Gold Market Radar (August 20, 2012)

Sunday, August 19th, 2012

Gold Market Radar (August 20, 2012)

For the week, spot gold closed at $1,616.05 down $4.15 per ounce, or 0.26 percent.  Gold stocks, as measured by the NYSE Arca Gold Miners Index, rose 1.14 percent. The U.S. Trade-Weighted Dollar Index edged higher, gaining 0.05 percent for the week.

Strengths

• Despite the dollar’s steady rise since the start of the summer, the gold price continues to defy efforts to push it lower.  Technically, gold has now traded above both its 50- and 100-day moving averages and the seasonally strong autumn rally in gold could well play out again this year.
• Gold sentiment likely got a boost when recent filings showed billionaire John Paulson raised his stake in an exchange-traded fund tracking the price of gold, leaving his $21 billion hedge fund with more than 44 percent of its U.S. traded equities tied to bullion.  In addition, the $25 billion Soros Fund Management LLC portfolio also made a sizable increase in its exposure to bullion. The Soros Fund, based in New York, raised its existing weight by slightly more than 175 percent from the previous filing.  And finally, investment funds in China soon plan on launching the country’s first batch of gold exchange-traded funds, according to the state-run Shanghai Securities.
• Nomura International Plc told clients that the gold price is “not heavily pricing in QE3,” referring to so-called quantitative easing.  “The potential upside, were QE3 to be introduced, would likely far outweigh any potential downside.  Even if it is not introduced, real rates remain very low and the gap between them and gold is large.”

Weaknesses

• Great Basin Gold announced this week that CEO Ferdi Dippenaar has resigned with immediate effect. This is due to a strategic review process begun as a result of delays at the group’s Burnstone operation in South Africa.  On release of the news the stock tumbled 50 percent.  In recent months, both Aaron Regent and Tye Burt, CEOs of Barrick and Kinross, respectively, also have been shown the door during these tough times for gold miners.
• Clive Johnson, the president and CEO of B2Gold Corporation, expressed his frustration on the company’s quarterly conference call with regards to the difficulty of trying to get distressed companies to come to the table for a potential acquisition.  Johnson noted the self-interest of management versus the shareholders was clearly evident in that many companies either are unwilling to sign confidentiality agreements or, if they are, they come with caveats – shackles in the form of standstill agreements – that make it tough to do anything.
• The World Gold Council (WGC) recently reported that gold demand reached 990 tonnes in the second quarter, down 7 percent from a year ago. The weaker trend in investment, jewelry and technology demand for gold was compensated by the Central Banks’ surging appetite, which led to the largest quarterly increase since the second quarter of 2009. Though both China’s and India’s gold consumer demand declined year-on-year in the second quarter, retail investment demand ex-China and India actually rose 16 percent. In particular, the European purchase of bullion bars and coins rose 15 percent, revealing investors’ demand for gold for capital preservation in light of the European debt and banking crises. The WGC highlighted that Russia will continue to be a driving force in the gold market. It is now the fourth largest consumer of gold jewelry, and has the world’s eighth largest gold reserves.

Opportunities

• David Prowse, Metals and Mining Specialist Sales at Bank of America Merrill Lynch, recently visited a number of accounts in New York and Boston.  David reported that he was perhaps halfway through the second day before a single investor had mentioned gold or gold shares. It has essentially been a year since gold peaked last August and few have interest in the shares these days making it that much easier to pick up a reasonable position without much market impact.
• Barron’s also carried a technical analysis of gold bullion versus the gold stocks this past week.  The publication noted that for the first time in more than two years, gold stocks are looking better than the metal, although they are not yet fully in bullish mode.  Barron’s pointed out that the desire to sell gold stocks versus gold itself reached a climax in May and since then the short gold stock trade looks to have washed out, perhaps establishing a price floor, and making their risk/reward profile look fairly good
• Since February, the COMEX speculative position on silver has fallen by 72 percent.  A survey of hedge funds showed they are the least bullish on silver in almost four years.  However, physical holdings of silver via exchange-traded products has climbed for three months and is now valued at $16.2 billion. In the coming weeks, the Jackson Hole Fed retreat may be the last chance the Fed has to act before the presidential election.

Threats

• Platinum producers in South Africa, which account for 75 percent of world output, are facing plunging profits, surging energy costs, and labor instability.  Lonmin plc has been at the epicenter of the crisis.  The labor unions have been the nucleus of the problem where the Association of Mineworkers and Construction Union (AMCU) has been targeting the platinum mines to extend its membership at the expense of the established mining unions, the NUM and Solidarity which are nowadays seen by some as part of the mining establishment.  Several murders took place between the rival factions so police were called in.  Unfortunately the conflict escalated with 34 deaths at the Lonmin Mine.
• Some believe David Rosenberg of Gluskin Shelf to be a perennial bear but he’s pretty much one of the few strategists who is willing to mention the bad news and bare the disdain of those who want us to keep the rose-tinted glasses on.  Dave noted this week that the spike in food and gas prices casts a cloud over the back-to-school shopping season.
• With regard to investors’ appetite for income-producing securities versus taking the risk of parking cash in the equity markets and trying to sleep at night, Mr. Rosenberg pointed out that that retail investors eagerly snapped up nearly one-third of the largest municipal debt deal of the year, a $10 billion one-year bill issued by California with a range of 0.3 to 0.55 percent.

Tags: David Rosenberg, Dippenaar, Dollar Index, Exchange Traded Fund, Exchange Traded Funds, Gluskin Sheff, Gold Exchange Traded Funds, Gold Market, Gold Miners, Gold Price, gold stocks, Great Basin Gold, India, John Paulson, Market Radar, Nomura International Plc, Nyse Arca, Price Of Gold, Qe3, Rosenberg, Rosie, Russia, Sizable Increase, Soros Fund Management, Soros Fund Management Llc, Spot Gold
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Stephen Roach: “QE3 Is Not Going To Work”

Wednesday, July 25th, 2012

Is it any wonder that Stephen Roach is now ex-Morgan Stanley? Today’s brilliant truthiness in his interview on Bloomberg TV is an absolute must-watch as the veteran market practitioner notes that the Fed is forced to act next week and while consumers are telling you that they want to pay down debt – which all the monetray stimulus in the world is not going to change – that QE is nothing but crack to a ridiculously addicted market. With 70% of the US economy in a balance sheet recession, the Fed knows this (which he notes is now run by WSJ’s Jon Hilsenrath since what he prints must be adhered to by Ben for fear of market disappointment) and is “dangling QE in front of the markets like raw meat – but it has not worked and it will not work!” But critically, he believes, the euphoric response of markets will be tempered since they have become “used to the fact that all of this unconventional monetary easing by the central bank is just not what it is supposed to be.”

Roach on whether more Fed stimulus is a good idea:

“The Fed is flailing and has been flailing for the better part of the last three years. We had QE1, which worked, and that’s it. We’ve had QE2, Twist 1, Twist 2 and now maybe QE3. The economy is in the doldrums. The biggest piece of the economy is the American consumer. 70% is in a balance sheet recession…The Fed knows this, but they are dangling this raw meat in front of the markets and the markets are salivating as they always do in that frenetic way that they try to believe in the Fed. But it has not worked and it will not work. “

On how likely it is that the Fed will issue more stimulus:

“Absolutely. They have no choice. They have gone about their usual pre-FOMC leak frenzy where they talk to this reporter and that reporter. Jon Hilsenrath is actually the chairman of the Fed. When he writes something in the Wall Street Journal, Bernanke has no choice but to deliver on what he wrote.”

On whether the Fed will move on stimulus next week:

“Absolutely. They will not disappoint the markets. The markets are now setting themselves up and discounting the next QE2. The Fed has just woken up to ‘oh my gosh, the economy is weak again.’ Well hello! The economy has been weak for the consumer for 18 quarters. The growth rate of consumption over the last four and a half years has averaged below 1%. 70% of the economy growing below 1% and the Fed is just figuring this out? Come on.”

“The point is, when they plant a story in the Wall Street Journal, and this story has been planted. Jon Hilsenrath is the weed that grows…the guy has a perfect track record…They’ll do some type of QE3. Twist 2 was a huge disappointment. It was a feeble flailing at the windmill and the economy is a lot weaker than when they reached the Twist 2 decision. They’ll have to do another round of quantitative easing. I don’t know exactly what securities will be involved. You could speculate it could be mortgage-backeds to try to help the housing market. There is some criticism they have been too focused on Treasuries. We’ll have to wait and see, but I think it will definitely be another round of quantitative easing as opposed to the twisting again like we did last summer.”

On whether QE3 will work:

“No, it’s crack! That’s what it is. It’s not going to work. QE1 worked because it was in the midst of wrenching crisis. QE2 failed, despite what the Fed’s research shows. Twist 1 has failed. Twist 2 is failing. When 70% of the economy is in a balance sheet recession and the growth rate for 18 quarters in row has been at less than 1% at an average annual rate, consumers are telling you something. They want to pay down debt and rebuild saving and all of the monetary stimulus in the world is not going to change what is a perfectly rational response. So the idea that the Fed is going to step in and save the day, it has not worked in the past except during the depths of the crisis and i give them credit for that. And it will not work in the future. Don’t believe the Fed PR that they put out while we have research that shows that it worked. Of course they do.”

On whether he expects futures to be higher than they are right now:

“The markets have responded positively to the leaks that came out late yesterday afternoon, but the response is small. I think the markets have gotten used to the fact that all of this unconventional monetary easing by the central bank is just not what it is supposed to be. In terms of delivering an actionable vigorous response in the real economy.”

Tags: Balance Sheet, Bernanke, Chairman Of The Fed, Consumers, Crack, Disappointment, Doldrums, Frenzy, Morgan Stanley, Qe, Qe1, Qe3, Raw Meat, Recession, Stephen Roach, Stimulus, Truthiness, Wall Street, Wall Street Journal, Wsj
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What if the Fed Throws a QE3 and Nobody Comes? (Hussman)

Monday, July 9th, 2012

The financial markets were largely unresponsive to news of further easing by the European Central Bank, the Bank of England, and the People’s Bank of China last week. Notably, Spanish bonds plunged, while German short-term government bonds now yield -0.17%, indicating growing concern about sovereign default risk in the Euro area. Every few days will undoubtedly bring word of new “agreements” and “mechanisms” – arcane enough to mask their futility – that promise to solve the European crisis. The headwinds remain very strong. The key distinction here remains liquidity versus solvency. There is little doubt that liquidity will be provided at every opportunity, though the continual degrading of collateral standards by the ECB suggests that all the good collateral has been pledged already. More importantly, with a global recession visibly unfolding, solvency risk will only increase.

The odds remain against European countries agreeing to the surrender their national sovereignty to the extent needed to create a “fiscal union” and enable massive and endless transfers of public resources from stronger to weaker European countries. Barring a catastrophe severe enough to either prompt European countries to hand fiscal control to a central administrator, or to prompt Germany to agree to unconditional bailouts, the least disruptive move would be for Germany and a handful of stronger countries to leave the Euro first, and allow the remaining members to inflate as they wish.

With regard to the economy, I noted two weeks ago that the leading evidence pointed to a further weakening in employment, with an abrupt dropoff in industrial production and new orders. Mike Shedlock reviews the litany of awful figures we’ve seen since then, focusing on the new orders component of global purchasing managers indices: U.S. manufacturing new orders and export orders plunging from expansion to contraction, Eurozone new export orders plunging (only orders from Greece fell at a faster rate than those of Germany), and an accelerating decline in new orders in both China and Japan.

Recall that the NBER often looks for “a well-defined peak or trough in real sales or industrial production” to help determine the specific peak or trough date of an expansion or recession. From that standpoint, the sharp and abrupt decline we’re seeing in new orders is a short-leading precursor of output. As the chart below of global output suggests, I continue to believe that we have reached the point that delineates an expansion from a new recession.

On the employment front, Friday’s disappointing report of 80,000 jobs created in June may be looked on longingly within a few months, as we continue to expect the employment figures to turn negative shortly. That said, it remains important to focus on the joint action of numerous data points, rather than choosing a single figure as an acid test. I noted last week in Enter, the Blindside Recession, GDP and employment figures are subject to substantial revision. Lakshman Achuthan at ECRI has observed the first real-time negative GDP print is often seen two quarters after a recession starts. Earlier data is often subsequently revised negative. As for the June employment figures, the internals provided by the household survey were more dismal than the headline number. The net source of job growth was the 16-19 year-old cohort (even after seasonal adjustment that corrects for normal summer hiring). Employment among workers over 20 years of age actually fell, with a 136,000 plunge in the 25-54 year-old cohort offset by gains in the number of workers over the age of 55. Among those counted as employed, 277,000 workers shifted to the classification “Part-time for economic reasons: slack work or business conditions.”

What if the Fed throws a QE3 and nobody comes?

To date, the stock market has largely shrugged off the evidence of oncoming recession, in the confidence that the Federal Reserve will easily prevent that outcome and defend the market from any material losses. On that point, it is helpful to remember that the real economic effects of Fed actions in recent years have been limited to short-lived bursts of pent-up demand over a quarter or two. Not surprisingly, as interest rates are already low, and risk-premiums on more aggressive assets are already remarkably thin, the impact of quantitative easing around the globe continues to show evidence of diminishing returns.

With the help of some preliminary work from Nautilus Capital, the following charts present the market gains, in percent, that followed versions of quantitative easing by the Federal Reserve, the European Central Bank, and the Bank of England on their respective stock markets (measured by the S&P 500, the Dow Jones EuroStoxx Index, and the FTSE Composite, respectively). In order to give QE the greatest benefit of the doubt and account for any “announcement effects,” the advances in each chart are based on the 3-month, 6-month, 1-year and 2-year gains in each index following the initiation of the intervention, plus any amount of gain enjoyed by the market from its lowest point in the 2 months preceding the actual intervention. The effects of most interventions would look weaker without that boost.

Remember that quantitative easing “works” through central bank hoarding of long-duration government bonds, paid for by flooding the financial markets with currency and reserves that essentially bear no interest. As a result, investors in aggregate have more zero-interest cash, and feel forced to reach for yield and speculative gains in more aggressive assets. Of course, in equilibrium, somebody has to hold the cash until it is actually retired (in aggregate, “sideline” cash can’t and doesn’t “go” anywhere). Increasing the quantity simply forces yield discomfort on more and more individuals. The process of bidding up speculative assets ends when holders of zero-interest cash are indifferent between continuing to hold that cash versus holding some other security. In short, the objective of QE is to force risky assets to be priced so richly that they closely compete with zero-interest cash.

Understanding this dynamic, it follows that QE will have its greatest impact on financial markets when interest rates and risk-premiums have spiked higher. If interest rates are low already, and risky assets are already priced to achieve weak long-term returns (we estimate that the S&P 500 is likely to achieve total returns of less than 4.8% over the coming decade), there is not nearly as much room for QE to produce a speculative run. Leave aside the question of why this is considered an appropriate policy objective in the first place, given the extraordinarily weak sensitivity of GDP growth to market fluctuations. The key point is this – QE is effective in supporting stock prices and driving risk-premiums down, but only once they are already elevated. As a result, when we look around the globe, we find that the impact of QE is rarely much greater than the market decline that preceded it.

To illustrate, each of the Fed, ECB and BOE quantitative easing interventions since 2008 are presented below as a timeline. The shaded area shows the amount of market gain that would be required to recover the peak-to-trough drawdown experienced by the corresponding stock index (S&P for Fed interventions, EuroStoxx for ECB interventions, FTSE for BOE interventions) in the 6-month period preceding the quantitative easing operation. The lines plot the 3-month, 6-month, 1-year and 2-year market gain following each intervention, adding any gain from the low of the preceding 2 months, to account for any “announcement effects.” Technically, the lines should not be connected, since they represent the gains following distinct actions of different central banks, but connecting the points shows the clear trend toward less and less effective interventions, with the most recent interventions being flops. Notice also that central banks have typically initiated QE interventions only when the market had somewhere in the area of 18% or more of ground to make up.

Of all the experiments with QE, the round of QE2 from late-2010 to mid-2011 was most effective, in that stocks recovered their prior 6-month peak, and even some additional ground. Yet even with QE2, the Twist and its recent extension, as well as liquidity operations such as dollar swaps and so forth, the S&P 500 is again below its April 2011 peak, and was within 5% of its April 2010 peak just a month ago (April 2010 is a particularly important reference for us, since that is that last point that the ensemble methods we presently use would have had a significantly constructive market exposure). The largely sideways churn since April 2010 reflects repeated interventions to pull a fundamentally fragile economy from the brink of recession, and recessionary pressures are stronger today than they were in either 2010 or 2011. Investors seem to be putting an enormous amount of faith in a policy that does little but help stocks recover the losses of the prior 6 month period, with scant evidence of any durable effects on the real economy.

In short, the effect of quantitative easing has diminished substantially since 2009, when risk-premiums were elevated and amenable to being pressed significantly lower. At present, risk-premiums are thin, and the S&P 500 has retreated very little from its April 2012 peak. My impression is that QE3 would (will) be unable to pluck the U.S. out of an unfolding global recession, and that even the ability to provoke a speculative advance in risky assets will be dependent on those assets first declining substantially in value.

Our economic problems run far deeper than what can be healed by more reckless bubble-blowing by the Federal Reserve. At the center of global economic turmoil is a mountain of bad debt that was extended on easy terms by weakly regulated lenders with a government safety net. Global leaders have done all they can to protect the lenders at the expense of the public – to make good on the bond contracts of mismanaged financial institutions by breaking the social contracts with their own citizens. The limit of this unprincipled madness is being reached.

The way out is to restructure bad debt instead of rescuing it. Particularly in Europe, this will require numerous financial institutions to go into receivership, where stock will be wiped out, unsecured bonds will experience losses, senior bondholders will get a haircut on the value of their obligations, and loan balances will be written down. Bank depositors, meanwhile, will not lose a dime, except in countries where the sovereign is also at risk of default. Even there, depositors will probably not lose any more than they would if they held sovereign debt directly. In the U.S., the pressing need continues to be mortgage restructuring, and an emerging recession is likely to bring that issue back to the forefront, as roughly one-third of U.S. mortgages exceed the value of the home itself.

Liquidity does not produce solvency. Bailouts from one insolvent entity to another insolvent entity do not produce solvency. Efforts to stimulate growth will not produce solvency if a large fraction of the economy is overburdened with debt obligations that cannot be repaid. What will produce solvency is debt restructuring. The best hope is that global leaders will recognize the necessity and move ahead with debt restructuring in an orderly way, particularly in the European banking system. The worst nightmare is that global leaders will deny the necessity and belatedly discover that they have squandered the last opportunity to avoid a disorderly finale.

Market Climate

A quick note on performance – as we’ve noted since the inception of Strategic Growth Fund in 2000, our investment horizon is specifically focused on the complete bull-bear market cycle, measured from bull-market peak to bull-market peak, or bear-market trough to bear-market trough. My view that stocks have entered a new bear market makes it reasonable to examine the most recent cycle, measured from the bull market peak of October 9, 2007 (on the basis of total-return) to the recent peak on April 2, 2012.

During the 2000-2007 peak-to-peak cycle, Strategic Growth outperformed the S&P 500 by a cumulative margin of 119.79% vs. 20.70% (11.46% vs. 2.62% on an annual basis). During the 2002-2009 trough-to-trough cycle, Strategic Growth outperformed the S&P 500 by a cumulative margin of 37.95% to -1.25% (5.10% vs. -0.19% on an annual basis). As I observed in numerous annual reports, that full-cycle performance margin was “as intended” – neither extraordinary nor disappointing from the standpoint of our long-term expectations.

In contrast, the most recent peak-to-peak cycle from 2007 to 2012 was challenging. For most investors, everything went wrong in the downturn and then everything went right in the recovery. For us, everything went reasonably as expected during the downturn, but my insistence on making our methods robust even to Depression-era data led to a significant “miss” of the market’s recovery in 2009 and early 2010 that will not be repeated in future cycles even under identical conditions and evidence. Largely as a result of that miss, Strategic Growth lagged the S&P 500 during the most recent cycle, by a cumulative margin of -12.91% vs. 0.08% (-3.01% vs. 0.02% on an annual basis). The Funds page includes full historical performance data on all of the Funds, as well as annual reports and other information.

In every cycle, Strategic Growth has experienced just a fraction of the downside experienced by the S&P 500 (-6.98 vs. -47.41% for the S&P 500 in the 2000-2007 cycle; -21.45% vs. -55.25% for the S&P 500 in the 2002-2009 cycle). I recognize that nobody can feed a family with reduced downside. It does, however, make it far easier to recover from difficult periods. The most recent market cycle was an outlier on nearly every basis that investors can imagine. It was – and I am confident it will remain – an outlier from the standpoint of our own full-cycle performance as well.

As a side note, from the presumptive bull market peak on April 2, 2012 through Friday of last week, the S&P 500 is down -3.95%, while Strategic Growth is down -0.78%. Needless to say, if the recent bull market establishes a new high, some of the above calculations will change. The essential point remains that our “two data sets” challenge in 2009 through early 2010 more than accounts for the cumulative performance shortfall of less than 13% between Strategic Growth and the S&P 500 in this cycle, and the methods we brought to bear on that problem leave us well prepared for a very wide range of market outcomes in the cycles ahead. We’ll go forward from here.

As of last week, our estimates of prospective market return/risk in stocks remained in the most negative 0.5% of historical observations. We’ve examined a range of possible outcomes that could produce a shift in our investment stance. While a further advance would moderately take the “edge” off of our present defensive stance, we also estimate that a fairly small advance would also re-establish an overvalued, overbought, overbullish condition that would weigh on any material risk-taking. So the greatest amount of latitude to accept market risk would be from substantially lower levels. Of course, that’s the most likely point at which another round of QE would be initiated as well. As usual, our willingness to expand our exposure to market risk will remain focused on observable measures, not on some untestable faith-factor. For now, we remain tightly defensive. Strategic Growth remains fully hedged, with a staggered strike hedge (just over 1.5% of assets being committed to raising our put option strikes), Strategic International remains fully hedged, Strategic Dividend Value is hedged close to 50% of its stock holdings (its most defensive stance), and Strategic Total Return has a duration of about one year, just over 10% of assets in precious metals shares, and a few percent of assets in utilities and foreign currencies.

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Tags: Bank Of China, Bank Of England, Central Administrator, Default Risk, ECB, European Countries, Export Orders, Fiscal Control, Global Recession, Government Bonds, Growing Concern, Headwinds, Hussman, Litany, Mike Shedlock, National Sovereignty, Public Resources, Purchasing Managers, Qe3, Solvency
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Is Quantitative Easing the Silver Bullet to Economic Recovery? (Giulotto)

Thursday, May 24th, 2012

 
By Joseph Giulitto, Trust Company of America

Some rise by sin and some by virtue fall.
– Shakespeare

I saw this quote recently while researching another topic. I found it to be appropriate to capture the challenge that professional money managers have in finding investments appropriate for the current domestic economic and geopolitical environment. The rules (that apply to what makes an investment good or bad) that have been established over the previous 40 years of investing are no longer relevant, and those investments that typically would struggle during a massive global recession have been successful in achieving a rising valuation. The Fed’s actions of late have certainly created buoyancy in a rather questionable market. But to what end? Are we slated now for yet another round of quantitative easing? QE3 to the rescue…

The Fed’s Answer to Recovery

Trying to find the right blend of investments during any normal market cycle can be trying. Throw into the equation the Fed’s involvement with quantitative easing, colloquially known as “QE,” and suddenly everything you may have thought you knew is no longer relevant. To add to the confusion, there are few historical references on which to base our future decisions – creating a recipe for complexity. The standard variables that an advisor may use to determine investment quality or the technical analysis that has worked over the previous decades may not apply in the same manner as before.

The term quantitative easing, as defined by Investopedia, describes a form of monetary policy used by central banks to increase the supply of money in an economy when the bank interest rate, discount rate, and/or interbank interest rate are either at, or close to, zero.

Quantitative easing is a phrase that has been added to the vocabulary of nearly every human in the developed world. Over the last four years, actions by the national banks across the globe have taken steps to stave off massive economic downturns by finding ways to inject liquidity into their respective economies. Historically, where government spends- a bubble develops. Only to be further followed by the eventual collapse of the bubble and the wake that is created.

The now infamous quantitative easing is the Fed’s answer to providing a potential recovery to the markets and economy. In past years, the Fed’s “go to philosophy” was to simply cut or raise interest rates to either cool or ignite the economy. While arguments exist in support of this methodology the question might be: why not stick with what works? Well, to answer my own question- because it wasn’t working.

When the Fed lowered rates to near zero it became a game of “what next.” What fiscal silver bullet existed that the Fed could use to create an up swell in the overall sentiment of the American and global investor? While the idea of QE seemed a fresh perspective on our shores for solving the financial crisis one didn’t need to look back too far to find an eerily similar event.

Japan: A QE Case Study

Japan is the only economy in the modern age to have tried a nationwide stimulus of QE for a significant period. The Bank of Japan lowered its rate aggressively with no effect on the economy. Once at zero the Bank of Japan (BOJ) instituted the first set of QE and ran the process for the following five years. Some economists would say that it appeared that the BOJ continued to have a hand in the economy by injecting liquidity from time to time even up to the current day. Like a defunct junkie, the economy of Japan is attempting to wean itself from the BOJ and its liquidity injections. Is this what the future holds for not only the US, but all economies that have participated in the game of QE (read – Euro zone)?

With today’s active methodology of QE the RIA would have to ask what this means to the current day investor. If we have this one example of the impact of QE on Japan’s monetary policy as our historical reference, we would ask what the impacts of QE were and how do we use this knowledge to our advantage? Looking at Japan as our case study, we find that the period that the BOJ was active in its QE philosophy corresponded to the largest expansion of Japan post WWII. In my readings many economists would not credit the QE with this expansion. I believe we would be remiss to think one did not impact the other.

QE and the Investor

With that said- should an investor throw caution to the wind and build an all equity exposure portfolio and let it ride? Hold on before you push that trade button. There is always another side to the market. What happened in the past will certainly happen again. Let us not forget to refer to our history lessons. Japan experienced significant volatility within the bond markets during the advent of QE. A bond bubble was created that had a significant impact on the economy of Japan. So much – that it nearly thrust them into another bought of stagnation, and ultimately a depression. This bond correction forced more action from the BOJ. This proverbial teeter totter of activity by the Japanese Fed has still yet to fully play out.

The consideration in this history lesson is asking the question how should one (country) use the power of QE? While most agree that QE is an effective measure to help stabilize short term liquidity issues, QE will never serve to provide the replacement for the truly hard decisions that need to be made by government to create a healthy and productive capitalist system.

We know that QE works, at least for a short term fix. The question is how long is this fix going to be used? We also know that from a historical precedent there are pitfalls, specifically in the bond market.

With the recent commentary coming out of the Fed identifying several downside risks. Is it time to reevaluate your current position?

Or to quote Shakespeare once again:

A fool thinks himself to be wise, but a wise man knows himself to be a fool.

Tags: Bank Interest Rate, Buoyancy, Central Banks, Complexity, Economic Recovery, Geopolitical Environment, Global Recession, Interbank Interest Rate, Interest Rate Discount, Investment Quality, Investopedia, Monetary Policy, National Banks, Professional Money Managers, Qe, Qe3, Silver Bullet, Trust Company Of America, Virtue, Vocabulary
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Jim Rogers: “Volume Is Not Going To Come Back. We’ve Had A Great 30 Years. That’s Finished!”

Tuesday, May 15th, 2012

 
Jim Rogers is hedging his gold (and silver) positions reflecting that this is normal, following such a tremendous run, and that this is good for the precious metal in the long-run. In his discussion with Maria Bartiromo this afternoon, he notes India’s anti-gold ‘protectionism’ (and its potential balance of payments issues) that are trying to force the hoarding into risky ‘productive’ assets (as others might say). The immutable commodity maven suggests JPMorgan (and its peers) could be behind the drops in the overall commodity complex as the uncertainty of their positions (and liquidation potential to raise cash as bank examiners begin their forensics) becomes more important. He holds the USD, which he hates; has a number of equity shorts; and is most fearful of banks – specifically admitting he is a serial seller of calls on JPMorgan.

His advice, and perhaps Maria should look into it given their ratings recently, is to become a farmer; own farmland; and speculate on agriculture. On the dismal ‘ethical’ state of our leaders and management, the thoughtful Rogers opines, “You can read world history for decades. There are always people doing things wrong. We have not changed our human nature and we will continue to have scandals and problems” and in a follow-up to CNBC’s standard ‘money-on-the-sidelines’ argument he crushes the money-honey’s dreams: “Finance had a great 30 years. That’s finished. Now to advance, we have too many people, too many MBAs, too much leverage and too many governments that don’t like us”. A must-see rebuttal to the ‘normal’ CNBC hopium with more on China’s slowdown, a US recession, Europe and a Greek exit, QE3, and ‘tractors’.

Tags: Balance Of Payments, Bank Examiners, Cnbc, Farmland, Forensics, Gold And Silver, Hoarding, Human Nature, Jim Rogers, Maria Bartiromo, Maven, Money Honey, Precious Metal, productive assets, Protectionism, Qe3, Rebuttal, Sidelines, Slowdown, World History
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Marc Faber on U.S. Equities, Economy, Euro Zone

Thursday, May 10th, 2012

 
The quote of the day goes to Marc Faber, publisher of the Gloom, Boom & Doom report. Faber says “I do not have a high opinion of the U.S. government, but the bureaucrats in Brussels make the government in the U.S. look like an organization consisting of geniuses.”

Marc Faber spoke with Bloomberg TV’s Betty Liu also stated “The market will have difficulties to move up strongly unless we have a massive QE3 and if it moves and makes the high above 1422, the second half of the year could witness a crash, like in 1987.”

Link if video does not play: Marc Faber on U.S. Equities, Economy, Euro Zone

Faber on whether he still thinks that profit margins will shrink and record profits seen will be no more for U.S. corporations:

“Yes, if you look at the statements by corporations, it is very clear. Earlier on, you had a commentator who said the exports to Europe from the U.S. are irrelevant. I agree with that. What is relevant are the businesses of American corporations in Europe and the earnings they derive from these businesses. That is definitely slowing down. The revenue growth is slowing down and, in my view, you will have more and more corporations that report earnings that are actually good but they do not exceed expectations…The bottom line is I think the market will have difficulty moving up strongly on less we have a massive QE3 and if it moves here and makes the high above 1422, the second half of the year could witness a crash.”

“A crash, like in 1987…because the market would become technically very weak. I would expect the market making a new high. If it happens, it would be a new high with very few stocks pushing up and the majority of stocks have already rolled over. The earnings outlook is not particularly good because most economies in the world are slowing down. People focus on Greece but Greece is completely irrelevant. What is relevant are two countries — China and India — 2.5 billion people combined. They are a huge market for goods and these economies are slowing down massively at the present time.”

On whether more Fed stimulus will put a floor on the S&P 500 this year:

“Yes, I think we had a rally that began March 2009 at 666 on the S&P. We made an orthodox pop a year ago on May 2, 2011 at 1370. Then we made a new high on April 2 of this year. The new high was not confirmed by the majority of shares and many shares are already down 20% or so and every day, there are shares that are breaking down or they no longer go on good news which is a bad sign. I think maybe we have seen the high from the year unless you get a huge QE3. That may not be forthcoming.”

On whether the Fed will issue QE3:

“I think that QE3 will come, but it depends on asset markets. If the S&P dropped here another 100-150 points, I think that QE3 will occur. But if the S&P bounces back and we are above 1400, I think the Fed will essentially be waiting to see how the economy develops. The economy in the U.S. consists of different economies, some of it is very strong. I was in southern California and there the economy is doing fine. In other places, it is not doing fine. It is not universally bad. Compared to other countries, it is actually doing relatively well.”

On whether Greece will exit the euro:

“There is a very good chance they will exit the euro and it would have been desirable if the euro countries had kicked out Greece three years ago. It would have saved a lot of agony. As a result of the bailout, the problem has become bigger and bigger and bigger.”

On whether policymakers can manage the exit properly:

“I think it would be much better for Greece and the entire euro area if Greece were kicked out. Spain kicked out. Italy out and even France should be out. At the end you just have Germany with the euro. The other countries can have their own currencies and still trade and use the euro as an international currency.”

“The bureaucrats in Brussels and the media are brainwashing everybody that if Greece exited the euro, it would be a disaster. My view is the best would be to dissolve the whole euro zone and that the countries would go back to their own currencies and still use the euro as an international currency the way you travel through Latin America and with a dollar you can pay anywhere you with. In my view, that would be the best. These countries that have financial difficulties, you will have to write off their debts and make it difficult for them to access the capital market in the future. Just to keep bailing them out will increase the problem. It will not solve the problem.”

On how economic catastrophe can be avoided if the euro is dissolved:

“Explain to me why there would be an economic catastrophe. Many countries have pegged currencies have given up the peg to another currency and it was not a catastrophe. The public has been brainwashed that the breakup of the euro would be a complete disaster when in fact, it may be the solution.”

On whether there will be a race to the bottom among various countries to devalue their own currencies if the euro is dissolved:

“I do not have a high opinion of the U.S. government, but the bureaucrats in Brussels make the government in the U.S. look like an organization consisting of geniuses. The bureaucrats in Brussels are completely useless functionaries and they want to maintain their power. They always talk about austerity being bad but if you look at the government expenditures of the EU, in 2000, it was 44% of GDP. Since then, it has grown by 76% under the influence of the Keynesian clowns and now it is 49% of GDP. That is the problem of Europe — too much government spending and lack of fiscal discipline.”

On whether it’s a mistake to short the euro:

“I want to make this very clear — the investment markets may move in different directions than the economic reality because if you print money. That’s why in the Bloomberg poll, Mr. Bernanke is viewed so favorably because fund managers and analysts and strategists, they are only interested in having stocks up so their earnings increase and their bonus pool increases. But in reality, the economy can go downhill and stocks can go up just because of money printing and in Europe, the ECB has proven now that they are very good money printers.”

On where to invest in Europe:

“Actually, usually when socialists come in or there is a crisis such as we have in Greece, it occurs usually near market lows. If someone really wanted to take speculative positions, he should look at quality non- financial stocks in countries like Spain, Italy, France, and Greece. I think rebound is coming. The market on a short-term basis is oversold. But if you look at the market action — first of all, we made a low on the S&P last October at 1074. We went to 1422. The market is down from 1422 to less than 1360. The whole world is screaming we’re in a bear market. This is a minor correction. I think it may become a more serious correction as the technical picture of the market has deteriorated very badly and as the S&P made a new high this year on April 2nd, all the European markets are lower than they were a year ago.”

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

Tags: American Corporations, Bloomberg Tv, Boom, Bottom Line, Brussels, Bureaucrats, Commentator, Crash, Doom, Euro Zone, Geniuses, Gloom, Liu, Marc Faber, Profit Margins, Qe3, Quote Of The Day, Report Earnings, S Corporations, Second Half
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PIMCO’s Bill Gross – No QE3 Right Away, but a Few Weak Employment Reports Brings It

Monday, April 30th, 2012

PIMCO’s Bill Gross has a wide ranging interview on Bloomberg discussing all sorts of topics from more QE, the Fed following the Bank of England’s plan to ignore any inflation as ‘temporary’ so they can continue ultra easy policies, the dysfunction in Europe, the potential for recession, among other topics.

9 minute video – email readers will need to come to site to view

Tags: All Sorts, Bank Of England, Bill Gross, Bloomberg, Employment Reports, Europe, inflation, PIMCO, Qe, Qe3, Recession, Video Email
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Gold Market Radar (April 30, 2012)

Sunday, April 29th, 2012

Gold Market Radar (April 30, 2012)

For the week, spot gold closed at $1,662.75 down $19.82 per ounce, or 1.2 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, rose 1.5 percent. The U.S. Trade-Weighted Dollar Index slid 0.61 percent for the week.

Strengths

• So when you thought the investment case for gold was all over in March with no imminent QE3 coming from the Fed, guess who was buying gold? – Central banks who fully understand you can’t park your reserves in the currencies of countries that are mired in an endless wall of debt. Overall, central banks apparently purchased no less than 58 tonnes in March. The three largest buyers were Mexico, which increased its holdings by 16.81 tonnes to a total of 122.58 tons, Russia with purchases of 16.55 tons giving it total reserves of 895.75 tons, and Turkey with 11.48 tons taking it to 209.6 tonnes in reserves. Some suggest an acceleration in central bank purchases could continue throughout the year as first quarter economic growth numbers are looking a bit flaccid. Last year, central banks bought 439.7 tonnes of gold, the biggest annual increase in almost five decades.
• Agnico-Eagle Mines reported first quarter results that handily beat market expectations. CEO Sean Boyd noted that Agnico-Eagle produced more gold in the first quarter of 2012 than in the first quarter of 2011, which included production of the now suspended Goldex mine. Compared to its peers, Agnico-Eagle has one of the highest quality resource statements and has a great corporate culture, so we expect the company to continue to gain market respect for the rest of the year.
• Gold Standard Ventures reported two drill holes from its Railroad project in Nevada. Drill hole 12-1 hit 164 meters at 3.38 g/t gold while the second one about 100 meters south of drill hole 12-1 netted 56 meters of 4.29 g/t Au. Gold Standard’s share price finished the week up 59 percent.

Weaknesses

• Pessimism in gold stocks may have reached a peak. In a recent marketing trip, Stephen Walker, a top gold mining analyst at RBC, noted investor sentiment still seemed a bit depressed as investors appeared to be waiting for a catalyst to bring gold off the bottom, such as emerging market inflation, QE3, or central bank buying, before stepping back into gold stocks. As a point of contrast, IAMGOLD came to the table on Friday to buy Trelawney Mining, sending the share price up 41 percent. It is interesting to note that Barrick Gold just sold its 20 percent stake in Highland Gold the day before. Barrick Gold has been criticized in the past for doing deals when price points hit painful levels, such as buying both a copper company and an oil company at peak copper and oil prices. Interestingly, IAMGOLD was one of the few companies to make an acquisition when gold stocks plummeted in late 2008 through early 2009.
• Feedback from the Zurich gold show is that company attendance outnumbered investor attendance by a good margin, again reflecting some of the discontent with buying gold companies. One participant we spoke with noted there was even some talk about industry participants coming to terms, when it comes to marketing the profitability of the company, with using cash cost versus all-in costs or total production costs.
• Cash cost is a concept that is a legacy measure which companies used to figure out if they were going to go bankrupt the next week. It says nothing about whether the company is profitable and that is what investors are concerned with today. For the senior gold miners, investors want to know if the company is making a profit and can grow its dividend. When companies espouse low cash cost numbers that don’t reflect the full cost to produce an ounce of gold, it just becomes a lightning rod for governments to increase taxes.

Opportunities

• Bob Hoye of Institutional Advisor published a report on Friday titled “Gold Consolidation Approaching an End.” The report shows that the relative strength of mining shares to the price of gold bullion is at extremes only seen five times in the past one hundred years. The report also notes that, historically, investors should look to the junior tier names to exhibit the greater price action relative to their senior peers.
• Goldman Sachs noted it expects to see higher gold prices up to its previous target of $1,840 an ounce this year. With real GDP adjusted for the build in inventories coming in at only 1.6 percent in the first quarter, some form of quantitative easing may be in the cards.
• Quatar Investment Authority (QIA), the Gulf state’s aggressive sovereign wealth fund, noted it has more than $30 billion to spend on investments this year and sees commodities as a key target.

Threats

• Has anything been learned by the government? We had a tech boom partially driven by Y2K spending. We had lending standards relaxed so that anybody who wanted to buy a home could get one at an inflated price. We have health care reform which will increase the patient load on the medical system, but does nothing to incentivize an increase in the supply of doctors and nurses which we will surely need. And now the government wants to continue to give loans to college students at below market rates? Student debt has now reached $1 trillion dollars and jobs are scarce, but is this the solution?

Tags: Bank Purchases, Central Banks, Currencies Of Countries, Dollar Index, Drill Hole, Drill Holes, Eagle Mines, Endless Wall, Gold Market, Gold Miners, gold stocks, Growth Numbers, Market Expectations, Market Radar, Nyse Arca, Nyse Index, Qe3, Quality Resource, Railroad Project, Spot Gold
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Concern or Correction?

Wednesday, April 18th, 2012

April 13, 2012

by Liz Ann Sonders, Senior Vice President, Chief Investment Strategist, Charles Schwab & Co., Inc.,
and Brad Sorensen, CFA, Director of Market and Sector Analysis, Schwab Center for Financial Research,
and Michelle Gibley, CFA, Director of International Research, Schwab Center for Financial Research

Key Points

• Economic data has softened a bit lately but still indicates growth in the United States. After a long stretch of relative calm in the markets, we’ve seen the markets pull back, possibly fulfilling the correction that was overdue. We believe the longer-term trend is higher but near-term risks continue to be elevated and earnings season could bring more volatility.
• After a couple weeks of shifting perceptions regarding what the Fed’s next move may be, the minutes from the most recent meeting seemed to solidify the notion that another round of quantitative easing (QE3) is not in the offing. Although the stock and bond markets initially reacted negatively, we are heartened by the rhetoric.
• European debt fears have flared up again in Spain and Italy and we believe risks are elevated and may not be fully appreciated. Meanwhile, China’s response to slowing growth has been surprisingly slow and risks of a misstep are rising, although we still remain optimistic in the longer term.

After the best first quarter stock performance since 1998, based on the S&P’s 12% return, and the recent pullback in the markets, investors may be wondering what’s next. Can the market resume its move higher? Was the correction enough to heal overbought conditions and elevated investor sentiment? What will be the catalyst for the next move?

There hasn’t been a shortage of commentary suggesting that a pullback in equities was overdue and needed for the next leg higher. But now that we’ve seen a pullback, concerns are suddenly growing that we could be in for an extended downturn. Although risks are elevated, currently we don’t believe the correction to-date represents a shift in the recent upward trend in stocks. In fact, we can look back at similar periods and find some heartening information. According to our friend Ed Yardeni at Yardeni Research there have been 17 times in the last 66 years that each of the first three months have posted positive S&P 500 returns. The average total yearly return for those 17 years was 20.2%, with none of those years posting a negative return. But with such a great head start, that might not be all that meaningful for the rest of the year. However, according to Ned Davis Research, there have been 11 instances since 1930 where the S&P 500 posted returns above 10% in the first quarter. The median return for the following three quarters was 6.95%, with all but two posting positive returns for that time period.

Additionally, the recent correction has helped push the Ned Davis Research Daily Sentiment Composite into excessive pessimistic territory, sharply reversing the overly optimistic sentiment seen just a few weeks ago. Negative investor sentiment has tended to be a contrary indicator and we believe is a positive development for the market as we move forward.

One more bit of historic data regarding the interplay between stocks and bonds. Bonds have had a decade-long run that has seen interest rates sink to historically low levels and we have warned investors that may be overallocated to bonds that a reversal to the mean may be in store. Capital appreciation on bonds is by definition capped as interest rates can only go to zero, which we’re not that far away from on Treasury securities. Furthering that warning, according to Bespoke Investment Group, when equities have outperformed bonds substantially (above 10%) for two quarters in a row, which just occurred and has happened nine previous times, the average equity return in the following quarter has been 4.6%, while bonds have averaged a decline of 0.5%. And we may be seeing that shift from bonds to equities begin as the week ended March 23^rd, according to EPFR Global, saw outflows from long-term government bond funds of $1.01 billion, the largest amount on record (thanks to Barron’s for pointing this out). However, we must caution investors that are investing in bonds and bond funds for income purposes that they still remain the most appropriate predictable income investment vehicle in most cases, and the vast majority of investors should maintain at least some exposure to bonds based on income needs and risk tolerances.

Earnings to take the reins?

Recent US economic data has raised some questions among investors as to the sustainability of the economic expansion. We share some of those concerns as confidence remains tenuous, the political situation is messy, the European debt crisis rages on, and Chinese growth has slowed. But we maintain confidence that the economic expansion is continuing and should continue for the foreseeable future. The Institute for Supply Management’s (ISM) manufacturing survey rose to 53.4, with a reading above 50 indicating expansion. Additionally, the employment component moved to 56.1 from 53.2, and while new orders dropped slightly, it still remains solidly above 50. The service side of the ledger also continues to show expansion as the ISM Non-Manufacturing Index posted a reading of 56.0.

The job picture got a little murkier with the latest report. Although ADP reported that March private payrolls expanded by 209,000 positions and February was revised higher, the Labor Department said that only 120,000 jobs were added, below expectations and contributing to the pullback in stocks. Positively, the unemployment rate dropped to 8.2%, still elevated but well off its high. Leading indicators of job growth such as initial unemployment claims continue to suggest that the March reading may prove to be an outlier and/or a natural pullback after the strong weather-related gains in the first two months.

In fact, the improving job picture appears to be bolstering the consumer, as retail sales numbers have been relatively positive and we’ve seen auto sales continue to rebound after a sharp drop-off.

Auto sales indicate increased confidence

Source: FactSet, U.S. Bureau of Economic Analysis. As of April 10, 2012.

And we’ll be getting more information at the corporate level over the next several weeks as first quarter earnings season heats up. There appears to be more uncertainty heading into this season than we’ve seen recently, but we have seen analyst forecasts revised higher recently. This reporting season could provide the next near-term catalyst for the markets as some positive surprises and commentary could provide further fuel, while disappointment could move stocks lower. One advantage we may have is that expectations entering the season appear relatively low, with Yardeni reporting that as of April 6 analysts are expecting S&P 500 companies’ earnings to only grow 2.4% over last year, which would be the slowest rate since the third quarter of 2009, providing the opportunity for upside surprises. Additionally, according to Strategas Research Partners, the negative-to-positive preannouncement ratio was 3.0 for the first quarter and they note that when the ratio has been above 2.1, the stock market in the month after the end of the quarter has risen 2.2%, while declining 0.3% when the ratio is below 2.1. One thing we’ll be continuing to watch will be commentary surrounding the massive cash that being stored on balance sheets and how it may be used in the future.

Corporate liquidity near an all-time high

Source: FactSet, Federal Reserve. As of April 10, 2012.

Fed continues to confound

The above chart helps to illustrate why we believe that another round of quantitative easing (QE3) seems unnecessary. There is plenty of liquidity in the economy and pumping more in would seem to us to do little good. It appears the Federal Reserve may be starting to move toward that view as well, or at least they’re becoming more confident in the economic recovery. The recently released minutes from their March meeting indicates that there isn’t much appetite on the Committee for QE3. Although stocks and bonds had an initial negative response, much like a child wobbling on a bike after a parent lets go for the first time, we believe Fed support needs to slowly be withdrawn so the economy can ride on its own.

European debt risks flare up

Contrarily, The European Central Bank (ECB) appears anxious to shove its kid on a bike as soon as possible with lagged and tepid responses to the ongoing debt crisis. That said, its three-year loan liquidity injections early this year did buy time for banks and governments and reduced the imminent threat of a banking system collapse. However, the sugar high may have lulled investors into a false sense of security, as the eurozone debt crisis was merely put on pause.

While it may be an oversimplification, the elevation to a crisis situation boils down to confidence. Loss of confidence can become a self-fulfilling prophesy, as we witnessed with Lehman Brothers in 2008. Therefore, in order to maintain investor confidence, European policymakers have to continue to make progress toward reducing deficits, meeting fiscal targets, making structural changes to provide a foundation for growth, and implement backstops in case things deteriorate.

However, instead of making progress, confidence is being slowly eroded by backward moves:

• In Italy, Prime Minister Mario Monti’s labor reform proposal has been watered down.
• France’s presidential election on April 22 and May 6 could result in a change of leadership to presidential candidate Francois Hollande, who has pledged to renegotiate the eurozone fiscal pact.
• Greece’s general election, which could occur around May 6, could result in a weak coalition government, increasing the possibility of missed quarterly bailout funding targets.
• Even the Netherlands, considered a core country and a strong proponent of fiscal discipline, admitted it too would run afoul of the European Union’s 3% deficit target in 2012, resulting in the need for austerity cuts.

But due to the size of its economy and debts, weak economic outlook and banking system, Spain is the elephant in the room that cannot be ignored. Eurozone debt concerns flared up after Spain announced it would miss its 2012 deficit target.

The Spanish economy has an uncertain and risky outlook as evidenced by unemployment still rising from an already high 24% and a housing bubble that is still deflating. Additionally, private sector debt in Spain grew dramatically during the housing boom and the risk is that Spanish banks could face more problems in the future because losses on private sector debt are likely to rise. As a result, bank problems could be inherited by the sovereign, because banks could need government aid.

The interaction between the economy, the banks and the sovereign can feed off each other and exacerbate the situation, and it may take only a minor deterioration in one or two areas for a negative spiral to take effect in Spain. We believe Spanish banks likely need more capital as a buffer, but we don’t believe Spain’s government is in imminent need of a bailout. However, markets are nervous that Spain’s situation could deteriorate, necessitating a bailout over the next couple years.

Eurozone concerns remain, particularly for Spain

Source: FactSet, iBoxx. As of Apr. 10, 2012.

We are discouraged that the combination of deterioration in Spain and the ECB reiteration that emergency measures are temporary has been able to have such a large impact on Italian yields. While the region’s bailout funds were somewhat boosted by combining the temporary European Financial Stability Facility (EFSF) with the longer-term European Stability Mechanism (ESM) for a year, an even bigger firewall may be needed.

Global growth moderating

The focus on austerity in the eurozone misses the need to foster the absent ingredient- growth. Economic releases over the past month have shown a generalized renewed economic weakness in Europe and continued declines in credit indicate growth will be difficult to achieve.

Meanwhile, the Asia/Pacific region is also under downside pressure. As discussed later, China’s economy continues to soften. Many Asian nations have close ties to the Chinese economy, and a slowdown in commodities and goods exports to China is reducing their growth.

As for Japan, the world’s third largest economy, economic data has been mixed. Japan’s leading index has continued to trend higher and there has been a recent rebound in machinery orders. However, Japanese household spending remains weak and despite an increase in the Bank of Japan’s (BoJ) asset purchase program in February, money supply dropped in March, and the quarterly Tankan survey showed business confidence has failed to improve. In contrast to the BoJ holding off on new measures in its April meeting, we believe the BoJ needs to do more and make good on its promise of pursuing “powerful easing” to create inflation and weaken the yen.

Likewise, somewhat disheartening is a slight change in tone by central banks elsewhere. For example, despite downside risks to economic growth, the Reserve Bank of Australia and the ECB also held off on easing at their recent meetings amid signs of inflation picking up. We believe inflation pressures will continue to ease globally as we move through the year, as food prices have fallen and oil prices could have downside risks as global growth slows and geopolitical pressures ease. This could give central banks more leeway to ease in the future.

China continues to slow, but crash unlikely

We believe markets had been underestimating the risks in Europe and over-emphasizing the possibility of a hard landing in China. Growth has slowed, but has defied the bearish calls for a crash. However, monetary easing has been disappointingly slow. We had believed that a sharp drop in inflation and money supply would allow stimulus to be enacted sooner. Typically an economy needs growth in money supply and lending to grow. Money supply has been growing at a slower pace than nominal economic growth, pressuring economic growth.

China likely slows amid modest money supply growth

Source: FactSet, National Bureau of Statistics of China, People’s Bank of China. As of Apr. 10, 2012.
* Excess liquidity is M2 money supply less nominal GDP

The Chinese government is playing a balancing game that has increasing risks of missteps. We are encouraged by early signs of a reacceleration in lending that could boost economic growth. Elsewhere, the government is trying to reduce imbalances in the economy and transition away from dependence on exports as well as building factories and infrastructure. While removing imbalances may be good over the long-term, the ability of the government to micro-manage an economy that is now the world’s second largest is becoming more difficult. Real progress toward a transition is likely to require tough political decisions and reforms, and miscues could make for a bumpy ride.

Read more international research at www.schwab.com/oninternational.

Important Disclosures

The MSCI EAFE® Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States and Canada. As of May 27, 2010, the MSCI EAFE Index consisted of the following 22 developed market country indexes: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom.The MSCI Emerging Markets Index^SM is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. As of May 27, 2010, the MSCI Emerging Markets Index consisted of the following 21 emerging-market country indexes: Brazil, Chile, China, Colombia, the Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand and Turkey.The S&P 500® index is an index of widely traded stocks.Indexes are unmanaged, do not incur fees or expenses and cannot be invested in directly.Past performance is no guarantee of future results.Investing in sectors may involve a greater degree of risk than investments with broader diversification.International investments are subject to additional risks such as currency fluctuations, political instability and the potential for illiquid markets. Investing in emerging markets can accentuate these risks.The information contained herein is obtained from sources believed to be reliable, but its accuracy or completeness is not guaranteed. This report is for informational purposes only and is not a solicitation or a recommendation that any particular investor should purchase or sell any particular security. Schwab does not assess the suitability or the potential value of any particular investment. All expressions of opinions are subject to change without notice.The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

Copyright © Charles Schwab & Co., Inc.,

Tags: Bond Markets, Charles Schwab, Chief Investment Strategist, Couple Weeks, Downturn, Earnings Season, Economic Data, Investor Sentiment, Liz Ann, Long Stretch, Misstep, Pullback, Qe3, Quarter Stock, Relative Calm, Sector Analysis, Senior Vice President, Stock Performance, Term Trend, Volatility
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Jeff Gundlach: “To QE3 or Not to QE3,” That is the Question

Wednesday, April 18th, 2012

Earlier today, thousands listened to Jeff Gundlach live (if with the occasional flash crash) lay out his latest views on the economy and markets. For those who missed it, as well as for those who may want a refresher on why Gundlach is slowly building up a natgas position, or why he is buying gold on dips, here is the full slidedeck used by the DoubleLine manager.

DoubleLine QE3

Tags: Buying Gold, Crash, Dips, Economy, Occasional Flash, Qe3
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