I’m sitting here with a mountain of technical analysis reports that are causing my desk to buckle this morning, all shouting “breakout”, “buy”, and “uptrend”. So I’m wondering, “is there a scenario out there where these might actually come to pass?”

At this point I thought it might be useful to engage in what Albert Einstein called “thought experiments” and come up with a New Theory of Everything. In any case, you have probably all figured out that I am a frustrated novelist. As my old friend and former mentor, Sherlock Holmes, used to say, “Eliminate the obvious, and consider all other possibilities.”

First, let’s see how we got here. It was obvious to me that the market was overdue for a huge short covering rally that would take the index up 20%-27% off the lows (see my early September piece “My Equity Scenario for the Rest of 2011”). That’s why I entitled my October 8 webinar “The Short Game is Over.”

That is exactly what we got. Corporate earnings came in much better than traders expected, triggering a huge rush by underperforming managers to bring in some decent numbers by year end. We hit my target of the 200 day moving average at 1,275, a gain of 19.7%, and saw the second best month in stock market history.

Enter black swan number one. Last week, the hedge fund community established heavy short positions expecting a complete breakdown of the European sovereign debt crisis talks. But the bar was set so low they could only succeed. Ten minutes before midnight, we received an unexpected news flash about a comprehensive three part deal that was clearly a major leap forward. The Dow futures immediately gapped up 200 points in the overnight market.

That delivered the massive short covering rally on huge volume that generated all the technical green lights now on my desk. Conventional active managers panicked and stampeded to address substantially underweight positions which they achieved only recently at the market bottom.

So what happens next? In a few weeks, the Supercommittee reaches its deadline for achieving comprehensive budget balancing targets. Guess what? The hedge fund community is setting up large short positions in the run up to that day, betting that intransigent Republicans will refuse to agree to any tax hikes whatsoever, automatically triggering huge, deflationary spending cuts. The bet is that a market crash is a guaranteed outcome, similar to the one that followed the debt ceiling debacle in July.

Enter black swan number two. A smiling and deeply tanned John Boehner appears in front of the cameras at ten minutes to midnight, announcing that “he went the extra mile” and “reached across the aisle” and resurrected the $4 trillion deal he almost reached with Obama last summer before the Tea Party stabbed him in the back. The Dow futures immediately gap up 200 points in the overnight market, and a monster rally ensues, taking the S&P 500 up to its 2011 high of 1,367 by year end.

We then go into January with a market that looks very toppy and expensive. Active managers and talking heads complain bitterly that this is all short covering not justified by the fundamentals. But hey, a dollar made a short covering market buys just as much Jack Daniels at the bar as one made from long only buying. Hedge fund managers bet the ranch that a new market crash is coming, taking it back down to the bottom of the range 300 points lower. Traders are salivating at the prospect of making a killing, and active managers hurriedly move to underweight positions again.

Enter black swan number three. The People’s Bank of China announces in a carefully worded statement that its campaign to end rampant real estate speculation has finally succeeded. Developers have been seen cutting prices on new apartments coming on the market as much as 25%. As a result, the risks to the Chinese economy are now to the downside, and the central bank immediately cuts interest rates by 0.5%.

The Dow futures immediately gap up 200 points in the overnight market as the mother of all short covering rallies explodes. Commodities, like copper, coal, platinum, and palladium go through the roof. BHP Billiton (BHP), Joy Global (JOYG), Freeport McMoRan (FCX), Union Pacific (UNP), and Caterpillar (CAT) go bid only. Oil soars. The S&P 500 touches a new all-time high at 1,565. A major hedge fund manager jumps off the top of the Empire State building and crashes into a taxi on 5th avenue driven by an immigrant Nigerian taxi driver. His pockets are fill with trade confirms showing gigantic short covering losses. There is a twisted grin on his face.

OK, the Nigerian taxi driver was a bit much. But I will tell you one thing for sure. This flock of black swans absolutely has not been discounted by the market, and has a much higher probability than the market’s many armchair strategists, pundits, and seers realize.

Personally, I put the odds of all this unfolding at one in three. If we do manage to claw our way up that high, we will be at the top of a 13 year range for the market. Then the greatest shorting opportunity of a generation will be on the table because the Great Crash of 2012-2013 will be just around the corner.

Come join me for lunch at the Mad Hedge Fund Trader’s Global Strategy Update, which I will be conducting in San Francisco on Friday, November 4, 2011. An excellent meal will be followed by a wide ranging discussion and a 60 minute question-and-answer period.

I’ll be giving you my up-to-date view on stocks, bonds, currencies, commodities, precious metals, and real estate. And to keep you in suspense, I’ll be throwing a few surprises out there too. Tickets are available for $229.

I’ll be arriving at 11:00 and leaving late in case anyone wants to have a one on one discussion, or just sit around and chew the fat about the financial markets.

The lunch will be held at a private club in downtown San Francisco near Union Square that will be emailed with your purchase confirmation.

I look forward to meeting you, and thank you for supporting my research. To purchase tickets for the luncheons, please go to my online store and click on “luncheons.”

“When you run in debt, you give to another power over your liberty,” said Benjamin Franklin.

The abject failure of yesterday’s seven year Treasury bond auction and the crash that ensued has enabled the year-to-date return for my Macro Millionaire trade mentoring program to soar to a new all-time high of 43%. The 30 year bond plunged a staggering six points from the previous day’s high. Yields on ten year government paper have ratcheted up 50 basis points in just a few weeks, from 1.80% to 2.38%.

It’s a good thing that my only position going into the collapse was a major holding in the (TBT), an ETF that profits most from exactly this type of scenario, which rocketed some 10% today. Using the leverage embedded in this popular ETF, some 40% of our capital is devoted to short Treasury bond positions. This move comes on the heels of my October 8 call to cover all shorts in “RISK ON” assets, including stocks, commodities, oil, and foreign currencies, with a major fall rallies imminent.

I am writing this report from the Duke of Marlborough Hotel and Pub in remote Russell, off the east coast of New Zealand’s North Island. One known as “The Hell Hole of the Pacific”, in 1835, no less an authority than Charles Darwin claimed this 19th century whaling port was populated with “the refuse of humanity.”

It has since been cleaned up, gentrified, and turned into a tourist mecca. It is much like Lahaina on Maui, Hawaii was in the early seventies, before the blighting high rise hotels and condos went up.

The Residents of Russell Were Most Welcoming
But….
Others Had Different Opinions

The bar is packed to the gunwales with drunken and riotous rugby fans screaming their lungs out in support of their team in the world cup quarter finals. When Wales won, I bought a round of drinks for the house, but first had to arm wrestle a deeply tanned and craggy faced Welshman for the right to do so. I hope my credit card doesn’t get cancelled when the bill comes through for NZ$1,046.29. “Thomas” is a Welsh name, isn’t it?

The trip started auspiciously at SFO when I found myself checking in behind a group of heavily tattooed, bulked up Maoris. First class was entirely occupied with older, but very large, white males all wearing an assortment of rugby juries. I arrived to find a country in the grip of rugby fever, every car and structure sporting the silver fern flags of the All Blacks home team, famous for their pregame “hakka” war dance.

Perhaps a Distant Kiwi Cousin?

The rental company was out of cars, thanks to the games, but managed to come up with a battered old Toyota Camry with bald tires, breaks well past their prime, and leaking fluids from every orifice. In other words, it was a lot like me. I was OK with the left hand drive, having lived for 20 years in Japan and England.

But the stick shift certainly made things interesting. I can’t tell you how many times I turned on the windshield wipers instead of the right turn signal. I headed north from Auckland hoping to find better weather, picking up hitch hikers along the way to absorb the local lore.

My dad was here 70 years ago with the Marine Corps, training for the invasion of Guadalcanal, and always remarked how friendly approachable the women were. I found them friendly, yes, but not so approachable. Maybe this is because he was a combat ready 19 year old, and I am a combat ready, but aging 59 year old fart.

The countryside was incredibly lush and green, mountainous, and covered with massive ferns and kauri trees ensnarled by choking vines. Cleared grazing lands were dotted with sheep. The Maori are ever present, accounting for a substantial part of the rural population. Every town name seems to start with the letter “W”, as in Whangaparaoa, Whangarei, and Waipu.

One of the most interesting conversations that I have had this year was with an aged Maori historian and Shaman at the Waitangi Treaty Grounds. When I told her I was part Cherokee, Sioux, and Delaware Indian, she opened right up and let loose for two hours. It turns out that tribal groups around the world are cooperating and coordinating legal attacks on establishment land ownership around the world. Everyone from the Maori’s to Hawaiians, Navajo’s, Australian, Aborigines, and Finish Laps are involved, and are getting legal aid from the United Nations.

The Maori’s have been especially successful, scoring a $170 million payoff from their government. The money went into community centers and education in the most Maori dominated parts of the country. It isn’t often that I get to discuss the global economic with a Neolithic tribal representative, and I relish the opportunity. I am always looking for the new view, and I’m sure there is much we can learn from 8,000 BC.

When I checked into the Pahia Beach Hotel and Spa, I did what I always do when I visit the Southern hemisphere. I flush the toilet, watching with satisfaction as the water disappears in a counterclockwise fashion, thanks to the Coriolis force. In the Northern hemisphere is goes down clockwise. If you don’t believe me, go try it. That night I found the Southern Cross, the only one of 88 constellations not visible at home.

We all thought New Zealand was toast when Great Britain cut the economic umbilical coat by joining the European Community in 1973, leaving the land of the kiwis out in the cold. A radical series of reforms saved the country in 1984. The financial system was deregulated and exchange rates were freed. Agricultural subsidies were cut, forcing farmers to become more efficient and globally price competitive.

Through a series of fortunate historical accidents, it then entered the sweet spot of the global economy. It was too small to have its own car industry, so it had nothing to lose when Japan took over that business. The same occurred with manufacturing, which China swallowed whole in the past decade. Today, services and tourism account for 70% of GDP. With a per capita GDP of $27,130, New Zealand ranks 33rd in the world, behind the US at $46.810 (7th), but well ahead of China at $7,544 (94th).

Kiwis Will Sell You Anything

Today, the World Bank ranks New Zealand as the most business friendly country on the planet. It has the lowest taxes in the developed world, and an unemployment rate at an enviable 6.6%. People are happy and the cities bustle. This makes all of the country’s assets long term buys, including the New Zealand dollar (BNZ), the stock market (ENZL) and a ten year government bond that yields a generous 4.65%. Use the big dips to take positions.

And Never Throw Anything Out

Well, I have to go now, or I’ll miss the last ferry back to Pahia on the mainland. Besides, that waitress across the room is starting to wink at me.

Come join me for lunch at the Mad Hedge Fund Trader’s Global Strategy Update, which I will be conducting in Orlando, Florida on Thursday, November 10, 2011. An excellent meal will be followed by a wide ranging discussion and an open ended question-and-answer period.

I’ll be giving you my up-to-date view on stocks, bonds, currencies, commodities, precious metals, and real estate. And to keep you in suspense, I’ll be throwing a few surprises out there too. Tickets are available for $275.

I’ll be arriving at 11:00 and leaving late in case anyone wants to have a one on one discussion, or just sit around and chew the fat about the financial markets.

The lunch will be held at a private club in downtown Orlando that will be emailed with your purchase confirmation.

I look forward to meeting you, and thank you for supporting my research. To purchase tickets for the luncheons, please go to my online store and click on “luncheons.”

I have always had a passion for the markets and Macro Millionaire gave me the courage to make my first trade. At the time I was unemployed and put in everything I could scrape together – about ten thousand dollars. For me this was a free education, as the profits would pay for all the books and the fee. My father gave me some money as a gift, while telling me ‘I was crazy’ following ‘some guy’ off the Internet.

Every suggestion I have taken religiously. I follow all your lead indicators from the Shanghai stock market to Dr. Copper and the jobless claims. In the last couple of months I have started doing my own successful options trades based on the extra suggestions you give in the webinars and commentaries. Often I do a trade and ten minutes later an alert comes.

My father who is worried about his future (like so many of us) is now joining the program. I am going to assist him with his first trades. Another family member has asked me to manage his money. I really feel you are helping me become a hedge fund manager with this fantastic program.

Geoff
London – England

“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price” said Oracle of Omaha, Warren Buffett.