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Fighting the cult of negativity, some realistic views on inflation

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February 22, 2011 – Comments (43)

In my entire 25 months of participating in the markets, and in the CAPs blogs (and also yahoo message boards for specific stocks, although I participate alot less now than I used to on the YMBs, as I am not making many new stock picks) I have been overwhelmed by the negativity.  In all of scope, consistency, and intensity it is remarkable.  

I have read one book on investing, Dremans book from the 90s on contrarian investment strategies.  In it he explains bear markets and market panics and explains that at bottoms nobody wants stocks, and every and any excuse is made why they are still expensive, while at tops or in bubbles any and every justification for why they are still cheap is paraded around grandly.  By pure luck, I picked THE perfect book to buy for investing over these 25 months.  That is, exactly, how it played out.  His book also told and gave statistics on how in big crashes the stocks that crash the most will rebound the most, how the cheapest stocks outperform, and all of that.  It all played out exactly as it has in the past, not really different at all.   Remember that freaking p/e of the S&P chart that the bears loved to parade around as the market rallied in early 2009?  Justifying that XL, with a price/book of about 0.1 based on todays book value, and a normalized p/e of about 1, was too expensive, you better sell it, right now, because the S&P would be fairly valued at 250.  I can't even imagine how preposterous the justifications for the tech bubble valuations were. 

Anyway, at times this resounding and infinitely energetic wall of negativity gets to me and I become incredibly irritable.  I sit here at my computer imagining that my fellow CAPsters are sitting at home licking their lips, dreaming of a crash like tomorrow looks like, dreaming of seeing the misery in their neighbors eyes, drinking fine spirits as their precious metal holdings go up, and planning long and elaborate speeches to rub it in the face of everybody whose 401k dropped.  Thats what really bothers me:  the apparent reveling in the suffering of others.   

Back then the negativity was about how all the banks were zombies and we were going to have a great depression, a deflationary crash, then it was how QE would cause runaway inflation, then back to deflation, now back to inflation and an amazing, internet-wide assault from hundreds of voices on how stupid Bernanke is and how he is to blame for everything.   QE2 is causing food riots, unrest in the middle east, it and it alone - Bernanke, no, "The Bernanck" himself is causing all of this.   There is no need to elaborate on how or why, or to think about other reasons why commodity prices may go up, or to even stop shouting at all.  This is a cult, the goal is to chant.  Sorry for the insulting tone, that is payback for making me aggravated on a regular basis for the last 2 years and for keeping probably thousands of people with kids to educate out of the biggest bull run of our lifetimes.  Something for which I sort of think you'll never bother to even think about.  

All I want to do in this post is offer some thoughts on why commodity prices may be going up that aren't QE2. 

SPECULATORS AND CHINA, FOLKS

1.  As part of Jim Chanos's short-china thesis, he has noted that every commodity company he talks to says that China is the marginal buyer.  That has also repeatedly been noted in Alcoa and other earnings calls that I have participated in over the last couple of years.  It has been a part of the "pro-commodity" thesis for the last 2 years as well.  China is expanding, buying, therefore commodity demadn will stay up.  

2.  Again per Chanos's short-china thesis, China, the worlds 2nd largest economy, is now up to 70% of GDP being internal construction.  That is 4x the peak for the US at the top of the bubble.  That is a greater amount of construction than we ever had.  It is massive, and it will consume enormous amounts of everything.  

So maybe, just maybe, if actual user-demand is a part of the rise, Chinas enormous demand has something to do with it?  I don't know.  

3.  Oil is probably actually now, or at least possibly, at a point where its demand/price interactions aren't so stretchy.  Marginal increases in demand give larger increases in price. 

4.  All time record amounts of money are being speculated on commomdities.  They are core parts of innumerable hedge funds and must be the trade-du-jour for retail investors, as the blogosphere is flat out full of discussion of them.  

5.  physically backed ETFs must now hold 10's of billions of dollars worth

6.  this trend actually began well before any QE butwas massively interrupted by the crisis and worldwide recession.  

7.  As evidence for 4., that crisis saw innumerable hedge funds implode, many of which were heavily long commodities, and this exacerbated the swings in the prices.  

8.  Bearish people love shadowstats.com.  Go there and look at his estimates of M3, the broadest (and most relevant, I would imagine) measure of money supply.  Its been in decline for several years.  The "printed money" has either A) not actually made its way into the economy or B) not actually replaced the money lost to deleveraging.  THERE ARE LESS DOLLARS IN THE WORLD NOW THAN IN 2007.  

People, from perch belly up to the bar, runaway massive speculation on commodities is a huge part of the price swings here.  If this is not the case, I would love to hear why its not explained.  Why does the fact that many times the actual user volume of futures trade every day not possibly explain a great deal of this?  To counter, you would say that people are speculating with "funny money" from Bernanke.  Its still the fanatical devotion to commodity buying in the speculative and investment world right now that is driving it.  Bernanke didn't make them buy gold, copper, and oil with their funny money.  

And, on a side note, I'm still waiting for my funny money check.  I guess its coming pretty soon?

 

THE WHOLE CONCEPT OF COST-PUSH INFLATION IS A BIT OUT THERE.  And beyond that, the entire idea of cost-push inflation seems fairly foolish.  If bread and gasoline go up in price, how can that make clothes and televisions go up?  Believe me, as a guy who has owned many businesses, if a business has the ability to force higher prices on its customres it does so with considerable haste.  

The fact of the matter is that wages in the developed world have dropped over the last few years, reducing pricing power at companies, which is itself an anti-inflationary reality.  

If a company can't pass on its costs, then rising commodity prices won't force massively rising inflation (except direclty in the commodity prices themselves) and they in fact create a deflationary force by reducing the amount of spare money that the average consumer has to spend. 

This is extremely simple stuff.  If gas goes up, heating bills go up, and needed food goes up, this creates less demand for new cars, restaurant tabs, new clothes, and other discretionaries, which in turn disables companies that make those from raising prices.  It is also deflationary to itself as it increases the likelihood of a recession.

What it is is bearish for corporate profit margins.  If the consumer has less money to spend, and if their input costs are rising, they get a bit of a squeeze.

Its bearish for wall street, eventually, but not actually bullish for broad widespread inflation.  

 

THE "STAGFLATION" OF THE 70S IS NOT GOING TO GET REPEATED NOW, AND HERE IS WHY.  


We don't have wage growth.  In the 1970s (thanks to Tom Graff's blog from RealMoney Silver, which is my #1 favorite paid stock/market/blog service) we had 3 years with double digit inflation, 74, 79, and 80.  In those 3 years CPI was 12.3, 13.3, and 12.5.  Unit wage growth was 11.5, 12, 11.3.  Right now unit wage growth is still negative and overall wage growth is far from great.  

If wages aren't rising, and necessary commodity prices rise like crazy, where is all the money to support 10%/year increases in the cost of rent, housing, clothes, furniture, trampolines, liquor, and bar tabs going to come from?  

Without wage growth a repeat of the 1970s just isn't in the cards.  

 

SO WHAT IS IN THE CARDS?

Scenario one - endgame is a china slowdown.  Imagine that the worlds current biggest consumer of many commodities, China (there is one heckuva lot more construction going on there than here, so we can't blame ourselves, and we can'nt one bit blame "The Bernanck" for actual user-demand), comes to a crash or significant slow-down from its currently unsustainable path of construction malinvestment:  say Chanos is right, basically, eventually. ...  That will reduce commodity demand AND PROBALBY MORE IMPORTANTLY that will take the wind out of the sails of commodity speculators, resulting in falling commodity prices.  

If the rest of the world suffers greatly for this, via less exports to China or something else, that could lead to another worldwide economic slowdown or even recession which should further supress commodity prices and further discourage speculators from going all in on Copper with 10x leverage.  

If the rest of the world doesn't suffer greatly for this, that may mark the onset of the next secular bull market, as only once the runaway rising of commodity prices comes to a halt will a new decade or two of growth and prosperity transpire.  Its worked that way EVERY SINGLE TIME for 150 years.  Fantastic paper by Barry Banister on that thats easily the most helpful tool I have ever seen in understanding the cycles of markets.  

Scenario two - endgame is a commodity-inflation forced slowdown or recession.  Lets be serious if we manage to speculate our way into another epic commodity bubble, gas at $4-5-6 bucks, heck, gas at 8 bucks.  Bread is 5 bucks a loaf, milk is 5 bucks a gallon.

What happens?  We have a recession, again, and so does half the world.  People NEED gas and food and if those prices head upwards eternally they will STILL have to keep buying them, and that will lead to less and less demand for other things, which will lead to layoffs at manufacturing plants and restaurants and shopping malls and car lots.  Thats deflationary, then we see commodity prices fall again.  

Scenario three - commodities underperform equities for a time and speculators sell copper and buy some SPY.   I don't know if thats goign to happen just yet, but it would be a better case. World growth is encouraged by falling commodity prices and the "wealth effect" and ...  the endgame still sees commodity prices at best stabilize and at worst fall.  

Scenario four - China is sustainable and it continues this level of construction forever or at least a really long time.  This breaks into two seperate scenarios:   in4a eventually speculative interest and the premium it is causing leaves the market and we stabilize at actual supply/demand.  We now have to wait for demand from the rest of the world to catch up to drive prices still higher, etc.  And 4b speculators are not increasing prices, but rather this is actual market demand, in which case prices still must eventually stabilize at China's demand levelplus a continued reduced level from the rest of the world, whose economies suffer the ill effects of the high commodity prices.  

Bottom line:  we have high unemployment and very low wage growth.  If commodity prices continue to be run up forever this will almost certainly force, eventually, a recession, which will almost certainly result in commodity prices coming back down.  If China stumbles as Chanos anticipates, this will almost certainly result in commodity prices coming back down.  

The 70s had significant wage growth (wages, in fact, nearly doubled in that decade), right now we do not.    That is an ENORMOUS difference, and drastically reduces or renders overwhelmingly unlikely the probability of 70s style stagflation.  Indeed, continued commodity inflation seems to point to a path that would send commodity prices back down again.  

And beyond that, to my point about the "cult of negativity" and their present contention that Ben Bernanke is the reason for all bad things, including the fact that they stubbed their toe yesterday and their neighbor has a nicer lawn... people, if someone is exporting inflation to the world right now its CHINA, they are the buyer.  Beyond that we have really only ourselves and the speculators among us to blame, and those spending all their free cash buying commodities would, ahem, be the ones running up the prices.  

I do realize you could argue that the speculators are buying because of Bernanke and QE, but this was already the worlds great obsession before QE and before the crisis.  Commodities are the giant momentum trend, the thing heading to a bubble, just liek tech in 1997 or whatever.  So everybody is piling on the bandwagon, left and right.   We have an abnormal amount of investment cash going into commodities, this is causing higher prices. 

From my perch, the vast majority of the likely scenarios lead to a cessation of rising commodity prices or drops, because if they keep rising too long we go back into recession, etc.  

Flopflation, not stagflation, is the most likely outcome.  Hyperinflation remains a wildly improbable outcome and essentially all of the discussion that predicts it is ... every bit as well thought out as that p/e chart of the S&P touted so long ago all over blogs everywhere by angry bears.  HAHA!

43 Comments – Post Your Own

#1) On February 22, 2011 at 3:14 AM, checklist34 (99.71) wrote:

The deflationary forces abundant in the world today -vs- the power of the momo trade of the decade (long commodities) and China's real estate construction binge.  Take one of those away (or if the latter goes it will take thewind out of the formers sails) and you have commodity deflation.

And everybody who now argues that we have widespread inflation because commodity prices are going up, will then argue I am sure that commodity prices going down are not, in fact, deflation.  We can have a semantic debate about it and then panic about something new.  ;)

And we lack wage growth, and if commodity prices keep rocketing up at a million miles an hour, we will run into less cash being spent on other things and possibly back into another scenario where wage growth goes negative as pinched companies lay people off.  This should in turn lead to a decline in commodity prices.  

With slack already existing in the industrial space and wage growth so low, the stage is simply not set for widespread inflation.  And ongoing dramatic commodity price inflation should lead in the end to ...  less demand for them (or many of them) and some deflationary forces in the commodity space. 

Flopflation, unless the world finds a neat balance.  Which doesn't seem to be the most likely scenario.

 

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#2) On February 22, 2011 at 4:50 AM, FleaBagger (29.77) wrote:

Even if luxury (non-food, non-energy, non-RE) prices come way down, the broke will be feeling the effects of stagflation as their wages stay flat and the price of necessities shoots higher. 

Yes, there is a deflationary effect of lost dollars on balance sheets, but that has largely passed. You seem to misread the M3 chart: it has been in decline for about 1.5 years, and is now turning upward.

Furthermore, the Austrian Money Supply is probably more accurate for measuring the money supply, and it has increased through the recession.

Inflation in the price of necessities still has room to run, as do unemployment and underemployment. Main Street recovery does not seem to be on the horizon for the next 3 years. The stock market may reward the shrewd as it always does, though. 

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#3) On February 22, 2011 at 5:22 AM, whereaminow (20.57) wrote:

Long post but worth the read.

It's true that the 70's had high (nominal) wage growth. But wage growth always lags price increases. (It has to. People who use the money last suffer the most in an inflationary environment.) Wage earners will see their wages grow in the next decade as well, but just like people in the 70s, they will be playing a losing game of catch-up. 

Although, as I have stated, cyclic flations or flopflation (such a great term) is the Fed's path up until the point they refuse to monetize debt (Armaggedon), in the short term, stagflation is already here. MIT's Billion Price Project reports 10.6% price inflation. The Producer Price Index has risen for the seven consecutive months.

The results are in. Stagflation is the present. Flopflation, however, is the future.

David in Qatar 

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#4) On February 22, 2011 at 6:46 AM, silverminer (31.35) wrote:

checklist,

Although we appear to approach these topics through disparate conceptual paradigms, and I draw very different conclusions on most of those major points, I nonetheless respect and applaud your well crafted tome covering your own Foolish perspective on these important issues.

I understand your level of frustration with all the negativity. I urge constraint in terms of presuming that folks are actually hoping for some of the less palatable scenarios to transpire. I can only speak for myself, and assure you that does not characterize my mindset. I have repeated incessantly over the years my undying hope that I might be proven wrong in the entirety of what I see taking shape in our future. I would rather lose every last cent I have invested and have the U.S. economy come roaring back to life in a context of fast-declining deficits, unemployment, and derivative debt impairment. The second I see those threats receding, you can bet I will embrace a far more positive macroeconomic outlook. In other words, take a moment to consider that those anticipating a difficult road ahead are likely just as frustrated by the negativity of it all as you may be.

I hope you will continue to examine the cost-push inflation scenario with open eyes, as I do feel strongly that cost-push inflation is a foregone conclusion.

With respect to China, keep in mind some of the key differentiators between China and the old-guard Western economies. One of those is China's far smaller exposure to toxic derivatives, along with its still-standing warning that state-run enterprises reserve the right to walk away unilaterally from failed derivative contracts. Derivatives remain the key powder keg of distress in the global financial system.

I wish I had time to respond in greater detail, but it's a busy time. I'm sure fellow Fools will have no shortage of input here, and I hope that those of disparate views will exchange those perspectives in a manner befitting of this wonderful community.

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#5) On February 22, 2011 at 10:18 AM, leohaas (32.77) wrote:

Post of the year!

You nailed it with this one: "Its worked that way EVERY SINGLE TIME for 150 years." All the negativists have is saying: "But this time it is different."

By the way, most of the negativism is political. They hate the FED, so they try to blame everything that's going wrong on the FED. They hate big government, therefore it is all the government's fault. (Reference to Nazi Germany removed). They want change. Real change, not the kind Obama promised. And they use forums like the CAPS blog in an attempt to affect that change.

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#6) On February 22, 2011 at 10:34 AM, checklist34 (99.71) wrote:

Flea, thanks for posting.  the M3 per shadowstats, this morning, is still declining.  The rate of decline is lessening and it appears that it could go positive soon, but its its below 0 thats means yoy its dropping.  You can't just look at the line. 

 

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#7) On February 22, 2011 at 10:35 AM, russiangambit (29.27) wrote:

> Anyway, at times this resounding and infinitely energetic wall of negativity gets to me and I become incredibly irritable.  I sit here at my computer imagining that my fellow CAPsters are sitting at home licking their lips, dreaming of a crash like tomorrow looks like, dreaming of seeing the misery in their neighbors eyes, drinking fine spirits as their precious metal holdings go up, and planning long and elaborate speeches to rub it in the face of everybody whose 401k dropped.  Thats what really bothers me:  the apparent reveling in the suffering of others.   

Yes, there is plenty of negativity but every bear has capitulated already, they are all angry and long.That means the negativityt this point is actually not due to desire to make a quick buck but because they actually care what happens with this country next? 

And you do realize that most actually do have 401K and we are  "forced to dance" as long as the music playing?

I think this is were negativity comes from -  understanding that we just painting over the problems and rpetending everything is well when we actually could've been solving the problems?

I learned it at my job a long time ago - even if you are right you get hurt by the crisis all the same, "I told you so" really doesn't feel all that good. There was this one project I was on, I kept saying it won't work with our current architecture( I was one of the architects), but the project delivery was already promised to higher ups. I was saying , just tell them we can't do it now, but nobody had the courage to go back and say it like it is because the powers that be really wnated it. So what, we spend a year and  a million on a project and we can't deliver. The managers still had to go back and do "mea culpa" but I gues their excuse was that they"tried their best". At this point I was so fed up, I left the company shortly thereafter. Did it do me any good that I was right - no, because I had no power for decision making.  The same with current politics and economics - we know it is wrong but we are not decision makers.

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#8) On February 22, 2011 at 10:41 AM, Option1307 (29.70) wrote:

Great blog per usual!

In my entire 25 months of participating in the markets, and in the CAPs blogs (and also yahoo message boards for specific stocks, although I participate alot less now than I used to on the YMBs, as I am not making many new stock picks) I have been overwhelmed by the negativity.

Extremes are never good, especially when investing. However, I must ask you, do you think that the your timing of entry into the market influenced your overall outlook? I don't mean that in a critical/rude way, just an honest question.

If I'm remembering correctly you first started buying in late 08, after most of "the crash". It seems entirely justifiable that your outlook was significantly different than from someone who had just lost ~50% of their 401K/etc. The world essentially was ending for many of those folks.

Im not justifying their negativity as I agree it was likely extreme, but I also think you should keep things in perspective when looking back on the past. A lot of people had recently lost the butts in the market and were rightfully scared of what the future held for them. Whereas you came into the market after a serious beatdown and were buying at quite possibly a generational low.

Again, I'm not criticizing rather just throwing out some food for thought.

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#9) On February 22, 2011 at 10:45 AM, russiangambit (29.27) wrote:

> Scenario two - endgame is a commodity-inflation forced slowdown or recession.  Lets be serious if we manage to speculate our way into another epic commodity bubble, gas at $4-5-6 bucks, heck, gas at 8 bucks.  Bread is 5 bucks a loaf, milk is 5 bucks a gallon.

This is the most likely scenario at this point in my opnion. The bubble has been reinflated, but it also caused a bubble in commodities. It will eventually pop, but it will hurt a lot of people again. And yes, I leave the blame at the FED's door . Theya re arrogane beyond any measure. They think they can outsmart the free market forces. Yes, the succeeded in reinflating the bubble but they also reinflated commodities. Why? Because this is a global world now , an open system, all their theoriesare only applicable to a closed system , i.e. a system where US is so much larger than everybody that it doesn't feel the feedback from the rest of the world to its actions. This world is no longer. In this current world there is a feedback loop for everything that US does and it has to acknowledge that.

I mention earlier, that the rest of world is nowhere as stocks centric as the US. In the rest of the world people will put extra money in real estate and commodities first and also long-term consumer goods, stock markets are rather undeveloped. So, with rise of emerging world we inevitably get bubbles in real estate and commodities if there is too much hot money. Real estate is local but commodities are global and this is what we got, a developing commodity bubble.

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#10) On February 22, 2011 at 11:06 AM, checklist34 (99.71) wrote:

David, thanks.

Armageddon is the point where the fed finally actively monetizes debt or you are saying that it is currently monetizing, and at the point it no longer does we reach armageddon?  I didn't quite understand your comment.

And, why do we have stagflation?  The economy is growing at a consensus of about 4% for 2011, is that lower than normal, low enough to be considered stagnant?

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#11) On February 22, 2011 at 11:21 AM, checklist34 (99.71) wrote:

silverminer, thanks for stopping by.  I don't know if my tome was well crafted, like everything I post I just sat down and wrote it without so much as a proofread.  

the "conceptual paradigm" I always try to approach things from is nothing mroe or less than occams razor.  

it is more difficult to envision a scenario in which commodity prices, from here, continue to elevate wildly than it is one in which they do not.

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#12) On February 22, 2011 at 11:27 AM, checklist34 (99.71) wrote:

leo, thanks!

if affecting change is the goal the super-negative/hyperinflation/gold/anti-fed/"the bernanck" crowd would serve themselves, and us provided the desired change is to our benefit, sooooo much better by sticking to factual commentary, avoiding hyperbole, and elaborating on points beyond the chant-of-the-day (as in whatever super-negative comment is making the rounds just then and currently popular). Quit stating that inflation has ruined everybody and their dollars buy only 7% of what they did, 14 times less, before the fed. They have like 20x as many dollars as they would have, we are better off than we were 30, 40, 50 years ago. 

etc.

Thats what gets me so bent out of shape about it all:  the overwhelming willingness to deviate from reality and venture far into the realm of a pep rally, a bunch of people extremely excited about something re-inforcing each others excitement to an extreme.

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#13) On February 22, 2011 at 11:29 AM, checklist34 (99.71) wrote:

Gambit, the bears would have lost betting against equities, and they certainly lost out on a chance to make an epic return...  but gold and silver seem to be their bastion, and those continue to perform...

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#14) On February 22, 2011 at 11:53 AM, checklist34 (99.71) wrote:

Option, yes, that has occured to me, and I am forever grateful for that timing and the fact that it no doubt helped me keep a clear mind.  On the flipside, the final tipping point in whether we sold our biz's or not was the declining market.  We assumed, flush with our memories of Dremans book, that the crash would pay off better than owning the biz's over the next 2-5 yrs.

I will say that I did not buy last summers dip as aggressively, in general, as I got carried down with it.  I made sizable purchases of IRE and NBG in April, was briefly up like 30% on the positions, and then lost my fanny.  Riding it down made me feel more scared (as is evidenced in blogs from me last summer) than i had been in early 2009.  

In the end it occured to me why I was feeling bearish and I made an absolutely monstrous bet on TCK and short various levered bearish ETFs that mroe or less saved my 2010  (and in fact it turned out very well). 

It is something to always keep in mind, and your point is fantastic.  And when I have said all year that I refuse to chase the market and will keep raising cash the entire time...  

It is for these reasons that I will endeavor to just buy big dips in the future...  at least until I feel a new secular bull is upon us:

1.  a crash to 1300 from say 1450 will leave a much better selection of cheap stocks than a giant rally to 1300, this is because some sector will fall out of favor and get pummeled, etc.

2.  I am proven good at buying dips, in fact I have probably bought them better than any and all hedge fund pros extant over my 25 months.  I am far from proven good at stock picking in an up trending market

3.  as you note, one is much more mentally prepared to buy the dip and see it for what it is if you aren't so deeply entrenched in it.

As an aside...  on the day I bet, literally, the farm on my thesis from early march 2009 I was down 30% and 40% on money I was managing myself.  

I was down 20% from my high in July 2009 when I deployed all cash, and down more than 20% from my inter-year high last sumemr when I deployed.  

It is emminently true that a huge challenge is to fight off those emotions and act rationally.  This will also be true at or near the top of a bubble.  And this makes avoiding cult-membership extremely critical.  

Here is the story of my self-invested money since November of 2008 when I got it.  

Say I had 10 bucks.  

I put 1.50 into the market via an investment with a fund that left the cash in my own brokerage account and had a great track record of beating the Russel 2000 and throttling the S&P.

I put 2.00 more into it in early December.  

In early January, heavily concentrated on the 5th and 6th, I self-deployed about 2.00 of the remaining 6.50.  I trickled more and more money into the market as the days ticked by and the market began its endless tank.

By Feb 23rd  I had about 7.50, $3 in the fund and I had already lost about 2 bucks of my 6.50 (on paper) and was massively down on everything including XL, TCK, ASH, and my (by far) biggest position, NCX.  

On Feb 24th NCX got bought out and I had 10 bucks again, over the next 2 days I dumped mobs of losers to wipe out the tax gain (mostly).  

By march 8th I was down to about 6.50-7 bucks, again, as everything I owned kept tanking mindlessly, day after day.  

I wiped out the rest of the NCX gain by selling losers and made my big bet.  

By March 13th I had 11.50

In late march I sold out, at a very slight profit, $3.75 from the fund and deployed it into my own accounts.  

By April 17th I had nearly 17 bucks.  I would have had 18 bucks,or maybe even 18.25, but I had to blow literally 5% of the portfolio to unwind a huge number of covered calls I had stupidly sold.

At the days end on April 20th I was down to 15 bucks.  It was an epic slaughterhouse.  >10% loss in a single day.  That day I took long positions in WYNN, CAT, DE, BA, and others with cash I didn't have by using margin to sell puts and then using the cahs to buy calls. 

Intra day on May 8th, I had 21 bucks.  

The next week I was down to 17 bucks

By the June highs I had 21 bucks again.  

At the July lows I had 16 bucks

By september of 2009 I had 30 bucks and began buying exotic and other cars at a rate shocking to my neighbors

I hit 35 bucks at the January 2010 highs before falling to 30 bucks again in the first dip of 2010.

I hit 40 bucks in April, dropped back to 30 bucks by July, and finished the year at 43 bucks.  

Up 9% before today, so probably up like 7% now or something. 

It has been a wild ride.  Along the way I spent some of those bucks on cars and houses, and taxes, and farmland, so the actual return has been better than  that.  I do also owe about 2 bucks to my brokerage for margin debt. 

I don't actually know what the return is on money I invested myself is, from where I started with the S&P at about 920 or something.  I will one day calculate it.  But it must be far over 5x, and probably 7x+ from the march bottoms.  

I declare victory. 

AND THE ONLY REASON I WAS ABLE TO DECLARE THAT VICTORY IS BECAUSE I NEVER JOINED A CULT, I NEVER LET MY THINKING BE DEFINED BY THE CLOSED OFF BELIEFS OF A GROUP, POSITIVE OR NEGATIVE.  

THINK FOR YOURSELVES, TRY VERY VERY HARD TO NOT LET YOUR PATH BE INFLUENCED PURELY BY THE THOUGHTS OF OTHERS.  MAKE SURE WHAT YOU ARE SAYING MAKES SENSE.  MAKE SURE ITS REALISTIC, STRIVE TO KEEP VERY VERY VERY VERY FAR AWAY FROM HYPERBOLE.

not a lecture to you option, just to the masses at large and the bubbles THEY, not the fed, create.  The fed never made anybody buy a house at record prices, it never made anybody buy pets.com, and it never made anybody buy cotton at record highs, etc.  

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#15) On February 22, 2011 at 11:58 AM, checklist34 (99.71) wrote:

The insanity of the ride I have been on in the markets is the reason for my huge pursuit of a mroe reasonable way to beat all the over-educated hedge funds.  A more automated way. 

You are reading a post by a guy who spent 100 hours a week in the first 4-5 months of 2009 reading 10qs and 10ks and listening to conference calls, sleeping 2-3 horus a day, living on caffeine. Terrified out of my mind half of that year, new kid on the scene and surrounded by this epic cult of negativity, who frequently told me how stupid I was.  Just suck it up and bet on history repeating itself. 

Anyway, that is why I think that the proper design for a hedge fund would be one that isn't like how I have managed my own money.  No customer of a fund wants to go on that ride iwth a significant portion of his/her assets.  

 

 

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#16) On February 22, 2011 at 11:59 AM, checklist34 (99.71) wrote:

Gambit,

   do you think there is any chance that the FED is doign what it, after many sleepless nights, thinks is the best choice?

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#17) On February 22, 2011 at 12:11 PM, rofgile (99.30) wrote:

I like the snarky new checklist34!

---

 I have another possibility - things will just be really boring for a while. Back in 2008-2009, things were interesting, because those of us who said "this crash will pass" and put all our savings into stocks trying to buy up everything when it was mispriced - that was exciting and fun!  And a bit stressful at times (I kept putting money into MTW in 2008-2009 all the way down.. wondering/feeling.. am I just throwing my savings away right?  And having to say - no.. this is rational, fear is not). 

 Well, things are perhaps returning to normal.  You see it in the rise in consumer confidence, the rise of exports/imports, and recapitalization of banks.  You see it gradually in the rise of government bond yields.  You see it gradually in the OK costs for corporate lending.  Maybe things are getting boring.  No more 2-baggers for a while.  Just a slow plateau.. sometimes a 5%-10% rise over a year for a good stock.  Really boring times.  Eventually.. five-ten years from now after we reach a much higher S&P, and prices have grown far above profit levels.. things correct again in a new way.  In the mean time.. its a boring investing era.  I think its good to play defensively, I hope to eventually raise my cash share to 20% of my holdings this year (currently 10%, the highest since 2008). 

---

 One catalyst I saw for a correction is that government bond yields are rising to levels that it becomes attractive to start moving some money back out of stocks again.  Read this article by the Canadian National Post.  In fact, checklist34- I hate to recommend a conservative paper (I'm quite the opposite persuasion), but you should read the Financial Post of this newspaper.  Its been fairly reasonable and almost bullish on equities for the whole of 2009-2010 - quite a different viewpoint than US papers.  Plus it has great commodity coverage, since mining and commodities are such big industries up north.

---

 My big prediction?  Rising copper prices will greatly benefit aluminum.  We should be using this metal for much more uses than we currently do.  

 -Rof 

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#18) On February 22, 2011 at 2:00 PM, Option1307 (29.70) wrote:

Fantastic response, thanks checklist. Every Fool can learn a tremendous amount from reading your posts, +1!

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#19) On February 22, 2011 at 2:27 PM, whereaminow (20.57) wrote:

#10) On February 22, 2011 at 11:06 AM, checklist34 (99.80) wrote:

 

David, thanks.

Armageddon is the point where the fed finally actively monetizes debt or you are saying that it is currently monetizing, and at the point it no longer does we reach armageddon?  I didn't quite understand your comment.

And, why do we have stagflation?  The economy is growing at a consensus of about 4% for 2011, is that lower than normal, low enough to be considered stagnant?

The Fed is currently monetizing debt. When they refuse, then it's go time.

Stagflation is high unemployment, high inflation, slow growth. 4% GDP (a nonsensical aggregate with no real meaning) would be considered slow, if I cared about GDP. I don't but either way, growth is slow. 

David in Qatar 

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#20) On February 22, 2011 at 2:36 PM, whereaminow (20.57) wrote:

not a lecture to you option, just to the masses at large and the bubbles THEY, not the fed, create.  The fed never made anybody buy a house at record prices, it never made anybody buy pets.com, and it never made anybody buy cotton at record highs, etc.

Are you saying Austrian Business Cycle Theory is incorrect? Would you like to debate on this?

David in Qatar 

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#21) On February 22, 2011 at 2:45 PM, davejh23 (< 20) wrote:

"I have been overwhelmed by the negativity.  In all of scope, consistency, and intensity it is remarkable."

I would say that blog posts/comments are the contrarian view.  Sure, if that's all you read, it looks like everyone is bearish...it must be a great time to buy. 

On the other hand, the MSM has been overwhelmingly optimistic recently.  Investor sentiment is very high, and short interest is at multi-year lows. 

So, which side do you trust?  The true contrarian position right now would probably be to aggressively short.  Read all the negative commentary from the alternative media and you would probably think the exact opposite. 

I think you can agree that it's not as clear cut as you, or your book, implies.  A year from now, looking back on Spring 2011, I think you'll be able to argue that your contrarian book was dead on whether the market continues to rally or if the market crashes.

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#22) On February 22, 2011 at 3:02 PM, whereaminow (20.57) wrote:

checklist34,

To be specific, your argument is the standard Keynesian argument of "animal spirits" causing bubbles.

But animal spirits is not an explanation and it merely begs the question, "why the cluster of errors?" After all, if people are always acting foolishly, nothing should ever work in a market economy. Why, at this moment in time, did everyone act like an idiot? Animal spirits does not answer that question.

I respect you a lot. I'm not debating you because I want to make you look bad.

But this post reeks. It's easier to defeat other viewpoint when you lump them all in together and label it a cult. The viewpoints you are arguing are wide ranging. 

Too much negativity is not an argument. Alstry could write the same post in reverse. Too much pollyanna. And it would be pretty much be sentence for sentence.

Finally, I thought you were on our side. Speculators do not cause markets to rise or fall. This has been proven over and over again. They enter already rising and falling markets. This same line of reasoning is used by politicians to ban short selling. Is that the side you want to be on? Speculators do not move markets. They provide liquidity to already moving markets.

Commodity price rises cannot be explained away by speculators. Again, that's a Keynesian line. I believe Krugman ran that exact same column a couple months ago. If you want to be taken seriously, you need to do better than that.

I'm sorry if this comment sounds harsh. It's not meant to be. I do like you and outside of economics, we have many shared beliefs.

I just think you haven't spent enough time analyzing different economic viewpoints. Mainstream Keynesianism is not the side I would want to be on.

David in Qatar 

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#23) On February 22, 2011 at 3:53 PM, russiangambit (29.27) wrote:

>  do you think there is any chance that the FED is doing what it, after many sleepless nights, thinks is the best choice.

Sure, you know if I am a member of a communist partyand benefit from it am I going to rock the boat for "the people" or do everything in my power to preserve the status quo? USSR was slowly declining for more thyan 30 years before Gorbachev outfoxed everybody else and rose to be the leader of the communist party and decided to end the status quo. If not him, USSR would've existed for another 20 years at least. FED is no different than Politburo, they have their religion/ ideology and they stick to it, they stick to their false choices because they are afraid to lose power. Because they refuse to do the right thing and reduce the role of the finance in the economy USA will continue declining and will eventually face even a bigger crisis. In fact, they've already waited too long. the right time was in 2003- 2004. If they withdraw support now it is going to be really bad because the real/ non-financial economy is in bad shape, it is being masked by financial bubbles. Yes, it is very scary to expose it at this point, but waiting makes the problem only worse.

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#24) On February 22, 2011 at 5:23 PM, awallejr (83.96) wrote:

"but every bear has capitulated already"

We still have Binve ;)

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#25) On February 22, 2011 at 5:41 PM, rofgile (99.30) wrote:

I don't think the bears capitulated, they just morphed into precious metals creatures.  

 -Rof 

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#26) On February 22, 2011 at 5:51 PM, davejh23 (< 20) wrote:

In the face of high investor sentiment, rosy analyst opinions, and low short interest, the only pervasive negativity I see (besides on these blogs) is in the forward guidance for many companies recently.  You aren't even a little bit worried with multiple stocks falling 10% on decent earnings but lowered forward guidance?  I'm not going to call the near-term direction of the market, but I'm fairly confident that a new bear market will start right before analysts start lowering S&P EPS estimates.  With a good number of earnings reports expressing caution and market weakness, who knows how soon that could be?

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#27) On February 22, 2011 at 6:45 PM, outoffocus (22.85) wrote:

awallejr

Apparently you havent been reading Binve's posts lately...

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#28) On February 22, 2011 at 7:01 PM, awallejr (83.96) wrote:

Well davejh23 are you predicting negative GDP growth?  Analysts are prediciting about 3.5% GDP for the US this year and I think 4.2% for global.  Nothing to get exhuberant about, but still steady growth.

outoffocus

Binve:

"you see my projection shows that we peak out somewhere around this level (1350 or so) and then we will spend the next year or so in congestion (not crashing, just consolidation). So I do think 2012 will be a bottom of sorts. Then I think we move up until 2015-2016, and then we get another cyclical bear to finish out the secular bear. . . .  I think there will be a lower low in both nominal and real terms to finish out this secular bear."

Predicting another crash knocking us down more than 50% sounds pretty bearish to me heheh.  Although he is bullish on gold and always has been.

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#29) On February 22, 2011 at 11:09 PM, ChrisGraley (29.75) wrote:

Why the hate for the bears?

There are 2 sides to every trade and the best way to make money as a bull is in a room full of bears.

I do agree with a lot of your points above, but even though you went into a lot of depth and effort. The conclusions are a little too simplistic.

My thought process has definately changed multiple times since the collapse, but since about May of 2009 I've been generally bearish equities and bullish commodities.

I agree we David in that we are most definately in stagflation. If we were not in stagflation, we should have already seen an increase in both employment and wages. I do also most definately agree with your idea that we put a lot of money into the system, but the money didn't go anywhere. If we would have effectively spent the money to create jobs, the velocity of money would have put us into very high inflation right now.

I am also watching the housing bubble in China. It will most definately pop sometime, but we could be talking another decade. Let's say it pops though. How does China respond? Well, since a slow down in China's economy, could mean a civil war, I think that they will throw as much QE as they can at it, which might not be so good for us. First off they can change the peg to the dollar any time that they want which would hurt our exports and raise the price for commodities. Next, they hold a lot of our dollars and could sell a lot of those dollars to finance their QE which would have the same effect.

China is strongly asking it's population to invest less money in real estate and equities and more money in gold and silver. I think this gives us a clue of what they are expecting.

Also, while I agree that Lybian oil isn't a huge concern, Iranian oil certainly is. If Iran collapses, Saudi Arabian oil comes into play as well.

I'm not out there to change your mind as much as I'm here to open it.

Last but not least, as russian pointed out, I'm not rooting for a bear market. I have a 401k. I have an HSA. I still have some long term bull investments outside those 2 accounts. It's a lot easier for me to make money in a bull market than in a bear market. (Especially since I don't like shorting stocks)

So my response for quite a while has been to buy as much silver as I could get my hands on. I was initally buying it because I thought it was undervalued before the crash. I saw the inflationary impact of the first bailout while Bush was still president though and kicked it into high gear at that time.

Could I be totally wrong? Yes. But sofar the market and economy have seemed to move with my thought process and not against it. 

It's really funny that you feel outnumbered by the bears. I've felt outnumbered by the bulls for a very long time now.

It's ok with me though.

The best place for a bear to make money is in a room full of bulls. 

Look at your recs in this post and decide if there are more bulls or bears.

PS. I tried to use the term "most definately" to demonstrate the points where I have a high conviction. 

 

 

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#30) On February 22, 2011 at 11:23 PM, ETFsRule (99.94) wrote:

whereaminow (92.44) wrote: 

"MIT's Billion Price Project reports 10.6% price inflation"

Sigh.

No they didn't. They never reported 10.6% price inflation.

On the Zerohedge site it says:

"...the ongoing surge in prices, which have increased by 1.25% in the last 45 days (December 31, 2010: 101.085, February 14, 2011: 102.353), a simple annualization indicates a 10.6% increase in prices in 2011! "

So, the people at Zerohedge (not the people at MIT) have taken a reported price increase over a 45-day time span, and annualized that number out to an entire year. I hope I don't have to explain how ridiculous that is... especially considering what is going on in the world right now.

In the future, please do a little fact-checking before posting stuff like this.

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#31) On February 22, 2011 at 11:38 PM, whereaminow (20.57) wrote:

ETF's, 

Every month and quarter a (price) inflation number is reported at an annualized rate. That's standard methodology.  

Obviously everyone here knows that.  

David in Qatar

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#32) On February 23, 2011 at 8:53 AM, ETFsRule (99.94) wrote:

David:

The inflation rate is calculated by reporting the price index at the end of a month or quarter, comparing it to the price index from a year ago, and then expressing the change as an annualized rate.

There is nothing "standard" about annualizing a change in the price index over a 45-day period.

MIT's annual inflation rate is right where it should be: 2.68%

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#33) On February 23, 2011 at 10:07 AM, whereaminow (20.57) wrote:

ETFsRule,

My bad.

David in Qatar

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#34) On February 23, 2011 at 11:27 PM, checklist34 (99.71) wrote:

rof, thanks very much.  I had to google the word snarky, I have been very snarky lately.  I don't quite know why, I think it was reading my old blogs from early 2009 and then some of the bearish ones got me highly snarky.  I am all snarked up and ready to argue. 

I think Canada has vastly superior media to ours.  Our media is an absolute circus, its a panic maker, a bubble maker, just a disaster.   don't watch TV or the news, and that keeps me seeming kind of strange to my fellow americans sometimes, I think.

I will try to check out that paper.  

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#35) On February 23, 2011 at 11:29 PM, checklist34 (99.71) wrote:

congrats on MTW.  I bailed on that one March 10th, right at the bottom, probably bought ACAS or ALD with it. 

So it worked out, but I did give up on that one at just about exactly the wrong time.  

I am really glad someone made it back up on that pony!

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#36) On February 23, 2011 at 11:30 PM, checklist34 (99.71) wrote:

David,

    The fed is only monetizing debt right now if they are not eventually repaid by the treasury for the treasuries that they are buying.  As of today we have no way of knowing, factually, if they are monetizing debt.  

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#37) On February 23, 2011 at 11:33 PM, checklist34 (99.71) wrote:

David,  the fed never made anybody overpay for a house, they never made anybody buy pets.com, they never made anybody get mega-long oil in 2008, or copper in late 2010.

I am not disputing that their policies may facilitate peoples bad behavior, but the fed does not itself make the bad behavior.

Congress, on the other hand...  DOES promote ethanol in fuel which may fuel rising grain prices, 2 presidents and congress DID promote home ownership as practically an american right, etc.  

Why no hate for congress?

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#38) On February 23, 2011 at 11:36 PM, checklist34 (99.71) wrote:

Dave,

    as you note, contrarian in 2011 would be to short or be cautious, which I have been, as I have noted many, many times in blogs and replies this year.  I am well prepard for a dip, should this turn into a serious one. 

    I have never seen an MSNBC message board, so I guess I can't comment.  

thanks for the insight. 

 

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#39) On February 23, 2011 at 11:38 PM, checklist34 (99.71) wrote:

Gambit,

     thanks for the reply.  I can't claim to know whats on Bernankes mind, I would just offer that nobody else can know, for certain, either.

     why do the bears never have any loathing for congress?  Just the Fed?  

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#40) On February 23, 2011 at 11:44 PM, checklist34 (99.71) wrote:

Chris,

    no hate for the bears, in fact quite a few are people I tend to click on when I see their name.  If "hate" exists in my "snarkiness" it is for coffee shop intellectualism (see the bottom of this thread), which absolutely abounds, and I mean ABOUNDS in bearish commentary. 

     sooooooo much of it is just repeating what seems to be the bearish argument of the moment.  personal observation of course, not leveled at any one person in particular.

      If my arguments are too simplistic, then "damn the fed, the dollar is going to collapse@!!!!!!#$%#@^%#$!!!!" is elaborate? 

      In any case, I don't remember what you guys in particular were saying at the march bottoms, or if you were a part of the rabid pack of insulting bears... but...

      back then the cult of negativity knew, KNEW, that we were "most definately" headed for a depression and that it was "most definately" a suckers rally.

       Thats the apparent beauty of the bearish frame of mind:  it cannot be wrong.  When it is it just finds a scapegoat and blames them, stating it was in fact actually right, EXCEPT for the evil man behind the curtain...

     

 

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#41) On February 23, 2011 at 11:46 PM, checklist34 (99.71) wrote:

folks, I am out of time for posting this evening, I do apologize if I missed anybody, and although my replies were brief I always eventually come back to read the responses.

 

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#42) On February 23, 2011 at 11:47 PM, checklist34 (99.71) wrote:

And I shall now observe that I have been wanting to "snark out" about this for quite some time...

but it took FOREVER to find a time to post it when it seemed like the bears would almost certainly be about to get their moment in the sun.

it is not in good form to lip off when everything is going your way.

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#43) On February 24, 2011 at 12:02 AM, russiangambit (29.27) wrote:

> why do the bears never have any loathing for congress?  Just the Fed? 

Because the FED is not elected (and thus not even pretends to be accountable) and because it is far more powerful. The Congress are just the clowns. Don't think I have any love for them either. But people in the FED are smart and powerful and can make a difference if they chose to. People in the Congress for the most part are shallow and not very bright, just good talkers. And did I mention corrupt? I keep hearing about the circus in Wisconsin this week and my opinion of politicians sank even lower, I ddidn't think it was possible -)).

Or look at it this way, - when you want some drastic changes made at how a company does things who do you go to - marketing&sales guy ( Congess) or COO and CFO (Fed)? I am pretty pragmatic, it is my nature to zero in on the source of the problem, this is why I keep going on about the FED, not the Congress. Plus, this is not a political blog forum.

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