another site
The following two charts cut right through the headline propaganda and show all there is to know about the state of the global economy.
The first is a chart of Global Cyclical stocks (Goldman ticker GSSBGCYC). The second shows Global Defensives (Goldman ticker GSSBGDEF). The resulting picture is worth 1000 Op-Eds welcoming you to yet another “global recovery.”
Good luck to the US as the “decoupled source” of all global growth in the coming year.
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Submitted by Adam Taggart via Peak Prosperity,
John Hussman is highly respected for his prodigious use of data and adherence to what it tells him about the state of the financial markets. His regular weekly market commentary is widely regarded as one of the best-researched, best-articulated publications available to money managers.
John's public appearances are rare, so we're especially grateful he made time to speak with us yesterday about the precarious state in which he sees global markets. Based on historical norms and averages, he calculates that the ZIRP and QE policies of the Fed and other world central banks have led to an overvaluation in the stock market where prices are 2 times higher than they should be:
John Hussman: What's interesting here is that if you think about equities, they're not a claim on next year’s prediction of earnings by Wall Street analysts. A stock, in fact any security, is a claim on any long-term stream of cash flows that investors can expect to be delivered to them over a very long period of time.
When you look at equities you can calculate something called duration. It's essentially the effective life of a security over which you are collecting cash flows in return for the amount you pay. For the S&P 500 the duration is about 50 years. In other words it is a very, very long-term asset. The only reason you would want to price that asset based on your estimate of next year’s earnings is if you were convinced that next year’s earnings are actually representative of the very, very long-term stream — and I'm talking 50 years or so of earnings that you're likely to get — that those earnings are in a sense accurately proportional to the whole long-term stream.
What's amazing about that is that is it has never been true. It has never been true historically. If you look at corporate profits and especially corporate profit margins, they're one of the most cyclical and mean-reverting series in economics. Right now, we have corporate profits that are close to about 11% of GDP, but if you look at that series you will find that corporate profits as a share of GDP have always dropped back to about 5.5% or below in every single economic cycle including recent decades, including not only the financial crisis but 2002 and every other economic cycle we have been in.
Right now stocks as a multiple of last year’s expected earnings may look only modestly over valued or modestly richly valued. Really if you look at the measures of valuation that are most correlated to the returns that stocks deliver over time say over seven years or over the next 10 years the S&P 500 in our estimation is about double the level of valuation that would give investors a normal rate of return.
So right now, we've got stocks valued at a point where we estimate the 10 year prospective return on the S&P 500 will be about 1.6 to 1.7% annualized — talking right now with the S&P 500 at 2032 as of today’s close.
Chris Martenson: I guess 1.6 or 7% doesn’t sound bad if you are getting 0% on your risk-free money, I guess. But this says that any move by the Fed to normalize — which means rates have to go up — any move to drain liquidity from the system is going to have its own impact. If we held all things equal, a normalization effort is going to then basically expose that the stock market is roughly overvalued by 100%.
John Hussman: 100%, yes. I actually think the case is a little bit harsher than that; in fact, quite a bit harsher than that.
The idea that well, "1.7% isn’t so bad" or "1.6% isn’t so bad" ignores the fact that really in every market cycle and economic cycle we have had a point where stocks were fairly valued or undervalued.The only cycle in which we didn’t see that was actually the 2002 low where stocks actually ended that decline at an overvalued level on a historical basis. But valuations were still relatively high on a historical basis in 2002. They got slightly undervalued in 2009, but not deeply.
On a historical basis, what's interesting is that if you look at measures of valuation that correct for the level of profit margins, you actually get about a 90% correlation with subsequent 10 year returns. That relationship has held up even over the past several decades. It has held up even over the past 5 years where the expected return that you would have forecasted based on time-tested valuations turned out to be pretty close to what you would have forecasted 10 years earlier.
Right now, like I say, we are looking at stocks that have been pressed to long-term expected returns that are really dismal. But more important than that, in every market cycle that we've seen with the mild exception of 2002, we've seen stocks price revert back to normal rates of return. In order to get to that point from here, we would have to have equities drop by about half.
This is one of the highest-quality and deepest-diving podcasts we've recorded in the 3-year history of our series. Part 1 is publicly available below. Part 2 can be accessed here (enrollment required).
Click the play button below to listen to Part 1 of Chris' interview with John Hussman (26m:29s):
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“So there is a failure of politics there that we’ve got to improve on.”
President Obama on Sunday tersely summarized Democratic losses in last Tuesday’s midterm elections, saying simply, “We got beat.”
Obama said the buck ultimately stops with him during an interview with CBS’s “Face the Nation,” his first Sunday show appearance since September.
“And so whenever, as the head of the party, it doesn’t do well, I’ve got to take responsibility for it,” Obama said. “The message that I took from this election, and we’ve seen this in a number of elections, successive elections, is people want to see this city work.”
Obama said there has been a “failure of politics” on the part of Democrats, to not court the other side.
“And I think there are times, there’s no doubt about it, where, you know I think we have not been successful in going out there and letting people know what it is that we’re trying to do and why this is the right direction,” he said. “So there is a failure of politics there that we’ve got to improve on.”
* * *
So, roughly translating this spinfest… Obama almost takes responsibility for the elections…. until he blames the loss on voters blaming Washington, not his administration.
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Prime Minister Mariano Rajoy has a problem. Despite his best legal and propoganda defenses (and harsh weather conditions) today’s symbolioc vote for Catalonia independence proceeded… and the initial results (with 88% of the vote counted) are in:
The Spanish government is saying the “data is not valid” and is investigating the illegal ballot calling it a “useless sham.” Catalan President Mas says pro-independence parties will meet this week to put pressure on Madrid.
Catalan President Mas speaks…
Rajoy responds…
As Xinhua reports,
Spanish Minister of Justice Rafael Catala said on Sunday that the ballot held in the northeastern region of Catalonia on its independence was a “useless sham.”
The Spanish government said that the ballot was antidemocratic, useless and has no legal effects.
* * *
One more thing…
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via Zero Hedge http://ift.tt/1APjmgc williambanzai7
Spoiler alert: it’s not the Fed, even though the portfolio rebalancing channel courtesy of a $4.5 trillion Fed balance sheet certainly assured that the artificially inflated bubble in stocks, as a result of the Fed’s own purchases of bonds, is unlike anything seen before (and to all those debating whether the bubble is in bonds or stocks, here is the answer: it is in both).
The answer, according to Goldman’s David Kostin is the following: “From a strategic perspective, buybacks have been the largest source of overall US equity demand in recent years.“
In other words, not only has the Fed made a mockery of fundamentals, the resulting ZIRP tsunami means that corporations can issue nearly-unlimited debt to yield chasing “advisors” managing other people’s money, and use it to buyback vast amounts of stock, which brings us to the latest aberation of the New Abnormal: the “Pull the S&P up by the Bootstaps” market, in which the only relevant question is which company can buyback the most of its own stock.
Some further observations on the only thing that matters for equity demand in a world in which the Fed is, for the time being, sidelined:
Since the start of 4Q, a sector-neutral basket of 50 stocks with the highest buyback yields has outpaced the S&P 500.
And sure enough, with the market once again rewarding stock buybacks…
… companies will focus exclusively on stock repurchases in lieu of actual growth-promoting capital allocation such as CapEx (as predicted in April 2012):
We forecast S&P 500 cash spent on repurchases will rise by 18% in 2015 following a 26% jump in 2014.
Putting this number in the context of the recent “fire and brimstone” announcement by the BOJ:
We estimate the incremental demand for US equities from the combined re-allocation of Japan pension assets will total $70 billion. For context, we forecast share buybacks by S&P 500 firms will total $707 billion in 2015, or 10x as much as the overall Japan pension fund re-balancing.
In other words, what the BOJ does to the market will be a tiny fraction of the impact the latest and greatest cost-indescriminate buyer – corporations buying back their own stock – will impart on equities.
And here is what happens to CapEx as a result:
… capex growth will decelerate by 200 bp to 6% as global growth concerns and a 25% plunge in crude oil prices since June have brought investment plans under review. The Energy sector accounts for roughly onethird of aggregate S&P 500 capex.
We have said it for years, and finally even Goldman admits it: the days of Capex growth are over:
There is more bad news: because whil stock buybacks mean even more artificial growth for risk assets, the collapse in CapEx, especially among energy companies, means that GDP in 2015 is about to drop off a ledge, polar vortex 2.0 notwithstanding.
Behold: 0% (or negative) growth in Real Private Fixed Investment Oil & Gas Structures & Machinery, a direct – and quite substantial – input factor into the GDP calculation.
But who needs growth when the Chief Executives of America’s largest corporations are about to trickle down their record, stock-buybacks driven bonuses for yet another year.
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Submitted by Gail Tverberg via Our Finite World blog,
The world is in a dangerous place now. A large share of oil sellers need the revenue from oil sales. They have to continue producing, regardless of how low oil prices go unless they are stopped by bankruptcy, revolution, or something else that gives them a very clear signal to stop. Producers of oil from US shale are in this category, as are most oil exporters, including many of the OPEC countries and Russia.
Some large oil companies, such as Shell and ExxonMobil, decided even before the recent drop in prices that they couldn’t make money by developing available producible resources at then-available prices, likely around $100 barrel. See my post, Beginning of the End? Oil Companies Cut Back on Spending. These large companies are in the process of trying to sell off acreage, if they can find someone to buy it. Their actions will eventually lead to a drop in oil production, but not very quickly–maybe in a couple of years.
So there is a definite time lag in slowing production–even with very low prices. In fact, if US shale production keeps rising, and Libya and Iraq keep work at getting oil production on line, we may even see an increase in world oil production, at a time when world oil production needs to decline.
A Decrease in Oil Prices May Not Fix Oil Demand
At the same time, demand doesn’t pick up quickly as prices drop. We are dealing with a world that has a huge amount of debt. China in particular has been on a debt binge that cannot continue at the same pace. A reduction in China’s debt, or even slower growth in its debt, reduces growth in the demand for oil, and thus its price. The same situation holds for other countries that are now saturated with debt, and trying to come closer to balancing their budgets.
Furthermore, the Federal Reserve’s discontinuation of quantitative easing has cut off a major flow of funds to emerging markets. Because of this change, emerging market demand for oil has dropped. This has happened partly because of the lower investment funds available, and partly because the value of emerging market currencies relative to the dollar has fallen. Again, a decrease in oil price is not likely to fix this problem to a significant extent.
Europe and Japan are having difficulty being competitive in today’s world. A drop in oil prices will help a bit, but their problems will mostly remain because to a significant extent they relate to high wages, taxes, and electricity prices compared to other producers. The reduction in oil prices will not fix these issues, unless it leads to lower wages (ouch). The reduction in oil prices is instead likely to lead to a different problem–deflation–that is hard to deal with. Deflation may indirectly lead to debt defaults and a further drop in oil demand and oil prices.
Thus, oil prices are likely to continue their slide for some time, until real damage is done, perhaps to several economies simultaneously.
The United States’ Role in the Oil Over-Production / Under-Demand Clash
The United States is the country with the single largest increase in oil production in the past year. This growth in oil production seems not to have stopped, in recent weeks.
Figure 1. US Weekly Crude Oil Production through Oct 24. Chart by EIA.
At the same time, the US’ own consumption of oil has not increased (Figure 2).
Figure 2. US oil consumption (called “Product Supplied”). Chart by EIA.
The result is a drop in needed imports. A number of oil exporters have been hit by the US drop in imports. Nigeria extracts a very light oil that competes for refinery space with oil from shale formations. Our imports of Nigerian oil have been reduced to zero (Figure 3). (The amounts I am showing on this and several other charts are “net imports.” These reflect transactions in both directions. Often the US imports crude oil and exports oil products, sometimes to the same country. In such a case, we are selling refinery services.)
Figure 3. US Net Petroleum Imports from Nigeria. Chart by EIA.
Our imports of oil from Mexico are way down as well (Figure 4), in part because their oil production has been falling.
Figure 4. US Net Imports of Petroleum from Mexico. Chart by EIA.
It is only in the past few months that US imports from Saudi Arabia have started to be significantly affected (Figure 5).
Figure 5. US net oil imports from Saudi Arabia. Chart by EIA.
Saudi Arabia, like other oil exporters, depends on the sale of oil revenue to provide tax revenue for its budget. While it has a reserve fund for rainy days, over the long term it, too, depends on revenue from oil exports. If Saudi Arabia’s exports to the United States decrease, Saudi Arabia needs to find someone else to sell these would-be exports to, or revenues to fund its budget will drop.
Alternatively, it can reduce the price it charges to US refineries, to influence purchasing decisions–something it has just done. Lowering its price to US refineries tends to push the world price for oil down.
Of course, the US also talks about allowing an increasing amount of crude oil exports, as its oil from shale formations rises. This increase would make the surplus of oil on the market worse, and world prices lower, if oil demand does not pick up.
Depending on Saudi Arabia and OPEC
In the West, we have been led to believe that OPEC in general and Saudi Arabia in particular exert great control over oil prices. We have been told that several OPEC countries have spare capacity. Several of the Middle Eastern countries claim that they have very high reserves, and we have been led to believe that they can ramp up their production if they invest more money to do so. We have also been told that these countries will reduce oil production, if needed, to hold up oil prices.
A very significant part of what we have been led to believe is exaggerated. Saudi Arabia’s oil exports were much higher back in the late 1970s than they are now (Figure 6). When they cut oil production and exports in the 1980s, they likely did have spare capacity.
Figure 6. Saudi oil production, consumption and exports based on EIA data.
But where we are now, the situation has changed greatly. The population of the Middle Eastern oil producers has risen. So has their own use of the oil they extract. Their budgets have risen, and the countries need increasing revenue from oil taxes to meet their budgets. Some countries, including Venezuela, Nigeria, and Iran, require oil prices well over $100 per barrel to support their budgets (Figure 7).
Figure 7. Estimate of OPEC break-even oil prices, including tax requirements by parent countries, from APICORP.
If oil prices are too low, subsidies for food and oil will need to be cut, as will spending on programs to provide jobs and new infrastructure such as desalination plants. If the cuts are too great, there is the possibility of revolution and rapid decline of oil production. Virtually none of the OPEC countries can get along with oil prices in the $80 per barrel range (Figure 7).
Most of OPEC’s actions in recent years have looked like actions a person would expect if OPEC countries were not all that different from other oil producers–their oil supplies were subject to limits and they tended to act in their own self interest. When oil prices were rising rapidly in the 2007-2008 period, they ramped up production, but not by very much and not very quickly (Figure 8). When oil prices dropped, they dropped their production back to where it had been, before the big ramp up in prices.
Figure 8. OPEC and Non-OPEC Oil Production, Compared to Oil Price. (Production is Crude and Condensate from EIA.)
Another situation occurred when Libya’s production declined in 2011. Saudi Arabia said it would increase its own supply to offset, but it could only produce extra very heavy crude when light oil was what was needed. In fact, even the increase in heavy oil is somewhat in doubt.
Furthermore, the dynamics of OPEC have been changed considerably in the last few years. Part of the problem relates to fact that both oil prices and the quantity of oil exports have been approximately flat in the period between 2011 and mid-2014. In such a situation, revenue from oil exports tends to be flat. OPEC members have found this to be a problem because their populations continued to grow and their need for water and imported food has continued to rise. These countries need ever-more tax revenue, but oil revenue is not providing it. At a minimum, OPEC countries have a strong “need” to maintain their current level of oil exports.
The other part of changing OPEC dynamics relates to increased oil production volatility. The bombing of Libya and sanctions against Iran have both produced unstable situations. Oil exports from both of these countries are lower than in the past, but can suddenly rise as their problems are “fixed,” adding to downward price pressures.
Another issue is the significant attempt to raise Iraq’s oil production in recent years. If Iraq’s oil production (plus US shale production) is too much to satisfy world demand for oil, should the rest of OPEC be the ones to try to “fix” the problem?
Figure 9. US net imports from Iraq. Exhibit by EIA.
Figure 9 seems to indicate that US imports from Iraq have increased in recent months. Of course, if we import more from Iraq, we will likely need to cut back on imports elsewhere. This doesn’t create good feelings among OPEC exporters.
Shouldn’t the United States Take Some Responsibility for Fixing the Problem?
One might ask whether the United States should be cutting back in its oil production, in response to low prices. Of course, as indicated above, US oil majors (like Shell, Chevron, and Exxon) are cutting back on investment in new fields, and this is eventually likely to lead to lower production. The question is whether this will be a sufficient change, quickly enough.
It is less likely that shale drillers will intentionally cut back quickly. The shale drillers have taken on leases on huge acreage and are reluctant to step back now. For one thing, part of their costs has already been paid, reducing their costs going forward on acreage already under development. They also have debt that needs to be repaid and many contractual arrangements with respect to drilling rigs, pipelines, and other services. Some may have futures contracts in place that will soften the impact of the oil price drop, at least for a while. Because of all of these factors, there is a tendency to continue business as usual, for as long as possible.
Whether or not shale drillers intentionally plan to cut back on oil production, some of them may be forced to, whether or not they believe that the production is likely to be profitable over the long run. The problem is likely to be falling cash flow because of lower oil prices, if the price drop is not mitigated by futures contracts. Because of this, some companies may be forced to cut back on drilling quite soon. Another alternative might be to ramp up borrowing, but lenders may not be very happy with such an arrangement.
We notice that some companies are already in very cash flow negative situations–in other words, in situations where they need to keep adding more debt. For example, Capital Resources, the largest operator in the Bakken, shows rapidly growing outstanding debt through 6/30/2014, without seeming to take on significant new acreage (Figure 10).
Figure 10. Selected figures from SEC filings by Continental Resources.
When companies are already in such cash flow negative situation, there may be more problems than otherwise.
If Lower Oil Prices “Hang Around” for Months to Years, What Could this Mean?
We are in uncharted territory, in such a situation.
One of the big issues is potential deflation. The issue seems to be not only lower oil prices, but lower prices for many other commodities, as well. The concern is that wages will drop, as will government receipts. Lower wages already seem to be happening in Spain. Unless governments figure out a way to “fix” the situation, this situation will make debt repayment very difficult. Lower debt will tend to reinforce the low prices of oil and other commodities.
If low prices become the norm for many kinds of commodities, we can expect major cutbacks in production of these commodities. This would be the situation of the 1930s all over again. Ben Bernanke has said he would send helicopters of money to prevent such a situation. The question is whether this can really be arranged, given that the United States (and several other countries) have already been “printing money” since 2008. At some point, it would seem like the arsenals of central banks will get used up.
If there is a cut back in debt and cutback in production of commodities, many goods we have come to expect in the market place will disappear, as will many jobs. There are likely to be breaks in supply chains, leading to more cutbacks in production.
With all of the debt problems, there is a question of how well international trade will hold up. Will would-be explorers trust buyers who have recently defaulted on their debt, and don’t look likely to be able to earn enough to pay for the goods that they currently are ordering?
The discussion has been mostly with respect to oil, but liquefied natural gas (LNG) is likely to be affected by low prices as well. Reuters is reporting that likelihood of US exports of LNG to Asia is down, for a number of reasons, including the discovery that costs would be higher than originally expected and the regulatory process less smooth. Another reason LNG exports are likely to be low is the fact that Asian prices dropped from a high of $20.50/mmBtu in February to a low of $10.60/mmBtu in August. Without sustained high LNG prices, it is hard to support the huge infrastructure investment needed for LNG exports.
Can Oil Prices Bounce Back?
If we could somehow fix the world’s debt problems, a rise in the price of oil would seem to be much more likely than it looks right now. As long as the drop in demand is related to declining debt, and the potential feedbacks seem to be in the direction of deflation and the possibility of making defaults ever more likely, we have a problem. The only direction for oil prices to go would seem to be downward.
I know that we have very creative central banks. But the issue at hand is really diminishing returns. Prior to diminishing returns becoming a problem, it was possible to extract and refine oil cheaply. With cheap oil, it was possible to create an economy with low-priced oil, inexpensive infrastructure built with that low-priced oil, and factories built with low-priced oil. Workers seemed to be very productive in such a setting, in part because low-priced oil allowed increased mechanization of production and allowed cheap transport of goods.
Once diminishing returns set in, oil became increasingly expensive to extract, because we needed to use more resources to obtain oil that was very deep, or in shale formations, or that required desalination plants to support the population. Once we needed to allocate resources for these endeavors, fewer resources were available for more general uses. With fewer resources for general activities, economic growth has become inhibited. This has tended to lead to fewer jobs, especially good-paying jobs. It also makes debt harder to repay. History shows that many economies have collapsed because of diminishing returns.
Most people assume that of course, oil prices will rise. That is what they learned from supply and demand discussions in Economics 101. I think that what we learned in Econ 101 is wrong because the supply and demand model most economists use ignores important feedback loops. (See my post Why Standard Economic Models Don’t Work–Our Economy is a Network.)
We often hear that if there is not enough oil at a given price, the situation will lead to substitution or to demand destruction. Because of the networked nature of the economy, this demand destruction comes about in a different way than most economists expect–it comes from fewer people having jobs with good wages. With lower wages, it also comes from less debt being available. We end up with a disparity between what consumers can afford to pay for oil, and the amount that it costs to extract the oil. This is the problem we are facing today, and it is a very difficult issue.
We have been hearing for so long that the problem of “peak oil” will be inadequate supply and high prices that we cannot adjust our thinking to the real situation. In fact, the two major problems of oil limits are likely to be shrinking debt and shrinking wages. The reason that oil supply will drop is likely to be because customers cannot afford to pay for it; they don’t have jobs that pay well and they can’t get loans.
In some ways, the oil prices situation reminds me of driving down a road where we have been warned to look carefully toward the left for potential problems. In fact, the potential problem is in precisely in the opposite direction–to the right. The problem gets overlooked for a very long time, because most of us have been looking out the wrong window.
For more on this subject, read my last two posts:
WSJ Gets it Wrong on “Why Peak Oil Predictions Haven’t Come True”
Eight Pieces of Our Oil Price Predicament
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Four Score and Seven Beards Ago
By
Cognitive Dissonance
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Within a few weeks of moving to the mountain in June of 2013 Mrs. Cog and I found ourselves in the one and only bank within 10 miles of our new place opening a checking account in order to conduct (local) financial business as needed. The manager, a pleasant woman married to the realtor who sold us our place, helpfully informed us the locals were all on ‘Mountain Time’, meaning things got done when they got done and not necessarily when we thought they should get done.
I was familiar with the term, or more accurately the concept, since several decades earlier I had been married (briefly I might add) to a young woman who had spent most of her formative years on a Caribbean island. Yes, my ex-wife operated on ‘Island Time’, which for her meant if it was going to get done it would eventually get done, though not necessarily by her. It was her one redeeming quality.
To be fair, with the benefit of 30 years of additional maturity under my belt and the desire to remove myself from the daily grind of the consumer rat race, Mountain Time didn’t sound all that bad, particularly if it came with a southern drawl and the opportunity to shoot the shit down at the local country store/auto repair shop. While there was no way this Yankee would ever be able to discard his New England accent, I am a people person and most acquaintances wind up liking me, though I suspect many have no idea why.
Having just relocated from the Northern Virginia/DC area, where the consumer power knob goes all the way to eleven on a one to ten scale, the manager cast us a dubious look when we both nodded our approval of Mountain Time, then once again welcomed us to her bank as we were ushered out the door. It only took 80 minutes to open one joint checking account so I thought we had successfully begun our acclamation.
I remember reading a long time ago that man took his first step from savage to civilized when he began to master time. Even back then I wondered who (or what) mastered who in that competition because it seemed to me by the time I was five and had entered first grade I was in sync with Father Time and not Mother Earth. But the idea I might just be able to ignore the clocks up here on the mountain after 50 plus years of running in place was decidedly appealing.
Of course for the most part the idea of living time free is more fantasy than fact, at least for us. There are still clocks in nearly every room in our home and on many appliances as well as on every computer, laptop, cell phone and motor vehicle in our possession. Since there are occasions when we must interact with various businesses and professionals in the area, we must at least be aware what time it is in order to function. In addition, considering we run a website with international membership, in some respects we must think globally with regard to time, not just locally.
All in all though, time and the clock do not dominate my life to the extent it did less than a year and a half ago. I suspect what I am experiencing is a less regimented life more than one disconnected from time. Working a nine to five job requires nearly every other aspect of our lives to be in sync with the primary activity of the day, that of work. And for the vast majority of “We the People” working is no longer as much about subsistence as it is debt service.
It has taken us well over a year to extinguish most (but not all) of our debt and thus our debt service obligations, allowing us to substantially lower our income needs as the outgo also diminishes. While we are still net negative income wise, the gap is narrowing and our happiness index is through the roof. In so many small ways our prior lives were lived to service our past (our debt) rather than living in the present.
However when I take a closer look at our expenses I realize even though we have been here more than a year we are still knee deep in projects to improve our home, outbuildings and the homestead grounds. This means that while the major projects have been budgeted as capital expenses, many of the small outlays for those projects tend to fall under ‘household’ expenses against income rather than ‘project’ expenses against capital. With the major improvements nearly complete I suspect our income needs will continue to decline.
But while my life is much less regimented it is by no means sedentary. Between the high maintenance log cabin and log outbuildings, the large garden area, maintenance of old logging roads and general grounds as well as special features unique to our place, at a minimum several hours a day are devoted to its upkeep. On the rare occasion when I complain to Mrs. Cog of the unrelenting daily demand on me Mrs. Cog sweetly reminds me I am working for myself rather than the man. I think of it as working for Mother Nature, the ultimate authority and taskmaster.
We arrogant humans have a bizarre relationship with time, bolding declaring we have mastered it while clearly subservient to its every whim. We obsessively measure it while chopping it up into ever smaller increments so our cell phones work and our nuclear plants operate………if they aren’t presently melting down in the ultimate Mother Nature middle finger to humans and our vaunted technological miracles.
On the other side of the ledger we stack increments of time on top of each other in enormous quantities in an entirely futile effort to mentally grasp large passages of time. Declaring something happened two thousand years ago when the scale of reference is our present age is as meaningless to us as stating the 2015 US government budget is $3.9 trillion dollars when our income for this year is less than $30,000. I have trouble thinking in terms of weeks and months and yet I’m expected to comprehend the volume of time that has passed since Christ was said to have walked the Earth? I don’t think so.
While we are assured by the experts that time is precisely measured based upon other ‘known’ phenomenon such as the decay rate of some radioactive material or the vibration of an atom, ultimately time is based upon perception and perspective. I have read some very interesting articles over the years where time was described as a construct of the mind and consciousness. Without the conscious observer present, there is no ‘time’ to speak of.
When I was much younger and still riding motorcycles, some idiot pulled out in front of me and then stopped in confusion and panic when he realized he wasn’t going to clear me in time. For my part I was travelling over 50 mph and was less than one hundred feet away from his stopped vehicle. There simply was not enough ‘time’ nor space to stop. Somehow over the next few seconds time slowed down for me to such a degree that I was able to plan out, then quickly maneuver the motorcycle first to one side, then the other and avoid hitting the negligent driver. A witness told me he had never seen anything like it in his life. Sparks were flying everywhere and the noise was terrible.
After the fact, when for me time had resumed ‘normal’ speed, I was astounded by what I had just done and was never able to repeat anything close to the maneuver that had saved my life. I had essentially laid the bike down first on one side, then the other in order to maneuver around the stopped car. And in the process I had ground down the foot pegs on either side as well as some of each exhaust. Plus the soles of my boots were now gone, ground away to nothing but a tiny stub for a heel and holes at the ball of the foot. I have heard several ‘expert’ explanations for what happened to other people in similar situations and it still all boils down to perception and perspective.
Similarly, anyone waiting for water to boil or attending a boring lecture knows how agonizingly slow time passes when you’re not having fun. On the flip side, engage in an activity that is new, exciting or fascinating and watch how quickly time flies by. How many times have you checked your watch or wall clock and been amazed by how late it was or how much ‘time’ had passed when you weren’t paying attention or were occupied? Another person in the same room doing the same thing may be experiencing exactly the opposite effect. But aren’t we all sharing the same ‘time’?
Much smarter and more imaginative people than I will claim I do this subject a disservice and I would not disagree. This is not a dissertation by any stretch of the imagination, but simple observations of a change in my perception and perspective. In fact it meshes nicely with the theme of our Two Ice Floes website, where we continue to navigate life with one foot still firmly within the Matrix while carefully attempting to place the other foot outside to the fullest extent possible. It is with this thought in mind that I have been observing myself and my reactions to this ongoing experiment in duality.
Our technological culture seems to place us firmly in conflict with time itself. The rush to cram as much as possible into as small a slice of time as we can seems to be the holy grail these days, and the pace is accelerating exponentially. While for now it is limited to external (to the human body) technology applications, I fully expect it to progress to internal computer chip implantations and drug induced time warping. The critical question is not can we do this or when will we be able to do this, but why would we want to do this. As my mother was prone to say, “Just because you can do something doesn’t mean you should.” I agree mom.
As I have slowly withdrawn from the rat race my perspective and perception of time has gradually morphed into something I didn’t quite expect. I must still be mindful of what day of the week it is as well as the actual calendar date for a multitude of reasons. But I pay attention to this only for the purpose of meshing with the Matrix rather than to be engulfed by, or subservient to, the demands of the Matrix.
My days are still very full, even though Mrs. Cog calls me ‘semi’ retired. In fact I would say in many respects my days are more demanding than when I was working a traditional 9 to 5 ‘job’. The difference is in the work flow and time critical situations. Here on the mountain, while I arise at the same time I always have, there is no rush to hit the bathroom to shower and shave, then hit the car to begin the commute that begins the daily dance with time.
Nowadays, while I might have the day planned out with regard to what I wish to accomplish, there is no strict order or process I must follow unless others are involved. Basically I do what I want when I want and purposely inject flexibility into my daily routines. I still have the same ‘work ethic’ and can be disappointed by a lack of progress on a project. But this is mostly because I still plan my projects with a 30 year old mind that happens to reside within a 58 year old body. The mind is strong, the flesh a bit weaker.
Overall I am more relaxed while doing equal or greater amounts of work than when I was a slave to the clock. This is not to say I don’t feel time pressures. As the season changed to autumn I tackled the last major project of the year, the sealing of our log cabin and outbuildings as well as caulking the log checks and cracks.
Within days I realized the logs were in much worse condition than I had assessed and the time I had allotted for the project tripled with the weather quickly getting colder. My back was against the wall time wise and now I was once again a slave to the clock. I did not like the personality/emotional change I experienced, with my anxiety level suddenly increased as I watched the weather reports for dry warmer days to continue the work. ‘Time’ was no longer on my side, or so I imagined.
However, another thought just occurred to me. I am much more attuned to Mother Nature and her cycles now that I spend several hours or more a day (and night) outside on chores, projects or just fun puttering around. Not only am I more sensitive to changes in the weather, but also the length of daylight as the seasons change. Like a squirrel frantically searching for nuts as winter closes in, I suspect I ‘sensed’ the end of the maintenance season was fast approaching and with the sealing project now greatly extended, like the squirrel I became a bit frenzied.
I did not wish to do a half assed job, which would have been the case if I had tried to use the water based sealant and caulk in cold wet weather. The bottom line though was simple. While I do watch the clock and the calendar, I can (and mostly do) choose to live my life by my own inner sense of time and priorities rather than an externally imposed timepiece. So it was extremely amusing for me to realize that over the last few months I had developed my own unique measure of time.
While previously working the nine to five life, for the most part I shaved on a daily basis. One of the small pleasures of life for me is no longer feeling the need to scrape my face daily with a sharp blade. Thankfully Mrs. Cog does not mind Mr. Cog in a beard, so there has been no resistance to a shaggy Cog. But I do not like full beards so after nine or ten days of growth I pull out the razor and shave away.
The other day I found myself thinking about a small project I had finished and I was trying to remember how far back it was. Try as I might I was uncertain how many weeks/months had transpired. Suddenly I thought about how many times I had shaved since the project was finished. The answer was three and a half….or three shaves times ten days on average between shaves plus another five days or a total of thirty five days……a little more than a month ago.
I laughed out loud at the silliness of it all, not to mention the originality of my discovery….at least for me. I have no doubt that for thousands of years man (and his beard) have discovered and created unique and interesting ways to measure increments of time and its passage. I guess what surprised me was how the idea just seemed to materialize as complete and fully accepted with little to no deliberate thought on my part about the process and application.
Usually by day eight or nine I begin to feel the beard is becoming too long. By day ten it is obvious to me I need to shave. If it goes to day eleven or twelve it has crossed over the line to become a full fledged irritant and now I am itching (pun intended) to hack the facial hair off with any sharp implement available. I suspect my beard will be a fairly reliable time piece for me as we continue our adventures up here on the mountain.
11-09-2014
Cognitive Dissonance
Pieces of Time
via Zero Hedge http://ift.tt/1uT8tr9 Cognitive Dissonance
By: Chris at http://ift.tt/12YmHT5
When I was younger, 16 I think, I wanted to be George Soros. Horror, I know given that there are probably parts of the world I’d be dismembered in the streets for uttering such a comment. Grumpy old bastard with abhorrent political ideas.
Yes, all true but at the time I wasn’t focused on any of that. I’d read about his shorting the pound – $2 billion in profits with $1B of that in a single day!
I’d just gotten interested in currencies. A strange thing you may think for a 16-year old and you’d be right, but I was living in a country with capital controls and was beginning to think through how I was ever going to “get out”. Tand this led me to investigate how rich people “got out”, which in turn brought me to reading about rich people…enter Soros.
In any event, rightly or wrongly, I viewed Soros as the little guy who bet against the big guy and won. A modern day David and Goliath story. Who couldn’t appreciate that?
Soros made a fortune on an asymmetric trade, but there are others of more recent fame. Let’s see:
What I takeaway from this, other than Kyle Bass being an obvious underachiever, is that when a lopsided market turns, fortunes are made.
Now, you’ll notice that the above mentioned trades involved short selling. One reason that short selling occasionally produces such spectacular returns is because typically short selling is a loss-making proposition. Precisely because it all too often produces losses, is exactly why asymmetry builds up allowing for such amazing returns to be garnered when the imbalance is finally corrected.
We’ve mentioned previously where we believe asymmetry lies. In the Japanese Yen, which we discussed here, here and here, and more recently Brad’s shorting of the Renminbi which we detailed here. These are trades which we’ll just keep rolling as part of a broad asset allocation and risk management plan. We believe our ship will come in and we’ll be patient until such a day arrives.
What I’d like to look at today is a sector I think well worth a bit of scrutiny… miners. Oh, what a dirty word!
Before providing you with the basic investment thesis, I’d like to review an article we published entitled, “Buying Bombed out Equities for Outsized Returns”. In it we provided some stats worth reviewing.
Average 3-year nominal returns when buying a down sector (since 1920s):
Down Avg. Annual Return
60% = 57%
70% = 87%
80% = 172%
90% = 240%
Average 3-year nominal returns when buying a down industry (since 1920s):
Down Avg. Annual Return
60% = 71%
70% = 96%
80% = 136%
90% = 115%
Average 3-year nominal returns when buying a down country (since the 1970s):
Down Avg. Annual Return
60% = 107%
70% = 116%
80% = 118%
90% = 156%
Notice that the second column is the average annual net return. Now, average is… well, average. Imagine you put even a little bit of effort into a sector, country or industry.
The beauty of what I’m sharing with you is that if you just focus on the numbers and take all of the emotion out of the equation, it’s no longer about being contrarian or trend following; it’s purely about following a statistical formula. While that is no guarantee that the particular sector, country or industry you’re tracking will perform as indicated above, it does provide a proven process, and we’ve got the data to prove it.
In light of the above I present to you one of the most horrific investments of the last few years (one which we’ve recommended on occasion, ugghhh): gold mining stocks.
The GDXJ ETF is down 87% from its high in late 2010, and the GDX ETF is down 74%. Statistically we could expect a pretty spectacular return going forward. Both seem like they’re still in free fall and I’m not here to pick a bottom., I’m just playing the odds. Nobody and I mean nobody wants to have anything to do with this sector. The odds look decent to me.
Now these are the ETFs of course, and the problem with mining stocks in the ETFs is that most of them are complete garbage and will never make any money. At least not for shareholders.
For this reason we put together this list of mining companies – all selling for less than cash.
I humbly suggest that simply remembering the statistics above and then buying a basket of better performing companies which are selling for less than cash on their balance sheet, will reduce overall portfolio risk, provide potential for outsized returns and should the strategy work out with the sector rebounding, the returns on the stocks here should theoretically outperform the index or ETFs.
Just remember this isn’t a call on gold going through the roof, or anywhere at all. It is merely looking at asymmetric trading opportunities.
Best of luck!
– Chris
“A stock operator has to fight a lot of expensive enemies within himself.” – Jesse Livermore
via Zero Hedge http://ift.tt/1uT4wmh Capitalist Exploits
The referendum for the Swiss Gold Initiative is scheduled for November 30th and the propaganda war – between the Swiss National Bank (SNB) and the Swiss Parliament on one side and the Swiss People's Party (SVP) on the other – has begun and we expect it to escalate as the day draws ever nearer. Having already questioned the 'location, location, location' of Switzerland's current gold stash, and examined the initiative in great depth here, JPMorgan notes that not only might the forthcoming Swiss gold referendum stabilize gold prices at a time when Gold ETF demand continues to decline, but warns, it also appears that markets under-appreciate this event.
As JPMorgan explains,
Gold ETF flows continued to bleed losing $4bn or 6% of AUM cumulatively since the end of August.
Gold Miners ETFs, which have held up relative well up until recently also suffered over the past two weeks (Figure 7).
The downtrend in Gold ETF flows represents a headwind for gold in the face of subdued physical demand recently.
The latest data from China Gold Association, reported physical gold demand by Chinese investors of only 185 tonnes in Q3, down from 246 in Q2 and 322 in Q1.
While Chinese physical demand remains subdued…
[ZH – a point we note is very much in the eye of the newspaper holder]
Who do you choose to believe?
h/t @sobata416
* * *
The forthcoming Swiss gold referendum could stabilize gold prices at a time when Gold ETF demand continues to decline.
It also appears that markets under appreciate this event.
If the referendum is passed, the Swiss National Bank (SNB) will be forced to increase reserves by around 1,500 tonnes over five years, i.e. 300 tonnes per year.
This 300 tonnes per year accounts for 7.5% of annual gold demand of 4,000 tonnes per year.
* * *
As Grant Williams noted previously, with the establishment being unable to actively campaign AGAINST the Initiative, all has been quiet for many months; but with the dawning awareness that this little campaign might actually grow some legs, a few members of that establishment have been getting a little antsy…
(Centralbanking.com): …Now, with less than two months until the vote, the central bank is intensifying its communication. It opened a “dossier” on its website yesterday where it will post materials outlining why it “reject[s] the initiative”.
“Monetary policy transactions directly change our balance sheet. Restrictions on the composition of the balance sheet therefore restrict our monetary policy options,” [SNB Vice-chairman Jean-Pierre] Danthine explained.
“A telling example is our decision to implement the exchange rate floor vis-à-vis the euro… with the initiative’s legal limitation in place, we would have been forced during our defence of the minimum exchange rate not only to buy euros but also to buy gold in large quantities.
“Our defence of the minimum exchange rate would thus have involved huge costs, which would almost certainly have caused foreign exchange markets to doubt our resolve to enforce the rate by all means.”
Sometimes I think these people are completely delusional.
So, let me get this straight: gold is a relic which restricts your ability to do such vital things as… oh, I dunno, promise to print unlimited amounts of your currency in order to peg it to another, failing currency and thereby debase it by 9% in 15 minutes? Or it might mean the market doesn’t have complete faith that you might be completely relied upon to do really smart things like that?
Disaster!
Somebody. Please? Make it stop.
The Swiss establishment has been reliant upon the public’s ignorance in these matters, but now they are up against a formidable opponent in Egon von Greyerz. Not only that, but they can clearly see that, as elsewhere around the world, the public is fast becoming disenchanted with the status quo; and that is potentially very dangerous for these people.
What is important to understand here is that if the initiative passes it will be part of the Swiss constitution IMMEDIATELY — not in two years, as many blogs and websites are suggesting. This means that the government and parliament cannot touch it. Only another referendum can change it. This is proper democracy for you.
The closer we get to the vote on November 30, the bigger this story is going to become, and the bigger it becomes, the higher the chance that the yes vote wins.
Should that happen, it will undoubtedly set off alarm bells throughout the gold market, as yet more physical gold will need to be repatriated and another sizeable, price-insensitive buyer will enter the marketplace.
via Zero Hedge http://ift.tt/1AOKImw Tyler Durden