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In the months leading up the 2016 election, daily WikiLeaks dumps repeatedly exposed CNBC’s John Harwood as nothing more than a pawn of the Hillary Clinton campaign who constantly behaved like a subservient puppy who would stop at nothing to garner his master’s love and affection (see our posts on the topic here and here).  And while the embarrassment of being exposed as a complete fraud would be sufficient motivation for most people to actually start performing their jobs with some level of integrity, John Harwood is apparently immune to the side effects of public humiliation that afflict the masses.

As the latest testament to his extreme impartiality as CNBC’s chief Washington Correspondent, Harwood sent out the following tweet storm aimed at all of “those making [the] silly argument that Obama hurt [the] Democratic Party” to confirm, once and for all, that “white fear” (aka racism) was responsible for democratic losses in Congress under Obama’s leadership and not his failed policies. 

for those making silly argument that Obama hurt Democratic Party: last 5 presidents have left both houses of Congress in opposition hands

— John Harwood (@JohnJHarwood) December 27, 2016

drivers of D casualties under Obama: a) depth of financial crisis/Great Recession b) accumulated angst over 30-year income stagnation 1/2

— John Harwood (@JohnJHarwood) December 27, 2016

drivers of D casualties under Obama: c) effective/unified R opposition, esp to ACA; d) Obama’s race amid white fear of cultural change 2/2

— John Harwood (@JohnJHarwood) December 27, 2016

among 2-term presidents, Clinton/Bush/Obama all began w/both houses of Congress run by their party, saw both flip. Reagan had & lost Senate

— John Harwood (@JohnJHarwood) December 27, 2016

 

If true, perhaps Mr. Harwood could explain to us why the “racist” and “angry” white people of Michigan, Wisconsin and Pennsylvania voted for Obama by margins of 10-20 points in 2008 before suddenly turning on Democrats in 2016?  Did those people who voted overwhelmingly for the first black President in U.S. history in 2008 suddenly become racists over the course of 8 years?  Or, is it just maybe possible that those people were disappointed that Obama’s “Hope and Change” rhetoric turned out to be nothing more than a pretty speech by yet another superficial politician?

via http://ift.tt/2iCyPcl Tyler Durden

Submitted by Mike Krieger via Lberty Blitzkrieg blog,

Today’s piece should be seen as a bit of a followup to yesterday’s post, India’s Demonetization Debacle Highlights the Dangers of Monetary Monopoly. While yesterday’s piece was more philosophical/strategic in nature, today’s zeroes in on some of the devastating real world impacts of Narendra Modi’s insane and inhumane cash ban. It’s hard to overstate the damage this policy has done to India’s economy. Modi is quickly solidifying his place as one of monetary history’s biggest idiots.

First, let’s take a look at the destructive impact the move has had on India’s massive small businesses community. The Washington Post reports:

NOIDA, India — Over the past two years, this suburb of New Delhi mushroomed into a flourishing enclave of small cellphone manufacturers, attracting tens of thousands of workers from the countryside. Noida, known as the “handset hub,” was touted as a showcase for Prime Minister Narendra Modi’s pet “Make in India” initiative.

 

Then on Nov. 8, Modi’s government took a step that has jolted the bustling industrial quarter. It scrapped high-denomination currency, with a view, officials said, to curbing illicit wealth and the financing of terrorism. But the cash shortage triggered by the move has also curbed legitimate small enterprises. Many of Noida’s manufacturing units have slashed production by nearly half, and more than a quarter of the workers have gone back to their villages.

 

“It was a booming sunrise industry before November 8th. Not now,” said Vipin Malhan, president of the Noida Entrepreneurs Association, who also runs a business that makes cellphone accessories here. “Many small factories and assembling units, which used to work round-the-clock, with three shifts, have scaled down to just a single shift. We are all in shock now. One word that businesses dread is ‘uncertainty.’ The government has thrown that at us.”

 

Several small- and medium-scale industrial clusters, employing a total of more than 80 million people across India, are reporting declining sales, production slowdowns and layoffs since bills worth 500 and 1,000 Indian rupees were invalidated (500 Indian rupees is worth about $7.40). Towns famous for weavers, lockmakers, power looms, bicycle-parts manufacturers, ready-made garments and handicrafts face rising inventories of unsold goods.

 

Even large car manufacturers have halted production in some of their factories for several days because of a sharp dip in consumer spending. And in a reflection of the belt-tightening that has accompanied the general sense of uncertainty, credit card companies have posted a decline in the total value of transactions, even as the cash shortage is forcing people to use their cards more.

 

“We started hearing murmurs that there were no fresh orders from the market. That our raw material was stuck because we could not pay. Stocks were piling up,” said Sudhir Ramphool Singh, 33, who lost his job at a cellphone assembly unit in Noida and returned to his Dharavu village in northern India this month. He is the sole breadwinner for his family of seven. “Production slowed. The unit was shut down for 10 days. When it reopened, many of us were asked to go.”

 

With the large bellwether state of Uttar Pradesh slated to hold elections early next year, the business slump — and the lines at the banks — have become campaign issues.

 

“Forget about creating new jobs. Modi’s decision is taking away people’s jobs,” the opposition Congress party leader, Rahul Gandhi, said at a public meeting this month.

 

Modi has urged people to adopt digital payment methods and bear some pain to support the long-term goal of rooting out corruption.

 

Mishra’s office is conducting 50 training sessions every day in small industrial hubs to help residents transition to cashless transactions. But many business owners in these clusters say it is not easy to change because daily wage laborers do not accept checks and do not have smartphones with Internet.

Well done Modi.

Last week, about 200 business executives in Ludhiana staged a sit-in against the cash-swap decision, calling it “ill-conceived.” They even formed a “stick brigade” and are threatening to beat tax officers who show up to “scrutinize our books needlessly and harass us.”

 

In the country’s largest textile town, Bhiwandi, in western India, more than 2 million power looms used to operate round-the-clock. Countless machines are silent now.

 

“The cash shortage has come as the latest blow to the industry that was already hit by global competition. Fifty to 60 percent of power looms have shut down, and more than 150,000 workers have gone back to their villages,” said Rashid Tahir Momin, whose family owns about 400 power looms.

Naturally, this is just the tip of the iceberg. The Indian diamond market has also been thrown into total chaos.

As Reuters reports:

The global diamond industry is facing disruption that could stretch through the first few months of next year, including Valentine’s Day in February, as a result of Indian Prime Minister Narendra Modi’s radical move to abolish most of the nation’s cash overnight.

 

In the western Indian city of Surat craftsmen usually spend 10-12 hours a day in small mills or grimy sheds cutting and polishing 80 percent of the world’s diamonds but the business is based on cash and the demonetization of the high-value banknotes from Nov. 8 has prevented many from operating. Thousands of diamond brokers in the area’s narrow lanes are also doing little business.

 

In India, jewelry demand typically climbs in the winter months’ wedding season. But this year sales are plunging as nearly two-thirds of jewelry is usually purchased with cash, which is in short-supply.

 

Ishu Datwani, owner of Mumbai-based Anmol Jewellers, says his sales are down nearly 70 percent since the government scrapped the high-value notes.

 

The demand is unlikely to revive any time soon as India struggles to dispense enough new notes, industry officials say.

Let this be a lesson to all of us regarding the dangers of centralized power. There’s no reason we should ever allow ourselves to be in a position where the foolish, capricious actions of one man can have such a devastating impact on an economy of more than one billion. This is precisely why we need to move toward a more decentralized way of living and discard many of the archaic, unnecessary and harmful institutions of the past.

via http://ift.tt/2i5z7eO Tyler Durden

Excerpted from “Get It. Got It. Good” by Grant Williams, author of “Things That Make You Go Hmm…”

The story begins in the 1970s when Henry Kissinger and Richard Nixon struck a deal with the House of Saud — a deal which gave birth to the petrodollar system.

The terms were simple The Saudis agreed to ONLY accept U.S. Dollars in return for their oil and that they would reinvest their surplus dollars into U.S. treasuries.

In return, the U.S. would provide arms and a security guarantee to the Saudis who, it has to be said, were living in a pretty rough neighbourhood. As you can see, things went swimmingly (chart below)

Saudi purchases of treasuries grew along with the oil price and everyone was happy.  (We’ll come back to that blue box on the right shortly)

The inverse correlation between the dollar and crude is just about as perfect as one could expect (until recently that is… but again, we’ll be back to that).

And, as you can see here, beginning when Nixon slammed the gold window shut on French fingers and picking up speed once the petrodollar system was ensconced, foreign buyers of U.S. debt grew  exponentially.

Having the world’s most vital commodity exclusively priced in U.S. dollars meant everybody needed to hold large dollar reserves to pay for it and that meant a yuuuge bid for treasuries. It’s good to be the king.

By 2015, as the chart on the next page shows quite clearly, there were treasuries to the value of around 6 years of total global oil supply in the hands of foreigners (if we assume a constant 97 million bpd supply which I think is a pretty reasonable estimate).

Now… with that brief background on the petrodollar system, here’s where I need you to stick with me. I promise you it’ll be worth the mental effort

Ready? Here we go.

Now, back in 2010, then-World Bank President Robert Zoellick caused something of a commotion when he suggested that an entirely new global monetary system maybe wasn’t such a bad idea.

The system he had in mind involved a freely-convertible Yuan and, controversially was constructed around gold as its central reference point:

(Robert Zoellick, November 8, 2010): …the G20 should complement this growth recovery programme with a plan to build a co-operative monetary system that reflects emerging economic conditions. This new system is likely to need to involve the dollar, the euro, the yen, the pound and a renminbi that moves towards internationalisation and then an open capital account.

 

The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values. Although textbooks may view gold as the old  money, markets are using gold as an alternative monetary asset today.

In seemingly unrelated news, two years later, Iran began accepting Yuan in payment for its oil amid US sanctions. The transactions were conducted through Russian banks:

(Financial Times, May 2012): Iran is accepting renminbi for some of the crude oil it supplies to China…

 

…Tehran is spending the currency, which is not freely convertible, on goods and services imported from China…

 

The trade is worth as much as $20bn-$30bn annually according to industry estimates…

 

The renminbi purchases began some months ago…much of the money is transferred to Tehran through Russian banks, which take large commissions on the transactions…

 

Beijing has been trying to get its trading partners to use the renminbi, in effect transferring the exchange rate risk to its counterparties, since the price of crude is set in US dollars. It also frees Beijing of the need to hold as many dollars in its reserves.

The crucial part of this deal was that, by diversifying their purchases in this way, the Chinese had found a path towards not only needing to hold fewer U.S. dollar reserves, but to circumventing the petrodollar system altogether.

By 2013, the penny had clearly dropped at the PBoC who declared an end to the era of their accumulation of U.S. treasuries:

(Bloomberg, November 2013): The People’s Bank of China said the country does not benefit any more from increases in its foreign-currency holdings, adding to signs policy makers will rein in dollar purchases that limit the yuan’s appreciation.

 

“It’s no longer in China’s favor to accumulate foreign-exchange reserves,” Yi Gang, a deputy governor at the central bank, said in a speech organized by China Economists 50 Forum at Tsinghua University yesterday. The monetary authority will “basically” end normal intervention in the currency market and broaden the yuan’s daily trading range

Yes, it was, apparently “no longer in China’s interest” to accumulate foreign exchange reserves.

Sure enough, in 2014, global FX reserves began to decline at the fastest rate in 80 years as you can see from this chart:

That same year, another piece of the puzzle was laid in place when Xu Luode, the Chairman of the newly-founded Shanghai Gold Exchange, explained that gold would be priced and sold in Yuan as a step towards what he called the “internationalization of the renminbi” (for those of you confused by Yuan and Renminbi, just think of them as the Chinese equivalent of ‘Pound’ and ‘Sterling’):

(Xu Luode, Speech to LBMA, May 2014): Foreign investors can directly use offshore yuan to trade gold on the SGE international board, which is promoting the internationalization of the renminbi…

 

Shanghai Gold will change the current gold market “consumption in the East priced in the West” situation.

 

When China will have a right to speak in the international gold market, pricing will get revealed…

 

Interestingly, Luode acknowledged what he accurately described as the “consumption in the East, priced in the West” situation and assured the world that the ‘real’ price of gold would become apparent once China took its rightful place at the centre of the gold market.

We can but hope he is correct. When that day comes, the change on the world’s gold markets will be unprecedented.

In 2015, another announcement slipped by the world when it was revealed that Russia’s Gazprom would also begin selling oil to the Chinese in exchange for yuan and that they were negotiating further agreements to use rubles and yuan to settle natural gas trading directly, without the need for dollars:

(Moscow Times, June 2015): “Two state energy companies, gas producer Gazprom and its oil arm Gazprom Neft, said they would use more Chinese currency in trade, while Russia’s largest bank, Sberbank, has also promoted the use of the yuan…

 

Gazprom Neft announced that it began settling shipments of oil to China in yuan. And previously, the head of Gazprom, Alexey Miller, said in a TV interview that the company was negotiating with China to use yuan and rubles for gas deliveries via a planned pipeline in Western Siberia.

OK… hands up if you’re still with me… great!

Oh… you’re reading this so I can’t see you but hopefully you’re following the dots…

For those of you who aren’t, here’s a little recap of where we are so far to help you get things into the right order before we push on to the end:

Get it? Got it? Good.

So… here we are, in 2016 and, as it turned out, April was a hell of a month if you were paying attention.

Firstly, the Saudis threatened to sell almost a trillion dollars of U.S. assets—including over $300 billion of treasury bonds—should a bill be passed by the congress allowing the Saudis to be held responsible for the 9/11 attacks:

NY Times, April 16, 2016): Saudi Arabia has told the Obama administration and members of Congress that it will sell off hundreds of billions of dollars’ worth of American assets held by the kingdom if Congress passes a bill that would allow the Saudi government to be held responsible in American courts for any role in the 9/11 attacks.

 

Adel al-Jubeir, the Saudi foreign minister, delivered the kingdom’s message personally last month during a trip to Washington, telling lawmakers that Saudi would be forced to sell up to $750B in treasury  securities & other assets in the US before they could be in danger of being frozen by American courts.

In a rare show of bipartisanship, the bill was subsequently passed before being vetoed by President Obama who then had to watch in ignominy as he suffered the first veto override of his presidency.

Just days later, the Saudis were the cause of a seemingly surprise failure by OPEC to agree a production cut as the oil price languished in the low-$30s:

(Wall Street Journal, April 17, 2016): DOHA, Qatar—Oil producers that supply almost half the world’s crude failed Sunday to negotiate a production freeze intended to strengthen prices.

 

The talks collapsed after Saudi Arabia surprised the group by reasserting a demand that Iran also agree to cap its oil production.

 

Oil prices had rallied in recent weeks on speculation that Saudi Arabia might successfully lead an initiative between members of the Organization of the Petroleum Exporting Countries and Russia, which joined the talks. 

 

A deal would have marked a new level of cooperation between non-OPEC countries and OPEC members that producers hoped would keep prices above January lows of $26 a barrel.

Just 48 hours after that surprise, the Chinese finally launched their twice daily gold fixing, setting the price at 256.92 yuan per gram:

(Bloomberg, April 19, 2016): China, the world’s biggest producer and consumer of gold, started a twice-daily price fixing on Tuesday in an attempt to establish a regional benchmark and bolster its influence in the global market.

 

The Shanghai Gold Exchange set the price at 256.92 yuan a gram ($1,233.85 an ounce) at the 10:30 a.m. session after members of the exchange submitted buy and sell orders for metal of 99.99 percent purity.

 

“This is a very important development and will obviously be very

 

closely watched,” said Robin Bhar, an analyst at Societe Generale SA in London. “But as long as it exists inside a closed monetary system it will have limited global repercussions. It could be a very important development if the new benchmark is a precursor to greater use of gold in the Chinese monetary system, Kenneth Hoffman…said by e-mail on Monday. It may also boost interest in the Shanghai free-trade zone, he said.

As Soc Gen’s Robin Bhar correctly identified, if the ability to trade gold for yuan exists within a closed monetary system, its importance will be limited BUT, as Bloomberg’s Ken Hoffman also correctly pointed out, if this was the thin end of the wedge, things could get very interesting indeed. Now, this chart shows the oil price going back to before the U.S. Civil War:

Between 1865 and 1973, the price of oil was incredibly stable against a backdrop of perhaps the greatest simultaneous economic, demographic and technological expansion in human history.

How was that possible?

Well simply put, because oil was effectively priced in gold.

However…

Once the gold window closed and the petrodollar system was implemented, the price of oil soared 50-fold in just 35 years.

The move on the right? With the question mark against it? We’re getting there, I promise.

Now, you remember this next chart and the yuuuuuge supply of treasuries which exists compared to oil now? Well, when we add in the roughly $100 trillion in boomer entitlements that will need to be paid for by issuing—you guessed it, more treasuries—the chart changes somewhat:

That red circle down at the bottom of the second chart is the spike you see on the first chart.

Ruh-roh!

It’s safe to say that, relative to even oil, and without any infrastructure spending by Donald Trump, treasuries are going to be…. abundant in the coming years.

Conversely, if we look at the value of gold relative to foreign-held treasuries, we see an altogether different story unfold.

During Reagan’s presidency, US treasuries were backed 132% by the market value of the country’s gold reserves.

Today, that number has fallen to just 4.7%

If we do the same thing and account for the $100 trillion in entitlement promises, as you can see from the chart on the next page, the number falls to 0.3% in 2025.

So the second chart (below, right) should come as no surprise to anybody.

Yes, the Chinese have started to do what they promised to start doing, when they promised to start doing it.

Now, this next part of the presentation was a rattle through a whole bunch of charts showing the recent activity in the U.S. treasury, corporate bond, agency bond and securities markets so you’ll have to brace yourself.

The charts will appear on the next page.

Chinese sales of US treasuries (1) have been consistent for the last three years…

…as have their sales of US securities (2) since 2015 after plateauing in 2013 when treasury divestiture began Concurrently, Chinese sales of corporate bonds (3) have accelerated over the same period…

…though agency sales (4)—despite a few periods of consistent selling—have yet to follow suit.

But now, as tensions rise and the cross-currents get harder to discern, guess who else has showed up as a seller?

That’s right, the Saudis are now steady sellers of US treasuries (5)…

…and even more aggressive sellers of U.S. securities (6)…

Meanwhile, taking a broader view, net foreign purchases of treasuries, according to the TIC data, have been in a clear downtrend since 2009 (7) and have been largely outflows for the last three years.

If we look at the 12-month sum of sales (8), we see an even sharper decline…

…and if we take the trailing net official demand chart for treasuries back to 1979, the scale and extent of the change is evident—as are the catalysts for the acceleration (and we’re back on this page once  again):

Take a long, hard look at that last chart folks—particularly within the context of the bond bull market and the ‘bid’ for treasuries we’ve seen throughout 2015 and 2016…

Meanwhile, the Russians—who, as we’ve seen are now selling oil for yuan to the Chinese, remember?— have been picking up the pace of their accumulation of gold reserves yet again, with the most recent monthly data setting yet another record…

…and the pick up in pace is evident when we look at average monthly purchases prior to 2013 and post the agreements put in place around that time between the various parties. Now, the next chart (top of the following page) is crucial to understand because a look at the market value of Russia’s gold reserves shows just how crucial their ongoing accumulation of bullion has been for the country’s finances over the last two years…

…and that increase in value has cushioned the effects of, amongst other things, the bailing out of the ruble.

As you can see from the green line, Russia’s gold reserves in Ruble terms have soared as the country’s currency has weakened—something which confounded all the doommongers who called Game Over for Russia amidst sharply declining oil revenues:

(Bloomberg, April3, 2015): Here’s why Governor Elvira Nabiullina is in no haste to resume foreign-currency purchases after an eight-month pause: gold’s biggest quarterly surge since 1986 has all but erased losses the Bank of Russia suffered by mounting a rescue of the ruble more than a year ago.

 

While the ruble’s 9 percent rally this year has raised the prospects that the central bank will start buying currency again, policy makers have instead used 13 months of gold purchases to take reserves over $380 billion for the first time since January 2015.

Hmmm…

Now, crucially, being given the ability to sell oil to the Chinese for yuan and buy gold with that same yuan directly through the Shanghai Exchange has completely changed the game for the Russians and those changes are being reflected where they matter most—in the energy markets, the supply/ demand dynamics of which are quietly morphing in plain sight.

By August of this year, Russia had overtaken Saudi Arabia as the largest exporter of oil into China…:

(Al Awsat, August 3, 2016): During the first seven months of this year, China imported about 30.5 million metric tons of Saudi oil, a 0.4% decrease than that of last year. Whereas, China imported about 29.5 million metric tons of Russian oil with 27% increase than last year.

…and that wasn’t something the Saudis could take lying down:

Amid this fierce competition, it is important for Saudi Arabia to fortify its oil position in China with more political and strategic support

On the contrary, they rededicated their efforts to increase what they call “political and strategic support” for China.

Now, I hope you’re all still with me because here’s where we get to the final piece of this glorious puzzle—the piece that ties all these seemingly unrelated threads together: China’s own crude oil futures contract, to be priced in Yuan and traded at the Shanghai International Energy Exchange—a yuan contract which will be made fully-convertible:

(Bloomberg, November 5, 2015): By the end of 2015, China, the world’s No. 1 oil importer as of April, may start its own crude futures contract.

 

The idea is to establish a Chinese rival to the world’s two most traded oil contracts: West Texas Intermediate, housed on the New York Mercantile Exchange, and Brent Crude Futures, owned by ICE Futures Europe in London.

 

The yuan-based contract will trade on the Shanghai International Energy Exchange and will be among the first Chinese commodity contracts available to foreign investors as China promotes global use of its currency…

 

Participation will be open to all foreign investors and the yuan will be fully convertible under the contract, according to Song Anping, the chairman of the Shanghai Futures Exchange.

As you can see from the date of the article, this contract has been postponed several times— ostensibly for reasons such as stock market volatility in China, but perhaps there is more going on behind the scenes that is causing the delay because, once this contract is in place, things change.

Dramatically.

In the interim, China has supplanted the U.S to become the world’s biggest importer of oil, which serves to increase both its importance in the oil markets and the likelihood of it launching its own yuan-denominated contract at some point in time:

(Bloomberg, October 13, 2016): China is now the world’s biggest oil importer, unseating the U.S. The country’s crude imports climbed to a record 8.08 million barrels a day in September, a year-on-year increase of 18 percent, customs data released Thursday showed.

So, the world’s largest exporter of oil is now dealing with the largest importer directly in yuan and it has the ability to convert those yuan proceeds into physical gold through the Shanghai exchange— which the data suggest it is doing as fast as possible.

Currently, the bilateral oil for gold trade is only available to what the U.S. would no doubt consider a ‘basket of deplorables’ in Iran and Russia…but just think what happens once that fully convertible oil contract is up and running…?

Suddenly, the availability to price oil in gold is available to everybody and, given rising Saudi/U.S. tensions and the Middle East nation’s recent rededication to providing “political and strategic support” to China it’s easy to see why this would be attractive to the Saudis, for example.

Whatever happens, opening that contract creates a market-wide arbitrage opportunity which affords anybody with oil to sell the ability to exchange said oil for gold and anybody wanting oil to acquire it cheaply by buying cheap gold in the West and shipping it to Shanghai or HK where it can be sold for yuan.

Already, places like Tokyo, Seoul and Dubai are opening physical gold markets and discussing linking their nascent markets for bullion to the Shanghai exchange which has rapidly become the largest physical delivery market in the world.

Now, were this arbitrage to begin happening in any meaningful size, with the market for oil far bigger than that for gold, it would immediately be evident in the ratio between the two commodities…

…which, interestingly, is precisely what has happened since the peak of global reserves in 2014 and the Sino-Russian agreement to essentially transact oil for gold. With those conditions in place, the gold/oil ratio has broken out to its highest level in 80 years (chart, next page):

…which brings us right back to the question mark on the second chart which we left hanging like a matzah ball earlier in this presentation

The recent move in the oil price looks to me suspiciously like a sign that a move has started to return to pricing oil in gold.

That move, if indeed it is happening beneath the surface, allied with the endless possibilities enabled by the potential full convertibility of the yuan under the Shanghai-based oil contract leaves oil producing nations with a rather obvious choice for the first time in almost half a century—a choice made perfectly clear by the two charts on the next page:

If you are an oil producing country, do you…:

MINIMIZE your production in order to MAXIMIZE your holdings of one of the most abundant and easily-produced commodities in the world—U.S. treasuries—as has been the case for the last 40 years… knowing full well that, with the level of entitlements due in the next decade, more will need to be printed like crazy?

Or……

Do you MAXIMIZE production in order to gain the largest possible market share in the biggest oil market in the world and, through the ability to buy gold for yuan, thereby maximize your reserves of a scarce, physical commodity which is impossible to produce from thin air and which happens to be not only the most undervalued asset on the planet, but is trading at its most undervalued relative to U.S. treasuries in living memory?

With an annual production of $170bn, gold is by far the largest metal market by value.

However, that figure is dwarfed by the oil market which is 10x the size of the gold market on an annual production basis.

If we throw in the average annual foreign holdings of U.S. treasuries over the last 2 years, we see that the ‘other’ commodity is at a different magnitude altogether.

So, which one of these commodities has any scarcity value? Given the choice, which one would you seek to maximize your holdings of?

U.S. treasuries which can be conjured out of thin air by the U.S. government and which, are described thus by The Securities Industry and Financial Markets Association:

Because these debt obligations are backed by the “full faith and credit” of the government, and thus by its ability to raise tax revenues and print currency, U.S. Treasury securities – or “Treasuries” – are generally considered the safest of all investments. They are viewed in the market as having virtually no “credit risk,” meaning that it is highly probable your interest and principal will be paid fully and on time.

Or how about oil? Which the Saudis, for example, can simply print pull out of the ground at will at a cost of a little under $10/barrel?

Or gold? A commodity which is limited in availability, trading at its all-time low relative to U.S. treasury supply and is not only getting harder and more expensive to produce, but which is also catching the eye not only of the central banks of the world’s two largest producers, but of the largest importer and largest exporter of oil?

* * *

Much more in the full PDF below

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Submitted by Rick Falkvinge via PrivateInternetAccess.com,

Fake news has always been around for humor purposes, but the real “fake news” scares happen when the establishment is so used to getting away with lying, that any alternate narrative is demonized as factually false, irresponsible, and dangerous.

“The Onion” was next to “The Economist” in the newspaper stands for almost two decades. “Weekly World News”, which one-ups most British tabloids with regular Elvis sightings and vivid descriptions of two-mile fish orbiting in the rings of Jupiter, is still next to “Foreign Policy” in the same newspaper stands. This was never considered problematic in the slightest. Why, then, is a unified establishment screaming bloody murder about “fake news” all of a sudden?

To see the pattern here, it helps to know a little history – let’s look at the great “Fake News” scare of 1530. It has a lot of elements similar to ours today.

After the Black Death hit Europe hard around 1350, the monasteries were chronically short on manpower. The families that had used to send a child or two to become monks or nuns simply needed all their kids to work in the fields, to ensure food production, before such luxuries as manning the monasteries could even be considered. Therefore, any work that required involving monasteries became increasingly steep or scarce for the coming century.

This is relevant as those monasteries were the only places that produced books, all of which were in Latin, and all of which were in complete synchronization with the messages of the Catholic Church, the owner of the monasteries and therefore the owner of all mass media at the time. To compound the situation, the same owner also employed all the news anchors – the village preachers, who were the ones who read the books (in Latin) and translated them to the common tongue in villages.

A book was hideously expensive to produce. Not only was each page copied by hand, but the pages were made from animal hides: it was estimated that a single book may require the hides of as much as 300 calves. We don’t have a lot of comparative numbers from Europe of the time, but we do have them from elsewhere: a fine book in the Islamic world of the time could cost 100 dinars, with the annual paycheck required to support a middle-class family being about 25 dinars. Put differently, the prospect of buying one single book would consume an entire family income for four years – or in the $500k to $1M range in today’s value.

To the day, almost a century later, Johannes Gutenberg combined the four inventions of the squeeze press, oil-based inks, metal movable type, and cheap rag-based pages to produce the first printing press. All of a sudden, books could be mass produced cheaply, and there was an enormous profit motive to be made in producing books for the common people. You could accurately and shamelessly call it an undercutting of the monastery business. (“How will the monks get paid if we allow cheap copying technologies?”)

Gutenberg was convinced his invention would strengthen the Church, as the ability to mass produce books from a single original would eliminate all the small copying errors invariably introduced in the manual book production process. The result was the exact opposite, through mechanisms Gutenberg did not foresee.

It’s important to remember here, that through the media cartel of the medieval ages (where the Catholic Church produced all news and reported all news), that there was an absolute gatekeeper position over the narrative. The Church could essentially claim that something was true, and everybody would believe it. This is a very powerful position, being the gatekeeper of true and false – one that is prone to abuse without any opposition, or competition, in reporting. As it turned out, the Catholic Church would indeed come to abuse this power quite egregiously, and paid the price for it.

In the late 1400s, the Catholic Church needed to raise money, and came up with the idea of selling forgiveness for sins, the basic idea being that you didn’t need to be a good person to gain the favor of the Church (and divine beings), you only needed to be Rich. A priest, monk, and theologist named Martin Luther took particular exception to this message, seeing how it stood in complete opposition to everything the Church was supposed to be about, and nailed his 95 theses to the church door in 1517.

These 95 theses outlined how the entire practice of selling divine forgiveness was based on falsehoods, fabrications, and fiction. However, it’s important to look at the bigger picture here: what Martin Luther protested was only superficially the selling of salvation to raise funds. More fundamentally, he was objecting to abuse of the gatekeeper position over truth and lie to twist the narrative for the gatekeeper’s material benefit.

This is where the story should start to feel familiar with modern day conflicts over the Power of Narrative.

Luther was excommunicated – banished, exiled – in 1521. This was one of the graver punishments administered, short of the death penalty, and the only thing remaining for somebody thus punished was normally to leave for foreign lands. However, in Luther’s case, he was given refuge in lands siding with him instead of the Catholic regime, ultimately setting off a century of civil war over the Power of Narrative.

The final death knell came when Luther published bibles in German and French using the new printing press, the so-called Luther Bibles, first published in 1522. These set off shockwaves, as they were 1) distributed by the cartload in the streets of Paris and France, 2) were readable by the common people without translation by the clergy, and 3) didn’t cost the equivalent of a million dollars each.

The Church immediately went into a panic, as they had instantly lost their gatekeeper position. No longer were they able to stand unchallenged when they were reading from the Bible in Latin, as people could – and would – verify the claims made, using their own direct sources. And as it turned out, a lot of the things that had been claimed – selling salvation among them – had been baloney of the highest order with no support in the Christian Bible as claimed.

The Catholic church went on a rampage and a crusade against this new spread of ideas that would challenge its narrative, and in particular, against the technology which enabled people to challenge its narrative. Copying books cheaply and efficiently instead of paying four annual salaries for a single book – the audacity, the outrageous heresy! How dared people copy books themselves without respecting the Church? Obviously, books could only be properly copied in monasteries, to ensure proper quality.

(“How will the monks copying books get paid otherwise?” was as much a smokescreen then as it is today.)

The church kept up the pressure against the printing press, as it saw all the resulting non-sanctioned news channels as completely fake, not just being wrong, but being dangerous. They were irresponsible. They were deliberately spreading misinformation – at least the Church saw it that way, a Church which was institutionally incapable of unlearning that it was no longer the single source of information and would no longer have whatever outlandish claim accepted without question.

However, the nobility and royalty of the time were certainly paying attention to the Church. After all, the Archbishop installed Kings, so there was a mutual dependence for power between the clergy and royalty at the time. Therefore, when the Church exclaimed the sky is falling (“there is fake news everywhere! We must do something!!!!!!!”), the royalty tended to listen.

As a result, on January 13, 1535, the French King Francis I signed into law the death penalty by hanging for using a printing press at all. Yes, you read that right: there was a death penalty for making unauthorized copies. The justification for the law, as still readable in the preserved logs from 1535, was to “prevent the spread of misinformation and false news”.

So the gatekeepers of knowledge and culture in 1530, on losing their gatekeeper position over the narrative, didn’t counter with higher-quality reporting, but instead attacked the technology enabling competition, calling it out as spreading misinformation and irresponsible fake reports. Does any of this seem… familiar?

The law was a complete fiasco. Once people had learned to read competing reporting, there was no unlearning it. The law was repealed shortly thereafter. England went another route to prevent the success of the printing press by establishing a censorship regime with printing monopolies, known as copyright, but that’s a story for another day.

As a final touch, let’s consider the words of Paul Graham, in his excellent essay “what you can’t say”:

“No one gets in trouble for saying that 2 + 2 is 5, or that people in Pittsburgh are ten feet tall. Such obviously false statements might be treated as jokes, or at worst as evidence of insanity, but they are not likely to make anyone mad. The statements that make people mad are the ones they worry might be believed. I suspect the statements that make people maddest are those they worry might be true. […] If Galileo had said that people in Padua were ten feet tall, he would have been regarded as a harmless eccentric. Saying the earth orbited the sun was another matter. The church knew this would set people thinking.”

Privacy and narrative remain your own responsibility.

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If you’ve paid into Social Security, become injured or sick, and can no longer earn more than $1,130 a month, you can get a monthly subsidy from the Disability Insurance Trust Fund. As Bloomberg notes, in 1990 fewer than 2.5% of working-age Americans were "on the check;" by 2015 the number stood at 5.2%, with geographical "disability belts" appearing across America.

Something changed in 2000…

 

That growth has left the fund in periodic need of rescues by Congress – most recently in 2015, when the Bipartisan Budget Act shifted money from Social Security’s old-age survivors’ fund to extend the solvency of the disability fund to 2023.

“None of us should be surprised that the cost of the program was rising,” says Stephen Goss, Social Security’s chief actuary.

 

He says the program’s growth is mostly a consequence of demographic change. Older workers are more likely to get sick, and as women have entered the workforce, they too have become eligible for benefits.

In 1956, when the disability insurance fund was created, qualification was based on a list of accepted medical conditions. In 1984, Congress broadened the criteria, giving more weight to chronic pain and mental disorders. The qualification process also became more subjective. Now, rather than check diagnostic conditions against a list, the process determines whether applicants are able to perform work that’s available. “It’s not as if you go to the doctor, the doctor says, ‘I’m sorry, son, you’ve got disability,’ ” Autor says. “It’s a social construct, because it’s about whether you can work.”

Source: Bloomberg

The geographic distribution of people on disability tells a different story to the government's "it's a demographic/aging issue" argument: Workers who might have endured pain for a physical job apply for disability when jobs disappear.

This has created what some economists call “disability belts” – rural areas in Appalachia, the Deep South, and along the Arkansas-Missouri border.

Source: Bloomberg

In a 2013 paper, David Autor, an economist at MIT, and his co-authors wrote that Social Security disability insurance was the single biggest source of federal transfers into areas that had been directly affected by trade with China and Mexico. Dan Black, now at the University of Chicago, found in a 2004 paper that growth in disability claims in Appalachia dramatically outpaced those in the rest of the country. Although it’s not designed to, Autor says, Social Security disability benefits function as unemployment insurance.

In the coming Congress, Republican Representative French Hill, who represents Van Buren County, plans to reintroduce a disability insurance reform bill he wrote after hearing Autor, the MIT economist, present his analysis of the program—a talk that echoed things Hill had heard from folks back home. The bill would require more frequent reviews of disability recipients with nonpermanent conditions.

Source: Bloomberg

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Authored by Ron Paul via The Ron Paul Institute,

In the spirit of New Year’s, here are four resolutions for President-elect Trump and Congress that will enable them to really make America great again:

1) Audit the Fed….and then end it: The Federal Reserve Bank's easy money policies have eroded the American people’s standard of living and facilitated the growth of the welfare-warfare state. The Fed is also responsible for the growth in income inequality. Yet Congress still refuses to pass Audit the Fed, much less end it.

 

During the campaign, then-candidate Donald Trump promised that Audit the Fed would be part of his first 100 days agenda. Unfortunately, he has not spoken of auditing the Fed or another aspect of monetary policy since the election. President-elect Trump should keep his promise and work with Congress to pass Audit the Fed and finally let the American people know the truth about the Fed’s conduct of monetary policy. Then, of course, end the Fed.

 

2) Bring the troops home: President Barack Obama has not only failed to withdraw American forces from Afghanistan and Iraq, he has further destabilized the Middle East with reckless interventions in Egypt, Libya, and Syria. The Obama administration has also brought us to the brink of a new Cold War.

 

President-elect Trump has criticized the 2003 Iraq war and promised to end nation-building. However, he has also made hawkish statements such as his recent endorsement of increased US military intervention in Syria and has appointed several hawks to key foreign policy positions. President-elect Trump also supported increasing the Pentagon’s already bloated budget.

 

America cannot afford to continue wasting trillions of dollars in a futile effort to act as the world’s policeman. Rejecting the neocon policies of nation-building and spreading democracy by force of arms is a good start. However, if Donald Trump is serious about charting a new course in foreign policy, his first act as president should be to withdraw US troops from around the globe. He should also veto any budget that does not drastically cut spending on militarism.

 

3) Repeal Obamacare: Obamacare has raised healthcare costs for millions of Americans while denying them access to the providers of their choice. Public dissatisfaction with Obamacare played a major role in Donald Trump’s election.

 

Unfortunately, since the election President-elect Trump and the Republican Congress have talked about retaining key parts of Obamacare! While it is reasonable to have a transition to a new healthcare system, Congress must avoid the temptation to replace Obamacare with “Obamacare lite.” Congress must pass, and President Trump must sign, a true free-market health care plan that restores control over healthcare to individuals.

 

4) Cut Taxes and Spending: President-elect Trump and Congressional leadership both favor tax reform. However, some leading Republicans have recently said they will not support any tax reform plan that is not “revenue neutral.” A true pro-liberty tax reform would reduce government revenue by eliminating the income tax. Fiscal hawks concerned with increasing federal deficits should stop trying to increase tax revenues and join with supporters of limited government to drastically cut federal spending. Congress should prioritize ending corporate welfare, reducing military spending, and shutting down unconstitutional federal agencies like the Department of Education.

If President Trump and Congress spend the next six months passing Audit the Fed, ending our militaristic foreign policy, repealing Obamacare and replacing it with a true free-market health care system, and cutting both spending and taxes, they will begin to make America great again. If they fail to take these steps, then the American people will know they have been fooled again.

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Just a week after Obama held a press conference announcing that he sent a stern warning to Vladamir Putin regarding his alleged “election hacking” efforts (see “Obama Told Putin To “Cut It Out” On Hacking“), the Washington Post is reporting that the Obama administration is close to announcing a series of economic sanctions and other measures to punish Russia for its “interference” in the 2016 presidential election.  Quoting “U.S. officials,” WaPo said that an announcement from the Obama administration could come as early as this week and would likely include “covert cyber operations.”

According to WaPo’s “sources”, the delay in sanctions against Russia have come from Obama’s inability to take unilateral actions under current laws.  While Obama previously signed an executive order that would allow him to freeze the assets in the United States of people overseas who have engaged in cyber acts, it only applies to actions that have threatened U.S. national security or financial stability.  Further, per a “senior administration official,” use of the existing law would require (1) actual election infrastructure to be designated as ‘critical infrastructure’ and (2) the administration to prove that such infrastructure was actually “harmed,” conditions which the National Security Council say have not been met. 

The White House is still finalizing the details of the sanctions package. Holding up the announcement is an internal debate over how best to adapt a 2015 executive order that gave the president the authority to levy sanctions against foreign actors who carry out cyberattacks against the United States.

 

The order was used as the “stick” in negotiations over a highly-publicized 2015 agreement with China that neither nation would hack the other for economic gain.

 

But officials concluded this fall that the order does not cover the kind of covert influence operation that the Intelligence Community believes Russia carried out during the election — hacking political organizations and leaking stolen emails with the goal of influencing the outcome.

 

The April 2015 order allows the Treasury Department to freeze the assets of individuals or entities who used digital means to damage U.S. critical infrastructure or engage in economic espionage.

 

The National Security Council concluded that it would not be able to use the authority against Russian hackers because their malicious activity did not clearly fit under its terms, which require harm to critical infrastructure or the theft of commercial secrets.

 

“You would (a) have to be able to say that the actual electoral infrastructure, such as state databases, was critical infrastructure, and (b) that what the Russians did actually harmed it,” a senior administration official told The Post. “Those are two high bars.”

 

Of course, laws are merely suggestions for an Obama administration that has grown quite comfortable legislating through executive action from the White House.  As Zachary Goldman, a sanctions and national security expert at New York University School of Law, points out the current laws simply require the Obama administration to “engage in some legal acrobatics to fit the DNC hack into an existing authority, or they need to write a new authority.”

“Fundamentally, it was a low-tech, high-impact event,” said Zachary Goldman, a sanctions and national security expert at New York University School of Law. And the 2015 executive order was not crafted to target hackers who steal emails and dump them on WikiLeaks or seek to disrupt an election. “It was an authority published at a particular time to address a particular set of problems,” he said.

 

So officials “need to engage in some legal acrobatics to fit the DNC hack into an existing authority, or they need to write a new authority,” Goldman said.

 

Administration officials would like Obama to use the power before leaving office to demonstrate its utility.

And, not surprisingly, another administration official points out that “part of the goal here is to make sure that we have as much of the record public or communicated to Congress in a form that would be difficult to simply walk back.”  Yes, that is the problem with legislating through executive action rather than acknowledging the will of the American people and trying to work with Congress.

And while Obama and Democrats continue their crusade to deligitamize the Trump administration, we would point out once again that, despite all the rhetoric, not a single person has gone on the record and/or presented a single shred of tangible evidence to confirm Russian involvement in the DNC and/or John Podesta email hacks. 

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Submitted by Adam Taggart via PeakProsperity.com,

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Republican control of all three branches of government in Washington DC has the nation’s second largest labor union worried about what a Trump administration might mean for their already declining membership and corresponding union dues.  In response, the Service Employees International Union (SEIU) which represents nearly 2 million government, health care, and building-services workers and wields an annual budget of $300 million, has taken steps to slash its budget by 30% in an effort to hoard cash “to fight-back against” Trump’s “extremist-run government”.  Per an internal memo from SEIU President Mary Kay Henry reviewed by Bloomberg:

“Because the far right will control all three branches of the federal government, we will face serious threats to the ability of working people to join together in unions,” SEIU President Mary Kay Henry wrote in an internal memo dated December 14. “These threats require us to make tough decisions that allow us to resist these attacks and to fight forward despite dramatically reduced resources.” After citing the need to “dramatically re-think” how to implement the union’s strategy, Henry’s all-staff letter announces SEIU “must plan for a 30% reduction” in the international union’s budget by January 1, 2018, including a 10 percent cut effective at the start of 2017.

 

Asked about what the memo could mean for its current campaigns, SEIU didn’t offer specifics. “As we prepare to fight-back against the forthcoming attacks on working people and our communities under an extremist-run government, we know we must realign our resources and streamline our investments to buttress and broaden our movement to restore economic and democratic opportunity for all families,” said spokeswoman Sahar Wali. “As part of this process, we are currently looking at possible ways to improve our budgets.”

Of course, the SEIU is likely most worried about so-called “Right to Work” laws which allow workers the choice to decline paying fees to the unions that represent them.  But if unions are providing such a great service for their membership then shouldn’t workers to happy to pay their dues?

In Michigan, for example, Republicans in 2012 passed a private sector “Right to Work” law that let workers decline to fund the unions representing them, a public sector law doing the same for government employees, and a third law stripping University of Michigan graduate student researchers and  home-health aides of their collective-bargaining rights. Afterwards, SEIU’s Michigan healthcare local lost most of its membership.

 

With Republican dominance in Washington, the threats to SEIU will get more grave—everything from slashing health-care spending to passing a federal law extending “Right to Work” to all private-sector employees could be on the table. One of the most widely expected scenarios is that a Trump appointee will provide the decisive fifth vote on the Supreme Court’s labor cases. The court already ruled in 2014 that making government-funded home health aides pay union fees violated the First Amendment, and a future case could apply the same logic to all government employees, effectively making the whole public sector “Right to Work.” SEIU was bracing for such a ruling earlier this year, in a case called Friedrichs v. California Teachers Association, but got an unexpected reprieve when Scalia’s death left the court tied four to four. With several similar cases brought by union opponents already making their way through lower courts, it may not last for long.

In the past few years, the SEIU has been most vocal about it’s “Fight for $15” campaign which has drawn support from the likes of Bernie Sanders.  Of course, the effort seemingly ignores the cost of living differences between the Midwest and large metropolitan areas like San Francisco and New York City in arguing that a $15 minimum wage is somehow perfect for the entire country.

 

According to the “Fight For $15” website, the organization started with just a few hundred fast food workers in New York City and has since spread to over 300 cities and a variety of industries.  Meanwhile, the organization also claims to have “won” mandates for a $15 per hour minimum wage in multiple jurisdiction across the U.S. including New York and California.

The Fight for $15 started with just a few hundred fast food workers in New York City, striking for $15 an hour and union rights.

 

Today, we’re an international movement in over 300 cities on six continents of fast-food workers, home health aides, child care teachers, airport workers, adjunct professors, retail employees – and underpaid workers everywhere.

 

For too long, McDonald’s and low-wage employers have made billions of dollars in profit and pushed off costs onto taxpayers, while leaving people like us – the people who do the real work – to struggle to survive.

 

That’s why we strike.

 

When we first took the streets, the skeptics called us dreamers – said a $15 wage was “unwinnable.”

 

We won $15 an hour across New York State and California.

 

We won $15 in Seattle, and huge raises in cities from Portland to Chicago.

 

We won $15 for Pennsylvania nursing home workers and all hospital employees at UPMC – Pennsylvania’s largest private employer.

 

And we won’t stop fighting until we turn every McJob into a REAL job.

As we’ve pointed out before, sometimes defining a “victory” can be difficult…this doesn’t look like a “win” to us:

 

And neither does this:

 

In conclusion:

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Submitted by Lance Roberts via RealInvestmentAdvice.com,

With the markets closed on Monday, there really isn’t much to update you on “technically” from this past weekend’s missive. The important point, if you haven’t read it, was:

“The stampede into U.S. equity ETFs since the election has been nothing short of breathtaking,” said David Santschi, chief executive officer at TrimTabs.  ‘The inflow since Election Day is equal to one and a half times the inflow of $61.5 billion in all of the last year.  One has to wonder who’s left to buy.’”

You can see this exuberance in the deviation of the S&P 500 from its long-term moving averages as compared to the collapse in the volatility index. There is simply “NO FEAR” of a correction in the markets currently which has always been a precedent for a correction in the past. 

The chart below is a MONTHLY chart of the S&P 500 which removes the daily price volatility to reveal some longer-term market dynamics. With the markets currently trading 3-standard deviations above their intermediate-term moving average, and with longer-term sell signals still weighing on the market, some caution is advisable.

While this analysis does NOT suggest an imminent “crash,” it DOES SUGGEST a corrective action is more likely than not. The only question, as always, is timing.  

However, this brings me to something I have addressed in the past but thought would be a good reminder as we head into the New Year.

“The most dangerous element to our success as investors…is ourselves.”

The 5-Most Dangerous Biases

Every year Dalbar releases their annual “Quantitative Analysis of Investor Behavior” study which continues to show just how poorly investors perform relative to market benchmarks over time. More importantly, they discuss many of the reasons for that underperformance which are all directly attributable to your brain. 

George Dvorsky once wrote that:

“The human brain is capable of 10¹⁶ processes per second, which makes it far more powerful than any computer currently in existence. But that doesn’t mean our brains don’t have major limitations. The lowly calculator can do math thousands of times better than we can, and our memories are often less than useless — plus, we’re subject to cognitive biases, those annoying glitches in our thinking that cause us to make questionable decisions and reach erroneous conclusions.“

Cognitive biases are an anathema to portfolio management as it impairs our ability to remain emotionally disconnected from our money. As history all too clearly shows, investors always do the “opposite” of what they should when it comes to investing their own money. They “buy high” as the emotion of “greed” overtakes logic and “sell low” as “fear” impairs the decision-making process.

Here are the top-5 of the most insidious biases which keep you from achieving your long-term investment goals.

1) Confirmation Bias

As individuals, we tend to seek out information that conforms to our current beliefs. If one believes that the stock market is going to rise, they tend to only seek out news and information that supports that position. This confirmation bias is a primary driver of the psychological investing cycle of individuals as shown below. I discussed this just recently in why “Media Headlines Will Lead You To Ruin.”

The issue of “confirmation bias” also creates a problem for the media. Since the media requires “paid advertisers” to create revenue, viewer or readership is paramount to obtaining those clients.  As financial markets are rising, presenting non-confirming views of the financial markets lowers views and reads as investors seek sources to “confirm” their current beliefs.

As individuals, we want “affirmation” our current thought processes are correct. As human beings, we hate being told we are wrong, so we tend to seek out sources that tell us we are “right.”

This is why it is always important to consider both sides of every debate equally and analyze the data accordingly. Being right and making money are not mutually exclusive.

2) Gambler’s Fallacy

The “Gambler’s Fallacy” is one of the biggest issues faced by individuals when investing. As emotionally driven human beings, we tend to put a tremendous amount of weight on previous events believing that future outcomes will somehow be the same.

The bias is clearly addressed at the bottom of every piece of financial literature.

“Past performance is no guarantee of future results.”

However, despite that statement being plastered everywhere in the financial universe, individuals consistently dismiss the warning and focus on past returns expecting similar results in the future.

This is one of the key issues that affect investor’s long-term returns. Performance chasing has a high propensity to fail continually causing investors to jump from one late cycle strategy to the next. This is shown in the periodic table of returns below. “Hot hands” only tend to last on average 2-3 years before going “cold.”

I traced out the returns of the S&P 500 and the Barclay’s Aggregate Bond Index for illustrative purposes. Importantly, you should notice that whatever is at the top of the list in some years tends to fall to the bottom of the list in subsequent years. “Performance chasing” is a major detraction from investor’s long-term investment returns.

Of course, it also suggests that analyzing last year’s losers, which would make you a contrarian, has often yielded higher returns in the near future. Just something to think about with “bonds” as one of the most hated asset classes currently.

3) Probability Neglect

When it comes to “risk taking” there are two ways to assess the potential outcome. There are “possibilities” and “probabilities.” As individuals we tend to lean toward what is possible such as playing the “lottery.”  The statistical probabilities of winning the lottery are astronomical, in fact, you are more likely to die on the way to purchase the ticket than actually winning the lottery. It is the “possibility” of being fabulously wealthy that makes the lottery so successful as a “tax on poor people.”

As investors, we tend to neglect the “probabilities” of any given action which is specifically the statistical measure of “risk” undertaken with any given investment. As individuals, our bias is to “chase” stocks that have already shown the biggest increase in price as it is “possible” they could move even higher. However, the “probability” is that most of the gains are likely already built into the current move and that a corrective action will occur first.

Robert Rubin, former Secretary of the Treasury, once stated;

“As I think back over the years, I have been guided by four principles for decision making. First, the only certainty is that there is no certainty. Second, every decision, as a consequence, is a matter of weighing probabilities. Third, despite uncertainty we must decide and we must act. And lastly, we need to judge decisions not only on the results, but on how they were made.

 

Most people are in denial about uncertainty. They assume they’re lucky, and that the unpredictable can be reliably forecast. This keeps business brisk for palm readers, psychics, and stockbrokers, but it’s a terrible way to deal with uncertainty.

 

If there are no absolutes, then all decisions become matters of judging the probability of different outcomes, and the costs and benefits of each. Then, on that basis, you can make a good decision.”

Probability neglect is another major component to why investors consistently “buy high and sell low.”

4) Herd Bias

Though we are often unconscious of the action, humans tend to “go with the crowd.” Much of this behavior relates back to “confirmation” of our decisions but also the need for acceptance. The thought process is rooted in the belief that if “everyone else” is doing something, they if I want to be accepted I need to do it too.

In life, “conforming” to the norm is socially accepted and in many ways expected. However, in the financial markets the “herding” behavior is what drives market excesses during advances and declines.

As Howard Marks once stated:

“Resisting – and thereby achieving success as a contrarian – isn’t easy. Things combine to make it difficult; including natural herd tendencies and the pain imposed by being out of step, since momentum invariably makes pro-cyclical actions look correct for a while. (That’s why it’s essential to remember that ‘being too far ahead of your time is indistinguishable from being wrong.’

 

Given the uncertain nature of the future, and thus the difficulty of being confident your position is the right one – especially as price moves against you – it’s challenging to be a lonely contrarian.”

Moving against the “herd” is where the most profits are generated by investors in the long term. The difficulty for most individuals, unfortunately, is knowing when to “bet” against the stampede.

5) Anchoring Effect

This is also known as a “relativity trap” which is the tendency for us to compare our current situation within the scope of our own limited experiences. For example, I would be willing to bet that you could tell me exactly what you paid for your first home and what you eventually sold it for.  However, can you tell me what exactly what you paid for your first bar of soap, your first hamburger or your first pair of shoes? Probably not.

The reason is that the purchase of the home was a major “life” event. Therefore, we attach particular significance to that event and remember it vividly. If there was a gain between the purchase and sale price of the home, it was a positive event and, therefore, we assume that the next home purchase will have a similar result.  We are mentally “anchored” to that event and base our future decisions around a very limited data.

When it comes to investing we do very much the same thing. If we buy a stock and it goes up, we remember that event. Therefore, we become anchored to that stock as opposed to one that lost value. Individuals tend to “shun” stocks that lost value even if they were simply bought and sold at the wrong times due to investor error. After all, it is not “our” fault that the investment lost money; it was just a bad stock. Right?

This “anchoring” effect also contributes to performance chasing over time. If you made money with ABC stock but lost money on DEF, then you “anchor” on ABC and keep buying it as it rises. When the stock begins its inevitable “reversion,” investors remain “anchored” on past performance until the “pain of ownership” exceeds their emotional threshold. It is then that they panic “sell” and are now “anchored” to a negative experience and never buy shares of ABC again.

This is ultimately the “end-game” of the current rise of the “passive indexing” mantra. When the selling begins, there will be a point where the pain of “holding” becomes to great as losses mount. It is at that point where “passive indexing” becomes “active selling” as our inherent emotional biases overtake the seemingly simplistic logic of “buy and hold.”  

 

Conclusion

In the end, we are just human. Despite the best of our intentions, it is nearly impossible for an individual to be devoid of the emotional biases that inevitably lead to poor investment decision making over time. This is why all great investors have strict investment disciplines that they follow to reduce the impact of human emotions.

Take a step back from the media, and Wall Street commentary, for a moment and make an honest assessment of the financial markets today. Does the current extension of the financial markets appear to be rational? Are individuals current assessing the “possibilities” or the “probabilities” in the markets?

As individuals, we are investing our hard earned “savings” into the Wall Street casino. Our job is to “bet” when the “odds” of winning are in our favor. Secondly, and arguably the most important, is to know when to “push away” from the table to keep our “winnings.”

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