After the meeting in Davos and a shaky start to the trading week, “the seeds of the next financial crisis” have already been sown.
QT: Biting Again?
By Bill Fleckenstein President Of Fleckenstein Capital
January 22 (King World News) – After the three-day weekend the market opened with a bit of a thud, losing roughly 1% across the board. I’m not exactly sure what the precipitating cause was. It might have been weak economic news out of China, but who the heck really knows given that it trades as it does on a daily basis these days.
From there, the market never really bounced much, as it just kept stair-stepping lower until it rallied a little late in the day, thanks to White House hot air in the form of Larry Kudlow blowing smoke on Bubblevision about China. By day’s end, the indices were off 1.5% to 2.0%, with the Nasdaq faring the worst. Away from stocks, green paper was mixed, oil fell 2%, fixed income was higher, and the metals were a tiny bit higher as well…
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Facing the Music of Debt Musical Chairs
Turning to the news, there was an interesting article in the New York Times headlined, “A Chill That Has Davos Chattering,” which reprised a letter written by Seth Klarman about the problems he sees looming on the horizon because of the all the debt piling up here and around the world. In particular, there are several excerpts that I thought might make readers feel less crazy as they watch people basically party while Rome burns:
“The seeds of the next financial crisis (or the one after that) may well be found in today’s sovereign debt levels…There is no way to know how much debt is too much, but America will inevitably reach an inflection point whereupon a suddenly more skeptical debt market will refuse to continue to lend to us at rates we can afford…By the time such a crisis hits it will likely be too late to get our house in order.”
This is a point I have made from time to time about the consequences of just kicking the can down the road. By the time the problems that you’ve been pushing out into the future finally bite, they are way worse than if you had dealt with them at any earlier moment along the way.
As you can see, there is a path whereby the bond market revolts and disciplines both the government and the Fed for monetizing all this debt while allowing huge financial problems to continue to build. This explosion in debt, thanks to monetization, is a path that can cause the Fed to ultimately lose control of the printing press.
All-In Good Time
Klarman also had a worthwhile point about human nature:
“Individuals, professional investors, and financiers are prone to project their own recent experiences into the future…so when adversity is absent investors become complacent. They assume good times will continue and they grow careless about risk, perceiving it through rose-colored glasses.”
And that is exactly why we’ve had the party that we’ve had, even as all the macro problems that we have faced for some time only continue to get bigger. (Of course, precious metals are protection against that eventuality, but everyone who is involved already knows that.)
Worth a Second Look
On the subject of the metals, I talked to a knowledgeable friend over the weekend about the merger of Newmont and Goldcorp and I learned a couple of interesting facts. The most important had to do with my concerns about what it meant for Goldcorp and its CEO to want to sell out to Newmont at the price it did. Namely, that there could be significant future operational problems that hadn’t yet been disclosed.
My friend’s view, and he has a lot of contacts in the industry, is that it was basically Goldcorp’s board, in the name of its chair, Ian Telfer, that pushed for the Newmont deal in the wake of the Barrick-Randgold merger. Thus, sadly, it was a case of a chairman who has done a very poor job of leading the board and the company selling out the shareholders just so his fiefdom would stay relevant.
In any case, my friend feels that Newmont’s management has done a good job there and the combined entity might be a worthwhile investment in the large-cap arena. I haven’t done anything about this yet, but it made me much more intrigued to be potentially involved in the post-merger entity, at least from a trading standpoint, so I wanted to pass that along.
In more mining news, Pan American reported its 2018 production results and 2019 guidance and the stock was hammered for about 7%. Quite frankly, I can’t put my finger on what the problem was. The company’s all-in sustaining costs for 2019 are higher, but that was more or less expected. In any case, almost everything management discussed is moot because its operations are going to change quite a bit after the merger. Silver production for 2018 was about 1% light, but I can’t believe that is relevant either, so this may be just another case of an overreaction to a rather innocuous piece of news. It does get old when any sort of news short of an upside blowout causes mining stocks to get sold.
Done Good
Lastly, on a very positive note, the generosity of Rap readers allowed us to raise just shy of $75,000 for Shepherd’s Counseling, counting my match, so I would just like to say thank you to everyone who contributed. All of you should know that you have improved many lives with your donations.
Also of importance…
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***To subscribe to Bill Fleckenstein’s fascinating Daily Thoughts CLICK HERE.
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