I'm not going to comment on what's happening to the paper price of gold. What's the point? It will go down until it doesn't. I see no point in trying to speculate on when that will be.
But, related to gold, I watched a webinar today that featured Jim Cramer and Doug Casey (certainly not the typical line-up). One of the other people involved was Eric Sprott, who noted the following (after both Cramer and Casey suggested that people should have 20% of their portfolios in the precious metal): gold and related stocks represent only 1% of total global financial assets. Therefore, if everyone was striving to have merely 5% of their money in gold (forget about 20% for a moment), the price would have to go up 5 times. The point is, at some moment in the future, people will wake up to the necessity for owning gold, and the price will rage.
Wednesday, June 26, 2013
Monday, June 24, 2013
The New Reality
Consider this post as being as much for me as it is for you, faithful reader. I want to verbalize what I think is going on in the markets, and what is qualitatively different now. Much of it will be influenced by what I’ve read on Bill Fleckenstein’s site, as well as from James Gruber and Turd Ferguson.
The longstanding narrative has been that the Fed (and other central bankers) is able to use aggressive monetary policy (i.e., money-printing) to fix the economy. Fleck calls it the “Goldilocks” syndrome – an inherent confidence in the Fed’s competence at managing markets and all problems that come. By contrast, my view has been that these stimulus measures only serve to inflate the price of financial assets, without providing any organic or sustainable growth in the real economy. A wealth effect which does not translate to more and better jobs. However, for a long time now, the Goldilocks view has prevailed.
But, something changed in the past week, and had been building up in the months before that. The suggestion of a taper in QE gained a lot of traction, with the idea being that the Fed had seen enough improvement in the economy to begin slowing down the drugs that were being dealt. So, in the lead up to last week’s FOMC statement (and subsequent press conference by the Bernank), rates started to creep up. And guys like Krugman were arguing that it was all about improvement in the economy, and not some evil force like bond vigilantes.
Then, last Wednesday. Bernanke doesn’t take a particularly hawkish stance, but merely hints at the possibility of tapering should conditions improve enough and other metrics are hit. And the market is roiled. Treasuries spike up, and have been continuing to do so ever since. Equities are hit hard, and that has been the trend in the last week. And, of course, given that it’s scared of its own shadow these days, gold is taken out to the woodshed yet again also.
I think there are a few implications to draw from all of it. First of all, throw out the garbage that the economy can go without stimulus. If ever we needed confirmation that the wealth effect was an artificial construct, just look at what non-action and merely dovish words can do. There is no seamless exit here. The Fed is in a trap of its own design, and now will be forced to backtrack on something it had no imminent plans to implement.
But, there is another part to it. What if this change is not about the taper, but the beginning of a recognition that the Fed has done too much and has far less control than everyone previously thought? What if this moment symbolizes the shift from total confidence in the Fed to seeds of doubt? If that were the reality of these markets, wouldn’t it suggest that whether they taper or not, or even expand the size of the program, the results might not meet the same reaction as in the past. It would suggest desperation and people might wonder why so much has been done, but so little has been achieved. We’ve seen something like that in Japan. Maybe that was the spark that is now spreading.
Anyway, I think all of it means greater volatility in what comes next. And that the market is going to assert itself a bit more from now on. The Fed is not bigger than the market. It never was. It wants to keeps rate low, but that’s not where rates want to be. And if the Fed tries to monetize every bond in an effort to control rates, it will lose the currency, and then still lose bonds again. The upshot from my seat is the Dollar losing its reserve currency status. And with no powerful growth on the horizon, we are likely to see stagflation.
That’s the roadmap in my opinion.
The longstanding narrative has been that the Fed (and other central bankers) is able to use aggressive monetary policy (i.e., money-printing) to fix the economy. Fleck calls it the “Goldilocks” syndrome – an inherent confidence in the Fed’s competence at managing markets and all problems that come. By contrast, my view has been that these stimulus measures only serve to inflate the price of financial assets, without providing any organic or sustainable growth in the real economy. A wealth effect which does not translate to more and better jobs. However, for a long time now, the Goldilocks view has prevailed.
But, something changed in the past week, and had been building up in the months before that. The suggestion of a taper in QE gained a lot of traction, with the idea being that the Fed had seen enough improvement in the economy to begin slowing down the drugs that were being dealt. So, in the lead up to last week’s FOMC statement (and subsequent press conference by the Bernank), rates started to creep up. And guys like Krugman were arguing that it was all about improvement in the economy, and not some evil force like bond vigilantes.
Then, last Wednesday. Bernanke doesn’t take a particularly hawkish stance, but merely hints at the possibility of tapering should conditions improve enough and other metrics are hit. And the market is roiled. Treasuries spike up, and have been continuing to do so ever since. Equities are hit hard, and that has been the trend in the last week. And, of course, given that it’s scared of its own shadow these days, gold is taken out to the woodshed yet again also.
I think there are a few implications to draw from all of it. First of all, throw out the garbage that the economy can go without stimulus. If ever we needed confirmation that the wealth effect was an artificial construct, just look at what non-action and merely dovish words can do. There is no seamless exit here. The Fed is in a trap of its own design, and now will be forced to backtrack on something it had no imminent plans to implement.
But, there is another part to it. What if this change is not about the taper, but the beginning of a recognition that the Fed has done too much and has far less control than everyone previously thought? What if this moment symbolizes the shift from total confidence in the Fed to seeds of doubt? If that were the reality of these markets, wouldn’t it suggest that whether they taper or not, or even expand the size of the program, the results might not meet the same reaction as in the past. It would suggest desperation and people might wonder why so much has been done, but so little has been achieved. We’ve seen something like that in Japan. Maybe that was the spark that is now spreading.
Anyway, I think all of it means greater volatility in what comes next. And that the market is going to assert itself a bit more from now on. The Fed is not bigger than the market. It never was. It wants to keeps rate low, but that’s not where rates want to be. And if the Fed tries to monetize every bond in an effort to control rates, it will lose the currency, and then still lose bonds again. The upshot from my seat is the Dollar losing its reserve currency status. And with no powerful growth on the horizon, we are likely to see stagflation.
That’s the roadmap in my opinion.
Friday, June 21, 2013
Open Shorts
I have been looking for the market to go down for a while. The past few days therefore have seemed like an important change in validating that view. It would be nice to say that I had some huge shorts on. I don’t. At the moment, I am short the 10-year JGB and Santander (NYSE: SAN). The former is about the eventual funding crisis, which looks to be hitting Japan first. The latter is about a weak Europe, a weak banking system, and finally a weak market.
My short position with SAN started about 2 months ago when the price was in the $7.20s. I have provided the chart below to show what’s been happening. Back then, I thought I saw a head-and-shoulder formation in the making, that was in the process of defining the right side. Over the past handful of sessions, it appears that that formation has completed itself, signaling a big whoosh down to come. It is literally right at support, with a substantial air pocket underneath.
My short position with SAN started about 2 months ago when the price was in the $7.20s. I have provided the chart below to show what’s been happening. Back then, I thought I saw a head-and-shoulder formation in the making, that was in the process of defining the right side. Over the past handful of sessions, it appears that that formation has completed itself, signaling a big whoosh down to come. It is literally right at support, with a substantial air pocket underneath.
Thursday, June 20, 2013
Not much to say
Support broke. Again. Guess I actually got it right this time. But I think there’s a key difference at work this time. Central bankers are losing “control” – I put that in quotes because they never really had it in the first place. The market is bigger. And when it recognizes that the bloom is off the rose, there’s no going back. The Fed will fight to maintain the status quo, because it doesn’t know any better. And the vicious cycle will feed on itself. Inflation without growth – the perfect remedy to a broken chart. You see, even if the trends and charts matter in the short term, they are absolutely terrible at recognizing the underlying seismic shifts that define secular turning points, at least until way later. The world has shifted the last two days.
Wednesday, June 19, 2013
Tuesday, June 18, 2013
"Not 1, not 2, not 3..."
I am about to write about the Miami Heat, as they are down 3-2 in the NBA Finals. The upshot is that they will now probably win the next two games. Nevertheless…
If I were going to describe the Heat in each of the past three seasons, it would go something like this:
-Season 1, angry and defiant. No title.
-Season 2, humbled and driven. NBA title.
-Season 3, a bit cocky and acting with a sense of entitlement. Remains to be seen, but currently against the ropes.
If I were going to describe the Heat in each of the past three seasons, it would go something like this:
-Season 1, angry and defiant. No title.
-Season 2, humbled and driven. NBA title.
-Season 3, a bit cocky and acting with a sense of entitlement. Remains to be seen, but currently against the ropes.
QE Forever
Over at Turd Ferguson’s website, there is an interesting post up about interest rates and the size of deficits.
Specifically, current interest expense in the federal budget is about $350 billion, with an average rate of 2.2% and average duration of 5 years. Turd provides a great table that shows how interest expense has stayed relatively flat since the late ‘80s, even though total debt has gone up about five-fold. The secret has been to transition to and keep all of the debt short term (which makes it cheaper), while suppressing interest rates at the Fed. And it has been a fairly potent concoction – low interest rates, steady interest expense…and a few bubbles (but we digress).
Anyway, think through what happens if the Fed discontinues it program. Rates start to normalize – which historically speaking could mean something closer to 5%. Add to that, instead of $16 trillion in current debts, move out a few years when it’s projected to be $20 trillion. All of a sudden you’re talking about a trillion dollars a year, just in interest. Need I remind everyone that the current budget is only $3 trillion and the deficit is already $1 trillion. And foreign owners of treasuries have already become net sellers lately, so who’s going to pick up the slack? Because without someone to do it, you run into a major problem with funding the government. So who’s left?
I think we already know the answer.
Specifically, current interest expense in the federal budget is about $350 billion, with an average rate of 2.2% and average duration of 5 years. Turd provides a great table that shows how interest expense has stayed relatively flat since the late ‘80s, even though total debt has gone up about five-fold. The secret has been to transition to and keep all of the debt short term (which makes it cheaper), while suppressing interest rates at the Fed. And it has been a fairly potent concoction – low interest rates, steady interest expense…and a few bubbles (but we digress).
Anyway, think through what happens if the Fed discontinues it program. Rates start to normalize – which historically speaking could mean something closer to 5%. Add to that, instead of $16 trillion in current debts, move out a few years when it’s projected to be $20 trillion. All of a sudden you’re talking about a trillion dollars a year, just in interest. Need I remind everyone that the current budget is only $3 trillion and the deficit is already $1 trillion. And foreign owners of treasuries have already become net sellers lately, so who’s going to pick up the slack? Because without someone to do it, you run into a major problem with funding the government. So who’s left?
I think we already know the answer.
Monday, June 17, 2013
Saturday, June 15, 2013
Four Kings
The book by George Kimball (2008) covers the last great era in boxing -- when Leonard, Hagler, Hearns and Duran challenged each other over 9 fights. A great read for anyone who has a passion for the sweet science, which I do. Gave me greater appreciation for Hearns and Duran, who are often given less attention than the other two.
Friday, June 14, 2013
Not Shocking
An article from Bloomberg quoting Thomas Simons, an economist from Jefferies:
“The fiscal picture has a very long way to go before it is on a sustainable path...the effect of the S&P ratings outlook revision takes some of the heat off Congress in the near term to address the deficit.”
That attitude tells you a lot. No one is actually serious about reform. If they can avoid it, they will. And they won’t do something about it until the crisis is already here.
“The fiscal picture has a very long way to go before it is on a sustainable path...the effect of the S&P ratings outlook revision takes some of the heat off Congress in the near term to address the deficit.”
That attitude tells you a lot. No one is actually serious about reform. If they can avoid it, they will. And they won’t do something about it until the crisis is already here.
Tuesday, June 11, 2013
What if...
I’ve seen it mentioned in a couple of places recently (here’s one) – the notion of negative convexity selling in the bond market.
The story goes something like this. When interest rates are low, people who have mortgages are apt to re-finance, with the opposite true when rates are higher. And for an investor who owns any of these MBS bundled products comprised of mortgages, a mixture of increasing rates and increased duration (from fewer re-fis) is very bad for asset value. The hedge is to short treasuries (i.e., “convexity selling”). And the rumor is that somewhere around 2.2% on the 10-year is where owners of these MBS bonds are going to be forced to do it in greater volume.
In the context of what’s going on lately, with respect to the talk of tapering by the Fed, if they actually did buy fewer bonds (which would cause rates to rise), at the same time that convexity selling is starting to increase, you can only imagine how much higher rates would actually go – killing any semblance of a recovery and absolutely decimating the idea that the budget deficit is shrinking.
So, it seems likely that there is no taper coming. By the way, the 10-year is right at 2.20% these days. Interesting times, indeed.
The story goes something like this. When interest rates are low, people who have mortgages are apt to re-finance, with the opposite true when rates are higher. And for an investor who owns any of these MBS bundled products comprised of mortgages, a mixture of increasing rates and increased duration (from fewer re-fis) is very bad for asset value. The hedge is to short treasuries (i.e., “convexity selling”). And the rumor is that somewhere around 2.2% on the 10-year is where owners of these MBS bonds are going to be forced to do it in greater volume.
In the context of what’s going on lately, with respect to the talk of tapering by the Fed, if they actually did buy fewer bonds (which would cause rates to rise), at the same time that convexity selling is starting to increase, you can only imagine how much higher rates would actually go – killing any semblance of a recovery and absolutely decimating the idea that the budget deficit is shrinking.
So, it seems likely that there is no taper coming. By the way, the 10-year is right at 2.20% these days. Interesting times, indeed.
Ugly Chart
I have a daily chart for GLD below over the past 3 months. Does not look good. A perfect cup and handle has formed. A break below ~$130 signals the next downdraft, and measures out to somewhere around $117 (which means about $1,200 in the metal itself). Basically, we are at the level where we find out what comes next.
Wednesday, June 5, 2013
Modern New York
The subtitle is The Life and Economics of a City and the author is Greg David (2012). An interesting read about the City, since the mid ‘60s, when John Lindsay became mayor. The takeaway is that the City is at its best when Wall Street is thriving. Therein, though, the author (who was the editor of Crane’s New York Business for over 20 years) tries to note distinctions in the administrations that encouraged growing incomes, versus those who emphasized the role of government to lift everybody up. Again, where the mayor (Koch, Giuliani, Bloomberg) seemed to be supportive of the financial industry, the economy grew. In every case, though, each of the mayors seemed to revert eventually to growing government in order to pay back constituents (whether from the beginning, like Dinkins, or later on, like Giuliani).
The book also touches on rent control. It has become a political third rail and the chances that it is ever eliminated are slim – even though it still operates as a disincentive to development and forces up the rents of market-rate apartments, making the City prohibitively expensive for many. In fact, the chances of the system becoming even stronger are high with the election of a new mayor in 2013.
The other interesting discussion is about the sectors that drive New York’s economy now. Obviously, the list includes finance (which in 2007 represented 28% of all income in the City). But, of great import is also tourism. And, more recently, higher education, the television and film industry, and technology have all become key engines with regards to income and workers. As one anecdote, the 110 institutions in New York have about 600,000 students – roughly the population of Boston, which is itself known as the college town. All of which is to say that manufacturing is not nearly as important as it once was – so, the argument from community groups when a new development is proposed in their backyard, that includes reference to the loss of manufacturing jobs when industrial space is converted, is not really valid given the data.
As a born and bred New Yorker, it got me nostalgic at times, reminded of my childhood when certain pivotal moments in the City’s recent history were mentioned. I enjoyed the book.
The book also touches on rent control. It has become a political third rail and the chances that it is ever eliminated are slim – even though it still operates as a disincentive to development and forces up the rents of market-rate apartments, making the City prohibitively expensive for many. In fact, the chances of the system becoming even stronger are high with the election of a new mayor in 2013.
The other interesting discussion is about the sectors that drive New York’s economy now. Obviously, the list includes finance (which in 2007 represented 28% of all income in the City). But, of great import is also tourism. And, more recently, higher education, the television and film industry, and technology have all become key engines with regards to income and workers. As one anecdote, the 110 institutions in New York have about 600,000 students – roughly the population of Boston, which is itself known as the college town. All of which is to say that manufacturing is not nearly as important as it once was – so, the argument from community groups when a new development is proposed in their backyard, that includes reference to the loss of manufacturing jobs when industrial space is converted, is not really valid given the data.
As a born and bred New Yorker, it got me nostalgic at times, reminded of my childhood when certain pivotal moments in the City’s recent history were mentioned. I enjoyed the book.
Tuesday, June 4, 2013
Some Observations
A bunch of different things, briefly:
-Gold looks like it is getting ready to make a sharp move. The only question is in which direction. A few “tells” perhaps – it is slowly stair-stepping higher over the past couple of weeks, forming an ascending triangle, and is now above the 10-day moving average. It looks like $1,420 is the level that needs to be broken through.
-Treasuries are still within the trading channel that dates back a year, on the high end of the range – but for several sessions they have also remained above 2.08% on the 10-year, and 3.28% on the 30-year, which were important resistance levels within the past 24 months. Of course, there are probably plenty of people who might argue that higher rates are the natural consequence of a “healthier” economy. I don’t think that’s what is going on. But I'm not doing anything about it either yet.
-As a corollary, the high yield market has fallen off a cliff lately (using HYG as the proxy). That may signal that rates will continue to rise, but not for good reason.
-I genuinely believe that the S&P 500 topped out on May 22nd. While there might be another rally that gets everyone excited, the key thing to watch is whether 1,687.18 gets taken out.
-The Nikkei continues to be a shit-show. Kyle Bass was right – Abe and Kuroda are going to need to go even bigger with their QE program.
-The Yen went as high as 103.75 against the U.S. Dollar (on May 22nd), and has now worked its way back to 100. It could very well fall back to about 97.20 or 94.50, given the huge move since last year, but regardless I still think it will continue to get weaker over time.
-Gold looks like it is getting ready to make a sharp move. The only question is in which direction. A few “tells” perhaps – it is slowly stair-stepping higher over the past couple of weeks, forming an ascending triangle, and is now above the 10-day moving average. It looks like $1,420 is the level that needs to be broken through.
-Treasuries are still within the trading channel that dates back a year, on the high end of the range – but for several sessions they have also remained above 2.08% on the 10-year, and 3.28% on the 30-year, which were important resistance levels within the past 24 months. Of course, there are probably plenty of people who might argue that higher rates are the natural consequence of a “healthier” economy. I don’t think that’s what is going on. But I'm not doing anything about it either yet.
-As a corollary, the high yield market has fallen off a cliff lately (using HYG as the proxy). That may signal that rates will continue to rise, but not for good reason.
-I genuinely believe that the S&P 500 topped out on May 22nd. While there might be another rally that gets everyone excited, the key thing to watch is whether 1,687.18 gets taken out.
-The Nikkei continues to be a shit-show. Kyle Bass was right – Abe and Kuroda are going to need to go even bigger with their QE program.
-The Yen went as high as 103.75 against the U.S. Dollar (on May 22nd), and has now worked its way back to 100. It could very well fall back to about 97.20 or 94.50, given the huge move since last year, but regardless I still think it will continue to get weaker over time.
Monday, June 3, 2013
My first NBA post in a while
Disregard later maybe. But, I remember reading an article early this season where Skip Bayless pointed out that Lebron had a long history of choking in the big moments -- then Game 6 in Boston last year, Miami rolls to a title, and suddenly all is forgiven and forgotten. Did he really change that much, from someone who was not dependable in the clutch to a closer? I don't know if Bayless was on to something, but tonight sure does offer us a great chance to find out the answer.
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