Money Supply Growth
Wednesday, August 8th, 2012
“An improvement in the global economic outlook is the key fundamental reason to take on more risk in an investment portfolio,” said BCA Research in a recent commentary. “The U.S. payroll report was positive relative to expectations, but rather weak in absolute terms. Moreover, last week’s Fed and ECB meetings did little to lift our optimism. Several indicators continue to suggest it is too early to add to pro-cyclical currency trades.
- For example, the global leading economic indicator is still pointing down. More importantly, with no new stimulus measures announced this week, it is difficult to see the global LEIs inflect upwards.
- In addition, gold is a real-time monetary indicator and the peak in March 2008 correctly warned that deflation risks were escalating. Gold’s recovery in early 2009 (ahead of the bottom in equities) then accurately indicated that reflationary policies were finally gaining traction. Gold prices slipped back below $1,600/oz following this week’s Fed and ECB meetings. This suggests that major central banks are still behind the curve. As in early 2009, a sustained rally in gold will signal that the forces of reflation are starting to win out.
- Finally, an uptrend in Chinese stocks and an acceleration in Chinese money supply growth will be bullish signs for Chinese growth and the commodity complex.”
BCA concludes that “it will take further proof that the global economy is stabilizing before augmenting a pro-cyclical currency investment stance.”
Source: BCA Research, August 7, 2012.
Tags: Absolute Terms, Central Banks, Chinese Growth, Chinese Money, Chinese Stocks, Currency Investment, Currency Trades, ECB, Fundamental Reason, Global Economic Outlook, Global Economy, Gold Prices, Investment Portfolio, Investment Risk, Leading Economic Indicator, Monetary Indicator, Money Supply Growth, Payroll Report, Reflation, Uptrend
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Sunday, April 1st, 2012
By Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors
The odds of winning tonight’s Mega Millions jackpot are 1 in 175,711,536. This remote chance hasn’t stopped people from lining up to buy a ticket, as the “what-if-I-win” idea seems so thrilling.
Some bears may think the odds of China being the winner among emerging markets in 2012 are also remote. Over the past few years, Chinese stocks have lagged compared to its emerging market peers. However, the Periodic Table of Emerging Marketsperfectly illustrates: last year’s loser can be this year’s winner. Historically, every emerging country has experienced wide price fluctuations from year to year. Over time, though, each country tends to revert to the mean.
In the visual below, we highlighted China’s performance pattern over the past 10 years. Chinese stocks landed in the top half four out of 10 years—2002, 2003, 2006 and 2007. In 2003, China climbed an astounding 163 percent; in 2007, it was the top emerging market again, returning nearly 60 percent.
Since then, the country has fallen to the bottom half of the chart. If you apply the principle of mean reversion, history appears to favor China landing on top during this Year of the Dragon.
Unlike the lottery system, China won’t leave its success to pure luck. If the Dragon doesn’t breathe fire into markets, it may be a shot of liquidity injected by policy easing that could drive stock prices higher. Macroeconomic theory states that when a country’s money supply exceeds economic growth, the excess liquidity tends to drive up asset prices, including stocks.
BCA Research documented this trend in China over the past eight years. The research firm compared the difference between the change in money supply growth and nominal GDP growth and Chinese stock prices. In both instances when the change in excess liquidity fell to a low, so did stocks. Conversely, the rise of money supply growth compared to GDP growth “coincided with major rallies” for China’s stock market, according to BCA.
Today, it appears that the change in excess liquidity is just beginning to bounce off another low, as are stocks, indicating another potential inflection point.
BCA hedges China’s possible stock advancement in the short-term if signs of economic improvement continue because they “reduce the odds of aggressive policy easing.” A few weeks ago, I discussed how investors seemed to overlook China’s focused macro policy strategy, with its actions deliberate and purposeful. This year, the government has extra incentive to sustain meaningful growth as it transitions to a new leadership by the end of the year. As President Hu Jintao and Premier Wen Jiabao depart, Xi Jinping and Li Keqiang are expected to take over.
Looking at historical GDP growth per year since 1978, Deutsche Bank finds there’s precedence for this idea. During the fifth year of the leadership transition cycle, “high or stable” GDP growth was maintained, with the exception being the Asian Financial Crisis in 1997.
When I was in Singapore at the Asia Mining Congress this week, I was fortunate to be among a group of sharp and intelligent experts across the financial and mining industries. One China bull presenting an excellent case for the country was Jing Ulrich, JP Morgan’s managing director and chairman of China equities and commodities group. She’s the Oprah Winfrey of the investment world, as for the past three years, Forbes Magazine has ranked her among the 50 Most Powerful Women in Business.
Ulrich expressed similar views toward China and its political will in a recent “Hands-On China Report” following her attendance at the China Development Forum in Beijing. She said that the government ministers emphasized their commitment to rebalancing the economy toward consumption. While “fundamentals are currently sound, the nation must modify its ‘imbalanced, uncoordinated and unsustainable’ course of development,” says Ulrich. Importantly, the government had the financial resources to effect this change and considered it important to maintain sustainable growth, writes Ulrich.
The ups and downs of this road toward a consumption-led economy are topics I’ll cover in next week’s webcast on China. I will be joined by CLSA’s Andy Rothman. Together, we’ll discuss what investors should expect from China in terms of long-term GDP growth, fixed asset investment, exports and the housing market. Be sure to sign up now.
Copyright © U.S. Global Investors
Tags: Asset Prices, Chief Investment Officer, China, Chinese Stock, Chinese Stocks, Commodities, Commodity, Emerging Market, Emerging Markets, Excess Liquidity, Frank Holmes, Gold, India, Lottery System, Macroeconomic Theory, Mega Millions, Mining, Money Supply Growth, Nominal Gdp Growth, Periodic Table, Price Fluctuations, Ris, Stock Prices, Theory States, U S Global Investors, Year Of The Dragon
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Sunday, March 11th, 2012
Emerging Markets Radar (March 12, 2012)
- The Global Emerging Markets Fund (GEMFX) has benefited from a bias toward small-caps in 2012. On a relative basis, the fund has benefited from choosing stocks that pay more than twice the dividend yield of the Russell 2000 Index and those companies which have a low price-to-earnings ratio.
- China’s February Consumer Price Index (CPI) was up 3.2 percent in February, lower than the estimate of 3.5 percent and below January’s 4.5 percent figure. With inflation expectations tamed, the market expects the People’s Bank of China (PBOC) to further cut the reserve requirement ratio (RRR).
- China’s fixed asset investment (FAI) growth came in stronger than expected at 21.5 percent year-over-year during the first two months of 2012, up from 18 percent in December. Interestingly, residential FAI rose 27 percent, the same pace as last year. This indicates that the housing market may not collapse as many worried last year.
- New bank deposits rebounded strongly in February to Rmb 1.6 trillion, enabling Chinese banks to lend more in March. In addition, M2 money supply growth was near expectations, right at 13 percent.
- Philippine CPI rose 2 percent in February. This is well below the 3.2 percent increase that was forecasted.
- China’s retail sales and industrial production growth came in weaker than expected. Retail sales rose 14.7 percent, down from 17.1 percent in 2011. Industrial production rose 11.4 percent, slowing by 1.4 percentage points from December. These data points indicate that China had probably over tightened its monetary and industrial policies and needs to loosen up these policies during the first half of the year.
- China has lowered the country’s GDP growth target to 7.5 percent this year, 50 basis points lower than in the past eight years. Many believe Chinese policymakers will try to slow down the country’s economic growth by curbing housing market growth and postponing some infrastructure growth. However, China has consistently beaten its own GDP target every year over the last decade and the country will still encourage growth in consumption and industrial enhancement.
- Malaysia’s exports grew 0.4 percent in January, the slowest pace in 15 months.
- After a good run, Turkish industrial production faltered in January. Industrial production was up by 1.5 percent year-over-year in January, weaker than the market expectations. Turkey’s Purchasing Manager’s Index (PMI) also deteriorated in February as a result of poor weather conditions.
- Droughts from Mexico to Argentina are shrinking corn stockpiles to a five-year low. This raises the prospect of a bull market in the U.S., as farmers are expecting to see the biggest crop ever.
- Corn demand in China, the biggest consumer after the U.S., may decline after Premier Wen Jiabao lowered the annual growth target to 7.5 percent. Prices fell 16 percent in the last four months of 2011 as the U.S. Department of Agriculture (USDA) predicted Brazil and Argentina would produce their biggest crops ever. The two countries currently account for almost 10 percent of global corn supply. While prices may keep rising for now, analysts anticipate declines by the end of the year as U.S. growers harvest the most acres planted since 1944.
- This chart shows China’s inflation has come down notably since July 2011. Food prices, the largest contributor to the rise in inflation last year, have come down since the fourth quarter after the supply chain and logistics were improved. The market expects the PBOC to cut RRR again in order to support economic growth and liquidity in the economy.
- While investment flows pour into most of the largest emerging markets, foreign investors are selling South African equities at the fastest pace in four years over growing concern that policy makers will seek a larger share of the nation’s mining profits. International investors sold $933 million of South African equities in the first two months of this year and are on track for the biggest first-quarter outflow since 2008.
- A study commissioned by President Jacob Zuma’s ruling African National Congress party proposed increasing taxes on the mining industry last month. In addition, the party’s youth wing has lobbied for a government takeover of gold and platinum mines to boost employment in Africa’s biggest economy.
- China’s February retail sales rose 14.7 percent, below the expectations of policymakers. In order to reach the stated consumption growth target near or above 18 percent, Chinese policymakers need to loosen the country’s monetary policy or begin a fiscal subsidy, such as a new home appliance incentive.
Tags: Agriculture, Asset Investment, Bank Deposits, Bank Of China, Chinese Banks, Consumer Price Index, Dividend Yield, emerging markets fund, GDP Growth, Gemfx, Growth Target, Index Cpi, Industrial Policies, Inflation Expectations, Infras, Money Supply Growth, Pboc, Price To Earnings Ratio, Relative Basis, Russell 2000 Index, Small Caps
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Lacy Hunt: Face The Music, Road Back To Prosperity Is Through Shared Sacrifice, Not Government Stimulus
Friday, February 17th, 2012
John Mauldin posted an extraordinary interview by Kate Welling of Dr. Lacy Hunt, the chief economist of Hoisington Investment Management.
Dr. Lacy Hunt correctly identifies fractional reserve lending as the culprit behind the massive rise in debt. Hunt also explains why government spending cannot help, why Europe is in worse shape than the US, why a US recession is coming, and why Ben Bernanke is an exceptionally poor student of the great depression.
The entire PDF is a lengthy 29 pages, but well worth a read in entirety.
Here are some pertinent snips from “Face the Music“.
Face The Music
Road Back To Prosperity Is Through Shared Sacrifice, Says Lacy Hunt.
Kate: Happy New Year, Lacy. And thanks for sending all those charts to background me for our conversation. I have to say the first one stopped me — showing debt as a percentage of U.S.
Lacy: If you confine your analysis to post-war period, you only have one major debt-dominated cycle and that’s the one we’re currently in — and have been in for a number of years. But if you go back far enough, you have three more. You have the 1820s and 1830s. You have 1860s and 1870s and then you have 1920s and their aftermath. Sometimes it’s essential to take your analysis back as far as you possibly can.
Kate: Doesn’t your second chart, on the velocity of money [below], show how none other than Milton Friedman was misled into thinking that it was a constant because he only looked at post-war data?
Lacy: That’s correct and, in fact, I was misled along with him because I was also doing analysis based on the post-war data. Friedman’s period of estimation was basically from the 1950s to the 1980s. Well, if you look at the velocity of money in that time period, it’s not a constant, but it’s very stable around 1.675. So if you tracked money supply growth then, you were going to be able to get to GDP growth very well. Not on an individual quarterly basis, but even the individual quarterly variations were not that great. Until velocity broke out of that range after we deregulated the banking system. Now, velocity is breaking below the long-term average and it’s behaving exactly like Irving Fisher said, not like Friedman said, absolutely.
Kate: What a perfect example of the difference your frame of reference can make.
Lacy: Keynes and Friedman both felt that The Great Depression was due to an insufficiency of aggregate demand and so the way you contained a Great Depression was by your response to the insufficiency of aggregate demand. For Keynes, that was by having the federal government borrow more money and spend it when the private sector wouldn’t. And for Friedman, that was for the Federal Reserve to do more to stimulate the money supply so that the private sector would lend more money. Fisher, on the other hand, is saying something entirely different. He’s saying that the insufficiency of aggregate demand is a symptom of excessive indebtedness and what you have to do to contain a major debt depression event — such as the aftermath of 1873, the aftermath of 1929, the aftermath of 2008 — is you have to prevent it ahead of time. You have to prevent the buildup of debt.
Kate: And that your goose is cooked if you don’t you cut off the credit bubble before it overwhelms the economy?
Lacy: Yes, and Bernanke is thinking that the solution is in the response to the insufficiency of aggregate demand. That was Friedman’s thought. That was Keynes’ thought and most of the economics profession has traditionally thought the same way. They were looking at it through the wrong lens. Fisher advocated 100% money because he wanted the lending and depository functions of the banks separated so we couldn’t have another event like the 1920s.
Kate: You’re saying that Fisher argued against fractional reserve banking?
Tags: 1820s, 1920s, Ben Bernanke, Chief Economist, Culprit, Face The Music, GDP Growth, government spending, Great Depression, Happy New Year, Indi, Investment Management, John Mauldin, Massive Rise, Milton Friedman, Money Supply Growth, Music Road, Recession, Snips, Stimulus, Velocity Of Money, War Period
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Sunday, February 5th, 2012
The Economy and Bond Market Radar (February 6, 2012)
Employment data released on Friday, which put the current unemployment rate at 8.3 percent, showed strong improvement. This is the latest in a series of data points that show the U.S. economy is continuing to make strides in the right direction. ISI Group says that this was the 18th straight week of stronger economic data in the U.S. We’ve recently seen upticks in vehicle sales, same store sales, homebuilding and manufacturing.
Manufacturing PMI rose during the fourth quarter of 2011 and ISI Group thinks that it will rise another 3 percent to the 54 level during the first quarter of 2012. ISI says that over the past two years employment in the manufacturing sector has posted its strongest increase in almost three decades. But it’s not just the U.S. Manufacturing PMI on the rise, data from Europe and China also exceeded most forecasts and global PMI has jumped considerably since November.
One other factor that is likely driving better economic results is the year-over-year increase in U.S. money supply, which is growing at a robust 10 percent pace. Nominal GDP growth in the fourth quarter was 3.7 percent compared with the previous year and the current rate of money supply growth greases the wheels for America’s economic engine. Adequate money supply is the lubricant that allows the wheels of commerce to accelerate.
An article in the Wall Street Journal this week highlighted that in 2011 U.S. corporate tax receipts as a share of profits were at their lowest level in at least 40 years. Corporations paid a tax rate of 12.1 percent on profits during the fiscal year that ended September 30, 2011, less than half the average rate companies paid from 1987 to 2008. Those figures grabbed a lot of headlines in the press, but they don’t tell the whole story. In addition to putting aside more than $2 trillion in cash over the past five years, many corporations have employed a tax incentive known as “bonus depreciation” that allows companies to deduct from their taxes the capital that they invest back into their businesses.
The incentive has worked. Capital expenditures for American companies reached $1.5 trillion in 2011, up 10 percent from 2010. We believe this increase in capex has been a significant driver of the U.S. economic recovery. Corporate purchases of new fleet vehicles, machinery and data systems have created and maintained thousands of jobs for American citizens. It is unlikely the U.S. government would have achieved the same return on investment and multiplier effect on the economy.
- The January employment report was much better than expected, with the strongest job gains since April and the lowest unemployment rate since February 2009.
- The ISM manufacturing index rose to 54.1 and the new orders component rose to a strong 57.6. JP Morgan’s Global PMI Index also continued to move higher, hitting 51.2 in January.
- U.S. auto sales rose 12 percent in January supporting the uptick seen in manufacturing data.
- The Case-Shiller 20-city home price index hit the lowest level since February 2003. Prices have fallen 3.7 percent year-over-year.
- Consumer confidence fell sharply to 61.1 in January; expectations were for an increase.
- Fourth quarter productivity rose a very modest 0.7 percent.
- If the weekly oscillating trading pattern over the past couple of months is any indication of market direction, bonds could see a modest sell-off next week.
- Economic data has been strong and appears to be gaining momentum. This could be a threat to bond prices if the pattern continues.
Tags: Bond Market, Current Rate, Current Unemployment Rate, Economic Data, Economic Engine, Economic Results, Employment Data, Greases, Homebuilding, Isi Group, Lubricant, Manufacturing Sector, Market Radar, Money Supply Growth, Nominal Gdp Growth, Pmi, Tax Incentive, Tax Receipts, Three Decades, Wall Street Journal
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Sunday, January 22nd, 2012
It May Take a Dragon to Breathe Fire into Markets
By Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors
Kung hei fat choy!
On Monday, I’ll be returning home to Canada to speak at the Cambridge House’s Vancouver Resource Investment Conference. This year, I’ll be part of a special debate on whether China will boom or bust with bestselling author Gordon G. Chang. The title of Chang’s book, The Coming Collapse of China, states his position quite clearly and I look forward to the intellectual challenge of convincing him otherwise.
I’ve found many people are particularly energized about predicting a hard landing for China’s economy, but I believe the country is no sinking ship. China isn’t fast-approaching an iceberg in the dark of the night like the Titanic. Beijing has long been anticipating the ice chunks and subtly adjusting the rudder around inflation without steering the economic ship too far off course.
China’s government angled its vessel away from inflation by increasing the required reserve ratio (RRR) every month for the first six months of 2011 and raising interest rates three times. Once inflation was sufficiently under control, the country began to steer in a direction of growth again.
Recent results show how positive this easing has been. In its latest research this week, BCA Research reported that despite the policy tightening of 2011, the “most recent economic data out of China has all but confirmed that the economy remained incredibly resilient.”
One significant data point is the sharp increase in money supply. After the country hit a low level of monthly money supply growth, the three-month change in M-2 money supply climbed to record levels during the final month of the year, says Greg Weldon of Weldon Financial. He says that money supply “pegged at +6.419 trillion, easily exceeding the previous record 3-month increase, seen at the peak of the global crisis, in March of 2009.”
Easing in China is expected to continue through 2012, with ISI Group anticipating a potential RRR cut after Chinese New Year celebrations in February, then possibly again in April, June and August. Also, loans “have become more readily available in recent weeks,” says ISI. This should all be bullish for commodities, such as copper, oil and gold, and also trickle down to boost share prices of natural resources equities.
Chinese Copper Inventories Increase
Base metals were the laggards among commodities last year, with copper one of the worst performers, losing 21 percent. (Download our Periodic Table of Commodities now.)
Global consumption of copper increased only 4 percent in 2011, which is lower than the 10 percent growth in 2010, but higher than the decade-average of around 3 percent, says Macquarie Research. China’s consumption of copper—which makes up 40 percent of the global demand—was a primary reason for decreased consumption, as the country was drawing down on its own supply throughout the year.
This can’t continue forever, Macquarie says, adding that “demand made on new supply direct from producers would need to rise, with positive implications for prices.” Europe’s largest copper fabricator agrees with that sentiment, indicating that it anticipated China’s copper demand would be strong in 2012, according to Barclays.
A recent rise in copper imports is likely the result of restocking China’s depleted copper inventories. As is typical for China, after the metal fell in price last fall, the world’s largest buyer of the metal advantageously scooped up copper to replenish its cupboard, says Barclays Capital. As shown below, copper inventories into China reached a record low in 2011, but have sharply reversed recently.
An increase in copper demand places pressure on the supply side, which continues to experience shortfalls in mine output versus forecasts. These are caused by a variety of factors, such as weather, labor strikes, or simply a poor grade deposit. While Macquarie says there’s a possibility the world’s two largest copper mines, the Los Bronces mine in Indonesia and Peru’s Escondida mine, could deliver year-over-year increases in production, it concludes “it is highly unlikely that miners will succeed in delivering this level of additional output in total.”
While Chinese demand growth for commodities is not expected to be as robust as it has been historically, demand is expected to pick up throughout 2012. As confidence returns, Macquarie says there should be “a slow gradient of recovery in the near term before gathering pace into the mid-year.”
Increasing Reliance on Energy Imports
China’s rapid growth and increasing reliance on other countries for key resources has made a powerful case for commodities over the past several years. These three charts from BCA Research illustrate that once the country shifted from exporting to importing a commodity, there was no looking back.
You can see in all three how dramatically the energy balance has shifted to an ever-increasing dependence on imports. In each major commodity, after China began importing, growth took off.
China became a net importer of crude oil in 1994, and today, is the second-largest oil importer in the world. BCA forecasts the country is expected to surpass the U.S. as the largest oil importer in only a few years.
To obtain more natural gas, China spent years building massive pipelines to transport the commodity from Russia and other western Asian counties, and since 2006, natural gas imports have “gone vertical,” says BCA.
Coal, which accounts for the majority of total energy consumption in China has also been imported since 2008, and since that time, imports rose substantially.
Even with these imports, energy consumption is only a fraction of developed countries. The China story is just getting started: Urbanization just surpassed the 50-percent mark, hitting what I believe to be the pivotal moment that dramatically shifts buying patterns, driving an enormous demand for housing, consumer staples and durable goods. You ain’t seen nothing yet!
Happy Chinese New Year!
This weekend, the world’s largest annual migration takes place. Millions of people in China head home to celebrate Chinese New Year and welcome in the Year of the Dragon. U.S. Global Investors’ research analyst and Shanghai native Xian Liang recently talked about the significance of the dragon in Chinese culture:
“Unlike its western counterpart portrayed as evil, the Chinese dragon is an imaginary, mythical creature. Its body parts are from nine animals, including the horns of a deer, mouth of an ox, nose of a dog, trunk of a snake, and claws of an eagle. It has auspicious power because it can make itself invisible or visible at any time. It can both fly and swim. It makes clouds and rain. Because of these magnificent things, the dragon is associated with royal powers as well.”
After bounding through a tough Year of the Rabbit, we anticipate the Year of the Dragon will breathe fire back into Chinese markets in 2012. Kung hei fat choy!
Tags: Bestselling Author, Chief Investment Officer, China States, Collapse, Economic Data, Frank Holmes, Global Crisis, Hei Fat Choy, Ice Chunks, Intellectual Challenge, Investment Conference, Money Supply Growth, Month Of The Year, Reserve Ratio, Resource Investment, Returning Home, Rudder, Sinking Ship, U S Global Investors, Weldon
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Saturday, January 14th, 2012
Emerging Markets Radar (January 16, 2012)
- The People’s Bank of China (PBOC) 2011 financial statistics show that M2 growth rebounded significantly to 13.6 percent year-over-year at the end of December. With seasonal adjustments, this represents a 26.8 percent month-over-month increase on an annualized basis. Many attribute the monetary expansion to fiscal expansion measures taken by the Chinese government. In an early December Investor Alert, we discussed that we were at the beginning of a monetary easing cycle in China as the government tries to fine-tune the economy.
- The amount of new loans in China during December was Rmb 640.5 billion, higher than the estimated Rmb 575 billion.
- After targeting Rmb 7.5 trillion in 2011, China may set its 2012 new bank loan target at Rmb 8 trillion. Money supply growth is expected to be 14 percent and CPI at 4 percent, the Oriental Morning Post reported. The government may ease lending to infrastructure projects and local government financing vehicles (LGFV) this year.
- China’s online gaming revenue rose 32.4 percent (year-over-year) to Rmb 2.85 billion in 2011, while the mobile game market’s revenue rose 86.8 percent year-over-year to Rmb 1.7 billion, Xinhua News reported.
- After sinking 28 percent in value during 2011, China’s domestic stock markets (as measured by the CSI300 Index) have started 2012 by posting a 6.5 percent gain after the first five days of trading. The increase is driven by monetary easing policy and market participations by domestic institutions. After Premier Wen Jiabao called for boosting confidence in the domestic stock market, the China Securities Regulatory Commission (CSRC) will pursue reforms in IPO pricing mechanisms to prevent excessive high pricing, will encourage improving corporate dividend payouts, and will try to increase the proportion of corporate bonds financing.
- China’s December CPI dropped to 4.1 percent, a 15-month low, after peaking in July. This drop will provide room for China to increase money supply. China’s December PPI dropped 1 percent from November, indicating core input prices are declining faster than the market expectation.
- Korea’s December PPI rose 4.3 percent from the previous year but was down 5.1 percent from the previous month. The Bank of Korea maintained its benchmark interest rate at 3.25 percent for the seventh straight month, a widely-expected move.
- The China Auto Association announced that December 2011 passenger car sales were up 4.6 percent. The market had expected no gain due to a high base effect in December 2010 when the stimulus plan came to expire. The Association also forecast 2012 passenger car sales to grow 7 percent after growing 5.19 percent in 2011.
- Macau gaming names gained in the week after reporting 850 million a day (Macanese pataca) in gaming revenues for the first eight days of the year. This is similar to last year’s Golden Week in October.
- China’s National Energy Administration plans to double solar capacity this year and add four times the capacity by 2015. Solar stocks globally jumped on the news this week.
- Russia’s inflation dropped lower than post-Soviet lows, falling to 6.1 percent on a year-over-year basis. December’s inflation number is significantly lower than the 2010 average annual figure of 8.8 percent. However, Roubini Global Economics is forecasting inflationary pressures to reemerge in the latter part of 2012.
- China’s December exports were up 13.4 percent while imports were up 11.8 percent. Imports were lower than the market consensus, indicating slower export/import growth and increased pressure for China to further ease money supply.
- Continued weakness in electronics shipments drove Philippine exports to drop 19.4 percent year-over-year in November, the seventh-straight month of declines. Consensus estimates were for a 10 percent drop. Nevertheless, Philippine exports are a small share of the country’s GDP. The 2012 Philippine economy will be driven by domestic consumption, infrastructure investments and overseas remittance.
- Malaysia’s industrial production gained 1.8 percent year-over-year in November, the slowest pace in four months, as mining contracted and manufacturing eased.
- China’s foreign-exchange reserves dropped for the first time in more than a decade as foreign investment moderated. The holdings fell to $3.1 trillion on December 30 from $3.2 trillion on September 30, data released on the People’s Bank of China shows.
- China’s power use growth may slow to 8.5 percent this year, Xinhua reported, citing the deputy director of China’s State Electricity Regulatory Commission. Electricity consumption slowed to 11.7 percent last year from 14.5 percent in 2010.
- Signs that Chinese lenders will postpone losses on trillions of yuan loans made to local governments may undermine investor confidence in the banking sector, Standard & Poor’s said on Thursday. This local government loan issue can never be fully understood or go away by the like-minded institutions and speculators. We believe it is a huge issue but resolvable given time and time is always on the side of the Chinese government.
- Russian producer TNK-BP’s PetroMonagas venture with Petroleos de Venezuela SA plans to boost output of heavy oil by 20 percent to 145,000 barrels a day in 2013.
- Weibo, a Chinese microblogging service run by Sina, has seen its user base reach more than 50 percent of the country’s entire Internet population of 500 million people, according to J.P. Morgan. As a leader in microblogs, Sina Weibo possesses unique opportunities to monetize the phenomena. Proliferation of tablets and smartphones should also give additional push to the microblogging trend.
- With China in a monetary easing cycle and the U.S. experiencing a slow but steady recovery, the European sovereign debt issue is the single biggest question for the market. Therefore, it is still advisable to not be surprised by short-term market volatility.
- BCA Research published a piece this week highlighting themes among the emerging market space. Among them, a U.S. dollar breakout coupled with emerging market currency weakness was mentioned. Unlike in 2008, the problems are now in Europe and developing countries, while U.S. growth is set to outperform other regions. BCA believes this only reinforces the case for a strong U.S. dollar as global capital favors U.S. assets, while emerging market currencies remain more volatile than they have been in the recent past.
Tags: Bank Of China, China Securities Regulatory Commission, Corporate Bonds, Csrc, Domestic Institutions, Domestic Stock Market, Fiscal Expansion, Game Market, Gaming Revenue, Infrastructure Projects, Investor Alert, Local Government Financing, Monetary Expansion, Money Supply Growth, Oriental Morning, Pboc, Seasonal Adjustments, Securities Regulatory Commission, Target, Xinhua News
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Sunday, December 11th, 2011
You Can’t Print More Gold
By Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors
What do you get when you mix negative real interest rates with stimulative money supply efforts by global central banks?
An exceptionally potent formula for higher gold prices that could send gold to the unimaginable level of $10,000 an ounce. Negative real interest rates and strong money supply growth are two key factors of what I refer to as the Fear Trade.
Negative real interest rates occur when the inflationary rate, or CPI, is greater than the current interest rate. A quick account of the G-7 and E-7 countries shows that the majority have negative real interest rates.
Across the developed G-7 countries, British citizens are the worst off with real interest rates in the U.K. sitting at negative 4.5 percent. U.S investors aren’t doing much better with rates at negative 3.25 percent and the Fed has all but guaranteed rates will remain there. Only Japan has a positive real interest rate among the G-7 and that rate is barely above zero.
Conversely, the most populous nations making up the E-7 have mostly positive real interest rates. However, the grouping’s grandest economic powerhouses, China and India, have negative real interest rates sitting around negative 2 percent.
Simply put, investors in those countries who have parked their savings in cash and low-yielding investments, such as Treasury bills and money market accounts in the U.S., are actually losing money due to inflation.
That can be tough for any investor, but when you’re the central bank of a country with millions of dollars in reserves, it can be catastrophic. This is why central banks around the globe have sought protection by diversifying their foreign-exchange reserves into gold bullion this year.
VTB Capital’s Andrey Kryuchenkov told The Wall Street Journal this week that, “Central banks are diversifying, and it has intensified to a rate that nobody had expected.” Latest estimates predict global central banks will purchase between 475-500 tons of gold in 2011.
This amount of capital flowing into gold has the potential to push prices up a level in 2012. John Mendelson from ISI Group sees gold prices reaching $2,200 an ounce during the first six months of 2012.
While real interest rates look to remain in the red for the foreseeable future, many of these same countries are printing record amounts of “green” with accommodative monetary policies.
U.S. Global’s director of research John Derrick says central banks around the world have focused their attention on stimulating growth. Beginning with Brazil’s interest rate cut in late August through the European Central Banks (ECB) cut this week, there have been 40 easing moves by global central banks, according to ISI Group.
John says this also means we will likely see more quantitative easing in 2012. The Bank of England has already started its quantitative easing, and many experts believe the ECB and the Federal Reserve will follow in its footsteps.
Bloomberg reports that global money supply (M2) is “set to increase the most on record in 2011.” The chart below shows the year-over-year change of global money supply has been gradually moving higher and higher since mid-2010.
The reason global central banks have shifted the printing presses into overdrive is simple: they need the money. My long-time friend Frank Giustra reminded us of this new reality in an op-ed piece for the Vancouver Sun last week. Frank writes:
“The bottom line is that the money needed to bail out Europe and to fund America’s spiraling debt and future unfunded obligations is in the ten of trillions. IT DOES NOT EXIST. It has to be created by printing money in massive quantities, and despite all the rhetoric you will hear against such policies, in the end it’s the path of least resistance. Printing money is an invisible tax on savings, much easier to initiate, than, say, raising taxes or cutting back on services and entitlements.”
As central banks print money and increase supply, currencies become devalued. Whereas in the recent past, one currency may be reduced in value compared with other currencies, this time there is global competitive devaluation as excess liquidity is put into the system. Historically, this excess liquidity has made its way to riskier assets, i.e. stocks and commodities.
Gold is generally a benefactor of this flight to riskier assets as many investors see it as a store of value. This chart illustrates the interconnectivity of gold and global money supply growth.
However, this image doesn’t tell the whole story. While the price of gold has followed the same upward path as money supply over the past 14 years, it hasn’t been able to keep pace with M2 growth, says the Bloomberg Precious Metal Mining Team.
In fact, if the global money supply were backed by gold, gold prices would be much higher, according to Bloomberg. The yellow line below shows how gold would be greater than $5,000 per troy ounce if just half of global money supply were backed by gold. If all of the money supply in the world were to be backed by gold, the price of one troy ounce would need to rise above $10,000.
It’s unlikely, of course, that this will happen, but it serves as a useful illustration for the disappearing value of the world’s fiat currencies.
Frank reminded readers that we have been down this path before. Frank says, “When great nations mature and over-extend themselves, they revert to the paths of least resistance: borrow and/or print money. They all did it and they all failed; this time will be no different.”
The beneficiary of this type of event has historically been gold.
Tags: Andrey, British Citizens, Central Banks, Chief Investment Officer, CPI, Current Interest Rate, Economic Powerhouses, Foreign Exchange Reserves, Frank Holmes, Gold Bullion, Gold Prices, Money Market Accounts, Money Supply Growth, Ounce, Populous Nations, Potent Formula, Real Interest Rate, Treasury Bills, U S Global Investors, Wall Street Journal
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Thursday, October 13th, 2011
Global Money Supply And Currency Debasement Driving Gold Higher
Gold is trading at USD 1,670.40, EUR 1,216.90, GBP 1,063.81, JPY 128,555.00, AUD 1,643.34 and CHF 1,500.20 per ounce.
Gold’s London AM fix this morning was USD 1,673.00, GBP 1,065.74 and EUR 1,218.05 per ounce.
Yesterday’s AM fix was USD 1,687.00, GBP 1,070.36 and EUR 1,222.02 per ounce.
Cross Currency Table
Gold is marginally lower in all currencies today and appears to be steadying near four-week highs on further evidence of strong consumer demand in Asia. Market concerns about contagion in the eurozone should prevent significant price falls from these levels.
Jewellers and bullion dealers in India and China continue to stock up prior to their various festivals – such as Diwali in India and Chinese New Year in January 2012.
One of the primary drivers of higher gold prices in recent years has been money supply growth in the US and globally and consequent concerns about currency debasement.
Since 1998, increases in the price of gold have been correlated with increases in global M2. If central banks in both the developed and developing world continue to adhere to highly accommodative monetary policies, global M2 should subsequently rise and support a further increase in gold prices, as it has in the past.
Global Money Supply Growth – 1998 to Today
(Eurozone, US, China, Japan, South Korea, Australia, Canada, Brazil, Switzerland, Mexico, Taiwan and Russia)
Developing China’s M2 money supply has been rising by a large 20% and Russia’s by a very large 30%.
Even developed countries such as Switzerland have seen money supply growth of 25%. Japan’s M2 is gradually moving higher after the ‘Lost Decade’ and after recent events exacerbating an already fragile situation.
Global money supply growth is increasing by 8%-9% per annum. Meanwhile annual gold production is less than 1.5% per annum.
We looked at money supply growth and charts regarding global money supply, debt levels etc in a comprehensive article in early August (‘Is Gold a Bubble? 14 Charts, the Facts and the Data Suggest Not’ – http://www.goldcore.com/goldcore_blog/gold-bubble-14-charts-facts-and-da… ) when gold was trading at $1,670/oz or much the same price level as today. The charts and conclusions remain apposite.
In order to fight economic problems brought about due to too much debt, debt based paper and electronic currency has been created at historically high levels. There is no sign of this abating any time soon given the scale of the global financial and economic crisis.
Indeed, shuffling debt from one sector to another and creating more debt to deal with what was essentially a problem of too much debt is making the situation worse and leading to currency depreciation and debasement.
Growth in global money supply, U.S. dollar, euro, pound and all fiat currencies depreciation or currency debasement and massive uncertainty in global financial markets and the real risk of contagion will likely continue to lead investors and savers toward using precious metals, and specifically gold and silver bullion, as stores of value and safe havens.
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Fiat Money and the Euro Crisis
Tags: Asia Market, Australia Canada, Brazil, Bullion Dealers, Canadian Market, Central Banks, China Japan, Chinese New Year, Commodities, Contagion, Currency Table, Debasement, Diwali, Eurozone, Fragile Situation, Global Money, Gold, Gold Prices, Gold Production, India, Jewellers, Monetary Policies, Money Supply Growth, Price Of Gold, Week Highs
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Sunday, September 18th, 2011
Emerging Markets Cheat Sheet (September 19, 2011)
- In China, both exports and imports posted positive results in August, rising 24.5 percent and 30.2 percent, respectively. Exports to Europe and Japan rebounded, in addition to accelerating shipments to the Middle East and Latin America. Imports were driven by demand for commodities and capital goods as industries ended a period of de-stocking.
- Thailand’s growth in total vehicle sales accelerated to 20.3 percent year-over-year in August from 11 percent in July, as Japanese car makers continued to increase production to meet pent up demand after the March earthquake. The government also introduced tax incentives this week for first-time car buyers.
- Singapore’s retail sales growth in July was revised up to 11.1 percent year-over-year from 10.7 percent, higher than expected, driven by watches and jewelry, telecom apparatus, and motor vehicles sales, thanks to rising tourist arrivals.
- It is no wonder that many Greek companies are moving operations to Bulgaria, where taxes are 10 percent instead of the 25 percent they have to pay at home (see chart). Who loves success more – the developed world that taxes away profits or the emerging world that leaves more of the profits in the hands of entrepreneurs?
- China’s M2 money supply growth moderated to 13.5 percent year-over-year in August from July’s 14.7 percent, the slowest pace in six years and lower than market estimates. However, central bank officials said the slowdown was within expectations and the August data didn’t fully reflect actual total money supply because of banks’ off-balance-sheet activity, nonbanks’ stealth lending, and private underground financing.
- China’s growth in electricity generation decelerated to 10 percent year-over-year in August from 13.2 percent in July and 16.2 percent in June, driven by weakening demand from cement, metals and equipment manufacturing industries.
- In July, India’s industrial production grew at a slower rate of 3.3 percent year-over-year, compared with June’s 8.8 percent, because of volatile capital goods output meanwhile, inflation increased to 9.8 percent year-over-year in August from 9.2 percent in July. India’s central bank raised the benchmark reverse repo rate by 25 basis points to 7.25 percent from 7 percent.
- Authoritarian rulers of Armenia, Belarus, Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan turned to Russia to set up a rapid-reaction force against potential uprisings. Russia strongly opposed military intervention in Libya and is against imposing sanctions on the Syrian regime.
- Indonesia should be among the least vulnerable to another potential European and U.S. recession. Relative to the rest of Asia, Indonesia is less dependent on external demand since exports as a percent of its GDP ranks among the lowest at 25 percent, thanks to a large domestic economy. In addition, 64 percent of Indonesian exports go to Asia including Japan, where growth prospects are brighter than the EU and the U.S.
- Should the U.S. dollar continue to rally, Asian equities might remain under selling pressure as global liquidity could continue to rotate back into the U.S. In fact, a negative 72 percent correlation still exists between Asian stocks and the U.S. dollar index in the last three years.
Tags: Balance Sheet, Capital Goods, Cement, Central Bank Officials, Commodities, Electricity Generation, Emerging Markets, Exports And Imports, First Time Car Buyers, Greek Companies, India, Japanese Car Makers, Latin America, Manufacturing Industries, Money Supply Growth, Motor Vehicles, Retail Sales Growth, Slowdown, Tax Incentives, Time Car, Tourist Arrivals
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