Saturday, February 28, 2015

Am I in a Bearish Echo Bubble?

"Gold: I'm long and adding"

The man behind the quote is none other than Steen Jakobsen, the Chief Economist and CIO of Saxo Bank. Usually I don't trust economists, but Steen is a really upfront and smart guy. On top of that, he has been pretty clairvoyant in his views and forecasts. He is also very honest about his previous forecasts, which I find most people are not.

I read a piece that he wrote today and I find it quite compelling. However, what kind of took me about is his mirroring of my sentiments that I explicitly came out to say earlier. Other than my view of Russia being very cheap (I do know that it is very well within possibility that I am in very early), his views of a weaker USD, weak US stocks and higher Gold are the same as mine.

Now, I feel really scared that I am in an echo bubble. Are the overlap of all the news I read and people that I follow confirming a certain herd view that we all have?

My single strongest conviction is the absolute retardedness of the US stock market. I like looking at historical comparisons, so for me looking at past valuations at peaks and comparing it to recent times is how I arrived to my conclusion. Steen came to his point from another angle, which is from the earnings and GDP relationship, which is very strong btw.

His view is that the USD will peak this quarter and that is probably the end of it. I am in very very strong agreement of this as well.

Using MACD as my lagging indicator, you can see how far it has gone over the zero line, while it looks like a crossover is imminent. A crossover is a confirmation signal meaning that the trend has already changed. The exact turning point will be before the crossover point.

With Stochastics as my leading indicator, you can also see that this period of overextension is actually very long and unnatural. The last time such an extreme happened was in 2009, but in the oversold territory. However, levels of oversold were not as extreme as these levels of overbought.

I am expecting a massive USD reversal anytime soon.

I think my position as a gold bug has also been well documented for a long time. Surprisingly, with the USD performing so well since the 3Q of last year, gold has managed to hold its price relatively well. I think that is a good sign. If and when the USD reverses, the gains will be swift and fast.

Anyway, don't get me wrong, I'm not advocating people to take up these trades based on the views that Steen and I share. These have been horrible bleeding trades for the past few months and the only thing saving me from selling my backside is segregating my "fun" money from my my actual long-term investments and practising risk management.

If and when these narratives and trades start working out, I would think that they are going to pay out quite handsomely for quite a while.

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