Recently, there has been much euphoria to define all those who believe that gold will outperform as goldbugs. We in turn are fairly confident that pretty soon all those who have faith that the central banks will somehow get it right this time, instead of causing all out war again, will be labeled as "paper bugs." What however, surprises us is that all the so called "gold bugs" continue to be invested in the best performing asset class over the past day, 5 days, 1 month, 6 months, 5 years, and 10 years: on a relative basis gold has outperformed stocks in all these time categories, yet it continues to be more hated than even Ben Bernanke, whose stealthy destruction of middle class purchasing power is in fact cheered by the "paper bugs" - we will not bore you with the chart that shows how the dollar has lost almost 100% of its purchasing power since the creation of the Fed. Anyway, here is David Rosenberg, who several months ago joined the gold bandwagon, and presents one of the better defenses to all those who blame gold bugs for not catching the "bungee jump" in the most manipulated stock market in history. "We continue to field criticism that we “missed the call” on the equity market. Well, no doubt we did not see the 1930-style bungee jump last year, but: (i) it’s over, and (ii) there were many other asset classes we liked that did very well: what has done better than gold, which is up more than 30% in the last 12 months." We obviously agree both now, and about 50% back, at the time of the creation of this blog, when we said that the only natural response to Fed insanity is the otherwise useless shiny metal.
More from David:
REALITY CHECK ON THE MACRO OUTLOOK
We think it has to be understood that over 80% of the economic growth we saw from the lows of 2009 in real GDP was due to the massive amounts of federal government stimulus and the huge inventory swing. In other words, the underlying trend in organic real final sales is barely above 0.5%. One has to therefore wonder, with an estimated 1.7 percentage point drag from fiscal withdrawal in the coming year and the evident signs of a peaking-out in the inventory contribution to growth, how the economy does not contract heading into 2011 (perhaps starting in Q4 — the biggest mistake being made right now is confusing the delay of the double-dip with derailment).
Of course, we are likely on our way for a positive monetary shock out of the Fed, but let’s be honest, if QE1 had truly been successful (outside of the narrow goal of bringing in mortgage spreads from the orbit), then we wouldn’t be hearing about QE2 right now. That said, the drag from fiscal restraint alone is worth seven 25bp hikes out of the Fed, so it would seem as though Bernanke et al are going to have their work cut out for them to prevent this fiscal shock from turning the economy over, as was the case in 1937-38. And to think that just six months ago economists on Wall Street were debating when the Fed was going to take “extended period” out of the press statement and embark on the process of tightening monetary policy.
Finally, we are sure to get calls today saying “why are you so bearish? Didn’t you see that article on page A4 of the WSJ discussing how state and local government revenues are rising?” Indeed, there is a column on this today — as of Q2, state and local government revenues have edged up 1.7% YoY — the third increase in a row. Ordinarily, that might be construed as a good sign — after all, at the peak of the GDP growth rates in 2005, revenues were coming in at a near 14% annualized pace.
But it’s one thing for governments to be generating a revenue stream via a booming economy and quite another that is caused by rising taxation, for the latter merely saps spending power out of the private sector, which is exactly what is happening. In the past year, state governments raised taxes the most since data were complied staring in 1979 — 29 of them raised taxes in one form or another (see Local Taxes Sway Races on the front page of the WSJ), and 10 of these involved income tax hikes (yikes!).
Amazingly, despite the lingering deflation in residential real estate, property tax revenues managed to climb 3.3%. We wonder how.
WHAT HAS BEEN WORKING
We continue to field criticism that we “missed the call” on the equity market. Well, no doubt we did not see the 1930-style bungee jump last year, but: (i) it’s over, and (ii) there were many other asset classes we liked that did very well.
Look at the S&P 500. It had one of the worst months on record in August followed by a smashing rebound in September that still leaves it in the 1,022-1,217 range for the year. At today’s level of 1,142, the S&P 500 is barely changed since mid-November; nothing to show but flattish returns and a ton of volatility.
The TSX has done a little bit better and in fact we have favoured Canada over the U.S. given the resource and gold exposure. Even here, at 12,190, the TSX is little better than it was in mid-March, so in this case it is six months of a do-nothing market. It is still within the 11,092-12,280 range of 2010.
But we can understand the need for people to label market commentators as being “bullish” or “bearish”; however, in the final analysis, it is all about growing capital in a prudent manner. If somebody was “bullish” on equities at the start of the year and told you to load up on tech stocks (which are actually down), was he/she more correct than someone who wasn’t as “bullish” on the overall market but told you to load up on telecom (+7.0%) and staples (+5.0%) in an overall equity underweight? Or even in the past 12 months, with the overall market up barely double-digits, would a “bullish” strategist have been right if he/she advised you to be long the financials, which are down 4.5%. Or could it be the “bearish” strategist was actually more prescient by being underweight but advising clients to have a core position in basic materials (which happen to be up 9.0%)? There is more to investment advice than merely being “bullish” or “bearish” on a particular asset class, as is usually the case, the real gems are what lies beneath the surface of the forecast as opposed to what makes the headlines.
Our call on bonds has been solid with Treasury market returns of 10% over the past year (outperforming the S&P 500 by more than 50bps). We have been through most of the past year positive on commodities, and the CRB index is up 13%.
The theme of strong corporate balance sheets has been constructive — returns in the corporate bond market have been a solid 11% — equity-like returns for less risk and volatility.
And of course, what has done better than gold, which is up more than 30% in the last 12 months.