What does the nations most successful trader hold – and why….

Posted by The Pragmatic Capitalist

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I wasn’t at my friend, Jim Grant’s, famed conference in New York. But I gather Bill Fleckenstein was. Bill notes that John Paulsen, the nation’s most successful trader (he made over two billion last year being short housing) spoke about gold (and I note that Paulsen has a huge position in gold shares). Said John Paulsen, “What I”m looking at is not where gold is going to be tomorrow, one week from now, one month from now, three months from now. What I’m looking is where is gold going to be vis-a-vis the dollar one year from now, three years from now, five years from now. And I think, with a high probability, at each of these points, gold will be higher than it is relative to the dollar today. That probability increases the further out you go. So when I look at what the risk is, the risk to me is far more in staying in dollars than it is staying in gold at this point.”

For more from Richard Russell please see the following:

Hope Is Not A Strategy & A Madman During A Hurricane



Richard Russell is better than fine wine.  His thoughts, as always, are excellent.  Investors interested in his daily missives would be wise to investigate his website:

There are two ways to view the stock market’s advance from the March lows. One way is to assume that the stock market, despite an awful lot of negative news, is discounting better times ahead. This is the usual way of viewing a steady stock market advance, and it is undoubtedly the way most bulls are thinking.

The other way to view the advance from the March low is that this is the normal and expected recovery following a semi-crash in the stock market. I consider the 2007 to 2009 collapse a semi-crash. The automatic recovery following a crash is the single surest action in the market. Normally following a crash, the market will recoup one-third to two-thirds of the territory lost during the crash. The Dow would have to advance to the 10300 area to recover just half its 2007 to 2009 loses.

Meanwhile, we are facing an extraordinary situation in US finances. Wall Street, or I should say, the Federal Reserve, has bailed out Wall Street banks and entities that were considered “too big to fail.” The actual and potential costs of the financial bailout put US taxpayers on the hook for $17.8 trillion (that’s trillion), which is more than the entire annual gross domestic product of the US.

In 1990 the 20 largest companies in the nation controlled 12% of US financial assets. Today the 20 largest companies control more than 70% of US financial assets. Many of these include corporations that have been deemed “to big to fail.” The Russell comment is “if they’re too big to fail, then they’re too big to exist.” In a true capitalist (not socialist) economy, if you fail you fail and you’re bankrupt. You just haven’t made the “grade.” If any business is so reckless and so ignorant of risk that it goes broke, then damn it — let it go under. And let its CEO and board be accountable. But that’s hardly what’s happening in the US today.

While the run of Americans are struggling with their economic lives, the big bankers are back “in business as usual,” paying out billions of dollars in bonuses and making profits on the backs of the taxpayers who bailed out these incompetents. And ironically, these same blundering bankers are now throwing road blocks in front of meaningful regulatory reform.

Even worse, the Congressional Budget Office estimates that the 2009 budget deficit will be almost $1.4 trillion, which is about 10% of GDP. As of September, 2009, the interest on the national debt was $383 billion or more than one billion dollars for every day of the year! By 2010 the national debt will be $20 trillion, and the US will be borrowing to pay just the interest on its out-of-control debt.

I prefer to keep it simple and basic. I look at the whole picture from a Dow Theory standpoint. A basic principle of Dow Theory is that the primary trend of the market and the economy cannot be manipulated. The primary trend, one way or another, will run its course to conclusion, despite the wishes or efforts of any government or congress or president or central bank.

In their effort to halt or reverse the primary bear trend, Bernanke and Geithner have virtually bankrupted the US. Their frantic efforts to “pump up” the US economy with an ocean of Fed-created junk money and zero interest rates have failed to inspire America’s consumers to go back to their high-spending ways. For the retail stores and chains, the “back-to-school” session has been a dud. Leading retail experts are already warning of a “slow to disastrous Christmas season.” The age of thrift has descended on America. And all the wild Fed and Treasury spending has only served to frighten US consumers into (can you believe?) saving.

Now the fright has moved into anger. Americans see that the Wall Street banks and Goldman have been saved. But what about the man on the street? Politicians respond to only two things — money and votes, and the pols are currently quaking at the thought of the next elections.

As far as Bernanke is concerned, there is only one path to follow — keep doing what you’ve been doing. More liquidity, keep the rate at zero, continue blabbing about “green shoots,” issue more propaganda about “the economy improving.”

Ironically, the talk has now turned to an “exit strategy” for the Fed’s program. This would mean raising interest rates and cutting back on government spending. Bernanke knows that at this point reversing the Fed’s stance would be disastrous. It could throw the nation into a deep recession or depression.

The exploding deficits and skyrocketing debt of the US are not lost in real money — gold. As the world’s central banks create new currencies in order to stem any rise in the dollar, all fiat currencies weaken. It now requires an increasing amount of junk currencies to buy an ounce of gold. Thus, against the time-honored standard, gold, fiat monies around the world are losing value or purchasing power. When it takes more of a currency to purchase a hamburger or a bicycle or an ounce of gold, you’re talking about inflation.




The author of The Pragmatic Capitalist is the founder and CEO of an investment partnership.  Prior to establishing his own business, TPC was a Merrill Lynch Financial Advisor.  TPC is a Georgetown University alumnus, growing up in the DC area and now living in Southern California.

The Pragmatic Capitalist is a jack of all trades.  Rather than focus on one facet of the U.S. equity markets, the goal is to assess and address global capital markets as a whole – with the understanding that all markets are intertwined and being an “expert” in one segment of the market without a vast knowledge of the others is futile.

The saying “common sense is very uncommon” has never been more applicable than it is to modern markets.  TPC attempts to approach markets with sound reasoning and as little emotion as possible.  A capitalist through and through, but always pragmatic…


TPC uses a top down investment approach.  The research and market methodology is based on cognitive science and the theory of chaos.  Through the understanding of market psychology you can derive that markets are non-linear dynamical systems which are susceptible to inefficiencies.  Markets are inefficient in short time periods due to their chaotic nature (a symptom of human psychological irrationality).  This creates opportunity.

Based on this methodology we employ risk management structures that account for the possibility of short-term inefficiencies and random occurrences within large and liquid systems.  Although there are short-term opportunities in markets, risk management is the overriding factor in achieving high absolute returns.  Black swans cannot be predicted, but they can be avoided by employing proper risk management.  This analytical, quantitative and systematic approach helps us in achieving our goal of high absolute returns.