Category: investments

The Fed is not the answer

by Michael K. Farr
08-May (CNBC) — Prior to the Federal Reserve’s September meeting last year, we went against the consensus opinion and said that the Fed would postpone its decision to taper. The basis for our position was not the Fed’s ongoing concern about the labor market, but rather the evidence of disinflationary pressures across the economy. The Fed is charged with pursuing policies that not only maximize employment, but that also promote price stability. And based on its preferred measures of inflation, the Fed would be unwilling to begin the taper process until it saw more data supporting the consensus opinion that the recent disinflation was transitory.

While we turned out to be right about the deferral of the taper, we also argued that the Fed’s assessment of “inflation” was flawed. Not only does the Fed essentially disregard the prices of food and energy (which disproportionately affects low- and moderate-income consumers), but the central bank also fails to consider asset price inflation.
Janet Yellen, chair of the Federal Reserve, speaks at The Economic Club of New York on April 16, 2014.

Virtually everyone agrees that the Fed’s easy-money policies have directly contributed to a huge rebound in stocks and housing prices. In fact, aggregate household net worth has increased by $25 trillion to over $80 trillion (an all-time high) since the first quarter of 2009. But the Fed’s goal was not simply to make rich people more rich (which they did). Rather, they are operating under the misguided assumption that higher asset prices will, by some miracle of trickle-down economics, lead to plentiful jobs and higher incomes for the masses.

…The Fed’s unwillingness to extricate itself from the markets is a very worrisome trend that has had devastating outcomes in the not-too-distant past. Effectively, the central bank is attempting to induce inflation in the broader economy by boosting asset prices by tens of trillions of dollars. Nothing very positive can come out of this experiment. The best case is that baby boomers, wary of the stock market, will have to accept much smaller returns going forward if and when they begin to embrace stocks again. The worst case scenario is that another bubble will burst. Either way, we don’t believe the Fed’s continued meddling will end well.

[source]

Posted in Central Banks, investments, Monetary Policy |

Klarman warns of impending asset price bubble

09-Mar (Financial Times) — One of the world’s most respected investors has raised the alarm over a looming asset price bubble, calling out “nosebleed valuations” in technology shares like Netflix and Tesla Motors and warning of the potential for a brutal correction across financial markets.

Seth Klarman, the publicity-shy head of the $27bn Baupost Group whose investment opinions have attracted almost a cult-like following, said that investors were underplaying risk and were not prepared for an end to central banks reversing a five-year experiment in ultra-loose money.

While noting that he could not predict exactly when a significant market correction would occur, Mr Klarman wrote in a private letter to clients: “When the markets reverse, everything investors thought they knew will be turned upside down and inside out. ‘Buy the dips’ will be replaced with ‘what was I thinking?’ . . .  Anyone who is poorly positioned and ill-prepared will find there’s a long way to fall. Few, if any, will escape unscathed.”

[source]

Posted in investments |

Testing times for China’s foreign exchange reserves

18-Feb (China Daily) — China’s foreign exchange reserves, the largest in the world, reached a record $3.82 trillion last year.

Since China’s reserves started accumulating more than a decade ago, the increase has been widely regarded as an encouraging and beneficial development. With China gradually becoming the “world’s factory” and posting an increasing trade surplus in the past decade, Chinese reserves ballooned. During that period, the Chinese felt positive about growing reserves. But now they are feeling increasingly nervous about the situation.

With the rolling out of the three stages of quantitative easing, the Chinese realized with great disappointment that the real value of their reserves had depreciated considerably due to the United States’ monetary policy, which is beyond the Chinese government’s control.

The US government budget limit problem last October once again highlighted the possibility of a US default, which would not only affect its creditworthiness and the cost of US government financing but also the value of China’s reserves and the confidence of the country, which is the largest investor in US government securities.

Not only would China lose due to the reduced value of its investment in US Treasury notes and related assets, but it also could be criticized for allowing the US government to maintain low interest rates and release unprecedented amounts of liquidity into the global economy.

[source]

PG View: You think their disappointed now? I fear they haven’t seen anything yet…

Posted in Central Banks, Debt, investments, Monetary Policy |

Crash of 2014: Like 1929, you’ll never hear it coming

19-Feb (MarketWatch) — Imagine, you’re in the exciting new 21st century. Civilization still exists on Planet Earth. Wall Street’s still in business. But you’re still asking: Why can’t we hear the next crash? Are we deaf? No. The warnings are always long and loud. So why can’t we “hear” them? In fact, it’ll get worse. Here’s why …

Yes, crashes will keep coming: History lesson: The 1929 crash led to the Great Depression. On March 20, 2000 we warned: “Next crash? Sorry, you’ll never hear it coming.” Few listened. The 1990’s dot-com mania led to Wall Street losing $8 trillion in the 2000-2003 bear-market recession. Nothing changed. Another round of warnings roared from 2004 into 2008. Few listened. Another crash. Wall Street lost even more, $10 trillion.

Through much of 2013, pundits warned how bad the market really was. Then in December the Wall Street Journal revealed that after 13 years in negative territory, Wall Street’s “Lost Decade” (which lasted from the 2000 crash to the end of 2013), finally broke even on an inflation-adjusted basis.
Fearing 1929, investor sentiment swung wildly through holidays

And here we are panicking again, fearing that 1929 will repeat in 2014: Wall Street, Main Street, tens of millions of Americans, the Fed, SEC, all of Washington. Yes, outward calm. Inside? You guessed it, total Panicville.

…Early warnings of a crash are dismissed over and over (“just a temporary correction”). They gradually numb us about the inevitable. Time after time we forget history’s lessons. Until finally a big surprise catches us totally off-guard.

[source]

PG View: Many of our clients have been taking some money off the table in the stock market in recent weeks, and bolstering their gold holdings. It’s never too early to get your hedge on.

Posted in investments |

Yes, I Still Think There’s A Decent Chance Of A Stock Market Crash — And, No, The Recent Recovery Doesn’t Reduce My Concern

by Henry Blodget
19-Feb (BusinessInsider) — After a brief 5%-10% swoon over the past month, the stock market has popped right back to its all-time highs.

I own stocks, so that’s good news for me.

But I still think there’s a decent chance that we’ll see a major decline in stock prices over the next year or two (a 30%-50% price drop), and the recent market moves don’t change that. And I’m still very confident that stock performance from current prices will be lousy over the next 7-10 years.

How lousy?

I think we’ll see average returns of about 2.5% per year for the next 10 years, a far cry from the 10% long-term average.

…Stocks are now very expensive according to every valid long-term valuation measure that I look at. In the past, when stocks have reached these levels on these measures, they have produced lousy long-term returns. And I think the same thing will happen this time.

…And, right now, you may be unnerved to learn, stocks are more expensive than they have been at any time in the past century, with the exception of a few months in 1929 and a few years around the massive bull-market peak in 1999 and 2000.

…And also don’t delude yourself into thinking that we need a “catalyst” for a crash. We don’t.

[source]

Posted in investments |

Capital Flows

18-Feb (Across the Curve) — This is an analysis of the monthly Treasury report on international capital flows via Gennadiy Goldberg at TD Securities. China was a huge seller and foreigners were net sellers of agencies and corporates and equities.

Via TDSecurities:

The December TIC capital flows report showed net long-term outflows of $45.9B from US securities – the largest monthly outflow since June 2013.

…Foreign official flows showed very strong net selling in December, with China shedding an enormous $47.8B and Japan selling $3.9B. It is worth highlighting that Caribbean accounts (a proxy for hedge funds) saw no change in Treasury holdings during the month, suggesting that Treasuries were largely well-positioned to receive the December tapering announcement.

[source]

Posted in Debt, investments |

ROSENBERG: The Murky Earnings Landscape Is A Bigger Issue Than The Fed Taper

18-Dec (BusinessInsider) — The Fed just announced that it will taper asset purchases to a monthly rate of $75 billion from the current $85 billion pace. But Gluskin Sheff’s David Rosenberg thinks there’s a bigger market issue at hand.

“Never mind the Fed taper — a much bigger issue, perhaps even obstacle, is the earnings landscape which has turned murky,” Rosenberg said in a note ahead of the Fed announcement. This is in part because a record 94 S&P 500 companies have issued earnings downgrades so far this quarter and only 12 have had positive pre-announcements. This 7.83x ratio is the worst in seven years.

[source]

Posted in Economy, investments |

They’re Planning the First Legal “Bank Robbery” in U.S. History

18-Dec (MoneyMorning) — So-called “bail-ins,” which give banks the right to dip into your savings to pay for their lousy financial decisions, have been on the table for years, ever since Cyprus tested the idea.

But they’re moving beyond the “testing phase” now.

The latest clue came from a seemingly benign banking conference on December 2, when one man revealed some frightening central government intentions.

And anyone taking careful notes understands the consequences.

They’re huge.

You see, the most direct impact will be felt by the biggest account holders. But the indirect impact will hit everyone.

401(k)s… IRAs… Individual brokerage accounts…

… Back in early November I told you your retirement account is fair game, and that you should protect yourself by becoming your own central bank. I also suggested there were several things you could do to protect your assets, like owning and investing in hard assets like gold, silver, energy, and real estate; by holding plenty of cash; and by holding some assets internationally.

The thing is, all of these are helpful strategies that can also help protect you against a future bail-in.

[source]

PG View: I would hazard that most depositors don’t view themselves as “investors” in their bank, and yet there seems to be a push to reclassify them as unsecured creditors. As this situation develops, it would be prudent to get some of one’s savings out of the banking system and into a hard asset, such as gold.

Posted in Central Banks, Debt, investments, Monetary Policy |

Nobel Prize winner warns of US stock market bubble

02-Dec (CNBC) — A sharp rise in U.S. equity prices could be leading to a dangerous bubble, according to one of the three Americans who won the 2013 Nobel prize for economics.

“I’m not sounding the alarm yet. But in many countries the stock price levels are high, and in many real estate markets prices have risen sharply…that could end badly.”

“I find the boom in the U.S. stock market most concerning,” Robert Shiller said in an interview with Germany’s Der Spiegel magazine published on Sunday.

He added that this was a key concern because the U.S. economy was “still weak and vulnerable”.

…At the ceremony in Sweden, Schiller told Reuters news agency that the Federal Reserve’s economic stimulus and growing market speculation were creating a “bubbly” property boom.

[source]

Posted in investments, Monetary Policy |

In The Future, You May Have To Pay The Bank To Hold Your Money

25-Nov (BusinessInsider) — The economy is stuck in a weak recovery and unemployment remains high, but the Federal Reserve long ago exhausted the normal tool it uses to spur economic growth.

Now, it is considering a policy change that could lead banks to charge depositors negative interest rates.

…In recent weeks, economist have discussed the idea of how to implement a negative interest rate while preventing people from hoarding paper currency. Economist Miles Kimball has discussed creating an electronic currency and having an exchange rate between it and dollar bills. Others have discussed going cashless and eliminating paper currency altogether.

[source]

PG View: If the banks are going to charge you to store your money, you should consider storing some of your wealth in gold.

Posted in investments, Monetary Policy |

Market already misses Bernanke

27-Jun (MSN Money) — Why did just talking about an end to the Federal Reserve’s program of buying $85 billion in Treasurys and mortgage-backed securities throw global markets into such chaos?

I don’t think you need to invoke “feral hogs” or imagine conspiracies by the gnomes of wherever to explain the global sell-off. It’s really quite simple.

Fed Chairman Ben Bernanke’s May 22 answer to a question after his congressional testimony marked the end of the “Bernanke put.” That put — what the financial markets have seen as the guarantee that the Federal Reserve would support asset prices — has been a key to this rally, which took the Standard & Poor’s 500 Index from 1,131 in September 2011 to 1,650 in May 2013.

Something, some guarantee from the world’s central banks and, most importantly, the Fed, has replaced it. It’s not like the Fed is about to abandon its support for the mortgage market, for example.

But right now, nobody knows what’s in the fine print of that guarantee, how good the guarantee is or how long it runs.

“When in doubt, get out” will rule huge hunks of global financial markets until the MBAs who crunch the numbers at the world’s big financial institutions feel they understand the new guarantee enough that they can plug it into their formulas.

[source]

Posted in Central Banks, investments, Monetary Policy, QE |

The 441 TRILLION Dollar Interest Rate Derivatives Time Bomb

24-Jun (The Economic Collapse Blog) — Do you want to know the primary reason why rapidly rising interest rates could take down the entire global financial system? Most people might think that it would be because the U.S. government would have to pay much more interest on the national debt. And yes, if the average rate of interest on U.S. government debt rose to just 6 percent (and it has actually been much higher in the past), the federal government would be paying out about a trillion dollars a year just in interest on the national debt. But that isn’t it.

Nor does the primary reason have to do with the fact that rapidly rising interest rates would impose massive losses on bond investors. At this point, it is being projected that if U.S. bond yields rise by an average of 3 percentage points, it will cause investors to lose a trillion dollars. Yes, that is a 1 with 12 zeroes after it ($1,000,000,000,000). But that is not the number one danger posed by rapidly rising interest rates either.

Rather, the number one reason why rapidly rising interest rates could cause the entire global financial system to crash is because there are more than 441 TRILLION dollars worth of interest rate derivatives sitting out there. This number comes directly from the Bank for International Settlements – the central bank of central banks. In other words, more than $441,000,000,000,000 has been bet on the movement of interest rates. Normally these bets do not cause a major problem because rates tend to move very slowly and the system stays balanced. But now rates are starting to skyrocket, and the sophisticated financial models used by derivatives traders do not account for this kind of movement.

[source]

Posted in Economy, investments |

Exit from the bond market turns into a stampede

25-Jun (NYT via CNBC) — Wall Street never thought it would be this bad.

Over the last two months, and particularly over the last two weeks, investors have been exiting their bond investments with unexpected ferocity, moves that continued through Monday.

A bond sell-off has been anticipated for years, given the long run of popularity that corporate and government bonds have enjoyed. But most strategists expected that investors would slowly transfer out of bonds, allowing interest rates to slowly drift up.

Instead, since the Federal Reserve chairman, Ben S. Bernanke, recently suggested that the strength of the economic recovery might allow the Fed to slow down its bond-buying program, waves of selling have convulsed the markets.

[source]

Posted in Debt, investments |

Growth outside QE required to curb distortions in asset prices

Regression
03-May (Financial Times) —We are all bond investors at the moment, and that is not ideal. As the calendar flipped into May this week, the S&P 500 notched up six straight months of gains, its best run since September 2009, and on Friday crowned it by surging beyond 1,600 for the first time.

Heady stuff for equity investors, but it’s a rally that defies the usual characteristics of a bull run, with leadership coming from quality defensive stocks that look like bonds. One only has to look at the performance of Johnson & Johnson, up more than 22 per cent this year, and well in front of the S&P 500’s 13 per cent rise, to see how investors are betting on quality companies that boost their dividends.

Some even term this the ‘SHUT’ rally, as companies in the Staples, Healthcare, Utilities and Telecom sectors have led from the front and remain in favour in spite of trading at lofty valuations, which should raise alarm.

[source]

PG View: While the DJIA ends the week near 15,000 and the S&P closed above 1600, a degree of caution is warranted. As investors celebrate these new highs in the stock market, it might be time to actually start bolstering your hedges. Think gold…

Posted in investments |

The Libor Scandal In Full Perspective

by Paul Craig Roberts
19-Jul (Institute for Political Economy) — The article about the Libor scandal, coauthored with Nomi Prins, received much attention, with Internet repostings, foreign translation, and video interviews. To further clarify the situation, this article brings to the forefront implications that might not be obvious to those without insider experience and knowledge.

The price of Treasury bonds is supported by the Federal Reserve’s large purchases. The Federal Reserve’s purchases are often misread as demand arising from a “flight to quality” due to concern about the EU sovereign debt problem and possible failure of the euro.

…The lower is Libor, the higher is the price or evaluations of floating-rate debt instruments, such as CDOs, and thus the stronger the banks’ balance sheets appear.

Does this mean that the US and UK financial systems can only be kept afloat by fraud that harms purchasers of interest rate swaps, which include municipalities advised by sellers of interest rate swaps, and those with saving accounts?

The answer is yes, but the Libor scandal is only a small part of the interest rate rigging scandal. The Federal Reserve itself has been rigging interest rates. How else could debt issued in profusion be bearing negative interest rates?

…How long can the regime of negative interest rates continue while debt explodes upward? Currently, everyone in the US who counts and most who don’t have an interest in holding off armageddon. No one wants to tip over the boat. If the banks are sued for damages and lack the money to pay, the Federal Reserve can create the money for the banks to pay.

…To sum up, what has happened is that irresponsible and thoughtless–in fact, ideological–deregulation of the financial sector has caused a financial crisis that can only be managed by fraud. Civil damages might be paid, but to halt the fraud itself would mean the collapse of the financial system. Those in charge of the system would prefer the collapse to come from outside, such as from a collapse in the value of the dollar that could be blamed on foreigners, because an outside cause gives them something to blame other than themselves.

[source]

PG View: An excellent article that illustrates just how far beyond the Libor scandal the “fraud” seems to extend. Discussions about the manipulation of global financial markets are no longer relegated to just the tin-hat crowd, and Roberts calls the Fed’s zero interest rate policy what it is: “Rigging interest rates”, which is fundamentally little different from what Barclays and the other setters of Libor where engaged in.

Perhaps now is a good opportunity to take a portion of your assets outside of the traditional financial markets, which are increasingly acknowledged as being “rigged.”

Posted in Economy, Gold News, investments, Politics, U.S. Dollar |

The Alternative Portfolio: Diversifying Away From a Traditional Allocation


June 2012 (AAII) — “How can I construct a portfolio that is capable of producing returns different than those of the S&P 500 and long-term Treasuries and that is also capable of warding off the threat of inflation?” This is what many AAII members have asked me for.

The good news is that I was able to create such a portfolio. In fact, over the time period tested, its performance topped that of a traditional large-cap/long-term bond portfolio. The portfolio can be replicated using exchange-traded funds. Unfortunately, this alternative portfolio is more volatile than a traditional portfolio comprised of large-cap stocks and long-term bonds. Furthermore, the time period used to test the portfolio may not be long enough to show whether its performance advantage will last well into the future.

…So, I started with a bit of brainstorming to figure out what assets would make sense. On the equity side, I chose master limited partnerships (MLPs), real estate investment trusts (REITs) and micro-cap stocks. On the bond and income side, I chose Treasury inflation-protected securities (TIPS), high-yield corporate bonds and preferred stocks. Finally, I selected gold to provide exposure to commodities via a physical asset.

Physical gold avoids the transaction costs and use of leverage involved with investing in futures contracts or funds that invest in futures contracts. It can also provide a hedge against the deterioration of a currency’s purchasing power.

Gold produced the highest returns over the period studied, while preferred stocks produced the lowest return.

[source]

PG View: I post this because I took a bit of a swipe at the AAII in a recent article I wrote, for declaring in a recent article on their site that “the three most important asset classes for individuals are stocks, bonds and cash.” I’m encouraged to read that the AAII does indeed appreciate what gold can bring to a diversified portfolio.

Posted in Gold News, Gold Views, investments |

JPMorgan Trading Loss May Reach $9 Billion

28-Jun (The New York Times) — Losses on JPMorgan Chase’s bungled trade could total as much as $9 billion, far exceeding earlier public estimates, according to people who have been briefed on the situation.

When Jamie Dimon, the bank’s chief executive, announced in May that the bank had lost $2 billion in a bet on credit derivatives, he estimated that losses could double within the next few quarters. But the red ink has been mounting in recent weeks, as the bank has been unwinding its positions, according to interviews with current and former traders and executives at the bank who asked not to be named because of investigations into the bank.

…As JPMorgan has moved rapidly to unwind the position — its most volatile assets in particular — internal models at the bank have recently projected losses of as much as $9 billion. In April, the bank generated an internal report that showed that the losses, assuming worst-case conditions, could reach $8 billion to $9 billion, according to a person who reviewed the report.

[source]

PG View: Yeah…nice “hedge.”

Posted in investments |

China’s Middle Class Projected to Grow 146% by 2020

15-Jun (USAGOLD) — An article in The Wall Street Journal this week highlighted an expected dramatic rise in the size of China’s middle class. Over the next 8-years, the middle class is projected to grow by 146% to 607 million.

“The potential buying power of China’s middle class is vast. About 247 million Chinese, 18.2% of the population, qualify as middle class, meaning their households spend between $10 and $100 a day on average, according to Brookings Institution economist Homi Kharas.

If current patterns continue, the number will soar to 607 million by 2020, and spending by China’s middle class will rival that of the U.S., after adjusting for inflation and purchasing power.”

When you consider that China has a very gold-centric culture, the implications for the yellow metal are staggering.

On top of that, according to the US State Department the middle class of another gold-centric nation, India, is expected to “grow tenfold by 2025″.

Perhaps, “staggering” is too tepid an adjective…

Posted in Economy, Gold News, Gold Views, investments |