Trader Vic...explaining the Catch 22 of 'quantitative easing' = Gold +++++

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Trader Vic...explaining the Catch 22 of 'quantitative easing' = Gold +++++

posted on Mar 20, 2009 11:43AM

Catching Up With ‘Trader Vic’

Written by HardAssetsInvestor.com

Friday, 20 March 2009 00:00

http://www.hardassetsinvestor.com/fe...

We last spoke with Victor Sperandeo ... aka "Trader Vic" ... in January of 2008, during a very different market for commodities. Victor is one of the world's most outspoken commodities traders, and is author of "Trader Vic on Commodities," the third in a series of books on trading. In addition to trading his own account, Trader Vic has invested independently for the likes of George Soros, Leon Cooperman and BT Alex Brown. Sperandeo was featured in the best-selling books, "The Super Traders" and "The New Market Wizards."

HardAssetsInvestor.com (HAI): Top of mind for all of us right now is the Fed's so-called "quantitative easing." That certainly made all of the commodities markets react, particularly gold. What's your take?

Victor Sperandeo (Trader Vic): Well, two and two is four. I understand the movements of gold pretty well as a trader and as an investor, and as a fundamentalist - if you will - investor in gold. This kind of action is pure inflationary stimulus, which down the road is going to have a significant effect. So gold would be the obvious place to be a buyer in this newly created bubble in bonds.

It's a very logical step. I'm surprised gold's not over $1,000 today based on the long-term prospects. Now, you know, things don't work out as simple as that. But in the long run, gold is going to double from here for sure. For sure.

HAI: A double? That puts us close to $2,000. When you're talking long term, are you talking 50 years or five?

Trader Vic: The context that I'd like to put that in - because that's a fair question - is this: When the Fed is successful and the Treasury is successful in getting the economy rising to some degree, it will be accompanied by rising prices. And at that stage, gold will anticipate a great deal more inflation before the Fed can take this stuff off. So I would say it'll be concurrent once you see GDP start to rise. So it'll start to move - not in the same day obviously - but in the direction, once that occurs.

Now most people conceive of that event in the fourth quarter. I highly disagree with that. The whole bet here is on the money supply growth and fiscal policy. What they call a stimulus is really a detriment. It isn't going to help the GDP growth. And understand that - and I point this out because I've never seen it in print or mentioned once - lowering interest rates is normally a very stimulative event when banks can borrow money cheaply and are willing to loan and make the spread.

If banks are not willing to make loans - which they aren't today - lower interest rates have a harmful effect on the economy, because it punishes savers. Right now you could have $10 million in the bank and you'd be making less on your money than a bartender. No one's thinking about this. I'm going to estimate this ... this is not a firm number ... I'm going to estimate that in savings, with pension fund money and all forms of savings, if you will, that there is somewhere in the vicinity of $40-$50 trillion floating around.

If you lower interest rates from 5% to 0%, that's 5% of whatever that big number is for savings that somebody isn't getting. They, therefore, can't spend it. Right? So if they can't spend it, that's a de-stimulus. But meanwhile, where's the stimulus? Right now you go to a bank to get a loan, they won't give it to you; they won't give you anything.

Now I'm exaggerating: It is very, very difficult to get any kind of a decent loan. If I applied for a line of credit - a guy with no debt and I've got a substantial net worth - they really don't want me to borrow money.

Right now, they put off people like me by saying, "Well, give us five years of tax returns." Nobody likes to do that. So they have ways of discouraging you from really even asking for money.

They look at the gross aggregate numbers of rising unemployment, rising delinquency rates and rising bankruptcies. And if those are accelerating, they want to shrink from making loans, because they can get a percentage of those problems. So it's logical. If I were a banker, I'd be doing the same thing.

My point is this: The injection of cash is - down the road - stimulating and will be inflationary. Right now, there is a de-stimulus, which no one's talking about. And that is that lower interest rates mean lower spending, because people are not getting the money. You see my point?

HAI: Right, because it comes off the table in terms of the interest people collect, and yet there's nobody actually loaning anybody any more money, which they could then go spend. So we're in this sort of dead zone.

Trader Vic: Exactly. If you lower rates and you don't get the effect of the multiplier effect - people borrowing and redepositing, and borrowing and redepositing - you have a de-stimulus by lowering rates. So it's not as easy as people seem to make it.

But to get back to the specifics of your question, you will have inflation once GDP starts to turn up. You will start to get accelerating price movements. And gold will anticipate that. And gold is $2,000 at that. I'm not saying a straight line. But it's very easy for it to go there.

HAI: So if the money's not getting loaned, that immediately makes me think about the ags. We're told all the time that the agricultural markets really rely on liquidity from the banking sector to fund fertilizer, to fund production. Do you think that that means we see continued problems with production in things like corn and soybeans?

Trader Vic: Absolutely. Everything is affected. Not only that, of course, the government is going to stop subsidizing the ... according to Obama. So a lot of big farmers won't get subsidies. So it will make it harder. So that'll mean higher prices.

HAI: What about the energy markets?

Trader Vic: I am a major bull on oil, and I have been. In this case, I'm in print because I send out letters - I virtually caught the low here. When Benjamin Netanyahu became the prime minister of Israel, which was several weeks ago, oil - the oil I have right now is April oil - was $40. The low on April oil was about $37. Right now that same oil's $51.

The reason is really simple. This is the Barry Goldwater of Israel. Barry Goldwater was not somebody you messed with. Neither is Netanyahu. He doesn't care about collateral damage. He doesn't care about anything. If he believes that you're a threat, he will take you out. And that means Iran. And if he believes Iran has a nuclear weapons and the U.S. refuses to do anything about it, he really won't care. He'll go in and take them out and he'll create an unbelievable problem in the world. But he won't care about that either, because his main goal is the survival of Israel. And that's what it should be.

[Oil] is a geopolitical position, not necessarily a short-term supply/demand phenomenon. Because that's all he has to say ... is one small indication that he will be aggressive. And of course the counter by Iran is they'll sink a ship in the Strait of Hormuz, and that will cause oil to pop to $110, $120 - name the price.

The bottom line is ... there is only one position in oil now, and that's long. Now, should you have 50% of your assets in oil? Absolutely not. I think if you have 5-10% of your assets in oil, and 5-10% - depending on how bullish you are - in gold. I think the rally in equities is a bear market rally. So I wouldn't be long equities here. That's my judgment for now.

And I think that that is the place to be: very liquid cash, and basically gold, some oil. I'm not necessarily recommending anything other than that at the moment. But that's a play where any one of many things can happen - Pakistan can erupt. It's basically a play on a problem in the world that's not being anticipated, and isn't a problem today, but may be a problem tomorrow.

HAI: And you're on record as being kind of an oil bull on the long term, just based on fundamentals ...

Trader Vic: Exactly. But, to be fair to the readers of this, we go out of oil at $130. And we have not touched it except for minor little scalp trades. This is the first bullish position. And we write letters once a month. So I wrote the bullish position at the beginning of March. Netanyahu was nominated, the lows were in February. So when it was $40 - which was on the 24th, the 25th, in there - we were bullish.

HAI: Well Victor, thanks for the time. Food for thought.

Trader Vic: You're welcome.

More on this topic (What's this?)

Daily Futures Commentary COMMODITIES March 20, 2009 (Oxbury Publishing, 3/20/09)

Commodities Soar versus Equities... (Dead Cats Bouncing: Musings on t..., 3/4/09)

Editorial: Commodities Showing Relative Strength (Trendsman Research, 3/15/09)

Why Commodities Prices May Rise, Even In Deflation (George Washington's Blog, 3/10/09)