Wednesday, December 4, 2013

A gold investor’s perspective: From the Taj Mahal to Westminster Abbey

By Frank Holmes

I recently returned from India, a nation where an incredible 600 million people are under the age of 25. That’s nearly double the entire population of the U.S.!

What’s amazing about that figure is that, unlike the 1970s when India had no global footprint, today’s generation is increasingly gaining access to the Internet.

Social networking platforms are seeing an incredible growth trajectory in India, as one of the fastest growing markets. In fact, by 2016, the country is set to be Facebook’s largest population in the world, according to the BBC.

While Forbes India reports that there are only 137 million users in India, with the growing population and rising wealth, we expect this number to grow substantially.

I believe this connectivity changes the growth pattern for commodities. Like I told Kitco’s Daniela Cambone at the Metals & Minerals Investment Conference in San Francisco, this population carries on its love of gold. Mineweb reports that about 1 million couples will marry this wedding season, with around 33,000 weddings taking place on Nov. 19 alone.

Gold traditionally accompanies these events, and a typical gift is “a pendant, earrings or a ring, weighing 5-10 grams depending on financial circumstances. Parents of the bride generally give heavier items like a necklace or bangles weighing 50 grams or more,” according to Mineweb.

Still, to help manage expectations, investors should anticipate a short-term headwind for the precious metal as India’s GDP per capita has stalled. The World Bank estimated India to grow 6.1% this year, but lowered its forecast to 4.7% because of a slowdown in manufacturing and investment.

The long-term picture looks positive though. While India grew at 4.8% in the third quarter, the finance ministry is confident the country can return to its “high-growth plan.” It projects the economy to pick up, accelerating to around 6% in the next fiscal year and about 8% in another two years, says The Wall Street Journal.

India’s growing GDP is very important to gold’s rise, especially when it comes to the Love Trade, where about 50% of the world’s population buys gold out of love. The math shows that an increasing GDP per capita in this part of the world has historically been linked to the rising price of gold.

Related to the Fear Trade — buyers holding the metal out of fear of poor government policies — gold has recently become less attractive because of the slightly positive real interest rates in the U.S.

As we explain in our Special Gold Report on the Fear Trade, one of its strongest drivers is real interest rates, which is when the inflationary rate of return is greater than the current interest rate.

Our model tells us that a real interest rate of more than 2% is typically bearish for gold.

Still, the real rate is not very close to the 2% tipping point. As of the end of November, the five-year Treasury yield is 1.31% while inflation is at 1%. Investors end up with a slightly positive return of 0.31%.

With onerous regulations continuing to slow down the flow of money, I believe the government will need to keep its printing presses warm, eventually reigniting the Fear Trade.

Keep in mind that real rates are not positive in every country. In my presentation at the Mines and Money conference in London, U.K. investors are still losing money after inflation. The five-year gilt yield is at 1.51%, but inflation is at 2.2%, resulting in a negative real rate of return.

What Are You Thankful For?

The holiday season is a good time to give gratitude for our loved ones.

Here’s one more thing investors can be thankful for: The nearly 30% return in U.S. stocks so far this year.

This is despite Americans being bombarded with negative messages of the health care reform. TIME printed a busted “Obamacare” pill accompanied by the headline, “Broken Promise: What It Means for This Presidency.” The Economist features an image of President Barack Obama sinking in water with the headline, “The man who used to walk on water.” This November, Obama’s approval rating sank to a new all-time low.

While the government may not function well right now, there is a lot that is working well in America. The stock market reflects that, even though the headlines don’t.

Take a look at the chart below, which shows President Obama’s second-term presidential cycle in comparison with four-year presidential cycles from 1929 through 1940 and the presidential cycles from 1953 through 2012. The current cycle beats both of the historical trends.

To me, the chart indicates that investors who ignore the negative headlines and focus on the strength of the U.S. stock market are the ones who have been very profitable this year.

See the original article >>

Coffee rallies as producers hold onto inventories

By Jack Scoville


General Comments: Futures were sharply higher in London and a little higher in New York and Sao Paulo. London was higher on reports of light offers again from Vietnam due to recent rains and low prices. Roasters and others look for supplies and some have turned to Arabica, although not enough to move New York futures that much. The Arabica market is seeing only light offers as well, but buying interest for Arabica overall remains very limited. Brazil said last week it is considering new measure to support producers if needed. Brazil has a lot of Coffee to sell, but the market there remains quiet as producers wait for prices to rally above the cost of production. The rest of northern Latin America was quiet, but there is talk of a lot of Coffee there as well. Colombia has been more active, but sales have tailed off lately Central America is showing light offers as the harvest progresses under mostly good conditions. New York is trading in a range, but London continues moving higher in the short term and is now closet o objectives for the move.

Overnight News: Certified stocks are lower today and are about 2.673 million bags. The ICO composite price is now 104.41 ct/lb. Brazil will get scattered showers this weekend. Temperatures will average near to above normal. Colombia should get scattered showers, and Central America and Mexico should get mostly dry weather. Temperatures should average near to above normal.

Chart Trends: Trends in New York are mixed. Support is at 107.00, 105.50, and 104.00 March, and resistance is at 112.00, 115.00, and 117.00 March. Trends in London are up with objectives of 1760 January. Support is at 1725, 1665, and 1630 January, and resistance is at 1750, 1770, and 1780 January. Trends in Sao Paulo are mixed. Support is at 132.00, 131.00, and 129.00 March, and resistance is at 136.50, 138.00, and 140.00 March.


General Comments: Futures closed mixed in consolidation trading. Prices remain in a trading range, and it seems like the market wants some demand news. Prices are still getting support from the storm that hit the production areas last week. Quality has suffered with the storm, and there is potential for some yield loss as well. There are questions about demand in China as the government there has offered its supplies into the domestic market. It sold half of its offer at the auction last week and will most likely offer more soon. Wire reports indicate that some production has been lost in China after recent bad weather in some growing areas. Brazil conditions are reported to be very good in Bahia. Harvest continues this week in the US, but should get interrupted again late in the week when the cold and snow and rain arrives.

Overnight News: The Delta and Southeast should see dry weather today, then some showers and snow late in the week and through the weekend. Temperatures will average below normal. Texas will see rain and snow for the next couple of days, then dry conditions. Temperatures will average much below normal. The USDA spot price is 74.94 ct/lb. today. ICE said that certified Cotton stocks are now 0.225 million bales, from 0.237 million yesterday.

Chart Trends: Trends in Cotton are mixed. Support is at 78.00, 77.40, and 76.65 March, with resistance of 79.65, 80.50, and 80.95 March.


General Comments: Futures closed lower as the weather in Florida remains generally very good. Cold air is coming again at the end of the week, but harmful temperatures should stay well to the north of any production areas. Current above normal readings in northern areas will be replaced by much below temperatures this weekend. No one is predicting any freezing temperatures for Florida. Traders are expecting USDA to lower production even more in coming production reports. The greening disease has affected crops in a big way and could cause reduced production for the next few years. Growing and harvest conditions in the state of Florida remain mostly good. It has turned drier, which is seasonal, and reports indicate that crops are in good condition. Irrigation water is available. Harvest is increasing. Brazil is seeing near to above normal temperatures and showers.

Overnight News: Florida weather forecasts call for mostly dry conditions. Temperatures will average above normal.

Chart Trends: Trends in FCOJ are mixed. Support is at 135.00, 131.00, and 130.00 January, with resistance at 141.00, 143.00, and 145.50 January.


General Comments: Futures were lower in both New York and London and made new lows for the move. Traders were talking about increased offers from India and Thailand. All this coming on the back of very high Sugarcane production in Brazil. The market needs some demand news. Chart trends remain down in New York and London. Countries like India and Thailand are selling as much as possible. Weather conditions in key production areas around the world are rated as mostly good. There is no news of losses to Sugar areas in Vietnam and China, but some losses are possible due to big rains a few weeks ago. India could see some losses from unseasonal cyclone activity in the northeast and east part of the country. Eastern growing areas have now seen three or four cyclones in the last couple of months. Weather in Brazil appears to be mostly good, with showers to support new crop development.

Overnight News: Brazil could see showers and near to above normal temperatures.

Chart Trends: Trends in New York are down with objectives of 1680 March. Support is at 1680, 1670, and 1640 March, and resistance is at 1715, 1730, and 1750 March. Trends in London are mixed. Support is at 452.00, 446.00, and 440.00 March, and resistance is at 461.00, 465.00, and 466.00 March.


General Comments: Futures closed mixed in consolidation trading. There were reports of increased selling from Ivory Coast last week, and supplies should be available. Ideas of very strong demand are supporting prices, and certified stocks keep dropping in New York. Reports indicate that rains are less this week in West Africa, which should help harvest progress and processing progress. Much of West Africa is now reporting reduced production due to stressful conditions earlier in the growing season, but this has yet to bear out in official data outside of Nigeria. The overall fundamental picture should support generally higher prices as the supply situation should be tight once the harvest selling is done. Midcrop production conditions are rated as good

Overnight News: Scattered showers or dry conditions are expected in West Africa. Temperatures will average near to above normal. Malaysia and Indonesia should see scattered showers. Temperatures should average near to above normal. Brazil will get dry conditions and near normal temperatures. ICE certified stocks are lower today at 3.413 million bags.

Chart Trends: Trends in New York are mixed to up with objectives of 2880 and 2960 March. Support is at 2800, 2770, and 2755 March, with resistance at 2845, 2860, and 2890 March. Trends in London are mixed. Support is at 1730, 1710, and 1680 March, with resistance at 1775, 1790, and 1800 March.

See the original article >>

Buy Low And Sell High? Our Super Commodity System Do This For You

The system allows to take position on the market well in advance of traditional methods and greatly benefit the investor in the subsequent management of the open positions. Super Commodity works with simple and effective rules and with fixed and not optimized parameters.


Test and evaluate for free our Super Commodity system



Top 10 rules of portfolio diversification

If there is one thing the 2008 financial meltdown taught us, it is the value of a properly diversified portfolio. The second thing is that if you think you are diversified, you may need to check again. At the time, many thought they were, only to see losses across the board as assets that previously were uncorrelated moved together and sunk many a portfolio.

Today, figuring out what constitutes a diversified portfolio and, more importantly, how to actually assemble one can be a difficult and at times frustrating ordeal; every analyst and investment advisor has a different idea. To help you navigate these treacherous waters, we offer the following 10 rules of portfolio diversification.

1. Start with the end in mind. A diversified portfolio is not a one-size-fits-all product. Instead, it should be personalized, focusing on your personal long-term investment goals while considering your current personal circumstances. According to Michael Loewengart, senior investment strategist at E*TRADE Capital Management, your personal circumstances should take into account your current financial situation, expected future expenses and how far away from retirement you are. "The goal of asset allocation is to make sure the level of volatility in your portfolio is in line with your goals, personal circumstances and tolerance for risk," he says. Additionally, consider your temperament. If high-risk assets make you overly stressed, perhaps it would be better to stick with comparably low-risk alternatives.

2. Aim to reduce overall risk. Portfolio diversification has two goals, this being the first and what most people associate with diversification. If you have multiple assets in your portfolio, even if one is not doing well, you have others that are outperforming. As such, this reduces the overall volatility of the portfolio. "[Diversification] reduces your risk. Instead of being stuck in just one sector that may not do well at times, a diversified portfolio can sustain you and keep you in business," Michael Clarke, CEO of Clarke Capital Management, says.

3. Aim to enhance overall returns. Being able to capitalize in markets that are outperforming and adding to your bottom-line is the second goal of a diverse portfolio. Not only does owning a range of assets protect you in the event that one does poorly, but it positions you to take advantage of ones that perform exemplarily. "We try to have a finger in each of the different sectors because in our experience usually something is working and that one may save the bill," says Clarke.

4. Invest in multiple asset classes. Traditionally, a portfolio was considered diverse if it had a mixture of equities and bonds. As investors are becoming more sophisticated, other assets such as commodities, real estate and foreign currencies are receiving more attention. In order to reduce risk and enhance returns, investments in numerous asset classes help keep correlations among assets in check. Each class has its own drivers and its own speed bumps. Taken together, they help smooth out the ride.

5. Invest in multiple sectors within the asset classes. Just as investing in multiple asset classes reduces risk and enhances returns, so too does investing in multiple sectors within those asset classes. Just including equities, bonds and commodities is not enough as equities have sectors reaching from healthcare to industrial metals, bonds have a variety of maturations and commodities include energies, metals and foods. "You want to be allocated amongst the various market sectors and industries. Across asset classes, you want to have further diversification into the different segments," Loewengart says.

6. Own assets that do well in bull, bear and sideways markets. This point really stresses the need for owning a diverse array of assets. You do not want to place all your eggs in a basket that does well when the stock market is moving up, because that also means your portfolio will do very poorly when that bull market turns into a bear. Instead, it usually is advisable to own assets with a negative correlation in which one asset moves higher while the other moves lower. Examples of this relationship include the U.S. dollar and crude oil as well as stocks and bonds. It is often true that in times of crisis all correlations go to 1.0, but some strategies are more resistant to this. It is wise to look broadly at how various assets perform in different environments.

Commodity Trading Advisor Salem Abraham pointed out following 2008 that nearly all asset classes were long the economy. Managed futures, which are diversified in their own right through being long or short disparate sectors like agriculture, metals, energies, interest rates and currencies, also perform well in periods of high dislocation. Other diversified asset classes had the same negative response to the economic crisis but managed futures did well by taking advantage of fat tail events rather than being punished by them.

7. Have a disciplined plan for portfolio rebalancing. If you have constructed your portfolio properly, it is to be expected that some assets will outperform others and over time begin constituting a larger percentage of your portfolio. That is the time to rebalance and bring your investments back in check with one another. "If you have a disciplined plan for rebalancing in place, then you can capitalize on the different movements that will take place from the different assets in your portfolio," Loewengart says.
He explains that that discipline will enable you to automatically sell out of your outperforming assets and buy into those underperforming. Consequently, you will naturally be selling high and buying low.

8. No "borrowing" among classes except during rebalancing. Trading can become emotional and that can cloud your judgment. It may seem like a good idea to abandon an investment decision that is not immediately paying off or to bolster ones that are doing well. Proceed with caution, because that is a move that catches many investors. The reason for having a rebalancing plan is to remove that emotional element. "When you look at your portfolio, rebalancing with a stated framework is going to give you the discipline that many investors inherently lack," Loewengart says. That discipline helps you do the things that you may not want to do, but are in your best interest.

9. Backtest your portfolio, but consider current market conditions. Backtesting can help you see correlations that exist in your portfolio and can allow you to see how it would stack up in various market conditions. There is a reason, though, that investment advisors are required to say, "Past performance is not indicative of future results." Also, remember there will be periods in the past in which your portfolio would not have fared well.
Past events can provide a framework, but also consider current market conditions to better position your portfolio for future events. We can learn a lot from the past, but current events are shaping
tomorrow’s markets.

10. Test asset correlations periodically. If there is one thing we can count on in the markets, it’s that they will never stay exactly the same. What was negatively correlated one year can move lock-step the next. Consequently, it is not enough to simply rebalance from time to time; you also need to test the asset correlations in your portfolio periodically to see if anything has changed. As markets change, you need to make informed decisions as to how you need to alter your portfolio to counter those changes. You can’t expect your portfolio allocation decisions to be a one-and-done event; as markets change, so to must your portfolio.

These rules leave a lot to personal judgment and that is the key to success. One additional item to point out is that any allocation to a less liquid asset should calculate that liquidity risk in addition to other risks to achieve the proper allocation.

Your portfolio should fit your needs. Unfortunately in the past not all potential asset classes were available to retail investors. Today, thanks to innovative exchange-traded funds (ETFs) and mutual fund structures, nearly every investor can access commodities, currencies, short and leveraged strategies as well as active strategies including managed futures. Now everyone truly can be diversified.


Should You Still Use Commodity to Diversify Investment Portfolio?

A new study from the Bank of International Settlements (BIS) raises doubts about the value of commodities as a tool for enhancing portfolio diversification. The paper’s smoking gun, so to speak, is that “the correlation between commodity and equity returns has substantially increased after the onset of the recent financial crisis.” Some pundits interpret the study as a rationale for avoiding commodities entirely for asset allocation purposes. But that’s too extreme.

In fact, this BIS paper, although worth a careful read, isn’t telling us anything new. That said, it’s a useful reminder for what should have been obvious all along, namely: there are no silver bullets that will lead you, in one fell swoop, to the promised land of portfolio design. The idea that adding commodities (or any other asset class or trading strategy) to an existing portfolio will somehow transform it into a marvel of financial design is doomed to failure. Progress in the art/science of asset allocation arrives incrementally, if at all, once you move beyond the easy and obvious decision to hold a broad mix of the major asset classes.

Correlations are a key factor in the design and management of asset allocation, but they’re not the only factor. And even if we can find assets and strategies with reliably low/negative correlations with, say, equities, that alone isn’t enough, as I discussed last week. You also need to consider other factors, starting with expected return. It may be tempting to focus on one pair of assets and consider how the trailing correlation stacks up today. But that’s hardly the last word on making intelligent decisions on how to build a diversified portfolio.

Perhaps the first rule is to be realistic, which means recognizing that expected correlations, returns and volatility are in constant flux—and not necessarily in our favor, at least not all of the time. Bill Bernstein’s recent e-book (Skating Where the Puck Was: The Correlation Game in a Flat World), which I briefly reviewed a few months ago, warns that the increasing globalization of markets makes it ever more difficult to earn a risk premium at a given level of risk. As “new” asset classes and strategies become popular and accessible, the risk-return profile that looks so attractive on a trailing basis will likely become less so in the future, Bernstein explains. That’s old news, but it’s forever relevant.

As more investors pile into commodities, REITs, hedge funds, and other formerly obscure corners, the historical diversification benefits will likely fade. Granted, the outlook for expected diversification benefits fluctuates through time, and so what looks unattractive today may look considerably more compelling tomorrow (and vice versa). But as a general proposition, it’s reasonable to assume that correlations generally will inch closer to 1.0. That doesn’t mean that diversifying across asset classes is destined to become worthless, but the expected payoff is likely to dim with the passage of time.

The good news is that this future isn't a total loss because holding a broad set of asset classes is only half the battle. Your investment results also rely heavily on how and when you rebalance the mix. Even in a world where correlations are higher and expected returns are lower, there’s going to be a lot of short-term variation on these fronts. In other words, price volatility will remain high, which opens the door (at least in theory) for earning a respectable risk premium.

Still, it’s wise to manage expectations along with assets. Consider how correlations have evolved. To be precise, consider how correlations of risk premia among asset classes compare on a rolling three-year basis over the last 10 years relative to the Global Market Index (GMI), an unmanaged market-weighted portfolio of all the major asset classes. As you can see in the chart below, correlations generally have increased. If you were only looking at this risk metric in isolation, in terms of history, you might ignore the asset classes that are near 1.0 readings, which is to say those with relatively high correlations vis-a-vis GMI. But by that reasoning, you’d ignore foreign stocks from a US-investor perspective, which is almost certainly a mistake as a strategic decision.

Nonetheless, diversifying into foreign equities looks less attractive today compared with, say, 2005. Maybe that inspires a lower allocation. Then again, if there’s a new round of volatility, the opportunity linked with diversifying into foreign markets may look stronger.

The expected advantages (and risk) with rebalancing, in other words, are constantly in flux. The lesson is that looking in the rear-view mirror at correlations, returns, volatility, etc., is only the beginning—not the end—of your analytical travels.

Sure, correlations generally are apt to be higher, which means that it’s going to be somewhat tougher to earn the same return at a comparable level of risk relative to the past. But that doesn’t mean we should abandon certain asset classes. It does mean that we’ll have to work harder to generate the same results.

That’s hardly a new development. In fact, it’s been true all along. As investing becomes increasingly competitive, and more asset classes and strategies become securitized, expected risk premia will likely slide. But what’s true across the sweep of time isn’t necessarily true in every shorter-run period. The combination of asset allocation and rebalancing is still a powerful mix—far more so than either one is by itself. And that’s not likely to change, even in a world of higher correlations.

Gold Price Manipulation And The Dog Track

By: Bob_Kirtley

What follows is a light hearted ‘take’ on the current situation in the gold and silver space.
Many of our readers refer to the manipulation of the gold price for the reason that gold isn’t trading a lot higher than it is today. If you believe that the price of gold is manipulated by the ‘powers that be’ in order to drive prices lower then let’s indulge our imaginations by way of a visit to the dog track.

The Dog Track
Let’s assume that you have been invited out for night of fun at a dog track racing event. You go with your pals and when you get there the word is that dog number five is going to win the next race. Much enthusiasm and frivolity follows as the countdown to race start time builds to its climax. Now you are aware that everyone thinks that the race is rigged, knowledgeable friends are sure that number five will indeed win this race.
It is decision time for you. You can either avoid this race as you know the result may have been tampered with or you could place a small wager on the said grey hound in the hope that your pals are correct. Alternatively you can study the form as they say and decide to place your small wager on dog number three as it looks the part and has a good track record etc.

The chances are that you will be swayed by the superior knowledge of your friends and go with the flow and back dog number five.
The situation is similar for the gold market; you are convinced that the gold market is rigged and gold is being forced down and is therefore losing its value. You know that gold has been going down for past two and half years or so, despite the many factors that suggest it should be trading at a much higher price level. You are in a similar position to that of the dog track in that must try and decide what the appropriate action is, in order to make a profit.

The recent history of gold prices is littered with false dawns and rallies that have struggled to gain any sort of meaningful traction before petering out.
Should you go with the flow and position yourself accordingly or should you buck the trend with the view that gold is about to win today and you will be the beneficiary.
There are many answers to the above dilemmas and I can only give you my very humble personal view on both situations.
When it comes to gold I will go with the flow, which is bearish, even though I am a gold bull at heart. Now isn’t the time to imagine what gold should be doing, now is the time to trade according to the trend. Rigged or not the gold price is going down and has been for some time now and those who are long are getting battered financially.
When the trend changes so will our trading strategy; as retail investors we are small enough and nimble enough to reverse course completely and set sail in a new direction.
Finally the dog track decision; I would probably place a tiny wager on a dog which had the same name as my favorite Auntie or if it was wearing a racing jacket with ‘go-faster’ stripes or some other frivolous nonsense would sway me. But above all else the wager would not be much more than the price of a drink, as my knowledge of racing dogs is non-existent and I have never actually been to a dog track racing event.
Dogs are for fun, gold is serious, so get serious and see the situation as it is and not as you imagine it should be and trade accordingly.
Got a comment, fire it in, especially if you disagree, the more opinions that we have, the more we share, the more enlightened we become and hopefully the more profitable our trades will be.

See the original article >>

S&P 500: When and How Long Before The Next Price Consolidation

By Ashraf Laidi

When Fed Chairman-nominee Janet Yellen said in her testimony earlier this month that stocks were not in a bubble, citing PE ratios, many found it a fresh motive to buy. 8 months after the S&P500 broke a new record to take on its 2007 highs, the index is up an additional 16% from those highs. Year-to date, the S&P500 is up 27%, which if maintained, would be the strongest year since 1997, when it logged 31%.

PE Nearing 2007 Levels

Back to the price to earnings ratio. Currently at 17 times earnings, the multiple is dangerously close to the 17.60 level reached in October 2007, just prior to the 2007-09 crash. But 17.0 is no comparison to the 30.0 multiples prevailing at the height of the dot com bubble. Low PEs relative to soaring prices imply soaring earnings as a result of deep cost-cutting from companies. Up to what point can earnings defy slowing sales remains a key question. A more reassuring metric for the bulls is the price to book ratio (focusing on balance sheet book value). Today's price to book ratio for the S&P500 is at 2.6, compared to the 2.9-3.0 prevailing in June-September 2007 and the 4.9-5.0 prevailing in Q1 2000.

      Breadth Remains High, but…

A key distinction from the late 1990s bubble is the breadth of the rally. 446 socks in the S&P500 are up, which is the most since 1980. Half of those stocks are up more than 30%. Today, 82% of S&P500 stocks stand above their 200-day moving average, compared to 63% in September 2007 and 20% in February 2000.  Do keep an eye on this indicator if it drops below 75% within the next 4-6 weeks as this would signify a clear negative breadth divergence.

       Fed Remains on a High

For the first time in history, US central bank policy is at its most aggressive mode while stocks are at their highest levels. Most notably, the Fed has signaled it is in no hurry to withdraw its stimulus. Now that Fed has de-linked tapering from any rate hikes, the notion of reducing asset purchases may not  necessarily be negative for equities. And what was an unemployment threshold of 6.5% for raising rates has now become a threshold of “considerably below 6.5%” before rate hikes are considered. This further supports the notion that interest rates will not be raised before the end of 2015.

Rather than asking whether stocks are due for a sharp decline, the question is how long is the next price consolidation before the next move up? While a move towards 1850 remains viable, we must closely watch the PE as it nears 17.6, book value nearing 2.9 and the 200-DMA breadth nearing 80%.

See the original article >>

Euthanasia of the Economy?

by John Mauldin

Today's Outside the Box comes to us from my good friend and business partner Niels Jensen of Absolute Return Partners in London. Niels gives us an excellent summary of how QE has affected the global economy (and how it hasn't). I have found myself paraphrasing Niels all week.

I also want to call to your attention an interview first posted at ZeroHedge between my friends Chris Whalen and David Kotok. This is an inside-baseball view of a not-so-minor issue involving central banks and ZIRP. The FDIC charges 7-10 basis points on deposits for the national deposit insurance scheme. At close to the zero bound, the fee means that banks can lose money on deposits. As Chris and David point out, this is just another distortion being fed into the system. David was the first to introduce me to this concept (and rather passionately). I have not written about it because it gets complicated quickly, but it highlights a very serious problem and one that is not dissimilar to the deflationary aspects of the Basel III requirements, working at odds with what central bankers are trying to do. This goes with my long-held contention that the models the Fed and all central banks are working with are simply inadequate to describe the complexity of the global economy, and we have no true idea what we are doing, just a guess and a hope.

Then there's this quote that appeared in the Wall Street Journal this weekend, from Friedrich A. Hayek's lecture "The Pretense of Knowledge," delivered upon accepting the Nobel Prize in economics, Dec. 11, 1974:

To act on the belief that we possess the knowledge and the power which enable us to shape the processes of society entirely to our liking, knowledge which in fact we do not possess, is likely to make us do much harm. In the physical sciences there may be little objection to trying to do the impossible; one might even feel that one ought not to discourage the over-confident because their experiments may after all produce some new insights. But in the social field the erroneous belief that the exercise of some power would have beneficial consequences is likely to lead to a new power to coerce other men being conferred on some authority.

Even if such power is not in itself bad, its exercise is likely to impede the functioning of those spontaneous ordering forces by which, without understanding them, man is in fact so largely assisted in the pursuit of his aims. We are only beginning to understand on how subtle a communication system the functioning of an advanced industrial society is based—a communications system which we call the market and which turns out to be a more efficient mechanism for digesting dispersed information than any that man has deliberately designed.

If man is not to do more harm than good in his efforts to improve the social order, he will have to learn that in this, as in all other fields where essential complexity of an organized kind prevails, he cannot acquire the full knowledge which would make mastery of the events possible. He will therefore have to use what knowledge he can achieve, not to shape the results as the craftsman shapes his handiwork, but rather to cultivate a growth by providing the appropriate environment, in the manner in which the gardener does this for his plants.

There is danger in the exuberant feeling of ever growing power which the advance of the physical sciences has engendered and which tempts man to try, "dizzy with success," to use a characteristic phrase of early communism, to subject not only our natural but also our human environment to the control of a human will. The recognition of the insuperable limits to his knowledge ought indeed to teach the student of society a lesson of humility which should guard him against becoming an accomplice in men's fatal striving to control society—a striving which makes him not only a tyrant over his fellows, but which may well make him the destroyer of a civilization which no brain has designed but which has grown from the free efforts of millions of individuals.

Finally, and speaking of Zero Hedge, I want to offer a personal note about what I think is an egregious affront to the integrity of a close friend. Zero Hedge published and then expanded upon a rather silly article written in the Toronto Globe and Mail about the “sweet” deal that Gluskin Sheff chief economist David Rosenberg gets, noting that his $3,000,000 salary seems high for a top-five executive at a public firm, and implying that Rosie decided to turn bullish in return for the pay increase, that in essence his opinion could be bought.

Let me state that Rosie is a close personal friend and that we try to spend as much time as possible together and keep up with each other on the phone about our views on the world. Since we are more or less in the same business (writing and speaking on investments), we also share rather deep data on our personal business situations. I know Rosie’s business situation first-hand. I have offered Rosie advice on that compensation package.

First, the sweet deal is Gluskin Sheff’s. I have argued to some of their management that Rosie is underpaid. I think I might have used the word massively. Why? Because he writes a newsletter that has 3,000 subscribers who pay a $1,000 a year – roughly equal to his salary. But in addition GS gets his brand – and it is a valuable one– more or less for free and still works Rosie's ass off traveling the country meeting with clients, all while he puts out a lengthy daily letter. The man is a machine. Now, kudos to Gluskin Sheff for getting that deal. I wish I could get him for that for Mauldin Economics. But Rosie is not overcompensated, based on his actual production numbers.

Rosie is one of the most popular speakers at my annual conference. This year, after having been bearish for years, he turned bullish while at my conference and presented the reasons why. He had been at GS for several years as a very firm, committed bear. He gets no more money contractually whether he is bearish or bullish. Like me, he just wants to get it right. We win some and lose some, but we call it the way we see it. To suggest that someone like Rosie can be bought (with what I think of as his own money from his newsletter sales) is ridiculous. Zero Hedge owes Rosenberg a major apology.

And one final point. The “author” of the ZH piece is “Tyler Durden,” which is a pseudonym. The name comes from a movie character in Fight Club. If you are going to trash someone, at least have the testosterone to do it using your real name. Man up, guys. And kudos to my readers, who when they respond to my letters almost always do with their real names and photos. None of this hiding behind the web BS. I notice that even when my thoughts get trashed, it is done civilly and with the respect of people arguing different opinions. As opposed to the situation on some other websites. But then, I always knew my readers were a cut above.

Time to hit the send button, as another meeting here in NYC is coming up in a few minutes. Tomorrow should be a very interesting day, and I will report what I learn at the CIO Investment Summit this weekend.

Your thanks for letting me vent analyst,

See the original article >>

Low Labor Force Participation Is Not Due To Demographics

by Lance Roberts

"Son, someday robots are going take my job."  It was the late 70's and my father was convinced that these "new fangled" computers were going to steal his job. At that time no one believed him but as it turns out he was right.  I have written extensively since the end financial crisis about the structural change to employment in the U.S. and the push to increase productivity to reduce employment costs and boost profitability.  I addressed this issue specifically in "The Great American Divide" stating:

"Suppressed wage growth, layoffs, cost-cutting, productivity increases, accounting gimmickry and stock buybacks have been the primary factors in surging profitability. However, these actions are finite in nature and inevitably it will come down to topline revenue growth. However, since consumer incomes have been cannibalized by suppressed wages and interest rates - there is nowhere left to generate further sales gains from in excess of population growth."


"This is why the gap between corporate profits and the number of working employees is the highest level on record.  Fewer workers, higher productivity and longer hours for the same pay, or less, equals higher corporate profits. This is great for executives, primarily the top 10% of wage of earners, who are compensated from rising share prices, bonuses and other performance related compensation.  However, for the 'working stiff,' there is little reward for their labor."

This "shift" has been critical to the employment landscape in the U.S. over the past 5-years as the number of individuals that are no longer counted as part of the "labor force" has risen above 90 million individuals which equates to roughly 36% of the entire working age population that are 16 years or older.  The chart of the labor force participation rate shows this problem graphically.


The dramatic drop in the LFPR since the turn of the century has been dismissed as a function of the "baby boomer" generation reaching retirement age.  The problem with that assumption is that a large portion of the "boomer" generation is unable to financially retire and are holding onto their jobs for both incomes and healthcare.  Secondly, even assuming that the "boomers" do all retire it does not fully account for the drop in the labor force participation rate.

In a recent study entitled "Labor Force Participation And Monetary Policy In The Wake Of The Great Recession," by Christopher Erceg and Andrew Levin of the Federal Reserve Board, the authors provide solid evidence that the decline in the labor force participation rate since 2007 has been due to cyclical factors–the recession and slow recovery–rather than to demographic factors.  The chart below shows the estimate of how large the US unemployment rate would be without this abnormal decline in the labor force, and they produced this amazing chart which summarizes their findings.

erceglevin 26aug2013-fig-6-right

In other words, due to the weak economic recovery a large number of people have simply "dropped out" of the labor force but are not retired. Since the unemployment rate does not count the people who dropped out of the labor force it no longer gives a good reading of the state of the labor market. The unemployment rate would be much higher without this large decline in the labor force participation.


There really is no longer a debate over labor market performance during the recent recovery as both are unusually weak.  This also no clear way to measure the millions of individuals who have disappeared into the abyss of the uncounted.  Many of the 90 million individuals that are currently unemployed, and not counted by the BLS, would likely be more than happy to work given the opportunity.  However, in the current economic environment, those options are not widely available which is why there is very much a silent "depression" running through the underbelly of this economy. While we may not see the breadlines and soup kitchens that existed in the 30's, it is simply because they exist electronically and in the mail.

The real debate needs to be over the current economic policy makeup which is deterring real employment growth in the U.S.  The lack of fiscal policy from Congress, and dependence on monetary policy from the Fed, is not the prescription that this particular ailing patient needs.

See the original article >>

Brazil's markets deteriorating on rising uncertainty


Brazil's economy contracted in the 3d quarter for the first time since the Great Recession. This was not entirely unexpected, though the drop was worse than economists had estimated.

Reuters: - Brazil's economy contracted in the third quarter for the first time since early 2009 as a steep drop in investment showed flagging confidence in what was recently one of the world's most attractive emerging markets.
The economy shrank 0.5 percent between July and September from the prior three months, government statistics agency IBGE said on Tuesday, missing forecasts in what has become a disappointing routine over the last three years. Gross domestic product had been expected to drop 0.2 percent, according to the median forecast of 40 economists polled by Reuters.
The weak quarter reinforced a dimming economic outlook for Brazil, which has struggled to contain inflation and stay competitive in recent years, tarnishing the reputation earned with a decade of robust growth.

All that wonderful government stimulus the Rousseff administration poured into the nation's economy recently has done little to rejuvenate growth. At the same time its withdrawal, combined with the Fed's taper, could create some serious headwinds for Brazil going forward.

Reuters: - The tax breaks and cheap loans unleashed by Rousseff have yielded meager results, and their withdrawal is now clouding the outlook for carmakers and furniture factories.
Public spending grew 1.2 percent in the third quarter, the economy's strongest driver of new demand, but officials have warned there is no room for more stimulus as tax revenues dry up and the government misses budget targets.
That leaves Rousseff without much fiscal firepower at the end of her first term. Next year promises to be a handful for the president, as she juggles preparations for hosting the World Cup, skepticism from business leaders and a likely withdrawal of monetary stimulus in the United States.
Some were hoping that the fourth quarter will bring better news, as October seemed to show improvements for the nation's manufacturers. But the latest data from Markit suggest that is not the case.
Markit: - The HSBC Brazil Manufacturing PMI fell to 49.7 in November, from 50.2 in October. After contracting at the margin for the entire third quarter, economic activity in Brazil’s manufacturing sector was unable to sustain October’s rebound and fell back below the 50 mark. Firms reported that output continued to climb, but at a slower pace than in October, while other key components such as new orders and employment all lost momentum.
With the 2014 general elections coming up and economic conditions deteriorating, the markets have been pricing in a difficult year ahead. The fact that the upcomong FIFA World Cup could bring massive and possibly violent protests is not helping. The nation’s equity market has underperformed materially against both the global and emerging indices, down over 17% for the year.

Blue: Brazil BOVESPA, Green: iShares EM Index ETF

What's particularly troubling is the sharp increase in long-term interest rates, as investors dump domestic government bonds. The 10-year rate broke 13.25% today.


Some consider this a buying opportunity. Perhaps. Given such tremendous uncertainty however, it may be some time before Brazil's debt and equity markets begin to recover.

See the original article >>

China's swelling sugar stocks bode ill for prices


Sugar prices may stage a recovery in the spring, but could fall back below 16 cents a pound by the end of next year, dynamics from one of the market's most important drivers, Chinese imports, indicate.

A "sharp jump" in Chinese imports has been a "driving factor" in supporting sugar prices over the last four years, when they have, even at current levels, remained well above historic averages, Australia & New Zealand Bank said.

Indeed, China looks this year on track to import more than 4m tonnes of sugar for the first time in a calendar year since at last the mid-90s, thanks to an opening up of an arbitrage against elevated domestic prices.

Sugar values are being underpinned by high production costs, pegged by US Department of Agriculture staff in Beijing at 5,300-5,400 yuan ($870-886) per tonne, equivalent to about 40 cents per pound, besides by state purchasing to offer support for cane growers.

Imports were at one point in the summer some $200 a tonne cheaper than domestic supplies, even when the out-of-quota tariff rate and VAT on buy-ins were factored in, ANZ said.

Indeed, China's sugar imports hit a record 709,873 tonnes in October, and are likely to have remained strong last month, given the "persistence" of the arbitrage in August and September.

'Natural cap on prices'

However, while growing demand will swallow up much of the imported sugar, much is ending up in inventories too, with China's sugar stockpiles to end 2014 up 4m tonnes in two years to the equivalent of five months' supplies.

This will reduced the need for imports next year, "placing a natural cap on global sugar prices in 2014", ANZ senior ag economist Paul Deane said.

Imports may well halve to 2m tonnes next year, assuming the, unusual, arbitrage on imports closes – an outcome rendered increasingly likely by a rise in the price of Brazilian export supplies, by $70 a tonne quarter on quarter, and an increase in freight rates on the Brazil-China route of 20%.

'Prices vulnerable'

While it was "likely" that sugar prices "will need to trade above 17 cents a pound" in the first quarter of next year to curtail imports to China, "on the flip side, in the second half of 2014, this [price] level will act as a cap on the market", Mr Deane said.

"If [world] prices persist above 17 cents a pound in the second half of 2014, a lack of discretionary sales to China will occur.

"This leaves prices particularly vulnerable in the second half of 2014," and they may need to fall below 16 cents a pound "to help entice Chinese buyers to absorb Brazil's exportable surplus".

Market prices

Raw sugar futures actually rose in early deals in New York, adding 0.4% to 16.87 cents a pound as of 06:00 local time (11:00 UK time) for March delivery.

However, this follows a 10-session losing spree which has taken the contract to a nine-week low.

"The current focus on strong Indian and Thai production prospects continues to provide significant headwinds for the global sugar market," Luke Mathews at Commonwealth bank of Australia said.

See the original article >>

Drop in corn values to depress food prices in 2014


A slump in values of the likes of corn and soymeal will feed through into a fall in food prices for a third successive year in 2014, before a small recovery kicks in in 2015, Macquarie forecast.

The bank, launching its own food price index, said that food prices would fall by 9.6% next year, only marginally short of the 10.9% expected for 2013.

However, prices will return to growth in 2015, of 2.8%, with values rising across a range of agricultural commodities, with soymeal, wheat and cocoa notable among exceptions.

"The index entered the downside in 2012 and will stay in this overall bearish trend until 2015, when we expect both agricultural and soft [commodity] prices to recover," Macquarie said.

Corn to fall

The prospects for prices of feed ingredients, which Macquarie is using in its index as a proxy for meat values, look particularly poor for next year, with losses for corn and soymeal forecast at more than 20%.

"The animal feed components will again drive the index lower," said the bank, which is relying largely on futures, rather than physical, prices in compiling the index, called the MacPI.

However, staple grains, a segment including rice and wheat, will be the weakest performer in 2015.

"All commodity groups, except staple grains, should finally turn bullish by the end of 2015, with the animal feed and sugar components contributing the most to the MacPI recovery."

'Fill a gap'

The food price index adds to those already compiled by the likes of the UN Food and Agriculture Organization, the International Monetary Fund and the World Bank.

However, Macquarie said that its index, which is compiled from 28 agricultural commodities, also including the likes of arabica coffee, sorghum and rapeseed meal, differed in being weighted towards consumption, rather than trade.

"We believe that trade volumes can at times incorrectly interpret the significance of a commodity in terms of global consumption and thus under- or over-estimate the contribution of an item to the whole index."

Furthermore, the MacPI, which will be updated every Monday, offers a predictive element which the bank hopes will "fill a gap in the market" and appeal to the likes of economists, agribusinesses and food producers.

Political importance

Food prices, which have a rich history on a rising trend of causing social unrest, have also increased back up the political agenda with growth in prices of many agricultural commodities to levels well above past averages.

However, ironically, it is low prices of one crop, coffee, which is currently causing particular unease, among rural populations of the likes of Brazil and Colombia for which the bean is a key earner.

Macquarie's estimate of a 10.9% drop in food prices in 2013 compares with a World Bank figure of 12% drop over the past year.

The UN FAO index sees prices down 5.3% in the year to October.

See the original article >>

Russian Banks Most Exposed As Ukraine's "Precarious" Finances Spike Risk To 3 Year High

by Tyler Durden

Ongoing anti-regime demonstrations in Ukraine are weighing on investor's risk perceptions as CDS spike to near three-year highs today (up over 100bps). At a minimum developments lower president Yanukovich's chances of remaining in power beyond the spring 2015 elections and possibly undermine his hold on power earlier, further decreasing the likelihood of sizeable financial support from Russia. With Moody's earlier comments on the nation's "precarious external liquidity" position; as Goldman warns, with even higher political uncertainty ahead, an acceleration of capital outflows might also follow and while they think the authorities will eventually turn to the IMF to avoid a disorderly sell-off of the currency, recent events arguably raise the risks to that view. However, the capital outflows are already having an impact as Reuters notes, Russian banks are considerably exposed as Ukrainian banks should deposit runs escalate.

Some background from Guy Haselmann of Scotiabank:

Ukraine is a strategically important country of 45 million people. A trade pact with the EU was close. However, it appears that a rival bid (or other means of influence) arose during two closed door meetings with Vladimir Putin. The press often reports that President Yanukovich’s corrupt government has shown an instinct for self-preservation often at the expense of the expense of the nation.

The Ukraine economy is in recession. The country has only $20 billion of foreign reserves which is 2 ½ months of imports (worse than Egypt). The IMF’s red flag level is 3 months. Ukraine has $10bln of external debt maturing in 2014. Its CDS rose over 100 bps this week to near 1100. Debt-to-GDP is only 43%, but Argentina defaulted with its debt-to-GDP at 50%. Its currency (Hryvnia), which was devalued in 2008, is pegged to the dollar. The current account deficit is 7% and herein lies the biggest problem.

The IMF is unlikely to help until after the 2015 election. The EU is unlikely to provide any aid. Russia may be enticed to help via loans. The President is on his way to China - who may help - but he may return no longer in power.

And Goldman notes the situation is fluid but highly likely that anti-regime protests will persist with several possible scenarios developing:

1) President Yanukovich declares a state of emergency and/or uses force to prevent protests from developing further;

2) President Yanukovich agrees to talks with the opposition and to a roadmap for signing the EU association agreement at some point in 2014 (our understanding had been that this would not be possible on the EU side, but EU leaders have recently suggested otherwise);

3) President Yanukovich does nothing and protests persist.

From the macroeconomic standpoint, these protests come at a time when the National Bank of Ukraine (NBU) has had to defend the currency peg through sizeable interventions, which have depleted the reserve cover to 2.5 months of imports, and when the government is arguably unable to roll its debt in the market. Goldman fears the further risk is that, due to the heightened political uncertainty, capital outflows could intensify, putting further pressure on the peg.

While there had been some press reports suggesting sizeable Russian financial help in exchange for the country not signing the EU association agreement, the recent developments, in our view, call this further into question. We think that Russia is unlikely to extend substantial help without guarantees. Given that it appears that President Yanukovich's chances of holding on to power beyond the 2015 spring election have decreased following the protests and schisms in his administration might even weaken his powers earlier (splits in the Region's Party, for instance, might deprive him of a majority in parliament) he might very well not be in a position any more to give those guarantees.

As indicated by polling and by the participation in street protests, the decision to suspend preparations for signing the EU association agreement was an unpopular one, at least with a significant part of the population. Goldman believes that President Yanukovich may have underestimated the political ramifications of doing so.

At this stage, it is difficult to forecast how the situation will evolve. Apart from the size of the protests it also matters to what extent the president can hold on to his own power bases in the Regions Party and the eastern part of the country. Given that the economy is in recession and the heavy industries in the east in particular are suffering, his support there might very well be more brittle than in the past.

But perhaps there is a silver lining - in an odd twisted way - the concerns about Ukrainian banks and the currency peg have seen deposit outflows increasing the risk to the country's financial system and creating a particularly acute headache for Russian banks. The silver lining, of course, is that Russia may be forced to provide more assistance in a Cyprus-style save for its own banks (lenders) and depositors...

As Reuters notes,

While other foreign lenders have cut their Ukraine exposure in the five years since - to 20 percent of Ukraine banking sector assets in 2012 from 40 percent in 2008, according to a Raiffeisen Research survey - Russian banks have maintained a strong market presence, still accounting for 12 percent.

Among foreign banks, the Russians have easily the biggest exposure, more than twice that of Austrian lenders, the next biggest.


"[Moodys] estimate that these banks' exposure to Ukrainian risk is $20-$30 billion, a sizeable amount indeed, considering that their combined Tier 1 capital was $105 billion in June," Moody's said.


Moody's, which estimated that 35 percent of all bank loans in Ukraine were problem loans, said the country's severe economic problems would keep local borrowers under pressure and could result in higher loan losses for the Russian lenders.

In the absence of the association agreement with the European Union, Russian-Ukrainian trade is likely to rise, and the four big Russian banks may well increase their exposure to Ukraine, it added.


Dimitry Sologoub, head of research at Raiffeisen in Kiev, said the banks had learned lessons from the 2008 crisis, so were much less exposed to credit risk, liquidity risk and forex risk, and the central bank was calming matters by providing liquidity and foreign exchange.

"The question is how long it will go? The reserve cushion of the national bank is not so big."

In the meantime, Ukraine might secure short-term benefits from its closer ties with Russia, enough perhaps to stave off the kind of currency crisis that nearby Belarus suffered in 2011, said Charles Robertson, chief global economist at Renaissance Capital in London.

"In the long run, it will probably keep Ukraine poor. This is bad for Ukrainians and bad for Russia," he added.

"Instead of being a strong, successful economy on Russia's borders, able to buy plenty of Russian exports, Ukraine risks becoming another Belarus."

Which - after all - could be just what Putin wants...

See the original article >>

Follow Us