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Saturday, January 29, 2011

REGRESSION TO THE MEAN

All markets are subject to the forces of regression. Newton's basic laws of motion; Action and reaction.

At current levels both the S&P and Nasdaq 100 are stretched further above the 200 day moving average that virtually any other time in  the last 10 years.



Not surprisingly the further a market stretches in one direction the harder it snaps back in the other once the forces of regression gets its hooks into the market.

The Fed is exacerbating this process with their constant meddling in the markets.


The flood of liquidity unleashed by Greenspan and Bernanke from 2002 to 2007 in the vain attempt to abort the bear market was directly responsible for creating the conditions that led to the market crash of 08/09.


The rally last April was pushed much higher than it would normally have risen by the forces unleashed during QE1. The end result; the correction when it finally came was much more severe than it would have been normally, even including a mini-crash in May.

QE2 has now driven the market even further above the mean than in April. Unless the law of action and reaction has been repealed we should soon see an extreme regression to the mean event
.
 

I believe the Fed has put into place the conditions that will bring about the end of this cyclical bull market and usher in the next leg down in the secular bear. 

During the next 3 months we should see the dollar begin to collapse down into the 3 year cycle low unleashing the currency crisis we've been expecting. This will drive a massive surge in inflationary pressure that will poison the fragile recovery and send the global economy back down into the next recession.
A recession that should be much worse than the last one as it will begin with economic conditions much weaker than in `07.

The last time the Fed did this it produced a brief period of prosperity by creating a real estate and credit bubble. We all know how that ended. This time I expect the party to last two years tops, which means this cyclical bull should top by March. In their ill fated attempt to get something for nothing the Fed is going to cause a currency crisis and a massive surge in global inflation. 


The price we will all pay when the house of cards comes crashing down again will be multiples more expensive than last time.

334 comments:

  1. Gary,

    Obviously the market will hit new lows in real terms (priced in ounces of gold for example). What do you think the chances are it will hit nominal new lows?

    Do you think the fed can actually achieve a price level where the debt is manageable, and inflation stabilizes, or does this end in a currency collapse at some point?

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  2. OK, I'm with you on how stretched we are and the need for a regression to the mean, even for the bulls case.

    But that type of event is a intermediate cycle bottom, which you still have not accounted or planned for.

    I know that's because of your 3 yr dollar cycle low, but couldn't equities ignore and decouple from the dollar 3 yr drawdown? Or is such a force to great?

    How about a scenario where we get one ELT equity cycle (to form an intermediate bottom) dropping together with the first ELT dollar cycle. But then the last two ELT dollar cycles into the 3 yr low equities are rallying back in the standard dollar down/equities up correlation?

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  3. Gary, that is why I think the "surprise" is a harsh and fast correction now. These stretched moves are distorting your/Our cycles.

    My plan is to average in the rest of my capital over the month of Feb on every down day my target stocks experience.

    My Favs are AG, EXK, GORO, GDXJ and SLW. I currently have postions in all of them. SLW is my version of SLV (I do not like the fraud aspect of that ETF.

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  4. I need to qualify wht I just posted. I mean stocks in general, not gold and silver miners, i think they bottomed.

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  5. Movax,
    Only if magic all of a sudden starts working.

    There is no easy way out of this. The Fed is just making a much bigger problem just like they turned the tech bubble crash into a real estate and credit bubble collapse.

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  6. Poly,
    It doesn't necessarily have to all occur in the next 2 weeks. We could get a hard correction followed by a failed daily cycle or we could possibly see another mini crash like we did in May.

    While I have my doubts about two market crashes in less than a year it would produce the necessary drop required for an intermediate correction.

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  7. That chart makes me want to buy a big pile of TZA at the open Monday morning...but I won't. I want to save every FRN I have for silver.

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  8. Gary,

    What I hope for is a possible price level where inflation stabilizes. There would be of course a massive speculative gold phase, but then it would come down and stabilize at some new level, similar to 1980: The cycle there started with gold trading at $35 and hit 800+ and came down to the $300 area before everything started over again.
    This time we start from $300, so if this somehow repeats, perhaps we have another bull market in stocks and gold comes down to $3000 or so from ~$8000.

    There could be confidence in the dollar again, but we live in a world where a loaf of bread costs $500 and minimum wage is $1500 an hour or something.

    Do you think this is possible?

    If this doesn't happen, then the dollar collapses and hyperinflation makes cash valueless.

    ReplyDelete
  9. The problem is debt. Hyperinflation is the result of a government debt spiral. At some point the debt becomes so large that a nation can't even service the interest on the debt. At that point there are only two options. Either default or inflate.

    Actually both are a form of default.

    Unfortunately debt service by monetary inflation is a road from which there is no return unless the country is prepared to suffer the bitter pill of a deflationary collapse.

    That would lead to a deflationary depression much worse than the Great Depression. So far the US is still in denial and still piling on ever larger amounts of debt in the futile attempt to cure the debt problem.

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  10. Gary: I think we really could have two mini-crashes in a short time. So many things are out of whack because of the fed meddling I am nostalgic for normal trading. We are so stretched and the rise has been so relent;less that it may take a mini-crash to wipe out the excesses. We'll see. Under normal circumstances I'd agree completely that two near each other in time would be almost impossible.

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  11. DG,
    Friday turned out to be another 90% down volume day. Usually that will trigger some kind of relief rally the next day, even if it's only a small bounce.

    If Monday turns out to be another severe down day I may warm to the idea of another mini-crash.

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  12. Gary,

    I agree. So if the US can create enough inflation while somehow holding onto the dollar system they can reduce the real value of the debt and stabilize the system at some new general price level. If they can inflate faster than debt is created.

    This is in effect taking value from savings/production and paying down the debt through theft, but if it works, it works.

    The question is whether the massive debt can be payed this way without hyperinflation or massive interest rate increases that crush the whole system.

    Do you have an opinion on if the entire system is screwed? Mad max scenarios? Or do you hope for balance somewhere?

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  13. There is no way we can print our way out of this.

    In the 80's we were rescued by Volker's willingness to put the country through two recessions and the advent of the personal computer and internet.

    This time we've let the debt bubble get too far out of control. There will be no coming back from this one. Now we just have to decide whether the depression will be deflationary or hyper-inflationary.

    Unless we get Bernanke out of the Fed it's looking like it's going to be of the hyper-inflationary type.

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  14. Gary,

    Is there a material difference between the $HUI index that you use and $GDM?

    ReplyDelete
  15. Looks like they are basically the same.

    ReplyDelete
  16. Thanks for your thoughts Gary.
    I am hopeful the system will somehow stabilize, but I doubt it will. Guess I'll be getting rid of my cash at some point, hopefully pay my mortgage and get the deed to my house in hand.

    Even though I am in Canada and have some protection, if the dollar goes, I expect the loonie will get hurt pretty bad too, compared to real goods.

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  17. Gary,

    while your overall analysis makes sense, it's all about timing. How, for example, do you explain that Marc Faber - who in principle shares similar view about the money printing, the global economy, and precious metals - comes to the conclusion that this coming correction is not the beginning of a larger downturn in stocks, but rather I buying opportunity. I am not saying one is right and one is wrong, but how do two intelligent people with the same basic analysis come to such different conclusions?
    I would explain it with timing. He probably sees the same results, but further down the road, not after just two years of rally.
    Thanks

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  18. PS: That was meant to be a question, not a statement, so your answer is appreciated.

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  19. Faber is awesome, but I think cycle timing is a far better tool than his (seemingly) fundamental based analysis.

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  20. Basil,
    I come up with that timing based on the next 4 year cycle low coming due in 2012.

    Since bear markets tend to last about a year and a half to two years and they invariably occur during a left translated 4 year cycle that puts the top of this cyclical bull occurring probably this spring.

    Another factor is the dollar's three year cycle low. The bounce out of that low should usher in the next deflationary event. Just like it did as the dollar rallied out of the 08 three year cycle low.

    My timing predictions are based on cycle theory. The unknown is whether or not the Fed can extend the next cycle.

    Personally I don't think they can because inflation is already taking a toll on the global economy, especially in emerging markets.

    And of course as the dollar collapse really gets going we will see a much more serious spike in inflation.

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  21. Hi Gary,

    In the 07/08 crash, PM and commodities crashed with the general market. Do you expect the same thing in the next leg down? Thanks much for the excellent works and insights.

    ReplyDelete
  22. Basil,

    Faber sees stocks more as the lesser of two evils vis-a-vis bonds. It's not a matter of being bullish on the fundamentals of the US economy (he isn't) as much as considering equities a preferable place to hide in a hyperinflationary scenario. Remember that the stock market did very well in Weimar Germany, at least in nominal terms.

    I'm sure he prefers gold to either stocks or bonds.

    ReplyDelete
  23. BTW

    If anyone finds this stuff interesting beyond a way to invest and make money, that is, as far as the Socioeconomic aspect, and hasn't seen the following already, please consider:

    Must watch:
    Money as Debt
    Money as Debt 2
    Century of the Self series (excellent)

    Maybe:
    Zeitgeist movies
    Conspiracy Theory with Jesse Ventura series
    Alex Jones is worth a mention too though he is a bit nutty.

    ReplyDelete
  24. Rebecca,
    08 was a selling climax on par with the crash of 29 and 87. Those kind of events only happen once or twice a century.

    The next bear market will likely follow the normal bear market grind. I don't think that kind of bear will exert the kind of selling pressure on gold that the 08 crash did.

    Also 08 was the 8 year cycle low for gold. The next one isn't due till 2016. I expect that to separate the second phase of the bull market from the third bubble phase.

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  25. Gary, David,

    thank you for your responses.

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  26. Alright I am a nut case!!!! But none here seem to worry about the potential of anther distress...Really...is even the US investor so blind to realize what is going on...I will take any verbal assault at this point, because you guys are freaking missing the boat right now...Unfricking believable. Do you guys solely look at TA; are we really that stupid?
    Ah Well....maybe it is time for me to leave this blog.....

    As always good luck all...I wish the best for everyone and their families. But I have had enough. With what is going on, I really can’t figure why so many guys are arguing over lines on chart. We are in the mist of creating history, and we are talking about 1265 for gold. My patience is done……sorry!

    ReplyDelete
  27. Hi Keys,

    What's on your mind?


    James

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  28. Yea, Keys, what are you seeing?

    FYI though the $HUI and $GDM perform similary as Gary notes, their component counts vary a bit.

    $HUI has 16 components - see http://finance.yahoo.com/q/cp?s=%5EHUI+Components

    $GDM has 31 components - see http://finance.yahoo.com/q/cp?s=%5EGDM+Components

    ReplyDelete
  29. Hi Keys,

    Let me take a stab here.

    What we are seeing in Egypt and maybe other countries of the Middle East is instablility because of a weaker dollar. A weaker dollar has caused agricultural products such as wheat and corn to rise considerably. It just so happens that these countries depend on these commodities. These products which were once cheap are no more.

    So will we continue to see further unrest in other countries that are highely dependent on cheap agriculture products?

    You bet.

    The federal reserve that caused this dilema ultimately wants to force our hand at spending. If you knew that food prices were going to soar in the future would you not being buying now? Of course you would.

    So buy spending the fed hopes to create jobs. I think it may work but the trade off is each person will have less worth. (But hey, at least we're working).


    James

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  30. Oh,

    And I believe Egypt unfortunately was the catalyst we were looking for.


    James

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  31. ive been loading on s&p put since end of december... now ive got them all on feb expiry... hey guys, how low can we go by feb 19th??? should i ride them to expiry expecting smart money to pull out fat or not??

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  32. ive been loading up on puts, on s&P feb19th expiry, hey guys, how low is it going to go... should i ride it out to expiry expecting smart money to pull the ;arket down to get the max out of that expiry.. of come out before based on sentimemt...

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  33. This comment has been removed by the author.

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  34. Quote from Richard Russell newsletter:

    Gold has risen a fantastic ten years in succession. Gold, of late, has been receiving a lot of interest and publicity and advertising. Gold is probably overdue for a correction in this ongoing bull market. Analysts are talking about "gold correcting down to 1200 or even 1000." However, I believe that the more important picture is that the gold bull market has much further to go on the upside.

    I've been reading the McClellan Market report for years. It's one of the better and more intelligent reports that I read. McClellan does a good deal of research on cycles, and I must say some of their cycle studies work out quite well.

    McClellan has discovered that there's a cycle low appears for gold roughly every 12.5 months. The cycle lows have run as follows: Jan 6, '06, Jan 8, '07, Jan 7, '08, Jan 5, '09, Jan. 4, '10, Dec. 31, '10. McClellan puts the next cycle bottom for gold at February 8, 2011. Which means that the cycle low for gold should arrive at any time between now and February 8, give or take a few weeks before or after that date.

    Interestingly, the McClellan cycle bottom for gold is due to arrive amid a good deal of professional bearishness regarding gold ("gold overdue for a major correction"). Thus, many traders have traded out of their gold positions, just as we near the date for the McClellan cycle bottom.

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  35. Tase index -3,85%.Tomorrow probabily sell off on stocks.Get ready :-)

    good evening to everybody

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  36. Yes, it was precipitated by decades of corruption and grinding poverty, but the overthrow of the Tunisian govt and all the unrest in the Mideast is actually traceable to a *single person*.

    Basboosa
    http://en.wikipedia.org/wiki/Mohamed_Bouazizi

    ReplyDelete
  37. TZ, the timeline:

    http://www.nationaljournal.com/timeline-revolt-in-the-middle-east-and-north-africa-20110128

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  38. Sorry guys for the previous rant!!
    Should have kicked the dog instead....Basically I am just frustrated with what is going on...Really rather obvious if we take a step back. Emotional outbursts are part of being slightly nuts.

    In any regard...people are people...think of a bunch of 5 year olds playing in the sandbox. Some other kids see what the kids in the playground are playing with...they stare at the favourite toys secretly wanting it...Now imagine that the kids in the sandbox start a fight and get a time out...so to speak. Their toys are now left unguarded. The boys that were secretly coveting the toys, now have an opportunity. So they run to get the toys fighting to see who can get them first.

    Ie if the Middle East turns into such a disaster that governments lose their effective power, the countries such as the US, Russia, China, will all dive in to control the region....If governments lose control in the region, the potential for a world-wide conflict is at hand. Again everything is caused by Ben's arrogance and stupidity. Riots, wars, famine. I don't know if any of you have friends and family in the regions; as people we tend to think only about what we see outside. I hate gold, and being forced into this trade because the US is unable to or unwilling to do the right thing really bites a little. Once we understand what is really going on with the printing presses, we really can see what a horror has been placed upon the world and its citizens.

    And we have only started. The QE effect on food prices has only just begone. The potential for further riots and population reaction is almost a given at this point; the only thing I am not sure about is the amount and degree of unrest.

    Sorry again for the previous rant!

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  39. Does McClellan take into account QE 2 in his cycle dates?



    James

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  40. Cheers Gary, were seeing a lot of distribution in the tech sector, we could see mid september lows taken out here.

    http://pressurepointpivots.blogspot.com

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  41. Keys,

    Are you Alex Jones? Sorry, overall I really like Alex, I just think he can be a bit over the top and loses control of his emotions sometimes.

    ReplyDelete
  42. Daniele,

    Where is the TASE index trading today that it is down almost 4%? Does it trade in Asia/Europe, etc? And do you know if this includes the top 25 market cap companies just in the US or worldwide?

    Thanks in advance,

    Steven

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  43. lol! Losing it was much worse when I was younger. Should have never gotten off the meds. :)

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  44. Ah! Thanks Gary. Why would this lead one to believe that worldwide exchanges will be off tomorrow (although I tend to agree).

    Gary,

    Do you think the situation in Egypt as it ha progresed over the weekend will cause further runs to safety (PMs, Dollar/Irony, etc)?

    And do you think this is a few day wonder or could it be the catalyst to the beginning of the C wave? I read the weekend report but couldn't tell where you came out on this particular issue.

    ReplyDelete
  45. Steven,
    I have no strong feelings either way. That's why I laid out several options for either scenario.

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  46. Just remember that the bears were calling for Dow 4000 or below even as the Fed was printing money. It was only much later when the market kept on rising that the bears attributed the rise only as a result of money printing. Oh, so that is the reason. Now the bears "know" why the market is rising, and that is all they ever talk about these days.

    What is the bears' next excuse when SPX hits 1500?

    Then 2000?

    Then 2500?

    Well, there will be some other excuse when they can no longer attribute the further rise to money printing. Remember that when Dow was at 7000, people were calling for the next Great Depression and that there was nothing anybody can do about it. Then the Dow rips and roars higher; oh, something could be done in the form of money printing. It's pretty obvious where the reasoning pattern is going.

    Gary, I think your convictions are way too ironclad strong, for someone who can change his mind rather quickly. Weren't you the Dow 4000 crowd?

    Other further excuses I see coming up in the bear crowd include:

    - hyperinflation
    - the next tech revolution

    A new tech revolution is a real possibility because technology is advancing at such a staggering pace. It is not a matter of if, but a matter of when. It is to be expected. As such, one should not be too convicted to the secular bear market case, especially after we've supposedly been in one for nearly 10 years now.

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  47. BEANIE,

    Where is your money placed?

    You conveniently seem to leave that out of almost every market commentary you make.

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  48. Beanie, stop saying rubbish stuff! What is happening in Egypt is big and far from beingover...Even if Mubarak leaves, there will be riots in Yemen and Mauritania and finally in the Middle East like Jordan, Saudi Arabia etc... If Mubarak stays, there will be a blocade of tge Suez canal and here we go, 1973 again... So please Beanie, don't talk about a rally here, it won't happen...

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  49. Beanie,
    I actually missed the bottom by one day (I had to wait for a swing low).

    I did think the market would turn back down after testing the 200 DMA. When it didn't it became obvious we were in another cyclical bull market.

    Being a perma anything isn't good for ones portfolio. Your perma bull stance got you destroyed in 08/09. Many perma bears have decimated their accoiunts since the 09 bottom.

    I don't know why it's so hard for some people to understand that markets go both ways.

    In regards to the secular bear market there is absolutely no debating that one.

    Since 2000 the market has just traded in a big roller-coaster spurred on by currency debasement and a series of Fed blown bubbles.

    During the last 10 years PE ratios have contracted from 42 to the current range of about 17. Of course in inflation adjusted terms true stock market value has taken a huge hit.

    That is the definition of a secular bear market. And unless human nature has changed this one will end like every other secular bear market in history has ended, by valuations dropping to ridiculously cheap levels.

    The fundamental driver will be the cleansing of debt from the world.

    We had the chance to solve this problem early in the last decade but instead we decided to make the problem bigger. So now we are going to have to suffer through a very painful deleveraging process.

    We went through this exact same thing in the 30's. We made the wrong choices then also and the result was a 15 year depression and WWII.

    To think that somehow we can solve a problem of too much debt with more debt defies logic.

    I assure you we can't so we will continue to have these massive swings in the market just like we did in the 70's with each collapse being bigger than the last.

    You really should jettison the perma bull stance so you don't get caught again when the next collapse comes.

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  50. Steven, i wasn't meaning that tase can lead market as leader.Just point out sentiment now is absolutely of fear and it can anticipate what presumibily could happen tomorrow on market.

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  51. Odd..
    Saudi market up 2.5% today (1/30) despite the turmoil over in Egypt.

    http://www.gulfbase.com/site/interface/MarketWatch.aspx?m=1

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  52. The rest of Middle East marketd down sharply.

    http://news.yahoo.com/s/ap/20110130/ap_on_bi_ge/ml_mideast_markets

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  53. Beanie,

    I was pounding the table for stocks in March 2009. Many longtime bears were. The people who were paralyzed were permabulls who had just lost half their money. Go back and look at Doug Kass, Barry Ritholtz -- many bears recognized that stocks had finally become a bargain.

    They're not a bargain anymore. I just pulled my kids 529 funds out of the S&P last week after doubling them in two years.. I will reinvest when I am assured of an 8%
    annualized return.

    You should really stop congratulating yourself for money you haven't made yet.

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  54. erich, but Saudi shares fell 6.4 percent on Saturday.Today recover just a little.

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  55. David,

    I can tell you for a fact that just about every single market commentator and blogger, both bull and bear, have claimed that they called the March 2009 bottom. That simply can't happen. You cannot have bulls and bears all calling the bottom (or top, for that matter) at the same time. It's just not how the market works. One group is always wrong at one end.

    ReplyDelete
  56. Sorry to come back with this, but it's my view that we won't get a bottom in miners before the s&p correction has run its coarse... so...ive been loading on s&p put since end of december... now ive got them all on feb expiry... hey guys, how low can we go by feb 19th??? should i ride them to expiry expecting smart money to pull out fat or not??

    ReplyDelete
  57. David,

    You may be confusing a real bottom with a technical bottom. Many have called the March 2009 as bottom. But a few months later, they exclaim, "Get ready for the ride for another collapse!" Ironically, those same guys now all claim they have called the March bottom. That isn't calling for the bottom, really. What they called was a technical bottom and somehow it morphed into,"I called the bottom."
    :)

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  58. Beanie,

    Just look it up. Their calls are on the record.

    Doug Kass, Barry Ritholtz, Marc Faber -- all flipped bullish in winter 2008-9.

    The people who were selling at the bottom were the margin clerks liquidating the positions of people who bought the top. That's how bottoms are made.

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  59. Golden,
    If you have gone all in on puts you are playing with fire. Every little intra day wiggle will cause gigantic swings in your portfolio. Very few people can make rational decisions in those kind of conditions. No to mention February is way to short. You should be out to April at least so you don't have to deal with extreme time decay.

    If I was you I would sell as soon as you get back to even and then just take out a modest short position if you want to play the short side.

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  60. Beanie,

    The 2009 bottom was a technical bottom.

    Whether it also proves to be a final, never-to-be seen again secular bottom remains unknown to you or anyone else.

    You should also know that true permabears -- stopped clocks like Tim Knight who have been shorting this rally all the way up -- come in for a fair amount of ridicule on this forum. So do stopped clocks of the bull variety.

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  61. David,

    I'm pretty sure i called a technical top back in August 2007, but you will never see me go anywhere saying I called the August 2007 top. (Bulls cannot call real tops, just like bears cannot call real bottoms).

    One of the few handful of bears I know who actually called the bottom was when he said "generational bottom". But even he didn't think the market was going to go any higher back in late 2009.

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  62. David, The fact was Ritholz went bullish, but he also went bearish again and fully cash somewhere around 850-900 range. He went in on a technical basis of support at the 12 year low. To say he was or is bullish on the economy is a misnomer. Beanie being right is rare, but he has this one.

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  63. The difference is the Ritholtz profits from both bull and bear markets. perma bulls only make money when the market is rising. Then the give it all back during a bear market.

    Perma bears do the exact opposite.

    If one is a perma anything then you have no chance of making and more importantly keeping any gains in the market.

    One has to recognize that the market goes in two directions and they have to be able to recognize secular bull and bear markets.

    Stocks are in a secular bear market. Gold is in a secular bull market.

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  64. Gary,

    It is simply not try regarding permas don't make money. Permabulls do make money even in bear markets; they just don't get to realize their profits until the bull market returns.

    Permabulls make their money by buying great companies on the cheap in bear markets. Then the profits come when the market gets more bullish. In fact, for the last 100 years or so, the market has been overall bullish. If anything, the market have favored the permabulls.

    It is safe to say that Warren Buffett is a permabull. He rarely rarely shorts stocks and he is always invested even in bear markets. He obviously sees advantage in being a permabull. And he's right.

    All great super investors like John Paulson, George Soros, Warren Buffett, David Einhorn, Bruce Berkowitz, David Tepper, are invested even in bear markets. All like to scoop up stocks in bear markets. Some also short stocks, but they do have money invested even in bear markets.

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  65. Not exactly true. In 66 before the secular bear market started Buffett liquidated his fund because he couldn't' find any more bargains.

    During the last bear market Paulson made billions by recognizing the broken fundamentals in the financial markets and betting against them.

    The largest gains come during bull markets. Obviously as the most one can make shorting is 100%.

    During a secular bear market one can't remain constantly bullish or they will throw away 15 to 20 years of time value while their account goes no where. (In reality their wealth gets decimated by the forces of inflation)

    The only time one can go into perma bull mode is during a secular bull market. In those conditions one can buy and hold. You do have to be able to spot the eventual top though or you risk getting caught in the inevitable bear that will follow.

    There will come a time when we will exit all gold positions and look to re-enter the general stock market in preparation for the next secular bull.

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  66. When you feed trolls, they just don't go away...

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  67. Gary,
    Thanks for ur advice on s&p puts... i exited 80% PM postion in dec with a high % profit keeping 20% as core... i scaled in 3% portfolio in dec on s&p jan expiry puts... lost it all... then scaled in another 3% of fev expiry s&p puts so far i've made a profit... now it's going down i stop scaling in... my understanding is that the best time to buy is when fear is dominant, which translates to high implicite volatility on puts... i will keep them till impl vol spikes.. regarding the PM miner, i use GDX and GDXj as good proxys... they also harbour an options market... i've been reading this post and other about nailing a bottom... a low risk strategy at this stage would be to sell naked puts for an equity value of say 10%porfolio... if i'm wrong i can always get assigned on the puts, cash in the premium and its as if i had a lower buy level... i would do this on the first swing... and add on if i get the sort of confirmation u speak about in ur week end report...

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  68. It is true John Paulson made $4 billion for himself by shorting the housing market. But he made $5 billion for himself last year going long the financials, and probably with less effort.

    It's hard to believe, but the markets have always favored the bulls when you look at the long term scheme of things. Had your grandparents bought just 1 share of KO (and reinvested all the dividends) one hundred years ago, that initial 1 share investment would be worth well over $7 million today. I sure wish my grandparents (or my parents) had the foresight to be a permabull.

    ReplyDelete
  69. Golden,

    Actually the best time to buy puts is when fear is nowhere to be found. And then, if you are very lucky or impeccable in your timing, if the market tanks you make a killing not only because it's going in your favor but also because the time premium goes way up due to the big rise in fear. That's the ideal scenario, but very difficult to pull off in real time.

    If you buy when fear is prevalent, then if the market pauses or goes up a little, you could lose a lot because the time value of put options drops off as fear abates. You could even lose a lot of the value of your options if the market only goes sideways, such that the value of the underlying does not actually go against you.

    Options are tough.

    I would read Gary's suggestions on how to play them if you are going to continue to play them. He has suggested buying deep in-the-money options so that the value of the option nearly matches the value of the underlying. That way there is very little time value, so the option should track very close to the underlying no matter what the underlying does.

    Good luck!

    ReplyDelete
  70. Paulson made $5 billion in gold. Gold is where the bulk of his assets are invested.

    ReplyDelete
  71. Beanie,
    No one will deny that over the long haul stocks always go up. The thing is that in a secular bear market they spend many years doing nothing and if you factor in inflation they lose a tremendous amount of purchasing power.

    If you bought stocks at the beginning of 2000 then you have held for 10 years only to lose 16% in nominal terms and double that in inflation adjusted terms.

    Who in their right mind wants to hold on to something for 10 years only to lose 30% of their wealth, especially when during that time they could have increased their wealth over 1000% by riding the secular bull market in mining stocks?

    One just has to understand how these big long term cycles work and spot the major turning points when they happen.

    We had one of those turning points in 2000.

    ReplyDelete
  72. Other than my gold and silver miner holdings, I trade options.

    First off selling premium is always preferable to buying premium, but if you do, using spreads eliminates much of the volatility crushes and time decay.

    ReplyDelete
  73. Options are for suckers. High commission and wide spreads. What else does one need to know?

    ReplyDelete
  74. And don't forget the greeks with options. Most people can't guess up or down well enough to make money, much less a changing rate of time decay.

    ReplyDelete
  75. Beanie,
    Hereis a very good chart sequence of what has happened during secular bear markets and what is happening in inflation adjusted terms during the current bear market.

    ReplyDelete
  76. Silver broke the daily downtrend line this evening. Also put in a swing low (and will appear on the $silver chart tomorrow because, as we already estabilished, it includes overnight/24hr data).

    No swing low in gold yet or downtrend break, but we don't have far to go up to do so.

    ReplyDelete
  77. Im showing the high for Gold to be 1347.20, thats above Gary's 1346.30

    ReplyDelete
  78. TZ,

    Silver futures (march) have not broken the downtrend line (yet). They touched it and have pulled back.

    ReplyDelete
  79. Gary,

    It is a very common misconception that you can only win 100% on the short side. That is absolutely not true. You can win just as much as on the long side, without ever being leveraged.

    People seem to think that if you short a stock at 100 and it goes to 0, then you make only 100% return. The problem is that when a security goes down in value, you have to short more shares in order to keep your short position at 100%. When you are long, you don´t need to do this rebalancing, because the value of the security goes up together with the value of your portfolio. So if you constantly rebalance your short position, you will make almost an inifinite % as a security goes from 100 to 0.

    ReplyDelete
  80. David,
    What you are talking is adding leverage. You are assuming the security continues down. If it doesn't then you will quickly get a margin call if you keep adding to your shorts.

    The same can be said for the long side. You can continue to add margin to your positions but as soon as the trade goes against you you will get a margin call.

    ReplyDelete
  81. Gary,

    I am not talking about leverage. I am talking about keeping your position at 100% invested. If you short 100 shares of a stock when it is priced at 100, you are shorting 10,000 dollars. When the stock goes to 50, you are gonna be worth 15,000 and you will be short only 5,000. So to bring your short position back to 100% you need to short an aditional 200 shares. If you do the math you will see that your gains are not limited on the short side without you ever being leveraged.

    ReplyDelete
  82. PIMA,

    Call it as you see it.
    It was above when I wrote. Now it's back down to retest.

    ReplyDelete
  83. the book i recommended multiple times to other traders is now selling on Amazon for 1234.00 new

    thought that was funny

    mind over markets is the book

    hope everybody had a great weekend

    ReplyDelete
  84. PC,
    TZ is right. Silver did break above the downtrend line.. not to be technical or anything

    http://screencast.com/t/J0MajUyMfA

    ReplyDelete
  85. David,
    Look at it this way. Let's say you sell short 1,000 shares at $10 per share. The security drops 10% to $9. Your initial position is now worth $11000. You rebalance by selling another 100 shares. Then the security pops back up to $10. You don't just go back to even you are actually down $100 even though the stock is at the same price you originally sold short at.

    You are actually adding leverage every time you rebalance and if the trade goes against you you can still lose money even if you cover at a lower price than where you sold short.

    For the re-balancing act to work in real time you have to have the trade continue in the right direction. Plus the deeper you go the more risk you incur if you continue to re-balance.

    For instance let's say the stock drops 90% to $1. You re-balance all the way down till you have 19,000 shares short at $1. If that $1 share price jumps to $2 then you have lost all your money.

    In theory it sounds like a great strategy but in real time it's going to probably end up being a quick trip to the poor house.

    ReplyDelete
  86. whether it broke the trendline or not is meaningless since today is Sunday night. The price goes up from 7 to 9 pm then it falls back down through the night. Lets see what happens tomorrow morning but my hunch is we will get a pullback tomorrow.

    ReplyDelete
  87. allright, I do see that silver poked very slightly above the TL.

    My chart shows only a very slight penetration of the TL. Note that I use log scale on my charts. If I turn log scale off, the penetration is more pronounced.

    However, as Gary (and lots of other analysts) has said, TL's, Channel and support/resistance lines and other lines on the chart need to be drawn with a crayon. Maybe even a fat crayon.

    ReplyDelete
  88. The cyclical driver of the sector is gold. Silver is a very thin market. Any move not confirmed by gold would be suspect in my book.

    ReplyDelete
  89. When the gold holdings of GLD drop (due to redemptions of shares for physical) it tends to preceed a rise in gold.

    http://4.bp.blogspot.com/_cvdgPlEKW9k/TUPNgrs4zxI/AAAAAAAABoo/G8AM1DFNh0U/s1600/GLD_Puke_Indicator.png

    article
    http://fofoa.blogspot.com/2011/01/who-is-draining-gld.html

    ReplyDelete
  90. I mentioned the NY Market gap 1334-43 at Kitco, and probably here, in the last 2 weeks. I said it was strange and noteworthy that the market avoided the gap and ran through it up, down and back up, and now the market is parked in that gap.

    This happens over and over in history. The 24 hr ACCESS market does zip to change it. That's true for computer trading also, now, and 20 yrs ago; they do nothing to change human emotional wiring.

    What should happen next is more gap trading, probably 2 days more (max) with lots of fake outs dashing this way and that, but still ending up in the gap.

    Then the market in 48 hours from now or tad longer, will move dramatically, I think. And the direction you and the many you list is up.

    ReplyDelete
  91. My math is off a little bit, but if one were to re-balance a short position after every 10% drop a $10,000 short position would increase to roughly $55,000 if the equity drops 90%.

    The risk is that at any point a 100% bounce will wipeout one's entire stake. And after a 90% decline a 100% bounce is very easy to achieve as we saw with bank and restaurant stocks after the crash.

    One could pyramid short exposure as a way to increase potential gain but once anything drops 50% or more the risk of a large snap back rally wiping out ones stake starts to increase exponentially.

    ReplyDelete
  92. I'm thinking about this as my position-

    30% SLW
    30% SIL

    40% Mixture of these-

    Majority in SVM, AXU, HL, AG, HL

    Smaller amounts of these XRA, NG, EXK, RBY, GBG

    Overkill? or decent blend on these picks?

    ReplyDelete
  93. @James,

    The comment on the MacClellan report was part of the Russell quote (4 paras).

    I do not subscribe to the MacClellan report.

    But from the sound of it, it's based on historical patterns rather than current events like QE2.

    ReplyDelete
  94. Short term trading today is dancing between a bread slicer, we in our skivvies and the machine looking to cut that bread.

    Today is an international holiday. Only the machines will enjoy today. I've fed them too much of my profit hoping for a longer trend than 2-3 points.

    ReplyDelete
  95. Jayhawk,

    How about some AGQ to add to your mix? : )

    ReplyDelete
  96. Closed my silver futures position after it started going negative this morning. I didn't get a good entry on fri like I did with the gold futures and we are down almost $1 from the highs. Simple smart risk control.

    Still have very large gold position and will add more (with another tight stop) if we get much more of a drop this morning. I'll re-estabilish silver position in near future if the gold position pans out.

    ReplyDelete
  97. They are just trying to run stops on anybody who bought friday's ramp up....so far. But of course the possibility always exists that the whole move was fake and we go lower. Prudent trading dictates that at 5x leverage I can't get emotional about a position. I *think* we bottomed and am playing things that way, but I will be losing less than 1% net worth if wrong (even if I add this morning).

    ReplyDelete
  98. TZ, how do you know that they are running stops? It could just be nervous people like you selling to book profits.

    ReplyDelete
  99. We actually have a weekly swing low in silver..right?

    http://screencast.com/t/rkL0eTb4Fk5C

    ReplyDelete
  100. SB,
    I think you are correct. Friday was likely a knee jerk reaction to Egypt and then short covering piled on, just like we saw with N Korea a bit back.
    My money is on gold going lower. Look at SPX futures, not much nervousness there so far.

    ReplyDelete
  101. I'm not actually predicting metals go lower or higher from here, I don't know. At 50% invested, I'm prepared for either event, even though I hope we go lower first so I can add.

    ReplyDelete
  102. However, I do know for sure I wouldn't sell any metals down here even if I thought they had a good possibility of working lower. I try not to put myself in a position where I have to sell weakness (pullbacks) in bull markets. Position size is everything.

    ReplyDelete
  103. If the event in Egypt, won't take the market down, what will? Due for a correction. We have debated severity of a correction, while one hasn't even transpired. Amazing. You listen to CNBC, and wow at a certain points you actually question yourself...maybe I am wrong....Either way I am of course not bullish, just amazed out how the market is holding up when there was a clear opportunity for it to correct.


    It seems like the trading community has become desensitized to everything….

    In current news, China and Russia go to war with nuclear arms. Dow jones up 300 points as military companies surge. Earthquake in Europe destroys half the population. S&P surges 10%, as homebuilders plan on reinvesting in European projects. Ben Bernanke publicly declares that the US is ready to default, but has come up with the great notion of printing money to buy all existing debt of the US in one great purchase. Dollar surges, as investors realize the US will not go broke sighting that deflation in the States, nearing 10% annually will also be averted.

    ReplyDelete
  104. Does it seem like the big boys are having trouble bringing it down?

    Gold bounced at 1325

    ReplyDelete
  105. Friday was a sharp 90% down day with losses of 2.5% on the NASDAQ and Russell. On any reversal against the trend, you need to give it time to work against that direction, so expect a bounce today on the S&P of at least 5-8 points on the close and by mid morning it could be up by 1%.

    But she will turn down later this week, don't be fooled by today's actions. Also the news out of Egypt today will be subdued. If you do just a little research, you would know that the biggest rally of all is planned for Tuesday, where they are calling for more than a million men to march on the square. It will be plastered all over CNBC for the financial "professional" lemmings to digest.

    Use the top of the market this morning to "lighten your load" or if you've been waiting for that short opportunity, today could be your day.

    ReplyDelete
  106. Miners showing early morning strength.

    ReplyDelete
  107. That's the irony of a conflicted policy of economics.
    To avoid a deflationary depression the Fed has been printing money; creating inflationary pressure; resulting in higher food prices; leading to protests and political unrest countries with a large lower class such as Egypt; destabilizing the local power, which is supported by the US government; creating a political dilemma for the US possibly destabilizing its own influence in the Middle East.

    Another irony is that the inflation pressure, which the US is exporting to the world by increasing the money supply, is resulting in higher food prices everywhere. Now, wherever there are large low income classes, for which food (and energy) costs take the better part of their monthly income, there is a high chance of social unrest. The majority of the Chines population is grotesquely poor. The elite of people that we talk about when we speak of the Chinese economic miracle is a ridiculously small percentage. Take also into consideration that the Chinese governments influence over the many and vast regions is not unchallenged. The Fed's money printing might therefore have a very destabilizing effect on China.

    In other words, while the political consequences of Fed's money printing policy are a possible loss of US influence in certain world regions (Middle East), the money printing also weakens the US competition on the world stage (China), and probably much more than they weaken the US itself.
    Not that I am a conspiracy theorist, but the US government must be contemplating these things. I am sure they are not just blindly printing money. They are aware of all of what we talk about here plus a whole lot more.

    ReplyDelete
  108. Added gold futures; small stop.

    ReplyDelete
  109. 25 countries that will be hit most by a food crisis. Do you see a common denominator among the countries on that list?

    Lebanon (Hisbollah toppled government in January)
    Egypt (Will Mubarak be overthrown?)
    Tunisia (king already overthrown)
    Libya
    Morocco
    Algeria
    Nigeria
    Sudan
    Bangladesh
    Sri Lanka
    Hong Kong
    Azerbaijan
    Angola
    Romania
    Philippines
    Kenya
    Pakistan
    Dominican Republic
    Bulgaria
    Ukraine
    India
    China
    Latvia
    Vietnam
    Venezuela

    ReplyDelete
  110. This weakness in gold is very alarming. If the Egypt news was a flight to safety, then we're not seeing it in the Dollar. Currently the dollar index is back to the lows on this recent leg down.

    ReplyDelete
  111. Guys...at SOME LEVEL of printing, you don't get the sharp pullbacks anymore that you might expect.

    Israel stock exchange
    http://3.bp.blogspot.com/_Fd_dIsEkgvI/TM4bcIYuswI/AAAAAAAAAxQ/m_4vCxBZWyE/s1600/israel+inflation+vs+stock+prices+in+the+80s.jpg

    Zimbabwe
    http://blog.foreignpolicy.com/files/images/ZimbabweIndustrialIndex.jpg

    At **SOME** level. Are we there yet? Don't know. But our fed is now monetizing an over $1 trillion deficit. Sounds pretty big to me. We *ARE* in (hyper)inflation and *rapidly* growing despite all those deflationary people. They don't understand the game and the true definition of those words.

    ReplyDelete
  112. Yes, the fed can slack off the printing and throw us the other way. Then bonds crash cause nobody is there to buy the US debt. Pick your poison, it's a train wreck either way and you want metals.

    ReplyDelete
  113. TZ,

    that makes sense. Stocks are an inflation hedge, inferior to PMs, but still a hedge. Not adjusted for inflation their value should go up, and if you are a good stock picker you might do ok. With the constant money stream I just don't see another deflationary whiff coming. Now it's all about what will fall the least, adjusted for inflation. And that should still be hard assets. Followed by stocks.

    ReplyDelete
  114. Gold and Silver alert: traders at JPM and other Wall St. firms instructed by Fed/Treasury to attack PM’s – HARD ON MONDAY – to try and boost dollar and reduce food/energy prices – as inflation fueled revolts go global – and regimes in US and UK are now looking vulnerable

    http://maxkeiser.com/2011/01/30/gold-and-silver-alert-traders-at-jpm-and-other-wall-st-firms-instructed-by-fedtreasury-to-attack-pms-hard-to-try-and-boost-dollar-and-reduce-foodenergy-prices-as-inflation-fueled-revolts-go-gl/

    ReplyDelete
  115. PS: despite the fed being able to throw the game either way (which is what they have been trying to do up until now - walk the line) the *preference* is for inflation and not default on debt (which is what stopping printing causes). I don't want to get into this preference, but it isn't like an ice-cream flavor preference. When I say preference, I mean an almost certainty even though they COULD go the other way. There are reasons BK collapsing goverments throughout history print and inflate vs. default. So will it be again.

    ReplyDelete
  116. Jahawk,

    that's not very convincing. Good old Max Kaiser is unfortunately slightly out of his mind. How would attacking PM prices lower food prices?
    The only thing to support the dollar at this stage is a food crisis. If the poorer part of the world will sink into a food crisis, there might be a flight into the dollar.
    'Regimes' in the US and UK don't seem vulnerable any more than ever, I'd say.

    ReplyDelete
  117. BASIL,

    Everything of REAL value is an 'inflation hedge'. They are just better or worse LEVELS of inflation hedge. The best one is gold. There is a reason for the expression 'gold standard'.

    Chewing gum will rise in value and act as an inflation hedge too. But it is not the BEST inflation hedge. Get it?

    ReplyDelete
  118. Do me a favor people. Take the time to proof read your posts before you publish.

    I get tired of having to clean up all these deleted comments because you were in a hurry and didn't read what you wrote before you hit the publish button.

    ReplyDelete
  119. The whole point I wanted to make earlier with my posts about the food crisis is this: The US exported inflationary pressure resulting in a food crisis in poorer parts of the world might 'pay off' for the US in a cynical way. First of all, the countries and societies that will be hammered are mostly not important to the US politically and economically. Secondly, most of these countries are opposed to the US, which comes in 'handy' for the US. And thirdly, the rest of these countries are the biggest threats to the US empire, economically speaking, India and China. So a food crisis ain't all that bad, for some. I say that polemically. The US will begin to look comparably stable, which might result in a stronger dollar, and the US might even gain more ways of pressuring China and India. How is that for a twist?

    ReplyDelete
  120. TZ,

    I got it in the first place.

    ReplyDelete
  121. Yeah gary, I know you are talking about me. I rolled out of bed too groggy that not only am I messing up posts, but I misfired on some gold orders too.

    ReplyDelete
  122. basil,

    Maybe, but when the ravages of inflation clearly outweigh any remaining benefits for China, they will peg the yuan higher and higher and continue to sell (net) treasuries, until they just outright stop pegging and sell US debt.

    Then the US (dollar) is probably done.

    ReplyDelete
  123. There is no such thing as real value or intrinsic value.

    ReplyDelete
  124. Movax 2,

    I agree.

    Just saying that there is more to this food crisis, possibly even a concept behind it.

    ReplyDelete
  125. TZ,

    Do you know that you can delete your own posts?

    Gary, you shouldn't have to delete anyone's posts for them. They can do it themselves. That's what the trash can in the lower left of the post is for. It appears only on posts that I have entered, so those are the only ones I can delete. But I CAN delete them.

    ReplyDelete
  126. Dollar new lows. Is it possible to have a cycle top in a SINGLE day?

    ReplyDelete
  127. Pima: I have some EUO, but every position I have now is small. I am waiting for the dust to settle after Friday's huge move. If the dollar drops any more today I will buy more EUO. I am mostly waiting for gold to become clear in its intentions, and waiting/hoping for a marginal new high in stocks as (finally a time to get a decent short positions going. Other than that I have no strong opinions right now.

    ReplyDelete
  128. Gary: What do you mean "clean up the deleted posts?" It seems to me that you don't have to do anything Do you mean remove the text that says "deleted by author"? Why not just leave those there? Better than you wasting your time on blog housekeeping, no?

    ReplyDelete
  129. BASIL,

    I am deleting my own posts. What gary is doing is going through and removing the "post has been removed by author" leftover. I guess he's a neat freak
    :-)

    DAVID,

    There certainly is 'real' or 'intrinsic' value. A $100 bill has a real value of a fraction of a cent based on the paper(cotton)/ink/and printing.

    The illusionary FAKE value of that piece of cotton is (**CURRENTLY**) equated to about 3 silver oz. But its real value is almost nothing and always has been.

    ReplyDelete
  130. Unlikely that it topped in one day. More likely it's still working it's way down into the cycle low.

    If it's this tough to get a bounce one has to wonder what this is going to look like at the three year cycle low.

    ReplyDelete
  131. Yes all the deleted by author comments bug me.

    ReplyDelete
  132. Gary snf Dov,

    Silver seems to have put ina highr high snd s highrt loe. Is this significsn to you. Could silve pddiblu tsaking the lesd in the complex?

    Thsld

    ReplyDelete
  133. pima

    You can delete the comment contents (i.e. the text) but it leaves a marker that says something like, "this comment deleted by author", or some such thing. Those then end up cluttering up the comment section. That's what Gary's talking about.

    By the way, when you read the comments in emails you see all the comments as they are submitted. So I end up reading (or seeing) TZ's comments numerous times as he edits them. Though he's not the only one, just the worst offender. :-)

    ReplyDelete
  134. TZ (and others): How about it as a favor to Gary? Slow down maybe? He really has always been quite accommodating for us.

    ReplyDelete
  135. I thought *I* woke up groggy. Take a look at Steven
    :-)

    ReplyDelete
  136. TZ,

    What is the real value of something that has real value?

    Value is always a subjective and relative concept. Corn has no more real value than a piece of paper that´s used to exchange goods.

    ReplyDelete
  137. Gary,
    Is there an explanation for AGQ going up and SLW, SIL and GDXJ going down?

    ReplyDelete
  138. AGQ is up because silver is up on the day. the others are down because selling pressure is greater than buying pressure.

    Do you think that just because silver is up that the silver miners have to also rise?

    ReplyDelete
  139. I hired a translater to read stevens comment..

    He said either he was typing that while riding on the bumper cars or he ate something he was allergic too and his fingers are twice a fat today :)

    (And now he'll delete it & noone will know what we're talking about TZ-so here it is...(WHAT THE HECK???)

    Copy / Paste

    Blogger Steven said...

    Gary snf Dov,

    Silver seems to have put ina highr high snd s highrt loe. Is this significsn to you. Could silve pddiblu tsaking the lesd in the complex?

    Thsld

    ReplyDelete
  140. I believe Steven is making a point about our visual perception. We usually don´t read all the letters in sentences in order to perceive what´s written.

    ReplyDelete
  141. I'm leaning towards Steven is still drunk from the weekend. ;`)

    ReplyDelete
  142. I just hope we hear from him again, so we know he's alright ,and wasn't having a stroke or something. (I'm not joking about strokes...please hold all comments saying I'm insensitive..my uncle had a stroke yrs ago)--

    Please Steve, tell us that was your Arnold Schwarzeneggar impression !!

    ReplyDelete
  143. Basil, I saw your comment on food inflation. I have always thought that this is one of the goals of Fed policy; to break these currency leeches.

    Steven's wireless keyboard needs a new battery. LOL

    ReplyDelete
  144. Epic battle in the metals here. Still no dirction or volume from friday's action. Waiting for a break either way.

    ReplyDelete
  145. wmp,
    I guess you are finding out it doesn't always work that way :)

    ReplyDelete
  146. Watching this on the HUI-Most of these miners broke above their daily TLs. Hopefully just a quick mild back test of that line. I also like the 500 zone there for support.

    http://www.screencast.com/users/Jayhawk1991/folders/Jing/media/aad30dd4-1b9b-4d8b-869f-8807021ce84f

    ReplyDelete
  147. funny

    I was JUST looking at the same thing on EXK and AG as you posted that Jayhawks. Was comparing daily volumes up vs down.

    Nothing very conclusive, but definitely nothing negative.

    ReplyDelete
  148. Are we walking abot me or another Steve? If it is me thank you for the concern but I'm ok.

    ReplyDelete
  149. I have no idea what I typed in that previous post. It was not like that when I proofread it!

    ReplyDelete
  150. Decent Volume buying just came in after lighter volume morning pullback...see 2day chart of EXK ag hl slw 15 minute interval

    Hey Steve..yes you , even that post is funny. Glad U R Well!

    ReplyDelete
  151. Apparently, Steve had a right translated left hand:

    Silver seems to have put ina highr high snd s highrt loe. Is this significsn to you. Could silve pddiblu tsaking the lesd in the complex?

    Thsld

    Translation:

    Silver seems to have put in a higher high and a higher low. Is this significant to you. Could silver pssibly taking the lead in the complex?

    ReplyDelete
  152. Bear or Bull trap ?

    Gold or SPX market ?

    ReplyDelete
  153. Alex,

    I meant a bear trap in the S&P.

    ReplyDelete
  154. While this should be the beginning of at least a daily cycle correction I won't have any desire to short this market until the dollar puts in the three year cycle low.

    ReplyDelete
  155. Alex, it's the first day after a big down day, today's action is to be expected.

    ReplyDelete
  156. Gary - with all due respect, when you stated "The problem is debt. Hyperinflation is the result of a government debt spiral. At some point the debt becomes so large that a nation can't even service the interest on the debt. At that point there are only two options. Either default or inflate." - this is actually wrong.

    I too used to think this, until I began to study the monetary system that we live in. The foundational reason why this is wrong is that we view the sovereign government balance sheet as that of a household. If we as a household tood on too much debt, then yes, we would go bankrupt. The government does not use debt to finance anything though. They also do not use taxes on the federal level to "function". I would highly encourage you to read a book written 2 decades ago by Randall Wray to help explain this.

    The idea of a US dollar crisis is also not going to happen. The value of the dollar is not left to whether foreigners buy our debt or other types of thinking. The value of a dollar is derived by the governments ability to require taxes be paid in dollars, and they will throw you in jail if you don't. It has been this way for 4000 years in the world.

    The next down leg in the market probably won't happen until the end of QE II is upon us. The market may anticipate it by a few weeks, but until we get closer, you should just buy the dips and forget the logic behind why it should go down:

    http://seekingalpha.com/article/248003-the-end-of-america-not-quite

    ReplyDelete
  157. Should be @ David, not Alex.

    ReplyDelete
  158. Correction - it is wrong for sovereign countries who issue their own currency and don't peg to anything - but is actually right for countries who don't fit this profile.....

    ReplyDelete
  159. http://bilbo.economicoutlook.net/blog/?p=2905

    This article will go a very long way to explain much better than I do why there is no need to worry about the end of America. I used to be a doom and gloomer - and everything in the article I used to DISagree with. But take the time to think through what it says, and it will help you sleep better tonight, and even spread the wealth outside of the gold only trade.

    ReplyDelete
  160. MMT alert. Remember, it'll make your head explode!

    ReplyDelete
  161. Tim,
    If you think the laws of economics somehow don't apply to a country I'm afraid you are going to be sadly mistaken.

    Just printing money isn't magically going to cure our problems.

    As a matter of fact it's been tried many many times in history and not once has it ever worked. I'm willing to bet it's not going to work for the United States either.

    ReplyDelete
  162. Jeanene,

    Does Tim believe this too?

    ReplyDelete
  163. I suspect Mr. Wray never bothered to read a history book :)

    ReplyDelete
  164. Tim and Jean ... I've been reading some of this as well lately.
    My question then is ... what was different in Germany in the early part of the century and more recently Argentina and Zimbabwe.

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  165. What laws of economics are you referring to that I am missing?

    I'm telling you - take the time to read MMT. Yes ONLOOKER - it will make your head explode. But if you are able to understand it, you will understand why we haven't exploded yet. You will understand why Japan is still fighting deflation even though their debt to GDP is 3 times larger than ours.

    Gary - the world has never seen a unified floating exchange rate system, thus their is nothing to compare with history. Often times we like to say that no country has ever printed and survived, but that has more to do with the fact that the rest of the world did not join in it.

    I used to deeply fear money printing myself...... until I learned the truth and accounting behind our monetary system.

    I'll bet you two burritos that we do not get hyperinflation in the US, and we do not have a currency crisis in the next decade!

    :)

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  166. Thanks, DG. (I had to step away
    for a bit, take my dog to the vet.)

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  167. Avann - The Weimar Germany was different in that they owed money in foreign denominated debt. We in fact owe debt to foreigners but its denominated in our currency.

    For a longer explanation than allows here, read this: http://www.huffingtonpost.com/ellen-brown/another-look-at-the-zimba_b_790074.html

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  168. I tend do agree with Tim. The fear of hyperinflation is overrated and the fear that something bad will happen to the U.S. is also overrated. In my country we´ve had hyperinflation of 30% a month (that´s right) and a few years was all that was needed to fix the problem. The U.S. will be just fine.

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  169. Gary -

    Can you please point me to the history in which you refer that we have done this before? By that I mean and apples to apples comparison in which the whole world was on a fiat/exchange rate system, and no currency was backed by anything, and then it all fell apart?

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  170. I have not read the article yet, but the problem is not government defaulting on the debt, it is the taxation on the people that brings the party to the end. The Federal Reserve prints debt, not currency, the exponential nature of interest rates causes an imbalance that destroys economies.

    What happens if China decides to anchor instead of float, they get to buy all of the resources they need, and the floating currencies are dead.

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  171. MMT?

    Methylcyclopentadienyl manganese tricarbonyl (MMT or MCMT)?

    Million Metric Tons?

    Multiple Mirror Telescope?

    Mission Management Team?

    Mobile Medical Team?

    Mood Management Theory?

    Help?? What dont I know here?? THanks!

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  172. This is from Wray's book, and I challenge anyone to refute it. I tried and failed, because it just didn't mesh with what I thought was the truth:

    In all modern economies the government defines money by choosing what it will accept in payment of taxes. Once it has required that the citizens must pay taxes in the form of money (say, dollars) the citizens must obtain money in order to pay taxes. In order to obtain "that which is necessary to pay taxes", or money, they offer labour services or produced goods to the government and markets. This means the government can buy anything that is for sale for dollars merely by issuing dollars. The government does not "need" the publics money in order to spend (or China's for that matter); rather, the public needs the "government's money" in order to pay taxes. Once this is understood, it becomes clear that neither taxes nor government bonds "finance" government spending. Instead, taxes are required to give value to money, while bond sales are a part of monetary or interest rate policy (providing an interest-earning alternative to non-interest-earning currency to be held as a store of value - thus soaking up money in the system and paying people to give up that liquidity)

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  173. At any rate it does not matter, own things that have limited supply and pay for it with something that has unlimited supply. you will make money.

    I believe gold, silver, hard assets fit that bill.

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  174. Alex -

    Modern Monetary Theory

    It's an eye opener - and I used to be an Austrian Economist who screamed for a gold standard, so I do not approach this subject blindly not knowing the other side of the debate.

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  175. T & J: Is there no level at which printing becomes a problem? Suppose the Fed created a sextillion dollars next year. That would just be absorbed somehow? The price of goods would not go up? People would not start wanting to get out of dollars? Regardless of the "theory" this just does not make sense to me. I have no idea whether something happens next year or not, but saying that there is no level of printing or debt that can cause a problem seems prima facie absurd.

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  176. T & J

    You assume that because the US Dollar is the worlds reserve currency, unlike any fiat in history, that hyperinflation will not happen. In reality, the fact that so many dollars exist, paper and electronic, increases the chance of US hyperinflation when this enormous amount of currency floods the US from the worlds reserves in an attempt to buy any and everything denominated in US Dollars (as the dollar is falling off the cliff).

    Hyperinflation is a psychological occurence. In a word, PANIC.

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  177. T & J ... that's a wonderful explanation but that would only work in a closed system ... as soon as you must pay for foreign goods and services it surely falls apart. Why would China, Russia and the rest of the world continue to accept worthless US paper?
    US citizens MUST transact in US$ but the rest of the world surely does not.

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  178. Do you realize you can pay for goods and services, and taxes in this country with gold and silver? These currencies are also convertible. So his premise is wrong.

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  179. Keep an eye on the SoS numbers today.

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  180. Tim & Jeanene

    Thanks I like to do research..I will do due diligence

    Thanks again

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  181. DG -

    Government spending can lead to inflation, but only when capacity utilization in any market is at a peak. If the US can only produce 10 million cars, but the government and public combined demand through spending 12 million, then the prices will indeed go up, unless productivity/production increases. Right now we sit at something like 70-75% capacity utilization and 10% unemployment. Austerity will kill the chance for 100% capacity utilization. Just look at the UK and how they just reported negative GDP while being on austerity.

    Government deficits offset public savings and exports to the penny. Government surpluses will always lead to the private sector going into debt. Public saving will require the government to run deficits.

    The blogs I posted and Randall Wrays books are earth shattering and much needed to guys like me who used to fear doom and gloom and desire a gold standard again.

    I highly encourage you to get your hands on it and read it with an opened mind. All that has happened the past few years will make a heck of a lot more sense. It will help you understand why Japan will not have a crisis and why we not need to fear China ever stopping the buying of our bonds.

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  182. Don't buy that one...Taxes give money value. Really?

    Life is based upon contracts and the appreciation of one’s position after that contract, not the appreciation to increase gov's holdings. Why do you think most business people leave areas that have higher taxes...it sure ain't because higher taxes bring a higher value to the currency.

    In order to contract, one wants to know the value of the contract will be maintained. IE a dollar today will be worth the same at the beginning of the contract as at the end. It doesn't even have to be dollars. Anything that will temporarily store the work done, before that person can spend or will maintain that purchasing power until they can spend it. In the absence of a tradable item that preserves purchasing power, we are stuck with the inefficient bartering system.

    Taxes are the last thing to give value to a currency...Like paying the king is some how my duty...the king can go get its own food.

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  183. http://mises.org/journals/rae/pdf/rae8_1_4.pdf

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  184. Avann - "that's a wonderful explanation but that would only work in a closed system ... as soon as you must pay for foreign goods and services it surely falls apart. Why would China, Russia and the rest of the world continue to accept worthless US paper?"

    Great points and there is an answer for that. Keep studying the works of Wray and you will get to it.

    One foundational point we must remember is that the US economy is $14 trillion while China is less than half that but growing. If the world's largest customer is the US - then you can only sell your stuff in US Dollars to that country. Until another country surpasses the US in GDP, we probably don't need to worry about losing our reserve status. The one who buys dictates to the one who sells what currency they will use.

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  185. Bob loves Hawaii -

    I challenge you to send the IRS a cold coin instead of dollars to pay your taxes.

    Even the biggest gold bugs HAVE to convert their gold into dollars in order to pay taxes.

    Sure - you might be able to exchange gold for goods and services, but only if you can find a willing barter partner. When is the last time you bought a gallon of milk with gold shavings?

    While it can happen, you have a very limited group of trading partners who will exchange goods and services for gold coins.

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  186. Keys -

    I hear you, and I know where you are coming from since I was there. The truth is that we are coerced into using dollars that the government created, therefore are we truly free? Free men use barter. Yes a response of taxes is to flee. If we all truly hated the governments system enough, we would all expatriat and move somewhere else. The fact that we don't means we agree to pay the taxes which we are coerced to pay by threat of prison and fines.

    Read my SeekingAlpha article I wrote. If the government stated tomorrow that they would only accept payment of taxes to be settled in hibiscus flowers, the value of paper dollars would plummet, and hibiscus flowers would skyrocket overnight.

    Sorry to Gary for hijacking this blog, I will refrain from further posting and let things get back on track.

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  187. You miss my point, I can sell my gold coin for cash and pay the IRS.

    also what you are seeinf in north Africa and South Asia is the first brushfire of people experience great discomfort of having linked their currencies to ours. Since their per capita GDP is significantly lower than ours, the rise in food and oil (as counterweight assets owned by rich people to protect against monetary inflation) are showing us how the Engel curve works, and these riots will work there way up the nations GDP chain the more Bernanke does this.

    Their program is not benign, and I'll make a bet with you. I'll pay for your buritto in dollars I convert from a gold coin in 5 years, you use pay for it with $8 dollars in todays currency.

    Who will buy more burrito for the other?

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  188. One last thing -

    Daniel - trust me - I used to think that way too. Austrians have it wrong because they don't realize that money is determined by the government and their ability to throw you in jail if you don't give it back to them. I used to have Mises as my home page on my browser. Wray does a fantastic job of showing the history of money and the the flaws of tying the money to something like gold or oil.

    Rocked my world.

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  189. Bob - your selling gold for cash means that you create demand for cash....

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