Another Bubble

The price of gold over the past 5 years:

http://img248.imageshack.us/i/goldprice.png/

Bubble? I think so.

I talked to a man today, a small town banker, who asked if the Fed's easy money policies would lead us to a repeat of Weimar Germany. I laughed and told him that won't happen.

What I believe will happen is that gold will continue to make new highs, perhaps as high as $1500/$1600, and then precipitously drop.

Great FT Article

Here .

A few good quotes:

"Since it was the bursting of the housing bubble in 2006 that inevitably touched off the financial and economic problems we are experiencing today in the US, it stands to reason that stability in home prices is a necessary and sufficient condition for a restoration of normality to the credit market and the economy. Residential real estate in the US, this $23,000bn asset class, after all, is the cornerstone of the collateral in the financial system and the backbone of the household balance sheet.

History is replete with examples of how real estate deflations end – much like today – in financial and economic chaos. Even though the builders have recently become more aggressive in cutting their production, the reality is that demand has been just as weak if not weaker and as a result the unsold new housing inventory still stands at uncomfortably high levels of over 11 months supply. By way of comparison, the highest this inventory/sales rate went in the early 1990s real estate meltdown in the US was 9.4 months. Not until this ratio dips convincingly below eight months’ supply do we believe residential real estate prices will begin to stabilise. The current mismatch between supply and demand portends a further 15 per cent downside to US home prices, on top of the record 23 per cent slide already incurred from the bubble peaks."

"The US is in the midst of a secular credit contraction and likely a prolonged period of sub-par economic activity. This is an environment conducive to a sustained period of ultra-low policy rates. This is no mere cyclical downturn in consumer spending. What we are seeing is the first phase of balance sheet repair – the deleveraging phase.

The buy-now/pay-later days are gone. Household debt is contracting at a record rate and the personal savings rate is now on a discernible uptrend. This transition from frivolity towards frugality, as painful as it is, is necessary in order for consumer balance sheets to become more manageable and blaze the trail for the next sustainable economic expansion."

"With the home ownership rate near 68 per cent in the US, compared with pre-mania normalised levels of 64 per cent, there is really not that much pent-up demand for housing, as the record low readings in the National Association of Home Builders index, mortgage applications and homebuying intentions attest. Therefore, attempts to try to solve the inventory crisis through demand-side government measures, such as trying to peg mortgage rates at 4.5 per cent by fiat, are a cushion, at best.

What we probably need is a supply-side resolution, either creating regional land banks to ring-fence the inventory or a moratorium on new housing starts to prevent further corrosion in residential real estate values. Supply-demand divergences are likely to persist through 2009, in our view, and will require even further contraction in construction activity before balance is restored in the real estate market."

Yet another confirmation of what people have been saying all along... this crisis is rooted in real estate, and only when real estate values normalize consumer confidence will return and the economy will start to grow at a normal rate.

Short Treasuries & Thoughts On Previous Posting

They're going to drop harder than Milli Vanilli's career. It's not a matter of if, it's a matter of when. The only caveat is if we experience sustained deflation. I doubt this will happen with helicopter Ben at the helm. This article provides the info.

Also, I was wrong a month ago on two counts.

One, I was wrong that oil would fall to $40. It actually fell below that amount.

Two, I was wrong when I wrote that the market rally above 8,000 would be temporary. It seems to be stable for the time, and based on the huge amount of money flowing into Treasuries, it may actually be undervalued despite the CAPE figures. I wonder if CAPE is wrong; that is, if the supply of capital has so increased in the last few decades that the required return on equity has fallen, thus allowing for stable and higher P/E ratios across the board. In this case, a simple mean reversion comparison over the last century would be inaccurate since it would not account for the possibility of a newly higher average P/E.

Ho ho ho!

Undervaluations ahoy!

A cheery article in the FT in anticipation of a year that will be anything but. Here are some good quotes:

"

The most interesting now lie in the corporate bond market. As Mark Kiesel of the bond fund manager Pimco points out, high quality credit spreads are trading at their widest levels for 75 years, while investors this month have been able to put their money into a diversified basket of investment grade corporate bonds yielding 8 per cent compared with an earnings yield on the S&P 500 of 6 per cent or less.

All across the developed world, corporate bond yields appear to be discounting defaults on a scale that defies common sense.

Equities likewise look cheap in big markets in terms of the Q ratio, which measures share prices relative to the replacement cost of net assets, and price earnings multiples. Yet the market will probably have to cope with some spectacular bankruptcies in 2009 and in a more muted capitalist environment the earnings prospect in the developed world looks unexciting.

So while the market will find a floor, any bounce may be tame. The way to make big money in equities will be to identify those companies that will defy the market’s expectation that they will fail."

Also:

"The tank traps next year could be in the government bond markets. With no borrowing taking place in the private sector, governments are being crowded in. Hence low yields on fixed interest debt. When credit markets return to health, this will be very dangerous territory.

If you still feel gloomy, remember that it could be worse. In December 1974 the dividend yield on the FT All-Share index reached 12.7 per cent. Things may be bad, but I don’t think we are going back there."

I don't understand what 'tank traps' are in a financial sense. Nor do I fully understand the meaning/implication of crowding-in. And why that leads to low yields on fixed interest debt (is he talking about treasuries?) and why this will be 'dangerous.'

Jim Cramer's Advice Worse Than A Coin Toss

Hahahah.

Link Here

A sweaty balding man who probably does a dozen rails before the show runs across a room screaming stock tips at the audience, and plays wacky noises to indicate whether a stock should be bought or sold. And millions of people take him seriously. I've always thought it was hilarious (human stupidity tends to be) and I'm glad to see that my thoughts are vindicated.

Commodity Price Outlook

Commodity prices shall return!

The question is, will they begin a consistent upward trend at the beginning, middle, or end of the recovery (once it starts to take hold)? And further, if one wanted to invest in commodities, what would be the best way? Futures contracts? Specific equity indices which are highly correlated with commodity price movements (such as oil companies)?

A question

Suppose in a flash of economic magic, the entire world's population was elevated to the prosperity and standard of living of the average American citizen. Given the earth's limited natural resources, is this level of consumption sustainable in the long term? If not, what can be done about it? After this economic speed bump we are experiencing, which may last anywhere from 1-3 more years (though possibly less) world economic growth will undoubtedly return to its long-term trend of 4-5% per annum. And eventually most of the world WILL be living like the American consumer of today (while the American consumer of today will have an even greater standard of living).

Mark to Market

In an efficient, rational market where asset prices are set according to their likely future inflows discounted to the present at a realistic discount rate, marking to market is a great idea. Having written that, you probably get the jist of what I'm about to say next.

Markets go through periods of terrible inefficiency for indeterminable amounts of time. For example, banks (which rely on positive balance sheet capital to stay solvent) may experience such dramatic, irrational writedowns in the values of their assets (loans for example) that they could potentially be shut down, even though those loans will eventually be paid in full and the primary reason for their dramatic loss of value is irrational fear. In this instance, mark-to-market accounting is a terrible idea and may even cause nasty feedback loops, to the point where what began as an irrational selloff of a financial institution might become rational as other actors lose confidence and stop transacting with the institution. When that happens, the company is doomed, unless uncle Hank steps in with billions of dollars in bailout cash.

[example of S&L bailout and eventual loan repayment]

Short Now

Going out to dinner... brief thought:

1000 point jump in 2 days? With a plethora of bad economic news still on the way? Give me a break. Now is the time to short the market. My instincts tell me it's going down.

Oil at $40?

Yet another predictive story by the FT . National oil companies expect oil to fall to $40/barrel. Personally I don't think they will go that low, although it's certainly a possibility. This prediction reminds me of the summer, when Goldman Sachs predicted $200/barrel oil and OPEC gave even higher forecasts.