Archive for the ‘inflation’ Category
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 »
BCA: Is China Losing Competitiveness
Tuesday, August 26th, 2008
There is little evidence to suggest that Chinese manufacturing competitiveness has deteriorated meaningfully.
The mainstream media has been filled with reports about Chinese companies closing production facilities due to rising costs. Some analysts have concluded that China is quickly losing its competitive edge, and international producers are moving to other countries. In reality, there has been no meaningful decline of China’s export market share, particularly when exports of oil-producing countries are excluded. Indeed, China’s slowing export growth in recent months is a reflection of changing global market conditions rather than a deterioration in Chinese producers’ competitiveness. Rising input costs due to higher commodities prices are not unique to China: manufacturers around the world are suffering similar cost pressures and margin squeezes. In addition, the RMB’s appreciation has not been excessive, rising at a 3.5% annual rate in trade-weighted terms since its 2005 de-peg from the U.S. dollar. The trade-weighted yuan is still below its 2002 levels, when the economy was struggling with a deflationary shock. Finally, recent weakness in the export sector can be partially attributed to the Chinese government’s voluntary export restraints, which have been part of the country’s broader growth-rebalancing strategy. These policies could be removed any time if excessive weakness develops. Already, the government has increased VAT rebates for textile and garment exporters since the beginning of the month.
Posted in China, Commodities, Economy, Emerging Markets, FXI, FXP, International Markets, Markets, Russia, inflation | No Comments »
Cost of Rising Commodities Falls
Thursday, August 14th, 2008
Last week, we highlighted that the rising prices of commodities during 2008 was costing the average American an extra $1.77 per day this year, which was down sharply from the $4.77 we saw in early July when oil and most grains were peaking. In the chart below we calculated the ‘08 price change of the major food and energy commodities in the CRB index (Corn, Soy, Wheat, Cattle, Hogs, Oil and Natural Gas) and multiplied the changes by the annual per capita consumption of each item. While this method may oversimplify the actual costs, it provides a good idea of how changes in commodity prices have impacted consumers’ wallets. As shown, this week we have seen the daily increase in food and energy prices in ‘08 decline to $1.37, which is now at a four-month low. A decline from $4.77 to $1.37 per day in a little more than a month is huge for consumers.
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Courtesy: Bespoke Investment Group
Posted in Markets, inflation | No Comments »
UPS Hopes China Ads Deliver
Sunday, August 10th, 2008
Check out the new ‘China Only’ UPS ads, that we will never see on TV in North America. UPS is really pinning its hopes on these, now ubiquitous, China ads. Judging by the message of the ads, it appears that UPS understands that what the Chinese revere is good ol’ American ingenuity, probably more than American culture. You don’t need to understand Chinese to get it. China is an integral part of America’s corporate growth strategy.
In recent weeks, UPS’s ads have become ubiquitous in China, showing up on buses and subways, on TV and radio, and on the luggage carousels at Beijing International Airport. The tagline on the billboards targets China’s emerging business managers: “If UPS can fully assist the Beijing 2008 Olympics, they can fully assist you.”
Its not just advertising or talk. The company is putting its money where its mouth is:
UPS has been planning for this for three years, timing all the traffic lights along its Beijing delivery routes and measuring the height and width of every bridge, tunnel and overpass. The company estimates it will have handled 19 million pieces of equipment and other items by the end of the Games, using resources that include 2,000 employees and 217 trucks.
The target isn’t TNT, its China, and China acquisitions.
Source: WSJ.com. Alex Roth, August 11, 2008, UPS Hopes China Ads Deliver
Posted in Gold, Markets, inflation | No Comments »
Oil and U.S. Banks
Friday, July 25th, 2008
(by John Authers, FT.com) Bastille Day, July 14, is a good day for an old order to come to a sudden and brutal end. And on July 14, the blade came down on the phenomenally successful “buy oil, sell financials” trade.
This trade, popular with hedge funds, offered a rare way to make money this year. It exploited the credit crisis and the response it provoked from the Federal Reserve. Investors deserted banks in the US (and Europe to a lesser extent) and bet that liquidity would instead flow to oil. As higher oil prices made i
t harder to aid banks with lower rates, and intensified pressure on banks’ customers, it was self-reinforcing.
By July 14, a trade of buying crude oil futures on Nymex while selling short the KBW index of US commercial banks would have made a profit of 168 per cent for the year. Even if we substitute the broader MSCI world financials index for the KBW, which covers the banks most exposed to US housing, the trade had made 114 per cent.
Then, banks bounced while oil dropped 15 per cent. The trade, using the KBW index, lost 35 per cent in the six days after Bastille Day (20.7 per cent using the MSCI world financials index).
This plunge was also self-reinforcing, in a different way. Traders covering their short positions by buying back bank stocks may have funded this by selling their positions in oil.
Note, however, that anybody who made the “long oil/short US banks” trade at the beginning of the year is still sitting on a gain of 74 per cent, much the same as they were six weeks ago. This has not hurt that much.
With the trade back to its level of early June, it appears, thankfully, that we can chalk up the extremes for banks and oil in the weeks before Bastille Day to speculative “piling on”.
But traders now have to find a new way to make money. And the world must still contend with the strong fundamental reasons for high oil prices and cheap US bank stocks.
Tags: Commodities, Credit Markets, FT.com, John Authers, kbw, long oil, Nymex, oil, short banks, Trading, US Banks
Posted in Commodities, Financials, Markets, Oil & Gas, US Stocks, inflation | 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 »
Bill Gross: Hmmmm? (Investment Outlook June 2008)
Monday, May 26th, 2008
May 26, 2008 - Pimco’s Bill Gross makes a most humorous analyses, drawing parallels that the hordes are marching on the new Rome (America), and that its time to act. Make sure you read this must read, the June 2008 Investment Outlook, by Bill Gross. At the end, Gross puts forth his recommendations.
What this country needs is either a good 5 cent cigar or the reincarnation of an Illinois “rail-splitter” willing to tell the American people “what up” -”what really up.” We have for so long now been willing to be entertained rather than informed, that we more or less accept majority opinion, perpetually shaped by ratings obsessed media, at face value. After 12 months of an endless primary campaign barrage, for instance, most of us believe that a candidate’s preacher - Democrat or Republican - should be a significant factor in how we vote. We care more about who’s going to be eliminated from this week’s American Idol than the deteriorating quality of our healthcare system. Alternative energy discussion takes a bleacher’s seat to the latest foibles of Lindsay Lohan or Britney Spears and then we wonder why gas is four bucks a gallon. We care as much as we always have - we just care about the wrong things: entertainment, as opposed to informed choices; trivia vs. hardcore ideological debate.)
It’s Sunday afternoon at the Coliseum folks, and all good fun, but the hordes are crossing the Alps and headed for modern day Rome - better educated, harder working, and willing to sacrifice today for a better tomorrow. Can it be any wonder that an estimated 1% of America’s wealth migrates into foreign hands hands every year? We, as a people, are overweight, poorly educated, overindulged, and imbued with such a sense or self importance on a geopolitical scale, that our allies are dropping like flies. “Yes we can?” Well, if so, then the “we” is the critical element, not the leader that will be chosen in November. Let’s get off the couch and shape up-physically, intellectually, and institutionally-and begin to make some informed choices about our future. Lincoln didn’t say it, but might have agreed, that the worst part about being fooled is fooling yourself, and as a nation, we’ve been doing a pretty good job of that for a long time now.
Bill Gross - Investment Outlook - June 2008 - “Hmmmmm”
Tags: Bill Gross, BRICs, Emerging Markets, Fixed Income, Hordes, inflation, Investment Wisdom, Markets, philosophy, PIMCO, rome
Posted in BRIC, Brazil, CPI, China, Commodities, Economy, Emerging Markets, Financials, Geo-political, India, Infrastructure, Markets, Oil & Gas, Politics, Russia, US Stocks, inflation | 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 Banks, Credit Markets, Economy, Financials, Fixed Income, Gold, Markets, Monetary Policy, inflation | No Comments »
Don Coxe’s Recommendations (Basic Points, 04/29/2008)
Monday, May 5th, 2008
May 5, 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, The Hinge of History II, April 29, 2008
1. In long-only equity portfolios, continue to underweight Wall Street banks and others that have been reporting high exposure to perfumed products of indeterminable value, including those which last year revealed—under duress— high exposure to SIVs. Within the financials, emphasize those whose loan losses are of the traditional, cyclical variety—not in derivatives or in untraditional banking businesses. Good banks that have stuck to their knitting—and whose CEOs compensation has suffered along with their stock prices—should be retained.
2. In long/short portfolios, be long commodity stocks and short bank stocks that make headlines for untraditional losses. That trade hasn’t been working lately, but it remains an overall portfolio risk-reducer. The list of banks that have shown great skill and profitability by going heavily into new kinds of products and new kinds of accounting is roughly as long as the list of major copper, oil and gas producers that profited by selling heavily forward.
3. A financial-led bear market within a financial-led recession can be particularly perilous if central banks run out of ways to reflate the system—and surprisingly benign if the central banks’ rescues remain timely. To date, the central banks have been up to the job—if propping up a badly-behaving financial sector is a key component of their job descriptions. Result: the overall stock market has outperformed our expectations. We still don’t like the risk/reward ratio.
4. Dividends become more attractive as central banks cut rates. The problem for investors is that many of “The Great Dividend-Paying Stocks” are financials that have been reporting ghastly blunders. In many cases, their payout ratios have climbed far above the 50% threshold that has made these stocks better investments than bonds. Opportunities remain—and dividends may be the only positive return most US stocks will deliver this year.
5. Although North American consumers have yet to see the cost pass-through in major foodstuffs of $6 corn and $8 wheat, it will come sooner or later. Based on past periods of food inflation, one of the first consumer cutbacks is on eating out. Restaurant stocks are especially unappetizing when food costs soar out of control.
6. Gold has pulled back from its high because the dollar stopped falling and the bank bailouts seem to be working. Remain overweight gold as a clear-cut hedge against further bad news on both those fronts.
7. The Canadian dollar decoupled from the euro, failing to rally to new peaks—which makes little sense to us. US clients should continue to use Canadian government bonds and Canadian short-term investments as alternatives to Treasuries and US cash.
8. Within the commodity group, continue to accumulate the leading agricultural stocks. Given the spectacular performance of the fertilizer stocks, the best bargains currently on offer are in the farm machinery companies. The global food crisis will almost surely cripple the opposition to GM seeds, which means the seed stocks have great upside room.
9. Within debt portfolios, continue to emphasize inflation hedge bonds—preferably in strong currencies. Treasuries remain overvalued, despite the recent strong run-up in yields from barely-observable levels.
Tags: Agricultural commodities, Agriculture, Bank stocks, BMO Capital Markets, Commodities, Donald Coxe, Emerging Markets, energy, Financials, Grain prices, Investment Strategy, Markets
Posted in Agriculture, Banks, Commodities, Credit Markets, Crude Oil, Economy, Financials, Fixed Income, India, Markets, contango, energy, gold stocks, inflation | 1 Comment »
Hard numbers: The economy is worse than you know
Wednesday, April 30th, 2008
April 30, 2008 - Kevin Phillips, author of Bad Money: Reckless Finance, Failed Politics and the Global Crisis of American Capitalism, published a recent article in Harper’s Magazine, about the way in which economic statistics have been massaged over many years by many White House administrations, one after the other, in order the mask the true nature of the US economy over the years. Here are some excerpts from this excellent article:
Ever since the 1960s, Washington has gulled its citizens and creditors by debasing official statistics, the vital instruments with which the vigor and muscle of the American economy are measured. The effect has been to create a false sense of economic achievement and rectitude, allowing us to maintain artificially low interest rates, massive government borrowing, and a dangerous reliance on mortgage and financial debt even as real economic growth has been slower than claimed.
The story starts after the inauguration of John F. Kennedy in 1961, when high jobless numbers marred the image of Camelot-on-the-Potomac and the new administration appointed a committee to weigh changes. The result, implemented a few years later, was that out-of-work Americans who had stopped looking for jobs — even if this was because none could be found — were labeled “discouraged workers” and excluded from the ranks of the unemployed, where many, if not most, of them had been previously classified. By the 1969 fiscal year, Lyndon Johnson orchestrated a “unified budget” that combined Social Security with the rest of the federal outlays. This innovation allowed the surplus receipts in the former to mask the emerging deficit in the latter.
Richard Nixon, besides continuing the unified budget, developed his own taste for statistical improvement. He asked his second Federal Reserve chairman, Arthur Burns, to develop what became an ultimately famous division between “core” inflation and headline inflation. If the Consumer Price Index was calculated by tracking a bundle of prices, so-called core inflation would simply exclude, because of “volatility,” categories that happened to be troublesome: at that time, food and energy.
Core inflation could be spotlighted when the headline number was embarrassing, as it was in 1973 and 1974. (The economic commentator Barry Ritholtz has joked that core inflation is better called “inflation ex-inflation” — i.e., inflation after the inflation has been excluded.)
In 1983, under the Reagan administration, inflation was further finagled when the Bureau of Labor Statistics (BLS) decided that housing, too, was overstating the Consumer Price Index; the BLS substituted an entirely different “Owner Equivalent Rent” measurement, based on what a homeowner might get for renting his or her house. This methodology, controversial at the time but still in place today, simply sidestepped what was happening in the real world of homeowner costs.
In addition to Phillips’ assertions here, The US Government stopped publishing money supply statistics, specifically M3, so that we would no longer be able to track the amount printed money that gets added to the country’s money supply every year since. Hmmm…?
Read this complete article here: Hard Numbers: The Economy is Worse Than You Know, Harpers Magazine, courtesy of TampaBay.com, April 25, 2008.
Tags: Bad Money, Bad Money: Reckless Finance, Barry Ritholtz, Economy, Failed Politics and the Global Crisis of American Capit, inflation, Kevin Phillips, Markets, The Big Picture
Posted in CPI, Economy, Financials, Geo-political, Gold, Markets, Monetary Policy, Politics, Strategy, inflation | 1 Comment »
A Look at Alan Greenspan’s Long Lost Thesis
Wednesday, April 30th, 2008
April 28, 2008 - Barron’s magazine has gotten their hands on Alan Greenspan’s Ph. D. thesis and provides analysis. The bottom line is that Greenspan long underestimated the potential effects of a popped housing bubble. Here are some excerpts:
There are only two known copies: the Maestro’s own and the one we viewed. As far as we can tell, Barron’s is the only news organization ever to have seen the thesis since a third and now missing copy was removed from the public shelves of NYU’s Bobst library at Greenspan’s request in 1987, the year that Ronald Reagan appointed him chairman of the Federal Reserve Board. Glancing at the document, we momentarily felt like Indiana Jones at the dramatic moment in which he discovers the Lost Ark of the Covenant.
We were tickled to find that the work’s introduction includes a discussion of soaring housing prices and their effect on consumer spending; it even anticipates a bursting housing bubble. Writes Greenspan: “There is no perpetual motion machine which generates an ever-rising path for the prices of homes.”
Greenspan, however, didn’t foresee a housing mania spilling into the general economy, toppling banks and brokerage houses and paralyzing key portions of the credit system. The worst he could anticipate was that a sharp “break in prices of existing homes would pull down the prices of new homes to the of construction costs or below, inducing a sharp contraction in building.” Back then, there were no home-equity lines of credit, derivatives or subprime mortgages. Mortgages were largely concentrated at savings and loans. Credit was harder to come by, too, because conventional mortgage rates were about 8.5% and headed significantly higher. Still, the thesis shows that the former Fed boss was focused on housing very early in his career. Thus, it casts doubt on his recent assertions about being surprised by the Mesozoic-era-size impact of this decade’s housing mania.
For the complete article click here: Looking At Greenspan’s Long Lost Thesis, Barron’s, April 28, 2008.
Tags: Alan Greenspan, Economy, Fed, inflation, Markets, Monetary Policy, Ph. D., Thesis
Posted in Credit Markets, Economy, Financials, Fixed Income, Gold, Markets, Monetary Policy, Politics, Satire, Strategy, inflation | No Comments »
Jim Rogers: All My New Money Is Going To Commodities and China
Wednesday, April 30th, 2008
April 27, 2008 - A recent Bloomberg article quotes Jim Rogers as to his bent for Chinese stocks and Commodities. Specifically, Rogers is focusing his attention in China in the areas of agriculture, airlines, tourism, and education.
“All my new money goes to commodities and China,’’ said Rogers.
“All the panic looks like a bottom,’’ he said. “I have bought in the last four to five weeks. I’ve been buying shares in China for the first time in a long time.’’
“China has a huge agricultural problem,’’ Rogers said. The “government is doing everything it can to revive the agriculture industry.’’
Rogers was bullish on the Chinese yuan, saying it could eventually rise to 2 yuan per dollar.
“Don’t sell your renminbi (yuan), because it will go a lot higher in the next 20 years,’’ Rogers said.
Apparently the folks at Morgan Stanley do not agree with Rogers, saying that China is a “sell.” Rogers appears to disagree vehemently.
Selling Chinese shares in 2008 “is a big mistake,’’ said Rogers, adding that he had also bought stocks in Singapore, Taiwan and Hong Kong. “I have never sold any Chinese shares.’’
The complete article is available by clicking below:
Investor Jim Rogers Buys Chinese Shares as Markets Hit Bottom, April 27, 2008, Bloomberg
Tags: Agriculture, China, Commodities, Jim Rogers, Markets, RMB, Yuan
Posted in Agriculture, BRIC, China, Commodities, Crude Oil, Emerging Markets, Gold, Infrastructure, Markets, inflation | No Comments »
Inflation Abounds
Tuesday, April 29th, 2008
April 29, 2008 - Courtesy Barry Ritholtz, The Big Picture - The Federal Reserve is now in day 1 of their two day meeting. The statement we get tomorrow, and the minutes we will read next month are likely to be intriguing.
Why? The longstanding official myth that inflation is modest, and contained is starting to be recognized for the fraud that it is.
Examples abound: The Times of London: Food-price inflation has already pushed up a typical family’s weekly shopping bill by 15 per cent in a year (Era of cheap food ends as prices surge). Yet here in the US, the BLS has food prices up only 4.5% year over year (that’s with the dollar down ~2% vs. the pound)
The price of rice has increased dramatically in recent weeks due to crop failure overseas and resulting hoarding… Rice has doubled in price in six months. (Bay Area Shoppers Asked To Limit Rice Purchases
During the first week of April…leisure fares from traditional carriers on 280 major routes rose 13
percent from the previous year…We’ve got an industry that’s in trouble,” said Vaughn Cordle, chief
executive and chief analyst at AirlineForecasts in Washington. “If oil prices stay anywhere near $100,
$120 for the year … we’ll have a massive restructuring of the airline industry.” (Summer travel headaches loom as airlines’ woes deepen).
All these obvious price increases are begining to undermine confidence int he Federal Reserve. We see article like this one in the San Diego Union-Tribune:The Fed’s inflation gauge isn’t realistic, critics say and this one in Harpers: