Reflation trade stumbling

Trends reverse asset class by asset class. Here’s where the reflation trade stands about two weeks past its possible peak:

Gold and silver: Nice, clear tops and solid sell-offs. I’m pretty confident about those tops holding, since sentiment readings got so high there. Decent profits are in hand, and I am out of this market as of yesterday, since a corrective rally wouldn’t surprise me here. I am waiting to put on my shorts again.

Treasury bonds: Firm-looking bottom off very negative sentiment and a nice rally so far. There is room to go, though I have sold my calls and now just own TLT. Recent auctions have been very successful, as these nice yields are drawing the highest bid-to-cover ratios since 2007.

The dollar: Back within almost a percent of its recent low, but I’m not worried about a collapse because most people are already positioned for fresh lows. Today’s mini panic looks like a potential set-up for the bulls, and I am very long versus the pound, euro and franc.

Oil: Sentiment here never got extreme, but the chart looks toppy and this trade is not independent from general dollar/reflation fears. I am short futures with a tight stop, since today’s bounce took us right up underneath a clear resistance level. Fundamentally, oil is way overpriced for this environment. I still think $20 awaits at some point in the future.

Copper: Very similar to oil’s situation. No extremes, but toppy. I’m short with a tight stop. I expect $1.00 again at some point once the S&P drops under 600.

Pork: Ok, this has nothing to do with the rest of this market, but pork bellies and hogs have been nice winners for me lately. I believe there is a good chance that they just made a lasting low. The flu panic has never been anything but hot air — just another boogeyman to drive people to love big brother. When the fears fade, demand is going to outstrip supply. China bulls ought to be all over this: the Chinese love pork — they even have a “strategic pork reserve”.

Stocks: The markets were pretty oversold after yesterday, but today we worked off that condition, so anything can happen tomorrow. Everyone is watching the 880 level on the S&P, though it feels like after the 40% rally we could see more nasty 90% down days in the coming days or weeks, which would take us closer to 800 and give the bulls a real gut-check. 880 wouldn’t do that.

If we do get down under 850, things are going to get tricky: we’ll have to look at internals and sentiment to divine whether we’re due for a big recovery and re-test of the highs, or if we’re on the express train to new bear market lows.

It is also possible that we never get a deep sell-off, but just chop around within a 50-100 point range for a few more months while fundamentals deteriorate until Pangloss just can’t justify hitting the offer anymore. Chopping around the 900s without ever breaking clean through 1000 would be nearly as exhaustive for the bulls as this rally has been for the bears. It would draw them all in until none were left and volume dried up. That would be an awesome set-up for bears who aren’t themselves worn out in the chop.

This is why I’m such a fan of long-term puts for playing a bear market: with them you don’t have to worry much about how the market gets to its destination, so long as it arrives and on time. Right now, you can buy 36 months of leeway with December 2011 puts. I bought December 2008 puts in Q2 2006 and 2009s in 2007 — there was drawdown from rallies and time decay, but in the end it didn’t matter.

No thank you, Mr. Keynes. America’s infrastructure does not need a bailout.

I’m sick of hearing the phase “America’s crumbling infrastructure” from the press and politicians. They have been pushing this theme for at least 18 months now. Observers should look for the motive behind all such recurring news themes, because nothing gets on the air on into print without one.

In this case, we are clearly being prepped for New Deal #2, involving at least the following programs:

• Public works projects. A resurrection of the Works Progress Administration (aka WPA or “We Piddle Around”).
• Green energy waste. The Tennessee Valley Authority with a touchy, feely twist. Al Gore, administrator?
• Neverending War in Asia. That’ll lick unemployment for good!

From Bloomberg, here are the latest brilliant ideas from the Senate:

Sept. 25 (Bloomberg) — Senate Democrats proposed a $56 billion economic stimulus package that would increase government spending on unemployment benefits, food stamps, infrastructure projects, aid to state governments and heating aid to the poor.

Senate Majority leader Harry Reid, a Nevada Democrat, said today that the legislation is needed to help millions of Americans struggling with the slow economy.

“We must not forget Main Street as we work to address the crisis on Wall Street,” he said, adding that the plan would “create hundreds of thousands of good-paying American jobs and prevent cuts in critical services for millions of Americans.”…

The Senate plan would extend unemployment benefits by as many as 13 weeks, expand food stamp aid and provide states coping with high Medicaid costs with an additional $20 billion in federal assistance.

Highway Projects

The plan would also spend $11 billion on highway and other transportation projects, $5.1 billion for heating assistance to the poor, $1.2 billion for the National Institutes of Health and $250 million for NASA.

Will Keynesianism never die?

Politicians and bankers love this repressive and discredited doctrine because it justifies all manner of scams. Today’s professors won’t admit it, but they haven’t changed a bit since falling hook, line and sinker for Orwellian nonsense that intentionally punishes savings and private investment, maintains a dumb consumer class, and allocates full freedom and power only to a ruling class of “philosopher kings”. They tinker around the edges of this egomaniac’s* theory, but they assure us that without the State pulling the levers (following their guidance of course), the economy will crumble down to the stone age.

The last thing America needs in a Depression is more government involvement in the economy, especially not government jobs for government-designed projects. This just steals from the sensible and allocates to the connected, while wasting the capital on unneeded projects with negative returns.

Relax, go for a drive.

The highway and other infrastructure in the US is among the best in the world, especially the road system. I have driven in a lot of places, and nothing beats four lanes each way with stadium lighting, fast and even drainage, huge reflective and logical signage, and perfectly cambered cloverleafs. It is just a joy to drive when you come back after being away. And by the way, American motorists, even New Yorkers, are very safe and considerate by world standards. The are not the Swiss, but we can’t all be.

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* Here is a character study (PDF) of the most-revered economist of the 20th century by one of the smartest and most honest economists of the same, Murray Rothbard, who’s writing happens to be a joy to read. How many Keynesian professors can you say that about?

There is lots more on Keynesian economics here, from America’s real libertarian think tank, the Mises Institute (not The Stato Foundation).