Asymmetrical Warfare
Gary Tanashian
From
the June, 2007 letter Don't
Say You Weren't Warned - Again:
"The
story that the above charts are telling is one of caution. One
where the smart investor will question his or her conventional
thought processes that were born of the 25 year bull market in
bonds, courtesy of the last great fiscal authoritarian at the Fed,
the inflation fighter himself, Paul
Volcker. The story is that with the casino atmosphere that
is a direct result of panic rate policy by the US Fed and other
central bankers (after the 2000 bubble burst) and the good old
dependable BOJ, "moral
hazard is catching" and risk vs. reward has now become
toxic."
Well,
it was a good job of timing the warning but our analysis got
whipsawed as the June letter projected a bearish summer as a result
of rising long term interest rates and rising yield curves.
But what actually happened was a sharp rise in the Yen (as projected
in the May letter),
yield curves and of course, credit spreads. Regardless, it
doesn't matter so much how we got here. We are here, and all
these indicators tell the same story: morally hazardous chickens
are coming home to roost. Yet an upturn in long term rates
would only make matters worse.
Today
we use stockcharts.com's
'sunset' theme for the charts as a symbolic nod to what I believe
are the last days of global investors' ability to hold the stitching
of their respective FrankenMarkets
together; to hold onto the illusion that their markets are
underpinned by something real, healthy and productive. Due to
the mind boggling levels of credit (debt), derivatives and other
genetically engineered financial products securitized and
distributed into the market place, the whole mess is supported by
the ability to keep up appearances.
These
are indeed dangerous times but I would like to note that they are as
potentially dangerous to bears as they are to sleepy bulls who have
been bred to believe that there is always another bailout (something
for nothing) on the horizon when things get a bit dicey. In
this regard we say 'price is price' and 'value is value'. They
are two completely different things. The 'price' of the Dow
could be 15,000 within a couple years but if you drill down into the
economy, into the mechanics of the financial system, do you find
something productive driving things or do you find more inflationary
policies? The question becomes when does a critical mass of
people begin to question the very currencies their investments are
denominated in? As we all know, there is currently massive and
growing pressure on global policy makers to compete in currency
devaluation while hoping against hope that the conventional herds
will continue to pop the blue
pill (Move along... nothing to see here. Click your heels
and wake up safely in your own bed in Kansas) of convention.
But
it is the unconventional that is really interesting at this
time. That is because rarely do you get a chance to cast your
lot, with patience and dedication, in alignment with fundamental
beliefs based on secular changes. But when it does happen, it
can change your life. Readers of the blog
know that I recently switched from technical analysis supported
trading to fundamental gold
sector bag holder. The reason? Because I believe it
is illogical to try to aggressively trade in the face of important
macro-fundamental changes and at this time virtually everything is
coming into gold's favor monetarily and the gold miners' favor
fundamentally. So no over-trading. Just positioning and
risk management in the form of always having cash available for
future opportunities. This is indeed asymmetrical warfare
taking place in the financial markets, but there is a calming effect
when you deeply believe you are on the right side of the big
picture, as I currently do. Meanwhile, the vast herds continue
to limit themselves to these general questions: "Do I
hold stocks and bonds for the long term?"... "Do I get
safe and go all cash?"... "Do I trade and stay
nimble?"... "Are foreign markets safer?"... "In
Greensp... err, Bernanke we trust?" and various other neatly
packaged conventional questions that keep many investors from doing
the hard work of realizing the big picture depths we have sunken
to.
In
the final analysis, there is no free lunch, yet free lunch is what
we have demanded all too much of. As Biiwii.com guest writer Jim
Kunstler wrote "I haven't changed my view of what is
happening to us. We have run out our string of stunts and tricks in
the money rackets. We've spent our legitimacy." We
have done this at the expense of future generations. We didn't
get something for nothing. We got something for something and
that something will be paid by our kids and their kids. It is
sad, piggish and the result of mass hubris. But here, in the
grips of Deflation Scare '07, we find things are anything but
symmetrical and a hubris born of lazy confidence is falling
away. I firmly believe we are entering another leg of the
secular turn that began in 2000. The question is can global
central banks do anything about it or will Robert
Prechter prove correct in that pushing on the limp string of
deflation is futile? Regardless of the answer to that
question, gold should be a part of any sensible portfolio in the
form of actual physical bullion, physical bullion services such as BullionVault,
GoldMoney or Perth
Mint the gold ETFs like GLD
and IAU or, on the speculative (and potentially highly profitable)
end of the spectrum, solid gold mining, exploration and royalty equities.
In
taking the pulse of sentiment, it can be argued that the public is
still doped up on the blue pill and is nowhere near understanding
that secular changes began to kick in in 2000 and are today on the
brink of extension. In 2002 daily life, it felt very
lonely as a precious metals sector trader. Five years later,
with gold at $700/oz., nothing has changed except that the metal's
boat was lifted by a massive awakening as to the value of resource
commodities in the face of rapidly industrializing developing
countries. But gold is not a resource commodity. It is a
safe haven. It is THE safe haven when currencies created out
of thin air come under rightful questioning. So, as I have
alluded to many times in the recent past, gold's fundamentals were
not helped by being part of the 'resource boom' or China or India
trade. In fact, the metal was ensnared in a 'commodity basket'
with an investor base that by definition would become weak handed in
a contraction. Thanks to people like Bob
Hoye and Steve
Saville (another guest
writer of ours), folks have had a chance to understand vital
differences between widespread perception of gold's fundamentals and
Old Yeller's actual fundamentals. Gold tends to shine
brightest during economic contraction, when central banks are being
pushed to debase their respective currencies through inflationary
interest rate policies. Commodities, which are positively
correlated to economies are different. The play on the gold
miners is of course that while their product is rising in relation
to nearly everything else (due to its monetary safe haven bid),
their bottom lines receive a turbo charge at a time when most other
companies' profits have either maxed out or turned down.
While
I expect that the world's central banks are not going to simply roll
over and let the metallic inflation barometer have a free run at
$1000/oz. and beyond, gold's performance throughout the summer of
discontent argues strongly that it is decoupling from the global
bull market in conventional and lazy risk taking. The gold
miners, with their leverage during economic contraction (did we
really need Friday's jobs
report for confirmation?) have also begun to get themselves out
of the pig's wake of late as many of their cost inputs decline,
although we are still waiting on oil. As any experienced gold
sector trader knows, nothing comes easy. But a sound strategy of
cash and risk management and buying the downers in the face of what
will almost certainly be asymmetrical financial warfare by monetary
authorities world-wide should prove highly successful in the long
run. After all, when we are talking about secular changes, we
are talking long run.
All
is not fundamentally well in the global casino. We cannot be
sure the current deflation scare will not somehow get papered over
with appearances being kept up yet again and the Dow's nominal
'price' at 15K or 20K somewhere out on the
horizon. But it is never a bad idea to try to hone a clear
vision about what this is in the big picture and take sensible steps
to a) not get blown up by it whether long or short and b) take
advantage of it. The nature of asymmetrical warfare is that
the other side can't see its true intent. In the ongoing
financial war, most people still have no clue that we are 7 years
into a secular bull market in gold. In fact, if you mention
gold to the average person you are more likely to get an odd look or
worse, a derisive attitude than you are to gain someone's sincere
attention. Call it the Buffet indicator.
The
above, as with all of my work is a sincere effort to present views I
hold. But they are my views born of my work. You must do
your own work and form your own conclusions or seek out trusted and
reputable professional financial advice. The biiwii.com
website is not commercial beyond a few affiliations with partners I
trust and some targeted Google advertising. I am considering
moving forward with a custom charting
service and we will see on that. But primarily, the work
presented on the site exists because I care about what is happening
in the financial world and by extension, the real world. Good
luck and be safe. Website terms
& conditions are located here and can be referenced any
time.
Gary Tanashian
www.biiwii.com
www.biiwii.blogspot.com
gary@biiwii.com
9 September 2007
Disclaimer: biiwii.com does not recommend that any trading or investment positions be taken based on views expressed on this site. If you speculate or invest it is suggested that you consult a financial advisor qualified in your area of interest.
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