Category Archives: Metals & Mining

The Bitcoin Market

A Bitcoin token now trades for about $7,000. In 2009, 10,000 bitcoins bought two Papa John’s pizzas. It has no value in any investment sense – it has no utility, cash flow or intrinsic value. The only reason for buying a token is the Greater Fool Theory, the notion that one can always find someone else who also believes in the theory who will pay you more for your token than you paid the lesser fool who sold it to you. Obviously belief in this theory has taken on manic proportions. Tulips, bah! What pikers.

This theory is generally falsified by a panic, which is characterized by the sudden disappearance of Greater Fools – and of course liquidity.

Unfortunately the stock market has become infected with this same notion, although the tokens in this case are a small number of ludicrously overpriced stocks. For example, the NASDAQ 100 index has been leading the market higher, but the index is driven by just 5 stocks that make up 45% of the index’s market capitalization. At the same time, 40% of NASDAQ stocks are below their 200-day moving averages.

This kind of situation has happened before. It has never ended well.

Toilet Paper

There’s something special about toilet paper. Perhaps, in addition to the obvious benefits in comfort and hygiene, it has become something of a symbol of civilization. It is widely believed that its inability to deliver adequate quantities of toilet paper triggered the downfall of the Soviet Union. As recently as 2009, the government in Cuba was facing unrest for the same reason. The political upheavals in Venezuela clearly highlight a shortage of toilet paper as a major grievance.

The common element in these situations is not toilet paper, but the government’s belief that it can control the economy to conform to socialist ideals while continuing to grow national wealth, production and employment. The shortage of toilet paper is merely a common, albeit not universal, symptom of the failure of centralized government economic management.

As we come to the end of 2015, we see that this belief in central planning has become widespread despite many failures. Keynesian economists have asserted that they can indeed achieve this nirvana by monetary manipulation, and so elected politicians have turned over the central banks to them. The result has been unprecedented volatility in financial asset prices as the inability to accurately forecast the results of monetary actions leads to wider and wider swings.

Sadly, there is no reason to believe that the Keynesians have learned anything from their failures. John Hussman says:

On the other side of the recklessly speculative advance of recent years is not only the likelihood of brutal market losses, but also tremendous opportunity. I fully expect the S&P 500 to double, and to double again over the coming 10-12 years, and yet I also expect the total return of the S&P 500 over that period to be zero. Both aspects of that expectation are likely because markets move not diagonally but in cycles. How did the S&P 500 trace out a total return of zero between 2000 and the end of 2011? By first losing half its value, then more than doubling, then losing more than half its value, and then doubling again. Across history, extreme valuations have invariably been followed by similar behavior – wide cyclical swings, yet only modest overall returns over the following decade.

Dr. Hussman’s assessment, based on history, is likely to understate the volatility of the outcome as the central banks, led by the Fed, will probably act to amplify the cyclic volatility, rather than dampen it as they should. As far as I can tell, nobody at the Fed has the slightest notion of control system theory. Since it has no reliable economic forecasting mechanism, there is no way for the Fed to look forward. Therefore it can only look backward – the Fed calls this “data-driven.” Control based on such feedback can work, but only when properly designed. The delays in the data and the action of any control inputs the Fed might make are probably too high to make any such control system stable.

The end point must be some sort of global economic revolution as socialism, or at least the form of socialism that requires continuous injections of new money to sustain itself, is finally rejected. Getting to that point will be tough as the beneficiaries of big government and redistribution far outnumber the victims, the workers who actually contribute value to the world’s economies. Navigating this series of economic tempests will be difficult. I remember once buying a copy of “Sail” magazine that purported to provide insight in how to excel in light air. The advice boiled down to “sail fast and avoid the holes.” Right. True, but not helpful. In the same spirit, “buy low and sell high.” Happy New Year.

Tick, Tick, Tick

Jeff Gundlach, who has been warning that the U.S. Federal Reserve should not tighten monetary policy in December, gave his “most bearish yet” presentation. According to zero hedge, he cited a number of asset classes that are signaling deteriorating conditions. The commodities market has been facing monstrous declines with copper prices, as an example, down 37 percent since July 2014 while “the breadth of the equity market may be the worst ever.” Gundlach characterized commodities as the “widow maker” of the markets.

Overall, Gundlach said it is “unthinkable” to raise rates with junk bonds and leveraged loans struggling so much. Slides are here, well worth reviewing.


Based on her speech this morning, Janet Yellen seems bound and determined to raise interest rates at the December meeting. Her interpretation of the labor market reports seems to led her to believe that all is well and growth is assured.

As I have said before, there are two prices that matter. One is energy and the other is labor. Energy is in glut, and prices have apparently resumed their decline after hovering in the mid 40s – low 50s basis oil. Labor prices are still being driven up by Obamacare’s soaring healthcare costs, even though real wages and disposable income are declining. However, yesterday’s ISM serves to confirm the wide variety of indicators that show manufacturing in rapid decline and world trade collapsing. It seems likely that labor demand and prices will follow suit with the usual several month lag.

It is interesting that even with a massive devaluation of the Euro (USD 1.06 as I write), inflation in the euro zone is non-existent. This is an indication of strong deflationary pressures, which are even more intense in the US as Yellen’s hawkishness serves only to strengthen the USD.

It is hard to imagine that Yellen’s move, assuming she does in fact carry through, will do other than further strengthen the dollar and increase deflationary pressures.

Long term Treasury bonds continue to be attractive, both fundamentally and technically. Zero hedge observes: “The last time the world was this short Treasuries, the 10Y yield collapsed from 3.94% to 2.39% in just 3 months.” When Japan raised rates under similar circumstances, JGBs soared and yields collapsed.

I think Ms Yellen’s action will be seen as a policy error. And if she changes her mind – again – it will be seen as a serious blow to her credibility. She is well known to be hyper-cautious, for example arriving three hours early for airline flights. This mindset is not serving her well. We’ll see.

The Economic Goon Show

If you ever wanted clear evidence that economics is not a science, simply read the news this morning:

In the US, after 7 years of ZIRP and QE, the expected December rate hike is supposed to push up inflation and confirm the economy is improving; it is naturally bullish for stocks.
In Europe, a year and a half of NIRP and a year of QE, an imminent rate cut further into negative territory is supposed to push up inflation and confirm the economy is improving; it is naturally bullish for stocks.

With apologies to Spike Milligan. “When Alice spoke, her words would appear as a series of meaningless squiggles. Her tribe lives on Goon Island and the Goons are indistinguishable from each other.”

Pavlov’s Dogs

Pavlov trained his dogs to salivate when a bell was rung. Wall Street has trained its algos – automated traders – to buy stocks and sell bonds when bad economic news and central bank jawboning portend more QE.

The result is a stock market that becomes more bizarrely overbought and overvalued every day and a Treasury bond market that offers great value. Consumer and commodity prices are in decline, and it seems certain that a global recession has begun, although that will not be confirmed for some months.

A sudden and steep decline (avoiding the c-word) seems inevitable as divergences grow.

Steel Yourself

This article, by Reagan’s OMB Director, David Stockman, clearly explains the pathology of the collapsing Chinese iron and steel industry, and its implications for the rest of the world.

Namely, the two-decade-long economic boom fueled by the money printing rampage of the world’s central banks is beginning to cool rapidly. What the old-time Austrians called “malinvestment” and what Warren Buffet once referred to as the “naked swimmers” exposed by a receding tide is now becoming all too apparent.

This cooling phase is graphically evident in the cliff-diving movement of most industrial commodities. But it is important to recognize that these are not indicative of some timeless and repetitive cycle—–or an example merely of the old adage that high prices are their own best cure.

Instead, today’s plunging commodity prices represent something new under the sun. That is, they are the product of a fracturing monetary supernova that was a unique and never before experienced aberration caused by the 1990s rise, and then the subsequent lunatic expansion after the 2008 crisis, of a cancerous regime of Keynesian central banking.

These falling prices are not cyclical or “transitory,” they are reflective of the failure of what should properly be called neo-Keynesian economics, or perhaps Krugmanesque economics.

Read the article and steel yourself for a bumpy ride as reality intrudes on the happy talk fantasies purveyed by the propaganda media.

Think Again

Do you think that the propaganda narrative which explains the collapsing price of oil as being due to a supply glut has any basis in reality?

If you do, the answer this question – where did this come from?

Australia’s biggest coal exporter Glencore will suspend its Australian coal business for three weeks in a move never before seen in the Australian market, to avoid pumping tonnes into a heavily oversupplied market at depressed prices.

Another supply glut, perhaps? Or could it, just possibly, be a global demand issue? Think about it. Think again.

Oh, and you Keynesians, that 2% inflation thing? Good luck with that…

Deflation Coming

There are only two prices that matter to the economy. One is labor, the other is energy. Both commodities are in oversupply relative to present demand. Therefore price is under pressure, exactly as one might expect.

Rolling Over

Overnight, the Japanese government admitted – in a roundabout way – that the Japanese economy was back in recession. Germany reported this morning that order books for its industries, including its exporters, had shrunk significantly providing ample confirmation that the Eurozone is back in recession. In China, the housing bubble has burst although economic growth is still being reported.

Here in the US, the bond market is off and running as it smells trouble and commodity prices are sinking. Of course, the stock market continues blithely along believing that every other market is out of step. I suppose.