Tag Archives: china

Mainstream contrarianism crushed

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Markets move in whatever way induces the maximum pain on the maximum number of participants. Those players who mock “mainstream” opinion, if experiencing more success than the crowd, are bound to get overconfident and to see their ranks swell at just the wrong time. Then they themselves are the mainstream, and true contrarians are to be found on the other side of their trades.

Here are ten pillars of what I consider the “mainstream contrarian” movement that just ate a big slice of humble pie:

#1 The dollar is toast, and will keep falling until hyperinflation sets in.

#2 Gold and silver’s rise cannot be stopped until the US trade and budget deficits are brought under control and the debt is reduced–that is, never.

#3 Global oil production has peaked, so oil will continue ever upwards. Oh, and we’ll bomb Iran any day now.

#4 China and India’s growth will continue unabated, and with it, their demand for commodities at any price.

#5 Financial stocks will fall without bounces. Long live SKF!

#6 CPI vastly understates inflation. Just look at M3 or shadowstats.

#7 We are experiencing a return to 1970s style stagflation.

#8 US Treasury bonds are toast.

#9 Deflation cannot happen in a fiat money regime. Bernanke told us he wouldn’t allow it.

#10 When the depression comes and the dollar becomes worthless, the sheeple will awake to the truth about their government and demand their republic back, with Ron Paul as their leader and gold as money.

 

Here’s a tip for frustrated contrarians: Join the deflationists. We’re a super-exclusive club of curmudgeons and equal opportunity shorts. We are gold bugs, but just made some righteous dough shorting gold. We know that oil has peaked, but we shorted it anyway! We know China will rule us all, but we shorted commodities. We know the US is bankrupt, but we aren’t afraid to go long the 30-year.

In a few years, we’ll be pretty popular, but then I think most of us will have moved on, maybe to the hyperinflation camp. If recent history is any guide, the ones who make the most noise (ahem, Peter Schiff) will find it hardest to make the necessary corrections and self-contradictions before the next big pivot.

Commodities bubble bursting

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If the commodities complex proves to have ultimately turned 4 weeks ago, it will be the best timing I have had on any sector short. In late May and June I bought puts on BHP, RIO, TCK, X, NUE, SU, POT, MOS and MON and also some of the SMN 2X materials short fund.

Most of those stocks are down about 20%, but their overvaluations are of true bubble proportions, so I would not be surprised by a return to 2005-level prices (50-80% lower) within 12-18 months. Heck, a lot of these stocks doubled and tripled in the last 12 months and have gone up well over 10X this decade.

Investors seem to have forgotten that you don’t pay premium multiples on cyclicals after the commodities they produce have gone up 3-15 times already, especially not at the brink of a global “slowdown.”

Yes, the China story is real. As Jim Rogers likes to say, China today is like the US in 1908 or UK in 1808. But people forget the periods of war and stagnation and deflation that punctuated those paths to riches.

And yes, crude oil production peaked in 2005 at a bit over 74 million barrels per day.  If we could have produced more since, we would have at these prices. If you don’t believe that, visit Matt Simmons’ site. But just past the peak the rate of drop is still shallow, and with today’s prices and a crumbling economy, demand will fall off a cliff. Once you get a well flowing, you keep it coming, and oil is hard to warehouse, so I would not be surprised to see $40 again (but you can bet I’ll be buying if it happens!).