Seeking Alpha

Justice Litle's  Instablog

Justice Litle
Send Message
Justice Litle is editorial director for Taipan Publishing Group. He is also a regular contributor to Taipan Daily, a free investing and trading e-letter and editor of trading research advisory service, Macro Trader. If his name sounds familiar, it's because Justice is regarded as one of the top... More
My company:
Taipan Publishing Group
  • Ignore The "Goldenfrueders"... Gold Remains A Great Store Of Value

    Conventional wisdom on Wall Street is often worth the price paid (i.e., nothing). But some hoary nuggets have value.

    "Sell in May and go away," for example, is based on a true and powerful phenomenon.

    As Mark Hulbert reports on MarketWatch:

    Over the past 50 years, the Dow, on average, has produced a gain of 7.5% during the winter months and lost 0.1% during the summer months.

    The "sell in May pattern also exists in other countries besides the US. Ben Jacobsen, a finance professor at Massey University in New Zealand, reached that conclusion after studying all available historical evidence from each of 108 separate stock markets around the world. For example, his statistical tests detected the seasonal pattern in the British stock market as far back as 1694.

    Any pattern with that kind of staying power is driven by very powerful forces. That the pattern is global is further evidence it is worth paying attention to.

    And in 2013, something more ominous lurks. Commodities, Treasurys and recent economic data readings are openly telegraphing deflation and the failure of central banks in the developed world to revive flagging.

    You don't have to look too hard for telltale signs of deflation. Prices for crude oil and copper - two of the most growth-sensitive commodities - are falling, not rising.

    Treasury bond yields are falling, not rising (despite no changes in Fed buying). Falling yields are a classic deflation omen.

    In the US, recent manufacturing and jobs data have disappointed. So have retail sales and consumer confidence readings.

    New fears of deflation and global slowdown also help explain gold's recent price declines.

    If the world is slowing in spite of massive debt monetization by developed-world central banks... and if European leaders can strong-arm bankrupt governments in Cyprus and Portugal into selling their gold... investors are starting to question gold's value as a hedge against inflation and further fallout from the ongoing European crisis.

    But to write off gold's long-term value would be myopic.

    A period of price adversity, coupled with a flushing out of "weak hands and hot money holders, is a far different thing than permanently dismissing the value of gold or declaring the decade-plus gold bull market to be "over.

    For that to happen, you would have to see the macroeconomic drivers behind gold's 13-year bull market change... and change significantly. And that clearly isn't the case.

    Have central banks in the US, Japan and Britain stopped deliberately debasing their currencies? No. Have the deadly serious economic issues plaguing Europe, the US, China and Japan tied themselves up with a neat little bow? No. Has there been a swing from negative real interest rates in the developed world (and China) to positive real interest rates? No.

    This hasn't stopped an outbreak of joy at the sharp decline of gold prices - what you might call "goldenfreude - in the mainstream press. Most of this, of course, comes from neo-Keynesians such as Paul Krugman. But it has nevertheless rattled the nerves of many individual gold investors.

    If you own gold... or are thinking of buying some following recent price declines, you must first understand that gold's recent sellers fear deflation.
    You must also grasp two important things about deflation:

    1. Modern central bankers loathe and fear deflation more than anything. They will do anything to stave off the threat of a deflationary downward spiral.

    2. The "first deflation, then inflation scenario still ultimately manifests inflation 100% of the time. This happens either by way of late withdrawal of monetary stimulus by central bankers in the case of a genuine recovery... or because central banks go "all out to defeat deflation and end up severely debasing fiat currencies as a result.

    In this light, drivers of the gold sell-off make sense. It has nothing to do with the false narrative painted by the "goldenfreuders.

    Understanding this allows us to foresee the endgame. One way or another, gold's status as a store in a time of central bank folly will be confirmed.

    Carpe Divitiae,



    Article brought to you by Inside Investing Daily. Republish without charge. Required: Author attribution, links back to original content or Any investment contains risk. Please see our disclaimer.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Apr 24 11:16 AM | Link | Comment!
  • What The Gold Crash And Bitcoin Crash Have In Common

    Gold and virtual currency bitcoin crashed in recent days. The crashes have something in common.

    First, let's talk about gold...

    The yellow metal plunged by more than $100 per ounce on Monday following talk that Cyprus would be forced to sell gold to pay back its debts. Although Cyprus is small in the scheme of things, the move suggests a precedent of forced sales from larger euro-zone countries (such as Portugal, Spain and Italy).

    This comes on the heels of increasingly bearish outlooks from major investment banks such as SocGen and Goldman Sachs.

    Worse, the faster and farther gold falls, the more likely a mass investor exodus becomes, forcing even heavily committed hedge fund managers to sell. Fears of a vicious feedback loop thus lead to self-fulfilling prophecy, as investors rush to the exits.

    Gold had already been in an extended downtrend based on the perception that (1) central bankers have won the battle against further financial contagion and (2) a lack of meaningful price inflation on the horizon. (It is hard to get real and sustained inflation when wages are suppressed.)

    Gold has long been billed as the only alternative currency not subject to a printing press. As such, gold is used by many investors as a form of "crisis insurance" -- a sort of credit-default swap for the entire global financial system. The greater the risk to the system the more desirable gold becomes.

    But now it seems that a continuation of the crisis in the euro zone could see the market flooded with gold. There are 11,000 tons of the metal in euro-zone vaults. Gold is a bastion of safety and a shelter of value in times of monetary and geopolitical crisis. But what happens if governments are forced to dump their gold to pay back debts?

    A major crisis event such as a euro-zone breakup thus becomes an unknown, rather than a positive, for gold.

    Bitcoins crashed too in recent days, albeit more severely. Last week, the value of bitcoins fell by more than 50% in one day.

    Bitcoins have the same "hard to value" problem as gold, but to an even more serious degree. Whereas gold pricing has decades and even centuries of history, coupled with a mature market to buy and sell into, bitcoins are brand-new (relatively speaking) with no intrinsic value benchmark at all.

    In this respect, gold and bitcoins have both the same core virtue and the same core flaw. Both represent an alternative to government-managed fiat currencies. Both are hard, if not impossible, to assign intrinsic value to.

    So does the crash in fiat alternatives mean the central bankers have truly "won"... and that there will be no challenge to fiat's reign?

    Hardly. Neither history nor economics argues that.

    It simply means the road to a 21st-century post-fiat world contains more twists and turns than many expected... so don't be surprised to see more serious volatility ahead.

    To be continued...

    Carpe Divitiae,


    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Apr 17 10:39 AM | Link | Comment!
  • This Tsunami Of Cash Will Send US Real Estate Prices Into A "Hyper-Bubble"

    In the movie Havana, Robert Redford tells Lena Olin, "A butterfly can flutter its wings over a flower in China and cause a hurricane in the Caribbean."

    The butterfly effect describes a finding of chaos theory known as "sensitive dependence on initial conditions." Even a minute change in inputs (the butterfly's wings in China) can trigger massive effects on the other side of the globe (a hurricane in the Caribbean).

    It is as true in the world of finance as it is in the world of weather... especially when the butterfly in question is Godzilla-sized.

    The new Japanese prime minister, Shinzo Abe, and Japan's new central bank chief, Haruhiko Kuroda, have taken "quantitative easing" (aka debt monetization) to a level never seen before. Call it "Godzilla-sized."

    Relative to the size of its economy, the Bank of Japan's stimulus will be three times the size of that of the Fed.

    And that is where the butterfly effect comes in...

    Imagine the following scenario:

    You have been saving and adding to your nest egg for many decades. It is all you have for your retirement. Your prime minister comes on television and basically says, "We are going to print currency until we get a 2% inflation rate -- no matter what."

    You have no idea what the outcome of this massive experiment will be. You understand, through some basic research, only that it is the biggest monetary gamble in the history of the world. It is a gamble with your retirement funds, which could potentially lose half of their value (or more) over the next two years.

    You also know that, if your government screws up this "experiment," runaway inflation could wreak havoc on your country. Your food and energy costs alone, for example, could triple or quadruple (as you are essentially an island nation with no natural resources).

    This is not hypothetical. The Japanese prime minister has already announced his crazy plan and hired a crazy central banker to carry it out. What would you do if you were in this situation?

    One thing you might do is seek out assets denominated in a stronger currency... assets that function as inflation hedges... assets such as real estate.

    Property booms in Miami, New York City, Las Vegas... and even Houston... are being driven not just by easy monetary policy and Wall Street private equity capital, but also by foreign investors sending their capital to the US.

    When, say, a wealthy Brazilian decides to buy a block of Florida condos as a diversification of assets, he can do it only by exchanging the Brazilian currency for dollars. These exchanges occur on such a massive scale they have kept the dollar more stable than many expected...

    Also, the US remains a military and agrarian superpower. This combination of military might and food stability makes US Treasury bonds attractive to foreign capital as a safe haven. (The political and military positioning of the US is a valuable intangible asset, not unlike the value of the Coca-Cola brand.)

    Japanese savers are already rushing to escape a doomed currency. That means their investment dollars will flood US markets -- fueling a US real estate hyper-bubble.

    To play this setup, you could buy shares in the iShares FTSE NAREIT Resi Plus Capp (NYSE:REZ), which tracks the performance of the US residential real estate equity market.

    This isn't quite a pure play on the residential real estate sector. (There are some health care and personal storage REITs in there too.) But you get exposure to plenty of apartment complex REITs, such as Equity Residential, AvalonBay, Essex Property, Camden Property Trust, UDR and BRE Properties.

    Or you simply avail of ultra-low interest rates, buy a second home and rent it out.

    Both are great ways to prepare for the Godzilla-sized flood of cash out of Japan and into the US real estate market.

    Carpe Divitiae,



    Article brought to you by Inside Investing Daily. Republish without charge. Required: Author attribution, links back to original content or Any investment contains risk. Please see our disclaimer.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Apr 12 1:23 PM | Link | Comment!
Full index of posts »
Latest Followers

Latest Comments

Most Commented
Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.