2/27/07--Beginning of a Bear Market?

[Finster]

Re: 2/27/07--Beginning of a Bear Market?

Nice nit-for-nit trade... ;)

I’ll scratch your nit if…

... and I basically agree that the $6,000 target is at least as good as $2,000, $4,000 or $10,000. I actually hope that it peaks nearer the lower numbers, since the social and cultural impact that the higher numbers would represent are not exactly pretty.

By the way, I stole the custodials concept from Jim Sinclair - would that I were 1/10 as sharp as he is.

He should be so lucky as to be as sharp as you are.

You got it and we agree as usual - the gold/dollar ratio is the final arbiter, especially in a free market.

To paraphrase Alan Greenspan, if you think we agree, you must have misunderstood … ;)

But seriously, I think it depends on what exactly we are talking about. Because the gum-mint can do just about anything it wants to the value of the dollar, the stock/gold ratio is a more reliable mean-reverting datum. In the long run CBs can do nothing to make either gold or productive capital worth more or less (except perhaps really muck up the economy for good…). The gold/dollar ratio, though, is where your monetary data come in. Stock/gold can’t tell us anything about what to expect for stock/dollar or gold/dollar individually.

The main central bank was the one that got wise before things almost went pow in 1979-80, and Bernanke doesn't seem much like Volcker to me. *sigh*

I don’t remember Volcker talking about sending out a fleet of helicopters!

mmm... more nits... aka http://www.nowandfutures.com/grins/mmm_something.wav ;)

The biggest problem with comparing any non static stock or other index against gold over a long period is that it's not an apples to apples comparison. As I recall, there's only one or two stocks in today's Dow that were also in it during the '20s. There's also substitution bias and also dividends as well as shoddy Wall St. practices to take into account.

If I was able to vary the purity of gold the way that Dow Jones or Standard & Poors change their index content (and even after adding in dividends etc.), I believe gold would have outperformed substantially.

Right. This is one reason why I like to use the broadest indices possible. As in the global stock/gold chart above. Such averages are made to reflect the aggregate experience of all the world’s stock investors. Obviously they don’t own the same stocks today as were in the DJIA in the 1920’s either.

Dividends are another matter. Stocks are by nature an investment, not merely a store of value. Over time, they should provide investors with a real return, which they do in the form of a dividend. Of course that "over time" part is a mighty big caveat, because as we all know there can be prolonged periods where the total real return is negative. And that’s before taxes.

Gold, on the other hand, over the long run, provides a slightly negative real price return, and no dividends at all. For this reason, in the aggregate and over the long run, investors are better off owning stocks. But again, we have that "over time" bugaboo … there can be prolonged periods where it can beat the tar out of stocks. And if these here charts are any indication, this is one of them.

And I wouldn't even have to make it a log chart... ;)

At least as long as you don’t mind getting finned mercilessly …

[bart]

Re: 2/27/07--Beginning of a Bear Market?

He should be so lucky as to be as sharp as you are.

Thanks, manor enhanced one... but he's rich!
I might be able to beat him in a grunt contest though... ;)

To paraphrase Alan Greenspan, if you think we agree, you must have misunderstood … ;)

But seriously, I think it depends on what exactly we are talking about. Because the gum-mint can do just about anything it wants to the value of the dollar, the stock/gold ratio is a more reliable mean-reverting datum. In the long run CBs can do nothing to make either gold or productive capital worth more or less (except perhaps really muck up the economy for good…). The gold/dollar ratio, though, is where your monetary data come in. Stock/gold can’t tell us anything about what to expect for stock/dollar or gold/dollar individually.

Poor Bubbles Al - he's so abused... ;)

True, although there is that small fly in the ointment about confiscation of gold or perhaps even other "strategic" metals that could even trash the gold/dollar or gold/stocks ratio... at least at official prices.

I don’t remember Volcker talking about sending out a fleet of helicopters!

Didn't you get the change in armaments bulletin back in the '90s? They switched back to liquidity missiles & drops... ;)

Right. This is one reason why I like to use the broadest indices possible. As in the global stock/gold chart above. Such averages are made to reflect the aggregate experience of all the world’s stock investors. Obviously they don’t own the same stocks today as were in the DJIA in the 1920’s either.

Dividends are another matter. Stocks are by nature an investment, not merely a store of value. Over time, they should provide investors with a real return, which they do in the form of a dividend. Of course that "over time" part is a mighty big caveat, because as we all know there can be prolonged periods where the total real return is negative. And that’s before taxes.

Gold, on the other hand, over the long run, provides a slightly negative real price return, and no dividends at all. For this reason, in the aggregate and over the long run, investors are better off owning stocks. But again, we have that "over time" bugaboo … there can be prolonged periods where it can beat the tar out of stocks. And if these here charts are any indication, this is one of them.

True that they don't own the same stocks too, as well as the indexes having changed substantially. Agreed too that stocks *should* produce superior returns over a long period.
But it still doesn't address comparing an unchanging item like gold or many other "hard" assets with items that change composition. One of these days, I'll hopefully run across a decent long term PPP dataset and it "should" show the point too.

As far as gold not paying interest or having dividends, neither do non dividend paying stocks or housing or gemstones or antiques or art, etc. and many of them have done quite well...

At least as long as you don’t mind getting finned mercilessly …

http://www.nowandfutures.com/grins/argh.wav ;)

[Finster]

Re: 2/27/07--Beginning of a Bear Market?

Thanks, manor enhanced one... but he's rich!
I might be able to beat him in a grunt contest though... ;)

Well I’ve seen his charts and I’ve seen yours…

Poor Bubbles Al - he's so abused... ;)

I love to heap disrespect on those who so richly deserve it…

True, although there is that small fly in the ointment about confiscation of gold or perhaps even other "strategic" metals that could even trash the gold/dollar or gold/stocks ratio... at least at official prices.

True again. One can never say never, but for the foreseeable future at least, confiscation seems remote. Now that Wall Street has ways to make money from it, such as ETFs, hedge funds, proprietary trading, etceteras, Washington may be more reluctant.

True that they don't own the same stocks too, as well as the indexes having changed substantially. Agreed too that stocks *should* produce superior returns over a long period.
But it still doesn't address comparing an unchanging item like gold or many other "hard" assets with items that change composition. One of these days, I'll hopefully run across a decent long term PPP dataset and it "should" show the point too.

It just doesn’t matter if they change composition. Take, just for example, a commodity futures index like that published by Goldman Sachs or Dow Jones. They likewise don’t represent anything unchanging; as you know as well as anyone, futures contracts expire and have to be "rolled over" to get anything resembling a continuous return. Yet you can chart that continuous return. Same with stocks; the individual components may change over time, yet you can buy, say, the S&P 500 and have a continuous, evolving, index.

Even though the form and names of individual bits and pieces may change, the broad entity of "corporate capital" is still a continuous thing. It has existed as long as capital has, and that’s a very long time. It also tends to be tenaciously constant over the passage of decades as a proportion of the global economy. Even though it rises and falls with secular cycles, it is strongly mean reverting with respect to the total global net worth and GDP. As long as you are looking at an index that is sufficiently comprehensive - and not just some selected fraction of corporate capital (like an individual stock, the Dow 30 or whatever), you have something comparable.

As far as gold not paying interest or having dividends, neither do non dividend paying stocks or housing or gemstones or antiques or art, etc. and many of them have done quite well...

I’m not knocking gold, here … not hardly! I’m simply distinguishing between savings and investment - i.e. things that act as stores of value versus things that produce real returns. And whether a stock pays a dividend or not, it nevertheless still derives its value from the prospect that it may someday pay one. If a stock never pays anything to its shareholders, it is fundamentally worthless and the market will eventually reflect that. Eventually a dividend must be paid, whether its a regular quarterly or whether it gets bought out (by another entity that also must eventually pay a dividend!), or whether it eventually liquidates and pays out its profits to shareholders at that time. In this latter case, the dividend is simply deferred, just as in the case where it eventually pays a regular quarterly.

Gems, antiques, and art are fundamentally different in that they do not represent productive capital. They are more similar to gold in that they are stores of value. Individual pieces may appreciate or depreciate, but in the aggregate they do not produce a real return. If they appear to collectively have "done well", that is because you are comparing them to currency units that are "doing unwell".

Again, this is not to say there haven’t been or won’t be very significant periods when stores of value handily outperform things that fundamentally produce a return, because the latter can get waaaay overvalued and underperform for years at a time. (Thanks largely to efforts to artificially expand credit.) Of course, it can get undervalued, too and then correspondingly outperform. But they are generally very comparable in terms of price … it’s the dividend - the economic profit resulting from the productive deployment of capital - that represents the difference between a store of value and something capable of producing real returns.

[grapejelly]

Re: 2/27/07--Beginning of a Bear Market?

Again, this is not to say there haven’t been or won’t be very significant periods when stores of value handily outperform things that fundamentally produce a return, because the latter can get waaaay overvalued and underperform for years at a time. (Thanks largely to efforts to artificially expand credit.) Of course, it can get undervalued, too and then correspondingly outperform. But they are generally very comparable in terms of price … it’s the dividend - the economic profit resulting from the productive deployment of capital - that represents the difference between a store of value and something capable of producing real returns.

There seem to be cycles between gold, as a proxy for tangibles, and income-producing assets in terms of highest returns.

I think this is mainly due to the effects of inflation.

I would suppose that most tangibles will, absent inflation, tend to decline in value over the long run. That is due to technology increasing productivity, decreasing the need for commodity inputs. OTOH of course there is expanding population making new demands on tangibles, such as we are seeing in China and India.

But I think cycles tend to decrease real returns eventually below zero on income producing investments (e.g. stocks)
due to the effects of inflation. Inflation allows more money to be created that then intermediates any investment opportunity away.

At this point in the cycle, gold is best. Gold is a proxy for cash, a store of value as you say. But it produces a real return through appreciation.

Then there is a big blowoff a la the Great Depression. Perhaps the 1970s qualifies in a small way. When the dust clears, you can buy income producing assets extremely cheaply. This is the time to re-enter the market.


I think these cycles have a lot to do with longevity. For decades after the Crash of 1929 and the Depression, Wall Street and investors were repulsed by debt. This allowed inflation to take advantage of them because they were so set on avoiding debt they failed to understand the new fiat regime and what it did to creditors. Think all the low fixed interest 30 year mortgages left in the 1970s.

These people died off and then there was no more memory of the Great Depression which set the stage for the current state of affairs.

[bart]

Re: 2/27/07--Beginning of a Bear Market?

Well I’ve seen his charts and I’ve seen yours…

True enough and I sure do have him beat on variety and depth, but the site purposes are very different and his charts also have much more of a short term and TA focus.

I love to heap disrespect on those who so richly deserve it…

*hug* ;)

True again. One can never say never, but for the foreseeable future at least, confiscation seems remote. Now that Wall Street has ways to make money from it, such as ETFs, hedge funds, proprietary trading, etceteras, Washington may be more reluctant.

Agreed, but I'm also on the alert for indications of "painting" gold or whatever as "bad".

It just doesn’t matter if they change composition. Take, just for example, a commodity futures index like that published by Goldman Sachs or Dow Jones. They likewise don’t represent anything unchanging; as you know as well as anyone, futures contracts expire and have to be "rolled over" to get anything resembling a continuous return. Yet you can chart that continuous return. Same with stocks; the individual components may change over time, yet you can buy, say, the S&P 500 and have a continuous, evolving, index.

Even though the form and names of individual bits and pieces may change, the broad entity of "corporate capital" is still a continuous thing. It has existed as long as capital has, and that’s a very long time. It also tends to be tenaciously constant over the passage of decades as a proportion of the global economy. Even though it rises and falls with secular cycles, it is strongly mean reverting with respect to the total global net worth and GDP. As long as you are looking at an index that is sufficiently comprehensive - and not just some selected fraction of corporate capital (like an individual stock, the Dow 30 or whatever), you have something comparable.

Depending on the commodity itself, many actually are only apparently unchanging. Most of the softs (agricultural and food items) for example actually have changed over the decades. The ear of corn or beef from the '70s is not anywhere near the same as today's, both from an actual quality and productivity view... but gold and silver and oil are. I submit that stocks are more comparable to softs than gold & silver, etc. and that true apples to apples comparisons are dicey and subject to conclusions that are misleading (at best) in the big picture.

Don't get me wrong too - gold and stocks is a workable comparison for sure and much can be learned and derived from slicing & dicing them (all hail the Ronco Veg-o-matic! ;)), but they're not even 80% directly comparable due to their underlying differences and probably a lot less.

"It ain’t so much the things we don’t know that get us in trouble. It’s the things we know that ain’t so."
-- normally attributed to Will Rogers

I’m not knocking gold, here … not hardly! I’m simply distinguishing between savings and investment - i.e. things that act as stores of value versus things that produce real returns. And whether a stock pays a dividend or not, it nevertheless still derives its value from the prospect that it may someday pay one. If a stock never pays anything to its shareholders, it is fundamentally worthless and the market will eventually reflect that. Eventually a dividend must be paid, whether its a regular quarterly or whether it gets bought out (by another entity that also must eventually pay a dividend!), or whether it eventually liquidates and pays out its profits to shareholders at that time. In this latter case, the dividend is simply deferred, just as in the case where it eventually pays a regular quarterly.

Gems, antiques, and art are fundamentally different in that they do not represent productive capital. They are more similar to gold in that they are stores of value. Individual pieces may appreciate or depreciate, but in the aggregate they do not produce a real return. If they appear to collectively have "done well", that is because you are comparing them to currency units that are "doing unwell".

Again, this is not to say there haven’t been or won’t be very significant periods when stores of value handily outperform things that fundamentally produce a return, because the latter can get waaaay overvalued and underperform for years at a time. (Thanks largely to efforts to artificially expand credit.) Of course, it can get undervalued, too and then correspondingly outperform. But they are generally very comparable in terms of price … it’s the dividend - the economic profit resulting from the productive deployment of capital - that represents the difference between a store of value and something capable of producing real returns.

No question from here too on dividends, although the general area is much more your forte than mine... and I've learned more than a little from you about them too.

Probably yet another nit (YAN in Mogambo-ese ;)), but when gems or art outperform and you say it's due to currency units that are "doing unwell", that should also be applied to stocks when they do well. Some of stock gains is certainly productivity and wise use of productive capital, but when even just CPI adjusted values on long term indexes like the Dow only about triple since 1900 and have less than doubled since the mid '60s (only up by 10-20% when using shadowstats CPI lies correction factors during the same period), we have to be exceedingly careful to use as valid a comparison as possible... and use stuff like the FDI to help level the playing field too.

[Finster]

Re: 2/27/07--Beginning of a Bear Market?

True enough and I sure do have him beat on variety and depth, but the site purposes are very different and his charts also have much more of a short term and TA focus.

Sinclair is no dum-dum, but he is vastly over-rated. He’s just another competent analyst that happens to have developed a cult following. Sure he made a lot of money in the seventies, but as with success in many fields, a lot of is has to do with being in the right place at the right time. For my money, his scope is too narrow. Whether and how much to invest in the field he follows is far more important than the specifics of which securities and minute timing details. Also in part due to his oracle-like image, he has tendency to get away with ambiguity that others cannot. As with the infamous Greenspeak, if something can be interpreted in more than one way, in hindsight - after the fact - people will tend to credit him with the interpretation most consistent with what actually transpired. I’m no Sinclair follower, so I might be being unduly hard on him. But the reason I don’t follow him is that I found nothing in my first couple exposures that was useful.

Your material, in contrast, has proved useful on numerous occasions. The USD is a security which none of us can escape dealing with and its value is relevant to every investor on the planet. The Fed, in turn, is the most important player in that equation, and you, in turn, help us understand what it is doing. Maybe I am somewhat biased due to the complementary nature of our work (like yin and yang), but to me it’s like the difference between a guy with a seismograph and laser core sampler and another one with a divining rod and silver cross.

Depending on the commodity itself, many actually are only apparently unchanging. Most of the softs (agricultural and food items) for example actually have changed over the decades. The ear of corn or beef from the '70s is not anywhere near the same as today's, both from an actual quality and productivity view...

Totally on board with you on the changeable nature of many commodities. This is not your father’s corn and beef we’re talking about. But I’d assumed - perhaps wrongly - that if you had futures contract that called for delivery of, say, the original (non-GMO) corn and someone actually delivered the frankenstuff, they’d be in default. The next contract might allow for delivery of the latter, but then that wouldn’t be treated in the index as the identical thing.

Or am I all wet here?

… but gold and silver and oil are. I submit that stocks are more comparable to softs than gold & silver, etc. and that true apples to apples comparisons are dicey and subject to conclusions that are misleading (at best) in the big picture.

Perhaps so, but that’s exactly what makes gold useful for comparisons. This time In 1972, the S&P traded around 105. Now it trades around 1395. But in 1972 we were using a far different dollar to measure it with than we are here in 2007! How can you conclude the S&P is actually worth 13.3 times what it was 35 years ago?

Answer: You can’t!

A far, better way to approach the question is to throw out those changeable (i.e. shrinking) dollars and use something that is the same now as it was then. Enter the venerable ounce of gold. At today's ~ 650 versus 1972 ~ 47.5, it also is trading about 13.3 times what it did 35 years ago.

So it turns out that when we do so, the S&P is the same price today as it was 35 years ago.

Anyone besides me tempted to conclude that the bonar is just worth around 1/13.3 times what it was then?

Probably yet another nit (YAN in Mogambo-ese ;)), but when gems or art outperform and you say it's due to currency units that are "doing unwell", that should also be applied to stocks when they do well.

Exactly. But we can factor out the common denominator - the currency unit - and ask how much of either the gems or art or whatever traded at the same prices as the same amount of stock. When we do so, we find that commodities do actually depreciate just a little compared to capital over long periods (multiple cycles) of time. It must be so, because it takes less labor to produce them as technology advances. Moreover, capital pays dividends, which allows us, by looking at price only - to make a more direct comparison. If we are to compare productive business capital with commodities on a total return basis, we are better off comparing stock returns to commodity futures returns - the latter effectively pay a dividend as well, providing a real return to the futures buyer derived from the economic service he provides. Indeed, over these very long periods of time, total returns from stocks and from commodity futures have been comparable. This was shown in the now-famous study done by researchers Gary Gorton and K. Geert Rouwenhorst at the National Bureau of Economic Reasearch (NBER), Facts and Fantasies about Commodity Futures.

[bart]

Re: 2/27/07--Beginning of a Bear Market?

Sinclair is no dum-dum, but he is vastly over-rated. He’s just another competent analyst that happens to have developed a cult following. Sure he made a lot of money in the seventies, but as with success in many fields, a lot of is has to do with being in the right place at the right time. For my money, his scope is too narrow. Whether and how much to invest in the field he follows is far more important than the specifics of which securities and minute timing details. Also in part due to his oracle-like image, he has tendency to get away with ambiguity that others cannot. As with the infamous Greenspeak, if something can be interpreted in more than one way, in hindsight - after the fact - people will tend to credit him with the interpretation most consistent with what actually transpired. I’m no Sinclair follower, so I might be being unduly hard on him. But the reason I don’t follow him is that I found nothing in my first couple exposures that was useful.

Your material, in contrast, has proved useful on numerous occasions. The USD is a security which none of us can escape dealing with and its value is relevant to every investor on the planet. The Fed, in turn, is the most important player in that equation, and you, in turn, help us understand what it is doing. Maybe I am somewhat biased due to the complementary nature of our work (like yin and yang), but to me it’s like the difference between a guy with a seismograph and laser core sampler and another one with a divining rod and silver cross.

I think that by virtue of your longer range investing horizon and that you seldom do trades lasting days or a few weeks, it's not surprising you feel that way about Sinclair. He's one of my regular daily reads, partly due to his background, partly due to his track history of trading success and partly for his charts and overall views. I agree that he is narrow too, but it's both his area of expertise and I wouldn't expect him to not talk some from "his book" too.

I also greatly respect his overall ethical approach and the occasional little bits of trading wisdom and of course the "behind the curtains" zingers and tips. Some of that ambiguity is intentional too - many floor and big traders read his stuff too and can "set up" to counter any recommendations he makes.

But you're right too - my charts and approach are both much broader than just gold, silver and mining stocks and also a bit more "everyman"... and I can hear the shock too, considering some of the "out there" stuff I track like TIOs.

Totally on board with you on the changeable nature of many commodities. This is not your father’s corn and beef we’re talking about. But I’d assumed - perhaps wrongly - that if you had futures contract that called for delivery of, say, the original (non-GMO) corn and someone actually delivered the frankenstuff, they’d be in default. The next contract might allow for delivery of the latter, but then that wouldn’t be treated in the index as the identical thing.

Or am I all wet here?

To tell the truth, I haven't looked that closely at contract specs but I doubt that it would distinguish between GMO and non GMO corn, just given the priority to pricing & costs. If a farmer is willing to deliver corn at a given price, it's likely acceptable. Hybrids have been around for decades too.

Perhaps so, but that’s exactly what makes gold useful for comparisons. This time In 1972, the S&P traded around 105. Now it trades around 1395. But in 1972 we were using a far different dollar to measure it with than we are here in 2007! How can you conclude the S&P is actually worth 13.3 times what it was 35 years ago?

Answer: You can’t!

A far, better way to approach the question is to throw out those changeable (i.e. shrinking) dollars and use something that is the same now as it was then. Enter the venerable ounce of gold. At today's ~ 650 versus 1972 ~ 47.5, it also is trading about 13.3 times what it did 35 years ago.

So it turns out that when we do so, the S&P is the same price today as it was 35 years ago.

Anyone besides me tempted to conclude that the bonar is just worth around 1/13.3 times what it was then?

True - and you can also do similar comparisons with the FDI, and I with CPI plus John Williams adjustments (it's about 9x now, CPI being about 5x, and the trade weighted dollar being another 3.5x). That's the real value in my opinion - when similar conclusions can be reached with wildly varying approaches, the probabilities sure can make for better trading/investing returns.

Exactly. But we can factor out the common denominator - the currency unit - and ask how much of either the gems or art or whatever traded at the same prices as the same amount of stock. When we do so, we find that commodities do actually depreciate just a little compared to capital over long periods (multiple cycles) of time. It must be so, because it takes less labor to produce them as technology advances. Moreover, capital pays dividends, which allows us, by looking at price only - to make a more direct comparison. If we are to compare productive business capital with commodities on a total return basis, we are better off comparing stock returns to commodity futures returns - the latter effectively pay a dividend as well, providing a real return to the futures buyer derived from the economic service he provides. Indeed, over these very long periods of time, total returns from stocks and from commodity futures have been comparable. This was shown in the now-famous study done by researchers Gary Gorton and K. Geert Rouwenhorst at the National Bureau of Economic Reasearch (NBER), Facts and Fantasies about Commodity Futures.

Soothsayer... and more shameless indirect FDI promotion too... ;)

Nice pickup and insertion of that study. I note it on my futures page too since it goes a long way to remove false information from the general area. The leverage and "gotcha's" in futures can be quite dangerous and I don't intend to appear to be promoting them... but huge leverage is not required and they can be a very direct play for those with the correct attitude and education and experience.