Always A Bull Market Somewhere

Some of the nattering nabobs of doom have resurfaced.

They argue that the present weakness in the markets signify as signs of the next market meltdown.

These people seem to argue not from evidence but from dogma.

And people blinded by dogma tend to get market predictions utterly and consistently wrong.

Even if they are correct and that a market meltdown occurs, it isn’t likely the same scenario as 2008.

We must be reminded that despite ANY market condition “there always will be a bull market somewhere”. The intrinsic difference is one of the idiosyncratic operating conditions which produces diverse types of bullmarkets.

In the 2008, despite a general financial market meltdown brought about by the recession that culminated with the Lehman collapse, the bullmarket was seen in the US dollar and US treasuries.

chart from netdania

Yet the same experts who failed to see the recent rallies and have made the Great Depression as the fount of their predictions seem to be singing the same tune again.

The idea of a Great Depression circa 2011 is false for the simple reason past conditions are patently dissimilar from today.

True, the US stock markets had its first major episode of correction for the year 2011.

But was it a broad market meltdown?

From US Global Investors

Obviously not.

The energy sector defied last week’s downturn. This goes to show that there has been an ongoing rotation of money—all too symptomatic of inflation dynamics at work.

As it is rare to find this gem of reality check from the mainstream; from the Wall Street Journal

It's important to keep in mind, however, that oil was already trading in the $85 to $90 a barrel range before the recent irruption in the Arab world. The run-up to that price territory began in earnest last year after the Federal Reserve embarked on its QE2 strategy of further monetary easing.

The Fed absolves itself of any responsibility for rising oil prices, attributing them to rising demand from a recovering global economy. Demand has been rising, but not enough to explain what has been a nearly across-the-board spike in prices for dollar-traded commodities. (Natural gas is the big exception, thanks to a boom in domestic exploration.) A spike in one or two commodities can be explained by a change in relative demand. A uniform price spike suggests at least in part a monetary explanation. The Fed will use the Libya turmoil as another alibi, but there's no doubt in our mind that oil prices include a substantial Ben Bernanke premium.

We have been told by most media outlets except the above that rising oil prices represent as a supply shock.

However, even if the Middle East Crisis fizzles out you’d be surprise to see that after the Libya premium would have been covered, oil prices will continually rise and will exceed the last highs and approach the $200 as we have been predicting.

chart from Pragmatic Capitalism

Of course we don’t believe that it’s a bear market, not yet anyway.

What we may be seeing instead could be another bubble at work in the US equity markets as margin trade in the US have been ballooning.

So people who argue that cash should be king will likely be wrong again.

Not with more chatters of QE 3.0 or where global governments have been deliberately destroying the purchasing power of money or currency values. And certainly not when the adjusted monetary base which is one of the monetary component which the Federal Reserve controls.

From St. Louis Fed

At the end of the day, all these money will have to flow somewhere. And unless governments learn to restrain themselves the likelihood is that we would likely see higher commodity prices—food, gold, oil etc....

As a side note fiat money stands for political redistribution, and similarly shackles to freedom and liberty. Meanwhile gold stands for the opposite, as per Ralph Waldo Emerson, “The desire for gold is not for gold. It is for the means of freedom and benefit”. Do not confuse one for the other.

What Gold’s Latest Record Prices Mean

``The struggle against gold which is one of the main concerns of all contemporary governments must not be looked upon as an isolated phenomenon. It is but one item in the gigantic process of destruction which is the mark of our time. People fight the gold standard because they want to substitute national autarky for free trade, war for peace, totalitarian government omnipotence for liberty.” Ludwig von Mises

A major trait of bullmarket is, whatever assets we sell today will climb higher tomorrow. This implies that the most regrettable course of action in a bullmarket is to sell.

And one great example would be the gold market. Gold just set a new record in terms of nominal high (see figure 1).

Figure 1: Netdania.com[1]: Gold’s Stairway To Heaven

The monthly chart reveals that gold prices have been in a bullmarket since 2000. While true enough, there have long periods of consolidation, the general trend over the last decade has been up.

And importantly, contrary to those who allege that gold functions as safehaven during recessions or during the “deflation-symptom” crisis similar to the Bear Stearns-Lehman episode of 2008, evidence has shown otherwise—gold fell during the previous two recessions of 2001 and 2008 (see black channel lines)!

Alternatively, the most recent record run only implies that the fresh milestone high, established last week, DOES NOT presage of any forthcoming market crashes or “double dip” recessions. And if gold serves as a lead indicator as previously discussed[2], then the likelihood is to see reanimated activities in global risk markets.

At the start of the year, we were told that gold wouldn’t generate investor appetite as the menace of “deflation” continues to lurk around the corner. We even read predictions stating that gold would fall back to the $800 levels[3] way until last month[4].

However, as we have always been saying--in a world of central banking, deflation is no more than a bogeyman to rationalize more inflationism, which central bankers are likely to accommodate. After all, inflation is ALL about politics. And central bankers, in spite of their supposed “independent” role, have been the main conduits in financing government expenditures. Thus all talks of “independence” are mostly demagoguery. Fact is, global banking regulations, as the Basel Accords, have all been skewed to accommodate government expenditures[5].

Of course, one major bullish factor about gold is that mainstream STILL doesn’t get it; gold isn’t just an inflation hedge, nor is it about alternative assets[6]. It’s also been starkly misguided to impute ‘conventional’ financial valuation metrics to gold when this doesn’t apply. It’s even myopic to calculate or value gold prices premised on commodity usage. And it is also faulty to appraise gold based on global mining output. Since gold isn’t being consumed, incremental additions to the above ground supplies by existing mines hardly determine the pricing model (see previous discussion[7]).

In a decadent world of fiat money, where money printing to fulfil specific political agenda have been the most convenient route resorted to by political leaders everywhere-for the simple reason that the ignorant masses hardly understands how such surreptitious redistributive activities influences their lives- gold seems to be re-establishing its role as ‘money’.

Therefore, gold’s ascendant trend in ALL currencies have simply been manifestations that demand for gold has been transforming from mere “commodity” (jewelry and industrial usage) to “money”.

Gold is being held as reserve asset not just by the central bank, but importantly by the general public. Gold’s increased function as “reservation demand” is what usually the mainstream sees as “speculation” or “speculative hoarding” or “investment demand”.

Otherwise said, money’s “store of value” is increasingly being factored into gold prices (unit of account). Hence, relative to gold pricing, this implies that reservation dynamics or the reservation model (and not consumption model) determines gold valuations or that the exchange ratio or monetary valuations relative to fiat currency applies-- where valuations are determined by the expected changes in relationship between the relative quantity of, and the demand for, gold as money vis-a-vis paper currencies.

And possibly one day, such transformation would include the deepening of “exchange demand” or gold as ‘medium of exchange’ (see previous discussion[8]). Proof of this has been the emergence of Gold ATMs in Germany[9] and in Abu Dhabi[10].

All these, of course, are ultimately dependent on the stimulus-response and action-reaction of global political leaders on the swiftly evolving political, economic and financial sphere.

And thus, periods of weaknesses, whether from recessions or from consolidations (in technical or chart lingo the “energy fields”), has served as buying windows rather than selling opportunities.

Yet for those whom have remained sceptical and or earnestly drudge to market “timing” gold’s prices, they usually end up chasing gold prices higher-- buy high and sell low.

And this is especially brutal to those in constant denial of gold’s ascendancy; they have entirely missed out the rally for ideological reasons, and vent their frustrations by continually disparaging such developments. The odd thing is that this has already been a 10-year market process.

Yet since gold rise has been threefold, all errant attempts to “time” the market has resulted to lost or missed profit opportunities.

As the legendary trader Jesse Livermore expressed by Edwin Lefevre in the classic must read for any serious investors, “Reminiscences of a Stock Operator”,

``Disregarding the big swing and trying to jump in and out was fatal to me. Nobody can catch all the fluctuations. In a bull market your game is to buy and hold until you believe that the bull market is near its end. To do this you must study general conditions and not tips or special factors affecting individual stocks.[11]”

In short, the best returns emanate from long term investments.

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[1] Netdania.com, Forex charts

[2] See Why The Current Market Volatility Does Not Imply A Repeat Of 2008

[3] Yahoo. Finance, Gold Is "Fairly Expensive," Could Fall to $800 If Fed Moves, Midas Fund Manager Says, January 22, 2010

[4] CNN.Money, The coming gold bust

[5] See The Myth Of Risk Free Government Bonds

[6] Reuters.com, US gold sets record, ends strong as alternate asset

[7] See Gold As Our Seasonal Barometer

[8] See Financialization of Commodities: Boon Or Bane?

[9] See Creative Destruction: Electronic Payments Over Cash And Checks

[10] Financial Times Blog, Abu Dhabi’s gold ATM machine a sign of more opulence to come, May 13 2010

[11] Lefevre, Edwin, Reminiscences of a Stock Operator p.76 John Wiley and Sons

Mark Mobius: The Stock Market Rally In Emerging Markets Has Legs

The UK's Telegraph interviews Templeton's Mark Mobius who says that emerging markets stocks will continue to rally.

This from the Business Insider,

``Templeton's Mark Mobius argues that the global rally still has legs. This is partly due to massive liquidity being created globally, via both government policy and derivatives.

``Moreover, Investors shouldn't time, nor flee from, any potential corrections along the way. More nerves of steel from the emerging markets perma-bull:

"Money supply is growing at a rapid pace, globally."

"Derivatives are not dead. There's $600 trillion dollars worth of derivatives out there."

"As you know, there are always corrections in a bull market. And the corrections can be very violent, and big... nobody knows when. And if you think that you're gonna catch it, forget it, because these things move very, very fast."

In short, guru Mark Mobius sees emerging markets in a secular bullmarket from which market "timing" could result to lost opportunities.

Watch video below