No Arguing The Facts
October 12, 2010The first three pages of NFTRH105 were mostly words. The remainder was a combination of words, charts and graphs, which gave clarity to the writer. I always like it when I finish writing and get the feeling that I actually learned something. That is what happens when you tune out the din and just let facts speak for themselves.
We are on a bull party, but there are risks involved. No matter how much fun it is hanging around the punch bowl, we must be aware of these risks. No, I do not view the static emanating from Ms. Yellen as a risk. But at some point, building pressures may abruptly cause a power outage when enough party goers have arrived and partaken.
No Arguing the Facts
The facts are that the HUI index of major gold stocks closed (by a hair) at new all time high territory on a weekly basis, silver has launched to new highs dating back to the post-Hunt Brothers era, and gold has been flying around in its latest patch of blue sky since early September after being the only asset to repeatedly make new highs over the last decade, as ongoing inflation is promoted against periodic impulses toward deflation.
Gold is rising like a barometer that senses increasing pressures among various nations to competitively weaken their currencies in an effort to goose their economies; none more aggressively or in grander style than the US and its Federal Reserve. Capital is frightened and it is going global in an effort to find shelter - and some nice returns :-) - from the storm.
Portfolio positions were added in the gold exploration sector as well as the global emerging theme. While I added a token short position against the euro, the balance of evidence suggests that there is not yet a compelling reason to believe markets will not continue to bull short-term, with the real excitement being in the precious metals and some emerging markets and commodities.
Desperation In Play
Of course, volatility is probably a fact of life now as desperation comes into play; desperation on the part of policy makers to pretend to be fiscally responsible (St. Louis Fed's James Bullard played bad cop last week in thinking aloud for the media regarding additional stimulus: "maybe we should push it off a meeting or two" pending economic data) while falling all over themselves to promote asset appreciation as a means to economic revival. Then there is the desperation on the part of market players ever more strident in their attempts to will markets toward their point of view.
In short, crosswinds are blowing all over the place and the monetary metal is right in the middle of the action. Soros and Buffett blow horns that sound a theme of gold as the "ultimate bubble", mainstream investment advisers are taking the metal seriously in their asset allocations, and more of the mainstream is starting to think "hmmm, I want to get in on this gold rush before the train leaves the station".
To this point in the precious metals bull, the sector has been the home of we crackpots, malcontents and weirdos. Well get ready for company my friends, we are going mainstream. Faith in policy makers is seemingly being rewarded by asset appreciation and the herd may come to a point where it just can't stand clinging to intrinsically worthless treasury bonds any longer. Volatility in many asset markets will almost assuredly accompany this desperation, and risk of reversal will be in play as well.
Transitioning Toward Global Re-Alignment
Beyond the 'transitional' asset class - the precious metals - the emerging global theme (that I have been compelled to pull in from 'long-term') to which the transition is geared, remains on track technically with many markets continuing their breakouts and is looking for all the world like it will not stop to let wannabe riders aboard.
The US markets meanwhile, continue to respond in their underperforming way to the fact of QE1 and the anticipation of QE2. Some areas of the economy are responding - particularly in manufacturing thanks to the weak dollar, which would get a lot weaker if policy makers have their way.
But the leveraged macro barge known as the vaunted US economy at the turn of the 21st century did not thrive on small potatoes like making things or being productive. It thrived on creating paper and digital instruments, marking them up and selling them to gullible people and entities in a pyramid scheme of epic proportions. In short, it thrived on selling garbage that naive buyers believed had value.
So when I tell you that my wife and I just sat with a real estate lawyer to close a refinancing on our small remaining mortgage (4.25%, which I must thank Mr. Bernanke for because there could easily be a '1' in front of that '4' in my opinion) and the lawyer told me business is brisk - with refi's, although many who want to refi cannot because their existing mortgages are under water - but new buys and new mortgages are virtually dead in the water, you see the major caveat clearly; it is just one unsustainable part of the massive 'stimulus' by policy.
It occurs to me that upon completion of the 'transitional phase' of the global macroeconomic changes now taking place, US housing will one day be a good investment. This is one asset class of value however, that probably has much lower to go in the interim because it was a target of the previous bubble in credit and is choked with legacy mal-investment, although general market speculation currently appears rampant.
Meanwhile, all that stimulus poured into the system by US and developed global policy panic, is currently going into things of value that are not burdened by such mal-investment. So while authorities may yet get their hoped for asset appreciation, it will manifest first and foremost in the 'transitional assets' and vital global resources required to build-out the global re-alignment.
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