While this all gave the illusion of relatively stable growth, artificially cheap money fueled a background credit inflation the likes of which has never been seen before. The chart below shows total US credit to GDP exploding from 1980 onwards, the great unintended consequence of attempts to stabilize and, of course, the source of the increased instability we have since borne witness to.

But there were other unintended consequences too. The artificial growth in debt saw an artificial growth in the size of the financial sector. And the financial sector did what the financial sector does. It financialized everything. Look at the explosion of these hitherto sparsely used words.

Ideas like these became glamorous because the people using them were becoming rich. In 1981 there was one financial professional in the top fifty names on the Forbes rich list. Thirty years later there were twelve. Cheap credit fueling higher assets benefitted those with access to credit, those who owned assets and the intermediaries who arranged the deals. Typically, such people were already rich. This in turn widened the great disparity between rich and poor we’ve discussed on these pages before, redistributing wealth from the asset poor to the asset rich. Or more simply just from the poor to the rich. Finance became king. Industry became an afterthought, something people “used to do.” Or at least, in the 1980s usage of the term “financial” overtook that of “industrial.”

But what does this all mean? Economists use the notion of “time preference” to describe an individual’s patience, or “discount rate.” The higher his time preference, the higher his discount rate, and someone with a high time preference would have a high preference to spend today compared to tomorrow. Something else which can be detected in these linguistic changes is an underlying change in time preferences. Remember the fundamentals of wealth accumulation: spend less than you earn. It’s no great secret. By working hard and saving you’re more likely to grow wealthy than if you don’t. Those with a lower time preference and a longer time horizon save more and are consequently rewarded more. Patience, thrift and hard work are all a part of the same package, and all serve in the natural process of capital formation and wealth accumulation.
But inflation inverts this calculus. With high price inflation of the traditional variety (i.e., an inflation of high street prices, or CPI), tomorrow’s money is worth less. Thrift makes no sense. Only idiots save. Patience is punished too, the more rational action being to pursue instant gratification by spending money while you can. (It has been well documented by Bernd Widdig, Gerald Feldman and others that during the Weimar hyperinflation, Berlin was simultaneously gripped by a wave of hedonism in which night bars, cabarets and strip clubs expanded as rapidly as the money supply.)

An inflation of credit is different in form but not substance. Why save up for something when you can cheaply borrow the money and have it today? Both types of inflation distort time preferences. Both types of inflation reduce the rewards of patience and thrift. Both types of inflation consequently distort the process through which wealth is created. The following chart reveals this inflated time preference through increased usage of the phrases “right now” and “fast money.”

To say, as almost everyone seems to, that there has been no inflation over the last thirty years and that there is no inflation today is a huge and misleading simplification in our view. What people mean, we think, is that there has been no inflation of the CPIs. Of course, this is true. But there has been a grotesque inflation of credit during this same period, and central banks are pulling out the stops to ensure that it continues. To do this they are engineering a staggering inflation of government bond prices which is inflating nearly all other asset prices. And all the while, there has been a commensurate inflation of economists’ confidence in themselves, of ordinary time preference and, as we shall now see, of expectations for the future. In other words, inflation is everywhere but the CPI.

But to understand the practical consequences it must be understood that language isn’t only a reflection of thought and action. It is a driver too. Language is our cognitive machinery; it shapes our ability to interpret, recall and process concepts. Lera Boroditsky, writing in Edge a few years ago, describes an Australian Aboriginal community whose language references direction in absolute terms, rather than the relative ones Indo-European languages use. Instead of telling someone to “watch out for the ditch ahead,” for example, someone from the tribe might warn a fellow member to “watch out for the ditch southeast.” Boroditsky writes that “the result is a profound difference in navigational ability and spatial knowledge” between the tribesmen and their spatially-relativist Indo-European speaking brethren.

One of the first studies to look into the effect of language on competence makes it even easier to understand why. Studies performed in 1953 on the ability of the indigenous Zuni tribes of New Mexico and Arizona found them to have difficulty retaining and recalling the colors yellow, orange and combinations thereof compared to AngloSaxons performing the same tests. As it happens, the Zuni have no separate words for the colors yellow and orange and therefore insufficient linguistic precision to process the difference. It is often said that sloppy language leads to sloppy thought. These studies and others like them conclude the same from the other direction: linguistic precision leads to cognitive precision. If distinct concepts are poorly defined they will be poorly understood.

It turns out that many of the terms we have long suspected of being hollow and gimmicky are in fact products of this era of financialization, and have only recently gained prominence in usage. As a first example, the following chart shows the Ngram for “wealth management.” It begs several questions. Like, was no one wealthy before 1980? Was there no “wealth” to be managed before then? Have serial asset price inflations and easy credit availability distorted what people understand as “wealth”? Or is it merely that the inflation of all things financial has fostered the creation an entirely new class of professional parasites called “wealth managers”?!

We don’t know. But we attended a lunch recently in which one such “wealth manager” was promoting his services to those around the table. An Italian gentleman claimed to be relieved to have finally found someone who could help him. “At last!” He gasped after the banker’s pitch, “I could really use some help managing my family’s wealth. We own vineyards and a processing plant in Italy, some land and a broiler farm in Spain, some real estate scattered around Europe and the Americas... We are fortunate indeed to have such wealth, but managing it all is increasingly challenging. Can you help?”

The poor banker looked forlorn. Of course, he didn’t mean that kind of wealth, the old-fashioned, productive kind of stuff. He meant the modern, papery, electronic kind. The stuff that blinks at you all day from a screen. Green on an “up” day, red on a “down”... He meant the kind of stuff you can buy and sell. He meant liquidity, we think. His pitch was for the management of the attendees’ “liquid” wealth, presumably because he wanted other people’s money to play with. (We have little doubt our Italian friend would have felt poorer had he sold up his estate and transferred the proceeds to the banker.)

Of course liquidity is an important component of wealth. But liquidity is not wealth. It’s needed to pay the bills that keep the lights on, the house running, the kids at school, provide for unforeseen events and so on. But why does the whole thing need to be liquid? A completely liquid portfolio of investments is important only for those who are intent on trading, and who might need to quickly exit their trades. Such activity may be the niche of a few financial market traders and talented speculators, but of the many who try to build or protect wealth using such methods few succeed. Why should it be so crucial to your average “wealth manager”? What has such activity got to do with the management of real wealth? And anyway, how is someone as confused by the difference between liquidity and wealth as they are between trading and investing supposed to manage anyone’s wealth, exactly? The explosion of wealth managers has seen a commensurate increase in the fetish for things which are liquid, a contrasting and relatively new fear of things which are illiquid.

Another linguistic distortion which has arisen during this age of financialization can be seen in the notion of “risk.” Indeed, the ngram for “risk management” looks similar to that of “wealth management” and again we ask ourselves similar questions. Was there no “risk” to be managed prior to 1980? Has the nature of “risk” changed since then? Or has the conceptualization and therefore understanding of risk changed during this time?

We suspect the latter. Within the space of a generation, bankers have become obsessed with “value-at-risk,” “risk-budgets” and more recently “risk-parity.” All such concepts use the volatility of market prices as the sole input into the calculation of “risk.” But price volatility is not risk and it is frankly dangerous to think that it is. There are so many different types of risks to consider in the practice of capital stewardship that we could write a book about them. Some are to be avoided without exception, others are to be embraced.

But all require judgment because none are measurable. In the broadest sense possible, the greatest and most fundamental risk is the risk of not knowing what you’re doing. To the extent these “risk models” trick “risk managers” into thinking they do, they are dangerous because they blind users to the true nature of risk. The paradoxical outcome is that such risk managers are making the financial world far riskier than it would otherwise be.

Perhaps the most concerning distortion though is the obsession with “growth.” So deeply ingrained is it in our thinking today that one could be forgiven for thinking it has always been thus. But it is actually quite new. Increasingly, we see it as a part of the widespread though subtle inflation of expectations.

As can be seen, this growth fetish also seems to have developed during the credit inflation. Note also the relation to inflated time preferences. The fixation on growth can encourage behavior which may seem beneficial in the short term but is detrimental to the long term. The debt-overhung world we live in today is a very good macro-level example of the long-run damage this growth obsession can cause. But the corporate world is strewn with them. Most companies even tie executive compensation to implied or explicit EPS growth targets. These, not to mention the primacy of expected growth in the broader financial community, create a pressure on management to behave in a manner they otherwise might not. It also encourages executives to focus more on their stock price than on their business, which can be quite devastating.
For example, a survey of 169 CFOs polled for a recent study into earnings quality found that 20% “manage their earnings to misrepresent economic performance” in any given period. In their book Financial Shenanigans, Howard M. Schilit and Jeremy Perler write that “investors are beginning to harbor a troubling suspicion about corporate financial reporting: that management now plays tricks... Sadly, these suspicions are well founded.” Indeed, the bulk of the frauds analyzed in their book turn out to be perpetrated by executives fearful of disappointing the growth expectations they had previously fostered among their shareholders.

Don’t misunderstand us, there is nothing wrong with growth. We like growth and we like the companies we have ownership stakes in to grow. But we like growth as the outcome of an outstanding business process. An enterprise which is better at solving its customers’ problems than its competitors will soon find itself with more customers. Such a business will inevitably grow and this is a natural and good thing. But a company pursuing growth for the sake of it, or because Wall Street demands it, or because remuneration has been structured around it, is less likely to be concerned with the long-term health of the business. The pressure on them to engage in the financial shenanigans that Schilit and Perler document in their book will be greater, all else equal. So it is no longer necessary to merely keep a weather eye on the manner in which companies report their numbers. Today, stewards of capital must also make sure executives haven’t succumbed to the growth disease.

Recently, for example, we examined a company which is regionally dominant in an industry we are interested in and have some knowledge of. But its forty-six page investor roadshow presentation used the word “growth” forty-eight times. The company in the sector we already own a stake in mentioned growth in its forty-four page presentation only four times. Unsurprisingly, the company we investigated had twice as much debt as the one we already owned and had doubled its share count in the last fifteen years (ours had steadily and consistently shrunk its own). Unsurprisingly again, Mr. Market gave the growth-obsessed company a higher multiple than our one because Mr. Market loves growth. But to us, this tendency suggests a company’s clear willingness to either take or ignore risks with its health in the name of its cherished growth. We didn’t pursue our interest.

On a related note, we’ve recently come to the conclusion that there seems to be a widespread misunderstanding of what “capital” is. We happened to stumble across a fabulous book called Talent is Overrated (no sarcastic emails on why we were so attracted to such a title, please) written by the well-regarded Forbes journalist Geoff Colvin. To be clear upfront, is an excellent book which we learned a lot from.

But consider the following extract (our emphasis):

For roughly five hundred years—from the explosion of commerce and wealth that accompanied the Renaissance until the late twentieth century—the scarce resource in business was financial capital. If you had it, you had the means to create more wealth, and if you didn’t, you didn’t. That world is now gone. Today, in a change that is historically quite sudden, financial capital is abundant. The scarce resource is no longer money...

“Financial capital” indeed. We found it striking that Mr. Colvin, a distinguished journalist of a distinguished business magazine should use the concepts of capital and credit completely interchangeably. Yet this is a fundamental error of thought. Capital is not money. One is scarce, the other is infinite. And we might not have thought anything of this sloppy language had we not been talking to an economist a few days earlier who feared for the future of euro. The situation remained grave, he said, and there was surely no alternative than for the ECB eventually to “print more capital”...

What he meant, we think, was printing more money. But it’s not what he said. He had confused money with capital as Mr. Colvin did in his book.

Like the Zuni tribes struggling to deal with the difference between yellow and orange without sufficient linguistic precision, we face the same problem in our financial system. As stock markets blink green on more QE supposedly making us all more wealthy, the developed world is saving less than it has at any time since WWII. And as central banks are conjuring up ever more liquidity, more thoughtful observers scratch their heads over the lack of collateral in the system. Of course, the problem is solvency, not liquidity. Capital comes from savings, and the policy of cheap credit with its inflation of time preference has encouraged spending, not saving. Scarce capital is growing ever scarcer.

One day, the price of capital will reflect its underlying scarcity, because one day it must. But in the meantime we think very carefully about the capital requirements of the businesses we own, growing increasingly wary of those which depend on artificially cheap “financial capital” for their survival. We note in passing that physical gold bullion is the oldest and purest capital there is...

What is the moral of this story for the steward of capital? Success in the long run requires that thought and action be fully independent from the false ideas of the herd. Yet today’s language of inflation embeds so many of these false ideas that the full rottenness of what passes for financial thinking today is obscured. One increasingly reads of capital stewards complaining that things seem more difficult today. We think it’s because they are. We are also increasingly mindful of conversations with friends, family and colleagues that reveal a widespread perception that something is very wrong, though people can’t quite put their finger on what it is.

As we have just argued, we think the answer is that the inflation of credit has driven an inflation of asset prices, which has driven an inflation of future expectations, which has driven an inflation of time preference... and that while the consequences of these various inflations are profound, the new language of inflation which it has spawned is shallow. Therefore, not only is there insufficient capital to ensure future prosperity and insufficient realism to deal with the future this implies, there is insufficient linguistic precision for most people to articulate the problem let alone understand it. And when language itself becomes so grotesquely distorted, how does one go about substituting the customers’ unattainable hopes and expectations of never-ending growth with the need for principled and honest action?

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