Gold, Dollar And Stocks

Too much talk about reverse correlation between dollar and everything else. Yes, we had such correlation since March. It doesn't mean such correlation would last forever.

During the great bull market of 1982-2000 dollar was going up, commodities down. Gold fell in 2001 to $256 from $850 peak in 1980. Oil traded as low as $10.50 in 1998. During bull market of 1960 commodities prices went up.

However, current correlation does present some useful information. This is information about markets. And it's very simple: this market is driven by traders. They are trying to find some order, some kind of dependency which can be traded, and run it as much as possible. Never mind fundamentals.

Right now market is in transition. It's still looking for direction. It's laughing at all attempts to find rational explanations. I was surprised to hear from Jim Cramer today that transports telling us that bull market is alive. Maybe. Maybe not. Nothing is certain right now.

I'm bullish long term. Almost certain that stocks, at least those I holding right now, are going to be much higher 18 months from now. But I'm not sure of short-term perspectives. So far, market was trading on technicals until March, then it was trading on sentiment. It ignored fundamentals. Now technicals don't tell anything (nice triangle formed up on S&P 500 graph, no?), sentiment is mostly bullish, but not outrageously so. Fundamentals still suck.

My hope is that fundamentals will start improving in the first quarter of 2009 and stock market will follow. Maybe we'll see the improvement even sooner. Let's say, US GDP shows second quarter of growth in the row, should be a great news! My problem with it: most earnings reports for the last quarter weren't that good. Earnings growth without revenue growth.

That's my hope. Let's see what will really happen.

Tired of Cramer

I'm probably not the only one. I'm watching Mad Money less and less. Enough to quickly scroll through recap.

My main problem is the first segment. I don't need to hear Cramer's view on the economy in whole and on the market every day. Stock picks aren't very good either lately. Usually I could find 2-3 stocks a week for follow-up review. Just about a couple in November.

Maybe Jim got tired of his show himself?

Trimming Banco Bradesco

I started trimming my Banco Bradesco (BBD) position today. This is a strategic decision: I decided to sell this position. Of course, I'm doing it in stages.

This was an attempt to make money on one of BRICs.

The main reason I'm selling this position: political situation in Brazil. Bad (for business) news are coming from there. Government more and more interferes with business decision. Last news: government tries to increase share of state banks in financial sector. Other news include plans to direct banks to increase lending. Brazil government more often finds itself in agreement with government of Venezuela, which is even more worrisome. I don't know if Lula wants to be Chavez, but you I can't completely ignore such possibility.

Another reason: Brazil economy is in situation of investment bubble. Real (local currency) appreciated a lot since beginning of year. Government even tries to slow down foreign investments: Brazil nuts? The country’s new capital control.

Third reason: Brazil economy mostly depends on export of raw materials and food. So far commodity prices are growing this year. But I have my doubts, especially because one of main export materials, iron ore, is in a bubble by itself. So much bubble, that China, main importer, uses less ore than it imports, stockpiling a lot of ore in ports (look here).

These factors make Brazil stocks way too risky for my taste. I will continue cutting down this position.


Full disclosure: at the time of publication author had a long position in BBD. Positions can change any time.

Giving Thanks

I am thankful to my country, United Stated of America. With all problems, with all drawbacks, it's the best country in the world.

I am thankful to all people around me.

I am thankful to the market this year. I recovered my of my last year losses.

Can Fed Defeat Dollar Carry Trade?

I wonder if Fed is accounting for dollar carry trade in their models. Because if not, we are all in a big, like Great Depression 2.0, trouble.

First, a little bit about money. Fed is creating money, true. But then it lends money to the banks, which lend money to other banks, businesses and people. There is multiplication effect on the way, because most of the borrowed money falls back into bank accounts and then available for borrowing again, with a 10% taken by Fed as a reserve. Usually every dollar lendt by Fed creates about 9 dollars in circulation.

By the way, the fact that almost all money in the country is a credit money, has interesting consequences. For example, to keep prices stable in expanding economy, country needs more money. Which means more credit. Which means that all calls to borrow less and save more are only good for contracting economy. People, calling for that, including our President, are calling for Great Depression 2.0, plain and simple.

There is a lot of talk about coming inflation. Sure, Fed wants to create some inflation. That's because alternative is so bad. Deflation is awful. Unfortunately, only very old people remember it in this country. Most of the people remember inflation of 1970s and fear it the most. But deflation is much, much worse than inflation. Again, all money in the country is on loan. In deflationary environment, money returned to the creditor worth more than it was when borrowed. Which adds to the interest rate you pay for the loan (somehow negative interest doesn't exist). As a result, money mass is contracting in deflationary environment, enforcing the deflation (deflationary spiral).

For more than a year, Fed keeps interest rates at almost zero. It seems that a lot of money is pumped into economy. Why don't we see inflation, which is "always a monetary phenomenon"? Because prices depend on money supply, money velocity and amount of goods sold. Money velocity dropped faster than money supply grew, it's that simple.

Can Fed increase money supply even more? That's a trillion dollars question. Remember, of 9 dollars of money mass, 8 are created by banks, not by Fed. Actually, 8 dollars should be created by banks, but looks like that's not working right now.

Enter dollar carry trade. Businesses are borrowing dollars with almost no interest rate and either lend money in other currencies or buy some stuff which supposed to grow up in price. Most of this money leaves the country or gets frozen on margin accounts, not creating new money in circulation. This is what was killing Japan in the last 10 years: Central bank was giving away yen, but borrowers didn't lend it inside the country, money mass was not increasing, country was (still is) in deflation and depression.

It's too soon to say if dollar carry trade would have the same effect. Yen carry trade, while negating Japan Central Bank policies, funded mortgage bubbles in US and Europe. Currently a lot of dollars went into commodity futures, funding possible mining bubbles. Some went into developing countries. China looks more and more like a bubble now. Bubbles pop sooner or later, as we know well. The question is: sooner or later?

Even if bubbles don't pop, carry trade can prevent Fed from pumping money into US economy. The main question is: can Fed fight dollar carry trade effects? Or we are going Japanese way?

Parking Cash

Added to my position in Wells Fargo Capital Trust XII (BWF). Parking cash in a high yielding place.

Want to Invest in Russia? Your Employees Might Be Killed

One more illustration about investing in Russia. Sergey Magnitsky, lawyer for Hermitage Capital investment group, died in jail. He was imprisoned for almost a year, government and court decided to keep him in jail until his court date.

Hermitage Capital was a little bit more lucky than many other investors. William Bowder, CEO of the company, withdrew most of money from Russia before government people could rob him. That probably was the reason for persecution of Magnitsky.

This is a lesson for anybody who wants to invest in Russia. Not only you risk your money, you also risk your people. If your company falls in disfavor in Russia, your employees can be jailed under invented reasons, they can be killed by prison officials or by hired killers on the street. Russian government thugs don't care who those employees are. They can imprison pregnant women, women with small children, terminally ill people. There are hundreds of examples.

And to get to the good side of Russian government, you'll have to bribe officials, sometimes surrender significant pieces of your property to government owned companies. Even in this case you are not safe: if your Russian counterpart falls in disfavor, you can lose everything.

Full disclosure: at the time of publication author did not have any positions, long or short, in Russian companies or in funds invested in Russia.