Manarin On Money » Derivatives

Gold, Derivatives, & the Stock Market (Plus: Why I Don’t Move More Of My Nest Egg To Cash)

Manarin Investment Counsel — Tue, 09 Dec 2008 19:54:36 +0000

It’s because of the insane level of derivatives being trading throughout the global financial markets – about $700 trillion. There’s not much new here for me to comment other than I still view derivatives as THE biggest threat to owning dollar-based assets in long term positions.

However, if this is a new topic for you, the below piece from 60 Minutes does a nice job of explaining what derivatives are and how they work, in common sense language:

Even if the derivative house of cards does not collapse any more than it already has, I am no less long term bearish on the dollar and other currency-based investments. Eventually the American greenback will return to its slide in buying power and investors that own hedge positions will be thankful.

My favorite method to hedge against a devaluing currency is with gold - both through direct ownership in gold bullion and by owning shares of a gold-mining mutual fund. So if you have concerns over the Fed’s devaluation of our currency then this is where you should be.

To put the Fed’s actions in perspective, consider this: Eight years ago there were just over $5 trillion circulating through the system. At last check this number had risen to nearly $9 trillion – almost a double in the quantity of paper money. That action, historically, spells inflation.

Recently I returned from Europe to see firsthand how our friends across the pond were being impacted by this economic environment. Not surprisingly, things seem very similar to life in the States. The shopping centers were busy, the restaurants were full, and the only negatives I witnessed were in regard to the financial industry and media’s drumbeat of doom and gloom.

Purchasing power parity tells me that the dollar is currently undervalued compared to the euro and the fact the stock market is rising in the face of negative economic data tells me there is a very good chance that we saw the market bottom back in November.

Of course there are no guarantees but what I do know is that the economic news will continue to worsen but the upside to ownership investments look a whole lot more promising than the downside.

As of now, it looks like by mid-2009 we will be facing a rapidly improving economy and that’s why the stock market has been rising in the face of all the current bad news.

My 6-Minute Video Response About The Economy (Plus: Aron Huddleston on WOWT)

Manarin Investment Counsel — Fri, 19 Sep 2008 16:36:44 +0000

Be sure to tune in to our radio show each week for more discussion.

Have thoughts or questions? Leave them in the comment field below.

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Aron Huddleston talks with WOWT in Omaha about what investors should be focusing on in today’s market environment:

Video used with permission of WOWT

Update: The transcript to Roland’s video can be viewed by clicking the link below.

Roland: Greetings. How about this technology? The digital age has come even to this office and you’ll have to call the office and thank Don Davidson for this.

He came in here and twisted my arm and said, “Talk to the folks about what’s going on.” Okay. Well, we’ve had a wild ride, but before I talk about that I want you all to listen to the radio show [September 21] this Sunday because we’ve interviewed Brian Wesbury, one of my favorite guys – you’ll love the this show so tune in, you’ll feel better, very informative. It will be on www.manarin.com/radio_show/ later Sunday and tell your friends that are scared to watch it.

Wild ride this past week and for me it’s nothing new. I’ve seen so many bear markets in my 40 years of watching the market.

1:04 So whenever these things happen, I borrow and buy and I have told you all and you’ve all heard me. When doom and gloom is thick, it’s usually a great time to invest. So in these past few days we’ve had a few panic clients call and that usually indicates a market bottom. Technical indicators like the VIX spelled a market bottom today. Today is Thursday, the 18th of September ‘08.

So my recommendation is if you can, take advantage of it. If not, just ignore it. Usually following a bear market of this magnitude, the average year following that the market has gone up 30 percent. So I can’t promise you a year from now we go up 30 percent, but we are going to go up sooner or later and now is the time to be buying and not selling. That’s about it.

2:00 The derivative market is what has caused all this disaster and I’ve been complaining about it for a dozen years and if it ever does hit the fan, it’s going to be in the derivative world as you’ve been watching the dominoes fall. Fortunately, they’ve only been in the financial sector and it’s nowhere near as bad in my opinion as it was in 1989 and ‘90 with thousands of S&L’s going down. But anyway, bottom line today is the economy is strong. All the central banks are pitching in to solve the liquidity problem – and what follows that is a confidence problem which is where, if it’s going to hit the fan, it’s going to be because of the confidence issue with derivatives. And if they all decide to get out of the game at the same time, it can’t happen.

3:00 So what choices do you have. What do we do? Well, a lot of people think that by bailing out and going over to a money market fund or even a guaranteed index annuity, they will be safe. Wrong. They’re going to be holding currency units or claims on currency units and if that derivative house of cards hits the proverbial brown stuff, it’s the currency that collapses; the paper dollar. Then what are those guaranteed insured investments worth?

Zippo versus you broadly diversifying in the equity market. When the dust settles, you still own some of the best companies out there. And when the new currency comes out, you will maintain a measure of wealth versus being wiped out sitting in paper money.

4:00 We had a 180-degree change in risk somewhere back in the 60s and the 70s as we got away from the gold standard. So if the derivative house of cards crashes, you are better off in a portfolio of stocks than you are are in a guaranteed and insured investment. The crowd went panicking into Treasury bills down to getting a negative yield on them which is insane.

It just goes to show you it doesn’t take much to cause a panic. The probability – a very high probability, in fact enough so though I don’t worry about a crash is that we’ll muddle through. The central bankers will provide the liquidity needed and somewhere down the road this will all be forgotten because the media will be focusing on the new noise du joir to frighten you.

5:04 When you look at the big chart on my wall it puts things in perspective. That goes back to 1921 and if we come back and visit 20 years from now, it will look the same. The big dip in the middle of that chart is not Carter, it’s Nixon. So even if our friendly socialist gets elected, oh, let me qualify that, there’s two socialists running – if the worse one gets elected it doesn’t matter, we’ll muddle through.

So I’m very bullish; I’m wildly bullish. I’m borrowing to buy more and I recommend you do the same. Well, not necessarily borrow if you lose sleep, but I am.

6:04 So bottom line is don’t worry about it, but if you are worried, don’t do the wrong thing because if it does hit the fan, if your fears come true, that which you run to feel safe in is the one you get wiped out in. Having said that, tune in Sunday, and the following Sunday. Peace and goodwill. Bye, bye.

Financial Derivatives

Manarin Investment Counsel — Sat, 07 Jun 2008 16:48:48 +0000

A question I often get is, “What, in your opinion, is the biggest threat to the global financial markets?”

The mainstream media never touches on this but I believe that financial derivatives are the biggest threat. These highly speculative instruments, most often used by big money center banks, are what I think would most likely trigger the collapse of the world’s debt structure.

Here’s the story.

Financial derivatives are simply man-made bets consisting of two parties. Party A enters the bet in hopes of earning massive profits but in order to create the derivative, they need a counter party to wager against them. This is where Party B comes in. They enter the bet looking to hedge against some form of risk.

Say you are a financial derivatives trader. You can speculate (or hedge against) the movement of interest rates, commodity prices, exchange rates, or just about anything else you wish to gamble on.

Those who participate in this global casino are required to place only a fraction of their bet down thus enabling derivative traders to control an enormous amount of assets using a tiny amount of money. This is where the danger comes in.

While traders can make big bucks being on the right side of the bet, there is also the risk of crushing losses.

This is what happened recently when a rogue trader for the second-largest bank in France made a bad bet totaling over $7 billion in losses, the largest in banking history.

But despite instances like these, the monstrous growth of financial derivatives continues.

Over 20 years ago, with derivatives trading around $1 trillion on a daily basis, I upped the gold hedge position in our portfolios to offer additional safety. That decision protected us during the huge stock market crash of 1987 brought on by derivatives.

Today, on the same daily basis, derivatives are trading at $500 trillion. To put that number in perspective, the U.S. has an annual GDP of $14 trillion. That means a 3 percent decline in the derivatives market would be greater than the total annual economic output of the world’s richest nation. Scary stuff.

If the derivative dike ever breaks, a panic would sweep the financial world. Bonds, money market accounts, bank CDs, cash, and all other dollar-based assets would plummet in value instantaneously.

History tells you that in these cases gold, common stock, and other tangible assets not linked to paper money become a source of value for investors. Derivatives alone are reason enough to keep a small portion of your wealth in gold-related assets.

For the remainder of your serious money, globally and geopolitically diversify it across ownership positions for maximum safety.

How large the derivative mess will grow to before the bottom falls out is anyone’s guess.

I predict we’ll continue muddling through just as we always have but just in case this house of cards one day comes crashing down, I know my investments will be safe when the dust settles.

That’s what I call peace of mind – and real world financial safety.

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