Friday, March 21, 2008

The Inflation vs. Deflation Debate - The Greater Depression

Not suprisingly, I guess, a lot of people are pretty down on the US these days and calling for economic malaise -- with prognostications running from "slower growth" (Bush administration) to "Greater Depression" (most of the tin-foil hat economic blogsters).

While, there seems to be an "argument" between the "deflationary" malaise (1930's US, 1990's Japan) and "inflationary" (1970's US, Gernam Weimar Republic 1920's) camps, I have been careful to try to walk in both worlds.

(technically, inflation is creation of new money (or credit) -- deflation is removal of said money or credit. In this case I'm talking about "price inflation" which is a symptom of the former)

My feeling was that:

asset prices (stocks, non govt bonds, real estate) would deflate, while the price of things that you need to live your "everyday life" would inflate.

The idea was that the availability of money for assets would disappear -- and drive down the ability of people to speculate in them. Meanwhile, the Federal Reserve, in trying to maintain the status quo of high asset prices would create additional liquidity. However, that liquidity would find a home chasing "things that the Chinese and Indians are buying" -- commodities and the raw material inputs for a society growing into "first world" status.

So far, whether that was the real reason that things have played out as predicted or not, that has worked out. However, this week, for some reason, the "wheels" came off that trade.

What happened to my account balance?

With this background in place I want to talk about what I saw in the markets today. Financial stocks were whipsawing wildly. Commodities, and commodity stocks were all under severe pressure most of the entire week.

While it's probably more important (and often smarter) to just follow the markets and not try to understand what is going on in the moment, I'm not geared to do that. And, that's why I'll probably never be a good trader. So, in here I'll attempt to explain what *I* think is driving the market activity of the last few days.

Bear Stearns -- obviously the Bear Stearns collapse was a huge event, for a lot of reasons. The most important was that it scared the bejeebus out of a bunch of people in the FED, the Treasury, the Admin, on Wall Street, Fannie, Freddie, and OFHEO.

Basically EVERYONE went to battle stations and immediately started damage control.

The FED slashed rates .75 points.
The FED cut the discount window rate by .25
The FED now allows non-banks, organizations that it does not directly monitor or control or oversee in any way to give it collateral of dubious value (home loans basically) and in return give out CHEAP loans of treasury paper which can be sold on the open market by these non-banks (think JP Morgain, Goldman Sachs, Lehman, etc.)

Why this is important is that while banks are subject to capital restrictions that cap their use of leverage around 7-1, the investment banks are not....They and their hedge fund clients often use 2 to 4 times as much leverage.

OFHEO relaxed restrictions that Fannie and Freddie were under (for failure to accurately report financials! in the past) and are letting these institutions "gear up" their leverage even further into the face of a declining Real Estate market.

Wall Street investment banks, in a bit of a panic i believe, have begun calling in the leverage being used by their hedge fund clients.

Many of these hedge funds had gone "short" the financials, and long on commodities (fuBarrio's trade for the last couple of years) and this has become a very crowded trade. As the hedge funds are all racing for the door simultaneously it's creating a massive short squeeze in the financials and a quick butchering in the commodity complex.

Meanwhile back in the Bond pits.....

US short term treasuries are now yielding .5% per annum on a 3 month. That's the lowest on record. And, according to Karl Denniger you could actually execute a "reverse carry trade" on the Japanese the yield is so low.

Denninger explains it as black and white:

1.) either the bond guys (who move many billions of dollars btw) don't know that they are doing, or
2.) we are entering a massive deflationary collapse on the scale of the Great Depression.

I've just started reading Denninger in the last month or so, but he is the best I've found online in trying to explain the gordian knot we've created for ourselves with this debt mess. He does a posting pretty much every trading day.

Good luck, everyone. At this point, I've paired back my exposure to the precious metals to just my "core holding" which is more of an "inflation hedge" than a spec that we are taking off while I'm still looking to go short on runups.....again a very crowded trade, and likely not that profitable until people start relaxin a little more.

If gold can somehow carve out a nice round bottom in the 800's.....retest the 1000....and pullback momentarily, we will be looking at a classic cup and handle after a big up move and i would be recommending to go in very long, perhaps in a leveraged way to catch a big upmove. Now, is not that time yet.

If you are not a trader, and have actually read this far, and wondering what you should do to protect yourself in case things continue to get "nasty" out there....get out of debt, stock up on food and cash, stay in touch with friends and family, (move to south america :) ), and get a gold coin or two and a little silver "just in case".


Wednesday, March 19, 2008

Gold Price -- Lunchtime Musings

Just a quick break from the workday to follow up on my last post.

In my last post, I pointed out that I had a "sense" that things were getting ready to "turn"....meaning the trends:

commodities higher
dollar lower
US financials lower
US stock market lower (in general)

...were all getting ready to reverse for a "pause that refreshes".

In light of the recent activity, I think we've seen that turn. Nearly all of the commodities have turned lower, the dollar bounced (slightly), US financials had a "snap back" rebound after the bear stearns news broke, and the US stock market had a powerful up day.

While I think that all of these "counter-trend" moves could carry on, I'm not willing to gamble on them anymore.

I'm moving to a "neutral" stance and I'm waiting like a panther to pounce on some of these things again. The only thing that bothers me is the speed with which this "snapback" took place. I was hoping for a couple of week move to cover the same ground.

I found a post backing my "sense" (at least in gold) that said that gold was ripe for a fall back to the bottom of an upchannel move down to spot 940 range. That was the number I was looking for, but given the speed with which we've fallen to that number, I'm not going to go "all in" yet....the counter trend rally *could* erase up to half of the previous gains from the recent move (and if something fundamentally shifts even more).

If we are lucky enough to have this retracement drag out a little bit longer to shake off some of the speculative "froth" in the gold market, it could set up for a very nice move upwards again.....for that we'd need to see the volatility calm down and the price of gold to move back into the back pages of the financial news rags.


p.s. the BIGGEST news (buried in the Bear Stearn debacle) was the fact that the OFHEO opened up fannie and freddie's ability to use their capital to loan out more money. in other words, from my understanding they *relaxed* their capital restrictions....again, in other words, from my understanding, they are letting them lever UP into a DECLINING market.

for the love of God this can only be a way for the investment banks hedge funds and other deer caught in the headlights to pawn off their crap onto an organization that is ostensibly under an implicit guarantee for taxapayers to backt them.

oh....p.p.s. fed funds rate is now 2.25 and i'm starting to go short the US financials again, regardless of what the technicians say. This bear market rally could last a couple of months but I believe another bank or banking institution will fail (probably more). At some point the federal reserve and the american people will run out of patience and balance sheet to keep propping them's ......GD part II.

Sunday, March 16, 2008

Paloma, Uruguay

Tried to drive out to Punta Del Diablo the other day and just gave up after several hours on the road and starting to lose the sun.

We cut about an hour off the trip by going to Paloma instead.

interesting little town with an amazing number of restaurants. It must be very busy with tourists during the "season". Right now we are sort of in the "shoulder season" and it didn't seem nearly as busy. i'm curious how many of those restaurants are open in the winter as well.

So, obviously they have a beach. The sand isn't great quality though compared to lots of other beaches in Uruguay, although it is wide and flat. Good for beach soccer....
The "ladies" (midori and golden lotus) enjoyed the waves and playing "fetch" (aka keepaway) in the sand. fubarrio, hid from the sun under an umbrella most of the afternoon.

Saturday, March 15, 2008

You're FIRED - Finance Insurance Real Estate

FIRE, which is some acronym that stands for Finance (loans), Insurance & Real Estate -- the heart of the "service economy" I guess....Apparently, the only place where regular Amercans were making any money least until things cracked up.

Well, remember when I said that there was a good chance that fubarrio would cease to exist and would descend into an oozing cesspool of commercialism?

Well, even from blatant commercialism there is something to be learned.

What's that you say?

Well, apparently, some member of the finance (loans) and insurance industries have figured out that paying for links on subject matter blogs like this one can enhance their search engine placements in what would otherwise be insanely expensive spaces to compete.

I got an email from a gal out of the UK that apparently shakes an stirs the blog universe a couple of times looking for blogs that actually have enough sway where they can actually (slowly) effect the rankings for the sites on google (among other search engines).

The other thing they've figured out is that balding dogs with bad breath and crooked teeth can be had for pennies on the pound sterling.

She pays a couple of "quid' a month for a link and probably charges the company she's placing it for considerably more -- (hooray intermediaries)

Well, as it turns out -- another free internet marketing tip from your uncle fubarrio -- if you place a link with anchor text in a DEEP link (meaning deep within some content that seems to fit what it is the link is going to) it tends to perform much better.

While they didn't really ask for my to create a blog post about loans or insurance, I decided to anyways as a freebie sendoff for my commercial actually make money with this internet thing? I'll have to look into that.

Anyhow, you know my personal opinion on debt by now. It's a giant ponzi scheme that is bound to be the end of us all.

Insurance i haven't talked a lot about.

I remember when I was a younger pup at the UW I was studying finance. I had delusional dreams of becoming an investment banker after spending some time as an analyst for Fidelity. Little did I know that the titans of wall street were more likely to hire a shoe shine boy outside the floor of one of the exchanges than to hire out of an unheard of pac-10 university.

I remember i went in to talk to the college career counselor (this university has something like 35k students). She said in the entire time she'd been there (10 years) she only knew of one person who had graduated from UW and went to work on wall street (!)

In the late nineties I knew of at least one other, but it was as struggle for him....he was making 35,000/year in Manhatten! He was working crazy hours as an anlyst for some "fourth tier" investment bank :) He gradually worked his way up to one of the more respected banks before bailing to get his MBA and a more relaxing lifestyle in Intel's Treasury Department.

Ok, well, if this deep link doesn't give someone's website a boost....I don't know what will....

Be informed about your life insurance Hey, I mean, that sounds like good advice right? I always likened the life insurance folks to casino types's like...hey, if this is such a great deal, how did you pay for such a huge building?

Loans to get your finances in shape. This link I have to say is almost oxymoronic....

If you want to get your finances in shape...stop taking out loans! Maybe they are gonna tell you that they can consolidate your credit cards, etc etc etc. I dunno. Call me a ludite, or a neo fundamentalist or something, but giving loans to americans is kinda like giving whisky to the indians....or keyboards to the English.


Thursday, March 13, 2008

Nuclear "Indian Summer"

Excuse my absence from posting anything lately.

It's a bit ironic, because I actually have quite a bit to say. It's just a matter of trying to organize it all into some sort of coherent thought process that someone could reasonably follow. Now, THAT is going to a take a little doing....but here it goes:

Get Your Affairs in Order Redux

In my orginal post "Get Your Affairs in Order" I posited that the US dollar was enjoying what would be a short counter trend rally -- perhaps lasting for one or two months, and after that rally the bottom would fall out.

For those that live on the dollar and are already cutting it pretty close to the bone in regards to "disposable income" (see: fubarrio!) my advice was to hedge away some of this risk. I think suggested that gold would be one of the most efficient ways of accomplishing this.

Since that orginal post, as predicted, all hell broke loose to the downside on the dollar, and things we use to "heat and eat" (commodities priced globally that we must compete for globally with depreciated dollars) have obviously soared.

So why do I bring this up now? Just to gloat? (yes, a little gloating is in order, but that's not why!)

What prompted me to post the orginal "get your affairs in order" and to speculate that some time remained for people to do just that was that there was a good deal of *manipulation* in the marketplace as the dollar approached significant psychological "points of no return"

If you remember, "support and resistence" -- theoretical "lines in the sand" are psychologically important price points for a given asset or security. While these fundamentally have no reason to exist (usually), the market is made up of people who have psychological motivations for the way they price things.

Important support prices (prices through which a given security seems "unwilling" to go under) or resistance (prices a given security has a hard time "breaking through") can be for any number of reasons. The most common are: round numbers, and places where significant bottoms or tops in price action were formed previously.

Right now, we've bounced off some important psychological levels, with a little help of overt market manipulation by the powers that be. They have in effect halted the "nuclear autumn" and put the warm sunshine of capital appreciation back on your face for an extended "nuclear indian summer".

Well, as soon as the warm snap is over, guess what....getting ready for "nuclear winter".

Gold at $1,000/oz

Gold "printed" 1,000/oz in the spot market today for the first time ever. This is a signficantly psychological price barrier and it is pretty unlikely that a security like gold could just power through without going back to "retest" the 1000/oz mark to see if it could act as "support".

Gold has since pulled back, but without doing any detailed analysis, this is NOT where you typically see a multi-year high. Gold should hit the 4 digit mark a few more times with small pull backs before approaching the 1000 absent any news. Then "magically" some news supportive of gold will probably appear to "explain" a breakthrough past the 1,000 mark in a significant

Dollar/Yen at 100

The Yen has *soared* in recent months. And, as many pundits expected his 100/dollar this a.m. It has since backed off fractionally. But with US inflation hitting asian shores look for them to continue to let their currencies appreciate (longer term) to fight off food inflation. While Japan is not China, Chinese appreciation gives Japan more breathing room (i believe) to let their currency inflate against the USD

Oil at 110/barrel

Does that number just sound "high" to anyone else? Good God. :)

Nat gas over $10/MBTU

I guess the unseasonably warm winter didn't materialize this year in the North and we see what happened to nat gas.

S&P at 1305, 1290, 1270, DJIA under 12k

OK. This is why I think that we could see some shorter term "counter trend" moves in all the aforementioned.

To any casual observer, the "great news" out of the treasury, or out of congress, the white house, or the FED (pick your day, and pick your 'suprise' announcement) just seems like (somewhat) normal newsflow.

To anyone who has been tradin for more than a week, the timing of the newsflow is VERY suspicious (to be kind). The FED, the treasury, and probably the president's working group on capital markets (AKA the "plunge protection team") have been waging a massive war of PR....

Now, if you are LONG in the dollar, or the US markets you may not notice. If you are NOT it seems very contrived.

It seems that no longer is the FED's mandate to "promote full employment" and "promote price stability" -- unless said "price stability" extends to exotic mortgage derivatives to the expense of bread for the people!

The FED has REPEATEDLY announced massive "bailout", special loans, dramatic rate cuts, liquidity injections, etc. totaling in the many 100's of billions of dollars.....All executed (even when done BETWEEN meetings --- a very rare time to announce rate moves) *right* when the markets seemed poised to cascade down off of major price support.

The FED's move seems to have been aimed at "shock and awe" (not sure if they are using this term but the media is) of the short sellers and other would be "bears".

Now, if you're long the US stock market or getting ready to retire in a couple of years you might think this is a good thing. But, sadly this is most certainly NOT a good thing. Because these injections of liquidity have to come at the expense of something ... and it's coming at the expense of the dollar....the result is rising prices for us as a way to socialize and subsidize the largess of the irresponsible lending institutions and their multi-million (and in some cases billion)dollar/year CEOs.

All the while, helping to "support" prices for the collateral underlying this mess (the houses and real estate itself) does NOTHING to address affordability for you and me who have to actually buy these mcstucco sh&t boxes at some point.

Government intervention in markets -- where markets are allowed to go up --- but not allowed to come down, can only end in a disaster. Unfortunately those gaining the most from their manipulations will NOT be those that suffer from the coming collapse. summary.....the manipulations are giving you a chance.....we may see some stability in the dollar and maybe even a little "dead cat" bounce in the markets. Use that as an opportunity to move your 401k money into something that doesn't rely on financial stocks.

If/when govt intervention fails we will see a massive and spectacular bank failure (or two or more) and by all rights the GSE fannie mae is probably insolvent right's just not admitting it yet.


p.s. as always, none of this constitutes investment advice. If you're crazy enough to accept investment advice from a blind, hairless dog on the internet with no dental plan, then expect to look like fubarrio in a couple of years.