Ad Hoc Commentary – time for a pause in Dow, next phase up will be driven be Merkelections

“…U.S. retail sales nudged the Dow Jones Industrial Average to its ninth straight day of gains, its longest winning streak in 16 years…”

Abe had managed to chase Japanese money out of hoarding in Japan into the American stock market. Yours truly is still expecting the money to move into Asian FDI windows – but perhaps that would be the medium term. Now that Kuroda-san is expected to be approved to succeed Shirakawa-san as BoJ governor, we will likely see a temporary pause in capital flight from Japan.

Third time is charm. The first time we got to these levels on the Dow was in 2007. We will likely need to let the bears out of hiding before making new highs. The next phase will likely be driven by Europeans losing all hope on the European project and bringing their capital into America and Asia. That is likely to happen as the Franco-German core is becoming like yin and yang on the growth-austerity debate. And not to forget, Greece is not making any progress. But don’t you worry now. Greece is only peanuts compared to France.

“…Talks between Greece and its international creditors over the release of the country’s next slice of bailout cash have broken off for two weeks…”

Capital lent to kings will be lost. The Fuggers, a prominent German banking family in the 16th century, lost a large portion of their wealth following three Spanish state bankruptcies (1557, 1560, 1575) under the reign of Philip II of Spain. Those who do not learn from history will go the way of the Fuggers.

Everything looks cheap relative to government bonds. That does not mean that real estate, equities and gold is cheap in a traditional valuation sense. Textbook valuations will tell you that they are expensive. We do not disagree. But what matters today is that real assets are cheap relative to government bonds. Bond traders only know two concepts – carry and roll-down. So, when they flee for the hills, they will be hunting for yields. Since gold does not provide a yield, it might be the worst performing asset after government bonds.

For the equities and real estate hills to fall to 10 cents on the dollar, you need capital to flight back into bonds. That is tantamount to running against the herd. Good luck on that. It is a very different world when the kings are desperate for money. Do you extend more credit to the crown when his cost of borrowing rose because of his deteriorating credit worthiness? Chances are, when interest rates rise you too will need to flock to the hills to bury your capital away from the tax collectors. History repeats, just the actors are different. Today we have democracies instead of monarchies.

Good luck in the markets.