(Editor's note: Market Sniper has put together a scintillating read here. I said earlier today I was short gold. My use of GDX and GLD are as very short-term trading vehicles (measured between hours and a few days). I did, as a side note, take handsome profits in GDX and 90% of my GLD shorts today; I am short just 1000 GLD right now, with a much looser stop, and I closed my DZZ trade as well. My point in saying all this is to not be confused by my own use of precious metals ETFs as trading instruments and the "broad view" that Market Sniper is offering below. - - Tim)
I wish to thank our gracious host, TK, for allowing us to post our trades and thoughts on this forum. Though only here on the Slope for a short time, the range of ideas, concepts and abilities demonstrated by individuals in this community has never ceased to amaze. What I propose do do with this post is to present one man's world view that has lead me to an inescapable "bearish" conclusion.
Money
The very basis of the case, I believe, goes to the question of "money": what it is and how it is created. We all use "money" but few understand it.
Money is by its very definition value in exchange. All economic transactions are exchanges; trades, if you will. If employed by another, you trade your time and skills for his "money." That "money" is then used to exchange or trade for goods and services that you want and/or need. Money as used today, throughout the planet, is a debt instrument. It represents debt out of which it is created.
I used to be a real estate appraiser and, from time to time, I would ask the listing broker on a house sale where the broker thought the money came from for the real estate loan in the transaction. Can't remember one who had the correct answer. Correct answer: until the loan was funded, the "money" did not exist in the known universe. The borrower created it when he signed the loan documents. He forged his own chains of debt enslavement. For value in exchange, it is always best for that value to remain constant or as close to constant as possible. How can a man know the value of his own labor if what he is paid for that labor is subject to constant change? How can you have equitable contract law under such conditions? Indeed, how can you maintain an equitable society under such conditions? You cannot.
What can be used for this "constant" value in exchange? Many things have been tried since the dawn of man. Only one thing has stood the test of time: gold. There are many reasons for that which would be a post just in itself. Don't argue with history, learn from it. The very fundamental basis of the system of money we now use is based upon a fundamental fraud. The fraud of central bank (usually private) monetized debt fractional banking money creation or the fiat money (money by government decree) system. What we use as money does not come from wealth or represent wealth. It comes from debt and represents debt. A system that historically has failed without exception.
Previously, such fiat failure was limited to single countries. This time it is different. The fiat system is worldwide. We are in uncharted territory historically in that regard. Fiat failure (currency collapse) leads to riots, rebellions, revolutions, civil wars, governmental terror and all manner of civil mayhem, historically, without exception. Even here in the USA, the collapse of the Continental Dollar lead to rebellion and mayhem but it also lead the the US Constitution. What we see in history is the following: commodity based money system devolves into a fiat money system. Fiat money system collapses and there is a return to a commodity based money system. The pendulum of history swings back and forth.
Cycles
I believe we live at a critical time of cycle confluence. James Dale Davidson and Lord William Rees-Mogg have written a book that I highly recommend you read, The Great Reckoning. They make the case for a 500 year cycle and hypothesized the possible existence of a 2,000 year cycle but there, as yet, is no data to substantiate a 2,000 year cycle. The case for the 500 year cycle is compelling. Going backwards in time: Early 1500's, the formation of the first central bank, the Bank of England; 1066, the Battle of Hastings which forever altered the face of the Western world; 410 AD, the sack of Rome and the year zero which saw the rise of Christianity which also changed the face of the Western world. The next shortest cycle theory available is the Kondratiev Long Wave (or K Wave) Theory. It does have its problems but can be of some benefit. Here is one view of the K waves in action:
| Period |
Date |
Innovation |
Saturation point |
| First Industrial Revolution |
Circa 1800 – 1850 |
Cotton based technology; spinning weaving, etc. |
1810 –end of Napoleonic Wars |
| Second Industrial Revolution |
Circa 1850 – 1900 |
Age of steam; railways, shipping, heavy industry, iron and steel, etc. |
1870s |
| Third Industrial revolution |
1908 – 1947 |
Petrochemicals, internal combustion engine, electrification. |
Inter-war slump 1920s and 30s |
| Post-war Boom |
1947 – 1991 |
Consumer goods, electronics, etc. |
1973 |
| Contemporary Era |
1991 – present |
Internet, wireless technology, biotechnology, etc. |
2010s |
As we drill down, the next shortest cycle period that I follow was developed by Martin Armstrong. The 8.6 year cycle. Armstrong started his work with the Kondratiev Cycle and applied Pi to it. His work can be found on the net in pdf format and is worth a good look. Mr. Armstrong's legal quagmire is convoluted and I will not address that here. Not withstanding, his work has merit. Con man? Quack? Genius? That I leave up to you. I personally consider him the greatest living cycle theorist. Here is Armstrong's cycle:
Armstrong's work appears to coincide with Elliot Wave Theory which is calling for a climatic wave down in the super cycle. Perhaps Armstrong's work points to a time frame at the bottom of that wave, mid-year 2011. For a very recent look at Martin Armstrong, there is an article in the October 12, 2009 issue of The New Yorker magazine.
Where We Are Now?
In a dictatorship, the dictator does not care what you think, just what you do (how you act). In the system we have, the ruling elites do not care what you do (there is police function to deal with that), just what you think.
To this end, there is a very well oiled perception manipulation machine in place. It is there to mold what you think.
Prime examples: gold is quoted in the fiat of your choice and appears to rise and fall in value. It does not. The fluctuations you see is actually the perceived value of fiat fluctuating. Gold is a constant measure of wealth and purchasing power. To see the reality, flip it around. Think of it this way: quote fiat in gold. Along the same line, the manipulation machine denigrates non-believers in the fiat fairyland and those who do not believe in modern wizards and alchemists (central bankers) as "gold bugs" and gold as "a barbaric relic." Words have meaning and the negative connotations are obvious.
The manipulation machine goes much further and "spins" economic data, some of which is made up nearly out of whole cloth. Unemployment statistics being a prime example. As Dear Old Dad Used To Say..figures lie and liars figure! I liken what we are seeing and have seen in the very recent past to a force 5 hurricane. The leading edge has now passed through. We are now in the eye of that economic hurricane. In the eye, you look straight up and you see clear skies, your perception manipulated by that machine. What is coming from the trailing edge of that hurricane appears to be even more powerful than what has already passed.
The collapse of many of the toxic weapons of mass financial destruction, the hedge derivative swaps, that triggered recent events are, in notational value, even LARGER than before. We have cycle confluence and a competitive devaluation race to zero in fiat worldwide. The conclusions reached seem fairly obvious to me. What could happen to change my perception? At this point only one thing. A HUGE breakthrough in energy technology. The modern economy is petroleum-based and not sustainable. A relatively inexpensive and plentiful alternative energy source, perhaps a MAJOR breakthrough in fusion technology, could do the trick but that maybe decades away and we are running out of time. Current alternatives are NOT viable as the resources required to allow a transformation away from oil as the energy source are also limited. See Dr. Stephen Leeb's Game Over for an in depth treatment of the subject. We are, in my opinion, about to face a world with a marked decrease in living standards planet wide.
What To Do Now?
Most here on Slope trade with short term time horizons, myself included. As such, our long term bias MUST be left a the door to our trading room.
Longer-term I see that the market is no longer pricing in outlier probabilities and outcomes. As traders, we deal with an unknowable future by thinking in probabilities. Probabilities are distributed on a bell curve with the most probable outcomes centered in the middle of the curve and the least probable outcomes at the ends of the curve (fat tails, outliers or Black Swan probabilities).
We have recently witnessed improbable outcomes come to pass at an increased rate of speed through time. What used to be decades between outliers have become a few years or even months as the bell curve continues to shift to the right. Now fat tail outcomes are almost too horrendous to contemplate. This has created, in my option, a mispriced market. Which way it goes, deflation or hyper inflation cannot be known and a great deal of debate between better minds than I are engaged in that issue.
Play both possible scenarios. Long term, deep out of the money calls and puts in the vehicle of your choice. Could be BOTH trades end up making money.....lots of money. More long term, exchange your depreciating fiat for REAL money every chance you get. Not as a "trade" but as a store of wealth and purchasing power. Get out of debt by any possible means. Those with debt are getting wiped out. Time to get small. If your already small, get smaller. Even longer term? You might want to brush up on your gardening and farming skills. Buy farmland in resource rich countries that will most likely weather the coming storm better than others. Canada and Australia would be prime targets for such an acquisition.
Conclusion
A wise man hedges his downside risks. Hope for the best but prepare for the absolute worst. No surprises then. Nothing would make me happier than to be proven absolutely wrong in my perception. The weight of history tells me that I am not likely to become "happy" however. Please protect yourselves and your families as best you can. It could be that those without gold will not eat. Those without farm-able land may also have trouble with basic survival. What you do NOT want to happen is to go to bed one night and wake up in the morning to a world that has shifted on its axis while you were asleep. A world you will not recognize.
The CRE crunch continues claiming victims, with the latest being the Four Seasons Hotel in New York. And while Stuyvesant Town is some dinky little project somewhere on the East side of New York (or so prevailing thought runs), which few care if it goes belly up or not, the fat cats that frequent the opulent hotel on 58th street next to the brothel, pardon, gentlemen's club, which is Tao in all but name, may be a little more concerned about this one. In addition to the Four Seasons, three other luxury hotels, which back a loan sent to a special servicer 10 days ago include the Four Seasons Biltmore Resort in Montecito, the ritzy Las Ventanas in Cabo, the destination of many a banker closing dinner, and the San Ysidro Ranch in Montecito. 
