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.

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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.

Dylan,

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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John Carter on "What Wallstreet Doesn't Want you to Know"

Don't Get Left Behind....PowerStocks is LIVE!

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See you in the markets,
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Crisis Investing in Action

By Nick Giambruno, Senior Editor, International Man

Stocks in Cyprus Are Down 98%—Time to Start Edging In?

Readers who have been with us for a while know that I've been hinting at the project Doug Casey and I have been working on in Cyprus for a while now. It's a project that dovetails perfectly with Doug's unique expertise. Now is the time to reveal what we have been up to.

Nick Giambruno: Doug, you are one of the foremost authorities in the world on the topic of crisis investing. Tell us about your background on this topic and the potential for life-changing gains it offers for those who have the intestinal fortitude to speculate in crisis markets.

Doug Casey: After my second book, Crisis Investing, [buy it here on Amazon.com] came out in 1979, I started publishing a newsletter. I used the Chinese symbol for crisis as the logo.

It is actually a combination of two symbols: the symbol for danger and the symbol for opportunity. The danger is what everybody sees; the opportunity is never quite so obvious as the danger, but it's always there.

Speculating in crisis markets is the ultimate way to be a contrarian, which means buying when nobody else wants to buy.

It is true, as a general rule, that you want to "make the trend your friend." But there always comes an inflection point when trends change because a market becomes either greatly overvalued or greatly undervalued. And when any market is down by 90% or more, you've got to reflexively look at it, no matter how bad the news is, and see if it's a place where you want to put some speculative capital.

Nick: Massive fortunes have been made throughout history with crisis investing. Was Baron Rothschild right when he said the time to buy is when blood is in the streets?

Doug: That's a very famous aphorism, of course. It was supposedly occasioned by the Battle of Waterloo, when he was buying British securities while the issue was in doubt. He was able to pull off that coup because he made sure that he got the information as to whether Wellington beat Napoleon a day before anybody else did. He recognized that Europe was in a period of tremendous crisis; Napoleon, after all, was actually kind of a proto-Hitler.

But a key point here is that a successful speculator capitalizes on politically caused distortions in the market.
If we lived in a completely free-market world—one without government interventions like taxes, regulations, inflation, war, persecutions, and the like—it would be impossible to speculate, in the sense I'm using the word.

But we don't live in a free-market world, so there are lots of good, speculative opportunities that, in effect, let you turn a lemon into lemonade.

And a good speculative opportunity is both high potential and low risk—not high potential and high risk. Most people don't understand that.

Nick: That brings to mind the Russian oligarchs, who became oligarchs in the first place because they did some crisis investing, i.e., they bought when the blood was in the streets and picked up some of the crown jewels of the Russian economy for literally pennies on the dollar. Are similar opportunities a possibility today in other countries?

Doug: It's interesting with the oligarchs because in the Soviet Union, everybody got certificates, which were traded for shares in businesses that were being privatized. The average person had no idea what they were or how to value them. The people who became oligarchs were able to buy them up for a couple of pennies on the dollar, taking advantage of the negative public hysteria following the collapse of the Soviet Union.
So this is a recurring theme—buying when the blood is in the streets. It's what speculation is all about: namely, taking advantage of politically caused distortions in the marketplace, or taking advantage of the aberrations of mass psychology.

Nick: Exactly—and that was the main reason why you and I were recently in Cyprus. We were there to see if that recent crisis presented a contrarian opportunity.

We all know what happened with the bank deposit confiscations and the capital controls, and most people would think you'd have to be crazy to put money into such an environment. Tell us how Cyprus fits into the theme of crisis investing.

Doug: What drew my attention to it was the fact that the Cyprus stock market is down 98% from its all-time high in October 2007. That's like a bell ringing at the bottom of the market. So I thought it was critical to go and get boots on the ground to see what the story really was.

It's down about as much as any market index has been in history, which makes it a unique opportunity. In any case, it was worth seeing whether or not it's really only worth 2% of what it was at its peak.

I'm not saying that we are absolutely at the bottom. I'm just saying that now is the time to pay close attention because when any market is down 90%, you're obligated to go and investigate.

Whether you buy when it is down 98% or you wait for it to be down 99%—which amounts to another 50% drop—is perhaps like looking a gift horse in the mouth.

Nick: Let's talk about the intrinsic value of Cyprus throughout history that comes from its geography—being at the crossroads of Asia, the Middle East, Africa, and Europe. Does the collapse in the paper Ponzi scheme banking system diminish Cyprus's natural value, or do you think it creates some interesting speculative opportunities?

Doug: Cyprus not only presents a tremendous speculative opportunity, but it is also quite instructive.
The banking sector there got quite out of control; it's similar to what has happened to the banking sector in other countries, like Iceland and Ireland in the recent past. But it's also predictive of what's very likely going to happen to larger banking systems in the near future.

Essentially, Cyprus became a favorite place for people of many nationalities—particularly, Russians—to put money that they wanted to diversify offshore.

The banks became overwhelmed with large amounts of money that dwarfed their capital. When a bank takes money in, it's got to find something to do with that money, and when the local economy couldn't absorb much of it, they became quite reckless.

Since most Cypriots are Greek-speakers, they naturally looked to Athens and wound up buying a lot of Greek government bonds, partly for patriotic reasons and partly because the yields were higher than elsewhere.

Once the Greek government bonds went south, it wiped out the capital base of the Cypriot banks that had purchased them. The Cypriot government was not in a financial position to bail them out, so instead they had what is called a bail-in, where large depositors took a haircut.

Nick: So, what kinds of speculative opportunities have been created from this crisis?

Doug: In all chaotic situations, in all true crisis situations, the baby gets thrown out with the bathwater. Everybody has decided that they don't want to have anything to do with a stock market whose index is down 98%.

But the fact of the matter is that there are sound, productive, and well-run businesses that are listed on the Cyprus Stock Exchange that got caught up in the maelstrom. There are businesses that will continue to produce earnings and pay dividends.

As Damon Runyon famously said, "The race is not always to the swift, nor the battle to the strong, but that's the way to bet."

The country has some unique advantages going for it. Cyprus is a place where Warren Buffett would be looking if the market weren't so tiny. It's also quite illiquid now because most people who needed to sell have already done so, but almost everybody is still too afraid to buy.

That said, I think it's time to start edging in.

We also looked at opportunities the crisis has created in the real estate market.

Nick: We should be clear that we are not necessarily talking about investing here. This is a long-term speculation. Can you elaborate on the differences?

Doug: I think it is critical to use words accurately and precisely, so that we know exactly what we are talking about. "Investing" is about allocating capital so that it can be used productively and produce more capital. "Speculating" is different. As I said before, speculating is about capitalizing on politically caused distortions in the marketplace.

One way this is pertinent to Cyprus is the fact that this is the first time the bail-in model was used and a government didn't step in to make depositors whole. That wiped out billions of euros and depressed the prices of financial assets.

People often confuse speculators with traders, who try to scalp a couple of basis points over a short period of time. What we are doing with Cyprus is not a trade. This is a speculation, and a good speculation can take a considerable amount of time to work itself out.

Nick: In order to take advantage of these opportunities and speculate on this market, one realistically needs to have a Cypriot brokerage account.

It's a testament to the chilling effects of FATCA and other US regulations that the vast majority of financial institutions in Cyprus, which are extremely desperate for cash, won't even consider dealing with American citizens.

And if Cypriot financial institutions won't deal with American clients, who will? Do you think the chilling effects of FATCA really amount to de facto capital controls for Americans?

Doug: Yes. US citizens have had draconian reporting requirements on what they do with their money abroad for years. But the new FATCA law has taken it to a new level.

Essentially, what it does is impose severe compliance burdens on foreign financial institutions that take an American client. It really makes the foreign banks, brokers, and other financial institutions unpaid employees of the US government.

This is expensive, legally onerous, and actually ethically questionable as far as their relationship with their clients. So, for this reason, there are very few non-US financial institutions anywhere that are still willing to take US customers. It's increasingly hard, and in some cases impossible, for an American now to get money out of the country, simply because nobody is going to take it.

I think as the global economic crisis that started in 2007 gets worse—and there is every reason to believe it's going to get worse, since we're just in the eye of the storm at the moment—these regulations will become even more onerous, and are likely to spread from the US to other countries.

So the takeaway from this is that your most important form of diversification in the world today is not diversification across investment classes—although that's very important. It's political diversification, so that all of your assets aren't under the control of one political entity, one government.

Here's how you can get in…

The opportunity for contrarians in Cyprus is great, but it's hugely important to analyze and evaluate all of the options. Doug and Nick's recent trip gave them great insights into the real economic situation in Cyprus and the companies located there. After getting their boots on the ground, Doug and Nick found quite a few pigs with copious amounts of lipstick applied… and a few shining gems, too—quality Cypriot stocks trading for tremendous crisis-driven bargains.

You don't need to take a trip to Cyprus yourself to get the lay of the land. Doug and Nick have written a special report titled Crisis Investing in Cyprus detailing their trip and offering the top investment picks they found on the Cyprus Stock Exchange. In it, you'll find detailed information of the best way to access these amazing opportunities from your living room, the real story on the ground, and much more.

The two of them also found a solution to the brokerage dilemma—they investigated every single brokerage on the island and found one willing to open accounts for American citizens remotely and without the need to visit the country.

All the details and on-the-ground contacts are in their report, which shows you exactly how to access the opportunities on the Cyprus Stock Exchange from your computer.

Crisis Investing in Cyprus is a crucial tool for taking the destructive actions of a desperate government and turning them on their head… and to your advantage.

For a limited time, you can get the report with a savings of 50% off the retail price of $199. That's just $99 for a huge speculative opportunity, penned by Doug Casey—the man who literally wrote the book on crisis investing. To get in on these opportunities, act now before the price discount is no longer offered.

Click here for more details.


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There is a Better Way to Buy Stocks

Ok COT readers....it’s time for a little tough love today. You alright with that? We are willing to bet that all the stock trading strategies you’re using aren’t producing the type of results you had hoped for. Honestly, are they? Sure, you thought it would. So called gurus told you how well those strategies performed, and if you tried it, you’d be rich beyond you’re wildest dreams.

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Good trading, we'll see you in the markets!
Ray @ The Crude Oil Trader 


7 Pre Screening Criteria Critically Important to Only Trading Stocks Most Likely to Get Institutional Support

America—the Next Big Contender in LNG Exports?

By Russia Today, News Network

Just a few years ago, pundits claimed that the US would be a major LNG importer—now they're saying the US will be a major exporter. The truth, says Casey Chief Energy Investment Strategist Marin Katusa in an RT interview, lies somewhere in between. Compared to its global competitors, says Marin, "America is a bit behind the eight ball, so to become a major player, they have to start getting their act together."

This interview was recorded at the Casey Research Summit in October. You can hear much more about where the US might be going in the eye-opening panel discussion from the Summit, "The Myth of American Energy Independence," with Marin and high caliber guests from the uranium and oil & gas sectors, including former US Secretary of Energy Spencer Abraham and Lady Barbara Judge, chairman emeritus of the US Atomic Energy Authority.

Hear these and more than 30 other speakers discuss the most pressing topics investors and free-market advocates face today, such as: Where to find reliable yield in a volatile market… how to protect yourself (and your assets) from ever greater government intrusion… the 5 top tech trends you should watch (and they may not be what you think)… and much more. You can listen to every presentation, every panel discussion, every workshop from the comfort of your home or car—on CD and MP3.

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Finding Explosive Stocks....How to Narrow Down 7,000 Possible Stock Candidates to Less Than 12 in Only 15 Seconds!

Who is Picking Stocks for These Fund Managers?

When successful fund managers make it a daily practice to sit down and review the trades and trading techniques of this staff of traders.....you have to wonder why.

But I’ve gotta say, after watching this presentation on how to select the highest probability stocks for the strongest expansion moves – now I know why these guys have been the “go to” people behind several Wall Street pros and million dollar market makers. So why would you try this alone...they don't! But, you want to know the best part? They’ve just created a free video giving away their entire stock selection strategy.

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Good trading!
Ray @ The Crude Oil Trader

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

December Nymex crude oil closed up $1.49 at $94.85 today. Prices closed nearer the session high today and saw short covering in a bear market. Crude oil bears still have the overall near term technical advantage. A nine week old downtrend is still in place on the daily bar chart.

December natural gas closed up 3.3 cents at $3.499 today. Prices closed near mid-range today and saw short covering after hitting a contract low Tuesday. There was follow through buying today and a bullish “key reversal” up on the daily bar chart was confirmed. That is an early clue that a market bottom is in place for natural gas.

The December U.S. dollar index closed down 0.227 at 80.560 today. Prices closed nearer the session low. The greenback bears have the overall near term technical advantage. However, it still appears a near term market low is in place.

December gold futures closed up $8.90 an ounce at $1,317.00. Prices closed near mid-range in more quiet trading. The key “outside markets” were bullish for the gold market today as the U.S. dollar index was lower and crude oil prices were higher. The gold market bulls and bears are still on a level near term technical playing field.

And the world just wouldn't be right if we didn't include our favorite trade for 2013-14....coffee. December coffee closed down 230 points at 101.15 cents today. Prices closed near the session low and hit another contract low. The coffee bears have the solid overall near term technical advantage. However, this market is now way oversold on a short term technical basis, and due for at least a good corrective bounce very soon.


Why are you losing money? The "Renegade Trader" is back to tell you why.

Thoughts from the Frontline: Bubbles, Bubbles Everywhere

By John Mauldin

The difference between genius and stupidity is that genius has its limits.
– Albert Einstein

Genius is a rising stock market.
– John Kenneth Galbraith

Any plan conceived in moderation must fail when circumstances are set in extremes.
– Prince Metternich

You can almost feel it in the fall air (unless you are in the Southern Hemisphere). The froth and foam on markets of all shapes and sizes all over the world. It is an exhilarating feeling, and the pundits who populate the media outlets are bubbling over with it. There is nothing like a rising market to help lift our mood. Unless of course, as Prof. Kindleberger famously cautioned (see below), we are not participating in that rising market. Then we feel like losers. But what if the rising market is … a bubble? Are we smart enough to ride and then step aside before it bursts? Research says we all think that we are, yet we rarely demonstrate the actual ability.

This week we'll think about bubbles. Specifically, we'll have a look at part of the chapter on bubbles from my latest book, Code Red, which we launched last week. At the end of the letter, for your amusement, is a link to a short video of what you might hear if Jack Nicholson were playing the part of Ben Bernanke (or Janet Yellen?) on the witness stand, defending the extreme measures of central banks. A bit of a spoof, in good fun, but there is just enough there to make you wonder what if … and then smile. Economics can be so much fun if we let it.

I decided to use this part of the book when numerous references to bubbles popped into my inbox this week. When these bubbles finally burst, let no one exclaim that they were black swans, unforeseen events. Maybe because we have borne witness to so many crashes and bear markets in the past few decades, we have gotten better at discerning familiar patterns in the froth, reminiscent of past painful episodes.
Let me offer you three such bubble alerts that came my way today. The first is from my friend Doug Kass, who wrote:

I will address the issue of a stock market bubble next week, but here is a tease and fascinating piece of data: Since 1990, the P/E multiple of the S&P 500 has appreciated by about 2% a year; in 2013, the S&P's P/E has increased by 18%!

Then, from Jolly Olde London, comes one Toby Nangle, of Threadneedle Investments (you gotta love that name), who found the following chart, created a few years ago at the Bank of England. At least when Mervyn King was there they knew what they were doing. In looking at the chart, pay attention to the red line, which depicts real asset prices. As in they know they are creating a bubble in asset prices and are very aware of how it ends and proceed full speed ahead anyway. Damn those pesky torpedoes.

Toby remarks:

This is the only chart that I’ve found that outlines how an instigator of QE believes QE’s end will impact asset prices. The Bank of England published it in Q3 2011, and it tells the story of their expectation that while QE was in operation there would be a massive rise in real asset prices, but that this would dissipate and unwind over time, starting at the point at which the asset purchases were complete.

Oh, dear gods. Really? I can see my friends Nouriel Roubini or Marc Faber doing that chart, but the Bank of England? Really?!?

Then, continuing with our puckish thoughts, we look at stock market total margin debt (courtesy of those always puckish blokes at the Motley Fool). They wonder if, possibly, maybe, conceivably, perchance this is a warning sign?



And we won’t even go into the long list of stocks that are selling for large multiples, not of earnings but of SALES. As in dotcom-era valuations.

We make the case in Code Red that central banks are inflating bubbles everywhere, and that even though bubbles are unpredictable almost by definition, there are ways to benefit from them. So, without further ado, let’s look at what co-author Jonathan Tepper and I have to say about bubbles in Chapter 9.

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.

Why has it become so hard to make money as a trader?