Customer’s Question

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk in investing in futures.

I received the following email from one of my more erudite customers. I think, between us, we raised more questions than we answered. You will see my response below. Andy, I sent that same article (Swiss Bank say “goodbye to US”) to a European friend that I frequently have global economic discussions with.  He excused it as the “Swiss being the Swiss”.  He said they have been complaining for years as almost all of the European countries have demanded the same transparency from them. He feels that their historic dependence on secrecy and neutrality has been crumbling as the world gets smaller and hasn’t seen them as “playing ball”.  This is the sound of a “baby crying because its not getting its way”.  They used to command respect in international finance, but are becoming far less significant or impactful.  Excuse it.  Ignore it, he said.  It signals desperation, as to lash out against the US is an old European ploy to garner support from there brothers on “the continent”, in a “we stand together” approach.  He reminded me that their list of complaints about the US government approach to the economy and the private sector is, 1) well know , and, 2) the same complaints that you hear in the US itself.  “Who needs them to remind us of the obvious?  Its just rubbish!  Throw it away.”  Interesting …………… As I constantly try to summarize and update my outlook, her are my latest random thoughts……. Although a double dip recession is theoretically possible, what are the realistic chances when money is being printed around the world and interest rates are so low?? As our major companies have globalized over previous decades, and that pace continues to accelerate, is the statistical relevance of the US economic indicators disconnecting from our own stock market?  So many of our prognosticators and experts base there predictions and interpretations on models built from another era.   The rest of the world’s indicators are showing a bottom in place and a standard upturn based upon overprinting of currency and low interest rates – full steam ahead.  The fact is that we have the same, but our banks are holding onto money to protect themselves from the government changing the rules, and the housing glut is feeding the negative impact on household wealth perceptions.  So, our government policy nightmare could feed domestic fears of deflation, economic slowdown, and continued unemployment, while the rest of the world is full steam ahead.  They may worry about potential inflation, fed by the voices of the gold bugs and their own fears based upon many a small country’s own history.  But as you rightly pointed out, it will not be based upon scarcity of labor, material, or capital.  But those three factors usually only come into play at the end of the cycle.  Inflation is prompted by too much cheap money  funding speculation, which fuels growth, expansion, hyper growth and eventually scarcity of labor or material (usually not capital, as what politician in his/her right mind would shut off the spigot which provides their power?)  And since in a globally developing world with 2/3 of the population at poverty levels, and global companies able to readily locate or relocate production to cheaper labor markets – labor inflation will not be a problem.  This leaves only material, raw or manufactured, as the instrument of limited supply – too much money chasing limited supply. And those with true needs for production, will be punished by speculators crowding into their space. Gold is a monetary option, not an inflation indicator.  It is a currency equalizer.  It has risen in response to the drop in the USD, which is in response to our government’s unclear policies.  Gold should drop when these become clearer (the rules of the game) and the game restarts. Although the floor has risen as all currencies are being devalued. Also, has the education of the US investors expanded sufficiently that global investing differentiation has reached the level whereby their personal wealth could be positively impacted by successful investment returns from emerging or global markets, such that they spark retail here?  Or will they focus on reinvesting to rebuild wealth (having been burned recently) and link consumption directly to job security and taxes? We are seeing the condensed cycles we discussed previously.  Easy money has only been around for a year and already everyone’s worried about inflation. So where does that leave me?  With the intention of getting in early and out on time ….. Short term (start of cycle) opportunities would appear to be:  Emerging market stocks, and US stocks of global companies, or banks, small companies with a global labor supply or consumer market but little exposure to materials with potential price spikes or limited supply (SHIT !!!!!! Just realized I’m in the wrong business !!!!)  Perhaps some real estate. Middle term (mid cycle) opportunities would appear to be:  Global stocks and US stocks of global companies, raw materials with limited supply or long windows of new supply coming on stream Long term (late cycle) opportunities would appear to be: Start looking for tops:  to short all stocks, to sell commodity futures, End of cycle opportunities:   Short everything, buy bonds (as interest rates will need to be lowered in the next recession), hold cash (to start buying at the beginning of the next cycle). What should I do today?   Looks like commodities should have a floor, due to cheap money and economic recovery world wide.  So I should stop shorting against minor pullbacks.  Perhaps the only fear of a double dip is domestically?  Although global growth is recovering, it is no where near levels to spark commodity demand – just speculation due to cheap money, and limited alternatives.  Commodities may stay in a range for some time. (When gold retreats, so will many other commodities) Play USD recovery when policies become clearer. Invest in merging markets. Drink wine…. My response: There’s an awful lot to go on here. PhD’s  are working overtime to generate responses to each of your individual questions and you expect me to digest it, whole? I do have a couple of thoughts on some of your points. I’ve read it three times now, and I think I’m starting to wrap my head around it.     1)    Double dip recession – I think it’s very likely if the tax plans go through. It seems to me that taxes will rise and this will hurt our economy both by slowing new employment and, in turn, undercutting federal estimates of planned tax collection. Furthermore, these taxes will provide no long term benefits whatsoever to our infrastructure, our individuals or, our corporations. As you and I have discussed, profits have come through cost cutting and one time stimulus injections. We’re generating zero domestic demand and our exports are increasing, primarily, through the effect of the declining Dollar and its effect on the agricultural markets. Finally, on the inflation/deflation debate of the double dip, I think I’ve gotten my head around to the following argument for deflation as our primary focus. We’ve already had the excess land and labor argument and I think deleveraging has put a damper on capital demand. Throughout the financial crisis, we have g
lobal deleveraging on an unprecedented scale. In addition, the money that the governments are printing is going into a banking system where it is being used by the to fix their own balance sheets. Therefore, the newly printed money is not being lent out, has no velocity and is generating less inflation than would historically be the case.     2)    I tend to think that models have a finite lifespan. Through my experiences in programming them, I have separated quite a bit of wheat from the chaff. There are technical indicators showing our bottom in place like the major divergences in negative momentum from the March lows. There are fundamental indicators like the explosion in jobless claims two months ago or, so followed by declining claims that tends to serve as a predictive indicator. There are the earnings reports, particularly in the financials, that all would indicate the worst is behind us. Remember when the LIBOR (see U.S. Interest Rate Futures) had its own 24 hour window on CNBC through the crisis? I think that globalization has put the U.S. markets in a basket of “tradeable markets.” It’s no different than U.S. investors placing money overseas. Any investor is simply looking for return on investment. As long there are sectors or, markets as a whole, people will design new trading strategies to increase their risk to reward ratios and, in doing so, become less concerned with a market’s internals as the day’s closing price will be the only meaningful metric. This WILL continue to create bubble after global bubble. We will ALWAYS seek out our own financial best interest. The education of U.S. investors is to ride the wave until it crashes then, look for the next one. Ignorance is bliss the whole way into the beach.     3)    Where do we stand in the cycle? The simple version is to invest anywhere there is a growing middle class  with an historically high savings rate, both in population and demographic. That description does not exist domestically.