Toward the end of 2012, Elliott Management’s Paul Singer made a speech at the Archstone Partnership annual meeting. He stated that, “The thing that scares me the most is significant inflation, which could destroy our society.” About a year later in an interview with Wall Street Journal’s “Heard on the Street” program he explained that this could come about with small changes in perception of inflation risk: “The first whiffs of either commodity inflation or wage inflation … may cause a self-reinforcing set of market events … which may include a sharp fall in bond prices, … fall in stock prices, rapid increase in commodities…” Continue reading
Asset price inflation might signal debasement of the currency and acceleration of commodity price inflation
This time it may well be different… For several years now, numerous high-profile commentators and analysts have been forecasting an imminent stock market correction, or indeed a crash, evoking the events of 1929, 1987, 2000 or 2008. Of course, many are now predicting it is sure to happen in 2018. If not, perhaps in 2019 or maybe 2020? Who knows… But so far, not many analysts – if any, apart from yours truly – have considered the possibility that this rally might extend even higher from today’s dizzying heights. In an October 2016 post I suggested that this is exactly what was ahead. Continue reading
Investors exert a great deal of intellectual effort to determine the correct valuation of securities. Economic value is central to our decision making and it plays a major role in our intuitive psyche. In daily life, when we buy a loaf of bread or a tank of gasoline, we tend to have a good idea about what we think is cheap and what’s expensive. We like bargains, don’t enjoy being ripped off, and just as we are inclined to shop for value as consumers, we find value investing intuitively appealing. But here’s the critical difference between buying goods and investing: shopping for investments is speculative while buying stuff isn’t, and speculation activates the part of our mental circuitry that can heat up to a boiling point and overwhelm any rational consideration of value. Continue reading
In my book, “Mastering Uncertainty in Commodities Trading” I argued that security prices “are driven by human psychology and its self-stoking collective action that can sustain major trends spanning many years.” That’s because in speculative decision making, our views about the actions of others can entirely override our rational appraisal of the underlying asset value.
The most recent example of this is the price of Bitcoin that has surged from below $400 in January last year to $4,300 this week. When we set up the Altana Digital Currency Fund several years ago, many people thought that digital currencies were just a strange fad and investors continued to show little interest in them – until very recently. Continue reading
Nature has … some sort of arithmetical-geometrical coordinate system, because nature has all kinds of models. What we experience of nature is in models, and all of nature’s models are so beautiful. – R. Buckminster Fuller
Nature’s survival strategies that bear the most similarities to activities of market speculators are those of predators. To live, predators must hunt and this activity includes elements of speculation. Like trading, predation requires knowledge, skills, judgment and decision-making. It also entails risk and uncertainty. A predator can’t be sure where her next meal is coming from. Each hunt is an investment of resources; it involves the risk of injury and loss of energy expended in failed hunts, which tend to be more frequent than successful ones. To survive and procreate, predators must consistently generate a positive return on this investment. Too much of a losing streak could turn out to be fatal. In his book, “The Serengeti Lion: A Study of Predator-Prey Relations” George B. Schaller painstakingly documented the details of hundreds of hunts by large cats in the Serengeti National Park in Tanzania. We have all seen wildlife television programs showing lions and cheetahs hunting, but Schaller’s work offers a much richer account of the life of predatory cats including their hunting behavior.
The anatomy of a hunt Continue reading
A question frequently arises among trend followers on the nature of effective trading strategies. The old school of thought holds that strategies should be simple, ultra robust and effective across markets and time frames. I happen to disagree so here I share a hard-won piece of knowledge that should help settle this question. Continue reading
Our future is being shaped by an unprecedented monetary experiment run by our central bank mandarins, but a happy ending is a mathematical impossibility. The economic imbalances that resulted in the last, 2008 financial crisis are now much worse and we are facing two possible routes of their resolution. One is a full-blown deflationary depression that could see asset prices drop by 50% or more. The other is a strong and sustained decline in the US Dollar (and other major currencies) with an accelerating commodity price inflation that might span a full decade.
Central banks’ overt commitment to supporting asset prices at all costs suggests that the second scenario may be more probable. In this case, a major stock-market crash could be averted; instead, we could see a significant and sustained rise in equity markets, as was the case most recently during the Zimbabwean and Venezuelan inflations, as well as the Argentinian, Brazilian, Israeli and German inflations before that. Below is the chart showing the appreciation of Israel All Share index during the country’s inflationary crisis in the 1980s: Continue reading