Monday, March 23, 2009

Long in the Tooth, II

The posting has been light as I have been on vacation. What a time to take a few days off... the market has its best 10 day rally in decades...

This has been some rally. Bear market rallies are wonderful - provided you are not "short". This rally is not being driven by new money coming into the market... it is being driven by shorts that, at the moment, look like the mirror borne aftermath of a bad zit.

My bet is this rally is coming to the end of its useful life. That does not mean it won't go higher. It probably will. But this won't go on much further. Use this as an opportunity to lighten up on equities. Inflation will eventually rear its ugly head... but not just yet.

Some very smart folks, like Mark Mobius, disagree with me. But...


While U.S. bank stocks have climbed this month, bonds of the companies yield
8.55 percentage points more than Treasuries, about the widest in 13 years,
according to Merrill Lynch & Co. indexes. The gap between yields of
financial institutions’ bonds and Treasuries widened even as their shares
jumped, suggesting this month’s record rally in financial stocks is in jeopardy.
The S&P 500 Financials Index has surged 48 percent from its March 6 low.
And that is why I will stick with corporate bonds over equities for corporate exposure.

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The Federal Reserve and the U.S. Treasury just pulled the rip chord, and the U.S. markets rallied nearly 7.5%. This is a great teaching moment. I have NOT been short equities, because I had no faith that our government would not be willing to do anything to inflate the markets - and now they have. I ceased being long equities, for the most part, as I had no faith that the government's attempts will actually work. Governments can issue unlimited amounts of paper. They cannot issue unlimited amounts of Oil, Corn, Gold, and Wheat.

The Fed has begun to monetize the nation's debt, and the Treasury is going to keep the Zoombie banks alive no matter what. These actions are going to have some very interesting unintended consequences, though at the moment we can't be sure of that they will be. But trust me - they WILL be.

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Lastly, though our political leaders are all smiles and "confident" in their plan's success, I am sure they have contingency plans... or at least a Plan B.

I wonder what that is?

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Good luck!

Mentatt (at) yahoo

9 comments:

bureaucrat said...

While us 4th graders know that history is filled with defunct currencies that were devalued into oblivion (and correspondingly their societies collapsed), there so far are no indicators on the immediate horizon that shows inflation is anywhere to be found (per Mish). I know Mish irritates Jeffers and Scientist, but so far he's been pretty much right. I bought all this gold with the idea that America was going to inflate the dollar into the deep, dark void. But because of the continuing drop in house prices and destruction of way more credit than money being inflated, the deflation that Bernanke so very much wants to conquer is going to be with us for some time. It's as if we are re-running the Great Depression all over again (same credit bubble beforehand), but with no Hilter to bail us out this time. And of course, peak oil is waiting just around the corner ....

bureaucrat said...

(Some of the sites that I read are the Agora peoples -- Daily Reckoning, etc. -- and they are gold/silver/oil bugs to the nth degree. They insist all the money being injected into the economy will eventually result in inflation, as it always has. Will be interesting to see who "wins" -- deflation or inflation -- and when.)

Anonymous said...

"I wonder what that is?"
Dreamhome in New Zealand?
IdahoDave

A Quaker in a Strange Land said...

Bureaucrat:

Mish does not annoy me - I find him very enlightening and interesting. The MS is less impressed. There are 2 sides to EVERY TRADE, and only one of them gets to be right.

Trading is about being right more often than wrong, and being able to ADMIT when you are wrong.

I believe that deflation will be with us for a while longer - I am just unwilling to put a time frame on it that I might be tempted to stick to - that is a dumb way to trade.

Anonymous said...

A dream home in NZ - Check.
Gold - Check
Silver - Check
Ammo - Check
Garden - Check
Tightly knit community - Check
Couple of citizenships - Check
Health - Check
Loving Family - Check!!
But what is my plan C? I better get busy.

Best,
Chuck H.

A Quaker in a Strange Land said...

Chuck:

You see, I can't help myself. I am an unrepentent capitalist. I figure there will be haves and have nots over the rest of my life time, and I am doing my best to be among the former.

I did not know you were a Kiwi, I thought you were American.

Anonymous said...

Please comment on this. I'm trying to get my understanding straight. It seems that the Fed creates the base money. These days, it appears that they do this by buying treasury notes on the open market. This base money supply is expanded through lending and creation of debt. The the total amount of money is approximately the base money divided by the reserve requirement or whatever percentage is held back as a guard against falling asset values. So, at 15% reserve, total money is between 6x and 7X base money, at 10% it's 10x, at 5% its 20x and at 3% (as in CDSs and SIVs ) its 33X.

As we get into the high leverage region, a small percentage change can make a huge difference in the amount of money that can be created. We were there, and the total money supply became huge, as the debt became huge.

Now, much of that debt has gone bad. As well, the savings rate has increased, so the debt is being paid down. Both things reduce debt and leverage, causing the money supply to shrink dramatically.

At present, debt and leverage are shrinking faster than the Fed can create base money. If the banks are sitting on the base money because there is no one worth lending to, the money supply will continue to shrink, and leverage will continue to decrease.

At some point in the future, leverage will be low by recent historical standards, and there will be piles of newly created base money lying around. When things take off, they'll go like a rocket. Demand will smack right into limited resources and prices will skyrocket. Oil is already creeping higher. New home starts are up 20%. Are we on our way?

Is this reasonable?

Regards,

Coal Guy

Donal Lang said...

As i recall, there was a false dawn before the bottom in 1929 too.

Two comments;
For there to be a continuing rally, you have to believe that getting the banks lending again will solve the problems in the economy. Will it stabilise house prices? Will construction companies start building houses?Will it make people buy American cars? Or get the retail market going again?

It'll only make a difference if the banks extend credit AND consumers go back to their old habits. If I were a bank manager, I'd still be VERY careful who I'd lend to, private or corporate. And as a consumer I'm certainly not going to buy anything I don't need, and that's a VERY short list!

Secondly, note the Chinese PM's statement about using SDR's as a new global reserve currency. China holds 2 trillion dollars in its reserves. If they decide to do this and convert their dollars to SDR's, it'll dump dollars into the market. After that, who'll lend the USA ANYTHING? No money for bailouts, buying toxic debts, investment in restructuring, or the next retail boom.

Anonymous said...

thanks for sharing.......

___________________
Sharon
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