Major changes are set to take place with our newsletter next week. We’re changing our name, our look, and our social presence. The only thing that won’t change is our awesome content and geeky sense of humor. That’ll keep coming. And every once in a while you guys will get another movie or book review.
I’ve been working on this re-branding quietly in the background for a while and it’s just about ready to unveil. My goal is for this big transition to take place as seamlessly as possible. The funny thing about technology, though, is that stuff like this always winds up being much more work than you initially budgeted for.
The reason why I mention it this week is so nobody panics when they come back next Thursday and see that everything looks completely different. I’m excited about it, and I think you guys will like it too.
Gold. Gold?!?
What the heck is going on with gold? Prices have corrected sharply since late February, which I personally find ironic. It would figure that immediately after issuing a mea culpa about being wrong on gold, gold would do exactly what I worried it would in the first place.
Gold is one of those assets where, when you say, “I think it’s going down,” it immediately spikes upward just to test your conviction. Then when you think it’s proven you wrong, it snaps sharply back the other way. It does this because it hates you, of course.
The two year chart still looks pretty good. That huge secular bull trend appears to be intact. In this chart, look for a move above 1800 to reconfirm that secular trend and all is good. A drop back through 1600 starts signaling more obvious concerns.
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The 1-year chart adds a few details to the story:
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You can see that since August of 2011, what’s actually in place is a cyclical bear trend. We had a sharp collapse after a parabolic run-up. That’s perfectly normal. But then we had a failure to make a new high followed by another collapse and a lower low. Then we had yet another failure to make a new high and subsequent pull back. If gold makes a new low below 1550, it’s going to be pretty difficult to argue that the party isn’t over. Doing so would require ignoring some fairly powerful data.
Gold may still be a great asset to own over the long run, and indeed, I’m personally of the belief that everybody should own a little bit because it’s different. But if you’re looking at a 10-year chart of gold and saying to yourself, “Man, this sucker just never goes down and over the long run probably never will,” then I’m wondering if you were also itching to load the boat with real estate in 2006 or stocks in 1999.
Surely this is the lesson of the decade, no?
It’s funny, this reminds me of one of my first experiences with gold. It was back in 2000. I grew up in the house of a hardcore gold bug, so gold always has been and always will be part of my fundamental investment psychology. But back in 2000, when I finally started paying attention to this stuff professionally, everybody hated gold. I mean, hated it. H-A-T-E-D. It’s almost shocking to think about. Even a lot of industry veterans seem to have forgotten the extreme revulsion that pretty much the entire world felt towards gold back then.
Back then we all loved stocks — especially dot-com stocks — and we loved fiat money! Alan Greenspan was an economic messiah! We hung on his every utterance. Gold was for old fogies. And hip hop superstars.
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- Snoop was on to something…
Of all the lessons that you could have learned in the last decade, the single most important one is that history is cyclical, not linear. Assets that are in favor today will be out of favor some day in the future. Prices do not move in the same direction forever, even if they’ve been doing so for what seems like a long time. Investments that everybody ignores right now will one day seem ubiquitous.
The timing of all that is impossible to predict, of course. But the point about cyclicality is useful. The natural reaction in psychology and investing is to grapple on to whatever trend is clearly in place and project it indefinitely into the future. At the very least, your rational brain (if not your emotional one) should understand that that’s not the way that the real world works.
Anyway, this should serve as a reminder that investors should maintain truly diversified portfolios.
Gold is a great thing to own because it’s so different. There are a lot of different ways to own it, too. But it’s still an incredibly volatile asset. If you hear someone refer to it as a “safe haven,” stop them in their tracks and ask them what qualifies in their book as a “safe haven.” Surely it must not be volatility or risk of devaluation.
Gold is awesome and everybody loves it, but it’s not a safe haven. With a monthly standard deviation of around 6% and an annualized standard deviation of over 20% — more than the stock market (!!) — it’s anything but a safe haven.
But with a lifetime stock market correlation of essentially zero, it sure is a great asset for diversification.
Trends in the labor market
I heard an interesting interview the other day with Chris Low, the chief economist at FTN Financial. He was talking about some changes in the labor market.
Everybody knows that the unemployment rate has dropped quite a bit in the last few months. For some strange reason, all I get on every webpage I visit now are these Obama 2012 ads talking about how much the job market is improving. I’m curious what bit of behavioral ad targeting code decided that these ads were relevant for me. Maybe it sees me clicking on Romney and Obama links and figures I’m one of those swing voters in the middle. What they don’t know is that I won’t end up voting for either one.
Anyway, I digress. The economy is creating new jobs — not a ton, but enough to tread water without fear of drowning.
We know that the reason why the unemployment rate has come down so much is because a significant number people are leaving the labor force. Remember this chart?
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I know it’s wonkish and I know it’s technical, but this is not the story that’s being told in the headlines (or those Obama ads that Google keeps serving me). The main driver of the unemployment rate coming down is the shrinkage of the labor pool, not the creation of new jobs. If the labor pool was the same size as it was in 2007, the rate would be well above 9%.
There’s actually a pretty big debate within the world of economists about this, but nobody refutes the fact that this is happening. The debate is about why people are leaving the labor force. The debate is about whether those people will eventually come back.
This is one of those debates that can go either way. I hear labor market optimists say that the reason is demographic, because boomers are retiring. They don’t believe that enough people will re-enter the labor market to derail the falling unemployment rate.
The labor market bears claim that the unemployment rate will be perpetually high because everybody will just come back into the market as jobs become available. The economic worry is that that creates a spiral of negative psychology and bad policy decisions.
Anyway, Mr. Low looked at the data and found that a significant portion of the people who have dropped out of the labor force are middle aged women. He said this correlates very highly with reductions in government jobs, a lot of whom are teachers. Many of these women are part of families with school-aged children and his thought was that these people have chosen not to re-enter the labor force because it’s a simple calculation of it being more financially practical to avoid the costs associated with child care than attempt to stay in the labor force and hunt for a job that isn’t there.
I thought that was an interesting observation. I haven’t heard anyone break down the data like that or put forth such a theory. It’s very pragmatic.
The bigger point is that a lot of the traditional dynamics of the labor market have been thrown out the window. The labor market was a fairly predictable beast during the long boom and it was easy to understand and model. In the last several years, as we’ve dealt with the acute issues from a nasty recession as well as played catch up with the longer-term “costs” associated with a massive increase in productivity and globalized workforce, we’re figuring out just how much we don’t know about our labor market.
Market Recap
After getting off to the best quarterly start since 1998, stocks have taken a bit of a breather this week. This morning we got some mildly-disappointing data that suggest — or really, act as a reminder — that this is still a weak economy. Would the Fed hint at QE3 in their April meeting if we were all in the clear? Would there even be speculation about such a thing if this economy was truly off to the races?
One of my big theses for the first half of 2012 was to watch for lower than expected consumer spending. I thought that after the surge of last Christmas and all the new uncertainty in 2012 consumers would take a break and retrench a little bit. So far I’ve been wrong about that, though we may be teetering on the brink of change. Best Buy, one of the best barometers of discretionary purchases, just dropped over 5% as its sales missed estimates. American Express, a decent proxy for the affluent consumer, just got downgraded by Wells Fargo.
There have been legitimate pockets of strength in the last few months, and in general, retail sales data was very strong in January and February. I’m watching closely to see if this latest data — rising jobless claims, retailer disappointments, and high gas prices — translates into a broader-based pullback in consumption. It may, it may not.
I’m hoping it doesn’t. But hope makes for a lousy investment strategy. Proper strategy is about being able to look at the data honestly and being able to develop a plan as that data evolves into the future.