Required Listening

Delivered in 1994, I think this concise, one hour speech by Ed Griffin remains the single best primer to understand the macro business environment in modern America:

http://video.google.com/videoplay?docid=638447372044116845#docid=-8484911570371055528

Green Exit Strategy

http://www.marketwatch.com/story/tesla-motors-revs-up-244-million-ipo-2010-06-28

Remember, selling to the public happens after the private owners feel they've taken an idea as far as it can go.

US Government Scrambles to Limit its Oil Liability

http://www.property-casualty.com/News/2010/6/Pages/NFIP-Will-Cover-HurricaneDriven-Oil-Damage-FEMA-Confirms.aspx

WASHINGTON—The National Flood Insurance Program will pay claims for damage to homes and contents from oil driven ashore during hurricanes, its officials have announced.

In a statement, Rachel Racusen, press secretary to the Federal Emergency Management Agency (FEMA), which runs the flood program, said, "The mixing of oil and other pollutants in flood water is not unusual during a storm."

She added, "Damage caused by these pollutants in flood waters is covered under the NFIP, subject to the provisions in the Standard Flood Insurance Policy."

Effectively, Racusen confirmed what Mississippi Insurance Commissioner Mike Chaney told state residents in a statement released Tuesday by his office.

In the statement, Chaney said that to recover damages stemming from the additional risks oil poses should a hurricane strike, claimants seeking payment under the NFIP must prove there is a flood as defined in the standard flood insurance policy.

If that can be proven, Chaney said, damage caused by pollutants to commercial policies is limited to $10,000.

Home and condo payments will be limited to policy limits, and oil or water with oil in the yard is not covered.

Chaney further said that the cost of complying with any local or state ordinance, including one that requires special removal methods for oil, is specifically excluded, with the exception of certain floodplain management mitigation requirements.

Moreover, Chaney said, there will be no coverage for testing for, or the monitoring of, pollutants unless there is a law or ordinance requiring it.　

Translation: "We won't cover significant damage from oil."

How Low Can We Go?

It's easy for human beings to conceptualize the infinite potential for gains. "If I buy this stock for $36/share", we dream, "it could go to $100, then a million, then a billion," and so on..."

Why is it so hard to comprehend the same unbounded realm with regard to loss?

Not comprehending the infinite distance to zero is a critical failure of our human imagination. "If I have a million dollars, that is all I can lose," we rationalize, "my losses are always limited to what I can understand."

That is so wrong.

Your potential losses are just as infinite as your potential gains. If I have an airplane and a boat, and I lose the plane, I am limited to sailing. If I lose the boat but still own my car, I am limited to driving. If I lose my car and have a bike, I am limited to riding. If I lose my bike and own a pair of shoes, I can walk. If I lose a shoe, I will hop. If I lose my other shoe, I will fashion a pair of shoes from scraps. If I can't find canvas, I will use cardboard. If I wear the soles of my feet raw, I will crawl. If...

Astute readers may sense infinite opportunity here, as it pertains to shorting. But the real purpose of this post is to get you thinking about the infinite potential of your life to change, especially if you fail to imagine the possible.

One exercise we should accomplish is to imagine that the money in our wallet represents our last few dollars on Earth. How do we act? How close can we get to that mindset? The closer we can get now, the father away zero will be.

PM Update

Anon wrote: Just a question on gold. Perhaps you can point to the right post if already answered this.Why are you expecting a big correction in gold in...

---

I've addressed PMs quite a lot throughout the blog. My basic position hasn't changed since I went long gold in the early 00's, then jumped off the bandwagon too early in late 2007, still bagging a 300% gain. Yes, I've given back 20% on that position, still on paper, but I'm not worried at all about it morphing into another huge gain. The reason I phased in long in '03 is the same reason I'm short now:

PM prices are driven purely by liquidity.

That's why PM prices act like paper stocks, usually with less volatility. Any genuine change in supply and demand has been dwarfed by an 80+ year sea change of inflating cash liquidity. Since prices deflated to major lows in 1932, the Dow (which in no way reflects individual stock prices) has increased from 40 to 10,000. Gold only inflated from $20 to $1235. Paper stock indexes are a much better inflation hedge than gold.

The quantity of counterfeit cash printed by commercial banks (contrary to popular belief, the US government cannot and does not print money), then laundered into borrowers' names has been plunging since it peaked in late 2007. There are NO signs of that letting up. To the contrary, prices ushered in by The Great Recession still dwell near all time highs. Our Depression hasn't even started rolling, it is in its infancy.

As liquidity dries up, precious metals, nothing but dead metal to reflect the amount of paper in circulation, get priced lower. The outcome is as certain as prices rising during inflation of the cash supply. The timing of the macro price decline is more difficult, as this event big is far bigger than our lifetimes, thus, day-to-day price movements are anyone's guess. But with W3 down maturing, my goodness, you have to LOVE the opportunity to short any asset still clinging to all-time price highs.

So I think gold presents a unique opportunity to capture 100% of the coming depression price declines, the single place you can still jump into an empty bandwagon. Although silver is almost 70% lower than its all-time highs, I think its emerging duality as a precious/industrial metal makes it an even more attractive short, as industry tanks hard.

Twice in a Lifetime

At Dow 14,000, I described the situation as once in a lifetime opportunity to get short. That was the beginning of W1 down. Here we sit at W3 down, the most devastating wave, and it's Deju Vu alloveragain. Some will ask: How can you be so sure this is W3 down? Didn't it take longer than expected to develop?

The answer to question 1 is, you can never be sure, but it doesn't get much better than this. We had a crippling mega 5-wave down to kickoff our colossal bear, followed by a perfect 62% retrace.

The answer to question 2 is, the most common W2 retracement, especially in a major degree movement, is 62%. It's hard to argue with nature on that basis. The W3 down that follows should be unmistakable and devastating. Again, it's hard to argue that an "inexplicable" 1,000 point cliff dive isn't a suitable W1 of W3.

Accenture lost their entire $30B market cap in a matter of minutes, as the stock dove from $44 to $0.01 and stayed there for several minutes. Most of the shares changed hands from heavily vested owners to traders, some with little to no cost basis. Mind you, this is a "recession proof" stock with 60% of its 170K employees located overseas, with years of extreme growth under its belt--a little like the sewing machine stocks of the late 1920s (see first quote below).

That market malaise took days to sort out. Still, no one knows how to properly handle many of the transactions. Parallels to the death throws and two year collapse of the "Big Bull Market" (so it was called in 1929) are unmistakable, but no one wants to say so out load. Before "the glitch," which was simply an absolutely accurate manifestation of market value met with late, dozing government intervention, every scholar on the face of the Earth would have testified under oath it was utterly impossible to overwhelm our modern trading system.

In fact, as many Black Swan'ers have pointed out the past several years, modern complexity = ever-increasing market fragility. Speed of light trades that travel through the dark of night are, of course, infinitely less robust than a paper system with some form of physical tracebility.

I'll close with the wisdom of dead people:

"To give one single example: during the bull market the common stock of the White Sewing Machine Company had gone as high as 48; on Monday, October 28th, it had closed at 11 1/8. On that black Tuesday, somebody--a clever messenger boy for the Exchange, it was rumored--had the bright idea of putting in an order to buy at 1--and in the temporarily complete absence of other bids he actually got his stock for a dollar a share! The scene on the floor was chaotic. Despite the jamming of the Communication system, orders to buy and sell-mostly to sell--came in faster than human beings could possibly handle them; it was on that day that an exhausted broker, at the close of the session, found a large waste-basket which he had stuffed with orders to be executed and had carefully set aside for safekeeping-and then had completely forgotten."

...

"Coolidge-Hoover Prosperity was not yet dead, but it was dying. Under the impact of the shock of panic, a multitude of ills which hitherto had passed unnoticed or had been offset by stock-market optimism began to beset the body economic, as poisons seep through the human system when a vital organ has ceased to function normally. Although the liquidation of nearly three billion dollars of brokers' loans contracted credit, and the Reserve Banks lowered the rediscount rate, and the way in which the larger banks and corporations of the country had survived the emergency without a single failure of large proportions offered real encouragement, nevertheless the poisons were there; overproduction of capital; overambitious (expansion of business concerns; overproduction of commodities under the stimulus of installment buying and buying with stock-market profits; the maintenance of an artificial price level for many commodities, the depressed condition of European trade. No matter how many soothsayers of high finance proclaimed that all was well, no matter how earnestly the President set to work to repair the damage with soft words and White House conferences, a major depression was inevitably under way.

Nor was that all. Prosperity is more than an economic condition; it is a state of mind. The Big Bull Market had been more than the climax of a business cycle; it had been the climax of a cycle in American mass thinking and mass emotion. There was hardly a man or woman in the country whose attitude toward life had not been affected by it in some degree and was not now affected by the sudden and brutal shattering of hope. .With the Big Bull Market zone and prosperity going, Americans were soon to find themselves living in an altered world which called for new adjustments. new ideas, new habits of thought, and a new order of values. The psychological climate was changing; the ever-shifting currents of American life were turning into new channels.

The Post-war Decade had corne to its close. An era had ended."
http://xroads.virginia.edu/~hyper/allen/ch13.html

Oilcanes

How long are we going to wait to evacuate people residing in coastal regions from Texas to Florida? Do we even have an estimate of the deaths and damage that will result from the first oilcane?

PW Update

With the recent market tumble and the mini spike in PMs, my VSE portfolio was zero % return as of PM opening prices this morning (worth 102K/100K, or +2%, but close enough). So, given Marketwatch.com VSE's inability to fix a reverse split of 1 for 10 on a short position, I took this opportunity to eat a percent or two; it is time to adjust my portfolio anyway. PW should work from here forward.