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The #1 Investment Going into 2014?

Freaking Heck's picture




 

By: Chris Tell at http://capitalistexploits.at/

 

 

What should we expect after eating an exceptionally spicy 3-day-old, reheated "jungle curry" from a Mumbai Street Hawker?

 

Decisions made when investing, trading, and in fact almost any business all center around the calculation of probabilities. Probabilities for some things are easier to determine than others, which is where I'm headed with my lead question.

We can infer what may happen in the future by looking at the past, but very few people like to look to the past. We know this by simply reading history and watching humans repeat the same errors time and again.

Clearly humans take little notice. Perhaps because history is replete with misery, simply ignoring it makes more sense. More likely it gives people the creeps, being full of the stale breath of the dead, like an old persons home, full of knowledge but depressing nonetheless.

Deciphering the future or forecasting, as far as I can tell, is by and large a con game. A big joke, and very rarely a good game for those buying into the forecasts. It's a conduit to sell something. The prophet/forecaster needs to only sound convincing, have a cleft chin, be tall in stature, twinkly blue eyes, swagger a little and voila. Don't say I didn't warn you.

Most of what I have read already this year amounts to economic porn. What makes sense to me is identifying business people with a knowledge of their own space that exceeds their competition. For example, an experienced farmer is likely better-positioned to know whether he'll need additional stock feed in the coming year than say the owner of the local burger joint. These people don't publish forecasts, they run businesses.

Deep down most of us know this. It doesn't stop most from buying into forecasts. The financial markets are not unlike religions, where prophets seek to lead their followers, and there is no shortage of followers. People love to outsource their thinking to Manila and Mumbai, which is how my street vendor can sell his 3-day-old, reheated “jungle curry”. I told you everything is interconnected.

Saner minds will look to deepen their understanding of any market in which they've chosen to participate. This knowledge will, hopefully provide them with insight and a clear edge. If they're lucky the masses will then follow like sheep.

The probability of a stock going up versus down these days may have less to do with whether the company who issues the stock certificate is profitable or not, and more to do with whether the company has a team of lobbyists in DC. It may also depend upon whether the black boxes on Wall Street like the trading pattern, and ultimately whether QE continues, is increased, tapered or some other genius idea is brought to the fore by our overlords.

Right now I'm ready for anything, including Janet Yellen going completely loopy, biting off the head of a chicken on CNBC, pole dancing naked and threatening "a good time" with anyone who's interested. Unfortunately she's likely to do far more harm than that.

We do know that there are consequences to actions. Fundamentals do matter. Much like the probability of a violent and disgusting bowel movement following our reheated 3-day-old Jungle Curry surely outstrips the probability of something similar occurring after consuming a granola bar.

Probabilities exist in the world of finance. There are serious problems, which we've discussed in these pages occasionally, not the least of which would be a bond bubble which continues to inflate unabated. A crash would seem to have probabilities not dissimilar to that of giving a 16-year old the keys to your new sports car and a complimentary pub crawl all in one.

That rant behind us, let's move on to some predictions for 2014. These are worth exactly what you are paying for them. Buyer beware!

 

Gold, the yen and the dollar

There are many factors at work affecting currencies. Interest rates typically play a major role, though today we live in the twilight zone where market correcting forces have been temporarily suspended. All are intertwined, as one affects the other, which affects the other and so on.

The fundamentals:

  • Gold is and has historically been a medium of exchange, though far less so today than possibly at any other time in history. I don't care what the gold bugs say, gold is not always and ever something to own. It's also not necessarily always a store of value. Gold will have its day just as soy, wheat and biotech start-ups will. The question is one of timing and risk/reward.
  • The stock market is largely overvalued and the current bull market is not young, at nearly 58 months in length. Knowing from history that the average bull run is just 29 months, we're clearly not in a position where the probabilities of more gains lie in our favour.
  • The sovereign bond market was bubblicious a decade ago, yet it continues to inflate with no end in sight. All countervailing forces have been suppressed for the time being. Thanks Ben, Mario and Haruhiko.
  • The currency markets are increasingly volatile and manipulated by sovereigns.

Based on the above you'd be silly not to own some gold, but is it time to trade it for a net long position? Probably not.

Remember that everything is interconnected. Right now we have this insane set of circumstances where central banks are acting in collusion to destroy their currencies and prop up their bond markets, and in all honesty they're succeeding, at least so far.

Without a valid exit for market participants central bankers can continue to push the limits of absurdity. History shows us that when imbalances have occurred in the past the market has moved to correct those imbalances.

When the Pound Sterling lost ground there was an alternative, there was an exit available for capital. That exit was the USD. Today no such alternative to the dollar exists. It's not Gold, it's not Norwegian Kroner, it's not yet Bitcoin, as none of these markets are deep or liquid enough to take meaningful capital flows. I discussed this very topic a long time ago in a post entitled “Ugly, Uglier, Ugliest”.

Given this setup, and an ever increasing bond bubble, I'm inclined to look to the weakest link in the chain. That link I believe is the Japanese bond market. Their current account deficit has just blown out, revealing a $5.7billion shortfall, the largest deficit in 29 years! The pressure is clearly mounting. Wasn't Abenomics meant to increase Japanese competitiveness? Oh dear!

Furthermore, I'm inclined to agree with our colleague and trader extraordinaire Brad Thomas, who believes this year will see the yen at 120 IF THINGS HOLD TOGETHER. If not watch out below. Brad's staggered option trades on the yen, which you can get complimentary here, will soar by much more than the 77% we're already up from just a month ago. It's early days, but once again this is simply playing the probability game.

What therefore happens if/when the JGB market finally cracks?

If you're a fund manager who has to move a few hundred million dollars quickly you need a liquid market, and fast. Money will flood into the US treasury and bond markets. A US dollar rally will happen as a knee-jerk reaction to the panic, and Janet will push the liquidity pedal to the floor...because that's all the Fed knows how to do!

Check out this dollar chart. Things look ready to pop.

dollar_chartCourtesy of Stockcharts.com

I don't pretend to know how gold performs in this scenario, though I do think that being long gold and short yen won't hurt. It's a strategy I've been employing for a while, and first mentioned here. So far I am about break even. This of course sucks when you're watching the S&P make new highs and your position sits their like a poodle waiting for a walk!

I'm sticking with it because the risk/reward on the trade gives me comfort. I'm trading one of the cheapest, most fundamentally sound currencies for one of the most fundamentally flawed, expensive currencies. It feels like the safest trade for me, though if you're a trader you may want to go long USD into 2014 and leg out of the greenback on strength, picking up some more shiny stuff.

Once the market settles down and figures out how the world's second largest bond market (Japan) got toasted, I think we'll be in a better position to get long more of the precious metals, including the stocks...in a really big way.

On Tuesday next week we will throw out some other "guesses" for 2014, including updates on Mongolia, Bitcoin and our favourite...private equity (and crowdfunding). Then Thursday we will have a classic contrarian play that we think makes a lot of sense. It comes to us from our friend Mark Schumacher, portfolio manager at Thinkgrowth.

 

- Chris

P.S. No quote, just a final thought... The second I think I "know" what is really going to happen my ego takes hold. Ego is the death of intelligent, critical thinking investors. Please read this post with skepticism and think long and hard about it. Compare it with whatever else you're reading on the subject and feel free to throw rocks at my ideas. I could care less about having my theory play out and you won't damage my ego, trust me. I care much more about being on the right side of a trade. Money talks and BS walks!

 

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Sat, 01/18/2014 - 02:02 | 4343406 MeelionDollerBogus
MeelionDollerBogus's picture

hm. I'd like to say this article is good but "buyer beware" seemed to be the best part.

UUP trades merely off the flawed dollar index. It doesn't properly measure valuations of anything since the size of trades & total currency+bonds available isn't reflected in the index weighting USDX aka DXY which UUP is derived from.

Meh.

At this point I'd suggest taking full stock of what tangibles you need & store them all in appropriate quantities. That which you can't make, need more of short-term, or suspect will be unavailable when you need them later - get more of now. Food, pills, tools, silver, gold, whatever. I suppose if you're in Asia a bit of jade might do well for trade. I know nothing of the jade market so I won't offer a further specific opinion.

 

Fri, 01/17/2014 - 10:32 | 4340681 Tinpony92
Tinpony92's picture

Nice Post...far better quality than a lot of the cr@p on here.

 

Fri, 01/17/2014 - 10:32 | 4340679 The worst trader
The worst trader's picture

MAx out credit and don't pay a nickle back. Then go on weelfare and sell drugs, Best plan ever!

Fri, 01/17/2014 - 10:24 | 4340647 toadold
toadold's picture

On a micro scale thing are really weird. Some $150 to $200 dollar items that I was pricing in December have now jumped in price by $30 04 $50.  On the other hand I've gotten a lot of offers to extend my credit even though I live on a fixed income......????  Usually I'll see price drops in January as retailers try to reduce inventory.  I think Obamacare hitting in January may have something to do with it and they my want to extend my credit because so many people have no jobs at all and have over borrowed for things like food???

Fri, 01/17/2014 - 09:07 | 4340404 realWhiteNight123129
realWhiteNight123129's picture

Another guy who has not taken the time to read Hume, Adam Smith and Thornton on exchanges.

 

Only one thing that drives exchange in the long run: Trade. Period.

Show me a sustainable trade surplus in the US coming from manufacturing and I will buy the USD. And BTW, if Chris, if you had done your readings, you would know that printing actually hurts trade, as soon as the devaluation effect fades and the base money printed enters the economy in the form "executive order to raise minimum wages".

Countries printing help their banks (avoiding bankruptcies) and their gov (inflating away).

Financial capitalism survives (financia assets shuffletsl ) but industrial capital shrinks (actual production of stuff). However if the GDP gets so low, Financial capitalism operates in Vaccum. Financial capitalism should never be in the driving seat but subservient to industrial capitalism (like in Germany today, or China). Marx had a few things right, but then when he came to the conclusion and recommendation, he blew up totally. 

No chance the US can get a trade advantage by printing, 0, zip nada. If they do internal deflation, they have Spain, super painful but now textile is coming back from China because wages have fallen a lot. When the restructuring is done, Germany would be well advised to do some sort of debt cancellation (that would achive the debt/GDP shrinkage). 

If industry invests in Spain anticipating stable prices which are crucial for the industrial sector, and if gains or productivities occur, the wages could start to rise in real terms from this low base, a rise coming from shared gains of productivity without threatening the trade advantage. Henry Ford had engineered super high productivity gains, but he knew he needed to share those. He was in that sense an example of industrial capitalism at its best. 

The problem is that in the last 50 years, economics textbooks are full of utter crap.

 

Sat, 01/18/2014 - 02:07 | 4343409 MeelionDollerBogus
MeelionDollerBogus's picture

I'd suggest we stop using GDP at all.
It's a flawed metric rigged to give bad answers as debt (bad) is included as a benefit.
The only proper way to handle debt in tracking it is to properly know what you need to pay & for having taken on that debt, any estimated gain directly from that debt for the future.
That future gain isn't assured so it should be tracked only as a target, or range of targets, to predict the net benefit from the debt, such as getting 10% benefit back on every dollar/euro/etc used that was borrowed but owing only 3% and figuring out how/why this might break or remain safe.
Otherwise proven levels of income vs proven levels of debt vs consequences of default should always be on the table.
This GDP nonsense has to go.
You wouldn't manage a corporate budget or family or personal budget with a calculation like GDP because you'd go bankrupt, it is so misguided / misleading.
We won't do any better managing entire nations using GDP either.

Fri, 01/17/2014 - 22:08 | 4343012 Freaking Heck
Freaking Heck's picture

I don't disagree and yes of course printing hurts trade. Long term about 99% of what is currently being done by CB's hurts the economy.

Fri, 01/17/2014 - 03:14 | 4340212 3rivers
3rivers's picture

Aha. So Chris believes EM is the place to be in 2014.  I agree.  A stronger dollar is great for exporters... 

Fri, 01/17/2014 - 02:35 | 4340201 starman
starman's picture

ah yes the higher low is highlighted green so eberybody can see it the blue is tranding down, nice and the red omg the fucking red is tranding up! I am speachless its beatiful, so what does it mean  again ? 

Fri, 01/17/2014 - 02:35 | 4340199 ebworthen
ebworthen's picture

Well I was with you until you started talking about trading paper Gold.

Fri, 01/17/2014 - 01:13 | 4340134 SAT 800
SAT 800's picture

I like the Long Dollar crosses for 2014. Currently Short GBP/USD and ahead $15,000, or so; I'd like to hold on to the contracts all year, as it really needs to crash vis a vis the dollar.

Thu, 01/16/2014 - 23:13 | 4339949 Uber Vandal
Uber Vandal's picture

#1 investment of 2014?

Pay off all personal debt, and don't look back.

Often, the best winning move is to not play.

Sat, 01/18/2014 - 02:12 | 4343413 MeelionDollerBogus
MeelionDollerBogus's picture

Alternative move: find out how much debt you can discard using bankruptcy and/or consolidation without any lasting harm.
I never filed but I should have. Reason being: I've never had a job that required good credit & once I paid off my debts I never used it ever again. It's already far past the 7 year mark for a credit history for me so I could have saved a lot by filing personal bankruptcy, paying less & having the rest dissolved for good.

 

Fri, 01/17/2014 - 01:15 | 4340137 SAT 800
SAT 800's picture

common sense comes to your rescue here; if you con't play, you can't win. as people say.

Thu, 01/16/2014 - 22:54 | 4339909 joego1
joego1's picture

We have a big global ship with a lot of momentum, it could take five or ten years for a major financial crisis to drive up PMs. There will be a  lot of ups and downs before that time in store for everyone in my estimation.

Thu, 01/16/2014 - 22:21 | 4339836 delivered
delivered's picture

If you remember all the way back about six years ago, there were numerous "mini" panics that always worked in favor of the USD and hit PMs. If I remember correctly, there was a mini panic that involved Dubai in 2009 and the UAE buying $10 billion in debt to stablize the situation (chump change by today's standards). Also, in 2008 when both LB and BS collapsed, I believe the same short-term reaction occured. Bring on Greece starting in 2010 and the stakes were raised again. I'm sure I've missed other events but the point is that each crisis tended to favor the USD as lets face it, it is the best looking horse in the glue factory. Further, each crisis has tended to get bigger and bigger with the next one set to be a real dozy so the only global FX/Debt market large enough to handle a massive move in liquidity is the USD and USTs.

The problem is, there is basically no safe place to run to in the event of the next big crisis. Japan's money printing experiment and the yen are a dissaster waiting to happen. China and the Yuan, hard to believe moving large amounts of capital here given the underlying debt problem China has and restrictive FX markets. The Euro, well I would agree with disabledvet in that it is significantly over-valued based almost entirely on the hope and promise of Europe turning the corner. No doubt that deflation is taking a firm hold in this region (as even the head of the IMF earlier this week noted that deflation is a real and substaintial risk). 

From my perspective, I don't believe there is a shortage of USDs as plenty exist in CB reserves around the world. Years of enormous trade deficits will do this. Rather, the next rush into the USD will be driven by simply having no other alternative available. With this said, it would be easy to come to the conclusion that this event would hammer PMs/Gold given the normal historical inverse relationship between these two. However, if the next crisis is big enough, both the USD and gold could see significant increases in a rush to safety (especially with the physical availability of gold becoming tighter and tighter) but I'm not so sure this will happen unless the crisis is larger than expected. 

In any case and what really sums this is up "What a freaking mess" the world economy is in as the great effort to inflate by the world's CBs is being fought by even greater structural deflationary forces as a result of debt loads that are now at record levels. Two to three years ago, I thought inflation could win. Today, I'm leaning towards deflation as there's just too much debt pressure building.

But whatever wins, I agree with one critical piece of advice. If you don't own some physical PMs (both gold and silver) as a form of insurance or hedge against the un-equaled CB actions over the past five years (relative to the past 100 years), you are playing with fire. Just too many structural risks not to have some type of alternative currency available to call on if needed.

Thu, 01/16/2014 - 22:09 | 4339800 Yen Cross
Yen Cross's picture

     Ya right. You keep going with that long $ theme... Just don't hold your breath in the process.

Thu, 01/16/2014 - 21:25 | 4339698 disabledvet
disabledvet's picture

What has spectacularly collapsed is the Candadian dollar

http://www.theglobeandmail.com/report-on-business/top-business-stories/c...

This is why I would be very wary of any speculations in the commodity space especially including gold. The only currencies left are the Chinese Yuan and the Euro.

With German interest rates suddenly approaching parity with Spain and Italy you could really see some serious fireworks as the blowback from last year's Cyprus fiasco suddenly "appears."

I still believe the euro is MASSIVELY over-valued (deflation is now readily apparent in the Southern Countries) and the Swiss franc is clearly going to become the "ridiculous safe haven currency" it always has been.

http://www.investing.com/analysis/usd-chf:-swiss-franc-pares-its-gains-i...

http://www.bloomberg.com/news/2013-11-07/switzerland-s-housing-market-in...

who knows how much metal storage exists in those mountains. one thing is certain...as energy production surges in the USA and imports collapse the availability of dollars decreases dramatically. This is especially true for commodity speculations. The only commodity one cannot get from "outer space" is coal. If you want to know what the Prussians were up to in 1871 this was it: http://en.wikipedia.org/wiki/Treaty_of_Frankfurt_(1871) And the return of "coal and steel country" (Alsace/Lorraine) was a French war aim of World War I. "get the coal back." Interestingly one of the prime war aims of the USA after World War II (which had ZERO territorial ambitions after the War...but had HUGE ambitions when it came to currency) was this: http://en.wikipedia.org/wiki/File:US_Electrical_Generation_1949-2011.png the collapse in coal generation has been truly spectacular...2 trillion kilowatt hours at peak. One look at that chart says renewables are moving "very high/very fast" as well. Since 80% of all electricity in the State of Washington is renewable (hydro) the "theory" that there can be a huge price spike in "the juice" to crush the dollar is clearly mistaken. moreover this creates an availability for export of the coal that is truly spectacular. "but you need dollars."

to get those dollars you have to buy refined product first. http://www.platts.com/latest-news/oil/newyork/year-end-wrap-exports-to-u... "mitigated by declining domestic demand." that's a good one. http://en.wikipedia.org/wiki/Ethanol_fuel_in_the_United_States "installed capacity of 15 billion gallons." that would be "ten percent of all fuel consumed" right now. at four bucks a gallon...if exported...(and it is) that would be 60 billion dollars annually. The problem of course is that imports are so cheap that "trickle" could become a flood. So no, there's no shortage of dollars or inflation that is causing problems here. We have a problem of DEFLATION as massive amounts of energy production "all comes on line all at once."

http://en.wikipedia.org/wiki/Gorgon_gas_project That's only "the fourth largest." In Australia. http://www.eia.gov/countries/country-data.cfm?fips=AS The only "consumption" indicator that has risen...incredibly...is oil. What the heck are they using it for? If they were smart in my view they would shut in production of coal immediately "and place a phone call to Elon Musk for a giga factory." as with the USA electricity consumption has collapsed....needless to say the potential impact of renewable energy on Australia is massive.

Fri, 01/17/2014 - 02:57 | 4340209 Rock On Roger
Rock On Roger's picture

Canada is the hyphen in Anglo-American.

 

Stack On

Fri, 01/17/2014 - 05:02 | 4340263 disabledvet
disabledvet's picture

every capitalist on the Planet wants a dollar collapse. They've already showed the President if he successfully collapses the dollar how they will be able to pay for everything. Instead gold has gotten crushed and the dollar has moonshot. In short...a DEFLATION. Think you can make money by failing to produce period? Take a look at Royal Dutch Petroleum's earnings. Then "skip across the pond" to Cabot Oil and Gas and see what "production going parabolic" looks like. Once that fuel is processed (and Royal Dutch is planning on a massive processing facility in Western PA for turning natural gas into a refined product...namely Hydrogen....among other fuels) then you'll see a very dramatic turn away from the ICE...and gold.

And that's the problem with the gold thesis...it's tied directly to the internal combustion engine. Once we move to all electric drive systems "it's over." that two types of batteries: fuel cells or rechargeables. fuel cells never need replacing...just require fuel. getting the feed stock is not a problem. the only thing missing is a collapse in propane prices right now.

Sat, 01/18/2014 - 02:16 | 4343415 MeelionDollerBogus
MeelionDollerBogus's picture

#1 every cell needs replacing, it's only a matter of time, not just from chemical use but from weathering for transport vehicles.
#2 every fuel cell needs catalysts to work, the most frequent being platinum and next in line may be gold, depending on how this nano-porous gold catalyst business turns out in the next 10 years.
So... none of that is bearish on precious metals, gold in particular.

Fri, 01/17/2014 - 08:22 | 4340356 eddiebe
eddiebe's picture

People still need a store of value, and the dollar or 5gallon cans full of gas aren't it.

Thu, 01/16/2014 - 21:24 | 4339690 SILVERGEDDON
SILVERGEDDON's picture

Well. The buck stops here. Thank God. You suck it up, bub. 

I got a date with a hot little silver seller wearing an anti bacterial silver Eagles thong.

Bullish on beaver and PM's myself.

We'el warm ourselves by the paper bonfire when it burns. 

Thu, 01/16/2014 - 20:31 | 4339530 acetinker
acetinker's picture

I like your style, Chris.  I'd call you Mr. Tell, but something "tells" me you wouldn't give a shit.

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