Bob Murphy on Cantillon Effects

December 7th, 2012 No comments

Economist Bob Murphy explains the uneven effects of inflation in under 400 words.

When we’re first getting students to think about money and prices, we might say, “Imagine the stock of money magically doubles overnight. Every single piece of currency creates a copy of itself. If you had $30 in your wallet went you went to bed, you wake up with $60. Now, after everything settles down into the new equilibrium, you see the community isn’t richer. All the prices doubled.”

But once the student gets that under his belt, you make it more realistic. You point out that all prices won’t just magically double. Commodity prices rise very quickly, whereas labor contracts are more rigid. If an old widow is on Social Security, she is clearly going to lose out, whereas a magician can just jack up the going rate for his performances pretty quickly. So we see that even though “on average” nobody is changed by doubling the money stock, in reality some people benefit and some people lose.

Yet another complication is that in the real world, new money doesn’t come in via a magical increase of currency, nor through a helicopter drop. Instead the government (or the owners of gold mines in a Rothbardian world) gets the money first, and then hands it out to its cronies. The new money then ripples out into the community. It’s best to be the government, it’s second-best to be the defense contractor or Wall Street banker who get sweetheart deals, it’s third-best to be the fancy restaurant that caters to the Wall Street bankers, etc. If you’re running a deli in Boise, you’re going to see your input prices rise before your customers are able to pay more for your sandwiches. So there will be a general redistribution of wealth to the people closest to the money spigot, every time there is a new injection of money that disturbs the price equilibrium.

Finally, to the extent that this new money comes into the economy via the credit market (as opposed to a helicopter drop or, say, running the printing press to pay the Army), then one of the prices that rise early on is the price of bonds. In other words, real interest rates are temporarily pushed down, until the new injection stops and then the price system re-equilibrates. This artificially low interest rate sets off the unsustainable boom.

See Bob Murphy’s full blog post here.

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November 8th, 2012 No comments

It was a bloodbath for stocks and commodities today with the Dow losing over 300 points, cracking through that all important 13000 level. But you know what was up? Gold, Guns and Ganja. $HUI (Goldbugs Index) +1.83%, $RGR (Sturm Ruger & Co Inc) +6.81%, $SWHC (Smith & Wesson Holding Corp) +9.62%, HEMP (Hemp Inc) +8.70%, $CBIS (Cannabis Science Inc) +14.88%, and $MJNA (Medical Marijuana Inc) +22.04%.

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The Dow’s Downward Trend

November 5th, 2012 No comments

It’s been a while since I blogged, so a quick look at the charts and an update is in order. Recall my last posts over a month ago stressed patience. There was a lot of choppiness in the markets, so I waited on the sidelines until a clear picture emerged. Remember back on 9/6, the S&P broke to a new multi-year high. The move was confirmed on 9/13 by the Dow at the same time the S&P continued making new multi-year highs. That breakout level at around 1425 for the S&P and 13350 for the Dow is a key price level. On 10/10, the Dow pierced back down below that level, but the S&P did not fall below its corresponding key level, so the move was not confirmed, and sure enough, a few days later, the Dow spiked up again.

But on 10/23, both Dow and S&P did fall through their key levels, indicating a confirmed downward move. This on the day of an FOMC meeting to boot. This was a legitimate news-based move, and if you were really quick to see the direction following the news, you could have traded either to the down side. Notice, though, that on the way up, the S&P was the first to breakout, and on the way down, the Dow was the first to break down. The Dow is clearly trading weaker than the S&P, so this should be kept in mind when deciding which to trade. You want to pick the leader–the S&P when going long, the Dow when going short.

My trade on the Dow came just this past Friday. The Dow’s initial pierce of the key price level and the low made following the FOMC created two price points to draw a trend line. With the markets now trending downward, my strategy was to wait for a good spike, wait for the momentum to shift from upward to downward, then enter on the short-side and simply sit back and allow the Dow to regress back to the trend line. I was prepared to hold for a week if I had to, to give it time. But it so happens that after I entered my position, the Dow dropped 140 points before the day was out. That was good enough for me, so I exited the position. I could have held on a longer and squeezed out more gains, but at that point I felt I had more to lose than gain.

Gold and Silver have been mid-range and choppy, but they’ve come down now almost to their breakout level from the end of August. This could be a turn-around point for them, but there’s no point in playing guessing games. Until the turn-around is clear, or a breakdown, I’m not interested in trading gold or silver.

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Lots of Potential Tomorrow

September 27th, 2012 No comments

The S&P and Dow, both after breaking multi-year highs, have fallen back down to test that price level this week, and today’s price action seems to indicate support is holding. Gold and Silver continue to creep up to a key level. I’ve been waiting for gold to break $1800 simultaneous with silver above $35 as a buy signal, but often their breakouts begin early based on intra-day or intra-week technical levels. Tomorrow has better than even odds of being the day everything starts to move upwards again, but if prices aren’t moving, patience is key. Wait to see which key levels prices approach, and use gold and silver as confirmations on one another, and the Dow and S&P likewise.

$BVSN spiked today like I feared, so I’m glad I covered yesterday, and this could create another great shorting opportunity.

$USU right now looks like it’s going to take its time, so patience is key here. I exited my Puts because even though USU dropped from my entry point, it did not drop enough, and I risk losing time premium. Recall I thought 75 cents would be a key price level. All day yesterday, the stock traded within 4 cents of that level. Today it’s creeped up some, but there’s no clear breakout above the range and volume is lacking. Last week’s breakout over .85 if you look back in hindsight actually began to run at 82 cents. I would consider treating 82 cents as a key price level, but only if the volume picks up some or the direction is clear.

On the down side, I’d look at a fall below 70 cents as troublesome for this stock price, however the downside from there would be limited since the ran-up began from 50 cents. A total market breakout may be a catalyst for a USEC Inc breakout, but I’d rather be in Silver or Gold under that scenario. Up or down, this one will be on my back burner for now, but not forgotten.

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BroadVision’s Dead Pump Bounce

September 26th, 2012 No comments

BroadVision Inc (NASDAQ:BVSN) was up earlier this year due to a pump and dump scam successful investor relations campaign. Just as with market bubbles, if the fundamentals of a company are weak, what goes up must eventually come down. ‘Eventually’ being the operative word. When BVSN broke out above $10 back in mid-December, nobody knew it would eventually make a high of $56.46, showing once again that prices can rise the most in exactly the places where fundamentals are weakest.

Last Wednesday, out of the blue, BVSN down far off its highs to the mid-$8 level ran big (1), to the upper $11, to close that day in the high $10’s. The next day, it peaked at $11.96 only to fall sharply in the afternoon going red on the day (2). Taking this as a sign of weakness, I entered into a short position, but the stock managed to come back some and close slightly positive at $11. I could see the next morning it wasn’t quite ready to break down, so I covered for a loss (3) avoiding the potential for further losses as the stock ran back up to $11.50.

1) Run-up, 2) Sign of weakness, 3) Not breaking down, 4) Fading, no shares, 5) Fading, found shares, 6) Covered

There was clear fading in the afternoon, and so I tried to re-short (4), but no shares were available through my broker, so I had to just sit on my hands. Monday started low but spiked real fast in the morning. By afternoon, it was clear that both the volume was fading and the price was falling, a great indicator of an upcoming drop (5). Luckily, my broker did have shares this time, so I shorted again, an even larger position since everything was in my favor: stock was red on the day, close to making a new day’s low, fading volume, and coming off of a spike.

Today, I covered my position (6) even though it’s likely the stock had another dollar to drop. My reasons for playing it safe are as follows: First, stormy weather was causing problems with my internet connection, and this was affecting my trading platform. Second, I rarely like holding for more than 2 days. Third, a lot of traders don’t like the risks involved in holding a short position over the weekend, so Friday squeezes are common, and sometimes it even happens on a Thursday. The later in the week I hold, the more probable a price spike becomes. And fourth, given the trading history of BVSN, after 4 red days, a green day is due.

Aside from the price action, what’s worth mentioning is how I traded. I made two trades on this. On one I lost money, on the other I made money. You might be tempted to say that’s 50/50, no better odds than tossing a coin. But on net between these two trades, I’m up about $300 on a $3500ish investment, for a roughly 8.5% gain in less than one week. If only I could do that every week. 8.5% per week, compounded, would mean making 70 times my position (or close to a quarter million dollars) by year’s end!

So 50/50 really isn’t that bad if you can: Spot opportunities, Have a plan, Manage your risks, and Stay disciplined and humble. I believe technical analysis and the Austrian perspective will not only give you a better understanding of the markets in general, but make you better on those four specific points.

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Two Weak Companies – Week Two

September 24th, 2012 No comments

Once again, my eyes are on BroadVision Inc (NASDAQ:BVSN) and USEC Inc (NYSE:USU).

USEC Inc continues to behave according to the textbook pattern of a worthless company up on hype. Some might call a $100 million subsidy news. I call it hype because, remember, they lost $92 million last quarter. This puts them on pace to blow through this subsidy in 3 months, making this very temporary news. What could keep the stock price from going right back down to 50 cents in 3 months is the expectation of the possibility of another $100 million subsidy down the road.

Recall I wrote the following on Friday,

Yesterday’s accelerated gains was actually an early warning sign, but often small market cap companies can have 2 or even 3 consecutive days of huge gains before falling apart. However, a red day is a sign of a shift in momentum.

Wednesday the stock closed at 74 cents, Thursday it closed at 84 cents, and Friday it closed at 95 cents. That’s back-to-back days of 13% gains. Today erased Friday’s gains completely. For a while it looked like it was holding support at 85 cents which, you’ll recall from my post Friday, was formerly resistance. But it dropped below that support level towards the market close. Tomorrow I’ll be looking out for a potential morning panic. I want to see if this stock re-tests the 75 cents level, which you might recall was last Wednesday’s high and Thursday’s opening price.

If tomorrow turns out to be a green day, however, this could indicate a consolidation, which is often characterized by choppy or sideways price action. If it does consolidate, this is a potential buy, but a tricky one. 95-96 cents is the current resistance level based on Friday’s high/closing prices. However, $1 is also a key level just because it’s a nice, round figure. There is the possibility that a breakout above 96 cents would fail to break $1, and that doesn’t leave much room to take profits. For this reason, I would only buy if I have reason to believe it will be a strong enough breakout to break both levels. Price action and volume at the moment might convince me, but I’d like to see a long consolidation first.

I currently own Put options on $USU. I’m ready to cut losses or take profits quickly unless I see something in the price action that changes my mind.

USEC Inc closes red after two consecutive 13%+ green days.

BVSN looked like it was going to break down last Thursday, so I shorted it late in the day only for it to up-tick and close green, so I was quick to cover the next morning for a 5% loss. By Friday afternoon, the stock was clearly fading, but shares weren’t available to short. This is what makes a sure-fire pattern tricky. Today, the fading continued, but I was able to find shares and took a position. Going into the close, I had some nice unrealized gains to give me a buffer against a sudden rise in price, but the pattern is ripe for a big drop tomorrow. This is the game I love to play: heads I win, tails I break even.

After a multi-day runup, BVSN has now seen two days of slowly falling stock price and fading volume.

Markets overall were down today, Gold, Silver, Dow, S&P, and oil services. Of my market indicators, only 30-year treasures were up, but nothing was changed by much today. Three out of four stocks follow the overall market, so that everything was down had some influence on these two stocks today. What I would like to see is the Dow and S&P re-test their breakout levels. This would mean going down some more in the near term, and that would help my positions, but that could also set the markets up for a rally, and I don’t imagine gold and silver will be left behind if that happens.

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A Plan Can Make You Right, Even When You’re Wrong

September 21st, 2012 No comments

USEC Inc (NYSE:USU) turned out to be a great lesson today. I wrote intra-day about this stock and that I thought we were seeing signs of its momentum shifting, but it ended up making a comeback as the day went on, closing well in the green at 95 cents. Recall what I wrote earlier today,

If it breaks out above 85 cents, or at least proves to me it’s not breaking down any further, I would consider this a potential re-buy,

If you’d bought it the instant it broke out above 85 cents, you were up around 10% in less than 10 minutes. The important take-aways here are that these technical price levels do matter, that the aim is to react not predict, and a good plan can turn a losing prediction into a winning reaction.

USEC Inc goes red-to-green in the final minutes.

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Rising Tides Lift More Than Just Boats

September 21st, 2012 No comments

After being up for 6 straight days, USEC Inc (NYSE:USU) has finally had a red day. Yesterday’s accelerated gains was actually an early warning sign, but often small market cap companies can have 2 or even 3 consecutive days of huge gains before falling apart. However, a red day is a sign of a shift in momentum. So far, the downward move has not yet erased Thursday’s big one-day gain, so it is possible the stock is just cooling off to go higher. But at this point, I am looking for the stock price to prove to me it can go higher before I jump in. If I had bought when I first alerted this stock at 54 cents, I would be selling now for a very handsome percent gain. If it breaks out above 85 cents, or at least proves to me it’s not breaking down any further, I would consider this a potential re-buy, but I have no interest in trying to guess the bottom to buy on the cheap.

Remember, Austrian economics teaches us we cannot know what future demand will be, and shares in a stock have a supply and demand just like any good traded on any market. We cannot predict, we can only prepare for likely scenarios and be ready to react.

Listeners of the Peter Schiff show may recall months ago when he warned of Jonathan Lebed and the National Inflation Association’s pump and dump scheme of BroadVision Inc (NASDAQ:BVSN). The NIA have long since stopped pumping this stock, and it’s been in free-fall ever since, but every now and then it has a big, multi-day run-up, and these run-ups provide technical opportunities for short-sellers.

There are two reasons why it is a good idea to consider short-selling BVSN. First, as most Austrians can probably appreciate, is the stock price is ultimately destined for de-valuation. Short-selling BVSN is making a trade in the directions of fundamentals, which will reward you in the long-term. The second reason is because BVSN is experiencing a technical event.

Unlike other aspects of technical analysis, which require a degree of subjectivity in guessing what key price levels are, technical events are more objectively grounded. The technical event we have here is a short-squeeze. A short-squeeze is basically when short-sellers are looking to close their positions, they must buy to cover. This buying, however, represents the closing of positions and is in no way indicative of speculators seeing future strength in the stock. The squeeze happens when the market somehow coordinates short-sellers into covering all around the same time. The sudden surge of buyers in a stock, especially a stock that is volatile, has a low float, and/or is trading in low volume, can send the price skyrocketing.

Regression to the mean is almost a gift from the market to short-sellers. However, sometimes the price surge can get the attention of real buyers and create some upward momentum. Sometimes this catches short-sellers off guard, and they have to cover and even higher prices still just to avoid being wiped out, so this move is not without its risks. In an ideal world, the safest way to play this is to wait for the first red day. The problem is in order to short sell, your broker needs to find you shares of the stock to borrow, and once momentum has shifted to the downside, those shares quickly become unavailable.

BVSN looked like it was finally ready to break down yesterday, so I entered a short position, mostly hoping for an early morning panic this morning. That didn’t happen, so I made sure to get out right away. Short-sellers generally don’t like holding over the weekend because there’s too much risk of positive news coming out during that time. This is the sort of thing that can coordinate covering and send the price higher. However, anyone who was going to cover before the close will be covered before the close, so if this stock spikes big at the end of the day, that spike may be the ideal time to short. It’s always nice holding an unrealized profit in a trade while awaiting the big move.

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Was Peter Schiff Right?

September 19th, 2012 No comments

There’s no need to rehash the details already captured beautifully in the viral “Peter Schiff Was Right” YouTube videos. The verdict on that is clear. Peter Schiff nailed 2008. But how has he done since? Critics point out that we haven’t had the inflation he predicted, and US bond prices have not only not crashed but actually made new all-time highs. Is Peter Schiff still right?

It’s important to clarify that when Peter Schiff talked about inflation, he was using the Austrian definition of inflation, which is monetary expansion. Is this a cop out or some sneaky way of dodging the facts as they have actually played out? Absolutely not, and I can prove it. If one believed that the official inflation figure, the CPI, is what would rise, one could play that by investing in TIPS–Treasury Inflation Protected Securities. But rather than advise his readers to invest in TIPS, Peter Schiff in Chapter 8 of CrashProof warns against them, writing “However, buying TIPS is a perfect example of trusting the fox to guard your henhouse. The basic problem with TIPS is that they are indexed to the consumer price index (CPI), which does not reflect actual inflation, but rather the government’s highly understated version of it.”

So what did Peter recommend? The title of Chapter 9 of his book holds a hint, “Gold Rush–Be the First Person o Your Block to Stake a Claim.” Even if you measure gold in the most unfavorable way possible, from its peak price before the ’08 crash to the recent lows we’ve just come out of 4 years later, you see more than a 50% increase, which yields an average annualized growth rate of around 10%. Fairer measures would be to look at peak-to-peak or trough-to-trough gains which show annualized growth of 20%. And, finally, if you were an ace trader who nailed the bottom and top, and held the entire time in between, your annualized growth rate would be north of 30%. I think those price increases qualify as high.

As to bond prices, it is true that Peter predicted they would fall, but specifically he predicted a bubble in the bond market. The fact that bond prices have risen to new highs actually supports, not damns Peter’s case. The fact that his critics misrepresent Peter on this point is so inexcusable that it doesn’t warrant my effort of citing a written source. The bond bubble is mentioned, plain as day, in radio ad for his brokerage firm. It doesn’t exactly require a lot of digging.

But debunking the critics isn’t enough for me. I would like to really go out on a limb and take this one step further and say I believe Peter Schiff was more right than even Peter Schiff gives himself credit for. Peter Schiff admits the one thing he got wrong was that he didn’t foresee the world flooding into the dollar as a result of the ’08 panic. My defense of Peter on this is that his niche is in building conservative portfolios for weathering economic crisis.

Recall last week when I wrote about USEC Inc (NYSE:USU), talking about how it was a terrible company, but that nonetheless I thought its price would rise. As of this writing, USEC’s stock price is up 37% in less than a week. Because this company is so fundamentally weak, it is not a conservative investment vehicle. If we measured the performance of the S&P, the Dow, Gold, Silver, Oil, and so in, in terms of the number of shares in USEC it could buy, this past week would look like a bloodbath. Does that mean in retrospect everyone should have sold everything to buy USEC shares? Not if you’re a conservative investor.

So I draw an analogy between USU and the USD. Yes, in hindsight, if we were wily speculators, the dollar was the place to be in late ’08. Since we measure prices in dollars, it looks like people who followed Peter’s advice and bought at the peak got killed, but a conservative investment advisor like Peter Schiff would have been wrong to recommend being in dollars. The performance of Peter Schiff’s strategy during any other time and the speed with which a Shiff portfolio bounced back is further evidence supporting my case.

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Is Austrian Economics Scientific?

September 19th, 2012 No comments

There are plenty of Austrians who will make the case from A to Z about how Austrian Economics is scientific. I do not need to repeat their efforts, so I will not be making the case that Austrian Economics is deduced from a true axiom. Rather I’ll take a softer view, but one that is harder to refute. Rather than claim statements deduced from the action axiom, humans act, are a priori truths, I will simply point out that they are conditional truths. That is, they are true whenever the statement “humans act” is true.

But when non-Austrians study history or economics or any of the other areas Austrians use praxeology to study, they are never denying humans acting. Sure, they may not feature human action as the center of their models, they may aggregate humans into groups to solve more easily solve larger problems, but they aren’t denying fundamentally that human act.

The testing of hypothesis via the scientific method also implies another truth that non-Austrians accept: the demand for internal consistency. If a new data point is inconsistent with the story the hypothesis tells, the data point may be an indicator that the hypothesis is flawed, or perhaps the hypothesis indicates that the observation of the data point is somehow flawed, but something must give. Science does not abide logical inconsistency.

So when studying economics from any school’s perspective, we are implying humans act, and so all theories must be consistent with all propositions deduced from the fact that humans act. Any inconsistency tells us one of two things–either the non-Austrian theory is wrong, or humans aren’t acting. Since non-Austrian economics implicitly assume humans do act, whether the Austrians are right or wrong, whether Austrian economics is science or not, the non-Austrian hypothesis in question is certainly flawed.

From this soft position, then, I cannot truly argue that Austrian Economics is scientific, only that it is more scientific than any competing school of economics. When pressed, defenders of mainstream science ultimately become more humble, acknowledging we can never know any scientific proposition is true with 100% certainty, and that the current state of science merely represents the best we can do at this time. As per my above reasons, for now it’s the Austrian School that provides us the best economic science we have.

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