http://pragcap.com/u-s-money-supply-plunges-double-dip-near
So we have deflation until we print money like Weimar.
Good Article at the link above.
Thursday, May 27, 2010
Interesting Analysis - Watch out later this year.
http://www.zerohedge.com/article/tactical-update-bob-janjuah-2008-will-seem-good-old-days
"from RBS' Bob Janjuah
Plse refer to my most recent comments, from 24th May, and 26th April. Things are playing out nicely. This is just a 'tactical' update. In my cmmt of the 24th May I set out 2 possible paths for the new bear market we are in, and I want to clarify a little:
1 - 1st, the bigger strategic theme is clear and unchanged - global growth HAS peaked and the deflation trend is clear for the next 3/6mths. This is strategically bullish the USD and USTs (think 1 vs the EURO, and low 2% 10yr yields). And this is strategically BEARISH risk assets (think mid-800s S&P in 3/6mths, and the iTraxx XO index up above 750bps). The strategic asset allocation outlook STRONGLY favours QUALITY as defined by balance sheet strength, balance sheet transparency (which therefore excludes most financials), market position, AND the ability to be a price setter (not taker).
The game changers are: A) a massive turnaround in China towards new stimulus & a new credit creation binge etc - for now very unlikely IMHO; B) a massive turnaround in corporate behaviour resulting in a leverage, capex, investment, hiring & spending binge - extremely unlike for now and for the rest of this yr; C) a new US fiscal package (pretty impossible now), so the most likely and only really viable remaining option is a MASSIVE DEBASEMENT/MONETISATION move led by the Fed (but no doubt globally co-coordinated) thru the announcement of a NEW (say) USD5trn QE package, aided/abetted by maybe another USD5trn of funny money printing by the BoE, the ECB, ther BoJ, the PBOC, the SNB etc etc.........HOWEVER, I don't expect this last bullet to be used until things get REAL UGLY (see above para for levels). If u know u have only 1 bullet left in the rifle - and unless you are amazingly stupid - u don't try to shoot the charging grizzly bear when its 50 yards away. No, you wait till its 5/10yards away...WHEN we get this final bullet out of the rifle it had BETTER not miss, as if it 'misses' we would then have the mother of stagflationnary busts in history where bonds get crushed due to debasement, taking risk assets out with them too. If this is the outcome - and this is really I think a late 2010/2011 story - then trust me, 2008 really will seem like the Good Old Days.....lets hope Uncle Ben not only has the rifle ready, but also that his scope is well lined up and that he has been practising hard...
2 - In terms of the shrter term tactical outlook, of the 2 scenarios laid out in my last piece, I now marginally favour the 'bullish June, disastrous July/Aug/Sept/Oct' outcome. This is a marginal call - the KEY trend for H2 2010 is BEARISH and HIGHER VOL - but I do think we can see the S&P (as a global risk proxy) up at 1150/1180 in June. This seems to me to be the next and an excellent place to get short risk/get long deflation. A move above 1180 IS possible but unlikely, with 1220 even more remote. However, I would be inclined to rethink a little the precise tactical timing/routemap IF we can get to and close above 1180 for 3 or so consecutive days. A break below 1020 on S&P would indicate that 800s S&P is coming sooner rather than later, but as mentioned, I think this is now business for JULY onwards, not for June.
It is important not to forget that we now have a pretty cool series of lower lows & lower highs on stks whereby we have taken out the early Feb lows. And if u like this sort of thing, a very powerful and ultimately deeply bearish Head & Shoulders is clear too.
So there u have it. Expect policymakers, the sell side consensus and the media to be Rah Rah over the next few days & weeks (its already begun). But don't get too sucked in - use any bull trap to OFFLOAD risk/to get liquid. JUNE can be a decent bullish month, but I really do think it is the eye of the storm ahead of a super nasty Q3/early Q4.
Cheers, Bob"
"from RBS' Bob Janjuah
Plse refer to my most recent comments, from 24th May, and 26th April. Things are playing out nicely. This is just a 'tactical' update. In my cmmt of the 24th May I set out 2 possible paths for the new bear market we are in, and I want to clarify a little:
1 - 1st, the bigger strategic theme is clear and unchanged - global growth HAS peaked and the deflation trend is clear for the next 3/6mths. This is strategically bullish the USD and USTs (think 1 vs the EURO, and low 2% 10yr yields). And this is strategically BEARISH risk assets (think mid-800s S&P in 3/6mths, and the iTraxx XO index up above 750bps). The strategic asset allocation outlook STRONGLY favours QUALITY as defined by balance sheet strength, balance sheet transparency (which therefore excludes most financials), market position, AND the ability to be a price setter (not taker).
The game changers are: A) a massive turnaround in China towards new stimulus & a new credit creation binge etc - for now very unlikely IMHO; B) a massive turnaround in corporate behaviour resulting in a leverage, capex, investment, hiring & spending binge - extremely unlike for now and for the rest of this yr; C) a new US fiscal package (pretty impossible now), so the most likely and only really viable remaining option is a MASSIVE DEBASEMENT/MONETISATION move led by the Fed (but no doubt globally co-coordinated) thru the announcement of a NEW (say) USD5trn QE package, aided/abetted by maybe another USD5trn of funny money printing by the BoE, the ECB, ther BoJ, the PBOC, the SNB etc etc.........HOWEVER, I don't expect this last bullet to be used until things get REAL UGLY (see above para for levels). If u know u have only 1 bullet left in the rifle - and unless you are amazingly stupid - u don't try to shoot the charging grizzly bear when its 50 yards away. No, you wait till its 5/10yards away...WHEN we get this final bullet out of the rifle it had BETTER not miss, as if it 'misses' we would then have the mother of stagflationnary busts in history where bonds get crushed due to debasement, taking risk assets out with them too. If this is the outcome - and this is really I think a late 2010/2011 story - then trust me, 2008 really will seem like the Good Old Days.....lets hope Uncle Ben not only has the rifle ready, but also that his scope is well lined up and that he has been practising hard...
2 - In terms of the shrter term tactical outlook, of the 2 scenarios laid out in my last piece, I now marginally favour the 'bullish June, disastrous July/Aug/Sept/Oct' outcome. This is a marginal call - the KEY trend for H2 2010 is BEARISH and HIGHER VOL - but I do think we can see the S&P (as a global risk proxy) up at 1150/1180 in June. This seems to me to be the next and an excellent place to get short risk/get long deflation. A move above 1180 IS possible but unlikely, with 1220 even more remote. However, I would be inclined to rethink a little the precise tactical timing/routemap IF we can get to and close above 1180 for 3 or so consecutive days. A break below 1020 on S&P would indicate that 800s S&P is coming sooner rather than later, but as mentioned, I think this is now business for JULY onwards, not for June.
It is important not to forget that we now have a pretty cool series of lower lows & lower highs on stks whereby we have taken out the early Feb lows. And if u like this sort of thing, a very powerful and ultimately deeply bearish Head & Shoulders is clear too.
So there u have it. Expect policymakers, the sell side consensus and the media to be Rah Rah over the next few days & weeks (its already begun). But don't get too sucked in - use any bull trap to OFFLOAD risk/to get liquid. JUNE can be a decent bullish month, but I really do think it is the eye of the storm ahead of a super nasty Q3/early Q4.
Cheers, Bob"
Monday, May 24, 2010
Great Investing Article - Decision Making and Dopamine
http://dailycapitalist.com/2010/05/24/stock-markets-cycles-and-dopamine/
Definitely worth reading!
Stock Markets, Cycles, and Dopamine
By Jeff Harding, on May 24th, 2010
This is an article on behavioral economics, markets, business cycles and Austrian theory. It was written by Doug French, president of the Mises Institute. I am reproducing it in its entirety. Anyone who invests in stocks, bonds, real estate, gold, or whatever, should read this article.
After reading the article I was reminded again of the brilliance of Ludwig von Mises and how perceptive he was about his favorite topic, the study of the behavior of human beings, or what he called “human action” (praxeology). The Austrian School was originally called the Psychological School of economics because of its focus on individual behavior rather than aggregate behavior.
The hot new branch of praxeology is behavioral economics, although many behavioral economists are probably not aware of this fact. In this piece, French summarizes current behavioral research and examines it in light of Austrian theory as it pertains to market behavior. The behavioral examples align well with Nassim Taleb’s Black Swan and his conclusions. Although Taleb doesn’t get into Austrian theory as a framework for economic behavior in his book, he, based on my understanding of reading other articles by Taleb, is Austrian in his outlook and conclusions.
Don’t Go With The Flow
By Doug French
Anyone who follows financial markets has to wonder at times, “What are people thinking? How did they come to make those decisions?”
It’s hard to imagine that John Muth and Robert Lucas came up with what’s known as the “rational-expectations theory,” wherein, as explained in Wikipedia,
it is assumed that outcomes that are being forecast do not differ systematically from the market equilibrium results. That is, it assumes that people do not make systematic errors when predicting the future, and deviations from perfect foresight are only random.
Muth and Lucas should watch daily programs on the financial channels like Jim Cramer’s Mad Money, which is supposedly to help individual investors, or CNBC’s Fast Money, a show clearly geared toward speculators. No viewer can watch these shows and walk away believing, “people do not make systematic errors when predicting the future.”
So while financial markets have been a series of speculative bubbles as the Federal Reserve creates money ad infinitum, rational-expectations economists Robert Flood and Robert Hodrick daringly conclude, “The current empirical tests for bubbles do not successfully establish the case that bubbles exist in asset prices.” [!]
The efficient-markets hypothesis (EMH) is the rational-expectations school of the investing world. The efficient-market hypothesis asserts that financial markets are “informationally efficient,” claiming one cannot consistently achieve returns in excess of average market returns on a risk-adjusted basis.
Bob Murphy wrote recently on Mises.org about Chicago School economist Eugene Fama, who is the father of the efficient-markets hypothesis.
Fama is not a Nobel laureate, but he did coauthor The Theory of Finance textbook with Nobel winner Merton H. Miller and he himself won the 2005 Deutsche Bank Prize in Financial Economics as well as the 2008 Morgan Stanley–American Finance Association Award.
Fama was interviewed by the New Yorker’s John Cassidy, which was the basis for Murphy’s article.
Cassidy asked Fama how he thought the efficient-market hypothesis had held up during the recent multiple financial crisis. Fama said,
I think it did quite well in this episode. Prices started to decline in advance of when people recognized that it was a recession and then continued to decline. There was nothing unusual about that. That was exactly what you would expect if markets were efficient.
When Cassidy mentioned the credit bubble that lead to the housing bubble and ultimate bust, the famed professor said,
I don’t even know what that means. People who get credit have to get it from somewhere. Does a credit bubble mean that people save too much during that period? I don’t know what a credit bubble means. I don’t even know what a bubble means. These words have become popular. I don’t think they have any meaning.
“I think most bubbles are twenty-twenty hindsight,” Fama told Cassidy. When asked to clarify whether he thought bubbles can exist, Fama answered “They [bubbles] have to be predictable phenomena.”
I don’t know what Professor Fama’s been smoking or whether he’s just in denial or not paying attention, but, especially since Richard Nixon cut the dollar loose from gold, it’s been one bubble and bust after another.
“It’s hard to be a contrarian. With the bubble in full bloom, the last thing you want to tell the boys at the club is that you have your money in cash or gold.”
And clearly in a boom people go crazy. Another term for bubble is mania, and according the Webster’s, “mania” is defined in an individual as an “excitement of psychotic proportions manifested by mental and physical hyperactivity, disorganization of behavior, and elevation of mood.”
Robert Prechter, in his book View From The Top of the Grand Supercycle, points out that mania refers specifically to “the manic phase of manic-depressive psychosis.”
Economists Kevin McCabe and Colin Camerer combined with neuroscientist Read Montague to do a study of financial markets where the subjects of the experiment were given $100 to invest, making their decisions against 20 different markets. Montague and the two economists used historical market prices, measuring the brain and behavioral responses to these.
The researchers were especially interested in how their subjects would respond to markets featuring bubbles and crashes. The subjects’ brains were scanned while they created and reacted to market bubbles with their investments. Fifty-two subjects played the investment game in the scanners but had no idea they were playing in actual historical markets.
Two of the markets used in the simulation were particularly brutal to the fifty-two participants; the 1987 stock-market crash and the 1929 crash. None of the subjects earned money in the 1929-crash simulation and many lost more than half their portfolio.
“This market,” Montague explains, “out of all twenty used, lulled subjects’ decision mechanisms into a kind of stupor and then — bang. Goodbye, money.”
The variable that most drove behavior in the investment game in all markets was — regret. Regret was a big factor when subjects changed their investments and also “showed up as an extremely strong neural signal in a reward-decision-making region of the brain, the ventral putamen, the same site where reward-prediction error signals appear.”
Montague believes this is significant because, as gambling games evolved to “exploit the frailties of our biological valuation and decision-making machinery,” the 1929 market “hit a kind of fragile ’sweet spot’ of valuation and decision machinery in the subject’s brain.”
Regret, in this case, is the difference between the value of what is and the value of what could have been. This is important because of dopamine, which is a chemical in the brain that helps humans decide how to take actions that will result in rewards at the right time.
People don’t get a dopamine kick when they get what they expect, only when they make an unexpected windfall. So, as Jason Zweig writes in Your Money and Your Brain, drug addicts crave ever-larger fixes to achieve the same satisfaction and “why investors have such a hankering for fast-rising stocks with ‘positive momentum’ or ‘accelerating earnings growth’.” Also, dopamine dries up if the reward you expected fails to materialize.
The brain has 100 billion neurons and only one-thousandth of one percent produce dopamine, but “this minuscule neural minority wields enormous power over your investing decisions,” cautions Zweig.
“Level-headed investors can (and have) been caught up in investment booms and manias.”
Dopamine takes as little as a twentieth of second to reach your decision centers, estimating the value of an expected reward and more importantly propelling you to action to capture that reward. “We’ve evolved to be that way,” explains psychologist Kent Berridge, “because passively knowing about the future is not good enough.”
The effect of all this is what Zweig refers to as “the prediction addiction.” Humans hate randomness. We want to predict the unpredictable, which originates in the dopamine centers of the reflective brain, according to Zweig, leading humans to see patterns where none really exist.
The whole technical-analysis field that Wall Street embraces, is based upon the human desire to predict, and when seeing two occurrences in repetition, people believe (or want to believe) that a trend is in process that, most importantly, they can profit from.
When Parkinson’s patients are given drugs to allow their brains to be more receptive to dopamine, they have the insatiable urge to gamble. When these drugs are stopped, the gambling stops immediately. But unfortunately, when we get what we expect, no dopamine rush ensues.
These neurologists don’t talk about the Austrian business-cycle theory. For that we turn to Ludwig von Mises, who explains that when the central bank lowers interest rates below the natural rate of interest, engineered by an expansion in liquidity,
the drop in interest rates falsifies the businessman’s calculation. … The result of such calculations is therefore misleading. They make some projects appear profitable and realizable which a correct calculation, based on an interest rate not manipulated by credit expansion, would have shown as unrealizable. Entrepreneurs embark upon the execution of such projects. Business activities are stimulated. A boom begins.
Computational neuroscientists would add that not only do the projects appear profitable on paper but also that dopamine is released into the brains of entrepreneurs as they anticipate future profits.
After all, it’s ingrained into the business and investing public’s collective brain that the lowering of short-term real interest rates, and eventually long-term rates, will have a broad and deep impact throughout the economy.
For example, mainstream economist Dr. Yoshi Fukasawa from Midwestern State University writes,
Lower real interest rates stimulate business investment by making more investment projects profitable.
Reduced interest costs mean that more machines and equipment will be bought, new factories and warehouses built, and additional stores and apartment buildings opened.
Businesses may also increase production because of a lower cost of financing inventories. A fall in interest rates thus peps up investment and production.
Lower interest rates also induce investors to move out of interest bearing investments like CDs and bonds and into stocks, causing a stock market rally. For this reason, investors in the stock market generally embrace the news of a lower interest rate. Higher stock values, in turn, make it easier for businesses to issue more stocks to finance additional investment.
As Ludwig von Mises wrote in The Causes of the Economic Crisis,
The moderated interest rate is intended to stimulate production and not to cause a stock market boom. However, stock prices increase first of all. At the outset, commodity prices are not caught up in the boom. There are stock exchange booms and stock exchange profits. Yet, the “producer” is dissatisfied. He envies the “speculator” his “easy profit.” Those in power are not willing to accept this situation. They believe that production is being deprived of money which is flowing into the stock market. Besides, it is precisely in the stock market boom that the serious threat of a crisis lies hidden.
So the excess liquidity created by the central bank is invested in stocks. As the prices of these stocks rise, investors’ dopamine levels increase from the expectation of gain, riskier stocks are then bid up in price by investors because more risk must be undertaken to achieve the same dopamine rush and a market becomes a bubble.
The modern world of financial markets is one long series of unending booms and busts. But the investing public falls for it every time. Rates are going down; the economy will get better; stocks are going up; real estate is going up — I better pile in! I don’t want to miss the boat. I don’t want to regret not getting in on the action.
“The simple fact is most people just do not have brains suitable for investing.”
What can explain this groupthink?
Solomon Asch’s work on conformity demonstrate that groupthink is extremely powerful. His experiments show that people influenced by a crowd will knowingly make wrong decisions 70 percent of the time.
Emory University neuroscientist Gregory Burns found that when people broke ranks with the conforming group, areas of the brain lit up that are associated with negative emotions. “In other words, nonconformity is an emotionally traumatic experience,” writes Michael Shermer in The Mind of the Market, “which is why most of us don’t like to break ranks with our social group norms.”
The fact is, it’s hard to be a contrarian. With the bubble in full bloom, the last thing you want to tell the boys at the club is that you have your money in cash or gold. They’ll make fun of you: “What are you, a wimp? Come on, this is easy. We’re cleaning up. You’re going to regret it if you don’t.” Then your spouse starts in on you. “How are our stocks doing honey? When are we going to pick up some rental properties like the Joneses next door?”
Groupthink studies show that good people can do evil things. That “evil is facilitated through the contagious excitement of the group’s actions, through the unchecked momentum of the smaller bad steps that came before, and ultimately permission for evil is granted by the system at large,” writes Michael Shermer.
By the same token, level-headed investors can (and have) been caught up in investment booms and manias. Even the best of investors can lose their heads. So if the stock market is going up, people pile in. There’s even a name for it: “momentum investing.”
Of course, ultimately the fundamentals of the investments do not support the prices. Market prices cool and dopamine levels dry up, as expected gains don’t materialize. A crash ensues with investor regret.
The booms end in tears. The ultimate bust “makes people despondent and dispirited,” wrote Mises.
The more optimistic they were under the illusory prosperity of the boom, the greater is their despair and their feeling of frustration. The individual is always ready to ascribe his good luck to his own efficiency and to take it as a well-deserved reward for his talent, application and probity. But reverses of fortune he always charges to other people, and most of all to the absurdity of social and political institutions. He does not blame the authorities for having fostered the boom. He reviles them for the inevitable collapse.
The rationalization that Mises refers to is discussed by social psychologist Daniel Gilbert in his book Stumbling on Happiness. Gilbert explains that our frontal lobes make us look at ourselves through rose-colored glasses: “To learn from our experience we must remember it, and for a variety of reasons, memory is a faithless friend.”
“In a world of fiat currencies, created with the ease of keystroke, the value of our savings is threatened every hour of every day.”
Psychologists also call this “hindsight bias.”
“People distort and misremember what they formerly believed,” explains psychologist Daniel Kahneman. “Our sense of how uncertain the world really is never fully develops, because after something happens, we greatly increase our judgments of how likely it was to happen.”
This bias keeps us from feeling like idiots as we look back, but unfortunately it “can make you act like an idiot as you go forward,” writes Jason Zweig.
The phenomena of cognitive dissonance is another way to look at this. Cognitive dissonance is the mental tension created when a person holds two conflicting thoughts simultaneously. For instance, an investor may have believed the stocks he invested in during the boom would make him rich. But when the bust occurs or the stock prices head south for another reason, the evidence is overwhelming that the investor was wrong. Will he or she admit it? No. “The individual will frequently emerge, not only unshaken, but even show a new fervor about convincing and converting people to his view,” psychologist Leon Festinger writes.
When we hang on to losing stocks, unprofitable investments, failing businesses, and unsuccessful relationships, we’re experiencing cognitive dissonance — rationalizing our past choices, while unfortunately “those rationalizations influence our present ones,” Shermer writes.
“There is need to stress this point,” wrote Mises,
because the public, always in search of a scapegoat, is as a rule ready to blame the monetary authorities and the banks for the outbreak of the crisis. They are guilty, it is asserted, because in stopping the further expansion of credit, they have produced a deflationary pressure on trade.
The simple fact is most people just do not have brains suitable for investing. Humans have too many biases — biases that protect us and our fragile egos, so that we can get up and face life each and every day.
But in a world of fiat currencies, created with the ease of keystroke, the value of our savings is threatened every hour of every day. And when monetary bureaucrats act, they send shock waves not only through the financial markets but also through investors’ and entrepreneurs’ brains, sending the mass investoriat on another chase toward riches that are but a chimera.
“The spiritual dimension of these inflation-induced habits seem obvious,” Guido Hülsmann writes in his book The Ethics of Money Production. “Money and financial questions come to play an exaggerated role in the life of man.”
But for ordinary citizens to simply put money in a savings account at the local bank is suicidal, as Hülsmann makes clear. “They must invest in assets the value of which grows during inflation; the most practical way to do this is to buy stocks and bonds,” he writes.
But this entails many hours spent on comparing and selecting appropriate issues. And it compels them to be ever watchful and concerned about their money for the rest of their lives. They need to follow the financial news and monitor the price quotations on the financial markets.
The rational-expectations and efficient-markets-hypothesis folks think that’s just fine; everyone is perfectly rational and have all the information they need to invest without worry. They say market bubbles and the ensuing crashes just aren’t possible. Investors know when markets will boom and bust.
Those of us in the Austrian School know better. Booms and busts do happen with all too much regularity in a fiat-money world, inflicting not only financial pain, but emotional and social turmoil as well. Professor Hülsmann points out that
Carpenters, masons, tailors, and farmers are usually not very astute observers of the international capital markets. Putting some gold coins under their mattress or into a safe deposit box saved them many sleepless nights, and it made them independent of financial intermediaries.
That’s good advice for all of us.
Douglas French is president of the Mises Institute and author of Early Speculative Bubbles & Increases in the Money Supply. He received his masters degree in economics from the University of Nevada, Las Vegas, under Murray Rothbard with Professor Hans-Hermann Hoppe serving on his thesis committee. French teaches in the Mises Academy.
May 24th, 2010 | Tags: Austrian economics, behavioral economics, Black Swan, economic forecasting, Efficient Market Hypothesis, Fama, Human Action, Mises, praxeology | Category: Austrian economics, business cycles | One comment
Definitely worth reading!
Stock Markets, Cycles, and Dopamine
By Jeff Harding, on May 24th, 2010
This is an article on behavioral economics, markets, business cycles and Austrian theory. It was written by Doug French, president of the Mises Institute. I am reproducing it in its entirety. Anyone who invests in stocks, bonds, real estate, gold, or whatever, should read this article.
After reading the article I was reminded again of the brilliance of Ludwig von Mises and how perceptive he was about his favorite topic, the study of the behavior of human beings, or what he called “human action” (praxeology). The Austrian School was originally called the Psychological School of economics because of its focus on individual behavior rather than aggregate behavior.
The hot new branch of praxeology is behavioral economics, although many behavioral economists are probably not aware of this fact. In this piece, French summarizes current behavioral research and examines it in light of Austrian theory as it pertains to market behavior. The behavioral examples align well with Nassim Taleb’s Black Swan and his conclusions. Although Taleb doesn’t get into Austrian theory as a framework for economic behavior in his book, he, based on my understanding of reading other articles by Taleb, is Austrian in his outlook and conclusions.
Don’t Go With The Flow
By Doug French
Anyone who follows financial markets has to wonder at times, “What are people thinking? How did they come to make those decisions?”
It’s hard to imagine that John Muth and Robert Lucas came up with what’s known as the “rational-expectations theory,” wherein, as explained in Wikipedia,
it is assumed that outcomes that are being forecast do not differ systematically from the market equilibrium results. That is, it assumes that people do not make systematic errors when predicting the future, and deviations from perfect foresight are only random.
Muth and Lucas should watch daily programs on the financial channels like Jim Cramer’s Mad Money, which is supposedly to help individual investors, or CNBC’s Fast Money, a show clearly geared toward speculators. No viewer can watch these shows and walk away believing, “people do not make systematic errors when predicting the future.”
So while financial markets have been a series of speculative bubbles as the Federal Reserve creates money ad infinitum, rational-expectations economists Robert Flood and Robert Hodrick daringly conclude, “The current empirical tests for bubbles do not successfully establish the case that bubbles exist in asset prices.” [!]
The efficient-markets hypothesis (EMH) is the rational-expectations school of the investing world. The efficient-market hypothesis asserts that financial markets are “informationally efficient,” claiming one cannot consistently achieve returns in excess of average market returns on a risk-adjusted basis.
Bob Murphy wrote recently on Mises.org about Chicago School economist Eugene Fama, who is the father of the efficient-markets hypothesis.
Fama is not a Nobel laureate, but he did coauthor The Theory of Finance textbook with Nobel winner Merton H. Miller and he himself won the 2005 Deutsche Bank Prize in Financial Economics as well as the 2008 Morgan Stanley–American Finance Association Award.
Fama was interviewed by the New Yorker’s John Cassidy, which was the basis for Murphy’s article.
Cassidy asked Fama how he thought the efficient-market hypothesis had held up during the recent multiple financial crisis. Fama said,
I think it did quite well in this episode. Prices started to decline in advance of when people recognized that it was a recession and then continued to decline. There was nothing unusual about that. That was exactly what you would expect if markets were efficient.
When Cassidy mentioned the credit bubble that lead to the housing bubble and ultimate bust, the famed professor said,
I don’t even know what that means. People who get credit have to get it from somewhere. Does a credit bubble mean that people save too much during that period? I don’t know what a credit bubble means. I don’t even know what a bubble means. These words have become popular. I don’t think they have any meaning.
“I think most bubbles are twenty-twenty hindsight,” Fama told Cassidy. When asked to clarify whether he thought bubbles can exist, Fama answered “They [bubbles] have to be predictable phenomena.”
I don’t know what Professor Fama’s been smoking or whether he’s just in denial or not paying attention, but, especially since Richard Nixon cut the dollar loose from gold, it’s been one bubble and bust after another.
“It’s hard to be a contrarian. With the bubble in full bloom, the last thing you want to tell the boys at the club is that you have your money in cash or gold.”
And clearly in a boom people go crazy. Another term for bubble is mania, and according the Webster’s, “mania” is defined in an individual as an “excitement of psychotic proportions manifested by mental and physical hyperactivity, disorganization of behavior, and elevation of mood.”
Robert Prechter, in his book View From The Top of the Grand Supercycle, points out that mania refers specifically to “the manic phase of manic-depressive psychosis.”
Economists Kevin McCabe and Colin Camerer combined with neuroscientist Read Montague to do a study of financial markets where the subjects of the experiment were given $100 to invest, making their decisions against 20 different markets. Montague and the two economists used historical market prices, measuring the brain and behavioral responses to these.
The researchers were especially interested in how their subjects would respond to markets featuring bubbles and crashes. The subjects’ brains were scanned while they created and reacted to market bubbles with their investments. Fifty-two subjects played the investment game in the scanners but had no idea they were playing in actual historical markets.
Two of the markets used in the simulation were particularly brutal to the fifty-two participants; the 1987 stock-market crash and the 1929 crash. None of the subjects earned money in the 1929-crash simulation and many lost more than half their portfolio.
“This market,” Montague explains, “out of all twenty used, lulled subjects’ decision mechanisms into a kind of stupor and then — bang. Goodbye, money.”
The variable that most drove behavior in the investment game in all markets was — regret. Regret was a big factor when subjects changed their investments and also “showed up as an extremely strong neural signal in a reward-decision-making region of the brain, the ventral putamen, the same site where reward-prediction error signals appear.”
Montague believes this is significant because, as gambling games evolved to “exploit the frailties of our biological valuation and decision-making machinery,” the 1929 market “hit a kind of fragile ’sweet spot’ of valuation and decision machinery in the subject’s brain.”
Regret, in this case, is the difference between the value of what is and the value of what could have been. This is important because of dopamine, which is a chemical in the brain that helps humans decide how to take actions that will result in rewards at the right time.
People don’t get a dopamine kick when they get what they expect, only when they make an unexpected windfall. So, as Jason Zweig writes in Your Money and Your Brain, drug addicts crave ever-larger fixes to achieve the same satisfaction and “why investors have such a hankering for fast-rising stocks with ‘positive momentum’ or ‘accelerating earnings growth’.” Also, dopamine dries up if the reward you expected fails to materialize.
The brain has 100 billion neurons and only one-thousandth of one percent produce dopamine, but “this minuscule neural minority wields enormous power over your investing decisions,” cautions Zweig.
“Level-headed investors can (and have) been caught up in investment booms and manias.”
Dopamine takes as little as a twentieth of second to reach your decision centers, estimating the value of an expected reward and more importantly propelling you to action to capture that reward. “We’ve evolved to be that way,” explains psychologist Kent Berridge, “because passively knowing about the future is not good enough.”
The effect of all this is what Zweig refers to as “the prediction addiction.” Humans hate randomness. We want to predict the unpredictable, which originates in the dopamine centers of the reflective brain, according to Zweig, leading humans to see patterns where none really exist.
The whole technical-analysis field that Wall Street embraces, is based upon the human desire to predict, and when seeing two occurrences in repetition, people believe (or want to believe) that a trend is in process that, most importantly, they can profit from.
When Parkinson’s patients are given drugs to allow their brains to be more receptive to dopamine, they have the insatiable urge to gamble. When these drugs are stopped, the gambling stops immediately. But unfortunately, when we get what we expect, no dopamine rush ensues.
These neurologists don’t talk about the Austrian business-cycle theory. For that we turn to Ludwig von Mises, who explains that when the central bank lowers interest rates below the natural rate of interest, engineered by an expansion in liquidity,
the drop in interest rates falsifies the businessman’s calculation. … The result of such calculations is therefore misleading. They make some projects appear profitable and realizable which a correct calculation, based on an interest rate not manipulated by credit expansion, would have shown as unrealizable. Entrepreneurs embark upon the execution of such projects. Business activities are stimulated. A boom begins.
Computational neuroscientists would add that not only do the projects appear profitable on paper but also that dopamine is released into the brains of entrepreneurs as they anticipate future profits.
After all, it’s ingrained into the business and investing public’s collective brain that the lowering of short-term real interest rates, and eventually long-term rates, will have a broad and deep impact throughout the economy.
For example, mainstream economist Dr. Yoshi Fukasawa from Midwestern State University writes,
Lower real interest rates stimulate business investment by making more investment projects profitable.
Reduced interest costs mean that more machines and equipment will be bought, new factories and warehouses built, and additional stores and apartment buildings opened.
Businesses may also increase production because of a lower cost of financing inventories. A fall in interest rates thus peps up investment and production.
Lower interest rates also induce investors to move out of interest bearing investments like CDs and bonds and into stocks, causing a stock market rally. For this reason, investors in the stock market generally embrace the news of a lower interest rate. Higher stock values, in turn, make it easier for businesses to issue more stocks to finance additional investment.
As Ludwig von Mises wrote in The Causes of the Economic Crisis,
The moderated interest rate is intended to stimulate production and not to cause a stock market boom. However, stock prices increase first of all. At the outset, commodity prices are not caught up in the boom. There are stock exchange booms and stock exchange profits. Yet, the “producer” is dissatisfied. He envies the “speculator” his “easy profit.” Those in power are not willing to accept this situation. They believe that production is being deprived of money which is flowing into the stock market. Besides, it is precisely in the stock market boom that the serious threat of a crisis lies hidden.
So the excess liquidity created by the central bank is invested in stocks. As the prices of these stocks rise, investors’ dopamine levels increase from the expectation of gain, riskier stocks are then bid up in price by investors because more risk must be undertaken to achieve the same dopamine rush and a market becomes a bubble.
The modern world of financial markets is one long series of unending booms and busts. But the investing public falls for it every time. Rates are going down; the economy will get better; stocks are going up; real estate is going up — I better pile in! I don’t want to miss the boat. I don’t want to regret not getting in on the action.
“The simple fact is most people just do not have brains suitable for investing.”
What can explain this groupthink?
Solomon Asch’s work on conformity demonstrate that groupthink is extremely powerful. His experiments show that people influenced by a crowd will knowingly make wrong decisions 70 percent of the time.
Emory University neuroscientist Gregory Burns found that when people broke ranks with the conforming group, areas of the brain lit up that are associated with negative emotions. “In other words, nonconformity is an emotionally traumatic experience,” writes Michael Shermer in The Mind of the Market, “which is why most of us don’t like to break ranks with our social group norms.”
The fact is, it’s hard to be a contrarian. With the bubble in full bloom, the last thing you want to tell the boys at the club is that you have your money in cash or gold. They’ll make fun of you: “What are you, a wimp? Come on, this is easy. We’re cleaning up. You’re going to regret it if you don’t.” Then your spouse starts in on you. “How are our stocks doing honey? When are we going to pick up some rental properties like the Joneses next door?”
Groupthink studies show that good people can do evil things. That “evil is facilitated through the contagious excitement of the group’s actions, through the unchecked momentum of the smaller bad steps that came before, and ultimately permission for evil is granted by the system at large,” writes Michael Shermer.
By the same token, level-headed investors can (and have) been caught up in investment booms and manias. Even the best of investors can lose their heads. So if the stock market is going up, people pile in. There’s even a name for it: “momentum investing.”
Of course, ultimately the fundamentals of the investments do not support the prices. Market prices cool and dopamine levels dry up, as expected gains don’t materialize. A crash ensues with investor regret.
The booms end in tears. The ultimate bust “makes people despondent and dispirited,” wrote Mises.
The more optimistic they were under the illusory prosperity of the boom, the greater is their despair and their feeling of frustration. The individual is always ready to ascribe his good luck to his own efficiency and to take it as a well-deserved reward for his talent, application and probity. But reverses of fortune he always charges to other people, and most of all to the absurdity of social and political institutions. He does not blame the authorities for having fostered the boom. He reviles them for the inevitable collapse.
The rationalization that Mises refers to is discussed by social psychologist Daniel Gilbert in his book Stumbling on Happiness. Gilbert explains that our frontal lobes make us look at ourselves through rose-colored glasses: “To learn from our experience we must remember it, and for a variety of reasons, memory is a faithless friend.”
“In a world of fiat currencies, created with the ease of keystroke, the value of our savings is threatened every hour of every day.”
Psychologists also call this “hindsight bias.”
“People distort and misremember what they formerly believed,” explains psychologist Daniel Kahneman. “Our sense of how uncertain the world really is never fully develops, because after something happens, we greatly increase our judgments of how likely it was to happen.”
This bias keeps us from feeling like idiots as we look back, but unfortunately it “can make you act like an idiot as you go forward,” writes Jason Zweig.
The phenomena of cognitive dissonance is another way to look at this. Cognitive dissonance is the mental tension created when a person holds two conflicting thoughts simultaneously. For instance, an investor may have believed the stocks he invested in during the boom would make him rich. But when the bust occurs or the stock prices head south for another reason, the evidence is overwhelming that the investor was wrong. Will he or she admit it? No. “The individual will frequently emerge, not only unshaken, but even show a new fervor about convincing and converting people to his view,” psychologist Leon Festinger writes.
When we hang on to losing stocks, unprofitable investments, failing businesses, and unsuccessful relationships, we’re experiencing cognitive dissonance — rationalizing our past choices, while unfortunately “those rationalizations influence our present ones,” Shermer writes.
“There is need to stress this point,” wrote Mises,
because the public, always in search of a scapegoat, is as a rule ready to blame the monetary authorities and the banks for the outbreak of the crisis. They are guilty, it is asserted, because in stopping the further expansion of credit, they have produced a deflationary pressure on trade.
The simple fact is most people just do not have brains suitable for investing. Humans have too many biases — biases that protect us and our fragile egos, so that we can get up and face life each and every day.
But in a world of fiat currencies, created with the ease of keystroke, the value of our savings is threatened every hour of every day. And when monetary bureaucrats act, they send shock waves not only through the financial markets but also through investors’ and entrepreneurs’ brains, sending the mass investoriat on another chase toward riches that are but a chimera.
“The spiritual dimension of these inflation-induced habits seem obvious,” Guido Hülsmann writes in his book The Ethics of Money Production. “Money and financial questions come to play an exaggerated role in the life of man.”
But for ordinary citizens to simply put money in a savings account at the local bank is suicidal, as Hülsmann makes clear. “They must invest in assets the value of which grows during inflation; the most practical way to do this is to buy stocks and bonds,” he writes.
But this entails many hours spent on comparing and selecting appropriate issues. And it compels them to be ever watchful and concerned about their money for the rest of their lives. They need to follow the financial news and monitor the price quotations on the financial markets.
The rational-expectations and efficient-markets-hypothesis folks think that’s just fine; everyone is perfectly rational and have all the information they need to invest without worry. They say market bubbles and the ensuing crashes just aren’t possible. Investors know when markets will boom and bust.
Those of us in the Austrian School know better. Booms and busts do happen with all too much regularity in a fiat-money world, inflicting not only financial pain, but emotional and social turmoil as well. Professor Hülsmann points out that
Carpenters, masons, tailors, and farmers are usually not very astute observers of the international capital markets. Putting some gold coins under their mattress or into a safe deposit box saved them many sleepless nights, and it made them independent of financial intermediaries.
That’s good advice for all of us.
Douglas French is president of the Mises Institute and author of Early Speculative Bubbles & Increases in the Money Supply. He received his masters degree in economics from the University of Nevada, Las Vegas, under Murray Rothbard with Professor Hans-Hermann Hoppe serving on his thesis committee. French teaches in the Mises Academy.
May 24th, 2010 | Tags: Austrian economics, behavioral economics, Black Swan, economic forecasting, Efficient Market Hypothesis, Fama, Human Action, Mises, praxeology | Category: Austrian economics, business cycles | One comment
Thursday, May 13, 2010
Europe
More Great Zerohedge Commentary
http://www.zerohedge.com/article/selling-out-germany
The Selling Out Of Germany
Submitted by Tyler Durden on 05/13/2010 11:27 -0500
2s10s. Bear Stearns Crude Fail Germany Great Depression Hyperinflation International Monetary Fund Japan Mars Momo Reserve Currency TARP
By Michael Krieger Of KAM LP
In some ways it’s a battle of the politicians against the markets. That’s how I do see it. But I’m determined to win this battle.
- Angela Merkel
Gold Is Money, and Nothing Else.
- JP Morgan, testifying under oath to Congress before the Pujo Commission, 1913
The Selling Out of Germany
I feel very bad for the German people. Not only do I feel bad for them but I can empathize. I too am being forced to sit back and watch this comedy of errors as a corrupt, inept and increasingly dangerous class of elitist political and financial oligarchs destroys my nation. On Sunday night an ex-client that I have remained in contact with since my days at Bernstein sent me an email with a simple question: “What do you think of the bailout.” I didn’t have time to answer it during trading Monday but when I finally sat down I wrote the following.
Basically, it’s a total joke as is everything else the politicians have done. No one and nothing is allowed to fail and this relates to the fact that the global monetary and financial system is a complete house of cards. It’s insanely bullish for gold. If Germans rioted they would be in the streets today. They totally got sold out beyond belief. But it doesn’t seem to be in their nature to riot so rather I think they will dump their Euros and buy gold. That’s how Germans riot. With every passing day and every new bailout of the global banks (which is all this is, all TARP was, and all everything has been) more and more people awaken to the fact it’s all a total scam. This will just accelerate the process of dumping the paper currencies we use today in favor of hard assets as this system is obviously coming down. A lot of people keep asking, is this the same as post Bear Stearns? I mean here is the biggest difference in my mind. Back then people believed in the system, the market and what we have going generally. Not now. Not anymore. Thousands more people every day figure out it’s rigged and it’s a ponzi scheme.
Now remember I wrote this on Monday night after having just witnessed a 400 point surge in the Dow that was also accompanied by a $5 drop in the price of gold. Such action must have made the control freak bureaucrats the world over self assured of their brilliance and more importantly their “boldness,” the latter a term that Obama likes to use as he is pushing forward some financial nuclear bomb pipedream welfare state policy that is extremely unpopular with the citizenry. Nevertheless, that one day of weakness in gold was followed by a surge to new highs in U.S. dollar terms as the selling out of Germany led to a major rush to buy physical gold. The Germans remember history and they did not disappoint. Just think about this fact. Muenze Oesterreich AG, the Austrian mint that makes the best-selling gold coin in Europe and Japan reported that buyers had purchased 243,500 ounces of gold since April 26, compared with 205,300 ounces in the entire first quarter! Wow. Make no mistake about it what has happened in Germany in the last week (the elections in North Rhine-Westphalia and the rush to convert colored pieces of paper to gold) is the financial equivalent of the shots at Lexington and Concord in 1775. I give the German people a lot of credit for what they have done as this is not just a battle inside America. This battle is global and the German people just launched an impressive counter-attack on the control freak bureaucrats.
At this point I would like to examine the quote at the top by German Chancellor Angela Merkel. “In some ways it’s a battle of the politicians against the markets. That’s how I do see it. But I’m determined to win this battle.” What an incredibly sad woman she is. Now of course she believes every word of this as do her fellow political-class colleagues; however, to anyone that has worked and succeeded in the real world the statement sounds as if it is from an indignant infant. So here we have it folks. In a seemingly simple statement, Angela Merkel said what every control freak bureaucrat that wants to run your life the world over thinks. They ARE the market. They decide who fails and when. They decide who is to succeed. This is prevalent across the entire developed world right now. They decided to bring down Germany and its currency because they want to save face and because the banks basically are forcing them to save them again (as if this will ever end).
The larger point which I have mentioned repeatedly in these emails is that the market always wins. The scary thing is that when the market does win within the context of a political class with excess power the political class turns on its people and attacks them, shuts down the market and then there is the potential for serious tyranny. Every country in the OECD faces this now and we must be prepared financially and emotionally so that we do not allow the political class with their corporate oligarch allies to turn what’s left of the middle class (and a lot of what now can be considered the upper class) into a bunch of serfs in this nightmarish neo-feudalism we seem to be progressing toward. The more gold, silver and platinum in the hands of the people when the house of cards comes down the better. This way not everyone will be destitute and we can start over on our own without having more insane ideas shoved down our throats by our “kings and queens”.
What’s Next for the Euro?
I believe that the physical gold rush we have seen in Europe is proof that the bailout was an epic failure. Of course propaganda will be used all over the place from the emotionally captured mainstream media to the stock market, which as I have said for over a year now is largely used as a political weapon because the uneducated masses actually believe the stock market going up means things are getting better. All we have to do is look at the stellar performance of the Zimbabwean stock market during the hyperinflation to know this is complete nonsense. Ah, but the Disneyland patrons chug along the river in their teacups as “it’s a small world” plays soothingly in the background as they are about to go over a waterfall. Everything is fine, we have acted “boldly” to prevent Great Depression Part II they say. Yeah, something like that…
Ok, so one thing this monstrosity that the Europeans and IMF have unleashed upon us has done is increase the odds that Germany leaves the EU. Now of course this assumes that this thing gets passed and goes into effect as planned. If it does, I do think the chances of Germany itself leaving the union in the next 2-3 years has gone from somewhere less than 10% to greater than 50%. This is partly why I think there has been no bounce in the euro. If it is not the PIIGS that get kicked out (which would probably be very bullish for the euro) but rather that Germany itself that opts out down the road when the political leadership changes then what is a euro then? Nothing. It could trade to $0.50 or lower, who knows. This is a real risk over the next several years to anyone holding euros.
Americans Will Unfortunately be the Last to Figure it Out
I do not mean to be insulting when I say this but the fact of the matter is that during my time at Bernstein a bothersome number of investors did not understand gold. Why it is important, how it has functioned historically, and how it inevitably would function in the future. I think the understanding is far greater today but still not good enough. Now the reasons for the lack of understanding can be easily explained, the most important of which is that fact that we have had the reserve currency since World War II and this has permitted us to print money and buy resources. As such, while Americans did experience major inflation in the 1970s we have not as a nation gone through a traumatic currency crisis to the extent that many other nations in the world have done. Thus, there has been no imperative for most of us to study the history of money and gold’s role throughout history in this regard. I keep hearing “analysts” on television that clearly have no idea what they are talking about expound upon why gold is about to crash. Of course there are scenarios where gold could crash but under those scenarios the stock market would probably go down 95% while gold goes down 50% (we will end up with the Dow and gold 1:1 or close to it one way or the other). This would only happen if government’s globally stopped printing money to bail everything out. Do you want to make that bet?
One fun mental exercise that I and others have often engaged in over the past year or so was speculation as to which bankrupt OECD nation would first see panic in their markets. Would it be Japan? The United States? Europe? Well now we have out answer and in some ways some Europeans may benefit from this in the long-run. The events in the last couple of weeks culminating in the bailout has made it clear to many that this really is game over. As such they are buying gold while it is still inexpensive relative to where it is likely to go. Sadly, this has left many Americans with a false sense of security and as such the public is likely to rush into gold only when it is well above $2,000/oz when the realities of bankruptcy hit the United States.
Oil is NOT $74/b!!!
Just a quick comment on the oil price. If you use WTI (CL1 Commodity on Bloomberg) at this time you have no idea what the oil price is. As a result of what appears to be record (or close to it) inventories at Cushing, Ok, WTI crude as a benchmark appears to be useless once again. Mars oil, which is a lower quality Gulf crude is trading at $77.36/b this morning and this should not happen. It’s all a storage issue and so WTI tells you nothing. Use Brent (C01 Commodity) to get a sense of the real oil price. Brent is currently trading at $80.50/b. Meanwhile, Asian Tapis closed at $83.74/b last night. This $9/b spread is close to record highs.
Final Thoughts
Last week I did an interview with Max Kesier and it can be seen at the following link. http://www.youtube.com/watch?v=pL3n_dqRfQg&feature=player_embedded I appear 13 minutes in but the entire thing is worth watching. Max Kesier’s website is also a good one to check out during the day for some of the financial news that the mainstream media would just as soon not cover. http://maxkeiser.com/
I might not write next week as I am working on something different that I want to get out before the end of May since I will be taking all of June off to drive across America. I leave you with the following cartoon which I think pretty much sums it up!
h/t Uber Momo Trader
http://www.zerohedge.com/article/selling-out-germany
The Selling Out Of Germany
Submitted by Tyler Durden on 05/13/2010 11:27 -0500
2s10s. Bear Stearns Crude Fail Germany Great Depression Hyperinflation International Monetary Fund Japan Mars Momo Reserve Currency TARP
By Michael Krieger Of KAM LP
In some ways it’s a battle of the politicians against the markets. That’s how I do see it. But I’m determined to win this battle.
- Angela Merkel
Gold Is Money, and Nothing Else.
- JP Morgan, testifying under oath to Congress before the Pujo Commission, 1913
The Selling Out of Germany
I feel very bad for the German people. Not only do I feel bad for them but I can empathize. I too am being forced to sit back and watch this comedy of errors as a corrupt, inept and increasingly dangerous class of elitist political and financial oligarchs destroys my nation. On Sunday night an ex-client that I have remained in contact with since my days at Bernstein sent me an email with a simple question: “What do you think of the bailout.” I didn’t have time to answer it during trading Monday but when I finally sat down I wrote the following.
Basically, it’s a total joke as is everything else the politicians have done. No one and nothing is allowed to fail and this relates to the fact that the global monetary and financial system is a complete house of cards. It’s insanely bullish for gold. If Germans rioted they would be in the streets today. They totally got sold out beyond belief. But it doesn’t seem to be in their nature to riot so rather I think they will dump their Euros and buy gold. That’s how Germans riot. With every passing day and every new bailout of the global banks (which is all this is, all TARP was, and all everything has been) more and more people awaken to the fact it’s all a total scam. This will just accelerate the process of dumping the paper currencies we use today in favor of hard assets as this system is obviously coming down. A lot of people keep asking, is this the same as post Bear Stearns? I mean here is the biggest difference in my mind. Back then people believed in the system, the market and what we have going generally. Not now. Not anymore. Thousands more people every day figure out it’s rigged and it’s a ponzi scheme.
Now remember I wrote this on Monday night after having just witnessed a 400 point surge in the Dow that was also accompanied by a $5 drop in the price of gold. Such action must have made the control freak bureaucrats the world over self assured of their brilliance and more importantly their “boldness,” the latter a term that Obama likes to use as he is pushing forward some financial nuclear bomb pipedream welfare state policy that is extremely unpopular with the citizenry. Nevertheless, that one day of weakness in gold was followed by a surge to new highs in U.S. dollar terms as the selling out of Germany led to a major rush to buy physical gold. The Germans remember history and they did not disappoint. Just think about this fact. Muenze Oesterreich AG, the Austrian mint that makes the best-selling gold coin in Europe and Japan reported that buyers had purchased 243,500 ounces of gold since April 26, compared with 205,300 ounces in the entire first quarter! Wow. Make no mistake about it what has happened in Germany in the last week (the elections in North Rhine-Westphalia and the rush to convert colored pieces of paper to gold) is the financial equivalent of the shots at Lexington and Concord in 1775. I give the German people a lot of credit for what they have done as this is not just a battle inside America. This battle is global and the German people just launched an impressive counter-attack on the control freak bureaucrats.
At this point I would like to examine the quote at the top by German Chancellor Angela Merkel. “In some ways it’s a battle of the politicians against the markets. That’s how I do see it. But I’m determined to win this battle.” What an incredibly sad woman she is. Now of course she believes every word of this as do her fellow political-class colleagues; however, to anyone that has worked and succeeded in the real world the statement sounds as if it is from an indignant infant. So here we have it folks. In a seemingly simple statement, Angela Merkel said what every control freak bureaucrat that wants to run your life the world over thinks. They ARE the market. They decide who fails and when. They decide who is to succeed. This is prevalent across the entire developed world right now. They decided to bring down Germany and its currency because they want to save face and because the banks basically are forcing them to save them again (as if this will ever end).
The larger point which I have mentioned repeatedly in these emails is that the market always wins. The scary thing is that when the market does win within the context of a political class with excess power the political class turns on its people and attacks them, shuts down the market and then there is the potential for serious tyranny. Every country in the OECD faces this now and we must be prepared financially and emotionally so that we do not allow the political class with their corporate oligarch allies to turn what’s left of the middle class (and a lot of what now can be considered the upper class) into a bunch of serfs in this nightmarish neo-feudalism we seem to be progressing toward. The more gold, silver and platinum in the hands of the people when the house of cards comes down the better. This way not everyone will be destitute and we can start over on our own without having more insane ideas shoved down our throats by our “kings and queens”.
What’s Next for the Euro?
I believe that the physical gold rush we have seen in Europe is proof that the bailout was an epic failure. Of course propaganda will be used all over the place from the emotionally captured mainstream media to the stock market, which as I have said for over a year now is largely used as a political weapon because the uneducated masses actually believe the stock market going up means things are getting better. All we have to do is look at the stellar performance of the Zimbabwean stock market during the hyperinflation to know this is complete nonsense. Ah, but the Disneyland patrons chug along the river in their teacups as “it’s a small world” plays soothingly in the background as they are about to go over a waterfall. Everything is fine, we have acted “boldly” to prevent Great Depression Part II they say. Yeah, something like that…
Ok, so one thing this monstrosity that the Europeans and IMF have unleashed upon us has done is increase the odds that Germany leaves the EU. Now of course this assumes that this thing gets passed and goes into effect as planned. If it does, I do think the chances of Germany itself leaving the union in the next 2-3 years has gone from somewhere less than 10% to greater than 50%. This is partly why I think there has been no bounce in the euro. If it is not the PIIGS that get kicked out (which would probably be very bullish for the euro) but rather that Germany itself that opts out down the road when the political leadership changes then what is a euro then? Nothing. It could trade to $0.50 or lower, who knows. This is a real risk over the next several years to anyone holding euros.
Americans Will Unfortunately be the Last to Figure it Out
I do not mean to be insulting when I say this but the fact of the matter is that during my time at Bernstein a bothersome number of investors did not understand gold. Why it is important, how it has functioned historically, and how it inevitably would function in the future. I think the understanding is far greater today but still not good enough. Now the reasons for the lack of understanding can be easily explained, the most important of which is that fact that we have had the reserve currency since World War II and this has permitted us to print money and buy resources. As such, while Americans did experience major inflation in the 1970s we have not as a nation gone through a traumatic currency crisis to the extent that many other nations in the world have done. Thus, there has been no imperative for most of us to study the history of money and gold’s role throughout history in this regard. I keep hearing “analysts” on television that clearly have no idea what they are talking about expound upon why gold is about to crash. Of course there are scenarios where gold could crash but under those scenarios the stock market would probably go down 95% while gold goes down 50% (we will end up with the Dow and gold 1:1 or close to it one way or the other). This would only happen if government’s globally stopped printing money to bail everything out. Do you want to make that bet?
One fun mental exercise that I and others have often engaged in over the past year or so was speculation as to which bankrupt OECD nation would first see panic in their markets. Would it be Japan? The United States? Europe? Well now we have out answer and in some ways some Europeans may benefit from this in the long-run. The events in the last couple of weeks culminating in the bailout has made it clear to many that this really is game over. As such they are buying gold while it is still inexpensive relative to where it is likely to go. Sadly, this has left many Americans with a false sense of security and as such the public is likely to rush into gold only when it is well above $2,000/oz when the realities of bankruptcy hit the United States.
Oil is NOT $74/b!!!
Just a quick comment on the oil price. If you use WTI (CL1 Commodity on Bloomberg) at this time you have no idea what the oil price is. As a result of what appears to be record (or close to it) inventories at Cushing, Ok, WTI crude as a benchmark appears to be useless once again. Mars oil, which is a lower quality Gulf crude is trading at $77.36/b this morning and this should not happen. It’s all a storage issue and so WTI tells you nothing. Use Brent (C01 Commodity) to get a sense of the real oil price. Brent is currently trading at $80.50/b. Meanwhile, Asian Tapis closed at $83.74/b last night. This $9/b spread is close to record highs.
Final Thoughts
Last week I did an interview with Max Kesier and it can be seen at the following link. http://www.youtube.com/watch?v=pL3n_dqRfQg&feature=player_embedded I appear 13 minutes in but the entire thing is worth watching. Max Kesier’s website is also a good one to check out during the day for some of the financial news that the mainstream media would just as soon not cover. http://maxkeiser.com/
I might not write next week as I am working on something different that I want to get out before the end of May since I will be taking all of June off to drive across America. I leave you with the following cartoon which I think pretty much sums it up!
h/t Uber Momo Trader
Monday, May 10, 2010
Sunday, May 2, 2010
Mad Max in Arizona
It would be great if every border state with Mexico took these steps. It is well past due. Time to take back control of our country and it's borders.
http://www.americanthinker.com/2010/04/the_arizona_uproar.html
by Leo W. Banks
"Listening to the national uproar, you'd be forgiven for thinking that Arizona has marched into the civil rights apocalypse with its new state law cracking down on illegal immigrants.
Last Friday, Arizona Governor Jan Brewer signed SB1070, making it a crime to be in the state illegally and requiring cops, where "reasonable suspicion" exists, to determine a person's legal status.
Rev. Al Sharpton is promising to come to Arizona to march, the New York Times says that the state has gone "off the deep end," and the Nazi references are flying. Los Angeles Cardinal Roger Mahony likened SB1070 to "German Nazi and Russian Communist techniques."
Riding the noise for political advantage, President Obama is summoning his Justice Department to look into the matter, saying that the law would "undermine basic notions of fairness that we cherish as Americans."
But 70 percent of Arizona residents support the law, according to Rasmussen.
What's going on here? Do we know something the rest of the country doesn't?
Actually, we do. Context is everything, and it'd be nice if the national media provided some, rather than simply slamming Arizona as a redneck haven filled with nativists and bubbas with a hankering for racial profiling.
An estimated 500,000 illegal aliens live in Arizona, and many are decent folks, to be sure. But the border is still wide open, and many more are coming. Last year in Border Patrol's 262-mile-wide Tucson Sector, agents arrested 241,000 illegal aliens, a drop of more than 130,000 from 2007.
It sounds great until you understand that gotaways outnumber arrests by three to one.
Does the country realize this, or have the people bought Janet Napolitano's political fairy tale that border security has been "transformed" from where we were in 2007?
As Obama lectures Arizona, citizens here await his decision on an urgent request to send three thousand National Guard troops to the border. Senators John McCain and Jon Kyl recently asked for soldiers, as did Democratic Congresswoman Gabrielle Giffords, to bring some security to American citizens being hammered by cross-border smugglers and thugs.
Here's an important bit of context: This isn't your father's illegal immigration, when polite farm workers offered to do chores in return for some water and a sandwich as they walked north. Today, the drug cartels have taken over the people-smuggling business. They own the trails into the country and dominate the land, the same way urban gangs control neighborhoods
Any group wanting in has to deal with them, and the going rate is $2,500 per person. If you don't have the cash, the cartel coyote will offer to bring you in for free if you carry his dope. As Cochise County Sheriff Larry Dever testified to the Senate Homeland Security Committee last week, most of the groups coming up now have a gun behind them.
Along the Chiricahua Corridor smuggling route north and east of Douglas, Arizona, residents have been screaming for some time about break-ins, threats, intimidation, vandalism, and home invasions. But the feds did nothing to keep citizens safe. Instead, they talked amnesty. Then the inevitable happened.
On March 27, Cochise County rancher Rob Krentz was murdered on his land, presumably by a drug smuggler. The death occurred on a well-known drug trail, and trackers followed the killer's prints back into Mexico. He is still at large.
Now, I can't argue with those who say that SB1070 has some provisions that smack of desperation -- such as making it a crime to stop your car to pick up a day laborer or to enter a stopped car to get temporary work. That sounds impossible to enforce.
But critics also say that it will have no impact on besieged residents of southern Arizona, and I disagree. It could help.
We have a huge problem with crooks coming up from Mexico to our cities and towns, committing crimes, and bolting back south of the border. Not long ago, I wrote a story that backtracked the records of two of these border coyotes and found that between them, they'd been arrested and released by either law enforcement or the courts a total of 35 times.
One was let go after a traffic stop, and the other had worked construction in Phoenix for years. If this law had been in effect, the police might've been able to get them off the street before they were able to lead more groups into southern Arizona, break into homes, and frighten citizens.
Civil rights? What about the civil right of American citizens to drive up to their homes at night and have some reasonable assurance that no one is inside?
On March 31, four hundred people gathered outside the one-room Apache School to tell their elected reps what it's like to live in smuggler-occupied territory. The meeting was held there, in the cold, open air, in part because the nearest place to host a group that size inside was seventy round-trip miles away, and these folks didn't feel comfortable leaving their homes for that length of time.
They live by a rule of thumb: If you leave your house empty, it will be occupied by illegals or drug smugglers. We're not talking just about homes five miles from the international line. We're talking about homes up to sixty miles north of the border.
Racial profiling doesn't matter much when you're in a fight to preserve your way of life and keep your family and property safe. Let me give you a different perspective on racial profiling. Now, when Border Patrol chases down and arrests illegals south of I-10, everybody says, "Atta boy. Good police work."
But if these crossers put a toe north of I-10, they're home free. Except for Maricopa County Sheriff Joe Arpaio, nobody is looking for them, and if you do, it's racial profiling.
The farther you get from the line, the more people want to make this problem about race. It's the ground the left wants to fight on because it's so effective. Political correctness shuts people up and keeps the border open.
Arizona has had enough and seen enough. This bill, admittedly flawed, motivated in part by anger and frustration, is an effort to step in and do something about a serious national problem on our southern border that grows more dangerous all the time.
But the national media largely ignore it because it offers up the wrong victims and the wrong politics. They don't send reporters out to Arizona get the story, to walk the smuggling trails, to sit with beleaguered Americans at their kitchen tables and understand the torment their lives have become.
Instead, they adopt the preening pose of the self-righteous, screaming from a safe distance about the bubbas. All 70 percent of them.
It's more fun than context.
http://www.americanthinker.com/2010/04/the_arizona_uproar.html
by Leo W. Banks
"Listening to the national uproar, you'd be forgiven for thinking that Arizona has marched into the civil rights apocalypse with its new state law cracking down on illegal immigrants.
Last Friday, Arizona Governor Jan Brewer signed SB1070, making it a crime to be in the state illegally and requiring cops, where "reasonable suspicion" exists, to determine a person's legal status.
Rev. Al Sharpton is promising to come to Arizona to march, the New York Times says that the state has gone "off the deep end," and the Nazi references are flying. Los Angeles Cardinal Roger Mahony likened SB1070 to "German Nazi and Russian Communist techniques."
Riding the noise for political advantage, President Obama is summoning his Justice Department to look into the matter, saying that the law would "undermine basic notions of fairness that we cherish as Americans."
But 70 percent of Arizona residents support the law, according to Rasmussen.
What's going on here? Do we know something the rest of the country doesn't?
Actually, we do. Context is everything, and it'd be nice if the national media provided some, rather than simply slamming Arizona as a redneck haven filled with nativists and bubbas with a hankering for racial profiling.
An estimated 500,000 illegal aliens live in Arizona, and many are decent folks, to be sure. But the border is still wide open, and many more are coming. Last year in Border Patrol's 262-mile-wide Tucson Sector, agents arrested 241,000 illegal aliens, a drop of more than 130,000 from 2007.
It sounds great until you understand that gotaways outnumber arrests by three to one.
Does the country realize this, or have the people bought Janet Napolitano's political fairy tale that border security has been "transformed" from where we were in 2007?
As Obama lectures Arizona, citizens here await his decision on an urgent request to send three thousand National Guard troops to the border. Senators John McCain and Jon Kyl recently asked for soldiers, as did Democratic Congresswoman Gabrielle Giffords, to bring some security to American citizens being hammered by cross-border smugglers and thugs.
Here's an important bit of context: This isn't your father's illegal immigration, when polite farm workers offered to do chores in return for some water and a sandwich as they walked north. Today, the drug cartels have taken over the people-smuggling business. They own the trails into the country and dominate the land, the same way urban gangs control neighborhoods
Any group wanting in has to deal with them, and the going rate is $2,500 per person. If you don't have the cash, the cartel coyote will offer to bring you in for free if you carry his dope. As Cochise County Sheriff Larry Dever testified to the Senate Homeland Security Committee last week, most of the groups coming up now have a gun behind them.
Along the Chiricahua Corridor smuggling route north and east of Douglas, Arizona, residents have been screaming for some time about break-ins, threats, intimidation, vandalism, and home invasions. But the feds did nothing to keep citizens safe. Instead, they talked amnesty. Then the inevitable happened.
On March 27, Cochise County rancher Rob Krentz was murdered on his land, presumably by a drug smuggler. The death occurred on a well-known drug trail, and trackers followed the killer's prints back into Mexico. He is still at large.
Now, I can't argue with those who say that SB1070 has some provisions that smack of desperation -- such as making it a crime to stop your car to pick up a day laborer or to enter a stopped car to get temporary work. That sounds impossible to enforce.
But critics also say that it will have no impact on besieged residents of southern Arizona, and I disagree. It could help.
We have a huge problem with crooks coming up from Mexico to our cities and towns, committing crimes, and bolting back south of the border. Not long ago, I wrote a story that backtracked the records of two of these border coyotes and found that between them, they'd been arrested and released by either law enforcement or the courts a total of 35 times.
One was let go after a traffic stop, and the other had worked construction in Phoenix for years. If this law had been in effect, the police might've been able to get them off the street before they were able to lead more groups into southern Arizona, break into homes, and frighten citizens.
Civil rights? What about the civil right of American citizens to drive up to their homes at night and have some reasonable assurance that no one is inside?
On March 31, four hundred people gathered outside the one-room Apache School to tell their elected reps what it's like to live in smuggler-occupied territory. The meeting was held there, in the cold, open air, in part because the nearest place to host a group that size inside was seventy round-trip miles away, and these folks didn't feel comfortable leaving their homes for that length of time.
They live by a rule of thumb: If you leave your house empty, it will be occupied by illegals or drug smugglers. We're not talking just about homes five miles from the international line. We're talking about homes up to sixty miles north of the border.
Racial profiling doesn't matter much when you're in a fight to preserve your way of life and keep your family and property safe. Let me give you a different perspective on racial profiling. Now, when Border Patrol chases down and arrests illegals south of I-10, everybody says, "Atta boy. Good police work."
But if these crossers put a toe north of I-10, they're home free. Except for Maricopa County Sheriff Joe Arpaio, nobody is looking for them, and if you do, it's racial profiling.
The farther you get from the line, the more people want to make this problem about race. It's the ground the left wants to fight on because it's so effective. Political correctness shuts people up and keeps the border open.
Arizona has had enough and seen enough. This bill, admittedly flawed, motivated in part by anger and frustration, is an effort to step in and do something about a serious national problem on our southern border that grows more dangerous all the time.
But the national media largely ignore it because it offers up the wrong victims and the wrong politics. They don't send reporters out to Arizona get the story, to walk the smuggling trails, to sit with beleaguered Americans at their kitchen tables and understand the torment their lives have become.
Instead, they adopt the preening pose of the self-righteous, screaming from a safe distance about the bubbas. All 70 percent of them.
It's more fun than context.
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