The Truth Shall Set You Free

A lot can happen in a month. A new president gets elected based on the mantra of change, but immediately starts staffing his cabinet with hardcore Washington establishment players. Citigroup gets a bailout. The Big 3 automakers fly in on their corporate jets and ask for a bailout but get denied. The Fed takes on all kinds of debt and refuses to shed a light on what it has. And the market implodes.

I’ve spend most of the past few weeks playing the market to the downside, and I got out right before the rally last week and did pretty well. I had a chance to speak with many people over the holiday about the current market, and it still amazes me how people can’t take off their rosy glasses and see the downside that’s still out there. It seems to me like some form of denial since acknowledgement of the risks would require acknowledging that our entire financial system, including the dollar, could collapse, and some people can’t fathom this and refuse to admit it’s possible.

Check out The Financial Ninja’s Scary Fed Charts if you don’t think it’s possible. He also has a great article on the failed economic policies of our current “leaders.” Ron Paul offers his thoughts about the Fed and its failed policies, and continues to push a bill for the abolition of the Fed. Maybe as this continues to play out people will start to listen.

Then there’s the issue of people continuing to look for a bottom in the market. This isn’t a normal bear market. There is serious downside potential still out there, and in my opinion it’s coming soon.

After two years of constant buildup, we’ll finally learn who the next president of the United States is. I don’t know about you, but I’m sick of all the political games and ready for it to finally be over. It seems the market feels the same way, as it’s been rallying lightly on decreasing volume. After the election effect wears off, I’m looking for further declines as the new economic reality sets in. I’m very interested to know what any of you think.

• The ’08 Campaign: Sea Change for Politics as We Know It - [NY Times]
• New Terrain for Panel on Bailout - [NY Times]
  
  The program that was supposed to be transparent and open is ending up opaque and muddy. Big surprise. Be sure to take a look at the graphic for a closer look at the five government officials running this program.
• Let It Bounce, So We Can Short Again - [Financial Ninja]
  
  Examining the case for further declines.
• Economic contractions AND rising prices, dare Reggie utter the “I” word - Enter a global phenomenon - [BoomBustBlog]
• Heh Barney Fife! - [Market Ticker]
  
  Another example of government hypocrisy and/or ignorance. Again, big surprise.

Karl Denninger on why you should stop paying your mortgage:

Stop Paying Your Mortgage Today - [The Market Ticker]

I love the subversiveness of this. Of course, just as Karl insists, you should only consider this if you have a “no-recourse” mortgage and can take a hit to your credit score, but it’s a great F-U to the perpetrators of this maliciousness if you can pull it off.

I think that exactly what is going on here is starting to dawn on people, especially those who pay a lot in taxes and do not receive significant handouts from the government. They’re realizing that they are paying for the mistakes of inept policy makers and corrupt businessmen who prey on the financial ignorance of the weak, that they are paying for luxurious expenses-paid retreats and “conferences” for AIG and others that needed to be bailed out.

Also, another article by Mr. Denninger on Bush and his trying to pull a fast one:

Bush - Caught Red-Handed In A Lie - [The Market Ticker]

Wake up people! The only way to stop this crap is to demand your current leaders stop allowing all of this, like when Congress initially listened to the uprising and said “No!” to the bailout, and to vote out those who do not listen. Spread the word.

Haven’t posted in a while because I’ve been sitting back watching the wild market gyrations, trying to get a feel for if the bottom is really going to drop out from under us or if the fall has run its course in the short term and if a bounce is on its way. I’ve also been spending a lot of time reading The Creature From Jekyll Island and I’m happy to say I just finished it. Look for a post on it in a day or two. Anyway let’s check in on some of the goings-on.

• Sleepless in Iran - [NY Times]

  It will be interesting to see how the decline in oil prices plays out in countries that were depending on high prices to fuel their spending programs and anti-Western rhetoric, such as Iran, Russia, and Venezuela.

  “(Incidentally, this was exactly what happened to the shah of Iran: 1) Sudden surge in oil prices. 2) Delusions of grandeur. 3) Sudden contraction of oil prices. 4) Dramatic downfall. 5) You’re toast.)

  Under Ahmadinejad, Iran’s mullahs have gone on a domestic subsidy binge - using oil money to cushion the prices of food, gasoline, mortgages and to create jobs - to buy off the Iranian people. But the one thing Ahmadinejad couldn’t buy was real economic growth.”

  To me, this sounds awfully similar to speculative bubbles and the irrational exuberance they create. People get caught up in the effects of a temporary economic situation, thinking it’s a new economic reality, and forgetting that markets are dynamic and can go down as well as up. And the cycle repeats itself.

• Roubini Says U.S. Needs $400 Billion Stimulus Package - [RGE Monitor]

  I’m definitely dismayed to see such a sharp economic mind call for Keynsian “stimulus.”

• Pop Goes The Weasel - [Evil Speculator]

  A good analysis of the current state of the markets

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NY Times has an article that illustrates the perils of oil dependence for countries other than the US, for a change:

3 Oil-Rich Countries Face a Reckoning - [NY Times]

The article examines the potential crises in Venezuela, Iran, and Russia, all three of which were empowered by the recent climb in oil prices and are now subsequently threatened by the more recent decline in oil prices. All three have been increasingly hostile toward the West, especially Chavez. It will be interesting to see what effect the decline in oil prices has on their ambitions.

Chavez has built a cult of personality based on his antogonizing of the United States. Some of his views, despite his grandstanding style, are justifiable, given our history of meddling in the region (all the more reason for us to pull out and stop meddling). But his economic policies and socialist tendencies are doomed to fail. The article cites their inflation rate of 36%, and this will only increase. What will his supporters say when the oil money dries up?

Two topics caught my eye this morning. The first is a piece from the NY Times on nepotism between Wall Street, especially Goldman Sachs, and Washington:

The Guys From ‘Government Sachs’ - [NY Times]

This of course is nothing new. There is a long history of incestuous relationships between lobbying, big businesses, Wall Street, and Washington. This just goes to show how difficult it can be to root out a lot of this corruption. Recently, I’ve begun thinking that I will still continue to fight and change the system, but I will also spend more energy learning how the system works and use it to my financial advantage in the markets. Not “if you can’t beat ‘em, join ‘em” but using a corrupt system against itself.

The second item is a very interesting article from Stratfor on Europe’s desire for Bretton Woods II. They argue that, instead of Bretton Woods being abandoned in 1971 after the US dropped the gold standard, it is actually still alive, with the US dollar simply taking the place of gold. And they do a good job of giving a historical perspective on the system. But most interesting is what they have to say about the proposed Bretton Woods II:

Ultimately, the Europeans would like to see a shift in focus in the world of international economic interactions from strengthening the international trading system to controlling the international financial system. In practical terms, they want an oversight body that can guarantee that there won’t be a repeat of the current crisis. This would involve everything from regulations on accounting methods, to restrictions on what can and cannot be traded and by whom (offshore financial havens and hedge funds would definitely find their worlds circumscribed), to frameworks for global interventions. The net effect would be to create an international bureaucracy to oversee global financial markets. [emphasis added]

I’ve read a lot of conspiracy theories about one world government, New World Order, and all that, and I’ve always considered such theories with a grain of salt. But it does make me wonder when I see things like this. I for one will be watching very carefully when the new administration comes in and begins to address this issue.

Full text of the Stratfor article after the jump.

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People want to know what caused this crisis, and more importantly, how to fix it. Everything we’ve heard from our leaders in Washington has been wrong, and that is why the market is not responding to the “rescue package” (read: Wall Street bailout) and to the billions of new dollars being pumped into the system. Most in the media are more clueless than the leaders in Washington. What we’re seeing is a failure of the conventional wisdom of this country for the past century, and especially since 1971.

Other voices are out there, such as Ron Paul and Jim Rogers. They have an answer. My only hope is that people listen.

Ron Paul in 2012? - [Salon]

An excerpt:

That’s what this whole story is about, the end of a monetary system that we’ve had since 1971. And something has to give. You just can’t create more money out of thin air and propping up everybody.

It’s an immoral system. You’re asking the poor people to bail out the rich. You’re asking the innocent people to bail out the guilty. You’re asking people to just totally defy the Constitution because there’s no place in the Constitution that says that we can do these things.

And, besides, economically, it’s a disaster. This is going to cause a great deal of harm. It’s like a drug addict taking a strong fix, and he feels better for a day or two. But believe me, we’re going to kill the patient. And the patient here is the dollar system and our entire world economy.

And a great interview with Jim Rogers (hat tip Campaign for Liberty):

I started getting interested in the stock market back in 2000, when people were still making millions in tech stocks and the mania was close to its apex. I decided to open a brokerage account, and promptly lost $800. So I pulled my money out, and decided to learn what I was doing before I lost what little money I had. I’ve read a lot of books since then, learning about as many aspects of markets, investing, finance, and economics as I could. Here are the books that have had the biggest effect on me and that I have enjoyed the most. Let me know if you disagree or if you think there should be some added.

1. Trader Vic

   The Trader Vic books by Victor Sperandeo completely changed my way of thinking about investing and the markets. He describes his approach to trading from all angles, including fundamental, technical, and psychological. He gives a good breakdown of technical analysis, including the definition of a trend and determining when a trend begins and when it ends. His writings on fundamentals, including the market distortions created when interest rates are manipulated by a central banking instead of being determined by natural market forces, is actually a great primer for Austrian economics. It’s a little hard to get through, but once you begin to understand what he’s talking about, you’ll never look at what happens in this country the same way again. In the second book, he describes how call and put options can give you tremendous leverage without significantly increasing your risk, and I’ve been using some of these strategies in my own trading since reading this.

   I cannot recommend these books enough.

2. Reminiscences of a Stock Operator

   This book is a true classic. I can’t even remember how many interviews I’ve read of successful traders that mention this book. Not only is it a great story following his ups and downs, but his descriptions of his trading strategies are particularly illuminating, especially the idea that markets will always follow the path of least resistance.

3. Jim Rogers

   I haven’t had the chance to read the book on China yet, but the other two are great reads on how an astute, former professional investor views what is happening in the world. Adventure Capitalism is the story of his trip driving around the world, and his thoughts on each place he visits from an investor’s point of view. Great stuff for someone who invests in international markets. In regards to our own country, he also describes the perils of fiat currency, and how actual inflation rates are much higher than what the government reports. His book on commodities called the great bull run that has been happening in commodities markets right as it was beginning. I inquired into his commodity fund after reading this book, but did not have the $10,000 minimum investment. I wish I had, because it’s gone up significantly since then.

4. Creature from Jekyll Island

   I loved a comment I read about this book: if you want to take the red pill when it comes to what is going on in this country, read this book. You’ll learn about the nefarious beginning of the Federal Reserve, how fractional reserve banking and fiat currency has always resulted in economic collapse and ruin throughout history without exception, how central banks benefit the financial elite, and how the system is rigged to privatize gains and socialize losses (sounds familiar, doesn’t it?). I’ll have a lot more to say about this book when I write up a full review in the near future. This book will blow your mind.

5. Market Wizards

   These books are also classics in the investing world. They provide a great way to gain insight into the minds of those who are truly successful in the investing world. What struck me after reading these books is that there are a multitude of ways to make money in the markets, as each of these investors has their own personal strategy, but the one common denominator among them all is discipline. It’s the one thing that they all mention as to why they’ve been so successful. Very insightful.

6. When Genius Failed

   Those who remember the meltdown of Long Term Capital Management in 1998, and even those who don’t, will be fascinated by this story. He describes how this group of truly brilliant traders and academics came together to create a financial juggernaut that was wildly successful. He gives great detail on their strategies and how they’re trading methodologies actually work, without getting too bogged down in arcane finance. This story shows once again how dangerous it is to put so much faith in computer models based on the unlikelihood of 100 year events when these market-swinging events actually happen in rapid succession. Most importantly, this book describes the precursor to the current financial crisis, and how dangerous and poorly understood these derivatives are, and how destructive they can be.

7. FIASCO by Frank Partnoy

   These books are the reason I get angry when people say that no one saw the current financial crisis coming. Frank Partnoy was talking about how dangerous derivates are and how poorly they are understood years ago. He does a good job of describing how these derivative contracts actually work, and why Wall Street was so successful in selling them. If you read these books, you’ll be miles ahead of everyone else when it comes to understanding how we got into this mess.

8. Trend Following

   Learn the story of the Turtles and how trends can be one of the most powerful investment strategies out there.

9. Cramer

   While I am reluctant to put Jim Cramer on this list because I would never recommend following his investment advice, I have to admit that I was entertained by this book. Unlike his recent Mad Money books, this book is the story of how he rose to run a large hedge fund. Living vicariously through his insane, violent blowups is actually kind of fun, and this book certainly explains how stressful being a hedge fund manager can be. I definitely wouldn’t recommend this for investment advice, but it is entertaining.

10. Ayn Rand

    OK, so this isn’t explicitly related to finance or investing, but Ayn Rand has had a much bigger effect on my thinking toward the markets than any book on this list. From her books, I’ve learned the importance of individual responsibility and creativity and the damage caused by self-sacrifice for the “greater good” and corrupt leaders with poorly defined beliefs and a reliance on pragmatism. Atlas Shrugged was especially world-changing. Behavior by people in the media and people in charge of the country, and people in general, that used to baffle me know makes sense. This can be difficult reading, but is well worth it. In my mind, she continues to prove herself true every day.

Mr. Rithotlz at The Big Picture brings us the story of Andrew Lahde, a manager of a small California hedge fund that returned 866% betting on declines brought about by the sub-prime crisis, and his resignation letter with a big F-U to those who deserve it. “May meritocracy be part of a new form of government, which needs to be established.” Amen brother.

Andrew Lahde: Goodbye! - [The Big Picture]

Karl Denninger has a great post on the fraud being presented as a bailout or “rescue package” and the level of corruption involved:

The Fraudacity Of American Finance - [The Market Ticker]

Some points:

• Banks are not going to use the government-injected money to lend out. They are going to hoard it to “improve their capital ratios.”
• Executive compensation limits “mean little or nothing.”
• The outright fraud of the CDS market

How long are we going to put up with this? When the $700 billion bailout package was first put before Congress, thousands of people flooded the offices of their representatives with their disproval of this fleecing of the taxpayer, and Congress buckled and actually listened for once.

This shocked the world, especially the money powers. But they recovered quickly, and put their flunkies in the media into action saying how this bailout was necessary for “Main Street” and how the economy would collapse, and stuffed a bunch of pork into the new bailout plan, and forced this down our throat. We’re seeing now their disingenuousness and corruption.

Are you willing to keep paying the salaries and paying for the mistakes of these corrupt, clueless executives, and paying for executive retreats at AIG, and allowing these corrupt officials to continute to run roughshod over our rights as citizens of this country and to squander our tax dollars? I know I’m not.

Campaign for Liberty sent out an email yesterday asking for donations. They are planning a large drive to increase voter awareness of this corruption. I’m going to make a donation today, and will continue to let my representatives know what I think of this bailout, and I urge you to do the same. The full text of the Campaign for Liberty email is after the jump.

Let’s take our country back. Let’s put a stop to the fraud and corruption.

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