June 22nd, 2015

The True Reserve Value of Gold

For thousands of years, in countless cultures around the world, gold has been recognized as an exceptional store of value and, as such, accepted in all forms of transactions.  Up until the twentieth century, most nations were still using the gold standard and the gold standard has historically provided long-term stability and inflationary controls.

However, as a result of central banks around the globe issue incredible amounts of debt in an effort to prop up or to stimulate their economies (and to not let their currency be left behind in a rush to the bottom in terms of exchange value), there just isn’t enough gold to support all the fiat currency that’s been created.

A recent article in Business Insider very graphically explains the problem in the following:




You read that correctly.  The price of all the 184,000 ounces of gold estimated to have ever been mined would have to increase 30x to around $34,000 per ounce if all the currency created would be converted into (spent to buy) that gold.  Clearly that’s never going to happen but it’s also true that the price of gold will have to increase from the current $1200/oz if it’s to continue backing up fiat money.

The only way this won’t be the case is if a global, recognized and accepted digital currency (like Bitcoin) replaces gold.

Check out the article here.

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February 6th, 2013

The Secular Bear Market and the QE’s

imageBarry Ritholtz recently asked in his blog, “Is the Secular Bear Market Coming to an End?“. He goes on to say “Here we are, a few weeks away from the start of the 14th year of the secular Bear market that began March 2000. The question on more than a few peoples’ minds has been whether or not it is reaching its end.”  Ritholtz goes on to give his definition of the term “secular bear market” and offers prerequisites required before the bear market can end.  In short, he concludes

“Regardless of your answer to our broad question, there is one thing that I believe to be clear: We are much closer to the end of this secular cycle than to the beginning. Many optimists — most notably, famed technician Ralph Acampora — believe the secular bear market has ended. Even skeptics have to agree that we are more likely in the 7th or 8th inning than earlier stages of the game.”

and offers the following chart:

Secular Bull and Bear MktsSource: Haver, Factset, Robert Shiller, FMRCo. Monthly Data, since 1871.

[Some of Ritholtz's comments and image match those of found in Fidelity Investments Viewpoints of a few days earlier.]

Helping to prevent losing objectivity to my fundamentally optimistic nature has been a long-running discussion about how the exit from the Secular Bear Market that has hampered the market’s advance for the past 14 years might ultimately look like.  The discussion began with a study of market behavior over the past 50-year that serve as the basis for the Market Momentum Meter, one of the principal topics of my book, “Run with the Herd“.

The data reveals that the market has fluctuated around a line that’s risen at a fairly consistent 7.5%/year rate since 1939.  The upper and lower boundaries of fluctuations around that line are +/- 44% on either side of that upwardly sloping mean distribution line.  The upper boundary was touched at the beginnings of the 1970 and 2000 decades, both of which were also the start of what turned out to be Secular Bear Markets.  The lows of both those Secular Bear Markets were at the lower boundary of the range.

S&P 500 1939-Present

Having touched the lower boundary in 2009, I wondered whether the exit from the 1970′s secular bear market might serve as an analog to the exit from today’s secular bear market.  “What the market trend be if it followed exactly the 1979-82 exit?”    I’ve written about the exit here several times over the years, the most recent being last year on June 4 in “Revisiting 1970′s Secular Bear Market Exit … Again” [that post includes links to previous references to the Secular Bear exit going back to October, 2008.

It turns out that the current Bear Market and the one in the 1970s is that inflation and economic stagnation (then known as “stagflation”) had one major difference.  Inflation had hit an annual rate of 13.5% when Jimmy Carter appointed Paul Volcker to head the Fed in August 1979.  He immediately began attacking inflation by raising interest rates to unprecedented levels of 20% by June 1981; inflation soon began easing and interest rates began to fall.

The current Bear Market was diametrically opposed, especially since the Financial Crisis and bursting of the housing bubble, with the fear of deflation with the crash in housing and real estate values.  To fight the “Great Recession” and ineffective or insufficient fiscal policies, Bernanke launched Quantitative Easing monetary policies which brought interest rates to low levels not seen since World War II.  The following chart shows the different impact of the two monetary policy courses:

1980's Analog and QE's

The 1970s Secular Bear Market exit analog may have been a good benchmark against which to measure the prospective current Bear Market exit.  At this late date, I would have to conclude that not only have low interest rates helped the economy avoid a depression, they may have also helped the stock market exit more quickly from the Secular Bear Market.  Rather than reversing and, thereby, extending the secular bear market’s life, so long as Bernanke keeps rates low, one can be confident that the market will soon exit the Secular Bear Market, cross into all-time new highs and, with luck, begin the first bull market advance since the 1990s.

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August 21st, 2012

Stock Market Recover Sidetracked by European Sovereign Debt Crisis

I think one of my most prescient posts was entitled Housing and Finance: Two Superimposed Crises and Bear Markets of September 17, 2010, almost exactly two years ago and just before the last mid-term elections.  The market had already bottomed the previous March and were breaking above what I saw as an inverted head-and-shoulder interim bottom.  As noted in the post,  there appeared to be the beginnings of a bottom in the housing market due to once-in-a-lifetime affordability.

Specifically, I envisioned the market being victimized for the first time in history by two economic crises: financial crisis hitting banks and other financial enterprises plus the housing crisis hitting consumers.  I suggested that before the market can advance to new highs, both these industry groups would have to bottom and begin moving higher.  The keystone of that post was the following chart on which I attempted to visually superimpose the impact of those two crises on the stock market:

Here we are, two years later, with the market having ground 24.6% higher from 1126 to 1420 today.  I wrote then:

The reason the market appears to be bottoming again (the inverted head and shoulders) may perhaps be that housing is beginning to bottom and turn also. The number of foreclosures continues to rise (although at a lesser rate than last year) and the improved affordability index (historic low mortgage interest rates and closeout prices of houses) has not yet stimulated a pickup in the housing sales turnover. But a pickup may be around the corner [triggered by an up-tick in interest rates?]. Without a turnaround in housing, the stock market recovery will be short-lived.

Unfortunately, I didn’t have sufficient courage to invest in homebuilders and missed out on the Industry Group with one of the biggest moves over the past twelve months, Homebuilders, at 75%:

We thought our Financial Crisis had been contained by the Fed’s first round of Quantitative Easing and that banks would begin their recovery however the effort was sidetracked because of the European Sovereign Debt Crisis beginning towards the end of 2009.  The recovery in the stocks of the country’s larger banks began to falter towards the beginning of 2010 and only now has begun to show signs of renewed life:

The “herd’s” big money flow again beginning to be directed into financial stocks gives hope that, absent a new major crisis (although our own Federal debt and budget debate is still looming on the horizon), the market will be able finally to continue to the previous all-time highs and ultimately break the grips of the 12- going on 13-year secular bear market.  A cross of the XLF above 16 will trigger for me the another clear indication that financials will begin leading the market higher.

It’s been a long, frustrating two years.  We’re facing another national election, this one even more important than the last.  Continuing to look at all the negative news continues to make our investment lives feel dismal.  Seeing the possibilities of some positive news for a change opens the mind to a totally different stock market future than the one we have become accustomed to.  I may be nothing more than an incurable optimist but that’s the best way to remain committed to the stock market and, ultimately, long-term financial well-being.

May 11th, 2012

Why the fixation on foreign exchange?

I’m always surprised and bewildered seeing the “Alert” image and hear the special effects sound whenever CNBC wants to say something about foreign exchange and make it appear as if something really significant has happened.  This morning it was a “breaking news” story about a move (or absence of a move when actually one was expected) in the €EU.

I understand that currency fluctuations are important since the world figuratively revolves around the free exchange of wealth (money) and goods.  And I also understand that countless speculators, investors and governments are involved in foreign exchange markets.  Furthermore, I understand that currency markets are extremely leveraged since the players can put on and lever up to huge positions with small equity of their own.  And finally I understand that the exchange values of one currency against another is based on supply and demand amongst all those players tempered by the policy positions of governments and central banks who attempt to influence (control) and stabilize those exchange values.

But as a trader who trades foreign exchange only on an extremely limited basis through ETFs, I don’t understand foreign exchange as a trading vehicle when currencies don’t fluctuate really that much.  Take the €EU (Euro) as an example.  It may be hard to believe given all the discussion about sovereign defaults and debate about the currency’s possible breakup, the €EU today is where it was in 2006 as reflected in the price of FXE (the Rudex CurrencyShares EuroTrust ETF:

The following chart compares the $US Index (a composite exchange rate index for a basket of currencies of our largest trading partners) with the more volatile S&P 500 Index:

To add another dimension to the €EU’s volatility, I superimposed the FXE on a chart of YUM (Yum Brands) for the same period to compare the two (the FXE is in blue):

Businesses surely need to pay attention to foreign exchange since those fluctuations impact revenues, costs and profits but I don’t understand where the fascination for individual investors comes from given that you’d wind up paying margin interest and wouldn’t earn the dividend yield (which in the case of YUM is currently 1.6%).

Why do most of the search results for the term “technical analysis” focus on foreign exchange?  If it weren’t for the huge margin possibilities (up to 90%) which makes it a more risky game, why should the average investor be interested at all in foreign exchange?  I can’t predict the future of the €EU or the $US but my guess is that fluctuation in the short run future won’t be all that significantly different than they have been in the past regardless of the EU outcome.  Can someone please answer the question “What am I missing?”

December 19th, 2011

Shorting Treasuries: Conventional Wisdom Gone Awry

One of the perplexing aspects of the monetary and fiscal issues  around the world (especially here in the US) has been the absence of inflation and the strength of the $US.  In “Short TLT Rather Than Be Long TBT” (January 2010), I quoted from the NY Times:

“Liquidating investments that pay almost nothing in order to shift to long-term bonds that pay substantially more may not make sense right now, said Robert F. Auwaerter, the head of fixed-income investing at the Vanguard Group….interest rates — at both the short and the long ends of the yield curve — are likely to rise this year if the economy keeps expanding…..When bond yields rise, their prices fall. The effect is magnified for longer-term securities, so a 30-year Treasury bond would fall in value much more sharply than, say, a six-month Treasury bill.”

That was the conventional wisdom and has continued to be for some time.  To take advantage of what seemed patently obvious, one could play the rise in Treasury bond yields by either buying TBT, the ultrashort ETF or shorting TLT, the ultralong ETF.

But this was just another case of conventional wisdom goes awry.  The turmoil in Europe has caused money there to seek out a safe haven and,  as incredible as it is, that safe haven has been the $US and US Treasuries.  Rather than seeing yields rise as prices decline, rates continued to decline to historic lows.  Holding TBT in the expectation of rising rates has been an unmitigated disaster for all those holding TBT:

20-yr Treas Yields vs. TBT 2010-2011

Not only have yields declined rather than rising this year causing TBT to also decline but TBT has declined further on a relative basis (some of the difference is compensated by dividend distributions).  Holding TBT in the hopes of increases in yields due either to inflation or fears brought on by the budget disputes has resulted in a nearly a 50% loss.  If interest rates reverse and return from the current 2.5% to above 4.0%, the levels it was at the beginning of the year then TBT could be expected to nearly double.

It could be a long wait but perhaps at this point one that might be worthwhile.

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November 30th, 2011

Impact of Coordinated Central Bank Action

“These are the times that truly try investors’ confidence.”  Just when you thought the market was going to perform in a relatively predictable way, out from somewhere in left field jump the Fed, 5 European and the Chinese central bankers promising what appears to be a coordinated “global Q(uantitative)E(asing)?”.  Quoting from the CNBC newswire,

“The world’s major central banks made it easier Wednesday for banks to get dollars if they need them, a coordinated move to ease the strains on the global financial system. Stock markets rose sharply on the move.”

Yes, the market’s initial reaction was a greater than 2.5-3.0% jump in market futures but, as some more level-headed analysts see it, is this not also a sign of the bankers’ frustration and desperation at the inflexibility and inability of legislators to act to cut spending and deficits.  Bottom line, things actually may be worse than we thought.  Remember the market’s reaction when the Fed launched QE I and QE II.  It skyrocketed 30% over the succeeding 8 months but we’re still laboring under 9+% unemployment and the market failed to sustain the gain and is still stuck in a trading range with yesterday’s close 13.94% higher than it was prior the QE I and actually below the level prior to QE II.

Let’s take a look at the chart as of last nights close:

S&P 500: 11/29/2011

If professionals can’t see what lies in the future and complain about not knowing whether to buy long or sell short, then clearly individual investors like you and me are having a very difficult time of it.  There’s only two ways to go: 1) stay long, collect your dividends, weather the storm and hope for the best, or 2) insulate your money as best as you can by either moving into cash or being portfolio protection in the way of hedges like index put options of leveraged short ETFs.

In other case,  the best to close your eyes and ears from the daily news (some call it noise) and stay focused on the long-term.  I’m looking at the trendline around 1220-1225 which has acted as an impenetrable resistance level several times.  The second event I’m watching is the the 200-dma inevitably crossing below the 300-dma, something that can’t be prevented without the market moving above 1260-1275 for several weeks.  The Market Momentum Indicator with which my subscribers are very familiar is based on 4 moving averages plus the position of the Index itself relative to those four.  As I outlined in my report to subscribers this past weekend,

Without some sort of dramatically positive surprise, the moving averages will move into a precise bearish alignment (arranged from slowest to fastest). May 29, 2009 was the last time we saw a perfect bear market alignment as the market was exiting from the Financial Crisis Crash. That period of perfect bear market alignment began just over four years ago on November 7, 2007 as the market was entering the start of the Financial Crisis Crash.

Was today’s announcement that “dramatically positive surprise” or is the market about to enter a period similar to November 2007?  No one knows with confidence so, for right now, rightly or wrongly I’m not willing to gamble and am basically watching from the sidelines.

December 16th, 2008

Is That The Sound of the $US Being Dumped?

The 2008 financial crises continues to spread like a bad virus. A couple of weeks ago, the Fed set aside $200 billion to buy credit card, car and student loans from banks and other lenders to try to get money flowing in those areas. Last week, there was news about budget and credit problems at the state and municipality level (several state unemployment funds have scraped the bottom of their barrels). Madoff’s $50 billion heist has decimated the treasuries of scores of non-profit agencies and charitable foundations. Soon it could be university endowments and pension/retirement funds.

As the Treasury and Fed continue acting as backstop by lending and printing money, it begs the question of whose going to lend money to the US? When will foreign purchasers of US debt stop buying government debt or, even worse, start selling off the huge amount of debt they own (and to whom)?

When you think about it, the reason the $US quickly reversed itself and is now quickly heading lower becomes obvious. Last July 14, the day of the Feb backstopping Fanny and Freddie, felt as if someone turned out the lights (see “Central Banks Market Intervention” for charts comparable to those below). The $US started weakening along with everything else priced in $US’s like precious metals and gold. However, that could have been a flash in the gold pan (pun intended) since after surging for four months, the $US has done a 180 degree turn and is taking along with it, again, hard commodities.

Perhaps the other central banks gave the Fed five months to the end of the year to “fix” the US economy by year-end before they ended their support. Take a look at some of these charts:

  • FXE (Rydex CurrencyShares Euro Trust ETF)

  • FXY (Rydex CurrencyShares Japanese Yen Trust ETF)

  • GLD (SPDR Gold Trust ETF)

Something is happening here. You can see similar, though smaller, moves beginning to take shape in other ETFs, like: FXF, SLV, DBA, MOO, DBN. No one can predict how long it will continue and explanations at this point would be mere speculation (as I’m doing here). Perhaps its inflation fears starting to creep in, perhaps its a rush to get rid of dollars and put them into things “more secure”. [Take a look at the TLT, SHY, IEI, IEF - ETFs I mentioned in "The Parking Lots Called ...." on November 17. TLT is up 18.89% since that date.]

I’m guessing we’ll hear more about this over the coming weeks and months. But for now, it’s something that may warrant small positions.

August 19th, 2008

Central Banks’ Markets Intervention

I’ve heard about it, I’ve read about it but it wasn’t until I looked at a whole series of charts and focused in did I see the manipulation that was the “market” that’s taken place since July 14, the day the Fed said they’d “backstop” Freddie and Fanny. It was as if somebody closed the curtain and then quickly opened it again and we were watching a different play. Let me try to show you what I’m talking about with some close-up charts (I reduced the charts to allow for more):

If I believed in conspiracy theories and thought it was even remotely possible, I would think that major central banks acted in harmony to stem the “commodities speculative bubble” by propping up the $US, depressing their own currencies and pushing gold and silver down.

What other explanation could there be for everything happening just as the Fed was saving the US mortgage lending industry and housing market?