Saturday, April 30, 2011
The bottom line as I see it is that these varied commodities have tracked each other pretty well over time. Copper is triple its 1980-era peak, gold about double its peak, silver about equal to its peak but is about double its late-1980 peak which was unaffected by the "corner" that sent it to around $50 months earlier (Hunt brothers). Copper is up about 15 times in 50 years; it has lost a good deal of its market due to fiber-optics. Silver is up about 40-50X in that time frame, as is gold.
Oil was in the $2-3/bbl range in 1970 and is up 40-60X from then. Oil is also about 2-2.5X its 1980 peak.
Where are the metals and commodities going?
So long as the Fed is engineering ultra-low interest rates and averting its gaze from the obvious price inflation that we see all around us, especially in that most "core" of human activities called eating, I feel that the underlying trend remains higher. The "cost of carry" is negligible when money on deposit in a bank yields a whole lot of nothing. Will there be sharp declines? Sure.
But when stocks and bonds were 10 years into their bull markets by the early 1990s, the best was yet to come. Dips were buying opportunities.
Watch the Fed's actions. When and if they actually withdraw liquidity, we will see what prices are real and what are pumped up. Given the unwillingness of Congress and the President to seriously bring revenues in line with expenses, I continue to believe that the game plan of the authorities is to inflate the debt away as well as to inflate housing prices upwards so that the banks and homeowners are made whole again in nominal terms. Doing so, or attempting to do so, has "collateral damage" on the dollar. This in turn reflects in elevated trends of prices of real goods that continue to be demanded by people and businesses. I am sticking to essentials or near-essentials. In these difficult economic times, I am leery of fripperies. The metals mentioned above are "core" products to our economy and financial system. Other core commodities include sugar and cotton, which in healthy bull market-type action, have had significant declines recently following huge runs. (I don't know the first thing about trading commodities on futures exchanges, but if I did, I'd probably be looking into buying the dip in those two commodities.)
I am not spending a lot of energy trying to decide which inflation play is "better" than another. So long as the central authorities have all the power they do, I'm just riding the weak dollar policy as carefully and as long as I can in a diversified manner. Metals, energy stocks, strong foreign currencies . . . it's all one trade. It's also getting crowded, but one could have said that about techs in, say, 1997. Don't fight the Fed is a motto I have adopted years ago. It continues to be a good trader's and investor's credo. The Fed wants more inflation; my money says there's more to come.
Copyright (C) Long Lake LLC 2011
Tuesday, April 26, 2011
But when they shrink the width of a roll of toilet paper, they've gone too far. Talk about not playing fair!
As goes toilet paper, so goes the dollar.
Down the "drain".
To try to verify if I am being more than a bit too harsh before publishing this, I asked myself whether, if I lived in Hong Kong or Sweden, I would have any interest in gaining exposure to the U. S. dollar. The answer was so obvious that I spent no time debating the answer with myself.
I then asked myself a more difficult question. Are there any currencies that are poised to outperform gold from here, counting the interest from bank deposits or government bonds?
It's not an impossibility that fiat paper can beat gold for periods of time. The U. S. had over 20 years where government debt far outperformed gold.
Here is one candidate to watch. It is Sweden. Sweden is running government surpluses, and the government is said to actually be overstating its liabilities. It had a banking crisis about two decades ago, resolved it without coddling the crippled banks, devalued its way back to financial health, and in 2006 began a program of successive tax cuts. Its central bank is well on the way toward extending an already impressive series of post-Global Financial Crisis rate increases, its economy may currently be the strongest in the E. U., and it maintains its own currency separate from the euro.
Any time you see a socialist country repeatedly cut taxes and then see the economy start booming, I believe you see the potential for it to offer savers enough return on their capital after inflation to bring willing capital out of tangibles such as gold into the financial system.
Here is a 5-year chart of the USD vs. the Swedish kroner (SEK):
I don't know what's with the spike down at the end of 2007. I'm ignoring it. I don't think that Sweden declared bankruptcy and then suddenly said, "Never mind". It's clearly a chart error. Blame Yahoo.
In any case, the downward tilt on the chart reflects a weakening trend of the American dollar against the Swedish krona. You can investigate this pair on Yahoo Finance with the symbol USDSEK where a typical stock symbol is inputted. There happens to be a Rydex CurrencyShares security the purchase of which buys bank deposits in Sweden, so there is a yield to the investor that is currently somewhat over 1% after the 0.40% trust expense ratio. That yield appears set to rise as the Swedes tighten up after their own extreme easing cycle.
As the American standard of living continues to lag the promises of the State, other countries actually are doing what the U. S. sort of did 15 years ago, which is to either shrink the size of government or at least be honest about its size and bring in revenue equal to or greater than expenses. That sort of government offers an attractive alternative to U. S. Treasury debt right around now.
While gold remains the "gold standard" for diversification from the U. S. dollar in the opinion of many, many people, it may be wise to continue to also look for non-metallic alternatives such as higher-yielding debt instruments (and related bank deposits) of the best-run governments. I have added a significant amount of FXS to my holdings in Brazilian, Norwegian, and New Zealand currencies, and will be watching to see if it one day makes sense to go out farther than bank deposits in the Swedish bond market.
Copyright (C) Long Lake LLC 2011
Thursday, April 21, 2011
By the 'stock market', I mean operating companies as opposed to funds of various sorts, preferred stocks, and other securities that would not qualify for consideration for entry into a stock index such as the S&P 500 or the Russell 2000.
From my start in the financial markets in 1979, I was always oriented toward the stock market, taking a brief timeout only in 1981-2, when bonds were very high-yielding and a severe recession raged and triple-tax exempt New York City bonds made sense for a professional couple earning the munificent combined income of $40,000 yearly.
That pro-stock posture continued until the tech-growth stock/"Nifty Fifty" stock bubble peaked in 2000, and the revelation of widespread corporate fraud at such companies as Worldcom and Enron, plus my own experience with some high-flying local companies, led me to swear that never again would I go all in with common stocks.
I did go half in in spring 2003 and then all out in the summer of 2007.
At this point, with money rates still at or below the price inflation rate in most countries, my posture toward stocks is that I would want to see what would happen if governments simply taxed as much as they spent. What would the effect on economic activity and corporate profits be? I suspect there would be a severe shrinkage of the percentage of reported corporate profits to GDP.
For example, about one out of every six dollars in the U. S. goes to the health care "industry". What would that ratio be without government support? Much less, I suppose.
In fact, the tech sector receives little in the way governmental subsidies. It has to prove its worth to businesses and its attractiveness to consumers every day. Perhaps that is why it has rebounded strongly.
So you can sense the hate part.
Now for the love.
Companies have proven to be decent stores of wealth in high-inflation states, though not as good as gold, silver, or oil. If one is in the (amazingly still small) minority that "gets" what the central authorities are up to, and especially if one is in the yet smaller minority that "gets" that central banks generally do as they are told by their political masters, one will be able to direct one's stock investments more appropriately than people who continue with traditional balanced portfolios or people who make the mistake of looking at dividend yields as indicating value.
When governments are directing their central banks to create money at below-market interest rates, that is usually the time when yield plays start to not work. Think the 1940s and the mid-1960s through January 1980.
Bulls on the stock market will tell you that historically nothing beats the stock market.
As a reliable predictor of the future, of course that statement is irrelevant. Perhaps the historical outperformance of the stock market has used up its future outperformance. Perhaps it's all a random walk. What will tomorrow bring, and tomorrow, and tomorrow? That is the question.
The government of the U. S. has changed. When the Fed was being formed, the issue of issuing currency tied to the issuance of debt was criticized. The Federal government had, after, almost no outstanding debt. Would there not be insufficient debt issuance to allow enough currency to be created?
We all know the answer to that question.
So I would paraphrase Edgar from King Lear (Act V, Scene II), to continue the Shakespearean theme. When I look at the financial markets on a tomorrow-tomorrow-and-tomorrow basis, I think that money-printing is all. Everything else is secondary.
Companies can raise prices over time to adjust for changes in the general price level, and with good fortune an investor may do OK even with companies that see shrinking margins, such as price-takers in the inflation rather than producers of the products (such as precious metals, usually) that see strong price increases.
Thus I lote the stock market.
Copyright (C) Long Lake LLC 2011
Tuesday, April 19, 2011
Italian Foreign Minister) Frattini, speaking in Rome after talks with rebel leader Mustafa Abdel Jalil, also said Italy will host talks next month on allowing oil exports from eastern Libya and could provide rebels with night-vision kit and radars.
The meeting would also try to find ways of using Kadhafi regime assets frozen around the world to aid the rebels and would discuss the question of arming the rebels.
So it's come down to stealing Libya's money as well as its oil. What country is going to trust Western banks again if the West uses Libya's wealth to support the Western-affiliated revolt against the long-standing government of Libya? Note no Western nation is legally at war with Libya, and I am not sure that even a state of war allows a nation to order its banks to provide it use of a belligerent's funds.
Copyright (C) Long Lake LLC 2011
Monday, April 18, 2011
Saturday, April 16, 2011
US Secretary of State Hillary Clinton said the NATO allies were searching for ways to provide funds to the rebels, including helping them to sell oil from areas they control.
"The opposition needs a lot of assistance, on the organizational side, on the humanitarian side, and on the military side," she said.