Tuesday, November 11, 2008

Mr. Market

The markets have excellent powers of predicting the future.  Unfortunately, the future they predict I would not wish on my worst enemy.  I very much hope the market is wrong.  Still, I am no believer in fighting the tape - and this tape is ugly.

Of course, you want to be buying at the darkest moment... but damned if I can parse the darkness.

I keep my eye on Gold.  Clearly, the U.S. is in the grips of deflation.  Is the rest of the world?  I made the mistake of fearing the printing presses more than deflation over the past several months.  All of the stimulus injected into the system has not been sufficient to counter the deflationary pressures as yet.  I believe that the Fed and Treasury will eventually win... getting the inning correct in this ball game will pay off in spades - so I keep my eye on Gold.

Gold is a commodity.  In a deflationary environment it should get beat up just like Oil, Steel, and Corn.  But Gold has different properties - in addition to being a commodity Gold is money, and money prices comparisons are a significant tool for judging where we are in the storm.  For instance, until the Yen stops rising, the carry trade is still being unwound.  During the unwinding, deflation will rule in the former carry trade currencies and their currencies will gain in price versus commodities, and worse - debt.

In deflation, a country's currency gains in value, making debt harder and harder to pay back.  Defaults surge, banks fail... sound familiar?  But there are other forces at work here.  Productivity (Oil supply might have something to do whit that), interest rates, budget and trade deficits (surpluses), etc... also affect the value of a currency, which in turn will affect interest rates (if the currencies country is dependent on foreign lenders), which will affect currency values, which will affect deflation/inflation.... see why they call this a cycle?

The problem for U.S. investors is that we are damned if we do and damned if we don't.  Which leads me back to Gold.  Gold should be falling like a stone for US$ investors along with the rest of the commodity complex.  It isn't.  Don't get me wrong.  Gold is down 25% or so from its peak, nothing to sneeze at.  Still, Gold is only down 10% or so from its 90 day average high - a much better measure.  Oil is down 50 % from its 90 day average high (that is the highest average price during any 90 day period for a given commodity).  Why?

Because, I believe, the US$ is simply the lesser of many evils at the moment, as measured against the other major currencies.  Gold is telling me that this moment will pass, and we US$ citizens will have to deal with the aftermath of years of silly fiscal and monetary policy as well as an energy crisis right out of The Omen.

This is not to say that Gold could not trade down another $100 per ounce - it could, and then again it might not.  Markets are not in the business of letting me make silly prognostications.  For my money, I will be selling out of the money puts on Gold - willing to buy at a lower price and getting paid for the privilege.  


Read it, if you really want to know...


The financial crisis, if you agree with Rubin's findings in the link above, were triggered by Oil (in my humble opinion, too).  This has huge political implications.
Yes. Oil depletion creates a real political dilemma for Barack Obama. If he acknowledges oil depletion – Peak Oil – then he will be expected to do something about it. Barack will have to challenge embedded political philosophy. He will have to find a way to change public opinion without causing a political crisis for the Democrats.
I feel for Barak Obama the way I felt for Ben Bernake.  I wish them luck, but I don't see how they are not damned for circumstances far beyond their control.  Of course, I fully expect Obama's compatriots on the Hill to get this exactly wrong in any (every) event.  A political crisis is extremely likely, if not the most likely, outcome. 

Back soon.

Mentatt (at) yahoo (d0t) com


bureaucrat said...

The Minyanville people are suggesting that for inflation or even hyperinflation to occur, you need two things: ample credit available and the wherewithall to borrow. We've had lots of the first thing but practically none of the second thing. And people don't want to borrow right now for good reasons, including being concerned about their jobs. But inflation will have its day .. someday soon.

Anonymous said...

Yep, Barack is in deep trouble. And, Mish seems to have gotten it right when he wanted at least half of the $700B to go to works projects. There seems to be plenty of money floating around, just no one worthy or willing to lend it to.

We need to create PRODUCTIVE jobs. Replacing imported oil seems to be productive. Do the Dems have the guts to pass a oil import duty to get the internal price up to $100/bbl so that alternatives have some guarantee of economic success? Do they have the restraint to let the market determine what the best mix of alternatives to imported oil might be? Can they clear the political road blocks to nuclear, off shore drilling, coal, etc. that are the only practical mid-term solutions?

This seems to be a good place to start. It looks to me like a bit less than $2 trillion in new investment would do the trick. Cheap, considering that this investment would make a return, and create many industrial, manufacturing and construction jobs. It would also release 12Million barrels a day of oil to the international market. There are places in the world, like Western Europe and Japan for instance, that have little other fossil fuel to turn to, and need foreign oil much worse than the USA.


Coal Guy