Why I Hate ZH and Other Similar Creatures.

Regular readers of this blog know that I dislike ZH with a passion. The over riding reason is, these guys have scared the retail investors since 2009 and have caused the biggest missing investment opportunity of our life time, when SPX more than doubled from its lows. I could write many valid points but toady I want to share the following from Joshua Brown ( the reformed broker)

Without further ado, here is what Joshua Brown has to say about the merchants of gloom & doom:

Escaping the Fear Factory 

Are the birds chirping? Is tranquility close at hand?

There are many who believe so or at least admit that they can see it in sight.

The world is awash in liquidity and opportunity abounds in every region around the world:

Distressed investors in Europe are now reaping the benefits of their midnight maneuvers where no one else dared to tread. Dan Loeb (Third Point) made a half a billion dollars buying Greek bonds before Labor Day and selling them before Christmas. Marc Lasry (Avenue Capital) is taking whole portfolios of performing loans off the hands of Belgian and French banks at steep discounts, bringing liquidity to one of the last deserts without it.

Animal Spirits are returning to the equity markets as five-year highs are penetrated with a persistent and lusty thrusting from below. The same is true in the corporate bond market asinvestors line up for the latest offering like sneaker aficionados on Air Jordan launch day. Not every waking second is being spent on avoiding loss - people are once again looking to win, a psychological seachange as important as any quantitative market indicator you want to present to me, I promise you that.

Housing, formerly the Achilles Heel of the US economy, is now the engine driving us out of the negative feedback loop.

Goldman Sachs is back to being Goldman Sachs again, smashing estimates from trading to I-banking to M&A to underwriting.

Bank of America is putting the sins of its acquired mortgage business behind it with every settlement and charge-off.

Even Citi has a request in front of the regulators to up their share buyback.

Morgan Stanley's just traded through a new 52-week high with very little other than green field ahead of it now that it's no longer the poster child for hidden Euro exposure.

You may look at the return to prominence of the big banks and say "How unfair!" You will be right, but please compartmentalize that notion. Because it has nothing to do with your duties as an investor.

The deficit hawks have read the polls, they now understand how unpopular their debt ceiling stance is with the people. They are unwilling to allow the "Republican Recession of 2013" to become the rallying cry of the Democrats during the next elections. And so they cave and grant an extension so that negotiations may continue.

The US stock market is trading at a 13 multiple on the $108 in earnings analysts are expecting for this calendar year's S&P 500.  The Schiller PE (a 10-year average to smooth out cyclicality) stands at 22.8, a higher-than-mean reading (the mean being 16) to be sure - but not obnoxiously so and given the massive earnings nosedive in 2008-2009, some generosity is required here.

Headline-wise there are just a few more hurdles, we are told, and then the Era of Crisis 2007-2012 will be germaine only to the historians and the professors.

And with our passage into the new era, we will leave behind the baggage of the old one.

There will be bloggers and journalists and newsletter writers who continue to fight the old battles that no longer matter. They will spend countless hours on "Who really caused the Crisis" and lament the favoritism shown by Geithner and Paulson. They will continue to chase mortgage fraud headlines down the rabbit hole of who-gives-a-shit and expend a great deal of time and energy on fearing high frequency trading and loathing the banks.

To which the productive and creative and ambitious among us will say "Whatever."

We will stop reading these diatribes, they will no longer enter into our decision-making process. Like the screams of the Wicked Witch of the East as she melts into the ground, their yowls and yelps will grow even more shrill and abrasive as our collective attention continues to fade. This will be embarrassing - like an older family member who seeks to bait you into a heated discussion about Vietnam at Thanksgiving dinner. We will not read or watch or click this stuff anymore.

Phasers set on ignore.

Our escape from the Fear Factory will not be an easy one. There will be surprise spikes in the Vix and drops in the market during which all the old alarmist assholes are trotted back out into the spotlight - however briefly - to sow the seeds of uncertainty and discord. They will return with their old catchphrases - "The Fed is shooting blanks, kicking the can, Bernanke is facing a liquidity trap, etc."  For an amazing, museum-quality look at everything the permabears got wrong these last few years, please visit this page of newsletter archives - it's like a compendium of every single horrible call you could have made all in one place. When you run a bear fund, this is your job I suppose - to make hay while the sun is not shining.

Hope they made the most of their moment, nobody will care going forward.

To say that "risks remain" and that "headwinds persist" would be an understatement. Many things must go perfectly right this year so as to ensure a continued expansion and the possibility of derailment is significant. Much of what needs to be fixed remains broken, even if less visibly so thanks to the healing power of time. The bandaids will not remain affixed to the wounds forever, at a certain point an actual treatment will be necessary - possibly a painful one.  The market understands this, has processed this and has decided that the issues we face are manageable.

We are coming off of our wartime footing. In the streets, shopkeepers are sweeping up the broken glass and putting their establishments back in order. Banks are lending again and filling the air are the sounds of hammers and drills and felled trees and the rumbling of machinery. We are borrowing and building and planning and hiring again. Only a lonely, bitter old man would fail to see this - his mind poisoned by his growing irrelevance in a world that's rapidly passing him by. How else to explain something like this bit of June 2010 commentary from the Dow Theory Letter's Richard Russell:

"Do your friends a favor. Tell them to “batten down the hatches” because there’s a HARD RAIN coming. Tell them to get out of debt  and sell anything they can sell (and don’t need) in order to get liquid. Tell them that Richard Russell says that by the end of this year they won’t recognize the country. They’ll retort, “How the dickens does Russell know — who told him?” Tell them the stock market told him."

If you've been overdosing on shit like that since 2008, you can stop now. Richard Russell cannot hurt you anymore. His time has passed and his furtive scratching and clawing at our time can be safely ignored.

The next drop in the stock market is around the corner - perhaps it will be a garden variety 5% correction and perhaps something more in response to politics or last quarter's earnings. This is what you should expect. In fact, if your time horizon as an investor and an accumulator of financial assets is longer than ten years, it would be irrational for you to be rooting against that!Pray for it, you will need it.  And what you will see on this next dip is a change in behavior, in investor mentality. These sell-offs will be bought up gleefully and rapidly by those who've remained in the Fear Factory for too long. This can go on for quite awhile, especially should interest rates remain low. The investor class has favored bonds to stocks at a rate of 33 timesthese past five years - an imbalance like that takes a long time to correct.

The next crisis is already in the works - this is how things will always be but remember that their risks are our opportunities. And smile. Think of what you've been through thus far!

Welcome the new era - whatever it brings - as a former prisoner of the Fear Factory welcomes the first rays of sun on the outside of the wall.

Bravo Josh. Very well said.

We will get corrections from time to time, sometimes even 20% or more but that would be another shopping opportunity. We do not have to be long all the time but we do not have to be scared all the time as well. 

Happy long weekend friends.

More new-Keynesian paradoxes

Last week I saw Johannes Wieland's paper "Are negative supply shocks expansionary at the zero lower bound?"  A side benefit of the job market season is that we see interesting new papers like this one, and it contributed to my project of trying to better understand new-Keynesian models.

Though starting academic papers with blog quotations is usually a bad idea, Johannes starts with a great and very appropriate one,

As some of us keep trying to point out, the United States is in a liquidity trap: [...] This puts us in a world of topsy-turvy, in which many of the usual rules of economics cease to hold. Thrift leads to lower investment; wage cuts reduce employment; even higher productivity can be a bad thing. And the broken windows fallacy ceases to be a fallacy: something that forces firms to replace capital, even if that something seemingly makes them poorer, can stimulate spending and raise employment.” -Paul Krugman

I endorse this quote, because it is an accurate and pithy description of the properties of many careful new-Keynesian analyses in the academic literature.

 Johannes explains

Does destroying productive capacity raise output when the zero lower bound (ZLB) binds? [ZLB: When interest rates are zero, the Fed can't lower them any more in response to shocks -JC] While this question may seem absurd, in fact it is a common prediction of many macroeconomic models: In these models, temporary negative supply shocks raise inflation expectations and lower expected real interest rates at the ZLB, which stimulates consumption and output. While some prominent economists have subscribed to this view and its policy implications (e.g., Eggertsson and Woodford [2003], Eggertsson and Krugman [2011], Eggertsson [2012]), there is wide disagreement over such a radical and unintuitive proposition.

Indeed there is.

These are just the beginning of the strange predictions new-Keynesian models (or modelers) make.

"Fiscal stimulus" is the prediction that even completely wasted government spending is good for the economy. Paul Krugman recommended, with refreshing clarity, that the US government fake an alien invasion so we could spend trillions of dollars building useless defenses. (I'm not exactly sure why he does not call for real defense spending. After all, if building aircraft carriers saved the economy in 1941, and defenses against imaginary aliens would save the economy in 2013, it's not clear why real aircraft carriers have the opposite effect. But I'm still working on the nuances of new-Keynesianism, so I'll let him explain the difference. I'm not a big fan of huge defense spending anyway.)

Furthermore, all the new-Keynesian models are "Ricardian." They predict the same stimulus whether spending is financed by borrowing or by lump-sum taxes  today. Good, we don't need to argue about "Ricardian equivalence," but to believe their predictions for spending borrowed money, you have to believe that taxing you and me a trillion dollars and spending it on a trillion dollars of alien defenses will raise overall output by 2, 3, or 4 (you can get really big multipliers in these models) trillion dollars.

Actually, stimulus financed by temporary payroll taxes can be even better than from borrowing money. These are a negative supply shock, which causes inflation and lowers the real interest rate. Sand in the gears is good. Stimulus financed by temporary consumption taxes is worse, because that encourages saving. Promises of higher future consumption taxes, anathema in the standard view of the world, are good, as they get people to consume today.

Super-weirdly, many new-Keyensian paradox predictions get worse as the central friction, price stickiness, gets better.

Johannes again on the new-Keynesian paradoxes:

First, according to the “Paradox of Thrift,” a rise in the desire to save is self-defeating at the ZLB, because it reduces output so much that aggregate savings fall (Keynes [1936], Krugman [1998], Eggertsson and Woodford [2003], and Christiano [2004]). Second, according to the “Paradox of Flexibility,” output volatility may rise at the ZLB when prices and wages are more flexible (e.g., Werning [2011], Eggertsson and Krugman [2011]).

My empirical results concern primarily the “Paradox of Toil” (Eggertsson [2010]), whereby a temporary increase in desired labor supply at the ZLB reduces the equilibrium employment level in standard models. .... Following this logic, payroll tax cuts are contractionary at the ZLB because they lower expected inflation (Eggertsson [2011]), and allowing collusion among firms is expansionary because it raises expected inflation (Eggertsson [2012]).

A pause in praise of economic models: They tie ideas together. You can't pick and choose. If you like stimulus with borrowed money, but suspect that tax-financed stimulus might not work so well, you can't just waive your hands and refer to new-Keynesian models to defend you. These models predict the two policies have the same effect. If you like your stimulus, but think that maybe hurricanes wiping out a bunch of the capital stock isn't great, sorry, you can't refer to new-Keynesian models to defend you. If you don't buy one of Krugman's assertions, you don't buy any of them. (At a minimum, you have to build a new variant of model -- you can't refer to existing new-Keynesian models to defend you.) To taste fish, you have to swallow the whole whale, hook, line, and sinker.

So, back to Johannes. He notes that the models predict quite different behavior away from the bound than at the bound, so conventional estimates don't really tell us that much about whether these predictions are true. But we have enough experience with economies at the lower bound now, that we can begin to test some of these astonishing predictions.

(Minor suggestion for PhD students. The key requirement for these predictions is that the Fed does not change the nominal interest rate in response to shocks. There have actually been other periods of time when central banks have fixed nominal interest rates, for example between 1945 and 1952 in the US. More generally, the general new-Keynesian view is that interest rates did not respond enough to shocks before 1980. So in fact, versions of the paradoxes should be visible in data away from the zero bound.)

Johannes looks at the earthquake in Japan, and oil price shocks. Surprise, surprise, earthquakes are bad for output. More subtly, the new-Keynesian prediction flows through inflation: "Supply shocks" should raise expected inflation, which lowers real interest rates, and lower real interest rates should raise consumption and output. (As I explained last week, new-Keynesian models anchor expected consumption in the far off future. Then real interest rates determine the growth rate of consumption, and higher growth means a lower level today. In the models consumption=output. See Johannes' equation 2 page 7.) Johannes finds that the supply shocks led to higher expected inflation, and hence a lower real rate. But the lower real rate just didn't have the predicted effect on output. In fact, he finds that oil shocks have worse negative effects on employment at the zero bound than in normal times!

Like all provocative empirical work, I'm sure this one will be picked over. The Booth Macroeconomics workshop did its usual good job of exploring nooks and crannies. But let us also pause in praise of serious empirical work. Rather than blurt "this is ridicuous!" let us go see if indeed earthquakes, hurricanes, labor market restrictions, oligopolization and other normally adverse "supply" shocks actually help the economy. The sun might just come up in the West at the zero bound.

Where to go from here? If I had this great introduction, and results that rather decisively reject a central night-is-day new-Keynesian proposition, clearly linked to all the others, I would obviously have been tempted to write it up as "this model is wrong," and dig deep into which key assumptions of the model drive its basic mistakes. Johannes takes another tack, and adds credit constraints to the model. Whether this is a successful repair or a clever epicycle I will leave for another time -- and frankly I haven't studied it closely enough to opine yet.  How many of the paradoxes it overturns is another good question. It seems to overturn quite a few. But the paradoxes are also the sexy policy implications.  It may save new-Keynesian models from their prediction that hurricanes are good, by destroying the new-Keynesian multiplier.

Republicans Go Over the Cliff

Too often, Democrats get blamed for our national debt problems and the economic stagnation that has come to characterize the US economy.  Republicans deserve their share of the blame.

Who provided the votes necessary to escape considering our debt problems at the start of this year?  Speaker Boehner violated the "Hastert Rule" and let the Senate bill come up for a vote which raised taxes.  48 Republicans then voted for the bill.  A solid victory for Obama.  A solid defeat for the American taxpayer.  And, who engineered this?  Republicans.  Ditto for the emergency pork bill that passed the House last week.  Once again, with Boehner's concurrence, Republicans provided the necessary votes to pass this abomination as well.

Yesterday, Republicans announced unilateral pre-emptory capitulation before the White House by pledging to extend the debt ceiling for three months in exchange for the usual -- nothing.

What is the difference between a Republican majority in the House of Representatives and a Democrat majority?  The answer -- nothing at all.

You get the same legislation, the same bad economic policy.  There is absolutely no difference.

Republicans object that the polls show that the public is on Obama's side.  What did the polls show, then and now, about Obamacare as Obama jammed his unpopular health care through the Congress?  It showed that Obamacare was unpopular then and unpopular now.  But, did that matter?  No

Obama saw it through.  Say what you will.  The Democrats believe in what they are pushing.  The Republicans don't and it shows.  Small wonder that Republicans have trouble getting their voters to the polls.  Why bother?

So Much For History.

History says Jan. OpEx is normally Red.
But this year the history was turned upside down, as was last year.
And all the day trading bears got slaughtered, again.
I sometimes visit a day trading forum of a TA site and I see folks animately discussing VIX trend line,( a new low of 12.31) T2111, USHL5, NYHGH, so on and so forth. The conclusion is that a Top is around the corner and things are about to crash.

I still hope for some sort of correction beginning of next week but definitely no crash. By the way, does any one remember what I wrote about VIX a week back? If you don't , here is a link:
Expect VIX to reach low double digit

The problem with these TA guys are same as that of Robert Prechter or ZH.
They are never wrong, just little early.
And TA need not be complicated. It works when you can make it simple so that anyone can understand it.
Prechter has been early with his S&P500 crash call for the last 5 years as has been ZH. May be one of these days it will really crash and then they can say "Told you so". But I doubt anyone would be left to short the market then, because by then everyone would have blown up their capital with these wrong calls.

Today gold and silver faced the resistance and retreated a bit.
Let us look at the chart of gold.

This is a simple chart with trend lines and Fib info. Easy to understand that gold is facing a resistance at $1700 and that is what we saw yesterday and today, when gold came close to $ 1700 and retreated. Very soon it will break this triangle and I am on the camp that it will break to the upside and run away. So we will be patient with our long gold position for many months to come. While there is a short term top in gold, the weekly cycles are up.

Nat. Gas is presenting a paradox. Seasonality and longer term cycles are down but having closed above $ 3.38, the price actions indicate that it wants to retest the last high before rolling over. As I do not trade against the cycles, I will not go long here. Rather, I will wait for the price action to exhaust itself and then take a short trade again.

Coffee futures are grinding higher but is still away from the long term buy signal. But cycles are close to bottom and specially in such situations we can expect whipsaws. The coffee ETF, JO is presently at around $35.10 and I think a buy signal would come around $ 38.75 or so. Please send your feedback on this one.

Oil has reached a point where I do not expect much short term gain and is looking a bit stretched here. A correction to the $ 88-$ 89 level is needed before we can go long oil again.

All in all, a very interesting week. There are some very interesting trends developing and Sunday Newsletter will highlight some of them to the subscribers. As always, let's not front run because this beast has some more energy to run.
Have a great weekend folks.

The New Wall Street

Better-than-expected results were common for the major money-center banks that reported earnings this week.  The announcement of these "good results" were accompanied by more layoff notices from every large bank.  Wall Street continues to downsize as the rest of the economy remains in hunker-down mode.

We are gradually becoming accustomed to accepting economic stagnation as the new normal.  Reminiscent of the 1970s,  Americans are becoming used to sluggish job prospects, sluggish income and wealth growth, and massive and continuing unemployment.  All of this is now described, by the president's coterie of supporters in the media, as an improving economy.  This is not an improving economy so much as a different economy.

The place to be is somewhere in the government or quasi-government sector.  You can make high six figure incomes at a relaxed pace in the upper echelons of most large universities.  Even better, you probably aren't at risk of being laid off.  But, if your plan is to enter the private sector and work your way up, the historic pathway of the American dream, you can probably forget it.

Working for government, at any level, is the ticket.  Once an economy reaches the degree of government control and government ownership that the American economy has reached, the pathway to success changes.  You can't depend upon the vibrancy of the economy any longer.  That vibrancy has been legislated out of existence.  So heading off to the private sector is problematic. Instead, it is time to strap on your politics and find your way into a government job or a non-profit job or a job in the educational sector.  That is the pathway to success in the new economy.

Of course, this means increasingly that economic growth will not happen.  How can it, when most people that "work" aren't involved in producing anything.  Many so-called "workers" are mainly enforcing laws that prohibit others from working.  If you have an economy where a growing percentage of workers produce laws and regulations and then enforce them, while a dwindling few produce anything of substance, then the real pie can't grow.

Instead you create a national divide -- something we can already see emerging -- between those in the protected sectors of government, education, and non-profit (funded by tax-reducing so-called charitable donations) who have incomes and job security and those fending for their life in the increasingly marginalized private sector.

So, the new Wall Street is simply the most visible current display of the decline of American economic leadership.  The Obama plan is working.

Counter Point

For those of you who have been brain wasted by ZH and other prophets of doom and gloom, here is something of a counterpoint:
Ray of Hope by Ned Davis
I am not saying we should rush to buy stocks.
I am just saying: keep an open mind.

P.S. Its now almost noon per Eastern time. I find it odd that ZH was silent for almost 40 minutes ( 11.34-10.54) and had not come up with another story why everything will end badly. Running out of ideas or Top is really close and no longer a need to drive folks to short?

Lauren Templeton shares investing lessons from Sir John Templeton

Investor Lauren Templeton shares some life wisdom and investing lessons from her great-uncle, Sir John Templeton in this VIC 2012 video. 

By way of background, John Templeton was a pioneer of global share investing who founded the Templeton Growth fund in 1954. As his wealth increased, he also became known for his philanthropic efforts and writings. In the 1960s, he renounced his U.S. citizenship (an increasingly popular move among the rich of late) and continued to live in the Bahamas as a Bahamian citizen.



In her talk at the Ben Graham Centre for Value Investing, Lauren Templeton shares some insights on Sir John's investment philosophy and his life. A few notable lessons and quotes: 

1. Born in Tennessee, Templeton was an excellent student who attended Yale and Oxford. While at Yale, young John found he had to work to pay for a part of his schooling. His skill with probabilities helped him earn a good part of the money playing poker. 

2. After studying at Oxford, Templeton took a 40-nation tour of the world. He was gone so long that his mother thought he had passed away! His travels provided a "bedrock of geopolitical knowledge" to guide his investing. 

3. Lauren relates the story of his first trade in "maximum pessimism", the famous deal in which Templeton borrowed $10,000 and purchased shares of all the U.S. companies trading below $1 a share. Even though many of the companies were facing bankruptcy at the time of his purchase (on the eve of World War II), most turned a profit and he sold his shares for a $40,000 profit a few years later. 

4. Listed among his personal attributes: self-reliance, flexibility, sense of stewardship, a drive towards diversity (seeking opportunities globally), a bargain-hunting mentality, devoting time to study, ability to retreat from daily pressures, developing a broad range of friendships and contacts, positive thinking, patience, simplicity, and great intuitive powers. 

5. "To buy when others are despondently selling, and to sell when others are avidly buying, requires the greatest fortitude and pays the greatest ultimate reward."

6.  "If you want to have better performance than the crowd, then you must do things differently from the crowd."

7. John was a thrifty saver and he advised his family and friends to live simply and save 50 percent of their income. He viewed his savings as the seed corn of future investments and opportunities. 

8. Templeton operated on a truly long-range view. He planned in advance for market panics by drawing up a list of securities to buy at bargain prices. When he discussed his charitable foundations, he spoke of finding the best investment opportunities for the next 200 years. After searching the globe for property investments that might suit his foundation, he still came back to stocks.    

There's a good deal more in this video on behavioral finance and human behavior in market panics. As Lauren Templeton says, "If you're aware of your biases you'll become a better investor.". 

Enjoy the video and the insights. You'll find more from Sir John and friends below.

Related posts: 

1. Jim Rogers interview: lessons on life and investing.

2. Lessons from Hedge Fund Market Wizards: Ray Dalio.

3. John Templeton's last memorandum from 2005.