it's been a long time since I posted a complete piece off a subscription web site. tonight's fleck is something everyone should read
fleckensteincapital.com
Lunacy 'Legitimized' by Barron's, Bernanke, Bubble Al
We've got a lot of ground to cover, so let's dig right in. First off, during the two weeks that I was away, the trends already in place continued, with precious metals, foreign currencies, and stocks all grinding higher. Then, after some pretty significant fireworks last night in the metals/currencies, as well as in Asia and our stock-index futures, those trends only intensified by the time our casino opened this morning. The most dramatic action, by my reckoning, took place in commodity land, where in the early going, silver was up about 4%, gold was up a couple percent, and copper and oil were up about 3%. As to what stoked the commodities, look no further than the utter nonsense and revisionist history emanating from the mouths of Easy Al and Benny Bernanke (more about that below).
Away from commodities, stocks were also hot, led by the mighty, mighty Sox, which gained a quick 3% in the early going. (Conversely, housing stocks were down nearly a similar amount.) It was pretty clear to me that the morning movement in stocks was a function of money being forced into the market both here and globally. It was basically liquidity and a flight from the dollar.
Silver's Six Appeal:
By day's end, most everything managed to settle near its high. The S&P and Dow were up about 1.25%, and the Nasdaq was up about 2%. Turning to currencies, the euro and yen were up about 0.75%, with the Canadian dollar up slightly less and the Aussie dollar slightly more. Precious metals, too, went out near their best levels. Silver was up a whopping 28 cents, to settle at $6.24. For longtime silver bulls, a period of trading north of $6 would certainly indicate that times have changed for that market. Gold was up a little better than 2%, up $8.70, at just under $425. I might add that in the precious-metal stock department, silver stocks fared better than gold stocks. Pan American was up almost 10%, while Newmont was up only a couple percent. (To remind folks, I own both those two stocks and am a director of Pan American Silver.) Oil finished up about 3%, to just shy of $34. Bonds were completely blissful about all of this, more or less unchanged.
Now, from the perspective of an (arguably) clear head after two weeks off, I have a handful of observations to share. In the space of a five-hour plane ride home yesterday, and thanks to three articles in Barron's,, which I picked up before boarding, I had time to reflect on the lunacy of today's environment. So ridiculous were these articles that I thought even a Mad magazine parody of a financial publication could not devise such absurdity.
Epstein's Imaginary Job Machine
First case in point: "Tomorrow's Jobs," by Gene Epstein, someone whose "work" I have followed for a long time. I rarely read his articles, mostly because over the years I have found him to be uniquely gifted at getting things exactly backward. In any case, in the absence of anything but arm-waving, he proceeds to crow: "Over the next 10 to 20 years, in fact, skilled jobs will be on the rise as never before. They will proliferate in nursing, computer science, entertainment, financial services and entire fields that may now be just a gleam in the eyes of the innovative."
Further, he says, "The IT Revolution, Part 2, is about to begin, with new kinds of information technology developed to serve the needs of the increasingly prevalent 'knowledge workplace' -- fields in which brain power, rather than machinery or processes, drive production. . . . Spending on intangible capital, or IC -- assets like patents, copyrights, brand names, trademarks and trade secrets -- will continue to grow faster than outlays on tangibles like structures and equipment." Then he continues to argue how these powerful trends will transform the job market and America.
However, he never gives any facts to substantiate his hypothesis, and this despite three pages allocated to him by Barron's. One magic wand gets waved and poof, a "serious" columnist spies a hiring boom at the very time when many jobs are on a fast track to India and other countries home to intelligent white-collar workers willing to toil for a hell of a lot less than required in America.
Laffer's Price-to-Rationalization Ratio:
That unsupported hypothesis for why job creation will boom here -- just the opposite of what I fear -- is then followed by a laugher of an article about Art Laffer, titled "Altitude Adjustment." In it, writer Jonathan Laing gives him ample room to arm-wave about why the P/E for the stock market is really only 3.3 times earnings (yes, I said 3.3 times earnings), even though the P/E on the S&P is around 30 times. The types of adjustments are unbelievably preposterous and devoid of corroborating data. To cite but one: "Stock prices are affected by tax rates on personal income, dividends and capital gains because the price an investor is willing to pay for a stock depends ultimately on the buyer's realized after-tax return. . . . Therefore, a dollar of earnings today is worth a lot more than in the past, implying that the P for each dollar of E should be substantially higher." Since Laffer apparently believes that, he adjusts up the E part so the P part will be smaller.
The bottom line is, he comes up with a whole bunch of nebulous ideas to justify why stock valuations are low, which is obviously the conclusion he wanted to come to. The whole exercise is totally preposterous. Obviously, thinking men who put real money to work, guys like Warren Buffett, don't believe his spew or they'd be buyers of stocks, as opposed to writing articles about why there's nothing to buy. Regrettably, instead of holding Laffer accountable to giving backup documentation, Barron's settled for presenting hyperbole and opinion as fact.
ISI Casts a Complacent Eye:
It's in this "hard-hitting" journalistic vein that in the same issue, Barron's interviewed Nancy Lazar of ISI, without challenging her on some of the "facts." She tells the magazine what a perfect world it is. Amazingly enough, she doesn't think that rates are going to go up this year because inflation is under control and the Fed's doing its job. She doesn't even talk about the fact that the Fed perceives its job to be fighting deflation during a year when oil hit its highest average price, $31, in 11 years. Then she contends that the dollar's ongoing slide is not a problem. In a stunning display of ignorance, she says: "The last time you had a significant decline in the dollar was in 1985 and 1986 and certainly in 1987. The dollar declined for two years before you started to see a negative reaction in stocks and bonds. The dollar went down by 22% before bond yields started to move up, and it declined about 23% before stock prices decreased. The dollar is down about 17% at this point so we are moving into a caution zone. . . . "
I got news for her. The dollar index was down 17% last year, but it was down about 13% the year before. The dollar index is now down about 29% since early 2002. So, the dollar has been down for two years (the amount of time she says one has to be concerned about, further on in the article), and we're already down more than we were in 1986 and 1987. She completely ignores that, and she is supposed to be the one with all the data to buttress her view!
Rated R for Revisionist:
Anyway, against that backdrop of lunacy, I arrived home to find more of the same, as the news was all about jaw-flapping by two of the biggest numbskulls at the Fed: Greenspan and Bernanke. Easy Al nearly dislocated his shoulder patting himself on the back when he said: "There appears to be enough evidence, at least tentatively, to conclude that our strategy of addressing the bubble's consequences rather than the bubble itself has been successful. . . ." This is the same "maestro" who didn't know there was a bubble, and then claimed in hindsight that it was not knowable. Now he'd have us believe that rather than having attempted to prevent the bubble from occurring, the Fed was better off to let it occur and burst because of the "exceptionally mild nature of the 2001 recession." Only someone working with whacked-out government data could call that recession mild. In my opinion, it hasn't really ended, despite a couple of good quarters. Look at the ravaged state and local budgets. Look at what's happened to the labor force.
The hubris of Greenspan knows no bounds. He says he couldn't successfully pre-empt the bubble, but has absolutely no problem trying to ward off the ill effects of the one that has occurred. Said differently, he doesn't know how to control things when they get crazy (or, identify craziness, for that matter), but he's pretty sure he knows how to cause markets to get crazy again. That's basically what he said when you strip away all the varnish. And, he's been somewhat successful, for now. He's got a disaster brewing in the housing market, and there's going to be another epic wipeout in stocks when they head down next time as it continues to dawn on the world that we are completely out of control from a financial standpoint.
Ben (Currency's Copasetic) Bernanke:
Along that line, Benny Bernanke threw gasoline on a lit fire when last weekend he described the risk of a dollar crisis as "quite low," and that to look at the dollar only against the euro could be "misleading." I don't know how he can make that statement, as the dollar has been pummeled versus every reasonable currency on the planet, as well as some tertiary ones like the Mexican peso. Then, in a display of his myopia, he said: "The direct effects of dollar depreciation on inflation, like those of commodity price increases, appear to be relatively small." He acts as though we don't require foreigners to fund our massive current-account and budget deficit.
I believe that the dollar continues to be a major accident waiting to happen. This will not end politely. It will end violently. At some point, stocks and bonds will be dramatically impacted to the downside, while precious metals will continue to reap the benefits of these trends. Just as happened in 1999 and 2000, the outcome of this farce is completely knowable. The stock market at some point will run out of gas and exhaust itself, though whether that's three hours from now or two months from now, I have no idea. But when it does, and it becomes clear that neither the economy nor the job market is on the path of a self-sustaining recovery, then the next time down, we will see the hangover that has been postponed for so long.
Ensnared by Longstanding Lunacy:
For now, however, we can continue to expect absurd comments from some "serious" financial publications, as well as from the Fed. It's all a false reference point that reflects the lunacy of the times. It's gone on for so long that people believe the same nonsense. I'm sorry for the length of today's Rap, but I felt it was important to set the stage for where we are now and what our focus needs to be before the ultimate disaster unfolds. I'll have much more to say about all of this in upcoming Raps. Finally, thanks to all of you who sent in donations to the charity I mentioned before leaving for vacation.
Positions in stocks mentioned: Long Newmont Mining and Pan American Silver. |
