Jim Rogers Tells ETF-Holders "The Next Bear Will Be Horrendous"

Legendary investor Jim Rogers, who in 1973 founded the Quantum Funds, a prominent family of hedge funds, with then-unknown Hungarian-born financier named George Soros, joined RealVision’s Steve Diggle for a wide-ranging interview where the legendary financier, who moved to Singapore in 2007 with his family because he wanted his children to be immersed in Asian culture, discusses his views on gold, bitcoin, and what makes a good investor – along with his belief that a major correction in financial markets is about to begin.

The interview, which was filmed two weeks ago in Singapore, begins with a discussion of a theme in finance that’s been at the forefront of discussions about the market outlook. Many investors believe that, with volatility at record lows and valuations at record highs, a major shock is imminent. However, these same investors have been burned by uncooperative markets, as an expected selloff has yet to materialize.

Rogers said he stumbled into his first job on Wall Street, but ended up falling in love with it because it allowed him to “follow the world and know about things.”

He added that, over his investing career, Roger"s has learned that he has a tendency for his calls to be early. So now when he makes an investment decision, he waits six months before buying.

SD: How do you know the difference between being early and being wrong? Because -

JR: You teach me that, OK? I"d like to know. I"m still trying to learn.

SD: I really don"t know, either. I mean, one of the things that has confounded, I think, all of us in this most recent unprecedented rally - I mean, it"s not unprecedented in history, but the sort of things that have gone up and the level of volatility we"ve had that"s been unprecedented. The only period that I can compare it to are the late 90s, where just everything in a certain area went up. Now it was almost-- at least in the States, it"s almost everything across the board. And there have been plenty of people who"ve wanted to short the FANGs, to short some of the tech stocks, to short some of these very expensive blue chips. And they"ve been very badly punched.

And then even in the face of very good mutual fund investors, people with tremendous track records like Grantham Mayo, who have moved to a higher cash position - they"ve seen massive reductions, because their own investors don"t seem inclined to stick around and see how it plays out. So both on a personal and professional level, being early seems to be incredibly painful and destructive to your business.

JR: Sure can.

SD: So if you"ve got a conviction, do you wait for a change in momentum? Do you use moving averages, which is something that I know people have been used, and I"ve used something myself, which is to wait until the 5 and 20-day diverge, and that gives you a signal that momentum"s coming out of a trade? Or do you just need to size it to a degree which you can be persistent?

JR: Well, I usually - since I know I"m always early, I make a decision and then wait, and just make myself wait a month, six months, whatever it happens to be. And I"m still too early. I"m still too early nearly always, because I make the decision too soon, I realize. So maybe I better start making the decision later in life. Sometimes, you just have to throw in the towel. Especially on the short side, you have no choice. If they"re just racing against you all the time, you can sit there and meet the margin calls all day long, but one of the old adages is, never beat a margin call, which you may have heard from old-time traders. If you"ve got a margin call, just don"t meet it, because that means something is very seriously wrong.

SD: Right, that"s your stop loss.

JR: Yeah, well, stop losses are usually before a margin call comes. But I want to go back to something you said. You"re not as experienced as I am, obviously, because you"re not as old as I am, is what I"m saying. But I remember in the early 70s, there was something called the Nifty 50, and they were 50 stocks that everybody - the JP Morgan bought everyday. Didn"t matter. Avon, Xerox, IBM - they were stocks that always were eternal growth stocks.

And they just kept - we would short them, and they just kept going up. They never stopped. Polaroid-- that was another. And they just never stopped going up. Everything else stopped going up but those Nifty 50, which would be something like the FANGs today, or maybe in the late 90s, some of the other kinds of stocks. So this has happened before in market history. They eventually crack, there"s no question.

And to today, if you look at the S&P 500, for instance, in the US, I think there are only 40 or 45 stocks that are above their 50-day moving average, to use technician"s kind of talk. Everything else is in a downtrend. And yet the market is making all-time highs.

SD: And so there"s a lack of breadth in the market.

JR: Definitely that lack of breadth. What is that - over 90% of the stocks are in downtrends. 10% are in uptrends, but they"re big companies. And since the S&P is capitalization weighted, those 50 stocks, 40 stocks, whatever it is, dragged the average to all-time highs.

Diggles" questions soon veered toward the subject of what makes a good investor. Some believe, Diggle says, that to have conviction, you need to know more than 98% of people who follow a stock.

Rogers said he was never a very disciplined investor, so it’s difficult for him to say how one develops skills like timing and good judgment.

Knowing more than your rivals is a major advantage, he says. But there’s something to be said for judgment that just can’t be taught.

SD: So what was different about your analysis? Had you gone deeper into this company? Because one of the things that you"ve said on a number of occasions, and I think it"s very impactful, is if you want to have conviction, you have to know more than not just 90% of the people, but 98% of the people who follow the stock. Is it that you"ve gone deeper? You"ve read the annual report, you"ve looked at what would now be the 14k. Or was it that you"d seen something with a greater level of skepticism or objectivity which other people had missed?

JR: Well, it"s both. If read the annual report, you"ve done more than 90% of investors. If you read the notes to the annual report, you"ve done more than nearly everybody, including the CEO of the company. So it is certainly knowing more than other people. But then it takes more than that. You also have to know more, but then you have to figure out what does it mean? Just because you know more, you have to then analyze it.

If 100 people go into a room and hear a presentation, Steve, they"ll all come out - most of them will come out with the same view. Seven or eight of those people will come out and say, aha, what this really means is it"s going down the tubes, or whatever you come out with. Or seven or eight will come out and say, this is the best thing since sliced bread.

They will realize. They will analyze it and understand it better than the others. It"s judgment. I don"t know how to teach judgment. I wish I knew how to teach judgment. Facts are wonderful. Knowing more than everybody else is a big, big, big leg up. But then judgment - how you get judgment? And that"s certainly what I didn"t have. I certainly didn"t have timing. Not that I do now, but I have a little better judgment than I used to, and a little better timing than I used to, because I learned to wait.

SD: So your prescription to be an above average investor, to go back to my original question, is be independent-minded, do your work. Don"t try and perfect the timing, but if you develop a high enough level of conviction around it, see it through.

JR: Yeah, that"s what I always do. And sometimes, I get it right. But I"ve certainly made plenty of mistakes in my life.

With stock and bond valuations hopelessly inflated, Rogers says investors hoping to lock in the highest risk-adjusted returns should consider buying gold coins. Barring that, gold futures are the next best market. Rogers says trading gold futures is a great strategy for traders because it’s a market where speculators have easy access to leverage.

Furthermore, investors who have time to conduct the due diligence should consider investing in a gold mine – but it needs to be the right gold mine.

SD: Going back to gold, so gold coins -

JR: Gold coins are the best way. And you should have physical possession of some gold coins. After that, gold futures are the best way if you want to make money and you"re a good trader. Gold futures, that"s where you can get the most leverage of any, unless you can find the right gold mine. But there are hundreds of gold mines. If you"re smart enough and have the time to find the right two or three gold mines, then, yeah, then you"ll make huge amounts of money in the right to - but, you know, there are hundreds of gold mines.

The conversation soon turned to a discussion of the ETF space, a market about which Rogers has many reservations.

SD: And investors do seem to be becoming more short-term, despite the fact that everything we know tells us that finding good people and backing them for the long-term is the most successful thing you can do. Investors seem to be becoming more and more influenced by very short-term records. And that"s one of the things that"s savaging the mutual fund industry right now. One of the things that I wanted to touch on is this ETF phenomena. I mean, it"s probably the equivalent of the Nifty Fifty of the day, which is buy everything in its weight, don"t do any research. Don"t take any views. Don"t even take a view on a manager let alone a stock, but just own a basket. And a lot of people feel great disquiet about this. I think your commodity index has a few ETFs on it, does it? So perhaps you"re not the guy to ask if you"re in the ETF industry.

JR: No, no, no, I certainly see what"s happening in ETFs. I mean I pay enough attention to know what"s going on. First of all, ETFs are very efficient, very easy, very simple. There"s no question about that.

Therein lies part of the problem, of course, with ETFs is that they are easy, simple, et cetera and that makes it easy for somebody to say oh, I want to buy Germany, buy the German ETF, and don"t even look to see what"s in the German ETF or whether it"s a good ETF to own. And maybe it should be a terrible ETF, but nobody looks anymore.

So there are excesses developing in the ETF business.

There"s no question about that. But don"t worry Steve, we"re going to have a bear market. And when we have the bear market, a lot of people are going to find that, oh my God, I own an ETF and they collapsed. It went down more than anything else. And the reason it will go down more than anything else is because that"s what everybody owns.

And it is this bear market that looms over the market that Rogers is most fearful of as the level of debt that has built across the globe makes a disaster inevitable...

JR: Steve, in America as you know, we"ve had bear markets every few years.

SD: We used to.

JR: Well done. And Janet Yellen will tell you we"re never going to have a bear market again because she"s smarter than we are, she"s smarter than the markets, and the central bank has things under control now. She publicly stated this. Do not worry. We will not have financial calamities again. Head of the central bank in America has said that out loud officially, Mrs. Yellen-- yeah, Mrs. Yellen.

I happen to have a different view. Now if you believe the American central bank, you shouldn"t be talking to me at all. But we"ve had, we used to have bear markets every several years. We always, always since the beginning of the republic. In my view we will have them again.

And the next one is going to be horrendous, the worst-- you came in the business in "86. It will be the worst in your lifetime, in your financial experience.

And the reason, in 2008 we had a bear market because of too much debt, staggering amounts of debt. Steve, since 2008 the debt has gone through the roof. Every country in the world talks about austerity. Nobody has reduced their debt in the last few years.

Everybody has increased their debt in the last few years. And so the next time we have a bear market, it"s going to be horrendous because of this.

Even China-- in 2008, the Chinese had a lot of money saved for a rainy day. It started raining in Singapore. They had a lot of money saved for a rainy day. It started raining.

They started spending and helped save the world. But even China has a lot of debt now.

Like his fellow hedge-fund luminary Ray Dalio, Jim Rogers is a cryptocurrency skeptic. However, his outlook is somewhat more nuanced. While Rogers says he doesn’t know enough about the market to have a view on which coins might prosper and which might die on the vine, he suggested that people shouldn’t assume that bitcoin will dominate the market forever.

After all, Rogers says, most people have never heard of the company that invented the automobile – it disappeared long ago, he said. There once were hundreds of companies manufacturing cars around the world. Now, he says, there are only 25.

SD: Well, there"s been plenty of commentary on cryptocurrencies or cybercurrencies on RealVision and in the mainstream. We"re trading them. it"s an extraordinary financial experiment. If you"re a libertarian, I guess you mind find it inspiring that this has happened with absolutely no regulation. But where do we go with these things? Are you a true believer?

JR: Well, Steve--

SD: Are you an enormous skeptic?

JR: I don"t own one, nor am I short one. So I am neutral in that sense. I do know that there are over 2,000 now in just a few years. And anything that booms like that usually has a reason - there"s reason for skepticism. You do know that some of them are already zero.

I think the Wall Street Journal had an article yesterday maybe that 30% of the ones that have been launched in the last year or two are at zero because they have not traded. Now, there are some that have been skyrocketing. They"ve gone up 30 or 40, 100 times. So if you own the ones that have gone up 30 times, you think these are wonderful. If you own the ones that have gone to zero - or some have already gone bankrupt.

Somebody offered me a lot of them recently. And while I was doing my homework, it turned out to be a sham, a fraud. Fortunately, I was doing my homework so I never got around to taking them.

There"s no question that the world has money problems. There"s no question that all of our lives are being changed by the internet. My kids will never go to a bank when they"re adults. My kids will never go to a post office.

They may rarely go to a doctor when they"re adults. And so money"s going to change on the internet too.

Which one? I don"t know. You"ve heard of IBM in the computer business? IBM did not invent computers. The company that invented computers you never heard of, likewise with automobiles. I mean, there were hundreds of automobile companies 100 years ago. There are only 25 now.

Rogers, who chafes at being called a contrarian, says one sure-fire strategy for strong investing returns is investing in assets that are "hated" by the broader investing community, for example his Russian-stock investments are making all time highs, he said.

SD: I want to turn to a few specific sectors now rather than the general outlook of the world. It"s clear that you"re very concerned about that, though not so concerned that you want to actually be fighting it with aggressive shorts right now. One thing that you"ve spoken about in the past and one thing that we are exposed to is agriculture. It"s an area that"s generating quite a lot of comment. But from our experience, very few people have actually done anything about it. Very few pension funds, very few individuals have exposure to it. It"s hard to get through the stock market. There are very few agriculture companies, certainly on land-owning companies. You can get exposure through the food industry. But you became very positive about the agriculture a while ago. Where are you know on that?

JR: I"m extremely bullish on agriculture. That hasn"t made me any money yet. Well it has a little bit because one of my largest shareholdings - a large - well, it"s not one of my largest, but I am a director of a Russian fertilizer company which is making all-time highs or near all-time highs, which is pretty astonishing given that it"s Russia and everybody hates Russia, as you well know. In fact I"m startled that all of my Russian stocks making all-time highs.

And this is a hated market. So it"s something I have learned. If you buy something that"s hated, chances are you"re going to make a lot of money down the road.

In one of his last questions, Diggle pointed out that Rogers, who began working on Wall Street during the first half of the twentieth century, has often expressed a disdain for young people working in finance.

Diggle says he first noticed this about Rogers while reading a piece he wrote for Barron’s Magazine in the late 1980s.

Rogers says he doesn’t trust young people for one simple reason: They’re often cocky. But the Darwinian nature of Wall Street quickly separates the wheat from the chaff, making those who survive far more tolerable.

SD: I think you have something against guys in their 20s because the first time I became aware of you as an investor was a Barron"s article written in the summer of 1987, and it"s a very impressive article. I was very young on Wall Street. And there was this guy, Jim Rogers, and they said, what do are you bearish on, Jim? And you said, the world. There are all these 20-something guys that are thinking that they deserve six figures just because they work on Wall Street and they know how to buy stocks. And three, four months later, you turned out to be absolutely right.

But as a 20-something at the time, I thought you were being very unfair on 20-something guys. Now that I"m 53, I share your view of these 20-year-old guys. You"ve got to stay away from them.

JR: Well, but see, you made it. You survived. You"re a 26-year-old or 20-year-old who made it and survived, and so it"s OK. Many of them don"t and don"t know why. They make a lot of money. They don"t know why they made money.

So they don"t know why they lose money. They don"t know what happened.

You, at least, something happened. You"re still here. You still have a job. You"re still in the investment world.

SD: I"m self-employed like you.

JR: Right.

Rogers has recently been vocal about his bearish outlook on the markets. In an interview during the summer, he claimed that the largest financial crisis of his lifetime is still to come.

Bay Area TV Anchor: "I Experienced Hate First Hand Today In Berkeley" From Antifa

After the media lashed out at right-wing extremists in the aftermath of the tragic violence in Charlottesville, the tide now appears to be turning against the all-black-clad "Antifa."

For the first time since the campaigns began late last year and protests broke out, The Washington Post unleashed this shocking headline.

Their faces hidden behind black bandannas and hoodies, about 100 anarchists and antifa - “anti-fascist” - members barreled into a protest Sunday afternoon in Berkeley’s Martin Luther King Jr. Civic Center Park.

Jumping over plastic and concrete barriers, the group melted into a larger crowd of around 2,000 that had marched peacefully throughout the sunny afternoon for a “Rally Against Hate” gathering.

Shortly after, violence began to flare. A pepper-spray-wielding Trump supporter was smacked to the ground with homemade shields. Another was attacked by five black-clad antifa members, each windmilling kicks and punches into a man desperately trying to protect himself. A conservative group leader retreated for safety behind a line of riot police as marchers chucked water bottles, shot off pepper spray and screamed, “Fascist go home!”

All told, the Associated Press reported at least five individuals were attacked. An AP reporter witnessed the assaults.

Berkeley Police’s Lt. Joe Okies told The Washington Post the rally resulted in “13 arrests on a range of charges including assault with a deadly weapon, obstructing a police officer, and various Berkeley municipal code violations.”

But it"s not just WaPo that is exposing some truth. Well known Bay Area TV personality, Frank Somerville - KTVU anchor - took to Facebook this weekend to explain what happened to him when he took a day trip to Berkeley.

Before he starts, he notes...

"My wife told me I"m going to get crucified by posting this. I told her I didn"t care. This is what happened. This is what I saw. This is what I experienced. This is the truth. Period.

If people dont want to hear the truth thats not my problem. I have no agenda. Im just saying that this is what happened to me today, think about it. And make your own decision."

And judging by the 2800 comments and 10s of 1000s of "shares", Somerville"s report (below) struck more than a chord...

I experienced hate first hand today... It came from these people dressed in all black at a protest in Berkeley.

Ironically they were all chanting about NO hate.

Some had shields and gloves. Some had helmets. Some had gas masks.

I was watching them and taking it all in. I came there on my own time. Because I wanted to see things first hand. I was dressed in shorts and a tank top.

At one point I took out my phone to take a picture. And that"s when it all happened. (And just to be clear they were playing for the cameras in front but I was toward the back. And since there were already so many people taking their picture I didn"t think it would be an issue.)

I took these two pictures and afterward they started screaming at me. I thought for sure they were going to attack. I was just waiting for it. I wasn"t scared.

But I stayed calm even though I thought this may not end well for me. Here"s how the conversation went (and as you"re reading this keep in mind that they were yelling at me and their words were filled with venom, anger, hate and intolerance.)

There"s just no other way to describe it. I was stunned.

Them: Hey! No pictures or we"ll take your phone!!! (At that point I"d already taken these shots)

Me (In calm voice): You"re on public property and I can take a picture if I want to.

Them: Oh so you"re a big man with a camera?

Me: No I just wanted to take a picture and talk with you.

Them (rushing toward me): We outnumber you and we will take your camera!

Me: You"re not going to take my camera and you"re not going to tell me what to do. Why can"t we just have a respectful conversation. (I then touched one of them on her hand to say it"s okay I just want to talk)

Them: Don"t touch me!!

Me: I"m not trying to do anything. I just want to try to understand and have a respectful conversation.

Them: We"ll block your shot!!!

Me: That"s fine. All I wanted to do was have a conversation.

Them: Now is not the time. (In fairness he was the one person who was respectful)

Then as I started to walk away a woman started screaming at me saying: We"re not interested in talking to you!! We"re not interested in talking to you!!

I walked away stunned. I grew up in Berkeley. I marched in anti-war protests during the sixties.

Its one thing to read about HATE, It"s another thing to be right next to it.

In my opinion, these people dressed in black are just as hateful and intolerant as the people they are protesting against.

Afterward I was talking to several other protesters. (Not dressed in black)

One of them actually stood up for me as the people dressed in black were threatening me. I was touched. They were just as disappointed as I was. They said that the people dressed in black represent a small minority and that they "hijack" the protests.

And I agree. MOST of the people out there today in Berkeley were non-violent.

They were there for the cause. They just wanted to come out and stand up against hate. I totally support them. But I do not support extremists, whether they are on the right or the left.

Hate is hate. And I experienced it first hand today. It was sad to see.

The commenters, as one would imagine, were very diverse in their opinions about Somerville"s story, but the cognitive dissonance seems immense...

Niki D"Amore That"s not hate. They were prepared for battle. They"re fighting for your daughter"s rights, for my rights. They had a preconceived notion of the kind of man you are, based on your whiteness, and the way you were dressed. Is their presumption of you ok, absolutely not, but we"re in the midst of a revolution, at a turning point, and some people expect you to pick a side. This wasn"t hate. It was anger.

Mileen Nahon I wouldn"t be surprised if they were actually part of the Neo Nazi group and are dressed as counter-protestors to make the opposing side look bad. WHY wear so much disguise unless you are there to cause real damage? WHY are you there to cause damage if you are there to oppose these fascist morons?

Tommy Salami That"s it. I"m done with you, Frank. Did you see Inglorious Basterds? Schindler"s List? Hell, Indiana Jones? Were you confused about who the bad guy was? You wandered into a literal battlefield dressed like a Summer tourist and tried to have a conversation? What on Earth is wrong with you?

Bob Demello How do we know they were not far right hater"s there to make peaceful protesters look bad?

Eric Anderson Surprising to hear you taking a political position and agreeing with our President"s statement regarding violence from many sides. Equivocation between fascists and anti-fascists is a core strategy of the alt-right.

Somerville was careful to respond to each assertion, and summarized as follows...

What"s so interesting to me about all of this is that I actually went there becausee I wanted to see if I could talk to a white supremacist... i was wondering what it would be like to be standing next to someone hates... instead I experienced hate by finding finding myself standing next to extremists on the left...

There have been a lot of people leaving comments about me where they completely disagree with me. and that"s totally okay. to the discussion that"s so important. We all see life thru a different lens. What I described today was what I saw they MY lens. But I also want to see things thru your lens whether I agree or disagree with you. That"s how we learn. So thank you for your comments whether you argree with me or whether you vehemently disagree with me.

Sticking your neck out and reporting truth is anathema in this new normal, we hope, as his wife suggested, he is not crucified; however, we suspect, given the bias in the Bay Area, he may well be.

And as an aside, here is Somerville"s daughter with her two best friends...

A couple of final thoughts...

For all the media worries that Trump is inciting violence against journalists, the only group consistently assaulting reporters is Antifa

— Scott Greer (@ScottMGreer) August 27, 2017

Texas is showing us the best of America.

California is showing us its ass.

— EducatédHillbilly™ (@RobProvince) August 27, 2017

Man walking to grocery store in Berkeley mistaken for being a Nazi is beaten into a coma. pic.twitter.com/pFpHhSKasi

— Hector Morenco (@hectormorenco) August 27, 2017

The Rollover Trio

From the Slope of Hope: Let"s take a step back - --  a few thousand steps back, actually - - and drink in a very long view of the stock market. We"ll use the S&P 500 as our observed entity. Here it is below, spanning several decades, with three major tops tinted.

You will notice something distinct that that third "top", which is that, unlike its green-tinted predecessors, it didn"t mark a top at all. It was shaped like a top. It was timed like a top. It was just about as good a top as the market gods can create. And yet it merely preceded another 35% rise in the market in a mere eighteen months. I"ve marked with an arrow that fateful day, February 11, 2016, which in hindsight marked one hell of a risk-free buying opportunity.

Turning the pages back on Slope, I took a look to see what kinds of things were being written. Here"s an item from MPTrader which lays out precisely the same stuff I was thinking:

Of course, that notation about "...the Fed is not actively and overtly buying assets" were like famous last words, because the central bankers of the entire planet piled in and did just that. As for myself, on February 11th 2016, I made this foolish mistake:

That probably marked, within moments, the precise bottom. Suffice it to say that my pledge to never show Chocolate Rain or Let "Em Burn is quite clearly important to heed.

Of course, over in ZeroHedge, the massive top was not lost upon them either:

So, yeah, we permabear pornsters were all excited, and we were also dead wrong. But let"s examine these last three tops in a bit of detail.

The first top was the Internet bubble. Now keep in mind, since we"re looking at the S&P 500, and not the NASDAQ, the gyrations aren"t as extreme, but there was still a squeaky-clean equity top. We can see the peak in March 2000 tinted in yellow, but as the arrow points out, the market didn"t really commit itself to an oh-my-God-everything-is-falling market for another fourteen months. At the arrow mark, the S&P was down, yes, but only 14%, and it was about to embark on a much bigger fall (including this little thing called 9/11 which was going to take place a few months later).

Seven years after the first top, the second one formed. The peak was October 2007, and as before, even though it started getting pretty wild, there was still plenty of "fight" left in the market, and 10 months later, it was like a carbon copy of the first top: a drop of about 14% which would soon to followed by something truly cataclysmic.

Which brings us to the third top, which I like to think of as an aborted top. (To quote Kay from the Godfather Part 2: "Michael, you are blind. It wasn"t a miscarriage. It was an abortion. An abortion, Michael. Just like our marriage is an abortion. Something that"s unholy and evil.") The market peaked in May 2015. It fell - - yep, you guessed it - - 14%.......

......and then THIS shit happened..........

It"s often stated that "It"s different this time" are the most dangerous words in the world of trading. Well, not this instance, huh? Because it WAS different this time, and those who foolishly bought stocks when it looked like the world was going to collapse a third time have made out like bandits.

So what now? Well, as you might imagine the utter failure of the can"t-miss, totally perfect stock market top has rattled my confidence just a touch. So my honest answer is:

I will say this, however: I do believe history repeats itself. And I further believe that what the market SHOULD have been allowed to do was, God forgive me, actually be allowed to do what markets do and act as a tool for honest price discovery.

It wasn"t allowed to do this, however, and I"m pretty sure I know why: the financial crisis scared the holy hell out of the entire world, particularly the central bankers. They have pledged - - and have demonstrated their commitment to this pledge - - that they will never, ever, EVER, allow such a thing to happen again. They will do whatever it takes, sacrifice any future, and use whatever "tools" they can create to prevent such a thing. It"s almost like what is said of the holocaust: "NEVER AGAIN."

This was expressed quite honestly by Yellen when she made the jaw-dropping declaration that there would not be another financial crisis in our lifetimes.

As disappointed (and shocked) as I am that the picture-perfect top of 2015/2016 turned out to be a triple-decker nothing burger with special sauce, I still hold the perhaps naive viewpoint that global markets are ultimately larger than those trying to manipulate them. The decline that the third top should have preceded is still waiting in the wings, although it has grown much more powerful, since the suppression of those natural market forces will simply allow them to be expressed more violently once they are uncontrollable.

Prayers delayed are not prayers denied. Neither are market tops.

Make It Liquid, Please

By Chris at www.CapitalistExploits.at

Most of you know the story of Africa"s great jewel.

Zimbabwe, presided over by the charming, charismatic, democratically elected leader Robert Mugabe.

So great is the country that under his leadership it has reached dizzying heights. The highest inflation in Africa, the highest unemployment in Africa, and, of course, the highest rates of poverty, which on the dark continent is really quite something.

Think about it, your neighbouring nations are themselves doing such a sterling job of raping and pillaging the populace and destroying wealth even before its past incubation point that in order to beat them you"d be forced to work so hard you"d probably have to quit drinking on the job.

It was under this backdrop that in late 2009 I, together with a bunch of mining engineers from South Africa and some ex-military gents, sensed opportunity.

You see, Zim had been running a government program which released its white citizens of the cumbersome obligations of ownership of all sorts of assets - things like farms, factories, land, and mines. And THIS was what we were interested in - gold mines to be precise. Many, but not all, of these assets had landed up in the hands of Mugabe"s henchmen. Many "whities" with a strongly held desire to keep their heads attached to their shoulders while simultaneously being mad as hell realising that all they"d worked for was to go to some illiterate thug with a panga and an IQ of 70 essentially had two options.

A small number actually took to a scorched earth policy. They sold what they could and destroyed everything they"d worked for as they were unwilling to see it go to thieves.

Others went the legal route of transferring land titles to blacks. In doing so, they got to choose the new land owners and so typically handed the assets over to longtime loyal employees, farm managers, mine managers, and so forth. The assets, now in the hands of black Zimbabweans, were that much safer from roaming thugs targeting white owned assets. The previous owners (those who could) fled to wherever they could. Amazingly, even previously war torn Mozambique received an influx of white talent though many went to Europe or South Africa. Pretty much anywhere looked better. Some had no options (no foreign passports) and either died or still eek out a living in the country today.

What"s the Liquidity on an Asset No Sane Person Would Want?

That"s the question we asked ourselves... figuring it to be near zero.

As a white non-Zimbabwean citizen (actually white Zim citizens were and are in the same boat) you really didn"t want to "own" these assets. You wanted to control them but you sure as hell didn"t want to own them.

The black guys who ended up with the assets couldn"t quite figure this out, the mindset being that they now had gone from having few assets to owning massive operations which were only a few years prior worth tens or hundreds of millions of dollars. So they just wanted to cash in and sell them.

It"s worth mentioning that most of these poor guys had no financial acumen at all, and when we explained to them that we placed the assets in the liability column on the balance sheet (they needed to be maintained, which costs money) we drew blank stares. A balance sheet wasn"t something they knew too much about but when it sunk in that we believed the assets to be worthless unless we could go through an extraction of product, they realised that they"d have to go back to work (producing on a revenue share) they weren"t overjoyed. Visions of big houses, Land Cruisers, and holidays in Europe seemed further out of reach.

Those assets in Zimbabwe can"t be easily bought or sold due to Mugabe and his minions creating all sorts of headaches requiring copious bottles of Klipdrift (a South African brandy) and a certain amount of hard currency changing hands with "officials". That"s if they don"t just simply take what they want outright. The impact on liquidity of assets is typically like that of a safe being dropped on your guts. Oofff!

Now, this is where it gets interesting.

Liquidity should have been zero. After all, what white guy would want to buy something that could and probably would be stolen from under him within a few years, if not months, and could quite easily involve the removal of his head from his shoulders?

But It Wasn"t...

Enter some other gents going by the names of Ivan, Anatoly, and Vsevolod.

These guys descended on Zimbabwe in waves. Perhaps there was a flyer in Moscow. Our own "soldier of fortune" explained to us where these guys came from and even some of their history, which was fascinating to me since he knew so much from just watching them across a table at a restaurant.

Any dope could see they were well dressed thugs who could snap you in two without taking their attention off their lunch but it turns out that tattoos reveal a lot. Apparently when you leave the employ of the KGB or Spetznaz your employment options are somewhat limited. Mercenary work in 3rd world hell holes looks and pays a lot better than licking stamps at the post office and smiling at Babushkas.

Anyway, the Russkies, after enjoying the collapse of the Soviet Union had a template on how to deal with such opportunities. You roll into town, use overwhelming muscle, and secure assets, then strip them and sell them. Hey, it worked in the ex-USSR, so why not Zim?

Indeed, why not?

Ivan and his mates were working for whatever "brains" had employed them, and they actually just went in and paid cash for all sorts of stuff. No need for any limbs to get snapped. This, as it turns out, was an excellent example of a truly terrible idea, and Ivan and most of his buddies have since departed, their tails between their legs. A few still hold onto assets (because nobody will buy them) which they paid waaaay too much for and to which their particular "skillsets" are not well suited.

It became patently clear that these guys firstly had money to burn (presumably "acquired" by conducting other "business")and didn"t seem to have a plan as to what to do once they"d bought the new assets. Clearly they wanted to just sell them on, and in the beginning, many "Ivans" approached our group with this in mind. Perhaps not giving thought to why on earth we, for our part, would pay a premium price on an asset which would could just as easily have bought (and indeed passed on) ourselves.

The point here is that even though liquidity of the assets should have been rock bottom it wasn"t... yet.

There is a solution here to all of this which we found, though it still had liquidity issues. How do you go about creating value in such a setup? The ultimate answer I think lies in code. Yup, computer code.

Now, keep that story in mind because later this week, I"ll explain to you another weird thing that happened in Mugabe"s paradise. Both of these are important due to an entirely new technology that you"ve probably heard about but perhaps haven"t given much thought to.

- Chris

"Focus on the movement of liquidity… most people in the market are looking for earnings and conventional measures. It’s liquidity that moves markets." — Stanley Druckenmiller

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Raoul Pal Warns The Day Of Reckoning Looms For VIX Shorts: "Reminds Me Of Portfolio Insurance In 1987"

ubmitted by Patrick Ceresna via Macrovoices.com,

In a podcast interview on MacroVoices, Macro Guru Raoul Pal makes some comments on some of the biggest imbalances in the markets today. 

He compares the VIX contango trade to the portfolio insurance problem that was blamed for the 1987 crash...

• they don"t realize the rate of change of the VIX can be so extraordinary that the losses can mount up massively and super quickly

Pal then goes on to discuss the record level of speculative long positions in the oil markets compares to the conditions in the summer of 2014 prior to the bear market decline

• The other thing was speculative position in crude oil was all time high in fact if I took the trend going back from the early 80"s it was seven standard deviations above that trend and well over three standard deviations maybe four standard deviations from the trend in the last 20 years or 15 years.


• I"ve seen a similar situation with copper driven by China and a few other things where copper position is wildly extreme and so I start to think well too much reflation is priced into these things maybe there’s an interesting opportunity on the short side


• What is interesting oil volatility has been coming lower. Look, I don"t think it"s going to get back to where it was in 2014 when it was trading below 20 but it has come down from a peak of 80, a kind of a real trading range of 50 down to 30. If it comes any lower the ability to buy options start to make sense because oil volatility can go to 80 can go to a 100

Full podcast:

Excerpts of the interview:

Erik:                One of the risk factors that we discussed last time was this crazy VIX contango trade where basically people are shorting VIX futures because each time they roll that contract forward they capture the contango by being short and they see it as a way to produce income. Of course, you know that"s not just picking up nickels in front of a steamroller, that"s pennies being pried out from under the steamroller and so far a big downdraft in equity prices has not happened which was the big risk that you saw there. You described how if there was a sudden downward move in equity prices it could really blow up in these guys" faces. Is that risk still in the system, is that trade still on or have people wised up and gotten out of it?

Raoul:             No, that trade still goes on to this day and it reminds me a lot of the portfolio insurance stuff around 1987 or some of the kind of spread trade Low Vol trades that happens around 1998 people go over their ski tips with this stuff. They think it"s all manageable and they think that OK we can sell VIX and if we lose money on that, we"ll use this as an opportunity to buy stock because we"ve been taking in premiums but they don"t realize the rate of change of the VIX can be so extraordinary that the losses can mount up massively and super quickly.

So, I worry about that position. I worry about a whole world that sets up for low volatility when you"ve got a new administration that is almost unquantifiable. We don"t know what kind of volatility should be under an administration like this but a relatively aggressive administration should create more volatility overall so at which case the generalized level of volatility should rise.

If the past 20 years of global historical data is anything to go by, that "awakening" of uncertainty is very bad news...

Erik:                Well I’ll see if you want to grade me on the thoughts I have. The only real directional trade that I see right here is long the dollar index and I think we agree on that we"ve already discussed the reasons why.

Beyond that the things I"m looking at there, if I look at the term structure of crude oil. We"ve got a fairly steep contango for a few months but then we see backwardation in the belly of the curve. So apparently, we"re not going to need storage after June or July or so it"s going to be a non-issue those tanks are going to be empty. I"m not buying that story.

So I do see a curve steepener trade that is-- I actually just bought a bunch of spreads short June, long December. Just thinking that at that point there was backwardation in that segment of the curve I don"t think that"s going to stay in backwardation I think by the time June gets here we"re going to be looking at contango again.

So that"s one trade that I see the other one I"m kind of waiting for and I’m lining up quite a few dominoes here is I think that Trump is going to get tough with ISIS very quickly after entering office and I wouldn"t be surprised if there"s some kind of ultimatum, ISIS knock it off or else, and I think there"s so much hysteria right now politically there"s so many people with such polarized viewpoints that you could easily see a an overreaction, a massive upward spike in oil prices because a lot of paranoid people are convinced that Donald Trump is going to launch nuclear weapons on ISIS or something.

I don"t think that"ll actually happen. If there was a $25 up spike in oil prices from here I would look at that as a very very ripe shorting opportunity because I don"t think prices can go $25 higher and stay there because the shale revolution will be restarted, the bakken will be relaunched and those prices will come back down.

So I don"t want to bet on the up spike I"m not convinced it will happen if it does happen I"ll definitely bet on the mean reversion. Frankly that"s all I can really see at this point for trades.

Raoul:             So to add on about oil. Oil is interesting to me because if you remember I made a very public forecast on oil way back in 2015 I think it was, when I said look I think oil is going to fall to $30 dollars a barrel it was like at 110 at the time and luckily it got there these things don’t always work out that way but it did and the reason I had a lot of faith was twofold one the dollar was going up and I thought it would go much higher which obviously is the normal nature of oil prices so that helps that.

The other thing was speculative position in crude oil was all time high in fact if I took the trend going back from the early 80"s it was seven standard deviations above that trend and well over three standard deviations maybe four standard deviations from the trend in the last 20 years or 15 years. So, the position was huge.

If I look at it now again, I"m looking again at my Bloomberg screen as we speak it"s equal to where it was. So, it came, all the way back down, it"s got all the way back up. So, the market is wildly gigantically bullish on crude oil and that is something that starts looking like an opportunity to me on the short side.

I get what you"re saying about the price risk which is always the danger of shorting crude oil it"s always a bit of a negative gamma trade. So it makes it a bit nervous but I still think that crude oil comes lower so I’m bullish in that.

I"ve seen a similar situation with copper driven by China and a few other things where copper position is wildly extreme and so I start to think well too much reflation is priced into these things maybe there’s an interesting opportunity on the short side.

Erik:                Yeah, I very much agree with that I want to be short equities here and I want to be short crude oil but I don"t dare to touch either trade from the short side right now because there"s been so much bullish hysteria in the equity market. I don"t know what"s going to happen to you know sell the inauguration. OK I"ve said sell quite a few times in the last few years and been wrong so I want to be short but-- emotionally I want to, I can"t bring myself to do it because there"s just been-- every time I say OK the market can"t possibly go higher than this it ends up going higher.

In the case of crude oil, I"m convinced that this rally has played out from a fundamental standpoint. It’s that hysteria risk that if it happens it"s a fantastic opportunity to go short. I would consider puts on crude oil here as a speculation that maybe they"ll go lower. But I don"t want be an outright futures here I"d rather be in puts on futures and have a very limited downside if Trump scares everybody.

If that happens – I don"t think it"s a real risk – I just think it"s hysteria and look at there"s actually been an increase in residency applications in Chile because there are people freaking out about Donald Trump so much that they want to be in the southern hemisphere for when he starts the nuclear war that"s a fact. This is hysteria and until it settles down I don"t want to be on the short side of the oil trade unless it"s using options or something protected.

Raoul:             Yeah, I agree. What is interesting oil volatility has been coming lower. Look, I don"t think it"s going to get back to where it was in 2014 when it was trading below 20 but it has come down from a peak of 80, a kind of a real trading range of 50 down to 30. If it comes any lower the ability to buy options start to make sense because oil volatility can go to 80 can go to a 100 so maybe buying some puts on oil or you buy kind of out of the money calls out of the money puts If you"ve got the view that you have that there is a tail risk events of something that Trump administration will do to drive up the price of oil and that"s possible don"t forget that the economic policies is credibly pro oil in the U.S. right now with the new administration. So, it is in that economic interest to drive up the price of oil.

So yes, I can see that too. I love these kinds of puzzles. These are the kind of ones that get me up at night thinking wow, that’s interesting, you"ve got all of the reasons why the oil price should fall, all of the geopolitical reasons and business reasons why the U.S. wants a higher oil price so how does this play out what does that mean for us.

The Fake News of Fakebook: Welcome to the Machine

Sometimes we need to take a step back and gain some perspective.  As we explain in our book Splitting Pennies - the world isn"t always as it seems at first glance.  What"s happening now, is much a result of what was planned and started 50, 60, and 70 years ago by a previous generation.  Modern history and especially regarding USA really should be looked at since @ 1950, at the wind up of World War 2.  And, the most significant element in global society, is quite possibly the first form of Artificial Intelligence: The Machine.  The Machine, as referenced by Eisenhower on his farewell address as the "Military Industrial Complex" and later referenced by Pink Floyd as simply "The Machine" - is a form of AI that is very dangerous for the survival of mankind itself, let alone the waste of economic resources and others.  Economically, looking at the military, it would seem that there really is an Alien conspiracy controlling powerful countries because the Military only destroys, it doesn"t create.

This battle between The Machine and "The People" you can say took hold in America in the 50"s and peaked in the 60"s during the civil rights movement.  Sides were formed, society was polarized.  Common interests aligned themselves.  Big business sided with The Machine as they saw new opportunities for profit and consumer control.  It"s important to have this perspective; often we write about the CIA, about the big banks, they are all cogs in a larger entity "The Machine" which has an intelligence of its own.  It is not a complex intelligence, such as developed recently in computing - but nonetheless, as any intelligence is defined, it is a form of artificial intelligence.  It has a simple goal - expand, survive, grow, evolve.  Human collatoral damage, is irrelevant.  Destruction of society, destroying the planet, doesn"t matter to the survival of The Machine.  War profiteers are like hosts to a virus, that perpetuate its operations.

Of course, the best example of one of the many parts of The Machine is the CIA, but it is not the only one, nor the most significant part of the machine.  Hosts to this virus like the forces behind Black Lives Matter, and other social destructive forces, are possibly even more significant, due to the fact that they are "on the front lines" stopping any change or taming The Machine.  The best explanation academically and intellectually is provided by Noam Chomsky, you can checkout his latest book here and see trailer from recent documentary below:

The Machine is now in it"s 3rd or 4th generation depending on how you calculate but in any regard, the current agents working for The Machine clearly don"t even understand their own jobs, they are just mindless government workers raised on a violent culture programmed by Quentin Tarantino, like the Rick Perry that didn"t know what his job would be, that he accepted.  The government has become so bloated and inefficient, 90% of it could be deleted and we"d still function fine.  But remember, the Government is no longer "for the people" it"s "for The Machine".  It"s unfair to say that specific people, or specific groups, are the sole cause of America"s decline - it"s not Globalists, it"s not "offshoring" - it"s a lot more complex than that and frankly, USA is irrelevant too for The Machine.  It just so happens that the USA has had and does have the most funded, technologically advanced military in the world.  It"s just strategic positioning.  America isn"t the most powerful country in the world because of "freedoms" or "ideals" it was simply a geo-strategic advantage during World War 2, on a number of levels, that enabled Superpower status, and the creation of The Machine which now operates on a global level.

Fakebook is the new "tool" of social control.  During the 60"s, 70"s, and 80"s the CIA popularized street drugs in order to control and quell the population, as well as various diseases (AIDS) and more modern methods (Chemtrails) and other tools.  Fakebook is the current "drug" of the era - what will be next?  We can get a glimpse at Darpa.

This is what TRUMP is up against.  And while politically, he"s a nobody, a rogue from the "forest" who as Gingrich said "Didn"t go to the same schools, isn"t part of a secret society;" in the final analysis, TRUMP is still part of The Machine, although a failed one - relying on his persona as a reality star to build his "brand."  Maybe this is why the common man can relate to TRUMP so well, he"s also been spit out by The Machine in different ways, in business - except he did it while part of the "haves" and not the "have nots" - probably TRUMP doesn"t know what he"s up against in the coming days and weeks ahead.  We must remember especially regarding the mindless zombies that burn down bank of america branches and McDonalds drive throughs, what is at stake for bettering the lives of all Americans is not political, it is not about liberals and their idiocy - The Machine is something far greater, it is employed by both parties, Democrat and Republican - Rich and Poor.  These are the dividing lines the Elite do not want you to understand!  As long as blacks are fighting whites, women are fighting men, homosexuals are fighting heterosexuals - the divide and conquer plan of the Elite is easy to implement.

This generation"s war for the machine is being fought in the battlefield called "social media" - and the platform hosting the Fake News - Fakebook.

Welcome my son, welcome to the machine
Where have you been?
It"s alright we know where you"ve been
You"ve been in the pipeline, filling in time
Provided with toys and "scouting for boys"
You brought a guitar to punish your ma
And you didn"t like school, and you
Know you"re nobody"s fool
So welcome to the machine

Welcome my son, welcome to the machine
What did you dream?
It"s alright we told you what to dream
You dreamed of a big star
He played a mean guitar
He always ate in the Steak Bar
He loved to drive in his Jaguar
So welcome to the machine

To learn about how this works regarding the financial markets, checkout Splitting Pennies - Understanding Forex, and see how deep the rabbit hole goes.