The Crisis: Is This The Death Of The Dollar? By Edmund Conway Of The Daily Telegraph

After two smugglers were stopped last week with what at first appeared to be $134bn in US state bonds, the tension and paranoia surrounding the fate of the dollar hit a new high.

Published: 7:32PM BST 20 Jun 2009

Border guards in Chiasso see plenty of smugglers and plenty of false-bottomed suitcases, but no one in the town, which straddles the Italian-Swiss frontier, had ever seen anything like this. Trussed up in front of the police in the train station were two Japanese men, and beside them a suitcase with a booty unlike any other. Concealed at the bottom of the bag were some rather incredible sheets of paper. The documents were apparently dollar-denominated US government bonds with a face value of a staggering $134bn (£81bn).

How on earth did these two men, who at first refused to identify themselves, come to be there, trying to ride the train into Switzerland carrying bonds worth more than the gross domestic product of Singapore? If the bonds were genuine, the pair would have been America's fourth-biggest creditor, ahead of the UK and just behind Russia. No sooner had the story leaked out from the Italian lakes region last week than it sparked a panoply of conspiracy tales. But one resounded more than any other: that the men were agents of the Japanese finance ministry, in the country for the G8 meeting, making a surreptitious journey into Switzerland to sell off one small chunk of the massive mountain of US bonds stacked up in the Japanese Treasury vaults.

In the event, late last week American officials confirmed that the notes were forgeries. The men, it appeared, were nothing more than ambitious scamsters. But many remain unconvinced. And whether fake or otherwise, the story underlines one important point about the world economy at the moment: that the tension and paranoia surrounding the fate of the US dollar has hit a new high. It went to the heart of the big question: will the central bankers in Japan, China and elsewhere continue to support the greenback even in the wake of the worst financial crisis in modern history, or will they abandon it as America's economic hegemony dissipates?

Dollar obituaries are nothing new. The currency has been presumed dead more times than Shane Macgowan. But like the lead singer of The Pogues, the greenback has somehow withstood repeated knocks and scrapes over the years and lived on, battered, bruised and a couple of teeth the lighter, to fight another day. In the 1970s and 1980s there were plenty predicting its demise, although at that point the main challenger was the Japanese yen. And in the years preceding this crisis, economists and investors including Peter Schiff and George Soros were lining up to declare the dollar's demise as the world's reserve currency. In the late 1990s, the creation of the euro gave dollar sceptics another stick to beat the currency with, and no doubt the European currency has claimed some of the prominence in its first decade.

Now, following the collapse of the global financial system, those warnings have become louder still, and ever more difficult to dismiss – because this time around there are threatening noises coming from those who actually have the power to do something about it. First came a paper from Zhou Xiaochuan, the governor of the People's Bank of China (PBoC), a couple of months ago, positing the idea of introducing the special drawing right (SDR) – a kind of internal currency at the International Monetary Fund (IMF) – as an international reserve currency. These calls were then repeated, with more force, by the Russian president, Dmitry Medvedev, who last week declared that the world needed new reserve currencies in addition to the dollar.

And this time around, the dollar is most certainly suffering. Since 2002 its trade-weighted strength – calculated against a basket of other currencies – has fallen by more than a quarter, from 112 to 81 points. In the same period, the proportion of dollars held by reserve managers in leading central banks has also taken a dive. According to figures from the IMF, confirmed holdings of dollars in government vaults, from Beijing and Tokyo to London and Paris, fell from 71pc of reserves to 64.5pc between 2002 and 2008.

However, detecting what is really happening in the world of foreign exchange reserves is notoriously closer to an art than a science. For instance, figures from April seemed to suggest a fall in China's holdings of US Treasuries – something 'dollapocalypticists' pounced on at the time. But according to Brad Setser of the Council on Foreign Relations, the country was merely rejigging its Treasury portfolio rather than liquidating parts of it. In such an opaque world it is little wonder the conspiracy theories over those two Japanese smugglers show little sign of dissipating.

Nonetheless, for US Treasury Secretary Tim Geithner, who has inherited his predecessors' role as dollar wallah-in-chief, the currency's travails have made it all the more difficult for him to repeat the mantra that he "believes in a strong dollar" while keeping a straight face. Indeed, when he tried to insist at a university lecture in Beijing earlier this month that "Chinese financial assets are very safe," it drew floods of laughter from the audience.

He wasn't playing for laughs, but the irony of the situation is plain to see. If there were a textbook list of actions one could take to weaken a currency, the US (alongside most other developed nations) would be following it to the letter. It has cut interest rates to a whisker above zero; it has engaged in quantitative easing, pumping cash directly into the economy; it has committed to spending trillions of dollars on a fiscal stimulus package designed to pull the country out of recession; it has pledged tacitly to support its stricken banks so that no major institution is allowed to collapse. In any normal circumstances, actions like these would hammer a currency.

According to Stephen Jen of BlueGold Capital Management: "People are having second thoughts not simply because they don't like the dollar, but they are having second thoughts about whether US assets are obviously the strongest assets to own."

Like everything else, the currency's fate depends on how well the US authorities manage the crisis. The US is balanced on a knife-edge between possible Japan-style deflation as the weight of all its debts bear down on it and potential inflation as the force of all its powerful stimulus measures take root. No one knows for sure which way it will fall, but neither would be particularly good for the currency, and by extension for those who hold much in the way of dollar assets.

And China and all other major central banks which have trillions of dollars in their vaults, face something of a dilemma. Any fall in the greenback will cause the value of their investments to slide. Even if they wanted to exit, there seems no easy way of doing so without provoking some serious self-harm. Indeed, according to Olivier Accominotti, a PhD economist at Paris's Sciences Po university, the situation is not unlike that faced by France in the 1920s, as it sought to reduce its massive sterling reserves. The Bank of France found itself in a "sterling trap" in which it "could not continue selling pounds without precipitating a sterling collapse and a huge exchange loss for itself".

Neil Mellor, of Bank of New York Mellon, said: "We've got a situation where Geithner is smiling and has no choice but to stress the credibility and stability of the US financial and economic system, while the creditors [such as the Chinese] smile back and say they believe him, while at the same time giving hand signals to their reserve managers to get rid of these things."

Rather like the brinksmanship on display throughout the Cold War, it is a dilemma which applies itself to game theory. Both sides know that the dollar is set to weaken, but both could be set to suffer if they both allowed it to collapse at the same time. "If you are the Chinese it is in your interest to play the game – you've got a lot of dollars at stake – but in the long run you surely want to reduce your holdings and diversify them at the margins," says Mellor.

Still, with every passing week, the conjunction of different warning signals for the US currency seems to evolve and intensify. Recently, the alarm bell ringing most loudly has been the increase in yields on US Treasuries – a sign, some fear, of acute nervousness among institutional investors about the sheer scale of the cash the Obama administration is planning to borrow in coming years. The Federal Reserve's meeting next week is likely to be watched attentively by everyone with a stake in the game, as the central bank indicates whether it is planning to plough more dollars of newly-created cash into the economy.

But while the debate fixates on the greenback, the issues at heart here go far deeper. The dollar's fate is intertwined with that of the global economy. America is on the brink of losing its economic superpower status, which it will have to share with China at least, if not others, in the coming years. Holding such a position confers important responsibilities, none of which is more symbolic than providing the world's reserve currency – the currency against which all major commodities are denominated, and the de facto international unit of exchange in trade and finance.

It was a position enjoyed by UK sterling during the first waves of globalisation in the Victorian era and the final decades of the British Empire. Eventually, around the time of the Second World War, the dollar inherited the mantle. At first this was something enshrined in the Bretton Woods agreement of 1944, which fixed world currencies to the dollar, but although that system broke down in the 1960s and 1970s, it has remained the de facto currency of choice.

In a globalised world, with trade being carried out between hundreds of different nations by thousands of different companies, having an international standard makes sense: it enables traders to exchange goods more quickly and efficiently than they would have done otherwise. It may be invisible to us, but the vast majority of foreign exchange transactions – particularly those between smaller nations – involve the dollar. Exchange your sterling for Thai baht and you're actually swapping pounds for dollars for baht, whatever the exchange booth says. Even the much-vaunted exchange arrangements by the Brazilian and Chinese are designed not to disrupt these foundations, but merely to smooth things over for importers and exporters.

But a by-product of the dollar's dominance has been the skewing of the world's monetary system. By dint of having this blessed position, the US has been able to finance ever-larger current account and fiscal deficits, with both the government and the public borrowing from overseas, at cheap rates of interest. It has been able to sell US Treasuries at interest rates that other countries can only dream of because of this position as reserve currency. It has had a captive consumer – both because its government bonds are something of a safe haven and because those wishing to peg their currencies against the dollar and enhance their trade flows have little choice but to buy US Treasuries.

And this mutated international monetary system that has evolved since the 1960s is largely responsible for the crisis into which the world has tipped. Because it was able to borrow off other countries at such low rates without enduring the market punishment – in other words higher interest rates – America was able to build up massive current account deficits which poured a record amount of debt throughout its economy, which manifested itself in the financial crisis.

Indeed, as Mervyn King said in a speech earlier this year: "At the heart of the crisis was the problem identified but not solved at Bretton Woods – the need to impose symmetric obligations on countries that run persistent current account surpluses and not just on countries that run deficits. From that failure stemmed a chain of events, no one of which alone appeared to threaten stability, but which taken together led to the worst financial crisis any of us can recall."

When the PBoC's Zhou referred to the SDRs he was not merely questioning the dollar's pre-eminence. He was indicating something far more radical – that China supports plans for a new Bretton Woods-style agreement to manage the flows of cash around the world. At that seminal conference in 1944, John Maynard Keynes's original idea, which was watered down by Harry Dexter White of the US Treasury, was for an international reserve currency, Bancor, fixed against a basket of 30 currencies, and that countries would be penalised if their current accounts swung too far into surplus or deficit. It is an idea which is now being dusted off from history books by officials in finance ministries around the world, including in China.

Such a radical shake-up would cause earthquakes in the currency markets, a prospect which perhaps makes it unlikely. So in the absence of such a deal, how is the dollar's role likely to evolve in the coming years? The short answer is that no one should expect it to lose its reserve currency status any time soon. It took around half a century for Britain to cede this position to the US, even after being overtaken in true economic might.

One possibility is that the SDR may be used increasingly as a means of denominating assets in accounts, but this is something which would take place gradually, over a course of some years. But even if that is a bridge towards a multi-polar world, in which other currencies vie with the dollar for influence, it will take some time – perhaps 30 years or more, according to Stephen Jen. "People should look at history," he said, referring to sterling's pre-eminence in the first part of the 20th century. "There's a real incumbency advantage."

Jim O'Neill, chief economist at Goldman Sachs, sees the next few years as something of a "vacuum period".

"The BRIC countries [Brazil, Russia, India and China] are becoming so much more important, while the G7, including the US declines, which raises issues about the degree of dominance of the dollar. The problem is that the currencies of the BRICS are the ones that matter, but they won't let you export or use their currencies.

"Until we see another five years' of evidence over whether China is a more consumer-driven economy, becoming bigger and bigger, and whether the euro can have a successful second decade, the dollar looks set to remain dominant."

China has made some hints about loosening its hold over the yuan in recent months, but these are only early manoeuvres. A second step would be to allow the yuan to become a part of the SDR – whose own value is determined by those of a basket of currencies including the dollar, pound and euro. As Jen adds, there are certain prerequisites any contender to the crown of world reserve currency needs in its pocket.

"We have to ask this question: is Russia going to provide asset market that will be as liquid, reliable property rights, the rule of law, currency convertibility and so on? Will we see the same from the likes of China? Their task is very daunting."

Referring to the forged Treasury bonds picked up on the Japanese smugglers on the Swiss border, he adds: "There is a message here: we haven't heard much about anyone counterfeiting roubles. That is probably telling you something."

Investment: Our New Corporate Website Is Launched!

With personal blogs from our leading financial advisers and an online valuation system available in Japanese, Chinese and English; we believe that the new Pinnacle Wealth Management website is both cutting edge and informative. For those of you who invest with us, we hope that you like it.

The Crisis: A New Acronym By Gareth Milliams

You've heard of the BRIC (Brazil, Russia, India, China) nations. The worlds leading emerging market nations. Now we have a new one, for those EU nations that have not fared so well through the downturn. They are the PIGS.

P = Portugal
I = Ireland
G = Greece
S = Spain.

The Crisis: Michael Lewis Talks To Fareed Zakaria

"...one of the things that's odd about the current situation is that the people who created the problem are so powerful in deciding what the solution to the problem is going to be. There is a great tradition on Wall Street of making a fortune, creating a mess, and then making a fortune cleaning it up. But to do it on this scale is breathtaking to me".

Brilliant stuff!

Investment: The Return Of The Saving Plan By Gareth Milliams

They were much derided, particularly by those who held large lump sum portfolios; but monthly savings plans are making a comeback and for good reasons.

The global equity markets are volatile and will stay that way for a long time to come. This is the perfect environment for savings plans. Their main benefit is that they allow the investor to take advantage of that volatility (no matter how negative).

For example:

An investor buys 300 units at a dollar each. At the end of the first month the price stays the same. In month two, the price drops 50% to 50 cents but returns back to $1.00 at the end of the third. Obviously the price stays at $300.

The savings plan scenario with a $100pm contribution over 3 months works as follows:

Month One: 100 units @ $1.00

Month Two: 200 units @ 50 cents

Month Three: 100 units @ $1.00

The total is 400 units with a value of $400.

By contributing monthly, an investment which ultimately stayed at parity as a lump sum, made a 33% profit. The profit was made by buying the lows at discount. Buying into a 50% drop, became a 100% gain ($1.00-50 cents-$1.00) for that contribution when the units were back at $1.

Below is a chart which explains unit purchasing at discount with dollar cost averaging very succinctly. Please click to enlarge.


However, the reason why dollar cost averaging models never outperform lump sum is that there is a point when the capital value of the investment just becomes too big. This is where most savings plans lose momentum. A ten percent loss on a $50,000 investment cannot be easily averaged by a $1,000 pm premium. Therefore, to manage a monthly savings plan is to manage two investments, the capital amount and the monthly contribution.

Too often, I see a portfolio which has had some success, be debased because the capital was not managed correctly. There sometimes appears to be a fear of switching profitable funds to cash in order to protect the capital.

I do not have that fear. My first job is always to preserve capital. I will sell units in funds that I consider under pressure, if the capital value of the investment is under threat. But I may also buy into those same funds (or an alternative) with the next monthly contribution in order to start a new profit dynamic.

Managed correctly, monthly savings plans are incredibly powerful investment tools. Every investment programme should have one as part of its long term strategy. It is the most efficient method of taking advantage and profiting from volatility and negative market movements.

Currencies: Jim Rogers Talks Of A Future Currency Crisis

Jim Rogers talked to CNBC and discussed the possibility of America losing its status as the worlds only reserve currency. This came to the fore again when Timothy Geitner made his visit this week to America's No1 creditor, China.

Luo Ping, a director general at the China Banking Regulatory Commission said, “Except for US treasuries, what can you hold? US treasuries are the safe haven. For everyone, including China, it is the only option. We hate you guys. Once you start issuing $1 trillion to $2 trillion [of bonds] we know the dollar is going to depreciate, so we hate you guys, but there is nothing much we can do.”

Russia Today reported the following comments by President Medvedev on 6th June:

“No national currency can be appointed to the world's reserve. The role of the Russian Federation is to make the Rouble a more attractive, convenient, and reliable method of transaction for all those who are ready to use it.”

Deputy Prime Minister Igor Sechin dealt the greenback another blow at the forum on Friday. He said oil prices should not be tied to the dollar.

Russia is not alone in welcoming the winds of change – China and Brazil have echoed the idea of abandoning the greenback. Yet any nation with huge dollar holdings also fears the dollar’s collapse.

On April 6th, I wrote in The Constant Broker:

"China did not make too much of the purported new reserve currency. It was (as I had said previously) pure political positioning. But don't be surprised if in the future, you see a repegging of the Yuan and a more aggressive use of the Renminbi as a regional currency or alternative to the US dollar. However, a global basket of currencies would be very difficult to achieve and would ratchet up the powers of the IMF to an unacceptable level. It helps its proponents that the present boss of the IMF is Dominique Strauss Kahn, an unreconstructed French socialist".



Whilst I believe even more that the Renminbi will take a larger role as a reserve currency, I also believe that I may have been wrong regarding the possibility of a global basket of currencies. If the political will exists, then even that which seems impossible can be made possible.

The Crisis: Anatomy of a Collapse (click to enlarge)

A hat tip to Barry Ritholtz at The Big Picture and Jess Bachman at Wallstats for this brilliantly conceived schematic of where we were, are now and heading toward in this financial crisis.

Casey's Charts: John Paulson, The Worlds Best Hedge Fund Manager Agrees With Gareth On Strategy

If John Paulson ever wants a job in Kamiyacho working for Pinnacle, it's his...

June 04, 2009

The privately owned hedge fund sponsor Paulson & Co. added over $3.7 billion in new gold positions during the first quarter of 2009, increasing its total investment to $4.3 billion. About 46% of the equity portfolio is now allocated towards gold and gold stocks.

Not familiar with Paulson & Company, or founder John Paulson? You should be, and here’s why:


• Paulson’s bet on the subprime mortgage debacle earned $3.7 billion in 2007.

• The company made an estimated £606 million profit selling short British bank stocks in September 2008.

• John Paulson ranked #2 on Alpha’s Highest-Earning Hedge Fund Managers of 2008.

• Two of Paulson & Co.’s funds ranked #1 and #4 on Barron’s Top 100 Hedge Funds 2009 list.

The Markets: Gold Rally Reflects Only Weak US Dollar

Interesting conversation on CNBC. The most important quote from Charlie Morris of HSBC is that "long term volatility of the market is still through the roof".

Geoeconomics:The Trillion Dollar Question: China Or America? Who Is Going To Come Out Of The Economic Crisis Stronger? By Niall Ferguson

Two years ago, economist Moritz Schularick and I coined the word "Chimerica" to describe what we saw as the key relationship in the then-booming global economy: China plus America. Cheap Chinese labour was making US corporations highly profitable. Spendthrift American consumers, in turn, were keeping Chinese corporations busy with export orders. And the Chinese monetary authorities were converting export surpluses into dollar denominated reserves with the aim of preventing their own currency from appreciating. The unintended consequence was a multi-billion dollar credit line to the United States, financing America's deficit at rock-bottom rates.

It was those low long-term rates – combined with monetary policy errors by the Fed, excessive bank leverage and reckless financial engineering – that inflated the American property bubble, the bursting of which triggered this crisis.

To simplify the story, think of an unhappy marriage in which one partner does all the saving, while the other does all the spending. (We all know at least one couple like that.) But then the partner with the retail therapy habit maxes out on his/her credit cards. At the same time, the parsimonious partner finds her/his job under threat. What previously was a stable relationship is suddenly on the rocks.

In February, the People's Daily acknowledged the "global importance and influence" of Chimerica, but warned of an impending "period of chillness". Could this be one of those great turning points in history, when the balance of power tilts decisively away from an established power and towards a rising challenger? It is possible. Financial crises often accelerate the gradual shifting of the geopolitical tectonic plates; they are to history what earthquakes are to geology.

It was inflation that undermined the foundations of Habsburg power and opened the way for the Dutch Republic. It was the disastrous Mississippi Bubble of 1718-19 that fatally weakened ancien régime France, while Britain survived the contemporaneous South Sea Bubble with its fiscal system intact. For most of the nineteenth century, financial crises in the United States had only marginal effects on the City of London. By 1907, however, a Wall Street crash could send a shockwave across the entire British Empire, a harbinger of a new era of American power.

Something similar may be happening as a consequence of the American financial crisis that began nearly two years ago. The flapping of a butterfly's wings may trigger a hurricane in the Home Counties; in much the same way, a crisis in the market for subprime mortgages could signal the waning of US hegemony and the advent of a Chinese century. Just visit the nearest bookshop if you don't believe me. There, alongside Fareed Zakaria's prophetic The Post-American World, you'll soon find Martin Jacques's darkly visionary When China Rules the World.

Just consider the impact of this crisis on the United States and China. According to the International Monetary Fund, the US economy will contract by 2.8 per cent this year – while China's is forecast to grow by more than 6 per cent.

The US stimulus package – worth $787 billion – has had rather a muted impact. The economy will do better in the current quarter than in the last one. But house prices are still falling at close to 20 per cent year on year. The rate of foreclosures per month is still rising. And a crisis in commercial real estate could blow a new hole in the balance sheets of US banks.

Moreover, no amount of stimulus can swiftly reduce the debt burden weighing down America's over-leveraged consumers. According to Bank Credit Analyst research, for household debt to return to a more sustainable level, real consumer spending would need to grow at no more than 1.3 per cent a year between now and 2013. If that calculation is correct, the Obama administration will have to junk its predictions of 3 per cent growth next year and 4 per cent the year after that.

China's stimulus is worth less in dollar terms – $585 billion – but Beijing is clearly getting more bangs for its bucks. In April, fixed investment surged by nearly
34 per cent. Net imports of iron ore leapt by a third, and imports of oil by just under 14 per cent. It's a measure of China's new economic influence that commodity traders attribute much of the recent upward pressure on oil, copper and other raw material prices to Chinese purchases. Indeed, China's growing presence in commodity markets in sub-Saharan Africa and South America – not just as a buyer, but also as an investor – has an almost imperial character to it.

Of course, China has not been wholly unscathed by the astonishing collapse of exports that struck Asian economies in late 2008 and early 2009. Many more Chinese than American workers have lost their jobs since this crisis began. Yet I do not believe (as some Sino-pessimists do) that the regime in Beijing faces a serious threat of social unrest. Like other rising powers in past centuries, China is imbued with a remarkable sense of patriotism that is not just a product of Communist Party propaganda. People are proud of their country's economic miracle over the past 30 years. After two wretched centuries, they believe China is on the way back. People whose grandparents survived the Great Leap Forward and whose parents endured the Cultural Revolution can surely cope with a decline in the growth rate from 11 to 6 per cent.

In short, it may be time to start believing the projections made by Jim O'Neill and his colleagues at Goldman Sachs, who predicted just a few years ago that China's gross domestic product could equal that of the United States by 2027. Three years ago, China did not have a single bank among the world's top 20, measured by market capitalisation. Today the top three are all Chinese. In 2006, the United States had seven of the top 20 banks, including the top two; today it has three, and the biggest, JP Morgan Chase, is rated fifth.

Even before its economy becomes the world's biggest, China can play a much more assertive role in its relations with the United States. The spouse with the money generally wins the argument, after all. Especially when the argument is about the other spouse's debts.

And what debts! The US federal government's deficit this year will be $1.84 trillion – roughly half of total expenditure and nearly 13 per cent of GDP. Not since the Second World War has the gap between income and spending been so huge. Moreover, the Congressional Budget Office anticipates that total debt will nearly double in the decade ahead. With the lion's share (around 70 per cent) of their $2 trillion of international reserves held in the form of US bonds, the Chinese are understandably alarmed by this tsunami of red ink. Last week's financial market action – which saw both bonds and the dollar drop sharply – will have caused palpitations in Beijing.

To be sure, China is still piling up those dollar-denominated bonds. In March alone, China's holdings of US Treasuries rose $23.7 billion. But Deutsche Bank recently predicted that Chinese reserves will rise by only $100 billion this year, compared with $418 billion last year. You don't need a Nobel prize in economics to know that $100 billion won't finance much of a $1.84 trillion deficit.

We know pretty much what Treasury Secretary Timothy Geithner is hearing in Beijing this week because the Chinese have been grumbling about American profligacy for months. "We have lent a huge amount of money to the United States," Wen declared in March. "Of course we are concerned about the safety of our assets. To be honest, I am a little bit worried." Soon after that, on the eve of the G20 Summit in London, the Chinese central bank governor Zhou Xiaochun proposed that the US dollar might eventually be replaced as the world's main reserve currency.

"The United States is making policy decisions purely according to domestic considerations and is giving little thought to the outside world," complained Zhang Ming, an economist at the Chinese Academy of Social Sciences, in April. "This being so, the Chinese government should prepare its defences. We can keep buying US debt but we have to attach some conditions."

The big question is: what conditions? For Mr Geithner knows the truth of the old adage: when you owe the bank a small amount, the bank has the power. But when you owe the bank a huge amount, it's the other way round. Luo Ping, a director-general at the China Banking Regulatory Commission, put it nicely in an interview back in February: "Except for US Treasuries, what can you hold? US Treasuries are the safe haven. For everyone, including China, it is the only option. We hate you guys. Once you start issuing $1 trillion to $2 trillion [of bonds] we know the dollar is going to depreciate, so we hate you guys, but there is nothing much we can do."

"We hate you guys?" Now that really does have the ring of marital breakdown. Let's hope Mr Geithner is good at ducking crockery. Like divorces, major shifts in the balance of power are seldom amicable.

Niall Ferguson's 'The Ascent of Money: A Financial History of the World' is published in paperback by Penguin this week

(From The Daily Telegraph)

Investment: A Full Bodied Profit By Gareth Milliams

I have been distracted recently from my conviction of a future crash in the US Dollar and a further downturn in the fortunes of the global equity markets. Distracted though does not mean unconcerned. In fact more than ever before, I believe that we are facing an additional attack upon the infrastructure of the financial markets and so am gearing up our portfolios to benefit.

What has been distracting me is an alternative investment. Not gold nor any other hard asset. Neither is it a hedge fund nor private equity.

It is fine wine.

Fine wine is a niche investment whose profits improve (like its taste) with age. Worldwide demand for wine has grown inexorably in the last 20 years, particularly in Japan and China. Supply is always limited but the thirst for the finest vintages is never sated.

This year the worlds leading wine expert Robert Parker, said the following, "It didn't take me long to realize that the 2008 vintage was dramatically better than I had expected. It had all the qualities that make an excellent and in some cases, a great vintage so special...with a number of wines that are close to, if not equal to prodigious 2005 and 2000 vintages."

For many, to be able to buy these great vintages purely to drink is a sign of affluence and sophistication. Whilst there are people willing to pay top dollar for that right, there will be investors enjoying great profits.

My company, Pinnacle Wealth Management has begun working with a UK company called Premier Cru that specialises in fine wine investment. We believe that they offer tremendous value through growth twinned with excellent tax benefits for our clients.

Part of our due diligence was to find independent reviews from clients of theirs. To our surprise, we found an article from 'The Spectator', one of the UK's leading weekly magazines. It's wine correspondent, Christopher Sylvester, said the following:

Opportunities For Vintage Growth
CHRISTOPHER SILVESTERWEDNESDAY, 11TH JUNE 2008

Christopher Silvester says you don’t have to be rich to invest in fine wine, and the rewards can be handsome

With somewhere between 800 and 1,000 clients, Premier Cru Fine Wine Investment Ltd (www.premiercru.com) is operated by the mother-and-daughter team of Paula and Stacey-Lea Golding and has been in business since 1992. ‘We look at wine as a commodity, not a beverage,’ says Stacey-Lea. ‘Each investment is tailor-made for a client’s individual needs.’

My own experience in the market has been a happy one. I bought a portfolio of Bordeaux wines through Premier Cru in 2001 for £2,879. When I chose to exit the market a couple of years later, I pocketed a tax-free profit of around 40 per cent. Stacey-Lea Golding has tracked my portfolio since then and in May of this year it was worth £10,355, which represents a total tax-free profit to date of 260 per cent, an average annual growth of 37 per cent and an average compound growth of just over 20 per cent. I still hold an imperial (the equivalent of eight bottles) of Château Margaux 1996, which I bought for £1,500 in March 2001. Its value this May was £4,000, showing an overall growth to date of 167 per cent, an average annual growth of 24 per cent and an average compound growth of 15 per cent.

As I said, wine investment does not have to be a rich man’s game; but it can certainly lead to your gradual enrichment".


Between January 1990 and June 2007, annualised returns of 18.73% pa were enjoyed by clients of Premier Cru. Effectively £10,000 invested in 1990 is worth £169,845 now. Thats an impressive return by anybody's standards.

Personal experience over a number of years is the best recommendation one can give. Christopher Sylvester is an independent wine professional of significant standing and a client of a company that I will recommend. I could hardly wish for a better endorsement of a new product.

For the whole article and further context please click the link below:

Christopher Sylvester's Full Article On Fine Wine Investment

Below is a brochure for Premier Cru. Take a look and tell me what you think.
Investment Brochure

Publish at Scribd or explore others:

The State: Welfare Con Game By Gareth Milliams

If todays workers are paying for the retirements of todays seniors; doesn't that make social security the greatest Ponzi scheme in the world?

Investment: Selling at a high is a high...By Gareth Milliams

In an event driven market like this, preempting market movements is a must.

We sold most of our savings plan portfolios on Tuesday night.

We made a profit.

We did not get greedy.

We never forgot that we were in a bear market rally, so we sold well.

Just a few more clients to contact.

Profits are resting in cash deposits.

New money from next monthly contributions redirected to mining and resources.

Life feels good..

Economics: The Zeitgeist Addendum

A hat tip to Seeking Alpha for introducing this movie to me. It is 2 hours long but exposes the realities and dangers of fiat money. I haven't seen it yet but will watch it over the next couple of days.

Enjoy!

Investment: When Black Clouds Have Silver Linings By Gareth Milliams

I am a financial adviser. More accurately, I am an investment adviser. My job is to manage the investments that my clients buy based upon the advice that I give. With that responsibility comes an explicit trust between my clients and myself.

They expect me to help them navigate the financial storms of 2009 and to steer them toward the shiny waters of financial security. They expect me to make money for them.

After more than 20 years in this business, I haven't lost my enthusiasm and hopefully am getting better at it every day. One of the tools that helps me to improve my skills is this blog. Whilst I was always an avid reader of financial journalism before starting The Constant Broker, I have probably doubled the amount of reading that I did and still spend a considerable sum on newsletter subscriptions.

So the opinions that I have are my own and are not those fed to me by financial institutions. Herein lies the problem. It is considered negative and dangerous to say that the markets are going to fall further and that everything is going to get worse, much worse before the recovery comes.

My clients expect the best financial advice possible and that advice has to take into account actual market conditions unblemished by misplaced optimism. The crazy thing is, is that this is one of the best times to invest in decades. Believe me, there is no need to sell blue skies when black clouds have solid silver linings.

So what are these silver linings? They are systemic laws of economics. This is not punting. I will not look for value where there is none. But I will look for mechanisms.

For example, I have clients who started monthly savings plans in Q4 last year who are up 60% or more since. This is because they bought into funds on a monthly basis just before the markets crashed and so have benefited from dollar cost averaging through October and November. However, I also have clients who bought in Q1 2007 who are up in excess of 40% since then. This is because we chose to switch all of their very profitable equity funds into US dollar deposits in August 2008 and buy emerging market funds from September.

Buying monthly into these markets works but to do it properly still involves management. We are in a bear market rally and so taking profit makes sense. I'll switch to cash again but this time probably Euro or Sterling. The dollar cannot sustain its value due to the sheer amount of fiat money being printed in the Feds presses.

The dollar will fall in value and the cost of commodities will rise when that happens. So I'll transfer new monthly contributions into buying oil and gold funds.

This is not guess work. We have made a good profit from emerging markets and so taking profits only makes sense.

If the world economies reflate, then they will also inflate and that will push the price of commodities up and the dollar down. It's just basic financial mechanics. To then invest new money into where the next stage of the recession will go, only makes sense.

Lump sum investments are different.

For nearly a year, my clients and I have been holding large deposits of Yen and the gold ETF (GLD). This has been very profitable. Gold has offered stability and has protected our dollar based portfolios against adverse currency movements and the Yen has benefitted from dollar weakness.

We were ahead of the curve in 2008 and have been so again in 2009. I did not invest my clients money into the bear rally because I have a duty to preserve capital. I stayed with that belief and will continue to do so. Bear rallies are blind alleyways. The only way to get out is to retrace your steps back.

I remember back in the 1990's when we would wait for AT&T or GM to have two positive quarters. They were called bellweathers. Bellweathers no longer exist as corporations anymore. Corporate America no longer has the power that it once did. What helped make American corporations great was their influence in Washington. Over the years the lobbyist industry collected billions of dollars to help corporations exercise influence with Congress. Now that their manufacturing bases are in Asia and other emerging markets, that influence has waned.

The real bellweathers in the 21st century are commodities. Gold, copper, oil and agricultural softs are more important than Chrysler. So I want to buy more gold, precious metals and wheat via electronically traded funds. ETF's are funds traded on an intraday basis on stock exchanges. They are very low cost and extremely flexible.

We are looking at the Ultrashort Financials as a possible choice.. This run up has been crazy for the banks. It will end and then the descent will begin. The market will be as oversold as it is presently overbought.

Again for empthasis. The funds chosen will be those that will benefit from the market falling and a cheaper dollar.

I think that recessionary markets can be more predictable than those of a bull market. They are more focused and narrow. Therefore they can offer greater focus and clarity. Part of the attraction of investing during a recession is that we know that we need to tick certain boxes to get back to recovery. It is those boxes that we are investing in.

There is an old saying that the pessimist always thinks that things will get worse but that the optimist knows that they will. The optimist is then prepared for when times get better.

So bring on those black clouds. I can hardly wait!

The Crisis: Michael Panzner Tells It Like It Is

 
Michael Panzner, author of Financial Armageddon: Protecting Your Future from Four Impending Catastrophes, makes so much more eloquently the very points that I have been trying to make about the global economic downturn.

The recent rally has been too strong and based not upon fundamental but misperception of where we are in the recessionary cycle. Like many corrections (whether emanating from a bull or bear market), the dynamic has taken on a life of its own. People are now doubting as to whether we are in a bear market rally and are beginning to believe that the recovery has begun. That is dangerous. When that happens the surface of the bubble reduces in viscosity.

The Markets: Beware The Bear By Gareth Milliams

I was looking for an image that summed up how bad this next downturn could be. This particular bear is pretty good but maybe not ferocious enough.

We are living in strange times. Since March, the markets have been rallying and surging ever upward. Commentators on CNBC have been calling the market bottom and are heralding the beginning of a new secular bull. It isn't and it won't be for another year. Prosperity is not here and won't be until mid 2010. Don't believe the hype!

There is a gathering storm. It appears that most people cannot see that. They want to see sunshine on a rainy day. Even if we were in the most aggressive bull market, a 42% rise in Asian stocks combined with a 27% increase on the Dow in April alone would look a little extreme.

We are not in a bull market. We are in what Alan Greenspan called a "one in a hundred year event". That was back in September 2008 and he's still right.

Look closely at what propagandist Ben Bernanke said to Congress this week:

May 5 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke warned that another shock to the financial system would undercut the central bank’s forecast that the U.S. recession will give way this year to a slow recovery.

“A relapse in financial conditions would be a significant drag on economic activity and could cause the incipient recovery to stall,” Bernanke said today in testimony to the congressional Joint Economic Committee. He highlighted that the economic contraction may be slowing and that the housing market has “shown some signs of bottoming” after a three-year slump.

The Fed chief gave no indication the Fed intends to retreat from its unprecedented policy of keeping the main interest rate near zero and boosting credit through emergency-loan programs and asset purchases. His remarks echo last week’s Fed statement that, while the outlook has “improved modestly” since March, the economy may “remain weak for a time.”

Bernanke and Geithner cannot play the role of Cassandra's. They are politicians and thus have to mix the truth with optimism and cheer lead. Therefore, a statement such as “a relapse in financial conditions would be a significant drag on economic activity and could cause the incipient recovery to stall,” should be read as a forecast rather than an observation.

He also stated that the housing market has "shown signs of bottoming". What signs? He provided no proof or data.According to the Wall Street Journal of May 6th 2009:

The downturn in home prices has left about 20% of U.S. homeowners owing more on a mortgage than their homes are worth, according to one new study, signaling additional challenges to the Obama administration's efforts to stabilize the housing market.

The increase in the number of such "underwater" borrowers comes amid signs that falling prices are making homes more affordable for first-time buyers and others who have been shut out of the housing market. But falling prices also make it more difficult for homeowners who get into financial trouble to refinance or sell their homes, and for others to take advantage of lower interest rates.

The Sage of Omaha himself said the following on May 2nd :

OMAHA, Neb. (MarketWatch) -- The recent drop in consumer spending and the resulting pressure on retailing, manufacturing and services industries could last "quite a long time," Berkshire Hathaway Chairman Warren Buffett said Saturday.

"I think our retail businesses will not do well for some time" as U.S. consumers save more, Buffett told investors at the company's annual shareholders meeting. "I would not look for any quick rebound in retail, manufacturing and services businesses."

The U.S. economy contracted at a 6.1% annual rate during the first quarter and unemployment soared as companies tried to adjust to a slump in global demand in the wake of the worst financial crisis since the Great Depression. Consumer spending accounted for roughly two-thirds of U.S. gross domestic product in recent years, so if that doesn't recover, the overall economy could be sluggish for some time.

Below is Art Cashin of UBS talking to CNBC.

Cashin makes a serious point. Volumes are low and getting lower, yet the market still surges ever onward. It seems that less people are convinced about the veracity of the rally and are on the sidelines counting their profits

The graph below is one that I've used before from www.dshort.com updated to reflect recent market performance. Click on it to enlarge and you'll see how this bear market rally is part of a normal pattern that we've been experiencing since Q4 2008. No market can keep falling as no market can keep rising without a correction.

All of the major recessions have followed similar patterns. The deeper the fall, the greater the bear market rally. The secret is to remember that this rally is just following a process.

The Crisis: The Austrians And The Gold Bugs Get Nervous By Gareth Milliams

Traveling through the blogosphere, I've noticed a disquiet. Even a murmering. Smart people who thought that the world was about to end are sticking their heads out of their nuclear bunkers and finding that maybe, they were a little early in their predictions of financial Armageddon.

Amongst those frustrated are 'the Austrians', those followers of Mises and Hayek, who believe in an almost nihilistic economic theory that rejects all statistics and mathematic modelling in favour of a philosophy which rejects any government intervention or contribution whatsoever. The Austrian school is economic Darwinism at its most fundamental. To them, Obama and his G20 colleagues represent the evil empire.

The gold bugs have also been in the forefront of predicting disaster and roundly mocked for it too. Talk of $2000 per ounce by mid 2009 now looks faintly ridiculous and the more famous bugs such as Turk, Casey, Conrad and commentators such as Faber, Roubini and Mobius have appeared to have been bullish on the yellow metal for very little result.

Why hasn't gold lived up to the hype? As an advocate of gold who is responsible for millions of dollars of client money, I have a stake in its performance. Investing other peoples' money comes with much accountability. But an investment which trades within a narrow range can appear indolent and that my dear reader, just won't do. So what is the problem with gold?

Bullion has little in common with equities. It pays no dividend and its performance is a reflection of external circumstances. In the last year those external circumstances have been dire for equities and the world economy in general. You'll need no reminding that we have all witnessed and experienced the worst financial crisis and recession of our lives.

Below is a chart (please click to enlarge). You'll immediately notice two dynamics. The first is the comparative stability of the gold ETF (GLD). The second dynamic is the performance of the NASDAQ, S&P 500 and Dow Industrial Average. To look at this part of the chart is to see an argument against diversification. It appears that when markets fall, they do so in lockstep. Asset quality doesn't matter, everything becomes dreck. Except it seems, for gold. Gold thrives on uncertainty and benefits from volatility. 



As mentioned in a previous post, the GLD ETF is now backed by 35,000,000 ounces of gold, an increase of 16,000,000 ounces in the last year. Whilst this has no discernible effect upon the value of gold per se, it is a strong indication that gold is still perceived as an alternative to fiat currencies whose value is dictated only by scarcity and the faith placed in it by the people who use it.

The situation that we have now, is that the UK and US governments are running a Ponzi scheme. By borrowing from the future to pay off the banks now, they are effectively committing the same crime as Bernie Madoff.

Take a look at the chart below from Richard Guthrie of Broadlands Property (click to enlarge) and make your own assessment of how optimistic Alistair Darling's projections are. For Bernie Madoff to succeed, he had to create turnover. For him to succeed as long as he did, those turnover projections had to be realistic. The projections from Her Majesty's Government's Exchequer are fanciful to say the least.

More worryingly, is the projection of gilt issuance from the UK as a percentage of GDP. The projection is that within 3 years, this will amount to 20% of UK GDP. 20%! In 2006, the entire financial sector of the UK represented only 10% of GDP. 

The Guthrie chart (click to enlarge) below illustrates this brilliantly. Gilt issuance was steadily rising for years (post 911) to finance the Iraq War. Since then, other than for a short period, issuance has surged out of control.

This is third world territory and potentially disastrous. America will not fare much better. In fact Goldman Sachs has recently predicted that the US will need to raise over $3 trillion this year in bond sales, which is well over 20% of their GDP (assuming GDP of some $14 Trillion). This all has to be paid for. In the UK, the largest business sector is banking. But the banking sector has diminished and no longer has access to the type of financial instruments that fueled growth in the last ten years. The days of 35x leveraging are well and truly over.

So we now have greater debt backed by nothing other than promises. We have a much smaller corporate tax base and lower projected GDP.

However, we are in the middle of a market rally. The question is, is it bull or bear? Back in 2002, Marc Faber wrote eloquently upon the 1930/31 bear market rally. It is a fascinating read:

The treacherous nature of bear market rallies

" 'The market itself is forecasting recovery' reads the recent headline of a well known financial publication. As someone who follows market movements very closely and tries to read signals the markets may give about future business conditions, I was also interested in the market's recent strength.

However, I would be extremely careful in concluding that rising stock prices after a terrific decline, such as we had in the NASDAQ since March 2000, do signal improving business conditions. For a market, which has become very over-sold, it is only natural to rebound, but frequently these rebounds are merely bear market rallies, which are subsequently followed by vicious declines.

Probably the most famous bear market rally in history is the rise, which took place following the October crash of 1929. Stocks began to recover strongly following the November 13th 1929 low amidst wildly bullish comments and confident statements by a very large number of respected Wall Street personalities.

In fact, for a while the bulls were right. From a low at 199 on November 13 - down from the September 4, peak at 381- the Dow Jones Industrial rallied to a high of 294 in April 1930 (up 48%). This famous and well-documented bear market rally took place for a number of reasons. After the October 29 crash, the market had become very oversold - incidentally far more oversold than the US stock market's position on September 21, 2000. Thus, a technical rally was natural.

Also, the Federal Reserve Bank cut the discount rate immediately following the crash from 6% to 5% on November 1, 1929, to 4.5% on November 15, and to 4% on January 30, 1930. Subsequently the discount rate was repeatedly cut to 2.5% in June 1930, to 2% in December 1930, and 1.5% in mid 1931.

The interest rate cuts after April 1930 did, however, no longer support the stock market, which began to sell off once more. And by the end of the year 1930, the Dow Jones Industrial had broken below the November 1929 low and fell to 158 (from there it fell 41 in July 1932). Another reason for the 1929/1930 rally was that the economy held up following the October crash, which led a number of leading business and stock market personalities to make positive comments and to buy equities.

During the first six months of 1930, the business curve of the Harvard Barometer was almost horizontal and, therefore, did not signal a recession. Thus, the October 1929 stock market crash was widely regarded as a financial accident - a direct consequence of excessive speculation, but not as the beginning of an economic crisis that was to jolt the social and economic structure of the entire world.

No one anticipated a recession, let alone a depression. Charles Mitchell who headed the National City Bank, announced soon after the crash that the trouble was 'purely technical' and that 'the fundamentals remained unimpaired'. While President Hoover assured the American people that 'the fundamental business of the country, that is production and distribution of commodities, is on a sound and prosperous basis.'

US Secretary of the Treasury, Andrew Mellon also remained confident about the economy: On December 31, 1929, he stated: 'I see nothing in the present situation that is either menacing or warrants pessimism… I have every confidence that there will be a revival of activity in the spring, and that during this coming year the country will make steady progress' and in February 1930, he added, 'there is nothing in the situation to be disturbed about'.

Economists were not unduly alarmed either. Keynes said that the crash might be beneficial, as money, which had previously been used to speculate on stocks could now be diverted to more productive enterprise. Irving Fisher stated that the 'factors leading to the crash of the American stock market were not factors of depression but of prosperity, unexampled prosperity' and thought that stocks were 'ridiculously low' (subsequently they fell another 80%).

To some extend, Fisher had a point. At its November low, the Dow Jones sold for only 10-times earnings after having peaked at 15-times earnings in early 1929. This was inexpensive when compared to interest rates of less than 4% on long-term government bonds - not to mention the current S&P 500 P/E of over 35!

In fact, these seemingly low stock valuations and sound economic fundamentals led several well-known investors to accumulate shares. Jesse Livermore, who in the summer of 1929 had sold short, publicly stated in November of that year that the decline had run its course and that he expected the market to recoup from its October setback.

Livermore subsequently lost all his money in the 1930-1932 decline and eventually committed suicide. John D Rockefeller who had not spoken publicly for several years, issued a statement in which he said: 'these are the days when many are discouraged…In the ninety years of my life, depressions have come and gone. Prosperity has always returned, and will come again…Believing that the fundamental conditions of the country are sound, my son and I have been purchasing sound common stocks for some days.'

Even Bernard Baruch, who had correctly anticipated the stock market collapse, later confessed: 'I never imagined, in these last months of 1929, that the collapse of stock prices was the prelude to the great depression. Anyone who knew the potentialities of the American economic system, as I had come to know them, could not help but believe that the market break would just inevitably be followed by an even greater prosperity.'

The point I should really like to emphasize is that rally phases after a serious break frequently lead to a false sense of security and confidence among the investment community 'that the worst is over' because stocks are rebounding strongly. Moreover, because business conditions do not deteriorate very badly during the first phase of a bear market, economists and well-known market observers remain optimistic about the future.

However, we all don't know if a strong rally after a sharp decline is a bear market rally, the extension of a secular bull market, such as occurred after the declines in 1987 and in 1998 or an entirely new bull market. But we ought to be careful in concluding that because US stocks have been rising recently, an economic recovery is just around the corner and that corporate profits will shortly begin to rise again.

We simply don't know how the world will look in a year's time. But it is clear that aggressive interest rate cuts, which led to the furious housing refinancing boom, and zero interest rate car loans have borrowed from future consumption, which will be curtailed once interest rates no longer decline.

Don't forget that following each recession over the last 100 years, in the initial recovery economic phase, interest rates continued to decline boosting stock prices and profits. Judged by the recent bond market action, interest rates will, however, go up even before this recession comes to an end.

Thus, given the S&P's still lofty valuation, I remain of the view that US equities have at present very best little upside potential and at worst, still significant downside risk. In fact, I lean toward the view - based on technical factors - that we may very well already have seen the recovery highs for the market or will see them in the next few days and that from here on the down trend will resume".

It is a prescient piece. However, This is not 1930 nor is it 2002. Our economy and this crisis is fundamentally different. The 1929 crash was very much concerned with a stock market bubble, whereas 2008/9 is more about economies that are fueled by record levels of debt created by disproportionally powerful banks. Being the distributors of money, they (along with their governments) encouraged massive borrowing in all sections of society and then structured complex financial instruments that created artificial profits backed up by nothing other than paper.

In 1929, gold was money. You could go to the bank and say, "If I give you $50.00, give me a gold coin". Alternatively, if you gave a bank gold, they gave you paper money. If you gave that paper money to somebody, they could take it back to the bank and get that gold.

Today, debt is money. Money isn't backed by anything. Gold is just a commodity you can purchase with your paper dollars. So as the value of the paper money changes, the amount of gold you can obtain changes. And the supply of that money is determined by the Federal Reserve.

As the value of the US dollar depreciates, the value of gold appreciates. As inflation increases so does the value of gold. The same equation can be made with uncertainty and fear. In overseas markets on September 11th 2001, the gold price spiked 6%.

So to conclude:

If we are not in recovery mode, then the bear market rally is bogus and overdue for a correction. Government borrowing is at historic highs and central banks throughout the world are busy printing record amounts of fiat money.

Ironically, Alan Greenspan, Federal Reserve Chairman from 1987 to 2006, was an early critic of fiat money arguing in his essay, Gold and Economic Freedom, that,

"This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the 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".

A record bear market rally combined with massive levels of newly printed dollar bills and historic government debt can only lead to a catastrophic event. The politicians offer only variations of more of the same, ultimately only exacerbating the crisis. They offer no solutions other than what they believe is required to get re-elected. 

We could be heading toward a new phase in this crisis, one which will let all the poison out of the system. 

So whilst the Austrian School and the gold bugs may be looking nervously at the surging indexes, a little patience will allow them to say the most satisfying four word sentence in the English language:

"I told you so"

The Markets: The Myth Of The Gold Bubble By Gareth Milliams

April 23, 2009

SPDR Gold (GLD) is the most successful ETF in history. Back in 2004, it opened with 260,000 troy ounces of gold. It now has 35,000,000 ounces of which 16,000,000 have been added in the last year alone.

I get told so often that gold is in a bubble, but how can that be? There is presently no correlation between gold purchase and return. This is partly because there is no perceived gold shortage - yet. It is also because certain other economic factors dictate gold value, such as dollar strength and inflation.

Inflation is at a comparative low. In fact at the moment we are currently experiencing a slight deflation of -0.38% (click on the chart below). The dollar is also relatively strong and therefore hedging against dollar weakness is not required. Yet despite this, gold still holds its value. Last year, as the markets crashed and banks failed, GLD even garnered an 8% profit.

courtesy of www.dshort.com

So what will defeat deflation? Unfortunately, it is rabid government spending that will create the inflation that will reflate the global economy. After the Great Depression, Roosevelt regretted that he hadn't spent more on infrastructure projects. Luckily (?) World War 2 came along, which (at the time) led to the greatest government spending initiative in history and deflation disappeared only to return in the late 1940's. Click on the chart above and you'll see that on the clearly marked 1940 line that there is a tiny spike in inflation (lendlease?) followed by a massive surge at the beginning of 1942.

A more modern example close to home is the deflation experienced in Japan during the 1990's. Despite a global boom, Japan's economy stayed in the doldrums because of a lack of internal investment and the government's inability to confront zombie banks that weren't lending and were in fact, bankrupt.

My point is this: Whilst spending for the sake of it goes against the grain, deflation is the greatest enemy of growth. To reflate we need to inflate and that means massive spending programmes from central governments. Click the chart below to see a shocking graphic of how the Adjusted Money Base (AMB) of the United States has increased.


All of this spending means that there will be a huge reduction in the comparative demand for US dollars. Excessive supply of any asset only weakens its value. The problem is, is that the US dollar is the lifeblood of the international finance and trading system and this level of printing will cause a massive weakness in dollar value and therefore a systemic increase in the cost of commodities such as gold and oil.

That is where gold comes into its own as a flight to quality and as a simple hedge against persistent dollar weakness. At some point there may be a mass hysteria for this finite metal pushing the price up toward record inflation adjusted highs.

So for my portfolio clients, I heartily endorse GLD and for monthly investors, the resource funds from JP Morgan, Black Rock, Martin Currie and Investec.

Inflation is coming, that is certain. We must prepare to benefit from it.

The Markets: Bull Or Bear By Gareth Milliams

The global financial crisis has been described as economic warfare. Yet for the last month, we have watched the S&P grow nearly 30%. But is it sustainable?

Last week the second largest US mall owner, General Growth announced one of the biggest bankruptcies in US history, going down for $27 billion. Additionally the bondholders of MGM Mirage in Las Vegas led by Carl Icahn have asked for that casino to announce bankruptcy with debts of more than $13 billion.

The big four autos are on their last legs with Chrysler being forced into a marriage of convenience with Fiat and General Motors who after having had to sack their President on White House orders are now seriously considering Chapter 11.

What I find more worrying is that much of this rally has been led by the financial sector who (as Goldman Sachs have shown) are quite willing to outright lie about their quarterly results. Additionally, there is nothing fundamentally strong about the American banking industry.

For those who believe that happy days are here again, take a look at the chart below (with thanks to Doug Short-dshort.com):



These are what Doug Short calls the "Four Bad Bears", 1929-32,1973-74, 2000-02 and 2007-09. 2007-2009 just looks too short, considering that this is (according to Alan Greenspan) a hundred year recession. If this is truly to be a short but deep recession then results have to beat expectations for more than one quarter. It seems to me that the markets are going up, but are leaderless. There is no recovery but only misplaced optimism.

Below is another DShort.com chart, this time looking at previous bear market rallies during this downturn. You'll notice a pattern, that the deeper the point drop, the greater the upswing when the market rallied back.



Looking at the chart, the so called 'new bull' looks suspiciously weak. Presently, the main equity indexes appear overbought and the fundamentals still look negative. From Reuters April 15:

Washington, April 14 - US retail sales unexpectedly fell by 1.1% in March due to declines in all major retail categories except food and beverage stores and health and personal care stores. But the surprise drop in March retail sales follows a 0.3% increase in February, which the Commerce Department upwardly revised from a 0.1% decline.

March's 1.1% drop is the biggest decline since December and well below the 0.3% gain economists expected.

A big factor in the overall decline was a 2.3% drop in auto and parts sales, which followed a 3.0% drop in February. Automotive sales are now down 23.5% from the level seen in March 2008. Gas station sales fell 1.6% in March and are down 34.0% from a year earlier.

Sales at electronics and appliance stores fell 5.9% in March, and clothing store sales fell 1.8%.

Retail sales excluding autos fell 0.9% in March, below economists' expectation of flat sales for the month. Commerce upwardly revised February sales ex-autos to a 1.0% gain from the 0.7% increase it first reported.


So as unemployment keeps rising, house prices continue to tumble and people cut their spending, there are those who are announcing a new bull market.

I'm convinced that it is not. I believe that it is a reaction to earlier sell offs and that the higher the bounce, the greater the upcoming downturn will be.

We have further tests to come in this recession. The first will be in the financial sector and heavy manufacturing such as auto's.Then we will have inflation. Interest rates will go up, testing many home and small business owners, but there will be growth. Inflation is a byproduct of growth & no recovery can happen without it. Higher inflation is created by greater demand than supply for goods and services. Until I see that happening, I'll protect my clients money and ignore these persistent false dawns.

The Crisis: Ever Get The Feeling You've Been Had?

Goldman Sachs shocked the financial world by declaring a $1.81bn Q1 profit.

In the middle of the biggest downturn since the great depression, GS showed the world why it is Wall Streets greatest bank. Or did it? Could it be that they were just being economic with the truth and imaginative with their accountancy?

Monday, April 13, 2009
Wall Street Emperor reports, sans appendage
In continuation of Wall Street's quarterly fantasy role playing game known as "gumptions and braggins", the Q1 Financial reporting charade I mean parade continues unabated with Wall Street Prince of Darkness firm Goldman Sachs reporting what looked like a blowout quarter until you read past the headlines to find that Goldman would have missed Analyst Estimates( oh the Horror!) if they stuck to their normal quarterly reporting cycle of Dec-Feb.

Is it any wonder that Goldman Lawyers are busy suing the new blogging site dedicated to uncovering their economically toxic machinations? http://www.goldmansachs666.com

It's unclear whether or not they are suing due to the said site's reference to Goldman or to the number of the Beast or do they hold the rights to both?

Not only did TARP bail out Goldman Sachs to the tune of around 25 Billion, but it also allowed them to skip their $2.15 per share/ 1 Billion loss incurred during December.( Isn't 1 Billion too round a number? hmmm...)

How are they allowed to get away with this you ask?

In our increasingly fictitious/fascist collusive Government/Media/Corporate environment, apparently being allowed to convert into a Bank holding company can allow you to skip a bad month if you choose to and you get a free pass from everybody including the media.

Why should the media shine a light to expose the truth yadda yadda yadda..... just give me my money and you can put my name next to the byline.

Out of more than 10 reports from mainstream financial media sources,

http://finance.yahoo.com/q/h?s=GS&t=2009-04-13T21:08:30

I've only noticed one glance over the "orphan" month of December 2008:

"Shifting the start of its fiscal year certainly helped the bank's overall results, said Denise Valentine, senior analyst at Aite Group, a Boston-based research firm.

"It's a little bit of fancy footwork, but for the market as a whole it's good news and it was needed," she said. "When your star does well or does what is expected, you breathe a little easier."

source: http://news.yahoo.com/s/ap/20090413/ap_on_bi_ge/earns_goldman_sachs

"Fancy footwork" You say? or is your job on the line if you say what you really mean about Goldman Sachs' accounting trickery?

Not only is Goldman Sachs seemingly allowed to report fictitious "mark to market" results that can only be generously referred to as "mark to fantasy" based on relaxed financial reporting regulations, now they can also skip reporting whole months altogether.

What's next in this rigged game?

Queue generic CFO voice: "Ladies and Gentlemen, we are proud to announce record profits this quarter and every quarter into the foreseeable future now that we are allowed to spin off our losing months into separate entities according to TARP...Sorry, I meant PRAT(Profit Realization Accretion Transfer).

Voila, I've made our massive losses vanish into the SEC ether. Now hurry up and dilute the bagholders which allows us to pay the TARP back so I can get my damned bonus thanks to the PRAT act."


The quarterly reporting Emperor, apparently having no shame in addition to his lack of wardrobe, has decided to leave one of his sight for sore eyes limbs in the castle before venturing out into the open.

update: There is some reporting of the accounting loophole that caused Goldman to "smash" analysts estimates.

>>>>>>>>>>>>>>>>>>
by Dan Wilchins


"A RARE OPPORTUNITY

But Goldman's report was not all positive. The bank said its net loss for common shareholders was $1.03 billion in December, prompting some to question whether the change in financial years had allowed Goldman to dump much of its bad news into that one-off period and start afresh in the first quarter.

"December was a rare opportunity for both Goldman Sachs and Morgan Stanley," said Brad Hintz, an analyst at Sanford Bernstein. "A single month, without any comparisons that can be made with any other months, so none of us will ever know what goes into the month of December. It's one of those rare opportunities that CFOs dream about." Hintz is a former Lehman Brothers chief financial officer.

The bank said in January that it recorded a roughly $850 million loss from loans extended to units of chemicals company LyondellBasell in December, though the units filed for bankruptcy in January.

Between the December losses and the subsequent profit, Goldman's tangible book value per common share was essentially unchanged from the end of November, at $88.02, the bank said. Tangible common equity is a measure of the bank's net worth, ignoring intangible assets such as goodwill.

A measure of the bank's trading risk, average daily value-at-risk, surged to $240 million in the first quarter of 2009, compared with $157 million for the three months ended February 28, 2008, implying that the bank took more trading risk."
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http://finance.yahoo.com/news/Goldman-beats-forecasts-to-rb-14915717.html

It is good to know that there are still some reporters like Dan Wilchins with enough backbone who are digging deeper but unfortunately for every one sentient report, there are 10 mindless company PR rehashes that drown them out.

The question to ask on the conference call in a couple of hours is how much they made in profit in their march 2009 quarter since it is taking place of their orphaned 1 Billion loss Dec 2008.

A safe estimate based on the frozen credit markets might imply that their Dec 2008 loss would have wiped out their profits from Jan and Feb of 2009 leaving them missing Analyst estimates by a country mile instead of crushing them.

But then again, we are not in the midst of a financial based economic collapse in spite of the accounting gimmicks of Wall Street firms but due primarily to the lax accounting standards that allow such chicanery to exist.

Another piece of irony is that Goldman made most of their profits using the same tactics of excessive leverage that have led to the horrendous tax payer money bailout of these bankers and it does not seem these bankers have learned any lessons about risk and leverage.

How long can they continue the same old same old while fleecing the public?

We shall see.

(With thanks to AB)

Economics: Soros Speaks To Reuters And Tech Ticker And States That "I'm Not Good At Predicting Markets!"

Legendary investor George Soros is asked questions by a roundtable of journalists. He expects greenshoots to begin to appear not this year but in 2010.

Its a fascinating and sobering 13 minutes.




His next interview was with Tech Ticker where he stated that "the danger of collapse has passed," but that the stock rally is not sustainable.

The Crisis: The Legacy Of The G20 By Gareth Milliams

The G20 conference was always going to be success. This was preordained. Conversely, previous to the first day, China and France took clear positions that they either softened or were virtually ignored once the conference began. These pre-battle shots across the bow were local politics designed to appeal to their own respective electorates or more accurately in China's case, proletariat. It was merely theatre. Like all of these shindigs, most of the spade work was done by the advance negotiating teams, leaving the politicians to just craft nuance.

However, the positions taken by these major actors did emphasise the comparative weakness of the Anglo Saxon nations. Overly dependent upon our banking sectors we had sacrificed manufacturing real goods for esoteric financial instruments and brought the world down with us. President Lula of Brazil famously said that the crisis had, "white skin, blonde hair and blue eyes".

The big announcement was the $1.2tr donated to the IMF, but much of that was promised way before the G20 (such as the $100bn from Japan and $40bn from China). Requests from Britain and the United States for more radical European stimulus packages were refused by the French and Germans. It seems that the Europeans still believe that the price for their lukewarm support is that the US does all the hard work whilst they sit on the sidelines. They consider this crisis to be essentially Anglo Saxon and thus expect the Brits and Americans to do all of the heavy lifting (this is despite major exposure to SIV's and CDS's for Deutsche Bank, BNPP et al).

China did not make too much of the purported new reserve currency. It was (as I had said previously) pure political positioning. But don't be surprised if in the future, you see a repegging of the Yuan and a more aggressive use of the Renminbi as a regional currency or alternative to the US dollar. However, a global basket of currencies would be very difficult to achieve and would ratchet up the powers of the IMF to an unacceptable level. It helps its proponents that the present boss of the IMF is Dominique Strauss Kahn, an unreconstructed French socialist.

So what will happen to the Chinese currency?

According to Forbes:

China sets the yuan's value based on a narrow range of fluctuation against a basket of currencies, including the dollar, euro, yen and won, and does not disclose the different weights assigned to each currency. But, using new statistical methods that take into account concurrently the movements in exchange rates among the reference currencies, the change in the weighting of each foreign currency over time can be inferred. What Harvard economist Jeffrey Frankel has found is that, after Beijing de-pegged from the dollar in 2005, the yuan eventually became equally weighted between the dollar and the euro. In fact, the yuan's 20% appreciation against the dollar over the next three years to 2008 mostly reflected the euro's gain vis-a-vis the dollar.

But, as the global financial crisis unfolded and the dollar began to rebound against the euro, Beijing started by May 2008 to move the yuan back toward giving primary weighting to the dollar, a move that prevented the yuan from falling against the greenback. In fact, in the period from September 2008 to February 2009, Beijing's currency regime "has come full circle, virtually back to what it was in late 2005," said Frankel, who is the director of the Program in International Finance and Macroeconomics at the National Bureau of Economic Research. In the first two months of this year, in particular, the yuan apparently gave full weighting to the dollar. A report last Wednesday by Morgan Stanley similarly observed a "new renminbi [yuan] regime featuring a quasi-hard-peg to the U.S. dollar

This pragmatic repegging makes absolute sense for the Chinese as they look to protect their dollar assets against their own yuan.

China has unprecedented political strength right now. It is flexing its muscles, but it does not threaten, it negotiates. It looks not to dominate but to be accepted as an equal.

Much of the success of the G20 was due to the flexibility of their positions."At the summit, Hu Jin Tao said China was willing to work with other countries to deal with the crisis as a "responsible member of the international society". Hu said: "All countries are on board the huge boat of the world economy. When this boat is riding into the storm, all members on it must work together to steer it out of turmoil."

The world that we have left behind and the one that we journey toward are quite different. Anglo Saxon hegemony is coming to an end. The next ten years will define the west for the next century. The legacy of the G20 is that the global reformation began in London last week.

The Crisis: A Quick Thought By Gareth Milliams

Could China be preparing to launch the Renminbi as a convertible currency?

Beijing has signed Rmb650bn ($95bn, €72bn, £67bn) of deals since December with Malaysia, South Korea, Hong Kong, Belarus, Indonesia and, now, Argentina in an attempt to unblock trade financing that has been severely curtailed by the crisis.

I think it likely that the dollars position as the worlds reserve currency will be under threat over the next few days. Whilst I do not expect the dollar doubters to prevail, it makes sense that Russia and China use its underperformance as leverage in their negotiations.

For the first time since the end of the cold war, America's position as the global hyperpower is under question. To get what it needs to conclude the G20 succesfully, the United States will have to make concessions. The only questions are; to whom, what and how much?

China is on the cusp of becoming a super power. Russia is an authoritarian state and a defeated superpower, dependent upon a high oil price to keep its promises to its people and order on its streets. Both of these nations have great incentive (politically and historically) to declare victory over the US at the G20.

Their choice of language in their final communique's at conference end will be interesting. But what will fascinate will be what has been stated implicitly.

I think that the basket of currencies proposal as an alternative to the US dollar is a 'stalking horse' for the eventual launch of the Renminbi on the world markets.

According to the FT of March 31st, "Economists say the SDR plan is unfeasible for now but see Beijing's currency swap deals as pieces in a -jigsaw designed to promote wider international use of the renminbi, starting with making it more acceptable for trade and aiming at establishing it as a regional reserve currency in Asia, something that would also enhance China's political clout.

This weekend could be a defining moment in the short history of this century.