The only growth industry in the Industrialized World is the creation of Credit
That’s it.
Pretty simple.
The better a country is at inventing new Credit (Debt), while not actually making anything of value (Assets), the more competitive that country becomes, as it implodes the value of its currency.
Paul McCulley of PIMCO has a good piece this month, in which he reviews the speeches and works of Krugman, Bernanke and Keynes – as they relate to Deflation and ZIRP (Zero Interest Rate Policy). I have reviewed this stuff before and the takeaway is that in order to get rid of Deflation, you have to appear to be insane when it comes to your desire to print infinite money and never remove it from the Economy – even after the economy starts to grow and Inflation returns to the system.
http://www.pimco.com/LeftNav/Featured+Market+Commentary/FF/2009/July+2009+Global+Central+Bank+Focus+McCulley.htm
“America is in a liquidity trap, driven by private sector deleveraging borne of asset price deflation, meaning that private sector demand for credit is axiomatically flat to negative, despite a Fed funds rate pinned against zero. The only source of credit demand growth in the United States is the Treasury itself.”
“So what should Washington do, if and when – and I stress “if and when”; I’m not making a forecast here! – private sector aggregate (nominal) demand growth looks like it’s going to languish in Japan style for the indefinite future? The answer: Take one cup of Krugman’s advice for Japan and two cups of Bernanke’s advice for Japan – responsibly act irresponsibly relative to orthodoxy.”
Years ago, McCulley noted that as a Bond Holder, you were now faced with the reality that you were either going to lose a lot of money via Debt Defaults or you were going to lose a lot of money vie the effects of Inflation on the Real Value of your Debt Holdings. Team Goldman has chosen Inflation financed by the taxpayer.
In May and June, the US Government has refinanced $450 billion in mortgages and moved the responsibility of that debt from the Banks to the US Taxpayers – via Freddie and Fannie. That is good for bank shareholders and bond holders and bad for the taxpayer. Expect this to continue.
Doug Noland sums it up like this –
“The problem only seems to get clearer. The maladjusted US Bubble economy is sustained by $2.0 to $2.5 Trillion of new Credit – Credit that must largely be issued or guaranteed in Washington. This reflation (a.k.a. Credit inflation/currency devaluation) drives massive flows to China, Asia and the emerging markets that have few takers other than the central banks. And as economies recover and inflationary distortions reemerge, these enormous dollar flows can be expected to foment increasing policymaker angst. Asian reflation is poised to take on a wild life of its own, forcing policymakers at some point to confront today’s reality that dollar flows are destabilizing and unmanageable. China, in particular, faces tough choices when it comes both to managing its Bubble and the massive accumulation of IOUs of deteriorating quality.”
The Bottom Line
I want to own things that make money as more money is printed. Think of it as a company, where the more stuff they make, the greater the value of the company – classic Revenue Growth and Earnings Growth lead to higher a Stock Price. What sees its value increase as more Leverage hits the system and more Money is created? Real Assets – stuff you grow in the dirt, stuff you dig out of dirt and stuff that moves the dirt around and stores it.
Commodity-Based Economies
Australia, Brazil, Canada, Latin America, Mexico, Russia, South Africa
Mexico (EWW)
EWW may have broken out of a 2-month trading range. That is the type of action I have been waiting for! You know by now that the most damage has been caused by failed breakouts, so I will be very careful if EWW trades back below $37 on heavy volume.
South Africa (EZA)
Is now back to the top of the recent trading range. A breakout on volume is what I am interested in. Remember, there are very few Quadruple Tops, so look for any weakness over the next few days to set up a huge breakout or an epic failure. I don’t think it will just sit here much longer.
Canada (EWC), Brazil (EWZ), Australia (EWA), Latin America (ILF) and Russia (RSX) have very similar chart patterns. That tells me that the stocks in these markets are trading more on the movements of the commodities they own or export and not on the underlying fundamentals of the countries they represent.
Currencies
The US Dollar ($USD)
The Dollar looks like it is rolling over yet again and the Point & Figure charts have it targeting a retest last-year’s low (not a prediction).
Swiss Franc (FXF)
The Swiss Franc used to be a store of value, but then their banks got into the leveraged debt business and they nearly blew up the country. Now FXF looks like it is the anti-Dollar. I gave the Dollar the benefit of the doubt during the pullback in stocks, but guess which one I want to own?
Same goes for the Euro (FXE)
Commodities-Based Currencies had substantially better returns than did the Euro or the Swiss Franc. They are more volatile and actually trade with more stock-like characteristics. The Australian Dollar (FXA) most interests me in this space.
Commodities
Agriculture
DBA is an ETF that owns agricultural commodities – Corn, Soybeans, Sugar #1 and Wheat. It has pulled back into support, down -17% since early June.
MOO is an ETF that owns the companies involved in Agribusiness. It has outperformed the underlying Agricultural Commodity over the past 8 weeks.
Based Metals
DBB is an ETF that owns metals – Aluminum, Copper – Grade A and Zinc.
XME is the ETF for Metals and Mining stocks. XME has a very high correlation with DBB. Far and away, my favorite stock in this group is Pohang Iron (PKX) (just my opinion and not a recommendation).
Crude Oil (USO)
USO doesn’t look so hot. It looks like a wedge into the 20, 50 and 200 day averages.
Oil Service stocks still look better than the large Energy companies, so I will focus on the Oil Service ETF (OIH). It pulled back hard most of June and then rallied sharply last week. I hope it sits around for a few days and then breaks out on heavy volume to stop me in.
Gold (GLD)
I refused to sell any gold as the markets topped and rolled over the last 8 weeks. I will continue to add to my Gold holdings. It needs to break above $1,000 an ounce to really get rolling. GLD is now in a 16-month base. I have several great looking Gold stocks that I really like and will be buying.
Silver (SLV)
Silver is a strange commodity – it is a precious metal but it also is used in a number of commercial applications, so it is very cyclical.
There is a lot of support at $12. SLV is high on my list. There aren’t very many Silver stocks to buy.
The other part of the Credit Expansion equation is which countries will see the most economic growth from all of the newly-created money being spent?
Emerging Markets and Asia
China (FXI) is still sitting in a 2-month trading range. China is the World’s growth engine right now and I want in if big money breaks it out of this trading range.
South Korea (EWY)
I like the countries that sell into China. South Korea has a great chart, barely budging as the markets sold off the last 8 weeks!
Emerging Market ETF (EEM)
The chart is similar to China and Korea, but EEM lets me own smaller countries that I may not have faith in as a pure play.
Once again, the markets were on the brink and the news environment was such that everybody knew things were about to crack unless Team Obama started printing more money. This week it was the string pulling to get CIT’s credit extended 30 more months. It also was California wussing out and not making the tough decisions – rather, they are returning to still more accounting tricks to try and “balance” the budget.
The rampable stocks had great weeks. The usually suspects – AAPL, MSFT, QCOM, GOOG, BIDU led.
How many iPods does Apple have to sell to justify $135 billion market cap? Just how attractive is Intel at 22 times earnings with slow growth?
At some point, the markets have to become something more than a few tech stocks and some banks with bogus asset prices. Moreover, the US has to figure out that exporting jobs to China may be good for the stock market, but the policy sucks for the average American – 11 point what percent unemployment in CA?
2009 is a Bull Market in the printing of money and the invention of still more bogus credit. I have been patiently waiting for the benefactors from this fundamental truth to base and break out of trading ranges. Option Expiration is now out of the way and a few days of pulling back could set up something to remember.
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