Monthly Archives: December 2008

Dollar to turn back up?

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December’s themes have been ‘quantitative easing,’ the ‘bond bubble,’ and the resumption of the dollar crisis. It seems as though reaching the $9 trillion bailout figure and ZIRP (Zero Interest Rate Policy) triggered some more recognition of Bernanke’s plan to destroy the currency. This helped to spur a rally in Euros, Swiss Francs and gold, all of which were oversold thanks to the general unwinding of the inflation/anti-dollar trade this fall.

The long bond is severely overbought at near 2.5% (though it can come back after a correction, this being a strong deflation). It is essentially all risk and no reward. Buyers at this price assume huge interest rate risks, but the fall in the dollar this month eliminated a fair chunk of currency risk in US bonds. If bonds sell off, as they should simply because the market is so bullish, I expect the dollar to regain much of its lost ground, thereby maintaining a kind of balance.

I have had some mild trepidation in seeing the Swiss Franc come back to 95 cents from 81 last month (I figured 90 would be all), but a quick check of Yahoo’s currency page reveals that the market still treats this venerable script much the same as the EU’s shaky upstart (3-month chart. CHF in blue, EUR in red):

Source: Yahoo! Finance. Click for sharper view.

The Franc of course is a far superior currency and lately strong against the Euro, but there has been no phase change since last summer, when I first got bullish on the dollar and realized that despite fundamentals, the Franc was due for a fall. The Euro is just as fundamentally junky as the dollar, since the ECB will surely come to ZIRP as well, and the Eurozone is under tremendous political strain. Plus, most people still think it is better than the dollar, and all things being equal it is usually preferable to be contrary.

Now let’s layer gold on here (GLD in green):

Source: Yahoo! Finance. Click for sharper view.

So gold still trades like a currency, albeit a volatile one.

Now let’s layer on the long bond (TLT as proxy):

Source: Yahoo! Finance. Click for sharper view.

So that’s what I’m working with. All three asset classes look overbought to me: bonds, gold and the Euro/CHF, and I suspect that their rallies are related and associated in traders’ minds with recent Fed and Treasury actions.

Could a sell-off here coincide with a surprise resumption of the equity crash, now that the widely-expected (even here) bear market rally (something akin to the 45 percent move from Nov ’29 to April ’30) has yet to materialize with any real strength?

October and November unwound a lot of old bull market positions, but not all of them. The equity culture is still alive, and since it’s never the thing you fear that gets you, perhaps despite Mr. B and the Bailouts, the dollar is not done with its comeback.

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.

So, where are we now?

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When I started this blog in early August, I was living near the equator in a city overlooking the Pacific, having packed up and shipped out of New York just after Bear Stearns blew up.  18 weeks ago, the Dow was solidly over 11,000, the 30-year bond was 4.6%, gold was $900, oil was $120 and the latest CPI figures were showing double-digit annualized inflation. I was holding a huge array of LEAPS and ETFs that put me massively short equities (including mining and energy), net short gold, and long Treasuries.

I was then constantly emailing friends and family with my latest reasons to get out of stocks, miners included, and to buy into Treasury MMFs and index puts. For the previous nine months I had been endlessly explaining the logic of deflation and its implications, having been dissuaded of Schiff-esque conclusions by the likes of Mish and Prechter, and I wanted to go on the record more publicly with my calls. Besides bragging rights, I wanted the pressure to dig deeper and get the details right.

I called for a depression worse than the 1930s. I said that the Dow was on its way to below 3500 (under 9500 by Christmas, I suspected), that commodities would tank, that gold would fall well under $700, that there would be huge bailouts for the crooks who blew the bubble (though I never thought we’d see anything like $9 trillion by the end of ’08), that Obama would win and back a “new New Deal” and that the long bond would yield less than 3% anyway.

Let it be known…

I believe that the only market call that I got wrong was my early preference for the Swiss Franc over the dollar, but I switched out of that on the first real signs of dollar strength. Please call me out if you know of any others. I also sold my Proshares inverse ETFs very early in the crash (over the week or two following the late September shorting ban), and of course they did not proceed to fail from a swaps default, but given the lack of disclosure regarding counterparties and collateral, that was the right call, especially for a portfolio stuffed to the gills with puts anyway.

Living history.

And so this is Christmas, and where are we now? Well, I’ve ditched the volatility of Latin America for frosty and gorgeous Zurich, and the world is falling apart more or less on schedule.

I haven’t traded much since November, other than to close some more shorts on dips. I’m not a short-term trader. Starting in mid-2007, I recognized a rare opportunity to catch a tidal wave, and positioned myself for the big move. I wound down my business by early ’08. I got out of all long positions. I put most of my eggs in one basket, and I watched that basket!

By August I was glued to the computer, tracking dozens of data streams. At times this fall I was sleeping 4 hours a day, waking up at 3AM to watch the crash wash around the globe and plan out the day’s orders for several different accounts. Naturally, this blog was a big part of that routine, as it helped me to organize my thoughts. It was also fun to see all of the traffic come in, 600 visitors a day at times.

Man, the action was fantastic, wasn’t it? What thrills! The weekend that Lehman was thrown to the dogs; the desperation and collapse of Wachovia; the ETF scare when AIG folded (swaps mayhem!); the 4% TED spread; even worries that the Options Clearing Corporation might default. This was uncharted territory. Nobody knew exactly how fragile the system was — clearly, it had been built by schmucks who hadn’t read history and wouldn’t give a damn anyway, and we didn’t know how much stress each component could take.

So for now “the system” still stands, though I have a few more gray hairs.

Politics is (really) theater.

Team Obama is of course the same Team America that has been running this show for time immemorial, the face change being a tried and true steam release for public discontent. But this time around, with the internet allowing any inquiring mind to look behind the curtain, it is still astounding to me how even intelligent people are relieved to see a ‘change’ in the White House, even as well known made men line up for posts at Treasury and such.

The Who knew this game:

We’ll be fighting in the streets
With our children at our feet
And the morals that they worship will be gone
And the men who spurred us on
Sit in judgement of all wrong

They decide and the shotgun sings the song
I’ll tip my hat to the new constitution
Take a bow for the new revolution
Smile and grin at the change all around me
Pick up my guitar and play
Just like yesterday
Then I’ll get on my knees and pray
We don’t get fooled again

The change, it had to come
We knew it all along
We were liberated from the foe, that’s all
And the world looks just the same
And history ain’t changed
‘Cause the banners, they all flown in the last war

I’ll tip my hat to the new constitution
Take a bow for the new revolution
Smile and grin at the change all around me
Pick up my guitar and play
Just like yesterday
Then I’ll get on my knees and pray
We don’t get fooled again
No, no!

I’ll move myself and my family aside
If we happen to be left half alive
I’ll get all my papers and smile at the sky
For I know that the hypnotized never lie

Do ya?

YAAAAAH!

There’s nothing in the street
Looks any different to me
And the slogans are replaced, by-the-bye
And the parting on the left
Is now the parting on the right
And the beards have all grown longer overnight

I’ll tip my hat to the new constitution
Take a bow for the new revolution
Smile and grin at the change all around me
Pick up my guitar and play
Just like yesterday
Then I’ll get on my knees and pray
We don’t get fooled again
Don’t get fooled again
No, no!

YAAAAAAAAAAH!

Meet the new boss
Same as the old boss

Travel, sleep, extracurriculars.

I apologize again to those of you who miss the active posting. Everything is fine. I’ve just been away from the markets (relatively speaking) since November, since I’ve been on a lot of airplanes and have lately been taking some time out to attend a German course.

Besides, I never really intended for this to be a news blog. I don’t have much new to say on each bailout measure or report of economic distress, since they are all just color at this point. They shouldn’t surprise anyone now, nor should they change anyone’s expectations. This is a depression and the government is only making it worse. It will last for years, and the US will become much less free in the meantime. At some point in the next few years, the Treasury market will buckle. Things will get very interesting when the government has to default on its promises. In the process, the global paper money system may change dramatically, from a fracturing of the EMU to unprecedented inflation in the US. We don’t know how or when these things will happen, but we do know that holders of all kinds of government paper will get stiffed, so we just have to keep buying gold at a measured pace — less now, more later, much more under $600.

So here are some new predictions for the next 24 months:

Unemployment as reported will hit 12%. Real unemployment (U6 — see shadowstats) will be 25%, as in the ’30s.

GDP will fall at least 15% from peak 2007-2008 levels. GDP is a bogus stat (why are consumption and government expenditures included?), but I’ll defer to convention.

The Dow will have breached 3000, with a few 20% rallies along the way, a couple of which lasting a few months.

Home prices will continue to drop, and Case-Schiller will register a 40% decline from peak by the end of 2010.

Trading notes

As far as trading goes, nothing is very compelling to me at the moment. I’m still holding a large, though much smaller, basket of 2010 puts on the S&P and various and sundry industrials, retailers, REITs and miners. I’m still holding real money of course, though I still have some hedges on it via GLD, and I have put the bulk of my shorting profits in T-bills, where they will sit until I am compelled to go more heavily short by a more heartfelt equities rally or heavier into the heavy metal at the right price.

Agriculture, as I have mentioned, is interesting. Grains never go out of style, depression or not, and prices are not in bubble territory anymore. Except for the last couple of years, farming has not been very profitable for decades, so the sector could be in need of investment. Also, a less free global market and greater political tensions (both a consequence of government responses to depressions) could mean shortages.

Energy is also getting tempting. Crude production peaked in the first half of 2005 — we will never again get as much out of the ground as we did then. The stuff is really, really, cheap. It was also cheap at $147, but I still shorted Suncor. $25 is not out of the question, but really, waiting for the bottom of the bottom is a fool’s game. I’ll be looking for ways to scale into oil and uranium slowly over the next couple of years.

No final bottoms.

I don’t think we have seen bottoms in anything yet: neither grains, nor metals, energies, foreign currencies, corporate bonds, munis nor equities (other than those at zero already). We have only seen the first move, but this move tipped the market’s hand.

All the same, I don’t like to be in the way of such a compressed market. Make no mistake — a rally and general improvement in mood could last a year! At all points in this bear market, consider what would happen to your portfolio if prices were higher 12 months out. Being right but early is being wrong if you lose so much that you compromise your ability to trade within the limits of prudence. Look for the layups and buy yourself as much time as possible. If you are going to short, find far-out LEAPS and buy them cheaply. Be a miser. The profits (and losses) are all in the buy.

Two contemporary libertarian greats talk about the crisis.

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Mises Foundation founder Lew Rockwell interviewed blogger Mike “Mish” Shedlock on his podcast series:

Link here.

Topics include bailouts, ‘stimulus’ plans, the benefits of deflation, and Mish’s campaigns to end bailouts and abolish the Fed.

Mish is really pushing hard politically. I’m 100% behind him, but I worry a bit about how the gangsters might respond to him now that he is getting so popular.

Also check out Lew Rockwell’s podcast archives and look for Jim Rogers’ interview yesterday.

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PS — Sorry again for the lack of posts. I’ve been a bit unsettled of late, having been in the middle of a transoceanic move.