We had an interesting line-up of guests and topics this week for our premium channel: Ross Hansen discussed gold and our slow move towards a cashless society, Urban Carmel talked about the tech bubble and not to expect such euphoria again, Marc Chandler talked about a multi-year bull market in the dollar, and, lastly, Dan Steffens addressed falling oil prices and the energy market.
(Note: All of the interviews listed below can be found on our Newshour Podcast page.)
On Tuesday, Jim interviewed Ross Hansen, founder of the one of the world’s largest private mints, where he spoke about what’s going on in the gold market. Even with all the sparks flying in gold and silver these days (by the way, click here to see their massive store), their discussion of our slow move toward a cashless society was really quite fascinating. Here’s Ross:
“One of the events that I attend every couple of years is the Mint Directors Conference where all of the leaders of the world mint get together usually in a host country. This year was in Mexico and was attended by a number of world leaders including George Bush and the President of Mexico and a number of other heads of state…
[Electronic money] is a hot topic at these functions. From a purely manufacturing aspect, what you're seeing is less and less cash being produced...the actual physical currencies that they are producing—from two years ago to this year was down another 18%. And the reason for that is...smart cards...[and] debit cards. And this is a tremendous convenience for people but it is also tremendously convenient for the government…
[W]hat they are working towards is every transaction no matter how small or big is going to be a chip-based transaction. So, in other words, any time money or goods or services change hands there's going to be an electronic recording of that...the government in the United States feels that they are losing in federal tax dollars somewhere around $850 billion. The state governments feel they are losing about $500 billion…
When you go back and meet these leaders that I've had a privilege of doing, they openly talk about the New World Order and that's their buzz-phrase…this is where they're going and they're sincere in their belief that if we go to a chip-based transaction, many ills of our society will be resolved. Whether it be illegal immigration because you can't pay your maid or gardener in cash; you can't buy your drugs in cash; you can do any illicit activity without them knowing about it; and you're correct this also is a mechanism to generate more money for the government that they are "legitimately" owed…”
On Wednesday, Urban Carmel at The Fat Pitch made a very strong case for why the absolutely insane level of stock market euphoria during the late ‘90s tech bubble may never happen again—or, at least, not anytime soon—given the radically different economic backdrop between now and then. Here’s Urban:
“You see commentators referencing the late '90s...to say that this is a good example or good yardstick of where this market can go. And so what are they actually referring to? There's the classic example of late '90s euphoria of going to a cocktail party and hearing stock tips; sitting down in a taxi cab and your taxi driver is telling you about the stocks he just bought. I can add a personal anecdote where we were helping a company very similar to e-Trade and we did some focus groups with individual investors that wanted to trade online and what we discovered in the course of those discussions was very interesting. We had former police officers and former teachers who had actually left their job to trade stocks. And they weren't just trading stocks for themselves and supporting their families with that income. They were actually trading for neighbors, former coworkers, and family members, which was pretty remarkable. So, clearly, in comparison today we have nothing like that. We don't have that same level of euphoria.
I think that level of euphoria was pretty unique and was really driven by a number of very interesting things. First of all, let's just talk about the NASDAQ: between 1996 and 1998 the NASDAQ tripled in value. And after a short pause, between 1998 and 2000, it quadrupled. So, imagine what that does to investors' psychology. You have tripled and then quadrupled on top of that. So, it's no wonder police officers and teachers were leaving their jobs to trade stocks. You really couldn't do much wrong and not make money. It was almost impossible not to. That was the backdrop of what was going on.
I think there were a number of interesting things beyond that which made that really possible. And these really fall down to demographic changes, not just in the U.S. but worldwide—there were unique political and economic events taking place... You had the European Union coming together and there was a lot of excitement over that… You also had during the '90s the introduction of India and China and South East Asia and Latin America into the global economic environment and that was very exciting... U.S. GDP growth was above 5% real year after year...you had women entering the workforce; you had a lot of dual income households; and, as a result, you saw a 19% increase in income levels between the mid-‘80s and the late-'90s. People had a lot of money and they were feeling very good about their economic situation...people were working, unemployment was very low...all of these things fed into that euphoria...”
On Thursday, Marc Chandler, the Global Head of Currency Strategy at Brown Brothers Harriman, explained the key drivers pushing the dollar higher and what this means for investors. All in all, given the structural forces at work, he believes the dollar will trend higher (with some ups and downs along the way) for the next several years. Here’s Marc:
“The key driver that is pushing the dollar higher is the divergence between the U.S. on the one hand and Europe, especially the Eurozone, and Japan on the other. And what happened, during the crisis everyone contracted, then the policy response differed. The U.S. took one course of action—aggressive fiscal and monetary stimulus—and the Eurozone took a different course. They thought how can you solve a debt problem with issuing more debt. So they had fiscal austerity and the monetary easing wasn't as aggressive as we had in the United States. And because of the different policy responses we are living in a world now that is rapidly diverging. So, the U.S. and the U.K. will likely raise rates next year...while the Eurozone and Japan will still be either easing aggressively or looking for new way to ease aggressively and this divergence has led people to reduce previous shorts on the U.S. dollar and underweight positions on U.S. assets and now go long.
Technically, it looks like the dollar is overextended...very overstretched...but that is primarily in the short-term, like a couple of weeks...but for longer-term investors...the dollar is likely to trend higher for several years to come...this divergence between the US and the UK on one hand and the Eurozone and Japan on the other looks to last for quite a while ahead of us still and because of that I do think the dollar has got a lot more room to run...
In a stronger dollar environment, overseas returns don't quite look as attractive because the currency eats away at the superior returns that one may appear to be able to get overseas. So if one has a basket of international bonds, the currency component could be two-thirds of your total return…if you have a basket of international stocks, the currency could be about a third of your total return...so some of the most popular products, like ETFs, have been those ones that allow dollar based investors invest in foreign markets but also hedge the currency risk.”
In the rest of this interview, Marc also gave his outlook for the current market and provided a fascinating response to the growing belief that globalization is falling apart. By some measures, he says, we see political and economic integration beginning to weaken; however, there is another often overlooked measure of globalization outpacing all others: digital networking, communication, and the spread of information online, which may be far more powerful than we realize.
On Friday, Dan Steffens, the President of Energy Prospectus Group in Houston, came on to discuss the energy sector and explained how a rising dollar is the key factor driving oil prices lower. Here’s Dan:
“The main reason that oil has dipped in the last couple of months is because the US dollar has gained in strength against the euro. The US dollar is up about 8 or 9% in the last couple of months and oil is down about 8 or 9% because crude oil trades globally and it trades in US dollars and so as the value of the US dollar goes up, the price of crude oil goes down. So really the long-term trend or trading channel for crude oil is still intact it’s just kind of shifted down about 7 or 8 dollars so as I said in my last newsletter I think the strong support level of about $90 is still intact..."
Dan also noted the still plentiful supply and strong economics behind drillers here in the U.S., which is helping to keep prices low as well:
“From the same location [U.S. oil producers] can drill 8 to 30 wells. I've seen reports from Continental Resources where they plan to drill 30 wells from individual pad locations: 16 one way and 16 the other way...all those wells getting hooked up to the gathering and processing facilities is what's increasing our gas supply...the economics are very strong for the Marcellus and the Utica formations so even though you have gas prices at $3.50 to $4, their all in costs are about $1.50...so there's a lot of gas supply and we're kind of swimming in this stuff right now so that'll keep gas prices low, which is great for consumers. It'll keep their natural gas prices and electricity prices low for quite some time.”
Our market technician this week is Louise Yamada where she gives her outlook on stocks, oil, gold, and more. Her interview will appear on the Newshour Podcast page on Saturday along with Jim’s Big Picture segment where he and Erik Townsend talk about the riots in Hong Kong as well as many other topics in these exciting and eventful times. Be sure to tune in!
