Rarebird:
Although we disagree about the bearish impact of cheap gold loans, we do agree that we are not far from a big upmove in gold and gold stocks.
From ALAN ABELSON'S column in today's Barron's. A very astute commodity analyst expecting a huge jump in the CRB by year-end. Gold never mentioned, but this won't be good news for the shorts to put it mildly.
Suddenly, it's last summer!
The parallels are spooky. Just as they were this time last year, the markets are teetertottering
dangerously.
The difference, of course, is that last year, with Asia caught in a sinkhole, the markets were roiled
by deflationary demons. This year, it's the specter of inflation returned from its long stay in the
desert that's throwing a fright into the markets.
Fears that labor will cease its docile ways and noisily push for "more" were fanned by Thursday's
disclosure that the government's employment-cost index had shot up 1.1% in the second quarter,
the biggest jump in the measure since 1991. Immediately, like a flock of ravens fluttering before
their eyes, investors were prey to visions of rising price pressures and even uglier visions of still
higher interest rates, courtesy of the Fed.
Nor were those nervous souls becalmed by the sharper-than-expected drop in new claims for
unemployment insurance. And even the ostensibly reassuring news (for those anxious about an
overly buoyant economy) that GDP in the second quarter had slowed to a 2.3% annual pace,
sharply below the 4.3% of the first quarter and below Street estimates as well, failed to lift spirits.
In fact, there was less for the cautious types in the GDP report than first met the eye. For one
thing, although consumer spending slackened, consumer income remained robust, which raises the
odds that Jane and John Q. are merely taking a breather. Further, businesses chose to fill
inventories much less aggressively, stocking up in the second quarter at half the $38.7 billion rate
of the previous three months. But there are good and sufficient reasons why inventories will rise
sharply as the year wears down.
Not the least of these reasons is the fact that many businesses have scaled down inventories to
unprecedented levels in the face of an economy still pounding along quite impressively. So, just in
the course of things, those inventories would have to be replenished. But, more to the point, come
the last few months of the year, you can expect a burst of inventory building as everybody is
seized by what a sharp friend of ours calls "Year 2K restocking fever."
Adding to this fever, the same friend notes, will be rising prices of all manner of commodities.
Indeed, he sees a rollicking rise in such trusty yardsticks as the Goldman Sachs Commodity Index
and the Commodity Research Bureau Index. That warming climate for commodities is not, it
somehow strikes us, entirely favorable for bonds. Which suggests to us that, intermittent rallies
notwithstanding, bonds will remain as punk an investment over the rest of the year as they have
been so far in 1999.
In a nutshell, the markets are right to be uneasy. For the disinflationary/deflationary environment
that has been so dominant throughout this decade -- and so benign for both stocks and bonds -- is
likely to be replaced by one more congenial to inflation. We're not talking the 1970s redux -- but
so what?
We attend very closely to what our friend says about commodities simply because he knows more
about them and is the most astute trader of them we've ever come across. And we've come across
a lot of the breed in our long trek through this valley of tears.
Normally a pretty cool cat, he grows quite animated when he beholds the prospects for
commodities and the end of their 18-year bear market. What's more, he anticipates a surge across
the length and breadth of the commodities markets, including such laggards as wheat, corn,
soybeans, cocoa and cotton, aided by the impact of drought.
Already, he points out, the economically sensitive commodities, notably oil, have been smartly on
the rise. And already, too, producers of selected commodities, like copper and aluminum, have
followed oil's lead in cutting back production to reduce supply and firm prices. He expects this
tactic to find converts among hards and softs alike, furnishing significant thrust to prices, even
while demand picks up in tune with the global economy.
Sentiment in the pits, he observes, has never been so bearish, with virtually every non-oil and
non-metal commodity showing record short positions. Come the fourth quarter, he sees a great
explosion upward across the board.
More specifically, he's looking for at least 20% rises in the commodity indexes from here. "The
commodity complex," he asserts, "is like a great stock trading at a discount to book, and all of a
sudden there's a story."
Which translates, to state the obvious, into bad news for bonds and, ultimately, for stocks. |
