Huge bearish thoughts fro Bill Cara

Discussion in 'Economics' started by wabrew, Oct 15, 2006.

  1. wabrew


    The following commentary can be found about m1/2 way down Bill's weekly WIR - full report at

    Can anyone direct me to a bullish argument that is as eloquent as Bill's bear argument

    Here is an excerpt from this weeks report -----
    Today, the 200-day MA for $GOLD is 599.78, and the 50-day MA is at 605.37. So the current price ($582.70) is below these MA’s, which represent technical resistance.

    The $540-$560 was tested successfully, and now I believe -- based on a $USD that can’t seem to cross up through the 200-Day MA resistance – that $GOLD is headed to the mid-600’s. I admit being out on a limb here, but I am not alone. That’s a view, btw, that is shared with most of the major broker-dealer analysts.

    Could we really be on the same wavelength?

    The people I hear talking about Gold at $540 - $500 - $440 etc are mostly people like Larry Kudlow and from small buy-side firms that CNBC likes to present to break the monotony.

    I continue to believe that the next Bull phase in the gold market will be on the back of a sliding $USD, and that $GOLD will move back over $700, and probably (as I see it) over $800. I also see that happening sooner than later – say within 12 months.

    When I look into the future of these gold miners, I can see a lot of new but small mines coming on-stream, but the winding down of some major producers. The net effect will likely be a declining gold production over the next 5 to 8 years.

    The U.S. reserves of gold are still huge, and quite sufficient to sell off bullion to hold the price from escalating to $2000, $3,000 or $4000 price levels. Nonetheless, the prospects of a financial systems failure that I referred to off the top, and again during this report, are concerns of mine. The problem is that financial futures are a zero-sum game that I don’t see how could return to zero without counter-party failure along the way to positions being unwound.

    You see the Credit-Default Swap (CDS) market is now much bigger than the cash Bond market, and it has been growing in one direction. But, like Amaranth discovered with Natural Gas, trying to unwind positions when the cash market goes to extremes against you is almost impossible. Maybe with a cushion of another $10 billion or $20 billion, Amaranth might have weathered the storm. But $10 billion wasn’t enough. As it happened, Amaranth had a little equity remaining when it rebalanced its NG positions, so clients lost that $6.5 billion.

    But lets suppose the next time, there is a major bank that is hedged (directly or via client positions) on interest rates only to say 6.00 pct on the long bonds, and their exposure is greater than its total capital. Say interest rates go 7, 8, 9, 10 pct in several days as failures start to ring up and large banks have to go to the Fed to borrow funds they cannot collect from clients that are failing.

    I’m not a risk management expert, but I have heard and read such experts say that they believe failures will occur, and they will involve big name banks. I believe it because it’s happened before. The S&L crisis of the 1980’s caused the failure of many banks. Then in the 1990’s the Japanese banking crisis wiped out trillions in equity and sent the country into a deflationary spiral.

    Those two crises, however, occurred before there was such a thing as Credit-Default Swaps, which are now growing about as fast as the total assets of the world’s biggest 1,000 banks. That growth is only possible if the inter-bank credit ring remains unbroken.

    Given that we could experience a banking crisis of the magnitude that occurred in the Great Depression (1929 and through the 1930’s), I think it is important for the various components of Humungous Bank & Broker to assuage the concerns of depositors, creditors and shareholders (all of us because it involves pension funds) by issuing reports that quantify the risks.

    I think it’s important to do that now before there is a 1,000 or 2,000 point loss in the DJIA or 100 or 200 basis point move in bond yields in the course of a week that would permanently sink some huge hedge funds and banks, putting everybody’s capital at risk.

    What concerns me most is that when you drill down the revenue base of HB&B, you’ll see that the reported net interest income of some of these banks is almost nil in growth – certainly single digit growth – while “fees” are growing at numbers like +20 pct Y/Y and “trading revenues” are growing at like +50 pct.

    That result is not sustainable.

    What happens when “trading losses” start to happen? What happens to net interest income during long periods of inverted yield curves? What happens to loan losses when refinancing mortgage loans becomes too costly for the average Joe? Will Mom & Pop start runs on those banks?
  2. wabrew


    part two of his report ---

    Around 1990, it was a fact that 10 of 10 of the largest banks in the world were Japanese. We didn’t know how or when it would come, but we knew a crash was inevitable? I’m starting to hear the same today about the American banks.

    The $USD is a not “a veritable powerhouse.” It is not “the greatest story never told”.

    Anybody who believes that stuff is a fool soon parted from their money.

    Things are always changing, which in itself is nothing to fear. In fact, we need change. But, early in 2001, I’d never heard of a Credit-Default Swap. In 2001, total bank assets were under $30 trillion (largest 1,000 banks); now they’re at something like $70 trillion, and I think too large for bankers to appropriately manage, so they have turned to computer systems many of them don’t really comprehend.

    I say that if a bank CEO doesn’t 100-pct comprehend the futures market or the Swaps market, that bank has no right to be a player. Look what happened at Barings Bank – the venerable institution known as the Queen’s Bank. That wasn’t a mental breakdown by a so-called rogue trader, which in itself is a writing of an acceptable form of history; that was a breakdown of management control systems. The bosses didn’t have a clue what the junior staff were up to. But I think the same exists today on a much, much greater scale.

    And when the crash of a bank happens, the senior officers ought to be sent to prison for arrogance and gross deceit of their customers.

    The structure of capital markets has changed so much because of political policies under George Bush. Because of a 1-pct Fed rate, debt was able to grow so fast, I am in awe. The only thing stopping that growth is the market’s inability to service that debt. But what will happen when the Fed rate moves higher from this point?

    If our savings rate was at record high levels instead of in minus territory, I’m sure the People could handle the implications of an 11 or 12 pct Fed rate; but today I doubt they could handle a Fed rate of more than 5.50 to 6.00 pct. When the tipping point is so low, I am alarmed.

    The discontent I read about today is, I think, mostly this. There is a growing nervousness that a “major financial accident” and “systemic failure to the financial system” could happen because we are too close to the line.

    Most people do not want to hold gold, which is a form of cash, an unallocated asset earning nothing. They’d rather put their money to work. Then they see companies built by the two wealthiest persons in the world sitting on cash hordes of $40 billion, with apparently no single place to invest at a satisfactory internal rate of return, and they wonder why. They see found-money Johnny-come-lately’s spending almost $2 billion to buy an unproven asset in YouTube. The joke of that came from watching a TV interviewer on the streets of New York the day of the Google-YouTube announcement if they knew what a YouTube was, and nobody – repeat, nobody – had an inkling.

    Isn’t that the definition of risk taking, where you take the shareholder’s money and spend it on something nobody has heard of? And, if you haven’t heard of it, you certainly don’t understand it, and cannot put a measure of risk to it.

    Well the banks today are up to their yin-yang in futures and swaps where senior managers don’t even know what a blog is, and couldn’t operate a Blackberry.

    I once had a meeting with a senior executive with Bell Canada, and while waiting in the reception area, his Executive Assistant came out and asked me not to discuss anything technical because she didn’t want her boss embarrassed. This man was managing a technology powerhouse and he was a Luddite. That was the Peter Principle at work, and today it exists in Humungous Bank & Broker, where managing these companies is too great a task for mere humans.

    So at the end of the day people with common sense gravitate to gold – just as prudent traders did during the Great Depression, and families fleeing regional political crises and military conflict have done forever.

    I was asked this weekend what percentage of capital should one allocate to gold and silver. Asset allocation is a matter of personal choice.

    For myself, within the past five years or so, my opinion on that has changed. Starting at a low of 5 pct, my view changed after the U.S. sent soldiers into Afghanistan, but it was still in the 6 to 7 pct range. Then came 9-11-2001 to where it moved into the 8 to 9 pct range at a maximum point of cycle for $XAU. Then when I started to see evidence of reflation policy, it moved to a maximum of about 12 pct.

    Now because of the sheer craziness of trading by hedge funds, explosion of the CDS market, which I think masks traditional volatility measures like VIX, the overt manipulation by the Fed and Treasury, way over-the-top hyping of markets by CNBC, ultra-high M3, elimination of the M3 disclosure, huge casualties in Iraq and Afghanistan, nuclear confrontation by North Korea and the breakdown of diplomacy at the U.N. all around the table, breakdown of values in North America where altering accounting records is deemed by many Talking Heads as being acceptable because so many companies do it, and on and on, my views have changed. I’m now an all-time high allocation in gold-related securities of 25 pct. A year or so ago, I never thought I’d see the day where more than one-eighth (12.5 pct) allocation would be advisable.

    There is something else, which is a positive, I think. Two things actually.

    One is that forex is now widely recognized as an asset class, so trading between dollars, Canadian dollars, euros, pounds, yen etc has become as acceptable to Mom & Pop as trading penny stocks. And companies like FXCM, which many of you have never heard of, are now doing as much currency trading as any big name second-tier bank. Whether that’s good or not is another issue, but I’m happy to see the acceptance of forex trading as an asset class.

    The other is that growth and consolidation in the precious metals industry has brought an increased sophistication. These companies are now operated by experts, not the old-style stock promoter – although there are still some of those around – and they have a larger and more diverse array of minerals properties, with much greater technical understanding of their resources. For proof of that look at Agnico-Eagle story today versus when Paul Penna – bless his heart -- was in his hey-day. Also, the World Gold Council has grown as a sophisticated organization, showing great leadership.

    So all in all, I feel more comfortable investing in the precious metals industry.

    Much the same is true for base metals, but gold and silver has for me the reality that to many people of the world this is money. They horde the physical stuff because paper money is useless at times, and there will always be a value to gold and silver.

    The latter point I am making is that I am investing in precious metals today the way I used to trade shares of Alcoa, Alcan, Rio Tinto, U.S. Steel, and in fact I have more confidence in the PM market than I even do in the Oil & Gas market now that politics is involved in things like Strategic Petroleum Reserves.