Interesting to hear how a legendary investor was humbled by the markets in his early days…

“There’s nothing like going broke to make you focus”.  “It’s very good to lose everything but do it when you’re young, do it when it’s fifty thousand dollars or five thousand dollars, not fifty million dollars”

“Don’t invest unless you know what you’re doing”

If you’ve never paid a visit to Zero Hedge here’s the gist: they have lightning fast reporting of financial news, in depth analysis of global markets, and a wealth of intelligent contributors – however the conclusion is almost always the same: get rid of your fiat money, hoard gold, and brace yourself for the imminent financial armageddon.  With that being said they do often times have some good insights and though provoking commentary.  I’d advise you to set a rule for yourself though: do not do any trading immediately after reading Zero Hedge – give yourself a chance to cool off first, the world is probably not coming to an end quite yet.

The first piece is actually from the WSJ by way of Zero Hedge, featuring PIMCO’s Mohamed El-Erian. Below I’m quoting Zero Hedge quoting El-Erian in the WSJ interview (emphasis added by ZH):

El-Erian’s Summary: “Virtually Every Market Is Trading At Very Artificial Levels”

“In order for central banks to achieve their ultimate economic objective – which is growth and jobs – they have to push investors into taking more risk than is justified,” is the somewhat chilling warning that PIMCO’s Mohamed El-Erian gives in this excellent interview with the WSJ. “Central banks are operating through the wealth effect and animal spirits,” El-Erian says peeling back the truth onion, as they prop up asset prices to “artificial levels, in virtually every market.” Worries over the central bankers of the world withdrawing easy money policies too early are “unwarranted,” he notes, adding that he suspects, “they will most likely stay too long and they will consciously make that mistake.” Critically, though, he sends a message that appears to fit with many of our recent discussions (most recently here) that “if these levels aren’t validated by the fundamentals, then investors will get hurt.”

The second piece is an attempt to explain the massive price drop in every Zero Hedge commentator’s investment of choice, gold.  This piece is largely about central / too big to fail banks manipulating the gold market.  The author seems to be your garden variety Zero Hedge contributor, 100% certain there is a huge conspiracy taking place to manipulate the global markets and economy.  He does make some interesting points, however my favorite part of his post is rather benign when compared to the rest of his post – it’s when he lays out the effects of ZIRP.

This Gold Slam is a Massive Wealth Transfer from Our Pockets to the Banks

The central plank of Bernanke’s magic recovery plan has been to get everybody back borrowing, spending, and “investing” in stocks, bonds, and other financial assets.  But not equally so, as he has been instrumental in distorting the landscape towards risk assets and away from safe harbors.

That’s why a 2-year loan to the U.S. government will only net you 0.22%, a rate that is far below even the official rate of inflation.  In other words, loan the U.S. government $10,000,000 and you will receive just $22,000 per year for your efforts and lose wealth in the process because inflation reduced the value of your $10,000,000 by $130,000 per year.  After the two years is up, you are up $44,000 but out $260,000, for net loss of $216,000.

That wealth, or purchasing power, did not just vanish:  It was taken by the process of inflation and transferred to someone else.  But to whom did it go?  There’s no easy answer for that, but the basic answer is that it went to those closest to the printing press.  It went to the government itself, which spent your $10,000,000 loan the instant you made it, and it went to the financiers who play the leveraged game of money who happen to be closest to the Fed’s printing press.

This almost completely explains why the gap between the rich and everyone else is widening so rapidly, and why financiers now populate the top of every Forbes 400 list.  There is no mystery, just a process of wealth transfer of magnificent and historic proportions; one that has been repeated dozens of times throughout history

By now you should probably just take it for granted that I recommend reading Hussman’s weekly market commentary.  His most recent commentary is no exception, so go read it.  I especially like his description of quantitative easing:

Meanwhile, all that quantitative easing does, will do, and is capable of doing, is to create the maximum amount of discomfort for the holder of [that cash] at each point in time, in the hope that the burden of zero interest will be sufficient to provoke the holder to exchange that hot potato, which goes on to scald someone else’s hands.

***

Undoubtedly, the eagerness of investors to aggressively buy every dip has been driven by the confidence that quantitative easing supports those actions. Still, I doubt that investors have seriously considered the fact that each round of QE has had successively smaller effects, nor that they have asked themselves exactly the mechanism by which QE “works.”

The reason QE “works” – though with weaker and weaker effects each round, is simple. QE creates an ocean of zero-interest money that must be held by someone at each point in time, and is intended to create as much discomfort as possible for each successive someone. That discomfort drives yield-seeking behavior, and ultimately produces precisely the sort of bubble that is now evident. Having successfully produced that result, investors might want to ask themselves who will relieve them of their positions once they decide to take their profits. Looking around them, and seeing a multitude of investors faced with exactly the same problem, they are unlikely to find the answer in fixed-income retirees and “permabears” except at much lower prices. This is a conversation that investors might want to have with themselves now instead of later. Again, this is not to imply any assurance of an oncoming crash in this instance – maybe the rabbit’s foot will work a while longer – but is instead to note that the conditions that have preceded other major market losses are already well in place.