I promise you I will mention gold before I am done today.
But first, I have to get into some real hair-raising “value investing” heresy…
Facts don’t move the market. Ideas do — period.
I know that can be hard to swallow. But it is an absolute fact, and the sooner you accept it, the happier — and richer — you will be.
If you’ll tolerate a brief rant on this, I will show you a way to leverage this idea into triple-digit gains. (I’m not guessing or talking through my hat here; the same trick has already done exactly that just a few weeks ago.)
Facts are Powerless — Until Someone Spreads Them Around…
A fact is a meaningless number until someone decides it matters and whispers it into someone else’s ear. Now that fact is an idea that is being transmitted from person to person, aka a “meme”.
Think about bacteria and viruses (viri?) for a moment: little useless bits of genetic material that can barely even reproduce on their own… But once they infect a population, they can change the course of history.
Memes also require humans to tote them around in our brains and pass them along from body to body. In the ancient world, it might have taken years for an idea to spread across a city. Now, one person can infect millions with the stupidest little ideas. Just think about fat kids with light sabers “going viral” on YouTube.
Greenspan Goes Viral
The classic viral investing tale I relate at conferences involves the penetration of the “Irrational Exuberance” meme back in 2000.
Everyone knows that the idea of irrational exuberance crashed the market back in 2000. Things were out of hand. Valuations were just too damned high: “This situation is irrational. The market has screwed the pooch: Get out now!”
But when did that whisper start? We can track the first public utterance of that exact phrase back to Alan Greenspan, during his speech to the American Enterprise Institute on December 5, 1996, on “The Challenge of Central Banking in a Democratic Society”:
Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past.
But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?
This was the birth of an history-altering meme.
But it took three more years — and another 88%! — before the murmur became a roar, and investors bailed en masse on the tech revolution.
As you can see an idea — a meme — infected a sufficient number of people, who then acted as a herd and altered the course of events.
Birth of the Banking Plague
This happens over and over again.
A more recent example: American banks were hurting long before the collapse of 2008.
The Federal Deposit Insurance Corporation’s Fall 2006 Outlook was already fretting about the exact factors that would tank the banks and the markets a year later:
As funding strategies and mechanisms have changed, the assumptions behind traditional liquidity ratios (that investments are the only liquid assets and deposits are the only stable and acceptable funding source) may no longer apply to many institutions.
In fact, these ratios may hide underlying risks, given that liquidity pressure may arise from a number of factors, including heightened credit or reputational risk.
But it would take some 14 months for this meme — this mental virus — to spread from Washington’s meeting rooms to the country’s living rooms, and for folks to walk away from banks, stocks, bonds, etc.
It’s not that economic statistics are totally irrelevant; a good grasp of the facts on the ground will most certainly give you a framework in which to operate, a healthy heads-up, and a clue as to which facts you ought to be watching.
But you need to know how the herd will react to those facts. This is not an impossible task, as these behaviors are both quantifiable and cyclic.
In fact that’s pretty much what I do for a living.
I track memes as they bubble about in the great kettle of social consciousness. I watch as they drop into certain key patterns. I ascertain which asset classes stand to gain or lose the most, and which companies within those classes are most susceptible to these pressures. And I recommend call or put options against those companies.
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Putting Memes to Work
I’ll give you an example as to how it can work, in fact is working right now.
The list of top-class memes — overarching ideas — that are working their way to the top right now is relatively short: Unemployment, Inflation, and Recession.
Yeah, I know; you already knew about them, right? That’s kind of the point here: These are the big ideas that have everyone’s knickers in a knot.
We all know that Washington borrowed a boat load of money — and just plain printed even more — so as to get the economy rolling again. And we all know that this has driven the dollar down and costs up. And we all know that things are stalling badly, with unemployment rising again and housing looking more and more like it is sliding into a double dip that might yet drag the economy into its own double-dip recession.
And most everyone wants to know what Washington is going to do about it all.
In fact, we can drill this whole argument down to a single meme: “QE3.”
Quantitative Easing 1, 2…
For those of you who have been in caves for the past few years, Quantitative Easing is the ever-so-soft name the Fed has attached to its massive cash injection programs. QE1 refers to the Fed’s first $1.75 trillion pass from late November 2008 to June 2010. QE2 refers to the Fed’s second pass starting in August of 2010, when it upped its total targets to over $2.054 trillion.
The Fed has sworn to end QE2 shortly, as it has quite obviously driven up costs beyond any economist’s or citizen’s “comfort zone.” But will they do it?
I know of one little-known fact that leads me to believe that Washington will find some way to keep pumping out cash. Inflation is a long-term problem that inevitably brings expansion cycles to a grinding halt. But 9.1% unemployment is an immediate problem for President Barack Obama, as no sitting president since FDR has been re-elected when unemployment has exceeded 7%…
But that’s mere economics — facts, not memes. And memes move the markets.
I have been tracking the herd’s fascination with QE3 for months now. We’ve seen a ten-fold increase in internet search interest over the past four months, with the past 30 days offering up a staggering 333% spike in the past 30 days.
This spike illustrates as well as anything the EXTREME pressure Washington is under to continue printing dollars so as to put voters to work prior to the 2012 election. And yet we know for a fact that pushing on this string has simply not worked.
With no increase in GDP, the increase in dollars in circulation has simply accelerated inflation and eventual economic collapse. It should come as no surprise that this inflation is continuing to drive investors en masse into gold. (See I promised to get around to gold, and here we are.)
Gold’s Reaction to “Easing”
Based on this continued upside pressure, I have recommended call options against the SPDR Gold Trust ETF (NYSE: GLD) more than a few times over the past few weeks, for gains exceeding 200%.
The current price for this ETF does not yet reflect the astounding interest in QE3, as the herd is still not absolutely sure if its interest will indeed cause the Fed to reverse its planned cessation of printing.
Buying additional calls now could allow readers to double or even triple their investment.
(Speculation really, as I do not suggest holding these for but so long. But why quibble?)
How to Leverage the Meme
So far, we’ve scored on the two previous rounds of GLD calls, with gains ranging from 19% to 200%.
I suggest once again that you pick up a few fresh contracts.
As I sit to write, GLD September 150 calls (GLD1117I150) are trading for $5.60, with a posted Delta of 0.6067.
Another 5% increase in GLD over the next few weeks would move these calls up to $10.17 for a gain in the area of 81%.
Editor, Outsider Club
Adam’s editorial talents and analysis drew the attention of senior editors at Outsider Club, which he joined in mid-2012. While he has acquired years of hands-on experience in the editorial room by working side by side with ex-brokers, options floor traders, and financial advisors, he is acutely aware of the challenges faced by retail investors after starting at the ground floor in the financial publishing field. For more on Adam, check out his editor’s page.