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The plunge protection team and their impact on the markets

July 29, 2015

Chris provides a short history on the plunge protection team. We then dive into the true drivers of the markets. There is no question in our eyes that that these markets have become in their own.

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Discussion
36 Comments
    CFS
    Jul 29, 2015 29:01 AM

    http://www.hussmanfunds.com/wmc/wmc150727.htm

    1) Valuations control long-term returns. The higher the price you pay today for each dollar you expect to receive in the future, the lower the long-term return you should expect from your investment. Don’t take current earnings at face value, because profit margins are not permanent. Historically, the most reliable indicators of market valuation are driven by revenues, not earnings.

    2) Risk-seeking and risk-aversion control returns over shorter portions of the market cycle. The difference between an overvalued market that becomes more overvalued, and an overvalued market that crashes, has little to do with the level of valuation and everything to do with the attitude of investors toward risk. When investors are risk-seeking, they are rarely selective about it. Historically, the most reliable way to measure risk attitudes is by the uniformity or divergence of price movements across a wide range of securities.

    I’ve called these The Iron Law of Valuation, and The Iron Law of Speculation. I’ve repeated them frequently. They deserve to be repeated. They’re not Kipling, but if you remember both of those principles through the ups and downs of the market cycle, I expect that they’ll replace a great deal of grief with a great deal of success over a lifetime of investing. They also explain virtually every major success and occasional stumble I’ve experienced in three decades as a professional investor.

      Jul 29, 2015 29:53 PM

      CFS, what is interesting is that as time goes by, one realizes that The Federal Reserve has been beaten. As stocks rise and fall with no general liquidation taking place, gradually money finds it’s way more plentiful into speculative use. It has now gotten to the point where if they raise rates the speculators will pay almost anything to get their hands on the money because so much is at stake for them. DT

    CFS
    Jul 29, 2015 29:03 AM

    hussman, if my memory is correct, is a retired Prof of economics from Michigan.

    Jul 29, 2015 29:49 AM

    I think the central banks would have to support oil too so the rest of the market can stay up and the shale producers holding a trillion in debt don’t go under. There have been to many bears on oil lately so it is bouncing back up. Production is expected to decline from existing wells including the middle east as they naturally deplete.

      Jul 29, 2015 29:01 PM

      Are we about to get a bounce in the USD which should see oil head lower again? Today’s oil bounce was just that… a bounce… surely?

    PF
    Jul 29, 2015 29:37 AM

    How about a debate between Chris and Rick on inflation vs. deflation?

    Jul 29, 2015 29:21 PM

    Chris’s view on inflation is absolutely the correct one in my opinion. The deflationist don’t seem to realize that the dollar is just one more form of debt that is collapsing (the last year notwithstanding, it has lost a LOT of purchasing power since 2001!).

      Jul 29, 2015 29:38 PM

      My view I expressed today is longer-term…there will likely be, however, one or more bouts of a 2008-style deflation along the way; it’s the nature of things today.

        Jul 30, 2015 30:31 AM

        I am not sure you appreciate the magnitude of the debt clearing trend that we are entering Chris. Fed interventions themselves are minuscule next to the size of the asset inflation that has taken place. And it is not as if they have the firepower to contend with it anyway. Just how much further do you think they can expand their balance sheet and the economy remain normal? Short of a deliberate decision to debase the currency there is very little that can be done to reduce the impact of a reconciliation between excessive asset valuations and the debt taken on to create them. Furthermore, consumer price inflation does not generally coexist happily with inflated values for homes and lands because it amounts to a tax on discretionary spending and savings. That means fewer still first time buyers and a flattening of speculation for the move-up market. Anyway, your interview today made you sound like a starry-eyed optimist but I think your confidence in the ability of central bank interventions and the ability of authorities to manage an asset price deflation is badly misplaced.

          Jul 30, 2015 30:18 AM

          The Fed can ALWAYS create inflation if it chooses to because it can always destroy the value of the currency that IT OWNS.

          Being underestimated by your opponent is always an asset so it’s probably no accident that so many who should know better underestimate the Fed’s power (I’m not saying YOU should know better but there are plenty of commentators who should).

            Jul 30, 2015 30:51 AM

            Of course they can inflate the currency. I acknowledged that when I wrote “Short of a deliberate decision to debase the currency….” in my comment above yours. So that’s a given. I just don’t think they are prepared to go down that road unless there are no other options. The most important reason naturally is that a decision to pursue a high inflation outcome is so destructive to creditors (banks) and also because it would induce a sharp rise in interest rates. The Fed’s primary obligation is to protect the banks in any event and maintain balance so its unlikely they will take actions that are destructive to the financial sector or that would cause many to become insolvent.

            And that means deflation will have to take its course….which is what is actually happening.

    Jul 29, 2015 29:54 PM

    So Greece is returning to a barter economy in part because credit has dried up and cash is in shortage. You might just think that gold would save the day. But you would be wrong. In fact, what the barter economy is thriving on is agricultural products and services (food and labour).

    Who knew eh…and we were all led to believe that precious metals would be there to fill in the gaps left behind when a country had a broken currency system. Truth is always better than lies though.

    It always comes down to food or whatever common production a country has on offer. And in this case that means cheese, olives, clover, hay, vegetables, corn, meat, cotton, spare parts and farm machinery shared amongst those who can no longer afford to rent or buy.

    They did not mention chickens yet…..but they will. Chickens are ALWAYS money!

    Total Collapse: Greece Reverts To Barter Economy For First Time Since Nazi Occupation
    http://www.zerohedge.com/news/2015-07-29/complete-collapse-greece-reverts-barter-economy-first-time-nazi-occupation

      Jul 29, 2015 29:03 PM

      Not again!

      Aristotle defined the characteristics of a good form of money:

      1.) It must be durable. Money must stand the test of time and the elements. It must not fade, corrode, or change through time.

      2.) It must be portable. Money hold a high amount of ‘worth’ relative to its weight and size.

      3.) It must be divisible. Money should be relatively easy to separate and re-combine without affecting its fundamental characteristics. An extension of this idea is that the item should be ‘fungible’. Dictionary.com describes fungible as:

      “(esp. of goods) being of such nature or kind as to be freely exchangeable or replaceable, in whole or in part, for another of like nature or kind.”

      4.) It must have intrinsic value. This value of money should be independent of any other object and contained in the money itself.

        Jul 29, 2015 29:46 PM

        If you think it through you will realize that a barter economy is driven by real goods, tangible products and necessary services that can be traded for other real goods. Food is the primary example here.

        So money in that sense contains its own value notwithstanding that some products will not hold value indefinitely. Bread might have a shelf life of days. Clover could last 6 months or so and spare parts may have utility measured in dozens of years.

        But none of those impediments stops those items from being used in trade or in completing financial transactions. While Aristotle has made excellent points we should consider that he was referring to what he considered the best form of money while not necessarily disparaging all other forms.

        The fact is that when fiat is not available people will still transact and they will do so with whatever is at their disposal.Gold might be best suited for those who want to save the profit and labour but it is certainly not alone as the only choice. In the real world even buttons and pins can be money if traders will accept them.

        And lets keep in mind that the majority are usually without the means to acquire or save silver and gold. So that means the majority of barter trading will be done in objects other than precious metals.

          Jul 29, 2015 29:26 PM

          The majority are not without the means to acquire or save silver and gold, they are without the means to save MUCH silver and gold. Cash is king in an economic collapse and gold is the king of cash. Those who have it will get a lot for it as those who don’t scramble to get it. As with any market sector, the masses will be way too late and more than a dollar short as they buy the top.

            Jul 29, 2015 29:13 PM

            You guys are great. A Listener (Birdman) always uses chicken (not pet turtles) as a bartering tool, and makes some good points from an interesting perspective on who markets behave different that we expect at times, but often has a jibe in there. Matthew has always been a sound voice of reason with respect to purchasing power, precious metals and economics. I learn from you both everyday, but remember a series of blogs in December that were very similar.

            When Matthew said “Not again!” and posted Aristotle, it brought a big grin to my face.

            Again you guys are great!! 🙂

            Jul 30, 2015 30:01 AM

            Yes Matthew, it is a fact that the majority are not in a position to acquire precious metals to use for trade, barter or money. Lets be specific here. We are talking about Greece and a real world example so we won’t bother to generalize or get into some airy-headed intellectual theory.

            Unemployment in Greece is currently running at almost 30% of the population of able-bodied people who fall within the age category that is monitored for employment. You already know how employment statistics are calculated by Western governments of course and for the most part the numbers poorly represent actual employment levels.

            Now tack on the number of non-working people below the age of 15 (Fourteen percent of the population) and add up the numbers of people in retirement above age 65 (20% of the population). And do keep in mind that Greeks retire as much as 10 years earlier than other OECD countries with many departing at age 55. But I will use age 65 for convenience.

            So we have 34% of the people in the country who do not even work (at a very minimum) and are above 65 or below 15 and we have a 30% unemployment rate for the remaining 66% of the working population.

            That means that roughly 5 million Greeks are in the labour force from a population of 11 million. Of that 5 million we need to subtract those surviving on social security, those incarcerated, those in the military and those not counted as employable because they are not seeking work.

            On that basis there is absolutely no question that the vast majority of people do not have the means to either acquire or save in gold and silver and this is even more true when you consider typical Greek incomes these days.

            Gold is thus almost irrrelevent to their economy. And how do i know that? Well I have an article that helps dispel the notion of how much importance Greeks place on precious metals as a store of wealth.

            From Bloomberg we have learned the following:

            “The Bank of Greece sold 5,849 Royal Mint Sovereign coins in January, according to an e-mail from the central bank, which said the numbers do not show any “abnormal activity.” While it didn’t provide monthly figures for comparison, government data show sales of 7,857 coins in the last quarter of 2014”. — Bloomberg February 9, 2015

            Got that? Greek investors purchased fewer than 8000 gold sovereigns from their own banks during the last quarter of 2014 and that amounts to a maximum of 32,000 coins on the year if extrapolated out. of course, it is far fewer than 32,000 because there was little appetite in the first 3 quarters.

            Maybe you think you can run an economy of 11 million people based on purchases of that few gold coins but I sure don’t. In short, as I stated earlier, the vast majority of people are not in a position to buy or save in gold and the facts back me up 100%.

            Jul 30, 2015 30:04 AM

            What’s with your uppity little “got that?” First, you are not making a useful point, second, you did not provide the total gold sales, just Greek sovereigns. Third, you did not provide recent data. Fourth, “Demand from Greek customers for Sovereign gold coins was double the five-month average in June, the U.K. Royal Mint said in an e-mailed statement.” Got that? The U.K. Royal Mint -not Greek.
            http://www.bloomberg.com/news/articles/2015-06-29/europeans-rush-to-buy-gold-coins-as-bank-of-greece-stops-sales

            And fifth, if people can save euros or dollars, they can save gold. If they can do neither, what does that have to do with anything pertaining to this discussion? That’s right, NOTHING.

            Jul 30, 2015 30:56 AM

            “Got that” is a pretty casual comment in a conversation circle. Not an offense. Certainly none was intended.

            Anyway, Greeks are not buying much gold. I would imagine its about the same as in the US. One or two percent tops. Not the majority by a long shot. People did however withdraw billions of Euros in cash though and stuffed them under their mattresses.

            Got that? (just foolin around, man!)

            Jul 30, 2015 30:22 PM

            K. Got it.

        Jul 29, 2015 29:47 PM

        Because God is the Creator, only He has intrinsic value; everything else has assigned value.

      Jul 29, 2015 29:16 PM

      This is also a good time to point out that, in 1912, J.P. Morgan testified to congress that “money is gold and nothing else.” This has a very different meaning than the misquote that is much more commonly used: “gold is money and nothing else.” In the real quote, he is saying that ONLY GOLD is money. In the misquote, however, gold is only money and other items are not excluded from also being money. Perhaps the original misquote was not an accident.

        Jul 29, 2015 29:53 PM

        Matthew,

        Do you agree with most people that silver is also money? It seems that based on his “Money is gold, and nothing else” statement that J.P. Morgan did not to believe that silver was money.

        Also just a small correction. When J.P. Morgan made his statement about money is gold, he was testifying before the Bank and Currency Committee of the House of Representatives, not Congress.

          Jul 29, 2015 29:19 PM

          Owing in large part to its vast and growing uses (supply/demand), silver is inferior money but much more interesting right now as a speculation.

          The House of Reps is part of Congress
          https://en.wikipedia.org/wiki/United_States_Congress

            Jul 29, 2015 29:46 PM

            Yes, the House of Representatives is part of Congress but he did not speak before the House of Representatives. He just gave his testimony before a committee, known as a congressional hearing. He did not actually testify directly to Congress but I understand that in an indirect way he did.

            Jul 29, 2015 29:11 PM

            I see what you’re saying but that’s how it came up in many places when I searched for it.
            http://thedailycoin.org/?p=12140

            Jul 29, 2015 29:35 PM

            Matthew,

            People get the idea that he actually testified before Congress when it was just a committee. However you (and the link that you gave) did not wrongly say that he testified before Congress but that he testified to Congress which would in a way could be correct. Did not mean to nitpick. Well, yes I did. 🙂

            Jul 29, 2015 29:51 PM

            Ha ha. 😐
            😮

      Jul 29, 2015 29:09 PM

      A Listener: You are a little right and a little wrong. In Germany during 1923 food was rotting in the fields because they had no way to get it to the cities but you could buy a nice house in Berlin for a gold Sovereign, about 1/4 of an ounce of gold.

      After WW II cigarettes served as money. In the coming collapse I suspect cigarettes and booze will be valuable to have but good luck on getting the farmers to send food to the big cities.

        Jul 29, 2015 29:58 PM

        Many don’t want tobacco anymore but chocolate will be in demand as always. DT

          Jul 30, 2015 30:46 AM

          If tobacco functions as currency you don’t need to smoke it to use it DT.

            Jul 30, 2015 30:48 AM

            Okay, I get your point, The Hershey plant in Hershey Pennsylvania was booming during The Great Depression, chocolate sells well in all economies.

            Jul 30, 2015 30:21 PM

            Truth in that DT. You know what else is handy to have during a sharp downturn and rarely ever mentioned? Spare parts. It could be for just about anything you can imagine whether motorcycles, laptops, toasters, sewing machines, bicycles or industrial equipment.

            You just need to specialize and you should do well if .

            The reason is that a great many factories go out of business during a depression or they stop producing full lines of their products. Secondly, there are typically shortages that develop during harder times because suppliers are stressed. Hell, its hard to get spare parts during the best of times.

            But the number one reason is that during a serious economic downturn both business and individuals become reluctant to buy replacement equipment preferring instead to keep the old machines running. What they do instead is hoard cash and try to make the dollars stretch out while patching up anything old that is important and needs attention.

            The outcome is that spare parts dealers do a fantastic business. Think of Cuba as an example where it was embargoed for many years and they could not get new vehicles.

            So then what was an alternator, headlamp or starter worth when no replacement parts could be acquired for your 57 Chev? In short they could fetch a fortune and those guys with a backyard full of older vehicles did great business keeping everyone else’s cars on the roads.

            Venezuela is having just such an experience right now. But the problem is not restricted to smaller countries. Russia itself suffered mightily after the fall of the wall and imports dried up to a trickle due to shortages of dollars and Euro.

            So there you go. If you really want to make out like a bandit you should be hoarding parts for equipment that others will be prepare to pay dearly for if it saves them from having to buy a new machine or vehicle.

    Jul 29, 2015 29:52 PM

    What has happened here…??
    The comments are intelligent…. Is this god real or has a crew been sent in???
    Thanks
    Agatha

    Jul 30, 2015 30:35 AM

    IT’S A CONSPIRACY I TELL YA!