Fear, the Mother of Violence

By: Rodney C. Cook | Tue, Feb 21, 2006
Print Email

The mother of violence walks amongst us. The first hint of fear in the financial markets could be seen last May. So I wrote our subscribers and reiterated my bullish position on gold for the first time in a year and a half. But this fear smells distinctively different and I feel compelled to bring forward a discussion of something truly obscene. After all, so much of what were mere expectations a few short years ago are now mainstream financial news. So my opinions had moved from obscene to downright respectable. But speaking about what I see for the next few short years will keep me lonely at cocktail parties once again: A catastrophic burst in the global bubble in human capital. Perhaps I should take a lesson from the maestro and speak with obscurity: "While this offers a perspective from which the effervescent elixir of tiny financial bubbles can be better understood and leveraged to improve personal sovereignty, and to establish a position from which fear and passivity dissolve as action takes precedent, it does little to instill hope for the vast majority of the stakeholders in global society." Yes, much better than: "Yer gonna die sukka."

The immediate and instinctive reaction to fear in financial realms is denial. But this may be ending as the fear that is beginning to be reflected in gold appears visceral. Simply put, it may well be the collective fear of death. A simple graph of world population would reveal that the number of humans has gone parabolic. If you removed the labels, all breeds of financial technical analysts would concur. A crash is inevitable if not imminent. So is the bubble in human capital is about to burst? How could this be?

An extensive discussion of population dynamics and carrying capacity would reveal much but leave us with just a few important take home lessons. The intrinsic growth rate underlying the exponential increase in the human population is constant and most argue that we have been able to maintain this rate of growth because we have been able to increase the carrying capacity of our world through innovation. This innovation takes many forms: all to increase the sophistication that we as individuals and societies use to improve our lot. But nothing is more critical than innovative social organization. Simply put, without our global efficiencies many would die. But is innovation sufficient?

My expectation is that innovation will be increasingly insufficient for highly centralized systems. Perhaps this fear in the market reflects a growing concern of the collective that Malthus was right and worse case scenarios for peak oil will play out. In that case the number of individuals for which innovation will be sufficient will be considerably limited. So regardless of the mechanism, if the grim reaper's shadow is cast, the collective mind should begin to exhibit fear proportional to the magnitude of the menace. This should be revealed first in the markets.

My past writings have been guided by Kondratieff. Those of us that have correctly used the long cycle to strategically manage our investments and our lives have done quite well. But the recent run up in precious metals has surprised most analysts and investors with uncharacteristic signs of strength. A few of the more astute have noticed subtle signs of strength that are excessive even for those expecting a violent return to honest money; signs that a parabolic forcing function perhaps a full order of magnitude stronger than the typical K wave has entered the market. If so, gold reaching parity with the Dow would be at the lower end of the range of probable outcomes. Nearly all scenarios for gold above this level include a significant role by the horsemen in reducing excess human capital.

This possibility has emerged from an effectively zero likelihood as we routinely continued to hone the quantitative discipline in our precious metals updates. Digging deeper to determine the best strategies for capitalizing on the primary trend, a consistency in ours and others' observations led us to pose a series of testable hypothesis. While admittedly these tests were tenuously cast and have low statistical power, we have consistently failed to reject the hypothesis that the freaking wheels are gona come off this suckka way fast. If the bounce off the 50 dma these past few days holds, then we fail to reject once again. And while the likelihood would still remain very low, our concern would grow. Even a fairly dramatic and sustained pullback would not cause us return our expectation to zero.

Subtle clues give this fear a likely time frame by consistently offering premiums to gold shares with particular profiles. Our investigations into established and emerging strategies for share selection have offered provisional evidence that is additionally disturbing. Shares with significant low cost production and short term potential for significant production have been uncharacteristically strong while participation by junior explorers has been sporadic with money flows easily explained by the attention offered by the established gold community. So is big new money is the scared money? This is interesting, as the gold community has more than its fair share of the paranoid. But it seems that the market is not as comfortable as it should be with risk. Again the data are weak as this could just be the normal rotation, but my concern will grow if ounces that will not be out of the ground in a fairly short time period are discounted as if they may never see the light of day.

So the action in precious metals may become more important as a prophet of obscene events than for the realization of obscene profits. Much is being revealed and it will be prudent for us all to adjust our strategies for life accordingly.

(A Precious Metals Update follows for subscribers)

***********************************************

Precious Metals Update

February 20, 2006

The Part 2 of this article shows recommendations and our sample portfolio. Specific recommendations are available only to paid subscribers. Subscribe at http://www.ObsceneProphets.com.


 

Author: Rodney C. Cook

Currently Rod is the founder and manager of Bull Trout Capital, a boutique investment company, and author of the FishWrapper, a private investment newsletter. Bull Trout Capital was founded to maximize returns based upon long cycle dynamics and Austrian economic principles. Dr. Cook uses internet based methodologies to identify sectors, strategies and shares that will most likely outperform at the current point in the cycle whilst maximizing upside exposure to potential economic dislocations. The FishWrapper features Dr. Cook's personal investments, methods and strategies where he has demonstrated extraordinary returns. Before Bull Trout he founded Sightward and authored patents (now owned by InfoUSA) to forecast human behavior on the internet; co-founded Ark Interface (now owned by xSides) to develop and patent innovative computer user interfaces; founded Optimas (now owned by Media Cybernetics) for medical and scientific image processing systems; and founded BioSonics Imaging division and developed their Optical Pattern Recognition System. Dr. Cook began his career as a Biometrician for the International Pacific Salmon Commission applying his doctoral dissertation in applied pattern recognition from the University of Washington College of Ocean and Fisheries Science.

Copyright © 2003-2006 Rodney C. Cook, Ph.D. All Rights Reserved

All Images, XHTML Renderings, and Source Code Copyright © Safehaven.com