Earlie, agree on most counts, but:
I believe the Fed has clearly changed its stance on gold. It's all a juggling act, trying to keep a whole bunch o' balls in the air. If they start getting too complicated, you pick one or two to sacrifice. IMO, they have realized that the strong dollar/weak gold is no longer helping us, but instead is wreaking long-term damage. They have given up on all other goals to focus on the biggest single evil that faces us: deflation. Bernanke made it clear that they will use the printing press to whatever degree necessary to prevent a declining general price level, and he even went so far as to mention purchasing foreign bonds or gold. It is absolutely necessary from their point of view to prevent the free market response - declining prices - because of the positive feedback it would unleash through increasing real debt loads. If I were in their shoes, I might do the same thing. Of course, I would've squelched the bubble years ago. We've all known that this would happen when rates approached zero, but it is one thing to suspect it, quite another to hear it coming out of the mouths of the Fed directly.
The Fed has tried to sustain the bubbles long enough to prevent the collapsing of them all in lock-step, along with the positive feedback that would result from their simultaneous collapse. I'm not sure how well this will actually work - they are certainly in uncharted ground. If they hadn't synchronized all the up-cycles in tech, credit, real estate, etc., then they wouldn't be trying to break up the downlegs in time. The price is that one bubble must be allowed to run longer and bigger while another one gets worked off.
I still see very little respect for the REAL bubble in our economy. People talk about the bubble in the past tense, when the stock market bubble was just a symptom of the true disease: too much debt.
No, the Fed now grudgingly accepts higher commodity prices, including higher gold and potentially a weaker dollar, as a necessary evil if we are to prevent a general deflation. Believe it or not, the Fed is now on the side of the gold bugs.
EDIT: Should be noted that this has very negative implications for equities. Deflation and excess capacity mean that the Fed's efforts to split the dollar 2:1 will result in increases in pricing for their inputs (commodities) while their finished products remain under severe price pressures and labor prices remain sticky to higher. If the Fed has its way, the consumer will be spared the undertow, at the continued expense of corporate profitability in all high-capital-content finished goods. The $10 trillion question is whether the feedback in the system is so high due to the degree of leverage that the squeeze on the corporate sector will result in an even larger squeeze on the consumer through layoffs.
Investment implications: short capital-intensive manufacturers (electronics, autos) and hedge or even go net long basic materials suppliers (gold, silver, oil, food, etc.). Optional services providers should weaken (restaurants, conveniences) but essential services providers should maintain pricing power (healthcare - unless government regulation stamps that out as well). Avoid or short anything liable to take shrapnel from periodic implosions in the financial sector. And, of course, stay short the intermediaries that have foolishly accepted all the risks of the credit bubble: financial guaranty insurers and reinsurers, and above all, MBI.
BC |
