Courtesy of Zero Hedge:
"Bloomberg's Macro index has utterly collapsed in recent weeks - now at its worst level in 7 months but apparently if good is good, bad is better, and totally shitty is absolutely awesome."
Tuesday, April 30, 2013
More Shorts
Today I initiated another short position -- this time in the Spanish bank Santander (NYSE: SAN). While already down about 20% from earlier this year, it is still up about 50% since last summer, when the problems that have not gone away on the Continent were front and center. In fact, in the past 2 years, the spring/summer has turned into an absolute bloodbath for Europe and its financial system. I see no reason why it will be different this year. That, and the chart also looks crumby. And I was inspired by a recent interview from Jim Chanos.
As they say, the rain in Spain falls mainly on the banks as they get squished like a bug on your windshield. Or something like that.
As they say, the rain in Spain falls mainly on the banks as they get squished like a bug on your windshield. Or something like that.
Western Delusions
Some interesting thoughts courtesy of George Friedman at Stratfor:
“That is not what was under the surface in Afghanistan or Iraq. These countries were not Europe and did not want to be. One of the reasons that Hussein was despised was that he was secular -- that he violated fundamental norms of Islam both in his personal life and in the way he governed the country. There were many who benefited from his regime and supported him, but if you lopped off the regime, what was left was a Muslim country wanting to return to its political culture, much as Eastern Europe returned to its.
In Syria, there are two main factions fighting. The al Assad regime is Alawite, a heterodox offshoot of Shi'ism. But its more important characteristic is that it is a secular regime, not guided by either liberal democracy or Islam but with withering roots in secular Arab Socialism. Lop it off and what is left is not another secular movement, this time liberal and democratic, but the underlying Muslim forces that had been suppressed but never eradicated. A New York Times article this week pointed out that there are no organized secular forces in areas held by the Sunni insurgents. The religious forces are in control. In Syria, secularism belonged to the Baath Party and the Alawites, and it was brutal. But get rid of it, and you do not get liberal democracy.
This is what many observers missed in the Arab Spring. They thought that under the surface of the oppressive Hosni Mubarak regime, which was secular and brutal, was a secular liberal democratic force. Such a force was present in Egypt, more than in Syria, Iraq, Afghanistan or Libya, but still did not represent the clear alternative to Mubarak. The alternative -- not as clearly as elsewhere, but still the alternative -- was the Muslim Brotherhood, and no secular alternative was viable without the Egyptian army.”
“That is not what was under the surface in Afghanistan or Iraq. These countries were not Europe and did not want to be. One of the reasons that Hussein was despised was that he was secular -- that he violated fundamental norms of Islam both in his personal life and in the way he governed the country. There were many who benefited from his regime and supported him, but if you lopped off the regime, what was left was a Muslim country wanting to return to its political culture, much as Eastern Europe returned to its.
In Syria, there are two main factions fighting. The al Assad regime is Alawite, a heterodox offshoot of Shi'ism. But its more important characteristic is that it is a secular regime, not guided by either liberal democracy or Islam but with withering roots in secular Arab Socialism. Lop it off and what is left is not another secular movement, this time liberal and democratic, but the underlying Muslim forces that had been suppressed but never eradicated. A New York Times article this week pointed out that there are no organized secular forces in areas held by the Sunni insurgents. The religious forces are in control. In Syria, secularism belonged to the Baath Party and the Alawites, and it was brutal. But get rid of it, and you do not get liberal democracy.
This is what many observers missed in the Arab Spring. They thought that under the surface of the oppressive Hosni Mubarak regime, which was secular and brutal, was a secular liberal democratic force. Such a force was present in Egypt, more than in Syria, Iraq, Afghanistan or Libya, but still did not represent the clear alternative to Mubarak. The alternative -- not as clearly as elsewhere, but still the alternative -- was the Muslim Brotherhood, and no secular alternative was viable without the Egyptian army.”
Saturday, April 27, 2013
Proceed With Caution
Despite the recent Barron's survey (from last weekend) which documented some 74% of institutional money managers as bullish, with 94% bullish on a 5-year time horizon, most of the friends and contacts who I speak to in the hedge fund universe are much more cautious. One such person said that he is expecting the market to be cut in half (and he is at one the biggest and most well-known funds) and has been buying puts accordingly. Anyway, my instincts lately have been the same, so I am going to continue to look to gain exposure on the short side.
At the same time...
I have been making some purchases of the very beaten down junior gold miners -- a couple of names that I have been following for years -- one which I am buying at 75% below the level when it first made it on my radar in 2011.
At the same time...
I have been making some purchases of the very beaten down junior gold miners -- a couple of names that I have been following for years -- one which I am buying at 75% below the level when it first made it on my radar in 2011.
Friday, April 26, 2013
And the beat goes on...
This article struck me as an important read (h/t Casey Research).
Essentially, in contrast to the recent chatter about how the FOMC minutes suggested an end to QE programs, a bunch of the voting members have spoken out in favor of staying the course, and perhaps even expanding asset purchases.
I thought this quote from the NY Fed President, William Dudley, provides great insight for those trying to forecast what's coming: "After reviewing the efficacy and costs of this program, I have concluded that that efficacy has been as high or higher than I expected at the onset of the program and costs the same or lower." In other words, "It's great, we see no consequences, so why would we stop anytime soon! In fact, why not do more!"
Great example of the Hyman Minsky logic -- that a lack of consequences immediately is often viewed in the most favorable way possible, leading to complacency and recklessness.
Essentially, in contrast to the recent chatter about how the FOMC minutes suggested an end to QE programs, a bunch of the voting members have spoken out in favor of staying the course, and perhaps even expanding asset purchases.
I thought this quote from the NY Fed President, William Dudley, provides great insight for those trying to forecast what's coming: "After reviewing the efficacy and costs of this program, I have concluded that that efficacy has been as high or higher than I expected at the onset of the program and costs the same or lower." In other words, "It's great, we see no consequences, so why would we stop anytime soon! In fact, why not do more!"
Great example of the Hyman Minsky logic -- that a lack of consequences immediately is often viewed in the most favorable way possible, leading to complacency and recklessness.
Wednesday, April 24, 2013
More Mendacity
Economist Noah Smith has a recent blog post in which he looks at Paul Krugman’s predictive powers the past few years, and specifically why he has been right and the Austrians / gold bugs / faux conservatives have gotten it wrong with respect to interest rates, inflation, etc.
While Krugman likes to credit the IS/LM model, Smith writes that it’s something else, since the model is more about guiding policy and is not meant to forecast what the reaction of the economy will be to policies like QE2. So, despite his own appeals, Krugman is not getting it right because he uses one of the basic Keynesian models. No, Smith says, it’s actually because Krugman understands the dynamics taking place in Japan over the past 20+ years, and sees that the US very much resembles it in the period following 2008. Therefore, despite huge QE measures and higher levels of debt, inflation simply is not going to get traction.
Of course, you know I disagree.
First off, the claim about inflation is only part of what the contra-Krugman contingent represents. It also very much believes that the QE measures and fiscal steps will not generate growth. And, so far, they’ve been right. Krugman, even though he always like to hedge by saying that what has been done is not enough (how convenient), is supportive nonetheless of these policies as steps in the right direction.
The second part, about inflation, is a different beast. Yes, part of the narrative is that interest rates will ultimately rise, but another and larger consideration for the counter-position is that easy money policies engender bubbles that ultimately have to burst. So, while the CPI tells us that inflation is nowhere near out of control, it sure does strike me as inflation when I look at the stock market (despite weak underlying fundamentals), or see how frothy things are getting in the multi-family space (where I play on a regular basis). The “trolls”, as Smith describes them, think that sustainable recovery is not possible in a manipulated economy where the Fed keeps rates low, and that the ultimate consequence is more pain.
(Side-point: Krugman and others like to point to interest rates as a measure of something, but seem to ignore how rates are where they are because of interventions – or are we to believe that rates would be even lower without these policy steps. After all, they don’t think rates should be raised, so are they suggesting that rates would go up or down without the QEs?)
When and where inflation comes cannot be predicted in advance, but by the measure of food and energy prices, it has gone up. In terms of financial assets, it has gone up (something you did not see in Japan, given that Mr. Smith thinks it is such an apt comparison). In addition, we know that the social dynamics in Japan are far different. Higher levels of savings, a Central Bank that generally reverts to a deflationary stance when things start to heat up, very few foreign creditors – none of which are the case in the U.S. I would also point out that the BOJ has finally started to act more like the Fed recently. And what have we seen? Much greater volatility in JGBs, a surging Nikkei, and a much depreciated currency.
Hmmm.
While Krugman likes to credit the IS/LM model, Smith writes that it’s something else, since the model is more about guiding policy and is not meant to forecast what the reaction of the economy will be to policies like QE2. So, despite his own appeals, Krugman is not getting it right because he uses one of the basic Keynesian models. No, Smith says, it’s actually because Krugman understands the dynamics taking place in Japan over the past 20+ years, and sees that the US very much resembles it in the period following 2008. Therefore, despite huge QE measures and higher levels of debt, inflation simply is not going to get traction.
Of course, you know I disagree.
First off, the claim about inflation is only part of what the contra-Krugman contingent represents. It also very much believes that the QE measures and fiscal steps will not generate growth. And, so far, they’ve been right. Krugman, even though he always like to hedge by saying that what has been done is not enough (how convenient), is supportive nonetheless of these policies as steps in the right direction.
The second part, about inflation, is a different beast. Yes, part of the narrative is that interest rates will ultimately rise, but another and larger consideration for the counter-position is that easy money policies engender bubbles that ultimately have to burst. So, while the CPI tells us that inflation is nowhere near out of control, it sure does strike me as inflation when I look at the stock market (despite weak underlying fundamentals), or see how frothy things are getting in the multi-family space (where I play on a regular basis). The “trolls”, as Smith describes them, think that sustainable recovery is not possible in a manipulated economy where the Fed keeps rates low, and that the ultimate consequence is more pain.
(Side-point: Krugman and others like to point to interest rates as a measure of something, but seem to ignore how rates are where they are because of interventions – or are we to believe that rates would be even lower without these policy steps. After all, they don’t think rates should be raised, so are they suggesting that rates would go up or down without the QEs?)
When and where inflation comes cannot be predicted in advance, but by the measure of food and energy prices, it has gone up. In terms of financial assets, it has gone up (something you did not see in Japan, given that Mr. Smith thinks it is such an apt comparison). In addition, we know that the social dynamics in Japan are far different. Higher levels of savings, a Central Bank that generally reverts to a deflationary stance when things start to heat up, very few foreign creditors – none of which are the case in the U.S. I would also point out that the BOJ has finally started to act more like the Fed recently. And what have we seen? Much greater volatility in JGBs, a surging Nikkei, and a much depreciated currency.
Hmmm.
Tuesday, April 23, 2013
Follow-Through
As discussed over the weekend, I opened a small short on XLY today, the consumer discretionary ETF, at around $54. This vehicle is tied to the sorts of things that should sink fastest when the stock market becomes more attuned to the realities of the economy in months ahead.
Friday, April 19, 2013
Fighting the Fed
As I mull it over, I am becoming more convinced that the market faces a meaningful correction. Between commodities rolling over, a weak earnings season, the other concerning economic data points that I have highlighted before, coupled with a chart (discussed yesterday) that looks like it's ready to turn, I think that I will put on some positions to be prepared.
However, as noted already, even at the major turning points in 2000 and 2007, the process of having the market top out and then break down did not happen all at once, but instead over about a 7 month period each time. We're only in month 2 then, if I'm correct about the ultimate outcome. Of course, there's no rule that says it has take 7 months, but I think there will be intervening events that force it to drag out a bit.
For starters, yes, the market looks weak, so I think at the first sign of a contraction related to a deflationary threat, the Fed will step in and up the ante on the size of their asset purchases, and perhaps even the scope of what they buy (think Japan, where the BOJ is buying debt, equities, REITs, etc.). So, the initial response to further Fed action is likely to be some sort of relief rally. And watching how long it lasts, and how powerful it is, will tell us how vulnerable the market is.
Having said all of that, I may still dip a toe soon and initiate very small starter positions on the short side with XLY and XLI, two ETFs that hit the economically sensitive sectors of consumer discretionary and industrials.
However, as noted already, even at the major turning points in 2000 and 2007, the process of having the market top out and then break down did not happen all at once, but instead over about a 7 month period each time. We're only in month 2 then, if I'm correct about the ultimate outcome. Of course, there's no rule that says it has take 7 months, but I think there will be intervening events that force it to drag out a bit.
For starters, yes, the market looks weak, so I think at the first sign of a contraction related to a deflationary threat, the Fed will step in and up the ante on the size of their asset purchases, and perhaps even the scope of what they buy (think Japan, where the BOJ is buying debt, equities, REITs, etc.). So, the initial response to further Fed action is likely to be some sort of relief rally. And watching how long it lasts, and how powerful it is, will tell us how vulnerable the market is.
Having said all of that, I may still dip a toe soon and initiate very small starter positions on the short side with XLY and XLI, two ETFs that hit the economically sensitive sectors of consumer discretionary and industrials.
Thursday, April 18, 2013
FYI
Here's a chart of gold (using GLD as proxy) that dates back to mid-2005, showing what I referenced yesterday:
Something Wicked this Way Comes...Or Maybe Not
Turning to other markets for a change, above I have posted a chart of the S&P 500 going back to 1997 (monthly candlesticks). Without trying to make an actual prediction, I would note the following:
-The market suggests the possibility of a triple top.
-Even if the market has topped out, if you look to those earlier peaks in 2000 and 2007, the process didn’t happen all at once, but occurred over 7-months in each instance before the down move really started. As it stands, we’re only in month 2, meaning if history repeats itself, we would be in September or October before a downturn begins.
-The down move during the 2000 cycle lasted 2.5 years, followed by a 4.5 year uptrend. Peak to trough, the 2007 cycle lasted 1.5 years, before the current uptrend which is now 4.5 years old. Eerie, right?
-The more turbulent 2007 cycle (i.e., bigger red candlesticks) speaks to the theory that trying to kick the can down the road leads to bigger and more painful blow-ups each time.
Observations complete.
If I were going to second-guess myself on what the charts are foretelling, it would be because of my terrible track record lately, as well as the unprecedented amount of liquidity from the Fed, BOJ and ECB. Also, it’s fair to question the predictive power of charts alone, since I have come to believe that technicians, by nature, generally fall into this form of analysis because they aren’t smart enough to read a balance sheet :)
Still, on a more serious note, people might finally be realizing that the economy is not in such great shape – the disappointing earnings season just the most recent evidence.
Wednesday, April 17, 2013
Fools Never Learn
So much for a final word. After avoiding the blood and carnage of the gold chart for several days, I decided to take a look. And what I found was mildly interesting. Where the drop finally relented on Monday ($1320 to $1330 area) actually coincided with a trend line that dates back to mid-2005. It was the bottom part of a channel that gold largely stayed within until the spike up to $1900 in September 2011. So, the stopping point made some sense. Now what I am watching is whether that level continues to hold. On the upside, Goldman advised clients to have a stop loss at $1400 for short positions.
There you go, $1330 to $1400 -- a convincing move outside that range in either direction will be telling.
There you go, $1330 to $1400 -- a convincing move outside that range in either direction will be telling.
Tuesday, April 16, 2013
Final Word
As the past few months have put on vivid display, I don't have a great feel for the gold market. Nevertheless, the fundamentals that support the story continue to be there in spades. So no selling for me.
On a less serious note, very much looking forward to the release of this song next week.
On a less serious note, very much looking forward to the release of this song next week.
Saturday, April 13, 2013
Paul v. Paul
If I wasn’t already convinced that he mixes a political agenda into his explanation of economics, his work this week certainly would’ve pushed me over to that side.
In Friday’s NY Times, Paul Krugman had a piece entitled “Lust for Gold” in which he criticizes so-called conservatives for embracing gold, both as a safe asset and for suggesting a return to the gold standard. His beef is that political actors were pushing it as protection against money printing. No, he writes, we have not seen inflation and there is no indication that we will see anything remotely problematic come from a discretionary monetary policy, except perhaps that it will be stymied by the right-wingers. He offers some other polemics, but it’s just not worth responding to. Still, in the course of doing all that, he does admit that gold can be a good investment as it is like a “very long term bond that’s protected from inflation”. Remember that last bit, because it’s important.
Now, go back to Thursday, and on his blog he writes a piece explaining why he is so supportive of the recent BOJ announcement concerning aggressive new policy measures. Specifically, he endorses it because “[i]f investors believe that the central bank will keep the pedal to the metal even as the economy begins to recover, this will imply higher inflation than if it hikes rates at the first hint of good news – and higher expected inflation means a lower real interest rate, and therefore a stronger economy.” In other words, the central bank can “credibly promise to be irresponsible”.
Do you see what just happened there? The first day he explains that all this money printing is intended to create inflation, and in a manner where people believe that it will be done irresponsibly. The next day, while admitting that gold is a good inflation hedge, he suggests that anybody who has been buying it in the past few years either suffers from a case of bad economics or bankrupt morals. Does that strike you as bizarre? Sometimes I wonder if this guy keeps track of everything he writes, or maybe it’s just two different people taking turns on alternate days. Whatever it is, it won’t help anybody to navigate what’s coming.
In Friday’s NY Times, Paul Krugman had a piece entitled “Lust for Gold” in which he criticizes so-called conservatives for embracing gold, both as a safe asset and for suggesting a return to the gold standard. His beef is that political actors were pushing it as protection against money printing. No, he writes, we have not seen inflation and there is no indication that we will see anything remotely problematic come from a discretionary monetary policy, except perhaps that it will be stymied by the right-wingers. He offers some other polemics, but it’s just not worth responding to. Still, in the course of doing all that, he does admit that gold can be a good investment as it is like a “very long term bond that’s protected from inflation”. Remember that last bit, because it’s important.
Now, go back to Thursday, and on his blog he writes a piece explaining why he is so supportive of the recent BOJ announcement concerning aggressive new policy measures. Specifically, he endorses it because “[i]f investors believe that the central bank will keep the pedal to the metal even as the economy begins to recover, this will imply higher inflation than if it hikes rates at the first hint of good news – and higher expected inflation means a lower real interest rate, and therefore a stronger economy.” In other words, the central bank can “credibly promise to be irresponsible”.
Do you see what just happened there? The first day he explains that all this money printing is intended to create inflation, and in a manner where people believe that it will be done irresponsibly. The next day, while admitting that gold is a good inflation hedge, he suggests that anybody who has been buying it in the past few years either suffers from a case of bad economics or bankrupt morals. Does that strike you as bizarre? Sometimes I wonder if this guy keeps track of everything he writes, or maybe it’s just two different people taking turns on alternate days. Whatever it is, it won’t help anybody to navigate what’s coming.
Friday, April 12, 2013
Ugly Day
Ouch.
I was already knee-capped over the past month. Today they just decided to give me a wedgie and hang me up on the flagpole to rub it in.
Oddly, it's a relief though. The break of $1,550 almost seemed inevitable. Now it's happened and we can let this flush play out.
But here's what remains the same:
-The U.S. economy is weak.
-The Japanese are upping the ante on experimental monetary policy with some concerning results already. Greece got in trouble (an economy the size of Indiana) and gold shot up. What do you think will happen when the third largest economy in the world faces a debt problem...which it will.
-The Eurozone is not in any great condition.
All of these realities mean more money-printing. The issue at stake for gold is psychological. People believe that they don't need it, that printing money is a good thing. When they realize that it doesn't work, that it causes currency and sovereign credit issues, that will change. When will that happen? Well, it certainly wasn't today.
I was already knee-capped over the past month. Today they just decided to give me a wedgie and hang me up on the flagpole to rub it in.
Oddly, it's a relief though. The break of $1,550 almost seemed inevitable. Now it's happened and we can let this flush play out.
But here's what remains the same:
-The U.S. economy is weak.
-The Japanese are upping the ante on experimental monetary policy with some concerning results already. Greece got in trouble (an economy the size of Indiana) and gold shot up. What do you think will happen when the third largest economy in the world faces a debt problem...which it will.
-The Eurozone is not in any great condition.
All of these realities mean more money-printing. The issue at stake for gold is psychological. People believe that they don't need it, that printing money is a good thing. When they realize that it doesn't work, that it causes currency and sovereign credit issues, that will change. When will that happen? Well, it certainly wasn't today.
Interesting Interview
An interview by Spiegel with Harvard economist Carmen Reinhart, one of the co-authors of This Time is Different. A few noteworthy excerpts:
-"No central bank will admit it is keeping rates low to help governments out of their debt crises. But in fact they are bending over backwards to help governments to finance their deficits. This is nothing new in history. After World War II, there was a long phase in which central banks were subservient to governments. It has only been since the 1970s that they have become more politically independent. The pendulum seems to be swinging back as a result of the financial crisis." (This quote really reminded me of the idea I put out there that the distinction between fiscal and monetary policy is a false one these days.)
-"The best way to deal with a debt overhang is to never get into one. Once you have one, what can you do? You can pray for higher growth, but good luck! Historically, it doesn't happen -- you seldom just grow yourself out of debt. You need a combination of austerity, so that you don't add further to the pile of debt, and higher inflation, which is effectively a subtle form of taxation..."
-"No central bank will admit it is keeping rates low to help governments out of their debt crises. But in fact they are bending over backwards to help governments to finance their deficits. This is nothing new in history. After World War II, there was a long phase in which central banks were subservient to governments. It has only been since the 1970s that they have become more politically independent. The pendulum seems to be swinging back as a result of the financial crisis." (This quote really reminded me of the idea I put out there that the distinction between fiscal and monetary policy is a false one these days.)
-"The best way to deal with a debt overhang is to never get into one. Once you have one, what can you do? You can pray for higher growth, but good luck! Historically, it doesn't happen -- you seldom just grow yourself out of debt. You need a combination of austerity, so that you don't add further to the pile of debt, and higher inflation, which is effectively a subtle form of taxation..."
Thursday, April 11, 2013
One More Thing...
I hate writing another post about gold, like I'm trying to convince myself of something, but I think it's a data point worth considering.
Back in 2008, when the shit really hit the fan, the price of gold dropped over $300 (or about 30%) during a 7-month period -- a similar move nominally to right now, but a much bigger one on a percentage basis. And it happened as global economies seemed to be crumbling.
Yes, the situation was different. Back then, there was a full-fledged panic liquidation across most asset classes. So, it stands to reason that when everybody is selling everything, gold would not be spared. On the other hand, it would be very easy to say that it did not perform like it should have, given its reputation as a safe haven. And here is where I think the idea that markets can be irrational for periods of time matters. Ultimately, gold got back on track and continued the move higher. But there were some gnarly times back then as it was going down.
Back in 2008, when the shit really hit the fan, the price of gold dropped over $300 (or about 30%) during a 7-month period -- a similar move nominally to right now, but a much bigger one on a percentage basis. And it happened as global economies seemed to be crumbling.
Yes, the situation was different. Back then, there was a full-fledged panic liquidation across most asset classes. So, it stands to reason that when everybody is selling everything, gold would not be spared. On the other hand, it would be very easy to say that it did not perform like it should have, given its reputation as a safe haven. And here is where I think the idea that markets can be irrational for periods of time matters. Ultimately, gold got back on track and continued the move higher. But there were some gnarly times back then as it was going down.
Strange
I’ve mentioned that a lot of people have recently declared that gold is at the end of its run. One of the folks who did it, and caused me greater consternation, was Greg Guenthner. He writes a daily commentary called “The Rude Awakening” that I get emailed as a result of subscribing to the “Capital & Crisis” newsletter from Chris Mayer. All of these guys are part of the Agora Publishing outfit, a group generally very much aligned with the views of the Casey Research team.
Guenthner is a CMT, a technical analysis guy. He wrote this piece a couple of months ago, and lately has been pointing out the concerning performance of gold at a time when it should be outperforming. As a result, he is yet another one who thinks investors should look elsewhere in the future for stronger returns. Granted, he is using the charts as the basis for his argument, but he is someone by affiliation who you would expect to have greater conviction about the long term prospects.
So, it came as a shock then when his email arrived this morning and I read the following:
“More new highs for the Dow and S&P. Investors still hate stocks. But stocks don't care...
Gold is a different story. After a decent start to the week, gold took it on the chin yesterday. It coughed up $35, coming to rest near $1,555. If you've paid close attention, this puts the yellow metal in the crosshairs of our danger zone. Any significant violation of this support could lead to a swift selloff.
But wait...
A Goldman note hit the Street early yesterday advising clients to short gold. It also includes a price target of $1,450. That's not totally outrageous--but it is more than $100 lower than where we sit today.
As I read through the brief, I noted several similarities to my recent analysis.
I have told you many times that I've been skeptical of recent price action. I didn't like how gold reacted to the Cyprus crisis. And I've also noted strong selling at key support levels. Despite piles of economic evidence saying gold should move higher, it couldn't catch a bid.
But something about this Goldman report stinks...
Earlier this week, I wrote that it would be a good idea to get out of the gold ETFs and miners if you hadn't already done so. I'm standing by that one. But this Goldman call for an outright short of gold itself is fishy--and I'm starting to rethink my strategy.
The short gold call is working now. Gold is at $1,560--and printed as low as $1,552 yesterday afternoon. But I'm still skeptical of how this plays out on a longer-term basis.
Here's my gripe:
Why test the waters with a short selling recommendation now--after gold has fallen more than $250 from its October peak? What's the motivation here? And more importantly, when is a report like this ever anything but a contrarian indicator?
Bottom line: you don't want to be running hand in hand with Goldman when a report like this comes out. It might work initially, but it's a good way to get burned. Don't short gold.”
Huh?
It certainly didn't take much for him to reverse course on long term prospects. My best guess is that he was potentially looking for a way to hedge his call. Because he knows that it is still probably premature to make.
Guenthner is a CMT, a technical analysis guy. He wrote this piece a couple of months ago, and lately has been pointing out the concerning performance of gold at a time when it should be outperforming. As a result, he is yet another one who thinks investors should look elsewhere in the future for stronger returns. Granted, he is using the charts as the basis for his argument, but he is someone by affiliation who you would expect to have greater conviction about the long term prospects.
So, it came as a shock then when his email arrived this morning and I read the following:
“More new highs for the Dow and S&P. Investors still hate stocks. But stocks don't care...
Gold is a different story. After a decent start to the week, gold took it on the chin yesterday. It coughed up $35, coming to rest near $1,555. If you've paid close attention, this puts the yellow metal in the crosshairs of our danger zone. Any significant violation of this support could lead to a swift selloff.
But wait...
A Goldman note hit the Street early yesterday advising clients to short gold. It also includes a price target of $1,450. That's not totally outrageous--but it is more than $100 lower than where we sit today.
As I read through the brief, I noted several similarities to my recent analysis.
I have told you many times that I've been skeptical of recent price action. I didn't like how gold reacted to the Cyprus crisis. And I've also noted strong selling at key support levels. Despite piles of economic evidence saying gold should move higher, it couldn't catch a bid.
But something about this Goldman report stinks...
Earlier this week, I wrote that it would be a good idea to get out of the gold ETFs and miners if you hadn't already done so. I'm standing by that one. But this Goldman call for an outright short of gold itself is fishy--and I'm starting to rethink my strategy.
The short gold call is working now. Gold is at $1,560--and printed as low as $1,552 yesterday afternoon. But I'm still skeptical of how this plays out on a longer-term basis.
Here's my gripe:
Why test the waters with a short selling recommendation now--after gold has fallen more than $250 from its October peak? What's the motivation here? And more importantly, when is a report like this ever anything but a contrarian indicator?
Bottom line: you don't want to be running hand in hand with Goldman when a report like this comes out. It might work initially, but it's a good way to get burned. Don't short gold.”
Huh?
It certainly didn't take much for him to reverse course on long term prospects. My best guess is that he was potentially looking for a way to hedge his call. Because he knows that it is still probably premature to make.
Ad nauseam
More on the same topic.
I read an article from the NY Times yesterday, talking about how gold has lost its luster and that banks are advising their clients to sell. There is some mention of the Soros argument that it is not acting as it should following events like Cyprus, but most of the piece thinks about how an improving economy generally mitigates the need for gold.
Which brings me back to my post last night, about how history may not repeat, but it sure does tend to rhyme.
As you’ll recall, it is my position that we had two prior bubbles that were largely enabled through easy money policies at the Fed. It is also my position that what people are mistakenly terming a recovery now is largely just financial assets getting bid up again due to money-printing. Now take a step back for a moment. When Nasdaq and housing were roaring higher, hardly anyone thought that there was a bubble, but instead viewed it through the lens of a “New Economy”. In the former, gold finally found a bottom after a 20-year bear market. In the latter, it outpaced the gains that were seen in most other asset classes. To be very clear on this point, even though the economy was being viewed through rose-colored glasses, gold still went up. And what that tells me is that gold’s role is not just as safe haven, but also as a hedge in a world of depreciating currencies. But somehow many are ignoring that fact.
So, let’s get to the point. I can’t predict the future. But given what we’ve seen, I am hard-pressed to believe that things are as promising as people would like to believe. In fact, I made a list last week documenting many of the statistics that point to a lack of recovery. And, yet, even if I’m right about a more guarded stance, there is no guarantee that I will be vindicated any time soon. Still I think it would be premature to sell gold. When you consider all of the fundamental factors that suggest the bull run isn’t over, that should give an owner of gold some confidence to stay the course. Time will tell.
I read an article from the NY Times yesterday, talking about how gold has lost its luster and that banks are advising their clients to sell. There is some mention of the Soros argument that it is not acting as it should following events like Cyprus, but most of the piece thinks about how an improving economy generally mitigates the need for gold.
Which brings me back to my post last night, about how history may not repeat, but it sure does tend to rhyme.
As you’ll recall, it is my position that we had two prior bubbles that were largely enabled through easy money policies at the Fed. It is also my position that what people are mistakenly terming a recovery now is largely just financial assets getting bid up again due to money-printing. Now take a step back for a moment. When Nasdaq and housing were roaring higher, hardly anyone thought that there was a bubble, but instead viewed it through the lens of a “New Economy”. In the former, gold finally found a bottom after a 20-year bear market. In the latter, it outpaced the gains that were seen in most other asset classes. To be very clear on this point, even though the economy was being viewed through rose-colored glasses, gold still went up. And what that tells me is that gold’s role is not just as safe haven, but also as a hedge in a world of depreciating currencies. But somehow many are ignoring that fact.
So, let’s get to the point. I can’t predict the future. But given what we’ve seen, I am hard-pressed to believe that things are as promising as people would like to believe. In fact, I made a list last week documenting many of the statistics that point to a lack of recovery. And, yet, even if I’m right about a more guarded stance, there is no guarantee that I will be vindicated any time soon. Still I think it would be premature to sell gold. When you consider all of the fundamental factors that suggest the bull run isn’t over, that should give an owner of gold some confidence to stay the course. Time will tell.
Whatever's On My Mind
Clearly, the price action in gold has been disappointing. Only to be made worse as the bears are coming out in force to rub it in. Time will tell who's right, but there's no denying that gold has not acted the way you would've expected given what's taken place.
Anyway, one idea I saw somewhere is that the Austrians understand the cause of the bust, but it's the Keynesians who know what to do when faced with recession. And if I take that at face value, it might suggest that the Austrians, and their predilection for gold, are simply on the wrong side of history in this period.
But, then I remember, what's happening now is really just the final act of a play that's been going on for more than a decade. It started with easy money around the time of LTCM's blow-up. What followed was a stock bubble. And when confronted with a recession, the pumps were primed again, and we were led down the path of reckless finance and irresponsible consumers, and ultimately a housing bust that engendered a financial crisis. At each step, the blow-up was bigger and the consequences greater.
The concluding chapter is therefore on an even grander scale. It involves stocks, but especially bonds, reserve currencies, and the fate of entire economic unions. The solutions being offered resemble the solutions that were touted after LTCM and then after Nasdaq. Why will this time be any different?
I think gold is the right investment for what's coming, and given what's been done already. And like those earlier episodes, the insanity might persist far longer than seems reasonable. It's very possible that the key support level around $1,550 won't hold this time. I'm not sure. I think markets are not very rational much of the time. Eventually they get it right though.
Why will this time be any different?
Anyway, one idea I saw somewhere is that the Austrians understand the cause of the bust, but it's the Keynesians who know what to do when faced with recession. And if I take that at face value, it might suggest that the Austrians, and their predilection for gold, are simply on the wrong side of history in this period.
But, then I remember, what's happening now is really just the final act of a play that's been going on for more than a decade. It started with easy money around the time of LTCM's blow-up. What followed was a stock bubble. And when confronted with a recession, the pumps were primed again, and we were led down the path of reckless finance and irresponsible consumers, and ultimately a housing bust that engendered a financial crisis. At each step, the blow-up was bigger and the consequences greater.
The concluding chapter is therefore on an even grander scale. It involves stocks, but especially bonds, reserve currencies, and the fate of entire economic unions. The solutions being offered resemble the solutions that were touted after LTCM and then after Nasdaq. Why will this time be any different?
I think gold is the right investment for what's coming, and given what's been done already. And like those earlier episodes, the insanity might persist far longer than seems reasonable. It's very possible that the key support level around $1,550 won't hold this time. I'm not sure. I think markets are not very rational much of the time. Eventually they get it right though.
Why will this time be any different?
Wednesday, April 10, 2013
Low Rates Forever!!!
Another interesting interview with Kyle Bass, this time on Bloomberg. Covers a lot of the usual territory with Japan, but also offered interesting thoughts regarding rates in the U.S. Specifically, that they cannot be raised. Basically, every 100 bps rise equates to another $150 billion in interest expense (and that’s only if you assume that debt levels will not rise anymore). Contrast that with the budget situation – the politicians can’t even agree to $1 trillion in cuts over 10 years. And the discounted value on that is about $80 billion per year. In other words, the deficit becomes that much more onerous with higher rates since no offsetting cut is coming.
Tuesday, April 9, 2013
Why Am I Wrong?
I’m not sure that I am, but call that question a rhetorical device to get me thinking and to provide something to write about.
Gold has done decently over the past handful of days, but it sure feels like it spends way more time playing with support levels than trying to test resistance. On the heels of Cyprus, you have a digital currency doing what you might have expected out of gold, and people like George Soros observing the same. Kyle Bass would rather be in gold than in paper, but is also at a loss for explanations. Fleckenstein, nothing to add. Kuppy, buying but not prepared to say a bottom is definitely in. I guess Faber sort of did that, but a “tradable bottom” sounds a lot different to me than a re-ignition of bullish tendencies.
So, what gives?
Two things come to mind.
First off, central bankers still have credibility. The fear of inflation is greatly outweighed by the instinct to be optimistic and to believe that government policy will work its magic. Most people, I think, are prepared to buy the cheerleader story because it’s easier to digest. There is no reason to believe the bears (or realists) because what they have called for hasn’t shown up in a quantifiable way yet (unless you have the ability to remember two recent bubbles, I suppose). So, you just don’t need gold.
Second point, which is compounded by the first, in a market driven by algos, and with ETFs that make every asset essentially the same (i.e., just candlesticks on a chart with resistance and support levels), fundamentals are no longer driving the boat. It also makes moving into and out of gold far easier for weaker hands and trend followers. As optimism is more prevalent right now, and gold isn’t needed, selling begets selling as charts get uglier. How long that will last is beyond my expertise.
So, in essence, a lot of what’s going on has an ephemeral component that can’t be quantified or fully understood. Which means it will test your will since it can last for far longer than one would reasonably expect.
But, lest we forget, money-printing is only becoming more pervasive, meaning the environment should only become even more conducive to gold. When more people finally connect the dots is a moment that I deem inevitable, even if it’s not imminent. I guess the only advice is to avoid leverage so that you can make it through to see the other side.
Gold has done decently over the past handful of days, but it sure feels like it spends way more time playing with support levels than trying to test resistance. On the heels of Cyprus, you have a digital currency doing what you might have expected out of gold, and people like George Soros observing the same. Kyle Bass would rather be in gold than in paper, but is also at a loss for explanations. Fleckenstein, nothing to add. Kuppy, buying but not prepared to say a bottom is definitely in. I guess Faber sort of did that, but a “tradable bottom” sounds a lot different to me than a re-ignition of bullish tendencies.
So, what gives?
Two things come to mind.
First off, central bankers still have credibility. The fear of inflation is greatly outweighed by the instinct to be optimistic and to believe that government policy will work its magic. Most people, I think, are prepared to buy the cheerleader story because it’s easier to digest. There is no reason to believe the bears (or realists) because what they have called for hasn’t shown up in a quantifiable way yet (unless you have the ability to remember two recent bubbles, I suppose). So, you just don’t need gold.
Second point, which is compounded by the first, in a market driven by algos, and with ETFs that make every asset essentially the same (i.e., just candlesticks on a chart with resistance and support levels), fundamentals are no longer driving the boat. It also makes moving into and out of gold far easier for weaker hands and trend followers. As optimism is more prevalent right now, and gold isn’t needed, selling begets selling as charts get uglier. How long that will last is beyond my expertise.
So, in essence, a lot of what’s going on has an ephemeral component that can’t be quantified or fully understood. Which means it will test your will since it can last for far longer than one would reasonably expect.
But, lest we forget, money-printing is only becoming more pervasive, meaning the environment should only become even more conducive to gold. When more people finally connect the dots is a moment that I deem inevitable, even if it’s not imminent. I guess the only advice is to avoid leverage so that you can make it through to see the other side.
Around the Web
-Paul Krugman has a new post on his NY Times blog in which he criticizes those who criticize expansionary monetary policy right now. He thinks that first the target was fiscal policy, but now the vitriol has shifted to low interest rates – for a change, I disagree. Those who I know to be big critics of experimental monetary policy have always identified the Fed as the biggest problem, with huge budget deficits simply one consequence of an accommodative central bank. In any event, Krugman’s position is that these “sado-monetarists” are inconsistent. They argue that you need to let the market operate, which is not allowed to happen with Fed interventions, yet seem oblivious to the fact that the market is so easily duped by a low interest rate regime. So much for laissez-faire.
I think there is a two-part response to his criticism: (1) lower rather than higher interest rates are much more likely to lead to speculation and Ponzi financing because of increased liquidity and easier credit (and you rarely hear about the Fed trying to keep rates too high); and (2) for those who disapprove of Fed actions, the position is never that we would go without downturns in the alternative, rather that we would be able to fail faster and fail smaller because no one is trying to prop up zombie institutions and perpetuating instability over and over again. Even Hyman Minsky acknowledged that we have deferred to inflation and greater volatility by allowing the lender of last resort to prevent any failures from occurring. So, as we persist in this habit of never allowing anything bad to happen, each time the economy invariably cracks up, the pain is that much greater and harder to deal with.
-I discovered the blog Asia Confidential recently, written by James Gruber and with a heavy emphasis on Japan. In this week’s article, entitled “Protecting Yourself From Japanese Insanity”, he tackles the most recent big announcement from the BOJ and outlines what he views as the possible outcomes from the global money printing experiment. They are:
(1) Only moderate inflation and economic recovery.
(2) Inflation but central banks are able to respond early and cause a recession.
(3) Recovery but with inflation that gets out of hand.
(4) A deflationary depression because the stimulus is unable to get the velocity of money going.
Gruber thinks that (3) and (4) are the most likely outcomes, and gold performs well under both scenarios because confidence in fiat money deteriorates. As for his expectations for Japan specifically, he is not convinced that the BOJ can successfully achieve its 2% inflation target, but they will still absolutely destroy the Yen in their attempts.
I think there is a two-part response to his criticism: (1) lower rather than higher interest rates are much more likely to lead to speculation and Ponzi financing because of increased liquidity and easier credit (and you rarely hear about the Fed trying to keep rates too high); and (2) for those who disapprove of Fed actions, the position is never that we would go without downturns in the alternative, rather that we would be able to fail faster and fail smaller because no one is trying to prop up zombie institutions and perpetuating instability over and over again. Even Hyman Minsky acknowledged that we have deferred to inflation and greater volatility by allowing the lender of last resort to prevent any failures from occurring. So, as we persist in this habit of never allowing anything bad to happen, each time the economy invariably cracks up, the pain is that much greater and harder to deal with.
-I discovered the blog Asia Confidential recently, written by James Gruber and with a heavy emphasis on Japan. In this week’s article, entitled “Protecting Yourself From Japanese Insanity”, he tackles the most recent big announcement from the BOJ and outlines what he views as the possible outcomes from the global money printing experiment. They are:
(1) Only moderate inflation and economic recovery.
(2) Inflation but central banks are able to respond early and cause a recession.
(3) Recovery but with inflation that gets out of hand.
(4) A deflationary depression because the stimulus is unable to get the velocity of money going.
Gruber thinks that (3) and (4) are the most likely outcomes, and gold performs well under both scenarios because confidence in fiat money deteriorates. As for his expectations for Japan specifically, he is not convinced that the BOJ can successfully achieve its 2% inflation target, but they will still absolutely destroy the Yen in their attempts.
Tuesday, April 2, 2013
Just a Thought
When guys like Krugman are skeptical of QE, it is often couched as monetary policy is not enough on its own to bring recovery without a complementary fiscal component as well. But, if you think about it, the announced size of QE is roughly commensurate to the size of the budget deficit in a given year. Thus, in a certain respect, the bond-buying program of the Fed operates to subsidize the rest of the government. So, at what point do we stop acting like monetary policy isn't itself just fiscal policy by another name?
"I'm Paid to be a Realist"
I watch gold get beaten up today and try to ignore the noise. Because that’s what it is. I don’t think the reason to own it has changed, but it would appear that more and more people are comforted by reports of an improving economy, especially if you watch the stock market.
Let’s put that in perspective for a moment, though. A few data points to consider:
-About 47.8 million Americans were on food stamps as of December, 2012.
-As of the most recent BLS employment report for February, the labor participation rate had fallen to 63.5%, its lowest level since 1981. As an indicator, it tells you the number of working-age people in the population who are employed or unemployed but looking for a job. So, think through the implications. That remaining 36.5% represent people who have given up, retired, or probably some other iteration. Forget for a moment that more than a third of this cohort is not working, it also has to translate into higher entitlements and safety-net expenditures going forward, which cannot be good for deficits.
-The average duration of unemployment rose from 35.3 weeks to 36.9 weeks, and the number of people unemployed for more than 6 months rose by 89,000 to 4.8 million. Add to that, the number of multiple jobholders went up by 340,000, more than the total jobs created per the headline number of 236,000, justifiably casting some doubt on that number’s ultimate significance.
The point being, for a recovery, it’s not terribly impressive. At the same time, to quote Kyle Bass (as I did in the title of this post), over 1,400 new billionaires emerged in the past couple of years – think there might be some misallocations of capital.
In any event, let’s try to think about these things from the perspective of a Keynesian. I had Hyman Minsky in mind. He argued that capitalism was inherently unstable, and as people were deluded into a fall sense of security over time because things did not appear to be getting worse (and maybe even marginally better), more and more bad and reckless decisions would be made that would ultimately implode on themselves. I suspect that may be the case here and now. As the cheerleaders cheer, and we see one-off data points that support the rosy case, the aversion to risk starts to dissipate. Of that notion, I think Minsky got it right, even if he offered no credible explanation for the transmission mechanism.
And in spite of that, the world is not in a great place. Every time I hear that Europe is just grand, something happens to dispel the notion. Japan, for all its wonderful money-creation of late, still printed a negative GDP number in the last quarter. And the U.S., well, the U.S. is simply the tallest midget in the room. The problems we face are structural. No way around it. But, we continue to hope and pray that there might be.
The moral of the story: money-printing has a long way to go in its life cycle. It cannot and shall not stop. That isn’t noise.
Let’s put that in perspective for a moment, though. A few data points to consider:
-About 47.8 million Americans were on food stamps as of December, 2012.
-As of the most recent BLS employment report for February, the labor participation rate had fallen to 63.5%, its lowest level since 1981. As an indicator, it tells you the number of working-age people in the population who are employed or unemployed but looking for a job. So, think through the implications. That remaining 36.5% represent people who have given up, retired, or probably some other iteration. Forget for a moment that more than a third of this cohort is not working, it also has to translate into higher entitlements and safety-net expenditures going forward, which cannot be good for deficits.
-The average duration of unemployment rose from 35.3 weeks to 36.9 weeks, and the number of people unemployed for more than 6 months rose by 89,000 to 4.8 million. Add to that, the number of multiple jobholders went up by 340,000, more than the total jobs created per the headline number of 236,000, justifiably casting some doubt on that number’s ultimate significance.
The point being, for a recovery, it’s not terribly impressive. At the same time, to quote Kyle Bass (as I did in the title of this post), over 1,400 new billionaires emerged in the past couple of years – think there might be some misallocations of capital.
In any event, let’s try to think about these things from the perspective of a Keynesian. I had Hyman Minsky in mind. He argued that capitalism was inherently unstable, and as people were deluded into a fall sense of security over time because things did not appear to be getting worse (and maybe even marginally better), more and more bad and reckless decisions would be made that would ultimately implode on themselves. I suspect that may be the case here and now. As the cheerleaders cheer, and we see one-off data points that support the rosy case, the aversion to risk starts to dissipate. Of that notion, I think Minsky got it right, even if he offered no credible explanation for the transmission mechanism.
And in spite of that, the world is not in a great place. Every time I hear that Europe is just grand, something happens to dispel the notion. Japan, for all its wonderful money-creation of late, still printed a negative GDP number in the last quarter. And the U.S., well, the U.S. is simply the tallest midget in the room. The problems we face are structural. No way around it. But, we continue to hope and pray that there might be.
The moral of the story: money-printing has a long way to go in its life cycle. It cannot and shall not stop. That isn’t noise.
Monday, April 1, 2013
Marginal Concerns
As I was reading through a couple of econ blogs this morning (particularly the comments sections), I started to get frustrated by some of the usual suspects who are always there to defend Keynesian economics. It seems that whatever evidence is presented, it is spun in a way to defend the theory and to rebuke any counter-point. All of which I have anticipated as the trend that will become more obvious with time.
But, as my temperature started to rise with the audacity, I suddenly remembered that it doesn’t really matter. I don’t really care if a majority becomes convinced of the virtues of the contrarian view. Truthfully, as long as more people than not continue to operate in a stupor, the outcomes remain more predictable. Even with the investments that I make to protect myself, I’m not banking on gold, for example, going mainstream like stocks or bonds. Demand only has to change on the margins, which means just a small increase, and then the price will go supersonic. And when “austerity” is misused now in order to justify more fiscal and monetary stimulus, you know the other side is in trouble.
(And if you’re wondering, we now use that term to refer to a decrease in the rate of increase. For the record, that ain’t austerity.)
The Keynesian argument (and I’m calling it Keynesian, but really it captures monetarists and other mainstream folks also) always comes back to this notion of below-trend growth. We were on some sort of trajectory in the middle of the last decade, and now we are far below. But, again, way back when, I noted how growth during the bubble years represented an abnormality from the previous trend. Which, on its face, would suggest that something funky had happened – it’s not like we had some sort of manufacturing renaissance. No, we simply allowed a housing bubble to form and the financial industry to grow recklessly large, a result of terrible monetary policy and complementary political missteps to encourage it.
This battle between what solutions are best, I think, is being hashed out with good intentions. But the prevailing fatal conceit is never far away. So, my priority is protecting my family. Convincing people that I’m seeing the problems for what they are matters much less.
But, as my temperature started to rise with the audacity, I suddenly remembered that it doesn’t really matter. I don’t really care if a majority becomes convinced of the virtues of the contrarian view. Truthfully, as long as more people than not continue to operate in a stupor, the outcomes remain more predictable. Even with the investments that I make to protect myself, I’m not banking on gold, for example, going mainstream like stocks or bonds. Demand only has to change on the margins, which means just a small increase, and then the price will go supersonic. And when “austerity” is misused now in order to justify more fiscal and monetary stimulus, you know the other side is in trouble.
(And if you’re wondering, we now use that term to refer to a decrease in the rate of increase. For the record, that ain’t austerity.)
The Keynesian argument (and I’m calling it Keynesian, but really it captures monetarists and other mainstream folks also) always comes back to this notion of below-trend growth. We were on some sort of trajectory in the middle of the last decade, and now we are far below. But, again, way back when, I noted how growth during the bubble years represented an abnormality from the previous trend. Which, on its face, would suggest that something funky had happened – it’s not like we had some sort of manufacturing renaissance. No, we simply allowed a housing bubble to form and the financial industry to grow recklessly large, a result of terrible monetary policy and complementary political missteps to encourage it.
This battle between what solutions are best, I think, is being hashed out with good intentions. But the prevailing fatal conceit is never far away. So, my priority is protecting my family. Convincing people that I’m seeing the problems for what they are matters much less.
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