DELEVERAGING OR DEFLATION??
Started Nov 20 2008 at 10:50PM (EST) (By dgryder)
New post from www.stockshotz.blogspot.com
So many people are confusing deleveraging with deflation. Lets go back to Jim Rogers fundamental discussion on oil. He simplified the equation by saying that we obviously have growing demand for oil over time and we haven't discovered "major" new field in the last 30 years. So I ask the question, is demand for oil falling this rapidly or are falling prices the function of hedge funds selling? Many investors are selling anything they can get their hands on to raise capital. Now I don't doubt that oil may have gotten overdone to the upside, but markets tend to overrun.
Ask yourself another very simple question. Do we have to have oil to operate our economy? Yes we do and this economy will get going again. We have overrun to the downside and will see the demand story emerge very soon. Think about this in terms of "percentage chances". As oil prices fall, consumers will either do more driving or they will have more disposable income to buy goods. How do goods move around the country? It takes OIL. I know that is a ridiculously simple example, but it will materialize quicker than most believe.
We all know that markets aren't supposed to move in a straight line. When they appear to you must look for an extenuating circumstance. That circumstance in the case of oil is the dollar rally. The dollar and oil have been feeding off of each other since the late spring. What happens when this dollar rally ends? How can you believe that the dollar can continue its run in the face of all of this government borrowing? Jim Rogers was concerned about the Federal Reserve destroying the value of the dollar back when the only bailout was Bear Stearns. Many so called "pundits" are patting themselves on the back bragging about how they have been right on the money with their deflation call. They have been patting themselves because they have seen the greatest deleveraging in the history of the world. Will any of you out there argue that our economy---from hedge funds to consumers and their credit cards-- was not abusing leverage? If you would like to make that argument, please post a comment.
I don't want to touch any new stocks here. I sold some stocks today. I said last night that we didn't need to see a 400-500 point down day on the DOW today. We didn't see the slam down---just the slow bleed. I think we could see 6500 on the DOW before the end of the year. I do believe that 450 on the S&P is also possible. We are almost certain to have some form of a suckers rally soon, but it won't be a very big one. We could rally tomorrow as some shorts cover their positions and go party the weekend with the money they made. When it seems too easy---and the short side has been easy---it is likely to change even if only for a short period.
I still like UNG. Yes I know I am down in that trade, but I think natural gas is the poster child for getting smacked during the deleveraging. I also like gold for a longer term play. Gold may be headed down if the deleveraging keeps getting mistaken for deflation over the short term. GOLD IS A LONG TERM PLAY.
Most people don't want to hear that the pain for our markets is just beginning. Someone make a comment and let me know what positives you can see---I don't see them. The good news is that we have ETF's which will make it easier to profit once inflation begins. GOLD OIL NATURAL GAS.
So many people are confusing deleveraging with deflation. Lets go back to Jim Rogers fundamental discussion on oil. He simplified the equation by saying that we obviously have growing demand for oil over time and we haven't discovered "major" new field in the last 30 years. So I ask the question, is demand for oil falling this rapidly or are falling prices the function of hedge funds selling? Many investors are selling anything they can get their hands on to raise capital. Now I don't doubt that oil may have gotten overdone to the upside, but markets tend to overrun.
Ask yourself another very simple question. Do we have to have oil to operate our economy? Yes we do and this economy will get going again. We have overrun to the downside and will see the demand story emerge very soon. Think about this in terms of "percentage chances". As oil prices fall, consumers will either do more driving or they will have more disposable income to buy goods. How do goods move around the country? It takes OIL. I know that is a ridiculously simple example, but it will materialize quicker than most believe.
We all know that markets aren't supposed to move in a straight line. When they appear to you must look for an extenuating circumstance. That circumstance in the case of oil is the dollar rally. The dollar and oil have been feeding off of each other since the late spring. What happens when this dollar rally ends? How can you believe that the dollar can continue its run in the face of all of this government borrowing? Jim Rogers was concerned about the Federal Reserve destroying the value of the dollar back when the only bailout was Bear Stearns. Many so called "pundits" are patting themselves on the back bragging about how they have been right on the money with their deflation call. They have been patting themselves because they have seen the greatest deleveraging in the history of the world. Will any of you out there argue that our economy---from hedge funds to consumers and their credit cards-- was not abusing leverage? If you would like to make that argument, please post a comment.
I don't want to touch any new stocks here. I sold some stocks today. I said last night that we didn't need to see a 400-500 point down day on the DOW today. We didn't see the slam down---just the slow bleed. I think we could see 6500 on the DOW before the end of the year. I do believe that 450 on the S&P is also possible. We are almost certain to have some form of a suckers rally soon, but it won't be a very big one. We could rally tomorrow as some shorts cover their positions and go party the weekend with the money they made. When it seems too easy---and the short side has been easy---it is likely to change even if only for a short period.
I still like UNG. Yes I know I am down in that trade, but I think natural gas is the poster child for getting smacked during the deleveraging. I also like gold for a longer term play. Gold may be headed down if the deleveraging keeps getting mistaken for deflation over the short term. GOLD IS A LONG TERM PLAY.
Most people don't want to hear that the pain for our markets is just beginning. Someone make a comment and let me know what positives you can see---I don't see them. The good news is that we have ETF's which will make it easier to profit once inflation begins. GOLD OIL NATURAL GAS.
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6 Comments
Top 2%
MasterOFate
Nov 21 2008 at 1:06AM (EST)
Currently, the market expects deflation of 4% over the next 2 years.
"Breakeven rates, which show the difference in yields between inflation-linked and nominal bonds, suggest traders are betting the U.S. economy will face deflation over the next two years. The two-year U.S. breakeven rate was minus 4.04 percentage points."
http://www.bloomberg.com/apps/news?pid=20601087&sid=abcsXIgEMs2o&refer=home
Top 1%
V4Vendetta
Nov 21 2008 at 1:51AM (EST)
This is what is known as a 'false dilemma'. There is no reason you can't have both.
We've been on a deflationary trend since last year due to increasing debt defaults. *This* forced the de-leveraging, not the other way around. Many hedge funds made the wrong bets on sub-prime MBS' and had to unwind other, more profitable positions, in order to meet their margin calls.
Demand for oil can go down. People can drive smaller cars shorter distances. They can consume less. Many will have to, due to unemployment.
Deflation *destroys* demand. People can't buy cheap assets with money they don't have.
Top 1%
dirtyharry
Nov 21 2008 at 3:00PM (EST)
On oil -
Thinking globally, if I were a country like China holding all of those U.S. dollars that are about to devalue, I'd be loading up on oil futures using those dollars to fund my future expansion on the cheap......
On another front, my Jan 10 GLD $90 Calls finally went up today. From $6.40 to $10.40. There could be a lot more to go. If we get the inflation that I expect and not your deflation, I see gold topping $1500 by Q2 2009 and those contracts going to $65/pc.
Top 1%
beancounter
Nov 21 2008 at 3:15PM (EST)
Nice Dirty! that is sweet. Given how well GLD has held, that's a great play.
With regard to China/oil, there has been noise that China may use those dollars to buy gold, instead of oil, so your play there may have even more support.
Regarding deflation/devaluation/prices going to hell fast - You may have noted also that even the utilities have reported substantially lower electricity usage as well, which is making them nervous and will likely mean they report lower earnings, and possibly div cuts.
Top 1%
beancounter
Nov 21 2008 at 3:16PM (EST)
Ultimately however, this bubble in bonds will burst, and those treasuries you're buying for $125,000 with a par value of $100k, will come crashing down 30+%.
Top 1%
V4Vendetta
Nov 21 2008 at 4:20PM (EST)
I'm skeptical of the whole 'bond bubble' thing. There are too many negative-feedback mechanisms in place to prevent that from happening, I think.
But I admit I may not understand the argument that well.
The economy moves in cycles and when some sectors start growing again the hedge funds will sell their bonds and start investing again.
I was about to comment that a 'bond bubble' makes about as much sense as a 'cash bubble'; but I just realized that deflation *is* a cash bubble!
Re: Gold. Most people don't know that the largest holder of gold bullion reserves in the world is the US government. By a factor of two. China has a long way to go to catch up.