Changing on a Paradigm

Last summer, I embarked upon a series of three posts explaining why I was committing our funds substantially into a weak dollar set of investments; click for links to the first, second and third of the series, which delineated three ways to invest on that theme: gold, silver, and foreign currencies. I also wrote favorably of stocks, with emphasis on those with substantial international exposure.

All these investment classes have done quite well.

I believe that for a multi-month horizon, it's time for a new paradigm.

As might have been expected given an economy that merely had a growth slowdown last summer and fall and then rebounded on its own in association with a simultaneous huge injection of government spending "paid for" by newly-created Fed "money", there has been a massive speculative top in silver a week (plus) ago, wild speculation in certain "Internet 2.0" stocks, such factors as the one-sided coverage of this past Friday's employment reports (with the media mostly ignoring the negative household survey in favor of the positive establishment report), the increase in new unemployment claims, the return of the Consumer Comfort survey (now a Bloomberg report, formerly ABC News) to near-2009 lows, and (last-not-least), the reported double dip in housing. The stage is set for another growth slowdown at best, eerily similar to that of last year, but perhaps ending worse.

The major reason I am reversing the summer 2010 decision I made to go heavily into the "risk on" assets is, however, seen in the video linked to HERE. This should be seen in conjunction with the charts on the left side of the current home page of the Economic Research Institute (which may change).

ECRI raises the possibility of a global industrial recession, and the likelihood of a significant deceleration of industrial activity. It is the second derivative of growth that traditionally most affects markets, meaning unexpected acceleration or deceleration away from the prior trend.

Given where market prices are today compared to where they were when I wrote the above articles, it's risk off in the DoctoRx investing world. Anybody who monitors bloggers and other commentators who complain about Comex "hits" on virtuous silver buyers may wish to consider that silver was roughly $20/ounce when I wrote my linked piece.

For those familiar with investment lingo, last week I sold in May and went away. The only significant non-bond, non-cash assets that remain in our portfolios are gold and some public but illiquid undervalued equities, which I have hedged with short positions in more liquid investments which may be fundamentally worse values. If ECRI is correct, the only weak dollar hedge one needs is gold.

None of the above represents a short term timing call in any way, shape or form. After last week's carnage, my trading sense would suggest that silver and oil, for example, are due for a bounce higher in the upcoming week. It's also not a bear call on stocks per se, given that many stocks are "defensive" and given that capital rightly continues to seek alternatives to cash.

Much more to follow as the Obama deficits continue to meet Helicopter Ben.

Copyright (C) Long Lake LLC 2011

QE To Infinity: Not?

Bloomberg.com surprised me this AM with its lead story, as follows:

Fed Policy Makers Signal Abrupt End to Bond Purchases in June

Federal Reserve policy makers are signaling they favor an abrupt end to $600 billion in Treasury purchases in June, jettisoning their prior strategy of gradually pulling back on intervention in bond markets.

“I don’t see a lot of gain to reverting to a tapering approach,” Atlanta Fed President Dennis Lockhart told reporters yesterday. “I don’t think that is necessary,” Philadelphia Fed President Charles Plosser said last month.

Central bankers, who next meet March 15, are about half way through their second round of bond purchases. To bring the program to a full stop in June, they must be confident that the economy is strong enough to endure higher long-term interest rates and rising expectations of an exit from the most expansive monetary policy in Fed history, said Dan Greenhaus at Miller Tabak & Co. LLC in New York.

“If this is a self-sustaining recovery that can withstand higher interest rates, then why not get the hell out?” said Greenhaus, Miller Tabak’s chief economic strategist. “Still, I am nervous about their ability to withdraw from this policy without broader disruptions.”

The Fed announced in November that it would buy $600 billion of Treasuries through June in a bid to boost the recovery and reduce an unemployment rate lingering near a 26- year high. The program, known as QE2 for the second round of so- called quantitative easing, followed $1.7 trillion of asset purchases that ended in March 2010.

Stock Versus Flow

Fed staff members, such as Brian Sack, the New York Fed official in charge of carrying out the bond buying, have argued the total amount, or stock, of securities the Fed has announced it will make has more impact on longer-term interest rates than the timing of those purchases. That’s a view now held by several members on the Federal Open Market Committee, including the chairman.

“We learned in the first quarter of last year, when we ended our previous program, that the markets had anticipated that adequately, and we didn’t see any major impact on interest rates,” Fed Chairman Ben S. Bernanke told the Senate Banking Committee during his March 1 semiannual monetary-policy testimony. “It’s really the total amount of holdings, rather than the flow of new purchases, that affects the level of interest rates.”

Fed Vice Chairman Janet Yellen supported that perspective, saying at a monetary policy forum in New York last week that “the stock view won out over the flow view.”

The bolded paragraphs (my doing) above are key. We can hope that this signals that the parties in Washington have agreed, at least in principle, on significant deficit reduction, so that ordinary debt market mechanisms can finance the Federal deficit without the central bank adding to the money supply as it has been doing with quantitative easing. Presumably, it is a show of confidence in the economy. Of course, a year ago a similar show of confidence gave way to the summer slowdown and QE2. Will past be prologue?

I don't know the answer to that, but we can hope this is a return to prudence, and that in turn there could be reason to abruptly rethink the entire weak dollar investment theme. After all, the markets sometimes are a lot smarter than any individual. "Rethink" does not necessarily mean "alter" or "abandon", however. In the prior economic cycle, the Fed did not overtly monetize the deficits, which of course were much smaller, but the private sector went wild with credit creation. Soaring commodities prices and a weak dollar were the speculative result; then the Fed began withdrawing liquidity, and the whole shebang came tumbling down. For now, leaving the important Mideast disturbance and all the known other issues aside, the cards look increasingly aligned for a traditional "sweet spot" year for economic activity. Low interest rates, lots of labor slack, a good deal of unused manufacturing capacity, and tons of fiscal stimulus. Plus lots of skepticism.

Interesting times.

Copyright (C) Long Lake LLC 2011

The Peso of the North

Look who's got the strong currencies, as reported by Reuters:

BOGOTA, Sept 15 (Reuters) - Colombia's central bank on Wednesday started purchasing what it said would be at least $20 million daily for the next four months to help ease the rise of its currency, becoming the latest Latin American economy to intervene in its market.

The move left the door open for more measures to curb the peso's COP=RR appreciation and followed intervention by Brazil to ease the real's climb and Peru's buying dollars to curb the sol.

The article is worth a read in its brief entirety.

Yours truly continues to be at least as comfortable with Brazilian real-denominated interest bearings debt instruments as with any multinational stock. The vehicle has the NYSE symbol of BZF, which ties to the short-term money market rate. Not nearly as easy to purchase are real-denominated Brazilian government bonds. These have a different risk-reward calculus from BZF. You may wish to consult a financial adviser and/or do some independent research to see if either of these vehicles makes sense for you.

In any case, the worm has turned. The U. S. dollar is the weak currency. Exchange controls may be more likely in the U. S. than in Brazil.

What is the Spanish word for schadenfreude?

And the Portuguese word for it as well . . .

There just may some of that emotion going on in central banks south of the equator in the Western hemisphere.

Copyright (C) Long Lake LLC 2010

Gold's New High and Monetization of the Debt

Here is a suggestion about why gold is at a new record high today, up about 2% in one day. It has to do with the following two "front page" article summaries from Eurointelligence (link provided, but free subscription may be required):

ECB IS BUYING BONDS AGAIN

So much for phasing out the bond purchasing programme. The latest weekly ECB data suggest that the ECB bought €237m worth sovereign bonds last week, the highest since the middle of August, according to the FT. Still small in absolute size, the paper notes, it is a sign of continuing problems in eurozone bond markets. Irish traders last week reported that the ECB had been in the market to support Irish bonds, whose yield spread to German bunds rose to new record levels. The article suggested that the ECB was also buying Greek and Portuguese bonds.

About that ECB’s exit strategy

Ralph Atkins and David Oakley have an excellent analysis in the FT about the change in the ECB’s exit strategy. While a year ago it was the conventional wisdom inside the ECB that the banking support policy would have to be phased out, and only then could interest rates rise. That is no longer so. As banks have become dependent on generous ECB liquidity support, it is possible that the monetary tightening occurs while the liquidity policies are still in place.

The eurozone, Japan, the U. S.: the three most important currency blocs around, all have central banks busily monetizing government debt and/or central governments engaged in massive deficit spending upon a base of huge accumulated deficits. Gold cannot be printed by a central bank, and I believe that its seemingly inexorable price rise since 9/11/01 relates to the permissive monetary policies that followed in the wake of the twin wars on the post-bubble economy (fighting "deflation") and on "terror".

Unfortunately, there is little evidence that officialdom is changing its pro-money-printing views yet. Witness Dana Milbank's piece today in the WaPo, titled John Maynard Keynes, the GOP's latest whipping boy. I have no time to deconstruct what is in large part a political rather than economic article, but the article tries to make the case that Keynes remains an economic god, or perhaps the God of economists. One brief quote in the article from a Republican economist shows Mr. Milbank's argument:

"If you were going to turn to only one economist to understand the problems facing the economy, there is little doubt that the economist would be John Maynard Keynes. Although Keynes died more than a half-century ago, his diagnosis of recessions and depressions remains the foundation of modern macroeconomics."

In other words, the point is, we are all Keynesians now. Resistance is futile. If you are not a member of the Keynesian Borg, you are just out of it intellectually.

Hmmm . . .

In my view, the idea that Wise Guys in Washington know better than individuals, businesses, non-profits etc. what level of consumption vs. saving is optimal for the inanimate abstraction called "the economy" is wrong in theory and increasingly is proving wrong in practice.

Increasingly, Keynesianism is the ancien regime, out of touch with today's realities. At the close of Milbank's piece, he talks about the "misery" people of today. Perhaps he thinks he's back in France of the 1780's, with most people living in hovels (at best) and Jean Valjeans stealing bread to support their families. Les Mis and all that. Perhaps he more mildly believes this is America of the 1930s, where a brilliant politician could credibly claim to see one-third of a country ill-fed/housed/clothed. Mr. Milbank may not have noticed that today, in contrast, we see one-third of the country obese and one-third in houses too large and fancy for them to afford.

As Shakespeare might have said, Keynesian has succeeded not wisely but too well.

Governments all over the world are dealing with a modern credit collapse of a scale that rivals that of the 1930s; and as in the 1930s, different countries are dealing with the issue differently.

The new highs in gold are evidence that market participants continue to view these efforts skeptically. The gold rally (dollar collapse) of the 1970s did not end until Paul Volcker took decisive action to make dollar-denominated investments attractive. Why should matters be different this time?

Copyright (C) Long Lake LLC 2010

Hedging Against U. S. Dollar Weakness Caused by Federal Reserve Policy

The major theme I am focusing on these days is prospective U. S. dollar weakness and how to invest accordingly as a U. S.-based individual.

You may click on the enclosed charts to enlarge them.


This is Part I, with one or more additional parts to follow.

I think that most investors based in the U. S. continue to have the vast proportion of their assets tied to the dollar, or naturally so if the holding is real estate based in the U. S. Our dollar has been the reserve currency of the world for everyone's investment lifetime . . . but it's been having its ups and downs. Here are some reasons why I have been allocating an increasingly large proportion of my financial assets in non-dollar and anti-dollar vehicles, and commentaries of which vehicles I have chosen.

The case that the U. S. dollar is fundamentally overvalued is well made by John Hussman in a post from a few weeks ago titled Why Quantitative Easing is Likely to Trigger a Collapse of the U.S. Dollar.

Please read the discussion as he presents it. My thumbnail summary is that by suppressing the rates on Treasuries below market via its various debt purchases (creating "inflation" in the Austrian sense of the term), the Fed is inducing markets to rapidly and substantially decide to devalue the exchange rate of the U. S. dollar (the "dollar" herein, as opposed to dollars of other countries such as New Zealand). I agree and want to hedge against a de facto dollar devaluation. This multi-part series begins with a mention of gold and then introduces other assets I have been accumulating for at least six months.

The purest way to hedge against the dollar's decline is by owning currencies against which said decline will occur, as opposed to indirectly doing so by owning stocks of companies doing business in foreign countries.

It appears to me that this trend predicted by Dr. Hussman is playing out quietly under cover of a euro that is at this time even weaker than the dollar. I am not involved in investments that have a short-term focus, however. This is more of an intermediate (months to years) strategy in my mind.

Once again, the commentary provided is mine alone, the opinions are mine, and nothing represents investment advice.

At this juncture in the markets, the ultimate "currency" continues to be gold. Gold has just set what has to be the quietest all-time closing high for a major asset class in memory. I was lucky enough to successfully trade an important intermediate top in gold and described said tactical trades in a post on December 3, 2009. The major reasons for severely lightening up then were that exchange traded gold funds such as Gold-Trust (GTU) had gone to significant premia over net asset value, the pricing appeared extended, and there was lots of excitement about gold on such websites as Zero Hedge.

Now, GTU and the more newly-launched "PHYS" gold ETF are at relatively low premia to NAV and for some time now, there has been little excited talk about gold on Zero Hedge. Compared to December 3, 2009, the metal is much closer to its 200 day moving average and is up year-on-year much less. So I am not inclined to sell any gold. If the comparator investment is a 5-year Treasury yielding almost certainly less than consumer prices will increase, how likely is it that at some point within the next 5 years, gold's price will allow gold-related investments to be sold at a profit that exceeds the return from that 5-year note? I think the probability is very high.

This series of articles is not going to discuss different ways to invest in gold. That will be addressed in the future.

In addition to gold vehicles, I have identified one other commodity in which I have invested, and three other currencies. The commodity is silver, and the currencies are those of Norway, New Zealand and Brazil. The other chart shown above is an exchange-traded fund that provides the return equal to money market rates available in Brazil (very roughly 10%) minus fund expenses, with full currency risk vs. the dollar. Not shown is a similar ETF for the New Zealand dollar, "BNZ".

In contrast, the only way I know to invest from America in the Norwegian kroner is by purchasing Norwegian sovereign bonds through a full-service broker.

Norway is in good part an oil-backed country, so I view its kroner as a form of a commodity currency; New Zealand has a large commodity role given how many sheep and cattle it contains per (human) capita; and Brazil is a special case with a strong chart pattern for BZF.


In Part II, I will discuss silver on its own merits and in relation to gold. Discussion of the above-mentioned countries and their currencies will follow.


Copyright (C) Long Lake LLC 2010