Doubling Down in Europe:Bond Gold Dollar

Bonds

As we discussed last month, we don’t know if a secular turn in the bond market has occurred. Given our budget deficits and the fact we haven’t had a federal budget in three years, (what exactly are both parties doing in Washington) it’s easy to see why global investors might start questioning our resolve (lack of leadership) to address our budgetary largesse, and back away from Treasury bonds. However, we remain unconvinced the U.S. economy has achieved a sustained growth path and expect Europe’s debt problems to resurface, which should provide bonds a bid in coming months. Of course, not everyone agrees with our assessment. In March, Goldman Sachs published a 40 page report detailing why investors should say a ‘long good bye’ to bonds and embrace the ‘long good buy’ for stocks, since their global projections show the next decade is likely to be a peak period for global growth. While we give them style points for the cleverness of their phraseology, we think most of the next decade could be especially punk. The developed world, which currently represents more than 65% of global GDP, will continue to struggle under a mountain of debt and a need to reduce budget deficits with spending cuts. This is likely to keep GDP growth under 2% for the developed nations during the next several years at a minimum. China, the world’s second largest economy (and roughly 10% of global GDP), is undertaking a transformation of its economy from being primarily driven by exports and fixed investment, to one that is largely supported by domestic consumption. This transition will take almost a decade to fully accomplish, and will be accompanied by a few surprises along the way. We continue to believe the secular bear market in stocks that began in 2000 has another 3 to 5 years remaining before a new secular bull takes hold. And less than 5 years may prove optimistic.

In February, we recommended buying TLT in three stages, $117.23 (open on 2/24), at $113.91 after closing below $115.49, and below $112.85. The average is $114.66. We thought TLT could bounce back to $114.00 or higher in coming weeks. It reached $117.60 on April 16. Raise the stop from $108.50 to a close below $110.58. We think TLT will exceed $125.03 before year end.

By Guest Author - April 24th, 2012, 8:30AM

Macro Factors and their impact on Monetary Policy
the Economy, and Financial Markets
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Investment letter – April 17, 2012

Dollar

When Europe heats up, so will the Dollar. Raise the stop on the Dollar ETF UUP, from $21.70 to a close below $21.82.

Gold

A recent investment survey found that 37% of those asked favored gold, over any other investment. From a contrarian point of view this could be a big negative for gold. We also think there is gross misunderstanding of the expansion of central bank balance sheets. Many observers (and TV commercials) have concluded that central bank balance sheet expansion is the equivalent of printing money. It is not. If a large portion of the money sitting on central bank balance sheets was entering the economy through a surge in bank lending, it would have inflationary potential, as too much money chased too few goods. Currently, there is too little demand chasing too many goods in all the developed countries, while growth is slowing in China, Brazil, and India. In the U.S., the velocity of money is slowing dramatically. This is deflationary. At some point, gold will have a huge run, as it becomes the only currency of choice and the final investment bubble.

We still think a decline to $1525-$1550 is possible.

Macro Tides