Dan Zanger gives his 10 golden rules for trading and notes to be followed while running with the stock markets. Note: If you are new to trading or investing, I suggest reading these rules many times over until they become ingrained so you can act without emotions. Stocks that breakout and move up with tremendous volume and close near the highs of the day seem to work out best. However many stocks that move up 15% or more on breakout day often fail. You'll just have to watch your stock's action like a hawk and get to see and understand these things over a long period of time. If trading were easy everyone would be making millions. It's not; it takes years and years of hard work and long hours. Many traders employ a half hour rule, meaning that for the first half hour of the day many traders do not buy any stock that gaps up in price. If the price holds after the first half hour then often many traders will step in a buy the stock. I find this rule works good after the market has moved up for few strong weeks and is not very effective at the start of a new strong move. If it's earnings season then it's an absolute must that you know the date that your company reports its earnings. Many traders prefer to be out 100% before a company reports its earnings in case the company misses its earnings or guides lower. Others I know reduce positions substantially before earnings are released to lower risk. The choice is up to you. You can see an earnings calendar on this web site by clicking on the icon Useful Stock Recourses. Please verify this information by calling the company or visiting the company's website which you should be able to find in any search engine. *The market moves in waves that can last anywhere from weeks to months. Then a correction or setback starts, which can last anywhere from 5 to 8 weeks or even as long at 4 to 6 months. If you are starting a free trial and are a novice you may be lucky to join just as the market gets underway, in which case you will see the full power of charting. If however you start after the move has been going for sometime then things won't look as good as traders are paring down positions. Or even worse the market could be selling down hard and working off the prior up move in which case you will be completely discouraged. The power of charts is through waiting for the correction to end whereby the chart patterns will then be fully developed. After weeks of base or pattern building, stocks will begin to lift off and that's when the big rewards come in. The question is, are you willing to wait and be here for the start of the next big move? The biggest mistake a novice can make is to come back after a move has started. *Please read a few times my interviews in Stocks and Commodities and Traders' Magazine at the top of the home page of this web site. There are many tips and how - to's that will greatly improve your ability to understand how this works. More good comments can be found in the FAQ section of this web site in the member login area. I give setups of stocks that are ready to potentially move. That's my job. Your job is to get to know the stock and its movement along with the general market each day. You are the only one that can do this in realtime during market hours. Then if a stock acts well (i.e. volume is very heavy and the stock is moving easily out of the base) then that is the one to buy. I do not buy most stocks that breakout as most do not meet my heavy volume/price action behavior during the day. Also, I buy only the most expensive stocks as the percent loss is least if the stock pattern fails. High priced stocks are the best quality stocks as a general rule in playing the market. Remember to buy as close to the trendline as possible and the volume should come in at least 10 to 20 minutes after you buy (or even earlier) and if not by then, you know no one wants the stock and might as well check out early
1. Make sure the stock has a well formed base or pattern such as one described on this web site and can be found on the tab "Understanding Chart Patterns" on the home page, before considering purchase. Dan highlights stocks with these patterns in his newsletter.
2. Buy the stock as it moves over the trend line of that base or pattern and make sure that volume is above recent trend shortly after this "breakout" occurs. Never pay up by more than 5% above the trend line. You should also get to know your stock's thirty day moving average volume, which you can find on most stock quote pages such as eSignal's quote page.
3. Be very quick to sell your stock should it return back under the trend line or breakout point. Usually stops should be set about $1 below the breakout point. The more expensive the stock, the more leeway you can give it, but never have more than a $2 stop loss. Some people employ a 5% stop loss rule. This may mean selling a stock that just tried to breakout and fails in 20 minutes or 3 hours from the time it just broke out above your purchase price.
4. Sell 20 to 30% of your position as the stock moves up 15 to 20% from its breakout point.
5. Hold your strongest stocks the longest and sell stocks that stop moving up or are acting sluggish quickly. Remember stocks are only good when they are moving up.
6. Identify and follow strong groups of stocks and try to keep your selections in the these groups
7. After the market has moved for a substantial period of time, your stocks will become vulnerable to a sell off, which can happen so fast and hard you won't believe it. Learn to set new higher trend lines and learn reversal patterns to help your exit of stocks. Some of you may benefit from reading a book on Candlesticks or reading Encyclopedia of Chart Patterns, by Bulkowski.
8. Remember it takes volume to move stocks, so start getting to know your stock's volume behavior and the how it reacts to spikes in volume. You can see these spikes on any chart. Volume is the key to your stock's movement and success or failure.
9. Many stocks are mentioned in the newsletter with buy points. However just because it's mentioned with a buy point does not mean it's an outright buy when a buy point is touched. One must first see the action in the stock and combine it with its volume for the day at the time that buy point is hit and take keen notice of the overall market environment before considering purchases.
10. Never go on margin until you have mastered the market, charts and your emotions. Margin can wipe you out.
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Saturday 28 November 2009
10 Golden Rules
Friday 30 October 2009
Thursday 15 October 2009
Abandoning The USS Dollar
It's no accident that three of the four BRIC nations are active participants in this plan. The leaders of these nations have moved beyond BRIC being a theoretical construct invented by Goldman Sachs in 2001. They have formed an actual alliance based on common goals, cooperating both politically and economically. The BRIC governments also share a distrust of American motives. Asserting their growing independence, Brazil, Russia, India and China held their first formal conference this June in Yekaterinburg, and the United States was not permitted to attend as an observer. They understandably didn't want to share the details of their tactics to lessen their exposure to dollar depreciation. The leaders of the BRIC countries have already publicly discussed purchasing each other's bonds and engaging in intra-group currency swaps. Two of the nations - Russia and China - are members of the Shanghai Cooperation Organization (SCO) who have agreed in principle to using regional currencies in trade. Every member but Russia has committed to purchasing IMF bonds denominated in Special Drawing Rights, which includes such non-dollar currencies such as the yen, euro, and pound. The nations have a combined holding of $2.8 trillion in USD reserves, so any commitment to sell dollar instruments or even lessen the scale of purchases is a serious threat to the currency. While many of the governments involved have denied oil plan, it fits in with the alternative currency initiatives already announced. In addition, the Gulf Cooperation Council's move toward monetary union is far from unique. Just two years ago, former Mexican President Vincente Fox mentioned on Larry King Live that he had discussed a single currency for the Americas with President Bush, but this was part of a "very long term" plan. In April 2008, the 10 ASEAN countries (Association of Southeast Asian Nations) met to discuss "monetary integration" and cooperation with regional non-members China, South Korea and Japan. Even the Bank for International Settlements called for eliminating national currencies and forming regional currency blocs "based on the dollar, euro and renminbi or yen" in 2006. It makes sense that nations would collaborate to form currency life rafts to survive the eventual sinking of the U.S. dollar, now listing badly to starboard. Gold Shines Again Despite the fact that most Western financial advisors and economists perceive gold as an oddly fetishized commodity, the global majority understands this metal is the king of currencies. I view this inclusion of gold in a monetary basket as a transitional state to a gold backed currency. After all, this possibility was broached a few months ago at the July G8 meeting. Gold coins imprinted with the slogan "Future World Currency" were presented to each of the world leaders. Originally designed to unite Europe with the United States, Russian President Medvedev expanded its scope and touted it as the new "supranational currency." While China was not present at this meeting, its steady drumbeat of complaints about U.S. monetary policy suggests it was behind this initiative. Nevertheless, I don't believe either President Medvedev or President Hu of China actually wants to unite the globe under one monetary standard, even if it uses gold coins. Instead, they are clearly trying to move from the current dollar hegemony to a system of competing reserve currencies without crashing the global economy. Each country has ambitions to supplant the U.S. dollar with its own money. Medvedev hasn't been shy about expressing his desire to convert the ruble into an international medium of exchange. China is now selling yuan-denominated bonds outside its borders as an intermediate step toward forming a globally traded currency. Many nations from South Africa to Argentina have purchased bullion for their reserves, but China has the inside track when it comes to replacing the USD with an alternative hard currency. China has much larger forex reserves with which it can acquire assets, and it didn't suffer a depression at the turn of the century as Russia did. As I explained in my July article, "Gold, the U.S. Dollar and the Yuan," the Chinese have a long term goal to become the pre-eminent reserve currency. The government allowed the private ownership and sale of gold by their citizens in 2002 in order to re-monetize the metal, and now they are promoting silver purchases as well. The Chinese know they must step in to facilitate the move back to hard money. Chinese officials are aware of the significance of the bailouts I discussed last fall in my essay, "The Dollar Is Doomed." Despite rhetoric to the contrary, the situation has only worsened over the past year. The potential liabilities have increased to $23.7 trillion, according to the TARP's special inspector general, Neil Barofsky. The tremendous inflation of the money supply was billed as a necessary rescue of the global financial system, but in reality, the U.S. will effectively default on its obligations through hyperinflation. In the meantime, China is scouring the world, securing gold and hard assets in exchange for its dollar promises. The Chinese will swap this paper for bullion as long as counterparties are willing to make the trade. Fortunately for them, Western central banks continue to unload gold both openly and surreptitiously in order to make their currencies look solid. Nonetheless, if these nations don't curb their reckless spending, they will find their global influence draining away even faster than the metal China is actively acquiring.
Robert Fisk's article in The Independent on October 6, "The Demise of the Dollar," has created many shock waves in the currency markets. Fisk reported that major Arab nations are secretly planning to dump the current petrodollar scheme in favor of pricing oil in a basket of currencies. Included in this basket will be the yen, yuan, euro, a new, pan-Arab currency, and gold bullion. Co-conspirators include Saudi Arabia, Russia, Brazil, China, France, and the formerly compliant Japanese. This validated my July prediction that the Persian Gulf states will eventually accept yuan in exchange for oil.
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Saturday 3 October 2009
Deferring Financial Disaster
Exuberant markets and slap-happy finance ministers, combined with record profits at the investment banks of Mordor, or Wall Street, are supposed to convince us that the worst is over, calamity has been averted, and with sober and moist eyes we roll up our sleeves to prevent the ghosts in the machine from re-emerging. A more masterful symphony of optical delusion has never been conducted, and the invisible puppeteers manipulating the strings of marionettes Ben Bernanke and Timmy Geithner are smug in their continued anonymity. Meanwhile, unemployment continues to rise, foreclosures and delinquencies ditto, and but for select industries, decline and bankruptcy are the measure of balance sheets, not growth. The principle tool of deception for this motley crew of G7 finance ministers and the Invisible Hands that control them is currency. With these key economies now flush with capital in the uppermost layers, victory can be claimed by pointing to the balance sheets of those institutions who have averted disaster by capturing the lion's share of this manna from heaven. That the capital is not filtering down meaningfully into the broader economy in the form of investment and lending is the clearest sign that the worst is yet to come, and we now merely pause in the eye of this economic hurricane. Keep in mind, if the Great Depression that started in 1929 is a fair analogy, then we are in the autumn of 1930, and the peak of contraction globally did not manifest itself until 1933, when unemployment in the United States reached as high as 25% in some areas. Within that four year overall plunge were several mini-bull rallies that lent solace to the fearful, albeit temporarily. The major difference between the period from 29-33 and now is that the governments of that era did not have either the ability or the willingness to print money with abandon, because they knew that the outcome of such policy would certainly be future inflation, which would itself handicap any chances of recovery. Since we now live in an era where its only what is happening right now that matters, the financial overseers seek solutions that immediately repair the illusion of prosperity in perpetuity, even if it means a smaller and smaller percentage of the population is fooled. The act of printing currency with abandon equates to deferring the financial reconciliation required to achieve balanced budgets into future generations. As long as we print money, and agree to value that money as legal tender, the illusion can go on ad infinitum. But what happens if, from the bottom up, people start saying "Hey wait a second…this cash is counterfeit!"? Well that's what is happening with the price of gold. Even the government of China is hedging its bets that its own currency will suffer devaluation in lock-step with the excess of U.S. currency afloat. After all, China's foreign reserves are the largest collection of American funny money there is outside of America. So despite the glad-handing and cheerful sentiment echoed by the mass media controlled by about 7 men, the financial disaster continues to unfold, and the only reason the masks are still on the players in the ersatz performance is to pick clean the pockets of those susceptible to such disingenuous rhetoric. For the rest of us, preparations must be made for the next leg down. There are two things to own going forward. Precious metals and the companies that mine them. The very worst tsunami is a boon only to the surfers crazy enough to catch the wave, and that will exactly be the situation when the fragrant chile hits the fan part 2. Instead of a thrill though, the owners of shares in mines that produce gold will be rewarded with financial security in perpetuity, barring unforeseen acts of foolishness. Gold producing operations will soon see their valuations increase dramatically. Lifted on that rising tide will certainly be soon-to-be-producers and to a lesser extent, explorers of advanced economic deposits. The long term deterioration of the U.S. Dollar has been underway for decades. Its days as a viable currency are numbered. History proves this. Buying gold and gold related assets will soon also reveal itself to be the only sound investment of the next 10 years. With due apologies and full credits to the author
Those who read the contrarian and alternative financial commentators may well be forgiven for wondering why the financial doomsday oft predicted hasn't quite materialized. The financial crisis heralded by the crash in October 2008, preceded by the demise of Bear Stearns and Lehman Brothers, among others, by all accounts was the tip of the iceberg and the advent of the Great Depression of our age.
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Gold is a Bargain, Even Above $1,000
The inflation-adjusted price of gold at its 1980 peak is just over $2350 — that leaves a considerable amount of headroom just on the basis of making up for past inflation, let alone the prospect of continued inflation. The gold rally of 1970-1980 began in much the same way as the current rally, eventually catching up with inflation, ultimately pushing significantly higher to price-in future inflationary expectations. Having said that, we could indeed still be a long way from any potential top. The new gold market began in 2002 and is now in its 7th year (in 2009). In terms of cycles, the gold market may have years left to run, consistent with the bullish implications of inflation-adjusted gold. Jim Rickards, director of market intelligence for Omnis, said in a recent CNBC interview that the Fed is going to have to manage a 14-year devaluation of the dollar – by as much as 50% — with the goal of inflating away a portion of our massive and still growing debt. I believe Rickards chose a 14-year timeline because it equates with 3.5% to 4.0% inflation over the period. An oppressive inflation rate to be sure, but shy of true hyperinflation. If Rickards’ assessment is accurate, it likely equates with at least 14 more years in gold’s bull run. Unfortunately in this age of instant gratification, most investors tend to focus on the short-term, when it is the long-term that really matters. Examining the more familiar secular bull market in U.S. equities provides an opportunity to perhaps ascertain where we might be within the current bull market in gold. The first gold bull market lasted about 13-years, beginning in the late-1960s and lasting to the early-1980s. After a few years of adjustments, the bull market in stocks began around 1982 and lasted until 2007, with a brief respite when the tech-bubble burst in 2000, which was quickly offset by extremely loose monetary policy. During the 25-year bull market in stocks, the DJIA went from a low of 770 to a 14,480 high — up nearly 19 times. In its first seven years, 1982 to 1989 stocks rose roughly 3.6 times — or roughly 15% of the complete move. Similarly, gold during its first seven years has appreciated roughly 4.0 times having started its bull move at $250 and trading in 2009 at just over $1000 (1032 high as of this writing), and we are not yet at the end of the year. Some analysts believe the DJIA/Gold ratio is heading back to a not unprecedented 1 to 1 ratio. The chart above shows that such a move is very feasible and could be attained by a dramatic rise in gold, a dramatic drop in the DJIA, or more likely some combination of significant gold gains and significant stock market losses. If gold were to continue to track the stock market’s bull market performance, gold would top over the next years in the vicinity of $4750 per ounce. Will $1000 gold represent less than 25% of the gold market move? Of course, any number of events could intervene to prevent gold from reaching that level, or vault it even higher. As an example of the latter, take into consideration the nightmare German inflation that took hold in the period between the First and Second World Wars. Famed economist John Maynard Keynes summed it up nicely: “The inflationism of the currency systems of Europe has proceeded to extraordinary lengths. The various belligerent Governments, unable, or too timid or too short-sighted to secure from loans or taxes the resources they required, have printed notes for the balance.” At the beginning of World War I in 1914, an ounce of gold cost 86.8 marks. By November of 1923, the hyperinflationary blowoff drove the price of an ounce of gold to a staggering 63,016,800,000,000 (paper) marks. (Yes, that’s 63 TRILLION marks!) The following chart shows the ascent of one gold mark in relation to one paper mark. Invert the chart, and you have an illustration of the demise of a fiat currency in just a few short years. Similar events are unfolding even today, where an ounce of gold was not available at any price in terms of Zimbabwe dollars as a result of massive money printing. I’m not suggesting things are likely to get as bad as Weimar Germany in the 1920s, but none of the conditions that have shepherded gold above $1,000 on several occasions now have suddenly gone away. In fact, one could argue that they have accelerated of late, resulting in the first ever monthly close above $1,000 (September 2009). At the end of the aforementioned CNBC interview, host Joe Kernan says to Jim Rickards, “You just made a heck of case for buying gold right at $1,000…” It would seem there are any number of cases for such action. With due apologies and full credits to the author
Despite a four-digit price tag, gold remains a relative bargain when a little perspective is applied.
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Monday 28 September 2009
Gold: Hyperinflation: Millions, Billions, Trillions And Then...
$16 for a loaf of bread? Money carried in wheelbarrows? Hyperinflation, an event from the past? Most investors today are now familiar with the lessons of the Great Depression. But few are so sanguine about the lessons of the 20s and the Weimar Republic's hyperinflation. History is full of examples of countries that failed to pay their debts, opting instead for hyperinflation to pay their bills. Inflation simply reduces the value of debt, hurting creditors and postpone the inevitable adjustment. History also shows that deficit spending and printing money is so addictive and politically expedient that governments rarely manage to reverse the downward spiral. Hyperinflation is a greater evil that wipes out savings and destroys more economies than depressions. Right now, hyperinflation is a greater risk than the 1930's style depression that so many fear. In the last century there were over 25 episodes of hyperinflation with most occurring in the half century. While many know of the Weimar Republic hyperinflation, few recall the French hyperinflation in the 1800s, nor of China's from 1935 to 1949. Ukraine faced hyperinflation in 1994. And fast forward today, Zimbabwe is still experiencing hyperinflation. In the last two decades, inflation was like the five cent cigar. The lack of inflation has allowed America's politicians to spend more, promise more and the consequences have resulted in a series of bubbles. Easy money allowed homebuyers to buy homes they could ill afford leading to an inflation in property prices and of course the inevitable bust. But few people remember that America has experienced double digit inflation in 1910s, 1920s, 1940s, 1970s and even in the early 80s. It seems like only yesterday that we were on the verge of a collapse of the world's financial system. A year on the steep rally that started in March has been fed by the identical recipe of cheap money and big doses of government spending that spawned previous bubbles. Recession, What Recession? The good news is that Washington, contained the meltdown through government support and bailing out Wall Street. The bad news is that the record amount of debt will cause yet another and deeper wave of financial crisis. The really bad news is that America's creditors are running out of patience, and the unprecedented monetary easing and fiscal expansion will push down the dollar causing a bigger decline and hyper-asset inflation. Having just emerged from an economic trauma caused by excessive spending and debt, what we don't need now is more spending and debt. While largely a twentieth century phenomenon, in every decade we have experienced hyperinflation. A study of some 20 hyperinflation episodes reveals that most lasted about five years and all were preceded by up to a decade of excess government spending such as today. And in all hyperinflations there was a common ingredient of loose spend and the excessive printing of money by these heavily indebted countries. One thing is now clear. When governments spend more than they bring in, monetize their debts with increased supplies of fiat currency to fill the gap, great countries can go insolvent. Weimer Germany became the world's largest debtor facing huge war reparations that exceeded its GDP and could not pay their bills so took to printing money that ended in hyperinflation. France's eighteen century collapse was caused by printing so many assignats that businesses closed and it took over forty years for a full recovery. In Zimbabwe today, Robert Mugabe expropriated land, printed dollars and the economy came to a halt, revived only when they used outside currencies. Or there is Argentina which monetized its deficits and is going through a second bout of hyperinflation. And then there was China's near bankruptcy caused by Chiang Kai-Shek's numerous wars with Japan and the Communists which caused his government to takeover the banking system in order to fund its deficits with printed yuans that ended in hyperinflation and the collapse of his government. What is Hyperinflation? The major cause of hyperinflation is a massive increase in the supply of paper money to finance a sovereign government debt, usually over 100 percent of GDP. One far reaching consequence of the global financial meltdown is that debt made a bad slump worse, particularly those with high debt to GDP ratios. We believe that despite the green shoots of recovery, the United States is running up such an enormous national debt as a percentage of GDP that they risk eventual default. Indeed, a look at America's monetary base shows it has exploded at an unprecedented 110 percent flooding the financial system with money. Another obvious parallel, is that the hyperinflation countries in the past often abandoned a tangible backing such as gold or silver in favour of printing a fiat currency. Many even created financial instruments as substitutes for money. For example in the French experience, land for a time backed the assignat in the modern day equivalent of a mortgage backed security. Without the need of a monetary discipline like gold or silver to back money, governments find it too tempting to resort to the printing press to pay their bills. After all, money is a form of a government liability so a paper currency without an implicit backing other than a state based faith, is dependent upon public confidence. Milton Friedman once said, "Inflation is always and everywhere a monetary phenomenon". Inflation enabled governments in the past to reduce or avoid repayment of their debt burdens. Inflation also makes certain assets worth more and today we have a healthy dose of hyper-asset inflation. When too much money chases too few goods it creates pricing pressures. Stock markets and tangible assets are up. Price inflation is next. We believe a look at the crises of the past gives us a better understanding of the present and the future. Today there are too many similarities with past hyperinflations from the usage of the Fed's quantitative easing methods to pay for deficits caused by wars and excess spending, to the mobilization of the banking system as surrogates of the central bank, to the Fed's mark up of Wall Street's toxic assets to pay off loans. The US is not the first country to resort to the printing presses but the sad truth today is that no one, including "Helicopter Ben" is talking about how to fill the gaping hole in the federal budget. History shows that hyperinflation is often the obvious solution, choice and consequence. Hyperinflation in the Weimar Republic Before World War I, Germany was a prosperous country with a gold-backed currency. Germany abandoned the gold backing in 1914 to finance the war with some 160 billion marks. The dollar then was worth 4.20 marks. After WW1, Germany became the biggest debtor in the world facing huge war reparations primarily to the Americans who had become the creditor to the world. Today, the roles are reversed with America, the biggest debtor while China now plays the role America played then. Germany's debt to GDP was over 100 percent. In order to pay for the war reparations under the Treaty of Versailles, the German government borrowed heavily issuing more and more paper. By December 1922, the mark fell to 8,000 marks per dollar. Postage stamps even had a face value of 1 billion marks, and by November 1923, the dollar was worth 4.2 trillion marks as monthly inflation ran at 322 per cent. So much money was issued that over 130 companies were commissioned to print banknotes, not dissimilar to California who recently was forced to issue IOUs to honour its debts. Tangible or hard assets like diamonds or art were hoarded instead of worthless paper. Corruption flourished. Price controls were ineffective. The German people soon lost all confidence in their money. Pianos were bought by non-musical families. Tellingly, the great German industrial businesses like Krupp, Thyssen and Stinnes survived and prospered calling for a lower mark so that German goods would be cheap and help out exports. Industrialists with taxable assets did exceptionally well as did farmers who owned productive land and crops. Between 1919 and 1920, stocks went up 95 percent. Savers were the big losers. To collect its debts, the French occupied the Ruhr. Debtors became winners. Inflation then was seen to be good. In late 1923, hyperinflation was exhausted as monetary reform created the Rentenmark backed by real estate and bonds with a certain value of gold but this time, fixed in quantity. Late in November 1923, Adolf Hitler arrived on the scene with the Munich beer hall Putsch. Hyperinflation in France In his book, "Fiat Money Inflation in France", Andrew Dickenson White describes how the French in April 1790, issued 400 million "livres" in paper money called assignats secured by the confiscated lands of the French Church during the Revolution. These early mortgage-backed securities or assignats bore interest at 3 percent and were secured by the aforementioned land. Mirabeau their brilliant leader and a great orator of the National Assembly with Obama-like enthusiasm argued that the issuance of assignats was "a loan to an armed robber" and, "that infamous word, paper money ought to be banished from our language." But in September of that year, the government had spent the available funds. Mirabeau reversed course and called instead for the issuance of even more assignats to cover the growing national debt of some 2.4 billion, declaring that the issuance of more assignats would get government lands into the hands of the people instead of the old privileged classes. The public however hoarded that cash and money didn't reach the real economy. Of course that did not last too long as some citizens actually asked for the underlying lands instead of the paper assignats. By the end of 1791, the purchasing power of the assignat declined to the point that businesses closed and in their place came a speculating class. Mirabeau himself, was found to have secretly received bribes. Also, around that time a new debtor class was created with expropriated church lands and an early shadow banking system was created from this new land-based debt allowing for the issuance of more money. The government lands were even revalued upwards. By December 1791, billions of assignats were issued. The merchant class at first benefited as higher prices made the inventory on their shelves more valuable. Inflation was seen to be good or so they thought. Corruption flourished. White noted that businessmen became gamblers, politicians became businessmen and in the city centers came the quick growth of stock jobbers and Bernie Madoff-type pyramid schemes. The government even declared a new tax on married men on incomes of 10,000 francs and upon all unmarried men of 6,000 francs. The rich soon fled, hid their wealth and only a portion of the tax was actually raised. The government then responded by confiscating the lands from those who had left the country enabling the government to issue more paper. Andrew White describes that the market price for bread was equivalent to $16 per loaf, but later, could not be bought for paper money at any price. By 1795, over 40 billion assignats were issued. While France's fiat money inflation lasted for nearly ten years, it required another 40 years to bring about a full recovery. Napoleon Bonaparte took over the bankrupt government and its immense debt. At his first cabinet meeting, Napoleon declared that he would be pay cash or pay nothing. In 1797, Napoleon wrote , "While I live I will never resort to redeemable paper". He never did, and Bonaparte confiscated all the gold and France was forced to live within its means. Andrew White's essay on Fiat Money and Inflation was first published in 1876 and again in 1918. Hyperinflation in China China's hyperinflation teaches us about the dangers of a central bank exerting too much control over an independent banking system. Between 1935 and 1949, China experienced hyperinflation as the Nationalist government under Chiang Kai-Shek printed large amounts of paper currency to pay for wars and debts. In the first year, bank loans accounted for 49 percent of the government's revenue. Prior to 1935, China had no central bank but a vibrant privately owned banking system centered largely in Shanghai. The banking system was disciplined by the threat of a run on the bank, which kept it from issuing more liabilities than assets. However, with the arrival of the Nationalist government in 1927, a consolidation of the banks began as the Nationalists needed the banks to help fund its ever bigger deficits. And with parallels to today under no constraints, the banking system soon became an instrument of the government. And like today, the Chinese central bank guaranteed the private banks' bonds, so the banks could issue even more paper. So much money was printed that Chinese currency notes had to be printed in England. The Chinese government bonds were backed by silver but in 1934, the United States introduced the Silver Purchase Act which caused a run in the price of silver, causing a flight from Chinese bonds. All institutions and individuals who owned silver were ordered to exchange specie for the new currency, not unlike Roosevelt's confiscation of gold. The Nationalists' takeover of silver allowed the government to print currency without a backing, placing the country on a fiat currency system. The newly created Bank of China consequently printed more money, guaranteeing the notes issued by the three largest government banks. Of course the value of China's paper money collapsed. By July 1935, the Nationalist government became the majority shareholder in each private bank, effectively ending private banking. In June 1937, 3.41 yuan was worth $1.00 , but by May 1949, it took 23,280,000 yuan to be worth $1.00. Chiang was forced to leave the country amid the Great Inflation, paving the way for Mao Zedong. Hyperinflation in Zimbabwe On April 18, 1980 when Zimbabwe was born from Rhodesia, one Zimbabwe dollar was worth US $1.59. Zimbabwe then was rich with mineral wealth and agricultural potential. In the early nineties, Robert Mugabe expropriated land from the white farmers paving the way for one of the world's worst hyperinflations as Mugabe forced the central bank to print money. Inflation reached 624 percent in 2004 and from January 2005 to May 2007, the central bank issued currency at a rate exceeding that of Germany's Reich. Living standards fell by 38 percent and the ten year cumulative inflation rate was nearly 3.8 billion percent. In February 2007, inflation was even declared "illegal". The only expanding entity was the central bank itself as its staff grew by 120 percent. In January of this year, Zimbabwe's central bank launched a $50 billion note which could only buy two loaves of bread worth some US$1.25 on the black market. Today almost 80 percent of Zimbabwe's population is unemployed. The government has abandoned the local currency licensing over 1,000 shops to sell goods in foreign currency like the US dollar and South African rand as a replacement for the local currency. The end may be near as Governor Gono of the Reserve Bank has proposed issuing a gold-linked backed Zimbabwe currency. Hyperinflation in Argentina Argentina twice experienced hyperinflation, the first starting in 1969. Hyperinflation began again in 1989 and continued until 1990. Like before, the ultimate cause was too much debt and reckless spending such as aid to Cuba and Nicaragua. The monetary base was doubled. Before 1969, the highest denomination was 10,000 peso. When inflation rose about 10 percent monthly, the Austral plan fell apart by mid 1987. Then the government decided to launch another stabilization plan called Australito or little Austral plan. The government increased minimum wages by 75 percent but public spending continued to grow. Taxes were also increased but that was not enough. The printing of money became a priority and in 1990, a second bout of hyperinflation was unleashed. One current peso was worth 10 billion pre 1969 pesos. Money demand collapsed when it became evident that fiscal deficits were being monetized by the central bank. By June 1988, inflation was running at 186 percent monthly. Lacking faith in their currency, Argentina dollarized their economy by linking the peso to the dollar. Obama's Words Are Not Enough Like France's Mirabeau two hundred years earlier, President Obama raised public expectations with his oratorical skills but instead his big government spending, cheap money, and unsustainable fiscal policies has resulted in the United States facing financial ruin not prosperity. Both saw their popularity wilt when public anger over spending increased. And like before, there's disturbing parallels. For example, elite financiers like China's banks, Germany's industrialists or French jobbers in Goldman-like fashion all feasted during the hyperinflations. Those interests prospered and for a time became populist targets. Today Wall Street is bigger, the healthcare institutions are bigger and there are still three car companies, all at the taxpayer's expense. The taxpayers today, like then, are the biggest losers. And the banking system, like China's faltering system then is still in the throes of failure with overleveraged balance sheets laden with esoteric debt instruments like swaps, cdos and level II assets. Indeed, rather than become guardians of money, central banks led by the Fed have become creators of money. "Out of the box" solutions such as flooding the system with newly printed money and the mobilization of a surrogate banking system is amazingly still not enough. Another reason for uncertainty in the capital markets is the looming budgetary fight over America's social safety net, including its healthcare program. Healthcare already absorbs 17 percent of America's output. Obama's almost $1 trillion program to give universal healthcare to 40 million uninsured Americans are ambitious, particularly since he wants to put the financing burden on the rich by raising tax rates. Meanwhile, the US government's "cash for clunkers" program was met with such enthusiasm that the program ran out money within the first week. Not so lucky are the taxpayers because the Fed is still guaranteeing Wall Street's indebtedness, as well as financing another $2 billion for the "cash for clunkers" program scheme. Debt fuelled consumption continues. The depth and breadth of last year's meltdown has led politicians and central bankers to consider how the United States will exit from their unconventional monetary policies. That exit strategy could include letting short term credits run down or by selling longer term assets, or it could simply raise short term interest rates. The grim truth is that the Fed could easily offset this spending but in a political context would prove to be unpopular and political suicide. Indeed, the problem isn't that the cash is not there, it is being hoarded instead by the financial instituion and foreign central banks. The latest figures from the US Department shows that US liabilities to other central banks have rocketed by 31 percent over the 11 months to May but that the maturities are increasingly skewed to the shorter term instruments. The danger in borrowing short to finance its long term liabilities, the funds might not reach the real economy. The big worry is that the world has become less anxious to finance the Americans, particularly with Chinese savings. Hyperinflation Today We believe the unprecedented scale of monetary easing and debt creation has the potential to consign the US to a similar fate as Weimar Germany or eighteen century French hyperinflation when currencies collapsed to a trillionth of their value. History shows that the printing presses are only one way of making money. Unorthodox monetary policies, including quantitative easing creates money to purchase assets and today is the fodder of hyperinflation in the future. Overseas, the Bank of England's reserves have increased almost 2000 percent and the Fed's balance sheet has similarly jumped to $2 trillion in less than one year as it swapped highly liquid treasuries for Wall Street's toxic mortgage paper. A year later, America has become the world's largest debtor. The United States has gone deeply into debt, doubling its debt to $52 trillion from $26 trillion in 2000, borrowing almost half of every dollar of spending. The interest bill on the US national debt of $12 trillion alone is about $340 billion. In ten years, the White House forecasts that the deficit will become $20 trillion and the interest bill would be at least $600 billion or more than last year's deficit. Obama's ballooning budgetary deficit is likely to read $1.6 trillion or 13 percent of GDP adding to a national debt already at the highest level since World War II. The pace of debt creation has caused the current $12.1 trillion debt ceiling to be raised three times in the past two years, and a failure to raise the ceiling this time will cause a default by mid-October. Right now America's GDP of about $14 trillion must now support a whopping debt of around 370 percent of GDP. Household debt is currently near a record high of 131 per cent of disposable income due largely to questionable mortgages of which from the fellows at Deutsche AG report that almost half of all US homeowners are most likely to owe more than the properties are worth next year. Still, there is America's weakened financial system that exceeds 120 percent of GDP after receiving hundreds of billions of dollars and is still on government life-support. And it gets worse, by guaranteeing the financial sector's debt and the trillions of obligations the government itself has pushed its overall indebtedness to over 150 percent of GDP or double US economic output. That is unsustainable. The Oracle of Omaha, Warren Buffet recently issued a warning about the US taking on too much debt. The billionaire investor fears that a devaluation of the dollar and hyperinflation itself is in the offing if the United States does not change. As before, the consequence of a growing debt load has undermined faith in a faith based dollar and the direct purchases of federal debt for the first time in a half century resembles the desperate action by the French or Weimer central banks in their unsuccessful fight to avoid hyperinflation. China Syndrome Today the United States has become so reliant on the largesse of foreigners that its needs are now larger than all the savings in the Western world. Someday soon, those foreigners will grow cautious about lending to a country with no self-discipline and demand instead higher interest rates to protect them from a depreciating dollar. Or they could, as hinted recently, insist on lending in euros or renminbi, currencies that the American government cannot print. China has lent huge sums to the United States. It is the world's largest exporter, surpassing Germany's. It is the world's largest maker of cars, surpassing the United States. Its foreign reserves are at $2 trillion, the world's largest. The relationship between the US and China is in large part defined by China's status as the world's largest holder of US treasury bonds. The unprecedented expansion of central bank liabilities, has made China nervous about holding more dollars and China has begun to dump dollars, driving up prices of dollar based hard assets. China is so concerned about America's dollar inflation that it has reduced its treasury holdings to $776 billion from $801 billion in May. China has also bought more gold as a hedge against the debasement of the dollar. Premier Wen Jiabao confirmed that Beijing also intends to use its massive foreign exchange reserves, to invest in strategic overseas assets in a "going out" strategy. The move supports that nation's strategic goal of independence and includes strategic purchases of copper, iron ore and now Canada's oil sands. China's appetite for resources has fuelled a commodity rally, also putting a floor on precious metal prices. China increased its gold reserves by 75 percent to 1,054 tonnes, making China the world's fifth largest holder of gold, just ahead of Switzerland. Noteworthy, that the holding is less than 1.8 percent of reserves and China is likely to purchase gold from the upcoming IMF's 403 tonne gold sale. Lessons from The Past History shows that money must be respected and instead of the artificial propping up of bubbles and more rhetoric, needed are savings, capital, and investment as part of any exit strategy. It is far too easy for politicians to give people what they want. After asset inflation, price Inflation will follow. As long as Washington continues to believe in a free lunch of spending to solve their problems, those huge deficits must somehow be financed. And the Fed, faced with little choice, will print more money. Unfortunately it is all too familiar. We should learn from history not repeat it. Today, foreigners are rightly fearful of dollar inflation, which erodes their own reserves. The US dollar has lost status as a store of value and the amount of debt will pull down the value of the dollar against currencies further. In each episode of hyperinflation, governments went off a gold or silver standard. The United States went off the gold standard in 1971, and in less than ten years, inflation soared causing interest rates to peak at 21.5 percent. Gold prices went from $35 per ounce to $1000 per ounce as the dollar collapsed. We escaped hyperinflation only by a sharp push on the monetary brakes by Federal Reserve Chairman Volcker who drove interest rates up to double digit levels to strangle inflation. In January 22, 2001 George Bush was inaugurated as President of the United States and the price of gold was $265 an ounce. The US then had a budgetary surplus. Today the price of gold broke $1000 an ounce which means the dollar has been devalued in terms of gold by almost 250 percent in less than eight years. The loss of purchasing power is a consequence of America's profligacy funded by cheap credit, wars and various stimulus packages. The invention of derivatives or money substitutes greatly exacerbated America's problems. While the unprecedented bailouts have piled on more debt, the need for more money to be printed is reminiscent of other hyperinflations. Hyperinflation tomorrow? No, hyperinflation now. The conventional wisdom is that we must avert a repeat of the Great Depression. This is wrong. What we face now, is worse than the Great Depression because the United States, once the strongest country in the world is quickly becoming insolvent as its banking system remains under-capitalised, its savings are depleted and the inevitable consequence of the trillions of money supply growth is hyperinflation. Gold is a good thing to have. Gold is the antidote to our problems and history shows a safer alternative to other assets, particularly amid worries about the greenback's diminished status as a reserve currency. We continue to believe gold will hit $2,000 an ounce within twelve months. Recommendations As gold soared through $1,000 an ounce, gold mining shares finally picked up led by the big cap producers, no doubt because of their inherent liquidity. Over the past few years, mining shares have underperformed gold bullion, partly because gold miners could not make a decent return on their mines. But as gold settles above $1,000 an ounce, producers will at long last be able to generate a decent return and in fact fund future projects. In addition, while there continues to be much demand for ETFs, where investors can buy gold at today's spot price, why pay retail, when you can buy wholesale by purchasing gold mines with ounces in the ground valued at $200 per ounce. Since this March 10 the TSX gold index is up 24 percent while gold bullion is up 13 percent. It remains cheaper to buy ounces on Bay Street.
With due apologies and full credits to the author
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Sunday 27 September 2009
INFLATION IS OUR FUTURE
Puru Saxena says ...... At present, there is a lot of confusion amongst the investment community and opinion is divided as to whether we will witness inflation or deflation. On one hand, the deflationists are claiming that given the extremely high debt levels in the West, further inflation is impossible. On the other side of the argument, many proponents of inflation are calling for Zimbabwe style hyper-inflation. In this business, everyone is entitled to their opinion; however it is my contention that we will get neither deflation nor hyper-inflation. If my assessment is correct, once business activity picks up, our world will have to deal with high inflation. Although I have great sympathy for the deflation crowd, given the reckless attitude of the central bankers and their ability to create debt-based money, I do not believe deflation (contraction in the supply of money and total debt) is very likely. For sure, in this post-bubble environment, American consumer debt continues to contract but this is being more than offset by the expansion in federal debt. Over the past year alone, federal debt in America has surged from US$9.645 trillion to US$11.813 trillion. In other words, during the past twelve months, American federal debt has risen by a shocking 24.47% and it now stands at 83.52% of GDP! Now, given the ability of the American establishment to essentially create dollars out of thin air, I have no doubt in my mind that it be able to inflate the economy. However, this will come at a huge cost and the victim will be the American currency. In fact, the recent weakness in the US Dollar is a sign that central-bank sponsored inflation has started to dominate the private-sector debt contraction in the West. Furthermore, over the past few weeks, various governments have issued US Dollar-denominated debt and this suggests that the carry-trade is back in vogue. In a startling move, Germany recently announced that it plans to borrow money in US Dollars! Now, given the ongoing federal debt inflation, debasement of paper currencies, sky-high budget deficits and competitive currency devaluations, the macro-economic environment has never been better for precious metals. Yet, both gold and silver continue to frustrate the bulls by staying below the record-highs recorded in spring 2008. So, what is going on here? Have we already seen the end of the precious metals bull-market or are we about to witness an explosive rally? Before I attempt to answer this question, I want to make it clear that even though gold failed to better its all-time high during last autumn's panic, it was the only asset (apart from US Treasuries) which stayed relatively firm. And looking at the various markets today, gold is the only asset which is flirting with its all-time high. So, whether you like it or not, gold deserves some credit for fulfilling its role as a safe haven. Now, unlike some of the die-hard gold bugs, I don't believe that gold is the ultimate asset to own at all times. Without a doubt, there have been times in history when gold has proven to be a lousy investment. For instance, between 1980 and 2001, the nominal price of the yellow metal fell by an astonishing 70%. This horrible price action spawned an entire generation which grew up hating gold and up until a few years ago, the vast majority considered gold a barbaric relic. However, during other periods in history, when macro-economic uncertainty was high and inflationary expectations were running out of control, gold turned out to be a fantastic asset to own. If my take on the macro-economic situation is valid, then we are in such a period now and gold must form a part of every investment portfolio. You may remember that over the past year, central banks have injected trillions of dollars into the banking system and it is only a matter of time before inflationary expectations start spiralling out of control. Up until now, this 'stimulus' money hasn't permeated through the economy in the West but once money velocity picks up, prices will start rising and the investment community will become very concerned about inflation. When the deflation scare abates and people start protecting the purchasing power of their savings, capital will start to flow towards precious metals. Long-term clients and subscribers will recall that about two years ago, I highlighted gold's tendency to rocket higher every other year. Figure 1 captures this trend perfectly and you can see that since the outset, gold's bull-market has been punctuated by lengthy consolidations and the yellow metal has surged to a new high every alternate year. Figure 1: Is gold about to shine? So, if gold remains in a bull-market and its trend consistency is intact, its price should surge over the following months. Conversely, if the price of gold fails to climb above its all-time high before year-end, it should start to ring alarm bells as this would open up the possibility that the bull-market may be over. Remember, certainty does not exist in the investment world and savvy investors should remain open to all outcomes. Now, given the uncertainty in the world today and the ticking inflationary time-bomb, my view is that gold will soon embark on its north-bound journey. So, I suggest that investors hold on to gold and the related mining companies which will probably continue to perform well until next spring. As far as silver is concerned, it has always been a high-beta play on the direction of gold. If the next up leg in gold's bull-market materialises, the price of silver will also head towards the heavens. Accordingly, investors may also want to allocate a portion of their investment portfolio to silver bullion and silver producing companies.
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Tuesday 1 September 2009
Major Markets: Stochastics, MACD and TRIX Are Telling The Story
Gold shows the Stochastics, MACD, and TRIX all flat-lining.
With due apologies and full credits to the author
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Sunday 30 August 2009
Prelude To Stagflation? Transition From Crisis To Stagflation
Crisis to stagflation? We may be moving from a two year crisis stage to a post stage of stagflation that lasts years. There are several aspects to clarify first. First, assuming there is NOT another credit meltdown this Fall/Winter, and the USD does NOT have a big devaluation event, but rather tails down gradually, then I expect stagflation to emerge. The US and Western economy could do a Japan esq battle with deflation for a decade. It is caused by a hobbled credit system and huge government deficits. Depending on how the West handles that battle, inflation in essentials like food and energy could emerge, while the economy stagnates or has slightly negative growth or flat growth. One problem with the inflation side of the equation is that major currencies are so managed (manipulated) now, that to get inflation in any major currency (especially the USD) requires the others not to inflate or hold their own. But, if the USD devalues, and we still do have fairly large exports that compete out there, then our trade competitors will be very tempted to co devalue, or else face a significant loss of price competitiveness. That currency linkage to exports is what allows the USD to hold up far better than it would with the US Fiscal deficit now running $2trillion a year - another problem that has to be discussed. Even with the US running a $2 trillion Federal deficit, if the other central banks decide to co devalue with the USD, they effectively will underwrite the USD, which can hang in there years after it 'should' before the bond markets rebel. Sort of like the central banks 'holding hands'. Some scenarios So, assuming the USD does not have a bond market rebellion on that $2 trillion deficit, and there is no new credit meltdown like fall 07/08, a stagflation environment emerges. A few years of stagflation is highly gold and commodity bullish - over the long term. Another food shortage Right now, the world economy is battling deflationary forces. I do not see a great deal of inflation, except perhaps food and energy and related commodities. Energy is more manageable, but food production is basically peaking and the world is running out of stocks of grains. Necessities need to be considered separate from the general commodity complex. Obviously if there is any food shortage worldwide, we have a totally new ballgame in many areas. A food price escalation would not be good for an economy struggling to recover. Likely oil speculators would jump in more and do a repeat of the oil and grains speculation bubble of 08 that later collapsed. In fact, if you want one area that can easily do well in 2010, its Potash stocks. Can we survive a credit blowup III Another scenario is what would happen if a third credit blowup like the 08 and 07 fall crisi happened again. Since we really shot the wad on the last two, can we do a third? The 'we' here is the Western central banks. If another credit crisis of the same magnitude of the 07 and 08 fall crashes happen, and 'we' cant' do another $10 trillion or so of bailout on a flash basis, will we lose control this time and actually have a pan Western bank holiday, which results in a total economic shutdown till its sorted out, and likely shortages of food and fuel? I suspect every stop in every central bank in the world would be thrown at any Credit Crisis III because of the economic disaster that would ensue in a few weeks. If you think the economy is bad now, imagine what it could be like if people pulled their money out of banks and we had banks close across the West. So, stagflation in 2010/11 can emerge if the Western economy starts to at least 'land' and gets out of deflation. One problem with that scenario is that we are still at the early stages of the USD bubble deleveraging that began with the housing bubble crash in 06, then led to the credit crisis I in 07 and II in 08. That could prevent deflation from turning into stagflation. The Prudent Squirrel newsletter is our financial and gold commentary. Subscribers get 44 newsletters a year on Sundays, and also mid week email alerts as needed. The alerts include quick notification of important financial news developments by email. Subscribers tell us that the alerts alone are worth subscribing for. I had one potential subscriber ask me if the newsletter has much more content than these public articles, ie, if it was worth subscribing. The answer is that the public articles have less than 10% of our research and conclusions that subscribers see, not to mention the subscriber email alerts of important breaking financial news. We have anticipated many significant market moves in the last year, such as imminent drops in world stock markets within days of them happening, and big swings in the gold markets within days of them occurring. We have also made a number of good calls on big currency swings, such as with the USD, the Euro and the Yen.
Now that we are just about 2 years into the world financial/credit crisis, it's time to ask what is next in one or two years. One is to ask will stagflation emerge in 2010 and after, which is highly gold bullish long term.
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