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Good Morning Readers.
Sometimes
in the market, as well as in life, it is necessary to step aside in order to
get a clear picture of what is happening. As Gerald Loeb in “The Battle
for Investment Survival” has taught us – it is necessary to be
able to read a balance sheet and understand it and it is also necessary to be
able to do the technical analysis of a stock. In short we need to be
proficient in both fundamental and technical analysis. In the end however, it
is the man who can tell which way the winds are blowing, “That can
separate the wheat from the chaff” that will be successful.
Let me
first preface my remarks by saying that in today’s mathematical
algorithmical market you are consider to be long a stock if you hold it
longer than 20 minutes. Gone are the days of Bernard Baruch, who told of
trades of 10,000 shares of a company that were consummated over a cigar, a
glass of brandy and a handshake. As I have already written those days are
long gone. We live in a world of impersonal emails and “tweets”
that leave no room for such things as time and friends.
I was
raised to believe that the “truth will set you free”. Today,
sadly, especially in the market, the truth will trap you.
In a
speech given to the International Monetary Conference in Atlanta, Georgia on
Monday, the money-printer-in-chief of the Federal Reserve denied that the
Fed's easy money policies are responsible for the inflation that is currently
showing up in commodity prices. The public shouldn't have expected anything
else from the dissembling Fed Chair, nor should they believe anything he
says.
Dr.
Bernanke claims that rapidly rising commodity prices are the result of rising
demand and not enough supply.
As
Professor Newcomb taught his students it is the law of “supply and
demand” that creates economic conditions.
“When
prices go up two processes will set in – an increased production and a
demand in consumption. The effect will be a gradual fall in prices. If prices
get too low two processes will set in – decreased production because a
man will not continue to produce at a loss and second, increased
consumption."
While in
isolation this is always the case in economics, it doesn't explain why demand
is rising in leaps and bounds and why this has occurred during the time the
Fed has been on a money printing binge. Let's look at a few of
them: U.S. gasoline prices went from approximately $1.60 a gallon to
almost $4.00. Oil prices have tripled from a low around $33 a barrel. Copper
prices almost tripled during the same time. Cotton prices have gone through
the roof and took out a high established around 150 years ago. Silver prices
went from a low of $8.88 to almost $50. I could go on and on but you
get the idea.
Did
global demand for oil, copper, and silver increase by three or more times in
two and a half years? Certainly not! If anything, economic demand has
only increased by a few percent. There is something that increased by a lot
more however - the Fed's balance sheet, which expands when it prints money.
That has gone through the roof just like commodity prices. Money printing of
course increases demand for any number of items because it makes a lot more
funds available in the financial system and people “feel” better.
Somehow, Dr. Bernanke didn't quite connect the dots in his speech.
The
recognition that increasing the available money in the economy leads to
rising prices has been known for 500 years. The idea is based on grade-school
arithmetic. If you have an economy of a certain size and a given amount of
money and you increase that amount of money then each unit of money is worth
less. It's not rocket science and yet Fed officials with PhDs from top
schools can't seem to be able to grasp this simple concept; or is it because
they don't really wish to do so.
Dr.
Bernanke's speech also didn't explain why the price of gold has doubled since
its Credit Crisis low. The price of gold is a good gage of the inflation
expectations on the part of the investing public. Dr. Bernanke claimed these
were under control, so we don't have to worry about inflation. Sadly, gold is
telling a very different story - and gold doesn’t lie.
Dr.
Bernanke also fell back on the employment is high and there is slack in the
economy, so inflation can't happen. “It’s an old trick but it
just might work”. A recent look at historical analysis indicates that
hyperinflation takes place under just such conditions. The most recent
example happened in Zimbabwe in the 2000’s. As the economy collapsed
and unemployment headed toward close to 100%, prices skyrocketed. It also
wasn't the first time something like this has happened. It's the same story
over and over again throughout history. I wrote recently about a classic book
I had just read “Extraordinary Popular Delusions and the Madness of
Crowds” by Charles Mackey. The book was written in 1851 and the first
story was called the “Mississippi Scheme”. The “Mississippi
Scheme” took place in 1714 and to be brief it was about the fiat
printing of paper money instead of using bulky coinage. The effect was the
same as it was in the years 2000 through 2008. Everyone was rich and
prosperous until it collapsed like a house of cards.
So,
as I have often written in this letter, I consider my blog better than school
because every day you get a new chapter of the textbook called my life and it
is happening in real time and we are playing with live ammo.
Mea
Culpa! Yes I am human and I make mistakes. I knew in my bones that in May it
was time to “sell in May and go away”. I thought however that I
could squeeze a few more points out of this rally and I was wrong. Yesterday
we had a minor rally and when the market was up 180 points I did a little
house cleaning. It is time to step aside for a while and let the
“madness of the crowds” pass by because this is far from over.
There
will be opportunities for profit and I will look to exploit any of those that
I can find but now is a time to be quick and nimble. There are simply too
many “Black Swans” swimming around and as we all know what the
market hates most is uncertainty and these times are most uncertain.
On
a positive note I suggest that my readers read about Quest Rare Minerals
(QRM) because this CEO, Peter Cashin, is determined to dominate the Rare
Earth Market for a long time. Also keep an eye out for any dips to buy
General Moly (GMO). If you can get this stock in the low $4.00 range
it’s a buy. Be forewarned, they still do not have their permits and
there is a Black Swan regarding water rights that still casts a cloud over
the stock but the tax revenue that will be realized by Nevada makes it seem
very likely that this stock will play out as scripted. Once it is permitted
it will be trade in the range of $7.00 - $10.00 and once in production it
will trade in the $17.00 - $21.00 range and like any other commodity the
price of the stock will fluctuate according to the price of molybdenum. The
reason I know that GMO will trade in the $17.00 range is because they are
sold out for the first five years of production at the price of $16.40 for
molybdenum.
In
the mean time I will patiently wait for Ucore (UURAF), Tasman Metals (TASXF)
and Avalon (AVL) and look to buy on the dips and sell on the rips.
Stay Tuned for any updates.
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