It's all been said endlessly, in newspapers, CNN, CNBC and the financial blogosphere - there has never been a time of such conflicting data and opinion. People are genuinely being turned off North American equity markets. The tone of US political bickering is discouraging and uninformative. Canadian politics seem designed to put the electorate to sleep and if they wake up, they shut the shop. Out of all this, people are advocating "throw them all out", which is understandable but seem at the same instant to embrace radical positions that if actually enacted, would worsen their own situations, which is not.
On top of this, we have cries of 'treasury bubble', 'gold bubble', scary Hindenburg Omens, what-if "W" scenarios, deflation-inducing de-leverage, closed-door credit, persistent unemployment, flatlined incomes, debt and pension crises, 'I'm OK so far' housing here, debacles elsewhere. No wonder equity investment is declining and people are easily stampeded into bonds at non-existent interest rates, just in the hope of preserving original capital. Theories abound for an imminent further drop in US markets. None, except for general contrarians, call for an advance.
The actions being talked up in America and Europe, if actually pursued to their conclusions will mean at least 2 or 3 years of considerable difficulty for most citizens. In Europe they are already in place. In the US they are not. I believe they will not be enacted there before the Nov. 11 elections and even less so afterwards, despite current claims to the contrary.
Many large corporations have quite decent balance sheets. But the US government, whose actions in conjunction with the US Federal Reserve affect us all, does not. Add to this state revenue shortfalls and the competition to sell bonds by governments to somebody that is NOT the government (unless its foreign), will be intense.
Most recent government financing has been into the short-term market. That means - as a certainty - that in order to raise new money, simultaneously all of the short-term debt has to be rolled over (re-sold) also.
We see that in the short term the economy will be weak and unemployment persistent, so tax revenues will be poor. The new debt numbers will therefore be monumental. If the debt is not sold - and the need will be such as to guarantee fierce competition - it is exceedingly unlikely that rates can be held down. The repeated periods before each major issue will seem like mini-crises.
This not irrational scenario will put huge pressures on North American and European currencies. Commodity sales will help Canada but our currency cannot get so far separated from the USD as to collapse our industrial sector.
Currency changes exist in relation to other things. The best of energy and gold stocks would survive. If as an alternative you want the most secure and liquid direct gold participation, I have previously suggested looking at the Sprott PHYS ETF of Canadian-held physical gold. It trades in USD. Don't switch currencies until you are ready.
Position: Long ARNA-Q, CGG-T, VET.UN-T
Wednesday, August 25, 2010
Thursday, August 12, 2010
Confirmation of a View
With a stay in the hospital happening within a market period with plenty of weekly volatility but very little new substance behind it, I have been keeping up but not writing. Events make it time for another post.
A few weeks ago, everything focussed on the demise of Euro sovereign debt and a corresponding media barrage supporting future strength in the USD. While large US corporations and banks were (and are) doing fine and many manufacturers were finding an improved export edge due the previously lower dollar, nothing that the US government or the Fed had done suggested that they had changed their position of allowing the dollar follow its own course. That this course is downward has no connection with the permanent official line of support for "king dollar".
On Tues Aug 10, the message from the Fed Open Market Committee (FOMC) was that it was leaving rates alone. It did not mention deflation but stressed the economy was weak and indicators unusually mixed. This caused an immediate general selloff that swept across Asia overnight. Strangely to some of us, gold dropped in lockstep with the market. Since "everyone knew" that the Obama administration had been forced to stop anything resembling a further bailout or economic support - very dirty populist words - prior to the November 8 elections, it could make sense.
However, the real reason was because commentators had not looked closely enough at the Fed's additional statement that capital recoveries on their previous purchase of "toxic" mortgage debt (to save the real estate industry, mortgage holders and those in Congress up for re-election), the proceeds would be reinvested in US long Treasury bonds. Since all those mortgages could not be a total writeoff, the plan was that any capital recovery would drop off and reduce the debit side of the Treasury's balance sheet. A day later, markets grasped that this previous potential reduction would now be used to monetize new US Treasury debt. The semantics if not the theory being, no new money would be involved! The USD sank and gold recovered.
In a nutshell, this validates our position that there is insufficient political will in any currently visible US Administration to do what Europe at least officially stated it would do; that is, put hard decisions into actual effect to improve their sovereign debt positions. Of course by its very actions, the Fed has made it much more difficult for those that are trying to put their houses in order, to do so. The Canadian economy, which had been remarkably strong, started to look weaker as the BC and Ontario HST kicked in and manufacturers felt their prices rising in the US market as the US dollar fell. Recent hikes in Canadian interest rates only added to the discrepancy and make the timing look inappropriately hasty.
Our investment outlook is unchanged for the time being. We have re-expanded our long position in China Gold International Resources (CGG), formerly Jinshan Mines (JIN). We have also expanded our position in the well-managed and geographically diversified Vermilion Energy Trust (VET.UN), which will soon be converted to a normal corporation. There is a possibility that in due course Vermilion may seek to expand its listing (and therefore its market capital potential) to include the NY NASDAQ. We initiated a modest speculative position in Arena Pharmaceuticals (ARNA). The US FDA will review its unusually promising diet and weight control product, Locaserin, in mid-September.
Much has been made of a current gold bubble. There are vested interests who wish to maximize this view. It can be argued that a much larger bubble is occurring in long-dated (10 year is the bellweather) US federal, state and municipal debt. An eventual decline there will affect debt markets everywhere. Whether the Euro zone recovers will depend upon the ability of the weaker countries to govern in the months immediately ahead as the effect of tough policies bite pocketbooks and retirement.
I came on this jewel recently, written by Ambrose Brice circa 1880. Brice was an American essayist and social critic.
"... politics is a strife of interests masquerading as a contest of principles...the conduct of public affairs for private advantage."
A few weeks ago, everything focussed on the demise of Euro sovereign debt and a corresponding media barrage supporting future strength in the USD. While large US corporations and banks were (and are) doing fine and many manufacturers were finding an improved export edge due the previously lower dollar, nothing that the US government or the Fed had done suggested that they had changed their position of allowing the dollar follow its own course. That this course is downward has no connection with the permanent official line of support for "king dollar".
On Tues Aug 10, the message from the Fed Open Market Committee (FOMC) was that it was leaving rates alone. It did not mention deflation but stressed the economy was weak and indicators unusually mixed. This caused an immediate general selloff that swept across Asia overnight. Strangely to some of us, gold dropped in lockstep with the market. Since "everyone knew" that the Obama administration had been forced to stop anything resembling a further bailout or economic support - very dirty populist words - prior to the November 8 elections, it could make sense.
However, the real reason was because commentators had not looked closely enough at the Fed's additional statement that capital recoveries on their previous purchase of "toxic" mortgage debt (to save the real estate industry, mortgage holders and those in Congress up for re-election), the proceeds would be reinvested in US long Treasury bonds. Since all those mortgages could not be a total writeoff, the plan was that any capital recovery would drop off and reduce the debit side of the Treasury's balance sheet. A day later, markets grasped that this previous potential reduction would now be used to monetize new US Treasury debt. The semantics if not the theory being, no new money would be involved! The USD sank and gold recovered.
In a nutshell, this validates our position that there is insufficient political will in any currently visible US Administration to do what Europe at least officially stated it would do; that is, put hard decisions into actual effect to improve their sovereign debt positions. Of course by its very actions, the Fed has made it much more difficult for those that are trying to put their houses in order, to do so. The Canadian economy, which had been remarkably strong, started to look weaker as the BC and Ontario HST kicked in and manufacturers felt their prices rising in the US market as the US dollar fell. Recent hikes in Canadian interest rates only added to the discrepancy and make the timing look inappropriately hasty.
Our investment outlook is unchanged for the time being. We have re-expanded our long position in China Gold International Resources (CGG), formerly Jinshan Mines (JIN). We have also expanded our position in the well-managed and geographically diversified Vermilion Energy Trust (VET.UN), which will soon be converted to a normal corporation. There is a possibility that in due course Vermilion may seek to expand its listing (and therefore its market capital potential) to include the NY NASDAQ. We initiated a modest speculative position in Arena Pharmaceuticals (ARNA). The US FDA will review its unusually promising diet and weight control product, Locaserin, in mid-September.
Much has been made of a current gold bubble. There are vested interests who wish to maximize this view. It can be argued that a much larger bubble is occurring in long-dated (10 year is the bellweather) US federal, state and municipal debt. An eventual decline there will affect debt markets everywhere. Whether the Euro zone recovers will depend upon the ability of the weaker countries to govern in the months immediately ahead as the effect of tough policies bite pocketbooks and retirement.
I came on this jewel recently, written by Ambrose Brice circa 1880. Brice was an American essayist and social critic.
"... politics is a strife of interests masquerading as a contest of principles...the conduct of public affairs for private advantage."
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