Tuesday, February 3, 2009

Morning Mix; Good News Is Out There Somewhere, but Where?

First, today's Market Review, then economic comments and references to relevant posts/articles:

Japanese stock market disappointing: Bank of Japan announced it will purchase stocks; Japanese stock market had a nice move up; then closed down. No buying power. Asia mixed.

Gold: Churning; more signs of sellers' exhaustion: Super Bowl gold-related ad; and today a Bloomberg.com article: Sprott Says U.S. at Start of Depression That Will Boost Gold.

Reading the article suggests a different interpretation. Mr. Sprott has correctly been bearish on financials and the U.S. economy. However, the article references his call of March 6, 2008. Since that time, gold is down 6.3%. The correct call, made by Mish and others, was to buy Treasuries for the coming deflation. Mr. Sprott may have done well shorting financial stocks.

But the fundamental problem for gold is that it is a truly worst-case product. Unlike in the 1930s, it is NOT money. Roosevelt's manipulated upping of the gold price could only be done because gold was money. A rise in the price of gold now would not do anything to reverse deflation, if we really get there. Should the financial system of the world completely collapse, gold is a more-or-less universal back-up currency. But what kind of world it would be is unclear. It may be that owning gold through an ETF is speculating; but owning physical gold is somewhat like building a backyard bomb shelter during the Cold War.

U.S. stocks esp. disappointing in that consumer stocks such as Pepsi, Procter & Gamble and others are breaking down, reflecting and perhaps accurately projecting further economic problems worse than "expected". It has been noted here that McDonald's is a key for the market. It is acting poorly and if it goes to a new reaction low, that could set up a move to new lows.

There are some excellent posts. Naked Capitalism links to a Milken Institute report, "The Rise and Fall of the U.S. Mortgage and Credit Markets". It is quite readable and belongs on the E-shelf of people who wish to be able to review this current problem from some future vantage point. NC also has some very interesting links today.

Nouriel Roubini has a subscription-only post comparing Japan to the U.S. He has raised his estimate of a 10% chance of us following Japan into stag-deflation from 10% to 33%. I have to suspect that the longer the Federal Government "dithers" (his term and mine; remember that Team Obama/Reid/Pelosi anticipated a stimulus bill to be signed on Inauguration Day) re "stimulus" and a fix for the banking crisis, he will follow the dire Asian data and up the risk to 50%.

Correlating economics with markets, the money-center financial stocks continue to be weak and to underperform a flat stock market. Weakness in JPMorgan Chase and Bank of America have presaged bad news on the economy. Dr. Roubini has been predicting for some time that the fundamental news on the economy would surprise on the downside this quarter. That has clearly been true out of Asia. The safety of government debt continues to appeal to this blogger, especially because it is so hated.

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