Posts tagged ‘Jimmy Rogers’
The Central Bank Dog Ate My Homework
It’s been a painful four years for the bears, including Peter Schiff, Nouriel Roubini, John Mauldin, Jimmy Rogers, and let’s not forget David Rosenberg, among others. Rosenberg was recently on CNBC attempting to clarify his evolving bearish view by explaining how central banks around the globe have eaten his forecasting homework. In other words, Ben Bernanke is getting blamed for launching the stock market into the stratosphere thanks to his quantitative easing magic. According to Rosenberg, and the other world-enders, death and destruction would have prevailed without all the money printing.
In reality, the S&P 500 has climbed over +140% and is setting all-time record highs since the market bottomed in early 2009. Despite the large volume of erroneous predictions by Rosenberg and his bear buddies, that development has not slowed the pace of false forecasts. When you’re wrong, one could simply admit defeat, or one could get creative like Rosenberg and bend the truth. As you can tell from my David Rosenberg article from 2010 (Rams Butting Heads), he has been bearish for years calling for outcomes like a double-dip recession; a return to 11% unemployment; and a collapse in the market. So far, none of those predictions have come to fruition (in fact the S&P is up about +40% from that period, if you include dividends). After being incorrect for so long, Rosenberg has switched his mantra to be bullish on pullbacks on selective dividend-paying stocks. When pushed whether he has turned bullish, here’s what Rosenberg had to say,
“So it’s not about is somebody bearish or is somebody bullish or whether you’re agnostic, it’s really about understanding what the principle driver of this market is…it’s the mother of all liquidity-driven rallies that I’ve seen in my lifetime, and it’s continuing.”
Rosenberg isn’t the only bear blaming central banks for the unexpected rise in equity markets. As mentioned previously, fear and panic have virtually disappeared, but these emotions have matured into skepticism. Record profits, cash balances, and attractive valuations are dismissed as artificial byproducts of a Fed’s monetary Ponzi Scheme. The fact that Japan and other central banks are following Ben Bernanke’s money printing lead only serves to add more fuel to the bears’ proverbial fire.
Speculative bubbles are not easy to identify before-the-fact, however they typically involve a combination of excessive valuations and/or massive amounts of leverage. In hindsight we experienced these dynamics in the technology collapse of the late-1990s (tech companies traded at over 100x’s earnings) and the leverage-induced housing crisis of the mid-2000s ($100s of billions used to speculate on subprime mortgages and real estate).
I’m OK with the argument that there are trillions of dollars being used for speculative buying, but if I understand correctly, the trillions of dollars in global liquidity being injected by central banks across the world is not being used to buy securities in the stock market? Rather, all the artificial, pending-bubble discussions should migrate to the bond market…not the stock market. All credit markets, to some degree, are tied to the trillions of Treasuries and mortgage-backed securities purchased by central banks, yet many pundits (i.e., see El-Erian & Bill Gross) choose to focus on claims of speculative buying in stocks, and not bonds.
While bears point to the Shiller 10 Price-Earnings ratio as evidence of a richly priced stock market, more objective measurements through FactSet (below 10-year average) and Wall Street Journal indicate a forward P/E of around 14. A reasonable figure if you consider the multiples were twice as high in 2000, and interest rates are at a generational low (see also Shiller P/E critique).
The news hasn’t been great, volatility measurements (i.e., VIX) have been signaling complacency, and every man, woman, and child has been waiting for a “pullback” – myself included. The pace of the upward advance we have experienced over the last six months is not sustainable, but when we finally get a price retreat, do not listen to the bears like Rosenberg. Their credibility has been shot, ever since the central bank dog ate their homework.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs) , but at the time of publishing SCM had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
Historical Trampoline Cycles of Fear & Greed
What goes up, eventually comes down, and what goes down, eventually comes up. Like an adolescent jumping on a trampoline, emotions in the financial markets jump sky high before crashing down to earth…and then the process repeats itself. The underlying reasons behind every market gyration are different, but the emotions of fear and greed are similar. Since 1919, there have been 29 recessions, and 29 recoveries (pretty good recovery batting average). Over that 92 year period we have also witnessed the Dow Jones Industrial Average go from around 100 in 1919 to over 12,300 today – not too shabby.
The blood curdling panic experienced in 2008 and early 2009 has turned to ordinary fear among retail investors – although the doubling of the equity markets from two years ago has instilled a good dosage of animal spirits into professional traders and speculators. When trillions of low yielding cash and Treasuries ultimately come barreling into equity markets, thereby extending equity valuations, then I will become extra nervous. Until then, plenty of opportunities still exist – there just is not nearly as much low-hanging fruit as two years ago.
More of the Same
To make the point that “the more things change, the more things stay the same,” you can go all the way back to 1932 and read the words of Dean Witter – I also wrote about the history of panic in the 1970s (see Rhyming History).
Even some 80 years ago, Witter was keenly aware of the doomsday bears:
“People are deterred from buying good stocks and bonds now only because of an unwarranted terror…All sorts of bugaboos are paraded to destroy the last vestige of confidence. Stories of disaster which are incredible and untrue are told to foolish and credulous listeners, who appear willing to believe the worst.”
The bugaboo purveyors I called out in 2009 included Peter Schiff, Nouriel Roubini, Meredith Whitney, and Jimmy Rogers. I’m not sure who the next genius du jour(s) will be, but I am confident they will be prominently paraded over the media airwaves.
Cherry Price for Consensus
As firmer signs of an economic recovery finally take hold, investors slowly regain confidence about investing in risky assets. The only problem is that prices have skyrocketed! Witter captures this dynamic beautifully back in 1932:
“Some people say that they wish to await a clearer view of the future. When the future is again clear the present bargains will no longer be available. Does anyone think that present prices will continue when confidence has been fully restored? Such bargains exist only because of terror and distress.”
Herd Gets Slaughtered
History proves over and over again…the general investing public suffers the consequences of following the herd of fear and greed. Or as Witter states:
“It is easy to run with the crowd. The path of least resistance is to join in the wailings that are now so popular. The constructive policy, however, is to maintain your courage and your optimism, to have faith in the ultimate future of your country and to proclaim your faith and to recommend the purchase of good bonds and good stocks, which are inordinately depreciated.”
In the short-run, markets move up and down in an unpredictable fashion, like an irresponsible teenager jumping on a trampoline. In the long-run, investors can do themselves a favor by ignoring the masses, and sticking to a disciplined, systematic investment approach that includes controlled valuation metrics and contrarian sentiment factors. That way, you won’t fall off the investment trampoline and permanently break your portfolio.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
Extrapolation: Dangers of Mixing Cyclical & Secular
One of the toughest jobs in making investment decisions is determining whether changes in profit growth rates are due to cyclical trends or secular trends. The growth of technology and the advent of the internet have not only accelerated the pace of information exchange, but these advancements have also led to the explosion of information (read more).
Drowning in too much information can make the most basic decisions confusing. One of the dreaded by-products of “information overload” is extrapolation. When faced with making a difficult or time consuming decision, many investors choose the path of least resistance, which is to fall back on our good friend…extrapolation.
Rather than taking the time of gathering the appropriate data, exploring both sides of an argument, and having objective information guide educated decisions, many investors open their drawers and grab their trusty ruler. The magic ruler is a wonderful straight-edged tool that can coherently connect any two data points. The beauty of the wooden instrument is the never-ending ability to bolt on a simple convenient story on why a short-term trend will persist forever (upwards or downwards).
We saw it firsthand as the world got sucked down the drain of the global financial crisis. Throughout 2008 bearish pundits like Nouriel Roubini, Peter Schiff, Meredith Whitney, and Jimmy Rogers came out of the woodwork (read more about Pessimism Porn) comparing the environment to the Great Depression and calling for economic collapse. Needless to say, equity markets rebounded significantly in 2009. The vicious rally was not strong enough, nor has the economic data turned adequately rosy for the bears to pack up their bags and hibernate. To be fair, the panicked moods have subsided for “Happy Abby” (Abby Joseph Cohen – Goldman Sachs strategist) to make a few short cameos on CNBC (read more), but we are far from the euphoric heights of the late ‘90s.
I think recent comments by John Authers, columnist at The Financial Times, captures the essence of the current sour mood despite the economic and equity market rebounds:
“Last year’s rebound was, most likely, a bear market bounce. The central hypothesis remains intact. On balance of probabilities, the rally since March has been a (very big) rally within a bear market, and the downward move is a (not so big) correction to that rally. There is no new reason to fear we will revisit the lows of 2009, but every reason to believe that stocks are still fundamentally mired in a bear market.”
Just as overly pessimistic bearishness can cloud judgment, so too can rose colored glasses. Chief economist at the National Association of Realtors, David Lereah, is an example of how biased bullishness can cloud reasoning too. Among the many comments that made Lereah a lightning rod, in July 2006 he noted the real estate “market is stabilizing” and followed up six months later by claiming, “It appears we have established a bottom.”
Extrapolation is a fun, easy tool, but at some point the simple laws of economics must kick into gear. Supply and demand generally do not rise and fall in a linear fashion in perpetuity. As the saying goes, “The herd is often led to the slaughterhouse.” Rather, I argue mean- reversion is a much more powerful tool than extrapolation for investors (read more).
The country faces many critical problems that cannot be ignored and politicians need to show leadership in addressing them. I encourage and remind people that we have survived through multiple wars, assassinations, currency crises, banking crises, SARS, mad cow, swine flu, widening deficits, recessions, and even political gridlock. So next time someone tells you the world is coming to the end, or a stock is going to the moon, do yourself a favor by putting away the ruler and aggregating the relevant data on both sides of an argument before jumping to hasty conclusions.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at time of publishing had no direct positions in LM, or GS. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
Rogers: Fed Following in Path of Dodo
Jimmy Rogers, the bow-tie boss of Rogers Holdings and past co-founder of the successful Quantum Fund with George Soros, is no stranger to making outrageous predictions. His latest prophetic assessment is the Federal Reserve Bank is on the path of the Dodo bird to extinction:
“Don’t worry – the Fed is going to abolish itself. Between Bernanke and Greenspan, they’ve made so many mistakes that within the next few years the Fed will disappear.”
Given the shock and awe that transpired from the Lehman Brothers collapse, I can only wonder how investors might react to this scenario….hmmm. If this doozy of an outlandish call catches you off guard, please don’t be surprised – Rogers is not shy about sharing additional ones (Read other IC article on Rogers). For example, just six months ago Rogers said the Dow Jones could collapse to 5,000 (currently around 10,472) or skyrocket to 30,000, but “of course it would be in worthless money.” Oddly, the printing presses that Rogers keeps talking about have actually produced deflation (-0.2%) in the most recently reported numbers, not the same 79,600,000,000% inflation from Zimbabwe (Cato Institute), he expects.
I suppose Rogers will either point to a data conspiracy, or use the “just you wait” rebuttal. I eagerly await, with bated breath, the ultimate outcome.
Is U.S. Fed Alone?
If the U.S. Federal Reserve system is indeed about to disappear after over nine decades of operations, does that mean Rogers advocates shutting all of the other 166 global reserve banks listed by the Bank for International Settlement? Should the 3 ½ century old Swedish Riksbank (origin in 1668) and the Bank of England (1694) central banks also be terminated? Or does the U.S. Federal Reserve Bank have a monopoly on incompetence and/or corruption?
Sidoxia’s Report Card on Fed
I must admit, I believe we would likely be in a much better situation than we are today if the Federal Reserve board let Adam Smith’s “invisible hand” self adjust short-term interest rates. Rather, we drank from the spiked punch bowls filled with low interest rates for extended periods of time. The Federal Reserve gets too much attention/credit for the impact of its decisions. There is a much larger pool of global investors that are buying/selling Treasury securities daily, across a wide range of maturities along the yield curve. I think these market participants have a much larger impact on prices paid for new capital, relative to the central bank’s decision of cutting or raising the Federal funds rate a ¼ point.
Although I believe the Fed gets too much attention for its monetary policies, I think Bernanke and the Fed get too little credit for the global Armageddon they helped avoid. I agree with Warren Buffett that Bernanke acted “very promptly, very decisively, very big” in helping us avert a second depression while we were on the “brink of going into the abyss.”
Beyond the monetary policy of fractional rate setting, the Fed also has essential other functions:
- Supervise and regulate banking institutions.
- Maintain stability of the financial system and control systemic risk of financial markets.
- Act as a liaison with depository institutions, the U.S. government, and foreign institutions.
- Play a major role in operating the country’s payments system.
I will go out on a limb and say these functions play an important role, and the Fed has a good chance of being around for the 2012 London Olympic Games (despite Jimmy Rogers’ prediction).
Sidoxia’s Report Card on Rogers
As I have pointed out in the past, I do not necessarily disagree (directionally) with the main points of his arguments:
- Is inflation a risk? Yes.
- Will printing excessive money lower the value of our dollar? Yes.
- Is auditing the Federal Reserve Bank a bad idea? No.
My beef with Rogers is merely in the magnitude, bravado, and overconfidence with which he makes these outrageous forecasts. Furthermore, the U.S. actions do not happen in a vacuum. Although everything is not cheery at home, many other international rivals are in worse shape than we are.
From a media ratings and entertainment standpoint, Rogers does not disappoint. His amusing and outlandish predictions will keep the public coming back for more. Since according to Rogers, Bernanke will have no job at the Fed in a few years, I look forward to their joint appearance on CNBC. Perhaps they could discuss collaboration on a new book – Extinction: Lessons Learned from the Fed and Dodo Bird.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds (VFH) at the time of publishing, but had no direct ownership in BRKA/B. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
Shiny Metal Shopping with Schiff, Rogers, and Faber
There I am, strolling through Costco (COST) with a pallet full of toilet paper, Diet Coke, and a garbage bag-sized bag of tortilla chips on my flat orange cart. As I roll into the cash register, I feel a cold panic grab me, only to realize I forgot my 25 pound gold brick in my car trunk as a method of payment for my necessities. Sound far-fetched? Probably not, if you are a part of the hyper-inflationary “Three Musketeers”: Peter Schiff, Jimmy Rogers, and Marc Faber.
Here is what some of the “world-is-ending” crowd is saying:
Peter Schiff (President of Euro Pacific Capital – Connecticut Senator Candidate): He sees the market potentially going much higher, but “it doesn’t matter how much money we have because we’re not going to be able to buy anything with it.”
Marc Faber (a.k.a.,“Dr Doom”, creator of the Gloom Boom & Doom Report): When asked by faux frog boiler and Fox News reporter Glenn Beck if he believes “it is 100% guaranteed that we are going to have hyper-inflation like Zimbabwe,” Faber’s short and to-the-point response was simply, “Yes, that’s correct.”
Jimmy Rogers (Chairman of Rogers Holdings): “I’m afraid they’re printing so much money that stocks could go to 20,000 or 30,000,” Rogers said. “Of course it would be in worthless money, but it could happen and you could lose a lot of money being short,” he adds. Mr. Rogers likes gold too: “I own gold, I’m not selling it.”
PRICING IN GOLD
One consistent theme heard from these three economic bears is that the Dow and other market indexes should be measured on a gold adjusted basis. Since Peter Schiff’s Dow 10,000 to 3,000 forecast never came to fruition (See Schiff’s other questionable predictions), he rationalizes it this way, “So if you price the 2002 Dow in gold, the Dow is at 3,000 now.” Marc Faber makes a similar argument by saying the Dow could double from today, but with gold tripling your worth will be down. That’s funny, because if I price the Dow based on 2002 lumber prices (rather than gold), the Dow would actually be up to about 20,000 (more than 2x its value today)! If prices should truly be measured in gold, then why doesn’t Goldman Sachs’ (GS) and others provide inflation adjusted price targets on their research reports? If gold is the true measure of value, then why can’t I pay off my American Express (AXP) bill by mailing in my gold necklace?
GOLD FEVER
With the effective quadrupling of gold prices in the last seven years (~$250/oz to ~$1,000/oz), gold bugs are more confidently pounding their chests and throwing out multi-thousand, frothy price targets. For example, Peter Schiff predicted $2,000 per ounce by 2009 (who knows, maybe he’ll be right and gold will be up another 100% in the ne next 90 days…cough, cough). Not only are you hearing the strategists and investors bang their drums more loudly, but gold advertisements are plastered all over the radio, television, and internet. Here are a few excerpts*:
- “Watch your gold investments be “on the money” every 9 out of 10 times.”
- “Gold prices could reach $2,300 an ounce or more before it’s over. Buyers of gold bullion at $900 an ounce could earn a return of +155%. That’s very good. But there’s an even BETTER WAY!”
- “Discover Our Little Known “Gold Price Predictor” That Has Been Spot On Every Single Time… Since 1901..!”
- “Turn EVERY $1 Of GOLD Into $10…Or MORE!”
Sources: streetauthority.com and soverignsociety.com
ALTERNATIVE SCENARIO
Another scenario to consider is a complete collapse in gold prices (and surge in the dollar) like we saw in the early 1980s We experienced about a -65% drop in gold prices (~$800/oz. to $300/oz.) from 1980-1982 and saw ZERO price appreciation for about a 25 year period. When did this abysmal period for gold begin? Right about the same time that Paul Volcker raised interest rates to fight inflation. Hmmm, I wonder what next direction of interest rates will be, especially with the Federal Funds rate currently at effectively 0%? Could we see a repeat of the early ‘80s? Seems like a possibility to me. Certainly if you fall into the Marshal Law, civil unrest, soup kitchen, and bread line camp, like the “Three Musketeers,” then burying tons of gold in your homemade bunker may indeed be an appropriate strategy.
Another head scratcher is all the talk revolving around an inflation driven market rebound. If inflation is truly the worry, then shouldn’t the “Three Musketeers” be massively short and be concerned about declining PE (Price/Earnings) multiples, like the single digit PE levels we saw in the late-1970s and early-1980s (when we were experiencing double-digit inflation)?
As I have chronicled, there can be some mixed interpretations regarding the direction of future gold prices. If you think a repeat of Volcker driven gold price collapse of the early ‘80s is possible, then establishing a heavy short position may be the ticket for you. If on the other hand, you are in the gold $4,000 camp, then it might be best to carry a few extra gold bars in the trunk for your next Costco trip.
DISCLOSURE: Sidoxia Capital Management and client accounts do not have direct long or short positions in COST, GS, AXP or gold positions. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
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