Notes From Underground

It appears that the world is awash with Schadenfreude as analysts and pundits are experiencing great satisfaction and joy in the misery of others. Today the European automakers released sales data for March and the numbers were much weaker than the markets had expected. Registrations fell 10 percent and German auto sales dropped 17 percent. It appears that European auto sales in the passenger market are expected to hit 1993 levels. Ford and Peugeot also saw double-digit falls in sales. The euro rally against the YEN is dramatically biting into German car sales and the proof is in the fact that Japanese auto production has increased, and Toyota, Honda and Nissan stock prices have performed very well during the last six months.

To add to the misery, the U.K. saw a sales increase of 5.9%. The Europeans are taking great pleasure in the German slowdown as the demands for increased austerity by the Merkel government is causing serious economic pain in the peripheral nations. France, Spain, Portugal, Ireland and others can point at the German slowdown and say: Our pain will become your pain. Yes, Schadenfreude, what a wonderful concept. The only problem is that if Germany slows dramatically, will the cries for budget cutting in Germany become louder as Chancellor Merkel has made a balanced budget a keystone of her economic policy? Those who are regaling in German economic pain should be very careful of getting what they wish for. The pain in Germany is being felt as the DAX turned back lower on the year, but then so is the French CAC index.

Schadenfreude is of course breaking out in the media over the fall of GOLD and SILVER prices. Many analysts are pointing at the owners of gold and saying, “See it is a barbarous relic and we told you it is not an investment.” From Paul Krugman to all the talking heads, great joy is taken as the price of GOLD falls and substantial losses are sustained. This group should not gloat for GOLD is in a corrective stage and it has been a star performer over a long period of time, even as the gloaters decried its uselessness. Let’s see: The SPOOS are back to where they were 66 months ago while GOLD remains 75 percent higher. Yes, a correction is in motion but to think that GOLD has been a poor investment and is just for crackpots is to deny the financial landscape of the last decade.

For all the pundits enjoying the pain of gold investors, what about those who bought APPLE stock over the past year. Should you say you will never buy a stock again and it has no real value? How about those who were long Bank of America, Citi or AIG in 2007? How you doing over the same period that GOLD has gained 75 percent? The lesson is not to partake in SCHADENFREUDE but to understand that markets are dynamic in nature and even when the long-term fundamentals seem consistent, short-term flows have major impact on all types of investments.

In today’s London Telegraph, Ambrose Evans-Pritchard had an interesting column, “Fed and the Bank of Japan Caused Gold Crash.” While I don’t agree with all of Pritchard’s reasoning, it is very well thought out. The FED is to blame for the recent drop in gold for these two reasons: 1. The Fed warned in February that the longer QE goes on the harder to extricate from the massive bond purchases; and 2. The FED MINUTES warned of a possible tapering in purchases as the economy “returns to some normality.” The Bank of Japan announced Kuroda’s massive stimulus and the implication was for a return to the “YEN CARRY TRADE,” which would lead into vast amounts of investable capital fleeing Japan and raising global asset markets. The immediate evidence, as AE-P points out, is the opposite. Japanese investors have been selling overseas assets and bringing the money home to buy domestic real estate and equities. They have even been selling GOLD to put the money to work in riskier asset classes.

I don’t agree with this analysis and find it too simplistic. Mrs. Watanabe may be bringing some money home but the large holders of JGBs are moving money. Maybe not cash in the immediate sense but through all types of derivatives. Since the time of the BOJ announcement, the YEN is 6% lower. If all that money is coming home who has been selling? Regardless, the point that Pritchard makes is worth thinking about. More importantly, his views on the idea of the FED extricating itself from the trillions of dollars of large-scale asset purchases is certainly an issue discussed in this BLOG during the last three years. If the FED thinks that buyers will line up to lift their stockpile at a MODEL PREDICTED PRICE, well, the BOND VIGILANTES WILL SHOW YOU SOME REAL SCHADENFREUDE. The bottom line is that both GOLD AND THE FED MAY BE DEPENDENT ON THE SAME INVESTORS: CHINA. Ambrose Evans Pritchard ends his article with this: “The era of money is young yet. Gold will have its say again.”

***The last bit of SCHADENFREUDE today was the gloating by the anti-austerity crowd about the supposed flaws in the work of Rogoff and Reinhart. It seems some graduate students at UMass-Amherst discovered that the major work on debt crises that have been the center piece of the push for sovereign budget austerity cannot be tested because the data is subject to a computer glitch in the software program they used. This will be a continuing saga but the airwaves were full of gloaters claiming that massive budget deficits do not negatively impact future GDP growth as much as expected so full speed ahead on fiscal stimulus.

As Rick Santelli and others responded, the critics of Rogoff/Reinhart still found that large deficits did lower GDP growth 1% over a very extended period in which the deficits continued to grow, thus resulting in lower growth. One percent over an extended time period is very serious wealth regardless. For those old enough to remember, this takes me back to the great challenge of the 1970s, with one of the first major econometric studies: TIME ON THE CROSS. The authors, Robert Fogel and Stanley Engerman, were the stars of the economic history world until further review. Oh, SCHADENFREUDE WHERE ART THOU STING?

Tags: CAC, DAX, Euro, Fed, GDP, Gold, Reinhart/Rogoff, S&P, silver, Yen

This entry was posted on April 17, 2013 at 9:16 pm and is filed under BoJ, Currency, Europe, Fed, Gold. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.