Martin Kronicle

The video of David Faber and Marc Faber drew some interesting comments about all the parties involved in the video clip. One response was so well-written, that I thought it deserved it’s own space than to be relegated to the Comment section. I give it to you below in its entirety and unedited. — MM

By John Del Vecchio, CFA

The problem with a lot of people on CNBC is that they are preconditioned to think stocks go up, along with professors that write books about stocks over the long-term.

In reality, many of the individual stocks that comprise an index, under-perform the index over time. In the Russell 3000, it is nearly 2/3 of the stocks, with 20% falling 75% or more. The statistics for the S&P 500 are horrible in this regard.

Imagine it were 1979 and I told you that in 30 years GM, Kodak, Polaroid, Xerox, Bethlehem Steel, General Electric, etc would either be bankrupt, bailed out by the government, trading for less than it was in 1969 or with their competitive advantage seriously eroded. You would throw me right out of your office. But, that’s exactly what happened to those companies.

Stocks have had long periods of doing nothing. 1929-54, 1966-82, 2000-10. Individual stocks are relics. People lose quite a bit in real terms during flat markets.

We can have a deflationary bust, the USD can rise, Gold can rise, and stocks can fall. The notion that this is a typical post-war recession is absurd. After the war, everyone else was destroyed. It was an unfair competitive advantage that no longer exists.

You had a massive debt bubble, only a small fraction of which was wiped out in 2008. The U.S. then printed to offset the deflationary pressures, but the money never went anywhere. There is no bank multiplier. What small business can get a loan?!?!

Average workweek hours are down. Unemployment is really around 17%. There is tons of excess capacity out there. ALT-A and option ARMS are starting to reset. How can there be inflation?

If people think the USD is worthless, then what is the EUR worth? Their problems are far worse.

The USD can rally because it’s the funding currency for carry trades. When the @##$% hits the fan, those shorts will be covered and the USD will be bought. But what no one talks about is that not only is the USD the funding currency for carry trades, it is also the reserve currency of the world. So, you’ll have even added buying pressure in a crisis.

When the Yen was the funding currency there was a massive rally when the crisis hit. But, it was not also the reserve currency.

Gold is an asset class like anything else. It will have periods were it performs well and periods when it does not. My opinion is that now it is being viewed as a currency as opposed to a commodity to protect against inflation, which means it can go much higher than people think.

And, notice how the analyst poo-pooed gold but clearly has no problem being paid in dollars which has lost 90% of its value since 1913.

CNBC has it all wrong. I wouldn’t buy U.S. stocks with counterfeit money.

Eidtor’s Note: I wrote an article called Pain Spotting about John Del Vecchio for Trader Monthly.

The U.S. Securities and Exchange Commission’s top economist is leaving the agency after Chairman Mary Schapiro merged his office with another and passed short- selling rules that hedge funds said ignored financial analysis, according to an article in BusinessWeek.

James Overdahl, whose office reviews potential regulations to determine whether benefits outweigh costs, said in an e-mail today that he will step down March 31 to join NERA Economic Consulting. He joined the SEC in 2007 from the Commodity Futures Trading Commission, where he also served as the top economist.

I don’t short sell equities, but as far as regulation goes, this is political rule during a time when the Obama Administration needs a win. I wrote about the SEC Short Selling Rule and that something was rotten in the state of Denmark on March 2 with the 3 – 2 vote that was taken.

If there is going to be an introduction of a new regulation, the vote has to be unanimous.

George Soros in Davos this year.

George Soros will literally start to have a backache when all of his faculties don’t line up anymore. Here is a quote from How George Soros Knows What He Knows by Flavia Cymbalista, Ph.D.

“My father will sit down and give you theories to explain why he does this or that. But I remember seeing it as a kid and thinking, Jesus Christ, at least half of this is bullshit. I mean, you know the reason he changes his position on the market or whatever is because his back starts killing him. It has nothing to do with reason. He literally goes into a spasm, and it’s this early warning sign.”

You can read all about it in Section 4. The Role of the Backache: an Entry-Point to Experiential Reflexivity found on page 36 of the pdf attachment.

Photo of Soros Copyright by World Economic Forum. swiss-image.ch/Photo by Sebastian Derungs and is licensed under Creative Commons.

Bloomberg ran an interesting article on the relationship between the Australian Dollar (AD) and the Canadian Dollar (CD) the other day. Both are considered commodity currencies b/c their respective economies rely heavily on commodities. Easy, right?

“The Australian dollar is being overtaken by the Canadian dollar among commodity currencies as the safety of Canada’s banking system and ties with the U.S. economy spur investors to buy the loonie.” Maybe this is true, maybe it’s not, but you can see what the rest of the world thinks of this cross rate (see below) by looking at the chart and seeing for yourself. There is an upward trend the cross as indicated by the red line.

Bloomberg has a nice chart of some of the major currency crosses.

Like the term greenback, the word loonie is slang for Canadian Dollar b/c there is a picture of a loon on one side of the coin.

Besides trading these as outright, directional trades, you can create relative value – or spread trades between the currencies. As a default, the currency futures contracts are benchmarked inversely against the USD, so if you’re long the Loon, you’re short the USD. But you can avoid all that by trading crosses: relationships between two currencies other than with the USD.