Friday, January 14, 2011

Gambling on Stock Prices, Kenny Rogers Helps to Explain Price Formation

1/14/2011 Portland, Oregon – Pop in your mints…
"You got to know when to hold 'em, know when to fold 'em,
Know when to walk away and know when to run.
You never count your money when you're sittin' at the table.
There'll be time enough for countin' when the dealin's done."
The Gambler by Kenny Rogers
Despite our warning yesterday, there is no sign on the Oregon coast that the Yuan invasion has begun to move north.  What a relief.  We are still trying to deprogram ourselves from converting everyday prices from Bolivianos into US Dollars.  Creating yet another everyday conversion mechanism for our mind to follow may be more than our system can handle.
A peek at the news today reveals that "Higher food and Energy Costs Lift Wholesale Inflation."  This "Wholesale inflation" is the type of inflation that rolls downhill to the consumer.  High rates of consumer inflation are on the horizon.  As night follows day, so do rising wholesale prices find their way downstream.  Even the ECB seems to think so, though it continues to buy bonds with printed Euros and leaves its special friends and family (read banking cartel) interest rate at 1%.  Worried about inflation?  You must be kidding.  Fellow taxpayers are advised to plan accordingly and get at least some physical silver and/or gold.
Peering further, We see continued evidence of Government mismanagement, this time in their handling of investments.  From Aaron Task at Yahoo's Tech Ticker:
"…Congressional Oversight Panel, whose latest report criticized the Treasury Department for selling shares at the IPO price of $33 vs. the $44.59 needed to recoup its investment.

"By selling stock for less than this break-even price, Treasury essentially 'locked in' a loss of billions of dollars and thus greatly reduced the likelihood that taxpayers will ever be repaid in full," the COP report states."

Shocking!  Government Bureaucrats made a bad investment even with unlimited access to insider information, complete control of upper Management of company they were to invest in, and a limitless supply of money printed by the Federal Reserve.  The company in this case is GM, but it could easily be AIG, Wells Fargo, or Goldman Sachs.  Of course, the very notion that the Government can invest and make money is complete rubbish.  They are completely and hopelessly overmatched by forward thinking minds.  Government, by definition, is always looking backwards, trying to figure out what happened.  It is large and clumsy.  Ditto for a majority of banks.
To sum up current events, they are continuing as expected under the current state of affairs.
Those of us in the US and most of the Western economies, it feels like we are on the verge of entering a further period of weakness which to most of us feels like a Depression but will likely be labeled as a "speed bump on the road to recovery" or some other disingenuous term created by academic economists who live by numbers. 
Here at The Mint, we pay attention to numbers but live and make decisions by feel.  Numbers lie.  Not because they want to, but because of the inescapable fact that by the time you put a number on something, it is past, history, and of little use for present or future decision making.
Why?  We are glad you asked.  When you are investing or making any other sort of future speculation, say, choosing the quickest route to work based on traffic, once you know or can quantify the actual outcome, a good portion of the advantage that was to be had by making the investment or choosing the route has been lost to you and gained by the persons who made the speculation without the benefit of data, or rather, by a gut feeling.  As a society that is bombarded by data and numbers and endlessly commissions studies to produce more data and numbers in an effort to understand what is happening, what works, and what doesn't work, this concept of trusting one's gut may seem confusing.
Allow us to sum it up this way.  As an investor, you want to be the person creating the data points that will later be studied, not the person who reads the studies of the data points and reacts to them.  You must operate on feel, on an observation of what is really happening, and then let the subsequent data points either confirm or deny your hypothesis.  This type of acting, which is what every human being does to some extent, whether they realize it or not, is called speculation and is commonly villainized as "Gambling."
The best investing advice, then, may have been given by Kenny Rogers.  Listen closely:
If you are hard of hearing, you can see the lyrics here.
As The Gambler would put it, the time to "run" out of the stock market is coming!
Stay Fresh!
P.S.  If you enjoy or at least tolerate The Mint please share us with your friends, family, and associates!
Key Indicators for Friday, January 14th, 2011

*See FED Perceived Economic Effect Rate Chart at bottom of blog.  This rate is the FED Target rate with a 39 month lag, representing the time it takes for the FED Target rate changes to affect the real economy.  This is a 39 months head start that the FED member banks have on the rest of us on using the new money that is created.