Guest Post by Don Coxe (courtesy of Zero Hedge)
Don Coxe Dissects Gold, As “The Oldest-Established Store Of Value Moves To Center Stage”
…We think that future historians may well report that the moment when gold once again became a store of value was when the dollar began soaring in response to the stench of seared Greece—and gold climbed right along with it. The asset classes that have been inversely correlated since Keynes’s time suddenly united….
… So why didn’t inflation come roaring back when Bernanke doubled the Monetary Base and M-2 was climbing at double-digit rates?
And why didn’t inflation come back when central banks across the OECD were growing their monetary bases and money supplies were climbing? And why did gold take off to record levels when money supply growth began to dwindle and actually turn negative?
… What we believe is unfolding is a rush into gold by individual investors who look at the astronomic growth in financial derivatives—particularly collateralized debt swaps—and government deficits at a time when the effects of demographic collapse are finally being understood. According to some guesstimates we have heard, the supply of outstanding financial derivatives may be in the $70 trillion range, dwarfing the combined value of money supplies and debts. The total value of gold is so minuscule in comparison to the supply of these software-spawned instruments that it cannot be any real help in stabilizing global finances—but it can be a haven for investors seeking to protect themselves against an implosion of majestic proportions.
… So…as a store of value for future generations,
If you can no longer believe in residential real estate,
and you can no longer believe in bank deposits,
and you can no longer believe in the dollar,
and you can no longer believe in the yen,
and you can no longer believe in the euro…
What can you believe in?
How about gold?
It’s so old, it’s new again.
… Among the arguments routinely adduced against it is that it pays no interest—but with interest rates in the zero range, the opportunity cost is minimal.
Stock Market Strategy: Follow Up – Credit Check
Michael Johnson (a.k.a Credit Guru) weighs in on recent credit market performance and shifts his stance:
Last Wednesday we turned from tactically bearish to neutral. We went completely bullish Friday morning. The equity market’s ability to ignore the recent improvements in bank and non-financial CDS profiles appears to be faltering…. and this could lead to a sustained equity rally… …Credit market performance so far this morning indicates that the SPX should be trading in the +25pt range….that would match the note we sent out Friday morning
Bears About to be Gored
Summary:
We now believe investors should be Tactically Bullish as well as fundamentally bullish
Bears should be getting nervous…credit market is improving
GS Credit curve has steepened
New Issue Market reopened
Bank CDS Spreads tightening
Credit market volatility decreasing
How many times do you think credit will tighten before the equity markets jump on the bullish bandwagon? It’s probably sooner rather than later…
Gored… As our readers know, during the recent sell-off we have remained fundamentally positive while turning tactically bearish. We have written numerous pieces highlighting the differences between the feared “sovereign credit crisis that will never be” and the onset of the 2007-2009 credit crisis. The fear of Greece and of Euro viability concerns short-circuiting the global economic recovery is wishful thinking by the bears. This is like the bank nationalization argument….politicians will allow the Euro to fail because they know it will cause global havoc….politicians will nationalize the banks because they know it will cause global havoc…investing based on the hope that politicians will make stupid mistakes does not seem appropriate.
However, the ability of FINREG to destabilize the bank’s access to the credit markets is a truly scary, and much more likely to happen, in our opinion. The inversion of the GS credit curve and the widening of larger US bank credit spreads began a week before the overall equity and credit markets began to sell off. In our opinion, the weakness in the money center bank’s credit profiles made it a lot easier for sovereign risk concerns to find a willing audience.
The combination of the sovereign credit crisis headlines along with money center bank credit fears caused the correlation between banks CDS spreads and CDX IG Index spreads to increase. Credit market volatility materially increased and appeared to spill over into the equity markets. Many of the equity market’s worst sell-offs immediately followed large credit market sell-offs.
However, the reason we are becoming tactically bullish at this point is the reduced likelihood that FINREG will be passed with its most destructive portions. This opinion is working its way through many of the money center banks CDS credit curve profiles and credit spread volatility is decreasing. Additionally, continued improvements in nearly every consumer loan asset class will likely force even the most bearish bank analysts to reduce their loss estimates….
Conclusion:
Being fundamentally bullish and tactically bearish has been a relatively solid approach to the recent sell-off in our opinion. However, the recent decrease in credit market spread volatility and the stabilizing of money center bank CDS profiles makes it difficult to remain tactically bearish when we remain bullish fundamentally. We are now fundamentally and tactically bullish. The recent trend in which the equity markets ignore credit market strength is not likely to last.
