A Simple Message (long version)

By: Gary Tanashian | Wed, Mar 16, 2005
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A primary mission at biiwii.com is to remain neutral, to try to see reality coldly, clearly and without the tint of color from any particular pair of glasses, particularly those that are rose colored. It may be obvious that I am personally not a perma-bull, do not hold a favorable view of the fundamental workings of the US financial markets, do not hold a favorable view of the US consumption/debt culture that masquerades as an economy, and by no means believe that our immediate future will be better than our recent past, simply because we are entitled to such a destiny.

On the other hand, I have noted many people who consider themselves bears getting blown up again and again because they tie their actions too rigidly to their doctrine and refuse to wait for the markets to tell them when it is time to be right. Everybody wants to be right, but nobody is. Not all the time.

So how do we go at this mess daily, with an open mind, ready to be right or wrong, and more importantly, ready to make adjustments and take the particular actions that a given environment would dictate? A couple good ideas would be to try to subordinate ego and keep prejudiced thoughts at bay. The ego part is simple; You're going to be wrong sometimes. GET OVER IT.

As far as prejudiced thoughts go, here are a few examples that come to mind:

Alan Greenspan and his berserk fiat monetary regime: Blame him for reckless policy or not, the Fed is now, and has been for some time, giving signals you should be listening to. Tightening. The Fed is raising rates in an effort to reign in the bond market, stabilize the dollar and show the rest of the world that the US hasn't totally lost its mind. Meanwhile, certain Fed governors are out sooth-saying and trying to manage this tightening cycle to keep things calm. But you should keep your eye on what they are doing, and what they are doing is withdrawing liquidity little by little. The bond market yield spread has been the playground of many large commercial and speculative interests, and it has not given up without a fight. That may now be changing. Not only is the Fed saying rates are going up, but the 10 year treasury yield is starting to show it.

Even if this rise were to stop at what I'll call "red alert", just above 5%, don't you suppose it would have tradable consequences for the markets and very real consequences for the economy. My preferred view is that by the time the 10 year reaches 5%, there will be a lot more talk of deflation and a lot less talk of inflation. But by no means do I think deflation will carry the day, not without a fight from the promoters of inflationary growth. In other words, there will probably come a day when Ben Bernanke goes "steroidal" (as my friend John, coiner of a thousand catchy and hilarious phrases, has said).

Bottom line: The Fed is tightening, the bond market is starting to listen. The least we can do is tune in as well. Die hard goldbugs don't want to hear it, but their beloved miners are squarely in the gun sights. Perma-bull stock market participants and bond owners are too. The near to intermediate term, if history is any guide, might best be summed up by Richard Russell's famous line: "He who loses the least, wins."

Over time, the stock market always rises: Yes, and if you want to take comfort in that, be my guest. No doubt we will one day get a backdrop that encourages more inflationary policy, and all things not the dollar will rise again. After all, it is what has been happening for decades upon decades. It would be wise however, if you don't like riding out extended bear market phases, to adjust your thinking on a short or intermediate term basis. Personally, aside from the few speculations and foreign equities I am still involved with, I believe less is more right now; cash, short term treasuries, Central Fund of Canada (for reasons noted here), and fledgling short positions are where I will be near term. I should note however, that I am ready to be wrong. Maybe the forces driving the bond market are stronger than the Fed (doubt it), and the heretofore highly profitable carry trade will conduct business as usual.

Bottom Line: I am not a genius, therefore I will go by what I see on a day to day, week to week, month to month basis. What I see is a deflation spook being let out of the closet. If that thing slams the door open and gets into the room, gold stocks, broad markets, commodities, real estate and what ever else has risen contrary to the dollar over the last two years will be in short term trouble. Trouble that I want no part of.

Deflation is a secular phenomenon, and will not stop until debt is completely addressed and unwound: Yes and no. I do believe that deflation, through productivity resulting from technological progress and global labor exploitation, is the predominant backdrop to economic progress. But how often have policy makers let the deflationary pressures build up to a point, only to come to the rescue and fight it tooth and nail, slaying the savage beast and saving us all in the process? Our current household and government debt CAN NOT be unwound in an orderly way through deflation. It's not going to happen. So what is the solution? Yes, more inflationary policy to the rescue. Listen, since biiwii is non-commercial and I don't charge you for my opinions, I can say what I think, not what I think will sell. And what I think is this; we once had a good thing going. We had productivity in spades, with deflation the result. Prices declining as a result of real productive endeavors is a good thing. Prices rising and falling as a result of a constantly opening and closing liquidity spigot is not. We are off the balance sheet now, and no garden variety deflation, or withdrawal of liquidity is going to help. The cycle will grind on, inflation-deflation-inflation-deflation until one day the gears simply seize up.

Bottom line: Do ya feel lucky punk? Well do ya? One of these days, we are likely to get the final deflation or repudiation of a sometimes wildly successful and other times haggard-looking system of credit creation, monetary expansion and consumption. Final for this chapter in financial history, that is. But who says it will be this time? Sometimes greed is good, and sometimes pigs get slaughtered.

Gold is the only real money: Goldbugs make a strong, if sometimes over the top case. Gold is simply what it is, a beautiful, ancient metal with a history dating back to the dawn of civilization. But I seem to recall this green stuff in my wallet coming in quite handy many times. I would much rather have plenty of it than not enough. It is not paper currencies in and of themselves that define gold's importance. Rather, I would say it is the way governments and societies treat their currencies that define what gold will represent at any given time. Gold just is, everything else is in motion. I would personally rather see my currency, the USD, saved through sound macro-economic and financial practices than see its destruction and "gold to da moon!". At its heart, I like my country, and I sometimes wonder how that sentiment plays with some goldbug.

Bottom line: Gold related investments should not be treated as religion. In so far as one may want to preserve wealth during times of declining faith in a fiat currency regime, gold should be strongly considered. But to place it on a pedestal above all other assets known to man is to be blinded by its mystique, its lore and its legend. It is a tool to be used for economic survival or prosperity, and if you're reading more into it than that, you may well be setting yourself up to be on the wrong side of the trade one day.

There are bullish as well as bearish things going on in this chart of gold from 1972. It could well be argued that gold has not even broken out of its cyclical BEAR market from 1996. The magical 500 level has not even been approached, and may not be before a major deflationary "whiff" kicks in:

Meanwhile, we all know that more basic commodities have indeed gone "to da moon!".

We are Amercia, the last great superpower: Well, that may be so, but it is advisable to consider that we do not own or control history. We in the US have merely benefited well from it during our lifetimes. Existentially, we are what we know and do, and what we have done is ride a continuum of power and prosperity that has solidified the idea, among American citizens and I would guess, a significant portion of the rest of the world, that this is the way it is, and will be. Until one day it isn't. It is advisable to prepare for any future outcome, including one that includes the US being pulled back toward the rest of the pack, whether through the ascendance of China and its Asian neighbors, the European block or our own choking on gluttonous levels of credit and debt.

Bottom line: One could strongly argue that we are mortgaging our future, through denial and hubris, in the ill-fated attempt to continue being what we know we are. One caveat: Remember the old saying "if everybody knows something to be true, chances are it.................."? I'll stick to my old boy scout motto and be prepared!

A simple message (short version):

There are gurus and experts everywhere. They want to sell you gold stocks, energy and alternative energy stocks, tech stocks, blue chips, Asian stocks, Euros, Yen and bonds of all stripes. They want to sell you inflation, deflation, diversification, technical indicator identification and what-have-you-ation. In many cases they are quite helpful. But ultimately, nobody knows everything all the time, and I would argue that nobody knows most of what is happening in the financial world most of the time. There are simply too many variables, too many prejudiced, preconceived ideas and too many easy answers flying around out there.

My advise is simple; keep an open mind and try to incorporate every new day into your world view. I personally have a very definite game plan for how I think the near and intermediate term will unfold, and have allocated accordingly. But I could be wrong.

The above was written because I have been thinking about biiwii in existential terms of late. As in, why does it exist? It has thus far been a free resource aiming to present financial reality, not a pre-packaged, easy answer service. Yes, I have thought about commercializing the site but a question lingers; how does one sell reality, or more accurately, one's interpretation of reality? I would like to dedicate more time and resource to the site, and get into more detail, but to do so would involve subscription. For now, busy as I am with productive economy endeavors, I'll leave things as they are, but I am also driven to make biiwii all that it can be.

Thank you for hearing me out.

Your keeping an open mind essayist,


 

Gary Tanashian

Author: Gary Tanashian

Gary Tanashian
http://www.biiwii.com/

Disclaimer: biiwii.com does not recommend that any trading or investment positions be taken based on views expressed on this site. If you speculate or invest it is suggested that you consult a financial advisor qualified in your area of interest.

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