This Week in Barrons – 1-5-2014
Where do we go from here?
Fortunetellers always have their gimmicks: a crystal ball, a deck of cards, a board, or a book of ancient sayings. In 2013 crystal balls were sometimes in the shop for a tune up, cards were slightly smudged, boards were a little warped, and books of ancient sayings was often gibberish. What I ultimately rely on is information. With enough information we can see ‘dots’, and with enough ‘dots’ we can connect them. And just like the ‘connect the dots’ children's books – often a picture emerges.
In the past we were able to predict:
- Gold’s run over $1,000 when it was just $290,
- The Iraq war,
- The housing bubble,
- The credit bubble,
- The banking system collapse,
- And a handful of other big ticket items.
The issue with ‘connecting the dots’ is: What if the information ‘behind the dots’ is fabricated or at minimum – incomplete? The old computer saying is: ‘garbage in – garbage out.’ Recently I remember:
- The NSA telling us that they don’t spy on us – and we all found out otherwise,
- Banks telling us that they don’t ‘fix’ rates – and then the LIBOR scandal surfaced,
- The ‘Too Big To Fail’ banks getting slapped with fines for money laundering,
- Bernie Madoff scamming people out of billions,
- Our own IRS hunting down and ‘auditing’ anyone that had questioned Obama,
- Sub-Prime mortgages (comprised of part-time McDonalds and Wal-Mart workers buying $800k homes) were being AAA rated,
- Presidents telling us that there would be ‘No New Taxes’,
- Our unemployment rate being 7%, when it’s clearly around 15%,
- The Housing industry telling us that they are strong – when those same housing permits and applications are hitting multi-year lows, and
- Our government telling us that gold and silver are worthless – while demand for the physical metals hits all new highs.
The issue I need to watch (over the next several years) is the blatant inaccuracy of the data – upon which I make my decisions. This inaccurate data tends to ‘fog up’ the crystal ball and makes short-term predictions extremely difficult causing money to be misallocated, energies misspent, and wrong decisions made.
My fear is that ‘going forward’ these data distortions will become greater and louder. Remember the phrase: “The truth will set your free.” Well, first you need to find the truth. For example: Sun Zhaoxue (the most influential leader in the Chinese gold industry – President of the China Gold Association and President of China Gold Group (China's largest gold mining company) recently said: “The United States intends to suppress the price of Gold to ensure the Dollar's dominance." Now:
- Wouldn't suppressing the gold price be a global manipulation? Yes.
- Wouldn’t that be illegal? Yes.
- Will Uncle Sam ever admit doing it? No.
- Does John Q. Public know that our Government is secretly beating down the price of gold in the paper market? No.
- Will CNBC, the N.Y. Times or the WSJ ever tell us of that manipulation? No.
As far as long-term predictions go, the most common misconception is that ‘Gold has no place in a fiat monetary system’. Most people believe that when President Nixon closed the gold window in 1971 and our currency became ‘fiat’, that gold just shriveled up into a worthless ball of dust only used in jewelry. Nothing could be further from the truth. Every day Governments electronically ship tons of gold back and forth because gold is the basis for the entire ‘petro dollar’ setup. Historically, J.Q. Public could walk into a bank and exchange dollar bills for gold. Then, in 1933, the rules were modified so that only Governments could make this exchange. In 1971 President Nixon realized that France and other nations were draining our gold reserves – so he ‘closed the gold window’. Then came the ‘deal’ with the Saudi’s.
Currently, the most important commodity on the planet is oil. The ‘deal’ with the Saudi’s is that the Saudi’s can only sell oil for U.S. dollars. In public, the Saudi's go along with this because the U.S. offers them protection via armed forces. The second part of this deal was that the EPA would be created, and (under the guise of keeping the environment protected) it would keep U.S. oil sequestered – not competing with Middle Eastern oil. (FYI – when the pact was signed (1971) oil was trading for less than $4 dollars a barrel.)
Behind the scenes a system evolved where U.S. dollars would come to the Saudi’s in exchange for oil, and the Saudi’s would exchange some portion of those for Gold bullion. This gold is never physically moved from place to place – but rather sits in vaults (bullion banks) where it can be ‘leased out’ to handle financial ‘gold’ and other commodity future transactions. For example: as gold miners need money to pay bills – these gold miners will come to bullion banks and in exchange for future deliveries of gold, receive present day ‘cash’. Then as the miners produce the physical gold, they repay their loans to the banks in the form of gold bullion. This all gets very confusing, but every major economy has a gold reserve, which gives it the right to buy and sell commodity goods around the world. Therefore, the idea of gold being some worthless relic is nothing but a smoke screen.
Knowing that gold has functioned as the true behind the scenes money for all these years, we now have to take into account the fact that around the globe, people are very tired of the U.S. and its behavior. The Chinese have called us currency manipulators, and they make no apology for saying publicly that they are tired of the deliberate debasing of our dollars. They also know that since it is only our Petro dollar arrangements that have allowed us to remain the global reserve currency, they want desperately to do two specific things:
- One, turn as many of their U.S. dollar reserves into gold as possible, and
- Two, use as many of their U.S. dollars to purchase tangible items.
This trend is not China specific. There are currently 13 countries with trade pacts involving doing their oil business in local, or regional currency, thereby by-passing the dollar. This started when Saddam Hussein decided to sell his oil for Euro's. It wasn’t long after that – when he was blamed for terrorism and killed. The same fate befell Gaddafi, as he was beginning to trade Libyan oil in diverse currencies, and then for pure gold.
But China has nuclear weapons, and an army of unparalleled size. At some point China is going to announce that they have enough gold that they can back their Yuan with a percentage of gold, and it should be part of a new global reserve currency. That would be the ultimate tipping point. The day the U.S. can't just print trillions of dollars and force others to use them, is the day the U.S. comes to grips with something every other country already knows – if you live beyond your means, bad things happen.
If the U.S. can’t balance its budget and needs to borrow money from other countries by selling debt (Treasuries) – the game ends, because nobody will want our U.S. dollars because they are decreasing in value and are not needed to purchase oil.
This end is coming, but it’s a change of such magnitude that trying to predict the timing of it is extremely difficult. Every resource will be utilized to keep it from happening. Nothing will be off the table: not wars, not banking holidays - nothing. However, the end of the U.S. financial reign is mathematically inevitable. Therefore, for the long-term picture – massive disruptions are in store. Gold and silver will exert themselves as the underpriced money they truly are, and become considerably more valuable. Inflation will rage. Living standards will drop.
I next week’s letter I will be outlining my thoughts for 2014. I think in 2014 we will witness some very exciting times. Let’s ride them out together.
The New Year has dawned and (thus far) not lived up to its financial hype. The first trading day of the New Year brought us a down session. The second day brought us some pops and drops, but in the end, we didn't even regain half of what we lost the day before. But that came on the back of what I could only call an exceptional year in the capital markets. So what will the remainder of this New Year bring?
While most of the talking heads are predicting another 8 to 10 percent rise in the markets, I think our markets could perform very differently. I actually don't mean that we might roll over and fall like a stone. I’m considering the real possibility that (depending upon what Ms. Yellen has up her sleeve) we could see the markets rocket to 18,000 on the DOW.
Here’s the issue: The U.S. economy is not a DOW 16,000-point economy. At very best we're functioning at the 8 – 9,000 level. But because of the Trillions the Fed has printed and injected into the system, we're at unseen levels. There are many ways this can play out, and the long-term situation is very interesting to explore. But in the short-term, we have some immediate ‘issues’ to deal with.
- One is, the 10-Year note flirting with 3%. Despite the bravado suggesting that it isn't a ‘big deal’ – rising interest rates are indeed a ‘big deal’. So we need to watch that.
- Secondly, the big investment names such as Warren Buffet and George Soros (and others) have been dramatically trimming their investment positions. When the big guys start pulling money ‘out of the system’, they generally have a hunch that things aren't going to be so rosy going forward.
- Finally, there's absolutely no doubt that (at some point) the money-managers (that have made a ton of money during the big market run) will want to ‘lock in’ some of those profits. You ‘lock in profits’ by selling.
On the other hand, we have the ‘New Year’ money, the January effect, and earnings reports starting later this week. So, there is good reason to believe that this market could indeed climb higher for the next couple of weeks.
There is a ‘Tug-O-War’ going on. In the long-term, the petro-dollar collapses, inflation soars, and the U.S. economy enters depression. In the short-term however, there are many reasons that we could set all new highs – again. I think (this coming week) we see a circling of the wagons, and a market ‘levitation’ into earnings season and the Non-Farm Payroll report on Friday.
I did some ‘tax loss’ buying on New Year’s Eve. That means that I purchased a basket of stocks that were ‘tossed out with the bath water’ – literally on New Year’s Eve – in hope of seeing them bounce in the New Year. These stocks included: ARIA, HSOL, AFOP, STML, CAVM, LNKD, TGT, TSLA, and ULTA. Let’s see if they bounce over the next 2 weeks.
- USO and UCO (oil ETF): pulled back substantially this week. I’m looking for our March and April CALL options to regain their dominance – and this offers a good buying opportunity.
- FXY (Japanese currency ETF): Although the Japanese Yen rose slightly this week – the PUT options continue to fall. March and April FXY – PUT contracts continue to do well.
- XHB (the housing sector ETF) continues to do well – up over 55% for the month.
- The entire 3D printing sector is continuing to run higher. ‘Triple D’ (DDD) and SSYS are the true stalwarts in the group – but don’t forget smaller names like XONE and VJET.
- Look at: ATVI and XLU (could be elephant trades forming) on the long side.
- Look at: SINA as a buying opportunity.
- Look at: FCX as a way to play the gold bounce only playing it through copper.
- Also if AAPL, GS, or AMZN ‘gap down’ on Monday – look at this as a buying opportunity.
My current short-term holds are:
- USO – April 2014 $37 Calls – in USO at $34.51 (currently $33.75)
- FXY – March 2014 $97 Puts – in FXY at $96.47 (currently $93.22) – room to run,
- XHB – Mar 2014 $33 Calls – in XHB at $31.74 (currently $33.15) – room to run,
- HD – in at 81.07 (currently 82.09) – stop at 81.50,
- EMC – in at 24.74 (currently 25.00) – stop at entry,
- DDD – in at 82.60 (currently 96.88) – stop at 93.00,
- SSYS – in at 126.63 (currently 136.00) – stop at 132.00,
- FCX – in at 34.95 (currently 37.32) – stop at 36.50,
- SIL – in at 24.51 (currently 11.61) – no stop,
- GLD (ETF for Gold) – in at 158.28, (currently 119.23) – no stop ($1,238 per physical ounce), AND
- SLV (ETF for Silver) – in at 28.3 (currently 19.46) – no stop ($20.12 per physical ounce).
To follow me on Twitter and get my daily thoughts and trades – my handle is: taylorpamm.
Please be safe out there!
I'd like to recommend a website - http://www.simpleroptions.com It's an excellent resource and 'honestly' - I've been following them for over 6 months and they're more right than they are wrong with their predictions, and that's a rarity in this climate. Please check them out on my recommendation.
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