Weak Hands vs. Strong Hands

When you know you’re whipped, go for the moustache. 

Dave lost a bunch of money. It was about 1997 and Dave had started a new business about five years before. It was starting to get some traction and was involved in a new industry that was emerging and there were about 50 – 100 companies of similar size and age to Dave’s that were creating a new marketplace.

Dave’s business had a good strategy and it was well-positioned to compete with the other emerging business, but there was one problem. Part of the industry involved government regulations and policy development that were being influenced by Nike and retailer The Gap that involved the Federal Trade Commission, the U. S. Department of Agriculture and the EPA. The strategy looked good and there was a clear path, at least it seemed so at the time, based on the official line that was coming out from The Gap and Nike. Then suddenly a problem popped up. Nike and The Gap joined together on the policy and they changed course 180 degrees. The burgeoning industry collapsed nearly overnight.

What did Dave learn from this? He learned that there is very little correlation between right and wrong as compared with weak and strong.  You can be right, but it doesn’t mean that you’re going to succeed.  You can have a sound strategy and flawless execution and still lose out if you’re the weak hand positioned against a strong one. 

This is one of the reasons why Dave really doesn’t like it when the government gets involved in business.  For example, in Dave’s town the library has a huge collection of DVD’s and CD’s.  You can check the movies out for free.  Just down the street from the library is a vacant building.  It used to have a movie rental place in it.  Dave lives kind of in the country/suburbs so there’s no shopping center nearby and the little movie store was tucked away in an old building and of course it went out of business years ago because the library is in the movie business and library budget in Dave’s town is huge.

Why does Dave mention the library?  Because everybody loves the library (if not librarians all that much… shhhhh) and libraries are a perfect example of where the government starts inching over into the private sector?  Does Dave think we shouldn’t have government controlled and funded libraries, fire departments and such?  Kind of.  I guess if Dave was in charge he would say “We should have libaries in communities that are set up as community foundations.  Rich people who want poor people to get a leg up in their education so that they won’t break into the rich people’s houses and steal their stuff should pay for the library and librarian, otherwise they can build a big fence around their house and try to protect themselves.  Libraries are cheaper and more effective.  The government shouldn’t do it because it’s not the job of government to educate people, it’s the job of people.”  Sounds kind of extreme doesn’t it.

Well, that’s the problem with things that creep like the government and even government-regulated stuff such as Google’s creepy line.  They creep, like those vines along the edge of my yard that have to weedeated back every summer or they take over the landscape.  Best to get ‘em in the spring before they get a foothold because they’re tough to get rid of, just like libaries that have Sports Illustrated swimsuit edition on display for my nine year old son to see every time we go and return our free movies.  Okay, I’m guilty I support the free movie  business that I condemn.  What’s the point of all this librarian of congress bashing anyway?  The point is that putting local video stores out of business is the same as crushing the global commodities market by having a hand that is so strong (as in JP Morgan in bed with the CFTC) that you don’t need to have a good business strategy.  You just have to be big enough and stand your ground (or simply turnaround and walk away as in Dave’s case of Nike and The Gap) and you win by the default of your sheer size.

Dave has a sneaking suspicion that something along these same lines is happening in the commodities space.  The gold and silver market have been very volatile the past few days and then Blythe Masters, head of commodities for JP Morgan goes on the air yesterday to allay your concerns that JPM would do anything to harm you and the price of your fresh peanut butter sandwich, full tank of gas or next pair of Hane’s Her Ways.  Why bother going on the public airways if everything is good? 

Then there’s this really strange report from Bloomberg stating that “five counterparts” to JPM trader Bruno Iksil are complaining that JPM’s hand is so strong that it is single-handedly moving markets.  http://www.bloomberg.com/news/2012-04-05/jpmorgan-trader-iksil-s-heft-is-said-to-distort-credit-indexes.html  What’s up with all this?  Dave smells some books cooking and the obvious question is; will it drive down the price of silver and gold or will it drive up the price of silver and gold?  Of course Dave knows the answer and that’s why you come here to read Dave (thanks for that by the way). 

The answer is both.  Dave thinks that the strong hand playing against the weak hand is more about volatility (both up and down) than it is about direction.  If you follow the thought patterns of the likes of FOFOA, Victor the Cleaner and Antal Fekete (links below), then you probably find yourself scratching your head.  Throw in Dave’s theory of Vector Gold (i.e. accounting for in-ground gold supplies by pre-monetizing them to sovereign hedge fund balance sheets of divorced currencies) and you really have the conversation going.  It’s so convoluted even the librarian at your local reference desk couldn’t sort it out. 

There’s a key issue at the bottom of all this and it has to do with the physical nature of things.  It’s tough to buy and store an oil tanker filled with oil.  It’s difficult to handle an entire silo filled with soybeans unless you’re a farmer.  It’s not so tough to buy a gold coin at the local coin shop or to fill a sock with those pre-1965 silver dimes and that’s a problem for Blythe Masters and Jamie Dimon.  Commodities are unmanageable for the weak hand, but gold and silver are not.  Dave believes it is important to understand that dollars don’t bid for gold and silver so much as gold and silver bid for dollars.  Dave believes that this single idea could and will result in a set of circumstances whereby gold and silver aren’t really even measured in the price of dollars anymore. 

Does that mean that the price of gold and silver are going up or going down?  I don’t know, you tell me.  If you can’t buy gold and silver with dollars, then did the price go up or did the price go down?  If something disappears is it because it became valuable through scarcity or as worthless as that empty video store down the street from Dave?  If it’s illegal to use gold and silver, will it become as scarce as a Ball mason jar of moonshine.  Dave hasn’t been offered any good ’shine lately and he can imagine gold and silver being just as rare as Budweiser during prohibition. 

Dave’s sense is that something’s up and the strong hand is hard at work trying to figure what to do about it.  I used to work with a guy who whenever we were in the weak hand position and we had to take on the strong hand, he would say, “I have a plan.  We’ll get ‘em with death by a thousand ant bites.”  In that scenario, who is the strong hand and who is the weakhand.  I guess you should ask Marie Antoinette.  The problem this time around is that between our Visa card, mobile phones, trusted traveler status with the TSA and EZ Pass on our cars, if the strong hand controls the network, does the strong hand control the ants? 

Does JP Morgan have a solution to all the silver short positions that they inherited from Bear Stearns.  Have they already resolved this issue and are we looking at $500 gold and $10 silver in our new and improved stable global economy?  Two days ago you may have thought that was the case.  That’s the problem with going public and telling everyone that you’re not doing anything wrong.  The just may not believe you.  You see if the market dynamic is not about betting on direction, but rather about betting on Large vs. Small (i.e. Nike vs. Dave), then you can say you don’t bet but tell it to the guy with empty video store. 

Blythe Masters explains: 

“JPM’s commodities business is not about betting on commodity prices but about assisting clients”… “it’s about assisting clients in executing, managing, their risks and ensuring access to capital so they can make the kind of large long-term investments that are needed in the long run to expand the supply of commodities”…”We have offsetting positions. We have no stake in whether prices rise or decline. Rather we’re running a flat or relatively flat matched book.  “What is commonly out there is that JPMorgan is manipulating the metals market. It’s not part of our business model. it would be wrong and we don’t do it.”

On Victor the Cleaner, FOFOA, Antal Fekete, Larry Summers, bitcoin and how your mobile phone could result in a reverse of Gresham’s law:

http://tradewithdave.com/?p=9772

http://tradewithdave.com/?p=9733

 

 

 

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