A Real-Time Lesson in the Supply and Demand of Investing

Damien Hoffman from WallStCheatSheet.com has offered to share his market insight with Trader’s Blog readers today. Read on to learn what he thinks about gold, the US dollar, and what he sees and predicts will and needs to happen in the US economy.

Damien will also be answering any questions that you might have via our comments section below. We invite you to read the article, share your thoughts, and visit WallStCheatSheet.com.


With India and China's strong demand for gold, it’s the perfect time to look deeper into how markets work ...

Many people are patriotically upset about the US dollar’s descent. However, it has been a direct result of the debt we’ve voluntarily assumed for all types of things including cheap goods and wars. In recent years, we’ve now decided to make matters worse by bailing out banks and propping up the housing market.  In years to come, the aging boomers will add another layer for healthcare and social security.

I don’t mention this to anger you, only to face the raw facts which have and will play a very strong role in whether our currency strengthens or weakens.  As investors, we must understand that the supply of US debt has exploded and at the same time many countries are losing their appetite for these instruments.  This can only mean one thing: further pressure on the price (i.e., value) of a US dollar.

In order for this situation to change, several new strong trends must develop:

1) Our economy must produce real value that others will line up to purchase;

2) As the economy strengthens we must retire a very sizable portion of our debts; and,

3) We must prevent other nations from dumping too much US dollars and debt in their effort to diversify.

If we cannot reduce the supply of our debts or increase the demand for lending to us as a safe/strong economy, we will continue to watch the US dollar slide as hard currencies such as gold strengthen.  This may seem elementary, but many times hard to accept since it’s our currency and our perception is very biased.

Unlike gloom and doomers who say the dollar is headed to zero or gold will go to $10,000 an ounce, we believe the dynamic nature of the world will soon present a reason for optimism and new sources of wealth. Although we are not going to predict which of those things will be the winners (e.g., alternative energy, health tech, etc.) or when they will arrive, we choose to keep an open mind to their arrival so as not to fall prey to “buy and hold” gold.

As savvy investors, always ask yourself, “Who demands this good or service?” “Is supply tight or flooding the market?”  Over time, you will realize these very basic questions can both make and save you a very sizable portion of your net worth.  For example, the tech bubble began its loud burst as new shares of tech companies flooded the market and outstripped demand.  Similarly, there was a moment in time when the bidding frenzy for houses slowly quieted down. These signals all occurred months before markets collapsed.  It’s our job to survey the current environment to see where and when supply or demand is making a fundamental shift.

Damien Hoffman
Wall St. Cheat Sheet

26 thoughts on “A Real-Time Lesson in the Supply and Demand of Investing

  1. Good article . . . though it stays away from discussing the current political winds blowing across the US . . . . fundamentally transforming the United States of America by embracing a Progressive lifestyle that will instill more control by a central planning state with the population more heavily in debt due to social and state programs that are increasing at a larger clip than the state's ability to raise/confiscate revenues while the US standard of living has nowhere to go but sideways at best, yet with the likelihood of drifting slowly downward.

    1. rrblum,

      I do not discuss politics because it's much more emotional than rational -- and I am politically agnostic when it comes to analyzing the market. All we need to know is that the government has taken on huge debts (which has been a trend for about 7 years now).

      Political movements are cyclical like everything else. The pendulum swings one way, goes to far, and then swings the other 😉

  2. Interesting article and thought provoking comments.

    That the US economy should resume the production of "real value that others will line up to purchase" is a comforting thought. That was possible in a situation in which world competion had been eradicated by the WWII destruction of most of the industrial capacity outside the United States, the purchasing power of buyers being provided by the United States itself and by the transfer of whatever gold reserves still existed abroad. In the early 70s, the party was over. The problem has not surfaced in the last two years. It can only be solved by cost reduction and the further lowering of real incomes of the US middle class (what's left of it).

    To "retire a very sizable portion" of US debts will be somewhat difficult under the present dispensation. Domestic debt will have to be inflated away. Foreign debts will continue to grow. The US has been quite successful in persuading the rest of the world to align itself behind US military power. Foreign creditors are well aware of the distress a US bankruptcy would cause. Domestic and international public opinion has been skilfully manipulated by an unending series of threats: terrorism, illnesses, the whether and, though none of them has been convincing, new ones will continue to be invented, as the need to keep the people under control continues to be perceived.

    I rather liked the idea that the US "must prevent (sic!) other nations from dumping ...US dollars..." It would have amused me to have that thought developed, especially with regards to the means to be employed.

    1. Thanks, Finn. Great, thoughtful comment. In regards to your final point, the means to deploy such a protection of the US dollar would be to 1) have it backed by a stable, productive economy, and 2) stop monetizing debts (i.e., run the US economy like a profitable business).

      All the best to you!

  3. With respect to war with China, we may find them the initiator of some future conflict.

    Their country is at severe risk of collapse via complete desertification. Over the past 20 years, continued poor agricultural development of the land and depletion of underground life sustaining water aquifers have resulted in over 50% of Northern China now being barren desert. Incredible sand storms from ferocious winds literally carry rivers of levitated sand that now even have recently begun to lay siege upon her capital, Beijing.

    These precious internal natural resource (think water, earth minerals, life sustaining land) for China continue to diminish, while on the other hand, population and rapid desertification are increasing.

    History has shown in the past that circumstances similar to those above often drive countries to begin to acquire massive external resources to sustain while expansion into areas of high internal resource abundance occurs.

    But, back to trading.....

  4. Won't interest rates eventually go sky high.So other country's will come and buy dollars and buy our long term bonds.

    1. As my bond trader friend says, "That's the trillion dollar question." We may also sit with very low rates for a longer period than anyone expects. Look at Japan.

  5. Ken, your detective ally and Pete and all the others - you guys need to read Milton Friedman and Anna Schwarz on the importance of replacing lost liquidity after a credit collapse. The US doubled its debt between 2001 and 2008, from $25 to $50 trillion, largely through the criminal activities of Wall Street, not only by offering sub-prime, ARM and Alt-A, but by then slicing and dicing the stinking mortgages so that tracing who really owns what would be practically nigh impossible. Then they had the gall to sell them off to other unsuspecting banks and other financial organisations the world over, spreading the contagion in the hope it wouldn't all be left in the US to blow up the US economy forever. Anyway, that increase in debt had all gone into thin air by 2008, leaving not only the home-owners with unsaleable houses but mortgage receivers around the world with bad debts and both businesses and individuals cash-strapped in debt.
    Can't you remember? Companies couldn't even get commercial paper!

    Ben Bernanke, who is a republican, is a student of the great depression and knows that it is absolutely imperative that the liquidity that has imploded must be replaced, and this is what he and the Treasury are doing - making sure there is enough liquidity in the system (which is now global since dollars are held almost everywhere) so that there is no deflation. Note that he has done this irrespective of whether the administration is red or blue. Both administrations have assisted in this endeavour. Bush gave a tax rebate which was short-lived and completely insufficient and did not and could not prevent October 2008. A tax rebate has a temporary effect of putting making more household cash available. Obama has continued to improve household disposable income through various means such as home rebates, cash for clunkers, etc. in other words through selective assistance to prevent the total collapse of the sectors involved. Amazingly, you Ken, and your supporters, complain. You are very very lucky the whole system didn't collapse so that nothing moved.

    Even from a trading perspective I don't see what you and your supporters are complaining about. If the Fed and the Treasury had not pumped liquidity into the economy the S&P 500 would now be 8% of what it was in May 2007. If you are traders in the market you have had the all-time best rally in history in the last 10 months. So what's going on? Are you sore because you didn't see the downturn coming, or what is your real gripe? Obama has allowed your party to continue and now you turn around and say 'Hey, thanks for saving the economy and the stock market but you shouldn't have spent the money!'

    What I could understand would be if you complained about how both administrations have not allowed the big banks to fail for their multitude of sins, and have instead wasted vast sums of money to prop up the big banks, which are now still having to try and repair their capital ratios and cannot lend as much as is necessary to individuals and small businesses. And don't be misled by the big bonuses. The bankers know that it is touch and go whether they survive, and are taking out huge bonuses as insurance policies in case they get sued or pursued and are forced to move and set up in a rogue country.

    Of course some claim that if the regulatory system was so thoroughly dismantled in H2 2008 the banks would have failed in a disorderly way in hours and days, wreaking huge havoc in the economy, and for this reason some propping up was necessary. However at least the Obama government could at have resolutely adopted the Swedish model, which took over, cleaned out and re-privatised its five national banks in eight months. Thereafter the Swedish economy climbed steadily and out of its near depression.

    But no, it was 'politically impossible', i.e. the US population is so ignorant historically and politically and so indoctrinated that it collectively believes that if the US government were to do clean out the banks then the country would become de facto communist overnight. And if Obama had done it then he and the government would have been lynched. Yet what is the present result, if not the worst of all worlds, when the US government now owns 85% of a Citibank that is continuing to fail? Is this present status quo not semi-communist? By not cleaning out the banks and by instead propping them up ad infinitum, the US has copied the Japanese non-solution which led to zero growth in the Japanese economy for 20 years - from 1989 right up until this time - January 2010. At best – trading ranges, here we come. At worst, further cascading corrections a la 1930 to 1933.

    Which European country does Morgan Stanley believe will grow most in 2010, by 2.4%, WITHOUT being in hock to the rest of the world (just like the US, UK, Japan, and many other countries are)? Sweden. The rest of Europe will grow at anything between minus 5 and plus 1%. So if we forget our childhood indoctrination about the communist spooks in the White House and think outside the box for once, then perhaps it is Sweden that is truly capitalist and the US is semi-communist, or at least risks collapsing into a centrally planned economy because it won't deal with the root problem. And what is the root problem? – a lack of real confidence in the US economy because the wonky big banks are hiding toxic assets on their books, and are in no state to support an economic revival. (See Meredith Whitney's second downgrading of Goldman Sachs in the last month or look at the Niall Ferguson videos or the interview of Dan Alpert cited below, to get a grip on the relationship between money, nominal values, what money will buy, and confidence in money.

    If it will not clean out the banks the US will not get out of this conundrum of a weak economy, obstinately high unemployment and a burgeoning debt. The classic way collapsing imperial countries try and extricate themselves is indeed by starting war so that they can have an excuse to cancel their debts, even though it often only leads to further weakening in its economic and military power. I assume that is what Dave J is referring to.

    The trouble with most traders is that they only understand the markets from their daily interaction with them. Every profession has a distorted view of the world and each in their own way and traders are not an exception. The world could be falling down around their ears but they only see what is going on on their screens and digital ticker tapes and only know the mantras that they have been inculcated with. “Sell in May...” etc. Their profession distorts their view of the world so that it becomes myopic, obsessed with the incremental movement of the markets and every little percentage decimal and every basis point, and then trying to find a reason to pin the movements on to. Post hoc. Few have a macro perspective, and when the system goes haywire and the unexpected happens, all they do is whine and try and blame someone or something else.

    I suggest one can get a better macro and international and historical understanding by reading Martin Wolf in the FT for a more international and historical view of where the US and the capitalist system is very likely going, plus other accounts of those who have caused the present malaise, so all you traders can get some real hate objects to blame, i.e. those who dismantled the regulatory framework which gave the criminals on Wall Street free reign to cause this heinous mess which could easily go cataclysmic.

    See Martin Wolf in


    "The Master of Disaster"

    Alternatively you could study Niall Ferguson's video series on what the value of money is really based on:

    Then for the relationship between the economy and the Fed and the weakening banks see the interview of Dan Alpert on CNBC last Tuesday:


    Regarding a disintegrating economic and political world. We have now over forty failed states in Africa and Asia. Amongst other things there will probably have to be a permanent fleet off Somalia to control the pirates which threaten the oil. Al Qaeda is close to getting control of a source of oil in the Sudan. Russia uses threats and actually cuts off the supply of oil to its former Soviet, now European, neighbours. The United Kingdom may invade Iceland. Although it is Iceland's banks which owe the UK, the UK itself is in massive debt (350% of GDP) and needs to bristle to distract and fool its creditors. The EU or at least the Euro could fall apart because of the contradictions in having a cumbersome and only semi-democratic political system. This political system is in bad synch with vastly different member economies coupled to a Central Bank which only has inflation control as its mandate. The EU also has a totally unrealistic target for sovereign debt during recession, and a totally insufficient internal mechanism of moving troubled EU economies forward.

    Regarding some comment here about Clinton not getting hold of Osama bin Laden. He may be a liar (I did not have xxxxxxx relations with M L) but he claims he gave the order for the CIA to get OBL and kill him.

    As for the US using a war to call a default on its payments, how about this for the date of a geo-political standoff between the US and another suitable country:

    28th March 2011

    Of course I think it is as good a date as any. Don't ask me where I got that date from.

    1. Excellent comment, Paul. I,too, got heartburn when they repealed Glass-Steagall. And, it's true that having a macro view of things comes in very handy. With that in mind, allow me to once again suggest to all concerned that, if we really want to solve our problems, we should seriously address The Book of Proverbs in the Bible. As it is written:" All the paths of wisdom are peace(Prov. 3:17b." Surely, the honest of heart who read this can only agree that that's the exact opposite of what we have today. I would most humbly submit that having learned that view is the ultimate in macro thinking.

  6. damien....I hope your correct however i don't seeit. The fundamentals of what's going on now and the potentila geo-political difficulties as well as numerous other variables leads me to think it will be some time before this mess is righted. No, it never will be as we are now on the brink of a new world order being materalized.
    The perfect storm is here gentlemen. God bless you and good luck.

    1. Philip,

      Thanks for your comment. For the record, our Premium service has been long Gold. We also just started a Premium Gold & Silver service because we believe the long term outlook for metals and commodities is very strong.

      My point above is to not get caught in the extremes of being too bearish or bullish. Everything is cyclical. I believe there will be new industries and new organic economic growth. It's happened every decade. There are exciting industries which are maturing, and I think they will be a big benefit to our future. Some we are watching are health tech, alternative energy, Web 3.0, and nuerotech.

      All the best!

  7. It seems that our best bets are the basics. Food, energy, utilities and transportation. Demand comes from the population that uses food, energy, utilities and transportation. The demand is steady. Supply may decline because of weather, depletion and service reduction. So take positions now, for the long term, in those areas that must go up in demand or must decline in supply. As for trading just follow the triangles. I think you need to "trade" within those sectors and "invest" for the long term. But don't try to invest against a trend.

    1. Good points, Tom. I think those sectors are a natural play if you are thinking China and India. In the US, we have some population issues coming soon with all the Boomers getting older. It's not as much of a sure thing. But you are thinking correctly.

  8. By no means was I happy with the debt that accumulated under George Bush, but boy!... please tell me that the comments made before were incomplete at the time they were sent.

    Damien thank you for your article.

    I'm not that optimistic about your point about new sources of wealth and innovation leading us out of an anemic economy while the Government is attempting to place this country on welfare. As long as The Government enforces laws based on bills such as Cap & Trade, Health Care Reform, bail outs, Tarp with preconditions (regulations), Clunkers,etc.. and its attempts to generally redistribute wealth by skyrocketing taxes and energy costs and pledging hundreds of billions to world organizations and governments for climactic reasons it will be disastrous for free markets and capitalism. Government is trying to have a bigger hand in business by expanding itself and this will cause the free market to dwindle, to be less competitive because you can't compete with the Government - they can never go out of business. The result will be an environment where innovation, wealth and opportunity will be limited if not stifled. But I do hope your correct Damien.

    Thanks and Regards,

    1. Thank you, Johnny. I am not happy with the government action either, but we will get through this cycle and move forward. Maybe not soon, but at some point.

      I wish you all the best!


  9. I trust that Market Club will forgive me for waxing political, but the following must be noted. A couple of observations: There is concern that Dave J' memory is selective. Clinton's alleged- and, I DO mean alleged- budget surpluses were not actual, cash-in-the-Treasury- surpluses. They were budgetarily PROJECTED. That is far different than actually having the cash. And, to further jog everyone's memory, a few years before these PROJECTED surpluses, his proposed budgets PROJECTED deficits as far as the eye could see. It was only the Republicans winning back the Congress in '94 that fiscal discipline started to become fashionable again...Then there is the matter of the war. Clinton had the opportunity to catch Osama, but his administration turned it down. It is documentable fact that Sudan was ready to hand over Osama. Had that happened, there's a high probability that the disaster of 9-11 wouldn't have happened. And right after 9-11, Bush said that this was going to be a long war, and that it's not going to be easy. And, unfortunately, that is true.

    1. Dave is ignorant of science and history, too. You don't enrich plutonium. There is only one isotope that is not highly unstable, thus no need to separate them as you have to do with uranium, to separate the fissionable U235 from the far more plentiful U238. And the idea that the US invaded Vietnam because they were our creditor ... what can I say. Maybe he's just too young to remember.

  10. Hitesh,

    This is a great question. The data you need is going to be in the general financial news at Yahoo or Wall Street Journal, etc. Here is a great article showing the global holdings of Gold:


    In so far as a particular sector of stocks, you want to look at a sector ETF or leading stocks. Then look at the volume growth on a multiyear chart.

    In the example of tech stocks in the dotcom boom or houses in the recent bubble, tech IPOs stopping rising on issue (which means demand was waning) and the S&P Case-Shiller index peaked almost a YEAR before the stock market.

    All the best to you in this new year!


  11. Fundamentals are for economists. Technicals are for traders. Traders will always find ways to make money no matter what happens in mis-managed economies. Some traders rely on economics for longer-term planning. Many do not.

    Multi-national capitalism is so broken right now that repairing it will require radical, evolutionary innovations. I, for one, will welcome them. My hope is that the innovations will lead us to become a more ecological, gentler world, but I am not optimistic, given that the same miscreants who placed us in this mess still own the world's wealth and institutions, steering it all still through their non-governmental organizations like WTO and NAFTA bypassing legitimate democracies.

    Bush's war has been so costly that the United States may not ever recover from the debt it still burdens us with--and to think that we had a balanced budget and a trade surplus when Dubya took office just a decade ago! World history shows that when public debt grows so burdensome as to become intolerable, debtor nations invade their creditor nations. The prospect of the United States attacking an implacable and unforgiving China is unspeakably dangerous, but not out of the question for the Western intelligence community and its dogs of war to trump up another fight like the Gulf of Tonkin incident in 1965. Insofar as Russia and China are aligning themselves with Iran over its massive supplies of oil and development of enriched plutonium, the idea is not out of the question that we could stumble our way into armed conflict with China by confronting Iraq's large neighbor to the north.

    1. Great comments, Dave! We just did a cost-benefit analysis of NAFTA at Wall St. Cheat Sheet, and as you can imagine, it hasn't been much of a benefit to the US.

      Insofar as using economic data for investing, you are correct that traders use additional technical indicators. But what is a stock chart? Price and volume. Those two variables are 100% reflective of supply and demand.

      You are also correct that economists are horrible investors. They are 😉 But top tier traders are well aware of macro trends so they can swim upstream with their trades. When a sector is "hot", that means demand is strong. Traders like me have those sectors on my daily watch list.

      Also, every pro trader I know changed direction during the dotcom boom not because of a technical break, but because the IPOs were not finding demand. That was the MAJOR clue the game was over and you could not simply buy the dips.

      Thanks for your insights. We share many of the same hopes.

      All the best!

    2. It's amazing that Dave J talks about W's spending on the war and mentions nothing about BO's spending on everything in vastly greater amounts.
      I doubt that "we could stumble our way into armed conflict with China", while we are yielding our national power to international organizations.

    3. Okay, Dave, now that we have experienced your parroted political soap box--I did not realize this was the forum for that-- how about some useable stock trading information rather than your socialist opinion of Ameriaca. Your post sours the intent of this forum, imo.

  12. It's very good article. I am being a very small and less experienced investor(trader)like to ask you how and where I can find data or info. related to supply and demand for example, so I can make a better decision to what, when and why I should buy stocks or particulare industry or sector?. I am using help market club signals and optionshouse's basic reserach, and yahoo finance for news about stock. Can You please talk in detail about how to apply your info. to make decision. Thank you in advance for your efforts in helping me.
    God Bless

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