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June 15, 2006: Everybody! Back in the Pool!

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  • June 15, 2006: Everybody! Back in the Pool!

    Global Stocks Rebound as Commodity Prices Advance
    June 15, 2006 (Bloomberg)

    "Global stocks extended their rebound, rising the most since 2003 as oil and metal prices climbed and reports from China and the U.S. showed gains in manufacturing.

    "Emerging markets, led by India, Colombia and Russia, posted their largest increase in three weeks. BHP Billiton and Anglo American Plc, the world's biggest mining companies, led the advance in Europe as gold prices snapped a seven-day slump and copper continued its advance from a seven-week low."

    Confusion reigns. This crashing up and down of global stock and commodity markets reminds me of the period of ambivalence before the NASDAQ correction in 2000, before reality set in and the NASDAQ was down for the count.

    What's peculiar in the current case is the positive correlation of ambivalence between usually negatively correlated asset classes. It's as if the markets can't decide where the risk is at. Inflation or credit default?

    The NASDAQ bubble was the result of a fixation by a few on the relatively minor fiction of a 1990s New Era, whereas the simultaneous bubbles we've seen in everything from hedge funds*, to bonds, to stocks, to real estate, to commodities since late 2002 are the result of a much larger fiction with many, many more participants, most of them unwitting. Hundreds of millions are motivated to believe that a global central banking price fixing scheme, to use Jim Grant's term, can ever work long term. Does any one person or group of government bureaucrats really "know" what the "right" interest rate is at any given time? What the "right" level of inflation is? What the "right" level of GDP growth is? Politically, "right" GDP growth is always positive, and if manipulating interest rates and the money supply achieves that objective in the short term, then the agreed upon interest rates and inflation levels must be "right."

    Sometimes, the economy resists these efforts, delivering both slowing economic growth, including a steady decline in jobs growth, and steadily rising inflation: stagflation. Some are optimistic that the current instance of stagflation will be short lived, but as high energy prices for the past several years led to current circumstances and they are likely to rise further for the foreseeable future as cheap energy supplies are depleted, the evidence is against a forecast of short term stagflation. Keep in mind that net increase in jobs since the early 2001 recession is about 2 million, and 2.82 million of all new jobs created since 2001 were created by
    government spending, either directly (increase in government payrolls) or indirectly (government contracts to private industry).

    Occasionally even the masters of the game lose the faith and leave themselves a bit of wiggle room should the price fixing scheme not turn out as hoped. Near the start of the Asia currency crisis, Greenspan, who must have had access to better and more timely information about events than you or I, had the following exchange with Senator Paul Sarbanes at a Senate Committee Hearing, September 1997, with respect to Greenspan's written report to the Committee before the hearing:

    Sarbanes: "Do you actually mean that the Fed 'should cease to function unless affirmatively continued?'”

    Greenspan: “That is correct, sir.”

    Meaning the Fed's continued existence should be forced to a vote by Congress versus continuing to operate in perpetuity as it has since 1913. This written suggestion to a congressional committee comes from not only the guy running the Fed but from a guy who in the estimation of most had been running it well for over a decade. Continuing...

    Sarbanes: “Now my next question is, is it your intention that the report of this hearing should be that Greenspan recommends 'a return to the gold standard?'”

    Greenspan: “I’ve been recommending that for years, there’s nothing new about that…. It would probably mean there is only one vote in the Federal Open Market Committee for that, but it is mine.”

    Who can blame him? Certainly looked like the game was up at the time. The Asian Currency Crisis that started in July of that year must have looked like a bottomless, deep, dark hole to the Fed by September. A month later it looked that way to the markets: on October 27, 1997, the Dow Jones industrial plunged 554-points, or 7.2% in response to the growing crisis. But a deal among global central banks was worked out, liquidity was injected and the end game crisis was once again averted.

    The dogs of deflation barked but the asset inflation caravan moved on. Two years later the markets were hitting new highs.

    Back to our current time. My June 9 Quick Comment stated, "I expect silver to correct to $9 but may go as low as $8, gold to correct to $590 but may go as low as $550, and platinum to correct to $1100 but may go as low as $990." posted a Community Poll #20 June 13 asking members when (not if) gold hits $550, what to do?

    The next day, June 14th, just happened to be the day gold hit a low of $550 in intra-day trading before heading back up again.

    Lucky guess.

    With gold back up to $575 today, the community with 86% voting in favor of either staying in or backing up the truck appears to have made a good call on the $550 lucky guess.

    It's helpful when watching the markets during turbulent periods to think in terms of processes versus events. It's easy to get caught up in the drama, but what matters is the structure of things. Trends can run counter the structure for a time, even for years, but ultimately the structure determines the outcome. This should be intuitive. What's important is that you understand the structure.


    Eric Janszen

    * Most so-called "hedge funds" today are no such thing. A dozen years ago, no one got away with calling a fund a "hedge fund" if it was not long/short. Today, many if not most so-called "hedge funds" are long. In something. Usually, the same thing, following each other around like pension funds from venture capital to private equity to commercial real estate... whatever the "professional" herd has decided is "the asset class" de jour, destined to rise. And as they command vast funds, their group behavior makes it so, at least until the same bet they're all making turns against them.

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    Last edited by FRED; 06-23-06, 03:21 PM.