The fiat money carry trade to buy gold and agriculture

Last year it did not matter what you bought, you made money. Today, many are shocked by the drop in stocks, silver and gold. One simple explanation for the drop in silver and gold could be the strength of the dollar. This alone will affect the value of commodities that are priced in dollars. But then, why are agricultural commodities like wheat or soybeans going up? Shouldn´t they also be going down? They are also commodities priced in dollars.

The end of the dollar carry trade
I think we are starting to see the end of the dollar carry trade. We are in the final phase of the surge in asset prices fueled by easy dollar credit and negative outlook for the future value of those dollars due to excessive money printing. During 2009 the dollar has been very weak against the euro and most currencies. This has encouraged especulators to borrow in dollars in order to buy assets and other currencies. This has recently reversed due to the weakness in the Euro Zone, due to the problems in Greece and the contagion of the crisis to Portugal, Spain, Italy, UK, Ireland... Now we watch the unwinding of the speculative chasers of the dollar carry trade to buy stocks, silver and gold.
However, I believe that western countries are so indebted that the only way out they have left is either default on their debts or printing money. It seems clear that the US and the UK already made their choice: printing money. Once the US starts printing money and debasing the dollar, the rest of the world has very limited options, basically, they can only start a devaluation of their own currencies in a race to the bottom. Otherwise they will be unable to be competitive in their exports.
In my opinion the drops in stocks and precious metals of yesterday and today are just signalling where the hot money was invested: stocks, gold and silver.
Last year many people bought gold with the "dollar carry trade": the outlook of the dollar looked so bad that they borrowed dollars to buy almost everything, including gold and stocks. But with the Euro so weak the "dollar carry trade" is wounded. Does this mean that prices of gold and silver are doomed because they surged due to the dollar carry trade and will die with the end of it, as some, like Derek Blain predict? I do not think so.


Black swan hunting for the year 2010.

After my first article I have been asked in several emails how did I manage to get high returns during several years and was challenged to give an example of the strategy I called "black swan hunting".
So I am up to the challenge and I will discuss now one of the "black swans" we intend to hunt during 2010:

Bye, dollar carry trade, wellcome fiat money carry trade!

Our black swan prediction is that the dollar carry trade will just transform into the euro carry trade, the swiss franc carry trade, the sterling carry trade, the new dollar carry trade... you get the point. An all fiat currencies carry trade. But this time, the amount of assets chased by the hot money will narrow dramatically. And what type of assets will this global fiat carry trade buy? We think it will mainly buy two type of things:

1) The only currency that can not be debased: gold. I actually believe that is the meaning of George Soros´ words that "gold is the ultimate bubble". I believe it is actually the ultimate bubble, the last one yet to occur due to the global fiat money carry trade. Because it is one of the few assets one could buy when all fiat currencies debase to the bottom. We are however only carefully buying gold, because we believe the unwinding of the dollar carry trade could still have room to go, but we will be aggressive buyers as soon as there are signs that this fall is over. To put a price, we may start buying strongly around and below 1040, the price at which the central bank of India bought 200 tons from the IMF.

2) But there is still the ultra-ultimate bubble, in Soros´ parlance. Commodities that are fundamental for basic human life, essentially food. This demand will suffer the least from the global crisis. Therefore we are buying wheat, soybeans and corn. Interestingly, the fact that agricultural prices seem stronger is an indication that no carry trade inflated the price of agricultural commodities. This makes me believe that agricultural commodities will start to profit the first ones from the coming black swan: "the global fiat money carry trade".

To contact us, please e-mail: emoreno@cnio.es

By Eduardo Moreno-Lampaya

http://blackswanhunters.blogspot.com/

Eduardo Moreno-Lampaya is a private investor, has a PhD in biology and an MBA in administration of technology-based companies.

How predictable are black swans? The black swan hunters.

How predictable are black swans? The black swan hunters.

We invest using the scientific method and tools such as convergent evolution and comparative economic history in order to try to predict black swans. Here is our story:

1-The black swan.

The Black Swan (Cygnus atratus) is a large aquatic bird which breeds mainly in the southeast and southwest regions of Australia.
But the term black swan has also come to mean a highly improbable event with three main characteristics: 1- It is unpredictable. 2- It carries a massive impact. 3- After the fact we concoct an explanation that makes it appear more predictable than it was. Black Swan Events were described by Nassim Nicholas Taleb in his 2007 book, The Black Swan. Use of the term a black swan derives from the 17th-century European presumption that 'all swans must be white', because all three european species of swans (the whooper swan (Cygnus cygnus), the mute swan (Cygnus olor), and Bewick's Swan, Cygnus bewickii ) had white feathers. In that context, a black swan was something that was impossible, and could not exist.

However, after the discovery of black swans in Western Australia during the 18th century, the term metamorphosed to connote that a perceived impossibility may later be found to exist. But are really black swans so unpredictable or could an informed observer predict them? In other words, is there anything intrinsic in black swans that make them unpredictable, as Taleb argues, or is it just our lack of relevant information what leads to their unpredictability?

2- Black Swans are predictable.
To make the point, lets take the Black Swan (the bird) and tell a little story about its predictability. What I am trying to tell by this story, is that black swans (all of them, not only the birds) may be more predictable than the current wave of obscurantism promoted by the Nassim Nicholas Talebs of the world wants us to believe. It therefore goes beyond ornithological talk. I will argue that science starts to have tools to predict the future, not only in highly repetitive systems like astronomy, the cicles of the moon or a solar eclipse, but also in systems that seemed more unpredictable just a few years ago, like evolution or economy. For example evolution of Black Swans. Could one search for the information that would lead to the correct prediction of black swans? What does it take for an individual to become a black swan hunter? What type of information is it needed to hunt for black swans?

Obviously, because black swans are events that have not yet taken place, one needs to be able to predict the future. In the case of the Black Swan (the birds) one should be able to predict the evolution of the species. However, most evolutionary scientists assume that the outcomes of evolution are random, trends are little more than drunkard´s walks and most evolutionary products are masterpieces of improvisation. However I will argue, together with Cambridge´s researcher Simon Conway Morris, that evolution is much more predictable than generally assumed. And not only evolution, but the world is also much more predictable than generally assumed. So, as said above, lets start the story of Black Swan predictability and go back to 16th-century Spain. All swans described until now are white, but the explorers have just brought to the King and the Queen of Spain a very different type of swan found in what constitutes modern Chile. Everybody is puzzled. Have a look at it:

It is the black necked swan, Cygnus melancoryphus. A handful of people, those at the right place at right time, should be by now aware of at least two main points: 1- Some swan feathers can be black. 2- Not all swans are completely white. This should of course raise doubts about the impossibility of black swans. It is a hint that appeared more than hundred years before the discovery of black swans by europeans. But things get even better. The degree of predictability becomes huge thanks to the phenomenon known as convergent evolution. I will next argue that convergent evolution helps to predict the future.

3-What is convergent evolution?
Convergent evolution describes the acquisition of the same biological trait in unrelated animals. For example, birds have thousands of genes. Many genes are involved in pigmentation of the feathers. But one called MC1R plays a crucial role in controlling the type of pigment synthesized by animals, including humans. In particular, high activity of MC1R leads to synthesis of black pigments, whereas medium activity leads to the synthesis of red pigments and lack of activity leads to total lack of pigmentation (i.e., white). Interestingly, mutations in this gene appear in the Black Swan but not in the white swans. And even more interestingly, similar mutations appear in other black birds like black arctic skuas (Stercorarius parasiticus) or even black rock pocket mice. And a similar case happens with the black necked swan, where the same gene is mutated but in a different position, a position that leads to activation of MC1R and that it is also correlated with black color in chickens, quail and bananaquit. An it is even a mutation associated with rare black jaguars! What am I trying to get to? The fact that variations in the same gene are always involved in the creation of black birds is one proof of the power of convergent evolution and the few choices that the world can take to lead to events such as a Black Swan. It suggests that the world is very constrained and solutions are channeled by those constraints.
Of course, the degree to which constraints affects the predictability of the world is the subject of controversy. In his book Wonderful Life, Stephen Jay Gould argues that if the tape of life were re-wound and played back, life would have taken a very different course. Simon Conway Morris counters this argument, arguing that convergence is a dominant force in evolution, and that because the same environmental and physical constraints act on all life, there is an "optimum plan" which life will inevitably evolve towards, and therefore the outcome will be highly predictable. For example, Black Swans can exist and we can even predict which gene (out of thousands) they will mutate to become black.

4-Black swan hunting investment method.
I side with Simon Conway Morris and extend his argument to economic black swans. As mentioned at beguinning of this article, we have been investing for more than four years using the scientific method and tools such as convergent evolution and comparative economic history in order to try to predict black swans (even before they got the name...). We have had returns of more than 100% per year, having predicted the collapse of the spanish housing bubble, the rise of silver and gold and the problems in Greece and Dubai. Of course, past returns do not guarantee future returns, but we are excited and we plan to continue investing using our method of black swan hunting. We give lectures on black swan hunting. To contact us, please e-mail:
Eduardo Moreno-Lampaya
emoreno@cnio.es

http://blackswanhunters.blogspot.com/
Eduardo Moreno-Lampaya is a private investor, has a PhD in biology and an MBA in administration of technology-based companies.