Cuts Like a Knife

I took it all for granted
But how was I to know
That you'd be letting go
--Bryan Adams

As stock markets chug higher, the under performance anxiety is getting pretty palpable. Increasingly, professionals and retail investors feel the need to get there.

Two scenarios are plausible. One is that more folks jump on the train and higher prices become a self-fulfilling prophecy.

The other is that with sentiment getting giddy, Ms Market is ready to lop some heads.

No edge from where I stand on how to play it. Although today I was tempted to slap on some upside exposure just because it feels like they're going higher.

But chasin' 'em's not my bag.

Dealing Propaganda

Been away so long I hardly knew the place
Gee it's good to be back home
Leave it till tomorrow to unpack my case
Honey disconnect the phone
--The Beatles

My friend Vitaliy discusses the new Michael Moore 'Capitalism' movie thru his lens of a former citizen of the Soviet Union. He proposes that successful propaganda efforts share three characteristics:

1) influencing attitudes rather than providing information
2) selectively presenting facts (what he calls 'lying by omission')
3) eliciting emotional rather than rational response

The short story is that, if people engage their brains and employ their capacity to reason, then propaganda is rendered useless.

Contraction Action

Look up on the wall, there on the floor
Under the pillow, behind the door
Theres a crack in the mirror
Somewhere theres a hole in a window-pane
--Genesis

The observations of 'money printing' by the Federal Reserve continue. Such money printing is thought to be a primary driving force behind the recent rise in gold. Spectres of 1920s Weimar or modern Zimbabwe come to mind.

For the most part, however, the Fed is not printing currency via a 'printing press.' Instead, it is trying to create credit. It is offering cheap credit supply to the banks. However, to pyramid this initial credit supply thru the monetary system requires credit demand by banks and, ultimately, from borrowers.

When the monetary system is functioning 'normally', $1 of Fed credit might be pyramided into anywhere from $10 to $100 of credit via the banking system. Currently, demand for credit is low, resulting in a much lower leverage ratio.

Moreover, money 'velocity' data suggest a marked decline in funds actually being used in transactions. Money is being hoarded by both lenders and borrowers alike.

This is classic deflationary, not inflationary, action.

position in gold

Out of Bounds

The reflex is an only child, he's waiting in the park
The reflex is in charge of finding treasure in the dark
--Duran Duran

Hard not to like the picturesque breakout in gold today. Nice pop from the mini pennant formation on good volume.

Futes hit a record high today and finished closed strong above 1040/oz.

One news item driving the dollar lower, and thus gold higher, has been growing chatter that nations plan to switch out of USDs when paying for oil.

There's been considerable debate over whether sentiment towards the yellow metal is overly bullish or bearish. On one hand, many gold newsletter writers report that die hard gold bugs expect a sizeable correction pending--suggesting that the gold trade isn't very crowded. On the other hand, commitment of traders numbers indicate large short positions for commercial hedgers (the alleged 'smart money').

I've certainly been among the skeptics. For some reason, I haven't liked the action during the past couple of months. Perhaps my deflationary bent has tainted my view.

I've been out of 'paper' gold and silver since mid summer. However, my bullion position, a permanent holding, keeps me exposed to further upside should gold rip higher from here.

Meanwhile, surveying the post-close headlines, it does seem that gold's new highs are not grabbing much fanfare. Should my perception persist, it may prompt me to buy some GLD for a trade. The 'easy' entry would be GLD 100-101, should prices pull back and test the gap.

positions in gold, silver, USD

Why Ask Why

Here comes the rain again
Raining in my head like a tragedy
Tearing me apart like a new emotion
--Eurythmics

Minyan Peter observes that a recent NYT reporter writing does not pursue the underlying causes of the Simmons Mattress bankruptcy.

Indeed.

People seem far too willing to assimilate a situation without asking why it is occurring. Viewing the empirical world as-is is known as induction. Animals can do this.

Humans differ from animals in that they possess the power to reason. Reason permits the analysis of a situation in order to understand why things are as they are. This is known as deduction.

Unless deductive skills are employed, past problems are certain to resurface, since we fail to grasp their root causes and implement solutions to prevent recurrence.

Without reason, repeating the past is our destiny.

New Deal Reasoning

Hey I'm not complaining 'cause I really need the work
Hitting up my buddy's got me feeling like a jerk
Hundred dollar car note, two hundred rent
I get a check on Friday, but it's all ready spent
--Huey Lewis & The News

Robert Reich engages in another piece of 'make work' drivel. The argument is that government needs to increase spending (beyond the trillion$ of stimulus already in motion) to get more people working.

As for issue of ladeling on even more debt to pay for the make work programs, well, according to Mr Reich we'll have to deal with that later.

I suppose this is what passes for well reasoned thought at Berkeley, eh Professor?

Stabilizing Influence

I tried so hard to rearrange your mind
But after while I realized you were disarranging mine
--Rolling Stones

Although I can't relate to Nobel laureate Hyman Minsky's Keynesian roots, his theories on financial market instability certainly resonate.

The basic idea is that periods of stability sow seeds for subsequent periods of instability. Stability causes folks to take on more risk and become complacent about the chances that the risks will be realized.

When policymakers seek to 'calm' markets down, the resulting moral hazard creates even more risk taking as decision makers perceive that someone has their back if things turn out poorly.

Intervention that is stabilizing in nature pushes out, and likely increases, the degree of instability in the future.

Greenback & Co

And it goes running all through the night
Until it ends there is no end
--Cyndi Lauper

In his posts today, Fleck dismissed the 'proposed' inverse relationship between the dollar and stocks as 'silly.'

The data suggest otherwise.

Comparing the SPX to the USD over the past 3 yrs reveals a pretty strong relationship. When the dollar goes down, stocks go up and vice versa.

While this relationship may not hold for all of history, it 'works' right now because of the leverage in the system. Many folks have borrowed lots of US dollars while owning risk assets like stocks at the same time. Stated another way, people sell dollars (USD price goes down) in order to buy stocks (SPX goes up).

When they want to shed risk, people sell stock and then buy dollars to pay back their loans.

As long as there's lots of dollar denominated debt out there, this relationship promises to hold to a signficant degree.

positions in SPX, USD

Cool Down

Fire and ice
You come on like a flame
Then you turn a cold shoulder
--Pat Benatar

Decent sized sell off today ahead of tomorrow's payroll numbers. Technically, the ball is still in Hoofy's court. Our bovine buddy would argue that we're merely taking pressure off of overbought conditions. And the picture suggests that he's correct.

A near term sign that Boo might be taking control of the helm would be a break below the 50 day MA at about SPX 1020, which also roughly corresponds to support from the uptrend line defined by the March lows.

Stochastic oscillators suggest more downside room before things get too oversold in the near term. This is another feather in Boo's cap.

A repeat of today's action in the next coupla days would also raise eyebrows.

position in SPX

Q3 AA

Nobody on the road
Nobody on the beach
I feel it in the air
The summer's out of reach
--Don Henley

Overall asset allocation breakdown thru Q3 2009:

cash 45%
stocks 29%
real estate 15%
precious metals 10%
commodities 2%
short equity 2%
currencies 1%

My sense is that probabilities of another deflationary wave will increase in the months ahead. As such, I'm looking to reduce stock exposure in favor of additional cash. If I'm fortunate enough to 'see' the right opportunity, I may also take on more short side exposure and increase my position in USD.

positions in gold, USD