THE GREAT LIQUIDITY RACE – WHY GOLD WILL SOAR
Paul Tudor Jones appears to have shifted from the bear market rally camp to the bull market camp. As of our last update he was firmly in the position that the market had rallied too much and was due for a downturn. Late last summer Tudor Jones stated his desire not to chase the 45% rally in stocks and rather, buy into an autumn downturn in anticipation for a year end rally:
While 45% is nothing to ignore, one should take into account that the S&P through July 31 is still down more than 20% on a price basis year-over-year. The bottom line is that we are not inclined to aggressively chase the market here. Rather, we eye a better opportunity to be long equities into year-end on a potential autumnal pullback.
He has changed his tune a bit now and believes the economy has the potential to remain quite robust into Q2 of 2010 as Fed policy remains accommodative, the dollar remains weak and inventory de-stocking continues:
The forceful policy response to avert depression tail risks posed by the financial crisis has likely unleashed a wave of liquidity which is probably greater than that of 2001-2003. Our job is to identify the best performing assets of this “Great Liquidity Race.” At present, it appears those assets are gold, emerging market equities denominated in local currencies, and commodity related stocks.
Liquidity is making its way into bond purchases by banks, into equity markets, into capital flows to emerging markets and into international reserve accumulation and related diversification away from the dollar. This will be the trend over the next quarter—or two—even before discussing potential portfolio shifts within it.
Due to this easy money approach he is becoming heavily invested in gold and other precious metals as he expects metals to win the “great liquidity race”:
“precious metals exposure has been increasing and is currently the largest commodity exposure. As a result we have included, for this quarter, a separate discussion on gold as an appendix. I have never been a gold bug. It is just an asset that, like everything else in life, has its time and place. And now is that time.”
In the bond market he likes Curve Flatteners as inflation is likely to pick-up in the coming quarters. Julian Robertson does not have the same gold outlook and also has a different perspective on playing rate increases.
“Curve flatteners also provide tail risk insurance against long gold, short dollar and long equity positions and, as such, marry well with other market views presented here.”
In terms of currencies he sees the dollar falling further on the back of the Fed’s easy monetary approach. He likes the Brazilian Real and the Australian Dollar. He also likes the Korean Won and Yuan, but believes their appreciation against the dollar will be slower. He does not find the Euro intriguing.
He continues to like equities into year-end. Let’s just hope he didn’t just buy at the top:
“the stage should be set for another run of meaningful size into year-end. Ensuing developments lead us to think that run could continue well into the first quarter of next year.
As for our regional preferences, we continue to favor emerging markets in general, and countries like Brazil and Taiwan, in particular.”
*Thanks for Deal Book for this report.
I’m always interested to hear what the Master’s of the Universe think, but I always take what they say with a grain of salt:
1. What incentize would a private hedgefund manager have to talk publicly about his/her trades other than to talk his book and/or front running the retail buyer?
2. Jones is in the hedge fund Pantheon with a few select others (John Paulson, Robertson, Soros, Steinhardt, etc). These guys have made the bulk of their vast fortunes getting the timing right on huge, leveraged contrarian bets. Why is he now jumping on reinflation bandwagon so late? the short dollar, long hard asset carry trade is the most crowded trade out there.
3. All these guys pounding the table about reinflation, loose monetary policy and liquidity only talk about how these things help the financial economy. I never hear them talk about how liquidity has done absolutely nothing for the real economy. Just shows you how big the disconnect is between wall street and the real world. something tells me that this will end badly for the risk takers.
Gold hugely overavalued on a long-term inflation adjusted historical basis. The great race is a speculative bet. Get in early and you win. Get in late and you lose big. Just ask anyone who bought gold in 1980 (or oil in June 2008). The gold bubble could be huge, but it also could pop at any time.
kbob Reply:
October 29th, 2009 at 8:29 AM
Gold is most definitely not overvalued or a bubble. It is still well below it’s 1980 inflation adjusted high of $2000 something. Gold was dead in the 80’s because Volker killed inflation with 20% interest rates. However, based on current money supply, future deficit forecasts, and extended periods of ultralow interest rates, gold is undervalued and has one of the brightest futures of any asset class, along with the rest of the general commodity sector. Currently it might be overbought due to ultra-bearish sentiment on the dollar, so it can have a small correction- but definitely not a bubble.
Rob Reply:
October 29th, 2009 at 10:56 AM
Except for just before the 70s-80s bubble for most of the past century gold has ranged from $350 to $450 per ounce in today’s inflation adjusted dollars. We would need a decade of inflation like the mid-70s to early 80s to justify today’s price.
If you bought at the inflation adjusted price of $2,100 in the early 80s, then you have lost half your money inflation ajdusted terms, have had storage cost and zero yield. All the gold bugs who bought back then are praying that gold goes over $2000 oz so that they can breakeven.
If you bought in the early 70s and sold when gold hit $750 oz then you made out like a bandit. Especially if you plowed your gains into stocks.
I don’t doubt that gold may reach $2,000 /oz, but which inflation to match the bubble will pop just like it did in the 80s. Do you really think that the Fed with its mandate to maintain stable prices will really allow inflation to reach double digits? (Paul Volker is one of Obama’s top advisors and one would hope ready to step in for helicopter Ben at any time). There is also serious doubt how sucessful the Fed will be with its effort to try to create inflation considering the massive destruction of credit and the insolvent banking system.
Why would anyone not want to be in equities and commodities right now? Every other asset (Bonds/Doller) has increasing supply.
Actually, Tudor makes his money following the momentum. He believes that having a great conviction in a trade will eventually set you up for financial failure. His 1987 play was contrary to the market, but he kept getting hurt on small positions until the market finally agreed with him, and then he rode the wave of momentum down.
It is hard to judge gold to be overvalued when once considers the huge monetary base explosion that has occurred over the last few years, however, it has stood the test of time as store of value (thousands of years). Julian Robertson would argue that the problem with gold is that it has no industrial demand, thus its supply and demand is based solely on it being a store of value. Its an interesting issue, we are in a market that has not been driven by fundamentals for some time now.
Oh a cautious bear turning bull? I am probably going to buy puts tomorrow or monday now.
I prefer to read Pravda to get my propaganda, thank you. I’d rather not know what PTJ is thinking, since if you know anything about him, his LT calls are awful. His greatest successes are attributable to turning on a dime and booking his losses quickly mostly on trades that can be measured in hours if not minutes. Only a fool and a dead man don’t change their mind. I’m quite certain he’s already changed his.
Gold was a great buy during the tech bubble when everyone wanted internet stocks and no one wanted gold. Now everyone wants gold and commodities, but are still afraid of stocks (follwing the bursting of two recent bubbles).
Gold was bid up rapidly as soon as Ben started cutting rates in August 2007. I bought the GLD the day he cut the discount rate. But I would not add to my position now and I thought that it was overpriced when I bought it, but I wanted hedge. I figured it would run to maybe 900. I was pleasantly surprise by early 2008 and then almost scared into selling my position earlier this year when deflation seemed a forgone conclusion.
I still think that the destruction of credit, the insolvent banking system and long-term unemployment will keep domestic price inflation in check for some time – even with all the money printing. I bet price changes are volatile over the coming years. Last year we had a sharp burst of inflation during the recession and even now in recovery we are very close to deflation.
I think that ultimately real interest rates will rise further as the government has a harder time selling its debt. Price inflation is necessary get to the Fed’s objective of having negative real interest rates. So I am sure they will keep pushing on the string. But they have announced that their programs to purchase treasuries will end tomorrow and mortgage paper early next year. Without that support will zero interest rates be successful in preventing deflation? Maybe.
I think we will see the first hints of inflation oversees in countries with currencies linked to the dollar. Is there price inflation in China yet? No. They (supposedly) have 9% GDP growth but inflation is extremely low. (Asset price inflation is high, but not consumer or producer prices.)
FYI. Please shoot all the holes you want in my agruement.
Joe Frugal Reply:
October 29th, 2009 at 12:59 PM
Rob,
I agree with your statement except the prices of consumer goods have soared in China in the last two years. My friend was over there two years ago when prices started rising and this time he said almost everything…furniture, foods, etc. all the stuff people buy every day is 300% higher.
I am not sure I believe gov stats seeing what is published here. I prefer to walk outside and see for myself. The head of the Bank of China already warned their people against”blind optimism” in their stock market but he seems to be ignored by many….at their own risk imho. Last time he said that was prior to this recent great crash.
Yesterdays severe drop was a shot over the bow of what will happen in the coming weeks imho.
Rob Reply:
October 29th, 2009 at 1:24 PM
Can anyone point me to good sources of data on the Chinese economy? e.g. Electric usage, real consumer price changes, etc. The official reports this year have been GDP growth of about 9% and very low price inflation.
I like the truck and rail data that TPC regularly posts for the US econonomic picture.
prescient11 Reply:
October 29th, 2009 at 10:08 PM
Rob, fyi, I saw a IB note that inflation had hit 15% in China. They are experiencing inflation, believe that.
As TPC and I have discussed many times the inflation/deflation argument is a tricky one and I think you are right for the most part.
I view it as consumer deflation. What do consumers have – homes, cars, durable goods, etc. That is why, except for a few AG plays, I don’t want to be in those asset classes.
However, look at who and what will be spent. I think we will have commodity/infrastructure inflation – governments including ours and China have definitely move towards green technologies and the space is awash with cash, so for those asset classes I think they will rise.
Then we get to the average investor, mom and pop and the “smart” money. Bernake will not raise interest rates, I think he will expand the MBS buying, etc. Then look at the budget, it is exploding and no one is stepping in to stop it. Obama runs the show for three more years. I’ll readjust my perspective then.
Until that time, it looks like the inmates are running the asylum and fiat currencies are going to be broken. Currency markets will fluctuate like mad I believe.
TPC Reply:
October 29th, 2009 at 1:10 PM
Gold is nothing more than an inverse dollar play in my opinion. People who hold physical gold do so with the worry that the fiat currency system will perish. I think that’s a fantasy. The days of paper money are here to stay. That doesn’t make is a bad investment, but it’s based on a false hope to a certain extent. I say short dollars if you want to bet against fiat currencies. Better yet, buy commodities with real intrinsic economic value.
If gold is a bubble, it has been a vary smooth bubble since 2001, when the Fed+Japan started massive printing 2.0, as well as uncertainty over the Euro. Nothing has changed in 10 years so I don’t see any massive downside. All the conditions or worse (mentioned above) are in place as they were in 2000. Gold has shown to be true alternative asset as it has played differently than real estate and commoidities and Swiss Franc’s. It is also very hard to increase production by more than a 2-5 %/year. It is a perfect store of value, but you don’t always need one (just like we should all have guns but we don’t). The question is if you are concerned about the 3 items above what’s the downside risk of owning gold as a hedge: lose interest payments – nope; massive downside – nope, max -50% (safer than C!); new technology or unexpected supply or massive investment in new supplies – mostly nope?
Julian Robertson has a curve steepening position, not a flattening position.
TPC Reply:
October 29th, 2009 at 5:00 PM
I should have been more specific. Robertson and Jones both believe rates are going higher, but Robertson is betting on it via curve caps – not steepeners. He swapped out of his steepeners over a month ago.
I believe gold’s move higher is capped by the strength of the US dollar based on positive GDP numbers that started coming in.
TPC, gold is not really an inflation play purely, but as I said a credit crisis play.
The currency markets are going to blow many people up, many people.
Short all fiat currencies. They may be here to stay, but tell me how much that dollar bought in 1950, 1980 and now.
Much much devalued.
Rob Reply:
October 29th, 2009 at 9:02 PM
In nominal dollars gold cost $41 in 1949, $45 in 1959, $41 in 1969 and $290 in 1999. In 2009 dollars, gold cost $367 in 1949, $336 in 1959, $241 in 1969 and $376 in 1999.
Gold cost $459 in 1979 ($1,365 in 2009 dollars) as the bubble really started. Gold went up 10x in 10 years but prices only doubled. An overreaction. Even today prices are only about 6x 1969. Gold hit over $2,100 in 2009 dollars. Then collapsed even faster than the NASDAQ bubble. Not quite as fast as last year’s oil bubble.
Buy gold. It may go to $2,000. Nevertheless, I think it is already priced in anticipation of prices more than doubling within a decade. Since 1999 gold has gone up 3 1/2 times but prices have only gone up 30% or so. The dollar is down 40% against the Euro. How does that justify a more than tripling in gold? Much less a lasting move to $2,000.
Gold is either speculative play at over $1000 or it has been permanently repriced in comparison to its historical value.
prescient11 Reply:
October 29th, 2009 at 9:56 PM
Through etfs many many people can buy gold easily simply by clicking a button.
Gold is not a pure inflation play, it is, however, a credit crisis play.
The credit crisis is far from over. And yes, a repricing is coming.
We are adding almost 20% of the national debt FOR THE LAST 230 SOME YEARS, in a year.
Yes, fiat currencies are in big trouble and will all slide downwards from here, with I’m sure bumps and bruises down the way.
I do think gold has made a sustained move north, sure it could drop below 1000, but I don’t think in the next five years that is the case.
And what is the future, the morons are trying to break the balance sheet even further. You tell me how this plays out.
And I’m not trying to be confrontational, I read your comments all the time and respect your opinion greatly, I just think a sea change is at hand and gold, essentially, has been repriced. I look forward to your response.
jt26 Reply:
October 30th, 2009 at 5:32 AM
“Even today prices are only about 6x 1969″
Based on official gov stats and CPI … but looking at my parents house value over that time period … typ 35X … actually outpacing gold … for most people CPI underestimates “real buying power”. Tuition+accomodations has been one of my biggest personal expenses (vastly outpacing food & clothng) … I think it easily trumps CPI rises as well.
Rob Reply:
October 30th, 2009 at 8:21 AM
I have been looking for a good internet source for real prices over the past century. e.g. What did specific things cost is 1920, 1930, 1940, 1970, etc.
My personal experience is that my cost of living has gone up less than the official CPI over the last 10 years, even though sources like “Shadow Stats” calculate that CPI is massively understated. I have never understood the owner’s equivalent rent part of the CPI, but excluding that the CPI doesn’t appear to me to be that far off.
State universities cost so much more today than years ago not just because of inflation but because the most states have cut back subsidies dramatically.
My parents bought a house in 1983 in Ohio and sold it at a CPI inflation adjusted loss at near the peak of the market in 2004. Real estate depends on location.
The health care and finance industries are bloodsucking drags on the economy.
jt26 Reply:
October 30th, 2009 at 3:49 PM
You’re right Rob. A lot of the inflation is situational, urban real estate powered by the rise of the two income household (and House and Garden TV). I also forget the goode deflation, like a computer with 1000 MIPs has probably gone **down** by 10000000X in that time period.
On a related note, China has started to step up gold buying and along with the reports on base metals investing, this may be the first indications of China starting to export inflation. Some strategists have been saying since ~2000 (when China really turned up its export machine) that China would be exporting deflation initially (think low cost labour) but as their domestic economy picked up they would start to export inflation (every Chinese owns 2.3 SUVs, big refrigerators etc.). At the time they said that this would start happening when China started to let the RMB rise because this would signal that China needed oil more than selling plastic toys to the US. That might not happen yet if China can secure these assets with their truck load of USDs, but private citizens may start the inflation with their private investments.
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