Sunday, December 18, 2005

The Value Of Money

There was a time you knew the value of your money.

That time may come again.

Commodities and currencies now bob and weave in a mixture of prize fighting and dance.

Currencies no longer have any backing, except by a politicians promise.

Perception now determines an individual currency's value as it floats or sinks against other measures of value.

If you have been watching this dance for a while, you have realized there is no continuing, rational valuation. What everyone talks about this week may be totally different than what they talked about last week. In truth this weeks data may be opposite of last weeks, and still effect the markets the same direction; different excuses are used to explain different market action.

The Kitchen is 70 degrees Fahrenheit, the stove above 200 degrees, the pot of water boiling furiously between those temperatures. If the stove is turned off, all will eventually reach thermal equilibrium.

There is no equilibrium in markets. If it was just normal rise and fall of economic activity there would be shallow booms and busts, but the trend would continue on a steady upward march.

Reality is governments try to control those small booms and busts, making them larger and highly unpredictable. Dozens of governments, each with their own agenda, play with relationships of commodities and currencies. It is like turning the stove to HIGH; the water will boil furiously, and much will vanish as steam.

The prices of cash and things will move quickly; it becomes difficult to determine their real relationships.

Right now governments around the world are creating inflation, they are printing money. More money means it has less value, prices of things therefore increase. Along with overworked printing presses lending constraints have loosened, putting even more money into the system.

There is a finite amount of water in the pot. At some point the water will have evaporated, the pot will melt or start a fire. To those of us in the real world of money - we will have deflation or hyperinflation.

Perception will be key to future value.

If you want to find a way to judge future perceptions, technical financial analysis claims to have the insight needed. The claim is that past action reflects past psychology and perceptions, and hence is a clue to the future. In practice it is easier to look at the past and explain it than to look at the future and decipher it.

If you are interested in technical analysis, check out Robert Prechter's books, especially Socionomics. If nothing else you will learn a new way of considering both past and future - and you will have enjoyed the read.

In the meantime do not pay to much attention to trader talk or news reports. These tend to view events, and then make up a cause to go with these events.

A fair picture of currency and commodity markets is a lot of folks at a social dance with a free buffet and open bar, waiting for the last minute to rush the exits. - Did I mention the building is on fire?

Our Speculation Rule:

Fill your own pockets and leave early.

It's ok to watch from a safe distance.



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