Agora Financial’s Rude Awakening

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Laguna Beach, California

The “Internal Cash Memos” go external,

What on earth is an Uridashi bond…and why have they spiked?

The double delight of refining and enraging, and more…

Eric Fry, reporting from Laguna Beach, California…

About a year and a half a go, your editors here at the Rude Awakening presented a three-part series entitled, “Cerebral Striptease.” And, as the titled implied, the series was both intelligent and sexy…or maybe it was sexy BECAUSE it was intelligent. [Check here for Parts I , II and III ]

In any event, the series of columns featured a free-flowing email discussion among several of our colleagues about the gravity of the current account deficit. (See, we told you it was sexy!) These sorts of internal debates rage all the time between and among several of our colleagues. This process enables us all to refine our investment ideas…and to annoy our colleagues at the same time – a double delight.

These internal debates usually remain “For Internal Distribution Only.” But every once in a while, your California editor begs his colleagues to expose their unpolished inner thoughts to the outside world…and occasionally his colleagues oblige.

A little over one week ago, for example, Dan Denning, editor of the Australian Daily Reckoning, dispatched a shocking email to his colleagues. “I’m going to cash,” he said. “I know its crazy, but I’m advising my readers to liquidate all their positions and get into cash. If you think that’s crazy or just stupid, you needn’t bother reading on.”

Over the ensuing days, Dan’s colleagues respond with a mixture of empathy, shock and advice. Ultimately, Dan answers his colleagues with an impassioned response of his own.

This email exchange raises critical considerations for every investor during what may prove to be a very critical time in the history of the American stock market…and our beloved currency: the dollar.

Your California editor is pleased, therefore, to present lightly edited highlights of this multi-day, multi-colleague email exchange. Last Friday’s edition of the Rude Awakening featured “Part I” of “Agora Financial…Unplugged.” Today’s edition features Part II – a discussion which took place over Labor Day Weekend, prior to last week’s trading. 

Hope you find it worthwhile…

Agora Financial…Unplugged, Part II
Edited by Eric J. Fry

Adrian Ash, editor of Gold News:

Forget about commodities and T-bonds! The place to have been last month was in Yen, not least for Aussie investors. The Yen has gained more than 11% against the Aussie dollar since July 24th…

Equities may continue to slide from here. But the big dump’s already whacked 10% off the MSCI…The sharp move in the Yen also looks to have gone, for now at least. New corporate Yen-bond issuance fell to a two-year low in August, so the carry trade at least took a pause, even if it wasn’t unwound. Maturities on outstanding Uridashi bonds targeting the New Zealand Dollar also spiked. 

Dan Denning, editor of the Australian Daily Reckoning:

Thanks everyone for the feedback. Lots of interesting and good ideas.
 
I had no idea there even WERE Uridashi bonds…or that the yields had spiked.
 
Also, I should apologize for not making something more clear: I am ALWAYS right about this stuff. Always. It’s just that sometimes I’m a year or two early on the call.
 
For example, I quit Penny Stock Fortunes with a circulation of 30,000 readers because I thought the tech market had topped out…in 1998. Right call, two years early.
 
In 2000, at “Strategic Investment” I recommended the preferred “B” shares of Freeport McMoran as a play on gold. The B shares would be redeemable at 1/10th the price of gold in 2002 – right before gold’s big move. Early again.
 
In 2003, I recommended the Oil Service Holders (OIH) as part of the post-Iraq war strategy. I reckoned they would go from $40 to challenge their all-time high of $95. It did reach $95 by 2005…and then kept going (it’s at $180 now…Thank you Peak Oil!)
 
In 2004, I called the top in the mortgage-lending bubble.  I recommended long-term puts on HGX, the homebuilders index. It doubled from there. I was two years and several trillion dollars in subprime mortgages early on that one.
 
And in November 2005 I moved to Australia to escape the decline and fall of the U.S. dollar.
 
What I’m trying to say is that in making my “go to cash” call now…it’s possible you have about 18 months to get out before it’s too late.
 
But if you use 2005 as the actual date of my call (judging by the deeds not the words), they you have about 62 days, four hours, and twenty three minutes….
 
You’ve been warned.
 
For the record, I AM presumptuous. And a coward. And a Nervous-Nelly. And many other things. But not complacent.
 
So I did tell the Aussie readers of our edition of Outstanding Investments to liquidate all their U.S.-dollar denominated stocks.
 
Many of these stock were no longer useful because they’d appreciated so much…or because in Aussie dollar terms, they were not going up fast enough to compensate for the currency risk.
 
It wasn’t a wholesale exodus out of stocks. We have quite a few open positions in Aussie stocks, most of which are in precious metals, energy, base metals, and mining services (companies whose earnings are not dependent on the U.S. consumer).
 
But I think it’s still worth considering if it’s time to make a major strategic change in focus.
 
If not now, when?
 
Chris Mayer, editor of Capital & Crisis:

Jeez, man…what are you on over there? First e-mail is a doubt-filled plea for help and the second one is “I am ALWAYS right you jerks…”
 
The all-cash option is like the nuclear option… It’s drastic. Although, it sounds like you are not really doing that…given that you are keeping your Aussie equities.
 
Interesting stuff in any event…
 
Dan Denning:

My question about the market risk is still the same, after all the replies: if credit as an asset class is in a bear market, how will stocks go up from here?
 
It was the biggest bubble of all time and the signs that it’s been pricked are all around us. Yet you’re telling me the whole thing’s been factored into stock prices and earnings? 

Balderdash!!
 
It’s not like we haven’t seen what happens at the top before. It’s just that we’re choosing not to believe the end of the credit bubble will result in falling stock prices. But why shouldn’t it?
 
As the Nasdaq declined to 4,900, 4,800, 4,500 there were plenty of dip-buyers. Dipwads!
 
Once the tech bubble burst, there was no going back. The Nasdaq fell 77% from its March 09, 2000 closing high of 5,041 to 1,114 on October 9th of 2002. And today, seven years later, the Nasdaq is still nearly 50% below its 2000 high.
 
Asset classes that lead one bull market up rarely lead the next one up. Instead, they go into a generational bear market, like real estate in Japan. It takes a long time to wash the taste of a crash out of your mouth.
 
How is today so different that a genuine bear market in credit does not mean much lower stock prices? Will the whole bubble in structured finance deflate without any impact in the real economy?
 
You could argue that there is real economic growth to this boom, and that this boom is global. That would give you some justification for buying stocks. But which stocks?
 
And more importantly, should you be buying any stocks at all right now, when the bear market in credit appears to be getting ready for something spectacular, vicious, and completely unplanned?
 
Of course it is probably a mistake to talk about “the stock market” and then make decisions about single stocks. So the questions I put to myself are these: 

1.  What companies can grow earnings even if credit contracts?
2.  Which stocks or assets depended the most on credit growth for their rise?
3 . Is it possible the credit bubble will collapse without any long-term effect on stock prices or the real economy?

The market may have been a little over-sold by the end of August. But the “big dump” wasn’t that big and it wasn’t that much of dump. A “bigger dump” will mean much steeper falls in financial stocks and anything that depends on the U.S. consumer.
 
Granted, you may get a few ultra-blue-chips that have lots of cash and very little debt that become “lifeboat stocks.” But I think the de-leveraging of the market means much lower U.S. stock prices.
 
There probably ARE some quality U.S. businesses with strong balance sheets that are worth owning. I would make a list of the top ten of them and look to buy them at much lower prices. Lots of cash, little debt, and lots of tangible (visible) assets on the balance sheet.
 
And if I never got to buy them, I wouldn’t lose any sleep over it. That’s because I think this is exactly the inflection point we’ve been writing to our readers about for years. It’s finally here and we want to imagine that things will keep muddling through.
 
Maybe they will for a bit. But…

To be continued tomorrow.

Joel’s Note: If cerebral stripteases are your kind of thing, I’d recommend you grab a copy of the Vancouver investment Symposium Audio CD Set. You’ll find Mr. Denning, Mr. Mayer, Mr. Fry and all the rest of your Agora Financial editors doing their best to wow the crowd there with titillating financial insight. It’s a great listen but, as with all actionable market commentary, relatively time sensitive. Click here to order your copy.

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Rude Endnote: All weekend I’ve been receiving well thought replies to Dan’s question: To Cash or not to Cash? Responses range from the more predictable arguments for gold to the less anticipated advice to get into the olive tree business. There was no shortage of readers who advised that ammo and fallout shelters were the best bet, either. 

While it would be humanly impossible to answer all these emails, we will be publishing a selection of them in a special Mailbag series in the upcoming days. In the meantime, thanks for all the input…and keep ‘em coming.

And now, over to our Baltimore desk for all the intraday action from our
5 Min. Forecast.

Cheers,
Joel Bowman
Rude Awakening