A Five Year Forecast: Is this a Tsunami Warning?

By John Mauldin

It is the time of the year for forecasts; but rather than do an annual forecast, which is as much a guessing game as anything else (and I am bad at guessing games), I’m going to do a five year forecast to take us to the end of the decade, which I think may be useful for longer term investors. We will focus on events and trends that I think have a high probability, and I’ll state what I think the probabilities are for my forecasts to actually happen. While I could provide several dozen items, I think there are seven major trends that are going to sweep over the globe and that as an investor you need to have on your radar screen. You will need to approach these trends with caution, but they will also provide significant opportunities.

There is a book in here somewhere, but I do not intend to write one today. In fact, my New Year’s resolution is to write shorter letters in 2015. Over the last decade and a half, the letter has tended to get longer. A little more here, a little more there, and pretty soon it just gets to be a bit too much to read in one sitting. That means I need to either be more concise, break up my topics into two sessions or, if further writing is necessary, post the additional work on the website for those interested.

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So I’m writing today’s letter in that spirit. Each of the major topics we’ll be covering will show up in other letters over the next few months. I would appreciate your feedback and any links to articles and/or data points that you think I should know about regarding these topics.

But first, this is generally the most downloaded letter of the year. I want to invite new readers to become one of my 1 million closest friends by simply entering your email address here. You can follow my work throughout the year, absolutely free (and see how my prognostications are turning out). And if you’re a regular reader, why not send this to a few of your friends and suggest they join you? At the very least, Thoughts from the Frontline should make for some interesting conversations this year. Thanks. Now let’s get on with the forecasting.

Seven Significant Changes for the Next Five Years

Let’s look at what I think are six inexorable trends or waves that will each have a major impact in its own right but that when taken together will amount to a tsunami of change for the global economy.

1. Japan will continue its experiment with the most radical quantitative easing attempted by a major country in the history of the world… and the experiment is getting dangerous. The Bank of Japan is effectively exporting the island nation’s deflation to its trade competitors like Germany, China, and South Korea and inviting a currency war that could shake the world. I’ve been saying this for years now, but the story took a nasty turn on Halloween Day, when the Bank of Japan announced it was greatly expanding and changing the mix of its asset purchases. The results have been downright scary, and a major slide in the JPY/USD exchange rate is almost certain over the next five years. I give it a 90% probability. All this while the population of Japan shrinks before our very eyes.

2. Europe is headed for a crisis at least as severe as the Grexit scare was in 2012 – and for the resulting run-up in interest rates and a sovereign debt scare in the peripheral countries. After all these years of struggle, the structural flaws in the EMU’s design remain; and now major economies like Italy and France are headed for trouble. In the very near future we will finally know the answer to the question, “Is the euro a currency or an experiment?” The changes required to answer that question will be wrenching and horrifically expensive. There are no good answers, only difficult choices about who pays how much and to whom. Again, I see the deepening of the Eurozone crisis as a 90% probability.

3. China is approaching its day of reckoning as it tries to reduce its dependency on debt in its bid for growth, while creating a consumer society. The world is simply not prepared for China to experience an outright “hard landing” or recession, but I think there is a 70% probability that it will do so within the next five years.

And the probability that China will suffer either a hard landing OR a long period of Japanese style stagnation (in the event that the Chinese government is forced to absorb nonperforming loans to prevent a debt crisis) is over 95%. To be sure, it is still quite possible that the Chinese economy will be significantly larger in 2025 (ten years from now) than it is today, but realizing that potential largely depends on President Xi Jinping’s ability to accomplish an extremely difficult task: deleveraging the debt overhang that threatens the country’s MASSIVE financial system while rebalancing the national economy to a more sustainable growth model (either through either a vast expansion of China’s export market or the rapid development of “new economy” sectors like technology, services, and consumption; or both).

This will not be the end of China, which I’m quite bullish on over the very long term, but such transitions are never easy. Even given this rather stark forecast, it is still likely (in my opinion) that the Chinese economy will be 20 to 25% bigger as 2020 opens than it is today; and every other major economy in the world (including the US) would be thrilled to have such growth. At the very least, though, China’s slowdown and rebalancing is going to put pressure on commodity exporters, which are generally emerging markets plus Australia, Canada, and Norway.

4. All of the above will tend to be bullish for the dollar, which will make dollar-denominated debt in emerging market countries more difficult to pay back. And given the amount of debt that has been created in the last few years, it is likely that we’ll see a series of crises in emerging-market countries, along with an uncomfortably high level of risk of setting off an LTCM-style global financial shock.

My colleague Worth Wray spoke about this new era of volatile FX flows and growing risk of capital flight from emerging markets at my Strategic Investor Conference last May, and he has continued to remind us of those risks in recent months (“A Scary Story for Emerging Markets” and “Why the World Needs the US Economy to Struggle”).

Now that Russia has tumbled into a full-fledged currency crisis with serious signs of contagion, Worth’s prediction is already playing out, and I would assign an 80 to 90% probability that it will continue to do so, as a function of (1) the rising US dollar and a reversal in cross border capital flows, (2) falling commodity prices, or (3) both. This massive wave is going to create a lot of opportunities for courageous investors who are ready to surf when countries are cheap.

5. I do not believe that the secular bear market in the United States that I began to describe in 1999 has ended. Secular bull markets simply do not begin from valuations like those we have today. Either we began a secular bull market in 2009, or we have one more major correction in front of us.

Obviously, I think it is the latter. It has been some time since I’ve discussed the difference between secular bull and bear markets and cyclical bull and bear markets, and I will briefly touch on the topic today and go into much more detail in later letters. For US focused investors, this is of major importance. The secular bear is not something to be scared of but simply something to be played. It also offers a great deal of opportunity.

If I am right, then the next major leg down will bring on the end of the secular bear and the beginning of a very long term secular bull. We will all get to be geniuses in the 2020s and perhaps even before the last half of this decade runs out. Won’t that be fun? Let’s call the end of the secular bear a 90% probability in five years and move on.

6. Finally, the voters of the United States are going to have to make a decision about the direction they want to take the country. We can either opt for growth, which will mean a new tax and regulatory regime, or we can double down on the current direction and become Europe and Japan. I’ve traveled to both Europe and Japan, and they’re both pleasant enough places to live, but I wouldn’t want to be a citizen of either Japan or the Eurozone for the rest of this decade. (I particularly love Italy, but it is beginning to resemble a basket case, with last year’s optimistic drive for reforms seemingly stalled.)

However, I would rather live and work and invest in a high-growth country, with opportunities all around me, a country where we reduce income inequality by increasing wealth and opportunities at the lower end of the income scale instead of trying to legislate parity by increasing taxes and imposing government mandated wealth redistribution, which slows growth and squelches opportunity for everyone.

A restructuring of the US tax and regulatory regime does not mean a capitulation to the wealthy, big banks, or big business. Properly conceived and constructed, it will allow the renewal of the middle class and result in higher income for all. Sadly, it is not clear to me that either the Republican or Democratic parties are up to the task of making the difficult political decisions necessary. They each have constituencies that tend to opt for the status quo. But I see hope on both sides of the political spectrum that change is possible. The course they set will give us an idea where we will want to focus our portfolios in the decade of the ’20s. It is a 100% probability that we will have to make a decision. It is less than 50% that we will make the right one – or at least the one that I think is the right one.

7.  We have entered the Age of Transformation. We’re going to see the development of new technologies that will simply astound us – from increasingly capable robots and other applications of AI to huge breakthroughs in biotechnology.

The winners are going to be those who identified the truly transformational technologies early on in their development and invested wisely. While riskier (potentially far riskier) than most of your investments should be, a basket of new-technology stocks should be considered for the growth part of your portfolio. I see the Age of Transformation as a 100% probability.

Just for the record, I also see a continuation of the global deflationary environment and a slowing of the velocity of money until we have some type of resolution concerning sovereign debt. Central banks will continue to try to solve the “crises” I mentioned above with monetary policy, but monetary policy will simply not be enough to stem the tide. Central banks can paddle as hard as they like into the waves of change, but they cannot reverse their powerful flow.

Now, let’s look further at each of the waves that are forming into a potential tsunami.

To continue reading this article from Thoughts from the Frontline – a free weekly publication by John Mauldin, renowned financial expert, best-selling author, and Chairman of Mauldin Economics – please click here.

The article Thoughts from the Frontline: A Five-Year Global Financial Forecast: Tsunami Warning was originally published at mauldineconomics.com.

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Why Russia Will Halt the Ruble’s Slide and Keep Pumping Crude Oil

By Marin Katusa, Chief Energy Investment Strategist

The harsh reality is that U.S. shale fields have much more to fear from plummeting oil prices than the Russians, since their costs of production are much higher, says Marin Katusa, author of The Colder War: How the Global Energy Trade Slipped from America’s Grasp.

Russia’s ruble may have strengthened sharply Wednesday, but it’s plunge in recent days has encouraged plenty of talk about the country’s catastrophe, with some even proclaiming that the new Russia is about to go the way of the old USSR.

Don’t believe it. Russia is not the United States, and the effects of a rapidly declining currency over there are much less dramatic than they would be in the U.S.

One important thing to remember is that the fall of the ruble has accompanied a precipitous decline in the per barrel price of oil. But the two are not as intimately connected as might be supposed. Yes, Russia has a resource based economy that is hurt by oil weakness. However, oil is traded nearly everywhere in U.S. dollars, which are presently enjoying considerable strength.

This means that Russian oil producers can sell their product in these strong dollars but pay their expenses in devalued rubles. Thus, they can make capital improvements, invest in new capacity, or do further explorations for less than it would have cost before the ruble’s value was halved against the dollar. The sector remains healthy, and able to continue contributing the lion’s share of governmental tax revenues.

Nor is ruble volatility going to affect the ability of most Russian companies to service their debt. Most of the dollar-denominated corporate debt that has to be rolled over in the coming months was borrowed by state companies, which have a steady stream of foreign currency revenues from oil and gas exports.

Russian consumers will be hurt, of course, due to the higher costs of imported goods, as well as the squeeze inflation puts on their incomes. But, by the same token, exports become much more attractive to foreign buyers. A cheaper ruble boosts the profit outlook for all Russian companies involved in international trade. Additionally, when the present currency weakness is added to the ban on food imports from the European Union, the two could eventually lead to an import substitution boom in Russia.

In any event, don’t expect any deprivations to inspire riots in the streets of Moscow. Russian President Vladimir Putin’s popularity has soared since the beginning of the Ukraine crisis. The people trust him. They’ll tighten their belts and there will be no widespread revolt against his policies.

Further, the high price of oil during the commodity super cycle, coupled with a high real exchange rate, led to a serious decline in the Russia’s manufacturing and agricultural sectors over the past 15 years. This correlation — termed by economists “Dutch disease”— lowered the Russian manufacturing sector’s share of its economy to 8% from 21% in 2000.

The longer the ruble remains weak, however, the less Dutch disease will rule the day. A lower currency means investment in Russian manufacturing and agriculture will make good economic sense again. Both should be given a real fillip.

Low oil prices are also good for Russia’s big customers, especially China, with which Putin has been forging ever stronger ties. If, as expected, Russia and China agree to transactions in rubles and/or yuan, that will push them even closer together and further undermine the dollar’s worldwide hegemony. Putin always thinks decades ahead, and any short term loss of energy revenues will be far offset by the long term gains of his economic alliances.

In the most recent development, the Russian central bank has reacted by raising interest rates to 17%. On the one hand, this is meant to curb inflation. On the other, it’s an direct response to the short selling speculators who’ve been attacking the ruble. They now have to pay additional premiums, so the risk/reward ratio has gone up. Speculators are going to be much warier going forward.

The rise in interest rates mirrors how former U.S. Fed Chair Paul Volcker fought inflation in the U.S. in the early ‘80s. It worked for Volcker, as the U.S. stock market embarked on a historic bull run. The Russians — whose market has been beaten down during the oil/currency crisis — are expecting a similar result.

Not that the Russian market is anywhere near as important to that country’s economy as the US’s is to its. Russians don’t play the market like Americans do. There is no Jim Kramerovsky’s Mad Money in Russia.

Russia is not some Zimbabwe-to-be. It’s sitting on a surplus of foreign assets and very healthy foreign exchange reserves of around $375 billion. Moreover, it has a strong debt-to-GDP ratio of just 13% and a large (and steadily growing) stockpile of gold. Why Russia will arrest the ruble’s slide and keep pumping oil
And there is Russia’s energy relationship with the EU, particularly Germany. Putin showed his clout when he axed the South Stream pipeline and announced that he would run a pipeline through Turkey instead.

The cancellation barely lasted long enough to speak it before the EU caved and offered Putin what he needed to get South Stream back on line. Germany is never going to let Turkey be a gatekeeper of European energy security. With winter arriving, the EU’s dependence on Russian oil and gas will take center stage, and the union will become a stabilizing influence on Russia once again.

In short, while the current situation is not working in Russia’s favor, the country is far from down for the count. It will arrest the ruble’s slide and keep pumping oil. Its economy will contract but not crumble. The harsh reality is that American shale fields have much more to fear from plummeting oil prices than the Russians (or the Saudis), since their costs of production are much higher. Many US shale wells will become uneconomic if oil falls much further. And it they start shutting down, it’ll be disastrous for the American economy, since the growth of the shale industry has underpinned 100% of US economic growth for the past several years.

Those waving their arms about the ruble might do better to look at countries facing real currency crises, like oil dependent Venezuela and Nigeria, as well as Ukraine. That’s where the serious trouble is going to come.
The collapse in oil prices is just the opening salvo in a decades long conflict to control the world’s energy trade. To find out what the future holds, specifically how Vladimir Putin has positioned Russia to come roaring back by leveraging its immense natural resource wealth, click here to get your copy of Marin Katusa’s smash hit New York Times bestseller, The Colder War. Inside, you’ll discover how underestimating Putin will have dire consequences.

And you’ll also discover how dangerous the deepening alliance between China, Russia and the emerging markets is to the future of American prosperity. Click here to get your copy.

The article Why Russia Will Halt the Ruble’s Slide and Keep Pumping Oil was originally published at casey research

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What’s the Frequency Zenith?

By Grant Williams

WARNING: This week’s Things That Make You Go Hmmm... is going to run a little longer than usual, I’m afraid, so if you have some time to kill, strap yourself in for the ride.

Yes. I have read it.


For the last couple of weeks those have been the five words I have used the most — by a country mile.

The second most used five word combination during that time has been “I know, what a tool.”

The subject to which the first group of words pertains is, of course, Michael Lewis’s new book, Flash Boys; and the second phrase refers to a certain president of a certain exchange, who made a complete fool of himself during the fierce media debate that has surrounded the book since it burst upon the public consciousness in the space of what ironically felt like a few nanoseconds. (The particular piece to which I refer has to be seen to be believed; but if you somehow missed it, you’ll have your chance. Stick around.)
Now, before we get started, let’s get a few things straight right off the BAT(s).

Firstly, I am an enormous fan of Michael Lewis’s work. I think he is an incredible storyteller with a gift for narrative worthy of a place alongside many modern greats. I have read each of his books and enjoyed them all tremendously. Michael has an ability to weave complex subject matter into a tapestry that can be understood and enjoyed by many who might otherwise find such material utterly incomprehensible.

Secondly, I am no expert in high-frequency trading, but I have had some experience of it in recent years; and I have spent some considerable time analyzing it from a business perspective, which has given me a reasonable understanding of its mechanics.

Thirdly, whilst I have limited direct experience of HFT, I DO have almost thirty years’ hands-on experience of equity, bond, and commodity markets in the US, UK, Singapore, Hong Kong, Australia, and Japan, as well as in another dozen or so countries across Asia Pacific; and having watched markets of all types move in strange ways for seemingly no reason until, a few moments later, the cause of the move revealed itself, I feel I have developed enough of an understanding about how the markets work and, perhaps more importantly, about the people who MAKE them work, to venture an opinion or two about the subjects raised by Michael Lewis in Flash Boys.

But before we get to the book that is on everybody’s Kindle, we’re going to turn to sport for a little lesson. Let’s go back in time to Game 6 of the American League Championship Series between the Boston Red Sox and the New York Yankees in 2004, and recall the actions of another “Flash Boy,” Alex Rodriguez, the Yankees’ star third baseman.

Now, at this point, I’m sure the thousands of non-baseball fans amongst you are tuning out in your droves; but in order to try to keep you engaged, let me also tell you a parallel story from the football (or “soccer,” if you must) 2002 World Cup in South Korea, a tale that features one of its brightest stars of that era, the Brazilian midfielder Rivaldo ... and some decidedly unsavory antics.

Let’s see how we get on with this whole parallel story thing, shall we? I know Michael Lewis would do a phenomenal job of weaving the two stories together. Me? I’m not so sure.....

Deep breath.

In 2002, Rivaldo Vitor Borba Ferreira was a footballer at the very top of the world game. He had helped Brazil reach the final of the 1998 World Cup (where they lost to France), and four years later he was one-third of the renowned “Three Rs,” alongside Ronaldo and Ronaldinho (sadly NOT referred to as “the Two Ronnies”), who spearheaded the dynamic Brazilian team that was rightly installed as the prohibitive favourite to win the trophy that year.

In Brazil’s opening game against Turkey on June 3rd, Rivaldo scored a goal in the 87th minute to give Brazil a 2-1 lead with only three minutes to play, and was on his way to earning the Man of the Match award (think “MVP,” baseball fans). With seconds of added time left, Brazil won a corner, which Rivaldo wandered across the pitch to take at a pace which could, at best, be described as “lacking a degree of urgency.” The ball was at the feet of Turkish defender Hakan Ünsal, who most certainly WAS in a hurry.....

(Cue Michael Lewis-like change of scene to increase the dramatic tension.)

Game 6 of the 2004 ALCS, played at Yankee Stadium on October 19, 2004, had urgency to spare, as the Boston Red Sox, having lost the first three games of the series to their hated rivals from New York, needed a win to tie the series at 3 games each and force a Game 7 decider, which would be played at The Stadium the following night. One more loss and their season was over. (No team had ever come from 3 games down to take a Championship Series.)

The Yankees were led by their talismanic third baseman, Alex Rodriguez, who had almost joined the Red Sox earlier that year after the team had suffered a heart-breaking Game 7 loss in the 2003 ALCS — to whom else but the Yankees — only to have the deal voided at the last minute by the players’ union, a move which opened the door for the Yankees to steal the highest-paid and, at the time, most prolific player in the game from under the noses of the seemingly cursed Red Sox. (You can see how that whole situation played out in the excellent ESPN short documentary The Deal).

Rodriguez had been on a tear in 2004 and would end the season with 36 home runs, 106 RBIs, 112 runs scored, and 28 stolen bases. (Soccer fans, I’d give you a comparison, but there isn’t one. Think: doing everything. Really well.) This made Rodriguez only the third player in the 100+ years of baseball history to compile at least 35 home runs, 100 RBIs, and 100 runs scored in seven consecutive seasons (joining two other players with names that even soccer fans would know [kinda]: Babe Ruth and Jimmie Foxx). (No, NOT the actor who won an Oscar for Ray, soccer fans.)

During the playoffs, Rodriguez had dominated the Minnesota Twins, batting .421 with a slugging percentage of .737. (Soccer fans, let’s face it, baseball owns statistics. You got nuthin’. Nuthin’. Take it from me, Rodriguez was Messi with a bat.) He had also equaled the single game post season record by scoring five runs in Game 3 as the Yankees seized a 3-0 lead.

But in Game 6, Messi with a bat was about to get messy with at-bats as his form deserted him and he found himself at the plate in the 8th inning, facing Red Sox relief pitcher Bronson Arroyo, in the game for starting pitcher Curt Schilling, who had battled heroically through seven innings with a torn tendon sheath in his right ankle.

With the Yankees down 4-2 and team captain Derek Jeter on first base, Rodriguez represented the tying run......

On that steamy night two years prior, in a purpose-built stadium in Korea, Rivaldo stood by the corner flag, hands on his knees, waiting oh so patiently for the clock to run down Ünsal to pass the ball to him. The fans whistled their derision at the Brazilian’s delaying tactics. Sadly, time wasting in such situations is commonplace in football, and though the referees are obliged to add additional seconds to negate these tactics, they seldom do so effectively.

Ünsal was no doubt frustrated at the Brazilian’s gamesmanship and kicked the ball towards him at some pace in an attempt to speed things up.

Rivaldo flinched and tried to turn away from the incoming ball, which struck him roughly two inches above his right knee.

With the linesman (baseball fans, think: third base umpire) standing no more than two or three feet from the Brazilian, Rivaldo collapsed to the ground, clutching hisface as if he had pole axed by the incoming projectile, and writhing around as if every bone in his face had been shattered by the evil Turk.

To the astonishment of everybody in the stands, commentators from over a hundred countries, hundreds of millions of fans around the world, and, above all, Ünsal himself, the Turkish player was shown a red card and sent off (baseball fans, think: ejected) for his “crime.”

Rivaldo, having made a miraculous recovery, took the resulting corner, and Brazil held on against the ten men of Turkey for the victory.

Back in the Bronx, with the count at 2-2 (soccer fans, that’s two balls and two strikes, which means... oh, to hell with it. Baseball is so much trickier to explain. From here on in, you’re on your own), Alex Rodriguez swung his bat, made contact with Arroyo’s pitch, and sent it bobbling down the first-base line. As soon as he hit it, Rodriguez set off in a furious foot race that he had absolutely no chance of winning as he tried to beat the ball to first base. He knew it. We knew it.

Sure enough, Arroyo, with a head start, got to the ball first and took the two or three steps necessary to tag the Yankee with the ball (before he reached first base, which would render him “out” and send him back to the dugout, bringing the Yankee inning closer to an end).

However, as he reached out to tag Rodriguez, the ball spun loose from Arroyo’s glove and bobbled into right field, keeping the play alive and letting Jeter score from second and throw the Yankees a lifeline.

Rodriguez continued to second base, where he stopped, called time out, clapped his hands, and whooped.
Cue pandemonium.

Everybody in the stadium — except the first-base umpire ... and presumably the millions at home — had seen Rodriguez intentionally slap the ball from Arroyo’s glove, a move which in baseball parlance is known as “cheating.” (Soccer fans, think: cheating.)

After a strong protest from Red Sox manager Terry Francona and a lengthy consultation among the various umpires, justice was done. Rodriguez was called “out,” Jeter was returned to second base, and the score remained 4-2.

The Red Sox would go on to win the game and, the following night, become the first team in baseball history to win a series after losing the first three games. They would go on to defeat the St. Louis Cardinals 4-0 in the 100th World Series (soccer fans, think: national championship with no “world” connotation whatsoever) and to vanquish a famous “curse” that had persisted for 86 years.

Now, armed with that background, watch these two defining moments HERE and HERE.
In the aftermath, both players were defiant. Rivaldo, amazingly, tried to paint himself as the victim:

(BBC): Rivaldo had admitted fooling the referee by clutching his face after Ünsal kicked the ball at his leg while he was waiting to take a corner in the closing moments of the Group C match.

But he shrugged off the fine and defended his faking as part and parcel of the game.

The 30-year-old said: “I’m calm about the punishment.

“I am not sorry about anything.

“I was both the victim and the person who got fined.

“Obviously the ball didn’t hit me in the face, but I was still the victim. I did not hit anyone in the face.”

... whilst Rodriguez was, for some reason, “perplexed”:

(NY Times): Alex Rodriguez was standing on second base when the umpires decided that he did not belong there. He folded his hands atop his helmet and screamed, “What?’’

He was, to use his word, perplexed.

After the game, Yankees Manager Joe Torre demonstrated that, when it comes to seeing important plays that go against your team, there is one thing common to both soccer AND baseball: the unreliability of a manager’s eyesight. These guys see EVERYTHING that goes against their team perfectly but somehow always seem to be curiously oblivious when the shoe is on the other foot:

(NY Times): “Randy Marsh was closer than anyone else, and it looked like there were bodies all over the place,’’ Torre said, referring to the fact that first baseman Doug Mientkiewicz was near the play. “There were a lot of bodies in front of me, so I can’t tell you what I saw. I was upset it turned out the way it did for a couple of reasons.”

Presumably neither of those reasons involved the fact that the call was right.

Anyway, the point of these two stories as they pertain to Flash Boys is this:

Both Rodriguez and Rivaldo knew there were dozens of TV cameras on them. They knew there were millions of pairs of eyes on them around the world, and they knew that they were being watched by officials charged with monitoring the games to ensure fairness and punish malfeasance — and yet, knowing all that to be true, they both instinctively cheated to try to gain an edge.

That is how they, as competitors, are wired. Whether it’s right or wrong is irrelevant. (It’s wrong, in case you were wondering.) They were both given a set of rules within which to play, and both chose to step outside those rules in the hope that they would get away with it.

Rivaldo did, Rodriguez didn’t.

It’s a fine line, but the reward for success — even if it does involve bending the rules — is considerable.
Lewis’s media blitz began on Sunday night with an appearance on 60 Minutes, and in answering a simple opening question with a typically florid response, he sparked a media storm the likes of which I haven’t seen in a long, long time.

Steve Kroft: What’s the headline here?

Michael Lewis: Stock market’s rigged. The United States stock market, the most iconic market in global capitalism, is rigged.

Those words sent financial anchors on CNBC and Bloomberg TV into a state of apoplexy at the mere suggestion that the playing field in financial markets is anything but scrupulously fair.

As I watched the circus unpack its tents, erect them, and send a parade of clowns careening into the ring, I was genuinely baffled at what I was seeing.

The first act was Bill O’Brien, the president of BATS (one of the exchanges which, according to Lewis’s book, offers an unfair advantage to high-frequency traders), going toe-to-toe on CNBC with the hero of the book, Brad Katsuyama, once of RBC and now the founder of IEX, an exchange dedicated to leveling the playing field for the average investor.

Until last Sunday, I had never heard of either man, nor had I ever seen them in action.

What followed was extraordinary.

If you haven’t seen the clip, you can (and should) watch it HERE, because excerpts from a transcript cannot do justice to either the defensiveness of O’Brien or the cool confidence of Katsuyama; but from the off, had it been a fight, it would have been stopped before one of the participants embarrassed himself any further:

(CNBC):O’Brien: I have been shaking my head a lot the last 36 hours. First thing I would say, Michael and Brad, shame on both of you for falsely accusing literally thousands of people and possibly scaring millions of investors in an effort to promote a business model.

Bob Pisani (to Katsuyama): You are very respected on the street. I have known you a little while. You are thought very highly of. Do you think the markets are rigged?

Katsuyama (calmly): I think it’s very hard to put a word on it...

O’Brien (animatedly): He said it in the book. You said it in the book. “That’s when I knew the markets were rigged.” It’s disgusting that you are trying to parse your words now. Okay?

Katsuyama (calmly): Let me walk you through an example...

O’Brien: It’s a yes or no question. Do you believe it or not?

Katsuyama (calmly): I believe the markets are rigged.

O’Brien (somewhat triumphantly): Okay. There you go.

Katsuyama (calmly): I also think that you are part of the rigging. If you want to do this, let’s do this.

From there, Katsuyama proceeded to ask O’Brien how his own exchange (the one he, O’Brien, is president of) prices trades:

O’Brien: We use the direct feeds and the SIP (Securities Information Processor) in combination.

Katsuyama: I asked a question. Not what you use to route. What do you use to price trades in your matching engine on Direct Edge?

O’Brien: We use direct feeds.

Katsuyama: No.

O’Brien: Yes, we do...

Katsuyama: You use the SIP.

O’Brien: That is not true.

From there, O’Brien made the most successful attempt to make himself look a fool that I think I have ever seen (and on CNBC, that’s saying something). It was, I thought, painfully embarrassing to watch.
In my head, all I could hear was Sir Winston Churchill’s booming voice:

“Never engage in a battle of wits with an unarmed man.”

Less than 24 hours later...

(Wall Street Journal): BATS Global Markets Inc., under pressure from the New York Attorney General’s office, corrected statements made by a senior executive during a televised interview this week about how its exchanges work.

BATS President William O’Brien, during a CNBC interview Tuesday, said BATS’s Direct Edge exchanges use high-speed data feeds to price stock trades. Thursday, the exchange operator said two of its exchanges, EDGA and EGX, use a slower feed, known as the Securities Information Processor, to price trades.

Viva El Presidente!

Anyway, the interesting thing to me, once I got past the sheer insanity of it all, was the level of amazement shown by the CNBC journalists that the market could possibly be “rigged” in any way, shape, or form.
That amazement was shared by the two anchors on Bloomberg’s Market Makers show, Stephanie Ruhle and Eric Schatzker, when their turn came to take a tilt at Lewis the following day:

Ruhle (bewildered): The market is rigged? That’s a big claim!

Lewis (even more bewildered): Well it IS rigged. If you read the book, I don’t think you’d put it down and say the market’s not rigged.

Then, after a pretty good casino analogy that was interrupted by the anchors a few times, Lewis got to the crux of the issue that had been bothering me as I watched:

Lewis: Why are you so invested in the idea this is fair? Why are you even arguing about this? It’s so clear... people are front-running the market. There’s plenty of evidence in the book.

Schatzker: Their orders are being “anticipated.”

Lewis (laughing at the escalating absurdity): Anticipated and run in front of.... [The HFTs] PAY to execute the orders. Tens of millions of dollars a year. Ask yourself THAT question. Why would ANYONE pay for the right to execute someone else’s stock market order?... It’s quite obvious. That order is an opportunity to exploit, because he has advance information about the pricing in the stock market. Is that “fair”?

Ruhle: Today, when I go to execute a stock, I feel like, man, how did that get jacked right in front of me, every time? I do feel that way. But fifteen years ago when I did a trade, I was paying significantly more to do it through a specialist because of what the fees were.... Is it a different situation than when specialists were on the floor?

Lewis (with a somewhat confused look on his face): I never said THAT.

Ruhle: So has the system ALWAYS been rigged?

Lewis: Yes.

Yes.

After watching these exchanges, I was so astounded that so many people could STILL live in a complete fantasy world under the illusion assumption that the markets couldn’t possibly be rigged that I turned to my friends in the Twittersphere:

That was the 2,567th tweet I have sent out and, in contrast to the nearly pathological indifference shown by the rest of the world to the previous 2,566, this one was retweeted 96 times. (Button it, Bieber! That’s an impressive number for me, OK?)

But who are these people who believe in unicorns and rainbows fair markets?

Click here to continue reading this article from Things That Make You Go Hmmm… – a free weekly newsletter by Grant Williams, a highly respected financial expert and current portfolio and strategy advisor at Vulpes Investment Management in Singapore.

The article Things That Make You Go Hmmm: What’s the Frequency Zenith? was originally published at Mauldin Economics

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Hitch a Ride on This Supply Crunch

By Jeff Clark, Senior Precious Metals Analyst

Can you name a commodity that's currently in a supply deficit—in other words, production and scrap material can't keep up with demand? How about two?


If you find that difficult to answer, it's because there aren't very many.

When you do find one, you might be on to a good investment—after all, if demand persists for that commodity, there's only one way for the price to go.

At the end of 2012, the platinum market was in a supply deficit of 375,000 ounces. Much of it was chalked up to the sharp decline in output from South Africa, where about 750,000 ounces didn't make it out of the ground due to legal and illegal strikes, safety stoppages, and mine closures.

The palladium sector was worse: It ended the year with a huge supply deficit of 1.07 million ounces—this, after 2011, when it boasted a surplus of 1.19 million ounces. The huge reversal was due to record demand for auto catalysts and a huge swing in investment demand—going from net selling to net buying in just 12 months.

What's important to recognize as a potential investor is that the deficit for both metals isn't letting up, especially for platinum.

Since platinum supply is dwindling, let's take a closer look…...

Will the Supply Deficit Continue?

 

According to Johnson Matthey, the world's largest maker of catalysts to control car emissions, platinum supply will decline to 6.43 million ounces this year, largely due to lower Russian stockpile sales. But the company claims the decline will be made up by a 7.4% increase in recycling.

Ha. Projections on scrap supply are almost always wrong. Analysts said in early 2012 that supply from recycling would grow 10-12% that year—but it declined by 4%.

There are critical issues with scrap this year, too…

• Impala Platinum ("Implats") reported a 17% decline in output, not due to decrease in production but in scrap supply. Other companies have not reported this problem, but Implats is one of the biggest producers of the metal.

• Recycling of platinum jewelry in China and Japan is falling and is on pace to be 12.9% lower than last year.

• European auto sales are declining, so one would think demand would be the most impacted. However, this has major implications for supply, too: The average age of a car in Europe is eight years, with more than 30% over 10 years old. When a vehicle exceeds 10 years, the wear and tear on the catalyst is so significant that a substantial portion of the platinum has already been lost. So the jump in supply many are anticipating will be much less than expected.

Some of these declines are offset by scrap from auto catalysts in the US, but this obviously hasn't made up for all of it.

Demand Isn't Letting Up Either

 

Platinum demand is driven mostly by the automotive industry and jewelry, which account for 75% of world demand. What happens in these two sectors has a significant impact on the metal.

We'll let you draw your own conclusions from the data…...

The Cars

• Auto industry analysts forecast total monthly sales in the US last month will reach about 1.23 million for passenger cars and light trucks, up 12% from 1.09 million in October 2012.
• China, the world's largest auto market, saw a 21% rise in passenger car and light-truck sales in September to 1.59 million units, an eight-month high.
• PricewaterhouseCoopers forecasts that sales of automobiles and light trucks in China will have nearly doubled by 2019. This trend largely applies to other Asian countries too, becoming a constant source of demand for both platinum and palladium.

The Politicians

Both platinum and palladium will benefit from new regulations that take effect in 2014 in Europe and China:

• Europe's new "Euro 6" emission regulation will force diesel vehicles to have new catalysts going forward.
• China has already accepted tighter emission standards that will substantially push platinum demand in the country. It's worth mentioning that car markets in China and other emerging countries are at the "Euro 4" level, so they have some catching up to do before reaching US and European levels.

The Investors

NewPlat, a platinum exchange-traded fund, launched in South Africa on April 26 and has already seen an inflow of 600,000 ounces through the end of September. This unprecedented surge is expected to lift platinum investment demand by 68% to a record 765,000 ounces.

The Jewelers

Jewelry is the second-largest use for platinum, representing 35% of overall demand.

China dominates this market, and demand has doubled in the past five years. According to ETF Securities, China is well on its way to make up around 80% of total platinum jewelry sales in 2013—their report calls Chinese platinum demand "a new engine of growth."

Johnson Matthey expects the interest for platinum jewelry to soften in China this year. However, a recent article in Forbes suggests the opposite may be happening:

A good proxy for Chinese platinum jewelry demand is the volume of platinum futures traded on the Shanghai Gold Exchange. Average daily platinum volume on the exchange in 2013 is running near 45% above 2012 levels, recently reaching a new record high this year.

Another indicator of Chinese platinum jewelry demand is China platinum imports. The latest data on China platinum imports for September showed the highest level since March 2011 at 10,522 kilograms (or approximately 338,300 ounces).

And this from International Business Times…

Net platinum inflows into China hit their highest levels in two and a half years … China's net imports of platinum rose by 11%, to hit almost 70 metric tons for the first three quarters in 2013, higher than the 62 metric tons from the same period last year.

Overall, platinum demand is expected to be greater than ever before, reaching a record 8.42 million ounces this year. And this while supply continues to decline.

This supply/demand imbalance will likely continue for at least several years, perhaps a decade. Prices haven't moved all that much yet, but that doesn't mean they won't. Prices of commodities with a supply/demand imbalance can only stay subdued for so long before reality catches up. Either prices must rise or demand must fall.

The other metal to take advantage of right now is gold. While there's no supply crunch, the gold price is so low right now that it practically screams to back up the truck.

Learn in our free Special Report, the 2014 Gold Investor's Guide, when and where to buy gold bullion… the 3 best ways to invest in gold… and more. Get your free report now.


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Precious Metals & Miners Start Bottoming Process

Precious metals and their related mining stocks continue to under perform the broad market. This year’s heavy volume breakdown below key support has many investors and trader’s spooked creating to a steady stream of selling pressure for gold and silver bullion and mining stocks.

While the technical charts are telling me prices are trying to bottom we must be willing to wait for price to provide low risk entry points before getting involved. Precious metals are like any other investment in respect to trading and investing in them. There are times when you should be long, times to be in cash and times to be short (benefit from falling prices). Right now and for the last twelve months when looking at precious metals cash has been king.

Since 2011 when gold and silver started to correct the best position has been to move to cash or to sell/write options until the next trend resumes. This is something I have been doing with my trading partner who focuses solely on Options Trading who closed three winning positions last week for big gains.

In 2008 we had a similar breakdown in price washing the market clean of investors who were long precious metals. If you compare the last two breakdowns they look very similar. If price holds true then we will see higher prices unfold at the end of 2013.

The key here is for the price to move and hold above the major resistance line. A breakout would trigger a rally in gold to $2600 – $3500 per ounce. With that being said gold and silver may be starting a bear market. Depending what the price does when the major resistance zone is touched, my outlook may change from bullish to bearish. Remember, no one can predict the market with 100% accuracy and each day, week and month that passes changes the outlook going forward.

The chart below is on I drew up on May 3rd. I was going to get a fresh chart and put my analysis on it but to be honest my price forecast/analysis has been spot on thus far and there is no need to update.

Gold Daily Technical Chart Showing Bottoming Process:

Major technical damage has been done to the chart of gold. Gold is trying to put in a bottom but still needs more time. I feel gold will make a new low in the coming month then bottom as drawn on the chart below.

Silver Daily Technical Chart Showing Bottoming Process:

Silver is in a similar as gold. The major difference between gold and silver is that silver dropped 10% early one morning this month which had very light volume. The fact that silver hit my $20 per ounce level and it was on light volume has me thinking silver has now bottomed.

But, silver may flounder at these prices or near the recent lows until its big sister (gold) puts in a bottom.



Gold Mining Stocks Monthly Investing Zone Chart:

Gold mining stocks broke down a couple months ago and continue to sell off on strong volume. If precious metals continue to move lower then mining stocks will continue their journey lower.

This updated chart which I originally drew in February warning of a breakdown below the green support trend lines would signal a collapse in stock prices, which is exactly what has/is taking place. While I do not try to pick bottoms (catch falling knives) I do like to watch for them so I am prepared for new positions when the time and chart turn bullish or provide a low risk probing entry point.

While we focus more on analysis, forecasts and ETF trading another one of my trading partners who focuses on Trading Stocks and 3x Leveraged ETF’s has been cleaning up with gold miners.

Gold, Silver and Mining Stocks Conclusion:

Precious metals continue to be trending down and while they look to be trying to bottom it is important to remember that some of the biggest percent moves take place in the last 10% of a trend. So we may be close to a bottom on the time scale but there could be sharply lower prices yet.

The time will come when another major signal forms and when it does we will be getting involved. The exciting this is that it could be just around the corner. So if you want to keep current and take advantage of the next major moves in the market be sure to join our newsletters.

From HFU trading partner Chris Vermeulen


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Silver Miners, Gold Miners and the Price Of Gold

Silver and silver mining stocks are front and center for investors and active traders. Because of silvers high volatility (large price swings) it naturally attracts a lot of attention.

First you have seasoned investors who are waiting for the right opportunity to get long or short for the next move. Then you have the active traders playing the day to day price swings. Finally you get the gamblers who are salivating over the potential to double their accounts and are riding the commodity on pure emotions (Fear & Greed). All these things compound the volatility for the investment making it headline news and what everyone wants to be involved in.

The focus of this report is show you where the price of gold, silver and miner stocks are currently trading and what to lookout for in the coming days/weeks. Below is a chart of gold but silver has a similar pattern and will follow or should I say lead the price of gold in percentage terms because of its volatility.

Gold Weekly Chart:

Gold has been testing its long term support level for three weeks. I expect we see price start to move quickly sooner than later but there is potential for it to tread water here until the second half of April. We all know the saying “Sell in May and Go Away” and as we get closer to that date we should start to see money flow into the “Safe Havens” being gold, silver, and miners. While this has not happened many times on the charts I am thinking beyond them and of what the masses are likely to flock to when stocks lose their luster.

Also if you have been following the price of the dollar index you know that its getting a little overbought and when it starts to correct the falling dollar should help send precious metals higher.




Gold & Silver Miners VS Gold Bullion Performance:

The stock market has certain chart patterns that tell chart readers what the holders of that particular investment is feeling emotionally. Knowing how to read these extreme patterns can yield some big gains and works for most investments types (stocks, bonds, commodities and currencies).

Without getting into the boring technical details precious metal stocks are starting show signs of panic selling which typically happens before a major bottom is put in place. A bottom generally takes a week or two for some type of bottoming pattern or base building to form. This is the most volatile time to be trading these investments so trade with caution.



Gold Miners Bullish Percent Index:

Bullish percent indexes are a great way to see how popular an investment is. If you do not know what a bullish percent chart is then you can look it up online and learn more. The way I read it is when it’s up over 75-80 it’s a popular investment and everyone is buying it. It also means it’s in a major uptrend. But you must be aware that when everyone is buying something once price starts to turn down you better be one of the first few out the door before everyone else runs for the door and price crashes.

It’s similar but reversed for investments that are below 20. Everyone is selling, no one wants to own it but once the selling momentum stops price should rebound and rally. Keep in mind this indicator is not great for timing, but confirms that what you are looking at is either oversold, neutral or overbought in the BIG picture.



Weekend Precious Metals Trading Conclusion:

In short, I still like gold, silver, and their related mining stocks. I am watching them very closely for signs of a bottom and will be jumping on that train when the selling momentum looks to have stalled. Keep in mind that all these investments are still in a VERY STRONG DOWN TREND and trying to catch a falling knife is not what I do. Waiting for momentum to shift is my focus as there should be big upside if metals and stocks can find a bottom soon. If gold breaks down below key support as posted on the weekly chart then the uptrend may be over and it will be time to start looking for short positions.

You can get my free weekly reports and ideas here at The Gold & Oil Guy.com

Chris Vermeulen


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Gold, Crude Oil & the SPX Trends and Setups

Over the past year our long term trends and outlooks have not changed for gold, oil or the SP500. Though there has been a lot of sideways price action to keep everyone one their toes and focused on the short term charts.

As we all know if the market does not shake you out, it will wait you out, and sometimes it will do both. So stepping back to review the bigger picture each weeks is crucial in keeping a level trading/investing strategy in motion.

The key to investing success is to always trade with the long term trend and stick with it until price and volume clearly signals a reversal/down trend. Doing this means you truly never catch the market top nor do you catch market bottoms. But the important thing is that you do catch the low risk trending stage of an investment (stage 2 – Bull Market, Stage 4 Bear Market).

Lets take a look at the charts and see where prices stand in the grand scheme of things.

Gold Weekly Futures Trading Chart:

Last week to talk about about how precious metals are nearing a major tipping point and to be aware of those levels because the next move is likely to be huge and you do not want to miss it.

Overall gold and silver remain in a secular bull market and has gone through many similar pauses to what we are watching unfold over the past year. As mentioned above the gold market looks to be trying to not only shake investors out but to wait them out also with this 18 month volatile sideways trend.

A lot of gold bugs, gold and stock investors of mining stocks are starting to give up which can been seen in the price and selling volume for these investments recently. We are contrarians by nature so when we see the masses running for the door we start to become interested in what everyone is unloading at bargain prices.

Gold is now entering an oversold panic selling phase which happens to be at major long term support. This bodes well for a strong bounce or start of a new bull market leg higher for this shiny metal. If gold breaks below $1500 – 1530 levels it could trigger a bear market for precious metals but until then we're bullish at this price. We think we could see another spike lower in gold to test the $1500- $1530 level this week but after that it could be off to the races to new highs.

 

Crude Oil Weekly Trading Chart:

Crude oil had a huge bull market from 2009 until 2011 but since then has been trading sideways in a narrowing bullish range. We expect some big moves this year for oil and technical analysis puts the odds on higher prices. If we do get a breakout and rally then $130 will likely be reached. But if price breaks down then a sharp drop to $50 per barrel looks likely.



Utility & Energy Stocks – XLU – XLE – Weekly Investing Chart

The utility sector has done well and continues to look very bullish for 2013. This high dividend paying sector is liked by many and the price action speaks for its self. If the overall financial market starts to peak then these sectors should hold up well because they are services, dividend and a commodity play wrapped in one.


 

SP500 Trend Daily Chart:

The SP500 continues to be in an uptrend which we are trading with until price and volume tells us otherwise. But there are some early warning signs that another correction or a full blown bear market may be just around the corner.

Again, sticking with the uptrend is key, but knowing what to look for and prepare for is important so that when the trend does change your transition from long positions to short positions is a simple measured move in your portfolios.



Weekend Trend Conclusion:

In short, we remain bullish on stocks and commodity related stocks until I see a trend change in the SP500.

Energy sector is doing well and looks bullish for the next month. As for gold and gold miners, we feel they are entering a low risk entry point to start building a new long position. Risk is low compared to potential reward.

When the price of a commodity or index trade near the apex of a narrowing range or major long term support/resistance level volatility typically increases as fear and greed become heightened which creates larger daily price swings. So be prepared for some turbulence in the coming weeks while the market shakes things up.

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