Sajal's Instablog Stock market and technology enthusiast analyzes the financial markets, economic trends, technology ideas, and tech companies. Sajal has a passion for investing and evaluating/refining ideas using fundamental and technical analysis. Understand. Collaborate. Profit. Sajal http://seekingalpha.com Reading links on market direction. http://seekingalpha.com/instablog/160728-sajal/24770-reading-links-on-market-direction?source=feed 24770 Well, this linkfest specifically focuses on market prognostications!

  • VALUE LINE HASN’T BEEN THIS BEARISH SINCE 2000 : Value Line reduced its recommended equity allocation to the range of 60% to 70%.This reflects a cautious to outright bearish posture on Value Line’s part, since the firm has never lowered its recommended allocation to below 50%. The last time it was lower than it is now was October 2000.?

    Value Line’s rationale for lowering its recommended equity allocation was not that the economic and financial news is about to take a big turn for the worse, however. Instead, the firm’s concern is that the stock market has rallied so far, so fast, that it has gotten too far ahead of itself.
  • Marc Faber: Expect a correction over the next 2 months.(CNBC)
     
  • Barry Ritholtz : I wouldn’t be surprised to see a 60-70-80 % rally before all this is over and the market rolls over and dies. This is a trading rally not a multi-year rally so it’s likely to end and retrace a part of it.

    Ritholtz has 1050-1080 as an upside target for the S&P 500, with a slight chance it can go as high as 1200 (It’s a low probability event). Making up 68% of loss is not unheard of. If the rally does extend to those outer limits, Ritholtz sees the Dow topping out "somewhere around 12,000.
  • Is this the start of the big one?

    I don't believe in market calls, and trying to time turns is a perilous game. But most savvy people I know have been skeptical of this rally, beyond the initial strong bounce off the bottom. It has not had the characteristics of a bull market. Volumes have been underwhelming, no new leadership group has emerged, and as greybeards like to point out, comparatively short, large amplitude rallies are a bear market speciality.
  • Top adviser turns bullish, for at most one quarter! (Well, I thought the headline was misleading, the advisor is actually BEARISH!)
  • Paul Tudor Jones on the bear market rally
    The bottom line is that we are not inclined to aggressively chase the market here. Rather, we eye a better opportunity to be long equities into year-end on a potential autumnal pullback.
  • Rounded Reversal into Exact Fibonacci Confluence on SPY
  • TOO FAR, TOO FAST? By Rob Arnott

    Now is not the time to be complacent. Most assets are no longer the bargains they were a few short months ago. As we have stated many times, tactical asset allocation is about taking risks when they are compensated and backing away when they are not. In some cases, the snapback has led risky asset classes like equities and high yield bonds to be susceptible to further price declines
  • Let’s play Ping Pong!

    The point here isn't so much to say, "Ah, prices are extreme and this is a top". Barring a market top, the extreme move from March, 2009 is indicative of two things: 1) the easy gains are behind us; and 2) the indices will likely move sideways to higher but in a more choppy fashion. If a market top comes out of this consolidation, it is likely to develop over the next several months. In general, market tops are affairs; market bottoms are events.
  • China Stocks Enter Bear Market as Index Falls 20% From High
  • More bearish data points for equities.
  • Manic Monday I'm sorry, the reality we see in the market does not justify options prices this high. Is there a reality in the market we don't see? Because if not, Fear is way too high, and anecdotally bullish.
  • Surprising sentimentHulbert :Sentiment picture has taken an unexpected turn for the better
  • Gummy Bears. Try not to overthink what the market might be saying. Cut in half from here? Unlikely.

 

Check complete post here:
financialjoyride.blogspot.com/2009/08/re...
 

]]> Wed, 26 Aug 2009 21:14:01 -0400 Well, this linkfest specifically focuses on market prognostications!

  • VALUE LINE HASN’T BEEN THIS BEARISH SINCE 2000 : Value Line reduced its recommended equity allocation to the range of 60% to 70%.This reflects a cautious to outright bearish posture on Value Line’s part, since the firm has never lowered its recommended allocation to below 50%. The last time it was lower than it is now was October 2000.?

    Value Line’s rationale for lowering its recommended equity allocation was not that the economic and financial news is about to take a big turn for the worse, however. Instead, the firm’s concern is that the stock market has rallied so far, so fast, that it has gotten too far ahead of itself.
  • Marc Faber: Expect a correction over the next 2 months.(CNBC)
     
  • Barry Ritholtz : I wouldn’t be surprised to see a 60-70-80 % rally before all this is over and the market rolls over and dies. This is a trading rally not a multi-year rally so it’s likely to end and retrace a part of it.

    Ritholtz has 1050-1080 as an upside target for the S&P 500, with a slight chance it can go as high as 1200 (It’s a low probability event). Making up 68% of loss is not unheard of. If the rally does extend to those outer limits, Ritholtz sees the Dow topping out "somewhere around 12,000.
  • Is this the start of the big one?

    I don't believe in market calls, and trying to time turns is a perilous game. But most savvy people I know have been skeptical of this rally, beyond the initial strong bounce off the bottom. It has not had the characteristics of a bull market. Volumes have been underwhelming, no new leadership group has emerged, and as greybeards like to point out, comparatively short, large amplitude rallies are a bear market speciality.
  • Top adviser turns bullish, for at most one quarter! (Well, I thought the headline was misleading, the advisor is actually BEARISH!)
  • Paul Tudor Jones on the bear market rally
    The bottom line is that we are not inclined to aggressively chase the market here. Rather, we eye a better opportunity to be long equities into year-end on a potential autumnal pullback.
  • Rounded Reversal into Exact Fibonacci Confluence on SPY
  • TOO FAR, TOO FAST? By Rob Arnott

    Now is not the time to be complacent. Most assets are no longer the bargains they were a few short months ago. As we have stated many times, tactical asset allocation is about taking risks when they are compensated and backing away when they are not. In some cases, the snapback has led risky asset classes like equities and high yield bonds to be susceptible to further price declines
  • Let’s play Ping Pong!

    The point here isn't so much to say, "Ah, prices are extreme and this is a top". Barring a market top, the extreme move from March, 2009 is indicative of two things: 1) the easy gains are behind us; and 2) the indices will likely move sideways to higher but in a more choppy fashion. If a market top comes out of this consolidation, it is likely to develop over the next several months. In general, market tops are affairs; market bottoms are events.
  • China Stocks Enter Bear Market as Index Falls 20% From High
  • More bearish data points for equities.
  • Manic Monday I'm sorry, the reality we see in the market does not justify options prices this high. Is there a reality in the market we don't see? Because if not, Fear is way too high, and anecdotally bullish.
  • Surprising sentimentHulbert :Sentiment picture has taken an unexpected turn for the better
  • Gummy Bears. Try not to overthink what the market might be saying. Cut in half from here? Unlikely.

 

Check complete post here:
financialjoyride.blogspot.com/2009/08/re...
 

]]> spy fxi markets Bob Janjuah : Exit short positions if market crosses 1022 4 days in a row. http://seekingalpha.com/instablog/160728-sajal/24533-bob-janjuah-exit-short-positions-if-market-crosses-1022-4-days-in-a-row?source=feed 24533 Note: This post originally appeared here: http://bit.ly/1Gepi

Came across this David Tice interview, courtesy Pragcap.

While the interview was standard David Tice fare, there was this quote from Bob Janjuah which caught my ears. (I’ve referred to his crash warnings earlier here. For an even better compendium, check out this FT Alphaville post.).

 

IF market closes above 1022 for 4 days in a row, it is time to hit the exits.

Note: Here "exit" refers to exiting from his short positions via stop loss. Basically, he's looking for a momentary spike to 1025-1050. If we can sustain above 1022 for 4 days, then it's time to exit short positions as another asset bubble is coming our way...

Hmm..I guess we’ll find out soon enough! (Tuesday was the second day the markets did exactly that).

PS: As I type this, the Asian markets are selling off. If the sell off should extend to the US markets and S&P 500 closes below 1022, then this count shall be reset to zero.. 

]]> Tue, 25 Aug 2009 17:04:34 -0400 Note: This post originally appeared here: http://bit.ly/1Gepi

Came across this David Tice interview, courtesy Pragcap.

While the interview was standard David Tice fare, there was this quote from Bob Janjuah which caught my ears. (I’ve referred to his crash warnings earlier here. For an even better compendium, check out this FT Alphaville post.).

 

IF market closes above 1022 for 4 days in a row, it is time to hit the exits.

Note: Here "exit" refers to exiting from his short positions via stop loss. Basically, he's looking for a momentary spike to 1025-1050. If we can sustain above 1022 for 4 days, then it's time to exit short positions as another asset bubble is coming our way...

Hmm..I guess we’ll find out soon enough! (Tuesday was the second day the markets did exactly that).

PS: As I type this, the Asian markets are selling off. If the sell off should extend to the US markets and S&P 500 closes below 1022, then this count shall be reset to zero.. 

]]> spy markets outlook S&P 500 and the Shanghai index: How far to go? http://seekingalpha.com/instablog/160728-sajal/22080-s-p-500-and-the-shanghai-index-how-far-to-go?source=feed 22080
Back in early April, I had written about the 50 day - 200 day Moving Average crossover in the Shanghai stock market. I think we should look at the Shanghai index as a ‘leading indicator’ to gauge US markets. This crossover happened a good 2 months before the US markets did. We also got an early non-confirmation of the March lows when the Shanghai index failed to make a new low at that point of time.

 
Since I believe this is a cyclical rally in a secular bear, I wanted to use Fibonacci analysis to gauge the retracement levels in the Chinese markets. This basically gets you an idea of how far this bear market rally retracement should go. While you might not believe in Fibonacci or technical analysis, it's still useful to keep these levels in mind as selling and buying pressure would appear around these levels from people following these trends. As can be seen from the chart below, we’ve already crossed the 38% retracement level, which means the 50% retracement at 3800 on the Shanghai Index is in play. This suggests further upside ahead.



 
 
 
Since we’ve crossed the 38% retracement on the Shanghai index, I expect a similar move on the S&P 500 as well. A similar 50% retracement on the S&P 500 gets us to 1100.


 

Babak points out the over-extended nature of the current rally, and the similarity to the speculative blow-off of October-November 2007. The RSI indicator in the chart is also similarly showing an overbought reading in excess of 70. This marked the top during the previous bull run. However, the overbought conditions became even more overbought, and stayed that way before the markets corrected. In fact, the Shanghai market went up more than 100% after registering RSI readings in excess of 70!!

 Note also the similarity between the 1 day 7% decline two weeks ago and the 8.8% one day decline on February 26th, 2007. (John Authers talks about this in FT.) The Shanghai markets continued rallying for the next few months after this decline. Historically, the bear market rally of 1929-1930 also consisted of a 50% retracement back to 294, after the initial decline took the Dow from 381 to 198. Here’s an excellent FT piece on comparisons with other historical periods.

 Well, turns out Fibonacci has really been in the news for retracement levels last week. For a  list of sample instances, please refer to the link. While the absolute numbers might differ marginally, the upshot is the same. These levels are being watched by a huge number of investors. 

 The key point is that most commentators see the equity markets upside capped at around 0-10% from here, but the downside is considerable, quite possibly retesting the March lows. Even the non-Fibonacci fundamentals driven consensus seems to be for at most a rally to around the 1,050-1,100 mark on the S&P 500. This suggests we’ll either:
 
a) go down around here, or
b) go right through 1100.
 
Consider the second case. If one were to look at all this Fibonacci analysis from a contrarian perspective, this might be bullish news. Just as the widely discussed head-and-shoulders pattern turned out to be a head fake and the equity markets rallied sharply, the current consensus using Fibonacci retracements could be a bullish omen.

 
To paraphrase the Bespoke group, with so many market and economic indicators reaching pre-Lehman levels, one has to ask: will the markets be next? Reaching pre-Lehman levels would take us to 11,000 on the Dow and 1,200 on the S&P 500.

Note: This article originally appeared on Fundamental Insights here and here.

Ful Disclosure : No positions]]> Tue, 11 Aug 2009 05:52:38 -0400
Back in early April, I had written about the 50 day - 200 day Moving Average crossover in the Shanghai stock market. I think we should look at the Shanghai index as a ‘leading indicator’ to gauge US markets. This crossover happened a good 2 months before the US markets did. We also got an early non-confirmation of the March lows when the Shanghai index failed to make a new low at that point of time.

 
Since I believe this is a cyclical rally in a secular bear, I wanted to use Fibonacci analysis to gauge the retracement levels in the Chinese markets. This basically gets you an idea of how far this bear market rally retracement should go. While you might not believe in Fibonacci or technical analysis, it's still useful to keep these levels in mind as selling and buying pressure would appear around these levels from people following these trends. As can be seen from the chart below, we’ve already crossed the 38% retracement level, which means the 50% retracement at 3800 on the Shanghai Index is in play. This suggests further upside ahead.



 
 
 
Since we’ve crossed the 38% retracement on the Shanghai index, I expect a similar move on the S&P 500 as well. A similar 50% retracement on the S&P 500 gets us to 1100.


 

Babak points out the over-extended nature of the current rally, and the similarity to the speculative blow-off of October-November 2007. The RSI indicator in the chart is also similarly showing an overbought reading in excess of 70. This marked the top during the previous bull run. However, the overbought conditions became even more overbought, and stayed that way before the markets corrected. In fact, the Shanghai market went up more than 100% after registering RSI readings in excess of 70!!

 Note also the similarity between the 1 day 7% decline two weeks ago and the 8.8% one day decline on February 26th, 2007. (John Authers talks about this in FT.) The Shanghai markets continued rallying for the next few months after this decline. Historically, the bear market rally of 1929-1930 also consisted of a 50% retracement back to 294, after the initial decline took the Dow from 381 to 198. Here’s an excellent FT piece on comparisons with other historical periods.

 Well, turns out Fibonacci has really been in the news for retracement levels last week. For a  list of sample instances, please refer to the link. While the absolute numbers might differ marginally, the upshot is the same. These levels are being watched by a huge number of investors. 

 The key point is that most commentators see the equity markets upside capped at around 0-10% from here, but the downside is considerable, quite possibly retesting the March lows. Even the non-Fibonacci fundamentals driven consensus seems to be for at most a rally to around the 1,050-1,100 mark on the S&P 500. This suggests we’ll either:
 
a) go down around here, or
b) go right through 1100.
 
Consider the second case. If one were to look at all this Fibonacci analysis from a contrarian perspective, this might be bullish news. Just as the widely discussed head-and-shoulders pattern turned out to be a head fake and the equity markets rallied sharply, the current consensus using Fibonacci retracements could be a bullish omen.

 
To paraphrase the Bespoke group, with so many market and economic indicators reaching pre-Lehman levels, one has to ask: will the markets be next? Reaching pre-Lehman levels would take us to 11,000 on the Dow and 1,200 on the S&P 500.

Note: This article originally appeared on Fundamental Insights here and here.

Ful Disclosure : No positions]]> fxi spy tan China Market Outlook Blockbuster Chinese June loan growth: FINAL stock surge ahead? http://seekingalpha.com/instablog/160728-sajal/14045-blockbuster-chinese-june-loan-growth-final-stock-surge-ahead?source=feed 14045  It is widely accepted that a big reason for the Chinese equity rally was the massive increase in banking loans and money supply. Thus when the Financial Times reported a blockbuster June loan growth, I wondered if this would lead to a July-August surge in the stock markets, the last one. Looks like we might be getting one. 


Here are two charts showing the credit and money supply surge:

 

 
 
An excerpt from the FT

China’s increasingly fretful banking regulator worries that rampant credit growth “poses risks” to the financial system. The warning comes after banks advanced Rmb5,840bn ($855bn) of new loans in the first five months, almost triple the amount a year earlier. As for June’s lending, at $220bn it was a blockbuster as banks pumped up their quarterly loan numbers, just as they did in March (to $280bn).

An unknowable amount of this cash has ended up on the blackjack tables of Macao – or that other casino, the Shanghai Stock Exchange, where daily volumes are currently three times the five-year average. But even assuming that most has gone where intended, there are still many reasons to worry.

Early this year when we had a loan surge, it led to a Chinese equity markets rally, which fed on itself, propagating to the rest of the world. (The Indian elections were of course a factor in sustaining the current emerging markets bubble.) This February Bloomberg article alleged:

Chinese companies may be using record bank lending to invest in stocks, fueling a rally. As much as 660 billion yuan ($97 billion) may have been converted by companies into term deposits or used to buy equities.

Companies are reluctant to increase production amid a slowdown in demand and some may have diverted funds meant for expansion into the stock market to chase higher returns.


Fast growth and sustainable growth are two DIFFERENT ideas. Growth for growth's sake might not lead to the desired outcome in the long term. The state mandated growth will lead to a huge misallocation of capital, depressing your return on invested capital. Don’t confuse this rally as a beginning of a new bull market. I would argue that what we are seeing is one final bull market gasp led by casino-China. Don’t misread the tea leaves. New lows are ahead of us.

Disclosure : No Positions

]]> Fri, 17 Jul 2009 04:08:21 -0400  It is widely accepted that a big reason for the Chinese equity rally was the massive increase in banking loans and money supply. Thus when the Financial Times reported a blockbuster June loan growth, I wondered if this would lead to a July-August surge in the stock markets, the last one. Looks like we might be getting one. 


Here are two charts showing the credit and money supply surge:

 

 
 
An excerpt from the FT

China’s increasingly fretful banking regulator worries that rampant credit growth “poses risks” to the financial system. The warning comes after banks advanced Rmb5,840bn ($855bn) of new loans in the first five months, almost triple the amount a year earlier. As for June’s lending, at $220bn it was a blockbuster as banks pumped up their quarterly loan numbers, just as they did in March (to $280bn).

An unknowable amount of this cash has ended up on the blackjack tables of Macao – or that other casino, the Shanghai Stock Exchange, where daily volumes are currently three times the five-year average. But even assuming that most has gone where intended, there are still many reasons to worry.

Early this year when we had a loan surge, it led to a Chinese equity markets rally, which fed on itself, propagating to the rest of the world. (The Indian elections were of course a factor in sustaining the current emerging markets bubble.) This February Bloomberg article alleged:

Chinese companies may be using record bank lending to invest in stocks, fueling a rally. As much as 660 billion yuan ($97 billion) may have been converted by companies into term deposits or used to buy equities.

Companies are reluctant to increase production amid a slowdown in demand and some may have diverted funds meant for expansion into the stock market to chase higher returns.


Fast growth and sustainable growth are two DIFFERENT ideas. Growth for growth's sake might not lead to the desired outcome in the long term. The state mandated growth will lead to a huge misallocation of capital, depressing your return on invested capital. Don’t confuse this rally as a beginning of a new bull market. I would argue that what we are seeing is one final bull market gasp led by casino-China. Don’t misread the tea leaves. New lows are ahead of us.

Disclosure : No Positions

]]> fxi spy China Market Outlook Economy Book Review: Animal Spirits by Shiller and Akerlof http://seekingalpha.com/instablog/160728-sajal/10084-book-review-animal-spirits-by-shiller-and-akerlof?source=feed 10084  "Some books are to be tasted; others swallowed; and some to be chewed and digested." 

-Francis Bacon

Animal Spirits clearly falls under the “chewed and digested” category. Economics is in a state of crisis and there's been much debate about the myth of efficient markets and rational human beings. This book presents a framework to explain the nature of markets, and the importance of human psychology in it. Don’t be fooled by the thin appearance! Instead of a quick read, you’ll find pages which challenge conventional wisdom every step of the way.

The authors are famous economists. Mr. Akerlof won a Nobel Prize in 2001, while Robert Shiller first gained prominent recognition with his book “Irrational Exuberance”, which was published just before the stock market peak in 2000. The second edition, out in 2005, warned about the bursting of the housing bubble.

So what are animal spirits? Animal spirits are essentially thought patterns that animate people’s ideas and feelings. The book describes five different aspects of animal spirits and how they affect economic decisions – confidence, fairness, corruption, money illusion and stories. Confidence is procyclical, and is similar to the Keynes multiplier. When confidence is up, asset prices start rising. Fairness basically influences wages. The authors consider whether concerns about fairness and social expectations trump the consequences of strictly economic motivations. Money illusion refers to the fact that participants can’t seem to see through inflation. “Stories” is a term to describe ideas that become widely accepted in the society. For instance, the internet mania in the late 90s and the “house prices never go down” mantra were widely accepted “stories”.

The authors use their animal spirits theory to answer the following questions:
"Why do economies fall into depression? Why do central bankers have power over the economy? Why are there people who can’t find a job? Why is there a tradeoff between inflation and unemployment in the long run? Why is saving for the future so arbitrary? Why are financial prices and corporate investments so volatile? Why do real estate markets go through cycles? Why does poverty persist for generations amongst disadvantaged minorities? “

For instance, to explain why economies fall into depression, they show how the previous depressions in the US occurred due to fundamental changes in confidence in the economy, in the willingness to press pursuit of profit to antisocial limits, in money illusion, and in changes in the perception of economic fairness. Their discussion on the power of the central bankers is extremely relevant in today’s environment.

The book makes a compelling case that it might be time to redesign financial regulations to take account of the animal spirits that often drive markets, to make markets work more effectively, and to minimize bailout costs. The question of animal spirits is important, as “the future of any country is in the hands of the business people who decide on investments, and it is in large measure dependent on their psychology."

Some of the unresolved questions which the authors ask in conclusion are actually being addressed by the financial reforms currently being debated. While Animal Spirits may not provide a miracle-cure for our current predicament, it’s an important first-step in understanding the role of human psychology in driving our economy. On a scale of 1 to 10, where 10 would be a gastronomical delight, I’d give this one an 8. Go check it out!
]]> Fri, 26 Jun 2009 05:28:03 -0400  "Some books are to be tasted; others swallowed; and some to be chewed and digested." 

-Francis Bacon

Animal Spirits clearly falls under the “chewed and digested” category. Economics is in a state of crisis and there's been much debate about the myth of efficient markets and rational human beings. This book presents a framework to explain the nature of markets, and the importance of human psychology in it. Don’t be fooled by the thin appearance! Instead of a quick read, you’ll find pages which challenge conventional wisdom every step of the way.

The authors are famous economists. Mr. Akerlof won a Nobel Prize in 2001, while Robert Shiller first gained prominent recognition with his book “Irrational Exuberance”, which was published just before the stock market peak in 2000. The second edition, out in 2005, warned about the bursting of the housing bubble.

So what are animal spirits? Animal spirits are essentially thought patterns that animate people’s ideas and feelings. The book describes five different aspects of animal spirits and how they affect economic decisions – confidence, fairness, corruption, money illusion and stories. Confidence is procyclical, and is similar to the Keynes multiplier. When confidence is up, asset prices start rising. Fairness basically influences wages. The authors consider whether concerns about fairness and social expectations trump the consequences of strictly economic motivations. Money illusion refers to the fact that participants can’t seem to see through inflation. “Stories” is a term to describe ideas that become widely accepted in the society. For instance, the internet mania in the late 90s and the “house prices never go down” mantra were widely accepted “stories”.

The authors use their animal spirits theory to answer the following questions:
"Why do economies fall into depression? Why do central bankers have power over the economy? Why are there people who can’t find a job? Why is there a tradeoff between inflation and unemployment in the long run? Why is saving for the future so arbitrary? Why are financial prices and corporate investments so volatile? Why do real estate markets go through cycles? Why does poverty persist for generations amongst disadvantaged minorities? “

For instance, to explain why economies fall into depression, they show how the previous depressions in the US occurred due to fundamental changes in confidence in the economy, in the willingness to press pursuit of profit to antisocial limits, in money illusion, and in changes in the perception of economic fairness. Their discussion on the power of the central bankers is extremely relevant in today’s environment.

The book makes a compelling case that it might be time to redesign financial regulations to take account of the animal spirits that often drive markets, to make markets work more effectively, and to minimize bailout costs. The question of animal spirits is important, as “the future of any country is in the hands of the business people who decide on investments, and it is in large measure dependent on their psychology."

Some of the unresolved questions which the authors ask in conclusion are actually being addressed by the financial reforms currently being debated. While Animal Spirits may not provide a miracle-cure for our current predicament, it’s an important first-step in understanding the role of human psychology in driving our economy. On a scale of 1 to 10, where 10 would be a gastronomical delight, I’d give this one an 8. Go check it out!
]]> The 600 year silver bear market. http://seekingalpha.com/instablog/160728-sajal/8849-the-600-year-silver-bear-market?source=feed 8849 The book "The Ascent of Money" actually talks in depth about the discovery of the New World Potosi mines by the Spaniards. Apparently, a great metal shortage was solved by this discovery. The Spanish ‘pieces of eight’ became the global reserve currency. But obviously this did not make the Spaniards wealthy in the long term. The increase in money supply merely increased the prices of all goods and services. The period from 1540 to 1640 was the only period where annual inflation of about 2% per annum actually existed before the era of fiat currencies. Check out my earlier post on interesting quotes from the book here. 

 

Coming back to the topic of this article, here is a 600 year graph of silver prices and silver/gold ratio from 1344 to 1998 as shown in 1998 dollars.





Also included in the chart is the silver/gold ratio. Note that gold is more counter cyclical then silver. So for insurance purposes, gold is obviously the preferred asset. Looking at the chart, one might be tempted to conclude that silver looks undervalued when compared to gold based on the silver/gold ratio. But when the primary trend in prices has been down over the course of the last 600 years, what does it mean to be in a bull market? Looking at this chart, even the great 1970s bull market in silver was essentially a bull market in a longer term downtrend. (While this data series is till 1998, the general trend would not change by extending it to 2008.)

The story of silver over the past 600 years has been one of declining inflation-adjusted prices. Just something to keep in mind.

Full Disclosure: No positions

]]> Thu, 18 Jun 2009 05:39:29 -0400 The book "The Ascent of Money" actually talks in depth about the discovery of the New World Potosi mines by the Spaniards. Apparently, a great metal shortage was solved by this discovery. The Spanish ‘pieces of eight’ became the global reserve currency. But obviously this did not make the Spaniards wealthy in the long term. The increase in money supply merely increased the prices of all goods and services. The period from 1540 to 1640 was the only period where annual inflation of about 2% per annum actually existed before the era of fiat currencies. Check out my earlier post on interesting quotes from the book here. 

 

Coming back to the topic of this article, here is a 600 year graph of silver prices and silver/gold ratio from 1344 to 1998 as shown in 1998 dollars.





Also included in the chart is the silver/gold ratio. Note that gold is more counter cyclical then silver. So for insurance purposes, gold is obviously the preferred asset. Looking at the chart, one might be tempted to conclude that silver looks undervalued when compared to gold based on the silver/gold ratio. But when the primary trend in prices has been down over the course of the last 600 years, what does it mean to be in a bull market? Looking at this chart, even the great 1970s bull market in silver was essentially a bull market in a longer term downtrend. (While this data series is till 1998, the general trend would not change by extending it to 2008.)

The story of silver over the past 600 years has been one of declining inflation-adjusted prices. Just something to keep in mind.

Full Disclosure: No positions

]]> gld slv