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Today's Commentary: 11.15.04
Rally 'round the Christmas Tree
By Christmas, Vince the alarmist will be in New Zealand. Unhappy with the election results and the hopeless feeling he has been afflicted with of late, he has set his eyes on another land on another side of the world. In truth, if life hadn't tethered me so much to my current location, I might be inclined to follow him. There are some compelling reasons for his concern and all of them are financial.
A true alarmist is steeped in gold at the moment, skewing their investments toward the truest resort for the worried. The bond market has its concerned citizens aa well but unlike the precious metal that Vince is now 70% invested, this haven might be the next best move for savvy investors.
A cup of coffee revealed his thoughts and they are worth noting for two reasons, he has been right time and again when it comes to gold and monetary policy. His exodus to the southern hemisphere would leave him well financed for a good many years because of that thinking and when it translates into real dollars, it is awfully hard to argue.
The recent purchase rally that has been taking place in the equity markets is often called the Santa Claus rally by market watchers and with good reason. The merriment for stocks whose results are not that spectacular happens almost on cue every year. Nothing wrong with it but it is often followed by a readjustment early in the next year. But what worries Vince isn't all of this cyclical joy. Instead it is the fact that the real reasons for the enthusiasm are hidden beneath an inflation effect that isn't counted and a monetary policy that is largely ignored.
Inflation has found its way into the retail sales figures which were rather dismal compared to last year at the same time. Food and fuel, the notoriously volatile duo that the Fed chairman watches but choses largely to ignore because of their cantankerous ways, have found new pricing power among in the market. For many reasons not the least of which is hunger, the cost of food has gradually and insidiously been climbing. Not the reverse inflation pricing of making product sizes smaller but charging the same price but the actual a determined increase in prices that originate on every level of the supply chain.
Vince worries that this will greatly impact any further gains in consumer confidence that often end up as results in sales stats. He's right because the disposable income available to spend is now trailing behind inflation. Income gains of 2.4% over the last year paled as inflation for the same time period was measured, excluding those two bad boys in the aforementioned paragraph, at 2.7%. With a noticeable increase at the cash register (read announcements of increased same store sales and translate) and the as-yet-to-be-known severity of the upcoming winter is the recipe for disaster has this middle aged man visibly shaken.
He says he hates to be such a sober weight but he continued to poke holes at the enthusiasm veritably bubbling from the markets of late. The dollar, always a cause of concern as it has failed to strengthen has begun the precipitous drop he said was coming. Monetary policy can remain accommodative as the Fed has often told the world - yes, the world pays very close attention and often mimics the Federal Reserve's moves and thinking - but if the interest rate continues to increase even measurably, the ripple effects on the 40% of the nation that holds adjustable rate mortgages will be the final blow to the consumer's accommodative spending.
His devotion to gold is not new and neither are his dire predictions. The geo-political situation is bound to accelerate as fast as our deficits grows. Vince expects the international money people to issue warnings to the belligerent borrowers that we have become and expects our response will be to down play the dollars weakness, point to the way commodities are priced, and the fact that we are still the standard bearer for stability. Iraq, the deficit, the proposed changes in the tax code and New Deal programs that are in jeopardy of radical overhaul if not elimination all add to the poor mood he is in and expects the country to eventually be in as well.
But his disposition changes when he thinks about the new gold offering upcoming in the form of exchange traded funds. By creating an ETF, the actual physical possession of the precious metal will no longer be necessary. While he sees this as an financial windfall for his alarmist views, he also sees it as the beginning of the end for the customers of Treasuries. Why buy bonds, he asks when gold is gold and may just turn out to be the new standard bearer for stability?
The Blue Money Report
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