The Zimbabwe School of Central Banking

The market hit new highs on comments made by presumptive Fed head Janet Yellen. More and more, the market is seeing Yellen as even more radical than Ben Bernanke.

Many people thought that Bernanke was a professor from Princeton. This is true. But few people know that he graduated from the Zimbabwe School of Central Banking. And Yellen got a Ph. D. from there!

I think they also both buy their clothes from Banana Republic!

Enough kidding. This is actually a very serious situation.

Massive easing through bond and mortgage backed securities purchases causes massive distortions but does not achieve what they say they want to achieve, lower unemployment.

They believe that their buying reduces interest rates which therefore causes people to want to buy houses which then leads to new houses being built and therefore unemployment comes down.

The problem is that they are trying to repeal the Law of Supply and Demand.

This sounds good in theory but not in practice.

Certainly, lowering the price of mortgages increases the demand for mortgages. Until May, we were seeing massive amounts of refinancing of old mortgages. The pop up in interest rates has largely ended that surge in refis.

But wait, there was no surge of new mortgages for new houses! How could that be possible, Mr. Bernanke and Ms. Yellen?

The problem is that the price is too low for lenders to be interested. Lenders look at mortgage rates around 4% and know that they cannot make money over the life of that mortgage. Inflation and taxes will eat them alive. Plus, of course, they have to also cover the cost of some of those mortgages defaulting.

So mortgage lending is very very slow largely because interest rates are too low for lenders to want to make loans.

In other words, there is no supply of mortgage money at the rates that Bernanke and Yellen believe should stimulate new housing.

They need to stop this insane policy and let the market adjust. It will heal naturally.

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Notes

Life is good.

I’m hanging at the Blue Water Grill in San Pedro, Belize. Lunch was a nice salad followed by a big fruit plate.

I’m literally on the beach. A couple of kids are playing in the sand. A couple of boats are drifting by in the distance.

Island music in the background.

My eyes are drooping from the relaxation. I feel like I’m going to turn into a lizard if I stay here any longer!

Wait, maybe life isn’t so good.

I’m about to take a plane up to cold New York. Don’t get me wrong, I love New York. But not when it’s freezing. Particularly when I’m coming from the tropics!

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How Binary Options Can Improve Your Trading Skills

I’m always excited to learn ways to improve my trading.

Our resident binary option expert, Abe Cofnas, was just interviewed on how to use binary options to improve your trading skills.

The blog, Trader Tech Talk, just did an interesting interview where Abe talks about binary options. Listen to it for some surprises!

Click here to listen to it: http://blog.tradertechtalk.com
I think you will enjoy it!

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Notes

I just returned from a trip to South Africa again. I was teaching a trading class there to over 350 people. This is a huge size for this class as we normally do much smaller classes in the US.

The point is that this shows how keen South Africans are to learn about trading.

Apparently, there are only a few people who teach investing in South Africa and they are not very good.

I was very impressed with the level of enthusiasm they had for investing. They seemed very hungry for the info!

I’m looking forward to going back there in January to teach two more classes!

We’re really making a push there as the market is very keen for our material. We’ve hired a South African and are setting up an office there. I think we are early to the market there as incomes are still low but I think that they are growing rapidly and I’d rather be too early than too late.

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Posted in Economics, Futures, Investing General, Stocks | 2 Comments

Japan is a Train Wreck

The latest insane policy to come out of Japan is that they are going to raise the countries’ sales tax from 5% to 8%!

Yes, the Japanese economy is starting to grow. But so is inflation.

Yet Prime Minister Shinzo Abe says it is needed. The New York Times reports that he is “citing the need to “maintain confidence” in Japan’s fiscal health and pay for the country’s growing number of elderly citizens.”

From the NY Times:
“If we raise taxes now, would consumption slump, and would the Japanese economy sink back into the deep valley that is economic morass and deflation?” he said. “I pondered these questions until the very end. But there is no road left for us but to grow our economy and to rebuild our finances at the same time.”

By combining a tax increase with government stimulus, Mr. Abe is signaling to global investors that Japan will start taking concrete steps to rein in its colossal debt and that it is prepared to take ample measures to shore up the economy.

Earlier this year, national debt topped 1 quadrillion yen, or $10 trillion, for the first time — more than twice the size of Japan’s economy and larger than the economies of Germany, France and Britain combined. That level of borrowing raises concerns that investors could one day lose confidence in Tokyo’s ability to service its debt, which could set off a crisis with grave consequences for the global economy.”

This will fail.

Yes, the government needs more revenue. But raising sales tax will lead to less sales.

I have a principle. If you tax something, you get less of it.
The principle means that there will be less sales as a result of the tax hike. This means that there will be a near recession coming in Japan after that tax hike.

I’ll monitor the situation closely to see if the staggering of the economy will create a trading opportunity. Normally, I’d be looking to sell the yen, Japanese stocks and buying Japanese bonds.

I’ll keep you posted!

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  Notes    

I’ve never spent very much time in Japan. The weather sucks. It seems like it is always cold when I am there.

Yet, there, in the distance, is the magnificent Mount Fuji. I find my heart leaps every time I see that beautiful mountain.

I love Japanese prints by Hokusai and Hiroshige. I love them for their subjects, color, design, and odd perspective.

Few people realize the impact these prints had on western art.

I saw a remarkable exhibit at the Vincent Van Gogh museum in Amsterdam.

What they showed was early paintings by Van Gogh. What was remarkable were his copies of Hiroshige prints. He literally learned to paint largely from copying Japanese prints! Once you know that, you can start to see the influence even on his later work. Clearly his use of color and texture are very different from the Japanese prints but note that his perspective is very similar.

It gave me a completely different perspective on Japanese prints and Van Gogh. I love them both and the exhibit opened my eyes to a new reality and actually deepened my appreciation of both.

Posted in Economics, Investing General, Politics | Leave a comment

Why The Market is Like a Texas Sheriff

I had long hair and was driving a Volkswagen van. Yep, a total cliche of looking like a hippy. Well, I was a hippy so I guess that was to be expected.

I was driving as fast that that old 1957 microbus could take me which was not very fast.

All of a sudden, I heard the sound of a siren and saw flashing lights in the rear view mirror.

WTF!

I’m not speeding! My VW can barely go the speedlimit let alone speed in West Texas!

I pulled over. The cop got out and sauntered over to my window.

“I want you out of my county right now. Don’t stop driving til you get out of my county.,” he said succinctly.

I mistakenly blurted out, “But I didn’t do anything!”

“Your tail light is busted.”

“No, its not!” and I got out of the car and went to the back of the car. The tail light was fine.

He sauntered back, stopped for a second, and kicked out the tail light.

He blandly looked at me.

“Thank you, sir, for alerting me to my busted tail light. I’ll get it fixed in the next county!”

The point: you can’t fight the market. No matter how stupid, manic depressive, compulsive, or just plain wrong it is.
It will always win. It is too big to beat.

Our job as traders is to simply look the market plain in the eye and say, yes sir, I’ll go short XYZ. Yes, sir, I’ll go buy some ABC.

That is the way to make money in the market.

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Notes     

I was in Hong Kong last week on business.

I was staying at the Hyatt Regency in Sha Tin, which is on the outskirts of Hong Kong.

Across the street is the Sha Tin Race Course. This is the secondary track in Hong Kong.

The biggest race course in the world is right in the middle of Hong Kong. It’s called Happy Valley. Betting here is crazy!

The amount of money bet at Happy Valley in a year is more than all race courses in the US combined! They love their racing here.

I love Hong Kong! I love just walking down the streets because of the great energy on the streets. I’ve only felt that in two cities, Hong Kong and New York. Partially it is the jostling of people on the street. Partially it is the focus of the people on the street. I always feel that Hong Kongers and New Yorkers are on their way somewhere to accomplish something important.

Is this a great tourist town? Not if you want to go to museums. This is a city all about the living. Some people believe this is the best eating town in the world.

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Why The Fed Will Not Taper Soon

The market was shocked last month when the Fed declined to cut their monthly bond buying. The Fed has basically said that the economy, especially the labor market, is not strong enough to stand on its own feet. Inflation is low enough that they feel that they can safely continue to keep money supply growing.

The market had felt that the economy was doing well enough to cut back the stimulus. They were wrong.

After the Fed’s decision to not taper, the market thought that they would start the taper at their next meeting.

I’m coming to the conclusion that the Fed will not taper soon.

The current shutdown of the government will likely go on for another week or so, perhaps longer. The debt ceiling will be supposedly hit on October 17. As the shutdown continues, it starts to run into the debt ceiling. Right now the debt ceiling is not on the radar screen of the Mainstream Media. Only the shutdown counts right now.

But the longer the shutdown continues the more likely it will be lumped together with the debt ceiling fight into a Battle Royale about the role of government and spending policy.

I believe that they will find a solution at or about the date of the debt ceiling but I am afraid that both sides are currently digging in their heels and that will lead to a brutal fight around October 17.

As you know, I pay a lot of attention to seasonal price tendencies. This year, the normal seasonal calls for a 5% decline in October. The fight over the debt ceiling may be the trigger for the decline in the market.

I think the market has discounted the shutdown and it will no longer affect the market unless the shutdown drags on for another two weeks.

I am still long the market and enjoying the ride!

But I’m very nervous about the prospects for a 5% correction. As a result, I’ve got my finger on the trigger of my hedges. I’m using puts on the etf SPY. They are cheap right now. I’ll trigger the hedges if we see a slight drop in the market.

I’m long but nervous.

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Is The Market About to Crash?

I co-wrote my first book back in 1979. The book was all about seasonal price tendencies for commodities. I had chapters on things we don’t trade anymore. I miss the days when I could trade iced broilers and Maine potatoes!

I first discovered seasonals in the late 1970′s and became fascinated with a technique that was showing a consistent gain or loss in the market. I figured that if a market made a consistent rally most years then I could find a way to make money from that tendency.

For example, what if corn consistently dropped into harvest. Shouldn’t I be able to watch that seasonality and then use a technical method to enter short the corn market when the seasonality shows that the market will drop. Of course I could!

It turns out that the stock market is also highly seasonal during certain periods of the year.

My seasonal analysis tells me that the stock market will likely drop by about 5% during the month of October into the month of November.

I normally pay very close attention to seasonals, but I also try to find a fundamental reason to support that seasonal tendency. So what is it that might cause a 5% drop?

I think that the trigger will be one of two fact:

1. Fiscal Cliff. Now that Syria and Taper have faded from the headlines, attention has shifted to the Fiscal Cliff. Senator Ted Cruz’ filibuster is getting live coverage and filling the airwaves and headlines with Fiscal Cliff news. I believe that is the main reason, along with profit taking, why the market is dropping over the last week.

The market has sold every time in the past when confronted with the Fiscal Cliff. And, each time, it rallies when a last minute deal is struck.

This time is a little different. Both sides are trying different tactics to muscle the other side to their will. I don’t think either side will win and we will end up with the same conclusion: kick the can down the road. But the differing tactics will cause more attention to be focused on the issue than normally and this will cause a bigger reaction than normal.

2. Fed Talk. Secondarily, it is possible that some Fed official will say something to cause the market to drop. I consider this unlikely but possible.

Seasonals are powerful. We have a fundamental trigger. We have a currently weak market. I’m nervous. I’m starting to set up some hedges to use if I see any further weakness.

I don’t think the market will crash. There are not the usual factors in play to cause that. But a 5% correction? Sure! That would be normal!

I’m not short the market but am very alert to get ready to hedge my long stocks.
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Notes

I’ve been in the US for about a month but am about to start another long trip overseas. This trip will take me to at least Hong Kong, Singapore, Sydney, and Johannesburg.

I love going overseas, except for the jet lag.

I love all the different cultures. Eating in the hawker stalls in Singapore. Riding the White Star ferries in Hong Kong. Basking in the beauty of the Sydney harbor.

I don’t know Johannesburg well yet but am hoping to spend a week there on this trip so that I can get to see it better.

I’m working on a project to teach trading to a bunch of teenagers in South Africa. We are working on this project with the government. Who knows if we will actually get the project going, but I like the idea!

Posted in Economics, Investing General, Politics | Leave a comment

Why ZIRP Is NUTS

I’ve recorded a short audio report for you to really understand the present and coming disaster of the current Fed policy. It’s scary!
It will help you understand the current situation. This policy is going to affect your personally!
Just press play below to listen to this short audio.

Good trading,
Courtney

P.S. I’ve been around the world, literally, three times so far this year. Exciting but tiring! I’ve been able to go to South Africa for the first time and finally get to spend some quality time in Australia. I really liked them both but they are really different!

It was crazy seeing herds of kangaroos leaping across fields! It was otherworldly!

The bird life was also great, seeing wild parakeets and other super colorful birds.

I even took my life in my hands by driving on the wrong side of the road for the first time. Scary! Not for me but for all the other drivers on the road!
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Posted in Economics, Investing General, Politics | 2 Comments

Summers Gone and the Markets are Yellen!

Summers

Who knew that Larry Summers was so powerful?

Just the mere mention that he doesn’t want to be the Fed Head caused major moves in every key market. Turns out that markets felt that he would be a curmudgeon with Fed policy, as least compared with leading candidate, Janet Yellen.

The market views Summers as far more hawkish when it comes to monetary policy. They believe that he would taper quicker and bigger than Yellen.

They are probably right.

After all, Summers has actually had real jobs in his life so has at least a brushing acquaintance with reality. Yellen has been an academic or government worker for her whole life.

So it should be no surprise that she is supportive of a very easy monetary policy.

Some say she should be the next Fed Chairman.

Mark Gongloff, of the deep analytical publication, the Huffington Post, points out that she said, “Policy makers should be compelled to take action given the serious costs of long-term unemployment when overall unemployment is already high. A week of unemployment is worse when it is experienced as part of a longer spell.”

Certainly, unemployment is one of the twin but often contradictory goals of the Fed. The other being a stable currency. And, certainly, I support lower unemployment!

But current Fed policy, which presumably Yellen supports as the vice-chair, is anti-unemployment. The Fed is buying virtually of the Federal Government debt under the idea that low interest rates will stimulate the investment and housing arenas.

However, this has not and will not happen due to a flawed understanding of how economies work.

 

1. Buying all Treasury debt keeps interest rates low. This helps our deficit now but masks the true cost to the economy. The Federal government is encouraged to borrow more because rates are low but is now building up unsustainable levels of debt that is creating an unsustainable level of interest costs. The Treasury NEEDS to have zero interest rates or Federal interest payments will become the second largest expense of the Federal government in just a couple of years. Compounding can be a heavy burden when it is working against you!

2. Low interest rates are killing employment! You see, every business makes the decision when they are growing to either hire more people or buy a machine to increase productivity of the existing employees. Low interest rates have caused a huge shift to machines and away from hiring people. Low interest rates make it more attractive to boost productivity of the existing employees rather than hire people. So Yellen’s idea is totally idiotic if she really cares about unemployment.

3. Low interest rates have helped the housing market but it took years to see that help. Low interest rates cause the real cost of owning a house decline, thus boosting housing demand. So let’s count this as a check in Yellen’s favor. But the cost is so high that I am not pleased by this false boosting of demand. The problem is that every element that caused the housing crisis IS STILL IN PLACE! So Yellen’s policies will eventual lead to another housing crisis within the next ten years!

The bottom line is that the Fed is trying to play God with our money. The twelve academics on the Board of Governors of the Fed have proven themselves to be incompetent. Yellen will just be the latest.

In the meantime, we can clearly see that the market is simply being supported by the Fed, not economic fundaments. Fed tightening will lead to at least a 10% correction in the market and more likely a 20-30% correction.

I’m not Yellen.

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The Big Alibi For Failure

“Markets are different now”
“Markets are so much more volatile now”
“You can’t time the market”

These statements are all false. They are alibis for failures.

Markets are the same as they ever were. The losers are saying that human nature has changed. Really? This is just nonsense.

The same people just simply don’t know the history of markets. Quick, show me a market character that has never happened in the past.

Study the history of markets and you will that every type of market that exists today has existed in the past.

Are markets more volatile now? Probably not. I would actually argue that they are less volatile!

You see, markets are deeper and more liquid than at any time in the past. More participants means less volatility.

They will tell you that you can’t time the market. What nonsense.
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Just look at the track record of trend followers. Here is a group of people who consistently beat the market through market timing. D they predict the market? No. But they make money by timing the market.

I’m one example. Timers Digest ranked me the top bond and gold trader for three years. Can anyone say that was luck? It’s possible but not likely. I came in second for three years as a stock market timer to Don Walanchuk who has consistently crushed the market as a timer.

The people who say that you can’t time the market should rephrase the statement to simply say that they can’t time the market. They shouldn’t project their ignorance and perhaps failure onto others.

One should never blame your trading failure on outside factors.

Posted in Economics, Investing General | 1 Comment