Why forex traders tend to lose money...

There Will Never Be Enough Good Jobs Again


It’s over. Except for a short moment or a wild and self-exhausting governmental mandate (both of which are doubtful), there will never again be enough “good jobs” to go around. That model is gone and we need to root it out of our imaginations.

Sure, there will be some good jobs, but nowhere near enough.

About half of the Western world is already on the dole in one form or another. 93 million Americans lack a decent job and have no real hope of getting one. And so long as the current hierarchies remain, things won’t get substantially better.

I’m sorry to dump that on you, but it’s better to face it directly.

But please bear in mind that I’m a confirmed optimist. Just because there are no “good jobs” doesn’t mean that we’ll all languish in a meaningless existence. Far from it. Once we get over our addictions to status, hierarchy, and dominance, a glorious future awaits us.

Why It Won’t Get Better

The standard response to what I’ve noted above is to call it “the Luddite fallacy.” That line of argument says that in the past, innovation has not wiped out jobs, that new types of jobs were created and filled the gaps fairly well.

And that statement is true. Individual jobs were wiped out, but new jobs came along and (more or less) picked up the slack.

However, that is not happening this time, and for a very simple reason: Adaptation is now against the law. Previous rises in technology occurred while adaptation was still semi-legal.

Please take a look at this graph and remember a simple truth: Regulation forbids adaptation.

http://freemansperspective.com/wp-co...6/image001.png
The US government is currently spending $60 billion, every year, to restrain business activity. (And the EU is worse.) On top of that, reasonable estimates show that US government regulations cost businesses nearly $2 trillion per year.

And let's be honest about this: The primary purpose of regulation is to give the friends of congressmen a business advantage. Why else would they pay millions of dollars to lobbyists?

So, the new jobs that should be spawned, will not be. Mega-corps own Congress and they get the laws they pay for. And mega-corps do not like competition.
Furthermore, the political-corporate-bureaucratic complex will bite and claw to retain every scrap of power they have, and small businesses will be their first victims. (They already are.)

Trapped Between Hammer and Anvil

So, the people who are hoping and waiting for a “good job” to pop up are trapped between hammer and anvil. Robots are starting to roll into the workplace while the job creators (small entrepreneurs) are in regulatory and economic chains. They can’t come to the rescue.

In the 19th century, all sorts of possibilities were open to entrepreneurs. This remained at least partly true, even into the 1970s, when I watched the business heroes of my youth having a gas while making piles of money.

It used to be that a clever person could get ahead, independently, and have a ball doing so.

Those days, alas, are over.

These days, to get rich, one needs to take government as a partner. If one does not,regulation and legislation are likely to destroy your business. At this point, many of us (myself included) have had businesses – good businesses that benefited everyone involved – crushed by legislation.

To avoid being crushed these days, you have to be smarter and fleeter of foot than everyone else. Not many of us can survive in that situation, and as regulations continue to rise, even that number grows smaller and smaller.

For the generation before of mine, independent success required ambition, but it was reachable. For my generation, only those of us blessed with unusual talent had a chance at controlling our economic destinies. For the young generation of today, it’s nearly impossible. These days, if you want to jump ahead, you need to be part of something big… and you need to start as a sycophant.

So…

So, if you’re looking for the proverbial good job, stop waiting for “The Hierarchy That Is” to sort things out and get everything back to normal. Good jobs get fewer and fewer every year, and those that are lost won’t be coming back.

But… if and when you’re ready to change your thinking – to seriously change your thinking – this is good news too: You can reclaim the parts of yourself that you were ready to sacrifice to the “good job.”

You see, the “good job” was nearly as much a curse as it was a blessing. Yes, I know, steady wages and benefits are a very comfortable thing, but they also play right into a ridiculous, predatory script.

You know the one: where you struggle to display your status to all the other worker-bees. You feel like you have to do what the ads tell you: Get the new car, the bigger truck, the video player in the back seat, the gigantic TV, the most “amazing” holiday parties, the expensive shoes, the designer bags, the organic veggies, etc., etc., etc.

I would like you, please, to consider this quote from the boss of Lehman Brothers, just as the World War I production surge was failing:

We must shift America from a needs, to a desires culture. People must be trained to desire, to want new things, even before the old had been entirely consumed. We must shape a new mentality in America. Man’s desires must overshadow his needs.

Would you agree that their plan worked?

As long as you follow their script, you’ll remain in a permanent deficit mentality. No matter how much you have, you’ll always feel like you need more. It's life on a shiny gerbil wheel. The “good job” kept us from knowing ourselves; it allowed us to sleep-walk through life. We got a “good job” and never developed ourselves any further. Work, retire, die, ho hum.

Then What?

So, if we forget about having a “good job,” what happens?

Well, it might very well mean that you do what you’re already doing, but you stop feeling bad about it. It means that you get over the endless grasping after status... of letting ridiculous ads define what “success” looks like... of letting other people define your self-opinion.

Letting go of the “good job” delusion means that you stop pining for the days when you could blow a third of your money on status crap. It means that you start taking pleasure in growing your own food, developing new ventures, and improving yourself.

It means that rather than begging politicians to ride in on a white horse and fix your world, you ignore them and start paying attention to your actual life.

Fundamentally, this means that we start using our own initiative, without seeking permission, and start building better things.

Rather than going on, I'll leave you with two quotes, both from Erich Fromm. I think they are worth close consideration:

Our society is run by a managerial bureaucracy, by professional politicians; people are motivated by mass suggestion, their aim is producing more and consuming more, as purposes in themselves. All activities are subordinated to economic goals, means have become ends; man is an automaton – well fed, well clad, but without any ultimate concern for that which is his peculiarly human quality and function.

The quest for certainty blocks the search for meaning. Uncertainty is the very condition to impel man to unfold his powers.

Paul Rosenberg

http://images.mauldineconomics.com/t...ed-dillian.jpg

Piston Hurricane

An old friend from the Coast Guard visited me over the weekend. He is retired and now works as an emergency planner.

If theres one thing government folks do, it is plan. But many times Ive seen plans go out the window when emergency strikes and people start to improvise. Or maybe the planned-for emergency never materializes. Maybe you get a different emergency you didnt plan for. The anarchist in me says that plans are useless. But I agree that its good to think about these things ahead of time.

So my friend and I got to talking about hurricanes, which is a specialty of his. He told me that no hurricane has ever scored a direct hit on my piece of the South Carolina coast (I live just a few yards away from the beach). Hurricanes have hit north of me and south of me, but in the recorded history of hurricanes, none have ever hit here, at least, not a direct hit by one of the big ones.

Im not sure if that makes me feel good or not. If my house did sustain a direct hit, smell you later.

But it got me thinking about when I was working at Lehman Brothers in 2004, when Hurricane Katrina hit. Were you active in the markets back then? If so, you probably remember that stocks ripped to the upside, particularly energy and construction companies that would have to repair all the damage. Of course, the insurance stocks got killed.

I was 30 years old back then and not really steeped in economic thought. None of us were. We were traders, not philosophers. But we were all sitting around wondering why the stock market was ripping when the hurricane was clearly going to wipe out a huge city. Made no sense.

My answer was that the winners from Katrina were probably publicly traded, while the losers werent.

But does anybody win from a hurricane in the first place?

The Parable of the Broken Window

You may have heard of the Broken Window Fallacy, where a boy throws a rock through a storefront window, breaking it. The shopkeeper must hire the glazier to come fix the window. He pays him 50 bucks, thereby stimulating business in town.

Everyone sees this and says, Gee whiz, a kid breaks a window and suddenly theres 50 bucks in circulation. Hey kid, why dont you run around town and break the rest of the windows?

If this sounds familiar, its because youve heard it beforefrom an economist named Frdric Bastiat.

Bastiat basically comes up with the ideas of opportunity cost and unintended consequences simultaneously, when he observes that if the shopkeeper did not spend 50 bucks to fix his window, he might have spent it on something else more productive. What, we dont know. But we can assume that he knows best how to spend the 50 bucks, at least better than the kid who broke his window.

Bastiat is one of the forefathers of libertarian/Austrian economics, and he often talked about the things that are unseen in finance. A good example is the minimum wage debate, which we talked about briefly in last months issue of Bulls Eye Investor.

The layman thinks if you raise the price of labor to $15/hour by fiatyay, people are making $15! But generally what happens is that some people will see their wages drop to $0/hour, because the bossman had $150 to spend on labor to begin with, and he can either hire 20 people at $7.50/hour or 10 people at $15/hour.

If you think the bossman should somehow operate at a loss to accommodate everyone at the higher wage, then we can have a nice discussion on the role of profit in society.

Bastiat is the reason I come to work every day, because there are so many people who have believed, and will always believe, that you can fix the price of something atx just because 51% of the voters said so.

Keynesian Stimulus

One of the great tragedies of the financial crisis was the $780 billion we shelled out for the giant stimulus package. Wow, was that bad, for a lot of reasons.

I remember driving around and getting stuck in construction and seeing these stupid signs everywhere:
http://ggc-mauldin-images.s3.amazona...18_10thMan.gif
So back to Bastiat, why was the stimulus bad? We spent $780 billion basically paving the same roads over and over again. It was one step up from digging holes and filling them back in. And just like in the broken window example, sure, some people got rich off it.

But what would the taxpayers have done with $780 billion, aside from paving roads? Probably some pretty interesting stuff. Possibly they could have thought of better things to do with it than paving roads. Even if they had saved it, thats $780 billion less the government would have had to borrow, which would have lowered interest rates and increased credit availability for private borrowers.

The counterargument is that if you go back to the 1930s when we did all this Keynesian stimulus (the Hoover Dam, etc.), that it worked in getting us out of the Great Depression. Did it? Maybe it made the depression worse. You cant go back in time and not have the Keynesian stimulus and see what happens.

In US history classes over the years, FDR has generally gotten credit for ending the depression, but more and more scholars are beginning to challenge that idea.

Captain Facepalm

I think these things are pretty obvious. I cant figure out why people have such a difficult time seeing them. I cant figure out why Nobel Prize winners cant see them.

Any economic intervention, no matter how slight, causes unintended consequences. There are things that you cannot see, that the planner cannot anticipate. There are also easy ones. If you cap the price of a good, there will be a shortage. If you put a floor on it, there will be a surplus.

If you make it hard for people to trade swaps, you might reduce liquidity and push people into other, potentially more risky products.

Ill be here all week. Tip your server. Try the veal.


Jared Dillian
Editor, The 10th Man

The Corn & Ethanol Report

06/19/2015

By Daniel Flynn
Market Analyst at The PRICE Futures Group

Let's Make a Deal

Good Morning!

We head into this weekend hoping this Greek Tragedy will have some concessions and the power brokers stop hurling insults and put an agreement in place so the Free Markets will trade without concerns of the collapse of European Union.

In the overnight electronic session the July Corn is currently trading at 355 which is 2 of a cent lower. The trading range has been 358 to 355 so far. We did see profit taking after the weather rally and the Greece question mark. However, we could see more price spikes over concerns of acreage destruction.

On the Ethanol front the July contract is currently trading at 1.459 which is .004 of a cent lower in the overnight electronic session. The trading range has been 1.459 to 1.455 so far. The weakness in the Energy and Grain complexes is spilling into this market as well.

On the Crude Oil front the July contract is currently trading at 5956 which is 89 points lower in the overnight electronic session. The trading range has been 6056 to 5943 so far. We have rig-counts today and if the trend continues we will see a rally. If there is an agreement between the EU and Greece this weekend the market should catapult at least $5.

On the Natural Gas front we have a lull here as well with the ongoing negative Greece talks In the overnight electronic session the July contract is currently trading at 2.764 which is .013 of a cent lower. The trading range has been 2.799 to 2.752 so far. I still remain long-term bullish.


Have a Great Trading Day!

Thanks,

Daniel Flynn

The Beginning of the End for the EU?
by Jeff Thomas



After World War II, many politicians talked about creating a united Europe, much like the United States. The idea was that there would be one currency and a federal government that would act in much the same way as does the federal government in the US. They began, very sensibly, with trade agreements and slowly expanded.



Over the ensuing years, the national leaders of Europe steadily pushed forward toward the major goal of a unified Europe under a federal leadership. They reached this point with the Maastricht Treaty in 1992.


My personal belief was that the concept would not succeed over the long haul. Whilst trade agreements can be very beneficial for European countries, the idea that Europe can be unified under a single government and a single currency was, in my opinion, doomed to failure.


The United States was created primarily for the defence of the thirteen American colonies, so that a minimalist central government could protect all the colonies equally. Of course, as soon as the idea was ratified, some political leaders began to try to expand that centralised power. The US federal government then grew, a bit at a time, and eventually became dominant over the states.


Not so with Europe. The various European countries had been around, in one form or another, for centuries and had been based upon tribal groups. Each had its own language and its own culture. Some were more prosperous and had a stronger work ethic than others.


In addition, through historical conflicts, there was a decided lack of trust between many countries. The Irish distrusted the English; the English distrusted the French; the French distrusted the Germans; etc.


The very idea that a Dane, a Dutchman and an Italian could agree on an entire governmental and economic system was an impossibility from the start. Their cultures and national perspectives were deeply ingrained and would not change in a major way, simply because their political leaders had come up with an idea that benefitted them.


However, the EU was on a roll, and around 2000, at a time when I stated, “I’d give the EU twenty years at the outside,” they may well have been at their high point.
In the intervening years, all of the predictable problems have surfaced, and as they have, the people of each of the EU countries have grown increasingly dissatisfied with the union, whilst the politicians of those same countries have done all they could to paper over the problems to keep the EU ship from capsizing.


In recent years, Greece has held centre stage, as, even though it is a small country with an equally small economy, it is a net recipient of EU funding, due to its unfunded social programmes, and is bleeding the EU with no end in sight.


Conversely, the more northern EU countries, where the work ethic is stronger, are footing the bill. For some time now, the possibility of a Grexit has been on the cards, and recent developments have suggested that it may be imminent.


Of course, the political leaders of the EU countries desperately want to hold on to Greece, as a Grexit may well spark other exits, beginning most probably with Italy, Portugal and Spain. Should that happen, the EU would be doomed. And so, the EU is now way out on a limb, far beyond what is safe for the people of Europe, in the hope of keeping Greece on board.


Throughout the course of these developments, the citizens of the EU have been relatively quiet, although the general mood has been one of growing distrust for the union. But recent developments in the Greek tragedy have riled them to the point that representations have been made to their political leaders to consider their own exits. Not surprisingly, the political leaders have remained steadfast that that is out of the question.

Power to the People

Now that dam has suddenly burst. In Austria, a country that is in far better shape than most of the EU countries, 260,000 citizens have signed a petition, requesting that the government leave the EU and go off the euro. (The threshold for a debate on a possible referendum is 100,000.)

In Italy, another petition has been circulated, with similar results, triggering some 200,000 signatures.


A referendum is planned for the UK, but no date has yet been announced. (The political leaders, predictably, have been dragging their feet for some time on setting the date.)


In France, Spain and Germany, there are similar signs that the citizenries have reached a breaking point with the failed experiment and want out.


And so, should we expect to see a breakup of the EU soon? Not likely. Political leaders are extraordinarily adept at keeping a virtual corpse on life support long after it was obvious to all and sundry that the plug should have been pulled. They do so because it allows them to retain power and the perks that go with it. However, it is not at all in the interest of the citizenry to continue to pour money into a dying union.


Further, Europe’s citizens have grown quite weary of the bad marriage that their governments have entered into. They’re realising that a divorce is inevitable and should be dealt with soon to stem the flow of red ink on their respective national balance sheets.


The Turning Point

But a turning point has been reached. From here on in, what we shall be witnessing will be a groundswell from the citizenries of EU countries, in clear opposition to their political leaders. And this will occur in virtually every EU country before the game is over.


This is no small matter. As this separation of people and state develops, in one country after another, much of the Grand Illusion of the EU will fall away. It will become glaringly clear that the union was created by the political leaders for the political leaders and was never intended to serve the citizenry of Europe.


The countries of Europe had large, costly governments prior to the formation of the EU, a condition that was greatly exacerbated with the additional cost of an uber-government.


In years to come, we may look back and see this point as the one where the tide turned for Europe, and the former EU countries once again became a collection of neighbors, each in competition with the other, each prospering or declining in keeping with its level of work ethic and fiscal prudence.

To be sure, there will be those countries that will fail along the way. Like drug addicts, they must first purge themselves of the entitlements that were beyond what could have been funded.


As a result, they will first experience civil unrest, then frequent changes in leadership, each without any real solution, then a long, slow recovery. Some may learn a valuable lesson; others may simply return to empty promises of politicians and begin the debt cycle over again.

In any case, a turning point has been reached with the EU. After it does reach its end, we may see partnerships forming between some former EU countries, but we are unlikely to see another EU anytime soon.

Commodities Ominous Signs

Leo Kolivakis,
Pension fund analyst, hedge fund analyst, long/short equity, portfolio strategy


Copper traded near the lowest since 2009 as Chinese manufacturing data added to evidence that demand is slowing in the world’s biggest user of raw materials.

Commodity and energy shares are getting clobbered and short-sellers are profiting from the carnage.

Is it time to buy this dip or is there more pain ahead as the clouds from global deflation gather, warning of a major storm ahead?

Martin Ritchie and Agnieszka De Sousa of Bloomberg report, Copper Poised for Worst Week Since January as Commodities Slump:

Copper traded near the lowest since 2009 as Chinese manufacturing data added to evidence that demand is slowing in the world's biggest user of raw materials.
The preliminary Purchasing Managers' Index from Caixin Media and Markit Economics unexpectedly fell to the lowest in 15 months. Goldman Sachs Group Inc. predicts lower copper prices, and traders and analysts were the most bearish since May in a Bloomberg survey.

"China is very negative for metals today," John Meyer, a mining analyst at SP Angel Corporate Finance LLP in London, said by phone. "There's been a significant slowing of the economy. Construction and infrastructure spending has collapsed."

Copper for delivery in three months on the London Metal Exchange fell as much as 1.5 percent to $5,191.50, the lowest since 2009. Prices are heading for a 4.3 percent drop this week, the worst loss since January.

Expanding gluts have pummeled markets for raw materials, with the Bloomberg Commodity Index dropping to the lowest in 13 years. Goldman Sachs says demand for copper in China, which consumes about 40 percent of the world's supply, is poised for the slowest expansion in almost two decades.

While Goldman is bearish, Citigroup Inc. predicts copper will climb more than 15 percent by the year-end, helped by rising demand in China from consumer goods and the power grid.

Accelerating Demand

"We think that sustainable copper demand will accelerate," said Ed Morse, head of commodities research at Citigroup. Prices are "approaching the lows, if not at the lows," he said on Bloomberg Television.

Copper pared declines on Friday after data showed stockpiles in warehouses tracked by the Shanghai Futures Exchange fell to the lowest level since December.
The Chinese factory gauge was at 48.2 for July compared with a median estimate 49.7. Numbers below 50 indicate contraction.

"We have continued to see unrelenting selling pressure from Chinese investors, which has been the main weight on metals prices this week," Nicholas Snowdon, an analyst at Standard Chartered Plc in London, said by e-mail. "A larger net short position from China's investors is possible."

The slump is driving down shares and increasing pressure on miners to trim costs. Freeport-McMoRan Inc., the biggest publicly traded producer of copper, fell the most in six months on Thursday after Chief Executive Officer Richard Adkerson told investors that "all options are on the table," including asset sales and curtailing operations.

Macquarie Group Ltd. said July 16 that copper will find support in the mid-$5,000s a metric ton. Barclays Plc said this month that there was a floor at $5,000 and the metal had the greatest upside potential.

Nickel lost 1.2 percent, while lead and zinc fell more than 0.3 percent. Aluminum gained 0.2 percent.

"There are a lot of macro headwinds coming together to press commodities lower," Francisco Blanch, head of global commodities research at Bank of America Corp., said this week. "I envision a few more months of commodity weakness."

What are the "macro headwinds" driving commodity prices and shares to multi-year lows? The mighty greenback keeps surging higher as investors fear the Fed is getting ready to hike rates this year and more importantly, the bursting of the China bubble is why global investors are scrambling out of commodities and commodity shares and into good old U.S. bonds (NYSEARCA:TLT), which has the perverse effect of driving the USD higher.

All this spells big trouble for mining giants which are shedding thousands of jobs around the world. The devastation in commodity shares is unprecedented. The Bloomberg article above mentions Freeport-McMoRan (NYSE:FCX) which is down 66% this year and keeps plunging to new lows:

http://static.cdn-seekingalpha.com/u...fcx_thumb1.jpg

And it's not just Freeport which is getting massacred. Check out the long-term chart of the S&P Metals and Mining ETF (NYSEARCA:XME) which is close to the November 17th, 2008 low of $17:

http://static.cdn-seekingalpha.com/u...XME_thumb1.jpg

You might be tempted to catch this falling knife but before you do, let me share a personal trading story. The week before Patriot Coal first declared bankruptcy, wiping out shareholders, I was trading it wrongly thinking they won't file Chapter 11 and making huge gains (+50% in one week). Then one day, BOOM!, they filed for bankruptcy and I scrambled to sell that big position for pennies.

If I remember correctly, that happened in the summer of 2013, right after I recommended a lump of coal for Christmas back in December 2012. That was a painful and costly mistake, one that taught me to be careful trading counter-trend rallies in weak sectors and that just because a stock has suffered a huge decline and looks oversold, it can always go lower and even head to zero!

Now, admittedly, trading ETFs is safer than trading individual stocks but when all the components are dropping like a hot knife through butter, be very careful, there could be more damage ahead and the sector can stay out of favor for a lot longer than anyone expects. There are plenty of other coal stocks that got slaughtered this year (or filed for bankruptcy).

Have a look at the one year chart of Peabody Energy (NYSE:BTU), one of the few coal companies whose shares are still trading:

http://static.cdn-seekingalpha.com/u...BTU_thumb1.jpg

OUCH! King Coal is dead! And there are plenty of others that were flying high during the BRICs boom years which are now trading for pennies or bankrupt (like Walter Energy and Alpha Natural Resources).

When I talk about coal stocks to traders, they invariably tell me that natural gas has effectively displaced coal, but if you look at where nat gas prices are trading and charts of stocks like Cheasapeake Energy (NYSE:CHK), you see the carnage has spread in that sector too:

http://static.cdn-seekingalpha.com/u...CHK_thumb1.jpg

It's no wonder so many traders are shorting every commodity. The charts are ugly and there are plenty of macro reasons to think it can get a lot uglier before it gets better.

But go back to carefully read my comments on Bridgewater turning bearish on China and a tale of two markets. We could be setting up for some nice countertrend rallies in Chinese (NYSEARCA:FXI), emerging markets (NYSEARCA:EEM), energy (NYSEARCA:XLE), commodities (NYSEARCA:GSG), metals and mining (XME), and gold (NYSEARCA:GLD) shares in the next few months.

How is this possible? First, if markets deteriorate further, the Fed won't hike rates this year. Second, real rates in emerging markets remain too high relative to real rates in the developed world, so expect more central bank easing in emerging markets in the near future. Third, the reflationistas may be temporarily right, global growth will likely come in stronger than anticipated in the next few quarters, which will help boost energy and commodity shares.

But make no mistake, my long-term forecast of global deflation remains intact which is why even though I might be tempted to trade any countertrend rallies in energy and commodities, I keep steering clear of these sectors in favor of tech (NASDAQ:QQQ) and biotech (IBB and XBI).

The problem with tech, however, is that it's a concentrated few high flyers like Amazon (NASDAQ:AMZN) which just reported stellar numbers that are driving the NASDAQ to record highs. I find the breadth in biotech is a lot better and can find opportunities in many large, mid and small cap biotechs.

Here are some of the smaller biotechs I trade and hold core positions in, courtesy of Broadfin, Baker Brothers, Point 72 Asset Management and other top funds I track every quarter:

http://static.cdn-seekingalpha.com/u...op_2Bpicks.jpg

But biotech isn't for the faint of heart. On Friday, shares of Biogen (NASDAQ:BIIB) are getting slammed hard as the company slashed its 2015 forecast as MS drug sales disappoint:

http://static.cdn-seekingalpha.com/u...IIB_thumb1.jpg

Take it from a guy with progressive MS who knows Biogen very well (I was among the first Avonex patients in Canada taking part in the CHAMPS study back in 1997) and is taking part in clinical trials at the Montreal Neurological Institute. I have many conversations with my neurologist, MS patients and clinical trial coordinators and know all about new therapies. As such, I can unequivocally tell you Biogen is one of the best biotech companies in the world and they have an incredible pipeline for MS, Alzheimer's and other neurological diseases. This dip is another big buying opportunity, especially if its share price falls below $300 a share (doubt it).

Lastly, I'm a macro and stock market junkie who tracks thousands of companies in over 100 sectors and industries. I've built that list on Yahoo Finance over many years and keep adding to it every day. I regularly look at the YTD performance of stocks, the 12-month leaders, the 52-week highs and 52-week lows. I also like to track the most shorted stocks and highest yielding stocks in various exchanges.

At night before bedtime, I sit on my iPad and go over various sectors, thinking hard of the macro themes driving the shares higher or lower. Macro is the key and those who ignore it or dismiss it are doomed to underperform.

Below, Mike Harris, president at Campbell and Co. said Thursday on CNBC's "Futures Now" that he's "short almost every commodity right now." That's a great trade for now but I wouldn't get too greedy shorting commodities, in these markets, pigs get slaughtered.

Connecting The Dots ........

6 Warning Signs That the Economy Is in Trouble
By Tony Sagami August 4, 2015

On July 14, I wrote about the danger developing in the transportation sector, and things are looking even worse today. Here’s what I mean:

Look Out Below #1: Royal Dutch Shell reported its quarterly results last week—$3.4 billion, down from $5.1 billion for the same quarter a year ago—and warned that “today’s oil price downturn could last for several years.”

http://ggc-mauldin-images.s3.amazona...150804_CTD.gif

In anticipation of tough times, Shell slashed its 2015 capital expenditure budget by 20% and is going to lay off 6,500 high-paying jobs (not Burger King-type jobs) this year.

Look Out Below #2: UPS is a very good barometer of the consumer end of our economy: It’s the largest component of the Dow Jones Transportation Average both by sales and market valuation.

http://ggc-mauldin-images.s3.amazona...150804_CTD.gif

And UPS isn’t very confident about the US economy. Here is what UPS CEO David Abney said in a recent conference call with analysts:

If you just look at in [sic] January, the GDP forecast we thought was going to be about 3.1%. Now the thinking in July is about 2.3%, so let’s say a pretty significant decrease.

Why so glum?

The continued strength of the US dollar and I think this impending rate hike by the Fed appears to be holding back some US growth.
Abney has good reason to complain: UPS’s revenue fell 1.2% over the last 12 months. Not good.

Look Out Below #3: Rolls Royce may be best known for its luxury limousines, but the heart of its business is making engines for jet airplanes. Along with General Electric, the company dominates the aerospace engine business.

http://ggc-mauldin-images.s3.amazona...150804_CTD.gif
Business isn’t so good. Rolls Royce just issued its fourth profit warning in the last year and a half and is shutting down its $1.56 billion share buyback, introduced a year ago, to conserve cash.

The problem? Weak demand for its jet engines.

Hey, if Rolls Royce doesn’t want to buy its own stock… why should you?

Look Out Below #4: The reason Rolls Royce is suffering is that the airborne freight market is shrinking. While the passenger cabins you and I sit in may be full, the belly of the plane where the cargo freight is held is growing increasingly empty.
http://ggc-mauldin-images.s3.amazona...150804_CTD.gif
The International Air Transport Association (IATA) reported that air freight load factors have dropped to lows not seen since 2009.

“The expansion in volumes we saw in 2014 has ground to a halt, and load factors are falling… we have to recognize that business confidence is flat and export orders in decline,” said the CEO of IATA, Tony Tyler.

Look Out Below #5: The trans-ocean freight business isn’t doing any better; the number of idle container ships has increased two months in a row.

http://ggc-mauldin-images.s3.amazona...150804_CTD.gif
The number of idle ships (over 500 20-foot-equivalent units) has jumped from 82 to 108. Yup… business is so bad that the owners of 108 ships don’t have any business whatsoever.

“The traditional peak summer season has so far failed to provide a boost to vessel demand, as the weak cargo outlook is forcing carriers to cut back on their capacity deployment plans,” reported Alphaliner, a container shipping watchdog.

Look Out Below #6: The reason why all these transportation companies are struggling is that global trade is simply shrinking.
http://ggc-mauldin-images.s3.amazona...150804_CTD.gif

Moreover, world trade is falling at the fastest pace we’ve seen since the last financial crisis. Global trade shrank 1.2% in May from the previous month, and the little-followed World Trade index (which tracks import and export volume) fell to 135.1 in May.

Look, transportation companies prosper when the economy is rocking and rolling. However, they are among the first to feel a business slowdown when things turn downward.

My bashing of the transportation industry is just as much of a warning about the overall economy as transportation stocks. Do you have a contingency plan to protect your portfolio when things turn ugly?

The best time to prepare for trouble… is before trouble arrives. I recommend you take us up on our 90-day money-back guarantee and give my Rational Bear newsletter a risk-free try.
http://www.mauldineconomics.com/imag...ony-sagami.png
Tony Sagami

Cim Banque

China has to grow anyhow:

On Tuesday, Peoples Bank of China (PBoC) surprised markets devaluing the yuan by 1.9 percent, the biggest one-day loss since the creation of the united Chinese currency system in January 1994.

This move increases the risks of a new front in a currency war that stretches from the Euro zone to Japan as every nations look to boost their economies.

The euro and the yen tumbled around 20 percent against the US dollar in the past 12 months. More than 20 central banks have loosened monetary policy this year to spur growth and fight deflation. Versus the US dollar the Russian Ruble has lost 44 percent, Brazilian Real 35 percent and Indian Rupiah almost 5 percent.

The consequence of these devaluations against the Us Dollar is that American economy is starting to suffer. At year-end 2014 the Fed was forecasting nominal GDP growth to accelerate to 4.1% this year. In six months, the Fed has been forced to massively lower its forecast of nominal growth to 2.6%.

China maintained a de facto peg forcing the yuan to be a strong currency.

The result is that the economy is not growing as fast as China needs. A report on Saturday showed Chinese exports shrank 8.3 percent in July, compared with a Bloomberg surveys median estimate of a 1.5 percent.

Chinese authorities built into the market an expectation that they were keeping the currency stable and promoting a greater global use of the yuan. Then all of a sudden, they devalued. Because they devaluate today, markets will continue to look for similar conditions in the future. If exports will continue to fall, markets will expect more depreciation.

Our view is that in a weak global economy, it will take a lot more than a 1.9 percent devaluation to increase Chinese exports. This raises the chances of a future new yuan devaluation that could likely force other central banks to continue to proceed with competitive devaluations.

The debt of Chinese Government should not be an issue for now given the high level of reserve they own in foreign currency.
http://www.cimbanque.com/templates-m...08/0815_07.jpg

Depreciation of EUR, Yuan, and Real vs Us Dollar from 06/17/2014

Maltese Prime Broker EXANTE Implicated in $100M Insider Trading Scheme

Exante and Global Hedge frequently made illicit trades in the same securities, on the same days and around the same time, said the US SEC.



Malta regulated prime broker, EXANTE, is allegedly involved in one of the largest financial cybercrime networks of all times. Dozens of traders from around the world, who seem to be linked to a hub in Ukraine, illegally traded on insider information stolen by hackers from newswires.

The US Securities and Exchange Commission (SEC) filed fraud charges against over thirty people yesterday for being involved in the crime ring, and relayed that they were generating more than $100 million in illegal profits.

According to the charges, Exante Ltd. holds proprietary trading accounts at Interactive Brokers and at Lek Securities, which were used in connection with the scheme to make trades resulting in approximately $24.5 million in ill-gotten gains.


Exante is owned by Lartemisis Holdings Ltd which shares the same address as Portomaso Tower in St Julians, Malta. Its founder and CEO is Alexey Kirienko, who founded a public Global Hedge Capital Fund in 2007. According to his past description, the hedge fund contributed key technological infrastructure and knowledge base for the prime brokerage company, EXANTE Ltd.


In its complaint, the SEC said that several of Exantes directors are also owners of defendant Global Hedge Capital Fund Ltd., and the two entities share employees. Exante and Global Hedge frequently made illicit trades in the same securities, on the same days and around the same time, and often through the same IP addresses, the charges read.


According to local reports in Malta, three of the companys five directors have Maltese addresses; Bruno Cakans, Gatis Eglitis and Alexey Kirienko. The two other directors; Anatoli Knyazev and Vladimir Masliakov live in Moscow, Russia.


Exante Responds


Exante denied the allegations, saying,The complaint completely misrepresents Exante, our business model, and the regulatory conditions we operate in. Exante has worked hard to build a strong brand respected by its peers that serves as a one-stop shop for all markets and instruments. The company was built for traders by traders and any illicit trading will not be tolerated.


Contrary to claims in the complaint as well as in the media, Exante has never been and is not a hedge fund. Our business model is to execute trades for our clients.
The company added that it is in direct contact with multiple authorities, including the MFSA, to resolve this issue swiftly. We have no doubt in time we will be proven to have acted in an appropriate manner and await the factual results.


Our employees will continue to work hard to ensure Exante clients continue to receive outstanding service whilst gaining peace of mind and security.

EUR/JPY Cross


The EURJPY price remains stable above the support level at 132.20, affected by some of the intraday trading to keep the expectation of the price attempt to reach 134.10 level valid, then to be able to gather new negative momentum, therefore, we expect the limitation of the price between the previously mentioned levels until providing negative signal by surpassing the previous support then reaching the initial target at 130.90.

We notice that stochastic attempts to surpass the oversold levels to support the intraday positive fluctuation, which opens the way towards gathering the required momentum.

Expected trading range is between 134.10 and 130.90

Expected trend for today: bearish until confirming the breach

The Certainty Equivalent

One of my students met me in my office the other day. He is a ROTC cadet; thats Reserve Officer Training Corps, in case you dont know.

He knows I have military experience, and he wanted to pick my brain about how he could use his MBA while working for the government.

Uh, you cant, really, I said.

So he asks me, Should I stay in the government or get out?

At this point I drew him a graph. (Graph is missing, I am tired of attempting to attach a simple picture)

The x-axis is your ability, competence, IQ, whatever. The y-axis is how much you get paid.

So the government path is indicated by the dashed line. If youre very smart, you can get paid a little more, but generally everyone gets paid the same no matter how competent or incompetent they are. Thats the government.

But its a lot more than what you would get paid in the private sectorunless,unless you are one of those savants like Zuckerberg or the Google guys or even
a smart businessman or talented trader, in which case you can make a lot more in the private sector than working for the government.

But for 9 out of 10 people, no, you should not work in the private sector. You should work for the government.

So I asked him, Are you one out of those 10 people?

He said, I think I am going to keep working for the government.

Decision Theory

If youve ever taken a decision theory class (I have, and it was awesome), this is the first thing you learn.

You have a 50/50 chance of winning $10,000. You have P = 0.5 of getting $10,000 and P = 0.5 of getting 0.

Or you can choose not to play the game and get $3,000.

What do you do?

The answer is: it depends on who you are and what your risk preferences are.

Rationally, the number to get you to walk away should be $5,000. But most people will walk away for less. Sometimes much less. Sometimes people will walk away for $500 or $1,000. After all, its money they didnt have before.

Anyone who accepts less than $5,000 to walk away is known as risk-averse.

Loss Aversion

Here is where things get interesting. Turn the experiment on its head.

Tell people they have a 50/50 chance of either losing $10,000 or breaking even.

Then tell them that they could either take their chances with the 50/50 game or they could lose a certain $2,000.

Faced with this choice, people will roll the dice. Every. Single. Time.

Nobody wants to lock in a certain loss. As long as there is a chance that they could break even, they will hopeexcept hope is not a strategy.

This is known as loss aversion.

If you understand this experiment, you understand half of behavioral finance.

Kahneman and Tversky, and Thaler

I started reading about this in 2004. Daniel Kahneman is quite famous, with his book Thinking Fast and Slow, and Richard Thaler is perhaps even more famous, with his books Nudge and Misbehaving. He is also an advisor to President Obama.

About 11 years ago, nobody outside of geeky financial circles had ever heard of these guys. I was reading their academic papers to get better at my job.

Pretty much all of the behavior of the financial markets can be explained through this framework. Particularly this correction.

This is why markets go up on an escalator and down on an elevator. People are taking tiny profits all the way up and letting the losses run on the way down.

Im being serious.

Human beings are just not wired for risk. Both parts of the experiment are stupid. The first part is known as taking profits too soon. The second part is letting losses run.

People are guilty of both.

Trading 101

In some sense, this edition of The 10th Man is a lesson in Trading 101. But thats fine, because most investors are barely literate 8th-grade dropouts.
Lets talk first about letting losses run. This is the mistake beginners make.

I buy a stock at $50.

It goes to $48. No big deal.

It goes to $46.

I could have sold it at $48. I cant sell it at $46.

It crashes to $40. Now Im really in trouble. If I sell now, it would be catastrophic. I hope, pray, do rain dances that it will come back.

And then it goes to $20.

The professional sells when it goes to $48.

But the professional makes a different sort of error. He buys Apple at $10, sells it at $11, and then it goes to $700.

In many ways, this is much more catastrophic. Markets do go up over time, and frequently, beginning traders will get bailed out.

But you cant undo buying AAPL at $10 and selling it at $11.

The best investors in the world dont make any of these errors. My favorite, Stan Druckenmiller, talks about being a pig in the trade. Hed rather make a Type I error than a Type II error. Find his speech at the Lost Tree Club on the Internet for more details.

Sometimes I see beginners falling ass-backwards into great trades just because they never make the Type II error. Someone told me recently that hes been
long GOOGL since $250.

Nice job!

But I was way too small, he said.

And that, my friends, is the Type III error.

Tune in next time, for Trading 201.

Before I go, let me briefly tell you about a new documentary that may interest you. Its called China on the Edge. Its about Chinas big boom, the transformation its in right now, and Xi Jinpings plans for the New Silk Road that could really hurt US companies. Some big names in there too, like Ian Bremmer and George Friedman.

After seeing how the Chinese stock market crash made stocks worldwide tumble, I think you cant know too much about China. Pre-register here to watch the film for free when its released on September 23.


Jared Dillian
Editor, The 10th Man

By Brandon Smith

In my last article, I outlined the deliberately engineered trend toward the forced “harmonization” of national economies and monetary policies, as well as the ultimate end goal of globalists: a single world currency system controlled by the International Monetary Fund and, by extension, global governance, which internationalists sometimes refer to in their more honest public moments as the “new world order.”

The schematic for the new world order, according to the admissions of the internationalists, cannot possibly include the continued existence of U.S. geopolitical and economic dominance. The plan, in fact, requires the destabilization and reformation of America into a shell of its former glory. The most important element of this plan demands the removal of the U.S. dollar as the de facto world reserve currency, a change that would devastate our current financial structure.
I outlined with undeniable evidence the reality that major governments, including the BRICS governments of the East, are fully on board with the globalist agenda. There is no way around it; the BRICS, including Russia and China, have openly called for a global monetary system centralized and dictated by the IMF using the SDR basket. This same plan wasoutlined decades ago in the Rothschild-owned magazine The Economist. We are witnessing that plan being implemented in front of our very eyes today.

For the past couple of years, the current head of the IMF, Christine Lagarde, has used the phrase “global economic reset” often in her speeches and interviews. There is some (deliberate) ambiguity to this notion, but after sitting through hours upon hours of her most boring and repetitive discussions in globalist think tanks such as the Council On Foreign Relations, the consistent message is pretty straightforward. If anyone can stand to listen to this woman's carefully crafted prattle and well-vetted half-truths for more than five minutes, I suggest they watch this particular speech given in January at the CFR:

Her message on the global economic reset is essentially this: “Collective” cooperation will not just be encouraged in the new order, it will be required — meaning, the collective cooperation of all nations toward the same geopolitical and economic framework. If this is not accomplished, great fiscal pain will be felt and “spillover” will result. Translation: Due to the forced interdependency of globalism, crisis in one country could cause a domino effect of crisis in other countries; therefore, all countries and their economic behavior must be managed by a central authority to prevent blundering governments or "rogue central banks" from upsetting the balance.

It’s interesting how the IMF’s answer to the failings of globalization is MORE globalization. In other words, Lagarde would argue that while we are in the midst of an international system, we are not centralized enough for such a system to succeed.

The IMF points out correctly that the economic situation around the world is not stable and could revert once again to the chaos of the initial 2008 crash. The Bank for International Settlements, the primary hub of central bank control, has also given numerous warnings this year on the potential for disaster, including in its latest quarterly report.

The warnings of the BIS in particular should not be taken lightly (some analysts are indeed taking them lightly). The BIS knows exactly when financial disasters will erupt because it wrote the central bank policies that created those same events. For example, in 2007, the BIS released a warning that perfectly predicted the elements of the derivatives and credit crisis in 2008.

What these globalist institutions will not tell you in a direct manner are the real causes and motivations behind the inevitable next stage in the ongoing destruction of the current economic system

The global reset is not a “response” to the process of collapse we are trapped in today. No, the global reset as implemented by central banks and the BIS/IMF are the CAUSE of the collapse. The collapse is a tool, a flamethrower burning a great hole in the forest to make way for the foundations of the globalist Ziggurat to be built. As outlined in my last article, economic disaster serves the interests of elitists.

When you look at these actions by the Federal Reserve and the U.S. government in particular, questions arise. Is it “stupidity” that is causing them to sabotage the golden goose? Is it hubris and greed? Their actions are clearly facilitating a program of incremental implosion, yet they continue to ignore the obvious. Why?

The people who ask these questions are operating on a false assumption; they have assumed that the international bankers and the puppet politicians they control have any interest in protecting the longevity of the U.S. The fact is they do not. They have no loyalty whatsoever to the U.S. system, nor do they see the U.S. as “too big to fail.” This is utter nonsense to globalists. Rather, they see each nation and central bank as a piece in a game, much like chess. Some pieces have to be sacrificed in order to gain a better position on the board. This is all that the U.S., the Federal Reserve and even the dollar are to them: expendable pieces in a larger game.

The U.S. is now experiencing the next stage of the great reset. Two pillars were put in place on top of an already existing pillar by the central banks in order to maintain a semblance of stability after the 2008 crash. This faux stability appears to have been necessary in order to allow time for the conditioning of the masses towards greater acceptance of globalist initiatives, to ensure the debt slavery of future generations through the taxation of government generated long term debts, and to allow for internationalists to safely position their own assets. The three pillars are now being systematically removed by the same central bankers. Why? I believe that they are simply ready to carry on with the next stage of the controlled demolition of the American structure as we know it.

Bailouts And QE: The First Pillar Removed

The bailout bonanza was in part a direct intervention in the deflationary avalanche of the derivatives bubble, but also an indirect intervention in that it changed the psychological dynamics of the markets. As former Fed chairmans Alan Greenspan and Ben Bernanke have both hinted at in interviews and op-eds, one of the primary concerns of the central bank was the psychology behind higher stock prices.

Stock prices could be propped up by the Fed itself through proxy buyers using the printing press. Or the Fed could inject billions, if not trillions, of dollars into banks and allow them to run wild, artificially boosting investment while doing nothing to solve the existing dilemma of negative fundamentals. Beyond this, the markets began to move on the mere words or edicts of Fed officials as algo-computers and the general investment world placed bets on rhetoric rather than reality; a dynamic which is now ending.

The bailouts also reanimated the cadavers of large corporations and banks, not just in the U.S. but in Europe, giving the illusion of life to the financial system while leaving Main Street to rot. In the meantime, quantitative easing measures provided a way to continue financing U.S. government debt at the expense of generations of taxpayers as numerous primary lenders began to abandon typical long-term bond purchases.

Furthermore, oil markets appear to have been directly inflated by QE intervention. It is important to take note that oil prices remained extraordinarily high despite the continuous fall in global demand UNTIL the moment the Federal Reserve instituted the taper of QE3. Then, prices began to plunge.

In a September 2013 article, I predicted that the Fed, despite all common sense and the claims of banks like Goldman Sachs, would indeed follow through with the taper: a removal of the first pillar levitating the U.S. system.

I was, of course, called crazy at the time for this prediction by some people within the alternative economic community.

“Why in the world” they asked, “would the Fed taper QE when they can simply print to infinity and kick the can down the road perpetually?” Again, these people do not understand that America is under scheduled demolition by the international banks; it is not being protected by them.

The taper occurred in December of that year.

Near Zero Interest Rates: The Second Pillar Nearly Removed

After the taper of QE, volatility not seen since 2008/2009 returned to the markets. And the public once again was reminded in sporadic moments that the recovery might not be real after all. Europe and Japan quickly stepped in with their own renewed stimulus measures, and Fed officials began using strategic media interviews to “hint” falsely that QE might return. Markets rallied, then fell dramatically, then rallied again, then fell again in a shocking manner. And this volatility has been the trend up until recently, when the question of the end of zero interest rate policy arose.

Again, very few people have ever asked or demanded the Fed end QE or ZIRP. There was never any legitimate public pressure on the fed to remove these pillars. The investment world has been essentially addicted like heroin junkies to assured gains for three years. The war cry of the investment world has been BTFD! (Buy the f'ing dip) for quite some time; investors have come to expect and demand inevitable central bank intervention and fiat driven stock market rallies. Yet, the Fed is ending the party anyway.

ZIRP is the only pillar left holding stocks in place. Without zero interest rates, and with even the most minor of .25 basis points added, cost-free overnight lending to banks and corporations will end. They will not be able to afford continued lending on the massive scale seen since 2009/2010. This means no more stock buybacks for dying companies like IBM or General Motors, among others. This means a considerable decline in the markets, declines which we have had a taste of in recent plunges in equities at the mere mention of interest rate increases.

In August in an article entitled 'Economic Crisis Goes Mainstream: What Happen's Next?', I wrote:

"The Federal Reserve push for a rate hike will likely be determined before 2015 is over. Talk of a September increase in interest rates may be a ploy, and a last-minute decision to delay could be on the table. This tactic of edge-of-the-seat meetings and surprise delays was used during the QE taper scenario, which threw a lot of analysts off their guard and caused many to believe that a taper would never happen. Well, it did happen, just as a rate hike will happen, only slightly later than mainstream analysts expect.

If a delay occurs, it will be short-lived, triggering a dead cat bounce in stocks, with rates increasing by December as dismal retail sales become undeniable leading into the Christmas season."

You can also read my analysis on the motivations behind a Fed rate hike as well as the theater surrounding their policies.

The cat seems to have finished its bounce and stocks are returning to volatility. Retail sales so far for Black Friday weekend (including Thanksgiving) have posted a staggering 10% drop with online sales below expectations. Chain Store sales have recently crashed 6.3% week over week. Plunging freight rates and global shipping indicate a severe lack of global demand and a terrible sales season ahead. Janet Yellen, ignoring all negative economic signals as predicted, has all but declared a rate hike a given by Dec. 16.

I was, yet again, called crazy for this assertion by some at the time; and to be clear, I could still be wrong. The Fed could pull a fast one and not raise rates, though the rhetoric coming from the fed today almost guarantees they will take action. Not raising rates doesn’t match with their past habits; they seem to be following the timing of the taper model perfectly. The point is, despite common assumptions within the alternative media, the Fed is not “trapped” and can do whatever it wants, including killing the markets if it benefits the greater goal of a global economic authority. With the ZIRP pillar gone, expect even more violent swings in stocks and general uncertainty and panic among day-traders and the public.

U.S. Dollar's World Reserve Status: The Third Pillar In Progress Of Removal

I’ve been writing about the loss of the dollar’s reserve status since 2008. And as I have always said, the removal of this final pillar is a process, not an overnight affair. The BRICS nations have been positioning themselves for years — China since 2005, the rest of the BRICS since at least 2010.

The delusion that some economic analysts have been under is that the BRICS were strategically vying for power by building their own unified banking institution in “opposition” to the IMF and the West. As I presented in my last article, this has proven to be completely false. They were in fact positioning to take their place as puppets within the new global paradigm taking shape. China has now joined the IMF’s SDR basket (as predicted); and Russia, along with the other BRICS, has openly called for the IMF to take control of the global monetary system.

China’s inclusion, I believe, will hasten the loss of the dollar’s market share of reserve status over the next year, along with other factors. Saudi Arabia has also brought the idea of a depeg from the U.S. dollar into the mainstream discussion. This action, which mainstream economists are calling a possible Black Swan, would end the dollar’s petro-status and result in catastrophe for the U.S. economy. The removal of the final pillar is well underway.

As I have stated in the past, the U.S. system as it stands does not necessarily deserve to survive, but then again, this does not mean that it should be sacrificed in order to breathe life into the monstrosity of global economic governance. Such a trade-off only serves the interests of a select group of elites, with the global reset ending in the mechanized multicultural suicide of sovereignty, leeching prosperity from the rest of us in the name of “collective
progress.” Globalists want us to believe there is no other option but their leadership, and they will create any measure of chaos in order to convince us of their necessity.

great posts, thank you!!!

The Eurasian Storm

Jan 11, 2016

The Chinese stock market fell dramatically last week. That sounds significant but it actually isnt. First, the Chinese stock market doesnt serve the same function as Western markets. The equities that are sold there do not allow shareholders to control companies, nor are the underlying values of these companies correlated to the price of the stocks in any way. Second, the percentage of Chinas wealth that flows through the markets is relatively small compared to the size of Chinas economy. Market capitalization has little to do with value of Chinese companies.

The really significant news last week related to Chinas foreign reserves. The Peoples Bank of China revealed on Jan. 7 that the country ended 2015 with less foreign reserves than it started the year with. It was the first time reserves shrank over the course of a year since 1992. In effect, China saw its first decline in reserves since the Chinese boom really got under way. The surprising part of this development is not the contraction, since thats been going on for at least a year, but the fact that it was announced. And this announcement told us that China entered a new era in 2015 and is now in uncharted waters.

There are more important implications stemming from the decline in reserves than the Chinese stock markets panic. The governments anxiety was shown by aggressive assertions of confidence, demands for greater discipline, and an intensification of arrests of Chinese officials, businessmen, and others. The government is worried and is clamping down. Indeed, it has been worried for several years, and President Xi Jinping has been trying to maintain social stability in the face of a sea change in Chinas economy. Now, as he attempts to reformand controlthe Peoples Liberation Army, which is the key to Chinas regime, we are in the witching hour in China. Whether the regime can maintain stability in the country while it undergoes managed change is at issue.

I wrote last week about Chinas reality and strategy in anticipation of this sort of crisis. The task this week is to step back and take a look at the global reality. China is not the only nation in Eurasia facing social and political instability as a result of economic shifts. Almost all of Asia, with the major exception of India, is undergoing growing instability of different sorts. The Europeans are struggling to deal with massive economic and political divergences within the European Union. The Russians are simultaneously attempting to deal with an economic crisis stemming from declining oil prices, but rooted in their inability to use oil revenues to build a more robust economy.

The Middle East is in political and military chaos, due to reasons ranging from US attempts at disengaging from the region to deep animosity between Shiite and Sunni Muslims. And Central Asian countries, caught between Russian and Chinese dysfunction and the lapping waters of M uslim discontent, are struggling to contain the resulting unrest.

What we are seeing is a regionfrom the Atlantic to the Pacific, and from the Arctic to the Indian Oceansdestabilizing. Of the 7 billion souls alive today, 5 billion live in this region. In most of Eurasia, the realities that have been taken for granted for the past generation are no longer certain. There has been a belief in much of the region that, at some point, everything will go back to normal. It was assumed that Chinas economy would flourish; that Europe would sort out its problems; that, without the US presence, conflicts in the Middle East would subside; and that Russia would, in due course, accommodate itself to its new liberal democratic principles. However, none of those things are going to happen. Instability, uncertainty, and increasingly impotent regimes trying to find their way out of the crises they have stumbled into, are the new normal.

The different parts of Eurasia will not experience the same type of crisis. Chinas problems are not the Middle Easts, and the Middle Easts are not Europes, but these regional crises have a common cause and interact with each other, complicating them enormously. I wrote a recent article for Mauldin Economics about an emerging crisis for major exporting countries. I want to expand on this in order that we might understand the root cause of the Eurasian crisisinterdependence.

Interdependence has been seen as a panacea for humanitys problems. However, it solves problems, but also creates them. Its most important weakness is that a systemic failure in one region rapidly spreads to other regions. The attempts to solve problems in some nations also affect other countries. Therefore, a byproduct of an interdependent system actually turns into the most dangerous reality of all. This byproduct is conflict among nations, as they str uggle to stabilize their own crises and are constrained by the behavior of other countries. The conflicts brought on by interdependence are the most dangerous because they breed the greatest desperation.
The current Eurasian crisis began in 2008, a crisis that resulted in recessions that had a global impact. The United States and Europe reduced the amount they imported from around the world. China was in a particularly vulnerable position because its economy was heavily dependent on exports. It had been expanding dramatically for over a generation and, as ought to have been obvious, such an expansion was not eternally sustainable. By 2008, China was reaching the limits of its economic model. But as many do, China sought to extend the model, not so much out of greed, as out of fear of what slow growth might mean socially, in an extremely poor country. The Chinese sought to sustain the economy through various forms of subsidies that continued to support growth in GDPalthough not at the same level as beforebut pyramided the growing irrationalities of the economy. It was cushioned by its financial reserves, but that could last only so long.

Chinas economy has continued to slow. The last update from Chinas official statistics agency reported 6.9 percent growth in the third quarter of 2015. I suspect, although cant prove, that the real growth rate is substantially less than what Beijing claims. And to the extent that the growth was real, it was likely not very profitable. China has many competitors who sell the same products at a lower price. Because of this slowing growth, the amount of industrial commodities China could buy, from iron ore to oil, declined. As always, there was a failure of the markets to grasp that the Chinese economy was not going to return to the old normal, but that a new normal had been in place for several years and, therefore, the price of these commodities was irrationally high. The inability of markets to see what was obvious was critical over the past two years or so. But this is a normal feature of financial markets, which have a great deal of trouble identifying discontinuities. It is the true irrationality of markets, but a dangerous one to try to exploit.

The markets ability to delude itself collectively for extended periods of time is part of one of the fundamental realities of geopolitics: the interaction between economics, politics, and war, which is the place we all live our lives. And certainly where Eurasia is now.

The illusion of China, which I once called the China Bubble, burst in 2014. I should emphasize that this was not the result of Chinas economic shift. That had been going on for years. Rather, 2014 was when the markets realized that Chinas downturn was now a permanent feature of the international system. Interestingly, the positive effects of lower oil prices on consumers were not trivial, but not nearly as significant as they would have been 30 years ago. Efficiencies and alternatives had decreased the importance of oil to consumers. But they did not decrease oils importance to producers. And, as important as the economic consequences of declining profits for mineral producers (its important to go beyond oil) have been, their political consequences have been critical.

Last week, the son of the Saudi king said that Saudi Arabia was interested in selling part of the state-owned oil firm Saudi Aramco. The only reason to put this on the table is that the Saudis need money badly. The potential political consequences of the sale of Aramco are enormous. For decades before the 1970s, European and American interests had owned most of the regions oil. This had been a sore point in the region; however, the Saudis and others changed this dynamic following the 1973 oil embargo. Nevertheless, the hostility toward the West in the Arab world has increased and, more importantly, the two groups are fighting a war in the region. For the Saudis, at any moment but particularly at this moment, to raise the possibility of selling part of Saudi Arabias oil resources (however small the amount) back to Western interests, represents the deep crisis that falling oil prices have created.

A similar problem exists for Russia. The Russians fumbled the Ukrainian crisis. They went from having a light but real control of all of Ukraine, to seeing the country governed by a pro-Western government, while Russia clings to Crimea and a small strip of support in the east. They were in the middle of confronting the West on this issue when the oil crisis hit. Oil revenues were a major component of Russias national budget and the driver of the economy. Their dramatic contraction led to a significant financial and economic crisis for which the Russians have no solution. There are many reasons for why they became more assertive in their foreign policy, but maintaining domestic confidence in the government is the key. The decline of oil prices and its impact on the economy will remind most Russians of the events prior to the fall of the Soviet Union. By appearing to be a major player in Syria (Russia actually has deployed relatively few aircraft and fewer t roops), the government has maintained its popularity in spite of the emerging hardships.

The point here is that not only is Eurasia as a whole in crisis, but the crises in individual countries and regions are increasingly interacting. The Middle East crisis is interacting with Russia. It is also interacting with Europe, both in terms of the refugee crisis and European deployments in the Middle East. The refugee crisiswhere an extra million people on a continent of about 700 million people is hardly overwhelminghas revealed deep fault lines within Europe over the question of borders. Borders are the single central issue of the European Union, and it was thought to have been settled. In addition, Europes ongoing inability to solve its economic malaiseand I dont expect a solution for a long timehas intensified Chinas problems. Europe was Chinas largest customer. Also, the crisis in Ukraine has focused Poland and Romania on the perceived threat from the east, much to the indifference of the rest of Europe, but drawing in the United States as the guarantor of the eastern frontiers. And as mentioned, our forecasting model at Geopolitical Futures points to serious instability in Central Asia as a result of Russian, Chinese, and Middle Eastern problems.
Trade is another potential source of disruption brought on by interdependence. Exports constitute about 23 percent of Chinas GDP. They make up almost 50 percent of Germanys GDP and 30 percent of Russias. In Saudi Arabia, its 52 percent. However, in Japan its 16 percent. And, in the United States, exports are only 13.5 percent of GDP and only about 8 percent is attributed to countries outside of NAFTA. When we look at the export levels, we are measuring a nations vulnerability to the international system. I would draw the boundary of excessive dependence on exports at about 20 percent of GDP. It is important to add that I evaluate the consequences of dependence, not so much in economic terms, but in their impact on social and political stability. High exporters are not necessarily unstable, but their risk is higher.

Based on this, and looking only at a handful of major powers, we can see onethough not allof the drivers of the crisis in Eurasia. We can also see why Japan, as economically hard-pressed as it may be, has not destabilized. In looking at the American numbers, and at the geography of its exports, it is also evident why the United States, which may have triggered 2008, has generally not suffered much of the social chaos. It is least exposed to what happens in Eurasia because it depends least on those markets. There are other reasons, of course, but it is important to bear these export numbers in mind.

George Soros said this week that we are heading for a crisis similar to 2008. I disagree with him to this extent. First, the 2008 crisis never ended. It just merged with political, social, and military processes and became part of them. Second, the economic crisis, while there may be one, is trivial compared to the conflicts within Europe and along the European-Russian borders. It is trivial compared to the chaos in the Middle East and the economic dysfunction in China. Ultimately, the 2008 crisis never ended. Indeed, it defines the new Eurasia, a place where most human beings live, where stability is increasingly hard to find.


George Friedman
Editor, This Week in Geopolitics

The Corn & Ethanol Report 01/11/16

China Slide Continues

Good Morning!

In the overnight electronic session the March Corn is currently trading at 354 ¼ which is 2 ¾ cents lower. The trading range has been 357 ¼ to 353 ½ so far. Traders are eagerly awaiting tomorrow’s final Crop Production USDA Supply/Demand to see if there will be any bullish surprise.

On the Ethanol front there were no trades posted in the overnight electronic session. The February contract settled at 1.335 and is currently showing 1 bid @ 1.317 and 2 offers @ 1.340.

On the Crude Oil front the market is taking more heat with the February contract currently trading at 3270 which is 46 lower in the overnight electronic session. The trading range has been 3320 to 3224 so far. There is good support at the 3215 level.

On the Natural Gas front the market is acting like it already priced in the cold snap. In the overnight electronic session the February contract is currently trading at 2.422 which is 5 cents lower. The trading range has been 2.480 to 2.399 so far. The 10-day weather forecast should be a driving force in this market.


Have a Great Trading Day!

Thanks,
Daniel Flynn

Profiting from a culture of compliance


Multiple and powerful pressures are impacting the hedge fund industry, but two are particularly prominent: a dramatically increased regulatory burden, and investor demands for greater transparency and lower fees.

Far-reaching and complex new rules continue to reshape the environment, from Dodd-Frank and EMIR to FATCA and AIFMD. To meet these stringent regulatory responsibilities, and keep pace with evolving investor best practices, hedge funds will need to adopt a firm-wide “culture of compliance.”

Non-compliance not an option

Satisfying regulatory rules and investor demands may seem like a costly headache, but compliance is simply good business. Poor or non-compliance risks:

1. More frequent regulatory examinations.
2. Potential enforcement actions.
3. Higher legal fees and other expenses.
4. Employee morale issues and attrition.
5. Distraction from business priorities.
6. Reputational damage.
7. Loss of existing and prospective investors.

Institutional investors in particular demonstrate a preference for greater transparency, accountability and operational rigour from the managers with which they invest. Given what’s at stake, compliance may be as important now as investment performance.
Technology-enabled compliance
Increasingly, a robust technology infrastructure is at the heart of any truly competitive, operationally-efficient, customer-focused and compliant hedge fund business. Key technology components include:

 

1. Order Management Systems for accurate and efficient trading

An advanced trade order management system can handle higher volumes and greater instrument sophistication, mitigate trade-related risks, improve execution efficiency, maintain trading activity audit trails and support seamless reporting.

 

1. Portfolio Management Systems for transparency

A state-of-the-art portfolio management system helps firms price and value holdings accurately, adhere to industry-standard performance measurement practices, and deliver real-time information for regulatory and client reporting.

 

1. Multi-Series and Investor Accounting

Integrated investor accounting systems can perform automated book and tax allocations among investors through multi-tiered fund structures, automate rate of return calculations and NAV computations, provide look-through reporting and send account statements to investors.
The ability to demonstrate compliance and best practices will only grow in importance, especially when attracting institutional money. Rather than a burden, compliance instead offers opportunities for savvy hedge funds.

Economicus Terra Incognita

By John Mauldin | Jan 10, 2016


The most reliable way to forecast the future is to try to understand the present.
John Naisbitt

We really cant forecast all that well, and yet we pretend that we can, but we really cant.
Alan Greenspan

http://ggc-mauldin-images.s3.amazona.../160110-01.jpg

Welcome to 2016. Tradition dictates that you spend the first few weeks or so reading forecasts for the coming year. I can say with certainty that most of them will be wrong. A smaller number may hit the target. Unfortunately, no one knows which forecasts will fall into which category.

For the last 16 years my first letter of the year has also been a forecast issue, and I will continue to go with that tradition but with one major caveat. I do not base my forecasts on mathematical models or some finely honed methodology, but on my sense of where the economic world stands today and where I think it might likely be in the near future.

Actually, Im going to spend the first few pages demonstrating that the mathematical models used to forecast GDP and all sorts of interesting economic events are basically nonsense.

For me, forecasting the year ahead is somewhat like being an explorer who comes to the top of a high new mountain pass along with a group of his friends and looks far out in the distance and sees another mountain pass, shrouded in clouds but offering the promise that its possible to continue the journey. It is clear to him that they should all forge ahead to find a way to that next mountain pass, but between his location and his destination lie all manner of unknown geographical features, not to mention the prospect of unfriendly natives who may want to contest their passage.

So today, as we crest the mountain pass of a new year, I will look off in the distance and tell you what I see. Let me be clear, though, that Im not coming back from the future and telling you what its like; I am merely hoping to get our general direction right. Some years the path ahead seems remarkably straightforward and clear of obstructions. I can tell you right now that this year the challenges seem particularly fog-shrouded. But whats an explorer to do but to press ahead?

Before we begin, I want to suggest you mark out time in 2016 to attend my Strategic Investment Conference. This year weve moved the event to Dallas. The dates are May 24-27.

Im proud to say that SIC probably has more repeat attendees than any conference I know. This fact speaks to the care with which my conference team organizes the event and the quality of our speakers. A side effect is that the bar is raised a little each year. Somehow I have to deliver a better-than-ever program year after year and somehow weve always done it.

My goal in designing the agenda is to give you a mixture of old favorites as well as new perspectives. Our confirmed speakers so far (in no particular order) are George Friedman, Mark Yusko, Pippa Malmgren, Charles Gave, Lacy Hunt, Anatole Kaletsky, David Rosenberg, David Zervos, Gary Shilling, Louis Gave, and Neil Howe. We will be confirming several others within the next few weeks. You probably know at least some of those names. If not, you should. Just this initial group is quite a brain trust.
This year Ive juggled the schedule to give us more time for informal networking opportunities. SIC attracts an impressive group of attendees, and every year I hear from people who made invaluable business contacts at the conference. We are going to be using an app for the conference that, among other cool options, will help you network and find people whose ideas and information will enhance your own life. Note that this extra networking feature is completely optional. (We are still accepting sponsors, too, if your company would like to reach several hundred high-powered investors and money managers from around the world.)

For more information, you can visit the SIC 2016 website. Register by Jan. 31 and youll save $500 off the walk-up rate.

Two notes before we start. At the beginning of the letter I am going to launch a few nukes on the banality of making predictions based on models. That is at least the first half of the letter. If you want only my musings on events to look for in the coming year, skip down about halfway.

Second, and VERY IMPORTANT. At least to me. This is the typically the most forwarded letter of the year. If you are reading me for the first time, this letter is free you can subscribe at www.mauldineconomics.com by simply entering your email address. And you can get free emails from a brilliant group of writers and analysts who are far smarter than I am, if you choose. The whole team at Mauldin Economics looks forward to serving you. Now, lets jump in!

Wall Street Takes the Heat for You

What will the stock market do this year? It seems like a simple question. You might wish for a simple answer to it, and think that people who watch stocks for a living should know that answer. Not so. The evidence shows they are no more accurate than anyone else is.

Morgan Housel of The Motley Fool skewered Wall Streets annual forecasting record in a story last February. He measured the Streets strategists against what he calls the Blind Forecaster. This mythical person simply assumes the S&P 500 will rise 9% every year, in line with its long-term average.

The chart below shows Wall Streets consensus S&P 500 forecast versus the actual performance of the S&P 500 for the years 20002014.

http://ggc-mauldin-images.s3.amazona.../160110-02.jpg

The first thing I noticed is that the experts collective wisdom (the blue bars) forecasted 15 consecutive positive years. The forecasts differ only in the magnitude of each years expected gain.

As we all know (some of us painfully so), such consistent gains didnt happen. The new century began with three consecutive losing years, then five winning years, and then the 2008 catastrophic loss.

The remarkable thing here is that forecasters seemed to pay zero attention to recent experience. Upon finishing a bad year, they forecasted a recovery. Upon finishing a good year, they forecasted more of the same. The only common element is that they always thought the market would go up next year.

Housel calculates that the strategists forecasts were off by an average 14.7 percentage points per year. His Blind Forecaster, who simply assumed 9% gains every year, was off by an average 14.1 percentage points per year. Thus the Blind Forecaster beat the experts even if you exclude 2008 as an unforeseeable black swan year.
This data raises plenty of questions, starting with, Why do investors listen to forecasters who are so consistently wrong? I have a guess, but lets first look at Morgan Housels answer. (I should note that Morgan is my favorite writer at The Fool.)

The first question is easy. I think theres a burning desire to think of finance as a science like physics or engineering.

We want to think it can be measured cleanly, with precision, in ways that make sense. If you think finance is like physics, you assume there are smart people out there who can read the data, crunch the numbers, and tell us exactly where the S&P 500 will be on Dec. 31, just as a physicist can tell us exactly how bright the moon will be on the last day of the year.

But finance isn't like physics. Or, to borrow an analogy from investor Dean Williams, it's not like classical physics, which analyzes the world in clean, predictable, measurable ways. It's more like quantum physics, which tells us that at the particle level the world works in messy, disorderly ways, and you can't measure anything precisely because the act of measuring something will affect the thing you're trying to measure (Heisenberg's uncertainty principle). The belief that finance is something precise and measurable is why we listen to strategists. And I don't think that will ever go away.
Finance is much closer to something like sociology. It's barely a science, and driven by irrational, uninformed, emotional, vengeful, gullible, and hormonal human brains.

For the most part, I agree with Morgan. Investors want to believe that certainty is possible, that crunching the right numbers or listening to the right guru will reveal what lies ahead. The idea that markets are inherently messy and disorderly frightens them. Its much more comforting to think that someone out there has a crystal ball that you just havent found yet.

Ill add a twist to Morgans answer. I think what many investors really want is a scapegoat. The only thing worse than being wrong is being wrong with no one to blame but yourself. Forecasters keep their jobs despite their manifest cluelessness because they are willing to be the fall guy. Present company excepted, of course.

There used to be a saying among portfolio managers: No one ever gets fired for owning IBM. It was the bluest blue chip, one that everyone agreed would always bounce back from any weakness. If IBM made you have a bad year, the boss would understand.

Wall Street strategists serve a similar purpose. If, say, Goldman Sachs forecasts a good year, and it turns out not so good, you will be well-armed for the inevitable discussion with your spouse, investment committee, or board of directors: I was just following the experts.

Compare that to the alternative. How does that discussion turn out if you build your own forecasting model and it delivers dismal results? The story probably ends with you sleeping in the doghouse and/or polishing your resum.

In the short run, hiring a scapegoat, er, forecaster, seems the path of least resistance. Thats why so many people choose it. But in the long run, that path leads you nowhere that you want to go. You will be in fine company as you underperform, but underperform you will.

People also look to forecasts that reward their confirmation bias, reinforcing and validating their understandings of markets and investment strategy. Sadly, I must confess that I much prefer to hear a forecast or read analysis that confirms my own biases. Which is one reason I make sure to read the analyses of those who dont agree with me.

I typically ignore for good reason, as we will see below forecasts based on mathematical models. I much prefer the assessments of those who analyze the future in terms of trends and general economic forces, giving us their own sense of direction about the interplay of the complex drivers of the economy. But thats just me.

Fed Says Fed Forecasts Fail

All right, so if forecasting the stock market is harder than it looks, how about forecasting the economy? Surely the Federal Reserve has a good handle on future growth prospects.

If thats what you think, prepare to be disappointed.

We cant say the Fed doesnt try. In 2007 the Federal Open Market Committee (FOMC) started releasing GDP growth projections four times a year. They do this in the same report where we see the much-discussed interest-rate dot plots. It is called the Summary of Economic Projections, or SEP.
A 2015 study by Kevin J. Lansing and Benjamin Pyle of the San Francisco Federal Reserve Bank found the FOMC was persistently too optimistic about future US economic growth. They concluded:

Over the past seven years, many growth forecasts, including the SEPs central tendency midpoint, have been too optimistic. In particular, the SEP midpoint forecast

(1) did not anticipate the Great Recession that started in December 2007,

(2) underestimated the severity of the downturn once it began, and

(3) consistently overpredicted the speed of the recovery that started in June 2009.

So, it isnt just Wall Street that wears rose-colored glasses they are fashionable at the Fed, too. Lansing and Pyle provide helpful charts to illustrate the FOMCs overconfidence. This first one covers the years 20082010.

http://ggc-mauldin-images.s3.amazona.../160110-03.jpg

The colored lines show you how the forecast for each year evolved from the time the FOMC members initially made it. Note how they stubbornly held to their 2008 positive growth forecast even as the financial crisis unfolded, then didnt revise their 2009 forecasts down until 2009 was underway and then revised them too low. However, they did make a pretty good initial guess for 2010, and they stuck with it.

The next chart shows FOMC forecasts for 20112013.

http://ggc-mauldin-images.s3.amazona.../160110-04.jpg

We see a different picture in this chart. As of October 2009, FOMC members expected 2011 and 2012 would both bring 4% or better GDP growth. Neither year ended anywhere near those targets. Their initial 2013 forecast was near 4% as well. They reduced it as the expected recovery failed to materialize, but as in 2009, they actually guessed too low.

One problem here is that GDP itself is a political construction. Forecasting the future is hard enough when you actually understand what you are forecasting. What happens when the yardstick itself keeps changing shape? You get meaningless forecasts. But this doesnt stop the Fed from trying.

CBO: Were Less Wrong Than They Are


If the Fed cant accurately forecast the economy, can anyone? Surely someone in the federal government has better answers.

The Congressional Budget Office issues forecasts much as the Federal Reserve does. And like the Fed, the CBO grades itself. You can see for yourself in CBOs Economic Forecasting Record: 2015 Update.

Read that document, and you will find the CBO readily admitting that its forecasts bear little resemblance to reality. Their main defense, or maybe I should say excuse, is that the executive branch and private forecasters are even worse.

Im not kidding. The CBO report includes the following chart. I removed other categories they measure so we can look specifically at their GDP estimates. I should also point out that they cooked the books a little by averaging two-year forecasts to make themselves look better. But even so

http://ggc-mauldin-images.s3.amazona.../160110-05.jpg

The bars compare the degree of error in forecasts by the CBO, the Office of Management and Budget (OMB), and the private Blue Chip economic forecast consensus. A reading of zero would mean the average forecasts matched reality. A negative number would mean they were too pessimistic. A positive number which is what we see for all three entities means they were all overly optimistic on GDP growth.

So, what we see is that the OMB whose director is a political appointee was more optimistic than the Blue Chip consensus, which in turn was more optimistic than the CBO, which was more optimistic than reality.

It is also worth noting how the CBO views the future. Their latest economic outlook update, published last August, features this chart.

http://ggc-mauldin-images.s3.amazona.../160110-06.jpg

The forecasts for GDP growth, unemployment, inflation, and interest rates all flatline after 2016. As of now, the CBOs official position is that the US economy will remain stable with no recession until at least 2025.

If you find this particular prognostication hard to believe, you arent the only one. Nevertheless, this is what the government agency with the best forecasting record says we should expect.

Ill go out on a limb here and say that the CBO is wrong. I am 100% certain we will have a recession before 2025. We can debate when it will start, what will cause it, and how long it will last, but not whether it will happen.

Economists Are (Still) Clueless

I wrote these next few paragraphs three years ago, but what I said then is still true today.

In November of 2008, as stock markets crashed around the world, the Queen of England visited the London School of Economics to open the New Academic Building. While she was there, she listened in on academic lectures. The Queen, who studiously avoids controversy and almost never lets people know what she's actually thinking, finally asked a simple question about the financial crisis: "How come nobody could foresee it?" No one could answer her.
If you've suspected all along that economists are useless at the job of forecasting, you would be right. Dozens of studies show that economists are completely incapable of forecasting recessions. But forget forecasting. What's worse is that they fail miserably even at understanding where the economy is today. In one of the broadest studies of whether economists can predict recessions and financial crises, Prakash Loungani of the International Monetary Fund wrote very starkly, "The record of failure to predict recessions is virtually unblemished." He found this to be true not only for official organizations like the IMF, the World Bank, and government agencies but for private forecasters as well. They're all terrible. Loungani concluded that the "inability to predict recessions is a ubiquitous feature of growth forecasts." Most economists were not even able to recognize recessions once they had already started.
In plain English, economists don't have a clue about the future.

If you think the Fed or government agencies know what is going on with the economy, you're mistaken. Government economists are about as useful as a screen door on a submarine. Their mistakes and failures are so spectacular you couldn't make them up if you tried. Yet now, in a post-crisis world, we trust the same people to know where the economy is, where it is going, and how to manage monetary policy.

Central banks tell us that they know when to raise or lower rates, when to resort to quantitative easing, when to end the current policies of financial repression, and when to shrink the bloated monetary base. However, given their record at forecasting, how will they know? The Federal Reserve not only failed to predict the recessions of 1990, 2001, and 2007; it also didn't even recognize them after they had already begun. Financial crises frequently happen because central banks cut interest rates too late or hike rates too soon.

The central banks tell us their policies are data-dependent, but then they use that data to create models that are patently wrong time and time again. Trusting central bankers now, whether in the US, Europe, or elsewhere, is a dicey wager, given their track record. Unfortunately, the problem is not that economists are simply bad at what they do; it's that they're really, really bad. They're so bad that their performance cant even be a matter of chance.

The reason is that they base their models on flawed economic theories that can only represent at most a pale shadow of the true economy. They assume they can use what are called dynamic equilibrium models to describe and forecast the economy. In order to create such models they have to make assumptions and when they do, they assume away the real world.

It is not so much that the models I am criticizing are useless they can offer economic insights in limited ways but they cannot be (successfully) used to predict the economy or stock markets with anything close to certainty. They are simply not complex enough and they cannot be made complex enough to accurately describe the nonlinear natural system that is the economy.

Such models can at best give you insights into certain conditions that are limited by the assumptions you have to make in order to create the models. If youre using your models properly, you understand their deep limitations. I freely admit to using models to gather as many insights as I can (especially about relative valuations), but I certainly dont rely on them to actually predict the future. You should never use a model without understanding in a deep and all-encompassing way that past performance is not indicative of future results.

Im concerned that, in the coming years, looking at historical data for guidance about the future will be more misleading than simply guessing would be. The times arent just changing; the very underlying economic conditions that produced past performance will no longer pertain. We are truly on economicus terra incognita. (Okay I made that one up, but you get the idea.)

If I were a young and mathematically gifted economist, I think I would explore the use of complexity theory to model the economy, based not on Keynesian nonsense or the hubristic assumption that an economy can ever be in a state of equilibrium (it cant), but using Claude Shannons information theory instead as a better way to demonstrate how economics works in the real world (an idea brilliantly suggested by George Gilder inKnowledge and Power).

QE 4

So now that weve established that forecasting is worthless, let me make a forecast. When we next have a recession in the US, the Federal Reserve will give us QE 4. They are going to base their monetary policy on the data they have at the time, even though all their own research says that the last round of QE really didnt do anything. They will once again push us into a world of financial repression malinvestment because they will feel the need to do something, and about the only thing they will be able to come up with is more quantitative easing. Which will force the world into yet another mutually destructive round of competitive currency devaluations. The image that springs to mind is that of a circular firing squad, with the participants being the worlds major central banks, some of which actually do have bazookas. As usual, the investors of the world will be caught in no-mans land. (I hear the old tune by Martha and the Va ndellas starting to play in the back of my brain: Nowhere to run to, baby, nowhere to hide.)

There is a significant part of me that now feels, or perhaps fears is the better word, that the Fed will embark upon an experiment with negative interest rates in the worlds reserve currency. One of the ideas that I want to explore at my conference this year is what the consequences would be of negative interest rates in the US and how we should deal with them. We will have a number of European financial experts in attendance, and I will pose the question to them. I am more interested in this prospect as a practical matter than as a theoretical one. If you are managing a clients money in anything that looks like income ETFs or mutual funds, how would you deal with this? There are a number of different types of funds that are actually required to hold their excess assets and cash reserves in short-term Treasurys. Will regulators really make funds hold reserves in assets that force clients into negative returns? Seriously?

Why Forecasting Next Year Is a Crap Shoot

By this point it should be clear that even the brightest economic and financial minds struggle to make accurate forecasts. Should we ignore them all?
No. I think the real problem is timing.

I think it is possible to observe events and trends and then to make informed projections about the future. A few people can even do it with reasonable accuracy, at least in their own areas of expertise. The problem lies in correlating what you know is coming with the particular calendar year in which it will occur.

For instance, note what I said above. I made a recession forecast within a 10-year period. I feel very confident we will have a recession between 2016 and 2025. I cant tell you exactly what year it will occur, although I will expose the extent of my hubris by actually trying to narrow that range down in just a few paragraphs.

I can readily forecast within a 10-year window because economic trends rarely change overnight. The events that drive national and global economic cycles take time to unfold. Even if we completely ignore present circumstances, we know it would be unprecedented for the US economy to go 10 years without at least a mild recession.
Ill readily admit that some people are pretty good at forecasting short-term market movements. Most of them are professional traders. Theyre also the first to tell you that they dont bet the house on their forecasts. They know how easy it is to be wrong and how costly.

My own talents are at the other end of the scale. I can look out 510 years and tell you in broad terms what I think will happen, but the next year is a crapshoot. I make annual forecasts mainly because so many people want to know what I think. If thats you, please note that I reserve the right to change my mind tomorrow.

Another Muddle-Through Year

So with all that as prelude, lets get on with my 2016 forecast. I talked about it in a CNBC appearance last month. Click on the picture of the old guy for a quick summary; then Ill give you some additional detail.

http://ggc-mauldin-images.s3.amazona.../160110-07.jpg

I dont know exactly how this happened, but I have become widely known in financial circles as the Muddle-Through Guy. I began using the term in 2002, when I was forecasting that we would be lucky to do more than 2% for the entire decade. It turns out I was an optimist we did only 1.9%. Likewise, I think we will be lucky to average 2% in the US in 2016.

In general, recent data has been trending down (with the obvious exception of the employment numbers). I am concerned that the US will be much closer to 1% growth than 2% for 2016. I know plenty of folks who expect the US to go into recession this year. They may be right, but if so that downturn will be due to some kind of external shock. But at a 1% growth rate, which is close to economic stall speed, it wouldnt take much of an external shock. I can see three real possibilities that we will need to keep an eye on.

1. The first is Europe. Longtime readers know that my base forecast is that the euro survives, but only if the eurozone nations mutualize their national debts. The euro is not an economic currency; it is a political currency. And it will take the political solution of creating a fiscal union to maintain it. Given the level of debt of most of the major members of the eurozone, a fiscal union can occur only if every country read Germany agrees to mutualize debts,.

Up until recently I believed that you could get a majority of eurozone voters to go along with the pro-euro elite politicians extraordinary intentions to actually mutualize debts under the balance sheet of the European Central Bank (or another organization that would be created in the midst of crisis).

I now think that a political solution is at serious risk because of the immigration crisis. You can almost feel whatever sense of political unity existed in Europe disintegrating right in front of us. The recent tragic events in France and Germany are exacerbating the problem. I think getting a majority of voters to go along with the idea of giving up national sovereignty over their own budgets (which is what a fiscal union and the mutualization of debt would require) is becoming increasingly unlikely. As more and more people begin to demand that their countries control their own borders, the entire Schengen agreement is in jeopardy. And without that agreement, the next national debt crisis (beyond that of Greece Italy? France? Spain?) will call into question the unity of Europe.

As country after country in Europe begins to close its borders, the flow of refugees will not slow but will actually increase. If you are in a failed state in the Middle East or North Africa and you think the doors to Europe are closing, youre going to go now rather than wait. The refugees will find ways into Europe through those countries that dont have the resources to control their borders (think Greece). Europes ad hoc approach to border control simply wont work. It will only serve to demonstrate the true impotence and incompetence of Brussels and EU bureaucracy. And it will provide political fodder to nationalist groups that are beginning to hold sway in a number of major European countries.

No matter what you think of economic austerity in Europe, that concept is going to come increasingly under political fire and will be discarded. European borders are becoming less transparent, and Europe is increasingly economically vulnerable. A recession in Europe will cause a recession in a US economy stuck at stall speed.

1. I am flying over China (from Hong Kong) as I write this paragraph. I have just been a speaker at a conference sponsored by Bank of America Merrill Lynch, with some 60 major investment representatives sitting around a large table, for a very wide-open conversation. There were multiple hundreds of billions of dollars of funds represented around that table. Now perhaps it was influenced by two days of significant losses in the Chinese stock market, but the overall mood was decidedly bearish. Only a few people were actually talking hard landing, but the large majority of Chinese growth projections were decidedly lower than government forecasts.

Further, there seemed to be general agreement that the renminbi is headed down. I was particularly impressed by the Merrill Lynch Chinese analyst from Shanghai who pointed out that if the wealthiest 3% of Chinese moved just 7% of their money offshore, we would be talking close to $1.5 trillion. Money is literally flying out of China, in a variety of legal and questionable ways.

The Chinese government has been manipulating its currency higher for many years. That is now getting ready to change. Andy Xie, a well-regarded China analyst who sat next to me during my presentation, would not rule out a 3040% devaluation over time. Admittedly, his is one of the more bearish forecasts, but few in the room were arguing that the renminbi would get stronger. Andy in particular was bearish about China over the next two years, though he remains an undaunted China optimist over the longer term. He truly believes China will rule the world within a few decades. In what was a very multicultural room (as you would expect in Hong Kong trading and investment society), it was interesting to watch the crowds reaction to Andys sentiments.
Chinas slowing down more than forecasts anticipate or, God forbid, a hard landing would definitely deliver a shock to a still-weak US economy. We will have to pay close attention to China this year.

1. While everybody thinks of the Middle East in terms of geopolitics and military conflicts, the economic consequences of low oil prices will have far more problematic effects on the stock markets of the world. We are talking about sovereign wealth funds holding multiple trillions of dollars having to liquidate a portion of their assets in order to maintain their governments. These vehicles were created as the ultimate rainy day fund, and it is raining hard right now. My personal view is that we will see oil in the $20s before we see it back in the $50s. By a kind of perverse logic, the cure for low prices is low prices. It wont happen overnight, but oil will reverse. In the meantime, low oil prices mean that sovereign wealth funds have to liquidate.

But lets examine that concept for a moment. Many sovereign wealth funds are invested in very long-term and illiquid projects. Rightly so that is what you should be doing with that sort of money. But that means when you have to liquidate, you sell what you can, not what you want. And that means funds will be selling liquid stocks and bonds. By the hundreds of billions of dollars worth. That is a lot of selling pressure, much of it in dollars and much of it in the US.
Unfortunately, this will happen just as more people realize the US stock market is priced for a correction. The earnings expectations of many companies are far too optimistic, and they are running out of financial engineering tools to hide it. We have gone much too long without an extended correction. I believe we could see a 1520% downturn if key companies miss their forecasts.

While multiple crises blanketing the entire Eurasian continent suggest that dollars will be flowing into the United States, the sovereign wealth fund need for liquidation will require the reverse. I defy anyone relying on anything other than an educated guess to tell me which will be the greater force. (Do Japanese pension funds continue to liquidate JGBs and buy US and European stocks? In what size? Do they wait for the markets to settle out? Inquiring minds want to know.)

Here is the real question: Can the US have a recession without an inverted yield curve? This is an ongoing debate I am having with several prominent economists. I would say yes. Although we have not seen a recession without an inverted yield curve since World War II, I think we are now in different times, with different underlying conditions, as noted above. Zervos and Rosenberg would argue that the Fed will continue to raise rates until we get the potential for an inverted yield curve, albeit at a lower rate than we have ever seen. I am doubtful that the Fed will raise rates more than two or three times this year. We are going to enter the next recessionary period with interest rates the lowest they have ever been. I defy you to perform an historical analysis that sheds light on future conditions under those circumstances. Which is why Im concerned about the Fed giving us negative interest rates.

Im actually far more concerned about a real bear market in stocks creating the conditions for a recession. Any of the three potential shocks I listed above could create a bear market and a US recession. Attention must be paid.

Jim Grant, who spoke at the same private conference in Hong Kong that I did, said he was worried that the US is already slipping into recession. I am certainly not ready to agree with that analysis, but I am not confident enough to disagree with my friend Doug Kass, who expects that the US will enter recession before the end of the year. My base case at the moment is that we will not, but we will continually teeter on the brink. For all intents and purposes, the result may feel like a recession. Which suggests to me that the data the Fed looks at will keep them from raising rates the four times they currently predict. I still think we will once again see 0% interest rates before we see 2% rates or maybe even 1% rates depending (I say with a dollop of sarcasm) on the data.

Dangerous World
Looking beyond China and Europe, Latin America is a wild card. The strain of lower resource demand from China is beginning to show. Argentina has a new president, and Brazil may get rid of its current administration. I think we will see some dramatic swings in Latin American stock, bond, and currency valuations this year. Venezuela is on the edge of collapse.

Pulling all the evidence together into a strategy, my own plan is to avoid directional market exposure as much as possible. We should see plenty of volatility, and staying on the right side of it will be very difficult. I think certain targeted technologies will do well mainly those that enhance productivity. Human workers will keep losing ground to artificial intelligence algorithms a phenomenon that will continue to spread both vertically and horizontally in 2016.

I intend to direct more of my own assets into the private credit opportunities I mentioned two weeks ago. Thank you, by the way, to the many readers who wrote to me about the opportunities youve seen. A lot is happening below the radar, with very promising results so far. Ill share more with you as the year unfolds and legal restrictions permit.

Bottom line for 2016: Dont tie your fortune to a rising market and I mean any kind of market anywhere on the globe. This is a time to think strategically, stay hedged and diversified, and avoid big directional bets. I think active and hedged management will be the place to be in the coming period. To quote the motto of House Stark in Game of Thrones, winter is coming.

In summary, while I understand the argument that Zervos and Rosenberg make about our not entering a recession until there is an inverted yield curve, I do not believe it. In the past it is been easy to predict a recession because every recession since World War II was preceded by an inverted yield curve. With short-term rates artificially low, we no longer have that indicator. The US economy is close to stall speed, and a negative nudge could push us into recession, inverted yield curve or not.
The average stock market retreat in a recession is around 40%. If the Fed takes us back to zero rates and, gods forbid, possibly even negative rates, I think we will see the long bond at 2% and the 10-year below 1%. Think Japan. Its counterintuitive in the extreme, but the world is going to be turned upside down. You are going to get a shot at the lowest mortgage rates of your life. This year? Next year? If such intricate timing makes a difference to you, you need to rethink your portfolio balance.

Seriously.

Next week I will look at the forecasts that others have made and comment on them.

Back from Hong Kong

I normally put a personal note here, but the letter is already overly long, and I need to hit the send button to get this to my intrepid editors, who will be working on Sunday.

I want to thank my hosts at Bank of America Merrill Lynch in Hong Kong for being most gracious. I believe I learned a great deal more at their conference than whatever small morsels of knowledge I dished out. The dinner conversations were sparkling. Im looking forward to some biotech startup finding a fix for jet lag, because I do enjoy getting outside the confines of my home and absorbing the knowledge and wisdom of those from other backgrounds.

Even with what is a rather sober forecast issue, I remain an unrepentant optimist about the future. You have a great week and even better new year! I look forward to exploring Economicus Terra Incognita together with you. It will be an adventure!

Your fellow explorer analyst,


John Mauldin

Welcome To 2016 Are You Ready?


The New Year is here. Are you ready? My posse is as some of my views from as far back as last summer are finally coming to fruition. Some of you know I spend a lot of time on Twitter and have made some very interesting connections including some influential members of the media. Of course, these individuals who cover politics don't know much about the stock market. I remember one person who is a regular on one major cable network who will remain nameless challenged me at the August turn when I told him it wasn't the bottom. I had this same discussion with a writer from the Washington Post. Now we are not at the low overall although many stocks have dropped 20%+ and now the Transports are safely below the August bottom.

You don't think the entire market is headed down there? I do. For the year the SPX was down a few points but it wasn't supposed to be. Why not? It was a year ending in the number 5. The vast majority of the time years ending in 5 turn out to be significant rally years. This one wasn't. Last year at this time I told you 2015 was going to be a very rough year and I didn't think it would resemble the typical 5 year. You can go over your notes. How many people were actually that close on 2015? But many were talking about 5 years last week. For that matter how many were close on 2014 as we were looking to that year for several years as a geopolitical turning point? That was the year we learned of ISIS. We started talking about 2014 geopolitically as early as 2012.


No, this is not a celebration. This is a reminder the methodologies we use really work and work really well. They are the stars. The more time you invest with us, time has proven you will be on the right side and be on the cutting edge to anticipate things coming down the pike. So I hope you will be in gear with us this year.

That being said, in December I warned people the setup to the Santa rally was one of the crummiest I'd ever seen. Markets were dropping in December already, weren't they? But I told people not to get overly bearish because there had to be a Santa rally and there was. But I said my major concern was what happened on the other side of the New Year. So I'll show you exactly how we got here and it played into my methodologies perfectly. Adjust your browser if you can't see the charts.

http://staticapp.icpsc.com/icp/loadi...1a32/image/png


This is the SPX from the last week of the year.

"But the cash market is also 617-18 hours off that bottom at this turn. It secretly hit yesterday and turned right on schedule and gave us follow through today. Still none of it is confirmed but I find it very interesting to get this kind of window right here at the end of the year. This is the kind of thing if we get any follow through on it come next week you’ll know why and should press it as you’ll have a good calculation creating wind at your back."

http://www.lucaswaveinternational.com/shortTerm.php

This is what I said in the December 30 Short Term Update. Why did we get the top? It was 617-18 trading hours from the August low. Its that simple. We teach people how to do this and if they don't have the time or will to keep track of it, I do it for you in the updates. Want to talk about the psychology? Haven't I also been warning eventually China would get hit again? This goes against conventional wisdom as well because many thought the bottom was in. If China wasn't propping up their market and making it illegal to hit the sell button they would be a lot lower. Its amazing they were able to pull it off since August. But I am eventually looking for a 1930-32 style sell-off for China. As you know that wasn't a crash but a relentless water torture that seemingly had no end to it.

It doesn't bode well for us either. I am on record as saying oil can get all the way down to $10. Why? The golden spirals on the long term chart have that level as a 261 extension target. What would it take to get there? Who knows? But overall you know I was one of the early bulls after the 2009 bottom when I had those calculations. Now I have great calculations for the top and have shared them with you months ago. Nothing has happened to change it. Certainly when you look at the geopolitical situation there is nothing bullish about it. Now consider the domestic situation in the US and there isn't anything bullish there either. I think we could be looking at 1939 in terms of geopolitics but 1968 in terms of domestic issues. You remember 1968, that was the year of the Chicago riots at the Democratic National Convention. You look up those charts, each were bears.

Do you realize where the GOP convention will be held? Its going to be in Cleveland. The recent scene of the latest racial upset with the death of Tamir Rice, the unfortunate case of the child who was messing around with the toy gun. Last week a grand jury refused to indict. That was Cleveland. You have to be kidding me. This could be 1968 on steroids. It is my contention traders and the public are getting worn out by the relentless 24/7 news cycle and see all that is going on around the globe. People don't buy when they get weary, dreary and depressed. But it doesn't mean you have to be. In fact some of the best opportunities materialize when everyone is miserable. But you have to keep your head up, be tough and believe.

As you see I don't mess around with political correctness. I can't afford it, I have traders all over the world to look after. This is what I see coming, don't blame the messenger. We also have a situation in the NASDAQ where today's bar violated the first or A wave high back on September 17. Those of you who follow Elliott know that is a clear violation of the 4th wave overlap rule and increases the odds exponentially the move up from August is over. This isn't a little graze of the line. Its a clear violation.

Now that we have the big picture, here's a sample of how you can take advantage of it. Right now we are in a teaching of traps and trap lines as well as our traditional timing work.

http://staticapp.icpsc.com/icp/loadi...ae95/image/png

This move was further along from the 617-18 hour high on the intraday NQ. It was Wednesday I believe where we had this consolidation and it rolled over at 159-60 bars off the prior low which led to the big move.

http://staticapp.icpsc.com/icp/loadi...4e2e/image/png

In this example look at the green bar near the high. This drop commenced at a key time calculation at 375dg (Fibonacci 377) but just as important the drop hit right at the bottom of that big green bar. Why did that happen? Well, the people who buy near the high are either buying what they think is a breakout or the end of a dip. Once they get below the line they are underwater and all they want to do is breakeven so that's where they get out. Smart bears push the situation and in a downtrend add to positions and create new selling pressure.

http://staticapp.icpsc.com/icp/loadi...3a11/image/png

This was a chart that was in the Saturday tutorial where I told readers it looked like another trap was setting up. Many times the retest will come right back to that exact point of the bottom of the green bar near the high. This is zero sum trading at its best because you have the edge over people who bought the top. It has obviously extended this week.

http://staticapp.icpsc.com/icp/loadi...4950/image/png

Conditions don't always go perfectly but in this example you see the perfect trap of the people who bought the top but this one drifts lower. Do you know why? Because of the great support below where bulls were really strong. So when you see the trap not only do you have to look at what happens above you have to consider the vulnerabilities of what comes below.

That's what we teach in our updates, that's what we teach in our training programs. It certainly helps us to see what is coming. Its my contention this chart of BIDU would already be at support below at the line if it wasn't for the strong green bars on the way up.

So its another New Year, we are once again opening the training program to new students until next Tuesday night. Its a good time to get started and as you can see we have excellent methodologies and you will learn enough to understand just about anything the market can throw at you. I have to be frank about this, 9 out of 10 people have no idea how to figure out this market. They don't understand this market is similar to the 1937-42 market. Invariably if you don't understand it how can you ever hope to be on the right side of it unless you are guessing and hoping?

You will learn how to crack the timing codes of all the major markets which you can see enabled us to get out front of this drop. You will learn how to manage big wide range power bars, something that intimidates many traders into submission. You also learn all about traps and trap doors which lead to some of the biggest moves. If you get nothing else out of today's update here I hope you realize what I've shown you leads to some of the best moves. This is important to those of you who are winning a few, losing a few never getting that far ahead. Its not about picking tops and bottoms because those are only A or 1st waves which get retraced. If you are right about picking tops or bottoms and you are right 60% of the time you'll be wrong 4 out of 10 which means you are marginally better. But then consider these are not the big moves. If you are going to ahead for good, you must be able to identify the biggest moves in financial markets.

You have to let a winner run to cover your smaller losses.

By Jeff Greenblatt

END

From my perspective
by Gregory Alexandr

"Letting a winner run"

Easier said then done, emotional elements control many traders when confronted with a Bottom or Top. (When, Where, and How?)

Critical Facts:


1. Our physical environment and normal circumstance which most fall under (ie. PMTs, regardless of what it is), the tendency is to react and reason the way out of the trade for smaller gains assuring their percentage or paycheck.

2. How does one overcome the need to provide for themselves or their independents?

3. Instead of one or two longer trades, the tendency is to take your gain(S), wait, assess and enter if circumstances allow, the odds are against logic, many reason their way out of practical entries/exits.

4. Bottom or Top confirmation....How do I analyze the longer term trend?

5. KNOW THYSELF.


Time and wisdom answers all, but we must confirm ourselves here and now to determine whether trading is an endeavor one is able to perform adequately PART TIME.

I traded part time for a little more then a decade while always assessing my skills (not with or against others) but to determine what went right or wrong and how to minimize repeating those actions when confronted with similar conditions. I had a lot of bad habits, which COST ME A LOT and TAUGHT ME VERY EXPENSIVE LESSONS.

If you choose to TRADE, do so by understanding the logistics of trading first; exchange, location, co-locations, service desks, servers, APIs, telecom private lines, fiber, platforms, I know its backwards but this will benefit your understanding from the end to the beginning and who NOT TO TRADE WITH is extremely important to your wallet.

Any broker will take your money! Write a list of five brokers who refuses your business or determines by their own checklist you are not qualified to trade?

Ok, they are out their but the greater point is YOUR MONEY, do not give it away, give yourself a greater chance to survive this WAR and the many BATTLES upon this field.


What has history suggested to you about retail trading?


It is your responsibility to understand this world, tread lightly and educate yourself.

Silly Season

Its getting weird out there.

Ive been doing this long enough to see things get silly a couple of times.

1. Tech stocks
2. Housing
3. Now commodities

Both on the way up and the way down.

The markets always give you opportunities at the extremes. Problem is, nobody has either the liquidity or the uh, cojones?... to take advantage of them.

Lets explore this in further detail.

Buffett

I am a big detractor of Warren Buffett, but not old Warren Buffettnew Warren Buffett.

The old Warren Buffett did some pretty cool stuff. Several times throughout his career, he has been the buyer of last resort. Most recently when he got those bank preferreds at ridiculous yields.

Guess what: You cant be the buyer of last resort unless you have drum roll

Cash!

To all readers of The 10th Man: Who here has cash? When I say cash, I mean cash as a significant percentage of your portfolio. 20 to 30% at least.
Having cash is so important.

Now, when tech stocks crashed, I had the cash, but I didnt have the cojones.


When housing crashed, I did not have the cash.

Finally, in the middle of the commodity crash, I have cash. And I am deploying it in regular intervals (find out how in my monthly newsletter, Street Freak).
I see no point in ever being fully invested. It severely limits your options.

In the old days, mutual fund managers had the flexibility to raise cash in downturns. Now they really dont. There is a lot of pressure for them to remain fully invested.

But you have the ability to carry around cash. That means you may under perform in a bull market, but it also means you will be able to take advantage of opportunities in a bear market.

Problem is, if you find yourself short on cash at this moment, its probably too late to raise it.

Time Takes Time

Here is the thing nearly everybody forgets about markets:

Trends take a lot longer to play out than you think.

For example, people started saying that tech stocks were overvalued as early as 1996.

They went up for four more years. That was the ultimate pain trade.

The way down was even worse. The Nasdaq 100 Index (NDX) was down 50% in a year. But the bear market still had two more years to go.
When I talk to people about this commodity crash, I tell them that the closest parallel is actually July 2002. Tech stocks went down day after day after day and got to absurd levels. Go back and see where you could have bought AMZN, or MSFT, or EBAY.

If you had the cash.

People started shorting banks and homebuilders as early as 2005. Most of the people I was running around with back then knew there was a bubble.

The top was two years later. Two years of pain.

The bottom was two years after that.

Commodities have been going down for five years now. Long enough?

If you find yourself on the wrong side of the trade, cut your lossesit could have years to run.

If yourself on the right side of the trade it could have years to run.

The Bearish Argument

This is actually a Jared Dillian quote; I did not steal this from anybody:

The bearish argument is always most compelling on the lows.

Stated another way, the bearish argument sounds the smartest.

The commodity bears sound pretty smart. They are right! Great.

When the turn happens, they will be wrong.

In other words, there is zero probability they will suddenly just have a change of heart and get bullish on commodities right on the lows.

So it is hard to use these folks as a coincident indicator. But when the volume of these arguments picks up, its time to pay attention.

I could find half a dozen people to argue with me why commodities should be even lower. Or zero, or negative. It would be a compelling argument. Because the bearish argument is most compelling at the lows.

At the lows, the bullish argument is totally nonsensical. But often right.

This is a Market Wizards sort of discussion. What makes a great investor?

One more Jared Dillian quote:

You have to be willing to be wrong and alone.

Jared Dillian
Editor, The 10th Man

Mexico as a Major Power

BY GEORGE FRIEDMAN MARCH 14, 2016

Mexico has the 11th-highest GDP in the world based on purchasing power parity, according to the International Monetary Fund. As Europe weakens, it will be in the top 10 in the not-too-distant future. Yet, this country is regarded by many Americans as a Third World nation, dominated by drug cartels and impoverished people desperate to get into the United States.

While it is true that organized crime exists in Mexico and that many Mexicans want to immigrate to the US, a roughly equal number are leaving the US and returning to Mexico drawn by economic opportunities in their home country. The largest auto plant in the Western Hemisphere is in Mexico, and Bombardier builds major components for aircraft there. Mexico has many problems, of course, but so does the U.K. (the 10th-largest economy) and Italy (12th).

No one would be surprised by the U.K. or Italy rankings, but many people would be stunned to find that Mexico is ranked right up with them. Obviously, Mexico is not as developed as Britain is. Like most nations transitioning from underdevelopment to greater development, Mexico suffers from substantial class and regional inequality, and the emergence of a dominant middle class is still unfolding.

At the same time, Italy also has substantial regional inequality. Mexico can't aspire to British standards, but Italy is a reasonable model. Inequality diminishes the significance of being 11th in some ways, but it doesn't change the basic reality of Mexicos relative strength.

Mexico is commonly perceived, far too simplistically, as a Third World country with a general breakdown of law and a population seeking to flee north. That perception is also common among many Mexicans, who seem to have internalized the contempt in which they are held.

Mexicans know that their countrys economy grew 2.5 percent last year and is forecast to grow between 2 percent and 3 percent in 2016roughly equal to the growth projection for the US economy. But, oddly, they tend to discount the significance of Mexicos competitive growth numbers in a sluggish global economy.
Here, therefore, we have an interesting phenomenon. Mexico is, in fact, one of the leading economies of the world, yet most people dont recognize it as such and tend to dismiss its importance.

This week, I spoke at the annual meeting of the Mexican Association of Banks in Acapulco. It was a major event, with the Mexican president and the head of the central Bank speaking, along with Americans such as Larry Fink, chairman of BlackRock. The contrast between what Fink and I had to say about Mexico, and what the Mexicans had to say, is interesting. The Mexicans were cautious, frequently dwelling on the challenges facing Mexico and not focusing very much on the countrys achievements.
Fink and I were effusive about Mexico. Given the condition of the rest of the world, we argued, North America is an island of tranquility and opportunitywith Mexico as the most promising region economically. The contrast between our views, the views of many Mexicans, and the views of most Americans is so vast that it feels as if we dwell on different planets. I know of few places on earth that are viewed so differently by different observers.

Let me summarize the argument I made. First, the Eastern Hemisphere (Eurasia in particular) is moving toward systemic failure. The EU is struggling to manage a host of problems. Russia is contending with strategic and economic challenges, particularly the collapse in oil prices. China is trying to find a stable new normal and maintain social stability. As for the Middle East, no summary will suffice. The rest of the Eastern Hemisphere is experiencing what I might call normal instability.

Compared to other parts of the world, North America is not only remarkably stable but is also doing well economically. One of the main views of the Geopolitical Futures model is that, following the collapse of the Soviet Union, there was no longer any European global power. The center of gravity of the international system had shifted away from Europe, to North America. This argument rests heavily on the inherent military and economic power of the United States. The US Navy controls the oceans, and the United States produces 22% of the worlds GDP. Just as important, the United States is an inefficient exporter, a factor that cushions the US from the Eastern Hemispheres crisis.

While roughly 30% of GDP comes from exports in Russia, 46% in Germany, and 23% in China, US exports account for only 13% of GDP with over a third of that total sold to Canada and Mexico. Thus, while Eastern Hemisphere powers teeter on the edge of an economic volcano or tumble in, the United States finds itself relatively insulated from declines in global import demand, and the US insulates the countries on its northern and southern borders to a great extent.

The contrast between the European Union and NAFTA is critical. There are institutional differences between the attempt by the EU to integrate heterogeneous countries and NAFTAs limits on integration. But the most important difference is that Germany, the foundation of the European system, is a massive exporter, while the United States is a net importer. Given the vastness of the US economic base, the net negative flow has little impact. However, it has an important twist in terms of Mexico. Exports, more than 80% of which go to the United States, constitute 32% of Mexicos GDP. Thus Mexican exports to the United States amount to about a quarter of Mexicos economy.

US GDP is about $17 trillion, and imports from Mexicos are about 0.2 percent of the US economy, so they have very limited impact. But their impact is further mitigated because Mexican-manufactured exports contain a substantial quantity of components made in the United States. For example, Mexico is one of the top exporters of automobiles to the United States. These cars are not sold under a Mexican label, since Mexico manufactures them for foreign companies. But unlike Japanese or Chinese exports to the United States, cars manufactured in Mexico contain about 40% of their parts purchased from the United States. This means that US manufacturers contribute to the total value of Mexican exports.

Synergies have driven Mexico into dependence on the United States. The US has had the option of shifting its imports away from China and sourcing from Mexico instead. This shift has had a huge impact on Mexicos growth. It is also one of the reasons why the Mexicans are less than positive about their economic position.
There is much history between Mexico and the United States, with the pivotal event being the American conquest of northern Mexicofrom present-day California to Texasin the 1830s and 1840s. This conquest created a complex view of the United States, informed by both anger and envy. The tragedy of Mexico, from its point of view, is that it is still so tied to the United States.

NAFTA, much debated in the US, had an even greater effect on Mexico. Access to the American market reshaped the Mexican economy, strengthening it immeasurably. It also created an enormous imbalanceeconomically in Mexicos favor, politically in the United States favor. When you send 80% of your exports to one country, that country has tremendous power over you. This is not only a political fact, in the sense that some politician could try to shut down trade, it is also distinctly
macroeconomic: If the American economy catches a cold, Mexico catches pneumonia. As other exporting countries have discovered, their well-being is in the hands of their customers. So long as the USMexico imbalance is there, the Mexicans will and ought to feel uneasy.

The American conquest of Northern Mexico implanted an image in American minds. The Mexicans ought to have defeated the Texans. The Mexicans had the larger army, better equipment, and, in many ways, better commanders. But the Mexicans also had the defect of a class-ridden society. The army General Santa Anna brought north into Texas had well-trained French generals and good artillery, but it was an army drawn from Chiapas, composed of indigenous people without shoes or training. It was a Napoleonic army of the impoverished led by the nobility, fighting as a mass rather than with individual skill.

When Santa Anna crossed the northern deserts, his army found itself facing the coldest winter in years, with ice and even snow. The soldiers suffered terribly, and by the time they reached the Alamo, they were exhausted. Their commanders didnt care about the troops and made their way east to San Jacinto where the Texans defeated them.

It is important to understand the vast chasm that existed between the officers and soldiers in Mexico's army. There are always such differences, and they sometimes run very deep. But the chasm in the Mexican army resembled the divide in the British army so apparent at Waterloo, when the commander, Wellington, called his men scum. The Mexicans adopted the European model, in which the soldiers were induced by money or simply pressed into service. This was the lot of Mexican soldiers; it was their lives. But when they confronted the Americans, where the gap between enlisted men and officers was substantially smaller, an army that was inert (unless pressed) confronted an army that encouraged initiative at all levels. The latter army won.

The model of European colonialism defined the Mexican forces but not the Americans. And for the next century and a half, the Mexican legacy of colonialism continued to define the difference between the two countries armies.

The experience of the Mexican-American War also defined American perceptions, and perceptions turn into habits, and habits become truths. The Mexican soldiers were seen as typical Mexicans and held in contempt, while the generals were seen as fools.

Further, the border that was created shielded Americans from a real understanding of Mexico. The border was arid and mountainoushard to penetrate. As in many borderlands, it was a brutal place of criminals and desperate men. Certain commodities are always worth more on one side of the border than on the other. Sometimes it is cattle; sometimes it is drugs. Sometimes the goods are rightfully owned, and sometimes they are stolen.

The area north of the USMexico border is not like the rest of the United States, and the area south of the border is not like the rest of Mexico. But the borderland is a shield, and the shield is all that most people on either side tend to see.

The American view of Mexico was formed at San Jacinto and confirmed by endless images of Mexican revolutionary Pancho Villa raiding US border towns. He was depicted as ignorant, brutal, and dangerous. Today, Mexico is seen as a land of drug dealers, the descendants of Villa, far more dangerous than he was to American security. This perception is like viewing the United States today as if it were Chicago in the 1920s and 1930s and as if Al Capone were the typical American.

The Mexican fear of the United States is not unreasonable. Nor is the American fear of Mexico. It is easy to construct a tale of Mexico that is heavy on cartels and illegal aliens seeking to plunder and terrify the country. There is a deep history between our nations, a history that regenerates in different ways at different times.

The bankers I met at the conference in Mexico were cautious. They have been disappointed many times before by their own country. The Americans were enthusiastic. Americans tend to forego history in favor of the future especially where money is concerned. But everyone there knew what Donald Trump has been saying during his campaign and resented the way he preys on American fears. There is no denying these fears, and there is no denying that Trump understands them. There is also no denying that, like most fears, there is some truth to them. There are cartels, and there are illegal immigrants, if fewer than before. But it is the distance between the Mexico that these fears conjure and the reality of what Mexico has become that is startling. The Mexicans themselves dont trust the transformation of their country that has happened. They expect success to be snatched from themprobably by the United States.

But the fact is that Mexico is the 11th-largest economy in the world, with free access to the largest economy in the world and vast amounts of American investment pouring in. It may still have to contend with the challenges of sharing a border with Central America, but with China in decline, even the poor of the south might be mobilized by the low-level industries that made China successful and that now seek a new home.

The borderland and the smugglers who live there do not represent Mexico. Mexico will be one of the top 10 economies in the world shortly, and since North America is now what Europe once was, the prospect of two great powers on one continent is worrisome.

Of course, most of us cannot imagine Mexico as a great power. Nor could most people have foreseen the emergence of China or the resurrection of Japanor even the United States itselfas a great power. This is a failure of imagination masquerading as common sense. I always doubt the ability of humanity to manage its future. The inevitable rolls over us. But here is a moment when an understanding of what Mexico has become might just have some real value, if only for our grandchildren.

There is an old Mexican saying: Poor Mexico. So far from God, so close to the United States. I dont know about Mexicos proximity to God, but it is clear to me that Mexico is no longer paying a price for its closeness to the United States, and neither is the United States. But now Mexico, as the junior partner, must manage this relationship.


George Friedman