Barron’s Interviews Ray Dalio

Tuesday, May 22nd, 2012

While hedge fund manager Ray Dalio generally stays under the radar, it is always interesting to read the thought’s of the man who runs the world’s largest hedge fund shop.  This weekend Barron’s did an extensive interview with the man, and it is worth the full read.  He does a very interesting comparison of Europe now with “America” post revolution in terms of structure.  Some excerpts below:

We’re in a phase now in the U.S. which is very much like the 1933-37 period, in which there is positive growth around a slow-growth trend. The Federal Reserve will do another quantitative easing if the economy turns down again, for the purpose of alleviating debt and putting money into the hands of people.

We will also need fiscal stimulation by the government, which of course, is very classic. Governments have to spend more when sales and tax revenue go down and as unemployment and other social benefits kick in and there is a redistribution of wealth. That’s why there is going to be more taxation on the wealthy and more social tension. A deleveraging is not an easy time. But when you are approaching balance again, that’s a good thing.

How do you expect Europe to fare?

Europe is probably the most interesting case of a deleveraging in recorded history. Normally, a country will find out what’s best for itself. In other words, a central bank will make monetary decisions for the country and a treasury will set fiscal policy for the country. They might make mistakes along the way, but they can be adjusted, and eventually there is a policy for the country. There is a very big problem in Europe because there isn’t a good agreement about who should bear what kind of risks, and there isn’t a decision-making process to produce that kind of an agreement.

We were very close to a debt collapse in Europe, and then the European Central Bank began the LTROs [long-term refinancing operations]. The ECB said it would lend euro-zone banks as much money as they wanted at a 1% interest rate for three years. The banks then could buy government bonds with significantly higher yields, which would also produce a lot more demand for those assets and ease the pressure in countries like Spain and Italy. Essentially, the ECB and the individual banks took on a whole lot of credit exposure. The banks have something like 20 trillion euros ($25.38 trillion) worth of assets and less than one trillion euros of capital. They are very leveraged.

Also, the countries themselves have debt problems and they need to roll over existing debts and borrow more. The banks are now overleveraged and can’t expand their balance sheets. And the governments don’t have enough buyers of their debt. Demand has fallen not just because of bad expectations, although everybody should have bad expectations, but because the buyers themselves have less money to spend on that debt. So the ECB action created a temporary surge in buying of those bonds and it relieved the crisis for the moment, but that’s still not good enough. They can keep doing that, but each central bank in each country wants to know what happens if the debtors can’t pay, who is going to bear what part of the burden?

What’s your outlook for the U.S.?

The economy will be slowing into the end of the year, and then it will become more risky in 2013. Then, in 2013, we have the so-called fiscal cliff and the prospect of significantly higher taxes, as well as worsening conditions in Europe to contend with. This is coming immediately after the U.S. presidential election, which makes it more difficult. This can be successfully dealt with, but it won’t necessarily be successfully dealt with. We have the equipment and the policy makers, and as long as policy is well managed, we’ll be okay.

What of China and the emerging economies at this point?

They are doing much better in the following way: They were in a bubble, and when I say a bubble, I mean a debt explosion. Their debts were growing at a fast rate. Their debts were rising relative to income and they were growing at rates that were too fast. Those growth rates have slowed up significantly and probably will remain at a moderate pace. They are in pretty good shape but will be subject to the deleveraging of European banks.

Tags: Barron, Collapse, Decision Making Process, ECB, Euro Zone, Excerpts, Federal Reserve, Fiscal Policy, Growth Trend, Hedge Fund Manager, Monetary Decisions, Nbsp, Quantitative Easing, Ray Dalio, Redistribution Of Wealth, Refinancing, Social Tension, Taxation, Treasury, Unemployment
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Eric Sprott: Investment Outlook (April 27, 2012)

Sunday, April 29th, 2012

When Fundamentals No Longer Apply, Review the Fundamentals

by Eric Sprott & David Baker

April 27, 2012

This may not come as a surprise, but we’re still not seeing it. We’re not seeing a US recovery.

Here we are, well into 2012, and the fact remains that the US housing situation is still a bust. There is simply no housing recovery happening in the United States. US New Home Sales fell for the fourth time in a row month-overmonth in March, representing a seasonally-adjusted annual rate of 328,000, down from 353,000 in February.¹ Do you know what the annual rate of New Home Sales was back in 2006? About 1.21 million.² No recovery there.

Same goes for US Existing Home Sales, which fell unexpectedly by 2.6% in March to an annual rate of 4.48 million units.³ Again – would you care to know where they were in the same month back in 2006, before the financial system fell apart? Approximately 6.92 million units.⁴ No recovery there either.

Then there’s unemployment. Judging by all the recent earnings-release cheerleading, March’s jobs numbers seem to have been forgotten, but they were plainly weak. The US Labor Department showed US hiring slowing to a mere 120,000 new jobs in March, below expectations of 200,000+.⁵ That’s not a recovery. That’s simply weak data.

Same goes for the most recent jobless claims numbers, which have been running above 380,000 for the last two weeks, above the 375,000 threshold that supposedly signals future unemployment increases.⁶ Again – this is not positive data, this is weak data. How high will it have to go before the economists admit that it’s weak? 400,000? 425,000? We’re asking – we’d like to know.

Then there are US tax receipts, which continue to point in the same direction. If the US is recovering so strongly, then why are employment tax receipts only up 2%? ($484 billion fiscal year-to-date as of March 2012 vs. $475 billion over the same period to March 2011).⁷ A 2% increase is explainable by inflation alone, which was last reported running at 2.7% according to the Bureau of Labour Stastics.⁸ Shouldn’t the tax receipts be much higher than that? Wasn’t unemployment down so far this year? As the Associated Press plainly states, “The unemployment rate has fallen to 8.2% in March [2012] from 9.1% in August [2011]. Part of the drop was because people gave up looking for work. People who are out of work but not looking for jobs aren’t counted among the unemployed.“⁹ Oh! Sorry,… now the numbers make more sense. There hasn’t been any net new employment at all. Question: if everyone “gives up” looking for work next week, will the US unemployment rate go to zero? We’re asking – we’d like to know.

Other economic indicators exhibit the same downward momentum that the pundits are loath to acknowledge. For example, the Economic Cycle Research Institute’s (ECRI) Weekly Leading Indicator index, which had been rising from its 2011 lows earlier this year, has resumed its downtrend in April.¹⁰ More recently, US Durable Goods Orders were revealed to have dropped 4.2% in March, representing the largest decline since January 2009.¹¹ To top it all off, China’s most recent Purchasing Managers Index (PMI) indicated that China’s manufacturing activity has now been in contraction for six months in a row.¹²

FIGURE 1: SPANISH BANKS – DEPOSIT AND EUROSYSTEM FUNDING (% OF TOTAL ASSETS),
1999 – FEB 2012

Note: Deposits of domestic ex credit institutions in Spanish MFIs. Eurosystem borrowing Eurosystem funding via Open Market Operations Source: Bank of Spain, ECB and Citi Investment Research and Analysis

Meanwhile, the situation in Europe continues to worsen. There’s no point in mincing words: Spain is a complete disaster. This past week, the Spanish government managed to pull off two separate bond auctions, only to have the yield on their 10-year government bond shoot right back up the moment the second auction closed. Everyone’s nervous because the Spanish banking system is up to its eyeballs in approximately €143.8 billion worth of delinquent loans, and the private sector is unwilling to lend Spanish banks the money to weather the potential write-downs.¹³ As we’ve seen before, the real culprit plaguing the Spanish banks is customer deposit withdrawals. It is estimated that €65 billion of deposits left Spanish banks this past March alone.¹⁴ People are taking their money out of the Spanish banking system, and without the help of the generous European Central Bank (ECB), the Spanish banks would likely be in a full collapse today (see Figure 1).¹⁵ As it stands, the Spanish banks have now borrowed a massive €316.3 billion from the ECB in order to meet the withdrawals and maintain the illusion of solvency.

Tags: Amp, April 27, Bust, Cheerleading, David Baker, Earnings Release, Economists, Employment Tax, Eric Sprott, Existing Home Sales, Fiscal Year, Investment Outlook, Jobless Claims, Nbsp, New Jobs, Sprott, Surprise, Tax Receipts, Threshold, Unemployment, Us Labor Department
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When Fundamentals No Longer Apply, Review the Fundamentals

Friday, April 27th, 2012

When Fundamentals No Longer Apply, Review the Fundamentals

by Eric Sprott & David Baker

April 27, 2012

This may not come as a surprise, but we’re still not seeing it. We’re not seeing a US recovery.

Here we are, well into 2012, and the fact remains that the US housing situation is still a bust. There is simply no housing recovery happening in the United States. US New Home Sales fell for the fourth time in a row month-overmonth in March, representing a seasonally-adjusted annual rate of 328,000, down from 353,000 in February.¹ Do you know what the annual rate of New Home Sales was back in 2006? About 1.21 million.² No recovery there.

Same goes for US Existing Home Sales, which fell unexpectedly by 2.6% in March to an annual rate of 4.48 million units.³ Again – would you care to know where they were in the same month back in 2006, before the financial system fell apart? Approximately 6.92 million units.⁴ No recovery there either.

Then there’s unemployment. Judging by all the recent earnings-release cheerleading, March’s jobs numbers seem to have been forgotten, but they were plainly weak. The US Labor Department showed US hiring slowing to a mere 120,000 new jobs in March, below expectations of 200,000+.⁵ That’s not a recovery. That’s simply weak data.

Same goes for the most recent jobless claims numbers, which have been running above 380,000 for the last two weeks, above the 375,000 threshold that supposedly signals future unemployment increases.⁶ Again – this is not positive data, this is weak data. How high will it have to go before the economists admit that it’s weak? 400,000? 425,000? We’re asking – we’d like to know.

Then there are US tax receipts, which continue to point in the same direction. If the US is recovering so strongly, then why are employment tax receipts only up 2%? ($484 billion fiscal year-to-date as of March 2012 vs. $475 billion over the same period to March 2011).⁷ A 2% increase is explainable by inflation alone, which was last reported running at 2.7% according to the Bureau of Labour Stastics.⁸ Shouldn’t the tax receipts be much higher than that? Wasn’t unemployment down so far this year? As the Associated Press plainly states, “The unemployment rate has fallen to 8.2% in March [2012] from 9.1% in August [2011]. Part of the drop was because people gave up looking for work. People who are out of work but not looking for jobs aren’t counted among the unemployed.“⁹ Oh! Sorry,… now the numbers make more sense. There hasn’t been any net new employment at all. Question: if everyone “gives up” looking for work next week, will the US unemployment rate go to zero? We’re asking – we’d like to know.

Other economic indicators exhibit the same downward momentum that the pundits are loath to acknowledge. For example, the Economic Cycle Research Institute’s (ECRI) Weekly Leading Indicator index, which had been rising from its 2011 lows earlier this year, has resumed its downtrend in April.¹⁰ More recently, US Durable Goods Orders were revealed to have dropped 4.2% in March, representing the largest decline since January 2009.¹¹ To top it all off, China’s most recent Purchasing Managers Index (PMI) indicated that China’s manufacturing activity has now been in contraction for six months in a row.¹²

FIGURE 1: SPANISH BANKS – DEPOSIT AND EUROSYSTEM FUNDING (% OF TOTAL ASSETS),
1999 – FEB 2012

Note: Deposits of domestic ex credit institutions in Spanish MFIs. Eurosystem borrowing Eurosystem funding via Open Market Operations Source: Bank of Spain, ECB and Citi Investment Research and Analysis

Meanwhile, the situation in Europe continues to worsen. There’s no point in mincing words: Spain is a complete disaster. This past week, the Spanish government managed to pull off two separate bond auctions, only to have the yield on their 10-year government bond shoot right back up the moment the second auction closed. Everyone’s nervous because the Spanish banking system is up to its eyeballs in approximately €143.8 billion worth of delinquent loans, and the private sector is unwilling to lend Spanish banks the money to weather the potential write-downs.¹³ As we’ve seen before, the real culprit plaguing the Spanish banks is customer deposit withdrawals. It is estimated that €65 billion of deposits left Spanish banks this past March alone.¹⁴ People are taking their money out of the Spanish banking system, and without the help of the generous European Central Bank (ECB), the Spanish banks would likely be in a full collapse today (see Figure 1).¹⁵ As it stands, the Spanish banks have now borrowed a massive €316.3 billion from the ECB in order to meet the withdrawals and maintain the illusion of solvency.

Perhaps it’s Euro-crisis fatigue, or maybe just plain denial, but the equity markets appear unwilling to acknowledge how close we are now to yet another round of Eurozone upheaval. Spain’s economy is almost five times that of Greece. Spain also has over four times the amount of externally-held nominal debt outstanding.¹⁶ If the bond vigilantes choose to punish the Spanish 10-year bond (currently trading precariously close to a 6% yield), we could soon be back where we were this past September, only with a problem four times as large.

The rest of Europe isn’t looking so hot either. Italy’s bond market is in a similar situation to that of Spain, with the Italian 10-year bond trading perilously close to the 6%-yield threshold. Recent data showed the European Purchasing Managers Index (PMI) falling to 47.4 in March, well below the 50 mark which signals growth in industrial activity.¹⁷ German PMI recently confirmed this move with its April release of 46.3, down from 48.4 in March, representing the fastest rate of contraction since July 2009.¹⁸ These declines in economic activity, combined with the austerity measures most Euro countries are currently attempting to impose, almost guarantee more printed money will be pumped into the European bond markets before the year is over. It’s simply a matter of time.

As expected, the powers that be are busy parading around in preparation for the next round of Eurozone panic, with the IMF using the renewed concerns as an opportunity to re-establish its relevance as a firewall provider. The IMF most recently secured $430 billion worth of new “pledges” from various G20 member countries to increase its potential lending capacity to $700 billion in the event of further problems in the Eurozone.¹⁹ Not unsurprisingly, the BRICS countries have expressed irritation at the disproportionate voting power held by Western powers within the IMF at the expense of themselves and the other developing nations. In prepared remarks at an IMF press conference, Brazil’s finance minister criticized the skewed quotas that dictate voting power, stating that, “The calculated quota share of Luxembourg is larger than the one of Argentina or South Africa… The quota share of Belgium is larger than that of Indonesia and roughly three times that of Nigeria. And the quota of Spain, amazing as it may seem, is larger than the sum total of the quotas of all 44 sub-Saharan African countries.”²⁰ This unbalance used to make sense when the IMF was designed to help fund ailing third world and developing countries through economic crisis. But that is clearly no longer the IMF’s main purpose.

It must be difficult for the BRICS countries today. On one hand, they continue to jockey for respect among the Western powers, insisting on participating in quasi-European bailout funds like the IMF. On the other hand, they are also clearly aware of the Western nations’ continuing efforts to surreptitiously devalue their domestic currencies, and the pernicious effect that has had on them as exporters and as lenders of capital. In that vein, it was interesting to note that during the latest BRICS Summit held this past March in New Delhi, the main topic of discussion centered on the creation of the group’s first official institution, a so-called “BRICS Bank” that would fund development projects and infrastructure in developing nations. Although not openly discussed, reports suggest what they were really talking about was creating a type of BRICS central bank – an institution that could facilitate their ability to “do more business with each other in their local currencies, to help insulate from U.S. dollar fluctuations…”²¹ Given the incredible scale of western central bank intervention over the past six months, the BRICS’ increasing frustration with their printing efforts should be a given by now. The real question is what they’re doing about it, and what assets they’re accumulating to protect themselves from the inevitable, which brings us to gold.

Although the paper gold price has been range-bound over the past month, the physical gold market has been undergoing staggering change. Earlier this month it was revealed that Hong Kong gold imports into China totaled nearly 40 tonnes in the month of February, representing a 13-fold increase over the same month last year (see Figure 2).²² 40 tonnes annualized equates to 480 tonnes per year – a massive number in a market that only produced 2,810 tonnes of mine supply in 2011.²³

FIGURE 2: CHINA’S GOLD IMPORTS FROM HONG KONG

Source: Hong Kong Census and Statistic Dept, Reuters
Reuters graphic/Catherine Trevethan, Rujun Shen 11/04/12

If there’s one thing we now know for certain, it’s the fact that the market has completely missed the importance of the demand-side changes currently taking place in the physical gold market. China has now imported 436 tonnes of gold through Hong Kong over the past eight months.²⁴ This compares to imports of a mere 57 tonnes over the same eight month-period a year earlier (July 2010 – February 2011). The net new demand implied by this increase is 379 tonnes, which when annualized equates to 568 tonnes of new demand in a market that supplies 2,810 tonnes per year in mine production. These are astounding numbers. Recent IMF data also shows that at least 12 countries increased their physical gold reserves by 58 tonnes in the month of March, with Mexico, Turkey, Russia and Kazakhstan making sizeable purchases.25 58 tonnes annualized equates to 696 tonnes of demand per year. We know that central banks bought 439.7 tonnes of gold in 2011, and if the pace of recent central bank purchases continues, it will equate to another 256 tonnes of net new change in the physical gold market.

The significance of this demand shift is striking. If we combine China’s implied net change of 568 tonnes with the central banks’ net change of 256 tonnes, we’re left with a demand shift of over 824 tonnes vs. an annual mine supply of 2,810 tonnes. That represents close to a 30% net change in the physical gold market in 2012. If we remove the portion of global gold production produced by China and the other non-G6 central bank gold buyers (like Russia and Mexico – because we know they’re not sellers), we’re now dealing with over 824 tonnes of demand change hitting an annual global mine supply of a mere 2,170 tonnes – representing a 38% shift.²⁶ Although we have been continually reminded that ‘fundamentals don’t matter’ in today’s marketplace, there isn’t a physical market on earth that can withstand that type of demand increase without higher prices over the long-run, and the gold market is no different. There are no sellers of physical gold that we know of who can satiate that scale of new demand, and global gold mine supply has been virtually flat for over the last ten years. Even if we incorporate the estimated 1,600 tonnes of “recycled gold” that the World Gold Council insists on including in its annual gold supply estimates, the numbers above still suggest a net change of 19%.²⁷ Who is going to give up their gold purchases to make room for this scale of new demand? Where is the gold going to come from? We ask because we don’t actually know.

We have written at length about the disconnect between the paper gold price and the physical gold market. If the demand changes stated above applied to any other market, the investing public would lose their minds. Could you imagine, for example, if the demand shifts described above were applied to the global oil market? What would happen if a single country came in from nowhere and increased its oil purchases by a factor equivalent to 30% of the world’s annual oil supply? We are students first and foremost of the physical market, and the numbers stated above speak for themselves. We remain confident about gold for the simple reason that the demand we are now seeing for physical is completely unsustainable without higher prices, and we do not see that demand abating in the coming months. The US recovery is not happening. Europe is poised for yet another full-fledged economic crisis, and the BRICS countries continue to aggressively convert to hard assets like gold in order to protect themselves from currency debasement. The paper market for gold can continue its charade, but demand in the physical market will soon overpower it through sheer momentum – there’s only so much physical to go around, and it appears that there are some very large buyers that are eager to take it.

Footnotes:

1. Cooper, Stephen and Mayo, Raemeka (April 24, 2012) “New Residential Sales in March 2012″. U.S. Department of Housing and Urban Development. Retrieved April 24, 2012 from http://www.census.gov/construction/nrs/pdf/newressales.pdf

2. Isidore, Chris (April 27, 2006) ” New Home Sales Soar”. CNN Money. Retrieved April 20, 2012 from http://money.cnn.com/2006/04/26/news/economy/newhomes/index.htm

3. Reuters (April 19, 2012) “U.S. existing home sales fall 2.6% in March”. Montreal Gazette. Retrieved April 20, 2012 from http://www.montrealgazette.com/business/existing+home+sales+fall+March/6484888/story.html

4. Molony, Walter (April 25, 2006) “Existing-Home Sales Rise Again in March”. National Association of Realtors. Retrieved on April 20, 2012 from: http://archive.realtor.org/article/existing-home-sales-rise-again-march

5. Fletcher, Michael A. (April 6, 2012) “U.S. hiring slowed sharply in March; unemployment fell to 8.2%”. The Washington Post. Retrieved April 19, 2012 from http://www.washingtonpost.com/business/economy/us-hiring-slowed-sharply-inmarch-unemployment-fell-to-82-percent/2012/04/06/gIQAroNXzS_story.html

6. Gibbons, Scott and Sznoluch, Tony (April 26, 2012) “Unemployment Insurance Weekly Claims Data”. United States Department of Labor. Retrieved on April 26, 2012 from http://www.dol.gov/opa/media/press/eta/ui/current.htm

7. Department of the Treasury (March 31 1, 2012) “Monthly Treasury Statement”. U.S. Treasury. Retrieved April 15, 2012 from http://www.fms.treas.gov/mts/mts0312.pdf (see pg 34)

8. Associated Press (April 13, 2012) “U.S. inflation rate cools in March”. CBC News. Retrieved April 20, 2012 from http://www.cbc.ca/news/business/story/2012/04/13/us-inflation.html

9. Rugaber, Christopher S. (April 19, 2012) “US unemployment claims signal slower hiring”. Associated Press. Retrieved April 19, 2012 from http://hosted2.ap.org/APDEFAULT/3d281c11a96b4ad082fe88aa0db04305/Article_2012-04-19-US-Unemployment-Benefits/id-6c727abcd67641f193cdb091302d6424

10. Short, Doug (April 20, 2012) “ECRI Weekly Leading Indicator: The Growth Index Slips”. Advisor Perspectives. Retrieved on April 20, 2012 from http://www.advisorperspectives.com/dshort/updates/ECRI-Weekly-Leading-Index.php

11. Reuters (April 25, 2012) “Durable Goods Orders Show The Sharpest Drop in 3 Years”. New York Times. Retrieved on April 25, 2012 from http://www.nytimes.com/2012/04/26/business/economy/us-durable-goods-orders-fall-sharply.html

12. Kazer, William and Li, Liu (April 22, 2012) “Initial HSBC China PMI Gains In April But Still In Contractionary Range”. The Wall Street Journal. Retrieved on April 24, 2012 from: http://online.wsj.com/article/BT-CO-20120422-717772.html

13. Bjork, Christopher and Roman, David (April 18, 2012) “Spanish Banks’ Bad Omen”. The Wall Street Journal. Retrieved April 19, 2012 from http://online.wsj.com/article/SB10001424052702303513404577351554212260294.html

14. Bloomberg Editors (April 12, 2012) “Europe’s Capital Flight Betrays Currency’s Fragility”. Bloomberg. Retrieved April 15, 2012 from http://mobile.bloomberg.com/news/2012-04-12/europe-s-capital-flight-betrays-currency-s-fragility?category=%2Fnews%2Faustralia-newzealand%2F&BB_NAVI_DISABLE=BIZ

15. Foxman, Simone (April 17, 2012) “Chart of the Day: The Run On Spain”. Business Insider. Retrieved April 19, 2012 from http://www.businessinsider.com/chart-of-the-day-deposits-disappearing-from-spanish-banks-2012-4?utm_source=alerts&nr_email_referer=1

16. World Factbook (April 13, 2012) “Spain Section” Central Intelligence Agency. Retreived April 19, 2012 from https://www.cia.gov/library/publications/the-world-factbook/rankorder/2186rank.html

17. Billington, Ilona (April 24, 2012) “Euro-Zone’s Private Sector Shrinking Fast”. The Wall Street Journal. Retrieved on April 24, 2012 from http://online.wsj.com/article/SB10001424052702303459004577361250582738454.html?mod=googlenews_wsj

18. Baghdjian, Alice (April 23, 2012) “German manufacturing shrinks at fastest pace since 2009 – PMI” Reuters. Retrieved on April 24, 2012 from http://uk.reuters.com/article/2012/04/23/uk-germany-manufacturing-idUKBRE83M0DO20120423

19. Lowrey, Annie (April 20, 2012) “I.M.F. Adds $430 Billion in emergency Lending Ability”. New York Times. Retrieved April 20, 2012 from http://www.nytimes.com/2012/04/21/business/global/imf-adds-430-billion-in-emergency-lending-ability.html?_r=1

20. Ibid.

21. Associated Press (March 29, 2012) “India endorses BRICS bank”. CBC News. Retrieved April 15, 2012 from http://www.cbc.ca/news/world/story/2012/03/29/brics-summit-india-bank.html

22. Thomson Reuters (April 10, 2012) “Hong Kong February Gold Flow to China up 20%”. CNBC. Retrieved April 15, 2012 from http://www.cnbc.com/id/47012323/Hong_Kong_February_Gold_Flow_to_China_Up_20

23. World Gold Council (April 2012) “Demand and Supply Statistics”. World Gold Council. Retireved April 25, 2012 from http://www.gold.org/investment/statistics/demand_and_supply_statistics/

24. Reuters (April 11, 2012) “Chinese Gold Imports From Hong Kong Rise Nearly 13 Fold – PBOC Likely Buying Dip Again”. Goldcore. Retrieved April 15, 2012 from http://www.goldcore.com/goldcore_blog/chinese-gold-imports-hong-kong-rise-nearly-13-fold—pboc-likely-buying-dip-again

25. Williams, Lawrence (April 24, 2012) “Twelve countries increase their gold reserves in March – some significantly”. Mineweb. Retrieved April 25, 2012 from http://www.mineweb.com/mineweb/view/mineweb/en/page34?oid=150086&sn=Detail&pid=102055

26. George, Michael (January 2012) “Gold”. U.S. Geological Survey. Retireved April 25, 2012 from http://minerals.usgs.gov/minerals/pubs/commodity/gold/mcs-2012-gold.pdf

27. World Gold Council (April 2012) “Demand and Supply Statistics”. World Gold Council. Retireved April 25, 2012 from http://www.gold.org/investment/statistics/demand_and_supply_statistics/

Tags: Amp, Bust, Cheerleading, David Baker, Earnings Release, Economists, Employment Tax, Eric Sprott, Existing Home Sales, Fiscal Year, Jobless Claims, New Jobs, Same Direction, Surprise, Tax Receipts, Threshold, Unemployment, United States, Us Labor Department
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WSJ’s Hilsenrath: Fed Will Stay Pat

Tuesday, April 24th, 2012

Before we get to Fed talk in the early action we’ve obviously seen the S&P 500 break through 1370 (with vigor), and last week’s lows of 1365s. The previous week’s surge down to 1357 is the next key level. Now of course with sharp selloffs there can be large reflexive bounces along the way – we saw that last Tuesday when the market skyrocketed on the back of Apple, but all that led to was more choppy action the rest of the week and then today’s smack to the face. So unless one’s timetable is measured in hours it’s a market complexion one does not want to be dealing with much.

Off to Fed speak… as long time readers know the Fed has its special little birdies in the media that it likes to speak to us through, and Jon Hilsenrath is among the most prominent. Not surprisingly Jon says the Fed will stay pat at this meeting – I believe the key one shall be mid June as Operation Twist finishes up, and they need a replacement program. Any good correction in the market will also help as the Fed now believes their transmission policy for Fed can largely come through the transitory “wealth effect” of the stock market – even if that benefit accrues to a relatively small portion of society. [Nov 10, 2010: Who Will Any Form of Intermediate Term Wealth Effect Really Help? Not the Masses] On that end, we’re probably half way to the point Ben will feel he must step in to make sure the “free” market goes up.

• If the Fed expects economic growth to slow, inflation to fall, or unemployment to stall at high levels or rise, it will be inclined to do more to support growth with new programs to reduce interest rates. If it sees the opposite, the conversation turns toward reining in credit. The changing forecast will be one of the most important topics of discussion at the central bank’s policy meeting Tuesday and Wednesday, when officials will update their quarterly economic projections.
• It’s possible to handicap the Fed’s changing forecast in part because officials are becoming open about it. And the outlook doesn’t look like it’s shifting in a way that would support new initiatives to boost economic growth. The new forecasts could project a little more inflation in 2012 than the Fed forecast in January, thanks in part to a recent rise in gasoline prices. It could also project a little less unemployment for 2012, thanks to recent declines in the jobless rate.
• But with many officials still doubtful about the durability of the recovery and expecting inflation to recede, the broader view at the Fed seems likely to favor sticking to their plan to keep rates low until late 2014.
• Taken altogether, the economy doesn’t seem to be breaking in a way right now that would cause the Fed to shift the stance it laid out in January. Investors expecting a signal of an early rise in rates are likely to be disappointed. And those expecting a new bond buying program are likely to be disappointed too. The Fed is on hold until its forecast shifts more clearly.

Tags: Amp, Bounces, Complexion, Economic Growth, Economic Projections, inflation, interest rates, Last Tuesday, Little Birdies, Lows, Rest Of The Week, Selloffs, Small Portion, Stock Market, Time Readers, Timetable, Unemployment, Vigor, Wealth Effect, Wsj
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What “Seasonal Adjustments” Actually Mean and Do For Data (Tchir)

Tuesday, March 13th, 2012

Via Peter Tchir of TF Market Advisors,

There has been a lot of talk lately about “seasonal adjustments” and what they actually mean and do for the data.

Reporting today’s forecast in “seasonally adjusted” terms would not be incorrect. The temperature today is almost 30 degrees higher than the average March temperature in NYC, so reporting it as 30 degrees higher than the annual temperature is fine. You instantly know that today is abnormally warm for the time of year. It doesn’t necessarily help you choose what to wear unless you know the monthly and annual averages. It isn’t wrong, but the information isn’t perfect either. If you only had national average temperatures, how would you seasonally adjust today’s NYC temperature? That gets more complicated.

We like “seasonally” adjusted numbers because it “smooths” the data. We don’t get big jumps due to the time of year and we can apply trend lines, etc. to the graphs. There is nothing wrong per se with that, but the adjustments can also mask things in the data. On unemployment, is the BLS adjustment better or worse than what other people model? What variables does it account for? Does it properly account for potential effects of how long a recession has been going. How often does “seasonality” change. In theory, the market could see a -200k number and realize that if normally this time of year it would have been -400k, then it is a good number. It would be a good sign, but it is only +200k for example if the seasonality is consistent. Anyways, enough on that subject. Seasonality isn’t bad, and is useful in many ways, but so is the raw data and trying to figure out if the adjustments make sense or need to be modified a lot due to the particular circumstances at the time (like great warm weather).

The markets are almost all doing well so far this morning. Corporate and financial credit in Europe is significantly tighter, with Main 3 tighter, XOVER 11 tighter, and the Financials CDS index 4 tighter. Partly on the back of some German confidence numbers (which don’t seem to be a leading indicator) and hopes that the EU is becoming less austere. Spain has been told to get to a 5.3% budget deficit, rather than the 4.4% one they reneged on last week. Both sides are maintaining the farce that the 3% target for 2013 will be met.

Spanish bond yields are higher again, and CDS is unchanged – about the only asset that doesn’t seem to be doing better today. According to Bloomberg, the EFSF will be releasing money to Greece, €5.9 billion in March, €3.3 billion in April, and €5.3 billion in May. That is good, because the ECB has €4.7 billion of GGB bonds maturing in March, and €3.3 billion of GGB bonds maturing in May.

After a flurry of early numbers, we can all wait for the Fed statement. If there was ever a day designed to be waiting for the Fed statement sitting outside at Bryant Park or somewhere, today would be that day. But inside, staring at screens, the market will be closely watching the statement. There is some concern the Fed may acknowledge that inflation is actually a concern for the first time, reducing chances of further QE. As the election gets closer, it will become harder for the Fed to move on QE without compellingly bad data (not just bad in the eyes of the Fed, but to general person tracking the economy). There is still hope that the Fed has been downplaying growth in order to justify QE and will signal its intentions to move before it is too late, and the bank stress tests may be another reason the Fed can justify QE, especially in the mortgage market, where the Fed insisted on scenarios worse than most investors expected.

Tags: Annual Temperature, Average Temperatures, Circumstances, Europe, Graphs, Mask, Raw Data, Recession, Seasonal Adjustments, Seasonality, Time Of Year, Trend Lines, Unemployment, Variables, Warm Weather
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Is This Recovery?

Friday, February 17th, 2012

Guest Post: This article originally appeared on The Daily Capitalist.

There is a lot of good news to buoy the markets and give cheer to the public. We hear that new jobless claims are down another 15,000 to 358,000, the ninth week of declines out of the last ten, finally breaking below the 400,000 mark. A reduction in unemployment is a very positive sign and is politically significant. Also Gallup released its latest economic confidence poll and it is up to -20, the highest in 12 months, a very solid gain from the -54 score in August and September.  We heard as well that Greece may qualify for another round of funding to stay default (we are very skeptical of that). And, the S&P is very close to its 52-week high.

There is more. The official CPI was up 2.4% last year, a very modest and tolerable amount according to the Fed. Markit reports that the combined U.S. ISM manufacturing and non-manufacturing indices were up from 56.4 in December to 58.9 in January, hitting its highest level since March of last year. New orders in both surveys were up significantly. These data were backed up by reports of durable goods orders and factory orders. Data from many of the regional Feds confirm this.

Personal income increased 4.7% in 2011 versus an increase of 3.7% in 2010. Real disposable personal income (DPI) increased 0.9% compared with an increase of 1.8% in 2010. Real personal consumption expenditures (PCE) increased 2.2%, compared with an increase of 2.0% in 2010. State tax revenues increased 6.1% YoY according to the latest report.

What could possibly go wrong?

Are we in a recovery or not? This article will deal with this issue. I will briefly recap how we got here and the problems we need to overcome before we can call it a recovery. I will look at the reasons behind our current positive data. And then I will compare the current data to see where we are.

What is holding back recovery?

Economic recovery is quite simple when you think about it: bad investments and their supporting debt need to be liquidated. These bad deals are called “malinvestment” and our recent housing boom left huge piles of them for us to clean up. Think of it as the detritus of bad economic policies that led to bad business decisions. Massive amounts of capital (consisting of real and fiat “paper” capital) were lost during the resulting bust and there is nothing anyone can do about it. Keeping bad deals alive only serves to trap valuable capital into unproductive assets and delays recovery. New capital must be created through real “organic” production to get the economy going again.

The biggest piles of detritus to clean up before the U.S. economy can recover are:

• The asset and capital structure of our local and regional banks, mostly as related to real estate loans;
• The debt of small business owners, especially in relation to commercial real estate holdings;
• The debt of households in relation to home mortgages, student loans, and consumption-related debt.

All of the above have been important contributors to the stagnation of our economy. And all of the above, except student loans, have to do with real estate.

There certainly are other major issues this country needs to deal with that will also affect economic recovery. Those issues are political in nature and will depend in large part on the outcome of the 2012 elections. They are our budget deficit and huge national debt, tax policies, social welfare entitlement programs, and regulations which negatively impact capital formation and business expansion. These issues are not within the scope of this article but we have discussed them frequently here at The Daily Capitalist.

There is one further policy matter that is political in nature and that will impact the economy, and that is Fed policy which I will discuss.

Will consumer spending drive the economy?

Most economists and analysts point to the lack of consumer demand as being the economy’s greatest hurdle, but that is a symptom of a serious underlying problem rather than the cause. The cause is what Austrian theory economists call a lack of “real savings” (real capital). That lack occurs because, as noted above, the boom-bust business cycle, which we are still in the midst of, destroyed huge amounts of real capital/savings. (Household wealth declined by $10 trillion, for example.) We need real capital in order to have new production; without it, the economy stagnates.

To get production going manufacturers need to buy capital goods and commodities in order to make things. If they haven’t been produced and you have a fistful of fiat dollars, then there is nothing to buy and nothing to produce. If we could print real savings we would already be in recovery which tells us that fiat money, the stuff that the Fed creates out of thin air, is not real wealth. Real savings can only come from the production of things that consumers, or the manufacturers of consumer goods, want. Profits saved from such production or from saved wages of workers employed to make such goods, is real capital/savings.

The bottom line is that if we had enough real capital/savings, we would have already recovered. The fact that we haven’t recovered means that we don’t have enough real capital/savings. Flogging the consumer to spend will only impoverish the consumer and destroy more capital. Consumers need to save, not spend.

Will manufacturing drive the economy?

Manufacturing is an important part of our economy, but not as important as it was. The production of goods represents only 24% of the economy (services are 47%). There is no question that recently manufacturing has been improving. It is being driven mainly by manufacturing exports and auto sales.

What is causing this?

There are two parallel functions occurring that are giving rise to the current good economic news. One is the natural forces that cause an economy to recover. The other is the Fed’s policies to devalue the dollar and keep interest rates artificially low.

When I refer to “natural forces” causing a recovery, I am talking about market forces such as the liquidation of debt related to malinvestments, the devaluation of those malinvestments, and the formation of new real capital/savings. It is occurring naturally, often despite government policies, and is clearing the way for new production. But I believe it has been a very slow process and has not been sufficient to cause most of the positive economic news. I will discuss this in some detail in another article coming soon.

Much of the recent good economic news comes as a result of the Fed’s cheap dollar policy. It does two things to stimulate manufacturing:

First, fiat money devalues a currency. This is obvious to us as we look at a constant positive inflation rate and the decline of the dollar in relation to most other currencies. That devaluation makes U.S. goods appear to be relatively cheaper on foreign markets and stimulates demand for them.  Thus a cheap dollar policy stimulates exports.

Second, the Fed’s zero interest rate policy (ZIRP) which has driven down interest rates, stimulates demand for certain big ticket goods such as autos.

Exports

Exports represent about 14% of GDP and of that manufacturing exports is about 5% of GDP: a substantial factor. So when the dollar declines it stimulates exports and this is going a long way to revive manufacturing in the U.S.

Tags: Amp, August And September, Capitalist, Cheer, CPI, Declines, Disposable Personal Income, Dpi, Durable Goods Orders, Economic Confidence, Economic Recovery, Feds, Gallup, Ism Manufacturing, Jobless Claims, Markit, Personal Consumption Expenditures, State Tax Revenues, Unemployment
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A Risk Lurking in October’s Retail Sales (Koesterich)

Thursday, November 17th, 2011

by Russ Koesterich, Chief Investment Strategist, iShares

According to the Commerce Department, retail sales rose 0.5% in October, higher than the 0.3% economists had forecast, thanks in part to a large jump in electronics purchases.

The better-than-expected retail sales figures are the latest sign that the US economy is likely to avoid another recession and is experiencing what I’m calling “The Great Idle.” But a look behind the retail numbers also reveals a major risk facing the US economy.

With unemployment still high and wages growing so slowly that hourly workers are losing purchasing power at the fastest rate in 20 years, you may be wondering where consumers are getting the money to buy new cars or the latest iPhone.

As I mention in my recent Market Update piece, it turns out that surprisingly brisk retail spending is being supported by lower savings and by help from the government.

Lower Savings: Despite numerous predictions of a more frugal consumer, the US savings rate is once again dropping. September’s savings rate was 3.6%, the lowest rate since late 2007. In contrast, the personal savings rate averaged 5.1% in 2009 and 5.3% in 2010. For the time being, consumers appear to be maintaining their spending habits by reverting back to an old trick: Saving less.

Government Help: Government transfer payments — such as Social Security, unemployment and disability payments — have spiked in recent years. As I’ve mentioned before, transfer payments now constitute about 20% of disposable income and growth in transfer payments has been the major factor supporting income growth. Since the end of 2007, overall disposable income has risen by slightly more than $900 billion. Of that $900 billion, more than $550 billion has come from rising transfer payments.

Saving less can continue for a while longer, but not indefinitely. More importantly, the US consumer’s reliance on transfer payments shows why investors should pay particular attention to any budget cuts that come out of the Congressional super committee negotiations. Any near-term tax increases or reductions in transfer payments would hit consumers at a difficult time and could act as a drag on an already feeble expansion.

While the current US fiscal situation is also unsustainable, paradoxically, trying to fix it too quickly may raise the odds of another recession.

Copyright © iShares

Tags: Chief Investment Strategist, Commerce Department, Disability Payments, Disposable Income, Economists, Government Transfer, Iphone, New Cars, Personal Savings Rate, Purchasing Power, Recession, Reliance, Retail Sales Figures, Retail Spending, Russ, Social Security, Spending Habits, Transfer Payments, Unemployment, Wages
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David Rosenberg in Depth – Are We In a Recession?

Wednesday, November 16th, 2011

This week on Wealthtrack, Consuelo Mack interviews one of the few economists to foresee the global economic slowdown. Gluskin Sheff’s David Rosenberg saw signs of trouble as chief economist at Merrill Lynch. Now back in his native Canada at Gluskin Sheff he continues to warn about a prolonged slump with high unemployment in the developed world. He discusses what it means for investors and where to find growth despite a stagnant U.S. and Europe.

Source: Wealthtrack, November 11, 2011.

Tags: Chief Economist, Consuelo Mack, David Rosenberg, Economists, Europe, Global Economic Slowdown, Investors, Merrill Lynch, Native Canada, November 11, Recession, S David, Sheff, Signs Of Trouble, Slump, Unemployment, Wealthtrack
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More Than Meets The Eye (Hussman)

Tuesday, August 2nd, 2011

More Than Meets the Eye

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

On the surface, the agreement on the U.S. debt ceiling can be expected to produce a significant relief rally in the financial markets, particularly if one views uncertainty on that front to be the reason for last week’s market weakness. That prospect, coupled with the predictable support that investors gave the S&P 500 precisely at its 200-day moving average, prompted us to cover just over 10% of our short calls, but retaining full hedge on the remainder of our holdings, and keeping a strong line of protection about 2% below Friday’s closing levels using index put options (near that 200-day). That’s still a fairly tight hedge, because unfortunately, the ensemble of observable data continues to indicate negative expected returns. So while we’ve modified our position slightly to allow for reduced uncertainty on the deficit front, and the likelihood of “knee jerk” technical support at the widely-followed 200-day average, the expected return/risk profile in stocks remains negative in our estimation. Of course, our precise hedge will change from day-to-day as market conditions change.

Part of the problem here is that market internals have deteriorated badly, particularly last week, where breadth was nearly 10-to-1 in favor of declining issues, and downside leadership exerted itself with more stocks hitting new 52-week lows than new highs. Meanwhile, though new claims for unemployment dipped just below 400,000 last week, we would be more encouraged if the margin was greater, and sustained over a period of many weeks. At present, the 4-week average is running at about 414,000, a level which has historically been associated with growth of only about 30,000-50,000 in monthly non-farm payrolls on average (see the July 11 comment), though there’s certainly month-to-month noise around those averages.

The overall impression from the data suggests the possibility that there is more information in the recent breakdown in market internals than can be explained by debt ceiling concerns alone. On that note, there are emerging economic signals whose leading tendencies are strong enough to make a review worthwhile.

We’ll begin with our own recession warning composite, which accurately signaled oncoming recessions in 2000 and 2007 (see the November 12, 2007 comment Expecting A Recession ). That particular conformation of indicators never deteriorated sufficiently in 2010 to provoke a recession warning, though the deterioration in the ECRI leading index and other measures clearly indicated serious concern. In any event, QE2 effectively forestalled incipient economic weakness in 2010. Given that second quarter GDP came in at just 1.3% annually, and first quarter GDP growth was revised down to just 0.4% (from a prior estimate of 1.9%), it is wholly unclear that the Fed’s extraordinary actions have been worth the market distortions, predictable commodity hoarding, injury and social unrest among the world’s poor (resulting from food and energy price increases) and significant “unwinding” risks that this policy has produced.

The components of our recession warning composite might be called “weak learners” in that none of them, individually, has a particularly notable record in anticipating recessions. The full syndrome of conditions, however, captures a critical “signature” of recessions. That signature of “early warning” conditions is based on financial market indicators including credit spreads, equity prices and yield curve behavior, coupled with slowing in measures of employment and business activity. Every historical instance of this full syndrome has been associated with an ongoing or immediately impending recession.

The components (which I’ve reordered for simplicity) are:

1: Widening credit spreads: An increase over the past 6 months in either the spread between commercial paper and 3-month Treasury yields, or between the Dow Corporate Bond Index yield and 10-year Treasury yields.

2: Falling stock prices: S&P 500 below its level of 6 months earlier. This is not terribly unusual by itself, which is why people say that market declines have called 11 of the past 6 recessions, but falling stock prices are very important as part of the broader syndrome.

3: Weak ISM Purchasing Managers Index: PMI below 50, or,

3: (alternate): Moderating ISM and employment growth: PMI below 54, coupled with slowing employment growth: either total nonfarm employment growth below 1.3% over the preceding year (this is a figure that Marty Zweig noted in a Barron’s piece many years ago), or an unemployment rate up 0.4% or more from its 12-month low.

4: Moderate or flat yield curve: 10-year Treasury yield no more than 2.5% above 3-month Treasury yields if condition 3 is in effect, or any difference of less than 3.1% if 3(alternate) is in effect (again, this criterion doesn’t create a strong risk of recession in and of itself).

At present, both measures of credit spreads in condition 1 are widening, the S&P 500 is within about one percent of its level 6 months ago, the Purchasing Managers Index is at 55.3%, total nonfarm payrolls have grown by only 0.8% over the past year, the unemployment rate is up 0.4% from its March 2011 low, and the Treasury yield spread is just 2.7%. From the standpoint of this composite, we would require only modest deterioration in stock prices and the ISM index to produce serious recession concerns.

This impression is supported by a number of other observations. First, the year-over-year growth in U.S. real GDP is now just 1.6%. As David Rosenberg notes (via John Mauldin), this level of growth has historically been slow enough to anticipate an oncoming recession.

Wells Fargo’s senior economist Mark Vitner reiterated the point last week, noting that since 1950, year-over-year growth in real GDP has dipped below 2% on 12 occasions. In 10 of those instances, the economy was already in recession or quickly entered one. The exceptions were 1956 and 2003.

For our part, we’ve always believed that the strongest evidence is obtained by combining multiple data points into a single “gestalt.” So I have difficulty concluding that the U.S. is on the verge of recession simply because the year-over-year growth rate has stalled. At the same time, we are closely monitoring a much broader set of data, because the deterioration has been very rapid. I should be clear – the evidence is not yet convincing that a recession is imminent, but it is also important to recognize that the developing risks are greater than most investors seem to assume at present.

I should also note that while our recession warning composite uses the ISM Purchasing Managers Index as a component, we believe it is important to monitor a much broader set of survey-based data, including the ISM (National, Chicago, Cincinnati, Milwaukee) and Federal Reserve (Empire Manufacturing, Philadelphia, Richmond, Dallas) indices. As you can see from the chart below, the combined evidence from these measures collapsed sharply during the summer of 2010, and enjoyed a brief bounce as the Fed embarked on its second round of quantitative easing. The deterioration in recent months is of significant concern, though again, we would need to see further weakness in a number of measures before attaching a significant probability to an oncoming recession.

Notably, the full effect of QE2 on economic activity was to provide transitory bump to short-term growth. Of course, that’s not a surprise, as we knew (and the Fed should have known) that there is virtually no “wealth effect” from stock market values to real GDP (specifically, the historical impact has been an increase of just 0.03-0.05% in GDP for every 1% increase in stock market capitalization). Yet, in order to achieve this pitiful amount of can-kicking, the Fed has now leveraged its balance sheet to 55-to-1, driving the monetary base to 18 cents for every dollar of nominal GDP. Notably, we’ve never observed Treasury bill yields at even 2% when the base has been anything greater than 10 cents per dollar of nominal GDP. Given the non-linear relationship between short-term interest rates and the amount of base money per dollar of GDP, a non-inflationary increase in interest rates to just 0.50% would presently require approximately $1 trillion in Treasury bond sales by the Fed, more than reversing its entire volume of purchases under QE2 (see Charles Plosser and the 50% Contraction in the Fed’s Balance Sheet ).

Tags: 52 Week Lows, Breadth, Debt Ceiling, Downside, Estimation, Financial Markets, Hussman Funds, Likelihood, Market Weakness, Moving Average, New 52 Week Lows, New Highs, Non Farm Payrolls, Observable Data, Rally, Remainder, Risk Profile, S Market, Uncertainty, Unemployment
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Cash Can Be Risky Too

Thursday, July 21st, 2011

by Kevin Feldman, iShares

Young investors who keep their money in cash may think they’re playing it safe, but the strategy could cost them in the long run.

A recent Bank of America-Merrill Lynch survey found that almost half (47%) of 1,000 affluent Americans—defined by Merrill as Americans with investable assets in excess of $250, 000—describe themselves as “conservative investors,” meaning that they favored low to moderate risk investments intended to deliver modest but steady gains. Among young investors aged 18 to 34, that number soared to 59 percent.  (As compared to 41% among investors aged 35-64.)

What’s striking about these findings is that they’re basically a reversal of conventional financial wisdom, which holds that younger investors should take on more risk than older ones; since they have more time before retirement, they can afford to be more aggressive in search of greater gains, which are then compounded over decades. Older investors, however, won’t have as many years before retirement to recover from potential large downturns in riskier investments.  Younger investors are typically the ones who buy growth-oriented equities, while older folks are typically the investors moving their portfolio into less risky and income-generating investments.

What’s going on?  The consensus is that older investors’ attitudes were shaped by the long-running bull market of the mid-1970s through the late 1990s.  Younger investors, however, had less time to form positive impressions of the market before being hit by two crises in less than a decade: the bursting of the tech bubble in 2000 and 2001, and the recent market plunge of 2008 and 2009. So while older investors saw a quarter-century of upward movement before a sustained plunge, younger investors saw deep drops bracketing a few years of growth.

Given the economy, younger investors are also likely to have an understandable fear of unemployment, and so want to keep cash on hand—as opposed to investing it in equities that, in their experience, can suffer massive drops in value.  It’s the modern equivalent of people who lived through the Depression stuffing cash under their mattress.

I can understand why younger investors lack confidence in equities, but I can’t endorse the strategy. Playing it safe in reaction to past crises is investing by looking in the rear view mirror, and ironically, it really isn’t playing it safe at all—more like the opposite.

For two reasons. One, investors who allocate too much of their retirement portfolio to cash or fixed income will likely lose out on the higher gains that equities have historically generated over long-term periods. They’ll also lose out on the compounded value of those gains between now and their future retirement years.

And two, they may lose money by not keeping up with inflation, as is entirely possible when keeping your money in cash or short-term bonds, particularly at current interest rates. Most financial advisors would tell you that only if you strongly believe we’re headed for deflation, or if you have a near-term plan for a major purchase such as a home, does it make sense for a younger investor to hold 1/3 of his or her portfolio in cash.

This is the kind of longer conversation that investors should really have with their financial advisors, of course. But broadly speaking, for younger investors the old advice is still sensible: Start saving as early as you can and don’t stop. Diversify, diversify, diversify. Keep costs low and be tax savvy in where you place your investments.

Keeping your money under the mattress—figuratively or literally—is not the road to a comfortable retirement.

Diversification may not protect against market risk. Past performance does not guarantee future results.

Tags: 1990s, Affluent Americans, Bank Of America, Consensus, Conservative Investors, Crises, Financial Wisdom, Impressions, Investable Assets, Market Plunge, Merrill Lynch, Mid 1970s, Moderate Risk, Older Investors, Quarter Century, Retirement, Risk Investments, Survey Found That, Unemployment, Upward Movement
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