From the June, 2007 letter Don't Say You Weren't Warned - Again:
"The story that the above charts are telling is one of caution. One where the smart investor will question his or her conventional thought processes that were born of the 25 year bull market in bonds, courtesy of the last great fiscal authoritarian at the Fed, the inflation fighter himself, Paul Volcker. The story is that with the casino atmosphere that is a direct result of panic rate policy by the US Fed and other central bankers (after the 2000 bubble burst) and the good old dependable BOJ, "moral hazard is catching" and risk vs. reward has now become toxic."
Well, it was a good job of timing the warning but our analysis got whipsawed as the June letter projected a bearish summer as a result of rising long term interest rates and rising yield curves. But what actually happened was a sharp rise in the Yen (as projected in the May letter), yield curves and of course, credit spreads. Regardless, it doesn't matter so much how we got here. We are here, and all these indicators tell the same story: morally hazardous chickens are coming home to roost. Yet an upturn in long term rates would only make matters worse.
Today we use stockcharts.com's 'sunset' theme for the charts as a symbolic nod to what I believe are the last days of global investors' ability to hold the stitching of their respective FrankenMarkets together; to hold onto the illusion that their markets are underpinned by something real, healthy and productive. Due to the mind boggling levels of credit (debt), derivatives and other genetically engineered financial products securitized and distributed into the market place, the whole mess is supported by the ability to keep up appearances.
These are indeed dangerous times but I would like to note that they are as potentially dangerous to bears as they are to sleepy bulls who have been bred to believe that there is always another bailout (something for nothing) on the horizon when things get a bit dicey. In this regard we say 'price is price' and 'value is value'. They are two completely different things. The 'price' of the Dow could be 15,000 within a couple years but if you drill down into the economy, into the mechanics of the financial system, do you find something productive driving things or do you find more inflationary policies? The question becomes when does a critical mass of people begin to question the very currencies their investments are denominated in? As we all know, there is currently massive and growing pressure on global policy makers to compete in currency devaluation while hoping against hope that the conventional herds will continue to pop the blue pill (Move along... nothing to see here. Click your heels and wake up safely in your own bed in Kansas) of convention.
But it is the unconventional that is really interesting at this time. That is because rarely do you get a chance to cast your lot, with patience and dedication, in alignment with fundamental beliefs based on secular changes. But when it does happen, it can change your life. Readers of the blog know that I recently switched from technical analysis supported trading to fundamental gold sector bag holder. The reason? Because I believe it is illogical to try to aggressively trade in the face of important macro-fundamental changes and at this time virtually everything is coming into gold's favor monetarily and the gold miners' favor fundamentally. So no over-trading. Just positioning and risk management in the form of always having cash available for future opportunities. This is indeed asymmetrical warfare taking place in the financial markets, but there is a calming effect when you deeply believe you are on the right side of the big picture, as I currently do. Meanwhile, the vast herds continue to limit themselves to these general questions: "Do I hold stocks and bonds for the long term?"... "Do I get safe and go all cash?"... "Do I trade and stay nimble?"... "Are foreign markets safer?"... "In Greensp... err, Bernanke we trust?" and various other neatly packaged conventional questions that keep many investors from doing the hard work of realizing the big picture depths we have sunken to.
In the final analysis, there is no free lunch, yet free lunch is what we have demanded all too much of. As Biiwii.com guest writer Jim Kunstler wrote "I haven't changed my view of what is happening to us. We have run out our string of stunts and tricks in the money rackets. We've spent our legitimacy." We have done this at the expense of future generations. We didn't get something for nothing. We got something for something and that something will be paid by our kids and their kids. It is sad, piggish and the result of mass hubris. But here, in the grips of Deflation Scare '07, we find things are anything but symmetrical and a hubris born of lazy confidence is falling away. I firmly believe we are entering another leg of the secular turn that began in 2000. The question is can global central banks do anything about it or will Robert Prechter prove correct in that pushing on the limp string of deflation is futile? Regardless of the answer to that question, gold should be a part of any sensible portfolio in the form of actual physical bullion, physical bullion services such as BullionVault, GoldMoney or Perth Mint the gold ETFs like GLD and IAU or, on the speculative (and potentially highly profitable) end of the spectrum, solid gold mining, exploration and royalty equities.
In taking the pulse of sentiment, it can be argued that the public is still doped up on the blue pill and is nowhere near understanding that secular changes began to kick in in 2000 and are today on the brink of extension. In 2002 daily life, it felt very lonely as a precious metals sector trader. Five years later, with gold at $700/oz., nothing has changed except that the metal's boat was lifted by a massive awakening as to the value of resource commodities in the face of rapidly industrializing developing countries. But gold is not a resource commodity. It is a safe haven. It is THE safe haven when currencies created out of thin air come under rightful questioning. So, as I have alluded to many times in the recent past, gold's fundamentals were not helped by being part of the 'resource boom' or China or India trade. In fact, the metal was ensnared in a 'commodity basket' with an investor base that by definition would become weak handed in a contraction. Thanks to people like Bob Hoye and Steve Saville (another guest writer of ours), folks have had a chance to understand vital differences between widespread perception of gold's fundamentals and Old Yeller's actual fundamentals. Gold tends to shine brightest during economic contraction, when central banks are being pushed to debase their respective currencies through inflationary interest rate policies. Commodities, which are positively correlated to economies are different. The play on the gold miners is of course that while their product is rising in relation to nearly everything else (due to its monetary safe haven bid), their bottom lines receive a turbo charge at a time when most other companies' profits have either maxed out or turned down.
While I expect that the world's central banks are not going to simply roll over and let the metallic inflation barometer have a free run at $1000/oz. and beyond, gold's performance throughout the summer of discontent argues strongly that it is decoupling from the global bull market in conventional and lazy risk taking. The gold miners, with their leverage during economic contraction (did we really need Friday's jobs report for confirmation?) have also begun to get themselves out of the pig's wake of late as many of their cost inputs decline, although we are still waiting on oil. As any experienced gold sector trader knows, nothing comes easy. But a sound strategy of cash and risk management and buying the downers in the face of what will almost certainly be asymmetrical financial warfare by monetary authorities world-wide should prove highly successful in the long run. After all, when we are talking about secular changes, we are talking long run.
All is not fundamentally well in the global casino. We cannot be sure the current deflation scare will not somehow get papered over with appearances being kept up yet again and the Dow's nominal 'price' at 15K or 20K somewhere out on the horizon. But it is never a bad idea to try to hone a clear vision about what this is in the big picture and take sensible steps to a) not get blown up by it whether long or short and b) take advantage of it. The nature of asymmetrical warfare is that the other side can't see its true intent. In the ongoing financial war, most people still have no clue that we are 7 years into a secular bull market in gold. In fact, if you mention gold to the average person you are more likely to get an odd look or worse, a derisive attitude than you are to gain someone's sincere attention. Call it the Buffet indicator.
The above, as with all of my work is a sincere effort to present views I hold. But they are my views born of my work. You must do your own work and form your own conclusions or seek out trusted and reputable professional financial advice. The biiwii.com website is not commercial beyond a few affiliations with partners I trust and some targeted Google advertising. I am considering moving forward with a custom charting service and we will see on that. But primarily, the work presented on the site exists because I care about what is happening in the financial world and by extension, the real world. Good luck and be safe. Website terms & conditions are located here and can be referenced any time.