Monday 30 June 2008
Saturday 28 June 2008
Media: O'Reilly Outfoxed
The Markets: A Rally In Gold Futures
The wonderfully accented Polya Lesova interviews David Steel, Chief Commodities Analyst of HSBC on the surge in gold this week.
Wednesday 25 June 2008
The Markets : Real Estate and Consumer Confidence
My fear is that a global slowdown linked to high inflation will lead to stagflation, the worst of all worlds.
However, as all my clients well know, I love gold. And gold is built for stagflation. Those of you who are holding bullion via the ETF, should stay pat and look to accumulate as the stagflation story gathers pace.
One word of warning. Beware of mining stock in the short term. If the RBOS and Morgan Stanley predictions of catastrophe are correct (Please see blog of Monday 23rd June), then all equities will be affected to a greater or lesser extent, even gold mining. This is because whilst gold loves stagflation, copper and silver and metals that have industrial uses do not and these can all be found in gold mines. They have a direct effect upon the profitability of the mining companies.
Below is an article from the WSJ, followed by a video interview with University of Southern California real-estate economist Delores Conway on just how bad the US housing market collapse is.
Twin the sharp drop in housing with high inflation, low demand and a weak dollar and what we are left with is a perfect storm of bad economic conditions.
| PAGE ONE | ||
Consumer Confidence Plummets
Fed Is Likely to Hold Interest Rates Steady
June 25, 2008
American consumers, battered by falling home prices and soaring gasoline prices, are at their gloomiest in decades, raising fears they might cut back on spending later this year and tip the economy into a recession.
Consumer confidence plunged in June to its lowest level since 1992, and home-price declines accelerated in April, according to data released Tuesday. The renewed signs of economic weakness underscored why Federal Reserve policy makers, who wrap up a two-day meeting Wednesday, are likely to hold the target for their benchmark interest rate steady at 2%.
| University of Southern California real-estate economist Delores Conway says the correction in the housing market is happening much faster than usual, thanks to Wall Street's relationship to the recent lending spree. Stacey Delo reports. |
The Conference Board, a New York-based business research group, said consumer confidence dropped to 50.4 in June from 58.1 last month. The scale -- which uses as its benchmark a 1985 level of 100 -- peaked most recently at 111.9 in July 2007. Consumers' expectations of the economy six months ahead plunged to the lowest levels since the board began conducting its surveys in 1967.
The economic pullback since last year has been led by slumping home construction and flattening business investment. But growth has remained marginally positive: The economy grew at a 0.9% annual pace in the first quarter of this year and will likely post a similar gain in the current April through June period. That's largely because consumers, whose spending makes up two-thirds of U.S. economic output, have remained resilient.
But the latest evidence of slumping confidence and tumbling home prices suggests that Americans' willingness to keep spending is being tested, and the odds of avoiding economic contraction have dropped. (Economists note, however, that consumers' behavior does not always follow what they say about their confidence.)
"The final quarter [of 2008] could be a big mess," said John Lonski, chief economist at Moody's Investors Service. He noted a host of risks to growth through early next year: rising prices of goods and services, continued pain in the housing market, and a possible slowdown in consumer spending once the impact of federal economic-stimulus checks fades. "That might be when we finally observe back-to-back quarterly declines" in gross domestic product, which typically signify recession, he said.
In St. Louis, Companion, a small chain of bakeries and cafes, has already seen its restaurant clients trim back their orders and its regular customers visit less frequently. "There seems to be so much uncertainty, people are just getting spooked," said Companion's co-owner, Josh Allen. Meanwhile, he said, because the price of flour has risen sharply, he charges $3 for a baguette now, up from $2.50 six months ago.
In Washington, Leonel Quijano, a 21-year-old electrician, said he's already changed his buying habits. "A lot of things that I used to buy, I don't," he said. "I don't go out as much as I used to. Instead of going to a bar I'll stay home and get a six-pack."
Consumer glumness is being fueled by an acceleration of home-price declines. Prices of single-family homes in 20 major cities dropped by 15.3% in April from the year before and are now back to 2004 levels, according to the Case-Shiller home price index released by Standard & Poor's. The Office of Federal Housing Enterprise Oversight, which oversees Fannie Mae and Freddie Mac and tracks prices of homes purchased with their mortgages, said home prices were down 4.6% in April from the previous year, the lowest level since its tracking began in 1991.
Tracking Home Prices
The S&P/Case-Shiller index shows larger price declines in part because it tracks metropolitan areas where prices are more sensitive than in rural locations. Ofheo, on the other hand, may understate the weakness because it tracks only so-called agency-backed mortgages, which exclude homes purchased with subprime loans.
Both surveys show that price declines vary sharply by region. Las Vegas and Miami continue to have the largest one-year drops, of 26.8% and 26.7% respectively. Los Angeles, San Diego, San Francisco and Tampa, Fla., have also seen declines of more than 20%, according to the S&P/Case-Shiller data.
Other regions are faring better. In eight areas -- including Boston, Dallas, Denver, Portland, Ore., and Seattle -- prices either rose or stabilized in April from the month before. "If there is anywhere to look for possible improvement, it would be that the pace of monthly declines has slowed down for most of the markets," said David M. Blitzer, chairman of S&P's index committee.
In Chicago, Sergei Mirkin thinks the time to sell is near. The biologist, who moved to Boston a year and a half ago, held onto his old condo but says he's preparing to put it on the market next spring. "The Chicago housing market seems to be on its way to recovery," he said, noting that several other units in his building have recently sold. The home price indexes don't track condo sales, but the S&P/Case-Shiller data show that home prices in Chicago rose in April by 0.1% from the month before.
![[Image]](http://s.wsj.net/public/resources/images/OB-BR854_housin_20080624085800.jpg) |
| Getty Images |
| A house for sale in Miami last month. |
Yet across the U.S., potential buyers remain wary. According to the Conference Board, 2.2% of respondents say they intend to purchase a home in the next six months, a 25-year low. Consumers also ratcheted back on plans to purchase cars and major appliances, and fewer said they intended to take a vacation over the next six months.
Worries About Growth
Worries about economic growth are likely to cause the Fed to announce it's holding interest rates at 2%, according to analysts. Low rates could help the economy, by making the cost of borrowing lower for companies looking to invest in their businesses or families interested in buying homes.
But low rates can also stoke inflation at a time when companies and consumers are already noting the sting of rising prices. United Parcel Service Inc. said Monday that an "unprecedented increase" in fuel-costs and the weak economy would hurt its second-quarter earnings. Dow Chemical Co., meanwhile, announced Tuesday its second round of price hikes in a month, saying it will charge as much as 25% more for some products starting July 1.
Bill Hardin, 70, lives in Alton, Ill., and works as a Transportation Security Administration officer at nearby Lambert-St. Louis International Airport in Missouri. He sees first-hand the myriad surcharges now imposed by airlines, and also feels the pain at gas pumps since he drives 25 miles each way to work. "I'm just bent," he said of the higher prices. "Your take-home pay goes down because fuel is more expensive."
Write to Kelly Evans at kelly.evans@wsj.com7
Music: Hendrix, Clapton and Lulu...
At 2.02 mins did I detect Jimi riffing The Beatles, "I Feel fine"?
And all this on the Lulu show...
Monday 23 June 2008
The Markets: Prophets of Doom...
The Royal Bank of Scotland was founded in 1727 and is considered one of the more prestigious of banking institutions.
That they would have come out this week, as they did, with a report advising clients to prepare for a full-fledged crash in global equities and credit markets within the next 3 months is, therefore, worthy of lifting the eyebrows over.
The language the RBS uses is startling to say the least:
- "The Fed is in panic mode. The massive credibility chasms down which the Fed and maybe even the ECB will plummet when they fail to hike rates in the face of higher inflation will combine to give us a big sell-off in risky assets".
A similarly gloomy report from Morgan Stanley, also this week, warns of a “catastrophe” and a monetary crisis due to the disjointed and at-odds monetary policies being independently pursued by the Fed and the European Central Bank.
To have institutions of this size and global importance putting aside their usual “always bullish” stances to issue such dramatic and dire warnings may be unprecedented. They will certainly be noticed and, most certainly, acted on by the professional investing herd.
Hopefully, you have already rigged for the financial typhoon the RBS and Morgan Stanley are now joining us in predicting. Don’t forget to warn your friends.
RBS issues global stock and credit crash alert
By Ambrose Evans-Pritchard, International Business Editor
The Royal Bank of Scotland has advised clients to brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses the major central banks.
"A very nasty period is soon to be upon us - be prepared," said Bob Janjuah, the bank's credit strategist.
A report by the bank's research team warns that the S&P 500 index of Wall Street equities is likely to fall by more than 300 points to around 1050 by September as "all the chickens come home to roost" from the excesses of the global boom, with contagion spreading across Europe and emerging markets.
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Such a slide on world bourses would amount to one of the worst bear markets over the last century.
RBS said the iTraxx index of high-grade corporate bonds could soar to 130/150 while the "Crossover" index of lower grade corporate bonds could reach 650/700 in a renewed bout of panic on the debt markets.
"I do not think I can be much blunter. If you have to be in credit, focus on quality, short durations, non-cyclical defensive names.
"Cash is the key safe haven. This is about not losing your money, and not losing your job," said Mr Janjuah, who became a City star after his grim warnings last year about the credit crisis proved all too accurate.
RBS expects Wall Street to rally a little further into early July before short-lived momentum from America's fiscal boost begins to fizzle out, and the delayed effects of the oil spike inflict their damage.
"Globalisation was always going to risk putting G7 bankers into a dangerous corner at some point. We have got to that point," he said.
US Federal Reserve and the European Central Bank both face a Hobson's choice as workers start to lose their jobs in earnest and lenders cut off credit.
The authorities cannot respond with easy money because oil and food costs continue to push headline inflation to levels that are unsettling the markets. "The ugly spoiler is that we may need to see much lower global growth in order to get lower inflation," he said.
"The Fed is in panic mode. The massive credibility chasms down which the Fed and maybe even the ECB will plummet when they fail to hike rates in the face of higher inflation will combine to give us a big sell-off in risky assets," he said.Kit Jukes, RBS's head of debt markets, said Europe would not be immune. "Economic weakness is spreading and the latest data on consumer demand and confidence are dire. The ECB is hell-bent on raising rates.
"The political fall-out could be substantial as finance ministers from the weaker economies rail at the ECB. Wider spreads between the German Bunds and peripheral markets seem assured," he said.
Ultimately, the bank expects the oil price spike to subside as the more powerful force of debt deflation takes hold next year.
Morgan Stanley warns of 'catastrophic event' as ECB fights Federal Reserve
By Ambrose Evans-Pritchard, International Business Editor
The clash between the European Central Bank and the US Federal Reserve over monetary strategy is causing serious strains in the global financial system and could lead to a replay of Europe's exchange rate crisis in the 1990s, a team of bankers has warned.
"We see striking similarities between the transatlantic tensions that built up in the early 1990s and those that are accumulating again today. The outcome of the 1992 deadlock was a major currency crisis and a recession in Europe," said a report by Morgan Stanley's European experts.
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Just as then, Washington has slashed rates to bail out the banks and prevent an economic hard-landing, while Frankfurt has stuck to its hawkish line - ignoring angry protests from politicians and squeals of pain from Europe's export industry.
Indeed, the ECB has let the de facto interest rate - Euribor - rise by over 100 basis points since the credit crisis began.
Just as then, the dollar has plummeted far enough to cause worldwide alarm. In August 1992 it fell to 1.35 against the Deutsche Mark: this time it has fallen even further to the equivalent of 1.25. It is potentially worse for Europe this time because the yen and yuan have also fallen to near record lows. So has sterling.
This will most likely occur through property slumps and banking purges in the vulnerable countries of the Club Med region and the euro-satellite states of Eastern Europe.
"The tensions will not disappear into thin air. They will find fault lines on the periphery of Europe. Painful macro adjustments are likely to take place. Pegs to the euro could be questioned," said the report, written by Eric Chaney, Carlos Caceres, and Pasquale Diana.
The point of maximum stress could occur in coming months if the ECB carries out the threat this month by Jean-Claude Trichet to raise rates. It will be worse yet - for Europe - if the Fed backs away from expected tightening. "This could trigger another 'catastrophic' event," warned Morgan Stanley.
The markets have priced in two US rates rises later this year following a series of "hawkish" comments by Fed chief Ben Bernanke and other US officials, but this may have been a misjudgment.
An article in the Washington Post by veteran columnist Robert Novak suggested that Mr Bernanke is concerned that runaway oil costs will cause a slump in growth, viewing inflation as the lesser threat. He is irked by the ECB's talk of further monetary tightening at such a dangerous juncture.
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The contrasting approaches in Washington and Frankfurt make some sense. America's flexible structure allows it to adjust quickly to shocks. Europe's more rigid system leaves it with "sticky" prices that take longer to fall back as growth slows.
Morgan Stanley says the current account deficits of Spain (10.5pc of GDP), Portugal (10.5pc), and Greece (14pc) would never have been able to reach such extreme levels before the launch of the euro.
EMU has shielded them from punishment by the markets, but this has allowed them to store up serious trouble. By contrast, Germany now has a huge surplus of 7.7pc of GDP.
The imbalances appear to be getting worse. The latest food and oil spike has pushed eurozone inflation to a record 3.7pc, with big variations by country. Spanish inflation is rising at 4.7pc even though the country is now in the grip of a full-blown property crash. It is still falling further behind Germany. The squeeze required to claw back lost competitiveness will be "politically unpalatable".
Morgan Stanley said the biggest risk lies in the arc of countries from the Baltics to the Black Sea where credit growth has been roaring at 40pc to 50pc a year. Current account deficits have reached 23pc of GDP in Latvia, and 22pc in Bulgaria. In Hungary and Romania, over 55pc of household debt is in euros or Swiss francs.
Swedish, Austrian, Greek and Italian banks have provided much of the funding for the credit booms. A crunch is looming in 2009 when a wave of maturities fall due. "Could the funding dry up? We think it could," said the bank.
Sunday 15 June 2008
Economics: The young radical Alan Greenspan..
Surprisingly, he advocates a return to the gold standard and against the concept of a central bank.
It is a fascinating article, that underlines his essential pragmatism and small 'c' fiscal conservatism.
If all tangible assets have an actual value, then public borrowing will require collateral. This reduces the ability of government to borrow against future revenue to finance pork spending. Holders of T-Bills will no longer have their paper backed by a worthless politicians empty promise but a tangible real asset.
Under this system, governments could pay all debt on creditor demand. Instead, we live with inept politicians overseeing technically bankrupt states that continue to spend money like drunken sailors on our or our childrens tabs.
Gold and Economic Freedom
By ALAN GREENSPAN
An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense-perhaps more clearly and subtly than many consistent defenders of laissez-faire-that gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other.
In order to understand the source of their antagonism, it is necessary first to understand the specific role of gold in a free society.
Money is the common denominator of all economic transactions. It is that commodity which serves as a medium of exchange, is universally acceptable to all participants in an exchange economy as payment for their goods or services, and can, therefore, be used as a standard of market value and as a store of value, i.e., as a means of saving.
The existence of such a commodity is a precondition of a division of labor economy. If men did not have some commodity of objective value which was generally acceptable as money, they would have to resort to primitive barter or be forced to live on self-sufficient farms and forgo the inestimable advantages of specialization. If men had no means to store value, i.e., to save, neither long-range planning nor exchange would be possible.
What medium of exchange will be acceptable to all participants in an economy is not determined arbitrarily. First, the medium of exchange should be durable. In a primitive society of meager wealth, wheat might be sufficiently durable to serve as a medium, since all exchanges would occur only during and immediately after the harvest, leaving no value-surplus to store. But where store-of-value considerations are important, as they are in richer, more civilized societies, the medium of exchange must be a durable commodity, usually a metal. A metal is generally chosen because it is homogeneous and divisible: every unit is the same as every other and it can be blended or formed in any quantity. Precious jewels, for example, are neither homogeneous nor divisible.
More important, the commodity chosen as a medium must be a luxury. Human desires for luxuries are unlimited and, therefore, luxury goods are always in demand and will always be acceptable. Wheat is a luxury in underfed civilizations, but not in a prosperous society.
Cigarettes ordinarily would not serve as money, but they did in post-World War II Europe where they were considered a luxury. The term "luxury good" implies scarcity and high unit value. Having a high unit value, such a good is easily portable; for instance, an ounce of gold is worth a half-ton of pig iron.
In the early stages of a developing money economy, several media of exchange might be used, since a wide variety of commodities would fulfill the foregoing conditions. However, one of the commodities will gradually displace all others, by being more widely acceptable. Preferences on what to hold as a store of value, will shift to the most widely acceptable commodity, which, in turn, will make it still more acceptable. The shift is progressive until that commodity becomes the sole medium of exchange. The use of a single medium is highly advantageous for the same reasons that a money economy is superior to a barter economy: it makes exchanges possible on an incalculably wider scale.
Whether the single medium is gold, silver, sea shells, cattle, or tobacco is optional, depending on the context and development of a given economy. In fact, all have been employed, at various times, as media of exchange. Even in the present century, two major commodities, gold and silver, have been used as international media of exchange, with gold becoming the predominant one. Gold, having both artistic and functional uses and being relatively scarce, has always been considered a luxury good. It is durable, portable, homogeneous, divisible, and, therefore, has significant advantages over all other media of exchange. Since the beginning of Would War I, it has been virtually the sole international standard of exchange.
If all goods and services were to be paid for in gold, large payments would be difficult to execute, and this would tend to limit the extent of a society's division of labor and specialization. Thus a logical extension of the creation of a medium of exchange, is the development of a banking system and credit instruments (bank notes and deposits) which act as a substitute for, but are convertible into, gold.
A free banking system based on gold is able to extend credit and thus to create bank notes (currency) and deposits, according to the production requirements of the economy. Individual owners of gold are induced, by payments of interest, to deposit their gold in a bank (against which they can draw checks). But since it is rarely the case that all depositors want to withdraw all their gold at the same time, banker need keep only a fraction of his total deposits in gold as reserves. This enables the banker to loan out more than the amount of his gold deposits (which means that he holds claims to gold rather than gold as security for his deposits). But the amount of loans which he can afford to make is not arbitrary: he has to gauge it in relation to his reserves and to the status of his investments.
When banks loan money to finance productive and profitable endeavors, the loans are paid off rapidly and bank credit continues to be generally available. But when the business ventures financed by bank credit are less profitable and slow to pay off, bankers soon find that their loans outstanding are excessive relative to their gold reserves, and they begin to curtail new lending, usually by charging higher interest rates. This tends to restrict the financing of new ventures and requires the existing borrowers to improve their profitability before they can obtain credit for further expansion. Thus, under the gold standard, a free banking system stands as the protector of an economy's stability and balanced growth.
When gold is accepted as the medium of exchange by most or all nations, an unhampered free international gold standard serves to foster a world-wide division of labor and the broadest international trade. Even though the units of exchange (the dollar, the pound, the franc, etc.) differ from country to country, when all are defined in terms of gold the economies of the different countries act as one--so long as there are no restraints on trade or on the movement of capital. Credit, interest rates, and prices tend to follow similar patterns in all countries. For example, if banks in one country extend credit too liberally, interest rates in that country will tend to fall, inducing depositors to shift their gold to higher-interest paying banks in other countries. This will immediately cause a shortage of bank reserves in the "easy money" country, inducing tighter credit standards and a return to competitively higher interest rates again.
A fully free banking system and fully consistent gold standard have not as yet been achieved. But prior to World War I, the banking system in the United States (and in most of the world) was based on gold, and even though governments intervened occasionally, banking was more free than controlled. Periodically, as a result of overly rapid credit expansion, banks became loaned up to the limit of their gold reserves, interest rates rose sharply, new credit was cut off, and the economy went into a sharp, but short-lived recession. (Compared with the depressions of 1920 and 1932, the pre-World War I business declines were mild indeed.) It was limited gold reserves that stopped the unbalanced expansions of business activity, before they could develop into the post- World War I type of disaster. The readjustment periods were short and the economies quickly reestablished a sound basis to resume expansion.
But the process of cure was misdiagnosed as the disease: if shortage of bank reserves was causing a business decline- argued economic interventionists-why not find a way of supplying increased reserves to the banks so they never need be short! If banks can continue to loan money indefinitely--it was claimed--there need never be any slumps in business. And so the Federal Reserve System was organized in 1913. It consisted of twelve regional Federal Reserve banks nominally owned by private bankers, but in fact government sponsored, controlled, and supported. Credit extended by these banks is in practice (though not legally) backed by the taxing power of the federal government. Technically, we remained on the gold standard; individuals were still free to own gold, and gold continued to be used as bank reserves. But now, in addition to gold, credit extended by the Federal Reserve banks (paper reserves) could serve as legal tender to pay depositors.
When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage.
More disastrous, however, was the Federal Reserve's attempt to assist Great Britain who had been losing gold to us because the Bank of England refused to allow interest rates to rise when market forces dictated (it was politically unpalatable). The reasoning of the authorities involved was as follows: if the Federal Reserve pumped excessive paper reserves into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain's gold loss and avoid the political embarrassment of having to raise interest rates.
The "Fed" succeeded: it stopped the gold loss, but it nearly destroyed the economies of the world, in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market-triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence.
As a result, the American economy collapsed. Great Britain fared even worse, and rather than absorb the full consequences of her previous folly, she abandoned the gold standard completely in 1931, tearing asunder what remained of the fabric of confidence and inducing a world-wide series of bank failures. The world economies plunged into the Great Depression of the 1930's.
With a logic reminiscent of a generation earlier, statists argued that the gold standard was largely to blame for the credit debacle which led to the Great Depression. If the gold standard had not existed, they argued, Britain's abandonment of gold payments in 1931 would not have caused the failure of banks all over the world. (The irony was that since 1913, we had been, not on a gold standard, but on what may be termed "a mixed gold standard"; yet it is gold that took the blame.)
But the opposition to the gold standard in any form-from a growing number of welfare-state advocates-was prompted by a much subtler insight: the realization that the gold standard is incompatible with chronic deficit spending (the hallmark of the welfare state). Stripped of its academic jargon, the welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide variety of welfare schemes. A substantial part of the confiscation is effected by taxation. But the welfare statists were quick to recognize that if they wished to retain political power, the amount of taxation had to be limited and they had to resort to programs of massive deficit spending, i.e., they had to borrow money, by issuing government bonds, to finance welfare expenditures on a large scale.
Under a gold standard, the amount of credit that an economy can support is determined by the economy's tangible assets, since every credit instrument is ultimately a claim on some tangible asset. But government bonds are not backed by tangible wealth, only by the government's promise to pay out of future tax revenues, and cannot easily be absorbed by the financial markets. A large volume of new government bonds can be sold to the public only at progressively higher interest rates. Thus, government deficit spending under a gold standard is severely limited.
The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which-through a complex series of steps-the banks accept in place of tangible assets and treat as if they were an actual deposit, i.e., as the equivalent of what was formerly a deposit of gold. The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets.
The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy's books are finally balanced, one finds that loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion.
In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.
This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the "hidden" confiscation of wealth. Gold stands in the way of this insidious process.
It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.
Wednesday 11 June 2008
The Markets: Talk is cheap....
By stating the obvious, he increased the strength of the dollar; reduced the oil price; the Dow had a positive day "and G-d saw everything that he had made, and behold, it was very good".
But it can't last. The dollar needs a fundamental reason to strengthen not just words from a political appointee.
So what Chairman Bernanke really did was give market traders a road map for how Tuesday was going to play out and they took his direction.
Within a couple of days we'll be back in the real world.
Sunday 8 June 2008
The Blog: The cheesy name thing...
Naming the blog 'The Constant Broker' wasn't an ego thing, it was aspirational.
Saturday 7 June 2008
The Blog: What is a Constant Broker?
constant
• adjective 1 occurring continuously. 2 remaining the same. 3 faithful and dependable.
To be a constant broker is to be trustworthy and resolute. A good financial adviser invests millions of dollars a year on behalf of his clients and his clients families. That is a daunting responsibility. It is also a great honour.
To repay that trust, I endeavour to put together the best portfolios available. I have almost unrestricted access to the global equity and bond markets. If I am to work on the premise that I must offer my client's 'best advice' at all times, then I cannot accept any commissions on funds. I cannot invest in assets that are not daily or (at worst) weekly traded.
Too often I see clients stuck in monthly or even quarterly valued funds that have a 6% exit fee to cover commissions. These kind of funds have so many charges attached that future profits are nigh on impossible to achieve.
For this reason, I only purchase daily traded, non commission bearing assets but charge a 1% fee on portfolio value.
For this my clients have direct access to worldwide stock, ETF's and mutuals from institutions such as JP Morgan Fleming, HSBC, Fidelity, Goldman Sachs etc. Part of the attraction of offshore investment is to be able to have almost unrestricted access to global assets on international markets.
From my point of view, it's a little like a chef being able to buy any ingredients that he likes in order to be able to cook a great meal. Unfortunately, in my business, most other 'chefs' choose to cook with a more limited choice of ingredients of lesser quality and then pocket the change.
Many investors go ahead with an offshore plan without even a basic understanding of their tax position on return home. There is no point ever doing an offshore plan if you do not understand the tax ramifications of landing the gains.
But neither do the majority of advisers in my industry. Very few were formally trained in the UK or their home country. They have learned the job from somebody who also learned at a Tokyo brokerage. You cannot understand the gravity of investing client money unless you were trained in a regulated environment with inbuilt checks and balances.
So how does a potential client whittle the wheat from the chaff?
Its not that difficult. Firstly ask questions. Ask him/her as to why they are recommending particular investments and what the pro's and cons are for each.
Ask them about taxes. Ask them about the effect of the charges within the investment programme and if they take commission for buying funds for lump sum portfolios. Then ask them to put all of that into writing. If the adviser agrees willingly, take the next meeting. If he baulks, reconsider.
There is a myth that purports that the biggest investment that you'll ever make is your home. If you are 35 and you retire at 60 and live till 85, you have 25 years to earn enough money to live for another 25 years without working. Not only do you face those odds but you also have to fight inflation eroding your investments at a probable average of 3%pa for the next 50 years.
That is why you need a Constant Broker.
Friday 6 June 2008
The Markets: Blowing Bubbles...
According to the International Herald Tribune of May 15th 2006:
"Robert Shiller, a Yale University economist and author of "Irrational Exuberance," thinks commodities markets resemble the technology-stock bubble of the 1990s.
"It's the same phenomenon," Shiller said. "When you have something that has glamour value, it opens up the possibility of a speculative bubble. You can't have a speculative bubble if there isn't a story."
Analysts, including Tom Fitzpatrick of Citigroup in New York and John Noyce in London, say crude oil prices may have peaked at the April 21 record of $75.35 a barrel, while the Société Générale analyst Frédéric Lasserre in Paris said last week that oil might have reached a "tipping point."
"A speculative bubble is forming," said Tony Dolphin, director of economics and strategy at Henderson Global Investors in London. "It may be sensible for some investors to get out of these markets now and return once there has been a correction in prices."
$73.35? We'll probably never see the price per barrel that low ever again. So what has caused this massive increase in oil prices? Obviously, it's not one single thing but a combination of factors that include:
A US dollar that has been weak for two years without respite, pushing up the oil price, which as it strengthens adds further to dollar weakness. A perfect vicious circle.
Massive demand from China and India, reducing the availability of cheap oil from the middle east to traditional markets in the West.
The threat of international conflict or terrorist attack disrupting supplies.
Peak oil. This is the new phrase de jour. Effectively it means that the world consumes more oil than it can drill. The countries that reach peak oil levels very quickly end up as net importers rather than exporters. A case in point is Indonesia which has just left OPEC, because it can no longer export oil without harming its domestic economy.
According to Casey Research:
The United States hit peak oil production in 1970. Here is a list of nations whose oil production is now in irreversible decline, followed by the year of their peak oil production:
Egypt: 1987
France: 1988
Germany: 1966
Iran: 1974
India: 1997
Indonesia: 1991
Libya: 1970
Mexico: 2003
New Zealand: 1997
Nigeria: 1979
Norway: 2000
Oman: 2000
Syria: 1996
Tobago: 1981
Venezuela: 1970
UK: 1999
From the Associated Press:
"Protests broke out in India and Malaysia on Thursday as consumers reacted angrily to sharp fuel price hikes that could undermine governments in both countries.
With global oil prices soaring, authorities in the two countries said a day earlier they were slashing fuel subsidies that were draining government coffers.
In Malaysia, gasoline pump prices jumped 41 percent overnight and diesel prices surged a stunning 67 percent.
The gasoline price hike in India, the second this year, was smaller — about 11 percent in the capital, New Delhi — but will still weigh on consumers. India also raised prices on diesel and cooking gas".
So is this a bubble and will we see oil at $73.35 again? The answer has to be no. Just the demand from China and India alone means that less cheap oil will be available globally. The fact that GM is shutting down its Hummer manufacturing plants indicates their belief in a longer term high oil price. In fact 19 of their next 20 car launches are either compact or hybrid. Some second hand car salesmen no longer accept SUV's in part exchange. Nobody wants to buy them. But more significantly, the erosion of fuel subsidies in Asia, is a massive indicator. Politicians do not like to make tough decisions which increases voter hardship.The higher oil price has also effected the cost of basic food. Food needs to be transported and if those costs escalate, so does the price of your loaf of bread. But your daily loaf is also being pushed up in price by the cost per bushel of wheat. More wheat needs to be grown as the emerging market middle classes in Asia eschew rice for bread. But less wheat is now grown as farmers in the US and Canada jump on the ethanol band wagon. And what is the main use of Ethanol? As a fuel additive. Again we go full circle with oil.
Food may provide an even more serious global problem than oil:
From the Guardian:
Trade barriers should be lowered and export bans removed to stop the spread of hunger, the UN said at its summit on the global food crisis today, as its secretary-general Ban Ki-moon declared world food production must rise by 50% by 2030.
Ban Ki-moon estimated the "global price tag" needed to overcome the food crisis would be $15bn-$20bn a year and urged a quick resolution in the world trade talks to alleviate the crisis.
"Nothing is more degrading than hunger, especially when manmade," he told the summit. "Some countries have taken action by limiting exports or by imposing draft controls," he said.
Countries that are net exporters of food are now holding on to their excess inventories and are reducing supplies to poorer countries. This has already led to food riots in the Philippines and Thailand, the worlds largest supplier of rice to propose an OPEC style cartel for rice.If food becomes a nationalist issue, it could become a catalyst for further unrest and maybe even war.
So are we experiencing a series of bubbles? I think not. I think that we are living in the first stage of a massive global sea change in the world economy. Globalisation used to be a much bandied about concept. It is now a reality and if the whole world participates in global growth, who are we to restrict the benefits to the newly affluent?
We live in tumultuous times. The 19th and 20th centuries were defined by their first two decades, I get the feeling that so will the 21st.
Thursday 5 June 2008
The Blog: My First Blog....
I'm a financial adviser, who loves what he does. I don't just do it for the dough, I do it because I think that it's important work. Important, because a good financial adviser who gives a damn can make a positive, qualitative difference to people's lives.
I love this profession and my ego and my balls are big enough to want to provide my clients with an online record of my investment advice and philosophy. as well as useful points for discussion.
This blog will record nadirs as well as zeniths. It will also criticise, praise, cajole and nag. Hopefully, what it won't do, is bore.