 SIGNS OF THE TIMES - FEBRUARY 5, 2008
Autogyro Money?
Bob Hoye
Institutional Advisors
Feb 6, 2008
This Year:
The blaming of a $7 billion
hit to SoGen on one trader seems to be taking our old observation
that "The bigger the trading loss - the more unauthorized
the trade" to hitherto unimaginable levels.
The full story is not out yet.
However, considering the enormity of widespread losses, dire
exclamations would be natural, but have been subdued, or perhaps
we missed some. Or maybe, the lack is indicating that the worst
will be discovered over the next hill.
Last Year:
"Credit Woes Chip at
Banks"
"Even as the big banks
crank out double-digit earnings gains, weakening in credit quality
is showing up."
-Wall Street
Journal, January 18,
2007
"Conservative Investors
Line Up For Junk Bonds"
"The junk-bond market
is undergoing a sort of gentrification, appealing to more conservative
investors, who like many in the current low-yield environment,
are starved for higher returns."
-Wall Street
Journal, January 20, 2007
The old "reaching for
the extra 1/8th in yield" is always and inevitably a killer.
Well, the best that can be said for the exposure is that they
were onside for a few months as the yield and spreads
went the consensus way until May when the yield had declined
from 9.75% to 9.25%. With this the spread narrowed to a record
4.18%.
Now the yield is 14.32%, which
represents a plunge from 106 to 71, or 35 points. Not nice, and
there is a lot further to go as eventually many bonds will be
quoted in parts per million (ppm), rather than as percentage
of par. And the spread has now reached 10 percentage points over
treasuries.
Stock Markets: We have had the month of January as
a possible low for the initial phase of forced liquidation of
suddenly insupportable positions in the stock markets. This was
global and dislocated most sectors.
Using the Nasdaq, the "crash"
ran for the typical 55 trading days to Wednesday, January 22.
With this accomplished, the rebound could run into March and
retrace some 40% to 50% of the loss. It is worth emphasizing
that the break followed mounting problems in the credit markets,
which change is first in the order in ending a boom and starting
a cyclical contraction. The irony is that the next step on the
way is the break in the stock market, which is inevitably followed
by the economy rolling over.
Earnings usually turn with
commodities, and those who "study" the economy to determine
the course of the stock market are working with a self-imposed
and costly handicap.
While there could be unsettling
news items, the general market could recover to a tradable high
in the next 6 to 8 weeks.
Gold Sector: Technically gold's nominal price has
been acting well. The correction down to the 20-day moving average
at around the third week in January, was expected to be followed
by continuation to beyond 905. The correction low was 868 on
January 22 and the rally made it to 942 yesterday.
Needless to say, gold
has been gathering more widespread popularity - even wistfulness
amongst those following orthodox theories about portfolio management.
So, where do we go from here?
One aspect is that it is yet
another rotation into the latest fashionable game. This may be
so, but our view is that some of the move is due
to increased investment demand with the onset of the credit contraction.
This shows up in the real price of gold, which reached a cyclical
low in May at 143. This, of course, is when the credit markets
reversed and our gold/commodities index has rallied to 230 this
week.
However, in the past week the
senior gold indexes have not kept pace with the bullion move,
suggesting that the sector could have a brief rest.
***
 Much
is being said about Bernanke's "Helicopter Money,"
and some have concluded that the Fed, in its desperation to prove
that interventionist theories always work, will depreciate the
dollar to zero. Of course, great financial distortions can only
occur when intellectuals focus upon the markets and the blunders
can be monumental.
For example, during the notorious
German inflation of the early 1920s leading economists found
compelling reasons to keep it going. That really was a printing
press inflation and, given the technology of the day, it could
have been called "Autogyro Money". No matter what it
is called it destroyed Germany's economy and political culture.
But on the way, leading economists found reasons to keep the
rip-off going, that in today's light seem nonsensical.
"In proportion to the
need, less money circulates in Germany now than before the war."
-Prof. Julius
Wolfe, Summer 1922
"However enormous may
be the apparent rise in the circulation in 1922, actually the
real figures show a decline."
-Prof. Karl
Eister, 1923
A couple of generations of
gold bugs have been claiming that the Fed would ultimately accomplish
such an inflation. Our point has always been that in the early
1920s Germany had no bond market to destroy, and that the US
bond market and its "Vigilantes" would prevent the
actual printing of paper currency. And now a credit contraction
is underway that will likely forcefully prevent the Fed from
further massive depreciation by any means.
###
'Bob and Phil Show' Howestreet.com
Feb 1, 2008 -audio
-Bob Hoye
Institutional Advisors
email: bobhoye@institutionaladvisors.com
website: www.institutionaladvisors.com
SIGNS OF THE TIMES - FEBRUARY
5, 2008
Hoye Archives
The opinions
in this report are solely those of the author. The information
herein was obtained from various sources; however we do not guarantee
its accuracy or completeness. This research report is prepared
for general circulation and is circulated for general information
only. It does not have regard to the specific investment objectives,
financial situation and the particular needs of any specific person
who may receive this report. Investors should seek financial advice
regarding the appropriateness of investing in any securities or
investment strategies discussed or recommended in this report
and should understand that statements regarding future prospects
may not be realized.
Investors should note that income from such
securities, if any, may fluctuate and that each security's price
or value may rise or fall. Accordingly, investors may receive
back less than originally invested. Past performance is not necessarily
a guide to future performance. Neither the information nor any opinion expressed constitutes
an offer to buy or sell any securities or options or futures contracts.
Foreign currency rates of exchange may adversely affect the value,
price or income of any security or related investment mentioned
in this report. In addition, investors in securities such as ADRs,
whose values are influenced by the currency of the underlying
security, effectively assume currency risk. Moreover, from time to time, members of the Institutional Advisors team may be long or short positions discussed in our publications.
321gold Ltd
|
