It is June and the economy is weakening

Posted by Ray on June 6, 2011 under Main | Be the First to Comment

I suppose it was back in the late fall and reiterated again in mid-winter that I believed the market would simply go up for no real reason until QE2 ended and then it would begin to decline as liquidity ended. It looks as though I was somewhat accurate in that prediction although you did not have to be a rocket scientist to figure that out unless you were a permabull with your blinders on and absolute faith in the government and the Fed in which case please move along.

The Fed knew the same thing I and many others did and that is why at the last meeting they emphasized that they would continue to reinvest maturing paper and interest from the existing portfolio, kind of a QE infinity if you will, but on a small scale. I do believe they will let QE2 go and not announce anything new until the fall when they see the economy really weaken. I think a couple months of sub 100K jobs reports, with a healthy BLS birth/death adjustment, along with softening other indicators such as the PMI and so forth the Fed will get the point and step in with $1T in QE since $600B did not work.

That is how it works as one QE is ineffective the next one gets bigger. The really unfortunate part is that Japan has done the same thing and it did not work but there is a big difference between the US and Japan, we are the reserve currency and they aren’t. In other words, Japan could print all they wanted because their citizens bought their own debt and the world settled trades in dollars. However, the US is limited in what they can really do in QE because as the value of the dollar sinks, and we really had a nice scare a week or so ago, the world will pick a new reserve currency on its own. You know how that story ends.

Ben knows this and he knows that his QE options are limited and he can probably only get away with 1 more so it will be big, it has to be. If that one does not work and spur growth, well, the Fed is done and completely out of bullets in a traditional sense. We would see some new things coming to the table like in 2008 with all the new facilities and such, but I have no idea what they will be or what they will look like since we do not know how things will play out.

What I do know is that we should get a nice bounce in the dollar here sending commodities lower for a bit. This will give Ben and Washington a little relief and you an opportunity to buy, buy, buy every commodity you like. I love silver, still, wheat, gold, palladium, soybeans and corn (unless the subsidy is pulled). If those go on sale buy them either directly or via the growers or agricultural ETF’s.

In the mean time enjoy watching Ben sweat it out as he will not have answers for the weakness in the economy or the weakness is ‘transitory’ which is the longest transitory period I have ever seen. Kind of like this recovery it is the longest start of a recovery ever as it gains steam and loses steam every other week. Good luck.

The dollar is dead

Posted by Ray on February 21, 2011 under Main | Be the First to Comment

We have witnessed the Middle East go up in flames and the troubles in Europe start to percolate again, but the dollar is not doing anything. I am only surprised that it is happening so soon, I thought there was more time. While I highly doubt that anyone will rush back into the greenback it could happen. The world’s faith in the US has been shaken by our inability to seriously discuss our deficit and debt problems. A perfect example is the latest round of talks encompasses cutting some tens of billions of dollars from a mere 12% of our total budget leaving the entitlements and military spending off the table, is it any wonder why no one trusts us to seriously address our debt issues?

If people are not buying dollars what are they buying? Gold and silver. The prices do not lie and both metals have moved significantly over the past few weeks as the Middle East began to demand regime changes. All the while the USD has basically treaded water or moved slightly down. Not only does the lack of interest coincide with the latest budget battle but it also coincides with the fact that we are right in the middle of QE2 which was frowned upon by most nations. The double whammy of our inability to seriously deal with our debt and our very own central bank monetizing large amounts of our debt, over mythical low inflation figures I might add, makes other countries stop and think about how to allocate their assets during times of uncertainty.

Overall the US total debt and monetary policy is also inflationary which makes an inflation protected asset more attractive than UST’s and dollars. Why would investors choose gold and silver over TIPS? Because no one trusts the government to actually track inflation honestly which is why you are seeing lower inflation expectations in TIP yields right now. Again, gold and silver fit the bill as an alternative as a flight to safety. Granted, gold is considered safer than silver, but lately silver has picked up more prestige and I believe silver will make some spectacular moves in the near future. In other words, gold has likely picked up more of the safe haven assets than silver but it is clear that both metals have outperformed the dollar and may be replacing the dollar until something else comes along.

So, is the dollar dead? I think it is one its way if we do not address our debt and annual deficits this year. The deficits are so bad, so outrageous and so dangerous that ignoring them for one more year may be devastating. Our total national debt, officially, if 100% of GDP and our unfunded liabilities is tens of trillions of dollars… we got serious problems. Adding insult to injury is the whole QE situation which is debt monetization no matter how you slice it. This shows weakness and is highly inflationary which will drive foreign investors away from the USD. Why would you buy an asset today that you know will be worth less in the future? You wouldn’t and either will other countries when it comes to USD’s.

The fact that we have had a few governments get toppled and a few more on the way in the most volatile region in the world and the dollar has not rallied is kind of scary. Instead we have seen commodities continue to rally, stocks (I guess the only source of our economic success) go straight up, and the dollar trend a bit lower. In the meantime gold and silver are being treated as currencies and when turmoil kicks up they go up in value. I have known for a long time that the dollar is in trouble and would blow up because we have a lack of leadership in Washington who do not want to make hard choices and the Federal Reserve who seemingly has lost its mind and has missed every major issue with our economy over the last 10 years who has decided to monetize our debt.

This will end with high inflation and the fact that the Fed disagrees is exactly why you should agree with me. Gold and silver make sense, own them physically, along with other soft commodities. I fear that the dollar has seen its best days and while I do not know exactly what will come in the longer term I do know it will not be pretty. I think you will know who to blame by then, I hope at least.

Silver, the trade that was easy to see

Posted by Ray on November 4, 2010 under Main | Be the First to Comment

There have been lots of things happening in the silver market lately all of which reinforce my bull case for being long. Long time readers know I have been pounding the table of silver for the better part of 2 years now.  The one aspect of the market that I have concentrated on is the supply/demand side of the equation. It stands to reason that with some 2 billion souls entering the middle class they will all want cell phones and other modern toys. All of these toys involve silver to some extent in their production.

The supply of silver is not unlimited and very few miners solely look for the shiny metal, it is typically a byproduct of copper and gold mines. Silver is also not recycled the way many other metals are which means it is used once and never again and that is unlike many other metals that are usually recycled. I believe that the reason people believed silver had an unlimited supply is because it was so cheap, but now we find out, I have known for awhile, that the prices were manipulated by 2 big banks, HSBC and JPM. This is not conspiracy talk anymore as 2 lawsuits have been filed and Bart Chilton has admitted the manipulation.

Moving forward I believe we will continue to see higher prices as the shorts cover in the silver market. I also think that COMEX does not have enough supply to meet physical demand for the metal if investors want to take possession, which they will eventually. That means there may not be enough silver at any price to meet demand. It sounds unbelievable, but it could happen. I would not bet the farm on the COMEX thing being the driver, but I would bet the farm on Asia and India driving demand well into the future.

The other very obvious factor in the recent rise in silver prices is the dollar. In the US we have to ask if silver is really climbing or is the dollar just tanking so hard making it more expensive to us. Frankly, it is both things happening at once which should worry my fellow dollar bulls out there. I think the dollar will break its all-time low in the near future thanks to Mr. Bernanke. You cannot print as much money as you want without repercussions and the repercussions of massive printing are the dollar losing much of its value. Out of everything happening out there right now the dollar’s slide is what scares me the most and it should scare you too.

Silver is the barometer of inflation, in my book at least, and the rise in price is signaling trouble ahead. Everyone believes the dollar will always be there in its current form and nothing like Zimbabwe or Argentina can happen in the good ole US of A, but bad things can and do happen here all the time and with an obscene monetary policy that Brazil, Russia, China and now Germany are criticizing bad things are sure to happen here. I would be a buyer of silver not just to profit from it, but to hedge my wealth with it. That means owning it physically, not in a brokerage account or in storage somewhere, but where I can see it. If the dollar breaks its all-time low things may get ugly and as we buy up our locally produced products we will see what the inflationary pressure is like when we are forced to buy, suddenly, very expensive Chinese goods.

Doom and gloom you are thinking, maybe, but I prefer to say this is a realistic situation now. I know I would rather be prepared instead of just hoping things will work out. In my experience hope is a wonderful thing, but hope isn’t reality. Reality is that thing outside your window and our reality may just turn into a nightmare and suddenly moving from the city to the country, farmland specifically, with a shot gun and you silver and gold hoard may suddenly make sense. After all, this is the advice some hedge fund managers gave their wealthier clients in recent years.

Buy silver on any dip and I am sure that in 5 years, or much sooner, you will be extremely happy. As for equities, well, if you think these gains are real you are delusional. Ben is simply propping up prices to make people think they are wealthy, but if the dollar keeps falling at some point the rise in equity prices will not offset the loss of purchasing power of your dollars, just ask any Zimbabwean about that. They had the best performing market over the last 10 years, but would you be holding their currency? I think not. Silver, gold or other commodities are your hedge, not stocks and not TIPS.

The trade of the decade?

Posted by Ray on July 31, 2010 under Economy, Main, The Federal Reserve | Read the First Comment

The 2Q10 GDP report came out and it was an eye opener for many people as it showed that the recession, depression, was deeper than most believed and things are surely not as rosy as we are being told. Aside from the inventory rebuild there is not much else going on, final sales are dead as a door nail and some firms, like Samsung, are reporting good earnings, but warning of weaker times ahead. I take the Samsung warning pretty seriously as they are a large or the largest supplier of electronics which had shown signs of strength recently. So when they say things may not be rosy in the near future I suspect that will apply to more than just TV sales.

What made the news cycle this week was a report by Fed President Bullard about the threat of a Japanese style deflation here in America. I am kind of shocked that people were caught so of guard by this news, about 10 economic data points already indicated this to be if not already occurring a very real near-term threat. I suspect we are in for some really tough times ahead and worse yet I suspect we will see the Fed start moving towards quantitative easing, again. As I have said, repeatedly, this will not do anything to boost economic demand as we must wait for the deleveraging cycle to be completed by the consumer before demand will return. Zero Hedge just wrote a piece about this tonight which illustrates exactly what I have been saying for a month now, but no one is listening. Here is what they said:

“In other words, all those who say QE2.0 will do nothing to stimulate the economy are correct, as all such a greenlighted action would encourage is the warehousing of yet more cash by banks. And since banks have no incremental incentives to lend it out, it doesn’t matter if the Fed’s liabilities are $2.5 trillion or $2.5 quadrillion. Instead of stimulating inflation, which is the end goal, all such an action would do is to create further doubts about the stability of the dollar, which in turn, as Ambrose Evans-Pritchard discussed, is a sure way to go to hyperinflation without first passing either Go, or inflation.”

They also indicate my thoughts exactly, we bypass money velocity inflation and go straight to dollar devaluation, i.e. currency crisis, hyperinflation. The irony is that you would only feel this pain on imported goods and we do consume 87% of what we produce domestically so it may take some time before any real currency devaluation hits home. Regardless, Bullard indicated along with prior reports by Ben Bernanke himself that QE is on the table. The question is what kind of QE, treasury purchases or other asset purchases? Also, how much, I bet $3-5T in total purchases, but who knows.

What we do know, compliments of David Rosenberg, is that Ben Bernanke said IF we hit a Japanese style deflation that the target rate on the 30 year treasury would be 2.5%. Rosenberg says that if we hit that rate, down from the current 4% yield, one would receive about a 30% rate of return. I think he is right and if one followed his recommendations of treasuries and gold, along with high yield stocks, you would have avoided much volatility this year and had nice returns. I am happy to say I bought 2’s and 5’s when the yield was 1.10% and well over 2% so I am happy. I suspect the rally in treasuries will continue and if QE happens, wow.

The trade of the century, although risky, would be to leverage a long position into the 20+ year treasury market, UBT (2X bull) or TMF (3X bull). IF Rosenberg and I are right and this happens, QE, deflation or a major selloff in equities, those positions would do very well. However, they are risky, they are leveraged ETF’s, but if you time it right I believe that you could do very well. I also believe that the bull market in bonds is in full force again, very similarly to the summer of 2008 I might add which adds a bit of mystery to the rally in treasuries. The mystery is, what is going on and is the bond market telling you that something really bad is coming?

A look at the chart above looks like there is something going on in the bond market. We broke above the 123/4 mark on the 30 year futures and now that is support. I believe it goes higher because of, at least, of deflationary pressures and, at worst, because of QE. However, while I am short-term bullish on treasuries I hate them long-term since it will be impossible for the U.S. to meet its long-term debt obligations which means they will default somehow in the future, in my opinion. I also believe, as stated earlier, that QE will wreck our currency maybe not now, but at some point in the near future which makes gold very attractive as well. If QE is announced treasuries will go nuts and so will gold. If one is levered into treasuries you could do well, if you want the risk.

What QE means for stocks, I do not know. I would think QE would be bad for stocks as it signals things are not good and the economy is weak, but we are living in bizzaro world where good news is fantastic and bad news is even better.

Deflation, a reality

Posted by Ray on July 15, 2010 under Main | Be the First to Comment

Deflation is more than a pipe dream, it is basically here and it is global in nature. We saw a whole slew of data points come out over the past 12 hours and none of it was very positive from my lens since it all pointed towards either a slowing of the economy or deflationary headwinds. There is just no question that the second half of 2010 is going to be vastly different than the first half for America and 2011 is going to be worse than expected. To be blunt, when the Federal Reserve is telling you things are bad, things are much worse than you think. We are talking about the same Fed that got everything wrong or underestimated every problem we have had over the past 30 years. In their notes yesterday, wow, there was just nothing positive. We will have quantitative easing and it will be spectacular since we have no idea how this will impact the U.S. long-term.

China released its GDP figures last night, some 10.3% GDP, but its CPI was 2.9% compared to expectations of 3.5%. Some would argue that is good news, but I would disagree. With rapid growth you would expect to see inflation higher than 2.9% and if they are paying lower prices that means they are having end demand problems as well. Some say this ‘planned’ slowdown is good and maybe it is, but if China is the engine for the global economy and it is fulfilling its goal of a slowdown how in the world can that be good news for the U.S. or Europe? I don’t see it. I also see a stronger RMB as a major problem for China and the rest of the world, but I have beat that horse to death by now. Just remember, manufacturers with 3-4% profit margins cannot pay their employees more while their currency is rising and other currencies are falling or staying flat, a best case scenario for the U.S. and the EU. Watch out below in China and I feel much more comfortable in India or Brazil than I do in China at this point maybe even in Indonesia.

Data in the U.S. was horrible and there is no way to deny that. The initial claims data is very noisy since the seasonally adjusted data is looking for retooling of the auto industry which is not happening right now, but it makes the weekly number look real nice. Unfortunately, it is not reality and to put everything into prospective, last week’s number was revised up, this number, 429,000, will also be revised up as well and take a look at the unadjusted data set. The unseasonal adjusted data is flat week over week at 513,347 which looks similar to last week’s figure and shows how the BLS is not seeing through the distortions of the auto industry retooling and makes the case that seasonally adjusting doesn’t always work. Either way, this figure is a head fake and even Steve Liesman admitted that so what does that tell you?

The CPI/PPI, what can I say? Disinflationary at best and this is what the Fed is worried about. This problem is global, not just a U.S. problem and, unfortunately, looks a lot like what happened in the 1930’s which was made worse by Europe’s debt problems I might add, sound familiar? The Fed also said we are looking at 5 to 6 years of this, ouch, and this means equity prices should be trading at what P/E exactly? Certainly not 20, maybe 10, 15? No one knows, but we are way overvalued that much we all know at this point. To make a point about deflation let’s take a look at Marriott’s earnings, they were good, but if you look at their room rates YoY they were down across the board from 2009, I thought we were in the midst of a fantastic recovery? If Marriott has to cut its rates by 4% all over the world, except in the UK, what does that tell you about pricing power? There is none, they have to discount to fill rooms. Also, their luxury brands were flat and their lower end brands were doing much better, staycations anyone. Don’t bet on global growth, you will get slaughtered.

The Empire State report, from 19 to what??!! To say that we are not having a slowdown with an Empire State report slipping 15 points, 19.57 to 5.08, on top of the ISM making lower highs, the Baltic Dry Index plummeting and unemployment hideously high is insane. This is just the icing on the cake, in my opinion, I am sure some people will claim it is a one off event, but there is a clear pattern here and it is down. All of this means a slowdown, good earnings or not. This is also not a case of more stimulus with the exception of extending unemployment benefits, we need to let this thing sort itself out at this stage of the game. Unfortunately, we will get it whether we want it or not starting with quantitative easing from the Fed which will do nothing to boost money velocity. The bottom line, the Empire State report was awful and will likely not be talked about much today or ever again. The other Fed reports will likely show a similar slowdown as well.

Painful, I think that is the word we are looking for as we look at the data today. How or why futures are not down bit time, who knows. I think you would be hard pressed to find anyone, myself included, who said that 2Q10 earnings would not be good, but forward earnings are the key and all forward looking data points look terrible. The ECRI comes out tomorrow and it is pushing closer and closer to that -10% mark, but I guess that indicator only matters when we are on our way up, not on the way down. Be very careful in this market as it is devoid of reality at this point. Valuations will matter and the fact that we are seeing deflationary pressures mount from China to room rates at Marriott means you have to treat valuations differently. You cannot look at a 19 P/E and consider that cheap in a deflationary environment and we have very little experience in these environments to boot, so think deep value, ultra low P/E’s and high dividends from strong companies that do not need to go to the capital markets to raise capital. Good luck.