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POTPOURRI (PART II) - GOLD BUBBLES, STOCK MARKET RALLIES AND HIGH INFLATION
To be interested in the changing seasons is a happier state of mind than to be hopelessly in love with spring.
~ George Santayana, Spanish-American philosopher, essayist, poet and novelist
Dear Mountaineers,
As mentioned last week, let me comment on a few more topics in the context of our "Mountaineer Potpourri Intermezzo". Please forgive the pompous language...I don´t know what got a hold of me!
Despite mixed signals and indicators in the realm of fundamental economics, stock markets worldwide continue to move onward and upward. Gold continues up. Inflation, despite higher yields, is nowhere to be seen (yet).
Richard Russell, in his Latest Remarks, pretty much sums things up: "We´re dealing with a tricky rally (some call it a cyclical bull market) in what I believe is a continuing primary bear market. At this point, the stock market is over-valued, over-loved and over-bought -- but it keeps advancing as it feeds off a parade of good news and massive liquidity. Obama states that he´ll cut the deficit by two-thirds in the next five years. ‘What´s he smoking?´ I think to myself.
"The bond market has turned long-term bearish and interest rates are heading higher.
"The bull market in gold is 10 years old and is still strong. It has not yet undergone its speculative third phase."
Gold is not even close to ‘bubble territory´
Yes, gold is getting a lot of attention these days. And, ever since it reached its all-time high of US$ 1,212.50/ounce last December, the "BUBBLE!!!" cries have been loud and frequent.
After its pull-back at the beginning of the year, taking it down to almost $1,060/ounce, gold has gone back up to $1,151 as I write this commentary. At this point, $1,100 appears to be an important support level, while the next important breakout target is around $1,220.
Gold continues to move up against all odds and against the expectation of most. For over ten years now, gold has continued doing precisely that.
In general, gold is believed to rise when inflation is high. Similarly, many commentators and experts consider gold negatively correlated to the value of the US dollar. In other words, the dollar goes up, gold moves down, and vice-versa. Both of these viewpoints are incorrect and far too simplistic.
During the bull market of the 1970´s, interest rates rose in sync with the fear of high inflation. Therefore, to this day, it is widely believed that a gold bull market will always go hand-in-hand with rising inflation expectations and rising interest rates. However, over the past ten years, this ‘common wisdom´ was proven faulty. Gold rose while interest rates continuously moved lower. Gold rose while inflation expectations were periodically at a 40-year low or close to non-existent!
If there is a correlation between interest rates and gold prices, then it exists with regard to credit spreads and interest rate spreads, or in other words, the difference (spread) between long-term yields and shorter-term yields. These spreads are an expression of the mistrust -- the risk aversion -- of markets relative to monetary policies.
I am confident that we are witnessing a primary bull market in gold. This bull market, unlike the bubble that popped in 1980, is a result of growing concerns over the sustainability of our current monetary and fiscal policies, of the international system of fiat or non-intrinsic currencies. The system largely lacks a mechanism for discipline: a firm barrier and limit on fiat-currency production.
The following chart is interesting in this context. The chart compares the price performance and volatility of gold prices during the 1970´s to the gold bull market that started in 1999, when gold was trading just below $300/ounce. Clearly, the past ten years were much less volatile.
This gold bull market has not yet entered the final ‘bubble´ phase of a bull market. In my view, we are not even close. There is LOTS and LOTS of upside potential in this market and it is worth taking advantage of it while it lasts.
A Gold Bubble? There is none!
Stocks are up. The recovery is strong and well. Oh Yeah?!?!
I expect global stock markets to advance further. The mainstream media and official statistics -- eagerly painted in rosy colors -- carry an extremely positive note that investors can continue to tap into, BUT WITH HIGH CAUTION.
Contrary to the gold market, I am far more skeptical of stock markets. They too have continued performing very well. And, supported by recent positive corporate earnings reports, can be expected to move further. However, I consider these price advances artificial. They are constructed on the basis of growing public debt and not the result of fundamentally solid economic trends.
These concerns are not based on my generally pessimistic character or the mere rumbles of my stomach. The more you review the hard factual economic data of this global economy, the more you doubt that the party is genuine. Recent warnings and concerns published by the IMF -- of all sources!! -- may provide confirmation for those who care for official / institutional reassurance.
Nevertheless, the market is a psychological profile of all international investors and therefore a reflection of sentiment. Micro- and macro-data have greatly increased confidence in the robustness of the US expansion. Particularly, US markets have performed very well over the past 3 months. The S&P 500 is now up over 16% from its early February low.
The following chart displays the performance of international MSCI indices over the past three months, in US dollar terms. The US has outperformed the rest. The two 2010 laggards so far are Europe and China.
In such times of growing stock market euphoria, it is worth remembering the journalist Mr. Edward Angly. He wrote a book that some three generations ago everybody was reading. It was published in 1932 and was titled Oh Yeah?.
In his book, Mr Angly simply provided a long list of quotes from US financial and political "authorities" (notably President Hoover) verbatim as they tried to reassure the people that the system was sound. In hindsight, we know it was not. And, in hindsight, reviewing the quotes from back then provides for a healthy reminder of caution.
As Santayana once said: "Those who cannot remember the past are condemned to repeat it!"
No worries. No inflation in sight - NOT YET
Lately, the number of commentaries on ‘high inflation´ has been on the rise. Obviously, as discussed in the Mountain Vision Update of April 16th, we are at the end of a long period of declining interest rates. As portrayed in the following chart, which presents the TNX (the yield on 10-year US Treasury Notes) over the past 3 years, they have started moving up, potentially setting the stage for the ‘Debt Trap´. This observation is pointing to a conclusion that high inflation is moving in just as quick.
However, while I agree that the potential for a high inflation scenario clearly exists, I don´t consider that scenario immediate (possibly in 2011 inflation will start to rise considerably and visibly), nor do I see clear indications of sharply rising price inflation in America or Europe yet.
Possibly, it is helpful reviewing the chart above on a longer time-line. The following chart portrays the TNX since 1985. In this longer context, the current up move appears far less threatening. For now, in my opinion, inflation should not be our greatest concern. I am still more concerned about a deflationary bout like we experienced in 2008.
It´s a chaotic and confusing world. And, things are often not what they appear to be at first sight!
Sincerely,
Your "Swiss Mountain Guide",
Frank R. Suess
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RON´S PANORAMA - ‘HIRE´ REVISITED
Among Congressional achievements for the month of March was the Hiring Incentives to Restore Employment (HIRE) Act of 2010. The name sounds positive, but the effect will be the exact opposite, with reactions already beginning.
"We Swiss are fed up with the American government trying to tell us how to manage our affairs. Here the people run the government. In America it seems the government runs the people." That´s from the Swiss Peoples Party, now the largest party in Parliament. What´s gotten them so riled up?
The new law deals with, among other things, reporting by Americans who are customers of banks and other financial institutions outside the U.S. It clears up some gray areas, which is good; it creates new gray areas, which is bad; and it tightens reporting requirements, which also is bad. But for U.S. investors whose strategy is to follow the rules, it´s is really no big deal. The simple response to the new legislation is the same as it was under the old rules - if in doubt, report.
The new law is just one more irritant for Americans: another of the revenue and control measures now oozing out of Washington. But the impact on foreign banks is far rougher. It purports to require them to report on their clients who are U.S. citizens or residents. And it will force U.S. banks and brokers to close the accounts of foreign institutions that don´t comply. Not a very Swiss-friendly approach.
The effect of this legislation will be market disruption and economic hardship for the United States, as foreign jurisdictions say NO to the latest attack on their independence and sovereignty. Foreign institutions will choose to cleanse their portfolios of all U.S. stock, bond and dollar investments in order to insulate themselves from American threats and coercion.
Some financial writers characterized the new law as the beginning of U.S. exchange controls or capital controls -- "It´s Official America Now Enforces Capital Controls" -- but we have another take on it. Although the measure could indeed lead to capital controls, it´s more likely that such controls, if they come, would be imposed overnight by a Presidential Executive Order.
The real danger in this legislation is the potential to create a run on all U.S. investments, as foreign institutions decide that it´s better to dump U.S. Treasury obligations, corporate bonds and U.S. stocks than to incur the high cost of spying on clients and monitoring who is and who is not covered.
The Swiss have seen all of this before. It didn´t work then and it won´t work now. Quoting Hitler, "You must always demand so much that you cannot be satisfied." The penalty in Nazi Germany for an unreported foreign bank account was death. The new law won´t impact Americans who follow all the reporting rules, but it may well have the unintended consequence of devastating the U.S. financial markets.
Ron´s Panorama is contributed by Ron Holland and offers economic, financial and social considerations for Americans, from an American - with a somewhat Swiss perspective. Ron is a retirement expert and consultant who works out of Zurich and is a contributing editor to the Mountain Vision Newsletter.
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NEWS BRIEFS
Don´t Forget Your P´s - as in Platinum and Palladium
According to Steve Emerick of Asset Strategies International, Platinum and Palladium deserve more attention.
"Everyone talks about gold and silver -- and why not? They are the best known and most popular precious metals. However, there are two other metals you should consider for your portfolio: platinum and palladium. Let me tell you why.
"Both platinum and palladium have performed extremely well over the last month and the last twelve months. In fact, they have vastly outpaced both gold and silver. If profit is one of your primary reasons for investing in precious metals, you should consider adding the Noble Metals to your portfolio. In this article, we will look at why these metals are so valuable, as well as options for buying and storing them."
Go to Story
Greece May Not Be the Last Bailout
According to Harvard Professor Kenneth Rogoff, "Greece is unlikely to be the last euro nation to need an International Monetary Fund bailout, with Ireland, Spain and Portugal conspicuously vulnerable".
"It´s more likely than not that we´ll need an IMF program in at least one more country in the euro area over the next two to three years," Rogoff, a former IMF chief economist who has co-authored studies of financial and sovereign debt crises, said in a telephone interview. "The budget cuts needed in Europe in many countries are profound."
Go to Story
U.S. Stocks Cheapest Since 1990
This is the opinion of a large number of analysts and provides more fodder for current up-beat market sentiment.
According to this Bloomberg report, even after the biggest rally since the 1930´s, U.S. stocks remain the cheapest in two decades as the economy improves. Income is beating analysts´ estimates by 22 percent in the first quarter, making investors even more bullish that the rally will continue after the index climbed 80 percent since March 2009. While bears say the economy´s recovery is too weak for earnings to keep up the momentum, Fisher Investments and BlackRock Inc. are snapping up companies whose results are most and closely tied to economic expansion.
Go to Story
Jimmy Rogers: The Next Crisis is Already Unfolding
As a bit of an antidote to the last News Brief about US stocks, Jimmy Rogers and Kirby Daley, senior strategist at Newedge Group, speak up and declare "the next crisis in the making".
They claim that the next crisis has already started to unfold as sovereign debt worries increase and global central banks only exacerbate the issues.
Go to Story
Goldman Sachs Destined to Lose the Lawsuit?
An interesting viewpoint on the lawsuit against Goldman. Barry Ritholtz, in his blog, points out ten reasons why Goldman is destined to lose:
"I have been watching with a mixture of awe and dismay some of the really bad analysis, sloppy reporting, and just unsupported commentary about the GS case. I put together this list based on what I know as a lawyer, a market observer, a quant and someone with contacts within the SEC...".
Go to Story
And Yet the Government Insists Things are Getting Better...
Jeff Clark discusses the discrepancies of everyday experience and official economic statistics in the context of a heart-warming experience with his son.
"I didn´t sleep at all last night. Sometime around midnight, my 8-year-old son crawled into bed with me and my wife. When he noticed my eyes were open, he asked me a question that sent my heart racing...
"Daddy," he asked, "why would a person kill himself?"
Go to Story
Panel to Seek Solutions to U.S. Budget Woes
Seeking to show [read: ‘pretend´] he is serious about reigning in soaring budget deficits, President Barack Obama on Tuesday will kick off the work of a panel he created to try to solve America´s fiscal woes.
Obama has given the independent, 18-member National Commission on Fiscal Responsibility broad leeway to suggest remedies for the debt and deficits. A debate already has erupted over options the panel might consider, with conservatives urging that tax increases be ruled out and liberals seeking to shield the Social Security retirement program and other entitlement program from cuts.
Go to Story
Nuclear Summit in Washington DC - Special Membership Terms Apply...
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| © Copyright 2010, by BFI Capital Group AG, Bahnhofstrasse 29, 6300 Zug, Switzerland, website: www.bficapital.com. The MOUNTAIN VISION UPDATE is published by BFI Capital Group (‘BFI’). Quotation is allowed if credit is given. Although every care has been taken in the preparation of Mountain Vision, BFI does not guarantee and cannot be held responsible for the accuracy of any statistic, statement or representation made. We recommend that you consult qualified professional advisors to determine the applicability of this information and opinion. The publisher is not a registered investment advisor. Readers should not view MOUNTAIN VISION as offering personalized legal or investment advice. |
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