Dennis Gartman carries significant weight in the trading world and many people listen to him. I do not know his track record in stocks, I assume he must be OK, but I do know his track record on gold and it is terrible. When Dennis says to buy or sell gold, do the opposite and you will do very, very well.
Last summer when gold was in the low $900’s Dennis was on Fast Money, a CNBC show, and said he was shorting gold and said it was terribly overpriced. He went on to say the technical’s said it should go to the mid $800’s or lower. He must have lost a bundle on that trade because gold quickly ran higher to the $980 level never to return to the low $900’s again. Ever since then he has been more negative on the metal than positive as it marched higher, until it was in a clear breakout above $1,000 – $1,100 and he bought it in Euros.
I stopped listening to what he had to say a long time ago because he was proven wrong on every call he made and I rarely listen to what the talking heads say on TV anyhow, they are always talking their book. Anyhow, I happen to caught a story on CNBC.com were Gartman said to “run to the exit on gold,” get out before it is too late or you will lose your shirt was the case he was making a week or so ago. Why was he making this call? Because gold was selling off because of a global liquidation and it sank to sub-$1200 and the momo’s were getting out of it, so what. Investors rarely care what is happening right now, they are about what will happen in the future and gold is still a good long-term investment and Gartman knows it because he has changed his mind, again!
This means you should probably sell if you are a trader or prepare to buy if you are an investor because prices are about to get cheaper, if Gartman’s record holds true. According to CNBC.com Gartman said this: “On Monday, Dennis Gartman reversed his call for gold investors to rush to the exits, saying the precious metal was no longer overbought, but also warned that it was a technical call and he is “not a gold bug.” This guy changes his mind more than most people change their socks and is wrong more than most I might add.
I get that people do not know how to value gold that maybe a clue that one should not trade it and rather invest in it instead. Buy some nice pretty coins and stick it in your sock drawer and after Helicopter Ben prints us into the new Zimbabwe you can then cash them in, that is what owning gold is all about, protecting your buying power and wealth. However, the pundits will never get it and one should use their calls as a contrarian indicator of when to buy at better prices since they never seem to get the forecasts right. For the record, I have no real forecast on the price of gold except it goes much higher from here, but I am the type of bug who buys some every month and when there is a big dip I buy more than usual, depending on the reason why. When central banks are talking about printing a trillion here and printing another trillion there it is impossible to believe paper currencies are worth anything at all. Paper currencies need confidence to succeed and what little confidence is left is quickly disappearing which should scare everyone.
The past 2 weeks we have seen the markets do things that simply do not seem natural from freefall flash crashes to intraday 300 point turn around rallies. However, there is one thing that is pretty clear, I would not buy this pull back. As David Rosenberg points out and a few other non-perma bull market strategists, not that there are many left, point out is that these wild swings are not normal in a bull market.
Think back to the market of late 1999 to the early 2000 and you will remember such swings, but do you remember how it ended? If you bought on those dips you never made your money back, ever if you bought the NASDAQ and you would have barely broke even in the S&P 500 if you sold at the peak in 2007. I think it is safe to assume that this market action is a sign of a sick overbought market trying to lure you in to buy one more time before it robs you blind, don’t do it. To be clear, I believe the broad market will move lower, I think 900 to 950 is not an unreasonable target, but we could move much lower than that. Before you say it, no the fundamentals are not so strong that we could not see the lows of last March, more on that in a minute.
I am not saying do not buy great individual companies, not at all, I am bearish on the market, but I like some individual names. I am bullish in the biotech area as there are tons of patents expiring in the next few years and you will see big pharma buy many of these names, but I also like big pharma too. Look at the yields and the rock bottom P/E’s, they are dirt cheap and you should look at some of these names, but biotech is not a prisoner to the business cycle, as long as it is well funded and near approval for a drug. I also like consumer staples that pay dividends, boring names, but they pay you to hold them and no matter what the economy is doing you will always need toilet paper and a toothbrush, I hope at least. I also still like high quality bonds and can make a case for treasuries right now, but use your own discretion, I would stay away from high yield, I sold mine a couple months ago.
Why do I think boring and income is the best model right now? Well, the market is going to correct even more than it already has, kind of a simple explanation. Income strategies, which I have been on the record for supporting since last year, makes sense because we are living in disinflationary, possibly deflationary, times where real yields are much higher than what we think. I am a long-term inflationist, come on look at all the money being printed and Obama wants to double exports in 5 years, you cannot do that with a strong dollar, but right now deflation is the name of the game and income makes sense. Deflation also means stocks need to be trading at much lower multiples than most people think and that is why I think this correction will potentially be much deeper than most people believe. Time will tell who is right about that.
The Fundamentals!
What about the fundamentals? Are they better than a year ago? Sure. Do they support a 20 P/E multiple on the S&P 500? Nope. Do you really think the housing data since the homeowner tax credit implementation was actually real data? No way. How about unemployment, do you believe temporary jobs are going to lead America to the next level of prosperity? Well, all the amazing job growth has been only in the temporary job area, let’s not forget that the actual employment report numbers are tinkered with via the birth/death model which added 188K jobs to last month’s employment report. For those of you who don’t know, the birth/death model are estimates the BLS uses to predict how many new business are started based on how many business died and population growth, it is fantasyland stuff basically.
What about corporate earnings? They have been good, but I do not believe they are sustainable. First, the stimulus is running out, that is a very important thing to remember moving forward. Second, a cool 30% of the S&P 500’s earnings come from Europe and up until lately U.S. companies enjoyed, globally, a weaker dollar which is over since the new sovereign debt issues are driving the value of the dollar higher. In technology a large percentage of earnings came from Asia and I do not believe that will continue much longer because of what is happening in Europe, Greece was a big deal indeed.
You see, Europe represents 20% of the worlds GDP and, believe it or not, China’s top importer is not the U.S. it is the EU. So, if the EU is going to have lower growth because of austerity measures, which they will, it will automatically be a drag on world GDP, but it will specifically hurt China. If China begins to slow down that is very bad news since China is “the recovery story of the world” or some other tag line the media gave it. In other words, China will be buying less from the U.S., exporting less to the EU and the EU will be buying less from the U.S. Also, China will be running, more than likely, trade deficits not surpluses which means they do not need to buy our debt. Can you see the problem now?
Greece is/was a big deal not on its own, but because it was locked in with the other PIIGS which were locked into the EU as a whole. It is all very bad news and no matter what CNBC says we are all still coupled with each other. It is the interlocking of the global economy, especially in the debt markets, that is the problem and there is no escaping it. I am afraid that even when governments guarantee debts that may not be enough anymore because, as the price of gold is proving, people are losing faith in money. Our whole system is based on faith and when that faith is damaged that is when problems get out of control and I believe we are just about at that point. The rumor yesterday was a .50% rate cut, how is that good for the Euro? If anything that would have brought it closer to parity to the USD. Printing another trillion just won’t calm markets because it means nothing. At this point I cannot see much of anything from Europe that will calm the markets.
The only things they can do is let the PIIGS default on their debt and kick them out of the EU, not necessarily in that order. Anything else will just prolong the problem and the printing press is the cause of the problem, not the solution.
I was reading Zero Hedge yesterday, a post in regards to gold where Peter Schiff was part of the topic, and there were some interesting comments. One caught my attention as being somewhat ludicrous which is not unusual, but is was because the author is a contributor to the site. Unfortunately the comment was flagged as junk, I hate it when that happens because counterpoints are always good things to have and I do not mean to rip him apart, but rather correct years of misinformation he probably picked up from school or TV armchair economists.
One comment he made was:
“On gold to the moon: Peter you’ve been talking up your gold positions for years, but once calm is restored, you’re going to take a major haircut on gold.”
Another was:
“On the US economy “not growing”: Has he looked at the ISM, employment (not just payrolls but household survey), industrial production, and the leading indicators over the last ten months?”
And the other one was referencing that as soon as the trillions in bailouts the banks received hits the economy it will calm the economies or something to that effect. He also indicated that as long as confidence remains in the system everything will be fine, which is true, but how much will it take to keep that confidence or instill that confidence? Also, the more money we inject to create confidence the more confidence it actually erodes, it is a zero sum game in the end. Part of the comment was that the EU was trying to avoid a “deflationary death spiral” or something similar, this is why people should not flag things as junk because they are not junk, which is what really bothered me.
People are thoroughly confused by deflation and deflationary death spirals and what that means. Deflation is a problem, we have deflation now, but it is not a huge problem. However, a deflationary death spiral is what we had in the 1930’s and is what keeps Ben Bernanke up at night. We will not, I do not think, have that deflationary death spiral and I think we need to understand what that death spiral was, what caused it and why we will not have it. After that I want to address the rest of the comments he made above.
What we suffered fro in the 1930’s was horrible and something I hope we never see again. To understand more about what it was like in the Depression please Read The Depression: A Diary by Benjamin Roth and stay away from the academic stuff. However, during the depression dollars were scarce because fo the massive bank failures and deposits were frozen or simply lost when the bank closed down. On top of that the stock market wiped out millions of peoples savings which had a domino effect into the real estate market which is what caused the banking crisis, somewhat reversed from today’s crisis I might add.
What this did was literally wipe dollars out of existence, they just disappeared and were not transferred to anyone else. Today one persons loss is likely another’s gain through derivatives or other hedging instruments known as bailouts, but that was not the case in the 1930’s. Since these dollars were gone or frozen and the U.S. was on the gold standard we did not have a Helicopter Ben to get dollars into the system, at first the Fed tightened credit, who knows why, but they later tried to reverse that decision, but it was too little too late. What we had was complete demand destruction and people saving whatever dollars they had, which was strange because people would rather starve than spend their money.
In fact, while people were starving crops were on or at a record pace, prior to the dust bowl fiasco of course. It was a simple fact that the U.S. was tied to the gold standard and could not put more dollars into the system and people just did not want to spend what they had saved because who knew what tomorrow would bring. We also had no safety systems in place such as unemployment insurance, welfare or Social Security, until FDR was elected a few years into the Depression. By not having those safety nets in place it made things much, much worse and that is why we had such massive deflation.
This was not the run of the mill demand deflation, which is what we have now, this was the death spiral lack of dollars in circulation plus no demand deflation. So for people to draw a comparison to 1930’s deflation to todays is a bit ridiculous to say the least. We have those safety programs now so people will not starve instead of spending money, ironically our poor actually have cable TV, go figure, and we have other safety nets in place. This is why we will not see 1930’s deflation and this is also why we can hide the evidence of our current Depression, if we do not have to see the soup lines they are not there, right? Never mind the fact that 1 in 8 Americans receives some form of Food Stamp assistance, if that is not a Depression statistic I am not sure what is.
The banking system is still suffering from after shocks much like we saw in the 1930’s, closures did not stop for years after the crash of 1929 as real estate continued to decline in value, sound familiar? We are still suffering from similar bouts of bank closures today because of declining real estate prices and that is unlikely to change. Many of these banks were bailed out, funny how some “too big too fail” are now failing after they were bailed out. How can, as his comment claimed, the markets be calmed because of trillions in bailouts will build confidence when those banks who were bailed out are still failing? This is very similar to the 1930’s when many banks who received aid under the first Hoover plan still failed. The point being is that it will take a long time for the system to heal itself and with the government propping it up it will take much longer. The Depression lasted some 10 years, 7 with major government help, our current problem got help on day 1, how long will our recovery really take?
With the massive stimulus and government spending in the banking system it is nothing more than inflationary measures. The comment that “when the trillions making it into the economy will only build confidence,” is a bit absurd, in my opinion, as it points out that the issues were very bad for a very longtime. Also, when the trillions, a bigger and more accurate statement would had been if the trillions, make it into the economy it will create inflation, period. There is really no doubt that the measures taken by all the central banks were to stem the tide of the aforementioned deflationary spiral and it did work, but the central banks cannot stem the tide of the inflation that they created. After all, central banker’s primary mandate is to inflate the currency at about a 3% annual rate to begin with so they have no real mechanism to dis-inflate a currency anyhow. Sure, they can raise rates and do reverse repos, but serious, that will do little.
In fact, for all the money spent on bailouts and stimulus measures I would argue we have received a very poor return on our investment. We had a sharp mini-V of a +5% GDP print, but that appears to be it. We had spend far less in the past and had averaged far higher GDP prints, about a 7% print after major interventions, so, sure, you got a V, but it is one side of a W, sorry Charlie. People had been bragging about the ISM Survey’s for some time until the Ism survey’s failed to support their claims, but they fail to support my claims as well. In fact, they are neutral, but well below what we would call normal expansion averages. Not to mention, these are survey’s and should be calculated as survey’s, as in this is how people feel at this point in time, not as this is what will happen in the future.
My main point is that we do have growth and things are better, but no where near where the bulls think they are and we are not heading to where they think we are going. The comment also pointed to the leading economic indicators as a “bright spot.” Funny, Kudlow and company have not brought up the LEI for sometime now because, well, the number rolled over a couple months ago now and has been heading lower, funny what happens when Uncle Sam cuts off the money. So, I am not sure what LEI the commenter is looking at, but the one everyone else is looking at is pointing to the South, not the North, good luck if you think down is up and up is down because you got Vertigo my friend.
The global economy is about to end its amazing recovery, sorry folks. Europe is 20% of the global economy and they are instituting massive austerity measures right now and these are only the start, more is needed. If 20% of the world’s buyers have less money you will see economists start lowering forecasts very soon, trust me on that one. You know how the U.S. is pestering China to revalue its RMB? Well, it is pegged to the U.S. dollar, right? Do you know who China’s largest trading partner is? Hint, it is not the U.S., it is the EU. That means Chinas products are now more expensive in the EU than they were just 2 months ago. Wasn’t China credited for the global recovery? Isn’t China in the middle of a liquidity bubble? Won’t not selling products hurt their exports causing an artificial popping of their bubble which could cause more problems for the world than originally thought? I think so, but we are still pressuring them to revalue and spreading the falsehood that we are their largest trading partners, what baloney.
It is kind of funny to see people dismiss all this information and keep economic events locally when this is a global economy, I mean, there is a reason why when the U.S. market tanks foreign markets go down as well and why when we go into a recession so do other countries. Decoupling will happen, but not until the rest of Asia emerges like China did, but until that happens China is dependent upon the U.S. and the EU. However, let us mak sure we are clear, the EU is, for sure, China’s biggest trading partner and a falling Euro is a big problem for China as well. Keep an eye on that, I am.
On to the topic of the day, gold. Peter Schiff has been bullish on gold since, well, forever now and has taken much heat for it since it climbed from $250 to $1,240, yes, taking heat for something that quadrupled. The commenter stated that gold will take a haircut, a major one, when markets calm down, maybe he is right, but let’s take a look so far. Trillions have been spent on the banks, that has not calmed the markets and now you have governments in trouble, what is going to calm the markets even if small governments start defaulting? Even beyond that, look at 2003, 2004, 2005, 2006, 2006, 2007, 2008, 2009, 2010. During most of those years the markets were considered “calm” and in a “goldilocks” period upon a new wave of global liquidity never before seen, what happened to the price of gold? Oh, yeah, it quadrupled.
The one big down year gold had was in 2008, when it first hit $1,000 I might add, when everything was in liquidation because of a global margin call. If the Fed did not start dropping money from helicopters we would have had our 1930’s deflationary spiral on our hands, but that is not what happened. What happened was things were supported by the government and long before the markets shot back up 70% gold was on its way back up to it’s previous $1,000 high. So, Peter Schiff can hold on to his gold trade all he wants, it worked for him as he lost little during the collapse by holding it and it returned more than the S&P, from January 1, 2009 to December 31st, 2009, than the S&P 500 did without the volatility. Comments like the ones made by the person in question show that they do not look at the facts and simply do not like the asset class, or do not understand it, and end up looking silly at the end of the day.
Do I think gold will go down? Yes. Why wouldn’t it? Everything rises and falls, but I think it will be much high 10 years from now than today. We know that central banks inflate the currency, that is a fact. We know, especially right now, that sovereign default risk is real and confidence in currencies is really a fleeting thing, we have merely been lucky for 38 years since the gold standard was eliminated, we know that turmoil will always exist and we know gold, silver or other commodities are a finite resource that has much higher demand that supply could ever meet. In my opinion, only a fool would not want to own gold, just look at APMEX.com, all their smaller American Eagle coins are sold out for crying out loud, is that the confidence in the global system we are looking for? Is that the sign of a growing global economy? Nope.
Much is being made over the price of gold over the past few days and questions are being raised. The main question is; why is gold going up while the dollar is gaining strength? To me it is fairly obvious, there is no faith in any of the currencies of the world at the moment. It is not as if gold is making highs in only Euros or dollars, but it is making highs in most currencies at this point. Again, it is because of a complete lack of confidence of currencies rather than, but not completely devoid of, inflationary fears.
In short, the gold bugs were right and the jokes that many made are suddenly not so funny any longer. What we are witnessing is nothing short of spectacular and one should not underestimate the importance of what is going on either locally or on the other side of the world. It is not very often that we see developed world economies default or come to the edge of default which should make everyone extremely nervous. This is not Ecuador defaulting or the Congo, but we are talking about Greece, which is no surprise in itself, Portugal, Spain and Italy who are or were on the verge of default. It does not end there though, even though they are the countries grabbing the headlines, because if they go France, Germany and the UK could all go as well, this is serious.
This has all the making, as I have said before, of a currency crisis and contagion that can and will more than likely grip the whole world, ending in the U.S. at some point in the near future. To many this is news to them as they fell into the “that cannot happen here” crowd, but the gold bugs, like myself, have been saying for years that at some point the markets will tell you that you have borrowed too much and they will cut you off. When that happens the currency becomes worthless and inflation will inevitably set in making life miserable for the inhabitants of said countries. This is why gold bugs accumulate gold for years because they see it coming and this is why we are witnessing Europeans scramble to buy bullion now. Rumors are that European mints are almost out of bullion, both gold and silver, which may be one reason why prices are spiking. The rumors are not verified, but it would not surprise me one bit as the Euro continues its slide and I do not believe we have seen anything yet in terms of the decline in the Euro or the price of precious metals.
Many wonder why people run to gold for safety during times of stress and the answer is simple, it is a well known store of wealth with a 5,000 year history. It is recognizable, rare, relatively speaking, it cannot be diluted, it is inversely correlated to currencies and you can usually tell if it is fake or not as well as it is portable. All of those reasons make it attractive as an alternative to currencies during times of stress and why people are buying it now. The common reason people present, lately, for not buying gold is that it is not a safe haven because it got crushed in 2008 with everything else. That is true, but the world was in liquidation and seeking dollars to try and settle trades, dollars were tough to find remember, which is why everything went down, except for treasuries. Others claim that other commodities are better, like food, that is true, but food goes bad, you would need a lot of it, it is not as rare and people always need a medium of exchange, currency, to trade with which is exactly what gold is. I am not saying it is perfect or it will work, but I would rather own it than not own it at this stage of the game.
What does have me concerned is the fact that while the jokes about gold bugs have stopped the talk about gold has escalated dramatically lately as we are pushing new nominal highs. I am bullish long-term on gold, I mean, come on, the Fed by its very nature devalues the dollar by about 3% a year by design which makes gold a no brainer for the long-term, but shorter term when everyone is bullish I get bearish, kind of. I believe this time is different as we are facing, literally, a confidence issue if a major currency which is bullish for gold, but I am concerned that the price might get ahead of itself in the near-term. This happened the last time we got in this area and all the chatter stopped when it broke its winning streak, which I was happy about, and the same thing might happen again. However, the situation is different and unlikely to resolve itself.
What amazes me is that while all the talk is about gold no one is talking about silver. We are pushing almost $20/oz on silver right now, which is close to a breakout, and conditions are right for silver to really take off. With JPM making headlines about price manipulation, a currency issue, tight and dwindling supply, high demand, a metal no one recycles, a metal that is in everything we use makes silver, in my opinion, the trade of the century. I can see silver trading much higher than it is currently based on figures I have seen which estimates all the above ground silver consumed within the next 5 or 6 years. If that happens, $20/oz silver is a steal.
Regardless, metals make sense right now and while one should wait for a better entry point the idea is to be looking for that entry point to begin with. This is not rocket science as metals have fixed extraction costs and then it is supply demand after that. With the world’s population growing precious metals make complete sense especially since the vast majority of the world’s population considers precious metals the ideal investments. That in itself should make you think of adding some to your portfolio since the emerging markets population dwarfs the developed markets by a long shot and I would rather be selling it to them at a profit rather than trying to buy it from them at inflated prices.
I said it on Friday, I wonder how Jim Cramer will revise what he says when there is a bounce in the markets from his; “Don’t buy until Dow 9000” call. Well, we certainly did not have to wait long for the mighty Cramer to revise his history, yet again, and spin “what he meant to say was” moment. As it turns out Cramer meant to say that if Trichet did not do anything he would not buy until Dow 9,000, but that is not what he really said.
Anyone who watches his show, I only do at night when I am going to bed because I like to laugh before I sleep, knows that this guy says one thing, will be wrong and will then “remind” you of what he said. Unfortunately, he reminds you of the complete opposite of what he says, almost every time. I think he forgets that video is forever or something because I am not sure how he thinks he can spin what he says when he is on tape saying pretty much the opposite of what he says he said. Cramer was a great money manager and a great self promoter, but as far as “looking out for you,” well, I think Congress looks out for you more than Mr. Cramer and that ain’t saying much.
This is not the first time he has done this and will not be the last time either. It kills me that he just slams bears and short sellers when he also sold short and was not an investor in his hedge fund. He also wants you to believe that the markets should go straight up and never down, unreal. What I find humorous is that he thinks the fundamentals are “great,” even in Europe. In May 7th he says Europe fundamentals are junk, but on May 10th the fundamentals are great, huh? He was extremely bearish on May 7th and bullish on May 10th, huh? Make up your mind. I am bearish on the markets, but like individual companies, what does that make me? I think a realist, but Cramer is just a damn phony.
The EU is in for some awesome austerity in the near future and the EU is 20% of the world GDP. If they are going to be thrown into a recession because of austerity, let’s just call it higher taxes, that will be a drag on the world economy, right? How can this Mad Money guru not know this? If you watch the full May 7th video he talks about the 290K employment report, how can he not see the 188K phony birth/death model addition? How can he not discount Census hiring, 66K temporary jobs? On top of another 26K actual temporary jobs in the private sector? Let’s face it, this guy is a headline reader and not a fact checker. I am not sure why he gets under my skin, perhaps it is because he acts like he is looking out for you when he is not and knows nothing about macro events. Most of all, he rejects what he actually said and replaces it with what he thinks he said. Some people have a word for that, it begins with an L.
Here is what he said May 10th:
Compare that with what he said on May 7th and you be the judge:
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