A certain flavor of econometric model dominates conventional portfolio management and financial analysis. This model can be paraphrased thusly: seasonally adjusted economic data such as the unemployment rate and financially derived data such as forward earnings and price-earnings ratios are reliable guides to future economic growth and future stock prices....If this model is so accurate and reliable, why did it fail so completely in 2008 when a visibly imploding debt-bubble brought down the entire global economy and crashed stock valuations? Of the tens of thousands of fund managers and financial analysts who made their living off various iterations of this econometric model, how many correctly called the implosion in the economy and stock prices? How many articles in Barrons, BusinessWeek, The Economist or the Wall Street Journal correctly predicted the rollover of stocks and how low they would fall? Of the tens of thousands of managers and analysts, perhaps a few dozen got it right (and that is a guess--it may have been more like a handful). In any event, the number who got it right using any econometric model was statistical noise, i.e. random flecks of accuracy. The entire econometric model of relying on P-E ratios, forward earnings, the unemployment rate, etc. to predict future economic trends and future stock valuations was proven catastrophically inadequate. The problem is these models are detached from the actual drivers of growth and stock valuations.
In a move that will surely shock, shock, the monetary purists out there, the Bank of Japan has just gone and done what we predicted back in May 2011, with the first of our "Hyprintspeed" series articles: "A Look At The BOJ's Current, And Future, Quantitative Easing" (the second one which discussed the imminent advent of the ¥1 quadrillion in total debt threshold was also fulfilled three weeks ago). So just what did the BOJ do? Why nothing short of join the ECB, the BOE, and the Fed (and don't get us started on those crack FX traders at the SNB) in electronically printing even more 1 and 0-based monetary equivalents (full statement here). From WSJ: "The Bank of Japan surprised markets Tuesday by implementing new easing policies and moving closer to an explicit price target, the latest sign of growing worries around the world about the ripple effects of the European debt crisis on the global economy. With interest rates already close to zero, the BOJ has relied in recent months on asset purchases to stimulate the economy. In Tuesday's meeting, the central bank expanded that plan by ¥10 trillion, or about $130 billion. The facility, which includes low-cost loans, is now worth about ¥65 trillion, or $844 billion." The rub however lies in the total Japanese GDP, which at last check was $6 trillion (give or take), and declining. Which means this announcement was the functional equivalent to a surprise $325 billion QE announced by the Fed. What is ironic is the market reaction: the BOJ expands its LSAP by 18% and the USDJPY moves by 30 pips. As for gold, not a peep: as if the market has now priced in that the world's central banks will dilute themselves to death. Unfortunately, it is only at death, and the failure of all status quo fiat paper, that the real value of the yellow metal, whose metallic nature continues to be suppressed via paper pathways, will truly shine.
Under any collectivist society, the act of non-participation is always painted as an attack on the group. In a fully interdependent system, refusing to contribute automatically hurts others, and therefore, makes you a criminal by default. These systems are built this way deliberately, in order to control a population by exploiting their sense of innate guilt. The DHS may claim a limited involvement in globalization, restricted to security issues, but the very process of integration with the international corporate framework as well as foreign institutions makes the agency a catalyst for forced collectivism. Bombs in shipping containers (the bombs we’re supposed to believe are everywhere), do not warrant the massive shift of our security apparatus into a policy of global centralization. In the end, this move on the part of the DHS has nothing to do with security, and everything to do with manipulating the attitude of the general public towards globalization. It is much more difficult to challenge a methodology when that methodology is suddenly treated as a national security issue, and is defended by an army of bureaucrats and blue-shirted thugs. When a world view is made violently essential to the very survival of a people, defiance is held tantamount to treason, and change, no matter how wise, becomes impossible.
While unemployment is a big problem for the Chinese Government, inflation is a HUGE problem. Over one third of China's population lives off less than $2 a day. If the price of food rises in China... those "mass incidents" will explode into outright widespread rioting and civil unrest.
As Brent and WTI prices ebb and flow from local and global fundamentals and risk premia, Morgan Stanley notes that to be bullish from here, one would need to believe a supply disruption is coming. Considering conflict with Iran, sustained Middle East tensions, and the potential for sustained supply disruption their flowchart of price expectations notes that prices follow inventories and that as price rises, fundamentals will weaken (as without an OPEC production cut, inventories would balloon by 2Q12) and therefore to maintain current prices across the curve, supply risk premia must continue to grow. They raise their estimate for 2012 average Brent price to $105/bbl from $100/bbl which leaves them bearish given the forward curve priced around $115/bbl, as their base case adjusts to a belief that Middle East tensions persist but a conflict with Iran does not occur as they address QE3 expectations and EM inflation/hard landing concerns.
Heading into the North American open, EU equity indices are trading lower following reports that Eurozone Finance Ministers have dismissed as incomplete a budget presented to them by the Greek party leaders. In addition to that, EU lawmakers have warned Greece of more intensive involvement in the Greek economy to improve tax collection and accelerate the sale of state-owned assets. The Greek Finance Minister Venizelos said that Greece must make a “final, strategic” decision Greek membership in the Eurozone over the next six days as it decides on new austerity and reform measures or faces leaving the single currency. However, according to sources, German finance minister told MPs, Greek reform plans would bring debt to 136% of GDP by 2020, instead of targeted 120%. So it remains to be seen as to whether Greece will be able to meet the looming redemptions in March. Of note, analysts at Fitch said that the ongoing Greece talks stating that the country must secure an agreement to cut its debt burden in the next few days to prevent a “disorderly” default.
Mario Draghi has just begun his press conference in a more upbeat tone than recent months. EURUSD is limping back from its last try at 1.33 but only modestly as he sees inflation risks 'broadly balanced' and reminds us all of the 'transitory' nature of his temporary non-standard measures, as Bloomberg notes. The main thing is that the ECB is once again easing collateral demands and will now accept credit claims. This simply proves that Europe is running out of any money good assets to pledge to the ECB as "collateral." Before the European (and thus global) ponzi is over, the central banks will accept Mars bars wrappers as collateral at 100 cents on the freshly printed dollar/euro.
He's in the process of ruining the country.
Gold Increased In Value In Both Extreme Inflationary And Deflationary Scenarios - Credit Suisse & LBS ResearchSubmitted by Tyler Durden on 02/08/2012 10:42 -0400
Mohamed El-Erian, CEO and co-chief investment officer of bond fund giant PIMCO, said investors should be underweight equities while favoring "selected commodities" such as gold and oil, given the fragile global economy and geopolitical risks. Over the long term gold will reward investors who own gold as part of a diversified portfolio. Trying to time purchases and market movements is not recommended – especially for inexperienced investors. New research from Credit Suisse and London Business School entitled ‘The Credit Suisse Global Investment Returns Yearbook 2012’ continues to be analysed by market participants. The 2012 Yearbook investigates data from 1900 to 2011 and looks at how best to protect against inflation and deflation, and how currency exposure should be steered. The chief findings are that bonds do well in deflation and benefit from currency hedging, and equities are not a perfect inflation hedge, but benefit from international diversification. The report shows that gold offers a timely inflation hedge and long term holders of gold should expect a positive correlation to inflation – gold is one of only two assets since 1900 to have positive sensitivity to inflation (of 0.26). Only inflation-linked bonds had more - 1.00, as expected. By contrast, when inflation rises 10%, bond returns have fallen an average 7.4%; Treasuries fell 6.2%, and equities lost 5.2%. Property fell by between 3.3% and 2%. Importantly, gold managed to increase its value across both extreme inflationary and deflationary scenarios. The academics from LBS analysed 2,128 individual years in 19 major countries (1900-2011), finding gold rose 12.2% in the most deflationary years - when average deflation was 26%.
Hardly a week passes without some washed out, discredited legacy media outfit bringing up the "China will bail out Europe" rumor from the dead if only for a few minutes, just so the robots which have now shifted from stocks to the EURUSD, ramp the currency higher and stop out the weak housewife hands. So while we know what the wishful thinking within the status quo (and those who wish to receive its advertising dollars) is, here is the reality. From Reuters which translates China's Financial News: "Chinese banks and companies in the northern port city of Tianjin have cut their exposure to Europe as the euro zone debt crisis festers. In a recent survey of 53 banks and 15 firms done by the local foreign exchange regulator, 11 banks said they had cut or stopped trade finance for European countries with high debt risk, suspended derivatives business with European banks, cut or stopped lending to foreign peers, particularly those from Europe, the newspaper said." Isn't this a little contrary to an atmosphere of mutual goodwill if not mutual bail outs? "They also reduced the issuance of euro-denominated wealth management products as a weakening euro resulted in negative earnings last year. The pullback by Chinese companies comes as European leaders have appealed to the Chinese government to support debt bailout funds. Although Chinese leaders have expressed confidence in European nations, they have also refrained from making firm financial commitments, urging Europe first to take further steps on its own." But why is Tianjin important: "Europe is Tianjin's second-largest exporting destination only after the United States. But local exporters are trying to sell more domestically or venture into emerging markets to cut their reliance on the euro zone, the newspaper said." Great work Europe: by slowly going broke, you are implicitly promoting the development of the Chinese middle class. And for that general act of goodness for humanity, well Chinese humanity, we salute you.
Ahead of the North American open, European Indices are trading in negative territory following further deliberations over a Greek settlement, with a tentative meeting between the Greek PM and his respective Party Leaders scheduled for some time after 1600GMT as well as an underperforming Basic Materials sector following caution over the upcoming Glencore/Xstrata merger. In foreign exchange news, the EUR/CHF currency pair has exhibited volatility following comments from the SNB’s acting Chair Jordan. Jordan has committed the Central Banks’ resources to preventing any further appreciation of the CHF adding that the SNB will buy unlimited amounts of Forex to defend the minimum level of 1.2000. Overnight, the AUD index has appreciated following an unexpected move by the RBA to hold its base rate at 4.25%, with many analysts expecting a drop in rates due to the global economic outlook and domestic job losses. In terms of European economic releases, German Industrial Production data fell below expectations for the month of December, posting a 2.9% fall while the figure was expected to stay flat at 0.0%.
Just when Japan can least afford it....
Mind versus technicals.
Martenson Interviews Dines: 'Wealth In The Ground' Is Your Best Bet to Surviving the Coming 'Supernova of Inflations'Submitted by Tyler Durden on 02/04/2012 12:04 -0400
James Dines has been in the business of making bold calls for over 50 years. In this deep-diving interview, he minces no words about the dire risks the US economy - and the world at large - faces at this juncture. Simply put, he sees the excessive credit in the financial system as having placed the global economy on a collision-course with hyperinflation. Unlike past periods of turmoil, there are no truly 'safe' places for investment capital to hide. Geographic markets and almost all asset classes are positively correlated these days. They share many of the same risks and if a systemic crash occurs, they will crash together. At this point, says Mr Dines, you want to invest in assets that can not be printed away by government desperation. You want to hold hard assets; "wealth in the ground" as Dines says (physical commodities, mining companies, etc). They're your best best to make money faster at a rate faster than inflation is going to happen.
The vast majority of professional investors are unable to contemplate truly dark times for the markets. After all, the two worst items most of them have witnessed (the Tech Bust and 2008) were both remedied within about 18 months and were followed by massive market rallies.Because of this, the idea that the financial system might fail or that we might see any number of major catastrophes (Germany leaving the EU, a US debt default, hyperinflation, etc.) is on par with Bigfoot or Unicorns for 99% of those whose jobs are to manage investors' money or advise investors on how to allocate their capital.