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After a recent commentary (“Fiscal Follies: Greece versus the U.S.”), a reader disputed my contention that the media were exaggerating the weaknesses of other economies, while ignoring the more serious problems of the U.S. and U.K. economies. The anecdote he used as ammunition was a statement from a member of Germany's government that Germany was anticipating significant economic problems in 2010, while for officials of the U.S. government, the operative buzzword is still “recovery”.

The short form of my rebuttal was that both the U.S. and the EU want the U.S. dollar to get a little firmer versus the euro, so that the next “surprise” to upset the market concerning the U.S. economy is not enough to send the greenback into an immediate nosedive. Thus the various officials of EU governments – and even the European media – have very little incentive to counter U.S. propaganda of this nature.

The point to make here is that as we see the steady deluge of fraudulent, U.S. “statistics”, and the even more outrageous “spin” attached to the numbers, it is not enough for us to judge the persuasiveness of this propaganda in absolute terms. To attempt to predict the impact of the propaganda on markets (and our investments), we not only have to evaluate such disinformation, but also the competing interests of the various actors in the ongoing drama which we call “markets”.

While the other players (and nations) aren't going to allow the U.S. dollar (and thus, U.S. assets) to get as ridiculously overvalued as they were after the Wall Street-engineered crash in the fall of 2008 (?), there are many losers if the U.S. dollar falls too far, too fast. As an added “bonus” in these ever-shorter episodes of “U.S. dollar strength”, the holders/producers of commodities are still gullible enough to allow the prices for their precious goods to be knocked down to fire-sale levels, including (in this case) precious metals.

In a world where both our population and our overall “appetite” for food and natural resources is exceeding the rate of increase in production (year after year), it is a sellers' market. In resource markets which are not large enough to have open trading, but rather rely upon the settlement of private contracts, impasses – where the suppliers refuse to supply unless their price is met are not uncommon.

Ironically, however, the sellers usually choose to “flex their muscle” in this manner during times when prices are already high (and supplies are tight), tending to hurt themselves as much as their buyers, by choking-off demand. Meanwhile, when prices for commodities are forced lower to what are now “cheap” levels (no matter how that is achieved), these same, “tough” negotiators suddenly turn into jellyfish – ready to supply endless amounts of their precious goods at rock-bottom prices.

In other words, because commodity-producers (and the parasitic traders who feed off of them) appear to act primarily out of greed rather than conviction, not only are they their own, worst enemies (especially at the bargaining table) – they are also the “enemies” of investors who have chosen to hitch themselves to the commodity-bandwagon. The same traders and “experts” who one year ago thought that $30/barrel oil sounded about right, and one month ago decided that $80/barrel oil sounded about right, my be herded into the belief that $60/barrel oil is “just right” one month from now.

So what is a rational investor supposed to do? The general answer to that question is simple. The tricky part is to try to implement those principles in a reasonably competent manner – in a world where markets have gone insane. Those who want to point the finger primarily at trading-algorithms have my support.

It was bad enough when traders and “experts” did as little thinking as possible in guiding our markets. The fact that they now believe that they have “improved” markets by doing absolutely no thinking at all should have instantly terrified all of us. Even if we assume the highly dubious models these algorithms are built upon to be valid (I don't), validity of the models is irrelevant – especially in U.S. markets.

With somewhere around 75% of all U.S. equities trading being directed in one way or another by the tentacles of Wall Street, with the compliant media happy to put a Wall Street-approved spin on the vast majority of the news reported, and with the Plunge Protection Team waiting in the wings when even that level of 'stacking the deck' is not sufficient, we cannot allow computer programs to make markets so easily “gamed” that Wall Street traders can literally know exactly how markets will react to every major trade they make.

The fundamental assumption upon which each and every trading algorithm depends is “free and open markets”. Surely not even the most deluded zealot could believe that the rigged-casino described above bears any resemblance to “free and open markets”? Without free and open markets, trading algorithms are not “useful tools” to allow traders/investors to make near-optimal decisions much faster than they could make those decisions using their own brains. Instead, they are rings which traders insert through their noses – to make it as easy as possible for the Wall Street shepherds to lead them around. But getting back to “strategy”...

The guiding principle which all of us must ultimately use to make decisions is “risk/reward”. In the case of making buying/selling decisions in the market, it is simple to frame this issue. Using the recent plunge in commodity markets as an example, we have two basic options before us.

We can sell some or all of our holdings, in which case the “risk” is that markets immediately reverse higher, and we're suddenly holding more soon-to-be-worthless-paper while our former “positions” take off without us. The “reward” is if commodities continue to move lower, and we can hopefully make a 20% or 30% trading-profit – if we are able to time both our exit and our re-entry to near-perfection.

Alternately, we can hold onto our positions. The “reward” in that scenario is obvious: we guess right, and markets turn back higher tomorrow. The “risk” is that commodities continue going lower...and then what?

Unless we are buying our commodity investments using “margin” (and we aren't doing that, are we?), then the only real “risk” is that while we spend a few weeks (or perhaps months) waiting for the commodity yo-yo to go back up, we might have missed some “get-rich-quick” schemes during that span.

Clearly, my own bias is showing through here. Knowing that I'm on “the winning side”, long-term, with my commodity investments, the “risk” which I personally fear the most is running out of patience (or nerve?) and allowing myself to be 'spooked' back into paper, at exactly the wrong time. The reason why this is the risk which I fear the most is that it is the risk which is the hardest from which to recover.

If you sell a bunch of your holdings, and they jump 10% higher tomorrow are you going to buy back in? Not likely...and if they go up another 5% (and then another, and another...)? If you do jump back in and start openly “chasing” those stocks, you run the risk of getting into the worst possible loop: selling low and buying high. A great way to turn a lot on money into a little money – in a hurry.

Conversely, I got caught holding most of my investments when the Crash of '08 hit, and I recovered from that. It's highly unlikely that the commodity sectors could see a repeat of that massacre – because presumably the same people won't make exactly the same mistakes twice, less than two years apart.

What did China do in response to the Crash of '08? The Chinese government pulled out its cheque-book (for its U.S. dollar chequing-account), and went on the biggest commodities shopping-binge in history. Do Western governments really think that China needs more help in taking control of the global economy away from these same intellectually-bankrupt “leaders”?

In other words, there is (hopefully) a “mechanism” in place which did not exist prior to China's first commodities shopping spree: the realization that far from “outsmarting” China (and their other “emerging market” creditors) with the made-in-the-USA, Crash of '08, that it is China and those “emerging markets” which emerged stronger the first time this ploy was attempted, and they would obviously be the benefactors (again), should the Western banking cabal again attempt to “control” markets by destroying them.

The best/easiest way for growing Asian economies to leave Western economies behind them in their wake is to get continued access to cheap commodities. Cheap commodities + cheap labour (+ a strong work-ethic) = the sort of prosperity which Western economies can only dream about now.

Ultimately, the way we commodity-investors should “place our bets” at the current time is based upon our assessment of the people “pulling the levers”. If we assume that something was learned the first time the U.S. economy crashed (and we know that crash will resume, if not exceed its previous intensity), then we must also assume we won't see a repeat of the dollar/commodity insanity – and the wonderful “present” bestowed upon China's economy. In that scenario, we hold our commodity positions, confident that a “floor” is very close by.

On the other hand, if you have less faith in human nature (and human intelligence) then your assumptions must be reversed. When the media and the global economy are “surprised” (in the near future) by the renewed collapse of the U.S. economy, chumps around the world will throw away their commodities so that they can hoard worthless, U.S. dollars – and equally worthless U.S. bonds.

Should that scenario occur, then I would have no choice but to fall back upon that old, Star Trek line:

“Beam me up, Scotty. There are no signs of intelligent life down here.”

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written by Jeff Nielson, January 28, 2010

Yes, whether it's "margin" in your portfolio, or too much "leverage" in the mortgage, it's taking on too much debt which fastens the Bankers' Yoke around our necks - and puts is in a position where someone else controls our fate

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written by JsJ, January 28, 2010

Debt is bondage, and leverage = debt. No leverage, then hold what you have until the price is right.

It's nice to multiply your successes, but multiplying your failures can be a disaster.

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