If you don’t mind I would like to provide some food for thought.
Governments around the world continue to increase the supply of money in double digits. China increased their money supply 28% year over year, India 20%, Brazil 16% and the list goes on. The money has to go somewhere. In the last 15 years we have seen excess money go to the tech bubble, then real estate then the bond market and most recently there was a run up in commodities and precious metals.
The latter is still an ongoing bubble and the bond bubble has yet to pop. Does anyone really believe that interest rates are going to stay at these dramatic low levels forever?
Many commentators and market participants seem delighted in taking anticipatory positions against gold (and other things). It is always foolish to anticipate market turns as markets can remain irrational for very long periods of time—to paraphrase Keynes. We keep moving higher in gold and the people who are short based on very good looking charts are being forced to cover over and over which adds fuel to the bull market and the higher prices.
This phenomenon is occurring in the general equity markets as well.
Traders should be concerned and the market should pull back—but at this time you should breathe easier and realize that in many markets we are 40% off of the highs and so you are really not missing that much and are probably not too late for the ride.
Leading economic indicators are turning positive and governments are doing there best to stimulate the economy—you should not ignore this phenomenon and stay on the sidelines. What are stop losses for anyway—huh?
Why are gold newsletter writers turning so bearish on gold? Many appear to be using a macro perspective and appear to be ignoring the trend that is before them. Remember it was Jessie Livermore in Reminisces of a Stock Operator who said:
“But not even a world war can keep the stock market from being a bull market when conditions are bullish, or a bear market when conditions are bearish. And all a man needs to know to make money is to appraise conditions.”
or
“it is not our duty to be bullish or bearish but to be right,…”
Ignore the noise, ignore the ads on TV to sell gold ignore everything and really see what is happening. If you are buying is in the top right hand side of your screen then it is probably a strong bull market.
You don’t manage very much money so you can get out fast. You are not Warren Buffet who moves markets.
If you are looking at gold don’t forget the stocks. Agnico Eagle is going to have their best quarter ever. They are unhedged of the gold price and their margins are the best ever. Steel is cheap, energy is cheap and gold is rising fast.
To paraphrase T Boone Pickens when he was discussing oil in the 1970’s:
“It is cheaper to buy gold on Wall Street”
These stocks got hammered and there are values.
Oil is back in the spotlight as it makes new highs each week. Jeff Ruben who is a proponent of Peak Oil lays out the bullish case for oil on the attached video.
The International Energy Agency (IEA) is once again revising their forecasts upwards—more urgently now that oil is above 75 dollars. Combine that with the release of data that showed China’s oil imports are up 15% from where they were 1 year ago and speculation that 80 or 90 dollar oil will be possible by year end and you have more complaining to do when you get to the pumps.
If you think that that is bad many respected analysts are calling for triple digit oil in the first quarter of 2010.
There are 2 camps on the price of oil right now. One believes that it will hit triple digits and the other is thinking 20 dollars per barrel.
Who is right?
The 20 dollar crowd must be making some assumptions about another Banking crisis (Lehman) that will cut economic activity seriously. I don’t buy that personally because I think the central bankers won’t be caught napping this time. They appear more than willing to print more money/lower rates/quantitative easing at the drop of a hat. No teeth gnashing and navel gazing this time around!
Natural Gas on the other hand might trend sideways or lower given current oversupply and the often reported extra supply that the new shale fields might produce. The latter reports appear to be ignoring the 60 to 80% decline rates on many of these new fields and maybe they are correct for the short term but It is also wise to note that the Administrations 914 report is showing gas production decreasing due to lower rig count . If production continues to decline and storage draws start to occur then it could take 12 to 18 months to get production back to current levels. The latter could cause price spikes.
If you think LNG will ride to the rescue you might want to note the lack of supply landing on US shores. Partly due to higher prices elsewhere. It should also be noted that up to 20% of a liquid natural gas shipment is lost in the conversion/reconversion process. Higher prices are needed to support this supply option.
Oil does not have the same bearish case. I have noticed that the biggest moves occur in oil when pessimism is at it’s greatest and inventories are at their highest. For whatever reason that has been shown as being at the bottom of the market the last several cycles. If you recall there was no end to supply and bearish forecasts on oil just a short time ago.
Many of the oil bears may have a more short term view of the market which would explain their lack of emphasis on the long term bullish prospects for oil. China for instance has passed the US in gross auto production and that shows little sign of easing given the growing wealth in that country and the fact that many in that country do not own a car, but aspire to do so. This is a long term demand characteristic which would be unwise to ignore.
I like to remind everyone that many of these 20 dollar market commentators are the same people who missed the entire bull market this decade—they advocated 30 dollar oil all the way up to 147.
Do you want to throw your investment dollars at someone with this track record or perhaps maybe, just maybe that peak oil advocates such as Matt Simmons and Jeff Rubens might be right. The latter 2 have been more than kind to your investing dollar the last few years.
I am watching with great interest the rising stock market, energy markets, and precious markets these last few weeks with a mixture of misunderstanding and glee. The latter because I am almost fully invested and the former because for some of these markets the volume is flat or decreasing.
Declining volumes do not support a bull market. I have noted that most of the time that just a slowdown in buying can cause a specific equity to decline or level off–so my only thinking on these markets is that there are no sellers.
I hear reports about the Asian markets this year that are rising and yet you talk to hedge fund and long only funds from the region and they have seen no new money this year. Many have half the investible assets of last year. Synopsis is that no measureable amount of foreign money is entering the region.
Combine that with reasonable valuations (notice I didn’t say cheap!) and you have an interesting and perhaps sustainable bull market.
Would I trade without stops—hell no!!!—Remember what time of year it is and what has happened in Octobers past.
I am reviewing Jessie Livermore on this.
In this fictional book (the trader’s bible) Remininces of a Stock Operator he talks about the gentleman that taught him the importance of being a bull in a bear market—Mr. Partridge. He also wrote that in a bull market there are really only 3 positions that you can have.
“Old man Partridge’s insistence on the vital importance of being continually bullish in a bull market doubtless made my mind dwell on the need above all other things of determining the kind of market the man is trading in. I began to realize that the big money must necessarily be in the big swing. Whatever might seem to give a big swing in its initial impulse, the fact is that its continuance is not the result of manipulations by pools or artifice by financiers, but depends on basic conditions. And no matter who opposes it, the swing must inevitably run as far and as fast and as long as the impelling forces determine.”
Markets will go further and for far longer than anyone is willing to believe that they will–and that guessing a turning point is futile.
I will have to live with the nervous stomach and the tums for a little longer apparently.
Robert Kiyosaki with Andy Tanner
The message is that rather then making money on a directional trade for any given stock you can monetize your position by writing options. Andy Tanner suggests monthly in his example for a given stock although I think prudence would dictate that you might have to vary your activities based on the market environment each time you are looking at a trade—in order to better your overall return.
Creating Infinite Returns Using Paper Assets from Conspiracy of the Rich on Vimeo.
Essentially the idea is to keep the asset and get cashflow from it. I realize that he likes to do this monthly because that is where you get the most time decay for the option—meaning that the option that you wrote is worth less and less at a more accelerated pace. See the video for a more comprehensive explanation.
They compare the process to monetizing a piece of real estate which I think is apt. You buy a property and either through improvements that increase cash flow/better management/or improved market conditions you borrow out your down payment and effectively have an infinite return. The latter is the result if you have all your money back AND the property is able to support the old and new financing AND gives you some cashflow each month. Not an impossibility in many markets over the last number of years. Perhaps more difficult recently however you are all big girls and boys and you realize that we are talking conceptually here.
Anyway in a rising market you write naked puts on stock you would not mind owning at the strike price or you write calls on stock you already own and the market is telling you that the stock is moving sideways or down. For the latter you must like the strike price as your sale price or you shouldn’t do it.
Sounds simple and it is—but you have to be paying attention as your entry price might be fleeting. Although you could leave orders.
I tend to only focus on quality names on stocks that I am familiar with.
June 10, 2009
I wanted to find a video that featured John Paulson—the fund manager who made billions off of the credit default swap debacle of 2008—because quite frankly, I was interested.
What did I find on Youtube? One boring ass video without much content.
He spoke at the 92nd street Y with Joseph E. Stiglitz. Matthew Bishop was the moderator.
One thing I did learn is that this Y is a pretty interesting looking place—too bad I don’t live in NYC but at least I can look at their website from time to time.
Paulson touched on what went wrong in the credit default market. He thought that the pending problems where so obvious that he couldn’t understand why others didn’t see it. He realized that the securities were badly mispriced and we were in a casino. He can only surmise that other players got caught up in the exhuberance of the moment, the need to increase underwriting volumes, and the competition to increase fees. Many just focused on annual fees and ways to increase the bonus pools short term. It sounds like the greater fool theory on steroids.
Joseph Stiglitz chimes in about how the bonus structure was definitely a problem but he also referred to the flattening of the yield curve and hence the Banks had to take more risk in order to get the same traditional returns from this business.
In other words the price of risk went down. I guess the quote that a rising yield curve makes Banking geniuses out of lending idiots get reversed when the curve flattens. My point here is the Banking geniuses became idiots in a flat rate environment. This refers to the often quoted axiom that a positive sloping yield curve makes Banking geniuses out of idiots. Banks make most of their money traditionally from lending long (2 years and higher) and borrowing short (your savings account that pays nothing—or almost nothing).
Everyone got caught up in it–including the regulators—they allowed it to happen because they thought that everyone was being rational, including themselves.
Going forward the panelists believe that systematic risk has been removed and that the government should be given some credit. Paulson thought that they didn’t create the problem after all—although some might argue that the Fed flattened the yield curve which aggravated the problem. He also believes that the sector uses too much leverage and takes too much risk—this is strange coming from a hedge fund guy. He thought that the recent equity issuance would help stabilize things as well.
Joseph discussed about how the Banks can borrow from the fed at effectively zero and lend at much higher rates is effectively a gold mine. If they can’t make money—well. Recent reported profits were creative accounting (FASB has allowed them to not write down certain impaired assets) The other is on the trading book–which is a heads I win tails you lose for the taxpayer because he calls it gambling where if they win they get the profits–but if they lose then the taxpayer bails them out and they get retention bonuses.
Dr. Marc Faber October 13, 2009
I continue to watch the Dow climb today along with oil and the Faber interview strikes home.
I always find it interesting to see the varied definitions of inflation that are thrown around these days. Many quote the headline CPI that excludes food and energy as if it had real relevance to everyday life. I realize that I live in Canada and have a different perspective from those that live in warmer climes—but heck you have to drive your car and run your air conditioner—so energy prices are important to you as well.
Food—I won’t go there except to say that prices continue to climb given the lower value of money plus the rising cost of the energy component in food. Modern agriculture requires a lot of energy remember!
So we have Faber clearly stating again and again that a more proper definition of inflation relates to money printing and not rising prices—the latter is caused by money printing—and yet the message apparently is not heard. I admire his patience in answering these questions over and over again. A friend of his—Jim Rogers who is in the same investing league as Faber has been getting very cranky as of late.
I have been told by some old codgers in my office that the textbook definition of inflation 20, 30 or 40 years ago was an increase in the supply of money. You look at an economics textbook today and it will refer to rising prices. It does make you wonder if some of the conspiracy theorists are right and we are being screwed by big government and the rich without even knowing it.
One note of caution or fear that should be heeded here and in that has been mentioned in other Marc Faber other interviews is that deflation will follow inflation. Many market commentators believe that we are in actual danger of deflation right now and have compelling evidence for proof. Unfortunately, they are probably focusing on the wrong CPI numbers and are ignoring the money printing that is going on. I have even heard some mention that a weakening US dollar is proof of deflation—interesting statement but they are ignoring the fact that the currencies on the other side are appreciating primarily due to better fiscal management and less money printing—notice I said less money printing.
We are in an era of competitive devaluation right now with rapid inflation as a probable result.
Marc Faber October 13, 2009
Dr. Doom discusses the secular decline in America.
The current deficits of 2 trillion per year will continue into the foreseeable future. Along with many other commentators he does not believe that the deficits will decrease.
You will start to see changes in people spending behavior. Currently people are saving money but eventually they will start to realize that their money is not earning anything and in fact is losing value each year due to inflation. Then they will start to purchase what they perceive are assets such as stocks, gold, farmland, luxury condos in Singapore etc.
The government will continue to print money at an accelerated pace until eventually there will be bankruptcy or the equivalent thereof.
Basically money printing turns into inflation which turns into bankruptcy.
The strategy obviously is to buy assets above while they are still relatively cheap. There will be volatility but there are still opportunities. Assets are essentially becoming cash. They are acting as a store of value.
One of the functions of cash as it can be liquidated quickly to buy assets. If cash is not trusted then people would rather hold the Dow for example that can be liquidated quickly and tends to rise when the dollar weakens. If the dollar strengthens then the Dow will likely drop along with commodities—unlikely to happen in this environment.
Interesting to note that the Dow just broke 10,000 while I was writing this blog. Rick Santelli (CNBC) whom I respect does not seem that impressed for many of the same reasons outlined by Faber however the cheerleaders on the show appear gleeful. Time will tell if Marc Faber and Rick Santelli are right.
So you want to be in charge of monetary policy? The Federal Reserve Bank of San Francisco has created an interesting game for armchair Fed Bankers to see the effects of their decisions of the unemployment rate and inflation.
Here is the link:
http://www.frbsf.org/education/activities/chairman/
Your goal is to maintain unemployment around 5% and inflation around 2%.
First Try
Tried increments of .25% and was doing fine until there was an oil price shock. This increased inflation fears (and rate) plus oil shortages pushed inflation over 5% (with unemployment at 3%). I obviously got behind the curve and I was dismissed as Fed chief.
Second Try
This time I thought I would get smart and try to front run the inflationary forces. When inflation started to rise I increased in half percent increments and when inflation crossed 3% and unemployment went below 4% I increased by 1% in order to lower the former and increase the latter. All was well however I pushed the economy into deflation and a last ditch effort to fix the system by lowering rates to zero failed miserably—-I was dismissed.
Third Try
Third time I was doing well—but then I held rates down too low and got an inflation spike—I was dismissed.
Fourth Try
Hit it!!! However I sense it was a matter of timing and no oil/whatever shocks. I sense that I will be a one term wonder/guru.
Fifth Time
Success again. Apparently I am a genius.
Thoughts:
Warren Buffets comments come to mind in when I think about the difficulties of this game. He stated on multiple occasions he would never want the job of Fed Chairman because he imagined it to be one of the hardest things he has ever done.
I started to realize the lag effect of rate hikes or rate drops. I am fascinated by the psychological component of the game as well. If you get behind on inflation or deflation the newspaper headlines feed panic and it overshoots in either direction. Edward Greenspan understood this in my opinion. he quite often talked the markets into the direction that he wanted. I believe the term is moral suasion.
If this game has any relevance to real life then I see potential opportunities for investing due to the “madness of crowds”. This is exactly what people like George Soros
have been saying for years–although he calls it reflexivity. A concept I first read from him in his 1990’s era book “The Alchemy of Finance”.
In the interview I linked to he touches on the concept. If you want to get a real earful then buy the book—although I found it difficult to understand and apply at the time.
Jim Rogers and Dr. Copper have many things in common. Both are at times way ahead of market turning points, are sometimes wrong in the signals they give, and last– but not least—are not as sexy!
Below please find a video where he reaffirms his faith in commodities and other hard assets.
Jim Rogers had stated that there are three questions you need to ask and answer to determine if any commodity is headed higher in price. The first question is how much production is their worldwide? Are there any new source is the supply? Are there any substitutions?
Here’s something else Jim Rogers said in 2006 regarding commodities and bubbles.
“You can have a bubble when the media have only begun to pay attention to commodities in recent months after years of disinterest. We are now only in the early part of a long-term commodity price boom that has years to run and will likely see dozens of raw material prices make new highs. Even crude oil and copper have a long way to go, even though they recently set price records.”
If you look at these three questions or conditions copper is a remarkable long-term investment at this time.
First Condition:
Is production limited or on a decline curve. The answer is yes.
It is no secret that China and India are going through a massive growth curve. China in particular is spending billions of dollars on infrastructure. Leading up to the commodities blow off in 2008 China was a big importer of copper. The last several months with the price of copper at extremely low levels China has been a huge buyer. The scuttlebutt in the market is that they are purchasing hard assets such as copper, oil, gold etc. rather than US treasuries due to their fear that the US dollar will drop significantly in value. Russia and China have both expressed concerns over this issue in the recent past.
It is not an issue of whether or not their selling a US treasuries with their huge surpluses— they have chosen to slow their buying of treasuries and purchase hard assets instead. You may notice in the media that they have made deals with Brazil and various African countries over the last several months to secure supply in strategic commodities. For instance from Brazil and Venezuela they are entering into long-term contracts for oil. Just last week there was some controversy over their purchase of Nigerian oil leases that are currently being held by Western oil companies and their offshore oil basin.
One could speculate that they do believe at the very least that copper and other commodities will rise in price at least in the short term. Unless, you believe that they are stupid.
Second Condition:
Are there any new sources of supply? The answer is that demand is greater than supply.
There has not been any new major copper discovery in more than 100 years. We are currently working through inventories but have been amassed over the years. Between 1999 and 2004 the world world only mined one third of the amount of copper that it produced— essentially drawn inventories.
Why do this occur?
Some historical background: Currently Europeans consume 9 kg per capita of copper. Primarily the uses are for infrastructure and manufacturing. Contrast that with the Japanese who consume 12 kg of copper per capita versus the North Americans who consume 10 kg grams of copper per person. Basically the same. Meanwhile China, India, Eastern Europe and Central and South America consume less than 2 kg per capita. You have to admit that if Japan, Europe and North America just maintained their consumption and China, India, South America etc. doubled their consumption than the price of copper would have to rise strictly based on supply and demand fundamentals. The current infrastructure craze based on government spending and Keynesian economic principles will likely at the very least maintain copper consumption or more likely increase it.
Dr. Copper may continue to be read after all— although he appears to be much more accurate at predicting economic downturn.
Third Condition:
Are there any substitutions that are feasible? The short answer is no.
Yes, aluminum would seem like a likely choice. Look at the wiring of any late 50s and 1960s era home and there is a good chance that aluminum wiring was used. There are several problems with aluminum that must be considered.
First of all relative to copper there is none of aluminum the world. If you totally eliminated copper and used aluminum instead you would only have nine days supply before you ran out— based on current inventories.
Have I proven my case? Based on rereading the above I would say—partially.
The only caveat I have in my own mind is that Chinese buying may not necessarily be motivated by the expectation of higher copper prices. Their motivation may be that they have too much friggin US dollars to spend and no place to put it. If you think about it from their perspective. Six months US treasuries virtually yield 0%. 10-year treasuries yield what?– two or 3%. 30 year treasuries— what?— five or 6%. Given their worries that have been expressed by US spending habits— combine that with the concerns of the UN, the Russians etc. and the possibility of some central bank somewhere saying I’m going to sell my treasuries for there is a run I think that they may be stockpiling these commodities because they have nowhere else to put their money.
Time will tell and maybe somebody will figure it some way to properly measure Chinese demand for commodities.
I am doing what I always try to do in markets. First determine if I am bullish or bearish.
In the case of commodities I am bullish.
Then I have to decide if I am really, really bullish and therefore really long. Or modestly bullish and therefore modestly long—or neutral with no position.
I will be checking prices this week to see if the recent pullback will hold at 2.50. I am not a fan of catching a falling knife—so I do not believe that I will have to act immediately.
Good Luck!