Morning Market Thoughts — From Yesterday Morning
Yesterday I popped into the forum and discovered a few squabbles that needed to be addressed. Took care of them gracefully, and then moved into a post on the precious metal trade. I’ll get to that in a minute, but first, those who are intellectually curious might find the time to read John Mauldin’s work, which I find quite informative, though it tends to be a bit long-winded for me at times. (Take that with a grain of salt — my nightly videos can sometimes hit 30 minutes, so I’m the last guy to take someone to task for being long-winded).“Europe Is a Minefield” by John Mauldin: http://www.mauldineconomics.com/frontlinethoughts/europe-is-a-minefield
He discusses a lot of aspects of Brexit of which I was unaware. When you know that you don’t know much, it’s best to say very little for fear of alerting others that you don’t know what you are talking about. John Mauldin knows what he’s talking about, so I just read with a happy smile on my face, and a strong cup of coffee in my hand.
PRECIOUS METALS
I think that the precious metals, as noted in the weekend update, and in the weekend forum where I spent a bit of time reading and replying, are likely to go much much higher. The very fact that the EU will be on uneven, uncertain ground for YEARS is why the equities market is likely to go higher. Take note that this will be a complex deal that’ll take a long long time to complete. The EU bureaucrats who see the trend and realize that their power is slipping away aren’t going to slither back under the rocks from which they slithered. No, they’re going to be clinging to their power like a drunk clings to his last bear bottle when visiting a local bar in Palm Desert as he prepares to check into the Betty Ford Clinic to battle his alcholoism. No matter how strong the bartended, athe drunk is not going to give up that “last call” bottle without gettng every drop out of it first.
The Eurocrats are probabaly drunk right now, ranting about making the UK pay for their sin of leaving their nice little party. They feel that they have to drive a very hard bargain because, if they don’t, other nations will have similar votes and leave the party. So much for it being a great party. If it’s so awesome to be a member of the EU, then why does everyone want to get out. (And to the embarrassing idiot who wrote an article at Vox.com about how the US made a mistake in leaving Britain because we’re so worthless and destructive to world peace and harmony, I will ask a simple question that may or may not make sense to you, depending on how much high quality dope you have ingested with likeminded friends as you wait for the next Occupy Wall Street smoke-in. Here is your answer: If the US isn’t so great, why are millions risking their lives to get in here? Did they forget their coat and hat at the party and are just trying to get them back before they return to their nice little country?)
But this is important pertinent quote: “The market always climbs a wall of worry.” If that’s true (and it is), then the climbers should do just fine. But proper risk management (by either position size, or puts) is the climber’s equivalent to “On belay!”
So the uncertainty that enables equities to go higher is the same dynamic that makes it highly likely (nothing is guaranteed) that precious metals will move higher. (I’ve been a bit remiss in neglecting to emphasize silver. I’ve mentioned $SLV and $SLW in many recent strategy sessions, but haven’t highlighted the fact that it is outperforming gold. My bad, and thanks to those traders who have pointed this out to me. We will all profit from it).
Central banks and sovereign nations are hoarding gold. Even if demand remained static, the resultant decrease in supply brings a concomitant increase in price. But demand is not remaining static. It is increasing. Smart money sees what is happening throughout the global economy, and also must have a longer term approach than most retail traders/investors. And smart money looks at the EU as the source of a multi-year period of uncertainty. And that uncertainty is prompting a bit of a “flight to safety”, which extends much further than buying Consumer Staples and Utilities.
Smart money (read: Large investors…who are only large because they are smart) is buying the precious metals. And they are not buying them as a “trade.” They are buying them as assets to hedge against their equity portfolios, which are extremely vulnerable right now. Their accumulation, combined with the massive accumulation of gold by central banks and sovereign nations, is cutting into the supply of gold for further accumulation by investors. So it’s turning into a buying spree — a feedback loop where rising prices bring out more demand, and more demand creates even higher prices. What’s on the back of your shampoo bottle? “Lather, rinse. repeat.”
And what do you think this is doing to the short sellers who are betting against the precious metal rally? Somehow, saying “oops” doesn’t quite cover the magnitude of a really disastrous trade. They’ll cover.
There is also an argument that gold/silver are being bought as a hedge against the inevitable inflation that results from ZIRP. That’s the textbook theory, but there is no evidence of inflation on the horizon, so that argument really doesn’t hold water. I’d argue that deflation is the bigger risk.
If the Fed were truly “data dependent”, which is something you hear parroted virtually every day on CNBC by Michael Santoli and others, the ZIRP would have been reversed long ago because the data reveals that it is no longer working. In fact, it’s having the opposite effect. But the Fed (and indeed, all the central banks on this particular planet) never assumes that it is wrong. The term “wrong” is not in their vernacular, only “more of the same”. When you catch a cold, Robitussin works wonders. But when you break your arm, all the Robitussin in the world won’t help. You can chug it, or even rub it on your arm. But it won’t help. And if you leave the bottle open, you’ll just attract ants.
Central banks are using Robitussin for a global compound fracture, but to put away the bottle is to admit that you are wrong — and that will never happen. Never!
I contend that Central banks are NOT data dependent. They would like to be; and they say they are, but I’d hate to be a fly on the wall in any of those meetings. First, I’d get stuck in all the Robitussin. And if I could get out of the conference room, I’d probably start building a bomb shelter. Their dependency on data equals their dependency on “hope and change,” as in, “We hope the data changes.” They aren’t looking at what the data is truly revealing; they are just hoping that it reveals something different than what is obvious to everyone else: that ZIRP actually encourages money hoarding, not spending. Nobody in the financial media talks about this hoarding, but it is real. And it is being overlooked by those in power.
The central banks are not data dependant. They are data fixated; data frozen. They can see only ONE action to take. No imagination; no thinking outside the box; no calling in experts with differing views that might help them out of the lobster trap thay have wandered into. No. They do none of those things. Instead, they continue to go down the road embarked on by Ben Bernanke and never ever question whether that road is actually going to take them to their destination. Frankly, they’ve thrown the map out the window. They know ONLY how to stay on the road. They are playing Radar Love on the radio and drive all night long until their hands get wet on the wheel. Always moving on the same road; never even glancing at crossing roads, turnaround stops, and dead end signs. They keep waiting for that specific data that will tell them that they are on the right road.
If that is “data dependent”, then it’s a great road — as long as they ultimately find the data they are looking for. But if they do not find the data they are looking for on that road, they will never even wonder whether they are actually snipe hunting and the joke is on them. This is a serious game, and I doubt the Fed even understands it. If so, they are keeping very tight lips on it.
What you need to know: There is no way that any central bank on the planet is going to raise rates anytime soon. And “soon” extends a long, long time. As someone said (I forget who — I’ve been doing a lot of reading), quantitative easing only works if ony one bank is doing it. If more do it, it’s a disaster. In such an environment, you want to avoid being the FIRST one to start on a trend to normalize rates. So no one is going to do this
Smart money sees this and invests accordingly. Not-so-smart money believes the headlines and continues to confuse the meaning of competency and power when considering the actions of central banks.
All of these reasons are why, in my admittedly fallible opinion, gold and silver are going much higher. It’s an “asset allocation thing.” It is a hedge against the future. The nice thing is that we can make money on it now. We can trade along with the big boys because we can simply focus on the charts, and turn the TV volume down. Do that during times of uncertainty, and you’d be amazed at how well you do in your trading decisions.
Dan
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