Trade With Dave

JP Morgan Chase Headquarters – Manhattan, New York City (photo: Wikipedia)

When Dave started accepting Bitcoin as an experiment, some folks thought Dave was Dr. Frankenstein.  Well, Bitcoin may not have created a monster for fiat currencies, but it is most certainly gaining some attention.  One of the challenges has been a convenient way to convert U.S. dollars into Bitcoin while avoiding doing the transaction over the internet.  Now you can TradeWithDave at any Wells Fargo or Chase bank branch via ExchB – The 1st US Bitcoin Exchange. 

http://www.betabeat.com/2011/08/15/bitoin-exchange-chase-wells-fargo-exch/

Some folks are surprised to discover that one person can put money in another person’s bank account.   I know this first-hand because this is the way most of our tenants pay their rent.  We ask them to deposit it directly into our bank account.  Many folks think that it is weird because they have never done it (make a bank deposit into someone else’s account).  People with kids at college know all about it because that’s how lots of college kids get their money but many of those accounts are likely joint accounts so people don’t realize it is possible to deposit funds into someone else’s account.  

One of the folks in the comment thread (see the article link above) suggests that this practice will not comply wiht the bank’s “Terms of Service” which are essentially “know they customer” as required by The Patriot Act.  Interestingly, making a cash deposit into a bank account doesn’t make you a customer.  ExchB is the customer and I’m sure Chase and Wells Fargo know them.

https://www.exchangebitcoins.com/

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Dave usually doesn’t have much trouble coming up with something to write about.  It’s what Dave does.  Ever since that debt ceiling-FED rate fixing-S&P downgrading-stock market High Frequency trading -SocGen French bank raiding fiasco I must admit I’ve been a little off kilter.  Like Warren Buffet, I did made the call at 2:50 p.m. on Monday (http://tradewithdave.com/?p=7689) to double down on the DOW… that was good thing, but I must admit a scary thing at the time.  Dave doesn’t make calls lightly or very often as that was only the fourth call in over two years.  I also made the call to sell gold and buy oil.  So far everything is working out except the gold and that’s created uhhh… a “situation with Dave.”

I have written many times here on the blog that I expect gold to go to $5,000 and maybe even $10,000 or much higher if you follow the writings of a fellow who goes by the handle FOFOA (do a google search).  It’s just that Dave felt like gold’s natural level right now, in this situation was around $1,500 and that there’s just a little bit of froth left over from the debt ceiling-FED rate fixing-S&P downgrading-stock market High Frequency trading -SocGen French bank raiding fiasco that I mentioned earlier.  Be that as it may, Dave’s going to stand by his near-term price target and with the most recent announcement that Hugo Chavez is nationalizing the gold resources of Venezuela it will put upward pressure on gold for a moment but also remind everyone that gold is the money of kings and those who control countries and weapons systems and that it can be taken from those who do not control such things. 

Now to get back to the situation with Dave.  Since Dave has been in business dating back to when he was fourteen years old and hired the first kids in the neighborhood to help him mow lawns, he’s been operating on the right hand side of the number line – you know, the positive side.  I’m not saying that Dave hasn’t ever lost money because he has lost plenty.  It’s just that Dave has always been operating under the premise that value creation was connected with money creation and that value destruction was linked to money destruction…. seems obvious right?  Well not anymore.

That’s why Dave has been struggling to come up with something to write about.  If there’s one thing Dave prides himself on it is flexibility… adjusting to the reality of the marketplace.  If I didn’t adjust, I certainly wouldn’t be blogging regularly and well on the way to attracting a million reads of the blog over the next year.  Adjusting to the environment, or the situation is Dave’s speciality.  I’ll never forget that Wharton professor who said that marketing is nothing more than going to the market, listening to what people want that they can’t get, and then taking that very thing back to the market.  He was right and it works everytime… at least it used to… but not anymore.

You see, after Dave’s better than thirty years in business, we’ve moved off of the right-hand side of the number line and onto the left-hand side of the number line into the abstract numbers.  You can show somebody what one ounce of gold looks like, but you can hardly show them what a negative ounce of gold looks like.  It looks the same as zero ounces of gold, but with a simple accounting entry you can experience a negative ounce of gold, or silver.  That’s how they run the exchange traded funds such as the COMEX and their SLV silver shorts where paper provides the acceptable substitute for a silver purchase with the simply entry of one ounce of “owed” silver signified by the entry -1.

It may have taken two or three days for Dave to get the hang of this “making money by losing money” thing, but it’s awesome and let me tell you something, it’s big business.  Some of the biggest names in the business are making big dollars off of losing dollars, let me tell you.  Just check out this list. 

A.  Bank of New York/Mellon – Nearly everyone knows by now that the largest custodial banking institution in the country is charging its biggest customers for their deposits.  That’s right.  Companies deposit money into BONY and they get an invoice from BONY for the privilege of having their deposits at the bank.  http://www.bloomberg.com/news/2011-08-04/bny-mellon-sets-13-basis-point-charge-on-clients-excess-cash-deposits.html

B.  The Federal Reserve is paying banks not to lend out money by paying them interest on their excess reserves.  So if you’re a commercial lender and wonder why you’re not making any loans it’s because your bank gets paid not to make loans and that means you get paid not to work.  http://www.businessinsider.com/government-paying-banks-not-to-lend-2011-8

C.   Ben Bernanke locks in Grandma’s savings rates for two years at near zero while Mervyn King of the Bank of England declares that inflation will likely run closer to 5% http://www.independent.co.uk/news/business/news/inflation-rate-set-to-rise-2338084.html .  That means that Grandma is not only paying the bank to hold her money, she’s also paying the U.S. Treasury for the privilege of holding it in U.S. dollars.   

C.  The Federal Government provides food for people who cannot afford it.  It’s logical to think that there is a connection between rising unemployment and the use of food stamps.  Dave’s going to make the theoretical leap that if the U.S.  government wanted more people to work that they would not have sent the $16 trillion in bailout money (http://tradewithdave.com/?p=7433) to foreign banks.  I know it’s a stretch, but bear with me.  http://www.dailykos.com/story/2011/08/03/1002681/-More-Americans-using-food-stamps-than-ever-before:-458-million 

There’s more.  This isn’t just situational ethics, this is situational economics literally and it involves “The Situation.”  I have spent most of the summer at the beach and the other night I’m walking down the street and there is this huge line of people waiting to get into this club.  Girls are running down the street in their sandals trying to get in line and everyone seem super excited.  I’m thinking to myself, maybe Lady Gaga or Bruce Springsteen (is he still popular?) are performing at this club.  So I asked a group of excited teenagers what’s going on tonight?  They say in unison “It’s The Situation, from the Jersey Shore, he’s here tonight.”  Dave says “Who’s the situation?”  The excited teens say “He’s from the Jersey Shore!… the TV Show!  He’s going to be here tonight!”  So like any guy who had a lawn mowing business over thirty years ago would say, Dave says “Does he sing or entertain?  What does he do?  Is he in a band?”  The group looks offended as the excitement simultaneously falls from their faces and they attempt to look away from me, but now it’s too late because Dave wants answers.  “He’s just gonna be here… clubbin’…. you know…dancin,” one of the group responded as they all turned away from the old guy embarrased to be speaking to someone who doesn’t understand their situation any better than that. 

Then today when Dave is at the end of his rope and is hitting zero on the number line for blog posts and has no idea of where to turn, it hits me as I hear the news out of the home office.  I realize you CAN go below zero.  It just takes a willingness to accept the abstract… the negative number…. and like Tiger Woods, you’ve got to “be the minus.”  The answer to all my problems comes over me like a wave as I read the official press release from the home office of the official wardrobe supplier of Summer 2011… Abercrombie & Fitch. 

It seems that Abercrombie & Fitch wants to pay The Situation from the TV show The Jersey Shore to stop wearing their clothes.  Evidently Mr. Situation is not enhancing the brand image of Abercrombie and they don’t want him gracing the TV screen while wearing their duds.  It’s the product placement version of literally putting on and taking off ”The Bernanke Put”.

That’s when it all comes together for Dave and I breath a huge sigh of relief.  This is like crossing over into the other side of a black hole in the outer galaxies, or like a trip to Carl Sagan’s Flatland (http://www.youtube.com/watch?v=fVXV8XB-GPo), or like passing through the double slit of classical Newtonian physics and emerging on the side of quantum mechanics.  Dave gets that.  This is about losing money to make money.  This is about doing what Dave learned when he was a lifeguard; if you have to drown your victim a little to save them, then do it.  This is what Jeremy Rifkin was talking about when he wrote that book titled The End of Work. 

I get it.  If we’re going to pull the entire Eurozone under with us and hold them there long enough to get the new Western currency SDR model (http://tradewithdave.com/?p=7114) around their neck, then that’s exactly what we’ll have to do.  It’s all about appeasement and “An appeaser is one who feeds a crocodile – hoping it will eat him last,” as Winston Churchill taught us. 

So, if the situation is feeling negative to you, it is, but don’t be discouraged.  We can all learn something from The Situation.  If they’re paying you NOT to do something, you might want to take a second look at what they’re paying you with.  If it’s dollars and you’re not doing anything for them except clubbin’, then that is your first clue as to what those dollars are going to be worth.  If you want Dave to stop bloggin’ then pay him to stop.  Send him some bitcoins and once the value of the bitcoins reaches the value of never working again, I promise to quit.

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If you’re a gold bug you might just be starting to believe that Christmas is coming early this year.  Okay… I know what Jim Rickards is saying, but are you hearing what Dave is hearing?  Listen to the interview and then take a look at what Dave is hearing below.

Okay, this is what Dave is hearing.  Dave hears George Soros.  Dave hears President Obama.  Dave hears the CIA.  Dave smells a gold trap.  Sure, all this makes perfect sense.  All this talk about the metaphorical Merchant of Venice and the Cass Sunstein “pound of flesh”  libertarian paternalist default opt-in organ donor program, behavioral-economist-knows-best stuff is just too much for Dave. 

Dave smells a trap.  It’s a gold lined trap.  It’s like on of those Chinese finger trap things, but this is the one where you reach your hand in the box and grab the gold, but you can’t get your hand back without releasing the gold.  Dave is starting to believe that the entire “gold is a currency” meme is nothing more than a CIA/IMF/White House disinformation campaign designed to drive the price of gold up so that we can inflate away our debt to the Chinese.  Those who stay on the merry-go-round one revolution too many will see the reset switch become an electrocutioner’s switch for their accounts.   

I think I remember just about a year ago that Jim Rickards said gold was $5,000 and now he’s saying $7,500.  I don’t question that we’re heading there, but there are a couple things you need to understand.

 - If you’re gold is in an ETF you will never see it… instead you will see dollars…. greatly depreciated dollars…. read your prospectus.

 - If you buy physical, a simple change in the law here in the U.S. and you’re trapped with your physical and forced to redeem it for the same dollars (see above). 

- When they talk about “stripping out the bad assets” from the nationalized banks and then IPO’ing the banks, this will destroy the bondholders which will require their replacement with the new Eurozone bond and set the stage for the new occidental SDR-backed currency that you probably read about first right here at www.tradewithdave.com.  You can count on Mr. Rickards to set expectations for bondholders to be crushed so that when they finally swap their bank bonds for the new Eurozone bonds they’ll think they got a great deal.  I can almost hear him saying “What’s the difference between a bond in a nationalized bank and a bond in the Eurozone?”  The difference is that Germany won’t do this unless you first “strip out the bad” as Mr. Rickards points out. 

This is all about reaching the goal of being within an arms-reach of the reset switch.  This is “the intelligence machine” at work at its best.  Dave has been really struggling about the silver and gold comparisons.  Sure only gold can sit on a central banker’s balance sheet, but they will never be able to round up the silver like they can round up the gold, so they’re going to keep the CME hard at work supressing the price of silver whereas gold just needs to follow the path to $7,500 so that the ”Eunited States” can use it to win the economic war against China.   

Here are previous posts on why Dave hears what Dave hears:

http://tradewithdave.com/?p=7114

http://tradewithdave.com/?p=5310

http://tradewithdave.com/?p=6999

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The National Debt Clock (photo: Wikipedia)

Don’t you just love those back-to-school shopping ads.  Just about the time every kid gets in the groove of summer, here comes a wave of advertising promoting school bus driver season.  That’s not to say that there is more than one mom out there who is in big need of a school-induced vacation of sorts from screaming kids trying to navigate the backyard slip-and-slide without resulting in a trip to the local urgent care.  We love you mom.  Hang in there… Wal-mart’s harbingering (yes, it’s a word I learned in school) your freedom. 

One of my favorite things about going to school, at least in the first grade, was when you would get a brand new zipper pack that fit into the three punch holes in the blue fabric covered binder that held your new pencil.  These weren’t just any No. 2 pencils.  These pencils were called ”BIG MO” pencils and they were oversized and designed for the clumsy hands of six year old boys.  Imagine a regular size pencil on steroids with an equally oversized eraser. 

I couldn’t help but think, as I listened to our President, about how big an eraser it would take to erase our national debt when I was listening to President Obama’s speech this week.  The President was speaking to a group of employees at a high tech battery plant in Michigan that is operated by Johnson Controls.  (full transcript here  http://www.whitehouse.gov/the-press-office/2011/08/11/remarks-president-johnson-controls-inc ).  Dave was taken back when he heard the President’s ideas on what we need to do to get this economy moving.

 ”We can do some things right now that will make a difference.  We know there are things we have to do to erase a legacy of debt that hangs over the economy.”  President Obama – Holland, MI    

When Dave heard that all he could think about was back-to-school shopping for a BIG MO pencil with a built in eraser and how big would that eraser have to be to “erase” the debt.  Forget paying it off… paying it back… austerity… debt ceilings and deficits.  Now, we’re finally getting somewhere.  Let’s simply erase this puppy and get back to business. 

I thought this “erase the debt” plan is the ticket.  So I went out and shopped around to see what other people thought about the “Erase The Debt” plan.  It struck me with the same type of forceful inspiration of the government’s ”Say No To Drugs” and Homeland Security’s ”See Something, Say Something” campaign.  I didn’t find a lot of support and nobody that I could find was even aware of the President’s plan even after the speech.  I even checked with the Chinese and the People’s Bank of China.  I’m still waiting to hear back from them on how effective they believe a BIG MO eraser will be on all those Treasury bills they’re holding.   

There is one guy that I found that had something to say about the President even though it wasn’t exactly about the effectiveness of erasers on the debt.  The writer’s name is Charles Fried and he writes for a blog called The Daily Beast (http://www.thedailybeast.com/articles/2011/08/06/obama-is-too-good-for-us-charles-fried-on-the-debt-fiasco.html).  Dave was thinking to himself what a great idea President Obama had to erase the debt and when he saw Charle’s article titled “Obama Is Too Good For Us” all I could think is Obama is more than too good for us, he’s too good to be true if he can erase this debt… are you kidding me?  He’s the greatest… greater than Muhammad Ali.  He’s got complete control over Johnson Controls.  He’s got more mojo than Austin Powers.  He’s the BIG MO of DEBT ERASERS!

The introduction to the article reads as follows…

The debt deal fiasco proved that any decent, honest poltician like the president simply doesn’t stand a chance against the likes of Michele Bachmann.  Charles Fried on how the Tea Party ruined America. 

Don’t kid a kidder.  Do you think Michelle Bachmann has any idea whatsoever on how to erase the debt?  She’s never even put a pencil to a debt-eraser proposal in congress.  She was all bogged down with the ceiling when what she needed to be focused on was erasing.  Here’s what else Charles had to say about President Obama….

“… he is an honest man. He is intelligent, analytical, and knowledgeable. And he tries hard to think through the dilemmas which confront us and to tell us clearly and straightforwardly what he wants to do and why he wants to do it.  But it doesn’t seem to work.”

Wrong again.  Erasing the debt works.  Trust me.  It’s the best idea anyone has ever come up with.  I can almost hear you saying… “But what about China… they bought the debt in good faith… we can’t just erase it.”  Oh, but my Grasshopper… you fail to understand.  Who do you think that we’re going to have to buy all those BIG MO pencils from to erase the debt?  That’s right – CHINA… Dave’s not as dull as you thought, now is he.  You would think that after raising 23 foster kids and all the back-to-school supplies she had to pay for that Michele Bachmann would have been able to figure that out before she went off and “ruined” America like Charles said.  

To order your own BIG MO pencil contact Wytheville Office Supply… and yes that is a real No. 2 pencil on the front of their building.  Imagine what that can do to a stack of T-bills.

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Photo: NASA

Call me a conspiracy theorist, but don’t you see the connection between the LifeCall TV commercials that began running in 1987, the stock market crash of ’87 and the past week on Wall Street?  It’s uncanny by definition.  You see the definition of uncanny is “peculiarly unsettling or unnatural” and that’s exactly what this market is… unnatural.

Dave’s written about how the high frequency trading algorithms have created a market that is literally unnatural in that it bypasses human intuition and wisdom as it piles up pallet loads of pennies scalped of hundreds of millions of trades.  Dave’s been thinking that the unnatural nature of all these computers trying deliver what Pimco’s Mohammed El-Erian described as our “Sputnik moment” might just have a bright side to their dark side of operating in a world without financial gravity as we know it. 

Nearly everyone who is subject to the law of gravity agrees that gold has been transformed from a precious metal asset into a non-sovereign reserve currency.  If gold is evolving into a currency and if the U.S. dollar is still the reserve currency here in planet earth, and gold has a huge run-up like it has experienced in the past week, wouldn’t that qualify as GoldFlation?  Isn’t the definition of inflation too much money chasing too few products?  Sure, it may be the University of Texas endowment and your neighbor with the bomb shelter, but it’s still inflation… or maybe more accurately hyperinflation.

Don’t get Dave wrong.  Dave believes that gold is going to at least $5,000 and has stated such right here on the blog, but Dave doesn’t believe that it’s going to happen like this.  Dave smells inflation hiding again which it is so prone to do.

 Just take a look at a few things that have changed.  It was only one to two years ago that…

~ John Paulson & Co. hedge fund was making a killing in the market… it just lost 30% of its value.

~ Goldman Sachs trading desk was having 63 profitable trading days in a quarter that had only 63 trading days in the quarter.

~ Bank of America stock was trading at nearly $20 per share… today it trades at $6.77.

What’s significant about this?  A couple of things.  Corporations have massive amounts of cash sitting in their bank accounts so there are little or no concerns about liquidity crunches (for the largest corporations) like we witnessed during the Lehman Bros. bust.  This rout merely creates buying opportunities for more consolidation.  The United States government and the United States citizens are not worried about the United States financial system collapsing.  Notice I mentioned the United States…. not Europe or France in particular.

If you look at a chart of the DOW for the past eighty years you will see an interesting pattern.  It rises slowly and falls quickly.  That’s the nature of gravity.  If you’re Isaac Newton, you know it takes time to climb the apple tree where is it takes nearly no time at all for the apple to fall from the tree and hit you on the head.  If you know about gravity you know that technically it is not a law, but rather it is a statistical probability.  Just like the second law of thermodynamics… it’s not a law at all.  Instead it is a statistical probability.  These so-called laws exist on a human scale and they don’t exist, at least not the same way on the quantum scale and that’s where these computers are operating.

Computers don’t get tired.  They don’t get fatigued and they don’t get worn down by the market like human beings have a tendency to do.  That’s why markets rise gradually like walking up the steps of a tower which takes times for a human and that’s why they fall rapidly like the tragic death of a Korean stock broker who leapt to his death over the recent stock market volatility.  Dave thinks we’ve moved out of the gravitational field and into the non-gravitational realm of the quantum stock market.  What this means is that in the future markets will crash up just as quickly as they crash down. 

Most of what Dave learned about investing he learned from a really successful investor… Dave’s Dad.  Dave’s Dad was a Benjamin Graham-style investor who based his valuations on earnings and a disciplined approach to making money when you buy stocks, not when you sell them.  There was a comment made by a senior economist on a popular cable business channel yesterday.  It went something like this… “We are having difficulty determining the answer to what is happening in the marketplace in response to the FED’s actions because we don’t know what the question is.”

If you’ve ever seen the game show Jeopardy, then you know all about answering the question before the question is asked.  Dave’s sense of this marketplace is that we’ve decided to collapse the market before we’ve determined whether or not there will be any Benjamin Graham-style earnings to support it.  Sure, there may be a ”global slowdown” or a “double-dip” but haven’t we learned by now that any cut-back in spending is actually a cut-back in the rate of the increase of global spending and not a “real” cut-back? Don’t we realize that the words “balanced approach” and “balanced budget” couldn’t be further from each other than the moon and the earth? 

Do you really believe that there will be fewer McDonald’s billions served next year than last year when there are billions of people applying the Dave theory of hokey-pokey economics (http://tradewithdave.com/?p=7693).  Am I saying that the stock market won’t go down?  No… it will go down.  What I am saying is that these computers just might be the ticket to making the stock market recoveries just as steep and rapid as the stock market declines and that would be as much of a change as classic Newtonian mechanics and quantum mechanics.  Heck, if they get that Large Haldron Collider working, we’ll be able to see what the price of a stock is going to be one second in the future.  You can’t beat that. 

Let me put it another way.  If we’re no longer operating under the laws of gravity then what fear would cause someone to jump out of a window when it wouldn’t solve their problems anyway?

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… at least not for the next 24 months.

He said it, I didn’t.  Below is my response to the Fed’s decision to take the historic step of going time-definite on their plan.  In business on the rare occassion when I allowed my hand to be forced to make that type of decision was when I knew for certain I wouldn’t be the one that would have to be around to follow-through on it. 

Here’s my most recent theory posted to ZeroHedge.com

Bear with me on this theory…

Okay, so BONY Mellon says we’re going to charge you to hold your demand deposit… The Bernank says we’re going to keep rates low…  We see some bank runs in the Eurozone and a decent sized flood of liquidity into dollars… Maybe we see a bank run on B of A…. Now for the theory. 

Then we see corporations and wealthy families desiring to hold actual greenback currency in safes/private depositories instead of in a time deposit of any sort… just for extra safety, liquidity and the near-elimination of counterparty risk.  Instead of repatriating all this corporate cash on hand, they actually pay a premium to get greenbacks to store in private depositories.  So, it’s an opportunity cost forgone.  In other words, it’s an effective interest rate paid for the cost of holding the greenbacks in suitcases sitting in private depositories.  

Would not under such a theory that be an effective off-balance spike in interest rates in the form an opportunity cost.  If you’re cost to acquire the cash, transport the cash, store the cash and mitigate counter-party risk however one might do that comes to 5%, isn’t that an effective interest rate even if the Fed Funds Rate is closer to zero that pushes through from the other side.  Instead of starting off with $100 and ending up with $105 in the bank, you start off with $100 under the mattress and end with $95 after paying for dog food for the pit bull and a chain.  It’s still a 5% cost of capital, it just that you and your pet are the new bank.  Isn’t that the same as the BONY/Mellon value proposition?  In such a scenario the last place anyone would want to store the excess balances is in a fractional reserve environment regardless of the “vaulting capabilities” (i.e. Gunsmoke Bank & Trust) such as those touted by JPM a year ago once we have a Euro-zone Lehman event.       

Normally such a scenario would be unheard of because of the need to be able to move quickly in and out of positions due to unknowns.  Since we have a “date certain” then the cost of entirely mitigating counterparty risk, including the FDIC/Sovereign can now be measured on a time-definite timeline in a slow-growth/no-growth domestic scenario is it not probable that at least a meaningful amount of cash balances may find themselves literally “in the green?”  If so is that not in itself a spike in rates under the pit bull paradigm?  Theoretically the only risk would be missing out on appreciation in equities, but how hard is it to execute on a stock buyback from your own corporation when the greenbacks are sitting in your own corporate treasury?  I know it sounds crazy, but think of it as the DOW’s version of Death of a Salesman… cut out the middleman.      

Wasn’t the most powerful weapon the Fed had in the past the dual prongs of flexibility and credibility?  Now that they’ve sacrificed flexibility on the interest rate side if you can assume for argument’s sake that the balance sheet is destined for liquidation via upstreaming (http://tradewithdave.com/?p=7173), then the only remaining arrow is credibility which will be destroyed if they move before mid-2013. Is the gamble that the credibility belongs to the chairman and not the FOMC (3 dissenters seem to think so).  Isn’t this simply a strategy to raise interest rates off-balance sheet without over-strengthening the dollar while nearly guaranteeing a collapse of a Euro TBTF bank(s) into a Euro-zone version of a T-bill and possibly a U.S. TBTF (“We don’t need capital”) institution regardless of meeting Basel 3.    

Sure, you can say “But what about gold?”  Yeah, see how you’re gold looks over the next two years if real rates are 5% as suggested and I’m a fan of precious metals and see this (the past week withstanding) as yet another supression of real prices although I still fail to understand gold’s link with human consciousness.  Sure, the argument could be made that “If it’s that bad, who cares if our corporate treasury collapses… we’ll all be running for the hills.”  We all know that’s not how this works for the next 24 months.  This is not a cake walk, but this is musical chairs and there’s a seat for everyone except one. 

Tell me what I’m missing here. 

Dave Harrison

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I’ve been on the floor of the New York Stock Exchange.  It was a field trip for the finance club when I was in college.  We got to meet the specialists and see how they “made the market.”  It took me about five minutes to figure out that “making the market” was a license to steal.  Then again, once in a blue moon it was a license to loose your shirt when the stock you specialized in got overwhelmed.  That was nearly thirty years ago.  My guess is that they don’t even have stock specialists anymore and if they do it’s probably some sort of window dressing for CNBC.

Everyone knows that the machines run the stock market.  Everyone knows that high frequency trading and algorithms designed by folks who made 800 on their math scores rule the day.  I’ve heard there’s an entire hotel building in New York City dedicated to high speed servers because it is a millisecond closer to the exchange.  All that stuff makes me laugh because it doesn’t have anything to do with investing, but my guess is that today it made people cry.  You see the machines ruled the day… actually they rule everyday that has a degree of volatility.

Of course any trade that anyone makes via their TD Ameritrade account from their house is going to get scalped for a few pennies in this high frequency world, but today people lost their shirts thanks to the machines.  You see everything I learned about trading (remember my specialty is in trading ideas, not stocks) I learned from Eddie Murphy the comedian.  He was in the movie Trading Places with Dan Aykroid.  It was released in 1983 about the same time that I was on the floor of the New York Stock Exchange. 

The movie, if you haven’t seen it, explores the classic thesis of Pygmalion and the Rosenthal-Jacobson study and whether or not the observer has a significant impact on the observed and what role do expectations play in our relative success or failure.  Dave has some very strong opinions on these issues as they are all relevant to his key interests from quantum physics to the Broadway hit My Fair Lady.

Dave believes that at the very core of the premise of Trading Places, My Fair Lady, Pygmalion or Young’s Double Slit Experiment is a challenge to our free will and how it is influenced by outsiders.  You see folks like George Bernard Shaw who was co-founder of the London School of Economics (and writer of My Fair Lady), or Cass Sunstein who would be a modern-day promoter of behavioral economics put a lot of stock in how one person can essentially take control over another person through their statistical influence. 

Dave doesn’t deny the influence, he just denies the power.  Dave believes every one of us is born in God’s image and that image is the essence of free choice to love or to hate, to kill or to heal.  The science of behavioral economics is at the very core of the challenge to mankind’s free will through efforts such as “choice architecture” which is no choice at all and orientations such as “libertarian paternalism” which is about as far from libertarian as you can get.   

Getting back to Wall Street and what’s going to happen tomorrow or the next day or the day after that.  In the movie when the Eddie Murphy character makes his trade in the marketplace he does it based on the upcoming Christmas holiday gift buying season.  Here’s a slight paraphrase of the scene…

Randolph Duke: Exactly why do you think the price of pork bellies is going to keep going down, William?

Billy Ray Valentine (Eddie Murphy): Okay, pork belly prices have been dropping all morning, which means that everybody is waiting for it to hit rock bottom, so they can buy cheap and go long. Which means that the people who own the pork belly contracts are going insane, they’re thinking, “Hey, we’re losing all our darn money, and Christmas is around the corner, and I ain’t gonna have no money to buy my son the G.I. Joe with the kung-fu grip! And my wife ain’t gonna make love to me if I got no money!” So they’re panicking right now, they’re screaming “SELL! SELL!” ‘cos they don’t wanna lose all their money, right? They’re panicking out there right now, I can feel it.

[on the ticker machine, the price keeps dropping]

Randolph Duke: He’s right, Mortimer! My God, look at it!

Randolph Duke: Pay up, Mortimer. I’ve won the bet.Mortimer Duke: Here, one dollar.Randolph Duke: [chuckling] We took a perfectly useless psychopath like Valentine, and turned him into a successful executive. And during the same time, we turned an honest, hard-working man into a violently, deranged, would-be killer! [laughs]Now, what are we going to do about taking Winthorpe back and returning Valentine to the ghetto?Mortimer Duke: I don’t want Winthorpe back, after what he’s done.Randolph Duke: You mean, keep Valentine on as managing director?Mortimer Duke: Do you really believe I would have a black man run our family business, Randolph?[Valentine's eyes widen with outrage]Randolph Duke: Of course not. Neither would I.

The premise of the nature vs. nuture story is that although the brothers Duke have “turned him (Eddie Murphy) into a successful executive” and turned their own blue-blooded family member (Dan Aykroid) into a homeless bum that they still are racist at heart.  This is pygmalion at its worst and what we witnessed today on Wall Street is trading at its worst because it wasn’t trading at all any more than the brothers Duke “turned” Eddie Murphy into a success and Dan Aykroid into a bum.  To try and separate nurture and nature is exactly what was attempted by the famous philosopher Isaiah Berlin when he attempted to take Liberty and divide it into two parts in his landmark speech “Two Concepts of Liberty.”  It’s the same premise that you will find in modern movements such as Zeitgeist: Moving Forward (http://tradewithdave.com/?p=5282) and the recent Wall Street movie Inside Job (http://tradewithdave.com/?p=5401) and Dave’s favorite current event, the Bank of England’s Mervyn King’s proposal for a divorced currency (http://tradewithdave.com/?p=5310).

Dave happens to be of the school that economics, as a field of study,  is nothing more than the financial arm of political science and that it is all about policy and has nothing to do with business.  It’s the current policy of the Securities and Exchange Commission and the Commodity Futures Trading Commission that allows such a mockery to be made of the price discovery process as the scalping that goes on through high frequency algorithmic trading.  I heard the former CEO of BB&T last week state that the financial markets no longer operate under the rule of law but rather the whim of regulators.  Is it any wonder that days like today can happen when it’s taken over a year since the May 6, 2010 Flash Crash for the SEC to issue subpoenas (Aug. 8, 2011 Wall Street Journal article http://online.wsj.com/article/SB10001424053111904480904576494573110465278.html?mod=googlenews_wsj). 

So what’s the bottom line?  It’s the same as it was in the pork belly market in 1983 which, by the way, was recently closed by the COMEX due to the fact that two companies control most of the pork business (see policy statement above) which means that like the NYSE there’s no more need for a market-maker when the entire global market can be solved on a golf outing by the duopolists.  The market will come roaring back and strangle the unbelievers like G. I. Joe with the Kung Fu chokehold on their throat.  Don’t get me wrong. We’re going to see the collapse of weak sovereign nations, the bankruptcy of countless companies and hardship like we’ve never witnessed, but the market will rise if for the fact of no other reason than we are going to print more money increasing the relative price of the last two bacon companies still standing. 

Dave’s theory is simple.  He calls it Hokey-Pokey economics.  You remember what Eddie Murphy said about the wives of the traders in the pork belly pit.  There’s even a nursery rhyme that says first comes love, then comes marriage, then comes a bacon-eating-baby in the baby carriage.  You see the power of love and the desire to leave a legacy is much more compelling than the dismal science of behavioral economics.  The other night I was walking down the street near the beach and there was a long line of kids waiting to get into a 21 & under night club.  They couldn’t have been more excited and it was NOT about the stock market or QE3.  It was about each other and the hope of meeting that special someone and the hope that somehow, somewhere and some day they would start their own microeconomic family adventure.

I realize a lot of the animal spirits of the American male have been dulled by the beer companies, hypnotized by cable TV and vented through the spectacle that is the NFL and NASCAR.  But take a look around the globe and you’ll find that the hokey pokey is going 7 billion strong and the stock market, at least the Dow Jones Industrials are not an exclusive-to-America story anymore.  They tell a global story of a Joe who is coming from the East and who most definitely has his Kung Fu grip intact. 

So don’t worry, at least not yet, but if you are worried, then sell into the algorithm.  In the old days it took human beings time to rebuild our courage following a market collapse and to retain the confidence required to drive the market back up.  We’ve literally ”traded places” with the machine and the good news is machines don’t need time to heal and G. I. Joe isn’t real.

(man against the machine disclaimer – Dave is not a financial advisor so make sure you don’t rely on Dave when you trade and when you do trade you can count on in this rigged market that whatever price you do pay, the machine thanks you for the opportunity to scalp your trade.)

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Double Down On The Dow

Sell the gold for now

Buy some oil

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Photo: Federal Reserve

You can almost hear one of those eery Hugo Montenegro soundtracks playing in the background this morning.  You know those spaghetti westerns where Clint Eastwood is standing there wearing a poncho with a toothpick in his mouth and there’s that dowey dowey doooo whistling song playing from the surround sound speakers in the theater. 

Pete Peterson has really moved to the forefront this week on the Dave-o-meter through his association with author and educator Carmen Reinhart (This Time Is Different), the recent publication of his policy brief Europe On The Brink  http://www.iie.com/publications/pb/pb11-13.pdf and today’s article on his website (The Fiscal Times) The Fed’s Last Few Bullets http://www.thefiscaltimes.com/Columns/2011/08/08/The-Feds-Last-Few-Bullets-Will-Bernanke-Take-Aim.aspx#page1

 As most of you already know the gubermint has been in the business of changing the definition of inflation to suit their needs.  Core inflation excludes energy and food.  That makes sense to me… at least if you want to cover up inflation.  You see you can’t get get energy or food from China except maybe those freeze dried ramen noodles.  To make things worse, energy and food have been going down lately.  Here’s what the folks at The Fiscal Times had to say about inflation.  

Much to the discomfort of the Fed’s inflation hawks, the GDP revisions also show that inflation is running higher than first thought, especially in recent quarters. Overall inflation, which had surged as a result of higher energy and commodity prices, is now easing lower, but inflation everywhere else is accelerating. Based on the Fed’s preferred gauge, core inflation, which excludes energy and food, is 1.3 percent measured from a year ago, but the pace this year is running progressively hotter. The quarter-by-quarter annual rate was 1.6 percent in the first quarter and up to 2.1 percent in the second quarter, a tick above the central bank’s implicit target of 2 percent.

Dave’s not sure what’s going on exactly, but he figures Pete is getting some of the blame for the debt ceiling debacle because his focus is on Social Security and entitlement programs and reducing the overall deficit.  When Dave gets confused he usually rents a movie and lays on the couch until he figures out what’s up.  This time Dave was thinking about Italy, so who better to grind the pasta with as I unravel the global fiscal spaghetti than Sergio Leone.  

The Dollars Trilogy

1. A Fistful of Dollars (1964)  – Quantitative Easing

2. For A Few Dollars More (1965)  – QE2

3.  The Good The Bad And The Ugly (1966) – The Twist or QE3 Modified 

The way Dave sees it, the entire Federal Reserve drama is a Hollywood production and like all Hollywood productions, to maximize the return on investment you need to make it into a trilogy.  Here’s what the folks at The Fiscal Times had to say about the Fed’s current options for the third and final chapter of QE.   

1.  “(The Fed) could be more specific about the period over which its target interest rate and level of its balance sheet would stay at their current level, instead of just saying “for an extended period.” That action would lift asset prices by reducing uncertainty about when the Fed would start tightening policy.”

2.  “The Fed could increase the average maturity of its $2.6 trillion in securities holdings, which would put downward pressure on long-term borrowing rates.”

3. “(The Fed) could reduce the 0.25 percent rate it pays on deposits banks hold at the Fed. That would reduce the incentive for banks to park funds at the Fed and increase the incentive to lend them out.”

Underlying the entire dollars trilogy is The Man With No Name (aka inflation, reflation, stagflation, creamflation, and even deflation) who according to Fiscal Times amid the revised GDP data pointing towards recession combined with data that suggests that the financial crisis may have “greatly impaired the economy’s ablity to grow, while making it susceptible to inflation.”

What does Dave think of all this?  Two things come to mind.  When you drug up an economy it gradually becomes less responsive to future drugs and in general you weaken the core which in the U.S. is small business.  Small business has no confidence in government so any policy will require twice the horsepower to achieve half the result.  Secondly, Dave smells a Treasury trap similar to the ones that are in those Clint Eastwood westerns where you wait until the posse is riding through the canyon and then you ambush them.

You see the canyon, in Dave’s mind is like a tranche.  Dave believes that the so-called “twist” (here’s Daves comment from a few months back http://tradewithdave.com/?p=6968) is going to create just such a canyon for Treasuries and sovereign debts in general.  At the other end of that canyon will be the reset switch.  If you get trapped in that canyon, then you’re only way out will be the reset switch.  What’s the bait?  A fistful of United States Treasuries.

As written on ZeroHedge previously, the Fed can either target its balance sheet which it has been doing or target interest rates – not both at the same time.  If the Fed is Dead, then bury the balance sheet by buying up all the 10 year notes needed to clear the market at the target price.  This puts a surge under the housing cornerstone of the economy just in time for the election season.  http://www.zerohedge.com/article/bill-gross-warning-operation-twist-coming-2-year

If you believe as Dave does, that The Fed, as an institution, has already been gunned down in the street and long since come under the authority of local undertaker (http://tradewithdave.com/?p=7173), then the ambush is set and the Fed is nothing more than a bunch of cardboard cowboys set up as a decoy.  The real trap is not the U.S. dollar, but the twisted Treasuries that will be trapped in the time-frame of the canyon.  U.S. currency, in the form of a literal fistful of dollars on the other hand is going to be more valuable than ever as long as you can afford the storage fees and I don’t mean in a bank account at BONY Mellon.

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If I’ve heard it once in the past week, I’ve heard it a thousand times.  Washington is experiencing a lack of leadership.  In Dave’s opinion, the leadership void is not exclusive to D. C. and it’s starting to show up big time in the C-suite of corporations.

Dave has been a salesman, a manager, a president, a CEO, a Chairman and a board member.  He knows the difference between the title and the job.  Sometimes when Dave has worked for other people, it can become a little bit confusing, especially when you’re the president but not the CEO.  Dave knows that the most surefire way to tell the difference between a CEO and a president is pricing power.  At the end of the day, the CEO always has the pricing power and the pricing responsibility.

For example, if you’re the CEO of Wendy’s hamburger chain and you decide to get rid of the “dollar menu” and replace it with a “dollar and a quarter” menu, that’s usually your call.  You get the credit it if works and you get the blame if it doesn’t.  Sure, you’ll have studies conducted by your marketing folks and and your financial analysts will pore over every permutation of the numbers in an attempt to provide you with reasonable projections and scenarios, but in the end it’s a gut decision and hardly based on science.  Dave knows.

Well Dave noticed a very disturbing leadership vacuum this week that extends beyond the Washington Beltway and its designed to address the belt-tightening consumer as the country enters a so-called double dip recession.  It seems that not only are Commander in Chiefs being accused of avoiding tough decisions, the same thing can be said of the CEO of Wal-Mart and Midas Muffler.  Both companies (and I’m sure there are more) have launched their own name your price campaigns.  Wal-Mart calls it “Our Ad Match Guarantee” and they summarize it like this:

We’re committed to providing low prices every day. On everything. So if you find a lower advertised price on an identical product, tell us and we’ll match it. Right at the register.

They go on to provide an entire page of complicated disclaimers but the one thing they don’t disclaim is how long it will take to sort out the disclaimer…. right at the register.  Here’s the full policy:  http://walmartstores.com/10563.aspx

Midas took a slightly different approach in their latest campaign.  I’ll call it the Priceline name your price approach.  Midas wants you to go into their store and tell them how much you are willing to pay for a brake job and they’ll do their best to come up with a brake job that fits your budget.  Excuse me?  I’d like my brakes to be free, thank you.

What is all this about and why is Dave making such a big deal about pricing power.  It’s simple.  In business, pricing power is a starting point for everything from strategy down through the income statement to a company’s earnings.  How a company (or a country) positions themselves in the marketplace is all about how they price their product.  Are you Starbucks, Dunkin Donuts or Waffle House (i.e. The U.S.A., Canada or Brazil).?  By the way Dave’s always been a big one for taking the Waffle House exit off the interstate for coffee when he’s traveling and feeling a little sleepy.  At Waffle House the coffee is cheap, the O.J. on the other hand… it comes in one expensive size… LARGE.

Pricing is about leadership and leadership is about taking risks.  No one in Washington from the CEO on down seems to want to take any risk.  CEO’s, chief marketing officers and sales managers alike are all responsible for providing leadership but the one thing none of them want to do in this environment is to take responsibility for the price of their product.  Instead they’re going to leave it up to my wife and the cashier at Wal-mart to work it out “at the register.”  You’ve got to be kidding.

Have you ever been to Wal-mart?  Have you ever tried to negotiate with my wife over the price of back to school supplies and tube socks or gift wrap the day after Christmas?  Have these CEO’s lost their collective mind even more than the political class.  No one and I mean no one wants to accept responsibility for anything in this environment due to uncertainty.  Where do you think Wal-mart came from, much less the United States?  I can tell you this much, the cashier at Wal-mart is going to side with the customer and not with the shareholders.  If she doesn’t, the checkout line is going to slow down worse than the U.S. economy.

As far as using a William Shatner “name your price” strategy for my next brake job, I’ll let you know how that one works out.  I’ve been walking all summer and have hardly used my car which may postpone the need to the point where the company comes to their senses.

The bottom line in all this is a huge attempt to extend the bottom line and make it someone else’s problem.  Whether it’s postponing until after the next election, or placing the financial burden on future generations, the kick-the-can-extend-and-pretend plan has now become the name-your-own-price-plan so that if and when the country and Wal-mart does go broke, at least we can blame it on the customer for naming their own price… zero.  As far as the new “Super” congress is concerned, my guess is that it will be made up of six people who are not going to be up for re-election and another six people who have no chance of winning re-election unless they hit a homerun.

What happened to doing the right thing rather than simply saying the right thing and accepting the consequences.  No one likes uncertainty and the volatility it creates is one more chance to fleece the public.  Does anyone really believe that people are dumb enough to accept the words “balanced approach” as meaning the same thing as “balanced budget?”  If people do accept such spin, then I guess they deserve the opportunity to name their own price when it comes to the value of their country.  By the way, can you get a T-bill on E-bay?

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