Eric Sprott: Gold Alert (June 8, 2012)

Friday, June 8th, 2012

 
By Eric Sprott & Shree Kargutkar

June 8, 2012

There have been key developments in the physical gold market over the last few weeks which we feel are worth highlighting:

1) The Chinese gold imports from Hong Kong in April, 2012 surged almost 1300% on a YoY basis. Total gross imports for the month of April were 103.6 tonnes and the net imports were 66.3 tonnes¹. It is not the data for April alone which has caught our eye. There has been a stunning increase of gold imports through Hong Kong for export into China over the past 2 years. Between May 2010 and April 2011, China imported a net 66 tonnes of physical gold through Hong Kong. Between May 2011 and April 2012, that number jumped to 489 tonnes. This represents an increase of 640%.

HONG KONG GOLD EXPORTS TO CHINA (KG)

Source: Census and Statistics Department of Hong Kong

2) Central banks from around the world bought over 70 tonnes of gold in April, 2012. Data from the IMF showed developing countries such as the Philippines, Turkey, Mexico and Sri Lanka were significant buyers of gold as prices dipped².

3) Iran purchased $1.2B worth of gold in April, 2012 through Turkey. As the developed nations continue devaluing their currency at the expense of developing nations, countries such as Iran, China and Mexico are forced to look at alternative stores of value³.

4) After twenty years of lackluster returns and stagnant bond yields, Japanese pension funds have finally discovered the value of investing in gold. The $500M Okayama Metal and Machinery pension fund placed 1.5% of its assets into gold bullion-backed ETFs in April in order to “escape sovereign risk”⁴.

5) Bill Gross writes⁵, “Soaring debt/GDP ratios in previously sacrosanct AAA countries have made low cost funding increasingly a function of central banks as opposed to private market investors. Both the lower quality and lower yields of previously sacrosanct debt therefore represent a potential breaking point in our now 40-year-old global monetary system. […] As they (investors) question the value of much of the $200 trillion which comprises our current system, they move marginally elsewhere – to real assets such as land, gold and tangible things, or to cash and a figurative mattress where at least their money is readily accessible”. Is the bond king recommending gold? YES, YES YES!

6) The Gold Mining ETF, GDX, has seen strong inflows in the past 3 months. The number of units outstanding have increased from 162.5M⁶ to roughly 187M⁷ between March 1, 2012 and May 31, 2012. This represents an increase in assets of almost $1.2B in a span of 3 months. It is worth pointing out that for a majority of this three months period, GDX, and by extension the gold mining companies were experiencing significant declines in their market values.

We believe there has been a material change in the gold investing landscape. The HUI, which is the Gold Bugs Index, is now up over 20% from its lows since May 16th, 2012. The slide in gold equities seems to be subsiding as a foundation for a strong move upwards is set. New buyers, represented by the Chinese, central banks, Japanese pension funds and the Iranians, bought almost 140 tonnes of gold in April alone. To put this into perspective, the annual gold production is approximately 2600 tonnes⁸. China and Russia produce around 500 tonnes of gold annually, which never makes it to the open market. This leaves about 2100 tonnes of gold production annually for the rest of the world.

When buyers representing 140 tonnes of new demand enter a market which only has 175 tonnes of monthly supply, we are left wondering about two things:

1) In a balanced market, where is the source of supply to the new buyers going to come from?

2) How can a new buyer of size get into the gold market, which is already balanced, without significantly impacting the price of gold?

The answer is fairly obvious. When demand outstrips supply, prices move higher. These significant macro changes in the supplydemand dynamic of the gold market should propel the price of gold to new highs.

1. HK Gov statistics website: http://www.censtatd.gov.hk/

2. IMF website: http://www.imf.org/external/data.htm

3. http://www.resourceinvestor.com/2012/06/05/irans-gold-imports-from-turkey-surgedin-april?ref=hp

4. Financial Times: http://www.ft.com

5. http://www.pimco.com/EN/Insights/Pages/Wall-Street-Food-Chain.aspx

6. http://www.forbes.com/sites/etfchannel/2012/02/28/notable-etf-inflow-detected-gdx-abx-gg-nem-3/

7. http://www.forbes.com/sites/etfchannel/2012/05/29/noteworthy-etf-inflows-gdx-abx-gg-nem-3/

8. GFMS – www.gold.org

Tags: Bill Gross, Bond Yields, Buyers Of Gold, Central Banks, China, Developed Nations, Eric Sprott, ETF, ETFs, Gold, Gold Bullion, Gold Exports, Gold Imports, Gold Market, Gross Imports, Investing In Gold, Key Developments, Market Investors, Month Of April, Private Market, Shree, Sovereign Risk, Sprott, Sprott Gold, Statistics Department
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Bill Gross: Investment Outlook (June 2012)

Thursday, May 31st, 2012

Wall Street Food Chain

June 2012

by William H. Gross, PIMCO

• Soaring debt/GDP ratios in previously sacrosanct AAA countries have made low cost funding increasingly a function of central banks as opposed to private market investors.
• Both the lower quality and lower yields of such previously sacrosanct debt represent a potential breaking point in our now 40-year-old global monetary system.
• Bond investors should favor quality and “clean dirty shirt” sovereigns (U.S., Mexico and Brazil), for example, as well as emphasize intermediate maturities that gradually shorten over the next few years. Equity investors should likewise favor stable cash flow global companies and ones exposed to high growth markets.​

The whales of our current economic society swim mainly in financial market oceans. Innovators such as Jobs and Gates are as rare within the privileged 1% as giant squid are to sharks, because the 1% feed primarily off of money, not invention. They would have you believe that stocks, bonds and real estate move higher because of their wisdom, when in fact, prices float on an ocean of credit, a sea in which all fish and mammals are now increasingly at risk because of high debt and its delevering consequences. Still, as the system delevers, there are winners and losers, a Wall Street food chain in effect.

These economic and/or financial food chains depend on lots of little fishes in the sea for their longevity. Decades ago, one of my first Investment Outlooks introduced “The Plankton Theory” which hypothesized that the mighty whale depends on the lowly plankton for its survival. The same applies in my view to Wall, or even Main Street. When examining the well-known wealth distribution triangle of land/labor/capital, the Wall Street food chain segregates capital between the haves and have-nots: The Fed and its member banks are the metaphorical whales, the small investors earning .01% on their money market funds are the plankton. Yet similar comparisons can be drawn between capital and labor. We are at a point in time where profits and compensation of the fortunate 1% – both financial and non-financial – dominate wages of the 99% and the imbalances between the two are as distorted as those within the capital food chain itself. “Ninety-nine for the one” and “one for the ninety-nine” characterizes our global economy and its financial markets in 2012, with the obvious understanding that it is better to be a whale than a plankton. Not only do Wall Street and Newport Beach whales like myself have blowholes where they can express their omnipotence as they occasionally surface for public comment, but they don’t have to worry as yet about being someone else’s lunch.

Delevering Threatens Global Monetary System
Yet while the whales have no immediate worries about extinction, their environment is changing – and changing for the worse. The global monetary system which has evolved and morphed over the past century but always in the direction of easier, cheaper and more abundant credit, may have reached a point at which it can no longer operate efficiently and equitably to promote economic growth and the fair distribution of its benefits. Future changes, which lie on a visible horizon, may not be so beneficial for our ocean’s oversized creatures.
The balance between financial whales and plankton – powerful creditors and much smaller debtors – is significantly dependent on the successful functioning of our global monetary system. What is a global monetary system? It is basically how the world conducts and pays for commerce. Historically, several different systems have been employed but basically they have either been commodity-based systems – gold and silver primarily – or a fiat system – paper money. After rejecting the gold standard at Bretton Woods in 1945, developed nations accepted a hybrid based on dollar convertibility and the fixing of the greenback at $35.00 per ounce. When that was overwhelmed by U.S. fiscal deficits and dollar printing in the late 1960s, President Nixon ushered in a new, rather loosely defined system that was still dollar dependent for trade and monetary transactions but relied on the consolidated “good behavior” of G-7 central banks to print money parsimoniously and to target inflation close to 2%. Heartened by Paul Volcker in 1979, markets and economies gradually accepted this implicit promise and global credit markets and their economies grew like baby whales, swallowing up tons of debt-related plankton as they matured. The global monetary system seemed to be working smoothly, and instead of Shamu, it was labeled the “great moderation.” The laws of natural selection and modern day finance seemed to be functioning as anticipated, and the whales were ascendant.

Too Much Risk, Too Little Return
Functioning yes, but perhaps not so moderately or smoothly – especially since 2008. Policy responses by fiscal and monetary authorities have managed to prevent substantial haircutting of the $200 trillion or so of financial assets that comprise our global monetary system, yet in the process have increased the risk and lowered the return of sovereign securities which represent its core. Soaring debt/GDP ratios in previously sacrosanct AAA countries have made low cost funding increasingly a function of central banks as opposed to private market investors. QEs and LTROs totaling trillions have been publically spawned in recent years. In the process, however, yields and future returns have plunged, presenting not a warm Pacific Ocean of positive real interest rates, but a frigid, Arctic ice-ladened sea when compared to 2–3% inflation now commonplace in developed economies.

Both the lower quality and lower yields of previously sacrosanct debt therefore represent a potential breaking point in our now 40-year-old global monetary system. Neither condition was considered feasible as recently as five years ago. Now, however, with even the United States suffering a credit downgrade to AA+ and offering negative 200 basis point real policy rates for the privilege of investing in Treasury bills, the willingness of creditor whales – as opposed to debtors – to support the existing system may soon descend. Such a transition occurs because lenders either perceive too much risk or refuse to accept near zero-based returns on their investments. As they question the value of much of the $200 trillion which comprises our current system, they move marginally elsewhere – to real assets such as land, gold and tangible things, or to cash and a figurative mattress where at least their money is readily accessible. “There she blows,” screamed Captain Ahab and similarly intentioned debt holders may soon follow suit, presenting the possibility of a new global monetary system in future years, or if not, one which is stagnant, dysfunctional and ill-equipped to facilitate the process of productive investment.

Tags: Bill Gross, Bond Investors, Brazil, Central Banks, Equity Investors, Estate Move, Fishes In The Sea, Food Chains, Giant Squid, Global Monetary System, Gross Investment, Haves And Have Nots, Investment Outlook, Little Fishes, Market Investors, Member Banks, Money Market Funds, Stocks Bonds, Street Food, Wealth Distribution, William H Gross, Winners And Losers
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The Menu (Hussman)

Monday, May 9th, 2011

The Menu

by John P. Hussman, Ph.D., Hussman Funds

“The reality of risk is much less simple and straightforward than the perception. People vastly overestimate their ability to recognize risk and underestimate what it takes to avoid it; thus, they accept risk unknowingly and in so doing contribute to its creation.

“Risk arises as investor behavior alters the market. Investors bid up assets, accelerating into the present appreciation that otherwise would have occurred in the future, and thus lowering prospective returns. And as their psychology strengthens and they become bolder and less worried, investors cease to demand adequate risk premiums. The ultimate irony lies in the fact that the reward for taking incremental risk shrinks as more people move to take it.

“People often say, ‘It’s not cheap, but I think it’ll keep going up because of excess liquidity (or any number of other reasons). In other words, they say, ‘It’s fully priced, but I think it’ll become more so.’ Buying or holding on that basis is extremely chancy, but that’s what makes bubbles. In bubbles, infatuation with market momentum takes over from any notion of value and fair price, and greed (plus the pain of standing by as others make seemingly easy money) neutralizes any prudence that might otherwise hold sway.”

Howard Marks, The Most Important Thing

Just a note – Howard Marks is the head of Oaktree Capital Management, and wrote his new book, The Most Important Thing at the behest of Warren Buffett. Though the bulk of Oaktree’s business is in high yield debt, distressed debt, and private equity, the book is packed with insightful lessons for investors in most other markets as well. Included are many quotes from Marks’ client letters over the years. If you read them carefully with attention to their dates, you’ll notice that a great many of them would have been largely dismissed by investors because they were warnings against ongoing speculation – both in the late 1990′s and in the 2004-2007 period. Though Marks’ focus on value and risk management leaves little room for other quantitative investment methods and tools that I believe are useful – particularly those based on market action, internals and trend-sensitive indicators – I am convinced that most trend-followers pay far too little respect to value and true risk management (apart from, say, selling when prices break some moving average), so this book will be a great benefit to quantitative and technical investors as well.

You won’t find much in the way of specific models or methods, but the perspectives on value, risk and prospective return are outstanding. For long-term readers of my own market comments, you’ll see a lot of familiar themes. Marks views the ultimate investment error as “reaching for return” when markets are not priced to deliver them, and quotes Peter Bernstein, who said “The market’s not a very accommodating machine; it won’t provide high returns just because you need them.”

With valuations now pushing the levels we observed in 2007 (not to mention 2004-2006), it is clear simply from a valuation standpoint that investors are unlikely to be rewarded by “reaching for return” – even if the progress of the market remains positive or stable for a while longer. With respect to the gradual resolution of present credit conditions, Marks had this to say in a CNBC interview Friday:

“We’ve gone through a period – I’ve been in this business for 42 years – that has primarily been a period of great prosperity. My essential underlying assumption is that the coming years will not be as prosperous as the last decades of the 20th century were. Incomes were stagnant during that period. GDP grew healthily. What bridged the gap between incomes and GDP was the extension of credit, and I don’t believe that there will be a comparable increase in the use of credit in the next 10 years.”

The Menu

One of the ways investors can think about prospective return and risk is from the standpoint of the “Capital Market Line,” which essentially lays out a menu of investment possibilities at various levels of return and risk. In theory, investors like to believe that this menu is always a nice, positively sloped line, where greater risk is associated with greater prospective return. And somehow, regardless of where market valuations are, investors often seem to believe that 10% is “about right” for the prospective return on stocks.

As it happens, however, valuations exert an enormous effect on the prospective returns that stocks and other investments can be expected to achieve over periods of say, 7-10 years, and those figures vary a great deal. The menu is often anything but a straight line, and sometimes fails to have any upward slope at all. There are certainly shorter-term factors that can keep the market at rich valuations over periods of several quarters, and in rare cases, a few years, but this doesn’t change the mathematics of long-term returns.

For 5-year bonds or 7-year, high-quality corporate debt, you can essentially read the expected return directly from the yield to maturity. For long-term investments, like 30-year Treasuries or the S&P 500, there is somewhat more modeling required, but it should be clear from our standard methodology of estimating 10-year equity returns that valuations are extremely important in explaining the long-term total returns that investors subsequently achieve. Presently, our estimate of expected 10-year total returns for the S&P 500 is just 3.4% annually. The probable returns that were built into stock valuations in early 2009 have been compressed into the recent advance. Since 2009, to use Howard Marks’ words, investors have “bid up assets, accelerating into the present appreciation that otherwise would have occurred in the future, and thus lowering prospective returns.”

To illustrate how the menu of investment options has varied over time from an expected return/risk perspective, the chart below presents the menu that we estimate was available at a number of points in time. For 30-year Treasuries and the S&P 500, the expected return estimates use a 10-year investment horizon. I’ve included the profiles for August 1982, March 2000, August 2007, March 2009, and today.

Notice that 1982 was really a once-in-a-generation investment opportunity from the standpoint of long-term assets. On the basis of well-defined relationships between valuations and subsequent market returns, stocks were priced to achieve total returns approaching 20% annually for a decade. In fact, they followed with compound annual returns of nearly 20% over the next 18 years.

Unfortunately, the rapid returns of the S&P 500 in the late 1990′s exceeded those that stocks were actually priced to achieve, and therefore were “borrowed” from the future. By early 2000, the S&P 500 was priced to achieve negative 10-year total returns for the first time since 1929. Treasury and corporate bonds, however, were still priced to achieve reasonably positive returns in the 6-8% range. This was no secret to value-conscious investors. Then again, Jeff Vinik, who managed Fidelity Magellan, acted on this fact too early in the late-1990′s market bubble as prospective 10-year market returns dropped toward zero. Though bonds soundly outperformed the S&P 500 over the following decade, the shift was seen as inappropriate for a fund intended to closely track the market, and Vinik was replaced.

Though the 2000-2002 decline cleared a good portion of the extreme overvaluation (and allowed us to remove about 70% of our hedges in early 2003), it certainly did not take stocks to a level that could be viewed as historically undervalued. By 2007, the S&P 500 was priced to achieve prospective 10-year returns of less than 3%, while the prospective returns for bonds were scarcely above 5%.

The subsequent market decline, which took stocks down by more than half by March 2009, brought 10-year prospective returns for the S&P 500 modestly above 10% annually. I’ve regularly discussed the challenges of this particular cycle, particularly the need to contemplate credit-crisis data outside of post-war period (even after prospective returns exceeded 10% in the Depression period, stocks dropped by another two-thirds). With the methods we had available in 2009, we could not rule out substantially lower valuations (and far higher prospective returns). Still, my impression is that the snapshot of 10-year expected returns we observed in 2009 will probably turn out to be quite accurate when we look back in 2019. Meanwhile, the flight to safety in Treasuries, coupled with concern about credit risk in corporate debt, created an unusual hump in prospective returns for bonds, with corporate yields about twice the level of long-term Treasury debt, despite historically lower volatility.

The blue line on the graph presents the current menu of options available to investors. Importantly, except when one moves immediately away from Treasury bills, where the 3-month T-bill is now priced at a yield of 0.02%, the tradeoff between prospective return and risk has no positive slope at all. 10-year Treasury debt yields 3.16%. Corporate debt (as measured by the Dow Jones Corporate Bond Index) is priced to achieve returns of just 3.63%. Based on our long-term bond models (which factor in yield curve rolldown, real-interest rate reversion, and other considerations), 30-year Treasuries can be expected to achieve total returns of about 3.60% annually (though a sustained inflationary spike would worsen returns in the next decade and increase them in the out years), and we estimate that the S&P 500 is priced to achieve 10-year returns of about 3.43% annually.

All of these prospective returns are nominal. In real, after-inflation terms, they translate into an expectation of near-zero real returns over the coming decade. From the standpoint of pension funds and endowments, the current profile of expected returns is of great concern, given that few corporations, states, universities or charitable foundations have lowered their long-term return assumptions from the 7.5%-9.5% range. This means that we’re likely to observe increasing budgetary strains from underfunded pensions and endowments in the years ahead. Much of this is thanks to policies that have regularly aimed to distort valuations and have needlessly encouraged the allocation of scarce savings toward inefficient and often reckless uses.

The impact of the Fed’s policy of quantitative easing has not been to increase “wealth” upon which a future consumption stream can be based. Instead, the effect of QE has been to increase valuations – producing high short-run returns by borrowing from long-term prospects. This has now produced a degenerate menu of long-term investment options (for passive investment strategies). Quantitative easing cannot produce wealth – it can only shift the profile of returns from the future to the present by forcing all assets to compete with zero-return cash. Now that it has done so, it is urgent for investors to weigh the prospective returns that remain, against the likely long-term risks.

Needless to say, I do expect that greater prospective returns are possible from investment strategies with the flexibility to vary their market exposure and asset allocations over time, and to some extent, from certain sub-categories of stocks (particularly large-capitalization stocks with stable-revenues, clean balance sheets, and non-cyclical margins). Still, it is not possible at the aggregate level for all investors to enjoy above-market returns from asset allocation.

So the challenge – and success strategy – for investors will be to accept much less exposure to market risk when it is priced to achieve poor long-term returns, and to expand their exposure to market risk when it is priced to achieve strong long-term returns. At present, the weight should move toward defensive strategies, though as I noted earlier, investors should be mindful that long-term prospects don’t cleanly resolve into short-term outcomes. Despite the challenge in the recent cycle of having to contemplate Depression-era risks, none of the lessons we’ve learned suggest that valuations have become unimportant. Investors should understand that attention to valuation and risk-management are likely to be their greatest assets as they address the low-return investment menu that is presently available, and the changes that will be offered in that menu as the coming years unfold.

Market Climate

As of last week, the Market Climate for stocks remained characterized by an overvalued, overbought, overbullish, rising-yields syndrome that has historically been hostile for stocks. Still, given that we had the opportunity two weeks ago to raise the strike prices of our put options in Strategic Growth as the market pushed against every upper trading band (daily, weekly, monthly), last week’s selloff put those puts in the money, and gave us an opportunity to cover about 30% of our short-call option position while still retaining strong downside protection. Strategic International Equity remains tightly hedged here as well.

The shift in Strategic Growth will be helpful primarily if the market advances more than a few percent, at which point our put options would go back out-of-the-money, leaving us with a roughly 30% unhedged position coupled with a tight “safety net.” Ideally, though, we would prefer for the stock market to “clear” the present condition with a larger decline, a retreat of advisory bullishness, a clear reversion to falling interest rates, or ideally all of these. At that point, we could drop our put options from in-the-money to slightly out-of-the-money, giving us a greater exposure to market fluctuations but retaining something of a “line-in-the-sand” if the market was to experience extended weakness.

My longer-term view is clearly cautious, particularly given the syndrome of hostile conditions I noted last week (see Extreme Conditions and Typical Outcomes ). Still, those conditions have more consistent importance for intermediate- and long-term market outcomes than they have, on average, over the following 3-6 month period. In some cases, such as 1987, the short-term outcome was very severe. But given the variability, my impression is that the best approach is to maintain a willingness to accept market exposure provided that we clear some component of the present hostile syndrome, but also to retain a safety-net using a line of out-of-the-money put options to defend against market losses that might emerge more quickly.

In bonds and precious metals, we observed a slight improvement in market conditions last week. For bonds, this was due to some general weakness in economic reports, relative to expectations, which eased the upward pressure that we had previously seen in Treasury yields and – given that the weakness was not enough to create credit concerns – also eased the pressure on corporate yields. In precious metals, the selloff in gold and silver was modestly constructive in that it moves us closer to the point where we would be willing to re-establish some of the exposure we cut previously. The breathtaking plunge in silver prices was a wonderfully instructive example, I thought, of what happens when a Sornette-type bubble hits its “finite time singularity” (see Anatomy of a Bubble ). Strategic Total Return presently carries a duration of about 2.7 years, with about 5% of assets allocated between utility shares and precious metals shares.

Copyright © Hussman Funds

Tags: Behest, Bubbles, Capital Management, Client Letters, Distressed Debt, Easy Money, Excess Liquidity, Gold, Greed, Hussman Funds, Infatuation, Investor Behavior, Irony, Market Investors, Market Momentum, Private Equity, Prudence, Risk Premiums, Speculation, Sway, Warren Buffett
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Navigating Fears of the Bond Market

Tuesday, June 22nd, 2010

This article is a guest contribution from James Pressler, Northern Trust.

As we take stock of the global landscape at mid-year it is immediately apparent that international risk appetite remains very fragile, with bond market investors in particular nervous about the massive amounts of debt being issued by many countries. Fear of sovereign default (historically a pretty rare occurrence) has surged. For many countries credit default swaps (CDS), the main point of reference for indicators of sovereign default risk, remain sharply higher than two years ago (Chart 1). The synchronized nature of the global financial crisis and recession led to a massive increase in government borrowing that has yet to abate. Most investors are reluctant to take big positions given the level of uncertainty about the global outlook and even emerging market debt issuance has been drying up in recent weeks as spreads have ballooned. After last year’s recession-induced fiscal blowouts, many sovereign debt issuers are now discovering that demand at auctions is hinging on domestic policy news, particularly on progress in implementing fiscal tightening or even outright austerity. The need to keep the bond market happy while implementing often far-reaching fiscal reforms is most acute across Europe, where the outlook is for weak real GDP growth into 2011 – albeit with significant variations between countries. Conversely, the recoveries in Asia and in the Americas have effectively eliminated fears of sovereign defaults but now concerns over economic overheating will dominate. Finally, the U.S will eventually have to address its own public debt overhang, but for now is enjoying a temporary safe haven status.

Chart 1

Europe: Higher Funding Costs and Painful Reforms

The trigger for Europe’s current difficulties came late last year with revelations that Greece’s budget deficit and public sector debt levels were far higher than previously admitted. As a result Greece, with junk-level sovereign debt ratings and punishingly-high CDS rates (Chart 2), is now shut out of the markets and dependent on IMF and EU aid. However, the roots of Europe’s woes can be traced to last year’s recession. The economic contraction hit some public budgets harder than others, depending on the underlying flexibility of labor markets, the fiscal stimulus measures enacted, and the level of spending on banking sector bailouts. In the wake of a number of Euro-zone sovereign debt rating downgrades earlier this year, the markets are now hyper-sensitive to the longer-term fiscal outlook across the region. Euro-zone sovereigns face additional pressure because they are unable to print money to repay their outstanding debts. Non-Euro-zone Sweden, which has recovered smartly from the recession, looks set to return to a public sector surplus by 2012 without having to implement any major spending cuts or reforms. The rest of the region is not in such a happy place. Countries such as Finland and Germany should be able to get their government accounts back onto a sustainable path by clawing back stimulus measures and continuing with existing plans to maintain competitiveness and productivity – although the political fallout of spending cuts will mean headaches for the incumbent governments. However, countries such as Spain and Portugal will need more deep-seated structural reforms of their labor markets and public spending. So, too, will France and Italy, although they are not yet as afraid of the bond markets, being much bigger economies and able to carry a higher debt load.

Tags: Brazil, Budget Deficit, Canadian Market, China, Credit Default Swaps, Debt Issuance, Debt Issuers, Debt Levels, Debt Overhang, Default Risk, Fiscal Reforms, GDP Growth, Global Financial Crisis, Global Landscape, Global Outlook, International Risk, James Pressler, Market Investors, Massive Increase, Point Of Reference, Rare Occurrence, Real Gdp, Risk Appetite
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Bill Gross: Investment Outlook (August 2009)

Thursday, July 30th, 2009

Bill Gross shares his latest take on markets, the economy and investing in his August 2009 investment outlook, “Investment Potions.”

Here are a few excerpts:

On price vs. performance – getting the potion you paid for…

But my point is that those who sell investment “potions” must wrap their product with an extra large ribbon because history is not on their side. Common sense would dictate that the industry as a whole cannot outperform the market because they are the market, and long-term statistics revealing negative alpha for the class of active managers confirms it. Yet, what a price investors are willing to pay! A recent Barron’s article pointed out that stock funds extract an average 99 basis points or virtually 1% a year in fees from an investor’s portfolio. Bond managers are more benevolent (or less pretentious) at 75 basis points, and many money market funds manage to subsist at a miserly 38. Still, those 38 basis points are as deceptive as the pea that disappears beneath the shell of a street-side con game.

What investors need to do in this new normal market…

Investors looking for love potions or successful investment strategies in this new normal economy dominated by deleveraging and reregulation must focus on some very macro-oriented ingredients as opposed to typical news-dominated minutiae. The latest quarterly earnings report from Goldman Sachs may be an indicator that the financial sector is getting some color in its cheeks, but it doesn’t really let you know what needs to happen in order for the real economy to stabilize as well.

Read the whole newsletter here, or click on the image below.

Source: PIMCO, August 2009 Investment Outlook

Tags: Barron, Basis Points, Bill Gross, Common Sense, Con Game, Financial Sector, Goldman Sachs, Gross Investment, Investment Outlook, Investment Strategies, Looking For Love, Love Potions, Market Investors, Minutiae, Money Market Funds, Portfolio Bond, Potion, Quarterly Earnings Report, Stock Funds, Term Statistics
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Byron Wien’s Ten Predictions for 2008 and what he predicted for 2007

Thursday, January 3rd, 2008

January 2, 2008 Check out what Pequot Capital’s Byron Wien predicts for 2008 in Wall Street Journal: Here’s a quick summary of his 2008 predictions:

1. The U.S. economy suffers its first recession since 2001.
2. S&P earnings decline year-over-year, and the index falls 10%.
3. The dollar strengthens in the first half to $1.35 against the euro, but weakens in the second half.
4. Inflation rises above 5% on the CPI and 10-year yields hit 5%. Stagflation becomes a prominent topic on the campaign stump and in op-ed pieces.
5. The price of oil goes down early in the year (to $80 a barrel) and up again later, rising to $115 a barrel in the second half of 2008.
6. Agricultural commodities remain strong. Corn rises to $6.00 a bushel and cotton to 85 cents a pound, while gold reaches $1000.
7. The Chinese stock market gets hit sharply as the Chinese economy slows. China revalues the remnimbi by another 10%. (As an aside he expects several long-distance runners to beg off from the Beijing Olympics due to air quality issues.)
8. Russia’s new president, Dmitry Medvedev, becomes more assertive in world affairs, and Russia and Brazil lead the BRIC stock markets, while the Gulf Cooperation Council markets begin to attract interest among emerging market investors.
9. Infrastructure improvement will be an important election theme, bolstering construction and engineering stocks. Water supply becomes a criticial problem world-wide.
10. Barack Obama is elected president in a landslide over Mitt Romney, and the Democrats end up with 60 Senate seats and a clear majority in the House of Representatives.

  Here’s what he predicted for 2007: Pretty Good Calls

1. The S&P 500 exceeds 1600 thanks to strong earnings, and market volatility jumps.
2. China revalues the yuan by 10%.
3. Crude remains in short supply because of Asian demand, pushing oil to $80 a barrel.
4. Agricultural prices rise – corn at $5 a bushel, wheat to $7, soybeans to $9 and cotton to 80 cents a pound.
5. S&P 500 earnings grow by 10% in 2007.
6. The Fed doesn’t lower rates in the spring, and the 10-year yield rises to 5.5%, with the yield curve resuming a positively sloped shape.
7. Gold hits $800 an ounce and silver rises to near $18.
8. Japan’s Nikkei 225 rises 15% as the Japanese economy improves.
9. Latin America does well, particularly Brazil, where the Bovespa index rises to 55,000 (currently 44,780).
10. Rudy Guiliani pulls ahead as the leading candidate for Republicans and Barack Obama “gains momentum” for the Democrats.

He appears to have been dead-on 4, 6, and 9.

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