The downfall of a hero or one of the most surreal headlines ever?
Wednesday, 23 July 2008
Friday, 11 July 2008
The Markets: From Those Nice People At Casey Research...
 | July 10, 2008 |
It has become fashionable for commentators to sound like they know what they are talking about by saying that the economy of China and the U.S. are going to "decouple." They ramble on about China developing its own consumer demand and not needing the U.S. market for their exports. Even if the U.S. economy goes into serious recession, they say, China – and other fast-developing nations – will continue to prosper decoupled from U.S. dominance.
The data, however, tell a different story. Since November 2007, the iShares FTSE/Xinhua China 25 Index (NYSE: FXI) measuring the 25 biggest Chinese companies has matched the movement of the S&P 500 with eerie similarity. The Chinese majors (their 'red chip' stocks, if you will) have, not surprisingly, been more volatile, their highs higher and their lows lower; however, the chart above shows how China’s industry has moved in a tightly synchronized pattern with an ETF that has two times leverage to the S&P 500 (the ProShares Ultra S&P500; NYSE.SSO).
In other words, the Chinese economy as measured by its biggest companies has moved in tandem with U.S. economy and its blue chip stalwarts. The only difference is that China’s ups and downs have been more extreme.
This is why we choose to remain focused on facts, instead of listening to pundits. As Bud Conrad says, data trumps blather.
Tuesday, 8 July 2008
The Markets: "There's gold in dem dar hills"...Or is there?
Nearly all of my portfolio clients have nominated to sit out the next few weeks and wait for the fog from this bear market to lift. We see no reason to participate in a market that appears to have no leadership or direction (other than down).
August is coming and with it is the most dangerous trading environment of the year. It can be highly volatile at the best of times, but this year the market ambiance is potentially highly toxic. Mortgage based financials such as Fanny Mae and Freddy Mac are under particular pressure after Lehman Brothers said new accounting requirements might force them to raise more capital.
Since their highly generous downgrades, financial and mortgage guarantors Ambac and MBI claim to have enough funds to cover their commitments. However, should they face further downgrades that would become doubtful.
"So what has all of this to do with gold?", I hear you whine (whilst losing the will to live). The general stockmarket is very sensitive to the plight of the financials. If they continue to tumble, the equity market as a whole will fall with them, including mining stocks. Physical gold will become more attractive and may even head north of $950 per ounce again.
Should this posting prove correct, it'll stay on the blog as a manifestation and proof of my genius. Should I be wrong, it'll disappear faster than Lord Lucan.
Below is an article from Seeking Alpha related to this subject.
August is coming and with it is the most dangerous trading environment of the year. It can be highly volatile at the best of times, but this year the market ambiance is potentially highly toxic. Mortgage based financials such as Fanny Mae and Freddy Mac are under particular pressure after Lehman Brothers said new accounting requirements might force them to raise more capital.
Since their highly generous downgrades, financial and mortgage guarantors Ambac and MBI claim to have enough funds to cover their commitments. However, should they face further downgrades that would become doubtful.
"So what has all of this to do with gold?", I hear you whine (whilst losing the will to live). The general stockmarket is very sensitive to the plight of the financials. If they continue to tumble, the equity market as a whole will fall with them, including mining stocks. Physical gold will become more attractive and may even head north of $950 per ounce again.
Should this posting prove correct, it'll stay on the blog as a manifestation and proof of my genius. Should I be wrong, it'll disappear faster than Lord Lucan.
Below is an article from Seeking Alpha related to this subject.
Searching for the 'Golden Goose'?
For years we have been speaking and writing about the massive bind the Fed now finds itself in. With price inflation rising – read as food and energy skyrocketing -- and little hope for nominal interest rate increases – read as housing too weak for higher rates – negative real interest rates (nominal rates less inflation) looks set to persist for some time.
Now why is that important?
Firstly, not only do negative real interest rates make holding non-income producing assets such as gold attractive, but an environment where inflation is allowed to have its way and economic growth is sick (stagflation), is tantamount to the perfect storm for gold stocks and other precious metals!
So what do you do?
You load up on assets leveraged to the price of gold – namely gold stocks.
Wrong!
As old gold bulls, we have seen this situation before. A low growth high inflationary environment is poisonous for equities – gold stocks included. And whilst the storm persist in the equity markets it will either drag gold stocks lower or prevent them from fully expressing themselves to the upside! That’s why we encourage investors to have a portion of their portfolio exposed directly to the metal either through ETFs, futures or physical:
Chart 1 - Since July 2007 the S&P (red) has been moving lower and gold the metal (green) has outperformed gold equitites (red and black)
Hunting Elephants
There is no doubt that an equity risk premium has weighed heavily on precious metal equities and that stabilization in equity markets would certainly benefit such stocks. But that’s old news.
What we consider interesting and downright fascinating is the nature of gold equities investors should be focusing on over the next year.
Conventional wisdom is that the juniors are where the investment gems lie. We don’t disagree – entirely.
Over the longer term (3-5 years) the fundamentals certainly favour late stage explorers and emerging producers, but an overlooked market dynamic causes us to lean rather towards their larger cousins.
As we have alluded to above, gold stocks and other precious metal equities are equities and more often than not subjected to the same forces as the general equity market. One such force is the veritable wall of passive indexed money, by some accounts amounting to several trillions of dollars.
And what’s the passive indexed money saying?
Chart 2 - large caps now outperforming small caps
Firstly, it’s saying that the long period of outperformance by small caps versus large caps (chart 2 is falling) bottomed in 2006 and the trend has since been towards large caps.
Secondly:
Chart 3 - large cap growth has outperformed value since late 2006
The trend in large caps from value to growth (chart 3 is falling) also looks to have bottomed around late 2006. We define growth as earnings growth of +15% p.a. and/or PEG ratio of around 1.5.
These trends resonated well with us as large cap gold producers beat out small cap miners over the last year leaving many a gold stock speculator highly frustrated.
Where to find such elephants that will benefit from these trends?
We would begin by looking at components of the Gold Stocks ETF (GDX) or the Amex Gold Bugs Index (HUI).
Monday, 7 July 2008
Crisis 2008: The Worldwide Food Shortage
For many years, we have known of the damage that the US Farm Bill and the EU Common Agricultural Policy have done to poorer non-subsidised farmers in the third world. It is an indictment upon us all that it is cheaper for a Ghanaian consumer to buy American tomatoes than those locally grown in Ghana.
We talk of the flood of Chinese goods coming into our countries when we have been flooding the poorer nations with our produce for the last 25 years.
Then just when the global demand for seed and corn begins to exceed production, we divert it away from the dinner table in order to fuel cars. The true cost of ethanol production is massive. Just consider the use of water:
From USA Today:
Ethanol is also becoming less sustainable politically. John McCain opposes it openly and Barack Obama will face pressure to do the same. In the EU, Britain has been joined by the Scandinavians in their opposition to Ethanol.
This week the G8 meet here in Japan, with world hunger on the agenda. The time has come to stop feeding our SUV's in order to feed people.
Just as importantly, welfare for major agricultural corporations and wealthy farmers must stop. Self sufficiency in food production will become more key over the next few years for the poorer countries.
Below is todays editorial from the New York Times:
Editorial
We talk of the flood of Chinese goods coming into our countries when we have been flooding the poorer nations with our produce for the last 25 years.
Then just when the global demand for seed and corn begins to exceed production, we divert it away from the dinner table in order to fuel cars. The true cost of ethanol production is massive. Just consider the use of water:
From USA Today:
"The figures cited by both Martin and Pimentel include only a plant's production of ethanol, not the water it takes to grow corn. After adding that, about 1,700 gallons are needed to produce every gallon of ethanol, Pimentel said.
The entire water-use picture, coupled with the fuel it takes to produce ethanol, makes long-term, mass production of ethanol unsustainable, Pimentel said.
"I wish it were sustainable, I'm an agriculturalist," he said. "I wish this whole ethanol deal was a major benefit, but you've got to be a scientist first and an agriculturalist second."
Newsweek reported:
In the arid regions of the American West,water has always been a precious liquid gold. But in Adamson's home of Yuma County, Colorado, two hours east of Denver, the stakes just got higher. Thanks to the boom in ethanol production spurred by green-energy concerns, corn farmers in Yuma County—one of the top three corn-producing counties in the country—are enjoying a new prosperity.But the green-fuel boom touted as a clean, eco-friendly alternative to gasoline is proving to have its own dirty costs. Growing corn demands lots of water, and, in eastern Colorado, this means intensive irrigation from an already stressed water table, the great Ogallala Aquifer. One sign of trouble: in just the past two decades, farmers tapping into the local aquifers have helped to shorten the North Fork of the Republican River, which starts in Yuma County, by 10 miles. The ethanol boom will only hasten the drop further, say scientist and engineers studying the aquifers. The region's water shortage has pitted water-hungry farmers against one another. And lurking in the cornrows: lawsuits and interstate water squabbles could shut down eastern Colorado's estimated $500 million annual ethanol bonanza with the swing of a judge's gavel. Collectively, "[ethanol] is clearly not sustainable," says Jerald Schnoor, a professor of engineering at the University of Iowa and co-chairman of an October 2007 National Research Council study for Congress that was critical of ethanol. "Production will have serious impacts in water-stressed regions." And in eastern Colorado, there's lots of water stress.
Michael Grunwald reports that one person could be fed 365 days "on the corn needed to fill an ethanol-fueled SUV". He further reports that though "hyped as an eco-friendly fuel, ethanol increases global warming, destroys forests and inflates food prices." Environmentalists, livestock farmers, and opponents of subsidies say that increased ethanol production won't meet energy goals and may damage the environment, while at the same time causing worldwide food prices to soar. Some of the controversial subsidies in the past have included more than $10 billion to Archer Daniels Midland since 1980. Critics also speculate that as ethanol is more widely used, changing irrigation practices could greatly increase pressure on water resources. In October 2007, 28 environmental groups decried the Renewable Fuels Standard (RFS), a legislative effort intended to increase ethanol production, and said that the measure will "lead to substantial environmental damage and a system of biofuels production that will not benefit family farmers...will not promote sustainable agriculture and will not mitigate global climate change."Ethanol is also becoming less sustainable politically. John McCain opposes it openly and Barack Obama will face pressure to do the same. In the EU, Britain has been joined by the Scandinavians in their opposition to Ethanol.
This week the G8 meet here in Japan, with world hunger on the agenda. The time has come to stop feeding our SUV's in order to feed people.
Just as importantly, welfare for major agricultural corporations and wealthy farmers must stop. Self sufficiency in food production will become more key over the next few years for the poorer countries.
Below is todays editorial from the New York Times:
Man-Made Hunger
To a large degree, this crisis is man-made — the result of misguided energy and farm policies. When President Bush and other heads of state of the Group of 8 leading industrial nations meet in Japan this week, they must accept their full share of responsibility and lay out clearly what they will do to address this crisis.
To start, they must live up to their 2005 commitment to vastly increase aid to the poorest countries. And they must push other wealthy countries, like those in the Middle East, to help too. That will not be enough. They must also commit to reduce, or even better, do away with their most egregious agricultural and energy subsidies, which contribute to the spread of hunger throughout the world.
In the last year, the price of corn has risen 70 percent; wheat 55 percent; rice 160 percent. The World Bank estimates that for a group of 41 poor countries the combined shock of rising prices of food, oil and other raw materials over the past 18 months will cost them between 3 and 10 percent of their annual economic output.
Some of the causes are out of governments’ control, including the rising cost of energy and fertilizer, and drought in food exporters like Australia. Higher consumption of animal protein in China and India has also driven demand for feed grains. Wrongheaded policies among rich and poor nations are also playing a big role.
Of those, perhaps the most wrongheaded are the tangle of subsidies, mandates and tariffs to encourage the production of biofuels from crops in the United States and the European Union. According to the World Bank, almost all of the growth in global corn production from 2004 to 2007 was devoted to American ethanol production — pushing up corn and animal feed prices and prompting farmers to switch from other crops to corn.
Long-standing farm subsidies in the rich world have also contributed to the crisis, ruining farmers in poor countries and depressing agricultural investment.
Rich countries are not the only culprits. At least 30 developing countries have imposed restrictions or bans on the export of foodstuffs. Importing countries are now stockpiling supplies, which takes more food from global markets. Export barriers also reduce farmers’ profits and discourage them from investing in more production.
So far there is no sign that the leaders of the developed countries are ready to do what is needed. The United States and Europe have refused to curtail their bio-fuel subsidies or their lavish farm subsidies. They are also falling far short of their aid commitments.
At the 2005 G8 summit meeting, leaders said that by 2010 wealthier nations would increase annual development aid to poor countries by $50 billion. Yet aid has increased by only $11 billion. And there is suspicion that the G8 nations, who were to provide the lion’s share of the increase, want to wiggle out of their commitment.
We welcome President Bush’s pledge to provide $5 billion this year and next to “fight global hunger,” but much more must be done. The United States remains the stingiest of rich nations when it come to foreign aid.
In a letter to heads of state of the G8, Robert Zoellick, the World Bank president, estimated that the bank needs $3.5 billion to provide immediate food aid and seed and fertilizer in poor countries. The International Monetary Fund and the World Food Program estimate they need $6.5 billion more in the short term to help feed vulnerable populations. This does not even count the need for essential longer-term investments to increase farm productivity in poor nations in Africa and elsewhere.
As Mr. Zoellick wrote, the food crisis is a test of the world’s willingness to help the most vulnerable. The leaders gathered in Japan must rise to the challenge.
Friday, 4 July 2008
Economics: The ECB is from Mars and the Fed is from Venus...From the WSJ
July 3, 2008, 10:41 am
ECB and Fed: Worlds Apart?
The European Central Bank, as expected, raised interest rates a quarter point to 4.25% in a bid to attack inflation despite signs of weakening growth. The U.S. Federal Reserve, meanwhile, appears to be on hold for the coming months — despite rising inflation concerns — to give the economy more time to recover from the turmoil in housing, credit, labor and energy markets. Their divergence might be explained by the central banks’ mandates: the ECB is charged with maintaining price stability first, while the Fed aims to achieve low inflation and optimal growth at the same time.
But the difference in mandates or even economic circumstances between the U.S. and Europe don’t quite account for the divide, Deutsche Bank economists say in a research note this week titled “ECB is from Mars and Fed is from Venus.” As chief economist Peter Hooper explains, “The two central banks are reacting to relatively similar economic and financial circumstances as if they are from different planets, with the ECB’s approach akin to a frontal attack on inflation that the Roman god Mars would have approved of, while the Fed is being more cautious and patient, in a manner the goddess Venus would have endorsed.”
The Deutsche Bank economists say the divergence comes from the two regions’ different historical experiences in dealing with the shock from deflating asset prices and rising inflation.
In the United States: “The traumatic experience of the deflation and extreme levels of unemployment that occurred during the Great Depression in the 1930s – and the Fed’s mistakes during this period — play a prominent role in the discussion of monetary policy by both practitioners and academics. Accordingly, Fed policy makers have been very sensitive to the risk of asset price collapses and debt deflation (note, for example, the Fed’s reaction to the 1987 stock market crash, the [Long-Term Capital Management] crisis, and the burst of the dot-com bubble).”
In Europe: “Probably the most prominent economic trauma in Europe were Germany’s hyperinflation after World War I and currency reform after World War II. Throughout its existence the Bundesbank was extremely sensitive to inflation pressures, and willing to take significant risks with growth to keep inflation in check (note, for example, the Bundesbank’s reaction to the two oil shocks of the 1970s and its reluctance to follow the Fed in 1987). German sensitivity to inflation risks of course had a strong influence on the institutional design of the ECB and more recently on the implementation of the euro zone’s monetary policy.”
Of course, Fed officials in recent weeks have ratcheted up their talk about “vigilance” of inflation and inflation expectations. But most policy makers appear inclined to wait as long as they can to give their rate cuts of the last year a chance to work. And the ECB won’t necessarily be following today’s rate increase with more tightening. The Deutsche Bank economists say the the transatlantic policy divergence will diminish when weaker growth in Europe lowers fears at the ECB and even leads to rate cuts in 2009, while the Fed remains on hold. “What now looks like the beginning of a new transatlantic divergence of monetary policy,” they write, “will in our view eventually look like a blip in the time-tested relationship of the Fed leading and European central banks following.” - Sudeep Reddy
Tuesday, 1 July 2008
Economics: The US Economy In 2008 Charted By The WSJ
Consumer confidence is low, prices are high, unemployment is up. The existing housing market is crashing and starts are down.
The Fed wants to fight inflation but if they do raise interest rates, this will put further pressure upon home owners.
The oil price is (as of today) over $142 and rising with the possible threat of war between Israel and Iran.
The financials are looking even weaker with MBIA and AMBAC downgraded. Fitch says that their positions are looking 'tenuous'.
Lehman Brothers stock is falling through the floor on reports that it will be sold on to Barclays.
We've just been through a bear rally in equities without the expected retracing and the credit markets have just had the worst quarter in six years.
Be scared. Be very scared....
The Fed wants to fight inflation but if they do raise interest rates, this will put further pressure upon home owners.
The oil price is (as of today) over $142 and rising with the possible threat of war between Israel and Iran.
The financials are looking even weaker with MBIA and AMBAC downgraded. Fitch says that their positions are looking 'tenuous'.
Lehman Brothers stock is falling through the floor on reports that it will be sold on to Barclays.
We've just been through a bear rally in equities without the expected retracing and the credit markets have just had the worst quarter in six years.
Be scared. Be very scared....
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| Inflation | |
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| International Trade | |
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Monday, 30 June 2008
Saturday, 28 June 2008
Media: O'Reilly Outfoxed
I know that this is old and it may even be irrelevant, but watching O'Reilly getting his clock cleaned by TV legend Phil Donahue is just so good to watch....
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
We constantly hear that American's need to save more in order to make them less dependent upon foreign governments buying US debt. But the truth is, is that the high spending American consumer drives the world's export markets. So when the US consumer confidence index falls by more than 50% over a year (from 111.9 to 50.4) then its becomes time to worry.
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.
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
Home Prices See Sharp Decline;
Fed Is Likely to Hold Interest Rates Steady
Fed Is Likely to Hold Interest Rates Steady
By KELLY EVANS and ANTON TROIANOVSKI
June 25, 2008
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]](https://lh3.googleusercontent.com/blogger_img_proxy/AEn0k_tg783WWAOAPC4fhrw6vpVTqvqGPbwmBdEmzs24EebWoqd5ZULh3F4fj2YL8wOm6_NGZ_RVbgDQg1Z45DRmcDidCUlmh3sbXOQnam9nyBupbP8_0SaY6gogUzCZtajYJqgiytICBVhG6e1rIgsqIg=s0-d) |
| 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...
This is pure class. Part of Jimi's greatness was that he sounded better live than in the studio and this is one of the best performances ever. What's really cool is when he stops singing "this rubbish" (Hey Joe!) and plays the intro of Cream's, Sunshine Of Your Love.
At 2.02 mins did I detect Jimi riffing The Beatles, "I Feel fine"?
And all this on the Lulu show...
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 Scots are a dour bunch, always happier under dark lugubrious clouds than bright blue skies. But they also make fine conservative bankers. One of the world's most respected institutions is the Royal bank of Scotland.
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:
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.
By Ambrose Evans-Pritchard, International Business Editor
By Ambrose Evans-Pritchard, International Business Editor
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
Last Updated: 12:19am BST 19/06/2008
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.
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"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
Last Updated: 1:29am BST 17/06/2008
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.
Morgan Stanley doubts that Europe's monetary union will break up under pressure, but it warns that corked pressures will have to find release one way or another.
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..
The young Alan Greenspan was part of the Ayn Rand inner circle. In 1967, when she published her first non-fiction book, "Capitalism, The Unknown Ideal", she included this essay by 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.
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....
So with violently spiking oil prices and an anaemic, weak US dollar, Ben Bernanke warned of the dangers of inflation and thus the market reacted accordingly.
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.
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...
The name of this blog is a bit cheesy...But after more than 20 years in the business, I still just want to be the best.
Naming the blog 'The Constant Broker' wasn't an ego thing, it was aspirational.
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...
In the 1990's we had the Internet bubble and now in the noughties we have massive increases in the price of oil and food. But are these bubbles or indications of long term trends?
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.
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:
If food becomes a nationalist issue, it could become a catalyst for further unrest and maybe even war.
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....
It seemed like a good idea at 11pm on a Thursday evening, but will it last or will I get bored after a week?
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.
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.
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