January 27, 2010

Global Market Comments
January 27, 2010

Featured Trades: (EXIT SRATEGY), (PALLADIUM), (PALL), (CANADIAN MAPLE LEAF),? (MILLENNIUM GENERATION)

1) I can tell you with absolute certainty that the ?Exit Strategy? the Fed?s Bernanke is contemplating is nothing less than a total, unadulterated myth. This is the fairy tale you read to your young children at night where the government cuts back its spending and the Fed shrinks its lending. The private economy then picks up the slack, and the rest of us live happily ever after. Unfortunately, this time there will be no Prince Charming riding in on a white horse. In 2009, the US ran an unprecedented $1.5 trillion budget deficit, financing the shortfall by issuing Treasury bonds. The Fed happily obliged by soaking up this tsunami of paper, either directly, or indirectly through mortgage purchases. This boosted its own balance sheet from $800 million to a mind boggling $2 trillion in the process, or about 14% of GDP. Were there any other takers of new government debt? China bought $100 billion, and another $200 billion went to a hodgepodge of assorted foreign central banks and sovereign funds, barely 20% of the total. Back out the Fed as the buyer of last resort, and where are we? The private demand isn?t there, especially if the Fed plans on raising interest rates at the same time. I can already hear the excuses the foreign buyers will be fobbing off on Tim Geithner; I?m sorry, but I?ve got to rush off to a Peking duck dinner; it?s Ramadan; I have a date with my mistress; the dog ate my homework; etc; etc; etc;. There are only two possible outcomes to the greatest financing gap in history. Interest rates have to soar to unimaginable levels to attract recalcitrant investors, or the plunge in spending sends us into a postponed Great Depression II. Let me know which one it is, will you? I?ll be hiding out in my camouflaged underground bunker in the desert. And if you do come calling, be a peach and bring me some MRE?s, a five gallon bottle of water, and a case of 9 mm ammo, will you?

 

2) When the current outbreak of angst biting at the heels of the markets runs its course, and traders morph back into risk accumulation mode, you can count on palladium outperforming the other precious metals. During 2009, gold rose 27%, silver 49%, platinum 56%, and palladium a whopping 117%, and I expect this outperformance to continue. Last month, Toyota?s USA?s president, Jim Lentz, told me over a couple of beers that the US car market will recover from the present 11 million annual units to 15 million by 2015. (You can forget the drug induced haze of 20 million annual units free money brought us, returning in our lifetime). Fewer than one million of these will be hybrids or electrics. That means industry demand for catalytic converters is ramping up by 3 million units a year. Which catalyst will the auto makers choose? Palladium at $440 an ounce or platinum at $1,550 an ounce? Hmmmm, let me think. They do have new management now, so maybe they?ll figure it out. Some 80% of the world?s palladium production comes from Russia and South Africa, dubious sources on the best of days. On top of this, you can add demand from the new platinum ETF (PALL), which with a launch of $250 million, will soak up a hefty 8% of the world?s palladium production on day one. Those set up to trade the futures can play the December contract, where a margin of $2,363 gets you a 100 ounce exposure worth $44,000. If you don?t know how to do this, email me at madhedgefundtrader@yahoo.com and I?ll tell you how. If you are looking for something to stash in your gun safe, bury in the backyard, or give to the grandkids on their college graduation, get physical with 100 ounce bars at $50 over spot, or Royal Canadian Mint one ounce palladium Maple Leaf coins at $80 over spot.

 

3) I have been banging the table for years now about the importance of demographic trends for the economy, the financial markets, and the housing market. Well, politics is no different, as the table below of Obama?s approval rating shows. Millennials, who are now aged 18-29 (I have three of them) are suspicious of government, have a strong anti business bias, are opposed to new regulation, are highly conscious of environmental issues, and give the president his highest marks. They also happen to care the least about health care, and put a high value on ethics. This is important because the Millennium Generation will surpass in size 80 million baby boomers this year. No wonder the last election focused so much energy on Internet campaigning and fund raising. Is the outcome of future elections to be determined by clicks and bandwidth? The data effectively means that the population of liberals is growing, while that for conservatives is shrinking. Politician planners and makers of campaign tchotchke take note.

Age???????????????????????????????????????????????????????????????????????????? Approve?????????????????????????????? Disapprove

Millennials?? 18-29???????????????????????????????????????????? 60%???????????????????????????????????????????? 40%
Gen X?? 30- 46???????????????????????????????????????????????????????? ???? 56%???????????????????????????????????????? ?? 44%
Baby Boomers 47-63???????????????????????????????????? 56%???????????????????????????????????????????? 45%