Monday, May 12, 2008

Observations and Thoughts

I want throw my 2 cents in on the deflation/inflation argument. I am aware of the division on the street regarding this. There are many well traveled shrewd insightful analytical market minds on both sides it can be confusing. I am going to jump around on what many of them think and my thoughts on theirs. It may be a little haphazard, but that is how my mind works. It's ADD combined with hyperness, with a touch of caution as I always assume I am the sucker until I can prove otherwise. (I do so as it tends to save me money!)

Remember I am summarizing what I have read and followed about the mentioned market observers from recent memory. I am NOT quoting them and hopefully not misrepresenting what they think or have said, given that they may have modified or adjusted their positions which is their right. I welcome any feedback or clarification regarding their positions from my readers or even the people mentioned.

  • Jim Rogers/inflationist- brilliant, no other way so say it I agree 95% with his outlooks on bullishness for commodities, I diverge with him on China's market, in that I truly believe the corruption and speculation there are endemic and need to be purged out something awful. The economy and the market can diverge significantly. He likes the yen, yuan and the Swiss Franc while hateing the US dollar which I agree with.

  • Gary Shilling/deflationist- oozes wisdom no matter what the shallow pollyanas like Jerry Boyer on Kudlow say or think about him. He has forgotten more than lighweights like boyer could ever dream of knowing. Shilling thinks the dollar is done and loves the long bond. I agree with him mostly my exception is with his call on the long bond. I am petrified that foreigners, yeah those cats that buy all our paper are going to realise that we are bailing everyone out and the gig is up. The bonds will tank something awful. People forget that the bond market got obliterated in the deflationary depression of the early 30's. I have not blogged about the bonds in a while but there is not a day that goes by that I don't watch whats going on and contemplate and bond market massacre. I want to short the long bond via the proshares PST(10yr) and TBT(30yr) but have not and will wait on this, call me conflicted.

  • Mike Shedlock and Mike Panzner/deflationists- excellent analytical minds with Mish being an analyst at my old firm BMO and Panzner the author of the prescient book Financial Armageddon, which is must reading, especially now that much of what he called is unfolding. Both believe credit is being destroyed faster than it is being created.

  • Richard Russell/inflationist- his motto is that governments have 2 choices, inflate or die. I agree but I have to reconcile that with the credit destruction Mike,Mike and Gary are calling. I watch the St. Louis Fed adjusted monetary base chart and it is talking deflation to me. I must remain flexible but the chart is saying deflation unless it is wrong and I am highly skeptical of many government statistics. He is bullish on the equity markets now.

  • Bill Fleckenstein/inflationist - He can be summed on with his web site motto, "In a social democracy with a fiat currency, all roads lead to inflation." Very bright analytical mind and a true contrarian. Some dismiss him at first glance but don't let the long hair fool you, wise beyond his appearance.

  • Marc Faber/inflationist- believes money creation is full throttle ahead. like emerging economies like South Korea. Dr. Doom is a misnomer as he has been bullish on many markets when need be.

  • Jim Sinclair/inflationist- believes the derivative situation is dire and we are heading to a Weimar republic situation. Calling for the $USD at 52 which I cannot disagree with and believe. He is looking for $1150 and then $1600 gold. I lifted the following from his web site Jim Sinclairs MineSet",There is no escape from a Global Weimar Experience as Central Banks monetize bankruptcy. Equity markets in the Weimar experience went to unimaginable levels on the upside." Given my disposition to being short this sits in the back of the mind on a constant basis and not in a good way.

This is a short list I may do another one with more shrewd cats I try to follow. So where does this leave us here at Prudens Speculari.

I believe we are experiencing unprecedented credit destruction and contraction and the banks retrench. Economically I am an Austrian at heart and inflation is everywhere and always a monetary phenomenon. I believe credit increases are inflationary not a rising oil or corn or what have you price, which is a reflection or symptom of the credit increase. I am watching the adjusted monetary base chart for clues.

To be blunt I am watching for things that the correlation, black box, intellectual thinkers believe cannot happen. Government remedies and intervention only exacerbate the issues. I am worried that things are so critical and so dysfunctional, and that as market participants try to adjust and feel their way around we can, are and will get temporary misleading signals as 'the market digests what is truly going on. Which I feel is a bursting of the mother of all bubbles, the credit bubble, whose ramifications are global, UK, continental Europe, and Australia. Its attendant effects on banks, credit creation and the consumer.

I sit sometimes thinking globally we are on the verge of a Daimler/Chrysler situation. Remember that, it was called a merger of equals but I remember an obscure analyst whose name I cannot recall who claimed that either Daimler came down to Chrysler's level or Chrysler came up to Daimlers'. As my wife is fond of saying, water finds its own level. Globally are we going to find the emerging markets economic level or are they rising to meet us. I think it is a combination of the 2 with them coming to us, slowly but surely but more problematically we falling faster to them.

Should we be long emerging markets short developed UK, US on a spread trade. Not a bad idea. I don't believe we can decouple. We consume like nothing else can and those hoping the Middle East and BRIC countries will replace us lockstep is fantasy. Our economy is 70+ % the consumer and it took us decades to get where we are, Should I believe they (BRIC) consumer will arrive at the same place overnight.

I am a peak oil believer. We are not in a bubble although speculation is present everywhere and always. Simply put easily accessible and plentiful suppy has all been found. Demand is rising, recession or no recesssion. Crude is still cheap compared to other goods. Gold is insurance but may very well become money, for as an Asia college buddies grandfather used to always say, "no trust paper!"

So where am I ? I am squarely in the deflationary camp, with the perogative to change my mind at any time !!!

My apologies for the lengthy post but I do this for me as well as my readers, buy mainly so I can go back and read over how stupid or wrong I was at any particular time in the past !

Wishing you continued success in all your endeavours and above all Good Speculating to you all !

Open Positions:
Long 6 units Currencyshares Japanese Yen ticker FXY @ $88.55 stop at $91.40
Long 1 unit Allis-Chalmers ticker ALY @ $14.45 stop at $16.64
Long 2 units Ultrahort Real Estate ticker SRS @ $85.35 stop at $84.84
Long 2 units Ultrashort MSCI ticker EFU @ $76.25 stop at $74.34
Long 2 units Powershares DB Agriculture ticker DBA @ $36.35 stop at $36.46
Long 2 units Ultrashort S&P500 ticker SDS @ $57.05 stop at $56.14
Long 1 unit Ultrashort Russell 2K ticker TWM @ $74.60 stop at $69.92
Short 2 units Daimler AG ticker DAI @ $86.20 stops at $82.48/$81.38
Short 1 unit Brinker Int'al ticker EAT @ $21.25 stop at $24.14
Short 3 units Retail Holders ticker RTH @ $96.72 stop at $98.56
Short 2 units Goldman Sachs ticker GS @ $197.95 stops at $192.14/197.68
Short 1 unit Darden ticker DRI @ $37.30 stop at $40.27
Short 2 units Lehman ticker LEH @ $43.70 stop at $47.46


m said...

Phenomenal post. Thank you.

Harleydog said...

M thx for reading and your kind words are appreciated !