Good bye 2009

I believe that the last few minutes of trading this year are a harbinger of 2010.

Dow futures, 1-week (you might have to squint to see the final dive at the buzzer):

Source: Interactive Brokers


VIX index, 1-week:


Happy new year, everyone. Thanks for stopping by and chiming in over the last 16 months.

Cocoa cooling off?

I follow all sorts of odd commodity futures, since the more you follow, the more set-ups you can potentially find. Cocoa got my attention a few weeks ago as it made a 30-year high on lower momentum than its previous high, and I took a short position when it stalled out at over $3400 per metric ton. It had a violent sell-off several sessions ago, and has so far failed to rebound, suggesting that animal spirits may be waning. This is a daily chart going back to August:



You can see in this monthly chart that if this new high does mark the end of the bull market, even a retracement of the last leg would take prices to the $2500 area:


The 25-year view shows how cocoa futures are part and parcel of the larger commodities complex:


Like other commodities, cocoa was very expensive in the mid-to-late 1970s, with inflation adjusted prices about triple or even quadruple today’s high prices (i.e., nominal prices ranged as high as $4000 in 1978-1979).

Just when nobody is watching, stocks look done.

Here’s a 10-day shot of the Dow — see the broken trendline and failed retest, and note that ramps in DSI only result in weak price moves:

Source: (still loving their charts)


The 5-day equity put call ratio is giving a louder sell signal than a few days ago:


The VIX has been bleeding downward momentum and flattening out, much like the dollar this autumn before it started its violent reversal:

Source: yahoo! finance

Here’s the dollar vs. the euro:

Source: yahoo! finance


I am now short stock indexes and calls, long VIX futures and long puts. It appears highly unlikely that stocks press much further here, and there is a risk of an abrupt decline in the coming weeks — all it would take is the slightest scare to trigger a stampede.

Is the commodities rally done?

Here’s the daily continuation chart of commodity index futures since July. Note the new highs on weakening momentum:



The oil and base metals markets are similar. Here’s the base metal index, from


And oil futures, from (3-year chart):


See also:

Copper looks set to fall hard (12/21/09)

A true liberal education includes Ludwig von Mises













(Via This new Mises biography gets high praise from Bob Higgs, himself a talented and hard-hitting classical liberal (or libertarian, minarchist, anarcho-capitalist, etc):

Jörg Guido Hülsmann, Mises: The Last Knight of Liberalism (Auburn, Ala.: Ludwig von Mises Institute, 2007). If I said I don’t love this book, I’d be lying. Not only do I wish I had written it; I wish that I had the talents and intelligence to have written it. Alas, I can only recommend this beautifully written volume to everybody as one of the very best books I’ve ever read: the product of deep and wide scholarship, it presents a fascinating account of the life, times, and intellectual activity of the twentieth century’s greatest economist. You can also learn a great deal from the book besides what it teaches you about Mises himself.

Nobody wants insurance

Put options are out of fashion, as shown by the 5-day average equity put:call ratio, which is again one standard deviation below its mean. Except for two brief touches, it has now been well under the mean for six months. Since this is a mean-reverting statistic, it is overdue for an excursion into the upper end of the range:



A little anti-bankster populism is apparently a grassroots movement to inspire people to withdraw their savings from the powerful mega-banks and to deposit it in local institutions. The premise is that the big boys blew the bubble and that the little guys sat out the craziness.

It is true that the largest banks are some of the highest-leveraged, that they have benefitted the most from government and central bank actions, and that many of their executives are nefarious bastards, but it is by no means a given that community banks are safer. In fact, these are being put down by the FDIC at the rate of several a week (the announcements come out late on Fridays). Check out this list of Texas ratios here before deciding to trust any bank. It is just the nature of fractional reserve lending that virtually all modern banks operate from the get-go in a state of insolvency, since they lend out money that they do not have. This is the very source of the inflation/deflation (or “boom-bust” or “business”) cycle.

It is not right, but certain institutions like JP Morgan will be the very last to disappear, since the government and Federal Reserve were created by big banks, for big banks. In fact, I would consider JP Morgan to be the safest place to stash cash in the US aside from a Treasury-only money market fund or Treasury Direct. If JP Morgan goes under, that means the government won’t be far behind. Don’t hold your breath. Anyway, this video makes for good holiday viewing:


For more on fractional reserve lending, central banks and moral hazard see:

In praise of bank runs; the only regulator we need

A crash course on the banking cartel

Greenspan was framed! Blame bankers’ moral hazard, not their lackey.

Eric Sprott: new lows ahead for S&P 500

From Bloomberg:

Dec. 29 (Bloomberg) — The Standard & Poor’s 500 Index will collapse below its March lows as an expected rebound in economic growth fails to materialize, according to hedge fund manager Eric Sprott.

The Toronto-based money manager, whose Sprott Hedge Fund returned 496 percent over the past nine years while the S&P 500 lost 32 percent, said the index’s 67 percent rally since March reflects investors misinterpreting economic data. He’s predicting the gauge will fall 40 percent to below 676.53, the 12-year low reached on March 9.

“We’re in a bear market that will last 15 or 20 years, and we’ve had nine of them,” Sprott, chief executive officer of Sprott Asset Management LP, which oversees C$4.3 billion ($4.09 billion), said in an interview Dec. 18.


Here’s what a 20-year, deflationary bear market looks like (Nikkei 225):

Source: Yahoo! Finance


Sprott also still likes gold, and from his perch in Canada he picks up smaller mining and exploration stocks. Although I like gold for the long term, I do take issue with the idea expressed here:

“If you get into this thing where you’ve got to keep printing more and more and more, who knows about the price of gold?” he said. “It will be the new currency in due course.”

Japan of course tripled its money supply and debt load in the aftermath of the bubble, but the central bank’s refusal to let bad debt and bad banks go under has locked the country into deflation and the Yen has remained strong. The debt situation in the US is much worse than in Japan, so our deflation should be even stronger. Japan was also bouyed through the ’90s and ’00s by strong exports as the rest of the world continued to grow, whereas the current bust is global. I do agree that after this deflationary stage clears the way, the government and central bank are bound to destroy the currency. The same could be said for the euro, pound and all of the rest, since none have any gold backing anymore.

The issue is timing — I have been saying since before the crash that deflation would be the situation for longer than almost anyone anticipates, myself included. This is because we have a credit system, not a cash system — in our economy it is credit issuance that controls the value of the currency unit, and credit will be contracting for years to come.

Capitalism needs failure, say winning fund managers

Kevin Duffy and Bill Laggner are acquaintances of mine who run the Bearing Fund, which returned high double digits for its investors in 2008. Their moral and economic philosophy is grounded in the Austrian understanding of the credit cycle and the parasitic role that government plays in today’s economy. I highly recommend an interview with them in this week’s Barrons (subscription only). Here are some excerpts:

Duffy: Any healthy system needs a way to correct error and remove waste. Nature has extinction, the economy has loss, bankruptcy, liquidation. Interfering in this process lengthens feedback loops. Error and waste are allowed to accumulate, and you ultimately get a massive collapse.

Capitalism is primarily attacked by two groups: utopians who wish to impose a more “compassionate” system, and political capitalists who want to enjoy the fruits of success without bearing the pain of failure. They use the coercion of the state to gain privileges, at the expense of everyone else.

As a country we’ve become less tolerant of economic failure. The result has been a series of interventions, such as meddling in the credit markets, promoting homeownership and creating a variety of safety nets for investors. Each crisis leads to an even greater crisis. The solution is always greater doses of intervention. So the system becomes increasingly unstable. The interventionists never see the bust coming, then blame it on “capitalism.” …

Laggner: AIG made sure its creditors received 100 cents on the dollar. Essentially you have the socialization of risk, but the survivors are still highly leveraged. There is still a multi-trillion dollar shadow banking system that FASB [the Financial Accounting Standards Board] wants to address next year. The central planners have already spent $3.15 trillion on various bailouts, credit backstops, guarantees, etc., and given approximately $17.5 trillion of government commitments, etc., while allowing many of these institutions to remain in place, with the same people running them…

Barron’s: What kind of financial reform would you like to see?

Laggner: We don’t believe in a central bank. The idea that banks can speculate with essentially free money from the [Federal Reserve], which ultimately is the taxpayer, and that when they lose money the Fed bails them out and then passes that invoice to the taxpayer — that whole model is broken and needs to go away.

Duffy: To get to the heart of the problem, we need to address fractional-reserve banking, which is causing the instability. We have essentially socialized deposit insurance and prevented the bank run, which used to impose discipline on this unstable system. At least it had some check on those who were acting most recklessly. Until we address the root of the problem, we are going to have a series of crises, greater responses and intervention, and more bubbles — and the system will keep perpetuating itself.


The whole system is broken and needs to go away. We can only hope that this depression fosters that end, though the actors that control the guns (i.e. government) will use all of their wiles to hold onto their racket.

Yes, the 1700s and 1800s had their booms and busts, but the 200 years leading up to the first world war saw the greatest improvement in living standards that the world has ever seen. The industrial revolution and development of modern communications, medicine and transportation happened on the gold standard, with non-existent or non-interventionist central banks and governments that allowed busts to clear away mal-investments and bad debts so that the market could guide capital and labor into productive hands.

Nobody back then believed that consumption and “stimulous” could generate anything but debt and waste. Since the ruinous economic policies of the 20th century took hold, we have been squandering our wealth and merely coasting on technological improvements, which government only impedes in a thousand ways.