Monday, September 21, 2009

Conflicting Data

Today's Quote - "The opposite of a correct statement is a false statement. But the opposite of a profound truth may well be another profound truth." Niels Bohr.

I spent the weekend crawling through reams of data: Bank reserves, energy consumption and inventories, Gold prices, interest rates, shipping rates and costs, retail sales, industrial production...

I come away with the sense that we might have seen a bounce but not necessarily a "recovery"in the U.S. and perhaps something more than that in the world data (keep in mind world population growth virtually assures "growth").

This does not mean that US equity market momentum won't carry the market higher... I get back to my inflation argument because EVERYTHING has been going up versus the US$. If you compare the Dow to Gold, it has gone nowhere. If EVERYTHING is going up relative to the US$... well, isn't that the very definition of inflation? What would happen if all asset classes fell ALONG WITH the US$? Isn't that a possibility if the world is in a state of over-capacity and the US keeps running $Trillion plus budget deficits? (Read this excellent post by the Mad Scientist... then tell me that that is not a DISTINCT possibility.)

For my money, on SIGNIFICANT weakness, I am going to go long energy equities, but I am going to hedge it with a short position (could be a typical long/short or just a covered call.) I say this even though the risk of significant decline in Oil prices is pretty high (after further consideration, the data does NOT support higher energy prices in the short term). Inventories just don't justify $73 Oil, even if gasoline consumption might. Since the object is to buy "low" and sell "high" and the likelihood of supply constraints in the U.S. in the 2011 - 2013 is fairly high... this outcome would awfully convenient... perhaps, too convenient.

Oh, well, as I like to say - you can trade it, just don't believe it. If you are right hold on; if you are wrong be gone.



Anonymous said...

This is the greater part of the run-up in equities. Nobody is buying goods. Interest rates can't go down, so bonds won't go up. Your local bank is offering 2%. Gold is not yet on the radar for the average American, and won't be until inflation gets bad. Where else can you go for a potential gain?

This rally is built on nothing else but nowhere else to go.


Coal Guy

bureaucrat said...

I'll agree the market rally has no clothes. But I'll keep harping my deflation examples till someone listens. :) In Chicago, the two major supermarket chains are Jewel and Dominicks. Several months ago, Jewel started cutting their prices for food and personal proiducts even more than before, and this summer Dominicks followed that same business model/advertising plan. And what did I see this weekend? Walgreens, the biggest drugstore chain here, started putting up signs saying they are cutting THEIR prices. If the necessaries industries in human life (food and personal products) are slashing (realistically maybe 10%) their prices, demand continues to drop. Not to mention the debt overhang continues to be multiples ahead of the printing Bernanke is doing. Deflation, Jeffers. Japanese-style deflation. It's simple.

Anonymous said...

If commuting is the large part of gasoline consumption, and the real unemployment rate ( that is, including those whose benefits have run out ) is approaching 16%, who is using all of that gas? I know that I95 is more crowded than 6 months or a year ago. Are these practice runs, or is employment increasing?


Coal Guy