Juggling Dynamite

Jon Nadler, Metals Market Analyst at Kitco, was one of my co-speakers in Montreal last weekend. I have known Jon for a few years now. In the midst of the emotionally charged commodities space, I have come to respect Jon's commitment to fact-based analysis. His recent interview on gold is worth a read:
“What we really see is a momentum- and index-fund-driven speculative move that started almost on cue on Sept. 1. They've been piling in, hand over fist, with margin positions and futures positions that have now mushroomed to a level that's unreal—historic highs, on the order of 750 tons of long positions. They outnumbered the shorts 9:1 as of the week before last; it has since narrowed to 7:1 [as of Tuesday, Oct. 27]. Still, that's way distorted.
But I have to say from the get-go, I'm not a gold bear. I know that anybody who doesn't say “$2,000 gold!” is automatically a bear, but I'm just a realist who looks at supply and demand.”
Read the full article: Gold is not in a Bull Market.

The Center for Strategic International Studies hosted Richard C. Koo, the world renowned chief economist of Nomura Research Institute, for a speech titled “Great Recessions- Lessons Learned from Japan.”
This is one of the most insightful discussions I have heard in a while. Listen to the Audio here. As I have mentioned previously, Japan is different from the US in that they have maintained a restrictive immigration policy and low birth rate throughout their crisis which has amplified their stagnate growth.
However there are a few key points that stand out as potentially similar:
*Like Japan, the UK and US in the present cycle have massive asset deflation that is likely to undermine the economy for several more years, prompting repeated rounds of government stimulus.
*So far commercial real estate in the US has corrected about 30%, where as Japan's commercial market deflated more than 80% from the peak. Commercial real estate in the US is likely to come under significant downward pressure in 2010-2011.
*Individuals and companies are likely to continue paying down debt and building up savings for several years to come. This will be good for repairing individual financial health overtime, but will be a headwind for economic growth.
*Massive government spending did not create inflation in Japan because the on-going forces of asset and wage deflation were so enormous. A difference this cycle is that most of the western world is now in the throws of deflation and massive stimulus where as Japan was more an island of its own misery over the past 20 years. In other words, although Japanese stimulus did not create inflation there, concerted global efforts at stimulus and currency deflation may be more likely to create inflation longer term.
*Even if the government is able to keep GDP positive through government spending, it does not mean net job creation or corporate earnings growth will follow.
*It also does not mean that the stock market can continue to soar throughout. The following chart of the Nikkei may be indicative of the type of stock market action we have ahead of us for the next few years. From 38,000 in Dec 1989 the Japanese stock market traded with massive volatility to end 2008 at 6994:

Ms. Park did a series of interviews for The Moneyshow on October 21. The first clip is now available on the web here at the Moneyshow.com.