A review of my futures trades from the previous week:
No trades last week! Wow, that hasn't happened in a long time. I'd probably be better off if I did this more often.
Other existing positions I've got:
Short the British Pound - Last time I shorted the British Pound, it turned out to be a quite profitable trade. The fundamentals of the Pound Sterling are terrible, and I think it's possible we could see the Pound at $1.50 over the next 12 months...or maybe over the next week at this rate.
Short a couple of 10-Year Treasuries- Treasuries have performed quite poorly over the last two weeks, and Jim Rogers described them as the "last bubble left". Have they topped? I think they may have - and boy have they got some room to fall if interest rates skyrocket like I think they will. Although trending up since I shorted (what else is new), the chart still looks bearish, with lower highs and lower lows. Some significant potential resistance coming up around 112.
My wish list (waiting for an uptrend...and we could be waiting for awhile):
***"Cash out" mostly means taxes, but lately I've also been using it for living expenses, and also to finance a time management software startup I'm working on.
When I became chairman of the Federal Reserve, I think there was a general feeling in this country that economic affairs, and inflation in particular, had reached a kind of crisis point. Things were not going very well. There was a feeling of uncertainty.
There was a lot of speculation in commodities and the gold price, which was then free to fluctuate up to $ 800 an ounce. In an odd kind of way, that’s a good time to step into a job because people thought that something needed to be done. I also think the mood of the country was willing to accept action, which 10 years earlier they wouldn’t have been willing to accept. And once we got caught up and I got caught up – or the Federal Reserve Board got caught up, for that matter the country got caught up – in an anti-inflationary effort, there was a certain willingness to take very high interest rates and eventually a rather severe recession, with the hope and expectations – certainly, the expectation that I had – that things would get better. And if we could restore any sense of stability in the currency, the country would be better off as long as we sustained that phase.
A quick sound bite from Rick about how he is salivating at the opportunities currently available in the resource markets:
This opportunity we have in front of us right now, this is something that I've trained my whole life for. This is just as good as it gets. I have the reputation. I have the capital. I have the experience.
Sean Hyman from World Currency Watch says watch out, the Bank of Japan is not one to be reckoned with. They are ready to intervene to stop the Yen's rise - and you don't want to test them.
And... While I don't want to spend the whole letter today on Japan... I must say that I think we should all be very wary of the BOJ and their history of intervening to keep yen weak. This will be a huge battle between the Carry Trade unwinders and Uridashi Bond sellers VS the BOJ... Just don't get caught up in it... If it happens, stay to the sidelines, you don't want to get caught up in an intervention battle...
A quick summary of Jim Rogers' interview on Bloomberg from 10/24/08 - I just can't get enough of Jimmy (if you couldn't tell):
The best place to have your money is (drumroll...) in commodities.
Why? Because this credit crunch will drastically hurt the supply of commodities.
"Farmers cannot get loans to expand. Nobody's going to give you money to open a zinc mine in the next decade."
"If gold goes down, I'll buy more. If it goes up, I'll buy more. Gold's in a bull market. I expect agriculture to do better."
"Inventories of food are the lowest they've been in 50 years...we have a shortage of farmers now."
"Massive inflation is coming...get out of paper assets."
Video quality here is not great, but audio is fine. He busts out some gold bullion midway through, right out of his pocket, in case you decide to listen rather than watch.
Sorry the picture came through a bit blurry - you can click the link above for a closer shot - that would be September 2008 where the chart does a hockey stick up to the sky.
A review of my futures trades from the previous week:
Covered my Swiss Franc long- Turns out I didn't want a dollar neutral trade after all. The Swiss Franc kept on dropping, and I got out.
Other existing positions I've got:
Short the British Pound - Last time I shorted the British Pound, it turned out to be a quite profitable trade. The fundamentals of the Pound Sterling are terrible, and I think it's possible we could see the Pound at $1.50 over the next 12 months...or maybe over the next week at this rate.
Short a couple of 10-Year Treasuries- Treasuries have performed quite poorly over the last two weeks, and Jim Rogers described them as the "last bubble left". Have they topped? I think they may have - and boy have they got some room to fall if interest rates skyrocket like I think they will. Although trending up since I shorted (what else is new), the chart still looks bearish, with lower highs and lower lows.
My wish list (waiting for an uptrend...and we could be waiting for awhile):
***"Cash out" mostly means taxes, but lately I've also been using it for living expenses, and also to finance a time management software startup I'm working on.
Remember when the grains and softs were doing moonshots, and every other column here was about bullish news for food prices? Seems like just yesterday I was imploring a much smaller readership base to sugar me sweet.
Jim Rogers lays the smack down on some CNBC poindexters.
I really enjoy these types of nitwit commentators getting toasted by Jim - it reminds me of late 80's wrestling, where they'd trot our some no name guy on Saturday afternoon WWF Superstars to get destroyed by the Ultimate Warrior in 15 seconds.
Check out the 5:40 mark for the really good stuff.
Quick hits from Jim:
This is not deflation. Stocks are going down, and there is forced selling in commodities. He believes this is temporary.
He's of the view that "the world is going to recover someday, and with all the money that is being created, history has shown this has always lead to inflation."
The current environment is fundamentally different from 1929. The Great Depression was a result of a lack of bank liquidity. The current crisis is the result of bad bank decisions - and right now, the bad banks are being propped up.
Check out the charts of gold vs. other currencies - it really took me aback. As down as we all are on golds recent performance, it's important to realize that gold's performance is disappointing in US dollar terms. It is holding up relatively well in comparison with other currencies.
The US dollar is on an absolute tear right now, as we discussed this morning. It could go on longer than we all think - for me, it already has.
But all of the cash that has recently been added into the system is going to show up somewhere, someplace. Deflation rules the current day - but once the velocity of money picks up again, we could see a very rapid switch into hyperinflation.
Here's the best explanation I've read yet - courtesy of Everbank's Chris Gaffney - in today's Daily Pfennig:
These investors had to sell some of their higher yielding assets to make up for the losses, and a move toward deleveraging started to emerge. As these first investors sold these assets, their price dropped, forcing still others to sell. The credit crisis, and the lockup of the credit markets was a final straw in the leveraged carry trades. Even investors who wanted to stay in the trades could no longer get the loans to keep these trades alive. They were forced to deleverage, selling their investments to pay back the loans.
So the benefactors of this deleveraging of the financial system? The Japanese yen and the US$, currencies which were used to funds these carry trades. The US and Japan have some of the worlds largest banks, and extremely low interest rates making them the perfect funding currencies for the carry trades. As the deleveraging has occurred, investors have purchased back these currencies to pay back loans.
Editors note: Further discussion of this topic and article can be found on SeekingAlpha.com.
I believe that long dated US treasuries are one of the worst investment options available right now. Should we short them? Let's examine the evidence:
Exhibit A: US government debt continues to baloon
I wondered last month why the rest of the world will continue to lend money to the US at 3%+ percent, while our government spends money like drunken sailors. Someone on Seeking Alpha even hilariously asked me what drunken sailors have ever done to me to earn such an insult.
Basic lending 101 dictates that the higher risk of defaulting the prospective debtor appears to have to the creditor, the higher the interest rate the creditor will demand. And right now, our government is behaving like a banana republic government.
Exhibit B: Long term interest rates are below the current rate of inflation
The 10-Year Treasury is currently yielding 3.936%. Official CPI calculations are running around 5%, and in reality probably higher than that. According to John Williams of Shadow Stats, using the pre-Clinton era method of calculating the CPI, inflation is north of 8%.
What kind of investor commits to a long term investment that is guaranteed to lose money?
Exhibit C: Tom Dyson - The global asset liquidation may soon spill over into Treasuries
Tom writes in the October 17th edition of Daily Wealth: "My concern is, if this credit crisis gets worse, it's going to trigger even bigger whales to liquidate their Treasury bond holdings... whales like the Chinese, the Japanese, or the oil exporters."
Exhibit F: The US government must print money as fast as it can Somebody has to pay for all of these stimulus/bailout/rescue packages - and there are only two ways our government can raise the money needed to cover these:
Raise taxes
Print money
I think we'll see a bit of both, but raising taxes will be challenging in this bleak economic climate. I believe the printing presses are already humming quite loudly.
Exhibit G: Treasuries have started a downtrend over the past two weeks This is especially telling because, based on the action of the equity markets, you would have expected to see investors piling into US Treasuries over the last two weeks. Instead, they behaved quite poorly in the context of the broader economic picture. It appears that a downtrend in 10-Year Treasuries has begun.
Conclusion: I believe long-dated US treasuries are ripe to be shorted. I have begun to build up a full short position via the futures markets, and intend to increase this position over time as interest rates rise.
I would recommend readers avoid financial positions that may be vulnerable to rising interest rates.
Ironically, this may in fact be an argument for diving back into the real estate market before it bottoms. A long-term mortgage locked in around 6% will be quite desirable if interest rates spike to their highs from the early 80's.
Aggressive investors can look to profit from rising interest rates by shorting long-dates Treasury or Eurodollar positions via the futures markets. Alternatively, there are several ETFs that inversely track interest rates - DXKSX is the one I own in my Scottrade account, because it provides 2.5x leverage.
A review of my futures trades from the previous week:
Went long the Swiss Franc- As I mentioned last week, I wanted find a match for my short British pound position. And the Swiss Franc is my favorite European currency. I don't want to short the British pound outright, because then I'm essentially long the US dollar. This gives me a trade that is dollar neutral. And hey, if Jim Rogers is buying Swiss Francs, I figure I should be also.
Shorted a couple of 10-Year Treasuries- Treasuries have performed quite poorly over the last two weeks, and Jim Rogers described them as the "last bubble left". Have they topped? I think they may have - and boy have they got some room to fall if interest rates skyrocket like I think they will.
Other existing positions I've got:
Short the British Pound - Last time I shorted the British Pound, it turned out to be a quite profitable trade. The fundamentals of the Pound Sterling are terrible, and I think it's possible we could see the Pound at $1.50 over the next 12 months.
My wish list (waiting for an uptrend...and we could be waiting for awhile):
***"Cash out" mostly means taxes, but lately I've also been using it for living expenses, and also to finance a time management software startup I'm working on.
Staying on our "guys who got this trend right" theme - Warren Buffett has been standing on the sidelines holding a war chest of cash over the past few years.
"Fears regarding the long-term prosperity of the nation's many sound companies make no sense," wrote Buffett. "Most major companies will be setting new profit records 5, 10 and 20 years from now."
"Bad news is an investor's best friend," Buffett said. "It lets you buy a slice of America's future at a marked-down price."
I've posted the latest video of Marc Faber on CNBC yesterday (October 14, 2008). Faber currently believes:
Downside to the US dollar is limited from this point
Resource related currencies (Australian dollar, New Zealand dollar) both have room to move up from here, but he believes we have seen their highs
Does not like gold exploration stocks - because exploration is difficult, and because they rely heavily on outside capital
Prefers physical gold
Likes commodities in the long run
Says the best thing to do right now is to "take a holiday"
Be careful about getting suckered into stock market rallies - in late 1929, the market bottomed out and rallied 50% going into the summer of 1930...only to collapse another 90% from there!
I took this screen shot yesterday - respondents to a very informal LinkedIn poll appear to be quite bullish on the "market" - I'm assuming this refers to the US stock market.
Man, I should have posted it then, and we all could have used this as a contrarian indicator, shorted the S&P futures, and made a boatload of money. My bad.
Picture quality not so good on the upload - here's the breakdown:
Rod Underhill, startup legend, co-founder of MP3.com, and, I'm very proud to say, strategic advisor and legal counsel to Chrometa, writes on his new blog that he expects to see a greater # of startups created during the current economic downturn:
However, I am expecting to see an even greater number of start ups to be created, despite the trouble on Wall Street, and really, because of the trouble on Wall Street.
A lot of people are losing their jobs right now. Many of the people who lose their jobs will find themselves feeling all "entrepreneurial" and create their own start ups. They may find it more difficult than normal to seek out venture capital funds, but they will fund themselves first with money from friends and family and angel investors still appear to be a good avenue for investment funds for early stage companies.
Always important to remember that just as bust follows boom, boom also follows bust - that's just how it's always been throughout history.
For the rest of this article, and more thoughts from Rod's unique mind and perspective, check out his blog here.
Stratfor is an intelligence and news service that provides very high quality coverage and analysis of global events. They cover events that really matter in the big picture - not the crap you see in the mainstream news.
I'm a satisfied subscriber, and was pleased to see this latest piece of analysis could be republished with attribution to www.stratfor.com. So there's my plug for them - check them out - I believe they now offer up some quality free content as well.
States, Economies and Markets: Redefining the Rules
October 13, 2008 | 1734 GMT
By George Friedman
A complex sequence of meetings addressing the international financial crisis took place this weekend. The weekend began with meetings among the finance ministers of the G-7 leading industrialized nations. It was followed by a meeting of finance ministers from the G-20, the group of industrial and emerging powers that together constitute 90 percent of the world’s economy. There were also meetings with the International Monetary Fund (IMF) and World Bank. The meetings concluded on Sunday with a summit of the eurozone, those European Union countries that use the euro as their currency. Along with these meetings, there were endless bilateral meetings far too numerous to catalog.
The weekend was essentially about this: the global political system is seeking to utilize the assets of the global economy (by taxing or printing money) in order to take control of the global financial system. The premise is that the chaos in the financial system is such that the markets cannot correct the situation themselves, and certainly not in an acceptable period of time; and that if the situation were to go on, the net result would be not just financial chaos but potentially economic disaster. Therefore, governments decided to use the resources of the economy to solve the problem. Put somewhat more simply, the various governments of the world were going to nationalize portions of the global financial system in order to stave off disaster. The assumption was that the resources of the economy, mobilized by the state, could manage — and ultimately repair — the imbalances of the financial system.
That is the simple version of what is going on in the United States and Europe — and it is only the United States and Europe that really matter right now. Japan and China — while involved in the talks — are really in different places structurally. The United States and Europe face liquidity issues, but the Asian economies are a different beast, predicated upon the concept of a flood of liquidity at all times. Damage to them will be from reduced export demand, and that will take a few weeks or months to manifest in a damning way. It will happen, but for now the crisis is a Euro-American issue.
The actual version of what happened this weekend in the financial talks is, of course, somewhat more complex. The United States and the Europeans agreed that something dramatic had to be done, but could not agree on precisely what they were going to do. The problem both are trying to solve is not technically a liquidity problem, in the sense of a lack of money in the system — the U.S. Federal Reserve, the European Central Bank and their smaller cousins have been pumping money into the system for weeks. Rather, the problem has been the reluctance of financial institutions to lend, particularly to other financial institutions. The money is there, it is just not getting to borrowers. Until that situation is rectified, economic growth is pretty much impossible. Indeed, economic contraction is inevitable.
After the failures of so many financial institutions, many unexpected or seemingly so, financial institutions with cash were loath to lend money out of fear that invisible balance-sheet problems would suddenly destroy their borrowers, leaving lenders with worthless paper. All lending is driven by some appetite for risk, but the level of distrust — certainly after many were trapped in the Lehman Brothers meltdown — has meant that there is no appetite for risk whatsoever.
There is an interesting subtext to this discussion. Accounting rules have required that assets be “marked to market,” that is, evaluated according to their current market value — which in the current environment is not very generous, to say the least. Many want to abolish “mark to market” valuation and replace it with something based on the underlying value of the asset, which would be more generous. The problem with this theory is that, while it might create healthier balance sheets, financial institutions don’t trust anyone’s balance sheet at the moment. Revaluing assets on paper will not comfort anyone. Trust is in very short supply, and there are no bookkeeping tricks to get people to lend to borrowers they don’t trust. No one is going to say once the balance sheet is revalued, “well, you sure are better off than yesterday, here is a hundred million dollars.”
The question therefore is how to get financial institutions to trust each other again when they feel they have no reason to do so. The solution is to have someone trustworthy guarantee the loan. The eurozone solution announced Oct. 12 was straightforward. They intended to have governments directly guarantee loans between financial institutions. Given the sovereign power to tax and to print money, the assumption was — reasonable in our mind — that it would take risk out of lending, and motivate financial institutions to make loans.
The problem with this, of course, is that there are a lot of institutions who will want to borrow a lot of money. With the government guaranteeing the loans, financial institutions will be insensitive to the risk of the borrower. If there is no risk in the loan whatsoever, then banks will lend to anyone, knowing full well that they cannot lose a loan. Under these circumstances, the market would go completely haywire and the opportunities for corruption would be unprecedented.
Therefore, as part of the eurozone plan, there has to be a government process for the approval and disapproval of loans. Since the market is no longer functioning, the decision on who gets to borrow how much at what rate — with a government guarantee — becomes a government decision.
There are two problems with this. First, governments are terrible at allocating capital. Politics will rapidly intrude to shape decisions. Even if the government could be trusted to make every decision with maximum efficiency, no government has the administrative ability to manage the entire financial sector so directly. Second, having taken control of interbank finance, how do you maintain a free market in the rest of the financial system? Will the government jump into guaranteeing non-interbank loans to ensure that banks actually lend money to those who need it? Otherwise the banking system could be liquid, but the rest of the economy might remain in crisis. Once the foundation of the financial system is nationalized, the entire edifice rests on the nationalized system.
The prime virtue of this plan is that it ought to work, at least in the short run. Financial institutions should start lending to each other, at whatever rate and in whatever amounts the government dictates and the gridlock should dissolve. The government will have to dive in to regulate the system for a while but hopefully — and this is the bet — in due course the government can unwind its involvement and ease the system back to some sort of market. The tentative date for that unwinding is the end of 2009. The risk is that the distortions of the system could become so intense after a few months that unwinding would become impossible. But that is a problem for later; the crisis needs to be addressed now.
The United States seems to dislike the eurozone approach, at least for the moment. It will be interesting to see if Washington stays with this position. U.S. Treasury Secretary Henry Paulson, who appears to be making the decisions for the United States, did not want to obliterate the market completely, preferring a more indirect approach that would leave the essence of the financial markets intact.
Paulson’s approach was threefold. First, Washington would provide indirect aid to the interbank market by buying distressed mortgage-related assets from financial institutions; this would free up the lenders’ assets in a way that also provided cash, and would reduce their fears of hidden nightmares in each others’ balance sheets. Second, it would allow the Treasury to buy a limited stake in financial institutions that would be healthy if not for the fact that their assets are currently undervalued by the market; the idea being that the government takes a temporary share, in exchange for cash that will recapitalize the bank and reduce its need for access to the interbank market. Finally — and this emerged at 2 a.m. on Monday — the government would jump into the interbank market directly. The Federal Reserve promised to lend any amount of dollars to any bank so long as the borrower has some collateral that the Fed will accept (and these days the Fed accepts just about anything). The major central banks of Europe have already agreed to act as the Fed’s proxies in this regard.
The United States did not want to wind up in the position of micromanaging transactions between financial institutions. Washington felt that an intrusive but still indirect approach would keep the market functioning even as the government intervened. The Europeans feared that the indirect approach wouldn’t work fast enough and had too much risk attached to it (although the Fed’s 2 a.m. decision may take the air out of that belief). They also believed Washington’s attempt to preserve the market was an illusion. With the government buying distressed paper and investing in banks, they felt, what was left of the market wasn’t worth the risk or the time.
There is also an ideological dimension. The United States is committed to free-market economics as a cultural matter. Recent events have shown, if a demonstration was needed, that reality trumps ideology, but Paulson still retains a visceral commitment to the market for its own sake. The Europeans don’t. For them, the state is the center of society, not the market. Thus, the Europeans were ready to abandon the market much faster than the Americans.
Yet the Europeans and the Americans both had to intervene in some way, and now they face exactly the same problem: having decided to make the pig fly, there remains the small matter of how to build a flying pig. The problem is administrative. It is all very well to say that the government will buy paper or stock in companies, or that it will guarantee loans between banks. The problem is that no institutions exist to do this. There are no offices filled with officials empowered to do any of these things, no rules on how these things are to be done, no bank accounts on which to draw — not even a decision on who has to sign the checks. The faster they try to set up these institutions, the more inefficient, error-prone and even corrupt they will turn out to be. We can assure you that some bright lads are already thinking dreamily of ways to scam the system, and the faster it is set up, the fewer controls there will be.
But even if all of that is thrown aside, and it is determined that failure, error and corruption are an acceptable price to pay to avoid economic crisis, it will still take weeks to set up either plan (with the possible exception of the Fed’s announcement to jump into the interbank market directly). Some symbolic transactions can take place within days — and they will undoubtedly be important. But the infrastructure for processing tens of thousands of transactions simply takes time to build.
This, of course, is known to the eurozone finance ministers. Indeed, the Europeans will hold an EU-wide summit on the topic this week, while the Americans are going to be working very hard to clarify their own processes in the next few days. The financial institutions will need to have guarantees to start lending — or some sort of retroactive guarantee — but the bet is that the stock markets will stop falling long enough to give the finance ministries time to get organized. It might work.
We need to add to this another dimension we find very interesting. We have discussed elsewhere the axes on which this decision will be made: one is the degree of government intervention, the other is the degree of international collaboration. Clearly, governments are going to play the pivotal role. What is interesting is the degree to which genuine international collaboration is missing. Certainly there is voluntary collaboration — but there is not an integrated global strategy, there is not an integrated global institution administering the strategy, nor is there an irrevocable commitment on the part of governments to subordinate their sovereignty to relevant global institutions.
The Americans and Europeans seem to be diverging in their approaches, with Paulson delivering a warning about the consequences of protectionism. But the European Union is also now being split between members of the eurozone and EU members who have their own currencies (primarily the United Kingdom). Indeed, even within the eurozone, the solutions will be national. Germany, France, Italy and the rest are all pursuing their own bailouts of their own institutions. They have pledged to operate on certain principles and to coordinate — as have the United States and Europe — but the fact is that each state is going to execute a national policy through national institutions with its own money and bureaucracies.
What is most interesting in the long run is the fact the Europeans, even in the eurozone, have not attempted a European solution. Nationalism is very much alive in Europe and has emerged, as one would expect, in a time of crisis. And this raises a crucial question. Some countries have greater exposure and fewer resources than others. Will the stronger members of the eurozone help the weaker? At present it seems any such help would be simply coincidental. This is a global question as well. The Europeans have pointed out that the contagion started in the United States. It is true that the Americans sold the paper. But it is also true that the Europeans bought it readily. If ever there was a systemic failure it was this one.
However, it has always been our view that the state ultimately trumps the economy and the nation trumps multinational institutions. We are strong believers in the durability of the nation-state. It seems to us that we are seeing here the failure of multinational institutions and the re-emergence of national power. The IMF, the World Bank, the Bank for International Settlements, the European Union and the rest have all failed to function either to prevent the crisis or to contain it. The reason is not their inadequacy. Rather it is that, when push comes to shove, nation-states are not prepared to surrender their sovereignty to multinational entities or to other countries if they don’t have to. What we saw this weekend was the devolution of power to the state. All the summits notwithstanding, Berlin, Rome, Paris and London are looking out for the Germans, Italians, French and British. Globalism and the idea of “Europe” became a lot less applicable to the real world this weekend.
It is difficult to say that this weekend became a defining moment, simply because there is so much left unknown and undone. Above all it is unclear whether the equity markets will give governments the time they need to organize the nationalization (temporary we assume) of the financial system. No matter what happens this week, we simply don’t yet know the answer. The markets have not fallen enough yet to pose an overwhelming danger to the system, but at the moment, that is the biggest threat. If the governments do not have enough credibility to cause the market to believe that a solution is at hand, the government will either have to throw in the towel or begin thinking even more radically. And things have already gotten pretty radical.
