Notes From the Rabbit Hole
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Pivotal Events
By Bob Hoye March 11, 2010
The
following is part of Pivotal
Events that was SIGNS
OF THE TIMES: It is
worth noting that at this time last year markets were in a liquidity
panic. "Canadian
banks not lending to hedge funds that are shorting bank
stocks." –
Business News Network, March 3, 2009 It seems
that understanding of markets was trumped by spite. "White
House Knocks Jim Cramer for Calling Obama Budget the 'Greatest
Wealth Destruction by any President.'" –
TV Newser, March 3, 2009 "Toyota
has leased a cargo ship to store 2500 unsold cars." –
Financial Post, March 4, 2009 *
* *
* * This
Year: "Our
work is far from over, but we have rescued this economy from the
worst of the crisis." –
President Obama, February 16, 2010 Other
reports included "On
anniversary, Obama vigorously defends economic stimulus". Perhaps
enraptured by the brilliance of Obama's advice that all the US needs
is more Obama, Senator Chris Dodd exclaimed that Obama will win "overwhelmingly"
in 2012. "China's
demand for import soybeans will remain 'huge and
irreversible'". This was
proclaimed by the director of the Development Research Center of the
State Council in China. –
Bloomberg, February 24, 2010 "A
'wall' of junk debt maturing in the next four years will increase
the risk of corporate defaults." –
Bloomberg, February 24, 2010 This was
from a report by Bank of America that included a chilling turn of
phrase. "Almost 90% of such bonds is
due to be REPAID between 2012 and 2014." [emphasis
added] *
* *
* * STOCK MARKETS Stock
markets have coped with the sovereign debt problem rather well. In
part, this could be due to the size of the hit down to early
February which was enough to prompt a good rebound. The other aspect
is the duration and we had originally thought that the good times
could run well into March. This
would be assisted by an intermediate rally for crude oil and base
metal prices, which seems to be working out. However, last week
there were some reports that are disquieting to many pension fund
managers. Some of the establishment's economic numbers came in way
below consensus expectations and then there is the sovereign debt
problem. If
the big participants back off from being optimistic to just
complacent it sidelines a lot of buying. Thus, our reading last week
that progress over the remainder of this rally could be
"choppy". The
overall action remains within the "rounded top" pattern
that we thought would end the big rebound out of the crash. This,
along with the change in the corporate bond market would likely
occur within the "turn-of-the-year" window. Last week the
ChartWorks reviewed the combination of the unusually low mutual fund
cash position and the signal from the gold/silver ratio (GSR). The
chart is attached and is worth reviewing, with the note that the
ratio is plotted as the silver/gold ratio to show sympathy with the
direction of the stock market. The ratio tends to lead corresponding
changes in the stock market. Moreover, changes in the ratio have
anticipated some big events. The huge blow-off high in gold and
silver in January 1980 was anticipated by the reversal in the ratio
by a couple of weeks. The
combination of exceptionally low mutual-fund cash and the pattern in
the GSR confirms that an important top is completing. INTEREST
RATES As
the saying goes "Credit
is suspicion asleep", and it seems that one of the main
exercises of the Fed is to keep investors complacent. This has been
done through the garbage notion that only one bank can get in to
trouble at one time. Then brilliant central bankers will bail out
that one offending bank and all will be well. The
basic problem has been to assume that all banks won't willingly
engage in reckless lending at the same time. This requires a studied
ignorance of financial history and a brainwashing by theoreticians
who have never reviewed market history. Actually in too many cases
the gullible only require a "light rinse". For
some time, these pages have suggested that the establishment's
precocious theories would work if enough of the public had taken, at
least, Economics 101. Perhaps such an educated consumer would follow
policymaker dictates with more conviction. Reluctantly, we have
examined this concept and have decided that this has been wrong. The
main financial problem is that too many central bankers have taken,
and passed, Economics 101. It
has been decades since a central banker was an actual banker, and
commercial banks haven't been run by bankers in a couple of
generations. Back
in the good old days when the Fed and New York banks were run by
real bankers there was much less recklessness with disasters limited
to, say, the extent of the 1929 example. Today,
Canada's federal government has revealed a "budget". This
is an annual event and this writer has been fully employed in the
investment business for 47 of them. Each as tedious as the one
before. It was in the mid 1960s when the big investment dealers
began hiring economists and the game of "crunching" the
numbers began. There was the notion that part of the budget was
"policy" that would improve the course of the economy.
Economists would, with great sincerity, change GDP projections from
3% to 3.25%, or the other way around. This
required dedication to the belief that an economy was national. It
also required no knowledge of the magnificent speculative bubbles
and their consequent contractions that have been global
events--since the first one in 1720. There is no such thing as a
national economy. After
ignoring so many budgets, our main conclusion is that all they do is
artfully obscure the agreed-upon rate of state theft. "The
art of taxation consists in so plucking the goose as to get the most
feathers with the least hissing." –
Jean-Baptiste Colbert, Finance minister, 1665-1685, to Louis XIV Back
to the credit markets and if the sovereign problem was limited to
just one country no doubt the theory about the bailout of last
resort would work. But,
as we have been reviewing, all, repeat all, countries become
profligate at the same time. It has much to do with a mania in
credit. We
don't recall reading that the senior central bank would be called
upon to be the lender of last resort to only one country failing,
let alone a cluster of them. In
2007 the sub-prime mortgage disaster began and the establishment
boasted that it was "isolated" and could be
"contained". In following the post-bubble path (almost
typed bath) this was not the case as in 2008 liquidity from Libor at
the short-end to junk disappeared. The
panic continued to a year ago when in late February a couple of
indicators reversed trend. One was the gold/silver ratio turning
down and our Gold/Commodities Index turning down. Then on February
27, Ross made the call on an important change in the currency
markets with the dollar heading down. The
carry in corporate bonds, particularly for junk, has been
outstanding and prices reached an Upside Exhaustion in January. We
took this as culminating action and it was likely to occur in the
"turn-of-the-year" window. The low yield was set in the
week of January 12 and the chart has been working on an important
bottom for interest rates. For
the high-yield the low was 8.53% on January 14 and the high has been
9.42% on February 12. As part of the rallies into March the yield
has slipped to 8.87% yesterday and the move is a test of the low.
The unheralded return of risk to sovereign bonds will likely inhibit
the return of carefree buying to the corporate sector. Most
corporate bonds are working on an important reversal that could be
completed by June. As
with the constructive turn a year ago, our indicators should assist
in advising the turn down. Gold's real price and the silver/gold
ratio are still sympathetic to the advance in the positive stuff
that could run into late March. Currencies:
As the saying goes "It is hard to keep a good
thing down". The Dollar Index rallied to our target of
80 and became overbought enough to prompt a worthwhile correction.
Instead, the overbought condition is being eased by a narrow trading
range. This along with the seismic temblors on orthodox economic
numbers and sovereign debt is providing some caution on conventional
investment vehicles. However,
we hope that there is enough of a drop in the dollar to provide a
technical exit for stocks, corporate bonds and commodities.
bobhoye@institutionaladvisors.com
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