Asset Class Selection Is The Key

  • Currencies rebound on Wednesday!

  • Gold rebounds! 

Good day... And a Tub Thumpin' Thursday to you! What a evening last night! I was surprised by a former colleague, and good friend, Jen and her sisters. They were out for the evening and a little bonding, and I was sitting with my friends discussing the problems of the world. Jen began working with me in 1994, right out of college! I got her to come with me to EverBank when we first started the bank, and she was there at my side all those years... No baseball last night, UGH! Our Blues play tonight, hopefully they can stop the other team from scoring 5 goals in the game! Robert Plant greets me this morning with his song: Big Log... 

The Headline on Bloomberg this morning is this: Stock Rout Continues, while bonds, currencies remain calm. 

That statement right there, tells you that all my harping and ranting for years on years about diversification of your investment portfolio, including currencies and metals is playing out right here before our eyes... 

Don't look now but Gold has rallied two consecutive days, and is up nicely early this morning to bring it back to $1,200, the euro is rising again, and Treasury Bond yields are dropping again, thus signaling a flight to safety of bonds and guaranteed yield without capital risk of the stock market... There's a reason you diversify, and its to protect the overall value of your investment portfolio, so that when one asset class is in a bear market, the other asset classes are in bull markets... 

The key, and I've talked about this for years, but it's good to repeat for all the new readers to this letter, is that your choice of asset classes, must have different pricing mechanisms and independent trading from the other asset classes in your portfolio... 

A good example of this was the bull market in commodities that took place starting in the early aughts, and out performed just about everything else while they were in the bull market. But while that was going on, Stocks just weren't the hot potato they have been. Longtime friend, and publishing guru, Bill Bonner, called it early in the 2000's by saying that his trade of the decade was to buy Gold and sell the Dow... 

An investor needs to be nimble and quick to reallocate their investment portfolio when a Central Bank begins to monetize the debt, like the Fed began doing in 2009... But I had better not get started on that subject, and just get back to the discussion at hand... So, there you have an illustration of what a properly diversified investment portfolio does, and the thing I like is that it's happening right here, right now, (as Jesus Jones sang) right in front of your eyes... my eye... 

OK, so I guess we need to talk about what's causing this rout in stocks... First and foremost, I'm not a stock jockey, so my view is a broad brush stroke about the asset class... And from my view in the cheap seats, it appears that the perfect storm has hit stocks... The Trade War with China, Europe and anyone else that wants a piece of this, is causing falling margins and reduced profits for U.S. corporations. Then add in the rate hikes, and the idea that that the Fed is going full steam ahead with rate hikes, and finally a resurgence of yields in bonds... I told you, no wait, I warned you that this all would happen eventually... Remember me saying, that "one day yields will be at a level that it makes sense for stock market participants to sell risky stocks and buy guaranteed interest returns"? 

Of course, I really didn't think that 2.25% Fed Funds rate was going to influence the kind of yields I thought were needed to attract investors, but I guess it's really tied to the fact that the markets and participants really believe that the Fed is going to keep hiking rates... And so it begins... 

What will the Fed do? I mean ever since Big Al Greenspan was the Fed Chairman, the Fed has had the stock market's back... I'm just saying... 

Well, Gold gained $5.30 yesterday, and is up over $8 in the early morning trading today. The thing I'm hoping to see here, is that Gold is allowed to move upward without interference... I can hear some of you saying, "But Chuck, won't the threat of higher rates, negatively affect the price of Gold?" To which, I'll say that initially, yes, they will, but if you just switch your attention to the 70's... Interest rates were ratcheting higher and higher in the Volcker years, and the price of Gold was ratcheting higher and higher too! 

OK... yesterday I talked about how a longtime reader sent me a note about how he disagreed with me on the Russian ruble... And I looked at his thoughts and thought to myself, that I was a real dolt sometimes, but then talked about the conflict in Ukraine and the collapse of Oil prices, as the reasons behind the ruble's drop in price in the last decade... 

He agreed that those two things did major damage to the ruble, but wanted to point out that the ruble hasn't been able to keep up with the price of Gold through the years, and sent me a chart that I can't include here, but here's what he had to say... "Here is a 10-year price chart showing depreciation of the ruble, from roughly 25,000 to 80,000 per ounce of gold. That equals a 320% loss in the purchasing power of the ruble over the past decade."

Well, I'll go back to my thought from Monday, and that is that without the sanctions Russia's economy would be doing much better, and with inflation under control now, the ruble could be much more attractive... And they have all that Gold!

The Chinese renminbi continues to be marked downward with each and every passing day in the fixing... I see the Chinese reacting to the Trade War with a cheaper renminbi, to offset the tariffs on their goods shipped to the U.S. Period... 

On the other end of the BRICS... The Brazilian real continues to push the currency appreciation envelope further each day. A lot of pent up frustration is being displayed here, and like I said last week, it's a move that's all about politics in Brazil, and that scares me, for it's not a fundamental move, and therefore could be reversed in a heartbeat. But for you trading-jockeys out there, I say ride this horse until it bucks! 

The price of Oil saw a $3 drop yesterday, which was contrary to what I thought might be the case, as the hurricane made landfall in the Gulf region, thus disrupting Oil production... Strange move if you ask me... And there must be something else in play here, that I'm sure I'll read about today, but with no Pfennig tomorrow, you'll have to wait until Monday! Or if it's significant enough, I might just tweet it out! 

To recap... The headline on Bloomberg says: Stock rout continues, as currencies and bonds remain calm... And Chuck says this is all playing out as he thought it would, only earlier than he thought. Proper diversification is the key... Chuck goes through the items in the perfect storm for stocks, and is patting himself on the back this morning! HA!

For What It's Worth... Well, I've long feared derivatives... I've talked about this several times in the past that no one really knows the delivery mechanics of these derivatives if they all get executed. Well, this article in the Asian Times is about how these derivatives are beginning to spew smoke... Uh-oh!

Or, here's your snippet: "The risk remains that dollar credit will seize up globally, with disastrous consequences for countries that have to borrow dollars to cover deficits

The cure for the last crisis always turns into the cause of the next one. The economies of southern Europe - Greece, Italy, Spain and Portugal - nearly collapsed in 2011, and Europe's monetary authorities responded with negative interest rates.

So did Japan. Europeans and Japanese pay to hold cash or own 10-year German government bonds, which means that every pension fund and insurer will fold in a finite time horizon. They responded by exporting more, saving more, and buying American assets that still pay a positive, if low, real yield.

Hedging the foreign exchange risk in this half-trillion-dollar per year business has exhausted the balance sheet of the global banking system. That explains a large part of the jump in the U.S. 10-year note yield to 3.2% last Friday from 2.85% in early September. Hedging the foreign exchange risk in these massive flows created a derivatives mountain, and it has started to spew smoke and lava.

Banks are rationing foreign-exchange swap lines, making hedges so expensive that German and Japanese investors can no longer afford to buy U.S. bonds. If the foreign bid for U.S. debt dries up, the cost of financing America's $1 trillion annual budget deficit will rise, and so will interest costs around the world."

Chuck again... Got Gold?

Currencies today 10/11/18..American Style: A$ .7096, kiwi .6592, C$ .7665, euro 1.1572, sterling 1.3210, Swiss $1.0126, European Style: rand 14.6327, krone 8.2103, SEK 8.9890, forint 280.80, zloty 3.7262, koruna 22.3336, RUB 66.29, yen 112.23, sing 1.3797, HKD 7.8369, INR 73.97, China 6.9197, peso 19.05, BRL 3.7308, Dollar Index 95.15, Oil $71.81, 10-year 3.17%, Silver $14.43, Platinum $825.65, Palladium $1,078.95, and Gold... $1,203.35

That's it for today, and this week... My beloved Missouri Tigers have to go to Tuscaloosa Alabama on Saturday to play the #1 team in college football... UGH! I'm old enough to remember when going to Alabama to play a game for my Tigers was no big deal, or going to Ohio St., or a bowl game and playing a higher ranked team... They took on all challenges, and won! But times change... players like Phil Bradley, James Wilder, Kellen Winslow, Chase Daniel, just to name a few, moved on to the pros... Oh well, give 'em hell Tigers! I'm heading to lunch today with good friend Duane, so that'll be fun. Next week, I've got scans, and dr. appts so I need to get the fun in while I can! HA! John Waite takes us to the finish line today with his song: Missing You... I hope you have a Tub Thumpin' Thursday today and a Fantastico Friday tomorrow... Be Good To Yourself!