Category Archives: Notable Posts

Previous articles and posts of interest.

Peak Fed

By Biiwii

clowncar

While we’re on the subject of Mr. Bullard, the opening segment from this week’s NFTRH (#335) had a little fun with the Fed.  Serious multi-market and economic analysis came later, but sometimes you just need to shake your head in awe and wonder.

Peak Fed

The Fed is important because millions of market participants believe it is important and a critical mass of people are under the illusion that its policies have put the “Great Recession” in the past and laid a path for a sustainably good economy going forward.  In short, confidence in the Fed has never been more pervasive as it reaps the reward (the respect and confidence of the majority) for a job well done.

Never mind for now that previous Fed policy is what fomented the “Great Recession” (i.e. a near liquidation of the system) and the supposed remedy has been similar but more intensive policy using official credit as opposed to commercial credit as the stimulant.

Through this cycle I have watched Gold Bugs that used to rail against “Helicopter Ben” fade to black, the Bond Vigilantes who would short the long bond (including one over exposed Vigilante, formerly of PIMCO) get their hats handed to them and the general backdrop of distrust and revilement toward the Fed simply get erased somehow.

It’s as if a majority of market participants are little more than black boxes with certain coding for certain cycles.  Today the code might look something like this…

<style=”subservient”>

<caption>Sit quietly and we will control all that you see and hear</caption>

Continue reading Peak Fed

Gold Sucks!

By Biiwii

[edit] a quick look around the interpipes tells me that there are people watching gold with no sense of humor, taking the title of this post literally or as a contrary indicator.  sometimes i just don’t know.

Ben Kramer-Miller, a fundamental gold stock analyst who I keep an eye on, recently had an article at SeekingAlpha called Gold’s Bull Run Has Not Yet Begun.  I remember taking note of the title when it came out, but as is usually the case I did not have the time, nor the inclination to read it.  I like to keep my own thoughts square and balanced and don’t need other peoples’ thoughts on gold clouding my own.

But as I was fooling around over at the St. Louis Fed’s website (it is recommended that geeks register for a free account) doing the following charts I remembered ‘oh jeez, I think somebody’s already on this topic’.  So I checked it out and sure enough he did gold vs. the Monetary Base using a graphic from the also-recommended MacroTrends website.  Anyway, preamble behind us we move on…

The long-term chart of nominal gold, anyway, has not done so bad.  Boy, this bubble from 2001 to 2011 sure was a humdinger.  It must have so much further to fall.  Look how much higher gold went this time compared to the bubble that blew out in 1980.

gold

Oh wait, this bubble was actually not as bad as the 1980 bubble when CPI adjusted.

gold.cpi

Oh wait again, gold is and has been in a bear market in Monetary Base units ever since the US dollar was freed from its shackles in the early 70’s.

gold.base

Bottom Line

  1. Either gold sucks
  2. …or its bull market has not yet begun

…and may never begin if confidence remains intact in policy makers conjuring up digital funny munny units out of thin air while holding our trust in their stewardship.

Stewardship is defined here as blatant manipulation of things that used to mean something, like the rates of interest on loans to be paid back and the productivity that would spring forth from savings, capital deployment and investment.  You know, hokey old fashioned stuff like that.

But this is a world where large entities, including governments, don’t need to be responsible for the ‘paid back’ side of the deal and so, gold has sucked because there seem to be no repercussions for it to protect people from.  They are creating debt and confidence money and this stupid rock is below the pre-Bretton Woods levels in Money Supply terms.

All the more reason that the ‘gold is not about price, it’s about value’ mantra holds up just fine.  It’s price sucks and its value in a traditional sense measured by out of control governmental money creation, has never been better.

Tilting at Golden Windmills

By Biiwii

dq.windmillsThere is a writer we’ll call Don Quixote who is tilting at something that no longer really exists… the evil gold promoters that used to be taken seriously by innocents to the tune of near total destruction of their portfolios.

Don once went on about the gold cult and I even highlighted his post because I had been going about the gold cult as well.  The cult-like aspect of the gold “community” (← a dead giveaway) was real, and the group-think that the 2001-2011 bull market fostered was very strong and really damaging to those who did not question its tenets until it was too late.

Continue reading Tilting at Golden Windmills

Bird Doo; Yellen Goes to Congress

By Biiwii

This is only the second best Fed Hawk photo I’ve ever seen.

yellen

The best one by far is the un-photoshopped Loretta Mester in all her natural hawkish glory.  Note the piercing eyes, the aerodynamic features and the focused intensity.  Also I must say, at 56 she has a youthful dynamism about her.  If she were Fed chief and told me to jump I’d ask ‘how high?’… or if she told me to print I’d ask ‘how much?’

mester

Okay, moving on; the funny Hawk at the top is going to gulp down a mic in front of Congress and the media are all over it.  The lead article in the graphic above would actually turn your friendly blogger into a nice contrary indicator, what with his status among the majority that were bullish on the S&P 500 at the last polling by Tickersense.

Continue reading Bird Doo; Yellen Goes to Congress

Gold: Value, Re-Propositioned

Last weekend, in a segment titled Gold Obsession & Ephemeral States of Mind NFTRH 330 talked about a growing presence that seems to follow Martin Armstrong’s anti ‘gold promoters’ theme.  This theme seems to be – coming as it does in a gold bear market – something of a promotion itself; just as the over-the-top inflationist gold bug stuff was during the bull market.

Please understand, dear followers of Marty, I am not at all calling him a promoter.  He is the originator of ideas, thoughts and analysis that while not all my cup of tea, is interesting enough that it is linked at NFTRH.com and Biiwii.com.  But behind this mindset that is solidifying in the public consciousness, is a growing cadre of gold bugs – some of whom benefited from the notoriety lavished upon them by the likes of Mr. Gold, Jim Sinclair – that seems to be taking things over the top*, as always seems to happen with humans and in markets.  Every mental elastic band seems to stretch too far.

In the above noted NFTRH 330 segment an article I wrote in 2007, A Value Proposition, was referenced.  In re-reading it for the first time in years I was impressed with how the ‘value’ case for gold has not changed one bit in the last 7+ years.  At least in my interpretation of value, which has kept me personally at an even pulse rate during the bear market and given NFTRH subscribers consistent perspective through a difficult, but ultimately necessary and healthy phase for gold.  It felt refreshing to re-read it.

So, if the article benefited me, its author, all these years later, I thought it might be of benefit for other peoples’ perspective as well in this emotional time of gold obsession.

As a final note, I’ll just say that it sure is interesting that today, in a wicked bear market, gold is nearly $500 an ounce higher than it was when the article was written.

* I have done my share of gold bug critiques, complete with the requisite incoming hate mail.  But the point is that the new thing going on now was nowhere to be found when it was unpopular to take shots at the gold bug ‘community’.  Indeed, with the help of a subscriber who stated ‘enough already, we get it!’ I came to realize that the horse has been dead for a while.

A Value Proposition  (November 3, 2007)

As the rot in Wall Street’s dark alleys works its way from the inside out, from the seediest hedge funds’ leveraged ‘investment’ vehicles to Main Street’s financial institutions (pensions, 401K’s, savings, etc.) gold has taken center stage, closing above $800 for the first time in its still young bull market. Fear and anxiety are increasing as the US Dollar falls further below serious long term support and in this environment, gold is an emotional conduit through which growing fears of fiat monetary instability pass. Picture a burning building with a limited number of exits and a large crowd trying to pile through the door. Let’s call it a… oh I don’t know… let’s call it a casino.

Gold is the object of many strange and varied perceptions, perhaps because it is an ancient asset that has always stirred basic human instincts for wealth, good fortune and even survival. But in light of the perverted and multi-headed monster we call a financial system – with seemingly infinite instruments of ‘profit’ limited only by the imagination of financial engineers – perceptions toward gold have become distorted, helped by an enabling Wall Street and mainstream financial media.

The main point to remember is that gold does nothing; it just sits there and does not care about the crazy gyrations going on all around it. But to understand and accept this, casino patrons must first accept that the metrics they have been schooled in and the rules they have been taught over the fiat decades to play by are not applicable. Filling the void that this lack of understanding creates is a whole host of opinions, many disparaging and/or dismissive. Others simply attempt to fit this “asset class” into conventional metrics. The inspiration for this missive was a recent SeekingAlpha piece by Brad Zigler called All That Glitters May Not Be So Golden. Mr. Zigler did not write a ‘hatchet piece’ on gold but what I find interesting is his and many other financial media correspondents’ analysis of gold as a return (or lack thereof) instrument.

Gold pays no risk premium as it carries no default risk. But in the world of financial media-fed perceptions that is a bad thing. No return you say? No markup? No leverage? Who needs that?! Gold is about value and nothing more in my opinion. That is why I refuse to get excited when its fiat currency denominated price goes up and why I also remain at a normal pulse rate when said ‘price’ declines sharply. I do agree that when trading or investing in the gold miners (as I do) it is important to keep traditional metrics in mind. But the miners are my casino of choice and I most certainly do not see the gold miners as gold, a gold equivalent or anything other than a potentially hugely leveraged play on an enduring asset of value.

Back in the real world, players are just beginning to get the hint that the risk they have taken on in the hunt for return in some very dark corners has come at a price and the price is a massive debit against the entire system of something for leveraged nothing. Yes, gold pays no premium but neither is it subject to this debit because it never went anywhere to begin with. It Is What It Is and as a barometer of global financial sentiment its exchange value is rising versus a whole host of paper promises not to mention many hard assets. So what many investors now need is a sort of 12 step program as they attempt to ‘put down the crack pipe’ and come to an understanding that real value has nothing to do with return (unlike modern portfolio and asset allocation theory) and it certainly has nothing to do with leverage.

Mr. Zigler’s assertions and my responses:

Debate has raged for some time now about the utility of gold in a portfolio. Forget, for a moment, the breathless claims of infomercial touts and Parade magazine advertisers. Think, instead, of asset class selection.

Why should anyone add gold—or, for that matter, any asset—to a portfolio? The answer that comes immediately to many people’s minds is “return.” It’s the promise of outsized, and often outlandish, returns that entices people to call that 800 number in the wee hours of the morning to get their hands on the yellow metal.

There should be no debate. An asset of historic value belongs in a portfolio if debt obligations (bonds) and calls on corporate earnings (stocks) belong there. I agree, the 800 number pitch men are seedy characters capitalizing on fear and insecurity, but why are they part of the conversation? Have you ever seen the movie Boiler Room? The world of stock scams dwarfs that of unscrupulous precious metals dealers.

Gold isn’t the end-all, be-all, however. In the long term, the metal’s price is notoriously unstable. Since gold’s price was allowed to float in 1970, its annualized standard deviation—its price variance—has been clocked at nearly 20 percent, versus 15 percent for blue-chip stocks. And in that time, gold’s return has only averaged 8 percent. The S&P 500 earned 11 percent per year.

There is the word “return” again. The reason gold has under-performed over the measured time frame (minuscule in the context of history) is because contrary to what some gold bugs may think, there certainly was upside to the fiat money system. This upside was manifested in liquidity to build out all manner of productive enterprise. The United States for example spent the majority of the 20th century on the upside of this build-out. The question now becomes ‘do we remain on the upside or have the secular changes beginning in and around 2000 marked a decided switch to the inevitable payment to the piper (of the debt used to keep the dream alive)?’ If you think there is still productive upside, you will see gold’s ‘return’ as sub-par. If you believe that secular changes are at hand, you are looking for that exit door in a crowded casino and you don’t give a damn about return. You want to stay whole.

So what return can we expect from gold? Well, financial theory says you can’t expect any increase in an asset’s value without growth prospects. Stocks’ expected return derives from earnings growth. Issuers of corporate securities can create things and grow. There’s a real prospect for a company trading its shares or warrants to be worth more and more as the result of management decisions. Gold itself doesn’t produce earnings, and for that reason its expected return can be approximated as zilch. Nada. Bupkis.

Mr. Zigler is correct. Gold provides no ‘return’ in the modern asset allocation theory sense of the word. But in bringing the word ‘value’ into the equation he again shows how modern portfolio theorists are trained; no return, no ‘growth’ = no value proposition. Gold does not stand at $806 this morning because of its growth but rather because of its retained value vs. paper instruments – USD first and foremost – which are coming under heavy questioning. It should be noted that in the US the stocks of these growth entities are denominated in USD.

Appreciation in the price of gold, of course, does occur. History attests to that. There’s just no reason to expect it. What influences the price of gold are external, not intrinsic, forces.

It appears Mr. Zigler and I have been watching two different financial systems over the last several years but I certainly agree that gold’s value is affected by external forces.

He then goes on to write about the gold miners which is my usual subject matter on the TA Blog [edit; much less so now, as too many patrons micro manage every squiggle in this sector publicly and NFTRH reserves most of its gold stock analysis for subscribers], so I will just end here this critique of modern portfolio theory as it applies to gold. I hope it helps shed a little light on an alternate way of thinking for a few people.

I will leave you with a final thought that I was taught early on in a school of decidedly unconventional asset theory. Price is price and value is value. They are not one in the same. Unfortunately that simple thought has been schooled out of the masses. I have no doubt that pitchmen of all types will come out of the woodwork to hawk the golden solution to an awakening public. A fortunate few will keep it simple however and remember that real value is enduring and real value is not a pitch. I find value splitting wood at my wood pile. I find value in jamming loudly on guitar. I find value in Google. I find value in the air I breathe. I find value in remaining financially whole. I do not find value in debits attached to an unpayable black hole.

The Financialized Economy

This segment is excerpted from this week’s Notes From the Rabbit Hole, NFTRH 329, and was originally titled…

Does the US Economy and Stock Market Need Manufacturing?

The ISM PMI reports for December and January showed deceleration in line with our view that a persistently strong US dollar would begin to eat away at US manufacturing, exporters and other companies that depend on significant foreign business.  But in an age where investors will bid up Twitter* (with its forward P/E of 141 and 30B market cap to 1.2B revenue) by 16% in a day, are we returning to the old days of ‘PE’s don’t matter’ with the hook or tout being ‘it’s all about ad revenue’?

One analyst quoted in the WSJ:  “Given FB’s (Facebook) history… we think that investors do not want to miss out on another social stock run”

Is this type of mentality not reminiscent of the late 1990’s?  Twitter, like Facebook, is implementing strategies to monetize all those short attention spanned eyeballs, but 30B?

As you will see by the charts in this week’s report, despite elevated general forward valuations (graph below) and ridiculous individual valuations like Twitter and so many other fad stocks, the bull market’s technical situation remains unbroken and generally bullish, although the volatile ‘swing’ market theme remains intact for now.

* Personally, I deleted my Facebook account because after all, who really needs to see yet another picture of someone’s super bowl chili or winter vacation in the tropics?  I use Twitter as a button at the websites.  Make post, press button… done.  Another tweet the world really doesn’t need.  But it is a handy little tool.

Back on topic, here is the current forward P/E level of the US stock market (graph source is factset.com, by way of the free ‘Daily Shot’ email service from soberlook.com).  They each cover relevant global macro data and are recommended.

pe

P/E is as stretched as it gets for US corporations.  But in a world where deflation is the key theme, capital flows have well, flowed into US asset markets.  On a risk vs. reward basis, the view continues to be that certain global areas are more favorable than the US for new investment.  As an example, we have been noting that Germany, as an exporter operating behind a weak currency and QE-inclined Central Bank, could be a destination for favorable investment vs. the US in 2015.  Deutschland factory orders are improving.

Continue reading The Financialized Economy

Hulbert on Rate Hikes & Stock Market; a Response

Mark Hulbert has a piece this morning at MarketWatch in which he de-correlates the first Fed interest rate hike from any supposedly corresponding stock market movements.  I agree with some but not all of what he writes.  Let’s take it a chunk at a time.

Investors, it doesn’t matter when the Fed raises rates

Are you obsessed with whether the Federal Reserve will begin to raise official interest rates in July, September or sometime next year?

No.  I’ve wanted them to do it for years now.  So I’m obsessed with why the Fed refused to raise rates, despite a strong economy and inflation signals that were not nearly so tilted toward the dis-inflationary end of the spectrum as they are now.  I am obsessed with wanting to know why the mainstream media and financial establishment even take their oh so heavily anticipated policy decisions each month seriously.  I am obsessed with the all too obvious underlying message that this is all about a stock market ‘wealth effect’ that eventually trickles a little stream down Main Street, with Grandma and other prudent savers thrown in the gutter.

A review of historical data fails to find significant statistical support for believing that higher rates are in themselves bad for the stock market. And even if they were, the difference of a few months in the timing of increases makes little difference when determining if equities are expensive or cheap.

I concede that both of those beliefs are far from conventional wisdom on Wall Street. But the job of the contrarian is to challenge norms.

Agree.  But I am not sure why Mark is using the 10-yr yield in his article.  With the Fed at work on all parts of the curve, the whole thing is corrupted and not subject to extrapolation of historical data anyway.  But insofar as it would be, why not use the Fed Funds rate or the 3 Month T Bill?  This chart from NFTRH has clearly shown that rate hikes did not matter to the stock market for extended periods on the last 2 cycles… until of course, they suddenly mattered… big time.

irx

Continue reading Hulbert on Rate Hikes & Stock Market; a Response

Bottom Line Thoughts on the Gold Sector

Improving Macro Backdrop

In light of a shifting global macro backdrop that we can finally sink our teeth into with respect to a bullish orientation on the gold stock sector, I thought it might be a good idea to publicly post some bottom line thoughts from this week’s NFTRH report.

The report went into great detail to explain why more fundamentals that matter are starting to come in line, after the chart below refused to make a signal against our big picture view of global economic contraction, which has been the biggest key for the counter-cyclical gold mining sector.

During the worst of the gold sector cyclical bear market we used Gold vs. Commodities to gauge a higher low to the 2011 low, which despite perceptions of the time, kept our longest-term macro view intact (as noted to subscribers several times, if Au-CCI had broken down we’d have had to admit that the view had failed, no if’s and’s or but’s).

The moving averages have triggered, a higher low has been made and the long-term thesis is being confirmed.

au.cci

Hence, a bullish stance on quality gold mining operations (a unique counter-cyclical sector) has finally come about and the relevance of this chart of HUI vs. the S&P 500 now means more than simply one market crashing in terms of the other.  It means RISK vs. REWARD is on the side of the counter-cyclical gold mining industry vs. the cyclical broad US stock market.

Continue reading Bottom Line Thoughts on the Gold Sector

Welcome, Baby 2015

babynewyearSo Baby 2015 has slammed the book on wrinkled old 2014 (this imagery just cracks me up), a year that featured the continuation of existing macro trends like US stocks up, global stocks wobbling, precious metals weak and commodities weak to tanking.

Personally, I found the year revolting as an honest market participant, but thankfully made like a caveman and simply used my tools to help me avoid the pitfalls of my emotions and logical mind.  I try very hard to tune down the Tin Foil Hat stuff, but I continue to be in awe of Policy Central and the depths of what looks to me like depravity that they will stoop to in order to keep up appearances.  Reference Operation Twist and its “inflation sanitized” selling of short-term notes and buying of long-term bonds.

Who would’ve thought managing an economy and a financial system could be so easy, so controlled and well, so sanitary?  Of course, that was way back in 2011, when the macro began to quake in anticipation of change.  An anti-market (AKA gold) was brought under control but good and though the masses would hold tightly to their fear (so deeply ingrained from 2008) for another year or more, 2013 and 2014 saw increasing momentum toward a complete recovery of hurt feelings from the 2008 crisis time frame.

Continue reading Welcome, Baby 2015

Deflation!

soda.jerkWell, now that the title has hopefully gotten your attention I’d like to talk about the ‘d’ and ‘i’ words that so many financial types – myself included – throw around so often.  This is due to a reader/subscriber KR’s aggravation at my use of the word deflation, which he had thought was meant sarcastically, but then came to find out I am serious when I use it.

First I want to note that I seem to have been pissing everyone off lately, gold bugs (one of which I am) and gold bears in particular.  That is due to my writing style being one where if I’ve got something to say, I say it.  Sometimes that’s bad for business, as I can get a little heavy handed.

I’ll try to be less heavy handed going forward but in criticizing what I view as promotion with little backing substance (whether bullish or bearish), I don’t retract any comments aimed at the type of people that I think are not being square with readers or are simply not doing the work required (i.e. promoting lazy analytical thinking).

Continue reading Deflation!

US’s Debt Not Such a Big Deal –Mr. Gold

[edit]  Mr. Gold’s last paragraph is the tell on his bias, as he is unwilling or unable to conceal the contempt he has for people who were absolutely right for 10 years+ and are now suffering a bear market, both to their asset of choice and in sound monetary thinking.

“The vastly improved fiscal situation may last only a few years, but it’s a big plus for U.S. markets and the U.S. dollar — and another nail in the coffin for the gold bugs and doom-and-gloomers who can add one more item to the long list of things they got really, really wrong.”

Why the US’s Debt is No Longer Such a Big Deal  –Howard Gold writing at MarketWatch

Before we find out about Howard’s thoughts on the debt situation (I am only going by the headline right now) let’s divide the GDP by the Federal Debt.  This is a view of a deluded nation going right down a sink hole in service to greed and denial.

gdp.feddebt

Now let’s see what Mr. Gold (not the discredited and now strangely silent ‘gold bug’ Mr. Gold) has to say in regard to “the US debt is no longer such a big deal”.

Continue reading US’s Debt Not Such a Big Deal –Mr. Gold