The reality is that as an oversold asset gets sold to lower prices, there remain fewer and fewer sellers that can keep the entire area down forever. On a shorter term oversold such as a weekly or daily oversold, you do not want to hold for much longer if the longer term downtrend breaks and you may wish to drastically reduce your position either immediately or on the next bounce. On a longer term oversold signal such as a monthly chart being oversold and the RSI being oversold, you will rebalance your position and increase it over time as stocks go lower. Your general rule of thumb is to aim to add only half your position as the asset declines, and add the other half on the way up to where you started, but the half may not be added in even increments. However, you should really aim at a position size you can deal with. If your normal position sizes of entire assets are 10-20% you would instead aim for maybe a 5-10%
I considered accumulating a position in natural gas around $4, but now it’s at $2.5. I normally don’t consider buying a “contrarian” purchase until an asset is down 75% from it’s highs altthough it appears on my radar when stocks are down 50% from their highs. Well Nat gas I am now buying in my personal account an initial purchase. on paper I started a bit ago. However, depending on which peak you use, natural gas has declined significantly from the peak, more so than usual.
This is an older chart, but it shows that such drastic declines are not uncommon and can be followed by a drastic increase in price over the next few years. That doesn’t mean it’s inevitable, but possiblle. Either way, the value is presenting itself here. If you want to accumulate say a position of 5-10%, you want 2.5 to 5% to be accumulated on the way down. Well the max you expect it to decline is 90% from the peak, that is just more than your normal post bubble decline and it is very rare to see a 90% decline. So you might aim to acquire half of your position or 5% by that point. How gradual or how aggressive depends on how prudent you are. If you are willing to potentially miss out, you may do a very small position now, and put in a much more aggressive one if it drops.

 

That’s not to say that the supply can’t increase dramatically and it may not take awhile before the demand consumes the supply, or that an area may not lose interest, but the opposite can happen as well. By holding multiple positions on different time frames both representing risk and risk aversion, you should be able.

90% from the peak, we will put the peak around 14 even though in it was higher in 2005-2006, it failed to make a higher high and hit near 14 in 2008.

There are generally people that call the bottom a bit too early, and you have to recognize you probably won’t get the actual bottom. However getting stocks below there prior longer term trend line and around the last bottom after a 50-90% decline is usually going to be in the general range of “low prices”. You will someday look back on this and say “even if I had bought well before the bottom, it would have been a good idea.” That is… if you have the ability to withstand the decline and hold on on the next increase and wait long enough.
Well a 90% decline from 14 puts you at 1.4. Prices are currently below 2.5. So you have from 2.5 to 1.4 to accumulate a position that makes up around 5% of your portfolio. a decline from 2.5 to 1.4 would be a 56% decline from current prices. Doubtful, but still within the realms of the low end of the range in what could be expected from peak to trough.So a contrarian investor may have to absorb an incredible amount of pain. This is why you see Buffett holding tight to his BAC position. He was prepared to endure that kind of pain. This is why I do not use a very big amount of my portfolio in such bets, and have assets in risk off and risk on and “neutral” that can provide me with more stability and gains to compensate so I am not to worried about a single position having such a large decline.

You can break it up into a handful of purchases that use a fixed dollar amount until you make your adjustments
price – total position size as a percentage
2.5 2%
2 3%
1.4 5%
———–
1.5 6%
1.5 8%
2.5 10%
———–
Or instead, you might use a percentage increment such as roughly every 16% you increase your position size by a percentage point
2.5 2
2.1 3
1.764 4
1.481 5

Either way if it hits bottom early, you just deal with having a smaller position size
On the way up beyond your 10% aim, you might maintain your 10% position and only reduce after the trend has played itself out.

Contrarian purchases basically have no stops and rely on the already large sell off and tremendous upside over a long period of time to put the amount you gain when you produce a “win” drastically higher such as 4 or 5 times higher than the theoretical 100% loss. The greater issue is time and how it does relative to other investments in terms of overall gain per year. It might take a considerably longer period of time. However, this is just one of your many tools in a portfolio.

I gotta say, I’m not a huge fan of contrarian plays. They aren’t exciting, and they require a pretty good tolerance, but I think they are good and healthy to have. It hel you keep your other loses in perspective and also gives you a drastically different investment which should have very little correlation with anything else. You will be in and out of quite a handful of trades and shift allocation in and out of risk dozens of times by the time you are done with your contrarian play

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Although the market has been overbought on a weekly basis for awhile now, we are showing some early signs of perhaps a mild correction here.

The daily chart shows a mild bearish divergence with stocks making higher highs and higher lows as the RSI and slow stoch made lower lows and lower highs. It also is trending down from overbought conditions.

The weekly shows a bearish crossover of the slow stochastic from overbought conditions and we potentially could be breaking down from a rising wedge pattern and trendline break.

The monthly is a bit overbought, but only a bit and has yet to make the bearish cross over

July 2011 3.3% cash
August 2011: 3.4% cash
Sept 2011 3.8%R
Oct 2011 3.5%
Nov 2011 3.5%
December 2011 3.5%
January 2012 3.6%
Feb 2012 3.6

Still low cash levels in mutual funds, although corporate cash levels remain high as well.

Well this either is an excellent time to buy the dip or we are ready to break down through the longer term rising channel. Short term we have just barely broke the rising wedge to the downside, suggesting lower prices. Longer term we still are near support of a rising uptrend, suggesting higher prices. One of them have to give. I predict Bulls successfully defend here, but bears pierce an early warning sign of a correction, with a fall back to support somewhere above 1300 with secondary support around 1200-1250.
here is dow/nasdaq. It has been very rare for Dow to be undervalued enough relative to nasdaq (or nasdaq overvalued enough relative to dow) for dow/nasdaq ratio to get below 4.5

Perhaps growth can continue on for a long time. Perhaps nasdaq will one day be more valuable than the dow like they were saying in the 90s. Growth stocks are certainly not neglected right now though. Another way to look at it is relative PEs. I will have to do more work on this. Right now Nasdaq 100 has PE around 27. There are two ways the nasdaq can be overvalued. One can be through justified price appreciation that while justified by it’s previous earnings growth may not continue in the future. If either slower expectations or slower actual growth results in the future, even though the PE may be reasonable, the nasdaq still may be overvalued relative to the dow. If earnings expectations grow causing price to grow while the PE gets higher rather than staying the same, this is a sign of over enthusiastic market. It may be helpful to look at the dow PE divided by the nasdaq PE over a long period of time to see where we are at in comparison , but that can be done at a later time.
I believe that when the nasdaq is priced high, it generally is either a sign of over enthusiasm about the future (betting on future growth that won’t be there), or over enthusiasm in price caused by short sightedness with regard to current multiples vs the forward PE. (betting on the present without taking into account the inability for the company to maintain high rates of tgrowth in the future). But there are too sides to the coin, and that means that it could be a function of the dow being cheap either due to future growth that isn’t priced in, or low PEs because value stocks are being ignored.

Dow is really undervalued here, I think, more so than nasdaq being overvalued. But that is only due to all the cash tied up in bonds that is coming out and all the cash around the world that is migrating into the US due to the weakness in Europe and Japan.

You have to realize, although a weakening dollar may mean increasing asset prices relative to dollars, what does it mean for the price of those commodities priced in another currency? Probably it will stay the same (or go down even). If the dollar is weakening against their currency and they hold the assets measured in say Yen, then that means the yen is strengthening relative to the dollar. A stronger yen means it can buy more than it could of a particular asset as it strengthens, so if that asset is gold, that means that gold is cheaper in yen, or the price is going down. So a weaker dollar actually is bearish but everything trades on a relative basis so that is very masked by the fact that everyone else will follow the us and weaken their currency. If they didn’t, they risk a speculative surge which can prop things up very high and result in excess speculation and leverage and ultimately eventually take them lower as a country, and have capital eventually migrate away from them more than they can handle which could cause a collapse.
Well, I don’t know if the economists really “get it” for the most part, because they are looking at things from the perspective of an “island”economy. They miss the part in history books of the great depression where rates skyrocketing around the world and nations around the world defaulting starting with Austria resulted in skyrocketing rates and capital drew itself away from the US to other strong currencies and assets, globally.
October 1929 was when the Bank Austria (central bank) cut off discount window financing to the BodenKreditAnstalt and forced it to merge with Credit-Anstalt. In other words, Austria cut off cheap money in another part of the world. It was the failure of the new entity that was to kick off the acute phase of the crisis in 1931. So there is a direct continuity between the events of 1931 and those of late 1929.
So one should also consider the international aspect, since Europe was in many ways the epicentre of the crisis. The BodenKreditAnstalt had trouble financing itself as early as October 1929 when the Bank Austria (central bank) closed the discount window. The forced merger with Credit-Anstalt created the new entity that was to kick off the acute phase of the crisis in 1931. The bond market, much larger than the stock markets around the world began defaulting. Well cash was scarce internationally and so capital was drawn from anywhere possible. My understanding from what Martin Armstrong suggests is that the crash of 1987 was due to the G5 (now G20) announcement that they wanted to take the price of the dollar 40% lower. Much money was drawn out of the stock market from foreign investors, as they would rather hold cash in their currency that would get stronger against the dollar, and then they would be able to buy dollar priced assets cheaper.

If you held a bunch of real estate in Japan and you knew suddenly they were going to weaken the yen, this would be bullish only for Japanese real estate investors who choose to hold real estate rather than yen. For you, it is better to move to Dollars and the dollar will get stronger against the yen while the yen gets weaker. The improvement of real estate prices or whatever priced in YEN is not due to say rising wages, but instead increasing credit, then the fundamentals actually get weaker just as we saw with the subprime market getting pumped up in 2000 and then crashing later on, even though the price got higher priced in dollars initially, it perhaps didn’t priced in another currency, so the appreciation would not have been experienced relative to an external currency, but the crash may have. So for this reason, weakening the dollar internationally may actually have the opposite as intended consequence.

If the US suddenly wishes to devalue the dollar by 40%, the Japanese investors would move out of US stocks and assets.
A weaker dollar is not all that great, really. However, what is good for assets is if there is inflation in the dollar while globally there is inflation as well. This is what is happening, so stocks are SUPPOSED to be higher.
If China would start increasing rates and Europe would start strict austerity measures to strengthen the euro rather than inflate it, and the Yen got strong as Japan strengthened rates as well, the dollar would be the odd man out, and capital would migrate from stocks and US bonds out to other countries and foreign bonds and foreign assets… The attempt to weaken the dollar by say, lowering rates would just make US bonds less attractive to invest in, and also those holding US assets priced in a different currency than Dollars… Foretunately for us, every single commodity IS priced in dollars, even though there are some attempts to make sure that doesn’t happen.

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One of the draw backs of most technical analysis is that it is difficult to be objective. There have been various methods that people have come up with to try to eliminate any bias

1)Sharp rules of entry and exit regardless of the pattern.

2)using moving averages golden cross and death cross as two signals without having a price target

3)A measurement rule on the patterns. The pattern high minus the pattern low added on to the breakout point gives you price target. Stoploss should be 1/3rd of the target.

4)Point and Figure Charting (tic tac toe stuff)

Obviously by the title we will be looking at some tic tac toe.

I’m not going to reinvent the wheel and try to explain it all, stockcharts does a great job answering, “what is point and figure“?

The main drawback to point and figure is that it doesn’t give us a time frame, but it can give us a direction and price target and always give us an answer “is this stock going higher or lower?” and “how much higher/lower?” I did not say that it will always be right, or that it won’t suddenly give a reversal sign or breakdown and be bearish when it was bullish the day before, but it does do a good job of filtering out noise by only counting the given interval which usually is a whole dollar amount. (A break above $41 is not significant unless it crosses to $42).

P&F is useful for quickly and objectively identifying price target and calculating which areas have more upside.

I decided to put in some work in generating price quotes, running wikiwealth’s value analysis to generate price target and running P&F targets. So far I have just done those included in “regional ETFs”

I wanted to put more weight into the fundamental values first. I went with a 68% weighting into the value analysis and 32% into the P&F targets (daily chart).

Unfortunately there are some that had no P&F target at the moment, for these I had to just go with the value weighting. Additionally the “fair value” price was determined a few months ago, so it’s possible the fund has changed it’s weightings drastically since then or that the earnings or individual stocks in those ETFs have changed in value for one reason or another.  So you may want to recheck the value of the ETFs.

With that being said, the result is the following 12 names with 50% or more “potential gain” as determined by this weighting.

UMX,INDL,IXP,BBH,KWT,JXI,MNA,IRY,LBJ,DZK,UBR,FGD

MNA had no P&F target

Ultra MSCI Mexico Investable Market (UMX)
Daily India Bull 2x Shares (INDL)
iShares S&P Global Telecom (IXP)
HOLDRS Biotech (BBH)
Market Vectors Solar Energy ETF (KWT)
iShares S&P Global Utilities Sector (JXI)
IQ ARB Merger Arbitrage ETF (MNA)
SPDR S&P Intl Health Care Sector ETF (IRY)
Direxion Daily Latin America 3x Bull Shares (LBJ)
Direxion Developed Mrkts Bull 3x Shares (DZK)
Ultra Brazil (UBR)
First Trust DJ Global Select Dividend (FGD)

A very diversified group. Not just diversified among sectors but countries and type to a limited extent (dividend, merger arbitrage ETF). The great thing about this is many of them add very unique things tot t he portfolio and are not heavily correlated with the markets. As such,You can get a bit more aggressive and boost your return without sacrificing risk; assuming these correlations hold and/or that this value analysis and technical analysis can offer increased returns at lower risk, which I personally believe both to be true to at least some extent.

If you are not looking for a long term play, you can monitor chart patterns or candlestick patterns instead, and try to time these. This way you are trying to time vehicles that should go upwards to a greater degree over time so if this analysis holds true and your timing is even random, you should be able to have a more than adequate return.

The next step is perhaps to look at other asset classes (currency ETFs and bond ETFs, look at commodity ETFs and REITS) and perhaps some more sector wide ETFs to get exposure to a few more sectors and do the same thing.

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Euro is fucked up royally. Who the fuck thinks you can take a system and say “okay we make euros now, you owe us money in euros” and then say “fuck you, go sell some of your own damn bonds”. What would happen if the US went into the gold standard and owed all of it’s creditors gold? I’m sorry, we owe you 13 trillion dollars worth of gold? We only have 8000 fucking tonnes 1 tonne is worth 1000 kilograms. 1 kilogram is worth 1000 grams. Gold is about $55 per gram…

So $55 times 1000. Times 1000 again times 8000. If my crude (or if you prefer “fuzzy”) math is correct that means we have $440 billion of gold about. If we went to a gold standard, gold would have to by my math get about 30 times more expensive than current price if we were to pay all of our debt back and that would mean shipping all the fucking gold in this country away from us. Maybe it would be worth it long term, I don’t really know. But if you think that’s where we are headed, you better get your JakeGint on like a mother fucker, and guard your shit with guns so the government can’t take it and ship it away.

But the point is not about us…. It’s about EUROPE. If we went to the gold standard and owed our old debts in GOLD, we could not pay it without gold going much higher. In order for the gold standard to become a viable option gold has much further to rise.

But if we continued to do business in Bonds and keep everything somewhat the same we would be fucked.

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There is an excellent effect of earnings revisions on stock prices. I believe these are also some of the major factor behind the Zack’s ranting system.

The PPT has a screener that can help you with this as well, to go with the Fly’s updates and the communities comments on stocks, and of course the main reason to subscribe is the hybrid score.

 

But I digress… this is not an infomercial, but instead is about using a screen to identify such stocks.

I will use Zacks free screener so the freeloaders have a chance to try it out.

Now you can look at several factors from here, it depends on how strict you want to be.

Personally I like companies with a cash ratio of 1 or more, high profit margins, and high ROE. But sometimes I will manually go through this list of 100 names and plug them into wikiwealth or gurufocus and look at the valuations. Then I sort the top several and post it to finviz and look at the charts. But it’s up to youl. Instead, lets take the abbreviated version.

Earnings surprises can be one factor to use as well, but today I run the following screen.

Optionable=Yes (my personal preference)

Market Cap > 100M

% Change LT Growth Est. (4 weeks) > 10

Cash Ratio>1

ROE>10

Net Margins>0.10

Results: BIIB,DV,FRX,LSCC,XLNK

Some options have a lot of the expected gain cooked in, others don’t. So you will have to come up with expectations of price and a timeframe and determine where the risks and rewards lie and how much capital you should risk as a result. I like to relate things by using the kelly criterion and a kelly criterion calculator so I have a measurement of risk and reward, a expectation of gain relative to another where both are equivalent in risks to assess the situation. Certainly this is a bit of guesswork. Certainly because of the lack of certainty of probabilities, you have even more reason to risk less than the kelly, but as I have stated before decreased correlation and investment size can increase return.

 

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Mutual fund cash levels

July 2011 3.3% cash
August 2011: 3.4% cash
Sept 2011 3.8%R
Oct 2011 3.5%
Nov 2011 3.5%
December 2011 3.5%

historically very low

10 year PE 22.47 (EP yield 4.45%) Historically slightly higher but still reasonable.

S&P div yield 1.97 (historically low)

10 year treasury around 2% (historically near all time lows)

The stock market has recently taken off. Although the monthly chart is now confirmed bullish on the parabolic SAR and MACD histogram is close to turning bullish, the monthly chart is overbought at the same time it is turning bullish. Meanwhile the daily and weekly charts are egregiously overbought.

So although there may have been a very brief period of time to get a bit less cautious, that time is quickly changing.

Holding treasuries is perhaps even more vulnerable as the RSI as well as the slow stoch is overbought.

So what is one to do? This is where focused effort can be placed into looking at correlation and a margin of safety. Risk off should remain a fairly large portion of your portfolio, profits should be taken in both risk on and risk off and cash should be raised.

If you seek to trade, you can use daily, weekly and to some extent monthly signals on individual etfs. However, if you are less concerned about trying to time the market and less inclined to rotate your portfolio through trades, you should look to find a margin of safety and undervalued names as well as look at the monthly chart. A bit of both methods perhaps is ideal as it will cut down the correlation of your portfolio even more, and allow you to invest with multiple time perspectives in one portfolio.

Your long term return should seek 3 things things. One is a high Alpha at all times. You want to identify securities that are trading well below their value to buy. (You also may seek those that are trading well above their value to sell) This is “seeking the outliers” in the following chart. It is buying $1 for 50 cents.

The 2nd thing is basically to shift the beta based on market conditions. This is timing the market as a whole. You can either shift into selling a greater percentage of assets that are overpriced, and out of those that you own that are underpriced, or you can use index ETFs to shift assets. 
You want a higher beta when the probability of the market trading higher is large, and a small or negative beta when the probability of the market trading higher is low, assuming all else is equal.
I prefer to monitor my correlation to the S&P and aim to reduce it when the market is vulnerable, but also I use a balancing act between general ETFs such as the TLT, UUP (and other currency etfs) and SPY,QQQ,FXI and other index etfs.
Generally you want to watch the market trend and the overbought/oversold signals on multiple time frames to keep everything in perspective and to reduce your position size of risk assets when the market is vulnerable to a correction, and shift into more aggressive holdings and a larger beta when the capital is shifting into the market.

The third thing is to monitor overall correlations among your assets. This is often overlooked, but the thing that is important is to reduce your correlation. When the markets crash, the people that do best are those that have assets that are not strongly correlated with the market. Many assumed the subprime mortgage crisis would not effect everything else, but in fact it did. There was a greater correlation than people realized and those that thought they were diversified by holding stocks of different kinds were in trouble.
This can be illustrated by the following using a bit of thought.

You get a greater return by 2 independent bets at 1/2 the "optimal" bet. Therefore, more independent bets provides superior long term returns. In the stock market everything has a correlation, so no bets are really completely independent at the same time. However the closer the correlation between multiple assets to zero and the closer the return/risk of these bets, the more these principals come into play. So aside from shifting your beta while maintaining a high alpha, you also must be diligent to be sure you can do your best to reduce correlation. If the future were completely known and you knew where every stock and every asset would be, there would be no need for diversification and reduction of correlation. If the future were completely random, that would be all that matters, so some of just how correlated you are depends upon how accurate you are as a prognosticator and how clear your crystal ball is. The same goes to how much you ramp up your beta when you see the future in stocks as a bright one, and your individual skill as a stock picker should depend on how much effrt you spend in selecting individual names vs broad index funds. I will try to reserve the trend report for helping assess where we are and how to plan (beta, allocations among large general classifications, correlations), where as the trend trader will be reserved for assessing individual assets among those groups.

I would continue to remain defensive. Your beta should remain low. Your correlation to the market should be low or even negative at this time. You should run through each asset you own relative to every other asset.

There are two types of correlation, one how your overall portfolio correlates to the market. The other being how your overall portfolio correlates to itself. Unless you have certainties about where stock will go or a high level of confidence or an extreme amount of difference in value, you generally always want your portfolio to have close to zero correlation with itself with multiple assets.

But the shift of risk relative to the market sometimes referred to in some situations as "beta" has to do with the conditions. Bullish conditions should have a higher beta and higher correlation with the market. Beta also refers to leverage where this correlation calculation does not.

http://www.sectorspdr.com/correlation/

How much you shift your beta depends not only on conditions but on how aggressive you want to be. Generally I might say that a uptrend monthly chart with an uptrend weekly chart with both overbought should be perhaps slightly more bullish than a downtrending monthly chart with an uptrend and overbought weekly chart. However we are more overbought than before on a weekly and daily level so it’s relatively moot.

If you find it difficult to reduce your positions, one way to do it is through shorting an index ETF. I tend to try to avoid owning overbought markets so I will sell them and do my best to rotate into somewhere less overbought. Regardless, the art involves alpha, beta, and the right balance of correlation. It is no easy feat, but if it were easy, there would be no one to take the other sides of our trades, and no fiscally irresponsible money manager to lose through volatility over time for us to gain. Which brings up the question, why help other traders? First, sometimes a little information does the people you teach more harm then good if they do not apply it correctly, or only apply some of your teachings. There is a saying that a little knowledge is more dangerous than none at all, because it can result in the overconfidence that leads to ruin. Secondly, because there are trillions of dollars in the stock market, many people already know this so the damage you do by helping is negligible, and the gain you get from sharing and learning the knowledge yourself is worth it. The people who teach the information they learn, learn better and recall the information better. This is why I don’t mind blogging from time to time, while giving myself a journal of sorts to look back on as well.

February

commodity valuations	http://www.wikiwealth.com/commodity
commodity etfs	http://etf.stock-encyclopedia.com/category/commodity-etfs.html
currency valuations	http://www.wikiwealth.com/country
currency etfs	http://etf.stock-encyclopedia.com/category/currency-etfs.html
bond etfs	http://etf.stock-encyclopedia.com/category/bond-etfs.html
reits etfs	http://etf.stock-encyclopedia.com/category/real-estate-etfs-reits.html
resource etfs	http://etf.stock-encyclopedia.com/category/resource-etfs.html
asset allocation etfs	http://etf.stock-encyclopedia.com/category/asset-allocation-etfs.html

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FLY AKA JESSE LIVERMORE AKA Old Mr. Partridge wins again…

For those not in the know, the title is a reference to Jessie Livermore’s book, Reminiscences of a Stock Operator. A passage of it reminds me of the Fly with regards to people trying to convince him to sell YELP.

In it, he describes an old man named Mr. Partridge who would always walk around telling people “it’s a bull market you know”.

“Why, this is a bull market!” The old fellow said it as though he had given a long and
detailed explanation.
“That’s all right,” said Elmer, looking angry because of his disappointment. “I know this
is a bull market as well as you do. But you’d better slip them that stock of yours and buy
it back on the reaction. You might as well reduce the cost to yourself.”
“My dear boy,” said old Partridge, in great distress “my dear boy, if I sold that stock now
I’d lose my position; and then where would I be?”

Jesse Livermore said the important line here,

“And right here let me say one thing: After spending many years in Wall Street and after
making and losing millions of dollars I want to tell you this: It never was my thinking
that made the big money for me. It always was my sitting. Got that? My sitting tight!”

Here is a more complete passage:

“One day a fellow named Elmer Harwood rushed into the office, wrote out an order and
gave it to the clerk. Then he rushed over to where Mr. Partridge was listening politely to
John Fanning’s story of the time he overheard Keene give an order to one of his brokers
and all that John made was a measly three points on a hundred shares and of course the
stock had to go up twenty-four points in three days right after John sold out. It was at
least the fourth time that John had told him that tale of woe, but old Turkey was smiling
as sympathetically as if it was the first time he heard it.
Well, Elmer made for the old man and, without a word of apology to John Fanning, told
Turkey, “Mr. Partridge, I have just sold my Climax Motors. My people say the market is
entitled to a reaction and that I’ll be able to buy it back cheaper. So you’d better do
likewise. That is, if you’ve still got yours.”
Elmer looked suspiciously at the man to whom he had given the original tip to buy. The
amateur, or gratuitous, tipster always thinks he owns the receiver of his tip body and
soul, even before he knows how the tip is going to turn out.
“Yes, Mr. Harwood, I still have it. Of course!” said Turkey gratefully. It was nice of
Elmer to think of the old chap. “Well, now is the time to take your profit and get in again
on the next dip,” said Elmer, as if he had just made out the deposit slip for the old man.
Failing to perceive enthusiastic gratitude in the beneficiary’s face Elmer went on: “I have
just sold every share I owned!”
From his voice and manner you would have conservatively estimated it at ten thousand
shares. But Mr. Partridge shook his head regretfully and whined, “No! No! I can’t do
that!”
“What?” yelled Elmer.
“I simply can’t!” said Mr. Partridge. He was in great trouble.
“Didn’t I give you the tip to buy it?”
“You did, Mr. Harwood, and I am very grateful to you. Indeed, I am, sir. But ”
“Hold on! Let me talk! And didn’t that stock go op seven points in ten days? Didn’t it?”
“It did, and I am much obliged to you, my dear boy. But I couldn’t think of selling that
stock.”
“You couldn’t?” asked Elmer, beginning to look doubtful himself. It is a habit with most
tip givers to be tip takers.
“No, I couldn’t.”
“Why not?” And Elmer drew nearer.
“Why, this is a bull market!” The old fellow said it as though he had given a long and
detailed explanation.
“That’s all right,” said Elmer, looking angry because of his disappointment. “I know this
is a bull market as well as you do. But you’d better slip them that stock of yours and buy
it back on the reaction. You might as well reduce the cost to yourself.”
“My dear boy,” said old Partridge, in great distress “my dear boy, if I sold that stock now
I’d lose my position; and then where would I be?”
Elmer Harwood threw up his hands, shook his head and walked over to me to get
sympathy: “Can you beat it?” he asked me in a stage whisper. “I ask you!”
I didn’t say anything. So he went on: “I give him a tip on Climax Motors. He buys five
hundred shares. He’s got seven points’ profit and I advise him to get out and buy ‘em
back on the reaction that’s overdue even now. And what does he say when I tell him? He
says that if he sells he’ll lose his job. What do you know about that?”
“I beg your pardon, Mr. Harwood; I didn’t say I’d lose my job,” cut in old Turkey. “I said
I’d lose my position. And when you are as old as I am and you’ve been through as many
booms and panics as I have, you’ll know that to lose your position is something nobody
can afford; not even John D. Rockefeller. I hope the stock reacts and that you will be
able to repurchase your line at a substantial concession, sir. But I myself can only trade
in accordance with the experience of many years. I paid a high price for it and I don’t
feel like throwing away a second tuition fee. But I am as much obliged to you as if I had
the money in the bank. It’s a bull market, you know.” And he strutted away, leaving
Elmer dazed.
What old Mr. Partridge said did not mean much to me until I began to think about my
own numerous failures to make as much money as I ought to when I was so right on the
general market. The more I studied the more I realized how wise that old chap was. He
had evidently suffered from the same defect in his young days and knew his own human
weaknesses. He would not lay himself open to a temptation that experience had taught
him was hard to resist and had always proved expensive to him, as it was to me.
I think it was a long step forward in my trading education when I realized at last that
when old Mr. Partridge kept on telling the other customers, “Well, you know this is a
bull market!” he really meant to tell them that the big money was not in the individual
fluctuations but in the main movements that is, not in reading the tape but in sizing up
the entire market and its trend.
And right here let me say one thing: After spending many years in Wall Street and after
making and losing millions of dollars I want to tell you this: It never was my thinking
that made the big money for me. It always was my sitting. Got that? My sitting tight! It
is no trick at all to be right on the market. You always find lots of early bulls in bull
markets and early bears in bear markets. I’ve known many men who were right at
exactly the right time, and began buying or selling stocks when prices were at the very
level which should show the greatest profit. And their experience invariably matched
mine that is, they made no real money out of it. Men who can both be right and sit tight
are uncommon. I found it one of the hardest things to learn. But it is only after a stock
operator has firmly grasped this that he can make big money. It is literally true that
millions come easier to a trader after he knows how to trade than hundreds did in the
days of his ignorance.
The reason is that a man may see straight and clearly and yet become impatient or
doubtful when the market takes its time about doing as he figured it must do. That is
why so many men in Wall Street, who are not at all in the sucker class, not even in the
third grade, nevertheless lose money. The market does not beat them. They beat
themselves, because though they have brains they cannot sit tight. Old Turkey was dead
right in doing and saying what he did. He had not only the courage of his convictions but
the intelligent patience to sit tight.”

The important message is sticking to your plan

Here’s an interesting statistic that I have found but have not personally verified…

In bear markets (losses of 10-20% or more per year) 80% or more of all market participants beat buy-and-hold.

In sideways markets (+/- 5% per year) 20-50% of all market participants are able to beat buy-and-hold.

In weak bull markets (annual advance about +10%) about 10% of all market participants are able to beat buy-and-hold.

In average bull markets (annual rise about +15%) about 3-5% of all market participants are able to beat buy-and-hold

In powerful bull markets (annual rises about +20%) only about 1-3% of all market timers beat buy-and-hold.

In monster bull markets (annual advances of 25-50%) less than 1% of the market participants beat buy-and-hold.

In hyperinflations (rises of some hundreds of percentage points each year) no one is able to beat buy-and-hold for a year or longer.

I would imagine that applies to WINNING STOCKS too.

It’s easy to beat bear markets by just exiting positions every now and then and not being exposed to the entire downward move. Tight stop losses or trailing stops will help avoid bear markets in most conditions. However, you are generally better off trying to join bull markets. Of course that assumes you can anticipate them.

Have you made over 100% since 2009 bottom? Of course, by the time many people start holding, and start to believe in the market and decide to “buy and hold for the long term”, it’s usually too late…

That’s why you have to trust signals, whatever signals you use. I have a bit of a bipolar nature in my trading in that I have longer term holds which I may occasionally rebalance in the short term, and then I have a portion of my portfolio reserved for trading. If not for the longer term trades, my account would be volatile and there would be times when I trade poorly where I would wipe my account out. I learned the hard way.

Many people use the 50 and 200 day MA as a sign of when to hang on. When you get a golden cross (short term MA passing longer term MA), hold onto your positions you are in a bull market. That is a simplistic way and objective way that isn’t always right, and if you use shorter time frames, perhaps you’d rather use the 20 day and the 100 day. A pull back below 50 day, particularly on strong volume is a good time to take some of your profits. This applies to individual stocks as well as the market’s moving averages.

March 2009-March 2010 SPY rose over 75%.

March 2010-March 2011 only around a 10% increase.

March 2011-March 2012 only around a 5% increase (major setback crashing to lows in October and then rallying from there).

March Trend Report shows we are in a bull market, but we have been for quite some time. We are overbought on many indicators, but when does one consider shorting and getting bearish as opposed to sitting in more cash than risk on assets?  Overbought doesn’t mean much, although it means a bit more if the RSI is overbought, and more importantly, if it was just overbought and closed below overbought it is more susceptible to a larger decline.

My core strategy which is conservative that I have been tracking is still ahead of the market just slightly since October 15th when I started, but let me tell you it has slipped significantly and the market has played catch up. At this rate I will be unable to stay ahead of the market.

This market is leaving me with very few options but to get more aggressive If I want to beat it. I don’t know if this market will end it’s uptrend very soon or not…. One way or another though, I am going to be getting more aggressive…. Perhaps I will allocate more capital into natural gas, perhaps I will find some stocks which are down significantly and undervalued. Perhaps I will look at the growth stocks that still present value. Perhaps I will instead look to trade other areas. Commodities, currencies and so on.

I do not like losing for very long.

For now I got a bit more aggressive than I normally would under such circumstances and perhaps my plan going forward will be a bit more aggressive.

The biggest problem with trying to time the market is sometimes the top never comes, or at least it doesn’t for years. The nature of a timer is to move in and out of the market, not stay in it.

Now while I am tempted to do things “all or nothing” and go in hand over fist into this market, I do not believe the market is stable. So I will employ some more creative tactics such as buying some calls here and there, adn perhaps even some puts if the price is right. and it gives me enough time. Oakshire Financial recently pointed out a good play involving a spread where you buy puts in the XLF and cover the cost by selling puts in the S&P.

Wall Street Elite recommends the simultaneous purchase of XLF June 15 PUTS for $0.39 and sale of SPY June 103 PUTS for the same price in equal numbers.

http://oakshirefinancial.com/2012/03/19/great-odds-on-a-bearish-options-play-xrt-and-xlf/

I don’t like writing puts naked 9without the capital available to buy it if you get it assigned to you), nor do I wish to be restricted and feel I have to have that much capital available, nor do I like selling options even at that low of a strike price, when the VIX is this low and options are this cheap and the market has been in an uptrend. I would rather play a call in the short term in the same area or in a different area. for now I think the XLF is still stong and will outperform until the market pulls back so I like actually buying JUNE XLF 16 calls and SEPTEMBER XLF 15 puts. A pretty neutral play but mostly is bullish short term, bearish long term.

I am not against ever selling puts, but I want to do it in an extreme scenario like on the S&P in 2009 when the VIX is super high and the price already has declined so much and I can sell way out of the money puts long term and still collect a nice premium with very minimal chance that I will ever have to buy it, and would be happy if I could that cheaply.

The one thing scaring me a bit is energy’s recent performance. The XLE does not look good. That could be an early indicator the market is ready to top out if energy does not rebound. However, if it does, it could build a base here

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1) (space reserved to insert something that happens in 2012 after the act to appear prophetic)
2)The increased leveraged in the euro to try to save it will be like an atom in nuclear fission with 1 too many protons… It becomes unstable until it causes a chain reaction. We’ve seen it happen time and time again after efforts to keep Greece alive continued. Now yields are blowing up everywhere and they may come up with one final “solution” but it won’t be until a culmination of everything unwinding until they will be able to stop it.
3)Suddenly capital flees europe and goes into the dollar. Capital flows into the US even as it prints like crazy.
4)Some country (if not 2 or more) defaults sometime next year and soverign debt blows up, setting up fear of default everywhere else and yields higher.
5)Prior to this news there is a panic spike higher in the dollar and possibly demand for US treasuries and possibly the Yen.
6)This should correlate with stocks being sold to buy up treasury bonds in final stage of yields declining to the panic bottom.
7)The US government will attempt to inflate away all the capital inflows that they have received from Europe assuming the capital will keep coming in, so they will be spending more than they receive (also for the purpose of inflating away their future and current expenses through inflation).
8)As a result capital will flow out of bonds and into assets like stocks.
9)Real estate will bottom in this time along with interest rates (for now). The strength of the dollar initially will drive prices lower. People from Europe who now upon the collapse realize that they cannot live off the government in Europe anymore will seek to become US citizens. The Yen will also strengthen and the more the dollar drops later on in 2012, the more migration from Japan and other places there will be, but specifically Japan.
10)Stocks will TOP at March or April 2012, June at the LATEST, if they haven’t already.
11)Stocks will bottom in early Spring 2012 to late summer 2012 for a long time to come depending on if they can kick the can for another several months or only just
12)Gold will be mostly flat as it will have to pause before it continues the strong uptrend
13)A few celebrities will die. At least one will be a big surprise. But likely candidates include Pat Summerall, Ross Perot or Bob Dole (if he’s still alive)
14)The anti wallstreet as well as anti government movements will intensify and eventually contribute to some kind of “antiestablishment” party.
15)When bond yields bottom, and there is a default, there will be a realization that the government debt is not as safe as people thought, upon realizing this once unrealized risk, bond yields will start to skyrocket.
16)Capital will migrate into the stock market heavily from that point on into 2013 and beyond. The FED will be forced to raise interest rates eventually, but it will appear too little too late, and over the next several years they will continue to hike the rates
17a)We will see a Romney-Gingrich ticket… The possibility of a “third party” is very real now, it could very well be one “by the people“. If this goes through and picks up steam, what I predict will be a Romney-Gingrich ticket will win. If not, Obama pulls through provided the stock market and economy can bottom and recover early enough in 2012. (I don’t think so).
17b)I predict Ron Paul will pull the upset in Iowa, and Romney takes New Hampshire. The establishment candidates will get together and vote in Romney. No way are people concerned about religion after they elected Obama and his controversial pastor Jeremiah Wright as well as the “my muslim faith” flub.
18)There will be a currency realignment around the world on the horizon, as the euro goes under. Maybe not 2012 but soon. The dollar will not be the world reserve currency 5 years from now, or if it is, there will be either a 2nd world reserve currency, or a 2nd US currency.
19)Although the “3rd party” if you can call it a party will not win in 2012, they will have a realistic shot at taking it in 2016 as unemployment in the US fails to decline due to the cheap labor overseas and fading industrial based nation as we continue into the information age and age of technology.
20)The “internet revolution” will pick up steam.
21)In the future may even enter into mania mode sometime between 2013-2016 as the business cycle climaxes to it’s peak. The measures taken to prevent this decline will manifest themselves drastically on the next up cycle, resulting in some over priced stocks and a very large decline.
22)Something unusual will happen. Technology will evolve and mathematic modeling of the world will begin to take place and it will constantly be refined. Through this process, something big in science will fall apart, and perhaps science itself will be replaced over time by computer modeling of reality.
23)Sometime in Romney’s 1st term there will be a pre-emptive strike in Iran setting off a chain of events with unintended consequences. If this occurs, move away from major cities out into the mountains somewhere because this could create huge instability sometime down the line.
24) If the magnitude of the 2012 damage in the stock market is bad enough, riots will break out, and possibly more wars.
25) A new Breton Woods agreement will take place sometime in the next several years
26)Stem cell research breakthroughs will occur, and cloning will be done of stem cells. Genetic mutation and experimenting will exist and behind the scenes governments will use genetic mutation to create super soldiers, or so the conspiracy theories will say.
27)Brett Favre will unretire again.
28)The Lions will upset the Packers in the playoffs, the Giants will beat the 49ers, The Saints will take their division and Giants-Lions will win the superbowl. In the AFC, although the Raiders will have a legitimate shot at beating the Steelers (or the AFC North Team), they will come up short due to a contraversal call by a ref and a missed field goal by Janikowski. The Steelers will beat the AFC East team such as the Patriots, and lose in the superbowl. If the Raiders make it, they will beat the Giants. I must have forgotten 2 teams or something. Probably Saints and Falcons as the other two teams, and the Saints could easily win.
29)Gerald Celente will be arrested for some stupid stunt such as throwing gold bricks at somebody.
30)A new Religion will be formed as opportunists seek to make money on the 2012 paranoia and they seek guidance and profits that will lead them… I mean prophets… or do I?
31)Al Gore will claim he invented Cloud Computing and Steve Jobs will come back from the dead and punch him in the face… and Bill gates too just for fun.
32)Many of my predictions will appear to have not come true… and then just when you think they won’t be, they will look even more wrong. While this may appear to be correct, it is an illusion and I will actually be proven correct given enough time, if only in another dimension.
33)Warren Buffet will be exposed for some scheme.
34)Many major institutions of the world will continue to fall apart in some way.
35)The group known as anonymous will soon be exposed and no longer “anonymous”.
36)Oil will skyrocket as Israel bombs Iran (pre emptive strike)
37)As such, oil will go north of $200 and possibly close to $300 even though under normal conditions it would be difficult to surpass even $150
38)There will be so many unintended consequences that it may change everything
39)One such unintended consequence could be a currency realignment
40)Another consequence is the rise of a third party that has already started between tea party, OWS and now the “people before party” party’s candidate, and so on, that a third party candidate will take over 30% the popular vote.
41) Some information about Area 51 will be released, then denied, then released again, meanwhile area 52 in Utah will be the new place to hang out.
42)As evidenced by my other predictions that extend beyond 2012, the world will not end in 2012… However, civilization will undergo major change and the series of changes will eventually lead to the result that could eliminate modern banking systems and other major institutions such as churches and colleges, and replace it with something else. The rise of the internet revolution will result in a sort of “meet up groups” to help people get together and solve problems of the world although I suspect profit will still be a primary motivator in some way, even if the profit is determined by public treasury and some kind of voting system or something crazy.
43)A nearby supernova will blow up somewhere in this galaxy causing a 10.5 earthquake and potentially opening the doorway for science to consider that earthquakes may be caused by supernova causing a shock-wave that results in vibration that shifts tech tonic plates, and causing a change in our understanding of the universe. Meanwhile Dr. Hawkings will be ejected from the shock of the earth letting out a mechanical sounding “no” that will be heard by aliens.
50)none of this is relevant
51)I will eat a sandwich
52)The stock market will find a way to destroy itself
53)At least one of these is a joke
54)At least one of my predictions are sarcasm
55)see #56
56)See #55
57)If you are reading this, you either don’t follow directions in a loop indefinitely, or are not blond…
58) Everything you know is wrong, even that which you appear to be right about will only be true because your perception of the world, and perception of “being right” is actually wrong. One day you will realize this and realize that nothing you know can be correct, because you can only know reality by associating everything you know by your 5 senses, which in fact may be just as flawed as everyone else’s way of interpreting reality. If you do not understand this, see #55 and 56 indefinitely until it makes sense.
59)People will become bored with predictions by Jan 31st, and bored with resolutions 2 months into the new year
60)The Fly always wins even when he appears to be losing, which is why he doesn’t mess with Hattery or Chuck Norris.
61)Gold bugs will appear to be stepped on, jakeG be damned in 2012 as gold declines. However, like cockroaches in a nuclear storm, they will emerge unphased in 2013 as gold continues it’s run. This is probably not a major “top” type of event that we saw in oil in 2008 with a massive sell off, but a more healthy “correction” that needs to happen.
62)

 

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Here is a post titled investing in 2012 for survival that I drew up. I will copy and past it below, and then add additional predictions.

If you want to know what the first 2Qs or perhaps even 3Qs of 2012 will be like, play Monopoly with no cash for passing go and half the starting money as usual. Properties may go fast initially, but then money becomes scarce, mortgages will be common, and soon properties will be auctioned, The person who conserves his cash will then have the ability to survive and get properties for less than the mortgage value available on the home as the “auction” will force prices lower. Those stuck playing the “old rules” of asset accumulation, and borrowing heavily to accumulate properties early and often will be in serious trouble later on when money becomes even more scarce.

Even those who have monopolies on boardwalk and park place will end up not having the funds to build houses, so those that live within their means and keep things tight to the belt will survive and position themselves to thrive when the opportunities hits. Calculated patience and caution is what is advised, and then there becomes a point where you must shift aggressively into accumulation where the rules will change and suddenly the deflation will have run it’s course even though everyone repeats the story as if it will get bad forever indefinitely. Making trades below intrinsic value for cash actually can make sense in this game, because you in monopoly can calculate that there will be more deals and everyone else will be even more short of cash than they are now. So even at the expense of giving someone else a monopoly, provided you take their funds to build houses will make sense since there will be opportunities on the auction block later where you can accumulate properties to generate more cash (by buying below the mortgage value), have cash to force trades into people who are near bankruptcy, and collect monopolies yourself in areas in which you can afford to build. In the stock market in real life, when liquidity dries up, selling assets below intrinsic value can make sense if other people will be forced into liquidation, thereby having less cash to be able to keep all the assets at their current PEs, and even better deals will become available. However, there is a very fine line between doing this and overdoing this. Eventually the people that are on margin and leverage collapse, the excess credit collapses, and those waiting for an opportunity strike and start to go on margin making up for that which was lost, and the markets refuel.

Knowing this well in advance, you should keep your options open by having lots of cash at all times and employing a strict minimum such as 40% that you must not go below.

Here are my predictions for 2012.

The increased leveraged in the euro to try to save it without an ability to print like the fed, and the fed having a different policy, globally will be like an atom in nuclear fission with 1 too many protons… It becomes unstable until it causes a chain reaction. We’ve seen it happen time and time again after efforts to keep Greece alive continued. Now yields are blowing up everywhere and they may come up with one final “solution” but it won’t be until a culmination of everything unwinding until they will be able to stop it.

The sovereign defaults will finally hit in 2012. Rates have risen dramatically and if €600 billion euro will be rolled in Spain and Italy in 2012, the national debts will begin to explode strangling the economy producing stagflation as was seen in the US during the late 1970s.

Capital fleas Europe initially for thee dollar. Shortly after the default event, everyone who will ever get into bonds will have already done so at maximum velocity. That means there will finally be a bottom in yields and a top in treasury demand in the US, the lack of new buying pressure will finally form a bottom around the middle of 2012. June will be the “panic” month.

In spite of trillions more of stimulus, deflation will hit as new debt comes due, but food prices and fuel prices will go up. Stagflation will occur due to slow global growth and domestic inflationary policies. Gold bugs will proceed to move into their bunkers in spite of falling gold prices.

“protect capital” is the #1 theme of 2012. This means more cash. Also, more frequent “rebalancing” and allocations a bit closer to the vest when bullish, (close to equal amounts risk on and risk off) and being more cautious about using leverage in arbitrage deals, and elsewhere.

Real estate will bottom along with interest rates shortly after the panic. The real estate “bottom” this year will be part of the first “double dip” assuming you don’t call the volatility a double or triple dip already. The real estate rally that unfolds will take a handful of years but not be great and it will never quite recover to the 2005 highs before it makes another multiyear decline.

The CDS market lack of “default” is triggering a sell off in bonds and spiking yields in Europe, while treasury demand in the US spikes. The “legal” insider trading of government official (while having a conflict of interest and working on the bill that effects companies they invest in) also feeds into the dissent along with MF global and potentially other scandals, and people will lack the trust needed to continue to buy goods and services, fuel the economy, push prices higher, and so on.

So in 2012 be sure to protect yourself

Just when you think things possibly couldn’t get worse they will, and soon people will forget that things eventually will also get better, but they will. As usual the cycle will return as the deals available are much more affordable even though earnings seem to be non existent. Loans will be non existent except for a few very intelligent ones. The most credit worthy will get loans and this will ensure that those that do get loans make good ones, businesses will be bought for cents on the dollar at some point. Eventually as things stabilize more people will be willing to take the risk, and that will result in a complete 180 as people go back in, and plus selling pressures can’t persist forever. When no one seems to be buying and a collapse seems possible, is when there will hardly be any buyers, but those that do will be able to get the best price. As soon as they start to go, rally will squeeze shorts. Short bursts of contra trend rallies will occur first, but eventually, the rally will be real and truly be the opportunity of a lifetime. Additionally there will be aggressive policies perhaps even extreme ones as allowing the fed to buy property or employing some agency that will buy property. Over time, unemployment will get worse, and this will be very bearish for real estate, however that does not mean there won’t be times of panic when people do anything for cash.

Expect cash to be king. Expect turmoil. Expect an increase in antiestablishment mentalities against big government (tea party) and big business (OWS) which will result in a 3rd party in 2016. There is a movement that is close to the 2.9million signatures needed at americans elect (americanelect.org) that could potentially shake things up in 2012.

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I received a critical anonymous comment by someone on my 2012 trend report. One particular comment was justified as I made a serious typo talking about a spike in treasury demand but mistakenly said treasury yields. In the context I talked about selling into strength of the spike upwards, but I certainly understand the criticism in that regard.

However, one such criticism was directed at my comments about hyperinflation, that I made suggesting that too much money wasn’t the only factor in hyperinflation, and that confidence was just as important. I am not saying that too much money isn’t a common cause, just that there are other factors.

Even if you consider hyperinflation to only be caused by too much money, there are other things that lead to those policies, such as unfunded liabilities and shortage in government treasury that require debasement or default to pay for, both of which have consequences, but in a republic, the only policy that makes political sense is debasement, as if you default you will probably not be reelected and there will be turmoil and rioting against the establishment.

The definition of hyperinflation is typically “too much money chasing too few supplies”. In a gold standard, if you run out of gold, you are in trouble. In a fiat currency, if you lose confidence you are in trouble.

Rome had no ability to mint coin at will. They did have the ability to mint coin using some lead and silver and gold so I am not going to say there wasn’t debasement. In fact there certainly was.

However, they had several things working against them before their collapse. Romans kept detailed records, so more information is available on Ancient Rome than any other ancient culture.

One such thing working against them was population decline. The ability to produce as a society becomes problematic when half your population dies. As rome sought to expand the empire in wars, many soldiers died. Angered, many barbarian villiagers raided the city, killing civilians as well as stealing supplies. To make matters worse, soldiers brought back the plague.

Here’s a graph I found plotting Rome’s population

The fate of Rome had clearly begun to change direction with the rise in the financial problems during the reign of Marcus Aurelius (161-180AD) when there was a sudden explosion of calamities afflicting the empire. The Parthian war erupted which would prove to be very expensive. And this is when the army spread the plague.

Government workers (Military Soldiers) were promised retirement benefits. The politicians were cheered for providing it and Rome in a free republic was made up of elected representatives.

The surplus left by Antoninus Pius in 161AD of some 2.7 billion denari in the treasury was reduced to a mere 1 million under Commodus by 193AD.

The Germanic tribes began to invade from 160-171AD there were many frontier breaches along the Danube as well as other invasions from different tribes including the attack on Buetica by 14 Moorish rebels in 171AD. There were a number of revolts in this period including a very serious one in Egypt (early 170’s). The Roman currency was not drastically debased until well after this.

There was increasing hunger and plagues during the 3rd century that devastated Rome as barbarian invasions began bringing a new gene pool. This hit the rural slave population the hardest, contributing to the further depletion of the slave labor force. Between 180AD and 280AD, Rome’s population probably declined by at least 30 percent. This contributed to the contraction of agricultural labor that was the largest economic sector, which became the single most important cause of declining economic trend behind the Roman economy. The economic crisis had tremendous impact causing enormous suffering for ordinary Romans. This lead to shortages, and required greater expenses by the government as supplies were more scarce, which with the treasury greatly reduced at this time, required great amounts of debasement. It was the shortages of supplies, including the government’s treasury that lead to the debasement, not the other way around.

It was the combination of the promises made by politicians that could not be kept, the decline of the labor force, and the rising costs of military that lead to shortages of government treasury. The government had very little choice at this point but to mint coin, employ aggressive taxation and make promises it couldn’t keep without currency debasement, or default to keep the republic going for a longer period of time. If they defaulted, it was possible the military themselves would turn on the leaders. The “inflation” was only done as a result of there not being enough and money not going far enough because of shortages. This was the result only because of aggressive military expansion and the use of a slave labor force in the race to economic expansion and military conquest.

It is not as if the choice of currency debasement was made in isolation. The expenses of war and military expansion rather than cultural expansion lead to supply shortages, and economic shortages. It was only when Rome was near bankrupt and supplies were scarce that they attempted to print their own money, and not much had to be printed to contribute to hyperinflation as the labor force had died and supplies were in very short supply. People were not going to give up their food when it was scarce and the famines existed for any price.

Similarly in the US, government official sought reelection by spending the nation’s treasury and making promises that could not be financed, and the combination of unfinanced promises and military expenses got to be too much and the only way to maintain some of the power of the US was to turn on it’s bondholders via the closing of the gold window. The government owed far more gold than they had in it’s reserves at the current price, not to mention the growing number of unfunded liabilities. The possibility existed for a run on the government’s gold via exchanging the debt payments for gold from the US treasury, (somewhat similar to what happened during a run on the banks in the great depression only the US treasury was the bank). To protect the nation’s gold reserves Nixon granted the treasury the ability to debase the currency at will, even though it was supposed to be “temporary”.

The one downfall of a republic (elected representatives) is that elected government officials will make promises we can’t keep as long as they are allowed to, and that means eventually even under a gold standard, we will be forced to go off of it like Nixon did at some point unless there are limits on how much government can spend and how much unfunded liabilities they can create. That is not a criticism of a free republic, but instead the lack of us to recognize the problems of history and guard against them.

Hyperinflation occurs when people don’t trust the currency. Even when there is a fixed amount of currency, eventually there is a tipping point that occurs if too much spending is done. The printing money is only done after the government comes up short on cash and decides to debase the currency. It is the supply shortages and debasement of currency that result from the unsustainable policy of promising what cannot be delivered as an alternative to default. If the government were to instead default on it’s promises, and (globally) no one bought their debt as a result or wanted their currency, I believe the currency would not be accepted internationally and be worth closer to it’s intrinsic value (in this case, the melting value of gold per ounce, in the case of paper money the value of using it as paper), and it’s value would likely still be diminished, even if no additional printing were done.

If they create a new currency instead, and the old currency fell out of favor and was accepted by fewer and fewer people, even if the currency was burned so there was very little of it left, without the public confidence and usage, it would become a very inelastic market where the very few amount of people who trade it determine the price. Like a rare piece of art, it can be worth quite a bit as a collectors item and antique, or very little if it’s not a historic piece of art and not appealing to the buyer’s tastes, depending upon the value the relatively few people give it.

Certainly debasement of a currency has a tendency to cause a loss in confidence but blaming too much money on the problem I feel is not looking closely enough at the root causes, which is government’s mismanagement of the money supply, war policies that lead to supply shortages, and government unfunded liabilities.

Regardless, although it certainly could be a significant factor, with all due respect I believe it is fallacy to assume that the only factor on whether there is high inflation is the supply of money, and that the precursor to “too much money” is “too many promises” or money and/or supply shortages.

If you think differently, unless you can show me evidence otherwise, we will have to agree to disagree at this point.

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