Monday, December 21, 2009

2010 -- The Year of the Tiger

According to the Chinese Zodiac, the Year of 2010 is the Year of the Tiger. I see two things occurring:

1. The correlation of equity markets and the bond market will break. When equities fall, bonds will not be bought as flight to safety trade.

2. Gold stocks will, for the first time in 9 years, trade with the metal on the upside and less so with the overall market.

Call me crazy, but I am not sure we want to see upside economic growth (relative growth vs. expectations on global basis) here in the US. Excess money floating around coupled with real demand overseas will spike the prices of the things we need and rely on (energy, food, and interest rates). Add those to the structurally high unemployment and the deficits we currently face both of which resulting in the goods we own (dollars, houses, and cars) continuing to depreciate. Not something to cheer for.

Tuesday, October 27, 2009


I try to refrain from using the term "bubble" but since its so widely excepted, I decided to use it just this one time to convey my point.

Gold, contrary to popular opinion, has many uses such as jewelery, medicine, electronics, and as a form of money. Today I would like to focus on the topic of gold in its monetary form. It is hard to ignore the price action of gold over the past 9 years, rising from around $300 to over $1000 an ounce. Although the price appreciation has been steady and consistent, there are constant calls for a gold "top" or identifying it as a "bubble." I am on the other side of the aisle in that gold, in its current state is not a bubble, but in a secular bull market that has a lot of room to run.

Bull markets are very difficult to ride in their entirety because the percentage gain from start to finish is sickening, but the best method is to be part of the bull market and walk away, looking from time to time. By "walk away", I mean to the point you forget you own gold.

I do actually think gold will become a bubble or mania, but again I believe that is far off. I don't have a price in mind, but sentiment will guide me. During the technology mania peak of 1999 and 2000, respectable businesspeople were quitting their jobs to become day traders. They believed this was the future. I believe we will know when gold is in the process of topping when, again these same respectable people will quit their day jobs to be gold dealers or brokers. That will be my sign, but until then the fundamental and technical picture remains in tact. Will you become a Goldmember?

Thursday, July 2, 2009

The new financial center v.2

Here is a follow-up to my New York City post a few weeks ago, just focusing on a different city, Boston, MA. These are not my words, they are from a well known site Itulip, which is run by Eric Janszen. Eric begins by discussing the consumer psychology in a depression and continues into some examples that he is seeing.

"What impresses us most is how unimpressed many appear to be about the seriousness of this depression. They ask why many restaurants are still busy and why many malls are still busy, even if apparently the shoppers in them are buying less. Where are soup lines? Where is the high crime rate?

We remind them that we are only one year in to a multi-year process.

The average man or woman does not change his or her behavior until years after an economy has changed around them. No one likes change, even positive change but especially negative change. The tendency is to ignore change as long as possible, and hope it goes away and "normalcy" returns. Meanwhile, change goes on.

This depression is transforming the world around us. If you don't think so, I encourage you to take a closer look. On the surface much appears to be the same as two years ago, but under the surface much has changed and is changing, shifting relationships among friends, families, and colleagues. Changes in circumstances effect the range of choices people can make. They make different decisions than before. Different decisions produce different results. Those results impact someone else's decisions. Collections of decisions combine in unexpected ways. One of the most obvious is that consumers buy less. As they do, after a lag, they will find that they have less to buy.

The Great Depression is taught in American schools as a market crash on a Monday in October 1929 with soup lines forming shortly thereafter. Blurred over are years of failed trial and error policies by politicians who desperately wanted to undo the damage caused by the preceding decade of credit excess. But as time went on, the damage that started off as abstract data on output and debt and incomes began to show up unmistakably in the physiognomy of economic depression. That itself will later to have consequences, feeding back into changes in behavior.

To get a street level view of this process, I brought my camera with me on my latest bike ride into Boston from the western suburbs where I live. On the usually pristine Minuteman Bike Trail that I ride on as far as Arlington, not seen on previous trips over the past ten years are now graffiti, piles of burned trash, groups of teenagers hanging out, and police cars parked on the side of the trail. Nothing says “things are not going well at home with Mom and Dad” like graffiti on the side of a boutique grocery store.

Riding down Newbury Street, Boston’s posh shopping district, I took 15 pictures of retailers that had gone out of business, eight of them side by side. So desirable is the location that even during the 1980s recessions a single vacant Newbury Street shop was a rare sight."

I will again come back to the idea that the U.S cities that decided to base their underlying economic strength on financial and retail sectors will have a hard time regaining their dominance. Again I ask, what will be the next great financial center of the United States?

Monday, June 8, 2009

Cuff Em

Friday’s slight improvement in the jobs number has found a way to quickly make a mockery of US monetary policy. The less bad headline number of -345,000 jobs lost in the month of May 2009 has prompted the expectations of the Federal Funds rate, set by the Federal Reserve Committee, to sky rocket. With short terms rates at 0% and talk of it staying that way for a long time to come from Chairman Bernanke, the FED now faces an interesting quandary. Expectations on what the FED will do during the upcoming meetings based on FED Funds Futures are as follows: 33% possibility of a 50-basis-point interest rate hike by September, a 40%-plus chance of a Sept hike and a 100% possibility by December. This after a report of a contraction of over 300k jobs!

If we think back to a similar situation where the FED was faced with this predicament, it can be last seen in the 1931-1934 period during The Great Depression. The FED saw the economic data improving and decided to raise rates prematurely. This backfired and sent the economy back into a downturn. As we all know, Ben Bernanke has dedicated his life to studying the Depression, so in my estimation, this policy action will be avoided (Fed Fund Futures are wrong in my opinion).

Leaving the question of whether we should currently be at 0% in the first place aside, this is where the FED has to make some decisions. Do they want to disappoint the American people and send us back into a depression they worked so hard to avoid, or will they continue to inflate the economy through low interest rates and liquidity programs? Inflation vs. Deflation, we have seen that the FED has chosen inflation, why will it change?

Now, the interesting part. The elephant in the room is foreign ownership of US Treasuries and T-Bills. Because the FED policy thus far has been one of ZIRP (Zero Interest Rate Policy) everyone and their mother has shortened duration in the treasuries they hold. For example, if I owned 10-year treasuries, I have decided to swap those in for 2–years as we know they are “safe” and tied to short term rates by the FED, who has told us time and time again they are on hold for “an extended period of time.”

So, two roads. Fed Funds Futures market is correct, and the FED decides to raise rates by the September 2009 meeting. OR, they stay on hold as implied by the last eight months of statements. Some believe the FED does not control the short end, the market does, which is quite possibility true. Either way, raising rates will cause a catastrophe in the short end of the curve due to enormous over crowding and will send us back on depression watch. Due to FED policy, banks have had the opportunity to make obscene profits from the record steep yield curve; this will go away. If they stay on hold, long-term rates will continue to climb, but this time at faster speeds thus squashing any housing recovery due to exploding mortgage rates. In addition, by upsetting what the market wants will create a dollar debacle, something our creditors have been staunch opponents of as they hold immense dollar assets.

Either way, their hands are tied.

Thursday, June 4, 2009

The new financial center?

In the 1700's New York City gained prominence as THE financial center of America. It established itself as a major trading port due to the Hudson River availability and for a brief time was the capitol of the US. As time went on, it grew in importance as a financial, cultural, fashion and entertainment mecca. In the financial realm, it is best known for Wall Street. Wall Street has been a key driver for the local economy in Manhattan fueling real estate, retail, fine dining, and nightlife. I believe this is changing. Manhattan will always be a cultural and entertainment hotbed, but the demise of finance will bear great strains on the city. You can see it walking around the streets. New Yorkers don't march up and down 5th Ave. shopping, it's foreign buyers here on vacation. Much of the real estate boom in New York was driven by lofty bonuses and a foreign buyer. What happens to a city that is reliant on one industry, a city that is not self sustaining?

The real question is what will be the next great financial center of the United States?