Sunday, June 26, 2011
Next, several news items are out showing how uphill the Obama surge is in Afghanistan. First, from Reuters:
Afghanistan's political crisis worsened Saturday with lawmakers voting to sack the five most senior judicial officials and international consternation growing after a presidential tribunal threw out a quarter of parliament.
The special court, set up by a decree of Afghan President Hamid Karzai after parliamentary elections last year were marred by fraud, ruled Thursday that 62 lawmakers would have to be replaced because of alleged poll fraud.
Karzai did not immediately comment, perhaps because he is in Iran attending a security conference. Hmmm . . .
And speaking of Iran, they're quite the wonderful country with which and in which to feel secure. Here is today's news out of Iran from the Guardian:
Prison guards in Iran are giving condoms to criminals and encouraging them to systematically rape young opposition activists locked up with them, according to accounts from inside the country's jail system.
A series of dramatic letters written by prisoners and families of imprisoned activists allege that authorities are intentionally facilitating mass rape and using it as a form of punishment.
And getting back to Afghanistan, of course there are many reasons for lack of military success (perhaps the main reason is that military force can't defeat a popular insurgency), but here's one that would have been utterly marvelous news 70 years ago:
German Soldiers Can’t Shoot
Leaked reports question the competence of the German army, which has thousands of troops serving in Afghanistan.
June 26, 2011 10:30 PM EDT
“German soldiers mostly don’t know how to use their weapons.” They “have no or little experience driving armored vehicles.” For German field commanders, “the necessity and ways [to protect their units from roadside bombs] are to a large extent either unknown or incorrect.”
These are quotes from a series of secret internal reports on the German army, the Bundeswehr, whose 5,000 soldiers in the northern Kunduz sector of Afghanistan were supposed to help the U.S. rout the Taliban and stabilize the country over the past 10 years.
Wednesday, June 22, 2011
I also want to comment politically. It is not clear what is motivating Barack Obama. He is maintaining a large military presence in Afghanistan. Do the polls tell him that a partial withdrawal, to a troop level that exceeds the level it was at when he took office, will win him votes?
Economically, not long ago the Senate rejected the Ryan plan with about 40 votes in favor. But it rejected the President's budget with no votes in favor.
It's not clear to me that this president is a leader. With FDR, it was clear that he (at least in posture and headline actions) favored the common man, who was a poor man in those days. With Mr. Obama, he favors the poor- but he also favors the rich, and he has turned out to be far more corporation-friendly than almost anyone expected. So he favors everyone. But he and the country are only what they are. And there are no tall aliens with the ability to serve man by making the deserts fertile. So, choices must be made. This business of trying to please all, which in my field of interest, finance, I correlate to pleasing both the stock and bond markets, simply is not working. It worked for Lula of Brazil, but that followed a prolonged period of hyperinflation. There was public and private support for conservative, growth-oriented policies. And who knows what Lula swept under the rug to get to 70+% approval ratings?
Unfortunately I am getting an LBJ-Carter feeling of a failed president. LBJ and BHO are both guns-and-butter-oriented. Both led the economy into big-time price inflation as the central bank obediently helped to monetize the resulting deficits. But no one would mistake LBJ for other than a leader. Mr. Carter, who may have been well-meaning, ended up looking unfocused and indecisive, and chose (was "forced" to) move to the right giving near-hyperinflation toward the end of his tenure. The world is not ending, and as I have noted recently, a number of headlines are overly histrionic. So what is "priced in" in the markets is impossible to know, especially given the vast amount of money the Fed has printed that has been seeping into the real economy. We do not need a QE3 for lots and lots of price inflation to occur.
Got gold? (And shares of gold miners?)
Monday, June 20, 2011
Given the article posted today by Econophile on the WSJ and inflation, I thought it timely to submit some quantitative considerations for anyone with savings who has to deal with interest rates on savings that are below the rate of price increases for consumer goods and services.
The WSJ writer's view is that the authorities "should" inflate away debts. I fully agree with The Daily Capitalist's different viewpoint about what "should" be done. It is further my view that what Mr. Arends of the WSJ advocates has in fact been "the plan" ever since the economy began collapsing in 2008. I believe that the Consumer Price Index understates price inflation and that if one removes housing from the CPI (because houses are financial assets rather than costs for most adults), the real cost of living has been rising at least at 5% per annum for the past year for the "average" American. I further believe that this policy of imposing negative real interest rates on savers, which is being called "financial repression", will continue for some time.
Thus gold ownership in various forms remains appropriate in my view even for small savers unless they may need access to those savings soon (e.g. retirees or people who are not able to save from their income). To review the reasonableness of current gold prices, which are around $1540/ounce, I have gone back to 1976 prices and interest rates, when gold was in the $100-140 range.
Saturday, June 18, 2011
Thursday, June 16, 2011
Since I don't discuss politics at that site, I wanted to prognosticate a bit. Yesterday, Lakshman Achuthan, the face of the Economic Cycle Research Institute, told Fox Business News that their US "long leading" indicators have not turned up yet, having turned down in January. Since these are supposed to lead downturns in the economy by a year or so, he said that he foresees the best case-- a lucky case-- that a cyclical slowdown/stagnation in the economy will last until the end of this year. My thought is that it is therefore reasonable to presume that economic activity will be stagnant until at least the end of Q1 next year.
Following from this, the Republicans will see the Presidency ripe for the taking on economic grounds. In that case, they will rally behind their alleged economy guy, Mitt Romney. He will reiterate that so long as he gets a cooperative House and Senate, his first official action will be to repeal Obamacare. (His support of Romneycare will be forgiven in the names of victory and getting the economy moving again.) My further guess is that he will choose a polished social conservative as VP, due to his health care issue vulnerability and for other reasons such as his Mormonism and positions he may have taken as Governor of Massachusetts.
Between the worsened financial status of average Americans as the country apparently heads into a cyclically worsened state of economic stagnation, my guess is that all other things being equal, there will be a President Romney in January 2013.
It goes without saying that there is many a slip twixt the cup and this lip (yet I said it nonetheless).
Copyright (C) Long Lake LLC 2011
We are seeing the deflationary market events occur that I recently suggested were most likely. One of several recent posts on this topic was titled Goldman Wrong on Rates, Zero Hedge Wrong on Oil As Deflationary Side of Biflation Begins Its Ascendancy. Next-month oil prices on the futures market have dropped to a multi-month low around $95/bbl. Gold, Treasurys and the US dollar are safe havens for the moment, and I suspect will be so for a while yet.
Short-term interest rates up to the 6-month range remain lower in the US than in Japan. If you, along with the great majority of investors, think that interest rates here have nowhere to go but up, you might be interested in perusing a multi-year chart of Japanese interest rates in the 5-30 year range. This is linked to from freely available data from the consultancy www.KShitij.com, which specializes in Forex.
To summarize, the Japanese have been locked since the 1990s into a near-zero interest rate policy. It is clear that investors did not want to believe that there could be such a persistence of this policy. Investors in the 10 year bond, and in the 30 year bond that was introduced during the time frame of the chart, apparently “knew” that rates had to rise. But they did not.
What is being called a “credit collapse” is a reasonable title for the dissipation of real capital in the booms, first of the late ’90s and then in the aughties, but it is a bit too gentle. The amazing leverage of companies’ capital bases led to insolvency when that limited real capital vanished. Until the stock market gets real with its valuation of operating companies, I remain unconvinced that a Japanese-type fate does not await, meaning a multi-decade stagnation/decline of prices of these pre-owned equities. There simply is a fundamental difference between stocks and bonds. Low rates on the latter is historically consistent in the US as well as Japan with low valuations on the former. To the extent that stocks are an inflation hedge, got gold? To the (more important) extent that stocks reflect the current value of the assets of the companies plus the (unknowable) present value of future profits, it just might be that today’s low interest rates are forecasting below-trend and below-expectations growth of said profits.
Today’s outside reversal (so far) of yesterday’s rally in stocks and oil is, as stated, finally beginning to get some bulls to throw in the towel. With no (public) interest in suggesting what tomorrow or the next day will bring, I think the most likely course is for more disappointing economic news in the months ahead, and that gold and only gold is the optimal hedge against a new round of money creation by the Fed.
COpyright (C) Long Lake LLC 2011
Monday, June 13, 2011
Here is the article's conclusion, which refers to an interview with Chairman of the Joint Chiefs of Staff Mike Mullen:
For now, the Pentagon will be working closely with the White House in the months to come to determine how best to bring an end to the surge that marked the moment Obama made the war in Afghanistan his own.
For now, America's top military adviser acknowledges that there are no clear answers to precisely how many US troops should remain on the ground.
"We don't know what the answer is," he says. "I can honestly say that no one knows what the answer is yet."
Yours truly has never been to Asia, but given the lack of success the surge has produced and the apparent fact that there are almost no al Qaeda left in Afghanistan, the answer appears obvious.
None. Support the troops. Bring them home.
Copyright (C) Long Lake LLC 2011
Sunday, June 12, 2011
Thursday, June 9, 2011
Now to today's effort. Barack Obama looks to me like a warlike Jimmy Carter, floundering at home and aborad.
Gone are the days when his critics called him 'Bambi'. Now he sends his Defense Secretary to posture, his strategy in Afghanistan having failed so far. Here is Robert Gates' latest:
KABUL, Afghanistan – In a last farewell to US and international forces in Afghanistan, Defense Secretary Robert Gates says they are on track to deliver a decisive blow against the Taliban.
Sorry, it was over a year ago that we heard that the victory in the non-city of Marjah was a prelude to a major, successful takeover of Kandahar city. What Gates and his boss should have done is what corporations learned to do years ago: underpromise and overdeliver. First rout them, then everyone will see the victory and you can be modest. Assuming the reporting is correct, Gates was engaging in puffery. Unattractive.
Not that I favor this effort at all. My sense is that 'Bambi' is in league with the neocons. I prefer the Reagan years. The only foreign military aggression I remember US troops performing was the minor thing in Grenada. Peace through strength. The last decade of all war, all the time with the latest, Libya, being an obvious war of choice.
Anyway . . . as with the ongoing military effort in Afghanistan, so with the economy. It's not yet falling off a cliff, and let's hope it does not, but as with Afghanistan, the administration has overpromised and underdelivered. And as the economic course was set in 2009 and 2010 with no Republican support, it was the Dems who were the lone wolf party and their president whose electoral fate is likely going to be decided next year based on the choices they unilaterally made one and two years ago.
It's time to let freedom (economic) ring. That's the solution. As we saw in 2009, the administration had no creative ideas for the economy, and so they ran up a multi-trillion dollar debt for little if any lasting benefit. At least FDR had the CCC and built some structures that are still in use today.
When the latest round of "Keynesianism" fails, which people will start to notice by this fall at the latest, there will be that many more adherents to the historical American position that that government is best that governs least.
BTW I put 'Keynesianism' in quotes because we are in a post gold-standard world with deficits so profound that it is impossible to know what John Maynard himself would be advocating were he around today. We have moved to an economic Extremistan that is sui generis in American history.
Copyright (C) Long Lake LLC 2011
Monday, June 6, 2011
Sunday, June 5, 2011
During the 1970s, the prices of everything, from houses to oil and labor, rose. Economic stagnation plus inflation gave rise to the new term, stagflation. This is not the same environment. The U. S. had been scared into a (temporary) era of fiscal prudence following the 1930s and then the debt "binge" of World War II. But none dare call this prudence (see chart, plus LINK):
What may await us in the financial markets in the months ahead? Here are some thoughts.
Thursday, June 2, 2011
Despite being almost 30% off their recent high, they are slightly more than double their price of one year ago, which in turn was nicely up from one year before that. When I last did a post praising the investment qualities of silver, on September 12, 2010, the fund "SLV" was trading around $19.50. SLV is now pushing $36.
More to the point, there are clear signs of froth in the silver community. In that post, I stated:
Silver has some highly committed partisans. Some of them argue passionately that there is a cartel that has been manipulating the price of silver down, and that there are massive "short" positions that would cause a tremendous rise in silver's price should these positions have to be covered.
I have no opinion on this controversy. It is, however, helpful to less committed silver bulls to have owners of silver who are not looking simply for another 5-20% appreciation (for example) before they sell. There may be many holders of silver who are looking for much, much higher prices. Thus the more modest aspirations I have for silver prices may allow me to sell with less competition from other sellers.
I did sell most of my silver "too soon", that's for certain, though I replaced it with other "hard money"-type assets that also appreciated. I continue to hold some physical and some paper silver, because I do think that it is a more-or-less permanent part of a sound money-oriented investment portfolio.
I grew up in a house with pounds of silver sitting around in the basement, as my father was an inventor in the silver field. To quote him, "Silver is a junk metal". Silver is mostly produced as a by-product of mining of other metals, such as gold or copper.
The silver space is replete with allegations of market manipulation, and if some of them are correct, its price could indeed skyrocket soon. However, I am skeptical, because a major paper silver trading vehicle, the Sprott Physical Silver Trust (PSLV), trades at a 17.1% premium to its net asset value. Why anyone would pay that much of a premium for a fund that holds silver, even with a redemption policy into physical for very large holders, is beyond me. I called up a local coin dealer yesterday and was informed that I could buy and sell physical silver at less than a 5% spread between bid and asked. There are no shortages for a retail investor, and the dealer was talking about a substantial $25,000+ cost for a bag of silver. I thus suspect that more likely, the small investor has ended up on the wrong side of a trade involving an asset whose price is too high for a challenging economic environment.
Every day that I look at the futures market and continue to see $100/barrel oil, as is the depressing case again today, the more I anticipate the stereotypical response of the U. S. economy to very high oil prices, which is an economic downturn. Given that silver is basically an industrial metal and is a monetary metal primarily in the minds of its partisans (though it may become one again), we just may find out that there has been a lot of double ordering of silver by its users in order to guarantee supplies. Should business demands unexpectedly blindside those users, watch for a glut and plummeting prices. Silver has no, I repeat no, price stability.
Silver may well be the hard money asset of the decade, as Eric Sprott has stated. It may however do that by first presenting a materially better buy-in price than we see today.
Copyright (C) Long Lake LLC 2011
Here we were past midday, down over 1.5% on the Dow and SPY, with clear global deceleration in economic activity, a highly valued stock market, and the major negative for the developed countries of continued $100/bbl oil, yet the VIX was only 17.5. For newbies, the VIX is a volatility index, and a low VIX reliably measures low fear of a stock market downturn via certain stock options trading computations. During the 2007-10 period, I observed that a VIX under 20 reflected too much optimism, and a VIX over 30 reflected too much pessimism. During good economic times, such as the 1995-99 period, the VIX can stay low for a very long time, but when the economy is not performing well, one does not see that pattern.
You may click on the nearby chart of the VIX for the past 5 years to enlarge it.
(Some people prefer a somewhat different measure of volatility, with the symbol VXO.)
It seems to me that the newsflow has turned rapidly enough to justify more anxiety than I was seeing, as would be signified at a minimum by a VIX of over 20 and preferably over 25.
The second sign I did not like was a series of comments on a well-known financial blog that appeals to those of the ursine point of view. Nonetheless, several of these comments were to the point that Gentle Ben was protecting their bullish stock positions. This comes from all the uninformed talk that the Fed now has a third mandate, after its Congressionally mandated goals of balancing low inflation with full employment, which third mandate (allegedly) is to keep the stock market up. Talk about LOL that these commenters had no idea what the Fed's true first mandate is. That mandate is to keep the Treasury funded. If Congress determines it is going to run trillion dollar annual deficits as far as the eye can see, and if the real economy cannot fund that amount at rates acceptable to Treasury, then it is up to the Fed and a more-or-less captive post-2008 banking system to accommodate enough money and credit creation to fund the deficit. So if the real economy is cyclically about to falter, and the Fed has to choose between high interest rates (as demanded by the free market given high monetary and price inflation) and letting the pols fund the deficit, IMHO it is nolo contendere. The Fed will have no choice. It and its cronies will drop their support of the stock market like a hot potato and herd the once-inflation phobic crowd into Treasuries. If necessary, they will do what it takes to scare people out of risk assets in order to support Treasuries. They will do whatever it takes. Treasuries uber alles. Catch my drift? I want to make one thing perfectly clear. Making sure the Federal deficit is funded is Job 1 at the Fed. All the other goals must be subordinated to the prime imperative.
Now, if Congress and the President engage in ineffective or wasteful deficit spending, the Fed can honestly deflect blame where it would belong, which is to the elected officials. All the Fed can do is certain banking functions, after all. It does not send people to war and does not set industrial or farm policy, the level of subsidies the poor and elderly receive, etc. Once the Fed has done its best to provide funds to the government if "requested", it has met its primary obligation in a Keynesian financial system.
What we see in the U. K., with already chronic 4% price inflation and pitiful o.5% policy rates, is what the bankers will do here if necessary. They will make savers pay any price they can extract to recapitalize the banks via negative real interest rates. They will use their power to create and maintain a seemingly illogical interest rate structure. This occurred in the U. S. throughout the 1940s and into the 1950s. Interest rates on the short end in the 1940s were around 1% despite average CPI increases of 7% annually for that decade. The long bond was capped well under 3%. Was this "fair"? Who can say, but that's the way it was. It wasn't till the early 1980s that savers caught a break.
Meanwhile, as I write this on Wednesday night, Asian markets are down a bit less than the U. S. stocks were, setting up for a rally attempt Thursday. A common pattern would be a rally Thursday, perhaps successful and perhaps "faded" at the close, and then traders would be all over the Friday jobs report.
On the other hand, short term contrarian sell signals aside, I have already begun seeing a number of hysterical headlines suggesting that the financial world is ending soon. LOL again. Remember that going into this week, stocks have been down 4 weeks in row. This week would make 5. Maybe BofA does eventually go down into Dodd-Frank-type receivership and the markets pull a 2008-style major meltdown, but that setup is not happening next week. The financial world is not ending quite that fast, the overly advertized Greek fiasco is not going to blow up the European financial system, and Barack Obama has many levers left to pull in his re-election effort (and these include economic psy-ops).
If we get a sharp break again in the markets sooner rather than later, and the VIX finally shoots up, and if all that happens to cause that is a weak jobs report and perhaps some scary news from some small insolvent European country with fewer people than live in the Los Angeles metropolitan area, my current plan is to cover all my shorts, perhaps book what would then be decent profits in Treasuries, and play stocks for a short-term rally. (Intermediate-term, however, I'm not bullish on stocks, but as always traders must be flexible.)
Right now we are seeing a textbook segue from a 2-year post-recession (depression) rally into at best a growth slowdown scare and at worst another cyclical economic downturn. Unlike the chaos that began in late August 2008, this time we appear at least to have some ground rules.
We are being cursed with interesting times.
Copyright (C) Long Lake LLC 2011