The Markets……Being  Right  or  Wrong


Most of us no doubt would rather be right than wrong in terms of market direction.

What one learns over a long period of time (maybe the time period needed is half of the 72 year Long Macro Economic cycle) is that being Right for a long period of time doesn’t make you smarter, just wealthier.

By the same token, being Wrong for a long period of time doesn’t make you dumber, just poorer.  In fact it is generally acknowledged that you learn more from your bad periods than your good periods.

Reality tends to show that the real reason investors/traders make money in markets is that their psychological makeup is in sync with the direction of the market.  It doesn’t hurt most investors long term results in the fact that they are generally long term optimistic. Since the Federal Reserve was created, its goal has been to provide a base of consistent inflation thus complementing the predominant investor makeup.

Contrarian viewpoints, especially contrary to Federal Reserve Policy, are a long and hard road.  Over short periods of time they can be highly profitable however.

Since I am writing this, I will take the right to talk my own story for the moment and then move into more important Macro Analysis efforts.  From June 2002 through June 2009 my track record showed a performance of a little over 300 % at a time that the S&P actually declined.  Even though I was old enough to know better, I felt pretty smart.

Now for the period of June 2009 to date I am down around 80 percent.  Again, I should know better, but I feel pretty dumb.  (leverage of 2 to 4:1 was used in both periods).

As a daily observer of the market I have become increasingly aware that the prominent Guru’s who have played the past 5 years well are feeling pretty smart.  Even Cramer, who has written a book called “Getting Back to Even” has gotten rather obnoxious lately, even saying back a couple of months ago (September 25) that a small group of techy stocks are what you really need to be focusing your investments.  Those stocks, NFLX, FB,TWTR, GPRO, TSLA, are in total down 20 percent (with no leverage) as of today.

But so much for the little picture, let’s try to focus on Macro Relationships and how they might impact your investing going forward.

If we go back and take the long view starting when Paul Volcker finished cleaning up the excesses in the economy in the early 1980s, we have seen over a 30 year rally in Bond prices, with some assists from the FED, but even so a 30 year rally that has yet to culminate.  During that same time we have essentially seen a decline in the dollar, with the exception of the 6 year rally from 1995 to 2001. No doubt with Globalization, King Dollar has become less of a factor.

Now I am going to switch focus on GOLD, not in terms of where its price is going, but what the story is that it has been telling.  Gold prices made a big Macro top in the period of August 2011 through October 2012. In the following discussion I will refer to this 14 month period as the MARKER PERIOD.  I am using Gold because it is the one outside barometer with which supply and demand (outside of the Gold Bugs) has little effect and even more importantly it is a marker that the FED has little influence.  No doubt the Treasury does buy and sell a little Gold, but it is not a factor in our world today.

At this point in the discussion, let’s look at the fact that Gold prices finished topped out right after the FED’s QE3 started. Why did Gold not embrace QE3 and rally in anticipation of impending inflation? I would suggest that the Gold market, being a Global market, was not impressed with the FED’s action relative to the size of the fundamental structural problems that existed and which no major government was or is now willing to tackle in a straight forward way, whether in the US, Europe, Japan, or China.  At the moment one country, Germany, is willing to take that stand on forcing structural changes.

Here are the facts that stand out for me as to the effect of the FED’s QE3.

  • In October 2014 just as QE3 was ending T-bond prices took out the highs established during the MARKER PERIOD. That was a big black flag to us. Interest rates in a stable economy would start rising as stimulus ended.
  • Gold basically topped out between the end of QE2 and start of QE3. This reaction may have been taken by the FED as a sign that their reflation policy did not have a lot of legs.
  • Looking at prices of Gold, T-Bonds, Dollar, and the S&P since the start of QE3 in September 2012 we see the following response to the reflation effort:
  1. Gold is down 29 percent.
  2. T-Bonds are up 4 percent. (decreasing interest rates)
  3. Dollar is up 9 percent.
  4. S&P is up 45 percent.
  • Bottom line, the primary impact of reflation has been US paper assets. At the same time reflation around the world is not catching hold.  With one asset group holding all the marbles lies the vulnerability of the investor.

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