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A Herd Of Rhinos

Yesterday I said that Dow 10,000 was “in the rear-view mirror.” If that is the case, then I am driving backwards. Actually, two qualifiers save a little bit of face. I said “perhaps,” and “for now,” which strictly speaking was correct.

I’m kidding. That was a bad call and illustrates why I avoid predicting one-day moves.

Stocks, of course, rocketed higher today. Supposedly, this was due to the possibility of a Greece bailout, but even after German authorities tried to turn the volume down a bit on that rumor stocks remained aloft. That could be due to the fact that Warren Buffett spent some time interviewing a Goldman banker (oh, sorry, it was a former Goldman banker, former Secretary Paulson) on CNBC, a sign in my mind that Warren might be getting a bit nervous about things.

Now, ordinarily no one watches the Wholesale Trade numbers, but today’s sharp drop in inventories, combined with a rise in sales, will be viewed by (a) bond market bulls as a sign that Q4 wasn’t as strong as we thought, since estimated inventory growth added a lot to Q4 GDP, and (b) bond market bears as a sign that inventories will be built going forward since the Inventory/Sales ratio fell. Oh, now I remember why no one watches Wholesale Trade.

I tend to view today’s equity rally with skepticism (the same way, some would say, that I view most equity rallies).


With the second Great Nor’easter of the week bearing down on us (the first one dropped a whopping two inches on our home), I went out today to pre-dig my driveway. You know, I thought I’d get a few inches ahead of the game before the snow hits. Then I realized something.

Some things, you just can’t prepare for. You just have to wait and dig later.

I fear that what is going to be happening over the next year or two, or possibly longer if the authorities manage to inflate the bubble one more time – the window on that, however, may be closing – is something that we fundamentally cannot prepare for. I don’t mean the financial market moves. For that, we can prepare: we can own a high-quality, global inflation-linked bond portfolio for example, or roll TBill deposits (which has a negative expected real return, but not bad). We can put some amount in commodity indices, and a small amount in high-dividend-paying, high-cash-flow, low-debt-burden stocks (both of them!).

But we cannot prepare for the societal changes that are implied by the mountainous deficit and debt, to say nothing of the Social Security and Medicare entitlements; we cannot prepare for the probability (in my view) that vehicles which are currently tax-free or tax-deferred, such as Roth or Contributory IRAs, will eventually be stripped of their tax advantage (at least for those who have stashed much wealth there); we cannot prepare for the crushing taxes or, equivalently, the accelerating inflation that is the only way to work our way out of these debts. If the government decides, one day, to simply seize your wealth, there is nothing you can do about it. The courts? “[Chief Justice] John Marshall has made his decision; now let him enforce it!” is still the way it works.

But of course, we can prepare for these sorts of things, but moving to the deep woods of West Virginia with a carload of firearms and canned goods and burying ingots of gold in my backyard has a lot of downside. And before you laugh and say this cannot happen, I will tell you it already has: if the government is dictating what wages are to be paid for what work on Wall Street, it is stealing the biggest asset most of the young workaholics there have – the present value of their future labor.


And meanwhile our President is losing his mind. On CNBC today he was declaring “We cannot have another year of partisan wrangling.” Oh really? “Partisan wrangling” is the only thing that saved this nation from much worse than you were actually enabled to deliver. Let’s hear it for partisan wrangling! But that isn’t where he lost his mind. It was the statement “We cannot have a balanced budget without healthcare reform” which caused me to recollect Ed Asner on Saturday Night Live admonishing his employees “you can’t put too much water in a nuclear reactor.” Did President Obama mean that the healthcare reform, which even his own party says will cost many many billions, will balance the budget? Or was he threatening, saying that he won’t accept any budget that balances unless he gets his prize? Either way, it makes no sense whatever. And honestly, he should let it go.

With all this, people still want to buy equities, and so we get a bounce like we did today. My co-worker reminded me today that “even if they are stupid elephants, a herd of elephants is still a herd of elephants” and there is no point standing in the way of the next stampede, regardless of value. True enough. The real question now is whether these are elephants, or rhinos who tend to forget in mid-charge what they were charging for?

Wednesday may be interesting, if this blizzard really delivers the punch to New York that the last blizzard failed to. Bernanke has already postponed his speech tomorrow, which is less a sign that he can’t get to the venue and more a sign that he doesn’t want to be talking when the market is thin. And it will be thin. This could end up being a problem as the Treasury needs to auction $25bln 10y notes, followed on Thursday by $16bln 30y bonds. The good news is that the runners no longer need to hand-deliver the auction bids to the New York Fed; the bad news is that the Treasury still needs those bids to show up somehow! The person in the 10y trader’s seat must be asking him/herself: “The Man just slapped an extra tax on my bonus and says I ought to get it all in deferred (a.k.a. likely to be worthless) stock anyway since he says I am a bad person. New Jersey Transit is going to be even more of a mess than usual. If I make it into the office, I’m going to be one of 17 primary dealers bidding on $25bln 10y notes, and half of my salesforce won’t be there to distribute the paper. I’m likely to get run over and own more notes than I could possibly want, and take a huge hickey on my P/L.

“Golly, I wonder if I ‘ll be able to get out of my driveway?!”

Categories: Uncategorized
  1. George
    February 10, 2010 at 2:43 pm

    US Dollar Positives

    Japan demographics as noted above
    Greece bailout

    Spain property bubble
    Baltic state currency collapse

    Savings rate in US headed north
    Extreme bearish US dollar sentiment
    Pending implosion in the UK
    Canadian property bubble bursting
    Australian property bubble bursting
    Hard landing in China, collapse of the RMB


  2. February 10, 2010 at 4:08 pm

    Tax on IRA contiributions, makes me woner if I would have been better off paingy it when Iput money in.Taking it out isn’t cheap. .

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