March 31, 2012
Finally, something that is starting to make some sense in these markets. After nearly doubling from mid-2010 to early-2011 agriculture has now been in a downtrend for the past year. I have mentioned before that I believe commodities in general likely bottomed in December 2011 and are simply still in the basing process. If the index can comfortably break through the 450 level next week the bottom is in.
Take note that Friday’s session alone wiped out losses of the previous 4 sessions. This is very bullish in my book. Let’s see if we get some follow through next week. As mentioned above if this clears 450 the bottom is in.
March 31, 2012
Here is a great interview with Martin Armstrong on the Sovereign Debt Crisis.
He sees the next crisis coming in 2015 and beyond which fits into the 33-34 year time cycle I have been talking about. It matches up nicely with the beginning of the secular bull market in equities that began in 1982 and ended in 2000.
I like the mention of the bubble in government employment/spending and comparing it to agriculture prior to the Dust Bowl.
HRN: Do you favor returning to a gold standard?
Martin Armstrong: We have to deal directly with the government spending. Eliminate the ability to borrow. That’s more important than what you are going to call money. In theory, what are they trying to do with the gold standard? They are trying to say, if we put the gold standard in then you can’t create money beyond what you have in gold, but they did that the last time. I don’t see where that is some sort of magic bean that’s going to stop them from doing it again. It gets to a stage where it doesn’t matter if you use conch shells for money or gold. There is no fiscal responsibility in government. We have to eliminate the core problem and eliminate government borrowing except in time of war.
HRN: Is that an argument for smaller government?
Martin Armstrong: Absolutely. During the Great Depression, unemployment had only gotten up to where it is now but then we had the Dust Bowl. It was what Schumpeter called creative destruction. It started the American workforce on a path to skilled labor. Before the Great Depression nearly half of the workforce was in agriculture. By 1980 only 3% was in agriculture. We are facing the same problem now only 40% of the workforce is in government. They produce nothing and don’t contribute anything at all to the gross domestic product (GDP). Of course, the government statistics include both the government’s spending and also the wages of government employees, so, if the government hires someone, the GDP goes up twice as fast.
March 31, 2012
I don’t always agree with Robert Reich but in this case I do. I’ve been talking about the bubble in higher education/student loans since I started this blog back in July 2009. As per this article, total student loan debt has now exceeded $1 trillion and the average debt per student is a staggering $45,000.00.
March 31, 2012
Always interesting to hear his perspectives since he is the largest bond fund manager in the world. He says lower economic growth is on the horizon along with inflation. In time, QE 3 and QE 4 are on the way. He also mentions that he believes that the 30 year bull market in bonds may be coming to an end. Fund flows would suggest bonds are near a top. As I posted recently despite the big run in stocks over the past 6 months money has been fleeing equity mutual funds and moving into bond funds. Some bond fund managers are refusing to accept any more capital because they can’t beat their benchmarks.
From the article:
“Despite the Fed’s communiqué earlier this week, Gross doesn’t believe the central bank’s interventions in the bond markets are over. In two rounds of quantitative easing (QE), the Federal Reserve printed money to buy hundreds of billions of dollars of Treasury bonds and mortgage-backed securities. “I believe there will be a QE3, and perhaps a QE4,” he said. Why? In the past few years, whenever central banks have stopped or paused their quantitative easing efforts, “stock prices have fallen and economies have slowed.” The globe’s private economies simply aren’t sufficiently strong enough to support robust growth, and the world’s central banks aren’t willing to stand by and watch. “That’s not a policy recommendation, it’s simply a realization that the substitution of central bank monetary purchases will continue for a long time, as long as they [central banks] try to support private economies on a global basis,” Gross said.”
March 30, 2012
I talked about manipulation last night and how the bond/Treasury markets don’t seem to be telling the right story. This may have something to do with it.
March 28, 2012
Over the remainder of the week we are looking at serious window dressing. The stocks/sectors that have done well will likely be marked up as fund managers want to show that the owned them as of 3/31/12. On the other hand what hasn’t done well is likely to get hit in the next few days as nobody wants to show that they own what hasn’t been working. Thus the rest of this week is simply noise. Hard to glean much of anything from trading at the moment. Next week we will finally be able to get a level view of what is really going on. Looking forward to next week.
March 27, 2012
As many of you know I don’t believe any numbers that come from the government. Recently we have seen a drop in the unemployment rate and at the same time we have seen moderate inflation. As a result we have had a booming stock market. Well, if you understand how the unemployment rate is calculated you would know that the unemployment rate is coming down because workers are “leaving the labor force” and thus are no longer unemployed by government standards. At the same time the government says that inflation is tame and that higher energy prices are “transitory”.
Consumer foods maker ConAgra would disagree on the inflation front. In their most recent quarter they experienced the most severe input cost inflation for its fiscal year at 11%. So do you believe the government at 2-3% or ConAgra at 11%? If you have been to the grocery store you would tend to believe ConAgra.
In addition to comments from ConAgra we also have gas prices at $4.00-$5.00 per gallon. West Texas Crude Oil is currently trading around $107.00 a barrel and Brent is around $126.00. It is my belief that inflation is what will eventually crimp this feeble economic recovery which in turn will hurt the equity market.
So where are the asset flows telling us? If inflation is a problem one definitely doesn’t want to own bonds. Yet, that is where all of the funds are flowing. Investors continue to pull money out of equities and divert those funds into bonds. Think about it this way. If you are making 2-4% in bonds and inflation is 5-10%, you have a negative REAL rate of return. Equities? Well, they are a better place to be than bonds but not as good as commodities. I still feel as though this market has further to go on the upside but eventually inflation will begin to crimp corporate profit margins which continue to sit near historic highs.My current feel is that the cyclical bull market that began in March 2009 COULD run into April 2013. My upcoming time cycles are April 2012, July 2012, January 2013, and April 2013.
Despite all of this Ben Bernanke come out yesterday and said that the Fed is standing by, ready to provide more liquidity if needed as the economy just isn’t growing fast enough to bring unemployment down to acceptable levels. Remember that the Fed has a dual mandate: price stability and full employment. They have been successful in driving prices higher but if liquidity could create jobs Zimbabwe would be at full employment and the most prosperous country in the world. You can’t print your way to prosperity. It reminds me of when I was a child and my mother first told me that a one dollar bill was worth more than a shiny nickel. I immediately went to my room, grabbed some paper, scissors, and a green crayola crayon and in an hour I was rich. I then explained to my mom that I had money and I wanted to go buy toys. She told me that only the government could print money. I was about 4 years old but that was my first experience in learning about the fiat money system. These paper bills we are carrying in our wallets are nothing more than IOU’s issued by the US Treasury and backed by their ability to tax the people. It is funny how on our balance sheets fiat money is considered an asset, yet on the balance sheet of the US Treasury they are listed as a liability. In other words, they are only worth something because the government tells us that they are. Said government would have been bankrupt long ago if they were subject to the same rules that you and I are.
In an inflationary environment one ideally wants to own tangible assets. Examples include commodities and real estate. Aside from oil, commodities have generally been poor performers since April/May 2011. On a relative basis they have done horribly since the equity market bottom in October 2011. Have to admit that I didn’t see that coming. As I have said before the same tide (liquidity) should keep all ships afloat. However, the two assets that make the least amount of sense in an inflationary environment (bonds and equities) have dramatically outperformed commodities. Sentiment on commodities is horrible right now and in line with what one would expect near an important low (I believe THE low in December and now I’m simply looking for a higher low to launch a sustainable move higher). I suspect that over the next 12-18 months commodities should outperform both equities and bonds. I continue to keep my eye on the Continuous Commodity Index (CCI), the CRB, and the Canadian Venture Exchange for signs of a bottom in commodities relative to the equity market. We aren’t there yet but at some point commodities will have to play catch up.
March 20, 2012
Over 5 months have passed since the equity market bottomed and Treasuries are just now beginning to confirm that bottom. The Treasury market is smarter than the equity market and it is very unusual to see such a disconnect. I have seen it happen for short periods of time but never anything like this.
The 10 year broke above 2.1% for the first time since late-October just this past Wednesday. However, it still hasn’t taken out the October high at 2.4% and also coincides with the low from October 2010.
A break above 2.4% would confirm a top in the 10 year Treasury.
There is huge resistance at 3.45%-3.50% on the 30 year Treasury. A break above there would confirm a top in prices.
The intermarket activity of the past 5-6 months has been very unusual to say the least. It seems as though multiple asset classes have been telling different stories. A breakout in Treasury yields would definitely help to clear this murky macro picture. The move over the past week is encouraging but I do want to see a breakout above 2.4% in the 10 year and 3.5% in the 30 year before declaring bottoms. I suspect we won’t have to wait too long.