A strengthening dollar is depressing gold – Equities are getting a boost

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The dollar is strengthening and geopolitical risk is priced in (or ignored), effectively depressing the price of gold.

A strong demand for dollars is driving both equity and and bond prices. Lower bond yields sustain borrowing, and so I think we’re seeing something like an internal carry-trade being executed.

I expect the net result absent external shock to be a long term upward trend in equities.

The problem with translating this assessment into timing rests with the fact that 2008 was an epic event. Lehman Brothers. Collapsing credit (liquidity). It was the equivalent of cardiac arrest caused by a supply-side money shortage.

Equity holders got killed in 2008. Yes, in the long run buy and hold was vindicated, but I think that’s always the case.

What’s preventing a similar catastrophe now? Active interventions by central bankers? Well, ok, but the U.S. and Britain are diverging in both need and policy from Japan and the eurozone.

Insofar as equity markets might be taken as a proxy indicator for economic prospects, then one must be optimistic, because the U.S. is a big and prosperous place. Natural resources, rule of law etc.

(Civil unrest is what it is, as they say, and unlikely to affect markets anyway).

Ok, so how about that geopolitical risk? Has it truly abated?

Ebola is in an incubation phase from a news cycle perspective, but it is arriving on non-African shores.

Chilly weather is coming and Russia hasn’t agreed to pipe gas to Europe yet. Western sanctions seem to be biting, but Mr. Putin isn’t sitting still. He and his allies have lots of leverage they haven’t used. Vlad is waiting for winter to eat the dish that’s best served cold.

They’ve also got an ace or two up their collective sleeves. The Chinese have massive dollar reserves and a lock on the rare earths that drive modern technology.

I’ve said before that our best bet for peace is to be a good debtor nation and to pay our bills on time. When the senkaku/diaoyu fracas kicks off, don’t get too exited.

Russia will be happy to put Japan in a pincer with their own claims to some of Japan’s northern islands, and no one but the US and Japan are going to be surprised when we roll over.

Remember that there are only 2 years left on this game clock. The Russians are unlikely to let us boost for the moon while they suffer under sanctions. The only thing holding them back is Chinese reluctance to press the advantage on their biggest debtor.

So, there you have it. Absent clarity, enjoy the profits you should have already locked in.

Maybe use a small percentage of available cash to keep a line in the water of the equities market (and I only ever recommend low cost Vanguard-style index-trackers), just so as not to feel left out.

Gas prices are falling. Gold is falling. If they leave us alone, the average Joe might just see some improvement in the standard of living. A strengthening dollar also means increasing purchasing power for the common man.

ACC

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Perceptions of risk are declining.

The markets are up on a Monday. Has anything changed? Or, has the news cycle simply turned over?

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Jackson Hole announcements are Wednesday. American slow-growth fundamentals are present and shaky. The EU is looking at a cold economic winter.

It feels like dollar inflow on expectations of dearer money. Equities are logical stores of value, so are safe bonds; hence indices up while yields remain low.

Yes, sideliners might regret it, but that’s where I remain. Too many emotions. Not enough fundamentals.

This is a long bull run driven by cheap money. Cheap money is ending. Yes, stocks will take an upward ride on dollar inflows. But still, there’s bound to be a lurch somewhere. It’s only Monday.

ACC

Ps. Robert Shiller’s exposition in the NY Times of his own market-ratio analysis is interesting reading.

Security is essential for political progress

The current administration has consistently been forthright in its view that long-term solutions in the Middle East (and elsewhere) must be political in nature and that the American military cannot deliver said solutions.

I agree.

However, I think that approach misses a larger point (which I understand to be roughly analogous to Maslow’s hierarchy of needs), in that basic security is essential before any of the higher order social functions, including political ones, can be undertaken.

Ultimately, it’s impossible to conduct durable civilized discourse in the middle of a war zone. Political solutions require stability in which to emerge. They also require time to mature.

Based on recent observations, establishing people-powered governments seems to be easier than running them effectively for any length of time.

Eventually, we may come to decide as a nation that we shortchanged the Iraqis by failing to provide the necessary breathing room for the entrenchment of their chosen form of self-governance.

Perhaps the long-term American occupations of Germany and Japan really are better models for nation-building than the ones we currently use.

A sobering thought.

ACC

Following up on yesterday’s post

Yesterday’s post spawned some private feedback which made me realize that it could have been taken for a general statement about religion as opposed to a specific statement about an emerging state.

To be clear, I have no argument with Islam, per se. It’s foreign to me, so I don’t truly understand it, but I think any belief system can be taken to uncivil extremes of behavior.

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GDP, CPI, QE and a Rainbow

1. GDP numbers are misleading. The wild swings of the last two quarters, taken together with Everyman’s experience, should be sufficient indicator that they are not trustworthy.

2. Inflation has been occurring in equities and elsewhere. It is a monetary phenomenon and despite CPI manipulation, the effect is beginning to appear in inescapable ways.

3. QE is coming to an end and interest rates will rise.

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The meanderings of a simple mind

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