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Musings Report 2020-32 8-8-20 A Contrarian's Confession
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A Contrarian's Confession
I confess that I'm a born contrarian, and I say that not with pride but with humility and even embarrassment, for contrarians can't help but jump in front of trends that often steamroll them. It's not a blessing, it's a profound curse.
So even though only fools start businesses in the middle of the deepest recession since World War II, there I was, launching a super-risky business in 1981 on a shoe-string. And so on. Show me an extreme or tell me it can't be done and you'll instantly have my contrarian interest.
The problem for born contrarians is quite often that it can't be done, "sure things" continue being "sure things" and extreme trends continue running to new extremes, for months or even years.
Thus I wrote a column for the San Francisco Chronicle in late 2004 proclaiming the top of the housing bubble, based on the history of valuations up to that point. The real estate industry and conventional pundits were confident that housing was not in a bubble and the soaring values were a healthy trend without end.
Given that the valuations of 2004 were the most extreme ever, my contrarian call of a top seemed reasonable. But I was wrong, dead wrong; housing valuations continued marching higher for another three years, far eclipsing previous valuations. Houses that went from $135,000 to $270,000--a crazy increase in just a few years--went on to sell for $540,000 in 2007. (Now this house is worth $960,000, according to zillow.com.)
This also works the other way around, of course. When bitcoin suffered one of its typical left-for-dead periods around 2015-2016 and the mainstream was declaring it worthless (again), my contrarian instinct was piqued: if the mainstream hates BTC, then there must be something in it.
So with all this in mind, take a look at this chart of a crazy tech stock, and tell me what course of action immediately appeals to you:
1. Buy it, since it's obviously going to the moon.
2. Bet it's going to drop, as it's already reached the moon.
3. Looks risky, don't touch it with a 10-foot pole.
So which crazy tech stock is this? Actually, it's a chart of gold.
Now longtime readers know I agree with Egon Von Greyerz that before the central-bank-money-printing era has reached its cataclysmic conclusion, it won't really matter how many central-bank dollars, euros, etc. you can buy with gold (or bitcoin) because they will have been issued in such quantity that their purchasing power will be effectively zero.
But the path to that conclusion may have surprising twists, turns and various precipices to navigate.
So when I look at a chart like this, regardless of the asset, my contrarian instinct is to think it's ripe for a reversal--yes, even gold.
Gold and the US dollar (USD) are famously on a see-saw, and so gold's recent ascent has been accompanied by a rising chorus of voices predicting the decline and demise of the USD, more or less in a straight line to oblivion.
My contrarian response is: not so fast. In my view the USD has been artificially suppressed by the Federal Reserve to float global equities higher, and the fundamental supply-demand picture is still very USD-positive.
The basic dynamics here are: 1) hot central-bank-issued money is flowing from one asset to the next as each bubble reaches its apex and the hot money seeks out whatever hasn't yet bubbled up to extremes. The poster child is the Russell 2000 index, with price-earning ratios (PEs) near 100, near-zero prospects for profits rising and yet it bubbled up quite ferociously after everything else had bubbled up and topped out. To say PMs are benefiting from this hot-money rotation seems self-evident.
2) Precious metals are front-running inflation, as everyone assumes the Fed's $3 trillion printing of USD this year and and a couple more trillion in 2021 will drive inflation/USD debasement in a straight line to zero.
I know this is contrarian, but the key reason the USD has plummeted isn't inflation expectations; it's the Fed threw a half-trillion USD at the other central banks to satisfy the demand for USD by creditors who borrowed trillions denominated in USD.
The Fed was worried that global demand for USD would send it higher, killing the global equity (stock market) rally. But little of that USD denominated debt has been liquidated; it's still out there, creating an insatiable demand for USD.
A USD rally could occur once that demand resurfaces and the Fed declines to "save" global equities from the consequences of a soaring USD.
As an inveterate contrarian, I see extremes of sentiment as precursors of crashes, and right now sentiment is 99% positive on gold/silver and 95% positive on equities and bonds, 95% negative on USD and 99% negative on Treasury yields, which everyone expects to drift to zero and beyond.
Contrarian that I am, I would guess that yields have bottomed and will rise and the USD will move higher based on fundamentals and sentiment extremes.
Rather than inflation, we might first get extreme asset deflation as everything gets sold to pay down debt and huge swaths of collateralized assets are repriced at zero. To cover all the losses, the Fed would have to print (by one estimate) an astronomical $100 trillion. I don't think it could do even a fifth of that without fatally disrupting the financial system via unintended consequences.
The old hands expect and welcome a modest pullback in gold, perhaps to the $1900 level (the 2011 high) or maybe $1800. Since everyone expects a mild dip, my contrarian sense suspects a much deeper retrace that catches everyone by surprise.
What are the odds of a sell-everything event that crushes all assets, including gold and bitcoin? The mainstream view is the odds of this catastrophe are near-zero. Those anticipating inflation will expect gold and bitcoin to hold their own or continue higher.
But what this contrarian sees is an unrelenting demand for what will become scarce in a world of USD-denominated debt--the US dollar. Yes, the Fed can create USD out of thin air, but there are consequences of this, both intended and unintended. $3 trillion is a lot of money, but then global financial assets total around $350 trillion, so the Fed just printed less than 1% of global assets.
Global debts may well exceed global assets, if we include shadow banking debts and other off-balance sheet debt. A great deal of that debt--whether it's "only" $250 trillion or $350 trillion doesn't change things--will have to go through the door of the USD.
Will all fiat currencies be devalued by accelerating issuance? Yes. But the ride to that destination might be wilder and far more unpredictable than the mainstream expects. That's the born contrarian's view, and of course it could be flat-out wrong. It often is. We'll just have to see how things rock and roll and try to avoid as much needless risk as we can.
Highlights of the Blog
If the "Market" Never Goes Down, The System Is Doomed 8/6/20
The Bogus "Recovery," Stress and Burnout 8/5/20
TikTok and our Last-Ditch Desperation for Social Mobility 8/4/20
A Vaccine May Not Be the "Magical Cure" Everyone Anticipates 8/3/20
Best Thing That Happened To Me This Week
On the last mile of the marathon to complete my new book.
From Left Field
Inside Brooklyn’s Illegal Firework Shows (11:54) (via Jesse H.)
This Four-Year-Old, $150M Mall in San Francisco Has Never Seen a Customer (via GFB)
Mass Consumption Is What Ails Us: To Avoid Pandemics, Our Whole Economy Needs to Change -- never thought I'd see what looks like an OTM post in the mainstream FA...
Corporate Insiders Pocket $1 Billion in Rush for Coronavirus Vaccine: Well-timed stock bets have generated big profits for senior executives and board members at companies developing vaccines and treatments. -- why are we not surprised?
Wilds: Are Predictions Of The Dollar's Demise Premature? -- just sayin'...
Comedy Break: Ecstatic teen opens his first-ever paycheck, learns what taxes are, is absolutely crushed (2:20) (via T.D.)
The Cantillon Effect: Why Wall Street Gets a Bailout and You Don't (Matt Stoller)
"The great urban exodus:" Colorado resort towns see flood of second-home buyers, burst in school enrollment-- the rich leave first... apres nous, le deluge...
A billion new autos by 2030 will kill climate change -- wait, are you saying that building another billion cars isn't the solution? Then what is--2 billion?
PodRide, an enclosed 3 or 4 wheeled e-bike that looks like a micro car
Absentee Ownership: How Amazon, Facebook, & Google Ruin Commerce Without Noticing -- politicos are starting to notice...
Small Family Farms Aren't the Answer: The romance of neoliberal peasant farming blinds us to our collective power
"In short, we've done the most modern-American thing possible: bartered away our quality of life for the freedom to be miserable." -- a profound article...
"The winds and the waves are always on the side of the ablest navigators." Edward Gibbon
Thanks for reading--
charles |
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