Investor Psychology and Human Behavior........
Tom, I always find it amazing (well really not, because it's always so predictable) to see how investor behavior plays out.
We've just had a great lesson in human emotion in regards to greed and the capacity for belief.
Regarding the capacity for belief:
Natural Gas Inventories just reached ALL-TIME RECORD HIGHS...a complete and total disconnect from reality -- crushing the entire supply:demand shock thesis as promoted by the Bush Cowboy Cartel "CFR" front man lackey -- Matt Simmons
-- (can you tell I'm not a fan?)
The Nat Gas permabulls rode Natural Gas right up the mountain and over the cliff...because they ignored reality regarding the entire thesis.
They bought into nothing more than rampant speculation as an endorsement of the reality that they so badly wanted to believe.
The capacity for belief is a powerful component of the markets.
Nat Gas permabulls continued to ignore the build in inventories...and rationalized it away -- because prices continued to rise.
Then the perfect storm arrived for speculators via the dual direct hits of hurricanes Katrina & Rita...and Matt Simmons ran the supply:demand price shock thesis up the flag pole once again...and they rallied around that flag like gnats to a streetlight-- running Nat Gas thru $15.
As inventories continued to build into peak demand season -- they continued to live in a world of denial and rationalization -- because they wanted to believe that they had "special information" and "insight into the market" -- that the "rest" of the market did not...and greed blinded rationality.
Now inventories have reached ALL TIME RECORD LEVELS...which completely and utterly blows the entire thesis out of the water...and prices have collapsed by -70%.
For investors to deny that nearly the entire commodity complex is not a speculative bubble, is yet another classic lesson in hard-wired human behavior & emotion and yet another popular delusion propelled by the madness of crowds.
This run in commodities was fueled by the massive reflation of Japan & the USA, that led to a historic mis allocation of capital -- allowing speculators an unprecedented level of leverage and liquidity.
Of course, the emergence of China and India is going to lead to a longterm demand increase in natural resources and commodities.
But, that longterm increase resulted in individual commodities doubling in mere weeks and months -- a complete disconnect from real underlying longterm supply:demand dynamics.
Speculative Bubbles ALWAYS Pop...always have -- always will.
When, not if...
Greed always takes speculators up the mountain and off the cliff...
The trap door always gets opened when things get -- "too easy" and when GREED gets rampant in the market.
We had 2 grinding 100 point HUI death march corrections recently in the HUI in 2004 & 2005.
Now, we just had the HUI goldbugs index collapse from a high of HUI 401 on May 11th to a low of HUI 307 on Friday morning, May 16th.
-- that's a 94 point HUI Index correction in less than 6 trading days.
If that is not a speculative bubble -- I don't know what is.
As usual...
I got slammed for warning about it being "TOO EASY" ...and for saying "DON'T GET GREEDY"...
The permabulls arrived with all of the BS rationalization from US Dollar Armageddon, to the US Deficits going to collapse the stock market, the currency markets, bonds and the world as we know it...
Damn it -- they had information...secrets that no one else had, or believed.
THEY and ONLY THEY were "THE TRUE BELIEVERS"... "THE HOLDERS OF THE TRUTH"....and GOLD was that truth.
DAMN IT ! -- GOLD was going to the moon and they were holding on tight for the ride (just as they were told(vbg).
Well, a rollercoaster ride by any other name -- is still a rollercoaster ride.
Whether it was this one:
Or, this one:
What truly has surprised me the most about the SI threadsters, is that instead of an ongoing maturation of trading style, money management and philosophy -- it's still the "big casino" driven by the most banal of human behaviors and emotions.
Greed and the capacity to believe what has been spoon fed to them by the newsletter pundits and market mavens.
You can get a great read on market sentiment, the level of speculation and the general mindset of the market, by following the top market newsletters.
Back in 1999-2000 as the gold sector was being decimated and virtually everyone had thrown in the towel and you had your sanity doubted and were literally laughed at for even bringing up the concept of investing in gold, or goldstocks... the target market existed of only true, died-in-the-wool longtime goldbugs. Those bunker-dwellers who loaded up on MRE's, bottled water, diesel generators and thousands of rounds of ammo -- for the Year 2000 Armageddon.
The gold newsletter marketing message was addressed directly to "gold bugs" -- because no one else other than a battle-tested 'bug was listening.
Then as gold started to move...after the tech & internet bubble had popped....the audience broadened and the level of sophistication in the marketing ratcheted up a notch.
Slowly, as gold rose... the message changed from one only directed to "true believer"...died in the wool 'bugs, to contrarians and value investors.
Then gold really broke out in 2002 & 2003...and then the rest of the commodity cognoscenti began to look at gold as a leader and not a laggard...and they jumped on board.
Today the market is a little more sophisticated... they've been bombarded with every marketing message from every angle....everything from Central Bank conspiracy theories, the eminent collapse of the US Dollar and the Stock Market, to Nuclear War with Iran.
Now those with decade+ long resumes of knocking gold and anyone who would even think of investing in it (such as James Cramer and Toby Smith)...are among gold's biggest cheerleaders.
-- never a good omen of things to come.
So, now the Big PROMISE from the newsletters & market pundits to the goldbugs had to get bigger.
Gold and Goldstocks were no longer touted as just insurance, or a hedge against armageddeon... no longer just as deep value contrarian plays -- today gold and commodities have gone full circle and have become the momentum sector du jour -- and the big promise is now that -- "GOLD is going to make you rich!...and here's the big secret & reason why..."
The big promise from the newsletter marketers like Agora & Weiss have been getting bigger and bigger and bigger.
We began to see headlines like:
China, Petrodollars and Gold, Oh My!
GOLD Market Going Berserk!
$2000 GOLD!
The Case for $2158 Gold
$375 Million Dollar Gold Trader makes stunning prediction on heels of windfall profits. Reveals 7 tsunami's to sweep GOLD to all time highs currently under Wall Streets radar. Click here now!
(we love tsunami's now don't we ! -- great hook word ...that one stopped the skimmers & scanners dead in their tracks and created more than a little whiplash...God, you just had to know what each and every one of those "7" tsunami's were - now didn't you? (vbg)
We've seen every "mechanism" from the Massive Bailout of New Orleans, to the Bird Flu, a coming Derivatives Armageddon, Rampant Inflation, Helicopter Ben's appointment as the new Fed Chairman, Imminent Nuclear War with Iran, to now, a Chinese new ETF.
Monitoring these newsletters...especially the headlines; will tell you where the "market" is.
You need to be following newsletter publishers like Phillips Publishing's Investor's Insight that brings you the email blasts from the likes of Louis Navellier & Tobin Smith; to that of Agora Publishing via the Daily Reckoning, Whiskey & Gunpowder, or the 25 page sales letter controls, pitching for their paid subscription offerings like the Resource Trader Alert, the Richebacher Letter, or Steve Sarnoff's Option Hotline Service...and Weiss Research's -- Money & Markets and the Safe Money Report, in addition to their premium services.
You need to have your finger on the pulse of the goldbug market... these companies are mailing out literally millions of offerings out to the goldbug community and they quickly change their message to match the market sentiment.
It's a great indicator...if you can remain emotionally neutral and agnostic to a particular commodity, sector, or thesis.
You need to be able to "read" the changes in the degree of sophistication, skepticism and greed that exists in the market at any given period in time and by having your pulse on the "promise" and the "mechanism" that these highly skilled marketers are utilizing within an always dynamic market -- you will be ahead of...and not behind, the sentiment level of the sector.
Pay attention when you see them leapfrogging over each other, having to make bigger & bigger "promises" -- ie: headlines moving from "$1,000 Gold!" to "$2158 Gold!"... to then, having to use different "mechanisms" such as a "coming Gold ETF from China", or the recent headline from Agora -- "Better Than Gold!" (promoting Silver -- sadly "after" instead of "before" it had doubled in price and tripled the corresponding return in gold) ...then you can surmise that the "bigger hype & bigger promise" headline was no longer working... both a sign of a maturing and a speculative market, growing skeptical of claims and promises. When this happens... these newsletter marketers will shift gears and come up with a new "angle" ... a new "mechanism" such as a "Chinese Gold ETF", or "Bird Flu" as the "new secret information" that they will furnish you with to reinforce that very human desire to know that "secret" that's going to "make you rich"....
Was it not a warning sign when James Cramer began pitching a $3 metals stock like Euro Zinc ? ... when the likes of the Toby Smith's of the world are raving gold bulls ? When the stock newsletters have to ratchet up the big promise to $2158 Gold to get subscribers... or, more importantly -- when the "big promise" no longer works...and they have to change "mechansisms"...be it Bird Flu, or Chinese ETF's...
People... we got too much -- too fast. It was too easy... a blind monkey could throw a dart of late and make big money in commodities. Hopefully we learned something from the .dot bomb boom & bust bubble collapse.... about "this time it's different"... about "Big Promises".... about "HYPE".... about "everyone being on the bandwagon" and "the same side of the trade"...
But, people did not learn.
They never will....never have.
Because people are people...
Human nature, emotion and behavior have not changed in 2,000 years...and will not change in the next 2,000.
Gold bugs got complacent back in August and September 2005 and the missed the far superior risk:reward opportunities in Silver and Palladium...as well as in other metals.
Gold bugs got lazy and got greedy here of late... and they got their 3rd near 100 Point HUI Index shakeout.
This one in just 6 trading days:
Doyle Brunson was right:
"Play the Players -- Not the Cards"
Some things never change,
SliderOnTheBlack |
