CheetahhhhhhhBlog Mark III

Bernanke’s comments today have not altered any of my opinions listed below. Remember, I am long term planning–almost 2 years in advance. The daily movements of stocks do not concern me. At the moment, following Big Ben’s speech, we see a nice spike in gold and silver and the SPX, and a spike down in the dollar. And a spike up in the Swiss Franc. Frankly I think this is going to be a fake spike for a day or three or ten and then I expect… well, everything I listed in the previous post.

The GMO Quarterly Newsletter is entitled “Time to Wake Up: Days of Abundant Resources and Falling Prices are Over”. Basically here they argue that commodity prices will continue to rise because of increasing population and finite natural resources. I disagree. Commodity prices are in a spike currently because of easy money thanks to the Fed’s loose policy. Everybody knows this. Everybody also knows QE is about to end and that rates will inevitably be tightened at some point in the future. This should signal the end of the commodities bull market. The argument about rising birth rates and finite resources, this is a bit simplistic. It overlooks technological developments which have enabled the population boom, for example, and fails to anticipate further technological advances. And while certainly resources are finite, the human species has proven very adept at finding alternate resources when needed; as the article points out, the shift to hydocarbons was caused by a shortage of wood. Well OK, we all know the oil is going to run out some day, and we’re already making gas out of soy, developing hydrogen cars, etc. So sorry but this gloom and doom scenario doesn’t hold water.

What is important to note is that commodity prices have been on a 100 year downtrend, with 4 notable spikes: WWI, WWII, the 70s oil crisis, and the current crisis. Aside from these crises, the price of commodities has consistently been dropping, largely because of technological advances which, for example, pesticides and fertilizer that make it easier to grow more corn, and machinery that make it easier to harvest the corn, and transportation systems that make it quicker and easier and cheaper to get the corn to market. I do not see this trend changing. On the contrary, it seems intuitively obvious that technological advances continue at a rather startling rate. The current surge in commodity prices is not a “paradigm shift” as the article points out, but rather an anomalous statistical deviation caused by a global financial crisis. While this crisis is not over, the fat lady is warming up her voice.

1. I think the silver market is an asset bubble which will shortly burst. I think there will be a series of volatile corrections and lower lows, though I also think it quite possible that there will be a parabolic decline.

2. Silver is not actually connected to our economy except in somewhat parenthetical ways. But it is not a store of value actually, contrary to popular opinion. Silver is worth whatever people are willing to pay for it. The US treasury is not going to go broke, for one thing, contrary to popular perception. This is impossible because the US treasury creates currency electronically. It is better to think of the Federal government as having “no money,” because their function is not to hold stores of gold. Rather, the US treasury’s function is to put liquidity into the market through public spending, and then reduce liquidity through taxes. Their function is to control the market conditions of the economy to keep the majority of people reasonably satisfied with, for example, interest rates, percentage of employment, etc. They do this through the electronic creation of liquidity, and the physical withdrawal of liquidity through taxes. But a big part of the speculation on silver and gold is that the dollar will collapse and the Federal government is digging itself into a financial grave, and that the Chinese own us, and a few other political notions floating around. But the Chinese do not own us, actually the vast majority of our debt is actually to ourselves. And to return to my initial point, it is actually impossible for the US dollar to collapse, or for the Federal government to default. They don’t have a certain amount of money sitting in the bank. That’s not the way our system works. They pay bills by creating money, basically entering numbers into a computer. The only actual way the US dollar could collapse or the Federal government to default would be by hyperinflation, to a point where people start refusing to use the dollar as a medium of exchange. For example Zimbabwe. But otherwise the vast majority of current speculation on the dollar is simply not so, and likewise, the perception that silver and gold are stores of currency. They aren’t. The market is a speculative bubble now currently whipping into a frenzy. They are traded commodities, not stores of value. Current speculation in silver and gold is not based on the fundamental situation of the market. Gold is worth the cost of its extraction in relation to market willingness to purchase gold. That’s what gold is worth. Which I would say is about $700, maybe $800. Credit Suisse says the cost of gold extraction is about $600. I believe people are willing to pay a premium on gold, so $700-800 is the real value of gold. Thus I believe the precious metals asset bubble will collapse, though saying when is virtually impossible.

3. I think the dollar is going to have a sustained rise because of the end of QE and the fairly inevitable eventual tightening of monetary policy. Predicting a calendar for this is impossible but we can make educated guesses. The majority of analysis believe the Fed will start tightening rates in 2012. I agree. Also the value of the dollar is correlated strongly (inverse correlation) with gold not for any fundamental reason, but rather because people mistakenly perceive gold as a store of wealth, and people believe the dollar is going to steadily devalue. I don’t think this is true. On the contrary, the way our financial system works, the US treasury will start to withdraw liquidity in order to control inflation. Now, the devaluation of the dollar is a long term trend, but this is largely a reflection of inflation. The function of liquid currencies such as the dollar and the euro is to operate as a medium of exchange, and move in a relatively inverse relation to each other. The European economy is different than the US economy. The individual countries, like the individual US states, cannot create money. And if we want to get to brass tacks, the Euro is in a most tangible sense the fiscal responsibility of the ECB and the relative economic production of Germany. The German economy is very strong. It is an export economy, the US has an import economy. So anyway European states actually have budgets and finite amounts of money in the bank. So for this reason and others, the USD and the Euro move in a somewhat inverse relation. The USD and Euro are liquid, electronically produced currencies and will fluctuate, but basically if the USD or Euro has any tangible worth, it is the relative productivity of their economies. Both the US and European economies are very strong. I think because the Fed will inevitably begin to raise rates, the USD will rise versus the Euro. I am not however quite as sure I think that I think this as I am with the other points. I need to study the situation further before I’m more certain I think this. But in general the USD is actually a commodity that has a store of value. The USD is actually a store of value, unlike gold. Its value is roughly the financial responsibility of the US treasury and the relative productivity of the economy. People are willing to trade the US dollar as a commodity, ie exchange it at a loss or at a premium. People are still quite obviously willing to trade the US dollar, it is the most liquid commodity traded. At the moment the dollar is heavily discounted, but like all commodities, its value moves in cycles. I’m inclined to think that the dollar’s value will rise in relative proportion to the decline of gold. In short I think the commodity market for the USD and for gold are going to soon revert to statistical norms.

4. The SPX generally moves in an inverse relation to the dollar. So I think the market will decline. I believe the US market is either in a long term downtrend starting in 2001, or more likely in a volatile consolidation, which would been whisaw sideways action for a few years.

5. I think I’m going to short the swiss franc. It is a generally stable currency and people have tranferred assets from dollars to swiss francs to preserve the value of their currency holdings. Further the high value of the swiss franc is hurting the Swiss economy and they will intervene eventually if market conditions don’t correct the matter.

I am a real expat. This has its advantages and disadvantages. I maintain business operations in four countries; the UK, the US, the Philippines, and Afghanistan. Here I am subject to currency fluctuations in 3 countries, mind you. One advantage of being a real expat is that you are reasonably mobile and can go where the money is. Most people are trapped in one job market. I can actually go to any job market I like. There are many added expenses to being an expat however, which you might not anticipate. A big one is this. If you want to lead a Western lifestyle, or at least as much as local facilities will enable you to lead a Western lifestyle, it is about as expensive as New York. If you want to eat Italian food, proper Italian food, for example, this is going to cost you a pretty penny in both Kabul and Manila.

I am virtually untaxed, which is good, however I am not contributing to the social security fund, which is bad. It is debatable whether social security will even exist in 25 years, so I’m not sure this is a particular concern, however, an expat doesn’t have this element of social security, and so much plan for the future much more carefully than the sedentary folk. Also an expat must plan far into the future to accomodate necessary visits to relatives on distant continents, an amount of time spent home (our apartment in Manila), etc, all of which require surprising logistics. My wife doesn’t have an American passport so it is difficult for us to travel without visas. Traveling is also very expensive when you are flying from a very remote place. Travel is also expensive when you have to buy tickets for a wife and two children. The expense is a real burden on profitability.

Now, working here in a war zone is not as freaky as you might imagine. Kabul is largely under control. A few insurgents occasionally manage to infiltrate the security network around the city, and these lunatics then find some place to blow themselves up. Apparently the US military has had some success in taking out the Taliban commanders. I’m told the current Taliban commander here in Kabul is young and inexperienced and wants to make a statement. A disturbing thing is that the Taliban are increasingly becoming more clever. For example 8 insurgents got into the Ministry of Defense last week because they had proper uniforms and ID. Also the recent attack on Finest grocery store and the Taliban’s subsequent press release indicates that they consider foreign aid workers a military target. This is all not good and we practice careful security. Because we practice careful security, we are in very minimal danger. You actually can forget there’s a war on.

Now as a real expat, the situation here, with a war on, is kind of interesting and exciting. This is a bit of adventure. The situation here is basically a civil war between Pashtun and Dari-speakers. The Taliban are Pashtun largely. The situation is made more complicated by the presence of an active terror organization, El Queda, who are still alive and kicking out here. Basically the US army is sitting in the middle of a civil war, and are actively supporting the Dari-speakers, and President Karzai, who is incidentally a Pashtun. The fact that Karzai does some odd things, like letting insurgents out of prison, are probably explained by this ethnic war. So the US is in an unstable alliance.

As an expat I don’t really have an opinion on the situation, to be perfectly frank, beyond the fact that I believe Kabul will not fall to the Taliban in the next two years, which is the duration of my contract.

Well, I was certainly wrong about the dollar not going down any further, though I am inclined to think that the dollar’s current push below major support is a hyperbolic push which will be quickly reversed. In short I believe a low of long positions are being covered at the moment, for example. I should note that I trade on a weekly chart. My opinion remains bullish on the US dollar, and this is primarily because QE2 will end soon, and within the near time frame (1-2 years) will inevitably begin raising rates. Naturally the timing of this cannot be precisely predicted. I will be candid with you, in my opinion this talk about the collapse of the dollar, the impending doom of the US dollar and the US economy… etc… in my opinion this is a bit of ridiculous nonsense, and I speculate that much of it is politically motivated. Political events cannot be predicted with any accuracy, however, the key even affecting the value of the dollar is QE2, which will soon end. In my opinion the Fed will inevitably raise rates partly because QE will be ending, and partly because inflation is rising. The Fed releases figures on inflation that subtract volatile inflation, such as with food and gas. The problem here obviously being that food and gas are experiencing alarming inflation. The Fed is well aware of the fact that real inflation is rather high, and this is why I think it inevitable that rates will be raised in the near term (1-2 years). I am watching UUP push lower but will at some point soon buy long calls on UUP for Jan 2013. This could be very profitable.

I have expressed my opinions why the gold and silver market will collapse in the very near term (1-6 months) and I remain of this opinion. I have been waiting and the price of ZSL options for Jan 13 keep getting cheaper and cheaper, so I am looking for some consolidation and will buy. I anticipate this trade will be extremely profitable. Frankly I don’t buy much of the talk on gold and silver at the moment, the smart money has already made its money in this bull market, and they will take their profits fairly soon, I think. I also remain of the opinion that any sign of raising rates from the Fed will signal the end of the gold and silver bull market, and my reason here is primarily that this is exactly what happened to the 1970s bull market when the Fed raised rates in 1980. I am of the opinion that we are currently seeing what is called “irrational exuberance” in the bull market, which is a pretty reliable indicator that the smart money are going to start taking their profits some day soon.

My mother asked me her opinion about what she should do with her mutual funds. I replied that because she trades mutual finds, she cannot hedge her position. I am inclined to think the market is not going to up much more in the immediate term (1-4 months) and this is because seasonal patterns almost always see a mid year consolidation or partial decline. I am not sure whether I am bullish on the the SPX in the long term, and you shouldn’t invest your money unless you’re pretty sure about what you’re going. Regarding the SPX I have a wait and see attitude, and this is because in the near term, the US has some serious economic problems to deal with, such as most US states being effectively bankrupt. This is what we might call a semi-sovereign debt crisis and is, I think, comparable to the sovereign debt crisis in Europe. These points aside, the US economy is very strong and can weather this storm. However it is difficult to give a broad recommedation based on these points. I am inclined to think that all gains for this year are now priced into the market, which means I think it will decline or move in a sideways fashion for the next year or so. Basically when we speak of the broad economy, we are unable to anticipate certain events, such as wars, defaulting on debts, the destruction of crops because of weather, etc. These events are unpredictable by nature and they have a profound effect on market movement. Indeed the current market is remarkable for being largely driven by political events rather than the internal fundamentals of the market itself. Silver is a good example. Its fundamental value is ridiculously distorted at the moment, and this bull market in precious metals is partly driven by political speculation about the collapse of the dollar, etc.

Incidentally I think part of the parabolic rise of silver at the moment is that millions of people got sick of their dollar holdings devaluing and shifted their assets to either the Swiss franc or silver or gold.

Now I suppose if I was my mother, I would keep my investments in this retirement fund since you refuse to move it. I would however open an account with a proper brokerage and invest 1-2K in hedging your position. For example, if you are invested long in the RUT as I believe you to be, I would hedge this with Jan 13 puts on the RUT. This will cut into your profit but also means you will not lose money which ever way the market moves. This is the only intelligent way to invest incidentally. If you do not hedge your position, you will inevitably get eaten by sharks. Be aware of this, it is an important consideration.

Smart money thinks 10 moves ahead in the chess game. When I say I’m shorting silver, note that I’m buying Jan 13 options–ie I’m thinking more than a year and a half in advance. One thing is clear and I’ve said it several times recently. QE2 the Fed’s current quantitative easing program is going to end June 30. This is the primary economic event of the near term future.

Another thing is clear, the dollar is at a big low versus the euro. If we compare the euro versus the dollar on a monthly chart, it is clear the dollar is reaching the bottom of the cyclical pattern.

One more thing is clear, commodities prices have been soaring. Commodities, which are priced in dollars, have to respond to the decline in the dollar by increasing in price. N.B. gold and silver are commodities, despite the fact that they have other properties.

I predict the following. As always I could be totally wrong. But I think not. Here’s my prediction. At some point in the next two months, the dollar will start to rally, and commodity and stock will decline. There is generally an inverse relation between the dollar and the stock market. Commodities have become more financialized and commodity prices of late have been following the broader market trends. Now, there is a generally inverse correlation between precious metals and the dollar, though the strength of this correlation has broken down somewhat of late. Further down the road, I’d say in June or in the autumn, the Fed will introduce wording into its quarterly announcements that warn us a rate hike is imminent. This will cause the dollar to rise even higher and should see the collapse of the precious metals rally.

That’s my prediction and yes, I am indeed putting my money where my mouth is.

I remarked in my previous post that I had liquidated my SPX index positions, as I believe the market is topping. This is primarily a seasonal patterns play (“sell in May and go away”). N.B. I could be totally wrong. Now for the long side, I’m a fan of the investment fund Betterment and recommend them highly, made about 12% this year. For the short side, I’m going to wait and see. Primarily I am starting to short silver and gold. Now as far as my mother goes, you have not taken my advice and continue to invest in mutual funds, which is just not a good idea, I told you to switch to a proper brokerage many years ago, so you need to make your own decisions. Anyway one of my favorite websites, Pragmatic Capitalism, writes the following, and I agree:

It is a rule-of-thumb that the average bull/bear cycle lasts about four years trough to trough — 2.5 years of bull market followed by 1.5 years of bear market. Like most of these kinds of rules, it is good to keep them in mind, but don’t try to set your watch by them. For example, the last bull market lasted five years, and the bear market that preceded it lasted two years. As it so happens, the last bear market lasted almost 18 months, which makes it fit the template almost exactly.

Bottom Line: The current bull market is getting a bit long of tooth, and the specter of six months of negative seasonality lies just ahead. This is not a happy coincidence, especially combined with the fact that volume has been weak for many months. Our mechanical timing model has us on a buy signal for now, but I would take it quite seriously if that were to change.

There have been ongoing security situations here in Kabul for the last 3 weeks, which has not actually affected us much except it makes going grocery shopping difficult, and we have not been able to go to the Serena Hotel Friday lunch buffet, which is the best thing this town has going. Today some jackass blew himself up at a police station apparently and there are ongoing threats which are curtailing our movement. We were planning on going to the Serena tomorrow and still may. The thing is when the threat is known, generally the terrorists will wait a few days for you to relax, and then blow themselves up. As it stands I am not worried about the Serena, which has excellent security, but I think we will steer clear of Spinney’s this weekend, too risky. This, despite the fact that Spinney’s has beefed up their security. I tell you, this town is going to the dogs. The level of violence is increasing. I personally really fail to see why over 100,000 US soldiers with the most advanced military tech can’t destroy 10,000 jackasses with AK47s. It’s a real mystery to me.

This blog is also partly my trading diary if you hadn’t noticed. By that, I mean I record my thoughts on the stock market so that I can refer back to them later. I don’t want my thoughts to be construed as advice and if you make your investment decisions based on what some guy blogs, you deserve to lose your money. This having been said, I sold my S&P500 positions, I think the market may be topping. I am still long Citibank calls for Jan 12 though it’s losing me money at the moment. I liquidated my physical gold holdings a week ago or so and am still planning to short silver with Jan 13 calls on ZSL, however, I have not made the trade yet, because volatility was up, which pushed the price of the options up. Basically I am waiting for the right moment. People will become complacent again and the price of the options will fall. As a professional trader, if you’re not making an effort to trade as cheaply as possible on principle, then I’m not sure what you’re doing in this business. The dollar has his a bigtime low of 74.83 which surprises me but I think this will not hold and the dollar will rise up above 75 (referring to DX futures here).

The Fed has lost a lot of credibility with me. Most recently their comments downplaying inflation and commodity prices are… well, patently ridiculous. That was the straw that broke the camel’s back for me. What, do they think I’m a total idiot?

Now in contrast the Bank of Japan gives a refreshingly unbiased assessment:

“While the strong increase in commodity prices has been driven by global economic growth propelled by emerging economies, speculative investment flows into commodity markets have amplified the intensity of the price surge. The dynamics of global commodity prices has been changing as well, in accordance with the growing presence of financial investors in commodity markets. The entry of new financial investors has paved the way for the “financialization of commodities”. Consequently, global commodity markets have become more sensitive to portfolio rebalancing by financial investors, which has made commodity markets more correlated with other asset markets, including major equity markets. Furthermore, globally accommodative monetary conditions have played an important role in the surge in commodity prices, both by stimulating physical demand for commodities and driving more investment flows into financialized commodity markets.”

What does this mean in English? Commodities are in a bull market. You could have figured that out very easily by taking a look at the Commodity Index chart. This has happened particularly with two investment concerns of mine, gold and silver, where SLV and GLD actually hold more of the precious metals in their vaults than most countries. This is very new.

To return to my point, for the Fed to downplay inflation and commodity inflation is patently ridiculous. The evidence is right there on the chart. So apparently the Fed is trying to pull the wool over my eyes….?

Forgot to mention. Tristan still isn’t talking. Almost 2 years old. As a linguist I have studied children’s language acquisition and am not actually concerned, basically he’ll talk when he feels like it. He clearly understands English and responds to it. Not sure why he isn’t talking but that’s his business I suppose.

He has, however, recently said his first word. “Juice.” He likes juice. So he’s got a one word vocabulary so far.

Tristan only likes to wear one shoe. It is odd. It’s not a fluke. It’s been going on for well over a year now. He will always, every day, several times a day, take off one shoe, but not the other. What’s with that.

Tristan’s favorite toys are the kitchen pots and pans and spatulas. He will put other toys into the pots, like racing cars and legos etc, and then he will stir them around with a spatula like he’s cooking. Maybe the boy will be a celebrity chef and I can retire.

Bug had two rather big cavities and we took him to the Roshan Clinic. Very nice and modern. Best clinic in Kabul as far as I can see. Like all nice things in Kabul, it is unmarked on the street. You can tell you’re in a terrorist war zone when the nice places are unmarked and hidden. So you go through an unmarked gate and then there is an extensive security search and you go through another gate. I’m all about good security. We generally don’t go places that don’t have good security. Anyway we had to take Bug twice. The first time he totally refused to cooperate and actually hid under the dentist’s desk. The second time, we convinced him that the dentist was going to fix his teeth and inject his teeth with Sonic the Hedgehog silver speed power. I showed him the silver in my teeth. Nowadays dentists don’t use silver any more but I didn’t mention that detail. So this time Bug totally cooperated and now he thinks he his much faster with Sonic power. Set me back $175. My driver and guard both thought this price was outrageous, apparently the same work can be done in the bazaar for about $20.

The plummeting dollar is really hurting me, I have to mention. On the bright side, for various technical (ie statistical reasons) I don’t think it’s going to fall any further. In other words I am calling a bottom, which almost never works. I don’t know enough about currency to actually trade on this prediction. I only trade what I know. Nevertheless I predict at the June Fed meeting there will be wording about an impending increase in rates. This will make the dollar shoot up. I think the market is already anticipating this. In the meantime however, the really low dollar is killing me. It costs me a fortune to transfer money to Manila for example.

Bug has always been a bit of a drama king. You’d have to hang out with him to see it but suffice it to say, he is Mr Drama. His latest drama is screaming in his sleep at night. This is very strange. He has parents who love him, we don’t beat him or even use physical punishment, he has enough food, plenty of toys, and he has never been exposed to any real psychological trauma. So what’s with the screaming at night. Woke me up 5 times. It’s weird and he better cut it out or I’m sleeping in the other bedroom, I’m a working man, I need my sleep.

Buying my tickets home today. We’re flying Deli to Bangkok on 27 May. Stay in Bangkok for 2 weeks. Actually we’ll probably head down to my 2nd favorite place in Southeast Asia, the lovely beaches of Ko Samet. Like Bora but with a Thai flavor. After that we’ll fly to Manila around 8 June or so. We’re going to go to Capoocan for Vanessa and Tristan’s birthday at the end of July. The jungle has been slowly destroying our house so I imagine I am going to spend most of my time repairing doors, plumbing, etc. Very irritating. I’m going to buy nara wood doors, which are a bit expensive, but are not subject to jungle rot. With the bathroom plumbing I’m going to try to locate copper piping, which also would be immune to jungle rot. Additionally the large airconditioner has mysteriously stopped working. This will probably be the expensive part of repairs. Furthermore the roof is not properly sealed and during typhoons, water leaks into the house. Sealing it is a simple matter but the irritating thing is the interior needs to be repainted. I don’t think I’ll do all this immediately just because I’m very cheap. Working in Kabul has made me very cheap. If I’m not putting money in the bank, I’m wasting my time, and that’s just a blunt fact.