I hope everyone had a great Monday. Stocks once again closed in the red today as deflationary fears and worries around 4th quarter earnings continue to worry Wall St.
There really was no trigger that sent stocks lower today. Deflation continues to rule the day. Gold and oil were absolutely pummeled. All of you gold bugs out there need to reconsider your strategy over the next year or two IMO. The $30 drop in gold today was a sign that deflation is here, and may stay for a couple years as Rosenberg suggested yesterday. The fact that gold has pulled back after that big move in the past couple months is a bearish sign in my view.
I am not saying the thesis is wrong. I am just suggesting that you might be early. Gold may very well end up at $2,000 an ounce before this is all said and done as we eventually get whacked by inflation. However, bonds and commodity prices are telling you that deflation is a huge force rigth now. This does not bode well for any assets.
Gold should used be a hedge right now folks. If its a core holding, I suggest you think twice about it in this type of deflationary environment.
A deflation spiral could send gold into the $400-500 range in the short term if the Fed cannot create inflation. Why do I say this? Lets once again take a look at Merrill's debt to GDP ratio chart:
My Take:
As you can see, the debt load that's currently being carried in this nation is almost twice what it usually is during normal times.
This simply cannot be maintained! Consumers will be forced to pullback on spending as they attempt to pay down debt. This is an extremely overpowering deflationary force. Its almost impossible to see inflation in this environment. Consumers have no purchasing power because their debt levels are twice what they usually are. Making matters worse is their wages continue to stay flat(that is if they don't get laid off).
You must have rising wages in order to see the sustained inflation like we did in the 1970's. Unions were able to increase wages during that period. Companies today are doing the exact opposite. They are decreasing wages in order to survive the most brutal recession seen since the 1930's.
Now inflation is still a risk down the road. I say this because inflation can also be caused by a serious cutback in production which results in less supply. However, we could be years away from seeing this. The excesses that have been built up by 25 years of over consumption are staggering and may take years to correct.
Housing is a perfect example. We have 11 months of inventory which is twice the historical average. The same is true for almost everything else. Have you driven down the main drag in your town lately? There is a mall and a Home Depot on practically every street corner in this country which results in a huge glut of inventories in areas like clothing, building supplies, furniture, electronics etc.
We will need to see many BK's before we can begin to ruduce the massive glut of supplies in this country. Massive deflationary forces will be in play in order to accomplish this. Remember folks, we spent two decades spending like a drunken sailor! These inventories won't go away overnight!
The fact the consumer is filled to the gills in debt will force this process to take even longer to play out because they can't even afford to buy things on sale.
This is why you need to be careful if you own gold or are long oil here. No one has enough buying power to sustain asset prices right now. If you want to own gold as a geopolitical play or as a play against a failed currency then keep your stash. I think the odds of this bet ever paying off anytime soon are against you, but that's your choice!
If our currency fails and its Mad Max time, I don't see what a gold bar is going to do for me other than make for a nice doorstop. I can't eat gold. I don't see how you can realistically use it to pay for something. If its Mad Max time I would much rather have a farm where I can grow food.
Like I said before, gold may get up to 2k an ounce down the road as a result of some sort of panic, but I see a lot of short term pain before it possibly ever gets there.
Bottom Line:
Tomorrow will be an interesting day. I still held onto SRS and FAZ. Both were up big today. I think someone is in trouble in the banking world. Citigroup and Bank of America were both down over 10%. I guess its time for the Treasury to throw some more money into these black holes. I have a bad feeling in my gut around the financials right now. However, they are too cheap at these levels to add short postions in my opinion considering they are backstopped by the government.
I have been saying for weeks that the financials companies are DEAD. Nothing today told me otherwise. I will continue to short financials with my FAZ. I think tomorrow might be a green day. AA earnings came out and the market moved higher even though they were awful. They already pre-announced this though last week and so I think the market priced it in.
I actually put a long on late today. I bought some QQQQ calls when the NASDAQ was getting creamed at the end of the day. Tech has gotten destroyed over the past few sessions, and it looks a little overdone to me in the short term.
Its earnings time folks. Lets see how bad they are. This will dictate where we go from here. Be careful this week. Its options expiration and things can get very volatile.
Stay Tuned!
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