Someone ought to gently nudge David Einhorn and tell the hedge-fund manager and wannabe baseball tycoon that Steve Ballmer doesn't play for the New York Mets. So firing Mr. Ballmer as Microsoft's boss will not enhance the fortunes of the hapless Mets that Mr. Einhorn is dickering to buy a piece of for a tidy $200 million. It's easy to forget who's on first while trying to tend to your day job managing a $7.8 billion portfolio.
Actually, the apparently well-intentioned Mr. Einhorn may simply be infected by a plague of forgetfulness that has afflicted our fair land. On this score, it strikes us as particularly strange, bordering on the paradoxical, that even as it pays proper deference to Memorial Day, the populace seems more inclined to amnesia than remembrance.
An odd lapse, indeed, since this proud country is actively engaged in not one but two wars. Admittedly, except for those doing the actual fighting and their families, the conflicts, unyielding as they are and taking as they continue to an enormous toll in blood and treasure, hardly impinge on the nation's consciousness. But on reflection, it's perhaps not all that surprising, since there are no overt, constant reminders as there were in earlier wars, such as the draft or a sharply greater tax bite.
This tendency toward forgetfulness is evident, too, amid the fuss and furor about deficits and spending that has the political parties at each other's throats. Folks appear to have plumb forgotten it wasn't all that long ago that the tally of federal income and outgo produced—we kid you not—a surplus. Americans by and large are optimists, and for good cause (we're blessed with natural bounty and, as Winston Churchill pointed out, ours is the worst form of government except for all the others), so it's not inconceivable that from time to time remaining upbeat requires a fuzzy memory of reasons for discontent.
Of course, politicians as a group are not renowned for their mental acuity. The Republicans seemed shocked by the rude discovery, courtesy of the recent election of a Democrat to a House seat in one of the most conservative districts in New York, that Jane and John Q. are enamored of Medicare, an inconvenient truth confirmed by every opinion poll taken by enquiring man.
The GOP's lament that the results were unforeseeable, skewed by a third party in the contest for the seat that had been comfortably occupied by a Republican for four decades, is pretty lame. After all, to find a precedent that might have helped avoid an embarrassing loss, they had only to hark back to the 1992 presidential election, when Ross Perot's presence on the ballot enabled Bill Clinton to edge out Bush the elder; the spoiler this time was the Tea Party.
As to the Democrats, against all odds, they managed to forget that the humble pocketbook commands more political clout than the grandest of promises. And when millions are out of work, their paramount, often their only, interest is jobs. Yet, more than two years into recovery, we're still laboring with a 9% unemployment rate, and more than 20 million people are underemployed or jobless.
It's not so much congenital optimism or chronic forgetfulness that's prevalent these days in Wall Street, the proximate cause of the horrors that so recently threatened to bury the economy and did such a fearsome number on the markets. It's quite the opposite, really—a highly selective memory that blanks out everything but the remarkable rebound of the markets from the depths of early 2009.
Restored to the living by a rich Uncle's unstinting generosity with your money and ours, the brokerages and banks tend to shrug off disturbing and even alarming signs of a faltering recovery and counsel courting risk with blithe assurances that the recent past will prove prologue. To us that seems like the perfect recipe for trouble.
WE HATE TO SOUND SO GLOOMY with a presumably three-day sunny weekend staring us in the face. And at the risk of being accused of reveling in someone else's misery to make our discomfort seem less imposing by comparison, we'd like to point out that things could be worse, a lot worse, and are in the weak sisters of the European Union. We're talking about Greece (the subject of our cover story this week), Portugal, Ireland, Spain and Italy. More than once, we've pointed out that to deliberately saddle these financially floundering countries with punitive austerity measures and higher interest rates in exchange for liquidity injections was similar to denying a drowning man a life preserver and insisting he learn to swim.
The insightful Michael Darda, who wears two hats at MKM Partners (chief economist and chief market strategist, but relax, he has only one head so far as we know) and whose views we've shared with you from time to time, happens to agree with us. His latest dispatch is ominously entitled "Why Bailouts and Austerity Are Failing in the Euro Zone."
In it, he points out that it's now over a year since the first bailout of Greece, followed last November by a bailout for Ireland and one for Portugal earlier this month. Yet, "debt-market spreads in peripheral Europe, which were supposed to ease as aggressive austerity took hold," are well above their year-ago levels, he notes. He contends that the bailout/austerity policy mix has failed.
The basic problem, Michael believes, is that those weak sisters are simply not competitive with the core nations: Their unit labor costs average some 22% more than France and Germany, while their prices run 8% higher than the European average. He traces this disparity back to the boom and bubble period during the mid-2000s, a stretch during which the periphery drew in capital and drove prices and wages higher than the slower-growing core euro-zone nations.
Absent a more accommodative stance by the European Central Bank (ECB, for short), the quintet named above, he fears, will have to suffer the pain of deflating nominal wages and prices. That translates into high unemployment, weak or declining gross domestic product and collapsing tax revenues, an ugly combo destined to "exacerbate debt burdens and render austerity fruitless."
Unless the ECB does a U-turn, Michael warns, "the entire periphery could be headed toward some form of default or restructuring." He expects the bank to eventually reverse course, but voices concern that the measures it has already imposed "create the potential for an increasingly disruptive series of events." To us, the moral of this little treatise is never underestimate the mischief the central bankers can wreak.
ALTHOUGH THE BULK OF THE LATEST communiqués from the economic front, including durable-goods orders, nondefense capital investment, consumer spending, pending home sales and new claims for unemployment insurance were disappointing or downright weak, not all the news, we're happy to report, was dispiriting. Consumer sentiment ticked up a bit in the latest survey, although it remains rather subdued.
One of the few things we've been consistently bullish on, thanks to the vagaries of the weather and, more specifically, a profusion of droughts globally, has been farmland. And we're indebted to the Federal Reserve Bank of Kansas City for affirming our preference. More specifically, it issued a recent report noting that farmland values are up a handsome 20% and credited strong demand from farmers and investors alike.
The rise in cropland values is all the more striking because, as we don't have to tell you, real estate in general is far from booming. And that goes in spades for residential real estate. As real-estate guru Mark Hanson, who has been pretty much on the money in assessing his chosen field, points out in a recent commentary, the prospects for an imminent housing recovery are anything but stellar.
He notes that Washington in its various incarnations appears to have thrown in the towel on reviving the industry after shelling out trillions via quantitative easing, tax credits and the like. And that doesn't exactly bode well for what he calls the "largest landlords in the world," namely the banks and servicers.
He lists the many woes that afflict the industry. High up among them is "effective negative equity," which he defines as the inability to pay off a mortgage, plus paying a real-estate broker 6% and coughing up 10% to 20% of the purchase price as down payment on a new purchase. Mark reckons that a majority of mortgages fall into that unenviable category rather than the 28% commonly estimated.
He also cites a humongous default, foreclosure and short-sale backlog overhanging the market. Since 2007, he relates, there have been only four million foreclosure completions and short-sale liquidations out of a probable 14 million to 18 million. That alone is enough to give you the willies.
Toss in unfavorable demographics, mounting energy costs, a miserable excuse for a mortgage market and inexorably declining home prices…well, you get the point. Housing is one of those festering sores on the economy that will be with us for quite a spell. And so long as it is, or until jobs grow more abundant and consumer income muscles up, the likelihood of a decent and sustained rebound for the industry seems a good piece off. And, we're afraid, the economy's recovery is apt to maintain its desultory pace.
Tuesday, May 31, 2011
Friday, May 27, 2011
The Dollar is a total disaster in the long run
I’ve been thinking a lot lately about how the dollar’s fall is likely to play out. The world is far bigger, richer, and healthier than it was during the last big currency shakeup. In the 1930′s, when the Pound Sterling lost its status as #1 reserve currency, the world had just 2 billion people with an avg life expectancy in the 40s (today it’s 69.2 – which is good in a societal sense, yet very bad in a govt-entitlement sense).
Its citizens are also saddled with many times higher debt-per-capita. Gold and silver-backed money has disappeared. Hence, the currency wars and economic turmoil we’re starting to see.
Importantly, the global financiers are (arguably) more thoroughly-entrenched in political/biz power structures than ever before. And they will have their way for now, like it or not.
Read Simon Johnson’s 2009 piece, The Quiet Coup, if you haven’t yet. Unfortunately, things have gotten worse since, during what will likely be seen in retrospect as the only real opportunity for financial reform this time around. Too late, Obama, if you care. So we are all-but guaranteed another, bigger crisis in the next few years. All anyone has done so far is kick the can down the road, in the direction of a muddy ditch.
EU v. Dollar, QE 2.80
The euro should provide quite an interesting challenge to the dollar over coming years, as the currencies vie for the title of “least-shitty” reserve option.
Germany has tough decisions to make, such as how best to slaughter the EU debt-beasts. Orchestrating a bond default of this magnitude, particularly the part where they try to convince Euro banks to eat losses, will not be pretty. But it’s going to happen (unless the populace as a whole agrees to be become debt serfs, and dedicate their entire lives to grinding away on 20% + debt.
No, that will not happen, which is why we’re seeing rising unrest. This transition can be orderly, or it can be ugly. But debt will, somehow, be restructured. If future programs look like that oh-so-horrible Irish package, with taxpayers and pensioners bearing the brunt for banks/financiers, we could see a revolution or two in the West. Those Greek riot pictures you’ve seen? Pretty bad.
But picture such an event in a large American city like Detroit, my dad’s hometown. Or any number of large struggling American cities. When food stamps, unemployment, and medicare stop providing the desired level of assistance, residents in these areas should expect things to get bad for a while.
In the US, the only decision I see Bernank and Co. making is how best to sell QEx to the public. As long as we have a dovish captured president, and Dudley, Geithner, Bernanke, Yellen, and other bank-loyal Bob Rubin types remain in power, that won’t change. Unrestrained, these folks’ proteges should be orchestrating round 28 of Quantitative Easing in 2025.
I suspect and hope that America’s crazy fiat experiment will be stopped before then. QE6 is where I think things will start to get really nasty (if we get there). By that time, the rampant, in-your-face, undeniable-despite-vigorous-CPI-massage-style-inflation will force even those such as Pulitzer-Prize winning economic doveologue David Leonhardt to question the Bernank’s wisdom (when he does, probably time to sell gold).
But for now, the Fed is determined in their mission to destroy the dollar and inflate. Pushed on by lazy politicians who don’t want to cut taxes or slash spending (numbskulls who voted recent leaders in, myself included, share the blame. Ron Paul 2012 ), and by banks who stand to reap enormous profits from their TBTF status.
Why will QE3, 4, and 5 appear?
Don’t worry, the Bernank assures us. More money-printing won’t be necessary*, (unless prices start to fall). Then, well… we’ll have to reevaluate. BTW, prices tend to fall when we stop printing money, and that inevitably leads us to print more money. It’s one of those vicious-cycle things, like Fat Bastard.
The QE brand will only last so long, so a new name and acronym seem inevitable. Maybe the powers that be could arrange a stock-split of sorts, 10:1. Make it a more publicly-digestible QE2.80?
QE 2.80 – or some acronym far more ridiculous and abstract – might fool a few hundred million people, and it would certainly look better for the Feds than a headline like this: US Central Bank Surprised For 27th time in a Row, As QE28 suddenly seen as necessary to prevent imminent and super scary deflation.
It’d be just like Citigroup’s reverse-split, but fwd (by the way, how is that $.01 per-share div a “dividend reinstatement” after a 1:10 reverse split, Vikram? Gotta love clumsy financial obfuscation..)
Whatever name QE3 takes, I think we should all agree ahead of time to call it that, regardless of the acronym spin.
Back to EUR/USD
My gut says that long-term, the Euro will stay stronger than the dollar (I don’t trade FX, and am but a lowly metal-owning sideline currency-heckler).
John Taylor said in January of this year that at some point in 2011, the USD and Euro should trade at parity (with the Euro even going lower). Of course, he’s right when he says that the market was/is overly optimistic on Europe. But it’s at least as bad in the US, long-term, and markets are starting to realize that. EUR is up 7% this year against USD.
Both economies have their strong and weak areas.
Germany – Europe’s largest economy by far – is quite healthy. California, New York? Not so much. Texas, PA, NJ? Pretty bad too. And the US Federal Govt? Likely worse off than Greece, long-term.
Almost all states in the US have big deficits, incredibly underfunded pensions, stagnant wages, rising prices, and very slow growth (likely negative in real terms). There are some bright spots, like Wyoming and North Dakota. But they make up a tiny portion of the total economy. The US manufacturing base has been exported, and will take time to rebuild.
Germany, meanwhile, is the EU’s top dog. And they have strong views on the necessity of controlling inflation.They also tend to focus on real economy and manufacturing, as opposed to America, where we have a big ol’ soft spot for finance/banking, expensive health care, and the military-industrial complex. Lots of good companies, but they are currently drowned out by TBTF crud. Financial-sector profits are back to 40% of ALL US profits, by the way…
Neither economy is perfect. But if I had to bet on a socialist-leaning economy with a strong manufacturing base and sound(er) monetary policy (GEUrmany), or the socialist-corporatist land of TBTF banks and reckless military spending (US), I pick the former.
Europe will inevitably get hit hard when Greece, Ireland, Portugal, and others go through their bond-default pain. But these things happen in economies, and economies rebound surprisingly fast from such trauma (see: Iceland, Russia, Asia). Europe’s future is cloudy, like America’s. But on a purely economic basis, I’d say the EU is likely to emerge from the mess before the US.
China will be tenting its fingers, a la Mr. Burns, in the corner, deciding how to play its increasingly sweet-looking hand; economically, politically, and militarily. There will be bumps along the road, like brewing housing-bubbles and inflation issues, but power is steadily shifting their way. They have over $3 trillion in foreign reserves, a growing domestic economy, and the luxury of letting their currency appreciate, if/when they want to.
China is an aspiring superpower snatching up resources across the globe. Notably, they’re doing it all in a very peaceful way. Sure, they have human rights issues at home, but thus far they haven’t even bombed a single country! Seems like a good sign for the world’s superpower heir-apparent.
The world has never seen such a currency war before, and it should provide observers with entertainment for years to come. Hopefully not decades
Its citizens are also saddled with many times higher debt-per-capita. Gold and silver-backed money has disappeared. Hence, the currency wars and economic turmoil we’re starting to see.
Importantly, the global financiers are (arguably) more thoroughly-entrenched in political/biz power structures than ever before. And they will have their way for now, like it or not.
Read Simon Johnson’s 2009 piece, The Quiet Coup, if you haven’t yet. Unfortunately, things have gotten worse since, during what will likely be seen in retrospect as the only real opportunity for financial reform this time around. Too late, Obama, if you care. So we are all-but guaranteed another, bigger crisis in the next few years. All anyone has done so far is kick the can down the road, in the direction of a muddy ditch.
EU v. Dollar, QE 2.80
The euro should provide quite an interesting challenge to the dollar over coming years, as the currencies vie for the title of “least-shitty” reserve option.
Germany has tough decisions to make, such as how best to slaughter the EU debt-beasts. Orchestrating a bond default of this magnitude, particularly the part where they try to convince Euro banks to eat losses, will not be pretty. But it’s going to happen (unless the populace as a whole agrees to be become debt serfs, and dedicate their entire lives to grinding away on 20% + debt.
No, that will not happen, which is why we’re seeing rising unrest. This transition can be orderly, or it can be ugly. But debt will, somehow, be restructured. If future programs look like that oh-so-horrible Irish package, with taxpayers and pensioners bearing the brunt for banks/financiers, we could see a revolution or two in the West. Those Greek riot pictures you’ve seen? Pretty bad.
But picture such an event in a large American city like Detroit, my dad’s hometown. Or any number of large struggling American cities. When food stamps, unemployment, and medicare stop providing the desired level of assistance, residents in these areas should expect things to get bad for a while.
In the US, the only decision I see Bernank and Co. making is how best to sell QEx to the public. As long as we have a dovish captured president, and Dudley, Geithner, Bernanke, Yellen, and other bank-loyal Bob Rubin types remain in power, that won’t change. Unrestrained, these folks’ proteges should be orchestrating round 28 of Quantitative Easing in 2025.
I suspect and hope that America’s crazy fiat experiment will be stopped before then. QE6 is where I think things will start to get really nasty (if we get there). By that time, the rampant, in-your-face, undeniable-despite-vigorous-CPI-massage-style-inflation will force even those such as Pulitzer-Prize winning economic doveologue David Leonhardt to question the Bernank’s wisdom (when he does, probably time to sell gold).
But for now, the Fed is determined in their mission to destroy the dollar and inflate. Pushed on by lazy politicians who don’t want to cut taxes or slash spending (numbskulls who voted recent leaders in, myself included, share the blame. Ron Paul 2012 ), and by banks who stand to reap enormous profits from their TBTF status.
Why will QE3, 4, and 5 appear?
Don’t worry, the Bernank assures us. More money-printing won’t be necessary*, (unless prices start to fall). Then, well… we’ll have to reevaluate. BTW, prices tend to fall when we stop printing money, and that inevitably leads us to print more money. It’s one of those vicious-cycle things, like Fat Bastard.
The QE brand will only last so long, so a new name and acronym seem inevitable. Maybe the powers that be could arrange a stock-split of sorts, 10:1. Make it a more publicly-digestible QE2.80?
QE 2.80 – or some acronym far more ridiculous and abstract – might fool a few hundred million people, and it would certainly look better for the Feds than a headline like this: US Central Bank Surprised For 27th time in a Row, As QE28 suddenly seen as necessary to prevent imminent and super scary deflation.
It’d be just like Citigroup’s reverse-split, but fwd (by the way, how is that $.01 per-share div a “dividend reinstatement” after a 1:10 reverse split, Vikram? Gotta love clumsy financial obfuscation..)
Whatever name QE3 takes, I think we should all agree ahead of time to call it that, regardless of the acronym spin.
Back to EUR/USD
My gut says that long-term, the Euro will stay stronger than the dollar (I don’t trade FX, and am but a lowly metal-owning sideline currency-heckler).
John Taylor said in January of this year that at some point in 2011, the USD and Euro should trade at parity (with the Euro even going lower). Of course, he’s right when he says that the market was/is overly optimistic on Europe. But it’s at least as bad in the US, long-term, and markets are starting to realize that. EUR is up 7% this year against USD.
Both economies have their strong and weak areas.
Germany – Europe’s largest economy by far – is quite healthy. California, New York? Not so much. Texas, PA, NJ? Pretty bad too. And the US Federal Govt? Likely worse off than Greece, long-term.
Almost all states in the US have big deficits, incredibly underfunded pensions, stagnant wages, rising prices, and very slow growth (likely negative in real terms). There are some bright spots, like Wyoming and North Dakota. But they make up a tiny portion of the total economy. The US manufacturing base has been exported, and will take time to rebuild.
Germany, meanwhile, is the EU’s top dog. And they have strong views on the necessity of controlling inflation.They also tend to focus on real economy and manufacturing, as opposed to America, where we have a big ol’ soft spot for finance/banking, expensive health care, and the military-industrial complex. Lots of good companies, but they are currently drowned out by TBTF crud. Financial-sector profits are back to 40% of ALL US profits, by the way…
Neither economy is perfect. But if I had to bet on a socialist-leaning economy with a strong manufacturing base and sound(er) monetary policy (GEUrmany), or the socialist-corporatist land of TBTF banks and reckless military spending (US), I pick the former.
Europe will inevitably get hit hard when Greece, Ireland, Portugal, and others go through their bond-default pain. But these things happen in economies, and economies rebound surprisingly fast from such trauma (see: Iceland, Russia, Asia). Europe’s future is cloudy, like America’s. But on a purely economic basis, I’d say the EU is likely to emerge from the mess before the US.
China will be tenting its fingers, a la Mr. Burns, in the corner, deciding how to play its increasingly sweet-looking hand; economically, politically, and militarily. There will be bumps along the road, like brewing housing-bubbles and inflation issues, but power is steadily shifting their way. They have over $3 trillion in foreign reserves, a growing domestic economy, and the luxury of letting their currency appreciate, if/when they want to.
China is an aspiring superpower snatching up resources across the globe. Notably, they’re doing it all in a very peaceful way. Sure, they have human rights issues at home, but thus far they haven’t even bombed a single country! Seems like a good sign for the world’s superpower heir-apparent.
The world has never seen such a currency war before, and it should provide observers with entertainment for years to come. Hopefully not decades
Wednesday, May 18, 2011
Marc Faber’s May Outlook: Beware the False Breakout in Stocks
Swiss investor Marc Faber has just released his latest issue of the Gloom, Boom, and Doom Report where he discussed his outlook for the stock market, gold, emerging markets, and other financial topics. Here are a few highlights from the report:
1. Equity Markets–The markets may be giddy about stocks hitting new highs, but contrarian investor Marc Faber is having nothing of this. He is concerned that stocks will fall sharply in May and that the recent breakout in stocks will prove to be trap for the bulls. The markets are due for a correction and the technicals point to a weak market. In particular, Faber points to the decline in new 52 week highs as evidence of an unhealthy internal market. Right now, Faber would stay away from cyclicals, tech stocks, and banks. If you have to own stocks make sure it is something safe like consumer staples (MO, JNJ, PEP, KO, etc).
2. Gold & Silver—Still likes gold as a long-term investment and recommends dollar cost averaging every month regardless of the price. However, when it comes to silver, Faber is more cautious, noting the recent run-up in the price. He expects a 20%+ correction in the metals complex because the inflation trade has become too crowded.
3. Commodities–Dr Copper is issuing a warning to investors. While the S&P 500 has made a new high, copper failed to do so (non-confirmation). This is a significant development because Dr Copper and the SP 500 have a very high correlation. This signal, along with the large declines in other commodities such as sugar and cotton, leads Faber to believe that stocks could follow commodities lower (in the short-term)
4. Buy Housing–While Faber thinks the US housing market has another 10% to fall, he would be a buyer because of attractive valuations. Faber compares the price of US housing to gold and concludes that housing has not been this cheap since the early 1980′s. But do not think there will be a quick recovery–there won’t be. The main point about housing is that it is a good inflation hedge and will likely keep its purchasing power of the next 10 years. In a serious inflation environment, Faber would rather own housing than paper dollars.
5. More QE Guaranteed–In Faber’s opinion, QE 3 is a near certainty. The US will be running trillion dollar budget deficits for the next 10 years. There is no way they can finance all of this through bond issuance. The Fed will have to at least partially monetize this to keep interest rates low.
1. Equity Markets–The markets may be giddy about stocks hitting new highs, but contrarian investor Marc Faber is having nothing of this. He is concerned that stocks will fall sharply in May and that the recent breakout in stocks will prove to be trap for the bulls. The markets are due for a correction and the technicals point to a weak market. In particular, Faber points to the decline in new 52 week highs as evidence of an unhealthy internal market. Right now, Faber would stay away from cyclicals, tech stocks, and banks. If you have to own stocks make sure it is something safe like consumer staples (MO, JNJ, PEP, KO, etc).
2. Gold & Silver—Still likes gold as a long-term investment and recommends dollar cost averaging every month regardless of the price. However, when it comes to silver, Faber is more cautious, noting the recent run-up in the price. He expects a 20%+ correction in the metals complex because the inflation trade has become too crowded.
3. Commodities–Dr Copper is issuing a warning to investors. While the S&P 500 has made a new high, copper failed to do so (non-confirmation). This is a significant development because Dr Copper and the SP 500 have a very high correlation. This signal, along with the large declines in other commodities such as sugar and cotton, leads Faber to believe that stocks could follow commodities lower (in the short-term)
4. Buy Housing–While Faber thinks the US housing market has another 10% to fall, he would be a buyer because of attractive valuations. Faber compares the price of US housing to gold and concludes that housing has not been this cheap since the early 1980′s. But do not think there will be a quick recovery–there won’t be. The main point about housing is that it is a good inflation hedge and will likely keep its purchasing power of the next 10 years. In a serious inflation environment, Faber would rather own housing than paper dollars.
5. More QE Guaranteed–In Faber’s opinion, QE 3 is a near certainty. The US will be running trillion dollar budget deficits for the next 10 years. There is no way they can finance all of this through bond issuance. The Fed will have to at least partially monetize this to keep interest rates low.
Marc Faber QE18
Marc Faber provided his latest views on the markets and global economy this morning in light of the nuclear crisis in Japan.
In a CNBC interview, the editor of The Gloom, Boom & Doom report made a bevy of predictions – which included many more rounds of quantitative easing (up to QE18), and eventually World War III.
Highlights from his comments included:
- the damage from the Japanese crisis will necessitate very heavy spending to rebuild infrastructure, and “that will be somewhat inflationary for the Japanese economy.”
- may be beneficial for equities in Japan
- negative for JGBs (Japanese government bonds)
- situation is “very negative for the yen in the long run”
- sees this as a “turning point for the yen”
- crisis is a “huge financial burden on a government that is already indebted”
- “I think it’s healthy that the markets start to focus on something else than what Mr. Bernanke is telling the press all the time.”
- “And then QE3 will come, QE4, QE5, QE6, QE7, whatever you want. The money printer will continue to print, that I’m sure.”
- “Mr. Bernanke doesn’t know much about the global economy, but he watches the S&P every day.”
- “I would fully expect more quantitative easing. There’s nothing else they (the Federal Reserve) can do actually.”
- mild economic recovery in the U.S. is ongoing, but the outlook for U.S. employment is not particularly good
- Oil is very attractive from a risk/reward point of view
- his macroeconomic forecast is an “ultra-bearish scenario” where “everything will collapse and that there will be World War III, and collapsing countries in the middle east, and then the supply will be curtailed and prices will go up.
- he corrected his earlier statement on further rounds of QE, saying that he meant up to QE18, not just QE8
- “until very recently the Fed has had very few critics. Very few people criticized the Fed’s policies under Mr. Greenspan and Mr. Bernanke. Over the last few months a lot of critical comments have come up about the Fed and its money printing habit, but I beg you, the S&P drops 20%, all the critics will be silenced, and they will all applaud renewed money printing. Sadly, sadly.”
- he did not specifically mention gold in this interview, but considering he has been bullish on the yellow metal for much of the past decade and sees so many additional rounds of QE ahead, he likely remains quite positive on gold.
In a CNBC interview, the editor of The Gloom, Boom & Doom report made a bevy of predictions – which included many more rounds of quantitative easing (up to QE18), and eventually World War III.
Highlights from his comments included:
- the damage from the Japanese crisis will necessitate very heavy spending to rebuild infrastructure, and “that will be somewhat inflationary for the Japanese economy.”
- may be beneficial for equities in Japan
- negative for JGBs (Japanese government bonds)
- situation is “very negative for the yen in the long run”
- sees this as a “turning point for the yen”
- crisis is a “huge financial burden on a government that is already indebted”
- “I think it’s healthy that the markets start to focus on something else than what Mr. Bernanke is telling the press all the time.”
- “And then QE3 will come, QE4, QE5, QE6, QE7, whatever you want. The money printer will continue to print, that I’m sure.”
- “Mr. Bernanke doesn’t know much about the global economy, but he watches the S&P every day.”
- “I would fully expect more quantitative easing. There’s nothing else they (the Federal Reserve) can do actually.”
- mild economic recovery in the U.S. is ongoing, but the outlook for U.S. employment is not particularly good
- Oil is very attractive from a risk/reward point of view
- his macroeconomic forecast is an “ultra-bearish scenario” where “everything will collapse and that there will be World War III, and collapsing countries in the middle east, and then the supply will be curtailed and prices will go up.
- he corrected his earlier statement on further rounds of QE, saying that he meant up to QE18, not just QE8
- “until very recently the Fed has had very few critics. Very few people criticized the Fed’s policies under Mr. Greenspan and Mr. Bernanke. Over the last few months a lot of critical comments have come up about the Fed and its money printing habit, but I beg you, the S&P drops 20%, all the critics will be silenced, and they will all applaud renewed money printing. Sadly, sadly.”
- he did not specifically mention gold in this interview, but considering he has been bullish on the yellow metal for much of the past decade and sees so many additional rounds of QE ahead, he likely remains quite positive on gold.
Monday, May 16, 2011
Paradigm Shift
fraud and conspiracy he had been charged with. What did in this Raj was his irrepressible penchant for trading on inside information—bad enough, but, even worse, committing the unpardonable sin of indulging in his dirty dealings via the telephone, with, as it happens, the feds an appreciative, if mum, audience.
We say "once-billionaire," because his lawyers reportedly have already relieved him of millions, and the appeals have yet to begin. The reckoning is that the inside dope (and, the trial revealed, there were no end of dopes eager to supply him with material tidbits) enriched Raj by nearly $64 million, a tidy sum consisting mostly of winnings, but also gains from dumping losers ahead of the crowd. The penalty for his mischievous doings could mount to over $170 million and an extended stay -- oh, say, 15 years minimum -- in the slammer.
Our fervent hope and prayer is that the Raj's misfortune will teach an invaluable lesson to the golden hordes of hedge-fund kingpins, indeed, to all who labor in the rich vineyards of Wall Street. And that lesson: If you insist on making illicit trades on privileged information, for heaven's sake, forget the phone and e-mail, and take a crash course in signage.
For the stalwart, upstanding 9,500 or so hedge-fund stewards of some $2 trillion in assets who aren't in jail, we suggest they brace themselves for intense scrutiny. Thanks to batting 1,000 against the Raj, prosecutors (to shamelessly change the metaphor in midsentence) smell blood in the water and are apt to pursue with newfound vigor other likely perpetrators of such illegal activity, determined to see justice done and not unmindful, to be sure, of the potential political gain of their worthy endeavors.
While the stock market seemed to shrug off the possible negative implications of sharply stepped-up surveillance of hedge funds, we have a hunch that the absence of the market's customary brio last week and, in particular, its limp performance in the final session, was in part a reflection of the unease such concerns engendered among the hedgies and their easily spooked investors.
Rather dispiriting, too, was that even much of the ostensibly good news was tinged with disappointment. For example, while retail sales in April extended their winning streak to 10 months in a row with a 0.5% gain, they shrank to 0.1% if you X out gasoline and food -- and they compared with 0.9% in March. The big jump at the pump also helped fuel a 0.8% increase in the producer price index, stirring renewed fears of inflation.
In like vein, while new claims for unemployment insurance fell a hefty 44,000 from the previous week, they still weighed in at 434,000, a formidable figure this late in a recovery. Moreover, the four-week moving average rose to 436,750, from 432,250. And while the most recent survey showed that job openings were at their highest since September 2008, there still were 4.3 folks out of work for every job available.
Lest we seem xenophobic, we should also note that restraining investor enthusiasm was fresh anxiety about the financial viability of the weak sisters in the European Union, especially Greece, and the ramifications of sovereign default (not good, in case you're wondering).
At the other side of the world, China continued to wrestle inflation, largely with monetary tightening. So far, this approach has not been notably successful, but Beijing seems intent on slaying the dragon, and, should its efforts seriously curb growth, the consequences for the rest of the globe are not clear -- but, chances are, they won't be salutary. At least, that's the view of nervous investors here.
None of this suggests that we're in imminent danger of the economy's staging a double dip. But it does help explain the ebullient stock market's sudden lack of oomph. And just so you don't fret too much over the weekend, it does provide a bigger wall of worry for equities to climb, and the bulls insist this is very, well, bullish.
To that lugubrious list of unsettling influences on investor sentiment, we might well add remaining bad vibes from the big shakeout in commodities that all but rubbed the shine off silver, nicked gold, dealt some mean blows to oil and, all in all, did a number on just about every commodity known to trading man.
Helping to polish off silver futures was a boost in margin requirements, while energy's drubbing sprang in no small measure from the better tone to the dollar and overstocking of gasoline and even some indications of softening demand. But the primary reason for the exodus from commodities was that so many of them had come too far, too fast and were begging for that nice euphemism known as "a correction."
The blame for the flyaway price surge is easily laid at the door of Federal Reserve chief Ben Bernanke and his beloved policy of quantitative easing. But we don't buy it. Rather, we think the culprit is better identified by that simple but revelatory table below. It's the handiwork of the admirable Jeremy Grantham of GMO, whose unvarnished insights we've had the pleasure of passing along from time to time.
China's Share of World
Commodity Consumption
CHINA %
COMMODITY OF WORLD
Cement 53.2%
Iron Ore 47.7
Coal 46.9
Pigs 46.4
Steel 45.4
Lead 44.6
Zinc 41.3
Aluminum 40.6
Copper 38.9
Eggs 37.2
Nickel 36.3%
Rice 28.1
Soybeans 24.6
Wheat 16.6
Chickens 15.6
PPP* GDP 13.6
Oil 10.3
Cattle 9.5
GDP 9.4
*Purchasing power parity
Source: GMO
We've lifted it from Jeremy's quarterly letter to shareholders. And what it depicts we find astonishing: namely, China's outsized appetite for commodities, and just how big a share of each one it consumes. Actually, the table appears in Part 1 of the missive, that bears the exhortatory heading, "Time to Wake Up: Days of Abundant Resources and Falling Prices are Over Forever."
The piece is really an extraordinary job, and we can't do full justice to it in the confines of the space allotted to us. So we suggest that, if you get a chance, plug into GMO's Website and read it at your leisure. The essence of it is that the world is using up its natural resources at an alarming rate, and "this has caused a permanent shift in their value."
The rise in global population (fast approaching 7 billion, and a recently released United Nations report estimates that it'll top 10 billion by 2100), the increase in wealth in developed countries, and the current explosive growth in developing countries, Jeremy warns, "have eaten rapidly into our finite resource of hydrocarbons and metals, fertilizer, available land and water." Despite a massive increase in fertilizer use, the growth in crop yields per acre, he observes, has declined from 3.5% in the 1960s to 1.2% today.
After a stretch of a hundred years ending in 2002, during which the world enjoyed price declines averaging 70% for all important commodities except oil, Jeremy reports wonderingly, ballooning demand from developing countries, especially China, has caused an unprecedented shift, and prices are now rising. Indeed, in the last eight years, they've risen enough to wipe out the effects of a century of decline.
The market, he contends, is sending us "the mother of all price signals." Statistically, by his reckoning, most commodities are so far removed from their extended former downtrend as to makes it likely that the old trend is gone -- "that there is, in fact, a paradigm shift -- perhaps the most important economic event since the Industrial Revolution."
To Jeremy, this means we'd better get serious about resource planning, and quickly. To us, it means that whatever the day-to-day or even month-to-month dips and blips in commodity prices, if Jeremy's right, the long-term trend has no place to go but up.
PART TWO OF JEREMY'S MESSAGE to shareholders may not be as cosmic as Part One, but it may be at least as important. It's about the stock market -- toward which he has been a bit antsy, but mostly positive. His advice, pure and simple: lighten up on risk-taking rather than waiting, as he had previously recommended, for October. And he admits that he may be too early, but there are worse things, we might interject, as 2008-09 painfully demonstrated.
What disturbs him is that here are equities a stone's throw from the 1400 on the Standard & Poor's 500 that he had targeted as the lower part of the 1400-1600 range he had expected it to reach. But the stock market, he points out, has reached this elevated level as if the economy were humming along strongly, as if housing had started to regroup after two years of being dead to the world and, most importantly, as if we hadn't experienced special and exogenous shocks. Yet, he sighs, "all of those presumptions are at least partly wrong."
He worries, particularly, about the Tunisia-Egypt-Libya-Yemen-Syria shock, that can be summed up as "oil shock." An oil shock has the potential to inflict serious damage on the economy, and touch off a big decline in stocks. While, the market has bounced back smartly, Jeremy fears it's underestimating the potential for bad trouble.
He owns up to other reservations as well. But it all boils down to this: "The environment has become too risky to justify prudent investors hanging around, hoping to get lucky."
We say "once-billionaire," because his lawyers reportedly have already relieved him of millions, and the appeals have yet to begin. The reckoning is that the inside dope (and, the trial revealed, there were no end of dopes eager to supply him with material tidbits) enriched Raj by nearly $64 million, a tidy sum consisting mostly of winnings, but also gains from dumping losers ahead of the crowd. The penalty for his mischievous doings could mount to over $170 million and an extended stay -- oh, say, 15 years minimum -- in the slammer.
Our fervent hope and prayer is that the Raj's misfortune will teach an invaluable lesson to the golden hordes of hedge-fund kingpins, indeed, to all who labor in the rich vineyards of Wall Street. And that lesson: If you insist on making illicit trades on privileged information, for heaven's sake, forget the phone and e-mail, and take a crash course in signage.
For the stalwart, upstanding 9,500 or so hedge-fund stewards of some $2 trillion in assets who aren't in jail, we suggest they brace themselves for intense scrutiny. Thanks to batting 1,000 against the Raj, prosecutors (to shamelessly change the metaphor in midsentence) smell blood in the water and are apt to pursue with newfound vigor other likely perpetrators of such illegal activity, determined to see justice done and not unmindful, to be sure, of the potential political gain of their worthy endeavors.
While the stock market seemed to shrug off the possible negative implications of sharply stepped-up surveillance of hedge funds, we have a hunch that the absence of the market's customary brio last week and, in particular, its limp performance in the final session, was in part a reflection of the unease such concerns engendered among the hedgies and their easily spooked investors.
Rather dispiriting, too, was that even much of the ostensibly good news was tinged with disappointment. For example, while retail sales in April extended their winning streak to 10 months in a row with a 0.5% gain, they shrank to 0.1% if you X out gasoline and food -- and they compared with 0.9% in March. The big jump at the pump also helped fuel a 0.8% increase in the producer price index, stirring renewed fears of inflation.
In like vein, while new claims for unemployment insurance fell a hefty 44,000 from the previous week, they still weighed in at 434,000, a formidable figure this late in a recovery. Moreover, the four-week moving average rose to 436,750, from 432,250. And while the most recent survey showed that job openings were at their highest since September 2008, there still were 4.3 folks out of work for every job available.
Lest we seem xenophobic, we should also note that restraining investor enthusiasm was fresh anxiety about the financial viability of the weak sisters in the European Union, especially Greece, and the ramifications of sovereign default (not good, in case you're wondering).
At the other side of the world, China continued to wrestle inflation, largely with monetary tightening. So far, this approach has not been notably successful, but Beijing seems intent on slaying the dragon, and, should its efforts seriously curb growth, the consequences for the rest of the globe are not clear -- but, chances are, they won't be salutary. At least, that's the view of nervous investors here.
None of this suggests that we're in imminent danger of the economy's staging a double dip. But it does help explain the ebullient stock market's sudden lack of oomph. And just so you don't fret too much over the weekend, it does provide a bigger wall of worry for equities to climb, and the bulls insist this is very, well, bullish.
To that lugubrious list of unsettling influences on investor sentiment, we might well add remaining bad vibes from the big shakeout in commodities that all but rubbed the shine off silver, nicked gold, dealt some mean blows to oil and, all in all, did a number on just about every commodity known to trading man.
Helping to polish off silver futures was a boost in margin requirements, while energy's drubbing sprang in no small measure from the better tone to the dollar and overstocking of gasoline and even some indications of softening demand. But the primary reason for the exodus from commodities was that so many of them had come too far, too fast and were begging for that nice euphemism known as "a correction."
The blame for the flyaway price surge is easily laid at the door of Federal Reserve chief Ben Bernanke and his beloved policy of quantitative easing. But we don't buy it. Rather, we think the culprit is better identified by that simple but revelatory table below. It's the handiwork of the admirable Jeremy Grantham of GMO, whose unvarnished insights we've had the pleasure of passing along from time to time.
China's Share of World
Commodity Consumption
CHINA %
COMMODITY OF WORLD
Cement 53.2%
Iron Ore 47.7
Coal 46.9
Pigs 46.4
Steel 45.4
Lead 44.6
Zinc 41.3
Aluminum 40.6
Copper 38.9
Eggs 37.2
Nickel 36.3%
Rice 28.1
Soybeans 24.6
Wheat 16.6
Chickens 15.6
PPP* GDP 13.6
Oil 10.3
Cattle 9.5
GDP 9.4
*Purchasing power parity
Source: GMO
We've lifted it from Jeremy's quarterly letter to shareholders. And what it depicts we find astonishing: namely, China's outsized appetite for commodities, and just how big a share of each one it consumes. Actually, the table appears in Part 1 of the missive, that bears the exhortatory heading, "Time to Wake Up: Days of Abundant Resources and Falling Prices are Over Forever."
The piece is really an extraordinary job, and we can't do full justice to it in the confines of the space allotted to us. So we suggest that, if you get a chance, plug into GMO's Website and read it at your leisure. The essence of it is that the world is using up its natural resources at an alarming rate, and "this has caused a permanent shift in their value."
The rise in global population (fast approaching 7 billion, and a recently released United Nations report estimates that it'll top 10 billion by 2100), the increase in wealth in developed countries, and the current explosive growth in developing countries, Jeremy warns, "have eaten rapidly into our finite resource of hydrocarbons and metals, fertilizer, available land and water." Despite a massive increase in fertilizer use, the growth in crop yields per acre, he observes, has declined from 3.5% in the 1960s to 1.2% today.
After a stretch of a hundred years ending in 2002, during which the world enjoyed price declines averaging 70% for all important commodities except oil, Jeremy reports wonderingly, ballooning demand from developing countries, especially China, has caused an unprecedented shift, and prices are now rising. Indeed, in the last eight years, they've risen enough to wipe out the effects of a century of decline.
The market, he contends, is sending us "the mother of all price signals." Statistically, by his reckoning, most commodities are so far removed from their extended former downtrend as to makes it likely that the old trend is gone -- "that there is, in fact, a paradigm shift -- perhaps the most important economic event since the Industrial Revolution."
To Jeremy, this means we'd better get serious about resource planning, and quickly. To us, it means that whatever the day-to-day or even month-to-month dips and blips in commodity prices, if Jeremy's right, the long-term trend has no place to go but up.
PART TWO OF JEREMY'S MESSAGE to shareholders may not be as cosmic as Part One, but it may be at least as important. It's about the stock market -- toward which he has been a bit antsy, but mostly positive. His advice, pure and simple: lighten up on risk-taking rather than waiting, as he had previously recommended, for October. And he admits that he may be too early, but there are worse things, we might interject, as 2008-09 painfully demonstrated.
What disturbs him is that here are equities a stone's throw from the 1400 on the Standard & Poor's 500 that he had targeted as the lower part of the 1400-1600 range he had expected it to reach. But the stock market, he points out, has reached this elevated level as if the economy were humming along strongly, as if housing had started to regroup after two years of being dead to the world and, most importantly, as if we hadn't experienced special and exogenous shocks. Yet, he sighs, "all of those presumptions are at least partly wrong."
He worries, particularly, about the Tunisia-Egypt-Libya-Yemen-Syria shock, that can be summed up as "oil shock." An oil shock has the potential to inflict serious damage on the economy, and touch off a big decline in stocks. While, the market has bounced back smartly, Jeremy fears it's underestimating the potential for bad trouble.
He owns up to other reservations as well. But it all boils down to this: "The environment has become too risky to justify prudent investors hanging around, hoping to get lucky."
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