As American as Apple Pie

Senator, we are all part of the same hypocrisy - MC  

  

 We are a nation of criminals - have been since the beginning. Our founding fathers made their bones thumbing their nose at the (Kings) rule of law. Even today, We celebrate criminals by writing books and making movies about them. It should then come as a shock to no one,  the people who run this country are some of the brightest minds the criminal class has to offer. While the size & scope of their criminal behavior rarely surprises Bagholder, their brazen manner of late (MF Global) is rather disturbing. They steal, in plain sight. No prosecutions, no perp walks, no one held accountable. In the parlance of our time, WTF?   

   Where is the media with explanations as to why some of the victims have been made whole, while others have to feed attorneys to make their claims for justice - a Sisyphusean task if there ever was one.   Where are the regulators  with the criminal indictments - or does the clown who ran the company & his minions get a pass, because he is a friend of Obama. Where is the public outrage over this nonsense? While some of you are thinking OWS movement, Bagholder would suggest there is a substantial difference in outrage between the Chinese guy who stood in front of the tank  and your average OWS protester. 

   Even more disturbing, is the why of all this. Why is JP allowed to cut to the front of the asset liquidation line, seizing physical metal in the process & leaving paper longs holding the bag, so to speak.  Lets be honest here, Jp and their ilk are the Paper Aristocracy who write the rules under which the rest of us plebs have to live. They have the power to loan unlimited amounts of cash into existence.  So, can it really be about the money? They have the political connections to write (and selectively enforce) their own laws. So, why thieve in broad daylight? 

  The elephant in the room is this:  they have not overturned the laws of the universe. As such, the Paper Aristocracy  does not have the power to will physical metal into existence. With that in mind comes this incriminating fact: those with cash in their MF Global accounts have (for the most part) been made whole. In the mean time, those paper longs & persons with actual physical metal on deposit are still victims. .

  The sum total of physical seized might be a few thousand tons of silver. Why would JP even stoop for such a pittance?  Having traded physical metal for decades,  Bagholder is well aware the physical market is stretched tight;  But not so tight, JP would resort to stealing scraps of silver in broad daylight. In the rare event Bagholder has misjudged the tautness of the physical market and JP has been forced to thieve in plain sight  - then the whole thing reeks of desperation. It also means the inevitable silver moonshot  will unfold over the next 18 months. While we believe this to be possible, it is not likely. We here at Mytwocent$ are of the opinion there is only one way JP's behavior makes sense. The MF Global seizing of assets is a trial balloon  for something much larger down the road. The crime itself (of jumping the bankruptcy line) is whats important here. Assuming this goes unchallenged, it becomes the roadmap for future confiscations. The precedent being set here, is the real danger.   

  At this point it should be obvious we live in JP's world. They show up,  in true mafia style, taking what they want. The 140,000 clients of MF Global are forced to squabble over what remains. The JP's of the world play under one set of rules, the rest of us saps are controlled with another set. The hypocrisy is astonishing. It seems Orwell had it right, as some are MORE equal than others. Those playing by the double standard should be exposed. Instead, our MSM seems complicit in the cover-up. Those playing by the double standard should also be prosecuted. But no prosecutions are likely, as the people who run this country are members of a select  lifelong club, all with licenses to steal.  

   With no punishment for their obvious crimes, going forward you can expect more of the same, only on a much grander scale.  The real lesson to take from all of this is to buy and hold physical metal. Futures accounts, brokerage accounts, GLD & SLV are all just paper claims. When push comes to shove, and it inevitably will - those claims will be denied by the Paper Aristocracy. Just ask MF Global clients. Don't be left holding the proverbial bag - buy physical today - while you still can……

  On a completely different note: the parlay of the day is  the Patriots & under 55.5 this Sunday. In the interest of full disclosure & spoken like a true gambler, Bagholder has lost 3 Super Bowls in a row - so I am due!!!

   

Popped Psychology

  Bubbles are a fascinating subject to us here at Mytwocent$. When inside one, it is often difficult to realize it. Human nature as well as flawed perspective makes spotting bubbles very tricky - doubly so, when you are in them. Rather than focus on historical precedents in identifying a bubble, it is much better to study the behavior of  market participants in an objective manner. Human nature is a constant. As such all bubble participants, regardless of the underlying subject,  exhibit the same behaviors.  Identify those, and you can spot a bubble. 

  For starters, participation is always widespread. When people who have no connection to a particular industry are piling in - its a bubble. Secondly, most participants are leveraging their way in, meaning they are borrowing (OPM) other peoples money just to participate. Third, the growth rates are mathematically unsustainable, yet participants in a bubble turn a blind eye (some due to greed, others due to ignorance) to the compelling math, with emotional justifications like "this time is different". Fourth, and perhaps most importantly - you can't reason with participants on any fundamental level, because it is faith driving their decisions - not rational thought. 

 Viewed through this lens, it becomes easier to differentiate between Bubbles & Bull markets.   Since most big  bull markets eventually give way to blowoff bubble tops before collapse, the value of being able to tell the difference is priceless. 

   We will examine eight of the largest bubbles in existence today, and then one market - which obviously does not qualify - no matter what the MSM says. 

  

1. Government spending  - all four bubble elements are here. Unsustainable widespread use of other peoples money, seemingly with no rational thought.  Government spending is over 40% of this nations GDP, and growing exponentially.  Our universe abhors a vacuum, as such it does not allow anything to grow at an increasing exponential rate indefinitely.  That means, either they get spending under control or the whole system collapses under its own weight. There is no third alternative

2. Educational costs - College tuition in this nation is out of control. It has grown in cost, exponentially,  for decades, seemingly with no end in sight. Gman (using OPM) forces up tuition costs through their student loan programs, to levels much higher than what the market would support if students actually had to pay their own way upfront.  They also saddle our brightest youths with massive debt burdens in the process.  Is it any wonder our universities teach almost everything except independent thought?

3. Medical costs - This is another market driven to stratospheric levels because of the widespread use of OPM. When Mom gets sick and has to go to the hospital, she deserves nothing but the best. Cost is no object. That attitude is prevalent, because of OPM. If people had to pay as you go for medical care, market forces would push costs down to a fraction of what they are today. Once again, its widespread use of OPM that drives up costs, saddling the sicker members of society with massive debt burdens in the process. Despicable. 

4. Military complex - As a nation, we spend 10x more $$ on a military, than any other nation on the planet. The Imperialistic ways of  empire & maintaining the paper con are to blame. Do you really believe other nations would take our paper in exchange for their goods, if it weren't for our military? Saddam said no more dollars for oil, he had a rope around his neck in less than three years. One of the chief causes of the collapse of the Roman Empire was maintenance of the oversized military.  It will contribute to our undoing as well.    

5. Wars - I'm calling a bubble in wars also. Iraq, Libya, Afghanistan, the drug war, war on poverty - I'm tired of it. Gman could never fund all these wars without the widespread use of other peoples money.  The only group who benefits from war are the bankers. Everyone else suffers. This is why Ron Paul represents the only alternative to the status quo in the next election. He, unlike ALL the others,  wants to end these wars. His is clearly the moral high ground.  

6. Paper dollars - Of all the bubbles on this list, this one amazes me the most - due to the sheer number of people taken in by it. Equally amazing is how futile it is to reason with those whose faith is placed in paper dollars. Even a casual glance at history shows ALL paper currencies eventually collapse once the victims get spooked & lose faith. Fact is, when you hold a dollar - you hold a claim backed by the full faith & credit of the US Government. I ask you dear reader, what could that really be worth?

7. Corruption - It is the oil which lubricates the economic engine of this country. The problem is corruption is so widespread, said engine is submerged. Its everywhere you look, and it always involves OPM. Ponzi schemes, rigged bids, kickbacks, political donations, earmarks, bailouts, legalized theft (MF Global), Manipulated markets, hidden taxes, short sales,  the list is endless. Corruption is a moral cancer which has taken over the host organism (our country). Like all things in nature which grow at an exponential rate, the cancer as well as the host, will eventually die.  

8. Bonds - this is, by far, the most dangerous of the bubbles listed here. When this one pops, all the other bubbles listed here will pop too. Buying Bonds today is no different than playing the childhood game of musical chairs. There comes a point where interest rates can't go any lower, meaning Bonds can't go any higher. That is where the music stops , and you either have a chair, or you don't. BTW, chairs only come in two types, Gold or Silver. 

9.  Gold market - There is no widespread participation. Nor, are there people leveraging their way into gold. Well paper gold maybe, but not the real deal. History would suggest the growth rate in dollar price is plenty sustainable for another decade. Gold bulls do not own gold because of any blind faith, they own it because logically & fundamentally its the place to park your wealth. Bagholder would argue, it is misplaced faith in Gmans paper by 99 percent of the populace that will make the 1 percent of us long gold, wealthy beyond the dreams of avarice. Since none of the bubble criteria exist here, its obvious Gold must be in a Bull market instead. Come get you some!!!!

Silver Bullets

  Last week we discussed the 2011 chart for Gold. This week we look at the Silver chart for the last 2 years.....

1.  Silver, unlike its stodgy cousin Gold, is a MANS market. The 28% mid year rally in Gold was dwarfed by the 60% rally in Silver the first four months of 2011. In fact, that 60% rally was really the last half of an 8 month 150% rally which began in Aug 2010.  

2. Of course the pullbacks are Mansize too. We have two drops in 2011, which by themselves are both over 30% - in a matter of days. That is as vicious as it gets. 

3. Looking at this chart, Silver has only 3 gears - Long steady rallies, sharp corrections, and sideways trading. Note: there are no long steady declines or sharp rallies - like you find in bear markets & popped bubbles. 

4. Long sustained rallies punctuated by ultra-sharp pullbacks is textbook Bull market behavior. Price action like this is how we know silver is not in a Bubble, but rather in a still very young Bull. 

5. From peak to trough this year, Silver has corrected only about 40%. The last major correction in Silver (in 2008) was closer to 55% off. This suggests silver could correct further.

6. In terms of Time, silver has spent 8 months correcting. Prior corrections in this bull have lasted 8-12 months. This suggests another few months of down is a very plausible scenario.

7. The 8 month rally which culminated late April was so hypnotic it had the effect of sucking in newbies to the Silver Market. Bagholder is personally aware of multiple newbies who got long in the $40's. Until most of those folks get flushed out - this Bull is too heavy to resume its upward path. 

8. Despite the 60% rally to begin the year, silver finished the year down - giving new meaning to the word volatility

9. Having now given back 2/3 of the gains since the last bull upleg began (in Aug 2010), Fibonacci would suggest the Silver correction has run its course. 

10. If the January 2011 bottom of $27 holds on this current correction, It would make a technically beautiful double bottom (11 months apart) on a long term chart. 

11. A 150% rally from $27 would put us at $67 - while that may seem light years away, history says its as little as 8 months away. 

12. Downside risk from here is probably minimal as there is tremendous long term support in the $19-$20 range. 

13. Bagholder is of the opinion this Bull is so strong the next upleg will be bigger in percentage terms than the last, the only real question is will it commence from the $27 double bottom, or after a trip down to $20 to test the Aug 2010 breakout. Either way, Silver is poised for a big year. 

Charting Greatness

    Above is the 2011 chart For Gold. Below are 13 of the most important observations to draw from it.

1. Gold was up again, for the 11th year in a row. Still the masses cannot recognize a trend for what it is. (How many times you gotta be told?)

2. Notice the advances of (April, July- Aug, and late Oct) all came on the heels of a month or more of sideways movement in price.  Sideways breeds apathy for both bulls & bears. This keeps the proverbial bull traveling light.

3. Gold Bulls had their greed ignited with a six week 28% mid year rally - only to spend the last four months of the year getting kicked in the junk with two big selloffs in September & late Nov-early Dec. 

4. Gold Bears have lost for the eleventh year in a row, yet they end the year feeling a little giddy after those two big selloffs. 

5. In essence, Gold was up for the year - yet bulls feel sick & bears giddy. Common sense would suggest thats not possible - yet here we are. 

6. The last 5 months of the year, gold has posted a series of lower-highs & lower lows. This has the effect of getting Technical traders (those who follow charts) on the short side of the market.

7. With Gold falling the last 5 months of the year and breaking below the 200 day moving average, Momentum traders are also piling on the short side of the market. 

8. As we all know, markets move in a manner which hurt the most people. With Bulls currently timid, bears giddy, technical & momentum traders on the short side - a massive upleg must be near. 

9. Before the upleg comes though, there probably needs to be some more sideways action first - for apathy sake.

10. Gold closed the year 19% off its all time high. For those looking to ride this Bull - that is about as cheap as it gets - historically. 

11. This is the 3rd consecutive year Gold has posted an important bottom between late June & late July. Expect this pattern to continue.

12. If history is any indication, $1900 will not be breached the next trip up - it will probably have to knock on that door at least three times. 

13. The five month selloff to end the year is testing the convictions of bulls as we speak. The more experienced among us, have seen this movie before. It ends with higher prices!!!!

Rocky Mountain High!!

   Winners. They are easy to spot.  They just do things differently than the rest. They make the extraordinary look routine, while others struggle to make the ordinary look routine. Winners live in the present, always thinking in terms of "I am or I will". Others are often consumed by their vision of the future - or in some cases, live in the past - but rarely in the now, like winners do. "I could & I did" is the mantra of also-rans. The fact winners live in the moment is what allows them to produce when the stakes are the highest.

   In sports (just like in life), you would think the winners would be the most naturally gifted.  Those who can run the fastest, think the quickest, or throw the hardest should produce more than their quota of winners. Yet for some reason, when you look at winners as a group - the most physically gifted rarely make the cut. Wilt Chamberlain is a perfect example. Many would consider him the most physically gifted player to ever lace  up sneakers. Yet, few would describe him as a winner.   While he had all the physical tools, he was lacking more important qualities -  like heart, dedication, and a killer instinct. Those traits as well as an uncanny sense of timing is what produces winners. 

This past Sundays  Bronco/Steeler playoff tilt - Tim Tebow,  with his usual flare for the dramatic rallied his team in overtime to win another big game.  As a 40 year follower of NFL Football, and a lifetime Bears fan, believe me, I have seen plenty of bad  quarterback talent. I can safely say as far as Tebow in concerned - I have never seen a worse throwing motion on any quarterback ever.  Not only does he have the slowest release I have ever seen - he throws closer to sidearm than overhand. There has never been a quarterback who gets more done with less talent than Tebow. When you combine the fact he has a very hard nosed style of play and a complete lack of talent - its tough to believe he will thrive in the league long term.  Having said that, I cannot believe what I have seen from him this year already. He has engineered multiple late-game winning drives. Its one thing to see experienced Quarterbacks do that, its something altogether different to watch a Rookie do it. Peyton manning won only 3 games all season as a rookie. Rookie quarterbacks, no matter how talented, simply do not win in the NFL. The fact he is winning is what makes Tebow so fascinating to watch. He is doing it, as a rookie, in  an unconventional way, with little talent, on the biggest stage (NFL Playoffs) in a clutch manner. Stated another way - he produces when it counts the most. In Bagholders book, that makes Tebow a winner.

   It will be some compelling drama this weekend when Tebow takes his show on the road against the Brady bunch. Bagholder believes Tebows magical season will come to an end. Brady, a winner in his own right, is also the stuff of greatness. Greatness is an entirely different beast - we will save that for another blog.  In the mean time, Patriots on the money line - like Tebow -  is a winner!!

Buy or Sell - Homegamers Edition

 Buy or Sell - U S Residential Homes. We here at Mytwocent$ will weigh the facts, one at a time as they relate to the big picture & let the chips fall where they may. The way bagholder sees it, these are the most relevant facts in no particular order:

1. Nominal dollar price -This seems a logical place to start. According to these US census bureau NUMBERS, the median nominal price of US homes has risen every decade. This has held true for the last 8 decades. Its not so much that housing has gone up in value - it hasn't.  Its because the dollars purchasing power is being systematically destroyed. Since Our leaders are spending $$ we don't have like drunken sailors, the printing (devaluing) will not be stopping anytime soon. Throw in the fact that housing prices today are a fraction of prices just five years ago, it seems reasonable to expect higher nominal prices ahead. BUY

2. Gold price - The reason we include the ounces of Gold required to purchase a home is to remove the distortion created by measuring the homes value in depreciating Dollars. Because dollars can be counterfeited & Gold can't; the price in ounces of Gold should give us a more accurate reflection of whether homes are - historically speaking - a buy. Looking again at the US Census Bureau NUMBERS, we see in 1940 & 1980 about 80 ounces of Gold were required to purchase a home. What is interesting about those two years is they both came on the heels of decades with massive dollar devaluations.  The pattern suggests the next bottom will be in 2020 following a decade of massive dollar dilution. Today, it takes 146 ounces to buy a home & its trending lower.  With Gold in a Secular Bull, and homes in a Secular Bear - it seems reasonable to expect the ratio to contract further. SELL

3. Supply/Demand - There is currently an 8 month supply of homes on the market, with many more sitting on the balance sheets of US Banks - just waiting for the market to turn-around. The fact there is a noticeable supply overhang could only mean the real $$ value is lower than todays trading price. On the Demand side, there are millions of people who have been removed as buyers from the housing market, thanks to foreclosures & short sales. Millions more are out of work. It is safe to say, demand is falling. Economic law states, in order to balance excess supply with falling demand - price must go down.  SELL

4. Trend - the recent trend in housing prices is clearly down. We here at Mytwocent$ are big believers in "a trend remains a trend, until proven otherwise". It is very difficult to see anything on the horizon, especially when you consider the supply/demand issues addressed above, that will change this down trend. The only plausible possibility would be massive dollar devaluation. This is the only real card Gman has to play if he wishes to reverse the recent down trend - in nominal terms anyway.  Since trends tend to run longer than anyone believes possible - and the peak of 2005-06 home valuations has all the earmarks of a popped bubble, this points to lower prices ahead. SELL

5. Cost to build - US residential homes are trading today at a fraction of what it cost to build them. On the face of it, that fact seems absurd. Logic would suggest homes should never trade that low.  At a minimum you would expect homes to sell for at least what they cost to build. Yet, here we are today with homes trading at substantial discounts to building costs. Bagholder has been told by his insurance company he has to carry 200k worth of Insurance even though his house at todays market value might be 120k. The reason is the cost to rebuild. It is simply not reasonable to expect this condition to be a permanent one. We will see the day again when homes trade at a premium to building costs. That portends higher prices ahead. BUY

6. Rental income - The amount of $$ a property will produce in Rent has historically gone a long way towards determining the market value of the house. If the spread between what it cost to buy the house & what it can be rented out for gets wide enough - then well capitalized investors will step in and bid up the property price to help close the gap. Arbitrage 101. Five years ago in Phoenix a 200k house would cost you $1100/month to buy & would rent for about the same. Today, that same house cost 100k (or $550/month). The rent that place will bring has increased slightly thanks to the large quantity of people who have been foreclosed on & thrown into the rental market (because they don't have the credit to buy). The spread between current rental income & buying price is as wide today as bagholder has ever seen. This too portends higher home prices ahead. BUY

7.  Taxes - While property taxes are an afterthought to most folks purchasing a house, they shouldn't be. Do you ever really own the property if you have to pay Gman 2-3-4-5% of its value every year?  Bagholder has watched the value of his home get whacked in half the last few years, yet his property taxes only went down 9%. The problem is taxes are only going to go up over time. Raise them high enough, relative to the value of the property & nobody will want to buy them. Case in point, Detroit - where the median home cost only $6,000.  In many cases they cost less, all that is required is you getting current on the taxes. As municipalities struggle for revenue, its only a matter of time till they raise taxes - again and again. If they raise them high enough, like in Detroit, demand will be non-existent & home prices will fall. SELL

8. Median wage - while this might not seem relevant to median house price, there is a connection. It speaks to what working man can afford. In 2010 4.4 years median wage would get you one home. That is over double the time required to work to purchase a home in 1940, 1950, 1960, 1970, 1980, and 1990 - and 1/3rd higher than in 2000.  In terms of hours worked & wages paid, housing prices are the highest they have ever been. We have to work more hours than ever before just to afford a median home. It does not seem reasonable this trend could persist much longer. Which means either wages paid will be going up, or house prices going down. Since wages going up is not likely anytime soon that leaves house prices heading lower. SELL. 

9. Interest rates - This is the proverbial sword of Damocles. It hangs over the Real Estate market like impending doom. Eventually Interest rates will rise. When they do, the purchasing power of home buyers will evaporate. The effect will be a complete collapse of the bid underneath the residential home market.  The powers that be know this to be fact. This is one of the reasons why they have been holding down interest rates below true market levels (propping up the bond market is another). Like a beach ball held underwater, microscopic interest rates are not a permanent condition. When those rates turn up, and they will eventually - home prices will get crushed. SELL

10. Bankers Position. As far as financial savvy goes, Bankers are a crafty lot. They rarely lose. With that in mind - bankers are Long residential homes - like never before. Not only are they Long - they are withholding supply from the market. This behavior suggests they are looking for higher prices down the road. Of course, this logic is only sound if the Bankers intentionally built their Long position. What if bankers are victims of their own greed and they were trapped into their long positions. If thats the case, lower prices may lie ahead. You can make a case for both higher  & lower prices ahead, based on the the behavior of those in the financial know. This is a tough call, but Bagholder just can't see bankers as victims. He believes they built their position intentionally and this fact points to higher prices ahead. BUY 

    These are the 10 most important considerations Bagholder can come up with in determining the direction in which US house prices are heading. According to my math, there are 4 Buys & 6 Sells.  This certainly does not give us anything definitive, unless of course you weight some of these facts as worth considerably more than others. For instance, Bagholder believes Interest rates to be the strongest sell argument & Bankers position to be the most compelling Buy argument.  Also, had we looked at these 10 facts in 05-06,  9 of 10 were a sell. The recent pullback in price has turned four of these facts bullish.  Bottom line: even if residential homes are not a buy right now - they are certainly moving in that direction. Thoughts?