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?