Gold, silver or Dow Jones?

The chart of intelligent bear (http://home.earthlink.net/~intelligentbear/com-dow-au.htm) shows the Dow Jones divided by the gold price over a long period with its trend. In the long run the Dow Jones goes up more than the gold price and you also gets dividends. So on the very long run you can better invest in the Dow Jones than in gold. But you have decades that gold is better. Since 2000 the Dow Jones is in a free fall versus the gold price. That fll can maybe stop at a level of 5 (so at a Dow Jones of 12,000 that could be a gold price of 2,400).
When the inflationary forces become as big as around 1980 the gold price can even go higher. For the time being that is very unlikely because of the high unemployment rate, the high productivity growth and the emphasis on cost reductions.
Bernanke has to introduce a QE3 to get gold prices above $2000 per ounce, I think.

Because of the start of phase two of monetary easing, QE2, there is tremendous attention for commodity prices, especially gold and silver.
The gold price should have left phase two of the Minsky cycle, after which he explosive rise should occur. That could happen now when you compare it with other big bubbels (see chart). According to these theories the gold price can rise tremendously, but fundamentally we are already too high and when the Minsky moment will occur then the gold price will fall below current levels. Investing in gold is very risky and only a good advice when Bernanke goes on and on with quantitative easing and doesn't hike rates (as will happen when the unemployment rate declines enough).

The silver price is rising faster than the gold price. Especially last week was a record week, individuals bought for 523 ton silver with ETF's. Silver has all kind of industrial uses and very popular for coins. When Bernanke manages to accelerate the growth in the world causing higher inflation normally the silver price will rise more than the gold price.

The Bank Credit Analyst thinks the gold price has risen too much and you should switch from copper to oil.
That is very well possible but the coming months silver could bubble the most. So take care, gold is a dangerous investment and silver is even much more dangerous (and so could be rewarding).

The not so good news of November 12 or maybe the Merkel crash is over?

oAngela Merkel follows the path of Paulson/ Fed in 2008 where egregious promises about support were completely destroyed by announcements that sharehldser should suffer, then that tier 1 bond holders must be punished and then that all bond holders must lose almost everything of threatened banks/ countries. At the end too big to fail will be tried by a spectatcular bankruptcy of now maybe Greece and/or Portugal and/or Ireland. Spain and Italy are luckily not that easy to speculate down to ashes, but also for them the Merkel carsh is not a Goldilocks scenario for them. That is why new solidarity must be shown by expensive help to recover some of the lost trust in the PIIGS. In the VS mocht Bernanke was to the rescue with QE1. The ECB has now to buy much more than in previous month of PIIGS government bonds (they did start buying at nice levels when big haircuts can be avoided). Several European banks have to be saved by dumping of too dangerous government bonds in supra national pools (or in case of Germany in their own special funds; that is why German banks have been get rid of many bad loans).
o The euro broke down through 1,37 versus the dollar to 1,36, what chartists brought to the conclusion that the structural trend of the euro versus the dollar is not up (the dollar is not a one way road down to zero against the euro despite QE2).
o The Chinese equity market fell more than 5% on a delayed wake up call about the bad inflation numbers. They make an interest hike unavoidable and other not nice things of the Peoples Bank of China. Also was the market down because of the Merkel crash with the growed worries on the Euro perphery, Cisco’s thoughts about an uncertain future. We need to hear first what the measures are to fight inflation and speculation in Chinese real estate (not good for steel compnaies like Arcelor Mittal) and the official hike, then Chinese equities can go up again.
o Korea could not recover from its flash crash in the last minute of Nov 11(thanks to a big sell order of Deutsche Bank that maybe will be punished for that). This is bad for the confidence of investors in Asia: not only in the US, but also in Asia suddenly without any bad news the market can go down tremendously.
o The Baltic Dry Index is going down, through chart technical barriers, not a good sign for the growth of the world trade.
o Real estate investors were shocked by a survey in IPE that because of Solvency II 74% of the insurers in Europe will revise its investment policy for real estate (read: lower their % invested in real estate).
o Technical correction in the US looms because the % of equitioes above th 50 days average fell below 80%. The prudent investors wait (or sell) until that number has declined to 20-40% above 50 days average before they buy (back).

I thnnk you must not become too bearish on all bad news of e.g. above.
1. 6-9 billion QE2 buying by the Fed (POMO) every day from now on has led to the proverb: a POMO a day keeps the bear market away. On Novemebr 12 the Fed started with buying of $7.2B and will not stop for the time being, only around Thankgivingsday is will be less. (see pictures where Bernanke begs and prays for a success of QE2 and the summary of Ritholtz from The Big Picture of Bernanke's explanation of QE2 on October 16, sending implied inflation up further as you could guess)
2. The Irish crisis is now at long last frontpage news(for example the Dutch Financieel Dagblad opened with: Irisih crisis contagious and the other headings were almost as sad: hospitals fear financial disaster; (insureres) falling between two world; notaries more often in default). Brokers are starting again to inundate us with conference calls like: European Periphery Meltdown. European leaders know they were stupid with their declarations on October 29 (and October 18 and..) so thhey definitely will come to the rescue (85% of Irish bonds is held abroad, so Gemeny/UK will do their best to do something nice for Ireland. All those rumours about € 80 B + support will be not totally false.
3. Technically is not everything bad: the call/ put rate of the Dutch equity market (see chart of Tostrams) is discounting already quite some pessimism for the short run. Numbers are of November 11 and on November 12 the decline probably will have continued. Then you are at levels where you saw in the past months nice recoveries.
4. Morgan Stanley was enthousiastic about Intel, also because of their new Sandy Bridge chips (good for making charts and videosand better than what Nvidia and AMD seem to have). The ICT Revolution is still powerfully going on. Cisco -16% is exaggerated, analysts should have seen that Cisco was not a miracle.

good news November 11

o Moody’s upgraded the credit rating of China and hing Kong to AA3 (while their Chinese antipodes did the opposite with US debt). This was one of the reasons why the Chinese equity market rose, the higher inflation on 4.4% was not so bad
. Because the collateral for Ireland as postulated by LCH is found the 10 year bond yields can decline now (temporarily?) from the current 8.9%.
o The equity markets of the PIG(S) are doing amazingly well given all te disasters since )ctober 18. The non financials have improved their balance sheets since 2009. That was seen before in Emerging Markets where currencies became worthless and corporates learned how to survive that and PIGS can do the same.
o The American Conference Board knows now also: in their official forecast for economic growth until 2020 they see more growth in the world than in 2000-2010 because of Emerging markets with their potential growth of 6.3%.
o Deutsche Bank sees consumption growth coming back on improved credit growth (see chart)in US
o A team of the White House tries by destructing sacrosant posts as social security, lower taxes for the middle class and lower defence spending the next ten years to save cumulative $ 4 000 billion (via 3000 billion less spending). In the proposed pace the government deficit will be gone in 2037 in the US(!). Chart of Robosaurus from Business Insider how you handle all those hot potatoes. Because this team cannot work with a robosaurus their plans don't have any chance of success.

Deutsche Bank sees S&P500 of 1500+

Deutsche Bank (Chadha c.s.) think US equities are cheap at a PE of 14.2 and deserve a PE of 16.4 based on current low credit rates versus operational profits/ share price.
Stronger for a higher S&P500 is their story that net demand for equities will improve. There is a strong correlation of equity returns with net demand (see figure 7)
Net demand was bad: equity fund flows were negative and net buybacks were also negative because of forced new issuances of financials while M&A were negligible. (see figure 6)
Both net buybacks as equity fund flows will improve substantially (see figure 16). Net buybacks are already quite high.

good news November 10

* U.S. initial unemployment claims down (key barometer for growth in the fourth quarter and approximately indicating 2.5% growth now).
* Japanese stock market friendly in story that Japanese (and Chinese) banks don’t need so much do for Basel III as initially feared. Also they are less worried about too strong yen.
* There is a theme developing you should buy laggards (Japan and financials).
* ING plans and figures were better than expected. Allianz also was not that bad.
* Philippine exports last month grew by 46% over the previous year. For decades, the growth of the Philippines fell behind that of Asia (in 1945 it was almost the richest country in Asia), but now at least have the trend of improving growth numbers.
* Deutsche Bank had a positive and believable story of why the S & P 500 next year should go to 1500 +.
* High prices for rare metals have accompanied create new investment in Kazakhstan, Kyrgyzstan and Greenland.

* ASR showed that air freight transport after some weakening is improving again, a leading indicator for stronger growth in the world (see picture).

The spell of Nasdaq following Nikkei broken

In March 2000 a sorceress(Meg Whitney ? to become over 121 months governor of California?) casted a spell over the Nasdaq causing the dot.com bubble to burst after Nasdaq's mojo seemed to be sold on ebay: Nasdaq thou shall follow the path of the Nikkei with a leg of 121 months.

And thus it came to pass. Until the powerful magician Bernanke at the end of August on the Jackson Hole conference broke the spell. With enough hundreds of billions of dollars, maybe trillions it seems to happen: the market has its greed back. The correlation Nasdaq / Nikkei is broken. Howard Simons van Bianco Research saw it (see chart). He wants 2.8% higher prices to be definitive, but you can already see that is stockmarket no longer is following the Japan scenario.

N.B.1 Japan started with QE1 in March 2001.
N.B.2: When Bernake proves to be not such a good magician and the equity markets starts again to follow the Nasdaq / Nikkei scenario (=double dip arriving), the equity markets wil go down tremendously.

QE2 and the path of Arthus

The chart shows the economic growth of the US according to several models/ theories.

In the long run the US economy followed the path of the law of Okun: the growth was about equal to 3% plus two times the decline of the unemployment rate, so structurally 3%.
Since the credit crisis is the US economy more and more deviating from the 3% path of Okun.
The economy is growing according to the best path of Arthus, the guru of Natixis. He is more or less a supporther of the New Normal theory. The loss of growth according to the Okun path is permanent he says and you will see no convergence to the Okun path in the coming few years. That is because of deleveraging the consumption cannot faster than income (something that in the past happened after every recession and that caused higher growth than 3%.
Even with the best path of Arthus the Fed cann't live, that forbids their mandate (and triggers impeachmeant of bernanke over some time). If the US economy continues to follow the path of Arthus the unemployment rate will not decline (but stabilise)enough reason for Obama to fire Bernanke, but than he has to be quick because he cannot be reelected on the path of Arthus.

So the Fed had to do something else thean normal, somthing that makes it possible to get the moderate V Bernanke path. That is why the Fed has to print tons of money even while there is not much danger for a recession in the coming quarters. Those hundreds of billions must restore confidence by blowing up the stock market, easing financial conditions so business get more credit and mortgages are easier to get also.
Obama will start to mr. nice guy for the republicans (as also Clinton did) and extend the Bsh tax cuts for at least one, probably two years, making the moderateV Bernanke path now the most probable path

good news November 9

o Greece could easily get money at an auction ( € 360 million) for 26 weeks paper.
o Good numbers of Barclays, diminishing fears about the financial position Also some Spanish and Italian banks went up.
o Financials are doing better last week, see break out of e.g. Philadelphia bank index (but no way they are at the April level, what many other sectors have managed). Pessimists say now their easy way to outperform equity indexec is destoyed by underweight of financials. See chart of Strategas.
o Theme of buying hard assets because governments want it found followers in Japan (advice to corprorates: buy assets abroad now the yen is so high).
o More and more positive news about extension of the extension of Bush tax cuts. Extension of one or two years is almost a done deal, also for the rich (maybe the democrats can limit it to poor fellows earning less than $ 1 million a year).
o Popularity of Obama is rising again, with 4% to 47% (approval rate according to Gallop) since the mid term elections last week. This is a leading indicator for the US consumer confidence.
o Growth car sales of China is accelerating again: +27% yoy in October versus + 19% in September.

Until now the financials didn't really participate in the equity rally. People were worried how you can get a nice without financials.These worriesare vanishing (but can return because of worries about Greece, Ireland,Spain or Portugal.

Shame on me: Dylan Grice (2)

To my (and hendrik Jan's) surprise also Dylan Grice called his column last Friday something with shame (Shame On Me). Hendrik Jan touched an open nerv with is remark that Dylan Grice has lost his bearishness on Emerging Markets.
In his Friday column Grice wittingly described how the humans are quite inventive for over a 50.000 years without needing quantitative easing.
I utterly agree with him that productivity growth is the most important for economic growth and that crying about deleveraging is not that important when you want to explain economic growth % (but of course, Grice wanted to tell the opposite, that we are lost for quite some time because of deleveraging; but now he wanted to divert the attention to put the shame on the Fed because of QE2 what will be a success I think).
Grice makes plausible in his charts based on valuations according to the Shiller-PE's that you should not expect too much of equities in the coming years (valuation are not good enough according to him, but I'm quite satisfied with current valuations).
But then he gives the expected returns of the most important emerging markets, the Bric's. And suddenly you see lots of optimism. So it is not yet clear what has happened with Dylan Grice, maybe he is indeed a fraud as he describes himself and is he no longer a bear on everything, since he is writing something positive on emerging markets for the second time.

good news November 8

*The Bank of Japan has called the first amount of risky assets like equities they will buy (Y 150B) on the newly created Vegas accounts.
* The Chinese equity market rose further on polls that the economic growth is improving again.
*US executives are increasing their optimism about profits in the future at a record amount.
* WSJ: individuals have started to buy equities again
* German exports rebounded strongly in September. Nominal exports rose 3.1%m/m and are up 18.5%q/q saar in 3Q10.
* Chinese President Hu Jintao said on Sunday his country will back Portugal's efforts to deal with the world financial crisis, but stopped short of vowing to buy Portuguese debt; that said, sources have revealed that Chinese investors did participate in Portugal debt auctions recently – Reuters
*JPM started to become more optimistic in its latest Global Data Watch: The tide is turning.
* GE’s CEO Jeff Immelt said he sees the company’s business in India growing at 30% a year. Reuters
* Air France said passenger traffic rose 3.1% in Oct and cargo traffic saw a 6.4% rise.
* Absolute Strategy Researcg: a notable bounce in positive revenues stories is suggesting that the corporate story is not simply about cost cutting. (see their chart)
*Positive story of Morgan Stanley (Sense and sensibility): 10Plausible default does not mean likely default. 2)Deus ex machina. The key here is: i) that there exist creditors willing to fund weaker governments on an ongoing basis (the IMF, the EFSF and its eventual successor); but also, crucially, ii) that these creditors are willing to do so at a ‘sensible’ interest rate. We think that the incentives to do so are strong enough to overcome obstacles
* Neelie Kroes will disentangle the European Union's jumbled online economy. And bring uniformity in the European digital copyrights according to WSJ
* NY FED: Total household delinquency rates declined for the second consecutive quarter in this third quarter of 2010. As of Sept. 30, 11.1% of outstanding debt was in some stage of delinquency, compared to 11.4% on June 30.
*Senior Loan Officers Survey: banks eased standards for lending (but they have still very tight standards, but it is a huge improvement that the banks are not only tightening less (that is already good for growth) but are already easing standards.
Also demand for loans is no longer falling.

Barron's sees China buying hard assets, not Treasuries

The most emailed article of Barron's was about China: China's sure bet (http://online.barrons.com/article/SB50001424052970203281504575590290564950892.html?mod=BOL_article_full_popview#articleTabs_panel_article%3D1).
The aricle shows the changing prefeences of China for hard assets instead of Tresuries. That shift is going on for years, but seems to be accelerating. For years and years economistst think that the investment preferences of the excess currency reserves of Emerging Markets goes more and more in the direction of the most riskless investment, US Treasuries. Indeed, that seemed to be the case, but Houston, we have a problem: China is believing more and more in hard assets (equity participations and commodities). That is especially disastrous for the US. In our book we have showed a chart that the US for decades had a current account deficit and still had a net income stream from abroad to the US. On the investments abroad (of multinationals) a high income was received. The foreigners invested almost everything in treasuries with their paltry rate of return. The net result was that the higher amount of investments of abroad in the US generated less return than the US got from his multi nationals etc. So it was no problem at all for the US to have a big current account deficit for decades. As long as the foreigners were too afraid to buy anaything else tha Treasuries the Us had a field day. Because of the too big demand the yields on Treasuries went down too much so everybody became more scared and bought even more Treasuries at the benefit of the US with lots of windfall profits.

So now China is no longer believing that you should no longer take any risk and invest everything in treasuries. The forced buying of China of US assets because of the big curent account surpluses (that is by definition true: a current account surplus with the US leads to a forced buying of US assets that China can't get rid of, only the price can fluctuate of those assets) is going less and less to treasuries. The Chines prefer to buy hard assets. That is not only very clever because it has a higher return but is also seen ore and more as less risky since the Us is indulging in more and more QE2.
China cannot escape to increase its US assets as long as they have a current account surplus. But how you invest that surplus that is what China can influence. When that preference changes from Treasuries to more risky investments (maybe they are less risky when QE2 goes too far) then that could have big consequences: better prices for risky assets and lower prices for Treasuries (=higher bond yields).

China is an example for many countries. Many people say China is very cleverly expanding its influence with clever investments. They want to copy the policies of China even more than the investment policy of Warren Buffett. That means more countries will invest their current account surpluses more in hard assets and less in treasuries. Japan seems to be a loyal buyer of Treasuries, but also wants to take more risk (buying Japanese equities). By the way Japan can pauze for years with buying of Treasuries, so you can't build on japanese buying of Treasuries.

So all in all you can see lots of clouds in the sky for Treasuries when the Fed stops buying Treasuries at any price.

QE2 explained well by Bernanke

Banzai (zerohedge) sees quantitative easing QE2 as new disaster and hopes taht we will get a cover of Time that could be explained as a contrary indicator.
The resistence against QE2 is huge and there is a seemingly never ending wave of new stories that the world will perish and that we will end up in an inflationary hell.

Still the markets reacted favourable om the gospel of QE2 while almost nothing new news was added by the Fed.

Jim Bianco thinks that the clear and loud explanation of Bernanke in the Washington Post explains the favourable reaction of the markets:
"This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion".

So the Bernanke put is now really formalised.

I think the positive reaction of asia did help the markets also. Asia/ Latin America (!) cry wolf and want promises of the US that they will not continue with more QE2, but in their heart they know better. When they really want to export so much to the US they must carry the losses like a man on their dollar currency reserves.

Will QE2 become a kind of Titanic as more and more people believe? Defintively not when that QE2 is not becoming too big. $600 billion is almost nothing for the size of the US economy and will not lead to a measurable rise of the inflation.
The balance sheet of the Fed will then remain smaller than that of the ECB and that bigger balance sheet is not yet leading to hyperinflation in Europe. When QE2 will rsie above $1500-2000 billion, then I start to believe you will see somewhat higher inflation because of too much QE2. However, i think that $600 billion will be about enough to get the economy growing fast enough to get lower unemployment rates. So we are going more into the direction of Goldilocks than Weimar.

Shame on you Mr Dylan Grice

My collaegue Hendrik Jan has annoyed seriously überbear (ursus major) Mr Edwards of Socgen and his side kick Dylan Grice with his reaction that Dylan Grice as super bear suddenly adviced to buy equities of Emerging Markets. No, even not equities but call options.

The reaction of Edwards was this weak a piece with the same title as Hendrik Jan had sent to us (Shame on you Mr Dylan Grice) (in which he had written among other things: I will not bore you to death with his previous recommendations, but instead summarize his view and that of his close colleague, Albert Edwards for the last year: we are all toast, extra crispy. Equities would fall, as would earnings, the double recession was around the corner, etc etc.

You can probably guess how Dylan squares the circle: the Fed's new round of quantitative easing. Huh? This is coming from the same guys who brought you the balance sheet recession which would "depress growth for at least a decade". Or the wonderful: "the Fed is pushing on a string". The best question to ask him is "would emerging market equities not have risen if the Fed did not do QE2").

Edwards started this week with: “A very good client complained that we were doing a U-turn, ditching our previous Ice Age bearish stance on equities and becoming vastly more bullish – using QE as the excuse. And to be fair, Dylan’s last two notes, suggesting that the Nikkei could go to 63 million in 15 years and that emerging markets could double, might be construed as being a tad bullish. In this note I will make MY view crystal clear and tie it into Dylan’s recent work”.

Edwards is insulted because he is still bearish: he underwaits equities with 25% (this not yet producing very favourable results for the time being). That double dip will arrive, no doubt about it and those people from ECRI that suddenly said last week that no way we will get a new recession are misunderpretating the facts edwards says. In 2008 you had also a tremenedous liquidity push and that was not helping, so this time it also will not rescue us. Edwards included some more pictures (see above) in which he makes the call of Grice even stronger to buy Emerging Markets.

QE2 will be a success according to expert

A colleague of mine had the following remark of his expert on QE:

"There’s nothing wrong with printing money to stimulate your economy and if you disagree I will have you beaten up”