The Gold Bubble

by ilene - March 10th, 2010 10:50 am

The Gold Bubble

This represents my personal opinion, not the views of the SEC or its staff.

I am not going to spend time here talking about how the price of gold is off-the-wall, that it is not just a bubble in the making, but a bubble waiting to burst. I don’t want to waste your time on that point.We all know it is a bubble.

George Soros has said “The ultimate asset bubble is gold”. Many of the top asset managers, such as Tudor and Paulson, are piling on; Paul Tudor Jones recently said gold “has its time and place, and now is that time.” The banks are echoing this view with their research. Goldman has a research piece that looks for gold to approach $1,400 in the next year. The more ebullient Charles Morris of HSBC has said, “I absolutely believe it’s heading into a bubble, but that’s why you buy it. ” He, along with a number of other professional and otherwise rational managers, looks for gold to move as high as $5,000 an ounce.

More interesting than this almost universal agreement is what that agreement tells us about the dynamics of the market.

The Naked Bubble

Usually the markets have the courtesy of giving cover for bubbles. We adorn the bubbles with some justification. Even if a guy is just after sex, he at least has the decency to act like there is some substance behind his interest. For the Internet bubble, it was that fundamental analysis based on the brick and mortar world did not bear relevance in the New Paradigm. For the Nikkei bubble, it was that the crazy P/E ratios were not considering one subtlety or another in the Japanese accounting system.

But with gold, no one seems even to care about giving a justification, other than “gold has been a store of value throughout 5,000 years of monetary history”. Which is fine as far as it goes, but that doesn’t say anything about what the price of that store of value should be.

Pump and Dump

Given that “hedge fund” and “highly secretive” are usually said in the same breath, don’t you get suspicious when so many of the top managers are so vocally out there about their gold investments? And when their positions are structured in a way that make them open to view? Paulson and Soros have huge positions in gold ETFs. We know that, because if…

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“Today I Think Of Myself As A Government Contractor……”

by ilene - September 17th, 2009 4:39 pm

"Today I Think Of Myself As A Government Contractor……"

Courtesy of Jan-Martin Feddersen at Immobilienblasen

When you here this kind of quote in context with the mortgage business it should be clear that in the not so distant future another not so "insignificant" bailout is already in the cards….. Looks like the Phony Mae & Fraudie Mac pain wasn´t enough…….

[No Easy Exit for Government as Housing Market's Savior]

No Easy Exit for Government as Housing Market’s Savior WSJ

After a year of extraordinary interventions in the economy, the federal government is starting to pare its support for the private sector. It doesn’t look that way to Peter Lansing, president of mortgage firm Universal Lending.

The Denver home lender sees every day how dependent the housing market has become on the government. At the height of the boom, just 20% of Universal’s mortgages were backed by the Federal Housing Administration, an arm of the government that guarantees loans to borrowers who can’t afford big down payments. Today, the FHA accounts for more than 80% of his business. For Mr. Lansing, this represents a new way of life — more government, more paperwork, but also a lot of sales that wouldn’t have happened otherwise.

"Over 29 years in business, we’ve always thought of ourselves as being in the free-enterprise system. Today I think of myself as a government contractor,"

Over the past year, the government has intervened heavily at essentially every stage of the home-buying process. In fact, more than 80% of the new residential mortgage loans made this year benefited from some form of government support, according to the trade publication Inside Mortgage Finance.

Speaking of CHUZPAH…….

Einigen Bänkern sind selbstredend auch die 80% noch zu wenig……

Wells Fargo urges US to boost mortgage market

The US government should help revive the moribund market for big mortgages by getting Fannie Mae and Freddie Mac to buy large home loans from banks, the chief executive of the lender Wells Fargo urged in an interview with the FT on Tuesday. John Stumpf, whose bank originates a quarter of all US mortgages, called for an increase in the size of loans purchased by Fannie and Freddie, the troubled finance groups controlled by the authorities.

Buffet will be proud ……

Behind FHA Strains, a Push to Lift Housing WSJ

[Broad Exposure chart]

The FHA insures loans secured with down payments as low as 3.5%. But values in many markets in which it has been increasing its activity have fallen far more than that in the past year. The result:…

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More On My “Deflationary Collapse” Ticker

by ilene - September 17th, 2009 3:00 pm

More On My "Deflationary Collapse" Ticker

Courtesy of Karl Denninger at The Market Ticker

Boy, that got people’s attention.

We must change our economic course now and accept the contraction that MUST COME in order to save our economic and monetary system.

Yep.

It also drew critics, chief among them being people who claimed that "debt isn’t really growing at that percentage beyond GDP."

Oh yes it is.

In fact, I was being rather reasonable, in that I was using time periods going all the way back to the 1950s.

But - let’s focus in on "closer to today", specifically, 1990 forward.

I think we can all agree that the 1990s were tremendously good times for GDP, and were not nearly so destructive for debt, right?

Ok.

Well, I hate people telling me they think I’m being unrealistically "doom and gloomish", so I "de-theoreticalized" that chart a bit, and picked on more-recent times where the growth rates were pretty darn good and some of the really-expansive debt periods, particularly from the 70s, were not included.

Here are the ugly facts - not conjecture, not assumptions, not going back 50 years data, current and unassailable facts.

During the period from 1990 onward, GDP grew at a compound annual rate of 5.361%¹. Debt during the same period, nearly 20 years, grew at a compound annual rate of 7.9401%.

It is worse if you look at 2000 onward - there GDP growth was 5.25% on an average annual basis, while debt growth was 8.6279%.

I thus have "recast" the 20-year forward graph for you in two forms - one assuming we can maintain the 1990 onward rates (which are more favorable) and the second assuming that the 2000 onward rates are what we face going forward.

Note that the GDP growth rate exceeds (by at least one percent and in most cases two percent!) the expected actual economic growth rate for at least the next five years from nearly all mainstream economists. I am also not building in any extraordinary increase in debt for the projected (by both the White House and CBO) increase in Federal Debt by $9 trillion over 10 years - a 100% increase - as it roughly corresponds with the expected debt increase in the economy as measured by previous trends. Nor am I including any of the unfunded liabilities of Social Security and Medicare, which total some $70+ trillion dollars all on their own. Since my intent is to discover whether there is any rational basis for a belief that we can…

Tags: Deflationary Collapse, Karl Denninger, Ponzi Finance Indicator, The Market Ticker

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THE STOCK MARKET HASN’T BEEN THIS OVERBOUGHT SINCE 1983

by ilene - September 17th, 2009 1:55 pm

THE STOCK MARKET HASN’T BEEN THIS OVERBOUGHT SINCE 1983

Courtesy of The Pragmatic Capitalist

Excellent data here from Bespoke. The market hasn’t been this overbought in over 25 years:

This additional chart from Quantifiable Edge shows the extreme level of stocks above their 200 day moving average. The stock market hasn’t been this oversold ever in terms of this indicator:

Source: Bespoke Invest, QE

Tags: overbought, Stock Market

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Germany’s DAX: Insight Into Europe’s Leading Economy

by ilene - September 17th, 2009 1:27 pm

Note: Our friends at Elliott Wave International have announced the beginning of their "FreeWeek event, where they throw open the doors to some of their most popular paid services to non-subscribers for one week." This time, they’re offering complete access to The Asian-Pacific Short Term Update and The European Short Term Update. - Ilene

FreeWeek Kicks Off With Germany: Click HERE to sign on and get invaluable insight into Europe’s #1 market.

Germany’s DAX: FREE Insight Into Europe’s Leading Economy

Courtesy of Elliott Wave International

It’s one of the first rules in the book of mainstream economic wisdom: a country’s economy is the thermometer which "reads" its stock market’s temperature. If financial conditions are heating up, stocks rise; if they are cooling down, stocks fall. Were it so simple — millionaires wouldn’t make up a measly .15% of the global population.

Obviously, there’s a major flaw with this logic; namely, it isn’t true. Time and again, stock prices smolder to near boiling even as economic growth chills to the bone. (The opposite also holds: Stock prices cool down even as the economy is on fire.)

Take, for instance, Germany’s main stock index, the DAX 30. On August 13, Europe’s number one economy reported a .3% rise in gross domestic product (GDP) — Germany’s first quarter of growth since January 2008. Soon after, the DAX began to rally and finished the day at a fresh, ten-month high.

In no time at all, every financial media outlet from Wall Street to la-la land had their story: "Germany’s DAX rose nearly 1% on the GDP data. The big picture will be one of ongoing gradual recovery through 2010." (LA Times)

One problem: the DAX’s bullish flame has been burning since the index landed at a two-year low on March 9, 2009. YET — the economic data over those six months has been about as "hot" as the Arctic Circle. Here, the following news stories from the time say plenty:

March 24, Wall Street Journal: "There’s a slew of evidence that Germany is in an economic freefall: A 19% drop in industrial output, a 23% decline in exports, a 35% drop in new manufacturing orders, and on. The numbers we’re seeing are just mind-boggling."
April 30, New York Times reveals a 17% year-over-year decline in Germany’s exports and writes, "With 47% of its GDP generated by exports, Germany would suffer a severe contraction in its economy."
May 16, Wall Street Journal: "In the fourth-quarter 2009,…

Tags: DAX, Economy, Elliott Wave analysis, Elliott Wave Free Week, Europe, Germany, technical analysis

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Video: Schiff announces run for Senate

by ilene - September 17th, 2009 12:59 pm

Video: Schiff announces run for Senate

Courtesy of Andrew Horowitz, The Disciplined Investor

What do you think of this? Peter Schiff’s announcement on MSNBC.

Visit msnbc.com for Breaking News, World News, and News about the Economy

Peter Schiff was a guest on a recent TDI podcast - Listen Here.

Tags: Peter Schiff, Senate

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IS THE MARKET CHEAP?

by ilene - September 17th, 2009 12:17 pm

IS THE MARKET CHEAP?

Courtesy of The Pragmatic Capitalist

According to the Shiller 10 year PE ratio the stock market is now trading at a hefty 18 PE. This is just slightly higher than the historical norm. Image 1 clearly shows that the market is neither extraordinarily expensive nor extraordinarily cheap, despite what some noted bears say. What is more interesting in this data is not the exact price, but the action surrounding overshoots and undershoots. In each of the instances where the S&P 500 approached an extreme overshoot of 25, the market undershot over the course of the following 5 years and always approached a PE between 5-10. Like Grantham, I am a firm believer in mean reversion and the idea that the mean tends to be overshot.

Chart 2 shows the extreme moves in terms of % above/below the long-term average. Although the market is not overly expensive or inexpensive it is interesting to note that we have not overshot to the downside despite the largest overshoot in the history of the market. This would lead one to believe that there is much more work to be done on the downside as PE’s contract and the market digests its excesses of the last decade.

Tags: S&P 500, Shiller 10 year PE ratio, Stock Market, valuation

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Don’t Blame Free Markets, They Never Existed

by ilene - September 17th, 2009 11:51 am

Welcome to Adam Sharp at the Bearish News blog!

Adam writes on the non-existence of a free market economy. Agreed - we don’t have free markets. About half-way through, Adam clarified another point - free markets cannot operate outside the framework of effective laws and a legal and regulatory system that will enforce them. He differentiates between deregulation and decriminalization - a semantic issue perhaps? Law enforcement and regulations (Adam might just say laws) have been m.i.a., and consequently, blaming laissez-faire capitalism for our economic woes ignores a vital part of the problem. - Ilene

Don’t Blame Free Markets, They Never Existed

Courtesy of Adam Sharp

A rhetorical question for free-market critics: Do the following policies reflect a laissez-faire economy?

#1 – Artificially cheap money - America’s central bank regularly provides heaps of cash to their member banks, especially when unsustainable rallies stall and sputter. Liquidity is the cause and the cure. This is anything but laissez-faire. Keeping interest rates low mangles the free-market, rewarding reckless borrowers and lenders, and punishing savers.

#2 – Bailouts – Banks feel safe taking huge risks, and for good reason. The taxpayer will surely bail them out. The absolute worst-case scenario for an executive who loses billions is getting fired. But when you only need a few months to make millions, who cares about getting canned?

#3 – Meddling in Housing; Freddie, Fannie & More – The housing market has been propped-up too long. The stated goal of GSEs like Fannie and Freddie are to facilitate affordable housing. Problem is, they’re become a significant part of the problem. They contributed to the housing bubble, and shifted debt from private to public hands. Further bailouts seem inevitable. In short, they are anything-but free-market.

Laissez-Faire Still Takes The Blame

Despite all this, free-markets remain the favored scapegoat of this crisis. David Leonhardt’s NYT piece titled Greenspan’s Mea Culpa captured wrong-headed use of laissez-faire perfectly:

Over the last 30 years or so years, the world has been deeply influenced by a laissez-faire economic philosophy, which has shifted the world toward an embrace of markets… But it certainly seems as if this country, at least, went too far toward laissez-faire economics.

Leonhardt goes on to blame the housing bubble on a lack of regulation from Greenspan and the Fed. We agree on where the fault lies. The Fed certainly did blow their regulatory duties. But his argument, like most made by free-market critics, ignores the real causes. The root of the problem lies…

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Nassim Taleb: We Still Have The Same Credit Disease

by ilene - September 17th, 2009 11:23 am

Nassim Taleb: We Still Have The Same Credit Disease

Courtesy of Mish

Reflation or not, end of recession or not, the global economic fundamentals have not changed one bit thanks to the misguided actions of central bankers. Nassim Taleb, author of the Black Swan says: ‘We still have the same disease’

Here are some clips from a Globe and Mail interview including some thoughts on Canada.

Margaret Wente: Happy days are here again. The central bankers say the recession is over. The markets are buoyant. Can we relax?

Nassim Taleb: Not at all. Central bankers have no clue. In the first place, the financial crisis was not a black swan. It was perfectly predictable. They ignored the phenomenal buildup in leverage since 1980. They acted like airline pilots who’d never heard of hurricanes.

After finishing The Black Swan, I realized there was a cancer. The cancer was a huge buildup of risk-taking based on the lack of understanding of reality. The second problem is the hidden risk with new financial products. And the third is the interdependence among financial institutions.

MW: But aren’t those the very problems we’re supposed to be fixing?

NT: They’re all still here. Today we still have the same amount of debt, but it belongs to governments. Normally debt would get destroyed and turn to air. Debt is a mistake between lender and borrower, and both should suffer. But the government is socializing all these losses by transforming them into liabilities for your children and grandchildren and great-grandchildren. What is the effect? The doctor has shown up and relieved the patient’s symptoms – and transformed the tumour into a metastatic tumour. We still have the same disease. We still have too much debt, too many big banks, too much state sponsorship of risk-taking. And now we have six million more Americans who are unemployed – a lot more than that if you count hidden unemployment.

MW: Are you saying the U.S. shouldn’t have done all those bailouts? What was the alternative?

NT: Blood , sweat and tears. A lot of the growth of the past few years was fake growth from debt. So swallow the losses, be dignified and move on. Suck it up. I gather you’re not too impressed with the folks in Washington who are handling this crisis.

Ben Bernanke saved nothing! He shouldn’t be allowed in Washington. He’s like a doctor who misses the metastatic tumour and says the patient is doing very…

Tags: central bankers, credit disease, debt, Nassim Talib, Obama

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Don’t Cry Over Spilled Milk

by ilene - September 17th, 2009 1:55 am

Don’t Cry Over Spilled Milk

spilled milk, milk prices Courtesy of Mish

Milk prices have plunged in recent weeks. Farmers in big dairy states like Wisconsin, Minnesota, and New York are hopping mad. Is there a conspiracy underway to suppress milk prices? Some must think so because Dairy Farmers Want Industry Probe.

Dairy farmers, stung by a price-depressing glut of milk, are pressing federal antitrust regulators to investigate competition in the industry.

A group of dairy farmers is slated to meet with antitrust enforcers Thursday in Washington, and Christine Varney, chief of the Justice Department’s antitrust division, is scheduled to appear Saturday at a Vermont hearing of the Senate Judiciary Committee, which is populated with several Democrats from big dairy states such as Wisconsin, Minnesota and New York.

The price of milk began a historic run-up in 2007, and dairy farmers raced to cash in by expanding their herds. Then, the global recession doused foreign demand for milk in 2008, contributed to an oversupply.

In the past year the price farmers get for their milk has dropped 36%, to the lowest level in three decades.

Between early 2007 and December 2008, U.S. farmers added about 190,000 milk cows, an increase of 2%, according to industry economists. In August, farmers on average were paid $11.80 for every hundred pounds of milk, down from $18.40 in August of last year.

Dairy farmers have long complained that they have too few buyers and too little competition for their milk. The industry is dominated by two players: Dean Foods Co. of Dallas, which is creating a national brand in what had been a fragmented industry, and Dairy Farmers of America Inc., a Kansas City, Mo., cooperative that buys milk from farmers and sells some of it to Dean Foods.

In a statement, Dean said it "does not control dairy prices or the dairy market. The numbers that have been reported by various media are grossly inaccurate. We buy less than 15% of [the] nation’s raw fluid milk supply."

Dairy Farmers of America said in a statement: "The national scope and size of our cooperative brings about scrutiny. We understand that and we invite open dialogue with those who want to understand our business better."

Andy Gilbert, a third-generation farmer in Potsdam, N.Y., who owns 800 milk cows, said farmers are struggling and he is borrowing to pay his bills. "I don’t know any dairymen who are covering their cost of production," he said. "It’s a stress on all…

Tags: Bankruptcy, demand, milk, milk producers, over supply, price of milk

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Germany’s DAX: FREE Insight Into Europe’s Leading Economy

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