Tuesday, December 8, 2009

Expect Continued Volatility as the Economy Hangs in the Balance

Hello all!

I know it's been awhile and I apologize.

Let's take a look at these choppy equities.

Mr Market appears to be confused. The positive jobs number last week(which was actually pretty impressive) really threw a wrench into the Fed's plans.

I find it interesting that the market sold off on the news. You would have thought the bubble boys would have taken the market higher after a -11k jobs print vs. the -150k or so that was expected.

Following the quick bounce after the announcement the market nervously closed pretty flat. Why?

There are a variety of reasons. As I explained in my last post, the banksters on Wall St really don't want to see an economic recovery. The reason for this is higher interest rates would soon follow because inflation would begin to start rearing its ugly head.

This would then flatten out the yield curve which in turn results in a less profitable environment for the banking system. I mean think about it folks: Borrowing at 0% right now and then lending at 5% is a pretty sweet gig for the banks. Any moronic banker can make money in this environment.

An even sweeter gig for these criminals is being able borrow at zero while charging 30% annual interest on a credit card balance. When you see this type of things, you really gotta wonder if any of these people have anything that resembles some type of conscience. I already have my answer.

I sometimes ask myself: Should this type of pillaging be regarded as criminal? IMO yes, but it's legal nonetheless. It's pretty sad when you can get a better deal lending money from the Sopranos instead of a bank!

I think it's absolutely disgusting that these arrogant banking gangsters have the gonads to charge 30% on credit cards after we bailed their behinds out! Where are the torches and pitchforks?

I guess I shouldn't be surprised after watching Wall St basically extort $700 billion from Congress in the form of TARP. Arghhh...I could go on and on about this but I feel my blood pressure rising so I better stop.

The bottom line here is this:

If the economy recovers, interest rates will eventually rise: Banking profits on lending would then shrink as a result. Housing prices would then drop because buyers will be forced to borrow at a higher interest rates.

Making matters worse, rising rates would lower the value of the bankers bloated mortgage bubble assets(MBS etc) that they continue to hold on their balance sheets. Banks would also have to pay higher interest rates on CD's.

So you see, an economic recovery isn't very profitable for the banksters. It could actually be very painful, especially if they borrowed at near zero and then bought 30 year bonds at 4+% and pocketed the spread. This is a great trade as long as interest rates stay low!

Many banks went under during the last economic crisis when they got caught on the wrong side of the interest rate trade like the one I described above as rates soared in the late '70's/early '80's.

A reminder to all:

Don't ever be fooled by these snake oil salesmen when they cheer about an economic recovery. They will tell you over and over on CNBC that things are getting better in an attempt to pump up stocks. However, behind closed doors, a floundering economy with zero interest rates is what the banks really want because they can make a fortune. They will never admit this of course.

Market Volatility and Gold

In the short term I expect a lot of volatility. Currencies are bouncing all over the place as a result of recent worldwide economic events. The Dubai debacle continues to rattle the world markets(this one ain't over folks).

We also face the threat of sovereign defaults of countries like Greece. Germany's production number was also very poor today.

All of this worldwide turmoil is forcing capital back into the dollar. If we have learned one thing in the past few weeks, the world still flocks to the US when things look shaky.

This surge in the dollar has taken its toll on the short dollar/long gold trade. Longer term I still remain bullish on gold because I think the US dollar will continue to drop as our own economic skeletons continue to come out of the closet.

Remember folks, history repeats itself so let's take a look at gold back in the 1970's:



Quick Take:

As you can see above, we saw a lot of volatility is the gold market as the world panicked about deflation, inflation, and the value of paper currencies. Inflation adjusted, gold would have to reach $2176 in order to match its highs in the early '80's.

We have done MUCH more damage to the dollar this go around as a result of our ridiculous spending deficits so I expect to see gold at least reach the previous inflation adjusted high of the early '80's.

Get used to the volatility! I expect to see see some serious wild swings in gold before we get there. You could see currencies bounce all over the place in the near term as various countries(including the US) teeter on the brink of disaster.

I continue to believe that its a good idea to hold gold because I think everyone should have "economic insurance" from the dollar in a market like this. If you are looking for a hedge your gold holdings, shorting the S&P at these levels makes a lot of sense.

The Bottom Line:

The market could get real choppy here in the near term. The jobs number threw everyone for a loop. The Fed will most certainly become more concerned around inflation if continue and see continued signs of an economic recovery.

Short term keep an eye on the bond market. Rates may begin to rise if the economic numbers continue to improve.

Don't misread me here folks, I am still extremely bearish longer term(Shocker eh?). My point is the market will begin pricing a recovery in if the numbers continue to improve regardless if they are accurate or not.

Remember:

Never underestimate the government and their ability to spin the numbers positive. I am highly skeptical of that jobs print. I bet that number would have looked pretty ugly if you took out the part time holiday workers and added the unemployed that have ran out of benefits.

I don't expect to see a sustained recovery anytime soon. IMO, The chances of seeing any consistent economic growth in the next few years are between slim and none.

That being said, the volatility should continue in the shorter term because the economic numbers continue to come in mixed.

Disclosure: Long gold and silver via GLD and SLV in longer term accounts. Short treasuries via TBT in longer term accounts.

14 comments:

Tom said...

Jeff,

Great to see you back! Excellent post.

- TomOfTheNorth

flipdippy said...

Happy holidays!

Bill Gross said earlier this week he doesn't believe the Fed will raise interest rates AT ALL in 2010. How about dem apples!

Nobody believes the government unemployment numbers right now anyway. When mint.com is making animated shorts like "the unemployment game" you know main street doesn't buy the jobs kool aid being sold.

I'm feeling more confident we see a major correction start sometime in January (who knows, perhaps this month) when the market looks ahead and the YoY earnings don't get Mr. Market cised about the future.

It's going to be an interesting 2-3 months for certain!

Anonymous said...

Of course it's going to correct but not in this fiscal year. Probably in January until March, at which point Comcast-NBC will re-broadcast all the episodes of every show on CNBC no need for the anchors nothings changed from last year. This will accomplish two things 1/It will cut expenditures allowing for greater profits, smaller payroll no Anchors just royalties. 2/ Coordinated with the TBTF banks allow them to ramp the markets up back to 10,000 Dow so as not to jeopardize next years bonuses.Wash Rinse Repeat

Steve said...

I'm a little confused as to what the greater force is- the threat of a domino of defaults (Dubai, Greece...) or the threat of the Fed monetizing too much of the new proposed spending. I still think gold is good to hold long, but for the next few months I think it'll be too risky and volatile for me.

I think the correction has already started- Black Friday sales were slow in stores (but decent online). Unemployment was a surprise but look at the sectors that gained: temporary workers and health care (the latter to expand before bureaucracy makes that more difficult, notice health care prices have skyrocketed this year too from the same threat).

I can't imagine the markets are going to respond well to the new talks of cap & trade being rammed through after health care. These are power grabs and should scare any business of any size.

I know I've got FUD to spare.

Good to have you back, Jeff. I really enjoy your blog and have missed your clarity.

Jeff said...

Tom

Thanks. Its great to be back! Sorry it been so quiet around here.

Jeff said...

Flip

Hehe, that's because bill gross needs low rates. Pimco is the best bond fund out there but they won't do well if bonds sell off. I think it will be the bond market that's takes rates higher vs the fed. I agree that a sell off I right around the corner. Interesting times!

Jeff said...

Anon

I hear ya. Everything seems so coordinated doesn't it? It makes trading the market risky unless you are in the know. Its a casino otherwise.

Jeff said...

Steve

Thanks!

I share your concerns. All I can say is stay dibersified and ride out the storm. There are so many risks out there its scary!

getyourselfconnected said...

Jeff,
great to read you! Hope all is going well for you right now. Great post. I had a similar themed thought last night 'Something is Broken' as in this stuff is getting a bit crazy.

Citi to repay 45 Billion in TARP via stock offering? Who is going to buy all those shares, the U.A.E like last time? From November 2007:
"US stock markets rebounded strongly overnight after banking giant Citigroup said it would gain a $US7.5 billion ($8.6 billion) injection from a United Arab Emirates investment fund.

The Dow Jones Industrial Average ended up a hefty 215.57 points or 1.69 per cent at a preliminary close of 12,959.01. The key index had slumped by 237 points a day earlier."
http://tinyurl.com/yb8kd94

Besides this wonderful investment in a value company, the U.A.E may be too busy paying for Dubai to buy Citi stock.

Anonymous said...

sell off in january for tax purposes.. this will trigger stops and the mother of all market drops. but we'll still be at 0% and the banks will be sitting on hoarded cash in a down market. cherry pickin' time. gold will hold better than other assets because of the pent up demand for prices under 800/ounce; demand for physical supplies will depllete in correllation to price drop i.e. physical supply deteriorates as the price drops... opposite of a true market.

Jeff said...

Get

Thanks!

Yeah don't you just love all of these huge pigs paying back the TARP?

It's Christmas bonus time. Time to get rid of Uncle Sam and back up the truck.

Disgusting.

Who needs SWF's when the government will just hand you over the money!

Jeff said...

Anon

I could see gold retracing back to those levels.

Inflation/deflationary panics will become very common over the next year.

I spoke to a Wall Streeter from the 1970's about this topic. He said everyone thought the economy was going to blow at any second pretty much on a daily basis back then until rates finally rose.

This created a brutal recession but it allowed us to purge trhe excesses from the economy.

The same thing inevitably will happen this go around too. This is all unsustainable.

Anitolia said...

Jeff - regarding the inflation/deflation debate - I have found THE ONE AND ONLY FOOLPROOF INVESTMENT:

Ready? The answer is, the US. SILVER DOLLAR!!! Hear me out.

If you recall, prior to 1965 (or whenever) the dollar coins actually had a percentage of real silver in them.

Thus, if we have deflation, you horde the dollars as currency becomes rarer and rarer in circulation - thereby preserving your wealth.

Conversely if we have inflation, you melt those same now devalued "dollars" down, extract the valuable silver and still preserve your wealth.

Sadly, this isnt very viable as the coin collectors already attach a sizeable premium to these old silver dollars - and the introduction of inflation/deflation hedgers to this market would drive prices into the stratosphere.

Still, its a fun fantasy to entertain!

Jeff said...

Anitolia

Good idea!

I remember collecting silver coins in the early '80's when I was a kid. They soared in value when silver ripped up to $50 an ounce.