Diary of a Financier

When Consensus Absorbs Contrarian: Time to Hit the Drawing Board

In Economics, Idiosyncrasy on Fri 25 Mar 2011 at 08:41
  • As consensus starts migrating into my contrarian themes, I’m looking for the next economic waves.
  • Precious metal/commodity bulls, USD bears & the inflation camp are so firmly entrenched and unopposed that I’m compelled to evaluate the contrary.
  • I expect stimulus beyond QE2, but I hope/expect it to target mortgages & housing specifically–like a [quality] HAMP2 instead of QE3.

Casey Research posted an interesting compilation of some recent interviews conducted on “Investment Legends.”  Among them were Jim Rogers (formerly of Quantum Funds), Bill Bonner (Agora Inc.), Peter Schiff (Euro Pacific Precious Metals), Jeff Christian (CPM Group), Walter Williams (Shadow Government Statistics), Steve Henningsen (The Wealth Conservancy), Frank Trotter (EverBank), Krassimir Petrov (Austrian economist), and Bob Hoye (Institutional Advisors).  I noticed that in declaring a “Dollar Collapse Inevitable,” none of these guys does any harm to his book/business.

Together, these interviews are an amalgam of consensus opinion from contrarians who have made careers from “thinking different.”  Oddly, all the interviewees–each embodying the “Smart Money”–seem to offer a homogenous answer to every question, which sets off an alarm in my head.

The consensus opinions expressed:

  1. Mortgage payments are still the biggest worry, harboring the trump of deflationary chaos.  Rising rates will be a death knell.
  2. Inflation is troublesome; likely to end in hyperinflation. (In almost unanimous contradiction to the preceding deflation call.)
  3. The US Dollar is dead.
  4. Gold is not a bubble, and if not the best investment in a generation, it’s at least the best hedge for a falling dollar.
  5. Invest in non-US assets & currencies, particularly the “real asset” commodity countries.

True to my own contrarian inkling, I touted many of these investment themes over the past two years.  They’ve worked famously.  Yet now, I’m hearing & watching cash (over)flow into these ideas, which are quickly morphing into consensus plays.   Therefore, I’m inclined to consider the pitfalls.  In terms of contrarian-gone-consensus themes: I’ve sat on the sidelines for Gold since December’s highs, but I’m still holding onto a big floating rate bank loan position we initiated in October 2010.  I have some thinking to do about that.

Spurred by the consensus offered by the Casey Research interview, here are some notions I’ll discuss over the coming months.  It’s early in the game for much of what follows, but I’ll develop the ideas as time passes:

  1. Come June, “HAMP 2” will be the artist formerly known as “QE3.” Monetary expansion by the Federal Reserve has collaterally damaged international socioeconomics.  Whether legitimate or merely perceived, headline domestic inflation looms due to commodity price (food & raw material input) inflation.  With mortgages & housing being the real aims of stimulus, future stimulus needs to directly impact mortgages & housing… without any residual effect upon food & energy.  HAMP 1 was wrought with corruption and idiocy, so I hope Washington takes a few months to carefully plan an effective sequel.
  2. The gold & commodity bears are disappearing.  How and when will this unravel?  I’m guessing with a major speculative player’s (Hedge Fund) liquidation of his precious metal allocation, but I’d like to be more certain of the specifics.  Regardless, every major central bank has voiced explicit intentions to either raise rates or tighten money supply–except the Bank of Japan, given the natural disaster.  This broad shift from an inflationary backdrop cannot pad the risk/reward ratio for higher precious metal & commodity prices.
  3. That answer will not only have implications for the USD doomsdayers, but also the bulls riding commodity currencies & economies (i.e. CAD & AUD).  Further, with potential housing bubbles burgeoning in Canada and Australia, will a catalyst originate in the US or elsewhere?

–Romeo (hattip ZeroHedge)

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  1. Neil Barofsky on HAMP:
    February 2009, when the Home Affordable Modification Program was announced with the promise to help up to four million families with mortgage modifications.

    That program has been a colossal failure, with far fewer permanent modifications (540,000) than modifications that have failed and been canceled (over 800,000). This is the well-chronicled result of the rush to get the program started, major program design flaws like the failure to remedy mortgage servicers’ favoring of foreclosure over permanent modifications, and a refusal to hold those abysmally performing mortgage servicers accountable for their disregard of program guidelines. As the program flounders, foreclosures continue to mount, with 8 million to 13 million filings forecast over the program’s lifetime.

    Treasury Secretary Timothy Geithner has acknowledged that the program “won’t come close” to fulfilling its original expectations, that its incentives are not “powerful enough” and that the mortgage servicers are “still doing a terribly inadequate job.” But Treasury officials refuse to address these shortfalls. Instead they continue to stubbornly maintain that the program is a success and needs no material change, effectively assuring that Treasury’s most specific Main Street promise will not be honored.

    http://www.nytimes.com/2011/03/30/opinion/30barofsky.html?_r=2

  2. […] wit, I’ll start with a fairly obvious observation of our state.  From my most recent entry on the matters du jour: Monetary expansion by the Federal Reserve has collaterally damaged […]

  3. […] The ECB will lead the charge.  Then, the great unwind; it will challenge all that’s become conventional wisdom–the USD demise, the precious metal rise, and the commodity […]

  4. Finally, some big boys follow suit. First, Goldman Sachs called the top in commodities & energy. Now, UBS has followed their lead. Generally, this large-scale, mainstream kind of call will lead to a quick pullback, a renewed attempt at highs, then an ultimate collapse. Stay tuned:
    http://www.businessinsider.com/ubs-downgrades-the-resource-sector-2011-4?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+clusterstock+%28ClusterStock%29&utm_content=My+Yahoo

  5. […] 3/25- “Precious metal/commodity bulls, USD bears & the inflation camp are so firmly entrenched and unopposed that I’m compelled to evaluate the contrary… [including] the bulls riding commodity currencies & economies (i.e. CAD & AUD). ” […]

  6. […] will occur, but it should be more targeted, less broad-based. It should address housing (like a HAMP 2)–not to stimulate the residential market, but to stabilize it in an attempt to quash […]

  7. […] why I expect the Fed to do what it can with its Fisher-Price toolkit.  I expect the Fed to pursue QE3-lite, a housing-focused program like an airtight, […]

  8. […] expect the Fed to do what it can with its Fisher-Price toolkit. I expect the Fed to pursue QE3-lite, a housing-focused program like an airtight, […]

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