Why Are Fanatics Usually Wrong?

Forex Fundamental Concepts or Lack Thereof

Why are fanatics usually wrong?  The last one I talked to was today about gold going to $5,000/oz.  It’s interesting to dissect the psychology of the fanatic and use some common sense investigation to see who they are and how they come to their conclusions.

 

Who are fanatics?  Fanatics are a group that gravitates toward the most awesome and outrageous claims.  Fanatics followed the Anna Nicole Smith tragedy daily.  They are the people supporting viewership of End of the World Discover Channel documentaries.  Don’t get me wrong it’s important to extrapolate things to avoid “Black Swan” scenarios like the recent subprime meltdown.  People should have been asking themselves; can real estate really keep growing this fast?  What would happen if these overleveraged speculators went bust due to a real estate slow down?  Is the subprime loan a tool created by the architects of the financial world to profit $500billion in a bubble explosion only they would see coming?  The last question should really get your gears turning because for the most part I believe it’s true.  Subprime loans should never have been allowed to grow at the rate they did.  So we should ask the question; who monitors subprime mortgage loans for risk of upsetting the real estate market?  Well the real estate market is a huge entity and the responsibility for monitoring something so large falls on the Federal Reserve as they loan and control credit to United States banks.  Once banks loosened requirements to write more subprime loans the Federal Reserve should have stepped in to monitor and take action if necessary to slow the exposure to high risk instruments.  There is a ludicrous argument circling that lays blame on consumers for the travesty.  First let me ask; would you rely on trading advisor to keep your lawn green?  Then why would you rely on high risk borrowers to make prudent decisions on mortgages?  By the way my lawn is green and I am a trading advisor.  I’m not saying you the reader expect these people to know what is going or to extrapolate the influence of high pressure sales and last minute modifications to mortgages.  The proof is probably in the meteoric rise in predatory mortgage lawsuits.  We’ve made a case for extrapolating relevant concepts to avoid what the financial world calls Black Swans or unexpected outcomes.

 

So how do fanatics come to their conclusions about the economy or commodity prices?  Well I suppose they are helped by networks pumping fear into the public about potential economic turmoil and insanely high energy prices.  I was watching CNBC mainly for humor’s sake this week when the reporter showed a 20 foot wide and 10 foot high display of gasoline prices steadily climbing.  For theatrical effect he climbed into a scissor lift typically used by construction workers to work on things 20+ feet above the ground and he raised himself about 13 feet in the air to show us where gasoline prices “could” go by next year if they continue at their present unsustainable rate.  He didn’t say unsustainable of course because that would calm the viewers down and they wouldn’t tell all their friends about the circus sideshow they watched on CNBC today showing $7+ gas prices in a year. 

The impetus to fanaticize fuel prices might be supported by the fact that fuel can never be worth zero.  A stock can become worth zero dollars if a company goes bankrupt but oil will always have some use and thus some value so I suppose these people find solace in their speculation that they can never be completely wrong.  Ok that argument is weak.  Perhaps they realize the world is growing and energy usage is growing while oil production is not growing.  That would be a legitimate argument, but they don’t like that argument because then we would have an objective rate of growth and an idea of production to create a legitimate price.  Fanatics find an analyst that talks about the economy in a way that pleases their emotions.  If the fanatic craves conflict and disorganization; which could be defined as a chemical addiction based in hormones, he or she will gravitate toward the drug dealer or financial analyst that gives them their fix.  If you’ve ever known someone who likes to fight a lot it’s most likely because they are addicted to the endorphins released during a fight.  Like any addict they always need more until they are unbearable to be around despite social programming to dissuade such behavior.  Well with financial fanatics it’s socially acceptable to speculate about economies being worth zero dollars or oil being worth $400 a barrel.   

 

Why are they wrong so often?  The market is mostly controlled by fear and greed.  When a trend explodes to the upside greedy people pile on to profit.  When a trend breaks down people sell fearing a collapse.  Fanatics are the cap of a bull market because they don’t get the information about the new trend soon enough to profit.  Fanatics are not good traders because they can’t trade for themselves.  They have to listen to analysts.  Near the end of the bull market analysts begin circus sideshows saying the market could go 50% higher in a short amount of time.  They think since it’s going up it should always go up and so is how the fanatic makes investment decisions.  The next time someone sits next to you saying oil is going to $400 a barrel and gold is going to $5,000 an ounce ask them if they know any rural Nebraska farmers that drive Mazeratis.

 

Here is the content of my post on ForexFactory:

Be reasonable when making speculative claims of $5,000/ounce. Think about it. Is there a global shortage of this substance? Does it follow fundamentals regarding supply? While at $300/oz was there enough gold in the world for everyone to buy an ounce? Would it make sense if the gold miners in Australia and Colorado became trillionaires in 3 years? I assume if gold hits $5,000 then soybeans must reach $60 a bushel? I'm not going to bring up oil because that causes a visceral reaction in the heads of the fanatical. Does it make sense that farmers would be driving Maseratis? Gold is a Dollar hedge so if the Dollar loses all faith/value then Gold would appreciate. Australian Dollars are about 80% tied to gold, so would Australian Dollars be worth $5 US Dollars? I suppose the question right now is; will the US Dollar gain value soon and bring commodity prices down? Jim Rogers said commodity bull market from 1999 to 2009. Jim said he's getting out in 2009. Notice he's been making a lot of appearances talking down US Dollars and talking up commodities and Asia near the end of his investment.
Just put a little perspective on things. I'm all for divesting portfolios, but gold is still a currency. It's a currency and it's money. Dollars are not money despite our common misconception. Gold has intrinsic value and is exchanged around the world as currency therefore is money. Dollars are fabric with no intrinsic value used to buy goods and services based on faith of a bank that prints them therefore they are currency. Fiat currency. If you think markets move according to crowds and psychology then gold should always be worth more than $1,000/oz. If you know there are entities that move the market and own the largest banks in the world (central banks) then you know prices mean very little as all the wealth in the world cannot be traded. Citi was the largest retail bank in the world last year. Citi was and is not owned by the people that own the world. Citi almost went bankrupt this year. The people that profited from subprime have to have an idiot to take the other side of their positions. Gold is less liquid than the mortgage market. Think about that. The US holds about $250billion in gold if we believe the tale they tell which is no longer audited for some reason. Subprime write downs are estimated to be worth $500billion and correct me but I think that's in the US alone and let me highlight that is losses only and not the whole market. Do you guys own real estate? Nothing is bigger than central banks and the people who profit off them.