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Friday, October 10, 2014

The Dow Jones has confirmed a short term correction - looking for more

On the 10th Sept 2014 I warned of a sell-off in stocks, only to withdraw that warning on the 18th Sept 2014, when the market went to new highs. As it turns out, it was a false signal, insofar as the market went back into reversal, and we now have a solid short-term downtrend, that seems likely to take us far lower. Markets down always have a 'pretty pattern' as we see in the first chart below. They under and over-shoot on occasion.
The reason for this market correction is simply the high level of asset prices. Asset prices are simply too high because rents are taking too much of people's incomes, or interest payments too much of their incomes, and that is despite record low interest rates. People are forced to live 'expensive lives' in the city in order to 'have a job in the city'. The problem is most wealth is created and vested in the cities. The problem is that these centres of growth become over-capitalised when governments are able to restrict land development. They do this in order to keep local taxes high, and because landlords like the 'wealth effect' of rising property prices.
In this first chart we can see the solid downtrend that has emerged in the last two weeks. We can see that the Dow, which closed at 16,660 overnight, closed off its low for the day. I actually think its going to break that in a big way....perhaps overnight, but it might really. But when it does break 16,660pts in the next day or two, it will be convincingly.
We can see that a short-term support is 16,500pts, however looking at the lowest chart, its possible we will be looking in a fall in the market to 14,000pts. That is a correction of 19%, or 13.67% from the start of 2014 (at 16220pts).

There is no compelling reason why the market should fall that much; not because the market is overpriced, but simply because there is nothing pulling it down. Interest rates are not rising. That augers well for the present. So I don't necessarily see this downside reaching 14,000pts because I'm going to wait for the market to tell me. The trick is to wait for the market's lack of confidence to be shaken out. It is fair to say that the central banks will look favorably upon a fall in asset prices - not just equities, but also housing. Housing markets are also softer in recent times. So let's see how much confidence is undermined. I frankly think these are good times. The problem is people are incredibly myopic. They tend to think markets evolve around their 'Western experience' and fail to see how Western market weakness (i.e. unemployment) is a boon to markets elsewhere. The money is flowing to the farthest corners of the world. It will collapse eventually, but we are a long way off that yet. The question is - how much of a fall is necessary to restore confidence in the short term. Rest assured that this fall is not going to spook consumers in emerging markets who don't own stocks, and who don't have so much wealth invested in their houses. They aren't going to be concerned because you might not be buying a new car, but you still need the underwear you make, and the people in their country are increasingly buying new 'branded' underwear, motor scooters and I-phones to impress their girl friends. Some of them are better off still doing your computer programming.

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Thursday, September 25, 2014

Should we be worried about global inflation?

There is a gross straw argument being perpetrated by economists and market pundits, and that is the prospects of 'rising' or run-away inflation, or at least the ominous threat of such. It is important to note two things:
1. Inflation is a monetary phenomenon
2. Inflation is a red herring
3. Commentators don't even know what inflation is

Consider the following article from Ben Eisen at The concern is that there is 'low fears of inflation'. The reason this is bad is purportedly because:
"Most economists believe some level of inflation is important to a healthy economy".
The problem with this perspective is that they think general price variance is a 'demand phenomenon' rather than a monetary phenomenon. The reason they think its not a 'monetary phenomenon' is because the Fed has launched a monetary stimulus program, and according to them, it disproved the Austrians who argued it would cause inflation. That might well be the argument of some or all Austrian economists, however I would counter that 'cost-of-living' inflation is not the only form of inflation. In an era of ultra-easy monetary conditions (i.e. low interest rates), money has fuelled a speculative bubble. It is easy to observe this in two respects:
1. The high prices for property in Western markets
2. The indebtedness associated with derivatives contracts has ballooned

The reason why we aren't seeing a lot of 'cost-of-living' inflation like in the 1970s and 1980s is simply because in those times there was no prospect of wage restraint. Unions were unfettered in their capacity to demand higher wages, so any rise in prices was destined to trigger a wages spiral. Today, there is no prospect of a wages spiral, not because unions have been busted, as that was merely the 'effect'. The reason is that unskilled workers in Western countries are in a very weak position to demand higher wages. Few industries are in a position to demand higher wages, and the reason is that:
1. Few industries (like mining, ports and government services) can get away with it without precipitating a shift in services offshore to emerging markets where labour is far cheaper.
2. There is no peer support from other unions for such rises. They are a collective organisation. You are not going to see 80% of union members supporting wage increases for 20% of members.

The flipside was that union membership has fallen instead because unions can no longer deliver on what members wanted - higher pay.

So what do we make of this logic?
"The U.S. central bank is targeting a 2% annual rise in consumer costs. The drop in market forecasts for inflation implies investors think the Fed will abandon that mandate and raise rates".
The reality is that the 'cost-of-living' inflation is destined to tread a path broadly inline with the rate of money supply increase. The reason is not because money supply is increasing, but because governments look to rising inflation to finance government. Governments don't want to be obliged to raise taxes. This was why it was so hard for the Japanese government to raise taxes. It would have been felt by the people. This is not a concern in other Western economies, where economic activity in rising, population is growing. Japan was unable to rely on these forms of stimulus because of its conservative people. The government was confronted with an unpopular choice - allow relaxed immigration, raise taxes or print money. It decided to print money and raise taxes. It scarcely delivered on the reform it promised.

You might wonder whether we need to be worried about rising interest rates. The answer is no. The Fed might well allow interest rates to rise, but they will never be allowed to rise more than enough to squash rampant speculation. The housing market is not overly priced. Current price levels are sustainable because there is simply no reason for raising rates, and current prices are actually reasons not to 'scare asset markets'.

Deflation is not actually bad; its just bad for government. Deflation is a natural inclination for markets because its a signal of rising purchasing power that is associated with wealth creation. It is not however conducive to governments raising revenue, so governments like some 'healthy inflation', or easily-won taxation. Governments don't like to have to qualify their actions because we have so little trust in them.

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Thursday, September 18, 2014

Global equity markets restore uptrend and positive outlook

My earlier concerns in anticipation of a Dow 'market correction' proved ill-founded. It turned out to be simply a 'consolidation phase' or channel trend, which has given away to the preservation of the existing trend. During this type I sat out of the market, and to good result. I exited IVR at 3.5c, buying back at 3.3c, in anticipation of some possible drilling results. The results are only half-way out, with 4500m of a 13,000m drilling program completed. The results have not been as good as I expected, prompting the stock to fall back 20% before recovering (-15%). These are the risks that one takes on explorers. I was looking for a 200% gain, but instead I have an 'ambiguous loss', whilst I wait for more results.

Looking at the Dow Jones, we can see that it has closed at a new intra-day and daily high of 17,266 points, so this augers well for the sustenance of this trend for the time being. The question is, when might we expect a correction. We can see from the following trend that the market is well-above its trend, and I would be reluctant to read too much into a daily data. We might yet see a 'cancelling' correction, however this 'break' into a new high, and the fact it closed at a high does auger well for sustainability of the trend.
 I have always said that there are two things which will break this market:
1. Asset 'bubbly' prices
2. Rising interest rates

Technical and psychological issues like a 2,000pt S&P, this chart trend, as well as the recent passing of Sept 11th were concerns. I don't see any substantive reason for raising interest rates, and if there are any such rises in interest rates by the Fed, it will be because of excessive demand in the economy, not because of concerns about spiralling wages. So it would only be constraint on a strong economy, and not a blood clot causing an economic hemorrhage.  For this reason, I'm expecting a rapid recovery from any sell-off 'correction phase'. That's not that we should not seize the opportunities to sell.

Another way of looking at the market is that, this might have been a good indicator for the government to look at raising interest rates. I'd caution against that, and say, it would be better for the government to look at 'real avenues' for stimulating economic activity beyond speculative demand in assets. The best ways of doing this are:
1. Privatisation
2. Market reform
3. Welfare reform
4. Political reform

There is every reason to expect more privatisation, and the TPPA might be construed as 'market liberalisation', but in fact its 'market management' by powerful friends of government. There has been some reform of welfare. There is evidence of a shift from 'unconditional' to 'conditional love'. Political reform is however a long way off. We might be encouraged by talk to secession in Scotland, independence in Myanmar, binding referenda in NZ, but these measures are mere 'smoke' in your screen.

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Wednesday, September 10, 2014

The prospects for a short term sell off in place - but how severe?

On the 27th August 2014 (2 weeks ago) I gave a warning of a possible correction in equity markets, based on the leading S&P500 Index. The prospect of a correction remains in play. Today, I'm outlining the technical drivers for a correction based on the Dow Jones Industrial Average - which is based on 28 of the leading stocks in the United States. This index is actually a better guide to the international market given the focus on the larger 'multinational' corporations.

Starting at the shortest-term chart, we can see that the index price action is trending down, and making successively low-lows, where previous support on the downside becomes resistance on the upside, conveying a downward market.
In the 2nd chart, the longer 2 month chart shows that we remain in a broader 'channel trend', so the market is ambivalent about direction, or otherwise stated, the market is an ongoing fight between buyers and sellers. You might also argue that large investors are buying or selling in this range, where buyers are actually placing large sell orders on to create resistance levels, so they can accumulate stock slowly below those resistance levels. Likewise, those companies with an adverse outlook, are placing large orders at support levels, and selling in anticipation of the channel structure breaking on the downside. The implication is that when the market finally 'breaks' it will either be a big move on the upside or downside.

The third chart is interesting because it conveys that the market is challenging previous resistance, and that its at previous highs. You might have heard as much in the last few weeks, and yet it remains at those 'highs', but sparingly so. The market has not marched on, but rather languished around those highs. In fact, it was sold off significantly to 16,500 points in late July. The index however preserves its uptrend. The question is whether it is going to break the long term trend. This is arguably just the same type of consolidation as occurred in Jan 2014, before the market marched on further.

Looking at the last chart, we can see that we are in the 5th year of this 'long market rally. Most market cycles are 7-8 years long, so it might be argued that this one has a little time to run. If this is your logic, than you might still want to exit the market because the market is still way off its long term support. It has the capacity to fall from the current 17,040 level to 16,500 points. There are a number of issues to precipitate that:
1. The poor job growth in the USA - real jobs I mean - not govt revision of methods that see 'self-starters' living on benefits classified as 'nascent entrepreneurs'. That's not to say that a "Bill Gates love child" is not among them, but rather that, you probably have not met the children of Bill Gates. But who you have undoubtedly encountered is the children of your typical conservative family, whether they are libertarians, anarcho-capitalists or liberals. They are less interested in making money until they desperately need a benefit.
2. The prospects of sustained war with Russia in the Ukraine - There is some apprehension about a protracted war. I personally don't see how such a war is likely given the capacity of Western nations to undermine the logistical support lives of counterparts. There will not be a war, but there will be a lot of bluffing. In the interim, you have a lot of apprehension, and war only undermines confidence.
3. The prospects of a terrorist threat. Today is Sept 11th. Are we going to expect a re-occurrence of terror? Its a symbolic gesture that undermines market confidence, however this time round the 'potential' is worse than the reality because it immediately becomes apparent that life goes on, and there are just too many targets. Whose going to miss a flight? The 300 passengers on board a plan and 15,000 relatives and 30,000 friends. Its very sad, but the world will go on. Even if you had 10 such events a year, it would be traumatic, but we would endure it. The odds of it happening to people in 'most parts of the world' are low. Most events would be in certain parts of Asia, EU, Africa and the Middle East. i.e. In places where markets are small or already depressed.

We are looking for a retracement to 16,500 points, and thereafter a possible fall to 14,000 points. The foundamentals for the global economy are actually very good. The problem I would argue is not the 'fundamentals' of excess debt, but really the travesty of too high property prices. The reason is that, when property prices get to a point where they are so high, two things happen:
1. Existing property investors see no further opportunity for gains, so they are not financing their activities with more passive property income
2. Aspiring property buyers are deferring their property purchases, which means they are not buying all the accessories that go with property acquisition.
3. Revision of market values are occurring as well. Many youths are responding to the 'new market reality' with more modest consumptive patterns of behaviour. This is great for the environment, for their long term 'savings sustainability', but it hits the current 'consumption driven' paradigm for this economy.

The implication is that once the stimulus from the central banks is seen for what it is, this market is going back down, and it will hurt the speculators and savings of people. This is part of the appeal for the government. Its your savings, so the impact is on your balance sheet, not the 'public budget'. The fact that you don't need to worry because your super will not be claimed for years, is part of the reason why, as investors, you will tolerate their bad custodianship, and not question the legitimacy of their form of governance. So we can expect government to continue going about their dirty business for at least the first start of this cycle, but in the long term there is solid prospects for political reform and fundamentally a very strong economy.

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Sunday, August 31, 2014

Investors need to be ready to buy stocks

Given that I am anticipating a correction in the next few weeks, or as soon as overnight. It falls upon those who support my premise to be ready for the correction. That is to say that we want to be fully prepared to buy back into the market, or unwind short positions when the market has reached its bottom. Now, we need to recognise an important distinction between stocks:
1. Blue chip stocks are more liquid - They take time to fall. That's why the 'safe investor' prefers them. They will lose 10% in a day, but they will do so with a lot of volume, and more than likely with considerable range trading, or intra-day variability. Now, I am expecting a 20% fall in the S&P500 (US) and 12% in the ASX-200 (Australia), so this is largely the response I'd be looking for in the blue chip stocks which account for the bulk of the market. Of course, some will perform better than others.
2. Spec stocks are illiquid - They will fall off very quickly because they are in a sense considered 'unsustainable' stocks, insofar as they have small 'vulnerable' projects, no assurance of cashflow to finance projects, and less ready access to finance when they need it. i.e. You are vulnerable to equity raisings at low share prices. This is however a generalisation that we can opportunistically profit from. Just as importantly, we need to realise that spec stocks are not going to behave in the same manner as blue chips - because they are less liquid. We can expect a sudden collapse because there is a complete withdrawal of buyers. Some of these buyers were only manipulating the market in any respect so they could unload stock, so you can expect the withdrawal of false support as well as 'true believers' who misjudged the market. Then of course there are all the sellers front-running each other to unload stock because they fear a 'liquidity crush' at this end of the market. This of course prompts a more severe correction in the specs. It also means that there is considerable panic. We can as investors profit from others panic. We need of course to have some better appraisal of the market, or some semblance of awareness as to the specific merits of specific stocks, which might be expected to perform better than the rest, or defy the 'general market sentiment'. After that initial collapse, and we are looking for a '2-3 day period of fear-induced selling', there is destined to develop a 'spread' or 'buyer-seller' gap in the illiquid specs. That's after all part of the liquidity problem, the 'ambivalence' over price discovery. Is the market going to fall further. If there is a big gap between buyer and seller, you have likely reached the stock's bottom, and you will see an 'infilling' of that gap, and eventually a restoration of confidence, and a recovery in the stock. This pattern is also conveyed through analysis of candlesticks. If you have not invested just before the 'gap' develops, then you have missed the 'sweet optimal buy zone'. The question is whether you are able to get adequate 'liquidity' to get a good enough position/volume of stock. Be careful to 'fill up' the 'buy side' of the market, as you are actually creating confidence. Similarly if you take out all panicking sellers, you will give comfort to sellers. They can see you 'off screen' buying up small volumes.

The lesson is that, we might wait for the stock index to 'find bottom' before we buy in the blue chips, but in the spec end of the market, you are more likely to be looking at a point of 'exaggerated fear' in the market. Specs cannot keep up the same length of collapse as the blue chips simply because they are falling by greater percentages each day. This is a vulnerability in the specs; but as we all know, its a source of opportunity as well. Not all sell-offs are so rapid, but the nature of markets is changing with derivatives, so rapid corrections are becoming more commonplace. Of course before you can buy, you need to have your trading account set up, linked to your bank account, and your bank account funded. A broker these days will not buy without money in the account, and you can't buy unless you have cash (liquidity). So this is a 'sell opportunity' I believe. Refer back to my arguments for suggesting as much here.

In my Global Mining Investing eBook I introduce investors to the benefits of investing in spec mining stocks. Its a livelong education that encapsulates other skills. I'm using investing as a practical outlet for your intellectual development, in the same way as its had that practical manifestation in my life. This will include consideration of trading systems, psychology, philosophy, politics, finance, accounting, mining engineering, geology, geophysics and mineral processing and markets. Why do you have to learn technical geoscience? You don't, but there are several reasons to heed:
1. Its probably the best way to make money - both generally and specifically at this point in the economic cycle. Firstly from demand-based stocks as well as precious metals.
2. Its a practical outlet that will sustain your 'practical interest' as opposed to abstract topics that you might struggle to integrate and endue.
3. Its an integration with broader lifelong cognitive skills like critical thinking
4. Its rooted in economics, psychology, science and philosophy, so introduces analytical skills that most people fail to get from memorisation in the school system. This is after all why our empirically-driven political system is failing us....we only got half an education. The half that makes us compliant relativists.

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Wednesday, August 27, 2014

An imminent correction in global equity markets is coming

In previous blogs I have alluded to the fact that the next 10-15 years will be punctuated by a succession of boom-bust events. The reason is that the fundamentals for the global economy are very good. The problem is that there is a process of adjustment under-way, and the Fed and other central banks are making sure that it comes sooner rather than later. They are doing so because, having caused an economic crisis by attempting to sustain the unsustainable boom, they are now attempting to sustain the 'normalcy' of the current 'persistent recession'. Well, recession if you are unskilled labour in the West. If you are skilled, or living in emerging markets, you're probably not going to feel what is about to happen.
I'm expecting in the next week, maybe even overnight, a correction to start in the S&P500. I expect the S&P500 to start falling from around 2000 at present to a support level of 1600pts. That's a 20% fall. I'm actually expecting the ASX-200 (Australian) market to fall back from 5624 to around 4950-5000 point mark. The reason is that resources are priced low, so the Australian market is relatively subdued anyway.
In either case, after these 'asset price' corrections, these markets will recover quickly, and I fully expect that by the end of 2015, they would have reclaimed those losses. The reason is because the current rally was too strong, too fast, and the evidence or justification for it will probably not emerge to later in the year.
I reiterate the global market outlook is fundamentally good. Its just in the short term assets are overpriced, and there is a need for a correction to allow reasonable value to be sustained. The reason I've expecting a correction is because:
1. Asset prices are very high - the best evidence is probably this Forbes media article, which was published back in July 2014. Since then, the S&P500 has climbed even further to 2000pts. They didn't pick a 'level'. They were purely going off fundamentals. Well, now you have a technical 'indicator'.
2. The uptrend has been broken - see the chart above - care of Google Finance
3. The S&P500 is at an important psychological level - its not breaking the 2000 point level convincingly, but rather wallowing around it. I would argue that it is being sold into. Even in the resources market, for the last 2 weeks, I have sensed that the market was being 'sold into'. People were unloading, expecting a correction.
4. You don't get a rally after a persistent rally like the one we've just had. The market needs a correction. It has been 7 years since the last correction - so we are due for another. Now, also note that this 'bubble' is bigger than the last 'bubble'.

Now, there are people arguing that this will be the end of the world...swarms of locusts will inherit the Earth. I'm not in that crowd. I'm arguing that this is simply an opportunity cost that you can avoid. It would be sad if you retained your shares now, because you can buy them back cheaper soon. But if you don't, do it at a reasonable price, just hold them because you'll probably get a bad re-entry price anyway. In any case, you probably have cash to buy more later - and you should do that. Don't sell during the collapse because you might get really bad prices. Maybe you want to hedge your bets if you are uncertain...if stocks are akin to gambling to you. I suspect however there will be some logic in what I say. I'm not even arguing that there is some imminent rise in interest rates. I think interest rates are staying low. There might be a modest increase in some countries worried about 'bubbly asset prices', but it will be intended to discourage you buying property rather than to 'tighten lending' to slow the economy' which no one is spending except on investment property. 

Whilst you are waiting for this correction, which is not long off, I hope you will take the opportunity to acquaint yourself with my latest publication 'Global Mining Investing'. These will be great stocks to own, whether to invest or trade moving forward. We actually want to teach you how to invest; but moreover we want to use investing to teach people how to think analytically. It will have applications in other areas of your life. Critical thinking is an undervalued tool, and we will be exploring stocks using your mind and our experience. We are discovering you from outsourcing responsibility for your money. We want to empower you, so you develop a sense of efficacy in investing. Of course we want you to profit as well - financially as well as intellectually. But we think it will mean more to you if you made the money yourself. Some of you will not have as much time. You'd be surprised how much time you do have when you are supported by other investors, potentially your partner and kids, as well as your passion for learning and profiting from your learning.

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Monday, August 18, 2014

The market upside is looking a little 'tentative' in the short run

Asset prices are relatively high. In such times, you have to question when or what can undermine them, and what will not. The reality is that the stimulus of the previous few years has meant that conditions are rip for economic growth. There is however considerable concern about the sustainability of that growth given that a lot of the past growth was fuelled by debt finance in the West. You might wonder however why we cannot expect more of the same. The reason is that there is considerable concern about the prospects of higher interest rates. The reality is that there is no reason for central banks to raise interest rates more than modestly to end the 'ultra-easy' monetary policy. The reason not to do that is simply that the economy is not strong enough. Those fears are however positive in some respects because 'fearful' mortgagees are rapidly paying off their debts, and that is of course preparing the way for another cycle of spending moving forward

For these reasons, you can expect a sustained growth in the global economy, on the basis that:
1. The fundamentals are good, i.e. Asia and other emerging markets keep getting richer, with strong rates of economic growth, income growth, high rates of urbanisation, strong population growth. Its all good.
2. Interest rates are ultra-low, so moving back to neutral policy will not greatly affect spending since that nominal rise in interest rates will only be taken when it won't hurt spending. i.e. The Fed will wait for signs of an overheated market before it raises raises, to establish a sustainable growth outlook
3. There is no sign of inflation simply because there is no wages pressure. Moreover there will not be wages inflation for another 15 years or more, i.e. There will be no wages spiral for over a decade. So we don't need to worry about 'cost-of-living' inflation.
4. There is every reason to expect asset inflation. This process has been well-entrained since 2000. Ultra-easy interest rates have been around for a long time. The Fed and the Western governments were not interested in sustainable economic policy, they were interested in running the economy as 'fast or as hard as they could get away with', without paying the consequences. This might strike people as sensible. i.e. Its actually the same policy as applied on the Titanic. Now, do they understand the global economy so well? Well, you'd have to wonder. They simply can't know what can thwart it. The greatest threat would have been SARS. But they might well get away with it. In any respect, the fundamentals are good. So whilst you can expect bursting equity and property markets, you can expect them to rebuild or recover in the current market. You should however look to trade these positions however to maximise wealth. This means using 6mth or shorter charts to pick entries and exit points.

On that note, looking at the following charts for the Dow Jones, we can see that:
1. The long term trend for the market is at its highs, and that it has downside to 15,000 points. I'd even expect it to go to support at 14,810 points.
2. The short term 6 month trend has seen the market rise back above the Moving Average. We will be interested to see evidence that this trend continues. Certainly the 176 point rise today is a positive lead.
We should not however overlook the fact that the market is getting peakish, and there is a need for a little short term scepticism if we are going to trade this market efficiently.

I'm looking for a market peak around 17,100-17,300 points; from which I think you can expect a substantial correction .The most logical correction would see a fall back to the 14810-15,000 point level. One already gets some sense that one's buying is getting 'sold into'. i.e. One gets the sense that for every order one places, there is a 'bigger player' getting out. This is most apparent in the less liquid stocks. Looking ahead, I'm expecting a very lucrative recovery from any sell-off. I'm expecting the next rally will offer a lot of profits based around a lot of Mergers & Acquisition (M&A) activity. This next rally I think will get consumer spending momentum going again.

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Saturday, August 02, 2014

Outlook for US & emerging equity markets - the next 6 months and beyond

There is some ominous news around of ebola virus spreading fears. It is improbable that such fears will manifest as any sustainable problem, however there is good reason for people to monitor the issue. There is some good news from China with growth in manufacturing. The job growth in the US was not as positive as expected, however we remain in a low interest rate environment, and the global context is largely stimulatory, even if economic activity is largely flat. The lack of spending is really just a concern that needs to feed its way through the economy. People are not going to start spending until skilled labour see wage gains, and then this will give unskilled wage earners more confidence despite 'wage restraint' at their end.
At the same time, strong employment and wage growth in the emerging markets mean these economies are going gang-busters. Its really just a patience game waiting for the economy to recover. The question is what will equities do in the meantime. I'm inclined to see the current sell-off as just a temporary correction. Using charts, I'm expecting a fall in the US S&P500 back to 1880 points, and a restoration of the rally. I'd not expect to see a collapse in earnings, and since yields are not overly high, then I'd expect more upside. You can however expect a bursting of high asset prices (including equities) at some point. In fact, I'm expecting a succession of 'small bursting bubbles' before a final 'serious burst' when we see higher interest rates.
                                Source: Google Finance

There is another reason to expect higher equities. There is a great deal of Chinese and Japanese money that it destined to pursue foreign markets. i.e. Japan bonds will experience a sell-off in favour of higher-yielding growth assets. The same for China. This will raise interest rates somewhat, but there will be a corresponding rise in economic growth. 

In the chart above, I'm expecting a large drop in equities to 1880 points on the S&P500, however I'd expect it to recover strongly in intra-day trading. 

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Friday, July 18, 2014

Rebuttal of Krugman's inflation critique

Paul Krugman is an annoying person. He is annoying because his entire modus operandi is attacking neo-conservative idiots on the right, whilst ignoring his own shortcomings. His short comings arise from his:
1. Gross ignorance about economics as a compartmentalised irrelevant economist
2. Engagement in straw arguments, or false dichotomies between left and right when the real game is the ascension of libertarianism.

Liberals love this game because it keeps them 'self-important'. The world will not miss Paul Krugman. He will fade into obscurity. But before he does, lest we be criticised for attacking the man without argument, let us focus on his arguments for asserting that there is no inflation, and that its not coming. Well, in truth, he is 'right'....yes 'right' in a sense, and wrong in a sense. There is bugger all 'cost-of-living' inflation. The problem with his arguments is:

1. Krugman does not understand inflation
Krugman thinks inflation is a 'cost-push' phenomenon caused by excess demand for goods and services. He thus celebrates the lack of demand for goods evident in the absence of evidence for inflation, measured empirically by CPI indices. The problem is that the 'goods and services' measured by the CPI are not exactly a useful basket, as some indices exclude the 'volatile' items in order to give a seasonal account. The greater issue however is the 'qualitative' adjustments governments make to inflation numbers, as they are not always comparing like items, i.e. A 286 computer in the 1980s bears no easy comparison to the modern computer. How do you account for the fact that you no longer need anti-virus software as an bundle of inflation costs. Finally, Krugman ignores the 'asset inflation' that exists in many countries. If these assets were to collapse, thanks to higher interest rates or correction to an impending asset bubble, then you would indeed expect inflation. The problem is 'not that the conservatives are wrong', but that their concerns are misplaced. i.e. Inflation is not in the short term from costs, but in unsustainable asset prices. The problem is that 'the problem' is concealed as a 'benefit' for some, because people in the cities like to see their property prices rise. Those buying late are happy as long as the correction in asset prices doesn't show. i.e. They are not concerned until there is a collapse, and even then they might not care if the collapse does not send them broke, precipitate the loss of their job, or their interest repayments does not exceed what they would otherwise have paid in rent.

2. Krugman cannot forecast inflation
Krugman is akin to the environmentalist who points at 'evidence' and decries how bad or wrong people are. He is a tragic soul who understands nothing. He has no credible analytical proscription for how the world works. This is why he cannot offer an explanation of the world; only criticism when others are wrong. He cannot tell us when inflation will appear; if it ever will, and he cannot offer an explanation of why. Firstly, we need to deal with what inflation is.
Inflation is a broad indicator of price movements relative to purchasing power; which is itself tied to the productive capacity of any economy and the supply and demand for money. 
The Austrian School is correct insofar as they regard there to be a relationship between the supply of money and the productive capacity of the economy. Their failure is to not convey an understanding of the dynamics that actually drive price movements. i.e. There is a tendency to speak 'broadly' (by definition) and not see the differentiated foundation for supply and demand in the economy. They fail to see that there are several pertinent factors, namely:
a. Wage restraint prompting an overweight investment in investments like productive property, productive capacity and securities that help finance that capacity, prompting an excess of savings over consumption, i.e. we see a deferment of spending. They fail to realise that this is caused by the autocrats of developing countries causing a pent up supply of labour, suddenly released in the 1980s. It will take us another 15-20 years to balance this global labour distortion, but the impact will be 'mass stimulus' to the global economy, the persistent of the 'super cycle', and low inflation. There will be no wages spiral, though we might expect some unionisation in Asia. There is however no culture of this, and Asia will need to compete with Africa, South Asia on labour costs.
b. Low interest rates prompting speculation in assets.

For these reasons, we can say that the global market place will be under low inflationary pressures for another 15-odd years. In that time, we can expect corresponding asset price bubbles. Its inflation, but not the type described by Krugman. He, like the Fed Reserve, like Alan Greenspan, are simply not looking at asset prices as a vulnerability. It is the prospect of asset price collapses that will demand further QE programs. These are forms of taxation rather that cost-of-living inflation. They are destined to recapitalise the value of money; but not cause the type of inflation spiral that is associated with cost-of-living inflation. In fact, the dearth of specialisation and economies of scale, along with productivity gains are destined to see costs under control. So that's the explanation and forecast.

3. Krugman offers no clarity over 'excess money'
Concerns about "excess money and a devalued dollar" is not a problem (as Krugman argues) because there is no such thing as excessive money. Even in the context of a 'balanced labour' market, the problem is not wage demands; the problem is that they able to be extorted from business by unionised labour. We are however under the illusion that unions are good, because they lead to better worker conditions. They don't. They take what business would have been forced to give (belatedly) or they extort that which business cannot afford to offer, so being forced to close business and go overseas, or go broke.
Krugman suggests that the USD is not weak, but in fact it is relative to hard currencies in Asia. He does not realise this because he selectively compares USD value with other major currencies, like the Yen and Euro, which are also weak, or those economies whose pricing is tied to the USD, whether its the managed 'mercantilist' currency regimes of Asia, or even the USD-denominated currencies of commodity producers like Australia, South Africa, Canada et al. It does not help that these countries borrow in USD. The implication is that all these currencies become immutably tied to the USD. The fact is that there is no country pursuing a 'productivity' based wealth strategy to prompt higher currencies. They are pursuing an 'economic stimulus' strategy, which attempts to create the illusion of wealth creation. Observe that households are working harder than ever, with two or more contributors to income, and they still struggle to live. Home prices are 10x average earnings in many cities. Unskilled labour is having a harder struggle still. This is the constituency that 'applaudes' Krugman's negativity, but he is unable to offer a solution. He can only knock down straw arguments.

It is true that many free marketers and conservatives have been expecting inflation. His argument is not entirely invalid; but this is not a man with much interest in truth; so much as disparaging counter-thesis to his own delusion.

In conclusion, we can expect more asset bubbles, with the prospect of more bail outs by government of banks or maybe creditors. We can expect no sign of inflation for more than a decade. We can expect those traditional indicators of inflation, the precious metals, like gold, silver, palladium and platinum to rise in price slowly, as they are among the cheapest assets. They will not however do as well as demand-based commodities in the short term, or as well as emerging market property. The reason being of course the low-yield on these asset classes. They will however be helped in time by the low yield on equities and property. This will take time to unfold. This is a don't be tragic. Though it will be harsh times for unskilled workers in the West. They live in an over-priced, high cost markets, and without exployment opportunities in the third world, they are really between a rock and a hard place, with no preparedness to address their problem.

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Wednesday, July 02, 2014

Gold price forecast-outlook 2014

An analyst at the Overseas Chinese Banking Corp has released a subdued outlook statement for gold prices in 2014. The research note highlights the prospects for stronger global growth and sees tapering from 2015 as buoying the USD. These facts are not in despite, however it is worth noting that:
1. Asset prices are a nascent or hidden form of inflation or deflation. i.e. Inflationary if the market needs to be recapitalised in order to refloat under-performing asset prices, or deflationary if asset prices were to collapse. Of course the Fed and no government is going to allow asset prices to collapse terribly, at least not in the property market because that would destroy credit. Credit or derivative transactions in equities are equally split, long and short, so no problem.
2. The threats to the global growth outlook, whether in the form of war or disruptions like oil shocks. We have in recent weeks seen ISIS in Iraq challenging the home security forces of the Iraw government. If these are destined to have the upper hand, we might expect Iraqi oil exports (4% of the export market) to be hit. This is not a huge market, particularly given the soft market conditions, however it will lift prices as a sepculative issue. Would it prompt a re-entry of the US? I suspect it would result simply in air strikes, with drones and targeted missile attacks.

Now, the prospect of cheap credit and an endless pool of super savings going into global markets is destined to lift stocks. Japan is planning to plant some huge some of domestic savings into the global market place to lift earnings. This is destined to lift interest rates in Japan, though given that rates are soft elsewhere, its not going to be excessive. Of course we are going to see higher equity and international bond prices. This is going to drive asset prices higher, and of course, in these conditions, gold will start looking appealing, simply because all other asset prices will be high. Is this reason to hold gold? No, but there will come a point when it wll, and of course there is equity exposure that can make more sense. i.e. Miners who are low-cost producers.
Asset bubbles tend to correct rather quickly; so its not the 'inflation story' which is sustained with a wages spiral (which we are not going to see for over a decade). People will tell me wages are rising quickly in the third world, but this is tied to productivity gains (like in the West). Where you can expect some rallies in gold will be with the expectation of market corrections, when only gold looks cheap. In these times, gold makes sense. Even if it falls off with a crash, its destined to be the sector that recovers first...assuming that its assets offer tangible value. i.e. Not blue sky exploration.

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Investment Strategy

If you are investing for the long term, you still need an investment strategy. Dont be fooled by the rhetoric of fund managers. The reason they advise you to 'buy & hold' is because they dont want to compete with you in sell-offs. Markets and industrial sectors are cyclical, so they demand trading to get the best returns. Fund managers actually cant hope to match the performance of small investors (if you are half good) because they have to manage huge amounts of funds and charge you a fee besides.
MY ADVICE is (i) look at a range of market indices and decide upon what level of correction would give you the justification you need to get in & out of the market. It might be a 5-10% retracement or a break of trend. (ii) Diversify if you dont have an intimate knowledge of the company or management. More than 30% in one company is aggressive.

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