|| Janszen's Quick Comment
20 Commodites Bubble or Not?
21 Ben's June 2006 Rate Hike Dilemma
22 Ode to the Short Seller
23 The Wizard of Oz says he's sorry?
24 Easy come, easy go
25 iTulip.com Poll Predicts Summer Stock Market Rout
26 John Serrapere on Peak Risk
2 House Cooling, Inflation Heating
6 High taxes, bird flu and tiny cars
9 All Risk Assets Down
13 Everybody! Outa the Pool!
15 Everybody! Back in the Pool!
19 This might be more amusing if it were not real
All Subsequent Quick Comments here...
June 19, 2006: This might be more amusing if it were not real
An interview of a U.S. Congressman by a comedian is supposed to be funny, but not this way. Congressman Westmoreland is not trying to be funny. Watch it and you'll see what I mean. It's like a reverse Ali G. Rather than the comedian asking crazy questions and the interviewee attempting straight answers, Colbert delivers straight questions and gets nutty answers.
June 15, 2006: Mr. Market Says: "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?
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."
iTulip.com 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.
With gold back up to $575 today, the iTulip.com 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.
* 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.
June 13, 2006: Mr. Market Says: "Everybody! Outa the Pool!"
Another down day. The market once again tried to rally, but no one wants to be left holding the bag. I half expected at least one major rally out of this correction that started in mid May but the fix is in.
It's time to call the official resumption of the bear market March 12, 2006, the day the updated Ka-Poom theory was published here. By resumption of the bear I mean that the bear market in equities that started April 5, 2000 as announced here in A Bear Market is Born April 5, 2000. It will run until the Fed cries "Uncle" and flushes The System with liquidity again. However, we're in a different part of the Bubble Cycle now than in April 2000. We are at the beginning the Ka phase of Ka-Poom.
The revised Ka-Poom theory assumes that the Fed holds off until after at least the congressional elections if not the presidential elections before sending Anti-inflation King Kong after Staglation Godzilla, but it appears as though Ben's not a Bushie after all, or maybe the crew over at the Fed figures Bush and the entire administration are political toast anyway, or maybe when Greenspan went for his visit last October to the two nations that purchased the lion's share of U.S. financial assets that year to keep the U.S. afloat -- China and Japan -- took a strong position, as in: "Cut off the money and get rid of these losers or we'll do it for you." Whatever the reason, looks like the Fed's pulled the plug along with a dozen other global central banks, no one's going to be happy with the results and Bush, Co. will take the blame. With their hideous spending habits, that's probably fair. Speculation about China and Japan aside, if I were Ben I'd be flushing that crew out of the White House and the House and Senate, too, and in a hurry, knowing if I went along with their policies, when they inevitably failed they'd throw me under the bus ala Snow, O'Neal, Lindsey or anyone else who's ever uttered a reasonable fiscal truth around the White House that conflicted with political ideology.
As usual, the mainstream financial press have it wrong. This piece today today is typical: "Wall Street resumed its retreat with another session of steep losses Tuesday as declines in oil and gold prices did little to calm anxiety over inflation. The selloff erased the Dow Jones industrial average's gains so far in 2006."
We're supposed to believe that stock market investors are worried about inflation because evidence of inflation is supposed to foretell more Fed tightening and that's supposed to be bad for stocks because that means the economy is going to slow. "...declines in oil and gold prices did little to calm anxiety over inflation."
Tip, guys: this is not your grandfather's economy. This is the Finance-Based Economy. Cut the flow of money, it implodes. Keep the money flowing, it explodes.
Looking out the window, past the rhododendrons in full bloom, at the woods behind the house, the results of nature's liquidity -- been raining cats and dogs on and off for weeks -- are apparent. The harsh, stark dry greys and browns of winter are gone. The flora wrap the house in a warm, reassuring lush green.
Meanwhile, out in the "real" world, central banks continue to run a coordinated extraction of liquidity of a different kind -- cheap money -- resulting in another day of volatility when the drying up of "green" forces money funds' roots to search desperately for deeper, safer soil. A blast of hot, dry dirt, like the sand that blows across the land in Iraq in summer, eminates from the Fed, the Bank of Japan and the ECB. It settles over global markets like a fine patina of shit.
So now we see a rush to quality and safety at the start of the "Ka" portion of the Ka-Poom: interest rates decline, bonds and the dollar rise; real estate, stocks and commodities -- all things leveraged -- fall.
Emerging markets are down, attended by the traditional flight to the dollar. For now, precious metals are seen as risky by speculators, as a good portion of the price increase over the past year was driven by the same speculative fever that drove up the prices of all assets, including real estate.
Down the street and around the neighborhood the zeal to cash out of the waning asset bubbles can be seen in a dozen signs -- literally -- of the desire to sell over the desire to buy.
As John Serrapere wrote to us today, "The Current Stock Sell Off Is A Consequence of Pop in the Low Quality Equity Bubble. Since May 10th, assets have been rotating from low to high quality stocks. In less than a month, EEM (MSCI Emerging Markets) and IJR (S&P 600 Small-Cap) have plunged 19.2% and 9.4%, while SPY (Spiders) and BQY (53% domestic + 47% foreign issues) have declined 5.1% and 3.6% respectively."
You can't have an all-assets-up condition with everyone making money during the reflation stage of the credit cycle without an all-assets-down phase as liquidity is withdrawn. We warned that precious metals were due to sell off as the followers lose their nerve and follow the late-comers out the exits.
Quoting iTulip AntiSpin from May 19: "Gold is up over 50% this year and dropped 3.7% today. If you're bullish, it's a long awaited "buy the dips" opportunity after a relentless ride in a bull market that started in 2001. If you're bearish, it's the end of a gold market bubble that started in 2005. Ka-Poom Theory says there will be a concerted defense of the dollar that will push the dollar price of commodities down, during which a decline in gold to under $600 is not unlikely. No one's smart enough to trade these but I have heard the 'it's going down $200' arguments on every decline since I bought at $270 in 2001, and still believe that when the US dollar is finally marked to market, gold is likely to be priced between $2500 and $3000... awaiting new evidence that suggest otherwise."
Again, no change to the forecast. During this part of this part of the "Ka" phase, 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, depending on how far the global central banking system takes its campaign to show How Serious We are About the Speculators before bringing in the helicopters.
C'mon, fellas. Our "Finance-Based Economy (PDF)"-- to use Bill Gross's term -- is run by speculators. Nationally, we get the Frankenstein Economy, and that's how it looks to the average Joe trying to make ends meet in the Globalogni Economy. But let's face it, the world now runs on the expectation of speculators that all central banks will keep issuing new bonds assured that someone, worst case another central bank, will buy them. Until the cows come home.
In the end, someone will break ranks (my money's on the French) and then it will be the central banks that race for the exits. Then we have "Poom" and you'll be glad you weren't shaken by recent declines in commodities prices.
June 6, 2006: Richmond, BC booms despite high taxes and expensive gasoline - Tiny cars - Bird flu chicken tenders or mad cow hamburgers?
So my wife and I are back from visiting family for a week in Richmond, British Columbia, a suburb of Vancouver. In Richmond, I feel like I'm in a suburb of Taipei. Heading out for dinner each night or the mall during the day, the teaming crowd is mostly Chinese, like my wife and in-laws, with me often the only caucasian in sight. The Chinese I know love to eat and shop. The food in Richmond is off the charts, and with the Canadian dollar now 90 cents to the U.S. dollar, most imports are cheap and the shopping frenzied. Income and sales taxes are high but that doesn't seem to slow down the shoppers. Gasoline costs US$4.25 per gallon. Here in the States, gasoline over four bucks is supposed to spell The End of Civilization as We Know It, but there's no shortage of cars on the road in BC. The average car is smaller than in the U.S. yet there are plenty of BMW SUVs and Mercedes sports cars around for those who care to pay to play.
One mall gallery is filled with a display of Smart Cars. The 40HP diesel two seater is sculpted in brightly colored plastic like a four wheeled Vespa. Made by Mercedes and not yet sold in the U.S., it's surprisingly comfortable inside with room for maybe five grocery bags in the back and rated at more than 60 MPG. Mercedes markets the micro car as an eco-cult fashion accessory for young urban women. At US$17,000 to $25,000, the car carries a hefty trendiness premium over a more visually mundane, practical and modestly less fuel efficient four seater like the US$21,500 Honda Civic. Smart Cars may come to the U.S. in 2007, according to the sales woman I spoke to. Here in the U.S. you might buy one to put in the back of the SUV, to use to make a run to the service station if you get a flat tire, or as a kind of pod that can be undocked from the Mother Ship in, say, Brookline, Mass. to explore for tiny parking spaces around Fenway Park before a Red Sox game.
A flood of immigrants from Hong Kong, Taiwan and the PRC have transformed Richmond from a rural farming community into a mid-sized city in ten years. Land use zoning remains hap hazard. A walk around my in-laws' neighborhood reveals a $2M McMansion that abuts a vacant junk filled lot next to a wildlife refuge beside a peeling house with a half dozen rusty dump trucks parked on a dirt driveway bookended by another million dollar plus McMansion. Closer to the main strip, cranes fill the sky as dozens of condo buildings erupt all over the place. The Hong Kong Chinese live in the houses and condos closest to the airport, oblivious to the jets screaming overhead. If you ever flew in and out of the Hong Kong airport at Kai Tak, where from your window seat you could literally see the whites of eyes of apartment dwellers as they hung up their laundry to dry on the balcony, you'd know why the folks from Hong Kong might feel so at home around airplanes. The new Hong Kong airport was re-located to Chek Lap Kok. When I go to Hong Kong, I don't miss the exciting touch-down and slam-on-the-brakes landings.
With nearly every block a construction site, the real estate market appears to be booming. Single family home "For Sale" signs are rare. I take a quick look at the local real estate market online forums to see what's going on behind the scenes. In the real estate section of the Vancouver Craig's List I spot one entertaining recent item posted by a happy-go-lucky housing bubble chaser who dodged the pain of SFO dot com crash bullet by deftly shifting to flipping properties.
sfo x-dot commer real estate agent made $500k < - > 2006-05-19 09:49:44
the last 3 years just by flipping properties, plus about 150k of commission....now, my strategy is going to lesser communities, like houston texas, vancouver Oregon, portland and vancouver, BC... Right now, the US stock market is sliding, US housing is not doing as well..i'm debating about either shipping my half million into the Chinese Yuan or the Canadian dollars via invest in their housing market. A decpreciating dollars mean appreciating chinese yuan or a canadian dollars.. don't be bitter about it, you could be like me. Just think outside the box and don't be afraid to try things out. I'm glad i'm not in the tech business anymore...My boy work at Yahoo is so jealous of me, now, because clearly i'm outpacing the dude in terms of wealthy....I have to Thank Peoplesoft for laying off my ass a few years back. Now, I have the financial freedom that i would never have if i continue to be somebody empolyee and making my employer rich...
Booms are fun while they last.
For vacation reading, I relaxed with "America's Forgotten Pandemic: The Epic Story of the Deadliest Plague in History" by John M. Barry. It's long winded and repetitious, but a few chapters make it worth wading through. To sum up, between 20 and 40 million people died world-wide, the scientific community didn't understand what was causing the pandemic and local governments and the federal government lied about what little was known because of an unwillingness to divert resources from the relentless drive to prepare the U.S. to enter WWI. The result was hundreds of thousands of unnecessary deaths. Barry concludes that a pandemic is going to happen again but no one knows when.
I bought the book for research after hearing a panel of VCs at a Churchill Club event in San Francisco a few months ago wax apocalyptic on bird flu. A month later on a show on the Boston NPR station, virology experts from several leading Boston hospitals were interviewed on a show about a potential influenza pandemic. All the experts say more or less the same thing: by the time human-to-human transmission of a deadly influenza virus gets reported, a global pandemic similar to 1918 is likely already in play.
The good news: More honest and immediate communication of the risks today (except here), a better understanding of what to do and more effective treatments. The bad news: Relatively poor public awareness, still no cure or vaccines, modern transportation will spread the virus more quickly and our global just-in-time supply chain for food and energy raises the risk of social breakdown. Sounds alarmist until you read the sections of the book where it's explained that for several days before you feel any symptoms you are contagious, that the virus can live for days in lethal quantities on a doorknob and healthy 25 year old victims can feel fine in the morning and die a very unpleasant death in the evening.
The most salient question to the experts on the NPR show was, "What are you doing personally to prepare?" They unanimously answered that they'd already stocked their homes with several weeks worth of supplies. "Stay home," was the consistent refrain. Fair enough, but who's going to fill in for Homer to watch the meters at the local nuke if Homer's hunkered down at home with Marge and the kids?
On my flight home I happened to sit next to a bio-chemist professor on his way to Cambridge to give a lecture at Harvard today on a related topic. I asked him if the Boston medical crowd sounded as survivalist to him as to me. He responded that his family also had a few weeks' supply of stuff. A national medical community survivalist cult? I'll follow-up with details in a full commentary later this month.
June 2, 2006: House Cooling, Inflation Heating
After a week, with 402 votes in, 80% of iTulip.com visitors report that their local housing market is either slow or dead while 20% report brisk sales. iTulip.com visitors are distributed roughly 50/50 suburban and metropolitan areas, located 70% US, 20% EMEA and 10% Asia.
Even if these results are far from statistically accurate, fair to say that the experience of our community is that the global housing market has stopped boiling and has "cooled," as they say in the real estate section of your local newspaper.
Where's this all leading? John Serrapere sent us the following note today:
Is a Stagflation Bear Likely?
June 2, 2006, John Serrapere
"Remove lower energy prices from your list of reasons why we will soon get lower all-items inflation.
"Fed Governor Arthur Burns made the mistake of ignoring food and energy prices during the late 1960s even as he was the first Fed Chief to focus on low core inflation for guidance on Fed policy. A focus on core inflation is reasonable if and only if higher energy and food prices are not persistent. Persistently high energy costs are more likely than primary demand to become the key driver of higher prices over time. Failing to observe this created Mr. Burn's well grounded legacy as The Father of America's Great 1970s Inflation.
"The case for lower crude for years on end now has been that high prices will dampen demand while supplies increase. Instead, this week reports show the strongest demand for oil since December 2005. How much faith should we place upon core inflation as a reliable predictor of future inflation?
"This week the Department of Energy reported an acceleration in gasoline demand at 9.3 million barrels a day, which is a YOY 0.9% increase. Distillate demand was also strong up 1.0% YOY and jet fuel demand rebounded to 8.7% over the past 12-months. Add in the news that electricity demand was 4% higher in 2005 than in 2004, and we can see the fallacy in the Fed's current reliance upon core CPI under conditions of persistently higher energy costs although a great predictor of future inflation at other times.
"China is also consuming more resources then expected. Last month, China said that over the last few years (they are not sure), the Chinese government understated their GDP by 11%, which causes us to raise forecasts for global energy and commodities demand.
"Each day there is more evidence of Stagflation. We are in a world where resources relative to demand will remain strong even while economies slow. The market is in the process of repricing stagflation, inflation, and all "ation" risks. This morning the US Dollar broke its $84 support level while gold and oil have resumed their rallies, Treasury note yields declines, stocks headed down and look to test their 200 day moving averages.
"Soon credit spreads will widen and liquidity we shrink even more. If you have not noticed, the Yen carry-trade died and global money supply has fallen below nominal GDP. If you think that extremely low default rates will support tight spreads, recall that our nation's all-time low default rate was during the second quarter of 1997, which was on the eve of our worst default cycle since the 1930s. High default rates are symptoms of economic malaise, not its cause. During these periods, quality credits and high quality stocks bests low quality securities, which reverses the trends seen since December 2002. Stocks smell The Devil.
"I define the Stagflation Zone as RGDP below 2.5%, YOY CPI higher than 3.5%, and unemployment greater than 6%. Currently, YOY CPI is already in the Zone and many economist are calling for 2006Q2 RGDP at <2.5%. However, while job growth has weakened significantly over the past three months, the unemployment rate declined in May to 4.6%. It may take awhile but, conditions are ripe. However, wise men ask the right question rather than merely fitting forecasts that support their bias."
As long time prognosticatgors of staglation, John's comments are 100% in line with our expectation. As John says, it's high time to get defensive in stocks.
May 26, 2006: Peak Risk
Today's Guest commetary comes to us from John Serrapere, Investment Analyst & Strategist for Foster Holdings, Inc. Mr. Serrapere has been advising investors since 1986. He currently is the Investment Analyst & Portfolio Strategist for Foster Holdings, Inc., a large Pittsburgh, PA based family office. His firm also consults other investors seeking alternative investment options. Mr. Serrapere was formerly a principal of Rydex Leveraged Hedges, LLC in Rockville, MD where he designed registered and non-registered products.
Mr. Serrapere has published in The Journal of Indexes, Global Financial Data, Corporate Finance Review (Warren Gorham & Lamont, NY, NY), The Retirement Planning Journal (Commerce Clearing House, Chicago, IL) and has presented for Information Management Network (NY, NY).
This is likely the most important analysis that iTulip.com has published in its seven year history.
You may be familiar with the concept of Peak Oil, whether or not you agree that the world is close to that point today or in the near future. John has developed a model that has successfully predicted most previous periods of peak credit risk, and they are in fact related to oil prices. As much as the optimists insist that input costs from rising oil prices will not necessarily be transmitted to consumer prices from producer prices, eventually they are and the event is expressed as a sudden increased focus by market participants on credit risk.
Quoting Former Federal Reserve Chairman Paul Volcker’s 2005 speech at Columbia University, “There's been a price to pay for Greenspan's aversion to negative shock therapy, traditionally the Fed's responsibility. The price has not yet been paid in terms of economic growth, nor in the volatility of economic growth. Nor has it been paid (until recently) in terms of a higher or more erratic inflation rate. Instead, the price has been met through a progressive increase in uninsured risk and vulnerability to shocks thanks to a rise in debt.”
Uninsured risk is what our piece on The Financial Markets are Polluted with Risk was all about. Above, John expands on the theme to add the ever important element of timing. The recent phenomenon of widening credit spreads will usher in a resumption of the secular bear market that was initiated in February 2000. Hope you find the details as illuminating as we do.
p.s. You make money by putting money in harm's way. You keep it by not leaving it there too long.
May 25, 2006
iTulip.com Poll Predicts Summer Stock Market Rout
With 452 votes in, the iTulip.com community has decided by a two to one margin that the U.S. stock market is likely to crash this summer. About one tenth as many voted that they expect the market to rise. This wisdom of the community aligns well with the prognostications that we'll deliver in a guest commentary tomorrow that takes a highly analytical approach to the question of where the markets are likely headed and comes to a similar conclusion.
I'll warn you in advance, it's a technical piece:
"It is highly likely that widening credit spreads will usher in a resumption of the secular bear market that was initiated in February 2000. It is my view that the bull seen since October 2002 has been a counter-trend rally driven by extremely low nominal interest rates, negative real rates, lax credit standards, and complacency. All of which fostered excessive liquidity supporting all asset prices, which in turn bred low volatility, which in-turn begets additional mal-investment.
"All assets with high correlations to stock and high yield markets, including most hedge funds will not protect capital from losses. It is widely known that the small but looming possibility of default renders the expected return distribution for financial products containing credit risk to be highly skewed and fat tailed. Campell & Forbes found that asset class returns behaviors are dependent upon the timing and magnitude of their declines."
You get the idea. On the Forum we'll translate the really tough bits into accessible language.
Next week we'll be moving the site to a new hosting company that offers a broader range of products to support new features that we will be adding to the site over time. You will not see many updates to the site next week but can expect us to return to daily updates the week after.
May 24, 2006: Easy come, easy go
Sometimes a disastrous event that someone foresaw gets you. The flood that got New Orleans. The tsunami that got Thailand. The warnings of these impending disasters failed to capture the popular imagination; no political movement grew to press for prevention, no opportunity arose to profit from prevention efforts, no industry developed to reap prevention industry profits. The warnings went unheeded.
Disasters which are precisely forecast with a hard deadline, such as Y2K, tend to capture the popular imagination and create profitable industries to address them. These disasters rarely come to pass either because the risks are purposely overstated by those who profit from prevention efforts or because the prevention efforts themselves worked to avert the disaster.
Lately I've seen several "it's looking like 1987" pieces that we are not posting here because we do not believe 1987 will happen again. The financial system is ready to fight the last war, but rarely the next. While there are similarities between the antecedents of the 1987 crash and conditions today, the 1987 crash was an event unique to its time. It will not happen again, nor will the 1929 crash or Internet Bubble crash happen again, at least not quite the same way. The trigger for the next crisis will come from an unexpected place that appears to be doing well, one harboring risks that market participants have all but forgotten about, such as Japan. The unintended consequences of patterns of risk taking that are generally believed to be reasonable will create conditions for the next chaotic market event.
The clearest indication that financial market risks are high is the ease with which so many have been making so much money on capital, and the ease with which money can be raised to fund everything from buyouts that assume liquidy as far as they eye can see, to Internet start-ups with dubious futures in crowded markets. Friends in the VC and private equity business tell me that money is pouring in to their new funds, with over-subscriptions common. The pressure from investors to place money, while not intense enough to produce the kind of careless investing that happened during the Internet Bubble, is still strong enough to push prices high in currently favored segments, such as so-called Web 2.0 companies, to valuations that make future profitable exits unlikely.
In the short term, these conditions appear favorable for entrepreneurs who getting funded and at good valuations. But when the market turns again they will be left trying to grow their revenues into these valuations while the the economy is slowing and the capital markets are discounting the revenues they do eek out, a double whammy when they go to raise their next round.
When raising funds for Bluesocket in 2002, during the depths of the VC funding depression, I was interviewed on a Boston radio station and asked just how hard it was to raise VC. I told the reporter I was traveling 50% of the time to raise money, had met with over 80 VCs in over a hundred meetings in six months, but added that this was to be expected: raising money is supposed to be hard anyway, and the fact that it was extraordinarily difficult at that time merely reflected the tendency of markets to revert to the mean. When money isn't hard to raise, the market has become distorted by excess capital. When that happens, safe to say it will sooner or later become distorted by a shortage of capital.
We have just been through a period where, in the words of a manager at one of Boston's largest private equity firms, "the debt markets are out of control." What's on the other side? Everyone knows, but no one wants to say. In the words of the Minister of Finance in Japan after one of the largest securities firms in the world went bankrupt in the early 1990s following the collapse of the Japanese bubble economy, "Easy come, easy go."
I asked the private equity guy where the money is after the private equity bubble ends. "Distressed debt," he replied, "but it's 'Tony Saprano' business. Not my thing." Mine, either.
May 23, 2006: The Wizard of Oz says he's sorry?
A reader sent me a note today (thank you) to point out that Bernanke just apologized for the incident of the rumor he inadvertently started that sent markets reeling. Something about "a lapse in judgement by me" with a promise that "in the future" he'll communicate "entirely by formal channels."
The Fed is the Church of Money, far more influential than any other church on this earth. Its Pope can never apologize for his conduct before his disciples; contrition ruins the mystique. On a personal level, I'd recommend to Ben what I'd expect any person at his level of authority to know, best put by Elbert Hubbard: "Never explain. Your friends don't need it and your enemies won't believe you, anyway."
May 22, 2006: Ode to the Short Seller
Two years after the Internet bubble popped, The Boston Globe ran an article in August 2002 that said, "Janszen seems nonchalant about the economic carnage, as if he could have told you it was coming. Actually, he did." Here in Boston, everyone was into tech stocks when the bubble popped, and many rode them all the way down. No one paid much attention to my warnings, and this "I told you so" piece on the front page of the Business section of our local paper years later didn't make me any friends. But then, that wasn't the point. The point was to be in a position later to help them the next time it happened, to earn enough credibility that next time, they'd be ready.
Since re-launch March 15, many who followed the site before are back and I'm thrilled to have them.
Coincidence that two months after iTulip.com re-started, the stock market is headed down? Perhaps. When asked by the press in March why re-start now, I said the time for iTulip.com to return to the scene is at the inflection point of "maximum complacency and risk." Charlie over at the Bubble 2.0 Blogspot stated the implications of the timing with the single, concise comment: "Uh-oh."
After the 2002 Globe piece, not until even more years passed did I admit in public that not only did I follow my own advice and sell Cisco and other tech stocks in March through June 2000 when I said to, but I shorted the NASDAQ using a negative index fund called USPIX. That's a trick that works more than once. On April 2 on the iTulip.com Forum I suggested USPIX, and it will likely close today up about 15% from there. Not that I will make a habit of short term calls; iTulip.com is about long term trend changes that portend major shifts in entire asset classes over long periods of time. But on occasions when my confidence in something specific is especially strong, I'll let you know.
At times like these, when the markets are headed down, to remind us of the importance of their role I offer the following Ode to the Short Seller:
Ode to the Short Seller
When the stock market is tanking,
Your portfolio gets a spanking,
The short seller's ear to ear smiling,
At your money he is piling.
Don't hate him for his making,
Money on the beating you are taking.
The short seller's neither naughty nor nice,
He's a buyer, after all, albeit at a lower price.
He's the buyer while most are selling,
Calming closing contracts while men in pits run yelling,
Rather, see him as hero,
For without him, our stocks can go to zero.
May 20, 2006 - Commodites Bubble or Not?
Morgan Stanley economist sounds commodity alarm
May 18, 2006 (MarketWatch)
Morgan Stanley Chief Economist Stephen Roach thinks there's a speculative bubble in commodities, and it's not a matter of if it will burst, but when.
"Asset bubbles have dominated financial market experience over the past six years," Roach wrote in a note to clients earlier this week, pointing to the initial bounce in stocks followed by runs in bonds, real estate and derivatives. "Like clockwork, liquidity-driven investors have migrated from asset to asset, desperately in search of yield," he said. "The world is now in the midst of another bubble -- this one in commodities."
No bubble to burst in commodities: PIMCO
May 18, 2006 (Reuters)
The drop in oil and metal prices this week has raised fears that a speculative bubble in commodities is bursting, but giant U.S. fund manager PIMCO says fundamentals will hold up the asset class.
"In considering commodities, we need to take a more strategic view instead of trying to predict in very short term what prices might give," said Bob Greer, senior vice-president and manager for real return products at the $600-billion-fund which mainly invests in fixed income.
Comment: Highly credible experts offer completely contradictory views. Roach and Greer can't both be right.
Here's what I think is going on.
Experts in the financial services industry, especially economists, like to talk as if the matter of where money is and where it's going is abstract, moved around by Adam Smith's "invisible hand," according to probability, fundamentals, in search of yield, and so on. Don't you believe it. While all of these factors play a role, keep in mind that a market is, more than anything, a war zone, a place where groups with vested interests fight over what humans are always fighting over: money. As a friend who was one of the founding reporters for CNN once told me, want to get to the root of any story quickly? Find and follow the money.
We are going through a major global economic transition as profound as any as has occurred in the last several decades. There will be winners and losers. The pressure now is on the team that's been winning for the past 20 years selling equity product. The fighting will at times grow intense and show up as extreme volatility. Plus the incumbent team has done a good job of using money and the influence it buys to keep the regulators at bay, using all manner of creative inventions (e.g., OTC derivatives) to increase yield on otherwise poorly performing underlying assets. As a result, they've really raised the stakes. They will defend their position with everything they've got.
The world's central banks cooperate per Ambrose Bierce's definition of an alliance, "In international politics, the union of two thieves who have their hands so deeply inserted in each other's pockets that they cannot separately plunder a third." Except that we are talking about a group of thieves versus two and what they are collectively stealing over the past year or so, as commodies prices have increased in all currencies not only the dollar, is the purchasing power of your income and savings. In the short term, the interests of everyone in the group are met by inflating all assets. Everybody wins, and when all assets are rising and everyone is winning, there is little motivation for fighting among group members. Peace reigns throughout asset land.
Eventually, however, no matter how the CPI numbers are re-jiggered, the resulting inflation from the U.S. to China to Japan to the Euro zone becomes impossible to ignore. As liquidity is withdrawn in the face of rising global inflation, at a national level the battle lines among previously aligned and cooperating groups are drawn. For example, China cuts oil and gas deals with anti-American regimes in Iran and Venezuela. At the level where financial services companies operate, that means businesses heavily dependent on sales of equity related product that do poorly in an inflationary environment are playing defense against firms like PIMCO who were years ago preparing for this battle by building or rebuilding real assets based and other operations that perform well in an inflationary environment, and are now in position to play offense.
Ka-Poom Theory suggests how the war might play out in terms of currencies, interest rates, inflation and commodities prices. But it will not be a smooth ride. No war goes according to plan. Just ask President Bush.
For anyone who expects gold, for example, to continue to go up in a straight line, I offer the following. During the five years that I have hung onto the investment I made when gold was trading around $270, silver was under $5 and platinum under $450, XAU (gold and silver sector index) has seen the following corrections:
Not exactly a smooth ride up to $700. I see no reason to not expect this kind of volatility to continnue. I will not be shocked if gold and other commodities correct 20% or 30% or more.
My money's on Greer, not Roach. But don't be surprised if Morgan Stanley re-opens their commodities desk, creates some new commodities index funds and other commodities related products and shortly thereafter trot out Roach to sing the praises of the future of commodities with some lame excuse about how global balances have changed. Nothing's changed since 2001. All roads lead to a weaker dollar, higher energy prices and thus higher commodity prices.
One more thing. The borrowing by the U.S. of nearly a trillion dollars from a nation governed by politicians who jail and repress their citizens is going to turn out to have been a terrible idea. Siding with repressive dictatorships in the Middle East to allow the U.S, to consume 921,000,000 gallons of oil a day is going to turn out to be an even worse idea.
The inflation hog is in the economic tunnel. You can't get around him and he can't back up. You have to wait until he works his way through.
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