Marcia, Marcia, Financials

Written October 23rd, 2012

In an economy dependent on financial machination, it’s no wonder that the financials are key to understanding market direction. In October of 2011, just a short year ago, the financials were trading roughly 25% lower (or, they’ve rallied about 35% from their October low). And why shouldn’t they? Obama’s victory seemed assured, Bernanke’s job at the Fed was secure, QEternity was a given, and everywhere else in the world seemed even worse, thereby ensuring flows into US equities.

Fast forward a year, and those same financials are already stretched. They’ve gone up, sure, but Obama’s victory is no longer assured, Bernanke is talking about not wanting the job, and everywhere else looks bad, but has already crashed.

Today the financials are leading us down, but of course, it’s also the bad earnings, Apple and Google faltering, and fear mongering by the political class.

I’m actually happy to see the market digesting some of the news that I couldn’t ignore for months. This is not unhealthy, contrary to what politicians or short term traders feel. The market is off some 400 points in a week – so what? Gold is off $100 – so what?

Unfortunately, bad news means that politicians will force the Fed to increase printing (and central banks in general will be forced to print), which in turn will be supportive to real assets. Gold is not a perfect inflation hedge (contrary to popular opinion), nor is real estate. Stocks are a maybe as P/E’s contract even if the P’s go up. But all in all, I’d rather own the optionality of keeping up with inflation than the guaranteed loss from fixed income investments. So we wait.

In the meantime, I’m reading The Age of Inflation. Published in 1979, it’s almost scary how similar the rhetoric by politicians sounds, how similar the direction of policies, and how similar the popular reactions. The book also discussed the hyperinflationary period in the Weimar Republic. The most interesting thing for me so far is the speed with which inflation hits, the misdirected demand for it by a misinformed citizenry, and the gap between winners (speculators) and losers (everyone else). For months, the German central bankers saw no inflation on the horizon, which gave them comfort in additional printing. The citizens, who were seeing shortages, welcomed price controls, wage caps, etc. and especially the increase in social welfare programs. This was not politicians working against the public, but rather politicians giving the public exactly what it demanded. That’s the irony! I’ll have a separate post about the book later this week.