The billion-dollar gram

Thursday, October 8th, 2009

“Billions spent on this. Billions spent on that. It’s all relative right?,” asked the creators of the amazing chart below. Click on the chart to enlarge the image.

Source: Information is Beautiful, September 2009 (hat tip: Fullermoney).

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Marc Faber on the economy and financial markets

Thursday, October 8th, 2009

Below is a wide-ranging interview with Marc Faber on four videos on CNBC TV18 in India in which he explains his views on inflation, currencies, commodities, stocks and more, all courtesy of Edward Harrison at Credit Writedowns.

Asset-based economy. In general, he thinks we are in an inflationary environment, whereas I think deleveraging is secular and means any inflation is only cyclical. But he shares my belief that zero interest rates induce money balances to move into consumption or into higher-yielding assets. He believes this is a boon over the medium term (if not the short or long term) for financial assets, whether they be stocks, bonds, commodities, real estate or art. And it is something that will continue, he says. Faber believes Bernanke will be loath to raise rates aggressively given his prior statements and writings.

Currencies. Faber takes the view, with which I agree, that the Fed’s easy money policies after 1998 flooded the global economy, especially emerging economies, with liquidity. This has led to asset bubbles. Hong Kong residential real estate is one example he cites. As a result, Faber thinks the US dollar is no longer overvalued at present levels. A snapback rally for the dollar resulting from oversold levels would be bearish for asset markets. But, longer term, Faber thinks the dollar is weak.

Equities. There has been a huge rally everywhere. He says he is not a buyer at these levels. However, as central banks are going to continue to print money, stocks could continue higher - but he would not bet on a blow-off rally from these levels.

Commodities. Faber thinks zero-rate levels make it extremely difficult to value anything. He poses the question: which would you rather own - the “US dollar at zero interest rates or a ton of gold or a ton of copper or a ton of crude oil?” Of course, commodities are supply constrained, whereas dollars are not, so there is a justification for buying them. But, he anticipates the commodity hoarding by China is about to end and that is bearish for industrial commodities as well as precious metals. As with other commodities, he thinks the huge run-up in oil could induce a setback. Long run, he is an oil bull because of limited supply.

Financial Crisis. He is disturbed by the fact that a crisis caused by excessive debt growth, especially as a result of Federal Reserve policy, has been allowed to pass with the same players in control. He says enjoy the ride for now. Longer term, this necessarily means the same bad policies will follow, which will lead to a system-wide financial collapse.

India. Faber is bullish longer term. Short term, there could be a correction. India is one of the best-protected countries because of less vulnerability to the export sector. He also believes the Reserve Bank of India has one of the best monetary policies in the world - supervising the financial system closely, relatively tight, and mindful not just of core inflation but also of other price levels like asset prices.

Part 1:

Part 2: Part 3: Part 4:

Source: Credit Writedowns, October 4, 2009.

Tags: Asset Markets, Boon, Central Banks, China, Cnbc, Cnbc Tv18, Commodities, Crude Oil, Easy Money, Edward Harrison, Emerging Economies, Emerging Markets, Financial Assets, Global Economy, Gold, India, Inflationary Environment, Marc Faber, Medium Term, Money Balances, Money Stocks, oil, Residential Real Estate, Snapback, Stocks Bonds, Zero Interest
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Australia: Taking the lead with higher rates, but who will follow?

Thursday, October 8th, 2009

This post is a guest contribution by James Pressler* of The Northern Trust Company.

In a move that surprised some analysts, the Reserve Bank of Australia (RBA) hiked its Overnight Call Rate by 25 basis points to 3.25%. After a spate of strong economic indicators, signs of recovery from Australia’s major trade partners and a moderation in price increases, the markets had priced in some monetary tightening before year-end. This hike confirms those expectations, and along with a few choice comments in the RBA’s accompanying statement, implies that another hike could hit by year-end. Given the economy’s recent performance, we have no complaints about tighter policy.

Today’s headlines made a special effort to point out the RBA’s move was the first tightening amongst the G-20, but in all candor we humbly ask who else could have been a viable contender? With the Euro-zone still struggling with problems in some of its weaker member countries, the US in quantitative easing mode and having posted negative GDP growth since Q4 2008 (although Q3 2009 figures due October 29 should break that streak), and Japan’s base rate having flatlined years ago, only a few niche players within the G20 could even offer a challenge against Australia for first to hike.

But now that the RBA has made its move, the more interesting question is who will be the next to pull the trigger. Right now, the likely candidates are all in Asia: Singapore, South Korea and China. Singapore currently stands as the favorite simply due to timing - the Monetary Authority of Singapore meets on Monday, and now has the opportunity to tweak its monetary stance without being the first in the pool. Its economy posted one of the first technical recessions in Asia due to a plunge in net exports, but in turn its recovery has been quite brisk and without any price pressures. While the temptation to let the economy feed off of cheap credit is very strong, the authorities now have some incentive to remove the ultra- from its ultra-loose monetary policy and start the long process of normalizing interest rates.

Also worth mention is South Korea, which just a year ago had to reassure foreign investors it was in fact not going to slide into the abyss a la 1998. The economy did go through a four-quarter weak patch, but in fact did not experience a technical recession and like many others came back strong in Q2 this year - thanks in part to a little fiscal priming. More to the point, the Bank of Korea timed its moves well over the past year, moderating its rate cuts as to not feed into a domestic asset bubble. Now with Australia taking the lead, the Bank can offer a hike as keeping in line with the regional recovery.

China is the least likely of the three to make a move, although the People’s Bank of China (PBoC) can throw a curveball now and then. Officials have offered the usual batch of central bank talk to cover all possibilities while not committing to a particular position, but the central theme from the PBoC suggests that while a recovery is well underway, it is an uneven rebound and there is still significant fragility in certain parts of the economy. Along with a few other key words we think China will remain on hold until early-2010, although given how much bank lending grew in the first half of the year we cannot help but wonder if inflation is a concern.

With global trade having restarted - although from a lower base - it is no surprise that Asia is seeing the first fruits of recovery. Now that the RBA has validated its personal belief that the worst has passed with its own rate hike, other economies will follow suit before the year is over. Whether those economies are ready for higher interest rates, however, is another story altogether.

** James Pressler is an associate international economist at The Northern Trust Company, Chicago. He joined the bank in 1993 and has been in Economic Research since 1995.

Source: Northern Trust - Daily Global Commentary, October 6, 2008.

Tags: Asia Singapore, Bank Of Australia, Basis Points, China, Choice Comments, Euro Zone, G20, GDP Growth, James Pressler, Monetary Authority Of Singapore, Monetary Stance, Niche Players, Northern Trust Company, Price Increases, Price Pressures, Recessions, Reserve Bank Of Australia, Reserve Bank Of Australia Rba, Special Effort, Taking The Lead, Trade Partners
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In Praise of Emerging Markets

Thursday, October 8th, 2009

This post is a guest contribution by John Derrick, Director of Research at US Global Investors.

We believe global growth is the most powerful investment theme now and for the foreseeable future. You can see this playing out as countries like China, India and Brazil grow in economic stature. As we saw in Pittsburgh last week, the G-7 is being supplanted by the more inclusive G-20 when it comes to global economic decision-making.

Emerging market stocks were hit especially hard during the financial crisis but have been among the best performers during the rebound. We are currently in the midst of a synchronized global recovery, and with aggressive government stimulus, strong balance sheets and an ever-growing share of global GDP, emerging markets are likely to outperform the developed markets due to strong domestic consumption and forward-looking infrastructure investments.

The chart below from Goldman Sachs on consumer spending illustrates that point.

Goldman estimates that consumer spending in China will increase by about 10 percent in 2010, while India and Brazil will be in the 4 percent to 6 percent range. At the same time, negative growth is expected in Spain, Britain and Italy, and the forecast for the United States is flat. Industrial production in emerging markets has recovered to roughly where it was when the recession began; in developed markets, IP is still down nearly 20 percent.

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This second chart, also from Goldman Sachs, compares the operating margins in developed and emerging markets for the companies in Europe’s Dow Jones Stoxx 600 Index. The analysis going back to the early 1990s found that the emerging-market operations of these companies have consistently yielded higher margins, and oftentimes the spreads have been significant.

US Global Investors recently hosted a global outlook webcast that featured Dr. Marc Faber, the well-known investor based in Hong Kong. In the course of that webcast, Dr. Faber addressed the developed-versus-emerging issue:

If you look at the next 10 to 20 years in the West, I don’t see how the lifestyle of the average person will improve meaningfully. On the other hand, if you look at a country like Vietnam, they have a GDP per capita annually of $800 which may go to $3,000 over the next 15-20 years.

The same is true for China and India. You suddenly have a middle class of 230 million people in India who will be buying cars like the $2,500 Nano and other goods.

Once a family moves from the bicycle to the motorcycle, it’s an improvement in their standard of living. But when you move to the car and drive your children to school in your car, it’s a huge increase in your standard of living and your social class.

Global growth has been a tremendous benefit for commodities, with the key driver being strong demand from China. And as we pointed out in a recent webcast focused on China, that use of commodities is less to fuel export growth and more to satisfy domestic demand as income levels rise. Increasing demand for commodities and the corresponding rise in prices has positive knock-on effects for much of the developing world.

The increasing importance of emerging countries in the world order also argues for their currencies to strengthen relative to the dollar. International stock markets outperformed the US market during the 1970s and much of the 1980s, with much of that outperformance relating to relative currency strength.

A continuation of the dollar’s decline in the face of slow growth and yawning budget deficits - nearly $11 trillion between 2009 and 2019, according to White House estimates - would provide a significant tailwind for globally-minded investors.

Source: John Derrick, US Global Investors - Investor Alert, October 2, 2009.

Tags: Avw, China, Commodities, Companies In Europe, Consumer Spending, Director Of Research, Domestic Consumption, Dow Jones, Dr Marc Faber, Economic Decision, Economic Stature, Emerging Market Stocks, Emerging Markets, Foreseeable Future, Global Gdp, Global Growth, Global Investors, Global Outlook, Global Recovery, Gold, Goldman Sachs, Img Src, India, Infrastructure Investments, John Derrick, Market Operations, Openx, Operating Margins, Random Number
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What Follows Record-Setting Dow Quarters?

Thursday, October 8th, 2009

This is a guest post by Barry Ritholtz, editor of The Big Picture Blog and author of the newly released book, Bailout Nation

With futures deep in the red, let’s take a look at how markets do after big quarters. The quarter ending September 30 saw the Dow putting in its best quarter since 1998, up a solid ~15%.

With everyone waiting for a pullback, and yesterday (Thursday] and today [Friday] viewed as the probable start, perhaps its time to review some history. What has happened historically after markets have put in record setting quarters - 15%+?

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For the most part, momentum has trumped mean reversion historically. Jim Bianco crunched the numbers, and he found that “stocks returned an average of 1.33% over the month following one of these record quarters, 3.46% over the following quarter, and 9.95% over the following year”.

It is worth noting that these average returns following quarters of 15%+ performance are nothing out of the ordinary. The average monthly return over all periods in the DJIA since 1900 is 0.58%, the average quarterly return is 1.66%, and the average yearly return is 6.90%. If anything, the average returns following huge quarterly gains actually outpace the average returns during all periods.

Perhaps another way to look at it is that these record setting rallies, especially following big selloffs, are themselves a form of mean reversion.

Here’s the table of the past 15% quarters:

Source: Barry Ritholtz, The Big Picture, October 2, 2009.

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