Happy New Year: Horse Coins!

Brazil is ready for the World Cup

Is China's central bank aiming at becoming the world's largest holder of gold reserves? They are rapidly going in that direction.

China is importing large amounts of gold. Macquarie estimates that 1,800 tons went into China in 2013. This is hard to verify as China, unlike other countries, does not disclose gold import figures. !,800 would make China the world's top importer and would represent the bulk of annual mine production of 2,600 tons.

China's central bank has not reported its reserves since 2009, when they were 1,054 tons. Currently the US Fed has,or at least has title to, 8,000 tons, or about 30% of world central bank holdings. Given that the NY Fed, which holds, or at least has some sort of call on, 6,500 tons on behalf of other countries' central banks, is unable to return Germany's paltry 300 tons that were supposed to be on deposit there, one assumes that all the gold has been lent out, which is standard practice among central banks. But the fact that Germany cannot be repaid immediately indicates that the NY Fed is having trouble recovering its lent gold. The Fed lends gold to banks like JP Morgan, which then sells it. So one can assume JPM is short and having trouble covering, which would explain why this bank is the biggest taker of physical delivery on COMEX, although the numbers are not huge.

In this context, the gold price has so far held up fairly well despite massive ETF selling. (Of course, it depends on what one means by "fairly well.")

The basic question is what is the Chinese central bank up to? Rumors are that it wants to become the largest holder of gold reserves in the world. As of 2009, the Fed had 7,000 tons more. We don't know where the Chinese are now, however, but there are probably several thousand tons more to buy.

QE's big success: Renaissance of the junk bond market

There was a good article this morning in the FT, "Corporate bond sales set to beat 2012 after passing $3 trillion." The story inside the story is more specific, however: Junk bond issuance is at record levels and the ability to issue has depressed defaults to only 2.2% of outstanding bonds. It is estimated that issuance will be greater than $500 billion globally, over twice the 2006 level of $208 billion. ($56 billion in 2008)

QE has certainly encouraged some degree of imprudent lending in the public markets but how much is hard to say. Of course, the higher the future inflation rate the lower will be the default rate in these issues, and vice versa.

I have been asking myself why free money in the public markets has not sparked a boom. I suppose the answer is that the contraction of the banking system has offset the looseness in the public markets. This is an advantage for large companies and a disadvantage for small and medium ones, as the latter do not have access to the public markets.

Even those who don't expect to pay aren't buying

Through the end of October, 1.2 million have signed up through the exchanges, both federal and state. Of these, 800,000 are in Medicaid (or CHIPS), the free overage for those with incomes of up to 133% of the poverty level. (Income is your own earned income, not including rent subsidies, food stamps, and other welfare payments.) Understandably, people who don't have to pay are more enthusiastic than those who do, but even the non-payers are lukewarm. Bottom line: this service has been rejected by paying customers, at least so far.

There is something fundamentally wrong with our US health system, both pre- and post-Obamacare. I don't understand why health care costs so much here. I have lived in England, France and Singapore. In England and France the care is good and costs society half what it costs here, as a percent of GDP. In Singapore,where the health care is the best I have experienced, the cost is one-fifth the US costs. It's puzzling.

Here is the story in the New York Times:

http://www.nytimes.com/2013/12/16/opinion/medicaid-outpaces-private-plans.html?smid=pl-share

Welcome respite from global warming

Yesterday the Boston Globe had an article on the snowy owl problem. These arctic birds have come further south and in greater numbers than in any previous December in living memory due to extreme cold in the arctic. They are posing a problem for planes at airports and the NY airports have started shooting them, to the consternation of naturalists. (Trapping solutions are now being tried.)

While the plight of these birds is a cause for concern, it is reassuring that we seem to be having a break in global warming. Antarctica has just recorded the coldest temperatures on record as well as record ice growth. (see below) Likewise, in the arctic ice growth has reversed its declining trend and the extent of sea ice in the north is now at normal historical levels.

Mexico responds to crime wave

Today's FT Mexico City Notebook reports on an interesting private sector solution to Mexico's crime wave: funeral parlors in Ciudad Juarez are now open 24-hours a day.

Happy at school? Not so much, in the USA

You can't expect them to notice everything

The Mexican authorities have just uncovered an illegal activity that seems to have been going on for years. A Mexican crime syndicate called the Knights Templar has managed to slip illegal iron ore mining operations, giant truck convoys, ship loading facilities and large bulk carriers right under the noses of the authorities and to smuggle the ore to the Chinese. The shipments go through Lazaro Cardenas, Mexico's second largest port.

By a fortunate twist of events, the authorities were able to stumble upon this operation. Firm action is contemplated.

http://news.nationalpost.com/2013/11/29/mexican-drug-cartels-diversify-now-make-money-mining-and-selling-ore-to-the-chinese/

Chinese Yuan Replaces Euro as Second Most Used Trade Transaction Currency

Swift reports that the renmimbi has passed the euro as a currency used in world trade. In January 2012, the renmimbi accounted for 1.89% of world trade. It was up to 8.66% in October 2013. The euro was 7.87%. This is a very dynamic rate of change.

I make bold to suggest that the abuse of the dollar by the Fed is producing unwanted consequences, which may possibly snowball.

The Bloomberg article is linked: http://www.bloomberg.com/news/2013-12-03/yuan-passes-euro-to-be-second-most-used-trade-finance-currency.html
--

Housing bubbles proliferate, except for the US and southern Europe

Neil Irwin of the Washington Post has blogged the following report on Nouriel Roubini's recent warning on where the excess liquidity is producing bubbles:

"Roubini doesn't see bubbles in the places where they were most severe in the pre-2008 period. He doesn't mention the United States or Spain or Ireland. Rather, Roubini sees housing prices getting out of whack in quite a few small and mid-sized nations that are well-governed and managed to avoid the worst economic effects of the financial crisis: Switzerland, Sweden, Norway, Finland, France, Germany, Canada, Australia, New Zealand and the London metropolitan area in the U.K. He adds some key emerging markets that show the same dynamic: Hong Kong, Singapore, China and Israel, and major urban centers in Turkey, Indonesia, India and Brazil.

"In this view of the world, a better question might be where in the world is there NOT a housing bubble (the answers, apparently, are the United States, southern Europe, Russia and all of Africa).

"Roubini's argument boils down to this: The major economies have been growing only slowly. Yet with low interest rates and aggressive central bank action across the globe, there is a giant pool of money that has to go somewhere. That somewhere has not been productive new investments, like companies building new factories. Rather, it has come in the form of people taking advantage of cheap credit to bid up the price of existing real estate in cities from Stockholm to Sydney."

Nepheloccoccygia

The weather woman introduced this word, which is new to me, this morning at the end of the weather forecast. She said that one accepted meaning of nephelococcygia is the tendency of people to see familiar objects in the shape of clouds. Googling the word, I found that the original meaning was Cloudcuckooland, the name of the mythical avian city in Aristophanes' The Birds, an imaginary, implausible utopian parody of 5th century B.C. Athens.

Turning this over in my head as I waited for my sister to get ready for me to drive her to the bus station for her return, post Thanksgiving, to Hartford, I came up with a third and new definition: "Nephelococcygia: the tendency to imagine that only good things can result from easy monetary policy." Looking up into the clouds, we discern a land of free money that never loses its value, bringing prosperity and happiness to all. It is a sort of paradise, albeit, I am afraid, only that of a fool.

Driving back from the bus station, NPR reported, since this is the first day of the month, that many people believe that saying "rabbit, rabbit" the first thing upon awakening on the first day of each month brings good luck. (This is also a new one to me.) Franklin D. Roosevelt was reported to have practiced this spiritual exercise throughout his presidency.

So I shall say "rabbit, rabbit" every time I hear or see Bernanke or Yellen on the news. It can't hurt.

Argentinian problem solving

House prices: "It looks like we are off and running again."

So says Robert Shiller.  The Federal Housing Finance Agency (FHFA) reports that September house prices were up 8.5% YOY.  Housing permits were up at a 6.2% annual rate in October, due mainly to apartment building plans, to 1.03 million units, a 5-year high.  Maybe the Fed's QE and ZIRP sparks have finally ignited the dry brush.

"It's just plain sad."

What every American born will need.

Thanks to Global Investors for this interesting drawing

Signs of global economic recovery proliferate

It looks like the world economy is accelerating, except, of course, in the US where health care uncertainties are delaying hiring and investment.  AP Moller-Maersk, which accounts for 15% of global sea freight, has just raised its 2013 profit forecast.  It says global sea freight will increase 2-3% this year and 4-6% in 2014 and 2015.  Meanwhile, the Bank of England says that unemployment is falling faster than expected.

Why is the US slowing down when the rest of the world is speeding up?

Japan grew at an annual rate of 4% in the first half of 2013. The Chinese PMI came in at 51.4, ahead of expectations, and they reported that industrial production showed the best growth in 18 months. Spain reported positive Q3 GDP and Greece as well, exceeding forecasts, due to strong exports. Ireland reported the 16th month of declining unemployment, which is now 13.2%. Important: It should be noted that Ireland's unemployment rate is reported on a U-6 basis, which includes part-time and discouraged workers. Our U-6 rate is 13.6%, so Ireland's unemployment rate is now below that of the US.


In light of the good world news, why is the US slowing down? I suppose it is because of Obamacare. Businesses don't really know the full implications of the law and are holding back on hiring and switching people from full- to part- time. It will take awhile to sort all of this out. I attended a presentation on the implications of Obamacare for Massachusetts organized by the Federation of Small Businesses on Wednesday. The presentation was given by people from MassHealth and an independent benefits specialist. The 37 business represented there were confused, nervous and a little scared. The benefits specialists said that many of his clients in the less-than-50-employee size were opting for salary in lieu of health care. (There is no penalty or fines for small businesses that don't offer health care.) That is, they are increasing salaries by the current cost of health insurance and cancelling their group plans

Let the debt cancellation begin!

It is beginning to look like debt cancellation, which Andrew Capon very amusingly discussed in his Christmas essay in Euromoney, "A Christmas Carol fit for a King," ( Inside Investment, Dec 2012 ) is the only way out for Japan and those other countries that aspire to be like Japan.

It's really a painless solution that involves no austerity and benefits everyone. The central bank simply buys government debt and cancels it, thus reducing the stock of government debt. Interest rates stay low because a shortage of debt is created. No government expenditures need to be curtailed and it is not necessary to raise taxes. (Tax could be reduced, in fact.) Inflation is avoided because households remain burdened with debt and their spending is restrained.


So when does the debt cancellation start?

Advice to ambitious whippersnappers: Get government work

Here is a quote from today's BLS employee compensation report. Government work is a much better deal than private industry for employees. That is therefore where the most capable among us will go.

"Private industry employers spent an average of $28.89 per hour worked for total employee compensation in December 2012, the U.S. Bureau of Labor Statistics reported today. Wages and salaries averaged $20.32 per hour worked and accounted for 70.3 percent of these costs, while benefits averaged $8.57 and accounted for the remaining 29.7 percent. Total compensation costs for state and local government workers averaged $41.94 per hour worked in December 2012. Total employer compensation costs for civilian workers, which include private industry and state and local government workers, averaged $30.84 per hour worked in December 2012."

Graft disguised as civil service employment in Greece

There is an interesting article on Greece's "efforts" to reduce its civil service "work" force over the past few years in the New York Times today.

http://www.nytimes.com/2013/06/12/world/europe/greece.html?smid=pl-share

The state used to employ about 1/3 of the country's "workers," but this number has shrunk to about 1/4. Further reductions have become somewhat intractable, with even "temporary" "workers" getting court injunctions that prevent their discharge.

It doesn't bother me that some people don't work; work is over-rated and the value of leisure is not appreciated as much as it should be. On the other hand, I don't believe someone else should pay for my leisure. Unless, of course, there are volunteers. . . Anyone?

More holders of physical gold and fewer of gold ETFs

Even as China yesterday approved the listing of gold ETF's domestically, investors are increasingly interested in owning physical gold directly. Deutsche Bank has just opened a vault in Singapore, where JP Morgan and the the Singapore Mercantile Exchange have one, and Morgan is reopening its New York vault and Baclays's is opening a new one in London. (see article below.) Gold is moving from the more speculative ETFs to longer term holders.

Lincoln

From the FT: 

"Deutsche opens Singapore gold vault for wealthy investors

By Josh Noble in Hong Kong 

"Deutsche Bank has become the latest bank to tap the growing appetite for precious metals vaults, opening a safe deposit in Singapore capable of holding up to 200 tonnes of gold to meet storage demand in Asia.

"The opening of the vault comes as banks seek to tap into rising demand from wealthy investors for direct access to physical bullion rather than holding exchange traded funds, futures and options on the metal.

"Over the past two years, JPMorgan has reopened an old vault in Manhattan and built a facility in Singapore. Barclays, meanwhile, opened a precious metals vault in London late last year.

"Mark Smallwood, Deutsche’s head of wealth management in Asia, said investors globally were now paying closer attention to where their gold was stored, and that the new facility would help meet the changing demands of Asian investors.

'“Until now, our private clients have traded and invested in significant amounts of gold through the London spot market and exchange traded funds,” said Mr Smallwood. “There is a growing recognition among investors that they might want to have at least part of their allocation in physical bars.”
"
"Deutsche’s decision to locate its new vault in Singapore is a boost for the city-state’s efforts to become the regional centre for gold trading. Last year Singapore removed sales tax on gold investment in an effort to boost its role in the market.

"Many Asian investors have used the recent falls in the spot price to load up on the precious metal. Fevered retail buying in April left many banks, jewellers and even the Hong Kong gold exchange without enough stock to meet demand.

"Deutsche Bank expected to see strong demand from wealthy clients looking to use physical gold as collateral for other trading activity, added Mr Small-wood.

'“Asian clients like to make all their assets work very hard for them. Even though they may be holding gold for a potential catastrophic event, they recognise that it might not happen tomorrow,” Mr Small-wood said.

"The new facility will be located in the Singapore Freeport, already home to storage facilities run by auction house Christie’s and wine investment manager Stamford Cellars.

"Other banks, such as JPMorgan, already have gold vaults in Singapore, which are largely focused on institutional clients. . . "
.

The US banks are awash with liquidity but aren't making loans

. . . or is it that borrowers won't borrow?

The remarkable and unprecedented since 1987 slump continues. (The only thing approaching normal is commercial and industrial lending.) At the same time, banks are maintaining $1.9 trillion in excess reserves at the FED.

Two graphs below:

Will the Fed succeed in engineering a 1970's investment environment?

I think that this is what the Fed is aiming for. It wold reduce the US federal debt burden to a manageable level. Below is a comment from Frank Holmes essay today on what worked then. (Remember, these are nominal numbers; inflation averaged over 8%/annum during the decade. Thus, the real value of the initial stock of government debt was reduced by over 50%; sorry, bondholders.)

"A Rerun of That ‘70s Show?

Looking ahead, if the economy starts to experience runaway inflation, history shows it makes sense to hold real assets. A decade ago, Investment Advisers Stephen Leeb and Donna Leeb wrote a very informative book on how to profit from the “Turbulent Post-Technology Market Boom.” The book, Defying the Market, discussed how to protect against deflationary and inflationary scares, comparing investment ideas that were likely novel to many people in their day, including energy, food, gold, and small-cap stocks.

Will Commodity Investors See
a Rerun of That ’70s Show?

	Nominal Annualized Returns
Gold/Silver	33.10%
Gold Stocks	28.00%
Oil	26.40%
Oil stocks	14.20%
Equity REITs	12.10%
Commodities	11.00%
Real Estate	10.10%
S&P 500 Index	8.40%
CPI	8.10%
T-Bills	6.80%
Government Bonds	3.90%
Source: Defying the Market, Stephen Leeb and Donna Leeb, Leeb Investment Advisors

One table listed the performance of these investments during an earlier era when Americans faced high inflation—the 1970s.

In that decade, gold, silver and oil outperformed many other areas of the market. Gold stocks rose 28 percent on an annualized basis and oil companies grew 14 percent. The S&P 500 Index, on the other hand, grew 8.4 percent on a nominal basis. After factoring in sky-high inflation of 8.10 percent, gold and oil still added significant real returns. The real return of the overall stock market, on the other hand, was nearly zero.

“Stocks leveraged to growth, such as the oils and oil drillers, did splendidly. But the big-cap stocks [i.e. the general market] … were complete duds,” wrote the Leebs."

The shift to equities from bonds is underway in Japan

Japan’s public pension fund, the world’s biggest manager of retirement savings, said it will reduce its holdings of local bonds and buy more shares.  The bond allocation is being reduced to 60% from 67%.

http://www.businessweek.com/news/2013-06-07/japan-s-pension-fund-cutting-local-bond-holdings-to-buy-equities

I suspect that the equity markets have further to go, at least until central banks start tightening.

Asians taking US jobs!

And it's not just Asians in Asia; it's also Asians in the USA. Is this a 5th column? Women, also, show some troubling signs of over-achievement. Lincoln

From today's US Bureau of Labor Statistics press release:

"Among the major worker groups, the unemployment rate for adult women (6.7 percent) declined in April, while the rates for adult men (7.1 percent), teenagers (24.1 percent), whites (6.7 percent), blacks (13.2 percent), and Hispanics (9.0 percent) showed little or no change. The jobless rate for Asians was 5.1 percent (not seasonally adjusted), little changed from a year earlier. (See tables A-1, A-2, and A-3.)

Puzzling failure of household sector in OECD to reduce debt after crisis

Only households in Germany and Japan are less indebted than in 2000. (see attached) This is interesting in light of Martin Feldstein's comments on NPR yesterday, when he pointed out that the household savings rate is now below 3% in the US and so consumption will consequently be very constrained in the next few years.

A small increase in interest may, in the absence of inflation should that be the case, trigger a shift from consumption to saving.

Consumers rewarded for defaulting on mortgages

Eleven banks, including Bank of America, Citi, and Morgan, have begun sending checks to "victims" of the robo-signing scandal, by which banks foreclosed on mortgage defaulters without observing proper procedures.  The cost to the industry, and therefore their shareholders and depositors is $9.3 billion.  Of the $9.3 billion settlement, $3.6 will be distributed to the victims in the form of cash payments. There are 4.2 million of these victims; a case-by-case review has found that only 53 of the 4.2 million were not actually in default.  (Yes, the number is 53.)  So the others (4.2 million minus 53) were in default.  This is why they are being compensated.

It's a little sad that people who actually paid their mortgages are not being compensated.  But such is the way of the world.

"Frustrated central banks move into riskier assets"

This is the title of an article on page 2 of today's Financial Times. Central Bank Publications and RBS have surveyed 60 central banks and these banks expressed dissatisfaction with artificially low interest rates on reserves currencies and fear for the consequences of unbridled monetary expansion as practiced by the Fed and others.  These banks hold $10.9 trillion dollars, most of which reserves are in Asia and the Middle East.  They have been diversifying into non-traditional currencies like the Canadian and Australian dollars, the Chinese renminbi, and the Scandinavia currencies.  Here is a quote: "The response to the crisis by these monetary authorities has had a profound effect, the poll found: more than four-fifths of the respondents said the aggressive monetary easing of the US Federal Reserve and the European Central Bank had altered their behaviour."

The chance of a dollar crisis is rising, but it is hard to see where central banks will go.

Chairman Ben and the lost boys (and girls) in Neverland

Each year, when it releases its full transcripts of the Federal Open Market Committee (FOMC) from five years ago, the Fed invites us to cast our minds back to a place long ago and far away. The conversation around the conference table at the Fed's Washington headquarters on January 30 and 31, 2007¹ seemed to take place in Neverland rather than on the verge of the worst financial crisis since the Great Depression.

Housing starts had fallen steeply from almost 2 million (annual rate) in early 2006 to about 1.1 million at year end, just before the FOMC met. The Feds were not worried however (there are few worries in Neverland) because their model predicted that the rate would soon rebound to a normal 1.3 million level. Problem solved! (But in fact, starts fell to 400 thousand by the end of 2008.) The FOMC did fret pleasantly about inflation, however.

In fact, only a relatively few paragraphs of the 200+-page transcript were devoted to the housing crisis. Here is a sampling. Moskow of the Chicago Fed said that that “the economy is clearly showing more underlying strength than we thought in December.” Lacker of Richmond commented that “each batch of housing data has bolstered my confidence in the trajectory we sketched out last fall – namely, that a drag from housing will mostly disappear by midyear with spillover having been relatively limited.” Gov. Bies said, “we feel very good about overall credit quality.” Gov. Mishkin commented, “we're not seeing anything out of the ordinary or a persistent pattern, and that gives me more confidence that nothing bad is going to happen here.” (Mishkin had co-authored a study proving that nothing bad could happen in Iceland either.) Bernanke summarized: “The general view was that housing would cease to subtract from growth later this year.” Yellen of San Francisco agreed: “Housing remains a concern, but I think the prospects for a really serious housing collapse that spreads to consumer spending have diminished substantially. . . To me the upside risk to inflation seems palpable, especially because labor markets have tightened.” (Yellen is the reputed front-runner to succeed Bernanke, assuring a continuation of .. . ah . . continuity; the magical Veil of Nescience that Dr. Greenspan bequeathed to Chairman Bernanke seems to sit well on her brow.)

The Fed GDP forecast at the meeting was a cheery 2.2% rate in the first half of 2007, 2.4% in the second, and 2.5% for 2008, not the 2% for 2007, 0% in 2008, and -4% in 2009 that actually befell the world outside of Neverland. Back on planet earth alarm bells were ringing non-stop.² Barrons had suggested in August 2006 that housing prices could drop 30%. At the Davos conference just before the Fed meeting, Nouriel Rubini made dire predictions, and the Bank for International Settlements warned of a deepening crisis. Despite these warnings, the Fed stuck to its rosy scenario because in Neverland every time someone says “I don't believe in fairies” a fairy dies.

Even Euromoney seems to have got it right! In the January 2007 cover story, “The world on the cusp,” which was well-illustrated by a drawing of a world on a cusp, Clive Harwood introduced a series of articles that presented “the view that the state of global imbalance must come to an end soon, and with painful consequences.” Charles Dumas predicted “a hard landing followed by poor recovery,” that would “likely cause severe deflation.” Brian Reading followed by stating that “the world is suffering unprecedented financial imbalances” and that “their inevitable reduction . . . will dominate global growth prospects. . .”

But even in Neverland where all stories have happy endings, drama exists. Think of Hook and the crocodile. At the Fed meeting, drama came in the form of the interim president of the Atlanta Fed, Mr. Pat Barron, a practical, energetic, and brilliant man who rose from auto mechanic at Buckhead Chrysler Plymouth to COO of the Atlanta Fed. He is a practitioner not of mathematical economics, like Dr. Ben, but of “descriptive economics,” which is now derided in academe and defined as explaining “economic phenomena as they are without making any statements about how they ought to be.” He expressed a “contrarian view” that the housing market was in deepening crisis. The Lost Boys (and Girls) listened politely to this real world Wendy and moved on.³

History suggests that investors should assign a correlation of -1 to the forecasts of certain central bankers. Ben says the exit from QE will be orderly. Where is he leading us? “Second star to the right and straight on till morning.” That's where you'll find Neverland.

1http://www.federalreserve.gov/monetarypolicy/fomchistorical2007.htm

2See Tee,Gillian, Fool's Gold, Free Press, New York, 2009, especially chapter 10: “Tremors.”

3 According to Tett's book, Geithner was also worried, but ever the good subordinate, he kept his peace.

Reserve Bank of NZ claims it's "not a bimbo."

New Zealand's Reserve Bank is putting in place a bank rescue plan that would include forfeiture of deposits. It denies, however, that these deposits are like Cypriote deposits. The bottom line, however, is that bank deposits have entered the mix of assets available to government to solve government problems.

Here is a report from Fairfax New Zealand News:

The Reserve Bank is rejecting suggestions that its new policy for banks facing a collapse is anything like rejected plans to sort out the present banking crisis in Cyprus.

The RBNZ plans that will mean a "haircut" or partial loss on all deposits if a bank fails, are due to come into force in New Zealand at the end of June.

Reserve Bank Deputy Governor Grant Spencer said today that the RBNZ "Open Bank Resolution" (OBR) policy would mean a quick and orderly resolution of a bank collapse.

"It is markedly different from proposals to resolve the banking crisis in Cyprus," Spencer said

Depositors' money in banks here had never been guaranteed, apart from temporary periods, such as under the Deposit Guarantee Scheme from late 2008 to December 2011.

"If their bank fails, depositors have always needed to understand that deposits are not guaranteed," he said.

The perception and reality of deficit spending.

Perception can diverge from reality for a considerable length of time.  Here are two comments that reflect this:

Mayor Bloomberg on the radio:  "“We are spending money we don’t have,” Mr. Bloomberg explained. “It’s not like your household. In your household, people are saying, ‘Oh, you can’t spend money you don’t have.’ That is true for your household because nobody is going to lend you an infinite amount of money. When it comes to the United States federal government, people do seem willing to lend us an infinite amount of money.… Our debt is so big and so many people own it that it’s preposterous to think that they would stop selling us more. It’s the old story: If you owe the bank $50,000, you got a problem. If you owe the bank $50 million, they got a problem. And that’s a problem for the lenders. They can’t stop lending us more money.” (Observer.com)

Warren Buffet on CNBC:  "If the Fed bought $3.5 trillion of Federal debt a year then we would have no deficit and would not have to pay any taxes at all." 

Buffet was being ironic but Bloomberg was not, or was it the other way around?

As goes Venezuela, so goes Germany: A run on the Fed's gold reserves?

Germany is withdrawing its gold from the Bank of France and the Federal Reserve and stocking it in their own vaults in Frankfurt. This follows Bundesbank board member Thiele's visit to all global storage sites.  The German central bank says its move is designed to "build trust and confidence domestically" in its gold reserves.  The statement also suggests that auditing, or lack of it, is an issue.

Are doubts building about the security of reserves held at the Fed by other central banks?

http://www.bloomberg.com/news/2013-01-16/bundesbank-to-repatriate-674-tons-of-gold-to-germany-by-2020.html

Hyperinflation or deflation?

Hyperinflation or deflation? It depends on your standard of comparison. We have had huge inflation since 2008 when measured in shares of RIMM (Research in Motion,) for example. Today it costs 10x as many RIMM shares to buy a McDonald's burger than it did four years ago, but has the price of a burger increased that much? In Latin America, we saw in the late eighties prices doubling each month in some countries in local currencies while they were dropping in terms of dollars. Were they experiencing inflation or deflation? As Einstein pointed out, it is relative to your terms of reference. I think we will eventually have hyperinflation measured in US dollars accompanied by deflation in real terms.

Ecuador loses competitiveness in bananas

Despite the government's efforts to maintain its reputation as the world's foremost banana republic through stupid and corrupt policies, Ecuador's competitiveness in the sector is declining, probably due to the effects of the oil boom.

Comment from Davy Stockbrokers in Dublin:

"FACTS: Ecuador banana sales have dropped by half, according to trade publication Fresh Plaza.

"ANALYSIS: Although Ecuador is a major banana exporting nation, accounting for about 25% of global exports in 2010, it has become less competitive with selling prices around $10.50/box versus $8.00/box in Colombia, Costa Rica and Central America. Fyffes, which sells 900,000 banana boxes to Europe weekly, currently uses Ecuador as one of its sources of supply but, according to a representative, it may soon cease purchases from Ecuador as competitiveness has been eroded."

India tries to curtail gold imports: Will other countries follow suit?

Gold accounts for one half of India's current account deficit, so the authorities want to reduce the imports by raising import duties. The question is whether or not this will increase the public's desire to partake of the forbidden fruit. The article from the FT is below. It is interesting that the FT's headline writers chose to describe of Indians' desire to hold their capital in the form of gold as an "unhealthy addiction." It certainly is unhealthy for those who wish to manipulate the value of money.


FT: Tuesday, January 15:

"India seeks ways to beat unhealthy addiction to gold"

News analysis

A rise in import duties is only one of the ideas under consideration, write Victor Mallet and Jack Farchy

It was no surprise that a deliberate threat at the start of this year by Palaniappan Chidambaram, Indian finance minister, to make gold “a little more expensive to import” sent shudders through the international gold market.

India is the world’s largest gold importer and accounts for more than a fifth of global demand. Last year, a drop in imports of about 20-25 per cent – perhaps caused by a previous increase in import duty but also the result of the slowdown of the domestic economy – was one of the main factors in gold’s relatively lacklustre performance.

“The focus on the cost of India’s gold imports at an official level could be seen as a threat to what is the largest physical bullion market alongside China,” says Tom Kendall, precious metals analyst at Credit Suisse in London.

What is not yet clear is whether the measures contemplated by the Indian authorities will actually curb the volume of gold imports, and so affect the price further.

Mr Chidambaram and other officials are concerned about the apparently unstoppable urge among the country’s 1.2bn people to buy gold jewellery and invest in bullion. There are two main reasons for this: the swelling current account deficit and the risks posed to the stability of the banking system.

India’s current account deficit hit a worrying 5.4 per cent of gross domestic product in the three months to September, and in some months gold imports accounted for half the gap. The “impact of huge gold imports on external stability” was described this month as “a major concern” by a Reserve Bank of India working group set up to study the issue of gold.

In its draft report, the RBI also spoke of “systemic concerns” arising from the “huge borrowings” of a growing number of so-called non-banking financial companies that lend money to Indian retail clients, storing their gold and gold jewellery as collateral.

One option for Mr Chidambaram, analysts say, is to increase the import duty from 4 per cent to, say, 6 per cent in an attempt to stifle demand. The revenue raised would have the beneficial side-effect of helping to trim the fiscal deficit. Higher tax, on the other hand, could simply divert more of the gold trade on to the black market.

In any case, says Kishore Narne, associate director for commodities and currencies at Motilal Oswal commodity brokers, only about 10-15 per cent of Indian consumers are price-sensitive when it comes to gold.

“It’s part of our tradition and we keep on buying gold,” he says. “It’s our compulsion. We can’t do anything about it.” The stock of the precious metal in India is estimated at between 12,000 and 25,000 tonnes, and greater prosperity in rural areas is pushing demand ever higher.

Another approach, championed by Raghuram Rajan, the government’s chief economic adviser, is to focus not on the desire for jewellery but on gold’s weaknesses as an investment. That means promoting non-gold financial investments that produce real returns for citizens, although the strategy has been undermined by gold’s strong performance in rupee terms as the rupee has fallen against the dollar.

Last but not least – and this would cut India’s external demand for gold while meeting domestic demand – the central bank and the government want to make better use of India’s vast existing gold stocks.

Ideas under consideration include various gold-backed financial products not requiring gold from abroad, such as an exchange-traded fund backed by central bank gold and a scheme under which public sector banks could lend on the physical gold they hold as collateral for loans.
Philip Klapwijk, of Thom-son Reuters GFMS, a leading precious metals consultancy, says: “[India is] quite concerned at the impact of gold imports on the balance of payments and that such a high proportion of savings is ‘sterilised’ by being in gold form instead of being put to productive use.”
In the end, however, it may be market forces – and not Mr Chidambaram’s suggested tax increases or any official scheme to recycle hundreds of tonnes of India’s idle gold – that succeed in suppressing demand for gold imports.

With some currency traders forecasting a rise in the rupee this year, and some commodity analysts seeing the end of gold’s international bull run, gold is likely to be a less attractive investment than it was. Indian consumers, however, have a history of ignoring attempts to wean them off their addiction.

“Even a 6 per cent premium over the international price is not going to reduce Indians’ basic desire to hoard the metal,” says Mr Klapwijk, who expects Indian jewellery demand to rise “decently” from last year’s poor showing.

“The Indian affinity with gold runs deep,” agrees Mr Kendall of Credit Suisse, noting that previous efforts to reduce demand, for example in 1962-68 when the government introduced restrictions on gold trading and ownership, merely resulted in an increase in smuggling. “Habits and attitudes towards gold do not change quickly.”

They treat us like dogs

Source: TLS November, 23, 2012

U.S. stock mutual funds gain $7.5 bln, most since 2001 -Lipper

The situation of the stock market compared to fixed income reminds me of a story:  Sam, an irascible fellow who was not much like by his neighbors, died and everyone showed up for the funeral either for the refreshments or to make sure he was dead.  At the appropriate moment in the service, the clergyman asked if anyone would say a few words of remembrance about Sam.  There was a long and awkward silence, so the clergyman said, "surely, there must be someone who has something to say about Sam?"  Finally, a longtime acquaintance stood up and said, "I'll say this for old Sam: his brother Henry was even worse."

Stock inflows were substantial in the week ending January 9th, according to Lipper .  With real interest rates already negative all over the world and high-quality stocks like Intel yielding 4.2%, the case for equities is so compelling as to be almost indisputable.  All that is needed for a big stock market rally is a dose of animal spirits.

From whence will these spirits come?  Perhaps it will come from Japan, where Mr. Abe seems intent on abolishing the last vestiges of central bank independence, consistent with what governments around the world are doing.  Japan lightening the spark of speculation would be highly emblematic to the rest of the world.

It is telling that central bank independence, long considered an important social good, is now being denounced as  unconscionable and even immoral by the likes of the formerly sane Joseph Stiglitz.  In demanding a weak currency and high inflation, Mr. Abe may be unleashing forces he can hardly comprehend, let along control, but they will likely lead to the aggressive deployment of capital that Keynes referred to as "animal spirits."

Here are the numbers for the week ending January 9th:

Migration: Is the American workforce becoming ossified?

The Wall Street Journal published some interesting statistics, the significance of which they did not really analyze, in an article today entitled  "Americans get moving amid torpid recovery"   

There are a couple of points of interest: 1. Americans are continuing to shift to the southeast and the west (ex-California)  2. Despite an uptick due to the current recession, internal migration is declining.

As to point one, people, particularly young people, are moving away from the states with heavy social overheads to the more efficient environments where jobs are being created.

As to point two, we are becoming older and more unwilling to move.  This is normal and understandable.  Of all of Newton's laws of motion, inertia has always been my favorite.  Moreover, I would think that the rapidly-growing reach of the social safety net has combined with lower incentives to work that have resulted from the decline in real compensation for labor has also been a factor.

I remember an article in the Financial Times some years ago that examined the problem posed by the fact that English people were reluctant to move from their homes to towns fifteen miles away to find work.  I observed the same phenomenon when living in France in the 1970's.  Now the USA is joining the club.

Implications of less striving include slower growth, more crime, and increased drug abuse and alcoholism in our Clockwork Orange society.

Greek tax evasion is institutionalized

A recent study¹ at the University of Chicago has concluded that Greece loses at least 1/3 of its deficit through tax evasion. (Other estimates puts this at more than 50%.)  They reached this conclusion by comparing bank lending to reported income, and they found that debt service on loans to many professions and industries exceeds 100% of reported income but that these loans have low default rates. Clearly, banks used actual rather than reported income in their lending standards.

My comment:  Since enforcement of taxes is very unevenly applied, Greeks feel justified in not paying them.

Here is a quote from the study:

“Ranked by euros tax-evaded, the largest offending industries are medicine, engineering,

education, accounting, financial services, and law. This industry distribution of tax evaders in Greece provides support for two incentive stories. First, paper trail matters. Industries with lower intensity of paper trail have more tax evasion. Second, politicians matter. The occupations of parliamentarians line up very well with the tax evading occupations, and these same parliamentarians failed to pass mild reform targeting their own industries.”

1“TAX EVASION ACROSS INDUSTRIES: SOFT CREDIT EVIDENCE FROM GREECE” Chicago Booth Paper 12-25. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2109500

Repent, for the end is eventual!

Many developed countries are in the final stages of the bankruptcy of their common business model, including the US, UK, France, etc.  At some point a wrenching change will occur; it will be precipitous, like Greece in April 2010.  I remember that at a conference in Hong Kong of risk managers in February of 2010, no one believed that the PIGS were a serious problem.  Then, suddenly, . . the emperor had no clothes.

So at some point the chickens will come home to roost.  The crisis will be caused by a change in psychology rather than some specific event.  More and more pundits are saying things like "our situation is dire." The debt ceiling debate may be a trigger.  But, as the bible says, "we don't know the hour or the day."

Gold investors are not a cult!

From THE NEW YORKER

Falling fertility rates mean no global growth the new normal

Standards of living and quality of life will rise without growth.   Retirement from gainful employment will cease to exist for the able-bodied.

 (FT, January 3, 2013)

Of Guelphs and Ghibellines

INSIDE INVESTMENT January 2013

Of Guelphs and Ghibellines

The Guelphs have papal blessing, but to preserve your wealth you are better off sticking with the Ghibelline camp, writes Lincoln Rathnam

On the 7^th of December, Mario Monti, smarting from political reverses, returned from Rome to his home city Milan to attend the opening of the 2013 opera season. The production was Wagner's Lohengrin and not the usual tour de force by native son Giuseppe Verdi. This has ignited a national anti-German furore. Italian president Giorgio Napolitano cancelled his reservation, although he attributed this to the press of business. (Perhaps he had to accept the credentials of some new ambassador?) The spectacular occurred even as former prime minister Silvio Berlusconi, a fellow Milanese, denounced Monti as being a tool of German interests.

It appears that the centuries-old northern Italian conflict between the Guelphs and the Ghibellines still lives. The Guelphs are traditionally anti-German, like Berlusconi, while the Ghibellines are pro-German, like Monti. For centuries northern Italy has been split between Guelphs and Ghibellines, but they both derive from a rivalry that started five hundred kilometers to the north.

It all began in the 12^th century when Henry the Proud, Duke of Bavaria and Saxony and Margrave of Tuscany, son of Henry the Black, opposed the ascension of Konrad III of the Staufer family (the Hohenstaufen) to the crown of the Holy Roman Empire, which then included much of Italy. When Konrad prevailed, he punished Henry by transferring the Duchy of Saxony to Henry's enemy Albert the Bear of Brandenburg.

Upon the death of Henry the Proud, his son Henry the Lion eventually succeeded to the Duchy of Bavaria. During a brief interregnum, Henry's partisans revolted against the loss of the duchy of Saxony and in 1140 confronted the forces of Emperor Korad III at Weinsberg, using Henry's dynastic name “Welf” as their battle cry. The imperial forces, in turn, called out “Waiblingen,” the name of their nearby fastness which dates from days of Charles the Fat. From these cries sprang the terms “Guelph” and “Ghibelline.”

Konrad III's successor Emperor Frederick Barbarossa returned Saxony to the Welf dynasty, and Henry in turn supported Frederick in his various wars, notably in maintaining Frederick's power in Italy. The rivalry entered Italian politics when Henry the Lion declined to support what he viewed as Frederick's foolish attempt to crush the revolt of the Lombard League, based in Milan, which resulted in Frederick's defeat at the Battle of Legnano in 1176. In fury, Frederick managed to strip Henry of many of his lands. Ever since then the Guelphs and the Ghibellines have, understandably, been implacable foes, although many of them cannot remember why.

Mario Monti may have been thinking about this as he watched and listened to Lohengrin, in which the yclept knight's marriage with Elsa is thwarted when she fails to keep her word. She drops dead as he rides away on a boat in the form of a dove to the Castle of the Holy Grail. “Is this an analogy for the European Union?” he may have asked himself. Of course, the Guelphs like Berlusconi were never really in favour of a union with Germany; they looked south to Rome for their alliances and would happily sail away from the union in a swan or dove boat or any other available conveyance.

Even as Mr Monti was peering through his lorgnette, the Trends in International Math and Science Study was released. It measures the proficiency of students in sixty-three countries. Sitting in suburban Boston, I was gratified to read that my home state of Massachusetts, if considered a separate country, would rank second only to Singapore in the knowledge of science among eighth-graders. This contrasts with the poor showing of the United States overall, which, trailing even Britain, ranked eleventh among nations.

Sadly, one must admit that there are two kinds of countries in the world: guelphs and ghibellines. Massachusetts definitely falls into the ghibelline camp, whilst the poor showing of places like California exhibit clear signs of guelphism.

Back in Italy, the ghibelline north has an income level 125% of the European Union average, while that in the guelphish south is 70%. This is disappointing. In the 1950's, Italy established the Fund for the South (Casa per il Mezzogiorno) which devoted a large part of Italian GDP to developing the region by establishing modern industrial clusters around which development would coalesce.

When I was an undergraduate in the 1960's, I remember my excitement when Prof. Lyons explained that Italy had solved the problem of development, and that this could be applied to the rest of the world, but when I told my father about it he just laughed in an irritating manner. Of course, all this noble effort did was to create a culture of dependency and greater poverty. The fund was disbanded in 1984.

My professional specialty has long been investing in emerging markets. They boom and then go bust over and over again, and most investors end up ruined. One thing I have learned is to stick with the Ghibellines.

Indian takeaways

INSIDE INVESTMENT (Euromoney)

Indian takeaways

Rising levels of obesity have produced an epidemic of type 2 diabetes in India. But there is no part of the country more bloated than its bureaucracy and less healthy than its legal system.  Lincoln Rathnam hopes India’s energetic entrepreneurs can escape these deadweights

A vision of the great Indian subcontinent lay stretched out before me as I stood on the sidelines of Institutional Investor magazine’s annual India Investment Forum held in late September at the Grand  Hyatt in New York City. Looking across the impressive expanse of the main ballroom, I could see high government officials moving slowly forward to their seats like so many juggernauts threatening to crush any entrepreneur who fell under the wheels of their inexorable regulatory advance.

A profusion of dark-suited men, businessmen presumably, swarmed warily around these lumbering structures casting verbal flower petals upon them while carefully avoiding the turning wheels.  Foreigners of various types mixed in this crowd, watching with fascination, and occasionally joining in. At the same time, one particularly bulky functionary made his way slowly, like a fully-laden oil tanker carefully negotiating its way up Thane Creek in the port of Mumbai, to the speaker’s platform.

There he called for greater transparency and, observing that many businesspeople are criminal fraudsters, asserted that putting these miscreants in dark, damp jails will encourage the others to invest more in the country. In introducing one particularly interesting session – Inefficient Indian Infrastructure: Are We Ready for Change? – the panel’s chairman noted that the past two years have been a, “period of desolation for the Indian infrastructure sector.”

Contractual, legal, and financial issues have been like so many snakes at a garden party for wireless phone operators and power plant owners. The impression left was that these problems stemmed largely from governmental actions and inactions and that government’s answer to the question posed must therefore be an emphatic, “no.”

A speaker representing private industry noted that the World Bank’s “Ease of Doing Business” index ranks India 132 out of 183 countries. This index is composed of factors that include dealing with construction permits, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts, and resolving insolvency.

Of particular note is India’s rank in “enforcing contracts” of 182, putting it just behind Angola (181) and ahead only of Timor-Leste, which is last of all. In India contracts cannot be enforced through the courts and that private means must be employed, as was once the case in Chicago.

India ranks 166 in the difficulty of starting a business, which is only slightly better that the West Bank and Gaza (177). This may be a particularly perverse example of George Soros’ reflexivity principle at work: when no one wants to come to your house you react by double bolting the door. In dealing with construction permits, India ranks 181 out of 183, putting it behind Ukraine but ahead of Albania and Eritrea.

Yet Indian entrepreneurs both in India and around the world are unusually successful. In the United States, Indians constitute the highest income ethnic group. One speaker noted that in the last fifteen years, thirteen of the fifteen highest returning listed stocks in Asia have been Indian companies.

India, in fact, has a lot going for it. Demographics are very favourable. One speaker said that in the year 2020, the average age of the population of India will be twenty-nine, while that of China will be thirty-seven and that of Japan forty-eight. Younger populations are more dynamic and produce more economic growth.

Another driver of economic growth is the migration of the relatively unproductive rural population to metropolitan areas. A large number of rural dwellers can be thought of as an untapped pool of future growth. This year, the rural population of China fell below 50% for the first time. But of the BRIC nations, India leads with 71% still living in countryside, compared to 27% in Russia and only 17% in Brazil.

Another advantage India has is the ineffectiveness of its meddlesome bureaucracy. One head of a state-controlled bank told the following story. A central banker at the Reserve Bank called him one day. The official said, “I am seeing these Western Union signs all over the country with offers to do money transfers. We have never authorized them to operate here, as far as I know. But I would be embarrassed to ask them directly on what authorization they operate, so will you do it?”

The banker did so and was told that Western Union had gone to the Post Office and had been given a letter saying it could operate in India. A very good line from the conference was that of a fund manager who said, “We worry about what is politically difficult to do, but what we should be worrying about is that even what is achieved politically may be administratively quite difficult.”

When one thinks of these striving entrepreneurs in relation to their government, one can imagine a game of Whac-A-Mole, that old arcade favorite where the player holds a large mallet with which he whacks the moles as their heads randomly pop up from holes in a table. In this case the player is the government and the moles are entrepreneurs. For India, it is fortunate that the lumbering player is much less energetic than the moles.