Friday, December 04, 2009

Some quick economic thoughts and an update

First my computer problem continues. It appears that I am going to have to take it to the computer doctor ($$$) and attempt an emergency reboot. Worse case scenario would mean that I am going to have to go through a major effort at file recovery. uggg

On a somewhat happier note the economic picture (nationally) is looking up, even if only a bit. Unemployment appears to be levelling off. The news was initially greeted with fireworks on Wall Street this morning (DOW up 150 at one point) but the US Dollar Index rallied on the news as well, as investors began questioning if this could lead to an earlier than expected tightening by the FED. This sent a chill down the Street as nervous investors fearing that the easy money rally could be coming to an end fled equities. At the end of the day the dollar was up well over 1% and most of the major equities indices were flat having given up all or most of the earlier gains. Commodities were down sharply with gold getting hammered.

My take on all this?

This was a huge overreaction to a (for the moment) imaginary threat. Ben Bernanke has made it abundantly clear that the only thing which is going to make him start tightening monetary policy is a significant spike in inflation. And while the reports on CPI (a little over 3%) from earlier this week are not good they are not enough to ground helicopter Ben. Nor is the current employment report which lowered the official unemployment rate to 10% from 10.2.%. He is well aware that the true unemployment rate remains north of 17%. Barring a really sharp spike in the CPI; I see almost no chance of a meaningful hike in FED interest rates before the end of the 2nd quarter of 2010 and it could easily be much longer than that.

Mr. Bernanke is a student of the Great Depression (the first one) and is a firm believer in the Keynesian theory that the principal reason for the severity of that depression was the failure of the government to throw sufficient amounts of money at the problem and or a precipitous move to withdraw monetary and fiscal stimulus (1936 and 1937). I would and of course do disagree. But this is the main reason why I remain highly skeptical of the almost hysterical fears that a major tightening of monetary policy is closer than expected on the heels of today's employment figures. It is not.

So where do we go from here?

I continue to believe that the carry trade is a good move for the near to intermediate term. Gold got hammered today on the dollar's rally. But gold has been moving in a near straight line for almost three months. Frankly markets don't move in a straight line (when they do it's time to get out). This is an overdue correction that I have been predicting for a while. It may last for a few more days before levelling off. At some point though the dollar will resume its death by a thousand cuts. I think gold is a buy during the current correction, though I would scale in as it is very possible that there could still be some significant short term downside.

Could I be wrong? Of course. A stop loss (or preserve profits) price should be built in. If the correction dips below $1085 I would exit stage right until things firm up a bit.

Beyond gold I like any diverse selection of foreign and domestic value oriented equities (for fund investors take a look at AMANX). I also like the Permanent Portfolio Fund (PRPFX). (Disclosure a substantial part of my IRA is in there). I would underweight exposure to long term US Dollar denominate fixed income securities, especially Treasuries which are high risk and low return right now. Even a modest reflation will produce a negative yield on them. For those interested in some speculative investments foreign bonds and emerging markets are potential sources for significant gains. I like TGBAX and VEIEX.

There is an enormous amount of subjects I would like to be posting on but time constraints (I am still stuck on public access computers at the library) make blogging difficult right now. I do however have some hopes that things will be back up in the coming week. I am not sure I will be on tomorrow. If not have a great weekend. I will definitley try to get online no later than Monday.


Chris said...


I cannot agree with your economic assessment. The fall of the jobless rate from 10.2% to 10% most likely indicates that several thousand people have been given temporary and/or part-time work at retailers and delivery companies (e.g. FedEx, USPS, UPS) to accommodate the increased business during the holiday season. Also, the initial large amount of people who were filing claims with a governmental unemployment agency are approaching their deadline (76 weeks beginning October of 2008) and I expect that the number of people receiving aid will continue to dwindle though they will actually still be unemployed. And I foresee that, unless major changes occur (and with this administration that is very unlikely), things will continue as they have been going. the dollar will remain weakd and probably grow weaker making any kind of turnaround subject to the toils of inflation and worthless money. Just my take.

John (Ad Orientem) said...

Actually the very slight downward tick in unemployment was due mainly to a correction to previously posted reports. The most recent report indicated a loss of 11000 jobs. Beyond that i concur with your assessment. In order for the dollar to strengthen we need a sharp reversal in current monetary policy and also some credible evidence that Washington is going to get serious about the debt and deficits. I see neither on the horizon.