Whatever will be in Europe, will be...
No matter. In the summer and early fall of 2011, when it became clear that the US economy and markets were stronger than those of Europe, I went to and announced on The Daily Capitalist a "Fortress America" investment theme. That applied to bonds, muni bonds being the low-hanging fruit as even AA and AAA-munis were then yielding more than Treasuries; then it applied to stocks when I invested/traded them-- AAPL being my #1 stock in 2012 and at times my only one- though it is international.
This theme continues. It also applies to China and Japan.
Jeremy Grantham's latest valuation favors "high quality" US stocks over bonds or general stocks. Only emerging markets rate a little better on his 7-year time frame, at the expense of greater expected error rates of what will occur versus what "should" occur.
Thus for an American, investing is easy. Tax-exempts for income and stable asset value, Treasuries to hedge stocks, and research to find "high quality" stocks.
The Cyprus thing changes little from this side of the pond. Will it be good for gold? Could be, but per my latest Seeking Alpha piece, I'm concerned that the disinflationary aspects of the fiscal normalization, welcome though that direction is, resemble the trends of the later '90s, which depressed gold's price.
So maybe there's no rush to commit more funds to gold if one already has a position in place.
The rest of the world looks to be a bit more trouble than an American needs from an investment standpoint.
Showing posts with label Treasuries. Show all posts
Showing posts with label Treasuries. Show all posts
Monday, March 18, 2013
Saturday, February 23, 2013
Risk Off?
I have a new article up on Seeking Alpha. The link is http://seekingalpha.com/article/1217911-tlt-moving-toward-a-possible-trading-buy-as-commodity-deflation-may-loom. Per the title, it presents growing evidence that Treasuries may be moving to being not just a portfolio diversifier to consider, but actually a decent speculative trading buy. Please note that I do not try to time these sorts of investments too precisely; and of course, nothing I ever write is actual investment advice.
The futures markets are seeing a hint of waning momentum in the risk on trade. The article presents charts from Finviz that suggest that this trade has gone to an extreme, and that the speculators have not made much progress. The spec long interest in crude oil, copper and platinum has hit an extreme, but the price has not responded. They may have been pushing on a string and may rush to exit. If so, it will be important to watch what support these prices have. (Of course, prices may surge; there's no way to be sure.)
Let's speculate on what might happen if the (highly leveraged) longs rush for the exit. If this occurs and is accompanied by data suggesting a "deflationary" economic downturn a la 2008, even if it is not "great", gold and silver will not rally and silver, at least, "should" drop more. Treasuries would reliably rally. If it is accompanied by "crisis", such as Signore Berlusconi becoming PM again, then Treasuries would likely rally for a while, but gold and possibly silver would rally also, I would guess.
Thus a guess is that the greatest contrarian trade now is to buy a long-term T-bond ETF. The conservative way is TLT or a shorter duration fund. An aggressive way is to buy one of the zero-coupon bond funds. I am aware of EDV and ZROZ. (I am long both EDV and TLT.)
Acting-Man presents at the end of his post a chart from Mark Hulbert showing a recent new record of bullishness toward the NASDAQ amongst newsletter writers:
It appears that after extreme readings, when sustained for a few months, begin to turn down, a price drop is coming soon and that the NAZ is thus, per Jim Cramer, a "Don't buy! Don't buy!". It takes bulls to make a bull market, though, so not buying does not imply a great opportunity to go short. Thus I would note that NASDAQ selloffs tend to be good buying opportunities for risk off assets such as Treasuries.
Hyperinflationists note: one suggestion that QE may cease led to a big selloff in commodities. There is so much leverage in the system, merely putting another trillion bucks in the system need not create much visible price inflation. One more recession could kill wages, which are by far the greatest input to costs. How long this situation can go on is another matter. Counter-intuitive though it is, the monetary inflation is going first and foremost into bonds. Not fighting the Fed may involve investing or speculating along with it and joining it in ownership of T-bonds.
With the world solidly off the gold standard, at least for now, Treasuries underpin the global economy.
They will, my guess is, endure with that status for the foreseeable future and perhaps beyond.
The most powerful government and its central bank desire very low borrowing costs. I don't see why they cannot continue to achieve this for a good while longer, no matter whether "real" interest rates are zero or worse.
The futures markets are seeing a hint of waning momentum in the risk on trade. The article presents charts from Finviz that suggest that this trade has gone to an extreme, and that the speculators have not made much progress. The spec long interest in crude oil, copper and platinum has hit an extreme, but the price has not responded. They may have been pushing on a string and may rush to exit. If so, it will be important to watch what support these prices have. (Of course, prices may surge; there's no way to be sure.)
Let's speculate on what might happen if the (highly leveraged) longs rush for the exit. If this occurs and is accompanied by data suggesting a "deflationary" economic downturn a la 2008, even if it is not "great", gold and silver will not rally and silver, at least, "should" drop more. Treasuries would reliably rally. If it is accompanied by "crisis", such as Signore Berlusconi becoming PM again, then Treasuries would likely rally for a while, but gold and possibly silver would rally also, I would guess.
Thus a guess is that the greatest contrarian trade now is to buy a long-term T-bond ETF. The conservative way is TLT or a shorter duration fund. An aggressive way is to buy one of the zero-coupon bond funds. I am aware of EDV and ZROZ. (I am long both EDV and TLT.)
Acting-Man presents at the end of his post a chart from Mark Hulbert showing a recent new record of bullishness toward the NASDAQ amongst newsletter writers:
It appears that after extreme readings, when sustained for a few months, begin to turn down, a price drop is coming soon and that the NAZ is thus, per Jim Cramer, a "Don't buy! Don't buy!". It takes bulls to make a bull market, though, so not buying does not imply a great opportunity to go short. Thus I would note that NASDAQ selloffs tend to be good buying opportunities for risk off assets such as Treasuries.
Hyperinflationists note: one suggestion that QE may cease led to a big selloff in commodities. There is so much leverage in the system, merely putting another trillion bucks in the system need not create much visible price inflation. One more recession could kill wages, which are by far the greatest input to costs. How long this situation can go on is another matter. Counter-intuitive though it is, the monetary inflation is going first and foremost into bonds. Not fighting the Fed may involve investing or speculating along with it and joining it in ownership of T-bonds.
With the world solidly off the gold standard, at least for now, Treasuries underpin the global economy.
They will, my guess is, endure with that status for the foreseeable future and perhaps beyond.
The most powerful government and its central bank desire very low borrowing costs. I don't see why they cannot continue to achieve this for a good while longer, no matter whether "real" interest rates are zero or worse.
Thursday, February 14, 2013
Some Contrarian Signs in the Treasury Market
First, a note. I put up a "long-term bullish" article on CVS on Seeking Alpha (LINK).
Next, while I continue to be more bemused than anything else, I am noting the bubbly valuations on the Russell 2000 (25X trailing P/E) and even higher on the Russell "growth stock" indices, and wondering if and when it is 1998-9. If so, Treasuries will come into fashion again. But overvaluation along does not kill a bull market. In those pre-QE days when money was acknowledged not to be free, the market top only occurred after the Fed tightened. Will it be the same now, or as with Japan, stock corrections and recessions will occur with ZIRP going on?
ZH updated a chart I saw some months ago that show a strange correlation between very low volatility in the T-bond and future market corrections or worse, associated with sharp drops in interest rates (LINKhttp://www.zerohedge.com/news/2013-02-13/how-bad-could-it-get-bonds).
Also, I was emailed the most recent copy of the McClellan Report, which has turned bullish on bonds. It presents data from the Rydex Funds showing the following: A) that money market fund balances are at multi-year lows; everyone is "in", and B) the market timer(s) in the long Treasury and short Treasury trading funds, who have been consistently wrong, is(are) heavily short them again.
Next, futures market positioning on the 30 year Treasury is at speculative short levels that have been associated with major peaks in yield the past two years, though the 10-year shows less negative sentiment, and negativity in both assets was even greater leading up to and during the Great Recession.
Last, I have observed that as a moderator of the Apple-oriented Braeburn Forum and as a contributor to SA, bullishness is rampant. There are some skeptics, but few people even try to adjust P/E's for the fact that the U.S. is engaging in monetary financing of state deficits. This would be sustainable only if there is still a crisis as in 2008-9, in which case P/E's should be low; or it will stop soon, and all this free money from Washington will no longer be free, in which case P/E's will tend to drop (though earnings of the "right" companies may continue to grow.
I continue to believe that if the Rogoff-Reinhart paradigm continues to follow historical precedent, more low-interest rate stagflation lies ahead for the United States. The investing public, including fund managers, is not thinking this way.
Thus, there is an increased chance of a discontinuous market event within the next year or two.
Next, while I continue to be more bemused than anything else, I am noting the bubbly valuations on the Russell 2000 (25X trailing P/E) and even higher on the Russell "growth stock" indices, and wondering if and when it is 1998-9. If so, Treasuries will come into fashion again. But overvaluation along does not kill a bull market. In those pre-QE days when money was acknowledged not to be free, the market top only occurred after the Fed tightened. Will it be the same now, or as with Japan, stock corrections and recessions will occur with ZIRP going on?
ZH updated a chart I saw some months ago that show a strange correlation between very low volatility in the T-bond and future market corrections or worse, associated with sharp drops in interest rates (LINKhttp://www.zerohedge.com/news/2013-02-13/how-bad-could-it-get-bonds).
There are few data points, and both were followed by dramatic events: the LTCM/Russian bankruptcy fiasco, and the 2006-7 period. Note for those looking at the right-side numbers, the numbers have a zero cut off. The top right number is 200, not 20, the next down is 180, not 18, etc.
Also, I was emailed the most recent copy of the McClellan Report, which has turned bullish on bonds. It presents data from the Rydex Funds showing the following: A) that money market fund balances are at multi-year lows; everyone is "in", and B) the market timer(s) in the long Treasury and short Treasury trading funds, who have been consistently wrong, is(are) heavily short them again.
Next, futures market positioning on the 30 year Treasury is at speculative short levels that have been associated with major peaks in yield the past two years, though the 10-year shows less negative sentiment, and negativity in both assets was even greater leading up to and during the Great Recession.
Last, I have observed that as a moderator of the Apple-oriented Braeburn Forum and as a contributor to SA, bullishness is rampant. There are some skeptics, but few people even try to adjust P/E's for the fact that the U.S. is engaging in monetary financing of state deficits. This would be sustainable only if there is still a crisis as in 2008-9, in which case P/E's should be low; or it will stop soon, and all this free money from Washington will no longer be free, in which case P/E's will tend to drop (though earnings of the "right" companies may continue to grow.
I continue to believe that if the Rogoff-Reinhart paradigm continues to follow historical precedent, more low-interest rate stagflation lies ahead for the United States. The investing public, including fund managers, is not thinking this way.
Thus, there is an increased chance of a discontinuous market event within the next year or two.
Thursday, February 7, 2013
Seeking Alpha Follow-Up; Jim Rogers Shorts Treasuries
A second article, on gold/GLD, has been published on SA:
I picked GLD for a general readership. My preference is either for physical or for a true physical fund, basically PHYS, the Sprott fund that allows Americans to get capital gains treatment; no other fund has this capability. Thus gains in GLD etc. get treated as commodity gains. In any case, the longer-term bull case on gold looks better to me than it has since mid-2011, though as restated below, times are unusually uncertain. Gold has no short-term momentum behind it, so this is not a "wild bull" piece, more of a statement of a bullish bias toward the asset versus the USD and other USD-based investment choices.
I am in the process of getting links or notifications in place between SA and this site. My daughter who lives down the street from us just had a C-section and a healthy baby, and I've been busy with other mission-critical things, so -- everything in its time. It's gratifying to start that relationship. I think that SA has potential and that it might be attracting a better class of writers; likely that's their goal.
I published a thematic article in which the message was "gold on hold, buy munis" piece at The Daily Capitalist in September, 2011 around the current gold price but at much higher muni bond yields. This was a good call. Gold has gone nowhere even though stocks have caught up and QE is now underway in a huge way.
I now reverse that muni call and think munis are at best a hold, or a sell-- the fear factor is finally gone from munis. Though some California zero-coupon low-investment grade tax-exempt munis-- a very special niche, to be sure, yield much more than Treasuries and may still see some nice price appreciation faster than the yield implies. And given how I feel about stocks "for the long run", I also took some spare cash and purchased a small odd lot of Illinois GO's maturing in 2016 at a pretty decent yield for the times we're in. The reasoning was the the President is not, not, not going to let his home state default. I think that Illinois GO's are money-good for a while. It's sad that investors are reduced to scrounging for 100 basis points of yield, but as Charlie Munger said, we have to suck it up.
And actually, per today's topic, Treasuries are beginning to finally be looking like the tail end of a bear move, though perhaps they have some more upside potential in yield even if lower yields await (though the structural bull market may or may not be over).
One reason I say this is the following headline in BBG (LINK):
I picked GLD for a general readership. My preference is either for physical or for a true physical fund, basically PHYS, the Sprott fund that allows Americans to get capital gains treatment; no other fund has this capability. Thus gains in GLD etc. get treated as commodity gains. In any case, the longer-term bull case on gold looks better to me than it has since mid-2011, though as restated below, times are unusually uncertain. Gold has no short-term momentum behind it, so this is not a "wild bull" piece, more of a statement of a bullish bias toward the asset versus the USD and other USD-based investment choices.
I am in the process of getting links or notifications in place between SA and this site. My daughter who lives down the street from us just had a C-section and a healthy baby, and I've been busy with other mission-critical things, so -- everything in its time. It's gratifying to start that relationship. I think that SA has potential and that it might be attracting a better class of writers; likely that's their goal.
I published a thematic article in which the message was "gold on hold, buy munis" piece at The Daily Capitalist in September, 2011 around the current gold price but at much higher muni bond yields. This was a good call. Gold has gone nowhere even though stocks have caught up and QE is now underway in a huge way.
I now reverse that muni call and think munis are at best a hold, or a sell-- the fear factor is finally gone from munis. Though some California zero-coupon low-investment grade tax-exempt munis-- a very special niche, to be sure, yield much more than Treasuries and may still see some nice price appreciation faster than the yield implies. And given how I feel about stocks "for the long run", I also took some spare cash and purchased a small odd lot of Illinois GO's maturing in 2016 at a pretty decent yield for the times we're in. The reasoning was the the President is not, not, not going to let his home state default. I think that Illinois GO's are money-good for a while. It's sad that investors are reduced to scrounging for 100 basis points of yield, but as Charlie Munger said, we have to suck it up.
And actually, per today's topic, Treasuries are beginning to finally be looking like the tail end of a bear move, though perhaps they have some more upside potential in yield even if lower yields await (though the structural bull market may or may not be over).
One reason I say this is the following headline in BBG (LINK):
Jim Rogers Joins Bill Gross Warning on Treasuries
Much as I have enjoyed reading Jim Rogers' travel books and have followed him into investing in Russian ETFs (a modest exposure, to be sure), he has been the single best contrarian indicator on the movement of Treasuries I have seen over the past three years. It seems to me that the time to short Tbonds is when stocks have been pummeled and the VIX is high. Even Jim Rogers has to pay the broker its call money to short a security, and he is out the coupon. So on an annualized basis, perhaps he's out 6% or more just to short the long bond. Who needs it? Why not just go long silver if he's so confident that price inflation is going to accelerate?
The other reason I'm sniffing at least a rally is that, finally, the speculators are shorting them on the futures board. Now we will just have to see how the politicians handle things in DC, and how the real economy appears to perform, and whether Europe actually finally suffers an extreme event or actually starts healing for real. These are unusually uncertain times, and thus I'm not trading much or initiating new positions. Is the long-term secular bear market in stocks actually ending, or resting? Could be, you never know. Or are we due for a third crash? Could be, you never know.
Bill Gross, OTOH, has not been much of an indicator either way. Sometimes he's right on interest rates, sometimes he's wrong-- at least in his public pronouncements. But sometimes he's talking his book, and sometimes perhaps he's trying to move markets a bit so he can trade against the market.
For want of a better valuation metric in today's very strange markets, I'm happy to use Value Line's time-tested and self-adjusting algorithm. Based on that, and based on a mediocre Q4 earnings season and higher interest rates than at year-end (a negative for stock prices in their equation), stocks are ahead of themselves at best. (Their average projection for the Dow for 2013 was 13,440; that would be lower now given higher yields. Thus a correction to 13,000 would make sense to their computer even in a non-recessionary situation.)
I am also researching RyanAir (RYAAY in the US), the Irish airline, which is the European version of LUV (Southwest Airlines). Here is a LINK to the max timeframe chart. To a nerd like me, this chart is a thing of beauty, not necessarily for a short-term trade, but on a longer-term basis. The agreement with SA is that the articles are unique, so I won't say more now. If any readers have personal experience with the airline or if you have thoughts on it as an investment, please comment. I have not solidified my thinking on it. It just announced a bang-up quarter and analysts raised out-year earnings estimates a lot, so it appears to be achieving strong operational results.
Over and out for now.
Monday, February 4, 2013
A Quick Comment on Bund Yields, and Treasurys
One year ago, the 10 year bund yielded 1.93%. After the recent furious back-up in rates, they are down 6 bps today to 1.62%. Rates peaked at 1.71% on Jan. 30 (Thursday). The precipitant appears to be more turmoil, but nothing major yet, in both Italy and Spain.
If rates can correct down so much so quickly with limited cause without coming close to year-ago rates, then I think the amazing bond bull market remains in force and will not be easy to overturn-- though of course it's quite possible. I also think that ultimately, the U.S. rate structure can equal that of Germany on the downside, even if rates are negative when judged against current inflation. After all, you can lose nominal capital in stocks, as well as losing ground to inflation. This fact appears of little interest to today's stock traders, however.
The least-advertised fact the media has fed to John Q. Public is how many capital gains bond traders have made the last several years, and in fact in much of the past three+ decades.
If rates can correct down so much so quickly with limited cause without coming close to year-ago rates, then I think the amazing bond bull market remains in force and will not be easy to overturn-- though of course it's quite possible. I also think that ultimately, the U.S. rate structure can equal that of Germany on the downside, even if rates are negative when judged against current inflation. After all, you can lose nominal capital in stocks, as well as losing ground to inflation. This fact appears of little interest to today's stock traders, however.
The least-advertised fact the media has fed to John Q. Public is how many capital gains bond traders have made the last several years, and in fact in much of the past three+ decades.
Tuesday, June 19, 2012
Deere Apple: GARP's Time Is (Approximately) Here and Now
Just wanted to put in a quick stock comment. Since I think that "safe" govvies are "played", I have gone to stocks with fortress balance sheets and unique large niches in core areas of the global economy. Thus I bought back into Deere (DE), which I have traded at higher prices this year, perhaps making a buck or two but jumping out as I sensed the downtrend in the shares. DE is heading for its 175th birthday. It has seen a lot worse than the mess going on in Europe! The P/E is about 9X projected 201s earnings, and its CEO was on CNBC a day or two ago reaffirming guidance and saying that construction is doing well in the US of A. Value Line's "fair value" or "value line" for DE puts fair value at about $110, not the $75 it's now at.
Also, I scaled further back into AAPL, having largely gotten out around $620+ after the DOJ lawsuit broke and trading had gotten just too crazy in the stock. Meanwhile, Microsoft came out with some event this evening that announced something more than vaporware but less than an actual product-- and was thus in stark contrast to Apple's recent WWDC where actual products ready to be shipped were announced.
Here is a pretty funny take on the event:
http://news.cnet.com/8301-17938_105-57455730-1/who-is-the-microsoft-surface-for-exactly/?part=rss&subj=crave&tag=title&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+cnet%2FpRza+%28Crave%29
I also received an impressive e-mail from a techie who may be switching from PC's to the new Empire after being blown away by seeing the Retina display on Apple's new MacBook Pro 15 inch portable computer that was unveiled at the WWDC. He is looking at much higher AAPL prices, soon. Unlike yours truly, he actually knows the hardware-software industry as a veteran insider. I'll publish his comments in full if he allows me to.
With interest rates so low, patient money that does not have to mark to market and thus can ride out what might be a very stormy time in the weeks and months ahead will, I think, outperform most bonds with a truly select group of dominant equities that generate strong free cash flow.
Thus I have added select GARP companies to bond-like utility stocks as I have moved away from the highly-appreciated bonds that now have more risk than reward as I see it.
Also, I scaled further back into AAPL, having largely gotten out around $620+ after the DOJ lawsuit broke and trading had gotten just too crazy in the stock. Meanwhile, Microsoft came out with some event this evening that announced something more than vaporware but less than an actual product-- and was thus in stark contrast to Apple's recent WWDC where actual products ready to be shipped were announced.
Here is a pretty funny take on the event:
http://news.cnet.com/8301-17938_105-57455730-1/who-is-the-microsoft-surface-for-exactly/?part=rss&subj=crave&tag=title&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+cnet%2FpRza+%28Crave%29
I also received an impressive e-mail from a techie who may be switching from PC's to the new Empire after being blown away by seeing the Retina display on Apple's new MacBook Pro 15 inch portable computer that was unveiled at the WWDC. He is looking at much higher AAPL prices, soon. Unlike yours truly, he actually knows the hardware-software industry as a veteran insider. I'll publish his comments in full if he allows me to.
With interest rates so low, patient money that does not have to mark to market and thus can ride out what might be a very stormy time in the weeks and months ahead will, I think, outperform most bonds with a truly select group of dominant equities that generate strong free cash flow.
Thus I have added select GARP companies to bond-like utility stocks as I have moved away from the highly-appreciated bonds that now have more risk than reward as I see it.
Monday, June 18, 2012
Newton's Fruit Falling Upward Once Again
CRUS, Cirrus Logic, which makes audio chips which trades essentially as an AAPL derivative, has broken out today strongly following a positive report from the Semiconductor Industry Ass'n that business has turned. I take this as a sign that AAPL is "probably" headed to new highs as well. I had gotten lucky and sold most of AAPL around $620+ after A) Cramer called it the stock of the century (I exaggerate only slightly) and then the DOJ e-books lawsuit was filed.
I have been scaling back into the fruit big-time. First intermediate-term target: $690-700 by year-end. Rationale: After FY Q3 earnings are released in about 5 weeks, TTM 12 month earnings could be $45. 15-16X those earnings gets one to about that range. I would also note that Value Line's "value line" places AAPL's "fair value" around $900 as of today.
Am selling my last 14-year Treasury Strip at a 9% return, good in that this one was not bought till late in the rally. My rule of thumb with trading zeroes is that I sell if I net 3 year's worth of interest payments on the trade. Especially so when it's a zero that pays you nothing to own it.
I have been scaling back into the fruit big-time. First intermediate-term target: $690-700 by year-end. Rationale: After FY Q3 earnings are released in about 5 weeks, TTM 12 month earnings could be $45. 15-16X those earnings gets one to about that range. I would also note that Value Line's "value line" places AAPL's "fair value" around $900 as of today.
Am selling my last 14-year Treasury Strip at a 9% return, good in that this one was not bought till late in the rally. My rule of thumb with trading zeroes is that I sell if I net 3 year's worth of interest payments on the trade. Especially so when it's a zero that pays you nothing to own it.
Sunday, June 17, 2012
Gold May Be Looking Tired
The latest gold rally is already showing signs of having brought in too many bulls too soon in the (unending) European crisis. I was lunching Friday with a hedge fund manager who noted that a very recent survey continued to show that the favored investment of Americans, per the poll, was gold. I had pointed to what I believe was an earlier version of the same poll in the summer of 2011 as part of the reason why I had begun selling my gold when it hit $1900/ounce, and sold more as the price dropped off. Too much belief. Where were these when I was buying gold in the $300s (unfortunately I did not buy "enough"!) in 2002 as part of what I thought was an obvious weak-dollar set of policies by both the Bush administration and the Fed?
Now we see a negative CPI print and rising claims for unemployment. Plus the obvious diminution of buying power in a spreading number of regions in Europe. Sorry gold traders, against this deflationary backdrop, rumors of the obvious-- that central banks will "print" as needed-- the following survey from Bloomberg.com makes me negative on gold short-term:
Gold traders are bullish for a fourth consecutive week after hedge funds added to bets that prices will rally, exchange-traded products backed by the metal expanded and Europe’s debt crisis roiled markets.
Twenty-four analysts surveyed by Bloomberg said they expect gold to gain next week and six were bearish. A further three were neutral.
In addition, Harvey Organ's latest summary of the COT in silver looks overtly bearish to him, and his reading of the COT in gold is mildly bearish. I have found his analysis to be pretty good-- he "called" the latest gold rally well, for example.
At this stage in the game, my POV is to take bad news as bad news. Gold almost always directionally trades with silver and platinum, and both of them have even worse charts on the 50-200 day sma basis than does gold.
Meanwhile, Bloomberg also reports that Israel's stock market is up 2% today, supposedly on hopes that the European authorities will stimulate something or other.
We know "they" will do their job-- that's what "they" do. But sorry-- they are not rampant inflationists. If they were, the STOXX 50 etc. would not be in a pronounced downtrend. Copper wouldn't be under $3.50/lb. Whole countries would not be going bankrupt due to difficulty rolling over old debt and selling modest amounts of new debt, because "they" would be "printing" the new money needed to keep the game going. What's going on is more subtle than that. It's the biflation I wrote about a lot last year. I actually think that the inflation is returning to U.S. housing prices, which are historically cheap relative to gold IMHO. And while you can't eat houses, you can either live in them or rent them out for, one hopes, a positive cash flow.
Our job as investors and traders is to recognize the planted stories in the media. Thus, it was revealed that part of the latest peak in Treasury prices was spurred (finally) by buying by the public. (I don't know what duration bonds and in what vehicles these were purchased, so I don't know how much staying power these investors have if yields back up more for a while as I expect.) So congrats-- the public is finally buying Treasurys near the end of an over-30 year bull market. Meanwhile I was pounding the table last spring and early summer for Treasuries in several posts on The Daily Capitalist, beginning when 30-year T-bonds were yielding over 4%. That was just one year ago or so.
During the latest peak in Treasury prices, electric utilities that have 'A' or better financial ratings and have at least a modest amount of inflation protection were left temporarily ignored by the media and the public, and their yield spread versus Treasuries went to historically wide levels. So it appeared obvious to take profits in Treasuries and arbitrage, as it were, into the utes. I'm not perceiving any excess in the utes yet given they trade as if their yields were bond-like, and in fact when I talk to financial people, they doubt the move. They all express worries about the scheduled expiration of the Bush tax cuts. That strikes me as an uber-strange response. Aren't Treasury interest payments taxable, also? (Plus I own the utes in IRAs and own tax-free vehicles in taxable accounts.)
I mention the above as a long digression in a gold-oriented post because I continue to believe that the aging investor base in the Western world and Japan has a built-in, difficult-to-shake bias for income with perceived safety. That 'safety' will, methinks, inevitably turn out to be illusory, but the Japanese example shows that seemingly illogical phenomena often have good reasons to have occurred and to persist. When they buy GLD, the only thing that is certain is the ongoing trust expenses, plus commissions of course.
Per Bloomberg, gold traders are heavily bullish in contravention of the intermediate-term charts and at a time when everybody and his sibling knows that the world is going to pieces. Brilliant! They ignore that the same sorts of growthy trends that were occurring in 2009, 2010 or most of 2011 are not the dominant trend now. The dominant trend on a macro global basis is the ill winds swirling around and blowing out of Europe. What is going on in Europe continues to remind me of what was going on in the U.S. in 2008- cascading serious financial problems in core parts of the economy-- large financial companies in the U.S., systemically important banks and increasingly major governments in Europe. At least in the U.S., there was one national government and one powerful Fed to do what they did. Europe lacks that advantage.
Gold and silver, as assets that actually cost money to store and that are not valid to pay debts, became items that were liquidated post-Lehman, and their prices plunged to yearly lows post-crash. There simply was no rush to buy into an orderly short-term gold uptrend pre-Lehman such as has been occurring the last few weeks in gold.
Thus for people who already have core exposure to these metals, I'm not thinking that this is an opportune time to add to the holdings. (If one owns none of them, that's a different story.)
I'm also not thinking that all the attention being paid to yet another "critically important" Greek event is worth all the digital ink that's been spilled on it. I'm waiting for further events in Spain, and critically Italy, to see how these historic and sad dramas will play out in asset prices.
The numerous economic and other strengths of the United States continue to become more obvious to more and more people, and IMHO support the "America First" sort of investment strategy that I propounded last fall. When it comes to gold, I'm just speculating that we may well see a period of disenchantment with it in some poll later this year or next year out of America, and that it or silver may then be properly set up for yet another major bull move.
Now we see a negative CPI print and rising claims for unemployment. Plus the obvious diminution of buying power in a spreading number of regions in Europe. Sorry gold traders, against this deflationary backdrop, rumors of the obvious-- that central banks will "print" as needed-- the following survey from Bloomberg.com makes me negative on gold short-term:
Gold traders are bullish for a fourth consecutive week after hedge funds added to bets that prices will rally, exchange-traded products backed by the metal expanded and Europe’s debt crisis roiled markets.
Twenty-four analysts surveyed by Bloomberg said they expect gold to gain next week and six were bearish. A further three were neutral.
In addition, Harvey Organ's latest summary of the COT in silver looks overtly bearish to him, and his reading of the COT in gold is mildly bearish. I have found his analysis to be pretty good-- he "called" the latest gold rally well, for example.
At this stage in the game, my POV is to take bad news as bad news. Gold almost always directionally trades with silver and platinum, and both of them have even worse charts on the 50-200 day sma basis than does gold.
Meanwhile, Bloomberg also reports that Israel's stock market is up 2% today, supposedly on hopes that the European authorities will stimulate something or other.
We know "they" will do their job-- that's what "they" do. But sorry-- they are not rampant inflationists. If they were, the STOXX 50 etc. would not be in a pronounced downtrend. Copper wouldn't be under $3.50/lb. Whole countries would not be going bankrupt due to difficulty rolling over old debt and selling modest amounts of new debt, because "they" would be "printing" the new money needed to keep the game going. What's going on is more subtle than that. It's the biflation I wrote about a lot last year. I actually think that the inflation is returning to U.S. housing prices, which are historically cheap relative to gold IMHO. And while you can't eat houses, you can either live in them or rent them out for, one hopes, a positive cash flow.
Our job as investors and traders is to recognize the planted stories in the media. Thus, it was revealed that part of the latest peak in Treasury prices was spurred (finally) by buying by the public. (I don't know what duration bonds and in what vehicles these were purchased, so I don't know how much staying power these investors have if yields back up more for a while as I expect.) So congrats-- the public is finally buying Treasurys near the end of an over-30 year bull market. Meanwhile I was pounding the table last spring and early summer for Treasuries in several posts on The Daily Capitalist, beginning when 30-year T-bonds were yielding over 4%. That was just one year ago or so.
During the latest peak in Treasury prices, electric utilities that have 'A' or better financial ratings and have at least a modest amount of inflation protection were left temporarily ignored by the media and the public, and their yield spread versus Treasuries went to historically wide levels. So it appeared obvious to take profits in Treasuries and arbitrage, as it were, into the utes. I'm not perceiving any excess in the utes yet given they trade as if their yields were bond-like, and in fact when I talk to financial people, they doubt the move. They all express worries about the scheduled expiration of the Bush tax cuts. That strikes me as an uber-strange response. Aren't Treasury interest payments taxable, also? (Plus I own the utes in IRAs and own tax-free vehicles in taxable accounts.)
I mention the above as a long digression in a gold-oriented post because I continue to believe that the aging investor base in the Western world and Japan has a built-in, difficult-to-shake bias for income with perceived safety. That 'safety' will, methinks, inevitably turn out to be illusory, but the Japanese example shows that seemingly illogical phenomena often have good reasons to have occurred and to persist. When they buy GLD, the only thing that is certain is the ongoing trust expenses, plus commissions of course.
Per Bloomberg, gold traders are heavily bullish in contravention of the intermediate-term charts and at a time when everybody and his sibling knows that the world is going to pieces. Brilliant! They ignore that the same sorts of growthy trends that were occurring in 2009, 2010 or most of 2011 are not the dominant trend now. The dominant trend on a macro global basis is the ill winds swirling around and blowing out of Europe. What is going on in Europe continues to remind me of what was going on in the U.S. in 2008- cascading serious financial problems in core parts of the economy-- large financial companies in the U.S., systemically important banks and increasingly major governments in Europe. At least in the U.S., there was one national government and one powerful Fed to do what they did. Europe lacks that advantage.
Gold and silver, as assets that actually cost money to store and that are not valid to pay debts, became items that were liquidated post-Lehman, and their prices plunged to yearly lows post-crash. There simply was no rush to buy into an orderly short-term gold uptrend pre-Lehman such as has been occurring the last few weeks in gold.
Thus for people who already have core exposure to these metals, I'm not thinking that this is an opportune time to add to the holdings. (If one owns none of them, that's a different story.)
I'm also not thinking that all the attention being paid to yet another "critically important" Greek event is worth all the digital ink that's been spilled on it. I'm waiting for further events in Spain, and critically Italy, to see how these historic and sad dramas will play out in asset prices.
The numerous economic and other strengths of the United States continue to become more obvious to more and more people, and IMHO support the "America First" sort of investment strategy that I propounded last fall. When it comes to gold, I'm just speculating that we may well see a period of disenchantment with it in some poll later this year or next year out of America, and that it or silver may then be properly set up for yet another major bull move.
Monday, June 4, 2012
Bloomberg Now Reassures Us There Will Be No Recession in the U.S. This Year
The usual counter-trend rally stuff is crossing the wires. It's "probably" a smart trend to play for a little while, though I don't fully trust it (but may play it with small change that can just sit for years if need be). From Bloomberg.com (BBG), this headline is redolent of so many fake-out excuses from prior established ongoing downtrends that suck the sheeple in: Asia Stocks Climb Amid Global Policy Stimulus Speculation, which begins:
Asian stocks rose amid speculation global policy makers will take steps to stimulate economic growth and after a four-day drop left the regional gauge at the cheapest level this year.
And then after reminding you that others are buying the dip, there's this, a bit down the page: Growth Slowdown Seen in U.S. as Recession Dodged,which features this "persuasive" lede:
The U.S. economy looks set to deliver a repeat performance in 2012: for the third straight year, it may suffer a swoon yet not slip into a recession.
“I don’t think the slowdown will be any more consequential than the past two years,” said John Ryding, a former Federal Reserve researcher who is chief economist at RDQ Economics LLC in New York. “There are positives out there in the economy. We’ll avoid a recession.”
The not so hidden persuaders at BBG that favor the theme that all is well and shall always be well will likely modify Ryding's happy foreknowledge of the future if need be by reminding us, should economic data turns more definitively south than it already has that A) the bad news has already been discounted by the markets, so BTD; and B) the Fed will do whatever it takes to save the day, so BTD.
You can see that the recession case has advanced, given that BBG has seen the need to refute the possible occurrence of one.
What I don't trust about the apparent reflex rally in the commodities is that it's unaccompanied by any significant selling in the T-bond futures, which are ripe for profit-taking. (If rates stay where they are in the AM, I'm planning on taking profits on the last of my T-bonds, and am also sorely tempted to buy TBT for the first time ever.) At this point my short-term guess is commodities up for a while, T-bonds up in yield, but continued negative economic data points that raise serious questions about Dr. Ryding's certitude that "We'll avoid a recession".
The "Perils of Pauline" markets continue on, mostly benefiting the brokers.
Asian stocks rose amid speculation global policy makers will take steps to stimulate economic growth and after a four-day drop left the regional gauge at the cheapest level this year.
And then after reminding you that others are buying the dip, there's this, a bit down the page: Growth Slowdown Seen in U.S. as Recession Dodged,which features this "persuasive" lede:
The U.S. economy looks set to deliver a repeat performance in 2012: for the third straight year, it may suffer a swoon yet not slip into a recession.
“I don’t think the slowdown will be any more consequential than the past two years,” said John Ryding, a former Federal Reserve researcher who is chief economist at RDQ Economics LLC in New York. “There are positives out there in the economy. We’ll avoid a recession.”
The not so hidden persuaders at BBG that favor the theme that all is well and shall always be well will likely modify Ryding's happy foreknowledge of the future if need be by reminding us, should economic data turns more definitively south than it already has that A) the bad news has already been discounted by the markets, so BTD; and B) the Fed will do whatever it takes to save the day, so BTD.
You can see that the recession case has advanced, given that BBG has seen the need to refute the possible occurrence of one.
What I don't trust about the apparent reflex rally in the commodities is that it's unaccompanied by any significant selling in the T-bond futures, which are ripe for profit-taking. (If rates stay where they are in the AM, I'm planning on taking profits on the last of my T-bonds, and am also sorely tempted to buy TBT for the first time ever.) At this point my short-term guess is commodities up for a while, T-bonds up in yield, but continued negative economic data points that raise serious questions about Dr. Ryding's certitude that "We'll avoid a recession".
The "Perils of Pauline" markets continue on, mostly benefiting the brokers.
Wednesday, May 30, 2012
Apple Turnover: Wednesday Trading Notes
I first blogged positively about Apple in the spring of 2010 (also was positive about gold in that same post and in follow-up posts). I have ridden AAPL up from about $200 early in 2010 to over $630, though I confess I missed some of the ride largely due to A) market fears (which were correct) and B) SJ fears (which were medically correct but so far irrelevant to the stock price).
In any case, let me segue to Treasuries. I began "pounding the table" for them about a year ago. At that time I went to an approximate 30% weighting in my accounts for 10-30 year maturities, heavily weighted to both the ultra-long maturities and to zero coupon bonds. After yields collapsed, I lowered that to about 10% and held it there as "insurance". With the latest collapse in yields, I have now lowered that to about 2% just this week. These funds have been recycled into stocks. These are not ordinary stocks.
The main stock is AAPL as a long-term holding, though of course I may trade it at any time. I am bearish on the stock market over the weeks and months ahead, but I "think different" about what's safe and what's not. As I've alluded to indirectly more than once, I think that the mega-cap "blue chips" with trailing twelve month P/E's of 15-20 but no organic growth and generally little, none or negative tangible book value are much riskier than Mr. Market thinks. They are less volatile on a day-to-day basis, but riskier. I'll leave it at that for now as trading awaits.
The secondary stocks are Con Ed (ED), which I can foresee rising in price to yield 3% as time grinds on; and further additions to my already significant holdings in leveraged closed end muni bond funds.
Finally, I want to add that I think that numerous measures of fair value for the Dow that are used widely on the Street are itching to buy the Dow here.
In any case, let me segue to Treasuries. I began "pounding the table" for them about a year ago. At that time I went to an approximate 30% weighting in my accounts for 10-30 year maturities, heavily weighted to both the ultra-long maturities and to zero coupon bonds. After yields collapsed, I lowered that to about 10% and held it there as "insurance". With the latest collapse in yields, I have now lowered that to about 2% just this week. These funds have been recycled into stocks. These are not ordinary stocks.
The main stock is AAPL as a long-term holding, though of course I may trade it at any time. I am bearish on the stock market over the weeks and months ahead, but I "think different" about what's safe and what's not. As I've alluded to indirectly more than once, I think that the mega-cap "blue chips" with trailing twelve month P/E's of 15-20 but no organic growth and generally little, none or negative tangible book value are much riskier than Mr. Market thinks. They are less volatile on a day-to-day basis, but riskier. I'll leave it at that for now as trading awaits.
The secondary stocks are Con Ed (ED), which I can foresee rising in price to yield 3% as time grinds on; and further additions to my already significant holdings in leveraged closed end muni bond funds.
Finally, I want to add that I think that numerous measures of fair value for the Dow that are used widely on the Street are itching to buy the Dow here.
Wednesday, May 16, 2012
More Evidence that the Bottom Is Probably Not In
In addition to what you know of today's action, which was driven by Europe, the Markit CMBX index, which is 100% U.S.-based, is crashing. LINK
For whatever reason, I have followed AA.4 the most closely. It has now dropped below the November 2011 low. One reason I follow this index is that it has been given to long intermediate trends. Thus to date it has had predictive value. This then brings me to thinking that continues to be bearish. Leaving aside the trading strategies of JPM and its London Whale, and other int'l financial groups, the U.S.-based banks ranging from certain microcaps and much larger co's I follow such as NTRS and UMBF are at or near multi-month/multi-year highs. Yet their credit quality should correlate with CRE credit quality, of which the CMBX indices are one way to view that metric. (Not the only one...)
If the ongoing drop in Treasury yields were due to Fed action with the strengthening economy that so many foresee here, then I'd expect to see European money flee Europe and bid our shortest-term rates down. Instead they are holding steady, thus the spread between the 10-year and the short rates has been narrowing--another recessionary sign, and entirely consistent with the message I take from the CMBX indices.
That is that there is growing empirical evidence to support the "recession 2012" view.
Even a mild recession could be associated with a disproportionate drop in stocks relative to drop in economic activity.
For whatever reason, I have followed AA.4 the most closely. It has now dropped below the November 2011 low. One reason I follow this index is that it has been given to long intermediate trends. Thus to date it has had predictive value. This then brings me to thinking that continues to be bearish. Leaving aside the trading strategies of JPM and its London Whale, and other int'l financial groups, the U.S.-based banks ranging from certain microcaps and much larger co's I follow such as NTRS and UMBF are at or near multi-month/multi-year highs. Yet their credit quality should correlate with CRE credit quality, of which the CMBX indices are one way to view that metric. (Not the only one...)
If the ongoing drop in Treasury yields were due to Fed action with the strengthening economy that so many foresee here, then I'd expect to see European money flee Europe and bid our shortest-term rates down. Instead they are holding steady, thus the spread between the 10-year and the short rates has been narrowing--another recessionary sign, and entirely consistent with the message I take from the CMBX indices.
That is that there is growing empirical evidence to support the "recession 2012" view.
Even a mild recession could be associated with a disproportionate drop in stocks relative to drop in economic activity.
Monday, June 20, 2011
Dealing with Financial Repression
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.
Sunday, October 24, 2010
Stimulative Fed Policy and Historical Financial Asset Analysis Good for Gold Versus Both Bonds and Stocks
Right now, the economy looks like more of the same-old, same-old mode: stagflation for the foreseeable future.
This past week, the Conference Board reported a modest uptick in its monthly Leading Economic Indicators and said:
Says Ataman Ozyildirim, economist at The Conference Board: “The LEI remains on a general upward trend, but it is growing at its slowest pace since the middle of 2009. There isn’t any indication of a relapse into another downturn through the end of the year.”
Says Ken Goldstein, economist at The Conference Board: “More than a year after the recession officially ended, the economy is slow and has no forward momentum. The LEI suggests little change in economic conditions through the holidays or the early months of 2011.”
The Economic Cycle Research Institute (ECRI) reports weekly to the public on its intermediate-term leading indicators via its Weekly Leading Index. This number remains becalmed around 122. It first reached this level 12 1/2 years ago.
It turns out, however, that most of the time slow growth and easy monetary policy is a good combination in the short term for the pricing of financial assets.
Where are the values, such as they are?
It has been noted that for every percentage point for which the 3-month Treasury bill is less than two points above the consumer price index, the price of gold has risen 8% annualized. In other words, neutral has been 2 points above the CPI. Thus in the 1990s, the price of gold trended down, and a review of the data (click HERE for CPI and HERE for T-bill rates through 2000) are consistent with that. The post-9/11 monetary world has been stimulative of the gold price.
1990 is a useful year to judge return rates on various assets. It was about a decade after the inflation fever peaked as judged by the action of gold and silver prices and was, not coincidentally, the year that short-term interest rates peaked.
It was also a decade before the stock market bubble peaked and the gold price bottomed. And of course following the extremes in interest rates on the upside in 1980, we now have what would at that time been an absolutely unthinkable extreme in interest rates at the low end of about zero percent on the short end.
So, as the sports announcer Warner Wolf might have said, let's go to the tape. In 1990, a 30-year Treasury bond yielded about 8%. Gold averaged about $400/ounce. Let us say that for all of 2010, gold averages about $1250/ounce. The average annual compounded return on gold from 1990 to 2010 then can be computed as 5.9%. Thus a financial asset of infinite duration, gold, has underperformed a similar high quality, long-term asset, the plain old boring long Treasury bond, by about 2 points per year.
Let us now apply the above-mentioned 8% rule. CPI is running about 1% per year. Of course, official CPI may well understate the average rate of consumer price increases. The statistical relationship between gold and the CPI is what it is, with the imperfections in the CPI understood.
If monetary conditions as measured by the 3-month T-bill continue to be one percent below the CPI (i.e., three points below neutral) for 4 more years, then this relationship predicts that gold will rise an average of 24% yearly. I'm going to calculate matters assuming 20% appreciation yearly rather than 24$.
How can we judge whether that would put gold into the severely overpriced category.
How overpriced would gold be if goes from a suggested 2010 average price of $1250 to a 2014 average price of $2500?
To get an answer, let's go back to 1990's average price of about $400/ounce of gold.
If it rose from $400 to $2500 over that span of 24 years, the compounded yearly appreciation would compute to 7.93%.
So over that time frame, the return from gold and a long Treasury bond since 1990 would be . . . identical.
So-- there would be no bubble in gold even if its price doubled. (Louise Yamada agrees.)
Isaac Newton comes into play here. He pointed out that a body in motion tends to stay in motion until it is opposed by a force that blocks said motion. He also was involved in 1717 in Britain going on a gold standard (please excuse gold ads at the top of the link; the writeup is quite interesting and based on other reading I have done, I trust it is accurate).
So, we have a Fed that is focusing on its second mandate, that of full employment, with some Fed leaders stating that if anything, prices are not rising fast enough to allow the Fed to do its job; the President wants 2012 to be another Morning in America so he can be re-elected; and Congress always wants jobs. So all of Washington that matters wants prices to rise if that is "necessary" to help the employment situation; and so do the states, as they want more revenue.
Thus I see no special reason for the above-mentioned general relationship of a Fed that keeps rates at or below the CPI rate not to continue at least until there is a more serious question of fundamental overvaluation of gold. That gold has functioned as such a leveraged play on negative real interest rates without the owner of gold having any leverage is quite interesting.
Of course, past performance need not predict future performance, etc.
Gold bears and gold skeptics often make much of the alleged explosion in ads about it and allege a bubble. Yet anyone who sees Gordon Liddy pitch gold on TV gets the wrong impression. Gold is the metal of kings, not crooks. There is a reason why every currency the past several years has declined against gold. Something that is "golden" is good.
The more that politicians and their minions in central banks create "money" that does not tie to something physical, the more that owners of paper wealth will want to transform that to something tangible. "Uncle" Warren Buffett may prefer farmland or Exxon Mobil (which does not meet its crude oil needs via its own reserves) to gold; or he may have been dissing gold to get a chance to buy it cheaper when he addressed the topic recently. It doesn't matter. As we have seen the past few years, the pols in the Western world and very possibly in China have gotten in bed with the speculative financial interests (a charitable phrasing), which have created a worse disaster with depositors' money on a larger scale--by far-- than ever happened in the 1930s. Without knowing an MBS from a CDO, the public gets it.
The brokers want what sells easily. They want a "story". They also want something to sell that generates enough profit to make it worth their while. Who knows, but it's just possible that the new gold bull market really began just one year ago, with the validation of the breakout above $1000/ounce that briefly happened in 2008, and that stock brokers will be given more and more precious metals products they can sell. In other words, you ain't seen real selling of a financial asset until the Street and its allies in the mainstream media jump aboard.
And though I'm no Steve Jobs-- one more thing. If you want to know what a real extended bull market/bubble is, consider the NASDAQ. In October 1974, at the end of an extended bear market for risky stocks (and only a few years after NASDAQ was created as an exchange with Bernie Madoff as a co-founder), it was around 55. By the end of 1998, it was 2344. Over that 24 years, the compound annual return of the index was 17%, which far exceeded any Treasury rate available in 1974. But that was of course just prelude. The index more than doubled in the next year and two months, reaching about 5100, giving a return of almost 20% annually for that quarter century since the bear market bottom.
Even now, from its bear market bottom 36 years ago, the compound annual return of the NASDAQ is 11% annually.
Now that's a bull market!
And just one more thing. Gold ended 1974 at around $180/ounce. That gives it a mere 5.70
% compound annual return since then. There was no 30-year bond issued then, but since the 10-year yield at the same time was 7.40%, we can assume that gold has substantially underperformed both long Treasuries and stocks.
That does not mean that it should "make back" that underperformance, but it rebuts the charge that gold is in a bubble, that it has gone up "too much", etc. The point is that gold is forever and is best viewed the way I have presented it here, not whether it has gone up a lot over the past year or has had one up year after another after two decades of woeful performance.
After all, when the NASDAQ fell by a full 50% from its bubble peak in 2000, it was still wildly overvalued. Sometimes time shows that assets get substantially above or below either fair value or at least a sustainable market value, and based on those criteria, gold's price might rise quite a bit in dollar terms and still be reasonably valued by multiple criteria. Not that it will do so, but I'm spilling a lot of digital ink because I think it may do so over the next several years and have invested accordingly.
Meanwhile, one final thing-- a chart (click on it to enlarge) from Andrew Smithers-- to put matters in a final perspective. At the end of 1974, traditional analysis of stocks based on asset value ("q") and cyclically-adjusted price-earnings (CAPE) ratio suggested that stocks were fully 60% undervalued. The same analysis today suggests that they are about 60% overvalued (note that the chart was drawn when the S&P 500 index was much lower; fair value was calculated at about 725 on that index).
So there's nothing intrinsic in stocks that they will do better than something as boring and unproductive as gold. Time will tell, but I continue to see gold as tracing out a chart pattern eerily similar to the NASDAQ pre-1999.
In a totally different investment sphere from gold, I continue to believe that AAPL is a unique and potentially seriously undervalued growth stock. The combination of AAPL stock and ownership of gold is quite a diverse twofer. Pure growth and innovation with financial strength; and pure money/value with no growth aspect.
Philosophically, I believe that all the Fed intervention in the economy is horribly misguided. It is Soviet-style central planning and cannot possibly work well in a nation as huge and complex as the United States; plus even if the Fed gets it "right" now and then, a free people and free banking system can do better and have the right to interact as they see fit. Whatever level of economic activity people and their businesses wish to transact is the "right" level.
(In any case, if one is fortunate enough to have investable funds, one has to separate philosophy from the "don't fight the Fed" principle of investing. So that's enough of a rant for a discussion of investments.)
As usual, this discussion represents my thinking as of the time written; accuracy of facts and calculations are intended to be of high quality but cannot be guaranteed; and nothing herein represents actual investment advice to anyone.
Copyright (C) Long Lake LLC 2010
This past week, the Conference Board reported a modest uptick in its monthly Leading Economic Indicators and said:
Says Ataman Ozyildirim, economist at The Conference Board: “The LEI remains on a general upward trend, but it is growing at its slowest pace since the middle of 2009. There isn’t any indication of a relapse into another downturn through the end of the year.”
Says Ken Goldstein, economist at The Conference Board: “More than a year after the recession officially ended, the economy is slow and has no forward momentum. The LEI suggests little change in economic conditions through the holidays or the early months of 2011.”
The Economic Cycle Research Institute (ECRI) reports weekly to the public on its intermediate-term leading indicators via its Weekly Leading Index. This number remains becalmed around 122. It first reached this level 12 1/2 years ago.
It turns out, however, that most of the time slow growth and easy monetary policy is a good combination in the short term for the pricing of financial assets.
Where are the values, such as they are?
It has been noted that for every percentage point for which the 3-month Treasury bill is less than two points above the consumer price index, the price of gold has risen 8% annualized. In other words, neutral has been 2 points above the CPI. Thus in the 1990s, the price of gold trended down, and a review of the data (click HERE for CPI and HERE for T-bill rates through 2000) are consistent with that. The post-9/11 monetary world has been stimulative of the gold price.
1990 is a useful year to judge return rates on various assets. It was about a decade after the inflation fever peaked as judged by the action of gold and silver prices and was, not coincidentally, the year that short-term interest rates peaked.
It was also a decade before the stock market bubble peaked and the gold price bottomed. And of course following the extremes in interest rates on the upside in 1980, we now have what would at that time been an absolutely unthinkable extreme in interest rates at the low end of about zero percent on the short end.
So, as the sports announcer Warner Wolf might have said, let's go to the tape. In 1990, a 30-year Treasury bond yielded about 8%. Gold averaged about $400/ounce. Let us say that for all of 2010, gold averages about $1250/ounce. The average annual compounded return on gold from 1990 to 2010 then can be computed as 5.9%. Thus a financial asset of infinite duration, gold, has underperformed a similar high quality, long-term asset, the plain old boring long Treasury bond, by about 2 points per year.
Let us now apply the above-mentioned 8% rule. CPI is running about 1% per year. Of course, official CPI may well understate the average rate of consumer price increases. The statistical relationship between gold and the CPI is what it is, with the imperfections in the CPI understood.
If monetary conditions as measured by the 3-month T-bill continue to be one percent below the CPI (i.e., three points below neutral) for 4 more years, then this relationship predicts that gold will rise an average of 24% yearly. I'm going to calculate matters assuming 20% appreciation yearly rather than 24$.
How can we judge whether that would put gold into the severely overpriced category.
How overpriced would gold be if goes from a suggested 2010 average price of $1250 to a 2014 average price of $2500?
To get an answer, let's go back to 1990's average price of about $400/ounce of gold.
If it rose from $400 to $2500 over that span of 24 years, the compounded yearly appreciation would compute to 7.93%.
So over that time frame, the return from gold and a long Treasury bond since 1990 would be . . . identical.
So-- there would be no bubble in gold even if its price doubled. (Louise Yamada agrees.)
Isaac Newton comes into play here. He pointed out that a body in motion tends to stay in motion until it is opposed by a force that blocks said motion. He also was involved in 1717 in Britain going on a gold standard (please excuse gold ads at the top of the link; the writeup is quite interesting and based on other reading I have done, I trust it is accurate).
So, we have a Fed that is focusing on its second mandate, that of full employment, with some Fed leaders stating that if anything, prices are not rising fast enough to allow the Fed to do its job; the President wants 2012 to be another Morning in America so he can be re-elected; and Congress always wants jobs. So all of Washington that matters wants prices to rise if that is "necessary" to help the employment situation; and so do the states, as they want more revenue.
Thus I see no special reason for the above-mentioned general relationship of a Fed that keeps rates at or below the CPI rate not to continue at least until there is a more serious question of fundamental overvaluation of gold. That gold has functioned as such a leveraged play on negative real interest rates without the owner of gold having any leverage is quite interesting.
Of course, past performance need not predict future performance, etc.
Gold bears and gold skeptics often make much of the alleged explosion in ads about it and allege a bubble. Yet anyone who sees Gordon Liddy pitch gold on TV gets the wrong impression. Gold is the metal of kings, not crooks. There is a reason why every currency the past several years has declined against gold. Something that is "golden" is good.
The more that politicians and their minions in central banks create "money" that does not tie to something physical, the more that owners of paper wealth will want to transform that to something tangible. "Uncle" Warren Buffett may prefer farmland or Exxon Mobil (which does not meet its crude oil needs via its own reserves) to gold; or he may have been dissing gold to get a chance to buy it cheaper when he addressed the topic recently. It doesn't matter. As we have seen the past few years, the pols in the Western world and very possibly in China have gotten in bed with the speculative financial interests (a charitable phrasing), which have created a worse disaster with depositors' money on a larger scale--by far-- than ever happened in the 1930s. Without knowing an MBS from a CDO, the public gets it.
The brokers want what sells easily. They want a "story". They also want something to sell that generates enough profit to make it worth their while. Who knows, but it's just possible that the new gold bull market really began just one year ago, with the validation of the breakout above $1000/ounce that briefly happened in 2008, and that stock brokers will be given more and more precious metals products they can sell. In other words, you ain't seen real selling of a financial asset until the Street and its allies in the mainstream media jump aboard.
And though I'm no Steve Jobs-- one more thing. If you want to know what a real extended bull market/bubble is, consider the NASDAQ. In October 1974, at the end of an extended bear market for risky stocks (and only a few years after NASDAQ was created as an exchange with Bernie Madoff as a co-founder), it was around 55. By the end of 1998, it was 2344. Over that 24 years, the compound annual return of the index was 17%, which far exceeded any Treasury rate available in 1974. But that was of course just prelude. The index more than doubled in the next year and two months, reaching about 5100, giving a return of almost 20% annually for that quarter century since the bear market bottom.
Even now, from its bear market bottom 36 years ago, the compound annual return of the NASDAQ is 11% annually.
Now that's a bull market!
And just one more thing. Gold ended 1974 at around $180/ounce. That gives it a mere 5.70
% compound annual return since then. There was no 30-year bond issued then, but since the 10-year yield at the same time was 7.40%, we can assume that gold has substantially underperformed both long Treasuries and stocks.That does not mean that it should "make back" that underperformance, but it rebuts the charge that gold is in a bubble, that it has gone up "too much", etc. The point is that gold is forever and is best viewed the way I have presented it here, not whether it has gone up a lot over the past year or has had one up year after another after two decades of woeful performance.
After all, when the NASDAQ fell by a full 50% from its bubble peak in 2000, it was still wildly overvalued. Sometimes time shows that assets get substantially above or below either fair value or at least a sustainable market value, and based on those criteria, gold's price might rise quite a bit in dollar terms and still be reasonably valued by multiple criteria. Not that it will do so, but I'm spilling a lot of digital ink because I think it may do so over the next several years and have invested accordingly.
Meanwhile, one final thing-- a chart (click on it to enlarge) from Andrew Smithers-- to put matters in a final perspective. At the end of 1974, traditional analysis of stocks based on asset value ("q") and cyclically-adjusted price-earnings (CAPE) ratio suggested that stocks were fully 60% undervalued. The same analysis today suggests that they are about 60% overvalued (note that the chart was drawn when the S&P 500 index was much lower; fair value was calculated at about 725 on that index).
So there's nothing intrinsic in stocks that they will do better than something as boring and unproductive as gold. Time will tell, but I continue to see gold as tracing out a chart pattern eerily similar to the NASDAQ pre-1999.
In a totally different investment sphere from gold, I continue to believe that AAPL is a unique and potentially seriously undervalued growth stock. The combination of AAPL stock and ownership of gold is quite a diverse twofer. Pure growth and innovation with financial strength; and pure money/value with no growth aspect.
Philosophically, I believe that all the Fed intervention in the economy is horribly misguided. It is Soviet-style central planning and cannot possibly work well in a nation as huge and complex as the United States; plus even if the Fed gets it "right" now and then, a free people and free banking system can do better and have the right to interact as they see fit. Whatever level of economic activity people and their businesses wish to transact is the "right" level.
(In any case, if one is fortunate enough to have investable funds, one has to separate philosophy from the "don't fight the Fed" principle of investing. So that's enough of a rant for a discussion of investments.)
As usual, this discussion represents my thinking as of the time written; accuracy of facts and calculations are intended to be of high quality but cannot be guaranteed; and nothing herein represents actual investment advice to anyone.
Copyright (C) Long Lake LLC 2010
Saturday, October 16, 2010
Chicago Fed Head Evans Strengthens the Argument that Short Term Rates Are in a Bubble
You may be aware that Chi-Fed Pres. Evans gave a pro-QE2 speech, He believes that the U. S. is in a liquidity trap. (For more on that phenomenon than most people want to know, click HERE for a link to the New York Fed on that subject.) Now, when they learn about a liquidity trap, most people would think that there's too much money around relative to investment opportunities.
But that's not what Dr. Evans and Dr. Bernanke think. Here is Evans:
If short-term interest rates remain near zero during this adjustment (Ed. that is, during QE2 = lots of money-printing), real interest rates would be between –2 and –3 percent. Perhaps that would be enough to improve labor markets and aggregate demand sufficiently, but I personally put more faith in analyses that suggest the liquidity trap is larger than this.
He is saying that he wants -- soon -- more negative real interest rates than -3%:
A variety of typical linear Taylor rules suggests around –4 percent. In addition, some calculations for optimal monetary policy simulations I have seen indicate that real rates of –3 or –4 percent between now and the end of 2012 would boost aggregate demand enough to deliver substantially lower unemployment by the end of 2012. . .
Over the course of this hypothetical adjustment, inflation is about 3, 4, and 3 percent from 2011 through 2013. Thus, policy can generate –3 and –4 percent real rates: This achieves a substantially higher opportunity cost of holding on to cash-like assets rather than lending and investing excess reserves in productive activities and workforces.
Of course, my concern is not how much interest a company makes on its cash reserves. Evans is saying that the average personal saver should be severely penalized because central planners such as he, and is the Comintern might have been, are unhappy with the business decisions that business people make. And the prudent savers must pay, just like road kill.
The truth, of course, is that higher prices only cause extra consumption in the form of hoarding, which sends the wrong signals to business, which has trouble distinguishing one-time increased demand such as from hoarding from organic increased demand. Also, the more that Fed policy steals real savings from savers, the more they turn to rank speculation, otherwise known as malinvestment. Hey, why not put some money into some friend of a friend's gold mine in the middle of nowhere? We're just going broke slowly with the money in the bank, anyway!
The deeper truth is that Messrs. Evans and all the other Fed bank Presidents work for a bank. Their interest is that the banks make money. So if they give the banks a continued cost of money of about zero, give them a little free money as interest on "reserves" (said reserves created when the Fed took assets off their hands at prices no one else would pay), and then, per Evans, give them the chance to charge higher and higher interest rates due to "inflation", well, then the banks can make more money, their bad loans can diminish in nominal terms, and everyone but savers and workers getting minimal to no wage increases can be happy.
It is a sick policy, but that's the plan.
Anyone who thinks that a 5-year Treasury yielding the grand total of $6 back for every $100 invested is prudent is entitled to his/her own opinion. In my humble opinion, the Fed is knowingly making all savers speculators. Why not at least keep up with Evans' high-inflation scenario with a 4% Treasury bond, with the chance for positive real returns if prices rise at 2% annually afterward, as he says he favors? And if by chance the U. S. goes Japanese anyway and we get true price stability, then one would have done OK with the 5-year note I just denigrated but one would do much better with the long bond.
Treasuries sold off on the long end last week on the above sort of talk, while the 2-year did not budge. Yet Evans and Bernanke are talking about 3+% inflation well within the 2-year time frame, so logically the short end should have sold off big-time, not the long end. Nothing has changed regarding years 11-30, though. We continue to have no idea what the future will look like then, though some of us won't be around to see it!
Thus the sell-off on the long end was speculative and can be bought speculatively. We are approaching the 4.1% intraday low of the 30-year in 2003, which may offer resistance now that we are so far into the next economic cycle.
Of course there are many risks with 30-year securities, but for quite some time I have been suggesting that gold and other hedges such as silver and foreign currency-denominated debt instruments are the best ways to deal with highly inflationary Fed policy in this era of the inherently deflationary credit collapse and its aftermath. I'm still long lots and lots of that sort of stuff, though I just sold the last of my silver yesterday on a timing basis.
The overvaluation of Treasuries-- i. e. the "bubble"-- is in the short end with 0.36% two year notes and 0.59% 3-year notes. Most bubbles go to greater extremes than to end with a rather boring 4% long bond. Let's see if we get 3-3.25%%. If it occurs at any time in the next 5 years, a buyer Monday at 4% will do just fine.
Copyright (C) Long Lake LLC 2010
But that's not what Dr. Evans and Dr. Bernanke think. Here is Evans:
If short-term interest rates remain near zero during this adjustment (Ed. that is, during QE2 = lots of money-printing), real interest rates would be between –2 and –3 percent. Perhaps that would be enough to improve labor markets and aggregate demand sufficiently, but I personally put more faith in analyses that suggest the liquidity trap is larger than this.
He is saying that he wants -- soon -- more negative real interest rates than -3%:
A variety of typical linear Taylor rules suggests around –4 percent. In addition, some calculations for optimal monetary policy simulations I have seen indicate that real rates of –3 or –4 percent between now and the end of 2012 would boost aggregate demand enough to deliver substantially lower unemployment by the end of 2012. . .
Over the course of this hypothetical adjustment, inflation is about 3, 4, and 3 percent from 2011 through 2013. Thus, policy can generate –3 and –4 percent real rates: This achieves a substantially higher opportunity cost of holding on to cash-like assets rather than lending and investing excess reserves in productive activities and workforces.
Of course, my concern is not how much interest a company makes on its cash reserves. Evans is saying that the average personal saver should be severely penalized because central planners such as he, and is the Comintern might have been, are unhappy with the business decisions that business people make. And the prudent savers must pay, just like road kill.
The truth, of course, is that higher prices only cause extra consumption in the form of hoarding, which sends the wrong signals to business, which has trouble distinguishing one-time increased demand such as from hoarding from organic increased demand. Also, the more that Fed policy steals real savings from savers, the more they turn to rank speculation, otherwise known as malinvestment. Hey, why not put some money into some friend of a friend's gold mine in the middle of nowhere? We're just going broke slowly with the money in the bank, anyway!
The deeper truth is that Messrs. Evans and all the other Fed bank Presidents work for a bank. Their interest is that the banks make money. So if they give the banks a continued cost of money of about zero, give them a little free money as interest on "reserves" (said reserves created when the Fed took assets off their hands at prices no one else would pay), and then, per Evans, give them the chance to charge higher and higher interest rates due to "inflation", well, then the banks can make more money, their bad loans can diminish in nominal terms, and everyone but savers and workers getting minimal to no wage increases can be happy.
It is a sick policy, but that's the plan.
Anyone who thinks that a 5-year Treasury yielding the grand total of $6 back for every $100 invested is prudent is entitled to his/her own opinion. In my humble opinion, the Fed is knowingly making all savers speculators. Why not at least keep up with Evans' high-inflation scenario with a 4% Treasury bond, with the chance for positive real returns if prices rise at 2% annually afterward, as he says he favors? And if by chance the U. S. goes Japanese anyway and we get true price stability, then one would have done OK with the 5-year note I just denigrated but one would do much better with the long bond.
Treasuries sold off on the long end last week on the above sort of talk, while the 2-year did not budge. Yet Evans and Bernanke are talking about 3+% inflation well within the 2-year time frame, so logically the short end should have sold off big-time, not the long end. Nothing has changed regarding years 11-30, though. We continue to have no idea what the future will look like then, though some of us won't be around to see it!
Thus the sell-off on the long end was speculative and can be bought speculatively. We are approaching the 4.1% intraday low of the 30-year in 2003, which may offer resistance now that we are so far into the next economic cycle.
Of course there are many risks with 30-year securities, but for quite some time I have been suggesting that gold and other hedges such as silver and foreign currency-denominated debt instruments are the best ways to deal with highly inflationary Fed policy in this era of the inherently deflationary credit collapse and its aftermath. I'm still long lots and lots of that sort of stuff, though I just sold the last of my silver yesterday on a timing basis.
The overvaluation of Treasuries-- i. e. the "bubble"-- is in the short end with 0.36% two year notes and 0.59% 3-year notes. Most bubbles go to greater extremes than to end with a rather boring 4% long bond. Let's see if we get 3-3.25%%. If it occurs at any time in the next 5 years, a buyer Monday at 4% will do just fine.
Copyright (C) Long Lake LLC 2010
Sunday, September 26, 2010
Gallup Reports Real Consumer Discretionary Spending Hits or Ties Multi-Year Lows
Gallup is reporting today that self-reported discretionary spending by consumers has essentially tied its low point from March, 2009. A total of 21,000 phone interviews over the prior 14 days shows that outside of normal bills/mortgage/auto payments etc., respondents spent $55/day. The margin of error is 3%, which I take to be $1.65. The low point I can find by scrolling over the data through the beginning of 2009 is $54 in March 2009. Given that this data is not adjusted for price increases, which the government says have occurred when housing costs are excluded, real consumer spending may actually be down over almost any time period one wants to use. This apparently was not a Recovery Summer for American consumers.
The same survey showed daily discretionary spending about $75 this past spring. Not shown is the data from the first part of 2008, when the recession was on but was just a mild slowdown so far as consumers knew. My recollection from following this survey then is that this number that is now in the $50s was in the $100-130 range.
This is one of the reasons why I feel this is a depression. Yes, all the money-printing and cyclical factors, plus 1% per year population growth, help keep some economic matters growing, but in the real world, the normal vitality of the American economy has yet to show itself. And truth be told, aside from the housing and credit bubble, said vitality was lacking all through the prior decade.
(The Gallup survey apparently includes all respondents, not just ones with jobs or who are retired. In other words, it presumably includes spending due to transfer payments, including those "paid for" by expansion of governmental deficit spending. Thus the underlying trend based on real earnings is yet worse than shown.)
This data dovetails with much other data and supports the view that in the "Japanecian" duality of the U. S. economy and financial system potentially going Japanese and/or Grecian, right now it is still in the "going Japanese" mode. Unless the recent data is a true outlier, this recent collapse in spending supports the investment strategy of being long assets perceived as being very safe or non-dollar-related. This is not, however, a short-term timing tool in any way, shape or form.
Nonetheless, I continue to put cash "to work", as the talking heads like to say, in long Treasuries on price weakness for a trade, betting that the Treasury bubble has more bull market moves ahead of it, long in the tooth though said bull market is. The yield spread between 10 and 30-year Treasuries is near its all-time peak, currently 120 basis points. On a ratio basis of the 30-year yield divided by the 10-year yield, that ratio of 3.80/2.60 is clearly at an all-time high except perhaps for several days last month.
The only view one has to take to be bullish on long Treasuries for a trade is that cyclical factors plus Fed actions will keep 10-year yields relatively low, and then that reversion to the mean of the 10-3o spread will occur. Of course, assumptions such as the ones I just made led Long Term Capital and many others to failure, so there are several ways for this reasoning not to hold water. Nonetheless, I like the odds here.
Copyright (C) Long Lake LLC 2010
The same survey showed daily discretionary spending about $75 this past spring. Not shown is the data from the first part of 2008, when the recession was on but was just a mild slowdown so far as consumers knew. My recollection from following this survey then is that this number that is now in the $50s was in the $100-130 range.
This is one of the reasons why I feel this is a depression. Yes, all the money-printing and cyclical factors, plus 1% per year population growth, help keep some economic matters growing, but in the real world, the normal vitality of the American economy has yet to show itself. And truth be told, aside from the housing and credit bubble, said vitality was lacking all through the prior decade.
(The Gallup survey apparently includes all respondents, not just ones with jobs or who are retired. In other words, it presumably includes spending due to transfer payments, including those "paid for" by expansion of governmental deficit spending. Thus the underlying trend based on real earnings is yet worse than shown.)
This data dovetails with much other data and supports the view that in the "Japanecian" duality of the U. S. economy and financial system potentially going Japanese and/or Grecian, right now it is still in the "going Japanese" mode. Unless the recent data is a true outlier, this recent collapse in spending supports the investment strategy of being long assets perceived as being very safe or non-dollar-related. This is not, however, a short-term timing tool in any way, shape or form.
Nonetheless, I continue to put cash "to work", as the talking heads like to say, in long Treasuries on price weakness for a trade, betting that the Treasury bubble has more bull market moves ahead of it, long in the tooth though said bull market is. The yield spread between 10 and 30-year Treasuries is near its all-time peak, currently 120 basis points. On a ratio basis of the 30-year yield divided by the 10-year yield, that ratio of 3.80/2.60 is clearly at an all-time high except perhaps for several days last month.
The only view one has to take to be bullish on long Treasuries for a trade is that cyclical factors plus Fed actions will keep 10-year yields relatively low, and then that reversion to the mean of the 10-3o spread will occur. Of course, assumptions such as the ones I just made led Long Term Capital and many others to failure, so there are several ways for this reasoning not to hold water. Nonetheless, I like the odds here.
Copyright (C) Long Lake LLC 2010
Saturday, September 25, 2010
Stocks Increasingly Frothy
Gallup's continuous polling is showing a continuing stagnation with a downward trend in discretionary consumer spending.
In this context, the buoyancy of many consumer stocks makes little sense. There's a difference between optimism and investing based on hope against the facts. When even a semi-free market has essentially no value placed on money for as long as two years, with Treasuries paying less than one dollar in total interest per $100 invested for two full years, then the profit outlook for reinvested profits, which is what helps drive the stock market, is poor.
Ultimately what matters in investing is value. Two standard ways to decide on the value of companies ties to their earnings and to the value of their assets. The accountant and investments expert Andrew Smithers, who loudly and contemporaneously called the stock market a bubble in 2000, has just provided another quarterly update of his estimate of the fair value of the S&P 500.
Please look carefully at the linked chart he provides on his website. His earnings-based (CAPE) estimate of fair value and his asset-based estimate (q) are in close agreement that the stock market is massively overvalued. Averaging fair value provided by CAPE with that provided by q gives a fair value of about 725. This in turn means that based on Friday's closing prices, the stock market can be estimated to be about 57% overvalued.
People point to ultra-low interest rates to justify high valuations. Unfortunately, that's circular reasoning. A dead economy is required to justify near-zero short-to-intermediate interest rates. If one carefully studies the Smithers chart, one can look at the 1930s and 1940s, as well as the early 1920s, to find times when there were low to very low interest rates and very low stock prices in relation both to earnings power and assets.
Not only are American common stocks very risky, their prices are increasingly disconnected from the experience of everyone I know and every poll or survey I see. No one I know sees business doing especially well or about to do well. The idea that stock traders know better is a dubious one. It's far more likely that ultra-cheap money is fueling the bull moves in all sorts of assets. The investor's task is to separate wheat from chaff, AIG from Chubb, Honda from GM, stocks vs. Treasuries circa 2000 and circa 2007.
The situation re stocks is reminiscent of the old punch line, "Who are you going to believe, me or your lying eyes?"
Another analogy is Wile E. Coyote suspended in midair.
Yet another analogy is a chart of the Japanese stock market since 1989. It looks like ours, about a decade out of phase. It shows several massive bull moves in a 21 year structural bear market.
This blog has argued for a long time that the best places for investment money were the trend-following ones of being long Treasuries (and implicitly other high quality bonds) and gold. Both of their structural bull markets remain intact. The gold bull is mildly extended short-term and is up about 30% year over year, which is a red flag. The 30 year Treasury is also extended, but the longer duration bonds represent the only part of the Treasury curve which I believe is not yet in bubble valuation.
The chronic weakness of consumer spending continues to support the Treasury bull, and the Fed's response is to print money, which then supports the gold bull. In that context, stocks (other than precious metals stocks) are an afterthought.
Someday the trends will change. Are they changing here and now?
I doubt it.
Copyright (C) Long Lake LLC 2010
In this context, the buoyancy of many consumer stocks makes little sense. There's a difference between optimism and investing based on hope against the facts. When even a semi-free market has essentially no value placed on money for as long as two years, with Treasuries paying less than one dollar in total interest per $100 invested for two full years, then the profit outlook for reinvested profits, which is what helps drive the stock market, is poor.
Ultimately what matters in investing is value. Two standard ways to decide on the value of companies ties to their earnings and to the value of their assets. The accountant and investments expert Andrew Smithers, who loudly and contemporaneously called the stock market a bubble in 2000, has just provided another quarterly update of his estimate of the fair value of the S&P 500.
Please look carefully at the linked chart he provides on his website. His earnings-based (CAPE) estimate of fair value and his asset-based estimate (q) are in close agreement that the stock market is massively overvalued. Averaging fair value provided by CAPE with that provided by q gives a fair value of about 725. This in turn means that based on Friday's closing prices, the stock market can be estimated to be about 57% overvalued.
People point to ultra-low interest rates to justify high valuations. Unfortunately, that's circular reasoning. A dead economy is required to justify near-zero short-to-intermediate interest rates. If one carefully studies the Smithers chart, one can look at the 1930s and 1940s, as well as the early 1920s, to find times when there were low to very low interest rates and very low stock prices in relation both to earnings power and assets.
Not only are American common stocks very risky, their prices are increasingly disconnected from the experience of everyone I know and every poll or survey I see. No one I know sees business doing especially well or about to do well. The idea that stock traders know better is a dubious one. It's far more likely that ultra-cheap money is fueling the bull moves in all sorts of assets. The investor's task is to separate wheat from chaff, AIG from Chubb, Honda from GM, stocks vs. Treasuries circa 2000 and circa 2007.
The situation re stocks is reminiscent of the old punch line, "Who are you going to believe, me or your lying eyes?"
Another analogy is Wile E. Coyote suspended in midair.
Yet another analogy is a chart of the Japanese stock market since 1989. It looks like ours, about a decade out of phase. It shows several massive bull moves in a 21 year structural bear market.
This blog has argued for a long time that the best places for investment money were the trend-following ones of being long Treasuries (and implicitly other high quality bonds) and gold. Both of their structural bull markets remain intact. The gold bull is mildly extended short-term and is up about 30% year over year, which is a red flag. The 30 year Treasury is also extended, but the longer duration bonds represent the only part of the Treasury curve which I believe is not yet in bubble valuation.
The chronic weakness of consumer spending continues to support the Treasury bull, and the Fed's response is to print money, which then supports the gold bull. In that context, stocks (other than precious metals stocks) are an afterthought.
Someday the trends will change. Are they changing here and now?
I doubt it.
Copyright (C) Long Lake LLC 2010
Monday, September 20, 2010
We Are All Speculators Now
The Federal government refuses to face the fact that its accrued liabilities, including explicit and nearly-explicit promises to current future retirees and users of governmentally-sponsored medical programs. This refusal leads everyone throughout the financial spectrum to be unable to make realistic plans.
If one is poor, and is aware of the situation, one wonders how government can continue to provide whatever aid is being provided, and one is concerned about one's future income and that of one's family.
If one is in the broad middle financially, and retired, one is being hit with no increase in Social Security payment but with large percentage increases in medical costs; and one may own one's home and have suffered loss of equity (the only real "deflation" in the economy the last few years except for typical tech pricing declines).
If one is a retiree who would have expected to be comfortable at current wealth levels as recently as 3 years ago, one now has no idea how to plan for the future. How much damage inflation will do to one's assets? What will public policy be regarding Social Security and Medicare?
If one is a young-to-middle aged employed adult, one is probably confused about what to do with income. Should it be saved? Why bother saving if government is going to tax heavily the income that the savings throw off, and in any case may inflate much of it away?
If one is truly rich (whatever that threshold is), one may be worried about the peasant-pitchfork scenario, and may be moving (more, perhaps, than one has already done) assets out of the country.
The certainty that the Federal government and many important state governments have their heads in the sand about their abilities to meet their obligations is causing sufficient uncertainty amongst the populace to be providing a negative feedback into the economy.
The blogger Calculated Risk had a (now-deceased) co-blogger who focused on the about-to-pop housing bubble known as Tanta who used to joke (not such a joke): "We are all sub-prime now!"
In 1992, tired of what then seemed like large Federal deficits and what appeared to be a once-every-50-year financial disaster (the S&L fiasco), taxpayers supported a balanced budget hawk as a 3rd party candidate for President. This Perot movement ended up being reflected in an apparently virtuous financial gridlock between the parties. The Republicans wouldn't allow President Clinton his spending priorities and he in turn would not let them cut taxes.
The public "got it" in 1992 and later in the '90s when it supported and took pride in balanced Federal budgets.
People know there is no free lunch, except perhaps in the Garden of Eden where there may have been low-hanging fruit to pick. What they need is for the President, as the official elected by all the people, to level with the American people and propose a realistic plan for government to meet all its obligations. He could propose a plan that takes Federal spending to 70% of GDP, as in Norway. Or, unlikely for this President, he could propose a plan that takes said spending to 10% of GDP, such as in Hong Kong.
The public would vigorously support the goal of a plan toward financial stability based on unaggressive projections. The political process would be charged by the President with working things out, subject of course to his veto. Then the horse-trading would begin. There is a reason why Congress has an 18% approval rating, and it comes from the public's knowledge that Washington has failed for several years to rise to Job 1:
chart a course for the future of the United States. Other countries have done so. Why can't we?
The current policy is no policy at all. It involves fighting unfunded wars; promising greater unfunded medical programs even as doctors retire young due to declining reimbursements and higher costs; "stimulating" the economy with giveaways to retirees, small and large businesses, and asphalt companies; and keeping a nominally Republican Fed chairman in place with the understanding that he will accommodate all the government's funding needs that the marketplace cannot provide at a price that the government will accept.
It is literally impossible to make logical choices one can believe in when political decisions or lack of decisions are such critical factors. Even more basic decisions such as whether to buy or sell a house are now made almost regardless of fundamental supply-demand considerations. Consider that even as unemployment came in worse than predicted in last year's "stress tests" on banks, house prices came in much higher. Who could have predicted the vast array of Fed and Federal programs to keep prices higher than expected given the relatively sluggish pace of economic growth? And will such prices and governmental support continue? Gentle Ben and governmental leaders may or may not even know. Maybe some other fiscal or military crisis will supervene.
The advent of stagflation in the 1970s threw a lot of people off balance, but the economic and financial imbalances did not become bubble-like until the energy crisis of the late 1970s sent oil prices skyrocketing for the second time in the decade. This was superimposed upon the chaos of the loss of the Viet Nam War. So the public sent Mr. Nixon packing; his plan to end the war was no plan, it turned out. Mr. Carter similarly got the boot after the "misery index" he used against Gerald Ford turned out to be much worse in 1979-80 than during Ford's tenure.
Matters turned when Messrs. Volcker (a Democrat) and Reagan laid out a coherent plan. It just may be that the fact that there was a plan that each man stuck with as long as he could was as important as the specifics of the plans. The political process put each man in place with his plans, thus the public explicitly and/or implicitly bought in, and individuals and businesses could make plans under this new set of policies.
Sorry, but health insurance reform to start after the next Presidential election, and another deficit commission due to report after the midterm elections is not a plan.
Mr. Obama started his term with a reservoir of very good will and fervent hopes, just as Jimmy Carter did. Neither one delivered what the public hoped when they elected them. Mr. Obama has time. He's wasted a year and a half from an economic perspective. Until he and Congress agree on a realistic plan that shows that Leviathan has developed strong self-assessment skills, we all all be fumbling around in the dark in America.
Exploration of new frontiers has its benefits. But nothing beats travel plans based on a good map. The country needs a good map. Blaming the prior guy does not provide that map.
Meanwhile the financial markets continue with two trends intact: falling Treasury yields and rising precious metals (and other commodity) prices. As with NASDAQ 1990s and housing 2000s, financial bodies in motion can stay in motion longer than reality-based bears can stay solvent. The third and most recent trend is truly easy money. Forget 1%- that is so last decade. Money should be free in the land of the free, right?
Well, sort of. If you're a member of Big Finance, yes, not only should it be free, but you should get to make money on the very money you put in reserve against losses. Huh?
The leaders of the United States of America are deliberately turning the country into a land where everybody has to guess as to what plan, or non-plan, they will come up with next. Thus we cannot plan our own futures.
We are all speculators now.
For the perma-bulls amongst us: precisely why will this end well before it gets worse?
Copyright (C) Long Lake LLC 2010
If one is poor, and is aware of the situation, one wonders how government can continue to provide whatever aid is being provided, and one is concerned about one's future income and that of one's family.
If one is in the broad middle financially, and retired, one is being hit with no increase in Social Security payment but with large percentage increases in medical costs; and one may own one's home and have suffered loss of equity (the only real "deflation" in the economy the last few years except for typical tech pricing declines).
If one is a retiree who would have expected to be comfortable at current wealth levels as recently as 3 years ago, one now has no idea how to plan for the future. How much damage inflation will do to one's assets? What will public policy be regarding Social Security and Medicare?
If one is a young-to-middle aged employed adult, one is probably confused about what to do with income. Should it be saved? Why bother saving if government is going to tax heavily the income that the savings throw off, and in any case may inflate much of it away?
If one is truly rich (whatever that threshold is), one may be worried about the peasant-pitchfork scenario, and may be moving (more, perhaps, than one has already done) assets out of the country.
The certainty that the Federal government and many important state governments have their heads in the sand about their abilities to meet their obligations is causing sufficient uncertainty amongst the populace to be providing a negative feedback into the economy.
The blogger Calculated Risk had a (now-deceased) co-blogger who focused on the about-to-pop housing bubble known as Tanta who used to joke (not such a joke): "We are all sub-prime now!"
In 1992, tired of what then seemed like large Federal deficits and what appeared to be a once-every-50-year financial disaster (the S&L fiasco), taxpayers supported a balanced budget hawk as a 3rd party candidate for President. This Perot movement ended up being reflected in an apparently virtuous financial gridlock between the parties. The Republicans wouldn't allow President Clinton his spending priorities and he in turn would not let them cut taxes.
The public "got it" in 1992 and later in the '90s when it supported and took pride in balanced Federal budgets.
People know there is no free lunch, except perhaps in the Garden of Eden where there may have been low-hanging fruit to pick. What they need is for the President, as the official elected by all the people, to level with the American people and propose a realistic plan for government to meet all its obligations. He could propose a plan that takes Federal spending to 70% of GDP, as in Norway. Or, unlikely for this President, he could propose a plan that takes said spending to 10% of GDP, such as in Hong Kong.
The public would vigorously support the goal of a plan toward financial stability based on unaggressive projections. The political process would be charged by the President with working things out, subject of course to his veto. Then the horse-trading would begin. There is a reason why Congress has an 18% approval rating, and it comes from the public's knowledge that Washington has failed for several years to rise to Job 1:
chart a course for the future of the United States. Other countries have done so. Why can't we?
The current policy is no policy at all. It involves fighting unfunded wars; promising greater unfunded medical programs even as doctors retire young due to declining reimbursements and higher costs; "stimulating" the economy with giveaways to retirees, small and large businesses, and asphalt companies; and keeping a nominally Republican Fed chairman in place with the understanding that he will accommodate all the government's funding needs that the marketplace cannot provide at a price that the government will accept.
It is literally impossible to make logical choices one can believe in when political decisions or lack of decisions are such critical factors. Even more basic decisions such as whether to buy or sell a house are now made almost regardless of fundamental supply-demand considerations. Consider that even as unemployment came in worse than predicted in last year's "stress tests" on banks, house prices came in much higher. Who could have predicted the vast array of Fed and Federal programs to keep prices higher than expected given the relatively sluggish pace of economic growth? And will such prices and governmental support continue? Gentle Ben and governmental leaders may or may not even know. Maybe some other fiscal or military crisis will supervene.
The advent of stagflation in the 1970s threw a lot of people off balance, but the economic and financial imbalances did not become bubble-like until the energy crisis of the late 1970s sent oil prices skyrocketing for the second time in the decade. This was superimposed upon the chaos of the loss of the Viet Nam War. So the public sent Mr. Nixon packing; his plan to end the war was no plan, it turned out. Mr. Carter similarly got the boot after the "misery index" he used against Gerald Ford turned out to be much worse in 1979-80 than during Ford's tenure.
Matters turned when Messrs. Volcker (a Democrat) and Reagan laid out a coherent plan. It just may be that the fact that there was a plan that each man stuck with as long as he could was as important as the specifics of the plans. The political process put each man in place with his plans, thus the public explicitly and/or implicitly bought in, and individuals and businesses could make plans under this new set of policies.
Sorry, but health insurance reform to start after the next Presidential election, and another deficit commission due to report after the midterm elections is not a plan.
Mr. Obama started his term with a reservoir of very good will and fervent hopes, just as Jimmy Carter did. Neither one delivered what the public hoped when they elected them. Mr. Obama has time. He's wasted a year and a half from an economic perspective. Until he and Congress agree on a realistic plan that shows that Leviathan has developed strong self-assessment skills, we all all be fumbling around in the dark in America.
Exploration of new frontiers has its benefits. But nothing beats travel plans based on a good map. The country needs a good map. Blaming the prior guy does not provide that map.
Meanwhile the financial markets continue with two trends intact: falling Treasury yields and rising precious metals (and other commodity) prices. As with NASDAQ 1990s and housing 2000s, financial bodies in motion can stay in motion longer than reality-based bears can stay solvent. The third and most recent trend is truly easy money. Forget 1%- that is so last decade. Money should be free in the land of the free, right?
Well, sort of. If you're a member of Big Finance, yes, not only should it be free, but you should get to make money on the very money you put in reserve against losses. Huh?
The leaders of the United States of America are deliberately turning the country into a land where everybody has to guess as to what plan, or non-plan, they will come up with next. Thus we cannot plan our own futures.
We are all speculators now.
For the perma-bulls amongst us: precisely why will this end well before it gets worse?
Copyright (C) Long Lake LLC 2010
Monday, August 30, 2010
Stock Post on The Daily Capitalist; and Treasury Bonds Have Begun to Bubble
The Daily Capitalist has posted an article I wrote with the very kind assistance of Econophile, the proprietor of said website.
While I discuss in that article why I have begun buying some stocks with the goal of holding them for the long term,the stock market as a whole may well be overpriced and may well prove to be, in the aggregate, poor investments. But such is the nature of investing. Stocks are far from their bubble phase. Perhaps they will enter a sustained period of historical undervaluation. In contrast . . .
The evidence is now that Treasury bonds have entered a bubble and left a standard, mature bull market behind. The economist David Rosenberg is calling for a 2% 30-year Treasury bond. He recently shrugged off the fiscal problems that the U. S. Gov't has, saying that Canada had similar problems in the 1990s. I don't know about Canada's problems, but I would assume, having lived through the 1990s, that no investors were rewarding the federal government of Canada with ultra-low and falling borrowing costs. What is happening in the U. S. is characteristic of bubbles. Those who are short the asset (i. e. have bet against it) are forced, as the price rises enough, to buy it to cover their bets against it, and momentum players jump in who have no interest in the investment merits of the asset. These momentum players are especially dangerous when they leverage their capital many times and thus purchase many more Treasuries than they can truly afford. The combination of short covering and leveraged Treasury purchases are key parts of the development of a bubble in Treasuries.
Another aspect of bubbles is the creation of misguided public enthusiasm late in the game.
In a piece running today, Bloomberg.com continues the pattern of promoting Treasuries. This piece is given a political wrapper but serves the bubble story well. It is titled Deficit Cost Drop Gives Obama Stimulus Clinton Missed. Here are some quotes from it:
While the government has increased the amount of marketable Treasuries by 70 percent to $8.18 trillion the past two years, rising demand has driven yields so low that interest to service the debt has fallen 17 percent so far in fiscal 2010 ending Sept. 30 from all of 2008.
Instead of punishing the Obama administration for running up a budget deficit the Congressional Budget Office said will total $1.34 trillion this year, bond investors are pouring money into fixed-income assets as inflation slows and equity markets stumble. . .
“The deficit concerns are on the back burner,” said Andy Richman, who oversees $10 billion as a strategist in Palm Beach, Florida for SunTrust Bank’s private wealth management division. “The bigger concerns are on the deflationary mode and seeing growth slowing in the second half of the year.”
Deficit concerns are on the back burner? Really? Perhaps in a parallel universe. Not among anyone I know.
Suddenly, people see the merits of Treasuries at these yields? I doubt it. More likely in my view is that the authorities are trying to scare people enough about the economy that they buy bonds to keep the statist, deficit-finance game going. Will the U. S. actually go Japanese, interest rate-wise? I don't know, but I wouldn't bet big money on it happening.
Here is one example of just how risky long Treasuries are at this level. In July 2007, the 30-year bond traded above 5.25%. Now let's say it is at 3.7% (up from as low as about 3.50% last week). To eliminate reinvestment considerations, I am going to give you the purest type of bond, known as a zero-coupon bond. All the interest accrues to the price of the security rather than coming back to the owner regularly (twice-yearly for Treasuries).
If one purchased a 30-year zero coupon bond at a 3.7% annual yield, the price would be $33.62. This excludes commission. Assume that five years from the now the yield finally gets back to 5.25%. What would this security then be worth? Well, one would now own a 5-year bond yielding 5.25% annually. The price calculates to $27.83 for a bond that will mature at $100 thirty years later.
Even if it took 8 1/2 years for yields to get back to 5.25%, the price of the hypothetical zero coupon bond would still not be back to its starting value of $33.62.
A bond that pays interest semi-annually, which most people are more familiar with, is mathematically similar, though the nature of its pricing and periodic payouts makes it less volatile. Nonetheless, a calculation of this sort of "par" bond would also show how risky a simple reversion to a "normal" yield of 5.25% would be at any time within the next 5 years.
I have begun to tack against the wind. Just as I sold out of stocks almost completely in 2000 and again in 2007, which both times was against the prevailing zeitgeist of growth forever, I am now seeing cash and Treasuries (not stocks) as unduly likely to provide negative returns after accounting for consumer price changes (which I unhappily anticipate to move up and to have more upside than downside risk). I am hearing more stories of people who can welll afford the risk of stocks but who want nothing to do with them, and of brokers who are responding by pushing bonds rather than stocks.
People fleeing into Treasuries because they held stocks too long should know that bonds can disappoint simultaneously with stocks. The idea that people are tying up capital for long periods of time at historically very low interest rates lending to a borrower with no coherent plan to repay its obligations simply because the stock market was vastly overpriced a decade ago strikes me as strange. What a brilliant investment strategy: own a hugely overpriced asset (stocks) in 2000, or simply be afraid of it now when their valuation is much more reasonable, and instead avoid that asset to instead buy another one after it has had an amazing three decade run of outperformance (Treasuries, of course).
The Japan scenario of even lower Treasury rates is a possibility, but not likely here in my view. Time will tell; is there a rush to make that call? One example in a different country proves nothing about the future in America. When it is in government's interest to sell massive amounts of bonds for little more than routine operating expenses (wars in Asia and the Mideast and economic stagnation both having become routine), and the media starts telling you about "rising demand" for bonds at the same time that the Federal Reserve has been a huge part of that demand, caveat emptor.
I now view 7-30 year Treasuries as trading vehicles only, just as I treated Internet stocks back in their bubble heyday. Once again, I am suspicious of situations in which the mainstream media push a story after valuations already are at historical extremes, trying to make the public believe that there is legitimate demand despite the extreme valuations. That to me is part and parcel of the pre-popping phase of a bubble. We are not seeing mainstream media hype for either stocks or precious metals. We saw it in tech stocks in the late '90s and homes 3-5 years ago, and it has begun in Treasury notes and bonds today.
Copyright (C) Long Lake LLC 2010
While I discuss in that article why I have begun buying some stocks with the goal of holding them for the long term,the stock market as a whole may well be overpriced and may well prove to be, in the aggregate, poor investments. But such is the nature of investing. Stocks are far from their bubble phase. Perhaps they will enter a sustained period of historical undervaluation. In contrast . . .
The evidence is now that Treasury bonds have entered a bubble and left a standard, mature bull market behind. The economist David Rosenberg is calling for a 2% 30-year Treasury bond. He recently shrugged off the fiscal problems that the U. S. Gov't has, saying that Canada had similar problems in the 1990s. I don't know about Canada's problems, but I would assume, having lived through the 1990s, that no investors were rewarding the federal government of Canada with ultra-low and falling borrowing costs. What is happening in the U. S. is characteristic of bubbles. Those who are short the asset (i. e. have bet against it) are forced, as the price rises enough, to buy it to cover their bets against it, and momentum players jump in who have no interest in the investment merits of the asset. These momentum players are especially dangerous when they leverage their capital many times and thus purchase many more Treasuries than they can truly afford. The combination of short covering and leveraged Treasury purchases are key parts of the development of a bubble in Treasuries.
Another aspect of bubbles is the creation of misguided public enthusiasm late in the game.
In a piece running today, Bloomberg.com continues the pattern of promoting Treasuries. This piece is given a political wrapper but serves the bubble story well. It is titled Deficit Cost Drop Gives Obama Stimulus Clinton Missed. Here are some quotes from it:
While the government has increased the amount of marketable Treasuries by 70 percent to $8.18 trillion the past two years, rising demand has driven yields so low that interest to service the debt has fallen 17 percent so far in fiscal 2010 ending Sept. 30 from all of 2008.
Instead of punishing the Obama administration for running up a budget deficit the Congressional Budget Office said will total $1.34 trillion this year, bond investors are pouring money into fixed-income assets as inflation slows and equity markets stumble. . .
“The deficit concerns are on the back burner,” said Andy Richman, who oversees $10 billion as a strategist in Palm Beach, Florida for SunTrust Bank’s private wealth management division. “The bigger concerns are on the deflationary mode and seeing growth slowing in the second half of the year.”
Deficit concerns are on the back burner? Really? Perhaps in a parallel universe. Not among anyone I know.
Suddenly, people see the merits of Treasuries at these yields? I doubt it. More likely in my view is that the authorities are trying to scare people enough about the economy that they buy bonds to keep the statist, deficit-finance game going. Will the U. S. actually go Japanese, interest rate-wise? I don't know, but I wouldn't bet big money on it happening.
Here is one example of just how risky long Treasuries are at this level. In July 2007, the 30-year bond traded above 5.25%. Now let's say it is at 3.7% (up from as low as about 3.50% last week). To eliminate reinvestment considerations, I am going to give you the purest type of bond, known as a zero-coupon bond. All the interest accrues to the price of the security rather than coming back to the owner regularly (twice-yearly for Treasuries).
If one purchased a 30-year zero coupon bond at a 3.7% annual yield, the price would be $33.62. This excludes commission. Assume that five years from the now the yield finally gets back to 5.25%. What would this security then be worth? Well, one would now own a 5-year bond yielding 5.25% annually. The price calculates to $27.83 for a bond that will mature at $100 thirty years later.
Even if it took 8 1/2 years for yields to get back to 5.25%, the price of the hypothetical zero coupon bond would still not be back to its starting value of $33.62.
A bond that pays interest semi-annually, which most people are more familiar with, is mathematically similar, though the nature of its pricing and periodic payouts makes it less volatile. Nonetheless, a calculation of this sort of "par" bond would also show how risky a simple reversion to a "normal" yield of 5.25% would be at any time within the next 5 years.
I have begun to tack against the wind. Just as I sold out of stocks almost completely in 2000 and again in 2007, which both times was against the prevailing zeitgeist of growth forever, I am now seeing cash and Treasuries (not stocks) as unduly likely to provide negative returns after accounting for consumer price changes (which I unhappily anticipate to move up and to have more upside than downside risk). I am hearing more stories of people who can welll afford the risk of stocks but who want nothing to do with them, and of brokers who are responding by pushing bonds rather than stocks.
People fleeing into Treasuries because they held stocks too long should know that bonds can disappoint simultaneously with stocks. The idea that people are tying up capital for long periods of time at historically very low interest rates lending to a borrower with no coherent plan to repay its obligations simply because the stock market was vastly overpriced a decade ago strikes me as strange. What a brilliant investment strategy: own a hugely overpriced asset (stocks) in 2000, or simply be afraid of it now when their valuation is much more reasonable, and instead avoid that asset to instead buy another one after it has had an amazing three decade run of outperformance (Treasuries, of course).
The Japan scenario of even lower Treasury rates is a possibility, but not likely here in my view. Time will tell; is there a rush to make that call? One example in a different country proves nothing about the future in America. When it is in government's interest to sell massive amounts of bonds for little more than routine operating expenses (wars in Asia and the Mideast and economic stagnation both having become routine), and the media starts telling you about "rising demand" for bonds at the same time that the Federal Reserve has been a huge part of that demand, caveat emptor.
I now view 7-30 year Treasuries as trading vehicles only, just as I treated Internet stocks back in their bubble heyday. Once again, I am suspicious of situations in which the mainstream media push a story after valuations already are at historical extremes, trying to make the public believe that there is legitimate demand despite the extreme valuations. That to me is part and parcel of the pre-popping phase of a bubble. We are not seeing mainstream media hype for either stocks or precious metals. We saw it in tech stocks in the late '90s and homes 3-5 years ago, and it has begun in Treasury notes and bonds today.
Copyright (C) Long Lake LLC 2010
Wednesday, August 25, 2010
Too Much Bubble Babble; Focus on Treasuries and Gold
Might there be a bubble in talk about the same?
This weekend, Randall Forsyth filled in for Alan Abelson with the lead article in this week's Barron's, titled Vacuous Bond-Bubble Talk. He begins as follows:
THERE'S A REAL BUBBLE TAKING PLACE in the markets and you can scarcely miss it, so blatant and omnipresent has it become. It is, of course, the bubble in talk about a bond bubble.
Maybe not. CNN Money and Fortune have the following article running, 5 Investing Bubbles, which asserts:
U.S. Treasury Bonds . . .
Verdict: Not a Bubble
and
Gold . . .
Verdict: A Major Bubble.
Michael Pento is out with an article titled The Fed's Biggest Bubble. He states that:
While Wall Street and Washington are petrified of the deflation boogieman, the real menace lurking in the shadows is the Fed's bond bubble . . .
A decade or more ago, you heard little or now talk of bubbles. It was understand in general terms that bubbles were rare and undefined. Just as with Justice Stewart's definition of pornography, you knew one when you saw it. So, when gold spiked to over $800/ounce in January 1980, then trended down for two decades, it looked like a bubble at the time and acted in the long term as if it had been one. Similarly concepts apply to U. S. stocks in 1929. Now that NASDAQ stocks went into a bubble phase in 1999-2000, and housing more recently, a search for bubbles appears de rigeur.
As with all investment memes and media themes, it's helpful to avoid undefined labels such as "bubble" and look at the facts. In investments, there are both fundamental and technical factors. Most people think they understand what a fundamental of a security or commodity is, at least in concept. A technical factor attempts to look at supply-demand forces to help guide one's thinking about where the price of the asset in question may move to. One important characteristic of technical analysis is whether an asset is moving from strong to weak hands or vice versa.
In this write-up, I am going to discuss fundamental and technical factors relating to the topics described above, namely Treasury securities and gold.
TREASURIES
It is of concern that a media that has not been advising the public to jump into the wonderful asset class of Treasury bonds for the last 30 years is pushing it hard now that yields are at historically low to unprecedentedly low levels.
Here is another quote from CNN/Fortune piece as to the author's reasons why Treasuries are not in a bubble:
The national debt is still a manageable 40% of GDP. Economists warn that growth will slow when it reaches 90% of GDP. The Congressional Budget Office projects it will take nine years to get to that level, and that's if Washington, which is debating the deficit, does nothing.
Let's do a fact check. Here's what OMB has to say. In Table S-14 (page 55) of its mid-year report to Congress, total gross Federal debt for the fiscal year that is drawing to a close was estimated as $13.779 trillion. For upcoming FY 2011, they are projecting $15.265 T. Sorry, CNN/Fortune, your numbers are incorrect. These numbers are excluding the ongoing and massive Fannie/Freddie bailouts, prospective FDIC and FHA (Ginnie Mae) losses, guarantees pursuant to emergency measures adopted in 20089, and implied but unfunded Medicare obligations. Debt has reached 90% of GDP under the most conservative assumptions and guess what, growth has slowed. And so far as Washington may do something about the deficit, it naturally is debating continuing some or even all of the 2001 and 2003 tax cuts that are due to expire at the end of this year, and the expiration of which is assumed by OMB's analysis of the projected (very large) deficit for FY 2011.
Beyond the above facts, there is common sense. Which would you rather own, an FDIC-insured bank deposit available on demand yielding 1.30-1.50% with the bank arm of profitable, highly-rated credit card issuers that advertise these deals all over the Net, or relatively illiquid 2-year Treasury notes yielding 1/2 of one per cent per year? (They are in practice relatively illiquid because of the bid-asked spread retail has to pay.)
Re the 10-year note now yielding 2 1/2%, consider that the same debt instrument yielded 3% and above between 1929 continuously into 1933.
That period involved obvious massive decline in prices across the board, and the U. S. was almost debt-free with massive gold reserves. A financially much weaker federal government, with banks that were/are arguably insolvent in the good times of 2007 (as revealed by securities pricing that became known in 2008), now is selling debt at higher prices (lower yields) than it did during the Great Depression!
This may or may not be a bubble, but is this fair value?
In another way of looking at things, my quick analysis is that in the 20th century, every time that Treasury bond yields have gone well under 3%, stocks have provided much better returns in the 10 years following.
One of the characteristics of bubbles in a see-it-you-know-it mode is media cheerleading.
Well, the L. A. Times is out with the bond equivalent of Internet hype a decade later. It is throwing out for all to laugh at the idea that there is a shortage of federal debt, in its article titled As economy fears deepen, everybody wants what the Treasury sells . It begins:
Good thing Uncle Sam is floating another $102 billion of debt this week. From the looks of the Treasury market on Tuesday, there aren’t enough government securities to go around.
Yes, John and Jane Q. are camping out the night before those hot Treasuries go on sale to get their share of the national debt, aren't they? What? They aren't?
No, they aren't. Here's the proof, from the same LAT article:
In this environment, whatever debt Uncle Sam has to sell, there are plenty of buyers -- including the Federal Reserve . . .
Austrian economists however teach to be wary of central banks buying Treasury debt. These anti-central bank libertarians have led the charge against the evils of central bank debt monetization. The central bank wouldn't buy the debt directly unless the free market would not (at current interest rates).
Maybe the public can still be misled by "Keynesians" run wild (though I am not sure whether in his later years even Keynes was as "Keynesian" as Ben Bernanke) is something I can't answer, but I smell the same rat I smelled in 1999-2000, when the media made sure the great unwashed were the repository of the greatest distribution of junk stocks in American history, pushing Yahoo! at 100X sales and Cisco at 150X earnings.
Now, 150X earnings is actually less undervalued in theory than 2-year federal debt at 200X earnings (the reciprocal of 0.5% interest).
On a chart basis, the 10-year note's yield has collapsed from 4% to 2.5% since April 5 of this year. This yield is lower than the note's 200 day moving average hit at any point at least as far back as my continuous chart goes back (to 1962), even including the period in 2008-9 post Lehman/AIG when the financial world had its equivalent of a stroke or heart attack.
So on a variety of fundamental, media and technical standpoints, my view is that short-term and intermediate Treasury issues have at the very least dropped too far, too fast to be attractive to me at this time.
GOLD
Gold has no fundamentals per se, so here are some of the ways I look at it.
First, the cost of prospecting for gold, developing a permitted mine, getting gold out of the mine in refined form, etc., is substantial. In the colloquial, it is not a gold mine of a business. And this is not 1979-80. Investors are not throwing scads of money at start-up gold ventures. So from that standpoint, gold is not in a bubble.
Another fundamental about gold is whether it has returned "too much" to its owners relative to competing monetary choices.
I went to a site that lists historical gold prices (http://goldinfo.net/yearly.html), which is a commercial site that I have no business relationship with, and found gold prices from various years. I then used a standard calculator to determine compound annual rates of return (CAGR) from then to now, using $1230/ounce for today's gold price. This is what I came up with.
Gold in 1840 = $20.73/ounce. CAGR: 2.43% over 170 years.
Gold in 1860 = $20.67/ounce. CAGR: 2.76% over 150 years.
Gold in 1910 = $20.67/ounce. CAGR: 4.17% over 100 years.
Gold in 1977 = $161/ounce. CAGR: 6.36% over 43 years.
Highlighting the 100-year return, Norfolk Southern just sold a 100-year bond at 5.95% return per year. Given that NS is not a AAA-rated company, does a 4.17% 100 year return on gold seem as though its price is in a bubble in comparison?
Re the 1977 comparison, economic statistics from WikiAnswers from 1977 include:
Yearly Inflation Rate USA 6.5%
Year End Close Dow Jones Industrial Average 831
Interest Rates Year End Federal Reserve 7.75%.
Separately, I have looked at 10-year Treasury note rates from 1977. It appears that they averaged about 7.4%. That would imply that had there been a 30-year Treasury bond out then, it would have yielded about 8%. And the Dow Industrials are up 12X since then, which even without dividends included beats gold's return.
What has been presented above indicates to me that gold, which after all is intended to be a permanent, indestructible store of wealth, shows no bubble valuation characteristics in comparison to many other financial alternatives.
From a media standpoint, to review, the CNN/Fortune article lists 5 asset classes; of those 5, it deems only Treasuries as not being in a bubble. It classes Chinese stocks as being in a bubble. It classifies pure-play shale stocks (natural gas) as being in a bubble. It waffles on cotton, calling it as being in a "minor bubble".
Its verdict on gold, as mentioned at the beginning of this article: "major bubble".
My view is, unsurprisingly, different. That the mainstream media would tar gold, which has been a mediocre investment over long periods of time, as being more bubbly than a Communist country's stock market says to me that gold has yet to become truly mainstream and thus it would be hard to be in a bubble (though it could simply be overpriced). And I identify the zero to negative real interest rate policy of the Federal Reserve since the events of 9/11/2001, the associated recession, and then the creation of and bursting of the resultant debt bubble as the core reason why gold has gone up reasonably steadily for 9 years.
In other words, so long as the Fed keeps printing money and monetizing the debt, the MSM sneers at gold while propounding misinformation about the quantity of federal debt, and gold's chart shows no clear signs of distribution from strong (well-informed) to weak (poorly-informed) hands, I am confident that gold is not in a bubble.
I suspect that gold remains a good investment apart from a bubble-no bubble discussion, but that's a topic to be discussed in the near future in more detail.
Copyright (C) Long Lake LLC 2010
This weekend, Randall Forsyth filled in for Alan Abelson with the lead article in this week's Barron's, titled Vacuous Bond-Bubble Talk. He begins as follows:
THERE'S A REAL BUBBLE TAKING PLACE in the markets and you can scarcely miss it, so blatant and omnipresent has it become. It is, of course, the bubble in talk about a bond bubble.
Maybe not. CNN Money and Fortune have the following article running, 5 Investing Bubbles, which asserts:
U.S. Treasury Bonds . . .
Verdict: Not a Bubble
and
Gold . . .
Verdict: A Major Bubble.
Michael Pento is out with an article titled The Fed's Biggest Bubble. He states that:
While Wall Street and Washington are petrified of the deflation boogieman, the real menace lurking in the shadows is the Fed's bond bubble . . .
A decade or more ago, you heard little or now talk of bubbles. It was understand in general terms that bubbles were rare and undefined. Just as with Justice Stewart's definition of pornography, you knew one when you saw it. So, when gold spiked to over $800/ounce in January 1980, then trended down for two decades, it looked like a bubble at the time and acted in the long term as if it had been one. Similarly concepts apply to U. S. stocks in 1929. Now that NASDAQ stocks went into a bubble phase in 1999-2000, and housing more recently, a search for bubbles appears de rigeur.
As with all investment memes and media themes, it's helpful to avoid undefined labels such as "bubble" and look at the facts. In investments, there are both fundamental and technical factors. Most people think they understand what a fundamental of a security or commodity is, at least in concept. A technical factor attempts to look at supply-demand forces to help guide one's thinking about where the price of the asset in question may move to. One important characteristic of technical analysis is whether an asset is moving from strong to weak hands or vice versa.
In this write-up, I am going to discuss fundamental and technical factors relating to the topics described above, namely Treasury securities and gold.
TREASURIES
It is of concern that a media that has not been advising the public to jump into the wonderful asset class of Treasury bonds for the last 30 years is pushing it hard now that yields are at historically low to unprecedentedly low levels.
Here is another quote from CNN/Fortune piece as to the author's reasons why Treasuries are not in a bubble:
The national debt is still a manageable 40% of GDP. Economists warn that growth will slow when it reaches 90% of GDP. The Congressional Budget Office projects it will take nine years to get to that level, and that's if Washington, which is debating the deficit, does nothing.
Let's do a fact check. Here's what OMB has to say. In Table S-14 (page 55) of its mid-year report to Congress, total gross Federal debt for the fiscal year that is drawing to a close was estimated as $13.779 trillion. For upcoming FY 2011, they are projecting $15.265 T. Sorry, CNN/Fortune, your numbers are incorrect. These numbers are excluding the ongoing and massive Fannie/Freddie bailouts, prospective FDIC and FHA (Ginnie Mae) losses, guarantees pursuant to emergency measures adopted in 20089, and implied but unfunded Medicare obligations. Debt has reached 90% of GDP under the most conservative assumptions and guess what, growth has slowed. And so far as Washington may do something about the deficit, it naturally is debating continuing some or even all of the 2001 and 2003 tax cuts that are due to expire at the end of this year, and the expiration of which is assumed by OMB's analysis of the projected (very large) deficit for FY 2011.
Beyond the above facts, there is common sense. Which would you rather own, an FDIC-insured bank deposit available on demand yielding 1.30-1.50% with the bank arm of profitable, highly-rated credit card issuers that advertise these deals all over the Net, or relatively illiquid 2-year Treasury notes yielding 1/2 of one per cent per year? (They are in practice relatively illiquid because of the bid-asked spread retail has to pay.)
Re the 10-year note now yielding 2 1/2%, consider that the same debt instrument yielded 3% and above between 1929 continuously into 1933.
That period involved obvious massive decline in prices across the board, and the U. S. was almost debt-free with massive gold reserves. A financially much weaker federal government, with banks that were/are arguably insolvent in the good times of 2007 (as revealed by securities pricing that became known in 2008), now is selling debt at higher prices (lower yields) than it did during the Great Depression!
This may or may not be a bubble, but is this fair value?
In another way of looking at things, my quick analysis is that in the 20th century, every time that Treasury bond yields have gone well under 3%, stocks have provided much better returns in the 10 years following.
One of the characteristics of bubbles in a see-it-you-know-it mode is media cheerleading.
Well, the L. A. Times is out with the bond equivalent of Internet hype a decade later. It is throwing out for all to laugh at the idea that there is a shortage of federal debt, in its article titled As economy fears deepen, everybody wants what the Treasury sells . It begins:
Good thing Uncle Sam is floating another $102 billion of debt this week. From the looks of the Treasury market on Tuesday, there aren’t enough government securities to go around.
Yes, John and Jane Q. are camping out the night before those hot Treasuries go on sale to get their share of the national debt, aren't they? What? They aren't?
No, they aren't. Here's the proof, from the same LAT article:
In this environment, whatever debt Uncle Sam has to sell, there are plenty of buyers -- including the Federal Reserve . . .
Austrian economists however teach to be wary of central banks buying Treasury debt. These anti-central bank libertarians have led the charge against the evils of central bank debt monetization. The central bank wouldn't buy the debt directly unless the free market would not (at current interest rates).
Maybe the public can still be misled by "Keynesians" run wild (though I am not sure whether in his later years even Keynes was as "Keynesian" as Ben Bernanke) is something I can't answer, but I smell the same rat I smelled in 1999-2000, when the media made sure the great unwashed were the repository of the greatest distribution of junk stocks in American history, pushing Yahoo! at 100X sales and Cisco at 150X earnings.
Now, 150X earnings is actually less undervalued in theory than 2-year federal debt at 200X earnings (the reciprocal of 0.5% interest).
On a chart basis, the 10-year note's yield has collapsed from 4% to 2.5% since April 5 of this year. This yield is lower than the note's 200 day moving average hit at any point at least as far back as my continuous chart goes back (to 1962), even including the period in 2008-9 post Lehman/AIG when the financial world had its equivalent of a stroke or heart attack.
So on a variety of fundamental, media and technical standpoints, my view is that short-term and intermediate Treasury issues have at the very least dropped too far, too fast to be attractive to me at this time.
GOLD
Gold has no fundamentals per se, so here are some of the ways I look at it.
First, the cost of prospecting for gold, developing a permitted mine, getting gold out of the mine in refined form, etc., is substantial. In the colloquial, it is not a gold mine of a business. And this is not 1979-80. Investors are not throwing scads of money at start-up gold ventures. So from that standpoint, gold is not in a bubble.
Another fundamental about gold is whether it has returned "too much" to its owners relative to competing monetary choices.
I went to a site that lists historical gold prices (http://goldinfo.net/yearly.html), which is a commercial site that I have no business relationship with, and found gold prices from various years. I then used a standard calculator to determine compound annual rates of return (CAGR) from then to now, using $1230/ounce for today's gold price. This is what I came up with.
Gold in 1840 = $20.73/ounce. CAGR: 2.43% over 170 years.
Gold in 1860 = $20.67/ounce. CAGR: 2.76% over 150 years.
Gold in 1910 = $20.67/ounce. CAGR: 4.17% over 100 years.
Gold in 1977 = $161/ounce. CAGR: 6.36% over 43 years.
Highlighting the 100-year return, Norfolk Southern just sold a 100-year bond at 5.95% return per year. Given that NS is not a AAA-rated company, does a 4.17% 100 year return on gold seem as though its price is in a bubble in comparison?
Re the 1977 comparison, economic statistics from WikiAnswers from 1977 include:
Yearly Inflation Rate USA 6.5%
Year End Close Dow Jones Industrial Average 831
Interest Rates Year End Federal Reserve 7.75%.
Separately, I have looked at 10-year Treasury note rates from 1977. It appears that they averaged about 7.4%. That would imply that had there been a 30-year Treasury bond out then, it would have yielded about 8%. And the Dow Industrials are up 12X since then, which even without dividends included beats gold's return.
What has been presented above indicates to me that gold, which after all is intended to be a permanent, indestructible store of wealth, shows no bubble valuation characteristics in comparison to many other financial alternatives.
From a media standpoint, to review, the CNN/Fortune article lists 5 asset classes; of those 5, it deems only Treasuries as not being in a bubble. It classes Chinese stocks as being in a bubble. It classifies pure-play shale stocks (natural gas) as being in a bubble. It waffles on cotton, calling it as being in a "minor bubble".
Its verdict on gold, as mentioned at the beginning of this article: "major bubble".
My view is, unsurprisingly, different. That the mainstream media would tar gold, which has been a mediocre investment over long periods of time, as being more bubbly than a Communist country's stock market says to me that gold has yet to become truly mainstream and thus it would be hard to be in a bubble (though it could simply be overpriced). And I identify the zero to negative real interest rate policy of the Federal Reserve since the events of 9/11/2001, the associated recession, and then the creation of and bursting of the resultant debt bubble as the core reason why gold has gone up reasonably steadily for 9 years.
In other words, so long as the Fed keeps printing money and monetizing the debt, the MSM sneers at gold while propounding misinformation about the quantity of federal debt, and gold's chart shows no clear signs of distribution from strong (well-informed) to weak (poorly-informed) hands, I am confident that gold is not in a bubble.
I suspect that gold remains a good investment apart from a bubble-no bubble discussion, but that's a topic to be discussed in the near future in more detail.
Copyright (C) Long Lake LLC 2010
Friday, August 20, 2010
More Headwinds for Treasury Bond Bulls: Goldman Turns Bullish
Talk about coming so late to the party even the good leftovers are gone. Zero Hedge reports that a Goldman Sachs technical analyst espies much higher prices ahead for long-term Treasuries after one of the most amazing rallies ever seen. Capitulation, anyone? Wanna short the euro at $1.20?
Sarcasm aside, I am not actually disagreeing with Goldman's Noyce. I tend to agree, but in the fashion as follows: about a year ago (timing may be off), I read somewhere, perhaps Bloomberg.com, that Goldman's London office had turned strategically bullish on 10-year Treasury yields dropping to about the 3% level. This was after a small move down in yields, not a massive one, if memory serves. Well, the forecast was correct, but was premature. Far better buying opportunities lay ahead.
The 10-year Treasury is vastly overbought. Even most of the comments on Zero Hedge about the article were positive to neutral on Treasuries; usually ZH comments are pro-gold and assume that Treasuriees are going to default in the near future. The public mood is gloomy. And all stock traders know that hurricane season is very dangerous for stocks. Plus the stock charts don't look too hot. So it's easy to see hiding in the 10-year. If you're hiding from a threatened financial storm, you don't really care if your aggregate income over 10 years from your $100 is $25 or $30 (2.5% vs. 3% yield).
But as an investor, I agree with Drs. Rosenberg and Shilling that the main point of owning long Treasuries at these low rates is for capital gains. So I've sold out of my Treasuries. I do own munis for income, as well as short duration Ginnie Maes (not Fannie or Freddie) MBS with yields similar to that of much longer duration Treasuries (and with principal paydown as well as interest). I have no interest in selling those securities at today's prices.
I remain in the stagflation camp. I don't believe in fighting the Fed. The Fed wants a low level of rise in the consumer price indices, or at least so they say. I believe that as in 2007-8, and as was the case after the Great Crash 1929-33 and until Paul Volcker came on the scene, the Fed will be behind the curve re short-term interest rates and price rises.
Got inflation hedges?
Copyright (C) Long Lake LLC 2010
Sarcasm aside, I am not actually disagreeing with Goldman's Noyce. I tend to agree, but in the fashion as follows: about a year ago (timing may be off), I read somewhere, perhaps Bloomberg.com, that Goldman's London office had turned strategically bullish on 10-year Treasury yields dropping to about the 3% level. This was after a small move down in yields, not a massive one, if memory serves. Well, the forecast was correct, but was premature. Far better buying opportunities lay ahead.
The 10-year Treasury is vastly overbought. Even most of the comments on Zero Hedge about the article were positive to neutral on Treasuries; usually ZH comments are pro-gold and assume that Treasuriees are going to default in the near future. The public mood is gloomy. And all stock traders know that hurricane season is very dangerous for stocks. Plus the stock charts don't look too hot. So it's easy to see hiding in the 10-year. If you're hiding from a threatened financial storm, you don't really care if your aggregate income over 10 years from your $100 is $25 or $30 (2.5% vs. 3% yield).
But as an investor, I agree with Drs. Rosenberg and Shilling that the main point of owning long Treasuries at these low rates is for capital gains. So I've sold out of my Treasuries. I do own munis for income, as well as short duration Ginnie Maes (not Fannie or Freddie) MBS with yields similar to that of much longer duration Treasuries (and with principal paydown as well as interest). I have no interest in selling those securities at today's prices.
I remain in the stagflation camp. I don't believe in fighting the Fed. The Fed wants a low level of rise in the consumer price indices, or at least so they say. I believe that as in 2007-8, and as was the case after the Great Crash 1929-33 and until Paul Volcker came on the scene, the Fed will be behind the curve re short-term interest rates and price rises.
Got inflation hedges?
Copyright (C) Long Lake LLC 2010
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