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...from Dr. John - Warning Goat Rodeo Ahead

Goat Rodeo - Appalachian slang for a chaotic, high-risk, or unmanageable scenario requiring countless things to go right in order to walk away unharmed.

Over the years, of the most frequent phrases in these weekly comments has been "on average." Most of the investment conditions we observe are associated with a mix of positive and negative outcomes, so rather than making specific forecasts about future market direction, we generally align our investment position in proportion to the average return/risk outcome, recognizing that the actual outcome may be different than that average in any particular instance.

Once again, we now have a set of market conditions that is associated almost exclusively with steeply negative outcomes. In this case, we're observing an "exhaustion" syndrome that has typically been followed by market losses on the order of 25% over the following 6-7 month period (not a typo). Worse, this is coupled with evidence from leading economic measures that continue to be associated with a very high risk of oncoming recession in the U.S. - despite a modest firming in various lagging and coincident economic indicators, at still-tepid levels. Compound this with unresolved credit strains and an effectively insolvent banking system in Europe, and we face a likely outcome aptly described as a Goat Rodeo.

My concern is that an improbably large number of things will have to go right in order to avoid a major decline in stock market value in the months ahead. We presently estimate that the S&P 500 is likely to achieve a 10-year total return (nominal) of only about 4.7% annually, which reduces the likelihood that further gains will be durable even if they persist for a while longer. In the context of present valuations and a probable Goat Rodeo in the months ahead, my impression is that the recent market advance may be a transitory gift.

Market Climate

As of last week, the Market Climate for stocks was characterized by conditions we associate with a "whipsaw trap," coupled with overvalued, overbought, overbullish conditions and evidence of exhaustion that has only a handful of generally awful historical peers. Strategic Growth and Strategic International remain tightly hedged, though in both funds, we've clipped a few percent from our hedges to reflect the more defensive composition of our holdings. Though steep market declines tend to be indiscriminate (with even defensive stocks often acting as if they have a beta of 1.0), we recognize that "risk on" days can also be very uncomfortable when defensives lag the market and our hedges bite with full force. The modest change to our hedge is intended to maintain our downside protection while hopefully producing a little bit less day-to-day discomfort on days when Wall Street suddenly goes "risk on" and chases banks, financials, materials, and high-debt cyclicals, all of which we hold with smaller weight than the major indices reflect. Overall, however, we would still characterize our investment position as strongly defensive.

In Strategic Total Return, we're seeing some moderate shifts in the Market Climates for bonds versus precious metals. We used last week's weakness in bonds to increase the duration of the Fund toward a still moderate 4.5 years, while using the strength in precious metals shares to clip back our holdings below 10% of assets. Given the volatility of precious metals shares relative to bonds, the overall effect is to move the Fund to a somewhat more conservative stance, in the sense that day-to-day volatility is likely to be lower than it has been with a more significant precious metals position. While the Market Climate for precious metals shares remains positive, we observed a discrete reduction in our projected return estimates, and are aligning our investment stance proportionately.

http://www.hussman.net/wmc/wmc120130.htm

Ten Dimensions

Occupy Baby - The Original 99% Movement

General Butler addressed the Bonus Army in Washington D.C. in 1933, as they “occupied” D.C. to demand compensation for their service to the country: General Butler invoked the 99% movement, telling the veterans: We are divided, in America, into two classes: The Tories on one side, a class of citizens who were raised to believe that the whole of this country was created for their sole benefit, and on the other side, the other 99 per cent of us, the soldier class, the class from which all of you soldiers came. That class hasn’t any privileges except to die when the Tories tell them. Every war that we have ever had was gotten, up by that class. They do all the beating of the drums. Away the rest of us go. When we leave, you know what happens. We march down the street with all the Sears-Roebuck soldiers standing on the sidewalk, all the dollar-a-year men with spurs, all the patriots who call themselves patriots, square-legged women in uniforms making Liberty Loan speeches. They promise you. You go down the street and they ring all the church bells. Promise you the sun, the moon, the stars and the earth,–anything to save them. Off you go. Then the looting commences while you are doing the fighting. This last war made over 6,000 millionaires. Today those fellows won’t help pay the bill. Indeed, veterans today support the 99% movement. They understand … just as General Butler understood. As Butler wrote: WAR is a racket. It always has been. It is possibly the oldest, easily the most profitable, surely the most vicious. It is the only one international in scope. It is the only one in which the profits are reckoned in dollars and the losses in lives. A racket is best described, I believe, as something that is not what it seems to the majority of the people. Only a small “inside” group knows what it is about. It is conducted for the benefit of the very few, at the expense of the very many. Out of war a few people make huge fortunes. In the World War [i.e. WWI] a mere handful garnered the profits of the conflict. At least 21,000 new millionaires and billionaires were made in the United States during the World War. That many admitted their huge blood gains in their income tax returns. How many other war millionaires falsified their tax returns no one knows. How many of these war millionaires shouldered a rifle? How many of them dug a trench? How many of them knew what it meant to go hungry in a rat-infested dug-out? How many of them spent sleepless, frightened nights, ducking shells and shrapnel and machine gun bullets? How many of them parried a bayonet thrust of an enemy? How many of them were wounded or killed in battle? Out of war nations acquire additional territory, if they are victorious. They just take it. This newly acquired territory promptly is exploited by the few — the selfsame few who wrung dollars out of blood in the war. The general public shoulders the bill. No wonder the 1% persecute pacifists: they threaten the world’s most profitable game. No wonder – as Nazi leader Hermann Goering noted – the war profiteers are always trying to trick the people into supporting war: Why of course the people don’t want war … But after all it is the leaders of the country who determine the policy, and it is always a simple matter to drag the people along, whether it is a democracy, or a fascist dictatorship, or a parliament, or a communist dictatorship … Voice or no voice, the people can always be brought to the bidding of the leaders. That is easy. All you have to do is to tell them they are being attacked, and denounce the pacifists for lack of patriotism and exposing the country to danger. It works the same in any country. http://www.ritholtz.com/blog/2012/01/the-original-99-movement/

Asset Class Performance Year-to-Date

Tango

L. A. Woman

"Ditching mystic metaphors for sinewy, dirty realism, Morrison sings like a cripple with a cough: wrecked, filthy and flailing at real and imagined demons. All Doors albums court the darkness, but previous efforts burst with the goofball color of a bad acid trip. L.A. Woman is sullen and kidney-colored, full of the mysterious bruises of the diseased and drunk. It's microscopic Americana: hellhound blues, liberated jazz, Hank Williams and the big beat, Ol' Blue Eyes, Bo Diddley. It's a lawless AM radio station manned by a schizo, spinning dive-bar bands for people more damaged than he is — broadcasting live from La Cienega." http://www.laweekly.com/content/printVersion/1588813/

Things We Say...

The Monk and the Fish

by Michael Dudok de Wit "The genesis of the film was the ending. It was that sequence I wanted to create, where there is a serene union between the monk and the fish. The ending by itself would be flat, too abstract, to pull the audience in, so I clearly needed to have a build-up, to establish and feel empathy with the character. In contrast to the ending, in the beginning the monk is obsessed, obsessed, obsessed, but in the ending he arrives at a resolution. In a quiet way, not with a big act."

Nature by Numbers

Nature by Numbers from Cristóbal Vila on Vimeo.

@JamesGRickards - Gold is Money and The Golden Rule

100 Years in 10 Minutes

...what makes the cut? Europe. America. Men. And a long list of downers: war, depravation, natural disaster, a-bombs, social crisis, financial crisis, genocide and assassination, all set to a dramatic soundtrack by Hans Zimmer. What gets left out? Anything that seemingly makes life worth living and (with some minor exceptions) human achievement. And, yes, Africa and Latin America too... http://www.openculture.com/2012/01/100_years_in_10_minutes_a_quick_video_history_of_the_past_century.html

El Erian - Uncertainty, Headwinds and Opportunities

Space Rip

Dave Brubeck in Moscow

December 2, 1997. Exactly ten years after his first visit to Moscow, jazz legend Dave Brubeck returned to perform before the faculty and students of the Moscow Conservatory. During his concert, an audience member asked him to improvise on the old Russian sea shanty “Ej, Uhnem.” About two minutes into the improvisation, a young violinist rose from his seat and started to play along. You just have to love Dave’s surprised look at 2:09. This young man turned out to be a student at the conservatory. His name is Denis Kolobov and he is now a violinist of international renown. Denis must have mustered up all of his courage to cut into the performance of one of the great jazz pianists. But the day before, French jazz violinist Stéphane Grappelli had died in Paris and Denis decided to honor Grappelli’s memory in this way. What a great idea! By profession, Matthias Rascher teaches English and History at a High School in northern Bavaria, Germany. In his free time he scours the web for good links and posts the best finds on Twitter. http://www.openculture.com/2012/01/an_uplifting_musical_surprise_for_dave_brubeck_in_moscow_1997.html

No Hopium

Raise My Debt Limit

The Fibo Artist

Stand-up Economist

Mountain-side Bike Path...glad I'm a roadie

John Cleese on Creativity

Metaphysical Hangover Cure

http://bigthink.com/ideas/41611