3 THINGS I THINK I THINK
6 November 2009 by Cullen Roche
6 Comments
- Gold is now trading higher than the S&P 500. if this isn’t the ultimate signs of the Fed’s failure over the last 25 years I don’t know what is.
- Isn’t it amazing that we’re past the recession and now almost two years past the official start of the Great Recession and we just reported 500K weekly jobless claims and 200K in monthly jobs lost while the unemployment rate continues to rise!?!? There is no doubt in my mind that we will see a positive job print in the next 6 months, but the pace and duration of this recovery are already astounding.
- I went cow tipping once as a teenager while visiting the rugged back roads of the great state of Virginia. All these years later as I see the cattle herded into their positions I now understand why these animals (and investors) are so easily toppled over….
1. Gold is money, buy and hold(equities) is a fraud perpetuated by fee earning asset managers on a public that wants an easy answer in a complex world.
2. Jobs are a lagging indicator, and anyway, the “real” unemployment is much higher than the headline print. Still has zero correlation with market returns.
3. Being dismissive of the herd is a sign of immaturity and a basic lack of humility in the face of the market’s omnipotence. The herd’s importance is in figuring out where it will go next, not in declaring that the herd is stupid because you’re too dumb to profit from it.
The LT trend has been up for 75 days, you’re either on board, or losing your ass. Be stupid, be long.
You say it is immature to ignore the herd? Can you show me one single shred of proof that following the herd produces greater risk adjusted returns? You can’t. Because it isn’t true.
Don’t follow the herd, but it doesn’t mean you should ignore the herd.
I think that overall Bernanke has performed an amazing balancing act. The question is if it will all blow up in his face at some point.
The market’s reaction to his actions has surprised me and has gone much further than I believed possible. (Inflation panic sends oil to $150, financial panic sends the year Treasuries to 2%). Nevertheless, both deflation and inflation seem to be at bay. Home prices have temporarily stablized. Unemployment is no where near depression levels yet.
I foolishly thought long term treasury rates would rise due to increased government borrowing, oil would fall due to a global downturn. In comparison the equity market’s reaction seems downright reasonable. Stocks are maybe 20% to 25% overvalued, but that is the closest to a normal valuation in many years (excluding part of the past year when stocks were a bit below or right on).
People said the same thing about Greenspan’s balancing act in the 90′s. Now 10 years later they think he is a moron. Give Bernanke 10 years. It is not different this time.
To paraphrase Bill Clinton, “It’s the debt stupid”. Until we rid ourselves of this pernicious debt, we will continue to have a very poor underlying economy. We have well over $40T in debt that must come down at least to GDP, or $14T. If we pay off the equity at 6% per year, we’ll have 18 years with a 6% drag on GDP. Doable, but painful until 2027!
There are two alternatives: inflate the debt away, and default.
The problem with the inflation scenario (which the Fed desperately wants), it involves increasing the money supply by credit creation. Unfortunately, that’s how we got into this mess, and people want to pay off debts, not take on more. Without the multiplier from credit creation from the banks, you have to PRINT IT ALL. If you think the Fed can print $26T dollars without being lynched, you’re a far more optimistic person than I. They’ve only printed a little over $1T so far.
Defaults will happen regardless. We are having a lot of foreclosures and bankruptcies already, which reduce the debt quickly. But $26T of defaults, even over many years, would crush economy completely. And if we get into a deflationary spiral, debt jubilee (universal debt forgiveness) may be the only answer.
Obviously, paying the debt down like adults is the best choice, but the government is piling debt on top of debt as fast as they can. They simply don’t get it. And that will only push us closer to default. So I don’t hold much hope for rapid solution to this crisis.
Gold will be a survivor, as always.
BTW: I am a big fan of ECRI. But I don’t think their indicators are designed to work in a deflationary environment: they probably mistake government stimulus for real growth, or as inevitably leading to it.