EconMatters Global

Just Because You Can, Does Not Mean You Should.

2013-05-25T07:36:00.000-05:00

I want to start with a short comment about Japan before moving onto the main subject of this week’s newsletter. As you probably heard, the Topix index plunged almost 7% just yesterday, the biggest drop since 2011’s earthquake and resulting tsunami. According to both Bespoke Investment Group and James Mackintosh of The Financial Times, this was also just the ninth time in the past 50 years that the Nikkei has fallen by more than 7% on a single day. (The Nikkei encompasses 225 stocks; the Topix tracks about 1,700.)

The drop was blamed, in part, on disappointing economic news from China and rising interest rates. Another contributing factor was the magnitude of this year’s rally in Japanese stocks. Even after today’s drop, the Topix is still up 2% this month and up 38% year-to-date, according to Bloomberg News. Volatility goes in both directions, and today was an example of downside volatility occurring after a large degree of upside volatility.

Prior to today’s Japanese market action, I had intended to start today’s commentary with the words, “Just because you can, doesn’t mean you should.” It is a phrase I find myself occasionally tweeting after hearing about a new investment product or strategy, such as a new specialty fund. There is a never-ending list of new products and revived investment ideas whose risks are capable of derailing your long-term plans.

Two of the most recent ones involve real estate and pension and settlement income streams.

CNNMoney published an article on Monday discussing how some investors are using their retirement savings to make investments in real estate. Not in real estate investment trusts (REITs), but directly in individual properties. My presumption is that the practice is not widespread, but there are enough people doing it to prompt an article on a popular website.

For a small portion of the population, direct investments in real estate can make sense. I have two friends who fit into this category. One spent years working for a major homebuilder before starting his own homebuilding business. The other not only had parents who owned rental properties, but also managed rental properties on his own before using his retirement savings to finance the purchase of an apartment complex.

Those of you without these types of backgrounds should tread carefully when investing in real estate. Buildings and land are comparatively illiquid relative to stocks, REITs and funds. Transaction costs are high. Buildings require upkeep. Mortgage payments, insurance, property taxes and any association fees require a constant outflow of cash, regardless if the property is rented or not. Add in the other potential headaches, such as bad tenants and late repair calls, and it becomes clear that considerations other than price appreciation must be factored into the decision process.

There is also a risk if retirement savings are used to fund the down payment on one’s home. If the house falls in value or fails to appreciate faster than the stock market over the long term, a sizeable opportunity cost occurs. If a 401(k) loan is taken, tax liabilities are created if the loan is not repaid by the time the person leaves their job.

The second is pension and settlement income streams, which the Securities and Exchange Commission (SEC) and FINRA recently published an alert about. Often pitched as pension loans, pension income programs, mirrored pensions, factored structured settlements or secondary-market annuities, these are investments intended to provide a stream of income based on someone else’s pension or lawsuit settlement.

The appeal of these investments is the 5.75% to 7.75% yield. The downsides are the high transaction costs, the difficulty of selling them, the risk you may not be paid and the risk that the agreements may not even be legal. In other words, these can be investments that are too good to be true.

Like real estate, buying and selling receivables and cash flow streams (a practice referred to as “factoring”) can be profitable if you know what you are doing, have the contacts and have enough capital to build a diversified portfolio. Factoring can be a challenging business for those who have experience doing it; it is very risky for an investor looking to buy a stream of income from a middleman.

There will always be investments that sound appealing. However, some investments are often pitched to benefit the seller or the company facilitating the transaction, not the investor. This is why just because you can buy an investment, does not mean you should.

The Week Ahead

The U.S. financial markets will be closed Monday in observance of Memorial Day.

Just four S&P 500 member companies will report earnings next week: Tiffany (TIF) on Tuesday, Joy Global (JOY) on Thursday, and Costco Wholesale (COST) and Pall Corp. (PLL) on Friday.

The week’s first economic reports will be the March S&P Case-Shiller Housing Price Index and the Conference Board’s May consumer confidence survey. Both will be released on Tuesday. Thursday will feature the April pending home sales index and revised first-quarter GDP. The final May University of Michigan consumer sentiment survey, April personal income and spending and the May Chicago PMI will be published on Friday.

The Treasury Department will auction $35 billion of two-year notes on Tuesday, $35 billion of five-year notes on Wednesday and $29 billion of seven-year notes on Thursday.

About The Author - Charles Rotblut, CFA is the VP and Editor for American Association of Individual Investors (AAII). Charles is also the author of Better Good than Lucky. (EconMatters author archive here)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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Can The U.S. Grow by Printing More Money?

2013-05-24T13:15:00.001-05:00

By Michael Lombardi, MBA for ProfitConfidential

A recession for the global economy is becoming an increasingly likely scenario.

The Chinese economy, the second-biggest in the world, witnessed a contraction in manufacturing in May. The HSBC Flash China Manufacturing Purchasing Managers’ Index (PMI) registered 49.6 for May, declining from 50.4 in April. (Source: Markit, May 23, 2013.) Any number below 50 represents contraction in the manufacturing sector.

The Chinese economy exports a significant amount of what it produces to the global economy. Contraction in Chinese manufacturing shows exports are falling—the global demand for goods is falling.

Similarly, Germany’s Flash Manufacturing PMI showed continuous contraction in the manufacturing sector. The index stood at 49.0 in May. (Source: Markit, May 23, 2013.) The German economy is important to observe, because it’s the largest economy in the eurozone and an economic slowdown in the nation can send the common currency region into another downward spiral, again affecting the global economy.

Looking at other key indicators, they are pointing to an economic slowdown ahead in the global economy. Consider the copper market. Demand for copper is suggesting activity in the global economy is sluggish, even deteriorating.

Copper prices are down more than 10% since the beginning of 2013, and stockpiles of the brown metal, tracked by the London Metals Exchange (LME), are up a staggering 95% this year! (Source: Bloomberg, May 23, 2013.)

Other industrial metal prices, such as aluminum, lead, nickel, and zinc, are in decline as well.

How can the U.S. economy possibly improve when the global economy is in trouble?

The U.S. is highly affected by any shift in demand in the global economy.

After the financial crisis of 2008, U.S.-based companies were able to show growth because of robust demand in the global economy. Some say the growth in the global economy pulled the U.S. out of recession in 2008.

Now, the economic indicators clearly point to diminishing global demand. Will U.S.-based multinational companies be able to show profit growth under the scenario of global manufacturing contraction? Of course not! (Someone tell stock market investors!)

During the first-quarter earnings reporting season, some of the biggest big-cap companies in the key American stock indices displayed concerns regarding the crisis in the eurozone. I expect more companies to start blaming the economic slowdown in the global economy as they report lower second-quarter corporate earnings.

Michael’s Personal Notes:

As I have been writing in these pages, economic growth in the U.S. economy won’t happen by printing more paper money—it’s a short-term fix that creates more long-term problems.

According to data compiled by Bloomberg, 2,267 non-financial constituents of the Russell 3000 index saw their cash holdings increase by 13% to $1.73 trillion in the first quarter of 2013 compared to the same period a year earlier. (Source: Bloomberg, May 23, 2013.)

As the cash hoard continues, business spending declined 21% in the first quarter compared to the last quarter of 2012. This was the biggest decline since the financial crisis of 2008.

To top this off, business executives in the U.S. economy are worried about troubles in the global economy, and they don’t have a very optimistic view on conditions here at home. A CEO Confidence Survey conducted by the Conference Board suggests only 29% of executives believe conditions in their industries have improved in the first quarter; going forward, only 32% expect the U.S. economy to improve in the next six months. (Source: Conference Board, April 25, 2013.)

Looking at all of this, how can you not question the effectiveness of quantitative easing in the U.S. economy? The problem at hand is businesses shying away from spending in the U.S. economy and hoarding cash. To my standards, quantitative easing is failing at making businesses more confident about spending as it was promised.

Dear reader, for economic growth to take place in the U.S. economy, businesses must be willing to spend and make investments; we are seeing the opposite of that. This isn’t rocket science; once businesses start to spend and make investments, we will see recovery in the jobs market and economic growth will eventually follow.

The U.S. economy is at a vulnerable stage. I am paying extra attention to business spending because troubles from outside the U.S. economy are brewing quickly, and as a result, multinational businesses may make further cutbacks on their spending.

Where the Market Stands; Where It’s Headed:

We are putting the finishing touches on “A Dire Warning for Stock Market Investors,” a forecast we will present in video format. Please see your e-mail inbox tomorrow for this presentation. It’s important you watch it to see where the stock market is really headed next.

What He Said:

“As for the stock market, it continues along its merry way oblivious to what is happening to homebuyers’ wealth. (Since 2005 I have been writing about how the real estate bust would be bigger than the boom.) In 1927, the real estate market crashed and the stock market, even back then, carried along its merry way for two more years until it eventually crashed. History has a way of repeating itself.” ~ Michael Lombardi in Profit Confidential, November 21, 2007.

This was a dire prediction that came true.

About the Author - Michael Lombardi, MBA at Profit Confidential, a daily publication for Lombardi Financial customers. (EconMatters author archive Here)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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Key Market Trends May 24, 2013

2013-05-24T08:22:00.003-05:00

By Emann Charts

As the market panic demonstrates, central banks are stuck on a treadmill of money printing

Oh what a tangled web central bankers weave when they practice to deceive… Last night's panic in Tokyo, where the Nikkei dropped a stomach churning 7 per cent, demonstrates just how difficult it's going to be for the world's central banks to exit their loose money policies.

It's not even as if Ben Bernanke, chairman of the Fed, said he was planning to exit; in fact, initially he said the reverse in testimony to Congress. It was only in the Q & A, and in minutes to the last meeting of the Fed's Open Markets Committee, that a clear bias emerged to slow the pace of asset purchases "in the next few meetings", so long as the economic data was strong enough.

Bernanke Says Interest on Reserves Would Be Main Tightening Tool

Federal Reserve Chairman Ben S. Bernanke said the Fed will raise the interest rate on excess reserves as its primary tool for tightening monetary policy rather than selling assets from its balance sheet.

“The principal tool that we contemplate is the interest rate paid on excess reserves,” Bernanke said today in response to audience questions at a conference in Stone Mountain, Georgia. During a tightening, money market rates will probably stay close to the interest rate on excess reserves, he said.

Japan’s Nikkei dives 7.3% in spectacular U-turn

HONG KONG (MarketWatch) — Japanese shares suffered their worst losses in more than two years on Thursday after data showing an unexpected contraction in Chinese manufacturing activity added to worries the Federal Reserve could downscale its bond purchases.

The Nikkei Stock Average, which had jumped 2% earlier on Thursday, ended the day 7.3% lower at 14,483.98 in a spectacular turnaround. The drop is the Nikkei’s worst single-day loss since March 15, 2011, when the market was overwhelmed by selling in the wake of a calamitous earthquake and tsunami. The benchmark’s closing level was nearly 1,460 points from the day’s peak.

Bank of Japan supplies funds after bonds plunge

--Bank of Japan announces Y2 trillion fund-supplying operation after JGB yield spikes

--10-year JGB yield briefly rises to 1.0%, highest since April 2012

--Strategists say market should stabilize in afternoon

Swedish Youth Riots Enter Third Day

Sparked by the police shooting of a machete-wielding 69 year-old man, traditionally calm-and-collected Sweden is suffering amid its third night of riots. It seems underlying tensions from high youth unemployment and rising nationalism against the nation's large immigrant population have been catalyzed by this seemingly unrelated event. Asthe Daily Mail notes, immigrant ghettos have been created where unemployment is high and there are few opportunities for residents with left-leaning commenters adding that the riots represented a 'gigantic failure' of government policies, which had underpinned the rise of ghettos in the suburbs - "We have failed to give many of the people in the suburbs a hope for the future." An anti-immigrant party, the Sweden Democrats, has risen to third in polls ahead of a general election due next year, reflecting unease about immigrants among many voters. What is driving this tension? After decades of practicing the 'Swedish model' of generous welfare benefits, the country has been reducing the role of the state since the 1990s, spurring the fastest growth in inequality of any advanced OECD economy. Given Sweden's 24.7% youth unemployment, we wonder just what will happen to the 60% of unemployed youths in Greece and Spain when school lets out this summer?

Hilsenrath Hits The Tape: Ignore Everything I Said Two Weeks Ago

The last time the WSJ' Jon Hilsenrath was relevant was two weeks ago (in a flashback to those days before QEternity when infinite QE was not assured and Jon's input was actually relevant), when following an article of his, and due to his "proximity" with the New York Fed, many assumed that the Tapering suggested by Hilsenrath was being telegraphed by Bernanke to the market. Turns out it was nothing but yet another baffle with bullshit headfake by a central planning regime that is now merely engaged in observing market responses to indirect stimuli: if reduce monthly flow by $20 billion then X (-1%); if cut QE off entirely then Y (-50%?), and so on. Moments ago the same Hilsenrath just released another piece, which effectively refuted everything his previous piece suggested, and in fact made his position as Fed mouthpiece absolutely irrelevant, courtesy of the following disclosure: "this time, when the Fed shuts off bond buying, it won't be... predictable." He goes so far as to say that the term "tapering" is no longer even applicable! Funny that,considering on May 11, none other than Hilsenrath said: "Federal Reserve officials have mapped out a strategy for winding down an unprecedented $85 billion-a-month bond-buying program meant to spur the economy."

The Housing Unrecovery Is Here: Lumber Enters Bear Market

Despite the incessant belief that this must be too-much-new-supply-driven (as opposed to a lack of demand for new home construction), Lumber futures (after hitting limit down once again today) have now officially entered bear-market territory. Front-month lumber prices are down 23% from their highs in mid-March and given the 2-month lead that correlates so well to the market, it seems things are a little ahead of themselves in 'housing recovery' land.

Keiser Report: Down is New Up, Up is New Down (E447)

In this episode of the Keiser Report, Max Keiser and Stacy Herbert examine whether the markets are soaring or crashing but find it impossible to determine as long standing data patterns have broken down. They discuss feeding the ducks while they're quacking and bitcoin vigilantes fighting the Fed. In the second half, Max talks to Sandeep Jaitly of FeketeResearch.com about the imminent extinction of the price of gold as well as the permanent backwardation in both gold and silver markets.

State-Wrecked: The Corruption of Capitalism in America

The Dow Jones and Standard & Poor’s 500 indexes reached record highs on Thursday, having completely erased the losses since the stock market’s last peak, in 2007. But instead of cheering, we should be very afraid.

Over the last 13 years, the stock market has twice crashed and touched off a recession: American households lost $5 trillion in the 2000 dot-com bust and more than $7 trillion in the 2007 housing crash. Sooner or later — within a few years, I predict — this latest Wall Street bubble, inflated by an egregious flood of phony money from the Federal Reserve rather than real economic gains, will explode, too.

They Better Pray There Is No Short Squeeze...

Well, they've finally done it.

As the following chart of the day from Bloomberg shows, as of this week, hedge funds have made "the biggest bet ever" against gold by taking Comex gold shorts to all time highs.

To their reflexive benefit, we will admit, they have managed to push the price of gold lower, not much... but it is lower (whether with the BIS' assistance or not is irrelevant). It is a different question if the price of gold is low enough to reflect such a record bearishness. But the biggest question is what happens if there is a catalyst to launch a covering rally: such as, hypothetically speaking of course, the People's Bank of China were to announce that it has in the past four years in which it provided no updates on its gold holdings (last is as of 2009), accumulated some 2000-4000 tonnes of gold.

EU plans saver expropriation from 2016

The EU reportedly has agreed with "overwhelming majority" that from 2016, savers must bleed event of bank failure. Deposits over 100000 euros are then gone. EU Law Committee: Cyprus was a model.

The Legal Affairs of the European Parliament has reportedly expressed yesterday evening with "overwhelming majority" for expropriating savings of about 100000 euros, if a bank goes bankrupt. An appropriate legislative proposal agreed to the Legal Affairs of the European Parliament. Balances below 100000 euros are said to be safe.

White House says drone strikes have killed four US citizens

The White House has launched a new effort to draw a line under its controversial drone strike policy by admitting for the first time that four American citizens were among those killed by its covert attacks in Yemen and Pakistan since 2009.

In a letter to congressional leaders sent on Wednesday, attorney general Eric Holder acknowledged previously classified details of the drone attacks and promised to brief them on a new US doctrine for sanctioning such targeted killings in future.

The Network of Global Corporate Control

Abstract

The structure of the control network of transnational corporations affects global market competition and financial stability. So far, only small national samples were studied and there was no appropriate methodology to assess control globally. We present the first investigation of the architecture of the international ownership network, along with the computation of the control held by each global player. We find that transnational corporations form a giant bow-tie structure and that a large portion of control flows to a small tightly-knit core of financial institutions. This core can be seen as an economic “super-entity” that raises new important issues both for researchers and policy makers.

Too big to fail is now bigger than ever: Andy Xie

BEIJING (Caixin Online) — The G-7 summit brought up too-big-to-fail (TBTF) financial institutions as a systemic risk to be addressed. The odds are low that any real reform will materialize. Removing this flaw could trigger a big global downturn. No major government has the stomach to go through with it.

RPT-Bankia compensation qualms signal loss of faith in Spain's banks

MADRID, May 19 (Reuters) - Many duped savers at Spanish lender Bankia are shunning a state-supervised compensation scheme in favour of expensive lawsuits, prolonging a mis-selling scandal and complicating efforts to restore faith in the banking system.

The disputes over mis-selling at Bankia and other nationalised banks have created a major headache for the government as it tries to take the next step in their rescue, imposing large losses on holders of junior debt.

US warned of Moody’s downgrade

The US remains the world’s biggest sovereign debtor. In 2014, its debt is expected to amount to 76% of the annual GDP. By 2018, the figure is likely to go down, but only slightly – to approximately 71% of the GDP.

Last week, the Congressional Budget Office said it expects this year’s federal deficit to amount to $642bln. This would be about $200bln less than in 2012 and represent a reduction from 7% of the GDP to just 4% of the GDP. The deficit would be at its lowest in 5 years.

EU bank customers to contribute to bail-ins?

Bank customers across the European Union are facing the prospect of a Cyprus style bail-in if a financial institution gets into trouble.

The EU’s Economic Committee has approved a draft law meaning banks needing rescuing could take cash from customer accounts.

Larger depositors in Cyprus suffered this very fate during the financial crisis on the island earlier this year.

Swiss Bank Sees U.S. Fine as Part of Deferred Prosecution Deal

Zuercher Kantonalbank, the biggest Swiss cantonal bank, expects to pay a fine to U.S. authorities as part of a deferred prosecution agreement for its alleged role in helping Americans evade taxes.

“The bank will have to negotiate a DPA separately with the American authorities, which will also contain a fine,” Urs Ackerman, a spokesman for Zurich-based ZKB, said today in an e-mailed response to questions.

Risk of vicious circle for gold as hedging returns

London-listed gold producer Petropavlovsk has said it will pre-sell 55pc of its future output planned for the second quarter of 2014, at an average price of $1,408 an ounce. This is the first time that a big producer has hedged more than half its future sales.

“We have a huge investment programme and thought a little price protection in the short-term will let us sleep better at night,” said chairman Peter Hambro.

About the Author - Emann Charts is a platform that provides live trade signals for individuals aiming to make a low risk return by investing a relatively small amount of capital. (EconMatters author archive here)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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Two Charts Say ECB's ABS Plan May Fail

2013-05-23T16:29:00.001-05:00

By Tyler Durden of ZeroHedge

While many would argue that youth unemployment (the real scariest chart here), in fact we suspect it is the following two charts that are really keeping Mario Draghi up at night. The lip service paid by the French and the Germans to growth strategies and youth unemployment pale in relation to the desperation of the European collateralizer-of-last-resort to de-fragment his transmission channels and unleash his own QE to the starving banking systems of Spain and Italy. As BNP notes, recent data on Italian and Spanish banks’ bad and non-performing loans (NPLs) have reignited the debate on the health of the banking sector in the eurozone’s peripheral economies and its implications for the bloc’s credit supply and, ultimately, economic growth. But what is worse is that interest rates on new loans for a company in Italy or Spain are almost double those in Germany and France. It is against this backdrop that Draghi expressed plans to revive the ABS market - but implementation will prove significantly more challenging than market hopers believe (as is clear in credit markets) and direct purchases will probably face vetoes by a number of influential members of the board.

Via BNP, ...

The deterioration of credit quality and the resulting problems for the banking sector are not news in Spain. The implications for bank balance sheets of the plummeting construction sector were the main trigger of the country’s fiscal crisis. Conversely, in Italy, the sounder state of the banking system allowed it to better withstand the initial shock of the financial crisis. However, a double whammy of indirect crisis effects is now hitting banks in both countries. The rise in government bond yields and the downgrades of sovereign debt ratings have pushed up the cost of funding, while the contraction in GDP has led to a worsening of loan quality.

...

Interest rates on new loans for a company in Italy or Spain are almost double those in Germany and France. With bank lending accounting for around 80% of the financing of the corporate sector in both Italy and Spain (the percentages are even higher for small companies, which find it harder to tap into alternative sources of financing, such as the capital markets), this is damaging firms’ competitive position and proving a significant obstacle to growth.

...
It is against this backdrop that we must view the ECB’s plans to revive the ABS market, as hinted at by central bank chief Mario Draghi at the last ECB press conference. Implementing the plan, we believe, may prove challenging.

Direct purchases would leave the ECB’s balance sheet vulnerable to credit risk and probably face vetoes by a number of influential members of the board. Other alternatives, like the direct involvement of the EIB, are more likely, but not free of problems, as higher levels of non-performing loans ultimately mean more risk.

Courtesy Tyler Durden, founder of ZeorHedge (EconMatters author archive here)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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The Macro Story as Told by Gold, Copper and Oil

2013-05-22T06:10:00.000-05:00

By EconMatters

Gold’s been on a wild ride. After reaching a peak of $1,920 an ounce in September 2011, gold has tumbled 28% to the current ~$1,380 level forcing John Paulson to take a 47% loss in his gold fund during the first four months of this year, according to Bloomberg.

Unlike Paulson who maintained his positions in gold, other big players like George Soros and BlackRock cut their gold ETF holdings, while Goldman Sachs issued a sell recommendation on gold right before the yellow metal plunged 13% through April 15, the biggest drop in three decades. And by looking at the futures curve (chart below), market does not seem to expect gold to come back roaring any time soon.

Chart Source: S&P Capital IQ

QEs Not Hitting the Real Economy

Historically, gold is regarded as a good inflation hedge and store of value, typically thriving in an environment of high inflation, and/or weak U.S. dollar (currency debasement). With U.S. Federal Reserve’s three rounds of QE, the never-ending debt crisis in the Eurozone, hyperinflation and dollar debasement seem inevitable and supportive of gold for the long run, right?

Theoretically, Fed’s QE and near zero fed funds rate is supposed to encourage borrowing and spending from the private sector thus injecting money into the real economy. However, theory and reality don’t always see eye to eye.

Since the 2008 financial crisis, banks have significantly tightened the credit standard and are reluctant to lend. On the other hand, corporations are making money mostly from “streamlined” headcount and structure, but instead of the intended wealth distribution effect expected by the Fed such as investing back to the economy, or increase employee pay which would in turn increase consumer spending, most corporations are hoarding cash or use profits for dividend, share buybacks, or mergers & acquisitions with limited impact on the real economy.

Copper & Oil Indicating Weak Demand

The weak demand is also reflected in part of the commodity market fundamental. WTI crude oil inventory climbed to 82-year high and copper inventory at LME hit a 10-year high in April, while Goldman Sachs cut its “near-term” outlook for commodities.

Although some have argued oil and copper have lost their significance primarily due to increasing domestic oil production, and “temporary” excess copper supply. While the abundance of domestic shale oil production may have distorted the historical supply and demand relationship, but with the U.S. becoming the world’s largest fuel exporter, the fast and furious oil inventory build is nevertheless still an indication of a weak world economy. And I can’t imagine how the “temporary” buildup of copper inventory is not a sign of weak global economic condition?

Further Reading - Oil Market Manipulation Reaches Absurd Levels

Massive QEs, Limited Inflation?

On top of the overall weak spending and demand in the private sector, most of the developed countries are undergoing some shape or form of austerity with reduced government spending. China, the growth engine of the world, is having some problems of its own. The old-fashioned massive infrastructure building QE program got China through the 2008 financial crisis, and was the main driver behind commodity prices. But Beijing can’t afford another QE due to inflation concern (plus China has probably run out of things to build). Low wage levels means China consumers can’t really pick up the spending slack, coupled with bad credit problem (i.e., NPL: Non-Performing Loans), and recent capital flight, had many analysts worried enough to downgrade China’s growth prospect.

The simultaneous pullback from both the private and government sectors in U.S. Europe, and China is a major factor why Fed's massive QEs have resulted in only limited inflationary pressure and increasing signs of deflation.

Dollar and Carry Trade Kills Gold

Nonetheless, when compared with Europe, China or any other regions in the world, the U.S. seems relatively more stable, and has been able to retain the “safe haven” status despite its own debt problem. With investors pouring money into U.S. equity and bond propping up the dollar, and weak demand suppressing inflation, two of the main conditions for a strong gold price -- high inflation and a weak US dollar -- are basically non-existent in the current macro environment.

Furthermore, there was already a bit of disconnect between gold and the other commodity prices such as copper, and oil. So eventually, gold had to come to grip with the macro reality.

Chart Source: Stockcharts.com

Another major factor against gold right now is that gold has no yield and is out of favor with the huge yield-seeking yen carry trade crowd (borrowing yen to invest in higher yield options) since bond and equity now are offering much better returns. Unless there's a shock to the system such as a war breaking out in the Middle East, or an eventual debt crisis in Japan when people start seeking safety, there's not much upside momentum for gold.

Gold's Volatility Game

For now, the prevalent view is that the Fed will slow or exit QE3, and gold is out of favor under the the current macro trend. For example, Lim Chow Kiat, the chief investment officer of the Government of Singapore Investment Corp (GIC), thinks gold still looks overpriced as the usage of gold for industrial or consumer products doesn't quite justify the prices. GIC is one of the world's largest sovereign wealth funds.

As long as dollar maintain its strength and inflation remains tame, gold prices most likely will see considerable volatility swinging between rumors and speculation (e.g., some central banks may need to unload some of their holdings due to debt crisis), and Asia retail buying on the dip (South China Morning Post reported that many shops in Hong Kong were running out of the precious metal for the first time in decades.)

Technically speaking, gold's next support level should be $1,330 range with $1,320 as the major support when most physical retail buyers would rush in. If gold breaks below $1,300 hard, expect a major liquidation when even Paulson could be forced to sell and everybody piles in.

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Oil Market Manipulation Reaches Absurd Levels

2013-05-21T00:39:00.000-05:00

By EconMatters

Markets & Manipulation: A long History

Most markets these days are manipulated to some extent, and this is nothing new if we look back through the history of financial markets. But there are some strange things happening right now in the oil market worth mentioning.

Brent-WTI Spread/Scam

Another scam in the Oil market is the Brent-WTI spread this has been one of the biggest scams over the years in the Oil market. Just to provide some data to the absurdity which is this much hyped about nonsensical spread Cushing Oklahoma has 49.7 million barrels in storage, it had 45.1 million barrels in storage a year ago. Cushing had 50 million barrels in storage at the start of the year. Moreover, in June Cushing will be adding additional supplies to storage due to current pipeline capacity going offline. So for all this talk about pipelines finally unlocking all the glut of oil supplies from the Cushing hub, and this being the reason for the impressive reduction in the Brent-WTI spread it is just a bunch of nonsense.

Cushing Oklahoma Supply Glut

So there is basically more oil trapped in Cushing Oklahoma then there has ever been when the spread was 25! So regardless if the spread is 25 or 8 it has very little to do with supplies residing in Cushing Oklahoma that is quite evident. Now there are a bunch of factors contributing to the nuances of the spread which I will not go into detail here but the takeaway is just to point out the absurdity which is the false and misleading rhetoric that encompasses this spread and Cushing Inventory levels.

400 Million Barrels & Climbing

While we are talking about inventory levels it is funny that WTI sits at $97 a barrel when the entire year we have had basically 3 minuscule draws in inventory supplies which stand at a record breaking 395 Million Barrels in storage. So the Dow keeps hitting new highs every week, and the US keeps setting new modern records for Oil in storage each week.

Weak Demand in an Artificial Economy

But it is not just the supply issues in an obviously oversupplied oil market with the US domestic production being the biggest culprit. The demand side of the equation has been equally bearish for the fundamentals with China`s actual economy slowing over the past 2 years, Europe being stuck in a perpetual recession, and the US being a mature market with higher fuel standards and a stagnant economy that requires $85 Billion of stimulus each month to keep from cratering. The demand side had been very underwhelming from the products side of the equation. For example, Gasoline supplies in the northeast are 10% higher than normal for this time of year.

Strong Dollar Bearish for Dollar Denominated Commodities

Finally the strong dollar is supposed to be bearish for commodities and oil, and with the US Dollar Index hovering around 84 and threatening to strengthen from these levels it is a wonder that the Oil market has barely noticed this strange occurrence in Dollar strength, unlike the Gold and Silver Markets.

Fundamentals: Are we talking about the Fundamentals Again?

The takeaway is that none of the actual fundamentals ever matter in the Oil markets. When you have a house style advantage that would make any Las Vegas Casino envious the fundamentals play little part in a manipulated Oil market. It is all about protecting the huge supply chain that is the oil market and everybody`s livelihood. When in doubt follow the money trail, and money is the biggest reason oil prices are where they are currently despite the bearish fundamentals of the commodity. Oil prices wouldn`t be at these levels if the powerful manipulators of the commodity were not making a whole lot of money as a result.

Oil Analysts Clueless

So the next time some Oil analyst tells you some hard studied reason why Oil prices are up it is all nonsense. Oil prices are up or down depending upon what the powerful players want oil to do, one week it can be at $86, the next $97, or $77, it is all about the money to these players, and they will do whatever it takes to make the money. And if it means being very creative with their methods then so be it, it is not like this is a regulated market!

The Stock Market Feels Like 2007 Again

2013-05-16T13:25:00.003-05:00

By Michael Lombardi, MBA for ProfitConfidential

Didn’t the government say the economy is getting better? Why do I question what they’re saying? Because consumer spending is going the wrong way.

Core retail sales declined 0.1% in April—and that’s after they already fell 0.4% in the previous month! (Source: U.S. Census Bureau, May 13, 2013.)

When compared to the first four months of 2012, consumer spending in the U.S. economy declined in the first four months of 2013 at electronics and appliance stores, health and personal care stores, gasoline stations, and general merchandise stores.

And looking forward, consumer spending in the U.S. economy doesn’t appear to look very promising either.

If companies don’t spend or create better-quality/better-paying jobs, can consumer spending really pick up? It’s well documented in these pages: the job creation we have seen since the financial crisis started has been in low-wage-paying sectors.

Keeping all this in mind, with consumer spending still bleak and core retail sales constantly declining, the retailer must be suffering.

But that’s not so!

When you look at the stock market and, more specifically, at the retailers, it appears that consumer spending in the U.S. economy is booming! Consider the chart below of the S&P Retail Index. This index tracks the performance of some of the most well-known retailers in the U.S. economy.

Chart courtesy of www.StockCharts.com

Dear reader, the stock market isn’t portraying the real picture of the U.S. economy. The retail sales number actually shows how consumer spending—the biggest contributor to our gross domestic product (GDP)—is fairing, and those numbers look terrible.

Even with the printing of trillions of dollars of new money via quantitative easing, the Federal Reserve hasn’t been able to do what it originally intended to do—spur economic growth in the U.S. economy. The Fed has made the banks financially stronger and has sent the stock market higher, but the “little guy” really hasn’t been helped.

It’s a vicious cycle that’s not working right now. For consumer spending to pick up, businesses must be willing to spend and invest rather than spending their money buying back their own shares to boost their earnings. Mark my words: this can only go on for so long.

Michael’s Personal Notes:

Something is starting to smell in the bond market…

Since their peak in July of 2012, 30-year U.S. bonds have declined in value—they are down almost six percent. Trading above $153.00 in mid-2012, 30-year U.S. bonds now hover around $144.00, as depicted in the chart below.

Chart courtesy of www.StockCharts.com

Keep in mind that bond investors use U.S. bonds as a benchmark to what kinds of rates other types of bonds, such as corporate bonds, municipal bonds, and junk bonds, should sell at.

For example, if U.S. bonds decline in value, chances are the other types of bonds in the bond market will follow in the same direction. So the yield on 30-year U.S. bonds really matters when it comes to looking at the direction of the overall bond market.

The bond market experienced a significant run-up as the 2008 financial crisis unfolded and investors sought safety. Now, investors have a different type of worry on their hands.

The Federal Reserve, which has become a major buyer of long-term U.S. bonds, buying up to $45.0 billion worth of them a month, is contemplating when it should stop reducing the amount of bonds it purchases each month.

According to data from Investment Company Institute, an association of U.S. investment companies, in the first three months of 2013, long-term bond mutual funds had inflows of $68.9 billion. This was 25% lower than the same period a year ago, when these funds had inflows of $92.08 billion. (Source: Investment Company Institute, May 8, 2013.)

As I have been harping on about in these pages for some time now, caution and capital preservation are hands-down the best strategy for bond investors, as conditions in the overall bond market are changing. A decline in the bond market will hit the most conservative type of investments, like pension funds and insurance companies, which invest heavily in bonds.

I am watching the bond market very closely as the recent decline in bond prices is significant. Bonds are signaling higher interest rates ahead, something very few economists are talking about.

Where the Market Stands; Where It’s Headed:

As I wrote last week, it feels like 2007 all over again. The stock market rises on good news and bad news. Bullishness among investors and stock advisors is near a multiyear high. Corporate profit growth has stalled. The higher this market goes, and it has gone higher than even I thought it would, the bigger the drop will be. The bear market has done a masterful job at convincing investors the stock market is a safe bet again.

What He Said:

“If the U.S. housing market continues to fall apart, like I predict it will, the stock prices of major American banks that lend money to consumers to buy homes will come under pressure – these are the bank stocks I wouldn’t own.” Michael Lombardi in Profit Confidential, May 2, 2007. From May 2007 to November 2008, the Dow Jones U.S. Bank Index of the world’s largest bank stocks was down 65%.

Should You Sell in May and Go Away?

2013-05-16T11:35:00.001-05:00

By Frank Holmes

During the first week of May every year, the maxim, “Sell in May and Go Away,” gets taken out, dusted off and powered up as a reason to sell stocks. The rhyme is more than just a catchy urban legend: June, July, August and September have historically been the weakest months of the year for the S&P 500 Index.

Yet even if seasons trigger certain events, when the snow falls in Minnesota in May, Midwesterners need to throw on their winter gear and roll out snowblowers, not lawnmowers.

Consider this encouraging research: The S&P 500 has been rallying for six months in a row, which has happened 48 times since 1950. Following these six-month winning streaks, stocks have historically continued rising. Sixty percent of the time, the S&P 500 climbed 0.79 percent over the next month; 84 percent of the time, stocks increased 3.50 percent, 7.77 percent and 11.77 percent the next three, six and 12 months following the streak.

In addition, 165,000 jobs were added to payrolls in April, helping the unemployment rate fall to 7.5 percent. This is the lowest level since December 2008.

The news comes days after the Federal Reserve stamped its approval on another month of bond buying, with the added bonus of Ben Bernanke stating that the Fed is “prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation.”

If that’s not enough to validate a continuing bull market, consider the European Central Bank’s exceptional move this week. Mario Draghi cut key interest rates to 0.5 percent, the first time in 10 months, following weaker manufacturing data out of top four largest economies in the eurozone. Germany, France, Italy and Spain all experienced manufacturing contractions.

Our portfolio manager of the Emerging Europe Fund, Tim Steinle, described the ECB’s motivation this way: It’s one thing to punish the periphery; it’s another to weaken the core.

Further Reading: Is This The End of The Commodity Super Cycle?

The S&P 500 has climbed an amazing 12.74 percent through April 30, so if you’re eager to do some investment spring cleaning, you might want to consider areas that have underperformed. For example, take a look at the year-to-date returns by sector, which reveal an interesting pattern. Health care, utilities, consumer staples and consumer discretionary have all climbed more than 15 percent, much more than the market. Meanwhile, companies in the materials, energy and industrials sectors have lagged the overall index.

In recent days, an inflection point seems to have occurred, with these weaker areas of the market gaining strength. We wrote in the Investor Alert last week that cyclical stocks, including health care, consumer staples, utilities and telecommunication, have been lagging the remaining sectors. From the beginning of the earnings season on April 24 through May 3, energy, industrial and materials stocks are nearly the best performing areas of the market.

We believe expectations might have become too lofty for defensive companies and too gloomy for cyclical stocks, so as perceptions toward global growth improve, it won’t take much for energy, industrials and materials to take off.

Spring Clean Your Treasury Portfolio Too

With the Fed’s insistence to keep interest rates low, real interest rates remain negative for investors. For example, a 90-day T-bill yields 0.06 percent and 2-year Treasury yields 0.23 percent, but inflation burns off 1.5 percent.

It’s interesting to note that while low interest rates help keep the government’s debt payments low, these rates hurt seniors living on a fixed income. My friend, Terry Savage writes this week,

“Savers are the big losers in this rigged game. And most domestic savers are seniors and those approaching retirement, who planned to live on the income generated by their savings. Today, that’s simply not possible – unless they are willing to take on a lot more risk.”

The important idea for investors is to adjust to the current conditions. Regardless of the month, if the thermostat shows frigid temperatures, dress accordingly. Likewise for when it’s hot in the summer. What’s important is to stay tuned and make sure your portfolio is dressed accordingly.

About The Author - Frank Holmes is CEO, Chief Investment Officer of U.S. Global Investors, an investment management firm specializing in commodities and emerging markets based in San Antonio, Texas. Frank is also the co-author of The Goldwatcher. (EconMatters author archive here.)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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Copper Price and 11 Other Recession Indicators

2013-05-08T16:22:00.001-05:00

By Michael Snyder

There are a dozen significant economic indicators that are warning that the U.S. economy is heading into a recession. The Dow may have soared past the 15,000 mark, but the economic fundamentals are telling an entirely different story. If historical patterns hold up, the economy is heading for a very rocky stretch. For example, the price of copper is called "Dr. Copper" by many economists because it so accurately forecasts the future direction of the U.S. economy.

And so far this year the price of copper is way down. But that is not the only indicator that is worrying economists. Home renovation spending has fallen dramatically, retail spending is crashing in a way not seen since the last recession, manufacturing activity and consumer confidence are both declining, and troubling economic data continues to come pouring out of Asia and Europe. So why do U.S. stocks continue to skyrocket? Will U.S. financial markets be able to continue to be divorced from reality? Unfortunately, as we have seen so many times in the past, when stocks do catch up with reality they tend to do so very rapidly. So you better put on your seatbelts because a crash is coming at some point.

But most average Americans are not that concerned with the performance of the stock market. They just want to be able to go to work, pay the bills and provide for their families. During the last recession, millions of Americans lost their jobs and millions of Americans lost their homes. If we have another major recession, that will happen again. Sadly, it appears that another major recession is quickly approaching.

The following are 12 recession indicators that are flashing red...

#1 The price of copper has traditionally been one of the very best indicators of the future performance of the U.S. economy. The fact that it is down nearly 20 percent so far this year has many analysts extremely concerned...

Copper's downward trend foreshadows a stock market collapse, according to Societe Generale's famously bearish strategist Albert Edwards, who said equity markets will riot "Japan-style."
"Copper is acting exactly as it did when I wrote about the impotence of liquidity in the face of the (then imminent) 2007 recession. Once again it is giving us an early warning that liquidity will not save risk assets: time to get out of equities," Edwards wrote in his latest research note, on Thursday.

#2 Home renovation spending has fallen back to depressingly-low 2010 levels.

#3 As Zero Hedge recently pointed out, U.S. retail spending is repeating a pattern that we have not seen since the last recession...

Retail sales of clothing is growing at the slowest pace since 2010; but while major store sales are about to drop negative YoY for the first time in over 3 years, the utter collapse in general merchandise sales is worse that at the peak of the last recession at -5%. It seems tough to see how a nation with an economy built on 70% consumption is not in a recessionary environment. And while this alone is a dismal signal for the discretionary upside of the US economy/consumer; as Gluskin Sheff's David Rosenberg points out real personal income net of transfer receipts plunged at a stunning 5.8% annual rate in Q1. The other seven times we have seen such a collapse, the economy was either in recession of just coming out of one.

#4 Manufacturing activity all over the country is showing signs of slowing down. In fact, Chicago PMI has dipped below 50 (indicating contraction) for the first time since the last recession.

#5 In April, consumer confidence unexpectedly fell to a nine-month low...

The Thomson Reuters/University of Michigan preliminary index of consumer sentiment declined to 72.3 in April from 78.6 a month earlier. This month’s reading was lower than all 69 estimates in a Bloomberg survey that called for no change from the March number.

#6 NYSE margin debt peaked right before the recession that began in 2002, it peaked right before the financial crisis of 2008, and it is peaking again.

#7 The S&P 500 usually mirrors the performance of Chinese stocks very closely. That is why it is so alarming that Chinese stocks peaked months ago. Will the S&P 500 soon follow?

#8 The economic data coming out of the Chinese economy lately has been mostly terrible...

For starters, China’s recent economic data, as massaged as it is to the upside, is downright awful. China’s PMI numbers were the worst in two years. Staffing levels in the Chinese service sector decreased for the first time since January 2009 (remember that year).
China’s LEI also shows no sign of recovery. If anything, it indicates China is heading towards an economic slowdown on par with that of 2008. And if you account for the rampant debt fueling China’s economy you could easily argue that China is posting 0% GDP growth today.

#9 Things just continue to get even worse over in Europe. Unemployment in both Greece and Spain is now about 27 percent, and the unemployment rate in the eurozone as a whole has just set a brand new all-time record high.

#10 Crude inventories have soared to a record high as demand for energy continues to decline. As I have written about previously, this is a clear sign that economic activity is slowing down.

#11 Casino spending is usually a strong indicator of the overall health of the U.S. economy. That is why it is so noteworthy that casino spending is now back to levels that we have not seen since the last recession.

#12 The impact of the sequester cuts is starting to kick in. According to the Congressional Budget Office, the sequester cuts will cost the U.S. economy about 750,000 jobs this year.

About The Author - Michael Snyder is the founder and editor of The Economic Collapse

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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The Real Unemployment Rate Is Worse Than You Think

2013-05-06T12:51:00.000-05:00

By Louis Basenese at Wall Street Daily

Only in the government’s fantasy land does its math add up.

On Friday, the Labor Department reported that the economy added 165,000 new jobs in April. It also revised February and March data up by a combined 114,000 jobs.

More jobs are obviously a good thing.

However, the misrepresentation comes in when the Labor Department brags that the gains helped push the unemployment rate down 0.1 percentage points from March – and 0.4 percentage points from January – to 7.5%.

Total crap!

That’s not the real unemployment rate. It actually went up in April. And in honor of Myth-Busting Monday, I’m going to prove it…

Never Trust the Government

Not surprisingly, governments like to paint an overly rosy picture whenever possible. And when it comes to reporting the “official” unemployment rate (known as U-3 unemployment), that’s exactly what they do.

Making matters worse, the mainstream press totally goes along with the charade. I’ve read countless headlines touting how the unemployment rate is now down to a four-year low.

Even though, as I mentioned above, the real unemployment rate actually increased in April.

How can that possibly be?

Simple. The government skews the calculation by conveniently excluding three groups of people:

Discouraged: People who have stopped looking for work because they believe that there’s no work available for them.
Marginally attached: People who’d like to work and are physically able, but haven’t looked for work in the last four weeks.
Involuntary part-timers: People who want to work full-time, but can’t find a full-time position.

Sorry. But if people can’t find work – or haven’t looked for work in a few weeks – that doesn’t make them any less unemployed. Just saying.

Now, you might be thinking that the government ignores these people because there aren’t enough in each category to sway the calculations, so the time and resources spent tracking them couldn’t be justified.

Think again.

The numbers are actually staggering…

At the end of April, the tally for discouraged workers stood at 835,000… The total for marginally attached workers reached almost 1.5 million… And the number of involuntary part-timers stood at 7.9 million.

Lo and behold, if we add them back into the calculation, the total number of unemployed Americans almost doubles from 11.7 million to 21.9 million.

Floyd Brown, our Chief Political Analyst over at Capitol Hill Daily, agrees. As he said on Wednesday, “The sinister truth is that we’re being lied to… The actual rate of unemployment is two to three times the Bureau of Labor’s bullsh… I mean statistics.”

And the real unemployment rate currently checks in at 13.9%, not the widely reported 7.5%.

Big difference, huh?

The crazy thing is, the Bureau of Labor Statistics provides the calculation for the real unemployment rate on a monthly basis. It’s referred to as U-6 unemployment.

So it’s not like the journalists and politicians who are peddling the 7.5% figure can use the excuse that they don’t know how to calculate the real number. It’s already done for them.

Bottom line: It’s time for the real unemployment rate to stand up. Any other calculation misrepresents the truth and distorts what’s actually going on in the economy. And now that you know the truth, there’s no more reason for you to be duped by the government, or the media.

Courtesy Louis Basenese at Wall Street Daily (EconMatters author archive here)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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Chart Du Jour: Commodities Jumping with S&P New All-Time High

2013-05-02T16:03:00.001-05:00

By Tyler Durden of ZeroHedge

Another POMO, another dip bought, another all-time high in the S&P 500 but we are sure there is some disappointment that the '1600' caps have to go back in the closet for one more day. The S&P's best day in over a week was greeted with an almost perfect 'unchanged' for Treasuries and while stocks went out near their highs,Treasuries closed at the low yields of the day (2-3bps lower than the highs). Of course, the 'most shorted' names were smashed higher (at the open and at 1515ET) providing today's ammo.

The USD started weak but Draghi's -ve rates comment sparked a USD surge (up 0.3% on the week) but stocks didn't care. WTI jumped back above $94 with its best day in six months (though little talk from the 'heads' of the removal of the implicit tax?). Gold and Silver also jumped (as did Copper) all ending the day up around 0.75%. Homebuilders banged over 2% higher on the day (as Lumber was limit down at 5 month lows) and while the Dow and S&P closed the previous all-time high, the Trannies remain -1.4% from Tuesday's close.

Stocks recovered yesterday losses very quickly and then went generally sideways on low volume post the European close today (though did make new highs in the meantime)...

WTI Crude saw its biggest jump in six months... closing back at $94

Shorts were trampled at the open and at the 315ET mark...

which dragged the S&P and Dow up to their highs... but not the Trannies...

But sectors tell a different story...

The last time the S&P closed here (Tuesday), 10Y yields were 6bps higher...

and AUDJPY (all JPY carry) disconnected all afternoon...

and US equities totally dislocated from global risk assets today once the US day session opened... (the green line is Capital Context's CONTEXT model - a proxy for cross-asset class risk)

Charts: Bloomberg and Capital Context

Bonus Chart: The last time Consumer Staples stocks were so highly correlated to US Treasuries - bad things happened...

Bonus Bonus Chart: What have global high-quality bonds known for the last 3 months that stocks didn't?

Bonus Bonus Chart: but then again, it's been a good run since the March 2009 lows for all global bonds...

Courtesy Tyler Durden, founder of ZeorHedge (EconMatters author archive here)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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Is This The End of The Commodity Super Cycle?

2013-05-02T12:35:00.001-05:00

By Frank Holmes

Sometimes following where money is being invested is a solid course of action to gain alpha; other times, a better opportunity lies in going the opposite direction, i.e., thinking contrarian.

Take commodities, energy and materials, which may be the most unappreciated areas of the market these days. According to Bank of America Merrill Lynch’s Global Fund Manager Survey of 250 participants who collectively manage $725 billion, energy, materials and commodities are extremely underowned.

As you can see below, the global asset class positioning during the first week of April compared to historical data shows that energy positions are close to 3 standard deviations below the long-term average. An allocation to materials is more than 2 standard deviations below its long-term average and commodity exposure is close to 2 standard deviations below its historical measure.

click to enlarge

Take note of the timing, though, as it appears that it may make sense to own the most underowned areas of the market. Compare today’s portfolio weightings to the last time fund managers had such a significant underweight in these asset classes. Each bar below indicates whether allocations in energy represented a net overweight or underweight position. Most of the time since 2003, managers maintained an overweight allocation, which means they likely anticipated outperformance in energy companies during this period of time.

However, the last time they had such a big underweight in global energy for this long was at the end of 2008 and the beginning of 2009.

click to enlarge

In materials, there were many more times that managers chose to have an underweight allocation to the sector. But again, the magnitude of today’s allocation decision matches what we saw in the 2008-2009 timeframe.

click to enlarge

A similar picture for commodities reveals this consistent trend. Asset allocation indicating an overweighting in commodities hasn’t been this negative since 2008-2009.

click to enlarge

Given the historical trend in late 2008 and early 2009 when managers were invested in other areas of the market, many likely missed the huge rally in natural resources stocks. From the market bottom on March 9, 2009, the Morgan Stanley Commodity Related Equity Index of commodity stocks grew 156 percent on a cumulative basis over the next two years. This is more than twice the return of the commodities futures index, the Dow Jones-UBS Commodity Index.

click to enlarge

Don’t miss the next potential rally. We believe the commodity supercycle continues, driven by emerging countries experiencing rising urbanization, increasing wealth and healthy GDP growth rates. What’s important for investors to remember is to build a diversified basket of natural resources companies actively managed by professionals who understand the seasonal and cyclical trends of these specialized assets.

Jobless Claims Dropped to 5-year Low, But Don't Get Too Excited Yet

2013-05-02T10:38:00.002-05:00

By James Picerno of The Capital Speculator

Initial jobless claims dropped again last week, slipping to a new five-year low. The news is an upbeat counterpoint to the weak economic numbers released earlier this week. New filings for unemployment benefits retreated to a seasonally adjusted 324,000 for the week through April 27, the lowest since January 2008. It’s been easy to interpret recent data as a sign that the economy’s stumbling again, perhaps fatally, but today’s release looks like a statistical stay of execution, if only for a day.

In fact, history strongly suggests that new recessions don’t begin when jobless claims are dipping to fresh multi-year lows. Anything’s possible in economics, but some things are improbable. Today’s release doesn’t immunize the weak numbers we’ve seen recently, including yesterday’s sluggish pace of payrolls last month via ADP’s estimates. Earlier I also noted that inflation expectations are trending lower as well, perhaps setting us up for macro trouble down the road. Those warning signs are still relevant, of course, but this morning’s claims report tells us that it's still premature to assume that the business cycle is destined for contraction in the near term.

Claims data is notoriously volatile from week to week, of course, but the fact that the four-week average is now in close pursuit of the weekly estimate is an encouraging sign for thinking that today’s update is more than noise. There’s also good news in the chart of the one-year change in the unadjusted data (before seasonal adjustment), as the next chart shows. The ongoing fall in claims each week from year-earlier levels is a robust signal for arguing that the labor market isn’t on the precipice of trouble. No one will confuse the economy's ability to mint jobs as impressive, but it's not yet so weak as to think that another recession is fate in the immediate future.

But what of the other disturbing news from earlier this week, and the sluggish numbers for March for that matter? How are we to square this circle of mixed results? For now, the reasonable view is that we’re knee-deep in another spring slowdown, which for one reason or another has become the norm in recent years. Why that’s been the case needn’t concern us here. Rather, the question is whether the broad picture of economic and financial data tells us that the economy has passed the point of no return? Some analysts are quick to answer “yes,” but a fair reading of the numbers (including today’s jobless claims data) suggests otherwise.

Could that change? Yes, and perhaps soon. But the worst you can say for now is that we’re suffering from a mixed bag of data signals. That may be the precursor to deeper woes, although it could just as easily turn out to be another head fake that leaves the bears running for cover. How will we know which outlook has the upper hand? When a preponderance of the indicators speak loud and clear. The good news is that we’re still well short of that tipping point, as a recent profile of the US economy through March suggests.

What’s the lesson in all of this? A familiar one, namely: The biggest hazard in the art/science of business cycle analysis is the popular sport of rushing to judgment.

About the Author - James Picerno is a veteran financial journalist since the early 1990s at Bloomberg, Dow Jones, etc. before becoming an independent writer/analyst/consultant in 2008. James is also the author of Dynamic Asset Allocation (Bloomberg Financial, 2010) and he writes at The Capital Speculator. (EconMatters author archive here)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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Will ASEAN-4 Escape The Middle Income Trap?

2013-05-02T10:32:00.000-05:00

By Anoop Singh (via iMFDirect)

(Versions in 中文 and 日本語)

Emerging economies in Asia have weathered the global financial crisis relatively unscathed and appear to be on track for continued strong growth this year and the next. Perhaps because the region has been doing rather well, policymakers’ concerns have increasingly shifted towards medium-term risks: could growth and fast convergence to living standards in advanced economies—come to an end?

In fact, while the economic performance of emerging economies in Asia remains undoubtedly strong in international comparison, it has already shown signs of gradual weakening.

Both China and India have shown a declining growth trend since the global financial crisis: growth in China has slowed from a rate of over 10 percent in the 2000s to between 8 and 9 percent in the past two years, while growth in India has slowed from around 8 to 6 percent during the same period.

No trend slowdown in Asean-4 economies

There has been no such trend slowdown in ASEAN-4 economies, such as Indonesia, Malaysia, Philippines, and Thailand, but there growth was lower to start with and—with the notable exception of the Philippines—remains significantly below pre-Asian crisis rates.

So what are the risks of a sharper, sustained growth slowdown that would prevent emerging economies in Asia from rising to the high-income levels of advanced economies?

Economic history tells us that as middle-income countries, they are a priori more exposed than their low- or high-income counterparts. Over the past half century, the frequency of abrupt slowdowns lasting for at least a decade has been 1.5 times higher for the former than for the latter. In other words, there is some empirical support for the so-called middle income trap.

But another lesson from economic history is that the middle-income trap can be avoided. In fact, Asia itself is showing us the way: Korea, Singapore, or Taiwan Province of China all graduated from middle income to high-income status in just a few decades.

Minimizing risks of sustained growth slowdown

How can policymakers in the region minimize risks of a sustained growth slowdown? Our recent research shows the following to be especially helpful: good infrastructure, sound economic institutions, open and diversified international trade, as well sound macroeconomic and macro-prudential policies that alleviate booms and busts, all help.

And here is the good news for the middle-income Asian economies I mentioned earlier: on many of these dimensions, they often compare favorably to their counterparts from other regions. But they all have their weak spots.

Compared to others in the region, India, the Philippines, and Thailand are exposed to a larger risk of growth slowdown stemming from subpar infrastructure. Improving economic institutions is a further challenge for India and the Philippines, as well as for China and Indonesia. China’s relative risk factors also relate to its post-crisis increase in investment, while Malaysia’s include its strong capital inflows—both of which have clearly supported growth but also involve potential vulnerabilities.

Demography’s impact

A word on demography. Could emerging economies in Asia get old before they get rich? This issue would warrant another blog, but two points are worth noting.

First, demographic trends are widely heterogeneous across the region. For instance, China, Thailand, and Vietnam will experience a rise in the so-called dependency ratio—the size of the young and old population relative to those of working age—over the next decade, but India and the Philippines will see a decline.

Second, ageing will put a premium on reforms that mobilize untapped pools of labor, not least women, too many of whom remain under-employed or out of the labor force altogether across the region.

Emerging Asia is doing well, but only through unremitting reforms will it be able to fulfill its promise.

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About The Author - iMFdirect is a weblog covering the global economy and policy issues, posted by the International Monetary Fund (IMF) headquartered in Washington D.C., United States. iMFdirect posts content related to the IMF’s work in economics and finance at global or national level, and posts currently highlight the debate over policy responses to the biggest global recession since the Great Depression. The IMF is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world. (EconMatters author archive here)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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When Fed Exits QE: 400% Increase of U.S. Debt Financing Cost

2013-05-01T15:47:00.000-05:00

By Tyler Durden of ZeroHedge

With the Fed now openly warning that there may actually come a time when the 'flow' stops; the most recent Treasury Borrowing Advisory Committee (TBAC) report has some concerning statistics for those change-ridden hopers who see a smooth Fed exit, deficit-reduction, and blue skies ahead. While they are careful not shout 'sell' in a crowded bond market; hidden deep in the 126 page presentation are two charts that bear significant attention. The first shows what TBAC expects (given the market's expectations) to happen to interest rates in the US as the Fed 'exits' its QE program (taper, unwind, hold) - the result, the weighted-average cost of financing for the US government will almost triple from around 1.6% to around 4.3% over the next ten years. But more problematic is that even with CBO's rather conservative estimates of the growth in US debt over the next decade the USD cost of financing will explode from around $205bn (based on TBAC data) to over $855bn. Still convinced the Fed can exit smoothly?

As TBAC warns:

Treasury yields could reprice notably when the market is convinced that policy tightening is imminent

There is a risk that markets may overshoot to higher-than-fair yield levels due to:

Concerns about Fed portfolio unwind
Inadequate interest hedging in certain asset classes
Portfolio rebalancing by retail investors

Annual interest cost on public debt to increase more than 400% (from $205 bn in 2013 to $855 bn in 2023)

Main driver : Increase in WAC from 1.7% to 4.3%
Secondary factor : ~ 65% increase in stock of debt

Given the market's expectations for Fed tapering (or gradual tightening)...

The marginal cost of financing will rise significantly...

but with the sheer size of debt now (and growing), that will balloon the absolute cost of servicing US debt to over $850bn per year...

And just what happens to all those retirees - who need yield - who are being herded into stocks when Treasuries pay over 4.5%? Would seem bullish for bond flows... think Japan...

Charts: TBAC