Thursday, December 3, 2009

Gold Finding Stagflation in Most of the Right Places

Anyone who thinks those who have been bidding up the price of gold vs. the dollar and most other fiat currencies are just imagining that the "fiatscos" are being actively debased despite a low-ish level of economic activity should look at a detail in the November 2009 Non-Manufacturing ISM Report On Business®.

Of the main measure and the ten sub-measures, only two showed growth in November vs. October wherein the growth rate was higher than the October growth rate. In ISM-speak, this means that "Direction" is "Growing" and "Rate of Change" is "Faster". These two "winners" are:

Prices paid, and new export orders.

Businesses are getting squeezed with higher input prices, are increasingly producing for the benefit of foreigners rather than for you and me, and are making do with fewer workers and undoubtedly pushing the remaining workers harder.

The rise is gold is largely an illusion. Of course, the dollar is falling, as are most of the other fiatscos. Gold just sits there.

Not all of gold's rise is illusory, however. This is shown by the ETF Central GoldTrust, symbol GTU. Its premium over net asset value has risen to about 7% today. Along with GLD trading at 22-23% above its 200 day moving average and more than 50% above its price of one year ago, the metals just look extended. Your truly sold most of his GTU today and put some of the capital into GLD and the rest into "cash" (whatever that really is nowadays). This is tactical; where were all the alleged true believers when gold was in the $800s and $900s earlier this year?

Meanwhile, getting back to ISM, we are looking at all sorts of proposals from Team Obama and its counterparts in Congress to pay for all sorts of things with more "contributions" from the "rich"--which mostly does not mean Jamie Lloyd Rubin Gates but rather small business owners and professionals who increasingly will choose for more leisure over incremental income if the rewards just cease to be worth it. Where's my bailout, most of them have been wondering this past year. When they see they are the ultimate bailees, they will bail as much as they can.

Decreasing operating margins, more Americans working to provide goods and services for foreigners: that's just what a weak dollar policy is designed to do. Yes, it will increase employment, but so does a world war. Better we work smarter rather than harder, and keep the fruits of our labor here.

A note on today's late-day sell-off in stocks. Based on the dismal hiring/not hiring data in November, the NFIB and other data for November, and the horrible household survey data for September and October, this non-economist's bias for tomorrow's first look at November employment levels is to take the bear side of the number. In any case, watch the household survey and the "birth-death adjustment". The establishment survey is correct but limited to the more established (sorry for the non-pun) companies who are favor in this credit crunch. The real damage is occurring at and under the surface, which the household survey picks up better. Goldman Sachs is not predicting that the Fed's zero interest rate policy will continue until 2011 because it believes that Team Obama is really bringing this economy to life.

Thus patient holders can buy Treasuries directly, via mutual funds, or via ETFs such as IEF or TLT and have a reasonable expectation that selling opportunities will occur within the next year or two at a profit, with the interest income beating cash in the bank. It's thought at EBR that businesses will have little choice for a measurable period of time to do other than accept squeezed margins while keeping on trucking. Remember that in the Korean war, Treasury yields were tiny while inflation raged. Treasuries can in fact yield less than ongoing inflation if the investment alternatives are perceived to be worse.

We are in such odd times that I may disagree with myself in an hour, however. As the old song goes, staying alive, staying alive . . . that's what money management is about in this era.

Copyright (C) Long Lake LLC 2009

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