India’s Growing Appetite for Energy

Friday, January 29th, 2010

India’s appetite for energy continues to grow, pushing Indians to consume coal in ever great quantities. Whole cities, like Jharia, in eastern India, are disappearing. At a time when Global Warming is at the top of world’s agenda, FRANCE 24 takes you to a town sacrificed to the pursuit of energy. Click the image for the video.

Tags: Agenda, Appetite, Coal, Eastern India, Emerging Markets, France 24, Global Warming, India, India India, Indians, Quantities
Posted in Bonds, Emerging Markets, Gold, India, Markets | No Comments »

Roundup: The Economy and Bond Market

Sunday, January 17th, 2010

The Economy and Bond Market Treasury yields rallied as this week’s 10 and 30-year auctions received a good response and concerns of global stimulus removal have highlighted risks in the global recovery story. Economic data was mixed this week as December retail sales were surprisingly weak and seemed to contradict earlier data. On the other hand, industrial production rose for the sixth straight month and is giving a classic sign of economic recovery. The chart below graphs industrial production on a year-over-year basis and makes clear the change in direction of activity. Strengths

• Industrial production rose 0.6 percent in December and has now risen for six months in a row.
• Chinese imports and exports moved sharply higher in December, which implies continued improvement in not only China’s economy but the global economy.
• Consumer prices in December remained muted, rising only 0.1 percent and giving the Fed plenty of room for monetary policy flexibility.

Weaknesses

• Retail sales for December disappointed and appeared to contradict earlier data. One positive caveat was November data was revised higher making the numbers a little more palatable.
• The Obama administration is proposing a tax on big banks as a way to recoup the government’s support. The concern is that this appears somewhat punitive and more taxes and/or regulation are not an effective way to stimulate the economy.
• The Fed’s beige book reported only a modest improvement in the economy around year end, and cited weakness in real estate and labor markets.

Opportunities

• Expectations continue to build for growth in the U.S. in the current quarter, possibly as much as 4-5 percent. The global economic recovery appears to be taking hold.

Threats

• The U.S. is facing a long-term risk as Fitch cited the budget deficit as a threat to the U.S. AAA debt rating.

Tags: Beige Book, Bond Market, Budget Deficit, Caveat, Change In Direction, China, China Economy, China S Economy, Chinese Imports, Economic Data, Economic Recovery, Emerging Markets, Global Economy, Global Recovery, Imports And Exports, Labor Markets, Monetary Policy, Plenty Of Room, Retail Sales, Stimulus, Treasury Yields, Year End
Posted in Bonds, Gold, Markets | No Comments »

Gold Outlook 2010: Gold Resuming its Historical Monetary Role – as the Anti-Currency

Monday, January 11th, 2010

Keynote Speech Presented by Nick Barisheff at the Empire Club’s 16th Annual Investment Outlook Luncheon

Thursday January 7, 2010

To download the PDF version of this article, click here.

Good afternoon. As always, it is a privilege to speak at the Empire Club.

Each year for the past three years, I have returned to share perceptions about the precious metals industry and specifically about gold. Generally, this forces me to step back and assess the previous year’s events and then to speculate about what they may indicate for the coming year. Choosing the seminal events this year has been more difficult than usual. Lately the pace of gold-related news has accelerated exponentially with gold’s rising price. While 2009 was an exciting year for gold, setting a new average high of $1,088, 2010 promises to be even more exciting.

In 2009 gold resumed its historical monetary role - as the anti-currency. Therefore, the influences and events that affect its price are not simple commodity supply/demand fundamentals, but the more complex global monetary issues.

To summarize some of the important key events, I thought it would help to separate them into three categories.

First, there are the obvious events-those whose implications for gold are self-evident.

Second, there are the events that require some interpretation and, finally, there are the events that we might call “incipient”. These events and stories are in their early stages of development. They may amount to nothing, or they may develop into tectonic forces that completely disrupt the gold-related financial landscape.

It is more than a year since Wall Street made some very bad bets that resulted in unprecedented losses, losses that were passed on to the American taxpayer. For their incompetence and greed, most of the company heads responsible were rewarded with generous severance packages, or with new jobs commensurate in pay and status to the ones they left behind. Even more surprising, perhaps, is that one year later many of these people continue to advise the US government’s financial policy makers. My associate, trend analyst Richard Karn, likens this particular situation to a group of chickens getting together and consulting with the foxes about a problem that is plaguing their community-the rapidly decreasing chicken population. Since the same key figures remain firmly in charge of US fiscal policy, we can assume the status quo will continue until the ship finally hits the iceberg.

So let’s start with the obvious gold events of the past year.  It was the first time in 20 years that gold purchases for investment purposes outpaced gold purchases for jewellery demand.  However, in terms of significance, central bank buying of gold this past year upstaged all other events. For the first time in over 20 years, central banks became net buyers rather than net sellers of gold. This is a watershed event.

India’s central bank purchase of over 200 tonnes of IMF gold in the fall of 2009 demonstrated that large central banks were willing to pay the market price for gold. This removed the concern that official sector sales could cut short any meaningful rally.  Although the central banks have been selling less gold each year lately, the threat of IMF sales had continued to weigh on the market.  Russia and China further dispelled this fear with the disclosure that they too have added 130 and 454 tonnes respectively.  Several smaller central banks such as those in Sri Lanka and Maritius also added to their gold reserves. Therefore, central bank buying was clearly the significant gold event of 2009 and will likely continue to be in 2010.

The next level of news events had implications that might not have been so obvious at first glance. On October 6, Robert Fisk, a veteran Middle East correspondent writing for the UK’s Independent, published an article entitled “The Demise of the Dollar.” The article described how “Arab states have launched secret moves with China, Russia and France to stop using the US currency for oil trading.” Although the central banks immediately rejected these rumours, the market treated their denials as a clear admission of guilt and gold broke through year-long resistance at $1,020 an ounce into an entirely new trading range that day.

The Iranian oil bourse, which allows oil sales in several currencies except the US dollar, is another indication that this trend will continue.  In addition, the US’s greatest supporter of the petrodollar, Saudi Arabia, announced that it would no longer trade oil futures on the NYMEX. And on October 19 a related event occurred that received almost no mainstream press coverage; in fact, the only mention I could find of this story at first was at Al Jazeera Online. This was an agreement between ten member states in Central and South America and the Caribbean to use the sucre rather than the dollar for intra-regional trade. Venezuela, one of the West’s largest oil suppliers, is also a member of this new alliance.

This trend is significant to gold because, since 1973, the US has been able to accumulate huge deficits thanks to an agreement with OPEC to price oil in dollars exclusively. This system worked until the 2008 financial crisis, which many felt weakened the dollar’s inherent worth beyond repair. The petrodollar experiment, which started in 1971 with the removal of the dollar’s peg to gold and continued in 1973 when the dollar was essentially backed with oil, is coming to an end after only 36 years. However, given the weakness of other currencies and the fact that no other paper currency currently threatens to replace the US dollar, the process may take years to complete. The end of the petrodollar’s hegemony, which is inevitable in my opinion, will have significant implications for gold.

Another event whose implications may require some extrapolation was the move by the Chinese government to encourage and facilitate gold buying by the Chinese public. China watchers know the Chinese have a long-term love for gold. In fact, on December 9, Reuters announced that China had surpassed India as the world’s largest gold buyer, for the first time in recorded history.  The Chinese have also demonstrated a strong propensity for saving. With their government making no secret of its displeasure with the US dollar, and with few other safe investment options available, the Chinese public could provide the fuel to move the gold price to new highs. One ounce purchased by each of the 80 million middle-class Chinese would equate to 2,500 tonnes of gold.  It is important to remember that during the last gold bull, the Chinese public was unable to participate. This is a story that definitely bears watching.

Finally, in the third category, is the news we might compare to the first spark of a match that either extinguishes uneventfully or ignites a raging, out-of-control forest fire. Most of us in the gold industry have discovered that we ignore these flickers at our own peril. Many of the stories that started as hints or rumours a few years ago are now accepted as fact. The first of these issues we are watching is the imbalance between gold derivatives and paper proxies and the amount of physical gold in existence. This is important because despite its best efforts, Wall Street still cannot print gold.

Since almost all the gold ever mined remains in existence and gold reserves and production estimates are monitored meticulously, such discrepancies will show up faster in the relatively small gold market than they might with other commodities. As Wall Street churns out new gold investment vehicles, people are starting to do the math. If it becomes apparent that financial institutions have sold more paper gold than actually exists in physical form, then the price of paper gold and physical gold could diverge.

This year, many analysts began to apply increased scrutiny to the gold and silver ETFs. In mid-July, hedge fund giant Greenlight Capital announced they were moving assets out of the world’s largest gold ETF - SPDR Gold Shares - and into physical gold. Greenlight is an industry leader whose movements are carefully studied and often emulated. Although Greenlight’s manager, David Einhorn, claimed it was cheaper to own and store physical gold than it was to pay the ETF fees, the fact that a major, industry-leading fund would move to physical bullion set off many alarm bells.

Since ETFs do not actually purchase their assets, there is nothing prohibiting Authorized Participants from contributing baskets of borrowed gold. The amount of borrowed gold held by ETFs is a matter of speculation.  With multiple claims on the bullion, ETF investors may suffer unexpected losses under stress conditions when they need their gold the most.

So with these events of 2009 in mind, I am often asked, “How high might the price of gold go?”

Let’s look at some figures.

We know that the US must refinance at least two trillion dollars of debt in 2010. They can raise this money in one of three ways:  through the sale of bonds, through increased taxation, or through monetization by the Federal Reserve. Foreign investors showed decreasing appetite for US treasuries in 2009. Rising unemployment along with an aging population makes increased taxation a poor option. Therefore, the US Fed will be forced to monetize the ballooning debt, further eroding  confidence in the dollar as the world’s reserve currency.

This will encourage central bankers, especially those of the developing countries, to accelerate their accumulation of gold. Stephen Jen, a managing director at hedge fund BlueGold Capital and an expert on sovereign wealth funds from his days at Morgan Stanley, estimates that the percentage of gold held by the Chinese, Indian and Russian central banks is just 2.2 percent. This compares with 38 percent held by Western central banks. According to Jen, they would have to buy $115 billion dollars worth of gold at current prices to raise their bullion to just 5 percent of total reserves, and $700 billions’ worth to reach just half of Western levels.

Along with many others in the gold industry, we have noticed that fund managers are starting to buy gold as long-term insurance, which they intend to hold for several years. By one estimate, if the world’s pension funds and hedge funds moved only five percent of their assets into gold, which these days seems quite conservative, gold would trade above $5,000.  With leading wealth managers such as David Einhorn, John Paulson and Paul Tudor Jones allocating significant amounts of their portfolios to gold, the process may have already begun.

In conclusion, the events of the past year bode well for the price of gold in 2010. At the recent highs of $1,200 many thought that gold was overbought. For those who feel this way, I would like to close with some recent words from investment legend Richard Russell who said, “If gold is going parabolic, then there’s no such thing as ‘overbought’,” Almost any of the events of 2009 I have highlighted could trigger such a parabolic rise. Right now the Chinese and Indian public, the non-Western central banks, the sovereign wealth funds, the pension funds and the hedge funds of the world are all looking for ways to increase their long-term gold holdings. The pull-back from the recent highs of $1,200 seems to be over, providing an attractive entry point for investors. In 2010 we will likely see prices rise to at least $1,300 to $1,500.

It is important to understand that this isn’t a typical bull market. Unless governments around the world stop creating massive amounts of new money, the price of gold will continue to rise.

There is a famous investment axiom that states, “Now is always the most difficult time to invest.”  To that I would add, “But now is also the best time to insure the wealth we have accumulated is protected through the ownership of gold.”

Thank you.

Tags: American Taxpayer, China, Commodities, Commodity Supply, Emerging Markets, Empire Club, ETF, Financial Landscape, Gold, Gold Outlook, Good Afternoon, Greed, Incompetence, India, Investment Outlook, Keynote Speech, Monetary Issues, New Jobs, oil, Pdf Version, Precious Metals Industry, Previous Year, Seminal Events, Severance Packages, Stages Of Development, Tectonic Forces, Unprecedented Losses
Posted in Canadian Stocks, Currency, Economy, Emerging Markets, Gold, India, Markets, Outlook | No Comments »

Words from the (Investment) Wise (November 29, 2009)

Sunday, November 29th, 2009

As shoppers were emptying their purses on Black Friday bargains, Dubai’s attempt to reschedule its debt roiled financial markets, plunging risky assets into the red. The government of Dubai requested a six-month payment freeze on the $59 billion debt issued by Dubai World - a state-owned conglomerate that has become known for its extravagant real estate projects.

Worries about Dubai’s debt woes rattled investors’ confidence, precipitating a sell-off in equities, high-yielding corporate bonds, commodities and the Baltic Dry Index, while mature-market government debt, the US dollar and the Japanese yen attracted safe-haven buyers. On Thursday and Friday, many emerging-market and high-yielding currencies declined sharply.

A fact not widely known is that Dubai has the worst debt per capita in the world. Ah well …

Source: Peter Brookes, Times Online

The credit-rating agencies promptly downgraded Dubai’s government-related debt and the cost of insuring against default jumped across the United Arab Emirates (UAE) region. As shown in the Bloomberg screenshot below, courtesy of Bespoke, the price of Dubai’s sovereign debt credit default swap (CDS) last week spiked up to 541 basis points. “Now that global markets have stabilized and exited crisis mode, an isolated event in Dubai where default risk doesn’t even spike to its 2009 highs [of almost 1,000 basis points] has caused a global market selloff,” remarked Bespoke.

Source: Bespoke, November 27, 2009.

Geoffrey Yu, strategist at UBS, said (via the Financial Times): “Although the majority of market observers believe the problems in Dubai are not insurmountable, the wider fallout has simply revealed how fragile markets are - and risk appetite may not be as strong as previously assumed, regardless of how profligate central banks globally have been in providing liquidity.”

Also as reported by the Financial Times, Julian Jessop of Capital Economics argued that Dubai’s move was unlikely to affect the positive outlook for emerging markets in the longer term: “We do not believe the events in Dubai mark a new phase in the global crisis. But if they are the catalyst for a more selective approach to investment, that might be no bad thing.”

In terms of banks’ exposure to Dubai, JPMorgan Chase comments (via The Big Picture) that the Royal Bank of Scotland underwrote more Dubai World loans than any other institution. In terms of capital at risk, HSBC has the largest exposure to the UAE.

The past week’s performance of the major asset classes is summarized by the chart below. Gold bullion (not shown on the graph) touched a record high of $1,194.90 on Thursday before tumbling to $1,136.80, but subsequently recovered to close 2.4% up for the week at $1,177.63. Similar volatility was seen in the oil price, with West Texas Intermediate Crude declining by more than $5 at one point on Friday, but later regaining some ground to end the week 1.8% down at $76.05.

Source: StockCharts.com

A summary of the movements of major global stock markets for the past week and various other measurement periods is given in the table below.

The MSCI World Index (-0.1%) last week marked time, whereas the MSCI Emerging Markets Index (-2.5%) experienced more selling from risk-averse investors. However, the aggregate indices mask greatly varying performances. For example, among mature markets the Japanese Nikkei 225 Index (-4.4%) recorded a fifth consecutive down-week, suffering from the strong Japanese yen that recorded a 14-year low versus the US greenback. On the other hand, the Brazillian Bovespa Index (+1.1%) and the Russian Trading System Index (+1.8%) bucked the broader downtrend among emerging markets.

As far as the US indices are concerned, Friday’s losses wiped out the gains from earlier in the week, reversing a new recovery high of 10,464 made by the Dow Jones Industrial Index on Wednesday. By the close of the Thanksgiving-shortened week on Friday, the S&P 500 Index remained unchanged on the week, whereas the other major indices experienced a second down-week. Five of the ten economic sectors (as measured by the SPDR exchange-traded funds) closed higher for the week, with Telecoms (+1.8%), Health Care (+1.3%) and Utilities (+0.9%) outperforming, and Financials (-2.2%) in the red.

The year-to-date gains in the US remain firmly in positive territory and are as follows: Dow Jones Industrial Index 17.5%, S&P 500 Index 20.8%, Nasdaq Composite Index 35.6% and Russell 2000 Index 15.6%.

Click here or on the table below for a larger image.

Top performers among stock markets this week were Bangladesh (+5.7%), Ecuador (+4.3%), Kuwait (+3.4%), Kenya (+2.1%) and Estonia (+1.9%). At the bottom end of the performance rankings, countries included Cyprus (‑15.6%), Vietnam (-11.7%), Serbia (-8.8%), China (-6.4%) and Greece (‑6.2%). The declines in the Shanghai Composite Index came in the wake of a warning by China’s banking regulator that it would refuse approvals for expansion and limit banking operations if lenders did not meet new capital adequacy requirements.

Of the 98 stock markets I keep on my radar screen, 30% recorded gains (last week 39%), 65% (58%) showed losses and 5% (3%) remained unchanged. (Click here to access a complete list of global stock market movements, as supplied by Emerginvest.)

John Nyaradi (Wall Street Sector Selector) reports that, as far as exchange-traded funds (ETFs) are concerned, the winners for the week included United States Natural Gas Fund (UNG) (+10.0%), Rydex S&P Equal Weight Utilities (RYU) (+3.0%), Currency Shares Japanese Yen (FXY) (+2.6%), PowerShares DB Gold (DGL) (+2.5%) and Vanguard Extended Duration Treasury (EDV) (+2.5%).

At the bottom end of the performance rankings, ETFs included iShares MSCI Turkey Investible Market (TUR) (-5.6%), SPDR S&P Emerging Europe (GUR) (-5.4%) and Market Vectors Russia (RSX) (-4.9%).

Referring to the bull market in gold, the quote du jour this week comes from Richard Russell, 85-year-old author of the Dow Theory Letters. He said: “There’s still loads of scepticism about the rising price of gold and the bull market in gold. It’s been so long since the US public (since 1971) realized gold was real Constitutional money that they don’t know what to make of the gold action. They think gold near $1,200 an ounce is expensive and they’d rather have dollar bills.

“I’ve coined the phrase, ‘dollar-bugs’ for these ignorant Americans. I guess they’ll have to get educated the hard way, which means holding on to their fading Federal Reserve Notes, no matter what. As far as I’m concerned, it’s an amazing example of mass brainwashing. ‘Hey, I’d rather have junk paper turned out by the Fed than the real thing - gold.’ Pathetic. And the happy thought is that you can (legally) still swap your junk fiat paper for gold.”

Still on the topic of gold, Ian McAvity (Ian McAvity’s Deliberations) said: “Gold bubble? I regard such talk as nonsense … Gold is about 52% higher than the peak weekly average price of January 1980. The US CPI is 177% higher, US M-2 Money Supply is 464% higher, and the S&P is 892% higher. I don’t think it untoward to suggest gold is badly lagging a number of important yardsticks and at these levels has some catching up to do.”

In other news, MarketWatch reported that the number of distressed banks in the US rose to the highest level in 16 years in the third quarter. The Federal Deposit Insurance Corporation’s (FDIC) Deposit Insurance Fund, which is used to protect depositors, swung to an $8.2 billion loss in the third quarter, the largest drop since the savings-and-loan crisis of the 1990s.

Separately, according to MarketWatch, rates on 30-year fixed-rate mortgages averaged 4.78% last week, matching April’s all-time low of in Freddie Mac’s weekly survey of conforming mortgage rates. The mortgage rate averaged 5.97% a year ago.

Next, a quick textual analysis of my week’s reading. This is a way of visualizing word frequencies at a glance. There is nothing specific to report here, other than that “gold” and “banks” are still prominent and “Dubai” is making an appearance.

Back to the stock markets: The major moving-average levels for the benchmark US indices, the BRIC countries and South Africa (where I am based in Cape Town) are given in the table below. With the exception of the Russell 2000 Index and the Bombay Sensex Index, the indices in the table are all trading above their 50-day moving averages, with all the indices also above their respective 200-day moving averages.

However, many stock markets have already fallen to below their 50-day lines (not shown on this table, but indicated on the performance table higher up), pointing to possible further weakness. Also, the Japanese Nikkei 225 Index last week became the first major market to breach its key 200-day moving average, pointing to a very weak technical picture.

The October lows are also given in the table. A break below these levels would indicate a reversal of the uptrend since March, i.e. reversing the progression of higher-reaction lows.

Click here or on the table below for a larger image.

In addition to having retraced 50% of their bear market declines, the Dow Industrial and S&P 500 are up against significant medium-term downward trend lines. Also, negative divergences have been showing up in a number of breadth indicators, financial stocks and small caps, suggesting a more cautious tone.

According to Bespoke, last week’s sentiment survey from Investors Intelligence showed bullish sentiment among newsletter writers was near its highest levels since the March lows (50.6%), while bearish sentiment is at a five-year low (17.6%). This puts the spread between bulls and bears at 33, which is the highest level since December 2007. “High levels of bullish sentiment are typically considered contrarian, but we would note that sentiment can remain bullish for extended periods of time with little impact on the market. While it is true that markets typically peak when bullish sentiment is high, however, high levels of bullish sentiment don’t necessarily mean an imminent decline,” said Bespoke.

Source: Bespoke, November 25, 2009.

Casting his eye on 2010, Eoin Treacy (Fullermoney) said: “Most markets rallied from deeply oversold levels this year and have posted impressive advances since March. It is unreasonable to expect the same type of performance to be repeated next year. Nevertheless, monetary conditions are unlikely to pose a headwind and the environment is likely to remain largely bullish despite the potential for swift mean reversion in markets somewhat overextended relative to their 200-day moving averages.”

In my opinion, stock markets have run too far too fast - driven by an avalanche of liquidity - and they have moved out of alignment with economic and earnings growth that may not live up to the expectations being priced into equity valuations. I will bide my time while the fundamentals play catch-up.

For more discussion on the economy and financial markets, see my recent posts “Dubai’s latest mega-project - a massive default?“, “Japanese Nikkei 225 nosedives“, “Gold ETF makes it 9 up-days in a row“, “Gold bullion - overdue for a pullback?“, “Ritholtz: “Buy and hold” is a disaster“, “Charlie Rose in conversation with Barton Biggs“, “Picture du Jour: Will emerging-market outperformance last?” and “WealthTrack: Robert Kleinschmidt - reveling in contrarian investment philosophy“.

Twitter and Facebook
I regularly post short comments (maximum 140 characters) on topical economic and market issues, web links and graphs on Twitter. For those readers not doing so already, you can follow my “tweets” by clicking here. You may also consider joining me as a friend on Facebook.

Economy
“There has been no meaningful change in global business sentiment during the past three months. Since mid-August, business confidence has been consistent with a tentative global economic recovery,” according to the results of the latest Survey of Business Confidence of the World by Moody’s Economy.com. “Businesses have remained consistently more upbeat about the outlook than their assessment of current conditions. Sales and hiring are soft, as are pricing and inventories. South American businesses and professional service firms are the most positive and North Americans and those working in government generally the most negative.”

Source: Moody’s Economy.com

Purchasing managers indices for the 16-country Eurozone region showed private sector activity expanding this month at the fastest pace in two years, led by France and Germany, reported the Financial Times. The composite index, covering Eurozone services and manufacturing, reached 53.7 in November, up from 53.0 in October, making it the fourth consecutive month of expansion.

As far as hard data are concerned, Germany’s economy expanded again in the third quarter of 2009. GDP rose by 0.7% on a seasonally adjusted basis from the previous quarter, when it expanded by a revised 0.4%. Economic activity was boosted by inventory restocking and spending on machinery and equipment.

Concerns remain about the pace of the global economic recovery, and therefore how quickly governments and central banks should withdraw emergency support measures. According to the Financial Times, Mr Strauss-Kahn, managing director of the International Monetary Fund, said the global economy stood at the cusp of recovery but remained vulnerable to shocks and policy missteps. Fiscal and monetary stimulus programs should not be stopped too soon, he said.

A snapshot of the week’s US economic reports is provided below. (Click on the dates to see Northern Trust’s assessment of the various data releases.)

Tuesday, November 24
• Minutes of November 3-4 FOMC Meeting - spots of optimism are visible, concerns about dollar, commercial real estate loans, and low interest rates are noticeable
• Widespread revisions of Q3 GDP
• Home prices - signs of stability remain in place
• Consumer Confidence Index moves up slightly

Monday, November 23
• Low mortgage rates and tax credit lift sales of existing homes

A very handy graph to assess the current state of the US economy comes courtesy of Russell Investments. Click here to link to the interactive version.

Source: Russell Investments, November 22, 2009.

The minutes of the Federal Open Market Committee’s (FOMC) November 3-4 meeting point to continued aggressive monetary policy in the near term. Although participants agreed that the recession was over, they expected the unemployment rate to remain elevated and the inflation rate to remain below the central bank’s optimal level. Participants expected economic growth to slow a bit in 2010 and then pick up again after that.

On the topic of the magnitude of the US economic recovery, David Rosenberg, chief economist and strategist of Gluskin Sheff & Associates, provided the following interesting snippet:

“The recession in the US may be over, but what sort of recovery lies ahead remains in question. All we can say is that when looking at what is normal in the context of a post-recession rebound during the post-WWII era, the first quarter of growth is closer to 7.3% at an annual rate, not 2.8% as we just saw in the latest real GDP estimate - the median was 6.3%. The fact that with the massive amount of stimulus - without it, growth would have flirted with 0% - this first quarter of positive growth was basically one-third of what is typical, really says something.”

Food for thought indeed.

Source: Gluskin, Sheff & Associates - Breakfast with Dave, November 26, 2009.

Week’s economic reports
Click here for the week’s economy in pictures, courtesy of Jake of EconomPic Data.

Source: Yahoo Finance, November 27, 2009.

The European Central Bank (ECB) will make an interest rate announcement on Thursday (December 3). US economic data reports for the week include the following:

Monday, November 30
• Chicago PMI

Tuesday, December 1
• Construction spending
• ISM Index
• Pending home sales
• Auto and truck sales

Wednesday, December 2
• ADP employment report
• Fed Beige Book

Thursday, December 3
• Jobless claims
• Productivity
• ISM Services

Friday, December 4
• Nonfarm payrolls
• Factory orders

Markets
The performance chart from the Wall Street Journal Online shows how different global financial markets performed during the past week.

Source: Wall Street Journal Online, November 27, 2009.

“Regardless of the dollar price involved, one ounce of gold would purchase a good-quality men’s suit at the conclusion of the Revolutionary War, the Civil War, the presidency of Franklin Roosevelt, and today,” said Peter Burshre (hat tip: Chart of the Day). Let’s hope the news items and quotes from market commentators included in the “Words from the Wise” review will assist the readers of Investment Postcards to not only don decent suits, but also build considerable wealth with their investment portfolios.

That’s the way it looks from Cape Town (where I will be spending my time over the next few weeks, because my visit to New York had to be cancelled to attend to local business responsibilities).

Source: Wayne Stayskal, November 11, 2009.

Financial Times: Bets rise on rich country bond defaults
“The mounting level of debt in the industrialised world is prompting a growing number of investors to use the derivatives market to bet on the chance of rich governments defaulting on bonds.

“The volume of activity in sovereign credit default swaps - which measure the cost to insure against bond defaults - linked to the US, UK and Japan have doubled in the past year because of concerns about their public finances.

“CDS volumes for Italy, which has one of the highest debt burdens of the developed economies, are now the highest for an individual country, according to the Depository Trust & Clearing Corporation.

“In contrast, the outstanding volume of CDS linked to emerging nations such as Russia, Brazil, Ukraine and Indonesia have been flat or fallen in the past 12 months as investors have become less interested in trading the risks of those countries.

“In the past, the CDS market for developed countries was sluggish, because few investors saw the need to buy or sell protection against a risk of default that seemed exceedingly remote.

“However, rising debt levels and growing political and economic uncertainty have created a more active market, with more investors now seeking insurance. Meanwhile, many banks are prepared to offer protection in exchange for a fee.

“This fee has recently jumped, since the cost to insure the debt of developed countries has increased since the summer of last year, while the cost of insuring emerging market debt has fallen.

“Gary Jenkins, head of fixed income research at Evolution, said: ‘The biggest single risk hanging over the bond markets is the rapid rise in public debt in the industrialised world.

“‘If we get to a point where the market thinks the levels of debt are unsustainable, then we will see an almighty sell-off in the government bond markets, with yields soaring. Governments need to take action to cut deficits and debt.’

“Nigel Rendell, senior emerging markets strategist at RBC Capital Markets, said: ‘It is not surprising that investors are increasingly worried about debt in the industrialised world. Debt to GDP of more than 100 per cent is difficult to sustain.’”

Source: David Oakley, Financial Times, November 22, 2009.

Financial Times: Dubai World
“Dubai has shocked investors by asking for a debt standstill at Dubai World, the government’s flagship holding company that has developed some of the world’s most extravagant real estate projects. The move raised the spectre of default in the Middle East’s trading hub just as early signs of economic recovery have emerged. John Paul Rathbone analyses recent developments in Dubai.”

Source: John Paul Rathbone, Financial Times, November 24, 2009.

Financial Times: Dubai shock after debt standstill call
“Dubai has shocked investors by asking for a debt standstill at Dubai World, the government’s flagship holding company that has developed some of the world’s most extravagant real estate projects.

“The move raised the spectre of default in the Middle East’s trading hub just as early signs of economic recovery have emerged. During the boom, Dubai rode the wave of easy credit generating phenomenal economic growth but was badly hit by the global credit crisis.

“Dubai’s surprise move angered some investors who had been reassured by local officials for months that the city would meet all obligations on its $80bn of gross debt in spite of recession and a real estate crash.

“‘Investors view this as shockingly bad news,’ said Rob Whichello of BNP Paribas. Two hours after announcing it had raised $5bn from two Abu Dhabi banks, the department of finance asked for a standstill until May 30 on all financing to the heavily indebted Dubai World and its troubled property unit Nakheel, which is due to pay back $4bn on an Islamic bond on December 14.

“Dubai also launched a restructuring of the government holding company, which oversees ports operator DP World, the UK-based P&O Ferries and troubled investment company Istithmar. Nakheel, the developer behind the city’s Palm Islands that boast celebrity owners such as David Beckham, has had to shed thousands of staff and left contractors out of pocket as local property prices halved and credit dried up.

“A symbol of Dubai’s pre-crunch excess, the government company has had to cancel plans for the world’s tallest tower and a constellation of reclaimed islands, as collapsing cash flow left the developer on the brink.

“‘This will destroy confidence in Dubai, the whole process has been so opaque and unfair to investors,’ said Eckart Woertz, economist with Dubai’s Gulf Research Centre.

“The gaping size of Dubai World’s $22bn debt problem has been apparent for a year. But the government’s level of support has been clouded by politics and a lack of clarity on how much it could raise from international markets and the oil-rich capital of the United Arab Emirates, Abu Dhabi.

“Bond markets reacted sharply to the news with investors demanding higher premiums to hold debt from the region. In London trade it cost about $460,000 annually over five years to insure $10m worth of Dubai government debt against default, compared with $360,000 on Tuesday. Prices rose for its neighbours with Abu Dhabi protection $100,000 more than on Tuesday.

“Standard & Poor’s and Moody’s Investors Service immediately downgraded the ratings of all six government-related issuers in Dubai following news of the repayment delay and left them on review for possible further downgrade.

“Moody’s cut ratings on some government-related entities to junk status, while S&P cut ratings on some entities to one level above junk.

“S&P said the restructuring ‘may be considered a default under our default criteria, and represents the failure of the Dubai government (not rated) to provide timely financial support to a core government-related entity’.”

Source: Simeon Kerr and Jennifer Hughes, Financial Times, November 25, 2009.

Eoin Treacy (Fullermoney): Dubai could trigger corrective phase
“Middle Eastern stock markets have been laggards over the last year despite the advance in oil prices. Laggards usually lag for a reason and these are now becoming apparent with yesterday’s announcement. This news has had little effect on the region’s stock markets which suggests either some expectations of credit problems are already in the price or the focus of these problems lies with the Dubai government and foreign creditors.

“Dubai took full advantage of loose credit conditions earlier this decade to build on a massive scale. A huge percentage of the world’s cranes were domiciled in the country and the ‘before and after’ pictures of the city were commonly used to illustrate the extent of the development. The aim of building a financial and tourist hub and becoming a gateway between Europe and Asia as a solution to the Emirate’s lack of oil and gas reserves is laudable, but as with any mania, the good idea was taken to excess. The contraction of global liquidity has put pressure on Dubai’s ability to attract investment and has contributed to the current problems.

“Countries that experienced the biggest building booms on credit alone are experiencing some of the deepest recessions. The US, UK, Ireland, Spain and a number of Eastern European and Middle Eastern countries share this characteristic. However, the stock market action of the last year demonstrates that not all countries have been affected the same way and those which avoided building to excess have largely avoided recessions and posted the best stock market performances.

“The extent to which British banks are exposed to Dubai World has begun to rekindle worries about contagion but I wonder how justified this is? Dubai’s big brother, Abu Dhabi, is on a sounder financial footing and remains likely to provide assistance. Creditors may have to endure a delay in getting their capital returned but massive writedowns akin to those experienced following Lehman Brothers’ bankruptcy are probably unlikely. However, the perception of these problems is more important in the short-term. Stock and commodity markets have had an exceptional run since March. The Dubai default could be a catalyst for a deeper corrective phase unfolding generally.”

Source: Eoin Treacy, Fullermoney, November 26, 2009.

Nouriel Roubini (Forbes): Will the world go shopping?
“Roughly one year ago, around the Thanksgiving festivities, the National Bureau of Economic Research announced that the US recession started in December 2007. One year later, though the US economy is in recovery mode, retailers are approaching the holiday season - which accounts for slightly less than one-fifth of yearly US retail sales - with some concern.

“A sharp collapse in US consumer spending since mid-2008 led to a particularly dismal 2008 holiday retail season. As per US Census Bureau estimates, core retail sales (which exclude autos, gasoline and building supplies) fell by 1.1% year on year during November and December 2008, compared to an average 4.6% year-on-year increase in holiday season sales over the past decade. Total retail sales suffered a larger collapse, falling 9.5% year on year.

“After collapsing in 2008, retail sales showed signs of stabilizing over the summer of 2009. While auto sales have fluctuated sharply during recent months due to the government’s ‘cash for clunkers’ initiative, core retail sales have risen for three consecutive months as of October 2009, creeping up at a pace of about 0.5% month on month. Entering the 2009 holiday season, the recent uptick in core sales offers hope for better than anticipated holiday retail sales.

“Economic indicators, however, suggest a note of caution. The renewal in US consumer confidence over the first half of 2009 faded. Successive grim reports on the employment situation revealed no quick end to labor market woes, lowering consumers’ income expectations. According to the October Reuters/University of Michigan Survey of Consumer Sentiment, in October 2009, consumers reported worsening personal finances for the 13^th consecutive month, the ‘longest and deepest decline in the 60-year history of the surveys’.

“The poor state of personal finances has driven consumers to reduce debt at an accelerated pace. In September, consumer credit fell for the eighth consecutive month at an annualized pace of 7.2%. The poor health of personal finances, labor market uncertainty and the ongoing household balance- sheet repair will continue to promote frugal behavior by US consumers. The Conference Board consumer confidence surveys tell a revealing story: Consumers’ plans to purchase big-ticket appliances have declined in the run-up to the 2009 holiday season. This is a bit unusual as plans to buy big-ticket appliances usually display a sinusoidal pattern, with a trough in the month of October and a peak sometime the following spring.

“A measure of weekly retail sales released by the International Council of Shopping Centers and Goldman Sachs indicates that same-store sales flattened over the first three weeks of November, though compared to 2008, sales are up by a promising average pace of 2.9%. The National Retail Federation projects retail sales will fall 1% during this holiday season, compared to an average 3.4% annual gain in holiday sales over the past decade. After the sharp slide in 2008, a decline of ‘only’ 1% or even a small positive gain in 2009 holiday sales may seem like a welcome number; however, accounting for the base effects of a dismal 2008 season, the underlying reality for retailers remains grim for this holiday season.”

Click here for the full article.

Source: Nouriel Roubini, Forbes, November 26, 2009.

Financial Times: Divisions emerge on stimulus strategy
“Stark divisions are emerging among economic policymakers about how quickly governments and central banks should withdraw emergency support measures, with Dominique Strauss-Kahn, the managing director of the International Monetary Fund, warning on Monday about the risks of early exit.

to shocks and policy mis-steps. Fiscal and monetary stimulus programmes should not be stopped too soon, he said.

“He added: ‘It is too early for a general exit. We recommend erring on the side of caution, as exiting too early is costlier than exiting too late.’

“His words may be of some use to the Obama administration, which is boxed in by increasingly shrill calls to reduce the budget deficit and by appeals from some liberal Democrats and economists to spur job creation with more public money.

“On the monetary policy side, Ben Bernanke, US Federal Reserve chairman, last week said ‘inflation seems likely to remain subdued for some time’ and reiterated that interest rates were likely to remain exceptionally low for ‘an extended period’, although he also said he was ‘attentive’ to the value of the dollar.

“Mr Strauss-Kahn’s stance contrasted with warnings by the European Central Bank that delays in unwinding exceptional measures taken to combat the economic crisis could backfire. Last Friday, Lorenzo Bini Smaghi, an ECB executive board member, said history showed that the late implementation of ‘exit strategies’ could cause future crises.

“Speaking in Madrid on Monday, Jean-Claude Trichet, ECB president, said the threats to public finances posed by government stimulus packages meant ‘there is an increasingly pressing need for ambitious and realistic fiscal exit strategies and for fiscal consolidation’. He said it was ’still premature to declare the financial crisis over. But when the appropriate time comes, there should be no concern about the ECB’s determination and ability to exit.’

“Mr Strauss-Kahn said the worst of the financial storm had passed but the global economy remained in a holding pattern - ’stable, and getting better, but still highly vulnerable’.”

Source: Brian Groom, Ralph Atkins and Tom Braithwaite, Financial Times, November 23, 2009.

Financial Times: Fed sees risks in low rates policy
“Federal Reserve officials have expressed concerns that near-zero interest rates could fuel ‘excessive risk-taking in financial markets’ but believe the possibility of such an outcome is ‘relatively low’ minutes from its November meeting show.

“Both China and Germany warned this month that the weak dollar and the Fed’s policy to keep US interest rates ‘exceptionally low’ for an ‘extended period’ could be laying the groundwork for a new speculative bubble.

“The central bank’s Federal Open Market Committee already had discussed this risk, according to the minutes released on Tuesday. In their meeting on November 3-4, the officials ‘noted the possibility that some negative side-effects might result from the maintenance of very low short-term interest rates for an extended period’.

“The minutes said: ‘While members currently saw the likelihood of such effects as relatively low, they would remain alert to these risks.’

“The committee members took a fairly sanguine view of the dollar’s recent decline, which they described as ‘orderly’ and linked to improved risk appetite. However, the minutes note that ‘any tendency for dollar depreciation to intensify or to put significant upward pressure on inflation would bear close watching’.

“In the meeting, the committee decided to stick to its interest-rate policy, saying the US economy was continuing to improve but that inflation risks were low. The committee members upgraded their forecasts for US growth in 2009 and 2010, but reduced their forecast slightly for 2011. They also lowered their unemployment expecations, forecasting a rate between 9.3 and 9.7 per cent next year, down from a previous forecast of between 9.5 and 9.8 per cent.

“The minutes were released after the commerce department said gross domestic product grew at an annual rate of 2.8 per cent in the third quarter, below its first estimate of 3.5 per cent.”

Source:  Sarah O’Connor, Financial Times, November 24, 2009.

CNBC: FOMC minutes - reaction
“Dissecting the FOMC minutes with James Bianco of Bianco Research, Zane Brown of Lorb Abbett and CNBC’s Steve Liesman.”

Source: CNBC, November 24, 2009.

MoneyNews: Interest alone on Federal debt - $4.8 trillion
“When you think about the government’s exploding debt burden, you probably don’t focus on interest payments.

“But those payments will likely total $4.8 trillion over the next 10 years, amounting to more than half the government’s $9 trillion in debt.

“Interest rates are near zero now, thanks to the Federal Reserve’s massive monetary stimulus. But at some point the Fed will have to reverse that easing.

“‘When interest rates rise, even a small amount, the interest payments go up a lot because of the size of the debt,’ Charles Konigsberg, chief budget counsel of the Concord Coalition, told CNNMoney.com.

“The $4.8 trillion interest-payment estimate made by the Congressional Budget Office assumes some interest rate appreciation. But if rates rise higher than its estimates, the dollar total will be higher.

“The Obama administration has pledged to cut the budget deficit to 3 percent of GDP, down from 10 percent last year. But that goal may be more fantasy than reality.

“‘Even under the president’s (2010) budget as evaluated by the CBO, we do not get anywhere close to that,’ William Gale, a senior fellow at the Brookings Institution, told CNNMoney.com.”

Source: Dan Weil, MoneyNews, November 23, 2009.

Asha Bangalore (Northern Trust): Widespread revisions of Q3 GDP
“Real GDP grew at an annual rate of 2.8% in the third quarter, previously estimated as a 3.5% increase. Lower estimates of consumer spending (+2.9% vs. +3.4% in the advance report), outlays on structures ((-15.1% vs. -9.0% in the advance report), residential investment expenditures and (+19.5% vs. +23.4% in advance report), including a smaller contribution from inventories and a wider trade gap more than offset the upward revisions of government spending and equipment and software spending.

“Going forward, real GDP is projected to show a slightly slower pace of growth in the fourth quarter of 2009 and first quarter of 2010, partly because car sales of the future have been borrowed to take advantage of the ‘clash for clunkers’ program.

“Corporate profits from current production rose 10.6% in the third quarter, following a revised 3.7% gain in the second quarter. From a year ago, corporate profits fell 6.7%, the first single-digit decline after three straight quarters of significantly weaker profits. Corporate profits of the financial sector advanced 36.4% in the third quarter and made up the larger share of corporate profits. Corporate profits of the non-financial sector increased only 2.0%. The financial sector’s performance is artificially boosted by the support programs in place.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, November 24, 2009.

Clusterstock: The bloodbath in American manufacturing is over
“Manufacturing has been one of the hardest hit sectors around, but the pain is going away.

“Today’s chart shows the number of mass layoff events (at least 50 people whacked in one blow) per month in manufacturing, and as you can see, it’s way down from its peak, and now below the peak of the 2001-2002 recession.

“Still, we’ve got to see a lot of improvement before we’re at pre-crisis levels.”

Source: Joe Weisenthal and Kamelia Angelova, Clusterstock - The Business Insider, November 20, 2009.

Standard and Poors: S&P/Case-Shiller - Home prices show sustained improvement
“Data through September 2009, released today [Tuesday] by Standard & Poor’s for its S&P/Case-Shiller Home Price Indices, show that the US National Home Price Index improved in the third quarter of 2009, posting its second consecutive quarterly increase and further improvement in its annual rate of return.

“The chart above depicts the annual returns of the US National, the 10-City Composite and the 20-City Composite Home Price Indices. The S&P/Case-Shiller US National Home Price Index, which covers all nine US census divisions, recorded an 8.9% decline in the third quarter of 2009 versus the third quarter of 2008. This is a marked improvement over the 14.7% decline in the annual rate of return reported in the second quarter of 2009, and the 19.0% drop in the first quarter. The 10-City and 20-City Composites recorded annual declines of 8.5% and 9.4%, respectively. These two indices, which are reported at a monthly frequency, have generally seen improvements in their annual rates of return every month since the beginning of the year.

“‘We have seen broad improvement in home prices for most of the past six months,’ says David Blitzer, Chairman of the Index Committee at Standard & Poor’s. ‘However, the gains in the most recent month are more modest than during the seasonally strong summer months.’”

Source: Standard and Poors, November 24, 2009.

Asha Bangalore (Northern Trust): Low mortgage rates and tax credit lift sales of existing homes
“Sales of all existing homes rose 10.1% to an annual rate of 6.1 million units in October. Attractive mortgage rates and the first-time home buyer tax credit of $8,000 helped to boost sales of existing homes. The tax credit program has been expanded and extended to April 30, 2010.

“Sales of single-family existing homes advanced 9.7% to an annual rate of 5.33 million units in October. Sales of single-family existing homes have moved up nearly 32% from the cycle low of 4.05 million homes in January 2009. The peak of single-family existing home sales was in September 2005 (6.34 million units).

“The median price of an existing single-family home declined 1.6% to $173,100 in October from the prior month and it is down 6.8% from a year ago. The year-to-year decline of the median price shows a significant moderation, with the October reading the smallest since June 2008.

“As a result of the low mortgage rates and the first-time home buyer tax credit of $8,000, the supply of unsold single-family existing homes in October dropped to nearly 7-month supply, which is slightly below the historical median of 7.2-month supply.

“The important implication is that the declining trend of the number of unsold existing homes should establish price stability. Additional home sales will be possible as the economy recovers and hiring recovers.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, November 23, 2009.

Clusterstock: The “distressing” gap between new and existing home sales
“This morning’s existing home sales number showed that sales surged in October by a surprising 10.1%. But new home sales continue to remain quite weak.

“Today’s chart, showing the ‘distressing’ gap between the two measures, comes courtesy of Calculated Risk, which explains:

“‘The initial gap was caused by the flood of distressed sales. This kept existing home sales elevated, and depressed new home sales since builders couldn’t compete with the low prices of all the foreclosed properties.

“‘The recent spike in existing home sales was due primarily to the first time homebuyer tax credit.

“‘But what matters for the economy - and jobs is new home sales, and new home sales are still very low because of the huge overhang of existing home inventory and rental properties.’”

Source: Joe Weisenthal and Kamelia Angelova, Clusterstock - The Business Insider, November 23, 2009.

MoneyNews: Nearly 11 million US homes underwater
“Some experts say the housing market has bottomed, but one statistic indicates otherwise.

“The portion of US homeowners who are ‘underwater’ on their loans - that is, they owe more on the mortgage than the home is worth - surged to 23 percent in the third quarter, or almost 10.7 million households, according to First American CoreLogic, a real estate research firm.

“Many of the underwater homes will end up in foreclosure or on the already bulging market of homes for sale.

“Of the 10.7 million homes underwater, nearly half have a mortgage that is at least 20% percent higher than the home’s value, according to First American.

“More than 520,000 of these homeowners are in default on their mortgages.

“This ‘is an outstanding risk hanging over the mortgage market’, Mark Fleming, chief economist of First American, told The Wall Street Journal.

“‘It lowers homeowners’ mobility because they can’t sell, even if they want to move to get a new job.’

“Some homeowners who are underwater are fully capable of paying their mortgages, but are ditching their homes anyway - to the tune of 588,000.”

Source: Dan Weil, MoneyNews, November 24, 2009.

Clusterstock: We’re still generating too many negative equity mortgages
“In Washington, DC, the prevailing view these days is that unemployment is now the leading driver of mortgage defaults. This is one reason you can expect to see the next stage of the government’s attempt to rescue the housing market focus on saving jobs.

“But a new study out of Amherst Securities indicates that negative equity is by far the best default predictor of defaults. If that view is correct, the fact that we are still producing mortgages that quickly slip into negative equity should be terrifying. And, in fact, much of the recovery in the housing market appears to be built on thinly capitalized mortgages subsidized by low loan-to-value FHA guaranteed mortgages and the home-buyer tax credit.

“As the chart below shows, even home buyers who took out mortgages as late as this year are finding themselves with negative equity at historically high rates. We’ve come down from the worst levels of the housing boom but we are still well above healthy levels.

“In short, we may be witnessing a policy mistake of stunning proportions as lawmakers and regulators focus on job creation while ignoring the still problematic loan-to-value ratios in the housing market.”

Source: John Carney and Kamelia Angelova, Clusterstock - The Business Insider, November 24, 2009.

Yahoo Finance - Tech Ticker: Housing bottom? “Not even close,” Barry Ritholtz says
“A fifth-straight monthly gain for the Case-Shiller Index Tuesday and Monday’s stronger-than-expected existing home sales report is giving renewed hope to the housing bulls.

“‘Disregard them,’ says Barry Ritholtz, CEO of Fusion IQ, who notes the existing home sales number was juiced by sales of cheap condos and various government programs. Meanwhile, the Case-Shiller results were below expectations.

“We are ‘not even close’ to a bottom in housing, says Ritholtz, who estimates national house prices remain 15-20% overvalued, based on the traditional metrics of: median income-to-median sales price, the cost of owning vs. renting, and housing stock as a percent of GDP.

“‘Until we start seeing a healthy housing market that can stand on its own, without government props, without distressed properties selling 60% off peak levels - that’s how you know the bottom is in,’ says the blogger and Bailout Nation author.

“The likely best-case-scenario for housing is several years of sideways action for prices, wherein population growth and a firmer economy combine to sop up the still huge inventory of homes on the market.

“‘And that’s if we’re lucky,’ Ritholtz says, citing the lackluster environment for jobs and wages, as well as CoreLogic’s analysis that 23% of all US mortgage holders are under water. With so many Americans owing more money than their homes are worth, the recent rise in foreclosures and so-called jingle mail is ‘not nearly done’, he warns.

“In sum, expect more homes for sale at distressed prices and more downward pressure on prices overall - unless the ‘real’ economy shows dramatic improvement, which Ritholtz doesn’t see anytime soon.”

Source: Aaron Task, Yahoo Finance - Tech Ticker, November 24, 2009.

Clusterstock: US weekly jobless claims the lowest since September 2008
“The Department of Labor reported today [Wednesday] that initial jobless claims for the week ending November 21 fell 35,000 on a seasonally-adjusted basis from the previous week.

“They rose 68,080 on a not-seasonally-adjusted basis, but this basically means that jobless claims rose less than normal for this time of year. Seasonal adjustments are widely used to spot overall unemployment trends since the employment market is indeed seasonal.

“As shown below, at 466,000, this most recent seasonally-adjusted claims number represents the best data point we’ve had since the week of September 13, 2008.

“Regardless of the potential for static in the weekly numbers, or errors due to seasonal adjustments, it’s now pretty clear that the overall rate of new jobless claims has indeed slowed substantially.”

Source: Vincent Fernando and Kamelia Angelova, Clusterstock - The Business Insider, November 25, 2009.

Angry Bear: Unemployment claims - 1975, 1982-83 and 2009
“The weekly initial unemployment claims are widely reported and various charts show how they have been falling since the peak. But it is hard to compare the drop in claims this cycle compared to after other severe recessions in the standard charts showing claims over time.

“So to make such comparisons easier I though readers might find a chart showing claims after the 1974 and 1982 recessions and this recession on the same scale.”

Source: Spencer, Angry Bear, November 25, 2009.

Asha Bangalore (Northern Trust): Consumer Confidence Index moves up slightly
“The Conference Board’s Index moved up to 49.5 during November from 48.7 in the previous month. The Present Situation Index (21.0 vs. 21.1 in October) fell, while the Expectations Index rose to 68.5 in November from 67.0 in the prior month. The number of respondents indicating that ‘jobs are hard to get’ rose to 49.8 from 49.4 in the prior month, while those noting that ‘jobs are plenty’ fell to 3.2 from 3.5 in September. The main message is that hiring remains weak.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, November 24,2009.

MoneyNews: Dreman - brace for 10 percent inflation
“David Dreman says investors should be prepared for high inflation rates - as high as 10 percent - to start within the next three years, and that the Obama administration is powerless to stop it.

“Dreman, the well-known contrarian investor and CEO of Dreman Value Management, told Fox Business that the stock market will see a correction, although ‘it’s anybody’s guess’ when that correction will occur.

“He said inflation could rise to be as high as 8 percent to 10 percent within the next three years.

“Dreman advises investors to hold onto their current stocks and ‘ride through’ the correction. He also advises investors to stay out of long-term bonds because they will take a hit.

“Instead, investors should go for very short-term bonds, equities, and real estate, he said.

“Dreman predicts that interest rates will remain low since ‘no administration’ will attempt to raise them with high unemployment rates. He said the current administration is both trapped and powerless.

“Dreman also said that gold is currently undervalued, despite breaking records daily.”

Source: MoneyNews, November 25, 2009.

Bloomberg: Late card payments rose in October, Moody’s reports
“US credit-card delinquencies climbed last month to the highest level since February as five of the six biggest card lenders posted increases, Moody’s Investors Service said.

“Loans at least 30 days overdue, a signal of future defaults, rose to 6.12 percent in October from 5.97 percent in September, Moody’s said in a report dated Nov. 20 and distributed today. So-called early-stage delinquencies, payments 30 to 59 days late, were unchanged at 1.66 percent.

“Banks typically write off card loans after 180 days, and defaults fell last month to 10.04 percent from 10.72 percent in September, reflecting lower delinquency rates earlier in the year. Credit-card defaults and delinquencies tend to track US unemployment, which climbed to 10.2 percent in October, the highest since 1983.

“‘Weak job creation, elevated bankruptcies and rising unemployment continue to weigh on results,’ John McDonald, an analyst with Sanford C. Bernstein & Co., said in a November 17 research note. ‘It still feels too early to declare victory.’

“Write-offs may peak at 12 percent to 13 percent in 2010, Moody’s analysts Will Black and Jeffrey Hibbs said in the report.”

Source: Peter Eichenbaum, Bloomberg, November 23, 2009.

Bloomberg: Strauss-Kahn says half of bank losses are undisclosed
“Dominique Strauss-Kahn, managing director of the International Monetary Fund, talks about bank losses and the outlook for a global economic recovery. Strauss-Kahn answers questions from delegates at the Confederation of British Industry’s annual conference in London.”

Click here for the article.

Source: Bloomberg, November 23, 2009.

Financial Times: S&P raises fears over health of some banks
“A study by Standard & Poor’s has raised questions over the financial strength of some of the biggest banks ahead of new rules that could require them to raise more funds.

“The analysis by S&P showed that HSBC is the best capitalised bank in the world, while Switzerland’s UBS, Citigroup of the US and several of Japan’s biggest banks are among the weakest.

“The ranking of 45 of the world’s leading banks will unnerve investors, highlighting once again the capital shortfall that institutions still need to make up over the coming years.

“Although some banks will be able to top-up capital through retained profits, analysts expect a string of rights issues from weaker banking groups as they try to raise tens of billions of dollars.

“S&P’s risk-adjusted capital (RAC) ratios - a measure of balance sheet strength - foreshadow the new capital ratio regime expected to be set by the Basel committee on banking supervision early next year.

“Its report, published on Monday, gave HSBC a 9.2 per cent ratio, compared with barely 2 per cent for the likes of UBS, Citigroup and Mizuho.”

Source: Patrick Jenkins, Financial Times, November 23, 2009.

The Wall Street Journal: Banks scramble as debt comes due
“Banks have spent the past year dealing with a mountain of bad assets. Now attention is turning to trillions of dollars of debt they have maturing over the next few years.

“Banks unable to maneuver around the challenge could be forced to refinance their debt at sharply higher costs.

“The situation was caused by banks engaging in cheap borrowing during the credit-market boom that began in the middle of the decade and lasted through 2007. As financial markets hit crisis mode, banks were propped up by government guarantees that enabled them to keep selling debt - but with much shorter maturities.

“About $10 trillion of debt comes due by the end of 2015, including $7 trillion by 2012, according to Moody’s Investors Service, which highlighted growing concerns about the banks’ looming liabilities in a report this month.

“The life span of bank debt has shrunk to historically low levels, forcing banks to deal with the problem sooner rather than later. Globally, the average maturity of new debt rated by Moody’s fell from 7.2 years to 4.7 years in the past five years.

“‘We thought that we should send a signal’ of warning, said Jean-Francois Tremblay, a Moody’s analyst and one of the report’s authors.

“The problem is especially acute for US and UK banks, which have been among the hardest hit by the financial crisis. In the US, banks have seen maturities drop to 3.2 years from 7.8 years in the past five years. In the UK, the average maturity for new debt fell to 4.3 years from 8.2 years, Moody’s said.”

Source: Carrick Mollenkamp and Serena NG, The Wall Street Journal, November 25, 2009.

Financial Times: Better climate for hedge funds
“The hedge fund sector looks to be going through the early stages of recovery, with industry flows turning positive and redemptions largely normalising to historical levels, says Huw van Steenis, head of banks and financials research at Morgan Stanley.

“‘Next year is likely to be a pivotal year for hedge funds, with the sector set to benefit from the rise in demand for better risk adjusted returns, the migration of talent from investment banks and trading off the back of a successful 2009,’ he says.

“Mr van Steenis believes sovereign wealth funds, foundations and pension funds have overtaken endowments and high net worth hedge fund of funds as the largest source of inflows - and thinks the market is underestimating the potential upsurge in demand for absolute return funds from private clients and smaller institutions.

“‘In the UK, in the third quarter alone, there were $2.1bn of inflows into absolute return funds - three times that in the first quarter. Our base case estimates that global assets under management in the sector will reach $1,750bn by the end of 2010 - where we were in the first half of 2007 - although we see risks posed by performance, regulation and reputational issues.

“‘The outcome of US/EU regulatory changes remains uncertain, but growing pragmatism should be the order of the day; we estimate that hedge funds funded 30-40 per cent of capital raised by US and European banks this year.’”

Source: Huw van Steenis, Financial Times, November 24, 2009.

Bespoke: Sovereign default risk
“Below we highlight current credit default swap prices and the year-to-date change for the sovereign debt of 39 countries. As shown, default risk has declined for every country except Japan in 2009, including Dubai.”

Source: Bespoke, November 27, 2009.

Yahoo Finance - Tech Ticker: A bad economy could spell good news on Wall Street for years to come
“The economic recovery isn’t as strong as first thought. Revised GDP figures released this morning [Tuesday] show the economy grew at a 2.8% annualized pace in the third quarter, less than the 3.5% initially reported. The revision was in line with expectations but shows the economy didn’t have as much momentum heading into the fourth quarter as previously believed.

“Unlike Wall Street traders, consumers seem to know the recovery is ‘anemic’, as Barry Ritholtz, CEO of Fusion IQ, describes it. The Conference Board’s latest confidence survey shows Americans feel worse about the current economic situation than they did in March, when the stock market was making new lows.

“What’s driving the disconnect between Wall Street and Main Street?

“Ritholtz says it’s a classic example of bad news being good news on Wall Street. ‘We’re in a cycle that’s not based on profitability, not based on expanding economy but based on all sorts of government supports,’ he says. ‘Bad news is going to be good news for the next couple of quarters probably.’

“That’s because low interest rates and liquidity provided by the Federal Reserve, coupled with government stimulus are enticing traders to buy into the market. ‘Cash is trash,’ says Rithotlz, who remains bullish on stocks.

“Ritholtz is confident that eventually fundamentals will prevail and thinks the market will take a hit once the economy shows signs of improvement, meaning the ‘extraordinary’ stimuli can be removed.

“But predicting the timing is anyone’s guess. ‘You could have this disconnect that goes on for not days, weeks or months but years and years,’ he says.

“So, in the meantime, Ritholtz - who correctly predicted the 2008 crash and told Tech Ticker’s audience ‘the mother of all bear market rallies’, was upon us in March - is still long stocks and likes commodities (thanks to a weak dollar) and emerging markets.”

Source: Peter Gorenstein, Yahoo Finance - Tech Ticker, November 24, 2009.

Financial Times: Getting technical
“There is one group of investors that has few doubts about the direction of the US stock market. Technical analysts - who scour price moves in charts for patterns of behaviour that they think will be repeated and drive future action - see plenty of signals that justify a continued move higher in the S&P 500 index of US stocks.

“Although there are many reasons to doubt the relevance of technical analysis, there are many investors who do trade on these signs. Indeed, much of the computer-driven, high-speed trading that has become a feature of stock trading uses such analysis to programme trades. At the very least, it is important to be aware of the key price levels that technical analysts are targeting.

“At its simplest in terms of technical signals, a rising support line connects the dips seen in the S&P 500 since it started its rally in March. This backs the idea that such a support will continue to prop up prices after any dips.

“In terms of specific levels, the most widely watched ones are those that cluster round key ratios identified by the mathematician Fibonacci in the 13th century. Under these ratios, technical analysts believe that once markets have rallied 50 per cent from a low, they tend to progress to a level marking a 61.8 per cent retracement.

“Taking the 2007 S&P 500 high of 1,576 as the top and the March 2009 low of 667 as a bottom, the eyes of these analysts are on the S&P reaching 1,121 - a level that would mark a 50 per cent retracement of the decline from the peak. The subsequent 61.8 per cent retracement level would be 1,229.

“Technical analysts similarly argue that charts signal continued dollar declines and rises in gold, silver and oil prices. With fundamental factors sending mixed pictures, more traders may grasp for the cryptic clues on short-term market moves provided by technical analysis.”

Source: Aline van Duyn, Financial Times, November 24, 2009.

Bespoke: Where are the Financials?
“Probably the main reason why the S&P 500 has struggled to take out old highs in recent weeks is the performance of the Financial sector. It’s actually surprising that the market is where it is given how poorly the Financials have done. As shown in the first chart below, the S&P 500 Financial sector can’t even get above its 50-day moving average, much less test its bull market highs from a month or so ago.

“The Financials led us into and out of the bear, and it’s hard to imagine the overall market continuing its bullish pace over the next few months without a resurgence in the Financials. The question right now is whether to treat the stagnation as a bullish signal to gain exposure to the sector or a bearish signal to sell the broad market.”

Source: Bespoke, November 23, 2009.

Bespoke: Goldman can’t get out of its own way
“While there probably aren’t a lot of people shedding tears over it, the stock of Goldman Sachs (GS) can’t seem to get out of its own way. We’ve highlighted the relative weakness in this stock several times over the last few weeks, so this shouldn’t come as any surprise, but GS is now on pace to close at its lowest levels since early November.

“Politicians in Washington and conspiracy theorists may be rejoicing in Goldman’s misery, but if there’s one thing Goldman employees can be thankful for it is that with the stock lagging the overall market, the intensity of public backlash directed towards the company seems to have abated. Next thing you know, the conspiracy theorists will claim that ‘evil’ Goldman is purposely making their stock weak just so they can buy back the stock at lower prices.”

Source: Bespoke, November 25, 2009.

Financial Times: Asian asset bubble fears overblown
“Fears that asset bubbles are being created in Asia by foreign capital inflows look overdone at this point, says Michael Spencer, Deutsche Bank chief Asia economist.

“He says that while a few narrow real estate markets may be starting to look pricey, equity markets for the most part appear to be at or near fair value.

“‘The bigger problem facing a number of key Asian economies is the extent to which their currencies are pegged to the dollar, and the Federal Reserve’s very stimulative policy stance.

“‘The monetary stimulus and capital flows these pegs are engendering are forcing [Asian] authorities to adopt more restrictive prudential regulations in an effort to avoid the inevitable inflation pressures and asset bubbles this arrangement will bring.’

“Mr Spencer says the possibility that this extends to capital controls cannot be ruled out - but argues that they would be used only as a last resort if monetary control could not be established through currency appreciation, rate hikes and sterilisation.

“‘We would anyway dispute the argument that capital flows or asset prices are at extremes. Asian equity prices may have risen sharply since the beginning of the year, but the regional index is only about 5 per cent higher than it was last summer. In a similar vein, while property prices in general are going up, it is only the luxury end that is ‘frothy’.’”

Source: Michael Spencer, Financial Times, November 25, 2009.

Reuters: Templeton’s Mobius eyes Libyan market
“Templeton Asset Management fund manager Mark Mobius said he was eyeing private equity and other investments in Libya and said the stock market had enormous potential for growth.

“Mobius, a prominent emerging market investor, told Reuters at the launch of a new Egyptian brokerage office in Tripoli he saw potential for tourism, infrastructure and telecoms investments.

“Libya, holder of Africa’s largest oil reserves, has attracted a wave of interest from Arab and international companies, operating mainly in energy and construction, since most international sanctions were lifted in 2004.

“‘This market is very exciting now because the government is embarking on a privatisation programme to list many of the state enterprises. Although the market is small now, the potential for growth is enormous,’ Mobius said, speaking late on Sunday.

“Libya has said it plans to sell shares in four state firms via initial public offerings (IPOs) in 2010 and will enact a law next year offering tax breaks to companies listing on the stock exchange in an attempt to get more Libyans to invest.

“The Libyan exchange now has 10 listed firms, mostly banks and insurance companies. Shares worth about 2.1 million dinars ($1.75 million) traded in October, a stock market report said.

“Foreign firms have been lining up for oil deals and infrastructure contracts in a country which boasts a long Mediterranean coastline but few top class hotels.

“‘The potential here for hospitality and tourism is tremendous. That’s one area. The other area is infrastructure, roads, bridges, whatever, if that’s privatised,’ Mobius said.”

Source: Shaimaa Fayed, Reuters, November 23, 2009.

MoneyNews: Forecasters see dollar decline next year
“The top performing forecasters in Bloomberg’s survey of 46 firms predict the dollar will continue falling next year.

“The sluggish economic recovery and exploding government debt burden will weigh on the currency, they say.

“Standard Chartered bank, which placed first in estimating the dollar-euro rate over the 18 months ended June 30, sees the euro rising 5.5 percent against the dollar next year, to $1.58.

“‘History tells us the dollar shouldn’t start rising on a sustained basis until 12 months after the Fed starts to lift rates,’ Callum Henderson, the bank’s head of foreign exchange strategy told Bloomberg.

“‘It’ll take time to drain the oversupply of dollars from the market. The dollar will remain weak until the Fed’s rates rise above the competitors.’

“All three of the top performers in Bloomberg’s survey see the dollar falling against the euro next year.

“That includes Aletti Gestielle (an Italian money management firm) and HSBC in addition to Standard Chartered.

“The dollar bears are contrarians, as 24 of the 37 predictions on dollar-euro have the greenback rising next year.

“But some of the most renowned currency experts anticipate the dollar will depreciate further.

“‘I think the dollar is an over-owned currency,’ Pimco managing director Bill Gross told CNBC. ‘The Chinese, the Asians have basically owned too many dollars for too long.’”

Source: Dan Weil, MoneyNews, November 23, 2009.

Richard Russell (Dow Theory Letters): Why gold?
“Let’s say you’re a multimillionaire. You’re seriously worried about what to do with your millions in savings. You don’t want to keep your money under your mattress or in your Frigidaire, so where should you keep it? US T-bills are now in a state of zero or even negative interest - you pay the government to hold your money, but you’re SAFE. T-bills have behind them the full faith and credit of the United States. Great, but, now you’re thinking the unthinkable - How good is the full faith and credit of the US? There are rumors that the credit rating of the US could actually be lowered. And with the massive unfunded debt of the US, that could happen, and worse - the dollar could cave in. What to do?

“And you ask yourself, ‘What’s safer than T-bills or even top-grade foreign short-term debt?’ The answer is that there is one item that’s safer - gold. Gold represents intrinsic value in and of itself and by itself. Gold needs no nation to back or guarantee its value. Gold is no single nation’s liability. Furthermore, gold has no maturity date and gold is so safe that it doesn’t need to pay interest to those who hold it. You decide to put your savings into gold rather than T-bills. And unlike T-bills today, gold doesn’t depend on anyone’s ‘full faith and credit’.

“The fact is that the so-called ‘opportunity cost’ of buying or holding gold is zero today. T-bills pay you nothing. The fact is that it’s cheaper, safer, and it makes more sense to hold gold at this time than at almost any time in my memory. And a lot of knowledgeable, big money investors are doing just that - buying and holding gold for safety and as a store of value.”

Source: Richard Russell, Dow Theory Letters, November 24, 2009.

TheStreet.com: $8,000 gold
“James Turk, author and founder of GoldMoney, argues that gold will hit $8K in 6 years’ time.”

Source: TheStreet.com, November 25, 2009.

International Monetary Fund: IMF announces sale of 10 metric tons of gold to the Central Bank of Sri Lanka
“The International Monetary Fund (IMF) announced today the sale of 10 metric tons of gold to the Central Bank of Sri Lanka. The sale was conducted on the basis of market prices prevailing on November 23, 2009 with proceeds equivalent to US$375 million. This transaction is part of the total sales of 403.3 metric tons approved by the Executive Board in September 2009, and it adds to the total of 202 metric tons already sold to the Reserve Bank of India and the Bank of Mauritius.”

Source: International Monetary Fund, November 25, 2009.

Financial Times: Gold rush forces US to clip Eagle sales
“The rush by retail investors into gold has forced the US government to suspend sales of the world’s most popular bullion coin, the American Eagle, after running out of inventories.

“The shortage, the second since the start of the financial crisis in August 2008, is the latest sign of investors seeking a safe haven into bullion amid the US dollar woes. Safe-haven buying spurred by concerns about the health of Wall Street and a spike in inflation due to a lax monetary policy have also benefited gold sales.

“‘The US Mint has depleted its current inventory of 2009 American Eagles one-ounce bullion coins due to the continued strong demand,’ the mint said in a statement late on Wednesday. It added that selling will resume ‘once sufficient inventories … can be acquired to meet market demand’.

“The US Mint has sold about 1.19m ounces of American Eagles so far this year, up almost 75 per cent from the same period last year and on track to be the highest annual volume in ten years, according to official data. Sales of American Eagle’s silver coins have hit 26m ounces, the highest level in at least 23 years.”

Source: Javier Blas, Financial Times, November 26, 2009.

MoneyNews: Banks say too much gold to store
“Gold prices have been soaring this year thanks to a weak dollar, and everyone wants in on the investment.

“For some banks, though, it is becoming clear that only the big institutional investors are welcome to store the precious metal in their vaults.

“So they’re telling smaller investors to get their gold out and store it elsewhere.

“HSBC has told retail clients to remove their small gold holdings from its vault in New York City, The Wall Street Journal reported.

“Small retail investors don’t turn enough profits for the bank like the big institutional investors do, the newspaper reported.”

Source: Forrest Jones, MoneyNews, November 24, 2009.

David Fuller (Fullermoney): Gold’s advance is not a bubble
“Intrinsic or not, I think value is in the eye of the beholder. The Fullermoney view for the last nine years is that gold is being gradually remonetised in the eyes of investors. That process has accelerated over the last year because we have witnessed nothing less than the greatest monetary reflation in history.

“What might we expect from gold over the short to medium term?

“Technically, gold looks temporarily overstretched and $1,200 is a minor psychological level. Consequently, we could easily see a short-term reaction and consolidation of perhaps $30 to $50 before this secular bull market powers on into 1Q 2010. If the consistency of the two earlier cycles commencing in September 2005 and September 2007 is maintained, gold should reach at least $1,300 between March and May of next year.

“I do not think that gold’s current advance is a bubble, although it is likely to become one eventually. A genuine bubble, as opposed to a market that happens to be rising at a time when most people are underinvested and therefore envious observers, will include gold fever of the sort we have not seen since 1979-1970.

“To put recent events in perspective, bullion consolidated for eighteen months prior to the last three month’s gains. It has rallied about $200 since the September breakout, which is approximately $100 less than the two earlier advances referred to above. Comparing those three moves, gold’s recent percentage move is clearly less to date than we saw on the two earlier advances. Lastly, the Amex Gold Bugs Index has yet to clear its 2008 high. This does not suggest a bubble to me.”

Source: David Fuller, Fullermoney, November 26, 2009.

Financial Times: Oil prices are too high
“An oil price at $80 a barrel is inconsistent with supply and demand dynamics, inventory levels and the current macroeconomic environment, says Alexander Redman, strategist at Credit Suisse.

“‘US gasoline demand is at lower levels than this time a year ago, while distillate demand remains well below the five-year range and jet plane storage continues to climb. Overall, US oil demand is still down by 3 per cent year-on-year.’

“At the same time, he says, US petroleum inventories are among the highest levels of this decade and a further 100m barrels of oil is being held globally offshore in tankers.

“Mr Redman says an examination of the longer-term association between the real oil price and global spare oil capacity indicates two important factors.

“‘First, the oil price only tends to spike up once spare capacity falls below the critical 2-3 per cent level - the International Energy Agency does not project this occurring again until 2014. Second, using the IEA’s estimate of 2010 spare capacity of about 8 per cent, the oil price would typically be closer to $40 a barrel.

“‘For now, the market appears to be pricing in the return to a tighter supply environment well into the next decade and disregarding the current glut in supply.

“‘Going forward, the Credit Suisse oil team is targeting $70 a barrel for WTI - and $68 a barrel for Brent Crude.’”

Source: Alexander Redman, Financial Times, November 26, 2009.

Financial Times: Eurozone PMI growth reaches two-year high
“The eurozone recovery is gathering pace in the final months of 2009, but warning signs of weaker growth next year have appeared.

“Purchasing managers’ indices for the 16-country region on Monday showed private sector activity expanding this month at the fastest rate in two years, with France and Germany powering the revival. However, the survey also pointed to a loss of momentum in coming months.

“The results add to evidence that the eurozone has returned to expansion, but that it risks seeing growth fade once government and central bank support measures are ended. The results are likely to add to policymakers’ wariness about the outlook for 2010.

“In a speech in Madrid, Jean-Claude Trichet, European Central Bank president, said: ‘We can spot a number of signs of stabilisation. But the crisis has debilitated the real economy … [and has] proved so deep because it has deprived our citizens of confidence.’”

“The eurozone recession ended in the third quarter, when gross domestic product rose by 0.4 per cent.

“November’s purchasing managers’ indices suggest the fourth quarter will see growth of a similar pace or faster. The composite index, covering eurozone services and manufacturing, reached 53.7 in November, up from 53.0 in October, making it the fourth consecutive month of expansion.

“However, Chris Williamson, chief economist at Markit, which produces the survey, said November ‘also saw the first signs of growth peaking’. New orders grew at a slower rate than in October, especially in the service sector. Job losses remained high and ‘highlighted the fragility of the recovery’, he added.”

Source: Ralph Atkins, Financial Times, November 23, 2009.

Financial Times: Japan says economy back in deflation
“The Bank of Japan moved towards a neutral stance on the risk of inflation on Friday even as the government formally declared that the world’s second-largest economy has entered deflation for the first time since 2006.

“The government’s declaration sets the scene for heightened tension with the bank, which has been resisting public calls by politicians for greater aggression in the fight against deflation.

“‘We want the BoJ to extend support on the monetary policy front in overcoming deflation,’ said Naoto Kan, deputy prime minister. Hirohisa Fujii, finance minister, and Shizuka Kamei, financial services minister, have also called on the central bank to do more.

“The bank’s policy board kept interest rates on hold at 0.1 per cent on Friday, but said ‘there is a possibility that inflation will rise more than expected’ due to higher commodity prices, offset by a risk it could fall due to lower public expectations for medium- to long-term inflation. In previous statements it only mentioned the risk of inflation declines.

“Consumer prices were down by 2.2 per cent on the previous year in September, or by 1.0 per cent excluding fresh food and energy. Although year-on-year inflation first turned negative in February, the government only now declared that ‘the Japanese economy is in a mild deflationary phase’.”

Source: Robin Harding, Financial Times, November 20, 2009.

Financial Times: Japanese export growth eases recession fears
“Strong demand from China and other Asian economies lifted Japanese exports, which last month fell at their slowest rate for a year, boosting hopes that the economy will continue to report healthy growth.

“In October, exports fell 23.2 per cent from a year earlier, compared with a 30.6 per cent decline in September, according to data released by the Ministry of Finance on Wednesday. The figure represented the smallest drop since October 2008, when exports fell 7.9 per cent.

“On a seasonally adjusted basis, the value of shipments rose for the third straight month by 2.5 per cent from September.

“Junko Nishioka, economist at RBS in Tokyo, said the fall in exports last month was smaller than expected and marked a ‘clear improvement’.

“‘It shows how rapidly the growth rate is improving. Overall, we can safely say that the worst is over and downside risk is limited,’ said Ms Nishioka.

“Japan’s economy grew at an annualised rate of 4.8 per cent in the third quarter, fuelled by a mix of stimulus-induced domestic demand, a bounceback in exports and rebuilding of inventories.”

Source: Justine Lau, Financial Times, November 25, 2009.

Financial Times: China banks prepare to raise capital
“China’s banks are preparing to raise tens of billions of dollars in additional capital to meet regulatory requirements following an unprecedented expansion of new loans this year, according to people familiar with the matter.

“China’s 11 largest listed banks will have to raise at least Rmb300bn ($43bn) to meet more stringent capital adequacy requirements and maintain loan growth and business expansion, according to estimates from BNP Paribas.

“China’s banking regulator has warned it would refuse approvals for expansion and limit banking operations if lenders did not meet new capital adequacy requirements, a move that has prompted the country’s largest state-owned banks to prepare capital-raising plans for next year and beyond.

“Expectations of giant cash calls from the listed Chinese banks spooked investors on Tuesday, helping to send the benchmark Shanghai Composite Index down 3.45 per cent on a day of record turnover on the Shanghai and Shenzhen markets.

“China’s banking regulator ‘is definitely aware of potential asset quality issues and is pushing for higher capital adequacy requirements to offset deterioration in asset quality’, according to Dorris Chen, an analyst with BNP Paribas.

“Following government orders to prop up the domestic economy in the face of the global crisis, Chinese banks extended a record Rmb8,920bn in loans in the first 10 months of the year, up by Rmb5,260bn from the same period a year earlier.

“This unprecedented loan expansion resulted in a record fall in their core capital adequacy rates from just over 10 per cent at the end of last year to 8.89 per cent by the end of September, a drop that worries regulators.”

Source: Jamil Anderlini, Financial Times, November 24, 2009.

Infectious Greed: China leaps to second spot in global science
“The latest Thomson ISI science data shows that China has leaped to second-spot worldwide in academic science, as measured by papers produced. The US still leads the way, at 340,000 publications per year (not shown), but China could surpass US production within five years at current rates of relative growth.

“Of course, paper production is only one measure. Citations matter at least as much, and that isn’t captured here. Nevertheless, it is striking stuff.”

Source: Paul Kedrosky, Infectious Greed, November 21, 2009.

MoneyNews: Roach - buy China after collapse
“Buy China, advises Morgan Stanley Asia chairman Stephen Roach - but only after it tanks following a market correction Roach says is long overdue.

“‘I think right now the markets have run too fast too far, liquidity-driven and they have moved out of alignment with what I think is a very sluggish underlying recovery in the global economy,’ Roach told CNBC.

“Roach says the Chinese have focused too much on its investment growths and depended too much on export sales.

“‘The crisis is a wake-up call that the external demand from the West won’t be there for a long time,’ Roach says, pushing China to find new sources of demand.

“‘Korea has shifted its major external market from America to China, as has Japan … so there’s a lot riding on the ability of the Chinese to stimulate this new source of internal demand that could benefit not just the Chinese, but the Koreans and the Singapore too,’ Roach notes.

“Overall, however, Roach remains bullish on China, seeing an upside in its services sector over the next 5 to 7 years.”

Source: Julie Crawshaw, MoneyNews, November 23, 2009.

Tags: Baltic Dry Index, Black Friday Bargains, BRIC, Central Banks, China, Commodities, Corporate Bonds, Credit Default Swap, Credit Rating Agencies, Crisis Mode, Debt Woes, Default Risk, Dollar And The Japanese Yen, Emerging Markets, Estate Projects, ETF, Gold, India, Jessop, Market Observers, Mature Market, oil, Peter Brookes, Risk Appetite, Risky Assets, Sovereign Debt, Swap Cds, United Arab Emirates
Posted in Emerging Markets, Gold, India, Markets | No Comments »

Advisor Alert - November 27, 2009

Friday, November 27th, 2009

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Tags: asset class, Canada, Census Bureau, Chief Investment Officer, China, Commodities, Congressional Budget Office, Economic Trend, Emerging Markets, Federal Budget Deficit, Federal Budget Outlays, Federal Deficits, Frank Holmes, Global Investors, Gold, Gold Equities, India, Market Groups, Medicare Medicaid, National Debt Clock, oil, Reputable Sources, Social Security Benefits, Treasury Department, Trend Data, Unfunded Liabilities, War Efforts
Posted in Bonds, Emerging Markets, Gold, India, Markets, Outlook, US Stocks | No Comments »

Alternative Treatments for Common Ailments | The Origin of Famous Brands | Garlic is the Best Investment in China | Men Married to Smart Women Live Longer | “Goodnight Keith Moon”

Friday, November 27th, 2009

Here is our selection of reading diversions for this weekend:

Alternative Treatments for Common Ailments
November-24-09, 11:04 AM

From garlic to honey, to lemonade and chicken soup, there are time-honored treatments from grandma’s remedy chest to heal yourself and speed your recovery from common ailments. Just head to the kitchen next time you are feeling ill, and whip up a remedy for what ails you. Below are some of the most common and easily prepared remedies for everything from stomachache to cold and congestion to household burns.

What’s in a Name? The Origins of Famous Brands
November-25-09, 9:50 AM

Our lives are full of brand names and trademarked products that we use every day, from the Apple computer I turn on every morning to the bowl of Quaker oatmeal I eat for breakfast. At the birth of every company that makes a product we can’t live without, somebody trying to come up with a memorable and successful name was present. Many of us know that a real Ben and Jerry, Wendy, and Ford exist, but the funny-hatted man on my oatmeal box is a figment of the founders’ imagination, thought to evoke images of honesty and value. Although many brand names are simple acronyms or versions of their founders’ names, some of the companies we trust every day actually have fascinating-and surprising-back stories.

Hold your nose: garlic is best investment in China
November-27-09, 11:04 AM

The price of garlic in China has nearly quadrupled since March, propelled by its very pungency to rank ahead of gold and stocks as the country’s best-performing asset this year.

Men married to smart women live longer
November-27-09, 9:28 AM

There is a lingering suspicion among girls (as the unpopularity of science subjects demonstrates) that boys don’t value cleverness as an essential quality in a life partner. Given a choice between gorgeous or brainy, there is no guarantee they’ll do the right thing, because men think they’re clever enough for two. Well, it turns out they’re wrong. Swedish scientists have discovered that long life and good health have nothing to do with a man’s education and everything to do with his wife’s. Men married to smart women live longer - simple.

“Goodnight Keith Moon”: A Creepier Version Of The Classic Kid’s Book (VIDEO)
November-27-09, 9:59 AM

“Goodnight Moon”: Everyone’s favorite children’s book about a notorious drummer who died of a drug overdose. Wait, that’s not what it was about? Well, authors Bruce Worden and Clare Cross have updated the classic story to revolve around the death of The Who’s Keith Moon with hilarious results.

Tags: Ails, Alternative Treatments, Apple Computer, Back Stories, Brand Names, Chicken Soup, China, China Men, Cleverness, Common Ailments, Diversions, Emerging Markets, Figment, Gold, Goodnight, Keith Moon, Life Partner, Pungency, Quaker Oatmeal, Science Subjects, Smart Women, Stomachache, Trademarked Products
Posted in Gold, Markets | No Comments »

Stephen Jen: Sovereign Buyers Could Tip Gold into Stratosphere

Friday, November 27th, 2009

Stephen Jen (Blue Gold Capital), who was formerly Morgan Stanley’s expert on sovereign wealth funds believes that China, India and Russia’s continuing purchases of gold bullion could be the catalyst for gold to rise in price into the stratosphere. He says that as their foreign exchange reserves as a percentage of their GDP is nearing 100%, the pressure to diversify away from fiat currency could reach a critical tipping point, should they decide to simply double their exposure to gold. As of this week, it turns out that India may emerge as the buyer of the remaining half of the IMF’s 400-ton sale of gold.

Here is an excerpt from Ambrose Evans-Pritchard’s Telegraph article:

China, India, and Russia have all been buying gold on a large scale over recent months.

Why should that stop when the AAA club of sovereign debtors is pushing towards the danger threshold of 100pc of GDP?

These new players account for almost all the accumulation of foreign currency reserves worldwide over the last five years, so what they do matters enormously.

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After crunching the numbers, Mr Jen found that the share of gold in their reserves is just 2.2pc compared to 38pc for the Old World (perhaps we should just call them the deadbeats from now on). They would have to buy $115bn of gold at current prices to raise their bullion to just 5pc of total reserves, and $700bn to reach just half western levels.

The killer-term here is at current prices since any such move in the tiny global market for gold would send prices into the stratosphere.

The reality is that sovereign debtors to the US may not be able stop supporting their symbiotic monetary relationship with the dollar, by buying US treasuries, but they can increase their proportionate  interest in gold denominated reserves.

Read the article here.

Tags: 2pc, Aaa Club, Accumulation, Ambrose, Blue Gold, China, Currency Reserves, Deadbeats, Debtors, Emerging Markets, Evans Pritchard, Fiat Currency, Foreign Currency, Foreign Exchange Reserves, Gold, Gold Bullion, Gold Capital, Imf, India, Morgan Stanley, Proportionate Interest, S 400, Stratosphere, Telegraph Article, Tipping Point, Treasuries
Posted in Emerging Markets, Gold, India, Markets | No Comments »

Richard Karn: Nobody’s Right When Everybody’s Wrong (Chapter 2)

Thursday, November 26th, 2009

On Tuesday of this week we featured chapter 1 of Richard Karn’s fascinating e-book, Credit and Credibility, about the future of  markets, the global economy, global credit markets, and the 5 most pressing issues in the midst at this ‘hinge of history’ we have arrived at.

Karn has been described as one of the finest analysts and writers in the financial industry. Karn happens to be the featured guest speaker in an upcoming webinar (1 CE credit), on December 2, on the subject of currency debasement, sponsored by BMG Inc.

Chapter Summary: Credit and Credibility

Chapter 1: Pay no attention to the man behind the curtain! discusses fiat currency, the financial excesses and abuse it engenders, interventionist policy response to perpetuate it, and the role of the US dollar going forward;

Chapter 2: Nobody’s right when everybody’s wrong develops our contention that all fiat currencies today have become derivatives of the US dollar;

Chapter 3: May you live in interesting times explores the extent to which emerging markets can decouple from “consumer” economies and the role of China as the litmus test for the thesis;

Chapter 4: The report of my death was an exaggeration details our contention the world has had its fill of “financial innovation”, and the only way the US economy will recover will be through its traditional strengths in agriculture, manufacturing, invention, and hard work; and

Chapter 5: Passing laws, just because offers our assessment of the anthropogenic global warming debate and pending legislation.

Below we are very pleased to feature once again, for its relevance, the full Second chapter. Karn offers us a hype-less, lucid, insightful, look at the “macro” picture and begins to answer leading questions, proffered from his profound research. Yesterday, we featured some of Richard Karn’s latest thoughts. Very interesting reading. Enjoy!

Credit and Credibility

Chapter 2: Nobody’s right when everybody’s wrong

Arguably more effective than the military adventurism that dominates the headlines, what amounts to American cultural imperialism has subtly seduced large swathes of the world, and it has not been limited simply to a taste for fast food, film, and fashion.  The far more addictive aspect has been the successful overseas marketing of the “debt culture” via the financial innovation associated with the securitization (derivative) markets, which at $27 trillion has constituted the US’ largest export of the 21^st century.[1] This is the realm of the money center banks.

Enticed by various forms of off-balance sheet ‘accounting’ skullduggery, very few large banks globally managed to resist the siren song of easy profits and big bonuses offered by these financial innovations simply because it appears the only restriction on ‘profits’ was how far a bank dared to push its exposure.  That these vehicles were purposefully unregulated only increased their allure: calls for regulation as far back as 1998,[2] and again in the aftermath of the Enron scandal when these vehicles’ deceptive capabilities were fully exposed, were shouted down at every turn by none other than Alan Greenspan, Larry Summers and Robert Rubin and their cohorts in the SEC,[3] ostensibly not to stifle innovation or to drive markets offshore. But the behavior at Enron, far from being viewed as a cautionary tale prompting stricter agency enforcement, was adopted as the exemplar by money center banks-the very same banks, incidentally, that had made the ongoing fraud at Enron possible through a host of derivatives and special investment vehicles[4] the likes of JPMorgan, Citibank et al[5] actively marketed to Enron; instead, derivatives were the mechanism use to transmit the cancer globally.

This tacit government sanction suggests to us then that in effect the whole financial crisis only came to light because of what amounts to a falling out amongst thieves. No investigative reporter or oversight committee or regulatory watchdog safeguarding the interests of the public discovered and exposed any wrong-doing: major international banks’ books just became so overloaded with god-awful paper they knew may well be worthless that they grew terrified of loaning money to each other even over night for fear of not being repaid.[6] Once inter-bank lending stopped, credit creation froze, and the Ponzi-scheme parallel in the fiat currency mechanism began to breakdown.

The securitization and derivatives markets were so thoroughly corrupted by ‘innovation’ that if a bank shuffled paper, adjusted notional values and tweaked their infallible computer models furiously enough, they could arrive at the happy position of not requiring any capital reserves whatsoever to make loans. In other words, major banks worldwide indulged in what amounts to rampant uncollateralized lending-literally creating and distributing unfathomable amounts of money in the form of debt issuance from nothing, secured by nothing.  And quite possibly worth nothing.  It is widely assumed the still undisclosed expenditure of $2 trillion of taxpayer money referred to in the previous chapter was used to purchase boatloads of this stuff in order to stave off the recognition by the public that this behavior had rendered many of these ‘too big to fail’ money center banks literally insolvent; similar bailouts have been undertaken by governments worldwide.

Concurrent with the runaway lending, central banks throughout the world were channeling trade surpluses with the US as well as with each other into US Treasury bonds while simultaneously creating equal amounts of domestic currency to weaken it in order to maintain export competitiveness. This got so out of hand that today two-thirds of the world’s assets are denominated in US dollars.[7] The most controversial of these arrangements has been the de facto vendor financing agreement China has extended to the US: China suppressed the yuan, exports exploded, and it accumulated surpluses; the US let the dollar fall, consumption exploded, and it accumulated debts.[8] Both actions were irresponsible and highly inflationary.  Combined with similar behavior from much of the world, it produced a flood of liquidity that was if not misinterpreted as emerging market prosperity, certainly overstated it.  At the time it was noted primarily for contributing to the low interest rate environment enjoyed in the US that enabled the American consumption binge accompanying the housing bubble.  Few realized housing bubbles were pandemic.[9]

Our analysis concludes it was never a case of a “global savings glut” as proclaimed by Mr. Bernanke and the Fed in 2005[10] and reiterated by ex-Treasury Secretary Paulson[11]earlier this year  to deflect blame for the global financial crisis but a global fiat currency glut-a case of rampant global monetary inflation. Too much money could be leveraged too many times and transferred between too many international markets too quickly.  In addition to masking the extent of fiat currency creation, it produced, by historic standards, rapid-fire sequential bubbles in a range of real assets and commodities supported by credible explanations like ‘the emerging market infrastructure build-out,’ or ‘they’re not making any more real estate’ or ‘emerging middle classes will want to improve their diets’ or ‘Peak Oil,’ and was reinforced by price action.  These bubbles, as they must be, were largely based on the sound reasoning, analysis and extrapolations of economic data, as was the price action that supported it on charts; however, positive technical chart patterns cannot readily distinguish between breakouts driven by a glut of fiat currency looking for a speculative return and the supply and demand imbalances in this instance attributed to emerging market growth. Momentum produced the self-reinforcing hype of being right-something the ETR fell victim to itself-and as markets have discovered, it works in both directions. 

Download a PDF of the complete chapter here.

[2] O’Brien, Timothy L.: “A Federal Turf War Over Derivative Control”; The New York Times: 08.05.1998. http://query.nytimes.com/gst/fullpage.html?res=9B0DEFD81231F93BA35756C0A96E958260&n=Top%2FReference%2FTimes%20Topics%2FOrganizations%2FT%2FTreasury%20Department%20&scp=1&sq=Brooksley%20Born%20warns%20about%20derivatives&st=cse

[3] Whalen, Christopher:  “Statement to the Senate Committee on Banking, Housing and Urban Affairs, Subcommittee on Securities, Insurance, and Investment”: June 22, 2009, http://banking.senate.gov/public/index.cfm?FuseAction=Files.View&FileStore_id=1f354557-7b1f-4ffd-9014-e80435bc55b8

[4] McLean, B., Elkind, P. & Gibney, A.: Enron: The Smartest Guys in the Room; Magnolia Pictures: 2005.

[5] Thornton, Emily & France, Mike: “For Enron’s Bankers, a ‘Get out of Jail Free’ card”; BusinessWeek: 11.08.2008. http://www.businessweek.com/magazine/content/03_32/b3845036.htm

[6] Carney, Brian M.: “Bernanke is Fighting the Last War”; Wall Street Journal: 18.10.2008. http://online.wsj.com/article/SB122428279231046053.html

[7] Tett, Gillian: “In uncertain times, all that glitters is the gold standard”; The Financial Times: 09.04.2009.

http://www.ft.com/cms/s/0/d29f2728-249e-11de-9a01-00144feabdc0.html

[8] Grant, James: “For a better fuse box”; Grant’s Interest Rate Observer: Vol. 27, No. 6, 20.03.2009. http://www.grantspub.com

[9] Tomlinson, Richard & Doyle, Dara: “Ireland Loses Iceland Stigma as Euro Ensures No Return to Past”; Bloomberg: 04.06.2009.  http://www.bloomberg.com/apps/news?pid=20601109&sid=aBWMuYMHhfXw

[10] Cassidy, John: “Anatomy Of A Meltdown”; the New Yorker: 01.12.2008. http://www.newyorker.com/reporting/2008/12/01/081201fa_fact_cassidy?currentPage=all

[11] Yanping, Li: “China Central Bank Attacks Paulson’s ‘Gangster Logic’”; Bloomberg: 16.01.2009. http://www.bloomberg.com/apps/news?pid=20601087&sid=an1lSsWKeDs0&refer=home

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Gold bullion – Overdue for a Pullback? (Richard Russell)

Thursday, November 26th, 2009

Gold closed up $1.10 yesterday to scale a fresh high of $1,165.80. Amazingly, this was the 14th higher close of the last 15 sessions..

It doesn’t take much analysis to conclude that gold is overbought, at least in the short term, but here is Richard Russel’s (Dow Theory Letters) answer to the question “Should I buy more gold here?”.

“To those of us who bought gold a year or five ago, gold looks expensive now. But is it really expensive? Does the US have too much debt? Can the dollar avoid a collapse? Those are questions I cannot answer. As I write tonight [Friday], gold futures are up over $17. By any standard, gold appears to be overbought. But wait - I’m wondering whether gold is on the edge of its third, speculative phase and whether it is starting to go parabolic. If gold is going parabolic, then there’s no such thing as ‘overbought’. Gold will continue to rise until it’s exhausted. And ultimately it will rise higher than almost anyone is expecting.

“I’ve written before that my experience in big primary bull markets tells me the item in question will advance further than anyone thinks reasonable or even possible. If gold is entering its third phase, I have no idea where it’s heading and neither does anyone else.

“Furthermore, if gold is close to going parabolic, all you can do is close your eyes and place your buy order. Waiting for a big gold correction is going to be a frustrating wait. You just have to pull the trigger and buy it. When the primary trend is up, the bull market will usually bail you out of most of your mistakes (and, of course, you will make mistakes).”

Mr Russell may very well be right, but I would still be reluctant to buy now, especially when considering gold’s “high pole” on the point and figure chart below, indicating the metal is overdue for a pullback.

Source: StockCharts.com

I have always been a proponent of buying a notoriously volatile asset like gold on downward reactions, which are bound to happen from time to time - even in a well-defined bull market. That’s the way I will play it.

Tags: Bull Markets, Buy Gold, Collapse, Dollar, Dow Theory Letters, Gold, Gold Bullion, Gold Futures, Heading, Mr Russell, Parabolic, Proponent, Pullback, Richard Russell, Russell Gold, Sessions
Posted in Gold, Markets | 1 Comment »

Richard Karn: Past, Present, and Future of the Dollar

Wednesday, November 25th, 2009

Richard Karn, of Emerging Trends Report, was kind enough to provide us with this exclusive overview of he and his group’s most recent thoughts on the past, present, and future of the vaunted/maligned US dollar and the elaborate context within which it manages to remain the world’s reserve currency, as well as the world’s fiat monetary system.

As usual, Richard’s exhaustive research yields a perspective that is insightful and profound, free of rhetoric, and hype-less.

Here are a range of thoughts regarding the fiat dollar, the majority of which I will be incorporating into the presentation as time allows:

Internationally:

• the world had the chance to end dollar hegemony when it discovered that the US was not honoring the Bretton Woods Agreement, but for political, security or economic reasons, chose not to;
• Gresham’s Law (bad money drives out good money) insures no country today could operate a sound currency based on the gold standard or some variation thereof;
• whether subverted or suborned, all countries today administer fiat currency regimes, rendering those currencies but derivatives of the US dollar and their politicians and central bankers guilty of defrauding their citizens for power and profit;
• the cost of a fiat currency franchise is the purchase of US Treasury instruments, which amounts to essentially an imperial tax or tribute, and whichr has reached unprecedented levels today;
• reserve currency status has little to do with comparative value and everything to do with how readily it is traded globally, and that is determined as well as maintained by military dominance;
• as was amply demonstrated in 2008-9, during an economic crisis, fiat currency regimes weaken from the periphery (or historically the frontier) toward the center, and the role of the reserve currency is simply to ensure continuity of the global financial system;
• behind the empty rhetoric today, calls for a new currency amount to but  posturing and a cheap power grab during a time of perceived dollar weakness because no one is offering a ‘backed’ currency which might be easily monitored, only a new fiat currency over which the proponents will have a greater say;
• recognizing that there is no legitimate challenge to the fiat dollar on the horizon provides observers with a filter with which they can tune out the ‘white noise’ in order to focus on what is being done, not said;
• market commentators today are so eager to write off the dollar and to promote communist China as the future of capitalism that they are overlooking the simple fact that in the aftermath of the global financial crisis all currencies are being inflated today, not just the dollar, which will someday result in a tremendous loss of purchasing power by their citizens–’confiscation by inflation’ on a global basis;
• long term this is supportive of commodity prices, but as events have demonstrated, short term anything is possible;
• the world will buy more, not less, Treasury debt: the cost of a fiat dollar failure would be a universal loathing of fiat currencies, with all of the unpleasant consequences for politicians and central bankers;
• in conjunction with the dollar replacing the yen as the currency of choice in the carry trades, the increased velocity and volume of ‘hot money’ chasing speculative return in a largely negative real interest rate environment globally means there will be both increased volatility as well as increased likelihood of a dislocating event;
• the increasingly desperate measures, the myriad deceptions, the the back-room deals and outright frauds that are being exposed on a near-daily basis, with the guilty parties going unpunished, virtually guarantees the global financial crisis is not over, merely awaiting the right spark.

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Domestically:

• the key enabling attributes for the successful administration of a fiat currency regime are co-operation between the financial sector and the government, endless promotion of their management prowess and regular deflection, taking advantage of varying perspectives regarding time and value, and credibility;
• so-called “end-of-the-world” financial crises and resultant taxpayer-funded bailouts are far more common than most people realize, with each being larger and more lucrative for the financial sector than the previous (think of Wall Street receiving record bonuses less than a year after precipitating the crisis);
• over the last 30 years and numerous bubble cycles, cumulative credit debt has ballooned while capital has been so badly misallocated that we are at, or fast approaching, a point at which there is not sufficient real income generated any longer to service the outstanding debt;
• in 1965, each dollar borrowed produced 93 cents of GDP growth; in 2008 a borrowed dollar produced but 18 cents of GDP growth, and predictions regarding the servicing of debt are so horrendous that it is thought that by 2015 borrowing money will have no net effect on the economy;
• should American consumers increase their savings rate and reduce household debt to 1980 levels, it would constitute as much as a 2.5% reduction in global GDP;
• the US government is using the financial crisis to further expand its power and bureaucratic reach into Americans’ lives;
• too much government is one of the problems: civilian workers outnumber government workers about 5 to 1, but it requires the tax receipts from roughly 14 average wage earners to pay the salary of an average government employee;
• the more financial resources that are consumed by government, which produces very little of value to the real economy, the less there is available to the real economy–out where real things are manufactured and real, sustainable income is generated;
• in contrast to what is generally accepted, financial sector credit growth precedes the expansion of the monetary base, and banks are not lending, they are hoarding;
• without money reaching those most in need of it, small businesses and individuals, recovery is impossible;
• government stimulus programs have historically proven to be of at best marginal benefit to an economy, but tax cuts, incentives and payroll subsidies to businesses have been shown to have a ‘multiplier effect’ of nearly three times the funds committed;
• interventionist policies implemented in the administration of the the fiat dollar regime amount to more of the same policies that landed us in this fix, only harder
• however, the interventionists are running out of options: we can count but six available to the administration over the near to intermediate term, which is the subject of the next webinar, with the most terrifying not being a full-blown depression but the wholesale March Toward Marxism under the largely fabricated aegis of the need to control the emissions of carbon dioxide–by everyone and everything.

Tomorrow, we will feature Chapter 2 from Richard Karn’s book, Credit and Credibility.

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Richard Karn: Credit and Credibility - Chapter 1

Tuesday, November 24th, 2009

5 months ago we featured a fascinating e-book by Emerging Trend Report’s, Richard Karn, Credit and Credibility, about the future of  markets, the global economy, global credit markets, and the 5 most pressing issues in the midst of this ‘hinge of history’ we find ourselves in.

Karn has been described as one of the finest analysts and writers in the financial industry. Karn happens to be the featured guest speaker in an upcoming webinar (1 CE credit), on December 2, on the subject of currency debasement, sponsored by BMG Inc.

Chapter Summary: Credit and Credibility

Chapter 1: Pay no attention to the man behind the curtain! discusses fiat currency, the financial excesses and abuse it engenders, interventionist policy response to perpetuate it, and the role of the US dollar going forward;

Chapter 2: Nobody’s right when everybody’s wrong develops our contention that all fiat currencies today have become derivatives of the US dollar;

Chapter 3: May you live in interesting times explores the extent to which emerging markets can decouple from “consumer” economies and the role of China as the litmus test for the thesis;

Chapter 4: The report of my death was an exaggeration details our contention the world has had its fill of “financial innovation”, and the only way the US economy will recover will be through its traditional strengths in agriculture, manufacturing, invention, and hard work; and

Chapter 5: Passing laws, just because offers our assessment of the anthropogenic global warming debate and pending legislation.

Below we are very pleased to feature once again, for its relevance, the first full chapter. Karn offers us a hype-less, lucid, insightful, look at the “macro” picture and begins to answer leading questions, proffered from his profound research. Tomorrow we will feature some of Richard Karn’s latest thoughts, and on Thursday, we will share Chapter 2 with you. Very interesting reading. Enjoy!

Credit and Credibility

Chapter 1: Pay No Attention to the Man Behind the Curtain

Americans’ willful ignorance of all things economic combined with a blind faith in our elected officials has made us all complicit to one extent or another, even if by omission, in the financial crisis rocking our country.  Most of us have been viscerally aware of the economic problems our country faces, but as with health check-ups after a certain age we’ve become loathe to visit the doctor for fear of what all those warnings we’ve been studiously ignoring really mean.  And the truth is that you do not need a doctorate to know that our economy is displaying the pathology of a critically ill patient that has been so badly, and we would argue purposefully, misdiagnosed that the disease itself has escaped real treatment while those treatments administered to the symptoms have only served to accelerate the progress of the disease.

We all want to believe that our government is acting in our best interests, that its shortcomings and failures are a matter of well-intentioned incompetence and not something more sinister.  But political pandering to special interest groups routinely takes precedence over the common good and is largely responsible for bringing us to the brink of economic collapse today.  In what has become an all too familiar scenario, successful lobbying resulted in the de- or self-regulation of another segment of the financial industry, which was accompanied by the concurrent elimination, subversion, or de-fanging of agency enforcement, and has culminated in another financial crisis rife with corruption, the cost of which is once again being borne by American taxpayers.  It strikes most of us as perfectly obvious that politicians cannot serve two masters, especially when one pays better and arguably preys on the other, but the practice continues unabated-as is witnessed by the financials sector’s continuing influence in Washington despite the revelations of the last 18 months.

The sheer scale of the debacle guarantees it will be the subject of myriad forensic dissections regarding what went wrong in the US and why, but the ETR submits historians will eventually point to the root of the problem being the very nature of the US dollar itself.  The dollar has been a purely fiat currency since August of 1971 when President Richard Nixon ended its convertibility to gold.  We support the contention that it is the inherent lack of fiscal restraint attendant to the subjective administration of a fiat currency regime rather than a rules-based currency accessible to all, such as a gold standard, that has by design or default culminated in the problems extant in the US economy today; that the dollar is the world’s reserve currency has startling implications for the global economy well beyond the heated rhetoric its mismanagement has provoked amongst our allies, trading partners and rivals alike.

Let us not equivocate here: the economic failure we are witnessing today is not with capitalism as many would have us believe but with the abuse engendered by the interventionist policies that have been put into practice since the US dollar became a purely fiat currency. It is not a coincidence that since ending the dollar’s convertibility to gold America has been transformed from the largest creditor nation on earth to the largest debtor nation, nor that it has fallen from one of the most admired nations on earth to one of the most reviled.  Any economic system whose foundation rests on the shifting sands of a fiat currency is destined to collapse: this has been the case with every single fiat currency in history, twenty failing during the 20^th century alone,[1] and the reasons are not difficult to fathom.  When a government holds its currency-literally its stock in trade-in low regard, which history tells us a fiat currency regime invariably does when it can conjure money at will to spend as frivolously as it dares, inevitably certain of  its citizens will too, giving rise to a Culture of Cheating. No longer restrained by such quaint notions as sound money of tangible lasting value or living within our means, the unbridled expansion of credit has witnessed a corresponding increase in the frequency of financial crisis, each of escalating magnitude and attended by ever more pervasive corruption.

Interventionist policy responses implemented ostensibly to resolve one crisis serve as well to foster the development of the next because the ’solution’ never addresses the root of the problem, only its latest chaotic manifestation.  Despite demonstrating time and again that low interest rates combined with massive liquidity injections invariably lead to asset bubbles that also invariably collapse,[2] that accurately summarizes the Fed and Treasury’s uniform response to crisis: promote the assumption of more debt as the means to restore economic growth.  But artificially stimulating growth through the creation of debt has been proven over the years to diminish the effect of each effort due to the increasingly debilitating economic drain attendant to servicing the accumulated debt, the misallocation of easy credit toward consumption rather than production, and the specious growth attendant to siphoning off ‘profits’ from transactions that merely shuffle the new paper hither and yon.  The growing imbalance between the service and manufacturing industries is reflected in the persistent deterioration in results: in 1966, each dollar borrowed produced ninety-three cents of GDP growth; by 2007, a borrowed dollar produced less than twenty cents of GDP growth.[3] (Please refer to the charts on page 5.)  In other words, each new effort requires more ’stimulus’ than its predecessor in order to produce a similar result: we term this policy rut, which we believe has spilled over into many aspects of American society, the doctrine of ‘more of the same, only harder’ because the desired outcome is not to cure the problem but to perpetuate it by deflecting it in a new direction.

Nearly four decades of experience with the fiat dollar is plainly telling us that this doctrine has failed, and until the fiat dollar is rejected, the progression of financial crises will continue to accelerate until our economy, and indeed quite probably large swathes of the global economy, is hopelessly gutted and lay in ruins.  We see this reflected in our vulnerable household finances which have deteriorated to the point we increasingly rely on revolving credit instead of savings as the most important source of liquidity after our jobs.[4] We see it in the uncontrolled growth of US trade imbalances, military adventurism, deficit spending, un- or underfunded entitlement programs, and ever more debt issuance and monetary expansion that have culminated in American taxpayers ultimately being responsible for more than $70 trillion dollars of debt,[5] not including that which we are currently assuming ostensibly to stave off financial collapse- a debt so large in fact it is literally only possible under a fiat currency regime.

Download Chapter 1 as a PDF.

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Bruce Berkowitz: WealthTrack Interview Transcript

Monday, November 23rd, 2009

The transcript of Consuelo Mack’s recent interview with Bruce Berkowitz, founder and lead portfolio manager of the five-star Fairholme Fund, has just been published. See below for the text. This is must-read material.

In case you missed the video clip, click here for the original post.

CONSUELO MACK: This week on WealthTrack, the golden rules of investing from Fairholme Fund’s Bruce Berkowitz. He’ll explain how avoiding losses, focusing on cash and trying to kill a business added up to big runs for this five-star fund. “Great Investor” Bruce Berkowitz is next on Consuelo Mack WealthTrack.
Hello and welcome to this edition of WealthTrack. I’m Consuelo Mack. The naysayers are licking their wounds. The zippy recovery that recent guest Jim Grant referred to could not be more apparent in the financial markets. Much was made of the fact that the Dow snapped its six-day winning streak on Thursday, but give the market a break. The blue chip average hit a series of 13-month highs last week and is still 57% higher than its March lows. Gold ended its eight-day run on the same day but is still trading in record territory, having advanced 25% this year. And oil has gained 73% year to date.
Meanwhile, despite a relatively lukewarm auction of 30-year Treasury bonds late in the week, the government successfully sold $81 billion of new debt, even though the Federal Reserve had wrapped up its $300 billion Treasury purchase program last month. Well, macro events such as these are not of particular interest to this week’s Great Investor guest. Bruce Berkowitz is a bottom-up value investor in the Graham and Dodd tradition. As a matter of fact, he was one of the handful of leading value investors chosen to introduce a chapter of the latest edition of Benjamin Graham’s classic, Security Analysis.
Berkowitz’s now $10 billion Fairholme Fund, a five-star Morningstar favorite, will celebrate its tenth anniversary at the end of the year, but its approach, which has delivered market and peer-beating annualized returns of more than 12%, remains the same. He and his team run a tightly focused portfolio of about 15 to 20 stocks and hefty cash positions averaging around 17%. And despite the increasing lure of overseas markets, Fairholme is sticking to what Berkowitz calls his “home team advantage,” investing in the U.S.-based companies. As if his job were not changing enough, the former bond manager is going back to his roots and will be launching a Fairholme bond fund in the New Year. A man of many memorable lines- one of his slogans is “the right time to invest is always”- I asked him, what about now?

BRUCE BERKOWITZ: Probably as good a time as any time, because after all investing is just an equation of what you pay and what you get. And there are more than enough situations today where you get so much more for what you’re paying today.

CONSUELO MACK: Let me ask you about the Fairholme Fund, some of your mantras. One is never to lose money. What do you mean by “you never want the lose money?”

BRUCE BERKOWITZ: Well, we make the assumption that people worked very hard for their money and that we have all of their long-term investment money, and that money is going to be very important to them in their retirement in the future. So our number-one goal is, don’t lose it. Because you lose it, you can’t start over again if you don’t have anything to start with, and no one likes to go back to go. So the number-one rule, don’t lose the money. Number-two rule: follow number-one rule. Number-three rule, try and make as much as possible at a reasonable risk basis.

CONSUELO MACK: What are some of the lessons that you learned from the last 18 months or so from the market meltdown? Did you learn anything?

BRUCE BERKOWITZ: Well, it reinforced a lot of the old lessons that people forget during very bullish times. Leverage is a two-edged sword. At the end of the day you have to count cash because after all, that’s all you can spend. Many people come up with reasons why an investment is going to do well. We’d like the turn that upside down and think about why an investment can kill you, so we try and kill the business, and if you can’t kill the business, then maybe something good will happen.

CONSUELO MACK: What do you mean by the exercise of trying to kill a business?

BRUCE BERKOWITZ: It gets to the point about the balance sheet. When you have a very leveraged organization, such as a bank or a credit card company, you’re really dependent upon the kindness of strangers, your bankers. If they decide one day they no longer like you, your business is over, so the balance sheet is very important. We want businesses that have a fortress-like balance sheet. If they don’t have a fortress-like balance sheet, we have to be absolutely convinced that the management has the ability to generate the cash necessary for the business to survive, even without the acceptance of their financial community supporting them and their credit structure.
Another lesson learned, getting back to that, is that when times are really tough, everything is correlated. When people need money, they sell that which is easy to sell no matter what the price is because so much can’t be sold. So people do not prepare for those one in every 10, 15-year events where you have this extreme moment that can take you out of the game because it is just too hard to sit on all that cash for such a long period of time or to be too conservative because there are new rules, but eventually we find out there are no new rules, just the old rules that work.

CONSUELO MACK: If you look at the events of the last two years, a lot of people were shocked at what happened, the market meltdown, the credit freeze-over, and a very popular book over the last couple years has been The Black Swan, by Nassim Taleb. He’s been on WealthTrack, and the fact that people look at what these “black swan” events and say this is a once-in-a-lifetime, a once in a generation, a once in a 100-year perfect storm. But you’re saying not so, and you have to figure they’ll happen more often.

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BRUCE BERKOWITZ: That’s right. Hurricane predictions, you say this is a storm that will happen every one in 300 years or one in 100 years, but we seem to have these 1 in 100-year storms every seven to 15 years. We don’t get it right. There’s a problem with the modeling. There’s a lack of common sense, and also with statistical theory that it’s only going to happen once in 100 years- what happens if it happens in the first year rather than the 70th year? Your statistics is all about the spinning of a roulette wheel in the Monte Carlo simulations. But you can’t apply that, for example, to Russian roulette. If you have a gun with 1,000 chambers and one bullet, does it pay to put it to your head and pull the trigger? The answer is no because if that bullet is in the first chamber, you can’t pull again. You’re dead.
So a lot of statistics assume that you can keep spinning and spinning and take chances and chances when, if you play Russian roulette, you can’t continue. And this probability theory that people apply to investing takes you down a very treacherous path.

CONSUELO MACK: So what is your substitute for it then? I mean, how do you protect yourself against these events that you think are going to happen much more frequently than we are willing to admit?

BRUCE BERKOWITZ: I don’t know if it was Warren Buffett or Charlie Munger who once quoted an old country western song. I think they quoted it backwards and it went something like, “tell me where I’m going to die so I don’t go there.” The trick to investing is not to die and not the play Russian roulette. Frankly, if there is a low, low probability of death, you pass. You don’t say to yourself, it’s only 1 in 100, 1 in 1,000. It’s unacceptable. Death is death.

CONSUELO MACK: Cash flow, free cash flow is another emphasis that Fairholme Fund has when you’re looking at companies. Number one, describe what you mean by free cash flow and also why free cash flow is so important to you.

BRUCE BERKOWITZ: Well, the best example I can give on free cash flow is my first job in a corner grocery store behind the counter. People will come in and buy what they needed for the day. Money would go into that single cash register. From that cash register you would pay the bills. You would restock the shelves. You would keep the place clean, paint it every once in a while, and then in the end what was left in that cash register was for the owner of the business to pay employees. And the remainder was for that owner to keep. And that’s the free cash. And then the owner had to think about capital allocations. Do I spend the money? Some of it, do I spend on my family? Do I spend the money to try to grow the business? Do I use the money to grow another business? And that’s how I think about it. Free cash flow is that amount of cash left in the cash register at the end of the business day, and we try and use that analogy on all of the complex businesses that exist today.

CONSUELO MACK: So give me an example, Bruce, of a company that is throwing off a lot of free cash flow that you’re invested in now and why that is so important to that company, especially given, again, this very difficult environment we’ve just been through.

BRUCE BERKOWITZ: Today you have the health insurers, where the fear is so great they’re going to be put out of business by the government, so their prices, their stock market prices have fallen off the proverbial cliff. So when you look at the prices today of a Humana or a Well Point compared to the amount of free cash that they generate, it’s a very high free cash flow yield. And it’s not because they’re making egregious profits, which they’re not. They make about a 4% profit margin which isn’t that much and is very sensible and competitive, but it’s because of the fear of their failure based upon what the current administration is going to do, allowed Fairholme to buy at a very cheap price in relationship to those existing cash flows, which have done quite well. And then, of course, we try to kill the business, and we ask ourselves, well, if the current health insurers aren’t going to do it, who is going to do it for the country?
The answer is there isn’t anyone else to do it for the country. Government is very good at printing checks, sending them out to people, but there’s no hidden department with hundreds of thousands of people ready to help with health care.

CONSUELO MACK: This is a long-term investment for you essentially. What’s your average holding at the Fairholme Fund?

BRUCE BERKOWITZ: It’s in the years. It’s many years. Investing is sort of like marriage. It’s like the longer we can hold an investment, the better we feel that all the time and effort we put into studying a company- it’s kind of when we sell a position, I feel as if it’s divorce. We’d like to ride a nice, long wave.

CONSUELO MACK: But you in the recent past have sold Berkshire-Hathaway; was one of your largest holdings. You sold it. Then it’s become one of your largest holdings once again. What happened? Why did you sell? Why have you bought back?

BRUCE BERKOWITZ: I wish I had a good answer as to why we sold. It probably was a stupid move on my part, but Warren talked about how we’re big, we’re large, we’re slow, we’re going to be cautious. We’re going to still do well, a couple points better than the S&P 500. Nothing wrong with that. It’s fabulous performance. I thought, given our size, we could do a bit better absent some type of cataclysmic event which would allow Berkshire Hathaway to put the tens upon tens of billions of dollars of cash they have, and that event happened. Warren Buffett has been able to put a tremendous amount of money to work that was yielding maybe 1% that’s now yielding 10, 12%. And the businesses that he’s put together just complement the insurance businesses so well, the volatility of insurance business versus the stability of the electric utility, and now the railroad business. These are big-scale businesses that will allow Berkshire to put much more money to work over time.

CONSUELO MACK: Let me ask you about the Burlington Northern acquisition, the largest acquisition that Berkshire Hathaway has ever made. The Wall Street Journal coverage of it said Warren Buffett is turning Berkshire Hathaway into a big industrial operator and it’s no longer the nimble investment firm that it was once. What’s your view of what Warren is doing in buying these big industrial companies?

BRUCE BERKOWITZ: Berkshire has a tremendous amount of flow from the premiums received from long-term insurance policies. That flow has to be invested in very secure, sound financial instruments: electric utilities cost plus or a railroad business which has the stability unlike many businesses. So here he’s taking money that’s actually got a zero cost to it and then investing it at a reasonable, not at an egregious yield, but at a reasonable investment yield. But when the cost is zero, the returns are phenomenal. He’s brilliant. Warren Buffett is being Warren Buffett in that he’s married another great big business to Berkshire Hathaway that’s going to make a sizeable difference overtime.

CONSUELO MACK: You think this might be the golden age of Warren Buffett, is that right, what he’s doing with Berkshire-Hathaway right now?

BRUCE BERKOWITZ: I think in the past two years, given prices and where he’s been able to buy and how much money he’s put to work and given how so many of his competitors have been weakened from this environment that this may prove to be his best period of all time.

CONSUELO MACK: Are there parallels to what Warren Buffett is doing with Berkshire Hathaway and what you’re doing in building a portfolio with the Fairholme Fund?

BRUCE BERKOWITZ: There are huge parallels. I mean, nothing we do is original. We’ll take our ideas from any successful person to help our investors. We have no ego when it comes to the origination of ideas. Warren Buffett and Benjamin Graham before him and others have taught some extremely valuable lessons. So, yes, and we’re constantly looking at the risks. We’re constantly looking at how the fund can get hurt, how our shareholders can get hurt. So we’re balancing. We want to be focused because after all how much can one person do? We want to focus on our best 10, 20 ideas so that we have the time to protect our shareholders, but at the same time if the positions do well, it will make a meaningful difference to the performance of the portfolio. But then we have to balance the different sectors that we’re involved in so we don’t get too heavily weighted in one.
We always want to have cash. I find cash to be a form of financial valium, that you can keep your cool during very difficult times. Of course cash is extremely valuable when no one else has it. When that situation occurs, the phone starts to ring and there are interesting propositions. We’ve been able to do securitized bonds at 18% yield to maturity, again, 25 plus percent bonds. We’ve been able to buy large positions in companies whose management we respect, where the prices were being decimated for no good reason at all. So it’s wonderful to have that flexibility, to have the heft of that balance sheet is the safety of having that cash.

CONSUELO MACK: Let’s talk about some of your top holdings. If an outsider were to look at the Fairholme Fund portfolio, there would be some quizzical looks and some people would say, what, is he nuts to be investing in these companies? You know, your two largest holdings, Pfizer for one and Sears. Why Pfizer?

BRUCE BERKOWITZ: Investing is all about what you pay and what you get. And for the prices we pay, we think the amount of cash that owners will eventually get will show a nice return in a company with a very solid triple-A like balance sheet run by a fairly new management team that’s heading in the right direction: very defensive, recession-proof, everyone’s again with the new administration coming down hard on anything that’s health-related. It’s caused the price the really ratchet down and the stock price. So that was the advantage. It was really a cheap price relative to the cash flows.

CONSUELO MACK: So what’s your excuse for Sears?

BRUCE BERKOWITZ: It’s not just a retail company. It’s four, five different companies, and I know Eddie Lampert deeply wants Sears and K-Mart to work, and I hope they do, but he’s also an economic person. He’s going to give it the good old college try, but he’s not going to keep throwing money down a sinkhole in terms of losing stores that may have a higher and better use for the property or for the parking lots or for whatever the zoning may allow. It’s very, very analogous to Berkshire Hathaway. When Warren Buffett bought the Berkshire Hathaway textile spinning mills, it turned out to be quite a losing operation. He had a tremendous respect for the employees there. He spent years trying to make a go of it with equipment, and in the end he realized that he had to take the cash, the free cash that the operation was generating and reallocate it for higher and better uses. And that’s the way Sears is going to go.

CONSUELO MACK: I don’t usually delve into our guest’s distant past, but you grew up at one point being a bookie.

BRUCE BERKOWITZ: Oh, who told you that? That’s good. Statute of limitations are over so I’m okay. I was a minor. I did drop out of high school, but don’t tell anybody.

CONSUELO MACK: I didn’t know that. Did you drop out of high school?

BRUCE BERKOWITZ: For about a year to be a bookmaker.

CONSUELO MACK: So what did you learn from being a bookmaker that you’re applying to your investing strategy?

BRUCE BERKOWITZ: Perverse psychology of the human condition: how people behave, how they judge winning versus losing, the need for hope. Most people do not understand the nature of odds, how some things are multiplicative in nature as an additive. I mean, for example, if you had to decide on a company and that company had, there were 15 different aspects of that company that you had to think about and you could be 95% correct on every one of those aspects, you still have about a 50/50 chance of, probably less than 50, probably 45% chance. So I learned about odds. I learned about people and their hopes and dreams and drudgery of work and the perverse psychology that makes people make stupid decisions. I was lucky in that I learned at a young age, but it’s time the move on; when I went back the high school, it was sad because it took about 15 years for me to get back to what I was making when I was about 15 years old.

CONSUELO MACK: I think you’ve made up for that since. Bruce, are you expecting a highly inflationary environment the next couple of years?

BRUCE BERKOWITZ: Well, when I think about the fixed income markets, I think of safety first. Given that the printing presses have been going 24/7, something’s going to give. That’s one of the reason we have a very large investment in St. Joe, a very large real estate company in Florida. So I think people, there are a lot of people reaching for yield now because interest rates are so low, there’s a tendency to go out very long to get that extra 1%, 2% per annum. Reaching for that extra one and two I believe will cause a lot of pain down the road. So we’re going to try and do what we think is right.

CONSUELO MACK: So are we going to see you… at the Fairholme Fund, you mentioned St. Joe, one of your largest hold, which is a major real estate holder in Florida. Are you looking more to the asset side of the economy?

BRUCE BERKOWITZ: We’ve always looked at the balance sheet, and St. Joe was developed from the DuPont family at the time of the Depression. The company has remaining maybe about 700,000 acres of land, 80% of which is within 15 miles of the Gulf of Mexico. If you’ve never been to that part, the panhandle, people call it the Redneck Riviera, or L.A., they call it the lower Alabama. It’s a tough place to get to, but it has some of the most gorgeous beaches, land that I’ve ever seen. The beaches are 95% quartz. They’re so white you need sunglasses to look at the beach. They’re wide. The company has 140 miles of land that touches the gulf, another 70 miles of land that goes to the intercoastal waterways. From one end of the other, about 145 miles of driving, and what most people don’t know about, I hope they don’t find out about, is that right in the middle of St. Joe’s land, a brand-new international airport is opening up next May, the first probably since 1995.

CONSUELO MACK: Wow.

BRUCE BERKOWITZ: But no one knows it and most people think it’s just a mosquito infested swamp land. That’s the price we paid for St. Joe. We basically paid swamp land prices.

CONSUELO MACK: Given again what we’ve just been through in the last couple years, what is the one piece of investment advice you would give individual investors?

BRUCE BERKOWITZ: The advice I give to most investors is that there’s just… investing is not your profession. That at the end of the day, you’re going to have to trust someone. So there are four, five simple rules that we use, that Fairholme uses when evaluating companies’ managements I think investors should use. You have to study the paper trail. So if you were looking at a mutual fund, you want to study the paper trail of the fund, especially during stressful periods. Don’t read what the fund is talking about now. Go back to before 1990, go back to 2006, ‘07, read what the fund had to say before a difficult period. See how the fund behaved during a very stressful period.
Now, talk is cheap. But when times get very tough, you see the true person. You see. It all comes out in tough times. And also you want to make sure that whoever is managing your money has most of their family net worth in the same investments because if it’s going to be good enough for you, it better be good enough for them. Of course you want honest, integrity, a smart crook is going to get you every time. The last is you have to have a layman’s understanding of the strategy. You have to have a basic grasp of what the manager is trying to do, because if you don’t, you will be shaken out at the worst possible time. If you’re a doctor, a lawyer, whatever profession you may be in, you have to get those five or six dynamics, then eventually you just have to trust someone. And that’s the advice that I give to individuals, and those are the rules we try and use when we look at companies.

CONSUELO MACK: Bruce Berkowitz from the Fairholme Fund, thank you very much for joining us.

BRUCE BERKOWITZ: It’s always a pleasure. Thank you, Consuelo.

CONSUELO MACK: The Fairholme Fund is extremely focused. It has around 40% of its portfolio in health care stocks right now. I asked Berkowitz if there is one holding that stands out. There is. Bruce Berkowitz’s One Investment for a long-term diversified portfolio is health insurer, Humana. Berkowitz likes its management, its business, it is a large Medicare Advantage provider, its free cash flow and, of course, its price, which he says has been battered by fears that health insurers will be driven out of business by the government- a prospect he feels is highly unlikely.
Well, needless to say, others disagree, so in that contrary note, let me tell you about the Great Investor we’re talking to next week. He is another true blue contrarian- Robert Kleinschmidt runs the Tocqueville Fund and one of his favorite pastimes is reading the new low list for investment ideas. Before we leave you, we want to welcome another state to our television family. WealthTrack will now be seen on public broadcasting in Atlanta in the state of Georgia, extending our reach to 77% of the country. Thanks for joining us. Have a great weekend and make the week ahead a profitable and a productive one.

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