The Last Bubble

U.S Treasury

Background Information
You need to know one thing. Yields on all the treasuries are at historic lows, very close to 30 years low. Yields for 3 month treasuries are negative. It means that you will lose money by putting money into it. It sounds very funny. But it is the way it is right now. From another perspective, U.S govt is getting money from you for nothing.

Deflation
The only reason I can think of to explain current situation is deflation. Supposed during deflationary times, people want to hoard cash. They will want to put into treasuries. Bonds will be more valuable even when yields are at record lows.

It is also pretty much a deflation scenario that we are probably facing right now. But here's the catch. What if it is a deflation now/inflation later scenario?Rates will go up or dollar will fall drastically. Whatever the case, it will force people to sell a whole lot of treasuries and that is going to drive inflation up into the stratosphere.

As Weird as it sounds...
Stock market picks up. Investors start to sell their treasuries with low yields. They go back into stocks. Yes, treasuries will still fall but at least it is a sign that the economy is picking up and money is going back into investment of goods. Ideally speaking, this sounds logical. So maybe it is a bubble that is worth having after all.

Greenspan/Bernanke put
I mention about Greenspan put previously. I think Bernanke has inherited his legacy. In a way, men believe that they can control things. In fact, men want to control things. But sometimes, you simply can't control them. Both are creating bubbles that they cannot control at all. For the current trouble with treasuries, with yields at record lows, Bernanke is making a crazy promise to held interest rates at such low level for a long period of time.

The implication is that should things pick up, Fed will be pressured to raise interest rates again. This will kill all the bond holders at today's low rate.

When the treasury market collapses…
It makes sense for a dollar collapse as well because there is going to be this huge supply of dollars lying around. Stocks will crash as well (again!?). I suppose this is the implication of a dollar collapse. But actually, stocks may bottom with this crash.

A straightforward thing is people will buy a true safe asset - Gold. It may be a new tentative money system while people are trying to sort things out.

Something about Great Depression

I wiki-ed recovery of Great Depression. It is a freaking short paragraph. But something interesting about it. It is said that some economists attribute the recovery to the devaluation of dollar against gold.

Maybe, Bernanke wants the dollar to collapse. This sounds very fuzzy. But supposed Bernanke realises that the current situation is so bad that to flush the whole system out, you have to flood it with more money. Let the dollar collapses and restarts. Maybe they are hoarding lots of gold. I don't know. Lots of conspiracy theories over there.

Nonetheless...
we can profit from this. It is the only four letter word that glitters. Starts with a G, ends with OLD. By the way, there is an incident that happened recently. It is called backwardation of gold. I still don't quite get it fully. But a permanent backwardation reflects a situation where no one will want to sell gold. Very interesting piece of stuff. Hope to share with you soon.

Are You Getting It?

I have been asking myself this question about whether I'm getting it. I mean whether I have grasped what's going on with the market so far. To some extent, I just want to affirm my stand again and be fully assured before I make my next move. I think that in stock market, you should take some rest once in a while. Even Jesse Livermore goes for some fishing after some trades and toally ignores the market.

Reflections

Let's reflect on what have happened so far and looked at things from a different point of view. We shall first look at stocks.

1. 2004-2007 Jul

First of all, we have some crazy bull runs from 1980s. It was stopped momentarily during 2001 dot come bubble. Afterwards, it was continued by some nice bull market. Things are looking great. China markets post gains that are simply mind blowing. Everyday, the market is making new historic high.

2. 2007 Jul to Aug

Just when things get too rosy, Bear sterns showed some signs of distress. Two hedge funds were closed. More companies are revealing the sub prime problem. Market corrected 10% for the US markets and 20% for the Asia markets. For example, STI bottomed at 2800.

3. 2007 Aug to Nov

I feel that there is a learning point here. I believe that in the market, there are always signs to look out for. They are very subtle signs which are very important in understanding the environment (remember environmental analysis...). In matter of months, the market shot straight up. You could simply take a ruler and draw a straight line upwards. It will be the graph for most markets. For example, STI shot to 3800. 30% of gains in matter of months.

According to my fuzzy logic, the end of a bull market is always marked by this acceleration period.

Alright, not a very nice picture over here but hopefully it's understandable. Normally in a bull market, gains are steady and small. But at the end of the bull market, there will be this last burst of fire. The last spur that the market will make and everyone will go crazy buying the market. It is very obvious to most that it will not go on. But this is the stock market.

4. 2007 Nov till today

Actually if you apply this theory right, it is the same for the bottoming process. Remember I mention that only when everyone thinks that there is no bottom and begins to sell, then it is a bottom. In a way, I'm also looking for this acceleration stage for the bottom. The day came in the form of a limit sell down for futures. It is not a very strong signal for a pure bottom of course but nonetheless, it is good enough to show a respite in the market.

Commodities

I guess everyone is quite familiar with this short timeline for stocks. The main point that I want to highlight in this post is about commodities.

1. Jan 2007 to Jul 2008

Basically, commodities were scorching hot. Oil went from $50 to $140. Gold reached $1000. These were history. I need to bring in something here - King Dollar. USD went the opposite way of course.

I will like to make some assumptions here actually. This dollar, oil, gold and most commodities are related. Of course they are! But looking more in depth, I will like to assume that a lot of people in particular hedge funds are buying oil and shorting dollar. Keep this in mind. It sounds really simple but I feel that there is some truth into this.

2. Jul 2008 till today

Oil tanked. Dollar rallied. Why? Again, in matter of months, oil dropped from $140 to $45. A bubble in oil initially? Maybe. But looking from another angle, remember that many people are buying oil and shorting dollar. Supposed they are being leveraged and are holding lots of other stuffs that never do well, in particular, stocks.

Because of the losses in other areas, they begin to unwind and sell off some of their positions. So they are selling their oil and covering the dollar. This leads to a massive chain effect. Oil dropped slightly and dollar rallied. This actually forces others to sell more oil and cover more dollar. I'm assuming that lots of money are tied down to these two positions.

So in the end, there is this huge unwinding of commodities and dollar trade that we are seeing right now and we have dollar strengthening and oil at $45.

The catch is this.

Question No.1: When you look at the dollar, is the strength of the dollar justified?
Question No.2: When you look at commodities, is the selling justified?

Answering question No.1 is simple. When you have someone that keeps printing the paper money and a country that is hugely in debt, you will have the most useless piece of paper in the future.

Question No.2 is tricky. True enough, demand will fall due to recession blah blah blah. But have anyone considered about supply side issues. Farms will close down, no one will open new mines, no one to lend money to prop up productions. All these events take time to surface. Demand is straight forward and simple and this is why most people ignore the supply side issue.

In conclusion, I believe that the commodities are grossly oversold. Of course they can go lower. The strength in gold recently reflects what I am preaching thus far. There is certainly some truth in the demand for gold. But the commodities are still quite shaky at the moment. Time is needed for money to go back in because supply issues will surface in the future and supply may fall much more than demand when you look at stuffs like agriculture. This is probably why Jim Rogers said that stocks and commodities prices are inversely related (though it is not reflected today), I believe in the long run when stocks turn down somemore, commodities will rally and that's where the money will be in because there is some truth in the commodities rally.

The Last Bubble

The treasury market is pretty funny at the moment. Yields for the 90 days notes are negative.

This is the two year chart for the 30 year Treasury bonds. Logically speaking, I don't understand why will people want to lend money to the US government. There are of course experts who state that the potential deflation disaster is spurring people into safe haven like bonds to preserve their money. I don't like the word "preserve".

Why will you want to hold an asset that is grossly overpriced (90 days notes yields are negative)? On top of that, you are getting dollars back that will likely to plunge badly in the future. By my own common sense, price of the notes will not go up that much to offset the fall in dollar because yields for some ntoes are way to little. Who in the right mind will buy them?

I believe that all the money are going into the treasuries at the moment and this thing has to unwind. It takes time to unwind. When it does, I think the last bubble in the financial market will be burst and commodities on a whole will rally.

I will study more about the last bubble and make a detailed one on during the weekends.

The Big Picture II

It is about time to consolidate some thoughts and look at what's happening. I will probably enter the market again pretty soon. This time round, I shall not throw in any economic jargons. It is just plain straightforward common sense investing.

Glittering Gold Again


Finally it is back. Gold in times of possible crazy deflationary period. I don't know. Remember one of the older post where I actually say Gold might fall to 700. I can't explain or even convince myself why gold will fall to 700 when interest rates keep falling and dollar keeps falling. It is super illogical to me. In the end, dollar simply skies through the roof and blows my mind away. I certainly did not consider such a scenario because it didn't make sense to me. But again, in the stock market, anything happens.

I was reading somewhere about bond yields can't stay at this low level forever. However, this makes sense to me. Who in the right mind will want to hold US treasuries? So demand for treasuries have to go. In a way, you can short some bonds but it is so out of my field. I'm actually reading about Charles D., the legendary bond trader. Hopefully I can learn a thing or two about the bond market.

So putting bonds aside, I just think that the only avenue that people will want to park their money in is gold. Holding cash just doesn't make sense. I really don't know if the dollar will just collapse one day. If you seriously like dollar, I can't stop you. So unless you can propose to me another currency, I believe that gold is one of the best asset class in the future and even now.

Gold simply has this mysterious lure. I am lured by it. I know Indians love them. I just can't see how the demand for gold will go down. It will stay flat at most.

Stocks

I like China Stocks. Alright maybe I shall change this blog to a Jim Rogers fan blog. LOL

On a whole, I don't really like stocks for the long run as mentioned before. But certainly there is more to the upside and I support buying any index. I like HSI.

I am keen on buying DJI 9500 DBeCW090323.

Again I have always emphasized on this before. When things go up, everything goes up together. It is just that which one goes up more. I really can't pin point any stocks to you. I just feel that buying the index makes a lot of sense. To some extent, I can highlight some stocks like consumer staples, Walmart, and this is all I know. I still don't like any banks. AIG was back on spotlight with some stupid speculation losses.

Buy some index stocks or bluechips. But again I don't like any stocks for the long run. I think stocks will go down badly and stay sideways.

Commodities

I'm a fan of Jim Rogers. What can I say? Actually gold is also a commodity but I want to highlight it separately.

You can buy them now or wait a bit first. Most of us don't have the staying power like Jim Rogers. The margin will probably eat us all up easily. Again, buy some agriculture.

Conclusion - The Big Picture

I am a bear. I don't like any stocks. Bailouts don't really solve the problem isn't it. What will happen down the road in a few more years? When the banks are still stuck? Who is going to bail the Fed out? It is pretty funny isn't it? I really don't know how people can be slightly optimistic about the future. We are really going to see crazy valuations down the road. Dow at 5000? STI 1000? HSI below 10000? Do look out for weekend post. I will try to consolidate everything that has happened so far in an interesting manner.

The future of money is commodities and in particular, argiculture. You ought to own some.

Mid Week Pit Stop #28

Men Never Learn From History


Last week, I stated that some people believe that the great men alive out there will draw lessons from history and apply appropriate measures. I will like to reiterate that human nature never changes. In a way I'm still quite pissed with the idea that men will "learn" from history. So let me give somemore concrete reasons. This is actually very important for investing in stocks and I will also explain why as well.

1. Greenspan Put

This is actually a famous phrase in wall street. It just means that no matter what goes wrong, the fed will rescue you by creating enough free money.

i. Crash of Oct 1987
Fed cuts interest rates three times in six weeks.

ii. Asian financial crisis, LTCM fiasco, Russian Default
Fed cuts interest rates three times in seven weeks

iii. 2001, worsened by 9/11 attacks
Fed cuts interest rates three times in seven weeks again, and later on bringing the interest rates down to 1%

iv. Only one chairman presided over a longer period of negative interest rates than Greenspan did. He was Arthur Burns. It took Paul Volcker (cool, Obama is smart enough to hire him) a nasty recession and decade of interest rates to repair the damage. By negative interest rates, I meant inflation adjusted short term rates, which simply means, money is free.

v. 2007 Housing bubble. The rest is history.

So...
If you were to ask any statistician, they would tell you that such bubbles and market crashes happen only once in many many years. We have tons of them in this century. Linking back to the forest fire analogy, putting out the forest fire immediately by flooding more leaves on it sounds awesome and effective.

But one must realise that the bubble gets bigger each time. With interest rate this low for many months to go, it will only lengthen the problem and we will have the great inflation of the 70s back again. Whether you are burnt to death or frozen to death, you are still dead. But I believe we might get both. In a way, my quote on Greenspan Put is to highlight the fact that lowering interest rates will resolve the problem only for now. During those big bubbles, it seems to be the best policy because the economy continues its growth afterwards. But it does not solve the root cause of the problem and it only leads to another bigger problem.

2. Smart people aren't that smart after all

Well, LTCM fiasco was caused by a group of smart people including two Nobel prize winners. Smart enough? They nearly brought the financial system down with them. They over leverage themselves, underestimate risks back then. Sounds familiar? All these are common sights in today's problem. Does men learn from history?

3. No one listens to real smart people (I'm not refering to myself =D)

Felix Rohatyn. I doubt many people know about him. You can read The Last Tycoons to know more about Lazard Frères & Co. He is the only man that criticizes on junk bonds in the 80s and no one listens to him.

Warren Buffett. No one listens to his shareholders meeting and the term that he coined - financial weapon of mass destruction.

Top 5 Hedge Fund managers (Soros, Paulson etc). Actually, they hardly speak.

Toh Chin Sheng. No one listens to me. Alright just kidding.

Conclusion: You have to learn from history. Based on history, commodities will go up. I like argiculture for the long time like what Jim Rogers said. I totally agree with him. Good times, bad times, you still have to eat. I dislike stocks for the super long run. Of course there will be bear market rallies but again, you can try to eat like chicken and shit like elephant.


Word of The Day
Seigniorage
Refers to the persistent overvaluation of a reserve currency

Eat Like Chicken Shit Like Elephant

Alright, finally I get a computer to work with. Exams are finally over but my computer is spoilt. I haven't been following the markets lately though but hopefully I can write something that make sense

Eat Like Chicken Shit Like Elephant

I was preaching for a bottom these days. Well, I just think that things take time to unwind and its time for a respite. Btw, do you understand the meaning of the title? =) I like this quote.

1. Technical Analysis

If we look at things from the technical point of view, Hindenburg Omen is over. From what I know, Hindenburg omen lasts until somewhere in between November.

2. Fundamental Analysis (hmm....)

The economy is horrible, period. But then again, stock market is just a funny area where even though things are bad, there will still be ups and downs in the market. But again, I just think that events will slowly unwind... maybe...

3. Environmental Analysis (cool)

I still can't forget the limit sell down day for DOW futures. I just think that it actually signals an end to current situation. Even though there was a day where it broke 8000 afterwards, I still feel that the crowd is more on the buy side now.

4. What Have I done?

I suppose lady luck smiles at those who are prepared. Alright, maybe I'm simply lucky. The mailman decided not to go for any call options in the end. In the end, I will be in for a crazy ride if I had bought any calls. Call me lucky.

5. Some Random Thoughts

i. Eat Some Chickens now?

Even though it's a very volatile period now and its very good for traders. But I think that most people will just be in for some small portion of chicken meat. I still think that big money will only be made in big swings not intra day and day trading.

ii. Shit Some Elephants

In one sentence, I just think that for day trading, you will be shiting lots of elephants while hunting for the chickens. Fair enough?

6. Let's Be Straightforward

I was reading some article about the current situation. Someone actually quotes some expert writing and says that we will not enter into another depression of the 20s. I was furious when I saw the 1st reason.

He quoted, "Experts have learnt from the mistakes of the past and will not repeat them again!"

I quote myself, "What kind of rubbish is this!"

Stock market never changes. Bubbles come and go. Crowds get mad and go into buying frenzy all the time even though things alway repeat itself and it is apparent that a bubble is waiting to be burst. Has anything changed in the stock market? NO. The reason is simply because human nature never changes. Complacency, greed, ignorance blah blah blah.

He quoted more reasons afterwards but I can't be bothered with the rest after reading the first one (I assume its the most important one).

7. What's my Outlook?

I am waiting for the mailman to be back in Singapore. I'm still more inclined towards the call side for a while, though I'm a crazy bear about many years down the road.


Thanks to those who will come back regularly to check this blog. Hopefully I can get a new computer soon and write better and interesting posts.

Cya

Eat Like Chicken Shit Like Elephant

Jin