The Bulls Still Have to Make Their Case

Posted by Ray on February 9, 2011 under Main | Be the First to Comment

I have stated that you have to be long this market until the Fed pulls the ample liquidity it has been pumping into the markets for the few months now. Before the Fed announced QE2 I was right to be bearish as the indices were heading lower under numerous stresses from both domestic and foreign sources. It was in August when Ben gave his speech about asset purchases and then the next meeting which started them that caused the markets to take off. Up until that point there was no real reason to be bullish.

Frankly, outside of the excess liquidity, there is still little reason to be bullish. Just because stocks move higher it does not mean that the economy is all better, sorry, but it does not work that way. I believe that the economic data we are seeing is heavily distorted and if we are in fact having 3-4% GDP growth, like several Fed officials claim, where are the jobs? That is a huge jump in GDP growth and that would certainly create jobs, but here we are witnessing the greatest exodus from the job market since the data has been tracked. The U-6 data is way up over 17% and Shadow Stats says we are saddled with 20%+ of unemployed/underemployed.

If we are experiencing 3-4% GDP growth why in the world are we still experiencing ZIRP and QE of any kind? It makes no sense at all. I know, because “inflation is too low.” Inflation as defined by Ben Bernanke and not by people who have to buy food and energy every day. The fact that we are arguing over the definition of inflation is asinine. Normal, sane people, would define inflation as the normal cost of living items, but the insane people say that inflation should be measured by the cost of computers and flat screen TV’s, that makes sense. The bottom line is Ben is distorting everything with this insane monetary policy and is causing food prices to rise around the world, including right here in the USA.

The economy is better, I have admitted this for some time now, but it is still sick and not functioning correctly. What we are seeing now with runaway government spending and excess Fed easing is a serious risk to the US dollar. I realize that every country wants a weaker currency so they can export their way to prosperity or so they can grow their way out of their debt problems, but this will not work for the US. The US debt issues are so large and the trade imbalances are so out of balance that it is impossible for the US to grow its way out of its debt problems.

While Ben tells Congress that the US must get the deficits under control immediately, a first I might add, it is impossible to do so. Have you ever wondered why the US cannot cut annual spending? They tell you it is because of entitlement programs, right? They also say these entitlement programs are solvent, at the moment at least, right? Wrong. The proof of this is in the annual deficits. When you received your paycheck there were federal income taxes withheld and FICA taxes withheld, for Social Security and Medicare. Supposedly the FICA taxes went into separate accounts to be used at a later date but our leaders used that surplus money to plug holes in previous deficits and gave the SSA and Medicare IOU’s instead. Now the SSA and Medicare are cashing in those IOU’s which is why the government cannot cut the annual deficit and it proves that the programs are insolvent.

All of this is evidence that the economy and economic health of the US is not good. We are still in trouble and all we did in 2008-2009 was transfer the bad debts from the banks to the US government, kicking the can down the road, and the banks are still in bad shape. The economy is not replacing lost jobs and probably never will replace all those jobs lost in the last few years. The only way the unemployment numbers will get better is because of how the BLS calculates the unemployed, i.e. not counting the ones that fall off the rolls.

The bulls need to make the case that the economy has really recovered. I am a bear and I said to own stocks, and commodities, and I was right too, but I am under no illusion that things are that much better. A stock market going up doesn’t really mean anything especially when the Fed is giving primary dealers billions of dollars every week to do something with. Not to mention that rising stock prices only help the investing class anyhow which is a shrinking portion of America nowadays.

You heard it here first

Posted by Ray on October 20, 2010 under Main | Be the First to Comment

John Carney at CNBC just put up a piece http://www.cnbc.com/id/39754650 which states: “This is a serious threat to financial stability. There’s no way Tim and Ben let this play out,” a senior banker told me, referring to Treasury Secretary Tim Geithner and Federal Reserve chair Ben Bernanke.

In short, Wall Street is betting that the bureaucrats will bail them out again.

I said this yesterday and these executives are right, banks will get bailed out again probably through QE. It is wrong and these banks have earned the right to fail, but the problem is that politicians do not have the will to help them this time. However, the Fed, which is proving itself so independent nowadays, will bail them out. As Zero Hedge reported PIMCO levered up on MBS and they know something, like $500B in QE coming directly to the MBS market, rumor has it. Again, QE will do nothing and while $500B is in the cards for MBS there is no word yet what the Fed will do with long dated treasuries… but they will buy them.

Quantitative easing, it’s reality, kind of

Posted by Ray on August 11, 2010 under Main | Read the First Comment

When I wrote last week that the Fed would do QE 2 and the trade of the century, granted that was over the top, was leveraged bull 20+ year ETF’s I received some flack, a lot actually. First, let’s talk about the economy and what is going on there. Second, let’s talk about the treasury, gold barbell trade that seems wild and crazy. To clarify something, no, I am not drunk as one commenter asked.

The economy, oh, how this recovery summer is not such a recovery after all. Perhaps Geithner’s op-ed in the Times should have read, “Sorry, we screwed up any chances of a recovery” instead of “Welcome to The Recovery.” Any improvement we have seen within the economy has been purely statistical or for the very wealthy, period. Yes, Saks and Macy’s are indeed having good years, but look at Walmart, not such a blockbuster year. If you strip away the stimulus spending and government transfers you have poor GDP readings, period. I cannot see how anyone would or could really dispute that, but I am sure there are some that will try.

The truest test of any economy is unemployment and I was saying, before it was popular by a certain ‘New Normal’ guy, that unemployment was a leading indicator, not a lagging indicator. Our employment situation is poor at best considering that we are having more and more people leaving the workforce because they are giving up. Imagine just giving up all hope of finding work, not that you don’t want a job, but you just can’t find one, but since you have given up our government says you do not count anymore, nice. Anyhow, if we include all those people who dropped out of the workforce we are up to 10.2-10.5% official unemployment. As far as the U-6 we are still around the 17% area, but I am willing to bet it is much, much higher and who knows, exactly, how many people simple have been unemployed so long they just don’t count anywhere anymore. Regardless, our unemployment issue is the truest test of our economic situation and has indicated for well over a year that the economy is in poor condition.

As far as the other economic data points and indicators, well, show me one that points to an actual positive improvement please. Hint, there is not one that points to a significant improvement in the economic condition in recent months. In fact it is so bad that the Fed is turning to a form of QE which they know will do nothing to boost the economy, but it will look like they are doing something. It is so bad you had Ben Bernanke testify in front of Congress and say; “I don’t know what is going to happen,” basically when he said ‘unusual uncertainty.’ You have the Fed Presidents talking about recessions, QE, Japan scenarios and a host of other issues, but don’t worry because CNBC says no double dip. You know what, they are right. There will not be a double dip because we never made it out of the first depression.

We got the Fed doing this reinvesting of interest and repayment of principal now, to the tune of about $300B or so, into treasuries. What is that going to do for the economy? Nothing. Ben is trying to force banks to lend by doing a bull flattener to the yield curve, good luck Ben. What he doesn’t realize yet is people do not want to borrow. In fact, people want to pay off their debts instead, go figure. Ben cannot boost demand and QE will not do anything at all besides make bond investors very happy. It is a dog and pony show to make everyone feel good and like the Fed has some ammo left, they don’t and the game is over for them. All more QE will do is damage the dollar at some point in the future, that is a certainty. Consumer demand will return only after the deleveraging period is done and that could take 10 more years, who knows. It will be a tough ride, that is for sure.

Now, for those who thought I was nuts for going long a leveraged 20+ treasury ETF and gold, well, you don’t have to say, my account says it for me. UBT was about $85 a share when the article came out and it closed today at about $90.50 and gold was at about $116.50 and it is at $117.73 (I am using GLD as a proxy). I do not believe the trade is done, I wouldn’t enter it here, but I am not exiting it either, especially after CSCO missed their revenue estimates tonight. This was not a crazy trade, it was the most obvious trade in the world. Easy money like this does not happen very often so I am not sure why anyone would think this was ‘high risk’ or abnormal. You can hold leveraged ETF’s, if they go in your favor, over a period of days, just not long-term.

Everyone knew the Fed was going to do something, anything, because the Fed is staunchly independent and not influenced by politics, yeah right. Come on, the Fed knew it had to do something to show it was helping the economy, but not too much because we have an election coming up. What could be safer than maintaining the balance sheet, but reinvesting loose change into treasuries to bring down long-term treasury rates? It does not raise any eyebrows, everyone knew they would do this and it does help borrowers, but it doesn’t help the real economy. Regardless, this was telegraphed and sets up the Fed for real money printing and QE after November.

In the meantime, I plan on locking in profits on my UBT soon and rolling into TLT on weakness. I fully expect that we see the 30 treasury move towards the 3% area, maybe 2.5% as Ben wrote about in the past. That makes longer duration treasuries very attractive still and inflation is not an issue now. However, inflation will be at some time in the future and QE will damage the dollar, hence the gold hedge. I think gold goes back to its high and make a run towards $1,300 an ounce, maybe higher is full blown QE kicks in this fall. Equities are not attractive, in my view, unless they pay an outsized dividend and have a strong balance sheet. Stocks like AAPL, no thanks, they do not work in this environment unless they pull a new killer product out of their back pocket every other month. Good luck.

If you just got worried…

Posted by Ray on July 21, 2010 under Main | Be the First to Comment

If you are just getting worried now about the economy over what Ben Bernanke said about the economy in today’s testimony I have to ask, where have you been? Did you not read the Fed minutes when they came out? Have you not read any of the economic indicators that have been showing we are heading for a slowdown? How about IBM’s cautious warning or other firms who are being cautious about the immediate future?

My point is simple, the data is fairly clear, a slowdown is coming, period. Double dip? Probably, but we will not know for some time now. However, it is likely we are facing severe challenges moving forward and Ben is scared, he is out of ammo and he knows it. Everyone is speculating and asking what he is going to do to spur the economy ‘if’ it weakens which is an absurd question because it is weakening and what is Ben doing? Nothing, why? Because he can’t.

Sure, he can stop paying interest on bank reserves, but banks will not lend because they are impaired still, he admitted that today. Plus, banks will just turn around and buy treasuries because lending is just too risky right now which is why banks are not lending, on top of their balance sheets being loaded with debts marked to make believe. Everyone also believes quantitative easing is on the way, but it is not. I have said this many times before and will say it again, QE accomplished its goal, lowered mortgage rates, treasury rates and the dollar. I ask, what direction are mortgage rates, treasuries and the dollar headed? We are out of the “liquidity” crisis part of our issues and are into the nobody wants to buy anything part of the problem, QE will not solve that problem.

Earnings season is a dud, period. I know, Apple, Apple, big deal they have the hottest products out right now and you expected them to fail or something? The question you have to ask yourself id this, what can Apple do next? They clearly had to push the iPhone 4 out and the iPad is something they really did not want to do, they were forced into it because they were told to by the geek squads. What product do they have next up their sleeve? Nothing so you better hope a whole lot of people want to keep buying an iPhone that doesn’t really work as the title implies. Outside of Apple we had a couple of other standouts in the earnings department, but more misses than anyone wants to admit. There were lots of revenue misses which means cost cutting worked, but poor sales are still poor sales. The Fed cannot stop that people.

If you were not nervous before you should be nervous now, but I have no idea why you were not nervous before. All the speeches or all the rigged stress tests in the world will not change the facts, the economy on a global scale, is slowing down. Even China says that Europe’s problems are creating big problems, like I forecasted previously, for their exports. How much do you want to bet that the Yuan strengthens further? I do not believe China is slowing down as much on purpose as much as China is just slowing down, but time will tell there. The real question is, if China does slow significantly more than forecasted what happens to the rest of the world? Answer, it isn’t good.

Explaining Deflation vs. Deflation

Posted by Ray on May 16, 2010 under Main | Be the First to Comment

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.