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The Biggest Bull on CAPS

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March 21, 2011 – Comments (27)

On November 22, 2009 I wrote:

"Back in June [2009], or around that time frame, some of our Top Fools got into heated debates about the length of the rally and the gold market. 

They appeared to fall on one side or the other. 

Bulls: The market will go up and gold will fall to $650-$700 (I think I read checklist34 saying S&P500 to 1100 by Dec 2009 and gold down to $700. Sorry if I got that wrong dude. I'm too lazy to go back and find it.)  So one out of two gets you in the Hall (in baseball.)

Bears: On the other side, we had the bears saying the rally was not shinola and gold was going to reach new highs.

How is that both were half right (wrong)?  How do we have gold at all time highs and the rally still going at just about 1100 at Thanksgiving?"

(Note: I'm not picking on checklist34 here. He is someone whose opinion I respected for years, which is why he was in that quote.  Other bulls made the same prediction in that time frame. Don't know why I singled him out.) 

So here we are today in March 2011. Both stocks and gold (and silver) continue to rise. If you understand why, you would be the biggest bull on CAPS.

First, let's define Bull and Bear.

A bull is someone who thinks the stock market is underpriced in dollars. It is not a liberal. A liberal is someone who adheres to a political philosophy.

A bear is someone who thinks the stock market is overpriced in dollars. It is not a liberatarian. A libertarian is someone who adheres to a political philosophy.

For some reason, CAPS members like to label anyone who is pro-liberal a Bull and anyone who is pro-libertarian a Bear. That is beyond stupid.  Stop doing that. You are making an a** of yourself. You are also confusing politics with stock market activity.

The biggest bull on CAPS is someone who thinks that both the stock market and gold (and silver) are underpriced in dollars. That person would be me (and there are a few others.)

Understanding Value

We're going to get into a concept that is not easy to digest because it requires some building blocks.

Since you're on CAPS you probably think of value in an equity analysis sense. That's fine for comparing one equity to another. Equity comparisons, however, are not economic analysis. Economics is another division of human action. So set aside your knowledge of intrinsic value (if you believe there is such a thing) and P/E ratios. They don't help you here.

In economic terms, value is always subjective.  Let's say that you walk into a Walmart (it would be you walking into a Walmart because I would never set foot in one. I'm a Target snob.)

Have you ever walked into a Walmart and said "I am going to spend $136.48 today!"  Of course not. You have a subjective attitude toward the cash/credit in your wallet/bank account. You think, "I need to purchase the following items today and if I find them, they are more valuable to me than the money in my wallet."

Next you take stock of the items available to you. Let's say that you need toilet paper. The 3-ply from Charmin vs. the 2-ply. Is it true that the 3-ply gives you 50% more utility?  Of course not. Utility - the satisfaction you recieve from an item - is subjective as well.  

Many factors come into play in the selection of goods. Price and packaging are very important. Trust in brand names matters more to some. 

You rank the items in your head as you select them. It is subjective. You don't think, "boy, this Ben&Jerry's ice cream makes me 34.91% happier than Breyers!"  You think, "I prefer B&J to Breyers."

(Perhaps you don't think at all, but you are still making a decision based on subjective value, for example, by picking items by how the packaging makes you feel.) 

Now comes the really fascinating part. Once the items are ranked in your head, and you have selected the best item for you, you make a subjective comparison of that item vs. the money you must part with to purchase it.

In other words, you might really want some Ben&Jerry's. But if you decide that you don't want to part with $5 to buy it, your shopping cart remains empty.  You value the $5 more than the ice cream.  

Money has a subjective value.

And money can lose its value.

How Prices are Formed 

You might think with all this subjective valuation going on, that price formation would be impossible. Perhaps you think that prices are accidents or something that is decreed by a CEO or a tyrant.  In fact, it is this very process of subjective valuation that forms prices.  

As consumers make decisions regarding the subjective value of various products, those prices are imputed back up to higher order goods (the goods used to make the products on the shelf.) Sellers are not only responsive to consumer valuation of finished goods (moving prices up and down in an effort to maximize profit and avoid bankruptcy), but those valuations force the movement of intermediate and higher order goods' prices.

I, Ipod

What are intermediate and higher goods?  I want you to refresh your memory of Leonard Read's classic essay "I, Pencil."  It takes quite a number of higher order and intermediate order goods to make a simple pencil, doesn't it?  What if no one wanted a pencil anymore?  All things being equal, the value of cedar, graphite, clay, and lacquer (to just name a few) would also decline, lowering their price. The machines specific to the crafting of pencils would decline in value as would the materials used to make those machines.

Now imagine rewriting Leonard's famous essay for an Ipod. Ha! Think of all the intermediate goods that are necessary to create an Ipod. These items never end up on a shelf in their unfinished form, yet they have value. Their value is imputed back from the subjective value that consumers place on the Ipod (and any other products that are made from these amazing combinations of machinery, labor, and natural resources.)

How To Destroy the Value of Money

Let's go back to the person at Walmart deciding whether or not to buy Ben&Jerry's ice cream. He hesitates. He thinks, "This ice cream would increase my satisfaction, but I might be able to use this $5 for something else."  What happens if he comes to the following realization, "However, this $5 might not buy as much tomorrow because prices keep rising."  Does this change how he values his money?  Does this affect his decision to purchase ice cream? Absolutely.

In my Basics of Inflation post, I covered how excess monetary creation leads to a bidding up of prices.  New currency competes with old currency to purchase scarce resources.  When these price rises start to affect consumer purchases, consumers subjective valuation of money falls. They spend more. Modern economics teaches that spending is good and savings is bad. I hope you are not too married to modern economic doctrine to consider that they are wrong.

In November 2010, like almost all modern non-Austrian economists, Paul Krugman warned of deflation (again.)  He wrote:

"There’s really nothing here to shake my view that deflation, not inflation, is the threat."

Paul Krugman does not understand subjective valuation.  

Modern economists believe in something called "excess capacity," the idea that if a nation has idle resources (high unemployment, e.g.) that no amount of monetary creation will cause rising prices. They put a nice round aggregate number on it and voila! This is where inflation can happen, they claim.

Nevermind that stagflation of the 1970s proved this doctrine erroneous. (Isn't it interesting that the "scientific" economists demand fact-based theory yet no amount of contradictory facts will get them to reconsider their theories?) 

Present Goods versus Future Goods 

Another way to look at subjective monetary value is the value of present goods versus future goods. What can you buy in the future with your $5? or $500?  What can you invest in? What can you purchase?

When you start to understand that your $500 will not go very far in 5 months, 5 days, or 5 minutes as it does now, you shed your $500.  You consume.

There is no fabled honey. In this world there is a trade off. You must make a decision, whether you are an individual or a nation, to consume in the present or trade for the future. As a nation turns toward rejecting the future in favor of the present, that is the crack-up boom.  The value of money is destroyed.

Before you marry an economic theory that embraces money that has no economic value (be it paper or electronic), ask them what their theory of hyperinflation is?  If they don't have one, get a divorce.  The value of money is subjective. When it no longer has value for the nation's consumers, they reject the future and embrace the present. Goods fly off shelves.  The crack-up boom.

Gold bugs see a nation where people are asked to trade the future for the present. They would rather not do so. That is why they buy gold. They could consume just like everyone else, but they choose not to. They save for the future. Because of this, they are ridiculed and sometimes, even in America, imprisoned. Yet those who ridicule never understand the basics of inflation, let alone subjective values and human action. This is why gold bugs rarely become paper bugs. They know something that paper bugs do not. They know that there is no fabled honey.

The Biggest Bull on Caps

Prices are objective measurements of the subjective valuations of market actors. Digest that sentence. It's important.

Paper money provides in instable basis for valuation. It is instable because paper (and digits) can be created arbitrarily, on a whim, by any crank or crook who thinks we need a war or expanded health care coverage or just to line the pockets of his crony capitalist friends.  Paper is the tool of crooks.  There is no denying this.

There are no stocks on the market that I would trade for paper money. There is no amount of gold (or silver) I would trade for paper money.  I am not alone.

Thankfully for the American warfare/welfare machine, I am, however, in the minority.  But our numbers are growing.  We prefer to be protected when Americans start to undertand that their money has more value purchasing present goods than goods five minutes in the future.  That day is coming.

But it's going to be a bumpy ride.  Despite objections to deductive economics, Federal Reserve economists know they are playing with fire. They will be late in dampening inflation (it's impossible for them not to be. If you don't understand why, re-read this post or ask for another explanation. I will try again), but they will try to dampen it.  

Just remember, when the flation flops (that's for checklist =D), it is just a temporary reversal. In the long run, there is nowhere for the stock market (and gold, and silver) to go but up. 

David in Qatar 

 

27 Comments – Post Your Own

#1) On March 21, 2011 at 3:12 PM, catoismymotor (33.14) wrote:

For some reason, CAPS members like to label anyone who is pro-liberal a Bull and anyone who is pro-libertarian a Bear. That is beyond stupid.  Stop doing that. You are making an a** of yourself. You are also confusing politics with stock market activity.

+1 Big Rec

This paragraph made me laugh so hard. Thank you for making the truth funny.

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#2) On March 21, 2011 at 3:23 PM, Valyooo (99.60) wrote:

Good post, but

There are no stocks on the market that I would trade for paper money. There is no amount of gold (or silver) I would trade for paper money.  I am not alone.

That is simply not true, because I doubt Target takes stocks and gold.

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#3) On March 21, 2011 at 3:24 PM, awallejr (82.96) wrote:

Actually I have been bullish on both stocks and precious metals.

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#4) On March 21, 2011 at 3:28 PM, whereaminow (37.75) wrote:

catoismymotor,

Glad you liked it!

Valyooo,

Ha, perhaps I didn't word that sentence properly. What I mean is that I would not trade stocks I own for cash (barring emergency, of course), not the other way around.

awallejr,

Well, look at us. We're in the same club. Happy to be your partner-in-crime. I think we should drink to that!

David in Qatar  

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#5) On March 21, 2011 at 4:13 PM, dragonLZ (99.70) wrote:

I said that PM Bull Market and Stock Bull Market will continue to coexist (see this post of mine from Aug. 2010).

I said it much earlier in RL than I did here on CAPS (some of my calls kinda prove it), but I don't know if that qualifies me as The Biggest Bull on CAPS.

If not, I congratulate whereiamnow on this fancy title.

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#6) On March 21, 2011 at 4:15 PM, whereaminow (37.75) wrote:

dragonLZ,

Happy to join your club :)

(Title of Biggest Bull on CAPS is pending copyright so don't go stealing it.)

David in Qatar 

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#7) On March 21, 2011 at 4:29 PM, goalie37 (94.27) wrote:

 

"A bull is someone who thinks the stock market is underpriced in dollars. It is not a liberal. A liberal is someone who adheres to a political philosophy.

bear is someone who thinks the stock market is overpriced in dollars. It is not a liberatarian. A libertarian is someone who adheres to a political philosophy."

Thank you thank you thank you for stating this.  I'm not sure when this bizarre attitude started, but it drives me nuts.  Economies and markets are driven by many forces, not just two political parties in one country! 

 

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#8) On March 21, 2011 at 4:30 PM, ChrisGraley (30.20) wrote:

market crash in 3.. 2.. 1...

Just kidding david. 

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#9) On March 21, 2011 at 4:42 PM, whereaminow (37.75) wrote:

goalie37,

It's been driving me crazy too. Then again, there's a lot of things I say that drive other people crazy.

Bottom line?  I'm not an easy guy to get along with. 

ChrisGraley,

LOL, I'm the kiss of death. 

David in Qatar  

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#10) On March 21, 2011 at 4:55 PM, rfaramir (29.49) wrote:

Great blog entry!

Right now, before the hyperinflation hits, both stocks and PMs (and other commodities) will continue going up. But the massive increase in the money supply is building up malinvestments which will have to be liquidated. This will hurt the stock market greatly at some point. It tried to correct in 2008-9, but was foiled before getting the job done. Not just by monetary policy (TARP, QE, et al) but by interfering in TBTFail bankruptcies.

Re: "stagflation of the 1970s proved this doctrine erroneous"

Krugman's doctrine (Keynesianism, i.e., the road to socialism) fails due to the supposed impossibility of a stagnant job market co-occuring with monetary and price inflation. As far as I've heard, they haven't 'fixed' their doctrine, so it remains disproven; don't listen to anyone who is afraid of deflation. Deflation is your friend: it makes your money go farther. Don't you normally like it when stuff you want to buy becomes cheaper? I do.

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#11) On March 21, 2011 at 5:47 PM, whereaminow (37.75) wrote:

 rfaramir,

Thanks! 

But the massive increase in the money supply is building up malinvestments which will have to be liquidated. This will hurt the stock market greatly at some point. 

Yes, this is true. I cannot say when, but the ride up can go on for a long time. I like to point out whenever I can that the stock market with the highest return in the world in 2007 was Zimbabwe.

David in Qatar 

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#12) On March 21, 2011 at 8:59 PM, blesto (31.45) wrote:

OMG! Why do I want ice cream all of a sudden? Btw my preference is Blue Bell's Banana Pudding ice cream. It's one of my weaknesses.

You know David, if the Motley Fool were to start a University you would more than qualify for a professorship. With your own department.

Your lecture above reenforces why I buy equities, read ownership of a company. Seeking quality companies that is. If the market plunges to all time lows, I'll still be an owner of said companies and if they're truly solid quality businesses, they will survive and recover. All the while I'm still an owner. The value I guess is subjective?

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#13) On March 21, 2011 at 9:50 PM, Bkeepr100 (< 20) wrote:

The wounded fiat Dollar will continue to drop. The cult of Keynes will continue to worship his ideas and personage till the crack up boom occurs and finally ends their unholy reign of debt terrorism.

 I have been long gold and silver since long before 2008. The government's  figures on the economic outlook have been doctored since the late 1990's.  These false data are being plugged in by the econ wizards in the attempt to predict. The problem is that GIGO is the standard for such false info.  So the models are wrong.

 

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#14) On March 21, 2011 at 10:49 PM, whereaminow (37.75) wrote:

blesto,

That was really nice of you to say. Thanks a ton!

Bkeepr100,

One hundred percent agreed!

David in Qatar  

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#15) On March 22, 2011 at 3:01 AM, whereaminow (37.75) wrote:

BTW, here is the infamous "I Am Going to Short Gold" post by checklist34 in 2009 that I am referencing. I hope he didn't actually follow through with this.

Guys like checklist34 are great. In fact, I think they are more like me than they ever want to admit. They are extremely opinionated, like me. They don't want to argue, but at the same time they love it, just like me. They are vocal and wordy. Like me. And they are stubborn, like me.

But I'll say this, when it comes to equity analysis, checklist34 wipes the floor with me every day and probably always will.

David in Qatar

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#16) On March 22, 2011 at 10:10 AM, drgroup (69.11) wrote:

David... Great work. I have learned more economic principals buy comparative shopping at WalMart over the past year than I did while being programed at any college.

While purchasing sizable quantities of dry goods and ammo 10 months ago I saved nearly 5% over purchasing at today's prices, only problem is not being able to make my purchases with gold or silver. No one wants to change a nugget into $20's or $50 for change. I guess they just don't know the real value of gold yet, fools...

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#17) On March 22, 2011 at 10:44 AM, PeteysTired (< 20) wrote:

While purchasing sizable quantities of dry goods and ammo 10 months ago I saved nearly 5% over purchasing at today's prices, only problem is not being able to make my purchases with gold or silver. No one wants to change a nugget into $20's or $50 for change. I guess they just don't know the real value of gold yet, fools...

I get the joke, but how do citizens protect themselves against central banks and gov'ts purposely devaluing money?  Do we keep it in the bank?  Are we suppose to keep investing and drive up prices with the hope of fighting inflation (the inflation I see not the #'s reported)?  This seems like a rat race only a few can hope to come out on top.  The rest of us "work" for those few.

I get that a gold standard is hard, but is this the alternative?

I fear greatly for my children, all this debt seems very hard to fathom.  How does a nation prosper if its citizens "write" checks that future generations must "pay" for?  Maybe with fiat money it doesn't matter, but something tells me this current direction is not good for all of us.

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#18) On March 22, 2011 at 10:52 AM, catoismymotor (33.14) wrote:

blesto,

Blue Bell Banana Pudding ice cream? That sounds evil, in a dreamy way. I now know where the next ten pounds I put on are coming from.

Miles from a grocery store,

Cato

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#19) On March 22, 2011 at 11:03 PM, checklist34 (99.72) wrote:

I don't think I ever predicted gold 700 in 2009, its just not something I would have thought about enough to bother with a price target.  if I did, and someone links to it, great, and I'll sign papers and post nudie pics of myself at the mall, but I don't think I did. 

lol

ok, carry on.  :)

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#20) On March 22, 2011 at 11:03 PM, checklist34 (99.72) wrote:

I don't think I ever predicted gold 700 in 2009, its just not something I would have thought about enough to bother with a price target.  if I did, and someone links to it, great, and I'll sign papers and post nudie pics of myself at the mall, but I don't think I did. 

lol

ok, carry on.  :)

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#21) On March 22, 2011 at 11:22 PM, ETFsRule (99.94) wrote:

David: You said, "Modern economists believe in something called "excess capacity," the idea that if a nation has idle resources (high unemployment, e.g.) that no amount of monetary creation will cause rising prices."

That's simply not true. Mainstream economists, believe it or not, are much more nuanced and realistic than that. Here are Krugman's own words on the subject:

"The kind of inflation we had in the 1970s, the famous era of stagflation — high inflation combined with high unemployment — was quite different. Deficits weren’t the issue — actually, US deficits were much smaller in the inflationary 70s than in the disinflationary 80s. Instead, what you had was a combination of excessively expansionary monetary policies, based on an unrealistic view of how low the unemployment rate could be pushed without causing accelerating inflation (the NAIRU), plus oil shocks that pushed up inflation across the board thanks to widespread cost-of-living clauses in contracts."

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#22) On March 23, 2011 at 10:25 AM, whereaminow (37.75) wrote:

I don't think I ever predicted gold 700 in 2009, its just not something I would have thought about enough to bother with a price target.  if I did, and someone links to it, great, and I'll sign papers and post nudie pics of myself at the mall, but I don't think I did. 

lol

ok, carry on.  :)

Check, hopefully that didn't offend you. I would just like to point out that you did in fact call a gold a bubble in May 2009, said you were going to short it, and said you would use leverage to do so.

If you followed through with that, you lost ur arse.

You've spent a lot of words lately characterizing anyway who disagrees with you on gold as a fool, irresponsible, or hysterical.

Could it be that you just don't have the tools in your economic analysis to understand what is going on?

You are a great stockpicker. Far better than I will ever be.  But stock picking is not economic analysis.

I would pick on porte if you'd prefer, but he won't actually engage in conversation.  HIs view on gold is even more wrong than yours, though like you he would never admit it.

Just admit you were wrong, and I'll buy the whole bar a beer :)

ETFsRule,

So what. Nothing I said is false. Nothing you have ever said here matters to anyone.

David in Qatar

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#23) On March 23, 2011 at 10:57 AM, mtf00l (44.12) wrote:

whereaminow,

I want to believe...I want to believe...I want to believe...

As usual, great post.  What I still don't understand is you get all these accolades on your blogs however, you refuse to act in a public fashion.  You're like the best candidate that never ran.

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#24) On March 23, 2011 at 11:04 AM, ETFsRule (99.94) wrote:

"Nothing I said is false."

It was false and I proved it. But you'll continue to ignore what people actually say, and stick with your preconceived notions about them instead.

"Nothing you have ever said here matters to anyone."

No Austrian economist has ever made a meaningful impact on the world, and they never will :-)

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#25) On March 23, 2011 at 11:17 AM, whereaminow (37.75) wrote:

mtf00l,

LOL, thanks man. I can't imagine that I'd ever get to a point in my life where I'd want to put myself under public scrutiny like that. I shiver at the thought of having dozens of inbred empty suits judging my behavior. I'll just do what I can behind the scenes.

ETFsRule,

Thanks for the laugh. Have a great day.

David in Qatar

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#26) On March 23, 2011 at 3:14 PM, ChrisGraley (30.20) wrote:

ETFs Keynesians always make impacts.

 

Like craters.

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#27) On March 25, 2011 at 11:33 PM, whereaminow (37.75) wrote:

It only takes a few days for my points to be borne out by Paul Krugman.

Above I wrote:

"Paul Krugman does not understand subjective valuation.  

Modern economists believe in something called "excess capacity," the idea that if a nation has idle resources (high unemployment, e.g.) that no amount of monetary creation will cause rising prices. They put a nice round aggregate number on it and voila! This is where inflation can happen, they claim. "

Today, Paul Krugman wrote:

"The key thing to remember is that current conditions — lots of excess capacity in the economy, and a liquidity trap in which short-term government debt carries a roughly zero interest rate... "

BWHAAHAHAHAHAHAH

David in Qatar 

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