Category Archives: deflation

Sunday night futures update

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In the first hour of Globex futures trading (starts for the week at 6:00 New York time), I closed up the gold and stock longs that I put on late Friday. I’m letting the Yen run, since it was so deeply oversold and has some support at this level.

Friday’s dollar rally was awesome, and may bode the start of an enormous rally, but it remains highly overbought on a 15-minute scale, so now is a good time to take a wait-and-see approach. Same goes for gold — it’s oversold near-term (from 1228 late Thursday to 1145 Sunday night) but still highly overbought long-term. Because of the extreme overbought condition after a giant parabolic rise, it has the potential to keep dropping straight off a cliff with just brief pauses to keep us guessing. Knife-catchers beware.

Here’s a 1-month view of February gold futures:

Source: Interactive Brokers, LLC

I’m going to watch for good entries on the long side of the dollar and short side of gold and stocks. Things may be aligning for a major downdraft in stocks, now that the dollar is looking up. With the Yen oversold and Nikkei overbought, Japan is also setting up for another try at the deflation trade.

Yen (priced in dollars), 1-month:

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Nikkei stock index futures, 1-month:

5th Avenue blues

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Hat tip Evilspeculator

They counted 48 vacant properties (I presume mostly street-front) from 59th to 14th Streets on 5th Avenue in Manhattan. I don’t have any stats to compare this to, but it is clear that times are not so good for landlords (and their banks) in NYC. I used to live on the same block as one very large storefront shown here, and I happen to know that that particular property has been vacant for over 18 months, ever since its former tenant, a nationwide retail chain, went bankrupt.

I have noticed that many of the “for rent” signs you see in Manhattan bear the name of Vornado or other such REITs. That sector is still doomed, though traders seem to have forgotten to ask, “where’s the equity?” I suspect that in most cases, an honest accounting would reveal that net of debt and marked to market, there is none at all.

Rosenberg: Latest employment and credit figures show deflationary depression unabated

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This morning’s Breakfast With Dave is good one.

There are so many headwinds confronting the U.S. consumer it’s not even funny. For a look at the new harsh reality of soaring usage of grocery vouchers, as well as other supplements to the household budget, have a look at the grim article on page 2 of the weekend FT (Families Take Up Food Stamps as Wages Shrink). On the very same page, there is an article on the latest trend in terms of 21st-century breadlines — Middle Classes Turn to Car Park Handouts. To think we still get asked why we aren’t more bullish over the outlook for spending. Truly amazing.

TREMENDOUS UNDEREMPLOYMENT

The U.S. economy is actually 9.4 million jobs short of being anywhere remotely close to being fully employed, which is why any inflation that can somehow be created by the Fed is simply going to be unsustainable noise along a fundamental downtrend in pricing power. After last Friday’s report, we have now lost 6.9 million positions that have been cut during this recession and we have to count in the additional 2.5 million jobs that need to be created — but never were — just to absorb the new entrants into the labour market. The ‘real’ unemployment rate is now 16.8%, so to suggest that this down-cycle was anything but a depression is basically a misrepresentation of the facts.

MONEY AND CREDIT AGGREGATES ARE NOW DEFLATING

It is interesting that the equity market has begun to wobble (fade last Friday’s rally on such low volume) because we have noticed that some key liquidity indicators are not behaving very well, all of a sudden. M1 fell 1.0% in the August 24th week and over the past four weeks is down at a 6.5% annual rate. M2 has contracted in each of the past four weeks too and over that time has slipped at a 12.2% annualized pace, which is a near-record decline. We see the same trend in the broad MZM money measure — off at a 15.8% annual rate over the past month. Bank credit also remains in a fundamental downtrend — contracting at an epic 9% annualized pace over the past four weeks.

So for the first time in the post-WWII era, we have deflation in credit, wages and rents, and from our lens this is a toxic brew that in the end will ensure that the focus on capital preservation and income orientation will be the winning strategy over a strict reliance on capital appreciation.

Hugh Hendry walks around China

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Hendry is the founder of Eclectica Asset Management.

“Who is going to pay the debt that that building is resting on? …A building with no tennants. Half a billion dollars of someone else’s liabilities.”

“…very expensive, empty building where the developer went bust.”

“I haven’t seen any sign of a manufacturing base anywhere close to here.”

Michael Hudson interview

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Got this from Zero Hedge, an excellent new blog.

Takeaways:

The debt must be written down.

Ancient Babylon had better economic models than our Nobel laureates.

Our politicians’ constituents are not the voters, but the bankers, who are parasites.

Obama’s economic team is the same crew that raped Russia in the ’90s and they will support an oligarchy in the US as well.

Fade the reflation trade

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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.

Most of the way there.

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The bounce has been faster and more comprehensive than I expected. I was thinking that we would top around these levels, but by summer or fall, not early May. I have continued to scale into distant-expiry SPY and QQQQ puts, favoring ITM and ATM, and have now deployed about 1/3 of the money I am willing to allocate to shorts. I also have a smidgen of shorter-term positions in certain ridiculously high-flying restaurant and other consumer stocks.

The bond sell-off and commodities rally indicate that inflation fears now have the upper hand, as most people still believe deflation will be a short-lived phenomenon. The aforementioned movements are setting up nicely for long and short replays, respectively.

Notwithstanding a long-overdue correction, I suspect that stocks have further to run, and am no longer such a skeptic of certain Elliott wavers’ target of S&P 1050. Bullishness is now at 80%, up from 2% in March, but judging from attitudes on TV, there is still a great deal of skepticism to be overcome before we can call a top. That said, the speed and evenness of the advance leads me to expect much more choppiness for the remainder.

Shorting precious metals has been frustrating, and I suspect that we are repeating the pattern of last spring, when we had to work our way through several months of chop after receding from manic levels (1030 gold that time, vs 1007 in February).

It is important to keep in mind the real situation, not just the current market mood (though you can’t trade on fundamentals alone). We can’t work off the greatest credit bubble in history in 18 months and just a 57% loss in the stock market. The real (private, productive) economy is not going to stop shedding jobs, let alone add them, for years, and people are so indebted that they cannot be enticed to reflate the asset bubble or return to previous levels of wasteful spending. It will take a generation to work through our debt and lifestyle delusions.

It bears repeating that today’s official headline unemployment number (8.9%) cannot be compared to numbers from before the 1990s, when the Clinton administration changed the reporting methodology to exclude large segments of unemployed. A more useful measure for historical comparisons is U-6 unemployment, which now stands at 15.8% for April. Today on Bloomberg I heard Christina Romer say that things were nothing like the Great Depression, as she compared apples to oranges. In reality, we are at solidly depressionary levels already.

Also bear in mind that stock valuations remain at bubble levels. This is easy to see when you remember that stocks have no intrinsic value other than marked to market book value and heavily discounted future earnings. The major indexes’ trailing PE’s on net earnings will be under 10 by the time this is over. We still need to work off the bubble that was blown in the 1990s, which didn’t finish deflating in 2003 because of the easing of credit. Every kind of credit is tightening now, unless of course you are a bank holding company.

Mish takes Peter Schiff to the cleaners

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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.

Still bearish on the yellow metal

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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.

Finally, time to short the long bond (for a trade).

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Here’s a two-year view of my proxy for the US 30-year Treasury bond, TLT:

Source: Yahoo! Finance. Click to enlarge.

It seems as though the mother of all Treasury rallies has run out of steam for now. I’m stepping in to play a possible correction, with a target exit range of 100-105 on TLT, corresponding to about 3.5 – 4.0% yields.

I also expect the dollar to regain lost ground at the same time, and for the Euro and Swiss franc to retrace the gains of the last three weeks.

Gold should also fall in such a scenario, as it’s price in Euros and Francs has barely changed since departing the 750 dollar level.

Whether or not to short the long bond has been the most consistent question posed by friends. I have advised against it until now, having called for sub-3% yields as early as last August. I still think this topping process needs at least another year to play out, but when nearly everyone is on one side of a trade, it is time to take the other. Simple as that.

Shorts have been burned all the way from 5.5%, and most have now given up in frustration. The news that the Fed will start buying is the perfect cherry of bullish fundamental news to complement a market top. What more could you ask? With every schmuck of a money-losing manager finally talking up bonds on Bloomberg, who else is yet to come on board?

I’m an options guy, but another way to play, besides futures, is to simply buy TBT, an ultrashort ETF.

Why do I think that yields will stay this low for over a year? Because this is the top of a 28-year bull market, and we’ve only been under 3% for a few weeks. At the last Treasury top, the 1940s, yields held under 3% for nearly a decade, even as inflation hit 10%. Market prices don’t have to make sense, in any sense other than as a reflection of mass psychology.

Disclaimer: Don’t trade like me. Don’t trade at all. It’s too dangerous out there, and this is very risky stuff, especially shorting in anticipation of a countertrend move.