Bull Run

Managing Expectations: Why Gold Should Thrive


Sunday, April 8th, 2012

Managing Expectations: Why Gold Should Thrive

By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors

It’s been a challenging week for gold investors. As I often say, investing, like life, is about managing expectations. Over the past 11 years during gold’s spectacular bull run, investors should remember that price action can go both ways. What helps is to look at the historical rise and fall of gold.  For example, looking at the past decade of one-day 5 percent drops in gold, you can see that this event is pretty rare. In 2006, gold dropped more than 5 percent in a day only two times. In 2008, there were three such events. Another one occurred at the end of this February.

The 1.7 percent drop experienced over the past month shouldn’t surprise gold investors given the seasonal pattern for gold. Whereas gold rises nearly 2 percent in both January and February, over the past 11 years, it’s been a non-event for gold to correct in March.

Seasonal PatternGold

In addition, it’s a good reminder that bullion has historically been less volatile than the stock market: the 12-month rolling volatility over the past 10 years for gold was 13 percent. For the S&P 500 Index, the 12-month rolling volatility over the same period was 19 percent.

This March, there seemed to be one main driver eight thousand miles away negatively affecting gold prices. I often say that government policy is a precursor to change, and fiscal government policy strongly affected the Love Trade in India last month. To trim its current account deficit, India’s finance minister proposed doubling the customs tax on the precious metal. It was soon reported that jewelers closed shops in protest.

As a result, gold imports into the world’s largest gold market fell 55 percent.

It’s not the customs tax that has the gold shops boycotting, says UBS Investment Research firm. Jewelers’ “prime gripe is with the new 1 percent excise duty on unbranded jewelry” leading to a greater recording of gold transactions, which means more regulation and red tape. What’s so egregious to jewelers is the excise tax will be retroactive so those shop owners holding old gold stocks will have to pay duty on those as well, says UBS.

I believe this is only a temporary sell-off for India. As I often discuss in my presentations, traditional festivals and holidays drive gold demand in India because of their strong history with gold. With their love for the yellow metal, Indians hold the belief that gold “will perpetually rise,” although there are certain buyers that wait for a “psychologically important $1,600 level,” keeping in mind the strength of the rupee, says UBS.

While the seasonal Love Trade period for gold generally falls between August and February, an important holiday is coming up which has historically driven higher sales of gold. Akshaya Tritiya festival occurs on April 24 this year. This is an important occasion for Hindus, celebrated annually in late April or early May, depending on the Hindu calendar. Buying and wearing of gold jewelry is important on this day, as UBS says it’s one of the two “biggest gold buying events” in the Hindu calendar. The second event is Dhanteras, which occurs during the peak seasonality period for the yellow metal.

How important is this festival for the gold market? UBS analyzed the buying data from India last year when Indians celebrated Akshaya Tritiya festival on May 6. It found that “physical sales to India peaked four days beforehand.” Also, “sales were consistently above average for 13 working days” before the festival because local banks and jewelers restocked their inventory.

Two factors need to change to help sales in India this year, warns UBS. The firm says the jewelers’ strike needs to end, and, according to one local who talked with UBS, it would help gold sales if the price of oil would reverse—this would “relieve some of the current account pressure and perhaps allow for more flexibility with regard to gold imports.”

What won’t change over the long-term is Indians’ gold-buying behavior: Indians “have an extensive cultural tie to gold” and this “is not changing,” says UBS.

Fear Trade for Gold is Still Alive
The world has been experiencing the largest liquidity boom, as the central banks’ seven-month easing binge continues. Over this time, ISI counted 127 different stimulative policies, such as printing money, lowering interest rates and other easing measures, taken by governments around the world.

The policy shifts helped carry the equity market a long way from the low on March 9, 2009. At the time, we noted in a special Investor Alert that there were significant government policy changes that signaled the market had hit rock bottom. According to USA Today, from the 2009 bottom through the end of the first quarter, the S&P 500 Index increased more than 100 percent. No wonder U.S. equity investors are singing.

However, the side effect of the abundance of printing by the central banks in the U.S., Europe, Japan and England has bloated balance sheets amounting to nearly $9 trillion. This is double the amount that it was three and a half years ago, says Ian McAvity in his recent Deliberations on World Markets, as the printing presses have pumped our monetary system full of liquidity. This is merely “kicking the can down the road,” as central banks will have to deal with the overhang later, says Ian.

This has historically been a strong positive catalyst for gold. An analyst at the Economics and Finance Fanatic blog put together a visual that illustrates just how strong of a catalyst the nonstop printing of money is. The chart compares the U.S. adjusted monetary base since 1990 with the “surging” price of gold. As you can see below, the amount of money in the U.S. system climbed to extraordinary heights since 2008, with gold following the same path.

Gold v US Monitary Base

The economic challenges of the U.S. and eurozone “promise to be a prolonged one with sluggish economic growth,” says the blog, and easy monetary policies will likely be the remedy for awhile. I believe this provides a strong case that any pullback in the gold price appears to be a buying opportunity. Ian says, “Tax uncertainty, festering toxic debt that’s out there but out of sight and impossible debt service ability looming? I’ll stick with gold and sleep better at night.”

U.S. investors might sleep better at night with an allocation to gold in the face of continued negative real interest rates. The chart below shows how gold has historically climbed when interest rates fell below zero percent, with a “strong correlation from 1977-84, and again recently when rates turned negative in early 2008,” according to Desjardins Capital Markets.

Gold Int Rates

The U.S. has not made any cuts in entitlements which make up 60 percent of the deficit. There have been no changes in fiscal policy and no change in current monetary policy. Ian McAvity says these factors together make “the most powerful argument in favor of converting that paper into gold.”

What would have to change to make me turn bearish? I believe the following three actions would need to be taken:

  1. Real interest rates would have to increase 2 percent above the CPI in the U.S. and Europe
  2. GDP per capita in Chindia would need to fall, negatively affecting the Love Trade
  3. Substantial fiscal cuts would need to be made in entitlement programs in the U.S. and Europe

I believe there is a low probability of these events occurring any time soon, so in this environment, gold should thrive.

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David Rosenberg: The Record Quarter


Tuesday, April 3rd, 2012

 

from David Rosenberg, Gluskin Sheff

What a quarter! The Dow up 8% and enjoying a record quarter in terms of points — 994 of them to be exact and in percent terms, now just 7% off attaining a new all-time high. The S&P 500 surged 12% (and 3.1% for March; 28% from the October 2011 lows), which was the best performance since 1998. It seems so strange to draw comparisons to 1998, which was the infancy of the Internet revolution; a period of fiscal stability, 5% risk-free rates, sustained 4% real growth in the economy, strong housing markets, political stability, sub-5% unemployment, a stable and predictable central bank.

And look at the composition of the rally. Apple soared 48% and accounted for nearly 20% of the appreciation in the S&P 500 (it now makes up 3% of the 200 largest hedge fund portfolios — three times as much as any other name; 4% of the S&P 500 market cap; and 11% of the Nasdaq). Not since Microsoft in 1999 was one stock this dominant, though the valuations are not comparable (MSFT then was trading with a 70x P/E multiple).

But outside of Apple, what led the rally were the low-quality names that got so beat up last year, such as Bank of America bouncing 72% (it was the Dow’s worst performer in 2011; financials in aggregate rose 22%). Sears Holdings have skyrocketed 108% this year even though the company doesn’t expect to make money this year or next.

What does that tell you? What it says is that this bull run was really more about pricing out a possible financial disaster coming out of Europe than anything that could really be described as positive on the global macroeconomic front. Low- quality stocks in the S&P 500 outperformed high-quality stocks in Q1 by 500 basis points and high-beta stocks within the Russell 1000 outperformed low- beta by 900bps. On a global scale, what has been a poorer place to put capital to work than Japan? And yet the Nikkei posted a ripping 19% advance in Q1, the best start to any year since the pre-bubble-burst times of 1988. Emerging markets are up 13% year-to-date. Greece rallied 7% in Q1 — that also tells you something about this rally. It’s called a dead-cat bounce. Meanwhile, the stodgy sectors that worked so well last year are biding their time — utilities so far in 2012 are down 3%, telecom is flat, and staples are up a mere 5%.

Most investors can dig back to 2000 if they really try. It was not uncommon for typically risk-averse investors such as retirees to be insistent that at least half of their portfolios consisted of Microsoft, Intel, Cisco and Dell. Each of these stocks had gone parabolic and none of them paid dividends, which was a good thing because that left them with all those earnings to plow back into the business. If you needed to buy groceries, you could just sell a few shares for cash flow.

My how things have changed. Today, “dividend paying stocks” are all the focus of attention — not to mention fund flows. Indeed, what is still so fascinating is how the private client sector simply refuses to drink from the Fed liquidity spiked punch bowl, having been burnt by two central bank-induced bubbles separated less than a decade apart. Investors continue to use stock price appreciation as an opportunity to rebalance and diversify rather than chase performance — pulling $15.6 billion from U.S. equity mutual funds so far this year while taxable bond funds have seen net inflows amounting to $59 billion.

The lack of any real significant back-up in bond yields suggests that the asset allocators have been idle as well.

It would then seem as though this is a market being driven by traders. Then again, it has been a very tradable rally, just as the post-QE1 and post-QE2 jumps were. Ditto for the current post-LTRO rally. But liquidity is not an antidote for fundamentals. And a market that lacks breadth, participation and volume is not generally one you can rely on for sustained strength, notwithstanding the terrific first quarter that risky assets delivered. We lived through this exactly a year ago.

Meanwhile, we have real estate deflation rearing its ugly head in China, a spreading European recession (for all the talk of German resilience, retail sales volumes sank 1.1% in February and have contracted now in four of the past five months), acute debt problems in Portugal and Spain (there is already talk in Greece about the need for a third bailout), and the U.S. data have been coming out rather mixed (it should have enjoyed a much bigger bounce than it did in recent months from the extremely warm weather — it was the fourth warmest winter since 1896; 15% warmer than usual.

In Chicago, it was the warmest March ever and second balmiest March on record in New York City. For the latter, it was 9 degrees above normal and would have lined up in the top 10 for any April!). That the employment, housing and spending data weren’t even stronger than what they showed — likely little better than a 2% pace for Q1 real GDP — is the real story beneath the story. The fact that the 10-year note yield stopped at 2.4% and has since rallied 20 basis points instead of making the expected technical challenge of 2.65% suggests that the bond market crowd may be figuring out what this means for the Q2 landscape as the weather skew to the data subsides.

U.S. DATA ON SHAKY GROUND
Yes, yes, U.S. personal spending jumped an above-expected 0.8% in February, above the 0.6% increase that was generally expected and the largest monthly gain since August 2009 when the shoots were green. But if truth be told, this as we would say in market parlance, was a “low multiple” increase. The reason? Personal incomes were soft and that is what counts most — income fundamentals remain dismal. Not only did income come in soft at +0.2% (half what was expected) but not even enough to cover the cost of living, but January and February were both revised lower. Real disposable income also declined 0.1% — the third decrease in the past four months and on a per capita basis is down 0.4% YoY, a far cry from the +2% trend of a year ago. The economy is building momentum. Right.

Let’s just say that had the savings rate stayed the same in February, nominal consumer spending growth would have come in at a puny +0.2% and guess what? Real PCE would have been -0.1%. Thanks for coming out. As we said, a “low quality” spending performance, absent the income fundamentals, there is no sustainability.

Then we got yet another spotty regional manufacturing index in the form of the Chicago PMI (the national figure comes out today). It came in below expectations at 62.2 for March (consensus was 63.0) — a 1.8 point drop from the previous month, and the third decline in the past four months. New orders slid from 69.2 to 63.3 — the largest one month drop since last May and the lowest level since October (this is now the fifth manufacturing survey to show a drop in new orders). If not for the inventories, which jumped from 49.6 to 57.4 — the sharpest run-up since December 2010 and the highest levels since last September — the headline decline would have been much worse. And in a signpost of how corporate executives (or the Human Resource departments in any event) are responding to negative productivity growth, the employment index dropped from 64.2 to 56.3— largest drop since April 2008 and it has fallen in two of the past three months.

Then we got the University of Michigan consumer sentiment index which was revised higher for March to 76.2 from 74.3 in the preliminary reading — this the highest level since February 2011. What was interesting were the details beneath the surface, such as auto buying plans being revised down from 123 to 122 — first decline in three months; and buying conditions for large household items being revised lower from 127 to 125— a four-month low.

Finally, the best Canada could muster up was a 0.1% gain in real GDP for January. At least it was positive — but barely. It reveals an economy that right now is uneven and sputtering. It’s a good thing there was a solid handoff from the tail-end of Q4, as that is what is keeping Q1 GDP estimates close to a 2% annual rate. If there is a piece of information that Canadian dollar bulls can put in their back pocket it is that manufacturing output, even with the loonie at par, managed to post a solid 0.7% advance — factory output up now for five months running. Now that is impressive.

 

Copyright © Gluskin Sheff

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The Social Media Revolution (Charles Biderman)


Tuesday, March 27th, 2012

  

Social media I say will create a revolution in how we govern ourselves and eventually will start the next bull market, but not for at least three to five years. I define social media as the ability for everybody on this planet to be in instant communication with everyone else.

Several of you have commented that social media is as big a breakthrough as was the personal computer in 1982. In my opinion social media is, but not until the current representative govt format, actually falls apart and unfortunately that unlikely to happen over the next few years.

Before explaining how social media will not only transform government but lay the basis for a long term bull market, I think a pre amble into the history of tech breakthroughs that caused quarter century bull markets in the past would be useful.

On my March 13 Daily Edge I said the Dow was destined to drop to around 6000 before bottoming. To arrive at that conclusion I looked at the three most recent long term bull markets.

The first quarter century bull run that started in 1904, was due to breakthroughs utilizing the ability in moving energy along a wire, called electricity; and also cheaply producing gasoline powered automobiles.

Market participants remember 1929 better than 1904 because 1929 was when the then Dow Jones Industrial Average topped out 12 times higher than the 1904 low. What happened, every economic boom throughout history sooner or later creates the excesses that requires a bear market to eliminate those excesses.

Some say it took a war to end the 13 year bear market in 1942. I say it was breakthroughs in being being able to transmit energy through airwaves, called television. Second was the breakthrough in small motors that created the modern kitchen and household appliances.

The bull run that started in 1942 was a 12 bagger that lasted through 1966 when the Dow first hit 1000. That bull market created excesses over a quarter century that it took the next 16 years to work through.

Then in 1982 storing data on a silicon chip at a price affordable by all became possible; and that led to the IBM PC and Apple II computer. Then came the internet and after that broadband. 25 years later, by October 2007 which was just four and a half years ago, the Dow at 14,000 was 18 times higher than the prior low. The excesses created during that 25 year run are still being worked off.

Here is where I pick up the thread from when I said it will take another five to eight years before Social Media starts the next long term bull market.

Representative government is the real headwind we are facing today. Representative government was created back in 1790 to solve the problem of how we could govern ourselves even before railroads, let alone telephones or the internet.. The United States was geographically so large that there was no way everybody could communicate with everybody else.

But now, social media puts all of us in real time communication with everyone else; therefore why do we need representative government to represent us. We will eventually become in charge of ourselves. To me already existing inside of social media is how we will govern ourselves as a global community.

To summarize, in 1904 we mastered electricity and big engines which allowed for urban living. The mastery of the airwaves and small motors allowed for suburbanization where you could live and work the suburbs just as effectively as in a city. Microchips and broadband allows for exurbanization, which means anyone can work from anywhere on the planet. And then social media will allow for everyone to become a responsible member of the global community.

Unfortunately, all of that will take several more years before it happens. It took 13 and 17 years to work of the excesses of the past two 25 year bull markets. That could mean it will be sometime in the next decade before the next bull run starts.

Charles Biderman
President & CEO TrimTabs Investment Research
Portfolio Manager, TrimTabs Float Shrink ETF (TTFS)

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Time to Bring Out the Howitzers (Mauldin)


Monday, December 5th, 2011

Time to Bring Out the Howitzers

by John Mauldin

Employment Up But Not Enough
The World Slips into Recession
Central Bankers of the World, Unite!
New York, Hong Kong, Singapore, and Cape Town
And My Conference

It is now common to use the term bazooka when referring the actions of governments and central banks as they try to avert a credit crisis. And this week we saw a coordinated effort by central banks to use their bazookas to head off another 2008-style credit disaster. The market reacted as if the crisis is now over and we can get on to the next bull run. Yet, we will see that it wasn’t enough. Something more along the lines of a howitzer is needed (keeping with our WW2-era military arsenal theme). And of course I need to briefly comment on today’s employment numbers. There is enough to keep us occupied for more than a few pages, so let’s jump right in. (Note: this letter may print long, as there are a lot of charts.)

Employment Up But Not Enough

The headline number is that 120,000 new jobs were created in November, in line with estimates. That total is the sum of 140,000 jobs from the private sector coupled with the now usual loss of 20,000 jobs in the government sector. But when we look at the details, things are not as upbeat.

First, the good news: the US economy is continuing to grow. As I have said for quite some time, the US should not fall into a recession unless it is pushed by something from beyond our shores, which, sadly, I expect (details below). However, we are nowhere near the typical recovery pattern. By this time into a recovery we are usually making new highs on the employment front. As everyone knows, we are millions of jobs from that level.

And my friend Bill Dunkelberg, the Chief Economist of the National Federation of Independent Business, sends us these headlines today from his own survey:

· AVERAGE EMPLOYMENT PER FIRM ROSE

· HARD TO FILL JOB OPENINGS INCREASED, UNEMPLOYMENT DOWN

· PLANS TO CREATE NEW JOBS NEARLY DOUBLED

The net change in employment per firm wasn’t much different from zero, but it did have a plus sign in front of it for the first time in nearly half a year. On average, owners reported increasing employment an average of 0.12 workers per firm. Seasonally adjusted, 14 percent of the owners added an average of 3 workers per firm over the past few months, and 12 percent reduced employment an average of 2.9 workers per firm. The remaining 74 percent of owners made no net change in employment (47 percent hired or tried to hire and 35 percent reported few or no qualified applicants for positions, both figures up 4 points).

The percentage of owners cutting jobs has returned to “normal” levels (even in a great job market, over 300,000 file initial claims for unemployment, i.e., they are fired or laid off). And the percentage of owners adding workers (creating jobs) continued to trend up. Reports of new job creation should pick up a bit in the coming months.

(I spent last Sunday with Bill, and we outlined our new book on creating jobs and employment. Our goal is to finish it in record time and have it out next spring.)

120,000 jobs is not quite enough to keep up with the growth in the population. Along with positive revisions to previous months, we have now averaged about 114,000 a month for the last 6 months. But then why did the headline unemployment number fall to 8.6%? That is a very large drop for one month. The simple answer is that the number of people looking for a job fell by 315,000. And the number of people counted as not in the labor force (a different measure) swelled by 487,000 to a record 86.5 million.

Again, for new readers, you are not counted as unemployed if you have not looked for a job in the last four weeks. Let’s look at a chart from the St. Louis Fed database that shows the number of citizens not in the labor force. What we see is a rise from 77 million in 2007 to 86.5 million today. Part of that can be explained by population growth, but it would be less than half of the increase of almost 10 million people not considered to be in the labor force.

If we looked at a chart of those counted as being in the labor force, we would see that it is roughly where it was back in 2007, yet there has been working-age population growth of at least (my guess) 5 million. And the next chart shows the number of people that are actually employed, private or government, full- or part-time. What we see is that the number of people working is about where it was 8 years ago.

That is not a pretty chart. What all that means is that unemployment would be closer to 11-12% if we went back to the labor force of just a few years ago and adjusted for population.

Let me quickly note, too, that if we went back to the unemployment measurement basis of a few decades ago, the numbers would be closer to what I suggest above. Counting unemployment the way it is currently done allows whoever is in charge to publish numbers that look better than they are in reality on the street. I expect Republicans to point this out in the next election cycle, although if they get into office they will have to live with that analysis when it comes back to haunt them in four years. Because as the next chart shows (from my friend Lance Roberts of Streettalk Advisors in Houston), we need job growth of about 400,000 jobs a month to get back to the long-term trend by 2020. This shows the employment-to-population ratio, which has dropped by 6% since 2000, falling precipitously since the beginning of the recession. We have never had such strong employment growth, and are unlikely to get it as we reduce government spending, which we must do.

This shows above all else why the #1 issue for the coming elections will be jobs. The US economy is looking more and more European all the time in terms of unemployment numbers. If the course is not changed, it will make any real recovery back to what we think of us “normal” for the US highly problematic.

Let’s quickly look at a few other problems in this employment report. The work week was unchanged at 34.3 hours (and was down 0.2 hours in manufacturing). Aggregate hours were up just 0.1%. Average hourly earnings were off 0.1%, leaving the three-month average at -0.1%. For the year, hourly earnings were up just 1.8%. When the Great Recession began, they were rising at a 3.4% annual rate. Aggregate payrolls were up just 0.1% for the past month. The decline in unemployment was concentrated among the shorter durations, with almost all of it among those jobless for 14 weeks or less. Those unemployed for 99 weeks or more rose 143,000 to 2.0 million, very close to an all-time high. The mean duration of unemployment rose to 40.9 weeks, a record. (Hat tip The Liscio Report.)

This does not bode well for consumer spending. Any growth of late has come from a reduced savings rate, as income is barely keeping up with inflation; and if you look at the inflation we “feel” in healthcare, food, and energy, then the average consumer is losing ground. This also means any recovery is only one external shock away from slipping back into recession.

Finally, the “quality” of the new jobs is not what we would like. More and more people are taking lower-paying jobs. We saw 105,000 jobs in retail, temporary, and food services out of the total of 120,000. Many of these are seasonal and will fall off in the next quarter. (Let me hasten to add that I am not being derogatory of food-service jobs. They are important and are hard work. I have two kids who are employed in the food-service world, and most of my kids, and your humble analyst, have been employed in various food-service jobs at one time or another. Without those jobs some of my kids might be moving back home! So, the next time you’re out, leave a bigger tip than normal if it’s deserved. Your wait person is someone’s kid!)

The World Slips into Recession

 

How fragile is the recovery? The rest of the developed world is either in recession or soon will be.

This next chart is from friend Prieur du Plessis of Plexus Asset Management in South Africa. Notice that every major region is slipping into contraction except the US. (http://www.investmentpostcards.com/2011/12/02/global-manufacturing-pmi-saved-by-the-u-s/)

Now, let’s look at more details, provided by SISR (sadly, I lost the email of the person who provided this, so I can’t credit him). It shows that outside of the US and Canada, the rest of the developed world is watching their PMI (manufacturing production) numbers go into contraction. Of the emerging world, only India and South Africa are growing. Notice that the contraction in both Germany and France is getting worse month by month.


Source: Markit Economics, SISR

How long can the US resist a global slowdown? My answer would be, for longer than you might think, absent the potential shock coming from Europe. But the above data does set the stage for the rest of the letter.

Central Bankers of the World, Unite!

Now, a few quick observations. This was truly a global effort by the central banks of the world (the US, Europe, Japan, Switzerland, Canada, and China). But then, what else did you expect them to do? Their main tool is to provide liquidity, and that is what they promised. They lowered the cost of coming to the “window” and certainly lowered the “shame” factor in doing so. Going to the central bank could be seen as a sign of weakness and, at higher rates, banks might be reluctant to do so. At the new rate it is reasonably economical, and the central banks have signaled it is more than OK.

Second, this effort also included China, which cut its bank reserve requirements by 0.5%. David Kotok pointed out to me something unusual about this. Normally, China makes it moves with a number ending in “7,” like 27 or 47, as 7 is good luck. For those paying attention, this was China’s way of saying “We are part of the team,” rather than acting on their own, as they usually do. Now, it makes sense that if you include Canada in the “club” you should include China.

The stock markets of the world went into an ecstatic frenzy, capping off a very positive week. But I would remind my enthusiastic friends of a few things. Let’s look at what really happened. We just recovered from a very over-sold condition and are still down almost 7% from this summer.

And this has happened before. Let’s rewind the clock to October of 2008, deep in the credit crisis. This is a report from Jim Lehrer of PBS (emphasis mine):

“JIM LEHRER: World stock markets staged a comeback today. They did so as key governments moved to support troubled banks. On Wall Street, the Dow Jones industrial average scored its largest point gain ever, soaring 936 points to close above 9,387. The Nasdaq was up more than 194 points to close at 1,844. Overseas, stock indexes rose 8 percent in Britain, 11 percent in France and Germany. Markets across Asia also shot higher, including a gain of 10 percent in Hong Kong.

News of European efforts to end the banking and credit crisis helped ignite the rally. On Sunday, nations that use the euro agreed on coordinated steps. Today, Britain was first to act. It was followed by Germany, France, Spain, Portugal, Austria, and the Netherlands.”

The good news is that this week’s action may (and I emphasize may) help stave off a true bank credit crisis on the order of 2008. That is, if the central banks of the various European countries follow through (more on that below). The real problem was best summed up this week by Mervyn King, the governor of the Bank of England, speaking at the press conference to launch his Financial Stability Report.

“Many European governments are seeing the price of their bonds fall, undermining banks’ balance sheets. In response, banks, especially in the euro area, are selling assets and deleveraging. An erosion of confidence, lower asset prices and tighter credit conditions are further damaging the prospects for economic activity and will affect the ability of companies, households and governments to repay their debts. That, in turn, will weaken banks’ balance sheets further. This spiral is characteristic of a systemic crisis.

“Tackling the symptoms of the crisis without resolving the underlying causes, by measures such as providing liquidity to banks or sovereigns offers only short-term relief. Ultimately, governments will have to confront the underlying causes… The problems in the euro area are part of the wider imbalances in the world economy. The end result of such imbalances is a refusal by the private sector to continue financing deficits, as the ability of borrowers to repay is called into question.

“The crisis in the euro area is one of solvency and not liquidity. And the interconnectedness of major banks means that banking systems, and hence economies, around the world are all affected. Only the governments directly involved can find a way out of the crisis…” (Hat tip, Simon Hunt.)

Time to Bring Out the Howitzers

If the problem were one of liquidity, then this week’s action would be enough. But the problem is solvency. The majority of European banks are insolvent. They own too much debt of sovereign countries that are going to have to reduce their debts. There is a growing number of analysts who are realizing that even Italy may have to reduce its debt burden. I have highlighted the problems faced by Belgium. And how about Spain, and Portugal?

What this action does is give the ECB the dollars it will need to loan to the various national central banks, so they can loan to their insolvent banks. Will they bail them out, or nationalize them? The answer depends on the country and its voters. But absent recapitalizing their banks, there will be a credit crisis that will affect the whole world.

The amount of debt that will have to be written off and the loan portfolios reduced, as well as new capital raised, is daunting. As I have noted previously, the need is for around €3 trillion.

Writing off so much debt in the midst of a recession, coupled with austerity moves, will be massively deflationary for the eurozone. But Merkel and the German Bundesbankers have made it clear that they will not be part of any “printing press” action that is not coupled with serious commitments for balanced budgets. Even in the face of a recession.

Which makes it quite strange that the ECB has been tightening in terms of money supply the past year. Notice in the graph below that M1, M2 and M3 are all in negative territory. (Chart from the London Telegraph.)

The ECB under Trichet was apparently fighting inflation. He raised rates and let his inner Bundesbanker take control. Maybe with the rate cut and the new head of the ECB, Mario Draghi, we can see signs that the ECB may in fact act to ease. This is from my friend Dennis Gartman, writing this morning:

“Turning to the ECB, the new President, Mr. Draghi, has obviously taken on the most difficult of jobs and we’ve no choice but to admire him for the audacity necessary to take on a role such as his… especially at a time such as this. Yesterday, Mr. Draghi made a statement that we find tectonic-plating-shifting-like in nature when he said firstly that the ‘Downside risks to the economic outlook have increased.‘

“They have indeed, and we’ve no problem with what he said for that is indeed the truth. Then, however, the plates shifted when he said, noting that the ECB’s mandate, that price stability is to be maintained ‘in both directions.’ In other words, the ECB’s mandate forces the authorities to be concerned about deflationary risks as well as those inflationary.

“Did you hear the plates shifting? You should have for they have indeed shifted. Draghi’s warning was that the authorities are just as concerned about deflation as inflation and that monetary expansion is to be considered just as has monetary contraction.

“So we are now… or shall soon be… faced with a monetary and political union that is manifestly different than that which the original united nations had signed up for AND we have a central bank intent upon fighting deflation as strongly as it has fought inflation. These are the attributes of a regime intent upon weakening, not strengthening, its currency in order to strengthen the economy and to save the union… if at all possible.”

The coordinated central bank action will make dollars available to the ECB, which will in turn loan them to the national central banks, which presumably will loan them to their in-country banks, taking lower-quality collateral than the ECB (which under the rules they are allowed to do). Given the deflationary pressures that are the natural result of a recession and deleveraging/default, they can print a lot of money without igniting too much inflation. But I agree with Dennis; I just don’t see how they can do so without seeing the valuation of the euro fall rather smartly.

Merkel and Sarkozy have told us they will meet Monday and announce a plan on December 9, when the full eurozone meets. Forget bazookas, this needs the equivalent of a howitzer. They are seemingly intent upon rewriting the treaty, which is the only way that the Germans will go along with any major ECB action. But by my reckoning, a few hundred billion, or even a trillion, is not major action, at least not on the level of what will be needed.

The price for German acquiescence will be a loss of sovereignty and the ability to run deficits of any real size for any appreciable length of time for the countries of Europe. Will the peripheral countries go along? Heck, forget them; will Finland go along? This situation has been coming along since the foundation of the eurozone. The early founders acknowledged that a tighter fiscal union would eventually be necessary if the euro experiment were to survive. And eventually is now. As in this month. Time is running out if they want to forestall a credit crisis that would be worse than 2008.

The world is watching, as what happens in Europe will affect us all, in every part of the globe. It could easily tip the US into recession, and it will only be worse for the emerging markets. For Europe, the Endgame is now. We can only hope they come up with a plan that avoids disorderly defaults and a crisis far graver than 2008. They have no good choices, only difficult ones and disastrous ones. Let us hope they choose wisely.

(And for my fellow Americans, note that we will face the same consequences if we do not get our own house in order, and very soon. This is more than an academic observation.)

New York, Hong Kong, Singapore, and Cape Town
And My Conference

I am reading Niall Ferguson’s new book, Civilization. It is a great read. Quick note: If you enjoy Niall’s writing, you may also enjoy watching his TV series on 4oD: The Ascent of Money (same name as his early book). He presents six 1-hour episodes. Only 11 days left on the website, a good idea for this weekend!

http://www.channel4.com/programmes/the-ascent-of-money/4od

Niall, along with Marc Faber, David Rosenberg, Mohamed El-Erian, Woody Brock, Lacy Hunt, David McWilliams, and your humble analyst, will all be at my conference (co-hosted with partners Altegris Investments) May 2-4 near San Diego. Does this not sound like the best line-up of any conference this year? Details will follow, but you won’t want to miss this one.

I am more or less home for the next six weeks, except for a quick trip back to New York later this month with Tiffani for a business meeting (good changes are coming, as always), and we will take some time to enjoy friends and the city lights.

Then I will go to Hong Kong and Singapore on January 10 for 12 days, coming back to finish a few things and then head off to Cape Town, South Africa in the middle of February (details later).

Tomorrow I go with Tiffani to take my granddaughter Lively to go see Yo Gabba Gabba “live.” This is a new kid’s show for very young toddlers that captures their attention like nothing I have ever seen. Below is a photo from last spring, when we were on a plane to somewhere (Lively is now a seasoned traveler!) and she was watching Yo Gabba Gabba on an iPad with her special baby earphones. Look how rapt she is. “Papa John” gets to sit in on this and even go back stage to meet with the cast. Wild horses could not drag me to endure this with your kid, but with my granddaughter? Try and keep me away! How we change with the advent of the next generation.

I am looking forward to the holidays. All the kids will be here, and we will go out to look at the lights, take in movies, and munch lots of great food! And it now looks like professional basketball will launch on Christmas Day, with the Mavericks playing the Miami Heat in a reprise of the NBA Finals last year. I do have rather good seats (front row behind the chairs), and my phone has been blowing up! The #1 most rabid Mavericks fan in the whole world, my daughter Abbi, has begged me to take her, and Dad can’t say no. (Are you listening, Mark?)

All Dad wants for Christmas is to meet his deadlines for the irrational amount of writing I have committed to do before I leave for Hong Kong. That and to have my kids around.

It is time to hit the send button so the translator in Hong Kong can get started. In theory, no more really late nights on Friday for me. But this letter has been more than long enough. Have a great week.

Your wondering how we Muddle Through analyst,

John Mauldin

John@FrontlineThoughts.com

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Jim Rogers – Why The Commodity Bull Still Has Room To Run


Monday, May 30th, 2011

(May 23, 2011-Edinburgh, Scotland) Jim Rogers, Co-Founder of Quantum Group of Funds, talks to Dan Richards about why the commodity bull still has room to run.

*Video:jim rogers

Source: ClientInsights.ca

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Market is Only Halfway Through Bull Run, says Laszlo Birinyi


Friday, March 25th, 2011

Markets are still digesting the fallout from the disaster in Japan, with Laszlo Birinyi Jr., Birinyi Associates


Source:
Stock Market Is Only Halfway Through Bull Run: Birinyi
Jeff Cox
CNBC.com, 23 Mar 2011

http://www.cnbc.com/id/42228291

h/t Barry Ritholtz, Big Picture

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Bubble: Are We There Yet?


Friday, October 1st, 2010

With new records being set every day, there seems to be as many non-believers in gold as there are believers. We tend to see the gold market in a different way as current and future believers in gold.

One firm that has a feeling the end of gold’s bull run is near is Macquarie. It is forecasting gold prices to average $1,100 an ounce in 2011, roughly 15 percent below where prices are now.

The firm argues that the current bull market is now three times longer than the average in terms of years and the two main factors that have driven prices over the past decade—growth in foreign exchange reserves and investment demand—have already peaked.

Macquarie does offer one caveat to its bearish prediction, however. If central banks become big buyers, that could be a catalyst for higher prices. We’re seeing the first increase in central bank holdings since 1988 this year so it depends on whether central bankers continue to diversify their reserves away from the U.S. dollar.

Deutsche Bank offers a much rosier outlook. The firm says that gold needs to surpass $2,000 an ounce in order to achieve “official” bubble status. One reason it cites is that gold prices haven’t run too far ahead of the rest of the commodity pack.

This chart shows the relative price of gold versus crude oil and copper. You can see that when oil started to approach bubble status in 2008, the gold-to-oil ratio was at its lowest level since the early 1970s. The gold-to-copper ratio bottomed a little earlier but also reached levels not seen since the 1970s.

Gold vs. Oil & Copper chart Right now, we’re roughly in the middle range of where both ratios have been for nearly 40 years. One ounce of gold is approximately worth 16 barrels of oil and 0.17 tonnes of copper. In order to reach extreme status in relation to oil and copper, gold would have to reach $2,890 an ounce and $2,100 an ounce, respectively, according to Deutsche Bank.

We maintain our bullish stance on gold for a number of reasons we’ve previously discussed, but a key factor is that governments in the U.S. and Western Europe are deeply entrenched in fiscal and monetary actions that will grow money supply and increase deficit spending. We don’t see that changing any time soon.

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Gold, Oil, and China


Saturday, September 18th, 2010

By Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors.

It’s been a lively year for both gold and oil investors but the year to remember may be the one ahead.

Goldman Sachs is forecasting a 27 percent jump in energy and a 17 percent rise in precious metals over the next 12 months. On the oil side, Goldman credits a rebound in industrial production for a 520,000-barrel-per-day increase in China’s implied oil demand in August (year over year). As you can see from the left-side chart, Chinese oil demand has remained a fairly consistent story going back several years.

Chinese Oil

Globally, world oil demand was up 2.4 million barrels per day on a year-over-year basis in August, according to Goldman Sachs (right chart). Rising demand from emerging nations has created a 600,000-barrel-per-day global supply deficit since May. This month saw a reversal in the U.S., with weeks of growing inventory surpluses swinging to draw-downs after Labor Day.

The long-term prospects for oil haven’t changed. Estimates from Wood Mackenzie and Deutsche Bank show that global oil production will decline 12 percent by 2015 without new investment. Production rates in Britain, Australia, U.S. offshore and Norway have declined 15 percent or more since 2000. Finding future reserves is increasingly difficult and costly, so prices will have to be higher to make developing these reserves worthwhile.

New all-time high prices for gold this week leave many to wonder if we’re nearing a top, but we think gold’s bull run may have further to go. Since mid-August, prices have risen on the back of a significant increase in net long positions on the COMEX and investor interest is near highs for the year. In addition, central bankers have also been stocking up on gold – for the first time since 1988, they will be net buyers of bullion in 2010.

Positions on the Rise

This could also be just the beginning. BCA Research says gold is in a bull market and will “remain that way until macro and/or industry-specific trends change significantly.” BCA cites low real interest rates and high policy uncertainty as the twin engines powering gold higher.

Washington has yet to show how it will reduce the gaping federal deficit, and the Federal Reserve is expected to keep interest rates near zero well into 2011. When you throw in a possible return to quantitative easing, the prospects for higher gold prices look even stronger.

The sturdiest pillar supporting both gold and oil should continue to be China. Even though China was recently crowned the world’s largest energy consumer, the country’s energy demands are still small on a per-capita basis. And for gold, Chinese demand—government, investor and jewelry consumers—remains strong despite high prices. The World Gold Council predicts gold consumption there could double in the coming decade.

Fears of a bubble bursting in the Chinese economy have been deflated as the country prepares itself for a soft landing. Analysts at CLSA says China will remain “the world’s best consumption story” due to income growth, moderate inflation and low household debt. They expect GDP growth to be just under 10 percent this year, and 8 percent to 9 percent in 2011.

There will likely be short-term volatility in commodities, but we believe the enduring strength of the global growth story being led by China and other key emerging markets should be a powerful demand driver in the years ahead.

On a side note, Kudos to our investment team for the mention of the World Precious Minerals Fund (UNWPX) in Investors Business Daily. You guys keep up the good work. We recently published a comprehensive review of our views on gold and precious metals. If you haven’t already had a chance, I invite you to read The Case for Gold at www.usfunds.com.

For more updates on global investing from Frank and the rest of the U.S. Global Investors team, follow us on Twitter at www.twitter.com/USFunds or like us on Facebook at www.facebook.com/USFunds. You can also watch exclusive videos on what our research overseas has turned up on our YouTube channel at www.youtube.com/USFunds.

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Faber and Shiff: Bond Bubble Trouble?


Saturday, August 28th, 2010

This post is a guest contribution by Dian Chu, market analyst, trader and author of the Economic Forecasts and Opinions blog.

As I’ve been saying for some time that the bond market is screaming for an imminent burst,  Dr. Marc Faber and Mr. Peter Schiff also spoke with CNBC on August 23 warning of a bond bubble trouble.

Faber – Stay away from a 19-year rally
Faber advises investors to “stay away from Treasuries as they’ve been rallying since 1981–equivalent to a 19-year bull run”–when the 10-year bottomed out on Sep. 21, 1981. Faber says Dec. 18, 2008 was the peak of the bond bubble with yields of 2.08% and 2.53% on the 10-year and 30-year respectively. (See 10-year chart)

“I think  there isn’t much upside potential in Treasuries unless it’s for the short term. Even the short term is uncertain. But if I look 10 years ahead, where do I want to have my money? Certainly not in U.S. Treasuries.”

Faber’s biggest concern is that because of a weak economy, the U.S. budget deficit will likely remain high, and continue to go up under the Obama administration, which could make interest payments on government debt unbearable.

He also warned against the misguided confidence arising from still strong foreign demand for U.S. Treasuries:

“In 1999 and 2000, foreigners (bought) the NASDAQ and what happened afterwards was a major collapse. I would not look at foreign buying as a very intelligent leading indicator.”

Faber says a better place for investor’s money now is farm land and, agricultural commodities, and gold should also be a part of an investor’s portfolio.

Schiff – The mother of all bubbles
Schiff basically declares the bond market the mother of all bubbles, and notes that when the bubble bursts, the loss will dwarf the combined losses of the bubbles of the stock market and  real estate. Eventually, the government will either inflate or default. Either way will ultimately make bond investors go bust.

For risk-averse investors, Schiff believes gold and foreign bonds such as Switzerland where government debt level is not as high, would be better options than U.S. treasuries.

My thoughts
Dismal economic data have spooked investors flocking to Treasuries, driving down yields. Traditionally, bonds are considered to be safer and less volatile than equities and commodities. However, the financial markets have evolved in such a way that the same players are active in all sectors, employing the same trading technique. This, in part, has made bonds behave almost like stocks with similar volatility. (See comparison chart.)

So, investors should start looking at bonds the same way as equities and commodities, and now is the time to move out of bonds and into either equities (dividend-paying blue chips as noted in my previous post), or commodities such as gold.

And for the highly risk averse, parking in cash for the short term would still be better  than staying in “the mother of all bubbles”.

(Recommended Reading: Self-fulfilling Prophecy: The Bond Trade, Yield: Dow 30 vs. 10-year U.S. Treasury, and Bonds & Equities: Expect a Major Shift)

Video Source: CNBC

Source: Dian Chu, Economic Forecasts & Opinions, August 25, 2010.

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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.

Decoupling

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.

BRIC Market Update and Research

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