Essays by James Goulding

I was asked this question and it’s a great question. Here’s the answer.

“Do you see 9/11 as a Catalyst? Or is it a Spark that doesn't catch, e.g. the Palmer Raids in the early 1920s? The market dropped and people freaked - but later went on into one monster blow off. As you know, we are a few years early for the S&H Winter to hit full-force - they typically quote 2005-2013."

I do think that 9/11 was much like the palmer raids and could easily be labeled a spark that didn't catch. I basically think that a catalyst and a spark that doesn't catch are very similar. Whatever 9/11 is going to be categorized as, I would say that the major impact it had is that the Millennial generation stopped being born shortly after 9/11. The new Artist generation, which I label the 9/11 babies, began being born shortly after.

The largest piece of evidence I can offer for this is the study that was done on the women in and around lower Manhattan that stated the babies they had, that were conceived after 9/11, are smaller in weight compared to another sample they used with babies born prior to 9/11. They think it's because of the debris in the air. Maybe. They don't know.

Furthermore, the shift in the American psyche was tectonic. This split is usually initiated at the beginning of a Winter crisis. It seems to have manifested itself about six-months after 9/11. This was due to the information that circulated on the Internet concerning every 9/11 theory, whether or not any of it is misinformation or not, it did the job of dividing the country about the government, and IRAQ solidified the division.

As far as the market drop and the comeback of the market, I'd just like to pass along the following information. I stand in the Ten-Year Treasury-Note pit in the Chicago Board of Trade. The name of the room I trade in is the Financial Room. We trade the commodities that represent most of our national debt. When the gov., sells debt, the buyers of that debt have to hedge somewhere. They hedge with us.

This room is the center of the universe as far as our national debt is concerned and it will become increasingly more visible as the crisis approaches. (If you’ve ever seen CNBC during the day, they cut to the CBOT floor with a reporter named, Rick Santelli. Behind Rick, you can see a trading floor; that’s the Financial Floor of the CBOT.)

The point is this; the market (the DOW) is behaving like the market of the 20s. However, I noticed something recently. When I advance the chart of the twenties in time, by 14 months, the similarities of this latest rally we are having (August 2003) are startling. 9/11 may have escalated the pace of the impending Spark. (The Spark wasn’t expected until 2009) It may have advanced to 2007.

To explain the above paragraph further, line up the Dow adjusted for inflation, beginning at 9/17/2001 (when the market reopened after 9/11/2001) and line it up with 12/07/1924. It’s very similar. 12/07/24 was the beginning of the last leg of the rally that started in 1901, just like the modern day rally began in 1981. The market characteristics are very similar, and not just the actual numbers but also in society.

This theory will be confirmed if the DOW keeps advancing over the next few months. If the DOW breaks below 9000, this theory is shot.

Remember, the rally from late 1924 up until the 1929 crash was huge. For many other reasons, like invention cycles and real estate cycles, we are mimicking the 1901-1929 cycle very closely. This all translates to a huge rally, before the crash. If the rally continues over the next few months and we break out to 10k-10.5k, we will head straight up to 18k over the next 20 months. We’ll peak at 35k sometime in mid to early 2008.

If the above theory fizzles, over the coming months, we’ll start the last leg of the rally in Nov 2004 and continue to 35k by mid 2008, with the break starting in Oct ‘09.

The DOW will fall to 17k from Sep ‘09 through 2014. We may even head back to 10k. But that’s it. Then we begin a very slow rally over the course of the following 9 years.

UPDATE March 13th, 2006

I was going back over the article, above, today and thought it deserved an update. From March 2006's point of view, I'm still sticking to DOW 35k. Several things have changed as far as the Spark though. Since the DOW hasn't started the major ascent, that pushes the Spark back to the 2009 area.

There's a board I post on at urbansurvival.com and there's a particular posting here: http://urbansurvival.com/discus/messages/14/221.html?1090420627

That posting is my buy signal, in May 2004. Worst case scenario you were in at 10,200. I'm still very confident we will rally to 35k. My stop price is 8,200, in the DOW. If it hits that, I'm out and I'll re-think everything.

In the next week or so I'll be putting out a more detailed update about what I think the future holds but not much has changed as far as my DOW 35k prediction. We're still headed there.

Take care,

Jim

Invention Cycles and Generational Theory

I'm always trying to predict the future. The two best indicators I've found over the last 20 years have to do with society, not economics.

My studies have led me to three authors. Two of the authors write together, Strauss and Howe. Both are generational theorists. HS Dent is an economic theorist, who basically says spending waves lead the market.

The cycles that these three men have written about are undeniable. They happen with quite regularity. Lets take a look at our current situation, August 2003, and see what these authors have to say. Strauss and Howe are predicting a ‘4th Turning’. A 4th Turning can also be described simply as ‘Winter’ (as opposed to spring, summer etc.)

Winter is not good for society. It's crisis time. The kicker is, that their generational theory names four basic generations that are reborn every 80 years or so. When the 4 generations line up in a certain age order, all hell brakes loose. Those 4 generations just lined up again, this year.[2003]

About 5 to 6 years after they line up, the spark is lit. That would put us at 2008/09. This crisis would be the 7^th in Anglo-American history beginning with The War of the Roses (1459-1487). The last crisis was 1929-1945.

HS Dent writes that the peak spending years of the boomers (archetype is Idealist) and first wave Gen-Xers peaks in 2008. (Gen-Xer's archetype is Nomad. Strauss & Howe also call this generation the 13ers)

HS Dent also writes about invention cycles. He states that we are currently in a 500-year cycle (printing press) and 80-year cycle (auto). In modern times, the transistor is the 500 year cycle and the Computer is the 80 year cycle. What’s important is this; the computer and the Internet reach 90% US household penetration is 2008. 90% penetration is never a good thing for the economy. Last major invention to do this was the auto. It reached 90% penetration in 1928. (Cell phones and broadband also hit 90% in 2008).

I see the catastrophe happening in Oct of 2009. I see two scenarios. First, there will be a stock break (DJIA) from 35k to 17k. It’ll happen much like 1929. Back then it happened over a 10-week period, September 10^th to mid-November. The FED will encourage the US Government to devalue the dollar, for a number of reason’s. [I am not going to go into them here.]

Second scenario is the Muslim oil countries pull the trigger and switch from the US Dollar to the Euro, for oil payments. That would bring us down overnight and the economic crisis would me much more severe than a stock crash.

Please visit HS Dent at www.hsdent.com and Strauss and Howe at www.lifecourse.com and www.fourthturning.com

Living on the Edge

I am standing on the edge of an abyss. I am staring out over it and the deep pit that separates what could be and what is. On one side stands a future that is orderly and the other, chaos. On one side stands David and one side Goliath.

Many, such as me, have lived on this edge for quite a long time. Sometimes falling and barely catching ourselves by the slimmest of edges, then clawing our way back. I am not on the edge of innovation nor Ekpyrosis (the death of the old order and the birth of the new).

I am on the edge that has provided for many others. These others have benefited a great deal, although immeasurably, from my being on the edge. However, these others are in for the shock of a lifetime as the past week has proven.

In this past week, the liquidity in the ten-years and the bonds all but disappeared. [2002]

The professional local is the key to deep liquid markets and the professional local barely exists anymore. If something is not done to alleviate this problem, the financial derivatives market will collapse and with it the US economy. The Mother of all devaluation’s is just sitting there; waiting to rear it’s ugly head. The slow death of the local trader at the Chicago Board of Trade is the first step towards the vanishing of liquidity. Take away the liquidity and the economy will collapse.

The local trader in the futures market provides a service. They are taking the opposite side of a trade in exchange for the edge. The local takes the other side of a customer order and is usually out of that trade in seconds. The local doesn’t trade long-term; he is flat, in most cases by the closing bell. He or she accepts the risk of blowing out everyday. They accept the physical punishment the trading pits dish out. They also accept trading out in the open, as in open-out-cry. If he or she is attempting to do anything under-handed they will be reprimanded in any of several ways. Perhaps through the CFTC, the CBOT or at the hands of their pit-trading colleagues.

By definition, the local is a professional trader. They do not look for a certain percentage return on their money. They expect to make a living trading. The percentage game is left up to the customer trading for hedge funds, etc.

The current trading system in the CBOT is breaking down. Yet, most people just see the internal trading volume going up, with little attention being given to the liquidity. Why isn’t the question being asked, “Who is providing that liquidity? Can they provide liquidity in a crisis, as they did in 1987?”

Liquidity is crucial and must remain for the long-term. The trading in the financials this prior week was just a glimpse into what lies ahead. The market volatility had nothing to do with active markets or news driven markets. The volatility was there because the professional local was not

In the 23-years that I have been on the financial floor and watched the financial markets, I have never seen this type of market. No one has. This is because the market has never been structured as it is now.

The oldest exchange in the United States calls a local by a different name, a specialist. On that exchange the local does have several different jobs, yet the theme of an orderly market is the same.

The Philadelphia Stock Exchange defines a specialist this way. “Specialist: A participant of the exchange who trades for their firm's or their own account and is responsible for maintaining a fair and orderly market in whatever issue has been allocated to them by providing bid and ask markets. They are also responsible for orders entrusted to them for execution.”

Personally, I don’t exactly agree with the set-up of the NYSE and the 443 specialists working for 7 firms, but that’s not the point. The point is the role that they provide in liquidity and orderly markets.

As described by the New York Stock Exchange.

“[A] Specialist's responsibility: Specialists must maintain a fair, competitive, orderly and efficient market. This means that all customer orders have an equal opportunity to interact and receive the best price. It also means that once auction trading begins, a customer should be able to buy or sell a reasonable amount of stock close to the last sale. Therefore, a specialist works to avoid large or unreasonable price variations between consecutive sales. The results: almost 98% of all trades take place at 1/8th point or less from the last sale. The auction takes place at the specialist's post where the stocks are traded. This single location -- or point of sale -- combined with rules of trading, guarantees maximum order exposure, interaction and market liquidity.”

The CME writes. “Locals: Exchange members who trade for their own account and/or fill orders for customers and whose activities provide market liquidity.”

The CBOT’s definition of a local is: Not available. We do not have a definition in our glossary. Kinda makes you think.

With that omission aside, the other exchanges I quoted from are saying the same thing. The local provides liquidity so the markets stay orderly. I contend that the bonds and 10-year notes on the financial floor of the CBOT are anything but orderly and the liquidity is now becoming questionable. The main ingredient is gone for the first time since 1848.

What does it cost the firms to have locals in the pits? Why do these firms want the locals and brokers out of the pits?

We know that they have screamed about the cost of doing business on the floor. What are the costs anyways? Are they ruining the likes of Morgan Stanley, Citi, UBS, etc? A peak at their annual reports says that isn’t the case. Well, then what is the problem?

If I worked at one of the brokerage houses I’d be a bit worried. Everything has worked fine until now. Profits rose and business increased. This has not stopped them from trying to secure the order flow by any means. This has not stopped them from taking the business away from the independent traders.

If I worked at one of the brokerage houses I’d be sounding the fire alarm. I’d say, “We are all in severe trouble and I think we are the ones creating the problem.”

Shall we take a peak into their balance sheets and see what is happening? Are the independent traders ruining their businesses? No, they are not. They are/where providing a very valuable service.

The concentration of derivatives among the big banks, according to the Office of the Comptroller of the Currency, reported that the total value of derivatives held by U.S. commercial banks rose $5.3 trillion to $61.4 trillion in the first quarter from the fourth quarter's $56.1 trillion. The OCC noted that in the first quarter, the seven largest U.S. banks held 96% of outstanding derivatives contracts by volume.

That’s in this country.

The global over-the-counter (OTC) derivatives market has grown to nearly $142 trillion according to the Bank for International Settlements.

Now what is the cost of hedging in a deep-liquid market? Or, for that matter, the cost of just outright trading. I’ll site the Mann Study.

“Sources of Market Making Profits: Man Does Not Live by Spread Alone”. By, Steven Manaster, Virginia Tech and Steven C. Mann, Texas Christian University February 1999.

“Using directly observed trade direction we find that customers’ total trading costs were only $100 million: $38 million in execution costs and $62 million in timing losses.

Market Makers are the Informed Traders.

Contrary to most theoretical predictions, we find that market makers profit both from timing and execution. This finding is consistent and conclusive across all pits in our sample and for nearly every individual trader. For the first six months of 1992 our data show that Chicago Mercantile Exchange market makers’ trading revenues totaled $130 million. Of the total revenue, only $45 million (34 percent) was due to execution profits. These execution profits occurred within one minute of trade execution. The remaining $85 million was due to favorable timing. From this evidence we conclude that market makers have better information regarding short-term price movements than other market participants.

These [two] empirical observations demonstrate that futures market floor traders can have both an execution advantage and a timing advantage relative to other market participants. The data show that they are willing to reduce, or eliminate, the execution advantage to exploit the information advantage.”

[End paper.]

Ya’ll better read that paper closely. It is stating that the FLOOR local is better informed. They can and do make money, while providing the MUCH NEEDED LIQUIDITY. That’s why the locals kept coming to the markets in the 80’s and 90’s.

This thing we call the Futures Market is really a delicate eco-system that needs every part of the system to work. Take away one aspect and it all falls apart.

It is impossible to create a whole new local market by inducting new blood, tossing them in front of a screen, placing a few commodity books in their hands and holding weekly strategy meetings and then call them locals. They are not locals, they are day traders, and day trading does not work.

The new breed of video trader will not be there when the market is trying to absorb a bank or a brokerage house’s orders when they are trying to hedge TRILLIONS of dollars in derivatives. Sure they’ll be there when the markets are rotating. But where were they last week when everyone suddenly figured out that the Fed had to sell 120 billion in notes and bonds over the next two quarters? They ran for the hills and customers could not get orders filled. Ask Harold Lavender what happened on the close (Thursday) with a spread order in the Ten-Years. This is just the beginning, if something isn’t done.

The powers that be, of which I am not one, had best wake up to a coming disaster. That disaster can be averted if they act now by reinstating the local trader on the floor of the financial room. If they don’t, there will be no liquidity to help the 142 trillion dollar derivative market when they need to hedge. And they will need to hedge, in a big way.

My question to you is, how are they going to do that? Please do not hand me the BUND argument. “There’s plenty of liquidity in the BUND, it works fine!” The bonds and notes that our government sells are not the German bund; they are US bonds and notes. I’ve got news for you anyways the Germans have serious problems.

Please do not give me the S&P argument. “The S&P mini’s are doing fine!" S&P’s are not bonds and notes. The banks will not be able to hedge in that market when it is hitting the fan, so to speak.

Think back to 1987 and read the countless number of reports out there that state how our market saved the NYSE from a catastrophic melt down. This is just one example.

Bite the bullet now before we are in to deep to turn around. Take the bonds and the notes off of the screen and replace them with a mini contract. This is a start.

There are many more things that can be done. I will not list them here because most of them have already been listed on the Member Net board.

Why is it that everyone always waits for the crisis to come when there are so many signs telling you to act preventatively? Take advantage of the greatest resource since the invention of the printing press, start reading for yourself, and stop the crisis before it happens. At least stop it from being catastrophic.

Lastly, I did not write this paper to get into debates over details. This paper was written to alert you of a problem. A problem that can be fixed. I do not wish to engage in debates over non-relevant issues that simply deter from the coming crisis. Said in a nutshell, after reading all that I have read over the last 2 years, nothing can convince me that the crisis isn’t coming so don’t waste your time. Instead, read. Act.

References

“Sources of Market Making Profits: Man Does Not Live by Spread Alone”.

Steven Manaster, Virginia Tech and Steven C. Mann, Texas Christian University, February 1999. (Reprinted with permission)

http://www.phlx.com

http://www.nyse.com

http://www.cme.com

http://www.federalreserve.gov/boarddocs/rptcongress/

http://www.federalreserve.gov/boarddocs/RptCongress/annual02/ar02.pdf

Social Movements and Secular Crisis

[Written Monday, March 01, 2004]

I offer some insight into the world of social behavior as viewed through the works of a Yale and Harvard grad., Neil Howe [i] and William Strauss [ii].

I’ve used their work for years for everything from marketing to predicting the markets to assisting in understanding the U.S. from a sociological view.

I offer this writing in hope that it will give you some peace while chaos swirls amongst us. At the end of the article you’ll find a smattering of web sites if you’d like to click around for some more information or perhaps buy one of Strauss and Howe’s books.

Social Movements and Secular Crisis

Strauss and Howe write that there are two types of social movements, ‘Secular crisis’ [iii] and ‘Spiritual awakenings’ [iv]. We are in a secular crisis now and that is the focus of this paper. Secular crisis is defined as, “…when society focuses on reordering the outer world of institutions and public behavior”.[v] Pertaining to the frequency of social movements, “Social movements do not arrive at random. For example, a secular crisis and a spiritual awakening never occur back to back. Nor does half a century ever pass without a social movement of either type. Instead, social movements arrive on a rather regular schedule.”[vi]

A social movement lasts about a decade. They arrive in time intervals roughly separated by two phases of life (approximately 40 to 45 years), and they alternate in type between secular and social. [vii] (For further reading of the timing of social movements in non-traditional societies like the U.S., read ‘Appendix A’, in “Generations”.)

What makes 2003 so interesting is that we are coming to the end of the birthing of the civic-minded Millennials (b.1981-2003) and the beginning of the birth of a new generation of ‘Adapitives’. The new generation is very similar to the ‘Silent’ generation, b. 1925-1942, the ‘Progressive’ generation, b. 1843-1859, the ‘Compromise’ generation, b. 1767-1791 and the earliest ‘Adaptive’ generation in U.S. history, the ‘Enlightenment’ generation, b. 1648-1673. [viii]

This year, 2003, is of massive social transition.

To understand why, we must first look at the five generational archetypes alive today and what role they play.

In 2003, there are five generations alive. The Millennials, b. 1982-2003, the 13ers (Gen-X), b. 1961-1980 [ix], The Baby Boom, b. 1943-1960, the Silent, b. 1925-1942 the G.I., b. 1901-1924 and finally the Lost, b. 1883-1900, (there were 68,000 people alive over the age of 100 in the 2000 census). [x]

Let’s look at the collective ages of the generations alive today.

Millennials – 0 to 20 (Youth)

Gen-x – 21 to 42 (Rising)

Boomers – 43 to 60 (Midlife)

Silent – 61 to 78 (Elder)

GI – 79 to 101

Lost – 102 to eldest living.

Let’s look at the definitions or the descriptors of the each of the five generations. These definitions are in very broad terms. They try to define the role each generation’s plays. Especially in the coming crisis.

Millennials – Civic, Dominant. Central role is Dependence (growing, learning, accepting, protection and nurture, avoiding, harm, acquiring, values).

Gen-x – Reactive, Recessive. Central role is Activity (working, starting families, and livelihoods, serving institutions, testing values).

Boomers – Idealist Dominant. Central role is Leadership (parenting, teaching, directing institutions, using values).

Silent – Adaptive, Recessive. Central role is Stewardship (supervising, mentoring, channeling endowments, passing on values.

GI – Civic, Dominant. (Strauss and Howe do not elaborate on the ages reached after 87.)

Lost – Reactive, Recessive. (Strauss and Howe do not elaborate on the ages reached after 87.)

Now lets take a look at some other eras in American history that mirror the time we are in at this moment, in 2003. Strauss and Howe define these eras as generational constellations. 1924, 1855, 1766 and 1664.[xi]

(For further reading on the Civil War era check the footnote. That era interrupted an entire generation. [xii])

“At all four of these moments, Americans perceived their social life to be fragmenting into centrifugal and uncontrollable wildness.” [xiii]

The above statement refers to the years, 1924, 1855, 1766,1664 and now, 2003. That quote was written in 1990. I find it amazingly accurate pertaining to the mood of the nation at this precise moment in time. Furthermore, “Looking up, 13ers will sense among the older generation an utter impracticality, an inability to see the world for what it really is.” [xiv]

As a 13er, I can state unequivocally, that statement is true. 13er’s love reality. This is one reason reality shows are so big. There core viewer is the 13er’s (Gen-X). (To read more about Gen-X, see page 313 in Generations. It’s very accurate)

This brings us to 2003.

Strauss and Howe wrote an article about the coming crisis that can be read here, http://www.lcourse.com/media/commentary/011029.html . It was written about the events of September 11^th, 2001. However, I do not believe that was the crisis that Strauss and Howe were predicting in the book Generations. In Generations, they state that the crisis should take place somewhere closer to 2020.

Their research shows, with great accuracy, that these things can be predicted. I think this last year has told us that although 9/11 was tragic and changed ten’s of thousands of people’s lives; it was not similar to the past crisis’ that occurred at a secular crisis. (Please excuse the callous way this is written. I mean no disrespect to those directly affected by 9/11.)

If you read the web page I pasted in above, you will see that things are not panning out the way ‘society is supposed to behave’ during a secular crisis. As we were all gung ho to kick the Taliban’s butt after 9-11, the mood has decisively changed as Iraq entered the picture. We are not coalescing like we should. This tells me that, unfortunately, 9/11 was not the worst to come.

Moreover, when I read the newspapers from 1923-24, I see similar things in society that are taking place today. Issues like immigration (congress practically closed the borders), and self-help (Carnegie and Peale) were at the forefront of society. Society demanded we take away civil liberties, like booze. Today we are taking away those liberties via the ‘Patriot Act’, etc. There were scandals on Wall Street that took place in 1921-22. Over the last three years we have also seen our stock market cycle mirror 1920, 21 and 22. The S&P rubber & tire index fell about 70% and the S&P automobile index fell 70% (their NASDAQ). General Motors fell 75% (our Microsoft, Cisco and Oracle) . (For more on these statistics, visit www.hsdent.com )

“As America moves into the ensuing crisis era, long-deferred secular problems can be expected to reemerge with fearsome immediacy.” [xv]

Strauss and Howe are speaking of the beginning of or the dawn of, the crisis era. That’s now. This era is slated to last until 2025.

“Moving further ahead, perhaps halfway into the crisis era, history suggests the mood will calm somewhat.” [xvi]

This speaks of the coming bull market. As we saw in 1924-1929. Things mellowed and everything calmed down. Then it hit the fan, didn’t it.

The point being, nuclear annihilation isn’t in America’s cards. Nor is a mass germ terrorist attack. Can I state this as absolute? Of course not. I have trouble predicting where the Bonds are going in the next five minutes. However I do not stop trying to predict. It is in all of our nature. We are traders and traders try to predict the future everyday.

Strauss and Howe predict the coming crisis lasting from 2013 to 2024 in one case and in another they predict it from 2020 to 2029 saying that in either case, the early 20’s will be tough. [xvii]

There’s so much I left out. Trying to write a concise, short paper on a book and many web sites is daunting. However, I think I’ve stated the point/theory. The catastrophe is far off. Regardless of President Bush, Donald Rumsfeld, Colin Powell, Osama Bin Laden, Saddam Hussein, Pakistan, India, North Korea or ‘insert-a-name that you feel is a threat’.

Further Reading

http://www.hsdent.com/

http://www.fourthturning.com/html/about_william_strauss.html

http://www.fourthturning.com/html/about_neil_howe.html

http://www.fourthturning.com

References

[i] http://www.fourthturning.com/html/about_william_strauss.html

[ii] http://www.fourthturning.com/html/about_neil_howe.html

[iii] “Generations-The History of America’s Future 1584-2069” p.71

[iv] ibid., p.71.

[v] ibid., p.71.

[vi] ibid., p.71.

[vii] ibid., p.71.

[viii] All names and years referenced, “Generations” p.97 pullout.

[ix] If you’d like to know why 1961 is the beginning of Gen-X and not 1965, then you must read the book Generations. It’s to complicated to get into here. I would agree with Strauss and Howe’s theory that the Baby Boom ended in 1960 and NOT 1964 as so many have written before. I will say this though, I was born in 1961 and I have nothing in common with the Boomers.

[x] http://enquirer.com/editions/2001/07/11/loc_numbers_of_super.html

[xi] “Generations-The History of America’s Future 1584-2069”, p.380

[xii] ibid., p.97. (pullout)

[xiii] ibid., p.380.

[xiv] ibid., p.381.

[xv] ibid., p.381.

[xvi] ibid., p.381.

[xvii] ibid., pp.,381-382

Monday, March 01, 2004

The 1920/21 Crash and The 2000/01 Crash; A Comparison

[ 1/09/2004, updated, 5/09/2004 ]

There are several different reasons for the crash in 1920-21. If you were to look in-depth into the crash of 1920-21, you'd find dozens of explanations. All of them interconnect in someway. Most of them support whatever theory the author is trying to get across.

I was focusing on the invention cycle. The modern day white papers and books I read all had one common element. The computer industry cycle and the auto cycle are very similar. They didn't all agree on the years the cycles began and ended. Or, they differed on this or that. What I wanted was, what was the main economic impact that sent us DOW.

What I found was land.

You must look past the economic theorists to get to this conclusion also. The first inkling I got, that it was about land was actually from a book I read, about ten-years ago, by the John Robbins called “Diet for a New America”. (He’s the 'Baskin-Robins' heir. http://www.foodrevolution.org/market/products1.htm).

In his book he identified what it took to keep the livestock in the US running as an industry. The startling fact was, over 50% of the farming land is needed to feed the livestock. I'm not talking about the place were they roam; I'm talking about the food that needs to be raised to feed them. 50% of all farmland used to grow agri-product are used to feed the animals. This astounded me.

However, the fact I hadn’t looked at was the land that was freed up because of the demise of the Horse. Millions and millions of acres where now open to produce food. In and around 1920, 8,000,000 horses and mules were eliminated and 25,000,000 acres of land was freed. This is directly due to the auto.

Now, let’s add that scenario (the demise of horses as transportation) to the severe export problem the US was having due to the end of WWI and the economy cascaded into a severe, but short lived crisis.

However, there were other problems in the US. Many people think the only reason the US economy hit the skids in 1920 was because WWI ended. What these people are saying is the economy crashed because of the loss of the export business in the US. True. Partially.

Demand at home also dropped in a big way also. Human consumption fell-off here for a variety of reason’s.

1) A sedimentary lifestyle began to set in, because of:

a. warmer buildings, were now becoming the norm due to advances in heating

b. the frickin Transcendental generation (idealists!!) began there cyclical preaching about eating better. The consumption of cereal, meat, animal fat, and other basic staples declined. Vitamin healthy foods were in. Veggies, Fruits and Dairy. ALL OF THEM TAKE MUCH LESS FARM LAND TO PRODUCE.

c. reclamation projects decimated the farming industry also

d. increased yields were taking off due to biological and technological advances

e. disease resistant food was increasing yield also

f. improvement in animal breeding

g. automated systems of fertilization and spraying

I would also add that the invention of the auto had another important effect on farms. That was the increased production of farm equipment because of the advances made in the engine building process and actual manufacturing productivity. (think assembly line)

In 1787, over 95% of the population was involved in producing food supplies for the country. By 1940, it was less than 25%. Between 1850 and 1940 over 30 million people were released from the agri business due to the advancement in farming technology. But it showed it affects severely in 1920-21 because of the advances made in the auto industry. From the quicker building of the equipment and more specifically to the faster movement of food because of trucks.

Trucks were the ‘last mile’ of delivery needed to enhance the productivity of the food chain. There was now a way to get the food from the trains to the stores in highly increased speed and efficiency. This overwhelmed the market with product and agri prices crash, hence land prices crashed.

Here’s what happened to the price of a few commodities:

December 1919, wheat was $2.15 bu.
December 1920, wheat was $1.44 bu.
Corn went for $1.25 to .68
Cotton from .36 to .14

Furthermore, thanks to our wonderful government, many of the farmers were in debt in a big way. The government encouraged them to buy more and more land from 1914 to 1918. The only way the farmer could afford to buy the land was to borrow. Land prices were going up rapidly at that time because Europe was demanding more and more food, due to WWI. Then, when the US entered the war in 1917, prices went up even further. More people bought at these ridiculous levels. By 1921, the farmers had nowhere to sell their food because of the facts I spoke of earlier.

Big farming businesses came in and bought up huge amounts of foreclosed farms during this period. This is evident from the size of the average farm in the US during this period. In 1920, the average size was 138 acres. By 1940 it was 190 and that was in the south, where there were numerous small cotton farms. If you look at the grain belt the size went from 190 to 258.

The number of farm owners fell drastically also. From 1910-1920 there was an increase of 87,000 farms. 1920-1930 a DECREASE of 159,000 and 1930-1940 another DECREASE of 192,000.

The crisis was not immediately evident after WWI. Europe still imported large amounts of food. This can be seen in the export figures from 1914-1920. They are pretty evenly spread throughout the years: Meat, $143mm to $353mm; Wheat, $88mm to $298mm and Cotton, $537mm to $767mm.

Europe needed these products to rebuild immediately after the war. There was a scarcity of these products in Europe, hence prices went up further after the war concluded. The increase in prices paid for food translated into the farmers in the US getting more money for their product. No one thought it would end. You can almost here them trying to rationalize paying higher and higher prices for land back in the US. “The war ended and Europe is still buying! It wasn’t the war that made the grain prices go up! This will continue forever!”

But the advancements in technology, particularly due to the auto industry set everything in motion. The market for grain products crashed. Land prices with it. But, how did we recover?

The farming industry had three distinct phases in the US.

1) 1830-1860 advancements in machinery although the power was horse and mule.

2) 1860-1914 More mechanical advances in machinery as far as how much farming could be done in one pass of the field. The adoption of horses alone, pulling the some of the machinery also.

3) 1914 saw the power machinery enter the industry.

By 1922, with the massive decline in internal buying of farm products and exports of agri products a new outlet was needed for the agri products and it was found. This is one factor for the recover, the other being the rise of the auto from 50% US household penetration in 1921 to 90% by 1928.

The new industry that agri products found was the chemical industry. Cereal grain found its way to the textile industry for sizing and finishing. Corn found starch, alcohol, glucose, and wallboard. Soybeans found the auto industry in huge amounts. Also, soybeans went to adhesives, plastics, paint, and varnish. From animal carcass came leather, glue and gelatin, soap, greases, glycerin and fertilizers. Skim milk became a hot item for preparation of wallpaper, paints, glue, and karolith was used in making combs, brushes, and buttons.

Flax found its way to carpets and cotton into the exploding clothing industry. Cotton also began being used in the making of cordage, auto tires, explosives, bags, paper, and stuffing. There’s more, but I think you get the point.

In conclusion, it is obvious that if we look into the 1920-21 crash in-depth a pattern emerges that shows the auto as the main cause of crisis.

[1/09/2004, updated, 5/09/2004]

Debt

[Written 3/2005; Updated 8/2006 & May 2007]

The financial problems I foresee in the future have everything to do with debt.

Many people hear or read about financial disaster predictions and think that it can’t affect them because they don’t invest. This is a very big mistake if you have any debt. Debt is an investment. My theory of the coming crash is based on debt.

The problem people don’t recognize is that they will not have the ability to pay off their debt when a crisis of magnitude hits. One reason people don’t realize this fact, is that they’ve never experienced a financial crisis in their lifetime. That’s exactly the problem with these types of crisis’; they only come every 85 years or so. That time frame is basically a lifetime, so everyone only experiences it once and they are at all different age locations. There are a few who experience it twice. Once in childhood and once in elderhood. By the time a person reaches elderhood they can’t possibly fathom that it’s going to happen again. “Everything’s different now,” they state. But, everything isn’t different as research surely shows. In today’s society those people are the Silent Generation, b1925-1943.

Another factor about debt that never comes to mind is that debt is precisely the reason the depression deepened after the 1929 crash. Many people think it was the stock market crash that caused the great depression. It wasn’t the spark that ignited the depression it was a catalyst.

The reason the economy slipped into depression was bank failures. The first failure didn’t happen until December of 1930 and the economy really wasn’t that bad up until December 1930. However, when the Brooklyn, New York, Bank of the United States failed, in December of 1930, it started an unprecedented cascade of failures.

In 1929, there were 24,970 commercial banks. In 1933, there were only 14,207. The number of banks in the Federal Reserve System fell from 8,707, in 1929 to 5,606, in 1933.

That’s a 27.5 percent failure rate. However, the non-member banks were the hardest hit. There were 16,263, in 1929 and 8,601, by 1933. That’s a 45 percent failure rate.

Between 1929 and 1933 there were 9,765 bank failures. Most occurring after December 1930. But why did they fail?

The answer is simple. People couldn’t pay their mortgages because they were either laid-off or their wages were cut. They couldn’t keep up the mortgage payments and they were soon evicted, as the banks took ownership of the homes. However, the banks couldn’t sell the properties because there were no buyers. The bank failures caused the depression.

The history books tell you that the brokerage houses were the cause because they were letting people borrow money to trade the market. These people would only have to put up 10 cents on the dollar. Then when the market crashed and the brokerage houses asked for the loans to be paid, no one could pay so the brokerage houses liquidated their positions. And that’s what the history books say caused the depression. Not!

What the books don’t say is that from 1919 to 1929 there was an unprecedented amount of lending going on that had nothing to do with the stock market. Specifically, people were buying all the new inventions that were created in the 20s, on time-payments.

Electricity enabled a zillion new products to hit the market including radio, refrigerators, ovens, dryers, washers, fans, etc. Many industries copied Henry Ford’s ‘borrow on time’ finance scheme. That scheme was a major contributing factor to the depression, along with the mortgages not borrowing to buy stocks. The numbers aren’t even comparable.

Any person today would say, “Things are different now. They have mechanisms in place that won’t allow the 1930s to repeat”.

Well, I’m here to tell you thats simply wrong and if you believe it you’re misinformed. What the average person doesn’t see, written in the press, is that this country is over 50 trillion in debt. The average person reads that we are 7 trillion in debt, which is the National Debt. Yes, that figure is accurate. But, what about mortgage debt, credit card debt, state debt, under funded pensions, under funded social security, under funded Medicare, corporate debt, GSE debt, and the US Governments ‘off the books’ debt?

Add them up and sums to over 50 trillion which is 5-times the 2005 Gross Domestic Product (GDP). The interest payments alone are estimated at 2.5 trillion dollars a year. That’s 25% of the GDP. If the GDP goes down by the same amount it did in the 1930s, 29%, the debt service will become 35% of GDP. That amount doesn’t include the new debt issued between now (2005) and 2010. If you add that new debt into our equation then we are talking about 45% of the GDP, going to pay debt service. That’s economically impossible to sustain.

If this scenario pans out the government would have no choice but to devalue the debt via the US dollar. The result would mean millions of people out of work and I guarantee the rest of the world would make a run on the Euro and Swiss currency. If that happens, the 1930s are going to look like a picnic.

Worse, the US Dollar is a fiat currency backed by nothing. If you think your bank account is safe because of the FDIC you’re sorely mistaken. The FDIC money comes from the member banks of the Federal Reserve, not the government. The Fed just acts as an agent to collect the money from the banks to pay-off the people who lost money from a bank failure. When those bank members fail who is going to pay you? Not the government. They’ll be dealing with two major problems concerning debt; the national debt and the biggest reason we’ll all be up a creek, the so called ‘Government Sponsored Agencies’ who issue mortgages. Both debts are 14 trillion combined.

Did you know that the average person put down 18% on a new mortgage in 1983? Today it’s less than 3% because of these government-sponsored agencies (GSE). And, they’re creating new derivatives every day to make it easier to borrow. A few of these agencies are in the news lately, under the names Fannie Mae and Freddie Mac. Why are they in the news? They’ve been lying about their earnings. And, these two entities make Enron look like a five-and-dime. No one is being held accountable and the failure of these entities alone would cause a depression.

Now, what happens if we have a crisis and people can’t pay their mortgages? Those agencies will fail and no one has the money to bail them out. There are no contingency plans in place. Think about it, you’re dealing with the US government and in their 229-year history they’ve always waited for a crisis to happen before acting.

Take care,

jim goulding

www.jamesgoulding.com

Written 3/2005; Updated 8/2006 & May 2007

Concerning the US Dollar

The precipitation of the Crisis era will probably be the US Dollar. I wrote about this in my book Winter is Coming. But, the writing was mainly geared towards the Euro, not the US Dollar. Since writing that book, in 2003, I’ve learned a few things.

· One of the big reasons the US economy keeps chugging along is because of petrodollars. If you want oil, you need to pay in US Dollars. That’s one of the sweet deals we cut at the end of WWII because… well…because we could. We were the superpower.

· To find the countries that are on the axis of evil, you need not listen to Bush, just watch for who is threatening to change their current way of paying for oil. They want to switch from dollars to euros. North Korea, Iraq, Iran.

North Korea already switched a percentage, Iran is opening a Euro denominated Oil Bourse, and Iraq committed the ultimate error, they completely switched to Euros for oil…. just prior to the US invading them. Mmmm.

Want to know when Hugo Chevas really in trouble with the US? Listen for his banter about switching to the Euro. It’s the only time he gets a response out of our government.

So, let’s try and put this together. I think the crisis, this Winter era, will be economic.

The US Dollar holds the key. For instance, no civilization in the history of mankind has kept a currency much longer when that currency hits 1% of its original value. Most civilizations begin borrowing against their currency heavily when it hits 10% of its original value.

The US Dollar hit 10% of its original value in 1984. Precisely when we started escalating borrowing. The US Dollar is pegged to hit 1% of its original value in 2008/09.

It’s worth 4.3 % today.

Then there’s the debt. It’s been mathematically proven that we can never pay off the US debt. So, there’s only one solution, abandon the US Dollar. That way, the US is free and clear; sans the ramifications.

What to-do, what to do? Mmmmmmmmm.
I’ve put a lot of thought and research into this subject and am slowly reaching some conclusions. I’m not sold on them yet, but am formulating some ideas.

My early thoughts are foreign currencies. Mainly the Swiss franc and the Euro. I guess what’s mystifying me in these early stages, is the movement of the Swiss Franc in the 20s and the 30s. While going back and studying the currency I was surprised to see that it barely budged in late 1929. Just after the first crash it closed at 0.1933, on 10/18/1929 and closed at 0.1937 at the end of 10/1929.

It closed on 12/27/1929 at 0.1945.

For that matter, the following year, it barely budged.

Well, it must have moved in January 1931! (I thought). The first real big bank collapse came 12/30/1930. Not! It closed on 12/30/1930 at 0.1951. By the end of January 1931 it was 0.1951. What’s up with that? It didn’t move!

By the end of 1931? It was trading 0.1950. zzzzzzzzzzzzzzz.

Confusing. I’d have expected it to do the opposite. Thankfully, we have Strauss and Howe. One of the points they've hammered home about the sparks that begin 4Ts, is that the majority of the public never really thinks of them as sparks. This makes sense. At the time of a crisis everyone believes they're invincible.

So, when did the currency turn around? Thankfully it turned around at my second choice for a rally; the bottom of the US Financial Crisis, 1933.

Sounds strange, but it makes sense. Here’s why:
I trade markets for a living. Namely US Treasuries. Currencies and commodity indexes too. The markets always do exactly what people least expect. The evidence is endless. Having stood in the Bond Pit at the Chicago Board of Trade from 1980-1995 and then again from 2001-2003, I’ve seen and heard most of the evidence. Thankfully I’ve learned. That’s why it drives people nuts that I’m calling for Dow 35,000. It drives them crazy!

Anyways, here’s what happened to the Swiss Franc currency in 1933.

01/1933 it was at 0.1925

By April, the financial crisis in the US really heated up and the currency took-off to the upside. It closed 04/28/1933 at 0.2145. That’s a big rally. By December it was 0.3030.

By September 1936 it was at 0.3246. Then it appears it took a very large dive in October to 0.2306. I’m wondering if there was a devaluation of some kind? I’ll have to look it up.

The markets closed down for the war beginning 06/13/1941 and the Swissy was at 0.2320 It started trading again in February 1946. It closed at 0.2336.

Well, that’s all for now. Gotta go do some more research. BTW, the best book I’ve read on surviving the crash is by Robert Prechter, “Conquer the Crash”.

Take Care,

Jim Goulding

www.jamesgoulding.com

Originally written: 06/22/2006

Updated: 05/06/2007

Social Security and the IOUs

This paper was written in response to a person, who posted on a bulletin web board, that we didn’t have to worry about the Social Security bonds that have been issued against money that was supposed to be put into an untouchable account by our politicians, in Washington. The ‘poster’ believes the bonds are as good as gold. They’re not.

09/02/2004

Rick,

I would disagree with this comment. There are IOU’s in the trust fund that are backed by US Government bonds. Those bonds are backed by the ‘full faith and credit’ of the US Gov. Full faith and credit is the taxing power of the Government.

If we are hit with an economic crisis in that matches or comes close to a crisis such as 1929 era, then those IOU’s are devalued. How much? No one knows but an educated guess would be 75%. (I’ve been trading bonds since 1984).

With the US currency worth 5.3 cents of it’s original value, we would have no choice, in the next economic crisis, but to abandon the US Dollar. There will be calls for a devaluation of the currency, but I don’t think that’ll float with the new Euro being so new and so strong.

There’s a lot of ‘ifs’ in that scenario. Maybe we don’t have an economic crisis? What then? Will the IOU’s still be worth what they are today or say close to today’s value? Yes they would be. The caveat is that since the government borrowed our trust fund and lent it out, they must pay interest on that debt and that debt service is growing daily just like the national debt. They will have to continue to sell more bonds to pay for the debt service and the Ponzi scheme starts all over. Similar to what they are doing now with the national debt. On an aside, it amazes me that no one mentions that the 50 states are collectively in debt more than the feds. (About 8 trillion). And, those states are picking up the pace in borrowing. I know, I trade their debt.

One little fact that I can’t put aside is that never in the history of mankind has there been a currency that has not been abandon when its original value hits about 1 cent. The US Dollar is projected to do just that about 2009.

It sure would get the government and the states off the hook with all those bonds. By abandoning the currency attempting to devalue it in any way it reduces it’s debt owed very quickly. Most of the debt owed would disappear including our trust fund. Not to mention the economic havoc it would cause the seven biggest US banks. They own 96% if the 142 trillion debt outstanding in the world right now. Yikes.

The moral is, ‘the easiest way for a government to reduce its debt is to devalue their currency. ‘

I’ll leave you with this quote by Rep. Mark Sanford

"Foresight is something folks in Washington could use right about now. At the beginning of April, the Social Security trustees told Americans that the nation's retirement system would go bankrupt about 24 months later than we had expected. According to their calculations, the wolf will not be at the door until early next century.

"In 1998, Social Security ran a $100 billion surplus. Washington spent $30 billion, and the remaining $70 billion paid down existing federal debt. Not a penny was used to pay for Social Security reform."

Take care,

jim goulding

www.jamesgoulding.com

09/02/2004

The 1929 Crash and a Debt Society

This article covers the 1929 Stock Market Crash and the consequences that followed from being a debt society. A very similar senario exists today (9/2005).

The crash itself took 13 weeks to manifest. It really began in September and truly ended on November 10th. But from our point of view (which comes from the history books) there was only one big crash, which took place in October 1933. From the viewpoint of the people alive at the time, they knew something happened but really stayed in denial up until the first bank failure in December of 1930, a full year after the crash. Even as bank after bank failed into early 1931, they still thought it would be ok. The administration spews out bullshit press release after release trying to calm the fears of the people. Many buy it, because to acknowledge the problem would be too overwhelming. Prices are kept artificially high by trying to keep wages the same as they were before the crash. But, no one is buying merchandise like they were before the crash. Inventories keep growing until something has to give.

The layoffs begin slowly. This is where the problem begins. Real estate taxes are assessed ever 3 years. It takes time for the actual prices of homes to decline and be openly acknowledged by everyone. But you still have to pay your RE taxes as if your home was worth its value before the crash. And you are out of a job. Your mortgage still exists. You look and look for a job. You begin to get behind in your payments. One month, two months. Then, multiply this by a few million and you are taking massive amounts of money out if the system, exponentially. If you understand how the banking system works you begin to understand that if the cash flow becomes interrupted from the customers, passed a certain percentage of overall loans, then the system teeters. This is the evil of a Central Banking System (fiat money) which we are part of.

Example: In a fiat system when a bank receives a deposit of $5,000, that deposit increases money supply by about $33,000 (depending on the reserve requirements at the time). It works the opposite way also. When people can’t pay their mortgages it stops the deposits at the bank which in-turn stops lending, which stops growth and crushes small business, which is the biggest employer. Vicious cycle. And, it happens very slowly.

This whole time, people are trying to stay optimistic. People are in denial. Time slows down. Things get worse because the debt machine that generated so much cash flow is now breaking down.

The banks will not ask for a small monthly payment from people because they will also be in denial. They will act as banks act and demand you pay or they will seize the property. Once they realize that a catastrophe is upon us it will be too late. That’s because the process of collapse takes much longer than people think.

Someone wrote me after the November 2004 elections and put forth a scenario. It was in response to an article I’d written on the housing debt cycle and the supposed housing bubble. I’d said that the bubble would burst but we’d only see some signs of it in early 2007. Otherwise, there was no such bubble and housing prices would continue to climb. Most people would be in denial after those signs showed up and the real bubble wouldn’t burst until the stock market bubbble burst (which I didn’t see happening until late 2009 when it was at about 35,000; I still believe that). I’d also told them to pay off any debt they had before the crash happened in 2009.

Here’s there question:

“Your article brings up the housing debt question again. Unlike the 30's, banks can't call your loan due in full at anytime now, so as long as payments are made we will be ok. I would still rather owe $2,000 a month and have $300,000 vs. payoff the $300,000 and watch my house go to $100,000 in value. I am sure I am missing a piece of the puzzle here?”

The important line above is, “…so as long as payments are made we will be ok.”

If your household has a 2k mortgage and the two breadwinners, or one breadwinner, of the household, can no longer get work that will pay for that mortgage, the system collapses. Where are people going to get 2k a month when they can’t find work?

The other problem is valuing the US Dollar.

“I would still rather owe $2,000 a month and have $300,000 vs. payoff the $300,000 and watch my house go to $100,000 in value. I am sure I am missing a piece of the puzzle here?”

Sans the issue above about finding a job, the question comes down to a debt payoff question. In devaluation, money today is worth more tomorrow. $300,000 in the bank is a good thing. But any debt brought along with that 300k diminishes that value. It appears to be an equation that has to be worked out. I will need to give it more thought and let you know.

Lastly, this whole economic system of ours is built on debt and the repayment of that debt. It’s not the first time we’ve done this. We’ve proven over and over again that it doesn’t work; yet here we are.

Pay close attention to the Fannie Mae problems. The GSEs are a catastrophe waiting to happen and your talking about 4 trillion in debts that everyone thinks is backed by the US Gov. NOT.

Become a professional at currency. Currency will be the key in the collapse. Which ones you own will determine your survival. Owning the US Dollar won’t be a smart thing. But you must wait until we have our last rise in the stock market which will truly baffle everyone and their lassie-faire attitudes. Then when the Euro is back under par, buy buy buy buy buy.

Take care,

Jim Goulding

www.jamesgoulding.com

Originally written, 09/11/2005.

Updated, 05/06/2007.

It's all about the US Dollar

Iran's threat isn't nukes; Iran's threat is the EURO.

Interesting that Israel’s deadline for Iraq coincides exactly with Iran's opening of its own Oil Bourse (trading exchange) that's completely denominated in Euros. The exchange will complete head-on with the NYMEX and the EURONEXT exchanges. Not good for the US $.

To find the enemies of the US, look to those who have completely abandon US Dollars for oil and only accept Euros for payment for oil. (North Korea, Iraq - just before our invasion, Iran.)

To find where tensions are strained between the US and other countries, look to those who recently began accepting some level of Euros for oil payments. (Russia, China. Venezuela always threatening)

The dollar is built on one thing and one thing only, a belief. With no belief there are no investors. With no investors there’s no one to cover our deficit. With no investors to cover that deficit…poof…the economy tumbles down.

King Fahd is dead and that leaves only one ally within the royal family, Prince Abdullah. He ain’t gonna live-forever. He’s also sewn to the Bush family’s hip. When Bush leaves in 2008, expect subtle, yet consistent, changes. Sure it’s great that Reagan made the Saudi’s keep 1 trillion in the US, but when push comes to shove they’ll bolt in a heartbeat. When the Saudi’s sneeze, the US catches a cold. When they get really ill, look out below for the US Dollar.

I find it interesting that in the history of mankind there isn’t a single government that hasn’t abandon their currency when it reached 1% of its original value. The scenario usually goes like this: once the currency gets to 10% of its original value the government borrows everything it can against it. Once it gets to 1% it abandons it and leaves those holding the bonds etc up-a-creak.

In 1984, the US dollar hit 10% of its original value. In 1984, our borrowing against the dollar began escalating and hasn’t let up. In 2005 the US dollar is valued at 4.3 % of its original value. It’s on schedule to hit the magic 1% in 2009. mmmmmm.

The US will defend its currency to the last drop. Don’t get me wrong, you won’t wake up the day after the dollar hits 1% of its original value and see the government announce that fact, then abandon it. No no no. It will happen very slowly and very painfully and will last over the course of about 4/5 years. My take is that they’ll do several devaluations first, each time sending the holders of our debt screaming and threatening etc. Then after years of this, say about 2014, they’ll abandon it. That’ll be the bottom. Exactly the time everyone panics. They always panic at the bottom.

The world we see today will look much different then. These times, albeit chaotic, will seem mellow compared to what lies ahead. So, keep your eye on the Euro for dollar story and you’ll be able to follow the plight of the US economy. Who’s asking for Euros for their oil? Who’s asking for dollars?

Take care,

Jim Goulding

www.jamesgoulding.com

Monday, January 23, 2006

The Fall of Wall Street

From: Jim Goulding [JGoulding@GHCO.COM]
Sent: Monday, September 12, 2005 12:08 PM
To: mark.whitehouse@wsj.com
Cc: Jim Goulding
Subject: RE: Slices of Risk: How a Formula Ignited Market That Burned Some Big Investors

Monday, September 12, 2005

Mr. Mark Whitehouse

RE: Slices of Risk: How a Formula Ignited Market That Burned Some Big Investors

WSJ, Monday, September 12, 2005

Dear Mr. Whitehouse,

Apparently every brokerage house in Wall Street has lost its collective mind. Basing a risk model, as Mr. Li does, on Gaussian math is insanity. Yet, the wolves that run the CDO divisions within the concrete enclaves on Wall Street are blinded by short-term money that they can collect with complete disregard for the investor’s long-term health.

The markets do not trade in Gaussian fashion and that fact was unequivocally proven over 40 years ago by Benoit Mandelbrot in his paper K & P. E14. M 1963b. The variation of certain speculative prices (The Journal of Business of the University of Chicago: 36, 394-419). Mandelbrot is currently Sterling Professor of Mathematical Sciences, Emeritus Mathematics Department, Yale University.

How can any quantitative mathematician ignore this fact? Oh, yeah, because they only have their interest at heart, not the investors. And that has been proven again and again by the shear number of penalties levied against these trading houses, over the last 20 years. Penalties that would have landed Joe Average in jail.

Any investor that would trust their money to any trading house that uses methods based on Gaussian math should have their heads examined. The markets do not move in Gaussian fashion, period. The mini-shock in the credit markets, this spring, was nothing. Within the next several years the true earth-quake of the financial world will hit and the math quants will simply shake their heads and shrug their collective shoulders while Joe Average shakes his pocket trying to look for some loose change.

Thank you,

Jim Goulding

Dealing with the stresses of working within the financial industry

I have been a member of the financial community for over twenty years. I understand the stresses of being a member of the financial community. As a former pit trader at the Chicago Board of Trade, I particularly understand the stresses of a day trader. I have searched long and hard trying to alleviate the stresses that come with being in this great industry. What I found changed my life forever. It can change yours too. It can make you richer in ways you have only dreamed about.

From feeling the excitement when you first begin to trade, the powerful rush you get when you make money, the absolute depression that hits you when you're on a bad streak, to the confusion one feels trying to decide if it's time to move to a different area of the financial industry. These feelings cause stress. That stress is felt at all levels in the financial industry. Whether you’re a on the support staff for a brokerage house, a day trader, a commissioned broker, support staff for traders on the exchanges or a local/market maker, stress can be constant.

A common thread throughout the industry is money. Wonderful, soothing, magnificent, empowering, evil, cruel, all-encompassing money. How many emotions come up for you when the word money is mentioned? Writing the emotions down is the first step in taming the money beast. More on that later.Why is it, we let money take such a toehold on us? Why do we let it rule us? Why do we let money come between personal relationships and us that mean far more than money ever could? As an employee we will leave a great job, for more money. Even though the job we have is very supportive in many other important ways. We’ll treat our co-workers differently because of the money they make or don’t make. A promotion or a raise becomes the focal point of our lives. Will I get it? If I do, what can I do with it? What’s the next step for me after the promotion or rise in salary? While we concentrate so heavily on these points, we lose perspective on life itself. Let’s look at something I call “the negative next step".

"The negative next step" is something adults in the work force seem to do naturally. It's looking into the future and not paying attention to the present. Some examples in the financial industry of the negative next step: for the day trader or local/market maker, the negative next step is, the next wining trade. For the commissioned broker it's the next customer trade. For support staff of the traders on the exchanges, it’s either a raise or whether the trader you work for is going to finance you so you can finally have your opportunity in the pits. So many feelings revolve around the negative next step, especially when it comes to money.

Here’s an example of the something I found that helped me to stop focusing on the negative next step, and start focusing on “a positive next step”. When I began my search on how to deal with the stresses of working within the financial industry, the number one “tool” I received was, "Completely let go of money". "Yea sure", you say? Well, it's the truth. Think about it. The answer starts to reveal itself in the form of a question; “Am I a slave to money”? Or maybe its, “Do I worship money”. Or perhaps it’s in the form of a statement; “If I make money, I will be loved ". In my opinion if you cannot bear to read those questions or that statement, or you are laughing at the thought, then I would say, money controls you 100% of the time.

Was I able to let go of money? Was I ready to say, “forgetaboutit”? NO. It took ten years. Yes TEN. Then I finally got it! The steps involved to finally getting it are many. For you, they may be fewer or they may be greater. It all depends on about a thousand different factors. BUT, it can be done. Believe me.

Depending on the area you work in within the industry, different steps must be taken to deal with all the different stressors. Maybe money is the issue. Maybe the different stressors you feel lie in different areas. However a positive next step must be taken to deal with the stressors. One key is learning about what makes you tick.

How can you learn what makes you tick? You can ask yourself a question to help start the journey. “What would my life look like if I had these stressors under control”? Write it down. Now, ask yourself how you can get from point A to point B. You know the answer. It lies within you. It may be you need a support group or a therapist? It may be you need a nutritionist or AA? However, when you start to build the bridge from point A to Point B, wonderful things start to happen. The stressors lessen and life becomes more of a joy than a burden.

Dealing with co-workers within the industry is a major stressor to many people. How many times did you just want to shoot your boss? How many times did you want to beat the #@$’ out of another trader on the floor? How many times have you wanted to hang up the phone on a particular client? For me it was about 286,000 on all of the above! Again there is a common thread one must understand to learn how to deal with co-workers. You must understand what makes you tick, before you can deal with relationship problems throughout the work place. Once you get a handle on yourself; you will start to understand the different personality types within the industry. Understanding the personalities of your co-workers is key to solving relationship problems.

What if you’re managing a group of employees or you’re the head of a division for a financial company? What kind of stressors are you dealing with? What can you do to solve the stressor problem? The first step, (you guessed it) understanding you is key. The second step is to understand exactly the personality type of the people that work for you. If you understand what motivates the people who work for you and what kind of people work well together, on teams, your stress level will subside substantially. It’s as simple as running a few personality tests on them. Many companies specialize in exactly this area. What could be better than having a smooth running operation where problems are dealt with swiftly and accurately?

The financial industries landscape is changing rapidly on a daily basis. Exchanges are struggling to survive amidst fierce competition throughout the world. Fund managers are competing for John and Jane Doe’s money everyday. Traders on the exchanges do not know if they will have a job in the near future, because electronic trading platforms are a threat. Commissioned brokers are feeling the threat of the Internet and the loss of many accounts due to the number of people who are trading for them selves. The list goes on and on. Do you think these situations are adding to the stress of your daily life? You bet they are. Many employees and independents within the industry want to stay in the financial markets. However their job may be gone tomorrow. What can you do to lower this stressful situation? Re-train yourself.

There are many expanding areas within our industry. You must identify what areas interest you. Career counselors are the key to identifying what you are and aren’t good at. They have a wide range of aptitude tests that will hone in on your specialties. Would your stress level go way down if you had a great back-up plan like this? Just think about what it would look like if you could stop worrying about whether your job will be there tomorrow. A career counselor can get you to that place. A career counselor can help you understand yourself in great detail.

The last stressor I want to touch on is our over all physical health. Working in the financial industry will bring on many bad habits. Those habits show up on a daily basis in many forms; poor eating, smoking, alcohol, legal and illegal drugs. Not exercising, not taking time to relax, not eating healthy... It's all just a slow death. So once again I want to ask you, “What would it look like if you where in a place of good health”? How can you get there? You know the answer. It’s worth your time and energy to find out. You can have everything you want while working within our industry; a healthy attitude about money, a healthy body, better relationships, competent and productive employees, the list goes on and on.

My experience in the financial industry has taught me many things. The one thing you can be assured of is stress will rear its ugly head. However, there are many ways to deal with stress. You can hire a career counselor or seek out a support group. You can hire a firm to have your employee's personality typed, so they learn about themselves and their co-workers and you learn what makes them tick. Seeking out a nutritionist or hiring a personal trainer is a very positive next step. The resources are endless.

Thank you,

Jim Goulding

Friday, March 10, 2000

Trying to Predict a Crash-1

----Original Message-----
From: Jim Goulding [mailto:JGoulding@GHCO.COM]
Sent: Friday, April 08, 2005 6:26 AM
To: George@ure.net
Subject: A couple of observations concerning your bearish view (jim goulding)

Hi George,

A couple of observations concerning your bearish view. First, when an economic researcher (me) wants to know when the crash begins, he needs to understand two things. The market always advances before the crash. Then, we crash. This takes place over a 3 - 4 year time span. Second, a researcher looks for two signs that there are problems. These two signs precipitate the crash by three years, then again one year before the actual crash. Those two signs are a crash in a specific real estate sector somewhere in the US and movement of gold.

The real estate sign hasn’t manifested yet. It will though, sometime in 2006, in my opinion. It will be on the high-end real estate market that’s supported by the consumer. (See my housing study on my web site for reasoning.) (http://www.jamesgoulding.com/excelworkbooks.htm#Housing).

That study looks at the pool of buyers. The pool for upper end real estate peaked in early 2003. It usually takes about 3 years for that to hit the market in a negative way.

Where the crash will occur is hard to say? I have no idea.

Movement of Gold:

The first signs of gold movement began a few years ago with the House of Rothschild getting out of the gold trading business. One can only speculate why they would do this. All I know is that it was a sign of trouble in years to come. Now, this week, we have gold movement. That’s another sign. Great Britain is selling gold. What caught my eye about this sale was not how much they sold but WHO was doing the selling. Great Britain was the seller and that is an extremely bad sign.

Why? Because America is financially connected to London and Germany. American financial crashes do not start here. They never have; not since the country began in 1776. They always start in London and Germany. Then they gradually move here, over the course of 2-3 years. Great Britain is selling gold. Yes they have a lot of gold left. However, it always begins this way. They sell gold and everyone rationalizes it by stating “who cares, they have a lot of gold left.” Then three years down the road, people realize that they do not have as much as they did three years earlier. That’s because they kept selling. Here we are again at the same juncture, seeing the same signs.

Germany has a big affect on our economy. Germany usually starts the downside rolling by showing greater and greater unemployment numbers. This week, Germany broke a resistance ceiling on a very long term trend line, of unemployed to the upside. Meaning, their unemployment is skyrocketing.

Remember that crashes are never taken seriously when they are being experienced in real-time. To the people alive, during the beginning and at the time of a crash, denial is the theme. They just can’t believe they were that stupid to not of noticed. They usually think that the same people who put them into the mess, politicians, will ultimately save them. Wrong. They never have, they never will. How do I know? History states this fact, again and again.

So, the first signs are beginning. They take 3-4 years to manifest. The ultimate signs of confirmation will be:

1. Continued movement of gold

2. Real estate crash in some high end real estate markets, somewhere within the US. (Maybe 2006).

3. The stock market rallies to all time highs as the people of the US stand by dumbfounded why the market is rallying. (Say, the DOW goes to 35,000 by 2009, then a crash that brings it to 17,000 by late 2010.)

4. London and Germany’s economies continue to erode while the US market rallies. This will lead to a faster crash in European countries as money is invested in the US, seeking better returns. Ultimately, London and Germany will stop lending to the US. When that happens, the crash will be about a week away. (Late 2009?)

Thanks George. I continue to love reading your site.

Take care,

Jim Goulding

www.jamesgoulding.com

Friday, April 08, 2005

And, then in June of 2005 I wrote the following:

Where have I been? What have I been doing? Why haven’t I posted since January? (Does anyone really care?) J

The Market:

I’ve been steeped in the trading world. I spend some of my day reading the markets and trying to coach traders at a broker/dealer in Chicago. I’m also constantly trying to interpret the market and where the market is going, in the next 10 minutes.

There never seems to be enough time to do all the things I want to do during a trading day. The ideas keep flowing and I can’t get them onto paper quick enough. I also love to build trading tools for the other traders to enhance their profitability.

So, what’s up with the stock market? The fixed income market?

Stocks:

I’m still massively bullish. I began telling folks to get long the funds that mimic the big indexes, like a Dow index fund, or an S&P index fund, last May. Best case scenario they were in at 9900 and the worst-case scenario 10,200. I’m bullish until late 2008, perhaps even into Feb of 2009, but that’s it. That’s when it’ll begin to hit the fan. Meaning, more and more people will catch on that the economic system is teetering. It’ll take a massive break in the market for the sheeple to realize it. Then it’ll be too late.

I’m still looking for Dow 35k by early ’09. Then a crash in late ’09 and that’ll leave the Dow around 17k by early 2010. By 2014 we’ll have broken 10k again. But, that’ll be it. Then we will gradually rise and recover until 2023.

Look for a new currency to be introduced somewhere in the teens. Why?

Never in the history of mankind has a currency reached 1% of its original value and NOT been abandoned. Currently, the dollar is worth about 4.3% of its original value and is scheduled to reach 1% in 2009. (That’s not the only reason I think we’ll crash. It’s too lengthy to go into here. You’ll have to read my free book, ‘Winter is Coming’ which can be downloaded for free from my site. Heck, it’s only 69 pages. And, all my books are free. www.jamesgoulding.com)

The funny thing about this cycle is that it’s a cycle! We’ve been through it before. However no one wants to call it like it is. They want to think everything is comin up roses. That ain’t roses yer' smellin’.

Every time a currency hits 10% of its original value the government that runs that currency goes on a debt spree. They barrow as much as they can against it. In 1984, the dollar hit 10% of its original value. If you go back and look at the borrowing habits of our beloved jerk-offs in Washington, you’ll see that in 1984 we began barrowing massive amounts of money against the USD. That borrowing has only accelerated since then. And the big question is…How did you think this country was going to pay off its 50 trillion debt? Yes, it’s 50 trillion, not 7 trillion. The press has everyone hypnotized watching everything that isn’t important. You need to add ALL the debt. State, Government, Municipal, etc. Mathematicians have proven that it can’t be paid off. So what makes anyone think it will? There’s only one way to do it and that’s to abandon the currency. Big big big DUH!

“All I want for Christmas is a bucket full of Euros and a bag of Swiss Francs!”

Does anyone out there not realize that this debt grab has happened many times before in this country? And in other countries? Not just on a governmental level but at the Joe Citizen level also. Go back and see what happened in the 1920s and you’ll see the exact same cycle. Joe Citizen was hocking and borrowing everything. Remember, the banks failed because people couldn’t pay their mortgages, not because of the stock market crash in 1929. The crash was just a catalyst. The first bank went down in Dec of 1930 and by the end of ’31 there were 1600 more. That’s what caused the depression. We’ve been a debt society before and we are a debt society once again. What a bunch of shcmucks. Oh well…

Fixed Income:

What conundrum? Greenspan is feeding you all a big pile a crap. The Fed knows exactly what’s going on. It’s called a deflationary cycle. Look at the 1850s, and the 1920s. Biggest Duh!

What should we do?!!

Well…George doesn’t have such a bad idea. That dude is collecting his acorns already and he’ll be ready.

Read. The best book out there is ‘Conquer the Crash’ by Prechter. If you want other supporting data, read Strauss and Howe’s 2 books Generations and The Fourth Turning. Harry S. Dent has some good books also. Disregard his short-term market guesses cause they stink. However, the guy is right about his long-term stuff.

Keep readin’ George’s great site. I really haven’t found anything like it on the net and I have over 5000 sites catalogued (I’m very sick in this department. I think I may be committed for the size of my bookmark collection and my database of electronic documents).

Other than that, well….don’t have a mortgage. Don’t have any debt. Usually in a crash, like the one that’s coming, it’s the opposite of what you grew up with. You grew up with the dollar being worth less and less each passing day. In a crash like this, the dollar becomes worth more after the crash…well….kind of.

Meaning, that in the ‘30s, if you had a million dollars before the crash, then you were many times richer after the crash, until they devalued the dollar in 1934. That hurt. This time around I think it’ll best serve folks to buy safe haven currencies like the Swiss franc. Look for the US to ‘adopt’ a sister currency to the Euro, or something to that effect. Gold is good too.

Hey, you know what? I’ve been giving this some thought. Do you know what will be worth a lot of money come the late teens and early 2020s? Manufacturers. Think about it. We’ll be in a time of repatriation. Buying anything from over sees will cost an arm and a leg. Now, think about the decimation of the manufacturing industry over the last 30 years? They’re gone! Abandon factories everywhere! Now, try importing manufactured goods when the goods cost more than something that could be made here. The Manufacturing folks that survive the next 15 years will be sitting on gold!

So, I’ve just been biding my time and tryin’ to store some acorns before winter hits. My kids keep me busy and so does my writin’. I kinda get the sense that it’s calm before the storm. Know what I mean?

Also, I’ll leave you with one last thing. Going back in time and studying the industries that survive the best during these types of crashes I found something very interesting. By the time 1935 came around there were two, count them….2, industries that did the best out of all the others; Electricity and Insurance.

Guess what Warren Buffet has been shifting the bulk of his assets into the last 10 years?

The utility industry and insurance.

Take care,

Jim Goulding

www.jamesgoulding.com

Debt Bomb

Sunday, October 03, 2004

Barb and Aileen,

Thanks for the comments. One last thing. Even if you don’t invest, you need to read this book. There’s a whole big domino effect that’s going to happen. This will affect everyone. No one will be exempt. Even those who do not invest. You’ll understand when you read the book.

_______________________________________________

Here are a few more things about the coming crisis that no one is thinking about. (I’ve shortened this article for easier reading. So, there’s a lot of evidence I’ve omitted.)

“The Debt Bomb”

Many people don’t think they’ll be affected by a financial crisis because they don’t invest. This is a very big mistake IF you have any debt. Debt is an investment. The theory of the coming crash is based on debt. More specifically, it’s because of the debt that has built up over the last 20 years that we are going to have a crisis.

The problem people don’t’ recognize is that they will not have the ability to pay off their debt when a crisis of this magnitude hits.

Another factor about debt that never comes to mind is that debt is precisely the reason the depression deepened after the 1929 crash. Many people think it was the stock market crash that caused the great depression. It wasn’t the factor it was a catalyst. The reason the economy slipped into a depression was bank failures.

The first failure didn’t happen until December 1930 and things really weren’t that bad until then. However, when the Brooklyn, New York, Bank of the United States failed, in December of 1930 it started an unprecedented cascade of failures.

But why did they fail?

The answer is simple. Regular people couldn’t pay their mortgages because they were laid-off or their wages were cut. They couldn’t keep up and they were evicted. The banks took ownership of the homes. However, the banks couldn’t sell the properties because there were no buyers. The banks failed. That’s the biggest cause of the great depression.

Another reason we slipped into a depression has been disguised in the history books or completely omitted. What the history books like to tell you is that the brokerage houses were the cause. “They were letting people borrow money to trade the market! These people only had to put up 10 cents on the dollar! Then when the market crashed and the brokerage houses asked for the loans to be paid no one could pay so the brokerage houses liquidated their positions. This was the evil that caused the depression!!”

What a bunch of crap.

What the books don’t say is that from 1919 to 1929 there was an unprecedented amount of lending going on that had nothing to do with the stock market. Electricity enabled a zillion new products to hit the market including radio, refrigerators, ovens, dryers, washers, fans, etc. Many industries copied Henry Ford’s ‘borrow on time’ finance scheme and that was a major contributing factor to the depression along with the mortgages, not borrowing to buy stocks. The numbers aren’t even comparable.

Any person today would say, “Things are different now. They have mechanisms in place that won’t allow the 1930’s to repeat itself”. Well, I’m here to tell you it’s a bunch of bull. What the average person doesn’t see in the press is that we as a country are over 50 trillion in debt.

To which the average person would say, “No way! That’s not possible. How do you know?”

I know because it’s there in black and white for anyone to see. The problem is, you have to know where to look. The government doesn’t hide this fact, they just don’t advertise it. But, it’s there and I’ve seen it. Many people have seen it. The problem is that no one is listening.

The average person reads that we are 7 trillion in debt because that’s the ‘National Debt’. That’s figure is accurate. But, what about mortgage debt, credit card debt, state debt, under funded pensions, under funded social security, under funded Medicare, corporate debt, GSE debt, and the US Governments ‘off the books’ debt? Even if you take out the under funded parts, the debt is still 35 trillion.

So what will the government do if there’s a crisis?

The government will have to devalue the debt and the US dollar (USD). When they do, they’ll be a massive scramble to sell US debt. USDs and anything that has US in front of it.

And, I’ve got another piece of info that is very scary, about the USD. There isn’t a currency that’s ever survived when it’s fallen to less than 1% of its original value. The USD is currently worth 5.3% of its original value. It’s on track to go under the magic 1% number between…2009 and 2012.

What’s even more worrisome is what governments have always done when the currency moves under 10% of its original value. They create as much debt as they can against the currency before it’s abandon. Every single time this has happened they’ve done this.

When did the USD go under 10% of its original value? 20 years ago. Exactly when the borrowing accelerated.

Worse, the US Dollar is a fiat currency backed by nothing. If you think your bank account is safe because of the FDIC you’re sorely mistaken. That money comes from the member banks of the Federal Reserve, not the government. The Fed just acts as an agent to collect the money from the banks to pay off the people who lost money in a bank failure. When those bank members fail who is going to pay you? Not the government. They’ll be dealing with two major problems concerning debt; the national debt and (the biggest reason we will all be up a creek), the so called ‘government sponsored agencies’ who issue mortgages. Both debts are 14 trillion combined.

Did you know that the average person put down 18% on a new mortgage in 1983? Today it’s less than 3% because of the government sponsored agencies (GSE). These agencies are in the news lately. ‘Fannie Mae’ and ‘Freddie Mac’. Why are they in the news? They’ve been lying about their earnings and these two entities make Enron look like a five and dime. No one is being held accountable. Typical government BS. The failure of just one of the GSE entities alone would cause a depression.

Now, what happens if we have a crisis and people can’t pay their mortgages? Those agencies will fail and no one has the money to bail them out. There are no contingency plans in place. You’re dealing with a government agency and the government has a 228-year history of waiting for a crisis to happen before acting.

There’s more. Lots and lots more. The evidence is overwhelming.

Take care,

Jim

Trying to Predict a Crash II

As many regular readers of this site know, I’ve predicted DOW 35,000 by late 2008 early 2009. I’ve written a lot about this subject on this site, in my book Winter is Coming, and in many different web discussion sites around the Internet. Much of it was written three-years ago.

Now that I have the benefit if three years in the rear-view mirror, I think it’s time for an update. Plus some other observations I’d like to comment on concerning Strauss and Howe’s predictions, from a generational point of view, and a few things about the US Dollar.

March 22, 2006 – Update time

The Dow

First things first. The DOW. I’m still bullish as all get-up. Never stopped being bullish. The only thing I see as different is maybe the time frame. I don’t really think that matters though. However, I’ll say a bit about the time.

We may not hit 35k by late ’08 early ’09. I’m 50/50 right now that everything is pushed back a year or so. Meaning, it won’t happen until 2010. I’m just not sure, but promise to update this as we go along.

My stop price for getting out and reassessing everything is 8200. We hit that price, then I’m out and I was wrong. I’ll move that stop up when we get to 14,000. I don’t know what the level will be, but I’ll make sure to post it. I initially put out a buy signal in May 2004. The worst possible price you could have bought a DOW index fund was 10,200.

You may still be able to buy the DOW at 10,400. However, I really don’t know. Which brings up a good point. When I talk about the DOW hitting 35k I’m only talking about the DOW, period. Meaning, I like the DOW index funds that buy a basket of the DOW 30 stocks. That fund mimics the DOW. If the DOW goes up, you make money, if it goes down, you lose money.

So, if I bought $10,000 of a DOW index fund at 10,200 and I get stopped out at 8,200 I will have lost $2,000 plus commissions.

Quick message to all my critics. You can curve fit any instrument that a person can invest in. For example: Someone writes and says, ‘If you’d invested in 3 month T-Bills since 2000 you’d have made X percent more than you would have in the DOW! So, you’re an idiot!’

Curve fitting depends on the date you pick to make your investment look better than the investment you’re selling. If I wanted to ‘sell’ the DOW to people (which by the way I’m not. I could care less were people invest. I don’t make dick from it.) I’d simply state that over the last three years the DOW has returned 12.8 % a year compared to 30 month T-Bills that have returned 2.3 %.

It all comes down to where you pick the starting date. So, stop sending me those stupid emails.

Back to the DOW. My theories are based on one thing, Generational Cycles. With a bit of HS Dent’s invention cycles thrown in.

Generational Theory states that we are repeating the 1920s. Invention cycle theory states the same thing. That’s how I predicted the 3 Million-Dollar rally in the Chicago Board of Trade Seats. I used generational theory.

I’ve done the same thing with the DOW. If we are repeating the 20s, then, the Dow has a long way to go. Where do I get 35k? From HS Dent. His formula is right on the money.

Where’s all the evidence to support these theories? It’s all over my web site. I couldn’t possibly cite everything in this paper because it took years and years of reading to come to the conclusions I have come to.

To summarize about the DOW.

· I like DOW index funds that mimic the DOW.

· I like the DOW going to 35k

· I have a stop in at 8,200 (meaning I’m out of the trade all together and will reassess.

· I see the rally-taking place from now through 2010. Although I’m not particularly convinced of the date. Doesn’t really matter though.

· When we do hit the highs of 35k we will break hard. Over the course of 18 months we will break to 17k. Over the course of the following 3.5 years we will go under 10k again. Then, we’ll begin a long slow recover over the following 9 years that will take us back up to 18k.

· Why will we rally and why will we break? Again, that’s been stated in my writing, that’s all over this site. So, I won’t go into it here.

· I’ll do periodic updates over the next few years when I see changes.

Concerning Strauss and Howe’s generational predictions from their books

They’ve absolutely nailed where we are concerning society. Their predictions from their 1991 book Generations and their 1997 book The Fourth Turning are dead-on. I see no reason for their predictions for the next 20 years to be any different.

Winter is Coming. Best you prepare for it.

Concerning the US Dollar

The precipitation of the Crisis era will probably be the US Dollar. I wrote about this in my book Winter is Coming. But, it was mainly geared towards the Euro, not the US Dollar. Since writing that book, in 2003, I’ve learned a few things.

One of the big reasons the US economy keeps chugging along is because of petrodollars. If you want oil, you need to pay in US Dollars. That’s one of the sweet deals we cut at the end of WWII because…. well…because we could. We were the superpower.
To find the countries that are on the axis of evil, you need not listen to Bush, just watch for who is threatening to change their current way of paying for oil. They want to switch from dollars to euros. North Korea, Iraq, Iran.

North Korea already switched a percentage, Iran is opening a Euro denominated Oil Bourse, and Iraq committed the ultimate error, they completely switched to Euros for oil…. just prior to the US invading them. Mmmm.

Want to know when Hugo Chevas really in trouble with the US? Listen for his banter about switching to the Euro. It’s the only time he gets a response out of our government.

So, let’s try and put this all together. I think the crisis this Winter era will be economic.

The US Dollar holds the key. For instance, no civilization in the history of mankind has kept a currency much longer when that currency hits 1% of its original value. Most civilizations begin borrowing against their currency heavily when it hits 10% of its original value.

The US Dollar hit 10% of its original value in 1984. Precisely when we started escalating borrowing. The US Dollar is pegged to hit 1% of its original value in 2008/09.

It’s worth 4.3 % today.

Then there’s the debt. It’s been mathematically proven that we can never pay off the US debt. So, there’s only one solution, abandon the US Dollar. That way, the US is free and clear; sans the ramifications.

What to-do, what to do? Mmmmmmmmm.

I’ve put a lot of thought and research into this subject and am slowly reaching some conclusions. I’m not sold am them yet, but continue to do research.

My early thoughts are foreign currencies. Mainly the Swiss franc and the Euro. I guess what’s mystifying me, in these early stages, is the movement of the franc in the 20s and the 30s. While going back and studying the currency I was surprised to see that it barely budged in late 1929, just after the crash. It closed at 0.1933 on 10/18/1929 and closed at 0.1937 at the end of 10/1929. It closed on 12/27/1929 at 0.1945.

For that matter, the following year, it barely budged.

Well, it must have moved in January 1931! (I thought). The first real big bank collapse came 12/30/1930. Not. It closed on 12/30/1930 at 0.1951. By the end of January 1931 it was 0.1951. What’s up with that? It didn’t move!

By the end of 1931? It was trading 0.1950. zzzzzzzzzzzzzzz.

Confusing. I’d have expected it to do the opposite. Thankfully, we have Strauss and Howe. One of the points they hammered home about the sparks that begin 4Ts, is that the majority of the public never really thinks of them as sparks, when they happen. This makes sense. At the time or a crisis everyone believes they're invincible.

So, when did the currency turn around? Thankfully it turned around at my second choice for a rally; the bottom of the US Financial Crisis, 1933.

Sounds strange, but it makes sense. Here’s why:

I trade markets for a living. Namely US Treasuries. Currencies and commodity indexes too. The markets always do exactly what people least expect. The evidence is endless. Having stood in the Bond Pit at the Chicago Board of Trade from 1980-1995 and then again from 2001-2003, I’ve seen and heard most of the evidence. Thankfully I’ve learned. That’s why it drives people nuts that I’m calling for Dow 35,000. It drives them nuts!

Anyways, here’s what happened to the Swiss Franc currency in 1933.

01/1933 it was at 0.1925

By April, the financial crisis in the US really heated up and the currency took off to the upside. It closed 04/28/1933 at 0.2145. That’s a big rally. By December it was 0.3030.

By September 1936 it was at 0.3246. Then it appears it took a very large dive in October to 0.2306. I’m wondering if there was a devaluation of some kind? I’ll have to look it up.

The markets closed down for the war beginning 06/13/1941 and the Swissy was at 0.2320

It started trading again in February 1946. It closed at 0.2336.

Well, that’s all for now. Gotta go do some more research. BTW, the best book I’ve read on surviving the crash is by Robert Prechter, “Conquer the Crash”.

I’ll try and post more as I learn. No need to worry yet though! We’ve got a few more years of financial bliss before it hits the fan.

Take care,

jim goulding

www.jamesgoulding.com

The Commodity Industry Cannot Survive with our Current Business Model

The commodity industry has a new business model. If history is our guide on what has worked then this new model cannot survive.

The money flow, on the Chicago Board of Trade Financial Floor, has made a dramatic shift. This shift is of tectonic proportion and seemingly is going without voices of dissent. Yes, people have spoken out. Members consistently talk about the problems that beset them and the exchange, on a daily basis. They talk to one another and talk to people who might have a voice that can speak in the meetings of the elected decision makers of the CBOT.

Furthermore, Trade Talk [i] is full of missives that speak volumes. They speak the truth and decisively from both sides of the argument. What amazes me is that nothing has come from the trade talk forum in the way of protecting the business model that has worked for the CBOT and the customers of the CBOT since 1848.

Everything has fallen on deaf ears or someone or something is manipulating the system. Conspiracy theories aside, I stand by the fact that ‘the money is gone’. It is off the floor. It is falling into the hands of the few. This is not the way it has worked in the past so what makes anyone think or gives any of our elected officials the right to implant systems that are supporting this new business model while not supporting the old business model?

OH NO!!! There I go. I’m attacking our elected officials! Or maybe you perceive some other devious motive from this writer? Let’s get my motives out in the open so there are no miss-understandings. And let’s keep it simple. First and foremost my motive is to make a living. To support my family. Period. Do I want our customers happy? Yes. Do I want my co-workers to make money? Yes. From the clerk to the biggest locals. However, make no mistake, I want to take care of ME first. So this isn’t about dishing out reprimands.

Back to the subject. The money is gone. It has shifted from the floor to the few. That is the subject of this writing. It is also the subject of this writing to ask questions. To make you, the reader, aware that the commodity industry business model has shifted. (Not that many of you didn’t already know this. I’m not here to insult intelligence.)

How we got here is moot. Who got us here is moot. None of that is important anymore. Saving ASPECTS of the old model is.

The facts are yelling at us on a daily basis. Locals are leaving the floor. Paper-filling operations are closing down. Clerks are being fired and the clerks who are not being fired are taking less in weekly pay. Booth space vacancy is up. Everyone, except for a very few, are making less and less money everyday. Why?

Because the money has shifted to the pockets of two-entity’s. The brokerage house’s and the CBOT's coffers. For those who haven’t noticed this let me try to explain. Volume on the CBOT is the driver of profits, cash flow etc. Volume is up. We had record volume last year. I quote from the January 17, 2003 letter from Mr. Neubauer.

“….344 million contracts, about 1,365,000 per day, an increase of 32% from 2001.” [ii]

If volume increased then the member’s income should have increased? It didn’t. Did some members on the financial floor have a good year? Yes. However, most made less. Much much less. Some made nothing and in fact lost money. Can I cite statistics that absolutely prove this? No.

Unless each member starts releasing earnings statements, then that cannot be proven. Then how do I know? My ears and eyes tell me. Talking to the membership tells me. Members are telling me that they are not only making less, they are firing people and many have left the floor to try and trade “upstairs”. (More on that later).

My eyes tell me that there are fewer people on the floor and booths are being abandoned in droves. Talking with phone clerks tell me that they are consistently worried about their jobs because the paper is moving to the screen and by-passing them.

“Our electronic volume was about 513,000 contracts per day, two and one-half the 209,000 contract average of 2001” [iii]

That volume does not come back to the members in the form of monthly or daily cash flow! (Monthly for the brokers and daily for the locals.) The money that the brokers would have made filling orders on the floor is not there anymore. That fact is having a devastating effect on the floors economy and is rippling through to the economy that survives around the CBOT, e.g., the stores inside the CBOT, the restaurants, parking lots etc. Again, I state, that the paper-filling operations are closing down at a dramatic pace. This is taking the money out of the hands of the many and placing it in the very few.

Two points need to be highlighted here.

It can be argued that this money IS going to the locals since they account for 78% of the electronic volume. [iv]
It can be argued that the local is just changing venues. Meaning that they are leaving the floor and going to offices to trade.

On point one, I disagree.

On point two, if this is the case then we have a very big problem.

Point one. The locals are THE KEY to keeping the exchange open. They are the liquidity.

That is my opinion. That is also the opinion of other members and others whom have studied the locals and how the locals make money.

Allow me to quote the study, “An Empirical Analysis of Local Trader Profitability”.

“Abstract:

This study examines the profitability of local traders on the Sydney Futures Exchange.

Specifically, local income is decomposed into two central components; liquidity and

position-taking profits. Liquidity profits represent the income that arises (is forgone)

from supplying (demanding) liquidity, whilst position-taking profits refer to the gains

(losses) resulting from price movements subsequent to a local establishing a position.

The decomposition of local profitability reveals that locals on the trading floor make

significant position-taking profits. Moreover, the ability of locals on the floor to

derive position-taking profits is positively related to order-flow related information,

and negatively related to the presence of exogenous information, local liquidity profits

and the length of a locals inventory cycle. Accordingly, this paper characterises locals

as active informed traders.”[v]

This study is also based on data from US Market Makers/Locals.

“Further, some analysis of the profitability of local traders in US markets has taken place. For example, Kuserk and Locke (1996)”[vi]

In this report it is stated that, “…locals do indeed appear to be net suppliers of liquidity.”[vii]

Only liquidity brings customers and keeps them coming.

Furthermore, in my opinion, the locals can’t make money trading in offices off of the floor. History tells me this by showing me HOW the locals made money. They made it on the floor, period. By no other means.

Others tell me this also. Again, allow me to quote the study, “An Empirical Analysis of Local Trader Profitability”

“…This leads to the following hypothesis:

H3: Locals’ “Position-taking” profits will be significantly lower in the

presence of exogenous non-order flow related information.

This hypothesis implies that local position-taking profitability is likely to be positively

related to the presence of order-flow related information, such as order-flow

imbalances Consistent with this, Madhavan and Smidt (1993) suggest that NYSE specialists profit in the short-term from information about impending order

imbalances, attained through their central position on the trading floor.”[viii]

“Several findings in this paper, in particular a comparison of local income on a floor and screen traded market, indicate that the ability of locals to earn positive position-taking profits is related to their presence on the trading floor. Furthermore, the extent of local position-taking profitability on the trading floor appears to increase with trading frequency and volatility, and decline

with the length of a locals inventory cycle, and the extent of exogenous information present in the market. Together these findings indicate, that the ability of locals to derive positive position-taking profits arises from short-term order-flow informational advantages, that they attain as a result of their presence on the trading floor.”[ix]

“Indeed, there are suggestions in the literature that they may have some sort of information advantage which allows them to predict and trade on order-flow related information (e.g. Silber, 1984). The profits earned by locals represent their reward for providing liquidity and/or trading on order-flow related information. Hence an analysis of the profits of locals can provide evidence

on their economic role.”[x]

In point two, from above, I stated, “It can be argued that the local is just changing venues. They are leaving the floor and going to offices to trade….. If this is the case then we have a very big problem.”

The problem is, you’ve turned the locals into screen traders, sitting in offices. Basically, what you have produced is Day-Traders. Not locals. The community that locals are familiar with is gone. If that is the case, and I’m convinced it is, then the liquidity will dry up eventually. When that happens, the brokerage houses will have to consolidate and many will go belly-up. First let’s look at the success of day-traders then where the money is going.

Let me cite some reports.[xi]

“Day trading is also analogous to futures trading. Both types of speculation entail leverage, and both, by definition, are forms of trading rather than investing. The lessons from the world of retail futures trading are instructive. Futures’ trading by retail customers is unsuccessful. Even industry leaders have acknowledged that 80 to 90 percent of individual customers lose money at their firms.”[xii] (Within original document source is cited as-

4 Scott McMurray, Burned Alive, WORTH, Apr. 1994, at 68, 70.)

“Day trading firms have high overhead and other costs. In addition, their customers have a high failure rate, leading to a high dropout rate. These factors have led firms to need a continuous inflow of new customers with trading capital.”[xiii]

“However, about 90 percent of those who venture into day trading leave with no profits. Therefore, it is important to get the facts, do your homework, decide if you have the psychological makeup, capital, and commitment, and get an education before actually putting your money at risk.”[xiv]

Now let’s look at where the money is going.

Earlier I stated, “Because the money has shifted to the pockets of two-entity’s. The brokerage house’s and the CBOT coffer's.”

There is no doubt that the money has left the floor. There is no doubt that the money is going to the brokerage houses and the CBOT.

When a trade is made on the computer, commissions are charged. Those commissions are going to the brokerage houses and the CBOT. That’s the new model.

Under the old model, when a trade was made in the pit, an FCM, brokerage house and executing pit broker charge a commission. (Of course this still exists today. But, at an alarming decline in two areas, the brokers and the FCM’s.

(I’m not going to talk about the FCM’s due to the fact that I don’t have enough information about them, yet. What I do know is that talking with some of them on the floor, their income is way down.)

The brokerage houses couldn’t be happier. If the customers are trading 18% of the volume on ACE,[xv] the brokerage houses are getting the money that was once going to the brokers on the floor. If the Brokerage houses charge $1.00 a contract and a .20 cents processing fee then that’s $110,808 a day coming off the floor and into fewer hands.[xvi] This is just one example of what is happening.

The brokerage houses are also deriving income through the customer trades. The point being that, volume is up and the brokerage houses are one of the two entities left making money.

The CBOT is getting a fee every time a contract is traded on the ACE also. This money is currently going to the CBOT and not to the members. The CBOT may give the money to us in a ‘dividend’ manner. But is that money going replace the money the members are currently losing on a daily/monthly basis? No. It can’t possibly pay the people on the financial floor the amount of money that is being taken away. This would amount to millions of dollars on a yearly basis. If the financial floor (AM’s) are to receive 1/6 of the money the Full members receive, then it’s impossible to ever achieve the money once made on the financial floor again. Hence, people are leaving in droves. Liquidity with it.

Why not buy a full membership? If the CBOT intends on giving the money back (that it is currently collecting) to the membership, then we should take a look at this. Let’s say I pick up a Full for 350k. My goal is to get back to an income level of say 500k of yearly income. (Remember that I’m trying to replace the money I had made on the floor. I can’t make this money anymore due to the drastic changes that have taken place.) There are 1402 full memberships. For each full membership to make an average of 500k a year, then the CBOT must pay $701,000,000. This is not going to happen.

In conclusion, I’m stating;

The current business model that has manifested at the CBOT can’t last. We will run out of liquidity. Because we will run out of locals.
The money is going into fewer hands. This is never a good thing. Especially when talking about making markets that are essential to providing the needed liquidity for the financial community.

We have responded and given the customer electronic access. Now, what is being done about keeping the floor population in business?

Sincerely,

Jim Goulding

Saturday, January 25, 2003

[i] https://membernet.cbot.com/cbot/membernet/main32

[ii] (https://membernet.cbot.com/cbot/membernet/newsdetail/1,1234,11+10660,00.html) (January 17, 2003 letter from Mr. Neubauer.)

[iii] (January 17, 2003 letter from Mr. Neubauer.)

(https://membernet.cbot.com/cbot/membernet/newsdetail/1,1234,11+10660,00.html)

[iv] (January 17, 2003 letter from Mr. Neubauer.)

(https://membernet.cbot.com/cbot/membernet/newsdetail/1,1234,11+10660,00.html

[v] Current Draft: 23 July 2001

An Empirical Analysis of Local Trader Profitability