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There is something about technical analysis - and its application to accurately
predict future price levels these days that is making me sick. It seems to
me that virtually every analyst, many of whom I respect, are too hung up in
their beliefs that mining shares de facto must revisit "lower bollinger bands" or
their 200 day moving averages. The rationale most often cited is that these
critical chart points are "always" revisited - history tells us this - according
to their chartist's discipline. After all, everyone knows that prices never go "straight
up" - or do they?
Well, here are a few bites of history compliments of George
J. W. Goodman:
"Before World War I Germany was a prosperous country, with a gold-backed
currency, expanding industry, and world leadership in optics, chemicals,
and machinery. The German Mark, the British shilling, the French franc, and
the Italian lira all had about equal value, and all were exchanged four or
five to the dollar. That was in 1914. In 1923, at the most fevered moment
of the German hyperinflation, the exchange rate between the dollar and the
Mark was one trillion Marks to one dollar, and a wheelbarrow full of money
would not even buy a newspaper. Most Germans were taken by surprise by the
financial tornado."
As the German Mark "streaked" toward one trillion to the dollar, I wonder
how many times it "retraced" back to its 200 day moving average?
I just love this one;
"My father was a lawyer," says Walter Levy, an internationally known German-born
oil consultant in New York, "and he had taken out an insurance policy in
1903, and every month he had made the payments faithfully. It was a 20-year
policy, and when it came due, he cashed it in and bought a single loaf of
bread." The Berlin publisher Leopold Ullstein wrote that an American visitor
tipped their cook one dollar. The family convened, and it was decided that
a trust fund should be set up in a Berlin bank with the cook as beneficiary,
the bank to administer and invest the dollar."
Is anyone wondering - like me - how many times the price of bread "retraced" to
its 200 day moving average?
I know, you're probably figuring that what happened with bread was a "one
off";
"Ordinary citizens worked at their jobs, sent their children to school and
worried about their grades, maneuvered for promotions and rejoiced when they
got them, and generally expected things to get better. But the prices that
had doubled from 1914 to 1919 doubled again during just five months in 1922.
Milk went from 7 Marks per liter to 16; beer from 5.6 to 18. There were complaints
about the high cost of living. Professors and civil servants complained of
getting squeezed. Factory workers pressed for wage increases. An underground
economy developed, aided by a desire to beat the tax collector."
Detractors - who will likely include the entire T/A community - will of course
be singing the tune that I'm selectively highlighting the perverse actions
of a whole pile of irrational market participants. So on that musical theme,
let's continue;
"Pianos, wrote the British historian Adam Fergusson, were bought even by
unmusical families. Sellers held back because the Mark was worth less every
day. As prices went up, the amounts of currency demanded were greater, and
the German Central Bank responded to the demands. Yet
the ruling authorities did not see anything wrong. A leading financial
newspaper said that the amounts of money in circulation were not excessively
high. Dr. Rudolf Havenstein, the president of the Reichsbank (equivalent
to the Federal Reserve) told an economics professor that he needed a new
suit but wasn't going to buy one until prices came down."
Irrational exuberance perhaps? Are any of you wondering how many times the
price of pianos "retraced" to their 200 day moving average? Let's not forget
ruling authorities seeing nothing wrong - now there's a novel concept. And
let's stop and consider the "sacrifice" on the part of monetary authorities
of the day - the man needed a suit and he actually "went without" - no doubt
as his own personal protest that prices were not "retreating" to their 200
day moving averages.
While I cannot be sure whether or not the Reichsbank reported M3 Money Supply
data - I'm going to go out on a limb and "bet not";
"So the printing presses ran, and once they began to run, they were hard
to stop. The price increases began to be dizzying. Menus in cafes could not
be revised quickly enough. A student at Freiburg University ordered a cup
of coffee at a cafe. The price on the menu was 5,000 Marks. He had two cups.
When the bill came, it was for 14,000 Marks. "If you want to save money," he
was told, "and you want two cups of coffee, you should order them both at
the same time."
Now, I'm not sure about you folks - but when I'm ordering a coffee - a ruler
and 'French curve' along with the 200 day moving average price of a cup of
java are not always the first things that come to mind.
Now I'm sure that many of you - by now - are dismissing all of this as fanciful
thinking. After all, America is the home of Democracy - with all of her great
political institutions, safeguards and great corporate infrastructure;
"Why did the German government not act to halt the inflation? It was a shaky,
fragile government, especially after the assassination. The vengeful French
sent their army into the Ruhr to enforce their demands for reparations, and
the Germans were powerless to resist. More than inflation, the Germans feared
unemployment. In 1919 Communists had tried to take over, and severe unemployment
might give the Communists another chance. The great German industrial combines
-- Krupp, Thyssen, Farben, Stinnes -- condoned the inflation and survived
it well. A cheaper Mark, they reasoned, would make German goods cheap and
easy to export, and they needed the export earnings to buy raw materials
abroad. Inflation kept everyone working."
Shaky governments, an external threat, a state of war and corporate entities
that somehow manage to rise above it all and prosper despite the conditions
- all against the backdrop of a yearning for a lower currency; I guess they
simply desired a little more "flexibility". Now I'll bet you are all wondering
what the 200 day moving averages were of Krupp, Thyssen, Farben and Stinnes
were, eh?
Thank goodness for technology - we now have "digital currency". The "tree
huggers" are much happier that we don't have to do quite as much "clear cutting" and
it's been particularly helpful in keeping the price of ink close to its 200
day moving average;
"The presses of the Reichsbank could not keep up though they ran through
the night. Individual cities and states began to issue their own money. Dr.
Havenstein, the president of the Reichsbank, did not get his new suit. A
factory worker described payday, which was every day at 11:00 a.m.: "At 11:00
in the morning a siren sounded, and everybody gathered in the factory forecourt,
where a five-ton lorry was drawn up loaded brimful with paper money. The
chief cashier and his assistants climbed up on top. They read out names and
just threw out bundles of notes. As soon as you had caught one you made a
dash for the nearest shop and bought just anything that was going." Teachers,
paid at 10:00 a.m., brought their money to the playground, where relatives
took the bundles and hurried off with them. Banks closed at 11:00 a.m.; the
harried clerks went on strike."
Since T/A involves the study of past price movements - looking for recurring
patterns and projecting them into the future, it's no wonder that a rising
price of gold has become the welfare statist's public enemy number one;
"The flight from currency that had begun with the buying of diamonds, gold,
country houses, and antiques now extended to minor and almost useless items
-- bric-a-brac, soap, hairpins. The law-abiding country crumbled into petty
thievery. Copper pipes and brass armatures weren't safe. Gasoline was siphoned
from cars. People bought things they didn't need and used them to barter
-- a pair of shoes for a shirt, some crockery for coffee. Berlin had a "witches'
Sabbath" atmosphere. Prostitutes of both sexes roamed the streets. Cocaine
was the fashionable drug. In the cabarets the newly rich and their foreign
friends could dance and spend money. Other reports noted that not all the
young people had a bad time. Their parents had taught them to work and save,
and that was clearly wrong, so they could spend money, enjoy themselves,
and flout the old."
While I'm not sure whether or not the price of Cocaine ever revisits its 200
day moving average, it should not be surprising to many that episodes like
the one described above ended with a swift deterioration of seemingly unbelievable
or inexplicable events. A true conundrum of the day;
"The publisher Leopold Ullstein wrote: "People just didn't understand what
was happening. All the economic theory they had been taught didn't provide
for the phenomenon. There was a feeling of utter dependence on anonymous
powers -- almost as a primitive people believed in magic -- that somebody
must be in the know, and that this small group of 'somebodies' must be a
conspiracy."
I'm going to bet that the conspiracy - if indeed there was one at all - was
no doubt being organized by the folks who knew where the 200 day moving average
was. In any event, by 1923 the Mark was trading at One Trillion to the Dollar
and the currency had finally lost all meaning;
"What happened immediately afterward is as fascinating as the Great Inflation
itself. The tornado of the Mark inflation was succeeded by the "miracle of
the Rentenmark." A new president took over the Reichsbank, Horace Greeley
Hjalmar Schacht, who came by his first two names because of his father's
admiration for an editor of the New York Tribune. The Rentenmark was
not Schacht's idea, but he executed it, and as the Reichsbank president,
he got the credit for it. For decades afterward he was able to maintain a
reputation for financial wizardry. He became the architect of the financial
prosperity brought by the Nazi party."
Sound familiar? Germany was a rich country that ended up with a worthless
currency.
While the tools in technical analysis are worthy of understanding, a little
common sense and attention to fundamentals may enlighten you to the real situation:
- While I do not totally dismiss its value, too much emphasis is placed on
technical analysis. By all means pay attention to it - but don't get married
to it.
- Financial markets are increasingly subject to surreptitious interference
on the part of the Fed and monetary officials - they use the same technical
analysis in conjunction with their beloved printing press to 'paint the charts'
- GATA has proven and documented this beyond a shadow of a doubt
- Technical analysts are increasingly 'charting a massive fraud'
- Fundamentals are being ignored - namely, the unsustainable twin deficits
of the U.S. current and fiscal accounts
- While being attune to important 'chart points' and technical analysis in
financial markets that are de facto driven by this discipline - we are fast
approaching 'break or tipping points' where fundamentals will reassert themselves.
- We know this because only rigged or managed markets in key strategic commodities
could lead to such misallocations, distortions and increasingly apparent
shortages in everything from electricity to refining capacity, to base and
precious metals exploration and production to over inflated housing prices
and financial assets.
- To illustrate these imbalances I need look no further than the street I
live on. In 1980 homes on my street sold for 200k while gold traded for 850
per ounce. Gold was said to be overvalued then. Today, homes on my street
trade for between 800k and 1 million - and gold is routinely said to be "risky",
a "speculation" and overvalued at 600 per ounce? Homes, of course, are only
ever referred to in the main stream financial press as being good, safe bedrock
investments.
- Explanations like "conundrums" or the China blame game as cause for many
of the imbalances outlined above are too unbelievable to be taken seriously.
- This is but further anecdotal evidence to something
I've written about - at length - in the past; namely, current asset
allocation models that are widely accepted and used today are categorically
inappropriate for those who have mistakenly placed "blind faith" in them.
They are built on false assumptions - like financial market instruments
reflect prices that are set in free markets.
- Increasingly, more and more oddities in our financial markets are being
dismissed as more and more conundrums. The reality - these are nothing more
or less than "masked" fundamentals beginning to reassert themselves as imbalances
or distortions resulting from derivatives alchemy or "rigging" which has
come to be prescribed, known and accepted as T/A
- The brutal reality - our beloved financial system is destined to a fate
similar to that of Enron
- Few realized - or better yet, BELIEVED - how bad Enron really was until
someone said "Uncle", but some knew all along.
Ben Bernanke, you claim that you are a proponent of more transparency at the
Fed. Isn't it about time someone said Uncle?
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