Marketwatch Talks to Marc Faber

Sunday, August 21st, 2011

via Trader Mark, Fund My Mutual Fund

It’s starting to get all ‘bearish’ up in here, when Marc Faber stories top the most popular list at places like Marketwatch.  ’5 Money Moves Dr. Doom is Making’ was the top story yesterday and remains in the top 5 today.  Faber has had a very hot hand of late, coming into the month of August claiming ‘The Bear Market is Starting’ (video here) – the timing was impeccable – and then a week later looking for a very short term oversold bounce (link here) – again excellent short term trading as the 9th was Fed day and the worst of the lows before 100 S&P points of a bounce.

I always prefer Faber in video format for pure entertainment purposes, but he is always worth the listen in whatever format.  While his long term views are quite consistent (and doom-y) you can see the path he has prescribed that governments and central banks would go down… has become very accurate. 

By printing money,  the earnings power of the proletariat is diminishing, while the assets held by the wealthy are going up. And at the same time, the wealthy are outsourcing more and more production to China, to further rob the masses.

• Faber is to financial-market optimists what the Grinch is to Christmas. He doesn’t often like what he sees, and nowadays he finds even less to like about the world’s economic situation than he did in 2008 — as if that wasn’t bad enough.
• “Financial conditions are today worse than they were prior to the crisis in 2008,” he said in a telephone interview earlier this week from Thailand. “The fiscal deficits have exploded and the political system [in both the U.S. and Europe] has become completely dysfunctional.”
• Faber doesn’t take a contrarian stance in the strict sense; it’s more of a constant vigilance — capital preservation over capital appreciation — so that one can live now to fight for investment gains another day. (a viewpoint more investors – and managers -  should take!)
• “The way I look at it,” Faber said, “I am ultra-bearish about everything geopolitically. In an environment of money printing, we have to ask ourselves, how do we protect our wealth? … Where do we allocate the money?
• Good question, but in fact a fairly straightforward one if, like Faber, you believe that Federal Reserve policy is stoking speculation over savings and debasing the U.S. dollar, hyperinflation is a real possibility, the stock market’s recovery since 2009 has favored the rich and powerful, cash is trash, and gold and land in the countryside are the only true safe havens.
• “The Federal Reserve is a very evil institution,” Faber said with characteristic bluntness, “in the sense that they punish decent people who have saved all their lives. “These are people who don’t understand about stocks and investments,” he added, “and suddenly they are forced to speculate.”
• Such a miserly attitude can become a self-fulfilling prophecy. Faber noted that corporate earnings will likely disappoint stockholders across the board, including commodity shares, with the exception of traditional defensive sectors such as health care, consumer staples and utilities.
• Moreover, one of the main ways corporations are spending money — on mergers and acquisitions rather than on hiring and equipment — is ultimately inflationary, Faber said. “The corporate sector is not spending much money on capital investments and new investments — that’s why they have this huge hoard of cash,” Faber said. “There will be many more takeovers and industry consolidation in the years ahead. It destroys jobs, but this is what will happen. As industries consolidate, they get more pricing power, and the cost of living increases.”
• Of course, Faber points out, while such dealings might not be ideal for Main Street, it can sustain Wall Street, which leads Faber to a prognosis for stocks that may surprise the doctor’s patients. “I’m not that negative about equities,” Faber said. “If you’re bearish about the world, you’ll probably be better off in equities than in government bonds and cash.”

So batten down the hatches, double-check the locks and keep Faber’s to-do list handy:

1. Avoid Treasurys

• “It’s a suicidal investment to own 10-year or 30-year U.S. Treasurys,” Faber said. What about the Treasury rally in the wake of economic weakness, stormy stock markets and investors’ flight to safe havens?
• “What does a weak economy mean?” Faber said. “It means collapsing tax revenues. The deficits go up. You have to issue more government bonds.” The abundance of new debt would dilute credit quality, he added, only further sapping investors’ confidence in Treasury debt.
• “U.S. government bonds are junk bonds,” Faber said. “As long as they can print, they can pay the interest. But another way to default is to pay the interest and principal in depreciating currency.
• “For that reason I would advocate a wide basket of diversification out of dollar-based assets,” Faber added. “The dollar may rally somewhat, but clearly in the long run the dollar and other paper currencies — the euro is not much better — will have a depreciating tendency vis-a-vis honest money: gold and silver.”

2. Cash is trash

• Given his bleak assessment of the U.S. dollar, it’s no surprise that Faber doesn’t recommend holding cash as a long-term cushion against portfolio shocks.“It would be very dangerous to say ‘I don’t trust stocks, gold, real estate, I want to keep my money in cash.’ That’s a way to end up losing a lot of money,” Faber said.  Specifically, the problem in Faber’s view is the loss of purchasing power as inflation whittles away the value of money.
• “We’re in a paradoxical situation where under a traditional monetary system the safest places are cash, Treasury deposits, government bonds,” Faber said. Nowadays, he noted, “they have been made by monetization into the most unsafe assets from a longer term perspective.
• “Weak economies usually have higher inflation rates than stronger economies,” Faber added. “In weak economies you have loose fiscal policies and money printing. And the U.S. is the world champion in loose monetary policies. I don’t believe a single word of what the Bureau of Labor Statistics is printing about inflation figures. “Paper money has lost its value,” Faber said. “Hyperinflation is the pattern to come.”

3. Stocks offer some safety

• “I am not completely bearish about stocks,” Faber said. “If I have cash, government bonds and stocks, for the long term, I’d take stocks.”  Just not necessarily U.S. stocks.
• While Faber said the U.S. market is “oversold” and the Standard & Poor’s 500-stock index could rebound to the 1250 to 1270 range, he expects U.S. equity values to decline — though not in a full-blown capitulation.  “My assumption is that March 2009 was a major low, and that we will not go back below that low,” Faber said. “Can we go to 900 on the S&P? Yes.”
• But as the S&P 500 slides closer to 1000, the Federal Reserve could step in with a third round of stimulus for investors to cheer, Faber said.  Fed action, he noted, “may not lift stock prices to new highs, but it may stabilize them. If you print money, stocks will not collapse.”

4. Emerging markets will expand

• In contrast to his dim view of U.S. and other developed markets, Faber is downright sunny about investing in emerging nations. “I do not think that investors fully appreciate the enormous shift that has and is occurring in the balance of economic power from the Western world to emerging economies,” he told subscribers In a market commentary published in early August.
• This week, Faber reiterated his opinion that emerging markets will reward buyers over the long-term. “I happen to feel that somewhere in the world we can make 7% on equities for the next 10 years,” he said. “I can buy you a portfolio of high-dividend stocks in Asia that would have a yield of 5% to 7%.” Dividend predictability is one reason that Faber also recommends holding corporate bonds.
• Faber’s own stock portfolio is centered on dividend-paying Asian shares, particularly in Malaysia, Singapore, Thailand and Hong Kong. These include a variety of real estate investment trusts and utilities.
• Lately he’s also turned positive on Japanese banks, brokerages and insurance companies. “They have a better loan portfolio than the European banks,” Faber said of Japanese banks. “The banks in Asia are in a very solid position. All these are a play on the recovery in the stock market in Japan.”

5. Gold is worth its weight

• Gold blew through $1,800 an ounce on Tuesday, continuing its forward march as investors seek higher ground. Given his world view, Faber is convinced that the price of gold will continue rising and that any pullback is a buying opportunity.
• To understand why, you have to see gold like Faber does — as a currency, an alternative to the U.S. dollar, that will be increasingly in demand as the U.S. and other governments print more and more money.
• “The function of paper money is to facilitate the exchange of goods and services, to be a store of value and a unit of account — the U.S. dollar fails on all three,” Faber said. “Intelligent people, instead of holding cash in U.S. dollars with zero interest rates, why not hold money in gold and silver?”
• And as a currency, Faber said gold should be held in its physical form and not in shares of gold miners or even exchange-traded funds. That would rule out popular vehicles such as SPDR Gold Trust or iShares Gold Trust
• Be sure to store your gold in banks in Switzerland, London, Singapore, Hong Kong, Australia — just not in the U.S., Faber said. “Physical gold in a safe deposit box is the safest,” Faber added. “Forget about huge capital gains. I would look at capital preservation. I want to preserve my capital.

Copyright © Trader Mark, Fund My Mutual Fund

Tags: Bear Market, Capital Appreciation, Capital Preservation, Central Banks, Constant Vigilance, Dr Doom, Economic Situation, Entertainment Purposes, Fiscal Deficits, Gold, Grinch, Investment Gains, Lows, Marc Faber, Month Of August, Mutual Fund, Optimists, Printing Money, Proletariat, Strict Sense, Telephone Interview
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The Biggest Urban Legend in Finance (Arnott)

Wednesday, March 30th, 2011

by Robert Arnott, Research Affiliates

Stocks ought to produce higher returns than bonds in order for the capital markets to “work.” Otherwise, stockholders would not be paid for the additional risk they take for being lower down the capital structure. It comes as no surprise, therefore, that stockholders have enjoyed outsized returns for their efforts for most—but not all—long time periods.

Ibbotson Associates, whose annual data compendium¹ covers U.S. stocks and U.S. bonds since January 1926, shows the S&P 500 Index compounding through December 2010 at an annual rate of 9.9% vs. 5.5% for long-term government bonds, an excess return of 4.4%. This return compounds exponentially with time. A $1,000 U.S. stock investment in 1926 would have ballooned to $3 million by December 2010 vs. $92,000 for an investment in long-term bonds, a 32-fold difference.

Emboldened by the 1980s and 1990s (when stocks compounded at 17.6% and 18.2% per annum, respectively), “Stocks for the Long Run” became the mantra for long-term investing, as well as a best-selling book. This view is now embedded into the psyche of an entire generation of professional and casual investors who ignore the fact that much of those outsized returns were a consequence of soaring valuation multiples and tumbling yields. In this issue we examine historical U.S. equity performance from a larger perspective and find that today’s overwhelming equity bias is built on a shaky foundation, reliant on a short and unrepresentative time period.

Let’s Talk Really Long-Term

For those willing to do the homework, longer-term stock and bond data exist for the United States. But that picture isn’t quite as rosy as from 1926–2010; therefore, it doesn’t receive as much attention from Wall Street optimists. From 1802–2010, U.S. stocks generated a 7.9% annual return vs. 5.1% for long-term government bonds.² Our realized excess return was cut to 2.8%—a one-third reduction—by adding 125 years of capital markets history!

Of course, many observers will declare 19th century data irrelevant. A lot has changed! The survival of the United States was in doubt during the early part of the century (War of 1812) and during the debilitating Civil War of the 1860s. The United States was an “emerging market”! The economy was notably short on global trade and long subsistence agriculture. Furthermore, there were three major wars and four depressions—two were deeper than the Great Depression—between 1800 and 1870, a span when data on market returns were notably thin.

By the following century, the United States and its equity markets enjoyed good fortune. It was not invaded and occupied by a foreign power. It did not suffer a government overthrow… just ask Russian investors their return on capital after the Bolshevik Revolution! As Ben Graham might caution, beware the difference between the loss on capital (a drop in price, from which we can recover) and a loss of capital (100% loss, from which we cannot). Russia’s stock market wasn’t alone in the 20th century as three additional top 15 markets in 1900—Egypt, Argentina, and China—suffered a 100% loss of capital while Germany (twice) and Japan (once) came very close.³

Whether we use 200+ years or 80+ years, how many people are pursuing an investment program of that duration? No one, of course. Even “perpetual” institutions such as university endowments aren’t exempt. As the late economic historian Peter Bernstein commented, “…this kind of long run will exceed the life expectancies of most people mature enough to be invited to join such boards of trustees.”⁴ Relevant horizons for all “long term” investment programs are significantly shorter—10 years or 20 years, maybe 30.

Shouldn’t a span of one, two, or three decades be sufficient for investors to be rewarded for bearing the risk of holding stocks? As displayed in Table 1, trailing returns for stocks haven’t come close to earning the excess returns that we’ve all come to expect, even after stocks worldwide doubled from the early March 2009 lows during the Global Financial Crisis! We’ll save an exploration for how the Fundamental Index® concept radically reshapes this picture for another time.

Where is the wealth creation implied by the Ibbotson data? Stock market investors took the risk—riding out every bubble, every crash, every spectacular bankruptcy and bear market, over a 30-year stretch. How much were they compensated for the blood, sweat, and tears spilled with all this volatility? A measly 53 basis points per annum! Indeed, investors who have incurred the ups and downs over the past decade have lost money compared to what they could have earned from long-term government bonds. They’ve paid for the privilege of incurring stomach-churning risk. Not only did Treasury bond investors sleep better, they ate better too!

A 30-year stock market excess return of approximately zero is a huge disappointment to the legions of “stocks at any price” long-term investors. But it’s not the first extended drought. From 1803 to 1857,5 U.S. equities struggled; the stock investor would have received a third of the ending wealth of the bond investor. Stocks managed to break even only in 1871. Most observers would be shocked to learn there was ever a 68-year stretch of stock market underperformance. After a 72-year bull market from 1857 through 1929, another dry spell ensued. From 1929 through 1949, stocks failed to match bonds, the only long-term shortfall in the Ibbotson time sample. Perhaps it was the extraordinary period of history—The Great Depression and World War II—and the spectacular aftermath from 1950–1999, that lulled recent investors into a false sense of security regarding long-term equity performance.⁶

The Odds

Fortunately for the capital markets and equity investors, an examination of history shows that, yes, stocks have a high tendency to outperform government bonds over 10-year and 20-year periods. Figure 1 illustrates rolling 10- and 20-year “win rates” for equities versus government bonds. We break the data into Ibbotson (1926–2010) and Total (1802–2010). The Ibbotson timeframe confirms investor behavior in the 30 years since Ibbotson and Sinquefield published their groundbreaking study.⁷ For the vast majority of periods—86% for 10 years and 96% for 20 years—equities outperform bonds. But the longer term data are less convincing. For 10-year periods, equities outperform in 71% of the observations, rising to 83% for 20 years.

A 70% or 80% win rate still offers pretty good odds. In professional basketball, those are average to above-average free throw percentages. But the relatively small probability of failure masks the magnitude of a miss. Just as a single missed free throw can cost a basketball championship, so too can an equity “miss” lead to drastic consequences, as the past 10 years have shown. There is no guarantee of superior equity returns, which begs the question: Why does our industry act like there’s one? More important, why take all that risk for a skinny equity premium?

Conclusion

We aren’t saying that we should expect bonds to beat stocks over the next 10 or 20 years. Rather, this brief history lesson illuminates that the much-vaunted 4–5% risk premium for stocks is unreliable and a dangerous assumption on which to make our future plans. In our view, a more normal economic environment would suggest 2–3%, which is the historic risk premium absent the rise in valuation multiples in the past 30 years. But these are not normal times. Today’s low starting yields, combined with the prospective challenges from our addiction to debt-financed consumption and aging population, would put us closer to 1%.

It would be foolish to act as if the past 200 years is fully representative of the future. For one thing, the United States was an emerging market for much of that period, with only a handful of industries and an unstable currency. In the past century, we dodged challenges and difficulties that laid waste to the plans of investors in many countries. Nassim Taleb points out that “Black Swans”—unwelcome outliers that exceed the bounds of normalcy—are a recurring phenomenon; the abnormal is, indeed, normal. Our own stock market history is but a single sample of a large and unknowable population of potential outcomes.

Peter Bernstein relentlessly reminded us there are things we can never know, that prosperity and investing success are inherently “risky”; they can disappear in a flash. Uncertainty is always with us. The old adage puts it succinctly: “If you want God to laugh, tell him your plans.” Concentrating the majority of one’s investment portfolio in one investment category, based on an unknowable and fickle long-term equity premium, is a dangerous game of “probability chicken.”

Endnotes

1. Ibbotson® SBBI® 2011 Classic Yearbook: Market Results for Stocks, Bonds, Bills, and Inflation 1926–2010, Morningstar.

2. For much of this section, we rely on the data that Peter Bernstein and I assembled for “What Risk Premium is ‘Normal’?” Financial Analysts Journal, March/April 2002. We are indebted to many sources for this data, ranging

from Ibbotson Associates, the Cowles Commission, Bill Schwert of Rochester University, and Bob Shiller of Yale. For the full roster of sources, see the FAJ paper.

3. See Arnott and Bernstein (2002).

4. See Peter Bernstein, “What Rate of Return Can You Reasonably Expect… or What Can the Long Run Tell Us about the Short Run?” Financial Analysts Journal, March/April 1997.

5. 20-year bonds were used whenever possible but the longest maturities tended to be 10 years for much of the nineteenth century. Also, in the 1840s, there was a brief span with no government debt (we should be so lucky!),

hence no government bonds. Under these circumstances, the equivalent to today’s Government Sponsored Enterprises, railway and canal bonds, were used as these projects typically had the tacit support of the government.

6. For more on this, see Robert Arnott, “Bonds: Why Bother?” Journal of Indexes, May/June 2009.

7. Roger G. Ibbotson and Rex A. Sinquefield, “Stocks, Bonds, Bills and Inflation: Year-by-Year Historical Returns (1926–1974),” Journal of Business, January 1976.

©2011 Research Affiliates, LLC. The material contained in this document is for general information purposes only. It relates only to a hypothetical model of past performance of the Fundamental Index® strategy itself, and not to any asset management products based on this index. No allowance has been made for trading costs or management fees which would reduce investment performance. Actual results may differ. This material is not intended as an offer or a solicitation for the purchase and/or sale of any security or financial instrument, nor is it advice or a recommendation to enter into any transaction. This material is based on information that is considered to be reliable, but Research Affiliates® and its related entities (collectively “RA”) make this information available on an “as is” basis and make no warranties, express or implied regarding the accuracy of the information contained herein, for any particular purpose. RA is not responsible for any errors or omissions or for results obtained from the use of this information. Nothing contained in this material is intended to constitute legal, tax, securities, financial or investment advice, nor an opinion regarding the appropriateness of any investment. The general information contained in this material should not be acted upon without obtaining specific legal, tax or investment advice from a licensed professional. Indexes are not managed investment products, and, as such cannot be invested in directly. Returns represent back-tested performance based on rules used in the creation of the index, are not a guarantee of future performance and are not indicative of any specific investment. Research Affiliates, LLC, is an investment adviser registered under the Investment Advisors Act of 1940 with the U.S. Securities and Exchange Commission (SEC).

Russell Investment Group is the source and owner of the Russell Index data contained or reflected in this material and all trademarks and copyrights related thereto. The presentation may contain confidential information and unauthorized use, disclosure, copying, dissemination, or redistribution is strictly prohibited. This is a presentation of RA. Russell Investment Group is not responsible for the formatting or configuration of this material or for any inaccuracy in RA’s presentation thereof.

The trade names Fundamental Index®, RAFI®, the RAFI logo, and the Research Affiliates® corporate name and logo are registered trademarks and are the exclusive intellectual property of RA. Any use of these trade names and logos without the prior written permission of RA is expressly prohibited. RA reserves the right to take any and all necessary action to preserve all of its rights, title and interest in and to these marks. Fundamental Index® concept, the non-capitalization method for creating and weighting of an index of securities, is patented and patent-pending proprietary intellectual property of RA. (US Patent No. 7,620,577; 7,747,502; and 7,792,719; Patent Pending Publ. Nos. US-2007-0055598-A1, US-2008-0288416-A1, US-2010-0191628, US-2010-0262563, WO 2005/076812, WO 2007/078399 A2, WO 2008/118372,EPN 1733352, and HK1099110).

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Tags: Annum, Best Selling Book, Bond Data, Capital Markets, Capital Structure, China, Currency, Emerging Markets, Excess Return, Government Bonds, Ibbotson Associates, Investment Bonds, Optimists, Research Affiliates, Robert Arnott, Russia, Shaky Foundation, Stock Investment, Stockholders, Term Bonds, Term Investing, Term Stock, Time Periods, Urban Legend
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Stuck in a Turnaround

Saturday, July 10th, 2010

Remember this scene in Austin Powers when the world’s wittiest spy couldn’t manage to get his cart turned around without getting stuck?

It seems today’s world leaders and central bankers are having the same problem. Despite their best efforts, the global economy is caught between recession and recovery, and it’s not clear which direction will prevail.

Pessimists can point to last week’s poor employment report, continued weakness in housing—in the U.S., China and elsewhere—and a slowdown in global manufacturing as indications things will get worse before they get better.

Optimists take heart in the International Monetary Fund’s (IMF) new forecast that the global economy will grow 4.6 percent this year and 4.3 percent in 2011. The 2010 forecast reflects stronger-than-expected growth in Asia. China is expected to lead the way with 10.5 percent growth this year and 9.6 percent next. The other BRIC nations (India, Russia and Brazil) are also expected see growth between 4 percent to 9 percent.

What about the EU’s debt problems spreading to the rest of the world? The IMF played down the idea of contagion—“contagion to other regions is assumed to be limited and the disruption in capital flows to emerging and developing economies to be temporary.”
But it says high public debt levels, unemployment and constrained bank lending amplify any downside risks.

Sovereign debt and slow growth isn’t a big issue in emerging nations. For that and other reasons, we think the BRIC nations and other key markets like Turkey, Indonesia and even Chile and Colombia (Latin America’s best-performing market year-to-date) will continue to provide good opportunities for active managers.

Tags: Asia China, Austin Powers, Best Efforts, Brazil, BRIC, BRICs, Contagion, Debt Levels, Debt Problems, Developing Economies, Downside Risks, Employment Report, Global Economy, Imf, India, International Monetary Fund, Latin America, Optimists, Pessimists, Public Debt, Recession, Russia, Slowdown, Sovereign Debt, Year To Date
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Did Imbalances Cause the Crisis?

Wednesday, June 16th, 2010

This article is a guest contribution from Kati Suominen, Trans-Atlantic Fellow at the German Marshall Fund in Washington, via VoxEU.

At their 26-27 June Summit in Canada, the G20 members will take the first look at their progress on the “Framework for strong, sustainable, and balanced growth,” a concerted effort adopted at the September 2009 Pittsburgh Summit to contain global imbalances.

The timing is opportune. With trade, credit, and commodity prices recovering, the IMF (2010) recently revised its projections of US current-account deficit to 3.3% of GDP in 2010 and 3.4% in 2011. Also UK, Canada, Australia, India, Turkey, France, and southern European nations are projected to run steep trade deficits (Figure 1). The mirroring surplus nations are the familiar China, Japan, emerging East Asia, Germany, and oil producing nations.

Figure 1. Global imbalances 1996-2015

Source: IMF (2010).

The Framework builds on the G20 November 2008 Summit declaration, which blamed both regulatory failures and the drivers of the imbalances (“inconsistent and insufficiently coordinated macroeconomic policies, inadequate structural reforms”) for the global crisis.¹ Under the Framework, each G20 member is to subject its economic policies to a peer review managed by the IMF, which, in turn, determines whether the member’s efforts are “collectively consistent” with global growth goals.

Tags: Alarmists, Australia India, Canada Australia, Canadian Market, China, China Japan, Commodities, Commodity Prices, Concerted Effort, Current Account Deficit, Economic Policies, Emerging Markets, German Marshall Fund, Global Crisis, Global Growth, Growth Goals, India, Macroeconomic Policies, Oil Producing Nations, Optimists, Raises Questions, Summit Declaration, Trade Deficits, Trans Atlantic, Us Gdp
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Hungary Meltdown – Euro Contagion Spreading

Friday, June 4th, 2010

Euro-contagion has spread to Hungary. Parity for the euro may come sooner than anyone expected. Here are notes and analysis from a variety of sources on the unfolding euro/Hungarian meltdown, Round 2:

To all those who listened to Hugh Hendry’s recommendation to panic a week ago, congratulations- you are well ahead of the market today. Hungary CDS is now offerless as investors are shocked, shocked, that the country (and continent) is actually really bankrupt, as opposed to just make believe. IMF’s comments yesterday that it does not have the funds to rescue all of Europe are not helping. Hungary CDS is now essentially bidless last seen 120 bps wider, around 430/460 with the bid/ask spread at 30bps, and only dealers daring to take on any risk exposure as the risk off brigade has kicked the optimists out of the building. The one thing up today so far? Gold. NFP better be north of 100 million or else the stick save today will be a tad problematic.

Europe Tremors Resume: Spain Bund Spreads At All Time Wides, China Exporters Ditch Euro As CHF Surges, from ZeroHedge.com.

Another horrendous day shaping up for Europe. Spanish Bund spreads have surged to all time highs just south of 200 bps, Hungary confirms that it was not exaggerating comments about chances of (not) avoiding Greek situation, pushing its CDS even wider, the EURCHF has dropped to under 1.40 and the SNB has not intervened yet, while the EURUSD is down to 4 year lows below 1.21. The nail in the euro coffin is a report by Reuters that a growing number of Chinese exporters turn down euro payment, flatly refuting anything SAFE may be saying officially.

Chinese exporters who made a big push only a year ago to bill in euros are increasingly turning their backs on the wounded European currency and demanding dollars instead.

By contrst, Beijing last week said a report it was reviewing the euro portion in its mountain of foreign exchange reserves was groundless and it calmed markets by saying that Europe remained a key investment market.

But Chinese exporters and the local governments that oversee them are less confident. They are trying to keep a wider berth from the euro, at least for now.

Oh, and now the French PM is quoted as saying that he only sees good news in parity between the dollar and the euro. Too bad none of his bank share the sentimentm realizing all too well none of them will exist in that situation.

Add Hungary to the PIIGs List, from Big Picture.

The market needs a new acronym to replace PIIGS to include Hungary as a spokesman for the PM of Hungary said their economy is “in a grave economic situation” and the possibility of default is “not an exaggeration.” Markets rolled over after the comments and the euro fell to a new 4 year low vs the US$. Hungary 5 yr CDS is higher by 15 bps to 323 bps, the highest since July ‘09. Hungarian stocks are lower by almost 4% and European banks are all lower. With respect to the US jobs data, it’s not the headline number that will matter but what’s under the hood as census workers may add 500k+ to the figure. The private sector is expected to add 180k jobs and that is the only thing that matters as the census workers will be off the gov’t rolls by Sept. The birth/death model will also contribute as 186k jobs were added in May ‘09. The unemployment rate is expected to tick lower by .1% to 9.8%.

Now it’s Hungary’s Turn, from TraderMark.

Well this one came out of the blue. Looks like they pulled a Greece in their statistics department. Hmm, governments worldwide fudging the numbers to create an alternate sense of reality? Whodda thunk!

• Hungary’s is in a “grave situation” because the previous government “manipulated” figures and “lied” about the state of the economy, said Peter Szijjarto, spokesman for Prime Minister Viktor Orban. The forint fell for a second day, dropping as much as 2.1 percent against the euro.
• A fact-finding panel will probably present preliminary figures on the state of the economy this weekend, Szijjarto said today at a news conference in Budapest. The government will publish an action plan within 72 hours after the committee reports its findings, he said.
• “It’s clear that the economy is in a very grave situation,” Szijjarto said. “We need a clean slate to formulate our economic action plan, and the fact-finding committee will provide just that.”
• “It’s no exaggeration” to talk about a default, Szijjarto said today.
• Hungary needed a 20 billion-euro ($24 billion) international bailout to avert a default in 2008. Orban, who took over May 29 after winning elections by pledging to cut taxes and stimulate the economy, yesterday failed to get European Union approval for looser fiscal policy.
• “Investors are losing their patience,” Gyorgy Barta, a Budapest-based economist at Intesa Sanpaolo SpA, said in a phone interview. “This is part of a communications strategy that wants to tell voters one thing and the markets another. It’s getting too complicated, and the government now needs to come clean and present a convincing plan of fiscal consolidation.”

Oh well, nothing a hundred or two billion euro won’t fix. Get to work US taxpayer… err IMF.

Biggest Hungarian Commercial Bank Trading Halted On Budapest Stock Exchange, from ZeroHedge.com.

All trading in shares of OTP Bank, Hungary’s largest commercial bank, has been halted on the Budapest stock exchange after a plunge greater than 10%. Nothing to see here, go back to reading Goldman’s spin on things, and why everything all of this really should be priced in already.

Austria Next On The Implosion Radar; German, France CDS Blow Out, from ZeroHedge.com.

Austria, the country most exposed to weakness in Central and Eastern Europe, is back on the radar. After having avoided skeptical investor scrutiny even as the bulk of Europe was collapsing all around it, the country is today’s top CDS widener, yet still stunningly trades inside of France and Belgium. Look for this spread to blow out over the next week. Then again, the biggest CDS wideners are precisely the countries formerly seen safe: Austria, France, Germany and Belgium are all the top movers in CDS. So much for the whole North vs South division in Europe.

Goldman Sachs’ Desperate Attempt at Hungary Damage Control, courtesy of ZeroHedge.com.

Goldman Sachs to save the day…

Hungary – Greek-like crisis has already happened; Fidesz tries to free itself from campaign promises

Yesterday’s comments by Fidesz vice-president Kósa alleged that Hungary stands on a brink of a sovereign default due to its very precarious budget situation and continuously appearing ‘skeletons’ in the fiscal accounts while Michaly Varga, a deputy PM, claimed again that the ‘true’ 2010 budget deficit is closer to 7%-7.5% of GDP rather than the 3.8% assumed in the IMF-led program or 4.3%-4.5% forecasted by the NBH. Given the seriousness of the situation, Kósa declared that within a week the new government will announce a two-year crisis management plan that would include deep constitutional and structural reforms. Nevertheless, Kósa did not withdraw the plans to lower taxes which was one of the key election promises. He also declared that countries that were successful at crisis management ‘rejected the requirements of the World Bank and the IMF’ and expected the European Union to foot the bill for a potential external rescue of Hungary.

On the same day, European Commission President Barroso urged the new Hungarian government to speed up fiscal consolidation and implement structural reforms that would help maintain long-term fiscal sustainability and support economic recovery.

The Hungarian PM, Victor Orban, followed with declarations that the new government is committed to restoring fiscal stability and that the new economic plan, to be published within 72 hours after revealing the budget report, will include structural measures to boost growth and competitiveness as well as significant tax cuts.

IMF mission chief is due to arrive in Budapest for informal talks with the government. His visit is not a part of a formal review mission, which was postponed because of the parliamentary elections.

COMMENT: We believe that yesterday’s dramatic comments were intended for domestic consumption and were used to build a dramatic backdrop that would let Fidesz backtrack on a large share of its campaign promises and broadly continue with the fiscal policies of the previous government, as well as preparing the ground for another round of IMF talks. Exaggerating the state of public finances left by the previous government, pretty common as it is (the incoming UK government used very similar tactics), supports the arguments against fiscal expansion and, in the future, will back up the claims that the crisis management plan was successful in reducing public deficit. The party faces local elections in October and not following up on the election promises risks alienating the voters, while blaming the ‘imminent crisis’ and ‘fiscal skeletons’ helps it save its face. At the same time, inflating the deficit forecast gives it space for negotiations with the international lenders and increases the chances that the potential new program will allow for some fiscal loosening in 2010 and 2011.

The claim that the country is on a brink of sovereign default and risks following the Greek path does not hold up against the facts. Hungary has already faced a crisis and asked for IMF and EU assistance in late-2008. In this context, Hungary is some 18 months ahead of Greece. Next, Hungary is not an EMU member and by having its own currency and domestic and external debt benefits from having a captive investor base. Finally, Hungary still has access to the undisbursed tranches of the IMF/EU loans. Our analysis (New Markets Analyst 10/04) shows that under the current policies debt stock is stable and that the country will be able to rollover its maturing debt without a problem.

It seems that Fidesz has taken a major decision on the path of macroeconomic policy and is now preparing the stage for its announcement – first, by revealing the ‘true’ size of the deficit and, second, by following up with the two-year plan. We believe that the ‘good scenario’ is more likely, namely a new agreement with the IMF and the EU and broad continuity of the fiscal consolidation plans, although with some loosening due to the cost of the yet to be announced structural reforms and to accommodate some of the election promises. We continue to believe that a stabilization program is the most likely outcome, which should significantly reduce the perception of the Hungarian sovereign risk (for more information, please see New Markets Analyst 10/05).

The risk here is that the new government attempts to follow the Ukrainian and Romanian examples, leading to protracted and rocky discussions. The other risk is that the new government is too confident in its ability to influence the Forint (in earlier comments, Fidesz said that weaker currency will support Hungary’s competitiveness) and may be careless in its communications (as shown by yesterday’s comments from Kósa). The punishment from the market may come quickly and weakening of the currency beyond the pain level of banks and households (about EURHUF of 300) – which hold significant amounts of FX debt – would serve as a warning to the new government. Our research shows that among CE3 countries, Hungary is most exposed to risk sentiment and the widening of risk premia would hurt Hungary’s growth.

The ‘negative scenario’ in which the new government abandons the IMF program and lets the fiscal situation get out of control would actually help fulfil the claims that the country is indeed unable to access financing; we find that unlikely, though.

The news that the IMF mission chief will hold informal talks with the new government is neutral. Such a visit had to happen regardless of the course of Fidesz’s macroeconomic plans. IMF needs to learn more about these plans and both sides need to decide how they want to proceed. This should clarify the situation and help us know whether the next program is going to happen. We expect some follow-up news within the next couple of days.

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Richard Russell (Dow Theory Letters): What are the markets trying to do?

Sunday, April 12th, 2009

“The market situation has seldom been more confusing. Many analysts are convinced that we are in a new bull market. Others (me included) believe we are in a bear market correction (rally).

“Because of the confusion, I’m going to step out and make a few guesses (might as well, since nobody really knows what’s going on).

“(1) I believe that we’re in a secondary (upward) correction of a bear market. I’m going to guess that this correction could rise further or at least last longer than most people are expecting. A bear market rally is supposed to convince the majority that a new bull market has started. The rally will often continue until a large number of investors are back on board, and then the bear will kill them as it fades away, leaving the new optimists high and dry and with losses.

“(2) Gold is in a downward correction of its primary bull market. Gold may decline or stall until it convinces the majority of gold-fans that the gold bull market has died. Holders of ‘paper gold’ and gold futures and options will be frightened out of their holdings. What we’re experiencing now is the big correction that often occurs prior to the third speculative phase in gold. Holders of physical gold (coins, bars) will do best, since they will tend to hold on to their gold positions no matter what.

“So what are the markets trying to do? They’re doing what they always do, keep investors in the equity bear market and keep investors out of the gold bull market. Why would they do that? Because that’s the very nature of markets. Markets tend to thwart the majority. And that’s logical and self-evident. If markets existed to make money for the majority, then most market participants would be millionaires, and we know that sadly, that is not the case.”

Source: Richard Russell, The Dow Theory Letters, April 7, 2009.

Hat tip: Investment Postcards

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