Wednesday, May 22, 2013

Dash from Cash to Trash a Mistake?

Gold shorts smell blood per BBG:

When this occurs with the long-term chart of an asset breaking down but still up more than 5 times from its low, this is not a contrarian signal.  The shorts have been burned on the Japanese yen more than once in the past years, but recently they have been long and strong in their short position, and absolutely correct.  What's really going on with gold, IMHO, is that real interest rates have turned positive again, and gold leverages that trend in either direction.

Numerous price-deflationary and recessionary trends are now besetting the US.  The imploding Japanese yen means that there is less global competition for raw materials, such as oil.  That's a deflationary trend.  The lower price of imported oil is good, but the more effective competition from Japan Inc. may offset that.  Commodities indices such as DBC and GCC (stocks) are in clear downtrends.  Traders are suspicious that numerous Chinese pig farmers are going to soon disgorge zillions of pounds of copper.

Close to home, lumber has rapidly entered a bear market.  This too is deflationary.  Bond prices have dropped, raising costs for businesses and individuals alike.

The greatest peacetime deficit spender in US history, President Obama, is a lame duck and is on the defensive with the House and the media.  This is going to hurt his ability to resist the Tea Party's push for a balanced budget.  As old-fashioned fiscal prudence reasserts itself, the Fed will have no ability to engage in QE, with which it has been quasi-monetizing the deficit. 

As all the above occurs, nominal GDP has risen about 3.4% yoy.  Meanwhile the Fed is injecting 6% of GDP into the economy.  Quick and dirty calculation suggests that the underlying economy, net of fiscal and monetary stimulus, is contracting at about a 2-3% annual rate.

The dash from cash into trash may soon prove misplaced.  Sooner rather than later, all hail the long bond and King Dollar?

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