short austerity, go long printing presses

The biggest news over the last couple of days has been that Portugal proved austerity is a short sale, as the government there basically “fell” after the Portuguese parliament rejected prime minister Jose Socrates’ modest attempt at financial discipline.

That Does Ring a Bell

Markets and investors have learned in Pavlovian fashion that trouble means a bailout is coming, and now they don’t even bother to panic and sell on bad news, but go straight into party mode, as demonstrated by yesterday’s Bloomberg headline: “Portugal Bonds Fall, European Stocks Gain, On Bailout.”

If markets can celebrate serious solvency issues because they are a harbinger of more free money, why should citizens be willing to stand by in any democratic country and let their leaders impose discipline and, ultimately, tough times on them when they can just be rescued by a policy that seemingly has no downside. Thus, not only is austerity a short sale, but the printing press has been raised to an even higher level of worship than it was before.

As for equity markets, they were higher around the world yesterday, and today they were mixed, with no big changes, while our market opened a bit higher.


In corporate news, Oracle was successful at beat-the-number and that stock traded higher, much as Micron had the day before. RIMM, however, imploded to the tune of about 10%, as it was not able to overcome the fundamentals of its business with hype about its tablet.

I had been afraid to be short RIMM because, given the rampant liquidity and people’s willingness to believe any story no matter how crazy, I thought the company might be able to get folks to overlook problems (as I saw them) in its business. Even while I expected their tablet launch to be a nonevent, I was concerned the company would be able to get the market lathered up about it and that excitement by the bulls might carry the day, but that turned out not to be the case. This is why I often say certain things don’t matter until they matter.

Back to the action, around mid-morning the market sprinted higher to gain better than 0.5% by early afternoon. It leaked for the rest of the session before closing with the modest gains you see in the box scores.

Away from stocks, the dollar was higher, bonds were lower, and oil was flattish, as were the metals.

Yesterday, in the early part of the day, gold and silver hit new highs before backing off and closing well off those highs. I’m sure the bears will declare that to be a reversal and the bull market is dead, but it is really just part of the noise associated with how the metals trade. I believe it is nearly impossible to have a major top with so little enthusiasm for (a record high in) gold. At a Barclay’s investment conference two days ago, 100 institutional investors were surveyed and not one expected gold to be the best-performing asset for 2011. In fact, they expected it to be second-to-last, just ahead of natural gas. Their favorite investment? Oil.

These Are a Few of Our Faber-ite Things

Wednesday afternoon I was fortunate enough to be invited to a presentation that Marc Faber was making to some of the top guys on the team that manages Bill Gates’ money. The man who runs that group, Michael Larson, is a friend of mine who was on the board of Pan American Silver with me for eleven years. Given all of the crosscurrents in the world, it was a wonderful time to be able to see what minds like these were thinking (Michael, Marc, and I also had dinner later). I wanted to share some of the main thoughts that emerged from the day.

First of all, I thought I used the term “money printing” a lot, but in the several hours that I was around Marc I must have heard him use it twenty-five times. In his view, money printing “distorts prices badly and causes huge misallocations of capital.” Thus, he feels that the wild volatility we have seen in nearly all markets will continue.

He, too, expects the response to any and all problems prospectively will be even more money printing, and he continues to be bullish on gold (he says the risk is in not owning it, rather than owning it) and is quite bullish on oil and oil stocks, adding that if you really think the economies of the world will do well, that is a commodity you definitely want to own.

Marc His Words

His expectation is that money printing will be such that stocks generically may be OK, as they have been in other countries where the confetti-making has gotten out of hand, his favorite example being Mexico from the early 1970s to the late 1980s. As the peso collapsed, stocks in general basically preserved purchasing power, which is the name of the game when the world is turning the colored paper we call “money” into confetti. In such an environment, it is extremely important to preserve your purchasing power (if not make it grow). Having said that, he sees markets in the short run as due for a decent-sized correction.

Marc also thinks government bonds will be a disastrous investment, and that the ECB will print money rather than risk a collapse of the euro. Obviously, others must have come to that conclusion; ergo, the party yesterday on the back of Portugal’s sliding bond market.

As for Japan, Marc sees selective, large-cap stocks as attractive there, since the Japanese will print money to finance all their reconstruction. Michael Larson also thinks certain large-cap Japanese stocks are interesting and is in fact buying some. In addition, Marc is keeping an eye on JGBs, as they may be an indication that things are starting to change in Japan in various ways.

Looking ahead, Marc said he would not be surprised to see sovereign defaults in the next few years. More importantly, in his view, central bankers have become such hostages to inflated asset markets, it is unlikely that tight money — whenever necessary — will be implemented again.

In summary, most of the conclusions that one would draw from the time we spent together are similar to views I already held, although it is always worthwhile to hear what other smart people are saying and thinking.

Why Pay Now When You Can Pray Later?

Marc closed his presentation with a terrific quote from Ludwig von Mises that I also wanted to share: “There is no means of avoiding a financial collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of voluntary abandonment of further credit expansion, or later as the final and total collapse of the currency involved.”

That, unfortunately, is the path we are on, which began with Greenspan in the early 1990s and his small bailouts, leading to the attempted bailout of the burst stock bubble with the real estate bubble. Now, of course, we have increased the stakes with the rescue of the financial system as we continue toward the destruction of the currency, as von Mises predicted.


About abwehra group

The Art&Science of Trading Gold
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