Slope of Hope Blog Posts
Slope initially began as a blog, so this is where most of the website’s content resides. Here we have tens of thousands of posts dating back over a decade. These are listed in reverse chronological order. Click on any category icon below to see posts tagged with that particular subject, or click on a word in the category cloud on the right side of the screen for more specific choices.
Macroeconomics and the US Dollar (by David Kern)
I have two charts for your perusal, dear readers – focused on the broader indexes. Tonight my thoughts go to my TSP allocation, specifically: my over weighting of the international index (the EFA). This international index will tend to have a bit more volatility than the S&P 500, similar to the Wilshire 4500 (EMW) – but decorrelated at times. Lately, the EFA and EMW have been rather decorrelated. Much of this is due to the economic worries in Europe, as the PIIGS national economies (Portugal, Ireland, Italy, Greece, and Spain) have really shown how shaky this debt/leverage house of cards can be.
Exchange rates also have much to do with the relative performance of the EFA and US indexes. As the value of US currency goes down (and o-how-it-has since 2000), the EFA will get a corresponding tail wind due to the greater currency valuations it represents. Now lest you think this whole post is just a bunch of hand waving and pie in the sky economic mumbo-jumbo, I offer my first chart: hard core technical analysis of the EFA point and figure chart. What I’m showing here is an equity clearly being owned by increasing demand that overpowers supply. Prices can not increase without more buying interest than selling interest – and this chart demonstrates that in spades. Fair enough, we should expect higher prices on the EFA and I’m happy to hold my investment there.
The natural follow up question is, “will the EFA outperform domestic indexes?” That question I hope to answer by means of my second chart, showing the value of the US dollar on a weekly candlestick chart. This proves by observation my earlier premise – that declining value in US currency boosts the performance of the EFA vs the EMW or SPX. Notice especially the blue outlined timespans: when the US greenback falls, the EFA was killing versus the domestics. Now granted, my chart note about a possible top forming is speculative – but it does fall in line with a descending channel.
I think the more compelling argument for decreasing value in the US dollar is in the headlines. You may have heard of quantitative easing, which is how my government has chosen to try to stimulate the economy (it really just means printing more money that didn’t exist before – I wish I could do that). Contrast that with the austerity measures being imposed overseas, and I think it’s a safe bet that there is room for the value of the dollar to fall further. Bottom line – although the EFA has underperformed the domestic indexes lately, I expect that those roles will reverse.
Thanks for reading, I blog at AbjectAvarice.com where you can watch my stock portfolio in real time.
David Kern (@AbjectAvarice)
Risk On/Risk Off (by BKudla)
People ask me all the time if the U.S. is in such bad shape and things get worse, why will the dollar and gold do well. I then whip out this chart and explain to them that as things get bad people need to sell things that are electronically invented and / or are leveraged and buy something that has less debt or leverage associated with it, or in the case of gold no debt associated with it.
To illustrate how much debt worldwide is out there against real capital, look at the following chart.
The annotations are mine from government websites. There is approximately $5 trillion in cash and gold supporting $290 Trillion in assets. That is some nasty leverage. The world governments are trying to add $2 trillion in capital to the foundation. This is grossly inadequate. The world's asset base simply declines by 3% and we are insolvent again.
As anyone who owns a business or truly invests in capital assets, you value these assets on the discounted income they generate, and as government spending takes over private spending to increase this capital base, it is inefficient and slows velocity that can generate income, and increasing taxation does the same. So bottom line, the income supporting these assets are suspect and after a next flirt with high inflation we collapse into a debt destruction spiral. Happy New Year.
Don’t Interest Rates Matter Anymore?
I would have otherwise had a good day, were it not for one position – a large long on TLT (the ETF on Treasury bonds). I had been watching @ZBH1 all night, and earlier it was up nicely, but it started slipping. What puzzled me was that, a little before the open, the futures were down about 1/10th of a percent, whereas TLT was down over half a percent (and that was just the beginning).
I got out of TLT at a loss early on, and a good thing too, because the thing basically collapsed all day long.
But that leads me to the question which is the subject of this post: don't interest rates matter to the market anymore?
Here are the cold, simple facts:
(a) Bernanke has made it abundantly clear there is no limit to how many hundreds of billions he will throw at the market to keep interest rates down. Conclusion: since this pledge is made by the most powerful financial force on the planet, rates should get low and stay low.
(b) Interest rates had done almost nothing but climb for the past three months, as shown in the graph below. Conclusion: the market's concerns about inflation outweigh the most powerful financial force on the planet, and QE2 is and will continue to be a failure.
(c) The housing industry, ostentisibly one of the principal beneficiaries of QE2, is heavily dependent on low interest rates (I'm pleased to report I refinanced my house at 3.25% fixed this autumn – – just about the only positive financial event in my life this year). Conclusion: With rates soaring higher, the housing market is going to continue to get damaged.
(d) The stock market, which for eons has shown its reliance on interest rates (dropping rates=good for equities; rising rates=bad for equities), simply keeps puking to new recovery highs every single day (check out the $INDU today), in spite of the above facts. Conclusion: the entire stock market can be replaced by one financial instrument whose ticker symbol will be WTF.
Couple of Long Ideas
