Tuesday, June 30, 2009

This Just In...There's Too Much Damn Corn! Futures Get Trashed

Corn futures are getting absolutely trashed this morning...along with basically everything else in the commodities sector.

July futures are down nearly 8% as I write, as the USDA just reported that corn stocks are up 6% from a month earlier. Obviously the market does not like this supply news, and corn is being heavily discounted as a result.

The USDA also reported soybean stocks down 12%, while wheat stocks are up 118% from a month earlier. Wheat and soybeans are also down on the report...beans down only half a percent though, so a decent performance in the wake of the carnage.

This looks like another "all or nothing" day in the markets - with the dollar and T-bonds up, and everything else down. We've been keeping an eye on this lack of decoupling...and I think we can assume it hasn't happened yet.

Notable performances in the commodity sector today by rough rice and orange juice...the only green ticks amidst a sea of red. Keep an eye on these two, as strong performances on down days can imply good things to come.

I wouldn't interpret this as a nail in the coffin of the bull market in agriculture - more likely just a respite for this year. The old saying is that if corn doesn't rally by July 4th, it's not going to happen.

We still appear, though, to be playing a game of Russian Roulette with the food supply - we basically need a bumper crop every year to keep this cheap food party going. Grain supplies remain near record lows, so the 2010 grain contracts may be an interesting speculation in the near future...or perhaps right now.

Puking up corn chunks...right past the line of support.
(Source: Barchart.com)

Interested in investing in agriculture...a la Jim Rogers? Check out our weekly series This Week in Commodities.

PS - If you haven't taken our 3-question reader survey yet, please take a minute to do so - much appreciated, as it helps me gauge what type of content we should focus on here.

Monday, June 29, 2009

Great Essay on the Threat of Hyper-Deflation

Yesterday in our weekly column, we kicked around the possibility that the hyperinflationists are wrong...or at least early to the party.

My piece was also picked up by Seeking Alpha, and you should check out the comment stream from livid gold bugs and monetary purists!

I get a kick out of folks that truly believe they "know" what's going to happen in the world of finance. In reality, we've all got something in common - none of us have a damn clue! I've learned to enjoy the banter between various opinions, and try to factor all reasonable points of view into my outlook. If there's one thing that can lead to ruin, it's being wed stubbornly to one point of view.

On that note, yesterday was fun, as we jumped sides and started waving the flag of the deflationists...much to the consternation of the commenters over at Seeking Alpha!

If yesterday's piece was up your alley, here's another deflation argument that's a beauty - courtest of Bill Bonner at The Daily Reckoning. I think Bonner's essays are works of art - the guy can absolutely write, and his contrarian views are always extemely intriguing. Here's a quick excerpt, with the full essay here:

Deflation is the immediate problem. Our guess is that it will be deeper and more vexing than even they believe. The feds’ money machine is broken. They can add reserves. But they can’t turn the reserves into price inflation at the consumer level. Result: deflation…maybe hyper-deflation. But far from eliminating the danger of hyperinflation, falling prices practically guarantees it. In other words, it’s not inflation we worry about; it’s the lack of it.

Recovery.gov Transparency a "Significant Failure" Says Watchdog Group

Recovery.gov, the resource setup by the Obama administration to provide full transparency of the squandering and misallocation of tax dollars, is reported to actually be more translucent than transparent.

Watchdog organization Sunlight Foundation, described as "normally polite" by ReadWriteWeb, referred to Recovery.gov's data transparency as a "significant failure." And not just once!

Sunlight co-founder Ellen Miller writes:

"By not including raw data at Recovery.gov, transparency is dramatically reduced. Sunlight has argued strongly for raw data in machine readable formats as the starting point for Recovery.gov. This is a significant failure by the Administration to live up to its promise for full and complete disclosure. Significant failure."

I'm sure you are flabergasted, dear reader, at this rare government shortcoming.

Related reading:

Sunday, June 28, 2009

Is Deflation “So 2008”? Hyperinflation Trade Looking Crowded

As the Federal Reserve continues to print money, the “hyperinflation trade” seems to be a crowded one.

The premise seems sound and reasonable – whenever a government prints money and devalues its own currency, rising prices follow. A deflationary environment cannot hold for a sustained period of time, because the government will print money, or drop dollars from helicopters, or do whatever it needs to do to create price inflation.

But is it really that simple?

If so, then gold is playing one hell of a rope-a-dope on all of us. Why has gold not been able to crank past the $1,000 mark decisively if inflation, and perhaps hyperinflation, are in the cards? After all, the market is supposed to be a forward looking mechanism!

Perhaps gold is merely climbing the “wall of worry” on the way to the final mania stage... doing a fine job at shaking out the weak hands and non-believers before ultimately skyrocketing to $1500…$2000…or higher.

Gold has risen each of the last eight years versus the dollar, and appears poised to extend that streak again this year, so maybe I’m being overly harsh.

However thus far, plays on hyperinflation have mostly disappointed. Sure, gold has rallied off it’s lows, but so have the broader markets, in what appears to be a textbook bear market rally.

Recently I’ve started wondering if there’s something fundamentally wrong with the hyperinflation hypothesis. A few weeks ago, I mused that the “buy gold” trade seemed a little overdone, at least in the short term…punctuated by Northwest Mutual’s purchase of gold for the 1st time in the company’s 152 year history.

When insurance companies are rolling up to the party, you can bet the cops are also on the way and ready to shut the joint down!

So please indulge me for a moment, and let’s ponder “what if” Helicopter Ben can’t print dollars fast enough.

Here’s what could gum up the efforts of the money printers says Robert Prechter in the June 2009 edition of The Elliott Wave Theorist:

“You can’t beat deflation in a credit based system.”

Prechter says that growth in money supply requires activity on the part of lenders and borrowers. And once a credit bubble implodes, there is no way to restart the engine.
Japan’s recent deflationary recession is a classic example of this – despite unprecedented efforts by the Japanese government to devalue the Yen and generate inflation, they weren’t able to do either!

No amount of public works projects, increases in federal spending, and monetization of debt has yet been able to snap Japan out of its deflationary nightmare. When its credit bubble popped in 1989, it stayed popped for good.

Was Japan an anomaly? With the US employing the same “hair of the dog” tactics, we’re going to find out soon!

If we had a cash based economy, then printing money would indeed cause price inflation, Prechter says. But in a credit based economy, credit is being destroyed at a much faster rate than the Fed can print.

(Roughly $14 trillion in credit down the drains so far, versus $2 trillion in deficit spending and monetization…so quite a large gap).

Eventually, enough credit is destroyed that the Fed will be able to affect the money supply. So, ironically, we could see hyperinflation at the end of this all…of whatever little money is remaining!

As engaging as this intellectual exercise is, at the end of the day we need to figure out where to put our money! There is no safe haven, after all – even if you’ve got your money in cash, you’re “long cash”…and “long” the currency you’re stocking it in!
So what are we to do?

Well, I think we’ve got to watch the charts, and listen to what the market is telling us. This is a time to protect our capital, not to reach for extra yield. If an asset class is getting taken to the cleaners…get out! That was the biggest mistake I made during the Great Deleveraging of 2008…that was the time to follow your stops, go to the beach, and catch a little R&R while the world fell apart.

That said – if we see gold smoke past $1050, $1100, etc – we probably want to be in gold. We’ll take that as a cue that our musings about credit based systems, while fun, were perhaps wrong!
For now, I think cash is not a bad place to be. With gold not yet able to break through, and the hyperinflation trade getting more crowded by the day, another burst of deflation could catch most folks with their pants down.

Remember, in a deflationary environment, cash is king…so don’t worry about yield. Cash gains purchasing power as prices deflate around it…so if you’re able to preserve your capital in nominal terms, we could do quite well in real terms!

Quick Reader Survey - Please Share Your Thoughs!

I tossed together a quick 3-question reader survey, and I'd appreciate it if you could take a minute or two to share your thoughts and suggestions with me using the survey link here.

It's always great to connect with you, and your feedback and input help me figure out where to focus my energies...namely on stuff you like, and stuff you'd like to see more of.

The Week's 5 Most Popular Posts...

Positions Update

We bought the sugar breakout this week...I don't know how much legs this rally could have - and honestly, I don't care - it's a 3-year high for sugar, so we gotta buy this breakout!

OK, if you want a fundamental reason - we've got a global deficit this year - and these can always be fun on the upside!

Current Account Value: $31,385.06

Cashed out: $20,000.00
Total value: $51,385.06
Weekly return: About even
2009 YTD return: -38.0%

2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial stake: $2,000.00

Friday, June 26, 2009

Five Trading Mistakes That Can Break You

Here's an excellent guest piece covering the fatal flaws that most traders make by Jeffrey Kennedy of Elliott Wave International. It is wayyyyy easier to lose money trading than it is to make money...as I can personally tell you from my past 15 months of being brought back down to Earth.

However trading CAN be quite profitable - and fulfilling - if done right. And to trade the right way, you must follow the fundamental rules of trading...and avoid the common pitfalls that cause almost 90% of traders to lose money. Now here's Jeff, an excellent trader in his own right, sharing the five fatal flaws of trading...


Five Fatal Flaws of Trading
June 25, 2009

By Jeffrey Kennedy

Close to ninety percent of all traders lose money. The remaining ten percent somehow manage to either break even or even turn a profit – and more importantly, do it consistently. How do they do that?

That's an age-old question. While there is no magic formula, one of Elliott Wave International's senior instructors Jeffrey Kennedy has identified five fundamental flaws that, in his opinion, stop most traders from being consistently successful. We don't claim to have found The Holy Grail of trading here, but sometimes a single idea can change a person's life. Maybe you'll find one in Jeffrey's take on trading? We sincerely hope so.

The following is an excerpt from Jeffrey Kennedy’s Trader’s Classroom Collection. For a limited time, Elliott Wave International is offering Jeffrey Kennedy’s report, How to Use Bar Patterns to Spot Trade Setups, free.

Why Do Traders Lose?

If you’ve been trading for a long time, you no doubt have felt that a monstrous, invisible hand sometimes reaches into your trading account and takes out money. It doesn’t seem to matter how many books you buy, how many seminars you attend or how many hours you spend analyzing price charts, you just can’t seem to prevent that invisible hand from depleting your trading account funds.

Which brings us to the question: Why do traders lose? Or maybe we should ask, 'How do you stop the Hand?' Whether you are a seasoned professional or just thinking about opening your first trading account, the ability to stop the Hand is proportional to how well you understand and overcome the Five Fatal Flaws of trading. For each fatal flaw represents a finger on the invisible hand that wreaks havoc with your trading account.

Fatal Flaw No. 1 – Lack of Methodology

If you aim to be a consistently successful trader, then you must have a defined trading methodology, which is simply a clear and concise way of looking at markets. Guessing or going by gut instinct won’t work over the long run. If you don’t have a defined trading methodology, then you don’t have a way to know what constitutes a buy or sell signal. Moreover, you can’t even consistently correctly identify the trend.

How to overcome this fatal flaw? Answer: Write down your methodology. Define in writing what your analytical tools are and, more importantly, how you use them. It doesn’t matter whether you use the Wave Principle, Point and Figure charts, Stochastics, RSI or a combination of all of the above. What does matter is that you actually take the effort to define it (i.e., what constitutes a buy, a sell, your trailing stop and instructions on exiting a position). And the best hint I can give you regarding developing a defined trading methodology is this: If you can’t fit it on the back of a business card, it’s probably too complicated.

Fatal Flaw No. 2 – Lack of Discipline

When you have clearly outlined and identified your trading methodology, then you must have the discipline to follow your system. A Lack of Discipline in this regard is the second fatal flaw. If the way you view a price chart or evaluate a potential trade setup is different from how you did it a month ago, then you have either not identified your methodology or you lack the discipline to follow the methodology you have identified. The formula for success is to consistently apply a proven methodology. So the best advice I can give you to overcome a lack of discipline is to define a trading methodology that works best for you and follow it religiously.

Fatal Flaw No. 3 – Unrealistic Expectations

Between you and me, nothing makes me angrier than those commercials that say something like, "...$5,000 properly positioned in Natural Gas can give you returns of over $40,000..." Advertisements like this are a disservice to the financial industry as a whole and end up costing uneducated investors a lot more than $5,000. In addition, they help to create the third fatal flaw: Unrealistic Expectations.

Yes, it is possible to experience above-average returns trading your own account. However, it’s difficult to do it without taking on above-average risk. So what is a realistic return to shoot for in your first year as a trader – 50%, 100%, 200%? Whoa, let’s rein in those unrealistic expectations. In my opinion, the goal for every trader their first year out should be not to lose money. In other words, shoot for a 0% return your first year. If you can manage that, then in year two, try to beat the Dow or the S&P. These goals may not be flashy but they are realistic, and if you can learn to live with them – and achieve them – you will fend off the Hand.


For a limited time, Elliott Wave International is offering Jeffrey Kennedy’s report, How to Use Bar Patterns to Spot Trade Setups, free.


Fatal Flaw No. 4 – Lack of Patience

The fourth finger of the invisible hand that robs your trading account is Lack of Patience. I forget where, but I once read that markets trend only 20% of the time, and, from my experience, I would say that this is an accurate statement. So think about it, the other 80% of the time the markets are not trending in one clear direction.

That may explain why I believe that for any given time frame, there are only two or three really good trading opportunities. For example, if you’re a long-term trader, there are typically only two or three compelling tradable moves in a market during any given year. Similarly, if you are a short-term trader, there are only two or three high-quality trade setups in a given week.

All too often, because trading is inherently exciting (and anything involving money usually is exciting), it’s easy to feel like you’re missing the party if you don’t trade a lot. As a result, you start taking trade setups of lesser and lesser quality and begin to over-trade.

How do you overcome this lack of patience? The advice I have found to be most valuable is to remind yourself that every week, there is another trade-of-the-year. In other words, don’t worry about missing an opportunity today, because there will be another one tomorrow, next week and next month ... I promise.

I remember a line from a movie (either Sergeant York with Gary Cooper or The Patriot with Mel Gibson) in which one character gives advice to another on how to shoot a rifle: 'Aim small, miss small.' I offer the same advice in this new context. To aim small requires patience. So be patient, and you’ll miss small."

Fatal Flaw No. 5 – Lack of Money Management

The final fatal flaw to overcome as a trader is a Lack of Money Management, and this topic deserves more than just a few paragraphs, because money management encompasses risk/reward analysis, probability of success and failure, protective stops and so much more. Even so, I would like to address the subject of money management with a focus on risk as a function of portfolio size.

Now the big boys (i.e., the professional traders) tend to limit their risk on any given position to 1% - 3% of their portfolio. If we apply this rule to ourselves, then for every $5,000 we have in our trading account, we can risk only $50-$150 on any given trade. Stocks might be a little different, but a $50 stop in Corn, which is one point, is simply too tight a stop, especially when the 10-day average trading range in Corn recently has been more than 10 points. A more plausible stop might be five points or 10, in which case, depending on what percentage of your total portfolio you want to risk, you would need an account size between $15,000 and $50,000.

Simply put, I believe that many traders begin to trade either under-funded or without sufficient capital in their trading account to trade the markets they choose to trade. And that doesn’t even address the size that they trade (i.e., multiple contracts).

To overcome this fatal flaw, let me expand on the logic from the 'aim small, miss small' movie line. If you have a small trading account, then trade small. You can accomplish this by trading fewer contracts, or trading e-mini contracts or even stocks. Bottom line, on your way to becoming a consistently successful trader, you must realize that one key is longevity. If your risk on any given position is relatively small, then you can weather the rough spots. Conversely, if you risk 25% of your portfolio on each trade, after four consecutive losers, you’re out all together.

Break the Hand’s Grip

Trading successfully is not easy. It’s hard work ... damn hard. And if anyone leads you to believe otherwise, run the other way, and fast. But this hard work can be rewarding, above-average gains are possible and the sense of satisfaction one feels after a few nice trades is absolutely priceless. To get to that point, though, you must first break the fingers of the Hand that is holding you back and stealing money from your trading account. I can guarantee that if you attend to the five fatal flaws I’ve outlined, you won’t be caught red-handed stealing from your own account.

For more information on trading successfully, visit Elliott Wave International to download Jeffrey Kennedy’s free report, How to Use Bar Patterns to Spot Trade Setups.

Jeffrey Kennedy is the Chief Commodity Analyst at Elliott Wave International (EWI). With more than 15 years of experience as a technical analyst, he writes and edits Futures Junctures, EWI's premier commodity forecasting package.

Thursday, June 25, 2009

Why Silver and Gold "In the Ground" is Tremendously Undervalued Right Now

Regular readers are often looking for ways to play gold and silver...after all, we figure with this historic printing of money, we've at least got a real shot at wild inflation.

The safest way to play gold and silver is to buy the bullion itself. If the world melts down, you'll be the envy of all.

Admittedly I've been too lazy to do this myself...probably shame on me...but honestly I don't have much actual capital lying around to protect anyway...I'm not exactly a rich old dude.

So then I figure - well, how can I get rich off the impending sh*t storm on the horizon? Why not throw some speculative capital at mining stocks, which can do some real moon shots if things take off (and provide plenty of cardiac moments along the way!)

Well now may be as good a time as any to buy some of these junior miners. In my opinion nobody covers juniors like the Casey guys...and in this guest piece, Louis James tells us that the gold and silver these guys have "in the ground" is actually selling for really cheap right now.

And FYI, I subscribe to the International Speculator publication myself, so can vouch for Louis' chops.

Read on to learn more...


Beware of Zombies Wearing Lipstick
By Louis James, Senior Editor, International Speculator

Before last fall’s crash, our economic views here at Casey Research were regarded by many in the mainstream as being extreme and alarmist. Unfortunately, they were also another thing: correct.

Predictably, having been proven right hasn’t changed anything; Wall Street still pooh-poohs us as being part of the lunatic fringe. But that’s okay; while the Suits are wondering if they can back-date their stock options far enough if the economy doesn’t recover, we are poised to profit whether it does or doesn’t.

Personally, I think the U.S. economy has decayed from dead-man-walking status to that of a zombie in the grave. The jury is still out on whether or not the zombie will rise and stumble on for another year or two. That introduces a lot of uncertainty into the markets now, with everyone unsure of what will happen next.

The reality is, beneath all the bravado, that no one is ever sure of what will happen next. And the fools who proclaim certainty should be treated kindly, not left unsupervised around sharp objects, and never trusted with money.

But there is one thing we’re very confident of: if the zombie rises, it won’t be real life we see.

In other words, there is no credible scenario in which the efforts of the U.S. and other world governments to cure the global economic crisis will succeed, not before the mistakes from the past are liquidated. With increasing doses of the same bad medicine that caused the illness in the first place, how could it? You can’t make bad medicine work better by prescribing more – but if you believe the patient just needs a stronger dose, you’ll keep trying. And there can only be one result: dead zombie.

Before the zombie gives up the ghost, however, it may show signs of rosy life – but it will just be lipstick, not the healthy flow of living blood. Though an imitation of a thriving economy is all it will be, it could be a very impressive likeness.

Abandoning my gruesome metaphor, I’d say we are approaching a fork in the economic road. Both paths before us lead to continued liquidation of decades of bad economic decision-making, differing only in how long it takes to get there. The short path drops sharply downward from here, with the decline perhaps triggered by another round of depressing economic news. This is what happens if the various stimulus and rescue plans simply don’t work, deflating the Obama Rally.

The longer path takes us through a reflationary boom for the record books. In this scenario, the stimuli “work,” a last hurrah for the old economic order. And in the end, the artificially simulated (not stimulated) good times will have created an even more gargantuan level of ill-advised consumption, unnecessary construction, and massive misallocation of capital – all charged to an already maxed-out MasterCard.

What Happens Next?

The near term is the hardest to predict, but there are good reasons to assign additional weight to the probability of an imminent correction.

If the U.S. and global economies take the short path, another market meltdown will hammer everything again, even assets that “should” do well in that context, like gold. Any correction in gold would be temporary and create spectacular buying opportunities.

If it’s the long path, a delayed Shopping Season may set in (normally, it’s “Sell in May and go away”), and with the market so jittery, it could be a vicious one this year. With a lot of money still on the sidelines that “wants” to be reinvested, and people desperate to believe things will get better, the Obama Rally could go on for another month or so, but it seems likely to us that it won’t last much more than that, even if the resulting correction is followed by the longer path’s reflationary boom.

Long path or short path, either seems to lead downward in the near term (if only for a few months, initially, in the case of the longer path). Yet, no one can say that precious metals won’t be surging higher as you read this, or next Monday, or next week… I have no crystal ball with which to read the future – but barring an immediate and major breakout in gold, I’m inclined to expect a short-term weakness in the junior mining sector, followed by continued recovery and growth among the quality companies with solid fundamentals.

Why should anyone continue to own these volatile shares if a short-term correction seems likely? Aside from possibly missing a sudden and decisive jump in gold (and silver) prices, consider that most companies’ assets are selling cheaper.

Take a look at this chart showing the spot price of gold and the dollars per ounce in the ground the market has been willing to pay among junior miners and explorers.

Note that the left and right axes are scaled differently. This magnifies the effect, to better show the widening gap between the two over the last two years, but it’s real.

Here’s the same divergence for silver:

This silver chart supports our bullish call on silver last month. The per-ounce price of gold in the ground has not kept up with spot gold, but it is close to being back to its level before the credit crisis started heating up in 2007. Silver in the ground, on the other hand, is still close to the bottom hit last fall.

Short version: whether or not there’s a correction just ahead, a jittery market has both gold and silver in the ground on sale, and that’s an opportunity.

Owning physical gold and silver is a must in these uncertain times. But the real money-makers are select, high-quality junior mining stocks with sound fundamentals, enough cash on hand, and high-grade deposits that can propel the share price to the moon when the company hits paydirt. We call them “Toronto’s Secret Gold Investments”… click here to take a look.

Dennis Gartman: "Warren Buffett is an Idiot"

Yeah, according to The Daily Crux, this headline is a true one...Gartman did refer to Buffett as "an idiot" for allowing Berkshire's stock to drop 45%.

The Gart-Man has since rescinded the statement - but The Crux reports that to Gartman's credit, he's actively shorting Berkshire Hathaway.

I've had a trial subscription to Gartman's Letter before, and thoroughly enjoyed it...though the price tag was too much for me to stomach ($500/mo or something like that).

Fan of Gartman? Check out his recent thoughts on China - a great read.

Wednesday, June 24, 2009

Why Jim Rogers Has Covered All His Short Positions

"Because they are printing money," he says...and believes that stocks could go to very high nominal levels, while the currency becomes worthless.

I was just catching up on Rogers latest media appearances, and found this video on CNBC from a couple of weeks back.

Jim's still pounding the table that we've got a currency crisis on the way...while giving a long, hard glare at the dollar as the prime culprit.

And of course, he still loves commodities.

Enjoy the video!

Also check out one of Jim Rogers' favorite investments, sugar, hitting a 3-year high yesterday!"

Jim's latest book...now on sale...

What Stage is This Depression At? Some Fantastic Graphs and Charts...

Came across this stellar piece earlier in the week via John Mauldin's excellent Outside the Box publication.

Authors Barry Eichengreen and Kevin H. O'Rourke lay our current depression side by side with the Great Depression to see how we measure up...and let me tell you, it's pretty foreboding!

This piece is republished with permission from VoxEU.org...and here's a link back to the original article: http://www.voxeu.org/index.php?q=node/3421


This is an update of the authors' 6 April 2009 column comparing today's global crisis to the Great Depression. World industrial production, trade, and stock markets are diving faster now than during 1929-30. Fortunately, the policy response to date is much better. The update shows that trade and stock markets have shown some improvement without reversing the overall conclusion -- today's crisis is at least as bad as the Great Depression.

Editor’s note: The 6 April 2009 Vox column by Barry Eichengreen and Kevin O’Rourke shattered all Vox readership records, with 30,000 views in less than 48 hours and over 100,000 within the week. The authors will update the charts as new data emerges; this updated column is the first, presenting monthly data up to April 2009. (The updates and much more will eventually appear in a paper the authors are writing a paper for Economic Policy.)

New findings:

  • World industrial production continues to track closely the 1930s fall, with no clear signs of ‘green shoots’.
  • World stock markets have rebounded a bit since March, and world trade has stabilised, but these are still following paths far below the ones they followed in the Great Depression.
  • There are new charts for individual nations’ industrial output. The big-4 EU nations divide north-south; today’s German and British industrial output are closely tracking their rate of fall in the 1930s, while Italy and France are doing much worse.
  • The North Americans (US & Canada) continue to see their industrial output fall approximately in line with what happened in the 1929 crisis, with no clear signs of a turn around.
  • Japan’s industrial output in February was 25 percentage points lower than at the equivalent stage in the Great Depression. There was however a sharp rebound in March.

The facts for Chile, Belgium, Czechoslovakia, Poland and Sweden are displayed below; note the rebound in Eastern Europe.

Updated Figure 1. World Industrial Output, Now vs Then (updated)

Updated Figure 2. World Stock Markets, Now vs Then (updated)

Updated Figure 3. The Volume of World Trade, Now vs Then (updated)

Updated Figure 4. Central Bank Discount Rates, Now vs Then (7 country average)

New Figure 5. Industrial output, four big Europeans, then and now

New Figure 6. Industrial output, four Non-Europeans, then and now.

New Figure 7: Industrial output, four small Europeans, then and now.

Start of original column (published 6 April 2009)

The parallels between the Great Depression of the 1930s and our current Great Recession have been widely remarked upon.Paul Krugman has compared the fall in US industrial production from its mid-1929 and late-2007 peaks, showing that it has been milder this time. On this basis he refers to the current situation, with characteristic black humour, as only “half a Great Depression.” The “Four Bad Bears” graph comparing the Dow in 1929-30 and S&P 500 in 2008-9 has similarly had wide circulation (Short 2009). It shows the US stock market since late 2007 falling just about as fast as in 1929-30.

Comparing the Great Depression to now for the world, not just the US

This and most other commentary contrasting the two episodes compares America then and now. This, however, is a misleading picture. The Great Depression was a global phenomenon. Even if it originated, in some sense, in the US, it was transmitted internationally by trade flows, capital flows and commodity prices. That said, different countries were affected differently. The US is not representative of their experiences.

Our Great Recession is every bit as global, earlier hopes for decoupling in Asia and Europe notwithstanding. Increasingly there is awareness that events have taken an even uglier turn outside the US, with even larger falls in manufacturing production, exports and equity prices.

In fact, when we look globally, as in Figure 1, the decline in industrial production in the last nine months has been at least as severe as in the nine months following the 1929 peak. (All graphs in this column track behaviour after the peaks in world industrial production, which occurred in June 1929 and April 2008.) Here, then, is a first illustration of how the global picture provides a very different and, indeed, more disturbing perspective than the US case considered by Krugman, which as noted earlier shows a smaller decline in manufacturing production now than then.

Figure 1. World Industrial Output, Now vs Then

Source: Eichengreen and O’Rourke (2009) and IMF.

Similarly, while the fall in US stock market has tracked 1929, global stock markets are falling even faster now than in the Great Depression (Figure 2). Again this is contrary to the impression left by those who, basing their comparison on the US market alone, suggest that the current crash is no more serious than that of 1929-30.

Figure 2. World Stock Markets, Now vs Then

Source: Global Financial Database.

Another area where we are “surpassing” our forbearers is in destroying trade. World trade is falling much faster now than in 1929-30 (Figure 3). This is highly alarming given the prominence attached in the historical literature to trade destruction as a factor compounding the Great Depression.

Figure 3. The Volume of World Trade, Now vs Then

Sources: League of Nations Monthly Bulletin of Statistics, http://www.cpb.nl/eng/research/sector2/data/trademonitor.html

It’s a Depression alright

To sum up, globally we are tracking or doing even worse than the Great Depression, whether the metric is industrial production, exports or equity valuations. Focusing on the US causes one to minimise this alarming fact. The “Great Recession” label may turn out to be too optimistic. This is a Depression-sized event.

That said, we are only one year into the current crisis, whereas after 1929 the world economy continued to shrink for three successive years. What matters now is that policy makers arrest the decline. We therefore turn to the policy response.

Policy responses: Then and now

Figure 4 shows a GDP-weighted average of central bank discount rates for 7 countries. As can be seen, in both crises there was a lag of five or six months before discount rates responded to the passing of the peak, although in the present crisis rates have been cut more rapidly and from a lower level. There is more at work here than simply the difference between George Harrison and Ben Bernanke. The central bank response has differed globally.

Figure 4. Central Bank Discount Rates, Now vs Then (7 country average)

Source: Bernanke and Mihov (2000); Bank of England, ECB, Bank of Japan, St. Louis Fed, National Bank of Poland, Sveriges Riksbank.

Figure 5 shows money supply for a GDP-weighted average of 19 countries accounting for more than half of world GDP in 2004. Clearly, monetary expansion was more rapid in the run-up to the 2008 crisis than during 1925-29, which is a reminder that the stage-setting events were not the same in the two cases. Moreover, the global money supply continued to grow rapidly in 2008, unlike in 1929 when it levelled off and then underwent a catastrophic decline.

Figure 5. Money Supplies, 19 Countries, Now vs Then

Source: Bordo et al. (2001), IMF International Financial Statistics, OECD Monthly Economic Indicators.

Figure 6 is the analogous picture for fiscal policy, in this case for 24 countries. The interwar measure is the fiscal surplus as a percentage of GDP. The current data include the IMF’s World Economic Outlook Update forecasts for 2009 and 2010. As can be seen, fiscal deficits expanded after 1929 but only modestly. Clearly, willingness to run deficits today is considerably greater.

Figure 6. Government Budget Surpluses, Now vs Then

Source: Bordo et al. (2001), IMF World Economic Outlook, January 2009.


To summarise: the world is currently undergoing an economic shock every bit as big as the Great Depression shock of 1929-30. Looking just at the US leads one to overlook how alarming the current situation is even in comparison with 1929-30.

The good news, of course, is that the policy response is very different. The question now is whether that policy response will work. For the answer, stay tuned for our next column.


Eichengreen, B. and K.H. O’Rourke. 2009. “A Tale of Two Depressions.” In progress.

Bernanke, B.S. 2000. Bernanke, B.S. and I. Mihov. 2000. “Deflation and Monetary Contraction in the Great Depression: An Analysis by Simple Ratios.” In B.S. Bernanke, Essays on the Great Depression. Princeton: Princeton University Press.

Bordo, M.D., B. Eichengreen, D. Klingebiel and M.S. Martinez-Peria. 2001. “Is the Crisis Problem Growing More Severe?” Economic Policy32: 51-82.

Paul Krugman, “The Great Recession versus the Great Depression,” Conscience of a Liberal (20 March 2009).

Doug Short, “Four Bad Bears,” DShort: Financial Lifecycle Planning” (20 March 2009).

Oil Failing to Rally on Bullish News...A Foreboding Sign

Have you been piling into oil with the rest of the hot money? Might want to think about covering...or even reversing...your position.

The fact that oil didn't leap up with delight at riots in Iran should make oil investors quake with fear. Iran produces about 5% of the world's oil every day. Its populace is rioting... and yet the price of oil fell 3%.

As my colleague Brian Hunt pointed out, it's a big bearish sign when an asset cannot rally on bullish news. We could see oil prices go into decline any minute.

Since breaking the $70 mark, oil has looked a bit toppy. News that China has stockpiled more oil than it can handle appears to have given investors pause.

Oil may be running out of breath after a huge run-up. (Source: Barchart.com)

Now's probably a good time to take some profits...and if you like to live dangerously, maybe even consider taking a small short position for a short-term trade.

PS - If you're a fan of short-term trading, I'd suggest you check out Jeff Clark's S&A Short Report. It's pricey...but if you're a serious trader, it's really top notch insights and recommendations. And right now they are running a special 3-month trial deal.

Tuesday, June 23, 2009

US Treasury to Raise Money Through Cash4Gold.com

Great piece of coverage here by the Onion News Network, as they uncover a desperation move by the US Treasury to raise funds by trading gold reserves through Cash4Gold.com. Enjoy!

Hat tip to our friends at The Daily Crux for finding this gem.

Sugar Shines on Manic Tuesday, Nears a 3-Year High

It's been a manic start to the week for commodities and currencies...deflation was "back" yesterday, with investors running back to the dollar...and today inflation was the focus, with the dollar getting dumped!

Last evening, we observed that sugar was standing tall amidst an across the board selloff in commodities. Well today, that strength carried through in a big way - with sugar up nearly a full cent on the day!

July sugar futures closed the day a shade under 16-cents, which was exceeded briefly this April and May. The October contract closed near 17-cents, a high on the year. If this jump holds, we'll be looking at picking up an October sugar contract on this mega-breakout.

Sugar me sweet, baby. (Source: Barchart.com)

What are the fundamentals driving this? The supply/demand deficit that has been on the radar screen since earlier in the year.

Caution is warranted, though, as a pullback in oil could send some of the hot money to the exits just as fast as it appears to be pouring into sugar. But for now, the market seems to be telling us that the sugar bull is back!

Monday, June 22, 2009

What's the Best Month to Buy Gold

Well, we sold our gold stocks after May this year, on cue with the old addage "sell in May and go away." We were alarmed that the gold market appeared to be looking a bit toppy, at least in the short term, so we took profits and went to the sidelines.

And now we're "safely" back in cash. BUT - when do we buy back into the market? That's the conundrum involved with selling an asset that's in a bull market...you sell and wait for the pullback, often to find that you lost your position, and are resigned to watch helplessly as the market takes off without you!

Fortunately for us, guest author Jeff Clark is going to dive into this topic today, as he looks at the best months for buying into gold and gold stocks.


When is the Best Time to Buy Gold?
By Jeff Clark, Editor, BIG GOLD

I bet you don’t own enough gold.

Before you tell me I’m wrong, let me ask it this way...
  • If inflation returns, or even hyperinflation...
  • If the economic crisis persists and gets worse...
  • If uncertainty and fear continue, and chaos and rioting begin...
  • If stock markets languish or suffer another meltdown...
  • If the recovery spending of the world’s governments proves futile...
  • If government interference in the economy continues to increase...
  • If the value of the U.S. dollar takes a major fall...
  • If world recovery from the current recession/depression takes years...
  • If you’re still wondering whether you have enough “safe” money...
...would you feel you own enough gold?

If all those things come to pass, I suspect many of us, including myself, would wish we had a few extra gold coins or bars stashed away.

So let’s assume you answered “No” to my question and need to add some ounces to your collection... is now a good time to buy?

The Best Time to Buy Gold?

Before glancing at the chart below, if you had to pick the month with the weakest average gold price, which would you select?

In our current 8-year bull market, June has seen the lowest return for gold. In other words, it’s been, on average, one of the best times to buy.

How does this compare to the bull market of the 1970s?

In the last great bull market, summer also was a good time to buy gold (although April was even better.)

What about gold stocks?

Since 2001, July and October have been the weakest months for gold stocks, as measured by the AMEX Gold Bugs Index, and the best times to buy.

However, keep in mind that these are price tendencies and not certainties. There were Junes when gold was up, and some Julys when gold stocks were up. Meaning, avoid using this chart for trading purposes or in anticipation of an immediate gain. Instead, use it to prepare for possible gold price weakness ahead. And if the weakness shows up, treat it as a buying opportunity and add to your holdings to position yourself for the next leg up in the bull market. Consider that this summer could be the last chance to buy gold for three figures.

Don’t lose sight of where we are at this point in the recession – in an intermission in the bad economic news. When it becomes apparent that the good ole days aren’t coming back, sentiment – and markets – could move rapidly. And gold is one of the best forms of capital that can protect you in a financial Armageddon. That gold was up in 2008 is a reminder of its protective power.

How much gold should you have? Continue to accumulate physical gold until you can honestly say you don’t care how many dollars Ben Bernanke prints.

Having physical gold in your possession is always a good idea in times of economic turmoil – there is no “uncertainty hedge” like it. But to actually make money, you should also look at premium gold stocks. Our current favorite has been so consistently successful that we call it “48 Karat Gold.” Click here to learn more.

Ed. note - I'm a Casey Research subscriber and can vouch for the quality of their research and analysis.

Green Shoots? Even the Porn Industry is Still Hunkering Down!

You know the economy is bad when even the porn industry is battening down the hatches...

Mediabistro.com reports that AVN Media Network Inc., publishers of trade journals for the adult entertainment industry, announced plans to consolidate four of their six monthly publications into a single monthly magazine.

Never fear, skin fans. The oldest industry in the history of the world will no doubt survive this downturn...it always does.

Turn Back the Clock...It's Another "Flight to Safety" Day

Mama said there'd be days like these...though you may have thought they were a thing of the past.

With the DOW dropping 200 points on the day, and commodities down across the board, the "flight to safety" positions stood tall, just as they did during the darkest days of the Great Deleveraging of 2008.

Yes, sadly, the US dollar, Japanese Yen, and long-dated US Treasuries were just about the only "green shoots" on the board today. This screen shot of the currency markets says it all, from Barchart.com:

On massacre days like today, I like to peruse the boards and find the lone bright spots. So was ANYTHING else up, other than these "safety" trades?

Sugar, coffee, and the meats were the lone bright spots for commodities. Sugar seems to have some nice support around 15-cents:

Sugar appears to have some support around 15-cents (Source: Barchart.com).

While coffee and cattle have been really battered of late. Coffee may be trying to find a bottom around 117, while cattle also looks like it's finding some support. Take a look at the long term chart for live cattle...with prices at their lowest levels since 2006, this could be a compelling time to take a look at loading up on some beef:

Cattle may be finding a bottom after a rough past year (Source: Barchart.com).

Sunday, June 21, 2009

Why Trend Following is Your Only Hope for Investment Survival

Buy and hold. Stocks for the long run. Diversify. These investment mantras were gospel during the great bull market of the 80s and 90s.

Drinking this Kool-Aid will get you slaughtered today.

There is no freaking way I would "buy and hold" anything right now. Too dangerous. Buy and hold hasn't worked over the past ten years, and it's unlikely to work for the next ten. We're in a secular bear market, and these things take time...usually 15 to 20 years...to run their course.

Buying and holding the S&P was a crappy trade over the last 10 years.

No doubt, we are in uncharted financial waters right now. Anyone who says they 100% know what's going to happen next is lying, or dilusional.

We've got historic deleveraging taking place, as unprecedented debt levels are slowly paid down. In the meantime, we've got the US government, among others, running the printing presses at full steam, and tossing boatloads of money down rat holes like Government Motors and socialized medicine.

The foundation of the system has been permanently rocked, and stability, or even just the illusion of it, won't be back anytime soon.

With the Fed's printing press (an irresitable force of hyperinflation) battling massive deleveraging (an immovable deflationary object), the crux of any investment thesis today starts with "inflation, or deflation?"

There's no shortage of arguments on both sides, many made by folks much smarter than I. For awhile, I was reading them until my head spun...first I'd read a very well thought out argument on why hyperinflation will win out...then I'd read a perfect counterargument for the deflation case.

So I thought - what the heck can a guy like me do, if these smart dudes can't reach the same conclusion themselves?

Then it hit me - trend following.

If gold and commodities go up - get in those vehicles, because the market is screaming "inflation"! Gold at $1100 could go much, much higher...real, real fast.

On the other hand, gold still has not decisively broken through $1000. It could very well retest it's lows below $700. So if it breaks down below, say, $900 - that's the market telling us that inflation is not in the cards...at least not yet.

Early this week, gold stocks hit a 3-week low...so I sold all of them. And I'll stay out until they once again "break out" to the upside. That's the only way I can see to play these insane markets - buy the breakouts, and follow your stops. It's OK to have a hypothesis, but don't wed yourself to it. If the market says you're wrong...then you probably are!

My friend Brian Hunt (editor-in-chief of The Daily Crux, an excellent investment website) made a great point to me on Friday about investing in China. Nobody knows what's going to happen in China. Some think it's a trainwreck waiting to happen. Others think China will be just fine, still the growth story of the 21st century.

So what's an investor to do? Watch the price of copper, he says. As long as copper's doing fine, that means China's doing fine. Let Dr. Copper show you the way.

To facilitate my trend following strategy, I've pared my investment assets down significantly. I used to own 40-50+ different stocks, a few currencies, a few commodities...if something looked good in one of my many newsletters, I bought it!

Then I learned during the Great Deleveraging of '08 that diversification does not prevent bad things from happening. Overnight, the correlation of almost all assets went to 1, and everything dropped 40% in a matter of 6 months!

Because I believe the inflation/deflation question is the only important one, I only need a few asset classes to play it. That makes trend following much, much easier for an armchair investor like myself - get into positions and back out quickly - no problem.

Remember the market is the judge and jury combined, the final arbiter of your investment decisions. So let's listen to what it's telling us in the turbulent years ahead...after all, the trend is our friend! And this friend may be our only lifeline to investment survival right now.

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Positions Update

Last week in this spot, I mused:

"Nice week but I have to admit – I’m starting to get quite cautious that some of these trends have played out"

It looks like the caution I expressed last week was warranted...commodities got hit hard across the board this week.

I exited all positions on Monday morning, after seeing the rough start to the week - that was enough to chase me out of all positions. On Thursday, I did reinitiate an Australian dollar position, after reading how the Reserve Bank of Australia was working very hard to keep their currency down in the month of May.

Current Account Value: $31,483.93

Cashed out: $20,000.00
Total value: $51,483.93
Weekly return: -6.8%
2009 YTD return: -38.0%

2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial stake: $2,000.00

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