ON THE SUBJECT OF MONEY
Twenty-Four Years ago, in April, 2000, I post the below document to the members of Alan's old "PROSPERITY LIST".
Folks,
Since this is the Prosperity List, and one aspect of prosperity is having the financial where-with-all to do as you want to, I thought I’d raise a subject that seems apropos at this time of the stock market swoon.
I’m wondering how many of you might have gotten the timing right to get out a couple of weeks ago, or even earlier a month ago at the top of the NASDAQ?
For those that did manage the right timing, I’d like to hear from you on of your rationale and data analysis that had you get it right. For those who got it wrong, I’d also like to hear from you as, in retrospect, it’s worthwhile knowing the basis of any error so one can correct future decisions.
Of course, the next great decision to take is when to get back into the equities scene.
I’d like to hear from you on your various rationales in that respect also.
For now we have an opportunity to enhance prosperity in the worldly-wealth sense.
For my part, I made the decision to bail out of my NASDAQ and Tech based investments the week-end of March 25-26. The NASDAQ was just under 5000. I didn’t have any fortune tied up, and no direct investment in shares, only mutual funds, IRA type money – but none of which I was wanting to lose at my age in life.
Apart from watching the exceptional volatility of the market in the weeks prior, and the change in opinion and sentiment expressed by some pundits, the clincher for me was the article in The New York Times on Friday, March 25, which spelled out the situation vis a vis the extent of money wrapped up in purchase of shares on margin. The amount of borrowed money being used by punters in the market was shown to be at an all time high, and to have ballooned out of sight in the last year. The article spelled out the scenario of average-Joe-blow day-traders having borrowed, not only from their brokers to buy on margin (they borrow 50% of the buy price of the share from their broker, using the share as collateral), but from credit cards and second mortgages on their homes.
What I saw, based on the lessons of history, was that a market drop, when it came, would not be a decline but a free fall; and a severe drop. This because those holding stocks on margin would be forced to sell into the declining market when the margin calls began.
Based on that article as the clincher, I made it my priority to move my funds out of the NASDAQ/tech stock arena as quickly as I could execute.
You may also be wondering what my prior setup was that primed me ready to take this decision.
I have long viewed the “science” of economics to be something bordering on fraud. The reality being, that economics, as a “science,” is nothing more than a collection of opinions and theories held in argument while the pundits try to figure out what really works. The underlying quantification tools of math and statistics are valid tools, though often incorrectly used; but the actual “science” of economics borders on fraud.
In particular, its “law” of “supply and demand”.
It is held as immutable that the “law of supply and demand” determines price and/or value. “Demand” pushes prices up, lack of “demand” sends prices down.
On inspection, one can actually see this to be incorrect. Apart from situations of vital supply such as for food, where it is not demand that raises prices but decrease in supply, the actual factor that moves prices and changes perception of value is OPINION.
It is one’s opinion as to value or fair or affordable price that determines one’s demand or not for goods or supplies. It is also observable that prices are moved in the marketplace based simply on opinions that prices will rise, or that they will fall: not as a result of actual demand for the priced item, but on an opinion of expectation. And such opinion can be based upon either facts or other opinion(s).
There is no demand without the prior, underlying and determining opinion that something is of fair value (or a bargain). How good a bargain of course determines how strong is your demandJ
And so it was that I was watching very closely the changing sentiment of opinion IN THE MARKET PLACE. What the politicos, and the Fed Chairman had to say, was actually relatively unimportant so long as the opinion in the market place was that he has got it wrong and that there’s a fortune to be made by buying in now, or holding onto what you’ve got now.
I’ll give you an actual example of the relative irrelevance of the “law of supply and demand” and of the primacy of opinion.
It’s the current price of gold. Not a lot of folk know that the supply of gold has been roughly only about 65-70% of the demand for gold for some several years. According to the law of supply and demand the price of gold should be through the roof.
When I looked at the figures about 5 years ago, even if ALL of the world’s central bank reserves were sold into the market, the entire stock-pile would be gobbled up by the shortage of supply in under 10 years.
If you have followed the press and opinion on gold for the last couple of years, what you will have observed is a lot — and I mean a lot – of talking down the value of gold. Opinion after opinion on the valuelessness of gold etc. Why should a central bank hold onto the worthless stuff --- better to hold US Treasuries and earn interest, the talk went.
About a year ago, both Australia and Canada unloaded a huge proportion of their reserves (I think the Aussies dumped all of theirs), and the market absorbed it so easily it didn’t even blink. Nobody noticed. No price change. And we’re talking some 100-200 ton of the stuff.
Then, after they’d dumped their gold, they announced they’d done so. “My GOD!” the market said. “The central banks ARE unloading their gold! My God, that’ll drive the price down!” And so in the stampede based on opinion after the fact, the price did fall. Nothing to do with actual supply or actual demand, just opinion. A few weeks later the price was up again.
Then the IMF yapped on about selling its reserves (it later thought better of it), and in June of last year the Brits, being gentlemen, though sometimes dull, announced to the world that they would be selling their gold reserves and even gave the dates upon which each of the parcels of the several hundred tons would be “auctioned”.
Opinion again crashed the market prior to the “auctions” (I don’t want to indulge any theories as to anyone conspiring to drop prices prior to the dates of the British sales). Fact is, prices went down based on opinion expressed prior to each sale, and as a result of the withdrawal from the market by the gold professionals who were forewarned as to the timing of the action. The price subsequently rose after each sale was completed.
In hindsight, the Governor of The Bank of England was castigated for his having cost the British Government $4 billion as a result of his stupid action of having setup the unfavorable opinion in the marketplace into which he sold the gold. The Aussies and the Canadians got it right. They simply put their gold into the market and let the excess of demand over supply absorb their tonnage and give them a decent price.
A number of countries have unloaded gold reserves over the last year or two. As it stands, there may not be much more that will be disposed of by central banks.
A number of key gold mining companies recently ceased the practice of selling their mine production forward at predetermined “future” prices. They’d been selling current production (market value varying around $300) based on futures contracts they executed guaranteeing prices at $350-400. [Amazing how they got the timing of that maneuver precisely right. Who would have thought to lock in a future price (Barrick Gold secured $400 an ounce) for production when prices were going up to peak at $400 12-18 months ago J]
Anglo-American perhaps the world’s largest producer in the 1970’s (also owns the diamond monopoly) and now also a major stake-holder in the key gold mine outfits in N. America was a client of mine for many years. Also I had as a client one of the London bullion banks that is a member of the “Fixing Committee” (its official title) that determines – and I do mean that word determines --- the 3 times daily fixing of the London gold price.
I say this in the context that I can tell you it is a cozy scene at the pinnacle of the world gold production and market making levels of operation.
Be interesting to see what happens to gold and its price as the opinions that get expressed in the media turn to trumpeting (factual) short supply versus actual much higher demand, rather than the recent yap about gold no longer being a monetary medium (Christ, that stopped in 1963), or an “investment” option; and instead start telling the truth that it is in many ways an industrial mineral with a demand far exceeding its available supply.
Of course, if you want to make money in a marketplace ruled by opinion, it is always wise to be in touch with or on the information-flow-lines of the MAKERS of the opinions that lead the market to do as it does.
Roger
4-16-2000
Topic: ON THE SUBJECT OF MONEY (Read 70 times)
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