A note from Morgan Stanley is in the piece below about a possible opportunity in the gold sector.
By Bill Fleckenstein President Of Fleckenstein Capital
August 9 (King World News) – The overnight financial asset party continued around the globe, with nearly all major stock and bond markets higher. Despite extremely disappointing productivity data (Q2 was reported at –0.5% versus expectations of +0.4%), our equity market followed the rest of the world higher, gaining 0.2% through midday. I don’t mean to suggest that I think the productivity data matters all that much, but it used to be something that bulls pointed to as a rationalization for doing what they were going to do anyway. Now it is just another piece of bad data to ignore…
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Make That “Data Co-Dependent”
Of course, ignoring any and all bad news is a function of the monster that the Fed has created, which won’t surprise anyone reading this column. However, on that subject, it is worth noting that an article by none other than Ben S. Bernanke himself written for the Brookings Institution today contains rationalizations some of us predicted we would see some time ago to justify the Fed dragging its feet, even after reporting that inflation has ratcheted up. (This is no easy task, given how the calculations of the inflation data are specifically set to preclude any CPI inflation.)
In this academic puff piece “The Bernank” makes the case that, even though we all thought seven years of 0% interest and $3.5 trillion of monetization were extraordinarily accommodative, he doesn’t really know if that is the case:
“However, the revisions in FOMC participants’ estimates of key parameters suggest that they now see this progress playing out over a longer timeframe than they previously thought. In particular, relative to earlier estimates, they see current policy as less accommodative, the labor market as less tight, and inflationary pressures as more limited [my emphasis]. Moreover, there may be a greater possibility that running the economy a bit ‘hot’ will lead to better productivity performance over time [my emphasis]. The implications of these changes for policy are generally dovish, helping to explain the downward shifts in recent years in the Feds anticipated trajectory of rates.”
As if that weren’t enough, before finishing this absurd piece of rationalization, he notes, “policy should not react until inflation has actually risen in a sustainable way.”
This is precisely an outcome I first discussed years ago, i.e., that the Fed would rationalize away any price increases because, since its policies don’t work, they would not have accomplished what they set out to from an economic activity stimulation standpoint (not to be confused — as so many do — with inflation). In other words, GDP growth would still be not quite good enough.
If Only Laser Printers Could Print On Möbius Strips
What I find sort of sweetly ironic is that Greenspan’s excuse for keeping monetary policy too low (which was a rounding error of “lowness” versus what we see today) was that productivity was booming (even though he exaggerated its impact, as did the BLS at the time). Now we have Bernanke arguing that creating an economy that is generating too much inflation might increase productivity. It is mind boggling to see how these Fed heads twist themselves into pretzels of rationalizations in an attempt to blame anything they can to explain why their policies don’t work, all so they don’t have to come to that very conclusion.
With that rant out of the way, in the afternoon the market slowly gave up most of its gains and was essentially flat with 30 minutes to go, when I had to leave. Away from stocks, green paper was weaker, oil was flat, fixed income was higher, and the metals gained about 0.5% apiece.
Nothing Gets By These Guys
On that subject, I note that a big dead fish house (in this case, Morgan Stanley) recommended Goldcorp today. For those of us who think that company has lagged way behind, this is the sort of report we are going to see more of. There are many investors and investment institutions that have been left behind in this gold bull market, and in my opinion they will all start to read how cheap it is vis-à-vis Barrick and Newmont and want to jump on the bandwagon. Today’s note from Morgan begins:
“We prefer GG over ABX and NEM on a better risk-reward view. In addition, we see less risk at GG around use of capital, and view grade sustainability concerns as overblown. We believe recent underperformance on disappointing guidance has created an attractive entry point…GG has lagged peers by approximately 95% year-to-date after resetting expectations earlier this year.”
The fact of the matter is, in terms of size, Barrick, Newmont, and Goldcorp are quite similar, although Goldcorp has potentially a better resource base, is in better countries, and of course is far cheaper. That is all the rationalization folks will need as the cheerleaders get behind the story, although I thought it was interesting that this particular fellow missed the recent insider buying that I noted last week.
Included below are two questions and answers from the Q&A’s with Bill Fleckenstein.
Bonus Q&A
Question: FWIW – Goldcorp’s new CEO bought 40k shares of the stock on Aug 2. CFO bought 6,300 shares too. It’s always amazing how hard gold and the miners get hit (and go up for that matter) on some NFP days. I wonder if CAT is going to re-open those 5 Midwestern plants and hire back laid off employees, are housing prices going to become affordable, did student loan debt get cut by a large percent, have car sales NOT peaked (someone call the Ford CEO and CFO and tell them about those job numbers), are health insurance premium increases gonna be rescinded, and most of all is the iPhone 7 design gonna be changed before it launches making us all want to go out a buy one – cause those semi-chip stocks sure are perking up. So many questions on exactly what does a really good job report mean about all the other recently reported economic data. I don’t jnow how many of these you can answer Bill…
Answer from Fleck: “Look, we live in a totally warped financial world, where central banks print money to buy stocks and bonds, and computers chase after things. To expect rationality on any given day or week is to misunderstand the environment. That is great news on GG, and helps confirm my view. I hadn’t seen that, so thanks.”
Question: Seeing the bitcoin hack and the idea that everyone will get a 36% haircut I am just amazed folks even trade in the “digital money” area. I worry enough about credit cards and bank accounts but at least there is a way for the consumer to come out whole in case of a hack. You add in the Delta system going down today and grounding flights and it just shows again the risks that can never be eliminated in a world of zeros and ones. It will always be a fragile system where everything from emails to personal information is at risk every day-and more dangerous things like power grids and transportation systems.
Answer from Fleck: “Yeah, there is still a lot that can go wrong with digital currencies.”
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