Print-friendly version
Send this to a friend
Posted 9/12/2005
Contrarian Chronicles
About Contrarian Chronicles
Learn the Contrarian Chronicles lingo
Subscribe to Market Rap on Fleckenstein Capital
Contrarian Chronicles
Recent articles:
• It's RIP for the housing boom, 8/29/2005
• Dell can't boot up demand, 8/22/2005
• Japanese showdown might cost you big, 8/15/2005
More...
| | Contrarian Chronicles
Katrina's fallout: good for gold, OK for stocks
The aftermath of Hurricane Katrina may cause the Fed to stop raising rates. Wall Street will cheer. Gold and silver investors will cheer even louder.
By Bill Fleckenstein
Any disaster has essentially two components: the social consequences and the financial/economic consequences. Katrina, like the tsunami last December, was a tragedy of nearly biblical proportions for hundreds of thousands of people. With economic outcomes being the focus of the Contrarian Chronicles, I will leave discussions of Katrina's social ramifications to others more knowledgeable than myself.
From a coldhearted economic perspective, the first thing to determine is whether an event is "investible" or not. For instance, from my vantage point, the aftermath of the tsunami was not investible. But I'm sure that lots of businesses were affected positively and negatively, and someone with the right information about that part of the world probably could have invested (or speculated) successfully in the wake of the tsunami.
When tragedy stays a tightening
As I pondered the economic and social ramifications of Katrina while it unfolded, it wasn't until Aug. 31 (when we saw weak results from the Chicago purchasing managers' opinion poll, followed by a weaker-than-expected Institute for Supply Management opinion poll) that an investible conclusion occurred to me: The Fed was likely to enter "pause" mode. It seemed clear to me that the consequences of that shift would cause dollar weakness and be bullish for the metals.
It was not clear to me then, nor is it now, whether the Fed's going "on hold" will trump the damage from Katrina. If the Fed does indeed pause, that will impact the expectations of folks across the country and the world. Thus, everyone is in a position, if they're so inclined -- not that they should, mind you -- to feel giddy about the Fed pausing. Also, because the tragedy only affects a certain number of people (albeit mightily), it's entirely possible that stock-market participants may attempt to shrug off any near-term economic negativity.
Could there be a Category 5 shift in sentiment?
In other words, for Katrina to matter to the United States economy, and in particular the stock market (or the housing market), we'd need to see a change in one of the most powerful components of any market trend -- psychology.
For example, psychology undergoes a shift during bubbles, such that people feel downright financially bulletproof (as we've seen recently in housing). I could make an argument that real-estate speculators may have been hurt due to the Katrina debacle, and that might change psychology. I could also argue that psychology might be impacted by higher gasoline prices, though for the moment this doesn't appear to be the case.
Related news and commentary on MSN Money
Breached levees as 'bullish'
As for the stock market, in the short run, it appears that visions of easy money have trumped whatever collective angst may have developed. But, as a recent issue of The Economist noted: ". . . at some point, something will persuade America's debt-laden consumers to keep their money in their pockets." I agree. The question is: What will that something be?
The "omnipotence" of the Fed, the "miracle" of derivatives, the trust that foreigners will always be there to finance our deficits in a currency that we can print and the belief that one can't lose money in real estate have combined to create the illusion of financial invincibility.
That bulletproof psychology appears not to have been altered just yet. But the risks exist -- in the same way that flood risks always existed in New Orleans. It was simply a matter of time (over 100 years, it turns out) before a storm would be big enough to do what Katrina did. As Bob Sheets, the former head of the National Hurricane Center, told The New York Times, "The longer you go without something like this, the less you think it will happen. The risk was there and now, obviously, it has come to pass to a great degree."
Of complacency and calamity
It's a similar case in the stock market and, by extension, the real-estate market: The longer the market can seemingly surmount or shrug off all obstacles, such that the storm "veers away before it hits us," the more risk people take (while not necessarily understanding that they are accepting more risk) and the more dangerous the financial landscape becomes. For the time being, the market appears to have concluded that all is well. However, I don't believe that for a minute.
Furthermore, there is a greater danger (i.e., a higher noise-to-signal ratio) than usual in relying on what the "market says," due to the behavior of its many voters. With 8,000 hedge funds and 8,000 mutual funds (many of which operate as though they were hedge funds), the environment today is more schizophrenic than usual. In his Sept. 6 letter, Justin Mamis -- who's been writing about the markets since the l960s -- said it best:
"For the first time in our experience, we have a gut feeling that this time, the market doesn't know. That it is in the hands of individual active traders/bettors, who are guessing this way and that, or betting that way or this, frequently, if not constantly, changing their minds, convinced and re-convinced by every different thing they hear."
I believe the comment is an accurate portrait of the current landscape. Take the pool of bettors willing to change their minds multiple times a day, take a macro tragedy like Katrina, then mix in a potential Fed easing, an oil price/refined product spike, and all the other disruptions caused by Katrina that I haven't mentioned. What you get is a milieu like we have, where on any given day, any market outcome appears possible. And yet, it may not tell us much.
Oil slicks on the short side
In addition, I believe that should oil decline, that would be perceived as bullish for stocks and bullish for metals, because it would make it easier for the Fed to pause. Every time oil goes down, bulls want to believe that it's going down for good. They conjure up all the bullish ramifications of that. Therefore, in the short term, I have chosen not to up my short exposure on the back of Katrina. But I have chosen to increase my metal "package" exposure, and I plan on increasing it more.
Eyeing precious-metal prosperity
As mentioned in my daily column recently, I always keep a core metals position as insurance, though I don't always keep a core position short stocks. That's because the risks associated with the macroeconomic imbalances, as I see them, will lead to a weaker currency/higher metals sooner and with less risk than to lower stock prices. Lower stock prices are coming, but the timing of speculating on that eventuality continues to be quite tricky.
Bottom line: It's much clearer to me that all of this will be ultimately bullish for the metals than it is that it will be immediately bearish for stocks.
Bill Fleckenstein is president of Fleckenstein Capital, which manages a hedge fund based in Seattle. He also writes a daily Market Rap column on his Fleckenstein Capital Web site. His investment positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy, sell or hold any security. The views and opinions expressed in Bill Fleckenstein's columns are his own and not necessarily those of CNBC or MSN Money. At the time of publication, Fleckenstein was long Newmont Mining.
|
