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Off the Cuff: The Tail Wags Harder

The system is more visibly serving itself vs the public
Friday, September 26, 2014, 5:16 PM

In this week's Off the Cuff podcast, Chris and Mish Shedlock discuss:

  • Topping Markets
    • Signs of an imminent correction continue to mount
  • Central Banks Gone Wild
    • No longer hiding their rampant asset purchases
  • Perpetual War
    • The military-industrial complex is the tail wagging the dog
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The 3 Likeliest Ways Things Will Play Out From Here

Do you have a plan for each?
Thursday, September 25, 2014, 3:58 PM

Executive Summary

  • The wisdom and value of scenario planning
  • Scenario #1: A Slow Burn
  • Scenario #2: Fragmentation
  • Scenario #3: A Hard Landing
  • The prudence of taking individual action now, vs depending upon "the system" to react to future events

If you have not yet read Part 1: Ready Or Not... available free to all readers, please click here to read it first.

It all begins with the clear-eyed recognition that the old way of doing business is clearly unsustainable. And yet knowing that the various governmental and institutional powerbrokers are doing everything they can to perpetuate the status quo way of doing business.

Business-as-usual is literally going to end in some flavor of disaster, and yet we collectively adhere to it, even when the end-point is as obvious as calculating the linear rate of withdrawal of water from a non-renewing aquifer.

But there's nothing linear about the nested and/or intertwined complex systems we call the Economy, the Environment and Energy.  Each of these is independently complex, meaning they often easily defy the attempts to manage them. And they are utterly unpredictable for anything longer than the immediate term.

For example, of the three, Energy seems the simplest, and it is.  But even there, we note that the amount of energy that can and will be extracted is a function of the price of energy, available technology and skills, capital available for investment, and what's actually down there in the earth to be pulled up.  In that list, several factors are courtesy of the Economy, which is itself dependent on Energy. A glitch in one can feedback rapidly to create a glitch in the other.

Given all of this complexity, one good way to get a handle on things is to identify the scenarios we deem to be most likely given all available evidence, and then assign probabilities to each. Asking ourselves, What can we today to prepare for Scenario X? then allows us to begin constructing action plans to mitigate our vulnerability, and even better in cases, position ourselves to prosper as the future unfolds. 

Scenario #1:  A Slow Burn

In 2008, the practice of borrowing too much caught up with the developed world and a serious financial crisis threatened to take down the entire financial system.  Indeed, according to after-action reports from Hank Paulson (then Treasury Secretary) and Mervyn King (then BoE chairman), the world came within mere hours of a full-blown global banking system meltdown... » Read more

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Death Cross on the Russell 2000

Another likely harbinger of a coming market correction
Monday, September 22, 2014, 7:51 PM

One of the 'targets' I've had my eye on in the market has been the Russell 2000, a small cap stock index comprised of the smallest 2000 companies in the Russell 3000 index.

The reason I've been tracking this index carefully, along with junk bonds, is that the small companies usually give you an advance heads-up on trouble soon headed for the larger cap companies and stock indexes.

 
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Off the Cuff: A Look Across the Pond

Europe is driving much of the action this week
Thursday, September 18, 2014, 11:46 AM

In this week's Off the Cuff podcast, Chris and Alasdair Macleod discuss:

  • Independence For Scotland
    • The implications of this week's historic vote
  • Gold's Depressed Price
    • The establishment benefits from a low price
  • Europe vs Russia
    • Why the EU holds a losing hand
  • The Evils of Central Banking
    • Creating worse problems than they're supposed to solve
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Why the Dollar Could Strengthen - A Lot - From Here

50-100% appreciation possible in the next few years
Tuesday, September 16, 2014, 10:50 PM

Executive Summary

  • The critical role of interest rates and carry trades
  • How capital flows across borders
  • The growth in supply of dollars is slowing
  • The rationale for the dollar strengthening from here by 50-100%

If you have not yet read Is Part 1: The Dollar May Remain Strong For Longer Than We Think available free to all readers, please click here to read it first.

In Part 1, we reviewed the key concepts that drive supply/demand (and thus the price/relative value) of the U.S. dollar. In Part 2, we’ll cover the dynamics that could push the value of the USD vis-à-vis other currencies much higher in the years ahead.

Interest Rates, Bonds and Carry Trades

To understand the price of any currency—measured in other currencies, gold, oil, etc.—we look at a currency as a special kind of commodity, one that greases transactional trade of goods and services and also serves as a store of value. Like any commodity, its price relative to other commodities is determined by supply and demand.

If demand is strong and supply is tight, the value will increase. This is the same for dollars, gold, oil, grain, bat guano, etc. The reverse is equally true: if demand slackens and supply balloons, the value will decline.

To understand the supply and demand for currencies, we need to understand the role of interest rates, sovereign bonds and carry trades.

The connection between interest rates and demand is self-explanatory: if interest rates paid at home are near-zero, and another nation’s bonds are paying a higher yield, it makes sense to sell (or borrow) one’s own currency and buy a bond denominated in another currency.

This is the foundation of currency carry trades.  PP.com’s own Davefairtex recently offered an excellent explanation of how carry trades work on the Gold & Silver Group forum:

I believe that QE causes inflation in other countries by dropping rates to 0% which encourages carry trades, whereby traders borrow USD for extremely low rates here in the US, and then send it overseas to find a yield.  Cheap money in the US causes money to flow elsewhere, where rates are higher.

Carry Trade For Dummies:

Step 1) Borrow $1 billion US at LIBOR-1M rate; cost 0.16%.

Step 2) Trade $1 billion US for 1.075 billion AUD.

Step 3) Buy 1.075 billion 2-year AUD govt bonds; yield 2.52%

Step 4) Collect $23 million USD/year for doing no work at all.

Carry trades work in both directions for the dollar... » Read more

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Russian Energy Sanctions Will Bite Europe

And possibly the world
Tuesday, September 16, 2014, 2:44 AM

For several months now, we've been running with the hypothesis that Russia would wait until fall arrived and then begin to crimp off EU gas, possibly even just cutting it off.

Well, even though fall is still officially a few days away, Russia has begun to retaliate, subtly, by diminishing the flows of gas to several European countries. » Read more

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Off the Cuff: The Many Reasons To Fear A Market Correction

Just too many signs of instability
Thursday, September 11, 2014, 6:02 PM

In this week's Off the Cuff podcast, Chris and Charles Hugh Smith discuss:

  • The Irrational Altitude of Asset Prices
    • Too high, for all the wrong reasons
  • Dollar Strength
    • The dollar's rise is impacting all assets, some not rationally
  • The Cost of Our Failing Policies
    • We're diminishing the prosperity of future generations
  • Signs A Market Correction Is Beginning
    • Which asset classes to watch closely
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How to Hedge Against A Market Correction

Reducing the vulnerability of your portfolio
Wednesday, September 10, 2014, 12:04 AM

Executive Summary

  • What you need to know about hedging with
    • Stops
    • Inverse and leveraged ETFs
    • Shorts
    • Options
    • Futures
  • Deciding which hedging instruments are appropriate for your portfolio

If you have not yet read Part 1: Defying Gravity available free to all readers, please click here to read it first.

OK - hedging sounds prudent. But how do you do it?

Our focus here in Part 2 of this report is to cover the most common vehicles used in hedging strategies. Each one merits its own dedicated report (a series we'll likely create in the future) to truly understand how and when to best deploy, so this report will focus on providing you with a good introduction to each, with guidance on how to further explore the ones that strike you as appropriate for your needs and personal risk tolerance.

Stops

An easy way to limit your downside on large positions in your portfolio is to set stops.

(Stops can be used on positions of any size, but you'll typically want to employ them on your largest ones first, where your exposure is greater.)

stop order (also referred to as a "stop-loss" order) is used to trigger the sale or purchase of a stock once its price reaches a predetermined value, known as the stop price.

As an example, let's say you bought a stock for $50. You may decide you want to limit your maximum loss on the stock to 10%, so you enter a stop order for $45. Then, if the price of the stock subsequently drops below $45, your stop activates an order to sell the stock at market.

If instead of falling, the stock you buy climbs higher, your stop is not triggered and you continue owning the security.

As the name "stop-loss" implies, stops are intended to help you... » Read more

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Why The Dollar Is Gaining Strength

Warning us of another impending financial crisis?
Monday, September 8, 2014, 8:30 PM

Recently, the US dollar has gained at lot of territory compared to the yen, pound, euro, ruble, and pretty much every other currency you can think of. The dollar is now at a 14-month high and has been on a real tear.

The reasons why are not that hard to understand, and it's important that we do. » Read more

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Off the Cuff: Demand Has Disappeared

The fundamental failing of the global economy
Thursday, September 4, 2014, 10:24 PM

In this week's Off the Cuff podcast, Chris and Brian Pretti discuss:

  • Demand Is Drying Up
    • There's just no market pull to create economic growth
  • Phantom Profits
    • Todays corporate earnings are accounting mirages
  • The End Of The Debt Supercycle
    • We've grown the economy through debt, and it can't handle more
  • Blame The Central Banks!
    • They're responsible for today's zombie economy