By DoctoRx
Here is a long-term chart of Bank of America stock (which includes its stock under its prior name of Nations Bank). This is on a semi-log scale, courtesy of Yahoo.
What the graph is shows is that since the stock’s peak a few years ago, it has been in a sharp downtrend bounded by a clear restraining “line”.
This stock recently made a more than 2-year low and is down a bit today even though JPM and Citi reported decent quarters. Northern Trust (NTRS) has again started setting multi-year lows, and even JPM has caught no bounce from its earnings “surprise” this week.
One has to wonder if these bank holding companies hold the capital they say they hold, based on current market prices.
Compounding my concerns is the stubbornness of oil prices. The global benchmark for oil, Brent, has done this in the past year (courtesy Oilnenergy):
This of course act as a tax on oil-importers.
Meanwhile, the US is financially looking nothing like the 1970s. Bond yields bottomed in the 1940s and gradually started trending up. They began accelerating upward after LBJ’s Viet Nam escalation coupled with Great Society spending. By the 1970s, it was clear that the long-term pattern of price stability in America was over. Rationally, lenders were able to receive more and more dollars per year for parting with their money. By an act of will, the Volcker Fed allowed lenders to finally receive so many new fiat dollars that it defeated the looming hyperinflation. Faith in paper money was restored.
That faith is being lost as the extent of unsound lending that occurred in the recent booms is being revealed. People are realizing that all that has to happen in the US is for some pols to fail to agree on a point of legislation to raise the debt ceiling and either taxes will need to rise massively or an economic depression will occur. Unlike under a gold standard, where global acceptance of gold as the final store of wealth protects individuals and businesses from the profligacy of politicians and bankers, fiat money has nothing behind it. When the government fails to stand behind its own money, chaos results.
Thus my conclusion is that the powers that be have little to gain from this chaos, as too much of their wealth and power is invested in the current system. So while the president hasn’t called me lately to give me the inside scoop, let’s assume that the debt ceiling can is kicked down the road so we can worry about other things. I want to therefore propose a possible scenario for the next months or year or two:
BofA, Citigroup, and/or AIG finally implode under the stress of too many bad loans in a sluggish economic environment and is/are finally put out of its/their corporate misery. This mirrors the Japanese experience of about a decade ago when Japan finally had to “kill” some of its major zombie financial institutions. The media and the government “herds” investors into the “safety” of government debt as stocks take another dive and interest rates on Federal debt amazingly drop further, allowing even more deficit spending. Meanwhile, concurrent global forces push the price of gold higher, with the temporary liquidation panic that to some extent reprises that of 2008 providing a new optimal entry point into gold.
This is not a prediction, as our future is knowable only from a future rear-view mirror, but bulls on the stock market need to explain why stocks have failed to gain ground on gold at all since the “Great Recession” allegedly ended. Here is a chart of the relative strength of the Gold ETF “GLD” and the stock ETF “SPY” for the past 2 years:
Pick a different time frame such as 5 years since gold bottomed in 2001 when Bush-Greenspan began to reprise LBJ’s guns&butter strategy, and the relative strengths will be more or less similar. Even accounting for storage costs of gold bullion and dividends on the SPY, gold has been stronger since the “recovery” began, and this is a part of the economic cycle that, if you go back to the end of the 1973-5 recession, was previously very strong for stocks vs. gold.
There are a couple of reasons that I “like” gold stocks, understanding that I only “like” gold as an investment as a reaction to the bad shows going on elsewhere. One is that Wall Street likes to point to a bull market in some stocks, as the stock market is amazingly profitable for it. Another is that these stocks are ignored and even hated. Yet a growing number of even second-tier gold miners pay dividends. Even a 1% dividend beats the annual return from lending money to the Treasury for 3 years. Analysts say that the profits of the miners are chancy. What if gold prices drop? Yet the same analysts are perfectly happy with General Mills raising its food prices year on year and increasing its gross margin. What if General Mills is fated to have shrinking profit margins for the next 10 years? They answer not. When the price of oil goes up, the price of the stocks of oil producers mechanically goes up. Why are gold miners so different? They are not; they are just more volatile both up or down than is the price of bullion. And perhaps they, and gold, are still climbing the fabled wall of worry.
If one goes back to the “Extremistan” of 1980 and looks at a gold price of $750/ounce and a 30-year Treasury yield of 12%, then from then to the bottom of the gold bear market around 2001, gold lost over 95% of its value versus a zero-coupon Treasury bond. This massive bear market in the ultimate “traditional” hard asset versus paper backed only by the full faith and credit of the government of the US has only partially been reversed. If balance sheet holes in large financial institutions around the world continue to be revealed, the possibility exists that what has been seen in gold and gold mining stocks will rival the NASDAQ mania of the second half of the 1990s– but with a more important rationale. Even a well-meaning pledge of full faith and credit of even the most honest and sincere governmental officials may be seen to have some limits.
This is not a consummation devoutly to be wished, but when there is a certain logic that can explain a variety of seeming unrelated trends, one begins to have a set of hypotheses and eventually a theory. I believe that we are experiencing one of the key insights of von Mises playing out in the real world and therefore in the financial markets, which is that it is better to make public the unsound investments of the boom and move on by liquidating them rather than to pretend they were sound. With 2-year Treasury debt selling at 36 basis points per year in interest and 12-month debt at 14 basis points, though, and with the CPI falling a bit in June, and further with the possibility of oil dropping a good deal in the months ahead due to demand destruction and the conceivable advent of the war in Libya ending, the biflationary theory is looking good for now. To simplify it, it is that the credit-dependent parts of the economy such as houses can fall in value while that which is paid for in cash and cannot easily be hoarded such as food rises. It’s a form of a concealed depression that I suspect requires a period of restrained consumption and sustained investment in the “correct” things to allow a new period of economic growth to occur without being built on the sand of financial engineering.
In Talebian fashion, I am watching what comes aware that the past is always an imperfect guide to the future, if it is any guide at all.
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