Chairman Bearhanky Wins One

A friend of mine calls the US Federal Reserve Chairman "Mr Bearhanky", because he often makes the bears cry, as he did again this week. But today's market action shows that Bearhanky doesn't understand and won't like what he won when he figures it out. Today gold was up over $30 in the US, the long Treasury bond futures were down nearly three big points (yield up from 4.175% yesterday to 4.353% today), and oil and gas and many grains and soy, and most "stuff" generally was up briskly.

Forget about recession or disinflation! Get ready for part two of Harry Dent's and Mr Kondratieff's commodity and interest rate bubble.

Those who have been reading me a long time know that I believe that the long wave of inflation and deflation bottomed by 2003 at the latest in commodities and interest rates. Stocks also bottomed in 2003. Stocks can and do run up with prices of crude commodity and consumer goods and rising interest rates for quite a while until prices and rates get "too high". "Too high" was 6% long rates in the mid to late 1960's when the stock market topped out and began its long flat line from 1966 to 1982. But commodity prices were just starting to make their second move in 1966, and they soared into the mid 1970's for some commodities and 1980 for the rest.

Right now US interest rates rates are far lower, and so are commodities, on an inflation-adjusted basis, than in the late 1960's. So the stock market need not fall off a cliff on the basis of inflation or recession at this time. I suspect we have been seeing a true financial panic due to hidden events like France's SocGen bank fiasco which we only learned about today. This is more like the 1987 or 1998 panics which were unrelated to the economy and spawned no recessions.

At this time my main worry about further fallout from the credit crisis would be that I have heard nothing at all about it from Japanese banks. Nada. Chinese, British, Spanish, US and now French banks have come forward to confess their sins, but total silence from Japan. It has been the Japanese banks who have loaned money everywhere at absurdly low interest rates to finance all the world's bubbles since 1991. This is the so-called "Yen Carry". It's enormously greater than anything the FED or US banks have done or loaned, and it reaches everywhere in the world. I'm hoping that no news is good news, because that would change things hugely if big Japanese banks have taken SocGen-like hits or go belly up.

But barring that, US stocks needn't collapse further, and it's fairly clear that SocGen's liquidation of its toxic portfolio is probably what tanked many markets in the past ten days. If that's over, and if we don't get more such stories, stocks should go up with commodity prices and interest rates. But the main beneficiaries of Bearhanky's move will be commodities and a possible turnaround in real estate for a while.

Since I am primarily an income investor I have gradually shortened maturities/durations of both taxable and non-taxable bonds and did so further today. Also I have increased inflation "hedges" some of which you can read about elsewhere on the blog. In my view, stuff (commodities and other physical assets) is going to fly: not every day or week or month, mind you. They now have additional tail wind from Bearhanky. Also bear in mind that I do not make investment recommendations. I only say what I am doing. And I could be wrong.