Oct 20

The Fed Spots Inequality, Misses the Point

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Janet Yellen says US inequality is worse than any time since, umm, the Fed was created…
 

IT DIDN’T take long did it? asks Greg Canavan in The Daily Reckoning Australia.
 
Now the Bank of England, the Federal Reserve’s old partner in crime, is at it too. On Friday, the BoE’s chief economist, Andy Haldane, said he favoured delaying interest rate rises in the United Kingdom.
 
That, along with comments from the Fed’s James Bullard on Thursday, helped global markets to rally late last week. It’s having a nice effect on our market so far today too. It was just as well. The situation looked extremely dicey on Wednesday.
 
Given US markets haven’t even had a 10% correction, the coordinated comments have a whiff of panic about them. What…can’t markets even have a half-decent correction these days without central bankers wetting themselves in panic?
 
While the minions were trying to hold things together late last week, boss Janet Yellen was inadvertently making a pretty decent argument to end the Federal Reserve altogether. She just didn’t know it.
 
In a speech on ‘economic opportunity and inequality’ in Boston on Friday, Yellen came out with some clangers. Unfortunately, most observers missed the irony of some of her comments.
 
Yellen drew heavily on data collated from the Fed’s Survey of Consumer Finances, which began back in 1989. Take it away, Janet…
“By some estimates, income and wealth inequality are near their highest levels in the past hundred years, much higher than the average during that time span and probably higher than for much of American history before then.”
Hmmm…the past 100 years you say? The Federal Reserve came into being in 1913. A coincidence, do you think?
 
Not convinced? Give us some more stats then, Janet…
“After adjusting for inflation, the average income of the top 5% of households grew by 38% from 1989 to 2013. By comparison, the average real income of the other 95% of households grew less than 10%.
 
“The lower half of households by wealth held just 3% of wealth in 1989 and only 1% in 2013.”
That’s interesting. Go on…
“The average net worth of the lower half of the distribution, representing 62 million households, was $11,000 in 2013. About one-fourth of these families reported zero wealth or negative net worth, and a significant fraction of those said they were ‘underwater’ on their home mortgages, owing more than the value of the home. This $11,000 average is 50% lower than the average wealth of the lower half of families in 1989, adjusted for inflation.”
Wow! The average net worth of 62 million US households is just $11,000…half of what it was back in 1989, despite 25 years of (mostly) economic growth?
 
Is it another coincidence that just two years before 1989 the Federal Reserve embarked on a policy of full-blown central banking activism? In 1987, Alan Greenspan had just taken the helm from the last great central banker, Paul Volcker, when ‘Black Monday’ hit, on the 19th of October (nearly 27 years ago to the day).
 
Greenspan panicked. He promised the market liquidity and support and whatever else he could. The Fed hasn’t looked back since. From that day on, it’s been the market’s socialist tormentor and benefactor…creating crises and then trying to solve them by throwing money at the problem.
 
And where does the money end up? In the hands of the already relatively well-off, which is why Janet Yellen’s statistics look so horrible.
 
The irony of a new Fed Chief pointing all this out is particularly…rich. Actually, it’s nauseating. If you didn’t know any better you’d think she was actually having a laugh. It’s either ingenuous or the work of the devil.
 
In truth, I think it’s genuinely ingenuous on Yellen’s behalf. You don’t set out to become the world’s biggest do-gooder by being a hard-nosed realist.
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Oct 16

What the Panic’s All About

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Stock markets are sinking for nothing. And everything…
 

As RON BURGUNDY said in Anchorman, writes Greg Canavan in The Daily Reckoning Australia, “Boy…that escalated quickly. I mean that really got out of hand fast.”
 
Indeed it did. It was a wild night of trading on US markets Wednesday. The S&P500 was down 3% at one point, before finishing just 0.8% lower. US Treasury yields plunged on fears of lower economic growth while gold momentarily surged $25 an ounce and closed out the session up nearly $20 an ounce.
 
An afternoon rally saved Wall Street. Apparently – and this is really pathetic if there’s any truth to it – rumours surfaced that Janet Yellen thought the US recovery was on track, despite worries coming from Europe.
 
There were no such comments from Mario Draghi in Europe. As a result, European stocks took a beating. French and Spanish stocks fell more than 3.5%, while German and British bourses fell nearly 3%. But the rally in the US came after Europe closed for the day.
 
So what’s all the panic about? Nothing in particular, it seems. Or nothing and everything, all at once.
 
These panic liquidations represent a psychological shift in trader positioning. It’s representative of complacency giving way to risk aversion. And it has given way big time in the past few weeks.
 
You can see this change in the volatility index, the ‘VIX’, in the chart below. Also known as the fear index, you can clearly see the ‘fear spike’ since the start of October. This comes just a few months after volatility levels were the lowest since early 2007.
 
 
In other words, something has clearly changed in the mindset of the market. In the short term, it’s probably gone too far…and you can expect to see a rally soon and a diminishment of the current high levels of fear.
 
But you should take the surge seriously. This is the highest level of fear since the Euro crisis of 2011. Except now there’s no discernible crisis. That’s the worrying bit. The market is saying that something is wrong. It’s not immediately apparent, but something isn’t quite right.
 
Maybe it’s fear of the effects of a slowing global economy…an economy that has a truckload more debt weighing on it than it did before the last downturn. The Telegraph in the UK reports:
“Morgan Stanley calculates that gross global leverage has risen from $105 trillion to $150 trillion since 2007. Debt has risen to 275pc of GDP in the rich world, and to 175pc in emerging markets. Both are up 20 percentage points since 2007, and both are historic records.”
Yep, debt levels are a major problem. And they become a very big problem when economic growth slows. That’s because to service debt, you need to generate growth.
 
When growth stagnates or falls, the debt servicing burden becomes a problem. Debt-to-GDP ratios rise and there is less money left over in the economy for investment, wages and consumption.
 
Debt, especially unproductive government debt, has detrimental long term effects on an economy. Let it grow large enough and it will eventually choke an economy into recession/depression.
 
That the only apparent response to a slowdown in a debt-based monetary system is to increase debt levels tells you something is seriously wrong with the world’s system of ‘wealth creation’.
 
The only question now is how long it will take the Federal Reserve to start back-tracking on its ‘interest rate hike for 2015’ talk. After they do that, I wouldn’t be surprised to see them dip into the QE playbook…again. The big question though, it whether it will be too late to inject another round of confidence into the speculating community.
 
They’re wheeling Janet Yellen out to speak at the end of the week, so we may get an idea of just what the Fed is thinking. Yellen must be careful to retain the market’s confidence. That the US Federal Reserve has no idea what it’s doing is beside the point. What’s important is that the market thinks the Fed knows what it’s doing.
 
Yellen must keep this con game going at all costs. Good luck with that. When you’ve got a bunch of panicked, slobbering trader yahoos in your face desperate for some sign that you’ve got it all under control, any minor slip-up can be dangerous.
 
When traders panic, liquidity disappears in the blink of an eye. That’s because confidence creates liquidity, and fear destroys it. And right now it’s the fear of huge debt levels consuming economies that is weighing on traders’ minds.
 
Why it’s happening right now, when the issue has been around for a while, is irrelevant. The important point is that the punters are beginning to wake up to the risks. The only question is how much longer the Fed can continue to pull the wool over everyone’s eyes.
 
Can another bout of QE do the job for another six or 12 months?
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Sep 24

Stupid Writ Large

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Battling the forces of BBTs and DMN our hero invites them to pull the other one…
 

FOR SEVERAL WEEKS, the tragic soul of The Mogambo has been troubled by subtle undertones in The Force, writes the tragic Mogambo Guru from inside his bunker, inexplicably using an old Star Wars metaphor.
 
Which brings up the interesting question as to how a Jedi light-saber would fare against a couple of belt-fed .50 caliber machineguns at point-blank range.
 
Other than pondering those kinds of deeply philosophical questions, it was the old “It’s quiet. Too quiet” kind of thing, where you are always nervously looking over your shoulder, and seeing enemies lurking in every shadow, every nerve on the razor’s edge. Trigger fingers twitching, too, which is difficult to say five times quickly, which only proves the point.
 
For instance, I started sensing strange vibrations in what people were saying, such as Paul Krugman, Janet Yellen and others, as concerns monetary policy.
 
And when I call them up to demand an explanation, and maybe helpfully explain how they are mere Earthling idiots who don’t know squat about economics, they won’t take my calls!
 
I mean, I clearly tell the receptionist that I am the Fabulous Mogambo Genius (FMG) on the line here, and I am calling to explain to them how their whole idiotic Keynesian idea of Quantitative Easing has been a big, fat, flatulent bust, and I want to find out what they are going to propose to do next, as concerns monetary policy, and it better NOT be any more of that stupid Quantitative Easing crap, as I am prepared to clearly and loudly detail how they must be the biggest idiots in the whole world to actually believe that the profound inflationary and bankrupting stupidity of vastly increasing the money-supply (and thus vastly increasing debt), and then committing that same incredible, suicidal folly over the long-term, could possibly, highly-improbably, one chance-in-a-million, one chance-in-a-zillion years, work!
 
But, alas, I never get through to anyone. Ever!  Even after I CLEARLY explained to the receptionist who I am and exactly why I, the Fabulous Mogambo Genius (FMG), am calling, so as to hopefully speed things along.
 
Even parsing their oily remarks through a Junior Mogambo Ranger Secret Decoder Ring (JMRSDR) yielded, alas, nothing.
 
Thus, I am left exhausted and confused, with an increased sense of dread, as actually befits the situation, but knowing little else about what’s ahead, monetary-wise.
 
Nonetheless, I instinctively knew something BIG was up, as my furrowed brow, exaggerated startle-reflex, and a frenzy of buying gold, silver, and defensive armaments so colorfully indicated. 
 
And, thinking about it, with your heart pounding, covered in a cold, clammy sweat, you suddenly realize that, alarmingly, the only thing it COULD be is a new, colossal attempt by the Federal Reserve and the government to somehow, some miraculous way, some fabulous way, some glorious deus ex machina way, please, please, please let this new version of massive Quantitative Easing work, even though 2,500 years of global economic history, a sad tale of one dirtball government after another bankrupting itself, with or without creating paper money in its death throes, proves that it can’t, and it won’t.
 
Of course, since I am the aforementioned Fabulous Mogambo Genius (FMG) of story and song, I always knew that the ultimate fate of grotesquely expanding the money supply to expand the size of government was to inexorably have to, in one fashion or another, relive the infamous “bread and circuses” policies of ancient Rome, the government desperately placating the teeming, impoverished masses, suffering as they are from rising prices, a large, oppressive government and abysmal living conditions, by giving them food and entertainment, which is a disastrous policy that always leads to Bad Bad Things (BBT).
 
So, was I more paranoid and cynical than usual, or was something actually, you know, up.  But what?
 
Who knew that it would be brought to my attention by Zerohedge.com, with the chilling title “It Begins”? When I saw it, I thought I heard banshees wailing, and ravenous wolves howling in the distance, growing frightfully closer. Ever closer.
 
“It Begins”, I am sorry to say, is not the title of a terrific new horror movie, a grand and glorious gore-fest of bloody, gun-happy shoot-’em-up action, fiery explosions, high-speed car chases and hordes of mutant zombies who mostly look like beautiful lingerie models, only less clothed.
 
Instead, “It Begins” refers, even more horribly and tragically, to an article in Foreign Affairs magazine, written by Mark Blyth and Eric Lonergan, of the Council on Foreign Relations, which is spooky enough.
 
 
To save you the trouble of rubbing your eyes in complete disbelief, it goes on that “Rather than trying to spur private-sector spending through asset purchases or interest-rate changes, central banks, such as the Fed, should hand consumers cash directly.”
 
Giving cash away! It’s bread and circuses, alright, in spades!  “Here’s some money to buy your own food and circus!” Wow!
 
The authors, who are so wrong about so many important things in the article, are nonetheless absolutely right when they say “In the short term, such cash transfers could jump-start the economy”!!!
 
The three concluding exclamation points were added by me, as a clever and clearly dramatic emphasis, to make sure that you completely understood that millions of consumers suddenly spending lots of new, free cash will certainly make the economy go!! Wow! What a boom it would cause!
 
The most laughable part is when they said that giving people cash “wouldn’t cause damaging inflation, and few doubt that they would work. The only real question is why no government has tried them.” Hahahaha!
 
I told you they were wrong about some things, and here are three at once, because, firstly, it certainly WOULD cause inflation, however you define “damaging”.
 
And, contrary to the laughable conclusion of the authors, nobody doubts that it would work! Nobody! Lots and lots of new money continually pouring into an economy would NOT make a boom? Hahahaha!
 
And the reason that no government has tried it is because it is Stupid Writ Large (SWL), as in “No government that tried giving away money to the population lasted long enough to write it down.”
 
The authors thought they were so smart to anticipate the Disagreeable Mogambo Naysayer (DMN) loudly objecting “Because terrifying inflation is guaranteed to ensue, you morons, and poor people would be more and more poor and starved, and they will all get testy about their kids crying from hunger, and they can’t stay warm in the winter, or get out of the rain, and everything goes downhill pretty fast when people are rioting in the streets, and pretty soon you can’t get a good pizza anywhere within miles.”
 
Instead of wincing and slinking away in shame at my cruel scorn, they write, hilariously, “Other critics warn that such helicopter drops could cause inflation. The transfers, however, would be a flexible tool. Central bankers could ramp them up whenever they saw fit and raise interest rates to offset any inflationary effects.” Hahahahahahaha!
 
Central bankers could give away more and more cash “whenever they saw fit,” and yet there will be some glorious time when the Fed sees “fit” to stop giving away money and thus cause an economic slowdown, risking asset-price deflation that is leveraged a 100-to-1? Hahahaha! As Monty Python would say, “Pull the other one!”
 
And raising interest rates to somehow sterilize a tsunami of cash? I care about interest rates when I am receiving more and more cash and price inflation is roaring?  Hahaha! I’m busting a gut here!
 
But jocularity and complete stupidity aside, somebody must be expecting some new income, as Chuck Butler of Everbank reports that “July Consumer Credit (read debt) grew by $26 Billion, and June’s number was revised upward to $18.8 Billion from $17.2 Billion. But, $26 Billion!”
 
He, as well as I, characterizes it as “off the charts folks, as if 2008 never happened! What the heck is going on around here? Doesn’t anyone ever learn lessons?”
 
Dave Gonigam of the 5-Minute Forecast parses it down to “Of that total, $5.4 billion came in credit cards — a surge previously unseen during the anemic ‘economic recovery’ these last five years.” 
 
“Of the remaining $20.6 billion, most of that was in auto loans, very little in student loans.”
 
So do these people suddenly have jobs, explaining their spending spree? No. In fact, ever fewer people have jobs.
 
And if you want some bad news on the employment front besides the usual upsetting stories about high unemployment and how jobs are disappearing faster than a pizza at a Super Bowl party, the booklet titled “Pocket World in Figures” from The Economist magazine, has a table titled “Largest Manufacturing Output” which puts the United States at the top of the list, at $1771 billion.
 
This puts us a measly $14 billion ahead of China, which is bad enough, but when you look at the next chart down the page, under “Largest Services Output”, the United States is again number one, at $10,574 billion, while the second place is held by Japan at a measly $3,904 billion, and China at a distant $3,172 billion.
 
In short, five times as many US workers are providing services as are employed manufacturing something.  Probably has something to do with explaining our $40 billion-per-month trade deficit! Hahaha!
 
But lamenting the gaping trade deficit aside, it is this terrifying kind of weird, economy-distorting “services” thing, and the bizarre thing about giving money away to people, that will almost certainly lead to new fiscal policy accommodating them both, since behavior that was once considered idiotic, suicidal desperation, is now the only way out.  Probably connected with a new war, if history is any guide.
 
And when the government starts doling out all that luscious cash, and calling it our patriotic duty to spend all this new cash, it’s party time! Par-tay!
 
And if this “give money directly to people” thing plays out even vaguely as proposed, then you will happily have some time left to accumulate lots of gold and silver during the Big Monetary Party (BMP) that will surely follow, and you will have some time to think and idly daydream of what their prices will be at the calamitously inflationary end of the aforementioned Big Monetary Party (BMP), when everything else is ashes and heartache. Astronomic!
 
Whee! This investing stuff is easy!
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Sep 17

Mean Reversion to the Rescue

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Small-cap US stocks are lagging bigger companies. The lesson…?
 

SO FAR this year, writes Frank Holmes at US Global Investors, small-cap growth stocks have surprisingly been lackluster.
 
After 2013, when it gained a scorching 38.8%, the Russell 2000 has delivered a tepid 0.62% year-to-date (YTD).
 
 
Performance has been so poor, in fact, that the spread, or bifurcation, between the 12-month return residuals of small and large caps is at its widest since the dotcom bubble of the late 1990s and early 2000s. This bifurcation is one of the largest since 1975.
 
According to Morgan Stanley, we’re in the worst beta-adjusted period for small-cap stocks since the late 1990s. The 12-month return in August for small-caps was -9.7%, placing it in the bottom 6% of any 12-month period since the mid-1970s. 
 
 
The bifurcation is more than apparent when you compare the year-to-date (YTD) total returns of the big boys (those in the S&P 500 Index and Dow Jones Industrial Average) to their little brothers (those in the Russell 2000 and S&P SmallCap 600 Index).
 
The Russell, though it led the other indices in March, has failed to reach a new record high, which the S&P 500 and Dow managed to achieve in the last couple of months. 
 
 
Are we on the verge of another bubble? We don’t think so. History shows bubbles are associated with excessive leverage and lofty valuations. That is not the case this time.
 
In July, Federal Reserve Chairwoman Janet Yellen stated in her semiannual report to Congress that small caps appear to be “substantially stretched,” even after a drop in equity prices at the beginning of the year.
 
There may be some truth to Yellen’s remark, an ideological echo of former Fed Chairman Alan Greenspan’s now-famous “irrational exuberance,” his description of investors’ rosy attitude toward dotcom startups of the late 1990s and early 2000s.
 
Much of the valuation gap has evaporated. Looking at the price/earnings to growth ratio – 20x for the Russell 2000 and 18x for the S&P 500 – small caps have slightly higher yet reasonable multiples and may offer better long-term growth prospects.
 
The recent underperformance among small caps has been a headwind for a few of our funds, most notably our Holmes Macro Trends Fund (MEGAX),whose benchmark, the S&P 1500 Composite, tracks the performance of not just large- and mid-cap US companies, but small-cap as well. With a bias toward small-cap companies, the fund has underperformed compared to last year, when such stocks were doing well.
 
Because small caps tend to have higher beta than blue chips, you would expect them to outperform in a generally rising market – which we’re currently in. So it appears that a major rotation out of these riskier, more volatile stocks has inexplicably occurred, leading to the wide bifurcation between small and large companies. 
 
The good news is that, based on 20 years of historical data, stocks in the Russell 2000 tend to rally in the fourth quarter and continue steadily until around the end of the first quarter. Over this 20-year period ending in December 2013, the Russell has generated an impressive annualized return of approximately 10%.
 
 
Whether or not this fourth-through-first-quarter rally will recur in 2014 and early 2015 is impossible to forecast. What can be said, however, is that prices and returns do tend to revert back to their mean over time.
 
I discussed this concept in full last month in the second part of my Managing Expectations series,”The Importance of Oscillators, Standard Deviation and Mean Reversion“. Although small caps are underperforming right now, the concept of mean reversion suggests that they’ll return to their historical relationship with large caps eventually – just as they did following the dotcom bubble.
 
In his 2006 book The New Rules for Investing Now: Smart Portfolios for the Next Fifteen Years, investor James P. O’Shaughnessy makes the case that small stocks have a performance advantage over large stocks simply because, well, they’resmall. This might sound like circular logic, but as he writes:
“A company with $200 million in revenues is far more likely to be able to double those revenues than a company with $200 billion in revenues. With large companies, each increase in revenues becomes a smaller and smaller percentage of overall revenues. Small stocks, on the other hand, have a much easier time delivering great percentage growth in revenues and earnings.”
O’Shaughnessy examined every 20-year rolling time period beginning each month between June 1947 and December 2004. That’s 691 20-year rolling time periods. What he found is that “small stocks outperformed the S&P 500 84% of the time.”
 
 
If O’Shaughnessy’s research is accurate, it seems very reasonable to be optimistic in the long term. It would be myopic to look only at the Russell 2000’s recent underperformance and impulsively rotate out of small caps without also considering the decades’ worth of data showing the growth that can be achieved.
 
Comparing index funds to actively managed funds, Kiplinger columnist Steven Goldberg wrote last month: “[I]ndex funds are designed to give you all the upside of bull markets and every bit of the downside of bear markets. Only good actively managed funds can protect you from some of the pain of a bear market.”
 
We at US Global Investors agree with Goldberg’s attitude toward good active management. Although MEGAX might be temporarily underperforming right now as a result of the sentiment-driven and disappointing performance of small-cap stocks, we’re confident that they will eventually revert back to their historical pattern as fear over Fed tightening settles down and fundamentals prevail.
 
In the meantime, we will continue to apply our dynamic management strategy of picking stocks in the fund using the 10-20-20 model: we focus on companies that are growing revenues at 10% and generating a 20% growth rate and 20% return-on-equity. This approach has served us very well in the past and enabled us to select the most attractive growth-oriented companies for our clients. 
 
On another note, and as I explained in a recent Frank Talk, a strong US Dollar could spell trouble for commodities such as gold, which tend to have a historic inverse relationship to the Dollar.
 
 
When the Dollar does well, investors often choose to store their money in paper rather than bars. Though September is statistically the best month for gold, with the Dollar rising almost two standard deviations above its mean, this month might not be kind to the yellow metal and other commodities.
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Sep 16

The Most Important Chart Right Now

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Dollar up, everything down. And the end of QE means it probably isn’t done yet…
 

I WANT to show you the most important chart in the investing world right now. It’s affecting the price of just about everything else, writes Greg Canavan in The Daily Reckoning Australia.
 
If the United States’ superpower status is on the decline, you wouldn’t know it by looking at the chart below – the US Dollar index. As you can see, it’s moved sharply higher over the past few months.
 
The momentum indicators at the top and bottom of the chart are severely ‘overbought’, and the index itself is well above the moving averages. This suggests a correction is imminent, but for now, everything denominated in US Dollars is weak.
 
 
The Aussie Dollar, gold, copper, oil and most other commodities have all been under pressure lately. And it’s why share markets around the world are struggling to push mindlessly higher…as they’ve been doing ever since late 2012 when Ben Bernanke and Co. got jiggy with it on the QE front.
 
But next month, it all changes. For a short time at least, global share markets will experience life without Federal Reserve QE for the first time since 2011.
 
In short, the market is having another ‘taper tantrum’ as the end of QE draws closer. The last such episode was back in June 2013. As you can see in the chart above, that was when the US Dollar last spiked to its current level.
 
Being the world’s reserve currency, US monetary policy is essentially global monetary policy. As the US Federal Reservewinds down QE, you can see the knock on effects starting to emerge.
 
US Dollar strength is just the most notable. Its strength since bottoming in May this year indicates tightening global liquidity. But until recently, the effects of this haven’t been all that obvious.
 
Emerging markets are usually most vulnerable to a strengthening Dollar. But that vulnerability only began to show in the past week or so, as you can see in the emerging markets index chart below…
 
 
Emerging markets rallied to new highs this year despite the strengthening Dollar. Until recently that is – when sharp falls took place, especially in markets like Turkey and Brazil. The Bank for International Settlements warned in its just-released quarterly report that these markets are particularly vulnerable because of increased US Dollar borrowing over the past few years.
 
As you know, borrowing in a strong currency while revenues and earnings are in a weaker currency doesn’t usually work out well. It places greater pressure on a company to service its debts, leaving less left over for shareholders.
 
You’ll have to wait and see whether emerging market resilience can continue, or whether the end of QE will finally have a more definitive impact on these peripheral economies.
 
I don’t know what the outcome will be. But I can say that markets often ignore issues for months on end and then all of a sudden worry about them acutely. Maybe this is just the start of an intense worry phase.
 
Whatever it is, Australia is a part of it. Our stock market and currency are under the pump, thanks to weaker commodities and a weaker iron ore price in particular. That, in turn, is because of a slowing Chinese economy, which, as it turns out, imports US monetary policy through a partially pegged exchange rate.
 
The US Dollar’s tentacles have a wide reach. And it touched China on the weekend with the Middle Kingdom announcing weaker than expected industrial production, fixed asset investment and retail sales growth.
 
The slowdown comes amid a deteriorating property market in China, which for years was the engine of growth for the country. But that engine is sputtering as China’s leaders grapple with trying to rebalance the economy without crashing it. It’s a tough task.
 
Which is why you can expect to hear calls for ‘more stimulus’ from China grow louder this week, because ‘more stimulus’ always works. If only we had done ‘more stimulus’ sooner rather than later, we’d not be in the position of needing ‘more stimulus’ now.
 
Economics really is that simple. Money may not grow on trees but it does lay dormant and abundant inside the computers of our heroic central bankers. (In case you need me to say it, yes…I’m being sarcastic.)
 
For that reason, all eyes will be on the Federal Reserve this week. They gather for a two-day meeting on the 16th and 17th, and boss Janet Yellen gets a chance to move markets with an accompanying press conference at the conclusion of the meeting.
 
Usually, the Federal Reserve provides soothing words about how interest rates won’t go up for ages and everyone can keep punting without any need to worry. That’s worked well for the past few years.
 
But the time is approaching where the Fed will actually start having to do something on the interest rate front. Or at least they’ll have to stop pretending they’ll keep interest rates low forever.
 
In other words, there are fewer rabbits in the hat. Or maybe there are no rabbits left at all?
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Aug 29

How Central Bankers Blew Up the World

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$2.2 trillion here, a 3% jump there, and soon you’ve got S&P 2,000…
 

ALL OVER the world stocks are rising, writes Bill Bonner in his Diary of a Rogue Economist.
 
In the US, the S&P 500 rose over the 2,000 mark for the first time in history. The Dow is over 17,000.
 
And if you want to buy a share of online TV network Netflix, Inc. (Nasdaq:NFLX), you will pay $144 for every Dollar the company earned over the last 12 months.
 
If you bought the company outright, in other words, you’d have to wait until 2158 to earn your money back.
 
But this story is playing out from Timbuktu to Taiwan to Texas. Here’s the latest from Bloomberg:
“Shares worldwide added more than $2.2 trillion in value since Aug.7, according to data compiled by Bloomberg. Optimism that central banks will support economic growth sent the MSCI All-Country World Index up 3.8% from its low this month. The S&P 500 has risen for 10 of the last 13 days and the Nasdaq Composite Index is about 10% from an all-time high.”
Put them all together, and publicly traded equities are now worth more than $66 trillion – just shy of total world GDP. That’s $12 trillion more than they were worth in the beginning of 2013…and it’s $30 trillion more than they were worth 10 years ago.
 
What has happened during the last 10 years to make stocks so much more valuable?
 
We remind readers that shares are titles to ownership of real assets and the earnings they produce. And in a competitive economy, they shouldn’t be able to diverge too far from the cost of creating those assets.
 
Typically, investors have paid from 10 to 20 times annual earnings for shares. But when they are bearish, as they were in 1982 and again in 2009, they will want to pay less than 10 times earnings. And when they are bullish, the sky’s the limit…but seldom more than 20 times.
 
Currently – except for China and Russia – almost all major country stock markets are closer to the top of the range than the bottom. With the S&P 500 now trading on a Shiller P/E (which looks at the average of 10 years of inflation-adjusted earnings) of 26.5.
 
What would make investors so bullish? And why would this bullishness extend to practically the entire globe?
 
After all, corporate incomes depend on corporate sales. And one corporation’s sales can only increase if a) it takes business from other corporations (which would mean no net increase for the world’s sales) or b) the world economy is growing.
 
But that’s the curious thing. As stocks have gone up…growth rates have come down, from a high of nearly 5% in 2009 to just 2% last year.
 
Last year, in the US, stocks rose 10 times faster than the economy beneath them.
 
Go figure.
 
The old-timers tell us that “the stock market always knows more than we do.” If that is so, what is it that the market knows that we don’t? Is there another Industrial Revolution coming? 
 
Are birth rates exploding? Not as far as we can tell.
 
So, what’s behind the big run-up in asset prices?
 
Here’s our guess: Janet Yellen, Mario Draghi and Shinzo Abe.
 
At the recent central bank meeting in Jackson Hole, Wyoming, Janet Yellen let it be known she was in no particular hurry to let markets discover prices on their own again. Instead, she’ll put prices where she wants them.
 
And that means setting interest rates at vanishingly low levels…and asset prices at in-your-face new highs.
 
Mario Draghi, meanwhile, is faced with a triple-dip recession in Italy, a flat economy in France and negative growth in Germany. From Bloomberg:
“[S]aid Patrick Spencer, head of US equity sales at Robert W. Baird & Co. in London, ‘Draghi gave clear indication that he’s standing ready with further measures to stimulate growth and that’s helping overall sentiment’…”
As for Shinzo Abe, the Japanese prime minister, he seems ready for any sort of mischief in the name of increasing inflation and GDP – including encouraging women to cut down trees!
 
Shhh…No need to accuse us of male chauvinism, as though we had something against women doing hard labor. We don’t. In fact, we’re in favor of it. But if you could raise prosperity by increasing the number of female lumberjacks, half the world’s women would already be wearing plaid shirts.
 
Shinzo, Janet, Mario…Surely there is a clever magazine somewhere readying a cover story…
 
“The Committee to Blow Up the World,” is the headline we propose.
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Aug 28

Authentic Fed Gibberish

Gold Price Comments Off on Authentic Fed Gibberish
Or AFG…as opposed to the inauthentic kind…
 

SO I was not at my personal best that morning, I admit it, writes the Mogambo Guru at The Daily Reckoning, but neither was the rest of the family, and making Freudian slips, while still early-morning groggy, is easy to do.
 
As I was to learn, everyone is all upset that I accidentally called the kids “stupid Earthling carbon units” instead of referring to them as “my wonderful, darling children”, which I admit I reflexively did NOT do because they are neither wonderful nor darling, but are instead some kind of mutant Dollar-gobbling machines.
 
The issue was about, again, getting braces for one of the kid’s teeth, I don’t remember which one.
“Don’t you see? The Dollar is losing its buying power…because the horrid Fed… continues to print So Freaking Much (SFM)…”
Naturally, as the caring, loving father, I patiently tried to explain that the mutant neo-Keynesian econometric lunatic Janet Yellen was at the helm of the evil Federal Reserve doing the same monstrous “money-and-thus-debt-creating” monetary expansionism crap that causes inflation in the prices of things you need and deflation in the prices of things you don’t, and gold goes up in price because it is the ultimate money which everyone will be turning to as all the other fiat-monies fail, slowly, terrifyingly, one after another, in the economic mayhem when insane levels of lunatic leverage are unwound.
 
I actually remember cleverly summing up by saying, “And therefore, we should put all our cash into gold, silver and oil! We should NOT, on the other hand, be foolishly wasting resources by getting braces for somebody’s teeth!”
 
Let the teeth grow in naturally, all crookedy and snaggly, and thus we will reap a veritable cornucopia of benefits! She will not be popular, based on her repellent looks, so we as parents won’t have to worry that she will get pregnant! Or have her stupid friends stealing food from our refrigerator, saving us money! And she will, out of bored necessity, busy herself educating herself in rigorous academics, excelling in sports, or doing something that can snag a nice college scholarship.”
 
Not content at that, I regret that I went on, “Or at least get off her fat butt, go out and get a job and pay for the damned braces herself, if it is so damned important to her, because, in case you people ain’t heard, I Ain’t Made Of Money (IAMOM)!”
 
The way their eyes were wide and staring, and their mouths were hanging open in stunned stupefaction, replete with glistening drool dribbling down their stupid chins, was my first clue that I was not succeeding in presenting my Mogambo Ironclad Economic Reasoning For Survival (MIERFS).
 
So, to remedy the situation, I helpfully continued, “Don’t you see? The Dollar is losing its buying power at accelerating rates, on its way to zero buying power, because the horrid Fed (and the other central banks of the world) continues to print So Freaking Much (SFM) money and credit, so that the bloated, bankrupt government can borrow it and cram it into the bloated, bankrupt economy. That causes gold, silver and oil to go up mightily in price! It’s guaranteed! It’s guaranteed because history shows they always do!”
 
I was instantly hurt and irritated that they did not leap to their feet, applauding in joy at my brilliant idea. That’s when I said, “Don’t you see what I am talking about, you stupid Earthling carbon units? When gold, silver and oil soar in price, that – that! – would be the time to sell a little bit of these wonderful appreciating assets, and use the pile of cash to have those nasty teeth pulled out and replaced with the latest and greatest innovations in implanted replacement teeth of the future, miracles of modern dentistry – maybe with built-in internet connectivity! – giving her a brilliant smile that her own stupid teeth could never even hope to achieve!”
 
Instantly, I was beset by the anticipated tide of people leaping to their feet, alright, only with no applauding, but instead having cereal bowls and spoons flying willy-nilly, a lot of screaming of really hateful words, how I was a horrible, horrible man who hates his children, and how they all wished I was dead, loudly daring each other to kill me (“I dare you!”), and blah blah blah.
 
Alas, my brilliant and wonderful Mogambo Ironclad Economic Reasoning For Survival (MIERFS) idea was for naught. Grasping at straws, I offered a little “happily ever after” treacle, saying, “Thus, she will be an inspiring story of an Ugly Duckling becoming the Beautiful Swan, a hero to ugly girls around the world, and her handsome prince will come along, and she will live happily ever after. In a castle!”
 
Desperate to seal the deal, I offered another hidden benefit. “And she’ll never have a cavity, or root canal, or crown, or bridge, or any of that expensive dental stuff to deal with, or pay for, ever again, either!”
 
But I see that my words that got me in trouble, which, thankfully, none of them recorded on their phones, and so it is just their lying words against mine.
 
But at least I am not poor Stanley Fisher, the vice-chairman of the Federal Reserve, who IS on record as saying, according to the Financial Times, “The challenge for policy makers was separating the cyclical from the structural, the temporary from the permanent.”
 
What? Hahaha!
 
Apparently, the structural part of the economy can exist independently of the cyclical, cyclical things don’t need the structural things, while cyclical things cannot become structural, and structural things cannot become cyclical! Hahahaha! The monetary policy of the United States is in the hands of these kinds of people? Yikes!
 
And don’t get me started on the insanity of hypothesizing something “permanent” in the economy, as nothing is permanent anywhere I look, but instead always in a state of decline. And so I would certainly rudely blurt out, “Drop dead, ya lowlife moron!”, the words dripping with all the scorn and contempt I could dredge up.
 
The part that almost made me pee in my pants was when he said, “The difficulty in disentangling demand and supply factors makes the job of the monetary policy maker especially hard since it complicates the assessment of the amount of slack, or under-utilised (sic) productive capacity, in the economy.” Hahahahahahahahahha!
 
I laugh uproariously! This Authentic Fed Gibberish (AFG)!
 
“Disentangling demand and supply factors”! Again, Hahahahahahaha! A new interpretation of Say’s Law? Hahahaha! As Bugs Bunny would say, “What a maroon!”
 
It all seems so, so easy to me. So easy, in fact, that I gleefully exclaim, “Whee! This investing stuff is easy!”
 
Perhaps this ridiculous nonsense was merely a ruse to distract us from asking how “tapering” of Quantitative Easing led the evil Federal Reserve to increase Total Credit by a hefty $11.5 billion in One Freaking Week (OFW) last week, and bought up a goodly $8.7 billion in US government securities, too, some or all of which may explain why the Monetary Base jumped up a massive $84 billion in that selfsame One Freaking Week (OFW) last week!
 
You can tell by the suddenly-serious look on my terrified face and my cold, steely gaze that when the vice-chairman of the foul Federal Reserve is saying things like that, and the Fed itself is creating cash and credit like that, and the population, and the politicians, and all our vaunted intellectuals of the United States are accepting things like that, then we are surely, surely doomed.
 
And if THAT if is not enough to make even the dullest Earthling carbon unit unhesitatingly want to go all-in, buying gold, silver and oil with a terrified, frenzied abandon, forsaking all else, then all the braces and the straightest teeth in the world will not be enough to pay for that dreadful mistake.
 
It all seems so, so easy to me. So easy, in fact, that I gleefully exclaim, “Whee! This investing stuff is easy!”
 
But to Earthling carbon units, it is apparently very difficult, if not impossible, to even vaguely understand. Maybe it’s their bizarre fixation on the straightness of their teeth!
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Aug 18

Gold Prices Lower on “Uneventful Monday,” Support from Hedge-fund Managers

Gold Price Comments Off on Gold Prices Lower on “Uneventful Monday,” Support from Hedge-fund Managers

GOLD PRICES have dipped below $1,300 this Monday afternoon. European stock markets rose following Asian gains. Analysts have referred to today as an “uneventful Monday”.

The single European currency trades Monday morning slightly lower, remaining in a tight range below $ 1.3400.

Reports of the destruction of an armed Russian convoy by Ukrainian troops on Friday pushed Brent oil up by one US dollar before coming back to trade below $103 per barrel as rumours seemed to be false, with Russia denying having crossed the border.  

Gold is expected to carry on “range trading… unless all the tensions in the world are sorted out,” says David Govett from Marex Spectron. “Gold is not the perfect safe haven … but it does knee jerk react to headlines and, as such, the downside should be limited for the time being,” he added.

In the Comex market of gold futures and options, gold’s bullish net position increased nearly 20% to 556 tonnes, the biggest jump for the last 8 weeks. The open interest gained for the first time in the last three weeks.

Silver cut the speculative net long position for the 4th week running.

Paulson & Co, the largest investor in the SPDR Gold Trust, maintained its stake in the exchange traded fund at 10.23 million shares in the three months ending June 30, as shown in US Government filings. This is the fourth consecutive quarter of unchanged holdings.

Another hedge fund giant, Soros Fund Management LLC, decreased its stake in Barrick Gold by more than 90% in the second quarter while it “nearly doubled” its ownership in the Gold Miners ETF and  initiated stakes in Allied Nevada Gold Corp, according to Reuters information.  

Axel Merk, chief investment officer of Merk Funds, considers that these actions underline that gold “has become increasingly attractive to hedge fund managers who are long-term investors as real interest rates remain negative.”

Gold closed its Monday’s trading session on the Shanghai Gold Exchange with a premium of $ 1.3 over the spot gold benchmark price in London. Reuters reports that physical demand in major buyers China and India has been weak with many consumers expecting prices to fall further. Bullion traders are expressing their worries that demand “might not pick up in the second half of the year, when it is normally stronger”.

This week’s macro data include US and UK CPIs plus the release of the FOMC minutes on Wednesday, which, according to analysts, should continue to reflect sustained improvement of the US economy, “and could give us a better idea of the Fed’s policy normalisation plan”. The Jackson Hole Symposium will start on Thursday, gathering central bankers from all around the world. This year’s title for the meeting is “Re-evaluating Labour Market Dynamics”. The US Fed Chairwoman, Janet Yellen, will speak on Friday.

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Aug 13

Risk? What Risk?

Gold Price Comments Off on Risk? What Risk?
US stock markets, like junk bond prices, are sitting near record highs…
 

PARTY LIKE it’s 1986 people! urges Dan Denning in The Daily Reckoning Australia.
 
The S&P 500 is just a few pips off its all-time closing high, hit a month ago on July 3rd at 1,985 points.
 
‘Unrestricted warfare’ in the skies of Ukraine? So what! Ultra-low global interest rates producing anaemic real growth? So what! Geopolitics as a factor in stock market valuations? So what!
 
Markets are treating risk like its cotton candy. Emerging market sovereign debt issuance was up 54% in the first six months of this year compared to last year, according to data from Thomson Reuters. Led by the likes of Mexico, Slovenia, and Turkey, governments in emerging markets are taking advantage of low interest rates to stock up on cash. Global investors have scooped up almost $70 billion in emerging market sovereign bonds so far this year.
 
Is this the new frontier of investing our colleague Kris Sayce is talking about? I doubt it.
 
Kenya’s government issued $2 billion worth of bonds in June. The offering was over-subscribed. Ecuador – a country that defaulted on its sovereign debt in 2008 – sold $2 billion worth of bonds in June as well. That offering was also over-subscribed.
 
It’s not just emerging market sovereigns either. The so-called developed markets issued $157 billion in new debt in the first half of the year. And that number doesn’t even include Chinese government debt, which is not yet traded in international markets.
 
Are you starting to get the picture? A low interest rate world leads to risk-taking behaviour by investors. That’s exactly what you’re seeing right now in the S&P 500’s performance and the demand for emerging market bonds. I’d tell you to be alarmed. But don’t take my word for it.
 
Billionaire investor Jeremy Grantham says the next bust will be ‘unlike any other’. He told the New York Times that US Federal Reserve Chairwoman Janet Yellen is ‘ignorant’. He’s preparing for the crash. Yellen’s rally may lead to new highs in the US. But from there?
 
Even Reserve Bank of Australia governor Glenn Stevens concedes there is only so much you can do with low interest rates. You can blow an asset bubble. But you can’t make a business borrow. “If people simply don’t wish to take on new business risks, monetary policy can’t make them,” Stevens told a gathering last month.
 
Stevens also suggested that the RBA’s next rate move could be a cut. That’s if the non-mining part of the Australian economy doesn’t get off its lazy backside, increase productivity, and start creating jobs and profits. A rate cut might take the steam out of the Aussie Dollar. But it barely budged in reaction to Stevens’ comments.
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Aug 07

America’s Immature Recovery

Gold Price Comments Off on America’s Immature Recovery
Can the Yellen Fed dare take away the QE allowance just yet…?
 

The PRICE of OIL is dropping – even with the problems in Russia and Iraq, notes Bill Bonner in his Diary of a Rogue Economist.
 
This suggests the global economy is slowing. And in the US, the homebuilders are crashing…probably in anticipation of higher mortgage rates.
 
Janet Yellen is being pushed into a corner by the Fed’s own pronunciamientos. It has been threatening to raise interest rates when its inflation and employment targets are hit. And hit they have been. So what’s she gonna do?
 
Our guess is she means what she says. She is a smart woman. But she is not smart enough to see that she has been talking claptrap…and not courageous enough to admit that her career is built on it.
 
“People come to think what they must think when they must think it,” is one of our signature dicta.
 
To become a major establishment economist Janet Yellen had to think that well-meaning, well-educated officials could improve the performance of a market system.
 
She could be a monetarist…or a Keynesian. Different strains of thought were acceptable. But she had to be some type of activist. She had to be a True Believer in the power of intervention.
 
And as numero uno at the Fed, she must believe, too, that its policies have prevented a depression and have helped the economy recover.
 
As lunatic as it sounds, she now believes she guides the US economy, and indirectly, the entire economy of planet Earth, to a stability and growth that it could not achieve on its own.
 
A heavy responsibility, no doubt. She probably hedges it with the further belief that an economy – like a surly teenager – does not always cooperate. It doesn’t always do what it ought to do when it ought to do it.
 
Sometimes it even sulks…and often, it fails to get out of bed in the morning. So, if it doesn’t meet expectations, it’s not her fault!
 
Now, she must think she’s got things headed in the right direction. Her role is to make sure it doesn’t get off track.
 
If she sees any sign the “recovery” has been put in danger by her attempts to normalize interest rates…she will back up. That is the history of the last seven years of Fed policy…and it is probably the best guide to the months ahead.
 
Almost surely, the withdrawal of QE will be accompanied by anxiety and volatility. As economist Richard Duncan points out, the net liquidity that has been driving up asset prices, month after month, is now drying up. The financial world is used to getting a big allowance, with no strings attached. Take it away and there are bound to be tantrums.
 
Yellen will not panic at end-July’s 500-point drop in the Dow. But if the drops continue…and if new data show the recovery is not as mature as she had thought…she will back off. She will give in. The allowance will be reinstated.
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