Emerging Markets Highlights

Saturday, February 20th, 2010

Emerging Markets

Strengths

• Overseas worker remittance to The Philippines in December reached an all-time high of $1.57 billion, representing 11.4 percent growth year over year. Remittance reached $17.4 billion for all of 2009 and accounted for 10.8 percent of nominal GDP.
• South Korea’s power sales to industrial users rose 24 percent in January from a year earlier in volume terms, the fastest pace in nearly 34 years due to continued recovery in global demand for auto and steel.
• More than 180,000 net new jobs were created in Brazil in January, bringing the total for the past 12 months to about 1.3 million.
• Eastern European countries are running a tighter fiscal policy and are far less indebted than the major world economies (see chart), enabling them to grow faster than the developed countries saddled with ever-higher deficits and debt burden.

Weaknesses

• Singapore’s non-oil domestic exports in January grew at a slower than expected 20.8 percent year over year, representing a seasonally adjusted 8.9 percent decline month over month, due to a moderation in both electronics and pharmaceuticals exports.
• Thailand’s daily trading turnover has shrunk 34 percent this month from January’s average, as investors stayed on the sideline ahead of Supreme Court’s Feb. 26 ruling on whether to confiscate the former prime minister’s assets, a decision that could lead to domestic political turmoil.
• Official Argentina CPI in January reached 1 percent, bringing year-over-year CPI to 8.2 percent compared to 7.7 percent in December. However, private sector estimates of the CPI are much higher and range between 14 and 17 percent.
• Data released Tuesday by Poland reveals a deep deflation in gross wages and salary income during the month of January, defined by a single-month plunge of 11.5 percent.

Opportunities

• Walmart de Mexico in 2010 is planning to open 300 new stores in Mexico and 30 in Central America. Around 60 percent of new stores will be in the Express format to gain market share from the informal sector.
• Mexico’s National Infrastructure Fund is planning a substantial increase in its investment program in 2010. In total, 30.4 billion pesos ($2.37 billion) will be committed to 42 projects, up from 22.1 billion pesos in 23 infrastructure projects last year.
• Citigroup revised its expectations for Russian growth upwards to 6.2 percent in 2010, with two-thirds of the growth to come from household consumption. A number of indicators suggest that the recovery in consumption is already under way – there was substantial improvement in retail sales in December and real household income was up 7.1 percent in January.

Threats

• An earlier-than-expected increase of the discount rate by the U.S. Federal Reserve might help sustain the current U.S. dollar rally and prolong the unwinding of the U.S. dollar carry trade. Emerging-market equities in general are susceptible to near-term selling pressure given their negative correlation with the U.S. dollar.
• The arrest of a prosecutor in Turkey revived tension between the courts and ruling AK Party. A Financial Times article suggests that any government attempts at constitutional reform that could precipitate early elections would hit sentiment, as the recent polls suggest that AK Party could not win an outright majority.

Tags: Brazil, BRIC, China, CPI, Debt Burden, Deflation, Domestic Exports, Eastern European Countries, Emerging Markets, Fiscal Policy, Former Prime Minister, Global Demand, Gross Wages, India, Industrial Users, Month Of January, New Jobs, Nominal Gdp, Political Turmoil, Remittance, Russia, Salary Income, South Korea, Volume Terms, Walmart, World Economies
Posted in Emerging Markets, India, 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 »

While pundits play “gotcha”, the unemployment situation improves

Friday, November 27th, 2009

This post is a guest contribution by Paul Kasriel* of The Northern Trust Company.

The best measure of the current condition of the labor market is the state unemployment insurance data. These data are not samples or surveys with guesstimates of how many new jobs were created by new businesses, but the head count of actual people standing in actual unemployment insurance lines. Too be sure, because a government entity is doing the counting, the first count is not always the most accurate count. But after four weeks of counting and recounting, the number that emerges is the one that remains for all times. The monthly labor reports from the Establishment and Household surveys get revised over and over, literally, for years.

Weekly data, which the state unemployment insurance data are, are inherently “noisy.” So, in order to more accurately measure the signal rather than the noise, it is prudent to average the state unemployment insurance data over rolling four-week periods. So, what are the state unemployment data signaling? They are indicating that the rate of firing has slowed significantly and that hiring could commence soon, if it already has not. As Chart 1 shows, the number of first-time claimants for state unemployment insurance on a four-week moving average basis has come down from a cycle peak of 659,000 in the four weeks ended April 4 to 497,000 in the four weeks ended November 21. Now, 497,000 new firings per week is nothing to brag about, but we can be thankful that it is coming down after the worst recession in the post-war era, a recession that started well before the stimulus program was instituted.

Although fewer people are now being fired, are any of those that have previously been fired being re-employed? Probably not yet, according to the continuing unemployment claims data, but the outlook for re-employment is improving. Because the past recession, which commenced in January 2008, well before the current stimulus program was initiated, was the longest recession in the post-war era, many of the people who have lost their jobs have been out of work so long that their regular unemployment insurance benefits expired. The current Congress and administration have implemented programs to extend unemployment insurance benefits to those who have exhausted their regular benefits. If we add these extended benefit claimants, which are not seasonally adjusted and need not be because there is unlikely to be any regular seasonal pattern to them, to seasonally-adjusted benefit claimants under the regular program, we see in Chart 1 that the four-week average of combined continuing unemployment claims appears to have peaked at about 9.9 million people and in the four weeks ended November 7 had moved ever so slightly lower to 9.8 million. Again, nothing to brag about but something to be thankful for. The combination of a decline in the number of firings per week and a slight drop in the total number of unemployment insurance beneficiaries suggests either that hiring has commenced in a small way or that it is about to.

How much of the improving labor market conditions can be directly attributed to the current stimulus program is impossible to say. For the current administration to make any claims along these lines opens it up to legitimate criticism. But what is possible to say is that about three months after the stimulus program was initiated, the overall economy began to emerge from the deepest and longest recession in the post-war era and now, about nine months after the initiation of the stimulus program, the labor market is showing incontrovertible signs of improving. Two of the biggest critics of the stimulus program with regard to job creation are two former chairs of the president’s Council of Economic Advisers (CEA), Michael Boskin from the Bush Sr. administration and Eddie Lazear from the Bush Jr. administration. Both of these presidential advisers appear to have gained policy wisdom after leaving their presidential advisory posts. For you see, during both Bush presidential terms, Senior and Junior, and under the tutelage of Messrs. Boskin and Lazear, the U.S. experienced the slowest job growth in the post-war era. If these guys are so smart with regard to job creation, why was job creation so weak when they were advising presidents?

*Paul Kasriel is Senior Vice President and Director of Economic Research at The Northern Trust Company. The accuracy of the Economic Research Department’s forecasts has consistently been highly-ranked in the Blue Chip survey of about 50 forecasters over the years. To that point, Paul received the prestigious 2006 Lawrence R. Klein Award for having the most accurate economic forecast among the Blue Chip survey participants for the years 2002 through 2005. The accuracy of Paul’s 2008 economic forecast was ranked in the top five of The Wall Street Journal survey panel of economists. In January 2009, The Wall Street Journal and Forbes cited Paul as one of the few who identified early on the formation of the housing bubble and foresaw the economic and financial market havoc that would ensue after the bubble inevitably burst.

Source: Northern Trust - Daily Global Commentary, November 25, 2009.

Tags: Accurate Count, April 4, Claimants, Current Condition, Cycle Peak, Government Entity, Household Surveys, Insurance Data, Insurance Lines, New Businesses, New Jobs, Northern Trust Company, Paul Kasriel, Post War, Pundits, Recession, State Unemployment Insurance, Stimulus, Unemployment Claims, Unemployment Data
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Joe Stiglitz: Bigger is Better

Monday, December 1st, 2008

Joe Stiglitz writes in the New York Times:

Joseph Eugene Stiglitz (born February 9, 1943) is an American economist and a professor at Columbia University. He was chairman of the Council of Economic Advisers from 1995 to 1997 and was awarded the Nobel prize in economics in 2001, and is the author, with Linda J. Bilmes, of “The Three Trillion Dollar War.” He is also the former Senior Vice President and Chief Economist of the World Bank.

A $1 Trillion Answer, by Joseph E. Stiglitz, Commentary, NY Times: What President-elect Barack Obama will need to do is horribly complicated but also very clear.

First, he must stop the economy from going deeper into recession. Then he needs to bring about a robust recovery, preferably in ways that support the long-term needs of the United States: by repairing our neglected public works, invigorating our technological leadership, making our society greener, fixing our health care problems, healing our social and economic divide, and restoring our social compact.

It will not be easy. President Bush’s legacy of debt and the opposition of those who benefit from the status quo present major obstacles. There is an emerging consensus among economists that a big — very big — stimulus is needed, at least 0 billion to trillion over two years. Mr.

Obama’s announced goal of 2.5 million new jobs by 2011 is too modest. In the next two years, almost four million workers will enter the labor force — or would if there were jobs. Combined with the loss of employment this year, that means we should be striving to create more than five million jobs.

A large stimulus package can always be trimmed later if it’s not needed…

Faint measures would be foolhardy. A weaker economy will suffer lower tax revenues, more foreclosures and more bankruptcies. Once a firm is bankrupt, you can’t unbankrupt it by providing a stronger stimulus later on.

… But what you do with the money counts… The money needs to be spent carefully to ensure that every dollar provides as much stimulus now as possible while also contributing to long-term growth.

… Americans are rightly afraid of losing their jobs, and with that, their

health insurance and their homes. We need to provide health insurance to the unemployed and to the uninsured, and we need to do it quickly, possibly through an expanded and more efficient Medicare.

We also need to stem the flood of foreclosures. If we help poorer homeowners, banks will benefit, too… And we need to change the bankruptcy laws to help homeowners.

… Deregulation and the failure to adopt regulations to cover risky new financial products have contributed much to the current mess. So far, we have merely given banks more money to spend recklessly. We have done little to change the banks’ incentives or constraints.

… If the asset program is not changed and if regulations are not imposed to change the behavior of those who got us into this situation — who enriched themselves at the expense of their shareholders — then confidence will not return. Those who got us into this crisis cannot have undue influence in shaping the response.

America has great assets, including a productive labor force and the best universities in the world. None of these assets so far has been impaired by Wall Street’s follies. These strengths, coupled with a sensible and fair economic stimulus package and judicious regulation, will help our economy recover.

Go to Source

Tags: American Economist, Bankruptcies, Banks, Barack Obama, Br, Chief Economist, Columbia University, Council Of Economic Advisers, Current, Dollar, Dollar War, Eco, Economic Sciences, Economics, Economist, Economists, Economy, Failure, Health, Health Care Problems, Health Insurance, Img, John Bates, John Bates Clark, Joseph E Stiglitz, Loc, Measures, Medicare, Money, New Jobs, New York Times, Nobel Memorial Prize, Nobel Prize In Economics, Ny Times, Obama, President Bush, President Elect, Recession, risk, Robust Recovery, Senior Vice President, Shareholders, Social Compact, Stimulus Package, Tax Revenues, Technological Leadership, Trillion, United States, Wall Street, World Bank
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NFP = 18,000

Friday, January 4th, 2008

Barry Ritholtz’s blog The Big Picture featured this story today, Non-Farm Payroll (jobs) grew by a stunningly disappointing 18,000, which further reinforces the likelyhood the Fed will cut, probably by at least 50bps at the next FOMC meeting, on the back of this recessionary news.  
 
Mr. Ritholtz’s highly acclaimed blog is by far one of the best on the web.

Wow, that’s a pretty ugly chart above.

Here are the details, via BLS:

“The unemployment rate rose to 5.0 percent in December, while nonfarm payroll employment was essentially unchanged (+18,000), the Bureau of Labor Statistics of the U.S. Department of Labor reported today.

Job growth in several service-providing industries, including professional and technical services, health care, and food services, was largely offset by job losses in construction and manufacturing. Average hourly earnings rose by 7 cents, or 0.4 percent.”

So, December NF Payrolls rose much less than expected, up a marginal 18,000 — or as BLS described it, largely unchanged – versus a consensus of 70,000. This was the lowest reading since August 2003. Construction job losses are now finding their way into the data, regardless of the aforementioned Birth Death adjustment.

Unemployment rate rose to 5.0%, the highest in 26 months. As we have noted repeatedly in past months, to keep up with population growth requires ~150k new jobs to be created each month. Given the number of months we have seen below that level, an uptick in unemployment was inevitable.

The spin coming from the usual sources will be that this poor showing was the result of the August credit crunch, and is therefore likely to be a temporary phenomena.

I disagree. 

These same folks will point to the increasing odds of a 50 bps cut at the January meeting. Those futures have risen to 44% from 36% yesterday. Unfortunately, the Fed finds itself somewhat hamstrung by elevated inflation, $100 Oil and $850 Gold as signs proof of inflation.

~~~

Coming on top of the slowing Housing market, weak income levels, ISM manufacturing index, and auto sales, this is further evidence to the building thesis that a recession is increasingly likely.Sources:Employment Situation Summary   
BLS, DECEMBER 2007
http://www.bls.gov/news.release/empsit.nr0.htm 

   BLS, DECEMBER 2007http://www.bls.gov/news.release/empsit.nr0.htm    BLS, DECEMBER 2007http://www.bls.gov/news.release/empsit.nr0.htm  

Fed’s Inflation Fears Might Trump
Calls for Another Big Rate Cut Monetary-Policy Makers
Appear to Have Less Room To Maneuver Than in Past
GREG IP
WSJ, January 4, 2008; Page A3
http://online.wsj.com/article/SB119940394997266181.html

Tags: Average Hourly Earnings, Barry Ritholtz, Birth Death, Blog, Bureau Of Labor, Bureau Of Labor Statistics, Chart, Construction Job, Credit, Credit Crunch, Credit Market, Desc, Earnings, Economy, Fed, Food Services, Gold, Housin, Housing Market, inflation, Likelyhood, New Jobs, Next Fomc Meeting, Nfp 18, oil, Payroll Employment, Population Growth, Recession, REW, risk, Services Health, The Big Picture, Thesis, U S Department, U S Department Of Labor, Unemployment Rate, Uptick
Posted in Credit Markets, Gold, Markets, Oil and Gas | No Comments »