Contrarian Tells

The Daily Reckoning – Weekend Edition
Baltimore, Maryland
May 6-7, 2006
by Justice Litle


Amid all the geopolitical hubbub, Fed gaffe gossip, and political buffoonery of the past week, two eyebrow-raising “contrarian tells” stood out.

The first relates to The Economist, one of my favorite reads. I have been a devoted Economist subscriber since 1996, when I first came across a cache of back issues in a musty Oxford library.

In addition to being widely respected for its content, The Economist – or rather, the cover of the magazine itself – has developed a reputation as a useful contrarian tell in regard to the beginning and ending of major trends.

The most famous instance is a cover from March 1999, depicting a couple of oil workers covered in gunk with the blazing headline “Drowning in Oil.” With oil approaching $10 a barrel at that point, there were predictions that it could eventually hit $5.

That marked the bottom, of course. Fading The Economist on that call could have netted a fortune. Within a few weeks of the “Drowning in Oil” cover, oil took off – and never looked back.

It happened again in December 2004. This time, there was a caterpillar munching on a dollar bill. Headline: “The Disappearing Dollar.” You can probably guess what happened next. Shortly after that cover, the dollar proceeded to rally, in fits and starts, for a year straight.

(Both of these are in my collection – I’m thinking about framing them for the office wall. Perhaps they will have collector’s item value some day.)

So what is the latest from our friends at The Economist? A mountain climber, hanging from a silhouetted cliff, glorious sunset and clouds behind him. And the headline: “On Top of the World – Goldman Sachs and the Culture of Risk.”

The Goldman boys are probably gnashing their teeth.

The AMEX Broker/Dealer Index ($XBD) is showing signs of distress for the first time in six months. Coincidence? Perhaps not. The “culture of risk,” so fawningly applauded by The Economist in its recent issue, has paid off in spades in the past few years. Piling on the risk, prudence be damned, has been the thing to do. For naked option sellers and premium collectors, the comatose VIX index has been a thing of beauty. Private equity is rolling in dough. Junk companies are financed on a whim. The hedge fund world has been so quiet, we’ve all but forgotten about those nasty credit derivatives piling up in the closet. Long Term Capital who?

That’s the problem with spotting trouble early: When nothing happens for a while, it’s all too easy to doze off again. Things have been benign for so long, we have forgotten that stuff tends to blow up from time to time…that the culture of risk is, well, risky.

Tell No. 2 is courtesy of Stephen Roach, chief economist for Morgan Stanley — and perhaps the most visible bear on Wall Street.

Roach has been growling for years, famously and perpetually alarmed by the building instabilities of the global financial system. In many ways, he has been Agora Financial’s gloom-and-doom doppelganger. (Or perhaps Agora Financial has been his; either way, you get the picture.)

Alas and alack, the great bear has capitulated. After six years of beating an ursine drum, the man has turned over a new leaf. “I must confess that I am now feeling better about the prognosis for the world economy for the first time in ages,” he said in a recent note to clients. “I am not prepared to give an unbalanced world the green light. But it’s time to give credit where credit is due.”

Uh-oh…Roach’s squishy transition has arrived just in time for the wheels to come off the wagon. China is raising rates as its economy threatens to overheat. Bernanke is losing control of monetary policy, accidentally delegating it to Maria “Money Honey” Bartiromo. The dollar is resuming its sharply downward trajectory. The “stable disequilibrium” of Bretton Woods II is being pushed into endgame.

And now one of the most prominent bears on the Street, after years of faithful service to a lonely truth-telling cause, lays down arms. All this against the backdrop of escalating geopolitical rhetoric and the seasonal element known as “Sell in May and go away.”

Last but not least, a bonus tell: 50-year mortgages have arrived in California. Holden Lewis of reports:

“Statewide Bancorp of Rancho Cucamonga began offering the loan in late March, to California residents…Half of first-time home buyers are 32 or older, according to the National Association of REALTORS. If those buyers get 50-year mortgages and never refinance or make extra payments, they won’t pay off their loans until they’re well into their 80s.”

That one needs no comment.


Justice Litle
for The Daily Reckoning

P.S. Ill winds are blowing. So what is an investor to do?

If you have substantial profits, bank them – at least a fair chunk of them. If you are comfortable buying longer-dated put options as cheap insurance against your holdings, consider it. If you are comfortable with shorting, take a fresh look at dark-side opportunities. If you are in it for the long term, hold on to core positions, of course; sharp corrections aside, the natural resource bull market has many miles, and many years, left to go.

— Daily Reckoning Book of the Week —

How Would a Patriot Act?
by Glenn Greenwald

How Would a Patriot Act? is one man’s story of being galvanized into action to defend America’s founding principles, and a reasoned argument for what must be done. Greenwald’s penetrating words should inspire a nation to defend the Constitution from a president who secretly bestowed upon himself the powers of a monarch. If we are to remain a constitutional republic, Greenwald writes, we cannot abide radical theories of executive power, which are transforming the very core of our national character, and moving us from democracy toward despotism. This is not hyperbole. This is the crisis all Americans-liberals and conservatives – now face.

In the spirit of the colonists who once mustered the strength to denounce a king, Greenwald invites us to consider: How would a patriot act today?

THIS WEEK in THE DAILY RECKONING: The economic data the government reports each month are more than a little skewed…and in “Manipulating the Masses,” below, Shadow Statistics’ John Williams shows us what the driving factors behind these fraudulent statistics are…

Noble Rot05/05/06
by Bill Bonner

“The green buds come out in spring, unaware that they are all doomed. But when the crisp weather comes, they do not simply droop and die. Instead, the stress of approaching death brings out the best in them.”

Manipulating the Masses05/04/06
by John Williams

“If you believe the government, annual inflation is running less than 3.5%, unemployment is less than 5%, annual GDP growth is about 3.5%, and the 2005 federal deficit was $318 billion.”

Seasons of Gold 05/02/06
by Doug Casey

“The yellow metal typically shows weakness from February to April, rallies in May, then heads down for summer. In August, gold typically begins to rebound and moves up pretty much for the rest of the year.”

Pure Economic Salvation05/01/06
by The Mogambo Guru

“I advocate that you take physical possession of gold and silver bullion. One reason is that once you have it paid for and in hand, your annual costs go to zero.”

Peak Activity
by James Howard Kunstler

I try to avoid the term “peak oil” because it has cultish overtones, and this is a serious socioeconomic issue, not a belief system. But it seems to me that what we are seeing now in financial and commodity markets, and in the greater economic system itself, is exactly what we ought to expect of peak oil conditions: peak activity.

After all, peak is the point where the world is producing the most oil it will ever produce, even while it is also the inflection point where big trouble is apt to begin. And this massive quantity of oil induces a massive amount of work, land development, industrial activity, commercial production, and motor transport. So we shouldn’t be surprised that there is a lot happening, that houses and highways are still being built, that TVs are pouring out of the Chinese factories, commuters are still whizzing around the DC Beltway, that obese children still have plenty of microwavable melted cheese pockets to zap for their exhausting sessions with Grand Theft Auto.

But in the peak oil situation the world is like a banquet just before the tablecloth is pulled out from under it. There is plenty on the table, but it is about to be overturned, spilled, lost, and broken. There’s more oil available then ever before, but also so many people at the banquet table clamoring for it that there is barely enough to go around, and the people may knock some things over trying to get it.

A correspondent in Texas writes: “On a four week running average basis, total US petroleum imports (crude + products) have been falling since 2/24/06, until last week, when we finally showed an increase of 1.3 percent, after bidding the price of oil up by about 20 percent. IMO, we bid the price up enough to (temporarily) increase our imports. We will see what subsequent weeks show, but I think that we are in the early stages of a bidding war for remaining net export capacity. The interesting question is what countries may not be importing because they can’t afford the oil.”

A substantial amount of total house sales are made up of new suburban McHouses built in places at the furthest extreme distance from employment centers – because that’s where the remaining cheap land is after sixty-odd years of suburban development. How many prospective house-buyers will close on those things with gasoline over $3 a gallon? Probably fewer than are required to sell them all. And more McHouses will be coming on the market in any case because they are products of a planning and permitting process that takes years for things to finally get built. Once the house-selling racket, and its associated mortgage racket, stop grinding along, the machinery of the US economy has to seize up. The financial sector, which used to be an appendage of the economy, but has become an end in itself, has to implode when the stream of rebundled securitized mortgage debt stops flowing into it.

When tablecloths are pulled out from under banquet tables, it is hard to say how the platters, bowls, and ewers will tumble and fall, but we can bet that few if any of them will land right-side up, unspilled. One also has to wonder how the other people at the table are going to behave when things come tumbling down.