Silver Lining

Yesterday morning I watched a compelling interview on CNBC with Kyle Bass, a hedge fund manager who has shorted the Chinese yuan. His argument was that China is just months away from having to devalue it currency by not just 10% but more like 30-40% ... for his reasoning see: CNBC Interview. Then later I read an article that made a convincing case that the Chinese banking system has as much as 5 trillion dollars of nonperforming loans and the government might soon be required to bail them out using its huge sovereign reserves ... for the details see: New York Times Article.

This all sounds like awful news ... not so fast! If the yuan were to be devalued by the amount that Kyle Bass expects, then Chinese products would have enormous price advantages around the world ... and its economy would soar. Also a bailout of the Chinese banking system would clear the decks for a number of new loans to Chinese industry ... matching its explosive industrial expansion with equivalent liquidity. The result would be that China would likely once again be the world's growth engine ... quickly using up the world's existing commodity surpluses. And this would solve much of the deflationary pressures that now overhang the world's stock markets.

Therefore, once again, every cloud has a gold, copper, oil, steel and silver lining.

Soothsaying

Back in Roman times soothsayers would predict the future by examining the entrails of animals. And astrologers throughout time have relied on the placement of stars to guide people's life decisions. Ditto, numerology. All these pseudo-sciences relay on man's superstitious nature to survive ... and there are modern-day equivalents. For example, trading in stocks, commodities, etc. often is predicated on "technical analysis" ... a misnomer if there ever was one.

Technical analysis in its truest form ignores all the fundamental metrics associated with such trading entities (such as price-earnings rations, earnings growth, yield, etc. in the case of stocks) and concentrates on discerning patterns in the chart of price and volume movements (a little like animal entrails.) Such  charting terms as 200-day moving averages, reverse head-and-shoulders, triple bottoms, Fibonacci series, etc. are often used to make buy or sell decisions ... sometimes successfully.

But why would such dice-rolling succeed? Because there are legions of other traders who believe in such omens. Why are 50-day or 200-day moving averages important? Why not 23-day or 174-day moving averages? Well, it is only because that is what nearly all the "technicians" use ... therefore, this can be predictive of what other soothsayers are going to do ... and so early discerners of such movements can, and often do prosper. This then become a validation of such silliness ... which is why is survives.

This whole technical analysis thing is kinda like going to a gambling casino when, if you have any rationality, you will know that the cards are stacked against you ... but, somehow you still believe you can beat them at their own games.

A very few do, but most don't.

Bitcoins

People with excess cash are in a bit of a quandary about where to park it ... forget about current money-market funds or CDs.

Expecting higher interest rates this coming year due to the Federal Reserve Bank's backing off of its quantitative easing, bonds are really not a very good investment at the moment … higher interest rates mean lower bond prices … often more than wiping out any interest income. 

And although the stock market has done very well over 2013, it is unlikely that it will repeat this feat to the same degree in 2014.
  

The next option is real estate.  However, higher interest rates mean higher mortgage rates … and the Fed should also be reducing its mortgage repurchasing program … both meaning that housing is unlikely to keep on the recovery pace that it has enjoyed recently.  (It still might be the best place to put some excess funds however.)

Another popular speculative investment, commodities, also tend to suffer when interest rates go up because the carrying costs of commodity purchases steal much commodity price-increase benefit.

And sovereign currencies are a very dangerous place to invest because the machinations of the world’s central banks are difficult to predict and fraught with shady dealings. 

Even the fine art market, although showing some spectacular recent sales, overall is not doing very well … see: New York Times Article.

What to do?  There are always bitcoins (see: LA Times Article … just kidding.)

And, the last time I looked, you can’t stuff cash into a Tempurpedic mattress …

Why is the Stock Market Going Up?

Dow Jones Industrial Average

The Dow Jones Industrial Average has just passed the 14,000 mark, yet the U.S. unemployment rate has just today ticked up by 1/10th of 1% and the U.S. economy (as measured by our GNP) shrunk in the fourth quarter of last year by 1/10th of 1%.  What's going on ... isn't this an economic disconnect?  No, I think that the U.S. stock market is presaging the entrance of that red-eyed monster ... increased inflation.  We all know that the Federal Reserve's actions over the last four years ... producing new money until the Mint's printing pressing are overheating (producing over $3 trillion in new money) ... has to bring back inflation.  The nervous question has been, "When?"

Well, all this money sloshing around our economy has to go somewhere.  And it is starting to find its way into hard assets ... into the formally-wretched housing mark, into commodities, and into the stock market.  And it is fleeing the fixed-income market ... corporate debt, municipal bonds, and various U.S. government obligations.  (The yield on ten-year U.S. Treasuries has, over the last few months, increased from 1.42% to now 1.90% and heading north ... reflecting the equivalent decrease in the price for these bonds).

One caveat for investors ... the stock market will go up in an inflationary environment until such time as run-away inflation starts to damage corporate profits ... or looks like it might.  My guess would be that this effect would kick in somewhere around an inflation rate of 6-8% ... so be careful.

Afterward: For some parallel thoughts on this subject see: Powerline Blog