Tuesday, September 9, 2008

The 'D' Word ?

I thought it would be extremely helpful, with everything going on, to take a giant step back and look at the truly BIG picture. The chart above is a 20year monthly view of the S&P500. I have posted this chart previously, and for good reason, as it speaks volumes as to where we are. As my notes indicate, Does this chart look like a buy or a sell to you? Remember this is a monthly view, which like an ocean going freighter, takes a long time to turn around. This chart is not my bias but rather an observable fact.

That being said, and I remind you BASED ON THE FACTS, that I am a deflationist. I believe the credit destruction we are witnessing is so extraordinary, so overwhelming, so monumental, that it is swamping any and all efforts by the monetary authorities to counter it. Combine this with a massive de-leveraging due to an over leveraged global financial community and you have a very dangerous mix. Regular readers may then ask, so why then have you, dear speculator/blogger been at various points over the last year, long commodities and short bonds? Should not commodities suffer in a deflationary environment and should not bonds prosper immensely. To this, I say good question as it is one I would ask as I agree.

I will address the bond issue first. The thing I am struggling with is I see the debt being taken on by the Fed and Treasury, Fannie and Freddie just doubled the totals overnight. I understand the flight to quality, more specifically at the short end of the curve. I understand the argument for higher rates made by many, but the time for that has passed, it would now absolutely crush the housing market even further, which I realise the polyannas on CNBC find ludicrous.

Mike Panzner over at Financial Armageddon and author of the fantastic book by the same name, which you have to read if you want to understand what is transpiring. Remember now, he wrote the book over 2 yrs ago! Too bad Bernanke, Paulson and Co. had not read it as well.

A few days ago, Sept 3 to be precise. In his post "Even Low Risk Can Be High Risk in Dangerous Times", which is a great read and should get you thinking, Mike had a great chart of the long bond covering the late 20's thru the early 30's. The picture it shows in not pretty, as bonds were absolutely crushed in the deflationary environment of the day. Like today, many then flocked to treasuries as a safe haven. I am NOT saying treasuries are risky, but I will safe they are riskier than at any other time in the history of the United States period. If our foreign creditors vote with their feet and walk, bonds, specifically the long end is in HUGE trouble. Hence my on again off again interest in being short the long bond via the TBT.

Now the gold issue. Yes I own physical gold and silver fortunately for me at much lower levels. So why own gold in a deflationary environment? Sometimes I think of the admonition of grizzled markets veterans of he who loses the least is the winner. I do believe that of all the assets one can own going forward, gold and the other precious metals should hold up better than most or if you prefer, lose the least.

I do believe in peak oil and all of its attendant difficulties for the global economy. But I am also a tape reader and let the tape tell me what to do, no matter how strong my fundamental belief in a concept. That said the following group of commodity charts paint a very difficult picture and while I am not long currently, I have opined that the various commodity charts were in correction mode and NOT a bear market.

The question I pose aloud, is are the commodity charts speaking the dreaded DEPRESSION word? I do not like using this word as many out there use it as hyperbole or for grandstanding purposes. I cannot ignore the depths to which various commodities have fallen and this tells me that maybe something much larger and more ominous is developing and that no matter how bullish I might be on say, the oil theme, the global deflationary, depressionary forces are overwhelming it.

I want to thank Mike for his post as it got the little mouse who resides up in my brain, off his ass and into the wheel for a run, firing up the few brain cells I still have. Your comments, thoughts, or criticisms are always appreciated.

Good speculating to you all and never ever forget that "an investor is a speculator who made a mistake and will not admit it".

Open Positions:
Short 1 unit Int'l Bus Machines ticker IBM @ $129.05 stop at $126.36
Short 3 units FedEx ticker FDX @ $87.10 stop at $88.16
Short 2 units of Apple ticker AAPL @ $178.05 stop at $177.76
Short 1 unit Salesforce.com ticker CRM @ $57.05 stop at $60.62


Anonymous said...

Well I agree with you...It a deflation environment...The timing for the bonds trade is not good...The idea is good but not the timing....We need a crash in equity after we may see a bond crash like 1931..You need conditions for that...The dollar is a good clue...If the dollar keeps strenthegning no crash in the long end curve...Good luck

Anonymous said...

When you say you own physical gold, I envision bars of gold. How do you purchase these?

Harleydog said...


I believe bonds will tank as return OF capital will become more important than return ON capital.

Harleydog said...


yes you can own bars, ingots or coins. 1 oz Krugerrands carry the smallest premium over bullion but that changes, currently the Cdn maple leaf looks okay. find a reputable local coin dealer and you are set. The web site bullion direct, which I am in no way involved or compensated could also help.