Archive for the ‘Infrastructure’ Category
Wednesday, November 9th, 2011
China’s inflation figure is being closely watched, because aside from government and central bank intervention in the West, the really big driver during the crisis was a massive spending spree by China – around 20% of GDP! [Feb 16 2009: Is China Pulling an Alan Greenspan?] While cheered at the time in most quarters some (hand raised) said there would be ill effects. [May 27, 2009: How is China Spending their Stimulus... and How Many Loans Will go Bad?]…. True to form, it led to many bad loans as so much money was shot out in every direction [Mar 29, 2011: [Video] An in depth Look at China’s Empty Cities] [Jan 14, 2011: [Video] Behold China’s Nearly Empty Mega Mall] [Nov 13, 2009: Ordos - China's Empty City] …. China is currently dealing with that fallout. [Jun 2, 2011: China Now Beginning to Feel Hangover from Lending Boom - Government May Assume Some Local Debt]
That said, the world’s speculators are praying for a new round of China stimulus even as the country grapples with the mess their last “Greenspan policy” left behind. However, China has had an inflation problem – and in a country where food inflation can lead to social strife, that’s no small matter. So today’s news that ‘official’ inflation is falling, will make those who demand government’s step in at every corner, happy as it may point to an end of central bank tightening.
As always with the China inflation figure – take it with many grains of salt… hence my quotation marks around “official” inflation. [Sep 13, 2010: BW - What's China's Real Inflation Rate? (What's China's Real Anything?)] [Nov 12, 2010: Even China Accuses China of Fibbing About Inflation]
- Chinese industrial output grew at its weakest annual pace in a year in October and inflation fell sharply, raising expectations Beijing will do more to support economic growth by “fine tuning” policy.
- A flurry of data on Wednesday showed that China’s factories are bearing the brunt of a modest economic slowdown even as consumer spending and investment in assets such as roads and other infrastructure remain resilient.
- China’s annual inflation rate fell to 5.5 percent in October from September’s 6.1 percent — the biggest drop in the annual rate from one month to the next since February 2009 — and a further pullback from July’s three-year peak of 6.5 percent.
- The 5.5 percent rise in the consumer price index in the year to September was in line with expectations from a Reuters poll.
- Producer price inflation also showed a marked slowdown to 5.0 percent in October, a one-year low, from 6.5 percent in September. The median of a Reuters poll had forecast an October reading of 5.7 percent.
- “All of this suggests that the balance of risk for the PBOC and State Council is likely shifting to growth and away from inflation,” Tim Condon, head of Asian economic research at ING in Singapore, said.
- China’s leaders have begun talking in recent weeks about “fine tuning” macroeconomic policy to maintain economic growth, which slowed in the third quarter to 9.1 percent, its weakest in more than two years.
- Premier Wen suggested prices had continued to fall. ”Since October, overall domestic prices have been falling noticeably,” Wen was quoted as saying by a government website. “Prices of pork and eggs have fallen, but prices of fruit, dairy products, beef and mutton remain at high levels.”
- But Zhou Wangjun, a senior official at the National Development and Reform Commission, saw inflation staying high and said it was too early for Beijing to relax policy. ”We will still maintain the prudent monetary policy and control the amount of money in circulation,” Zhou said, adding that the government will boost supplies of farm products to help put a lid on price rises.
- Wen and other policymakers have made it clear that stabilizing prices and fighting inflation are the top priority, so analysts rule out an early rate cut or reduction in bank reserve ratios.
- Evidence that food inflation is easing also supports the case for further fine-tuning measures from the government. Food prices, a major source of inflationary pressure in China, rose 11.9 percent in October from a year earlier, the smallest annual increase since May. But they fell 0.2 percent from September, the first decline since May.
- Even after the big fall in October, inflation remains well above the government’s 2011 target of 4 percent.
- While most analysts rule out an immediate cut in interest rates, there is more debate on when the central bank might reduce bank reserve ratios. At 21.5 percent, the RRR is at a record level for big banks.
Meanwhile industrial production has slowed some as well:
- Industrial output rose in October by 13.2 percent from a year earlier, slightly below expectations for a 13.4 percent rise and the weakest pace since October 2010. Exports were a net drag on China’s economic growth in the first nine months of this year as the sector felt the chill of a weak global market.
Tags: Alan Greenspan, Central Bank Intervention, Economic Growth, Empty Cities, Factories, Fallout, Grains, Hangover, Ill Effects, Inflation Figure, Inflation Problem, Inflation Rate, Infrastructure, Left Behind, Mega Mall, Quotation Marks, Reuters, Social Strife, Speculators, Spending Spree, Stimulus
Posted in Infrastructure, Markets | Comments Off
Monday, October 31st, 2011
Emerging Markets Cheat Sheet (October 31, 2011)
- China’s Flash PMI in October came in at 51.1, its first reading above 50 in four months. A PMI reading above 50 indicates the economy is in expansion mode and Asian markets have reacted positively to the news.
- China’s resources tax policy has been revised to be based on sales. It was previously based on production, which could have an adverse effect on corporate earnings when natural resources prices are down. Also, the tax was confirmed to be at 5 percent instead of the prior proposed rate between 5 and 10 percent.
- China has created 9.93 million jobs during the first nine months of this year and the country’s unemployment rate now sits at 4.1 percent. This is evidence of China’s robust labor market.
- After September’s slower inflation figures, China is probably passed the inflation inflection point. From October 17 to October 23, vegetable prices dropped 2.5 percent, and pork prices, the major driver of this year’s inflation rates, were down 1.8 percent on a week-over-week basis. Declining inflation should relieve the People’s Bank of China from further monetary tightening.
- China’s Premier Wen Jiabao said that the country’s economic policy will be fine-tuned as needed. China’s industry ministry said it is studying “stimulative policies” for smaller companies as a global slowdown threatens growth.
- China’s Shanghai Composite Index rose 6.74 percent with increasing volume for the week, reclaiming the 50-day moving average for the first time since the end of July. It was also the first uninterrupted “up week” in a year. However, the index is still down 12 percent year-to-date and its price-to-earning ratio is at the low of 2008.
- According to Citigroup, emerging market equity funds reported a second week of inflows as investors became more optimistic about the eurozone debt crisis. Funds investing in developing-nation stocks took in $1 billion for the week ended October 26. Adrian Mowat, JPMorgan Chase & Co.’s Hong Kong-based chief Asian and emerging-market strategist, said that, “we are now calling for emerging markets to outperform the developed markets. Everything in emerging markets got considerably cheaper in the last year.”
- Russia left borrowing costs unchanged after inflation slowed to 6.9 percent. Economic growth expanded the most in three years last quarter as lending to households spurred demand, Russia’s Economy Ministry said this week.
- Korea’s third-quarter GDP expanded 0.7 percent from the prior quarter. This is down from the 0.9 percent growth seen during the previous quarter but slightly better than the consensus estimate. Consumer confidence in Korea slightly increased but is still trending lower.
- Barclays Capital highlighted that Thailand’s flood is the worst in more than half a century, and may have wiped out as much as 14 percent of paddy fields in the world’s biggest rice exporter, potentially erasing the predicted global glut of rice. The crisis has severely affected large and small farmers alike. Many are also looking at more damage because they have been unable to move their animals in time to save them. One of the government’s recent measures has been a temporary waiver of the 2 percent import tariff on soybeans, a major ingredient in feed production, in order to help the livestock industry keep costs under control.
- Brazil’s September jobless rate remained unchanged in September at 6 percent, higher than expected. It had been anticipated that it would fall to 5.8 percent.
- Colombian policymakers held borrowing rates at 4.5 percent as they gauge the impact of the European debt crisis on global growth.
- Faced with a widening current account deficit, the Turkish Central Bank tightened monetary policy. The bank scaled back its weekly repo auctions and will instead provide funds via its overnight lending facility.
- BM&FBovespa SA CEO Edemir Pinto said that there are 40 companies waiting to list on Brazil’s stock exchange once market volatility eases after the country’s central bank cuts interest rates to boost growth, Bloomberg reports. Pinto, head of Latin America’s largest securities exchange, said the worst of the recent financial turmoil is over and investors will return to Brazilian stocks. He maintains his forecast for 200 new share sales by 2015.
- The yield on 10-year bonds issued by Poland fell below the yield on Italian debt of the same maturity on the expectations of a rating upgrade to A- from S&P.
- Russia’s 18-year quest to join the World Trade Organization (WTO) moved closer to fulfillment this week after Georgia agreed to a Swiss proposal for a compromise between the two governments.
- This chart from BCA Research shows that China’s infrastructure spending per capita is still much lower than the amount the U.S. has invested in its roads, rails, telephones, living spaces and passenger cars. Therefore, BCA forecasts China’s infrastructure build-out will continue, in turn boosting demand for natural resources and machinery.
- Sales of residential properties in Shanghai fell 14.9 percent during the first nine months to 10.63 million square meters, the Shanghai Statistics Department said. Facing increasingly tight liquidity conditions, swelling inventory and slowing sales, more Chinese developers have moved to cut prices by 30 percent in order to lure customers, Phoenix News reported from Hong Kong.
- RGE reported that a recession in developed markets, continued deleveraging in the eurozone and risk-aversion stemming from the eurozone debt crisis will hit Africa mostly through trade channels and higher financing costs. Despite sub-Saharan Africa’s overall resilience, limited financial integration on a global scale and depressed developed markets could hold back the region’s expansion. As a result, RGE has reduced growth forecasts to 4.8 percent in 2011 and 4.7 percent in 2012. In particular, RGE is expecting southern Africa, which has expanded 3 percent year-to-date, to keep lagging behind West and East Africa. This is due to the region’s weaker demographics, slower population growth and less convergence potential as the region has a higher per-capita GDP in comparison to its West and East counterparts.
- Argentina’s President Cristina Fernandez de Kirchner was re-elected in a landslide win this week, securing nearly 54 percent of votes. Ms. Fernandez’s current popularity is mostly due to the health of the economy, which has boomed thanks to high prices for exports such as soya. Days later, after regaining control, President Fernandez implemented a controversial law requiring all oil, gas and mining companies to repatriate all export revenue.
- PIRA Energy Group forecasts flat-to-declining oil production in Russia. Monthly production data to be released by the Russian statistical agency next week will give investors a more detailed view of the near-term trends.
Tags: Bank Of China, Bonds, Brazil, Corporate Earnings, Crisis Funds, Debt Crisis, Equity Funds, Expansion Mode, First Nine Months, Global Slowdown, Industry Ministry, Inflation Figures, Inflation Rates, Inflection Point, Infrastructure, Market Equity, Pork Prices, Premier Wen Jiabao, Price To Earning Ratio, Resources Prices, Shanghai Composite Index, Unemployment Rate, Vegetable Prices
Posted in Bonds, Brazil, Infrastructure, Markets | Comments Off
Wednesday, October 26th, 2011
Commodity Decline Could Provide a “Tax Cut”
October 24, 2011
- The global growth slowdown could offer some positive news: a decline in commodity prices and inflation.
- Domestically oriented countries—those that rely more on consumer or construction spending—could benefit from the consumption stimulus, while domestically oriented, emerging market countries could receive a dual benefit as monetary policy pressure lessens.
- Commodity prices may not decline to the same degree as in 2008, because another global recession appears unlikely.
It’s hard to cheer on a global economic slowdown, but there could be some good news for consumers amid the pessimism. As economic growth slows, the demand for commodities—such as oil, metals and food—typically slows, resulting in falling prices. The impact of this could be similar to a “tax cut” for consumers, giving them more money in their pocketbooks.
The benefit of this “consumption stimulus” is most likely to be seen in countries where growth is generated domestically, either through consumption or construction spending. Examples of developed, domestically oriented countries include the United States, Japan and the United Kingdom.
In addition to the “consumption stimulus,” emerging market countries could benefit from the downward pressure that falling commodity prices puts on inflation—reducing the need to hike interest rates.
Here, we’ll discuss:
- Why might we see a “consumption stimulus”?
- Why is inflation likely peaking?
- Who is likely to benefit from the “consumption stimulus”?
- Why are commodity prices unlikely to decline as much as in 2008?
- What are Schwab’s investment resources for international investors?
Why might we see a “consumption stimulus”?
Commodity prices tend to fall when economic growth slows due to reduced demand from both consumers and businesses. Consumers may cut back on energy use and purchase fewer goods and services to save money. Meanwhile, businesses may reduce production in response to reduced demand.
In addition, most commodities are priced in US dollars. When the dollar falls, commodity prices tend to rise as it takes more dollars to purchase the same amount of a commodity. And as we’re seeing now, the inverse is also true; commodity prices tend to decrease when the dollar rises.
While consumers pay attention to the prices they pay at the register, investors care more about inflation—and notably, we may have seen the top.
Why is inflation likely peaking?
With economic growth slowing, some investors are worried that inflation may increase because they may expect the Federal Reserve to pursue QE3 (quantitative easing, or asset purchases), which could weaken the dollar and raise commodity prices.
However, the dollar may not decline. Thus far, the Fed has done more to stimulate growth than the rest of the world. And with global growth slowing, other global central banks may begin to lower rates or pursue other stimulus measures in a “catch-up” phase. The impact of rate changes on currencies is relative. But the net effect of declining rates abroad and potentially better growth prospects in the United States is that the dollar may have an upward bias.
Commodity prices have already started to fall as a result of the economic slowdown, but inflation has not yet shown a noticeable decline. However, taking out the impact of the dollar and holding commodity prices unchanged from the levels reached this summer, measures of inflation are likely to decline relatively soon. The reason is that inflation is measured as a percent change from the prior period.
Commodity prices likely peaking near-term
Source: FactSet, Commodity Research Bureau, Dow Jones, NYMEX as of October 19, 2011.
* Indexed to 100 = 10/18/2006. 25-day moving average.
Who is likely to benefit from the “consumption stimulus”?
Depending on the type of economy, the “consumption stimulus” can have a different impact:
- Domestically oriented countries, those with bigger consumer sectors or reliant on infrastructure spending for growth, would benefit from lower commodity prices because a “consumption stimulus” could result in better potential for growth to reaccelerate. The extra money in consumers’ pocketbooks can be used for discretionary spending, and make infrastructure spending more attractive.
- Export-oriented countries tend to suffer in a global slowdown, although lower raw materials prices can reduce margin pressures for companies with less pricing power.
- In emerging market countries, food price declines have a large impact on inflation, because food accounts for a disproportional share of consumer spending. Emerging market inflation has been a problem due to rising commodities and expectations that prices increases would continue. Additionally, higher wages, which contributed to inflation when growth was accelerating, are likely to ease along with slowing economic growth. Peaking inflation could provide the cover for central banks to pause rate hike cycles, benefitting stocks.
- In developed market countries, the commodity that tends to get the most attention is oil. According to the Federal Reserve’s model, every $1 move in the price of oil equates to a 0.2% change in GDP in the United States. Through September 30, the price of Brent crude, the index most closely associated with changes of gasoline prices at the pump, has fallen $24 from the May peak. And while gas prices at the pump typically react a lot faster to spikes in oil prices than to declines, the national average price at the pump has fallen back down to $3.50 a gallon on September 30 from the $3.96 May peak.
Emerging market countries with a domestic orientation could receive a dual benefit from the “consumption stimulus” and the reduced pressure on monetary policy.
|Emerging Markets||Developed Markets|
|Domestically Oriented||Brazil India Mexico||Japan United Kingdom United States|
|Export-Oriented||South Korea Taiwan Thailand||Germany Singapore Switzerland|
Current outlook for select emerging market, domestically oriented countries:
- Brazil: the threat of a credit bubble could damage Brazil’s growth, where consumer spending grew on the back of excessive lending. Consumers have started to become delinquent on payments, risking the potential for bad bank loans in the future. Fiscal spending needs to be redirected from social programs toward productivity-enhancing investments. The central bank was one of the first to cut rates. However, with inflation still elevated, there’s the concern that the rate cut came too early, and inflation could resume upward.
- India: persistent inflation forced the central bank to essentially decide to sacrifice growth in the name of fighting upward prices. However, inflation remained above 9% in September, well above the central banks’ 4-6% target, and rate hikes may continue. Additionally, the country has longer-term issues with food supply. Available land has shrunk, crop yields have fallen due to flawed farming practices, and only 45% of fields are irrigated, leaving production at the mercy of weather. Other growth pressures include a large fiscal deficit and the need for foreign capital. Foreigner investors have pulled out money, discouraged in part by ongoing corruption allegations and government bureaucracy.
- Mexico: growth is typically tied to the United States, as it’s the destination for more than 70% of exports. Among developed nations, growth in the United States is attractive relative to the larger probability of a recession in Europe. Meanwhile, Mexico could benefit as auto production comes off the bottom and reaccelerates globally after the slowdown induced by the Japanese catastrophes earlier this year. Relative to other emerging markets, Mexico may have a better potential for growth because many other emerging markets could slow due to reduced growth in China.
Why are commodity prices unlikely to decline as much as in 2008?
While commodity prices fell sharply in 2008, prices may not decline to the same degree this time, because another global recession appears unlikely.
Emerging market incomes have continued to rise, increasing demand for both food and energy. Rising incomes tend to result in improved diets, increasing consumption of protein, which require more grains to produce than basic grain-based diets. This supports underlying demand for agriculture commodities. Additionally, energy consumption has risen in tandem with greater automobile penetration. Emerging markets now outpace developed markets in oil consumption.
Emerging market oil consumption more important than developed markets
Source: FactSet, BP Annual Statistical Review of World Energy as of December 31, 2010.
Tags: Brazil, Commodities, Commodity Prices, Crude Oil, Downward Pressure, Dual Benefit, Economic Growth, Emerging Market Countries, Energy Use, Global Economic Slowdown, Global Growth, Global Recession, India, inflation, Infrastructure, International Investors, Investment Resources, Market Analyst, Monetary Policy, October 24, Outlook, Pessimism, Pocketbooks, Positive News, Schwab, Stimulus
Posted in Brazil, Commodities, India, Infrastructure, Markets, Oil and Gas, Outlook | Comments Off
Dalio: “There Are No More Tools In The Tool Kit” – Charlie Rose Interviews The World’s Biggest Hedge Fund Manager
Monday, October 24th, 2011
When it comes to reading the world’s “tea leaves”, few are as capable as Ray Dalio, head of the world’s biggest (macro) hedge fund, Bridgewater Associates. So when none other than Ray tells PBS’ Charlie Rose that “there are no more tools in the tool kit” of fiscal and monetary policy to help America kick the can down the road, perhaps it would behoove the respective authorities to sit down and listen. Or not… and just to buy S&P futures in hopes that record career risk is big enough to force every other asset manager in the market to do the dumb thing and follow the crowd of lemmings right over the edge. Luckily, there are those who have the luxury of having both the capital and the time to not be drawn into the latest sucker’s rally. More importantly, Dalio shares some unique perspectives on what it means to run the world’s largest hedge fund, his perspective on social anxiety, and Occupy Wall Street and thus the demonization of wealth and success (in a way that does not imply crony capitalism: see Omaha), his views on taxation, on China, on the markets, on Europe and its insolvent banks, and most imporantly on the economy and why the much pained 2% growth (if that) will not be nowhere near enough to alleviate social tensions, such as those that have appeared over the past two months. Dalio’s conclusion, in responding to whether he is optimsitic or pessimistic, to the current environment of broad delevaraging of the private sector, coupled with record releveraging of the public, is that he is “concerned.” And that’s why, unlike the recently unemployed David Biancos of the world, who never exhibit an ounce of skepticism, Dalio is among the wealthiest men in the world (and hence a prime target of the #OWS movement). Well, that and also being smarter than most.
Full video interview after the jump
And complete transcript:
CHARLIE ROSE: Ray Dalio is here. He is the founder of Bridgewater Associates. He created the investment firm in 1975 out of a two-bedroom apartment in New York City. Today the company managed roughly $125 billion in global investments. Its clients include foreign governments, sovereign banks, central banks and institutional pension funds.
Over the last two years, Bridgewater ranked as the largest and best- performing hedge fund in the world. In 2010, his returns were greater than the profits of Google, Amazon and eBay combined.
I`m very pleased to have Ray Dalio at this table for the first time to talk about a perspective on the global economic scene and a whole range of issues having to do with where we see ourselves and also a look at his own philosophy and what has informed his own opinions and the way he looks at the world. Having said that — welcome.
RAY DALIO: Thank you.
CHARLIE ROSE: It`s great to have you here.
RAY DALIO: It`s great to be here.
CHARLIE ROSE: What is Bridgewater Associates?
RAY DALIO: It`s a global macro firm. We assess what the world economy is like and what — how asset classes will change and we are managing money for pension funds and endowments like you described; the Pennsylvania teachers, those types of pension funds. We`re trying to keep them safe.
CHARLIE ROSE: When you look at the world today, the global economic picture, I read today Goldman Sachs had a disappointing performance. JP Morgan did not do as well as some had hoped it might be. What`s happening with financial firms?
RAY DALIO: I think it`s important to understand that we`re going through a deleveraging. So we have to understand the big picture is — there`s a deleveraging. Three big themes: first there`s a deleveraging; secondly we have a problem with monetary and fiscal policies are running out of ammunition; and thirdly we have an issue in terms of people most importantly who are at each other`s throats politically and globally in terms of having a problem resolving those.
Imagine you earned $100,000 a year and you didn`t have any debt. You can go to a bank and borrow $10,000 a year. You can spend, therefore, $110 a year. When you spend $110,000 a year, somebody else earns $110,000 and they can go to a bank and there`s a self-reinforcing process in which your debt rises in relationship to your income.
And that goes on for a long time and that goes on for 50 or 75 years through history. We`ve had 50, 75-year cycles and then you reach a point where you can`t anymore get more debt and the process starts to change. And you can`t leverage up. Traditionally the private sector leverages up, we leveraged up then we got to a point in 2007 where we had a bubble and that same sort of bubble that happened in Japan, same sort of bubble that happened in the Great Depression, meaning we reached our debt limits. Europe`s reached its debt limits.
So then we begin the process in reverse as you can`t spend as much you — somebody else`s income falls. And that process works in reverse. So we`re in a deleveraging. So I think that this is important globally. That`s what Europe`s in.
So when we deal with Goldman Sachs or when we deal with banks and when we deal with Europe I think you can break the world into two parts, there`s the debtor-developed world which has reached its debt limits and is going through a deleveraging. Then there`s the creditor-emerging world, the countries like China which are competitive and are beginning to have those big surpluses and they`re lending us money. So we have this big imbalance in the world.
You can break the world into two parts. Debtor-developed countries and emerging-creditor countries and they have a big imbalance which is a debt problem. That`s the nature of the beast of what`s going on.
CHARLIE ROSE: And how long would the deleveraging take place? Ten years?
RAY DALIO: These take place over ten years. The key is to spread it out as much as you can. Make sure that it`s not disorderly.
CHARLIE ROSE: let me talk about the dysfunction issue. We can`t solve our problems domestically in the United States, our economic problems, unless there`s some sense of respect for other people`s views and some sense of it being able to come together and find solutions that are in the interest of the country, not necessarily always in the interest of the ideology or the party.
RAY DALIO: Yes. And I think that`s the problem so pervasively when we`re talking about culture. It is — when people disagree and you can take thoughtful people disagree, you have then the potential of learning a lot. If people who were disagreeing can say why do we disagree and work through that conversation in an intelligent way to try to find out what`s true, you can learn, you can make progress, it can be a fabulous thing.
When you instead have people who were talking behind each other`s backs and all criticizing and all looking for blame, this is a problem. I think the real question is how we approach those — can we approach that in a thoughtful way in which we work that through?
Let`s say for example the government budget balance.
CHARLIE ROSE: Right.
RAY DALIO: The government budget balance if you raise taxes — if everybody just sucked it in a little bit, you raise taxes by three percent, you cut spending by three percent — I`m using three percent as an example to say not much. Everybody should be able to pay three percent more or you should be able to cut your expenditures by three percent.
CHARLIE ROSE: If the government did that –
RAY DALIO: If the government did that, they would eliminate half the budget deficit — it`s estimated about $8.5 trillion over the next ten years is what we`re going to have as a deficit, they will eliminate half of that. Now –
CHARLIE ROSE: Over how long a period?
RAY DALIO: The next ten years.
CHARLIE ROSE: The next ten years, all right.
RAY DALIO: Now, I`m asking you if we could have every American — can everybody pay three percent more? Can everybody just spend three percent less? You can make a heck of a contribution to that.
Instead we have a division that`s going on in which we — the basic division is Republicans will say that we shouldn`t raise taxes.
CHARLIE ROSE: Or even reduce deductions.
RAY DALIO: Yes — in that way of raising taxes. So we — and Democrats say that we must raise taxes because we can`t cut the spending. So the delineation that as we came into that was the debt limit issue, that remains the debt limit issue.
And there`s vested interests involved; 70 percent of the taxes are paid by the top 10 percent of income earners, income taxes. And so — so what we have is a division here in which there`s not a coming together, I believe, and that means that in a deleveraging at a difficult time we`re not dealing with it in the best possible way. But it`s human nature.
CHARLIE ROSE: We are doing as they say, kicking the can down the road and not dealing with it. Suppose the super committee does not reach an agreement in terms of its requirement and therefore the mechanism — the trigger mechanism kicks in? What does your team think about that and what impact will that be?
RAY DALIO: Charlie, I`m meant to be a realistic person and sometimes when there`s concerns it`s difficult to talk about difficult situation. So I want to try and answer your question as honestly as I possibly can but I want to say that I`m very concerned not just of that. I do not believe that we will find a political solution. I think that that would not be — I`m pessimistic about that.
CHARLIE ROSE: So you have the same opinion that Standard & Poor`s had when they reduced –
RAY DALIO: Essentially.
CHARLIE ROSE: — America`s credit rating.
RAY DALIO: Essentially. So I think — and by the way I think it`s very important to understand that the government debt is the terrible challenging issue that we should talk about maybe but also more important is the private sector debt. So that resolving the public sector debt does not resolve the problem.
That individuals face the same problem meaning that they`re overly indebted and because they`re overly indebted and spend a lot of their consumption through borrowing and they had a — it was like if you borrow you have a party and everything`s good and you have a prosperity and you — you have your party, you hire the caterers, they`re employed and everybody`s happy.
So that there`s a private sector debt issue at the same time as the public sector debt. They`re both. So if you resolve the budget deficit, you do not resolve the private sector debt issue. Both of those things mean we`re both overly indebted. We cannot — the amount that we owe and have promised in its various forms can`t be paid.
Now we can accept is that right or wrong but let`s — and I think we need to talk about it forthrightly whether that`s right or wrong. And if it`s right — and I believe it`s right — then we have to talk calmly and logically about how we can approach that and deal with it in the best possible way without having this battle of one side or another.
Like the issue of is it better to have austerity or stimulus? The basic problem there is that there`s not a quality conversation on the subject. So if people who disagree could sit down and work on a television show or something, work through, how does the machine work, how does the economic machine work? What does it mean to each of those? How has it worked in the past so that they can understand what exists. Get past the ideology part of it and get on with trying to say we have is very difficult situation and how do we deal with it in our best possible way together?
We can`t solve the problem easily because we still have too much debt. But we can move forward in being able to make the best of it. We can spread it out, we can keep orderly we have a situation now in which we have a very severe situation, not only because we have a deleveraging going on, but we have a situation in which monetary policy cannot work the way it worked in the past, that fiscal policy will not be stimulative.
CHARLIE ROSE: Some people say that they describe that as there are no more tools in the tool kit.
RAY DALIO: There are no more tools in the tool kit.
CHARLIE ROSE: In terms of fiscal and monitory policy.
RAY DALIO: Yes, so number one is we have a deleveraging. Now that deleveraging means we`re going to have more debt problems. You`re going to see — no matter what is solved in Europe you will have a deleveraging. Banks will lend less and lending less will mean a contraction. That`s — that is what I believe is the case, we should talk about whether or not that is the case. Thoughtful people should discuss that.
If it is the case, we should then approach how do we deal with that? Now – - so I`m saying there`s a — I believe there`s a deleveraging going on. There are no tools in the tool kit and everybody`s at each other`s throats.
So that there is not a quality conversation of what is true; how do we best handle it?
CHARLIE ROSE: We have had that debate about the need for growth — which would be a stimulative impact on the economy and at the same time the need to reduce spending because of the debt and the deficit as well as the long- term debt. You need also to make investments for the future in terms of science and research and a whole range of issues so that that the country – - this country can be competitive around the world. Make sure it trained scientists and doctors and people who make a positive long-term contribution to the economy.
What is your own analysis as to how we find the right balance between austerity and growth? Or austerity and stimulus?
RAY DALIO: I think — I think it just comes back to the fundamentals same for us. Individually, the economics for government work the same as the economics pretty much for the individual that whatever we expend money on, we have to make sure — there`re certain things that are critical.
First you have to make sure that it will — it produces an income to pay it back. Investment, in other words, in some fashion or another. What we have to do is make sure that we put that money out and we — let`s say we build infrastructure, I believe that you can build infrastructure. I believe that you can hire people who unproductive people — people now who are idle, I think the worst thing now is not only the economics of it but I think the social impact of individuals who are not working or are living beneath their potential is a — is a dangerous thing.
It`s a social tragedy. It`s not good for them; it`s not good for the society. It`s a cancer that exists. They have to be made productive. But you can`t waste money doing it.
So those jobs — whatever they may end up being — or those investments have got to have a payback. And then –
CHARLIE ROSE: Did the stimulus program that was enacted by the Congress after the President — this President — assumed office, did it make a contribution to growth at all?
RAY DALIO: Oh, it made — it certainly made a big contribution –
CHARLIE ROSE: It did create jobs? Because some people would like to believe that that stimulus program didn`t create jobs and you`re here to say with your own analysis it did create some jobs.
RAY DALIO: Oh, a lot.
CHARLIE ROSE: Yes.
RAY DALIO: Ok but we — at the same time — and it created growth and it created some jobs. At the same time we have this overriding factor that is depressing jobs. So it created jobs in an environment — and let`s — so let`s turn to what is depressing jobs.
CHARLIE ROSE: Right. What is?
RAY DALIO: Ok. What`s depressing — what`s depressing jobs is that the world supply and demand for labor has changed. In other words, there`s a lot more people working as China came on and India came on and they are competitive. There`s a world supply of labor has change — has increased and technology has had an effect.
So we`re in an interesting era because I think almost and if you think of a person as — in a machine, an economic machine as being tool, a part of that economic machine the demand for labor has changed in a very profound way. It`s an interesting question. We might enter into a period in which we don`t need people as tools. So what does that mean?
CHARLIE ROSE: The two reasons that people are enormously curious about you: number one, is simply the objective success of what Bridgewater has done and become. And secondly there are interesting questions as to how you think about the world and how you think about investments.
You have mentioned a couple times the economic machine. Give us a sense of what that means to you. Because my understanding is that`s central to a philosophy you have about the way the economy works.
RAY DALIO: Reality works in a certain way. You have to understand how reality works. If interest rates go to zero and you can`t ease monetary policy, how does the economic machine work? Ok, a central bank can make a purchase and get money in the hands of somebody else or blah, blah, blah, blah, blah.
There is a certain machine. It is operated this — you can raise your debt relative to your income to so far but you can`t raise it more than that. And then when you reach that, that changes.
So the private sector cannot — there are such laws of economics, such realities of if — let`s say Europe. I`ll give you another one. We have a debt problem in Europe. You can either transfer the money from one rich country to a poor country –
CHARLIE ROSE: Right, Germany to Greece.
RAY DALIO: You can print the money.
CHARLIE ROSE: You can`t do it.
RAY DALIO: Or ECB could say I`ll find a way to do it, whatever.
CHARLIE ROSE: Right.
RAY DALIO: Or you can write them down. Those are the choices.
CHARLIE ROSE: So-called hair cut?
RAY DALIO: Hair cut.
CHARLIE ROSE: Machine for you is a theory of the way things work?
RAY DALIO: And so — yes, that`s right. It`s a description of reality. If I ski and I`m putting my weight on my downhill ski I will make a better turn than if I don`t.
CHARLIE ROSE: And you always make a point that you know what you don`t know and that`s equally valuable.
RAY DALIO: More valuable. I want to say that — so this is the whole philosophy. I — I so, know that I can be wrong; and look, we all should recognize that we can be wrong. And if we recognize that we`re wrong and we worry about being wrong than what we should do is have a thoughtful dialogue.
CHARLIE ROSE: Ok, but that –
RAY DALIO: So the way I get to success. The way — it`s not what I know. I`ve acquired some things that I know along the way and they`re helpful.
CHARLIE ROSE: It is — it is — it`s not what you know but it is –
RAY DALIO: It`s knowing what I don`t know or worrying that I won`t — that I`ll be wrong that makes me find –
CHARLIE ROSE: Yes.
RAY DALIO: Well, I want people to criticize my point of view — I want to hold down.
CHARLIE ROSE: Right.
RAY DALIO: Say I have a — I think this but I may be wrong. And if you can attack what I`m saying — in other words stress test what I`m saying — I`ll learn.
CHARLIE ROSE: So that everybody knows so therefore people will be free to tell you what they think.
RAY DALIO: Of course.
CHARLIE ROSE: Because you know that it will not be held against you and you can benefit from it.
RAY DALIO: That`s right.
CHARLIE ROSE: So anybody in a meeting at your company can stand up and say Ray –
RAY DALIO: Absolutely.
CHARLIE ROSE: — you`re absolutely wrong.
RAY DALIO: Of course.
CHARLIE ROSE: And you have not been precise, and your assumptions are flawed.
RAY DALIO: Oh it`s so essential, right. There`s — the — the number one principle at our place is that if something doesn`t make sense to you, you have the right to explore it, to see if it makes sense.
I don`t want people around who do things that they don`t — they don`t think makes sense because I`m going to have not-thinking people.
CHARLIE ROSE: Right.
RAY DALIO: So that they have not only the right, they have obligation. Don`t walk away thinking something`s wrong.
CHARLIE ROSE: Failure teaches you more than success?
RAY DALIO: Of course. One of my favorite books is “Einstein`s Mistakes.”
CHARLIE ROSE: Right. And because it showed you that even Einstein, the most brilliant person of the century in common judgment made mistakes?
RAY DALIO: The great fallacy of all — I think of all of mankind practically — I mean that`s a big statement — but the great fallacy is that people know more than what they do and there`s a discovery process and so when you look at — that`s the process for learning.
The process for learning is to say “I don`t know.” Like, I`m — I`m totally comfortable being incompetent. If I — if I — I like being incompetent. I don`t mind being an incompetent. If I don`t — how — how much can you be competent about?
And so that whole notion of do you like learning? Do you like finding out what`s true and building on it without an ego? And that becomes the problem. How many statements do you listen to people that begin “I think this, I think that,” where they should be asking “I wonder.”
CHARLIE ROSE: What`s in here? And why did you write it; because you wanted people who come to work with you to understand what your own philosophy was about openness, about management about dialogue, about the machine.
RAY DALIO: Yes. So what — I think every place has to have a culture.
CHARLIE ROSE: Right.
RAY DALIO: And culture is the values. What — when values are leaving (ph) out and so for example the number one value is it has to make sense to you, we have to talk about it, we have to work it through in a none egotistical kind of way. And so it`s an unusual place and it`s an unusual culture.
CHARLIE ROSE: Are you offended when people sometimes label it a cult?
RAY DALIO: I think that — I think a cult — when I think of a cult it means believe this. And where — it`s the opposite.
CHARLIE ROSE: Yes, you`re taken from on high.
RAY DALIO: In other words a cult mean — yes. Somebody`s telling you believe this –
CHARLIE ROSE: Because I said so.
RAY DALIO: And follow it.
CHARLIE ROSE: Because I have a superior wisdom.
RAY DALIO: Ok, it`s exactly the opposite of that, right? The number one principle is “Don`t believe anything; think for yourself.” And now let`s go through a process of what is true together. But we can`t stop that with ego. We can`t let that barriers stand in our way. So we`re going to live in a culture in which we can do that.
Ok, now that`s opposite of a — ok, it`s a belief system, in other words I`ll ask you do you believe that we should operate this way with each other. Ok, if you want to call that a cult, I think it`s the opposite of a cult, it means “think,” right? Speak up. Don`t hide it; don`t talk behind people`s backs. Its talking behind people`s –
CHARLIE ROSE: Did you have these ideas for a long time or these ideas that you came to through, came to through your own experience and your own living and your own sense of what you read and what you question and you came to this?
RAY DALIO: Of course, of course through my whole life. Now as I say when I started at the markets, the knowing I don`t know and the liking to have people challenge me. So when I was young I did like that — to know. I did know that I`m — I`m an independent thinker and I know that for an independent thinker and I like to innovate. We like to innovate.
And if you`re going to have an innovative thinker, they made –there`s a high chance they`ll be wrong and if you have to have an independent thinker they`re going to have a different point of view than the next person.
So if you`re going to have innovation and independent thinking you`re going to have to have the ability to disagree, to find out what`s wrong and I learned through my whole experience day after day that the cost of being wrong is a terrible thing.
So I worry about being wrong and because I worry about being wrong I want to know what`s true.
CHARLIE ROSE: Yes.
RAY DALIO: And we have a community here, I want to know what`s true including my strengths and weaknesses so that I know how to deal with them and I want to be in a community of other people who want to do that.
CHARLIE ROSE: Do you believe as –
RAY DALIO: And by the way that`s connected to our performance.
CHARLIE ROSE: You have this dialogue with members of the Tea Party on the Republican side and the members of the President`s administration on the other side. What would you tell them about the necessity for revenue in the next ten years?
RAY DALIO: Well, here`s what I would be telling them.
CHARLIE ROSE: You`ve got to tell them more than just talk.
RAY DALIO: Ok, no but here`s what I would say. Can I, Mr. President — Mr. Alternative Republican –
CHARLIE ROSE: Mr. Cantor, let`s say.
RAY DALIO: Ok, can we first just together sit down in a room, together with whoever you want to bring in, and go through an exercise of finding — now forget what we should do at the moment — just find out a discussion of how does the economic machine work? How does the machine work? We`re not going to get to what we`re doing at the moment. And can we agree on how the machine works?
CHARLIE ROSE: Do you think they`ve done that or not?
RAY DALIO: I — they don`t do that. They don`t — this is the big thing. Everybody`s looking at what to do and there`s a debate –
CHARLIE ROSE: Well but no this is about can they do — when I said do you think they have done that or not? Meaning have they set –
RAY DALIO: No, no, no.
CHARLIE ROSE: Let`s just test all of our assumptions about what`s necessary in the way the system works and the machine works?
RAY DALIO: No. No, so that`s the interesting thing. Everybody`s looking about what to do and each approaches it with a bias and we`ve not in a conversation that`s a quality conversation –
CHARLIE ROSE: And part of the argument comes — has to do with how you read history too. Those people who were saying –
RAY DALIO: Well, we could do it together.
CHARLIE ROSE: Right, we read history together?
RAY DALIO: And you can at a very nuts and bolts level I can take any period of history and put it through my template. There`s a template I wrote that describes how I think machine works.
CHARLIE ROSE: Right, right. When you have signed “The Giving Pledge” with Warren Buffett and Bill Gates, have you not?
RAY DALIO: Yes.
CHARLIE ROSE: When you look at the Buffett rule about 00 as a man who has a huge income, how do you feel about the Buffett rule vis-a-vis the way you look at it in terms of whether there needs to be more sacrifice on the part of people who are at the highest level of the economic –
RAY DALIO: So I — so — I think the answer to that is probably true.
CHARLIE ROSE: Yes.
RAY DALIO: Ok. I think that — but I want to be clear what — I want to say more than this on the subject. I think that there`s not enough discussion on people being — how do we get people to be self-sustaining?
So I want — so the number one thing I want for my kids, the number one gift I can give my kids or the number one gift that I can give anybody is that you`re self-sufficient.
I don`t — it`s not a matter of even living standards. It`s the notion of if you`re self-sufficient you have the freedom to make your own choices –
CHARLIE ROSE: It`s like a difficult parable about giving fish and teaching how to fish.
RAY DALIO: Yes and you can make whatever choices in life you want to make but you`re self-sufficient. And on an ethical standard it means that what I`m giving is equivalent to what I`m taking — self-sufficiency, right?
So what I want to do, what I think that we need to do is say this large percentage of the population, how do we make them useful? How do we make them self-sufficient? Let`s all agree on a goal of how to achieve that. So like my kids I don`t want to just give money. Let`s — I give — I`m going to give away a lot more than half of my money.
CHARLIE ROSE: Right.
RAY DALIO: I`d be happy to give that to the government –
CHARLIE ROSE: If?
RAY DALIO: If the government put together programs that were like I`m giving away to charity to certain programs in which I believe the money is sufficiently used to help people.
Let`s say for example if the government created a series of programs that said there`s this education, teach for America. If I can read these things off, ok, of these types of things –
CHARLIE ROSE: All those you support.
RAY DALIO: Yes or it doesn`t have to be those.
CHARLIE ROSE: Yes.
RAY DALIO: It just has to be good.
CHARLIE ROSE: Right.
RAY DALIO: Ok? If the government –
CHARLIE ROSE: The result has to be self-sufficient?
RAY DALIO: Yes. So for example Arne Duncan –
CHARLIE ROSE: The Secretary of Education.
RAY DALIO: Secretary of Education is a fantastic person for dealing with improving the quality of education in the United States and he — “Race for the Top” and such.
CHARLIE ROSE: So you say I`d be happy for my taxes to be raised if I knew that the money would go to be administered by someone like Arne Duncan.
RAY DALIO: Oh, man. Or even create a series of quality — I will — I will fund that opportunity. Give — don`t waste it. Ok, don`t waste it. Put it to good use for education, for opportunity.
So I`m — I think that what the country`s most important thing to give anybody is opportunity.
CHARLIE ROSE: Let me take this downtown to where there`s an economic protest on Wall Street.
RAY DALIO: Yes.
CHARLIE ROSE: In your sense — you clearly have read about that and looked at it — what do you think is at stake there and what do you think they`re saying to us?
RAY DALIO: I think the number one problem is that we`re not having a quality dialogue. So I wish that I could sit down –
CHARLIE ROSE: So somebody should be listening and –
RAY DALIO: No, no yes we get together, sit here in a room like you with those thoughts and understand how — how — what`s going on and what`s true. So for example on that particular case I don`t know that I adequately know the various points of views that are behind it.
CHARLIE ROSE: Right.
RAY DALIO: I certainly understand the frustration. I understand the dilemma. I understand that there`s discontent. Ok –
CHARLIE ROSE: Yes, discontent about there`s somehow a feeling that –
RAY DALIO: Right so it seems to me –
CHARLIE ROSE: — that some people did better because of the way the rules were or some people did better because –
RAY DALIO: Right.
CHARLIE ROSE: — they had power to influence Washington and they didn`t.
RAY DALIO: So I think we need to work ourselves through that. I — I`m sorry –
CHARLIE ROSE: No, no go ahead.
RAY DALIO: Ok, so I think that not only do we have to work ourselves through that, I would say like the question really is also a question that should be dealt — designated for our legislators, our government. Because if the government makes the rules, people will behind either — did they break laws or did they not break laws? This is a — this is a question of how should behavior be managed?
Like I think I — I think I did everything right, you know I — I did well for my customers. My customers are pension funds, teachers. I did well when others didn`t and I`m going to say that they are very grateful.
We have a wonderful relationship, 15-year wonderful relationship. That — what happens is I happen to earn one-fifth of the profits.
CHARLIE ROSE: Right.
RAY DALIO: So then –
CHARLIE ROSE: You make 20 percent.
RAY DALIO: Ok, I earn 20 percent of the profits.
CHARLIE ROSE: And you take a two percent fee for doing it.
RAY DALIO: What — yes that covers my overhead and a bit more.
CHARLIE ROSE: Right.
RAY DALIO: But anyway, I earn this money as a result. Very similar to I would say, any of those companies you mentioned, the eBay and so on and so forth.
CHARLIE ROSE: Right.
RAY DALIO: I pay about one-third in taxes. I pay about one — I give away about one-third. And I`m — and that`s what I do and I follow the law. And if I`m doing something that is incorrect, that they think is incorrect I`d like to know that and I would also like to say should those laws — is that right or wrong.
CHARLIE ROSE: You want the people who work for you to tell you exactly what they believe and to be able to document the fact that it`s not just what they believe but it`s what they have discovered.
And you have to test those ideas in the marketplace of your own firm before you go off and act on those assumptions, correct?
RAY DALIO: Yes.
CHARLIE ROSE: So what is it telling you now if Greece defaults? And that has a contagion ability to leap across the Atlantic and have some influence on the U.S. economy. What is it telling you, you know, about whether China, for example can maintain the level of economic growth it`s had and avoid the kind of social conflicts that might exist in that society.
What does it tell you about emerging nations and what it is that — what impact they will have on commodity prices and what does it tell you about the future of the dollar as a currency? All of those kinds of issues?
RAY DALIO: You`ve got a bunch of questions.
CHARLIE ROSE: No. I know I did.
RAY DALIO: And also I`ll do the best I can.
CHARLIE ROSE: In my remaining minute. Go ahead.
RAY DALIO: Ok, I would want to say that there is — there are two worlds. There`s debtor-developed countries and there`s emerging creditor countries, classically the United States and China.
CHARLIE ROSE: Right.
RAY DALIO: One is a creditor, one a debtor. They are getting we`re still borrowing, we`re still in debt, we`re still — they`re still earning. Then those two worlds can be broken into two — those that can print money and those that can`t print money.
So now when I`m giving you the total answer in my remaining minutes, Europe is — can`t, a lot of it, can`t print money. Therefore it will have to deal with whether there`s a transfer of wealth, there`s a limit to that transfer of wealth.
And so we are going to deal with the question of whether they would print money or get the haircuts. I think they`ll do both.
CHARLIE ROSE: Right.
RAY DALIO: When looking at China, China because they can`t raise interest rates because of their existing monetary policy, is that they can`t control credit growth in the normal ways that we control credit growth. So there`s a credit bubble emerging there and as — in other words there`s a quality of lending and it`s bypassing the credit system.
And that`s something that the Chinese will need to get a control of because it`s a dangerous thing. And so that creates their risk. If I take then the United States we`re in a position in which there is this deleveraging. Deleveraging is risky so for example banks are leveraged about 12 to 15, 17 times.
CHARLIE ROSE: Right.
RAY DALIO: 15 times is a round number it depends on the bank. They`re leveraged 15-1 and if they go down by one-fifteenth, we have a capital problem and we`re in a deleveraging. Those problems — bank crisis that have existed every ten years normally we are — we can have a problem.
We don`t have the ability to have the same effect of monetary policy as we did before because a central bank — it can buy a bond. It can — therefore buy the bond. It gives that money to somebody who sold the bond and they were going to buy something like a bond. They`re — the — the getting it in the hands of somebody who spends it on cars and houses who really owes probably too much in debt is not an easy thing to do for monetary policy. So monetary policy is not as effective and then we have this social tension.
So we should be able to — there`s this downward pressure of the deleveraging. We should be able to grow at a rate that`s comparable to our income growth if we are — if we keep orderly and we — and we work this through and everything is orderly. That means something between like 1.5 percent or 2 percent we should be growing at maybe about the 2 percent vicinity.
The problem with the 2 percent vicinity is that the employment rate remains the same or can trend higher. That produces social pressures, that produces tension which itself means that you can have a situation analogous to that which is existing in Greece and more social pressure you create the more tension that is existing and emerging in various ways, not just a Wall Street piece. But it`s existing in Spain.
CHARLIE ROSE: Right.
RAY DALIO: So if we can keep orderly and not argue with each other and not do disruptive things and we don`t go down ok and grow at that two percent you know maybe then it will be ok.
If we have disruption and we are not able to have a monetary policy and we can`t have fiscal stimulation and you have a problem of what do you do — you can`t recapitalize the banks. I mean if you should happen to need to recapitalize the banks you can`t have a TARP program again.
CHARLIE ROSE: Politically not feasible.
RAY DALIO: Politically not feasible.
So you have to have a plan. You need to be thoughtful, I think, how do you create that plan and not only it`s a theoretical thing when I say how do you make a plan because you have to be able to have agreement to implement the plan. You can`t have people at odds.
As I say sometimes to policymakers my job is very — is much easier than their job. My job is that I just have to pretty much anticipate what`s going to happen and be one step ahead. That`s not an easy job but it`s an easier job than policymakers who have to do that. They have to then find a solution for the bad stuff not happening. That`s not easy to find solutions and then even if they had solutions they have to get that solution through the political system. In which there`s — there`s — everybody`s saying that you can`t do that, whatever that is and everybody blaming each other.
CHARLIE ROSE: Are you optimistic or pessimistic?
RAY DALIO: I suppose I`m — if I was – I`m concerned. I think it`s a test of us. It`s a test of us in our society. It`s a test of us.
CHARLIE ROSE: On that note thank you for coming.
RAY DALIO: My pleasure, thank you for having me.
Tags: Asset Manager, Biancos, Bridgewater Associates, capitalism, Charlie Rose, Demonization, Dumb Thing, Fiscal And Monetary Policy, Gold, Hedge Fund Manager, India, Infrastructure, Insolvent Banks, Lemmings, Ounce, Prime Target, Ray Dalio, Skepticism, Social Anxiety, Social Tensions, Tool Kit, Video Interview, Wealthiest Men In The World
Posted in Gold, India, Infrastructure, Markets | Comments Off
Saturday, October 22nd, 2011
Muammar Gaddafi’s golden gun
Gold Market Cheat Sheet (October 24, 2011)
For the week, spot gold closed at $1,642.38, down $38.35 per ounce, or 2.28 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, fell 6.88 percent lower. The U.S. Trade-Weighted Dollar Index slid 0.49 percent for the week.
- The performance of the gold funds was in line with benchmarks and peers for the week, despite a jittery market. A handful of companies made positive gains. Among them is Detour Gold, up 4.4 percent, which is being driven by hedge funds going long Detour Gold and shorting Osisko Mining, down 9.4 percent. Rubicon Minerals was also up 4.0 percent on takeover speculation for the week.
- Further to the original agreement of C$92 million as a cash-share takeover of Grayd Resources, the takeover offer was sweetened to C$183 million cash instead. Since the announcement of the takeover on September 19, Agnico-Eagle shares have plunged more than 30 percent; it can be understood why Grayd would ask for more cash than shares.
- The European sovereign debt crisis is still dominating sentiment. Ultimately the money-printing solution should be positive for gold and the companies that control large resource bases of high grade reserves. The Russian Central Bank noted they will continue acquiring “huge volumes of gold.”.
- Bullion continued the recent trend, and outperformed equities for the week by 2.28 percent. The ongoing trend of weakness in junior mining companies relative to the seniors continues. The Market Vectors Junior Gold Mine ETF finished down 7.67 percent for the week, while the Market Vectors Gold Miners ETF closed down 6.87 percent.
- The plunge in Agnico-Eagle’s share price this week is reflective of how nervous investors are in the current economic environment. The write off of Goldex, Agnico-Eagle’s lowest grade operating mine, is a classic case of the street assigning too much value to low quality assets. The write down to the balance sheet is about $170 million but the market trimmed the valuation by $2.7 billion. Low grade assets have a much lower probability of delivering a dollar of profit to the bottom line.
- Only two mining companies have yet to meet consensus and guidance on gold production on their earnings this quarter. With no exception to the trend, Newcrest Mining’s gold production for September fell 16 percent to 587,286 ounces, being heavily affected by heavy rain and maintenance shutdowns at its mine in Papua New Guinea. Political instability, royalty concerns, strikes and weather influences have all been affecting the industry as a whole for the third quarter.
- The EU Summit meeting will take place this weekend. There are some expectations that a bank recapitalization could be worked out and this would take a lot of uncertainty out of the market. China, which Europe’s largest, trading partner, could see some benefits out of this. With Chinese consumers being the destination of about 60 percent of all commercial gold sold today, some stability would be a welcome relief.
- India’s festival, Diwali, takes place next week. With the festival around the corner, a slight dip in gold prices has presented a great buying opportunity for the metal. Traders are speculating that gold jewelry buying and smaller denomination coins will surge during the Indian festival of lights, with sales already picking up significantly.
- In response to weak mining sector growth and criticism over the industry’s contribution to economic growth, Tanzania is said to raise gold royalties by year end as the country continues restructuring the sector, the Minerals and Energy Minister William Ngeleja said on Wednesday. Despite Tanzania’s annual gold exports tripling to $1.5 billion in the past five years as the price of gold has risen, the government revenues have remained stagnant around $100 million a year.
- With talk of higher taxes, it is no wonder that Tanzania’s mining sector growth slowed to 5.8 percent for the second quarter this year in contrast with the 20.5 percent growth of the second quarter last year. Down from 28.3 percent in the first quarter of 2010, the sector only expanded to an annual of 2.1 percent in the first quarter of this year. Ongoing uncertainty over government policies, a prolonged power crisis and limitations within infrastructure were all contributing factors to this decline.
- Negotiations surrounding mining export and foreign investments bans for Eritrea were scheduled to begin Tuesday among UN Security Council members. The new draft resolutions, which stated in part that “all states shall prohibit investment by their nationals, persons subject to their jurisdictions and firms incorporated in their territory or subject to their jurisdiction in the extractive industries and mining sectors in Eritrea,” also calls on all states to prohibit the import of gold and other raw materials from the country, Reuters reported. Eritrea has been under considerable scrutiny from the international community for its reported affiliation with Somalia and funding armed terrorist groups, linked to al-Qaeda.
Tags: Agnico Eagle, Debt Crisis, Dollar Index, Gold, Gold Bullion, Gold Funds, Gold Market, gold stocks, Golden Gun, India, Infrastructure, Junior Gold, Market Vectors Gold Miners, Money Printing, Muammar Gaddafi, Nyse Arca, Printing Solution, Quality Assets, Rubicon Minerals, Russian Central Bank, Share Takeover, Sovereign Debt, Spot Gold, Takeover Speculation, Vectors Gold Miners
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Monday, October 17th, 2011
Repeating the Future
by Neel Kashkari, PIMCO
- For long-term investors, meaning those prepared to stay invested for three, five and even 10 years, who can endure volatility, we believe equities can offer attractive returns.
- In an extended period of slow economic growth and deleveraging, interest rates are likely to remain low. Actual income generation from investments is important.
- Hopefully society can institutionalize the lessons from this crisis so that future generations don’t repeat it: Individuals, corporations and countries should only borrow to fund long-term investment, not current consumption.
“Those who don’t know history are destined to repeat it.” – Edmund Burke
Having studied engineering and finance in college and graduate school, the last history class I took was my senior year of high school – U.S. history, with Mrs. Horgan. I remember class discussions about mistakes past leaders had made and becoming quite pleased with myself: “I would never make those mistakes. I know history and would surely do better”. I don’t think I was alone in my overconfidence. Implicit in Edmund Burke’s famous line is that people who do know history will avoid repeating it. They are wise. They can view what has happened in the past, and project it into the future. Recognizing potential pitfalls, they will succeed where earlier generations failed.
But this leads me to a question that philosophers have debated – and Hollywood has exploited – for years: If we could see the future, would we be bound to it? Would we be able to change course to materially affect the outcome?
Remember the Terminator series of movies about a woman, Sarah Connor, who learns that machines controlled by a military computer system, Skynet, take over the planet in the future? She tries desperately to stop it from happening. Yet, despite all of her efforts, she fails. The machines take over the planet.
Is it possible that certain events have already happened that have put us on a path whose destination we can not alter, despite all of our wisdom and effort?
Perhaps the historical leaders that Mrs. Horgan taught us about who made those mistakes didn’t simply lack wisdom. Perhaps they were trying to prevent an outcome that was rendered unavoidable based on decisions and events that had already taken place. Perhaps with all the knowledge we have gained in the ensuing decades we could have done no better.
Today, economists studying the Great Depression are quick to identify obvious policy mistakes: The Federal Reserve raised interest rates when it should have kept them low. Congress passed the Smoot-Hawley Tariff Act enacting trade barriers when it should have encouraged free trade. With all that we know now, we tell ourselves that the Great Depression wouldn’t have been so great.
Experts look at Japan, their real estate bubble, banking crisis, and lost decade of no growth and deflation and conclude Japanese policymakers were timid. The Bank of Japan should have been much more aggressive to battle deflation. Knowing what we know now, we wouldn’t have made those mistakes. Japan’s lost decade was avoidable, we tell ourselves.
Or perhaps in each case there were a series of events, conditions, and constraints that predetermined the outcome. Perhaps the wisest people today, transported to the past, wouldn’t have done much better. Perhaps when society massively misallocates its resources, profound economic consequences inevitably follow.
Perhaps today policymakers are trying desperately to prevent a painful economic adjustment that is likely inevitable after our society spent some 30 years accumulating debt to fuel consumption, rather than saving to drive investment. Perhaps the housing bubble and resulting financial crisis was largely unavoidable given our culture of debt. Perhaps the ballooning of our government’s balance sheet was inevitable in response to the crisis. Perhaps we really are in for a lengthy, multi-year period of slow growth and private sector deleveraging, and there are no policy tools to prevent that from happening.
Washington has certainly tried to prevent it: Quantitative Easing. Stimulus. Cash for Clunkers. Homebuyer tax credits. None have led to sustainable economic growth.
Is this really surprising? It is easy to generate strong economic growth when we are borrowing money to boost consumption. But now the private sector is paying down debt — a good thing, yet it results in slower economic growth, and painful, sustained unemployment. How could we expect a short-term boost of government spending (of virtually any magnitude) to make up for a long-term reduction in private sector demand?
The economy needs to continue adjusting, and frantic activity by policymakers won’t change that, any more than Sarah Conner’s years of planning were able to stop Skynet.
In their comprehensive historical review of financial crises, This Time is Different, Ken Rogoff and Carmen Reinhart document that financial crises often lead to sovereign debt crises, as governments borrow heavily to try to mitigate the fallout. Governments often default on their obligations, either explicitly, by not paying back creditors on time, or implicitly, by devaluing their currency or inflation. Economies then go through five- to ten-year adjustment periods causing severe hardship for their citizens until debts are worked off and sustainable growth restored.
Today the Federal Reserve continues to pursue aggressive policies to meet its dual objectives of price stability and maximum employment. Operation Twist is its latest initiative. With unemployment stuck at 9%, its aggressiveness is understandable. Chairman Bernanke has been clear that the Federal Reserve will not inflate away America’s debts. He will be aggressive so long as inflation expectations remain anchored.
But, one has to wonder, if, with the noblest of intentions, we are nonetheless on a course that will eventually lead to inflation and devaluation, just as Reinhart and Rogoff have warned. Perhaps the choices our society has made in the past have predetermined that outcome, but we haven’t realized or admitted it yet.
If this extended New Normal period of slow growth and deleveraging is unavoidable, does it mean equity markets will languish for the next decade? We don’t think that has to be so.
Let’s consider how equities offer returns to investors and see what markets today are telling us:
1) Multiple expansion.
Today, trailing twelve month earnings multiples for the MSCI World are at 12.2x compared with an average of 14.3x for the past year and 19.5x for the past 10 years. Emerging markets, as designated by the MSCI Emerging Markets Index, are cheaper yet, at 9.7x. While we aren’t forecasting strong multiple expansion from here, valuations today don’t seem excessive as long as the U.S. and global economy avoid recession.
2) Earnings growth.
Corporations have enjoyed very strong earnings in the past couple of years due to aggressive cost cutting, continued adoption of efficiency-enhancing technologies, as well as exports to higher growth markets. MSCI World earnings grew approximately 4% per year the last three years, with significant earnings growth coming from outside global developed economies. While a slow developed economy won’t help corporate earnings grow quickly, many companies can generate faster growth by continuing to export to higher growth markets. The New Normal does not necessarily doom corporate earnings – and careful stock selection can help.
In an extended period of slow economic growth and deleveraging, interest rates are likely to remain low, with the real return on bonds low or even negative. No longer having a debt-induced rising tide to continue lifting asset prices endlessly higher, actual income generation from investments is important. The MSCI World today offers a dividend yield of 2.9% which compares favorably to nominal 10-year Treasury yields at around 2%. Whereas the Treasury coupon is fixed, dividends on stocks tend to grow over time. Emerging markets are also offering yields of around 3.3% today.
Based on all three factors — reasonable valuations, healthy earnings growth and attractive dividends — we believe with careful stock selection investors can earn attractive returns during this extended period of slow economic growth.
But we must stress one additional aspect of the New Normal that is likely here to stay: heightened volatility. We have all experienced it watching equity markets rally and plummet on an almost daily basis, in part due to economic factors and in part due to a lack of confidence in political processes on both side of the Atlantic.
PIMCO is a long-term investor, and we do not try to time short-term swings in equity markets. Doing so successfully is almost impossible. We focus on whether near-term events change our long-term outlook for the companies we like. We also work to limit the downside risk of equity portfolios through the use of “tail-risk” hedges.
For long-term investors, meaning those prepared to stay invested for three, five and even 10 years, who can endure volatility, we believe equities can offer attractive returns. If you are saving to buy a house in six months, you likely don’t want to invest in equities today. However, if you are saving for your retirement or a child’s education, then investing in equities makes sense.
Even if the New Normal doesn’t doom equities, it is inflicting real pain on millions of people who have lost their jobs. Are policymakers really powerless to do anything about it? While short-term, consumption-oriented stimulus policies have failed to generate sustainable economic growth, long-term, pro-growth economic policies could help. It is well known that large corporations are sitting on record cash levels and are nervous about investing to expand and hire more workers. Offering a one-year tax incentive won’t have much effect when it takes three years to build a new factory which then has a five-year payback period. Fundamentally reforming our tax code to eliminate deductions and encourage long-term investment could have a powerful effect on our economic prospects; tax changes can affect investment behavior the moment they are signed into law. They can also be part of a grand bargain that reforms our entitlement programs and puts us on a path to fiscal balance. And smart infrastructure investments can expand the productive capacity of our economy. These long-term policies all seem obvious but are hard politically in a polarized country.
Yes, Sarah Connor failed to stop Skynet. But she did successfully prepare her son, John Connor, to lead the resistance against the machines. While we may not be able to avoid sluggish growth, we believe investors can earn attractive risk-adjusted returns by looking globally for the companies with strong balance sheets that are best positioned to thrive in the multi-speed global economy. And, hopefully society can institutionalize the lessons from this crisis so that future generations don’t repeat it: Individuals, corporations and countries should only borrow to fund long-term investment, not current consumption.
Tags: Attractive Returns, Bonds, Class Discussions, Computer System, Edmund Burke, Future Generations, Graduate School, History Class, Income Generation, Infrastructure, Long Term Investment, Military Computer, Outlook, Overconfidence, Philosophers, PIMCO, Potential Pitfalls, Sarah Connor, Senior Year, Slow Economic Growth, Term Investors, Terminator Series, Volatility
Posted in Bonds, Brazil, Infrastructure, Markets, Outlook | Comments Off
Monday, October 10th, 2011
Talking Points for the “Occupy Wall Street” Protesters
by John P. Hussman, Ph.D., Hussman Funds
Just a note – by the end of last week, Greek 1-year yields had surged to 144%. European leaders have shifted from promising to prevent a Greek default to promising instead to ensure that European banks are well capitalized. Here, I would repeat that it is essential for policy makers to make a distinction between liquidity and solvency. Banks that are solvent, and countries that are solvent, should be within the ring-fence, in the sense that it is sensible for policy makers to follow Bagehot’s Rule – freely provide liquidity, but only at high rates of interest, and only to the solvent and well-collateralized. Those institutions and countries that are not solvent should not be “saved” by using public funds to make private bondholders whole. The proper policy is to restructure, not bail out, the debt of banks and countries that have no reasonable prospect of paying off those obligations.
It remains in the best interest of Greece to default, and to leave the euro so it can depreciate its currency, but if it is going to default, it would be well-advised to default big. The only way to get new international capital after a default is for Greece to clear out enough of its legacy obligations that investors reasonably expect it to make good on any new funding they might (eventually) provide.
Talking Points for the “Occupy Wall Street” Protesters
We’re all for a good peaceful protest. As long-time readers know, I’ve been an adamant critic of the bailouts of mismanaged financial institutions, as well as various illegal policy actions that have been pursued by the Fed since the financial crisis began in 2008. Undoubtedly, there is good and bad on Wall Street, and we know a lot of smart, well-meaning financial advisors who go to work every day with the goal of improving the financial security of their clients, who do careful research, avoid speculation, and provide a service to others through their profession. A functioning economy needs to allocate capital effectively, and there Wall Street can be essential.
Unfortunately, over the past 15 years or so, the basic function of the financial markets has been corrupted into what I’ve grown to view as a self-serving carnival of speculation, where many participants are interested in nothing except getting the next rally going at public expense, regardless of how badly market signals are distorted, how recklessly capital is misallocated, or even whether what they do has any positive effect on the economy or the country (some of the sleazier ones even have their own shows on basic cable).
There is no single source of this transformation. Part of it is a remnant of the dot-com and technology bubbles, when market valuations moved to nearly triple the historical norm, and investors began to view perpetual market advances and high returns as a birthright. The subsequent decade of zero overall returns for the stock market largely reflects a reversion to more normal (but still cyclically elevated) valuations.
Another part of this transformation is due to the activist policies of Federal Reserve, which has continually attempted to short-circuit every instance of short-term economic discomfort by distorting the menu of investment returns (e.g. zero interest rate policies) in an effort to provoke investors to accept fresh speculative risk. Ironically, the long-term effect of distorting market signals has been to drive good, potentially productive capital into wholly unproductive uses – the housing bubble being a prime example. As a result, real U.S. gross domestic investment has not grown at all since 1998, and the portion financed by domestic U.S. savings has collapsed, so much of the new capital we’ve accumulated is owned by foreigners.
Undoubtedly, one of the greatest rhetorical victories of Wall Street has been to successfully plant in the minds of the public the idea that some financial institutions are simply “too big to fail,” and that the “failure” of “systemically important” institutions will result in global financial meltdown and Depression. The reality is much different.
So, with the hope of providing the Occupy Wall Street protesters with some talking points, what follows are some perspectives that might be useful in framing the issues that we are facing as an economy.
1) “Failure” only means that corporate bondholders don’t get every penny
Background: When Wall Street talks about the “failure” of a bank or other financial institution it means the failure of the company to pay off its own bondholders. It does not mean that depositors, counterparties or other bank customers lose money (See Recession, Recovery, and the Ring-Fence ). A bank is essentially a big portfolio of assets, about 70% which are typically financed by depositors, customers and other liabilities, about 20% by the bank’s own bondholders, and about 10% with the capital of the bank’s stockholders. In a typical bank “failure,” the bank is taken into receivership by regulators, the liabilities to stockholders and bondholders are cut away, the remaining package of assets and liabilities is sold as a single entity to some other firm (or can be reissued to investors as a new company), the old bondholders get the proceeds of that sale, and the stockholders are wiped out. When investors willingly take a risk, and buy the stocks and bonds issued by an institution that goes on to mismanage its business, this is the appropriate outcome. Depositors and customers typically don’t lose a penny (See the section on “How to Restructure A Major Bank” in Not Over By A Longshot ).
If public funds are provided during a financial crisis, and it cannot be clearly demonstrated that the institution is solvent, the funds should be provided post-failure, as senior loans to a restructured institution where shareholders and existing bondholders have already been subject to losses. The interest rate should be relatively high, to encourage replacement of public funds with private ones. With few exceptions, when public funds are used to avoid major restructuring and shield private investors from losses, the result is almost inevitably a larger, less transparent, and more recklessly managed institution.
The same is true for government or “sovereign” debt. When Wall Street talks about “failure” of Greece, for example, it means failure of Greece to pay off its own bondholders. In trying to avoid this failure, Greece is instead forced to impose extreme austerity and depression on its citizens. From the standpoint of those citizens, Greece has already failed them painfully. Those are the choices – let bad debt “fail” or force depression on innocent citizens.
Of course, there is a cost to any financial crisis, which is “contagion” where the failure of one institution or government calls others into question. The main way to contain this is to follow the century-old “Bagehot’s Rule” – lend freely, at high rates of interest, but only to institutions that are solvent and able to provide collateral for the loans. When policy makers behave as if every institution, solvent or not, is within the ring-fence, or that some institutions are simply “too big to fail,” saving these institutions comes at enormous costs, because true economic losses that should properly be taken by private investors are instead forced upon the public.
Keep in mind that money is fungible – not all losses are taken directly by the institution that created them. Many of the losses that should have been borne by banks were instead assumed by Fannie Mae and Freddie Mac. This allowed TARP to seem largely successful even while hundreds of billions of public funds are still being spent to bail out Fannie and Freddie. Recent efforts by government overseers of Fannie Mae to claw back these losses from the banking system are appropriate, but they also demonstrate how easy it is for private institutions to transfer their mistakes onto the public balance sheet.
2) The Federal Reserve’s purchases of Fannie Mae’s and Freddie Mac’s debt obligations were illegal
Background: Beginning in 2009, the Federal Reserve began buying nearly $1.5 trillion in obligations of Fannie Mae and Freddie Mac, both which were insolvent and in government receivership. The Fed justified these purchases by appealing to Section 14.2 of the Federal Reserve Act, which allows the Fed to purchase securities which are a “direct obligation of, or fully guaranteed as to principal and interest by, any agency of the United States.” Now, Ginnie Mae, the financing arm of the Federal Housing Administration (FHA) is a bona-fide government agency. So there would have been no legal problem if the Fed had purchased Ginnie Maes. In contrast, however, Fannie Mae and Freddie Mac were not, and are not, U.S. government agencies. Nor are the obligations held by the Fed “fully guaranteed as to principal and interest” by the U.S. government. At best, the obligations of these GSEs have implicit and informal backing, as any member of Congres will tell you, and simply taking a failing institution into conservatorship doesn’t confer government backing to its debt. In fact, the stop-gap measure enacted by Congress during the crisis only provides temporary backing for the obligations of Fannie and Freddie maturing by the end of 2012. Very simply, the Fed broke the law by buying Fannie and Freddie’s debt.
3) Creating shell companies to buy Wall Street’s bad assets is not “discounting,” and was therefore also illegal
Background: In 2008, the Federal Reserve created a set of off-balance sheet shell companies called “Maiden Lane” to buy undesirable long-term assets of Bear Stearns and other financial companies, justifying the purchases by appealing to Section 13.3 of the Federal Reserve Act. But if you actually read Section 13, it is clear that under the law, “discounting” means (as it has always meant) providing short-term liquidity by essentially providing a check-cashing service for obligations that are short-dated, well-collateralized, and promptly collectible (See also Outside the Oval / The Case Against the Fed ). The Fed’s creation of the Maiden Lane companies to purchase bad assets was, and remains, illegal under the language and intent of the Federal Reserve Act.
Keep in mind that we have only three branches of government: the executive, the legislative, and the judicial. The Federal Reserve is not an independent fourth branch of government, but operates under the legislation of Congress and therefore cannot be “independent” of Congressional control. While nobody wants monetary policy to be “politicized” in the sense of Congress telling the Fed what policy actions should be taken and before which election, it is quite a different matter to require the Fed to operate within the law. Here, Congress could use some encouragement.
4) The skewed distribution of wealth in the U.S. is worsened by policies that misallocate capital and divert public funds to bail out investments that have already gone bad.
Background: If you think about the “standard of living” in a country, you can roughly define it as the amount of goods and services that individuals are able to consume in return for their work. If you think about the “productivity” of a country, you can roughly define it as the amount of goods and services that individuals are able to produce for their work. Clearly, over the long-term, the productivity and the standard-of-living of a country go hand in hand. The best way to create both, over the long-term, is for an economy to build a stock of productive capital (inventions, new technologies, plants, equipment, public infrastructure, etc), and human capital (labor skills, education).
Still, even a generally productive economy can produce a skewed distribution in the standard of living enjoyed by its citizens. In a competitive and undistorted economy, the distribution of wealth is determined by the ability of each individual to a) provide a useful service, b) distribute the services they provide over a large number of “units”, and c) maintain the scarcity of what they provide.
So for example, professional football players earn more than teachers not because playing football has more virtue, but because professional football players are among a very small group, and distribute their “services” over millions and millions of spectators, each which implicitly pays a few cents to each player per game. Mark Zuckerberg at Facebook is able to distribute his services across hundreds of millions of users, each which implicitly pays him a tiny amount by viewing advertising. Bill Gates distributed his services over every computer that ran Windows, while the factory workers who built those computers were each able to distribute their skills over a smaller number of units. Teachers represent a large professional group, but are typically able to distribute their services over a limited number of students, each which implicitly pays a portion of their family’s income to the teacher. One-on-one aides tend to earn less, despite often being extremely skilled, because in order for them to earn a high income, their earnings would have to capture much of the income of their single student’s family.
The distribution of wealth has become increasingly skewed as trade has become more globalized and technology has allowed the innovations of a single person to be spread across millions of consuming “units.” At the same time, the economic emergence of China and India has brought forth literally billions of new workers who dilute the scarcity of the existing labor force. An economy where capital is scarce, protectable, and can easily be distributed over numerous units, while labor is plentiful, homogeneous and can only be applied to a smaller number of units, is an economy that is prone to an enormously skewed distrbution of wealth.
This process takes on a grotesque character when it becomes possible for a company to distribute its impact over a very large number of units, and government policy protects that ability even when the impact of the company reflects not skill but ineptitude. This is essentially what has happened with the “too big to fail” institutions. Despite inflicting massive damage on the economy, they are afforded a protected status that allows them to extract “rents” that don’t reflect the cost they have imposed. From that standpoint, the Occupy Wall Street protests are a welcome reflection of public frustration over Washington’s slavish coddling of reckless financial institutions.
The proper way to address the present economic imbalances is pursue policies that encourage the restructuring of bad debt, the allocation of public funds and private savings to productive investment and new research, the accumulation of education and labor skills (“human capital”) to allow workers to capture a greater share of their own productivity, and the continuation of social safety nets to ease the economic adjustments that are necessary in a deleveraging economy. In my view (which not everyone will like), this requires:
Again, long-term improvements in living standards require improvements in productivity, through the accumulation of capital, inventions, education and labor skills. The reason that wages are lower in developing countries is primarily because Americans are blessed to have an economy that has a legacy of accumulating productive investment and educating its workers. If we allow those advantages to slide, by misallocating investments, and diverting public funds from research, development, education and infrastructure in order to bail out reckless speculations gone bad, there is no inherent reason why other countries cannot rise to economic dominance. It’s our choice. We have far too great a need for productive investment than to use our scarce resources to bail out poor stewards of capital who gambled the nation’s savings and look to the government to make them whole.Market Climate
As of last week, the Market Climate in stocks remained negative, with our economic measures still solidly anticipating an oncoming recession. Strategic Growth and Strategic International remain tightly hedged. Strategic Total Return continues to hold about 18% of assets in precious metals shares, accounting for the majority of day-to-day fluctuations in the Fund, with an average duration of about 1.5 years in Treasury securities, and less than 5% of assets in utility shares and foreign currencies.
As a final note, the chart below updates one of our composite measures of U.S. economic activity, reflecting a broad set of ISM and regional Fed surveys. While the slight uptick in a few of these survey measures has been the basis of a strikingly premature “all clear” attitude taken on by Wall Street analysts, the fluctuation has been entirely negligible, and represents a tiny fraction of typical random month-to-month noise. It is equally important to recognize that the ISM indices tend to lag our Recession Warning Composite and our broader ensemble models (and also lag ECRI’s measures) by nearly 13 weeks, while payroll employment demonstrates a slightly greater lag. Given that the earliest signal – the Recession Warning Composite – deteriorated at the beginning of August, the October ISM, and even more likely the November reading, is really the window of concern. Suffice it to say that the recent evidence is generally more confirming than contradictory of recession concerns.
Tags: Best Interest, Bondholders, Bonds, Careful Research, European Banks, European Leaders, Financial Advisors, Financial Crisis, Financial Institutions, Financial Security, Hussman Funds, India, Infrastructure, liquidity, Peaceful Protest, Policy Actions, Protesters, Ring Fence, Solvency, Talking Points, Time Readers, Wall Street, Well Meaning
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Monday, October 10th, 2011
Emerging Markets Cheat Sheet (October 11, 2011)
- China will spend roughly 4 trillion RMB in the next five years to improve water and agriculture infrastructure. In Shandong province, the government plans to spend 20.6 billion RMB to construct the eastern route of the South-North Water Diversion Project. Such projects bode well for machinery and construction materials.
- Taiwan’s consumer price index (CPI) in September was 1.35 percent, slightly higher than 1.34 percent in August, while the Philippines’ CPI in September was 4.8 percent, also slightly higher than 4.7 percent in August.
- Korea’s CPI rose 4.3 percent in September, slowing from the 5.3 percent in August which was a three-year high.
- According to results of a sample survey, sixty main shopping areas in Shanghai realized total sales of RMB 1.035 billion from October 1 to October 3, a 26.2 percent increase year-over-year. Huiyin Household, a distributor of home appliances in tier 3 and 4 cities in China, released its sales from the national Golden Week holiday that showed a 74.64 percent growth on a year-over-year basis, with same-store sales increasing by 22.86 percent. This indicates China consumers are still spending.
- On October 2, the Forbidden City in Beijing recorded 127,800 visitors, while the official capacity was 80,000 a day. In Anhui province, the Yellow Mountain recorded almost 40,000 visitors a day, while Shanghai received 3.2 million tourists in the first three days of the Golden Week. A record number of visitors was also reported in many other cities and provinces such as Qingdao, Nanjing, Wuhan, Henan, and Shanxi.
- Chinese Premier Wen Jiabao said banks should support small businesses by extending credit to them with more tolerance for default, and the government needs to give them more preferential tax treatment, Xinhua News Agency reported. Mr. Wen was also quoted as saying the Chinese economy is “good” and “stable.”
- Turkey’s central bank has taken further steps, including a reduction in required reserve ratios, to limit the weakening of the lira, which slid to a record low earlier this week. This follows acceleration in the volume the central bank has sold at its foreign exchange auctions and interventions by other emerging market central banks to support domestic currencies in the face of risk aversion.
- Korea’s PMI for September fell to 47.5, according to HSBC Holdings Plc and Markit Economics. A figure below 50 indicates a contraction of industrial activities.
- China’s dealers of luxury cars have offered discounts to maintain sales as demand cools. In Beijing, BMW dealerships are discounting a 3-series car by as much as 19 percent, while Mercedes dealers are giving discounts of 20 percent.
- Turkey posted a worse-than-expected $8.2 billion trade deficit ($100 billion on a 12-month rolling basis) in August, reflecting a rise in global commodity prices, especially energy products, as well as the large divergence between robust domestic demand and sluggish external demand.
- In Hong Kong, the short selling turnover ratio today is much higher than in 2008. Short sellers and hedge funds are crowded on selling positions to take advantage of the market volatility. In today’s news-driven market, any good news can cause a market squeeze, which is an event in which all short sellers are covering their short position at the same time, pushing up the stock price. This high short/long ratio can be a contrarian indicator.
- In a recent news report, 89 percent of Wenzhou residents and 59 percent of businesses are involved in shadow bank lending, with total loans reaching 110 billion RMB. Some debtors have fled the city after they were unable to repay the debts. The Wenzhou news temporarily weighed on luxury stocks and banks. It looks like China has to battle a few important fronts at the same time – a property bubble, inflation, and bad debts arising from overexpansion. All of these could negatively affect economic growth.
Tags: Agriculture Infrastructure, Chinese Economy, Chinese Premier Wen Jiabao, Cities In China, Consumer Price Index, Forbidden City, Gold, Henan, Home Appliances, Index Cpi, Infrastructure, North Water, Preferential Tax Treatment, Premier Wen Jiabao, RMB, S Central, Sample Survey, Shandong Province, Shanxi, Tier 3, Water Diversion, Xinhua News Agency
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Friday, October 7th, 2011
Here are this weekend’s reading diversions for your personal enlightenment. Have a happy, long Thanksgiving weekend.
According to Edwards, one reason a parent might get along with one child more than another stems from temperament — if your child is similar to you, you’re more likely to feel compatible and want to spend time with that child, she said. A parent might also favor one child if he or she was born after lots of trying, if the child is the only girl or boy in the family, or if the child is easy to discipline. Birth order plays a role too, she said. For example, if you’re a first child and your daughter is as well, you might relate to her more easily than you do to a second or third child
After age 40, it’s not uncommon to start getting just a little bit shorter. But shrinking too much or too fast could be a sign of health problems, research shows.
Researchers at Princeton University and the University of Arizona found that people are more likely to yawn in the wintertime, since the temperature of the outside air is cooler than their internal body temp. That’s because when you yawn, you bring outside air into your body — and when you yawn to bring in cold air, it cools down your brain.
Multivitamins For A Headache Or Migraine | LIVESTRONG.COM
Your body needs several key vitamins and minerals to maintain a healthy nervous system, which can impact the development of headaches. Riboflavin and B-6, two B vitamins, along with vitamin D and magnesium, have been shown to reduce the frequency of migraines, so you should look for a multivitamin that contains all these nutrients. However, you should follow your doctor’s advice regarding proper migraine treatment.
Every day is a new beginning. But in life, sometimes you have to stop before you can truly begin. So starting today …
What is autoimmune disease? If we break down the word, you can see that it starts with “aut,” which comes from the ancient Greek word for “self.” I would hope you know that “immune” refers to the body’s immune system. So, autoimmune or “self-immune-system” diseases are those in which a patient’s immune system is attacking itself. The body’s mechanisms can no longer differentiate between foreign bodies and friendly bodies. Normally, the system’s white blood cells help protect the body, but the immune response in autoimmune patients destroys normal body tissue and foreign tissue alike. Think of it as friendly fire on a very minute scale.
A while back we posted a story about a bridge in the US that had been shut down indefinitely since a major crack was found irreparable. In Canada, we used to pride ourselves on superior roadways to that of the US, but that is rapidly changing. As governments of all levels struggle to stay on top of the crumbling infrastructure, we decided to take it to our Autobloggers to decide what is the worst of the worst for our cars and safety
Rita Altman, R.N.: Memory Loss Doesn’t Equal Loss of Humanity
People with Alzheimer’s disease or other forms of memory loss often seem to live in a different reality or a different time and place. Despite this disconnect, we should not simply dismiss a person as “gone” or focus so narrowly on all the abilities that the person has lost. Instead, we must focus on the uniqueness of each person and bring an open mind to how we address their needs — the basic human needs we all share.
A decade-long study of 135,000 men found that those who did not have children had a higher risk of dying from heart disease than those who did, raising new questions over the links between fertility and overall health, U.S. researchers said on Monday.
A new study found children with thinner parents are three times more likely to be thin than children whose parents are overweight.
“Fair-skinned individuals who burn easily are not able to make enough vitamin D from sunlight and so may need to take vitamin D supplements,” study researcher Julia Newton-Bishop, of the Cancer Research UK Centre at the University of Leeds, said in a statement.
“If you’re just grabbing and eating, you’re going to end up most likely consuming more calories than you need,” Gans told HuffPost. “And by consuming more calories than you need, you’ll most likely find you’re gaining weight because you’re not paying attention to what you are eating.”
Thanksgiving Day in Canada has been a holiday on the second Monday of October since 1957. It is a chance for people to give thanks for a good harvest and other fortunes in the past year.
Tags: B Vitamins, Birth Order, Body Temp, Brain Study, Canadian Market, Diversions, Favorite Child, Infrastructure, Migraine Treatment, Migraines, Multivitamin, Multivitamins, Personal Enlightenment, Princeton University, Riboflavin, Thanksgiving Weekend, Third Child, University Of Arizona, Vitamin D, Vitamins And Minerals, Vitamins Minerals, Wintertime
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Wednesday, October 5th, 2011
Perception vs. Reality
September 30, 2011
Liz Ann Sonders, Senior Vice President, Chief Investment Strategist, Charles Schwab & Co., Inc.
Brad Sorensen, CFA, Director of Market and Sector Analysis, Schwab Center for Financial Research
Michelle Gibley, CFA, Senior Market Analyst, Schwab Center for Financial Research
- Economic data continues to reveal sluggish activity, and markets have been increasingly trading in a “risk-on, risk-off” mode. While frustrating at times, opportunities can be found for investors who are patient.
- The Federal Reserve continues to try to stimulate greater economic growth, most recently with the announcement of “operation twist.” We have serious doubts this will engender any broad upturn, but it could help mortgage refinancings. We continue to look toward Washington to move beyond short-term rhetoric and provide some serious long-term plans that allow businesses to have more confidence in the future.
- European policymakers continue to delay any real action, increasing the risks of an escalation of the debt crisis. Meanwhile, China’s slowdown will keep downward pressure on global growth.
Correlations among asset classes have risen again as trading appears to have returned to the “risk-on, risk-off” action so prevalent over the past few years. The eurozone debt crisis has been a primary driver as market participants add or subtract risk based on the latest news out of Europe. In fact, we’ve seen the correlation between the German DAX (their equity market) and the US Treasury market increase to nearly 100%, a strong indication that the greatest near-term risk may be a European implosion.
There is not much more clarity in the US economy as economic data remains soft-to-mixed and bickering in Washington continues, keeping confidence among consumers and small businesses near 2008 lows. But there’s reason for optimism, especially for investors that keep a longer-term horizon in mind. American innovation, creativity, and entrepreneurship continue to be among our country’s best assets. Businesses are extremely profitable, balance sheets are strong, and cash levels are massive. Business investment has been a bright spot in the economy and given that it’s only running at a pace slightly above depreciation, there’s likely significant pent-up demand building for when confidence returns. And consumers’ balance sheets appear to be well-improved relative to the crisis levels of 2008. We continue to recommend investors use pullbacks to add to equity positions as needed to keep allocations line with targets; while looking to pare back any fixed income positions that may have become outsized.
Assessing the odds
One key to successful investing is balancing the potential risks of any certain investment with the potential reward. The goal, of course, is to add to those investments whose upside potential appears to most greatly outweigh the downside risk. Looking at the current markets, equities have traded in a relatively narrow range since the summer swoon and appear to be already pricing in a recession. Valuations based on historical means are relatively low as corporate profitability has remained healthy, while stocks have corrected.
A stronger message is emanating from fixed income, with Treasuries and high-grade corporate credit fetching near-record low yields. We believe this is a reflection of economic worries and foreign capital flows into US Treasuries, augmented by limited concern about inflation.
It remains our base case that the US economy remains out of recession territory, albeit in a low-growth phase for the foreseeable future. If we are wrong, stocks could have more downside. However, the upside to Treasury prices (and downside to yields) is severely limited. Yields can only go to zero, no matter how bad things get, and for much of the yield curve, we aren’t that far away.
But with so many negative headlines and dire forecasts permeating the news, it seems that any positive surprises could have a relatively large impact on markets. Case in point would be the initial strong reaction to the big drop in unemployment claims reported on September 29 and the upward revision to second quarter gross domestic product (GDP). While we aren’t forecasting a return to strong growth, the expectations bar has been set relatively low, a potentially good contrarian indicator for equities.
Corporate balance sheets remain flush with cash
Source: FactSet, Federal Reserve. As of Sept. 23, 2011.
* Cash includes: check deposits & currency, commercial paper, foreign deposits, money market funds shares, mutual funds shares, time deposits & savings, and govt. agency & Treasury securities.
Government continues to ding confidence, while the Fed works to offset the damage
The level of rhetoric continues to be elevated in Washington and the ongoing standoff in Washington is damaging the confidence of American businesses and consumers. It’s not that gridlock continues, which is often viewed positively by the market. It’s that many of the issues being discussed affect the ability of businesses to make long-term plans, while many of the decisions that have been made have been largely viewed as anti-business, particularly on the regulatory front.
We believe the error by both parties is in leaving long-term fixes aside for now in favor of short-term remedies. Numerous temporary steps have been tried, from “cash-for-clunkers” to home mortgage modifications and buyer tax credit; with few, if any, tangible results. We believe the latest round of proposals will have a similar impact.
Although we find it highly unlikely, an agreement between the two sides that resulted in a reformed, sustainable tax code, serious and practical entitlement reform, reasonable spending restraint, and a more friendly and globally competitive business environment would go a long way toward setting the economy on a sustainable growth path. The most effective and fastest way to solve debt problems is to grow your way out of them.
Fed contiues its efforts to restore confidence
The Federal Reserve continues to fight against this lack of confidence and announced its latest efforts at its last meeting through “Operation Twist.” The Fed will be selling short-term Treasuries and buying long-term Treasuries in the hopes of flattening the yield curve and pushing investors and businesses to move out on the risk spectrum. They also announced they will be reinvesting proceeds from maturing mortgage-backed securities back into the same instruments in an effort to stimulate the housing market. We continue to have doubts that these moves will have a significant impact on the overall economy, as confidence has been meaningfully damaged, including about the Fed’s policies.
The Fed can’t make people spend, borrow, or hire
Source: FactSet, US Bureau of Economic Analysis, Federal Reserve. As of Sept. 23, 2011.
* M2 velocity = GDP divided by M2.
Eurozone banks under stress, European recession may be next
Confidence continues to be undermined by the eurozone debt crisis; concern about the potential for Greece to default and contagion spreading to other “Club Med” nations; and losses on holdings of government bonds held on bank balance sheets. Anxiety has stressed European banks’ dollar-denominated funding; prompting global central banks to coordinate access to such funding. Banks have become skeptical of lending to each other, resulting in rising interbank lending rates.
European bank stress up
Source: FactSet. As of Sept. 27, 2011. Europe Bank Stress=three month EURIBOR (Euro Interbank Offered Rate) minus three-month EONIA (Euro Overnight Index Average) swap rate. Eurozone banks under stress, European recession may be next
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