Monday, December 18, 2006

Cassandra's Xmas Presents to You

OK, Santa has come early. Of course some will say just "Buy Gold", but the smart investor is always trying to optimize, and do better. After all, bullion yields nothing, is risky, can be confiscated, and has few uses outside the speculative and decorative. Here is a Xmas investment (adn trading) shopping list that should, if nothing else allow the Goldbugs or just the worriers to BOTH invest and sleep better in the evenings.

1. Short High-Grade Copper vs. Long Gold
(Lots more HG1 about than GOLDS. Easier money for those with strong constitutions than phishing bank details from Nebraskans).

2. Long Cheap Japan Domestic Stocks vs Short Expensive US Consumer Discretionary stocks (currency unhedged).
The Easiest money may be gone, but this will continue to pay. Own the sub-book value soon-to-appreciate currency vs. the sector that once again will be ask investor owning it to bend-over (and get the yield pick-up while you wait to offset the high cost of shorting YEN)

3. Long CAD vs. Short GBP
Erosion of USD value vs. contractionary outcome will insure Canada doesn't roll over and so Bank of Canada will not be cutting rates anytime soon. In the race to see who cuts first, BoE will blink first cutting sterling rates before loonies.

4. Long YEN vs. Short Euro
Twenty-percent in 2007 on this one (Take 10% in Q1 if you get it, and put it back on again in July). If it don't happen, random Japanese tourists will be ritually sacrificed on the banks of the Seine.

5. Short USD Bonds
Rebalancing of CB reserves, means some of the distortions in the USD bond market will cease. And since no new taxes until 2008, and no new rate rises in 2007, US fiscal, trade and CA deficits will continue to provide ample reason to short bonds.

6. Short USD Quality Spreads
Short conumer-sensitive junk bonds where a continued retrenchment by consumer from higher energy prices bites and forces cutbacks.

7. Short Nucor vs. Long Newmont
There is an impending surplus of steel. Maybe not as fine as Nuecor's specialty, but nonetheless this trade will pay and pay and pay. Similar rationale to short the physical copper and long the physical bullion. Do it in options (short call vs. long call for the meek and timid).

8. Long Devon (DVN), Anadarko (APC), Apache (APA), Cimarex (CMX), Encana (ECA), Suncor (SU), Conoco-Philips (COP) Chevron (CVX) & Marathon MRO).
All are well south of heavily discounted NPV using low forward oil price estimates. The essential play is one of property rights in that US & Canadian resource property rights - in the absence of world-rogering depression - are most secure. Recent moves in Bolivia, Venezuela, Russia are harbingers of future actions that will see nation-states take greater control. These are wonderful "stores of value" with attractive current yields, trading is discounts, relatively secure. Should be part of any portfolio.

9. Stay Long: Global Sante-Fe (GSF), Diamond Offshore DO), Cleveland-Cliffs (CLF); Raynier (RYN)& PlumCreek (PCL), & Svenska Cell 'B' (SCAB SS), and Sherritt (S CN).
Assets. Assets. Assets. It takes three years to build deepwater rigs like these, and there aren't many out there. Attractive valuations, wonderfully abundant free cashflow, little encumbrances, should continue to make DO & GSF prized assets. Geography will continue to favor CLF over CVRD or BHP for NAm steel. Great balance sheet, and still cheap. RYN & PCL are Timberland LPs that are far south of book, nice current yield, and great assets - the kind the Chinese would love to buy. Bearts thought the Timberland boom passe, but recent transactions (admittedly by RYN) just paid $2200 acre in Texas, goosing implied values substantially.

10. Eastern European (& German) Real Estate.
OK so you feel bad that you didn't buy them when they were giving them away. Shame shame shame. But do not forget that Central Europe was the Center of the Civilized Chistian World for a very long time. Paris and London were hovels in comparison to Prague, Budapest, and Belgrade. Croatia, Serbia, Hungary, Berlin rural Greece, all afford excellent value for those with a long view. When the coming Europe vs. Asia trade wars come, Eastern Europe will continue to prosper as the lower-wage periphery of developed Europe. Europeans will (rightly) prefer to pay a bit more and buy from THEIR periphery where 80% is recycled back into Euro-area economies than from Asia. Farmland, coastal property, and urban locations still will afford attractive long-term appreciations on long-view with acceptable (but rising yields) in the interim.

And with anything left over, just go buy some Titanium, Uranium concentrate, or ultra-pure polysilicon and warehouse it safely.

Peace to all!


Anonymous said...


Divine. Simply divine. All of it.

If I could just add one thing: if you do opt for the yellow stuff, make sure you own gold and not "gold." Ie, fully-backed metal, not a liability denominated in gold - futures, unallocated, derivatives, etc.


One, there are many conceivable scenarios in which the prices of these nominally equivalent assets could become quite divergent. At least, the decision to hold gold implies that you consider these scenarios conceivable. The only rational reason to hold gold futures is that you are a commercial user whose business demands a gold delivery on or about the future's expiration.

Two, by purchasing "gold," you are participating in an act of fractional-reserve banking which is financially unhygienic to say the least, and which dilutes your own investment. The amount of gold behind the world's "gold" is unknown, but the ratio is certainly well under 100%.

For private investors, there are three sensible ways to hold gold: (a) shares in an ETF such as GLD, (b) a new-style direct provider such as GoldMoney or BullionVault (the only two I consider reputable), or (c) for the paranoid, holding the stuff yourself.

Note that if you choose (a), you need to make sure that your shares are held in your name and not loaned out by your broker (otherwise you have "gold" instead of gold). Note also that use of a bank safe-deposit box considerably decreases any advantage that may be gained from (c). But which approach is best for you depends on who you are.


"Cassandra" said...

Tnx Moldy.

The downside is of course that the trades are mostly correlated. Speakeress Pelosi, with some work, could torpedo with requisite tax increases, carbon levies, as could Heli-Ben with an about face towards a more scrooge-like monetary stance. And finally, the US housing ball&chain could drag everything down too.

Neither is likely in 2007, and the surprise will be - contrary to Roubini - a shallower Housing implosion that everyone git yer liquidty surfboard out and Kawabunga!!

brad said...

CDS in 4) is a bit confusing -- seems like you are talking about canadian dollars not credit default swaps ...

Cassandra said...

Yes thats CADs (not credit default swaps). Thanks (fixed now in original post).

Moldy - By the way that was a highly entertaining exchange with GCS over the weekend. I have enormous respect for him. He has first-class economic mind that distills the essence of complex arguments coupled with the best of intentions. There are no "winners" in such a joust, except for me perhaps who was highly entertained by the pixels and bytes for some time, (much to my spouses chagrin).

Anonymous said...


Thanks - I only hope my respect was evident as well!

As someone who's been kicking about here and there on the nets since before he could drive, I can testify that finding the likes of gcs on any unmoderated anything is a rare day indeed in the bird book. And they so often take wing at the approach of noisy bombastic types like me.

It is frightening how correlated everything is these days. Someone must be working very hard trying to figure out how to make commodities the goat again. But if it could be done, surely it would have been done already? Or is the trick supposed to be a shallow recession in which stock appreciation compensates for housing depreciation as the mechanism of consumer dissaving? I have a funny feeling this strange stock rally could go on a lot longer than everyone thinks...


Cassandra said...

Some thoughts:

Curmudgeons dislike when equities rally.

Goods and Wage Price Inflation is typically bad for equities.

Asset price inflation is "good" for equities.

Optimists see the glass half full ALL the time. Pessismists the obverse. Getting this market right will confound those with anchored views.

At the moment equities reflect the benefits of asset price inflation, and nominal growth without the the negative impacts of goods and wage price inflation. In this sense, equities HAVE BEEN a reasonably good store of value, growing nominally with the economy while providing some yield

Globalization and CB dollar reserve accumulation have [temporarily] excised the linkages between growth in money & indebtedness in excess of GDP growth, and the negative effects typically associated with it. It there, but like Saddam was pre GWII, it's in a box.

When its relaesed from the box, traditional economic dependancies will prevail and equities will ecounter traditional difficulty.

BUT - if that happens in two years, and equities rally 30% then fall 40%, but during the same time bonds lose 30% (20% less coupons), equities were the better bet. These are realistic possibilities.

Equities are the lesser of the evils in many respects, because SOME have inherent inflationary hedges.

A continued erosion in dollar values will underpin employment, and economic activity and many nominal prices, will cause the price of oil and thus the trade deficit to decline (or at least remain stable), put a floor on nominal house prices, and raise the agricultural terms of trade for the US. If the CBs holding dollars don't blink (GCCs included), and the US raising some new reveue and curbs some imports, purgatory could continue for an indefinite period.

GCS under the banner of Vickerey believes this is a superior outcome for "The People" vs. more stricter & sacrificial policies protecting the value of money and economic balance at the expense of employment and the risk of wrenching deflation. I am an admirer of BuBa and Issing and Volcker, and am cautiious at heart, so I [personally]would always urge error on the side of prudence at the expense of higher growth IF it risked a dramatic increase in "speculative moral hazard". Mostly because I believe that the societal behaviour to be rewarded is NOT the clever dicks who "game" the system by leveraging to front-run political ineptitude, demagoguery and backsliding, but the folks who work hard and cleverly, and are equitiably rewarded when business is good and share the adjustment burden (within reason) when business is bad. Progressive tax rates are philosophically on the same page, and I mourn the way ideologues spurn them employing Randian excuses implying superior intellect, greatness and destiny. The Japanese "bonus" system works thusly, underwriting the worst of risk in bad times, and sufficiently sharing some of the goodies in the good times.

In a vacuum, without fundamental context, equities are not expensive, no matter how much they've gone up. The values reflect nominal rises in earnings and sales and reasonably justified...provided (and this is the big IF) provided nominal growth and money illusion continues in the future unchecked as it has in the recent past. My gut says we are near a time of monumental change, (increasing volatiity and the sheer scale of the imbalances that make it difficult to rebalance traditionally without politically untenable and severe economic dislocations. This realization will dawn upon the People at some point, and the result will be a panic that may (I emphasise the uncertainty) may overwhelm the central banks, authorities ability to intervene resulting an a traditional crash, and economic revulsion. Watching this unfold over the past 15 years, I have been several years early in the evolution of each phase (tech bubble, deflation fear, housing bubble, inflation fear, global imbalances), and the one working itself out at the monent into the public psyche is systemic fear. Maybe it will prove too obtuse. But the private flows en masse can overwhelm the public systemic defense.

I am just rambling here, but in a nutshell, equities are a lesser of evils, some equities are less evil than others, but there is an elevated risk of being "short the put" as a result of the inflation risk genie that's "out there", but not yet into wage& goods-price inflation.

Anonymous said...

I pretty much agree with all of this - especially the view that debt inflation through monetary dilution rewards leveraged Wall Streeters and comfortable homeowners rather than the "people."

The problem with gcs' system is that it depends on no one taking advantage of it. If you trace the history of American inflationism the line runs, like most of our ideas these days, through New England. The neo-Puritan Irving Fisher, who was as much a prohibitionist as a price indexer, is a key figure. The critical assumption is always that the new money will go to productive business rather than to speculators. This leads to a constant game of administrative whack-a-mole which seldom works out well.

The reason that city-on-a-hill, new-Jerusalem types have trouble seeing this pattern is that their views so often tend to depend on raising the moral level of society. If you allow the assumption that this can be done, many impractical things become practical.

I am especially, especially, in agreement that private flows are the real danger for this system. In the form of "investment jewelry" for India and Indonesia, they are already the main support for the gold market.

And if it is possible for the fractional market in paper gold to compete indefinitely with the non-fractional ETFs, I am simply on crack. Sooner or later there will be a delivery default / suspension. A gold future is just not worth as much, in gold, as the equivalent ETF share. This is disequilibrium by any name.

And what happens if Maria Bartiromo starts flapping her mouth about precious metals? Or if some (perhaps younger and cuter) YouTube chick emerges? If you look at all the new crop of alterna-investing sites, they are all gold, gold, gold. It is a completely different generation of conventional wisdom. Look at iTulip - perhaps the best of them.

Granted, this world's understanding of economics, in my book at least, is often totally out of whack. All kinds of craziness abounds. Which helps to keep the stuff out of fashion among sensible types. I get Bill Murphy (GATA)'s newsletter - the ratio of interesting and useful information to utter insanity is maybe 1 to 3. (And I am still entirely undecided about this whole peak oil thing.)

But I would not say this alterna-world is more wrong than the world of people who get the NYT and WSJ and Economist and assume they have an accurate description of reality. It is just delusional in a different way. When has it ever been otherwise?

And from a market perspective what matters is not its sanity, but its size. And that is definitely growing...

It may not change your views on progressive taxation, but since a tax is a tax whether it is paid by employee or employer, you can see progressive taxation as a penalty against businesses which employ high-priced employees. In other words, assuming that labor markets clear, if PT versus FT changes the net income to fat cats, it does so by changing the demand for their services.

But of course, no system of taxation is neutral. And the social arguments for favoring businesses which distribute wealth more evenly are unaffected by this argument. It is just a different way of looking at the same thing.

I'm something of a Henry George man myself, but from a strictly practical angle, I'd say that any communication strategy which causes advocates of market designs to sound like Randroids demands some serious rethinking. And moaning about today's very mild systems of progressive taxation is certainly in that category!


Cassandra said...


Tobias Wolfe in "Old School" skillfully and hilariously articulates some of the philosophically-relevant, real-world issues with Rand and her ilk.

Anonymous said...

Not mine, alas!

Murray Rothbard, who was briefly involved (no, not in that way) with Rand, wrote a short satirical play about her and her circle: "Mozart Was a Red." It's not exactly fiction on Wolff's level, but you might find it amusing.

The Wolff book looks good and it's cheap on Amazon. If you liked that you might enjoy his Vietnam memoir, In Pharoah's Army - a good entry in a pretty overexposed genre...

-pi said...

Finally Cassandra, something to bite into! I realize you're not in the habit of picking the fifth race at Belmont but this list will do. The most interesting and potentially explosive trade is the long yen vs short euro. How long before hot air starts to come out of Brussels and reach Tokyo? Time will tell of course. In similar vain, what's up with Swiss franc, or should I say down? Is this another source of carry trade that nobody is talking about?

Again thanks and perhaps, you can revisit this list in the future.