By R.F. Culbertson, Carnegie Mellon University
Something Wicked this way Comes?
After 36 hours in Seoul, South Korea - the leaders of the G-20 (talking about whose fault it is that America’s gone broke again) achieved a spectacular breakthrough late in the day, when crazed mediators from Britain, France, and Germany, persuaded the G-2 to call the whole thing off and go home. Presidents Obama and Hu quickly agreed to go home and blamed the whole impasse on the Irish and Greek governments for not living within their means and surrendering to German and French demands to slaughter their bondholders. Naturally no Irish or Greek representatives were present. While everyone bolted for the airport, President Obama remembered just how bad things are at home and headed off to visit Japan instead, one of the few industrialized G-20 nations with an outlook even worse than America’s. Before the next summit the IMF was chartered to study the currency wars and suggest a solution = Stay long precious metals. After this G-20 meeting:
- America is still living far beyond its means and setting out to trash its currency in the expectation this will somehow reduce unemployment,
- Europe is still heading towards a Club Med situation,
- China is still racking up a massive dollar surplus and has a domestic property bubble that could burst at any time,
- And Japan is aging its way towards a domestic crisis.
In other Asian news, China’s latest 5-year plan is intended to convert China from the world’s manufacturer to the world’s consumer. If that were to happen and 1.3 billion people start consuming like Americans (all on credit) we are heading for the boom of all booms, and then a massive credit bust. Happily it’s unlikely to happen. The world would quickly price scarce limited basic resources too high for the transition to occur. Even so, China has served notice that we are in for a decade of change ahead, starting in the next 5 years. Another reason to = Stay long precious metals.
I do tend to believe that there are baseline drawings that we can look at and make presumptions:
- One – it’s no secret that there are more people on this earth every day – all needing food, clothing and shelter. So we must think about the "commodities" as something important to our future.
- Two – the real detective work comes in the form of deciphering what is easily replaceable, and what is not. For instance, wheat - when the weather is good, the world produces more than enough – oil on the other hand can not be easily reproduced.
So are “stocks" at a generational low, and is this the buying opportunity of a lifetime like so many pundits suggest? In the here and now, a lot of the world is in an economic mess of biblical proportions. The US is broke, while Ireland, Spain, Portugal, Italy, and about 14 others from the Euro zone throughout emerging markets are bloated and debt ridden. And as much as I write about the doom and gloom, chances are pretty good that on the other side of what ever it is – we should climb back out and see a more stable economic picture emerge.
But here are some headlines:
- Our Q3 housing report shows accelerating declines in home values and a record 23.2% of mortgages underwater.
- As municipalities across the country pay billions to big banks to get out from under interest-rate swaps – the termination payments are coming at the worst possible time, as the recession has left states and cities facing huge budget gaps.
The number one issue right now is our currency. Bernanke is out to devalue it and the world knows it. I love the classic quote: "It might be OUR currency, but it’s YOUR problem". What do you do if you're China and you have well over a $Trillion in reserves that are related to or directly in dollar assets? Each new dollar Bernanke prints, lowers the value of the dollars in your vault.
I have said over the years that the dollar is doomed, and it will be replaced as the global reserve. I don't think the structure for the replacement is known just yet but it's in the works – and it will eventually need to be tied to a gold standard.
Gold and silver were beat-up this week. It's been long overdue, people became complacent – please use it as a buying opportunity – I am. Until economic sanity comes back and something new hits the stage – I’ll stick with precious metals – they’ve worked for 10 years – and I really can't see why they won't work for at least 4 more.
The Market:
On Friday and this week the market ended “red.” We've peeled off almost 500 DOW points in just a week. The general feeling was that Bernanke would unleash QE2, the market would love every dollar of it, and we'd soar higher. But this week the atmosphere changed - not only are most of the sane people in America upset over this next round of stimulus, but the rest of the world is angry at us too. So in Case #1: since expectations were probably running at 90% that we'd get QE2 and that the market would rally on it – the market decided to simply take everyone's money that hopped aboard for the ride higher. Then after fleecing the sheep it will turn back North and hit fresh new highs. Case #2 is that something more long term has hit. The global pressures, the backlash against QE2, the insiders selling in droves, the record bank closings, and a hundred other things have finally added up to the point where "stocks are expensive and need to be sold.” The problem with Case #2 is that this is not new – it’s been around for months. And as much as “something wicked this way comes”, and as much as I believe the market should be considerably lower – it begs the question – Where will $600B POMO dollars go if not into stocks? Honestly – if you're a big time banker, and because of a sweetheart deal between you and the Federal Reserve, what on earth do you do with all that money you’re raking in from selling Treasuries to the Fed other than buy stocks? The existing POMO program – is schedule to buy $7–9B on 11.16, $5B on 11.16, $4–6B on 11.17, $7-9B on 11.18, $6-8B on 11.19, $1-2B on the 22nd – and this continues for all of November and December. So if the money doesn’t go into stocks – where does it go – and I don’t have a good answer to that!
So I think it’s Case #1 – the garden variety fleecing of the short-term sheep, and they'll step back in and run this puppy back up with all their Fed POMO money. I think we'll know by Wednesday evening just what we have here. If the selling continues Monday and Tuesday, and we don't get a classic "Wednesday reversal" we'll have to consider the idea that something bigger is going on and look at some short side ideas. Be careful out there!
Tips:
Let’s review our holdings – with an eye toward our doubles (over 100% gainers) in the past four months of NG and SLW!
GDXJ – a basket of gold miners
GG – IAG – NG – AAU – NGD – ABX – FCX individual gold miners
GLD – pegged to the price of Gold itself
SLW – SSRI – SLV - silver miners and indexes
AUY – specific miner
VXX – volatility index (for the long haul)
DNN bought at 2.75
CBOE – JCI – MDT all stopped out for a slight gain
PHYS – Sold for not going up fast enough
We still like the metals and are buying on the dips – and looking at buying some SIVR, SIL, and SGOL.
We’re still in and out (mostly out these days) of TZA, DXD and SDOW on a daily basis (these are ETF’s that allow you to invest directly in the market going ‘down’ – for those that do not like to ‘short’).
If you’d like to view my actual stock trades - feel free to sign up as a twitter follower – “taylorpamm” is my nickname on Twitter – fyi.
