Bear Market

During an extended interview with Bloomberg TV, billionaire investor Stanley Druckenmiller provided a seemingly fact-based (and non-status-quo sustaining, commission-taking, media-whoring) perspective on a very wide variety of topics. The brief clips below touch the surface, with the detailed annotated transcript below providing details, as Druckenmiller opines on the looming catastrophe in entitlement spending "when you hear about the National debt being $16tn; if you actually took what we promised to seniors and future taxes, present value to both of them, that number is $200tn," why the Fed exit will be a big deal for markets, "it is my belief that QE has subsidized all asset prices and when you remove that, the market will go down," and his changing views on Obama "I was drinking the hope and change Kool-aid... in hindsight, he probably needed more experience for this job." Looking back to the financial crisis, he warns, "...a necessary condition to have a financial crisis, in my opinion, is too loose monetary policy that encourages people to take undue risk and go on the risk curve and do silly things. We should have shut this down in 1998, 1999. The NASDAQ bubble, we should have raised rates, we didn’t. Then we got the implosion."

The first signs are emerging that the cult-like status given to the world's central bankers is starting to wane, with significant market implications.

“At the peak of the cycle, when profits are far above average and the economy is doing well, it is hard to imagine earnings collapsing back below the average, as it is to imagine a depressed region recovering. Mean-reversion in earnings, though sometimes delayed, is as undeniable as the economic cycle itself. Cyclically adjusted (or trend) PE calculations will always give a conservative valuation estimate. But that is exactly the point of valuation – to offer a degree of safety (a margin of error) and to smooth the dangers of the economic cycle. That peak profits typically accompany peak valuations only reinforces the point." In the long run valuations mean everything.

How do markets (US equities, Gold, Crude Oil, and the USD) react around US military conflicts...? Citi shows what happened before-and-after the Gulf War, Kosovo, Afghanistan, Iraq, and Libya... and why Syria is arguably more complex than these previous conflicts...

Japanese finances are in a shambles and very soon investors are going to run screaming from the Yen and JGB markets.

As Dirty Harry would say.....

“Is there any good news?”

You bet.

The good news is that this fraudulent system of unchecked, unbacked paper currency is finally coming to an end.

This isn’t just any trendline. This is THE trendline. Take it out and the 10 year will likely be yielding 5-6% in no time… which by the way is where it was for most of the ‘90s and very early ‘00s.

UPDATE 2: India's Sensex -20.3% YTD in USD terms (bear market)

UPDATE 1: USDINR breaks above 64.00 (20% devaluation in 3 months)

Hot money outflows continue to crush most of Asia's currencies this evening led by Indonesia's Rupiah (-1.7%) and Indian Rupee (-1% to a new record low). From the Won to the Ringgit, the USD is bid and now trades at its strongest relative to Asian FX in 13 months. Equity markets are not faring any better as that leveraged carry is eliminated. Indonesia's Jakarta stock index is down 4.66% today (-12.4% From Thursday's close); India's Sensex is -1.6% today (-7.2% From Thursday's close) with Thailand and China's Hang Seng close behind with losses over 1.5% on the day. Even the Nikkei (in spite of JPY weakness) has given back all its early gains (after getting back to even from US day session futures losses). JGBs are modestly bid but EM bonds are getting slammed (India's 10Y +23bps to new 12-year high yield of 9.47%). But apart from all that, the markets are fine...

How do we protect the mining operation so that it can operate in both good times and bad while at the same time generating profits that grow with the gold price?

Presented with no comment (but an ugly sense of deja vu)...

It is well-known that as part of the S&P500's ascent to new records, investor margin debt has also surged to all time highs, surpassing for the past three months previous records set during both prior, the dot com and the housing, stock market bubbles. And as more attention has shifted to the topic of speculator leverage once more, inquiries into the correlation between bets upon bets and stock performance are popping up once more, in this case in a study by Deutsche Bank titled "Red Flag! - The curious case of NYSE margin debt." Of particular note here is a historical comparison of margin-debt warnings that have recurred throughout history but especially just before major stock bubble crashes, such as in the period 1999/2000, 2007/2008 and of course today, which have time and again been ignored. Here is what was said then, what is being said now, and what is ignored always.

From Bill Gross: "Capitalism depends on the successful offering and capture of carry in its multiple forms. If capitalism is faltering (recession) in developed/developing economies and yields are close to the zero bound, then portfolios should have less carry than before. If prospects are mediocre, portfolios should be overweight carry. If prospects are very bright, they should again be underweight bond carry. If we can be mindful of this, and accurately forecast it, we will be successful. This may be the most important conceptual change I have ever written about in an Investment Outlook. Readers who have stuck with this Outlook at least to this point have a scoop, if not a magic feather."

We do not inhabit a “normal” economy. We live in a financialised world in which our banks cannot be trusted, our politicians cannot be trusted, our money cannot be trusted, and – not least thanks to ongoing spasms of QE and expectations of much more of the same – our markets cannot be trusted. At some point (though the timing is impossible to predict), asset markets that cannot be pumped artificially any higher will start moving, under the forces of inevitable gravitation, lower.

Silver, like gold, is largely subject to the same underlying supply/demand dynamics (whether legal or not) where on the margin it trades merely as a precious metal, and those misguided pundits out there who claim that the drop in gold Comex holdings is purely a function of ETF reallocation, are surprisingly mum when it comes to explaining Comex silver which has not followed the move of gold in physical holdings and is in fact near all time holding highs despite an even more aggressive plunge in its price. Alternatively if indeed gold's inventory plunge was driven by the permissive nature of Singapore vaults as willing recipients for all the gold that has departed the assorted Comex system vaults, and thus are merely a physical receptacle to absorb the pent up Chinese "golden" demand, it would explain why this has not happened to silver. At least not yet. That may change very soon because as Bloomberg reports, silver is the new gold when it comes to vaulting in Singapore, and thus China's precious metal warehousing ambitions.