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.
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