Slope of Hope Blog Posts

Slope initially began as a blog, so this is where most of the website’s content resides. Here we have tens of thousands of posts dating back over a decade. These are listed in reverse chronological order. Click on any category icon below to see posts tagged with that particular subject, or click on a word in the category cloud on the right side of the screen for more specific choices.

The Year the Game Changed

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Gary from Biiwii with another macro chart worth noting.

In 1999, the price of gold bottomed after having ridden the
post-Volcker era down along with treasury yields. This was due to the
sound policies the former Fed chief rammed home and the confidence that
ensued.

Tyx

Enter the Maestro, Greenspan, who inherited the benefits
of this sound policy and used it for years as a lever to bail out the
system whenever needed. Many people thought Greenspan was a great and
powerful Fed chief, but in actuality he was simply playing off the
confidence that had been restored in the monetary and financial systems.

I
think this macro chart has profound implications and clearly shows that
sometime in the 1999-2001 period, we went off the charts as increasing
debt burden became not only acceptable, but necessary to support the
lifestyles we had grown accustomed to. Denninger's letter in the previous post illustrates China's role in the macro Ponzi scheme in the harshest of terms.

There
is talk of a gold bubble and in my opinion, the most unsavory of the
gold bug 'community' are out in full force, hoping for nothing less.
But gold is not in a bubble. That is because gold represents an anchor
to sensible systems and simpler times. It is going nowhere. The other
stuff, the remnants of a rotting system is what is going somewhere and
that somewhere is down. In short, confidence is being lost. It is no
coincidence that gold is the only asset in new high (blue sky)
territory.

Back to the chart, look at what happened as Greenspan
finally ran out of Volcker's ammo and the market realized that this was
simply a shell game promoted mainly by the macro vendor financing
relationship between the US and China. There have been various means of
keeping treasuries aloft, not least of which is the need for China and
other creditors to keep buying them or at the least, not talk them
down. Gold's honest monetary value has simply picked up on the rigged
game beneath the surface and sought the value that treasury yields have
thus far refused to seek.

At the very least, this is a picture
of honesty beneath the surface and sadly it is a picture that most
people will either never see or come to see when the media are shoving
it down their throats and they panic into gold at god knows what higher
price than it is currently at.

I'll kill it here, but when I see and ponder pictures like this, I hear thousands of words.

Don’t Ignore This Chart My Furry Friends (by Gary)

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Gary from Biiwii with a chart depicting a divergence that bears should be very interested in.

The gold-silver ratio (GSR) and the SPX are concurrently doing something that is most unsustainable during this last little thrust higher in markets.  They are rising together.  To review, when gold is rising vs. silver, a signal is given that liquidity is draining.  When gold declines vs. silver, the bull party is on.  It is no more complicated than that.

As you can see by the chart, the GSR has been in an intermediate downtrend since the blow-off hysterics in fear back in March.  Last week, bears (including myself) thought we had the market right where we wanted it and guess what, as long as the bearish divergence of a rising GSR remains concurrent with a rising market, we do!  This will not last.

Gsrdaily

So the vital question is 'which is real and which is Memorex?' when it comes to the two short term uptrends.  I did a less formal version of this study on my blog during pre-market and it appears for the moment at least, that the stock market and the GSR are cooperating toward my favored view, which is that the market will break down and the GSR will continue to rise, possibly into a new intermediate leg up (with corresponding intermediate leg down in the markets).

We should realize however, that the bulls have the benefit of the established trend and that counts for a lot. So, my furry friends, let's keep the hubris under wraps until we get further confirmation.  But so far, so good.

A Value Proposition

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Hi Slope, Gary from Biiwii.com and Biiwii.blogspot.com here again, with something I wrote in 2007 that I think can help settle some of the noise regarding gold, should Tim choose to publish.  I think it is relevant here since Tim often refers to some err, dynamic tension between himself and gold bugs.  🙂

As the rot in Wall Street's dark
alleys works its way from the inside out, from the seediest hedge
funds' leveraged 'investment' vehicles to Main Street's financial
institutions (pensions, 401K's, savings, etc.) gold has taken center
stage, closing above $800 for the first time in its still young bull
market. Fear and anxiety are increasing as the US Dollar falls
further below serious long term support and in this environment,
gold is an emotional conduit through which growing fears of fiat
monetary instability pass. Picture a burning building with a limited
number of exits and a large crowd trying to pile through the door.
Let's call it a… oh I don't know… let's call it a casino.

Gold is the object of many strange and varied perceptions, perhaps
because it is an ancient asset that has always stirred basic human
instincts for wealth, good fortune and even survival. But in light
of the perverted and multi-headed monster we call a financial system
– with seemingly infinite instruments of 'profit' limited only by
the imagination of financial engineers – perceptions toward gold
have become distorted, helped by an enabling Wall Street and
mainstream financial media.

The main point to remember is that gold does nothing; it just sits
there and does not care about the crazy gyrations going on all
around it. But to understand and accept this, casino patrons must
first accept that the metrics they have been schooled in and the
rules they have been taught over the fiat decades to play by are not
applicable. Filling the void that this lack of understanding creates
is a whole host of opinions, many disparaging and/or dismissive.
Others simply attempt to fit this "asset class" into
conventional metrics. The inspiration for this missive was a recent
SeekingAlpha
piece by Brad Zigler called All
That Glitters May Not Be So Golden. Mr. Zigler did not write a
'hatchet piece' on gold but what I find interesting is his and many
other financial media correspondents' analysis of gold as a return
(or lack thereof) instrument.

Gold pays no risk premium as it carries no default risk. But in the
world of financial media-fed perceptions that is a bad thing. No
return you say? No markup? No leverage? Who needs that?! Gold is
about value and nothing more in my opinion. That is why I refuse to
get excited when its fiat currency denominated price goes up and why
I also remain at a normal pulse rate when said 'price' declines
sharply. I do agree that when trading or investing in the gold
miners (as I do) it is important to keep traditional metrics in
mind. But the miners are my casino of choice and I most certainly do
not see the gold miners as gold, a gold equivalent or anything other
than a potentially hugely leveraged play on an enduring asset of
value.

Back in the real world, players are just beginning to get the hint
that the risk they have taken on in the hunt for return in some very
dark corners has come at a price and the price is a massive debit
against the entire system of something for leveraged nothing. Yes,
gold pays no premium but neither is it subject to this debit because
it never went anywhere to begin with.
It
Is What It Is (this is the credo by which the website was
created) and as a barometer of global financial sentiment its
exchange value is rising versus a whole host of paper promises not
to mention many hard assets. So what many investors now need is a
sort of 12 step program as they attempt to 'put down the crack pipe'
and come to an understanding that real value has nothing to do with
return (unlike modern portfolio and asset allocation theory) and it
certainly has nothing to do with leverage.

Mr. Zigler's
assertions
and my responses:


Debate
has raged for some time now about the utility of gold in a
portfolio. Forget, for a moment, the breathless claims of
infomercial touts and Parade
magazine advertisers. Think, instead, of asset class selection.

Why
should anyone add gold—or, for that matter, any asset—to a
portfolio? The answer that comes immediately to many people's minds
is "return." It's the promise of outsized, and often outlandish,
returns that entices people to call that 800 number in the wee hours
of the morning to get their hands on the yellow metal.

There should be no debate. An asset of
historic value belongs in a portfolio if debt obligations (bonds)
and calls on corporate earnings (stocks) belong there. I agree, the
800 number pitch men are seedy characters capitalizing on fear and
insecurity, but why are they part of the conversation? Have you ever
seen the movie Boiler
Room? The world of stock scams dwarfs that of unscrupulous
precious metals dealers.


Gold
isn't the end-all, be-all, however. In the long term, the metal's
price is notoriously unstable. Since gold's price was allowed to
float in 1970, its annualized standard deviation—its price
variance—has been clocked at nearly 20 percent, versus 15 percent
for blue-chip stocks. And in that time, gold's return has only
averaged 8 percent. The S&P 500 earned 11 percent per year.

There is the word "return" again. The reason gold has
under-performed over the measured time frame (minuscule in the
context of history) is because contrary to what some gold bugs may
think, there certainly was upside to the fiat money system. This
upside was manifested in liquidity to build out all manner of
productive enterprise. The United States for example spent the
majority of the 20th century on the upside of this build-out. The
question now becomes 'do we remain on the upside or have the secular
changes beginning in and around 2000 marked a decided switch to the
inevitable payment to the piper (of the debt used to keep the dream
alive)?' If you think there is still productive upside, you will see
gold's 'return' as sub-par. If you believe that secular changes are
at hand, you are looking for that exit door in a crowded casino and
you don't give a damn about return. You want to stay whole.


So what
return can we expect
from gold? Well, financial theory says you can't expect any increase
in an asset's value without growth prospects. Stocks' expected
return derives from earnings growth. Issuers of corporate securities
can create things and grow. There's a real prospect for a company
trading its shares or warrants to be worth more and more as the
result of management decisions. Gold itself doesn't produce
earnings, and for that reason its expected return can be
approximated as zilch. Nada. Bupkis.

Mr. Zigler is correct. Gold provides no 'return' in the modern asset
allocation theory sense of the word. But in bringing the word
'value' into the equation he again shows how modern portfolio
theorists are trained; no return, no 'growth' = no value
proposition. Gold does not stand at $806 this morning because of its
growth but rather because of its retained value vs. paper
instruments – USD first and foremost – which are coming under heavy
questioning. It should be noted that in the US the stocks of these
growth entities are denominated in USD.


Appreciation
in the price of gold, of course, does occur. History attests to
that. There's just no reason to expect
it. What influences the price of gold are external, not intrinsic,
forces.

It appears Mr. Zigler and I have been watching two different
financial systems over the last several years but I certainly agree
that gold's value is affected by external forces.

He then goes on to write about the gold miners which is my usual
subject matter on the
TA
Blog, so I will just end here this critique of modern portfolio
theory as it applies to gold. I hope it helps shed a little light on
an alternate way of thinking for a few people.

I will leave you with a final thought that I was taught early on in
a school of decidedly unconventional asset theory. Price is price
and value is value. They are not one in the same. Unfortunately that
simple thought has been schooled out of the masses. I have no doubt
that pitchmen of all types will come out of the woodwork to hawk the
golden solution to an awakening public. A fortunate few will keep it
simple however and remember that real value is enduring and real
value is not a pitch. I find value splitting wood at my wood pile. I
find value in jamming loudly on guitar. I find value in Google. I
find value in the air I breathe. I find value in remaining
financially whole. I do not find value in debits attached to an
unpayable black hole.

FXI – Breakout to new highs or exhaustion?

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Hi all, Gary from Biiwii still short the market (actually bullishly biased when gold stocks are factored) and not blinking – yet. 

One of my short positions is on China using the FXP inverse ETF.  On the surface it looks like the bulls have won again, but is it really so?  On a G-20 pump no less?  I am not so sure. 

Fxi

Take a look at the daily chart of FXI and tell me what you see, a bullish breakout or a gap up at the end of a short term trend, fueled by global macro-economic pumpers in positions of authority?  I see a market with a terrible risk vs. reward ratio, and it goes beyond China.  We are seeing gap ups all around, including in my gold miners. 

This is not to say it will not be different this time.  I have a tolerance level on the broad markets as per the 60 minute chart of the S&P 500 I showed last week.  We are basically there.  Most of the items I am short against are not at new highs.  These include the SPX itself, real estate, euro and financials.  I chose to look at the FXI today however because it is at new highs and it has left a nice progression of ill-fated gap-ups throughout this rally built on waning momentum.

Let's see how it turns out.

The Long Bond (by biiwii)

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Hello again, biiwii Gary posting a most important long term signpost for your viewing pleasure, the USB Long Bond and its deflationary 'backbone', the 100 month exponential moving average.

Against the backdrop of the long bond's uninterrupted rise from the 1980's, Alan Greenspan was able to portray himself as the great Maestro, always at the ready with inflationary policy when the market and economy needed it most.  This is what I have viewed as a wellspring, compliments of Paul Volcker's tough inflation-fighting policy of the late 1970's and early 1980's.  This policy sprung a new bull market in paper stock and bond certificates as confidence was restored in a secular way.

Greenspan used this sound policy as a lever with which to self-aggrandize and inject moral hazard into a global economy ever more dependent on debt and leverage to keep itself afloat.  The new bureaucrats in charge, Bernanke, Geithner and Summers, have taken Greenspan's play book and run with it.

But they will run as far as the long bond says they will run.  

Usbmo
 
It turned out that Q4, 2008 was merely an opportunity to push the mother of all panic buttons and introduce inflation policy into the system like never before.  This was a lay up as Larry Summers implored the public to buy treasuries right into an inflationary impulse that has been nearly equal to last year's deflationary one.  This trade has been like taking candy from a baby.

And the game of hide the cheese will continue to frustrate both the 'inflationists' and 'deflationists' at important turning points, as long as the secular trend remains intact.  I am of the opinion that there will never be outright deflation as long as the public maintains its…… I can't call it confidence… as long as the public maintains its penchant for thinking in conventional terms. 

Because as the public does so, it makes no effort to stop the ongoing and official gaming the long bond, which sees policy makers ramp the money supply every time treasuries rise strongly, giving them license if not imperative, to do so.

The game will end if and when the EMA 100, the secular backbone of the trend, is broken.  Then we are in uncharted inflationary waters.  I am looking for another test of the 100 as per the daily chart of 30 year yields shown in this post.  At that point, I will have to say the risk is substantial for the inflationists as another deflationary liquidation is probable.  From this event would come future inflationary policies in a continuation of the wash, rinse, repeat cycle.

Either that or the game ends and a new era begins.  That would be the era of hyperinflation.  We should be hoping the current trend holds.