October 9, 2013
- The 5 tries to avert its gaze from D.C., and then — dammit, Janet!
- Piercing the myth of Yellen’s fearsome forecasting record
- Ritholtz on five things that matter more than the Fed or the president or Congress
- Impressive chart: Keeping tabs on China’s, India’s gold accumulation
- A world-improver’s plea… Social Security email, right on cue… a final invite… and more!
“I’m concerned the shutdown will prevent the leaves from changing,” a reader writes us.
“What will we do without the government? Could we privatize the government? Is the president considered nonessential personnel?”
Our correspondent spotlights something important: While Wall Street and Washington are transfixed with the shutdown-debt ceiling drama, the rest of the country — heck, the rest of the world — is moving on. People are striving, innovating, achieving.
For instance, Samsung has taken the wraps off the Galaxy Round — a new flexible-display smartphone that benefits from our favorite wonder material, graphene. It’s not the bendy smartphone of our dreams, but it’s a step closer, with a display that fits your face more comfortably. It’ll be rolled out first to the Korean market.
We wound down our workday yesterday with the intention to ignore events in D.C. during today’s episode and focus entirely on investable innovations that can change the world and make you richer. Then the news got out that the president will nominate Janet Yellen to be the next Federal Reserve chief. The best-laid plans…
So instead, we must first make a proper introduction…
Jovial Janet Yellen…
Stern Janet Yellen…
“Eat your heart out, Larry Summers” Janet Yellen
Then we must gird ourselves for the task of analyzing a trope you’re going to see for the next several weeks — that Janet Yellen is a far-seeing economic prognosticator.
To paraphrase a quote attributed to Dorothy Parker, this notion should not be tossed aside lightly — it should be thrown with great force.
Case in point: “Ms. Yellen has a superb record in forecasting where the economy is going,” wrote Nobel laureate Joseph Stiglitz last month in The New York Times — “the best, according to The Wall Street Journal, of anyone at the Fed.”
Right… and in the land of the blind, the one-eyed man is king.
It is more accurate to say Ms. Yellen has been the least wrong of anyone at the Fed. The Fed governors collectively have “one of the worst forecasting records out there,” Currency Wars author Jim Rickards told us over the summer.
Unemployment, inflation, GDP, you name the number and “when you look at the Fed’s forecasts for the last four years, they were wrong every time, and they were wrong by a lot.” Ms. Yellen has been vice chair of the Fed Board of Governors for nearly all of that four-year span. She has outshone her colleagues, yes — but how much is that to crow about?
Case in point, part 2: Yellen “was one of the only top Fed policy makers who warned about the housing bubble before the crisis,” asserted Edward Harrison in the Times in July.
Mr. Harrison is not alone. We have no idea where this notion came from.
Said Ms. Yellen on Jan. 22, 2007: “While the decline in housing activity has been significant and will probably continue for a while longer, I think the concerns we used to hear about the possibility of a devastating collapse — one that might be big enough to cause a recession in the U.S. economy — have been largely allayed.”
Less than three weeks later, HSBC warned it would take a write-down on its subprime mortgage-backed securities — an event the Financial Times later called “the first large-scale subprime shock.”
On Dec. 3, 2007, as the “official” recession was getting underway, Yellen projected GDP growth “gradually returning to its roughly 2.5% trend over the next year or so.” A year later, GDP was collapsing at a 2% rate, with worse to come in early 2009.
Bottom line: Ms. Yellen has no more ability to predict the future than anyone else possessed of the hubris that an economy is like a machine — one that wise men and women can adjust with the push of a button or the pull of a lever.
OK, OK, you say — but what’s she actually going to do?
For that we turn to the aforementioned Mr. Rickards’ Twitter feed…
If Bernanke is dovish, Yellen is — well, the avian analogy escapes us at the moment. A hummingbird? Sparrow?
The major U.S. stock indexes are plateauing after another day of losses yesterday. Yes, this is a rerun of yesterday — so far.
For the moment, the Dow has come to rest at 14,737, the S&P a few decimal points below 1,650. Volatility as measured by the VIX is up slightly after it broke above 20 yesterday for only the third time in the last year.
[Ed. Note: The Street’s losses have added up to quick gains this week for Options Hotline readers. UPS dipped 2% in a little over a week; the option Steve Sarnoff recommended leaped 63%, and he urged readers to take profits yesterday afternoon. For more where that came from — and a risk-free trial of his recommendations — look here.]
Later today, the Fed releases minutes from its September no-taper meeting. Once again, we caution that Fed “minutes” are a thoroughly political document aimed at steering the market. If you want actual transcripts revealing who said what, you have to wait five years…
“I would suggest,” writes Barry Ritholtz, “that investors turn down the noise and focus on the signals that actually do matter.”
Mr. Ritholtz, a crowd favorite at our own conferences, just wrapped up one of his own. This morning, he aids us in our quest to avert our gaze from the shutdown/ceiling farce. He offers up five signals…
1. Valuation: How are stocks valued? Are they cheap or are they expensive? (Keeping in mind that cheap stocks can get MUCH cheaper and expensive stocks can get MUCH dearer.)
2. Trend: What is the economy doing in sum? Is it expanding or contracting? What is the market doing — is it rising, falling or range-bound?
3. Inflation: What is the overall trend in inflation? Are prices rising or falling or stable — and how rapidly?
4. Earnings: Are companies able to grow their top and bottom lines?
5. Credit: What is the cost and availability of credit?
“If you understand these five things and get them more or less correct,” he concludes, “you are ahead of 90% of your fellow investors.”
Otherwise, you might fall into the trap of believing the Yellen announcement would be short-term bullish for gold.
Not so. Gold tumbled below $1,300 this morning, although as of this writing, it has recovered. Barely. Silver’s back below $22.
Dollar strength relative to other fiat currencies is a factor in play; the dollar index, having spent much of October below 80, is up decisively this morning to 80.4.
“Gold demand from China remains brisk,” says Commerzbank analyst Carsten Fritsch, “offsetting weak demand in the West and confirming the shift in gold demand from West to East.”
Mr. Fritsch is addressing the latest figures of Chinese gold imports via Hong Kong. The August number is just as strong as July’s, and the year-over-year trend continues to impress…
China’s accumulation program proceeds apace. Invest accordingly.
Meanwhile, India’s gold demand is set to grow despite the government’s efforts to stymie the flow.
The World Gold Council forecasts 15% growth in India’s gold demand during the fourth quarter. “This will be because there are 20% more auspicious days during this festivals compared with last year and also because there was a good monsoon,” says the WGC’s India chief Somasundaram PR. “There is also a pent-up demand that could resurface after a difficult September quarter.”
“OK,” a reader writes after our account of gold bars smuggled on an Air India flight unsuccessfully, “I get the part about how the government of India wants to keep people from using rupees to buy gold. Balance of payments and all… Yeah, yeah, yeah…
“But that’s soooo modern economics! Really. Balance of payments for the rupee? Really? Does it matter? Who cares?
“As Lord Keynes might have stated, ‘In the long run, it’s all just worthless fiat currency.’
“Actually, in the long run, it’s better for India to export rupees now and import gold. Certainly if you believe that ‘gold is money’ — or even just slightly believe that gold is money.
“If you buy gold now, you’re exchanging a temporary form of currency that’s useful for short-term accounting with something else of long-term value as real money.
“Rupees under the mattress now? Or gold for the long term? No-brainer, really. No wonder people are stuffing gold bars into airliner toilets.”
The 5: And corrupting government officials — gasp! We see in the Indian press that two customs agents have been arrested for aiding another smuggling caper last month.
Fortunately, Americans don’t have to resort to such measures. Yet. Best move now before matters reach that point.
“It seems that every day that goes by, the shrill cries from both of the main parties grows louder and louder, especially by the Democrats,” writes a reader bound and determined to drag us back to matters in Washington.
“Republicans who have opposed them have been called, among other things, arsonists and terrorists. One observer commented that the level of rhetoric has gotten so bad that it is now at the level just before the outbreak of the American Civil War.
“Rather than face an economic collapse and a likely civil war, I would like to propose something. If this was a marriage, it would have broken up long ago. What is needed is, effectively, a divorce.
“The Democrats get the continental U.S. east of the Mississippi River, including the eastern part of Louisiana, plus the state of Hawaii, while the Republicans get the land west of the Mississippi River, the western portion of Louisiana, plus the state of Alaska, but minus the states of Washington, Oregon and Idaho, which are reserved for the libertarians.
“After this is agreed upon, the people in the states then have five years to move to the states that fit their political views. A website is created to sell houses and purchase new ones in the area that they are moving to, and another similar website is created for finding jobs.
“After those five years are up, the United States is officially dissolved, including the national debt, and three new nations are formed. What I’m proposing is going to cost a lot of money and for some people will be a huge headache, but ask yourself what will cause more trouble in the long run: dislocation or civil war?”
The 5: We’re sure that website would function at least as smoothly as the Obamacare one.
Besides, wasn’t this sort of top-down solution already tried with the partition of India? That worked out real well — 12 million homeless and a half-million dead, by one estimate. No, thanks…
“There will be a revolt if they touch Social Security,” reads an email we knew we’d get after our debt ceiling musings yesterday — “unless they pay us off upfront what they owe us for all the years we paid into it!
[Sorry, they already spent it.]
“The government screwed it up and has to make amends before it touches a dime of it.
[Too late. See “Trust fund, raiding of for ordinary government operations.” See also “Greenspan Commission.”]
“Lower the government’s wages and overpaid retirement income well before the people they are supposed to represent!
[You think government pensions are any better managed than Social Security?]
“Or simply shut down the whole mess they created for good! We the people will survive without the crooks in D.C.”
The 5: But the crooks are the only ones willing to cut your checks…
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. Last call for the Rancho Santana Chill Weekend. We received a ton of interest in Rancho Santana after last week’s breaking news about the airport construction project near the Ranch, scheduled to begin just after the new year.
Heck, we got so much interest it prompted Matt Turner, “el Jefe” at the Ranch, to put his money where his mouth is and offer an airport guarantee to those interested in purchasing developer-owned property at Rancho Santana.
For details on the nearly sold-out Chill Weekend or the airport guarantee, contact Marc Brown. This is the last Chill Weekend before airport construction begins…
P.P.S. One reason we want to keep the debt ceiling noise down to a dull roar is that a far worse crisis is looming beyond a week from tomorrow… and it’s a phenomenon no one’s talking about on Fox or at The New York Times.
Addison Wiggin is busily updating some numbers that spell a whole new world of hurt for your finances — unless you take six essential steps. Watch for his urgent update in your inbox tomorrow.