David Rosenberg: These Belong in Ripley’s

Tuesday, November 10th, 2009

Ahead of a record week of new government supply in the U.S., the demand for the 3-year Treasury note at yesterday’s auction was unbelievable. It drew a 1.40% yield, which was 3bps through the auction bid deadline level. And indirect bidding also took up 68.6% of the auction, which in part reflects a very healthy foreign central bank appetite for Uncle Sam’s obligations.

At the same time, gold, the antithesis of U.S. government credit quality, shot up to yet a new record high. Then we have the equity market, which, despite ongoing contractions in credit and employment, is approaching its bear-market-rally highs (in fact, the Dow has already accomplished that). But the rub remains that these distribution sessions where the gains are exaggerated by light volume (barely over a billion shares on the Big Board? Are you kidding? After a 16.6% plunge on Friday, volume in yesterday’s session was still far below normal and the second lowest in the past two weeks). This is a sign that conviction over the current rally remains unusually light.

The U.S. dollar traded down to a 15-month low, which may help partly explain the continued run-up in gold, though bullion is in a bull run against most currencies; and the weak dollar is widely considered as the genesis for the ‘carry trade’ rally in risk assets, though many countries outside the U.S.A. also have their funding costs near zero. It would seem that investors are optimistic on the future insofar as governments and central banks around the globe are going to damn-the-torpedoes-and-go-full-steam ahead and act as the consumer of first and last resort for their economies. The fact that the U.S. government, at a time when the deficit/GDP ratio is already at record levels of 10%, feels compelled to:

• Extend jobless benefits for up to two years (why not just put these folks on the government payroll? At least the unemployment rate will start to go down).

• Expand the homeowner tax credit.

• Provide tax breaks to homebuilders (the ones who helped get us in to this mess).

• Provide businesses with tax credits for new hires.

• And bump up social security payments once again.

All this really attests to how rotten things are beneath the surface. No doubt that all the government stimulus is going to provide some impetus to corporate profits, but what exactly is the fair-value P/E multiple in a period of state capitalism is a legitimate question.

Tags: Auction Bid, Bear Market, Bullion, Carry Trade, Central Banks, Contractions, Credit Quality, David Rosenberg, Gdp Ratio, Gold, Gold Bullion, Government Credit, Government Payroll, Government Supply, Jobless Benefits, Light Volume, Market Rally, Time Gold, Torpedoes, Unemployment Rate, Weak Dollar, Year Treasury Note
Posted in Gold, Markets | No Comments »

India-IMF Deal: Tipping Point for Gold

Tuesday, November 10th, 2009

This article is a guest contribution by Frank Holmes, CIO, US Global Investors.

Has a new floor been set at $1,000 per ounce?

By Frank Holmes
CEO and Chief Investment Officer

India’s deal to buy 200 metric tons (6.4 million troy ounces) of gold from the International Monetary Fund (IMF) is a huge deal - not just the fact that the New Delhi government is handing over $6.7 billion for the metal, but what it may mean for gold going forward.

India, the world’s largest gold jewelry market, is making a rational and bullish call on gold. The supply of gold continues to decline — the biggest supply is from socialist governments with socialist policies who’re selling their gold to pay for social welfare and bailout programs. The IMF is a classic case of this.

What’s particularly interesting in this case is that the buyer is a developing economy that’s the largest democracy in the world. I see this as another sign of the wealth shift away from the developed markets of North America and Western Europe toward the emerging world.

A decade ago, many of the major emerging markets were in shambles, with contracting economies and huge current account deficits - now many of them have large surpluses to deploy, and they’re thinking beyond Treasuries.

Energy analysts at Merrill Lynch came out with a research note today that predicts the price of gold will top $1,500 an ounce within the next 18 months. The rationale - a lack of confidence in major currencies will push investors toward gold as a hedge against competitive devaluation by the world’s largest economies.

The chart below lays out this scenario in a succinct way. Annual gold production is on a downward trend while the growth in money supply in both the United States and the Eurozone is bent almost straight up. Economics 101 — more money competing for a declining resource tends to drive up the price of that resource.

The note goes on to say that if gold prices rise, the price of energy and other commodities will rise as well.  The chart below from Merrill Lynch shows the strong capital inflows into emerging markets starting in the second quarter of 2009 have both strengthened their currencies and boosted commodities demand.

You also see that dynamic at work in the relationship between gold and oil over more than a century. Historically there is a strong positive correlation between gold and oil, and with 2009’s global monetary expansion, that correlation is being further strengthened. We’ve been writing about this correlation for many years.

It’s significant that, on an inflation-adjusted basis, all of the natural resources except gold and silver have surpassed their previous all-time highs. Gold is only approaching the halfway mark to $2,300 an ounce, which would be its 1980 high when adjusted for inflation.

Just like in the U.S., money supply is exploding in China, as you can see in the chart above.

Greg Weldon, who analyzes money supply in the Weldon Money Monitor, had this to say recently: “September’s +29.5 percent year-over-year pace of monetary expansion represents the fastest ever recorded in China… Against a U.S.-focused macro-monetary backdrop that is defined by intensifying risk to reflation, the pressure on the (U.S. dollar) against the Chinese currency, in line with the highly expansionary monetary dynamic dominant in China, makes us more willing to explore the bullish side of global equities and commodities.”

Along with India, China has also been a major gold buyer - its reserves have nearly doubled since the start of 2003, when the price was about $345 an ounce. And, of course, now there’s talk that China may buy the remaining 203 metric tons that the IMF is seeking to sell.

Another thing about India or China is that their governments won’t be criticized for buying gold because as a nation, they have a strong cultural affinity toward it. It’s how they store their wealth, and they can wear it as jewelry.

If the U.S. government went out and spent nearly $7 billion for the IMF’s gold, there would be no end to the howling.

The disconnect amazes me - the U.S. holds virtually all of its foreign reserves in gold. We are the world’s largest gold holder, with more than double the amount as #2 Germany, but as a nation Americans are gold skeptics. Just this week, I was interviewed twice on television by two old-timers who are still clearly anti-gold. They just don’t want to get it. It appears they would prefer to live in a state of denial.

But in emerging Asia, the citizens get it. They say it’s a good move because they are buying gold, too — they believe in it.

And with this purchase from the IMF, India has gone from being a price taker as a jewelry consumer to being a price maker as an investor. This is the sort of change in government policy that we watch for in shaping and maintaining our investment models.

We monitor the seven most populous emerging markets and compare them to the G-7. It is significant that India, the second largest country in the world by population and the largest gold jewelry consumer, may have created a new floor for gold at $1,000 per ounce.

The presence of a big bullish buyer tends to create a big bullish buzz for gold. We’re seeing it now - gold today exceeding $1,100 an ounce - and history suggests it may last a while.

Around this time in 2005, for example, Russia announced that it was doubling its gold holdings from 5 percent to 10 percent of its reserves. At that time, gold was selling for about $490 an ounce. A year later, the price was up 30 percent.

Of course, Russian purchases weren’t the only thing that drove up gold - back then the dollar was dropping, federal deficits were colossal, markets were volatile and investors faced negative real interest rates.

We have the same conditions now, but on an even greater scale following the credit crisis, steep recession and the massive economic stimulus programs created around the world.

Our consistent suggestions is that investors consider a maximum 10 percent allocation to gold - half of the exposure in bullion and the other half in gold equities. The factors we’ve described above tend to be positive for gold and gold investing - the vote of confidence by a serious buyer like India may make a good situation even better.

Tags: Account Deficits, Chief Investment Officer, China, Commodities, Delhi Government, Emerging Markets, Energy Analysts, Frank Holmes, Gold, Gold Jewelry Market, Gold Prices, Gold Production, Imf Deal, India, International Monetary Fund, International Monetary Fund Imf, Lack Of Confidence, Largest Democracy In The World, Largest Economies, Merrill Lynch, oil, Price Of Gold, Socialist Governments, Socialist Policies, Us Global Investors, Wealth Shift
Posted in Emerging Markets, Gold, Markets | No Comments »

Jim Rogers: Gold, Market Bubbles, Equities, and Dr. Doom

Tuesday, November 10th, 2009

This article is a guest contribution from Damien Hoffman, of Wall Street Cheat Sheet.

Jim Rogers is one of the most respected investors in the world. I had a chance to chat with him the other morning to get more details about some of his recent comments in the media …

Damien Hoffman: Jim, you were in the media a few times last week and I want to follow up on a few points you made. You said on Bloomberg that Nouriel Roubini did not do his homework regarding the asset bubbles about which he is now warning. Can you explain what homework he did not do?

Jim: All of it. How can you talk about a bubble when assets such as silver are 70% below their all-time high? Same for coffee, sugar, cotton, natural gas, and many more. I have a problem talking about a bubble when assets are this depressed from their all-time highs.

A bubble is when assets are screaming to new highs everyday, everyone is talking about them, and everyone owns them. Right now, virtually no one owns commodities. So for Mr. Roubini to talk about a bubble in commodities defies comprehension. It proves he does not understand markets.

I am flabbergasted at Mr. Roubini’s comment about bubbles because there is not a single market in the world making all-time highs except Gold, US Government Bonds, Cocoa, and the Sri Lankan stock market. That’s hardly reason to call for a bubble. So, I am most perplexed about this alleged bubble which is out there.

If an asset rises 100% in one year, that’s a great year, but not necessarily a bubble. Look at oil. It’s up huge off the bottom but nowhere near it’s old highs. Look at Citigroup. The stock is up 3 or so times off the bottom …

Damien: … and I doubt long term shareholders feel like they are in a bubble.

Jim: Exactly. And since Mr. Roubini thought oil would stay below $40 a barrel for all of 2009, I would love for him to tell me and the rest of the world exactly where are all the oil supplies because the International Energy Agency (IEA) — which has the best global data set on energy supplies — has no idea where is the oil. Mr. Roubini should tell us where this price suppressing oil supply is hidden. All the oil possessing countries in the world have declining reserves. All the oil companies have declining reserves. So Mr. Roubini must know something the rest of us don’t.

Damien: On another note, Gold has been reaching new all-time highs, although not inflation adjusted. You said Gold may reach $2,000 an ounce over the next decade. Can you explain what variables will push Gold to $2,000?

Jim: First, I hope you will keep Mr. Roubini’s statement where he said Gold going to $2,000 an ounce by 2019 is “utter nonsense.” I think you’re going to get a chance to call him before 2019 to ask him what he thinks of Gold at $2,000 and why he thought it was “utter nonsense.”

Regarding variables, it’s very clear there is huge suspicion about paper money around the world. This suspicion is gathering steam. Governments are printing huge amounts of money. This has always led to higher prices. Maybe I am wrong and it’s different this time. But I doubt it.

Additionally, no new large gold mines have been opened in decades. Some of those mines are over 100-years old. They are all depleting. On the other hand, central banks have huge Gold reserves above ground — and they are less interested in selling than in the past.

If you adjust Gold for inflation and go back to it’s former all-time high in 1980, Gold should be over $2,000 an ounce right now if you want to say it’s reaching new inflation adjusted all-time highs. That does not mean Gold has to get back to a true all-time high. Nothing has to. However, I suspect that given all the money printing in the world, we will see much higher prices for hard assets.

Despite Gold’s potential, I think I will make more money in other commodities such as silver, cotton, or coffee — all of which are terribly depressed.

Damien: Speaking of other assets, as an outsider living abroad, what is your opinion on US Equities?

Jim: This is one of the few times in my life I have not had shorts anywhere in the world. I have also not had a lot of longs in the stock market because I’ve chosen longs in commodities and currencies. I have kept away from shorts because there is a gigantic amount of money being printed and it has to go somewhere. I thought some of it would end up in the stock market, and it has.

How much higher can the equity markets go? I don’t know. There are a lot of problems in the economy, but I don’t know when those problems will cause a downdraft in the stock market. All we’ve done is paper over the problem, so I expect we’ll have to deal with those issues in the future. Printing and spending money we don’t have simply prolongs the problems and makes them worse in the long run.

If the world economy improves, commodities will lead the way due to demand and shortages. If the world economy does not get better, commodities are still a great place to be because governments are printing so much money. And, if the world economy doesn’t get better, they will print even more money!

Damien: Jim, thank you for taking the time to share your outlook and opinions. I greatly appreciate it.

Jim: You are very welcome. Your site is very impressive. I look forward to staying in touch.

Tags: All Time Highs, Bloomberg, Bubbles, Cheat Sheet, Citigroup, Cocoa, Coffee Sugar, Commodities, Comprehension, Dr Doom, Ener, Gold, Gold Market, Government Bonds, Hoffman, Jim Rogers, New Highs, oil, Oil Supplies, Roubini, Single Market, Sri Lankan, Stock Market
Posted in Commodities, DXD, Emerging Markets, Gold, HFD, MYY, Markets | No Comments »

Krugman: TIPs a Useful Indicator of Inflation

Tuesday, November 10th, 2009

Paul Krugman writes that TIPs (or Real Return Bonds in Canada) can be a useful indicator of the market’s inflation expectations, though not a perfect one,  in critical response to an FT article:

Treasury inflation-protected securities — bonds whose payouts are indexed to consumer prices — are really useful for economic analysis: they give an objective, market-based measure of expected inflation. But you have to be a bit careful about using them to interpret recent events, because the same financial disruptions that wreaked havoc with many assets also did some funny stuff to TIPS.

Krugman’s second point, is that writers sometimes shape stories. Despite his criticism, inflation expectations based on his useful indicator are 1.98%.

Read the whole article here.

Tags: Assets, Canada, Critical Response, Disruptions, Economic Analysis, Funny Stuff, Havoc, Inflation Expectations, Inflation Protected Securities, Paul Krugman, Real Return Bonds, Treasury Bonds, Treasury Inflation Protected Securities, Treasury Securities
Posted in Markets | 2 Comments »

Rogers vs. Roubini - Inflation vs. Deflation

Tuesday, November 10th, 2009

Bloomberg’s William Pesek discusses the ongoing debate between inflationists represented by Jim Rogers’ views, and deflationists represented  by Nouriel Roubini.

It’s a, well, golden opportunity.

Investor Jim Rogers thinks gold will double to at least $2,000 an ounce. Economist Nouriel Roubini says that’s “utter nonsense.” As these well-known market personalities duke it out, they’re doing us a favor by highlighting a critical debate: Which is the bigger threat — inflation or deflation?

…

The risk is that policy makers go overboard looking for exit strategies. That, in a nutshell, is Roubini’s shtick and it’s hard to refute the views of the New York University professor. Yes, inflation must be contained, but so must the forces of deflation in the short run.

Read the whole article here.

Tags: Bloomberg, Critical Debate, Duke, Economist Nouriel Roubini, ETF, Exit Strategies, Gold, Golden Opportunity, inflation, Investor, Jim Rogers, New York University, Nutshell, Ounce, Personalities, risk, Shtick, Utter Nonsense, William Pesek, York University Professor
Posted in Gold, Markets | No Comments »

Lending Conditions Improve, But Loan Demand Weak - Senior Loan Officer Survey

Tuesday, November 10th, 2009

This post is a guest contribution by Asha Bangalore* of The Northern Trust Company.

The main aspect that stands out in the October 2009 Senior Loan Officer Opinion Survey is that lending conditions were less tight than survey results of July 2009 indicated and there was a substantial improvement from the October 2008 survey when credit markets had frozen. The net fraction of banks that reported tightening standards on commercial and industrial (C&I) loans for large firms dropped to 14% during October from 31.5% in July and was noticeably below the peak of 83.6% reported in January 2009 (see chart 1). A similar reduction in the number of banks reporting tightening lending standards was reported for C&I loans to small firms (see chart 1).

However, demand for C&I loans continued to be weak according to the survey results of October but less weak compared with the July survey (see chart 2). It was noted that a decline in the need to finance inventories, purchases of plant and equipment, accounts receivables, and M&A activity were the reasons for soft demand for loans. The enormous excess capacity in place and soft consumer demand conditions are factors holding down the demand for C&I loans.

About 40% of banks reported increasing spreads of loan rates over their cost of funds, which is significant decline from the situation reported in October 2008 and January 2009 surveys (see chart 3). In sum, cost of funds is easing and underwriting standards of loans have been eased but demand for loans has to gather steam in the business sector.

Given the problems of the commercial real estate sector, the fact that there were fewer banks reporting a tightening of underwriting standards in October (33.9%) compared with the earlier quarters (see chart 4), suggests that the commercial real estate market may be in marginally less trouble than anticipated.

In the household sector, mortgage underwriting standards for prime loans were tightened by (slightly) more banks compared with the situation in July. However, bankers were less stringent with non-traditional mortgage loans (see chart 5).

There was a small improvement in the demand for prime mortgage loans reported in October survey compared with July, which is consistent with the increase in home sales.

The number of banks tightening standards for credit cards and other consumer loans fell in October, particularly in comparison with the situation in the second-half of 2008 (see chart 7). Are consumers willing to borrow? Chart 8 indicates that fewer bankers see a willingness among consumers to borrow in October vs. the situation in July. The Senior Loan Officer Survey indicates that bankers are more willing to lend (see chart 9) to consumers compared with the situation a year ago. Employment has to post a significant increase for households to be enthusiastic about borrowing.

* Asha Bangalore is vice president and economist at The Northern Trust Company, Chicago. Prior to joining the bank in 1994, she was consultant to savings and loan institutions and commercial banks at Financial & Economic Strategies Corporation, Chicago.

Source: Northern Trust - Daily Global Commentary, November 8, 2008.

Tags: Accounts Receivables, Bangalore, Business Sector, C Amp, Commercial Real Estate, Credit Markets, Decline, Excess Capacity, Household Mortgage, Household Sector, Inventories, Loan Demand, Loan Officer, Loan Rates, Mortgage Underwriting, Northern Trust Company, Opinion Survey, Quarters, Real Estate Sector, Substantial Improvement, Survey Results
Posted in Markets | No Comments »

Nigel Rendell: Buy Brazil, Sell Eastern Europe

Tuesday, November 10th, 2009

Nigel Rendell, emerging market strategist of RBC Capital Markets, talks to Izabella Kaminska of FT Alphaville about a broad spectrum of emerging-market related issues.

Part 1:
Rendell talks about the differing fortunes of economies from Russia to Argentina. He says Brazil remains a great pick outside Asia.

Click here or on the image below to view the video.

Part 2:
With many analysts bullish on Chinese growth, the big challenge for investors is gaining exposure. Rendell says Korea and Taiwan offer the best proxy plays.

Click here to view Part 2 of the interview.

Part 3:
With interest at record lows in developed economies, investors are increasingly looking for yield in emerging markets. Rendell comments on whether this inflow of money is creating a fresh bubble.

Click here to view Part 3 of the interview.

Source: Izabella Kaminska, Financial Times (here, here and here), November 9, 2009.

Tags: Alphaville, Argentina, Best Proxy, Brazil, Broad Spectrum, Chinese Growth, Eastern Europe, Emerging Market, Emerging Markets, Financial Times, Fortunes, Ft Alphaville, Inflow, Interview Source, Kaminska, Market Strategist, Rbc Capital Markets, Record Lows, Rendell, Russia
Posted in Emerging Markets, Markets | No Comments »