The American Output Gap Trap – Part I: We have three years to escape or we’re dead meat - Eric Janszen

[jk]

Re: The American Output Gap Trap – Part I: We have three years to escape or we’re dead meat - Eric Janszen

We have questions about oil trusts because the economics appear to run contrary to our expectation for oil resources to shrink. Oil trust returns are based on the value of the resource which is a function of both the amount of oil resource remaining and its unit price. In theory you can have a situation where the resource is depleting faster than the price is rising. It's a good question to pose to the Curbstone guys.

the problem is finding a way to buy oil in the ground in politically secure jurisdictions. not easy.

[FRED]

Re: The American Output Gap Trap – Part I: We have three years to escape or we’re dead meat - Eric Janszen

i find this site quite informative and a definite influence on my investment decisions. i was in gold before i found itulip, and it was in part ej's case for gold that got me reading here. it was lukester, many years ago now, who initially brought up the issue of peak oil. he was initially resisted by both ej and the rest of the community, but eventually ej adopted the idea with a modifying/clarifying "cheap" inserted in the phrase.

You must be forgetting Energy and Money that appeared in May 2006 shortly after iTulip.com reopened and long before Peak Oil was brought up here by anyone. That article was the beginning of our process of developing the Peak Cheap Oil theory because we were not satisfied with the doomer world typically painted by the members of Peak Oil crowd, such as James Howard Kunstler. Speaking of Kunstler, EJ challenged him to a debate and he accepted. We're still working out the details but it looks like it'll happen in October.

the discussion reinforced my notion of investing in canadian energy trusts. i haven't waited for any "official" calls of time to buy- i made my own call, but my education was aided by itulip. i am currently 19% in energy, mostly canadian producers that i started accumulating years ago. at least so far i'm glad i "jumped the gun." otoh, i sold my treasuries when tlt was 88-89; it's now 104-105. my bad. i don't expect to be told what to do here. i do expect to find things worth thinking about. and so far i have.

We'll probably be the last to sell Treasury bonds. Most either sold or even shorted them before now. They underestimated the House. We have questions about oil trusts because the economics appear to run contrary to our expectation for oil resources to shrink. Oil trust returns are based on the value of the resource which is a function of both the amount of oil resource remaining and its unit price. In theory you can have a situation where the resource is depleting faster than the price is rising. It's a good question to pose to the Curbstone guys.

[jk]

Re: Big thumbs up on content. Big thumbs down on format!

I'd just note that Lukester was notably wrong on a number of things: including that oil would hit $300 within 2 years, etc etc.

I'd also note that what Peak Cheap Oil means is vastly different than the Lukester/Oil Drum/no more oil we're all doomed ethic: Peak Cheap Oil is that there's PLENTY of oil, just not dirt cheap high quality oil.

The effect on investment is tremendously different: Peak Oil means prices spike and we all wind up fighting each other for a shrinking pool like crocodiles at a watering hole during a drought.

Peak Cheap Oil means the economic cost - therefore the economic benefit that must be derived - from each barrel of oil gradually ratchets upwards. This is a significant pressure on economies, on commodity prices, etc etc but is a gradual boiling of the frog.

Thus to say that EJ adopted what Lukester proposed is true in a certain sense, but quite untrue in the overall sense.

the global recession has kept oil demand in check, while production has remained essentially plateaued for several years, since about '05 iirc. i don't think anyone 5-10 years ago would have thought that we could be in the worst global recession since the 1930's, and have oil at $80/bbl. i think we could see a real price spike if global demand picks up. that's one scenario for triggering the next recession, perhaps.

[vinoveri]

Re: Big thumbs up on content. Big thumbs down on format!

The Bubble Cycle ended in 2007. The challenge going forward is first to identify the primary drivers of economic change for the next ten years and then construct a portfolio that allows us to capture gains as well as we did over the previous ten years with minimal risk and transaction costs. This is no mean feat and there is no guarantee that we will succeed as well this time as last. The bubble cycle was relatively simple and predictable. The interaction of a multiplicity of drivers over the next ten years is far more complex and less predictable, especially the political components. The dominant political components of the Bubble Cycle was asset price inflation and dollar depreciation. The political components of the next ten years include negotiation of a new international currency regime, a global battle over dwindling cheap oil supplies, domestic wrangling over how to manage the consequences of post-credit bubble era debt deflation, and how to escape the Output Gap Trap.

Would you please define or elaborate on what you mean by the end of the bubble cycle vis-a-vis what appears to be starting to happen at present with the ramp up in "all" asset classes that can be paper traded (bonds, equities and commodities)?

Does not ZIRP now going on for almost 2 years with no end in sight combined with QE guarantee that liquidity will be leveraged to bid up assets in bubble fashion. Even if securitization of private debt is gone, and the bubble machinery thereof dead, do not the global central bank policies generate bubbles? Why should we not look for those to invest in, even if for a short time of 1-2 years?

Do you deny the existence of bubbles inflating around the world or do you acknowledge them but just find them not worth "investing" in?

[c1ue]

Re: Big thumbs up on content. Big thumbs down on format!

it was lukester, many years ago now, who initially brought up the issue of peak oil. he was initially resisted by both ej and the rest of the community, but eventually ej adopted the idea with a modifying/clarifying "cheap" inserted in the phrase.

I'd just note that Lukester was notably wrong on a number of things: including that oil would hit $300 within 2 years, etc etc.

I'd also note that what Peak Cheap Oil means is vastly different than the Lukester/Oil Drum/no more oil we're all doomed ethic: Peak Cheap Oil is that there's PLENTY of oil, just not dirt cheap high quality oil.

The effect on investment is tremendously different: Peak Oil means prices spike and we all wind up fighting each other for a shrinking pool like crocodiles at a watering hole during a drought.

Peak Cheap Oil means the economic cost - therefore the economic benefit that must be derived - from each barrel of oil gradually ratchets upwards. This is a significant pressure on economies, on commodity prices, etc etc but is a gradual boiling of the frog.

Thus to say that EJ adopted what Lukester proposed is true in a certain sense, but quite untrue in the overall sense.

[ST]

Re: Big thumbs up on content. Big thumbs down on format!

Well said, FRED.

This summation is something that new subscribers should copy/paste to keep:

"The Bubble Cycle ended in 2007. The challenge going forward is first to identify the primary drivers of economic change for the next ten years and then construct a portfolio that allows us to capture gains as well as we did over the previous ten years with minimal risk and transaction costs. This is no mean feat and there is no guarantee that we will succeed as well this time as last. The bubble cycle was relatively simple and predictable. The interaction of a multiplicity of drivers over the next ten years is far more complex and less predictable, especially the political components. The dominant political components of the Bubble Cycle was asset price inflation and dollar depreciation. The political components of the next ten years include negotiation of a new international currency regime, a global battle over dwindling cheap oil supplies, domestic wrangling over how to manage the consequences of post-credit bubble era debt deflation, and how to escape the Output Gap Trap."

[jpetr48]

Re: Big thumbs up on content. Big thumbs down on format!

Fred,

What makes itulip unique is not only its readers but its subscribers. As a new subscriber, I am constantly challenged to think outside of the quick fix economic sound bytes of today.
EJ has been cautious in making any "new idea" recommendations because he studies and formulates first before firing out fad ideas.
Communities like itulip understand we need a nation of producers and no longer consumers of products, information etc. That means subscribers & members become partners.
My compliments to all long term subscribers and of course EJ
Joe

[LargoWinch]

Re: Big thumbs up on content. Big thumbs down on format!

I have to be honest xPat, I am affraid that I lack to sophistication to put in place such strategy and even to understand some of the terms you are using.

Looking forward to learn more as they say! Thanks for the reply.

Hi Largo,

One thing that I think sets iTulip apart is the respectful conversation and sense of community that exists here. ZeroHedge obviously has more up-to-the-minute trading perspectives, but the "member" commentary is subadolescent on a good day. While I don't really think this site was meant to be ABOUT trading in the short term, this community is certainly a good place to discuss such subjects.

The AUDJPY-ES convergence trade will keep working until the underlying correlation pattern breaks down. Until then, it's as close to a sure deal as you can find. As to capital risk, it's all about the stops. When the divergence blows out to (say) 10 ES-points, you put the convergence trade on with a target of crossing the line (zero divergence) and a stop at whatever your judgment tells you. My approach was to stop the trade at a 50% excess over the initial divergence. I only got stopped out once that way, and of course the trade turned right around and converged right after I got stopped out. I ran the trade successfully without getting stopped out at least 10 times. When ZH announces the opportunity for the trade, it's usually over before you get there. But if you plot an AUDJPY overlay on your realtime ESZ0 screen, you can see the entry opportunities yourself in real time. Unless you are way better at fancy trading rules than I am, you have to watch the trade manually, since the stops are relative and not at hard price points. As to capital risk, it's contained in the stops and there's enough liquidity in both markets to almost eliminate slippage risk. The only real cost is available margin. I was trading 200 to 300 ES contracts against 10 - 15mm Euros on the FX leg. The risk is well contained but the margin requirement is non-trivial. But a 10 ES-point convergence on 250 contracts yields a $125k profit, usually in about an hour, with very low risk.

As for posting more in trader's corner, I have to confess that I find this site hard to navigate. I don't read all the posts all the time the way I do on some other sites. I read the Ask EJ stuff and the comments under the EJ commentaries, and other topics if they catch my eye. But following the whole thing is too much work for the benefit involved IMHO. That would be one criticism I would (respectfully) levy against this site: The forums are hard to follow.

xPat

[FRED]

Re: Big thumbs up on content. Big thumbs down on format!

Thanks.

I'm not sure what the most efficient way for getting a refund is. Technically, under contractual law, you have paid for the subscription period and are only entitled to a refund if the site does not deliver at all (although I never bothered to read the fine print).

I don't see why my comment should be called "smearing". I've made my comment publicly and left it to the site administrators to decide whether my subscription can be/should be cancelled because that is what I would like to do. Do they have to do this legally? No. I also am not sure that a private e-mail would do this more effectively.

We have in the past received PM's from subscribers who did not "get" our analysis and our approach. We are glad to refund and have done so in the past, but the requests are rare. As I recall, we have only received three refund requests since 2007 when we started our subscription service. The most common feedback we get is that our service is vastly under-priced for the value it delivers compared to other services. Even though our expenses are rising, we are reluctant to raise prices because we pride ourselves at providing world class analysis to a broad range of readers.

I'm being very honest about my opinions here. One doesn't have to get offeneded by these things. This is not a personal quarrel. We disagree on the utility of the content on this site. There are those who may consider it invaluable, which is fine. My own view is that the content is not useful if you need to invest money regularly. If you have a high cash flow and high savings, you need to regularly think about investments. What you did with the money a decade ago when everything was depressed (other than the Nasdaq and the DOW) is not relevant now. What is relevant is what you do with fresh savings.

Our philosophy has for ten years had through the Bubble Cycle era been that it was not possible to earn a decent return on savings on a risk-adjusted basis with a traditional buy-and-hold strategy based on a portfolio of stocks and bonds. We also believed that net of transactions costs -- fees and taxes -- an actively traded portfolio was likely, due to high volatility, to under-perform a portfolio constructed for the conditions we foresaw, of asset price inflation, deflation, and reflation. We put substantial effort into devising a portfolio composed simply of gold and Treasury bonds. If you bought Treasury bonds from a Treasury Direct account as we recommended in the Fall of 2000, transaction costs were virtually zero over the entire period. The risk-adjusted returns are reviewed here.

The Bubble Cycle ended in 2007. The challenge going forward is first to identify the primary drivers of economic change for the next ten years and then construct a portfolio that allows us to capture gains as well as we did over the previous ten years with minimal risk and transaction costs. This is no mean feat and there is no guarantee that we will succeed as well this time as last. The bubble cycle was relatively simple and predictable. The interaction of a multiplicity of drivers over the next ten years is far more complex and less predictable, especially the political components. The dominant political components of the Bubble Cycle was asset price inflation and dollar depreciation. The political components of the next ten years include negotiation of a new international currency regime, a global battle over dwindling cheap oil supplies, domestic wrangling over how to manage the consequences of post-credit bubble era debt deflation, and how to escape the Output Gap Trap.

The first step is to lay out our case this month for the main drivers over the next ten years. We covered the first key driver in this article, the Output Gap Trap. Next we lay out the likely trajectory of the other three drivers. Next we attempt to model how they might interact with each other. Finally we relate these to asset prices.

To help us decide how to respond to this macro environment we have spent a year searching for investment professionals who share our vision of how the world will look. Each takes a different approach to the challenge of managing risk and earning decent returns through this period. We plan to present these professionals to subscribers in a series of webinars. The first of these is provided for free to subscribers later this month. So far 70 members have signed up at the link provided in Part II of this article. Even if a subscriber likes what they hear but is not in a position to meet the minimum account requirement, they will get exposure and a chance to ask questions of what we believe are the very best managers in the industry.

We also plan to make Postcatastrophe Economy Portfolio Strategy available to subscribers, once we work through a few final regulatory and compliance issues that we hoped we'd work out in September. This reveals another benefit of the gold and Treasuries portfolio that we are losing in the new era: simplicity.

The only reason that we have any optimism that we are likely to navigate the troubled environment of the next ten years, as we did previously by out-performing approximately 80% of professional portfolio managers over the past ten years, is that we have over 12 years learned how to analyze the political economy in a way that combines both qualitative and quantitative measures, and have as a result avoided the mistake of expecting a deflation spiral as a result of the collapse of the mortgage credit bubble in 2008 and 2009.

By way of example, I was a student when the Nasdaq collapsed. So what happened then is only interesting from the point of view of learning from past experience and not any more. The bulk of my cash savings have come in the last five years and for someone like me who is still going higher up the earning curve, becoming complacent about some good past investment decisions doesn't cut it. You need new ideas about where to invest money. They are sadly lacking here.

If that's how you feel then indeed this is not the place for you. Please PM me and we'll gladly give you a refund.

Re: Big thumbs up on content. Big thumbs down on format!

Hi Largo,

One thing that I think sets iTulip apart is the respectful conversation and sense of community that exists here. ZeroHedge obviously has more up-to-the-minute trading perspectives, but the "member" commentary is subadolescent on a good day. While I don't really think this site was meant to be ABOUT trading in the short term, this community is certainly a good place to discuss such subjects.

The AUDJPY-ES convergence trade will keep working until the underlying correlation pattern breaks down. Until then, it's as close to a sure deal as you can find. As to capital risk, it's all about the stops. When the divergence blows out to (say) 10 ES-points, you put the convergence trade on with a target of crossing the line (zero divergence) and a stop at whatever your judgment tells you. My approach was to stop the trade at a 50% excess over the initial divergence. I only got stopped out once that way, and of course the trade turned right around and converged right after I got stopped out. I ran the trade successfully without getting stopped out at least 10 times. When ZH announces the opportunity for the trade, it's usually over before you get there. But if you plot an AUDJPY overlay on your realtime ESZ0 screen, you can see the entry opportunities yourself in real time. Unless you are way better at fancy trading rules than I am, you have to watch the trade manually, since the stops are relative and not at hard price points. As to capital risk, it's contained in the stops and there's enough liquidity in both markets to almost eliminate slippage risk. The only real cost is available margin. I was trading 200 to 300 ES contracts against 10 - 15mm Euros on the FX leg. The risk is well contained but the margin requirement is non-trivial. But a 10 ES-point convergence on 250 contracts yields a $125k profit, usually in about an hour, with very low risk.

As for posting more in trader's corner, I have to confess that I find this site hard to navigate. I don't read all the posts all the time the way I do on some other sites. I read the Ask EJ stuff and the comments under the EJ commentaries, and other topics if they catch my eye. But following the whole thing is too much work for the benefit involved IMHO. That would be one criticism I would (respectfully) levy against this site: The forums are hard to follow.

xPat

[LargoWinch]

Re: Big thumbs up on content. Big thumbs down on format!

The AUDJPY-SPX reconvergence trade has pocketed me middle six figures...

Six as in 6 as in $X00,000? Woacaramba! Good for you xPat.

What kind of capital at risk are we talking about to achieve such a thing? Seven figures? Also, how many six figures losses are required to do this?



Here is what I am proposing: xPat please post your trades on "Trader's Corner" this way hv sticks around and I get to become as wealthy as Croesus or possibly even metalman for that matter. ()


PS: the whole post is "tongue in cheek" here, except for you posting your trades...

Re: Big thumbs up on content. Big thumbs down on format!

Hi again HV,

It sounds like I offended you and that was not my intent. I was merely putting myself in EJ's shoes. I don't know him personally, but my perception is that he's a guy who doesn't really need the money but enjoys doing this. If I were him and you sent me a PRIVATE e-mail asking for a refund, I would give it to you. But if you came into my virtual online "house" and declared my life's work to be "a complete waste of time", I would probably take offense and be less inclined to honor your request for a refund.

For whatever it's worth, I agree completely that this site is useless for day to day trading advice. What happened this weekend with the G20 was critical for short term traders, and I doubt you'll even see it mentioned here. That's not EJ's cup of tea. For me, as a full-time private investor, this site is invaluable specifically because it is so different from the rest. It is always about the long term big picture, and EJ's commentaries help pull me out of the day to day trading signal crap and see the forest through the trees, so to speak. As jpatter said, I too have on occasion become frustrated with follow-through on this site, but I accept it for what it is.

So let's get this on a useful track and talk about what might work better for you.

ZeroHedge.com is both the best and the worst of the investment sites on the net. Separating the ZH brilliance from the ZH bullshit is a skill that takes time to learn, but it's worth it. My rule of thumb is that there is no better place on the net to get a list of relevant topics. Expect most of them to be communicated with undue hyperbole and for there to be some articles that are just pure nonsense. You have to have the brains to separate the wheat from the chaff, but there are a lot of really worthwhile things there. The AUDJPY-SPX reconvergence trade has pocketed me middle six figures, and I found it there. Nic Lenoir's technical market commentaries are some of the best on the net, and they're free. You have to weed through the GATA posts and other bullshit to find the gems, but they are there.

Tony Boeckh has been publishing a fantastic FREE newsletter for about 6 months, and his book The Great Reflation was a must-read. I think he is about to go paid on the newsletter but I suggest reading through a few back-issues of the free version to see if it works for you.

FinancialSense.com gets dismissed by many as "just for newbie retails" because the podcast is designed to be understandable by everyone, but they get some fantastic articles (all free) on their "Financial Sense Online" area of the website. I always peruse them to look for useful new stuff.

TheOilDrum.com is more of a peak oil awareness site than an investment site, but it's free and is a wealth of information. Very worthwhile if you care to specualte on the coming peak cheap oil price shock and economic impacts.

ChrisMartenson.com is not really an investment site - more about Dr. Martenson's predictions of the macro economy and how it will affect average people. The best stuff requires a subscription but the free content is pretty darned good. Worth putting on your RSS reader or favorites list.

I hope these suggestions will help you find content more along the lines you are looking for. As to your rhetorical comment that you're not sure what the most efficient way to get a refund is, the answer is simple: Don't piss anyone off! You are correct that in terms of contract law, EJ owes you exactly nothing and has the legal right to keep your money laughing all the way to the bank. If you take a more respectful approach you might persuade him to feel sympathy for the fact that you obviously chose the wrong site to subscribe to, but public comments about his site being a waste of time probably aren't the way to schmooze him.

Best,
xPat

[LargoWinch]

Re: Big thumbs up on content. Big thumbs down on format!

First, I agree with jpatter666: it is great to have you around hv and I hope you stick around.

I'm not sure what the most efficient way for getting a refund is. Technically, under contractual law, you have paid for the subscription period and are only entitled to a refund if the site does not deliver at all (although I never bothered to read the fine print).

I don't see why my comment should be called "smearing". I've made my comment publicly and left it to the site administrators to decide whether my subscription can/be should be cancelled because that is what I would like to do. Do they have to do this legally? No. I also am not sure that a private e-mail would do this more effectively.

Here I agree with xPat; a simple pm to FRED and I am sure you can get this resolved. Posting such request on an open public thread is unwaranted and probably not the best way to obtain what you seek.

I'm being very honest about my opinions here. One doesn't have to get offeneded by these things. This is not a personal quarrel. We disagree on the utility of the content on this site. There are those who may consider it invaluable, which is fine. My own view is that the content is not useful if you need to invest money regularly. If you have a high cash flow and high savings, you need to regularly think about investments. What you did with the money a decade ago when everything was depressed (other than the Nasdaq and the DOW) is not relevant now. What is relevant is what you do with fresh savings.

By way of example, I was a student when the Nasdaq collapsed. So what happened then is only interesting from the point of view of learning from past experience and not any more. The bulk of my cash savings have come in the last five years and for someone like me who is still going higher up the earning curve, becoming complacent about some good past investment decisions doesn't cut it. You need new ideas about where to invest money. They are sadly lacking here.

Now here is the meat of the matter: you are not happy with the services provided by iTulip inc. Fine. Everyone I am sure will respect that opinion, although some - such as myself - will disagree.


What I am unsure about is:

a) Why such reaction now? iTulip has always been a macro-forum, I am sure you are very much aware of that since at least June of 2008.

b) Isn't the proposed allocation producing a given return each year? If this strategy produces higher returns after fees and taxes on a risk-adjusted basis when compared to constantly trading the stock market, what is the issue?

c) What to do with fresh savings? Simple; I simply follow my selected allocation by rebalancing my portfolio once every quarter or so. Again, new savings does not mean you have to trade them if you decided otherwise as per "b"...

d) EJ indicated that the next major shift in allocation is just around the corner. Furthermore, this strategy will address exactly what you feel iTulip is currently lacking: tradable advice.


In the end, we all respect your decision and value your opinion, but I still do not understand why...

[jk]

Re: The American Output Gap Trap – Part I: We have three years to escape or we’re dead meat - Eric Janszen

i find this site quite informative and a definite influence on my investment decisions. i was in gold before i found itulip, and it was in part ej's case for gold that got me reading here. it was lukester, many years ago now, who initially brought up the issue of peak oil. he was initially resisted by both ej and the rest of the community, but eventually ej adopted the idea with a modifying/clarifying "cheap" inserted in the phrase. the discussion reinforced my notion of investing in canadian energy trusts. i haven't waited for any "official" calls of time to buy- i made my own call, but my education was aided by itulip. i am currently 19% in energy, mostly canadian producers that i started accumulating years ago. at least so far i'm glad i "jumped the gun." otoh, i sold my treasuries when tlt was 88-89; it's now 104-105. my bad. i don't expect to be told what to do here. i do expect to find things worth thinking about. and so far i have.

[hayekvindicated]

Re: Big thumbs up on content. Big thumbs down on format!

toast,

I don't think you're objectively looking at what was said.

I couldn't agree more that critical feedback from the community is half the value here. But HV's gripe wasn't "I think your analysis is wrong because XXX". It amounted to "I wasted my money subscribing because this site is useless". He's certainly entitled to that view too. But his comment did not express a criticism of the base post. It only expressed that he thought there was no useful "tradeable" content on this site, and that he had wasted his money by subscribing and regretted that decision.

My point was simply that making comments that imply the site is without value probably isn't the most effective way to negotiate a refund, which is what he appears to want. If he had offered a substantive counter-argument, I'd have agreed with you, but he didn't.

xPat

Thanks.

I'm not sure what the most efficient way for getting a refund is. Technically, under contractual law, you have paid for the subscription period and are only entitled to a refund if the site does not deliver at all (although I never bothered to read the fine print).

I don't see why my comment should be called "smearing". I've made my comment publicly and left it to the site administrators to decide whether my subscription can be/should be cancelled because that is what I would like to do. Do they have to do this legally? No. I also am not sure that a private e-mail would do this more effectively.

I'm being very honest about my opinions here. One doesn't have to get offeneded by these things. This is not a personal quarrel. We disagree on the utility of the content on this site. There are those who may consider it invaluable, which is fine. My own view is that the content is not useful if you need to invest money regularly. If you have a high cash flow and high savings, you need to regularly think about investments. What you did with the money a decade ago when everything was depressed (other than the Nasdaq and the DOW) is not relevant now. What is relevant is what you do with fresh savings.

By way of example, I was a student when the Nasdaq collapsed. So what happened then is only interesting from the point of view of learning from past experience and not any more. The bulk of my cash savings have come in the last five years and for someone like me who is still going higher up the earning curve, becoming complacent about some good past investment decisions doesn't cut it. You need new ideas about where to invest money. They are sadly lacking here.