Run rabit run.
19 January 2011
Sean Russo
WITH the coming Lunar New Year we will be entering the Year of the Rabbit. I’m not sure what the Chinese astrologers have to say about the character of someone born in the Year of the Rabbit, but for me rabbits seem to be well known for three things: their ability to run fast but not particularly straight; their proclivity to breed, well, like rabbits; and, their propensity to stand in the middle of the road unblinkingly staring at the headlights of the vehicle about to dispatch them to that great warren in the sky.
Whatever investment theme you wish to create for investing and trading in the year ahead you need to keep your eyes on the rabbits.
The biggest rabbit of all is the US treasury. They can create debt faster than rabbits can create rabbits. At the time president Nixon took the US off the gold standard in 1971 treasury debt was $US430 billion. At the time of the collapse of the Soviet Union in 1991 it was $US4145 billion (yes, that’s thousands of billions). Up to 9/11 in 2001 it had only drifted up to $US5950 billion, but today in less than another decade it is over $US14,000 billion with the suggestion that the “debt ceiling” that must be approved by US congress will need to be raised to somewhere in the order of $US16,000 billion. Whatever they may want to say in the US media about the debt woes in “You-rope”, expanding US debt and their proclivity to believe they don’t need to deal with it will, I believe, increasingly become a lightning rod for negative sentiment towards the US.
While many in the markets think such negative sentiment will target the USD I can’t help thinking it might be much more negative for US equities. For all the pumping and all the extra debt US equities have been unable to gain back much more than half of their losses. Major US stocks have an average dividend yield of less than 2% while European bonds and Aussie and Chinese deposit accounts pay over 6%. US taxes have got to be going up across the board whatever the rhetoric and perhaps most chillingly the well known banking analyst Meredith Whitney (who predicted the problems of 2008) recently suggested on 60 Minutes that in the US municipal and state debt markets we could see 50 to 100 defaults in 2011 running to hundreds of billions. All that might well suggest that there are reasonable odds of a replay of the kind of equities collapse, or a collapse in confidence or simply on people seeing better pickings elsewhere , such as we saw in 2008.
Despite all that, and a whole lot more possible downside surprises, the positive sentiment and consensus forecasts for US equities are almost as strong as they have ever been. Is a long position in US equities at this juncture a bull position or is it more akin to a rabbit in the headlights, startled into inaction? I think it’s the latter.
Is it a car, a truck or a road-train coming? I don’t know but they do seem too startled to move. Possibly encouraged by the recent near-miss as the car swerved to avoid them, they are now emboldened into believing that those bright lights might just be the light at the end of a tunnel. In reality they got lucky, the driver was drunk and he hasn’t let up on the punch ever since!
I fear when the rabbits do start running in US equities market it is highly likely that it will spill over into a range of other markets that have enjoyed very strong one way support from bulls that bred like rabbits.
Gold bulls seem to be increasing at a rate that might make a rabbit blush. Higher prices seem to act like Viagra, stiffening their resolve and forever raising price targets. I have sympathy with some of the bullish theories and I believe that relatively gold can outperform many, if not most things, in the years ahead. I do think it is naïve to believe it is immune from a replay of a general run to liquidity in crisis; or, a much more benign return to living within our means (at federal, state and personal levels) that will likely drive prices down as we scramble to get rid of all that debt. Producers need to watch closely for signs of the gold rabbits running because theirs is not a game of relativities in an investment portfolio but one of absolutes –sales revenues must exceed cost of production.
Likewise the range of products with which to get long commodities in general seems to expand with rabbit-like enthusiasm. I am sorry but I simply don’t understand why a Copper ETF or a Nickel ETF is good for anyone except the person that manages it (and earns all the admin and storage fees) and the person that sells it (and earns all the commissions).
Is the management of all metal mining and exploration companies really so bad that punters would rather buy ingots and pay holding costs than have metal leverage alongside exploration leverage and (yes I know it’s rare but it will become less rare as miners seek to compete with ETFs) dividends?
I think not. As a positive the competition from ETFs may drive mining companies to behave more like other companies and focus on investor returns over mining throughput and that can’t be a bad thing. On the flipside the corruption of their influence on prices in the short term will last for a very long time. I feel certain that there will be a time when these ETF rabbits are not seen a floppy eared beauties that are nice to hold in your super but feral critters that did untold damage to the landscape.
It might be cool to run with the bulls, in New York, Pamplona or elsewhere, but for a stress free and prosperous 2011 it might be a better idea to keep an eye on the rabbits. They may just carry us through the year but if they either stop breeding or start running you want to be well ahead of them and most importantly if that’s not the end of the tunnel you think you see you don’t want to be one of them.