tag:blogger.com,1999:blog-16996326439280198392024-02-19T16:13:10.743+01:00The Rothbardian InvestorThe Rothbardian Investorhttp://www.blogger.com/profile/09722598347527860060noreply@blogger.comBlogger16125tag:blogger.com,1999:blog-1699632643928019839.post-18971075591446246642013-05-29T13:39:00.001+02:002013-05-29T13:47:44.272+02:00French Toast<div align="justify">
The title of this brief post does not refer to <a href="http://en.wikipedia.org/wiki/French_toast" target="_blank">the disgustingly sugary culinary monstrosity of the same name</a>, but rather to both the precarious state of the French economy/banking system/government and the trade idea that we’re going to illustrate here, the recipe of which also includes an important German ingredient.</div>
<div align="justify">
This is in our opinion an excellent trade, not only because it has the potential to deliver significant gains, but more importantly because of the exceedingly tiny amount of risk that it entails: it is a lesson in asymmetrical investing.</div>
<div align="justify">
So without further ado here is this brilliant idea: sell short an amount X of French OATs against an equivalent amount of German Bunds (i.e. buy 100€ of Bunds for every 100€ of OATs sold). This basically removes interest-rate risk from the equation (so that we don’t have to correctly forecast whether rates are going to rise or fall) and leaves only country-specific risk on the table, the idea being to sell the higher risk bond against the lower risk one, in the expectation of a re-pricing of the two that better reflects the real risk differential, currently suppressed by the various alphabet-soup policies of the ECB (such as LTRO and OMT) as well as the supportive buying of overleveraged French banks.</div>
<div align="justify">
What’s so interesting about this trade? At the time of writing, the spread between the yields of the two bonds is a paltry 53bps (that is: the French 10yr bond yields 0.53% more than the equivalent German security).</div>
<div align="justify">
Now we don’t know about you, dear readers, but we regard the possibility of French Bonds yielding less than German ones as quite remote, to put it mildly. Even yield parity seems to us to be extremely unlikely. Yet, let’s consider this as our worst-case scenario: all that it entails is a risk of 53bps, practically nothing (in our own risk analysis, we objectively consider the likelihood of the spread going as low as 25bps). On the other hand towards the end of 2011, during the height of the European crisis, the spread reached a high slightly above 200bps: is that feat repeatable? Of course it is! We would actually wager that it’s likely to be exceeded, for the reasons we’re going to enumerate in the next section. So, the extremely pessimistic scenario has us losing 53bps and a moderately optimistic one has us gaining 100/150bps, all this without having to take a stance on the direction of the underlying market (interest rates): not bad it seems!</div>
<div align="justify">
The only caveat is that since the 2011 rout ended OATs have shown the tendency to trade as a safe haven rather than as risk-on securities like BTPs and so far there is no indication that this may be about to change (although these phenomena tend to occur quite abruptly and without advance notice). As such, the prudent speculator might want to wait for definitive confirmation before committing to the position (i.e. he may decide to act only if and when OATs prices start to diverge from Bund prices, thus leaving some money on the table, but lowering his chance of failure and shortening his waiting time). Another option, that we’re also currently weighting, could be to sell a mix of OATs and BTPs, the latter offering lower risk but also a more uncertain return and the former offering exactly the opposite (i.e. a higher potential return, but also greater losses should the current calm that permeates the markets continue: the current spread stands at around 260bps and under such a scenario it could easily go to 150bps or lower).</div>
<div align="justify">
We won’t make any specific remarks about Germany, apart from the following: the country is far from being a sanctuary of fiscal rectitude and a refuge for free-market enthusiasts. It is simply further removed from the edge of the abyss than its neighbours (a big plus is that it does not have a real estate bubble, although one is incipient).</div>
<div align="justify">
<br /></div>
<div align="justify">
<strong><em><span style="font-size: medium;">The French Connection</span></em></strong></div>
<div align="justify">
<strong><em><span style="font-size: medium;"><br /></span></em></strong></div>
<div align="justify">
<em>1. Government Finances</em></div>
<div align="justify">
<em><br /></em></div>
<div align="justify">
As of the end of 2012, the French Government sports a 4.8% budget deficit and a 90.2% debt-to-GDP ratio. It has also forecasted a 3.7% deficit for the current year: we let our readers ponder on the likelihood of that target being reached (in our opinion chances are slim to none and slim is out of town). Now, these do not seem particularly comforting numbers, especially when one considers that a serious recession can significantly worsen the budget picture, by simultaneously lowering tax revenues and increasing expenditures. As we shall see below, there’s also the very real possibility that French banks will require a massive bailout, further increasing the public debt and actually bringing it to a completely unsustainable level. And of course the fact that the French Government is run by a bunch of twats (the wonderful definition of this word being: “a man who is a stupid incompetent fool”) who think that economic success ought to be punished doesn’t help: see “The Economy” section below. A final remark: public spending already accounts for roughly 57% of French GDP.</div>
<div align="justify">
<br /></div>
<div align="justify">
<em>2. The Banks & The Housing Bubble</em></div>
<div align="justify">
<em><br /></em></div>
<div align="justify">
The French banking system’s total assets are more than 400% of French GDP, with the largest three banks, BNP Paribas, Crédit Agricole and Société Générale (mind you: there’s the guillotine ready for those foolish enough to get even a single accent mark wrong), accounting for a whopping 240%. This should drive home the point that there’s no way the French Government could possibly “save” its banks if they were to run into serious trouble (doesn’t mean it won’t try, though). French banks are also highly leveraged (this is true of most European banks, with the German ones topping the list) with assets-to-equity ratios routinely around 30/40, they have large exposure to OTC derivatives and they’re allowed to assign a 0% risk-weighting to French OATs, allowing them to buy gobs of them entirely with funny money (i.e. with pure leverage) and thus linking their fate even more to that of the state. The last point means that they could provide support to OATs prices for a while, but it also means that the whole exercise is destined to end in tears (see Greece, Spain and to a lesser extent, at least so far, Italy), as two drunks try to hold each other up.</div>
<div align="justify">
The catalyst that may ignite a banking crisis in the country is of course the bursting of the huge real estate bubble that has now reached historical proportions (for a discussion on the French Housing Bubble, please see <a href="http://therothbardianinvestor.blogspot.com/2013/05/burning-down-house.html" target="_blank">our recent post on the topic</a>) and to which French banks are heavily exposed as is “de rigueur” to be, with very high Loan-to-Value ratios to boot (loans with LTV ratios of 100% or more were common at the height of the bubble). You can archive the following words, uttered by Oudea in June of 2012, under the tag “Famous last words”: “Societe Generale SA (GLE.FR) Chief Executive Frederic Oudea said Wednesday that French banks were not exposed to the type of real estate bubbles that have caused other major banking crises. Speaking on French radio, Mr Oudea, who also serves as president of the French Banking Federation, said that "major banking crises come from real estate bubbles," citing the U.S., Ireland and Spain. "The very good news for France is that... there has not been the same real estate bubble [in the country]," he said.” Very good news indeed, at least for short sellers!</div>
<div align="justify">
<br /></div>
<div align="justify">
<em>3. The Economy</em></div>
<div align="justify">
<em><br /></em></div>
<div align="justify">
The French economy is suffering from a serious recession. A combination of counterproductive economic policies (that include not allowing loss-making enterprises to restructure by firing workers), stifling regulations and bureaucratic requirements, ever-rising taxes and huge malinvestments engendered by the mispricing of capital due to the ECB’s interest rate manipulations all but guarantees that France is in for the bust of a lifetime.</div>
<div align="justify">
Let’s see some data: GDP is contracting at a quarterly pace of 0.2% and has been basically flat since late 2011; the unemployment rate stands at 10.6% and growing; PMI readings are dismal, both for the manufacturing and services sectors, and retail sales aren’t faring much better (<a href="http://www.markiteconomics.com/Survey/PressRelease.mvc/26f7683d6be5424291b20988f0408c51" target="_blank">here</a>, <a href="http://www.markiteconomics.com/Survey/PressRelease.mvc/6991f050ab1b42e497b80087c06ada32" target="_blank">here</a>, <a href="http://www.markiteconomics.com/Survey/PressRelease.mvc/e36516ccd4cb42b980b63e9370857958" target="_blank">here</a> and <a href="http://www.markiteconomics.com/Survey/PressRelease.mvc/fe60b82fefa642ffb6bb330f507a1f08" target="_blank">here</a> the links to the latest Markit press releases, which also provide a bit of perspective); industrial production keeps on declining at a worrisome pace and has been in contraction since the beginning of 2012; both business and consumer confidence are in the basement, with the latter now being lower than at the height of the 2008 financial crisis; car registrations are also at multi decade low (another sign of the bursting of the bubble). We could go on and on and on, but we think you get the picture!</div>
<div align="justify">
As such, we’re not surprised to see that <a href="http://in.reuters.com/article/2013/05/07/france-banks-idINL6N0DO12Y20130507" target="_blank">loan-loss provisions are starting to rise at major French banks</a>, as businesses and households face increasing financial difficulties and as the economic crisis favours and accelerates the bursting of the RE bubble. In fact, we expect to see more and more of the above, as the crisis gathers pace and starts to impact more directly the banks’ balance sheets.</div>
<div align="justify">
<br /></div>
<div align="justify">
<br /></div>
<div align="center">
<img alt="France GDP Growth Rate" height="270" src="http://www.tradingeconomics.com/charts/france-gdp-growth.png?s=frgegdpq" style="display: block; float: none; margin-left: auto; margin-right: auto;" width="640" /></div>
<div align="center">
<em>The rather depressing chart of France QoQ % GDP growth (or lack thereof), via <a href="http://www.tradingeconomics.com/" target="_blank">Tradingeconomics</a>.</em></div>
<div align="center">
<em><br /></em></div>
<div align="center">
<br /></div>
<div align="center">
<img alt="France Unemployment Rate" height="270" src="http://www.tradingeconomics.com/charts/france-unemployment-rate.png?s=umrtfr" width="640" /></div>
<div align="center">
<em>France’s unemployment rate: notice the troubling trend. Courtesy of <a href="http://www.tradingeconomics.com/" target="_blank">Tradingeconomics</a>.</em></div>
<div align="center">
<em><br /></em></div>
<div align="center">
<br /></div>
<div align="center">
<img alt="France Industrial Production" height="270" src="http://www.tradingeconomics.com/charts/france-industrial-production.png?s=fpipyoy" width="640" /></div>
<div align="center">
<em>The tragic chart of France’s % change in industrial production, again via <a href="http://www.tradingeconomics.com/" target="_blank">Tradingeconomics</a>.</em></div>
<div align="center">
<em><br /></em></div>
<div align="center">
<br /></div>
<div align="center">
<img alt="Historical Data Chart" height="270" src="http://www.tradingeconomics.com/charts/france-business-confidence.png?s=insesynt&d1=19800101&d2=20130531" width="640" /></div>
<div align="center">
<em>A long-term chart of business confidence: not very inspiring. Thanks to Tradingeconomics.</em></div>
<div align="center">
<em><br /></em></div>
<div align="center">
<br /></div>
<div align="center">
<img alt="Historical Data Chart" height="270" src="http://www.tradingeconomics.com/charts/france-consumer-confidence.png?s=frcci&d1=19720101&d2=20130531" width="640" /></div>
<div align="center">
<em>This chart is even more depressing: it shows consumer confidence at an new all-time low, via </em></div>
<div align="center">
<em>Tradingeconomics.</em></div>
<div align="center">
<em><br /></em></div>
<div align="justify">
<br /></div>
<div align="justify">
<strong><em><span style="font-size: medium;">Conclusion</span></em></strong></div>
<div align="justify">
<strong><em><span style="font-size: medium;"><br /></span></em></strong></div>
There’s no doubt in our mind that France is headed towards a meaningful crisis, that moreover appears to have already begun. The question is whether this event will engender a re-pricing of its sovereign debt or whether the bland reassurances of Super Mario will prove to be enough in preventing “contagion”. Our personal answer to this question is that we’re in for a quite wild ride in French OATs, but in any case the very low level of risk of this prospective trade makes it very appealing in our opinion, as the cost of being wrong is almost non-existent. We obviously encourage our readers to do their own research on the matter: caveat emptor!The Rothbardian Investorhttp://www.blogger.com/profile/09722598347527860060noreply@blogger.com0tag:blogger.com,1999:blog-1699632643928019839.post-17760090300320299492013-05-21T17:35:00.001+02:002013-05-22T08:18:09.448+02:00Ladies and Gentlemen, it is with great pleasure that we hereby present you with…<div align="justify">
…what is possibly the greatest gold contrary indicator ever! Ladies and gentlemen, please welcome to the stage <a href="http://seekingalpha.com/author/ananthan-thangavel/articles" target="_blank">Mr. Ananthan Thangavel</a> (a round of applause follows as the excited crowd cheers him on)! Apart from titillating our fantasy as we imagine the scene (we recently rediscovered our always-present and yet long-lost love for acting and performing), the objective of this post is firstly to inform our readers about the extremely high likelihood that a final bottom has been printed in the PMs market (a bottom that warrants further additions to our already very large positions) and secondly to present them with what to our eyes appears to be an extremely effective timing tool for our purchases: the short calls of Mr. Thangavel. It is not our intention to ridicule Mr. Thangavel (at least not much) as we know that investing is far from an easy business and everybody is bound to make their shares of mistakes (and we’re certainly not immune to this phenomenon, as e.g. we weren't expecting the collapse in PMs on the back of already extreme levels of pessimism). What we want to show, however, is that doing fundamental analysis using horribly wrong premises, spurious arguments and a wide array of trite fallacies vastly increases the possibility of committing grave mistakes. We are convinced that unless one is motivated to learn what sound analysis really is, then one would be better off just trading technically, without concerning (and burdening) himself with any fundamental considerations. Take <a href="http://peterlbrandt.com/" target="_blank">Peter Brandt</a> as an example: he obviously can’t differentiate between valid fundamental arguments and hogwash and yet he goes on to trade profitably by using simple charting techniques, prudent risk management and a multi-decade experience (and kudos to him for having been on the short side of the PMs markets for quite a while).</div>
<div align="justify">
<br /></div>
<div align="justify">
<strong><em><span style="font-size: medium;">A brief review of Ananthan’s latest article</span></em></strong></div>
<div align="justify">
<strong><em><span style="font-size: medium;"><br /></span></em></strong></div>
<div align="justify">
We intend to start with a point-by-point rebuttal of the seizure-inducing nonsense spouted in <a href="http://seekingalpha.com/article/1411601-short-gold-for-the-long-haul" target="_blank">Mr. Thangavel’s latest article</a> (which he published on May the 7th, so at least he got a couple of weeks of glory as prices collapsed!). Readers are encouraged to read it before proceeding through our post, as we’ll only quote brief passages of it or simply articulate our positions assuming that readers are familiar with the other side of the argument.</div>
<ul>
<li> <div align="justify">
“we did briefly believe that the initiation of QE3 would be a positive catalyst for gold back in September 2012” : excellent, you demonstrated you know how to pick tops as well, as your long call arrived when prices where around 1760$/oz. and topping. </div>
</li>
</ul>
<ul>
<li> <div align="justify">
“As can be seen from the chart, gold rose in a fairly steady pattern (with 2008 being an extended correction), from the early 2000s until September 2011. Viewing this chart, it appears the perfect picture of an asset bubble and collapse.” : if you say so… To us it seems like a powerful secular bull market experiencing a cyclical bear market correction. This chart, courtesy of <a href="http://www.macrotrends.net/" target="_blank">Macrotrends</a>, seems to confirm our suspicion:<br />
<br /></div>
</li>
</ul>
<div align="center">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgZA-1LxuKFyeV-8nbyQg7zjXwAKBw5snOBinhgeTvxVHMzfha-JSYEFwAUjPOhZ6KMWUsa2VRNxtXZAewHrGZBOZKe6D5YlO4n65vwk9qIu6KNhyEioAFr1fGK_sSQLjnMktrBEra6f54/s1600-h/Macrotrends.org_Gold_at_3000_Only_if.png"><img alt="Macrotrends.org_Gold_at_3000_Only_if_Bubbles_Repeat" border="0" height="382" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiJUmBNfZ7UsrjKCgtr84iFwyeTt1CRYLTtNsvPBNFpWLqNO0s7zQlbplmjfhQOPeS8SZPm5_yXC6tf4mhRJNkssAmjUS1lxabeXclI89-1Ag0UTUWpkOtxKdWRRwRchyphenhyphenCU2zVW_hRfUr0/?imgmax=800" style="border-bottom-width: 0px; border-left-width: 0px; border-right-width: 0px; border-top-width: 0px; display: block; float: none; margin-left: auto; margin-right: auto;" title="Macrotrends.org_Gold_at_3000_Only_if_Bubbles_Repeat" width="644" /></a><em>A chart comparing the percentage gains of the current gold bull market with those of other major bull markets: we can’t see any parabolic rise so far, in spite of what the hawk-eyed Ananthan says.</em></div>
<div align="center">
<br /></div>
<ul>
<li> <div align="justify">
“Considering there is no "right" price for the price of gold, but rather only the price that the next buyer is willing to pay, more and more investors came around to the bullish gold thesis, and this gradual realization drove the price higher.” : congratulations, you just discovered that prices are the composite result of a myriad subjective value judgments by economic actors. Unfortunately for you, this is an insignificant platitude that is true for all goods, not only for gold. No, there is no such thing as “intrinsic value”! Quick Austrian explanation: for a voluntary exchange to occur both parties need to value the goods to be acquired more than the goods to be exchanged for them (otherwise no transaction would take place, as both parties would expect a loss, rather than a gain, from the exchange): in short, this is called a reverse valuation. From this it logically follows that all values are subjective: if goods had an objective, intrinsic value, then there could be no reverse valuation (except through error). In other words, all exchanges would have to rely on the error of one or both parties to occur and this is obviously impossible (think about the coexistence of innumerable satisfied iPhone buyers and of large Apple profits: evidently they both gained from the transaction and no “right” price for an iPhone exists). </div>
</li>
</ul>
<ul>
<li> <div align="justify">
“However, by 2011, nearly every market participant knew or understood gold's appeal, and since gold could be easily purchased through an ETF or futures contract, everyone who believed in the thesis was in. The following chart shows the number of ounces of gold held by ETFs. […] We believe this massive accumulation of gold was the primary driver of the most recent leg of the bull market, punctuated by leveraged futures traders exacerbating the final spike. Moreover, ETF and futures demand for gold can be considered the marginal player, as central banks and other physical gold holders rarely trade in and out, so ETFs are setting the marginal price due to their relatively high turnover.” : here we have a powerful combo of specious arguments.<br />
A) It’s highly debatable whether in 2011 “nearly every market participant” had an interest in (much less an understanding of) gold’s appeal: there certainly was excessive speculative fervour and widespread bullishness, but certainly we saw no signs of a speculative mania (and at least we know that our good Ananthan had no interest in and certainly no understanding of gold). Moreover, we know that since gold does not get “used up” and a large stock of it exists (roughly equal to 50 times the annual mine supply), then it follows that all this gold has to be held by someone at all times: what matters is not whether “everyone is in” (in light of the above this sentence is meaningless), but whether at the current price there is or there isn’t an equilibrium between total stock and total demand to hold (which includes the demand to acquire gold and reservation demand to hold it) and whether the current price correctly reflects future anticipated conditions (if it doesn’t, then an adjustment is inevitable, in the form of an increase or decrease of the total demand to hold and hence an increase or decrease of the price until a new equilibrium is reached. The total stock bears little relevance as it’s almost a fixed constant). The heart of successful speculation is the ability to correctly gauge the current and the future relationships between supply and demand and identify meaningful discrepancies that could give rise to powerful trends in price (e.g. there currently is a large supply of sugar and hence prices are very low. Yet we anticipate a future situation in which this abundance disappears and hence we speculate on a meaningful price increase).<br />
B) The usual tripe about ETFs holdings… With 170.000 tonnes of above-ground gold what the hell does it matter whether ETFs hold 1.000, 2.000 or even 10.000 tonnes? All gold has to be held by someone, all that matters is at which price the market clears, i.e. at which price demand to hold and available stock match. Moreover, it’s evident that ETFs are tiny tiny players in the global gold market. They have no doubt made it easier for Joe Public to invest in PMs, but they’re still a minuscule source of demand. Moreover, the gold they buy is sold by someone else and that someone cares little whether the buyer on the other side is an ETF, a central bank, a large dealer or whatever: all he cares about is the price he can get (and whether that price is high enough to entice him to sell). So ETFs may be useful as a proxy for sentiment towards PMs, but their buying and selling most definitely does not influence the price. Have a look at the <a href="http://en.wikipedia.org/wiki/London_bullion_market#Market_size" target="_blank">London Bullion Market’s size</a> and then figure out for yourself whether GLD shedding a few hundred tons over the course of six months really matters much.</div>
</li>
</ul>
<ul>
<li> <div align="justify">
The paragraph titled “When bubbles burst: prices cannot catch up to unrealistic expectations” is a concentrate of gibberish. First of all, bull markets do indeed generally end when the fundamental drivers no longer are in place or when they have at the very least significantly deteriorated (reference <a href="http://therothbardianinvestor.blogspot.com/2013/01/if-bull-market-ends-and-no-one-is.html" target="_blank">our post on the subject</a>).<br />
Secondly, as we have observed above, good luck comparing gold now with the Nasdaq in 2000 or housing in 2006…<br />
Thirdly, mistaking a cyclical bear for the end of a secular trend is a mortal sin amongst speculators and pretending that an asset responds in the most obvious manner to news is utterly naive: if speculation were as easy as reading the paper and then doing the most obvious thing (like buying gold on leverage the day Bernanke announces his QE program), then we’d all be Soros. Moreover, all secular bulls experience cyclical corrections: in 1987 the secular stock market hadn't ended (as the secular drivers of said trend were firmly in place), BUT the then-current circumstances warranted a temporary and meaningful correction. The same goes for gold in 1975, stocks again at the beginning of the ‘90s etc. etc. etc.<br />
Finally, what about his assertions that “The current fundamental problem in the gold market is that every bullish fundamental has already been revealed” and that “there is no upside surprise left for gold investors, but there remains plenty of downside surprise.”? Well, save those lines for the stock market, dear Ananthan! In our opinion, it is obvious that there are still plenty of “hidden” bullish fundamentals for gold (hidden of course only for that 90+% of people who have never heard of the Austrian School) that will not fail to make themselves evident once the current monetary madness finally delivers its results. And be assured: that will be the time to sell, as the Ananthans of this world will rush to buy! Just as obviously, it seems to us that right now there are no downside surprises left for gold, given also the recent crash (a 4-standard-deviation event): the world economy is just perfectly fine and on the road to a strong recovery, no bad consequences can possibly result from massive inflation, debts will no doubt be repaid with honest money and all the perks and amenities of the welfare state will be maintained and even increased.</div>
</li>
</ul>
<ul>
<li> <div align="justify">
The next paragraph is another questionable one. Gold secular bull trends tend to happen during periods of economic crisis, when stocks are generally locked in a secular bear. <a href="http://therothbardianinvestor.blogspot.com/2013/02/you-know-its-bull-market.html" target="_blank">We have discussed the matter in a previous post</a>. There may be periods of positive correlation between the two assets, but the overall secular trend is clear. Moreover, if the Fed stops printing, good luck with trying to keep the current global financial ponzi scheme from crumbling. In that scenario (a highly deflationary one) we seriously doubt gold would perform poorly. It may decline in nominal dollar price (not very likely and mainly dependent on whether the U.S. gov’t can remain solvent), but it is certainly going to increase its purchasing power (i.e. the amount of “stuff” like oil, houses, cars, stocks, food etc. that you could buy with a unit of it) exactly like it did in 2008. If, on the other hand, Benny keeps on inflating (a very likely outcome) then good luck with trying to keep the current “Goldilocks Economy” in place for much longer: either a bust of massive proportions or a prolonged period of significant price inflation and stagnant economic activity or even the Misesian crack-up boom would likely appear and all three scenarios are bullish for gold (with the last one being <em>wildly</em> bullish). We’ll tell you how gold could be hurt: if Obama were to be possessed by the spirit of Murray Rothbard, so that all at once he would abolish the Fed, repudiate the debt, stop spending, cut taxes and regulations and let the free market re-establish equilibrium (of course he would have to be exorcised before being able to re-establish the gold standard, otherwise the scenario would still be bullish).<br />
<br /></div>
</li>
<li> <div align="justify">
“Future for gold”: another bit of gibberish about ETFs holdings coupled with the following: “At this point in time, with interest rates around the world staying low indefinitely, investors are grabbing for yield anywhere they can find it. Nearly every other asset, between stocks, fixed-income, alternative, and real estate, produces a higher current yield than gold's 0%. Given the fact that gold has not made a new high in 19 months, traders can no longer rely on price appreciation to make up for gold's lack of yield and utility. Therefore, they are selling the metal, and they have quite a bit more to get rid of before all is said and done.” Yes, you have got this one right Ananthan, although you couldn't resist mentioning the usual nonsense about the supposed bearishness of the liquidation of miserable gold holdings ( by the way, as far as we know sellers do not just throw their gold in the ocean, but rather sell it to buyers who become the new holders). Investors are indeed selling gold to chase other assets. The important question however is: is that likely to generate good returns? Personally, we wouldn't touch a junk bond yielding less than 5% with a ten-foot pole… Ditto for a stock market sporting a CAPE10 of 25 and a Q ratio above 1, both levels at which secular <strong><em>bull </em></strong>markets have ended, not begun.<br />
<br /></div>
</li>
<li> <div align="justify">
And now hold on to your hats, dear readers, as the two last paragraphs are riddled with enough rigmarole to make us almost pass out: “Given that gold is a commodity, most commodities eventually trade to their cost of production. Those of you that have taken a basic economics class will remember that marginal cost = marginal revenue. […] If investment demand continues to decline and gold ETF holders continue to sell, we believe a gold price below $1,000/oz is a near certainty. Gold will eventually return to its true cost of production, squeezing miners' profit margins.” It seems to us, dear Ananthan, that you are the one who failed to attend a basic economics class: please show us another commodity whose available supply pretty much equals the entire cumulative production that has taken place over the course of all of human history (save for a few sunken Spanish galleons and a few other tons that got either lost or consumed). In such a situation, the price of a real commodity, like corn or oil, would no doubt plunge <strong><em>far below</em></strong> the cost of production, since such an abundant supply would mean that nobody would need to actually produce the stuff (at least for a few decades) and hence the market, via its profit and loss mechanism, would send the signal that the scarce resources employed in the production of such a good would be better employed in other lines of production (in simple words: nobody would make a frigging dime producing that commodity). So, how come that gold prices do not plunge far below its cost of production, notwithstanding the huge above-ground supply? Well, maybe after all gold is not a commodity or, more correctly, it is a commodity whose function is to act as money, no matter how emphatically Ananthan tries to explain us how gold cannot possibly be money by babbling assorted nonsense. Gold being money, reservation demand plays a fundamental role in determining its value. This demand is of course fickle and subject to continuous changes, but all that matters to the astute investor is to correctly determine the likely direction of its trend, i.e. whether it is likely to increase or decrease meaningfully over the next few years. Truth be told, he is right in saying that gold is not a commonly accepted medium of exchange, but this happens not because it does not possess the characteristics of money (i.e. not because it lacks “moneyness”) but only because of government coercion in the form of legal tender laws. Proof of this assertion can be found in the fact that when a paper money system collapses, specie money always regains its rightful role as a medium of exchange.<br />
<br /></div>
</li>
<li> <div align="justify">
And finally Ananthan dispenses a wonderful pearl of wisdom for the benefit of the hoi polloi: “The problem with gold is that the market sets the price and there is no fundamental value. We must always be cognizant of this when investing in a psychological asset.” Ah, so now we know that gold is a psychological asset, whatever that means (we’ll no doubt interrogate a friend of us who happens to be a shrink on this and we may even put a gold bar on his couch so that he can properly analyse it)! Moreover, we also learn that gold has no fundamental value and that its price is set by the market and who cares if that is true of each and every asset on this planet (see the explanation above): certainly this only matters in the case of gold!</div>
</li>
</ul>
<div align="justify">
And with that last bit we have finished our rebuttal and we can move on to next part of the post (interested readers can spend some time overlaying the dates of Ananthan’s calls to short PMs to a chart of gold and see whether they notice any patterns). But before moving on, we want to mention that we’re not singling out Mr. Thangavel, as the drivel he spouts is usually used by a great many other analysts, nor we’re attacking him because he holds different views from us: what we’re criticising here is the shabby and shallow analysis and the careless use of specious arguments that don’t hold water. If someone were to say us that he’s short gold because the chart is bearish and there has been a breakdown, then we won’t have anything to object. We would still continue to be long (as we have our own way of investing), but we won’t engage in a debate with him: successful technical traders are very worthy of respect. But if someone comes up and says that he’s shorting gold because money printing is helping the economy and other assorted BS, then we can’t avoid dissecting his arguments and showing them for what they really are: nonsense.</div>
<div align="justify">
<br /></div>
<div align="justify">
<strong><em><span style="font-size: medium;">The current technical and sentiment picture</span></em></strong></div>
<div align="justify">
<strong><em><span style="font-size: medium;"><br /></span></em></strong></div>
<div align="justify">
Right now, after a series of endless plunges and crashes that no doubt helped clear the market from all kinds of even remotely weak hands, we see that both gold and silver have put in nice reversal candles. It is of course too early to say whether this will really be “it”. What we want to say, however, is that this time the bounce has a different feel attached to it: it just seems to us to be a bottoming process. A weekly close above 1400$/oz. for gold would most likely seal the deal in our mind. In any case, investors are now presented with an excellent opportunity to increase their exposure to this asset class. Sentiment of course is in the gutter, with newsletter writers now recommending a record-breaking average short position of 44% according to Hulbert Financial Digest and with <a href="http://www.sentimentrader.com/" target="_blank">Sentimentrader</a>’s public opinion survey now showing widespread bearishness. Positioning shares sentiment’s place in the gutter, with small speculators almost net short in gold and with the lowest exposure<em> ever</em> to silver (and this does not even reflect the recent plunge). Moreover, if one spends a bit of time lurking around in forums and blogs, then he’ll certainly notice that most people there are talking about shorting PMs, increasing their shorts etc. (nobody is talking about selling their longs as they already did during the last crash).<br />
<br /></div>
<div align="justify">
<br /></div>
<div align="center">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgLz3CYI4oXfG-hRMgLDTiJwBaqXUipFRna3uOkUKELSu4A-B5zppt4pFsldlH7cPx0hXjjDrnnWEWQjyUlfJDX8D-XxAoqjz748X6Ay7dxY87Zh3q1uHW1WFWSclLhQABH8gys3xk_rk4/s1600-h/gold%25255B4%25255D.png"><img alt="gold" border="0" height="484" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEglUq578g-o2-9oZsT7eCxffiMR7BUzVgwuWjSkdrA6eiKMi-oGnfqtGcLjGcpJkpq9TZiFkcAhuMTLpKFDx4Nk3Ra6HMQvV3GIpttbZdT9qFWzBPdmPI5O3iCLP2KKBB-uw1Skv1EMSEI/?imgmax=800" style="border-bottom: 0px; border-left: 0px; border-right: 0px; border-top: 0px; display: block; float: none; margin-left: auto; margin-right: auto;" title="gold" width="638" /></a><em>A chart of gold via <a href="http://stockcharts.com/" target="_blank">Stockcharts</a>: notice the reversal, accompanied by momentum divergences.</em></div>
<div align="center">
<em><br /></em></div>
<div align="center">
<br /></div>
<div align="center">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjhXjl6kmJF09XywdYjfJmP9Wx6M9qVBdwAN6DCXtJYRr09D-eEaqoaK95RdZ2ePbeGUAjfvaFYm21JPOpYly54mp-qQIN_2J2CtER1IheePMC5TsK_qCWA_WQIpxM8K4ipJ4cL194MYJo/s1600-h/silver%25255B3%25255D.png"><img alt="silver" border="0" height="484" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiq8HperYOlpfgONBb-S0nWx4sx3DFQYiDK_mOGb9JXcUcDHgyWR6MSwETiQKHQvxUqxPXutTle0sKn0hU2ZK2N41GKHWeZHVJsHyVbfQb8R0rPTjVsHaea8OkdwVzhNRrvR-Y5FSDA8uo/?imgmax=800" style="border-bottom: 0px; border-left: 0px; border-right: 0px; border-top: 0px; display: inline;" title="silver" width="638" /></a> </div>
<div align="center">
<em>The reversal (after fresh new lows) is even more evident in the case of silver.</em></div>
<div align="center">
<em><br /></em></div>
<div align="center">
<br /></div>
<div align="justify">
<strong><em><span style="font-size: medium;">Conclusion</span></em></strong></div>
<div align="justify">
<strong><em><span style="font-size: medium;"><br /></span></em></strong></div>
<div align="justify">
We cannot possibly know whether the bottom is in or not, but we know that the fundamental arguments used to support bearish views are fallacious and that sentiment and positioning both scream for a bottom (although in all honesty they have been screaming for a while). We now have a reversal that looks convincing and we have to make do with it. We are buyers, knowing that the rewards far outweigh the risks and more importantly knowing that the secular bull market has not ended, not by a long shot, and that as such being long here is a sound proposition likely to deliver excellent returns over the coming years. Of course, readers need to remember the importance of using their own brains and of prudent risk management (read: don’t be heroes who leverage to the hilt in hope of becoming the next Paulson).</div>
The Rothbardian Investorhttp://www.blogger.com/profile/09722598347527860060noreply@blogger.com0tag:blogger.com,1999:blog-1699632643928019839.post-71336356574173539802013-05-12T22:31:00.001+02:002013-05-13T09:57:22.797+02:00Burning Down the House<div align="justify">
The goal of this post (whose title is again going to titillate music aficionados) is to give our readers a quick overview of the state of roughly 20 real estate markets around the world. We’ll purposefully omit countries where the bubble has already clearly burst (like Spain, Ireland or Cyprus), although in many of them the downside may still be severe. A notable exception is the U.S., where the savvy policies of the bearded monetary shaman have helped bring the housing bubble back from the dead. </div>
<div align="justify">
Germany's housing market so far hasn't managed to enter bubble territory, although the recent influx of scared money, coupled with the ultra-loose policies of the ECB are beginning to work their voodoo.</div>
<div align="justify">
We intend to start with a brief Austrian explanation of the origin of bubbles and how come they often manifest in the RE sector and we’ll then move on to the actual description of the various RE markets, for which we’ll use a combination of statistical data, third party research, anecdotal evidence and direct experience (we’ve been to many of the countries mentioned and we’ve also had a stint in the construction business a few years ago). It’s worth noting that we’re currently short via long-dated put options (although a paper we recently read and on which we may comment in a subsequent post has had us reconsidering the wisdom of buying long dated options, rather than continuously roll-over short-dated ones) a few banks such as CBA in Australia, BNP in France, RY, BNS and CM in Canada: they’ve been binging on RE during recent years and we suspect they won’t be cheering once it becomes obvious that the party is over.</div>
<div align="justify">
As an aside, we still have to understand why exactly perpetually rising real estate prices (in the face of massive oversupply to boot) are held to be such a boon for an economy, as they only bring about more debt and/or a decrease in disposable incomes as they keep on tying up more and more resources.</div>
<div align="justify">
<br /></div>
<div align="justify">
<strong><em><span style="font-size: medium;">On the Origin of Bubbles</span></em></strong></div>
<div align="justify">
<strong><em><span style="font-size: medium;"><br /></span></em></strong></div>
<div align="justify">
Unless one believes that bubbles are a “gift” of God or the inevitable result of the evil capitalists’ activities, the first thing one has to ask himself is “How come there are bubbles?” and the second one is “How come they always (or at least very often) seem to appear in certain specific sectors of the economy (like e.g. real estate)?”. The answers to these very important questions lie in the thorough study of the theories formulated and expounded by the Austrian School of Economics and in particular by its two heavyweights Mises and Rothbard. If one does not wish to read roughly 2.500 dense pages of actually very sound and interesting economic thinking, then we can suggest him to at least have a look at <a href="http://www.acting-man.com/?p=10053" target="_blank">this great article on the production structure</a> assembled by the always excellent <a href="http://www.acting-man.com/" target="_blank">Pater Tenebrarum</a>, whose blog we highly recommend and on whose work we’ll rely rather extensively during the course of this post. Here, we’ll just give a short, to-the-point answer to the questions above, simplifying and summarizing more complex concepts that inevitably need other venues to be treated exhaustively.</div>
<div align="justify">
First of all, we need to recognize the fact that the production structure (i.e. the productive chain that starting from raw resources and labour delivers a final consumer product) is made up of different stages: higher order (like e.g. real estate, the capital equipment industry etc.) and lower order ones (like e.g. your grocer around the corner). These stages are defined according to their distance from the final consumer goods the production of which is always the ultimate goal of the economy: all factors of production, whether original (land/natural resources and labour) or produced (capital goods) are always employed to produce a final consumer good <em>somewhere down the road </em>(i.e. a trashing machine being built today with the use of raw resources and manual or mechanical labour will one day harvest grains that will then be consumed as food). It is important to note that there exists a lag between the beginning of the production process at the highest order and the actual production of the final consumer good (i.e. you can’t produce an iPhone if you haven’t designed it or built the necessary tools and machinery needed to assemble it). The longer the production structure, the longer the lag. It obviously follows from this fact that all investments in the production structure need to be funded by real resources that have already been both produced and saved (since the additional consumer products that will be produced as a result of these investments won’t be available before a certain lag); also, the financing of higher order stages of production requires significantly more resources than the financing of lower order ones, due to the fact that it takes longer for them to yield a final consumer good with which to repay the investment. In the trashing machine example above, we already need to have the grains with which to feed the labourers employed in its construction: we can’t make them work without subsistence whilst waiting for the machine to be completed and the next harvest to begin, no matter how loudly Paul Krugman argues for such an idiotic approach (by the way, we’d love to see him starve whilst trying to prove that you can indeed put the cart before the horse). Money simply facilitates this process: instead of paying our workers with grains, we give them money and they’re free to spend it according to their needs and wants. But the fact remains that we can only fund production with real resources and the appearance of fiat money (via printing and credit expansion) does not magically make appear real resources as well.</div>
<div align="justify">
That said, how do we go about deciding the allocation of resources between the different stages of production (i.e. how do we decide whether to invest more in harvesting machines or whether to keep harvesting by hand or even whether to further lengthen the structure by investing in the designing of a plant that will produce new and more efficient tools to facilitate our harvesting)? It all depends on our time preference rate, that is it depends on our willingness to sacrifice present consumption (that we need to save to finance investments) in favour of higher, but future consumption. Each one of us of course has his own personal preferences and in a complex market economy where many economic actors interact all these different preferences combine into forming the originary rate of interest (which is nothing but the society-wide time preference rate), in the same way in which buyers and sellers combine in forming the market price for a good. This originary rate of interest is not set in stone, but rather changes as conditions (like e.g. the size of the pool of real funding) and preferences change, again in the same way as prices do. <em>[For the sake of simplicity we omit to mention here the fact that each and every good has its own specific rate of interest and that there exists a never-fulfilled tendency towards the harmonization of all these different rates.] </em>Originary interest combines with a risk premium (dependent on the creditworthiness of the borrower), a price premium (dependent on the expected changes in the purchasing power of money) and an entrepreneurial profit to form the interest rate. </div>
<div align="justify">
With the above in mind, we can now begin to see how bubbles come into existence and the sectors in which they are likely to occur. The investor who needs to allocate capital (i.e. real, saved resources) relies on the interest rate to facilitate his calculations of which allocations are profitable (by discounting in the present the future value expected to be generated by the various investments). He also uses money as a unit of account and its availability as a proxy for the availability of the real resources this money is supposed to represent. We can now realize that if the money (or credit) is not backed by real resources, if its value is subject to a constant, subtle erosion and if the rate of interest does not truly reflect the real society-wide time preference rate then the investor can very hardly avoid making a mistake in his calculations. </div>
<div align="justify">
It also becomes clear that the higher stages of production will be affected more by such interferences than the lower stages as the lag between an investment in such stages and the actual production of the final consumer goods is greater and this makes its profitability significantly more dependent from changes in the rate of interest (since the period to be discounted using that rate is longer).</div>
<div align="justify">
Recalling the fact that investing in higher stages is more resource-consuming, we can see how these false signals that encourage investments in these higher stages in the absence of the required amount of saved-up resources are especially pernicious, as they deprive the economy of significant amounts of real capital that may have been used to satisfy far more pressing needs (as an example think of all the stuff that gets used up and all the people that are employed when building one of the famous “stimulative” bridges to nowhere). Moreover, when it is discovered that the required resources the existence of which was feigned do not actually exist, the re-adjustment process becomes inevitable (i.e. the bubble bursts).</div>
<div align="justify">
Proof of our assertions can be found in the fact that, as far as we know, we have not once seen or heard of a bubble in greengroceries, with people rushing to open up stores to sell apples and bananas to frenzied consumers (as the grocer buys the groceries wholesale at dawn and sells them throughout the day and does not need any particular capital equipment to carry out his job, he is basically immune from manipulations of the rate of interest, although as readers can see in the article linked in the next paragraph overconsumption takes place during a boom as well and is then inevitably followed by “forced savings” and this inevitably affects the latter stages). On the other hand, we’ve been to many cities with office and residential towers popping up like fungi and where we could see a real estate agency on every corner (or even more often) and meet deluded people who were happy to share their dreams of boundless wealth (of course, they only needed RE prices to go just a little bit higher).</div>
<div align="justify">
We want to make an additional and apodictic consideration (although we do provide a link <a href="http://www.auburn.edu/~garriro/strigl.htm" target="_blank">here</a> for those who want to further examine the argument): the stage of the production structure most neglected during the boom phase is the middle one.</div>
<div align="justify">
And with this we end our brief introduction, again stressing the need for way more thorough investigation of the matter on the part of interested readers.</div>
<div align="justify">
<br /></div>
<div align="justify">
<strong><em><span style="font-size: medium;">Old Europe</span></em></strong></div>
<div align="justify">
<strong><em><span style="font-size: medium;"><br /></span></em></strong></div>
<div align="justify">
Let’s begin with where we live, the wonderful continent of Europe. Readers interested in knowing more about it, in a heavily stereotyped (and hence fun) way, can watch “Jeremy Clarkson meets the neighbours”: <a href="http://www.youtube.com/watch?v=UnsphKs-8K8" target="_blank">here is the link to episode one</a>!</div>
<div align="justify">
<br /></div>
<div align="justify">
<strong><em><span style="font-size: medium;">Netherlands</span></em></strong></div>
<div align="justify">
<strong><em><span style="font-size: medium;"><br /></span></em></strong></div>
<div align="justify">
Here we start with a massive one! It seems to us that the Dutch are suffering from Tulipomania-related nostalgia and as such have been busy blowing a new bubble, and one for the ages!</div>
<div align="justify">
Household debt to GDP as well as household debt to disposable income ratios of 250% and skyrocketing home prices: an explosive combination! The end result is one of the most overvalued RE markets in the world, that lately clearly appears to be faltering. With 650 billion € of RE loans outstanding, stockholders, bondholders and depositors at Dutch banks beware: you may get Cyprus’d before you know it, as <a href="http://www.blogger.com/boombustblog.com" target="_blank">our beloved Reggie</a> often reminds to the Irish!</div>
<div align="justify">
Interested readers can find more info <a href="http://www.acting-man.com/?p=22492" target="_blank">here</a>, <a href="http://www.acting-man.com/?p=23107" target="_blank">here</a>, <a href="http://www.thebubblebubble.com/netherlands-housing-bubble/" target="_blank">here</a> and <a href="http://www.globalpropertyguide.com/Europe/Netherlands" target="_blank">here</a>.</div>
<div align="justify">
<br /></div>
<div align="justify">
<br /></div>
<div align="justify">
<img alt="Dutch housing data" height="306" src="http://www.acting-man.com/blog/media/2013/05/Dutch-housing-data.png" style="display: block; float: none; margin-left: auto; margin-right: auto;" width="640" /></div>
<div align="center">
<em>Two Charts depicting the performance of the Dutch housing market in recent years, via <a href="http://www.globalpropertyguide.com/real-estate-house-prices/N#netherlands" target="_blank">Global Property Guide</a>.</em></div>
<div align="center">
<em><br /></em></div>
<div align="center">
<br /></div>
<div align="center">
<img alt="household debt" height="448" src="http://www.acting-man.com/blog/media/2013/05/household-debt.jpg" width="640" /></div>
<div align="center">
<em>A wee bit of debt currently on the balance sheet of Dutch households, from <a href="http://www.acting-man.com/?p=23107" target="_blank">the previously linked Acting-Man post</a>.</em></div>
<div align="center">
<em><br /></em></div>
<div align="justify">
<span style="font-size: medium;"><strong><em>France</em></strong></span></div>
<div align="justify">
<span style="font-size: medium;"><strong><em><br /></em></strong></span></div>
<div align="justify">
Ze French would obviously not tolerate to be left behind by anybody (ah, la grandeur!) and so here we have them, with their RE market right on top of the list of the most overvalued in the world. Depending on the valuation measure used (whether disposable incomes or rents), prices are roughly 35-50% above their long-term average ratios, which means that, according to the law of the pendulum, they are likely to go quite a bit <em>below </em>said average ratios once the bubble pops. We wouldn’t be surprised to see prices at least halve over the course of the coming years, particularly if Monsieur Hollande keeps acting like a lunatic (let’s be honest: he looks like one, doesn’t he?! Have a look <a href="http://media.melty.fr/article-1367568-ajust_930/francois-hollande-vise-dans-la-chanson.jpg" target="_blank">here</a>!). It’s interesting to note that in Paris and in the surrounding region overvaluation is even more extreme, likely due in part to the economic and political importance of the area and in part to the huge influx of foreign money (this resembles the situation of London in the U.K., see below). No <a href="http://en.wikipedia.org/wiki/P%C3%A9trus_(wine)" target="_blank">Pétrus</a> for recent buyers, that’s for sure! A marked slowdown in building activity and a recent decline in sales (which turned into a 44% plunge in the number of transactions in Paris), accompanied by a modest reduction in prices may signal that the party is rapidly ending (readers need to remember here that prices are the last component to deteriorate, with construction activity and more importantly sales acting as early-warning signals). Interested readers can learn more <a href="http://www.thebubblebubble.com/france-housing-bubble/" target="_blank">here</a>, <a href="http://boilingfrogs.info/2013/02/02/french-housing-market-bubble/" target="_blank">here</a>, <a href="http://www.economist.com/news/finance-and-economics/21569396-our-latest-round-up-shows-many-housing-markets-are-still-dumps-home" target="_blank">here</a>, <a href="http://www.globalpropertyguide.com/Europe/France" target="_blank">here</a> and <a href="http://globaleconomicanalysis.blogspot.it/2013/03/housing-construction-in-france-lowest.html" target="_blank">here</a>.</div>
<div align="justify">
<br /></div>
<div align="justify">
<br /></div>
<div align="justify">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEioGiOTg8FxEX-jWYABSyM3cq0vabH9rwTsRZSKiC_rqbwNJFqFD-GtKMjrB8PQNa-DHJItB9b7_t67lRUKU1YU80yoLPJidqL9k854hzsTjXxR4vIrp3pj4htCLEZ4fwX_ZPlUHSGFYm4/s1600-h/clip_image0025.gif"><img alt="clip_image002" border="0" height="382" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEinpez77vNlmt6HIAEUevmmJ3KAzlIipgDHVBLiuKOeyBbWGSZPUyn0hzwVw_dCIBqwD2ulskbKT6PmHlwt3-a5RnYJ52jg8CsYu990JjKMSMs4nTLVH5Rk8sTsqZ2jPvBU4AdGty8vNfU/?imgmax=800" style="border-bottom-width: 0px; border-left-width: 0px; border-right-width: 0px; border-top-width: 0px; display: block; float: none; margin-left: auto; margin-right: auto;" title="clip_image002" width="644" /></a></div>
<div align="center">
<em>French home prices relative to disposable income, divided per region, chart courtesy of <a href="http://www.cgedd.developpement-durable.gouv.fr/home-prices-in-france-1200-2013-r137.html" target="_blank">CGEDD</a>.</em></div>
<div align="center">
<br /></div>
<div align="justify">
<strong><em><span style="font-size: medium;"><br /></span></em></strong></div>
<div align="justify">
<strong><em><span style="font-size: medium;">Belgium</span></em></strong></div>
<div align="justify">
<strong><em><span style="font-size: medium;"><br /></span></em></strong></div>
<div align="justify">
Even the tiny country of Belgium has managed to blow a rather sizable RE bubble, with remarkable levels of overvaluation. Interestingly, the market seems to be giving only feeble signals that the unwinding process may be about to begin: prices continue to creep higher (albeit not in Brussels), with the only warnings being a slowdown in construction activity and a decrease in mortgage issuance. We do however doubt that the Belgian bubble could be able to withstand a popping of neighbouring bubbles (France and Netherlands) and/or a new iteration of the global financial crisis (which, as readers of this blog know, we consider to be baked in the cake). Interested readers please have a look <a href="http://www.globalpropertyguide.com/Europe/Belgium/Price-History" target="_blank">here</a> and <a href="http://www.thebubblebubble.com/belgium-housing-bubble/" target="_blank">here</a>.</div>
<div align="justify">
<br /></div>
<div align="center">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhHK4OJONx2WezK8gYVIGD4WFC3SEOL6PYKCDdhuKDC3Tt8gpkqjgtmn6fk-5x-VKni01lMd6u7WnOZeSpoyrf7-xlHRqInyfLg3n9L37itUx7ZVJqg7t2MEOAZ-aa0JLv7zqCxbpdMbl0/s1600-h/image7.png"><img alt="image" border="0" height="417" src="http://lh5.ggpht.com/-gIna4GO-HA0/UY_8F_tK_UI/AAAAAAAAAag/Wpw3stfLDIY/image_thumb3.png?imgmax=800" style="border-bottom-width: 0px; border-left-width: 0px; border-right-width: 0px; border-top-width: 0px; display: block; float: none; margin-left: auto; margin-right: auto;" title="image" width="644" /></a> <em>Belgian house prices: still no sign of collapsing. Chart via <a href="http://www.globalpropertyguide.com/real-estate-house-prices/B#belgium" target="_blank">Global Property Guide</a>.</em></div>
<div align="center">
<em><br /></em></div>
<div align="justify">
<br /></div>
<div align="justify">
<strong><em><span style="font-size: medium;">U.K.</span></em></strong></div>
<div align="justify">
<strong><em><span style="font-size: medium;"><br /></span></em></strong></div>
<div align="justify">
The U.K. also sports a severely overvalued RE market, with London being one of the most expensive cities in the world when it comes to buying a house. Prices are at least 30% above their historic valuation ratios. Of course, British blokes are up to their eyeballs in debt (in the Greater London area mortgage servicing takes up on average a whopping 35% of income). And quite naturally <a href="http://www.guardian.co.uk/politics/2013/mar/26/george-osborne-help-to-buy-scheme" target="_blank">the government feels compelled to encourage even more reckless borrowing</a> (we want to reassure the author of the linked article, as there’s no risk of creating a new RE bubble: there already is one that is alive an well!). So far no major warning shots have yet been fired by the market (although there has certainly been a slowdown), however we encourage current RE owners not to feel too safe, as the foundations of the bubble are clearly shaky ones and a new recession or a financial shock may very well prove to be the proverbial nail in the coffin. Other, more detailed information can be found <a href="http://www.globalpropertyguide.com/Europe/United-Kingdom" target="_blank">here</a> and <a href="http://www.thebubblebubble.com/uk-housing-bubble/" target="_blank">here</a>.</div>
<div align="justify">
<br /></div>
<div align="center">
<img height="480" src="http://www.globalpropertyguide.com/template/assets/graph_images/204_graph2.jpg" style="display: block; float: none; margin-left: auto; margin-right: auto;" width="620" /></div>
<div align="center">
<em>The dizzying chart of U.K. real estate prices, via Global Property Guide.</em></div>
<div align="center">
<em><br /></em></div>
<div align="justify">
<strong><em><span style="font-size: medium;">Switzerland</span></em></strong></div>
<div align="justify">
<strong><em><span style="font-size: medium;"><br /></span></em></strong></div>
<div align="justify">
Even the famously dull Swiss have not resisted the temptation of engaging in a massive real estate binge, thanks in part to the mental policies of the SNB (zero rates and a money printing bonanza designed to stop the “harmful” rise of the Franc) and the large inflows of scared foreign money in search of a safe haven (and which may have ended up finding a grave). The result is a horrendously overvalued market where interest-only mortgages are common practice (otherwise many chaps could not even begin to think about buying a home) and where many cities and popular resort towns now sport some of the highest prices per square meter of the whole <em>orbis terrarum</em>. And so the secluded alpine country, famous producer of excellent chocolate and cuckoo clocks of dubious taste, is now drowning in debt, to the tune of 175% of disposable income. Again, there are no clear signs that the end may be approaching. In fact, it seems like the bubble is currently accelerating into its final blow-off stage. Readers are invited to read more <a href="http://www.globalpropertyguide.com/Europe/Switzerland" target="_blank">here</a>, <a href="http://www.thebubblebubble.com/switzerland-housing-bubble/" target="_blank">here</a>, <a href="http://www.swissinfo.ch/eng/swiss_news/Could_Switzerland_be_facing_a_property_bubble.html?cid=34958964" target="_blank">here</a> and <a href="https://www.research.unicreditgroup.eu/DocsKey/economics_docs_2013_131634.ashx?KEY=C814QI31EjqIm_1zIJDBJGdWFVZ20s5qhqoMd-mOWVQ%3D&EXT=pdf" target="_blank">here</a>.</div>
<div align="justify">
<br /></div>
<div align="justify">
<br /></div>
<div align="center">
<img height="480" src="http://www.globalpropertyguide.com/template/assets/graph_images/186_graph2.jpg" style="display: block; float: none; margin-left: auto; margin-right: auto;" width="620" /></div>
<div align="center">
<em>A chart of RE prices in Switzerland, which conceals the astonishing increases witnessed by some of the major cities.</em></div>
<div align="center">
<em><br /></em></div>
<div align="justify">
<strong><em><span style="font-size: medium;">Sweden</span></em></strong></div>
<div align="justify">
<strong><em><span style="font-size: medium;"><br /></span></em></strong></div>
<div align="justify">
Even the supposedly safe Northern European countries have taken part in the global RE bubble and they’ve done so with much gusto, as we shall see here. Starting with Sweden, we want to mention that prices have now begun to decline moderately, after having experienced an incredible run-up (more than doubling in the last decade). However RE is still severely unaffordable and at the very least 20% above its long-term average valuations. A household debt-to-income ratio of roughly 175% completes the picture. Signs of a slowdown are now present, but not yet obvious. For more on the topic please click <a href="http://www.globalpropertyguide.com/Europe/Sweden" target="_blank">here</a>, <a href="http://www.acting-man.com/?p=21778" target="_blank">here</a>, <a href="http://www.thebubblebubble.com/sweden-housing-bubble/" target="_blank">here</a>, <a href="http://www.thelocal.se/46272/20130219/#.UY5R6aKuybc" target="_blank">here</a> and <a href="http://larspsyll.wordpress.com/2013/04/02/household-debts-and-the-swedish-housing-bubble/" target="_blank">here</a>.</div>
<div align="justify">
<br /></div>
<div align="justify">
<br /></div>
<div align="justify">
<img height="480" src="http://www.globalpropertyguide.com/template/assets/graph_images/185_graph2.jpg" style="display: block; float: none; margin-left: auto; margin-right: auto;" width="620" /></div>
<div align="center">
<i>Housing prices in Sweden: now beginning to decline after coming close to a triple in less than two decades.</i></div>
<div align="center">
<i><br /></i></div>
<div align="justify">
<br /></div>
<div align="justify">
<strong><em><span style="font-size: medium;">Norway</span></em></strong></div>
<div align="justify">
<strong><em><span style="font-size: medium;"><br /></span></em></strong></div>
<div align="justify">
Norway is not in much better shape than Sweden. Arguably, the situation there may even be worse, due to the fact that its bubble has grown significantly larger than Sweden’s. Proof can be found in the fact that households now sport a debt-to-income ratio grater than 200%, not to mention that RE prices may be as much as 70% above their long-term averages, depending on the valuation metric used. Socialist paradise anyone?! Particularly worrying is that fact that so far there have been few if any signs of More facts can be dug up <a href="http://www.globalpropertyguide.com/Europe/Norway" target="_blank">here</a>, <a href="http://www.acting-man.com/?p=22020" target="_blank">here</a>, <a href="http://www.thebubblebubble.com/norway-housing-bubble/" target="_blank">here</a>, <a href="http://www.bloomberg.com/news/2013-03-05/norway-cracks-down-on-mortgage-risk-to-fight-housing-bubble.html" target="_blank">here</a> and <a href="https://mises.org/daily/6318/" target="_blank">here</a>.</div>
<div align="justify">
<br /></div>
<div align="center">
<img height="480" src="http://www.globalpropertyguide.com/template/assets/graph_images/146_graph2.jpg" width="620" /></div>
<div align="center">
<em>Honestly, we can’t see a bubble here, can you?! A mere tripling in 15 years can’t count as one! Via Global Property Guide.</em></div>
<div align="center">
<em><br /></em></div>
<div align="justify">
<strong><em><span style="font-size: medium;">Denmark</span></em></strong></div>
<div align="justify">
<strong><em><span style="font-size: medium;"><br /></span></em></strong></div>
<div align="justify">
Apparently even the almost inconsequential country of Denmark has managed to blow its own RE bubble and to make sure it was noticed abroad it made it egregious. Maybe exponentially-rising home prices have helped the Danes cheer up a bit, but don’t hold your breath for it. In any case, the solution to the supply-demand imbalance appears simple to us: just build a few Lego houses! Household debt is more than 300% (yes, that’s not a typo) of disposable income and house prices have almost tripled in the last 15 years. Also of note is the sheer size of the nation’s mortgage market: 600 billion € ready to blow up in the face of not very smart holders. The bubble here has clearly burst and the real fun is just beginning, as both the government and the banks scramble to find a way to keep the ponzi scheme going. More info <a href="http://www.thebubblebubble.com/denmark-housing-bubble/" target="_blank">here</a>, <a href="http://www.acting-man.com/?p=21718" target="_blank">here</a>, <a href="http://www.bloomberg.com/news/2013-03-18/denmark-races-to-prevent-foreclosure-shock-as-home-prices-sink.html" target="_blank">here</a>, <a href="http://www.bloomberg.com/news/2013-04-01/imf-urges-denmark-to-drop-risky-mortgages-as-losses-loom.html" target="_blank">here</a> and <a href="http://www.globalpropertyguide.com/Europe/Denmark" target="_blank">here</a>.</div>
<div align="justify">
<br /></div>
<div align="justify">
<br /></div>
<div align="justify">
<img height="480" src="http://www.globalpropertyguide.com/template/assets/graph_images/55_graph2.jpg" style="display: block; float: none; margin-left: auto; margin-right: auto;" width="620" /></div>
<div align="center">
<em>The party has clearly ended in Denmark: now it’s a question of who’s going to eat the losses. Chart via Global Property Guide.</em></div>
<div align="center">
<em><br /></em></div>
<div align="justify">
<strong><em><span style="font-size: medium;">Finland</span></em></strong></div>
<div align="justify">
<strong><em><span style="font-size: medium;"><br /></span></em></strong></div>
<div align="justify">
We terminate our overview of European RE markets with Finland, which also has its home-made bubble, although maybe less egregious than those of its neighbouring countries. Debt-to-income is “only” a bit above 100%, but home prices have almost tripled in the last 15 years. As of late the bubble seems to be wobbling, with price appreciation having slowed down markedly. Readers can continue their research <a href="http://www.globalpropertyguide.com/Europe/Finland" target="_blank">here</a>, <a href="http://www.thebubblebubble.com/finland-housing-bubble/" target="_blank">here</a> and <a href="http://blog.arjenpolku.fi/2013/02/25/finnish-real-estate-bubble/" target="_blank">here</a>.</div>
<div align="justify">
<br /></div>
<div align="justify">
<br /></div>
<div align="justify">
<img height="480" src="http://www.globalpropertyguide.com/template/assets/graph_images/67_graph2.jpg" style="display: block; float: none; margin-left: auto; margin-right: auto;" width="620" /></div>
<div align="center">
<em>House prices in Finland, via Global Property Guide.</em></div>
<div align="center">
<em><br /></em></div>
<div align="justify">
<strong><em><span style="font-size: medium;">Down Under</span></em></strong></div>
<div align="justify">
<strong><em><span style="font-size: medium;"><br /></span></em></strong></div>
<div align="justify">
We now move to the Southern Hemisphere.</div>
<div align="justify">
<br /></div>
<div align="justify">
<strong><em><span style="font-size: medium;">Oz</span></em></strong></div>
<div align="justify">
<strong><em><span style="font-size: medium;"><br /></span></em></strong></div>
<div align="justify">
Australia is where one of the most egregious RE bubble in the world has popped up, thanks in part to the commodities boom and to an enormous credit expansion. Houses are now at the very least 30% overvalued (with 40% to 50% being a more credible estimate), with cities such a Sidney sporting some truly ridiculous prices. Household debt stands at 150% of disposable income and most of it is mortgage debt, which the fractionally-reserved banks have very generously offered to the usual muppets who could ill-afford it. No problem though: skies are clear and prices keep on rising like there’s no tomorrow! Actually, they don’t: prices have stalled and have now begun to decline, although at a moderate pace. Their decrease is accompanied by a sharp decline in the number of sales and a marked slowdown in construction activity: it seems to us that the unwinding has begun, particularly given that China is now beginning to crumble as well (more on the topic below). Plenty of links for the passionate investigators: <a href="http://www.globalpropertyguide.com/Pacific/Australia" target="_blank">here</a>, <a href="http://www.thebubblebubble.com/australia-bubble/" target="_blank">here</a>, <a href="http://en.wikipedia.org/wiki/Australian_property_bubble" target="_blank">here</a>, <a href="http://www.biggerpockets.com/renewsblog/2013/04/14/housing-bubble-australia/" target="_blank">here</a>, <a href="http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10877307" target="_blank">here</a>, <a href="http://www.crikey.com.au/2013/02/15/why-australias-house-prices-are-anything-but-sensible/" target="_blank">here</a>, <a href="http://www.macrobusiness.com.au/category/australian-property/" target="_blank">here</a>, <a href="http://www.choice.com.au/reviews-and-tests/money/borrowing/your-mortgage/mortgage-debt.aspx" target="_blank">here</a>, and <a href="http://www.canberratimes.com.au/comment/housing-bubble-is-real--its-just-not-due-to-pop-20130419-2i5jo.html" target="_blank">here</a> (where the author shares his delusion that prices cannot possibly collapse since, among other things, they may have “plateaued”: 1929 anybody?!).</div>
<div align="justify">
<br /></div>
<div align="justify">
<br /></div>
<div align="justify">
<em></em><img height="480" src="http://www.globalpropertyguide.com/template/assets/graph_images/12_graph2.jpg" style="display: block; float: none; margin-left: auto; margin-right: auto;" width="620" /></div>
<div align="center">
<em>Prices in Australia have now begun their long trip down, via Global Property Guide.</em></div>
<div align="center">
<em><br /></em></div>
<div align="justify">
<br /></div>
<div align="center">
<img alt="Debt as a percentage of annual disposable income" height="314" src="http://www.choice.com.au/~/media/Images/Reviews/Money/Borrowing/Your-mortgage/mortgage-debt/percentage-of-annual-disposable-income.ashx" style="display: block; float: none; margin-left: auto; margin-right: auto;" width="640" /></div>
<div align="center">
<em>Debt to disposable income ratio for Australian households: pretty high and most of it is mortgage debt. Chart from</em><em> <a href="http://www.choice.com.au/reviews-and-tests/money/borrowing/your-mortgage/mortgage-debt.aspx" target="_blank">one of the articles linked above</a>.</em></div>
<div align="center">
<em><br /></em></div>
<div align="center">
<br /></div>
<div align="justify">
<strong><em><span style="font-size: medium;">New Zealand</span></em></strong></div>
<div align="justify">
<strong><em><span style="font-size: medium;"><br /></span></em></strong></div>
<div align="justify">
Apparently, the Aussie’s neighbours aren’t doing much better. In fact, it seems they’re currently experiencing the final stage of the bubble, with relatively brisk price increases across the board and some signs of a looming slowdown. Of course, the debt to income ratio stands at a quite buoyant 150% and prices are at least 25% overvalued, but may be as much as 65% more expensive that their long term average. Our guess is that when the Australian housing market finally sneezes the NZ is going to catch a cold. More information can be found <a href="http://www.globalpropertyguide.com/Pacific/New-Zealand" target="_blank">here</a>, <a href="http://www.rbnz.govt.nz/keygraphs/Fig5.html" target="_blank">here</a>, <a href="http://www.cnbc.com/id/100636386" target="_blank">here</a>, <a href="http://www.bloomberg.com/news/2013-04-09/new-zealand-house-prices-increase-at-fastest-pace-since-2008.html" target="_blank">here</a>, <a href="http://www.stuff.co.nz/business/money/8529459/Any-housing-bubble-may-hit-ratings-Fitch-warns-banks" target="_blank">here</a>, <a href="http://www.stuff.co.nz/nelson-mail/news/8542334/Warning-to-households-on-bubble" target="_blank">here</a>, <a href="http://www.odt.co.nz/news/national/222513/nz-housing-market-substantially-over-valued" target="_blank">here</a> and <a href="http://www.nbr.co.nz/article/budget-preview-myth-housing-bubble-weekend-review-wb-139409" target="_blank">here</a> (again, delusional – or maybe self-serving - comments about the non-existence of the bubble).</div>
<div align="justify">
<br /></div>
<div align="justify">
<br /></div>
<div align="justify">
<img height="480" src="http://www.globalpropertyguide.com/template/assets/graph_images/140_graph2.jpg" style="display: block; float: none; margin-left: auto; margin-right: auto;" width="620" /></div>
<div align="center">
<em>NZ house prices, via Global Property Guide. And they have the audacity to claim that there’s no bubble?!</em></div>
<div align="center">
<em><br /></em></div>
<div align="center">
<br /></div>
<div align="center">
<img height="320" src="http://www.rbnz.govt.nz/keygraphs/Fig5_large.jpg" width="640" /></div>
<div align="center">
<em>Here we have the usual wee bit of debt. Via <a href="http://www.rbnz.govt.nz/keygraphs/Fig5.html" target="_blank">one of the previously-linked articles</a>.</em></div>
<div align="center">
<em><br /></em></div>
<div align="justify">
<br /></div>
<div align="justify">
<br /></div>
<div align="justify">
<strong><em><span style="font-size: medium;">South Africa</span></em></strong></div>
<div align="justify">
<strong><em><span style="font-size: medium;"><br /></span></em></strong></div>
<div align="justify">
We have decided to include South Africa simply because we had the chance to visit it right at the height of its massive RE bubble and we enjoyed looking at then-current listings (referring to them as totally ridiculous is a huge understatement) and chat with a few chaps there about the market and we returned home deeply satisfied, with the persuasion that the market was headed for a decade or more of Buddhist-like nothingness. And in fact it seems like we were spot on, as prices have gone pretty much nowhere during the last few years, notwithstanding a relatively significant depreciation of the currency. But now it seems like the globalized inflationary race has begun to work its wonder on SA as well, with prices again starting to increase at a quite rapid pace. Whether this is just a temporary phenomenon or the beginning of a new bubble still remains to be seen. In any case, as much as SA is a lovely country, we wouldn’t buy a home there. Debt to disposable income stands at 76%, but remember that a large part of the population cannot possibly think about borrowing as they’re too busy surviving. Further info can be accessed <a href="http://www.globalpropertyguide.com/Africa/South-Africa" target="_blank">here</a>, <a href="http://www.rode.co.za/news/article.php?ID=2286" target="_blank">here</a>, <a href="http://www.rode.co.za/news/article.php?ID=2282" target="_blank">here</a>, <a href="http://www.iol.co.za/business/business-news/2013-likely-to-be-bottom-of-debt-service-cycle-1.1461930#.UY9i9KKuybc" target="_blank">here</a> and <a href="http://www.moneyweb.co.za/moneyweb-property/household-debt-will-likely-be-a-major-theme-in-201" target="_blank">here</a>.<br />
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
</div>
<div class="separator" style="clear: both; text-align: center;">
<a href="http://www.globalpropertyguide.com/template/assets/graph_images/175_graph2.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="244" src="http://www.globalpropertyguide.com/template/assets/graph_images/175_graph2.jpg" width="320" /></a></div>
<a href="http://www.globalpropertyguide.com/template/assets/graph_images/175_graph1.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="244" src="http://www.globalpropertyguide.com/template/assets/graph_images/175_graph1.jpg" width="320" /></a><br />
<div class="separator" style="clear: both; text-align: center;">
</div>
<div class="separator" style="clear: both; text-align: center;">
</div>
<div class="separator" style="clear: both; text-align: center;">
</div>
<div style="margin-left: 1em; margin-right: 1em;">
</div>
<div style="margin-left: 1em; margin-right: 1em;">
</div>
<div align="justify">
</div>
<div align="center">
<em>House prices in SA and YoY % change in nominal and real terms, via Global Property Guide.</em><br />
<br /></div>
<div align="justify">
<strong><em><span style="font-size: medium;">North America</span></em></strong></div>
<div align="justify">
<strong><em><span style="font-size: medium;"><br /></span></em></strong></div>
<div align="justify">
We’ll now quickly review the state of the housing market in the U.S. and Canada. It’s worth mentioning that Bernanke is “successfully” (depending on how you define success) re-inflating the once-burst U.S. housing bubble. Of course this is bound to generate even deeper distortions and dislocations in the economy’s structure of production. It won’t end merrily.</div>
<div align="justify">
<br /></div>
<div align="justify">
<strong><em><span style="font-size: medium;">U.S.</span></em></strong></div>
<div align="justify">
<strong><em><span style="font-size: medium;"><br /></span></em></strong></div>
<div align="justify">
The witch doctor, alternatively known as Fed Chairman, Ben S. has managed to re-start many bubble activities that were justly interrupted in the wake of the 2008 collapse. Of course this has happened at a grave cost, as unsustainable and ultimately unprofitable capital-consuming activities continue to be allowed to take place, at the expense of everyone in the economy. Housing is of course chief amongst these bubble activities and the market has experienced a strong rebound. Whether it’s going to survive the coming crisis is of course highly questionable. In the meantime, ever more people are getting sucked in, ready to be spit out in pieces once the downturn arrives (and it <em>always</em> arrives, although it often takes longer than anticipated). It should be clear that this whole process does nothing but inherently weaken an economy. Anyway, let’s review some data: debt to disposable income stands at 115% (whereas household debt to GDP currently is close to 90%), home prices are increasing at the fastest pace since 2006 (which was pure bubble territory) and median nominal prices for new homes are again at levels close to those registered at the last bubble’s peak. You draw your own conclusions! <a href="http://www.globalpropertyguide.com/North-America/United-States" target="_blank">Here</a>, <a href="http://www.ft.com/intl/cms/s/0/1fc5f7cc-a6ad-11e2-885b-00144feabdc0.html#axzz2SzHuwPQe" target="_blank">here</a>, <a href="http://www.bloomberg.com/news/2013-04-08/colony-capital-s-barrack-sees-bubble-in-u-s-housing-market.html" target="_blank">here</a>, <a href="http://finance.townhall.com/columnists/politicalcalculations/2013/03/24/the-us-housing-bubble-is-back-n1547457/page/full/" target="_blank">here</a>, <a href="http://finance.townhall.com/columnists/politicalcalculations/2013/05/06/the-second-us-housing-bubble-continues-to-inflate-n1587830/page/full/" target="_blank">here</a>, <a href="http://www.doctorhousingbubble.com/echo-housing-bubble-echo-real-estate-bubble-united-states-home-prices-incomes/" target="_blank">here</a> and <a href="http://www.businessinsider.com/chart-of-the-day-debt-to-disposable-income-ratio-2012-9" target="_blank">here</a> readers can find more information. Moreover we recommend <a href="http://mhanson.com/blog" target="_blank">this blog</a> and all the articles published at Acting Man by guest author Ramsey Su.</div>
<div align="justify">
<br /></div>
<div align="justify">
<br /></div>
<div align="justify">
<img height="480" src="http://www.globalpropertyguide.com/template/assets/graph_images/205_graph2.jpg" style="display: block; float: none; margin-left: auto; margin-right: auto;" width="620" /></div>
<div align="center">
<em>U.S. home prices have begun to creep up again: a new bubble is forming? Via Global Property Guide.</em></div>
<div align="center">
<em><br /></em></div>
<div align="center">
<br /></div>
<div align="center">
<img alt="Trailing Twelve Month Average of Median U.S. New Home Sale Prices, January 1963 - January 2013" height="464" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjiJUW9gm8WK-B2-8AUU4Sj4ZFodYWsNLD1AOw6g3oCPEUe-5My8JQPWm39MDya7ShKWlQ9lCmUpz02tyZN4oySIzA3a9Cv2UpsJniPe9Ab8lUMvGqLeUOICnW9Rkr2zHaMHpwrB9-TIvo/s1600/za-ttm-median-us-new-home-sale-prices-jan1963-jan-2013.png" width="640" /></div>
<div align="center">
<em>Median U.S. new home prices: back in bubble territory. Chart taken from <a href="http://finance.townhall.com/columnists/politicalcalculations/2013/03/24/the-us-housing-bubble-is-back-n1547457/page/full/" target="_blank">this article</a>.</em></div>
<div align="center">
<em><br /></em></div>
<div align="justify">
<br /></div>
<div align="justify">
<strong><em><span style="font-size: medium;">Canada</span></em></strong></div>
<div align="justify">
<strong><em><span style="font-size: medium;"><br /></span></em></strong></div>
<div align="justify">
Here we have another contestant for the top prize in the category “Most overvalued RE market in the world”! Again, the culprit is the reckless monetary policy of the central bank, which has allowed bank credit (i.e. credit that is not backed by real resources) to boom. The global commodities boom has also helped in fuelling the bubble. The result is that now Canadian households have a debt to income ratio above 160% and home prices are at least 35% overvalued (but the figure may very well be significantly higher, maybe even in the vicinity of 80%). Warnings signs have begun to appear as of late, with construction activity slowing down, sales number continuing to significantly deteriorate and a series of six uninterrupted monthly price declines. More information can be found <a href="http://www.globalpropertyguide.com/North-America/Canada" target="_blank">here</a>, <a href="http://canadabubble.com/" target="_blank">here</a>, <a href="http://www.thebubblebubble.com/canada-bubble/" target="_blank">here</a>, <a href="http://www.acting-man.com/?p=20331" target="_blank">here</a>, <a href="http://www.acting-man.com/?p=21927" target="_blank">here</a>, <a href="http://www.acting-man.com/?p=22758" target="_blank">here</a>, <a href="http://www.canadianbusiness.com/blogs-and-comment/canadian-housing-may-be-most-overvalued-in-the-world-says-the-economist/" target="_blank">here</a>, <a href="http://www.economist.com/news/finance-and-economics/21569396-our-latest-round-up-shows-many-housing-markets-are-still-dumps-home?fsrc=scn/tw_ec/home_truths" target="_blank">here</a>, <a href="http://www.huffingtonpost.ca/2013/03/20/house-prices-canada-february_n_2916164.html" target="_blank">here</a>, <a href="http://www.cbc.ca/news/business/story/2013/04/15/business-crea-march.html" target="_blank">here</a>, <a href="http://www.huffingtonpost.ca/2013/05/09/canadian-housing-bubble-steven-eisman_n_3247048.html" target="_blank">here</a>, <a href="http://www.theglobeandmail.com/globe-investor/meet-the-hedge-fund-founder-whos-betting-against-canadas-economy/article11585150/" target="_blank">here</a>, <a href="http://thetyee.ca/Opinion/2013/03/11/Canadian-Housing-Bubble/" target="_blank">here</a>, <a href="http://business.financialpost.com/2013/05/03/canadian-housing-bursting-bubble-or-gentle-landing/?__lsa=bad2-242b" target="_blank">here</a>, <a href="http://www.huffingtonpost.ca/2013/04/20/canada-housing-crash-economy-ben-rabidoux_n_3123312.html" target="_blank">here</a> and finally <a href="http://www.thereformedbroker.com/2013/04/29/five-reasons-im-not-worried-about-a-canadian-housing-bubble/" target="_blank">here</a> (look at his bright face and then ponder whether his “well-reasoned” arguments hold any value).</div>
<div align="justify">
<br /></div>
<div align="justify">
<img height="480" src="http://www.globalpropertyguide.com/template/assets/graph_images/36_graph2.jpg" style="display: block; float: none; margin-left: auto; margin-right: auto;" width="620" /></div>
<div align="center">
<em>Canadian home prices via Global Property Guide: up, up and away!</em></div>
<div align="center">
<em><br /></em></div>
<div align="center">
<br /></div>
<div align="justify">
<strong><em><span style="font-size: medium;">Rest of the World</span></em></strong></div>
<div align="justify">
<strong><em><span style="font-size: medium;"><br /></span></em></strong></div>
<div align="justify">
Let’s now quickly review the state of the housing market in a few more countries, before drawing our conclusions. We wan to to briefly mention that both Dubai and Hong Kong, by keeping their currencies pegged to the U.S. dollar, basically adopt the Fed’s monetary policy. As a result, their RE bubbles are sort of echo bubble, magnified by the relatively small size of their economies and by the huge foreign capital influxes. On the other hand, both Singapore and Hong Kong sport very low taxes and a remarkable level of economic freedom and are thus engaged in true wealth generating activities, which to a marginal extent mitigate the impact of the bubble.</div>
<div align="justify">
<br /></div>
<div align="justify">
<strong><em><span style="font-size: medium;">Dubai</span></em></strong></div>
<div align="justify">
<strong><em><span style="font-size: medium;"><br /></span></em></strong></div>
<div align="justify">
We couldn’t avoid mentioning Dubai, as it’s arguably the most absurd place on the earth, a big playground for His Highness Sheikh Mohammed bin Rashid Al Maktoum, a child at heart with gobs of money at his disposal. "The word 'impossible' is not in leaders' dictionaries. No matter how big the challenges, strong faith, determination and resolve will overcome them.". Sure, we mere mortals can’t argue with such words of wisdom, but in the meantime we humbly suggest to include the world “bubble” in the aforementioned dictionary (“debt restructuring” is already in it). Oh, and we happen to have a nice bridge to sell, should His Highness be interested!</div>
<div align="justify">
We were in the city of dreams (which may become nightmares) recently and we were delighted to see cranes all over the place: 2008 hasn’t taught the morons a thing! In fact evidence seems to suggest that there currently is a new speculative mania underway in Dubai’s property market. Proof of the foolishness of such RE frenzy lies in the sheer number of empty units. Again, we seriously doubt it could survive a resurgence of the 2008 financial crisis. The only mitigating circumstances are the absence of taxes and the relative degree of economic freedom, which, in an increasingly more totalitarian world, appear as ever more valuable features. More info <a href="http://www.globalpropertyguide.com/Middle-East/United-Arab-Emirates" target="_blank">here</a>, <a href="http://www.arabianmoney.net/banking-finance/2013/04/13/is-dubai-heading-for-another-real-estate-bubble-and-crash/" target="_blank">here</a>, <a href="http://www.bloomberg.com/news/2012-11-26/dubai-risking-bubble-redux-with-lowest-rates-mortgages.html" target="_blank">here</a>, <a href="http://www.skillsprovision.co.uk/latest-news/dubai-property-will-there-be-another-bubble-3670" target="_blank">here</a>, <a href="http://articles.chicagotribune.com/2013-02-27/news/sns-rt-emirates-propertyspeculatorsl6n0bq478-20130227_1_property-market-emaar-properties-property-bubble" target="_blank">here</a> and <a href="http://www.businessweek.com/articles/2013-02-14/dubai-real-estate-is-dominated-by-cash-buyers" target="_blank">here</a> for a bit of colour!</div>
<div align="justify">
<br /></div>
<div align="justify">
<strong><em><span style="font-size: medium;">Singapore</span></em></strong></div>
<div align="justify">
<strong><em><span style="font-size: medium;"><br /></span></em></strong></div>
<div align="justify">
Singapore is another very overvalued RE market (with the only caveat mentioned above), with prices roughly 50% above their long-term average according to The Economist. Signs of a slowdown are present, although we haven’t still heard a clear popping sound. Interested readers can have a look <a href="http://www.globalpropertyguide.com/Asia/Singapore" target="_blank">here</a>, <a href="http://www.bloomberg.com/news/2013-03-15/singapore-february-home-sales-drop-65-after-government-measures.html" target="_blank">here</a>, <a href="http://www.bloomberg.com/news/2013-02-28/singapore-avoids-stimulus-as-minister-acts-to-curb-bubble-risk.html" target="_blank">here</a>, <a href="http://www.economist.com/news/finance-and-economics/21569396-our-latest-round-up-shows-many-housing-markets-are-still-dumps-home" target="_blank">here</a> and <a href="http://www.tremeritus.com/2013/03/02/tharman-we-can-prevent-a-real-property-bubble-from-being-formed/" target="_blank">here</a>.<br />
<br />
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
</div>
<div class="separator" style="clear: both; text-align: center;">
</div>
<div style="margin-left: 1em; margin-right: 1em;">
<img height="247" src="http://www.globalpropertyguide.com/template/assets/graph_images/170_graph2.jpg" width="320" /></div>
<br />
<div style="margin-left: 1em; margin-right: 1em;">
</div>
<div style="margin-left: 1em; margin-right: 1em;">
<br /></div>
<br />
<div class="separator" style="clear: both; text-align: center;">
</div>
<div class="separator" style="clear: both; text-align: center;">
</div>
<div style="margin-left: 1em; margin-right: 1em;">
<img height="247" src="http://www.globalpropertyguide.com/template/assets/graph_images/170_graph1.jpg" width="320" /></div>
<br />
<div style="margin-left: 1em; margin-right: 1em;">
</div>
<br />
<div align="justify">
<br /></div>
<div align="center">
<em>House prices in Singapore and their YoY % change, via Global Property Guide.</em></div>
<div align="center">
<em><br /></em></div>
<div align="center">
<br /></div>
<div align="justify">
<strong><em><span style="font-size: medium;">Hong Kong and China</span></em></strong></div>
<div align="justify">
<strong><em><span style="font-size: medium;"><br /></span></em></strong></div>
<div align="justify">
Hong Kong is probably the single most overvalued RE market in the world, with Canada the only true contestant for the top spot. Prices there have tripled in less than a decade and are now roughly 70% overvalued. We explained the dynamics of the bubble above. We just want to add that the market is now in a manic blow-off stage, with prices increasing more than 20% in the last year. If we had a house there we would be rushing to sell it, not now but yesterday! Further information can be found <a href="http://www.globalpropertyguide.com/Asia/Hong-Kong" target="_blank">here</a>, <a href="http://www.macrobusiness.com.au/2013/04/hong-kong-property-bubble-about-to-pop/" target="_blank">here</a>, <a href="http://www.forbes.com/sites/kenrapoza/2013/03/29/if-hong-kong-isnt-a-housing-bubble-then-nothing-is/" target="_blank">here</a> and <a href="http://www.financialsense.com/contributors/puru-saxena/china-hong-kong-real-estate-bubble-end-badly" target="_blank">here</a>.</div>
<div align="justify">
<br /></div>
<div align="justify">
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
</div>
<div style="margin-left: 1em; margin-right: 1em;">
<br /></div>
<div style="margin-left: 1em; margin-right: 1em;">
<img src="http://www.globalpropertyguide.com/template/assets/graph_images/86_graph1.jpg" /></div>
<div style="margin-left: 1em; margin-right: 1em;">
<img src="http://www.globalpropertyguide.com/template/assets/graph_images/86_graph2.jpg" /></div>
<br />
<div align="justify">
</div>
<div align="center">
<em>Hong Kong RE prices and their YoY % change: a sheer bubble is glaringly obvious. Charts from Global Property Guide.</em></div>
<div align="center">
<em><br /></em></div>
<div align="center">
<br /></div>
<div align="justify">
China is a bit of a different story, quite complex and murky. We won’t analyze the market in detail here (although we do not rule out doing it in a future post): we’ll just provide some basic info and a quick overview. Real estate speculation is the national sport there and it’s also the main tool the all-knowing wild bunch of bureaucrats ruling the country uses to achieve the desired level of “growth” (i.e. an orgy of malinvestments mistaken for a mirage of prosperity). Leverage is also present in spades, notwithstanding the usually benign official statistics, thanks mainly to the so-called “shadow banking system” (i.e. a colourful potpourri of moneylenders, pawnbrokers and loan sharks). The picture is completed by the by-now famous “ghost cities”, imposing monuments to the utter madness of which humans are capable. Signs of a slowdown are present, but not yet unequivocal. It is however important to note that our Mandarin friends do not stand out for their transparency. Interested readers are welcomed to learn more <a href="http://www.globalpropertyguide.com/Asia/China" target="_blank">here</a>, <a href="http://www.thebubblebubble.com/china-bubble/" target="_blank">here</a>, <a href="http://www.cnbc.com/id/100659135" target="_blank">here</a>, <a href="http://business.financialpost.com/2013/04/16/china-property-prices-climb-as-cities-defy-government-policies-to-cool-housing-market/" target="_blank">here</a>, <a href="http://www.forbes.com/sites/kenrapoza/2013/04/09/with-new-anti-bubble-rules-housing-sales-collapse-70-in-beijing/" target="_blank">here</a> and <a href="http://www.forbes.com/sites/kenrapoza/2013/03/18/china-housing-bubble-up-up-and-away/" target="_blank">here</a>.</div>
<div align="justify">
<br /></div>
<div align="justify">
<br /></div>
<div align="justify">
<img height="480" src="http://www.globalpropertyguide.com/template/assets/graph_images/42_graph2.jpg" style="display: block; float: none; margin-left: auto; margin-right: auto;" width="620" /></div>
<div align="center">
<em>Property prices in China have experienced a “healty” increase in the last decade, via Global Property Guide.</em></div>
<div align="center">
<em><br /></em></div>
<div align="center">
<br /></div>
<div class="wlWriterEditableSmartContent" id="scid:5737277B-5D6D-4f48-ABFC-DD9C333F4C5D:ab19481b-2740-46d1-8233-a32a4b4e6c84" style="display: block; float: none; margin: 0px auto; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; width: 425px;">
<div id="e76e78d6-b6f3-4299-a621-a59dbfa25c20" style="display: inline; margin: 0px; padding: 0px;">
<div>
<a href="http://www.youtube.com/watch?v=rPILhiTJv7E" target="_new"><img alt="" galleryimg="no" onload="var downlevelDiv = document.getElementById('e76e78d6-b6f3-4299-a621-a59dbfa25c20'); downlevelDiv.innerHTML = "<div><object width=\"425\" height=\"355\"><param name=\"movie\" value=\"http://www.youtube.com/v/rPILhiTJv7E&hl=en\"><\/param><embed src=\"http://www.youtube.com/v/rPILhiTJv7E&hl=en\" type=\"application/x-shockwave-flash\" width=\"425\" height=\"355\"><\/embed><\/object><\/div>";" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiVh-VWRymTb-4GGOO1Qyl1UbJAUrPEY-XmK8bBRzUl5Vd3HPZhADtPYuKjGX60H7gnjfW5USJS_kfBhjAM1oXEtVoGIB4C8ewR3vC_-K97pP-kky1uX6n5Q8lfQ2lmL_5kucVYfpoveBE/?imgmax=800" style="border-style: none;" /></a></div>
</div>
</div>
<div align="center">
<em>An interesting documentary on China’s ghost cities.</em></div>
<div align="center">
<em><br /></em></div>
<div align="justify">
<br /></div>
<div align="justify">
<strong><em><span style="font-size: medium;">Conclusion</span></em></strong></div>
<div align="justify">
<strong><em><span style="font-size: medium;"><br /></span></em></strong></div>
<div align="justify">
It should be clear by now that the world at large is in the midst of an egregious real estate bubble (actually bubbles are pretty much everywhere and not only in RE, hence Jesse Colombo’s apt definition of this epoch as The Bubble Bubble, a bubble of bubbles). We have of course not covered all the countries in the world, but readers should have developed a taste for what it’s like. Those who are willing to spend some time doing further investigations can take a look at <a href="http://globaleconomicanalysis.blogspot.it/2013/05/huge-bubble-in-india-home-prices-ready.html" target="_blank">India</a> or <a href="http://www.thebubblebubble.com/emerging-markets-bubble/" target="_blank">other emerging markets</a> and see whether they can see any differences with the countries presented above. The takeaway is clear in our opinion: wherever you are, think twice before buying a house! Interesting speculative opportunities also abound, as shorting the stocks of banks that are heavily exposed to bubbly RE markets is likely to prove profitable, provided it’s done in an intelligent way. Exercising patience is always necessary though, as many of these bubbles could keep on going for quite some time, especially given the reckless policies currently implemented by global central banks (and we have them and their fractionally-reserved cronies to thank for this mess). Warning signs abound in many cases, but timing is always the tricky part. And of course there’s no substitute for doing your homework.</div>
<div align="justify">
As a final note, we’re generally not prone to self-praise, but assembling this post has really been yeoman’s work and we hope that our readers will appreciate it and if so help spread it to a wider audience.</div>
The Rothbardian Investorhttp://www.blogger.com/profile/09722598347527860060noreply@blogger.com0tag:blogger.com,1999:blog-1699632643928019839.post-60674044053131744322013-04-29T19:27:00.001+02:002013-04-29T19:39:41.626+02:00A Quick One<div align="justify">
The objective of this post (whose title is likely to ring a bell with rock enthusiasts) is to provide our readers with a brief update on the markets which we follow and in which we currently hold positions. It is not difficult to surmise that we’re not busy popping bottles of <a href="http://en.wikipedia.org/wiki/P%C3%A9trus_(wine)" target="_blank">Pétrus</a> to celebrate our winnings. As contrarians, we’re accustomed to coppering the public’s bets and we’re also used to being early and to suffering drawdowns that generally last anywhere from a few weeks to a few months. We rarely have the pleasure of picking exact tops and bottoms. We have however to admit that this time around the stubbornness with which the various markets persist in following their current trends is nothing short of amazing. This can either mean that A) we’re spectacularly wrong on all our major calls so far; B) for once in their lifetime, the herd is being granted by the market’s gods the privilege of being right in spades; C) the degree to which the current trends are being overstretched is going to guarantee equally strong and long-lasting trends in the opposite direction. We’ll let our readers make their own choices re the above.</div>
<div align="justify">
<br /></div>
<div align="justify">
<strong><em><span style="font-size: medium;">Precious Metals</span></em></strong></div>
<div align="justify">
<strong><em><span style="font-size: medium;"><br /></span></em></strong></div>
<div align="justify">
Since our analysis of the sector dated the 13th of February and our More-on trades of the 26th of February and the 6th of March, Gold experienced a crash of historical proportions and Silver did its best to keep up Gold’s pace.</div>
<div align="justify">
As we mentioned we were alert to the possibility of a final washout of weak hands, although we must admit we weren’t expecting such an effective cleansing. However “shit happens” in the markets as well. We aren’t concerned in the slightest that the fundamental, long-term trend is over: we consider this correction to be just part and parcel of a secular bull market and the longer and more severe it is, the better. Those who sell in a panic always have the opportunity to regret it and those claiming that during the ‘70s Gold halved in price and that as such it now has to go below 1.000$/oz. forget the different dynamics of the last bull market and the fact that Gold experienced a much stronger advance in a much shorter timeframe, thanks to the fact that it had just begun to trade freely. As a basis for comparison, please consider that during the same period Silver (which was already trading freely and which of course has a higher beta than Gold) declined roughly the same percentage: a testament to how overbought gold was.</div>
<div align="justify">
That said there are more than a few facts and factoids that point to the possibility that a major low has just been printed (or that at least a remarkable window of opportunity has opened up). [A retest of said low may or may not occur: we don’t now and, quite honestly, we don’t care. In case it does, it’s guaranteed to scare most people shitless.]</div>
<div align="justify">
Here are some of them, in no particular order of importance:</div>
<ul>
<li> <div align="justify">
Record-high volume on GLD both on Friday and on Monday;</div>
</li>
<li> <div align="justify">
Continued outflows from GLD notwithstanding a meaningful price recovery (those claiming that ETF selling is bearish and impacts the market need to remember that the total stock of gold roughly amounts to 170.000 tonnes vs. roughly 2.500 tonnes held by ETFs);</div>
</li>
<li> <div align="justify">
Record-high volume in the GDX ETF;</div>
</li>
<li> <div align="justify">
Record-high volume in the Gold futures market as well;</div>
</li>
<li> <div align="justify">
Record-low readings on the Hulbert Gold Sentiment indicator and very low readings on the <a href="http://www.sentimentrader.com/" target="_blank">Sentimentrader</a> Gold and Silver Public Opinion surveys;</div>
</li>
<li> <div align="justify">
Extremely good CFTC CoT reports for both metals for the week ending on the 26th of April, with Small Specs in Gold basically erasing their Net Long position. To quote Sentimentrader: “In gold, small speculators have gone from holding a net 60,000 contracts in October of last year, to very nearly being net short now for the first time since 2001. They've reduced their positions over the past two weeks more than any other two-week period since 1988.”;</div>
</li>
<li> <div align="justify">
A flood of bearish articles, reports and recommendations appearing on a variety of prominent financial sites, newspapers and magazines.</div>
</li>
</ul>
<div align="justify">
And here are some charts that highlight the severity of the decline and the sheer volume that accompanied it:</div>
<div align="justify">
<br /></div>
<div align="justify">
<br /></div>
<div align="center">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiOdpwrcI7GdygUhzX7T2tjyJKXmxj1QfqUXol4S8qdbkgPTmtNLOgSFV7n6OyA-AmvNQxW9uVPZCyGVXNZD9u8nddfZ5YqVcV8vbH6yC7G6g3m7u1qCKuXF3hdkQuMvkzLn8ShL7KwutQ/s1600-h/Gold5.png"><img alt="Gold" border="0" height="484" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh8S0J5D5-YpIOH8KdvMLbuPqR0uaok9oBusaFuDY95mEejluf-PPWA-6cprroZuob9OjEuEieVdLm7jcCaakW75NxXuv7VOHKPgnhgNh0iCCzjHLRc5-yW1ChvU3Dvb7NDJkCZzVZy9aw/?imgmax=800" style="border-bottom-width: 0px; border-left-width: 0px; border-right-width: 0px; border-top-width: 0px; display: block; float: none; margin-left: auto; margin-right: auto;" title="Gold" width="638" /></a> <em>Weekly Gold chart via <a href="http://stockcharts.com/" target="_blank">Stockcharts</a>. Notice the nice long “wick” at the bottom of the last red candle: it usually signals buying pressure and a bottoming process.</em></div>
<div align="center">
<em><br /></em></div>
<div align="center">
<br /></div>
<div align="center">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhwjOtSx8UcUeC7FeeJxTLgz-vPaU-xYZ7x3YsalkSFiUvmrUsaQ7sqDk7i02r8-4o0_fhJensyp-AXDo0FUWLoxBt-VY4FEt5NSXWRcOUXSL3jpHbeKKV_10D5WoyIFRjTkFrcsHqid28/s1600-h/gdx3.png"><img alt="gdx" border="0" height="484" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgbO6vxmL-us4hU4rp9vANfLiCSjYfT3oGpO4jdTS3bR_M_OSecyKPTAcCSXSoU8EcbDgv-XCnhuTR2KGg6xxJhhgHxwMqSAsqbnp3cvwG8tEh48ciRuiB3KZsBFtetr-lM96j9RfLfq_U/?imgmax=800" style="border-bottom-width: 0px; border-left-width: 0px; border-right-width: 0px; border-top-width: 0px; display: inline;" title="gdx" width="530" /></a> </div>
<div align="center">
<em>A daily chart of GDX via <a href="http://stockcharts.com/" target="_blank">Stockcharts</a>: notice the staggering volume.</em></div>
<div align="center">
<em><br /></em></div>
<div align="center">
<br /></div>
<div align="center">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjCYtiloMj0KPnqVVWaR1EY_Noneip63VLs2q8hjLC0eIPJ-x60dFPdU1lUFcEbf1DqL1V7XKbiw3hgN1oVroOznABntN7ICWO2g0wvscjRBohEstQlSuD1jbH3MBxYp8eO5WTbea0fP1c/s1600-h/gld9.png"><img alt="gld" border="0" height="484" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj5bWwiZ83RknyUimRtOrudLgTnE-tCqI3kOabjeZ8X5FR_F1_DBUnZYBxtLiUQG_UFqOdJNwhXP-INbYmbitFwiKJdHntR0-25BKrviWHNXtvqzzm6DDRyzUxDPU3VfBuvhd4lE2fFmjY/?imgmax=800" style="border-bottom-width: 0px; border-left-width: 0px; border-right-width: 0px; border-top-width: 0px; display: inline;" title="gld" width="638" /></a> </div>
<div align="center">
<em>Daily Chart of GLD via Stockchats: you can observe that just a wee spike in volume took place here as well.</em></div>
<div align="center">
<em><br /></em></div>
<div align="center">
<br /></div>
<div align="center">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjy0SaD_YdYC3jKXbx3ZZggrmGsBvRxU95d0OzyjV1HbDRM3S6IL2msLaQC1Lvq1oo-eMA7oKb5oR34s-muAMpDKcr16UFltmcjYeVklFN0fmb2EGRC3GUZwzznGnVa3VIMK0QzCs04Gb0/s1600-h/silver3.png"><img alt="silver" border="0" height="484" src="http://lh6.ggpht.com/-ULqYSLauUXg/UX6tawPwaSI/AAAAAAAAAYo/64_Vec22pBc/silver_thumb1.png?imgmax=800" style="border-bottom-width: 0px; border-left-width: 0px; border-right-width: 0px; border-top-width: 0px; display: inline;" title="silver" width="638" /></a> </div>
<div align="center">
<em>Weekly chart of Silver via Stockcharts: way less inspiring than Gold and yet some support can be detected there as well.</em></div>
<div align="center">
<em><br /></em></div>
<div align="center">
<br /></div>
<div align="center">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiHHMUAcCKbKSeMbhTXNLanVoWoEabLHboNpecwKlaMs7vfGuw7ZMJpY_AWEQZbD-NuAKKw1Ek4rpSLP1eoj_wn5nIWb96gGf8iuAPTPUl1xky3pg9iNHUDO8WN78t0ctbQMOLTUHPpvPs/s1600-h/SmallSpecGold3.png"><img alt="SmallSpecGold" border="0" height="387" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiAFozKsuRutNtEJwRIt-u_Iwg0rLb3lt-_9N9VUrKI0OTLRmChfAbmB1ckXPOXCPbyp9IUJvQCNP22QrQGQkGiMBeWPyRFJahZSoHRosb0iBSognlieuxdmqrO_6WG7RLHJikzXkwMWyY/?imgmax=800" style="border-bottom-width: 0px; border-left-width: 0px; border-right-width: 0px; border-top-width: 0px; display: inline;" title="SmallSpecGold" width="644" /></a> </div>
<div align="center">
<em>A chart showing the outright collapse in Small Specs’ positioning, via <a href="http://www.blogger.com/goldreport.com" target="_blank">Gotgoldreport.com</a>.</em></div>
<div align="center">
<em><br /></em></div>
<div align="center">
<br /></div>
<div align="justify">
<strong><em><span style="font-size: medium;">Softs</span></em></strong></div>
<div align="justify">
<strong><em><span style="font-size: medium;"><br /></span></em></strong></div>
<div align="justify">
Both Sugar and Coffee have experienced further declines since our posts dated 14 January, 1 February, 26 February and 13 March. Fundamentals continue to remain decidedly bullish, in particular for Sugar, and sentiment and positioning are extremely favourable to the bullish case as well. An interesting development is the marked reduction in volatility in Sugar, as measured by the width of its Bollinger Bands: our experience is that this usually signals that a powerful trend is the makings.</div>
<div align="justify">
<br /></div>
<div align="center">
<br /></div>
<div align="center">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhKJVaH2k3KbypI-xM1l5UJjem8pP-EH6YzdC84iNjHphDCHoO9fTJQ21m6FSPjWXc-mINr7ypWDODUtwnkerlH9mStYYg9g3F8dL_oqx0JqCm3umYskTsZCJB_HYrcMnJGjgJsUl0WDsU/s1600-h/sugar3.png"><img alt="sugar" border="0" height="484" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgOv1HkIIFNBI-qd30Q9qOj7sXbfSdeezkW1Wjnxf1EmnRZJB0Tfai5GYgDUX3IQnUWPrjmcPLDemf2hFwjw8ZiG4HRPkr-_ZViC-kuJ92O3Ed-PhZecUOca1DyO4mXpK0G2A0nWRyIx6k/?imgmax=800" style="border-bottom-width: 0px; border-left-width: 0px; border-right-width: 0px; border-top-width: 0px; display: inline;" title="sugar" width="530" /></a> </div>
<div align="center">
<em>A slow bleeding accompanied by a marked reduction in volatility: a powerful trend change may be in the offing. Otherwise, hold on to your hat, as we may see a repeat of the Gold near-death experience (extremely unlikely an yet still possible).</em></div>
<div align="center">
<em><br /></em></div>
<div align="center">
<br /></div>
<div align="center">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEixexlrmdlKe3y4Vcw1rNG4lJgTetmU_s01e7lVOuqjazcO9xt_DLJpRVAYzYtsnO3RkyJTiu4d8PUsAGJbgw2KUEwwIHQNXiAPaiAlICu1FPDxjolDzW_lkusi3SddMi49E2EP3tWz664/s1600-h/coffee3.png"><img alt="coffee" border="0" height="484" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEipcKaOiWEz3Puk8zZ6DbtwJH3gschGut5rhTgHjjb9zkbGwVBGPrQXzBAz5OuWTXiddnPYPzxR0Y6q1p36rwNtESbVLJJWxnhnzb88qsPit_sX-ExJN27Bk6mntdrHEOEJ4uXmIcww6tw/?imgmax=800" style="border-bottom-width: 0px; border-left-width: 0px; border-right-width: 0px; border-top-width: 0px; display: inline;" title="coffee" width="638" /></a> </div>
<div align="center">
<em>The decline of Coffee prices from their 2011 peak now amounts to almost 60%. As <a href="http://www.acting-man.com/" target="_blank">Pater Tenebrarum</a> likes to joke, there’s no need to worry, as it exists strong lateral support at 0. More seriously, we have now retraced exactly 100% of the previous advance (you can see the breakout area at the far left of the above chart).</em></div>
<div align="center">
<em><br /></em></div>
<div align="center">
<br /></div>
<div align="justify">
<strong><em><span style="font-size: medium;">Yen</span></em></strong></div>
<div align="justify">
<strong><em><span style="font-size: medium;"><br /></span></em></strong></div>
<div align="justify">
This is the market where the most interesting changes have occurred. Soon after taking on the role of BoJ Chief, the apparently inebriated Kuroda decided to double Japan’s monetary base on the spot. This may very well turn out to have killed the bullish case. We shall see. We just mention that risks continue to exist and actually abound in various currencies like the CAD and the AUD and that at least a decently-sized correction is likely to occur, to erase the oversold readings and the sentiment excesses. We hold long-dated options that have indeed turned out to prove effective in protecting us from ruinous losses.</div>
<div align="justify">
<br /></div>
<br />
<img height="480" src="http://msnbcmedia.msn.com/i/reuters/2013-04-26t083554z_2145062171_gm1e94q1a1w01_rtrmadp_3_japan-economy-kuroda.jpg" style="display: block; float: none; margin-left: auto; margin-right: auto;" width="368" /><br />
<div align="center">
<em>Kuroda cheering at the thought of destroying an entire country, right after having smoked some good stuff. He also seems to need a dentist quite badly, a sign that he may very well be addicted to Meth.</em></div>
<div align="center">
<em><br /></em></div>
<div align="center">
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhu7-s8E8uJA4cDxAjdf0VwXxhUhljMx_3sqy-nGKariq5PWxChfov0_E6zSJpIi4mmNfCzV_yQrbwjav4nvQG1MqagzSGlMwfRlkUBtpk8n0epcWqlIuv9ymmUHZghcwWA9KXAH_Fb9ho/s1600/yen.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="484" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhu7-s8E8uJA4cDxAjdf0VwXxhUhljMx_3sqy-nGKariq5PWxChfov0_E6zSJpIi4mmNfCzV_yQrbwjav4nvQG1MqagzSGlMwfRlkUBtpk8n0epcWqlIuv9ymmUHZghcwWA9KXAH_Fb9ho/s640/yen.png" width="640" /></a></div>
<div align="center">
</div>
<div align="center">
<em>A daily chart of the horribly oversold Yen: after a 30% decline in a bit more than 6 months a rally is just par for the course, even if the bear market were to continue. A double bottom may be in place.</em></div>
<div align="center">
<em><br /></em></div>
<div align="justify">
<strong><em><span style="font-size: medium;">Stocks</span></em></strong></div>
<div align="justify">
<strong><em><span style="font-size: medium;"><br /></span></em></strong></div>
<div align="justify">
</div>
<div align="justify">
</div>
<div align="justify">
</div>
<div align="justify">
</div>
<div align="justify">
</div>
<div align="justify">
</div>
<div align="justify">
</div>
<div align="justify">
</div>
<div align="justify">
</div>
<div align="justify">
This is the market that is frustrating us the most. After all, PMs have been great performers for years on end and they’re now experiencing a run-of-the-mill cyclical bear market; Softs are also in the last and hence tricky part of cyclical bear and the Yen is now managed by a band of lunatics. But the stock market is now in the late stages of an extremely powerful cyclical bull market, with money printing that does nothing but create unsustainable bubble activities, with macro data that now obviously point towards a recession (in the U.S.: the rest of the world is already deep in doo-doo), with earnings that are now clearly deteriorating and with sentiment and positioning that have now been signalling for quite some time a speculative frenzy and yet it refuses to beak down. Each and every time it tries to do so, there you have support coming in and, presto, new highs are achieved. Not even the DAX can manage a half-decent decline. The only positive development we’ve seen so far is the recent increase in volatility and in daily ranges, something that usually accompanies the distribution process that takes place at a top.</div>
<div align="justify">
<br /></div>
<div style="text-align: justify;">
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEilNkt4vYg6miQB_U6UoGalwvB9mHYRJE4tdTlg0WcB9i2cZzFt4RSc1dXiYfyAFkberszPiVKVQCqrErzdzT1MCZYZrqGRFm1PKIT_XUlLEY2-rp07XORiKIbx7HXidFM6IujkjVt0HKA/s1600/dax.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="484" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEilNkt4vYg6miQB_U6UoGalwvB9mHYRJE4tdTlg0WcB9i2cZzFt4RSc1dXiYfyAFkberszPiVKVQCqrErzdzT1MCZYZrqGRFm1PKIT_XUlLEY2-rp07XORiKIbx7HXidFM6IujkjVt0HKA/s640/dax.png" width="640" /></a></div>
<div align="center">
</div>
<div align="center">
<em>A chart of the DAX: after tagging the 200-day SMA a bounce occurred and now we’re again above the 50-day SMA. The chart doesn’t look very bullish though.</em></div>
<div align="center">
<em><br /></em></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh_ib6jo1tLvnMPW8zdyR6T1fKa3zpEB_g6qMunGM0Tlw17XW_f7HCM93L0iwtpGquQ5fPEfwN6qjaZi754Zh-vDQNUYnp0jdJU4hpC5l2h9on6PjkHOSDPyUtXB0Quz0ub4gQYd-Gt0n4/s1600/spx.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="483" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh_ib6jo1tLvnMPW8zdyR6T1fKa3zpEB_g6qMunGM0Tlw17XW_f7HCM93L0iwtpGquQ5fPEfwN6qjaZi754Zh-vDQNUYnp0jdJU4hpC5l2h9on6PjkHOSDPyUtXB0Quz0ub4gQYd-Gt0n4/s640/spx.png" width="640" /></a></div>
<div align="center">
<em></em> <em>Here we have the S&P500: it refuses to break down. Notice however how choppy the recent action has been: generally it is not a good sign when it occurs after long and powerful advances.</em></div>
<div align="center">
<em><br /></em></div>
<div align="center">
<br /></div>
<div align="justify">
<strong><em><span style="font-size: medium;">Conclusion</span></em></strong></div>
<div align="justify">
<strong><em><span style="font-size: medium;"><br /></span></em></strong></div>
<div align="justify">
We need to exercise patience and wait for our investment theses to play out. The more the various markets keep going in the current direction, the more they’ll need to play catch up once the reversal occurs. The only notable exception may be the Yen, given that there’s now been a catalyst powerful enough to change the secular trend.</div>
The Rothbardian Investorhttp://www.blogger.com/profile/09722598347527860060noreply@blogger.com0tag:blogger.com,1999:blog-1699632643928019839.post-58998021784042172362013-04-15T12:13:00.001+02:002013-04-15T12:14:47.115+02:00“I’m A Celebrity…Get Me Out Of Here!”This is probably what many investors in the PM sector are currently yelling at their brokers. What we are witnessing in Gold and Silver these days is outright panic and forced liquidation due to margin calls. This is painful to endure, even for committed contrarians like us and even if the extreme nature of these events means that they usually last just a few days. But we know, from experience and costly mistakes, that these are the best of times in financial markets: weak longs liquidate, eager shorts pile in recklessly, sentiment gets smacked down and the collective psyche of the traders and investors is conditioned to expect nothing but weakness and lower prices. In short, it is during these tribulations that a new bull market is born. We won’t engage in long ramblings to convince our readers of the merits of investing in PMs. We’ll rather present a few charts that highlight the fact that an inordinate stampede is currently taking place. We’ll leave it to the informed reader to make his own observations and to determine whether the current crash is likely to continue or whether it is a “one-off” event that has the potential of getting reversed quickly and violently. Our only suggestion is to watch out for a large “wick” (i.e. a long tail at the bottom of a daily candlestick that is likely to signal the exhaustion of selling). We also note that all the charts are as of last Friday and that today is shaping up as another panic, which has the potential of being worse than Friday and with even larger volumes. Finally, this remembers us how come that leverage is not a good companion to a contrarian approach.<br />
<br />
<br />
<div align="center">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi4NwNUBXhOIhdDkq88ZJNMS4t-1ia2nmmTm-BiwkmVK_CMEuUFF-ypW-_8MvQOMEVSocqo-dGCdnRvfO4nd2SgX8jCrdrixw89oUI626sMBchXe6kNoZ-WOg0yFepafXxZ69zN1CAbRYc/s1600-h/gold%25255B4%25255D.png"><img alt="gold" border="0" height="484" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEibsXdgz2-FiEh0vKrBnh4l5gVyvY2PZmfBniNOvTFUkZtig014BJfDebh250Fsbx__mGypAnusPypi_hbOiCDAmzvxjABlNB1O-sx_VQWlTc4CIM2bieuWvbhRcoAZQOtW9T9R3C1Fb5s/?imgmax=800" style="border-bottom: 0px; border-left: 0px; border-right: 0px; border-top: 0px; display: block; float: none; margin-left: auto; margin-right: auto;" title="gold" width="638" /></a><em>A chart of Gold: notice the sheer amount of contracts transacted on Friday. It seems likely that today we’ll see an even bigger figure: as of 11.00 GMT more than 220.000 contracts have been exchanged.</em></div>
<div align="center">
<em><br /></em></div>
<div align="center">
<br /></div>
<div align="center">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgdEpdgrxI5YyOm8V49WErmUJK-DdW0pf3NDt6W8EmOiwXbnoK7mFSri7Wdlt-JqsFHSxLGay7nuLNIPtA57CpVES11heAHpU-RIUK8FET8CbZFmyWY9Ezez-pcyFVGuoCv6pAs07iEmmU/s1600-h/gld%25255B7%25255D.png"><img alt="gld" border="0" height="484" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgIBLuTBab43OR6abAF-VeSdCfLogdKTmuBDP1QK2JNZCZjOujr2qzzlhAkkjQXWWWlHMwnfJfw6iqL9ARjkbm2yV77M0T-RmDVaf0qUFJfrPn5ID3au0IeihZNqfU7I8_4DhwGbiOE9Bw/?imgmax=800" style="border-bottom: 0px; border-left: 0px; border-right: 0px; border-top: 0px; display: inline;" title="gld" width="638" /></a> </div>
<div align="center">
<em>Same goes with the ETF GLD: roughly 55 million shares changed hands on Friday: one of the largest volumes ever. It’s worth noting that the amount of gold being held by the ETF has been steadily and steeply declining in the last quarter.</em></div>
<div align="center">
<em><br /></em></div>
<div align="center">
<br /></div>
<div align="center">
<a href="http://lh6.ggpht.com/-cD-3BcLh1ps/UWvSphewHjI/AAAAAAAAAXI/G2ANSBCSua4/s1600-h/Silver%25255B3%25255D.png"><img alt="Silver" border="0" height="484" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhxzOXs0IO1qV1vcro-86ebzqziIMYD8n4UR__TF4TaGcNEmADjlpbwT7bn2aTzkqj4eaq4aCvvkRhOzQiT1jbnh_jPUEiv75TAnJpscWCoM1r9jH6tJs7ETIRp6MiWwG3q0i5pSQtVBhI/?imgmax=800" style="border-bottom: 0px; border-left: 0px; border-right: 0px; border-top: 0px; display: inline;" title="Silver" width="638" /></a> </div>
<div align="center">
</div>
<div align="center">
<em>The chart of Silver is no different: almost 100.000 transactions took place on Friday.</em></div>
<div align="center">
<em><br /></em></div>
<div align="center">
<br /></div>
<div align="center">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgTyHv3EHG2ODhT9hOnO4Cw_57xeK9pfAlsRJMfOhB71jtEH1OC_SqILUaN-OdKBtkgHzyzuv4lGtEi6PlVab1gjzTdzFXvSd44ZPdXmtRSO_0tAcdc4E8R5ViDbfKJAkgLjz7JzHA2S80/s1600-h/gdx%25255B3%25255D.png"><img alt="gdx" border="0" height="484" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhtL_PDtRyEzn1eX6GUiytx-m4QFXmShWYV9QJC-7SOR54RQIHSt0KvpXZeRh25zlBsg0xzeCUhuundEFmBrZ6OOG7NTEU0D3_dbfy99eTI5ia8ev-WxgaMh-AA2078smKJn1V_t8Z_bGY/?imgmax=800" style="border-bottom: 0px; border-left: 0px; border-right: 0px; border-top: 0px; display: inline;" title="gdx" width="530" /></a> </div>
<div align="center">
<em>The ETF GDX has also seen massive capitulation volume. A suggestion to current holders: brace yourself, as today may turn out to be a nightmare.</em></div>
The Rothbardian Investorhttp://www.blogger.com/profile/09722598347527860060noreply@blogger.com0tag:blogger.com,1999:blog-1699632643928019839.post-2786615063933338512013-03-30T15:22:00.001+01:002013-03-30T21:53:42.826+01:00No words needed<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg7lCLUTcNjnNelogImnbj2bcAsg72qDuFgkwPwbUK2-oOmOCN7CxFDmU4HFUT2M3mTONvH6cl0y17lhyphenhyphen-mJaC1cyIvi0pvL1YdPorVLak7RBqGzhUPPlGuXUXEdA27GyuX0fuaNSlkZ5U/s1600-h/DSC03989%25255B4%25255D.jpg"><img alt="DSC03989" border="0" height="484" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjx92jAsgo8iNip9Wc64euO-3xK5FwFW1g2X1Yowh9F1wmFlGNSu00eeo3hlRyM1zCAq7zDatsKgXmFkM07yRIZBA2XiuucC7FfvsdBQWw9qbci3aS9s94kHmqJsbZxb45Eec_DrYrIf0w/?imgmax=800" style="border-bottom: 0px; border-left: 0px; border-right: 0px; border-top: 0px; display: block; float: none; margin-left: auto; margin-right: auto;" title="DSC03989" width="644" /></a> <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhmCqxnRtANNyVVWDBD7aAypTBB-L5oPqfmZsUrFGqKdgMbBAHOnhF4555UW_OnEGN-i1eCsBCnIFJOV5mmbSxTgGArlBVNGajsop9qjQ8TQNVmTvJcOZ20I2YqGLRz6UX2OFFglOGd7BQ/s1600-h/DSC04001%25255B4%25255D.jpg"><img alt="DSC04001" border="0" height="484" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEihWwYhsXsYlcBzd5utN8Cq67zyptAm35Vlo2zcZMeVSQTzHCwT7mHrnbxCBL4UZ8qXu3lPGlpHj8JkU2asEr2Pl_DThuNnK_EfAT81H5pFbgSY6I95GptJQA0JaavtUM5e4dmljuRfe8c/?imgmax=800" style="border-bottom: 0px; border-left: 0px; border-right: 0px; border-top: 0px; display: block; float: none; margin-left: auto; margin-right: auto;" title="DSC04001" width="364" /></a> <a href="http://lh3.ggpht.com/-TelrmOATZBQ/UVb0Q_ct8RI/AAAAAAAAALY/GI9hvehAty8/s1600-h/DSC04003%25255B4%25255D.jpg"><img alt="DSC04003" border="0" height="484" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjFPCzrLqEZizKum023Hgau8A3reQOwMiGbyeVn7oZJh1j8d7G4OzcIZ_Ha824i40vk1u3QKisehHPiId7wdHJG-aNWRC7ttxjyceO0ZALenFPfcbf3hszq7ZhPVTQl9V5zp8h6w7tJ_Nw/?imgmax=800" style="border-bottom: 0px; border-left: 0px; border-right: 0px; border-top: 0px; display: block; float: none; margin-left: auto; margin-right: auto;" title="DSC04003" width="644" /></a> <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhYai4gZLNfnmzoNllkmDQve0anyPJqcWXXMjZWbhyphenhyphenXGK9LBn1BSkQwtWvrmWu3IrTLraEgEoWhj7omzsXH3KkHPJ_08avBpYMEcMs9WoHpgECUPCIppkxM56k9mYWAlbQAwDPlI0Xfun0/s1600-h/DSC04005%25255B4%25255D.jpg"><img alt="DSC04005" border="0" height="484" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi5SaGUzlmGv-MJJUyegsTOBWIt1aV8GlVnyFvmHgzJWnlIUx4yBcbxHKgbEtSHYdj3S8CoUHdkfyThoMCHJd8lQJtNNmAqF7brxRSw80ZgVup2uvD2RcriEkVNNUzT4R91wYyim6sy_bY/?imgmax=800" style="border-bottom: 0px; border-left: 0px; border-right: 0px; border-top: 0px; display: block; float: none; margin-left: auto; margin-right: auto;" title="DSC04005" width="644" /></a> <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiZ3vAVdP82_99L0lPj0Z65H4RXGZvPRHAkO8l4jO1AiOddOVO0v0THV-ol3pNArX8uBsh19dQJqLN3MnX4MEaY2JcrqQ7XZr4PKrIPZz57gb52HAkUXxV20c18DuxaP7pj8_WNxzIXKNE/s1600-h/DSC04031%25255B4%25255D.jpg"><img alt="DSC04031" border="0" height="484" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiAxlRtaScZ5WKYFC7sog-nPWHYBb6hAFpNX24lGPdf5DSDJBu9SJBUMJUA2irMA8TV8StMIVJXF6YSskL6BGl_S55hW8qTkQaRF6MNBrU2-oQVyPgqsECrmzVi4Zx3uy26ajoHM5KpJxA/?imgmax=800" style="border-bottom: 0px; border-left: 0px; border-right: 0px; border-top: 0px; display: block; float: none; margin-left: auto; margin-right: auto;" title="DSC04031" width="644" /></a> <a href="http://lh6.ggpht.com/-QsocYT8xyHo/UVb0VJIXomI/AAAAAAAAAMI/mYHfd5MNdvc/s1600-h/DSC04059%25255B4%25255D.jpg"><img alt="DSC04059" border="0" height="484" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjENOSokmfm31lJqeryqb5jFqrpebzkmblMj5maFrT-fvBjdXJXhJzpNA4ohIcXw6BF8mJRbzsJQXDrdSoeuGZRaSP0YMBnBYam0vRErN3mE73uCfXauoWUCueL2iynFviHrQZnJl_EvmI/?imgmax=800" style="border-bottom: 0px; border-left: 0px; border-right: 0px; border-top: 0px; display: block; float: none; margin-left: auto; margin-right: auto;" title="DSC04059" width="364" /></a> <a href="http://lh3.ggpht.com/-yiD1wBs0Wiw/UVb0Wn3GwZI/AAAAAAAAAMY/9fVFxMxnsG4/s1600-h/DSC04072%25255B4%25255D.jpg"><img alt="DSC04072" border="0" height="484" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjlZfdQO6lGyMWtQNjwu4vsBain58QTjz0lyzwa4_4TxeKtSAGZwRxZNvI9eULUy-O7l2tmw3F1V7zP6Ri-3yhXg9mxmP6rZf6xaBbXlYpbhZMfkYTb_vNCBrf3vZbCldidl4Q663StUcg/?imgmax=800" style="border-bottom: 0px; border-left: 0px; border-right: 0px; border-top: 0px; display: block; float: none; margin-left: auto; margin-right: auto;" title="DSC04072" width="364" /></a> <a href="http://lh6.ggpht.com/-t47dupomj68/UVb0YJdPS9I/AAAAAAAAAMo/HcCnFv80lvE/s1600-h/DSC04140%25255B4%25255D.jpg"><img alt="DSC04140" border="0" height="484" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgzxvWaF1VWr163h3UjbKzxhpj6R6ocvig0Ofaff5-N5pwk03z2LZUQpxPKLffEPG2EnocyuWJrtSl_D0-8fYDBxUz8HxVDCUt10dz9FZVSxwXjPfMsB8tmUNazj1opmnwBtXK9mc-P5eQ/?imgmax=800" style="border-bottom: 0px; border-left: 0px; border-right: 0px; border-top: 0px; display: block; float: none; margin-left: auto; margin-right: auto;" title="DSC04140" width="644" /></a> <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgJ8hBbXC6jh1qMORfcw5h6KaMGqQPUiWVfj7yEo14rNa3EvnrSqtx08Fpp6AlLNqazWWLoDPMp_GnALlu8zqx5e9-5967NdVotvQY4BLi0RPI5HdNGjjmr_rgV9sfiqf9lz20umdVwRPw/s1600-h/DSC04142%25255B4%25255D.jpg"><img alt="DSC04142" border="0" height="484" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhbGWynd9qXhdzPUQf5mmkFmxRxaYpVQ7O3-SHqeq9aqmQ01WiwP98B4ULguxbxxxuHA0x7LhpOER_qDreUdNnQGhbH00KvCKbs9a15vRBEM9Xw_8tY_JeWvBLTIxF2kFvVT56fmZD3htc/?imgmax=800" style="border-bottom: 0px; border-left: 0px; border-right: 0px; border-top: 0px; display: block; float: none; margin-left: auto; margin-right: auto;" title="DSC04142" width="644" /></a> <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiNzhOfHNry8JkZZnGNrQTNlTr8kBYndtlw1CddXOE1QpkdBPRNUiBWfiHPi1IbRDSO0tGXLj01jo8CeUZL2BvQqP4RUQ7vAS3X8ORFRwY2YB6BVbb15rmY09JG9IjjrxQXpOBL0c4EooM/s1600-h/DSC04157%25255B4%25255D.jpg"><img alt="DSC04157" border="0" height="484" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgYEn0JSATRR5HtuIr2i9R1nbAZpFKF3OCU78k-EnOT5H9fpUzoi0XGAYs9_3IS2ghClYQboLaiAEXZrKYSfcn3_iEd8VfN06J77pUhAc1wVGYy4GmEV7qknPqoEANAV9Z5OUF5g3nUGcU/?imgmax=800" style="border-bottom: 0px; border-left: 0px; border-right: 0px; border-top: 0px; display: block; float: none; margin-left: auto; margin-right: auto;" title="DSC04157" width="644" /></a> <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgByM3GQRX4BSH2rZEC5vPvkoWPGSppG0oS0DpVEPiYx2vvP_DZ5U3NTRn-t_eV-X2q8UmSB2CGF9DBiZk7k2E4yuy7kXB04Qgd2N5SwTG-EIVzGB2Ze5-8yv6kzYUfZOLJDkhqkNzG48M/s1600-h/DSC04176%25255B4%25255D.jpg"><img alt="DSC04176" border="0" height="484" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhWsv4GcIzVYvYLR-HYEDqgafJoQkDca20_I6fqIYd8fmS5kDTiJKNuhRzu9xfUDMwy9L2bkdPYfMCq0V3nvF8d7WrJKx0VxKeojX84RKazF9ZdDmMoIndcceFUC1ITr79PrS2xvwjN1o8/?imgmax=800" style="border-bottom: 0px; border-left: 0px; border-right: 0px; border-top: 0px; display: block; float: none; margin-left: auto; margin-right: auto;" title="DSC04176" width="644" /></a> <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEht0YuciQaLubrMpG6aNpykTNaM3L_GM7koujkq9UFgNkyGZ3LV0C7Vc6k4-sPNUEAKpA4JZrdoJG10xKRkQujDVSJYdS6uu5wLJRvvcGHfWoNTghWhqn4eDEOL_ugeWHo_uQm8jx7g1Jo/s1600-h/DSC03437%25255B4%25255D.jpg"><img alt="DSC03437" border="0" height="484" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgFNjwYOI0UF1PN8kBagJTPDNC5SyDpjQxd1eACCajEe9kspgrFqOl_R4WJGkLiEd7shrCtUE58gPW4ItKNwfm6XlKyGu7ouTm-GiNaU0qR1Q11F6_iXBQPo2w6V2yGHcQ4hjzdKEeSFBM/?imgmax=800" style="border-bottom: 0px; border-left: 0px; border-right: 0px; border-top: 0px; display: block; float: none; margin-left: auto; margin-right: auto;" title="DSC03437" width="644" /></a> <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj4ixu64_hGaMqDyJgIAhohiiIiLCoSURZfgEKqFffq4vVsDdksyr9i_cakX41hxZsJwEThWm1afFxA3AdvwzdYt2Vas-dMK6tI-R0WV6ct1owdw7_RzKaLb8LwBlo6ek77OaNqc7rh1yg/s1600-h/DSC03445%25255B4%25255D.jpg"><img alt="DSC03445" border="0" height="484" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg6Qih78K0tLRHCndH2KcLKPPwKe300o7A3Cc9rR0b_GrL3u5CuT8w46r7E6Zza8IFQUd-IHDIWFk0sklsUPxsGQwjLuF7Ma4CLW3cFM8VzTla-ubYjqxdXPthbLn5mog2dD8UOKCVT5bQ/?imgmax=800" style="border-bottom: 0px; border-left: 0px; border-right: 0px; border-top: 0px; display: block; float: none; margin-left: auto; margin-right: auto;" title="DSC03445" width="644" /></a> <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjVxLiqVz6UScp_frZRmfOa7avZPJCggmg4kxXtJTIEkN6hDfzZzqS32QghlTaLdQfx_ac8H2UVdXSetR1UAvtmdZU35DUiqB2rLu28tQYmgm3ldKSAPzj914FpETnel3NbwiBye35cPZg/s1600-h/DSC03475%25255B4%25255D.jpg"><img alt="DSC03475" border="0" height="484" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhbArslI75jH9fad0ft3SsTQcpUQivM9bYq6PI8LZM7bdR_HEia2_3Ky0S6I3e7me3i2nQOd7NXdDy4PJGdhLTK6I2MKPDM8PFOzmrtI4ELDQD6B1Z8ncudWWJjDnbF-5BD6wtd2ca026k/?imgmax=800" style="border-bottom: 0px; border-left: 0px; border-right: 0px; border-top: 0px; display: block; float: none; margin-left: auto; margin-right: auto;" title="DSC03475" width="644" /></a> <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjVckalKdvxQObcQtBST4j2xFBab3aY0rvA9svp-D13VfobakNICSK9C9M0cjt3jIau3IFFt1SX5XMvY8i3Qib28U_J0oLtsIMoovMI2_nQk1G1l6rOQuaIS8lIHZDpAEoaySddQ9vcmhQ/s1600-h/DSC03492%25255B4%25255D.jpg"><img alt="DSC03492" border="0" height="484" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiSF8bdtdb8MZdtHPVW01sBXaAvqEjqW8gIoovxbWx1usf_rZD4a_UY92a1u5d0__93wiTmALd2ZWAhhTBOzyGyk3m32G3XGjXOQra6TV_mCupMYmRwKxnn5-LzORWRJEjEh71Qs190BMQ/?imgmax=800" style="border-bottom: 0px; border-left: 0px; border-right: 0px; border-top: 0px; display: block; float: none; margin-left: auto; margin-right: auto;" title="DSC03492" width="644" /></a> <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjbNt4ue8N50typ5AmC9OgI7iHtL9cKz7Hiq6pyovgnLvsuFgv_le86HVXB9zo3DLSGVMxoPTLw02kig475HG5cuTrE8YnuiEE1QZ1Zov8MqjSodjvRVzPNEVafmLdyx1RaJ04cfW23hB0/s1600-h/DSC03503%25255B4%25255D.jpg"><img alt="DSC03503" border="0" height="484" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgZMguXTiVxpnkQfH1WtVbqHO9BrnKqNHV6tGhG7gyJpOtIC46shfVzMkLUw3hLvYx4hRGmKJEnOV6VZZcDiLLLVKe9KBMYsxufpSV9SO6-KuE_vBvgVQ6Ka4pR8mE9WlGOC-BnVj6-tNs/?imgmax=800" style="border-bottom: 0px; border-left: 0px; border-right: 0px; border-top: 0px; display: block; float: none; margin-left: auto; margin-right: auto;" title="DSC03503" width="644" /></a> <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgwv329J1vzdpZakvEDXpsygc1UYkFA0Zo4W6aFPRYX4fygaybZA-VAnHviLytdgO8GE-g5FpX_gYSYIaX0fBiipTabXCImhix_EaE2hPveRdEF2RmTdrAoTIwu-WNXTuccyZZwa3eNB9c/s1600-h/DSC03507%25255B4%25255D.jpg"><img alt="DSC03507" border="0" height="484" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg8Dfh0Cr3WlW01nqlMZc413SfjZ6agL-wwrqwMGxVI00hvRoh9PTC9ygioEbD-D3JFEYw0whyphenhyphennJ8dTfYMNeghTGNXKpkDdKK9b_qrGH5xlW1lFJCOPUDVQRVBi4JKST47_1YATlPlfWXA/?imgmax=800" style="border-bottom: 0px; border-left: 0px; border-right: 0px; border-top: 0px; display: block; float: none; margin-left: auto; margin-right: auto;" title="DSC03507" width="644" /></a> <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhi-k5yrhIcKBn707P3442aEW1CImiv6yyxGIuWuMxk2XY3eyyW1Fqf2__UXu5IDttckKUSXhihsIkSrKxPtc_B19My55cwuCgwZTfFe_v7zirzU9ei_-aAjWY_xXNleZSx9O_aK88mnUU/s1600-h/DSC03508%25255B4%25255D.jpg"><img alt="DSC03508" border="0" height="484" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgMK73ZQpLOXfN1tj4-QVUBjrgY3H_mWY8MR2muslZ8fDVBzUcwkPWTw3qRkIA7WKKk5eiuZBHFe_h29VepeuZHZYf5qIOCBKsquEC3bf6OqOfMstOTV6o6Ej7Lr6NBWBQS5OWDvMWaELI/?imgmax=800" style="border-bottom: 0px; border-left: 0px; border-right: 0px; border-top: 0px; display: block; float: none; margin-left: auto; margin-right: auto;" title="DSC03508" width="644" /></a> <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhrBC_4-Gg2hMM7WwP5UsnHubVIqEQLmxTYhqTRYwTfW0M8PSsHka8B6stCM85WBAUOaisA76moICYEioWCoQoiAdSmTFkHDB7CfZHq0DZEJS2dsPiDBmWfSeu25ykDjLz8LcpbpR8GB8Y/s1600-h/DSC03536%25255B4%25255D.jpg"><img alt="DSC03536" border="0" height="484" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhwqDXaJI9EY-PMSwQJZMxXICpQQfJ5p8m4epd-jlY2grv1Oz0bCpjnRVlGG9vei7tY5vUJHvserujKiQWb_yPV2D5iNIMcshyWOmQ6nOz2-kR5YzHcGtsIY3fFoMYbIkXMre51XMaxk4M/?imgmax=800" style="border-bottom: 0px; border-left: 0px; border-right: 0px; border-top: 0px; display: block; float: none; margin-left: auto; margin-right: auto;" title="DSC03536" width="644" /></a> <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjiUuzJeF_ZJVItC2DlGGfP_GZBHsve2UCYa-YjdnaaEBkdY236sZwtwZWgLrPfQpulL3QCA-GqOVWBekk7Z0NbiYOczAzCVgLa1ey1oHGGVd37XJNwOF380z_Uuf6hAC8fAi4p-L2g5ns/s1600-h/DSC03546%25255B4%25255D.jpg"><img alt="DSC03546" border="0" height="484" src="http://lh5.ggpht.com/-ssTje_jHE6k/UVb0qn8UOyI/AAAAAAAAAQA/HdXmgNGf9xU/DSC03546_thumb%25255B2%25255D.jpg?imgmax=800" style="border-bottom: 0px; border-left: 0px; border-right: 0px; border-top: 0px; display: block; float: none; margin-left: auto; margin-right: auto;" title="DSC03546" width="644" /></a> <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjn-hPjCd1HocL5a_BKzmEllgzk7Zl5dZj_UchPUJJ6MI86c2C11JOraM27rneFdbgcrTjIhpRS02oIfUUsXf6si610MaZGvTOuCYiiTfu3EOnxtWI8WZQG2J8Gajaty-tvkikN2np9wHg/s1600-h/DSC03552%25255B4%25255D.jpg"><img alt="DSC03552" border="0" height="484" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiXior0e4id8XAQFdnF8HDFPxLC_jqWPkjvIzkIVKamn323h4ndSzaHbhYtZabzJFnVbE4I5EzolpWBqlfLH2bvgD2_tQPBWOUBkO41mDTLBpmSYf1uFLXDVlMPYK73cp3tOrNTzX82p0M/?imgmax=800" style="border-bottom: 0px; border-left: 0px; border-right: 0px; border-top: 0px; display: block; float: none; margin-left: auto; margin-right: auto;" title="DSC03552" width="644" /></a> <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhdztKjsOGYr8T-LiR8lmhQ7dHY0O1-gm7s_6cTRXFDa-zhwncFqNlwDy5fH5VZBEekevmEUPX3EG7OVf_J0iLMYJ6w9CbxJT5c9O523lRZZDMNaBT1Gfo4qtTLtUZFxgLPeYElgnSVmVk/s1600-h/DSC03565%25255B4%25255D.jpg"><img alt="DSC03565" border="0" height="484" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiRGxF9-MJ4HKywp_zRGIj6rmRdUhu_7OrutIlB1eYsZ-U7jxAQgDienmBiu6dqOE1Mf7U5Em4c0hx58RQMZT-5J7JJs6pC92ThG4xPhlXhVgLx2tXQE0HbKqOjevtIX3tJ_6bxxtVAPzE/?imgmax=800" style="border-bottom: 0px; border-left: 0px; border-right: 0px; border-top: 0px; display: block; float: none; margin-left: auto; margin-right: auto;" title="DSC03565" width="644" /></a> <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhjV2OPBIAeUcPK52gjWfOIGWMfzU-ajNOzAnpEenqiubTOZ_vN0u3lwGB2oE-RTqTaYdlRd8ZC9jlcIeJ7H1lpQgKPXbjkFxOaFav9s37IACx0TAV-PdIjOuAnW8cgw-__P9qFqazM1c0/s1600-h/DSC03571%25255B4%25255D.jpg"><img alt="DSC03571" border="0" height="484" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgV7jJPXnvuB3r8Z9cjSp_Ga-P2SXuyvqNy3_a45n7cDcEpEwnninRFB_XVHflYIjwmwIpmNIr3jnbI5lW1nvBOOIU_CcBH1RzlvDcdwEEZ4yQWJ1U868az69CJ8sCvwjaba9o1l9IrDUw/?imgmax=800" style="border-bottom: 0px; border-left: 0px; border-right: 0px; border-top: 0px; display: block; float: none; margin-left: auto; margin-right: auto;" title="DSC03571" width="644" /></a> <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgy2Yehaqd1WMtFNwtRrPhyi-lAhUhyphenhyphenYQmz8mQOt5sAezkusgTlTM-_D_2It8nJChhQmt9MSWkcGQEzskxXRyoyhzz3uCUKjhmITQ1FokAF2jT_UJx5oGEVw3ZPc65vldnyMKLWmP7KSf0/s1600-h/DSC03587%25255B4%25255D.jpg"><img alt="DSC03587" border="0" height="484" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiHwDqX2ikEA5Ky8onYjKnpOykuLRyx1NerpJc7fxam96LkE_0k_HumeRuxiMDjD3REN0mZLBJ6OQ9rrLxgXE3CuFub3W52-dfcw7pAFFMc1xd-ziU63Rma6SkCFXJQWR6KbLttqZzRVZY/?imgmax=800" style="border-bottom: 0px; border-left: 0px; border-right: 0px; border-top: 0px; display: block; float: none; margin-left: auto; margin-right: auto;" title="DSC03587" width="644" /></a> <a href="http://lh4.ggpht.com/-6s7Tq5BieFc/UVb0wshfljI/AAAAAAAAARI/KmJFgYm8mmA/s1600-h/DSC03598%25255B4%25255D.jpg"><img alt="DSC03598" border="0" height="484" src="http://lh3.ggpht.com/-NBSvmBW0tIY/UVb0xqAO5wI/AAAAAAAAARQ/I7lAVe27yn4/DSC03598_thumb%25255B2%25255D.jpg?imgmax=800" style="border-bottom: 0px; border-left: 0px; border-right: 0px; border-top: 0px; display: block; float: none; margin-left: auto; margin-right: auto;" title="DSC03598" width="644" /></a> <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh7Sh9b-Hrf8xUnh4JcJTAHyVFv9c2earTGuWAXJR1xAMEx-nWj0215LF56jrplXSH9svCShXaNdspfUO1RoO1GIUPhRS2dJ0XXfe1AjLLr5RSY50qwxqhgSson2_-nWGXWN8m6P4Q3bVo/s1600-h/DSC03599%25255B4%25255D.jpg"><img alt="DSC03599" border="0" height="484" src="http://lh6.ggpht.com/-9EEsBZ6E_uI/UVb0y7oMoDI/AAAAAAAAARg/FDXi70rPKOA/DSC03599_thumb%25255B2%25255D.jpg?imgmax=800" style="border-bottom: 0px; border-left: 0px; border-right: 0px; border-top: 0px; display: block; float: none; margin-left: auto; margin-right: auto;" title="DSC03599" width="364" /></a> <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhzdUAHK5whWIexcylgj7FP2S2dqFHF4mDtXw31fzI1uiinND0vhRiJzv5aZnbBvsTd9UFeEMYo9su3Yi2m9xOsm1F53FV-losazTF3cCIb9XGVq3347iW5zGhIjiTCJLnmBAmuoByCVx0/s1600-h/DSC03618%25255B4%25255D.jpg"><img alt="DSC03618" border="0" height="484" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh4FI1kVnPqGNawnZx-Y-GIZCFLE4upjkINEQSDggRnmiFPnFzhqNXsOEWMwjflv_U9CwN4RgmjyEAlRxR9opAJ1tZBOkdupmN9iFt4jLJ37oDopCRrot_ZbiBy7AtSHaLjscDvQwYlWBc/?imgmax=800" style="border-bottom: 0px; border-left: 0px; border-right: 0px; border-top: 0px; display: block; float: none; margin-left: auto; margin-right: auto;" title="DSC03618" width="644" /></a> <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi9EH8EAp1MUfxR_GhHmO5GGCBbz1mGU2CYs_Mb6_eemfr1cxVJuWqme8cx6YVHRXV_WpLQzBPP7iTBOrrGpT9eauuX_6jK3QByryE7XTcVM0bnCbu3oKYoUZQDLzP9KkEB016h5LJow3c/s1600-h/DSC03650%25255B4%25255D.jpg"><img alt="DSC03650" border="0" height="484" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhrmNsaBBDVm_Rxd2G7N8AePuicscPu0WNeFUjzuDC3_fpSRA6fqvWUKbzg_uInyNyOtnpZrQWnS97YTy6pdN4AQU_4HKGmij5DH3YH357XOMj1qlCitwI-eJ_Fke55th2n9h7RwiNQSrM/?imgmax=800" style="border-bottom: 0px; border-left: 0px; border-right: 0px; border-top: 0px; display: block; float: none; margin-left: auto; margin-right: auto;" title="DSC03650" width="644" /></a> <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhuoB6nTO3OxEGUswFo4GJbeRTismzyZKpkkRGR_UXRKBL8aGJ-ExARIIHGq8DpEXK7EVIcE6GqNlF9JJz9loe-_PDS7Emd934aVJ13kI9XOwmr0LWdJdudpiI0L5PTgB2EdQTuN3ofcGY/s1600-h/DSC03658%25255B4%25255D.jpg"><img alt="DSC03658" border="0" height="484" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgylR9qS8Ehum9kkCRwL4Q9El7lS_Wb1qwSGgUamz1pBH5MXBuMkrxl47JGdZGOlfP7LGDp59COJ1GMzRGvAIxZY2QaFDD1p23nlwWHxQeiVuuoA7zoQYsPtbtmpoTLeZmCCRSvi9ZXgwE/?imgmax=800" style="border-bottom: 0px; border-left: 0px; border-right: 0px; border-top: 0px; display: block; float: none; margin-left: auto; margin-right: auto;" title="DSC03658" width="644" /></a> <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgmyng7QbOfyBFQW17t1J5-I7SOTB8ulA8RIypBK4rn-ujIbbZ5tfGqbdUQx4echEfcQEFVd5WuCE5Lc6E5A8-36L_KWv6WhPwo4OFn8f_7kyps2Q4O9ftsD7Ac1YYNgVKo1p3-ZrX9vbE/s1600-h/DSC03659%25255B4%25255D.jpg"><img alt="DSC03659" border="0" height="484" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiJf-rA-2SkNs1wsnw65Bw6gfBoepHpBak-qHOv61_LwjblrVQV9o13T-V4NCnGfAs5xFa9kavVJuIxZtaIfkH7MpqIk1zpkvtve50BCEK3EobxCgsDolc63EdJ0ZeKPVNwv_Zh7hrx8L4/?imgmax=800" style="border-bottom: 0px; border-left: 0px; border-right: 0px; border-top: 0px; display: block; float: none; margin-left: auto; margin-right: auto;" title="DSC03659" width="364" /></a> <a href="http://lh6.ggpht.com/-NyxrwnRqNlo/UVb04ltJByI/AAAAAAAAASo/vVN4hmGmox8/s1600-h/DSC03666%25255B4%25255D.jpg"><img alt="DSC03666" border="0" height="484" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgq94zEIaqE4Lo7Tqmg_29Y7hMGEA32NqdlXmlqLa6P-20XbzdbIgqq_OzRb28nui4SkxAvXMJTBxu8EKTKyeT1BJaTCO1ep-cbYCW5R-oSIApgib2wgRx7lkeCcP2-JfU1St7VCvjACRU/?imgmax=800" style="border-bottom: 0px; border-left: 0px; border-right: 0px; border-top: 0px; display: block; float: none; margin-left: auto; margin-right: auto;" title="DSC03666" width="644" /></a> <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg8ebY8yLDRtHpwf2lAxmV4H_1n7HZzFuXJNh3XqpTvjfpHuLNK5gKfruwpoa0QnfFFNlP83U_3YFmJPKsCXuNC-oNOZxJalpwWtfdfYQOhXBM2QFoUUlv5LjcFAsNergT4WID-8rMpVdA/s1600-h/DSC03687%25255B4%25255D.jpg"><img alt="DSC03687" border="0" height="484" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg91p6U8jJ8s1LJh6c5KjaAJa4w9vOhPZLNKjYC4ygp1TYlvntsa0mMTHBjiyh2uUXcExBPRCFM1y3I9n9UaI6u3y2gkSCDXXnkz2mlaBWM4tc1rHri4RCDluimp9bG2m_RPYmS3yl30MI/?imgmax=800" style="border-bottom: 0px; border-left: 0px; border-right: 0px; border-top: 0px; display: block; float: none; margin-left: auto; margin-right: auto;" title="DSC03687" width="644" /></a> <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiuPSQpmDk3IGGYqAYcSKiN07tafz0AOEc1Qv3ABeMCAh2N5KtibDDhd3uNoOGP4Yd_9nFrkJH83pzPq5aznwBm_j8N_SUJqTylnr3fAQxBkJx49pTZLSuBYYEtXs5gkZ_gU4rvSGk9nBY/s1600-h/DSC03714%25255B6%25255D.jpg"><img alt="DSC03714" border="0" height="484" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg_wpec9wBNHF8s9QFfSciBoHdTUorShbnXQ0lFI-2kM5FKZs0m5is8WRlAbH0iMHjbXksqLfmn0UmtDQSpyOrYAHPwsjhrGQSvmOqMRf5ZKqJkHLCp1WZoX8va5MMy75VZ_JXlL4rsqMM/?imgmax=800" style="border-bottom: 0px; border-left: 0px; border-right: 0px; border-top: 0px; display: block; float: none; margin-left: auto; margin-right: auto;" title="DSC03714" width="364" /></a> <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiB60-kdYCKHl3mh0wjUI_QGTnwK4gl6JWtIg6z2-WE79Wvdx7yXBe0PxjXlsHTuvqdRtNsTKr_5Fr0lj0Zr0ugjGTluIU7-KFdtpAiAmPon8HCwAFGtVW9XPKIcNCvgpFjXCQOvY2rxic/s1600-h/DSC03736%25255B4%25255D.jpg"><img alt="DSC03736" border="0" height="484" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjJb-N29ozLjKKsKmSSz36l4QK7snmfTaIVjhlR_sg99ZCDV2Wa0fRf08ljOsVLL0vvkTsNwsC_L43-xZDidJf9kY-XFITkBAzlXoaERnTo8Ut9YbI4WDry1tW8VAloErrh5ojM4vEEaAY/?imgmax=800" style="border-bottom: 0px; border-left: 0px; border-right: 0px; border-top: 0px; display: block; float: none; margin-left: auto; margin-right: auto;" title="DSC03736" width="644" /></a> <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgXvPyhryaJYGYT6OeQ1tXPr_hOJsYLMI0DnD03J51eO7w42y31HUlqgYOENvUslpYyBPb_MssLh2tUNsN51j6jtP8XXkUtzHXva2I79_vtUY9ho5FA_Ee9kjumS2zGsd1peSTHYmegsng/s1600-h/DSC03737%25255B4%25255D.jpg"><img alt="DSC03737" border="0" height="484" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjp6ZIa7yIC-Qd08WmL_jSkz_X8R3vcHgBjnfwxfCi5CjSizrrbWBBc21Msu8Re_-_ohqBSTDWYAmz1vNEa7CVbTHa_agBnBv_yNoTtzmsj0Pn-0c0nnnJ96lrBYvJ6lCFQySr_nEbHGxI/?imgmax=800" style="border-bottom: 0px; border-left: 0px; border-right: 0px; border-top: 0px; display: block; float: none; margin-left: auto; margin-right: auto;" title="DSC03737" width="644" /></a> <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgHm5hiHN4hTq8WA1KJyuhzQCAg5cUluZjuJmi1rs_qobM6cj3TS-63fBXotEwBVZ9QQJFwwQa7LQfqUD7X8gz_w9EBcgnJxQ__kgAlB7Ei0UquW3CQYMTu6GC5ipHzvE1gswZ2b5GNf_g/s1600-h/DSC03743%25255B4%25255D.jpg"><img alt="DSC03743" border="0" height="484" src="http://lh5.ggpht.com/-R16S3ODGJ3w/UVb0_4zjCAI/AAAAAAAAAUA/C2-mCb4h0Yk/DSC03743_thumb%25255B2%25255D.jpg?imgmax=800" style="border-bottom: 0px; border-left: 0px; border-right: 0px; border-top: 0px; display: block; float: none; margin-left: auto; margin-right: auto;" title="DSC03743" width="644" /></a> <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgC846gF2FKSemf01oG8lr7rZxP2WHfj9rqgqfm1pLzCZEi8X6btAS-SZM8glT-1eM1LaEuhm_qWRH1pCl6xJfmmyce7Bluph4sIzza4BLSMYG3VJNrqD5ufrtiVX5rw5v0SLPwifpT5_s/s1600-h/DSC03783%25255B4%25255D.jpg"><img alt="DSC03783" border="0" height="484" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEilJs0LH_Yg3FnfAgUrSK-tnxztN4tjroj3NFxZ6hw9WBR2Slx3j3-RGdHDRfyzic09G3wqOzXianK02uuCRBT8iQ7SeE-7J_slWdVqVF02VzfwDkJndfMN8fSiNo23HQCRT1CTi2StiH4/?imgmax=800" style="border-bottom: 0px; border-left: 0px; border-right: 0px; border-top: 0px; display: block; float: none; margin-left: auto; margin-right: auto;" title="DSC03783" width="644" /></a> <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgEJtLgKauQSPKTt87ZktRD4r1h0-BVOvkJqm0HD9J8GRFQ_le8B9D6S09Bp5ZnawzixoKUkx3JPSQuoNePGUExNIMdVEtBpKmYbkxlCmB1NB2KlLAPQj_I3yYEanUQLCJmHsjsMNXWl2Q/s1600-h/DSC03798%25255B4%25255D.jpg"><img alt="DSC03798" border="0" height="484" src="http://lh6.ggpht.com/-KclgXgT-S4E/UVb1CbDmuzI/AAAAAAAAAUg/3QKc6x4rx-0/DSC03798_thumb%25255B2%25255D.jpg?imgmax=800" style="border-bottom: 0px; border-left: 0px; border-right: 0px; border-top: 0px; display: block; float: none; margin-left: auto; margin-right: auto;" title="DSC03798" width="644" /></a> <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiG2d23aiMGxgW33lk3g5xfA7VewYv4iipt-okmAf0FrdiDESZ0ON3chXYTPGLbPqWA5M51RgPz670qG51KGwak58JyL2VYCFfvisw3YniH9qDQ7f22_7Ep9lXx9-Di4vC-COjws25qGjM/s1600-h/DSC03823%25255B4%25255D.jpg"><img alt="DSC03823" border="0" height="484" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhvJtLsvkgFm9ysxPnSCHDk3b7X3bjyeM4M9ZZ9oxmNsMFV8JW6scNUrN7hK9tIkvgFHZcq-By0Pu3vOY9MHboJci_5N8zyWlLTa_FY9I83SI2596-cOgS2r3iQxTkkjquOH9bGiDg9xMI/?imgmax=800" style="border-bottom: 0px; border-left: 0px; border-right: 0px; border-top: 0px; display: block; float: none; margin-left: auto; margin-right: auto;" title="DSC03823" width="644" /></a> <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgqXXK_031etIWZLtcPaM_18MhBu9CyXD818VbUI6t6ZMzT3qD4jJSSjKMg0Eql_T-8MnKgG44n9JIPDJJ-IkLTcuJBVyRTJtUDApuEvClqZDC0rEkiEAxBvaaFqmB65fLClwKsKo7S7k4/s1600-h/DSC03849%25255B4%25255D.jpg"><img alt="DSC03849" border="0" height="484" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgN3aJ9GW3Lbn41fRxy0FUv_Qgyf9NrOBHPRDAJlfMgpwk5lFEVGUkPouHCrrG38C0ANaTlmmo_8IH9pXXqKfQeX7K9FiaZWoJRjyGrC8uWCqsa62SdEkFylkGw5UHi6tcJ9sWrorRL8bk/?imgmax=800" style="border-bottom: 0px; border-left: 0px; border-right: 0px; border-top: 0px; display: block; float: none; margin-left: auto; margin-right: auto;" title="DSC03849" width="364" /></a> <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEit2eWScK6es_FKIEE4xs__iO0NC4kiAYZLN43on56oyutc47HFLdFomHAwhFtzOyZ-cvlxwwUB-SYhmU9AYyOidHWJr3s2ca7Dda79RricfFgYW72e6HN2y8SVOhyphenhyphen2Zc0aiNVu1rjhdPI/s1600-h/DSC03863%25255B4%25255D.jpg"><img alt="DSC03863" border="0" height="484" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgjI708lS6dwYLrKPZz9yrr8whYVKAV3NFre0OhBrtoVJmiwrYE6nX62vjzwWw8l1fLx0SNuqKRVFBVZevg-5uAWFcA6X97v_Ji5BJDOOaFNvjUABC8P-ge78ie6EJ_4r417Fu62GMM07c/?imgmax=800" style="border-bottom: 0px; border-left: 0px; border-right: 0px; border-top: 0px; display: block; float: none; margin-left: auto; margin-right: auto;" title="DSC03863" width="644" /></a> <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj9YUZPTiV7_xfHju-60l6pnwcwww4QbrSRXxpJ-u0xPhrKsu4BA_GFcUdzIowtWO9mglrFDrM-7VudChMvubYdmZjis3PsrsacKZ6Mzc5rO3TRlB6oPAQcCPGX2KoGnKAsKeSTgKt6cZQ/s1600-h/DSC03938%25255B4%25255D.jpg"><img alt="DSC03938" border="0" height="484" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgzXZuqFL0EO8eur_pbGX3D6H8mOq8TtsEygbpYghCOA-BidOQOkh-eLMdLTBJJvSeORVXqqQuDgFU3zzkMN_sJ852J9banWeV8LpEMa782ArWxvsY6eDjvaFzMaP6FoXIv_Xjy_q3Yt30/?imgmax=800" style="border-bottom: 0px; border-left: 0px; border-right: 0px; border-top: 0px; display: block; float: none; margin-left: auto; margin-right: auto;" title="DSC03938" width="644" /></a> <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg7VLm5yy137q3AicGbDUMWjKY2YyJOoChK1LqHFeWCJEnXSS79459UW_XeTBAzLh2ar1A33Fm2znOQUnUmyAFSNthCiUmKuukezAc5QNrWscVHEzzQye_LHCV4Yfba-CbH-LDvk10Vpio/s1600-h/DSC03942%25255B4%25255D.jpg"><img alt="DSC03942" border="0" height="484" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiVCS7ZyE3KVQXUJ0EKKHayJ2Q-8GsxCqygR74v6rMnLJFzwoiCHqlQrEMz8DFy2GIFkBRbNebWSS1ywagrPxPf6f2s37L_WS1eiIITZfArCZr5NZXklbhu1yGvW9ER64CLNrMKs9XrQes/?imgmax=800" style="border-bottom: 0px; border-left: 0px; border-right: 0px; border-top: 0px; display: block; float: none; margin-left: auto; margin-right: auto;" title="DSC03942" width="644" /></a> <br />
<img alt="DSC04207" border="0" height="484" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiCJ9_lcVk2_R1oM8yQ55JAtf1uXPMip0ZhassrJVav7OFKA1-Hj7_P3mMDnPITnqiQEvfYVgVp8uixT61ZEegxkArSOxr8jfF-1nxacWlrFzRcYYyMCq_NqTJNqQ_jKHLqhwtFdnZ2VMs/?imgmax=800" style="border-bottom: 0px; border-left: 0px; border-right: 0px; border-top: 0px; display: block; float: none; margin-left: auto; margin-right: auto;" title="DSC04207" width="364" /><br />
<img alt="DSC04202" border="0" height="484" src="http://lh4.ggpht.com/-vfNEdz4A3Zc/UVb1KTzgEqI/AAAAAAAAAWA/Hi27A5Axx0o/DSC04202_thumb%25255B2%25255D.jpg?imgmax=800" style="border-bottom: 0px; border-left: 0px; border-right: 0px; border-top: 0px; display: block; float: none; margin-left: auto; margin-right: auto;" title="DSC04202" width="644" /><br />
<img alt="DSC04190" border="0" height="484" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgGtrteQNUpiW3O_6dOvMRHUxVT0PrxpW5FgjNfbWlIRF25en2uVMMR-1umpeUKlKbkao-ALnCRPms4MgF_FeWgEfXwfC2wSOfVIYM-iVdFkgYRyjGxG1Qtmw8oKE5sJ4F0VJQGaZjZJuw/?imgmax=800" style="border-bottom: 0px; border-left: 0px; border-right: 0px; border-top: 0px; display: block; float: none; margin-left: auto; margin-right: auto;" title="DSC04190" width="644" /><br />
<img alt="DSC04250" border="0" height="484" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhqd0l-XtqfIEoTrD1IsTWVKUR82PiWON6o433MhNvtl5p2i3FHlp1hsc4yZl53hyphenhyphenQajYh4R0BaQqgHNIqAcvpiTnht51bKUzsNLpOHmjAUnrsg1f4DEnI8_wgAfnMGTJyfQxx8b8vHaRU/?imgmax=800" style="border-bottom: 0px; border-left: 0px; border-right: 0px; border-top: 0px; display: block; float: none; margin-left: auto; margin-right: auto;" title="DSC04250" width="644" /><br />
<img alt="DSC04256" border="0" height="484" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgcGyg7HcmkFJuf-4EJ71-ZYsQmLcEOYEwFt27ySTjuLTgiP2yDFL2vPsdN9uTMAj-5lk1j83ryf2S4aPExm94XUS4_iq4Jn_r_1yzlChjJ98So4Lubx2zuHdimkSkmCmv7VrwDPJSqC7w/?imgmax=800" style="border-bottom: 0px; border-left: 0px; border-right: 0px; border-top: 0px; display: block; float: none; margin-left: auto; margin-right: auto;" title="DSC04256" width="644" />The Rothbardian Investorhttp://www.blogger.com/profile/09722598347527860060noreply@blogger.com0tag:blogger.com,1999:blog-1699632643928019839.post-34638605974939552892013-03-13T16:38:00.001+01:002013-03-13T16:41:11.536+01:00Killing me “softly”…The title of this post reflects what an investor in “Softs” (i.e. Sugar, Coffee, Cocoa, Cotton and Orange Juice. There’s also Lumber, but it has been on a tear and is very likely close to a major top connected with the housing cycle.) might be thinking of his holdings right now…A lot of nothing/nowhere action with a slight downward bias that wears out the vast majority of market players. This might ring a bell with gold bugs as well…<br />
Of course, we as contrarians are delighted to see this kind of action, since more often than not it accompanies major bottoms (we are obviously also humans, so we’re also bored out of our skulls and frustrated by this indecisiveness like everybody else). This is particularly true when strongly favourable fundamental conditions are present as well, as is the case with Sugar.<br />
The objective of this post is to detail the main reasons why we think the delicious and addictive white powder (the folks at the D.E.A. need not worry…) is ripe for a major multi-year bull run that has the potential to bring it back towards its old all-time highs in the 40 to 60c$/pound region. As a general rule, we do not like to make predictions or give price targets, as we think that this is often an exercise in futility, but in this case we want to point out our strong conviction that the coming bull market in Sugar is bound to take out the interim high established in 2011 around 36c$/pound.<br />
And now, without further ado, let’s see what’s brewing in the market…<br />
<br />
<strong><em><span style="font-size: medium;">The Fundamental Backdrop</span></em></strong><br />
<strong><em><span style="font-size: medium;"><br /></span></em></strong>
<strong><em>A) Economics 101</em></strong><br />
<strong><em><br /></em></strong>
It’s often said that “The cure for low prices is low prices” and indeed this statement is correct. The main problem lies in determining whether a certain price is sufficiently “low” to put the supply/demand adjustment process in motion. With regard to sugar the reality is that very few people involved in the global supply chain (from growers to mills in different countries) can turn a profit with a price of 18c$/pound (of course we’re not oblivious to the fact that in most countries sugar is a very heavily subsidized commodity: it’s simply not relevant to our discussion). So yes, it’s low enough: let’s then see how this impacts the market on both sides.<br />
<br />
<em>1. Demand</em><br />
<em><br /></em>
It should be obvious that a low price generally entices demand, both new and old. Current users of the product/commodity can increase their usage of the product without suffering an increase in costs, whilst users of similar products/commodities (like HFCS in the case of sugar) may find it’s economically advantageous to engage at least in partial substitution. Finally, new sources of demand that didn’t exist before may be created altogether.<br />
<br />
<em>2. Supply</em><br />
<em><br /></em>
On the other hand, producers of the commodity have no incentive to increase production and in fact may even be forced to cut it. Moreover, they’ll strive to find new, alternative uses for their products which can either provide a greater margin or at least partially absorb their surplus (this is happening with bio fuel in Brazil).<br />
Readers interested in exploring the subject, can take a look <a href="http://www.agrimoney.com/news/macquarie-offers-sugar-price-bulls-some-solace--5559.html" target="_blank">here</a>, <a href="http://www.bloomberg.com/news/2013-01-17/sugar-production-in-india-to-drop-on-cheap-imports-dry-weather.html" target="_blank">here</a> and <a href="http://www.bloomberg.com/news/2013-01-31/sugar-selloff-ending-as-production-declines-from-mexico-to-india.html" target="_blank">here</a>.<br />
<br />
<strong><em>B) The Bizarre Case of Chinese Buying </em></strong><br />
<strong><em><br /></em></strong>
This point is partially related to the one above: whenever sugar prices reach the 18c$/pound area, Chinese buyers step in and take delivery of large quantities of sugar. The reason is quite simple: producing sugar there costs about 30s$/pound and out-of-quota imports are subject to a 50% tariff, so 18c$ + a 9c$ tariff + some spare change for shipping and handling < 30c$ = a nice, risk-free profit for the importer. There are talks of restricting the ability of importers to engage in this arbitrage play, but so far nothing meaningful has been done, thus the market enjoys a strong floor at this level.<br />
See <a href="http://www.sugaronline.com/reports/website_contents/view/1209943" target="_blank">here</a> and <a href="http://www.brecorder.com/markets/commodities/europe/109452-physical-sugar-chinese-imports-seen-beating-expectations-in-q1.html" target="_blank">here</a>.<br />
<br />
<strong><em>C) The Brazilian Milling Industry and its woes</em></strong><br />
<strong><em><br /></em></strong>
This point really is the most important one. Brazil is both the largest producer and the largest exporter of sugar. Troubles there mean troubles for the world sugar market.<br />
And in the Brazilian milling industry big troubles are looming on the horizon. Actually, they’re already there and getting worse by the day. Let us explain: it all started many years ago, at the beginning of the last decade, when mills embarked on ambitious expansion projects in a race to gain market share, building new facilities and upgrading existing ones. How did they finance such heavy investments? By taking on huge debts, of course: after all, those were the credit bubble years…<br />
In 2008, problems started to surface: the financial crisis hit and numerous mills all of a sudden found out that they were struggling with debt servicing. Some of them went bust or were forced to sell their operations to more financially sound multinationals. Many just kept on going in the hope that things would somehow get better. Fast forward to today and we have low sugar prices, rising costs, rampant overcapacity and plenty of nearly-insolvent mills: instead of getting better, things actually got a whole lot worse.<br />
The main issue is that fixed costs (like e.g. the amortization of plants and equipment) account for the vast majority of mills’ costs and, in order to reduce their unitary cost of production, mills need to operate at or close to full capacity. Unfortunately, overcapacity is so huge that even bumper crops aren’t enough to satisfy the mills’ needs. The end result is that mills are forced to compete between them for cane to process, thus further driving up their input prices. To add insult to injury, a sugar price of 18c$ basically ensures that the vast majority of mills will be selling their product at a loss, further exacerbating their already precarious situation. Of course, even the most efficient ones, capable of turning a profit at the current low prices, won’t be drinking <a href="http://en.wikipedia.org/wiki/P%C3%A9trus_(wine)" target="_blank">Pétrus</a> to celebrate: their margins are razor-thin.<br />
To us this means only one thing: either prices will have to go up a lot on their own for some exogenous reason, thus allowing mills to regain their financial footing (prices of 20/25c$ won’t make any substantial difference), or they will go up much more as a result of a wave of bankruptcies amongst mills which will bring about a marked reduction in the available supply of sugar. This is not something that is going to happen overnight: our best guess is that it will take approximately 2 to 3 years to bring this problem to the forefront. Obviously a new financial crisis/globalized recession could accelerate the process markedly. Regardless, we have no problem waiting, particularly given that we believe the downside to be severely limited.<br />
<a href="http://www.agrimoney.com/news/sugar-boss-warns-over-brazil-mills-financial-woes--5009.html" target="_blank">Here</a>, <a href="http://www.sugaronline.com/news/website_contents/view/1208749" target="_blank">here</a>, <a href="http://www.reuters.com/article/2012/08/06/us-sugar-brazil-consolidation-idUSBRE8750NK20120806" target="_blank">here</a> and <a href="http://www.standardandpoors.com/ratings/articles/en/us/?articleType=HTML&assetID=1245342998258" target="_blank">here</a> readers can find additional information.<br />
<br />
<strong><em>D) India: a complete mess</em></strong><br />
<strong><em><br /></em></strong>
If trouble is brewing in Brazil, then what about India, which is the second largest producer and the biggest consumer of sugar?<br />
The situation there is messy, and this is a euphemism. Why is it so? Thanks to heavy government meddling. We won’t delve into the details: we have already bored ourselves to death with them and we do not want to inflict the same punishment on our readers. We’ll keep it short and say that in India sugar production pretty much equals consumption. There has been a surplus in the last couple of years, but our impression is that this is more the temporary result of a series of favourable phenomena than the product of careful long-term planning that is here to stay. As such, we think it’s very likely that India will at some point in the next 2 to 3 years be forced to import rather large amounts of sugar. The last time this happened prices rallied handsomely. Masochistic readers can have fun <a href="http://businesstoday.intoday.in/story/why-sugar-crisis-repeats-in-three-years/1/4659.html" target="_blank">here</a>, <a href="http://www.reuters.com/article/2013/02/11/india-sugar-output-idUSL4N0BB0TE20130211" target="_blank">here</a>, <a href="http://articles.economictimes.indiatimes.com/2013-01-07/news/36192902_1_import-duty-raw-sugar-india-sugar-mills-association" target="_blank">here</a> and especially <a href="http://eac.gov.in/reports/rep_sugar1210.pdf" target="_blank">here</a>. There are many other sources of info on the web, but the main takeaway is always that self-defeating “Fair and Remunerative Price” policies, coupled with other idiotic rules and regulations, do not allow the sugar industry to develop and thus leave it vulnerable to a few-years-long boom-bust cycle and to the occasional drought/whether catastrophe.<br />
<br />
<strong><em><span style="font-size: medium;">Technicals, Sentiment and Positioning</span></em></strong><br />
<strong><em><span style="font-size: medium;"><br /></span></em></strong>
The technical picture looks constructive and sentiment and positioning data lend credence to its validity.<br />
<br />
<div align="center">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg3BShqAy7eGIAd4iXll6ZU0WD_eX6iZ95AhMkRUoMYwZoU0u1fdb9uxJGANRdZpT0YeCGuXFei9iSMqWxTVWxFXgdeCE99E-rgvwjfTEztINmB9NJzAt0PA5gO_YiYSGWxU2Lqq-2R9JY/s1600-h/Sugar%25255B4%25255D.jpg"><img alt="Sugar" border="0" height="484" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjC9lqTL444HJcUJiV6bOPd-nhjql0jMv_LynAtWsuxMAJFqJ4PwyWjbmprwh09NAz65utw7UVoJNVABSht8_NXQZic9NnhAHPPl2dodJoZr-D4JJMJila9826JAnnm1th-OQ0XMoE2du0/?imgmax=800" style="border-bottom: 0px; border-left: 0px; border-right: 0px; border-top: 0px; display: block; float: none; margin-left: auto; margin-right: auto;" title="Sugar" width="638" /></a> <em>Chart of Sugar via <a href="http://stockcharts.com/" title="http://stockcharts.com/">http://stockcharts.com/</a>.</em></div>
<div align="center">
<em><br /></em></div>
<div align="justify">
The market continues to be stuck in a “falling wedge” consolidation pattern, which is bullish. The recent breakdown below the lower trend line (and below the important level of support around 18c$) appears to us to have been a classic “bear trap”. Price has now rallied convincingly and is back into the pattern and above the 50-day simple moving average, which has acted as strong resistance in the recent past. Further levels of resistance can be identified around 19c$ and 20c$. Both MACD and RSI show positive divergences, with the latter having broke out of a triangular consolidation and above the level of 50.</div>
<div align="justify">
Sentiment remains subdued and below neutrality, something which has pretty much been the rule since late 2011. CoT data are very bullish, with commercials continuing to hold a small net long position (like in 2007, just before a major bull was born).</div>
<div align="justify">
<br /></div>
<div align="center">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEisWzj6ziAbyZ8x1dHAz1Rtct_mEbiSo7c1ywrVvPYuuuWHrgAfw6pCFsFavHsiuDR2hdp6F7vI93KWrSippqU1q3EnQOSd1WzPKsGLOxkAz6rziwlOJQyo6BLBh-2B3dFFBEZIrPCVWE8/s1600-h/SugarCoT%25255B6%25255D.png"><img alt="SugarCoT" border="0" height="445" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg0BpCKfO3y0d5KEvE0-MF4Uc921XSmPohp9bHxA4LtF-YFlrzJwHsxBZDRcC7MoLi-lGslPo_Lo5gtIxvkXFRzzXId84dEVoU7ORcnXpvB_0fdb670Mxpa9NH7d5dopMfRKjQkWE2Y6gM/?imgmax=800" style="border-bottom: 0px; border-left: 0px; border-right: 0px; border-top: 0px; display: block; float: none; margin-left: auto; margin-right: auto;" title="SugarCoT" width="644" /></a> <em>CoT data via <a href="http://cotpricecharts.com/" title="http://cotpricecharts.com/">http://cotpricecharts.com/</a>.</em></div>
<div align="center">
<em><br /></em></div>
<div align="justify">
<br /></div>
<strong><em><span style="font-size: medium;">Conclusion</span></em></strong><br />
<strong><em><span style="font-size: medium;"><br /></span></em></strong>
The sugar market continues to be very attractive. In fact, we think it currently offers one of the best risk-reward propositions available to long-term investors. We have bought it quite heavily in the recent months and we remain convinced that it has the potential to generate a very profitable multi-year bull market. Patience is of course always required, as it might continue to consolidate for a while more. What really matters is that we do not envision serious downside (i.e. we really doubt it would ever make it to 16 or even 15c$ as some analysts speculate). A powerful breakout above some key resistance levels might have us buying even more, but this time around with strict trader’s discipline (i.e. with a tight stop loss in case things do not go as planned).<br />
A unrelated note: we’ve only made sparse updates to the blog recently and we haven’t produced any major articles (even this one is rather brief by our standards), because we’ve been quite busy following markets during the recent PMs turmoil and more importantly because we’re packing up for a very nice trip to the Seychelles, only slightly spoiled by the fact that we do not enjoy flying very much, to put it mildly. We’ll of course publish some photos of the trip, assuming we'll survive… The goal is obviously to cause some serious liver damage in over-worked readers currently stuck in their cubicles with no hope of breaking free before the summer (we are of course just joking).<br />
As such, in the next two weeks readers can expect only occasional posts from us, which we’ll publish only in case there’s something going on in the markets which requires our attention.The Rothbardian Investorhttp://www.blogger.com/profile/09722598347527860060noreply@blogger.com2tag:blogger.com,1999:blog-1699632643928019839.post-41496554744317200672013-03-06T22:26:00.001+01:002013-03-06T22:28:14.095+01:00Putting even more on…Just a brief post to inform our readers that we’re adding to our silver holdings. We saw a decent washout on the 1st of March that might have marked the low. Even if it turns out that it hasn’t, sentiment and positioning (plus strong support in the 27.50$/oz. area) have us thinking that the downside is limited.<br />
We also want to mention <em>en passant </em>that today’s action in miners looks promising: a nice reversal on large volume. <a href="http://www.blogger.com/theshortsideoflong.blogspot.com/2013/03/gold-miners-in-crash-mode.html" target="_blank">Given how oversold they are</a>, this strikes us as a good entry point. We do however remain convinced that outright ownership of precious metals is the way to go in this (and every other) bull market: mining companies may act as leveraged proxies from time to time (and this is likely one of those), but they can’t offer the safety and returns of the actual physical stuff.<br />
As usual, do your own research.The Rothbardian Investorhttp://www.blogger.com/profile/09722598347527860060noreply@blogger.com0tag:blogger.com,1999:blog-1699632643928019839.post-7055508819560363452013-02-26T20:03:00.001+01:002013-02-26T20:03:52.917+01:00The Moron Rule<p>This is just a brief post designed to inform our readers that we’re adding to our already substantial gold holdings here. Sentiment, technicals, positioning (the latest CoT report was a thing of beauty and it didn’t even reflect Wednesday’s plunge and the high-volume trading range of Thursday, whilst GLD recorded three days in a row of very high outflows) and the nice Bernanke head-fake (on high volume) all tell us that Wednesday marked a major bottom and if it didn’t that the downside risk is very limited. And of course the fundamentals are wildly bullish… We point out to particularly prudent investors that at-the-money put options on gold expiring at the end of March can be bought for approximately 1.5-2% of the current gold price: this strikes us as a relatively cheap way to insure oneself against the possibility of short-term apocalyptic scenarios (which in our opinion could manifest themselves only in the immediate future, given that not a single indicator points to the likelihood of sustained declines in the months to come), whilst retaining pretty much all of the long-term upside potential. We’re also grabbing some more coffee and sugar and we’ll continue to watch them like hawks (the real ones, not those of the Fed variety). In fact we have been planning for quite some time to write an article detailing our rationale for investing in sugar and we apologize for the delay, brought about by the quite hectic market action of the past couple of weeks.</p> <p>We’ll leave silver alone for the time being, as its price action as well as some facts (very high open interest, less-than-stellar CoT, absence of large outflows from ETFs, tendency to outperform gold during period of economic turmoil, unconvincing technicals) make us <em>less bullish (not bearish!) </em>on it. We suspect it has a higher probability than gold of experiencing a final washout and/or a period of nothing/nowhere action with plenty of volatility.</p> <p>Of course this should not be construed as investment advice, as careful white-shoe lawyers would say: we encourage our readers to always make their own decisions. We’d also like to remind them (and ourselves) the inherent dangers of buying in the absence of a well-defined uptrend (in fact the current short to medium term trend is down). The always-provocative Ed Seykota once dubbed the practice of increasing one’s position as price declines “The moron rule: just keep adding more-on”. If you do not wish to swell the already-large ranks of the morons who inhabit this beautiful rotating ball, remember that to be a successful contrarian means to only buy or sell at extremes and with proper position sizing, so that should the unlikely or even the unthinkable happen, you’ll not end up being killed by it.</p> The Rothbardian Investorhttp://www.blogger.com/profile/09722598347527860060noreply@blogger.com0tag:blogger.com,1999:blog-1699632643928019839.post-90609426090140111222013-02-13T17:17:00.001+01:002013-02-13T17:53:14.373+01:00“You know, it’s a Bull Market!”<div align="justify">
The wise words of old Mr. Partridge undoubtedly apply today to both Gold and Silver and the objective of this post is to outline the main fundamental reasons that determine the metals’ long-term bullish trend. We will also provide a brief overview of the current technical/sentiment situation, which is in our opinion neutral to slightly positive. We’ll focus mainly on gold, but much of what we’ll say applies to silver as well, with the important caveat that <em>the poor man’s gold </em>is much more volatile than the yellow metal and its performance is more strictly dependent on the ebb and flow of speculative demand.</div>
<div align="justify">
Before starting, however, we have to ask an important question: is gold money? The answer is yes and no. Yes, because it possesses certain characteristics that make it fit for the role of money, the very same characteristics that prompted its use as a medium of exchange in ancient times (see <a href="http://mises.org/document/4984/On-the-Origins-of-Money" target="_blank">Carl Menger’s seminal work on the origins of money</a>). These features cannot be stripped away from gold by means of government decree: it will continue to hold them and people will continue to be attracted to them whenever and wherever the need for sound money will arise. No, because money is correctly defined as “<em>the general medium of exchange, the thing that all other goods and services are traded for, the final payment for such goods and services on the market (Rothbard, Austrian Definitions of the Supply of Money)”</em>. Clearly, you can’t pay for petrol with a nice gold bling-bling (unless maybe you happen to be a gangsta rapper). We must therefore keep the above in mind when analysing gold and the determinants of its price. We may sum the above concepts up by saying that <em>gold is a commodity until it isn’t</em>.</div>
<div align="justify">
A final note on the usage of some words: when talking about gold we’ll use the terms <em>money</em> or <em>the money commodity</em>, whilst when referring to the fancily coloured pieces of nothing that we all keep in our wallets we’ll use the terms <em>paper money</em> or<em> fiat money</em>.</div>
<div align="justify">
<br /></div>
<div align="justify">
<strong><em><span style="font-size: medium;">The Fundamental Backdrop</span></em></strong></div>
<div align="justify">
<strong><em><span style="font-size: medium;"><br /></span></em></strong></div>
<div align="justify">
<strong><em>A) A brief introduction to the Austrian Theory of Money</em></strong></div>
<div align="justify">
<strong><em><br /></em></strong></div>
<div align="justify">
As hard-core Rothbardians, we are of course biased in our assessment, but let us tell you: the Austrian Theory of Money kicks ass! Well, at least in the realm of economics…</div>
<div align="justify">
In this field, the main achievement of the Austrian School (hat tip to Ludwig Von Mises) has been the successful application of Marginal Utility Theory to the analysis of money, its demand and its value. This has allowed the Austrian School to treat money like all other goods (even though it clearly recognizes money’s peculiar function and its specific characteristics) and thus offer a comprehensive and coherent body of economic theory based on the laws of praxeology and the action axiom. <a href="http://mises.org/daily/5188/" target="_blank">As Murray Rothbard so aptly put it</a>: <em>“No longer did the theory of money need to be separated from the general economic theory of individual action and utility, of supply, demand, and price; no longer did monetary theory have to suffer isolation in a context of "velocities of circulation, " "price levels," and "equations of exchange".”</em></div>
<div align="justify">
The supply and demand relationship can thus be represented graphically in the usual fashion (total demand-stock analysis): a falling demand curve intersects at a certain <em>equilibrium point</em> (where supply and demand meet) a vertical line which represents the total stock of money at the given time. On the horizontal axis we find the quantity of money (its supply), increasing rightwards, and on the vertical axis its price (in this case the purchasing power of money or PPM), increasing upwards:</div>
<div align="justify">
<br /></div>
<div align="justify">
<br /></div>
<div align="justify">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiSj8InnQ3Q8ab_rvWh9ul7STPu3du_b1DlwWJtzFZOJEUiK1Y2lKH6a9pSCLMF-aRotCjFhO__mcOu6cB3ivT1SVdZH9WQkxuKiM-sXvztNoZ8WGjQKKJeRuQOSDOGROxr1ReGs5Bjfio/s1600-h/Fig7411.gif"><img alt="Fig74" border="0" height="292" src="http://lh3.ggpht.com/-Mfbu3igUKAA/URu8ekExipI/AAAAAAAAAI4/GgQ5PPbZUQA/Fig74_thumb9.gif?imgmax=800" style="border-bottom-width: 0px; border-left-width: 0px; border-right-width: 0px; border-top-width: 0px; display: block; float: none; margin-left: auto; margin-right: auto;" title="Fig74" width="333" /></a> </div>
<div align="justify">
<br /></div>
<div align="justify">
We can’t refrain here from singling out the economic <em>ignoramus </em>Antal Fekete, founder of the “New Austrian School”, and his equally ignorant disciples, who claim that money doesn’t have declining marginal utility (or if it has it, its rate of decline is “negligible”): this is hogwash and we wonder how come they still use the adjective “Austrian” when they reject one of the core tenets of the Austrian School and thoroughly ignore one Mises’s most important contributions to economic theory. Not really surprising: after all they’re a bunch of monetary cranks and their ignorance certainly does not limit itself to the above.</div>
<div align="justify">
<br /></div>
<div align="justify">
<strong><em>B) Supply of and Demand for Money and their determinants</em></strong></div>
<div align="justify">
<strong><em><br /></em></strong></div>
<div align="justify">
<em>1) The Supply of Money</em></div>
<div align="justify">
<em><br /></em></div>
<div align="justify">
The supply of the money commodity tends to grow steadily and modestly over time: each year mining adds a small percentage to the total stock, whilst non-monetary uses and wear and tear reduce it. Fiat money on the other end is conjured into existence by the Central Bank and the Banking Cartel, either via outright money printing or via the more subtle process known as <em>fractional reserve lending.</em> They can increase its supply at will and, since the process allows the early recipients (the banks themselves, big business and the the well-off) to gain at the expense of the late recipients (workers, pensioners etc.), they are likely to do so.</div>
<div align="justify">
It is obvious from the graph above that <em>ceteris paribus</em> an increase in the supply of money will determine a decrease in its purchasing power and vice versa.</div>
<div align="justify">
<br /></div>
<div align="justify">
<em>2) The demand for Money</em></div>
<div align="justify">
<em><br /></em></div>
<div align="justify">
The demand for money has three subcomponents.</div>
<div align="justify">
<br /></div>
<div align="justify">
A) Non-monetary demand</div>
<div align="justify">
<br /></div>
<div align="justify">
This is the demand to use the money commodity for purposes other than monetary exchange (e.g. the use of gold in electronic circuits). If gold were actually used as everyday money, this demand would very likely be lower than it currently is, as the opportunity cost of using the metal would probably increase sharply. In any case, even now, as the price of gold increases, non-monetary demand tends to decrease, as the opportunity cost rises. Silver is much more dependent than gold on the vagaries of such demand. </div>
<div align="justify">
Obviously non-monetary demand is nonexistent in the case of fiat money (apart from tragicomic situations: e.g. people in Weimar burnt marks in the stove as they were cheaper than wood).</div>
<div align="justify">
<br /></div>
<div align="justify">
B) Exchange demand for Money</div>
<div align="justify">
<br /></div>
<div align="justify">
This is the demand to acquire money for exchange purposes by sellers of other goods and labour: people sell their surplus in order to obtain money with which to engage in indirect exchange (thus avoiding the limits of direct exchange, a.k.a barter). Sellers of goods will tend to have a perfectly inelastic demand curve (as they have no reservation use for their goods), whilst sellers of labour will have a falling demand curve (since they could always trade work for leisure): the combined exchange-demand curve for money is thus falling (as the PPM increases, the exchange demand for money falls). It’s clear that in the current situation, this demand is almost nonexistent for gold (nobody asks to be paid in gold for his work). It is however an important determinant of the value of fiat money, given that this demand exists only as long as paper money is the accepted medium of exchange.</div>
<div align="justify">
<br /></div>
<div align="justify">
C) Reservation demand for Money</div>
<div align="justify">
<br /></div>
<div align="justify">
The third subcomponent is the most volatile and thus most important one: it is the demand to hold money by people who have already acquired it. Money acquired on the market (by selling goods or labour) can be spent, either on consumption goods or investment goods, or added to one’s cash balance. Money already in the cash balance can either be kept there or dishoarded (i.e. spent on consumption or investment goods).</div>
<div align="justify">
<em>Ceteris paribus </em>an increase in the PPM will result in a reduction in reservation demand (as the value of money in terms of other goods increases, a lower quantity of money can now perform the same functions earlier performed by a greater quantity) and vice versa. There is an extremely important exception to this rule and that is when the Misesian <em>crack-up boom</em> appears: as people become aware of the deliberateness of the inflationary policy, <em>their reservation demand to hold paper money falls dramatically as the money supply increases</em>, thus exacerbating the inflationary crisis (see also further below). This of course can’t happen to gold, unless we were to really find the philosopher’s stone.</div>
<div align="justify">
We will see below what could alter people’s decisions to hoard or dishoard money (i.e. what could cause <em>a shift</em> of the reservation demand curve, as opposed to a simple movement up or down the current demand curve as in the example above), but it’s important to note that the values of both the money commodity and fiat money are heavily influenced by such shifts in demand.</div>
<div align="justify">
<br /></div>
<div align="justify">
<em>3) Influences on the reservation demand for Money</em></div>
<div align="justify">
<em><br /></em></div>
<div align="justify">
All people familiar with praxeology know that it is of course impossible to formulate a law that precisely and quantifiably predicts how economic actors will react to given changes in the surrounding reality, as each man has his own scale of values and preferences and is constrained by his own set of circumstances. The deluded refusal to acknowledge this simple fact of life is also know as “Mathematical Economics” or “Econometrics” and has so far only managed to produce untold misery, by way of justifying idiotic interventionist policies with fancy “scientific” formulae. </div>
<div align="justify">
It is however possible to infer certain general “rules of thumb” that can help us in making <em><strong>qualitative</strong></em> assessments on a certain situation. With that in mind, let’s see what can have a meaningful influence on people’s reservation demand for money and, as a consequence, on the value of money itself.</div>
<div align="justify">
<br /></div>
<div align="justify">
A) Uncertainty</div>
<div align="justify">
<br /></div>
<div align="justify">
Life is uncertain. We do not know what the future holds. But what if we were suddenly catapulted in a world of certainty, in an <em><a href="http://wiki.mises.org/wiki/Evenly_Rotating_Economy" target="_blank">Evenly Rotating Economy</a> (ERE) </em>where equilibrium has been reached and nothing can possibly change (i.e. all prices are final prices and remain constant, production and consumption patterns repeat over and over again etc.)? What would happen to money in such a case? We’ll let Rothbard answer these questions:</div>
<div align="justify">
<br /></div>
<div align="justify">
<em>“It is true, as we have said, that the only use for money is in exchange. From this, however, it must not be inferred, as some writers have done, that this exchange must be immediate. Indeed, the reason that a reservation demand for money exists and cash balances are kept is that the individual is keeping his money in reserve for future exchanges. That is the function of a cash balance—to wait for a propitious time to make an exchange.</em></div>
<div align="justify">
<em>Suppose the ERE has been established. In such a world of certainty, there would be no risk of loss in investment and no need to keep cash balances on hand in case an emergency for consumer spending should arise. Everyone would therefore allocate his money stock fully, to the purchase of either present goods or future goods, in accordance with his time preferences. No one would keep his money idle in a cash balance. Knowing that he will want to spend a certain amount of money on consumption in six months’ time, a man will lend his money out for that period to be returned at precisely the time it is to be spent. But if no one is willing to keep a cash balance longer than instantaneously, there will be no money held and no use for a money stock. Money, in short, would either be useless or very nearly so in the world of certainty.”</em> (Rothbard, Man, Economy, State with Power and Markets, Chapter 11) </div>
<div align="justify">
<br /></div>
<div align="justify">
Luckily though we do not live such a dull existence, but a more spicy one. And, as Rothbard says: </div>
<div align="justify">
<br /></div>
<div align="justify">
<em>“In the real world of uncertainty, as contrasted to the ERE, even “idle” money kept in a cash balance performs a use for its owner. Indeed, if it did not perform such a use, it would not be kept in his cash balance. Its uses are based precisely on the fact that the individual is not certain on what he will spend his money or of the precise time that he will spend it in the future.” </em>(Rothbard, Ibid.) </div>
<div align="justify">
<br /></div>
<div align="justify">
It is therefore clear that uncertainty plays an important role in determining people’s reservation demand for money. It is safe to say that, <em>ceteris paribus</em>, an increase in uncertainty will most likely cause an increase in the reservation demand for money. This is intuitive: what do you do when you are faced with an economic emergency (e.g. you lose your job or your business fails, or you are faced with a large unexpected expense)? The most likely answer is: <em>you raise cash</em>, that is you either restrain your consumption or you sell your investments or a combination of both. The same holds true when such an unforeseen event affects all or the vast majority of people (e.g. an economic crisis, a bear market, a war, acts of god etc.): <em>in the face of growing uncertainty people generally choose to increase their cash balances </em>(i.e. their reservation demand curve shifts to the right). </div>
<div align="justify">
Now we guess we don’t have to tell you what might go wrong in a world where increasing state intervention in the economy, endless money printing, gigantic malinvestments and growing social unrest rule the day… </div>
<div align="justify">
<br /></div>
<div align="justify">
B) Speculation </div>
<div align="justify">
<br /></div>
<div align="justify">
This is an easy point to make: if people expect the value of money to increase in the future, they’ll increase their hoarding now (i.e. their reservation demand will shift to the right), thus bringing about the change in the PPM in the present. Of course the opposite is true as well: <em>“an expected future fall in the PPM will tend to lower the PPM now.” </em>(Rothbard, Ibid.) </div>
<div align="justify">
This is what has recently happened to the Yen: speculators anticipating massive devaluation of the currency by the BoJ rushed to sell it, thus causing the fall to occur in the present. Unfortunately for them, all the relevant data point to a rather serious misunderstanding of the BoJ’s real intentions on the part of the speculators. But no worries: erroneous speculations are self-correcting, not self-fulfilling as the minions of the State would like us to believe. Correct speculations, on the other hand, are beneficial as they speed up the market’s adjustment to the new equilibrium conditions. </div>
<div align="justify">
In the case of gold, it is not difficult to see what could happen should a renewed economic crisis wreck havoc à la 2008/2009 on U.S. government finances at a time when debt and deficit monetization by the Fed and foreign central banks is already rampant, both in absolute and relative terms: </div>
<div align="justify">
</div>
<div align="justify">
</div>
<div align="center">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiXqprWjjEiA4GuD53__9Wou1_dASG6kD3ph2ZgBrIFnFGwvnjqSBDjy-QmzzRvN3tTU6du8HSq9pprBycu5_VDEMeonN218pIpXHPw6T5SRswO2L0qajmq8xLkZHGzt-OELbW5YLkx_9w/s1600-h/image113.png"><img alt="image" border="0" height="442" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEivkx4bCKLj3M0xKZr-4GbMMrcdw2oqUlmeSo8wK04357PTeYqTyxRxXEDy85gJra1ezHvZiWEexEfqYwjJmGMDU-fA-t7UAosmbNy9Z8NClSGEaUxz8Rk50qW0fQZZ05DOjNADBf7HFHE/?imgmax=800" style="border-bottom-width: 0px; border-left-width: 0px; border-right-width: 0px; border-top-width: 0px; display: block; float: none; margin-left: auto; margin-right: auto;" title="image" width="644" /></a> <em>YoY Percentage Change in U.S. government Receipts and Outlays superimposed to a 12-month rolling measure of the Deficit. Chart via <a href="http://blogs.forbes.com/michaelpollaro/" target="_blank">Michael Pollaro</a>. Could that nasty divergence happen again? Of course it can: we only need a nice crisis! Problem is, the deficit’s current level is already way higher than in 2007, both in absolute and relative terms.</em> </div>
<div align="center">
<em></em> </div>
<div align="center">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhDM7EDXJhnIe1jejhERPhv8FrTXr9s5HqVfAN7OR_tMHL4nyu55WUhpVLsmsCdmMVFWvp0vBisBKJ2OtdZfICeTR93vHnftyRQUQv8SBFw447g24SeB34bOJenJjMGd9nD1Xmm5bZAc2Q/s1600-h/Slide4e1358440217316%25255B1%25255D.gif"><img alt="Slide4-e1358440217316" border="0" height="396" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjmX9bQTFP4PQ4nrnyWRR5zUQzbJCuFjzPZAefxNFU7wrqHDbteeSL4Lk8S_27ekZSVhArsBmDkTdlSiv-jGgp6gze4ovtpvk9cQi3iB9H-tannVfgR0gVbN4agSN-yVwEKibhdwYt3CjY/?imgmax=800" style="border-bottom-width: 0px; border-left-width: 0px; border-right-width: 0px; border-top-width: 0px; display: block; float: none; margin-left: auto; margin-right: auto;" title="Slide4-e1358440217316" width="644" /></a> <em>The result of the U.S. government profligacy is a record-high level of debt monetization on the part of both the Fed and foreign central banks. Guess how they finance their purchases?! And what if they have to buy even more, due to resurgence of the 2008/2009 dynamics outlined in the chart above?! Again, thanks to <a href="http://blogs.forbes.com/michaelpollaro/" target="_blank">Michael Pollaro</a>!</em> </div>
<div align="center">
<em></em> </div>
<div align="justify">
In the case of the dollar it’s certainly more difficult to foretell what the market’s reaction to such a situation might be, as people’s reservation demand to hold it ultimately rests on a precarious foundation, as Mises pointed out in Human Action: </div>
<div align="justify">
<br /></div>
<div align="justify">
<em>“The course of a progressing inflation is this: At the beginning the inflow of additional money makes the prices of some commodities and services rise; other prices rise later. The price rise affects the various commodities and services, as has been shown, at different dates and to a different extent. This first stage of the inflationary process may last for many years. While it lasts, the prices of many goods and services are not yet adjusted to the altered money relation. There are still people in the country who have not yet become aware of the fact that they are confronted with a price revolution which will finally result in a considerable rise of all prices, although the extent of this rise will not be the same in the various commodities and services. These people still believe that prices one day will drop. Waiting for this day, they restrict their purchases and concomitantly increase their cash holdings. As long as such ideas are still held by public opinion, it is not yet too late for the government to abandon its inflationary policy.</em> </div>
<em>But then finally the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A<strong> </strong>breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against "real" goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them. It was this that happened with the Continental currency in America in 1781, with the French mandats territoriaux in 1796<strong> </strong>and with the German Mark in 1923. It will happen again whenever the same conditions appear. If a thing has to be used as a medium of exchange, public opinion must not believe that the quantity of this thing will increase beyond all bounds. Inflation is a policy that cannot last forever.”</em> <br />
<em><br /></em>
As such we can by no means know in advance whether the next crisis and the official response to it, likely constituting of a large dose of new inflation, are going to determine a shift in people’s perceptions dramatic enough to seal the fate of the dollar. In fact, we tend to doubt it. What we are strongly convinced of is that although the dollar could very well gain in value against other currencies, it is unlikely to make much progress, if any, in terms of gold. <br />
<br />
<div align="justify">
<em>4) A real-life example: the panic of 2008</em> </div>
<div align="justify">
<em><br /></em></div>
<div align="justify">
Now that we have described the components of the demand for money and their main determinants, let’s see if we can manage to explain, using these instruments, what happened to both gold and the dollar in 2008. </div>
<div align="justify">
Between July and November of 2008 the value of the dollar increased more than 20%, whilst the price of gold plummeted more than 30%. </div>
<div align="justify">
The reservation demand for the dollar was clearly pushed to the right by both uncertainty and speculation that deflation would increase its PPM. </div>
<div align="justify">
The case of gold is a bit more complex, as there were opposing forces at work: on the one hand, its price declined as speculators bet on a deflationary outcome; on the other hand, uncertainty pushed many people into the market (as demonstrated by the record surge in GLD holdings at the height of the panic, between September and October, which not accidentally coincided with Lehman’s bankruptcy). Once the deflationary scenario proved to be incorrect, its price soon returned to equilibrium: gold was by far the fastest asset to regain its pre-panic value and by February 2009 it was already close to it previous all-time high. It’s also important to note that during the panic it did either gain substantially or lose modestly against other currencies (with the exception of the Yen) and it also increased its PPM when measured against other goods (like e.g. crude oil, copper, equities etc.). Even if the deflationary outcome had come to pass, we suspect that gold would have not continued to lose value against the dollar, but its price would have most likely stabilized or even increased, as uncertainty would have become even greater as the financial system would have rightfully collapsed, thus pushing more and more people in the gold market at a time when sellers would have probably been rare (in fact the “Lehman demand” did indeed generate a meaningful rally in the price of gold). In any case it would have most certainly gained immensely in real terms (i.e. when measured against other goods, like houses, cars, food, energy etc.). </div>
<div align="justify">
We can then conclude that both gold and the dollar benefited from an increase in people’s reservation demand for money, with the former temporarily succumbing to speculative forces (which subsequently self-corrected) and the latter of course profiting from its status as reserve currency (as well as the deflationary scare). </div>
<div align="justify">
When the next crisis strikes, we fully expect gold to experience an even greater increase in reservation demand, as uncertainty will again increase and probably quite dramatically, given how unquestioningly people have put their faith in central bankers and their monetary tricks. Should (when, actually) the modern-day heirs of Count Cagliostro fail in bringing about prosperity by means of inflation, what would the poor saps do? Buy gold, that is. Moreover speculative forces should now be firmly on the same side, as it’s apparent that the default response to every problem is to “paper it over”. </div>
<div align="justify">
<br /></div>
<div align="justify">
<strong><em>C) Popular fallacies regarding Gold and its Bull Market</em></strong> </div>
<div align="justify">
<strong><em><br /></em></strong></div>
<div align="justify">
In light of the above, we can now embark on debunking some popular fallacies about gold and what drives its bull market. </div>
<div align="justify">
<br /></div>
<div align="justify">
<em>1) Gold is a commodity</em> </div>
<div align="justify">
<em><br /></em></div>
<div align="justify">
Although, as we have seen above, gold is not entirely money at this point in time, it is erroneous to then assume that it’s just your average commodity: it isn’t. And it follows that it’s dangerously misleading to apply conventional commodity-style studies to the gold market. Firstly, the existing stock dwarfs annual production, thus rendering traditional supply-side arguments useless (unless one correctly recognizes that the supply of gold is indeed its existing stock and not the annual mining output); secondly, as we have outlined before, there exists a <em>reservation demand</em> to hold gold, which is almost nonexistent in the case of other commodities (i.e. we have yet to meet <em>sugar bugs</em> or <em>coffee hoarders</em>) and which upsets standard demand-driven analysis that focuses just on those who want to acquire gold (without considering the far more important influence of those who already own it and want to keep it). This is always true, but becomes even truer when gold is, as is the case now, in a secular bull market, because it is at this precise time that gold takes on its monetary role with far more authoritativeness than before. </div>
<div align="justify">
<br /></div>
<div align="justify">
<em>2) Indian demand and Chinese demand</em> </div>
<div align="justify">
<em><br /></em></div>
<div align="justify">
The misconception that Indian or Chinese buying is an important force behind this bull market is the offshoot of the above “Gold is a commodity” fallacy. The reality is that there is more than enough gold available to meet both Indian and Chinese demand and the price at which it will do so depends not so much on the size of such demand as on the reservation demand of those who hold it (and have to sell it to the Indian or Chinese buyers). This is no surprise for those who understand that price is set at the margin. </div>
<div align="justify">
Sceptical readers might want to peruse <a href="http://www.gold.org/investment/research/regular_reports/gold_demand_trends/" target="_blank">the data published by the World Gold Council</a> and see whether they can find any significant correlation that lasts over the years between the vagaries of Indian and/or Chinese demand (or even global demand for that matter) and the gold price. </div>
<div align="justify">
<br /></div>
<div align="justify">
<strong><em>D) Miners ≠ Gold</em></strong></div>
<div align="justify">
<strong><em><br /></em></strong></div>
<div align="justify">
That mining companies are different from gold is a truism. From this it should logically follow that the reasons to buy (or hold) gold are unlikely to also constitute valid reasons for buying mining companies. And yet many people view an investment in said companies as a way to somehow “leverage” their exposure to gold’s gains: the sad reality is that more often than not they only manage to leverage gold<em> losses</em>, while underperforming its gains. Sure, miners can and often indeed do rise together with gold, sometimes even exceeding its advance, but the reality is that people buy and hold gold to satisfy very specific needs that can’t be fulfilled by owning miners and the stronger these needs grow, the larger the discount at which mining companies trade relative to gold is bound to be. And this does not even begin to address all the myriad specific risks and pitfalls that mining companies present to investors…</div>
<div align="justify">
Readers wanting factual proof of this need to look no further than the last big gold bull market of the ‘70s: at their respective peaks at the beginning of 1980, both gold and silver had outperformed the miners (as represented by the Barron’s Gold Mining Index) by a wide margin (gold returned almost 4 times more than the BGMI and silver almost 6 times more). Once the bull market ended (and so did the particular reasons to own precious metals) miners did skyrocket higher, doubling in less than a year an peaking in October 1980, as their profit margins were indeed being boosted by still very high gold prices (and yet their total return for the bull was still less than half that of both gold and silver).</div>
<div align="justify">
Of course peddlers of mining stocks or of investment newsletters of questionable quality will point out to <em>some specific miners </em>which indeed saw returns higher than the metals, but the fact remains: an average investor would have been much better off owning the metals outright rather than owning miners or, worse yet, trying to turn himself into a superstar stock-picker (remember that the aforementioned peddlers have the benefit of hindsight).</div>
<div align="justify">
That said, miners are indeed very oversold and very cheap at the moment and as such they might present a legitimate investment opportunity. Yet, we are not interested in taking it: we own metals primarily for safety and mining companies do not offer it. Moreover, history is on our side and we should see returns way in excess of those delivered by the miners. And after all is said and done, we could always buy them after the end of the bull and maybe still manage to reap gains larger than those of all the people who kept them for the whole period… We do not however exclude the possibility of <em>trading</em> miners, particularly at this very juncture, as their risk/reward profile appears excellent (in fact, we’re currently busy analysing a few mining companies).</div>
<div align="justify">
<br /></div>
<div align="justify">
<strong><em>E) The ‘70s Bull Market vs. the current one</em></strong></div>
<div align="justify">
<strong><em><br /></em></strong></div>
<div align="justify">
We have already mentioned what happened to gold and silver relative to miners during the last bull market. There are however a couple other points worth mentioning that explain why we think this bull market is going to deliver larger gains than the past one and with lower drawdowns.</div>
<div align="justify">
<br /></div>
<div align="justify">
<em>1) In the ‘70s, Gold had just started to trade freely</em></div>
<div align="justify">
<em><br /></em></div>
<div align="justify">
The bull market in gold officially started in 1966 (the year of the Dow/gold ratio high), but until March 1968 its price was artificially suppressed by the infamous <a href="http://en.wikipedia.org/wiki/London_Gold_Pool" target="_blank">London Gold Pool</a><em></em>, which of course miserably collapsed as soon as market forces became too powerful for the high priests of interventionism to counter (by the way, the <a href="http://en.wikipedia.org/wiki/Gnomes_of_Z%C3%BCrich" target="_blank">Gnomes of Zürich</a> have to thank this fateful event for their now buoyant local gold market). Moreover, artificial pressures persisted until 1971, as the so-called “gold window” (the spread between the fixed gold/dollar exchange rate and the actual market price) allowed some of the shrewdest pool participants to convert their currency reserves into gold at the fixed price of $35/oz. and then sell it on the open market for a nice, risk-free profit. As a result, gold had quite a bit of catch up to do after the definitive end of the <a href="http://en.wikipedia.org/wiki/Bretton_Woods_system" target="_blank"><em>Bretton Woods system</em></a>: it more than quadrupled in less than 3 years (it broke above 50$/oz. in the spring of 1972 and peaked at the end of 1974 at roughly 200$/oz.). This time around it took gold 7 or 8 years to complete the same feat, depending on whether one considers the 1999 bottom or the 2001 bottom as the starting point. This different behaviour also partly explains why in 1975 gold entered a two-year cyclical bear market that halved its price, whilst in 2008 it only corrected approximately 35% notwithstanding an epic panic and widespread liquidation that literally obliterated many other assets. </div>
<div align="justify">
If we exclude three brief +20% corrections (two during the powerful advance of the early ‘70s and one towards the end of 1978), the mid-‘70s bear was the only one that occurred during that powerful bull market: apart from that, gold only experienced run-of-the-mill corrections of 15% or less. This should put things into perspective and help calm the fears of all those who are currently expecting 1400$ gold (or lower) on the basis that <em>charts tell them this</em>…The current bull has advanced in a much milder and more regular fashion and has already had four +/- 20% corrections (2003, 2006, 2008 and 2011/2012, the last two qualifying in our opinion as outright bear markets), hence it doesn’t strike us as in need of some sort of collapse to “wipe the slate clean”. The same is even truer for silver, which has always generously purged speculative excesses with 35% to 60% plunges.</div>
<div align="justify">
The unexpected can of course always happen, but the above is one of the reasons why we tend to think that the current consolidation is all we will see: people waiting for 1400$ gold might end up being disappointed.</div>
<div align="justify">
<br /></div>
<div align="justify">
<em>2) This time it’s much worse!</em></div>
<div align="justify">
<em><br /></em></div>
<div align="justify">
This is a quick point: the crisis of the ‘70s was undoubtedly a serious one, but we can guarantee you the current one dwarfs it. We won’t enter into details, suffice it to say that the fundamental backdrop is much less inspiring this time around (think of a secular crisis as opposed to a cyclical one: i.e. we’re now at the end of the rope). As such we expect gold to benefit from a much larger increase in reservation demand and, consequently, in its price.</div>
<div align="justify">
This contributes as well to our scepticism towards claims that gold ought to “collapse” before being able to resume its advance.</div>
<div align="justify">
<br /></div>
<div align="justify">
<strong><em><span style="font-size: medium;">Technicals, Sentiment and Positioning</span></em></strong></div>
<div align="justify">
<strong><em><span style="font-size: medium;"><br /></span></em></strong></div>
<div align="justify">
<strong><em><span style="font-size: medium;"></span></em></strong> The technical picture is rather benign for both metals:</div>
<div align="justify">
<br /></div>
<div align="center">
<a href="http://lh3.ggpht.com/-U-JKakCncLo/URu8iDtvg_I/AAAAAAAAAJg/m5FAQX4qkhs/s1600-h/%252524GOLD%252520-%252520SharpCharts%252520Workbench%252520-%252520StockCharts.com_page1_image1%25255B6%25255D.jpg"><img alt="$GOLD - SharpCharts Workbench - StockCharts.com_page1_image1" border="0" height="484" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjtSSnMngxDkfGvD21e76Ws7otbDXDecr58Jd3Myb-BTO4sbbWX5RnTzmGmABvbdiZ_E544lUTgkgLkbOgfxf7X6ZfHhPmPcIeNXdfi6FPtWBUKqw7q7MRymIMHcCIxhNwP05A8-LbKOK8/?imgmax=800" style="border-bottom: 0px; border-left: 0px; border-right: 0px; border-top: 0px; display: block; float: none; margin-left: auto; margin-right: auto;" title="$GOLD - SharpCharts Workbench - StockCharts.com_page1_image1" width="638" /></a> <em>Gold chart, via <a href="http://stockcharts.com/" title="http://stockcharts.com/">http://stockcharts.com/</a>.</em></div>
<div align="center">
<br /></div>
<div align="center">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgVrhIJsLM91UyIW_pfi_0aWHr8XYiBP88_73OC1r-sAKpYrouJGT8EgKLZK8auBwzQsjZz_bSBtwlA8vFdZbvLv2aAE6rNHQsAQRzr88vNZIPy_UKoNdP3X8v07DkMhlt2Yu2GvqHVWYQ/s1600-h/%252524SILVER%252520-%252520SharpCharts%252520Workbench%252520-%252520StockCharts.com_page1_image1%25255B14%25255D.jpg"><img alt="$SILVER - SharpCharts Workbench - StockCharts.com_page1_image1" border="0" height="484" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjifFRqJZRYQChJdx4q2gaYTYxmASck_EpcuHMforOLCNW50BL2WhL8cQn7VgBkk32Spic2Pseabk0VTFVO_oQ-OE6LZUK0-3F6mGyXxodn9JdJwYcOjGOWyLRXhtDeQqYWSyxX8MSIPaQ/?imgmax=800" style="border-bottom: 0px; border-left: 0px; border-right: 0px; border-top: 0px; display: inline;" title="$SILVER - SharpCharts Workbench - StockCharts.com_page1_image1" width="638" /></a> </div>
<div align="center">
<em>Silver chart, via </em><a href="http://stockcharts.com/" title="http://stockcharts.com/"><em>http://stockcharts.com/.</em></a></div>
<div align="justify">
<br /></div>
<div align="justify">
As can be seen in the charts above, both have been spending quite some time in triangular consolidations from which they broke out higher during last summer. These bottoming processes have been accompanied by rising RSI and MACD indicators, with the latter showing remarkable bullish divergences in both cases. The metals are now in the process of recreating these formations on a smaller scale, significantly reducing their trading ranges in the process (a guarantee that a strong move is in the makings). Strong support can be found in the 1550/1650$ area for gold and in the 26/30$ area for silver. Major resistance levels are 1800$ for gold and 35$ for silver: anything in between is just noise. Time also plays an important role here: the gold bear is roughly 18-month long and the silver one is approaching the 2-year mark. This all combines into a bullish picture: a long correction/consolidation with positive momentum divergences and strong support right underneath it in the context of a powerful secular bull market doesn’t sound so bad, does it?</div>
<div align="justify">
So let’s see if sentiment and positioning agree with the above. </div>
<div align="justify">
The former, as reported by <a href="http://www.sentimentrader.com/" target="_blank">Sentimentrader</a>, is hardly buoyant: the readings on gold are currently below neutrality and actually close to levels only seen at major bottoms, including those of 2008, mid 2012 and December 2011. More importantly, they have been spending there quite some time since the 2011 top: another guarantee that there certainly isn’t any speculative mania going on (and if you still doubt it, then just spend some time on a few PMs forums…). The picture on silver is good, but less rosy: sentiment is below neutrality, but not particularly depressed. Moreover, it rose to relatively high levels during last autumn’s rally. Somewhat counterbalancing this is the fact that during last summer’s doldrums sentiment on silver plummeted to levels not even seen during the outright scary 2008 panic and stayed there for a relatively long period. All in all, we consider the sentiment picture positive and supportive of higher prices.</div>
<div align="justify">
Positioning, on the other hand, is a bit more mixed… ETFs flows show that there has generally be a slow bleeding away from the precious metals sector, with GLD and GDX leading the way (SLV actually recorded its highest ever daily inflow on the 15th of January). Major bottoms tend however to be signalled by some sort of capitulation selling, where large amounts of money are withdrawn all at once from the ETFs. Rydex funds data also confirm that a notable retreat from the sector on the part of dumb-money investors took place during the recent correction. CoT reports unfortunately do not (yet) agree with the above: although both large and small specs have reduced their gold longs to a neutral level, we still do not see the hoped-for washout. And silver is even worse: both large and small specs continue to hold dangerously high levels of longs. We can only hope to see improved data this coming Friday. We want to point out that this fact does not make us bearish at all: it merely means that there could be scope for further corrections/mini-crashes to flush the specs out of the precious metals market.</div>
<div align="justify">
A final note: we’ve been delighted to see a resurgence of the historical negative correlation between equities and gold, which was thrown under the bus during this last cyclical stock bull. It’s now obvious that gold is again ready to act as a “risk-off” investment, as it is fundamentally designed to do (and as in fact did in many prior instances, both recent and remote).</div>
<div align="justify">
<br /></div>
<div align="justify">
<strong><em><span style="font-size: medium;">Conclusions</span></em></strong></div>
<div align="justify">
<strong><em><span style="font-size: medium;"><br /></span></em></strong></div>
We are very bullish on gold and silver over the long term and we hold large positions in both metals (although we are overweight the former as it tends to deliver lower volatility and smoother, more regular returns). We intend to accumulate more should favourable circumstances present themselves (e.g. a washout bottom like last summer’s one or a convincing breakout above important resistance levels).<br />
The current picture is however mixed: on the one hand, it’s clear to us that unless and until a new crisis phase opens up, precious metals will very likely continue to be the speculators’ “discarded toys”, abandoned in favour of hotter assets like equities (which on the contrary are currently sustained by the delusion that monetary<em> hocus-pocus</em> can possibly engineer prosperity); on the other hand technicals, sentiment and to a lesser extent positioning appear consistent with the notion that prices are way closer to a bottom than to a top. This week’s Commitments of Traders will help in ascertaining whether we are indeed ready to turn higher or not, as a marked reduction in speculative fervour is the last important ingredient still missing. We also remain convinced that last summer’s bottom was a major one, as it presented all the important characteristics that generally accompany a meaningful intermediate-term low: it’s very unlikely that it will turn out to be violated this year.<br />
As always, we’ll keep our eyes open to spot important developments, but in the meantime we advise our readers to keep in mind the Golden Rule (“He who has the gold makes the rules”), as we believe it will be applied once again in a not-so-distant dystopian future where central banks’ and governments’ actions actually have consequences (and nasty ones to boot)…And of course we encourage them to engage in their own research!The Rothbardian Investorhttp://www.blogger.com/profile/09722598347527860060noreply@blogger.com2tag:blogger.com,1999:blog-1699632643928019839.post-76027053495951936822013-02-01T23:01:00.001+01:002013-02-01T23:08:42.229+01:00Miscellanea<div align="justify">
The objective of this post is to provide our readers with a quick update on the markets we have covered thus far, while waiting for our next major post, which will cover the precious metals market.</div>
<div align="justify">
<br /></div>
<div align="justify">
<strong><em><span style="font-size: medium;">Stocks</span></em></strong></div>
<div align="justify">
<strong><em><span style="font-size: medium;"><br /></span></em></strong></div>
<div align="justify">
The S&P 500 has advanced less than 4% since our post on the coming bear market, but judging from the bullish noises made by various pundits and commentators you’d tell it has doubled. CNBC has even put on their screens a “countdown window” measuring the distance between the current Dow level and the all time highs.</div>
<div align="justify">
From a fundamental perspective, the recent data releases have confirmed what we’ve long been thinking: the global economy is at best growing at a very mild pace, but most likely it is in the first phases of a contraction. Europe is undoubtedly in a recession, no matter how desperately talking heads try to positively spin the data: the recent Markit PMIs were supposedly a success, since the pace of contraction eased a little…big deal! Not to mention the fact that France is falling fast into the grave Monsieur Hollande has been so busy digging since coming to power. European retail sales were also disastrous (no surprise here for those who understand the specular concepts of overconsumption during the boom periods and forced savings during the bust). China is showing a lacklustre “recovery” (we’d prefer to call it: “short-lived rebound artificially engineered by means of inflation”), as evidenced by the latest PMI readings. Japan continues to be stuck in a recession, with the only difference being that now companies face additional pressures on their margins, given that a weaker Yen has pushed up their input costs, while their output prices continue to fall amid strong competition and a lack of demand for their products: they can of course thank Shinzo Ape (no, it’s not a typo) for this one. The US economy is also sending more than a few warning signals (and we are not referring to the meaningless GDP) and is in desperate need of a recession to correct and liquidate all the malinvestments engendered by the Mad-Hatter-in-chief Bernanke. It seems likely to us that much of the positive surprises in data recently released are due to <a href="http://www.forbes.com/sites/michaelpollaro/2013/01/28/the-next-greater-recession-now-baked-in-the-cake/" target="_blank">the already high and recently accelerating rate of inflation</a>, which furthers the aforementioned malinvestments. Moreover, earnings and revenue growth have at least stalled, but our suspicion is that they’ve started reverting to the mean: after all, <a href="http://www.factset.com/insight/2013/1/guidance_1.31.13#.UQvQtR00HFk" target="_blank">many companies have issued negative guidance</a>, either for the year or the quarter.</div>
<div align="justify">
Technically, the stock market remains very overbought and ripe for a correction. Bullish sentiment and complacency have reached new extremes and many sentiment and positioning measures are now well into their danger zones (e.g. NAAIM Survey, Investor Intelligence, AAII, Rydex Fund flows and positioning, Hulbert Survey etc.). In short: the retail investor is back, eagerly waiting to get fleeced again.</div>
<div align="justify">
We’re willing to make a wager here: we think that the actual top is less than 5% away (i.e. we think the S&P won’t surpass 1575, much to the chagrin of CNBC). Timing-wise, the prediction is a more difficult one to make: we may be two weeks or two months away from a top. It will all depend on how the stock market behaves: given that it’s already very overbought, if it were to rise fast towards the all-time highs, it’d probably mean a top is in; however, if it were to correct a little and then resume it’s advance, then we’d be looking at a longer topping process that could drag out until March or April. In any case these are just exercises in futility: what really matters is that we are convinced a top is near and we’re committed to the short side, as this is were the best risk/return proposition lies. To all the bulls pressing us to buy we can only say: <a href="http://en.wikipedia.org/wiki/Alphonse_and_Gaston" target="_blank">“After you, my dear Alphonse”</a>.</div>
<div align="justify">
<br /></div>
<div align="justify">
<strong><em><span style="font-size: medium;">Yen</span></em></strong></div>
<div align="justify">
<strong><em><span style="font-size: medium;"><br /></span></em></strong></div>
<div align="justify">
This is were things really get interesting! The Yen is as oversold as it has ever been, with e.g. the EURJPY cross stretched more than 22% above it’s 200-day simple moving average, something almost unheard of for a major currency pair like the EURJPY, which only happened before during the 2008 panic, for strong fundamental reasons to boot. But we’ve discovered a little something that might turn the bears dreams into nightmares… We’ve already commented about the usual strategy employed by the BoJ (to say a lot and then do a little) and it appears that this time they’ve really surpassed themselves!</div>
<div align="justify">
The details are as follows: the BoJ recently announced ¥13 trillion of monthly purchases of JGBs and T-Bills starting in 2014, but what has apparently gone unnoticed to the hordes of excited bears is that these purchases are <em><strong>gross</strong></em> (i.e. they include <em>rollovers</em>, that is purchases made to reinvest the proceeds of redeemed securities). <strong><em>Net </em></strong>purchases (which are made with newly printed money), on the other hand, won’t amount to more than ¥10 trillion <strong><em>per year</em></strong>, that is <strong><em>more than 10 times less than advertised </em></strong>(as a basis for comparison, consider that current monthly purchases amount to ¥3 trillion).</div>
<div align="justify">
Now this is a remarkable sleight of hand! They’ve fooled pretty much everybody into thinking they’re going <em>kamikaze</em>, when in reality they’re going to print one tenth of what they claimed and one third of what they already print. We think that such an achievement might warrant an entry in the Urban Dictionary: “to pull off a Japanese”. Derren Brown stands in awe.</div>
<div align="justify">
Of course market participants can continue to ignore reality for longer than it appears humanly possible, nonetheless with sentiment in the dumps, more and more stories pointing to the resurgence of the carry trade and extreme CoT readings we remain convinced that the Yen is going to revert to the mean and then some. It appears increasingly likely, though, that this will happen in concomitance with the decline of the stock market, exactly as in 2007: patience is advised.</div>
<div align="justify">
<br /></div>
<div align="justify">
<span style="font-size: medium;"><strong><em>Softs</em></strong></span></div>
<div align="justify">
<span style="font-size: medium;"><strong><em><br /></em></strong></span></div>
<div align="justify">
Sugar is behaving in a rather bullish manner: after washing out some more weak hands with a new low on 23/01, it immediately reversed up on huge volume and then proceeded to play a new trick on bulls, staging a high-volume reversal to the downside on 29/01 and then going through a very volatile range on 30/01, before resuming its march higher over the next two days before closing the week on a mixed note. Price now sits right just below the 19c$ level and the 50-day simple moving average and both have acted as strong resistance in the past. We suspect however that an upside breakout is imminent, not least because the recent CoT reports showed commercials going net long for the first time since 2007. Sentiment remains subdued, increasing the likelihood of positive surprises.</div>
<div align="justify">
Coffee on the other hand is showing weaker behaviour: after an initial follow-through from its break out level, it plunged right back to the 50-day moving average and then after a couple of days moved below it. It now stands again just below this key average, with favourable sentiment and CoT readings. We continue to remain bullish, but this latest development forces us to consider the possibility that the bottoming process is not yet finished and that as such further volatile spikes and corrections could occur. </div>
The Rothbardian Investorhttp://www.blogger.com/profile/09722598347527860060noreply@blogger.com6tag:blogger.com,1999:blog-1699632643928019839.post-76556954161094096702013-01-27T17:20:00.001+01:002013-01-27T17:32:12.493+01:00If a Bull Market ends and no one is around to short it, does it make a top?<div align="justify">
The objective of this post is to discuss the phenomena which usually accompany (and thus signal) the end of a bull market. These characteristics are generally present around the top of both secular and cyclical movements, although they obviously tend to be more evident in the former case than in the latter. </div>
<div align="justify">
It appears to us that currently one would be hard-pressed to find them in the Yen market, whilst they abound in the stock market. We suspect that a year from now the words of the immortal Jesse Lauriston Livermore could come in handy: “It didn't require a Sherlock Holmes to size up the situation.” </div>
<div align="justify">
The list we are presenting below isn’t complete: we have not included other factors which, although common, might fail to appear with such unwavering regularity, or others which we deem less important or less distinctive of a top.</div>
<div align="justify">
<br /></div>
<div align="justify">
<strong><em><span style="font-size: medium;">The usual companions of a dying bull market</span></em></strong></div>
<div align="justify">
<strong><em><span style="font-size: medium;"><br /></span></em></strong></div>
<div align="justify">
<strong><em>1. An already-deteriorating fundamental backdrop</em></strong> <strong><em>(often accompanied by an actual disregard for fundamentals)</em></strong></div>
<div align="justify">
<strong><em><br /></em></strong></div>
<div align="justify">
This is by far the most important characteristic. It almost never fails to appear and it almost never fails to signal that the top is near. When the mania is underway, the public stubbornly refuses to listen to the various Cassandra foretelling doom on the basis of sound factual analysis and actual data: this explains why the highest prices in a bull market are always reached when the fundamental drivers which fuelled the move have already disappeared or at the very least have significantly deteriorated and are about to change direction.</div>
<div align="justify">
Let’s take Apple as a recent example: as<a href="http://boombustblog.com/" target="_blank"> Reggie Middleton of BoomBustBlog</a> has pointed out many times in his excellent Google vs. Apple analysis, when it traded at 700$ per share the company had already been outclassed by its competitors and was losing competitiveness and market share day after day, as well as starting to feel the pinch of margin compression. And yet you could hear nothing but bullish calls on it, everybody knew it was certainly going to go to 1000$ and everybody was invested. But in all fairness, we can’t blame the poor saps: “This time is different”, after all! </div>
<div align="justify">
In fact, it is not: failure to appropriately consider the fundamental landscape on the basis of the wrongly-held belief that some magical forces are at work which will undoubtedly cause prices to rise indefinitely always leads to financial disaster. It happened in 1929, when stocks supposedly reached “a permanently high plateau”; it happened in 2000, when conventional valuation methods were to be be discarded because internet companies were somehow held to be “different” (i.e. they could apparently survive without having to generate any profits or even revenues); it will happen again whenever a similar set of conditions will manifest itself. To again quote Livermore: “Another lesson I learned early is that <em>there is nothing new in Wall Street</em>. <em>There can't be because speculation is as old as the hills</em>. <em>Whatever happens in the stock market today has happened before and will happen again</em>.”</div>
<div align="justify">
<br /></div>
<div align="justify">
<strong><em>2. Widespread public participation</em></strong></div>
<div align="justify">
<strong><em><br /></em></strong></div>
<div align="justify">
This is an easy point to make: if everybody is already in the market, who is actually going to come in and push prices even higher?! The moment one buys an asset, one becomes a bearish force in the market, since it’s logical that at that point one can only sell what it has previously bought (of course we’re omitting the possibility that one buys <em>even more</em>, something many chaps like to do at precisely the wrong time). </div>
<div align="justify">
It’s like an overcrowded boat where everybody leans to one side to watch a whale: by the time they’re all there, the whale is gone and the boat capsizes. Apple was (and probably still is) <a href="http://blogs.barrons.com/techtraderdaily/2012/09/19/apple-is-most-held-stock-among-large-mutual-funds-hedge-funds-too/" target="_blank">the most widely held stock amongst large mutual funds and hedge funds</a> (and we suspect we could include the public as well). </div>
<div align="justify">
It’s never nice to be in room full of people when somebody yells “Fire!”, but this inevitably happens at the end of major bull runs, as herd behaviour, euphoria, greed and the fear of missing out push the unsuspecting public in the trap.</div>
<div align="justify">
<br /></div>
<div align="justify">
<strong><em>3. A blow-off top / Euphoric rally</em></strong></div>
<div align="justify">
<strong><em><br /></em></strong></div>
<div align="justify">
The last consideration we have just made above serves us well in explaining this next point: when everybody (including previous disbelievers) finally becomes bullish and jumps on the proverbial <em>bandwagon</em>, a powerful (oftentimes almost parabolic) rally ensues, which culminates in a so-called blow-off top, after which prices generally collapse right away. Sometimes, as a new wave of fools, enticed by the “bargain”, rushes in, prices sharply recover and even make marginal new highs: this tends to happen more frequently in the stock market (as an example see the S&P500 between July and October 2007) than in other markets (like e.g. commodities). </div>
<div align="justify">
Of course the quasi-vertical rate of ascent witnessed during these runs is unsustainable and a big hint that it’s time to get out, but to the excited public it means nothing but the guarantee of even higher prices to come. During the last year of its uptrend, Apple saw its price almost double: quite an impressive feat for a stock with such a large capitalization. But after all it was meant to go to 1000$…</div>
<div align="justify">
<br /></div>
<div align="justify">
<strong><em>4. Overly bullish and complacent sentiment</em></strong></div>
<div align="justify">
<strong><em><br /></em></strong></div>
<div align="justify">
Daring to call a top of a bubble near its actual peak can prove detrimental to one’s health: people, excited by their own delusions, angrily and rabidly turn against all those who try to spoil their dreams of boundless wealth. Rational investors suddenly become “losers”, “haters”, “failures” and all reasoned arguments forwarded by them become irrelevant, since “this time is different” etc. Intoxicated by the artificial abundance of paper money and bank credit, the wonderfully irrational animal that man is happily engages in all sorts of unsustainable bubble activities, convinced that <em>“no harm will befall you, no disaster will come near your tent” </em>and that the Land of Cockaigne is just around the corner: all is needed is for the party to last a bit longer and not surprisingly party poopers are not welcome. </div>
<div align="justify">
Of course, this is nothing but a bitter illusion and the ensuing reality is even bitter. As Mises so aptly put it: <em>“The popularity of inflation and credit expansion, the ultimate source of the repeated attempts to render people prosperous by credit expansion, and thus the cause of the cyclical fluctuations of business, manifests itself clearly in the customary terminology. The boom is called good business, prosperity, and upswing. Its unavoidable aftermath, the readjustment of conditions to the real data of the market, is called crisis, slump, bad business, depression. People rebel against the insight that the disturbing element is to be seen in the malinvestment and the overconsumption of the boom period and that such an artificially induced boom is doomed. They are looking for the philosophers' stone to make it last.” </em></div>
<div align="justify">
These considerations and Mises’s wise words apply to speculative excesses in financial markets as well: conventional wisdom postulates that when something has been going up for quite some time, then it logically follows that it can only continue to go up and those who refuse to acknowledge it have simply missed the boat…The reality is that whenever excessive bullishness, complacency, overconfidence and sheer euphoria abound, then it’s time to quietly take the other side of the public’s bet. And the unchanging human nature (helped along by the ministrations of the inflationists) ensures that after the bust <a href="http://www.mackensen.com/you-should-know/cycle-of-market-emotions-graphic.cfm" target="_blank">the cycle is going to repeat</a>.</div>
<div align="justify">
<br /></div>
<div align="justify">
<a href="http://en.wikipedia.org/wiki/Extraordinary_Popular_Delusions_and_the_Madness_of_Crowds" target="_blank"><em>Extraordinary Popular Delusions and the Madness of Crowds</em></a><em> </em>offers to the interested reader a colourful account of some of the most incredible historical episodes of collective folly. Doug French’s book <a href="http://mises.org/Books/bubbles.pdf" target="_blank"><em>Early Speculative Bubbles and Increases in the Supply of Money</em></a><em> </em>analyses the underlying economic causes of some of those same phenomena from an Austrian perspective. <a href="http://en.wikipedia.org/wiki/The_Crowd:_A_Study_of_the_Popular_Mind" target="_blank">Gustave Le Bon’s</a> and <a href="http://books.google.com/books/about/The_Art_of_Contrary_Thinking.html?id=Oohmhovo588C" target="_blank">Humphrey B. Neill’s</a> works are nice companions to the above books.</div>
<div align="justify">
<br /></div>
<div align="justify">
<strong><em>5. Extensive News coverage / Outlandish predictions</em></strong></div>
<div align="justify">
<strong><em><br /></em></strong></div>
<div align="justify">
A useful rule of thumb is: whenever something has gone up so much that it makes for rosy newspaper headlines, then it’s time to sell it. </div>
<div align="justify">
The mainstream media are usually the last ones to jump on the aforementioned <em>bandwagon</em>: they need exciting stories that cater to a large audience, hence they all follow the latest fads. To make their products even more enticing, they generally add generous helpings of hype. </div>
<div align="justify">
It follows that the end of a bull run is usually accompanied by armies of cheerfully bullish journalists who regurgitate the most trite arguments to justify their (or some expert’s) shameless predictions, which usually prove to be just a stinky pile of rubbish. For a recent example, please watch <a href="http://finance.yahoo.com/blogs/daily-ticker/stocks-rallied-soon-headed-down-161007336.html" target="_blank">this video</a> (we want to warn our readers: even people with only half a brain will likely find it extremely annoying).</div>
<div align="justify">
<br /></div>
<div align="justify">
<strong><em>6. The initial trend change is met with scepticism (buy-the-dip mentality)</em></strong></div>
<div align="justify">
<strong><em><br /></em></strong></div>
<div align="justify">
Since in the public’s mind a raising market can only go higher, all sell-offs and corrections are viewed as opportunities to get in. This belief has been reinforced during the course of the entire bull market, where all sell-offs and corrections were indeed opportunities. Unfortunately, this fails to hold true at the top, where <em>distribution</em> takes place: early participants (astute investors) sell their stakes to latecomers (your proverbial dentist). Countless investors have been ruined by buying one dip too much. </div>
<div align="justify">
This phenomenon is also due to the fact that the euphoric mental state that we discussed above acts as a filter that automatically prevents people’s brains from contemplating negative outcomes. Pride, the desire to be right and blind hope contribute to it as well. </div>
<div align="justify">
It’s important to note, however, that this generally happens only at the end of major bull runs in stocks, since commodities have the pesky attitude of crashing much more swiftly.</div>
<div align="justify">
<br /></div>
<div align="justify">
<strong><em><span style="font-size: medium;">Conclusion</span></em></strong></div>
<div align="justify">
<strong><em><span style="font-size: medium;"><br /></span></em></strong></div>
<div align="justify">
We hope to have provided our readers with a brief, to-the-point list of phenomena that usually accompany the end of a bull market. We’ll leave it to them to ascertain in which markets it is today possible to find all or most of them busily at work. </div>
<div align="justify">
We want to stress that these are helpful yet imprecise tools: they can’t endow an investor with the ability to spot exact tops; they can however help him in identifying approximate turning points, or at the very least moments when the risks of buying something greatly outweigh the prospective returns. </div>
<div align="justify">
<a href="http://www.oaktreecapital.com/MemoTree/Ditto.pdf" target="_blank">Howard Marks’s last letter to his clients</a> does a great job at explaining both the difficulties and the importance of being a contrarian: we suggest our readers save the PDF and peruse it every time they feel compelled to run with the herd. In investing what feels comfortable is rarely profitable and as the brilliant <a href="http://www.seykota.com/tt/" target="_blank">Ed Seykota</a> once said “If comfort is your goal, stop trading.”</div>
The Rothbardian Investorhttp://www.blogger.com/profile/09722598347527860060noreply@blogger.com0tag:blogger.com,1999:blog-1699632643928019839.post-11647276003953494242013-01-21T11:14:00.001+01:002013-01-22T09:03:56.328+01:00The Yen: a Contrarian’s Wet Dream<br />
<div align="justify">
The objective of this post is to clearly delineate the reasons behind our recent Yen bullishness and to explain why we think buying it against the Australian and New Zealand dollars is likely to prove a very profitable and relatively safe speculation. We need however to immediately point out that everything we are going to write below is conditional upon the Bank of Japan continuing to do what it has always done (and what we think is likely to continue to do), namely to say one thing and then do another (or slowly do just a little of that one thing). In case the demented Abe is capable of fully enforcing his delirious inflationary views on the BoJ, then dear readers brace yourselves and prepare for the Misesian “disastrous bull market”… This is the main reason why we advocate implementing the trade with a judicious use of call options on the Yen (or put options on the Aussie and Kiwi), as they both buy us time and protect us from unwanted catastrophic scenarios that, although unlikely, could nonetheless materialize. With the above in mind, let’s begin our analysis.<br />
<br /></div>
<div align="justify">
<strong><em><span style="font-size: medium;">The Fundamental Backdrop</span></em></strong><br />
<strong><em><span style="font-size: medium;"><br /></span></em></strong></div>
<div align="justify">
<em><strong>A) Japan’s Money Supply growth is both modest and lower than that of other major currency blocks</strong></em><br />
<em><strong><br /></strong></em></div>
<div align="justify">
Leaving aside temporary phenomena which might impact it, the long-term value of a currency is mainly determined by its supply and demand dynamics: in the end it will tend towards the level where demand and supply converge. So the main question an investor has to ask himself is: what is the current supply/demand <em>status quo</em> and how it is likely to be impacted by future developments?</div>
<div align="justify">
We won’t cover here all the factors influencing the demand side, apart from briefly mentioning that during periods of economic turmoil society’s <em>reservation demand for money </em>(see Rothbard, “Man, Economy and State with Power and Markets” - Chap. 11) tends to sharply increase (as a reflection of the increased uncertainty market participants face). Of course such demand will tend to focus on those forms of money which, correctly or not, market participants perceive to be of highest quality. This is the formal explanation behind the <em>safe haven</em> trade and the reason why during the last crisis the Yen and the Dollar benefited handsomely at the expense of other, less trusted, currencies like the Euro. We will instead focus on the supply side.</div>
<br />
<a href="http://lh6.ggpht.com/-bkW3bJlmpHo/UP0TrcR7NeI/AAAAAAAAAGI/XeBQDfbymmI/s1600-h/TMSComparison3.gif"><img alt="TMSComparison" border="0" height="484" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgEeyjlDXHdCqBha5A0FyXjKrmuoVAlCZ8aNzknZ19CByuFOjz4wtlhYB4_AYbUiuxh8dWsmzVX1r2U_GrVoHpTQ7luRWe4z4ERRaefu7NfrbYEhQLwI4mH-n76tT12OmKZ5gxojRXpbg4/?imgmax=800" style="background-image: none; border-bottom-width: 0px; border-left-width: 0px; border-right-width: 0px; border-top-width: 0px; display: block; float: none; margin-left: auto; margin-right: auto; padding-left: 0px; padding-right: 0px; padding-top: 0px;" title="TMSComparison" width="523" /></a><br />
<div align="center">
<em>Japan’s True Austrian Money Supply as calculated by <a href="http://blogs.forbes.com/michaelpollaro/" target="_blank">Michael Pollaro at The Contrarian Take</a>.</em><br />
<em><br /></em></div>
<div align="justify">
As can be seen in the chart above, sourced from <a href="http://blogs.forbes.com/michaelpollaro/" target="_blank">the highly recommended blog of Michael Pollaro</a>, Japan’s True Austrian Money Supply growth has been muted in recent years (readers interested in learning what this money supply measure contains and why, as well as in which respect it differs from commonly used metrics like M1 and M2, can do so <a href="http://blogs.forbes.com/michaelpollaro/austrian-money-supply-definitions-sources-notes-and-references/" target="_blank">here</a> and <a href="http://blogs.forbes.com/michaelpollaro/money-supply-metrics-the-austrian-take/" target="_blank">here</a>). Even more importantly, given that currencies do not trade in a vacuum but rather against each other, it has been consistently lower than those of other important currency blocks like the U.S., the Euro area and the U.K (not shown in the chart above and yet important to mention is the fact that BoJ’s credit has only recently reached its old 2005 peak, whilst other central banks have tripled, quadrupled or even quintupled their credit since the beginning of the financial crisis).</div>
<div align="justify">
There are two main reasons as to why this has been (and may well continue to be) the case: on the one hand, the BoJ has been reluctant in injecting large doses of newly created money into the economy, notwithstanding all their posturing; on the other hand Japanese banks have been more than happy to grab the chance to engage in massive deleveraging (a.k.a. credit contraction), thus counterbalancing to a large extent the effect of money printing (it should be noted here that inflation is correctly defined as an increase in the supply of money <em>and money substitutes</em>). Going forward, the second factor is likely to remain unaltered, given that the sorry state of the Japanese economy and the increasing likelihood of a globalized slowdown mean that banks are probably going to be unwilling to extend new credit (please see chart below). So the question becomes whether the BoJ will truly print enough to overcome the deflationary effect of credit contraction and to outdo its competitors in the mindless race to devalue (on this last point please see our paragraph below). We are inclined to think that much of what we’ve heard so far is little more than political manoeuvring and that in the end they won’t seriously alter the status quo lest they may finally wreck the ship, given that Japan’s precarious position does not allow much if any room for “funny money” experiments. The BoJ’s meeting this week will give us some clues as to the likely direction they’ll take, although the actual implementation of their programs is what matters most.<br />
<br /></div>
<div align="justify">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgYOb6BzM9Fe2jxtWjdROMiGVUgNBsO0YkRuZ53OFhkzBBdylo5qBJn5J00U2_56ifP3uqFqCID7yj_zU8ZYrfFTD3rIwUbHWWhDa1S9cIIhUMWjsRF3wAsM4IqkJUvasbNLJqfhmIH8HM/s1600-h/japan-loans-to-private-sector3.png"><img alt="japan-loans-to-private-sector" border="0" height="274" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgbbH3qfMBw4WviOcjV9ZmUZP1Zb6LCYdD8rIudc4Qhspi78icuKs2YqoyAEyRUOHM_exV4i0HK-avTqXB4kZQ2PPMz4-H7hZka-erjjYltArte3UIMmOXgxxiOiPLxGlDrPKcc6yqV5l4/?imgmax=800" style="background-image: none; border-bottom-width: 0px; border-left-width: 0px; border-right-width: 0px; border-top-width: 0px; display: block; float: none; margin-left: auto; margin-right: auto; padding-left: 0px; padding-right: 0px; padding-top: 0px;" title="japan-loans-to-private-sector" width="644" /></a></div>
<div align="center">
<em>A chart showing first the decline and then the almost non-existent growth of credit in Japan, via <a href="http://www.tradingeconomics.com/" title="http://www.tradingeconomics.com/">http://www.tradingeconomics.com/</a>.</em></div>
<div align="center">
<br /></div>
<div align="justify">
We recommend our readers to have a look at <a href="http://blogs.forbes.com/michaelpollaro/files/2013/01/RTMSJapan-1-15.pdf" target="_blank">all of Michael Pollaro’s charts on Japan’s True Austrian Money Supply</a> as well as <a href="http://blogs.forbes.com/michaelpollaro/austrian-money-supply/" target="_blank">his work on other currency blocks</a>. We also suggest reading <a href="http://online.wsj.com/article/SB10001424127887324081704578231060875316852.html" target="_blank">this WSJ article</a>, in which the author points out that Abe’s inflationist policies might upset some powerful sectors of the business establishment (not to mention many other innocent people as well as the poor chaps at the bottom of the economic ladder, who always suffer the most from such insanity). Incidentally, this has so far been the only mainstream article we have been able to find which didn’t contain gloomy predictions about the Yen’s imminent demise and which didn’t simply regurgitate some expert’s opinion about why shorting the Yen is going to be the greatest thing since sliced bread…<br />
<br /></div>
<div align="justify">
<strong><em>B) Other Countries are unlikely to let themselves be outprinted by the BoJ</em></strong><br />
<strong><em><br /></em></strong></div>
<div align="justify">
We have already mentioned the fact that so far the BoJ has shown remarkable temperance in its money printing (and that other central banks have not), but should they decidedly change course, what are other countries going to do? Are they going to let themselves be “outprinted” by these latecomers in the inflation game? On this topic we can do no better than pointing our readers to <a href="http://www.acting-man.com/?p=21391" target="_blank">this excellent article</a> written by <a href="http://www.acting-man.com/" target="_blank">the always excellent Pater Tenebrarum</a>, which closely mirrors our own views and even includes a nice <em>haiku </em>for the discerning reader. It appears clear to us that the fallacious and highly damaging <em>mercantilist </em>approach is going to be embraced (or has already been embraced) by most nations, thus making any devaluation attempt on the part of the BoJ unlikely to succeed (particularly if half-hearted).<br />
<br /></div>
<div align="justify">
<strong><em>C) The influence of Capital Repatriation (i.e. carry trade and Japanese overseas investments)</em></strong><br />
<strong><em><br /></em></strong></div>
<div align="justify">
This point analyses in more detail one of those temporary phenomena which might impact the value of a currency: the sudden shift of large amounts of capital from one currency block to another. As we have already witnessed during 2008, when a serious, unexpected crisis strikes, massive quantities of money, which previously headed, during the course of many months or even years, in a certain way, are quickly moved back in the opposite direction, thus causing extremely powerful trends in the currency cross involved. This can be likened to the effect that suddenly opening the floodgates of a large dam has on the underlying brook.</div>
<div align="justify">
In the case of the Japanese Yen, we think there are at least two factors which might contribute to this phenomenon materializing: the infamous <em>carry trade</em> and the repatriation of foreign holdings on the part of Japanese investors.</div>
<div align="justify">
The former is certainly no longer as large as it once used to be, both because many speculators got badly burned during its 2008 dramatic unwind and because the spread amongst yields has been steadily diminishing. However, the fact that the <em>hunt for yield</em> has become even more desperate and the stable if mild uptrend which many risk currencies (like the AUD or the NZD) enjoyed against the Yen since the post-crisis rebound of 2009 might have induced at least a modest resurgence of this phenomenon. A generally low level of forex volatility that reached its apex during last summer probably also played an encouraging role. It’s important to note that this is only speculation on our part, as we do not have any concrete evidence to back our claims.</div>
<div align="justify">
The latter factor, on the other hand, has in our opinion the potential to generate the kind of outsized forex move we’re looking forward to. Japanese investors hold a staggering $3.3 trillion of foreign assets, which amounts to roughly 55% of their annual GDP. The Ministry of Finance holds approximately $1.27 trillion in exchange reserves, whilst the remaining $2 trillion are held by the private sector. During a crisis, either out of fear or out of necessity, some of these holdings are liquidated and the proceeds repatriated: this has an obvious boosting effect on the Yen. This is exactly what happened during the spring/summer of 2011: both the massive earthquake that shattered Japan in March and the mini bear market that shook global markets during the summer induced <em>capital flight </em>and thus generated a quite powerful rally in the Yen, <em><a href="http://www.bloomberg.com/news/2011-05-13/fed-bought-1-billion-of-u-s-currency-during-march-g-7-yen-intervention.html" target="_blank">which took place notwithstanding a globalized manipulative effort to the contrary on the part of the G-7</a> </em>(which was capable only of producing a temporary spike in late March of 2011). We expect this to happen again, only on a much larger scale, during <a href="https://www.blogger.com/therothbardianinvestor.blogspot.com/2013/01/2013-comeback-of-stock-bear.html" target="_blank">the coming bear market</a>.</div>
<div align="justify">
As to why we chose Australia and New Zealand as the main counterparties to our long Yen campaign (apart from the specific reasons outlined in the paragraph below), please consider the following: roughly 80% of Australian government bonds and 70% of Australian corporate bonds are owned by foreign investors (sources <a href="http://www.imf.org/external/pubs/ft/wp/2012/wp12158.pdf" target="_blank">here</a> and <a href="http://www.rba.gov.au/publications/rdp/2012/pdf/rdp2012-09.pdf" target="_blank">here</a>); the situation in New Zealand in not much different, with <a href="http://www.rbnz.govt.nz/statistics/govfin/d0/data.html" target="_blank">62% of government securities now held by foreigners</a>. We suspect this is going to have a huge negative impact on their currencies in case of a global crisis. The icing on the cake is that <a href="http://www.abs.gov.au/ausstats/abs@.nsf/Latestproducts/5352.0Main%20Features2Calendar%20Year%202011?opendocument&tabname=Summary&prodno=5352.0&issue=Calendar%20Year%202011&num=&view=" target="_blank">Japan’s investments in Australia total more than $123 billion and account for 6% of all foreign investments in the country (placing Japan firmly in the third place, behind the U.S. and the U.K.)</a>. <a href="http://www.crikey.com.au/2011/03/17/maley-japans-australian-bond-abandon/" target="_blank">Almost half of this sum is invested in Aussie bonds, in a desperate hunt for yield</a>. <a href="http://www.theaustralian.com.au/business/economics/nikko-to-feed-japanese-taste-for-aussie-bonds/story-e6frg926-1226422941262" target="_blank">There are signs that this phenomenon is accompanied by dangerously high levels of complacency and euphoria</a> ("If you think there's been a lot of investment from Japan in Australia so far, just you wait and see," Mr Beazley said. "The Australian economy looks and feels extremely secure."). Finally, <a href="http://www.reuters.com/article/2012/12/27/us-japan-funds-idUSBRE8BQ04O20121227" target="_blank">the traditionally risk-averse Japanese individual investors have recently started to become excited about the U.S. and other foreign equity markets</a>, exactly at a time when caution would be advised.<br />
<br /></div>
<div align="justify">
<strong><em>D) A Brief Introduction to the Australian Bubble</em></strong><br />
<strong><em><br /></em></strong></div>
We will now briefly cover the main reasons which stand behind our calling Australia a bubble.<br />
<br />
<em>1. Brisk monetary growth, both in absolute terms and when compared to other countries:</em><br />
<em><br /></em>
<a href="http://lh5.ggpht.com/-VtV8lgjhfmg/UP0TwwPENeI/AAAAAAAAAGo/-b6vdicxkCg/s1600-h/M1Index3.png"><img alt="M1Index" border="0" height="388" src="http://lh4.ggpht.com/-A7XdMyVcxl4/UP0TyqfUBeI/AAAAAAAAAGw/Kej-RANDKFA/M1Index_thumb1.png?imgmax=800" style="background-image: none; border-bottom-width: 0px; border-left-width: 0px; border-right-width: 0px; border-top-width: 0px; display: block; float: none; margin-left: auto; margin-right: auto; padding-left: 0px; padding-right: 0px; padding-top: 0px;" title="M1Index" width="644" /></a><br />
<div align="center">
<em>The hallmark of all bubbles: monetary growth. M1 in Australia, the U.S. and Japan, indexed at 100 in January 2005.</em><br />
<em><br /></em></div>
<div align="center">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEghufCG7jWZVU0jT6n2WJ1LSr7QUiVS8AgzVhfb-3TAi-_AL-Ydm__ffIxT9E1YwsLRJEFGnJgX-hTiWv6_7tQeqK6ctfHxWq0LSSijghyphenhyphensHz990jCcYhbHPcIipdtEG01px42mEyTliXk/s1600-h/M1Comparison2.png"><img alt="M1Comparison" border="0" height="382" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh92-91wJAoLKNPPdrtfIwQ4x6Sr5Z9ZUi32Ta0V_-8TjQm8578RfthKEP2Gzn1PLw78jJfCyJ6p2QiQiLnA_BG2vJa1pTzBcAvGc_LA0Gxy0xmsMPE6PKRzJRfwrDtO6E5UEdXcRNO9wQ/?imgmax=800" style="background-image: none; border-bottom-width: 0px; border-left-width: 0px; border-right-width: 0px; border-top-width: 0px; display: inline; padding-left: 0px; padding-right: 0px; padding-top: 0px;" title="M1Comparison" width="634" /></a></div>
<div align="center">
<em>A long-term chart showing the annual percentage changes in M1 for the same three countries. Australia has often led the way.</em><br />
<em><br /></em></div>
<div align="justify">
It appears clear from the charts above that there has been remarkable inflation going on in Australia for at least two full decades and we know that with inflation malinvestments and capital consumption inevitably occur. Japan on the other hand has certainly been the least bad of the group, something which we already remarked above <em>[Ed. Note: since we do not have True Money Supply statistics for Australia, we are using M1, which acts as a decent proxy.]</em>.<br />
<br /></div>
<div align="justify">
<em>2. Large amounts of debt, mainly concentrated in the household sector:</em><br />
<em><br /></em></div>
<div align="justify">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjMHlRgL035SjhlTtR-grwTml9Oejgq0SyaP29r7pBhu2CW1ybiWN-XEJC3QfxyDUI1IkO1k14JPxqv4nL7h1HH4EltVFEd-uJuJ0_PopGRGtVqZyEUO77XT_58mvqRakgrbjOcM77IXGY/s1600-h/HouseholdDebt3.png"><img alt="HouseholdDebt" border="0" height="388" src="http://lh3.ggpht.com/-EpPzLigvJFE/UP0T5y7ipwI/AAAAAAAAAHQ/u8wzUFtKX1U/HouseholdDebt_thumb1.png?imgmax=800" style="background-image: none; border-bottom-width: 0px; border-left-width: 0px; border-right-width: 0px; border-top-width: 0px; display: block; float: none; margin-left: auto; margin-right: auto; padding-left: 0px; padding-right: 0px; padding-top: 0px;" title="HouseholdDebt" width="644" /></a></div>
<div align="center">
<em>Household debt as a percentage of GDP: higher than in the U.S.</em></div>
<div align="justify">
<br /></div>
<div align="justify">
Australian households are buried in debt: if the economy barely sneezes, they’ll get pneumonia. In this context, it’s worth nothing that the latest PMI reading (December 2012) came in at 44.3, marking the 10th consecutive month of contraction, and that the overall picture painted by the report is rather bleak: interested readers can find more info <a href="http://www.aigroup.com.au/portal/binary/com.epicentric.contentmanagement.servlet.ContentDeliveryServlet/LIVE_CONTENT/Economic%2520Indicators/PMI/2012/12483_pmi_dec_12_web.pdf" target="_blank">here</a>.<br />
<br /></div>
<div align="justify">
<em>3. The always-present real estate bubble:</em><br />
<em><br /></em></div>
<div align="justify">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_Q5cUxYYCMOdeCmJk5xLyzkWjvIo3TrX0P5243oTcoDcKkWynrIJ-v-ySCgA7b7HRAm_m1xBjz_se2g9QsLytogNaCwSx9EcjEV8y6ErKxJayrJYbn18V7y1K2y83oxLnu3KPL2-G2bw/s1600-h/Global-house-prices_-Clicks-and-mort.jpg"><img alt="Global house prices_ Clicks and mortar _ The Economist" border="0" height="407" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhcsPib4d1f24BkZQlb0u9XASJNzWzQUyKEkzw_CIJkjfjfbXCpffxTOOCIN86TbfnbBruBhA3G0Y_wLgp1eiL7LhHTTCq6xchrkKpTrKnjYh0ogqkSIINyf_gx0vDwvCKgIo_2i97lOjk/?imgmax=800" style="background-image: none; border-bottom-width: 0px; border-left-width: 0px; border-right-width: 0px; border-top-width: 0px; display: block; float: none; margin-left: auto; margin-right: auto; padding-left: 0px; padding-right: 0px; padding-top: 0px;" title="Global house prices_ Clicks and mortar _ The Economist" width="644" /></a></div>
<div align="center">
<em>House prices in Australia, U.K., Canada, Spain, Japan and the U.S. via <a href="http://www.economist.com/blogs/freeexchange/2011/03/global_house_prices" target="_blank">The Economist</a>.</em><br />
<em><br /></em></div>
<div align="center">
<a href="http://lh5.ggpht.com/-vz1f0HfcKxc/UP0T9K23ACI/AAAAAAAAAHo/XNwGZXiaB9w/s1600-h/HousingGlobalPropertyGuide3.jpg"><img alt="HousingGlobalPropertyGuide" border="0" height="484" src="http://lh5.ggpht.com/-5myGDibFKPk/UP0T-iaBF_I/AAAAAAAAAHw/VdzagRO25F8/HousingGlobalPropertyGuide_thumb1.jpg?imgmax=800" style="background-image: none; border-bottom-width: 0px; border-left-width: 0px; border-right-width: 0px; border-top-width: 0px; display: inline; padding-left: 0px; padding-right: 0px; padding-top: 0px;" title="HousingGlobalPropertyGuide" width="624" /></a></div>
<div align="center">
<em>Year over Year % change in real estate prices in Australia, via <a href="http://www.globalpropertyguide.com/" target="_blank">Global Property Guide</a>.</em></div>
<div align="justify">
<br /></div>
<div align="justify">
It’s quite obvious that there’s a massive property bubble in Australia. Other indicators looking at affordability (namely price to income and price to rent ratios) also signal massive overvaluation. Mortgages account for a large part of the astronomically high household debt <em>[Ed. Note: readers can find some interesting info <a href="http://www.debtdeflation.com/blogs/2012/08/02/australian-house-prices-update-june-2012/" target="_blank">here</a>. We also think that the whole blog is worth keeping an eye on.]</em>. When will this bubble pop, as they all inevitably do? We wouldn’t rule out it’s already in the process of deflating, given that we’ve had <a href="http://www.bloomberg.com/news/2013-01-02/australia-home-prices-drop-for-second-year-as-consumers-cautious.html" target="_blank">two years in a row of declining prices</a> (recall how in the U.S. prices topped in 2005, roughly two to three years prior to the actual <em>bust</em>) accompanied by declining sales in both the <a href="http://www.theaustralian.com.au/business/property/new-homes-going-up-as-retail-sales-slide/story-fn9656lz-1226550711352" target="_blank">residential</a> <em>[Ed. Note: forget the mindless babbling of the article’s author and instead just focus on the chart at the top of the page.]</em> and <a href="http://www.bloomberg.com/news/2013-01-14/australia-commercial-property-sales-slump-on-economy-cbre-says.html" target="_blank">commercial</a> sectors. Moreover, point 4 below might prove to be the prick that this floating balloon needs so badly.<br />
<br /></div>
<div align="justify">
<em>4. Australia’s fate is highly dependent on China:</em><br />
<em><br /></em></div>
<div align="justify">
Exports to China constitute roughly 29% of all Australian exports, with Iron Ore accounting for more than half of the total, with Coal, Gold and Oil distant followers (all data sourced <a href="http://www.dfat.gov.au/geo/fs/chin.pdf" target="_blank">here</a>). It’s not difficult to envision what would happened in case the much-talked-about Chinese hard landing materialized. As a side note, we’re highly sceptical of the Chinese boom as well, given that it’s built on the shaky foundations of money and credit inflation, coupled with massive state intervention in the economy (which all result in malinvestments and capital consumption). Curious readers could embark on their own research on the topic: we’ll just mention that ghost cities are amongst our favourite manifestations of the massive misallocations and imbalances currently plaguing China, <em>mercantilist extraordinaire.</em><br />
<em><br /></em></div>
<div align="justify">
<strong><em><span style="font-size: medium;">Technicals, Sentiment and Positioning</span></em></strong><br />
<strong><em><span style="font-size: medium;"><br /></span></em></strong></div>
<div align="justify">
From a technical perspective, the Yen is severely oversold and incredibly stretched below its long-term moving averages (like e.g. the 200-day simple moving average):</div>
<div align="justify">
<br /></div>
<div align="justify">
<a href="http://lh6.ggpht.com/-hpvafZrria4/UP0T_zXJuwI/AAAAAAAAAH4/ecl6RzZyvTU/s1600-h/yen%25255B3%25255D.png"><img alt="yen" border="0" height="484" src="http://lh6.ggpht.com/-5w7zI9qHmPY/UP0UBe5XA8I/AAAAAAAAAIA/7hqRG_W05e4/yen_thumb%25255B1%25255D.png?imgmax=800" style="background-image: none; border-bottom: 0px; border-left: 0px; border-right: 0px; border-top: 0px; display: block; float: none; margin-left: auto; margin-right: auto; padding-left: 0px; padding-right: 0px; padding-top: 0px;" title="yen" width="638" /></a></div>
<div align="center">
<em>A chart showing the Japanese Yen Index, via <a href="http://stockcharts.com/" title="http://stockcharts.com/">http://stockcharts.com/</a>.</em></div>
<div align="justify">
<br /></div>
<div align="justify">
It’s important to note that the index above tracks the movements of the Yen against a basket of currencies and that the levels reached against certain currencies (like e.g. the Euro, the AUD, the MXN and the NZD) are even more extreme.</div>
<div align="justify">
<br /></div>
<div align="justify">
<a href="http://lh4.ggpht.com/-DfFRly2JFhs/UP0UCjpEstI/AAAAAAAAAII/TeGwJW1R5F0/s1600-h/JY%25255B3%25255D.png"><img alt="JY" border="0" height="445" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhE3iS4Aq0zOWvrNP0FssBDVcY5wEq9eGT_0voI0oCjPa26_VmISxTpwiUUbrxh3aL_44R4zRH0lw3DtDg-0Dt9PdVte9-ZiSXMhZzzVywBB9G60v2eN5n3EkHmszehyLUC9uTJFl8sR2Y/?imgmax=800" style="background-image: none; border-bottom: 0px; border-left: 0px; border-right: 0px; border-top: 0px; display: block; float: none; margin-left: auto; margin-right: auto; padding-left: 0px; padding-right: 0px; padding-top: 0px;" title="JY" width="644" /></a></div>
<div align="center">
<em>Yapanese Yen Futures Positioning, via <a href="http://www.cotpricecharts.com/" title="http://www.cotpricecharts.com/">http://www.cotpricecharts.com/</a>.</em></div>
<div align="justify">
<br /></div>
<div align="justify">
Positioning in the futures market is also remarkably elevated, with small speculators holding a record amount of shorts and large speculators’ shorts at a multi-year high (significantly higher levels were recorded during the summer of 2007, right at the peak of an egregious bubble and at a time when the carry trade was still buoyant). It’s worth mentioning that this is accompanied by opposite extremes in AUD and MXN positioning, thus showing a propensity toward risk-taking and generalized complacency. We briefly mention here that record CoT readings in risk-on and risk-off currencies usually provide very reliable contrary signals on the stock market as well.</div>
<div align="justify">
Finally, sentiment on the Yen lies at multi-year (possibly all-time) lows, with <a href="http://www.sentimentrader.com/" target="_blank">Sentimentrader</a>’s Public Opinion Survey showing only 16.5% of bulls, after having spent quite some time in the below-neutrality zone. Moreover, the Yen is universally hated: we have yet to see somebody who is not bearish on it. Pundits and talking-heads as well as many self-appointed experts have all been quick to point out how the currency is doomed, how shorting it is going to be the best trade of 2013 (when in fact it most likely was one of the best trades of 2012...), how the BoJ will inflate <i>ad infinitum </i>etc. As the heading of <a href="http://theshortsideoflong.blogspot.com/" target="_blank">one of our favourite blogs</a> reads: "When it's obvious to the public, it's obviously wrong."</div>
<div align="justify">
The conclusion is clear: rarely have we seen such extremes and they have never proved to be the hallmark of a sustainable trend.<br />
Moreover, an investor has always to ask himself: what is the market already discounting? It appears to us that in this specific case the market has already priced in many negative developments, some real some most likely not, leaving ample space for positive surprises.<br />
<br /></div>
<div align="justify">
<strong><em><span style="font-size: medium;">Conclusion</span></em></strong><br />
<strong><em><span style="font-size: medium;"><br /></span></em></strong></div>
<div align="justify">
We are very bullish on the Yen and we are convinced that the best way to position ourselves is to buy it against fundamentally weak currencies like the Aussie Dollar. The important <em>caveat </em>is that the mental Abe could really wreak havoc on the country and consequently on its currency, given that Japan truly is just a little inflation away from total disaster. We always prompt our readers to engage in their own research. In our next post, we’ll discuss how secular bull markets generally end and which common traits they tend to share at such a juncture: as you’ll see, the Yen currently displays none of them.<br />
<br />
<span style="font-size: medium;"><b><i>Addendum</i></b></span><br />
<span style="font-size: medium;"><b><i><br /></i></b></span>
The BoJ set a 2% inflation target and embraced open-ended asset purchases: we have to confess that we are rather pleased to see this outcome, given that on the one hand it deprives the hallucinated Abe of the possibility to attack the Bank and on the other it gives the Bank itself the flexibility to decide how much and when to print (whereas a fixed monetary goal would have forced them to act and would have always elicited calls to "do more"). Moreover, there wouldn't be any additional money printing until 2014. We'll now have to watch like hawks how this new program is implemented (and whether the appointment of the new BoJ governor in April will change the landscape significantly), as this is what really matters: should the BoJ really print <i>ad infinitum</i>, then it would be game over; should they decide to continue to deliver only a<i> modicum </i>of money printing now and then, as they've always done, then the secular Yen bull market should resume its advance. So far the market's reaction gives us cause for optimism: at least a short to medium term rebound is likely in the cards, as too many jumped too quickly on the short yen boat.</div>
The Rothbardian Investorhttp://www.blogger.com/profile/09722598347527860060noreply@blogger.com0tag:blogger.com,1999:blog-1699632643928019839.post-32782526549347750532013-01-14T12:54:00.001+01:002013-01-15T10:22:29.364+01:00A Technical Interlude<div align="justify">
What’s better than starting the week sipping a nice cup of espresso, carefully sweetened by the addition of some sugar <em>[Ed. Note: we actually like our coffee as it is and think that sugaring it should be made an offence punishable by death.]</em>? Starting the week buying some coffee and sugar futures, that’s what!</div>
<div align="justify">
With this post, we will provide a brief technical summary of these two markets, which in our opinion may be ripe for a buy. We won’t address their fundamental backdrop: suffice it to say that from a mid-to-long-term perspective we’re very bullish on sugar whilst we have mixed feelings on coffee. As a matter of fact, we’re convinced that sugar has not yet made its bull market high (i.e. we expect it to go higher than the 35c$/lb level reached at the beginning of 2011). Coffee on the other hand may have already had its blow-off top in May of 2011. Moreover the technical position of the former appears to us stronger than that of the latter. Finally, secular bear markets in equities tend to coincide with secular bull markets in the whole commodities complex (as opposed to specific, strictly supply/demand-driven cyclical bulls in single markets or sectors, which can happen at any time). You can peruse <a href="http://therothbardianinvestor.blogspot.com/2013/01/2013-comeback-of-stock-bear.html" target="_blank">our post on stocks</a> to better understand our perspective on this last topic.<br />
<br /></div>
<div align="justify">
<strong><em><span style="font-size: medium;">Sugar</span></em></strong></div>
<br />
<div align="center">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh5FiHIwzeFPpPrdBLa9KGCAITyVy0oWcDOc_CMNaH3HkGyEWC-dKQ5uayuwBOcUoOhUg3NLiUyNvPbURHMHM_PytjuN4bVpTkibCcYdeSf2lyvsF4-KCdx8GUOtr4KOkmr_0rZ0fcDGnA/s1600-h/SugarChart9.jpg"><u><span style="color: #bc290f;"></span></u><img alt="SugarChart" border="0" height="483" src="http://lh5.ggpht.com/-8cyGzqoQBKk/UPPxtKl5gYI/AAAAAAAAAFE/-0kpYJPo_0g/SugarChart_thumb7.jpg?imgmax=800" style="border-width: 0px; display: block; float: none; margin-left: auto; margin-right: auto;" title="SugarChart" width="640" /></a> <em>A daily chart of the sugar price, constructed using <a href="http://www.blogger.com/www.stockcharts.com" target="_blank">Stockcharts</a>.</em></div>
<div align="center">
<em></em></div>
<br />
As we can see in the chart above, sugar has been constrained in a “falling wedge” pattern since its early 2011 top. This pattern tends to be resolved to the upside (i.e. it’s a bullish pattern). It’s important to consider that this current pattern represents a meaningful long-term development, given that sugar has been stuck in a rather brutal (-50% peak-to-current-trough) and persistent (two years and running) bear market. This fact also increases the likelihood that a significant bottom is either behind us (we are inclined to think that the 13/12/2012 wash-out low around 18.30c$ indeed marked such turning point) or just in front of us: as already stated, this is for us of utmost concern, as we always strive to enter positions at a time when we think that the actual risk is significantly smaller (and way less likely to manifest itself) than the potential return. <br />
Zooming in on recent action, we can notice that significant momentum divergences started to emerge approximately six months ago and continued to increase during recent declines, reinforcing our view that there simply isn’t any meaningful selling pressure left in the market. Both the CFTC Commitments of Traders data and <a href="http://www.sentimentrader.com/" target="_blank">Sentimentrader</a>’s sentiment survey seem to confirm this assumption. Except for a couple of short-lived spikes, the latter has been oscillating in the 25% to 50% zone for more than a year: this means that for a protracted period of time very few participants have been bullish on this market and the few that have have also been quick to become bearish at the first signs of trouble. Anecdotal evidence (i.e. news headlines) confirms an entrenched bearish mindset. The former (chart below) have registered a consistently low level of speculative longs (and a consequently low level of commercials’ shorts) since the end of this summer, recently reaching rather extreme readings (with small speculators’ shorts at record levels and large speculators’ and commercials’ positioning at opposite multi-year extremes). It’s worth noting that previous instances where market participants were similarly positioned gave rise at least to powerful rallies (see May 2012 as a case in point, although that period’s readings pale in comparison to the current ones). It is precisely this kind of prolonged despondency that generates new, powerful bull markets.<br />
<br />
<div align="center">
<a href="http://lh3.ggpht.com/-3lcjRxQ1UbY/UPPxuqB95kI/AAAAAAAAAFM/w5QalPaegxI/s1600-h/SugarCoT%25255B9%25255D.png"><img alt="SugarCoT" border="0" height="440" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjdv_Ldbt1csn2PbepX0oLcd9QigG1ro40PX_JuLJeIwxgUmbxJXXwH0DNIFiQKzU0mV9O-9MXgyyQOCPc_rm56p09-RbBSH47NDwYVkRqmsOtHgXgVqW4fbX-t-HTSOr2H1FBcludTMUo/?imgmax=800" style="border: 0px; display: block; float: none; margin-left: auto; margin-right: auto;" title="SugarCoT" width="640" /></a><em> 2012 Commitments of Traders data via </em><a href="http://www.cotpricecharts.com/" title="http://www.cotpricecharts.com"><em>http://www.cotpricecharts.com</em></a><em>.</em></div>
<div align="center">
<br /></div>
<div align="justify">
Finally, we can notice how price has been recently capped in its advances by the 50-day simple moving average, which also provided important support or resistance in the past. Although we’re already long sugar and are holding it as a long-term investment in our portfolio, the more technically inclined amongst our readers might want to wait for a convincing breakthrough above that level before committing to the long side. The previously mentioned low might act as a reasonable stop-loss level. A break-out above the important 20c$ level might also prove to be a good entry or adding point. However this is not really our cup of tea: we employ a different approach to risk management and to investing in general, but to each his own.<br />
<br /></div>
<div align="justify">
<strong><em><span style="font-size: medium;">Coffee</span></em></strong></div>
<div align="justify">
<br />
As we already mentioned, we have a few reservations about coffee, but they’re mainly confined to the realm of the long-term. From a short-to-medium-term technical perspective this market seems to us to offer an excellent trading opportunity.</div>
<div align="justify">
<br /></div>
<div align="center">
<em></em><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhfOIYU_l5UzkjfyGFbCI-A1TuFT50z2h16yVAU6TvdUSfFQuqMZzZ3TDHXz8jtQVbvwqjzj-ZdmjQNgfR7pGvPsJFJNoxdI92tMJ19qiHZytN5sS9N5BC3JH4e6jwTnEzVpYcPkF1UQow/s1600-h/CoffeeChart%25255B4%25255D.jpg"><img alt="CoffeeChart" border="0" height="483" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgDNrfUMz297TgXm0JNSxT_kG6JMb-QeuQlb87kGVZ8iSKkwfOx66PRgvN72Bryss6p-VmAzq7yQA2xQA1gRf0OUSw_K25OFNkV1FR8zAI3SZBJHokg9eUv_4ofzxRet45JkLhW-jAPEOo/?imgmax=800" style="border: 0px; display: block; float: none; margin-left: auto; margin-right: auto;" title="CoffeeChart" width="640" /></a> <em>A daily chart of coffee constructed using <a href="http://www.blogger.com/www.stockcharts.com" target="_blank">Stockcharts</a>.</em></div>
<div align="justify">
<br /></div>
<div align="justify">
As can be clearly noticed, many of the considerations made for sugar apply to coffee as well: a long-term falling wedge pattern (not as nice as the previous one though) accompanied by meaningful divergences in momentum. Sentiment and positioning also paint a bullish picture: the survey on coffee has recently registered a depressed reading of 15% bulls (currently 26%), after having been stuck in the below-50% zone since late 2011 (with this summer’s rally constituting the only exception). Positioning is also at extremes, with commercials holding a record amount of longs and large speculators providing the mirror image with a record amount of shorts. Small speculators are in a no-man’s land, meaning they aren’t overly exposed to either side of the market. More details can be found in the chart below:</div>
<div align="justify">
<br /></div>
<div align="center">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjGWMFLYLo1_EQeud5Zbn5NNRfMgxfRP0GwJCqDh_WWFl_jqHJ_ifgIDWDmzeTJ1wHe-JeuFaEdrV1cm6P0Wu-wYSNiBOrBr4gtVVJR7luk-IflIWjZ1dVXOIxNvmZVSDgDN6ygSLShP-A/s1600-h/CoffeeCoT%25255B4%25255D.png"><img alt="CoffeeCoT" border="0" height="440" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgNzZXqBVmV0VZYCbB3NW300SXe7RpmPUjWCTdwo7A7xvxA3SkzBZo7AIvGn7MrLrLJWgCQ1CxLtktBoQlhoLgQxoYPWF6-ZCKgIoP_tDRxiOsKeAkHsFvwEWSV6OykNjKQqEkKuVMMqrk/?imgmax=800" style="border: 0px; display: block; float: none; margin-left: auto; margin-right: auto;" title="CoffeeCoT" width="640" /></a><em>2012 CoT data for coffee via </em><a href="http://www.cotpricecharts.com/" title="http://www.cotpricecharts.com"><em>http://www.cotpricecharts.com</em></a>.</div>
<div align="center">
<br /></div>
<div align="justify">
Again, it’s worth noting that a prolonged period of extreme readings usually produces a much more powerful and lasting trend than an episodic spike.</div>
<div align="justify">
There is however something very important that differentiates coffee from sugar: the former has already broken above and rallied from its 50-day simple moving average and did so on a Friday (last one, to be precise) and with very convincing volume. Both of these are meaningful details: a powerful Friday break-out with a convincing close at the highs positively shapes the weekly chart and signals a strong commitment on the part of position traders (those willing to take their bets home with them for the weekend). It also signifies that <em>all contracts that were sold during the week were actually sold at a lower price: </em>this is bound to put significant pressure on many short-sellers and usually ensures at least a temporary follow through. And now enter volume: Friday’s volume on the March13 contract (the one currently traded) was the highest since rollover day (i.e. since the beginning of active trading). More importantly, it was higher than any previous down-day volume registered during the life of the contract (including both active and non-active periods). This not only shows the sheer buying pressure, but coupled with the surge from the 50-day SMA, over-qualifies Friday as a “pocket pivot buy point”. This is a concept developed by Chris Kacher and Gil Morales in their let’s-not-brag-about-our-successes book entitled “Trade like an O’Neil disciple (How we made 18,000% in the stock market)”: in the context of basing/bottoming patterns sudden, unexpected surges from or above important resistance levels or moving averages, accompanied by volume that is greater than the highest volume registered during the 10 previous down-days, often signal important changes in a market’s character and anticipate successful break-outs from the aforementioned patterns <em>[Ed. Note: although we have more than a few reservations about the Authors and their work, editorial and not, and our investing style is as far removed from theirs as possible, we found this specific concept to offer value and we do have included it in our arsenal to our satisfaction.]</em>.</div>
<div align="justify">
All of the above combines in making us think that coffee is a good buy at current levels, at least for the short-to-medium term. Technical traders might effectively manage their risk by placing their stop-losses either below Friday’s low/the 50-day SMA or somewhere around the recent 149/143c$ congestion area (the recent low at about 141.20c$ appears to distant to us).<br />
<br /></div>
<div align="justify">
<strong><em><span style="font-size: medium;">Conclusion</span></em></strong></div>
<div align="justify">
<br />
We’re bullish on both sugar and coffee, although we do favor the former, at least from a long-term perspective. We’re walking the talk by actually being long both markets, but we want to stress that for us these represent rather small positions opened with the main purpose of diversifying our portfolio and keeping it well balanced. They offer good potential, but they also offer risks and more importantly plenty of volatility, hence they are not good candidates for a large exposure. Again, we recommend readers to embark on their own research and to always fully “own” their trading decisions: the best way to escape from losses is not to escape from responsibility.</div>
The Rothbardian Investorhttp://www.blogger.com/profile/09722598347527860060noreply@blogger.com0tag:blogger.com,1999:blog-1699632643928019839.post-67782291025200743382013-01-09T21:05:00.001+01:002013-01-09T21:12:21.940+01:00A Brief Note on the Yen<div class="wlWriterEditableSmartContent" id="scid:0767317B-992E-4b12-91E0-4F059A8CECA8:21b0d4ce-ae6f-44bc-b4be-37d0de098aae" style="display: inline; float: none; margin: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">
We’re currently busy writing our second post, which will focus on the Japanese Yen. We can by no means be certain that the recent bout of selling has exhausted itself, but as we’ve stated we like to establish a position when we think that the long term potential of the trade trumps its short-term risks. Hence we’re buyers here. As to why this is the case, please find below a brief summary of the salient points, on which we’ll elaborate further during the course of our next post, which we expect to go live early next week.<br />
<br />
<em><span style="font-size: medium;"><b>Interesting Fundamentals</b></span></em><br />
<em><span style="font-size: medium;"><br /></span></em></div>
<div align="justify">
Inflation as properly defined (an increase in the supply of money and money substitutes) has been relatively tame in Japan, particularly when compared to the rates of growth achieved by the Federal Reserve and the ECB. This gives our bullishness a solid basis, at least until the Bank of Japan continues to refrain from implementing the “bold” (read reckless and ruinous) policies invoked by Abe (our contention, backed by actual facts, is that <em>so far nothing meaningful has really happened: traders just think it has</em>). When it comes to the next BoJ Monetary Policy Meeting, it seems to us that <em>the market has likely discounted at least both an increase in the size of the asset-purchase program and the adoption of a 2% “inflation” (we use the term here in its common fallacious meaning) target</em>. Imagine what could happen if they were going to disappoint… Even if the BoJ were to implement both, we think we could still witness a “sell the news” event. As for the long-term soundness of the trade, it’d need to be re-evaluated in light of the Meeting’s decisions, keeping in mind that <em>one thing is to “adopt a 2% inflation target” and another one is to actively print money at a high enough rate to achieve the Yen’s devaluation (keep in mind that it’s not so easy to outprint Bernanke)</em>. Moreover, we harbour more than a few doubts about the desirability of a weakening Yen (and the accompanying rising interest rates) and we suspect that these are shared by quite a few Japanese, including some powerful business leaders who could make their voices heard at the LDP’s headquarters (the fact is, if Abe is not a complete fool, like for example Hollande is, he’ll quickly reach the same conclusion without the need for any outside help).<br />
<br />
<em><span style="font-size: medium;"><b>Two different and somewhat interrelated catalysts</b></span></em><br />
<em><span style="font-size: medium;"><b><br /></b></span></em></div>
<div align="justify">
We suspect that in recent times there has been a resurgence of the infamous <em>carry-trade</em>, particularly in favour of what we like to call bubble currencies (the Aussie dollar is chief amongst them). This has likely been driven by the desperate and very risky <em>hunt for yield</em>, which has also produced the already mentioned collapse in the spread of risky bonds vs. treasuries <em>[Ed. Note: we can personally attest to this fact, as we’ve witnessed many European banks peddle Aussie bonds of questionable quality to unsuspecting customers. This is moreover confirmed by the worryingly high 80% of Australian government bonds and 70% of corporate bonds currently owned by foreigners.]</em>.</div>
<div align="justify">
The Japanese hold a massive 3.3 trillion $ in net overseas assets (of which roughly 1.3 trillion $ are foreign exchange reserves, whilst the rest is in the hands of the private sector), more than 50% of their annual GDP. What if they suddenly repatriate some of them (maybe because of a scary bear market in equities or a resurgence of the European debt crisis or a deepening recession at home)? We mention here e<em>n passant </em>that Japanese holdings of Australian and New Zealand bonds are rather large in both absolute and relative terms. This, coupled with the very real possibility of a sudden bursting of the Australian bubble and a few other considerations, makes us think that the best way to play the Yen is via the AUD/JPY and NZD/JPY crosses. A careful accumulation of long-dated put options might prove to be a savvy speculation, as they could allow the owner to withstand any further upside there might be left in these crosses whilst at the same time limiting his losses to a predetermined amount in case the BoJ really goes nuclear.<br />
<br /></div>
<div align="justify">
<em><span style="font-size: medium;"><b>Extremely oversold readings and one-sided Sentiment</b></span></em><br />
<em><span style="font-size: medium;"><br /></span></em></div>
<div align="justify">
The USD/JPY cross has not been so stretched above its 200-day simple moving average since at least 2005. This combines with many other measures and indicators into an extreme technical picture rarely seen and almost always destined to revert spectacularly. Countless pundits and self-appointed experts with a dubious track-record have been all over the news predicting nothing less than the total collapse of the Yen. Sentiment on the currency lies at multi-year (probably all-time) lows. There are also signs that Japanese investors have recently increased their exposure to foreign equities (mainly American ones): as they tend to be rather risk-averse, this may indicate an extreme degree of complacency in the markets and act as a contrary signal for stocks (reference <a href="http://therothbardianinvestor.blogspot.com/2013/01/2013-comeback-of-stock-bear.html" target="_blank">our post on equities</a> as well), which could in turn activate on of our hypothesized catalysts.<br />
<br />
<em><span style="font-size: medium;"><b>How Bull Markets end</b></span></em><br />
<em><span style="font-size: medium;"><br /></span></em></div>
<div align="justify">
We will also go through a brief list of the phenomena that usually accompany the end of secular bull runs, with the purpose of showing that none of them are currently present in this case. We’ll use Apple as a recent example of how such moves tend to end (although it’s important to note that not all of them reach the same mind-boggling extremes).<br />
<br />
<em><span style="font-size: medium;"><b>Conclusion</b></span></em><br />
<em><span style="font-size: medium;"><br /></span></em></div>
<div align="justify">
We are bullish on the Yen and we’re actively buying it. We cannot rule out further weakness (and in particular a test of the 90 zone against the USD), but we consider the risk/reward proposition to be good enough for us. Readers should always remember the importance of doing their own analysis and of proper position sizing and risk management strategies.</div>
The Rothbardian Investorhttp://www.blogger.com/profile/09722598347527860060noreply@blogger.com0tag:blogger.com,1999:blog-1699632643928019839.post-62459486349586109972013-01-08T16:01:00.001+01:002013-01-11T12:50:43.519+01:002013: The Comeback of the Stock Bear<h1>
<span style="font-size: medium;"><span style="font-weight: bold;"><em></em></span></span> </h1>
<h1 align="justify">
<span style="font-size: medium;"><span style="font-weight: bold;"><em>A brief introduction to our secular perspective</em></span></span></h1>
<div align="justify">
The purpose of this first post is not to give an in-depth look at market history or to discuss at length what the long-term macro picture is likely to be, but rather to provide a sound analysis of the current market situation. However, in order to better contextualize said analysis, we feel it’s important to make our readers aware of what our secular perspective is.</div>
<div align="justify">
We are of the opinion that a secular bear market in equities started in March 2000 (this opinion is probably shared by anybody who has not lived under a rock during the course of the last decade). Secular bear markets tend to last on average approximately 17 years and at their secular bottoms they tend to reach certain specific and depressed valuation levels which in turn give rise to new secular bull markets. As we shall endeavour to demonstrate during the course of this post, such depressed valuations levels have not only not yet been reached, but not even approximated. This, the fact that according to historical records we still have some 5 years or so to go and certain macroeconomic considerations (a succinct summary of which you’ll find in the next paragraph) lead us to believe that we still remain mired in a secular bear market.</div>
<div align="justify">
Secular bear markets all display certain characteristics, one of which is the alternation of cyclical bear markets with cyclical bull markets. During the current secular bear, we’ve witnessed two cyclical bears, followed by two cyclical bulls, the last of which is the current one. Historical precedent tells us that we should expect at the very least another cyclical bear market, more likely two.</div>
<div align="justify">
With that in mind, let’s see why we think we may be on the verge of one of those nasty cyclical bears, but not before having covered some basic economic theory.</div>
<h1 align="justify">
<strong><em><span style="font-size: medium;">The money printing fallacy</span></em></strong></h1>
<div align="justify">
“But the Fed will not allow the stock market to plunge”, “With all this money printing stock prices are bound to increase”, “QE(insert number) is stimulating the economy and putting it back on track”, we can almost hear the sceptics say. So let’s quickly deconstruct these arguments and show why money printing (these days euphemistically called Quantitative Easing in Newspeak) is not helpful to the economy at all and, as an obvious consequence, ultimately hurts stock prices as well (even in extreme situations, when money printing goes berserk à la Zimbabwe, stocks fail to make any real advances, i.e. they fall when measured against gold). To all the readers brave enough to venture on their own in the realm of macroeconomic theory we suggest to read the important classics of the Austrian School of Economics, like “The Theory of Money and Credit” and the intimidating “Human Action” by Ludwig Von Mises and “Man, Economy and State with Power and Market” by our beloved Murray Rothbard. We strongly encourage all the other readers, who do not have this somewhat masochistic vocation or simply lack the time to engage in such in-depth readings, to visit Pater Tenebrarum’s blog <a href="http://www.acting-man.com/" target="_blank">Acting Man</a>: there he provides a very useful and always excellent commentary on the economy and markets and in our opinion does a great job at simplifying and summarizing rather complex concepts in a clear and concise way.</div>
<div align="justify">
What is money? <em>Money is the general medium of exchange, the thing that all other goods and services are traded for, the final payment for such goods and services on the market (Rothbard, Austrian Definitions of the Supply of Money).</em> Is money synonym with capital? No, capital represents the so-called “pool of real funding”, it is saved consumption (i.e. lower order goods) which can be used to fund investments in higher order goods (e.g. new plants, machinery etc.) with the goal of increasing productivity and achieving economic progress (i.e. doing more with less). All investments have to be funded with capital (that is: real resources that were saved before and that are now taken out from the economy’s pool of real funding to sustain the investments). Money alone does not suffice. However the fact that capital is often expressed in terms of money constitutes the basis for a pernicious misidentification.</div>
<div align="justify">
What do money printing or the expansion of fractionally reserved bank credit do to the economy? Because of the public’s conflation of money with capital, they fool economic actors into believing that there is more capital available than it’s actually the case. They encourage investments in higher order goods that appear sustainable when they really aren’t (because the economy has the money/credit, but doesn’t have the actual real resources to fund such investments that this money/credit purportedly represents). The longer this shell game continues, the more capital is wasted in the process, further reducing the pool of real funding and thus undermining the economy as well as its future prospects. Sooner or later reality sets in and all the endeavours that appeared to be profitable because of this fictitious abundance of capital are revealed for what they truly are: malinvestments that need to be liquidated. This happened many times before (inter alia 1929, 1965, 2000, 2007) and is happening again now:</div>
<div align="justify">
<br /></div>
<div align="justify">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhDGTogwVyxfyKzV_tFRErfY9dgioM19DJll26B8tZqK5Qeg5Cn8TtzWBLabuoGhQoSzaKdkuxdiYJwnrSix9Y-gex-hMf9iMUjveIErqFiaG7cGOqzexFY91wua14Itn_sQ9l0VP5-zq8/s1600-h/HigherOrder-LowerOrdervsSP500_03-01-%25255B2%25255D%25255B1%25255D.png"><img alt="HigherOrder-LowerOrdervsSP500_03-01-2013" border="0" height="388" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiggp5xL-e87mdVH0JmUPD829cCmImUmd41s-Qb2kG6hLTz7dK_x5jH9vzzSbaqkg8cTfjsiknLBqBg6o_0YqzxGmSfYvEPPe_p9gFVszhdx8O5bqLfHips8fEkUMRadYvxkdVnE2CKaM4/?imgmax=800" style="background-image: none; border-bottom-width: 0px; border-left-width: 0px; border-right-width: 0px; border-top-width: 0px; display: block; float: none; margin-left: auto; margin-right: auto; padding-left: 0px; padding-right: 0px; padding-top: 0px;" title="HigherOrder-LowerOrdervsSP500_03-01-2013" width="644" /></a></div>
<div align="center">
<em>The ratio of Industrial Production of Business Equipment to Industrial Production of Nondurable Consumer Goods and the S&P500 index (right scale, logarithmic). The graphical demonstration of our point: all unsustainable fiat money-driven spikes in the ratio of higher order to lower order goods need to be painfully corrected. Notice the strong correlation of such corrections with bear markets. It is important to note that Corporate CAPEX has been extremely high as well as of recent: not really a bullish sign.</em></div>
<div align="justify">
<br /></div>
<div align="justify">
As such, money printing cannot achieve what it should supposedly achieve, namely to bring about economic prosperity. What it can achieve is to delay the inevitable and, in so doing, make it worse.</div>
<div align="justify">
With these objections now out of the way, let’s get down to business.</div>
<h1 align="justify">
</h1>
<h1 align="justify">
<strong><em><span style="font-size: medium;">Fundamental Conditions</span></em></strong></h1>
<div align="justify">
In this section we intend to show you why in our opinion a new cyclical bear market is likely just around the corner. We will cover two main points: the current stage of the business cycle and the current level of stock valuations as well as the rationale behind them.</div>
<div align="justify">
<strong><em>A) Where we are in the Business Cycle</em></strong></div>
<div align="justify">
A premise: there are plenty of indicators out there which track (or supposedly track) economic trends and we are well aware that not all of them confirm what we are about to show below. However if a recession were obvious no profit opportunity would currently exist. Moreover some of those indicators aren’t in our opinion reliable, as they’re either lagging rather than leading or they’re based on shaky theoretical foundations. Generally speaking we tend to favour indicators which track the performance of the manufacturing sector, as it represents the core of economic activity. We also tend to dislike indicators based on GDP or GDP growth, as we’re not at all fans of this specific aggregate (and of economic aggregates in general), although now and then we do employ it to calculate ratios (and will do so below). We may some day write a more theoretical post on the many weaknesses of GDP and other popular indicators, but for now this will suffice. Of course we encourage our readers to do their own research on the topic. Finally, although we’ll only show US data below, we’d like to briefly mention that the December Markit manufacturing PMIs came in as follows: JPM Global 50.2 (up from 49.6 in November: back in slightly positive territory after a few months of contraction); Eurozone 46.1 (down from 46.2 in November: still no end in sight for the 18-month-and-running contraction); Germany 46 (down from 46.8 in November: in contraction mode since March 2012 with 18 months of falling orders…anybody wants some DAX futures?); Japan 45 (down from 46.5 in November and currently sitting at a 44-month low, with investment goods demand contracting the most).</div>
<div align="justify">
The first chart we show in this section tracks the performance of three popular indicators published by the Institute for Supply Management: the New Orders Index, the PMI Composite and the Production Index. They generally tend to be leading indicators, although to varying degrees, with the New Orders Index being our favourite one.</div>
<div align="justify">
<br /></div>
<div align="justify">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhOoEpGp5i-AZWaYiCL5VczT1Z4RYdUwSBB96x1cWarvGP3X14fHT803-ro2eFFocE_IRDQurw7ACa9N5agqTXwPW_3ZliVtnI3r8wwnd2ln1xP6SSIXbJcCoahfCmo3PexiQos5DEgGDI/s1600-h/ISMMix_04-01-2013%25255B1%25255D.png"><img alt="ISMMix_04-01-2013" border="0" height="388" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjloa6BHdyrpqjWpt0xHOIdAebLLJ9PspsBe6zZKwTzcSLTvIywtHZAXYYuTZcixqgE60EhBRqulrnbSnDQuTKlO6MN-_8giR_AXuc8RVhyPRDCYXyeX2hW1Dqe4uzNAukuiV5t9hlac7s/?imgmax=800" style="background-image: none; border-bottom-width: 0px; border-left-width: 0px; border-right-width: 0px; border-top-width: 0px; display: block; float: none; margin-left: auto; margin-right: auto; padding-left: 0px; padding-right: 0px; padding-top: 0px;" title="ISMMix_04-01-2013" width="644" /></a></div>
<div align="center">
<em>PMI Composite, New Orders and Production Index: their ability to anticipate recessions can be clearly gauged from this graph.</em></div>
<div align="center">
<br /></div>
<div align="justify">
As can be seen above, all these three indicators have been flirting with contraction territory for quite some time (remember that a reading above 50 signals expansion, whilst one below indicates contraction; the same applies to the Markit PMIs further above). Sceptics may point out the undeniable fact that these aren’t infallible measures, as they often give false signals, as in the period from 1990 to 2000. However one always has to contextualize information: back then we were in the second decade of a very powerful secular bull market, whilst right now we find ourselves in the second decade of an equally powerful secular bear market. To further prove this point, let’s see how this indicator fared during the last secular bear market (1965-1982 or 1967-1982 depending on interpretations):</div>
<div align="justify">
<br /></div>
<div align="justify">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiAkNsnnYDdx-UCFUpdUQXLN0uvTqMq01Vsf19nOTHumUjt_CxqbzJRTsdgcwQnOb-ikWxlqWX0Aa3EIUlcmY6IeW7MGGHeXB05ouDhTE4mRf932u6AMbbI7qSiIF0RchQuG1zahK2c9CA/s1600-h/fredgraph%25255B1%25255D.png"><img alt="fredgraph" border="0" height="388" src="http://lh6.ggpht.com/-sExXq_DWP0c/UOw0Mg5vaeI/AAAAAAAAABs/AnyVwo8bnkg/fredgraph_thumb.png?imgmax=800" style="background-image: none; border-bottom-width: 0px; border-left-width: 0px; border-right-width: 0px; border-top-width: 0px; display: block; float: none; margin-left: auto; margin-right: auto; padding-left: 0px; padding-right: 0px; padding-top: 0px;" title="fredgraph" width="644" /></a></div>
<div align="center">
<em>Same indicators as above, from 1965 to 1985.</em></div>
<div align="justify">
<br /></div>
<div align="justify">
It becomes clear that false signals become way less frequent, particularly as the economy enters the tail end of the secular bear cycle. Our contention is that we are today in a very similar situation: we are approaching the final and always more painful years of a secular contraction which, as we must never forget, was born out of an egregious bubble of unmatched magnitude.</div>
<div align="justify">
The second chart tracks the evolution of an indicator known as Smoothed US Recession Probabilities, which was created by economists Marcelle Chauvet and Jeremy Piger. Readers interested in exploring how this indicator is constructed and its workings can do so <a href="http://pages.uoregon.edu/jpiger/us_recession_probs.htm" target="_blank">here</a>. It is important to note that the indicator undoubtedly confirms a recession after it has long happened: if one wants to profit from its use one has to act in a sort of “twilight zone” of uncertainty (as is always the case in financial markets as well as in life in general). It is also worth mentioning that, given the way in which it is calculated, it is published with a delay of roughly two months (i.e. the last reading currently available refers to the month of October): this adds an element of uncertainty as well (one has to act early or risk “missing the train” as two mere months can induce a lot of change in the markets). With that in mind, let’s see what it tells us:</div>
<div align="justify">
<br /></div>
<div align="justify">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgghImaI0M6Ymq-1fRemZUHVQvMiuQx-kSid0Fsw4Fbjb5cE-qNQ1zdZAcf5a3E8pbkVJ18JNFiYNhpp8dCCFsi1OzLFFcacqRj4-kjeHMi6FHoOdbv8Z09oYmg2t5M3j-aFv8VBC-5H6w/s1600-h/RecProb_04-01-2013%25255B1%25255D.png"><img alt="RecProb_04-01-2013" border="0" height="388" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi88hRh5nm7tKXXMS0cuzlM7YVO1bwsr-1xERzYR8wTpmvMQYFjZJZZAk-K2jMU172uWQoLN1sX6NKwPVuydqvBhnQ84TBZHcgnWrWyoUAIqiJaLtzxv8WiXe5I5bJ9AT24ZhCnYyvhuNA/?imgmax=800" style="background-image: none; border-bottom-width: 0px; border-left-width: 0px; border-right-width: 0px; border-top-width: 0px; display: block; float: none; margin-left: auto; margin-right: auto; padding-left: 0px; padding-right: 0px; padding-top: 0px;" title="RecProb_04-01-2013" width="644" /></a></div>
<div align="center">
<em>Smoothed US Recession Probabilities: the last reading refers to the month of October and came in at 7.34%.</em></div>
<div align="center">
<br /></div>
<div align="justify">
We can notice a quite unpleasant spike in recession probabilities as of late. The last readings were as follows: July 0.6%; August 4.5%; September 4.8%; October 7.3%. Clearly, the trend so far is up and the rate of change tends to be quite dramatic, i.e. we are unlikely to see a quiet and progressive increase: this stems from the fact that recessions tend to happen quite abruptly. False signals are rare: the only one worth mentioning happened during late 2005. The two spikes recorded in the late ‘70s were soon followed by the 1980 recession. So the question becomes: is this recent increase likely to be a false signal? You decide! But we’d tend to think it’s not. </div>
<div align="justify">
Finally we’d like to include a chart which shows Corporate Profits with Inventory Valuation Adjustment and Capital Consumption Adjustment as a percentage of GDP, with the Dow Jones Industrial Average superimposed (right scale, logarithmic) :</div>
<div align="justify">
<br /></div>
<div align="justify">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj8JfIJu119pbCGGRkkC_NuWN-Hgh-9NnLJ4uRXekVv8thIF1mooJiT9jxgrhMjRDr3ps87fbj7wNzHpAMQJ1VXaFUrBquXw3y8u7kSEz4SpX3jhUu5dGdH3RbWZ48njr6dQv0gNyvNayE/s1600-h/CorporateProfitsGDPvsDOW_01-01-2013%25255B1%25255D.png"><img alt="CorporateProfits%GDPvsDOW_01-01-2013" border="0" height="388" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgr6ENhLJiMiOtD4wNgVdZMsXAM4w_0JnDgzacAiWG-9ajTChTkCny3gKepzNMQxqRwwCHmgmO0fMUavXHvBL63OaAV9v1d7OPK5mnurhLMWubjAVmU8TuDvhBvxE56ao8_xoR9x5rJNqk/?imgmax=800" style="background-image: none; border-bottom-width: 0px; border-left-width: 0px; border-right-width: 0px; border-top-width: 0px; display: block; float: none; margin-left: auto; margin-right: auto; padding-left: 0px; padding-right: 0px; padding-top: 0px;" title="CorporateProfits%GDPvsDOW_01-01-2013" width="644" /></a></div>
<div align="center">
<em>Corporate profits as a percentage of GDP: currently at nosebleed levels and they got there with an astonishing vertical rise to boot! Notice how during bear markets peaks in the ratio tend to anticipate important tops in the stock market.</em></div>
<div align="center">
<br /></div>
<div align="justify">
We can make two important observations with regard to the graph above. Firstly, Corporate Profits currently are at very high levels relative to GDP, when viewed in an historical context. This makes us think that further economic expansion seems improbable at this stage, since this is exactly what we've already got for the last four years and corporations have benefited handsomely: does this look sustainable? Secondly, the correlation between this ratio and stock prices tends to be rather weak during secular bull markets and strengthens during secular bear markets: this might be explained with the fact that during secular declines profit margins as a whole tend to be more dependent on the economic cycle, as it frequently and dramatically swings from expansion to contraction, whilst during secular advances they are influenced by a wider array of factors and recessions tend to be less frequent, milder and only temporary. Not surprisingly, the ratio usually peaks before the stock market does and as of now it has apparently topped already: are we going to see this relationship continue? Keep in mind that since the start of the current cyclical bull market in 2009 Corporate Profits growth has been impressive and is unlikely to continue on this path: mean reversion appears to be a more probable outcome, hence further upside in the ratio above should be capped.</div>
<div align="justify">
These considerations, as well as many other and maybe more conventional ones which we won’t cover here, have us thinking that a major turn for the worse in the business cycle is likely to happen fairly soon. Chances are, it may have happened already and its effects are going to become evident during the course of Q1 and Q2 2013.</div>
<div align="justify">
<strong><em>B) Equities are Overvalued</em></strong></div>
<div align="justify">
Although deteriorating economic conditions are a necessary factor in provoking a bear market, they are by no means sufficient: we also need to have generous and overly optimistic stock valuations. Something we’re apparently getting as well! Before proceeding with the analysis, we’d like to acknowledge the excellent work done on this topic by <a href="http://www.hussmanfunds.com/" target="_blank">HussmanFunds</a> in their <a href="http://www.hussmanfunds.com/weeklyMarketComment.html" target="_blank">Weekly Market Comments</a>. We were recently involved in a discussion on equity markets at <a href="http://theshortsideoflong.blogspot.com/" target="_blank">one of our favourite blogs</a>: a reader argued, somewhat bizarrely, that HussmandFunds’ lacklustre performance somehow disproves the validity of their research. As any real trader or investor knows, doing great analysis and employing it profitably are two very different things (by coincidence, <a href="http://www.hussmanfunds.com/wmc/wmc130107.htm" target="_blank">their latest missive</a> thoroughly and convincingly addresses this criticism and explains their long-term strategy as well as its basis). We are of the opinion that their work is not only interesting, but more importantly rooted in actual facts and sound arithmetic calculations. We also recommend our readers to have a look at the valuation research of <a href="http://advisorperspectives.com/dshort/" target="_blank">Doug Short</a> as well as at his other work: we do not always share his views, but he always makes for an interesting and thought-provoking read. We will present below a selection of charts from these two sources.</div>
<div align="justify">
The first graph plots a number of valuation metrics against their arithmetic mean (for the record, Doug Short also shows the same metrics compared to their geometric mean) and the distance between the CPI-adjusted S&P Composite and its exponential regression line:</div>
<div align="justify">
<br /></div>
<div align="justify">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhojJ_a84IaL4_1Vzz5999d3I3tIOUEYVyxkcJ6dF5Mmxc8cI3LeEMl-wxObhY0GfkXWEairv2TQ6qU7qqkKlyEz4srTXNAa8LZxxSCDTbXdhZXq9NMF4Hbj3IBnVgJzpT3JoykvR2mWiw/s1600-h/valuation-indicators-arithmetic%25255B1%25255D.gif"><img alt="valuation-indicators-arithmetic" border="0" height="469" src="http://lh5.ggpht.com/-ZaCvTtt-yvs/UOw0TnT6SvI/AAAAAAAAACc/3FUebhvoDbI/valuation-indicators-arithmetic_thumb.gif?imgmax=800" style="background-image: none; border-bottom-width: 0px; border-left-width: 0px; border-right-width: 0px; border-top-width: 0px; display: block; float: none; margin-left: auto; margin-right: auto; padding-left: 0px; padding-right: 0px; padding-top: 0px;" title="valuation-indicators-arithmetic" width="644" /></a></div>
<div align="center">
<em>Crestmont P/E, Cyclically Adjusted P/E (CAPE 10) and Q Ratio compared to their arithmetic mean and the distance between the CPI-adjusted S&P Composite and its exponential regression line. For the sake of brevity, we’ll leave it to the interested reader to investigate the details of these valuation measures and their validity or lack thereof. More information can be found <a href="http://advisorperspectives.com/dshort/updates/Crestmont-PE-Ratio.php" target="_blank">here</a>, <a href="http://advisorperspectives.com/dshort/updates/PE-Ratios-and-Market-Valuation.php" target="_blank">here</a>, <a href="http://advisorperspectives.com/dshort/updates/Regression-to-Trend.php" target="_blank">here</a> and…<a href="http://advisorperspectives.com/dshort/updates/Q-Ratio-and-Market-Valuation.php" target="_blank">here</a>!</em></div>
<div align="center">
<br /></div>
<div align="justify">
It appears evident that a) the overvaluation levels reached in 2000 were egregious, whilst those reached both in 2007 and presently look quite scary as well(in fact the ‘60s bull market peaked at or below those levels); b) neither in 2002 nor in 2009 did we reach the levels of undervaluation usually associated with secular bear market bottoms (actually we didn’t even come close to those levels) and considering the overshooting to the upside of Y2K we wouldn’t be surprised to see an equivalent one to the downside. An important caveat is that of course such undervaluation levels do not necessarily have to be achieved by means of a collapse in nominal stock prices (1970s bear market docet).</div>
<div align="justify">
So let’s now see what kind of nominal returns can an investor reasonably expect in the current valuation environment:</div>
<div align="justify">
<br /></div>
<div align="justify">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiZICzVQfrPrw_-9WaOKcbz6TKDaL2Ud4QvnyLnEaYcAnU_hM-rwL2crMduPwGpORuklTiYXsDTu3T6rAkWAXLrfrpDocbF-m3Z25X34jxBC8eeCOIs7dK41inYmNVxSg9V9r44e4PvKV8/s1600-h/HussmanProjected-Returns_01-01-2103%25255B1%25255D.jpg"><img alt="HussmanProjected Returns_01-01-2103" border="0" height="484" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEihfObWHQMHdT0y4VH8992QMleMKM0eTMV7xEJRHHHYC5GynOxbJ_T3g0ay_D91SIuRt3Yp8vz7i_hiYH77iiB3D55IuhyphenhyphenfC_NZZDy0bnZXVe9IHNifxH8-QVQAJTHa-5ir6hCne9SKKwE/?imgmax=800" style="background-image: none; border-bottom-width: 0px; border-left-width: 0px; border-right-width: 0px; border-top-width: 0px; display: block; float: none; margin-left: auto; margin-right: auto; padding-left: 0px; padding-right: 0px; padding-top: 0px;" title="HussmanProjected Returns_01-01-2103" width="569" /></a></div>
<div align="center">
<em>S&P500 Projected 10-year total annual return in nominal terms(details on the calculation method <a href="http://www.hussmanfunds.com/wmc/wmc050222.htm" target="_blank">here</a>) and the subsequent 10-year total annual return in nominal terms actually achieved by the index.</em></div>
<div align="justify">
<br /></div>
<div align="justify">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgrSJeoGbNPVYeC6HQ9Kilt6SLqtew2bhQy_9gVXG5OeIusIajT_z2POj8rVQs8fh8wCtRJOk2V3DCLviC1zXn3VCyNVC5kBS88maOvIjqgkLDJ6NCb0X48Ul_fPPh-IPW3x0oHPlptYvo/s1600-h/SP50010yrReturnMix_01-01-20134%25255B1%25255D.gif"><img alt="SP50010yrReturnMix_01-01-2013" border="0" height="473" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh6fvptwkUFonyu4Aue2J7Xow8bK81U5UwktN02HpXM85dbp1K8YyzibpopCr7fU9CdqiehN552177BO_AIw66kfm10iVZeFvFLScvS-BVIXQLKWNgLyB5iTcQ6amWMt2pwQi7ofAH882w/?imgmax=800" style="background-image: none; border-bottom-width: 0px; border-left-width: 0px; border-right-width: 0px; border-top-width: 0px; display: block; float: none; margin-left: auto; margin-right: auto; padding-left: 0px; padding-right: 0px; padding-top: 0px;" title="SP50010yrReturnMix_01-01-2013" width="640" /></a></div>
<div align="center">
<em>The same projections made using different valuations methods and the actual subsequent return. Extracted from <a href="http://www.hussmanfunds.com/wmc/wmc121126.htm" target="_blank">this article</a>.</em></div>
<div align="justify">
<br /></div>
<div align="justify">
As can be gauged from the charts above, the 10-year total nominal return a prudent investor (one who does not recklessly gamble in hope of finding the proverbial greater fool) should be expecting based on current valuations lies somewhere around 5% per annum. Historically, this is where bull markets tended to peak, rather than bear markets bottom: the latter occurred when prospective total annual nominal returns where around 20%. Buyers beware!</div>
<div align="justify">
It should be remembered that these generous valuations arrive at a time when earnings/corporate profit margins have likely peaked (earnings growth has already been decelerating for quite a while and has recently turned negative during Q3 2012, as reported by <a href="http://www.factset.com/websitefiles/PDFs/earningsinsight/earningsinsight_11.23.12" target="_blank">Factset</a>).</div>
<h1 align="justify">
</h1>
<h1 align="justify">
</h1>
<h1 align="justify">
</h1>
<h1 align="justify">
<strong><span style="font-size: medium;"><em>Technicals, Sentiment and Positioning</em></span></strong></h1>
<div align="justify">
The final section of this post will cover a variety of timing tools which we find useful in helping us assess the likelihood that a major market turning point is approaching. Again, this is not meant to be a comprehensive list: we just want to show some of the more interesting and maybe some of the lesser known technical and timing indicators we use.</div>
<div align="justify">
We’ll start by including a somewhat arcane technical indicator, developed by <a href="http://www.mcoscillator.com/" target="_blank">McClellan Financial Publications</a>: the previous year’s Eurodollar Commitments of Trader Report can be used to ascertain the likely direction of the S&P500 index. For some background on why this may be the case, please read <a href="http://www.mcoscillator.com/learning_center/weekly_chart/commercial_traders_foretell_markets_movements/" target="_blank">here</a>. We’ll present the most recent chart published by McClellan and then we’ll show you the graphical representation of the 2011 and 2012 Eurodollar Commitments of Traders Report.</div>
<div align="justify">
<br /></div>
<div align="justify">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgWxrmiQwY_8un_gwtarnyW5YYyUUHNq5jzvF2dVS-tcmhR6qT_9QVgHPRnIXL9RBergBZ1v4FpzF73CWYwjOVxYyanUH74N6FFpK6rG0cpLj2M9M6xDocotQ5RAzFN3ZVUr9NgHwB-GnI/s1600-h/ED-COT_2012%25255B1%25255D.gif"><img alt="ED-COT_2012" border="0" height="350" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEisDEpbH2xrXeUfy84WMGsXLFzmHZ83uc6-3eFZC8O2fZRX1dN_UGRcyB610T-G5thRLDuQ9ue_IAq5K6cOArj6Nj6lT9vrfiYxndktAdw-hI7lEOpHEkj3Jhp33j1eQJns3JHGLKcMZEw/?imgmax=800" style="background-image: none; border-bottom-width: 0px; border-left-width: 0px; border-right-width: 0px; border-top-width: 0px; display: block; float: none; margin-left: auto; margin-right: auto; padding-left: 0px; padding-right: 0px; padding-top: 0px;" title="ED-COT_2012" width="644" /></a></div>
<div align="center">
<em>Commercials’ positioning in the Eurodollar market: major tops in the S&P500 tend to occur about one year after major peaks in commercials’ net long exposure.</em></div>
<div align="justify">
<br /></div>
<div align="justify">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiuHrcN_qxFnZX4SGEbmHVDUXQrzzU7BkboZlEYJXqcis4uE2wCexqg5Fhvc0QeSgv7586ttft0JMlirFkp1cKPwfd_f9JS8Yub8kHEfH9xUqUANb1AXLZPoUlyN3BbQMPDq-nEYzipsZ0/s1600-h/EDCOT_2011%25255B1%25255D.png"><img alt="EDCOT_2011" border="0" height="445" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiI-JEVWfQXWCQ9GBDEk9e8qjYNgAwmwVsPYq8rFhy0Wmd5LMxE8ejJQRxAza0xKok1xOtT6cs99cGvnlZB6R7L8QetFs0T0eZhl5cgpbF9ZDW5PJyk-xUvZse7VkwKQqIYOR6aBUJtZ5s/?imgmax=800" style="background-image: none; border-bottom-width: 0px; border-left-width: 0px; border-right-width: 0px; border-top-width: 0px; display: block; float: none; margin-left: auto; margin-right: auto; padding-left: 0px; padding-right: 0px; padding-top: 0px;" title="EDCOT_2011" width="644" /></a></div>
<div align="justify">
<em></em> </div>
<div align="center">
<em>Traders’ positioning in the Eurodollar market during the course of 2011 according to data from the CFTC CoT reports: commercials’ net long positioning peaked around the end of November. Chart via <a href="http://www.cotpricecharts.com/" title="http://www.cotpricecharts.com/">http://www.cotpricecharts.com/</a></em></div>
<div align="justify">
<br /></div>
<div align="justify">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEif6s44Hbie5GvN3ITA3U7L779RcVyjIOTonAgRSocepnwVojM7W6fhGovK37J20EZT5xbERt4Oa3JHKcSfIN1b4fJM3OtqV5mcrjr4n7rBYcybKCAPG0jTLNQlVXggAuiQ5b34LALcIWw/s1600-h/EDCOT_2012%25255B1%25255D.png"><img alt="EDCOT_2012" border="0" height="445" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgWRFTrfLonBTY3dKn85ZsqRT-w9zZqOjHgMaV49q6fWkxVNQ3pkTur4gxM4YLQlpX5e8F5c4IFzfKoC3dPWmSfb7pZBf0Z-p7rY9iFt_f2pCBBxT_05SQUpsJd7ZRFVeW46XjpxmHoCdQ/?imgmax=800" style="background-image: none; border-bottom-width: 0px; border-left-width: 0px; border-right-width: 0px; border-top-width: 0px; display: block; float: none; margin-left: auto; margin-right: auto; padding-left: 0px; padding-right: 0px; padding-top: 0px;" title="EDCOT_2012" width="644" /></a></div>
<div align="center">
<em>The same information conveyed for 2012: commercials’ net short positioning peaked around September. Chart via <a href="http://www.cotpricecharts.com/" title="http://www.cotpricecharts.com/">http://www.cotpricecharts.com/</a></em></div>
<div align="justify">
<br /></div>
<div align="justify">
We want to warn readers that this is by no means a perfect indicator: it can and does give false signals and even correct signals may be of the mark by a few months. However we’ve found it to be useful, particularly when one focuses only on extreme readings (like the opposite ones registered during November 2011 and September 2012). According to this tool, the stock market may have already peaked and is unlikely to find a major bottom before this autumn.</div>
<div align="justify">
We will now show a very simple yet informative breadth measure: the percentage of S&P500 stocks above their 200-day simple moving average, with the S&P500 index superimposed:</div>
<div align="justify">
<br /></div>
<div align="justify">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgB6wPJx4ZZYkg9SPPDojm8KiQvsMMLW6dpfz3mziFGNAAFb2fORiomT8QBesZOKMUdmzdNyJAx0RYfq3vi9ll8iwmykVesX2FbdauqvVExSvpWeoAAGCwnDdAAg4gzodi-ibnqYavlNTM/s1600-h/sp500-vs-sp500-stocks-above-200d-sma%25255B2%25255D%25255B1%25255D.png"><img alt="sp500-vs-sp500-stocks-above-200d-sma-params-3y-x-x-x" border="0" height="399" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiezsXyd5FRxHrX_C1evVmK_PEFwx6zgj0hvKpm2znZaNMGjl7YODeE_lQPWka-rrVNXVgOtP3gp1_9fjVZL42cS-tO2CtGjuEhyphenhyphenVx0Qey7d__sZepCS3AjWBSHKp6b82cwLHsucVZVKoE/?imgmax=800" style="background-image: none; border-bottom-width: 0px; border-left-width: 0px; border-right-width: 0px; border-top-width: 0px; display: block; float: none; margin-left: auto; margin-right: auto; padding-left: 0px; padding-right: 0px; padding-top: 0px;" title="sp500-vs-sp500-stocks-above-200d-sma-params-3y-x-x-x" width="644" /></a></div>
<div align="center">
<em>The S&P500 index and the percentage of its components above their 200-day SMAs: the latter has been declining since at least the spring of 2011. Chart constructed using <a href="http://www.indexindicators.com/" title="http://www.indexindicators.com/">http://www.indexindicators.com/</a>.</em></div>
<div align="justify">
<br /></div>
<div align="justify">
The chart above shows that the participation rate in the last major advances has been constantly declining: notwithstanding new cyclical bull market highs, today 80% of stocks are in a long-term uptrend, as opposed to more than 90% at previous major market tops. Rising prices in the face of declining participation tend to signal weakness. We are aware of the fact that other breadth measures do not support this conclusion, but we think this simple indicator does a better job at measuring the health of the market than many more complex others.</div>
<div align="justify">
It should be noted that other important bearish divergences exist: most notably long term RSI and MACD divergences and declining volumes of trading. This all combines into a picture of deteriorating technical conditions that signals a faltering advance likely to top soon.</div>
<div align="justify">
The Volatility Index confirms the assumption that we’re more likely near the end of a rally rather than at its beginning:</div>
<div align="justify">
<br /></div>
<div align="justify">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg7pQzSUtw9uOBA8wYCHGfuIpDpQ1r_NlaBCiVROoXlj_Z_qs5HHoWe5E9KXsN14OeRn4rnYBH2a_JWZJ7whBdN7GvwmoMADwQ4Cm2kOOyph_Y-zvlGtG4u0bhANSMv2ebpkwPAKBqUWUE/s1600-h/sp500-vs-vix-1d-sma-params-3y-x-x-x%25255B1%25255D.png"><img alt="sp500-vs-vix-1d-sma-params-3y-x-x-x" border="0" height="399" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgZU2TOCC3fMO0Ub99pzscti2owczf2kKg1srIXOl6_jg0avmaxTqdw8k4AWFtuvlDeOAnAFSdt3X4Y4f_qNL2NMA1_5PWKAXOnqPpIfd2JLtaV3a5ice29XH1nQRAg3GzVKfO1lteaIqI/?imgmax=800" style="background-image: none; border-bottom-width: 0px; border-left-width: 0px; border-right-width: 0px; border-top-width: 0px; display: block; float: none; margin-left: auto; margin-right: auto; padding-left: 0px; padding-right: 0px; padding-top: 0px;" title="sp500-vs-vix-1d-sma-params-3y-x-x-x" width="644" /></a></div>
<div align="center">
<em>The S&P500 Index against the VIX: volatility is currently very low and during the recent correction it has failed to show the usual behaviour generally associated with major bottoms. Chart via <a href="http://www.indexindicators.com/" title="http://www.indexindicators.com/">http://www.indexindicators.com/</a>.</em></div>
<div align="justify">
<br /></div>
<div align="justify">
A careful look at the graph above reveals that major bottoms are usually accompanied by a meaningful spike in the VIX (at least above 30 and more likely towards 40/45). Moreover after said spikes volatility tends to remain at elevated levels for quite some time, as fear and disbelief accompany the nascent rally and every correction is mistaken for a further continuation of the downtrend. None of these circumstances where present at the recent bottom: the VIX briefly surged above 20 and immediately collapsed and currently sits at 13.8 as of Friday’s close: is this the marking of a major bottom?</div>
<div align="justify">
Sentiment and positioning tend to confirm our bearish outlook. We won’t include any charts, as many of them are copyrighted, but we’ll instead go through a quick overview.</div>
<div align="justify">
Sentiment: NAIIM Manager Survey, Market Vane bullish percentage and Hulbert Stocks and Nasdaq readings all stand at rather elevated levels and have been there for a while (a sign of complacency); sentiment on the Japanese yen (a classic risk-off play) currently lies at multi-year lows.</div>
<div align="justify">
Positioning: NYSE Margin Debt is at very high levels, signalling excessive speculation; Mutual Funds Cash as a percentage of total assets and Retail Money Market Funds as a percentage of market capitalization both lie at extremely low levels, signalling complacency and an active participation in the current rally on the part of dumb money; the spread between US Treasuries and risky bonds (High Yield and Emerging Market Bonds) currently sits at very low levels, rarely seen outside of the mid 2000s bubble years; traders’ positioning in the Japanese Yen and in the Mexican Peso both stand at opposite extremes (speculators are heavily short the former and equally heavily long the latter: this is an incredibly ominous sign that never fails to materialize at important market tops). <em>[Ed. Note: one of our next posts is likely going to cover currency markets in general and the Japanese Yen in particular, as we believe it might prove to be a wonderfully performing long in the months to come.]</em></div>
<div align="justify">
We show below the graphs of traders’ positioning in the Yen and Peso, to wet the appetite of the contrarians amongst our readers (a note on CoT charts: the persistence over time of very large speculative commitments, in either direction, is always more worrying than episodic spikes):</div>
<div align="justify">
<br /></div>
<div align="justify">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi8qHKJsU8t_ZUOrI90lTszSueM7fVBN4_5lNGJcKZBrOhprOlB-p0WV4yYFHKxnJ1xtxGWyFwoUBYMJ3BTUejf_MNhWIVzKaCWyDsmogAQTLDrOWxQ-iMlSeXisxObGFGiT4P0XxD3nUU/s1600-h/JY%25255B1%25255D.png"><img alt="JY" border="0" height="445" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhL6GbG7CICEvB5q6hZ-bfU0Ciw6u79iVACBJrA9SdHVwgDiknVk0O7GJLYyuM93-QyM1nuNSSslXyRNoe2wkeVOsYTaitc2wsHzQp-FbaMd6Lyz3wvyGIgZpKHNRgzJoZGf6swqkB6fZw/?imgmax=800" style="background-image: none; border-bottom-width: 0px; border-left-width: 0px; border-right-width: 0px; border-top-width: 0px; display: block; float: none; margin-left: auto; margin-right: auto; padding-left: 0px; padding-right: 0px; padding-top: 0px;" title="JY" width="644" /></a></div>
<div align="center">
<em>Traders’ positioning in the Yen: the last time we saw a higher commercials’ net long position was at the end of June 2007. Chart via <a href="http://www.cotpricecharts.com/" title="http://www.cotpricecharts.com/">http://www.cotpricecharts.com/</a>.</em></div>
<div align="justify">
<br /></div>
<div align="justify">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiy6g9yfILbLYB2Hlfz5ascPJYrXcNptrHKg2aGJZUmwaCFnzVhYmMvmU57HV1TMAm0Uk6kpJntnC0YCbIWYsuSeqr1zGIYtP0kwNYLctMLq-gPnn-Cvr7ZiL-fdQTjkWyVHE6QjrlAqIA/s1600-h/PM%25255B1%25255D.png"><img alt="PM" border="0" height="445" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgScN-Wux0wzudXSSrUZLF7yXeORXOSm9re4vWITK7vMrxGAFYlvN_e92HnZEh9_dqtwdUVlmSW20GctEr6JvOKXnKVmZ-6p4WZW-iRrrPiyCYTByYNOo1Uc5ygWJkVxrFW6To41OYDLXA/?imgmax=800" style="background-image: none; border-bottom-width: 0px; border-left-width: 0px; border-right-width: 0px; border-top-width: 0px; display: block; float: none; margin-left: auto; margin-right: auto; padding-left: 0px; padding-right: 0px; padding-top: 0px;" title="PM" width="644" /></a></div>
<div align="center">
<em>Traders’ positioning in the Mexican Peso: as far as we know commercials never held such a large net short position, at least not after 2004. Other notable extremes regularly occurred in concomitance with major stock market tops. Chart via <a href="http://www.cotpricecharts.com/" title="http://www.cotpricecharts.com/">http://www.cotpricecharts.com/</a>.</em></div>
<div align="justify">
<strong><em><span style="font-size: medium;">Conclusion</span></em></strong></div>
<div align="justify">
We remark once again that all of the above is simply an overview (although an extensive one we believe) of the current situation and does not constitute a complete market analysis. We have however performed such an analysis and we can confidently state that it confirms the view expressed above, namely that from both a fundamental and a technical perspective we’re fast approaching an important market top that will likely signal the beginning of a new cyclical bear market of unknown magnitude (we note however that at least a test of the important support zone around 1000/1100 on the S&P500 appears likely). We can not yet ascertain whether this top has already been reached: we shall endeavour to provide a real-time update if and when we become convinced that said top is in. We do note here that this mostly concerns active short term traders: we are long-term investors and we like to establish our positions at approximate turning points, when we become convinced that a major shift in trend either has occurred or is about to occur and that consequently the potential reward of the trade dwarfs the potential risk. In this specific case, we think that it’s highly unlikely that the S&P500 will close 2013 having gained more than 10% (this is our worst case scenario), whilst the possibility of a 30% or more peak-to-trough decline appears very real. Given the above, we have started to purchase put options on major stock indices, including the S&P500 and the Dax30. We have also opened some company-specific shorts <em>[Ed. Note: we won’t generally comment or provide coverage on single companies. To readers interested in this field, we suggest checking out the work of Reggie Middleton of <a href="http://boombustblog.com/" target="_blank">BoomBustBlog</a> fame: we subscribe to his services and are deeply satisfied with the quality of his research.]</em>. As always, we encourage all our readers to perform their own analysis.</div>
The Rothbardian Investorhttp://www.blogger.com/profile/09722598347527860060noreply@blogger.com0