Nov. 11, 2008
Who is short? Anybody, really?
I have been wrestling with trying to figure out how this once in a lifetime economic disaster will play out...And the truth is, I don't have any more of clue than you do as to where everything is headed, nor, I might add, do any of the powers that be, right up to the Secretary of the Treasury or the Chairman of the Federal Reserve. Nevertheless, what follows are some observations and my conclusions as to what I think will happen and how to possibly profit from it.
Some notes I have made to myself during the past few weeks...
A year ago, NOBODY in the investment industry was telling you get out of stocks.
Three months ago, NOBODY in the investment industry was telling you Crude Oil was going to be cut in half.
Three months ago, NOBODY in the investment industry was predicting an all out 20% rally in the US Dollar. Au contraire, the Dollar was supposedly headed down forever.
A year ago, NOBODY in the investment industry was telling you the almighty Chinese economy was about to see a 70% crash in their stock market.
Two years ago, NOBODY in the investment industry was telling you housing prices would be dropping by 20-30 %.
My point is, if you think there is ANYBODY out there who can tell you how all this is going to turn out, you are mistaken.
The world is more upside down than any of us have ever seen it. All of this uncertainty probably represents continued volatility (i.e., big price moves) which can therefore lead to potentially large profits...or losses...So, in this environment, all I am trying to do is make the best half-assed educated guesses I can, define my risk (primarily using the "2 & 1"), put my money on the table... and see what happens.
I recall an old Fed study of Leading Economic Indicators I came across 25 years ago which concluded the single best indicator of future economic activity was a rise or fall in raw commodity prices...As in all economic studies, nothing is absolute, but if there is any truth to that Fed study, a quick glance at the monumental sell offs on commodity price charts would suggest we are headed for a massive economic contraction, potentially much larger than any "recession" the typical analyst or economist might be using as a model. I would suggest that all of the commentary you hear as to what quarter this or that sector of the economy, or the stock market, will finally bottom out are no more than stabs in the dark, based on the fact that virtually all of the recessions after the Depression "came back" in some average number of months, and can therefore be expected to do the same this time around...But I would offer this time around is obviously something quite different...much darker and much worse.
With the severe selloffs in many commodities (charts follow), I had been leaning towards the idea of finding markets to buy, but have finally come to the conclusion this is not the time to be attempting to predict when or at what price lows will be made. For now, I believe you just stay on the short side, because, let's face it, that is NOT where most people are...My perception is, the typical mindset among traders, whatever the market, is "where do I buy it?"...And how many, many, many times have all of us just "known" this or that market was so beat up it "just had to be a buy", or "probably didn't have much more downside risk", only to find out there was a ton of money still to be lost (or made) as that market kept on heading south?
Yes, many commodities have fallen substantially but I think it is important to note many of those markets are still at prices that several years ago would have been considered extremely high...And as we are most definitely NOT still in the same hyper inflated bullish commodity atmosphere of a year, or even six months, ago, but rather in a severe negative growth environment, some of those already fallen commodities are still at fairly ridiculous levels. For example, even though Soybeans have dropped from $16.00 down to $9.00, they are, by no stretch of the imagination, "cheap", nor for that matter are 92 cent Live Cattle, or $730 an ounce Gold...And I am therefore looking for the right time, place and strategy to be short all three of these markets, as well as several others...I believe the fact that Beans are not yet $2.00 lower, or Cattle 20 cents lower, is simply a function of time and leftover bullish attitudes. In other words, Cattle cannot go from $1.15 to $.75 a pound in a matter of days...It takes time to make a move of that magnitude and there are probably plenty of cattle people and speculators around who are still hooked into last years bullish "story" and willing to buy the market as it falls, thus preventing an overnight 30-40 cent price collapse.
In general, I will say I cannot imagine a near term return to anything even remotely approaching the bull market in equities we have seen since 1982. Compliments of the 2000-2003 bear market in stocks, followed by the 40% decline the investing public is now dealing with, I believe a generation of investors are in the process of leaving a marketplace to which they will never return...And without the public earmarking "x" percent of their retirement accounts for stocks, the fuel simply won't be there to see another run like the one that has taken the Dow from 770 in 1982 to 14,198 last year (1850% in 26 years!) Let's face it...the Stock Market is NOT a nice place. It does NOT exist to make the average guy wealthy and the idea that "it always goes up" is tremendously misleading. To me, it's just a big casino, maybe more diverse and slower moving than commodities (most of the time), but it's still just a game where the public, at least once a decade, gets clocked...from whence many people never return...And this latest go round, which I suspect is far from finished on the downside, is the one that possibly either breaks everybody, or at a minimum, chases them off forever...
Which leads me to the Treasury Bond market...With the fact that the working public will still have to do something with their retirement funds, I firmly believe more and more and more and more of those funds will be ending up in Bonds, and one result will be a potentially monster bull market in what I consider to be the safest, most desired piece of investment paper on the planet, or, US Treasury Bonds...I believe we are in something of a steep deflationary spiral, and with job losses potentially now in an accelerating phase (meaning NO wage inflation), we are in an environment that should be extremely conducive to much lower long term interest rates, and much, much higher bond prices. As some of you may know, I could easily put you to sleep with page after page as to what I see in the bond market, but I've learned that nobody really wants to hear it...So, all I will say is, the Baby Boom Generation has represented a worldwide boom in gobbling consumption, which led to roaring bull markets in stocks, and real estate, and commodities...And now, those bulls are all "done"...and this generation will primarily be concerned with holding on to what they have (and haven't lost), and fixed income is where the bulk of their investing will occur...And Bonds (formerly an Old Fogey instrument) will end up being the object of their desires.
Enough claptrap...Here are some charts and a few recommendations....
Give me a call if any of this interests you...or if you have any ideas of your own you'd like to explore,
Buy Treasury Bonds...Inflation is DEAD. Job growth is dead. The world monetary authorities are throwing everything they have at the economic crisis and you can bet that bringing long term rates sharply lower (and therefore Bond prices higher), somehow, is part of their plan...
Take a look at the velocity and percentage size moves have been, virtually straight down, in all of these major commodities and tell me you think there is even the slightest possibility inflation is going to be a problem...To the contrary, the problem is DEFLATION (when everything is losing value), and it is a hell of a lot more serious than inflation. In fact, it is specifically this, deflation, that gave the Great Depression its name...Are we headed for some 21st Century version of a Depression?...I don't know but I do believe all these following charts make a major case for owning the Bond market.
We are shorting the Soybean complex again...immediately.
Backing off of our positions in Lumber and Cotton....
And we still see Cattle as a MAJOR SALE and this is currently our largest position. It doesn't mean I'm right, but if I could only make one trade, this is absolutely the one it would be...If you want something to get started with, I think this is it...
Gold must be a short....Think about it. As you can see from all the previous charts, the inflation boogeyman that Gold bugs are always touting is TOTALLY behind us. The idea that the Dollar has lost its status as the world's reserve currency and is a piece of worthless paper is also a dead idea. And the WORLD is dead in the middle of the worst economic crisis since whatever, and Gold has been going down? And is just laying there? As always, I may be dead wrong, but I think this market is screaming, "Sell me!"...And I would add it needs to be done before all of those zillions of sheep who piled into Gold up there in the $900-$1000 range wake up and realize if none of the above could rally Gold, what is?