Markets 2005 – Moon of Alabama

January 8, 2005

Markets 2005

To get some ideas about this year’s financial markets, I looked around my favourite pessimists and contrarian commentators and here are some of their and my thoughts.

In an earlier open thread I had posted Marc Faber’s December comments. He expected the Dollar to rise and the stock market to drop. The first week of January saw this happen and made me some change. Dr. Faber’s advice for the beginning of 2005:

In 2003 and 2004, all asset classes rose in value while the US dollar sold off. Would it be possible that in 2005, all asset classes perform poorly while the US dollar strengthens?? Only time will tell but for now, I would stay aside from equities, commodities (including gold and silver), and bonds and only hold the US dollar, which may have more of a rebound potential than is generally expected. As a trade, I would consider shorting the British Pound against the US dollar since the British price level is now so much higher than the one in the US.

I do see this as a trading advice, not an investment advise. If your time horizon is several years, and you do not have the time and/or knowledge necessary to trade, you should be in Euros or CanDos and an US$ counter trend rally here is no problem. The fundamental problems in the US$ have not changed and the longterm trend for the US$ will most likely be down.

Commodities and precious metals had a good year but probably hit a medium cyclical top for now. At least that is what cyclesman Tim Wood is saying. This does not mean they will go down as much as they went up, but they may rest for some month before the next run up starts. Commodities have major twenty year long up cycles and we are only in year 3-4 of the current cycle right now. So I do not worry and stick to my Gold.

Oil is the big wild card. Some OPEC countries have said they do want oil to stay above US$ 40/barrel. Morgan Stanley sees oil at US$ 35 at the end of the year, but that excludes a risk premium and any expectation of further Middle East problems. Energy analyst Bill Powers is betting on up to US$ 80 per barrel (he was right with a $50 call for 2004 last January). US action against Iran, to be expected after the Iraq election turns out to have worsened the situation there, will make sure that at least $70/b will be achieved in 2005.

There are massive structural problems in the United States. The Fed induced credit bubble after credit bubble and will someday have to face the consequences. From too much credit comes too much consumption. Kurt Riechenbaecher puts the structural problems in Hayek’s words

To American economists, this idea that over time, excessive consumer spending leads to recession and worse, by crowding out capital investment may seem preposterous. Widely unknown, it happens to be the central idea that F.A. von Hayek developed in his famous lectures at the London School of Economics in 1931.

In essence, he explained in great detail that an increase in consumer demand at the expense of saving will inevitably lead to a scarcity of capital, which forces a "shortening in the process of production," and so causes depression. Putting it in simpler parlance: Excessive consumption inevitably crowds out business investment. As a share of GDP, consumption in the United States is presently excessive as never before. And it keeps worsening.

The Fed now has finally turned its head towards the problem. In the recently released minutes of the last policy meeting the Fed mentions "excessive risk taking" in the markets. Stephen Roach from Morgan Stanley interprets and welcomes this as a signal for accelerated tightening by the Fed. His conclusion: Game Over. With higher Fed rates and tightening credit conditions the (house) equity and consumption bubble will burst, taking the stock and bond markets down to much lower levels.

Bill Gross of Pimco agrees especially on bonds and emerging market debt. He prefers to put the billions he manages into cash and German bunds.

Some people assume that Bush’s attempt to reform (read kill) Social Security by introduction of some kind of special private saving will bring a boost to the stock market. I believe this much discussed Social Security reform will go nowhere and end as a big fizzle. If Stelzer in the Weekly Standard agrees with Krugman in the The Economists’ Voice about Social Security reform being a bad idea, how can you expect that the people in Congress will come to a different conclusion? All facts point against Bush’s plan and unlike Bush, these folks have to care about getting reelected.

My conclusion for now: There is US$ counter trend rally that has some month to go and may be good for some more trades. Commodities and precious metals will rest for a while now so I will just stick to what I own. Oil may be volatile but will rise far above $50 again. I will buy on dips. The Fed will tighten more than the market expects and there will be blood on the floors of the bond and equity markets. The timing for shortening these markets is difficult and being wrong a month or two can be very expensive (just don´t ask how I know). So for now I just watch and keep some cash ready to jump on the short side when it looks save to do so.

Posted by b on January 8, 2005 at 20:34 UTC | Permalink

Comments

A holiday home in Florida b?

Posted by: Cloned Poster | Jan 8 2005 21:06 utc | 1

Fran in the Open Thread pointed to White House warns U.S. could be like Europe if taxes rise

But Mankiw said trying to fix Social Security through higher taxes alone, as some say is possible, would mean raising payroll taxes that now finance it to 15.9 percent from 12.4 percent.
“Such large tax increases would have adverse effects on the overall economy,” Mankiw said, adding that studies say one reason the U.S. economy is more dynamic than Europe’s is because Europeans work less since they are taxed more.
“Raising taxes to solve the Social; Security shortfall would, in essence, make the U.S. economy more like Europe,” Mankiw said, describing that as the wrong way to go.

Riechenbächer quotes

Euroland’s Secret Success Story:
“The United States is richer and grows faster than euroland because productivity levels are higher and productivity growth stronger – right? Actually, no. Euroland’s inferior GDP performance is attributable to a slower- growing labor force that works shorter hours.
“Euroland’s underlying economic performance is better than many commentators portray. Over the past decade, GDP per head has risen virtually at the same rate in euroland as the United States; euroland productivity growth (output per hour) and the rise in the employment rates were slightly faster than in the United States; and to maintain the same growth in GDP per head, U.S. workers have had to work much longer hours than their euroland counterparts.”
This subtitle and the above two paragraphs are not ours. They are the introductory remarks to a study about the eurozone economy, written by Kevin Daly and published by Goldman Sachs in January 2004.

Mankiw is just stupit when he says Europeans work less because they are taxed more. Europeans can afford to work less because they carry less risk. With higher taxes comes more security (health care, social security etc.) and more transfer from rich to poor. To me that´s a better society.

Posted by: b | Jan 8 2005 21:10 utc | 2

@CP
No

US highway 192 with its many different shops restaurants bars and commercial outlets is less than a 5 minutes drive.

I am used to have this within a 5 minutes walk or at least some public transport.
For a holiday home I would look for something more like this.

Posted by: b | Jan 8 2005 21:27 utc | 3

Bernhard,
Good take on the market. Two things I disagree with. First, the fed may tighten credit, but interest rates will not go above 3-4%. They will just reduce ability to borrow at the window.
Oil prices will not go to $70-80 dollars a barrel. There is to much supply and the war premium will soon wear off as markets are starting to get used to the Iraq debacle. It will become just another lingering item in the back of commodities traders minds.
I must agree that I don’t believe SS will get privatized because of smart people like us telling the truth. What I see happening is the repugs are trying anything possible to not raise taxes to pay back the money borrowed from SS. There will be a propaganda war on this one. The fact is the so called crisis is an out and out lie. But, Bushie got away with lying in the 2004 campaign, why not keep lying.
I still believe Mankiw, Norquist and the right wing NGOs (cato, Heritage, Hoover, AEI) are very dangerous to the middle and lower classes in this country. The Dems need to come up with a progressive grass roots message that resonates, mainly about economics. We have seen the largest transfer of wealth over the last twenty-five years from the middle and lower classes to the rich than any nation in history. That fact must be pushed.
We need a massive re-distribution of wealth in the US.
I see a push on tort reform, SS privatization, tax reform, but there is an even more insidious agenda here. Union busting and anti-labor laws to put the masses in their place.

Posted by: jdp | Jan 9 2005 0:04 utc | 4

Oil prices will go to $70 unless oil is bought in non US$ or the dollar stops becoming devalued – you think anyone is going to sell a product for less buying power in payment?

Posted by: Anonymous | Jan 9 2005 0:25 utc | 5

With interest rates going up some, the dollar will be stronger, thus, les pressure on oil prices. They will hover between $35-45 a barrel.
A local car dealer was teeling me last summer we would never see $1.75 gallon gas again. Well, I am about to collect my ten bucks. I bought gas in our higher than average price area for $1.69 a gallon.

Posted by: jdp | Jan 9 2005 0:57 utc | 6

@jdp – oil prices
Today’s NYT article Behind the Bouncing Ball of Oil Prices

The future price of oil is a topic on which very intelligent, well-informed people can have completely different views. Michael J. Economides, a professor of chemical engineering at the University of Houston who has advised Russian oil companies, predicted this week that oil would soon sell for more than $100 a barrel. Frederick P. Leuffer, a senior managing director and senior energy analyst for Bear Stearns, forecast that oil would average just $25 a barrel in 2005.
The peculiar thing is, each could be correct at some point this year.

Posted by: Anonymous | Jan 9 2005 10:04 utc | 7

If the price of oil goes down, then the price of scrap iron should go up–because the Chinese like to import scrap iron to build things, but they need fossil fuel to turn it into the right stuff (which means, I suppose, that this is a good time to subscribe to Iron Age).

Posted by: alabama | Jan 9 2005 16:18 utc | 8

Another author I like to read is Doug Noland. Here is his recent Credit Bubble Bulletin
(scroll down to “Issues 2005”)

When I reflect back upon 2004 through my analytical framework, I see Reflation dangerously transformed into Gross Over-liquefication, on a global scale never before experienced. What do I mean by this? Ultra-accommodative Fed policies that reached a crescendo in late 2002 nurtured blow-off excesses throughout U.S. mortgage and securities finance – Bubble at The Core. This dynamic set in motion an all-encompassing liquidity free-for-all domestically and globally, creating Myriad Bubbles all along The Periphery. From subprime, junk bonds and virtually all securities; to hedge funds, REITs and M&A; to energy, commodities and essentially all hard assets; to emerging debt and equity markets, cheap finance was abundant in virtually every nook and cranny across the globe.
…
From my analytical vantage point, 2005 appears poised for only greater Monetary Disorder. And I do sense in the marketplace an unusually high degree of uncertainty and indecision. This is as one would expect considering the confluence of over-liquidity, gross speculative excess, and acutely fragile Bubble underpinnings. Uncertainty and indecision would appear to guarantee wild volatility and unpredictability in various markets. Indeed, I expect increasingly treacherous market conditions as the year progresses. Cash is anything but trash, and currently inflated prices and depressed risk premiums across virtually all asset classes create a very unfavourable risk vs. return outlook for most markets. I expect the confluence of the Chinese/Asian/emerging market booms and uncontrollable dollar liquidity excess to support energy and commodity prices. The flight out of dollar balances into perceived better stores of value is in its infancy.
The Critical Issue for 2005 is the commanding role speculative leveraging has come to play in creating liquidity for both the financial markets and economy, including inflated corporate cash flows and profits. Following 2004’s massive central bank securities purchases, speculative leveraging, unwinding of hedges, and marketplace dislocation-induced Over-liquefication — market players and economic agents throughout are taking liquidity excess for granted. This is a mistake. The speculative liquidity-creating mechanism is vulnerable, and problematic whether the Bubble continues or bursts in 2005.

Posted by: b | Jan 9 2005 19:31 utc | 9

b
I can confirm that there is way too much liquidity around. Bankers are more and more desperately chasing clients around and are lowering their requirements to lend; in some sectors, we are getting close to the point where it becomes seriously unreasonable to lend at the conditions the market points to.
Of course, commercial bankers (people like me) don’t really care, because they want their fees today; problems will appear a few years down the road and it will be someone else’s problem. The people within the banks that are supposed to check out for this (risk departments) never seem to be as knowledgeable about the market as the commercial guys, and the ultimate decision makers are the top commercial guys anyway (or at least people more worried about their short term revenues and bottom line.
As long as banks make the same mistakes as others, it’s okay; on the other hand, you will NEVER get contragulated for having avoided a deal which later turns out to be a disaster (when you turn it down, people only see the lost revenue; when it crashes, people forgot why you avoided that particular pitfall)
After a dozen good years, banks’ balance sheets are in good order and can support a few “accidents”, but who knows what will happen if we have a real crisis, or some new kind of meltdown à la LTCM? Bankers really are sheep.

Posted by: Jérôme | Jan 9 2005 21:39 utc | 10

I’m glad to know that Jerome (bankers are real sheep).
It frees me up to use my intuition and other random info rather than relying on my banker for long-term advice.
New Yorker has a cartoon in the recent issue showing lemmings rushing single-file off a cliff. One of them had a paraglider. I think he was smiling as his contemporaries plunged to the bottom.

Posted by: rapt | Jan 9 2005 21:51 utc | 11

The Decline of the Dollar
Maass weighs in on the pessimistic side.

Posted by: DeAnander | Jan 9 2005 23:26 utc | 12

To see what a huge mess the whole world’s economy is in because Uncle Sam is a deadbeat with a Ponzi scheme, check out the two-part article by Andre Gunder Frank, “The Naked Hegemon”, at Asia Times online:
http://www.atimes.com/atimes/Global_Economy/GA06Dj01.html (part 1)
http://www.atimes.com/atimes/Global_EconomyGA07Dj01.html (part 2)
Maybe we should all just stock up on blankets, whiskey, guns and ammo, and other “trade goods” and hunker down to brave the Perfect Storm.

Posted by: hobbitess | Jan 10 2005 2:28 utc | 13

Here’s the corrected link to part two of that article:
The Naked Hegemon – part two

Posted by: HTH | Jan 10 2005 15:07 utc | 14

While I’m at it, here’s the link to the first part, to save on copying and pasting.
The Naked Hegemon – part one
Thanx for those links, hobbitess, that’s an interesting read.

Posted by: HTH | Jan 10 2005 16:44 utc | 15

For good coverage of the US imbalances, check out Setser and Roubini at:
http://www.roubiniglobal.com/
http://www.roubiniglobal.com/setser/
Scroll down on Roubini’s page to the “Rollover Crisis” entry. That one is a real eye-opener.

Posted by: Tom DC/VA | Jan 11 2005 3:09 utc | 16

HTH
Thanks for doing the links properly. I’m a bit of a neo-Luddite about computer stuff.

Posted by: hobbitess | Jan 11 2005 23:11 utc | 17

Interesting–and worrisome–article in Asia Times online today about the selection of Robert Zoellick as Condi’s righthand man: http://www.atimes.com/atimes/Global_Economy/GA14Dj01.html
(I know–I still don’t know how to do the links right.)
Looks like a good indication of exactly what the current regime is about: Corporate hegemony uber alles, backed up by the US military (i.e., our taxes, sons and daughters).

Posted by: hobbitess | Jan 13 2005 17:22 utc | 18

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