Bear Market

2014 may go down as the year when gold and silver conspiracy “theories” became conspiracy “facts” as banks globally were found to have conspired to rig the prices of gold, silver, currency and many other markets.

We thought yesterday's absurd story of former hedge fund manager James Crombie, founder of Paron Capital Management, who was arrested after found squatting in a million dollar Maryland house, would be as strange as it gets for hedge fund stories this weekend. We were wrong: moments ago the WSJ reported that Thomas Gilbert, founder of the $200 million Wainscott hedge fund, whose success Gilbert said previously had come from investing in biotech funds, was found dead with a single bullet to the head in his Manhattan apartment this afternoon, allegedly shot by none other than his 30-year-old son.

It’s high time for a new model and for new people. But the old ones, and their utterly and dramatically failed economies, hold the power, the media, the money, everything. So what other way out is there but mass fighting, mass casualties, a complete overthrow of everything that exists today, probably nuclear bombs dropping, and in the end a world none of us would recognize, let alone be able to survive in? It’ll take a while yet to get there, and it won’t be a pretty while by any stretch of the imagination. The powers that be are not done yet pretending to rule the universe and playing God. We should kick ‘em all out today, but we won’t. Because we’re all too much like them.

As noted earlier, following the failed vote Greek banks are cratering, with many entering a bear market as of the last price update, such as Eurobank Ergasias -23%, Piraeus Bank -21%, National Bank of Greece down  18%, Alpha Bank 17% lower. While in the past this would have been enough to send European shares limit down and peripheral bonds bidless, algos have forgotten their programmed kneejerk reaction since Greece has been off the front page for so long. As a result, Europe is down but not nearly where it would have been had today's vote taken place a couple of years ago. Then again, with the USDJPY far more important than what Greece may or may not do, all that will take for the Santa rally to resume, if only in the US, is for "someone" to buy a few yards of Dollar-Yen, push the pair to 121, and all shall be well once more.

As 2014 wheezes and coughs to its termination, I wanted to share some of what I consider to be the best posts of the year.

"Current equity valuations provide no margin of safety for long-term investors. One might as well be investing on a dare..."

Will 2015 be the seventh (7th) consecutive year of the current bull market cycle? It is possible. But with 100% of all analysts and economists betting on that outcome, it is quite possible that something else will happen.

Natural Gas prices are down over 11.5% in the last 2 days, falling to their lowest price since January 2013, as a familiar tale of excess production in the face of ebbing demand looms large. As WSJ reports, BNP Paribas' Teri Viswanath notes "the delayed return of cold weather has simply curbed all buying interest," and this was exaggerated by technical selling as the market broke previous support around 3.50. Ironically, given its detrimental impact on GDP, Macquarie points out, "it is increasingly apparent to us that weather will need to bail the market out again this winter - otherwise prices could see material downside during the spring and summer months."

The private sector – the part that pays the bills – is only $12 trillion. Total debt – government, corporate and personal – in the US is now $58 trillion (misreported yesterday as $59 trillion… but what’s a trillion dollars between friends?). That’s nearly five times the real economy that supports it. Assuming an annual interest rate of 2%, even if you could contain debt increases to 3% of GDP a year, the productive part of the economy would have to grow at 5% just to stay even. If the average interest rate were to rise to that level again – and sooner or later it will – it would take $3 trillion to service America’s debt – or one-quarter of private sector output. That can’t happen. The wings would fall off first.

Every year, David Collum writes a detailed "Year in Review" synopsis full of keen perspective and plenty of wit. This year's is no exception. "I have not seen a year in which so many risks - some truly existential - piled up so quickly. Each risk has its own, often unknown, probability of morphing into a destructive force. It feels like we’re in the final throes of a geopolitical Game of Tetris as financial and political authorities race to place the pieces correctly. But the acceleration is palpable. The proximate trigger for pain and ultimately a collapse can be small, as anyone who’s ever stepped barefoot on a Lego knows..."

Blind faith in policymakers remains a bad trade that’s still widely held. Pressure builds everywhere we look. Not as a consequence of the Fed’s ineptitude (which is a constant in the equation, not a variable), but through the blind faith markets continuing to place bets on the very low probability outcome – that everything will turn out well this time around. And so the pressure keeps rising. Managers are under pressure to perform and missing more targets, levering up on hope. Without further delay we present our slightly unconventional annual list. Instead of the usual what you should do, we prefer the more helpful (for us at least) what we probably wouldn’t do. Five fresh new contenders for what could become some very bad trades in the coming year.

To say that gold is in a bear market is to misunderstand both gold and markets. Gold isn’t an investment that goes up and down. It is money in the most basic store-of-value sense. Most of the time it just sits there, and when its price changes in local currency terms that says more about the local currency than about gold. But when currencies collapse, gold shines.

"Mutually assured destruction" now best describes the uneasy stand-off between an increasingly indebted US government and an increasingly monetarily frustrated China. So here's a quiz: 1) Which country is the world’s largest sovereign miner of gold? 2. Which country doesn’t allow an ounce of that gold to be exported? 3. Which country has advised its citizenry to purchase gold? Three questions. One answer. In each case: China. Is it plausible that, at some point yet to be determined, a (largely gold-backed) renminbi will either dethrone the US dollar or co-exist alongside it in a new global currency regime?

Slowing the rebalancing and creating further downside risk is a very strong consensus view that this pull back is temporary and that oil prices will quickly rebound as they did in 2009. According to a recent Bloomberg survey, the median WTI forecast for 2016 is $86/bbl (even we forecast it going back to $80/bbl). All of these forecasts are based upon now outdated cost data that is shifting as fast as the price. It is precisely this strong view for a rebound in prices and the behavior it creates, that not only suggests that oil prices can go lower for longer, but also that the new normal is far lower than we thought just one month ago. Instead of optimizing against a lower price environment, many oil producers are trying to position themselves for the rebound in prices