<it's amazing gold stocks are getting sold>
It's a good thing, if you need to load up, which I've needed to do. Now I wish they'd do the same thing in energy, and let me in those cheap again.
The Barron's piece, I don't think crack-up boom is defined as "buying equities" though, it would be buying real assets.:
WELL, WE SHOULD HAVE a recovery, given what it has cost. More than ever, this expansion has been bought with borrowed money, contends Trey Reik, manager of Clapboard Hill Partners, a hedge fund in the truest sense in that it has short and long positions. What he's long is gold, owing to the massive global credit expansion. That has made for a rough patch lately as the specter of rising rates has knocked the metal back all the way from around $430 on April 1 (before the March jobs data) to $380.
Rising rates per se don't hurt gold -- if the market is confident the Fed will keep prices in check, Reik says. That isn't likely to be the case. "The Fed is 'boxed in' by unprecedented leverage ($34.5 trillion) in the economy, as well as the economy's outright dependence on gigantic rates of incremental credit growth, approaching $3 trillion annually, or five times nominal GDP growth, in order to function," he writes. "The Fed simply cannot raise rates aggressively, as it has in the past. Indeed, should the Fed embark on an extended campaign of rate increases, there can only be one of two outcomes, either of which will prove beneficial to the gold price. In the first, the Fed is too 'measured' and falls behind the inflationary curve (already happening). In the second, the Fed succeeds in raising rates aggressively enough to stomp out inflation and credit growth (not likely), leading to an immediate surge in delinquencies, defaults and foreclosures on our nation's tsunami of variable-rate debt.
"Lest the weight of variable debt seem exaggerated, it is important to consider that even in the stable-rate environment of 2003, with rates pinned at 46-year lows, 1,660,245 personal bankruptcies were filed, an increase of 7.3% over 2002's record. To put this number in perspective, that is one out of every 73 U.S. households. During the past three years, roughly half of the $2.5 trillion increase in consumer debt has been of the 'variable' variety. Rising rates will prove devastating."
In a phone conversation, he cites as the "poster boy" for the credit mania a 28-year-old described in a New York Times story last week. The fellow bought a $500,000 house, effectively with nothing down on a mortgage on which he will make only interest payments. He said he was betting that both his income and the value of the house will keep rising. If not? No worries. "There is a difference between being poor and being broke," he explained. "Being broke is more of a temporary condition. Donald Trump has been broke a couple of times." (Indeed, the Donald missed a debt payment on his Atlantic City casino this week, though he says he'll have things worked out before his 30-day grace period is up.)
What has motivated this young man, and millions of other debt-happy Americans, is that the liquidity unleashed by the world's central bank has produced what economists of the Austrian school call a "crack-up boom," says Reik. People want to buy anything before the price goes up, be it equities or real estate.
While the Fed might be thinking about snugging credit, the nation's banks are easing it. According to the Fed's latest survey of bank loan officers, lending standards for business loans have eased since the last survey in January. Business loan demand also is picking up, the survey added. For its part, General Electric said it would provide financing for businesses peddling their wares on eBay. And foreign banks want to get in on the U.S. lending market. Last week Royal Bank of Scotland said it would buy Charter One Financial, adding to its holding of Citizens Financial.
(One possible bad portent for the credit cycle: the Texas Rangers Friday agreed to rename its stadium Ameriquest Field, for the mortgage company. Corporate names on baseball stadiums have been a kiss of death, as in the former Enron Field in Houston, among others.)
At the minimum, the Fed would hope to avoid a repeat of 1994. A decade ago, with the fed-funds rate at a then-unimaginably low 3%, Greenspan & Co. tried to "preempt" inflation. It doubled the funds rate to 6%, resulting in the worst losses in the bond market in modern history, a blow-up in mortgage-backed securities, the bankruptcy of Orange County, Calif., and the crash of the Mexican peso. No wonder Greenspan wants to move in "measured" fashion to avoid precipitating anything similar.
The Treasury also is trying to help. The department last week said it would cut back its auction of 10-year notes. Back in 1994, massive selling of 10-year Treasuries by mortgage players unwinding their hedge positions was the equivalent of Uncle Sam issuing upwards of $100 billion of those securities, according to some estimates at the time. Fewer 10-year-note auctions would help ease pressure on this key sector, if there were to be a rerun of '94.
"A decade later," writes Morgan Stanley's chief economist, Stephen Roach, "there is a strong sense of déjà vu." In real terms, that is after deducting inflation, money is even cheaper now than in 1994. Back then, cheap money funded the 'carry trade' -- borrowing at low short rates to buy higher-yielding, riskier securities. And when it reverses, the results are nasty, as '94 showed.
"While 2004 is not 1994, I fear that today's Fed is in danger of making an equally serious tactical blunder," Roach continues. By tightening in "measured" fashion, he says, the Fed is virtually assuring investors and speculators that they can continue the carry trade, whether in corporate, mortgage and junk bonds or commodities. "And so the carry trade morphs into ever-expanding asset bubbles," he says.
And, like Reik, Roach finds the real-estate bubble most worrisome. And apparently also to the Bank of England and the Reserve Bank of Australia, which have hiked rates to cool their property booms. But the Fed thinks asset prices don't count for anything.
This thinking is like what produced Nasdaq 5000 in 2000, Roach adds. But it's worse this time. "By digging in its heels and keeping the federal-funds rate negative in real terms, the Federal Reserve has now pushed America firmly into a multiple-bubble syndrome," Roach concludes. "This is shaping up to be a policy blunder of epic proportions."
Reik, for his part, contends the Fed is boxed in. Rather than risk a debt collapse, it prefers a bit of inflation. Either way, he figures, gold will benefit.
online.wsj.com. |
