I always keep an eye on Bret Rosenthal’s Blog as he always has an interesting and rational view of things and writes about things that interest me. Below is a direct copy of his latest posting.
“The Japanese tragedy continues to unfold and I, like the rest of you, watch on in horror. Meanwhile, the toxic sludge spewing from the traditional financial media outlets is at full throttle with spigots wide open. Nothing like a good tragedy to create hysteria and boost ratings.
1) We don’t know what will unfold, hence a deep breath is required to make the correct financial decisions. Is it possible Japan will cease to exist as we know it? So many talking heads on TV breathlessly report this apocalyptic angle. I humbly suggest most of the supposed ‘experts’ are not experts in the field of nuclear fusion and are most certainly not experts regarding the fluid situation unfolding in Japan.
2) “But they are experts”, you want to say. After all, CNBC, etc., all laud their words and the string of letters after names (i.e. Ph.D., etc.) implies intelligence. Alas, perspicacity is not guaranteed with extra book learning. In fact, evidence suggests arrogance is the common illness acquired. I will remind you that so called ‘experts’ were trotted out during the Gulf oil spill last year and they were almost all invariably proven wrong.
3) Today, ‘experts’ say Japan sits on top of seven volcanoes and another like magnitude earthquake will surely swallow the country whole. Last May similar ‘experts’ assured us the blown drilling platform and pipe were just the beginning of a chain reaction that would create an enormous fissure in the Gulf of Mexico and subsequent tsunami. I’m still enjoying the beaches of Florida, what about you?
4) Today, ‘experts’ say cesium will undoubtedly billow out from the Fukushima site ruining arable land in Japan – and even in the U.S. if the winds are right. Can this tragedy happen? I assume so. I’m not taking the situation lightly but (and here is the key), I don’t know. What I do know is that so called ‘experts’ assured us that a methane bubble was going to explode in the Gulf of Mexico last year and rain down acid in the farm belt of this country. Reality: No acid, just quality rain that created bumper crops this past year.
5) Today, traditional media outlets as well as the blogosphere love to direct our attention to a view of an empty Tokyo street and a Geiger counter. We are implored to watch this scene closely for impending doom. Of course, last spring these same fear mongers beseeched us to watch endless hours of a subsea oil pipe spewing energy. I’m still trying to figure out how that energy footage was useful, so I can’t even begin to get to the Geiger counter, sorry.
Conclusion: Two months and five days after the BP oil explosion hit the news wire BP’s stock price bottomed at $26.83. One month later the stock price was up 45% and today the stock price sits about 65% off the low. I’m not suggesting the duration and returns will be the same in this case. Certainly, events could unfold that will make this tragedy worse. In fact, one could argue this situation is already more dire and I would not disagree. The time for recovery could be longer. However, I am trying to add a little perspective. Financially remain calm and if the opportunity presents over the coming weeks, look to build a portfolio of companies that will benefit from the rebuild of Japan.
Precious Metals Outlook: Meanwhile, the precious metals (Gold and Silver) continue to offer the best harbor amidst the financial tempest. Gold remains marginally higher in all currencies since the tragedy began last Friday. I would wager any decline in the metal price can be tied directly to the unwind of the Yen carry trade.
As the reader may recall, the Yen carry trade is a favorite of the leveraged fund manager. Said manager borrows Yen at extremely low interest rates and invests in other assets he feels will outperform the cost of the borrow. In a simple example, the manager invests borrowed Yen into Australian government bonds at an advantageous spread (let’s say he borrows at .25% and receives 5% clearing 4.75% on the investment if held for 12 months). He sells borrowed Yen, buys Aussi $s and buys Aussi bonds. The problem occurs when this overly crowded trade hits the speed bump of a rising Yen. If the Yen rises in value too quickly this highly leveraged trade begins to lose money at an alarming rate as the cost to buy back the borrowed Yen exceeds the 4.75% annual spread.
The real world tsunami in Japan has created the financial tsunami described above. The leveraged carry trade manager has been forced to buy back Yen and unwind said trade due to the crisis. The Yen reached all time post WWII highs against the US$ yesterday. How long this unwind panic goes on is anyone’s guess, but this explains why on some days (like Tuesday) all asset prices go down together as margin requirements are being met and the carry is unwound.
For those of you needing encouragement to stay the course with your Gold and Silver holdings, Gary offers the following thoughts:
1) World gold production is approximately 2500 metric tons (mt)
2) 2010 production in China was 341 mt
3) Thus, world production excluding China equals about 2159 mt
4) Chinese central bank buys all internally produced gold; thus, imports are bought by Chinese citizens
5) 9.3% of estimated world production of 2159 mt in 2011 was imported for Chinese consumers through Feb or 55.8% annualized
6) World gold production was flat to down over last 3-4 years and not expected to grow in 2011
7) The Industrial and Commercial Bank of China Ltd. (ICBC) started physical-gold linked savings accountsin December. Account openings have surpassed 1 million, with already more than 12 tons of gold stored on behalf of investors. The ICBC has more than 20 million accounts. If the savings account program is introduced throughout China, Chinese demand could easily overwhelm world gold output.