Soapbox - Warning - A long one.
Let's consider "The Transformation of Benjamin Strong"
safehaven.com
More specifically, let's consider this paragraph:
Mixing “macro” analysis with playing the markets can be both fascinating and profitable. It can also be especially dangerous, as the more parlous the macro environment the more likely that inflationary efforts will be undertaken to “reliquefy” the system and stimulate lending and speculating. We reached another of these key inflection points during the fourth quarter and it is becoming increasingly clear that this latest inflationary “reliquefication” is today beginning to take hold. It may not last; it could easily be derailed by a faltering dollar, rising yields, or a myriad of other risks; and it will inevitably prove unsuccessful. But for now, importantly, financing conditions are improving markedly, and this is a major development with respect to company and industry analysis. Such a circumstance has, potentially, the greatest ramifications for the weakest, most leveraged companies and sectors – the marginal borrowers. That many of these marginal companies’ stocks, bonds, and Credit default swaps have attracted over-sized short positions is a dynamic of the current speculative marketplace that makes things all the more volatile and uncertain. And with the market appearing happy to ignore poor earnings releases – while completely dismissing today’s dismal jobs report – we see further evidence the market wants to believe in the unfolding “reflation.”
We are no doubt at an inflection point.
It is clearly "Inflate or Die".
Is it too late?
Can reliquefication succeed?
Certainly we have seen the cheap credit trash soar up.
COF NCEN MTG etc. (look at the charts)
Is this a signal that reliquefication is going to succeed?
Is this a signal that the market thinks it will succeed?
Does it matter?
Those charts are headed up strongly and I am not messing with them YET, although I have been sorely tempted.
Let's look at whether or not reliquefication can succeed.
Consider GM and F both deep deep in debt. The theory is to inflate away the debt. That is a nice theory, but wouldn't that take higher interest rates to accomplish? Otherwise how are we going to inflate away that debt to make it less problematic? Are company earnings going to be sufficient to pay off that debt under any circumstances? If interest rates rise, borrowing costs rise unless they can all float a godzillion more long term bonds to suckers at these current interest rates. If interest rates stay low, and GM and Ford keep losing $ on every car they sell, how can they possibly pay back the debt even if reinflation succeeds?
FWIW, I do not think they can both inflate away debt AND keep interest rates low. Can they possibly raise interest rates with the precarious housing bubble we are in, and with it being the only thing holding up the economy right now? I think not. Look at homes being sold to ever increasinly high risk customers. Consider that 68% of the US already has a home. How much more is left of housing (something I keep asking for a year now). Somehow it chugs along. God help us if housing collapses right now, because if it does it is game set and a DEFLATION match.
Look at jobs. Look at consumer spending. Look at retail sales.
For reinflation to succeed. We need jobs so that people have $ to spend. We are bleeding jobs badly, however. Month after month after month. In this situation, it will take mammoth printing of money, just to stand still. Once again it comes back to overcapacity. Reinflation is unlikely to succeed as long as there is overcapacity in autos, PCs, fiber, and continued loss of jobs to China, Mexico and other places.
Is stagflation the best we can do? Considering an out an out depression or hyperinflation as the only logical alternatives, stagflation might be the best we can do. I expect rising commodity costs, rising medical costs, rising insurance costs, but falling prices on finished goods. Will this alleviate the debt problem? No it will not. Ultimately, no matter what happens in the near term, it just might take a depression and/or massive bankruptcies in major businesses, to get rid of debt.
Thus you see, I have added it up and decided that reinflation has no real chance.
Now back to the stock market (if anyone is still reading).
When will the market realize that reinflation attempts are hopeless?
Perhaps it does not even have to realize that. Perhaps fund outflows are enough and the market is about to do its usual after January collapse regardless of whether or not anyone believes Mr Greenbucks can succeed. It takes $ to prop up a falling market, and at long last J6P has stopped pouring money into a hopeless cause. He has not (in mass) attempted to save what he has, but without fund inflows, and ever increasing outflows, the market is doomed to fall over time. This shift from inflow to outflow did not occur easily, nor will it reverse easily either, regardless of what anyone thinks about "sideline cash". . This is a new macro trend IMO. Fund Outflows. It will likley escalate.
There are three macro trends in place as follows:
1) Rising commodity prices (gold and silver especially)
2) Falling US$
3) Falling equity prices
I believe all 3 are playable and lets look at each:
1)The macro trend is that gold has bottomed. The charts say that, the US$ says that, and the stated reattempt to reinflate says that. Even if reinflation does not succeed(and I do not think it will), the dollars being pumped into the market in an attempt to do so, should bode very well for gold. Obviously the way to play this macro trend is in gold stocks, gold futures, or physical metal.
2)The macro trend in the US$ is down. A falling will cause inflation by making foreign good more expensive. The constant printing of $ is in itself inflationary (and some would argue that it is the definition of inflation, but I prefer to consider inflation as generally rising prices in a basket of goods). The way to play this is with foreign govt bonds, futures, or much riskier (foreig equities). I like foreign govt bonds and foreign currency plays. PSAFX and BEGBX are ways to play. I am in both.
3)Regardless of bear market rallies and everyone doubting themselves now, the long term trend is still your friend and that trend is still down IMO. That does not mean you can short and go away. I would hazard a guess, playing equities might be choppier this year due to the paniced nature of the Fed and Bush right now. I believe in the PPT, and it is very clear that the stock market is being targeted. Nonetheless, the final crushing blow (if it can be captured), will be the biggest percentage gains the fastest. Stocks are whipping about like no tomorrow, and the best approach IMO is a long term one, waiting for the inevitable, with leap puts on the indicies, taking profits on big dips and adding back on bounces. On shorter timeframes, individual chart reading and trading skills will be paramount.
Thoughts?
M |
