Tuesday, September 30, 2008

Waves and Mass Social Mood

Robert Prechter is the promoter of R.N. Elliott’s “Elliott Wave Theory”. It’s too technical to explain briefly, but essentially he believes that markets progress in waves and are directly tied to human psychology and the brain’s limbic system. His books, “At The Crest of The Tidal Wave” and “Conquer The Crash” are very insightful. His main thesis is NOT technical at all. He believes that “mass social mood” fluctuates in waves. Through history, herding human mammals go through cyclical optimistic and pessimistic mass mood shifts. When we’re happy and greedy, we drive financial markets upward and we’re predominantly peaceful. When we’re angry and fearful (now he says), we crash financial markets and start wars. He believes that financial markets are merely BAROMETERS of mass social mood. He believes that happy people buy stocks and the price rises versus believing that rising stocks make people happy. He’s coined the term “socionomics” for this psychological phenomenom.

His two websites are:

Some excerpts from his books:
"Only a true understanding of the nature of people's behavior as it relates to markets will allow you to reason through emotionally charged situations and deal with them properly"
Robert Prechter, At The Crest of The Tidal Wave, 1995, p. 161

"Even at this early date, we might speculate on just a few developments that appear likely. For instance, I would be inclined to expect that the Middle East and Latin America will destabilize;....wars will erupt in Asia and the Middle East....foreigners will commit terrorist acts on U.S. soil"
Robert Prechter, At The Crest of The Tidal Wave, 1995, p. 435

"So what is the right course of action? The Elliott Wave Theorist cautioned in early 1986,'Once the craze really takes hold, just be aware of what is going on, and make sure you are not caught up in the amorphous feelings of confidence, complacency and love at the ultimate top.' The reader of this book faces a difficult task, one that will put him in such an extreme minority that he will feel isolated and unsupported. By selling all of your stocks, you will take the maverick road, and you will take it alone. I have no doubt that by the time this bull market is ending, our call for a huge crash and depression will be laughed off the street. Do not lose your perspective when the time comes. It will take great courage to make money during this bull market. However, it will take greater courage to get out near the top, because that's when the world will call you a damn fool for selling."
Robert Prechter, At The Crest of The Tidal Wave, 1995, p. 217

"Collective man will enjoy the same successes and repeat the same mistakes over and over, with minor differences in specifics, throughout eternity, although each time from a higher level of advancement. Mistakes are repeated not because people fail to learn from history, as many contend, but precisely because they do learn from history, from recent history, their own experience."
Robert Prechter, At The Crest of The Tidal Wave, 1995, p. 20

"It forces the analyst to look at the big picture. A proper long term perspective elevates the wave analyst above the cacophony of daily news. It provides the opportunity to make sense of the great trend changes in markets and dramatic social events that accompany them."
Robert Prechter, At The Crest of The Tidal Wave, 1995, p. 12

Prechter’s outlook for many many years has been massive deflation as in the Dow Jones Industrial Average equaling 700. Yikes! His theory is that everything crashes: stocks, commodities, and the economy. Associated with that is major strife across the world including major military conflict. Not the option we hope for. He was “dead on” with 9/11 and Fannie/Freddie.

The Storm Series

I stumbled upon http://www.financialsense.com/ back in 1999 and was extremely impressed with Jim Puplava’s diverse content and his weekly radio show. I’ve listened to it since then on a weekly basis. His forecasts of the future have been amazingly accurate. In 2000-01, he wrote a series of papers entitled “The Storm Series”. I found that he had significant data supporting his forecasts and most of all, it made sense. I’ll recommend reading it again: http://www.financialsense.com/series2/perspectives2.html

Puplava called $140/barrel oil and $1000/ounce gold. In February this year he ranted every week on his radio show about “naked short selling”, “credit default swaps”, and “derivatives”. I was originally unfamiliar with these terms and was amazed last week when they became front page news.

Life At An Inflection Point

I believe that 8 years into this “change in trend”, the masses are finally mentally and emotionally engaged in the situation. Even politicians other than Ron Paul are talking about the subject!

“First they ignore you, then they laugh at you, then they fight you, then you win”
Mahatma Ghandi

“Didn’t anyone know that this was coming?” Glenn Beck 9-24-08

Many intelligent people have been forecasting these exact financial events for a long long time. This shouldn’t have come as a surprise to anyone. The media reports on what “has occurred” and they spend little time presenting the perspectives of intelligent people with regards to what they think “might be coming”. The internet provides a source of extensive content that we all should spend time sorting through and sharing. My personal interest has never really been the financial markets themselves, but more importantly the associated events and changes that will greatly impact our lives, our children’s lives, and our grandchildren’s lives. As I’ve stated before, my 9/11 impact was “is our generation prepared for the challenges ahead because we’ve had it so good for our entire adult lifetime”. We’ve been lulled to sleep by 26 years of comfort and good times. I believe that it’s very important to read and to locate material from a diverse range of sources. CNN probably isn’t the best place. My wife told me last week to “stop reading those books”, but I believe that one should have a perspective on all possible outcomes and have a plan for each. Reading history might be the best place to start because we always seem doomed to repeat it. I’m currently reading “Tradegy and Hope” a documentation of world history from 1880 to WWII.

“George, this one’s a pickle. It’s a pickle. Potter’s paying ten cents on the dollar.” Uncle Billy

Cycles of Regulation

During the expansion phase of the growth cycle, regulation always laxes. When the markets implode, the regulators come running in (e.g. Sarbanes-Oxley). Guess where we are now? Enron was not an isolated incident involving unethical management. Neither was Tyco, Worldcom, AIG, or Bear Stearns. They are all part of an overall cycle of laxed regulations and euphoric credit-induced expansion. Many participated in the process. Go research the accounting changes over the past 20 years. Get ready for the IRS audits.

The Oracle From Omaha

Who couldn’t like Warren Buffet. His track record is astonishing on all fronts and he’s so impressively humble. When you listen to an interview his perspective seems like simple common sense. His approach is basically “always buy value”. Last week, he might have illustrated that better than ever….$10 billion put to work buying the last standing financial institution for $.10 on the dollar. The most interesting investment of late in my mind is his purchase in the railroads. The what??? Yes, railroads. Warren might see something coming that everyone is clueless too….a transportation shift back to the rail. Could the “3000 mile salad” take to the rails? Last night I saw a CSX commercial with the tag line “How Tomorrow Moves”. http://money.cnn.com/2008/03/07/pf/sivy_apr.moneymag/index.htm?section=money_topstories

Sleep Easy, Those in Charge Know What They're Doing

"No one knows what to do. We are in new territory here. This is a different game. We're not here playing soccer, basketball or football, this is a new game and we're going to have to figure out how to do it." Senate Majority Leader Harry Reid

“This action does entail risk.” George W. Bush
I feel better now

Jan-2008: Democratic Rep. Marcy Kaptur of Ohio launched into a lengthy question to Ben Bernanke during the Fed chairman’s House testimony about community banks, securitization of home loans and investment banks’ role in the crisis, ending with this point: “Seeing as how you were the former CEO Of Goldman Sachs…”She was quickly stopped by Mr. Bernanke and the laughter in the room. “I’ve got the wrong firm?” she asked, before being corrected that she was thinking of Treasury Secretary Henry Paulson. “Oh, OK. Where were you, sir?” Said Mr. Bernanke: “I was the CEO of the Princeton Economics Department.”
She’s one that will be casting another vote on Thursday.

“Economics is something I don’t really understand.” John McCain

“This all started with the subprime mortgage crisis.” Barack Obama

It started in 1982 with Reagan/Voelker and the Fed’s credit machine. This is a 26 year issue, not a 2 year issue. The system and problem is much greater than the mortgage market.

Join The Revolution

You won’t see too many politicians with this level of knowledge of the financial system. He was mocked and marginalized, but now many can go back and watch the interviews and realize that we actually had one politician in the game who actually was informed and wasn’t afraid to speak the truth. It’s not too late to write him in on your ballot. So refreshing to see honesty, intelligence, and sincerity all wrapped in one.

The Great Fallacies

  1. The government won’t let it happen
  2. This time it’s different
  3. It’s now a world economy
  4. The internet changed everything
  5. The world is flat (only if we want it to be)

The Rising Tide

The rise in credit drove the rise in the financial markets, home sizes, debt levels, confidence, waistlines, car sizes, and childhood obesity. It’s all intertwined and some might say it was all artificially created. The “supersize me” era has ended. History will show that 2000 was the beginning of the end of this massive credit orgy. While everyone is blaming the mortgage market, I believe that this situation or cycle dates back to 1982 with Reagan/Voelker. That’s when the credit and greenback printing presses started warming up. Bush Sr./Greenspan participated. Clinton/Greenspan accelerated to a higher level and Dubyah/Bernanke continued the process. ALL were participants. Both political parties. To hear Greenspan interviewed last week and state that he knew this was coming is outrageous. He was the mastermind behind the majority of the credit cycle. The Fed continues to destroy the U.S. dollar. At some point, the printing presses will run out. Two years ago the Fed quit reporting M3 figures. They said that it was too expensive to track!!! Zimbabwe did the same thing with their inflation rate. Don’t worry, we got ya covered!

The Creature From Jekyll Island

The Creature From Jekyll Island
Probably one of the best books documenting our financial system and the history behind it.

If you don’t want to read the book, check out the author in this multi-video presentation: http://www.youtube.com/watch?v=F3TAh1gy6rc

*Note that there are 7 more parts/videos
The 6th segment addresses BAILOUTS.

The $700 Billion Bailout

The vote failed. I’m shocked, but it will pass on Thursday because “fear” has now replaced “greed” as the primary emotion consuming the world. The Plunge Protection Team has put fear in the minds of all. In addition, too many politicians are up for re-election. Placing a wrong vote is perceived to be better than casting no vote. Get ready for a temporary stock surge and gold plunge. It was stated this weekend that funding will be phased in and there will be congressional oversight….can we say IRAQ! This is so wrong. Financial markets, when left alone, behave in Darwinian fashion. Irrational exuberance will always correct itself. Poorly managed and unethical companies should be left to fail. Poor management should be removed without golden parachutes. The bailout won’t remove the correction it will only make it worse and last longer. Everyone is pointing the finger, but we ALL participated. Whether it was through the Dotcom orgy, cheap and creative mortgages, credit cards, or 0% financing. It’s a system and the consumer is one part of the equation. John McCain believes that firing the SEC Chairman solves the problem. It’s much larger than that.

Weekend at Pelosi's

“The Party is Over” Nancy Pelosi, 9-29-08

Euphoric credit orgy: 26 years
Time taken to come up with a plan: one weekend
Time taken to review the plan prior to a vote: 4 days

Where were the politicians during Nancy’s party?? head under the keg tap!

“This is an economic Pearl Harbor.” Warren Buffett 9-23-08

Economics of a 12 Year Old

Last Sunday morning I was watching C-Span where they were showing snippets of the many events of last week. My daughter walked in the room and we had this great discussion:
Daughter: Dad, can’t the president get as much money as he wants.
Dad: sort of
Daughter: doesn’t he have his own ATM machine?
Dad: sort of; he has a friend, Ben Bernanke, who does
Daughter: who is he
Dad: he’s the Federal Reserve Chairman
Daughter: he really has his own ATM?
Dad: sort of
Daughter: is he a good guy?
Dad: today he’s probably best described as the “fall guy”
Daughter: what’s a fall guy?
Dad: he’s someone who takes the blame for something he really didn’t do
Daughter: can we turn on the Disney Channel?
Dad: you bet!

Weekend at Bernie-anke's

Remember the movie “Weekend at Bernies” where Bernie died and his two associates kept him “virtually” alive all weekend for the beach party? The current financial markets sure do feel a lot like Bernie. And how about Fed Chairman Bernanke. He’s holding Greenspan’s bag and trying to figure out what to do. He’s standing at the podium trying to explain Greenspan’s sins. Isn’t it ironic that he’s a student of The Great Depression? The Fed will only lengthen the correction. Don’t try to control Adam Smith’s “invisible hand”.

Sunday, September 28, 2008

I Liked IKE

After being caged up in a “non-electric” world for five days after IKE, I had too much time to think. The result…….another rambling rant. Two weeks ago Wednesday at our 15th backyard, no-electricity BBQ, one neighbor said “have you heard what happen in the markets this week?”. I said “no”. He said “Lehman Brothers failed, Merrill Lynch was acquired, AIG may fail, and the market dropped 400 points!”. I responded “this is the week my mentors have been warning about and I missed it!”. Well, it appears that many more fireworks will be going off for all to watch in the near future.

It’s not all bad news! During the down cycle we’ll turn away from materialism and return to God. We’ll focus more on family and friends versus buying new toys. My IKE experience was that no electricity is a good thing. It was amazing to see how “community” emerges when the power is turned off. It was amazing to see kids playing in the street and building forts with tree limbs. It was amazing to see people working together with chain saws clearing out trees. It was amazing to see everyone getting along. I can’t tell you how many multi-family meals we had in our backyard. Challenging times will bring out the best in most. The human spirit is strong and good.

To close, an excerpt from Kuntler’s “The Long Emergency”:
"And in a way, I have my own thoughts about that because I’m basically a cheerful person, and in my own way I’m also an optimistic person. I’m not really a doomy-gloomy guy. And I would leave you with this thought: that the American people have historically been a generous, brave, forward looking, resourceful group, and we’ve shown great courage in the face of adversity before. I think we’ve become kind of a somewhat sloppy and complacent people in the last 25 years or so, but it doesn’t mean we can’t recover a lot of those virtues that are really part of the fiber of our national character. It’s still there and can still be recovered, and I think we’re going to be able to do that. It’s not going to be true for every place and everyone, but I think that’s going to help us a lot. So I have a lot of faith just in our national character, and the better angels of our nature, as Abraham Lincoln said.“