Fundamentals worth considering.
(Caution: This is my longest, but hopefully my most important, post of the year)
ns. As you know, been a little tied up the past few days. So, will expand my response a little beyond the focus of your question to share some ideas I've been thinking about.
First, afa this being a difficult market? There are so many short, intermediate and long term factors in rapid transition, that the cross currents impacting trading patterns in the various equity, debt and commodity markets, make it very easy for traders to be misled and whip sawed, no matter how intelligent and diligent they are with their market work.
John Maudlin pointed out even a lot of good solid pros have seen their performance drop sharply during the past year. But, those who've weathered previous Bear Markets factor that into their expectations, strategy and tactics.
In a nutshell: It pays to be more conservative in a Bear Market. Doubly so in a secular deflation. What would be normal risks in a Bull Market = overreaching in a major Bear. Capital preservation (which includes major gains from the previous year) is job one.
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Looking at the bigger picture. Have a few thoughts. In no way is this intended to be an inclusive list. Just a few things I find compelling that aren't usually emphasized or combined in other posts.
1. ST: End of 3rd quarter <portfolio blowout> reverses into a quick buying frenzy from fund mgrs trying to get positioned early for the new quarter.
Then today? Ka Boom on the downside. Welcome to the Coney Island Cyclone.
2. ST/IT: Typical, on again off again, delay the inevitable, gimmicks from Iraq. The U.N. accepts the B.S., the U.S. rejects it. Then, the markets whip around and vent like a snake stuffed with Ex Lax.<g>
3. IT/LT: Homeland Insecurity, national insecurity, the Afghan War and prep for an Iraqi War are <off budget>, (yeah right)<g>, the US budget is going to make the fastest plunge into massive deficits every seen in US History! Stay tuned.
The big news? AFTER the election, of course.<g> Behold the tab for the <Forever War>. OUCH!
Added to the already overwhelming debt and derivative levels in the private economy, led by the nightmare on Morgo street, the ramp up in gov debt that's just getting rolling is going to be ANOTHER major deflationary economy crusher. Can the Fed simply monetize all this new debt on top of an already full plate? We'll get to that in a minute.
But let's just assume, for the moment, that the Fed can (at best) monetize only part of all this new government debt.
Some of you here may be familiar with the <Crowding Out Effect>. This when private borrowers cannot obtain sufficient credit, even at higher rates, because the government has soaked up most of the available capital via a large wave of new bond issuance.
Remember folks, the Fed can only directly influence ST rates. The market for longer maturity debt is far to vast for them to control. Most here are only familiar with stocks, options, and some commodities. But if you consider the fact that the debt market is many multiples larger than all the equity markets put together, the enormity of the enormous slow motion systemic credit implosion that has us locked into a secular deflation will become clearer.
In the IT and LT credit markets, supply and demand for the paper, NOT the Fed, have the dominant role. And you all better believe that gov wall paper is about to see the mother of all supply increases over the next few years.
With our current economy already weak? Even a moderate increase in IT and LT interest rates from all that new supply would add further deflationary pressure and drive the economy down more rapidly. Housing prices would likely lead this next leg down as higher mortgage rates would end the latest Sir Alan bubble with a loud pop.
4. The Main Event catalyst: Le gran passion is preparing to take stage center with a hard core financial porn show guaranteed to bring the house down...LITERALLY.
S.S. Morgo (S.S. = sinking ship) lists further and further to port (and by proxy those of the entire US Financial System) as gaping holes below the waterline flood the hull faster than frenzied pumping can keep her upright.
With all due respect to my friend Arik, the recent lows in the market indices don't look like a major bottom to me.
Not much of the really big money is going to come into this market knowing, as we do....when that old whore Morgo finally keels over, the shock waves will devastate the entire world financial system.
Not even a matter of too many holes in the dike when the nations largest bank - the rotten central timber holding the dike - melts down.
It'll be too late to head for the hills, then. Enron will look like a kid's birthday party by comparison. Along with falling bank dominos left and right, many brokerage firms will fail.
And listen up people. The SIPIC awa private insurance that you think makes you brokerage account safe will be revealed as another cruel hoax foisted on the public when a tidal wave of claims immediately wipes out the relatively small reserves. Actuaries don't design brokerage insurance reserve levels for the Rogue Tsunami that may come once in a century!!
DON'T leave ALL your capital with financial intermediaries likes banks and brokers. Some physical gold, cash (and maybe even a good gun) in each and every bear cave is sound LT advice.
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A few people may disagree with this final point. (And unfortunately, I don't have time for a back and forth exchange.) But fwiw, the number one illusion I see all over on the web (and voiced by the few financial <experts> I'm asked to read out of courtesy to friends and family<g>) is the idea that the Fed can just print us out of the secular deflation that's still in it's early stages.
Monetize???
People, if Sir Alan attempts to do that it will simply boomerang given the overwhelming magnitude of the current debt overhang.
This is NOT the 1930s...
Back then, per capita public and private debt levels were much smaller than today. Plus, what little gov debt existed was owned by Americans. Principal and interest were returned to us in our own currency. Today, more than third of Treasury paper is held by foreign owners.
It's most definitely a <New Era>. John Mauldin's idea of a mild deflation is too optimistic, IMHO. There's nothing mild about what I see coming in the years ahead.
The deflationary credit contraction is only in it's early stages in the private sector. Sharply reduced consumer spending yet to even begin.
But, believe it. Lower housing values generated by rising IT & LT interest rates and increasing unemployment over the next year will hit consumer spending like a Mack Truck.
My read is the best the Fed can do is to attempt to soften the angle of deflationary descent only intervening when market meltdowns or major train wrecks occur in the financial sector that threaten the system.
Large equity and eventually bond market declines will be accepted as long as they are gradual enough to allow time for the W.S. honchos to operate their standard pumpty dumpty pillage the public scams.<g>
Remember, the bottom line is the nearly exponential debt mountain (plus derivatives) that nobody in the 1930s ever dreamed was possible. The colossal scale of this liability juggernaut is what, in my view, makes a major (NOT a mild) deflationary cycle unavoidable.
Any Fed attempt to inflate out of it will back fire by accelerating the deflationary cycle as the bond market tanks, in response, and rates ramp up swiftly crushing credit demand.
When the debt, derivative and over leverage in every segment of the economy reaches the kind of super extreme we currently have? A significant secular deflationary will occur no matter what the Fed does. Stocks, bonds, commodities, goods, services, everything goes down. Except gold and cash.
Why is that?
Cash fares well in deflations because the price of everything is eventually dropping in relation to it. But why does gold trumps even cash in a deflation.
It's because Gold is AN ASSET. Fiat paper money - even the world reserve currency the $ - is merely another promisory note i.e. A LIABILITY.
Worth repeating from the Jay Taylor piece posted earlier by Jim Woolly:
<<In January 1934, the price of gold was increased by decree from Roosevelt to $35, so it is correct to say that gold did not rise before the economy bottomed out. However, IT IS NOT CORRECT TO SAY THAT DEMAND FOR GOLD DID NOT RISE UNTIL AFTER THE ECONOMY BOTTOMED!
In fact, quite the contrary was true. In 1932 Hoover's Secretary of the Treasury reportedly warned his boss that so much gold was being demanded from the U.S. Treasury by U.S. citizens and from people abroad in exchange for paper dollars that the U.S. Treasury would soon lose all of its gold. That's why on January 31, 1934, Roosevelt forced American citizens to give up their gold or face a $10,000 fine and 10 years in jail. And as an aside, I think it is interesting to note that one day after the gold was stolen by the government from the American people, Roosevelt increased the price from $20.67 to $35. And get this! With the 69% revaluation of gold from $20.67 to $35, the government booked a $2 billion profit which it socked away in THE EXCAHNGE STABALIZATION FUND which according to GATA to this day is being used to manipulate the gold price.
But the point I am trying to make is that in the midst of the deflation, people were trashing paper money and demanding gold. Why? Because they KNEW, just as Japanese people today know that their money would not be safe in the bank. They instinctively opted for gold - an asset money rather than paper money which is a liability money!>>
As I've said in other posts this year, physical gold isn't about going for maximum profits. It's about conservative capital preservation and protection. Because you've taken custody, you've automatically placed those assets beyond the reach of financial institution failures. So we've come full circle since the beginning of this long boring post<g>
<It pays to be more conservative in a Bear Market. Doubly so in a secular deflation. What would be normal risks in a Bull Market = overreaching in a major Bear. Capital preservation (which includes major gains from the previous year) is job one.>
Citizens of many nations have learned, the hard way, that it's better to be too early than too late in setting aside at least some portion of one's capital in physical gold.
Nite all.
Isopatch |
