For me, the art of contrarian investing is a philosophical one. The words of Henry George come to mind:

 

Unless there be correct thought, there cannot be correct action, and when there is correct thought, right action will follow.

 

In the terms used by Ludwig von Mises in Human Action we might say the following; unless there is correct identification of suitable means for an end, that end cannot be correctly attained. When suitable means are identified, correct utilisation of those means for the end may take place. So, if we seek consistent profits via financial speculation, then we should think very carefully about the intellectual resources that we use.

 

Here, I discuss the common pitfalls in the consensual investor’s market philosophy, and the virtues of contrarian investing.

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Here, at greshams-law.com, I update and publish daily treasury statement charts on a regular basis. But why exactly do I bother? Why does it matter? How can it help the contrarian investor?

 

In short, I believe that the daily treasury statement can help us understand the ‘deleveraging pressure’ eminating from the private sector. This is significant because – when the private-sector is under pressure to deleverage – it ends up selling things to ‘buy money’. This can create a cascading set of trades in the current environment and thus can be very bearish for risk assets. I contend that the daily treasury statement can help us figure out the magnitude of the ‘deleveraging pressure’. Combined with a contrarian mindset, these charts can help us execute profitable trades.

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What is the essence of the business cycle? Is it a peculiar aspect of our specific age? Or is it deeply intertwined with human nature?

 

Here, I present the idea that holds the business cycle as a product of widely held false premises. If this idea is correct, then the business cycle (as we know it) isn’t destined to continue forever; rather it is bound to continue only insofar as we hold specific false premises.

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The investment community at large has become strangely polarized into the ‘inflation camp’ and the ‘deflation camp’. The protagonists of these two – mutually antagonistic – groups are occasionally dogmatic in their convictions; a trait that we ought to avoid as contrarian investors. Seemingly, if you’re – say – long commodities, you’re assumed to have adopted the prejudices of the ‘inflation people’. Likewise, if you’re – say – long government bonds, you’re assumed to share the ideas of the deflationists.

 

Does it have to be like this? Does one have to choose to be an orthodox inflationist or an orthodox deflationist?

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When pondering over the past, it is tempting to regard social events and investment themes as – well – obvious. The famous ‘tulip bubble’ was obviously a temporary period of insanity. The debauched practices with the guillotine (of the French Revolution) were obviously hopelessly immoral. One would have steered clear of such folly, right?

 

Those of us enlightened with the principles of group behaviour attempt to avoid such temptations. Taking an anti-consensual view on social phenomena has always been (and will always be) a very difficult task. My hunch is that during the periods mentioned above, the herding impulse would have been heightened. I expect that (almost unbearable) contempt and ridicule would have been hurled at the contrarians of those days. As evidence for this, note that even the great Isaac Newton was suckered into buying near the high during the South Sea Bubble.

 

So, in good spirit, let’s attempt to use this arrogance to our advantage; which investment themes of our age would seem ‘obvious’ to the 24th Century Historian?

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As contrarian investors, we should seek to oppose or avoid consensual modes of thinking (however dearly we hold them). So, in a market populated with increasing numbers of ‘bubble-watchers’, what’s a contrarian to do?

 

First of all, allow me to support my statement with some objective evidence. Please see the chart of the (financial) google searches for the word ‘bubble’ over the past seven years:

 

(Financial) Google Searches for 'Bubble'

Click to enlarge. Source: Google Insights

 

My personal contention is that this group of ‘bubble-watchers’ is already large. However, even if you have misgivings about this group’s size, it should be evident that it is growing (see chart). Can you blame them? After all, we’ve (potentially) had ‘bubbles’ in TMT, real estate, oil, the Dow, junk bonds etc. all in the past decade. Is it any wonder that people call every price-rise a ‘bubble’ these days? Furthermore, there has been an abundance of people who have missed these ‘bubbles’, and are desperate to catch/call the next one.

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Wouldn’t it be lovely if there were a commitment of traders report for the entire economy? Well, there is one: it’s described by the Modern Monetary Theory (MMT).

 

Money is the lifeblood of an economy. If you trade anything, you’re probably trading money as well. Money is to profit-seeking individuals as the sea is to fish. So, as a contrarian global-macro investor, you’ve got to be concerned with the monetary system. COT reports document what certain groups of traders are doing at any given time. They tell you who’s long and who’s short. The MMT provides a framework for understanding who’s short money and who’s long money. The groups used in the MMT framework are; the private sector, the government sector and the external sector.

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