I love the whole inflation vs. deflation debate. The "hard-core" bears all say a deflationary depression is unavoidable. People like Bernanke (and probably me) think that inflation is always possible with a fiat currency given the political will for it. This week we saw another upside "surprise" in the official inflation figures (CPI at .4). And Bernanke announced another $1 Trillion in money printing (to me, the definition is expanding the money supply in excess of natural demand).
The inflation bets have been on fire since the Fed announcement. 17% increase in two days for gold miners, gold itself soaring, oil soaring, materials, commodities all soaring… Bernanke can certainly beat deflation with this current strategy – unfortunately the consequences will probably be quite disastrous. Then again, I think a reasonable argument can be made the inflationary disaster is better than deflationary disaster. Time will tell. But I’m really starting to believe that if you aren’t investing to benefit from inflation, you are going to get hosed. Cash is not where its at.
I am now up big for the year and have hit a new all time high net worth. I have sold 1/3 of my muni bonds for 10% profit and remain mostly fully invested in "inflation bets". I have no intention of closing out positions until VIX/VXO fall to the low 20's.
To quote Kaplan again:
U.S. Treasuries rose slightly, although they did not nearly approach
yesterday's intraday peaks and gave up almost all of their early gains. I
expect U.S. Treasuries to soon stage a major downside breakout.
The U.S. dollar continued its recent dramatic plunge, and has given up more
than two months' worth of gains in just one week.
UNG, a fund of natural gas futures which I have been recommending for
purchase, retested its lows in the morning by dipping to 15.18, and then
soared to a late afternoon high of 17.29 (not 18.48, as some sources
incorrectly reported) before closing up 2.03 (13.33%) at 17.26. Most other
commodities also rallied, while equities closed narrowly mixed.
As the global recession becomes an accepted way of life rather than a shock,
people are beginning to realize that it is a two-edged sword rather than all
gloom and doom:
http://www.nytimes.com/2009/03/19/fashi ... ef=fashion
Today's first main topic is why the Fed is talking about buying U.S.
Treasuries and mortgage-related agency securities, and what impact this will
have on U.S. Treasury prices.
There was a lot of media hype yesterday when the Fed announced at 2:15 p.m.
that they were going to buy a trillion dollars or so of U.S. Treasuries and
mortgage-related securities.
It was well known that the Fed was not going to change their interest-rate
policy. So why would they make such an announcement?
In recent days, there has been a lot of concern expressed publicly by China
and other countries about the Fed's recent spending spree and the Fed's
decision to back up enormous potential loan losses which could run into the
trillions of dollars. China and other central banks have been known to
complain privately for years, but to take their concerns public is unusual
and shows the extent to which they have become alarmed by the Fed's
free-spending, socialist programs of the past year.
The Fed could have reassured China and other countries privately that they
were going to take various actions to ameliorate their concerns. Instead,
the Fed decided to take the very public step of announcing that they would
make a large purchase of Treasury and agency securities.
When you look at this decision from a rational point of view, rather than an
emotional one, you can see that it was a serious mistake by the U.S. Federal
Reserve.
A trillion dollars may sound like a lot of money. However, as the U.S.
Treasury market is considerably larger than all of the U.S. equity markets
combined, it's really no more than a few handfuls of peanuts for an
elephant.
Just as importantly, the financial markets always instantaneously adjust to
any such announcement, even if the planned actions will not occur for
several months or years. TLT, a fund of U.S. Treasuries averaging 25 years
to maturity, surged immediately to its intraday peak of 108.07, which is
still enormously below its December 30, 2008 zenith of 123.15. TLT is not
likely to surpass that mark for at least two more years, if then. Notice
that today's high for TLT was far lower, at just 105.66.
If you have a gun with six bullets and you are facing an adversary who
doesn't know how many bullets you have remaining, then you have some power
over your opponent. However, if you fire all of your bullets so that your
enemy knows you have none left, then you are completely powerless.
As of yesterday's foolish announcement, the Fed has now shot all of its
anti-inflation bullets. It has no ammunition left, and everyone knows it.
The market has already priced in its anticipated purchase of a trillion
dollars worth of securities. Unless it plans to come up with a few more
trillion, there will be no further positive impact.
What is even more important is that the Fed has created a false and
dangerous sense of security among investors both large and small in this
country and abroad. Those who are planning to refinance their mortgages now
have the illusion that the Fed will keep mortgage rates low. Those who own
U.S. Treasuries similarly believe that the Fed will prevent any serious
decline in these prices.
Once prices plunge, as they would have done with or without any Fed
announcement because of 1) massive global government spending; 2) the normal
behavior of inflation during any extended period of economic stagnation; and
3) pro-inflation policies such as the Swiss government's adoption of
"quantitative easing" (which is just another name for saying "let inflation
reach double digits ASAP"), U.S. Treasuries were set for a historic collapse
no matter what the Fed did.
If the Fed had not intervened, then at least people would have thought,
"Well, the financial markets have been quite volatile, so it's no big
surprise that U.S. Treasures are volatile also." But when the Fed has made
such a public show of allegedly supporting the U.S. Treasury market, and
then prices plummet just as rapidly, you can be sure that the Fed's
reliability will be in serious jeopardy. People will think, "The Fed said
they would keep mortgage rates low, and yet here they are above 8%. The
government lied, just as my sister said they were doing. I'm never going to
trust the government again."
Once people lose confidence in the Fed, this will likely cause an even
bigger plunge in the U.S. Treasury market than would have been the case
otherwise. When confidence is lost in the world's biggest asset class, then
there's nothing left. U.S. Treasuries are not backed by anything, nor are
they guaranteed by anything other than people's confidence in the government
and its ability to follow through on its promises.
I therefore believe that the likelihood that TLT will plunge below 70 later
in 2009 has increased by a significant percentage as a result of the Fed's
announcement yesterday.
I normally don't like to buy leveraged funds, nor do I like buying something
which has already increased substantially in price since my last purchase.
However, since TBT is such a compelling buy, I may consider adding to my
position even though my last and only purchase was at 35.98, as readers know
from my intraday update of December 30, 2008.
The recent sharp rise in GDX and other commodity-share funds confirms that
the Fed's announcement was highly inflationary.
In summary, the Fed's announcement about buying government securities is
strongly bearish for those securities because it creates a false sense of
confidence that, when shattered, will lead to an even worse collapse for
U.S. Treasuries and mortgage-related agency securities.
Today's second main topic is what to do now that there are no fabulous
bargains remaining.
The short answer is simple: nothing. Most of the time, you should be
neither buying nor selling. Now that the crocus bottom has come and
gone-although most crocuses are still blooming as brightly as ever-you can
relax, take a vacation (holiday), finally catch up with those chores you've
been postponing (like doing your income tax), and console your friends and
family who emotionally sold their stocks a few weeks ago.
Remember that bull markets have the sharpest one-day pullbacks. Since we
have not had such a rapid decline for some time, its chance of happening has
been increasing. There will likely be an average of two big down days per
month over the next half year, as we enjoy perhaps the biggest stock-market
rally in your lifetime (unless you were trading in 1933).
After each such down day, review a list of those securities that you were
interested in buying. If any of them have retreated to attractive levels,
then you can add modestly to your holdings in those securities.
If VXO and VIX spike sharply higher during any of the sharp pullbacks over
the next half year, then you can be more aggressive in adding to your equity
and/or commodity holdings, since it means that a longer period of time will
likely have to pass before we reach the ultimate peaks in 2009 (and in early
2010 for some lagging commodities such as crude oil).
To keep your trading sharp, it is ideal to take periodic lengthy breaks to
allow you to review the markets from a distance and to give you a clearer
overall perspective. This will enable you to become more alert and focused
once we begin to form important tops and it becomes necessary to take action
on the selling side.
Above all, do not sell just because something you bought has doubled (or
tripled) in price, or because of other artificially conceived targets.
Unless insiders become heavy sellers, and there are increasing negative
divergences, and VXO/VIX have fallen below 20, and there has been a recent
nearly vertical ascent for several weeks, and there are other reliable
signals which tell you it is too dangerous to remain heavily on the long
side, it is pure folly to sell.
In my opinion, it is worse to sell something and then watch it continue to
surge higher, than it is to not own something in the first place.
Be patient. Do not sell your holdings until there is a truly compelling set
of reasons to do so.