Archive for the ‘Credit Markets’ Category
Few Gain, Many Lose from Frannie Bailout
Monday, September 8th, 2008
UK bank shares are having a huge day (above are the 9:20 a.m. (Eastern Time) prices of UK bank stocks, September 8, 2008), following this weekends Frannie bailout announcement.
It appears that the short squeeze in bank stocks is in this morning’s trading.
Here are some excerpts from the saavy folks at DealBook.
Over the years, Fannie Mae and Freddie Mac showered riches on many winners: their executives, Wall Street bankers and Washington lobbyists. Now the foundering mortgage giants are leaving some losers in their wake, notably their shareholders, rank-and-file employees and, in the worst case, American taxpayers.
Golden Parachutes all around:
Daniel H. Mudd, the departing head of Fannie Mae, stands to collect $9.3 million in severance pay…
Richard F. Syron, the departing chief executive of Freddie Mac, could receive an exit package of at least $14.1 million
Its not clear that these former Frannie executives will actually get compensated.
But worst of all, long investors in either are getting killed:
The shareholders of Fannie Mae and Freddie Mac, including many employees, will not be so lucky. The companies’ share prices have plunged about 90 percent this year, wiping out about $70 billion of shareholder value. The shares are likely to be worth little or nothing under the government’s rescue plan.
As a result, Wall Street money managers and everyday investors alike stand to lose big. Bill Miller, the star mutual fund manager at Legg Mason, increased his bet on Freddie Mac even as the company’s shares plummeted this year. Last week, when Freddie Mac stock was trading at about $5, Legg Mason disclosed that it had bought an additional 30 million shares. Other value-oriented investors, including Rich Pzena, David Dreman and Martin Whitman, also placed big bets that the mortgage companies would recover. None of these money managers returned calls for comment.
“I am just shocked how they missed this, and why, when it became completely clear that the problem was snowballing, guys like Bill Miller doubled down,” Douglas A. Kass, head of Seabreeze Partners and an outspoken short-seller, told The Times.
And the few investors that gain:
Among the most vocal short-sellers betting against the companies is William A. Ackman, who runs a hedge fund called Pershing Square Capital. Mr. Ackman was among the earliest to warn of the credit crisis, and he is believed to have landed a windfall after shorting both companies, according to The Times, which cited a person with direct knowledge of a recent investment letter.
Tags: Banks, Fannie Mae, Financials, Freddie Mac, GSE, Paulson
Posted in Banks, Credit Markets, Economy, Financials, Investment Strategy, Markets | No Comments »
Let Fannie, Freddie Fail: Jim Rogers
Monday, September 1st, 2008
Fannie Mae and Freddie Mac should not be saved if they go bankrupt, and economic stimulus packages do more harm to economies in the long run than good in the short term, Jim Rogers, CEO of Rogers Holdings, told CNBC Friday, August 29, 2008 at 3:15AM from Singapore.
View Part 1, Click Play
View Part 2, Click Play
Tags: Credit Markets, Derivatives, Fannie Mae, Financials, Freddie Mac, Jim Rogers, Mortgage
Posted in Banks, Credit Markets, Economy, Financials, Geo-political, Gold, Markets, Monetary Policy, Strategy, US Stocks, wisdom | No Comments »
PIMCO Co-CEO: When Markets Collide
Sunday, August 31st, 2008
About a month ago, Charlie Rose interviewed PIMCO’s Mohamed El Erian. El Erian is one of the country’s most successful money managers. He’s the co-CEO of the Pacific Investment Management Company, better known as PIMCO which oversees more than 829 billion dollars. He previously led Harvard University’s endowment to substantial returns on investment. In the interview, which is available below, Charlie Rose speaks to him about his new book “When Markets Collide” and how he sees the global economy today.
View Part 1, Click Play
View Part 2, Click Play
View Part 3, Click Play
Tags: credit market, Derivatives, El-Erian, PIMCO
Posted in Banks, China, Credit Markets, Economy, Emerging Markets, Financials, Fixed Income, Gold, India, Investment Strategy, Markets, Monetary Policy | No Comments »
Hendry: Speculation is Dead, Gold is Heading to $600
Saturday, August 30th, 2008
As you know, GreenLightAdvisor.com is a huge fan of the outspoken Hugh Hendry, CIO, Eclectica Asset, who has been a unique, eloquent, and brash voice in this market. Its our sense that Hendry is also uniquely alone, and lucid, in the marketplace in terms of his outlook, and for this reason should be added to your must see/must listen to list.
click image to watch
The segment which aired August 19, 2008 on CNBC Europe, also contains midway, a terrific interview with GE CEO Jeff Immelt.
“There is no role for speculation or speculators today. This is kaput,” Hendry said. “If we were Second World War generals, we’ve exposed our flanks. We’ve been wiped out. This is about fundamentals … this is about losing money.”
As the crisis unfolds, the policymakers’ focus should shift from the threat of inflation to that of the world economic downturn, which could be more severe than economists anticipate, he said. (Watch Hendry’s interview below for more on the economy, inflation and commodities).
China, which many believe will balance out slowdowns elsewhere, will struggle if difficulties in the U.S. continue, while the current spike in producer prices is just a hangover from rising oil prices earlier this year, Hendry said.
“I fear that the central bankers of the world are fighting yesterday’s battle,” he said.
As for the banking sector, it is “insolvent,” Hendry said, adding he can’t tell just how low those stocks will go.
Tags: Banks, Commodities, Economy, Hugh Hendry, Monetary Policy, Recession
Posted in BRIC, Banks, Brazil, China, Commodities, Credit Markets, Crude Oil, Economy, Emerging Markets, Financials, Fixed Income, Gold, India, International Markets, Markets, inflation | No Comments »
Meet The Press: Treasury Secretary Henry Paulson
Sunday, August 10th, 2008
Treasury Secretary Henry Paulson gets grilled by Tom Brokaw — live from Beijing.
Running time, 07:36 minutes
Thanks to VJ for alerting TBP about this video, who posted the following comment:
“Brokaw repeatedly splashes Paulson in the face with reality on this morning’s Meet the Press: * Tells him the stimulus checks that his Treasury sent out “had about as much effect as a BB gun on a bear”. * Displayed his ‘CONTAINED’ quote up on the screen, “I don’t see [subprime mortgage market troubles] imposing a serious problem. I think it’s going to be largely contained.” * Showed the video of Chimpy saying that “Wall Street got drunk”. Paulson said that in 5 months, he exits, stage Right.”
Who knew Brokaw had the stones to grill a senior politico?
Tags: Credit, Markets, Video
Posted in Credit Markets, Economy, Financials, Markets | No Comments »
Video: Nouriel Roubini (3 Parts)
Friday, July 25th, 2008
Nouriel Roubini, NYU Stern School of Business, opines about the market, the credit crisis, and the housing market in this 3 part interview:
Bear Market Only Half Over, But It’s Not Armageddon
More Than $1 Trillion Needed to Solve Housing Crisis
‘They’re All Toast’: Roubini Says Brokers, Even Goldman, Can’t Stay Independent
Sources:
Video Interview on Tech Ticker: Roubini: “Bear Market Only Half Over, But It’s Not Armageddon”
Tags: Banks, Brokers, Economics, Financials, Housing Market, Nouriel Roubini, RGE Monitor
Posted in Credit Markets, Financials, Gold, Markets, Monetary Policy | No Comments »
Video: Faber Says Fannie, Freddie Should Split Up, Not Get Aid
Friday, July 25th, 2008
Investor Marc Faber, publisher of the Gloom, Boom & Doom Report, talks about the future of Fannie Mae and Freddie Mac, the global economy, and the outlook for stocks and commodities. Faber said Freddie Mac and Fannie Mae should close down their business or split into private companies and not get government aid.
click for video
00:00 “The world is in recession already.”
01:35 Earnings to “decelerate”; technology stocks
02:59 Need to close down or split Fannie, Freddie
05:11 Concerns about technology stocks
05:41 S&P 500 forecast; outlook for interest rates
07:50 “The Fed is totally ineffective.”
08:39 Outlook for oil prices, commodity markets
10:35 Credit crunch, impact on economy
11:24 Overseas interest in U.S. assets; China
13:46 U.S. resource companies “attractive” to Asia
14:47 Worst case: “colossal bust with inflation”
Source:
Faber Says Fannie, Freddie Should Split Up, Not Get Aid
Bloomberg, July 23, 2008 07:22 EDT
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=af89KR4uyEGI
Tags: Bail Out, Credit Crisis, Fannie Mae, Freddie Mac, Marc Faber
Posted in Banks, Commodities, Credit Markets, Financials, Geo-political, Gold, Markets | No Comments »
The Truth About Bear Stearns
Thursday, July 17th, 2008
Bryan Burrough, Vanity Fair, writes a stunning piece Bringing Down Bear Stearns, which details the events leading to the collapse of America’s 5th largest investment bank, and its Fed-orchestrated take-out by J. P. Morgan. The article provides a gripping, insider look at the storied investment bank’s shocking collapse, ultimately raising serious questions about who’s to blame. It is also now the fodder for the financial sector naked-shorting curbs that are slated to start next week. Put it in your must read pile.
It was an uneventful morning—at first. Molinaro sat in his sixth-floor corner office, overlooking Madison Avenue, catching up on paperwork after a week-long trip visiting European investors. Then, around 11, something happened. Exactly what, no one knows to this day. But Bear’s stock began to fall. It was then, questioning his trading desks downstairs, that Molinaro first heard the rumor: Bear was having liquidity troubles, Wall Street’s way of saying the firm was running out of money. Molinaro made a face. This was crazy. There was no liquidity problem. Bear had about $18 billion in cash reserves.
Yet the whiff of gossip Molinaro heard that morning was the first tiny ripple in what within hours would grow into a tidal wave of rumor and speculation that would crash down upon Bear Stearns and, in the span of one fateful week, destroy a firm that had thrived on Wall Street since its founding, in 1923.
The fall of Bear Stearns wasn’t just another financial collapse. There has never been anything on Wall Street to compare to it: a “run” on a major investment bank, caused in large part not by a criminal indictment or some mammoth quarterly loss but by rumor and innuendo that, as best one can tell, had little basis in fact. Bear had endured more than its share of self-inflicted wounds in the previous year, but there was no reason it had to die that week in March.
To watch an interview with Bryan Burrough, author of Barbarians at the Gate, and Bringing Down Bear Stearns, Click Here
Tags: Bear Stearns, Bryan Burrough, Molinaro, Rumors, Vanity Fair
Posted in Credit Markets, Financials, Markets | No Comments »
Hendry: Financials “Infected” by Bubble
Wednesday, July 2nd, 2008
Hugh Hendry, CEO, CIO, Eclectica Asset, guest hosted European Squawk Box this morning. A very informative interview with a bold discussion on what’s ailing the financial sector, and where Hendry, one of the UK’s top performing and most outspoken asset managers, is investing today.
Segment 1: http://www.cnbc.com/id/15840232?video=782713231
Segment 2: http://www.cnbc.com//id/25490573, includes CNBC Europe.
Hendry also sees few signs that the outlook is picking up for the US economy.
“I think we have to recognize the recessionary forces that are bringing to bear,” Hendry told CNBC. “Don’t fight that, just go with the flow of the relative momentum.”
Hendry said the outlook is particularly bleak for financial and technology stocks — the two largest components of the S&P 500 — which he said have both seen a bubble.
“When a sector becomes infected by a bubble…what history reveals is it takes 25 years to regain the highs that we saw in real terms,” he said.
(click on image to see video)
Hendry took the view that in a sustained market downturn, successful investing requires looking for more unconventional assets such as agriculture that have the potential to outperform the market.
“I think the most important thing to know is you don’t have to short this market,” Hendry said.
“If you want to stay involved the most important thing is make sure the stock you own is trending higher vis-à-vis the marketplace.”
This is one of the best interviews we’ve seen in a long time.
Tags: Agriculture, Commodities, Gold
Posted in Agriculture, Commodities, Credit Markets, Financials, Markets, Strategy | No Comments »
Where is the Boom, and the Doom?
Tuesday, July 1st, 2008
July 1, 2008 - The first half of this year has been chaotic and confusing for investors given the Subprime fiasco and rapid deterioration of fundamentals in the Banking and Finance sectors, the secular selloff in stocks globally, recession in the US, and soaring oil and commodity prices.
US Global Investors, an American mutual fund company, founded by Toronto native, Frank Holmes, interviews Dr. Marc Faber, author of the Gloom, Boom, and Doom Report, for 1:15 hrs in this highly informative webcast (courtesy of Investment Postcards) aptly titled, “Where is the Boom, Gloom and Doom?”
Please click here to listen to the webcast.
Source: US Global Investors, June 27, 2008.
Tags: BRIC, China, Commodities, Emerging Markets, Frank Holmes, GDP Growth, globalization, GloomBoomDoom, GreenLightAdvisor.com, India, Infrastructure, Marc Faber, oil, urbanization
Posted in Agriculture, BRIC, Brazil, China, Commodities, Credit Markets, Eastern Europe, Emerging Markets, Financials, India, Markets, energy | No Comments »
The Bonfire of the Vanities, the Sequel
Thursday, June 26th, 2008
June 26, 2008 - Andrew Ross Sorkin, of the New York Times, writes about how prophetic Tom Wolfe’s declaration was on the day of the Blackstone debut: “We may be witnessing the end of capitalism as we know it.”
When you get to the end of an era, marking the timeline with watershed events is always therapeutic. Here are some excerpts from Sorkin’s NYTimes article:
… Mr. Wolfe must be in attendance — was that the Blackstone Group, the big private equity firm, was minutes away from going public, the largest initial public offering in the United States since 2002. (At the time, he told The New York Observer that a friend was giving him a tour.)
Just then, a CNBC reporter pulled Mr. Wolfe aside to ask him what he made of all the hubbub. Mr. Wolfe paused for a moment to contemplate his answer.
And then, with a wry smile, he delivered a prophetic declaration: “We may be witnessing the end of capitalism as we know it.”
One year later …
Blackstone’s stock has gone nowhere but down since it went public, dropping nearly 50 percent from its high the day it started trading. But that’s the least of it.
The once mighty Wall Street investment banks have been brought to their knees, sending out pink slips to more than 83,000 employees worldwide, racking up billions of dollars in losses as a results of their foolish forays into subprime mortgages. Bear Stearns all but went out of business before being “saved.” Some hedge funds have gone belly up.
Those lords of private equity, many of which were preparing to follow Blackstone into the public markets, have been put on semipermanent hiatus. (Kohlberg Kravis Roberts & Company refuses to withdraw its I.P.O filing, almost a year after submitting it, with no immediate hope in sight.) Their deal-making has all but stopped.
As Mr. Wolfe nicely put it, “It sounds like even the firms that aren’t in trouble are in trouble.”
And, what of credit …
And yet, there has been a perverse, and misguided, optimism that somehow the situation will improve in the second half of 2008. How? Sure, the big banks may take fewer write-downs — but there is no way of knowing that. The news a few days ago that the big bond insurers were being downgraded will create new havoc — and losses — for holders of toxic subprime debt. Indeed, the bigger issue is what kind of business is going to generate any return for its investors. When you can’t lend or trade — and you can’t invest with the leverage that juiced returns to support seven- and eight-figure bonuses — how exactly are you going to make money?
“It has always interested me that the word ‘credit’ comes from the word ‘credere,’ which means ‘to believe,’ ” Mr. Wolfe said. “It only works if people believe in it.” He’s right, of course: one reason the credit markets have tanked is that people don’t believe anymore.
Complete Article:
A “Bonfire” Returns as Heartburn, Andrew Ross Sorkin, NYTimes, June 24, 2008
Tags: Andrew Ross Sorkin, Banks, Bear Stearns, Blackstone, capitalism, Dealbook, Financials, Markets, Tom Wolfe
Posted in Banks, Credit Markets, Economy, Financials, Markets, Satire, US Stocks | No Comments »
Interview: Nick Barisheff, Bullion Management Group Inc.
Tuesday, June 17th, 2008
Exclusive Interview
Nick Barisheff,
President and CEO,
Bullion Management Group Inc.
This week we interview Mr. Nick Barisheff, President & CEO, Bullion Management Group, and discuss with him the importance of gold bullion. Mr. Barisheff founded Bullion Management Group Inc. in 1997, and is the portfolio manager of BMG BullionFund, Canada’s only open-ended fund investing purely in gold, silver, and platinum bullion.
For a PDF version, click here:[PDF] Interview with Nick Barisheff, BMG Inc. Here is the interview:
GreenLightAdvisor.com: What’s the most important thing people need to understand about gold?
Nick Barisheff: Many people think gold is a commodity like copper, zinc or pork bellies, but it has 3,000 years of history as money. It was money that no government created by edict. It was just adopted for usage by itself, and it was and still is the best form of money. Currently, we have a 37-year global experiment in paper money. All prior paper money experiments ended in hyperinflation, with the currencies becoming worthless. All previous hyperinflations were contained within a single country, but this time, because of the reserve status of the US dollar, it is likely to be global in nature.
Right now, the price of gold is rising while most currencies are losing purchasing power as well as their value against gold. Gold comes back into its monetary role when there’s a loss of confidence in the financial system or in paper money, and that’s when people are attracted to it.
Before 1971, the monetary system was governed by the Bretton Woods Agreement. Under that agreement, the US dollar was backed by gold, and other currencies were pegged to the dollar. Other countries could trade their US dollars for gold. Essentially, US gold indirectly backed all other currencies. Then things changed. As the US was getting into the Vietnam War and into President Johnson’s policy of guns and butter, US gold reserves started declining. Countries holding dollars were presenting their US dollars and asking for gold in return, and that led to US gold reserves dropping from a peak of 22,000 tonnes to 8,800 tonnes. On August 15, 1971, President Nixon “closed the gold window” and stopped the exchange of US dollars for gold. Closing the gold window was a euphemism, but basically the US declared bankruptcy. When you can’t meet your obligations when they are due, that’s what it is. So from that point in time, we’ve had 37 years where the entire world has been on a global fiat currency monetary system.
Since 1971, when the dollar was freed from the constraints imposed on a currency backed by gold, the US has experienced increasing federal government and current account deficits. The US is now borrowing $800 billion annually to fund its consumption of foreign-made goods and commodities, and the federal government is running a deficit of almost $350 billion. At some point, foreigners will become unwilling to continue funding US expenditures, forcing the Federal Reserve to expand the money supply at a faster pace. This will result in rising inflation, rising interest rates and a continuous decline in the US dollar.
GLA: We’ve had the fastest money supply growth in almost 40 years that’s resulting in increased inflation. Why would an investor want to go into T-bills, given that interest rates don’t even cover half of the stated inflation rate, which we know isn’t even the real inflation rate?
NB: For the first time in history, we have an unlimited ability, by all central banks, to print, however much money we want, so to speak. Apart from the US M3 money supply growing at about 20%, we also have India and China growing theirs at about the same rate. China is at 18%, India is at 20%, and Russia is at 45%. As China or India sell goods to the US, they take in US dollars and they print yuan or rupees against those US dollars. Japan’s a little different; there, individuals and corporations can take their US dollars and buy US assets themselves. In China you have to turn your US dollars in to the central bank.
In today’s inflationary environment, many who invest in fixed income investment do not appreciate that instead of being “safe” investments, they are in fact guaranteed losses of purchasing power when you take inflation and taxation into account. We have done some analysis into a systematic withdrawal from our Fund for those investors requiring income. Based on the fact that precious metals have a long track record of staying ahead of inflation, an investor would be far better off in precious metals in terms of maintaining principal after inflation and having more after-tax cash flow to spend.
GLA: What did you think of John Embry’s (Sprott Asset Management) recent article about the manipulation of the price of gold? His assertion was that the central banks are deliberately keeping gold below $1,000 per ounce.
NB: John and Eric Sprott have recently written an extensive report called Not Free, Not Fair. The report brings forth a great deal of evidence that the precious metals markets may be manipulated. While it may seem like there’s a conspiracy to suppress the gold price, I think it’s simpler than that. It’s a well know fact that it is the job of central banks to manage their country’s currency, that’s part of their mandate. Central banks understand that gold is a currency, but one that they can’t expand as easily as paper money. I don’t think there is any lack of understanding on the part of central bankers that gold is an alternative currency.
GLA: Isn’t gold considered to be just a commodity with no real monetary role anymore?
NB: I’d like to refer to an article by Tony Fell , and it’s particularly interesting, given that he was chairman of RBC Capital Markets at the time of writing. He talks about how gold has three attributes: it’s a commodity, a store of value and a currency. He says so many people now think of gold only as a commodity or jewellery, or as an archaic relic, that there’s a feeling of “who needs it anymore?” People don’t think of it as money.
However, the daily sales volume gives a conclusive indicator that gold is much more than an industrial commodity. The physical turnover of gold by members of the UK’s London Bullion Marketing Association is about *$25 billion per day. We’re talking about net turnover between the LBMA members. The volume is estimated at 7-10 times that amount.
It’s pretty clear that these are currency transactions. That’s why gold, silver and platinum trade on the currency desks of all the banks and brokerages, not the commodity desks.
What people need to know is that gold is a currency [like dollars or euros or yen]. Gold is not trading at these volumes as a commodity or as some archaic relic.
GLA: What are your thoughts on technical analysis, given that gold is a currency?
NB: Technical analysis works if you’re looking at widely distributed stocks like the S&P 500, for example, where there are many, many transactions that accurately reflect public sentiment. The price of gold, however, can be impacted by one country, or one very wealthy individual who wakes up one morning and decides to buy, and then you can throw the charts away. Or when a government decides to sell or a government intervenes. I’ve looked at technical analysis for gold in the past and tried to back-test with various techniques and found that they don’t work more often than they do. In the most recent case, there is no justification for the drop in gold price; it should have been rising because nothing has fundamentally changed. In fact, the fundamentals got worse and the gold price should have rallied. None of the problems went away; nothing was solved; the conditions are as bad as or worse than they were previously. So the drop in gold’s price has been a false decline.
GLA: So, it’s the value of paper currency that changes, not the value of gold [so to speak]?
NB: One of the attributes of gold as money is that you can’t simply create it at will, like paper money. It’s no one else’s promise of performance and it’s not someone else’s liability. It’s not going to zero, no matter what. And, whether we’re moving the measuring stick of inflation or deflation really doesn’t matter, because the way gold should be measured is in terms of purchasing power. It doesn’t matter if gold is priced at $1,000 in paper money per ounce or $2 in paper money per ounce, it will retain its purchasing power in either circumstance.
The first important step in the big picture of understanding gold is that it is a store of wealth with a 3,000 year history, and it’s money. Over the long term, it retains its purchasing power. That’s why they say that an ounce of gold will always buy a man’s suit.
Apart from that, the US dollar is down 85% in purchasing power since 1971. In 1971 you could buy a car with 100 ounces of gold; a car was about $3,500 and gold was $35 an ounce. With 1,000 ounces, or about $35,000, you could buy a house. Today, you could buy several cars or a luxury car with 100 ounces, and a mansion with 1,000 ounces. You could also buy more units of the Dow Jones Industrial Average with your ounce today than you could in 1971. So that ounce has preserved its purchasing power while currencies have lost over 80% of their value.
GLA: Apparently, in the last 40 or 50 years, there’s only been three years that there was net selling by gold investors, three years out of almost half a century. Is this true?
NB: People who hold bullion tend to hold it for a long time, as the core of their entire wealth. It’s not sold once you understand its basic characteristics, because you have to have a reason to sell it, you have to use it to buy something better. I tend to look at investment performance as to whether I end up with more gold ounces or less gold ounces rather than percentage returns; you get a different conclusion then. For example, if you had invested 44 ounces in the Dow in 2000, you would now get back only 14 ounces.
This current cycle is not a conventional bull market in precious metals; I think we’re in the midst of a change in the global monetary system. This is not going to be like a typical commodity cycle where we go up for four years and down for four years; I think we’re witnessing a transition into another monetary system, whatever form that may take. At the end of this period the US dollar will no longer be the world’s reserve currency.
GLA: What happens if the US dollar ceases to be the standard?
NB: What happened when the British pound ceased to be the standard? It just ceased to be the standard. Its decline in value is still ongoing. It’s happened to every empire throughout history: the British, the Roman, the Greek, the Spanish, the Persian, and the Chinese. Every single empire ended up debasing their currency in order to maintain the empire.
GLA: Is gold likely to increase further going forward or has it topped and investors have missed out?
Currently, we have a lot of noise in terms of the credit contraction, real estate bubble, record high debt at all levels, dangerous derivatives vulnerabilities and unsustainable US current account and trade deficits. These could still blow up into bigger problems at any time. However let’s hope they get resolved or at the very least postponed somehow.
But there are two factors that are not changeable in all of this.
First: The US has to print money on an accelerating basis. Has to – because of the underfunded Social Security and Medicare obligations – which at present are about $60 trillion. If you took all of the net earnings of US individuals and companies it would not be enough to pay that off. You can’t tax people enough and politically you cannot tell everybody, “Sorry, we can’t give you your Social Security – we don’t have the money. And no Medicare either.” So they have to keep printing money.
Second: The issue of Peak Oil – it used to be a debate as to when the production of oil would peak. Now it looks like that has already happened, in March 2006. As a result we have a situation where oil production is declining while demand is increasing, particularly from India and China. This will result in ever-increasing oil prices, and also increasing prices for almost every product and service.
As these two forces – increased money printing and peak oil – interact, the result is a declining dollar alongside constantly increasing oil prices. This leads to even greater oil price increases in an effort to offset the dollar decline. These two highly inflationary factors are working in tandem, and they can’t be changed.
Therefore, as oil rises and the dollar declines, commodities – and particularly precious metals – will continue to rise.
GLA: What’s the relationship between oil and gold?
NB: There’s not necessarily a great deal of correlation between the two in the short term. However, in the longer term, the correlation has been in the order of about 16 barrels of oil for every ounce of gold.
GLA: Has that been consistent long term and what is the outlook for precious metals?
NB: With only short-term fluctuations, this ratio has held up over the long term. At this point the price of gold is undervalued compared to the price of oil. Gold should be closer to $1,500 an ounce if you use this measure.
On top of this kind of inflationary issue eroding financial confidence, we’re at peak production in gold. When the price of gold was low, miners employed high-grading to get the most easily attainable gold out of the ground. As the price rises, miners resort to lower-grade mining, which has become worthwhile – but in some cases you have to sift through tonnes of ore for each ounce.
Platinum, for instance; it takes six months to get an ounce of platinum out of roughly 10,000 tonnes of ore. Right now, almost all the platinum produced originates in South Africa, and the mines are miles underground, and electricity intensive. Power shortages in South Africa are interfering with production and slowing things down. All these forces are coming together, slowing production and driving up prices.
With silver, most of the aboveground reserves have been depleted – most of the silver that is produced is consumed each and every year. Silver also has two demand drivers – monetary and industrial. The number of industrial applications are growing every year while the monetary demand has also been growing in the past few years. It is important to remember that “silver” means “money” in several languages.
GLA: Why is gold so important as an element of diversification for investors?
NB: Take a look at the cycle from 1968 to 1982 – during that time it took stocks the whole 14 years to break even. If you factor inflation into it, it actually took until 1995. So stocks didn’t look so good in the past cycle, and they are not looking very good now. The DJIA is well below its inflation-adjusted highs. Its performance is much worse when measured in gold ounces. The DJIA has declined from a high of 44 ounces of gold in 2000 to about 14 today, but if you look at a chart the Dow appears to be at new highs. It’s like taking the Zimbabwe stock market and saying, “Look how well Zimbabwean stocks have done; the market was up 8,000%.” But what if we adjust for the 100,000% inflation in that country? Not so good, is it?
BMG BullionFund is internally diversified. We buy physical gold, platinum, and silver in equal amounts. While some people like to focus on gold, they would miss out on the fact that silver and platinum have both outperformed gold since the beginning of this cycle in 2002.
GLA: What do you do about inflation?
NB: First, it is important to look at real inflation. What is real inflation? The real number is around 9%, not 3%. The calculations the government uses for the Consumer Price Index (CPI) are really meaningless as a true inflation indicator. The real definition of inflation is an increase in the money supply that leads to an increase in prices. Prices do not increase on their own unless you have a shortage; when you increase the money supply, what you’re really doing is debasing the currency, and as the purchasing power of the currency declines prices appear to be rising. So with the US money supply (M3) growing at 20%, Canada’s growing at 9%, and most other countries’ growing at around 15%, that’s going to result in rising prices and real inflation.
If you take real inflation into account, Wainwright Economics suggests that the appropriate bullion allocation for a bond investor’s portfolio is 18%, and for the equity investor’s portfolio 40%, and that’s just to break even with inflation. Although this may sound incredible, think of the 1970s. How much bullion was required just to break even in an equity portfolio? Bullion went up 2,300%, while equities were flat on a nominal basis. Inflation was 15%.
So without even getting wrapped up in a discussion about the complex subject of money, those two points are fairly straightforward. Ibbotson Associates confirmed that precious metals are the most negatively correlated asset class to the traditional financial assets, so it gives the biggest bang for the buck for the least amount of allocation. In the process you also achieve a more balanced, diversified portfolio. Advisors would do well to have an allocation to precious metals to protect their clients from under-diversification.
GLA: Do you think this pullback in gold is an opportunity to add to positions at this time?
NB: Yes as long as there hasn’t been a major change in the fundamentals that drive the price. When these pullbacks occur, you always get some technical interpretations, whether it’s conventional technical analysis or Elliot Wave, coming out with the idea that the bull market in precious metals is over and that it’s now going down forever and so on.
When these things happen, you have to ask if anything changed fundamentally to justify that decline. If nothing changed fundamentally, the only conclusion you can draw is that something’s wrong in the technical interpretations. In all likelihood the technical interpretation is wrong because there’s been an intervention by monetary authorities. Technical analysis only works when the markets are working freely.
GLA: Well, whatever it is they’re trying to do to knock the price down, once again, he who wins in the end is he who has the most ounces and the most shares. It’s got to have been a good year for you with gold prices up 10%, silver up close to 19% and platinum prices over 30%.
NB: Yes, it has. We have grown assets year-over-year by 80% this year alone, so it’s been a substantial increase, and performance-wise, we’re about 20% year-to-date.
GLA: Thank you very much for sharing your knowledge with us.
*All amounts expressed in US dollars, unless otherwise noted.
For a PDF version, click here: [PDF] Interview with Nick Barisheff, BMG Inc.
Tags: Barisheff, BMG Inc., Bullion, fiat, Gold, inflation, Markets, money, Platinum, Silver, supply, US Dollar
Posted in China, Commodities, Credit Markets, Economy, Gold, India, Markets, inflation | 1 Comment »
Chart: Loss of Purchasing Power and Money Supply Growth
Monday, June 9th, 2008
Courtesy: Nick Barisheff, Bullion Management Group Inc.
The above chart demonstrates the relationship between the increase in money supply as measure by M3 and the loss of purchasing power of the US dollar. Using the official CPI the US dollar has lost about 82% of its value while the total money supply has climbed from about $800 billion in 1970 to $13 trillion today. The annual increases in total M3 are now more than the total money supply was in 1970. If you use the old formula for the calculation of the CPI, based on a fixed basket of goods and services, without hedonic adjustments or substitutions, the US dollar has lost about 95% of its purchasing power. For a detailed explanation of the changes that have been made to the methodology now used to calculate the CPI see http://www.shadowstats.com/article/56.
http://www.bmsinc.ca/images/graphs/purchaseloss-l.jpg
Tags: Barisheff, BMG Inc., Bullion, CPI, M3 Supply Growth, Markets, US Dollar
Posted in CPI, Credit Markets, Economy, Gold, Markets, inflation | No Comments »
When Markets Collide: Barron’s interviews el-Erian, Pimco’s co-CEO
Sunday, June 8th, 2008
June 2, 2008 - Pimco’s Co-CEO and co-CIO, Mohamed el-Erian discusses his new book, When Markets Collide, with Barron’s, which puts today’s market accidents in a unique perspective. Both the Barron’s interview and his book are must reads. Here is an excerpt:
What are the biggest things people missed?
Under a “just-in-time” risk-management mindset, people waited for the turn before taking risk off the table. Hubris took over. People believed these new derivative products would allow you to reposition your portfolio after the turn as opposed to preemptively. But that wasn’t a possibility with credit products and subprime, and losses were huge. People misinterpreted what these instruments can do, and didn’t retool significantly.
Who’s the poster boy for this way of thinking?
The book quotes Chuck Prince, [the former CEO] at Citibank, on the front page of the Financial Times, words to the effect that when the music stops it will be messy, but as long as it’s playing he’s on the dance floor dancing. Within weeks the music stopped and people couldn’t get off the dance floor. In many of these sophisticated firms, the traders did things that neither the middle nor the back office could support, and the result was very big losses. It’s like pipes in your house that are very old. Every once in a while, one will rupture below and you have a very messy cleanup.
When Markets Collide: Investment Strategies for the Age of Global Economic Change
Tags: Barron's, Chuck Prince, Citigroup, Economic Change, El-Erian, Markets, PIMCO, Risk, When Markets Collide
Posted in Credit Markets, Economy, Financials, Markets, Strategy, inflation | No Comments »
Don Coxe’s Recommendations, Basic Points (05/30/2008)
Tuesday, June 3rd, 2008
June 3, 2008 – Here we feature the recommendations of Don Coxe, BMO Capital’s Chief Investment Strategist.
As usual, his paragraphs are eloquent and provide significant guidance. Don Coxe’s Investment Recommendations, excerpted from Basic Points, Traders of the Lost Arc, May 30, 2008.
1. Assume that the leading US forecasters on the US economy will be cutting back on their economic and earnings forecasts. You could be pleasantly surprised, but you’ll more likely feel the other kind of pleasure—the sensation of being right.
2. Assume that the leading global forecasters will be cutting back on their economic and earnings forecasts. The actual outcomes will doubtless vary widely, but enough to challenge the performances of global stock indices.
3. Until the US financial stocks stop declining, rallies in the S&P or Nasdaq are selling opportunities. If the US banks still have problems when they can pledge their otherwise-unmarketable merchandise to borrow T-Bills, then those problems aren’t going away in a hurry. If the BKX index breaks 75, assume that the bad news is about to become much worse.
4. Gold and gold stocks become more attractive each week that global food and fuel costs rise along with writedowns on bank balance sheets.
5. Natural gas prices have benefited from the unusually cold winter in the Northern Hemisphere. They could be hurt if the cooling continues through July—when air conditioning demand peaks. Nevertheless, we believe the natural-gas-oriented stocks are fundamentally attractive.
6. The dollar failed to rise significantly even as US stocks were rallying and economic forecasters were declaring that the worst of the housing problems were over. If it goes to a new low, it will drive even more global investment funds into commodities and/or commodity stocks.
7. Wheat is the only grain to have experienced a dramatic rise and fall—a short squeeze rally, followed by a collapse—amid evidence of a huge winter wheat crop. Otherwise, the grains and oilseeds have been wellbehaved, within strong uptrends. Build exposure to the leading agricultural stocks.
8. The risks to global economic growth from stagflationary food and fuel conditions continue to increase. The commodity class whose outlook is most negatively affected by such perceptions is the base metal and steel group. We believe those stocks are the only truly vulnerable commodity sector for the balance of this year—barring a sudden, Black Swan-style, reversal in oil.
9. We didn’t expect to see spot oil at $133. Nor did we expect the oil futures curve to move—albeit briefly—into contango. As this is written, oil for delivery in 2016 trades slightly above spot crude. If this move toward contango accelerates, expect response from the Fed and the ECB. Within the oil group, emphasize producers with long-lived reserves, and underweight the Big Oil companies that are failing to replace their production.
10. The only thing more bearish for nominal bond portfolios than a central bank that doesn’t fight inflation is a central bank that suddenly discovers it must stop inflation in its tracks. That’s what happened when Paul Volcker took charge after the ghastly mistakes of his predecessors. We shall become interested in nominal long-term bonds again when Bernanke & Co. Drive short rates strongly higher. In the meantime, investors should emphasize real return bonds.
Tags: balance sheets, Banks, Basic Points, Bernanke, Black Swan, Commodities, contango, Crude Oil, Dollar, Don Coxe, ECB, Fed, financial stocks, Food prices, Gold Bullion, Grain, interest rates, Markets, oil, Traders of the Lost Arc
Posted in CPI, Canadian Stocks, Commodities, Credit Markets, Crude Oil, Economy, Emerging Markets, Financials, Gold, International Markets, Markets, Oil & Gas, Strategy, US Stocks, contango, inflation, wisdom | 1 Comment »
Whitney: Credit Crisis Will Run Into 2009
Wednesday, May 28th, 2008
Liz Moyer, Forbes
Bank analyst Meredith Whitney says the credit crisis will extend well into 2009, if not beyond. This means more pressure on financial stocks and bank balance sheets; banks have added $25 billion to loss reserves so far, but face mounting consumer credit losses in a second wave of the crisis that some bank executives have acknowledged will be worse than the first, which has cost hundreds of billions of dollars in write-downs and losses.
Wall Street’s originate-to-distribute model, designed to mitigate risk by spreading it around, actually exacerbated those risks. It encouraged banks to loosen lending standards because more loan volume meant higher profits; then it led to over-leverage, and finally to complacency. More and more paper dollars were created for trading on the assumption that housing prices would always go up. The first wave of the crisis affected trading books, but the second will hit lending. As long as housing values were rising, borrowers could refinance in perpetuity to avoid default. Losses mounted when the refinancing option disappeared. Banks relied too heavily on the securitization markets to boost lending to consumers, particularly in the form of mortgages.
In time, some lending will return, but the sky-high revenues of recent years will be hard to reclaim, says Whitney. The banking sector’s pullback in lending will cause further painful losses. Whitney believes banks will have to reserve an additional $170 billion through the end of next year just to keep up with estimated loan losses. “New and unforeseen strains on consumer liquidity will push more consumers into precarious credit positions and cause consumer credit losses to be far worse than what is currently estimated, even by the most draconian of investors,” Whitney says.
http://www.forbes.com/2008/05/20/whitney-banks-credit-biz-wall-cx_lm_0520banks_print.html
Hat Tip: BMS Inc.
Tags: Analyst, Banks, CIBC, Credit Crisis, credit market, Economy, Markets, Meredith Whitney, Oppenheimer
Posted in Credit Markets, Economy, Financials, Markets | No Comments »
Moody’s ‘AAA’ Mistake
Wednesday, May 21st, 2008
FT Alphaville exclusive: Moody’s error gave top ratings to debt products
Moody’s awarded incorrect triple A ratings to billions of dollars worth of a type of complex debt product due to a bug in its computer models, an Financial Times investigation has discovered.
Internal Moody’s documents seen by the FT show that some senior staff within the credit agency knew early in 2007 that products rated the previous year had received top-notch triple A ratings and that, after a computer coding error was corrected, their ratings should have been up to four notches lower.
News of the coding error comes as ratings agencies are under pressure from regulators and governments, who see failings in the rating of complex structured debt as an integral part of the financial crisis. While coding errors do occur there is no record of one being so significant.
Moody’s said it was “conducting a thorough review” of the rating of the constant proportion debt obligations - derivative instruments conceived at the height of the credit bubble that appeared to promise investors very high returns with little risk. Moody’s is also reviewing what disclosure of the error was made.
The products were designed for institutional investors. In the recent credit market turmoil, those who still hold the products will have suffered some paper losses while others who have bailed out have lost up to 60 per cent of their investment.
On discovering the error early in 2007, Moody’s corrected the coding glitch and instituted methodology changes. One document seen by the FT says “the impact of our code issue after those improvements in the model is then reduced”. The products remained triple A until January this year when, amid general market declines, they were downgraded several notches.
In a statement to the FT, Moody’s said: “Moody’s regularly changes its analytical models and enhances its methodologies for a variety of reasons, including to reflect changing credit conditions and outlooks. In addition, Moody’s has adjusted its analytical models on the infrequent occasions that errors have been detected.
“However, it would be inconsistent with Moody’s analytical standards and company policies to change methodologies in an effort to mask errors. The integrity of our ratings and rating methodologies is extremely important to us, and we take seriously the questions raised about European CPDOs. We are therefore conducting a thorough review of this matter.”
Credit ratings are hugely important within the financial system because many investors - such as pension funds, insurance companies and banks - use them as a yardstick either to restrict the kinds of products they buy, or to decide how much capital they need to hold against them.
The world’s other major credit agency, Standard and Poor’s, was the first to award triple A status to CPDOs but many investors require ratings from two agencies before they invest so the Moody’s involvement supplied that crucial second rating.
S&P stood by its ratings, saying: “Our model for rating CPDOs was developed independently and, like our other ratings models, was made widely available to the market. We continue to closely monitor the performance of these securities in light of the extreme volatility in CDS prices and may make further adjustments to our assumptions and rating opinions if we think that is appropriate.”
Related links: CPDOs expose ratings flaw at Moodys - FT.com
Tags: credit market, Economy, Fixed Income, Markets
Posted in Credit Markets, Economy, Fixed Income, Markets, inflation | No Comments »
Derek Webb Interview, Part 1 - Outlook and Investment Strategy
Tuesday, May 13th, 2008
May 12, 2008 - GreenLightAdvisor.com recently interviewed [Part 1] Derek Webb, Portfolio Manager, Webb Asset Management. Here are some excerpts from Part 1, in which Mr. Webb shares his outlook and his thoughts about how he trades in volatile and range bound markets. Here are some excerpts:
Regarding the Fed’s recent moves…
Anytime the Fed puts this much liquidity in to the system it’s like blowing into a pipe; all that pressure has to go somewhere—When the Fed drops hay bails of money out of the helicopter, those hay bails of money are like molecules. They have to attach themselves to something.
When you look at the huge amount of money put into the system because of the Long Term Capital Meltdown and Russia—now that liquidity event created the internet bubble. This is no different.
All of this liquidity is going to find a home. I’ll tell you that I think it’s finding its home right now. Fundamentally I am very bullish because of all this liquidity.
On his investment focus…
Through our quantitative homework we found that the delta or change in earnings is the only thing that’s predictable in terms of determining the direction of a stock’s price. That’s all we focus on; that’s all our research focuses on. So, where is that delta accelerating right now—it’s in commodities. Agriculture is number one, Oil and gas are number two, some base metals number three, like copper—The shine has kind of come out of precious metals in the short run, but I don’t think that trade’s over, I think it’s more of a seasonal thing right now.
On when to sell:
[Firstly], If we saw one analyst lower EPS forecasts for Potash, for example, WE WOULD BE OUT. Analysts are out there doing site visits. They’re doing their homework – as long as they’re raising their numbers we’re going to be long. As soon as we would see them hold steady or lower their numbers we would be out.
Secondly, if the earnings themselves just start to de-accelerate, meaning we are looking at a smooth line of earnings, not to get complicated, but we look from 3 quarters ago out to the next quarter and if that rate of change de-accelerates were out.
Thirdly, one negative earnings surprise and we’re out.
And lastly, if the relative strength indicator of the stock de-accelerates were out.
We’re ruthless on all our positions.
And lastly, if the relative strength indicator of the stock de-accelerates were out.
PART 1: Derek Webb Interview, GreenLightAdvisor.com.
Visit Webb Asset Management for more information.
Tags: Agriculture, bifurcation, Derek Webb, Fed, Investment Strategy, liquidity, Markets, Metals, Monetary Policy, Oil and Gas, Webb Asset Management
Posted in Agriculture, Banks, Canadian Stocks, Commodities, Credit Markets, Crude Oil, Economy, Financials, Gold, Markets, Oil & Gas, inflation | No Comments »
Chart: US M3 Money Supply Growth
Wednesday, May 7th, 2008
May 7, 2008 - Courtesy: Nick Barisheff, The Bullion Buzz Newsletter, Bullion Management Group Inc.
US M3 Money Supply Growth
M3, which is no longer published by the US Federal Reserve, is the broadest measure of money supply. It includes M2, as well as certain accounts held by banks and thrift institutions (including balances in money market mutual funds held by institutional investors). Since March 2006, M3b, a reconstructed version of M3, has grown by nearly $4 trillion, from approximately $10.5 trillion to about $14.2 trillion. To put this in perspective, total M3 in 1971, when the US cut the dollar’s link to gold, was less than $800 billion. The current annualized rate of increase is now about 20%. Since the classical definition of inflation is an increase in money supply that leads to an increase in goods and services, the price increases we are now experiencing are destined to accelerate. Given these inflation realities, portfolios need to be rebalanced to ensure that purchasing power is preserved. As precious metals are proven hedges for inflation, portfolio holdings should be rebalanced to ensure adequate allocations are held.
http://www.nowandfutures.com/key_stats.html
Tags: Currency, Economy, inflation, M3, M3 Money Supply Growth, precious metals
Posted in