Quotable
“It is too clear and so it is hard to see. A dunce searched for fire with a lit lantern. Had he known what fire was he would have cooked his rice sooner.

                                    The Gateless Gate
 
Commentary & Analysis
The A-B-C Price Pulse: How to Trade the C-Wave
 
Trading for real money isn’t easy. But one of the lessons I’ve learned over the years is we tend to make trading harder than it should be.
 
I am going to share a simplified pattern analysis approach that I apply every day in my currency trading and newsletter service.
 
I call it “Trading the C-Wave.”
 
Now I don’t want to pretend there is anything new here; as Jesse Livermore said:
 
“There is nothing new in Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again.”
 
Old hands will recognize this A-B-C pattern trading as similar to trading Gartley Patterns.   But I do think it is a methodology to allow you to scan the market and see some potential opportunities, then drill down and do your other work.

Read the full issue here

Jack Crooks
President, Black Swan Capital

As the yearly end of summer doldrums engulf the Hamptons, the uber-wealthy position themselves for a rocky coming storm when the robust fall trading season begins. Some of the most memorable major equity collapses happen during this time of year. Logic, fundamentals and sound business analysis has very little to do in forecasting when the actual plug will be pulled on the rocket ride in stocks. In a rigid game, the house always knows when and at what time the fleecing of the mark happens. Such timing projections do not apply to the decline in the purchasing power of the dollar. More appropriately, Federal Reserve Notes are only compulsory money because of the legal tender laws. Yet, financial instruments are gauged in terms of their worth by the dollar redemption value they produce.

Well, there you have it. This is the worst economic Catch 22 in memory. Any astute and honest breakdown of these circumstances must conclude that the conditions, that have brought the once greatest economic wealth creation engine to an abrupt seizure, are self-induced to aggrandize a select cabal of global elites.

So when will the joy ride end? For ordinary consumers the easy money train hit a brick wall with the 2008 financial meltdown. Not so, for the insiders who took corporate welfare and low equity prices to their smashing advantage. No other manufactured bubble has been more profitable for the royalty of Wall Street since the great depression.

The recent disclosure that “Soros Put” Rises To Record: Is The Billionaire Investor Betting On Market Crash? – raises a red flag.

“The “Soros put” is a legacy hedge position that the 84-year old has been rolling over every quarter since 2010. Since this was an increase of 638% Q/Q this has some people concerned that the author of ‘reflexivity’ and the founder of “open societies” may be anticipating some major market downside.

Furthermore, remember that what was disclosed yesterday is a snapshot of Soros’ holdings as of 45 days ago. What he may or may not have done with his hedge since then is largely unknown, and since there are no investor letters, there is no way of knowing even on a leaked basis how the billionaire has since positioned for the market.

Then again, considering that not only Yellen, who has warned about bubble pockets in stocks, but the BIS, Icahn and numerous other fund managers, now openly warn that the entire market has entered bubble territory, perhaps this is a case where the simplest explanation is also the right one… “

Is this just hype or should prudent people go to cash for protection from the next round of financial implosion? The answer may surprise most investors.

Stock pricings have little to do with the economic strengths, performance and future projections of the underlying businesses. Capital markets no longer serve their intended purposes of raising money to fund the operations of productive businesses. Equity downturns, turn into panics when central banksters and government planners need to create financial chaos to interject their newest consolidation system schemes.

A truly free market in commerce, much less in finance, does not exist. The dollar is not a real medium of exchange, but functions as mandatory barter vehicle for a captured society. Convertible rates of exchange with foreign currencies are more a result of political dynamics, than economic equilibrium.

When do you know that a bubble is ripe for a blow? Forbes gives you the high sign,$38 Million Ferrari Becomes The World’s Most Valuable Car, Yet Its Auction Price Disappoints. Gee, such sorrow over such a fire sale price.

Maybe you should heed the warning when, Billionaires Dumping Stocks, Economist Knows Why, which reported that, “It’s very likely that these professional investors are aware of specific research that points toward a massive market correction, as much as 90%.” Wow, spin that projection into a mere correction in an overheated market. Just maybe a 1962 Ferrari 250 GTO is not such a bad ride after all.

Remember you need cash to pay taxes. For those unlucky enough collecting government pension checks, you will get no sympathy if your retirement goes up in flames. Being a career enabler of a fraudulent political dynasty that destroyed entrepreneurship and the merchant economy deserves to be on poverty row with the rest of the country. The crash for a shrinking middle class has already occurred. Rest assured, Forbes reported, “The ranks of the world’s billionaires have swelled to a record 1,645 including 268 newcomers“, will not be feeling your pain.

James Hall – August 20, 2014

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Yesterday, Bitcoin crashed temporarily on BTC-e. We described this in our last alert:

(…) earlier today we saw a massive sell-off which brought the price of Bitcoin down from around $460 to $309 (!) in a matter of minutes. The currency erased most of the losses in the subsequent quarter of an hour and has stabilized around $440 since then.

Right now it seems that the move down to $300 is not representative of the sentiment so we wouldn’t bet on such a move at this moment. Also, the level at which Bitcoin has paused today is around $450 which corresponds to a similar level on Bitstamp.

The actual reason for the rapid decline on BTC-e can only be summarized by stating that somebody sold a lot of currency. We’ve read a more speculative analysis aiming to present a possible cause of the decline:

The event started at 1:36 PM (UTC+1) when large sell orders began to show up on the third largest western Bitcoin exchange BTC-e. Downwards momentum increased steadily as the orderbook became increasingly thin, crashing prices to a low of USD 309 per Bitcoin at 1.43 PM. In the following minutes prices rebounded swiftly on thin volume back to around USD 442 as arbitrage traders started to take advantage of the discount relative to other exchanges.

BTC-e is one of the few large exchanges that offer margin trading to their clients via the MetaTrader platform since November 2013, but the details of who excactly provides the funds necessary for margin trading have remained unclear. The shape and especially timing of the crash points towards margin traders being liquidated (or stop orders being executed), similar to what happened on Bitfinex a couple of days ago.

However, unlike Bitfinex which is transparent about open swap positions, BTC-e does not provide important data which would be needed to provide a more thorough analysis and so this last statement can only be considered a good guess.

So, it might be possible that the crash was caused by margin calls. Does this change anything?

While a move from $460 to $309 is definitely an important event, it doesn’t actually represent the market sentiment. Bitcoin came back from the slump and the losses were erased. The implications here are more important for Bitcoin traders using BTC-e. It seems that the exchange might be currently prone to such wild swings. It’s best to keep an eye on the price action on the exchange so to identify other possible “flash crashes.”

Since the crash didn’t have a lasting effect on the market, it seems that such events might not be as important for investors, even short-term ones, as it would seem at first sight.

Let’s take a look at the charts to see if anything has changed since yesterday.

Yesterday, Bitcoin went further down, to around $475. The volume was significant, the highest during the whole recent decline and the highest since Apr. 25. Yesterday was a significant day in the Bitcoin market. In our last alert, we wrote:

(…) the recent move down has already been quite strong. There was a surge in volume and now we’re seeing less trading than earlier during the decline. We’ve already seen a strong move down being followed by a breather (Saturday) and more depreciation (yesterday and today). This might suggest that most of the move down is already behind us.

On the other hand, what we’ve seen today (this is written before 8:30 a.m. ET) still looks like a pretty pronounced move down. These two hints give us a mixed picture.

What might be decisive now is the fact that we’re getting close to $450, the level at which Bitcoin stabilized in May and the starting level of the last strong rally (May-June). This level might stop the declines.

So far (this is written before 7:15 a.m. ET), $450 has in fact stopped the decline. The action today hasn’t been decisive in any direction but it seems that we might be seeing the beginning of a reversal. The volume, however, is lower than yesterday. This weakens the implications of today’s action.

On the long-term BTC-e chart we saw a strong move down yesterday on explosive volume. As we’ve already mentioned, Bitcoin hit $309 at one point during the day before coming back to around $440 at the end of the day.

Today, we’ve seen a move up on lower volume. This move has been more visible than the action on BitStamp but the volume doesn’t quite support a reversal. It is only natural to ask yourself if we’re actually seeing the beginning of a new rally now. This is what we’ve done. We share our insight with you.

Currently it seems that the action today supports a reversal at this time. This is not supported by volume which makes us weary of long speculative positions at this time. Whether Bitcoin closes the day higher than yesterday (or, at least, not much lower than yesterday) is one of two important signals of a possible change in the short-term situation.

The second indication of an improvement would be a move above $500. This is not automatic, mind. If we see a move above $500, we will still need to evaluate whether the situation supports a move up or if we’re seeing more sideway action.

Summing up, in our opinion no speculative positions should be kept in the market at this time.

Trading position (short-term, our opinion): no positions.

Quotable
““The thought is not something that observes an inner event, but, rather it is this inner event itself. We do not reflect on something, but, rather, something thinks itself in us. ” 

                                    Robert Musil

Commentary & Analysis
Japanese yen – Can 92% of the punters be right?
 
In currency markets we should be concerned about those that act, i.e. acting bulls and bears who take real positions as opposed to talking bulls and bears that are either on the sideline or just talk about currencies and don’t really trade for a living.  This positioning is what drives price action.  

….92% bearish yen…can that many be right?

Read the full issue here

Jack Crooks
President, Black Swan Capital

Forbes Editor-in-Chief and longtime friend Steve Forbes leads off this week’s Outside the Box with a sweeping historical summary – and damning indictment – of the “cheap money” policies of the US executive branch and Federal Reserve. Four decades of fiat money (since Richard Nixon and his Treasury Secretary, John Connally, axed the gold standard in 1971) and six years of Fed funny business have led us, in Steve’s words, to an era of “declining mobility, great inequality, and the destruction of personal wealth.”

And of course the damage has not been limited to the US; it is global. Steve reminds us that “The bursting of the subprime bubble put in motion a collapse of dominoes that started with the U.S. financial sector and European banks and led to the sovereign debt crisis in Europe, the Greek bankruptcy crisis, and the banking disasters in Iceland and Cyprus.” To make matters worse, the fundamentally weak dollar (and fiat currencies worldwide) have contributed a great deal to record-high food and energy prices that are spurring serious social instability.

As I showed in Code Red and as Steve notes here, we now face the looming specter of a global currency war. Steve reminds us that the real bottom line is that

Money is simply a tool that measures value, like a ruler measures length and a clock measures time. Just as changing the number of inches in a foot will not increase the building of houses or anything else, lowering the value of money will not create more wealth. The only way we will ever get a real recovery is through a return to trustworthy, sound money.  And the best way to achieve that is with a gold standard:  a dollar linked to gold.

Today’s Outside the Box is from Steve’s latest book, which is simply called Money.

I think it’s Steve’s best book in years. Get it for your summer reading. While there is more than one solution to reining in the current abuses by the major global central banks, Steve highlights the problems as well as anyone. This situation really has the potential to end badly. Just this morning the Wall Street Journal noted that “Reserve Bank of India Governor Raghuram Rajan warned Wednesday that the global economy bears an increasing resemblance to its condition in the 1930s, with advanced economies trying to pull out of the Great Recession at each other’s expense.” Rajan is one of the more highly respected economists in the world.

I am back in Dallas for an extended period of time (at least extended by my standards), where my new apartment is paying off in a less hectic lifestyle – people seem to be coming to me for the next few weeks. Tomorrow my good friend Bill Dunkelberg, the Chief Economist of the National Federation of Independent Business, will drop by for a day. We’re going to talk about the future of work, what kind of jobs will be there for our kids (and increasingly our fellow Boomers), what policies should be developed to encourage more jobs, and a host of other issues.

I’m still trying to absorb what I learned in Maine. We enjoyed the most beautiful weather we’ve had in the last eight years, and the conversations seemed to take it up a notch. I fished more than usual, too, which gave me more time to think. On Sunday, however, my thought process was not disturbed by so much as a nibble on my hook. That was after the previous two days, when the fish were practically jumping into the boat.

We had a discussion on complexity theory and why complexity actually had a hand in bringing down more than 20 civilizations. I understand the argument but think there is more to it than that. Something can be complex but continue to work smoothly if information is allowed to run “noise-free.” I began to ponder whether our government has become so complex that it has begun to stifle the flow of information. Dodd–Frank. The Affordable Care Act. Energy policy. The list goes on and on and on. Are we taking all of the profit out of the system in order to comply with complex rules and regulations? Not for large companies, necessarily, but for small ones? When we are losing companies faster than new ones are being created, that should be a huge warning flag that something is wrong in the system. The data in this chart ends in 2011, but the pictures is not getting better.

It will be good to see my old friend Dunk, and perhaps he can shed some light on my continually confused state. Enjoy your August.

John Mauldin, Editor
Outside the Box
JohnMauldin@2000wave.com

The following book excerpt is adapted from Chapter One of Money: How The Destruction of the Dollar Threatens The Global Economy – and What We Can Do About It, by Steve Forbes and Elizabeth Ames

The failure to understand money is shared by all nations and transcends politics and parties. The destructive monetary expansion undertaken during the Democratic administration of Barack Obama by then Federal Reserve chairman Ben Bernanke began in a Republican administration under Bernanke’s predecessor, Alan Greenspan. Republican Richard Nixon’s historic ending of the gold standard was a response to forces set in motion by the weak dollar policy of Democrat Lyndon Johnson.

For more than 40 years, one policy mistake has followed the next.  Each one has made things worse. The most glaring recent example is the early 2000s, when the Fed’s loose money policies led to the momentous worldwide panic and global recession that began in 2008. The remedy for that disaster? Quantitative easing—the large monetary expansion in history.

One of the reasons that QE has been such a failure was a distortionary bond-buying strategy that was part of QE known as “Operation Twist.” The Fed traditionally expands the monetary base by buying short-term Treasuries from financial institutions.  Banks then turn around and make short-term loans to those businesses that are the economy’s main job creators. But QE’s Operation Twist focused on buying long-term Treasuries and mortgage-backed securities. This meant that instead of going to the entrepreneurial job creators, loans went primarily to large corporations and to the government itself.

Supporters insisted that Operation Twist’s lowering of long-term rates would stimulate the economy by encouraging people to buy homes and make business investments. In reality this credit allocating is cronyism, an all-too-frequent consequence of fiat money.  Fed-created inflation results in underserved windfalls to some while others struggle.

Unstable Money:  Odorless and Colorless

Unstable money is a little bit like carbon monoxide:  it’s odorless and colorless.  Most people don’t realize the damage it’s doing until it’s very nearly too late.  A fundamental principle is that when money is weakened, people seek to preserve their wealth by investing in commodities and hard assets. Prices of things like housing, food, and fuel start to rise, and we are often slow to realize what’s happening. For example, few connected the housing bubble of the mid-2000s with the Fed’s weak dollar.  All they knew was that loans were cheap. Many rushed to buy homes in a housing market in which it seemed prices could only go up. When the Fed finally raised rates, the market collapsed.

The weak dollar was not the only factor, but there would have been no bubble without the Fed’s flooding of the subprime mortgage market with cheap dollars.  Yet to this day the housing meltdown and the events that followed are misconstrued as the products of regulatory failure and of greed. Or they are blamed on affordable housing laws and the role of government-created mortgage enterprises Fannie Mae and Freddie Mac. The latter two factors definitely played a role.  Yet the push for affordable housing existed in the 1990s, and we didn’t get such a housing mania. Why did it happen in the 2000s and not in the previous decade?

The answer is that the 1990s was not a period of loose money. The housing bubble inflated after Alan Greenspan lowered interest rates to stimulate the economy after the 2001 – 2002 recession. Greenspan kept rates too low for too long. The bursting of the subprime bubble put in motion a collapse of dominoes that started with the U.S. financial sector and European banks and led to the sovereign debt crisis in Europe, the Greek bankruptcy crisis, and the banking disasters in Iceland and Cyprus.

Other Problems Caused by the Weak Dollar

Many may not realize it, but the weakening of the dollar is at the heart of many other problems today:

High Food and Fuel Prices

As with the subprime bubble, the oil price rises of the mid-2000s (as well as the 1970s) were widely blamed on greed.  Yet here, too, no one bothers to ask why oil companies suddenly became greedier starting in the 2000s.  Oil prices averaged a little over $21 a barrel from the mid-1980s until the early part of the last decade when there was a stronger dollar, compared with around $95 a barrel these days.  Rising commodity prices spurred by the declining dollar have also driven up the cost of food. Many shoppers have noticed that the prices of beef and chicken have reached record highs. This is especially devastating to developing countries where food takes up a greater portion of people’s incomes.  Since the Fed and other central banks began their monetary expansion in the mid-2000s, high food prices wrongly blamed on climate shocks and rising demand have caused riots in countries from Haiti to Bangladesh to Egypt.

Declining Mobility, Great Inequality, and the Destruction of Personal Wealth

The destruction of the dollar is a key reason that two incomes are now necessary for a middle-class family that lived on one income in the 1950s and 1960s. To see why, one need only look at the numbers from the U.S. Bureau of Labor Statistics. What a dollar could buy in 1971 costs $5.78 in 2014.  In other words, you need almost six times more money today than you did 40 years ago to buy the equivalent goods and services. Say you had a 2014 dollar and traveled back in time to 1971. That dollar would be worth, according to the CPI calculator, a mere 17 cents. What has this meant for salaries?  According to statistics from the U.S. Census Bureau, a man in his thirties or forties who earned $54,163 in 1972 today earns around $45,224 in inflation adjusted dollars –a 17% cut in pay. Women have entered the workforce in much larger numbers since then, and women’s incomes have made up the difference for families. As Mark Gimein of Bloomberg.com points ou t, “The bottom line is that as two-income families have replaced single-earner ones, the median family has barely moved forward. And the single-earner family has fallen behind.”

Increased Volatility and Currency Crises

The 2014 currency turmoil in emerging countries is just the latest in a succession of needless crises that have occurred over the past several decades as a consequence of unstable money. Today’s huge and often-violent global markets, in which a nation’s currency can come under attack, did not exist before the dollar was taken off the gold standard. They are a direct response to the risks created by floating exchange rates. The crises for most of the Bretton Woods era were mild and infrequent. It was the refusal of the United States to abide by the restrictions of the system that brought it down.

The weak dollar has also been the cause of banking crises that have been blamed on the U.S. system of fractional reserve banking. Traditionally, banks have made their money by lending out deposits while keeping reserves to cover normal withdrawals and loan losses.  The rule of thumb is that banks have $1 of reserves for every $10 of deposits.  In the past, fractional reserve banking has been criticized for making these institutions unnecessarily fragile and jeopardizing the entire economy. Indeed, history is replete with examples of banks that made bad loans and went bust.  Historically, the real problems have been bad banking regulations.  In the post-Bretton Woods era, however, the cause has most often been unstable money. Misdirected lending is characteristic of the asset bubbles that result when prices are distorted by inflation. This has been true of past booms in oil, housing, agriculture, and other traditional havens for weak money.

The Weak Recovery

This bears repeating:  the Federal Reserve’s quantitative easing, the biggest monetary stimulus ever, has produced the weakest recovery from a major downturn in American history.  QE’s Operation Twist has not been the only constraint on loans to small and new businesses.  Regulators have also compounded the problem by pressuring banks to reduce lending to riskier customers, which by definition are smaller enterprises.

In 2014 the Wall Street Journal reported that this credit drought had caused many small businesses, from restaurants to nail salons, to turn in desperation to nonbank lenders—from short-term capital firms to hedge funds—that provide loans at breathtakingly high rates of interest. Interest rates for short-term loans can exceed 50%.  Little wonder there are still so many empty storefronts during this period of supposed recovery.  Monetary instability encourages a vicious cycle of stagnation: the damage it causes is usually blamed on financial sector greed. The scapegoating and finger-pointing bring regulatory constraints that strangle growth and capital creation.  That has long been the case in countries with chronic monetary instability, such as Argentina.  Increased regulation is now hobbling capital creation in the United States as well as in Europe, where there is growing regulatory emphasis on preventing “systemic risk.”  Regulators, the Wall Street Journal noted, “are increasingly telling banks which lines of business they can operate in and cautioning them to steer clear of certain areas or face potential supervisory or enforcement action.”

In Europe, this disturbing trend toward “macroprudential regulation” is turning central banks into financial regulators with sweeping arbitrary powers. The problem is that entrepreneurial success stories like Apple, Google, and Home Depot—fast-growing companies that provide the lion’s share of growth and job creation—all began as “risky” investments. Not surprisingly, we’re now seeing growing public discomfort with this increasing control by central banks. A 2013 Rasmussen poll found that an astounding 74% of American adults are in favor of auditing the Federal Reserve, and a substantial number think the chairman of the Fed has too much power.

Slower Long-Term Growth and Higher Unemployment

Even taking into account the economic boom during the relatively stable money years of the mid-1980s to late 1990s, overall the U.S. economy has grown more slowly during the last 40 years than in previous decades. From the end of World War II to the late 1960s, when the U.S. dollar had a fixed standard of value, the economy grew at an average annual rate of nearly 4%.  Since that time it has grown at an average rate of around 3%. Forbes.com contributor Louis Woodhill explains that this 1% drop means a lot. Had the economy continued to grow at pre-1971 levels, gross domestic product (GDP) in the late 2000s would have been 56% higher than it actually was.  What does that mean?  Woodhill writes: “Our economy would have been more than three times as big as China’s, rather than just over twice as large. And, at the same level of spending, the federal government would have run a $0.5 trillion budget surplus, instead of a $1.3 trillion deficit.”  And what if the United States had never had a stable dollar? If America had grown for all of its history at the lowest post-Bretton Woods rate, its economy would be about one-quarter of the size of China’s.  The United States would have ended up much smaller, less affluent, and less powerful.

Unemployment has also been higher as a consequence of the declining dollar. During the World War II gold standard era, from 1947 to 1970, unemployment averaged less than 5%. Even with the economy’s ups and downs, it never rose above 7%.  Since Nixon gave us the fiat dollar it has averaged over 6%:  it averaged 8.5% in 1975, almost 10% in 1982, and around 8% since 2008. The rate would have been higher had millions not left the workforce. The rest of the world has also suffered from slower growth, in addition to higher inflation, since the end of the Bretton Woods system. After the 1970s, world economic growth has been a full percentage point lower; inflation, 1.5% higher.

Larger Government with Higher Debt

By enabling endless monetary expansion, the post-Bretton Woods system of fiat money has helped propel the unchecked growth of government. In 1971 the total U.S. federal debt stood at $436 billion.  Today it is more than $17 trillion. It’s no coincidence that the federal debt has doubled since 2008, the same year that the Fed started implementing QE.

The Keynesian and monetarist bureaucrats who today set the monetary policies of the Fed and other central banks are like pre-Copernican astronomers who subscribed to the notion that the sun revolved around the earth. They are convinced that government can successfully direct the economy by raising and lowering the value of money. Yet, over and over again, history, and recent events, has shown that they are wrong.

What they don’t understand is that money does not “create” economic activity. Money is simply a tool that measures value, like a ruler measures length and a clock measures time. Just as changing the number of inches in a foot will not increase the building of houses or anything else, lowering the value of money will not create more wealth. The only way we will ever get a real recovery is through a return to trustworthy, sound money.  And the best way to achieve that is with a gold standard:  a dollar linked to gold.