Another short post here.
Within a week or two I expect a correction or change of trend regarding this “reflation” theme we are seeing. The bond panic is coinciding with toppy looking activity in oil, precious metals and grains. I’m buying puts on crude today with the July contract at 65.33.
The dollar is also a buy here against the Euro, Swiss Franc and likely the Pound and Aussie. I’m long UUP, the dollar bull ETF, along with Treasuries.
Mish has composed a detailed post on the many ways in which the vociferous Peter Schiff has been dead wrong on just about everything in this crash (the two actually had a little debate in December 2007). Mish’s post is essential reading for anyone who is considering following Schiff’s investment advice. In his own way, the man is usually just as wrong as the Pollyannas that he challenges on bubblevision.
Here is an excerpt:
Schiff’s Investment Thesis
- US Dollar Will Go To Zero (Hyperinflation).
- Decoupling (The rest of the world would be immune to a US slowdown.
- Buy foreign equities and commodities and hold them with no exit strategy.
12 Ways Schiff Was Wrong in 2008
- Wrong about hyperinflation
- Wrong about the dollar
- Wrong about commodities except for gold
- Wrong about foreign currencies except for the Yen
- Wrong about foreign equities
- Wrong in timing
- Wrong in risk management
- Wrong in buy and hold thesis
- Wrong on decoupling
- Wrong on China
- Wrong on US treasuries
- Wrong on interest rates, both foreign and domestic
That’s a lot of things to be wrong about, especially given all the “Peter Schiff Was Right” videos floating around everywhere. The one thing he was right about was the collapse of US equities and no part of his investment strategy sought to make a gain from that prediction.
I will admit that I was nearly taken in by Schiff’s thesis back in 2006 when I first became bearish on the economy and stock market. I even opened an account for someone with his firm, but the only thing I did with it was short the US market — I took none of his brokers’ advice on favored mining juniors.
I owe Mish and Robert Prechter a huge debt of gratitude for beating some sense into me with solid logic. Readers can easily check my archives to see my pre-crash stances on commodities, gold stocks, Treasuries, the dollar, the Swiss Franc and the Euro and the inflation/deflation debate. I can report that things have turned out very well for those who went against the crowd of contrarians, swallowed their fear of the dollar, and shorted not just US stocks but almost everything else in sight. All the world was a bubble.
On the need to stay nimble
Yes, the deflationists were right and hopefully all made some money or at least avoided terrible losses, but nobody can afford to get cocky. The markets do not trade on fundamentals on anything but the longest time-frames, so the ability to read the prevailing mood and adjust accordingly is a critical part of asset management. So is the willingness to contradict yourself and change your mind.
I see now that this deflation can last even longer than I had suspected, and that there may be even ways to avoid hyperinflation, such as negotiated Treasury debt forgiveness, but there is no need to try to guess about outcomes that are years away when you know how to read the signs as they come and remain humble and liquid enough to change your stance as needed.
By the way, Mish manages client accounts
Mish is an investment advisor representative with Sitka Pacific (not Euro Pacific!), a firm that manages private accounts on a percent of assets fee basis. I am not a client, but I would not hesitate to suggest giving them a call. I am working on setting up my own firm of this type, which offers many advantages over hedge or mutual funds, especially when set up with the protections that Sitka Pacific has included. My own style of trading is somewhat different from any of the strategies Mish uses (for example, I am willing to go net short or to a majority cash position), and of course I am not always in agreement with Mish on every aspect of the markets.
As many readers know, I have been bearish on gold lately. I have been buying puts on GLD and GDX and bought more yesterday, though I do have a big chunk of assets in bullion (20x more than in puts). My bullion is not for sale, but I suspect that the reality of deflation and its likely duration has yet to fully sink in, and that we are due for a demoralizing event in the gold market.
Gold is not fully treated as money at the moment, though fiat currencies don’t satisfy all of the criteria for money either. Only precious metals can fully satisfy them, when governments allow.
So gold is not really money now, since its liquidity is limited, but it is a long-term store of value that outlasts currencies and governments. This is the key point: from the perspective of a large player who can afford warehouse costs, other metals or commodities can also serve as a store of value and hedge against fiscal calamity. Copper and cotton and rice will never go to zero either.
Almost all other commodities are down by huge percentages, though gold hangs on. It makes sense for gold to outperform the others, since it is more liquid and portable and people naturally prefer it during a crisis, but the premium seems way too high.
Once this panic phase of the depression is over, and a general funk and low-velocity environment settles in, with the dollar and other currencies having survived to the surprise of so many gold owners, the metal could be again seen as dead weight and fall as people still need plain old folding money to pay their bills, debts and taxes.
That is how I see things. Only time will tell if I am right.
The markets are experiencing a bit of a thaw today, with the memory of panic several weeks behind us now. The VIX has just broken decisively below 40 for the first time since September. Treasury yields have broken out just a tad from their extreme lows. Oil has jumped back to the mid-40s, copper has relieved its oversold condition, the GDX gold stock ETF has more than doubled, and the Dow has crept back to near 9000 again.
The question now remains, how will fear return? In several more weeks or months after the mood turns from relief to greed (and fear of missing out), or in the very near future?
My mind is not made up, but any breakaway rally is way overdue. With every week since the November 21 lows, we have been relieving the oversold condition as a function of time rather than price. That is not to say that the Dow couldn’t creep all the way to 10,000 by March, but the longer we hover here, the less necessary such a rally becomes.
What would be interesting in a January plunge is for the bond market to sell off with the stock market for the first time in recent events. But if the inverse correlation still holds, the overbought condition in Treasuries could find relief in a “happy days are not quite here again but will be soon” rally in stocks. Today’s action is what such an environment would look like, but with a great deal more animal spirits — $65 oil might even materialize (before new lows of course).
At any event, with the VIX below 38 I picked up a few more cheap puts on GDX today. Gold stocks have had a great run, and the same people are buying them today as were holding them in the crash, and for the same reasons. That is a bad sign.
My favorite short though is still the death-defying Home Depot. Also keep an eye on WalMart. People need cheap stuff, but they don’t need as much of it as they have been buying in recent years. At 16.5, the PE on that behemoth is still out of line, as is Costco’s at 18.5.
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PS — Note that in this kind of analysis, I don’t pay much attention to news pieces or economic releases. That is not the way to trade. For instance, we have horrible manufacturing data out today, and all data is worse than 6 weeks ago, but the mood is hopeful and stocks are up, so how can you make money trading on the news?
I look at the mood of the market itself and try to figure out what it is feeling and what themes it is trading on: greed, panic, relief, inflation, deflation, dollar bad, dollar good, etc. I try to figure out the mood by what different asset prices are doing, and wait for entry and exit points when trends look exhaused. To know the larger trend is key, in this case deflation and depression, but the market’s take on the situation is always changing. You wait for Mr. Market to be very wrong about a situation or just too enthusiastic, as in the case of the overextended bond rally this month — in deflation, bonds are good, but overbought is overbought.
And the crash goes on. Asian equity markets declined 4-5% last night, and Europe is currently off about 5% (bloomberg):
US futures are also pointing solidly lower:
But the most noteworthy prices today are in the commodities sector, where we have oil under $87, Dr. Copper at $2.53, and coffee, yes, even coffee finally falling, down to $1.18/pound. I have been watching coffee, and for as long as I can remember it has been stuck in the $1.30 – 1.45 range
The commodity indexes have now given up all of the gains from their manic phase of late ’07 to spring ’08 (Bloomberg):
Meanwhile, Treasuries are marching higher, with the 30-year touching 4 percent flat this morning.
Smells like deflation.
“You remember my little girls. My 5-year old never owns stocks or bonds; she only owns commodities. She’s very happy owning commodities. She doesn’t care about stocks and bonds, but she knows about gold. I assure you, she knows about gold.”
