DMR-Jobs drop, gold pops; stocks face ‘psychological and algorithmic leverage’ and ‘computer herding’


The jobs number dropped and gold popped in early Friday trading – up $7 at $1245.  Silver is up 9¢ at $14.60.

Gold’s recent stability – we hesitate to call it strength at this juncture – should be traced directly to dovish remarks emanating from the Fed. A perceived agreement on oil production among members is also adding to gold’s appeal today as are concerns about the trade negotiations between the U.S. and China – particularly in light of the arrest of Huawei’s chief financial officer, Meng Wanzhou, daughter of the company’s founder. “After Ms. Meng’s arrest,” says Financial Times this morning, “the deadline for progress looks like a timebomb.” Meanwhile, the president, as if nothing unusual just happened, tweets this morning that the trade talks with China “are going very well.”

On another page in the Financial Times, columnist Gillian Tett makes an attempt to explain the wild swings in financial markets, a trend that seems to be snowballing.  She passes along an interesting observation from Seth Klarman, founder of the Blaupost hedge fund. “In 2008,” he says, “we had massive disguised [debt] leverage.  Now we have less financial leverage, but there is psychological leverage.”  Is that another way of saying that the markets are on the verge of panic?

Klarman goes on to warn about “algorithmic leverage” and “computer herding” – problems we have written about on these pages for years. [Link to the full editorial] Ms Tett, who has written with distinction about the markets and their tendency toward crisis for a good many years, ends with the observation that the propensity toward wild swings rather than a sudden, full-out crash gives “seasick investors opportunity to jump ship.” That is a course of action worth pondering as we head deeper into what could be an eventful closing month to the year.

Jumping ship, we will point out, is one thing, establishing a solid portfolio hedge is another.  The first without the second may turn out to be an empty exercise.

Quote of the Day
“Our central bank monetary-led boom has made debt replace wealth for a long time. That’s not sustainable, of course. (We are ‘mining’ our soil for short-term gain.) We’ll see a return to the significance of productive stuff again I think, and that even includes farming – maybe especially farming. And the Midwest has a pretty good track record with productive stuff. Hard assets will matter again. But of course, I sound ridiculous even saying such things. Like a grumpy old grandpa.” – Mark Spitznagel, Universa Investments (as quoted by columnist, P.J. O’Rourke)

Chart of the Day

Chart note:  After all is said, as of yesterday, gold is down just less than 2% on the year.  The last twelve months have been a struggle for the yellow metal but not as much the annus horribilis some would have us think. Predictions for 2019 have begun to show up in the financial media and most surprisingly strike a positive chord. Recently published observations from ABN-Amro’s Georgette Boele are a case in point.  “Gold prices,” she says, “have declined so far this year. But 2019 and 2020 should be positive again because we expect a lower dollar, lower US Treasury yields, a recovery of the Chinese yuan and higher jewellery demand. Speculators are expected to cut their substantial short positions and gold prices should rise to above the 200-day moving average. We keep our year-end target for 2019 at USD 1,400 per ounce.”

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