Investment Ideas

There is An Obvious Bubble in Gold (or Not?)

2012-02-24T01:56:00.001-08:00

CrushTheStreet.com has interviewed pedestrians in California following the Gold Bubble talks and asked them if they purchased Gold in the last year(s).

There were too few people in this video to make it statistically relevant, but still, none of the persons interviewed purchased Gold, although some bought Gold stocks (which they already sold) and one bought Silver.

It's quite difficult to have a bubble when there are few buyers. In 2000, during the Nasdaq bubble, individual investors' behavior was much different. I remember Marc Faber saying that during a new year party in 1999/2000, a woman asked him what he would buy. He answered that he liked treasuries, and the woman replied that treasuries would only return around 6% per year, whereas she could get 10% to 20% day-trading on tech stocks.

Hugh Hendry: Watch Out for Hyperdeflation

2012-02-23T05:30:00.000-08:00

Barron's has posted the transcript of an insightful interview with Hugh Hendry, Electica where he talks about hyperdeflation, China's potential hard landing, and his take on Japan (Companies are doomed, but the Japanese Yen could rise to 50 Yen per US Dollar). He's also very bullish on agriculture commodities and related companies.

Here it is (emphasis mine):

Barron's: What makes a great macro fund manager?

Hendry: First and foremost, an ability to establish a contentious premise outside the existing belief system, and have it go on and be adopted by the rest of the financial community. My great hero is [Caxton Associates' founder] Bruce Kovner, who was able to imagine the dollar falling to 100 yen—when the rate was 200. I am an existentialist. To my mind, the three most important principles when it comes to investing are Albert Camus' principles of ethics: God is dead, life is absurd and there are no rules. Of course, that's a doctrine of promoting the individual. You own your own decisions. As CIO of Eclectica, with $700 million [under management], I have no engagement with the sell side.

Where do you find yourself outside the existing belief system today?

In 2009, I made a YouTube video of the empty skyscrapers in Wuhan, China. Goldman Sachs and others articulate a very reasonable and compelling argument of being invested in China. With the evidence of my own eyes, I concluded that China had a very robust system of creating gross-domestic-product growth, but forsaking the creation of wealth.
When America was having its China moment in the 19th century, it occurred against the backdrop of a gold standard, a hard-money regime, with a public sector that was minuscule versus the overall size of the economy. As an entrepreneur, if your project failed to generate a sustainable level of cash flow, you failed.

China's great opportunity is taking place within the U.S. fiat system, and so the consequences are perhaps less stark than in 19th-century America, which had stops and starts and many depressions, though with an overarching prosperity. China has not had that volatility.
If you talk about a hard landing in China, you talk about GDP growth of 5%, not minus 5% or minus 15%. The Chinese government prints money. It can build superfast railways and overbuild airports, because the rest of the economy can subsidize it. China's swollen public sector is directing asset allocation, rather than pursuing profit maximization. They see [their system] as a success. But it creates a bubble, which can prove quite damaging.

You've already had a hard landing—in the Chinese stock market.

I should add something else that is contentious—U.S. quantitative easing [that eventually sent more money flowing to China], promoted because America had two sharp recessions and pursued orthodox policies, and had very little to show in the creation of jobs.

The policy was very successful. China now has inflation. Minimum wages have grown 20% annually for the past three years. This has encouraged the Chinese to tighten monetary policy. When you have bubbles and you tighten, bad things happen. China's stock and property markets are weak, a side-effect of quantitative easing. We may now have the pricking of the Chinese bubble. A year or two down the line, it could have enormous repercussions for the global economy.

How does one play it?

The world is very fearful of hyperinflation. Pension schemes have a preponderance of real assets, from forestry to gold to TIPS [Treasury inflation-protected securities], because they are very fearful. The road to hyperinflation is via hyperdeflation. That is why it's proving so difficult for hedge funds to make money. How does the rational mind that anticipates hyperinflation own 10-year government Treasuries yielding less than 2%? It can't. That's why people are struggling. To lay the seeds of hyperinflation, you need really, really bad things to happen. I thought the U.S. housing market having a massive crash would be hyperdeflationary. But then my Chinese friends pumped $1 trillion of credit into their $5 trillion economy, and created a global recovery, which has just come to an end. I'm speculating that hyperdeflation happens before hyperinflation. What's the worst that could happen? But the sum of all my fears would be China having a real hard landing of minus 5% or minus 10% GDP growth. If we had that—and Europe—the Fed would be printing $20 trillion, and I would have gold at $5,000. You can have a modest amount of gold, but you can't have all your assets in real assets, in case we get that hyperdeflation event.

That view would be consistent with interest rates staying low forever.

Last year, our fund made 12%, mostly from investing in the short end of interest-rate curves, on the presumption that rates will remain low forever. The risk premium in fixed income was huge, but the performance of global macro last year was quite disappointing. Most people understood Europe, but chose to bet on the euro being weak, which is a hard trade, because there's no risk premium or carry in foreign exchange.
This time last year, British interest rates were at a 300-year-low at 0.5%, and if you asked an investment bank to guess where rates would be in three years, it was betting above 4%. The figure today is more like 1.3%.

So how do you make money?

Would you believe that the AIG strategy of selling too much credit protection in risky assets like mortgage-backed securities is alive and booming today in Japan? It doesn't concern mortgages. It is credit-default swaps on individual Japanese corporations.

Do you seriously believe Japanese corporations are going to fail?

Clearly, they can and do go bust. I'm buying the CDS on investment-grade Japanese corporations because of the overpricing anomaly. Japan had a bust 20 years ago, and yet today the banking stocks, relative to [Japanese bourse] Topix, are making fresh lows. If I'm a Japanese bank and I lend money to a new business, I get 1% on 10-year paper. Then the bank gets a call from me, and I'm willing to pay 50 basis points for five-year protection on this same company. So suddenly, the yield has gone from 1% to 1½%. Compare that to five-year Japanese government bonds, yielding 30 basis points. The bank thinks: This is a great trade! Japanese steel companies are investment-grade and won't go bankrupt. So, the bank gets this huge yen yield, and thinks it is not taking any risk. You'd better believe it will sell way too much of that good thing.

One of my partners told me about Japanese steel: Here is a country with no energy, no iron ore or coal, yet it's the largest exporter of steel in the world, exports half its output. To put that in context, China manufactures 700 million tons of steel and exports perhaps 30 million. Japan produces 110 million tons and exports 40 million. As long as Asia is strong, they are fine. But if Asia hiccups or reverses, plant-utilization rates go from very high to very, very low very quickly.

Then we discovered that Warren Buffett owned shares of South Korea's Posco [5490.S. Korea], and that Korea was the biggest importer of Japanese steel, but Posco and Hyundai [5380.S. Korea] are building huge, integrated steel plants. They have a surplus of steel capacity and—guess what?—they're exporting to Japan, because the yen is so strong.
Initially, I wanted to buy a three-year, out-of-the-money put on Nippon Steel. My broker said, "I've been in a 20-year bear market; my boss will kill me." Then I thought, being long credit protection is being long volatility. I redialed his credit counterpart. I said: "I'm thinking of purchasing up to a billion yen of five-year credit-default swaps in Nippon Steel." The first thing he said was, "Would you consider 10 billion?" So one part of the bank is banned from selling volatility, and the other part is having a party. I bought reams of the stuff.

In August 2010, we set up a stand-alone fund to buy this credit protection. You no longer pay 50 basis points, you pay 130 basis points. U.S. Steel credit protection is more like 650 basis points, because in America, people are cautious on selling protection on such volatile businesses. They don't share that worry in Japan. It could make them very, very vulnerable.

Any other potential disaster catalysts?

Continuing yen appreciation; an exogenous shock—like a run on the Italian bond market; a slowdown in China; a sharp Asian recession. Japan is confronted by a European sovereign-type loss of confidence in the JGB market. We bought protection on steel names, and also on businesses with a huge sensitivity to the yen. I think the yen could soar from these levels [about 79 to the dollar] into the 60s, if not the 50s, with further dislocation in European sovereigns or a China hard landing.

From the early 1960s almost, Japan began recording current-account surpluses. Unlike Germany, it always invoiced in dollars.

So Japan is short its own currency, and has an enormous private-sector hoard of foreign assets. If the Nikkei falls, and your hedge and private-equity funds fall, pension funds in Tokyo will have fewer yen assets, but their liabilities will be the same. So they'd have to sell some overseas dollar assets and retrade them back to yen. If we have a series of bad events from China to Europe, that will express itself in a very strong yen rally.

What other names have you bought protection on?

Shipping companies, such as Mitsui OSK [9104.Japan]. The only place in the world one can buy credit protection on the shipping industry is Japan. These are very leveraged businesses, and there was overbuilding. We have protection in Nippon Sheet Glass [5202.Japan], which bought Pilkington. We have protection in trading companies like Sumitomo[8053.Japan] and Marubeni [8002.Japan]—companies leveraged, opaque and very geared to the global economy.

We've barely discussed Europe.

We are partly playing it (Europe) through Japan. If events kick off again in Europe, the correlation across all [global] asset classes will go to one. So the steel CDS is 130 basis points, while to insure against default by the French government, I'd be paying the same amount. Which is riskier? A very leveraged steel company that can't tax you? Or a government that can? Our bearish bets are largely outside Europe. As for Greece, the end game will be the Greeks rejecting austerity. The euro is nothing but a gold standard lacking flexibility, and all the onus is on private citizens to take the pain. Eventually, a Greek politician will say, 'Vote for me, and I'll get us out of this system.'

What else do you own?

In the next 12 months, we'll see further pathological swings in investor sentiment. Despite my reservations, I'm modestly long equity-market futures, some nonindustrial commodities, and some bullish fixed-income positions. We are very bullish agricultural commodities and agricultural equities, and hold a global basket of businesses—with interests ranging from fertilizer to farm equipment.

Thanks.

Via Barron's.

Jim Rogers: Gold Going Much Higher In This Decade

2012-02-22T17:55:00.001-08:00

ET Now interviews Jim Rogers on the 23rd of January 2012.

They asked him about commodities following the monetary easing by China, and he replied that natural resources such as silver, rice and natural gas usually benefit during periods of massive money printing. If the world economy gets better, there will be shortages, if it does not, they will print money. He owns more precious metals than base metals however.

If there is a conflict with Iran, everything will go down initially, except maybe crude oil, but this would be positive for Gold in the long term. He sees many people in Washington want to do something about Iran, and it looks like something will happen even though it's sheer madness.

GEAB 62: Euroland 2012-2016 : Perennisation of a New Global Power Contigent On Democratization

2012-02-15T18:15:00.000-08:00

Here are the highlights of GEAB 62 (February 2012) entitled "Global Systemic Crisis: Euroland 2012-2016 : Perennisation of a new global power contingent on democratization":

Global Systemic Crisis: Euroland 2012-2016 : Perennisation of a New Global Power Contingent on Democratization. The Euroland will come out stronger of the crisis as long as people are involved in the Euroland project (and not just technocrats).
2013 : End of the US Dollar Supremacy in Global Commercial Transactions. The decreased amount of commercial transactions in US dollars will be the main trigger of the demise of the dollar, not USD currency reserves by foreign powers.
2015 – The Great Slump of Western Real Estate. LEAP 2020 forecasts important price correction for real estate in western economies by 2015. (Excerpt from a book to be published in March 2012)
January 2012 GEAB $ Index: The US dollar accelerates its loss of value against the currency basket €, ¥, Ұ et R$.
Strategic and operational recommendations. Many currencies will fall sharply, mind where you keep your Gold, solutions for Greece, winter stock market returns were a travesty and the coming great collapse of Western residential real estate.
The GlobalEurometre - Results & Analyses. 69% of respondents (vs. 58% in January 2012) expect an important fall in the value of the US Dollar in the coming months.

The full GEAB 62 (PDF format) is available to LEAP 2020 subscribers for 200 Euros per year (10 + 6 issues).

Gold Outperformed the S&P 500 For the Period 1965-2012

2012-02-13T23:04:00.000-08:00

I've seen an article on Fortune magazine written by Warren Buffett that shows the graphics on the right showing the S&P 500 outperformed Gold since 1965.

Warren Buffett also explained his preference for stocks as follows:

Today the world's gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce -- gold's price as I write this -- its value would be about $9.6 trillion. Call this cube pile A.

Let's now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world's most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?

A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops -- and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond.

Considering peak oil is around the corner, Exxon Mobil may not be the best example ever, as it might be worth zero in 100 years, along with lots of other stocks 9if not all stocks). But let's go back to the subject of the S&P 500 outperforming Gold since 1965. I have edited an excel spreadsheet to calculate the return of the S&P 500 including dividends since 1965 (but excluding fees and taxes) as well the same return with Gold (again excluding premiums and taxes) and drawn the chart shown below (Click to enlarge).

There are two interesting facts:

Gold and Stocks appear to work in cycles, with period where stocks massively outperform Gold and vice versa. A logarithmic chart would show Gold is just at the onset of this cycle and should go much higher vs. stocks in the S&P 500. So there is no "Gold is better than Stocks' or "Stocks are better than Gold", there are just wealth cycles.
If I find the same result as Fortune for Gold appreciation since 1965, I just find 100 US dollars invested in the S&P 500 in 1965 would have returned 3370 USD whereas Fortune found those 100 USD would have turn into 6072 USD. I also reinvested dividend (at the end of the year) in stocks for each year.

Either my data is wrong or the way I calculated is incorrect. I used the S&P 500 price and dividends data by Robert Shiller (averaged per year) and for Gold I used both Kitco and Goldinfo.net.
For the formulas, you can check the S&P 500 vs Gold - 1965 - 2000 Spreadsheet.

So if I'm correct, Gold clearly outperformed the S&P 500 (including dividends) during that period. To be fair, if they had chosen 1950 has the starting we may have a different story.

Marc Faber: Greece Is Not Relevant, China Is.

2012-02-12T22:47:00.000-08:00

Marc Faber is interviewed by Fox Business News on the 10th of February 2012.

He explains that Greece is just a small appetizer to a much larger crisis. The market are currently overbought and there should be a correction in February / March the extend of which is yet to be seen. He said he bought shares in Singapore, Thailand and Hong Kong in November / January 2011 (Visit Marc Faber Picks at 2012 Barron's Roundtable for details).

He's also bullish on real estate in the US, he would buy a house as it is very cheap now. He gives an example of a nice 5-bedroom house in Phoenix that sold for 120,000 USD.

Finally he says China is the major issue in the world with most indicators pointing to bad economic times.

Jeremy Grantham Q4 2011 Australasia Update Summary

2012-02-10T19:50:00.000-08:00

Jeremy Grantham, GMO, has just released a long 54-page update.

First there are several tables showing the 2011 performance of GMO's Trusts that seem to cover virtually all markets around the world.

He reviews the Australian market for Q4 2011 (lower interest rates, market slightly up...) and gave GMO's outlook that is the potential for the Australian market to rally further thanks to low valuations (PE: 10) and despite global growth worries and earning downgrades.

After that, he gave his reviews of the global markets (European market and Emerging market weak due to the EU debt crisis while US markets outperformed as the US is seen less risky by investors) and provided GMO allocation strategy:

Maintain Quality bias. Quality gave back a bit of its outperformance this quarter, but the game is in the early innings still. High quality stocks still trade at attractive levels, and the general defensive posture of quality still remains appealing given all of the uncertainties surrounding global prospects,
dysfunctional governments, and horrific bond yields.
Bias toward Value in EAFE (Europe, Australia, Far East). We’ve also begun to bias our international portfolios toward Value. One cannot characterize this as a “big bet,” but valuations are such that we are beginning to see attractive spreads between Growth and Value in international equities.
Reduce exposure slightly to emerging markets. We funded some of the flows into EAFE both
through cash proxies and from Emerging equities. Continued concern surrounding China’s economic
bubble and a likely inability to deflate it without contagion effects gave us pause.
Continued bearishness on bonds. We are literally running out of superlatives to describe how much we hate bonds. Yields are pitiful, dangers of even a slight recovery that could wreak havoc for long-duration portfolios loom, and monetary policies globally certainly have added to the specter of rising yields.
Invest in conservative absolute return strategies, where available. Ideally, absolute return strategies are often a pure play on manager skill. Therefore, the return streams should have little correlation to the movements of the markets. Such investment instruments can provide equity-like returns, while helping to diversify other parts of one’s portfolio.

Then he switched to Emerging markets explaining that they underperformed their developed
counterparts in 2011. This was at odds with their relative macroeconomics with emerging economies making a lot more progress than their developed counterparts in regaining their pre-crisis growth trend.

For 2012, with slower growth and lower inflation, emerging market central banks begin the year significantly more open to monetary easing which is one of the reasons they are positive on the asset class this year. The other reason is valuations as after dropping about 20% over the course of the year emerging markets enter 2012 significantly cheaper than their historical averages.

You read the complete report which is available for free on GMO website.

Marc Faber: Stocks to Correct After April

2012-02-03T00:43:00.000-08:00

Marc Faber is interviewed by Bloomberg TV in Hong Kong on the 2nd of February 2012.

He talks about his recent investments (stocks in Hong Kong and Thailand) and his views on the markets in 2012. He expects February to be somewhat weaker than January, followed by another rally in March/April, before a more meaningful correction starting around May.

Marc Faber February 2012 Market Commentary

2012-01-31T17:33:00.000-08:00

Marc Faber has just released his February 2012 market commentary on the gloomboomdoom.com website.

This month report is entitled "In all Investments it is a healthy Thing Now and Then to Hang a Question Mark on the Ideas we Have long Taken for Granted", implying that we should always reconsider the things we think of as obvious truth.

There is 1 attachment with this monthly market commentary (MMC) :

"2012: A Year of Reflation and Bursting of the "Bond Bubble"" by Michael A. Gayed,Chief Investment Strategist at Pension Partners, LLC

Michael A. Gayed regularly posts articles on Seeking Alpha, I would not find recent articles related to the Bond Bubble, but he has some articles about the Reflation and the relation between treasuries and the US dollar in his "Winter Resolution of 2012" articles.

If I can find a summary, I'll post highlights of the Gloom Boom Doom market commentary a bit later.

Jim Rogers: Politicians Want To Fool Us This Year

2012-01-31T04:30:00.000-08:00

Jim Rogers is interviewed by CNBC on the 30th of January 2012.

They firstly talk about bank bonuses, then about prospects for US and Europe in 2012. Jim Rogers is not worried about the Euro this year, because of the elections around the world, which will lead to more printing by the central banks and more spending by politicians.

US Markets Valuation, Sentiment and Technical Analysis - January 2012

2012-01-28T20:02:00.000-08:00

In recent weeks, the S&P 500 has performed very well, almost reaching 2011 highs. At the same time, several indicators would seem to indicate a recession is coming to the US in 2012 and the Baltic dry Index does not look good either.

Today, I'm going to look at US markets, both in terms of valuation and sentiment. I will also look into technical factor to help determine whether it is a good time to sell or even short US markets.

S&P 500 Valuation.

For long term investors, Shiller S&P 500 CAPE (10-year price earning ratio adjusted for inflation) is the reference to asses whether the S&P 500 is undervalued or overvalued. Here's what it looks like today:

The CAPE stands at 21.14, it's much lower than the CAPE in 2000 (That is when Shiller talked about "irrational exuberance"), but still high compared to historical CAPE (average is around 15-16).

Another way, I like to look at valuation is by looking at earnings only. Historically, they've had a tendency to increase at a fix rate over long period of time and always oscillate around the trend line. That's the "mean reversion" preached by Jeremy Grantham. Here's the logarithmic chart of S&P 500 inflation-adjusted earnings between 1870 and 2012.

In 2011, earnings are above average and will revert to the mean at some point. Of course this could be this year or in several years.

Based on the 2 metrics above, it seems that based on valuation it is rather risky to invest in the S&P 500 or at least it's likely to average disappointing returns.

US Market Investors Sentiment.

Previously I liked to follow Market Harmonics Bull/Bear ratio, but it is not a free service anymore since last April. Now, I use the AAII sentiment index instead:
Week ending 1/25/2012

Bullish	48.4% up 1.2
Neutral	32.7% up 3.5
Bearish	18.9% down 4.7

According the AAII, the long term average are as follows: Bullish: 39%, Neutral: 31% and Bearish: 30%.

That shows people are now pretty optimist about the future. As a contrarian, that would be a bearish sign.

However, I like to look at things in a longer term perspective using AAII-14, as explained in my post "Using AAII Sentiment Survey to Time the Market". If the 14-week moving average of the AAII "Bullish" sentiment index is at 30% or below is a long term buy, above 50% it is a long term sell.

Now the AAII-14 is at about 42%, so this is neutral.

S&P 500 Technicals.

I'm now going to look at my 2 favorites technical metrics the RSI-14 and the index showing the percentage of stocks above their 200-day moving average (NYA200R).

I use the 14-day relative strength index moving average for short term moves.

The S&P 500 6-month chart and RSI-14 chart (Source: Yahoo Finance) shows it is now at 76.20. On the 23rd of January the RSI-14 was at 87.57 which was oversold, so a short term correction should be expected.

The NYA200R is really the index which tell me "wait" when other indicators tell me to buy or sell. Here's what it looks like today. (Source: StockCharts.com)

At 65.10%, the NYA200R tells me there is probably more upside potential for the S&P 500. I would become wary of holding stocks if it reached 80% or more for several weeks/month.

Conclusion

As some indicators suggest, there are significant recession risks for 2012. The S&P 500 seems relatively overvalued compared to historical ratios. Short term investors are very bullish and the market is overbought. However, longer term, it appears we have to not reached extreme bullishness (as the AAII-14 implies) and the NYA200R would suggest stocks have still more upside.

Based on this analysis, I would personally not add any position at the moment because of valuation and short-term bullishness and would even consider decreasing exposure to US stocks. I would not short the market however, because not all indicators are extreme and we have mad men (e.g. Ben Bernanke) and women (e.g. Janet Yellen) at the head of the US federal reserve that could unleash QE3 after announcing zero interest rates until 2014 since week.

Baltic Dry Index Near All Time Low

2012-01-26T02:28:00.000-08:00

The Baltic Dry Index (BDIY) now stands at 784 USD, basically at the lowest level it reached in November 2008 as you can see in the 5-year chart below.

This index tracks the price of shipping (by sea) and shows an oversupply of ships vs demand for shipping. I've seen some reports saying that this slump is due to the delivery of ships ordered during the boom in 2006/2007 to meet demand. There is indeed a long leadtime to manufacture large vessels. However, this indicator could still confirm the recession call by Hussmann and ECRI as well as a sharp correction for industrial commodities. I've also seen a 12-year chart that shows we are near all time lows.(Sorry I can't find it back).

Another metric for maritime traffic can be the Guggenheim Shipping ETF (SEA), composed of shipping companies. It has also been dropping sharply since February 2012 (-50% top to bottom), although it has stabilized during the last 4 months. The 2-year chart can be seen below.

Both the Baltic dry index and SEA ETF either indicate serious economic troubles ahead, or they have bottomed out and the SEA is a buying opportunity. I know where I stand at the moment...

I previously wrote about BDI in February 2011, as I was worried it would on industrial commodities. In retrospect, it would not have been a bad time to sell stocks and commodities.

India to Pay For Iranian Oil with Gold

2012-01-24T19:49:00.000-08:00

I've just seen a report on Russia Today saying that following sanctions from the US and Europe on financial transactions with Iran, India and Iran had found a compromise and India would now buy Iranian Oil with Gold.

Would that have any significant effect on the Gold market? Let's see the numbers. Russia Today's reporter said that Indian imported 12 billions USD of Iranian oil per year. Gold is now about 1670 USD per ounce. So That would be around 1.2 millions ounces of Gold or 200 metric tonnes of Gold per year. That's a massive amount considering India had 557.7 tonnes of Gold reserves in 2010 (source: Wikipedia). I assume India will not want to see their reserve go down, so they'd have to buy those 200 tonnes on the Gold market. By the way, 200 tonnes would just be the amount purchased by India from the IMF in 2009 (when gold was around 1100 USD). Another way to look at this numbers is to compare it to the SPDR Gold Trust Holdings - the largest manager of Gold-based ETF - that stood at 1,239 tonnes in May 2011. So if India and Iran actually implement this scheme for one or more years, this would be extremely disruptive on the Gold market both by the amount of required physical Gold and the geopolitical implications of such move.

Long Term Charts of the Thai Stock Market (SET) - January 2012 Update

2012-01-21T04:32:00.000-08:00

This article is the bi-annual update of the long term charts of the SET Index, price earning ratio and price to book value posted on CNX Translation Forum.

Here's our bi-annual update for the long term charts of the Thai stock market.

The chart below is the SET index between 1975 and January 2012, it has fallen sharply after July before rebounding and now stands at 1058.66.

The PER went from 14.5 to 12 in the last six months, due to the correction and earnings improvements. This kind of PER is neutral if we compare it to the PE history of the Thai SET. Six months ago, I expected a correction due to the relatively high PE which occurred and now I'm neither bullish not bearish based on this metric.

The price to book value went down to 1.87 (vs 2.14 in July) which makes Thai stocks slightly more attractive compared to 6 months ago.

To conclude, I believe the Thai stock market is fairly valued at those levels and the average dividend yield is 3.72% (vs 2.92% 6 months ago) which is comparable to what you can get in a fixed deposit (Bangkok Bank now offers up to 3.5 % p.a for a 36 months fixed deposit). I would neither by buyer or seller. However, if your investments are concentrated in US and/or European economies, you may still consider buying Thai stocks as Emerging economies become less reliant on Western economies (although there is no complete decoupling just yet) and Thai banks have virtually no exposure to European debts which make them more resilient should a recession occur in western economies this year.

Marc Faber: Relax! Stocks Won't Collpase

2012-01-20T00:33:00.000-08:00

Marc Faber is interviewed by CNN on the 20th of January 2012.

First, they discuss he views that US bonds should be rated Junk, with the debt increasing from 1 trillion dollars in 1990 to 5 trillion dollars in 2000 to now over 15 trillion dollars and if we include unfunded liabilities the number would be much higher (something like 100 trillion dollars).

Now, the debt can be serviced because of low interest rates, but if those would be to increase, it would become much more problematic.

Marc Faber also explained that everybody should relax, equities won't collpase because there isa stron (technical) support at 1100 on the S&P 500, and if the S&P 500 drops 200 points, the federal reserve will start QE3.

Finally, he said that Asian banks (in Thailand and Singapore) are a much safer place than western banks for deposit and that contrary to popular beliefs, emerging economies do no rely so much on the west to sustain themselves.

2012 Recession Likely

2012-01-17T21:12:00.000-08:00

A recession in the US is likely according to indicators used by John Hussman of Hussmann Funds and the WLI (Weekly Leading Indicator) growth by the ECRI.

John Hussman created a chart (below) corresponding to the average of standardized values (mean zero, unit variance) of the following variables:

6 month change in S&P 500
6 month change in nonfarm payrolls
12 month change in nonfarm payrolls
6 month change in average weekly hours worked
ISM Purchasing Managers Index
ISM New Orders Index
OECD Leading Indicator - total world,
OECD Leading Indicator - US,
ECRI Weekly Leading Index growth
Chicago Fed National Activity Index
3 month average, credit spreads (Baa vs 10-year Treasury),
Industrial commodity prices - 12 month and 6 month change
New building permits 6 month change.

Here's the chart between 1952 and 2011.

The level we currently get (-0.5) has always been associated with recessions, except with the false positive in 2003, right after the 2001/2002 recession. It correctly predicted or coincided with 10 recessions, never missed one and gave one incorrect signal as previously mentioned.

The WLIG currently stands at -8.4 (6 Jan 2012), a level usually associated with recession. ECRI insists however they use other leading indicator to make a recession call. That's why they did not make a recession call in 2010, but did make one for 2012.

There is now a fair amount of optimism in AAII survey (~50% bullish), although its' not extreme yet, and lagging indicators give a positive outlook for the US economy, so those recession calls still have many critics, but I believe they will eventually be proven right this year.

GMO 7-Year Asset Class Forecasts - 4Q 2011

2012-01-17T18:49:00.000-08:00

GMO has just released its quarterly 7-year Asset Class Forecasts and here are the expected annualized return (based on valuation and historical earning growth):

US Large caps: 1.4% per year
US Small caps: -0.5% per year
US High Quality: 5.3% per year
International Large caps: 6.12% per year
International Small caps: 5.0% per year
Emerging Markets: 6.8% per year

Different kinds of bonds are expected to return between -2.5% and 1.2% per year.
Managed Timber is expected to return 6% per year as always in GMO forecats.
Those are real returns adjusted for inflation of 2.5% per year.

The expected returns have slightly decreased since last quarter, but the best performing assets remain international large caps (Europe & Japan?) and emerging markets and the worst performing assets should be US and international bonds. The US market (except High Quality Stocks) should also be avoided with returns between -0.5% and 1.4% per year.

The ways to act on this forecast remain the same as last time, e.g. iShares MSCI Japan Index Fund(EWJ), iShares S&P Europe 350 Index Fund (IEV) and iShares MSCI BRIC Index (BKF) on the long side, and buy short ETF for bonds such as ProShares Short 20+ Year Treasuries (TBF). If you can short, you could do so with SPDR Barclays Capital International Treasury Bonds (BWX). However, the expected returns on the short side, may not warrant taking this risk just yet, especially with the decay inherent to short and leveraged ETFs.

You can receive GMO's forecasts (monthly) and the quarterly newsletter for free by registering at http://www.gmo.com

Jim Rogers on Europe Ratings Downgrade

2012-01-16T21:58:00.000-08:00

Jim Rogers interview on Russia Today on 16 January 2012 where he discusses the recent S&P downgrade of many European countries and what the future may hold if Europe breaks up.

GEAB 61: Global Systemic Crisis: 2012 : The Year of the Great Global Geopolitical Swing

2012-01-15T07:00:00.000-08:00

Here are the highlights of GEAB 61 (January 2012) entitled "Global Systemic Crisis: 2012 : The Year of the Great Global Geopolitical Swing":

Global Systemic Crisis: 2012 : The Year of the Great Global Geopolitical Swing. 2012 will be a transition year year between the old world and the new world order.
USA 2012: Towards QE3 Tragedy. QE3 will play an important role in the transition.
Anticipations 2012 - 20 up and 15 down. 35 Key Trends for 2012. For example, LEAP anticipates that People will become more and more angry, revolt around the world and contribute to the transition. They also expect that the power of central banks will decrease and that the Euro crisis will disappear in the headlines as the UK and the US debt crises will come back in front pages.
Strategic and operational recommendations
The GlobalEurometre - Results & Analyses

The next month, LEAP/E2020 will unveil its anticipations for Europe 2012-2016 in GEAB 62.
The full GEAB 61 (PDF format) is available to subscribers for 200 Euros per year (10 + 6 issues).

Marc Faber Picks at 2012 Barron's Roundtable

2012-01-15T02:35:00.000-08:00

The first month of the year is time for Barron's roudtable. There were 10 panelists for 2012:

Scoot Black - Delphi Management
Fred Hickey - The High Street Strategist
Abby Joseph Cohen - Global Markets Institutes
Brian Rogers - T. Rowe Price
Marc Faber - The Gloom, Doom & Boom Report
Meryl Witmer - Eagle Capital Partners
Mario Gabelli - Gamco Investors Inc.
Oscar Schafer - O.S.S. Capital Management
Bill Gross - Pimco
Felix Zulauf - Zulauf Asset Management

They discussed their views on the economy and markets and gave their picks for 2012.

Here are Marc Faber's Picks for 2012:

Investment/Ticker	Price 1/6/12
Big-Cap Stocks
Total / TOT	$50.75
Nestlé / NESN.Switzerland	54.00 CHF
Novartis / NVS	$57.31
Pfizer / PFE	21.57
Singapore
SATS / SATS.Singapore	S$2.23
K-REIT Asia Management / KREIT.Singapore	0.89
StarHub / STH.Singapore	2.9
Wing Tai Holdings / WINGT.Singapore	0.99
Fraser & Neave / FNN.Singapore	6.35
Hong Kong
Sun Hung Kai Properties / 16.Hong Kong	HK$98.20
Swire Pacific / 19.Hong Kong	75.45
Hang Seng Bank / 11.Hong Kong	92.9
India
India Capital Fund*	$66.24
Short
International Business Machines / IBM	$182.54
Salesforce.com / CRM	101.06
Australian dollar	A$1=$1.02
*Price of A shares as of 9/30/2011.

Source: Bloomberg

Here's the part of Barron's Roundtable where he explains his long picks:

Faber: My preference is asset diversification, as we don't know how much money governments will print, the size of fiscal deficits and so forth. The biggest uncertainty is what will happen to the Chinese economy. The Chinese probably can continue to muddle through, easing interest rates again to keep things up. But we're dealing with an economy driven by capital spending, which is driven by credit, which wasn't the case until 2008.

Faber: There is a huge amount of underground lending throughout Asia. Mr. Bernanke can drop his dollar bills on the U.S., but the growth in dollars here can lead to strong economic growth and inflation in other countries. That has happened in the past few years. I am the most bearish person you can imagine on earth, which is why I recommend putting, say, 25% of your money in equities, 25% in precious metals, 25% in cash and bonds and 25% in real estate. These assets won't go up substantially this year, but they could preserve your wealth.

People say large-capitalization stocks are inexpensive, and I agree. I would buy a basket of high-quality big-caps in Europe and the U.S. You can by Total [TOT], in France, which yields more than 5%, and Nestlé [NESN.Switzerland] and Novartis [NVS] and Pfizer [PFE]. These stocks don't have huge downside risk. Because emerging markets saw big declines last year, you could also buy SATS [SATS.Singapore], in Singapore, which provides catering services to the airline industry and ports. It yields 5% and trades for 13 times earnings. I also like K-REIT Asia Management [KREIT.Singapore], a real-estate investment trust that yields 7%. The stock has fallen by about 50% and the dividend might be cut. But even if it is cut to 4%, this is an OK investment. These stocks won't go up right away, but reinvesting dividends will yield an adequate return over time. StarHub [STH.Singapore], the mobile-phone company, yields 6.9% and the P/E is 14.

Zulauf: If China decelerates sharply, won't markets like Singapore have another big hit?

Faber: The question is, to what extent has that been discounted already? They could fall another 20%, but a luxury-property developer like Wing Tai Holdings [WINGT.Singapore] already sells for half its book value. I am positive about Singapore in the long run because more Europeans are moving there, and to Hong Kong. Because of banking-secrecy laws it is probably safer to have a bank account in Singapore than Europe.
The Hong Kong market was hit hard, and stocks haven't bottomed yet. But you can buy Sun Hung Kai Properties [16.Hong Kong], with a P/E of five and a yield of 3.5%. Swire Pacific [19.Hong Kong] is a blue-chip, a well-managed conglomerate. It yields almost 5% and the P/E is 11. Hang Seng Bank [11.HK] yields 5.6% and trades for 11 times earnings. There isn't a huge risk in these stocks, but maybe I'm too bullish.

and his short picks:

Faber: IBM [IBM] is a good short. It is the back office of the world. There is room for earnings disappointment. If China implodes, the Australian dollar will go downwhill. That's another short. A third is Salesforce.com [CRM], which I recommended shorting in the June Roundtable ["Buy Low, Stay Nimble," June 13, 2011].

Faber: Order, order. I haven't finished. Fraser & Neave [FNN.Singapore], in Singapore, is a conglomerate similar to Swire. It sells for 10 times earnings and yields about 3%. It could become a takeover target at some point. Lastly, I am the chairman of the India Capital Fund [an open-end fund sold outside the U.S.]. The fund and the Indian currency have been hit hard, and the fund could go lower. But the U.S. outperformed India last year on the order of 40%, and the Indian market looks attractive at 12 times earnings. As Chen Zhao at BCA Research said, in China the macro backdrop is fantastic and the micro is a disaster, but in India the macro is a disaster and the micro is fantastic. India has very good companies. The fund is overweight the banks and has a P/E of 10.
Last year I was overweight the U.S. relative to emerging economies. At what stage will the outperformance of the U.S. cease and emerging markets rise again? It could be three or six months, or a year. I am gradually increasing my exposure to emerging markets. Thai and Indian banks have no exposure to Europe. Indian banks lend domestically.

Why is the Indian economy having trouble?

Faber: Money-printing in the U.S. created food and energy inflation. In poor countries the percentage of per capita income spent on food and energy is much higher than in advanced societies.

Faber: Yes. Credit was growing rapidly and the hangover period could last for a while but these markets are good long-term investments. I travel extensively in these countries and you can see the growth of economic development. People go from bicycles to motorcycles, and from motorcycles to cars. First-time buyers of cars jump socially, as do first-time buyers of homes. Thailand has several consumer-credit companies. Buyers will do everything to pay off their loans. They aren't going to walk away. Plus, bankruptcy laws are tough.
Hedge funds performed badly last year, with few exceptions. Why is that? The bond market was strong, gold was up 11% and the U.S. market was flat, but sectors such as utilities did well. This year the economy could contract and stocks could go ballistic as central banks print money. If investors are diversified, they might do all right.

If you are interested in the full Barron's roundtable transcript and have the time to go thru the 9 pages, you can do so by reading the article Listen Up, Class: Here's How to Profit.

Marc Faber on US and Europe Credit Ratings

2012-01-14T02:41:00.001-08:00

Marc Faber interview on CNBC on Friday 13th 2012.

As France lost its AAA ratings, they discuss what could happen in the Europe, which countries could leave, which ones could stay and how it may affect the Euro. Marc Faber also said that he was not interested in buying any kind of government debt, be it French or American.

He expects the rest of the world (including Europe) to start outperforming the US markets sometimes in 2012, as the US market has better performed than most countries in 2011.

Finally, in case a further deterioration of the economy he expect massive money printing over the world and favor dividend paying high-quality companies such as Total and Novartis.

Jim Rogers: Short Emerging Markets, Long Base Metals

2012-01-13T17:49:00.000-08:00

Jim Rogers is interviewed by ETNow (India) on the 13th of January 2012.

He explains he sees the markets faring relatively well in 2012 because there are 40 elections in the world this year and politicians will spend money to get reelected. However, we may have a serious crisis coming in 2013 or 2014. In 2012, he seems particularly bullish on base metals. He is still short on emergent markets such as Indian, Brazil and Indonesia because they went up too much, too fast.

When asked about Gold, he says he owns it, do not plan to sell, but do not plan to buy for now as Gold has been in a bull market for 12 years without yearly corrections.

Eric Sprott: The Financial System is a Farce

2012-01-12T21:00:00.000-08:00

Sprott Asset Management published their monthly newsletter Market at Glance (January 2012) entitled "The Financial System is a Farce: Part Three".

This month, the newsletter is shorter than usual with 3 pages. Eric Sprott and David Baker explain that 2011 was a year with more bailouts, more kicking the can down the road and more denial.

Eurozone is not fixable, there’s too much debt and the politicians don’t know what’s going on. Nothing has structurally changed. There’s more global debt than there was a year ago, and it’s the same old song: extend
and pretend, extend and pretend,…

After October 2007 and September 2008, its' the 3rd time Sprott Management says the Financial System is a Farce (hence the title) and they re-affirmed their bearish views on the economy and markets.

In 2011, they found four farcical (but not funny) events:

MF Global bankruptcy with US$1.2 billion of missing customer funds and the CME did not act as a backstop.
Dodd-Frank financial reform aka "Too Big to Fail" regulations signed in 2010 has barely been implemented in 2011 (e.g. CFTC positions limits)
Europe and the European Central Bank (ECB) with another bailout (LTRO) and the states who lend to banks with the banks lending back to states.
National Defense Authorization Act (NDAA), not directly a financial issue, but when you make investments 'Political risk’ should also apply in the US (and other developed countries) and not only in developing or third world countries.

The full version of the newsletters is available at http://www.sprott.com/Docs/MarketsataGlance/2012/January-2012.pdf

Marc Faber January 2012 Market Commentary

2011-12-31T18:14:00.000-08:00

Marc Faber has just released his January 2012 market commentary on the gloomboomdoom.com website.

This month report is entitled "The Preoccupation with the Future frequently prevents us from seeing the Present as it is".
There are no attachment with this monthly market commentary (MMC) :

I'll try to post highlights of the Gloom Boom Doom market commentary a bit later.

Jim Rogers: Central Banks and Governments are Ponzi Schemes

2011-12-26T17:51:00.000-08:00

Jim Rogers has been interviewed on BBC Radio on the 26th of December 2011 where he explains that the current flow of money between the governments and central banks around the world is a "ponzi scheme, a fraud and a sham" and everything is going to get much worse in the end.

Here's the transcript of the interview:

Jim Rogers: Martin, it's very serious. America is the largest debtor nation in the history of the world and it's getting bigger and bigger by leaps and bounds at the rate of over $1 trillion a year. And in Europe you have several bankrupt countries and no one is dealing with the problem. If you look at the projections for all the European countries, none of them have reduced debt a year or two or three from now. So, this situation is serious and getting worse.
Martin Webber: Thinking back to the mid-1990s, capitalism seemed ascendant, western capitalism had triumphed over communism, economies were growing, stock markets were growing. Who do you blame for the fact that we have ended up in this mess?
Jim Rogers: Well, essentially it's governments and central banks; especially in the US they just kept spending money and the central bank just kept printing money. But there are several culprits.
Martin Webber: Who else apart from these authorities?
Jim Rogers: The government of United Kingdom, the central bank in the United Kingdom, the governments in places like Greece which used phoney bookkeeping, but also even Italy and France and Germany. They all started using phoney bookkeeping. They knew that the other countries were using phoney bookkeeping and they all said, oh it's okay, everything will be okay in the end.
So, the central banks and the governments were going hand-in-hand and spending money they did not have. Now, that's wonderful. It's great. It can cause huge growth. As you just pointed out, for 15 years you had great growth. But eventually, somebody has to come up with and pay for it, or eventually you just run out of other people's money.
Martin Webber: What seems to be going on at the moment is that central banks are creating money, lending it to banks, who are then lending it to governments in terms of buying their bonds because the private investors are no longer doing that. So you have got government owned institutions effectively buying government bonds. People don't seem to really understand what on earth can be going on?
Jim Rogers: It is a recipe for disaster. I am glad you pointed it out because there is nothing more authoritative than the BBC. It's a Ponzi scheme, it's a fraud, it's a sham and we are all going to have to - we are already starting to pay for it, Martin. It's going to be much, much worse in the end.
Eventually one of two things has to happen. We have to get together now and ring-fence the problem and figure out how we are going to survive and start over. Or, in a year or two or three, the market is going to say, no more money, we won't put up any more money. And then the whole system collapses, then you have gigantic chaos, social unrest, governments failing, civil war - huge mess.
Martin Webber: Let's try the more optimistic scenario. You say it is possible still to get a grip on this problem, what are the measures that need to be taken right now then to avoid the other scenario of civil war?
Jim Rogers: Well, at the moment some governments have credibility, Germany for instance still has credibility. And if they all got into a room together and Mrs. Merkel said, okay, you guys are going to fail, you have failed, and now you are going to fail. We are going to hold these banks, these companies up. We are going to make sure they survive. We are going to make sure bank deposits are okay. We are going to make sure checks continue to clear and the system will survive. Some of you are going to take huge losses and huge pain, but then we start over.
It would be a terrible two- or three-year period, Martin, but then the system could survive and we could rebuild after the people who have made mistakes take the losses. That's what capitalism is supposed to be all about. If you fail, you fail.
Martin Webber: And what are the mistakes then? Is it that the people who bought government bonds of France, Italy and all the other countries are going to have to take losses?
Jim Rogers: Absolutely. The banks who made these loans, and the bondholders who bought these loans, and the stockholders who own stock in these banks. They were making mistakes. They are all going to have to take huge losses. Now you are going to say, that's very painful, that's bad.
Well, I will remind you Martin that in the early '90s, Scandinavia had the same problem. They did exactly this. They ring-fenced everybody, many people failed, there was horrible pain, but after three or four years Scandinavia has been one of the great growth areas of the past 15 years or so. That's the way the system is supposed to work.
In Japan in the early '90s, they said nobody will fail. Well you know they have lost two decades in Japan. You know about zombie banks. You know about zombie companies. The Japanese way doesn't work. It is not going to work in America or Europe.
Martin Webber: So we got a situation there where people invested in banks lose money, presumably people with pensions who have investments in these banks lose money, and government bonds lose money too. But the politicians have a much nicer sounding solution it seems, which they have just come up with, which is that the European Central Bank creates money, lends it to the IMF and the IMF then lends it back to them. Sounds much nicer, doesn't it?
Jim Rogers: It sounds wonderful, doesn't it? But it is not based on reality. It's based on "Never Never Land." It's based on the "tooth fairy." Somebody has got to come up with real money somewhere along the line and payoff real debts somewhere along the line.
Martin Webber: But isn't that possible, that if you are the government, you can create as much money as you want because it's your money?
Jim Rogers: You certainly can. You can debase currency, and history is replete with governments that have debased their own currency and ruined their own currency for hundreds of - well for thousands of years it has been going on. You can do that and everything is okay for a while, but eventually you have inflation, you have high interest rates, you have currency turmoil, you have people no longer trusting each other to invest with each other, and then you have the end of the system, and we have chaos, and it starts over again.
Martin Webber: Is that not the more likely scenario in that the politicians never like to tackle problems. They are always interested in the next day's headlines. Isn't it more likely they will find yet another ruse to put off the day of reckoning?
Jim Rogers: Absolutely. You are a very insightful observer of the passing scene. That's exactly what they are going to do. If a politician ran on the platform, oh my gosh, we have got to take a lot of pain. Even if he won, Martin, which is very unlikely, but even if that politician won, after six months or a year or two of serious pain, he will be either thrown out or assassinated or something would happen because people would say this is too much pain. We didn't know you meant it was going to be this bad. Let's get out of this.
Martin Webber: Now many people say it's the euro that's at the heart of this crisis. They are calling it the "euro crisis." Is that how you see it?
Jim Rogers: No, absolutely not. It's not the euro. The world needs the euro or something like it to compete with the US dollar. We need another sound currency. The eurozone as a whole is not a big debtor nation. The eurozone has some debtor problems, some debtor nations, debtor states, but it's not a big, big problem. The euro is good for the world. It needs to work.
Martin Webber: Do you think in the past that political leaders were stronger, perhaps were less influenced by short-term considerations, had a greater feeling for the common good, perhaps the people themselves had a greater community spirit and would actually be happier to take austerity to understand you have to live within your means. Do you think in a way it's not just the political class, this is something at issue in society as a whole?
Jim Rogers: That's good observation, yes. We did have more discipline and more understanding in the past few decades, but that's partly because of the history of those decades. We remembered the First and Second World War. We remembered the Great Depression. We remembered what happened when you got too leveraged and couldn't pay your bills. We knew what happened when you debased your currency.
But now of course, since the Second World War, we have had two or three generations grow up who don't remember all of that, haven't read their history, politicians who didn't know anything about history at all and don't know anything about economics at all. So everybody thinks there's a free lunch.
Martin Webber: Do you think the media is to blame?
Jim Rogers: Well, the media are the same ones, Martin. I mean, you and everybody else grew up went to the same schools, had the same teachings and had the same period of good times. Since the Second World War, things have been pretty good in most of the western world, the developed world anyway, and we all grew up thinking, well this is the way the world is and it has been that way. But that's not the way the world has been for the past few thousand years.
Martin Webber: We have had this "Occupy Wall Street" movement emerging. Do you have any sympathy with any of the things that they are saying?
Jim Rogers: Well, I do have sympathy with the fact that they are saying, we shouldn't have bailed out the banks. I would have let all those banks go bankrupt, as you've heard me say before. But beyond that I don't have too much sympathy with them. You know, we all want a free lunch. I would like somebody to pay my bills too. I would like somebody to take care of me the rest of my life too.
Listen it's outrageous that the government took the money and saved the banks. Absolutely, they are right about that. It's outrageous, totally outrageous that governments went and bailed out some banker so they could keep their Lamborghinis and their summerhouses. But beyond that, I don't have too much sympathy with them.
Martin, whenever there are hard times, people look for somebody to blame. And they always blame the financial people, they always blame foreigners, and they always blame reporters. They always say, well if the reporters didn't write about this problem, we wouldn't have a problem. So be careful. Financial types get blamed first, the foreigners get blamed second, you are next.
Martin Webber: Okay. I am prepared.