This presentation was delivered by Dennis Gartman, editor and publisher of The Gartman Letter, at the New York Hard Assets Investment Conference, held 12-13 May 2008 at the New York Marriott Marquis on Times Square.
NEW YORK (Resource Investor Conferences) -- My name is Dennis Gartman and I'm a trader. And I used to go to undergraduate school for career day back 15 years ago when they would say, "Well it's very interesting that you're a trader. But can you make that much money selling America's secrets to other people?" And I would have to tell them, "No, It's T-R-A-D-E-R, not T-R-A-I-T-O-R." There have been times in the past when I wish I was the latter and not the former.
Having been a floor trader on the Chicago Board of Trade for 7 years, back in the late '70s and early '80s, I got rich three times, got broke two and a half times. I loved it in both directions. I lost a wife to a margin call - those things happen. Wives get very testy apparently when you come on a Tuesday and say, "Sweetheart, I lost the house." But I did. I found it again later, but one has a tendency to do that.
I went to my beloved North Carolina State University, not to be confused with the hated University of North Carolina. They are the 'Tarholes'; we are the wonderful Wolf Pack. And eventually, before I die, we'll probably beat them again in basketball. But I'm starting to lose hope.
Everything they taught me in grad school has proven to be, in economics, has proven to be utterly and completely worthless. I wish - it's really very sad. They taught me that markets are rational. Markets are utterly irrational more often than not. And although Lord Keynes was a communist, he was actually quite bright when he talked about markets. And he made a great statement saying that the market can remain irrational far longer than you or I can remain solvent. And Gartman's corollary to that is the market will return to rationality the minute you have been rendered insolvent. And that's an important thing to remember.
They taught me that markets were rational; they are not. And when I go back to undergraduate school for career day now, now that they know that I'm a T-R-A-D-E-R, not T-R-A-I-T-O-R. And they say, "Well, what should I study if I wish to be a trader? It is so cool that that's what you do. And I spend most of my day trading from my own account." What should you study?
And I would tell them, "Well, I've already told you that economics has proven to be utterly worthless. So don't study that." And then you're going to lose about half your audience. Well, if can't study economics, should I study business? And I tell them, "Actually, in business you've got a real problem. Because they actually believe in the business schools that A + B = C. And it doesn't in the realm of trading. So, no. And please don't get an MBA because I never saw a single floor trader with an MBA who was successful. I saw Israeli fighter pilots who were successful. I saw ex-professors who sometimes were successful. I saw ex-football payers who were successful. But I never saw any MBAs who were successful." Now you've lost three-quarters of your audience.
Should I study accounting? And I would say, "Well, my wife of the last 20 years is an accountant. And, no. No. Because accountants actually do believe that A + B = C, unless you're speaking to the IRS. And then you need it to equal D, and they can make that happen. But otherwise accountants are very literal, and trading and investing is clearly not literal." Now you've lost almost seven-eighths of your audience.
Well, what should you study? And I tell them, you know, in retrospect, I wish I'd spent more time studying literature. Because literature is the study of the human condition. Why did Lear split his kingdom into three parts? What kind of a trade was that? You know, that's important.
I wish I'd spent more time studying philosophy. Because that really is the study of the human condition. What makes us move? Why do we think? What are we thinking of? What kind of trade have we just put on? Philosophy is good.
Psychology. I wish I had studied more psychology. And one of the great changes that's occurred in economics in the last 20 years is that behavioural psychologically is actually now part of the business curriculum. And we're beginning to understand how people do think, and we are irrational beasts. And we do think rationally at times and irrationally at others. And we don't do the logical thing. And allowing that to occur is wise. So I wish I'd studied more psychology.
But I must tell you that at any one time on the trading floor, the background that had the greatest relevance was religion. Because at any one time there'd be 50 other floor traders saying, "Oh, God, just let this thing come back and I will never do that again." The problem is that we are all sinners in the hands of a very angry god whose margin account is demonstrably bigger than yours or mine shall ever be. And he gets mad sometimes.
In 35 years of trading, I've learned to be flexible. I've learned that pragmatism trumps all other things. I've learned very few rules. And I'm going to talk about commodities and currencies. But I want to get a couple things across to you this morning that I think have proven to me to be inordinately valid, and I wish somebody had told them to me when I was 26 and 27 years old and trying to learn how to do this, instead of being 58 and finally knowing how to do this.
Write this down. Buy things that are going up. Sell things short that are going down. Write that down! That's important. Most of you will never do that. Most of you will buy things that are going down. And when they go against you, you'll buy more of them. That's what you'll do.
And when something does start going up you'll take the profit. Very quickly. That's what you'll do. And you will fail miserably. Miserably. My wife, the accountant, when we first got married 20 years ago, it was hard for her to understand that when I sat down - we did the taxes. And she said, "Dennis, this is very sad. You made money this year. It's a wonderful thing. But 62% of the trades that you put on lost money. You can't even beat a coin toss." Now, that hurts. But I said, "Sweetheart, Margaret. I'm so in love with you it's colored my ability to think. Bear with me." She bought it. Okay.
The second year we sat down. My wife, the accountant - who's rational, who thinks that numbers mean things - said, "This is horrifyingly sad. You made more money this year than you made last year, and that's a wonderful thing. But nearly 70% of the trades you put on lost money. And don't give me that so in love with me crap, cause it really wasn't taking last year." And I just said, "Well bear with me baby, I think - I'll get better."
The third year we sat down. My wife, the accountant. "It's very sad," she said. "This is just not a good trend." She learned the word 'trend' by the third year of being married. "This is just not a good trend. Eighty percent of the trades you put on last year lost money. Now, you made more money this year than you made the previous 2 years of being married, which is a wonderful thing. But you've gotta get better!" And I told her, "Bear with me sweetheart, I'm really trying."
Fourth year we sat down. My wife, the accountant, looks at numbers. Believes in them. She said, "I think I got it. If you can just be wrong 90% of the time, I think we're going to get stinking rich." And I told her, "Sweetheart, the trend is there! I think I'm showing that ability."
The point being, it is astonishing how many truly stupid ideas I can come up with in the course of any given year. It's shocking. I can come up with some really dumb ideas. And I'm probably going to come up with one or two really smart ones. And it will be luck. It will be absolutely - as I get older, I'm convinced it's accidental.
But the trick in the business is to understand which ones are working. How do you know which one is working? Because it's profitable. That's how you know. This is a very clear and finite business. If you bought something at 20 and it's now at 18, you're wrong. Somebody knows something you don't know. And for you to add to that trade is illogical. It is wrong. It is the only thing in this business that will be a carcinogen. It will kill you.
If you buy something at 20 and it goes to 25, you are right. You may be right for the wrong reasons. But you're right. And when you're right, do more of it.
I wish I had learned that when I was young. I didn't learn that until I was almost 45 years old. It took me a long time to understand how you make money in the business of investing. You do it this way: do more of the things that are working, and do less of the things that are not. You want a golden rule of trading? There's the golden rule of trading. Do more of the things that are working. And try your damnedest to do less of the things that are not.
Retail people. People in the retail business understand it. They get it. They figure it out right away. Let's take the example of a dress shop owner. We'll make it simple. We won't even use designers. We'll just keep it simple. A man owns a dress shop. He's got red dresses on one side, he's got blue dresses on the other side of the shop. He opens the door on a Saturday morning. The women run in. They take the red dresses as fast as they can. Can't get them fast enough. The blue ones are left on the rack. What does the dress shop owner understand implicitly? Mark those blue dresses down. Get them out of here. And buy more red dresses. If they want red dresses, buy red dresses.
There is not one retail shop owner - who's successful - who buys more blue dresses. Not one. But every retail investor in the world says, "I made money on my red dresses. I'll take that money and average down and buy blue ones. Maybe they'll like them, too." That's illogical. That's stupid. Oh, 20 years from now they may come back. Twenty years from now blue may be the new black. But sitting there and wasting mental capital for 20 years defending a bad position in blue dresses is wrong.
Stop it. Don't do that. Buy things that are going up. And when they go upper, buy more. And sell things short that are going down, and when they go downer sell more. You have no idea how far 'down' is once something starts going down, nor have you any idea how far 'up' is once something starts going up. You just don't. You never will. And all the way down, they will tell you there's value. And all the way down, they will tell you that the fundamentals haven't changed.
I always use this case in point. Back in the early 1970s, sugar sold at a buck and a quarter a pound. And everybody was bullish on sugar at a buck and a quarter a pound. Why wouldn't you be? The world was inflating. Gold was at $1,000. The world was coming to an end. They're not going to make anymore sugar. Buy sugar! At a buck and a quarter.
So it went to $1.15. People said, "Well the fundamentals haven't changed. And if just gets back to $1.17, you can break even." And the fundamentals haven't changed, so people did. And then it went to a dollar. Well, at a dollar you said, "Well, it was a good buy at a buck and a quarter only 2 months ago, and the fundamentals haven't changed. And if I just buy it here, if it gets back to $1.10, I'll break even." Which was fine until it went to 75 cents.
Well, at 75 cents you said, "Well, the fundamentals haven't changed...that much. And if I just buy it here, if it goes back to 95 cents, I can break even." Which was fine till it went to 50 cents. Well, at 50 cents you said to yourself, "Well, the fundamentals are probably changing somewhat." The big fundamental really has changed - price has. But nobody pays much attention to that when they're trying to defend a bad position. And you bought some more at 50 cents cause now if it just gets back to 65, I'll break even. Which was fine until it went to a quarter.
Well, at a quarter you've got to buy more, don't you? Cause it was a buck and a quarter only 18 months ago. And the fundamentals really haven't changed that much. And if it just gets back to 35 cents, I'll break even. Which was fine...until it went to a dime.
Well, at a dime you've got to buy more, don't you? It was a buck and a quarter only 24 months ago. And the fundamentals have indeed changed, but if it just gets back to 20 cents, I can break even. Which was fine until it went to a nickel.
Well, at a nickel you've got to buy more, don't you? It was a buck and a quarter only 2 years ago. And the fundamentals, yeah, they've changed a lot. But now if it just gets back to 7 cents, I can break even. Which was fine until it went to 2 cents.
And at 2 cents they actually took delivery of sugar on the New York Coffee, Cocoa and Sugar Exchange. Which in those days was delivered in a burlap sack. People cut the burlap sack open, took delivery, dumped the sugar and sold the burlap. Which was fine ... until it went lower.
Now, I like to tell that story, and I especially like to tell it to Canadians. We're here in New York, but I like to tell that story to Canadians because I tell them, "Take a chart of sugar from the early 1970s, stick it on a wall. Oh, and get a chart of Nortel, stick it on the same wall. Walk 40 feet away. You can't tell the difference." And there was value all the way down.
You have no idea how far down can be until down finally stops. Oh, and you know what day it'll stop? It's on page 111 of your Paul Samuelson economics textbook. It's the "puke point." It's the level at which you throw up all over your shoes and finally give up. And you will. Buying things that go against you will kill you.
Let's talk a little bit about commodities. I'm supposed to talk about commodities, currencies and stuff. Okay. This is the age of stuff. There's a very important technical term, "stuff." You want to own stuff in the modern world. But you only want to own stuff when stuff is going up. And stuff doesn't all go up together. Sometimes different stuff goes up when other stuff ain't going up. And that's the important thing to understand: what stuff is going up.
I'm very bullish on the grain markets. Have been. I run a fund up in Canada. I supposed, I'm not allowed to call it a fund - it's a note. The lawyers don't like it when I call it a fund. I run a note up in Canada.
[Audience Member - inaudible]
Shoot him. I run a note up in Canada. And last year we made a lot of money trading wheat. I was long on wheat. And it's an interesting note because I'm only allowed to make decisions in this note once a month. Can you imagine a commodity fund that can only make decisions once a month?
It's actually worked very nicely. It's made me focus upon long-term trends. If I've learned anything in the last 35 years of trading, I've learned buy things that are going up, sell things that are going down, and don't worry about the minutiae. Don't worry about whether Argentina's crop of wheat is going to be 18.5 million metric tonnes or 18.3. You don't know, they don't know, no one in Argentina knows. It's not terribly important.
What is it important to understand is that demand in the modern world, where China per-capita income is - get this - moving from the lower left to the upper right on the charts. And it's likely not going to go into a downturn in my lifetime, in my children's lifetime, nor in my children's children's lifetime.
I think it's important to understand, and remember this - this is an interesting note. In the last 30 centuries, China has been the dominant economy in the world for 28 of them. It's just a return to the mean as China now becomes the dominant demand-oriented society in the world. In that environment, where Chinese per-capita income, India per-capita income, Asian per-capita income is moving from the lower left to the upper right, the demand for grain is going to go up. From the lower left to the upper right.
We are able in the modern world to produce a lot more grain than we ever have. We are able to do it because we have great scientists and great universities. And we will produce more grain on an average yield per acre next year than we produced last year, and 5 years from now than we produced this year, and 10 years from now than we produced 5 years from now, and 20 years from now than we produced 10 years from now. That you can absolutely count upon. We will genetically create plants that are simply better.
I always like to tell people that there is no such thing in the United States any longer as an amber wave of grain. We don't have wheat that's 4 feet tall anymore. What a waste of time to allow the plant to grow to 4 feet tall and wave in the wind. We have genetically modified that stalk out so it's only about a foot and a half tall. It doesn't fall down in the rain. It doesn't spend its energy growing a stalk. It stands upright. It's more - it's less resistant to or more resistant to disease. And it makes more wheat.
We produce better corn. We get more numbers of corn on a stalk than we ever did before, and they're bigger. We produce more soybeans. There's a reason why, in the United States, we have 1/100 as many farmers as we had at the turn of the 20th century and are producing what? A hundred times more grain. Every time a small farmer goes out of business, I applaud. It means it's going to go into the hands of a good producer, a large producer. Somebody who really can use machinery better.
Think about this: I don't think the fellow who organized or when the government came up with the idea of GPS - when some scientist created that thing in the sky, which was supposed to be used for security purposes - I don't think he ever thought, first of all that it'd be used to find fish in ponds by fishermen. Or two, I don't think anybody ever understood that farmers in the United States are going to have GPS systems on their tractors now, that you can farm, that you can plow 24/7. That when things get wet, in the past we might not have been able to get into the fields, but now you will be able to because you can guide yourself down the field.
And more importantly, when it comes time to put fertilizer on that crop, think about yourself if you're a big farmer and you've got 15,000 acres of corn - you know what the corn looks like around the outside of your field, but you really don't have any idea what the corn looks like deep in the midst of that field. But that thing in the sky does. And it can look down and look at that crop and send a signal to your machine as you're going through the middle of that field saying for the next 15 feet, we need more potash. For the next 30 feet, we need more nitrogen. For the next 100 feet, we need less of that. Can you imagine how much better we're able to produce crops just because of that? How much less runoff? How much less loss we're going to have? The game in agriculture has changed so dramatically, it's shocking.
But even so, China is going to demand enormous amounts of grain from us. Corn - I'm violently bullish in the corn market. And it broke out last week. Again. Somebody was trying to sell corn at six and a quarter. I never thought in my lifetime we'd $6.25 corn. But it broke out on the upside. You ought to own some.
Last year I owned wheat. It was wonderful to own wheat. I don't own any wheat anymore. Why? It ain't going up. It's that simple. Corn's going up. And the demand for corn is going to continue. The only concern I have is that we have the dumbest program in the history of mankind, run by for government, called ethanol. What a truly idiotic program that is. It gives you 85% of horsepower per gasoline, it corrodes the pipelines that it's sent in so you can't even use pipelines, and it's inefficient.
My one concern about corn is that we may eventually do away with the ethanol program. Is it going to happen now? No. We have an election this year. It's not going to be touched. My opinion is if we didn't have the Iowa caucuses, we wouldn't have an ethanol program; but that's another story for another time.
My one concern about corn is that ethanol probably will disappear a year from now. Maybe 2 years from now. Even so, Chinese demand will take that up. As per-capita incomes rise - this is all you need to understand - the demand for higher-quality food goes up. People don't eat grain when their incomes rise; they eat meat when their incomes rise. And meat eats grain. That's not going to change.
China, leaping from the 17th century right into the 21st century because of the advent of the computer, the advent of the Internet - we're now out in western China, where nobody ever saw what was going on 30 miles outside their village now sees a vision of what's going on 3,000 miles away and says to itself, "I want that life for my kids. And by golly, I'm going to get it." The Internet has brought demand to the world. If there is a driving economic motive force, it's that.
I'm bullish on grain. I am not bullish on wheat. I am bullish on corn. And I am very bullish of soybeans.
Copper - I made the stupid decision on national television a year and a half ago to say, when copper was trading at $4.00 a pound, that copper would never see $4.00 a pound again in my lifetime. I'm still alive. Some would say that's not a good thing; I'm even sure some of my clients would say that's not a great thing.
But here we are at $4.00 a pound again. And if somebody had told you 2 years ago that copper was going to get to $4.00 a pound and the United States was going to be in the midst of an important recession - and it's a very serious recession that we're in. It's not going to be much deeper, and I'm one of the people who thinks it's not going to last very long. And I'm actually getting very violently bullish with stocks for the first time in a year and a half.
But if somebody had told you that copper was going to be at $4.00 a pound, and the United States was going to be in the midst of recession, the most important facet of which is the demise of the housing market, where then is copper prices? You would have to say logically, "Got to be lower." Wrong. It's at $4.00. Or close to it.
Now there aren't many things in this world that I count upon, but I count upon this. If something is supposed to go down and it isn't, it's not going down. Write that down. Okay. If something should be going down and it's not, it's probably going up.
If copper breaks - and I own some copper. How do I own copper? I own copper stocks. I want to continue to own copper. And if copper should close above $4.00 a pound, I'm going to get so violently bullish, it'll be shocking.
And what's fascinating to me is the smartest people I know in the business, the guys who do in fact know the minutiae of the copper market, can tell me every day why copper must go down. They're wrong. The smartest guys in the business fought the copper market from 50 cents a pound all the way to $4.00. And there was every reason in the world, every single day, why it should go down - and it kept going up.
Now after 2 years of going sideways, it looks like it's about to break out on the upside again. I love markets where the smart guys - remember, as my daughters will tell you, "Dad's only got an IQ of 68, so you can't expect much from him." But when the smart guys are bearish, and I stand back and look at something from a distance and see that we're in recession and demand for copper should be falling, and yet copper won't go down, I'm a buyer.
Crude oil. My job is to be a liberal arts major of the market. So I watch all these things from a distance. And I look at crude oil. And every smart guy I know wants to explain to me why crude oil should go back to $85 a barrel. It may well get to $85 a barrel.
Now, I'm not a believer in peak oil, I think that's rubbish. I think it's absolutely rubbish. Why do I think it's rubbish? I don't care when we run out of crude oil. First of all, they told me back in undergraduate school in 1973 the folks on the eco left at the time, convinced us all that by 1980 we would run out of all reserves of crude oil. And there were great papers written about the fact that we would be out of crude oil by 1980.
Well, let me think. Here we are 28 years later. We know now that there are more reserves of crude oil in the ground than existed in 1980, and last I knew we used a little bit of crude oil since 1980. And as I like to tell people, we didn't come out of the Stone Age because we ran out of stones. We didn't come out of the whale oil age because we ran out of whales. And we won't go out of the crude oil age because we ran out of crude oil. We will go out of the crude oil age because crude oil prices will go far enough that a new technology, created by some kid in some garage somewhere, is going to trump all demand for crude. But until that new technology comes along, it's what we've got. It's what we have. And China is there.
Now what's important to understand is that we are really good at learning how to get along with higher prices, and BTUs, and the cost of energy, and what it is that drives stuff. We now, since compared to 1974 - don't hold me to the date; I'm going to be close enough on this. Since 1974, we have doubled the GDP that we can get out of the same British thermal unit of energy. That's an important statistic. It proves that we learn how to do things better. We are learning how to do things better.
Even at the margin now, ask the fellow who owns a large used car lot, you need anymore SUVs? Hmm, they're limit down. Small cars? They're limit up. That's not going to go away anytime soon. Ridership on public transportation? That's limit up. Single-person driving in the car on the highway? That's limit down.
We're learning how to accommodate and adapt to high prices. But I like to tell people that when I went to China my first time 17 years ago, and I stood in Shanghai on the street, on the Bund, on the old side of the Huangpu River, and the street light changed, I thought I was going to get run over by 10,000 bicycles. When I was there 5 years ago and the street light changed, I thought I was going to get run over by 10,000 Mercedes Benz. The game changed. And that's just Shanghai.
Now, modernity is moving west. Think about simply the number of refrigerators in China. You want to understand what's really going on in the world? Think about the number of refrigerators in China. It's going this way; it's about to go that way. The demand for energy to drive them is going to go that way. The demand for copper to cool them is going to go that way. The demand for food to put into them. Think about the new storage facility - times up. Think about the new storage facility that exists there in China from refrigerators.
This is a world of stuff. You want to own stuff. You want to own copper, you want to own grain. And you want to own it because the Internet, the computer has brought modernity to a society that is leaping from the 18th and 17th centuries headlong into the 21st centuries. And says to itself, "I want that new life for my children."
Thank you. Good luck.
Dennis Gartman is the editor and publisher of The Gartman Letter. He is also an outside director of the Kansas City Board of Trade and a member of the investment community of North Carolina State University. He has been the secretary treasurer of the Suffolk Industrial Development Authority since 1998.
Mr. Gartman has appeared often on CNBC, ROB TV [Report on Business Television] and Bloomberg TV discussing commodities and the capital markets, and he speaks before various associations and trade groups around the world.
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