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Why a New Depression Would Be Good For Us PDF Print E-mail
Written by Bill Bonner - Diary of a Rogue Economist & Chris Hunter   
Wednesday, 26 March 2014 09:41

hindenburg-wideThe Dow rose 91 points yesterday. Gold was flat – after getting battered last week. 

Today, we go even farther into the unknown... beyond eventually and past sooner or later... to what happens next. 

Specifically, we don't think central bankers are going to take the end of the world lying down. They've got tricks up their sleeves. These are not new tricks. They've been used many times in many different forms. But they've never been used on the scale we now foresee. 

But before we begin guessing, let us tell you a bit about what is really happening here at Finca Gualfin, our ranch here in northwestern Argentina. 

Three days ago, Jorge – the farm manager – came to us with a problem: 

"Señor Bonner, we found two calves dead. They looked fat and healthy. I'm afraid it is a disease called la mancha. I saw it many years ago. Healthy young cows just all of a sudden fall down and die. It almost wiped out our herd." 

We still don't know what la mancha is. But it is evidently not something to trifle with. Word went to Salta, a city about six hours away, that we had an emergency. A veterinarian advised us to inoculate the whole herd. Within hours, the medicine was on a bus bound for the hamlet of Molinos, about an hour and a half from the ranch. 

The next morning, all the hands were turned out – including your editor. We mounted up and headed out to the campo – an immense valley of some thousands of acres. Our job was to sweep the valley of all the cows...driving them to the main corral, where they would be vaccinated. 

The operation took three days. Your editor was probably more of a liability than a help. Driving cattle is not as easy as the local gauchos make it look. 

More on this later...

When the Debt Bubble Pops

Meanwhile, away from the ranch... 

The end of the world comes when the debt bubble pops. But before we get there, we will see more attempts by central banks to keep the debt bubble expanding. From Richard Duncan, author of The New Depression: The Breakdown of the Paper Money System

Given that the Fed has been driving the economic recovery by inflating the price of stocks and property, it is unlikely to allow falling asset prices to drag the economy back down any time soon. To prevent that from happening, it looks as though the Fed will have to extend QE into 2015 and perhaps significantly beyond.

So far, so predictable. But there is a "sooner or later" for QE, too. There will come a time when the world can take no more debt... and at that point, the debt bubble will finally blow up. 

Then we get the equal and opposite reaction. Asset prices that have been inflated by debt will be deflated by debt de-leveraging. A depression will most likely follow. 

This is not a bad thing... not at all. Contrary to popular opinion, crashes and depressions do not destroy wealth. They merely tell you that the wealth you thought you had really didn't exist. 

As long as the EZ money flows freely, mistakes remain invisible. Rotten companies are kept alive. Bad speculations seem to pay off. Debts that can never be paid are still serviced. Stocks with little or no earnings shoot up. 

Then when the bubble explodes the mistakes become painfully obvious. Phony gains return from whence they came. Investors reprice assets at more realistic levels. (After first going to unrealistically low levels and presenting opportunities for patient investors with plenty of cash onboard). 

Only then, when the economy has been thoroughly thrashed can it get up, dust itself off and get back to work. 

But central bankers are not likely to let it happen. They've made their careers by pretending to improve the economy. When the bust comes they will swing into action with more quack cures. 

That is when we arrive at the second stage of the coming debt deflation. It is when we will wish we had bought more gold... more real estate... more old cars and new potatoes. 

Most likely (but this is not guaranteed) central banks will find new and bolder ways to get money into consumers' hands. (Remember Ben Bernanke's "helicopter" speech?) This will be followed by a crisis of a different sort: high levels of consumer price inflation. 

Put on your seat belt. It's gonna be one helluva ride. 



Market Insight:
Wall Street's Dirty Secret 

From the desk of Chris Hunter, Editor-in-Chief, Bonner & Partners

Wall Street has a dirty secret... 

On average, over a five-year period, about 25% of actively managed funds outperform their indexes. 

That's just one in four funds that do a better job, on average, than an index-tracking ETF or passive mutual fund. 

Another roughly 25% will underperform by a small amount. Another roughly 25% will underperform by a large amount. And another roughly 25% will shut up shop before five years is over. 

In other words, by investing in actively managed funds you are giving yourself 3-to-1 odds of underperforming a passive index. 

Here are the results from the S&P Indices Versus Active Funds (SPIVA) US Scorecard for 2013. It shows the percentage of active funds outperformed by the index over five years ending 2013. 

Source: SPIVA

As you can see, for the five years ending in 2013, small-cap funds did slightly better than usual. The small-cap index outperformed just 66.8% of them for the period. Large-cap funds did a couple of percentage points better than the average. And mid-cap funds did slightly worse than average. 

This is strong evidence that you're far better off holding plenty of diversified passive index funds in your portfolio, than chasing after elusive... and expensive... actively managed funds. 

Of course, you can seek out some outperformance with a small portion of your portfolio... by stock picking or getting someone else to stock pick for you. 

Just be aware that the odds are heavily stacked against your beating a passive-investing strategy over the long run.

Gold’s Macro Fundamentals PDF Print E-mail
Written by Gary Tanashian: NFTRH   
Wednesday, 26 March 2014 09:13

This spike in short-term yields (2-year shown) is what harpooned gold last week and finally got it under control.


More importantly, this spike in the 2-year vs. the 30-year really hurt gold.


These spikes predictably came as the FOMC successfully managed to get the market thinking about an end to the damaging Zero Interest Rate Policy, ZIRP.


Yes, it is that time again when the letter writer veers off course into a brain dump. You, dear long time subscriber, have heard this before. But for newer subscribers I feel a point needs to be made so that your expectations of this market report are well in line with its raison d’être.

This is not a ‘go gold!’‘got gold?’ style pump house. Simply stated, I would rather live in a world where I do not feel gold is a necessary asset class. I would rather live in a world where bureaucrats were not in control of interest rate functions and hence, to some degree in control of financial markets.

Under this interest rate manipulation, the concept of saving has been utterly torn apart in the United States via the now 5+ year old ZIRP. If you do not speculate, you do not profit. The problem is that the risks in speculation are rising with every lurch higher in the stock market and junk bonds, to name two of the primary beneficiaries.

So it’s everybody into the (risk) pool and everyone foolish enough to depend on savings… screw you. So I [omitted, not for public consumption] because I continue to unwaveringly believe that this big macro operation, going in one form and degree of intensity or another since 2001, is little more a than racket to be unwound.

But if the moment were to come when I feel we really are on the right track – and folks, withdrawing ZIRP [could] theoretically at least be considered one component of ‘on the right track’ – this market report would simply move on from the precious metals sector because frankly, I find it a strange place inhabited by some strange people.

The problem though is partially represented by the distortion built into this chart…


Something is just not right here. Long into an economic recovery and even longer into a bull market in stocks the Fed Funds rate (FFR) is still pinning T Bill yields to the mat. Now, the Fed Chief babbles about a rate hike out in 2015, “that type of thing”. Gold then reverses its ascent (it was ripe, given the Ukraine hype coming out of the gold ‘community’) on the implications of rising short-term yields.

Using the 2003-2007 bull market as a template, the FFR should have begun to rise in 2010. Now it is 4 years later than that and the Fed is talking about a rate hike out in 2015, “that type of thing”. Please. They are playing poker against the market and for now the market is not calling any bluffs.

Back on the Funda’s

So last week we had a group of interest rate manipulators meet for 2 days and then a press conference by the group’s leader. She “you know” intimated that the ideal timing to begin phasing out ZIRP would be approximately “you know” sort of like maybe 6 months after QE3 is entirely tapered. “You know”, if the economy is still strengthening then; that sort of thing.

Okay tell me now, who knows what the economy will be doing then? As things stand now last week was a negative for gold, which was in need of a correction. But the key question going forward will be whether or not these negatives will endure or go back to business as usual as FOMC day fades to background?


So the long-term / short-term interest rate fundamental dropped to its lowest point of the gold bear market last week. What can we conclude from that?


  • Gold’s fundamental underpinning took a hit.
  • When measuring the length of the sideways channel on the yield spread, we note that gold may have already discounted this drop as its price is much lower than it was in summer of 2012 when the spread first declined to 80.
  • The yield spread, driven down by a jawbone and a lot of market emotion and media hype last week is at a potential bounce point.


So fundamentally speaking, gold bugs want to see last week’s hysterics fade pretty quickly and by extension, the spread hold the support area (notwithstanding a day or two of down spiking for good measure).

If the market comes to believe that the Fed means business on the Funds Rate and 2, 3, 5 year yields continue to rise relative to long-term yields, it would be bearish for the price of gold. I make the distinction between “bearish for the price of gold” and ‘bearish for gold’ because price is a reflection of the value assigned to gold at any given time.

For as long as it lasts, a phase where the market perceives itself to be under the sound monetary stewardship of the Fed – regardless of sustainability – would be gold price bearish.

Of course last week may have been a flash in the pan, as the Fed got the respect it always seems to get from the market during the ongoing phase of stock mini mania and economic mini revival. There are other phases you know, when the market gives them the finger. That is out in the future.

Let’s watch the dust settle on the interest rate front and evaluate weekly.

Postscript (current, 3.25.14)

So tell me, what was China doing late last week and early this week as gold got harpooned? Did gold suddenly decline because of the much hyped ‘China demand drop’? Did supposedly massive physical demand suddenly dry up on the spur of a moment? There’s always a seller on the other end of that demand you know.

Ukraine hyperbole unwound and that was expected to take something off the top. But chasing funnymentals like China, physical demand (vs. COMEX shortages) and Ukraine around is what got the gold community in trouble in the first place.

There is no debate, real interest rates jumped last week and gold got clobbered. There are other key fundamentals as well. Unfortunately with the media just pumping out story after story it is no wonder people get so confused.


NFTRH is a serious market management service (including ‘in-week’ technical updates), and is a value at only $29 per month (or 10%+ savings on an annual subscription).

NatGas Poised To Slide To $4; That’s Good If You’re A Buyer PDF Print E-mail
Written by Sumit Roy - Hard Assets Investor   
Wednesday, 26 March 2014 09:00

HAI NatGasXNatural gas inventories fell by 48 bcf last week, below expectations.

Natural gas was last trading higher by close to 3 percent to $4.35/mmbtu after the Energy Information Administration reported that operators withdrew 48 billion cubic feet from storage last week, below the 55 to 60 bcf that most analysts were expecting.

The latest withdrawal was below last year’s draw of 62 bcf, but above the five-year average draw of 30 bcf.


In turn, inventories now stand at 953 bcf, which is 923 bcf below the year-ago level and 875 bcf below the five-year average (calculated using a slightly different methodology than the EIA).



....continue reading page 2



The 64-Month Bubble Pattern PDF Print E-mail
Written by David NIcols   
Wednesday, 26 March 2014 08:27

Ben Bernanke, Janet Yellen, and Alan Greenspan have explicitly stated within the last few months that stock markets are not in a bubble.

History shows their track record on such predictions is embarrassing, which has left both Greenspan and Bernanke grasping for excuses after previous bubbles burst on their watch.

Soon it will be Janet Yellen's turn to backpedal, as there is simple-yet-compelling evidence that stock markets are indeed right now in an unsustainable growth pattern. 

Yup, it's a bubble.

In what may come as a surprise to Fed Chairs and Nobel Laureates everywhere, it turns out the most valuable skill needed to identify a bubble in financial markets is the ability to count to 64.

All the "name-brand" market bubbles in history have lasted 64 months from initial growth to blow-off top.  This includes the 3 biggest bubbles in modern market history:

- the Dow into the 1929 peak

- the Nikkei into the 1989 peak

- the Nasdaq 100 into the 2000 peak

This also includes more recent bubbles, such as home-builders into 2005, and crude oil into 2007. 

If it's an unsustainable growth pattern heading for a crash, it carries this 64-month time signature.





As an interesting aside, the famous stock market crash in October 1987 had a slightly different -- but equally interesting -- time signature.  The top in 1987 came at Month 61, with Month 64 turning out to be the post-crash low.


This pattern was different in that it turned out to be a sustainable pattern, with prices recovering fairly quickly to keep pushing relentlessly higher.  It was just a hiccup -- or maybe a dry heave -- on the way to the epic bull market in the 1990s.

So why 64 months?  Why that specific number?

That answer is beyond the scope of a short web post but the sound-bite explanation is because this is aligned with the fractal scaling constant that can be observed in all facets of human life on planet earth.  It is not a coincidence that the retirement age is 65 years, or that there are 64 - 65 trading days in 3 calendar months (one season). These patterns work across all timeframes. A 64-day growth pattern is seen frequently during strong market uptrends, and it can also be readily observed on hourly charts, and even 5 minute charts. 

It's fractal scaling.  It's there to be observed by simply counting.

There is good news and bad news for the bulls on this current 64-month pattern.


The bad news is time is almost up on this pattern. The energy is set to flip to the downside in June, or possibly July of this year if the timing extends out to Month 65, which sometimes happens.

The good news for the bulls is often the end-stage of a bubble pattern brings on a huge upside explosion.  So even though Month 64 arrives in just a few months there is still plenty of time for more gains -- even amazing gains. 

There are some nuances to how these patterns play out during the end stages. Frequently there is a broad double top, and the configuration of timing of this particular 64-month growth pattern does suggest a double top is in store.

That could create a highly unstable and volatile environment for stock prices between now and July.  I have been discussing the various scenarios for the end-stage of this pattern in my daily reports as there are straightforward ways to analyze this in real-time.

Interestingly, one of the individual stocks that is sure to become a cautionary tale about this particular bubble has already hit its 64 month high.


One final note:  I have been tracking the growth in bitcoin for quite some time, well before the bubbly price behavior that has emerged over the past year in this emerging decentralized medium of exchange. I am purposely not calling it a currency as that carries connotations that seem to distract people from really examining the magnitude of this breakthrough in network design.

The really intriguing thing about Bitcoin is you can "buy stock" in the entire emerging ecosystem simply by owning some bitcoin.  There was never a way to "buy SMTP" or "buy HTTP" or "buy WiFi" like there is now with Bitcoin.

There are classic timing signatures of a 64-month bubble pattern in the bitcoin chart, with the surges and corrections happening on schedule. The main difference is the scale of the price moves, which are unlike any previous growth pattern.  The potential of this pattern is really quite staggering.  I have just added a new section to my daily reportsto discuss bitcoin, to keep subscribers up to date on this unprecedented bubble pattern.



Here's an Unexpected Vote For Coal PDF Print E-mail
Written by Dave Forrest - Pierce Points   
Wednesday, 26 March 2014 08:15

"putting your money where the market is"

Here's an Unexpected Vote For Coal

There's a lot of money to be made spotting market bottoms in commodities. Buying producers and projects at ultra-low valuations, before the inevitable uptick in a sector.

Market commentaries are a key indicator in this regard. With bottoms usually being marked by "irrational apathy"--illogical reasoning from market bears who've simply been spooked by falling valuations in unloved sectors.

There's been a lot of such sentiment lately in coal.

I was particularly struck by one comment the last few weeks. From a high-profile market analyst, who noted that Asian coal demand can be written off as a market driver. Because no one in this part of the world wants to build new coal-fired power plants.

It's striking how such analysis flies in the face of actual events on the ground. In fact, just this week we got news of one high-profile energy consumer that's actively looking to add more coal power to its supply mix.

That's Tokyo Gas, Japan's largest municipal natural gas utility. Whose managers told a major power conference that the firm has "strong interest" in building new coal-fired power plants in order to diversify energy supply.

The comments came from Tokyo Gas executive officer and senior general manager Kunio Nohata. Who told the Gastech conference in Goyang, South Korea that his company "may have a coal-fired power plant in the future or at least, we may buy electricity from coal-fired power plants."

The move comes as Japanese utilities come under increasing pressure to cut fuel costs. With prices for alternative fuels like LNG still running at very high levels here compared to other parts of the world.

At the very least, this shows that big players are still receptive to coal. At the most, it could signal a wave of increasing coal demand as power producers increasingly come to rely on this cheap and reliable baseload fuel.

We're seeing the same story in India, East Africa and Southeast Asia. If analysts are saying otherwise, it might be time to be looking for a bottom in this sector.

Here's to putting your money where the market is,

Dave Forest
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Greg Weldon
17 April 2014 ~ Michael Campbell's Commentary Service

We are pleased to introduce a new feature to the Inside Edge with the first of a regular contribution from Greg Weldon. Greg's video and...   Read more...