March 18th, 2010

This article is a guest contribution by Tom Lydon, ETFTrends.com.

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As our name states, we’re pretty much all about looking for trends in exchange traded funds (ETFs). There are three trends we’re noticing in the markets right now. Here’s what they are and how you can play them.

Trend 1: Small Caps Kicking You-Know-What

Small-cap ETFs are dusting large caps. The primary reason? History. In recovery periods, small-caps tend to lead the way toward the light. They’re smaller and quicker to react to shifts in economic and market conditions. Large companies have lots of flag poles up which to run various matters and issues, leaving big changes in strategy to get caught in bureaucracy. In the last month, small-caps are up about 11%, vs. about 7% for large-caps and 8% for mid-caps. [The Case for Small-Caps in 2010.]

• Rydex S&P SmallCap 600 Pure Value (NYSEArca: RZV)
• WisdomTree SmallCap Dividend (NYSEArca: DES)
• iShares S&P SmallCap 600 Growth (NYSEArca: IJT)

Trend 2: What’s the Beef with Fixed Income?

Even we have sounded the alarm: fixed-income could get hit as the Federal Reserve hikes interest rates. And that’s still true. But right now, it’s copacetic; there’s been a lot of bark with no bite yet in sight. Yields continue to be appealing in certain areas, too. For example, the SPDR Barclays Capital High Yield Junk (NYSEArca: JNK) is yielding 12.2% right now. Long-term Treasuries will get beat in a higher interest rate environment, but short-term Treasuries and corporate bonds have been fine. Have an exit strategy in place if and when that changes, though. [8 ETFs That Can Add Income to Your Portfolio.]

• iShares iBoxx $ High Yield Corporate Bond (NYSEArca: HYG)
• Vanguard Short-Term Bond (NYSEArca: BSV)
• SPDR Barclays Capital Short-Term Corporate Bond (NYSEArca: SCPB)

[AA] For Canadian portfolios, consider the following:[AA]

• iShares U.S. Corporate CAD-Hedged (XIG.to)
• iShares U.S. High Yield CAD-Hedged (XHY.to)
• BMO High Yield Corp US - CAD Hedged (ZHY.to)

Trend 3: Base Metals Heat Up

The “shiny” metals are out; base metals are in. The stars seem to have aligned for a possible rally in base metals: China is growing, building and importing base metals faster than they can be used in new skyscrapers; other emerging markets are also building and importing metals; the auto market is slowly recovering, lending support for a rally in platinum and palladium and the U.S. housing market is recovering in fits and starts. All this building and recovery means more demand for copper, platinum, steel and other building blocks of construction at home and abroad. [Why Metals ETFs Are Leading the Charge.]

• PowerShares DB Base Metals (NYSEArca: DBB)
• iPath DJ-UBS Copper ETN (NYSEArca: JJC)
• ETFS Physical Platinum (NYSEArca: PPLT)

For more stories on spotting trends and acting on them, read our special report on trend following.

Tags: Barclays, Barclays Capital, Bsv, Corporate Bond, Corporate Bonds, ETF, Exchange Traded Funds, Exit Strategy, Flag Poles, Hyg, Interest Rate Environment, Ishares, Jnk, Mid Caps, Recovery Periods, Rydex, Small Caps, Smallcap, Spdr, Term Bond, Treasuries
Posted in Commodities, Markets | No Comments »

March 18th, 2010

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As reported over the weekend (via US Global Investors), the latest Chinese inflation figures surpassed the one-year deposit rate of 2.25%. Negative real interest rates may provide an additional incentive to drive asset prices higher, increasing the likelihood of the Chinese central bank raising interest rates from a five-year low.

Source: US Global Investors - Investor Alert, March 12, 2010.

Fears of further monetary tightening in China have recently been weighing on the Chinese stock market. Of all the bourses, the Shanghai Composite Index (3,046 at the time of writing) is the only one trading below its 200-day moving average (3,059), albeit after yesterday’s good performance by only 13 points. Clawing back to above this key line and also breaking its high of March 4 (3,097) would be bullish signs. However, the February low of 2,935 must hold in order for the cyclical bull market to remain intact.

Source: StockCharts.com

The Chinese stock market was the first to turn the corner after the credit crisis sell-off - a full five months before the majority of indices bottomed in March 2009 - and is being watched closely to ascertain whether this market would be the first to spell danger for global stocks, i.e. the proverbial canary in the coalmine.

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No reason to be overly concerned yet, argues David Fuller (Fullermoney) from across the pond: “People fear China’s credit tightening might trigger another significant sell-off in world markets. China’s monetary policy authorities need to get the balance right if they are to stem property speculation without overkill. This can be a fine balance but they have every incentive to succeed and their gradualist (baby-steps) approach to monetary policy tightening seems prudent. They will make some mistakes, like everyone else, but this is a medium-term risk and should have little effect on China’s long-term potential.”

He added: “Meanwhile, global stock markets have recently shown more evidence of a melt-up than a meltdown. Investors are climbing the ‘wall of worry’. I will worry more when they sound euphoric.”

Tags: 200 Day Moving Average, Asset Prices, Baby Steps, Bourses, China, Chinese Central Bank, Chinese Stock Market, Chinese Stocks, Credit Crisis, David Fuller, Fine Balance, Global Investors, Global Stock, Global Stocks, Gradualist, Key Line, Monetary Policy, Property Speculation, Shanghai Composite Index, Stock Mark, World Markets
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March 18th, 2010

Charlie Rose sits down with Michael Lewis, author of Liar’s Poker, The New New Thing, Moneyball, The Blind Side, Panic, Home Game and hot-off-the-press The Big Short: Inside the Doomsday Machine. His new book explains how some of Wall Street’s finest minds managed to destroy $1.75 trillion of wealth in the subprime mortgage markets.

A link to the transcript of the interview follows at the end of the post.

Click here or on the image below to view the 52-minute video.

Click here for a transcript of the interview.

Source: Charlie Rose, March 16, 2010.

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March 18th, 2010

This post is a guest contribution by Mark Vitner, managing director and senior economist at Well Fargo Economics Group.

The summer of 2009 marked my 25th year of analyzing the economy on a professional basis. Through this period I have had a front row seat to the Reagan Revolution and economic boom that followed it, the 1987 stock market crash, the collapse of the savings and loan industry, the fall of the Soviet Union, a couple of huge real estate cycles and credit crunches, a stunning stock market boom and spectacular crash, the rise, fall and re-emergence of newly industrialized economies, a handful of oil shocks, the 9/11 attacks, a couple of wars and the rewriting of the rules governing the financial markets.

Through this period three significant mentors have shown me the ropes. The first was John Godfrey, who hired me straight out of the University of Georgia. John was a veteran of the Federal Reserve Bank of Atlanta and taught me how to sift through the various economic indicators, pull out what was important, and then explain why. He also offered up great advice on how to analyze the Fed. It was much more difficult back then because the Fed made few public statements, even when it changed policy. Early years on the job were interspersed with tidbits of economic history lessons, including “Operation Twist,” the infamous “Saturday Night Massacre,” and the ongoing struggles the Federal Reserve faced in meeting the dual mandates of the Humphrey-Hawkins act of 1978.

The second major influence was David Orr, Chief Economist at First Union National Bank. David taught me how to view the economy through the eyes of a business decision maker. GDP was not simply a number we tried to understand and predict but also represented the volume of goods and services being produced, in real terms, and the revenues businesses, sole proprietorships and governments earned, in nominal terms. David’s humble, no-nonsense approach to analyzing the economy is something that I think about every day when I review the latest economic numbers or read the daily headlines.

The third mentor is John Silvia, who explained how to view monetary and fiscal policy through the eyes of policymakers. John’s background on Capital Hill as the Senior Economist at the Senate Joint Economic Committee and Chief Economist for the U.S. Senate Banking, Housing and Urban Affairs Committee provided some keen insights into the motivations behind key policy choices and how intractable certain choices are. One of the key lessons John taught is that once policy has made a major turn in a different direction, as it has recently, the impacts are slow to build but are typically very long lasting.

The three broad philosophies have been invaluable to me over the past 25 years. The period has seen an incredible amount of change but much of what was true long ago still holds true today. I have compiled a list of my favorite 25 rules for analyzing the economy. There are probably many more than this and many that have yet to be discovered, but this list has served me well over the past quarter century and hopefully will be of use to others.

Twenty-five fundamental rules for analyzing the economy
One of my favorites is “economics is just common sense made difficult.” Too often economists make things more difficult than they need to be. The most important concept to grasp when analyzing the economy is what motivates individuals and businesses to buy goods and services and what motivates them to produce and provide them. Forecasting the economy then simply devolves into determining if new policies or events would cause individuals to buy more goods and services, invest in more plant and equipment, hire more workers, or work more.

Of all the things John Godfrey taught, the one I always find most useful is that “it is important to distinguish between what you think the Fed will do and what you think they should do.” As economists, we tend to follow the Federal Reserve very closely and while we may have a good understanding of how monetary policy works, our views on what the Federal Reserve should do are irrelevant. It is far more important to have an understanding of what you believe the Federal Reserve, under its current leadership, will actually do.

Another key concept deals with the business cycle. “Recessions are caused by the build-up of imbalances and some sort of event or policy change that causes investors, consumers, businesses and regulators to become more risk averse.” Once you understand where recessions come from, you can begin to assess the risk of falling into one. The significant event leading up to the most recent recession was the housing boom, which resulted in an enormous oversupply of housing and a sharp run-up in housing prices. The event that put us on a path to recession was the unprecedented drop in home prices that began back in 2006. Falling home prices led to growing financial problems and bankruptcies at mortgage lenders and government sponsored enterprises that eventually brought down huge investment banks and financial institutions.

“Imbalances can build up far longer than seems logical.” During a boom, all sorts of justifications for the elevated level of economic activity will seem logical. We saw this at the height of the tech bubble and height of the housing bubble, which is one reason we ended up with such a tremendous oversupply of fiber optic cable and single-family homes.

“Persistent inflation is always a monetary phenomenon.” Measured price increases can sometimes pop up because of supply disruptions, spikes in key commodity prices, or bad weather. A persistent rise in inflation, however, will only take hold if the money supply has increased dramatically for a sustained period of time.

“Rising food and energy prices by themselves are deflationary if they are not accommodated by a loose monetary policy.” If consumers are spending more of their income for necessities, they have less to spend on everything else.

“Conditions do not have to be perfect in order for the economy to grow,” and that is a good thing because conditions seldom are perfect. The economy almost always faces a seemingly endless string of challenges: the budget deficit is too big, taxes are too high, regulation is too burdensome, and consumers have too much debt. Yet, while this was true for most of the prior 25 years, the economy grew solidly throughout most of this period.

“There is a tendency for forecasters to focus more attention on what is wrong with the economy than what is right.” Bad news almost always gets more attention than good news, and this is no different with economics. A danger, however, is that focusing too much attention on the negatives might cause you to miss out on valuable opportunities.

“The natural tendency for the U.S. economy is to grow.” Each year the United States adds close to three million new residents, which means we add the equivalent of France to our population every 20 years. In addition, trend productivity growth is somewhere around 2 percent. When you add in Americans’ strong desire to live better than each preceding generation, there is an enormous natural tendency for the U.S. economy to grow.

Over the past 25 years “the greatest forecasting mistake economists have made is to underestimate economic growth.” Paying too much attention to all the negatives in the economy tends to make economic forecast too pessimistic. Forecasters tended to overestimate the drag from federal budgets deficits during the late 1980s, the banking crisis in the early 1990s, and most of the subsequent crises that we faced during the past two decades. Many forecasters were also slow in recognizing that the potential growth rate of the economy had increased in the late 1990s with the advent of new information technologies.

“A trend will continue until is stops.” This famous line attributed to Herb Stein [1998] really cuts through the clutter on a number of fronts. Anything that grows faster than the underlying fundamentals can support will ultimately stop. If homebuilders build houses at a faster rate than the growth in the number of households that can afford to buy them, then ultimately building activity will stop. Likewise, if the federal government spending rises faster than the Treasury’s ability to raise taxes or borrow money then spending growth will eventually stop.

“You can learn an awful lot by simply observing.” Some of the best economic indicators I have seen in recent years have been things that I have observed with my own eyes and then verified with the data. If the airports seem more crowded take a hard look at the airline revenue passenger miles, whose growth tends to coincide with real GDP growth. A pickup or deceleration in airline revenue passenger miles may tip you off to a shift in the economy’s underlying momentum. While it may seem trivial, the same holds true with retail sales and business at your favorite restaurant.

“Never be overly eager to change your forecast.” Obviously you have to change it when the facts change but always remember that economic data are revised frequently and often by substantial margins. Some of the worst mistakes I have made have been to give up on a forecast too soon.

“Do not be afraid of making mistakes.” You will make them. It is part of the job. I learned when I was a goalkeeper on our high school soccer team not to get so upset about the other team scoring a goal that you second guess every move. You can do the same thing in economics. The critical questions you need to ask are: is your forecast well thought out? Have you researched and tested you conclusions? What are the holes in your argument and what are the risks associated with them? Are you making conservative or aggressive assumptions? If you have done all your homework, stated your position clearly and identified the risks, then you are likely to be wrong far less than you are right. Most important of all, have you informed your clients and prepared them for contingencies?

“Rapid growth nearly always sows the seeds of its own destruction.” Booms generally lead to busts because they lead to overproduction or overinvestment in the sector that is booming.

Along those lines, “booms generally lead to unforeseen problems.” When activity is booming sloppy credit underwriting, inefficient operations, and outright fraud are hard to see. This is the basis behind one of Warren Buffet’s [2002] favorite sayings “You never know who is swimming naked until the tide goes out.” Just think of the Bernie Madoff scandal, which did not become evident until the fall 2008 financial market collapse.

“Capital will always flow to the highest available risk-adjusted rate of return.” Every investment and business endeavor involves evaluating the risks involved in investing in that business and the return on that investment. The greater the risks, the higher the return has to be in order to attract any given amount of capital. Anything that heightens risks in the economy tends to restrain investment and business activity in general.

“The economy does not simply grow and contract, it is constantly evolving.” This is a concept made famous by Joseph Schumpeter [1975] and has become known as creative destruction. The basic concept is that there are always new industries and growth sectors evolving in the economy and there are always industries and sectors that are declining. Unfortunately, the declining sectors are typically easier to see than those that are growing.

“Soft landings are extremely hard to pull off.” The relatively long business cycles of the past few decades have witnessed several attempts by the Federal Reserve to bring the economy in for a soft landing. The Federal Reserve’s objective is to slow the economy just enough to head off inflationary pressures without causing the unemployment rate to increase. The Federal Reserve’s record is spotty to say the least. The problem with soft landings is that slower economic growth leaves the economy vulnerable to external shocks. The Federal Reserve nearly engineered a soft landing back in 1990 but then Saddam Hussein invaded Kuwait and oil prices skyrocketed, sending the economy into recession later that month. We were also headed for a soft landing back in 2001 but 9/11 put an end to that.

“Changes in political leadership matter” because the forces behind these changes have an immense amount of resources invested in their efforts.

Whenever possible try to “view the economy through the eyes of a business owner, consumer, and policymaker.” Think about how each would view the current environment and what each would view as risks and opportunities.

“Always look for consistencies and inconsistencies” in the economic data and your forecast. Inconsistencies demand considerable attention and may provide a hint about possible mistakes and vulnerabilities in your forecast.

“Write your reports and give presentations as if you were explaining economic concepts to your mother.” This will help ensure you respect your audience and do not talk over their heads.

“Listen to those who have opposing views.” At a minimum they will provide a good stress test to your own view and they might be right. I have found that I learn much more from reading reports and books written by folks that I disagree with than those I agree with.

“Do not outrun your headlights.” Know you limitations. The economy is like a giant puzzle that you will never finish piecing together. Do not try to do everything. Accept help when it is offered and concentrate on the things you know and do best.

Source: Mark Vitner, Wells Fargo Securities (via FXstreet), March 16, 2010.

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March 18th, 2010

This post is a guest contribution by Rebecca Wilder, author of the of the News N Economics blog.

Don’t let anybody tell you they know what the Chinese government will do with the yuan because they don’t. If you are interested in the pros and cons of yuan revaluation, some time ago Michael Pettis wrote a nice article worth revisiting. Basically, all signs economic point towards yuan appreciation.

The fact is, that nobody in the entire world, except for a handful of people of course, knows the plan for the yuan. Markets have become more and more convinced the yuan will appreciate over the next year.

The chart above illustrates the implied currency rate for the value of the US dollar (USD) in Chinese yuan (CNY) one year from the date shown on the X-axis, as derived from the 1-yr ahead non-deliverable forward. For some time, markets have “thought” the Chinese would let the yuan appreciate against the U.S. dollar (a movement down the Y-axis is an appreciation of the yuan and a depreciation of the U.S. dollar).

But ex post, markets have no clue.

The chart above illustrates the implied currency rate for the value of the US dollar in Chinese yuan by the 1-yr non-deliverable forward one year before the X-axis date in blue. The current ex post spot rate one year later (the date on the X-axis) is in red.

Basically markets are just fine at predicting trends, i.e., the positive correlation between the spot and forward rate spanning 2006 and 2007. But the reality is that markets have absolutely no idea how the Chinese will value the yuan in one year, as illustrated by the -0.47 correlation coefficient spanning the years 2008 to current. In fact, markets were looking for further yuan depreciation one year ago, but guess what: the yuan hasn’t budged since 2008, roughly 6.83 CNY per USD.

Source:  Rebecca Wilder, News Economics, March 15, 2010.

Tags: China
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March 17th, 2010

by Paul Goodwin, editor The Cabot China & Emerging Markets Report

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The Cabot China-Timer has flashed a new buy signal, telling us the trend of Chinese and emerging market stocks has turned back up. No one knows how long this signal will persist, and you shouldn’t try to guess. Instead, your best move is to go with the evidence, which is now bullish.

India’s Tata Motors (NYSE: TTM), the largest truck and auto maker in the sub-continent, has been a little of both over the years, but it looks like the time is right for a new advance.

Chart: MarketClub.com

[AA] Incidentally, MarketClub flashed a weekly and daily ‘trade triangle’ at $15.99 and $15.55 respectively on 2/26, and confirms TTM is in a ‘(+100) strong uptrend.’ MarketClub’s monthly trade triangle flashed when TTM was trading at $5.41, on last April 2.[AA]

Tata Motors is run by Ratan Tata, the great-grandson of Jamsedji Tata, who founded the Tata family empire. Ratan Tata is now the Chairman of Tata Group, which includes companies in steel, power, consulting, chemicals, hotels and telecom services.

Tata Motors was founded in 1945 as a manufacturer of locomotives, but made its reputation in manufacturing trucks and buses; it’s the fourth-largest truck manufacturer in the world and the second-largest bus manufacturer.

The company has been aggressive in pursuing growth, buying Daewoo’s truck division in 2004 and taking over the Jaguar and Land Rover brands from Ford in 2008.  In 2009, the company acquired Hispano Carrocera, a Spanish bus and coach body manufacturer.

But the product that has kept Tata Motors on investors’ minds for years has been its commitment to the Tata Nano, a fully enclosed, four-door, four-passenger car that is touted as “the least expensive production car in the world.”

Tata’s commitment was to sell the car for 100,000 rupees (or one lakh rupees), which amounted to about $2,000 at the time of the announcement. The Nano actually arrived for sale on March 23, 2009.

The Nano gets about 61 miles per gallon on the highway and 52 MPG in the city from its two-cylinder engine and has a top speed of about 65 MPH.  It is now in wide distribution throughout India, and is scheduled for export to Africa and Europe as regulatory guidelines are met.  A hybrid version is reportedly in development along with a fully electric model.

The Nano is crucial for Tata Motors because its low price puts the car within reach of an enormous number of potential owners in India. But it’s not the whole ball game.  Tata had annualized sales of $16.4 billion in 2009, and its businesses include engineering and construction fi rms, auto fi nancing, supply chain management and electronics and plastics manufacturing.

Tata Motors’ takeover bid for Jaguar Land Rover was a drag on the company’s finances for months, requiring a bridge loan to complete.  But the financing came together in late February and the deal was fi nalized.  Some analysts are worried about the repayment schedule for these loans, but the company’s greatQ4 earnings news showed a rebound in Jaguar Land Rover sales and Tata’s highest-ever one-month car sales in February.

Sales grew 23% in 2008 and 66% in 2009, although the Jaguar Land Rover takeover supplied a substantial chunk of that 2009 increase. The prospects for future sales depend heavily on the health of the global economy, but investors are clearly betting that the recovery will continue.

Learn more about this financial newsletter at Paul Goodwin’s The Cabot China & Emerging Markets Report.

Tags: Auto Maker, Bus Manufacturer, Cabot, China Timer, Coach Body, Emerging Market Stocks, India, Locomotives, Nyse, Passenger Car, Paul Goodwin, Power Consulting, Production Car, Ratan Tata, Rupees, Tata Group, Tata Motors, Telecom Services, Trade Triangle, Truck Manufacturer, Uptrend
Posted in Bonds, Markets | No Comments »

March 17th, 2010

by Nick Barisheff, BMG Inc.


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Unlike the world’s currencies, gold retains its value

In a speech I recently gave at The Empire Club of Toronto , I referred to gold as the “anti-currency.” Gold is not and never has been a currency. Gold is something entirely different and far more valuable. It is money.

“If you’re holding paper currency, you have to have some kind of trust that the country that issued it is not just going to print its way out of its problems. That’s a real concern right now. Gold, on the other hand, has real intrinsic value, unlike a paper currency which can be debased by its government.”

- Sacha Tihanyi, currency strategist, Scotia Capital

Currency versus money

Most investors confuse money and currency, but they are not the same thing. Money is defined as a medium of exchange, a unit of account and a store of value. For centuries, money referred to coins made of rare metals (gold and silver) with intrinsic value, and to notes backed by precious metals.

Currency, while it is a medium of exchange, is not a store of value. It only derives its value by arbitrary fiat - government decree and hence the term “fiat currency”. Paper banknotes represent money but they are not money. They are simply promissory notes whose long-term “value” or purchasing power depends entirely on the fiscal and monetary discipline of the government that issued them.

And therein lies the problem. In an era of massive fiat currency expansion by profligate governments across the globe, today’s currencies are depreciating in value faster than yesterday’s news. Fortunately for precious metals investors, gold and precious metals have risen in value, and will continue to rise in value against all currencies because they have once again resumed their historical role as stores of value: money.

“When the price of gold moves, gold’s price isn’t moving; rather it is the value of the currencies in which it’s priced that is changing.”

- John Tamny, economist, H.C. Wainwright Economics

The decline of the world’s currencies

Currency debasement isn’t a recent phenomenon. For decades, governments around the world, through their central banks, have been creating money out of thin air to cover their excessive spending and mounting debt. Investors have for the most part accepted this subtle form of taxation, because it seemed to have little personal impact. But appearances are deceiving. Investors are discovering that the value of their dollar-denominated assets has actually declined a staggering 82 percent since 1971 (not coincidentally, the year the US cut its link to the gold standard). Figure 1 tells the story.



The media are using the wrong measuring stick

Every day, the media (via currency traders) informs Canadian investors about the latest price of the Canadian dollar in US dollar terms, while US investors compare the US dollar to a basket of the world’s major currencies. But this information gives investors surprisingly little insight into the true value of their portfolios. If we started measuring the world’s currencies against money (i.e., gold), investors would be horrified at the stark decline in the value of all currencies. Most investors’ portfolios are heavily weighted towards currency-denominated financial assets (stocks and bonds), but few realize that the true value or purchasing power of their portfolios is declining every single year because of currency depreciation.

The rate of currency decline is accelerating

Since 1913 (the year the US Federal Reserve was established), the US dollar has lost over 95 percent of its value. The US and Canadian dollars have lost 82 percent of their value since 1971, as noted earlier. But the rate of currency decline is now accelerating.

In the past ten years alone, the US dollar, the Canadian dollar, the UK pound and the euro have collectively fallen 70 percent in value if measured in real (currency-debased) terms. In other words, when they are priced in terms of gold (Figure 2).

It’s all about the (fiat currency) money supply

Not too long ago, all the world’s major currencies were backed by gold because it was a universally recognized store of value. The gold standard imposed fiscal and monetary discipline, since each country had to hold enough gold to equal the amount of money in circulation. But not any longer. Government spending around the world is exploding, and (fiat currency) money supply, along with government debt in the world’s major economies, is exploding along with it. But nowhere in the world has spending become more out of control than the US (Figure 3), where the monetary response to last year’s financial crisis is creating yet another bubble, and this time it will be the bubble to end all bubbles.

Countries are increasingly at risk of sovereign debt default

“In the process of saving a few ‘too big to fail’ corporations and their bond holders, policymakers are greatly increasing the risk of sovereign defaults.”

- Puru Saxena, editor/publisher, Money Matters

The risk of massive and widespread sovereign debt default has never been higher. “Official” US government debt has soared to 90 percent of GDP, while multi-trillion-dollar budget deficits for the next several years will send that number soaring. Japan, the world’s second-largest economy, was recently put on credit watch. Its debt is twice total GDP, yet its newly elected government has announced much higher spending for 2010. The UK’s 2009 budget deficit will be over 14 percent of GDP, adding to a net debt that will reach 56 percent of GDP this year, 65 percent in 2010 and 78 percent by 2015.

Spain, Italy and Portugal are facing major fiscal deficits, as is Eastern Europe. Dubai is billions in debt and its prize jewel, Dubai World, is bankrupt. Greece’s credit rating has been slashed, and its debt is forecast to reach 130 percent of GDP. And then there is Iceland, whose debt had exploded to seven times GDP before the global meltdown. The country’s banking system has now collapsed, its currency is deeply devalued, its real estate market has imploded and the country is in a full-blown economic depression.

The incredible shrinking dollar

As the world’s reserve currency, the US dollar is a proxy for the rest of the world’s currencies. The dollar’s decline is a direct reflection of America’s deepening financial troubles, exacerbated by a ravaged banking system that, by 2010, may see over one thousand banks insolvent. In 2009, the US incurred a budget deficit of $1.4 trillion, and its debt rose by $1.9 trillion due to off-budget expenditures. These off-budget expenditures alone were more than the 2008 budget deficit. At the end of 2009, America’s total debt was over 100 percent of GDP.

In their attempt to reflate the bubble-driven economy, President Barack Obama, Fed Chairman Ben Bernanke and Treasury Secretary Tim Geithner have decided to add to this financial house of cards. Instead of raising taxes or cutting expenditures, they have decided to borrow their way out of the problem and have the Fed create money out of thin air, which will almost certainly create another bubble. This bubble will make the others pale by comparison and will help destroy the US dollar. The dollar may be the world’s reserve currency, but China and other countries are not only questioning its status, but also actively campaigning for greater use of alternative currencies.

Investors are demanding real money

Where are most investors putting their cash? It should no longer be in stocks. Key stock indices like the Dow Jones Industrial Average have been flat to negative in nominal terms since the end of the last century. But if the Dow is priced in gold (in other words, money) as opposed to depreciating dollars (in other words, fiat currency), its decline is far more dramatic. As Figure 4 shows, the Dow:Gold Ratio is not only in a downtrend, the downtrend is steepening which is a continuing indicator to move from equities to bullion.



Global creditors who currently hold trillions of dollars’ worth of dollar-denominated financial assets are dumping them to preserve their wealth. That is why gold bullion, along with its precious metals cousins, silver and platinum bullion, have been consistently keeping their value against financial assets (Figure 5).



Central banks are buying gold bullion

“We have a market-friendly Fed injecting a lot of liquidity in the system which will set us up for another bubble economy. Excessive monetary accommodation just takes us from bubble to bubble to bubble.”

- Stephen Roach, chief economist, Morgan Stanley

India recently bought 200 metric tonnes of gold bullion from the International Monetary Fund for $6.7 billion. Russia has recently added 120 tonnes of bullion to its reserves, while China has steadily (and surreptitiously) increased its gold bullion reserves from 600 tonnes in 2003 to 1,054 tonnes today. China is even urging its people to put five percent of their savings into gold and silver because it is so worried about the dollar. And because trillions of dollars of its reserves remain in US dollar-denominated assets, China’s central bank will be diversifying into gold for many years to come.

The world’s central banks know that gold is primarily a monetary asset, not a commodity. That’s why a growing number of them are quietly diversifying out of US dollars and adding to their 29,000 tonnes of gold reserves.

In its 2010 Precious Metals Outlook, Scotiabank noted that “seeing the value of the dollar steadily erode must be a nightmare for large US creditors such as China, Japan, South Korea, Russia, the oil producing countries and Sovereign Wealth Funds (SWF)…

Major investors are diversifying into gold

“Both China and America are addressing bubbles by creating more bubbles and we’re just taking advantage of that.”

- Lou Jiwei, Chairman, China Investment Corporation

It is not just governments that are dumping dollars for bullion. A rapidly growing number of sovereign wealth funds (including China Investment Corporation) are participating, as are major institutional investors. Hedge fund manager John Paulson, who made $3 billion in 2008 by shorting subprime mortgages, recently took a multi-billion-dollar position in gold as a hedge against inflation. Northwestern Mutual Life Co.’s CEO Edward Zore said his company purchased $400 million in gold (the first time in its 152-year history) because “the downside risk is limited, but the upside is large. We have stocks in our portfolio that lost 95 percent. Gold is not going down to $90.”

Hedge fund manager David Einhorn, through his Greenlight Capital fund, has sold gold ETFs in order to invest in longer-term and lower-risk gold bullion because of current US economic policy. Lone Pine Capital significantly increased its stake in gold this year. Perhaps of even greater interest to the unwary investor is a survey of US hedge fund managers by London-based Moonraker Fund Management: 90 percent (20 of the 22) of the hedge fund managers surveyed admitted they had bought physical gold for personal investment. These sophisticated investors know something that the average investor doesn’t: that the global policy response to the financial crisis will not only devalue the world’s major currencies, it will decimate the US dollar.

Many investors still view gold as a commodity

Individual investors are not so farsighted - yet. Because most of them have only experienced one kind of market - a 25-year bull market in stocks - many still think gold is just a commodity like copper, zinc or pork bellies. But gold is far more than that. It has a 3,000 year history as money; for much of that time, it was the universal medium of exchange because of its divisibility, portability, rarity, beauty, malleability and indestructibility. Despite today’s negative sentiment, gold is not a speculation or a barbaric relic. Gold is money. Gold retains its purchasing power year after year, as Figure 6 shows.



Forty years ago it took 66 ounces of gold to buy a compact car. Today it takes only 14 ounces. If you had put your money in gold instead of dollars, the same car would actually be 79 percent cheaper, because gold keeps its value. Houses, stocks and virtually every other asset on earth would also be cheaper if bought with physical gold.

The more investors learn about bullion, the better for their portfolios. If you are already a bullion investor, now is the time to add to your portfolio. If you are new to investing in bullion, now is the time to start dollar-cost-averaging into bullion. I encourage investors to learn as much as they can about bullion and about the markets in general. A good place to begin is the Learning Centre section of our website (www.bmgbullion.com). It offers a comprehensive look at the economy, money, markets and bullion investing, and provides a variety of thought-provoking articles written by experts in the field of gold and precious metals.

Gold is money

Gold is money because it cannot be created out of thin air by government decree. Unlike bonds, gold does not represent someone else’s liability and, unlike stocks, gold does not rely on someone else’s promise of performance. Gold is money because, unlike currencies, impatient monetary policymakers cannot change its value. The rising gold prices we have experienced for the last eight years do not signal a bull market in precious metals, but rather a vote of decreasing confidence in the future value of paper currencies.

Currency-denominated financial assets are a disaster waiting to happen. The current economic rebound is a mirage, being entirely dependent on something artificial and unsustainable: massive government spending. A new crisis is building out of unprecedented fiscal and monetary mismanagement. Fortunately, smart investors can protect their wealth from the coming storm. The true level of risk has not been priced into the markets. The time to shelter your wealth from the storm is now. And there is no safer investment on earth than bullion, because bullion is and always will be money.

1. Gold Outlook for 2010
Gold Resuming its Historical Monetary Role - as the Anti-Currency
http://bmgbullion.com/document/648

Nick Barisheff
Bullion Management Group

Nick Barisheff is the co-founder and President of Bullion Marketing Services Inc., which was established to create and manage The Millennium BullionFund. The fund is Canada’s first and only RRSP eligible open-end Mutual Fund Trust that holds physical Gold, Silver and Platinum bullion www.bmsinc.ca.

Tags: BMG Inc., Currency Paper, Currency Strategist, Empire Club, Fiat Currency, Fiat Money, Gold, Gold And Silver, Gold Metals, Government Decree, Intrinsic Value, Medium Of Exchange, Metals Precious, Money Currency, Paper Currency, precious metals, Price Of Gold, Promissory Notes, Purchasing Power, Rare Metals, Scotia Capital, Value Money, Wainwright
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March 17th, 2010

This article is a guest contribution by Tom Lydon, ETFTrends.com.

Commodity exchange traded funds (ETFs) have attracted a rabid investor following in a relatively short period of time. To play in the commodity sandbox before ETFs came along, you needed risk tolerance and capital. Today, you just need desire.

Last week, we discussed physically backed ETFs, which are just as the name implies: each share is backed by a physical product. Right now, physically backed ETFs only give exposure to precious metals. You won’t find an ETF backed by barrels of oil or livestock. [4 Types of Commodity ETFs.]

Physically backed ETFs have a special appeal to smaller investors who either lack the space for storage, or the inclination to hunt down and pay for storage themselves. In ETFs backed by physical metals, all you need to do is show up and buy a share. The rest is taken care of for you. [Contango and What You Can Do About It.]

These ETFs tend to correlate more closely to the spot price than commodity funds that hold equities or futures. The taxes are a bit different, too: profits in bullion-based ETFs are taxed at 28% (but consult your personal tax professional for specific advice). [ETFs and Taxes: What You Should Know.]

Physically backed commodity ETFs also enjoy the other benefits of ETFs, including cost-efficiency, tax efficiency and transparency (the bullion holdings in these funds are subject to regular audits and the results are posted on the ETF provider’s website).

For more stories about commodity ETFs, visit our commodity ETFs category.

• SPDR Gold Trust (NYSEArca: GLD)
• ETFS Physical Platinum (NYSEArca: PPLT)
• iShare COMEX Gold Trust (NYSEArca: IAU)
• ETFS Physical Palladium (NYSEArca: PALL)
• iShares Silver Trust (NYSEArca: SLV)
• ETFS Silver Shares (NYSEArca: SIVR)
• ETFS Gold Shares (NYSEArca: SGOL)

Tags: Audits, Bullion, Comex Gold Trust, Commodity Etfs, Commodity Exchange, Commodity Funds, Commodity Gold, Cost Efficiency, ETF, Exchange Traded Funds, Gold, Gold Shares, Inclination, Ins And Outs, Ishare, Palladium, Personal Tax, Physical Metals, precious metals, Risk Tolerance, Sandbox, Tax Efficiency
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March 17th, 2010

By Michael ‘Mish’ Shedlock

Pressure on China to do something about its allegedly undervalued currency is mounting by the day. Please consider the following articles.

World Bank Calls For Stronger Yuan

The World Bank Says China Must Pare Stimulus to Counter Bubbles

The World Bank indicated that China, the world’s third biggest economy, should raise interest rates to help contain the risk of a property bubble and allow a stronger yuan to help damp inflation expectations.

The nation’s “massive monetary stimulus” risks triggering large asset-price increases, a housing bubble, and bad debts from the financing of local-government projects, the Washington- based World Bank said in a quarterly report on China released in Beijing today. The group raised its economic growth forecast for this year to 9.5 percent from 9 percent in January.

The World Bank’s call echoes the assessment of private economists — analysts at Morgan Stanley this week said higher reserve requirements for banks may be “imminent” and interest rates could start to climb as early as next month. China’s economic rebound has also sparked increasing calls for an end to its exchange-rate peg to the dollar, adopted in mid-2008 to help shelter exporters amid the global recession.

Senate Considers Currency Manipulator Regulation

Bloomberg is reporting Senate May Force Obama to Take Tougher Yuan Stance

Five senators including Charles Schumer of New York and Lindsey Graham of South Carolina introduced legislation yesterday to make it easier for the U.S. to declare currency misalignments and take corrective action. Even if the bill stalls, it may have “ripple effects” that lead the Treasury Department to declare China a currency manipulator, William Reinsch, president of the National Foreign Trade Council, said.

Obama’s goal of doubling U.S. exports in five years depends on his ability to get China to raise the value of its currency, said Sherrod Brown, an Ohio Democrat and co-author of the legislation. China’s intervention in currency markets to keep the value of the yuan, or renminbi, at a set value acts as a subsidy to exports and tax on imports, Brown said at a news conference yesterday.

Senator Debbie Stabenow, a Michigan Democrat, and Sam Brownback, a Kansas Republican, are also supporting the legislation. Graham is a Republican and Schumer is a Democrat.

The senators said the U.S. recession could boost the political prospects for the legislation, which Schumer has proposed in various forms since 2003. Schumer said the Senate proposal will be attached “very soon” as an amendment to “must-pass legislation.”

“The only way we will change them is by forcing them to change,” Schumer said.

The yuan is undervalued by as much as 40 percent, which is “blatant protectionism,” Bergsten said. Brown and Schumer quoted the analysis of Bergsten and Nobel Prize winning economist Paul Krugman in support of their efforts.

Business Sours On China

Please consider Business Sours on China.

China’s relationship with foreign companies is starting to sour, as tougher government policies and intensifying domestic competition combine to make one of the world’s most important markets less friendly to multinationals.

Patent rules imposed Feb. 1 threaten to increase costs in China for foreign innovators in industries such as pharmaceuticals, and let authorities force foreign drug companies to license production to local companies at state-set prices.

A year ago, in a move foreign critics called protectionist, Chinese regulators rejected a bid by Coca-Cola Co. for China Huiyuan Juice Group Ltd., saying it could crowd out smaller companies and raise consumer prices. The two combined held just a fifth of China’s juice market.

In July, four executives of Anglo-Australian mining giant Rio Tinto were detained, initially accused of stealing “state secrets,” amid tense negotiations between global miners and China’s steel industry over iron ore prices. Rio Tinto denies wrongdoing by the men, who await trial on reduced charges of bribery and theft of commercial secrets.

Google Inc.’s woes highlight the angst. The search company, long troubled by Chinese censorship rules, threatened Jan. 12 to depart China after it said a Chinese hacking attack penetrated its computer network. Related attacks hit dozens of other multinationals. Google is expected soon to close its Chinese site, Google.cn., leaving local companies dominating an Internet market of 400 million users.

“The Google issue has had a crystallizing effect,” says Lester Ross, managing partner in Beijing for U.S. law firm Wilmer Cutler Pickering Hale and Dorr. “It raised the consciousness of government and of the boardrooms and other stakeholders” about the difficulties of doing business in China, he says.

Krugman Wants To Take On China

Inquiring minds are reading Taking On China by Paul Krugman.

Tensions are rising over Chinese economic policy, and rightly so: China’s policy of keeping its currency, the renminbi, undervalued has become a significant drag on global economic recovery. Something must be done.

Today, China is adding more than $30 billion a month to its $2.4 trillion hoard of reserves. The International Monetary Fund expects China to have a 2010 current surplus of more than $450 billion — 10 times the 2003 figure. This is the most distortionary exchange rate policy any major nation has ever followed.

So how should we respond? First of all, the U.S. Treasury Department must stop fudging and obfuscating.

If Treasury does find Chinese currency manipulation, then what? Here, we have to get past a common misunderstanding: the view that the Chinese have us over a barrel, because we don’t dare provoke China into dumping its dollar assets.

It’s true that if China dumped its U.S. assets the value of the dollar would fall against other major currencies, such as the euro. But that would be a good thing for the United States, since it would make our goods more competitive and reduce our trade deficit. On the other hand, it would be a bad thing for China, which would suffer large losses on its dollar holdings. In short, right now America has China over a barrel, not the other way around.

Looking At Half The Equation

For starters, Krugman conveniently ignores one side of the equation.

A sinking dollar is good for exports, however, given China’s regulatory policies as noted in Business Sours on China, it’s not at all clear exports to China would rise by much. Indeed, I suspect that China’s regulatory restrictions are a far bigger impediment to trade than currency fluctuations.

Furthermore, one cannot (or at least should not) ignore what would happen to the price of imports. A falling currency is not a free lunch.

While I agree with Krugman that China would not dump US Treasuries, the idea that the U.S. has China over a Barrel because is preposterous. Mutual deadly embrace with unbalanced winners and losers is more like it.

What China Can and Cannot Do With Reserves

Please consider What the PBoC cannot do with its reserves by Michael Pettis.

It is a real toss-up as to which generates more bizarre comment in the international press: Beijing’s long-feared dumping of US Treasuries, or the use and value of the PBoC’s central bank reserves. The revelation last week that Chinese holdings of US Treasury obligations fell in December by $34.2 billion, to $755.4 billion, generated a frisson of fear and excitement, leading one prominent newspaper to worry that “If there is one thing that gets investors twitchy, it is the fear that China is losing its appetite for US government bonds.”

Remember that China has a large current account surplus which necessarily must be recycled abroad, and the US has a large current account deficit which necessarily must be funded abroad. It would be astonishing if, under these circumstances, total Chinese holdings of USD assets declined, and of course it is impossible that they declined faster than the willingness of other foreigners to replace them.

If China runs a current account surplus, it must accumulate net foreign claims by exactly that amount, and the entity against which it accumulates those claims (adjusting for actions by other players within the balance of payments) ultimately must run the corresponding current account deficit. And as long as China ran the largest current account surplus ever recorded as a share of global GDP, and the US the largest current account deficit ever recorded, and especially since China also ran an additional capital account surplus (i.e. other non-PBoC agents ran a net capital inflow), it was almost impossible for the PBoC to do anything but buy US dollar assets. Given the sheer amounts, a substantial portion of these assets had inevitably to be USG bonds.

This was not a discretionary lending decision. It is the automatic consequence of China’s currency regime, in which it pegs the RMB to a foreign currency, in this case the dollar. Why? Because when the PBoC decides on the level of the RMB against the dollar, it does not do so by passing a law, and making it a capital crime for anyone to trade at a different price. What it does is far simpler. It offers to buy or sell unlimited amounts of RMB against the dollar at the desired price.

If it stops buying dollars, it must let the market decide by itself on the new equilibrium price of the dollar. In that case the value of the dollar has to plunge in RMB terms (or the RMB soar, which is the same thing) in order for buyers and sellers to match up and for the market to clear. The moment the PBoC stops buying, in other words, the RMB will rise in value – and so it cannot stop buying in anticipation of the RMB rising in value, as the FT article suggested.

Here is where things get interesting. China’s reserves are often thought of as if they were a treasure trove available for spending. They are not. They are simply the asset side of the mismatched balance sheet. If the PBoC wanted to “spend” $100, say for example to recapitalize a bank, it could do so, but this would automatically create a $100 dollar hole in its balance sheet. – it would still owe the RMB that it borrowed originally to purchase the $100. To put it another way, the reserves are not a savings account, free for the PBoC to spend as it likes. Reserves are effectively borrowed money.

So what are reserves good for? As long as China maintains its own currency and denominates all domestic transactions in RMB, the PBoC reserves cannot be used in China. They cannot go to pay doctors’ salaries, to build bridges, to lower taxes or to subsidize consumption. They can only be used to purchase or pay for things from outside China. This means that reserves ensure that China can import foreign commodities and other goods as long as it can pay for them domestically. It also means that the PBoC can ensure the availability of dollars to repay foreign debt and foreign investment. …..

… if the RMB is revalued by 10%, the value of the PBoC’s assets will immediately decline by $250 billion in RMB terms. Since the Chinese measure their wealth in RMB, isn’t this a real additional loss for China?

No, because remember that the only thing you can do with reserves is pay for foreign imports or repay foreign obligations. And just as the value of the reserves drops 10% in RMB terms, so does the value of all those foreign payments – by definition they must go down by exactly the same amount in RMB terms.

This means that China takes no loss. It can buy and pay for just as much “stuff” after the revaluation, and with less implied PBoC borrowing, as it could before the revaluation – and the real value of money is what you can buy with it. So the real value of the reserves hasn’t changed at all – just the accounting value in RMB, but this simply recognizes losses that were already taken long ago when the trade was first made, and should be a largely irrelevant number (except perhaps for conspiracy theorists).

Yuan is Undervalued by as Much as 40 percent?!

For the sake of argument, let’s assume The RMB is undervalued by 40%. Who is the winner?

To answer the question let’s return to a snip from Pettis:

“generally speaking China is likely to gain from a revaluation because after the revaluation it will be exchanging the stuff it makes for stuff it buys from abroad at a better ratio. The value of what it sells abroad will rise relative to the value of what it buys from abroad, and if we could correctly capitalize those values on the balance sheet, it would probably show that the Chinese balance sheet would improve with a revaluation of the RMB.”

If that is true generally speaking, then the US is a beneficiary now, generally speaking. This implies we should be careful of what we ask. However, the situation is more complex because as Pettis explains there are individual winners and losers:

“..it is not whether or not China as a whole loses or gains from a revaluation that can be measured by looking at the reserves, and I would argue that it gains, but how the losses are distributed and what further balance sheet impacts that might have.”

Shock Effect

Let’s consider the global shock effect of a sudden large revaluation of the Renmimbi. The key is the RMB does not float. To get a 40% rise in valuation, China must buy or sell unlimited amounts of RMB against the dollar to maintain the desired price. That might mean a huge hike in Chinese interest rates to make holding the RMB attractive.

In turn, sharp interest rate hikes would likely cause a huge slowdown in China, decreasing China’s demand for imports. This is yet another factor that Krugman and those crying “currency manipulator” miss.

And should the US impose a revaluation via tariffs, I would like to point out a little thing called Smoot-Hawley.

By the way, I am all in favor of a huge slowdown in China. I think China is on an unsustainable course, and the sooner and harder China slows the better for everyone in the long run.

However, the consequences of such a slowdown would be huge on the commodity exporters like Canada and Australia. Moreover, a slowdown in trade would slow global consumption.

I happen to think those are necessary adjustments along with more debt writeoffs, but believers in free lunches and Keynesian claptrap sure won’t see it that way.

Hopefully this gives you a bit more of an idea as to just what might go wrong with all these simplistic “the Yuan is 40% undervalued - so label China a currency manipulator” ideas floating around.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

Tags: Asset Price, Bad Debts, Bloomberg, BRIC, Charles Schumer, China, China Beijing, Corrective Action, Economic Rebound, Economic Trend, Global Recession, Government Projects, Housing Bubble, Inflation Expectations, Lindsey Graham, Michael Mish, Mish Shedlock, Morgan Stanley, Private Economists, Ripple Effects, Sherrod Brown, Treasury Department, Trend Analysis, Yuan
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March 17th, 2010

by Norm Trainor

I just returned from a ten day business trip to India. During my trip, I learned many lessons about life, business and people in India. Hopefully, you will find these lessons of value in your business and personal life.

1. The importance of generosity of spirit: Shakespeare, in The Merchant of Venice, has Portia express a famous line in English literature: “The quality of mercy is not strained.” By that, Shakespeare implied that you cannot fake generosity. People are either kind or not. When I arrived in Mumbai at 4:00 AM in the morning, Emile Goveia, the Managing Director of The Covenant Group, India, was waiting to greet me. There were hundreds of people at the airport waiting to greet friends and family. When I walked out of the Customs Area, Emile was standing in the front row, smiling at me. He was a welcome sight. He had been standing there for two and one half hours to welcome me to Mumbai. This was the first of many small kindnesses Emile bestowed on me throughout my visit.
2. People work hard and then some: The work week in India is, typically, six days and often consists of 12 -14 hour work days. During my trip, we flew from Mumbai to Delhi, the equivalent of flying from Toronto to Atlanta. Our flight to Delhi left at 2:30 PM after a morning of meetings in Mumbai. When we arrived in Delhi, we drove one hour for a dinner meeting with the senior executives of a major financial institution. We returned to the airport for an 11:00 PM flight to Mumbai. I was back in my hotel at 2:00 AM the next morning. Later that morning, when Emile picked me up at my hotel, he looked refreshed and relaxed. So many of the people whom I met in India were grateful for the gift of work that they truly enjoyed. Seventy percent of Mumbai’s 23MM people live in slums or on the streets. The poverty is overwhelming. For someone like Emile and our other associates, the ability to rise above poverty and provide a quality of life for their families is deeply appreciated.
3. The people of India are resilient: I was in Mumbai on the anniversary of the terrorists’ attack in which 170 people died. Security was very tight and life went on as usual. The people of India face so many challenges environmentally, economically, socially and politically. Yet, they seem to have learned to deal with adversity with equanimity. I was constantly struck by the serenity on the faces of people as diverse as beggars and street urchins to senior executives of major financial institutions.
4. India is a land of entrepreneurs: The best opportunity for the people of India to raise themselves from poverty is entrepreneurship. India has a population in excess of 1.1 billion people. The majority of the population is under age 20. On or before the mid-point of this century, India will be the most populous country in the world. One of the major challenges will be to create enough jobs for young people. The entrepreneurial sector is very strong and growing. Entrepreneurs range from micro businesses in the slums of major cities to huge family businesses that operate in many areas of the economy. The best entrepreneurs are opportunity providers. They have a vision of a better tomorrow and shape the environment to realize their dreams. In the process, they create employment opportunities for others.
5. Patience is required to do business in India: The traffic in cities like Mumbai is horrendous. One day, it took us two hours to drive 15 km. People deal with shortages of water, food and fuel. They do so with humour and grace. If there is frustration and impatience, it is rarely evident.

It was a privilege to visit this great country. I cannot wait to go back.

Norm Trainor is the founder of The Covenant Group, a company specializing in practice development for advisors. For further information, visit his Web site at www.covenantgroup.com.

Tags: Avw, BRIC, Business Trip, Covenant Group, Emile, English Literature, Generosity Of Spirit, Group India, Half Hours, Img Src, India, Life Business, Major Financial Institution, Merchant Of Venice, Mumbai, Next Morning, Openx, Peo, Personal Life, Portia, Quality Of Mercy, Random Number, Senior Executives, Six Days, Slums, Target, Welcome Sight
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March 16th, 2010

George Soros is interviewed in great depth at Hong Kong University, February 3, 2010. In this lecture, he shares his outlook, his thoughts on financial markets, and his philosophy.

A Conversation with George Soros at HKU from JMSC HKU on Vimeo.

Additional resources
Transcripts of Soros’ speeches from Central European University, October 2009:

Lecture 1 General Theory of Reflexivity
Lecture 2 Financial Markets
Lecture 3 Open Society
Lecture 4 Capitalism vs. Open Society
Lecture 5 The Way Ahead

Source: Hong Kong University, February 3, 2010

Tags: Additional Resources, capitalism, Central European University, Conversation With George, Financial Markets, George Soros, Hku, Hong Kong University, philosophy, Society Lecture, Soros George, Speeches, Transcripts
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March 16th, 2010

With the S&P 500 Index and a number of other benchmark stock market indices flirting with cycle highs, I will be monitoring things very closely over the next few days to see if the market’s overbought condition spells more downside potential than an expected consolidation. Or will the Index surprise us and fly trough the 1,151 area?

In addition to being overbought, the S&P 500 is also now expensively valued on a long-term cyclically adjusted PE (CAPE) basis, according to Robert Shiller, economics professor at Yale and author of, among others, Animal Spirits, Subprime Solution and Irrational Exuberance.

In order not to work with notoriously unreliable forward-looking earnings estimates, I have always preferred using Shiller’s CAPE methodology, or normalised earnings, as they average ten years of earnings. This measure provides a good picture of the market’s value regardless of where we are in the business cycle. I have therefore been updating a CAPE chart for a number of years. On this basis, the multiple has increased to 20.5 since the March low of 13.3, representing an overvaluation of 25.0% when compared to a long-term average of 16.4.

“Where breadth goes, the market usually follows,” goes an old market saying. Breadth indicators are useful tools to assess the inner workings of the market’s rallies or corrections, and are used to identify strength or weakness behind market moves, i.e. to assess how the bulls and the bears are exerting themselves.

One such measure is net new highs, calculated by subtracting the number of new 52-week lows from the number of new 52-week highs (see top pane in the chart below). This indicator often peaks before the price index, as was the case in November. It has also been falling sharply over the past few days. Is this again a precursor to a lower S&P 500 (bottom pane)?

Source: StockCharts.com

I stand by my summary in my Words from the Wise review on Sunday: Although the fat lady has not yet made her appearance to signal the end of the bull cycle, the steepness of the nascent rally, together with resistance in the area of the January highs, could result in stock markets consolidating in order to work off a short-term overbought condition. On the fundamental front, tighter money does not necessarily spell a declining stock market, but turning off the “juice” will certainly remove a tailwind, making earnings growth the key determinant for generating further gains (especially in light of stretched valuations).

Tags: 52 Week Highs, 52 Week Lows, Animal Spirits, Bottom Pane, Breadth, Business Cycle, Earnings Estimates, Economics Professor, Inner Workings, Irrational Exuberance, Market Moves, New 52 Week Highs, New 52 Week Lows, New Highs, Normalised, Price Index, Robert Shiller, Stock Market Indices, Stock Market Valuation, Term Basis
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