Thursday, March 13, 2008

Where do we go next?

It is clear by the comments on the Prudent Bear board that they don't expect another rally ever in the dollar. By comparison to 1987, it appears to me that the dollar isn't under so much pressure as one would think. 87 was a hell of a move against the dollar. This move, though solid with the Euro, is mainly with the yen. The yen has been undervalued for decades and now that the interest rates are matching a little more, moves back to the 1990's highs are more like it. People forget the dollar traded as low as somewhere in the 80's in yen. I cannot recall how low in the 80's, but I can recall around 88. The effect of a low yen has been devastating on the US auto market for decades, as prices most likely haven't moved in Japan, save commodities for close to 2 decades now and yet the yen has traded down on the international market.

My point here is we have another mania in commodities. Only a few grains are really in short supply. The rest are just being chased by every available speculative dollar out there. We are nearing the stage where there is only on side of the trade to have and when a market gets to that point, it is the side you don't want. Who can take the short side in any of this stuff and not get killed except an entity that has the stuff to deliver. If I was in any of these businesses, gold, silver, copper, oil, natural gas, wheat, soybeans, you name it, my stuff would be for sale right now. I would have it sold next year as well and the next year after until the price fell to a point I know I would want to buy it back. That is where this is going to end up and people don't realize that commodities aren't stocks. The guys that want to give it to you on delivery are going to insist you take it. You can take it and throw it back in stocks. The same isn't so true in commodities. The commercial longs have company and they know the market better than the specs. I wouldn't be surprised to see the commercial longs get out as prices go higher and buy from the spot market after the specs get stuck with the stuff. None of the specs have any use for 50,000 bushels of wheat, 5000 barrels of oil or 210,000 gallons of gasoline unless they are laying in a life supply.

Gold is the same way. We are reaching prices where as recession sets in, people are going to start recycling old jewelry. I overheard a guy Thursday in a restaurant talking about some kid that wants to get something for their old gold. As the economy in India slows down, we will see it come out of there by the ton, along with silver. There is nothing new under the sun and we are reaching prices where only gangsters will show it off.

This is a deflation that is going to bite. I know this because the driver of prior borrowing is on its butt. Housing prices are slipping, which means that credit generated from home buying activities is shrinking. Auto sales are shrinking. Corporate expansion is shrinking. China is going to slow down and Europe is going to catch cold. There is a lot of stuff just going to suddenly turn insolvent. We are at the end of a cycle.

Speculating long in a credit crunch is like playing golf in a hail storm. We aren't in the late 1980's, we are in a period following the maximum financing of everything at a time when the largest generation in US history is entering retirement underfunded. We have 20 somethings that don't have a clue what a recession looks like and 30 somethings that have little clue as to what a really tough recession looks like. They called the early 1990's the worst economy in 50 years, but I think it had been so bad here that I didn't realize it until I actually read statistics about it. I think it paled in comparison to the mid 70's oil and inflation shock recession where unemployment went from near full in 1972 to almost double digit in 1975. We never saw those early 1970's unemployment rates again, not even in the late 1990's.

It is really kind of entertaining to watch people go haywire over being long goods that are supposed to do really poorly going forward. I think we are going to see a 1907 type storm before long and there are going to be thousands go broke in this commodity craze. Few know how angry the bear can get in these goods, as the market just locks down. Stops don't work when there isn't anything on the other side of the trade except limit down. You can lose your life savings when this happens, not what you have up, but everything you own.

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