Posts Tagged ‘1990s’
Fear, Gold and the Dollar
Sunday, February 7th, 2010
By Frank Holmes
CEO and Chief Investment Officer
The U.S. dollar is up this week against the euro out of fear of how debt problems in Greece and elsewhere in Europe will be resolved, and as a result gold has had a tough week.
The dollar’s rally appears to be a short-term safe haven move, rather than a response to improving economic conditions in the U.S.
In fact, Friday’s report of a net loss of 20,000 jobs in December (the expectation was for a net gain in employment) and that many thousands more would-be workers have given up looking for jobs is evidence that the economy remains somewhat weak.
This weakness makes it less likely that the Federal Reserve will play it safe by not raising interest rates, and more likely that Congress and the Obama administration will pump more financial stimulus money into the system.
Both keeping rates near zero and expanding the monetary base are negative for the dollar, and thus positive for gold. We’ve seen that after a period of money-supply tightening in December and January, it appears that money is loosening again.
The federal deficit is pegged at more than $1 trillion this year and more than $8 trillion through 2019—this will slowly weigh on the dollar. On top of that, the TARP money being repaid by banks is not being removed from the monetary base—we shouldn’t be surprised if that money is used as a stimulus booster shot ahead of the 2010 midterm elections.
Our gold-dollar oscillator (above) shows that the dollar is approaching being overbought over the past 60 trading days, while the gold is showing signs of being oversold.
The magnitude of the current spread between gold and the dollar typically means that both could be close to a price reversal—dollar heading back and gold back up toward the mean.
In the 1990s, a strong dollar was associated with a strong U.S. economy, but the current one-month dollar rally has been accompanied by a drop in the S&P 500. With most of the world’s economic growth coming in emerging markets, many U.S. companies are relying on overseas sales to drive revenue and profit growth. A stronger dollar hurts U.S. companies trying to thrive in the global marketplace.
This is clearly evident in the illustration below. Here you can see that the world has changed and a strong stock market is aided by a weaker dollar.
Tags: 1990s, Chief Investment Officer, Debt Problems, Economic Conditions, Economic Growth, Emerging Markets, Expectation, Federal Deficit, Federal Reserve, Frank Holmes, Gold, Gold Dollar, Magnitude, Midterm Elections, Monetary Base, Money Supply, Oscillator, Rally, Safe Haven, Stimulus, Strong Dollar, Trillion
Posted in Markets | No Comments »
Birth of the Credit Monster
Monday, May 4th, 2009
Gillian Tett, of FT.com has written an in-depth exposé about the birth of innovative securities that gave rise to the markets’ abuse of leverage finance and ultimately, the catastrophic rise of debt. Here is the first excerpt from Tett’s new book, Fool’s Gold provided by FT.com, Genesis of the Debt Disaster, May 1, 2009.
In the 1990s, a young team at Wall Street investment bank JP Morgan pioneered a new way of making money – credit derivatives. Within a decade, the market for these exotic securities had exploded to more than $12,000bn – and some people later blamed them for fuelling the global financial fiasco. In the first of two extracts from her book, Fool’s Gold, the FT’s Gillian Tett reveals how the innovation genie was first let out of the bottle – and eventually devoured the system, to the horror of its creators.
The first sign that there might be a structural problem with the innovative bundles of credit derivatives that bankers at JP Morgan had dreamed up emerged in the second half of 1998. In the preceding months, Blythe Masters and Bill Demchak – key members of JP Morgan’s credit derivatives team – had been pestering financial regulators. They believed that by using the new credit derivative products they had helped create, JP Morgan could better manage the risks in its portfolio of loans to companies, and thereby reduce the amount of capital it needed to put aside to cover possible defaults. The question was by how much. (Though these bundles of credit derivatives later went under other names, such as collateralised debt obligations [CDOs], at that time these pioneering structures were known as “Bistro” deals, short for Broad Index Secured Trust Offering). Masters and Demchak had done the first couple of Bistro deals on behalf of their own bank without knowing the answer to their question for sure. But when they were doing these deals for other banks, the question of reserve capital became more important – the others were mainly interested in cutting their reserve requirements.
The regulators weren’t sure. When officials at the Office of the Comptroller of the Currency and the Federal Reserve had first heard about credit derivatives and CDOs, they had warmed to the idea that banks were trying to manage their risk. But they were also uneasy because the new derivatives didn’t fit neatly under any existing regulations. And they were particularly uncertain over what to make of the unusually low level of capital available to cover losses on the derivatives.
When the team did their first Bistro deal, they pooled more than 300 of JP Morgan’s loans, worth a total of $9.7bn, and issued securities based on the income streams from these loans. The lure of the idea was clear: the team had calculated that they only needed to set aside $700m - a strikingly small sum - against the risk of defaults among the 300-plus loans. After much debate, the credit rating agencies had agreed with the team’s assessment of the risks, and the deal had gone ahead on the basis that if financial Armageddon wiped out the $700m funding cushion, JP Morgan would absorb the additional losses itself. To Masters and Demchak, the chance that losses would ever eat through $700m were minuscule…
Read the entire article here, or PDF version here.
Tags: 1990s, Catastrophic Rise, Collateralised Debt Obligations, Creators, Credit Derivatives, Derivative Products, Excerpt, Excerpt From, Extracts, Fiasco, Financial Regulators, Fool S Gold, Genesis 1, Genie, Gillian Tett, Investment Bank, Jp Morgan, Leverage Finance, May 1, Monster, Reser, Wall Street, Wall Street Investment
Posted in Gold, Markets | No Comments »
BCA: Emerging Market Decoupling To Persist Into 2008
Thursday, January 3rd, 2008
BCA Research confirms its outlook on decoupling of emerging markets and the U.S. in its January 3, 2008 Bulletin:
January 3, 2008
Emerging markets have weathered the U.S. credit market calamity very well and the bull run will continue in 2008.
The economic decoupling between emerging economies and the U.S. is attributable to underlying fundamentals and is therefore sustainable. Unlike in the 1990s when emerging economies relied on foreign capital to finance their expansion, many of these countries are now net creditors in global financial markets and are not vulnerable to a withdrawal of financing by G7 banks.
Domestic interest rates are still very stimulative thanks to their strong currencies and vast savings, which will continue to underpin domestic demand growth. While exports to the U.S. have been slowing, trade among developing economies is booming.
As a result, overall emerging market growth will not slow considerably, even if the U.S. economic slump continues. Bottom line: Our Emerging Markets Strategy service recommends that investors continue to overweight emerging equity markets within a global portfolio.
Tags: 1990s, Banks, Bottom Line, Brazil, BRIC, BRICs, Bull Run, Calamity, China, Credit, Credit Market, Creditors, Currencies, de-coupling, Decoupling, Developing Economies, Domestic Interest Rates, Economic Slump, Emerging Economies, Emerging Market, Emerging Markets, Global Financial Markets, Global Portfolio, India, interest rates, Investment, Investors, Market Research, Markets, Miscellaneous, Overweight, risk, Russia, Strategy Service
Posted in Credit Markets, Emerging Markets, Markets, Outlook | 1 Comment »
