“You Call This Capitulation?” (Rosenberg)

Thursday, August 26th, 2010

GOLD GLITTERS

A contact of mine was kind enough to send me a copy of a speech that Ben Bernanke delivered on Japanese monetary policy back when he was still teaching economics at Princeton — A Case of Self-Induced Paralysis. Imagine that he gave this speech 11 years ago, and everything he laments in his speech is part and parcel of the U.S. macro and market backdrop today.

In any event, without getting too critical, this is the earliest piece we can find — three years ahead of his famous “What If” speech on November 22, 2002. What really caught our eye — on the same day that gold prices rose another $10 an ounce — was the section on “How to Get Out of a Liquidity Trap”, which we are clearly in considering that record-low mortgage rates have not stopped home sales from cratering to record-low levels. In particular, the subsection that contains one of the solutions to a deflationary debt deleveraging cycle, which is what he was advocating for Japan back then: “Depreciation of the Yen”. Indeed, instead of depreciating, the yen has strengthened 15% since Mr. Bernanke gave that speech, and look where Japan is today. So, it would go without saying that embarking on investment strategies that are inversely correlated with the greenback would seem to make good sense, and the gold price would certainly fit that bill (we should add silver into that mix as well).

YOU CALL THIS CAPITULATION?

Short interest on the Nasdaq down 1.6% in the first week of August?

The Rasmussen investor confidence index at 80.4? Call us when it hits 50, which in the past was a “classic” washout level.

Investors Intelligence did show the bull share declining further this past week, to 33.3% from 36.7%. But the bear share barely budged and is still lower than the bull share at 31.2%. Are we supposed to believe that at the market lows, there will still be more bulls than bears out there? Hardly. At true lows, the bulls are hiding under table screaming “uncle!”.

Yes, Market Vane equity sentiment is down to 46, but in truth, this metric is usually in a 20-30% range when the market correction ends. We are waiting patiently.

As for bonds, well, Market Vane sentiment is 73%. Now what is so bubbly about that. Call us on extreme positive sentiment when this measure of excessive bullishness is closer to 90%, and we’ll be in the correction camp hopefully by the time this happens.

In any event, the extent of the denial over U.S. double-dip risks is unbelievable. These are quotes from economists and strategists in yesterday’s print media — and just a select list at that for there was just so much surreal commentary:

“I’d be shocked if you don’t make a lot money in U.S. stocks over the next decade.”

“If yields rise, then 30-year bonds will suffer.”

“It won’t be a double-dip recession but it might feel like it.”

“There is a global perception that we are not necessarily going into a Japan-type scenario, there is a recognition of a slow recovery.”

“People shouldn’t panic.”

At market lows, the recession rhetoric becomes more intense and indeed it’s when people do panic that the best buying opportunities generally occur.

Copyright (c) 2010 Gluskin Sheff

Tags: Bear Share, Capitulation, Confidence Index, Gold, Gold Glitters, Gold Price, Gold Prices, Good Sense, Greenback, Investment Strategies, Investor Confidence, Investors Intelligence, Japanese Monetary Policy, Liquidity Trap, Low Mortgage, Lows, Mortgage Rates, Nasdaq, Ows, Short Interest, Silver, Teaching Economics
Posted in Gold, Markets, Silver | Comments Off

Rosenberg: “Bazooka Bust” and Gold Glitters

Thursday, May 13th, 2010

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This article is a guest contribution from David Rosenberg, Chief Market Economist, Gluskin Sheff, “Breakfast with Dave”, May 12, 2010.

Bazooka Bust

It was almost comical to read this headline yesterday on page 2 of the FT — Blast of Relief as Bazooka Finds its Target. The word “bazooka”, in this context, was coined by former Treasury Secretary Hank Paulson back on July 15, 2008 to describe his weaponry to safeguard Fannie and Freddie. The stock market rallied that day by over 1%, to 1,215 on the S&P 500, and the short-covering rally took the index above 1,300 by early August. Little did anyone know that we had almost 50% to go on the downside before the interim lows were turned in. Beware of bazookas; they don’t always work.

Speaking of the GSEs, it really is so encouraging to see that a week after Freddie went cap-in-hand to the Treasury for a $10.6 billion cash infusion, Fannie had to go begging for $8.4 billion to cover its burgeoning losses. These two wards of the state have now drained $148bln of aid out of taxpayer pocketbooks since the mid-2008 bailout (the size of the entire deficit before the recession began).

And what a housing mess it still is — Fannie reported that its delinquency rate still rose to 5.47% in Q1 from 5.38% the quarter before. What is happening now is that a growing number of people who can in fact pay their mortgage have stopped making their payments out of “anger” — according to a disturbing article that showed up on page A4 of yesterday’s WSJ (Emotion Drives Many Defaults).

Why it’s disturbing is that it cites research showing that 12% of mortgage defaults are now “strategic” and that somehow this is now okay on our increasingly hedonistic society. In fact, a law professor is quoted as lamenting why people are “throwing their money away on a home in which they may never have equity.” Wow. Look how far we have progressed. We used to be told “why throw your money away on rent? Why don’t you own?” Now it’s “why throw your money away on a house?” Maybe because you signed a contract — now why should that matter.

You really can’t make this stuff up.

Gold Glitters

In the aftermath of the Lehman collapse, gold faltered as there was a huge margin call everywhere and investors seeking liquidity sold off their winners. The secular bull market for bullion did not end at the time, no long-term trendline was violated, and gold did rise in non-U.S. dollars and far outperformed other currencies. But what happened during this recent round of intense European-led volatility and financial market weakness was that gold rallied even in U.S. dollar terms, which is significant seeing as there were large-scale safe-haven inflows into greenbacks. So this time, gold has managed to hit new highs in all currencies, and gold rallied even with the overall commodity complex slipping noticeably over the past few weeks.

This is a sign. Of what, you may ask? That gold is no longer trading just as part of the resource sector but is now taking on the characteristics of a currency. While the U.S. dollar has gained ground since late last year, there is no doubt that an Administration that has a stated policy of doubling exports in the next five years to “support” two million jobs absolutely craves a depreciating greenback.

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Meanwhile, a new socialist government in Japan wants a weaker yen. Sterling has only one way to go in an environment of heightened political uncertainty and a balance sheet that is at least as extended as Greece. And the ECB just gave notice with its agreement to buy sovereign and corporate debt that it is willing to distort the pricing of risk in the bond market for the greater good of helping profligate countries to avoid either defaulting or certainly help them finance their obligations at a subsidized cost. The Bundesbank, this is not.

So gold is no government’s liability and the shape and shift in its supply curve is the shape would seem to be a little easier to make out than fiat currency. We may end up being overly conservative on our peak gold price forecast of $3,000 an ounce.

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Copyright (c) 2010 Gluskin Sheff

Tags: Bailout, Bazooka, BMO, Cap In Hand, Cash Infusion, Chief Market, David Rosenberg, Delinquency Rate, Downside, Early August, Gold, Gold Bullion, Gold Glitters, Gses, Hedonistic Society, Law Professor, Lows, Market Economist, Mortgage Defaults, Page A4, Pocketbooks, Target, Treasury Secretary, Wards, Weaponry, Wsj
Posted in Bonds, Gold, Markets, US Stocks | Comments Off