Financial topics

[vincecate]

I haven't thought enough about it though because I didn't think the Fed could or would push this extreme. Vince obviously did so I'm sure he will have something more to say about it. My take is that we are now in immediate crisis mode.

I don't really study charts that much. The dollar value of the S&P or Dow Jones now can not really be compared to what it was 4 years ago because dollars can not buy as much rice, wheat, copper, etc. as they did back then. If you measure the market in Gold or some commodity the market is already way down. Comparing S&P at 1300 today to that value sometime in the past with different dollars does not feel right. Using a shrinking yardstick to measure things can get you into trouble. However, I still think stocks will go down much more because America is messed up and interest rates are going up.

My main theme is the same. I think in every historical case where a government had debt over 80% of GNP and deficit over 40% of spending and was printing money at rates comparable to the deficit spending they ended up with hyperinflation. As John has pointed out, the US is different because it is the world reserve currency. However, I expect the dollar to lose reserve currency status as the dollar goes into hyperinflation. The worse it gets the fewer countries will use the dollar. This will contribute to the hyperinflation feedback loop.

[Higgenbotham]

The dollar value of the S&P or Dow Jones now can not really be compared to what it was 4 years ago because dollars can not buy as much rice, wheat, copper, etc. as they did back then.

It's logical to me that someone may want to trade their dollars for some gold or some wheat, given what is happening, and that dollars measured against those items would decline. But when they want to trade their dollars for shares of companies (and pay more than they did overall before the financial crisis), many of which would be bankrupt without government support or intervention and which as a whole earned almost zero merely two years ago, that tells me the US dollar may be in crisis. Or it could be just the top of a wave 2 in the stock market, sort of a psychological mania or blip and that in itself is really no cause for concern, as prices will soon fall.

I just wrote back to David. Here's how I put it to him: "As far as the significance of this level, I can't help but feel it means that investors are willing to pay more for post crisis companies than they were willing to pay for pre crisis companies. That to me means investors now consider dollars to be "junkier" than a stock index which includes many companies that are shells on government life support. How could the source of the life support be worth less than the thing on life support? Is it temporary insanity?" I'll let you know if he has anything interesting to say about that.

[richard5za]

One theme that I've been hearing a lot in the last couple of days is
that "emerging markets are no longer hot."

I agree that emerging markets are losing their flavour, and will continue to lose their flavour, but note that the volumes on the NYSE are currently thin. The money is not going here; I don't know where its going but I suspect that investors are looking to less risk

On a different note, rising prices on thin volumes is a classic formula for a sharp correction. All it needs is the right "event"

Richard

[John]

Dear Richard,

> John wrote:One theme that I've been hearing a lot in the last
> couple of days is that "emerging markets are no longer hot."

> I agree that emerging markets are losing their flavour, and will
> continue to lose their flavour, but note that the volumes on the
> NYSE are currently thin. The money is not going here; I don't know
> where its going but I suspect that investors are looking to less
> risk

> On a different note, rising prices on thin volumes is a classic
> formula for a sharp correction. All it needs is the right "event"

As I recall, you're an expert on commodities investments. Is the
money going into commodities (wheat, copper), where prices have been
rising sharply?

John

[Higgenbotham]

Obviously, David and I can't be the only ones who have seen the importance this.

http://www.bloomberg.com/news/2011-02-0 ... oints.html

The Chinese raised interest rates overnight to contain inflation. I'm sure the Chinese didn't do this because the S&P went over 1310 - that was just one confirmation that there is an inflation problem, but the Chinese probably found other confirmations themselves.

Last night we were discussing the low volume. This is one comment that was made: "Why prices have continued to move higher may not be due to pure optimism but just wanting to stand back. I note a great desire of folks to just stand back and wait. They are not as bullish now, but the attitude is more anti shorting. Not I'm long, but why the hell would you short. And we see short interest is at lows but margin is not at highs. When the sellers stand back and the buyers aren't real bullish, the market can rally on low volume.

[jdcpapa]

The dollar value of the S&P or Dow Jones now can not really be compared to what it was 4 years ago because dollars can not buy as much rice, wheat, copper, etc. as they did back then.

It's logical to me that someone may want to trade their dollars for some gold or some wheat, given what is happening, and that dollars measured against those items would decline. But when they want to trade their dollars for shares of companies (and pay more than they did overall before the financial crisis), many of which would be bankrupt without government support or intervention and which as a whole earned almost zero merely two years ago, that tells me the US dollar may be in crisis. Or it could be just the top of a wave 2 in the stock market, sort of a psychological mania or blip and that in itself is really no cause for concern, as prices will soon fall.

Deflation here at "ground level" has actually given me more purchasing power with the dollar. Rice cost me 34 cents a lb. You can buy a local company for a discounted asset value (no good will). Real estate is dirt cheap. Construction costs are reduced by 50%. True some prices are higher but if you have "cash" you can negotiate your price and or if you look you can get a better price. The "market" is a necessary evil and a distraction from reality.

[richard5za]

Dear John,

As I recall, you're an expert on commodities investments. Is the
money going into commodities (wheat, copper), where prices have been
rising sharply?

Yes, commodities is "my game" and clearly a bubble is forming / has formed in commodities.

I don't know the details of whats happening now. Whether the funds for commodities are coming from sales in emerging markets, or elsewhere, or a bit of both, is an unknown. Its not going into NYSE and that is a warning. In my opinion no honest person can tell you exactly what's happening right now. Its too complicated. Only history will clarify matters, and it will be blunt, like the explanation of the 1929/30 crash. Commodities are traded by the hour, by the half day; traders try to make money on the way up and again on the way down. What a trader wants is movement; whether its up or down doesn't matter to the trader. A trader doesn't care if oil is at $ 60 per barrel or $ 160 per barrel as long as the price is moving up or down. But the price of commodities matters to real people who have to buy food and fuel.

May I share some history with you? My investing and trading started in the late 1960's and I paid some serious school fees and lost everything. Then the stagflation of the 70's came and it was hard; there were economic rain clouds everywhere. Then the 80's came at a time that I was travelling the globe. The economic blue skyes were amazing. It was wonderful. We all made good money.

Today we are back to black clouds. More serious black clouds than the 70's. The prices on NYSE are going up but volumes are very thin. It means that the main stream are not putting their money into stocks. Short term is about speculation, but the long term is about genuine value. Now is a speculation binge. The main stream of money is going somewhere else. Ask yourself why house prices world wide (except bubble China) are headed down. Not a good long term omen of genuine value.

My advice to everyone who reads this blog is "don't get in front of this market". Its just too dangerous. I am 95% in cash, only 5% in commodities and gold. Wait patiently for the real move. With dear Ben and Tim throwing money at everything that moves this market could go up 35% this year. Oil could get to $ 200 and Gold to $ 2500. But my view is that the opposite will happen. 35% down in stocks is my forecast and the Dow at below 5000 is a real possibility in 2012/3. And don't put your faith in gold unless you trade it by the half day. If the market goes into rapid liquidation everything will go with it, including gold.

Sorry to give you such a blunt and unhappy story.
Richard

[Higgenbotham]

I've traded through all of the bear market highs since 2007. I was short in 2007 through the July and October tops and was short last year through the January and April tops. What we are seeing here is different from any of those. The other tops were flattish and gentle. This one is very vicious. When it finally turns the other way, it may be equally vicious. Just one statistic: The S&P 500 is up 13% since December 1.

At the same time, I am noting that anytime there has been a large runup in the CRB Index of commodities (1973, 1979, and 2007) a vicious bear market in stocks followed.

[vincecate]

At the same time, I am noting that anytime there has been a large runup in the CRB Index of commodities (1973, 1979, and 2007) a vicious bear market in stocks followed.

The CRB is a leading indicator of inflation, which will in turn lead to higher interest rates. This is partly because people demand higher interest when there is inflation and partly because when inflation is getting bad the Fed will raise interest rates. Higher interest rates lead to lower P/Es, so stocks go down.

Looks like interest rates on 5 year, 10 year, and 30 year treasuries are spiking up at the end of the graph. The 5 year has gone from 1.96% to 2.40% in the last month. I don't think they can keep going up like this much longer without stocks crashing. Of course I am not totally confident in my March 18th S&P puts (not a lot of time left) and so was looking at some June puts today. Put prices look good to me.

http://www.fxstreet.com/rates-charts/bond-yield/
http://finance.yahoo.com/bonds/composite_bond_rates

[vincecate]

Yes, commodities is "my game" and clearly a bubble is forming / has formed in commodities.
[...]
My advice to everyone who reads this blog is "don't get in front of this market". Its just too dangerous. I am 95% in cash, only 5% in commodities and gold. Wait patiently for the real move. With dear Ben and Tim throwing money at everything that moves this market could go up 35% this year. Oil could get to $ 200 and Gold to $ 2500. But my view is that the opposite will happen. 35% down in stocks is my forecast and the Dow at below 5000 is a real possibility in 2012/3. And don't put your faith in gold unless you trade it by the half day. If the market goes into rapid liquidation everything will go with it, including gold.

Sorry to give you such a blunt and unhappy story.
Richard

Either there is a bubble in gold and commodities or the dollar is headed for serious inflation. Making the right investment decisions and protecting yourself depends on getting this correct. So figuring this out is very important.

The "coming inflation case" seems very strong to me.
1) Bernanke is printing money at amazing rates.
2) The deficit is so bad there is really no way the government could function if he stopped.
3) If bond sales slow the Fed will print faster.
4) The huge printing already done has not caused inflation only because the velocity of money is down because interest rates were so low, but as interest rate go up the velocity of money and prices will go up.
5) As interest rates go up bond values go down, so Bernanke could not "withdraw the liquidity he injected" even if he wanted to. His bonds are not worth what he paid for them so could not take out as much money as he put in. Back when people understood central banking they would only buy highest quality short term debt. Never long term or "toxic assets" where the central bank would not be able to take out the money it put in.
6) All historical cases of a government creating money fast when they had debt over 80% of GNP and deficit over 40% of spending resulted in hyperinflation.

I really think we are at one of those times in history when cash is not a safe investment and bonds can lose value big time. However, as interest rates go up this hurts stock P/E ratio and stocks go down. Higher interest rates hurt real estate values as well. If interest rates are twice as high a buyer with a budget of $2,000 per month can only buy a house of half the price. So gold, silver, and commodities may be the only safe place. My stuff on hyperinflation below.

http://pair.offshore.ai/38yearcycle/#hyperinflation

On a personal level I think food storage, weapons, and things that could protect you from rising food or energy prices could make sense. For example, a solar electric system and an electric car. A garden, fruit trees (even though there probably is not enough time they will help eventually).
I think things are going to get really bad.

Update: I just did a blog post related to this.
http://howfiatdies.blogspot.com/2011/02 ... -gold.html