David Braunstein

Weekly Recap: Is the U.S. Going Bankrupt?

GOLD BUGS TAKE NOTICE!! Gold like most other commodities and most stock markets worldwide are in a bubble. I do not argue that the world's economy is fragile. But, if you believe that gold will help you in a crisis, you do not want to hold Gold equity shares or ETF's or a so-called "Gold Account." If you own paper that entitles you to some kind of ownership in gold you've got to know that you can really get to the gold. In my opinion if all the gold were demanded by ETF's and "Gold Accounts" there would not be enough physical gold to meet the order. Gold paper is just another fiat currency. GOLD BUGS BEWARE. Only the real metal is worth the price of gold.

Weekly Recap: Is the U.S. Going Bankrupt?

GOLD BUGS TAKE NOTICE!! Gold like most other commodities and most stock markets worldwide are in a bubble. I do not argue that the world's economy is fragile. But, if you believe that gold will help you in a crisis, you do not want to hold Gold equity shares or ETF's or a so-called "Gold Account." If you own paper that entitles you to some kind of ownership in gold you've got to know that you can really get to the gold. In my opinion if all the gold were demanded by ETF's and "Gold Accounts" there would not be enough physical gold to meet the order. Gold paper is just another fiat currency. GOLD BUGS BEWARE. Only the real metal is worth the price of gold.

Not a Sucker's Rally - It's a New Bull Market

Since most of the cash still remains on the sidelines, the liquidity driving up the market argument falls flat. The market has been driven by a lack of liquidity and program trading. Lack of buyers will soon (in the next few weeks) begin to drive the market down slowly and not in a straight line over the next several months. Cash at zero is the best investment right now. Cash in a safe at home is even better.


On Oct 21 04:19 AM Faisal Humayun wrote:

> When you give billions to Dollars to major market participants and
> keep interest rates at near zero levels then a rally in the markets
> or for that matter many other asset classes is very likely...
>
> But one needs to see how much the Dow goes up in nominal terms and
> real terms...So the market rally is also associated with a sharp
> fall in the Dollar...
>
> Not always market rally is good news...The real economy is just too
> weak to absorb all the excess liquidity...Thus, the excess liquidity
> is getting absorbed by equities, commodities and other asset classes....

Best Available Risk Reward Proposition

I really don't buy the inflation theory. Even with the stimulus, the CPI is running a deflation of 2.2%. What happens as stimulus is withdrawn? How do you reconcile declining real estate prices with inflation? I agree that there is risk in long-term bonds as the economy may come back one day, but that day is not soon. In the meantime, I would be looking to buy long term bonds after the Fed stops its quantitative easing program. Then we will see the true rate of deflation surface.

Look at Earnings in Context Before Betting on Equities

Rakesh,

I don't believe the transfer of wealth from emerging countries to developed ones is on the verge of abruptly ending. Perhaps over time this thesis makes sense, but it will likely be a gradual process. Look at the China/U.S. relationship. China has effectively pegged its currency to the U.S. Dollar and other exporting countries are desparately trying to reflate the U.S. Dollar to help their exports.

Over time, I beleive in the next 30 to 40 years, power will transfer to the 3rd world countries as the United States baby boomers shift out of their peak spending years.

As far as the markets go, I agree, it's artifically propped up by stimulus. If the stimulus abruptly ends, it will cause a collapse of world markets and commodity markets. If stimulus continues too long, we will see bubbles in all the markets again followed by inevitable crashes.

The new generation has never lived through a prolonged bear market. They have learned that you get rewarded to take on too much risk. I beleive we are close to the breaking point where too much risk is being taken and the prolonged consequences of running huge deficits will emerge.

I am 100% in mutual funds with a vast majority of their holding are in U.S. Treasuries. I made 8% on my money during 2008 when others lost their shirt by heding my long positions using bear funds. I currently do not use the bear funds because I perceive that counter-party risks could interfere with their correct functioning during a crisis. This is similar to the 100% margin rules that were implemented on S&P 500 Index futures on October 19, 1987. Shorting futures didn't work on that day.

I do not expect a crash, but a slow drawn out bear market that should begin between now and the end of 2011. Patience is the order of the day!

Is It a Stock Market Rally or a Dollar Devaluation?

I don't know about stock prices, but certainly there is a strong inverse correlation between the US dollar and oil prices. Technically, the US dollar is at an inflection point. Odds favor a decline and a test of the 2008 lows when oil prices rose to $148 per barrel. Don't you think oil prices north of $100 would slam the brakes on economic growth?

Five Reasons the Market Could Crash This Fall

Dead wrong! Wall street firms and banks are the guarantors of derivatives contracts. They back those contracts by the financial insitution's credit rating. It is the customers of those brokerages and banks who are taking positions. It is a logical statement to say that all the customers of the financial institutions play a zero sum game, however, it is very posssible for one or more financial institutions to fail without another financial institution gaining anything.


On Aug 04 12:10 PM contracontrarian wrote:

> "If Wall Street did put $50 trillion at risk… and 10% of that money
> goes bad (quite a low estimate given defaults on regulated securities)
> that means $5 trillion in losses: an amount equal to HALF of the
> total US stock market."
>
> Any one particular Wall Street firm can lose everything they have
> or even more,but other Wall Street firms would earn the same amount
> at the same time,as they are on both sides of those derivative positions.
> Alltogether "Wall Street" can not lose money on their derivatives...

Five Reasons the Market Could Crash This Fall

I couldn't agree with you more. Great insights. Anyone long equities here is playing a game of Russian roulette. I'm amazed that computerized trading could be responsible for a 48% increase in this market without speculators coming back in. To me it reminds me of the market in 1997 to 1999 before the tech crash. A market driven by momentum investors. During that time growth stocks were king and value stocks trash. I often wonder if this market will be like that one given the tremendous amount of government stimulus in the economy. I don't disagree with your brilliant analysis, I just wonder if the crash will come this fall or the fall of 2011? Howver, no matter how you look at it, it looks to be a fool's rally and investors will likely be better off over the next several months holding high quality bonds or cash.

1929 All Over Again?

Good article. I especially liked the lack of convergence of reported and operating earnings. In case any of you readers missed my article comparing the current market to 1929:
seekingalpha.com/artic...
Maybe PE's have less to do with the stock market than crowd psycology. Maybe the pattern established in 1929 to 1932 repeating may be more likely than you think.

Consider These Conditions When Using the Unemployment Rate as 'Any Kind' of Indicator

Very nice article. Good insights. I agree, too many people beleive that unemployment is a lagging indicator and dismiss it.

Global Trade: Bottoming but Not Rebounding

Again, a great article. My guess is that the market leaders are alone far ahead of the pack. I suspect inflation expectations are ahead of the facts, too. Money on the sidelines has likely come back into the stock and commodities markets for lack of other business opportunities. This reallocation of cash put temporary upward pressure on prices from extreemly depressed levels. The fuel behind these market moves will likely soon run out.

The reason that bankers are not lending is that there are no more real bankers. Banks started syndicating loans after the bank failures of the 1980's and followed syndication with securitization. All real bankers have left the industry during the early 1990's to be replaced with fancy salemen, relationship types. The underwriting of loans was transfered to the securitization syndicate where the analysts knew nothing about the local economy nor the intergrity of the person applying for the loan. Loans were also dependent on loan score software that proved to be easily gamed. Since there are no more real bankers, they do not know how to make loans that stay on their bank's balance sheets. No wonder there is a political upsurge of bring back the securitization market. We saved the banks, but we did not bring back bankers. Instead, we saved a bunch of aggressive salesman jobs wishing for a return to the good ole days.

After securitization comes back, we will likely see a modest uptick in inflation and economic activity. Unfortunately, the seeds of the next sub-prime meltdown are already being planted. Those that do not learn from histroy are doomed to repeat it!

U.S. Government Recreating Leverage, Offering New Trading Windows

How does a trillion dollar securitization of consumer loans help anything? Isn't that what got us into this mess to begin with? Insured AAA junk. Now it's gonna be government insured AAA junk. My guess is that one or two trillion is not going to be enough stimulous to jump start this stock market, even for trading rallies. Unless of course the government will offer another couple of trillion for margin accounts and new carry trades!

The Real Crisis: Collapsing Capital Accumulation Process

firstproman, I disagree that we are sowing the seeds of the next bubble excess. Those days are over for many years because everyone is overleveraged now: homeowners, businesses, hedgefunds, nations, municipalities. The era of low interest rates produced over pricing and stock and asset bubbles. The next ten years will be marked by delevering and no amount of government intervenion is likely to change that. The government has two choices: (1) do nothing and let our capital system restructure the system through bankruptcies and foreclosures, or (2) pump more money into the system by printing it. Of course there is a third choice which is a mixture of (1) and (2). Since printing money hurts older americans and those who are unemployed and underemployed, that option hurts the most people as inflation cuts them to the bone. Therefore, a mixture is most likely. There will be no inflation or deflation if the governemt gets it right. Some asset prices will deflate; some will inflate. There will be winners and losers. Stock prices are likely to remain stable after reaching an equalibrium which is somewhere between 600 and 700 on the S&P 500 Index. From there it will rise, but most likely by only 5% to 6% annually for many years to come. Long-term interest rates will peak at 3% for the same number of years. Capitalism will coexist with socialism.


On Feb 09 04:28 PM firstproman wrote:

> Thank you for the fair response Rakesh. I agree with this briefer
> assertion. Left leaning thinkers have commonly argued that “state
> capitalism” is the natural next step in development of economies
> post “private capitalism”. In the west we are too often completely
> blind to this school of thinkers.
> Talking about our markets:
> I agree with your article that the current market collapse (equities,
> commodities, real estate) is largely due to the leverage excesses
> caused by Greenspan’s monetary expansion i.e. the last boom. I differ
> with you on what will happen next. I believe we are currently witnesses
> the birth of the Bernanke expansion and eventual bubble. A major
> question for investors is “which asset class or classes will experience
> exaggerated price increases?” even if only “nominal dollar” price
> increases.
> The market is infatuated with “booms”. We have so much cash (private
> capital) sitting on the sidelines waiting for the next drunken “price
> party” that the next “recovery” will become a self fulfilling prophesy.
> The Obamaniks will ensure this happens.
> Talking about world development in general:
> Most of the world is now trying to consume more i.e. improve living
> standards (development). At Davos even Putin, after condemning the
> U.S. for the current global economic reversal rejected a return to
> completely controlled economies OR protectionism (yes, yes, yes,
> self serving) . The current contraction may indeed get worse before
> it gets better but our central banks and governments are already
> sowing the seeds for the next boom and eventual bust cycle. I’ll
> be very surprised if nominal prices of one or more of the “hard”
> asset classes (equities, commodities) aren’t surging higher before
> 2010 ends!