Market Reflections

Thoughts, ideas and musings on current state and evolution of financial markets
  • .: Banyantree for small investors & traders :.

    Like anything, living and evolving, markets are always in perpetual change. Whoever is looking for all the “right answers” in the past will be wrong for the future. Change with the markets and you will prosper.

    “Bull markets are born in on pessimism, grow on skepticism, mature on optimism and die on euphoria.” – Sir John Templeton (Templeton Funds founder and philanthropist)
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    Consistently Profitable Trading 2009 and Beyond

    Posted By admin on March 1, 2009

    High volatility and lower volumes continue from 2008. New president revealed his first budget with more than double deficits from previous years. He is promising to cut the deficit to half by the end of his term based on $1 – $1.6 Trillion (depending on interpretation) new taxes and 3.2% growth 2010, over 4% growth 2011 and beyond. The growth figures are supposedly derived from the enormous stimulus spending authorized few weeks ago. Whoever looked closer into this spending bill realized that the only real stimulus there is the $400 per taxpayer per year less income taxes. With few more items having indirect impact on the growth of economy only about half of the package will be spent in 2009 – 2010 (see http://www.rgemonitor.com/economonitor-monitor/255667/us_fiscal_stimulus_package_little_bang_for_buck for thorough analysis). Using my Hill-Billy friend’s “juicy” vocabulary unless he is “dumber than dog shit” (DTDS) he knows that there isn’t a “snowballs chance in hell” $400 per taxpayer will turn this economy around in just 9 months. Of course, he is a lawyer, when caught, he can always get away with “… if I promised I don’t remember …” On the markets you see the politicians promising quick fixes, bright and easy life in near future and markets oscillating between “wishing – hoping” euphoria and desperation. This is one possible explanation for high volatility and lower volume. While the “storm” started in the US it has engulfed to whole world by now. For the US to start growing again the whole world must be at least on the road to recovery. By some respectable economists it is likely to take 10 years or longer http://www.theglobeandmail.com/servlet/story/RTGAM.20090223.wferguson0223/BNStory/crashandrecovery/home?pageRequested=all&print=true

    How to stay consistently profitable these years is for us, the traders, to figure out. One thing is clear: the markets are different now from the recent past. Successful strategies that worked then no longer work and that is going to last for some time. I see two opposite approaches: very short term trades (minutes) or longer term trades (weeks and months). The first takes lots of clicking, very good focus and eye-finger coordination. I wish now I had practiced this on video games. The second approach, is swing trading. It takes extreme risk tolerance to ignore the politicians and prominent bank analysts with hidden agenda
    . Ignore rapid changes in market mood as noise, count only on fundamentals and scientific analysis methods
    . Everyone has to decide which better fits his/her trading style, account size, need for consistent profits and time for trading activity.

    For the scalping approach the rapid changes in market mood are the profit opportunities. One has to detect early on when this is happening and attempt to ride with it until the next mood change. Fortunately exchanges and advanced brokers offer much more information for early detection of a market move than they did years ago. This data, most traders have largely ignored until now, tells you when a next move is in making and when it runs out of steam. Whether you see that from bid/ask sizes on different levels, bid/ask volumes of last bar/candle or time intervals between trades is again very personal. The conditions dictate a very rapid decision making with no time to devise an individual trading plan for each trade. One has to go with the one prepared ahead of time. Unfortunately, a large problem with scalping is implementation for a larger position. Hence it may not be appropriate if you like to trade tens and hundreds of contracts on shallower markets. If I see interest, I will tell how I do it. That may not fit your mold, but may give inspiration for developing your method.

    For swing trading approach short term opportunities are a hindrance. The noise is noticeably larger than it used to be. That makes the great chart analysis tools of the past much more complex to use. No surprise, the Refined Elliott Trader greatness is based on statistics extracted from millions of charts of the past where the noise level was lower. The tool still works fine, but sorting out the most likely scenario for the future market move is no longer a simple matter. It takes significant background economic knowledge and understanding of correlation between markets to arrive at the most likely scenario from tens produced by the tool. Luckily, with this approach, a trader will have time to devise the best trading plan for each individual trade.

    For the country and politicians the promised change has not arrived yet. Washington operates in “politics as usual” mode. For the markets and traders, the change is here. The change opens new opportunities and eliminates some from the past. There is no reason for desperation, we just have to change with the markets to prosper.

    Market Change Affects Profits

    Posted By admin on February 15, 2009

    From trading literature we have learned that winning traders are self-disciplined. They control their feelings, and execute their trading strategy with ease and perfection. The disciplined trader is decisive. He or she acts on trading strategy signals without wavering and second guessing. Of course, a great trading strategy must produce its entry and exit signals without any ambiguity for the discipline to pay off in form of profits. All the above is common knowledge, intuitively understandable and accepted. Yet, here’s where the contradiction is. The very same unwavering trader’s discipline has turned many substantial trading fortunes into even greater losses. How come?

    Discipline and lack of ambiguity in signals means that the trader will always react same way based on the market behavior and/or whatever the strategy’s signals are based on. As the market character changes the same basis for entry and exit signals may no longer be relevant. An unwavering trader will no longer make money or in worse case, will be forced to stop after all the profits and more are lost.

    Maintaining an equity curve is a well known way to find out whether you keep winning or are losing instead. Yet, with equity curve the decision to continue or stop trading a strategy is rarely as clear-cut as described in the books. For example, an equity curve of a simple break-out strategy that performed great for some time, then just ok for about a year and has been losing big time recent months. At which point would you have decided to pull the plug?

    market-change-affects-profits1

    Most of the time the decision to continue with a strategy or to abandon it is much more puzzling. Look at the equity curve of the same break-out strategy on a different market and think would you still be trading it? If not then what time did you decide to quit and why?

    market-change-affects-profits2

    To make things worse exactly the opposite happens as well – a strategy that did not work on a market at all, all of a sudden will do just great based on the equity curve. For example, different break-out strategy equity curve.

    market-change-affects-profits3

    Perhaps being a self-disciplined trader that quits only after all the money is gone is no longer the best idea even though it was in the past. On today’s rapidly changing markets knowing exactly what characteristics a strategy is sensitive to, closely monitoring any change of these aspects and evaluating impact to the strategy works better than simply “trying it out” with your money on line. Many break-out strategies are very sensitive to the volume. They work when the volume is just right and stop working when it is too low or too high. Year-to-year (2007/2008) volume decline of most CME Group market volumes has been profound. An average 49% decline across the board reaching 60% decline and more on financial markets and equity indexes may render some great strategies incapacitated … or the opposite — make them worth trading. http://www.cmegroup.com/wrappedpages/web_monthly_report/Web_Volume_Report_CMEG.pdf
    This is in contrast to most NYMEX markets where the volume has steadily grown http://www.nymex.com/md_annual_volume.aspx

    Self-discipline is good but in today’s fast changing complex market conditions not enough for a trader to be profitable. Happy trading but watch out for “common knowledge”!

    Market Hopes for Change

    Posted By admin on February 9, 2009

    Friday, Feb 6 someone asked me “what is happening: we had a worst employment report for years and market is shooting up like there is no tomorrow?”
    A trader makes money when the market moves and the unexpected economic reports do move the markets. Trading events has been a popular strategy among traders for long time. This is because stressed market “reasoning” for a move does not follow rational logic. Whoever has been trading for a while has probably experienced the “wishing, praying and hoping” phase when the market went against their position and fear of losing big time made rational decisions rare. Most traders apparently are under stress, unsure about the future. That makes up a stressed market. Praying, wishing and hoping that a bad employment report will make Washington to come up with a real stimulus package for the economy rather than for politicians is irrational. It is equivalent to believing in Easter Bunny and Santa Claus.

    We will see more of this in coming months and years as the economic realities sink in. People will wake up to see that a person chanting, “Hope, Change” is not a magician. Government and politicians cannot change anything for better because they themselves are hopelessly lost. While lost, they will make irrational decisions and lose lots of our money. The actual change will come from us, not from them, no matter what they promise. It will take some time because first we have to figure out what to change and how to make things better, rather than just change things around using old methods to try to solve new problems.

    Meanwhile, trade market’s reaction to an event rather than an event and have a plan when and how to close your position before you enter the trade in all possible scenarios that can unfold. It is much safer that way and even a big rally after very bad news will not get you.

    Market Manipulation with “Advisories” Continues

    Posted By admin on February 2, 2009

    From recent news Jan 21, 2009
    India’s gold imports dipped 47% to 402 tonnes in 2008, reported the PTI quoting a top economist of National Commodities Exchange of India or NCDEX, who cited high prices as cause for the decline. According to the economist, Manasee Gokhale, December 2008 imports stood only at 3 tonnes compared to 16 tonnes in December 2007.
    Gokhale said the economic crisis hit the demand for luxury goods, resulting in drop in demand for jewelery as well. The economist added that buying remained dull and prices rose up on global cues.

    What does it means to the demand of this commodity? According to World Gold Council (WGC) (http://www.gold.org) jewelery consistently accounts for around three-quarters of gold demand and India is the largest consumer in volume terms, accounting for 25% of demand in 2007 (about 800 tonnes) because of its importance in Indian marriage ceremony. The USA uses about half of that or 12.5% of world demand. WGC also wrote in Q3 2008 Gold Demand Trends that “…US and UK were down by 9% and 5% respectively (declines of more than 25% in tonnage terms). … “ and “ … industrial and dental demand declined 11%… “
    Same document states “ … identifiable investment, up 137.5 tonnes (56%) relative to year-earlier levels. …”
    India So, about 400 tonnes less to India, about 100 tonnes less to USA and 137 tonnes more for investment. WGC correctly noted that demand for jewelery was down most in countries hardest hit by economic downturn Q3 2008.

    By now China, Europe, India, Russia, Japan, … are all in deep recession. Yet, Jan 21, 2009 Bloomberg reports: “Gold may average higher for each of the next three years and climb to a record driven by increased demand and a declining dollar as governments ramp up spending to battle the global recession, according to Morgan Stanley.

    “Devalued currencies, growing global incomes and a renewed appreciation for gold should keep prices higher,” Morgan Stanley’s New York-based analyst Hussein Allidina wrote.” (http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aZhKY54ePh18)

    Do you really believe that a prominent Wall Street bank analyst of gold in New York does not know what is going on in the world? That Mr. Hussein Allidina was unaware EU unemployment reaching 8% (higher than ours), EU bank and industry “bail-out” about as pricey as ours. China’s “stimulus package” isn’t any smaller than ours either and it is closing factories anyway because its export demand has vanished? Apparently, Mr Allidina knew that the battle with recession is global. But he did not know that dollar has been appreciating, rather than declining like he writes.

    More likely Morgan Stanley has a different reason for promoting investment of gold at this time. There is nothing wrong in “riding with big guys” as long as one is ready to jump off quickly. Lessons from 2008 should have taught that investment demand for any commodity (oil, gold …) is artificial. (http://marketreflections.banyantree.us/?p=18) Once the bubble bursts Morgan Stanley and others will have again many billions to write down. Make sure they will not lose yours.

    What Drives the Market – Supply/Demand, Speculators … or sometimes the Government?

    Posted By admin on January 26, 2009

    Coming to power Ms. Pelosi promised to take care of the high gasoline prices. By May 2008 she practically doubled them! Facing re-election in few months Ms Pelosi and her compadres in Congress started feverously holding hearings with variety of experts from the industry and around it.

    A host of different theories emerged to explain the gasoline prices. The supply demand balance as a reason was strongly defended by the Wall Street bankers. For example, Lawrence Eagles of J.P. Morgan when asked what role excessive speculation played in rising oil prices, answered little to none. “We believe that high energy prices are fundamentally a result of supply and demand,” he said in his testimony. Same position was argued by Mr. Schumer – senator from New York and the voice of Wall Street on Capitol Hill.

    For the reference the chart below is compiled from the data published by Energy Information Administration Weekly Petroleum Status Reports. The left scale is for US monthly average retail gasoline price and the right scale for sliding four week average demand change from same period a year ago. Perhaps neither Mr. Eagles, nor Mr. Schumer bothered to read the Energy Department’s weekly reports on petroleum market and were unaware of the real situation with demand side. Whatever the reason, they both were wrong … or were they?

    gasolinepricedemand

    As evident even for an untrained eye, the gasoline demand has been trending down since late winter 2007 – more than 12 months at the time of hearings in the Congress.

    Some background of 2008 petro-bubble was discussed in previous week post. The question remaining is, how and why the government let this happen. Speculative position limits enforced by CFTC are designed to prevent big money cornering a market. As opposed to speculators, commercials (companies producing, distributing, storing, refining and consuming oil and oil products) do not have position limits.

    As it turns out, the Congress granted position reporting exemptions to special financial instruments – swaps with 2000 legislation. In this case, oil swaps allow investment banks to trade oil contracts on behalf of their clients without position limits. Large pension funds, hedge and index funds invested substantial amounts of new money on the petroleum markets via swaps through Goldman Sachs, J.P. Morgan, Morgan Stanley and Barclays. By this law they were not categorized as speculators even though these funds didn’t have anything to do with oil business. The investment banks benefited and had economic motivation to “forecast” exponentially higher oil prices enticing more funds to channel more money on this market by creating an artificial demand for oil. Some sources estimated that this speculative “demand” exceeded China’s yearly oil consumption. So … in legal sense Mr. Eagles of J P Morgan and Senator Schumer of New York were correct. Just that the “demand” did not come from actual consumers of oil products — gasoline, but from speculative entities.

    With the facts on the table, who is to blame for the $4.00+ gasoline prices? Exxon, BP, Shell, Chevron, OPEC, the pension funds, hedge funds, investment banks … or the government in lieu of the Congress? Our laws are in public domain. Everyone can check out on their own who sponsored and who voted for this legislation. Whoever did not enjoy their trips to the gas station at that time may want to consider calling the elected representative they voted in office and ask pointed questions about his/her motivation?

    Hearings in Congress resulted in threats from the lawmakers to tighten the regulation, publicity around privately traded oil swaps and scrutiny of CFTC enforcement activity. While the threats have remained only threats so far, CFTC discovered in July few large participants in oil market that were incorrectly categorized (from CTFC news bulletin late July 2008). CFTC revised all past Commitment of Traders reports to correct the problem. Institutional investor’s got scared and liquidated their positions. By some accounts, from mid July until the end of November, roughly $70 billion came out of commodities futures markets from these index funds. Suddenly, everyone “re-discovered” the slumping demand issue. Goldman Sachs discontinued advising their clients on strategies to liquidate remaining long positions on petroleum markets early December 2008.

    Who busted the petro-bubble? Government facilitated its emergence and the government action busted it.

    The lesson from here: consistent success in commodity futures trading requires not only supply/demand and technical analysis, strong discipline, prudent risk management, great strategy, but also keen interest and focus on potential changes in regulatory and legal environment applicable to the markets one trades. Sounds too complicated for an individual to handle. Well’ it isn’t, but it does require dedication, focus and time. It is full time job, not easy money. If you are looking for easy money, run for Congress: no responsibility for irresponsible laws, vote for your pay raise no matter how the country is doing.

    Advertisement disguised as forecast or analysis

    Posted By admin on January 19, 2009

    Some time ago I noticed that few weeks before the end of a quarter analysts of prominent equity brokers tend to come up with unexpected downgrades with justifications like “Downgrading Nokia because people are using less cell phones next year”. Retail investors sold Nokia believing that the reputable brokerage with large research staff knows more than they do. In surprising development few weeks into the new quarter same analyst issued an upgrade for the same company. Retail investors bought Nokia.

    I have a hunch why the brokerages did that in environment of very low commissions. Since I can not prove the “why” I’ll leave it up to the reader to connect the dots for him or herself. Nothing illegal though, everyone can voice their opinion and change their mind as frequently as they like. Just don’t be fooled by the “advertisements” with the sole purpose of improving the broker’s business. If you can’t resist then better don’t trade equities they follow. Lost opportunity is always better than lost money.

    In commodity futures markets everything is supposed to be only about supply-demand balance. Let see if that actually held true on an example of last years dramatic swings on crude oil and its derivates markets.

    We have to look these markets combined because crude oil demand is only coming from refiners to produce the real consumables. Among them gasoline, heating oil (diesel fuel), and jet fuel are by far the largest. The data for this little study is from Energy Department weekly publications available to everyone at

    http://www.eia.doe.gov/oil_gas/petroleum/data_publications/weekly_petroleum_status_report/wpsr.html

    The graph shows NYMEX crude oil futures closing price at the last day of each month on left scale. On right scale it shows 4 week average demand change for crude oil derivates relative to the same 4 week period a year ago. Since the absolute consumption is huge (gasoline around 9 million barrels, heating oil/diesel around 4 million) a 1% change is already significant.

    crudeoilsupplydemand1

    I included the data from earlier years because the trend of demand destruction started already late 2006 when oil prices were “only” around 60 (having peaked mid 70 during the summer). The vastly prevalent consumable – gasoline has been smoothly and steadily trending down since Feb 2007. Diesel and Jet fuel demands are choppier because their absolute volumes are lower and diesel/heating oil demand is also affected by weather. Yet, the downward trend is clear even for untrained eye.

    Mid winter 2008 Goldman Sachs (the ultimate authority in commodity market forecasting) top oil analyst advised their clients that oil prices will reach $120 per barrel by May. Their clients include large institutional investors (pension funds, hedge funds, endowments etc.) with trillions of dollars under management. Their clients bought crude oil and the small speculators followed. Indeed, the market reached $120 per barrel by May.

    In May Goldman Sachs came up with next target for oil market — $150 by 4-th of July. Other reputable investment banks and OPEC joined the fray predicting even further targets. The market got to $147 by 4-th of July. That is close enough to the target and Goldman Sachs issued next target — $200 by the end of the year.

    Meanwhile, Saudis, in attempt to tame the market, held a summit with oil consumer nation’s end of June 2008. Departing to the meeting our government top energy expert – Energy Secretary Mr. Bodman said that there is nothing Saudis can do – its all only about supply and demand. Wow, didn’t he read the reports from his own department?

    Do you think the Goldman Sachs vast research staff did not know how to read Energy Department’s weekly reports or they did not know how to plot price and demand number on a graph? Of course, you can not expect a government bureaucrat to perform any analysis not required by law.

    So what is the lesson here? If your pension fund was Goldman Sachs client you may want to ask them how come they did not bother little due diligence on what their adviser was telling them to do. If you trade your own money don’t be fooled by the advertisement (advisories, infomercials, …) from sources that have their hidden agenda no matter how reputable they are. Do your own due diligence or rely on providers you know will not benefit from you. There is nothing wrong for a small speculator “going with the wave” as long as you are aware that you are on “thin ice” and have your emergency exit strategy worked out when the market starts to unravel

    Why the history proved wrong Mr. Bodman, OPEC, Goldman Sachs and few other prominent investment banks that have faded to the history by now? Read next weeks post.

    Can you trust anyone with your money?

    Posted By admin on January 12, 2009

    Guarantees of outrageous returns, fraud and illegal activities flourished last year in the financial services industry. While not a new phenomena, frequency and amounts usually increase when the real returns are tougher to get. Whether the perpetrators are government certified or not does not seem to make any difference. Likewise, makes no difference whether they operate under a name of a reputable, large financial services firm or are completely independent and have made themselves famous in the past.

    Lacking sensation the small-scale wrongdoings are hardly noticed by mainstream financial media. Yet, these affect most people and mostly people who can ill afford it. http://www.bloomberg.com/apps/news?pid=20601109&sid=av970KMFcJPw&refer=exclusive

    It is troubling to note that none of the cases described in this article involved complex financial strategies that could be hard to validate by anyone. No-one has been caught (yet) selling Structured Investment Vehicles (SIV), Credit Default Swaps (CDS), …, etc. to the public. How come these 98 Costa Rica real-estate investors did not Google “Costa Rica real-estate investment”? Read a little and you will find out how realistic a 100% return is. Sadly, it appears that year-by-year we are moving further from the legacy of our ancestors – independent and strong they did not expect a government to “wipe their nose”. Relying only on their neighbors they stood up for themselves to protect their property and financial interests. What’s wrong with us? After all it is no more complicated than it was then. The “neighbors” with same interests and always ready to help you for free have not disappeared either. In fact, via Internet you’ll have many more of them. Managing your investments yourself with free information and free services on Internet you will fare better than relying on a certified professional who’s real motivation is to get away with your money.

    Big ticket financial services fraud targets wealthy individuals, funds, endowments, banks and even local governments. This category has gotten ample press recently as the numbers are sensational. Some of the losses have probably been exaggerated http://news.ino.com/headlines/?newsid=689574865900. as most reporters are only interested in sensations, not in truth. It is peculiar to note that the “victims” did not exhibit any more vigor for thorough due diligence of Madoff’s Ponzi scheme before handing over billions to crooks even though they certainly had means to do so.

    In hindsight, a loser can point fingers at credit rating agencies, SEC, family, friend or neighbor who recommended Madoff or someone from Ameriprise. At the end, it is everyone’s own responsibility to make sure the opportunity he/she invests in is sound, solid and the profit projections sold to you realistic under current economic conditions. Most importantly, same investor oversight and scrutiny must continue throughout the investment period. As we all learned 2008, economic conditions can and will change rapidly. Prudent opportunities of few months ago may turn into obvious losers fast. It is unrealistic to expect credit rating agencies revise their ratings daily although in some instances that would be the frequency required to keep the ratings current and meaningful.

    An alternative to credit rating agencies is to open public exchange trading for all securities including asset backed securities, and credit default swaps. After all market is a “collective” rating agency (with proper regulation to avoid abuse by ethics challenged organizations and individuals) is working just fine for that purpose. Until that is in place, it is prudent not to invest in opportunities one is unwilling or unable to monitor. Lost opportunity is always much better than lost money.

    Rich did not get richer only members of US Congress did

    Posted By admin on January 6, 2009

    A turbulent year proved wrong the bit of common belief that rich are always getting richer. Most of the wealthy lost a lot more than folks considering themselves poor and some lost all. Dramatic losses are attributable to lack of any risk management and due diligence by the folks who suffered. They failed to apply the simple investment 101 rule: “if an opportunity it sounds too good to be true, then it probably is not true”.

    The other issue is perception of wealth versus reality. Futures traders usually make clear distinction between the open trade profit or loss and the actual account balance. Only cash account balance is counted for their wealth. Whatever profit a trade has on futures market is called open trade equity. Whatever profit a trade has at the time of trade closing counts for traders wealth. Equities traders and real-estate investors tend to consider current value of their shares in a company or value of the property they own to be their wealth. Length of a usual trade was probably a reason for this difference. Fast and wild market swings of 2008 proved this method wrong. Deep, rapid losses of share values wiped out substantial portions of perceived wealth. Likewise, the usually resilient real-estate market became illiquid and turned open trade profits into steep losses.

    It is probably prudent to extend the futures traders wealth counting method to whatever market one trades. Count for your wealth only the money you have for certain – cash.

    The members of US Congress were a rare group of rich people who got a pay raise this year. While adamant that CEO’s of troubled banks will not get the pay the owners (shareholders) promised they voted themselves a pay raise despite the country being in trouble. Think about it, aren’t we actually voting them in the office to make sure the country will do well? Perhaps it is time to pick up Ross Perot’s idea from nineties and pay members of Congress an average American salary.

    Dr. Doom – 2009 to Be `Catastrophic’ for Global Economy

    Posted By admin on December 23, 2008

    Link to Dr.Doom interview

    I have observed Dr. Doom ( http://www.gloomboomdoom.com/portalgbd/homegbd.cfm) since 2003. I believe he is a Swiss national living in Hong-Kong. Always very serious and very extreme. IMHO, Dr. Doom is an old school economist (a very good one) who sees the economists running the show (e.g. Green …, Trischet, Bernanke, King, …) doing everything differently than he would. Since they must be wrong, the world must go wacko. Now (or never) is his heyday for sure. Like most economists whose work I have read, Dr. Doom always appears to search for “right” answers from the past. As a rule, they seem to discount the impact of technological, social and cultural changes to the economy. Perhaps this is the reason why so few of them make a fortune for themselves ;-)

    Other than that I agree with almost everything Dr. Doom said in the video with exception of few items:
    - I do not believe in gold for following reasons:
    - In global economy gold (or any other precious metal) is not a currency, none of the economic powers recognize it as such and IMHO, have no reason to do that in foreseeable future.
    - Gold has practically no utility value in personal or industrial consumption
    - For someone to wish to acquire gold at present valuation the person must be wealthy. As you have observed the wealthy are hit hardest this time around.
    - Since it is not a currency of any kind and Dr. Doom expects its valuation to grow substantially from current level he must also assume that there will be a sufficient market for it at much higher price levels. Well’ a person owning gold must be able to sell it for whatever “worthless” paper money he chooses to go the grocery store.

    - I do not believe that Asian economies recover before us because all viable Asian economies are strongly biased on export. They can not recover before their markets have money to buy their stuff again.

    - I do not believe that resource companies (Rio Tinto BHP, gold miners, … oil companies) will recover early because as long as there is no growth in their market there is also limited demand for their product.

    Dr. Doom is probably right that current “bail-out” bubble around the world (tell me one meaningful country that is not bailing out something) will depreciate the value of paper currencies relative to hypothetical gold currency and other tangible, real assets. The real, tangible assets in tough times must have utility value for the “middle class” to care. I don’t know enough about other countries, but in US, I see the real-estate probably becoming ahead with mortgage rates at historic lows, Treasury and Congress pushing money into banks and mandating them to halt foreclosures and write loans. At the same time starting new sizable infrastructure projects that will tie up the builders and contractors. Prices for concrete and lumber will likely appreciate, but not copper because roads and bridges don’t need it. Possible, farmers don’t have money for seed this year, but it is also possible Congress will mandate the banks to loan farmers. Note, we are in “half socialist” economy now . Many things are different. For better of worse (I think) government has a lot of power over banks for some time to come. Same in China, government can not afford to let people go hungry.

    Like Dr. Doom pointed out markets are very volatile and large swings should be expected. He promotes investing rather than trading. I think a very short term trading is much better idea. Not the same as it was a year ago, but the way markets work today. Only thing that will make all this work meaningless is if they ban markets all together. So far I don’t see signs of that happening.

    Outlooks for 2009

    Posted By admin on December 17, 2008

    Few observations and thoughts from reading:

    - Goldman Sachs December 11, 2008 Commodities 2009 Outlook: Pricing Supply destruction. (GS)

    - Societe Generale Cross Asset Research December 08 2008 Commodities Review. (SG)

    Whoever has paid the hefty price for the subscription to these marvels of modern financial forecasting can read the original. I have no authority to distribute this work. In a nutshell, both teams predict rapid appreciation of commodity prices to resume second half of 2009.

    It appears that both teams of analysts (and perhaps the economic models they rely on) ignore the profound changes in the society from the recent extreme price action in energy and agricultural commodities and of course, the simultaneous financial turmoil partially a consequence of that. Both teams seem to think that everything returns to the same it was within about 6 months. We have seen similar thinking from Fed for some time now. For some time now Fed, ECB, as well as the renowned analysts of these (and other e.g. IEA, … you name it) highly respected institutions have been constantly and dramatically revising their predictions exactly because they ignored the changes in attitudes of the society, changes in economy due to extreme price action. Unfortunately, their economic models seem to be too simplistic to be useful for predicting the future state of world economy. IMHO, it would be better for these folks to state that they don’ know rather than fool people to think that in 6 short months everything will be same as it was: prices of all commodities will again be exponentially appreciating and … surprisingly, everyone will be happy about it! I can understand that GS and SG will be happy to get back brokering large funds into commodity markets, but I am not sure the rest of the world will cooperate ;-)

    Different from these folks I see some fundamental changes in US attitudes unlikely to revert back independent of Fed actions or Democrat’s stimulus packages. For as long as US holds a substantial part of the world economy it is unrealistic to expect China, India, Korea and Japan (all very much dependent on export to US)  to grow.  Chinese government efforts to boost domestic consumption are welcomed, but temporary. Cultural changes in people attitudes will take much longer time and possibly democratization of the government.

    Why pessimistic?

    - Demand for all components of energy keeps falling independent of the price and winter weather. Apparently, people drive less and conserve energy.

    - The financial turmoil has hit hard the affluent public. Neuman Marcus, Saks 5-th Ave, … are in trouble, while Walmart is doing fine. Wealthy folks have fueled  recoveries by investing in real-estate and buying stocks previous downturns. Stimulus checks will not make back what they have lost from recent scams in financial industry and fall of hedge funds. Of course, equities slump does not help either. Most importantly, the financial services industry the way we knew it (investment banks) does not exist any more and the confidence is at its lowest on any financial services provider because of abundant Ponzi schemes and scams. I don’t see how trust and credibility can be restored by interest rates, nor stimulus checks.

    - Substantial part of our manufacturing is autos. In its current incarnation Big Three are not viable with roots deep in historic structure of these businesses. Bail-out money in any amounts will only delay the inevitable and will not fix the root cause of the problems. It is clear that if not Bush then Democrats will dump billions into Detroit couple of times before giving up on this. We’ll likely see this card house collapsing some time late summer 2009. It surely will take longer than 6 months for some to pick up the bits and pieces and build something viable from the fall-out of this industry. Good example of the real trouble is the hailed Volt 1 car – the so called GM savior — that takes $85k to manufacture (add health care, legal, sales, … costs for actual price) and will drive 40 miles with one load. Perhaps our new president can afford to buy one, but I don’t see this being a vehicle for anyone else.

    - As of now the bottom in housing is yet to be found. While Obama’s massive infrastructure spending may get some relief to the construction industry, it does nothing to eliminate oversupply in housing. What it is also likely to do is promote investment in solar and wind energy improvements (via federal rebates) which, in turn, reduces the need for oil. Yet, this is a niche industry unlikely to spur general recovery. Banks are still struggling to keep the people who have no money to pay in their houses.

    - The emerging markets are still to fall. Countries like Venezuela, Iran, Russia, Argentina, and bunch of smaller South American and African countries that fed their growth from unsustainable commodity prices are starting to fail their loans. Bolivia, Senegal, … list to grow. European banks are far out on the limb for these countries while US has very little exposure. This may very well turn into the fall of EU financial industry. With global slowdown I see no way to expect IMF funding all of them. This is because of deeply corrupt governments and IMF’s current largest contributors themselves are out of money. They would need to turn over China, India and Arabs that sit on larger reserves. While Arabs have been listening some times China has not at all. Besides, China and India have their expensive internal problems to cope with

    It appears that the world is still “drunk” from the economic boom of recent years, just starting to approach the “hangover” phase. It will take time to emerge from it and many things will be different once we do.