Remember a few months ago when I told you to get the Hell out of US equities?  It was only three months ago I shouted from  an unknown blog that there was absolutely no reason to have any investments in US equities or how about just two weeks ago where I sounded the rising volatility alarm?

Well US stocks are down a few percent and the VIX is at levels not seen in over 2 years! And this is just a taste of what’s to come.

These past few years the world has enjoyed unprecedented tranquility across all financial markets. Bonds and stocks steadily climbed in the period of Pax Central Banker but now that seems to be over as the Fed is tapering and the invisible hand that holds up the market goes with it.

When a system is supported artificially for too long, the natural supports of the system weaken. Theey can weaken to the point that when the artificial support is removed the natural support won’t be able to handle the increased strain in its weakened state. This is of course the world we live in. And now that the artificial support is being removed people are starting to get nervous and we can see that in the dramatic rise in volatility across a variety of asset classes.

One of those being commodities, and to be more specific let’s take a look at oil. The price of which has fallen from over $115 a barrel to under $85 in a short few months. The initial decline was partly due to a stronger dollar, which was also reflected in the falling price of gold. However, we have seen both the strengthening dollar and the falling price of gold reverse. The EUR/USD got as low as 1.25 and is now back to above 1.27. USD/JPY was above 110 and is now back to 106. The dollar has retreated and as for gold, which hit 1180 has since risen back to 1240 an ounce. The dollar has weakened, yet the price of oil continues to decline, unlike the price of gold which is rising.

Interestingly, while this trend has been going on, gold miners have sold off like hot cakes, which to me doesn’t make sense when the thing they sell increases in value and the cost of producing it goes down. Many of which are selling at fraction of their price to book value.

I expect the price of gold to stay around the 1200 level as volatility remains high and the price of oil to remain low as global demand slows.

Now could this all be temporary? Could the price of oil stabilize back over 90?

I don’t think so. The Saudi’s seem pretty set on selling oil at lower prices to hurt its competition in Russia, Iran and here in the US. Shale oil producers have been hit the hardest as their break even point on shale oil is about $80 which is where WTI is floating around today. Which is interesting, because these companies have a shit ton of debt, and no cash flow. So one has to wonder how long these companies can hold out with oil prices so low.

A counter argument is that global growth is slowing and oil demand is going down with it. So even if the US loses some shale production, it won’t make up for the global loss in demand. Which is what I think will be the case at least in the short term. What happens after the largest financial crash in the history of the known universe remains to be seen.

And if you don’t believe that growth is slowing just look at US treasuries. The 30 year just hit 2.85%. With that in mind, I don’t have high hopes for growth any time soon and will look at which gold miners I can pick up on the cheap.

“I can put my record against any leader around the world in terms of digging
ourselves out of a terrible, almost unprecedented financial crisis”
~ President Barack Obama

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God Bless that ignorance! He must sleep like a baby at night. He’s not even half way through the magic act and he’s acting like he just finished the prestige. I mean the printing presses aren’t even cold yet and he’s prancing around like he’s pulled a debt free college educated millennial from his hat.

All this celebration for what? $4 Trillion dollars printed. Over $8 Trillion added to the public debt. And what do we have to show? Minimal  growth? Labor Force participation at multi decade lows? Where’s the fracking escape velocity we were promised?!

Look I didn’t believe we’d ever get this mysterious escape velocity. Though to be fair I don’t believe in the Easter Bunny, Santa Claus or the Keynesian Economics either.

The point is, our economy and financial system is no better than it was six years ago. When Bill Gross’ took an escape pod over to Janus Capital, he showed that in regards to stability we are worse off. PIMCO was forced to dump a large portion of bonds onto the open market. Unfortunately for them, they found the market to be less liquid than they would have liked.

I mentioned this in a previous post but it’s worth mentioning again, the corporate debt markets are a lot less liquid than they used to be. And when you get a big sell off into an illiquid market you can get big swings in volatility.

This means that volatility although low for now, is not likely to remain low for long. Once again, I’d like to reiterate how big a fan I am of long term out of the money VIX calls. If you see the VIX holding steady in the 12 and lower range, you should look to pick up the longest term available contracts and just hold. With rough seas of volatility ahead, it is a very safe play right now.

Remember the last time the Fed stopped printing money the VIX spiked to over 40, and the bond markets were more liquid then. If that happens now, who knows what will happen. So enjoy the low volatility while it lasts.

The dollar is getting stronger. This should be expected.

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This is what happens when you stop beating your currency like a runaway slave. To be fair the dollar is the Fed’s slave. After all we gave it to them for safe keeping back in 1913. There’s irony here somewhere.

Alright! Enough slavery references. I think I just lost the black vote forever. And that’s bad for the world economy because you elect people like Barack Obama to run your blog posts and it all goes down hill from there.

What is just as bad for the world economy is a strong dollar. Compared to other major economies the US economy is supposedly the cleanest of the dirty shirts. It’s still dirty but she gets the job done. You can still wear her to interviews without being thrown out.  One of the things that has made her passable is a cheap currency. That cheap currency is now rising as the Fed prepares to shut off its printing presses for good (for now?).

Let me tell a little story.

The dollar goes up, commodity prices fall, capital leaves emerging markets,  emerging markets contract, emerging markets buy less US products, the US slows, stocks fall, asset bubbles bursts, and the world enters the 2nd “great” depression.

Of course that scenario doesn’t have to happen but the Fed needs to act quickly and it needs to do more QE, a lot more.

Now I don’t know if the Fed will do more QE until the after the next crisis starts, and it doesn’t matter. Everything is screaming slower growth. Slower growth means yields will continue to fall. Combine that with a strengthening dollar, long term US treasuries look very good.

I’m not holding to maturity. This is also bubble waiting to burst but in my mind it will be the last one to do so and thus will see capital flows into US treasuries as the rest of the bubbles around the world burst. So when the next crisis strikes and treasuries appreciate, then I will sell. Until then I will collect a measly dividend and wait for the inevitable.

If you want to hold US equities and pray the Fed steps in when the shit hits the fan be my guess. Personally, the only US companies I hold are ones that thirty years from now could have a giant robot army and the only thing saving me from pure annihilation is the title of “shareholder”. I’m looking at you GOOG!