WSW – After The Fed – 28 April 2010

If you are expecting global warming stuff, it’s here:

Canonical in reverse date order:

https://chiefio.wordpress.com/category/agw-and-gistemp-issues/

Intro page with favorites:

https://chiefio.wordpress.com/gistemp/.

Input Data Issues:

https://chiefio.wordpress.com/category/ncdc-ghcn-issues/

This posting is about the other thing I do, looking at investment markets. Prior postings in this series are available here.

The charts in this posting are live charts, so my comments will describe how it is now, but in a week it will be showing new data and a new week. Since I think it’s more important to be in touch with what the market is doing NOW than to preserve the historical chart, this is, IMHO, a reasonble choice. Just don’t be surprised if the chart I describe is not the one you see a few weeks from now! If you would like to see the historical chart, you may enter custom date ranges on the charting tool at http://www.bigcharts.com

Daily Notes

None Yet.

Wall Street Week – Wednesday, April 28, 2010

I’ve been remiss in my WSW postings. Here it’s been an entire quarter since my last posting. Golly. And I’ve run out of spending money, so I need to trade up the account some more. Strange how that works. Once you can “create cash” from trading it’s just like a contract job. When you want some spending money you “take the contract” and do the work… Just there are no negotiations and you don’t have to ‘sell yourself’ like you do for a contract.

OK, a quarter ago I said:

Greece is threatening a default on their Government Bonds, but the French are saying “No Problem” about Greek bonds… Short rates have jumped up for Gilts (as, for some reason, Greece and the UK are seen as involved with each other. Probably because of the large English financial markets.)

Well that was a bit prescient. Wish I’d put on a ‘short Greek Sovereign Debt” trade… At any rate, my thoughts on Greece are covered in a posting yesterday.

I’d also noted:

So Congress raised the debt limit by another $1.9 Trillion. That ought to hold them for a few months….

Ok, what does all this mean… It means, for now, holding selected cash is a reasonable thing, and longer term, holding cash is really dumb. It means holding bonds is a very bad idea (US or European) as the Sovereign Debt issues get worked out. (Nervousness makes rates rise, driving bond prices down…)

And it means we are still in a “race to the bottom” on what currency will be worth holding.

Well, not much has changed there…

So gold is going up, GLD and GDX (the Gold Miners) are doing fine and it’s a bad idea to invest in the bonds of countries with large social spending and no financial discipline. (Why does this sound like something my Dad said in the 1960s ??… Oh, I know, because it WAS something my Dad said in the 1960s… about the time we went off the gold standard and when everything cost about 1/10 what it does now (or put the other way around, before 90%+ of the value of the dollar was eroded by inflation).

But things have moved on. The Fed has announced no change of interest rates. Oil is back up above $80/bbl. Greece is in a pickle and Spain has brought the salsa. Germany is trying to decide if they really want to screw the Greeks or have them as house guests for the next 20 years. And Obama and the Dim Dems are still trying to bugger the dollar and spend all of every scrap of national wealth they can find, but the opposition has grown enough to cause things to grind a bit more slowly. Yet The Ministry of Stupidity still found time to do the “Embarrass Rich Guys” thing with Goldman Sachs in the dock.

So, lets see, the guys who did the best at surviving this crisis; the guys who did NOT cause it (Congress did that with stupid law changes, then mandating Fanny Mae and Freddy Mac to make the housing bubble) and the guys who did not go belly up (like Bear Stearns and Lehman Bros.); THOSE guys are the bad guys? Right…

As long as that kind of clown is running Congress, it’s not a time to be invested in the USA. Trades, maybe, but treat it like a banana republic. SHORT duration trades. Fast in, fast out. No money left on the table and only smaller percentages.

So where could you have made money this last quarter?

	
3 month Top Performer
10 Best Performing Industries
  DJ US Recreational Products Index	39.09%  
  DJ US Hotel & Lodging REITs Index	37.97%  
  DJ US Hotels Index	36.21%  
  DJ US Consumer Electronics Index	31.16%  
  DJ US Real Estate Services Index	31.06%  
  DJ US Real Estate Investment & Serv...	30.37%  
  DJ US Real Estate Holding & Develop...	29.86%  
  DJ US Furnishings Index	28.57%  
  DJ US Gambling Index	28.32%  
  DJ US Recreational Services Index	27.47%  
 
10 Worst Performing Industries

  DJ US Pharmaceuticals Index	-5.20%  
  DJ US Pharmaceuticals & Biotechnolo...	-4.16%  
  DJ US Medical Supplies Index	-2.86%  
  DJ US Health Care Index	-2.21%  
  DJ US Mortgage REITs Index	-1.54%  
  DJ US Reinsurance Index	-1.33%  
  DJ US Biotechnology Index	-0.99%  
  DJ US Multiutilities Index	-0.17%  
  DJ US Electricity Index	-0.03%  
  DJ US Conventional Electricity Inde...	0.03%  

Real Estate and the “We’re not dead yet so we’re going to play” trades. Not a lot of room there for error. The losers are a much more diverse group, but the losses were fairly small. Better to have been in than out.

How about the last week?

10 Best Performing Industries
  DJ US Hotel & Lodging REITs Index	5.64%  
  DJ US Hotels Index	5.14%  
  DJ US Durable Household Products In...	4.89%  
  DJ US Recreational Products Index	4.88%  
  DJ US Recreational Services Index	4.68%  
  DJ US Furnishings Index	4.27%  
  DJ US Residential REITs Index	4.15%  
  DJ US Home Construction Index	4.12%  
  DJ US Gambling Index	3.88%  
  DJ US Transportation Services Index	3.80%  
 
10 Worst Performing Industries
  DJ US Medical Supplies Index	-7.84%  
  DJ US Banks Index	-6.07%  
  DJ US Life Insurance Index	-5.52%  
  DJ US Airlines Index	-5.45%  
  DJ US Nonferrous Metals Index	-5.38%  
  DJ US Specialized Consumer Services...	-5.05%  
  DJ US Asset Managers Index	-5.04%  
  DJ US Biotechnology Index	-4.73%  
  DJ US Internet Index	-4.65%  
  DJ US Tobacco Index	-4.64%  

Not much different. Still “bottom fishing” and with broad risk. But notice that the downs were about the same size percentages as the ups? And in some cases larger? You had to be in the right sectors and out of the others or you lost money. A risky market…

The Long Term Context

This is a very long duration chart. Notice that we’re slowly rounding over into a flatter trend line. We’ve got the Slow Stochastic headed down (shorter term trade is weak or to the downside, a potential ‘re-entry” soon is possible.) The MACD indicator is weaving sideways, so we’re still going up longer term, and the DMI is still ‘blue on top” so it’s bull market rules, but that’s a lagging indicator so be prepared to ‘trade out’ at any time.

5 Years, NYSE

5 years, NYSE

And the S&P 500 on the same scale. Here is a 5 year chart with a different set of indicators. Everything is still saying “bull market, be in” but it looks like a short term trade to the downside is “due soon”. We’ll see.

5 Years, SPY

5 years, SPY

What Is Our Context

Let’s look at the S&P 500 largest stocks in America compared with some other kinds of assets; a couple of month maturity bond fund, oil, gold, Yen.

Asset Class Races

Asset Class Recent Race

SPY       The S&P 500 ETF
GLD       Gold ETF
USO       Oil ETF
FXY       Japanese Yen currency fund
SHY       1 to 3 year U.S. Treasury Bond fund
FXE       Euro currency ETF
SLV       Silver fund
BZF       Brazilian currency ETF
EWA       Austria ETF
WOOD      A wood and paper products fund

Zoomed in on this time scale we can see that the ‘bull run’ trade in the SPY is over for now. We have MACD with a crossover to the downside, and we have DMI with red on top. RSI has a pattern of lower highs and lower lows. We’re headed down for a while. Even wood took a plunge. That kind of sudden plunge usually means a professional outfit with tons of money is entering a very large short position. They WANT to panic folks, so they enter in size. And you get that kind of sudden one day collapse look. Whenever you see that, step aside. Time to leave that trade behind. At least until the bear raid is over.

Oddly, the BZF ticked UP. Usually when folks dump EWZ money comes out of Brazil and the currency drops. That the currency went UP implies folks are not dumping Brazil… Hmmmm… Take a closer look at Brazil… Also interesting is the way that EWA lead the roll over. Australia lead to the downside. Hmmm again. Another line of investigation.

What about Brazil? A Closer Look.

Last posting I’d said:


We stepped out of Brazil when they had a “Ministry of Stupidity Speaks” moment a couple of months back. We ought to keep an eye on them, though. But for now it is still a “watch but don’t touch” market.

That was a decent call. It tried to recover, but “failed to advance”. Oddly, though the stocks are rolling down, the currency is holding up. Strange… That implies little money leaving the country. Perhaps folks are buying the bonds? OK, I’d not buy EWZ right now, but I’d watch it for an entry “Real Soon Now”. We’ve got RSI headed toward 20 something. Buying time “soon”.

On January 28 I’d said:

With RSI nearing 20 and an inflection in the red line on the DMI chart, we could expect a ‘reversion to the mean’ with Brazil moving back up to the Simple Moving Average stack from the bottom. But when it touches that SMA stack, sell. Trading ‘up’ in a ‘down’ market is a hard fast trade…

And that trade did work. We’ve probably got a ‘sideways roller’ and can repeat that trade for a while. But it will get faster and choppier as time goes on.

Brazil the EWZ ETF vs the BZF currency ETF

Brazil ETF vs Currency Race

EWZ  - Brazil
BZF  - Brazilian Real currency
FXI  - China
EWA  - Australia
EPI  - India - WIsdom Tree fund
EWC  - Canada
EWW  - Mexico
GUR  - Middle East Fund

In a special posting October 20th, I had said to bail from Brazil as their President had started talking about special taxes on foreign stock trades. Now you can see why I said that.

Running ETFs

I have a new tool that searches chart patterns and finds those that I describe to it as “interesting”. For this section, “interesting” is those that have price over 25 day Simple Moving Average over 50 SMA over 75 SMA. Basically, those that are in a steady up run.

This is most likely to continue, but will at some point each ticker will hit a “dip” and fall off this search, only to return at the next rise. So a high number is good, until it fails, and a low number can mean time for a second bite at the apple. Being ON the list can be as important as rank on the list. Races tell you how to rank them. Realize that these have not been filtered in any way for the quality of the fund, nor for the volume traded, nor for what they hold. Each ticker must be looked at for those qualities before buying anything. This is just a way to find “things of interest” to explore. So what is on the top of the list?

These are not in yet


Basic straight runs:
Price > 25 > 50 > 75 
===============================

  

And running Tickers of all kinds:


Basic straight runs:

OOTUS – Out Of The U.S.

See the racing stocks tab for currencies and for foreign emerging stock markets for the latest moves.

The currencies are intriguing. We’ve got gold with a sudden jump on the Greece thing. We’ve got Canada and Mexico both rising. And we have the Brazilian Real holding up in the face of a dip in the Brazilian stock market. How odd… Looks like a bastard mix of “safety” with “not the USA or Europe – what the hell is there?!!?”

Some Selected Emerging Markets

Indonesia Fund 1 Year Chart

Indonesia Fund 1 Year Chart

This chart compares FXI – China 25 big stocks, EWZ – Brazil, EWO – Austria, EPI – Wisdom Tree India fund, and the Indonesia fund.
Well, we have Indonesia continuing to be a leader. Just odd. India is also nice and everything else is sort of a “why bother”. Very strange. Probably needs more time to figure it out than I’m willing to give it right now…

VIX the Volatility Index

Volatility Index and Related

Volatility Index and Related

VIX  - Volatility Index (not a ticker, you can't trade it)
VXX - Short term VIX futures ETN (a ticker you can trade)
VXZ - Medium term VIX futures ETN (a ticker you can trade)
FXY - Japanese Yen
SH - "Short" sell of SPY
SPY - S&P 500 benchmark
IYT  - Transports, a leading sector
XHB  - Homebuilders, a leading sector and "canary" 
XRT  - Retail

Wow! What a spike up! but the interesting thing on this graph is the non-volatility stuff. We’ve got real estate and transports leading the pack with the home builders rising rapidly. OK, we know where to go looking for action. The “Recovery Play”. Traditionally real estate and transports are “early recovery”. Wonder if I held onto those Mall REITs (like RPT and PIE) that I owned a while ago… (The things you need to keep up on…)

The Dollar

This is now a ‘US Dollar UP” trade chart of UUP instead of UDN.

Dollar Trade -UP

Dollar Trade -UP

Last time I said:

Clearly saying “the bottom is in, own Dollars”. Not an intuitive or fundamentals based trade, but the chart says be in dollars, so that’s where I am. As they say about Quantum Mechanics: If you don’t like what it says: “Shut up and calculate”…

Well, looking at that chart I’ve got to say that was one spectacular call. And a lot of my position has been “in dollars”. Sadly, as a native of a dollar country, that means I “won” relative to the rest of the world but don’t have any more money than I had at the start of that run. I would need to buy a leveraged “dollar option” and I just didn’t place that leveraged bet. Oh Well. At least I wasn’t in a losing position!

Ideas of the Week

Real Estate, transports, oil, gold, dollars. Run to inflation protection. Especially run away from the Euro and British Pound. Brazilian currency and bonds. Canada resource stocks and currency. Mexico perhaps, and a bit of Aussie Minerals and Gold.

What does the 10 day hourly chart say is happening now?

Here’s a 10 day houly chart of the Dow 30 Industrials (DIA), the S&P 500 (SPY), the Nasdaq tech companies (QQQQ), the Russel 2000 (RUT), and both a Brazil fund (EWZ) and an Australia fund (EWA). It also has a ‘short fund’ (SH) on the chart so you can see what being short this market is doing right now. We also have EWO, an emerging Europe Austria fund, EWW for Mexico and IIF for India.

10 Day Hourly Interval Broad Market

10 Day Hourly Interval Broad Market

Not much for the week, though the Australian market looks like a potential entry and Brazil is looking like a bounce off a local bottom. India has held up very very well… I suspect tomorrow, even as a Thursday, might be a good ‘couple of days’ trade entry from Brazil and Australia.

Other Asset Classes

The 6 month asset class race:

Asset Class Race

Asset Class Race

SPY  S & P 500 US stocks
GLD  Gold
EEM  Emerging Markets
FXY  Japanese Yen
JJC  Copper
SHY  Short term bonds 1-3 year
USO  U.S. Oil
DBA  Agricultural basket
SLV  Silver
WOOD  Wood / Timber

That plunge in “wood” is an issue. Time to step aside from the “got wood” trade. The shorts are in it, and there is nothing worse than having “short wood” ;-)

Not seeing a whole lot of love here…

So what happened in the Tech Market relative to world markets?

Tech vs Other Markets

Tech vs Other Markets


QQQQ  Nasdaq 100 mostly Tech companies
DIA  Dow Jones 30 Industrials
SPY  S & P 500 largest companies in the U.S.A.
MDY  Midcap  (Middle sized in terms of market capitalization)
RUT  Russel 2000 - a collection of 2000 companies from small to large.
EWZ  Brazil fund
EWA  Australia fund
EWO  Austria fund
EWW  Mexico fund

A very nice run, but we’re seeing “get the hell out” all over this chart. Look at how the MACD is crossed over to the downside. Slow Stochastic is shouting “BE OUT” with that downward pointing mouth / lines. Even DMI is “red on top”. “It was a nice run, now get the hell out” is what this chart is saying. Could it be an “entry”? Sure. Look back 2 months. Very similar. I’d bet on “be out” though. If in doubt, put a “buy if touched” a ways above present prices and only buy back in if the trend heads up. Me? I don’t need that much juice. I’ll stick with gold miners and oil producers with fat dividends…

Were Bonds a good idea?

OK, lets take a peak at the Bonds Race but with TBT (the “long term bonds” short sell ETN – that is, the thing that “shorts bonds”) as the main ticker symbol:

Bonds - TBT to Short Them

Bonds - TBT to Short Them

Well, you could make money “fast trading” the short bonds position, and the “TIPS” inflation protected bond is “OK”, but not much here that is really worth the effort.

What About Oils?


XOM  Exxon Mobil - Largest, U.S. / Global
COP  Conoco Philips - U.S.  with Russian exposure
CVX  Chevron Texaco - U.S.
PBR  Petrobras - Brazil
PCZ  Petro Canada HAS NOW MERGED WITH SU SUNCOR
BP   British Petroleum
STO  Norway
E    Eni Italy
TOT  Total - France
RDSA  Royal Dutch Shell
IMO  Imperial Oil - Canada Oil and Oil Sands
SU   Suncor - Canadian Oil Sands
SSL  Sasol - South African Synthetic Oil Company

Conoco Philips and Total are ripping. No idea why… Perhaps their exposure to Russia? The plunge at the end is a worry. That’s the “Shorts Signature”…

Some Near Oil and Oil Related Comparisions

CZZ is ripping! Makes me wish I hadn’t sold all those shares way back when. Then again, I’d made a bundle already… and with sugar, SGG, dropping like that I can’t see buying in to CZZ now as a major sugar grower. Not much else of interest in this area.

SEE the SEA!

SEA - A Boatload of Boats ETF

SEA - A Boatload of Boats ETF

Transports in general are a good early indicator. Boats, rail, maybe even some trucking. Clearly this is saying “GO to Sea!”

The REITS race – Real Estate Investment Trusts

REITS Race

REITS Race


PEI  Pennsylvania Real Estate - Mall REIT
VTR  Ventas - sr. care, nursing homes, hospitals
PSA  Public Storage - junk storage units
BXP  Boston Properties - office REIT on BosWash corridor  
HCN  Health Care REIT -  extended care, senior care, medical offices
HCP  Health Care Properties - ex. care, senior living, Dr. offices
PCL  Plum Creek Timber - lumber and trees REIT
SPY  S & P 500 broad stock market benchmark
RPT  Ramco Mall REIT
PLD  Prologis - logistics 

The mall REITS did best. Don’t know what the deal is with PEI. I think I still own a chunk of it in my spouses account. Probably ought to check that ;-)

So “mall REITS” are looking good while the “got wood?” question says to stay away from PCL and the Lumber REITS right now. I donno… it just smells like time to “step away from the table” on real estate right now… Don’t know why, it’s a “Right Brain” thing right now that will take me a while to translate to words…

Conclusions and Likely Actions

I think I’ll look at some shorts. That “Down spike at the end of a long run up” is just shouting “Shorts are preparing to eat your lunch”. That and some gold miners looks interesting…

Stock Indicators – what and how


If all this talk of indicators is leaving you wondering what the heck I’m talking about, hit the link in the heading of this section and there is a bit of an explanation.

Click for Disclaimers, Disclosures, and Where To Get Charts

Remember that on any stock or ticker I say I’m looking at, you don’t just go buy it. You wait for a stock entry indication to get the best possible entry into the position.

About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
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27 Responses to WSW – After The Fed – 28 April 2010

  1. Wes says:

    Chief, I’m a market timer and I went to all cash this afternoon, looking for some short term downside. (I trade QLD.) But, I won’t be surprised if the up move continues back to the old highs and above.

    While I agree with you short term, I disagree with your longer term views. The indicators I follow indicate that the market is quite undervalued, and valuation is currently about where it was in late 2002. This seems consistent with other things I read, like this for example:

    http://www.marketwatch.com/story/a-rare-buy-signal-with-a-good-record-2010-04-21

    I do think the market is due for a short term rest to remove some complacency. As for shorting, I just don’t think you’ll make much as the dip buyers will no doubt show up quickly. They’ve been rewarded too many times recently to allow much downside before they give it a try.

    So, I’m looking for a little weakness near term to join the dip buyers. If it doesn’t happen, I’ll not be shocked.

    Best of luck.

    P.S. I also enjoy reading your global warming studies.

    REPLY: [ I’m in “a lot of cash” and some long term positions now too. After a major drop like we’ve had in the last couple of years, it is unlikely that there is a lot of shorting opportunity. Even after a nice recovery like we’ve been enjoying. As you noticed, valuations are “not bad”. Also the news flow has been mixed on earnings, but with some real good reports from some sectors. I think we’ll likely end up in a “traders market” with mixed directions based on sector. So the only “shorts” I’m likely to consider would be as part of a “pairs trade”. I think the most likely outcome is a ‘sideways roller’ for a while as things sort out. Over the 5 year horizon, it will depend too much on what happens in the next elections. At present, we’re headed for “issues” from the extreme social program spending. If that holds, we’re in trouble. If it gets clipped back, we’ll do better. For now the arrow points at too much debt and spending; so that’s my opinion. But things change.

    FWIW, while I have an OPINION on where things will go, I trade based on the indicators. Somewhere or other in some posting ( I think it’s in the one about indicators linked at the bottom of the WSW postings…) I make that clear. So I’ll have an Opinion, but I don’t let it stop me from making the right trade ;-)

    Frankly, I think that’s one of the greatest virtues of an indicator based timing system. I can believe that The Socialism Shiny Thing will bugger the US $, yet know that right now UUP is winning so bet for dollar strength (“now”)… It makes it easy to get past my prejudices and trade the market that is in front of me. ;-)

    The other ‘fly in the ointment’ of a long term “down” view is Europe. If the Europeans start having a ‘flight to safety’ away from the Euro zone as things decay, the US markets will soak up some of it and rise. Rather like the $ is doing right now…

    The best advice I can offer is to keep a clear distinction between opinion and what the indicators say to do. The opinion mostly just informs how I’m going to feel about doing what the indicator tells me to do… For the USA, we’ve got a short term “correction ought to happen” and the 1 year chart says it’s time to be out, while the 10 year weekly says “it’s getting a bit old, correction soon” but still a bull market. That’s 2 votes for correction and one for ongoing bull run. Most likely is a dip and return to trend. But then we have a couple of years of future spending to get through, and my opinion is: that can become an issue… Oh, and the 10 day hourly chart just looks like that day trade roller market you get with news driven day to day action, when a market has stopped trending.

    Frankly, between the Brazilian and US central banks announcements and the Greek, Portuguese, Spanish, … things, it’s just a sloppy market. If I didn’t need to ‘trade up some money’ I’d likely just sit on the sidelines…

    Oh, and I’m always interested in more, different, and / or better indicators.
    -E.M.Smith ]

  2. P.G. Sharrow says:

    ChiefIO; Good to see you are back to doing real work ;-) can’t play all the time.
    I guess I should pay attention to your insight on markets. I tried to figure it out on my own 20 years ago and got side tracked trying to make a living. pg

  3. E.M.Smith says:

    Well, I ran out of spending money! Stuff Happens ;-)

    That, and the kid wants new toys… so I’ve got to go back to doing some “real work”…

    I’ve been a ‘student of the markets’ on and off since about 1960. That was when I started listening to the local stock broker as he was having lunch at the counter in my folks restaurant. I was the kid washing cups and glasses behind the counter… (Think of “Mayberry RFD” but with Opie being the son of the restaurant owner instead of the sheriff…) I’d like to think during that time I’ve learned a thing or two. (Though, frankly, a lot of it was “Don’t pay attention to THAT theory; it’s junk.”

    If I wanted to have a good general understanding, and avoid reading the 20 feet of junk books, I’d simply start with Benjamin Graham’s “Intelligent Investor” and Ben Stein’s “Yes You Can Time The Market” and round it out, for traders, with Elders “Step into My Trading Room”. (All titles from memory, so may need ‘revision’ ;-) After that, if you have interest, there are lots of books that have something of value in them. If anyone is interested, let me know, and I’ll put up a ‘reading list’ of my favorites with a few words about what each one has of merit in it.

    As a general bit of guidance, though, you can start by just looking at ONLY the S&P 500 Index. For either investing or trading, it’s hard to beat (literally, it beats 65-75% of all professional money managers running funds. It’s a dynamic list of the 500 biggest companies in America, so it tends to self correct to being the ‘winners’ over time.) It is my basic benchmark and the trade all other proposed trades must beat to be ‘interesting’. So if all you did was to get good at seeing what it does, and buy it when the time is right (and sell it when the time is wrong), you will beat almost all the folks who “run money”. (And it’s not that hard to do… Just look at the 10 year weekly chart. Price on top of the simple moving average stack, be in. Price on bottom, be out. You are ‘out” on average 2 years in 10, and in 8 of 10. After that, it’s all about improving that performance.

    So far, the things that have worked best for me to beat it have been the Nasdaq 100 (QQQQ) and the Brazilian market EWZ; though both are a bit more volatile and a bit trickier to trade. (Move faster and further so you have to be quicker and more diligent about checking the chart daily… )

    So add some TIP (Treasury Inflation Protected Securities – bonds where they pay more as inflation happens) and you’ve pretty much got all you NEED to have to trade and invest for a living. Personally, I’d also add the Russell 2000 IWM for the small cap angle and a bit of EEM for a broader basket of international emerging markets, but that’s not strictly needed.

    OK, take your small set of tickers ( SPY, QQQQ, IWM, TIP, EWZ, EEM ) and watch them. Look at the 10 year weekly and 1 year daily charts. Get to know them. You’ve got the best benchmark, tech, small cap, inflation protected bonds, and two flavors of international. A very nice little package. When the FED is raising interest rates, be in stocks. When the Fed is cutting interest rates, be in bonds. Let the charts be your guide. Congratulations, you are now in the top 20% or so of professional money managers.

    As you get bored, add more tickers to track and add more indicators to use. If you get really bored, look at faster trades like the 10 day hourly chart for a small percentage of your positions. When stunningly bored, learn all that is in Intelligent Investor and do some “fundamentals” screens on individual stocks and add them to the mix (but ONLY when they are showing more rise on the charts than the S&P 500 or when they hit a bottom reversal and are a ‘deep value’ with upward momentum. All of that is in some degree ‘optional’ (though helpful. FWIW, I started with that end and worked my way backwards to the small set of tickers I listed first. It took a while to “unlearn” the detail stuff and figure out there was an easier way. Not always more profitable, but way way easier…)

    So if you are interested in any of that, I can cook up a “starter guide to markets and investing”…

  4. Wes says:

    @P.G.

    Getting sidetracked making a living struck a chord with me. I got into the market when I retired in 1995.

    I now realize that I wasted my life working. Of course, at my age, a long term investment is when I buy 3 green bananas at the supermarket.

  5. Wes says:

    Chief,

    So far, so good. I have now established a 1/3 all in position (using QLD) which I will regard as a consolation prize position if we suddenly reverse back up.

    I anticipate further downside from here, but the dip buyers could show up at any time.

    I discovered another good chart indicating how fundamentally sound the market currently is :

  6. E.M.Smith says:

    I’m about 1/2 in, but much of that is that is in long term positions that I never liquidate. (BRKA and a chunk of oil trusts with very fat dividends)

    I was going to put the “trade portion” about 1/4 to 1/2 in today and just got overrun with other things and did not get my 10 day hourly charts done in time to ‘time the trade’. One thing I learned some time ago was that it’s better to skip a trade than to rush one… So not knowing if it was exactly right or not, I stayed on the sidelines.

    Looking at this chart does not give me a warm fuzzy feeling.

    The Slow Stochastic is in a ‘buy’ end of the scale for QQQQ (the underlaying asset for your QLD leveraged fund), but it’s just laying there on the bottom. No crossover to the upside. MACD was also “mouth down” with no crossover indication to the upside. DMI has “red on top” and with DMI at 20 ish, it’s saying dead flat trendless (that you can also pick up from just looking at where prices went. In 10 days, exactly nowhere.) I’ve added Williams %R and it, too, is ‘in the buy range’ but has not ‘ticked up’. And this is on an hourly chart!

    So I don’t feel ‘left out’ at this time. Too much news flow driven ‘crap’ to hold a lot more risk over the weekend. I’ll probably put a ‘buy if touched’ order to the topside and let the market ‘buy me in’ if it starts up.

    I’m going to do another WSW over the weekend (this one was just to get me back in sync with the markets) and see if I can do a better job of picking what to buy into. Normally one would expect a ‘surge’ from the end of month money. But I’m not so sure things are ‘normal’…

    The other indicator in the link you posted is interesting. I’ll spend some time looking at it over the weekend. One puzzlement to me right now is why the dollar is so strong. All I can figure is folks are bailing from the Euro in some size. It would be nice to have a volume indicator for that, but I don’t know of one. Oh well, can’t look at everything ;-)

    Good luck with the QLD position. I’ve thought of doing QQQQ trades with the indicators as an oscillator (they work fairly well with it…), maybe I’ll start having a special “Cubes” section ;-) though most of the time I’ll do the Russell 2000 for leverage ( IWM, TWM, RWM, UWM) but it isn’t giving me an entry call for right now either (though DMI/ADX is still blue on top)

    So I have more work to do…

    IWM is the basic RUT Russell 2000 index. UWM is the “ultra” leveraged form. RWM is short and TWM is double short. Apple tends to dominate the QQQQ and I ‘have history’ with Apple that makes me emotionally engaged when I trade it, so I tend to shy away from it (just to remain in ‘the martian view’…)

  7. Wes says:

    Chief,

    I’m a buy weakness, sell strength person, so price following indicators don’t work for me. I’m frequently wrong, but my greatest strength is a complete lack of financial pride. I can admit and correct incorrect decisions in a heartbeat.

    I study the psychological side of the market and am fascinated by the flow of feelings from greed to fear and back. So, I use a lot of charts that are only indirectly connected with price movement.

    A great many of the charts I use can be found at :

    http://www.haysmarketfocus.com/

    This is a subscription service, but they offer a 3 day free trial. With your analytical abilities you will probably know more about the wealth of information there in 3 days than I’ve figured out in the many years I’ve subscribed.

    Don Hays, the owner, is a “buy and hold” type fellow, but I’ve found his psychology charts are very helpful in market timing, and he has chosen those charts (from the multitude) just for those reasons.

    In addition, he has developed a valuation model that looks most interesting. I hope you can find time to do the free trial so we can discuss some of his parameters.

    Have a great weekend.

  8. Harold Vance says:

    Chief, my favorite sentimental indicator (by far) is the bullish percent index. The BP indexes for the major averages (S&P,DJUA,DJTRAN,etc.) have risen to levels last seen in late 2003 and early 2004.

    The trannies are at 100%, meaning every chart in the djtran index has a bullish formation. This is about as overbought as it gets. It’s also 180-degree turn-around from the god help us all reading of 0% set in March 2009:

    http://stockcharts.com/webcgi/Pnf.asp?S=$BPTRAN&E=on&N=C

    I think that stocks are super overbought but it could take another couple of years for the current bull market to wear itself out.

    btw, I totally agree with your comments on Socialism in your previous post. It’s a great way to build a giant inverted pyramid. Birth rates tend to decline with time in socialist democracies. The people who are born late in the life of these democracies get stuck with the bill and the misery (sub-part GDP growth rates, recessions and outright depressions).

    Europe (its banks) ultimately used a lot more leverage than we did in the U.S. so their comeuppance is going to be much uglier.

    I’m still shocked that DC property values have appreciated 76% since the year 2000. That’s faster than L.A. and San Diego. Maybe we should all go to work for the Fed.

  9. Soronel Haetir says:

    I do have to disagree some with your money valuation comments. I’m not sure that it is possible to calculate inflation across time periods in a meaningful way. How much would a computer that now goes for $500 have been worth in 1965 as an example. Or being able to make an international call on a moment’s notice without even really thinking about breaking the bank (even more so if you use VOIP). Some things are more expensive but other things are impossibly cheap now, the entire price regime has shifted so much that I really don’t know that it’s meaningful to make the comparison.

  10. E.M.Smith says:

    @Harold Vance:

    The RSI is a kind of sentiment indicator and tends to show a high reading ( 80 or so ) when things are “overbought”. One small point: I work in many time scales. It is important to state your time scale as things may be simultaneously headed up and down at the same time, depending on the scale of time you look at.

    Rather like climbing a mountain, you sometimes go down hill on a smaller hill, and while going down that hill, may step up to clear a large rock pile…

    So I look at the 10 year weekly to get a picture of my context. I don’t do trades longer than a year, so that’s my upper bound. And I look at 10 day hourly charts to time ‘the moment of execution’. Finally, most of the time, I look at 6 month or 1 year daily charts for “what is my trend NOW”.

    This can be very confusing when you are trying to keep straight 3 time frames in one stock. It gets far worse when doing it for 40 positions at a time…

    Why I mention this: Because the “overbought” indicator you mentioned must come with a time scale or it is not actionable.

    For example, the QQQQ on a 10 year weekly chart has an RSI of about 80. That’s “expect down soon” as an indicator. For that length of chart, probably about 2 to 4 weeks. On the 1 year daily chart, RSI is in the classic cascade down. It touched about 80, then had a lower peak, and now it is at 50. MACD is crossed over downward. DMI is ‘red on top’. All of that implies “down really soon” on the order of days. Yet on the 10 day hourly chart RSI is about 35 and given the recent pattern that is a “buy signal” for a day trade. I’d expect mid day Monday that QQQQ will have a gain in it. On the 5 day 15 minute chart it is an even stronger buy, with RSI having almost touched 20 and now with a ‘rising bottoms’ shape.

    So on a day trade basis, QQQQ is likely to go up, Buy! Similarly, on an investment basis, it’s probably a decent basket to own as valuations are fairly low. But in between, it’s a sell. For “Trend Trading” it is likely to have a trend reversal to the downside for several weeks. A market “correction”.

    This is a very key understanding, as it explains so much about how folks of good character and with proven track records of winning, can have directly opposite views. They look at different time scales…

    So on the one hand, I wanted to put on a ‘day trade’ buy today, expecting to sell it out late Monday or perhaps Tuesday as the next peak manifested ( though I didn’t get it done…) yet at the same time (but looking at a different time scale) I think we’re due for a ‘correction’ to the downside.

    Similarly, the US$ is headed down long term. Just too much government spending and obligations to do otherwise. Yet right now, the bet is WITH the dollar and against the Euro on a shorter time scale.

    So for your “correction soon” I have to presume your indicator is talking about a weeks to months type scale. And for Wes, his time scale is most likely either a day or two day trade, or a very long investment scale. ( I hope! Since the ‘week or two’ time scale is the one with a risk of a ‘correction’…)

    Per births and social contracts: I actually did a paper on that topic for my Social Studies class. Looked at the impact of Social Security on birth rates and the private cost of raising kids for the socially shared benefit. Yeah, you can get a very nasty demographic bomb… In Europe they have a major problem, but just haven’t had to deal with it yet. It’s going to get very messy. That demographic aspect, BTW, is part of why socialism takes a generation or two to implode. Some things take time, and babies growing up to become retirees is one of them… Japan too.

    @Soronel Haetir:

    Yes, it’s one of the very sticky problems of economics. How to measure inflation in an unbiased way when technology keeps shifting the relative costs and prices. One of the first things is to pick objects with fairly stable cost / technology structures for your basis. Things like commodities (oil, wheat, copper, gold, silver, coffee) and well established goods ( bread, suit of clothes) and sometimes things that are labor intensive and not subject to a lot of mechanization (homes). The price of an hour of minimum wage labor or the cost of mailing a letter are also fairly comparable over time.

    But it can be done. And it is done all the time.

    So the way you can easily see that the value of money has plunged is just pick a basket of those things and see how they change over time. If it’s just one or two prices out of place, most likely that one thing has had some technical change. But when almost all of them say the same thing, it’s pretty clear what is going on.

    So I’ve shown my basket. It pretty much confirms that the dollar has lost about 90% of it’s value from 1965 or so to now. If you don’t believe that, just go try to buy:

    House – $7000
    Car – $1500
    Bread – 10 cents a loaf
    Gasoline – 25 cents a gallon
    Steak dinner in restaurant – $2.85
    First Class postage 5 cents
    High end camera $150 (a very nice very high end camera…)
    Movie ticket 35 cents
    Acre of prime California farm land: $500 – $1000
    Hersheys Large chocolate bar – 10 cents

    Oh, and try to hire a cop for $12,000 / year or a college professor for $14,000. And get an ounce of gold for $45. Or pay 35 cents minimum wage. Just try.

    Could you make a ‘lousy basket’ loaded with items subject to extreme cost reduction from new technologies over time? Sure you could. But it does not tell you much of value. It mostly tells you that some (fairly limited set) of things have cost reductions over time from very rapid technology changes; and that you know how to cheery pick them. And it IS a very small basket of things. In comparison to just the bulk commodities (coal, oil, grains, minerals, meat, chemicals, wool, fruit,…) the entire set of tech toys is nothing.

    That it complicates the figuring? Yeah, it sure does. But it does not prevent getting very reasonable metrics for comparison. It’s hard to make a 3 digits of precision number, but very easy to get a single digit of precision.

    And it is something that Economists do all the time, on a global basis, and in terms of every currency on the planet.

  11. Dave McK says:

    Three 1965 dimes will get me the same gallon of gas today or the same groceries.

  12. Dave McK says:

    You just can’t use any currency as a standard. Currency is inflation.
    Before Keynes found employment as witchdoctor, he was a strict capitalist (Adam Smith). His trick was to realize that the wealth of the world is not a zero sum game. This idea has only penetrated the heads of royalty in recent decades as their history of a thousand years was shaped by pre-industrial conditions- they have always had serfs or sent men on voyages of plunder.
    What Keynes whispered into the tender ear of a system devoted to plunder was that it could be sustainable if one were restrained to inflating the currency at a rate that prevented the apparent cost of manufactured items from dropping- essentially pinching that difference by inflating – and then being able to claim one was stabilizing prices.

    Similarly, Alan Greenspan had been published in Ayn Rand’s non-fiction. He was also a strict capitalist until he swooned over power. A quote from his early years:
    “There is only one kind of inflation – the printing of currency- and it’s the way the state can pick the pockets of the citizens with not one man in a million knowing how it was done.”

    Currently economic courses teach that there are many kinds of inflation. This is the analog of ‘many kinds of truth’ which is a way to devalue the concept itself – by minting a multiplicity of variations so the word no longer refers to objective reality.

    I watch the fungible assets, using gold as a standard.
    It’s the best commodity that serves the unique purpose of money. Money is a particular kind of commodity.
    Gold is uninflatable and indestructible. It’s actually not counterfeitable even with tungsten – hit a tungsten bar with a hammer and you’ll know it instantly. The hammer will bounce off it. Tungsten is extremely NOT malleable and the wrong color and chemically reactive.

  13. pyromancer76 says:

    So if you are interested in any of that, I can cook up a “starter guide to markets and investing”…

    The answer is “Yes”. My only problem is that I will go slowly. Family with little ones and one on the way has just relocated from Japan. Helping to set up a household takes time, time, time — but, oh, what joy.

    Thanks for making this one of the most informative sites on the web. Keep working on your book — great thermometer die-off beware!

  14. Soronel Haetir says:

    The high end camera you speak of is not the same product that it was in 1965. It is far better now (even if you stick with film). I will make the claim that even meat and fruit foodstuffs are not the same products that they were in 1965, despite carrying the same names for the most part.

    Other products are both more similar and not, gold is gold of course but I’m not so sure of oil. The product delivered to consumers has changed but I have no knowledge of whether the standards underlying the commodity have shifted. Houses and cars are certainly not the same products they used to be. Both are (for the most part) made far better than their earlier counterparts on nearly every relevant measure. And that is part of where I believe such comparisons break down, the fundamental assumption that staple products are stable over time just isn’t true for the most part. Yet there isn’t really any reasonable way to go back and get a pound of 1965 hamburger to put it next to a 2010 pound of hamburger.

    I agree that you can’t do much better than taking a similar basket of goods and comparing the prices over time (or across other boundaries), but when the nature of what people buy changes I’m not sure that the comparison remains relevant. Certainly the average standard of living has increased greatly over such time frames. I suppose that could simply be innovation outpacing inflation but the effect is still very real.

  15. E.M.Smith says:

    @Soronel Haetir:

    Nice try. And yes, there are many differences you can admire endlessly in a small part of the total production of society. And yes, folks can, and have, written whole books about ‘the problems’ of calculating an inflation rate. But no, it does not prevent doing a quite good job using only a small number of readily comparable items.

    While a “Gentleman’s suit of fine clothes” is not the same style now as it was in 1500 and is not made of the same materials, the costs to produce those materials and the labor to make and deliver that suit are comparable; and the cost in gold has been nearly static. 1 ounce.

    For hamburger and fruit, you are way out on a limb. The same orchards that grew peaches when I was a child 50 years ago are still growing peaches today, and the same variety. Not a lot of change there. Both the product, and the farm land, are identical. Similarly, I drive past the same cattle feed lot on my way to LA. Yeah, it’s bigger now in that they have added capacity. No, it’s not different. A barn, feed shed, open ground, and fences does not change much.

    If I were arguing your side, I’d let go of the notion that basic commodities were significantly different. They are one of the easiest things to demonstrate as the same…

    (A counter example: When I was a kid, trout was terribly expensive. Roughly $20 / lb in ‘todays money’. Then we started fish farming… and trout was done first as the profits were so high. Now farmed trout is among the cheapest fish you can buy at $2.30 / lb. Yes, when making an inflation index you must identify those types of changes and allow for them. How they are allowed for is a large chapter, so I’ll not be typing it here… but the short form is “either drop it out of the core index, or include it as a ‘deflator’ but with proportionate scale to the size of production” That is, if it’s 0.0001% of GDP, you scale your deflator by that quantity… Or just use Halibut instead of trout in your inflation metric.)

    But for purposes of determining the static or dynamic nature of the CURRENCY you don’t need to allow for all the dynamic goods. You simply need to pick a basket of STATIC (or relatively so) goods and compare the prices. That gives a very good number very quickly. Hamburger is hamburger. Ground cow. And wheat is wheat (even if baked into a loaf of bread). And oil is oil.

    Similarly oil. The stuff pumped from the ground comes in a variety of specifications from tar sands to “light Arabian”; but it’s the same oil it was in 1880. Gasolines have changed a little bit, but Diesel oil hardly at all (less sulphur – and the pass through the desulphurizing unit is not a significant cost). Further, at the ‘splice’ between old simple distilled gasoline and ‘modern’ oxygenated gasoline there are available data on the change of cost to produce it (not very much, a few pennies per gallon) so we know the offset (and know it was not significant).

    Saudi Light was about $2 / bbl to $4 / bbl and now runs about $80 / bbl. That’s a 40:11 or 20:1 ratio. Clearly the formation of OPEC had an impact. Yet take just after OPEC when it was $12 / bbl to last year (or two?) when it was over $100 / bbl and we again have a 10:1 ratio. So even in a highly volatile commodity subject to extreme manipulation we have a fair metric that the dollar is about 1/10 of it’s former self (though with a wide error band that includes 1/20 to 1/8).

    As you collect many such cases, the central limit on the range of the ‘value of the dollar’ narrows and you get a reasonably good measure. Right now, that is about 1/12 to 1/9 of the prior value (for my basket). So a 1/10 value is “reasonable for all practical purposes”.

    Yes, my modern Cannon runs rings around my old Cannon in terms of making digital pictures. No, they are not fundamentally different objects. Buttons, knobs, wires, fine assembly, sturdy materials (though with more high end plastics substituted for metals) and some fine optical work. At the end of the day they are in fact ‘comparable’ for purposes of measuring gross inflation. You simply MUST put numbers on this you you miss the picture. One cost $150 the other costs $1500 and the decimal point has moved one whole position. That did not come from substituting a high end plastic for metal in the body nor from making the lens of plastics instead of optical glass. Those push the decimal point in the other direction…

    Most of the technical change does not show up in price or cost changes, it shows up as competitive advantage and consumer features. (My old car had an expensive to make tube radio that got AM, my new car has an easier to make computer driven radio with more quality of sound that gets AM/FM and plays CDs, but very comparable overall costs to make in real terms. Basically the technological advance shows up in feature set, not in pricing.)

    Now, by itself, that might have some doubt about the precision (ought it to be 1/9 or 1/8 or 1/11 instead of 1/10?) but when you then look at gasoline and find $0.25 to $0.30 moving to $2.50 – $3.00 and look at bread moving from $0.10-0.15 to now being $1.25-$2.00 and on down the list: It is pretty clear that the basic inflation rate has consumed roughly 9/10 of the “value” of that original dollar.

    Oh, and for that “house”. My personal inflation metric uses THE SAME HOUSE. The one in which I grew up. Houses have a very long lifetime, so the history of their sale is a very nice inflation metric. In reality, houses consume maintenance dollars to retain value (folks rarely keep track of that) and are net money sinks. But in an inflationary environment they are a great ‘store of value’ and folks do ‘keep them up’. So home sales, year over year, work quite well. And it’s not the nature of the construction that changes the prices. It’s “Location location location”. So just pick some homes in constant locations and you’ve got your metric. Preferably in a location with a modestly unchanging economic base, like a farm town. That’s where mine is located. (Picking one next to a Chrysler factory would be a bad idea. It does not show that you can’t figure out inflation, it just shows how lousy a cherry pick can be.)

    Yes, there will be technical change that causes divergences. No, that does not prevent calculating a quite workable number.

    BTW, a great example of technical change leading to divergence is Silver vs Gold. The very old historic ratio used for setting coinage was 16:1 (there were variations, that is just one of the more common ratios). So 16 Silver Dollars were worth about the same as one gold coin of the same physical size (more or less). It was even made the law by congress:

    http://www.u-s-history.com/pages/h763.html

    One of the strains on the “gold standard” was all the silver coinage that had a set ratio to it. Technology was changing.

    In particular, most of the silver today is a ‘waste product’. It comes from copper refining. The electrolytic refining of copper leaves a silver sludge behind.

    So as of today, the ratio of gold : silver is 63 : 1 and this raises the question: Is gold over priced or is silver undervalued? And the mostly likely answer is ‘neither’. (Though I’d lean toward a slight over valuation of gold). At the old ratio, either Silver needs to rise to $72 / ounce or gold needs to drop to $292 / ounce – which is about where it was a few years ago when central banks were selling it like crazy…)

    And lots of folks fret over that question:

    http://seekingalpha.com/article/14922-is-the-old-gold-silver-ratio-of-16-still-alive-today

    So yes, it is a bit messy to find the rate at which your money is evaporating to any great precision.

    But no, it is not at all hard to show that it IS evaporating, and at a fairly good clip too, for all practical purposes.

    Finally, you come very close to a clear answer with your statement that:

    Certainly the average standard of living has increased greatly over such time frames. I suppose that could simply be innovation outpacing inflation but the effect is still very real.

    There are two things going on here, and it’s easier if you keep them separated.

    First is ‘improvements in standard of living’. That comes entirely from economic growth, largely driven by technical advances. That’s what ‘adds features to the camera’ and what makes a polyester suit instead of a woolen one. That grows at about 3% / year. (Sometimes less, right now nearly negative in Europe and the USA, but showing signs of waking up; sometimes up to 8% as it is in China now.) That is “real economic growth”. It is what makes lives better. It is disjoint from the value of the currency.

    Second is “inflation”. Inflation is strongly a price artifact only. It is NOT a real change of production or value, only of prices in a given currency. (Note that beef and oil are sold in different currencies all over the world. The production of beef or oil are not dependent on the currency used to sell it.) So it’s not hard to get a working number for inflation. Pick something without a lot of that technical advance and measure it. In short periods of time (like 50 years) it is almost trivial to get workable numbers. Everything from specific art works to Waterford Crystal to barrels of oil and loaves of bread are substantially static in the decades time scale in terms of basic real costs to make and deliver. Only as you run out to hundreds of years does it become problematic. But, frankly, and sadly, there are very few paper currencies with more than a 200 year history… Think about it…

    Viewed that way, you can see where your argument is largely saying “technological advance improves living standards”. And that is very very true. It is the leap to saying “and that makes it impossible to measure inflation” that is a leap too far.

    A bit tricky to measure? Yes. Needs care in what you use to do the measuring? Yes. Best done with a selected basket to tease out the base rate from the tech changes? Certainly. But doable quite easily ‘for all practical purposes’? Absolutely.

    Just go buy a loaf of bread, a jug of wine, a suite of clothes and a pound of beef. The prices have hardly budged in gold in many hundreds of years. (Though in silver they have; but even measured in silver we find inflation…)

    The US $Dollar: worth 1/10 th it’s weight in gold, and falling.
    The Euro? Leading the parade down right now…

  16. E.M.Smith says:

    @Pyromancer76:

    No worries on your going slow, I’ll be going slowly too ;-)

    OK, one ‘starters guide to money’ coming up, in installments, Real Soon Now ;-)

    @Dave McK:

    Generally in agreement. (Though I’m a bit low key about it and have an emotionally flat attitude toward it… guess I’m just getting too jaded ;-)

    The “different kinds of inflation” is intriguing. WHAT different kinds? It was my understanding it was very simply defined. Rate of change of the value of currency over time.

    Wonder what magic they are pulling out of hats to get different kinds?…

    But basically, yeah, whoever controls the manufacture of the currency can garner to themselves the “value” of the total stock of the original issue by simply inflating it away over time with new issuance. So I only ‘sit in currency’ when it is going up in value (and that isn’t very often or very long…)

    Then there is the distinction that “currency” is a medium of exchange and nothing more while “money” is also “A Store Of VALUE”. No paper fiat currency ever meets the definition of money in the long run, which is why you will find the central bankers, such as Greenspan, carefully talking about currency and not money…

  17. Dave McK says:

    You got it.
    The brilliant innovation of paper currency is that by forcing it – via faith, fraud and force, (while confiscating the bullion – remember it wasn’t til Reagan it was legal to own bullion cuz it was monopolized by the fed) it was possible to bestow an expiration date on the store of value and induce perpetual churn – permanent game of musical chairs with paper.
    They monetized decay with paper backed by whim.

    I think right now Geitner is trying like hell to get China to inflate (like a good player- everyone on the merry go round is supposed to do that – otherwise somebody ends up having to print red bills at 10 to 1 real fast.

    Oh- the way the Russians did it last time- they also pumped up the press about criminal ‘money’ laundering to confuse them while they limited the time period and the amount that could be exchanged for the new bills. Thus they were able to vanish 90% of the ‘store of value’ overnight.

    Yes, modern university economics will have you mired in cost inflation, price inflation, wage inflation, etc – basically any time (due to the real one kind of inflation) the trade of currency for product changes, they defocus the cause and effect and create a mystical fog.

    I remember listening to Johnson in 1964 say on the radio that he would never remove precious metals from circulation. My boss at the time turned to me and said- “start saving quarters- you won’t see them next year”.
    He wasn’t off by but a few months.

    A store of wealth is precisely the purpose and value of money- it’s not about convenient exchange of tokens.
    In the absence of circulating money, then, real estate has often been a poor substitute.

    Oh- here are the other 3 laws of real estate that are as important as the first 3: timing.

  18. E.M.Smith says:

    @Dave McK:

    I remember we used to save the silver dollars from the restaurant when I was a kid. They were the “vacation fund”. One year we used a small bag of them to take everyone to Disneyland for a long while…

    A couple of years later and the Johnson thing happened.

    I now have a nice (though small) bag of silver dollars in a safe as we decided not to spend the silver on the next vacation; we spent the paper instead…

    That bag of sliver dollars is now about 19 x the face value. Been a great ‘store of value’ and real money. The $1 paper currency from the era that I’ve saved is not so well endowed… (even the ‘silver certificates’ that are no longer redeemable).

    I remember the ‘stink’ when they first removed “and redeemable in lawful money’ from the paper bills. LOTS of folks in my farm town were “not happy”. And the “fog” issued by the officials that it was a meaningless phrase… (Meaningless my Ass. It was THE link to the constitutional demand that only gold and silver be ‘lawful money’. But once you decide to lie, it’s very hard to decide where to stop the lie… so they went for the wopper. And it seems to have worked.)

    So for a store of value for more than a year, I use gold, silver, and platinum coins. (And a few odds and ends. Some pearls and a few stones). For less than a year, I check the charts and choose the currency that it going up or I’d use GLD or SLV as ‘paper gold’ and “paper silver’ contracts. For a few days or weeks, sure, I’ll carry dollars…

    Oh, and whenever possible I’ll load up on some nice asset with a mortgage priced in dollars (or other currencies) that’s got a ‘buy down’ on the interest rate. I’ve gotten about a 5:1 increase in value out of real estate that way… (well, really it’s more like 100 : 1 from my actual down payment, but after you allow for the monthly payments and all, it’s 5:1)

    You really do want to be in debt in a currency with a fixed rate when inflation starts to rise. All your debt just vanishes.

    Gee, and the (various) government (s) (in the world) is (are) up to their eyeballs (or well over them…) in debt. And controlw the rate of inflation. Wonder what they will choose to do … ;-)

    Oh, and on the “wage vs cost vs price” inflations. Yeah, I remember that now. We studied it for a while as a ‘new thing’ and the general conclusion in my era was “nice try, but it’s the money supply”. IIRC, the Chicago School.

    The basic notion was that you could have a “price shock” that could start inflation, but it had to be ratified by a monetary base expansion to stick. The ‘wage based’ was largely an artifact of the attempt by Johnson to have a minimum wage (and would have failed to inflate had they not gutted the currency – it would have instead resulted in unemployment). The ‘cost based’ simply reflected the time lag after a currency debasement when the commodity markets caught on and started a ‘catch up’ that then fed through the rest of the economy.

    At the end of it all, we concluded that all the “varieties” were in fact not causal, but were just admiring the time lags as different parts of the economy caught on (and caught up with) the shift of the value of the currency from fundamental monetarist forces.

    FWIW, that whole Johnson inflation era was part of what pushed me to study Economics and money. Having lived through an inflation burn I wanted to know the hows and whys.

    BTW: Sidebar on minimum wage. A “minimum wage’ can never bring wealth to the poor. At best it can assure more of them are unemployed.

    There is some inherent value to a product. If the price is raised too high (from excess costs in wages) the product will not sell and the labor will be unemployed. This is even more so for unskilled labor. THE biggest result I saw from the implementation of a minimum wage law back near the Johnson years was the unemployment of a lot of folks. There were rapid inventions of nut harvesters (tree shakers) and the motorized tomato pickers of today. We used to have thousands of migrant farm workers. None to speak of today. Call it “progress” if you want ( I personally would rather not pick walnuts ever again ;-) but the local farm kids no longer have a simple time picking up a summer job…

    A bunch of marginal businesses folded rather than pay higher wages. And there was a shift to less labor intensive crops. (Row crops moved to Mexico, for example, and mechanized crops stayed here.) We also had the UFW push for loads of wage increases. Net result was farms moved to crops without a labor component. Haven’t seen a UFW flag in years. (I’m sure they are still around somewhere…) I know of at least one farm they picked for a targeted “boycott” that “gave in” and payed them to pick the grapes. And then proceeded year by year to cut down grapes and plant machine harvestable crops. I think it was about 4 or 5 years to “no grapes” for them… Lately there has been the invention of an automated grape harvester…

    So one of my “benchmarks” for inflation is just “the minimum wage”. Sure, politicians like to raise it periodically. But it can never get too far ahead of inherent real value or they get massive unemployment. It was 35 cents. I remember when it hit $3.50 there was unemployment for a year or two, then inflation caught up and employment stabilized. Last I looked, it was about $8 in California. So at 10:1 we had relatively full employment. At 20:1 (that would be, based on the 35 cent era, $7.50) we have 12% official unemployment in California, and rising…

    That makes the inflation rate as roughly bounded by 10:1 to 20:1 with the unemployment rate arguing for closer to 10:1 and probably about 12:1 (that is more or less in line with the other metrics).

    And for anyone wanting to rant about “social justice” or the need to have a “living wage”. I’ve not said that this is RIGHT or JUST. I’ve simply said that it IS. Economics is nick named “The Dismal Science” for a reason. It has iron laws that are not subject to negotiation nor to legislation, no matter what politicians may think.

    You may well WANT a different result, and you may well find reality a Real Bitch. But “Reality just is. -E.M.Smith” so you need to accept that, if you would make sound decisions. And it is essential to accept it if you would understand how the world really works.

    So you can have “a living wage” for a smaller number of the poor, or you can have “full employment” for all of them. And no, you can not have both. (And no, it has nothing to do with me, nor what I want. I’d rather have a world with everyone making above average income… but unlike Lake Woebegone, you can’t all be above average…)

    Eventually, with enough technological advance, we might reach an economic state where equilibrium employment would result in a “living wage” for all, but that is not at all a given. And it is not the case today.

    So the minimum wage becomes a decent inflation indicator. AND it becomes a decent way of assuring unemployment.
    AND it is a decent way to stimulate automation beyond the economically driven level.
    AND it’s a great way for politicians to claim helping the poor when they have done nothing.

    But at the end of the day it accomplishes nothing of merit.

    Welcome to The Dismal Science…

  19. Dave McK says:

    LOL-
    When you look at the details it’s just as compelling from the bottom up view.
    We used to collect coke bottles – 2 cents return – not mandated but economically justified.
    Laws were passed to criminalize re-use of bottles – they ‘must’ be crushed now. Recycling is a state monopoly now by virtue of subsidies. Kids don’t learn the beginning lessons.

    In Oakland, when they legislated recycling, they upped the collection fees for garbage and charged for several different bins and required the homeowner to sort stuff for the convenience of the new professional green machine.
    The local bums who were accustomed to picking through trash for the aluminum cans, now found their work done for them and efficiently disposed of the aluminum – for a couple of weeks- it took no time at all to institute a 200 thousand dollar garbage police unit to prevent people for doing for free what the state had claimed as a monopoly.
    That expense is not figured in to the cost – it’s marked on the black column as ‘new jobs’.

    Stock clerk used to be a summer job for kids, too.
    It surprised me to cross picket lines at a grocery store in American River Canyon near Folsom where adults were seeking to extort a wage sufficient to raise a family – to make ‘stock clerk’ a profession.
    I shopped there preferentially so I could ask the picketers who approached me with flyers why they wanted to make a career of a summer job for kids. I usually bought a fancy chocolate cake from the very nice pastry bakery there as a gift for a client whenever I finished a job.

    I couldn’t help but notice in Strawberry Village that checkout clerks no longer need basic math skills, either- they don’t make change, even- they just .. um… help things along a conveyor… and watch you swipe your card…
    I foresee extinction of that job very clearly.

    From Principia Dischordia, what they call the law of unintended consequences is named the law of negative reversal: ‘for every imposition of order there is an equal and opposite release of chaos’

    Principia is a load of fun – but it requires that you know what is appreciate the brilliance of the satire.

    I know others have read it for significant nods are sometimes given without mentioning the source.
    Hail Eris!

    R Crumb’s Mr. Natural need never change his signature and it should be engraved on that gable of the capitol’s mock parthenon.

  20. Dave McK says:

    Incidentally- your reference to Garrison Keillor –
    the town he describes is (sorry I can’t remember the right name for the philosophy embodied by it just now) one that characterized Scandinavian agricultural communes. It was a zero sum game, then, so if anybody had anything more than anybody else, it had to have been stolen.
    Therefore being ‘above average’ brought you loathing. Equality was virtuous because it had a different meaning in that context.

    The same concepts exist by inertia today, even though the game hasn’t been that game for a couple hundred years.

    It’s clear to me how this cyst of retrograde philosophy is preserved and propagated, too. This is what needs to fail hard.

  21. Soronel Haetir says:

    I was not disagreeing that there has been inflation, only that I believe your figure of 1/9th value does in fact undervalue product improvement and that I believe such improvements need to count against inflation.

    A simple example, with nice round numbers pulled out of my ass :) When comparing a $2,000 car from one era and a $20,000 car from a later period I believe the safety, fuel efficiency and lowered maintenance needs (even if the maintenance that is required is harder) lower the apparent loss of buying power. If the improvement is only 25% that would still change the initial 1/10 factor to 1/7.5 ($20,000 – $5000)/$2000. If the newer model is 33% better under these measures then the factor shrinks more. And I don’t think a 25-33% improvement is an unreasonable figure to assign to those areas.

  22. Dave McK says:

    Soronel-
    Thought experiment:

    Let us now say that the accountant for Inferior Product Company proposes that his books would better balance if he could count the profit from every other company.

    That is Keynsian Economics and the product of Inferior Company is a cheesy imitation of money.

    Quality of one product can not be attributed to an inferior one. That is embezzlement of virtue and wrong.

  23. pyromancer76 says:

    An idea for you from WUWT (I hope Laurence Kirk does not mind my quoting him in toto.)

    “laurence Kirk says:
    May 2, 2010 at 6:04 pm
    Dear Anthony,

    A friend of mine, Peter Strachan, who runs his own authoritative subscription-base oil and gas newsletter here in Australia (‘Stockanalysis’ http://www.stockanalysis.com.au ) recently added a weekly radio-style “Feedback Session” to the subscribers’ section of the webpage through which his newsletter is delivered. As a subscriber, I was unsure the value of this at first, but am now an avid fan who never misses a single edition: it has proved to be a resounding success.

    Each session lasts about half an hour. The loose format consists of an overview and brief analysis of any significant economic events, then comments on relevant oil-industry, financial market and company-specific events, and then the main body of the session is a series of in-depth responses to clients’ specific questions, usually about particular companies, plus Peter’s own sometimes quite quirky observations of anything that amuses, intrigues or sparks his imagination.

    It is delivered through streaming, sound-only Windows Media Player and MP3 formats, and in my case I run it at my desk on Windows Media Player whilst I am working on other more mundane tasks.

    The reasons that it is such a success as far as I am concerned (and I think you will relate to these) are: a) The consistent high quality of content, which is a direct reflection of Peter’s depth of industry knowledge and the energy and effort that he puts in each week, b) the relevance of the content to the audience’s immediate interests, c) the originality and entertainment value of the material in the way that it is presented.

    Peter started out as an industry professional from a specific scientific background, who then diversified into broader-based resources industry, financial and scientific analyses and commentary. He now appears regulary on televison, radio and in the press and is frequently asked for his authoritative comments on mining, oil and gas industry matters. You might recognise a few common factors between his CV and yours!

    ANyway, if you would like to have a look at how his radio-style format works, you can either contact him through his ‘Stockanalysis’ website, or email me directly and I will be able to give you his contact details.

    I must say, if you were to go ahead with the proposed radio project, I would be a very regular listener to a half-hour per week WUWT commentary delivered through Windows Media Player, and if it included responses to some of the more original and interesting listeners queries, I think that would be very entertaining.

    Congratulations again on the excellence, interest value and high scientific integrity of your blog.

    With best regards,

    Larry Kirk

    (Perth, Western Australia)”

    With best regards, too, Pyromancer76, Los Angeles, CA

  24. KevinM says:

    I’ve become well aquainted with SPY, and thats the only thing I’ve traded for 3 years. I have developed a sub optimal but “good enough for me” strategy that has devolved into buying dips for the past 5 months.

    So I’ve decided te S&P is going to move sideways for a while (months) and then maybe drop (but I’m not sure), and I want to stay at least half in something safe that beats cash.

    Is there a reason to avoid GLD for the next few months? I have no gut for it. I’m looking for something with hopefully a slight uptrend, and some daily wiggles, but not much risk of a correction.

    REPLY: [ SPY / SH is a nice combination. I like the larger volatility of QQQQ or EWZ, but SPY is nice too. It is my benchmark and if I can’t find something to beat it, is the default.

    GLD: It is very volatile. It can be driven by central bankers chucking gold at the market and / or panic news driving prices up. The “gold fix” is done in London so the market in the USA often opens “gap up” or “gap down”. It’s a very hard trade from here. I’ll put money in it when the US $ is dropping, but otherwise usually not. Slight fairly stable uptrend and not much risk? TIP. Treasury Inflation Protected Securities. As inflation picks up, it pays out more. As the FED starts raising rates, you have a small risk of dropping, but we just had one Fed meeting and they indicated no change (and not much to come). Major risk to dollars is inflation and TIP takes that out. Major risk to TIP is The Fed raising rates, and you can see that coming a mile away… -E.M.Smith ]

  25. Wes says:

    Chief,

    I have taken profits and am all out again. I just cannot bring myself to go to the dark side in a market that has exhibited this much strength.

    I am using the period just after September 24 as a very loose template (QQQQ chart) for the near term.

    REPLY:[ Ah, day trading. Yes, for rapid day trades, doing a “down today up tomorrow” range based trade works well in flat(ish) markets. I’ve generally assumed most folks reading here would not be interested in day trade advice as it takes a particular set of skills (and attention in no larger than about 20 minute steps – that is, you have to look at it ever 20 minutes all day long to spot “the moment” for max gains.). Yeah, on the news of a Greek Bailout you have a classical “buy the rumor, sell the news” moment. -E.M.Smith ]

  26. Katie Tam says:

    Mr. Blankfein testified about investment and trading activities of Goldman Sachs and other investment banks involving residential mortgage based securities and related products.

  27. E.M.Smith says:

    @Katie Tam

    I’m pondering a posting on the “mortgage crisis”… it’s a fairly complicated thing to explain, but probably needs a record of it. GS didn’t do much “wrong”, but the congress certainly did…

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