I Run To You

This world keeps spinning faster
Into a new disaster so I run to you
I run to you baby
And when it all starts coming undone
Baby you’re the only one I run to
I run to you

Lady Antebellum - I Run To You

Who do you run too? When the world is spinning a bit too fast, from one disaster to the next, where do you run? Family, friends, God, a trout stream, a bottle, reality TV; all serve as places to run for a bit of respite.

Financially (at least for the time being) the world still runs to the dollar and US Treasuries. This has been the case for longer than I've been alive, but will it always be the case?

In the last seven days the dollar has rallied 4% versus a basket of currencies, Treasuries are up about 1%, Junk bonds hit a record low yield of 6.68%, and muni-bonds surged 2.4% (big moves in the span of seven days). While the dollar rallied, risk assets fell; the S&P 500 is down 1.2%, emerging market stocks down 4%, gold down 3%, and silver down a whopping 16%. 

As the fiscal/bank debt situation in Europe continues to degenerate (Greek 2 year bonds yield in excess of 25%), as China and India work to reign in inflation, as the Middle East continues to simmer at the boiling point, and as Japan's Fukushima reactor goes into official meltdown; nervous investors run to the warm embrace of the US Treasury. 

                                                                     Greek 2 year bond yields:

As the Euro-zone was scheduled to meet on the continued bailout of Greece, the head of the IMF (International Monetary Fund), Dominique Strauss-Kahn, ran into the "alleged" unwilling arms of his NYC maid. ( IMF chief Dominique Strauss-Kahn charged over sex attack on maid ... ) I'm sure it was all a big misunderstanding, Strauss-Kahn apologized to his third wife and four kids from the comfort of his NYC cell, while hiring Sean P. Diddy and Plaxico Burress's attorney Benjamin Brafman. The IMF is holding an emergency meeting on how to proceed, while Mr Strauss-Kahn is occupied, with his arrest and legal issues. What we do know for certain is that Greece's inevitable default will not wait for this seamy episode to run its course. The dollar will continue to strengthen versus the Euro.

I run from pain
I run from prejudice
I run from pessimists
But I run too late

Are we running too late? How long will the dollar be the worlds safe haven? You might recall that the US has a bit of a financial problem itself. It appears that we have reached our borrowing limit, unless Congress votes to approve another increase in the debt ceiling from its current $14.3 trillion level. Treasury Secretary Tim Geithner continues to warn of financial Armageddon, if the debt ceiling is not promptly raised. Should we listen to Geithner, Bernanke, and most of Wall Streets dire warnings to continue raising the debt ceiling without making any real changes to our budget deficit? In other words, should we continue doing what we've been doing for decades (raising the debt ceiling whenever we spend too much), and just hope for a better outcome? Well, some knowledgeable investors seem to think otherwise. Stanley Druckenmiller (the Steelers richest fan) seems to think otherwise. In this weeks must read interview ( The Weekend Interview with Stanley Druckenmiller: What If the U.S. ... ) Stan says that the real threat to the country is not a few missed interest payments on the governments debt, but a continuation on the current proliferate path of endless spending. In the future, he says, "People aren't going to wonder whether 20 years ago we delayed an interest payment for six days. They're going to wonder whether we got our house in order." When asked about the fear-mongering and dire forecasts of our Treasury Secretary, that the Treasury bond market will be impaired for 20 years, he scoffs, "Excuse me? Russia had a real default and two or three years later they had all-time low interest rates." Druckenmiller is so sure that a longer-term budget solution will be tied to any debt ceiling increase that he has actually purchased treasuries expecting them to rally, even if there is a temporary technical default.

It's a big gamble. Will Congress have the intestinal fortitude, to ignore Geithner and Bernanke, and allow the Treasury to technically default in order to finally fix our long-term deficits, or will they cave like every Congress before them? Druckenmiller is betting that they will come to their senses, but only under dire circumstances. Bill Gross (PIMCOS head, and a shorter of Treasuries) is taking the other side of that trade.

As for me, we are moving from bearish to neutral on US fixed income. 

When lies become the truth

That’s when I run to you 

Be careful out there, and keep the lights on,

Chris Wiles, CFA

412-260-7917

www.rockhavencapital.com

For prior Rockhaven Views visit:

www.rockhavencapmgmt.blogspot.com

This article contains the current opinions of the author but not necessarily those of the Rockhaven Capital Management.  The author’s opinions are subject to change without notice. This article is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

Aw, Yer So Bad

Aw, yer so bad
Best thing I've ever had
In a world gone mad
Yer so bad

Tom Petty - Yer So Bad

Things I Think I Think

As I said in my last note, this market is impervious to bad news, which is always a touch unsettling. This market is full of paradoxes. Transports are going up with energy--usually a combustable mix. Silver and gold are setting records based on inflation fears, but the Treasury market is trading like inflation is dead. Through noon today the S&P 500 is up about 2.8% in April, and up a very respectable 8.35% year-to-date. 

This is not a bad thing! The other night I was at our neighborhood tavern watching the Penguins bow out of the Stanley Cup playoffs, when a friend of mine asked, "Chris, why are you so negative. The markets are soaring, you're rich, and getting richer every day. Whats not to like?" In a lot of ways he's right (though "rich" is certainly relative). Corporate profits are screaming, commodities are soaring, the economy is showing some signs of improvement (1.8% GDP growth), interest rates remain low, and we have a new Duke and Duchess of Cambridge...Love is in the air. "My sister got lucky, married a yuppie."

But what really continues to gnaw at me is that all of this is true only if you price it in dollars. My net worth (priced in dollars) has risen because the dollar has depreciated. How are we really doing, when you look at it on a global basis, priced in Swiss Francs, Australian dollars, or heaven forbid Gold? This is the difference between Nominal and Real returns. Adjusting your returns for inflation and the devaluation of the dollar.

Looking at nominal returns, we can feel good. Ignore the plunging dollar, and your lower global standard of living, you can feel good. "Aw, yer so bad, best thing I've ever had, in a world gone mad, yer so bad."  

According to a recent Gallup Poll 55% of the American public seems to think we are in a recession/depression, only 27% think the economy is growing. Haven't these folks been listening to Washington and Wall Street? Is this simply a case of individuals projecting their recent past into the future? Probably. Interesting survey nonetheless.

We Have A Strong Dollar Policy:   

Its official, this week both Treasury Secretary Timmy Geithner, and Federal Reserve Chairman Ben Bernanke said so! 

First Geithner, "Our policy has been and will always be, as long, at least, as I'm in this job, that a strong dollar is in our interests as a country. And we will never embrace a strategy of trying to weaken our currency to gain economic advantag

e at the expense of our trading partners," he said in response to a question after a speech to the Council on Foreign Relations.

Now Ben, taking a question during his 1st ever press conference.

 Reporter: There are critics who say Fed policy has driven down the value of the dollar. And a lower value to the dollar reduces the American standard of living. How do you respond to the criticism that essentially Fed policy has reduced the American standard of living?

Ben: Thanks, Steve. First, I should start by saying that Secretary of the Treasury, of course, is the spokesperson for US policy on the dollar. Secretary Geithner had some words yesterday. Let me just add to what he said, first by saying that the Federal Reserve believes that a strong and stable dollar is both in American interests and in the interest of the global economy. There are many factors that cause the dollar to move up and down over short periods of time. Over the medium term, where our policy is aimed, we’re doing two things. First, we are trying to maintain low and stable inflation by our definition of price stability. By maintaining the purchasing value of the dollar, keeping inflation low, that’s obviously good for the dollar. The second thing we’re trying to accomplish is to get a stronger recovery and to achieve maximum employment. Again, a strong economy growing with attracting foreign capital is going to be good for the dollar. In our view, if we do what’s needed to pursue our dual mandate of price stability and maximum employment, that will also generate fundamentals that will help the dollar in the medium term.

Here's where it gets good. 

Reporter: Mr. Chairman one can’t help but notice it’s been unsuccessful so far. 

Ben: The dollar fluctuates. One factor, for example, that has caused fluctuation has been the safe haven effect. For example, during the height of the crisis in the fall of 2008, money flowed into the Treasury market and drove up the value of the dollar quite substantially, reflecting the fact that US capital markets, are the deepest and most liquid in the world, and a lot of what you’ve seen over the last couple years is just the unwinding of that as the economy has strengthened and as uncertainty has been reduced. 

Doesn't this make you feel much better? Unfortunately as the graphs below show it is utter BS. 

Here is how the US dollar performed during Ben's "Strong Dollar" comments. He started talking at 2:15, the dollars high for the day. Credibility issues?

Rappin' Economics:

On a lighter note, but no less relevant, here is a great video of two economic heavyweights going toe to toe:

Fight of the Century: Keynes vs. Hayek Round Two

Be careful out there, and keep the lights on,

Chris Wiles, CFA

412-260-7917

www.rockhavencapital.com

For prior Rockhaven Views visit:

www.rockhavencapmgmt.blogspot.com

This article contains the current opinions of the author but not necessarily those of the Rockhaven Capital Management.  The author’s opinions are subject to change without notice. This article is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

There's No Way Out Of Here

There's no way out of here
When you come in
You're in for good
There was no promise made
The part you played
The chance you took

David Gilmour - There's No Way Out Of Here - HD

Last night I received an email from the superintendent of my daughters school. He informed us that the much anticipated/planned/delayed groundbreaking ceremony for the $100+million high school remodeling project will be postponed. It appears that when the construction bids were opened last week, the lowest bid was a mere 16% above our cost estimates. Now this is simply shocking. When asked how this could be, the most common answer had something to do with inflation, the cost of materials and energy had gone up. The reason we are all so shocked at this "inflation" excuse is because our Fed chairman, Ben Bernanke, consistently tells us that core inflation remains low, and that any increases in food or energy are "transitory". 

One of the questions I would like to ask Mr Bernanke at his press conference today is, "How exactly do you define transitory, and how do we factor this transitory increase in prices into long term construction projects?"

Here is a nice picture of price increases over the last year. It does not include construction materials.

 

Last September, the Fed stated that one of their goals was to see prices rise more rapidly, and on that score they have succeeded. But, has their success in promoting inflation actually started to undermine the economic recovery?

Deja Vu All Over Again:

I don't know about you but my radar is starting to go off again. It feels like we have been here before, just three short years ago. The stock market is hitting new highs, as well as oil, gold, and commodities. Corporate earnings are strong, and the job market is showing some signs of strength (or at least stabilization). My net worth has increased, and my clients are happy. Clearly everything is right in the world, and I should be enjoying the ride. But something gnaws at me.

Maybe I'm just imagining things, but something just doesn't feel right.

The Fed is happily forcing money out of savings and out of bonds, and into risk assets. Those that are wealthy, are the predominate owners of those risk assets. Wealth disparity is at a record high. Asset inflation will spur an economic recovery, RIGHT?

In many ways today's problems are worse than those in early 2008. 

We have structural unemployment. Only 45.4% of Americans were employed in 2010, the lowest level since 1983. Only 66.8% of American men were employed, the lowest number ever.

We've transferred the problems of the failing banks onto the backs of our governments/citizens. Those governments are now in the process of trying to figure out how to shrink their deficits.

The failing banks that were bailed out are now actually Too Bigger To Fail.

We're now fighting an extra war in Libya.

The Fed's massive printing of dollars has caused the US dollar to depreciate versus other currencies, and commodities.

Commodity inflation is very real, and has led to sparks of unrest throughout the Middle East.

Home prices are still falling.

I could go on but I'm getting depressed. 

These problems are all well known, and the markets continue to ignore them and march ever higher. The Bernanke talks of transitory inflation, and the Feds ability to handle it when the time comes, and the markets march higher. 

At least we know that the President was born in Hawaii.

My job is to diversify and stay in harmony with the markets, and right now that means being nearly fully invested (just underweight bonds). Enjoying the ride, but it's a ride that feels increasingly unstable.

I wonder if we can really buy enough time, and grow the economy enough, to work our way out of this hole. 

Wish I could be more hopeful, but I still don't believe you can fix a debt problem with more debt, eventually there will have to be defaults and a shrinking of the economy. I applaud the Fed's efforts in trying to make this as painless as possible, I just believe that the pain will eventually come.

Until then, and until our indicators turn negative, we'll go along for the ride.  

Be careful out there, and keep the lights on,

Chris Wiles, CFA

412-260-7917

www.rockhavencapital.com

For prior Rockhaven Views visit:

www.rockhavencapmgmt.blogspot.com

This article contains the current opinions of the author but not necessarily those of the Rockhaven Capital Management.  The author’s opinions are subject to change without notice. This article is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.