Bitcoin Futures Begin Trading – Let The Madness Commence!

One of the things that I love about Bitcoin is that the fun never seems to end.  On Sunday, Bitcoin futures began trading on the Chicago Board Options Exchange for the first time ever, and within minutes the CBOE’s website crashed.  What a perfect metaphor.  Bitcoin and other cryptocurrencies are completely and utterly disrupting the global financial system, and the financial establishment is still groping for a cohesive response to this growing phenomenon.

For a long time the financial establishment seemed to think that if they just kept publicly trashing Bitcoin and other cryptocurrencies that they would eventually just go away.  In fact, earlier today I came across a story that talked about how Deutsche Bank is warning of a “Bitcoin crash” in 2018.  But what they don’t realize is that we have reached a tipping point, and the world will never go back to the way it was before.

And even though other global financial institutions are dragging their feet, an enormous threshold was crossed when Bitcoin futures were launched on the Chicago Board Options Exchange just a few hours ago

On Sunday, the Cboe will finally launch its long-awaited bitcoin futures contract; the CME Group will launch its futures contract later this month.

This will surely add a new element to bitcoin, shifting it from a buy-side-only trade to introducing the ability to go long — or short. This should bring new, larger and institutional participants into the market.

This move will also make it more tempting for large institutions to try to manipulate the price of Bitcoin, and that is always a dangerous thing.

But overall this is being hailed as a great thing for Bitcoin, and many believe that the wild ride that Bitcoin has been on in recent weeks has been because of this upcoming futures launch.  The following comes from CNBC

The futures are cash-settled contracts based on the auction price of bitcoin in U.S. dollars on the Gemini Exchange, owned and operated by virtual currency entrepreneurs Cameron and Tyler Winklevoss.

“The pretty sharp rise we have seen in bitcoin in just the last couple of weeks has probably been driven by optimism ahead of the futures launch,” said Randy Frederick, vice president of trading and derivatives for Charles Schwab in Austin.

As I write this, the price of Bitcoin is sitting at $ 16,487.99, which is much higher than it was just a couple days ago.  At one point it had dipped below $ 14,000, but it has bounced back nicely.

And this could be just the beginning for Bitcoin futures.  According to CNN, Bitcoin futures will soon begin trading on a couple of additional exchanges as well…

There’s more to come. Bitcoin futures will also begin trading on the Chicago Mercantile Exchange on December 17-18, while the Nasdaq will debut the options sometime next year.

Many of us that didn’t get into Bitcoin when it was first emerging are still kicking ourselves.  But one individual who did, but later abandoned his efforts, has more than 80 million dollars sitting in a landfill somewhere.  The story of a British man named James Howells was recently featured by Gizmodo

Through his computational labors, he amassed around 7,500 bitcoin before his girlfriend, fed up with the noise of block-mining hardware, made him stop. No great loss—the Silk Road was two years away and bitcoin was worth next to nothing.

Most of the equipment he was using was sold for scrap after he spilled lemonade on it, and the hard drive containing the key to his digital wallet sat in a drawer for three years before passing into its final resting place: the trash.

Near the tail end of 2013, Howells took stock of the crypto markets and began to regret his hasty cleaning decisions. At that time bitcoin’s market cap was beginning to climb, and his 7,500 lost coins were worth a few million. Four years later and he still—understandably—hasn’t let it go. One bitcoin is currently valued at $ 11,500, making the small fortune Howells sent to a landfill a considerably larger fortune of over $ 80 million.

Could you imagine being in his shoes?

That hard drive would almost certainly be virtually impossible to find at this point, but I am sure that he thinks about his lost fortune all the time.

But this is the great thing about Bitcoin.  Fortunes are being won and lost outside of the control of the global central banking system, and this has got to be driving the central bankers absolutely bonkers.  I have always believed that there would be a massive crackdown on cryptocurrencies someday, and this is something that Adam Taggart recently discussed with a digital currency expert

We talked about the central banking cartel’s longstanding monopoly of the money supply and its historic ruthlessness for squashing all competition. He agreed that the central banks would like nothing more than to replace the current cryptos as well as all paper fiat currencies with digital sovereign versions. And he predicts they will likely try to do exactly this. How successful will they be? Uncertain. He can certainly foresee a time when they ban ownership of Bitcoin and its brethren, criminalize transacting with them, and shut down the exchanges. Though while the cartel may be able to seriously curtail Bitcoin et al, he doesn’t see it succeeding in driving them to extinction for several reasons. One he offered that I hadn’t heard before (but have since verified) is that private investors have put a network of satellites up in space dedicated to making it possible to transact in Bitcoin anywhere on Earth even if the terrestrial networks are taken down by the authorities or natural disaster.

I agree that it is quite likely that global central banks will eventually come out with their own digital currencies using blockchain technology.  At that point it is entirely possible that they could try to ban the use of Bitcoin and other independent cryptocurrencies, and we must not allow them to do this.

The use of Bitcoin and other cryptocurrencies is one way that humanity can express independence from the global debt-based system that is systematically enslaving all of us, and so I greatly applaud the entrepreneurs that are working so hard to make these new digital currencies viable.

But the battle over currencies is just in the early chapters, and some huge twists and turns are ahead.  We don’t know exactly how everything is going to play out, but it is definitely going to be a wild ride.

Michael Snyder is a Republican candidate for Congress in Idaho’s First Congressional District, and you can learn how you can get involved in the campaign on his official website. His new book entitled “Living A Life That Really Matters” is available in paperback and for the Kindle on Amazon.com.

The Economic Collapse




Free Bitcoin Trading Next Week

As I told my Cycle 9 Alert subscribers on Tuesday, I’m no expert on cryptocurrencies. Still, I’m pretty sure 2017 will go down in the history books as the year of the Bitcoin bubble.

It’s checking all the “classic bubble” boxes…

Massive price gains. Up a hair more than 1,000% year-to-date!

Trending on Google Search. Bitcoin now garners 7-times more Google searches than Kim Kardashian. And it’s an international hot-topic, with the U.S. representing just the 8th-largest volume of search queries.

Non-investor interest. My wife is asking me about Bitcoin. She has no interest in investing, finance or economics.

New financial products. Both the Chicago Board of Options Exchange (CBOE) and the Chicago Mercantile Exchange (CME) will offer a Bitcoin futures contract, beginning December 10 and December 18, respectively.

Now, you might assume the Bitcoin mania can be kept in quarantine, so as not to infect the already animal spirits-prone psyche of stock market investors.

Sure, free-wheeling traders and speculators are naturally drawn to Bitcoin… just as they were drawn to internet stocks in the late ’90s. But real investors won’t fall victim to the craze… right?

Think again!

Consider this…

The S&P 500 is up a little more than 17% in 2017, and the average year-to-date return of all U.S. industries is around 12%.

Meanwhile, the SPDR Capital Markets ETF (NYSE: KCE) is up 27%!

That ETF is predominantly invested in the stocks of brokerage firms and financial exchanges – essentially, the “gears” of the Wall Street machine.

These include names like Interactive Brokers (IBKR), Schwab (SCHW), E*Trade (ETFC), and TD Ameritrade (AMTD), on the brokerage side. And the Intercontinental Exchange (ICE), Nasdaq (NDAQ), CME Group (CME), and CBOE Global Markets (CBOE) on the exchange side of the business.

While banks make profits on lending, and insurance companies on premiums, capital market players make most of their money on trading fees. The more you trade… the more they make.

Can you see where we’re going with this?

Trading volume in traditional stocks has steadily declined in the wake of the Great Financial Crisis.

Investors have largely kept to the sidelines or gone “passive,” leaving the capital markets firms’ “toll booths” with less activity than they were used to leading up to 2008, and certainly less than they enjoyed in the trader’s paradise of the late ’90s.

Of course, all this leaves them clamoring for a new, “hot” product to offer busy-bee buyers and sellers.

Something like, that’s right… Bitcoin!

As I said earlier, both the CME and the CBOE have gained regulatory approval to offer Bitcoin futures on their exchanges.  And in true “introductory-offer” fashion, you can start trading Bitcoin for FREE!

The CBOE’s chairman and CEO, Ed Tilly, made the jubilant announcement yesterday:

“Given the unprecedented interest in Bitcoin, it’s vital we provide clients the trading tools to help them express their views and hedge their exposure. We are committed to encouraging fairness and liquidity in the Bitcoin market. To promote this, we will initially offer Bitcoin futures trading for free.”

Free Bitcoin trading! What could go wrong? Right!?

Bitcoin is an infantile market. So it remains to be seen whether real investors join in on the mania seeded by the early-and-brave crowd.

Bitcoin may prove to be the next cash cow for the brokerages and exchanges.

Or, it could just as easily end up being a big headache, eventually leaving them with a regulatory nightmare and the empty bag of a passing fad.

What’s certain is, throughout all of 2017, capital market stocks have enjoyed the speculative run-up in Bitcoin’s popularity and the possibility it would go “mainstream.”

Have a look for yourself…

The Chicago Board of Options Exchange (CBOE) will be the first traditional U.S. exchange to offer a Bitcoin contract. And while regulatory approval just came in, investors seem to have been looking forward to this day pretty much all year.

With a year-to-date gain of 69.1%, shares of CBOE Global Markets (Nasdaq: CBOE) are up more this year than 485 stocks (97% of them) in the S&P 500.

Of course, the CBOE’s 69% rally may seem pale in comparison to Bitcoin’s 1,000% run. But, when appropriately judged against other common stocks, you have to wonder whether shares of CBOE have gotten ahead of themselves.

Often, it’s the anticipation of a “big deal” that drives stock prices higher, more so than the actual deal. If CBOE’s stock falls victim to Bitcoin’s bubble and investors’ tendency to “buy the rumor and sell the news,” it could be in for a disappointing drop.

That’s why I cautioned my Cycle 9 Alert subscribers on Tuesday against naively falling victim to the Bitcoin euphoria. And I showed them a creative way to potentially profit from the excessive excitement surrounding the CBOE’s introduction of Bitcoin futures.

So, while I won’t tell you what you can or can’t do with your own money… I’ll certainly encourage you, too, to approach this speculative market with a healthy dose of skepticism.

And if you’re interested in trading a proven strategy – one with a profitable track record much longer than Bitcoin’s – click here to gain access to my Cycle 9 Alert portfolio, which currently holds five profitable positions (of 5 total positions), averaging +73%.

To good profits,

Adam O’Dell
Editor, Cycle 9 Alert

The post Free Bitcoin Trading Next Week appeared first on Economy and Markets.

Adam O’Dell – Economy and Markets ()




Trading Wisdom From A JP Morgan Vet

Every once in awhile a few gems will surface through Wall Street’s noise. Such is the case with a departing note from Jan Loeys, a senior strategist from J.P. Morgan who has been at this game for over 30 years.

In his final note, Loeys shares his thoughts on all the hot issues in finance and trading. The following are his most relevant comments to what we do at Macro Ops. The bolded emphasis is ours.   

Quant  Vs Discretionary

  • Quantitative techniques are indispensable, though, to deal with the complexity of financial instruments and the overload of information we face. Empirical evidence counts for more than theory, but you need theory to constrain empirical searchers and avoid spurious correlations.
  • Rules versus discretion? You need both. I have tried to have logical arguments to buy or sell certain assets, based on Finance. And I have tried to corral evidence that the signals I use have in the past had the assumed impact on asset prices. Each of these then became a rule, of the form: If X>0, buy A, and vice versa. As we collected these rules, and published them in our Investment Strategies series, the question came up naturally whether we should not simply make our investment process driven by a number of empirically proven rules, and to banish any discretion (emotion?) from the process. Over time, we converged on a mixture of the two as pure rules ran into the problem that the world is forever changing, partly as everyone else figures out the same rule and then arbitrages away the profit, and partly as economic structures and regimes similarly change over time in a way that we cannot capture with simple rules.
  • Much as I have been talking a lot about cycles, I do not think of the world as a stationary system described by a set of parameters that we steadily get to know more about. Instead, as economists we think of people constantly optimizing their objectives, under the constraints they face. Aside from truly exogenous shocks to the system, the main difference between today and yesterday is that today, we know what happened yesterday and that information allows us to constantly fine tune and thus change our behavior. That is, we constantly learn from the past, much to try to avoid making the same mistakes. At the macro level, this means that the system is constantly evolving. As Mark Twain said, “History doesn’t repeat itself, but it often rhymes”. As investors, we should look at the market as billions of people all learning and adapting. The best investors are those who get ahead of this by learning faster and understanding better how others are learning.

Forecasting

  • The starting point of Finance is the Theorem of Market Efficiency which posits that under ideal conditions what we all know should be in the price. Only new information moves the price. Hence, it is changes in expectations about the future that drive asset prices, not the level of anything.
  • How to forecast view changes? The good news is that changes in opinions about fundamentals such as growth and inflation tend to repeat. This is one driver of momentum in asset prices, and is likely driven by the positive feedback between risk markets and the economy that forecasters naturally find very difficult getting ahead of.
  • There is a fundamental difference between an asset price and a forecast. A forecast is a single outcome that you consider the most likely, among many. In statistics, we call this the mode. An asset price, in contrast, is closer to the probability-weighted mean of the different scenarios you consider possible in the future. When our own probability distribution for these different outcomes is not evenly balanced but instead skewed to, say, the upside, the market price will be above our modal view. Asset prices can thus move without a change in modal views if the market perceives a change in the risk distribution. An investor should thus monitor changing risk perceptions as much as changing modal views.
  • Do markets get ahead of reality? They do, yes, exactly because asset prices are probability-weighted means and the reality we perceive is coded as a modal view. Information arrives constantly and almost always only gently moves the risk distribution around a given modal view. Before we change our modal view of reality, the market will have seen the change in risk distribution and will have started moving already.
  • Levels or direction? In our business, we are asked to forecast asset prices and returns. I have found this very hard but fortunately have had the luxury to be able to stick to forecasting market direction rather than outright asset price levels. In markets that are close to efficiently priced, what we know is already in the price and we cannot really use that same information to make a coherent case for an asset price level that much different from today. All I have been able to do is to make a case that there are mild-to-decent odds in favor of the market going in one direction rather than the other. We have been much more successful in forecasting direction than actual asset price levels, and it is the direction that is more important for strategy.

Finding Alpha

  • The Theorem of Market efficiency, which implies investors can’t beat the market, implies that asset prices will follow random walks, with drift and that asset price changes will be white noise, with no serial correlation. There are thus only two possible inefficiencies to be exploited: positive serial correlation, which we call Momentum, or negative serial correlation, which we call mean reversion, or Value (to become valuable, asset prices need first to go down, or fundamentals need to improve faster than the price). It is an empirical question which dominates where. At the asset class and sector level, we have found that Momentum dominates, while within the fixed income world, Value is more important.
  • Across time, market momentum at the macro level has been the best way to earn excess returns. I discussed above how some of this is due to the momentum in view changes. More fundamentally, in open markets, we frequently face a Fallacy of Composition according to which rational and equilibrating behavior at the micro level becomes destabilizing at the macro level. The free market is very good at motivating entrepreneurship and rational behavior at the micro level, but is subject to constant booms and busts at the macro level. Central banks try to control this instability through counter-cyclical policies but can’t undo it all.
  • Trade the risk bias. Even when markets price in exactly our modal views, I find it useful to consider how prices will move on new information and then try to position on any skew in the outlook. If I find that a particular price or spread will move a lot more on bullish than on bearish news, then I will position bullishly. This works at the portfolio level if I can combine different unrelated risk biases.

Red Team      

  • Cherish your errors. I have learned ten times more from being wrong than being right. Once you make a mistake, go public with it, analyze it in detail, and learn from it.
  • Be your own devil’s advocate, and spend most time with people who do not agree with you, or who have a different way of looking at things. Not always easy as being with like-minded people is more comforting.

 

 

The post Trading Wisdom From A JP Morgan Vet appeared first on Macro Ops.

Macro Ops




Lessons From A Trading Great: Ed Thorp

Ed Thorp, the father of quant investing, might be the most impressive market wizard. He turned seemingly random processes into predictable events, transforming the art of speculation into a science decades before Wall Street’s quants became mainstream.

His domination in the financial world began in the casino. Thorp figured out how to beat the most “unbeatable” games. In roulette, he created a wearable computer that gave him a 44% edge. And in blackjack, he developed the very first card counting system that’s still widely used today.

These gambling skills transferred perfectly to markets. Thorp’s first hedge fund, Princeton Newport Partners, never had a down year. It compounded money at 19.1% for almost 20 years — destroying the S&P 500.

His second fund, which he ran from August 1992 to September 2002, performed just as well with an annualized return of 18.2%.

Thorp’s list of discoveries, inventions, and people he’s influenced and invested in is comically long:

  • He discovered an options pricing formula before the Black-Scholes model became public.
  • He started the first ever quant hedge fund.
  • He was the first to use convertible and statistical arbitrage.
  • He was the first limited partner in Ken Griffin’s Citadel — one of the most successful hedge funds ever.
  • His books on blackjack and trading heavily influenced “bond king” Bill Gross.
  • He discovered that Bernie Madoff was a fraud many years before it became public.

And the list goes on…

Thorp’s advice on approaching games of incomplete information is methodical and scientific, making it very useful to incorporate into your own trading process. The following is his most valuable wisdom with our commentary attached:

Rare Events (Fat Pitches)

Fat pitches — the types of trades Buffett, Druck, and Soros salivate over— happen seldomly. And that makes sense because is takes extraordinary circumstances to push markets far enough from equilibrium to create these opportunities.

When these dislocations occur, it pays to go on high alert. It’s possible to make your year or even your career in a few days by hitting these fat pitches on the nose.

Here are a few of Thorp’s best plays:

1987 Crash

Black Monday was a traumatizing experience for most traders… but not for Thorp. When the crash started to accelerate Thorp was having his daily lunch date with his wife Vivian. The office called to report the news and Thorp didn’t even flinch. He had already accounted for all possible market scenarios, including this one, and didn’t have any reason to panic. He calmly finished his lunch and then went home to think about how to exploit the situation. This is what he came up with:

After thinking hard about it overnight I concluded that massive feedback selling by the portfolio insurers was the likely cause of Monday’s price collapse. The next morning S&P futures were trading at 185 to 190 and the corresponding price to buy the S&P itself was 220. This price difference of 30 to 35 was previously unheard of, since arbitrageurs like us generally kept the two prices within a point or two of each other. But the institutions had sold massive amounts of futures, and the index itself didn’t fall nearly as far because the terrified arbitrageurs wouldn’t exploit the spread. Normally when futures were trading far enough below the index itself, the arbitrageurs sold short a basket of stocks that closely tracked the index and bought an offsetting position in the cheaper index futures. When the price of the futures and that of the basket of underlying stocks converged, as they do later when the futures contracts settle, the arbitrageur closes out the hedge and captures the original spread as a profit. But on Tuesday, October 20, 1987, many stocks were difficult or impossible to sell short. That was because of the uptick rule.

It specified that, with certain exceptions, short-sale transactions are allowed only at a price higher than the last previous different price (an “uptick”). This rule was supposed to prevent short sellers from deliberately driving down the price of a stock. Seeing an enormous profit potential from capturing the unprecedented spread between the futures and the index, I wanted to sell stocks short and buy index futures to capture the excess spread. The index was selling at 15 percent, or 30 points, over the futures. The potential profit in an arbitrage was 15 percent in a few days. But with prices collapsing, upticks were scarce. What to do?

I figured out a solution. I called our head trader, who as a minor general partner was highly compensated from his share of our fees, and gave him this order: Buy $ 5 million worth of index futures at whatever the current market price happened to be (about 190), and place orders to sell short at the market, with the index then trading at about 220, not $ 5 million worth of assorted stocks—which was the optimal amount to best hedge the futures—but $ 10 million. I chose twice as much stock as I wanted, guessing only about half would actually be shorted because of the scarcity of the required upticks, thus giving me the proper hedge. If substantially more or less stock was sold short, the hedge would not be as good but the 15 percent profit cushion gave us a wide band of protection against loss.

In the end we did get roughly half our shorts off for a near-optimal hedge. We had about $ 9 million worth of futures long and $ 10 million worth of stock short, locking in $ 1 million profit. If my trader hadn’t wasted so much of the market day refusing to act, we could have done several more rounds and reaped additional millions.

Kovner Oil Tanker

In the 1980s, Bruce Kovner discovered a trading opportunity in buying oil tankers for scrap value. Thorp instantly recognized the fat pitch and invested.

Along with Jerry Baesel, the finance professor from UCI who joined me at PNP, I spent an afternoon with Bruce in the 1980s in his Manhattan apartment discussing how he thought and how he got his edge in the markets. Kovner was and is a generalist, who sees connections before others do.

About this time he realized large oil tankers were in such oversupply that the older ones were selling for little more than scrap value. Kovner formed a partnership to buy one. I was one of the limited partners. Here was an interesting option. We were largely protected against loss because we could always sell the tanker for scrap, recovering most of our investment; but we had a substantial upside: Historically, the demand for tankers had fluctuated widely and so had their price. Within a few years, our refurbished 475,000-ton monster, the Empress Des Mers, was profitably plying the world’s sea-lanes stuffed with oil. I liked to think of my part ownership as a twenty-foot section just forward of the bridge. Later the partnership negotiated to purchase what was then the largest ship ever built, the 650,000-ton Seawise Giant. Unfortunately for the sellers, while we were in escrow their ship unwisely ventured near Kharg Island in the Persian Gulf, where it was bombed by Iraqi aircraft, caught fire, and sank. The Empress Des Mers operated profitably into the twenty-first century, when the saga finally ended. Having generated a return on investment of 30 percent annualized, she was sold for scrap in 2004, fetching almost $ 23 million, far more than her purchase price of $ 6 million.

Sometimes the best trades aren’t on public exchanges. Looking outside traditional trading vehicles can reveal huge opportunities other traders pass up.

SPACs

An unusual opportunity to buy assets at a discount arose during the financial crash of 2008–09, in the form of certain closed-end funds called SPACs. These “special purpose acquisition corporations” were marketed during the preceding boom in private equity investing. Escrowing the proceeds from the initial public offering (IPO) of the SPAC, the managers promised to invest in a specified type of start-up company. SPACs had a dismal record by the time of the crash, their investments in actual companies losing, on average, 78 percent. When formed, a typical SPAC agreed to invest the money within two years, with investors having the choice—prior to the SPAC buying into companies—of getting back their money plus interest instead of participating.

By December 2008, panic had driven even those SPACs that still owned only US Treasuries to a discount to NAV. These SPACs had from two years to just a few remaining months either to invest or to liquidate and, before investing, offer investors a chance to cash out at NAV. In some cases we could even buy SPACs holding US Treasuries at annualized rates of return to us of 10 to 12 percent, cashing out in a few months. This was at a time when short-term rates on US Treasuries had fallen to approximately zero!

Runaway Inflation

Short-term US Treasury bill returns went into double-digit territory, yielding almost 15 percent in 1981. The interest on fixed-rate home mortgages peaked at more than 18 percent per year. Inflation was not far behind. These unprecedented price moves gave us new ways to profit. One of these was in the gold futures markets.

At one point, gold, for delivery two months in the future, was trading at $ 400 an ounce and gold futures fourteen months out were trading for $ 500 an ounce. Our trade was to buy the gold at $ 400 and sell it at $ 500. If, in two months, the gold we paid $ 400 for was delivered to us, we could store it for a nominal cost for a year, then deliver it for $ 500, gaining 25 percent in twelve months.

Notice the commonalities between Thorp’s fat pitches:

  • They’re rare and typically occur during crises. Crises create large dislocations that cause investors to act irrationally, creating huge opportunities.
  • They all have asymmetric risk/reward ratios.
  • Fast action was needed to capture each of them. Fat pitches don’t last long. Other traders will eventually find them and pounce.
  • They’re all “one of a kind” opportunities. The exact scenario had never happened before and creative thinking was needed to capitalize. Although history rhymes, it does not repeat. The next fat pitch won’t be exactly like the last one.  

Gambling As Training

Understanding gambling games like blackjack and some of the others is one of the best possible training grounds for getting into the investment world. You learn how to manage money, you learn how to compute odds, you learn how to reason what to do when you have an advantage.

Gambling is investing simplified. Both can be analyzed using mathematics, statistics, and computers. Each requires money management, choosing the proper balance between risk and return. Betting too much, even though each individual bet is in your favor, can be ruinous.

Notice how Thorp didn’t say anything about MBAs, economic degrees, or finance classes. Those don’t prepare you for the core challenges you’ll face as a trader like position sizing and risk management.

Our favorite cross-training exercise at Macro Ops is poker. Poker forces you to think in terms of probabilistic outcomes while managing your risk and establishing an edge.

Edge

You can’t succeed in trading without an edge. And a good way to find that edge is by asking yourself how the market is inefficient and how you can exploit it.

In A Man For All Markets Thorp details sources of inefficiency:

In our odyssey through the real world of investing, we have seen an inefficient market that some of us can beat where:

  1. Some information is instantly available to the minority that happen to be listening at the right time and place. Much information starts out known only to a limited number of people, then spreads to a wider group in stages. This spreading could take from minutes to months, depending on the situation. The first people to act on the information capture the gains. The others get nothing or lose. (Note: The use of early information by insiders can be either legal or illegal, depending on the type of information, how it is obtained, and how it’s used.)
  2. Each of us is financially rational only in a limited way. We vary from those who are almost totally irrational to some who strive to be financially rational in nearly all their actions. In real markets the rationality of the participants is limited.
  3. Participants typically have only some of the relevant information for determining the fair price of a security. For each situation, both the time to process the information and the ability to analyze it generally vary widely.
  4. The buy and sell orders that come in response to an item of information sometimes arrive in a flood within a few seconds, causing the price to gap or nearly gap to a new level. More often, however, the reaction to news is spread out over minutes, hours, days, or months, as the academic literature documents.

He then explains how to exploit these inefficiencies (emphasis mine):

  1. Get good information early. How do you know if your information is good enough or early enough? If you are not sure, then it probably isn’t.
  2. Be a disciplined rational investor. Follow logic and analysis rather than sales pitches, whims, or emotion. Assume you may have an edge only when you can make a rational affirmative case that withstands your attempts to tear it down. Don’t gamble unless you are highly confident you have the edge. As Buffett says, “Only swing at the fat pitches.”
  3. Find a superior method of analysis. Ones that you have seen pay off for me include statistical arbitrage, convertible hedging, the Black-Scholes formula, and card counting at blackjack. Other winning strategies include superior security analysis by the gifted few and the methods of the better hedge funds.
  4. When securities are known to be mispriced and people take advantage of this, their trading tends to eliminate the mispricing. This means the earliest traders gain the most and their continued trading tends to reduce or eliminate the mispricing. When you have identified an opportunity, invest ahead of the crowd.

Pay special attention to his second point: Don’t trade unless you’re sure you have an edge that’ll create better than random outcomes.

An easy way to do this is by backtesting or paper trading your strategy before investing in it.

It’s also a good idea to try finding a solid trading edge in markets you love. As Thorp explains:  

To beat the market, focus on investments well within your knowledge and ability to evaluate, your “circle of competence.”

If you love following small companies then just trade those. If you come from an energy background then focus on crude oil and natural gas. And if you like math and volatility, options are a good place to start. Only venture into a new market after spending a significant amount of time studying it!

Efficient Markets

Anyone who’s actually traded knows the Efficient Market Hypothesis is bogus. It’s a poor mental model used by lazy academics. Thorp has a much better take:

When people talk about efficient markets they think it’s a property of the market. But I think that’s not the way to look at it. The market is a process that goes on. And we have, depending on who we are, different degrees of knowledge about different parts of that process.

. . . market inefficiency depends on the observer’s knowledge. Most market participants have no demonstrable advantage. For them, just as the cards in blackjack or the numbers at roulette seem to appear at random, the market appears to be completely efficient.

Markets aren’t actually random. They only appear random to those without expertise. The right knowledge transforms the market from a sequence of random numbers into a predictable process.

Combining Technicals With Fundamentals

In the mid 2000s Thorp developed a trend following futures strategy. During the process he discovered that combining fundamental information with technical signals was superior to just technicals alone.

Here he is in Hedge Fund Market Wizards:  

The fundamental factors we took into account varied with the market sector. In metal and agricultural markets, the spread structure—whether a market is in backwardation or contango—can be important, as can the amount in storage relative to storage capacity. In markets like currencies, however, those types of factors are irrelevant.

Combining technicals with fundamentals can boost your win rate. Find the key fundamental drivers in your market and add them into your process.

Anchoring

In A Man For All Markets Thorp describes his first ever trade buying a company called Electric Autolite. In the subsequent two years the stock declined 50%. He decided to hold out, hoping it would return to his entry point so he could break even. The stock eventually did rebound and Thorp got out for a scratch, but he later realized how stupid that was. Here’s Thorp reflecting on it:

What I had done was focus on a price that was of unique historical significance to me, only me, namely, my purchase price.

Thorp’s early mistake is called anchoring. Humans tend to place special significance on price levels they originally entered at. But in reality, these prices have little significance. Don’t ever emotionally attach yourself to any price.

Interpreting Financial Headlines

It’s important to take news headlines with a grain of salt. Journalists build narratives behind every market move because it’s their job. Thorp warns about getting caught up in the noise:

Routine financial reporting also fools investors. “Stocks Slump on Earnings Concern” cried a New York Times Business Day headline. The article continued, “Stock prices fell as investors continued to be concerned about third-quarter results.” A slump? Let’s see. “The Dow Jones Industrial Average (DJIA) declined 2.96 points, to 10,628.36.” That’s 0.03 percent, compared with a typical daily change of about 1 percent. Based on the historical behavior of changes in the DJIA, a percentage change greater than this happens more than 97 percent of the time. The Dow is likely to be this close to even on fewer than eight days a year, hardly evidence of investor concern.

One way to separate signal from noise is to track the market’s expected move for the day. To calculate the expected percentage move of the S&P 500, take the VIX and divide it by the the square root of 252. If price stays within that band, any “news” for the day is likely not worth paying attention to.

Correlation

All the trading greats stress the importance of correlation. A low correlation among positions diversifies the portfolio and creates a much better risk/reward profile.

Here’s Thorp from HFMW:

We tracked a correlation matrix that was used to reduce exposures in correlated markets. If two markets were highly correlated, and the technical system went long one and short the other, that was great. But if it wanted to go long both or short both, we would take a smaller position in each.

A common problem traders face when monitoring correlation is the lookback period. Thorp found that 60 days was best. A shorter window is too noisy and a longer one will produce correlations that aren’t relevant anymore.

The Moore Research Center has a free to use correlation matrix for all major macro markets. Check it here.

Leverage

Use leverage incorrectly and you’ll blow up. But properly harness it and you can engineer a risk to reward ratio that perfectly suits you.

Heres Thorp:

The lesson of leverage is this: Assume that the worst imaginable outcome will occur and ask whether you can tolerate it. If the answer is no, then reduce your borrowing.

Don’t rely on a risk control model that uses probability to estimate your max loss. Always assume the absolute worst case and manage from there.

Position Sizing

Thorp popularized the position sizing formula called the Kelly Criterion. Here he is from Hedge Fund Market Wizards:

The Kelly criterion is the bet size that will produce the greatest expected growth rate in the long term. If you can calculate the probability of winning on each bet or trade and the ratio of the average win to average loss, then the Kelly criterion will give you the optimal fraction to bet so that your long-term growth rate is maximized.

Here’s the version of the formula that works best for trading:

So for example, if a trade has a 1:1 reward to risk ratio, with a 60% chance of winning, you would bet:

((1)(.6)-(.4))/1 = .2 or 20% of your account

The one issue with Kelly sizing is that we’ll never know our true win rate or reward to risk ratio in markets. The best we can do is estimate.

Also, the effectiveness of a trading edge changes over time. Because markets evolve, the same edge won’t work forever.

This is why Thorp only uses the Kelly number as a reference. In practice it’s better to bet around half-Kelly because you get about three-quarters of the return with half the volatility.

If you’re less certain of your edge, you should bet an even smaller amount. When Thorp was working on his trend following model in the mid 2000s, he was simulating 1/10 of the Kelly number.

Thorp also has advice on drawdowns. He suggests lowering your position size during rough patches and then ramping up again as you come out of them.

If we lost 5 percent, we would shrink our positions. If we lost another few percent, we would shrink our positions more. The program would therefore gradually shut itself down, as we got deeper in the hole, and then it had to earn its way out. We would wait for a threshold point between a 5 percent and 10 percent drawdown before beginning to reduce our positions, and then we would incrementally reduce our position with each additional 1 percent drawdown.

This is an extremely robust risk management technique used by almost all the trading greats. To read more about them, download our special report by clicking here.

 

 

The post Lessons From A Trading Great: Ed Thorp appeared first on Macro Ops.

Macro Ops




The Best Trading Podcasts For Global Macro Investors

These days we’re flooded with information with barely enough time to digest it all.

To help solve this, our team at Macro Ops tunes into trading podcasts.

With trading podcasts, all those hours you spend driving, doing chores, or working out can also be used to catch up on markets and learn something new.

Below you’ll find a list of podcasts we listen to on a monthly basis to keep our game sharp. We’ve separated them into two categories — process based and news/commentary/narrative based.

The process based podcasts help us develop our macro trading strategies while the commentary helps round out our global macro research. We find both very useful.   

Process Based Podcasts

#1 Chat With Traders

Chat With Traders

Chat With Traders is the leading process podcast for anyone interested in markets. In each episode, host Aaron Fifield invites a guest trader onto the show and breaks down their strategies. The focus is always on their mental models and trading framework — not their current trade ideas.

One of the best ways to improve your own trading is to listen to how others approach markets. You can take their experience and advice and apply it to your own unique style.

The show’s guest list is diverse and ranges from HFT all the way to global macro traders. You’ll get as taste of everything.

Recommended Episode

Chat With Traders, EP. 79 featuring Raoul Pal

I don’t know any of the better known traders who didn’t start with a chart. Paul Tudor Jones always a chart, Stan Druckenmiller always a chart, George Soros always a chart. Many of these guys, most of these guys are all chart based. ~ Raoul Pal

Raoul cut his teeth advising the biggest macro names in the industry including Paul Tudor Jones, Stan Druckenmiller, and George Soros. He then used his knowledge and experience to run a macro fund before retiring at the ripe age of 36.

Aaron does a great job digging into Raoul’s trading process to figure out how he plays the global macro chess game.

Key areas discussed include:

  • The definition of global macro trading
  • Combining technicals and fundamentals to create better trade signals
  • How to quantify the business cycle using the ISM number
  • How to trade around a position as a macro theme plays out

This is a must-listen episode to see how a veteran global macro investor thinks.

#2 Masters In Business

Masters In Business

Masters In Business is a podcast hosted by Barry Ritholtz — a wealth manager and popular financial blogger. Barry has deep domain expertise that makes him an incredible interviewer. He uses his experience to ask the right questions and pull as much as possible out of his guests.

Recommended Episode

Masters In Business featuring Ed Thorp

When people talk about efficient markets they think it’s a property of the market. But I think that’s not the way to look at it. The market is a process that goes on. And we have, depending on who we are, different degrees of knowledge about different parts of that process. – Ed Thorp

Ed Thorp has proved the Efficient Market Hypothesis incorrect over and over again throughout his career. He’s shown that it’s possible to win if you understand the concepts of edge and probability. Thorp does a fantastic job breaking these concepts down into digestible bite-sized pieces.

Key areas discussed include:

If you’re looking to beef up your “quant chops”, listen to this now.

#3 Invest Like The Best

Invest Like The Best

Invest Like The Best is hosted by Patrick O’Shaughnessy — a portfolio manager at O’Shaughnessy Asset Management and blogger at http://investorfieldguide.com/. His show focuses on longer-term investing rather than shorter-term trading. Patrick invites guests with a variety of investing backgrounds in areas like cryptocurrencies, venture capital, and equities. The best episodes are equity related as Patrick always brings on the sharpest guys in the world of stock picking. If you’re into analyzing specific companies, this show is a must.

Recommended Episode

Invest Like the Best, EP.54 featuring David Gardner

Many of the really important things that determine what wins in business are not captured on the financial statements. – David Gardner

This episode does a great job explaining investment narratives. Successful investing, especially in global macro, isn’t always about the numbers. Narratives and investor expectations often drive the macro landscape more than the data itself.

David Gardner, co-founder of the Motley Fool, talks with Patrick about how he invests using compelling narratives instead of traditional valuation metrics.

Key areas discussed include:

  • Narratives over numbers
  • Wisdom of crowds
  • How visionary leadership is key
  • How “overvalued” can actually be a buy signal

This conversation ties in well with Soros’ theory of reflexivity. Positive beliefs about a company can influence its underlying fundamentals to create a positive feedback loop that sends prices higher and higher. Naive traders that short these positive feedback loops end up paying the price.

#4 Better System Trader

Better System Trader

Better System Trader is a show primarily focused on short to mid-term systematic trading. If you’re a discretionary trader looking to get into systems, this podcast provides a great look into that world. The show is also good for more experienced system traders as Andrew Swanscott does a fine job balancing system building basics with more advanced topics.

Recommended Episode

Better System Trader, Episode 59 featuring Scott Phillips

The first fix [for drawdowns] is to bank partial profits along the way at a point that doesn’t sacrifice your total return too much but reduces the standard deviation of your winners. – Scott Phillips

Scott Phillips has an incredible trading journey that began as a recovering meth addict in prison. While inside, Scott read every trading book he could get his hands on. He even had people send him high, low, open, and close data that he would record by hand in a scrap book! Scott is a high energy, no-bullshit guy that delivers brutal truths about the difficulties of system building.

Key areas discussed include:

I really enjoyed this episode because of Scott’s directness. There’s no fluff at all in this conversation. Every minute is well worth your time.

#5 Futures Radio Show

Futures Radio Show

Futures Radio Show is hosted by Anthony Crudele. Anthony got his start on the floor of the CME back in 1999. He’s traded millions of futures contracts over his lifetime and was also one of the first to trade the E-mini S&P electronic contract. Since Anthony’s show revolves around futures, it has a macro fundamental bias. You’ll find some newsy segments here and there but the majority of the content focuses on trading process.

Recommended Episode

Futures Radio Show, Minisode 16: Kevin Muir

All those gaps add up, and they actually cause the futures chart, when you are looking at the continuous chart over a longer period, to not be indicative of what the asset return is during that timeframe. – Kevin Muir

Anthony Crudele invites Kevin Muir aka “The Macro Tourist” on the show to talk process and current events. Kevin is a veteran macro trader who now trades for himself. He specializes in derivative products like futures and options. Since he’s no longer in the institutional game, all his advice is very applicable to the retail trader.

Key areas discussed include:

  • Thinking about carry in the futures markets
  • Adjusting futures charts to see the carry
  • How to think about implied volatility vs realized volatility when trading options

I thought Kevin did a great job breaking down these complex concepts. You’ll learn a whole lot about the derivative markets in just a half hour.

#6 The Tim Ferriss Show

The Tim Ferriss Show

This is the one podcast out of the entire list that isn’t finance focused. It’s on here because Tim specializes in process building across all disciplines. Successful trading and investing is a lifelong journey that requires optimization in every area — health, fitness, business, etc. Tim talks to top performers across a variety fields to help you build great systems and habits into your life.

Recommended Episode

The Tim Ferriss Show, Episode 264: Ray Dalio, The Steve Jobs of Investing

Every buyer has behavioral characteristics for certain reasons, let’s say stocks, to use a very simple example, a typical individual, maybe mutual fund buyer, will buy after something’s gone up because they think it’s a better investment. They’ll sell when it goes down because they’ll get scared, and they think it’s a worse investment. Whereas, a typical institutional investor or pension fund, will buy when it goes down because they have to rebalance their portfolio to keep an asset allocation mix at a certain level. – Ray Dalio

Ray Dalio is one of the preeminent macro traders of the modern era with the track record to prove it. His hedge fund, Bridgewater Associates, is the most profitable hedge fund of all time — making billions upon billions of dollars for its investors.

Any media Dalio does is worth a listen. The man has so much wisdom and insight, he could go on for hours and hours. We only get two here, but it’s a solid two hours. Tim is an excellent interviewer who knows how to pull the maximum amount from his guests.

Key areas discussed include:

There’s no way to master global macro without deeply understanding the concepts Dalio discusses. Listen to this once, and if it doesn’t quite click, keep listening again and again. The wisdom here is timeless.

News/Commentary/Narrative Based Podcasts

#1 Financial Sense Newshour

Financial Sense Newshour

Financial Sense Newshour is a podcast available as a paid subscription through the FS Insider program. In it you’ll find market strategists with various backgrounds sharing their views. This show is a useful tool to stress test your own market theses. Everyone suffers from confirmation bias and actively seeking out opinions that differ from your own helps “red team” your analysis.

#2 Adventures In Finance

Adventures In Finance

Adventures In Finance has the highest production value of any financial podcast on the net. The hosts always put on an entertaining show chock full of interesting nuggets. The content of each episode varies greatly, but for the most part it focuses on bringing you the most compelling global macro narratives. They also have a brilliant segment titled “Things I Got Wrong”, where a money manager explains mistakes they’ve made and what they’ve learned from them.

Recommended Episode

Adventures In Finance Episode: 22 – Murderer, Gambler, Aristocrat & Pauper. John Law, The Godfather of Central Banking

In this highly entertaining episode, the team explores the fascinating story of John Law, a man whose economic ideas have influenced and shaped modern central banking. Law’s financial shenanigans created the “Mississippi Bubble”, a spectacular boom and bust process that played out in early 18th-century France. Listening to history is a great way to educate yourself on the perils of modern monetary policy as well as the timeless fear and greed that dominates our markets.

#3 Macro Voices

Macro Voices

Macro Voices is a weekly podcast reviewing the largest global macro themes driving equities, rates, currencies, and commodities. The host, Erik Townsend, is a tech entrepreneur turned global macro fanatic who loves discussing the big picture. Erik’s show has a different flavor than your typical market commentary because he actively trades through a small hedge fund. He has skin in the game and cares about getting things right.

If you want to hear more about Erik, Chat With Traders did a feature on him that you can listen to here.

#4 McAlvany Weekly Commentary

McAlvany Weekly Commentary

David McAlvany hosts this valuable global macro show where he discusses all the latest political and economic news that matters to financial markets. There’s a strong bias against central banks and for gold, but if you can get past that, there’s plenty of interesting macro themes to chew on. This show is best used to help with trade idea generation, but there are also various intelligent guests that come by and talk broader macro theory.

That concludes the list of podcasts we listen to. If you have any recommendations that we missed, just leave them in the comments below…  

If you’re interested in a thorough global macro book list, be sure to check out our rundown of the best global macro books here.

And if you’d like to see how our team trades, check out the Macro Ops Handbook here.

 

 

The post The Best Trading Podcasts For Global Macro Investors appeared first on Macro Ops.

Macro Ops




Is Manipulation to Blame for Silver’s Plunges?; Chris Powell: Futures Markets Give Trading Discounts to Governments

Welcome to this week’s Market Wrap Podcast, I’m Mike Gleason.

Coming up we’ll discuss the ongoing manipulation of the gold and silver markets with Chris Powell of the Gold Anti-Trust Action Committee. Chris tells us why he thinks the regulators are so powerless, the troubling authority that allows the government to legally rig markets, and what might happen to the metals if and when this manipulation finally comes to an end. Don’t miss a terrific interview with GATA’s Chris Powell, coming up after this week’s market update.

Well, this week brought both good news and bad news for precious metals bulls. The bad news is that gold and silver prices broke down from their major consolidation patterns. Based on the technical damage done, the momentum and the short-term trend in precious metals markets is pointing lower until new buying interest kicks in.

As you may recall we spoke about how silver was at an inflection point here on the show last week and that we would be looking for a move one way or the other during this the first week of the third quarter. Well, that move came as predicted and it was to the downside. Silver has now given back ALL of its 2017 gains.

Gold, however, is still holding onto gains of about 6% year to date. So the good news is that the yellow metal is still in a longer-term uptrend until proven otherwise. The even better news is that the long-term supply and demand fundamentals for gold and silver only get better with lower prices and the likelihood of diminishing mining output.

The question for traders, though, is whether silver will bring gold down in the days ahead or whether gold will lead silver back up. Silver prices are close to double bottoming at their lows of last December. Bulls will be looking for that level to provide some support.

As of this Friday recording, silver prices come in at $ 15.70 an ounce, down 5.9% on the week. Spot gold checks in at $ 1,215, off 2.3% since last Friday’s close. Platinum is down 2.4% to trade at $ 909, while palladium is lower by 0.9% to trade at $ 839 per ounce.

Earlier this week, the Federal Open Market Committee released the minutes from its most recent meeting. The Fed is still expected to stand pat on interest rates for the rest of the summer at least. But Fed officials are indicating that by September they may finally begin quantitative tightening – gradually scaling down their trillions of dollars in Treasury bonds and mortgage-backed securities.

Fed chair Janet Yellen is operating under the assumption that the last financial crisis has been solved, and the conditions that led up to it have been fixed. She even went to so far as to say that we probably won’t see another financial crisis in our lifetime, a rather smug and arrogant sounding claim to say the least.

It’s reminiscent of former Fed chair Ben Bernanke’s notorious claim that the problems in the sub-prime mortgage market were “contained.” Shortly thereafter, they nearly took down the entire financial system.

Now it’s true that the next financial crisis probably won’t look like the last one, which forced everyone to pay close attention to bank lending practices. No, the next crisis will probably emanate from somewhere else. Perhaps it will be the trillions of dollars in underfunded pension programs that governments and corporations are running.

Promise now, pay later. Kick the can down the road. It works for a while. But eventually, the road will reach its end and the unfunded obligations will come due.

The state of Illinois alone has accumulated $ 200 billion in pension liabilities. As of now, it could only afford to pay out about 40 cents on the dollar for its IOUs.

Illinois is effectively bankrupt. For the past several months, it has stiffed contractors and creditors. It has fallen behind on its utility bills. State legislators are now moving to raise taxes sharply in a desperate effort to plug holes in the budget.

But the longer-term problem of underfunded pensions remains insoluble in Illinois, in most other states, and at the federal level where unfunded liabilities loom totaling more than $ 100 trillion. Quite simply, the kind of money that’s needed to make governments financially sound again doesn’t exist in taxpayers’ pockets for governments to extract.

The only entity capable of generating the trillions of dollars needed to fill the gaps in pension funds is the Federal Reserve. The Fed may try to bail out U.S. pension and Social Security systems stealthily through inflation. But a sudden crisis would require more drastic action.

If you are a pensioner or planning to one day retire on pensions and Social Security, don’t count on these programs alone to carry you through into old age. It’s mathematically impossible for every beneficiary to get every dollar they are promised – at least in terms of today’s dollars.

As such, hard assets including physical precious metals should have a place in any sound retirement plan. Gold and silver bullion coins aren’t IOUs – and can’t be ruined by inflation.

Well now, without further delay, let’s get right to this week’s exclusive interview.

Chris Powell

Mike Gleason: It is my privilege now to welcome in Chris Powell, Secretary-Treasurer at the Gold Antitrust Action Committee, also known as GATA. Chris is a long-time journalist and hard money advocate, and through his tireless efforts at GATA he is working to expose the manipulation of the gold and silver markets. Through GATA’s work over the years. Some important revelations have come to light, which quite honestly should concern everyone.

It’s great to have him back on with us. Chris, how are you, and thanks for taking the time to talk with us today.

Chris Powell: Great to be with you Mike.

Mike Gleason: Well it’s been more than a year since the last time we had you on, and there actually are some developments finally in the whole precious metals manipulation realm, specifically Deutsche Bank coming under fire for rigging gold and silver markets. Talk about this Chris, bring us up to date here on the whole lawsuit, and then give us your thoughts on whether or not this is going to finally get us somewhere on ending the manipulation that has occurred in the precious metals markets for years, if not decades.

Chris Powell: Sure Mike. Deutsche Bank has essentially confessed to manipulating the gold and silver futures markets. It has offered to settle the antitrust lawsuits against it for manipulation for just a little less than $ 100 million. More importantly, I think the bank has volunteered to provide the antitrust lawsuit plaintiffs with evidence against other bullion banks that participated with the Deutsche Bank traders in the manipulation of the gold and silver markets. And that raises the possibility of all sorts of money that could be due in damages to at least gold and silver futures traders now.

Now unfortunately, the U.S. Justice Department is seeking to intervene in the antitrust case in New York to delay further discovery and deposition in the case, so that the government could undertake its own investigation of the rigging – which is pretty ironic since the U.S. Commodities Futures Trading Commission (CFTC) for years, was supposedly doing its own investigation of the silver market and kept saying they couldn’t find anything. Now, they want to hold up the civil lawsuit so they (the government) can investigate it. I don’t think that the government really wants to investigate the case at all, I think the U.S. government simply wants to delay any further disclosures that would come from discovery and deposition, because they know that eventually, the rigging investigation proceedings like these are going to lead to the U.S. government’s own participation.

But, anyway, there is now a formal admission by one major international bank, Deutsche Bank, that it helped rig the gold and silver markets, in collusion with other bullion banks. So, that degree of manipulation can’t be denied anymore. The other day, I guess last month, a former Deutsche Bank trader was convicted of a criminal violation for rigging the gold and silver futures markets through what’s called “spoofing,” placing a lot of fake orders that were immediately withdrawn after causing other traders to position themselves in certain ways. So, there’s more and more evidence and more and more documentation of this rigging that’s coming out.

My organization is more interested in evidence of manipulation by governments in central banks, so we’re pretty convinced that the bullion banks that are involved in the instance of litigation were most likely functioning as agents of central banks, and making trades on the market that the central banks wanted made in order to suppress prices controlled, prices. But the litigation has not yet gotten around to incriminating governments and central banks. We’re hoping that will happen eventually.

Mike Gleason: Yeah, certainly if nothing else, the latest developments here with the whole Deutsche Bank case have at least made it known that it’s no longer conspiracy theory, it’s conspiracy fact as we’ve been saying for a while now, and at least now everybody is aware of the fact that yes, the markets are actually being rigged.

Now Chris, people are finding out that the CFTC is simply a joke. GATA exists at least in part because regulators are completely in the hip pockets of those on Wall Street. In fact, we are learning more through Freedom of Information and Wikileaks about why the futures markets for gold and silver were created in the first place.

Our government wanted volatile markets largely to discourage ownership of physical gold and silver. Wikileaks released powerful evidence of that earlier this year. That, and the cozy relationship between regulators and Wall Street explains a lot about why the CFTC could investigate for five years, and somehow miss the fact that banks cheat. We wonder if they were embarrassed when Deutsche Bank admitted to rigging prices while the CFTC investigation took place, turning over 350 pages of documents and some audio recordings to settle a civil suit, helping plans to pursue other banks. So, can we expect regulators to ever do their job, Chris? And if so, can the civil courts hold the bullion banks accountable?

Chris Powell: Well you’ve got to realize, Mike, that what has been happening with gold and silver, the manipulation and the price suppression, is probably completely legal, because the government is doing it. If you go to the U.S. Treasury Department’s internet site and find the page for the Exchange Stabilization Fund – which is an agency of the Treasury Department – you’ll find that the Treasury Department maintains that under the Gold Reserve Act of 1934, as amended, I think, through the 1970s, the Treasury Department, through the Exchange Stabilization Fund, is fully authorized to trade secretly, and manipulate, and rig any market in the world. Not just in the United States, but any market in the world.

I think that, in the end, is why the regulatory agencies have done nothing about the rigging of the gold and silver markets, because it has most likely been done, or most of it most likely has been done at the behest of the U.S. government, which is fully authorized by federal law to rig any market in the world in secret. I’m pretty confident, I mean if I had to bet my life, I would bet my life, that the CFTC knew this when it was investigating the gold market and the silver market, that all signs led back to the government, and the government most likely was using these big investment banks as its agents in manipulating the gold and silver markets, and that the investment banks could just shrug and say, “Hey, we’re only doing this as an agent for the government, and the government is fully authorized to do it, so there’s no violation by us here.”

I’d like to call people’s attention to that. I’m not privy to every trade that is undertaken by an investment bank or a bullion bank on behalf of the government, but I do know that according to documents filed by a CME Group, which operates all of the major futures markets in the United States, documents CME Group has filed with the Securities and Exchange Commission, and has come out of the Futures Trading Commission that CME Group numbers, governments and central banks, has among its clients in-secret trading of all futures contracts in the United States. And not just financial futures contracts, but commodity futures contracts as well. The CME Group offers a volume discount trading program to governments and central banks for trading futures contracts on all CME Group exchanges.

So, we know that governments and central banks are surreptitiously trading all of the major markets in the United States that have futures contracts attached to them. We also know that the gold reserve after 1934 fully authorizes the Exchange Stabilization Fund to rig any market on the planet. I think that’s the direction that financial journalism, if we had any, ought to go in. The CFTC and SEC are powerless here, I think, because the law fully authorizes the U.S. government to rig every market on the planet in secret.

Mike Gleason: And speaking of that, GATA focuses on manipulation in the metals markets, first and foremost, but these days people legitimately wonder if there are any markets that aren’t being rigged in some fashion. I mean, the Federal Reserve has hiked interest rates three times since December. The response in the markets has been a weaker dollar, flat bond yields, and roaring stock markets. Given that the Fed has been tightening, none of these things were expected, but hey, it’s sure working out for Janet Yellen and her comrades at the Fed. They are normalizing rates with none of the negative side effects, it’s almost like magic.

Chris Powell: Yeah, we know that central banks around the world are heavily purchasing various assets… not just government bonds, but they’re also purchasing stocks and derivatives and things like that. We know from the CME Group filings with the CFTC and SEC that governments are secretly trading the futures markets in every respect in the United States. And we know from the filings, the annual reports at the Bank for International Settlements and certain statements by central bankers that governments are surreptitiously trading in the gold market and the gold derivatives market, according to a French central banker, nearly on a daily basis. I think there’s documentation that central banks are openly and surreptitiously trading virtually every market in the world here.

So, yes, certainly, every major market is manipulated, I think there’s whole documentation of that. The problem here, I think, is not so much that any particular market is being manipulated, but rather that the world is losing, or already has lost its free market system. And if you believe as we at GATA do that free markets are a great engine of human progress, then this speaks very poorly about our future. It means we’ve lost the market economy, that we’re transitioning into a totalitarian system.

Mike Gleason: That leads me right into my next question here. Some may be listening to this and might be thinking that it doesn’t matter, or that what these governments and central banks are doing is in the best interest of the people. But speak to that, and discuss more about why it’s in fact harmful, and then who’s getting hurt here by this gold suppression scheme specifically?

Chris Powell: I would argue that really the whole world is getting hurt by the gold price suppression scheme, because gold is a measure of currencies, it’s a measure of asset prices, and if you tamper with the gold price, you’re really tampering with every price, because these prices are related. You’re distorting the whole world’s economy, you’re destroying the market system. Now, I don’t think you can find examples of history where a totalitarian system, over the long term, achieved great economic progress. I think you can find examples in history where market systems produce the greater prosperity and progress.

Well, if we’re losing the market system, we’re losing economic progress, and we’re also losing democracy because people cannot see how prices are being established, they cannot see how power is being allocated in society, and for what purposes? And if you lose the free market system and you lose democracy, I just wonder, what else is there?

Mike Gleason: Isn’t there a limit to how long price suppression can persist though? I mean, if prices are held lower than a free market would cause for years or even decades, it seems, at some point, shortages would crop up, and prices would shoot up. What are your thoughts on this as we begin to close, do you think we are near such a point in time?

Chris Powell: Well yes, theoretically you’re right, but that theory has really developed before the age of derivatives. And now, we have this derivative system where infinite supply, at least infinite paper supply of commodities and financial assets can be created with just a few keystrokes on a computer. Eventually, there will be shortages, but not necessarily in the near future. If people, for example, with gold and silver, if investors in the monetary metals are prepared to accept unbacked paper as equivalent of real metal, then I imagine the gold and silver suppression scheme can go on forever.

If the metal eventually does run out, as it did run out in March 1968 upon the collapse of the London Gold Pool and then again in 1971 when President Nixon took the United States out of the Bretton Woods agreement. You know, governments can just declare force majeure, they can outlaw the private possession in the monetary metals or try to outlaw them. They can impose capital controls, they can impose windfall profits taxes on monetary metals, investors. There’s really no limit to the power of totalitarian governments, or governments that want to engage in totalitarianism.

So I make no prediction as to whether or when this system is going to end. I think it’s just as likely that it’ll grow worse. George Orwell’s vision of the future expressed by one of his characters in his novel 1984 was a boot stomping on a human face forever. I hope that’s not the future that we’re heading for, but I think there’s a chance that is unless people around the world are going to stand up for individual liberty and limited government, and accontable government and free markets.

Mike Gleason: You certainly have to wonder what may happen if we have another financial collapse, and how many people will actually run to the safety of physical gold and silver. Maybe we have a real divergence between the paper market price and the physical price. I think that’s certainly a possibility.

Chris Powell: Well, when that day comes, the metal will not be available to people. If they think that there’s any chance that the monetary metals will ever be fairly valued, I think you’ve got to get your metal now, and maybe it’ll never be fairly valued, and maybe it will. But when the great reset comes, if it does come, it’ll be too late to get your hands on any real metal.

Mike Gleason: Yeah, very well put. Well excellent stuff Chris. I want to thank you for your insights today, and for the work you’re doing there at GATA. Now before we let you go here, can you give our listeners more information on how they can learn more about this and follow what you’re doing there at GATA?

Chris Powell: Sure Mike. We’ve got an internet site, gata.org. We have daily dispatches to our supporters on our mailing list. You can enroll at our internet site to receive our dispatches there. They’re free. If you do care for our work, if you take a look at the documentation we’ve collected on our internet site and the agitation we do, we welcome financial contributions. We are federally-recognized tax-exempt civil rights and educational organization in the United States under Section 501c3 of the U.S. internal revenue code.

So, financial contributions to GATA are not just gratefully accepted, but they are tax deductible, and we really do solicit support from metals investors and people who believe in free markets. The mining industry, the monetary metals mining industry now, is so demoralized. I think it’s really cowardly that we can’t get too much support from them. So individual investors and supporters of free markets are vital to our continuing.

Mike Gleason: Well it’s a very noble cause, we certainly appreciate everything you’re doing there. We’re big fans of those efforts and would love to visit with you again down the road. Thanks very much for your time, and enjoy your weekend Chris.

Chris Powell: Thank you Mike.

Mike Gleason: Thanks again to Chris Powell at the Gold Antitrust Action Committee. Again, check out gata.org for more information. They publish a lot of great content there at GATA, and we highly recommend everyone check that out. I also want to urge folks to consider going to GATA and making a tax-deductible donation, as Chris just mentioned, to ensure that GATA has the resources to continue this important work.

Well that will do it for this week’s Market Wrap Podcast. Be sure to check back next week and throughout the year as we look to bring you more great content and exclusive interviews. Until then, this has been Mike Gleason with Money Metals Exchange, thanks for listening, and have a great weekend everybody.

Precious Metals News & Analysis – Gold News, Silver News




Lessons From A Trading Great: Amos Hostetter

Amos Hostetter cofounded Commodities Corporation (otherwise known as CC) along with Helmut Weymar back in 1969. CC is the trading shop that produced more legendary trading talent than the Yankees have All-Stars. Alumni include: Bruce Kovner, Michael Marcus, Paul Tudor Jones, Ed Seykota and more…

Hostetter was considered the wise sage and mentor of the group. He’s credited with imbuing many of these trading greats with the wisdom and knowledge they used to achieve their grand heights.

Upon his untimely death in a car accident in 1977, the directors of CC commissioned one of their traders, Morris Markovitz, to gather and record Hostetter’s timeless philosophy on markets and trading. The goal was to ensure future CC traders could benefit from his invaluable teachings. The resulting work was an internal booklet titled Amos Hostetter; A Successful Speculator’s Approach to Commodities Trading.

Hostetter’s trading philosophy could be boiled down to the following (in Hostetter’s own words):

  1. Try to acquire every bit of fundamental information available. Read extensively.
  2. Simultaneously, post daily charts on commodities and develop a feel for trends.
  3. Follow the fundamentals in your trading but only if and as long as the charts do not cast a negative vote.

He regarded money management as the first priority for any serious market speculator. From Markovitz (emphasis mine):

Sound money management is crucial to successful trading. The best market analysis won’t get a trader to the bottom line — consistent profits — unless he has a sound money-management policy. This is an area where Mr. Hostetter excelled.

Sometimes it is hard to draw a sharp line between trading principles and money-management principles. If I were to paraphrase a famous saying, I think it would provide an accurate summary of one of Mr. Hostetter’s most important trading and money-management principles: the market, to be commanded, must be obeyed. As a trader, Mr. Hostetter was aware of his own fallibility. He tried to protect himself from errors by the trading rules he used and by trying to anticipate areas of potential surprise. This alone, however, was not enough. If the market moved against him for a reason he did not understand, he would often exit without waiting for a trading rule to take him out: as a money manager, he knew he could not afford the luxury of a prolonged argument with the market.

Perhaps his most important money-management principles was “Take care of your losses and the profits will take care of themselves.” This means that a trader should place strong emphasis on keeping his losses small, because two or three large losses in succession would be a crippling blow.

His risk management principle of “taking care of your losses” is similar to Howard Marks of Oaktree Capital: “if we avoid the losers, the winners will take care of themselves.” This truth is the single most important law of speculation. It sounds glib, but cutting your losses and letting your winners run is the most common thread amongst all great traders. If I could travel back in time 15 years, I’d go back and beat this fact into my thick skull… and I’d be much richer today for it.

Hostetter used a multi-pronged approach to assessing markets and potential trades. It’s from him that Michael Marcus likely developed the “Marcus-Trifecta” to gauge markets — looking at “technicals, fundamentals, and market tone”. Here’s an overview of his approach to fundamentals:

Mr. Hostetter’s fundamental approach was, to use his own phrase, “broad brush.” This means that he would look at the overall balance sheet and the statistics that applied to the commodity in which a trade was contemplated. Then, certain basic questions would be asked:

— Will production exceed consumption this season (a stocks build-up)? If so, then the initial premise would be bearish.

— Will consumption exceed production (a stocks draw-down)? If so, then the initial premise would be bullish.

The initial premise would then be refined by other considerations. For example: weather could destroy the current production estimate for an agricultural commodity; a change in general economic conditions could destroy the demand or consumption estimate; the high price of meat could increase demand for potatoes.; the low price of corn could increase demand for soybean meal; and so forth. The last two items are intended to illustrate the flexibility, or creativity, of Mr. Hostetter’s thinking, and represent the personal style he brought to commodity analysis. He held facts in the highest regard, yet he remained constantly alert to the principle that the facts can and do change.

The key phrase is flexibility of thinking, which is the opposite of stubbornness. Mr. Hostetter knew that, whatever his fundamental analysis might show today, there was a good chance it would show something different by the time the last day of the season had arrived… In brief, Mr. Hostetter would never wed himself to a precise position on the outlook for the future; he had often enough experienced the phenomenon of a significant price change before the reasons behind it became general knowledge. He kept himself prepared for surprises, in both directions, in advance. If one does a little “dreaming” about the possibilities on both sides, then he is in possession of possible explanations for surprises, and will be less hesitant to act if and when they come.

Maintaining an open-mind and staying aware of your biases is critical. Markets serve ample helpings of humble pie to those who arrogantly wed themselves to a “market prediction”.

Hostetter took a nuanced approach to using technicals, similar to how we utilize price action in our trade analysis at Macro Ops. Markovitz writes:

Mr. Hostetter definitely did not accept the clear-cut dichotomy between fundamental and technical trading. Both methods can be used successfully, but he blended the two. It is my impression that Mr. Hostetter would have agreed with the following statement:

The pure fundamentalist concerns himself with production, consumption, stocks, and other basic economic data, viewing these as the causes and price as the effect, while the pure technician regards price as its own cause. In fact, to draw a sharp line of choice between these two approaches is not the best policy. Price itself should also be regarded as a fundamental. It can play the role of cause or effect or both under different circumstances.

The market’s own behavior can, in a real sense, be classified as a fundamental variable. The method of analysis, however, is completely different. The technical aspect of Mr. Hostetter’s trading consists primarily of:

1. Trend following
2. Support and resistance areas
3. Pattern recognition

These are listed in order of their importance, although any one of them may be the dominant influence at a  given time.

Within this technical framework Hostetter employed a number of useful heuristics to help him read the tape:

Many of the techniques Mr. Hostetter used depended on a time factor. In general, as with congestion areas, most patterns accrue more significance if they take more time to form, and a trader should be aware of time as well as price when considering any technical pattern. For example, a bear market that has persisted for a year is unlikely to form its bottom in a week, nor is a two-month bull market likely to take a year to form a top. A trader should keep in mind the duration of recent major moves and expect commensurate time periods for the formation of the current pattern. (Patience is an important virtue — hastiness rarely pays).

I find Hostetter’s thoughts on the “time factor” useful in analyzing where price may be headed. Markets tend to follow a certain symmetry over long periods of time. Some technical heuristics Hostetter used are:

  • He would become seriously concerned if a bull market was unable to make a new high for thirty days (the same is true for a bear market that hadn’t made new lows for thirty days).
  • A poor price response to bullish news is itself an ill omen for long positions, especially if other cautionary signs are present (e.g., the bull market is old, the vigor has shown some signs of waning, prices are near a fundamental objective, etc.)
  • The most important timing issue is patience. One should wait for his opportunity, wait until everything lines up according to his expectations. It is far better to miss an opportunity here or there than to jump in too early without a clear plan. Too much patience is rarely the problem for any trader.
  • A trader should do his fundamental homework, keep his eye on the charts, and patiently observe. Once he is able to form a definite fundamental opinion, he should wait for confirming market action before proceeding.

Practicing the necessary patience to win is one of the hardest aspects of speculation. Fear is man’s strongest emotion and is behind one of a trader’s most common foibles — the fear of missing out (FOMO). Success comes to those who realize that Pareto’s Law dominates the distribution of returns. Only a handful of trades a year will account for the majority of profits. It pays to sit and wait patiently for those fat pitches to come along.

Lastly, here’s a list of maxims and trading do’s and don’ts as recorded by Hostetter in his own words.

GENERAL PRINCIPLES AND MARKET MAXIMS

  • A very general and important rule is: take care of your losses and your profits will take care of themselves. This is both a trading maxim and a money-management tool. A trader needs big winners to pay for his losses and he won’t capture these big wins unless he stays with the trend all the way.
  • There is never any objection to taking a loss. There must always be a good reason before you can permit yourself to close out a profit.
  • When in doubt, get out. Don’t gamble. Be sure, however, that your doubt is based on something real (fundamentals, market action, etc.), and not simply on your own nervousness about the price level. If it is only the price level that is making you nervous, then either stick with the winner or at worst use a more sensitive stop-loss point. Give the major trend all the chance you can to increase your profits.
  • All major trends take a long time to work themselves out. There are times when the best approach is just to sit and do nothing, letting the power of the underlying trend work for you while others argue about the day-to-day news. Be patient.
  • Surprising price response to news is one of the most reliable price forecasters. Bullish response to bear news, or vice-versa, means that the price had already discounted the news and the next move will probably go the other way. Actually, this is only one example of a wider principle: When a market doesn’t do what it “should”, then it will probably do what it “shouldn’t”, and fairly soon. (Note that false breakouts, up or down, are also subsumed under this more general principle. When new lows are achieved in a long-term bear market, for example, the market ‘ ‘should” follow through with weakness—after all, it is a bear market. If, instead, it rallies quickly, this provides some evidence against the bear market premise).

THE DANGERS IN TRADING CAUSED BY HUMAN NATURE

  1. Fear — fearful of profit and one acts too soon.
  2. Hope — hope for a change [in the] forces against one.
  3. Lack of confidence in one’s own judgment.
  4. Never cease to do your own thinking.
  5. A man must not swear eternal allegiance to either the bear or bull side. His concern lies in being right.
  6. Laziness prevents a trader from keeping posted to the minute.
  7. The individual fails to stick to facts.
  8. People believe what it pleases them to believe.

DON’TS

  1. Don’t sacrifice your position for fluctuations.
  2. Don’t expect the market to end in a blaze of glory. Look out for warnings.
  3. Don’t expect the tape to be a lecturer. It’s enough to see that something is wrong.
  4. Never try to sell at the top. It isn’t wise. Sell after a reaction if there is no rally.
  5. Don’t imagine that a [market] that has once sold at 150 must be cheap at 130.
  6. Don’t buck the market trend.
  7. Don’t look for breaks. Look out for warnings.
  8. Don’t try to make an average from a losing game.
  9. Never keep goods that show a loss and sell those that show a profit. Get out with the least loss and sit tight for greater profits.

SUGGESTIONS

  1. Experience must teach. Follow it invariably.
  2. Observation gives the best tips of all. Observe [market] behavior and experience shows how to profit.
  3. Buying on a rising market is the comfortable way. The point is not so much to buy as cheap as possible or go short at top prices, but to buy and sell at the right time.
  4. Remember [a market is] never too high for you to begin buying or too low to begin selling. Let your tape reading show you when to begin. After the initial transaction don’t make a second unless the first shows a profit.
  5. There is a great deal in starting right in every enterprise.
  6. When something happens on which you did not count when your plans were made, it behooves you to utilize the opportunity.
  7. In a bear market it is always wise to cover if complete demoralization develops suddenly.
  8. Stick to facts only and govern your actions accordingly.
  9. What is abnormal is seldom a desirable factor in a trader’s calculations. If a [market] doesn’t act right, don’t touch it.

To get more wisdom from trading greats like Hostetter, click here.

 

 

Macro Ops




Donald Trump: The Embodiment Of Trading Greatness

Paul Tudor Jones, Bruce Kovner, Jesse Livermore… forget about em.

The only name you need to know when it comes to trading greatness is Donald Trump.

He’s everything a trader should aspire to be. When it comes to having “strong opinions, weakly held”, Trump has EXTREMELY strong opinions, EXTREMELY weakly held.

At the beginning of his campaign, The Donald was 2000% sure that China was a currency manipulator. But after a single piece of chocolate cake with his new buddy Xi, China was a problem no more.

In fact, that piece of cake was SO good that Trump is now looking to improve trade relations with the country. Along with changing his stance on NATO, Trump has quickly transformed from a staunch isolationist against all imports (other than his wife) to an avid globalist.

That’s what makes him amazing. He has an ability to turn on a dime that is uncanny. You can never pin him down to one idea, because he’s always switching his stance. He’s more flexible than a Cirque du Soleil performer.

Some people call Trump a populist, changing his position to whatever the most people want, but that’s not true. In reality, he’s just extremely fallible.

Trump is a master of changing his mind as soon as “new” information becomes available.

Everyone thought Trump and Putin were best buds. But they quickly ate their words when Trump hit Syrian President Bashar al-Assad with a few Tomahawks.

Maybe Trump and Putin were friends at one time, but that was before Trump saw that infomercial of the Syrian kids. This “new” information forced him to rip off the friendship bracelet Putin gave him and take action.

See? Huuuuuuge amounts of fallibility.

As Stanley Druckenmiller once explained:

I’ve learned many things from [George Soros], but perhaps the most significant is that it’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.

In Trump’s case, it’s not about doing what’s right or wrong, but how much money (or votes) you come away with in the end.

If you want to be a great trader, you need to be like Trump. Start with your fallibility and then move on to fixing your hair.

Good luck!

We’re kidding. Obviously. To learn from the real trading greats, click here.

 

 

Macro Ops




Trading A Le Pen Win In The French Elections

Success in the markets requires thinking in possibilities. A great trader understands the permanent information deficit he’s faced with and why it makes market prediction impossible. All he can do is plan for a range of reasonable outcomes and adjust his strategy as new information presents itself.  

In the latest issue of our Macro Intelligence Report (MIR), we discussed the reasons for the rise of populism across the Western world and how it’s currently impacting the Soros-style false trend in European equities.

To review, a Soros-style false trend develops when a narrative is founded on untrue assumptions, and yet is so compelling, that price moves in its favor anyway. The positive price action further enhances belief in the narrative and creates a positive feedback loop between market, fundamentals, and narrative strength. This loop continues driving price further away from the truth, creating more instability. Eventually this loop breaks when belief in the narrative falters and price corrects.

Just as general market prediction is a fool’s errand, so is attempting to predict the end of a false trend. But what we can do is track key events that may poke a hole in the recurring feedback loop. These events are narrative “tests” where should the market pass, the trend will grow stronger, should it fail, the trend may reverse.

The upcoming test for the European equity rally is the French elections. The outcome of these elections will either strengthen the current European recovery narrative and send prices higher, or dash investors’ beliefs and cause prices to correct.

The reason French elections are key to the current narrative is because of the possibility of populist leaders gaining power — in particular Marine Le Pen. Le Pen is the leader of the right wing National Front, an anti-euro, anti-immigration party. One of the main pillars she’s running on is exiting the EU. If France (Europe’s 3rd largest economy) manages to leave, the rest of the union will fall apart. This will quickly negate the short-term reprieve in economic numbers Europe is currently experiencing. The equity rally will quickly reverse as investors abandon the European recovery narrative.

That being said, we believe Le Pen will likely lose.

Populist movements tend to oscillate around secular trend lines. And while the long-term populist trend is up (blue line on the chart below), we’re likely near the peak of the current short-term uncertainty cycle (yellow line). We expect political events to swing back towards benign outcomes for a while (Le Pen losing).

A Le Pen loss should bolster the recovery narrative and push European equities higher.

But in reality, trying to predict elections with high confidence is just like trying to predict markets — impossible.

This is why we understand that a Le Pen loss is only one possibility. And ensuring we have a solid trading strategy requires that we need to look at the other side of the equation — a Le Pen win.

French elections are conducted over two rounds. The first round is set to take place on April 23rd and includes all 5 Presidential candidates facing off. Now if one candidate wins over 50% of votes in the first round, he or she will secure the office immediately. But this is rare. A second round is usually held where the top two candidates with the most votes face off. This will be on May 7th.

The favorite to win the presidency is Emmanuel Macron. Macron was the minister of economy for two years under the previous president François Hollande. He later split off to form his own progressive, pro-EU centrist party. He’s considered the safe bet who won’t shake things up which is good for the economy and the stock market.

The general consensus is that Le Pen and Macron will make it into the second round where Macron will defeat the populist candidate. Current polls say as much:

1st Round

2nd Round

And the prediction markets also have Macron winning:

But one thing you’ll immediately notice is that the polling numbers aren’t too far apart. Especially in the first round, Macron and Le Pen are neck in neck. And in the second round Macron is by no means dominating Le Pen. The gap between the two is larger in the prediction markets, but these have the tendency to be much more volatile.

So while the media likes to tout a Macron win as a lock, it really isn’t. There’s a legitimate chance of Le Pen winning.

Eurasia Group puts Le Pen’s chances at 40%. Eurasia Group’s founder Ian Bremmer cited voter turnout as a particularly important factor:

Turnout is key. Mr. Macron, who is neither left nor right, and is generally inoffensive to the entire population, is not super attractive to anyone. And so as a consequence, if you get low turnout…  Le Pen can win. It’s an actual possibility.

If you remember, part of the reason Trump won the electoral vote in the US is because of lackluster voter turnout. He won after garnering just 26% of votes from eligible voters, less than all 3 previous republican candidates. Low democratic turnout in key states propelled him into office.

The same thing may happen in French elections. Turnout is expected to hit record lows this year. Over 30% of French voters said they’ll abstain from voting in the first round.

This bodes well for Le Pen. Her support base may be smaller, but they’re by far the most angry with the status quo, and therefore more devoted to the cause. They’ll absolutely show up to the polls. As Bremmer said, someone less divisive like Macron doesn’t spark the same kind of devotion. Goldman Sachs strategist Bobby Vedral explained in a note to his clients that if Le Pen can get just 85% of her supporters to show up at the polls (average turnout is 80%), and if Macron only gets 75% of his base out to vote, Le Pen will win the election.

Le Pen voters are also the most sure about casting a vote for their candidate. Many of the other candidates’ supporters lean more undecided, meaning there’s a higher chance they vote for a different candidate when it comes down to ballot day.

In general there’s an unprecedented amount of indecision in this year’s elections. 43% of voters said they don’t know who they’ll vote for in the second round if their first round candidate loses. If those votes swing to Le Pen, she’ll likely win.

And if you move away from the “official” polling, Le Pen’s chances look even better:  

Clearly there’s a decent chance here for Le Pen to take it. This is the reason we focus on possibilities. While we have a gameplan in place for a consensus Macron win, we also wanted to red team that thesis with a potential Le Pen win.

We currently have a basket of European equities we’re tracking that should benefit from Macron winning. But at the same time we’ve put on a number of option/volatility plays that will profit regardless of who wins. This is important because even though we’re focused on just Macron and Le Pen here, there’s still the chance of a 3rd candidate coming through and sweeping. The polls continue to get tighter and the latest results show the communist candidate Jean-Luc Melenchon surging (because, why not?). And of course Putin has his hands in this election as well. He met with Le Pen in Moscow last month after previously giving her party $ 10 million. Anything can happen. And that’s why we stay fallible and make sure to prepare for every scenario.

If you’re interested in learning more about how we’re planning to profit from these elections, then check out the MIR. It comes with a 60-day money-back guarantee. You have two months to evaluate whether you like what you see. If not, we’ll give you your money back right away. To learn more about the MIR, enter your email below:

 

Macro Ops




Paper Gold Trading Market Continues To Depress Price

How do you depress the physical gold price? It’s quite easy… you throw $ 10 trillion paper dollars at it. Not only did global paper gold trading amount reach a new record in 2016, it surpassed the previous year’s total by nearly 50%.

This is simply amazing when we look around at the staggering amount of insanity taking place in the financial markets. With the economic and financial markets sitting at the edge of the cliff, it would seem prudent for investors to curtail their highly leverage bets in the “Paper Gold Casino” and buckle down by purchasing real physical metal.

Unfortunately, the Mainstream media and the Financial networks have totally lobotomized investors by removing the following vocabulary from the mushy substance between their ears…… Wisdom, Prudent, Long-term, Safe-haven and Gold-Silver.

With the advent of twitter, wisdom today comes down to reading no more than ONE SENTENCE. Anything longer than that is a complete waste of time when it is better spent sitting in front of six computer monitors trading digits. Forget about investing one’s money to build up a real company, when it is more stimulating to try and SCALP tiny profits by trading stocks all day fueled by a half dozen monster energy drinks.

This is called progress…… a giant leap forward for mankind and technology.

Global Gold Exchange Notional Trading Amount Hit New $ 10 Trillion Record In 2016

According to GFMS newly released 2017 Gold Survey, total global exchange notional trading amount reached $ 9.8 trillion in 2016. This was up 46% from $ 6.7 trillion in 2015. These figures were based on the total amount of “volume in nominal tonne equivalent” traded on nine exchanges. For example, here are the top four exchanges annual gold traded quoted by GFMS:

  1. COMEX = 179,047 tonnes
  2. SHFE = 34,760 tonnes
  3. SGE = 11,793 tonnes
  4. TOCOM = 8,541 tonnes

The total amount of paper gold traded on the nine exchanges in 2016 equaled 243,000 metric tons versus 180,000 metric tons the previous year. I took these values and multiplied them by the average annual gold price to arrive at the figures below. I also compared these figures to the total amount of physical gold retail investment for each year (source GFMS 2017 Gold Survey):

Global Gold Notional Trading Value vs Physical Retail Gold Investment

As we can see, the global exchanges traded a stunning $ 9.8 trillion worth of paper gold last year versus $ 42 billion in physical gold investment. This turns out to be 233 times the amount of paper gold traded for each ounce of physical gold purchased.

With this sort of trading volume, the Monster Energy Drink Stock (ticker MNST) looks like an excellent investment opportunity. And why shouldn’t it be? The Monster Energy Drink stock price has surged nearly 10 times from $ 5 in 2009 to $ 46 currently. While this may seem like a good stock to invest in, I am waiting until they sell Monster Energy IV’s that you just stick in your arm so you can continue trading without wasting waste time knocking down 5-6 individual cans.

We must remember… TIME IS MONEY.

So, the question is this…. what would happen to the physical gold market if a small percentage of the Monster Energy Drink traders purchased physical gold instead of the millions of contracts traded on the exchanges. According to GFMS, total gold trading volume just on the COMEX last year was a stunning 58 million contracts.

Annual Global Gold Exchange Trading Volume Also Reached New Record Of 7.8 Billion Oz

Furthermore, if we look at the total amount of paper gold traded on the nine exchanges in 2016, it also reached a new record 7.8 billion oz:

Annual Global Gold Exchange Trading Volume

Not only was the 2016 total 7.8 billion oz paper gold trading volume 34% higher than in 2015, it was 76 times higher than the 103 million oz of world gold mine supply. I decided to add the paper gold trading volume during the 1970’s when the gold futures markets began. During the first year of gold futures trading in 1975, a total of 84 million oz (Moz) were traded. However, by the end of the decade and as the gold price shot up towards $ 850, total paper gold trading surpassed one billion oz in 1979.

Again, what would have been the reaction to the physical gold market if investors purchased more physical gold in 1979, than the one billion ounces of paper contracts?? Well, I will tell you what I think from some wisdom from Jim Rickards. I listened to Jim Rickards interview with Greg Hunter today and he had some very interesting things to say. One of Rickards interesting tidbits was that Americans own about one ounce of gold each versus the typical poor Indian farmer who has acquired kilos of gold.

So…… when the FAN FINALLY HITS THE COW EXCREMENT, the wealth of the world will move from WEST to EAST as Americans are forced to pawn off the remainder of their gold jewelry for much needed MONSTER ENERGY DRINKS.

GOD HATH A SENSE OF HUMOR.

Precious Metals News & Analysis – Gold News, Silver News