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.