Deja Vu 2008
Peter is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
If you live long enough you come to realize the wisdom in the statement that history doesn’t repeat but is certainly does rhyme. The price action this spring is so reminiscent in feel to 2008 that waking up every morning feels like Groundhog Day.
In 2008 gold touched a high of $1033 per ounce the evening the news broke that JPMorgan had bought Bear Stearns for $10 per share. The sell-off in gold on the SPDR Gold Trust ETF (NYSEMKT: GLD) began the next morning, made another attempt to regain $1000 in July and then sold off until November making a low of $713 per ounce, a 31% retracement in price. The Continuous Commodity Index, which can be played via the Greenhaven Continuous Commodity Index ETF (NYSEMKT: GCC) fell 261 points or 43.9% between June and December of that year after gold attempted the $1000 level again and the U.S. Congress came out and demonized speculators in the oil markets.
The Rhyme Scheme
Gold put in a 2nd attempt to take out the $1800 at the end of February of 2012, on the eve of the Greek default and summarily sold off on a non-announcement of more quantitative easing by the Federal Reserve. At the same time the CCI rolled over and has since give back 14% in just under three months. Gold has sold off 15% since that point.
During that period of unease in 2008 the U.S. Dollar went on a massive bull run that saw commodity currencies like the Canadian Dollar and the Australian Dollar, traded as the CurrencyShares Australian Dollar ETF (NYSEMKT: FXA), collapse up to 40% during the period. All of this presaged an eventual massive bailout of the financial system that culminated in the vaporization of Lehman Bros., the double bailout vote, TARP, the election of Barack Obama and record low yields on U.S. Treasury bonds.
Again, does any of this sound familiar?
If not, now let’s revisit JPMorgan and the disastrous trade that had to be made public and the losses from which are whispered to be as high as $10 billion. If this trade was well contained within the capital structure of JPMorgan why is it that the Fed had to exercise its power to block JPMorgan from any further dividend or share-buyback outlays when according to the latest stress test the bank could absorb $31.5 billion in losses before such action would need to be taken?
We know that the Federal Reserve has put a bid underneath the long end of the yield curve with Operation Twist, which has helped push rates this low. But there is real fear in the markets over the res0lution of the situation in Greece. Capital is flying out of European banks into the relative safety of U.S. Bonds which are now trading at a 5 month low near 2.8%. What should raise your hackles is that CDS spreads on U.S. treasuries have risen sharply mid-March, rising 55.7% and are approaching 50 basis points in Euro terms. This rise is concurrent with the beginning of the rally in U.S. Treasuries.
It’s not the level that should scare you, but the rate at which fear of a U.S. default is rising. During the height of the Lehman crisis, CDS spreads on U.S. debt spiked to 100 basis points. Credit stress has been steadily rising since the Fed’s policy meeting on February 29th.
The dollar has broken through strong resistance on the USDX and is trading above 83 while the Euro has broken down through $1.24. The PowerShares DB US Dollar Index Bullish (NYSEMKT: UUP) has gains 5.2% in May. Since its peak at the end of February the Australian Dollar has lost 10% and is broken parity with the Dollar.
The Difference Engine
What is different this time is that the Dollar bull run is not as pervasive with the major dollar crosses. The Canadian dollar is not being thrown away along with the Aussie. Since March, the Yen has appreciated more than 5%. More impressive, the Yen has moved 10% versus the Euro. Japanese bond yields have plunged along with U.S. Treasury yields, the beneficiary of flight out of European banks who would need another 800 Billion Euros from the ECB to cover their losses on a Greek exit from the Euro. Japanese companies are using funds repatriated from Europe and are deploying them all across Southeast Asia at a furious clip. Japan’s investment into Vietnam for example in the 1st quarter was 150% of the amount they spent there in all of 2011.
The big beneficiary in all of this has been the Singapore Dollar which has appreciated against nearly every major currency except the dollar, having just broken above $1.26 and looks like it will push to $1.30 if the situation continues, which would be 2% devaluation. But, versus the Euro, the Yen, the Aussie and the Yuan the Singapore dollar has been on a tear; appreciating as much as 10+% against the Yen and Aussie.
The Empire Strikes Back
Or maybe this will be more like The Dark Knight, either way, this sequel is shaping up to be more resonant than the original script. This time around, like any good movie, the stakes are higher as the collective actions to save the system that broke in 2008 have allowed the cancer at the heart of the problem to metastasize into something even worse than it was originally.
Gold and commodities are still falling and will be under pressure for a while. They are trading very erratically. Under Ben Bernanke the Fed’s monetary policy shifts have been sudden and violent. We have seen a sharp reduction in base money in the last month which has created equally violent shocks across markets. Until the Fed announces another coordinated effort to prop up the banking system, capital will continue to flow into paper and gold may be sold to cover margin calls in equity losses. As much as many fund managers would like to put their funds somewhere other than U.S. Treasuries, they are bound by their prospectuses and cannot.
Commodity and gold prices have not reached breaking points where their costs of production are higher than their futures price. Gold flows to the east have been massive in recent months as Russia, Turkey and China have been buying hundreds of tons. Operation Twist is due to end in June, the Fed will have to embark on a new policy because the economy cannot have it withdraw support. They will support it, but only after the ECB has accepted more responsibility for the problems of Greece.
These trends will stay in place until that point and it may cost another major bank its life. The credit markets are betting on Morgan-Stanley (NYSE: MS) as their CDS spread are nearing the same levels as last fall, but JPMorgan’s are catching up fast as the rumors fly about how badly their derivative trades are blowing up all around them.
Fearful Symmetry that.
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