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Merryn Somerset Webb: Europe slows down the Orient Express
Anthony Bolton is launching his new China fund in April as an investment trust. Normally, investment trusts trade on their merits – IFAs get no commission for piling people into them.
Not so with this one. Fidelity is paying commission to advisers who recommend the fund for their clients’ individual savings accounts. If China was such a dead cert of an investment, why would they feel they needed to do that?
China: Hugh Hendry warns investors' infatution is misguided
The overriding problem is that the Chinese model leads to a deflationary spiral that is perpetual in nature.
40%-50% Chance Stocks Will Crash To New Low, Says Gary Shilling
China is overheating, and as it corrects, it will take global commodity demand down with it.
Commodity funds 'could be next bubble to burst'
But the products have become more complex, with some, such as index trackers, backed by swap contracts with other financial institutions, not investing in the commodity directly. To some they now offer an uncomfortable reminder of the toxic mortgages that led to the credit crunch, when investors had little idea of what they actually owned.
FUND VIEW-Worried wealthy investors try physical commodities
Last June it also launched a physical commodities fund which has drawn in an additional $20 million from ultra-high net worth individuals in Switzerland and Liechtenstein, many of whom were alarmed by the collapse of Lehman Brothers and financial market wobbles.
I must be having a problem with my math. There are "many" alarmed ultra-high net worth individuals in multiple countries and yet all they managed to scrounge up was $20 million?
"Copper always has a price and the price is never zero," he said.
If I hear that argument one more time I think my head will explode. The exact same thing was said of real estate. Copper peaked at $4 per pound and fell all the way to $1.30 when the global housing market fell apart. That's a 68% loss. The stock market didn't even do that poorly.
Copper now sits at over $3 per pound, which in theory is high enough to actually crash again.
October 24, 2009
Copper, gold, and Chinese pig farmers make Brent Cook nervous
He Jinbi from Maike (metal trading company). He told CCTV they saw many farmers in Guangdong province stocking more than 100 tonnes of aluminium at home. These people used to raise geese for living.
Because the interest rate is too low in China. Many farmers could make hundreds of RMB profits per tonne, with dozens of Rmb per tonne cost of interests. They use their existing inventories to borrow more from banks. Banks are very 'happy' to lend to them.
Thursday: Unemployment Claims, PPI, Fed Chair Powell
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[image: Mortgage Rates] Note: Mortgage rates are from MortgageNewsDaily.com
and are for top tier scenarios.
Thursday:
• At 8:30 AM ET, The *initial weekly ...
6 hours ago
39 comments:
Mark - the problem is that we assume that currencies have value. Deficits are trashing currencies. Bigger deficits will trash them quicker. Trying to get to smaller deficits will do the same thing because it's already TOO LATE without (let's guess) at least a decade of politically impossible pain.
It may be that for some indeterminate brief period of time you'll be right and commodities and gold will succumb to deflationary forces. Seems to me that buying gold/farmland in the period ahead to hedge cash makes sense in a world where countries need to devalue one against another, if only in the mistaken belief that this will give them a competitive advantage, mistaken because there is no demand from anywhere to boost global economic activity. This will just lead to more and more desperate attempts at reflation to get us out of the mire, not excluding negative interest rates and other as-yet unthought-of goodies.
The final upshot will be the ongoing devaluation of all major currencies. Little competitive advantage will be gained in the long run and the only obvious outcome could be visibly higher prices for food and gold (real money). The one fly in this depressing ointment could be solar power, where developments over the next 5 years could lead to a brighter future.
Yes, your call on selling gold at $1000 could still play out, but I think you should thank your lucky stars and get in around say $900, cos waiting for say $700 could prove to be a costly error of judgement. $200 an ounce too early might be a small price to pay for greater peace of mind.
Just opinions of course!
Stevie b.,
It may be that for some indeterminate brief period of time you'll be right and commodities and gold will succumb to deflationary forces.
Commodities and gold succumbed to 20+ years of disinflationary forces in the 1980s and 1990s. I don't consider that period all that brief. They also succumbed to our falling housing market more recently. Oil is still well off its highs and continues to sit below my $80 ceiling prediction.
I'm just predicting more of the same. First it was the real estate bubble in Japan. Then it was the real estate bubble in the USA. Next will be real estate bubble in China? I don't think investors have priced the risks in much at all. I don't believe that a billion Chinese are not going to be driving gasoline powered cars in my lifetime. I'm a believer in what Chanos had to say, and I was a believer even before he said it. So we'll just have to wait and see what happens next.
...cos waiting for say $700 could prove to be a costly error of judgement.
I'm not waiting for gold to do anything. I either like a given asset's price or I don't. It is my opinion that gold is overpriced. Can it stay overpriced to me? Sure. Can it become vastly more overpriced to me? Sure. Is it high enough to actually crash? Sure. It's quadrupled in the last decade and much of it, at least to me, is based on a faulty Chinese miracle story.
Paulson was on TV and Buffett asked him what he is doing with his money. He said young people should be invested in strong companies but that he was simply trying to protect what he's got. He's sitting in fixed income and money market funds apparently. I think he was sincere in his hypocrisy. Buffett didn't exactly heckle his opinion either.
I currently like the yield of the 30 Year TIPS. It's good enough to me. Should be getting a real rate over 2%. That's what I'll be buying next. I'll be holding until maturity. The auction will be announced in a few days. If gold outperforms it, then more power to you. That's certainly possible. I won't consider it a "costly error" unless my investments hurt me big time though. That's also possible of course. Many things are possible.
It's quite likely that I will never own gold again at any price, if for no other reason than most of my nest egg is now tied up in laddered long-term TIPS. I simply don't have access to the cash like I did when I last invested in precious metals.
I enjoyed a nice run in gold and silver when few others wanted them (2004 to 2006). Those days are over to me. If nothing else, the lowest lying fruit from the precious metals tree has already been picked. That's a fact. People who bought early have made tremendous real inflation adjusted profits. How much more fruit that tree is willing to bear is anyone's guess. I would argue that nobody knows. I sure don't. Many claim to know though.
Oops. I said...
"I don't believe that a billion Chinese are not going to be driving gasoline powered cars in my lifetime."
I have too many negatives in that sentence! I do not believe a billion Chinese will be driving gasoline powered cars in my lifetime.
Mark - re TIPS - fair enough but, as I think we touched on before, can the PTB manipulate the index? There's certainly a difference between the CPI and the RPI used for Index-linking here in the UK and maybe the PTB can use this as wriggle-room. Desperate times would definitely call for desperate measures.
As far as history is concerned, I just don't think the past is too relevant. It'll be different next time around cos the world is in a different place, and the world will not stand by and just allow ongoing deflation or even stagflation to happen without a helluva fight. But to back you up a bit, I did read a while back that in the UK printing our way out may not be a viable option because of the amount of Index-Linked Gilts already issued + other "supposed" indexed obligations:
http://www.telegraph.co.uk/finance/comment/edmundconway/6830938/Theres-only-one-escape-from-our-debt-trap.html
I'm not convinced by the logical "only one escape" argument in the article, especially when nearly everyone else in the world might be trying it to some degree or other. The pressure for "action" will be too great and that's where the danger really lies, and by danger I suppose i mean the threat of hyperinflation - that or debt repudiation.
Could the US be in a similar position to the UK? I certainly don't know, but whatever, I guess our comfort levels are satisfied in different ways and that's what makes the world go round!
Mark,
we get it, never buy gold at any price not even $0, check, gotcha.
5-7% returns year over year are not too hard but you have to move around a little bit and make some correct guesses.
Stevie B.,
I know I am at risk of losing to hyperinflation or outright default. The risk is not trivial either. There is no risk free investment these days though, especially now that gold has quadrupled. I'm just playing the odds as best I can. Aren't we all.
GYSC,
we get it, never buy gold at any price not even $0, check, gotcha.
With all due respect, that's not even remotely what I said.
We both know gold isn't going to zero any more than real estate will ever be going to zero. That concept didn't protect real estate speculators though.
No matter how cheap real estate gets I probably won't be buying more of it either. I just have no desire to be a landlord. I'm a "net seller" from here on out. At some point either I will sell my house or someone else will.
Similarly, one wonders how many net sellers of gold exist today? How many investors have leveraged up their buying on the sure thing? How many are all in? You don't know. I don't know. That's the risk.
Pig farmers in China are hoarding copper and borrowing money to do it. That's where we are now. I'll pass. Right or wrong, I'm deflationary. Since I can't time it even if I am right, I'd prefer to just ride it out in TIPS.
If I knew I was going to live to be 1000 years old, I'd no doubt have a different strategy. I do expect the risk of hyperinflation and/or outright default to grow over time.
Stevie b.,
I read the link you offered and it does tend to back my point.
However, I will back your point too.
TIPS can be inflated away. If prices double next year then my TIPS would double too. I'd be no better or worse off until I paid my taxes.
Let's see how I'd do then.
1. All that growth would push me into a higher tax bracket.
2. I'd be writing a massive check to the government.
3. Well over 10% of my nest egg's purchasing power would vanish to taxes. Poof!
I don't think it is at all likely, but there is always the risk.
Mark,
of course I was messing with you on the gold at $0 thing.
I noted the margin increase reserve may drive out speculators in the gold market and I think that is a great thing. Is gold a bubble? If it is then a margin increae will blow it up; of course they did this in December as well and not much happened.
In a time where default risk is a daily discussion and money printing has finally, finally!!!!, entered the mainstream thinking gold (and to a lesser degree silver) right now represent the best upside/downside risk profile I am looking at. Bubbles tend to burn bright and then go bust but gold has been steady uptrending for about 10 years now. Each to his own but I like the metals here very much. I am welcoming QE 2.0 (or 5.0?? who even knows) and a failed bond auction here and there and then we will see if gold, history's longest surviving money, is a bubble or just a sound choice.
Mark - i suppose they could always tax gold too - or try to... Ye gods, this wealth preservation business is hard work!
Mark - for the record, I was a Wall St. broker in the '73 - '74 crash, apparently the 7th worst on record, but all bar the great crash were falls of similar magnitude.
http://ezinearticles.com/?Guide-to-Stock-Market-Depressions&id=127590
I was in my late 20s and just starting to make a reasonable living. In fact as well as a few Krugers, I also bought some Index-linked gilts! The fact is that somewhere along the line I sold the I-L gilts and kept the gold. My memory is hazy now, but whilst I never felt the gilts were especially good, they got me through and were sufficiently novel to have a reasonable premium which i think moved lower as I held them and accounted for part of the "profit". And I don't recall thinking the underlying price index could have been manipulated (maybe I was too naive). The main thing I remember is that things seemed so bad that a colleague and I were seriously thinking of joining the Territorial Army (volunteers) to be more sure of being able to feed our respective families. I think I felt my Psychology degree might come in useful, as I wasn't much good as a cadet in my early teens at school. In the end i put my last few bucks into 4 shares that I thought would benefit from chaos when the FT Index was 160, 15 points from the absolute bottom as I recall. It was a fluke and 4 months later I'd sold for a 100% profit and if I'd held on for a year I'd have made 400% (not that I cared, but it still rankles a tad!)
The point is that at the time things did look pretty dire, but because the world is now so much more economically inter-connected, I can say that THE PROSPECTS look more dire to me now than they did at (let's suppose) the equivalent time in the '70s. I certainly don't think we're anywhere near the endgame where buying shares as a last throw of the dice is just round the corner. Maybe I'm more cynical now and more ready to see the worst in the tea-leaves, but surely one does not want to go into the possibility of such a potentially hazardous environment with just one string to one's bow...
Mark - seems relevant to your original post (and the previous one):
http://www.newsneconomics.com/2010/02/response-to-i-have-to-side-with-china.html
GYSC,
I think there is serious downside risk in gold as you know, and the margin increase is possibly a sign of it.
That said, let's say everything does crash again, and I do mean everything.
What will people buy at the bottom?
I'm not normally much of a fan of this author, but I do think he makes some decent points here.
http://finance.yahoo.com/banking-budgeting/article/108837/dead-cat
If the dead cat bounce dies and the Dow drops to 5,000 in 2010, as I predict, then the price of gold and silver may die with the dead cat of the Dow, as investors cling to cash. The next question you need to answer is, “If the Dow dies and the price of gold and silver drop, what should you invest in at the bottom…stocks, gold and silver, or cash?”
Could happen.
Over the next few months, it is important to watch both the Dow and gold. As I write, the Dow is around 10,000 and gold is at $1,000. If the Dow breaks 7,286, the 2002 low, and continues down below 6,547, the 2009 low, watch out below. If 6,547 is broken and gold passes $2,500 an ounce, you'll have even more to worry about.
No joke.
Stevie b.,
They tax gold pretty good right now. It's considered a collectible and is therefore taxed at 28% when you sell. I felt the pain!
Mark - my fault - i meant a tax on the purchase of gold.
Stevie b.,
The point is that at the time things did look pretty dire, but because the world is now so much more economically inter-connected, I can say that THE PROSPECTS look more dire to me now than they did at (let's suppose) the equivalent time in the '70s.
I can't argue with that. I've said all along that I thought we were combining the very best of the inflationary 1970s with the very best of the deflationary Great Depression. Two wrongs certainly won't make a right.
My current mood is based on China. I think there's more than a decent chance that Jim Rogers is wrong.
This is the kind of thing that hits home for me (especially the sarcasm), and it comes from someone who actually likes silver long-term.
http://messages.finance.yahoo.com/Business_%26_Finance/Investments/Stocks_%28A_to_Z%29/Stocks_S/threadview?bn=17484&tid=47560&mid=47561
Let's picture a way we could all be right.
I think there is a decent chance that commodities will outperform most investments over the long-term. I do believe in some "peak" theories long-term.
I think there is a decent chance that investors who bet on volatile commodities long-term and stick with them long-term may do better than most.
I think there is a decent chance that I will never regret hoarding toilet paper.
I think there is a decent chance that inflation will not skyrocket in my lifetime thanks to never ending overcapacity and a never ending glut of workers trying to fill a fairly static number of jobs. Think automation.
I think there is a decent chance that now is not the best time to be speculating on commodities. If and when the China story falls apart, commodities may get crushed (again).
I think there is a decent chance that TIPS will perform well enough for me over the course of my lifetime, especially if I am right about long-term overall inflation being somewhat tamer than many fear.
All these things are compatible. I'm not saying that it will play out as I suggest. I'm simply saying that it is possible.
Stevie b.,
Mark - my fault - i meant a tax on the purchase of gold.
You know what? I think you have found a subconscious reaction to gold in me.
This is the kind of thing I had to read in 2004 just after I bought gold and silver.
http://news.opb.org/article/6655-gold-bullion-tax-loophole-unlikely-be-closed-says-top-lawmaker/
During her 2004 campaign for governor, Democrat Chris Gregoire often talked about closing tax loopholes. And over-and-over again she singled out one in particular.
Chris Gregoire: "And that's golden bullion dealers. Now I don't know whether they should have their $150,000 tax exemption. But I do know we ought to review it and ask that question and hold them accountable."
It scared the bejesus out of me. I've never been more paranoid than the period in which I owned physical gold and silver. My governor was on a witch hunt.
Gregoire's Revenue department is pushing legislation to repeal the sales tax and business and occupation tax exemptions for precious metal coins and bars. At a hearing on the bill, coin shop owners said they work on profit margins of between one and three percent.
It worked out very well for me, but I was a basket case from the very start. I still have the safe in the garage though, that I bought just for it. I still have a handgun too. Go figure.
Perhaps it took your psychology degree to dig that out of me. Can I get off the couch now? ;)
Funnily enough I bought a 5-shot automatic shotgun in the seventies just to sort-of be on the safer side. I gave up my licence around 2001 and handed in the gun to the local police-station for them to destroy. I'm just beginning to feel a tiny tinge of regret...
I too have a safe, and the fact that you still have yours is clearly of deep psychological significance....I think..
Stevie b.,
I'm feeling a bit of regret today as well. I just deleted a potentially life changing email without even reading it first.
Re: Letter: Congratulations!/AIAM Lottery Winner/Reply urgently!
Mark,
you mean those emails are fakes? Oh crap, there goes my gmail account!
You have to go through some serious hoops here in Mass to get a gun license and I have not put the effort in as yet. I cannot even get swords shipped here anyomore for crying out loud.
GYSC,
"You have to go through some serious hoops here in Mass to get a gun license and I have not put the effort in as yet."
No license required here in the wild west, unless you wish to conceal it.
We aren't completely backward though. Pistol mortgages are frowned upon!
http://apps.leg.wa.gov/RCW/default.aspx?cite=9.41.120
No person other than a duly licensed dealer shall make any loan secured by a mortgage, deposit or pledge of a pistol.
It's probably just to clear up some confusion during bank robberies though. ;)
Customer: I want a mortgage.
Banker: Denied.
Customer: What about a mortgage on this pistol of mine?
Banker: How much cash do you want?
Customer: I'll take whatever you think the pistol is worth to you.
Mark,
If the Dow did happen to fall to 5,000 would you ever think about taking a position then?
watchtower,
The main problem is that I've already placed my bets and intend to ride them until maturity.
I'm locking in the 2% real yield on the 30 Year TIPS this month with what's left of my long-term non-emergency cash. I just won't have much left to make big bets in the future.
If the market crashes, I'll probably just sigh in relief that I wasn't caught in the downdraft much.
I'm certainly not predicting a 50% crash by the way. When I exited in 2004, I felt that the stock market would stagnate. The deflation surprised me.
At the end of the day, I wasn't all that far off though.
The DJIA was 10,150 when I got out. It's now 10,099. The ride to get here has been anything but stagnant though. Go figure.
Here's an amusing read for those who are skeptical of sure things.
The Yuan Is About To Surge Beyond Your Wildest Dreams
http://www.businessinsider.com/the-yuan-is-about-to-surge-beyond-your-wildest-dreams-2010-2
The Chinese Yuan is just begging for a home run. Any doubts that it is a huge screaming buy should have been dispelled last week when news came out that China had displaced Germany as the world's largest exporter.
I don't know. My dreams can be fairly wild, lol.
Here's something from the comments that amused me.
Yep, a surge, like an IPO, then a crash, like an IPO whose company's accounts are a work of fiction. - Ben
You go Ben. I like your style! Even if you ultimately end up being wrong (anything is possible), at least you weren't running with the "sure thing" herd.
For the record, I have no interest in owning the "ETF with an attached lottery ticket" mentioned in the article, nor do I think he understands the complex world of currency swaps. Namely, that someone is betting against him in a zero-sum game and that someone just might know more than he does.
Many chart types are calling for a retest of the lows last March but I am of the firm opinion that if that happens maybe 80% of the general public will NEVER put money in the stock market again, thus I highly doubt it. Highly.
GYSC,
Continued stagnation would certainly be bad enough.
It will be interesting to see just how much of the money that exited the stock market will never go back in. Mine won't more than likely, and I haven't even experienced the losses others have.
I have to imagine that as the baby boomers ahead of me retire that they'll be thinking twice too.
By the sounds of it, much of Paulson's money won't be going back in any time soon either.
http://blogs.wsj.com/economics/2010/02/09/paulson-im-not-a-great-investor/
In a session before the Omaha Chamber of Commerce, Paulson said Wall Street pay is “out of whack,” the economy is recovering and he’s keeping his money in fixed-income and money market accounts.
“One of the things I learned during my career is I’m not a great investor,” said Paulson, the former head of Goldman Sachs Group Inc. “A lot of what I have is in fixed-income markets, money markets, cash … growth equities.”
Its a low yield world but pensions and boomers need yield so what are you gonna do?
Money has never, ever, been cheaper than now and still the velocity of money is low. Something has got to give.
Check this out, FDIC leasing monster space:
http://tinyurl.com/ylzas2l
Nothing to see here.
From GYSC's link above:
"The federal guarantor of bank accounts needs what it calls a "temporary Midwest satellite office" as it processes receiverships and asset sales involving Midwestern banks."
I thought the smaller banks (especially here in the Midwest)were in much better shape than those huge banks that lent to the bubble areas?
I didn't think that Chicago was considered a bubble area?
Our local banks went out of their way around here to assure everyone that they were in good shape and willing to make loans.
But I am not located around Chicago so I really don't know what is going on up there.
GYSC,
"Its a low yield world but pensions and boomers need yield so what are you gonna do?"
Pile into 0.12% yielding 5-Year TIPS because even though there is no value left to extra the price always seems to go up anyway! Woohoo!
In all seriousness, I'd really like to know who is bearish for 5 years but is not bearish for 30? The 30-Year TIPS yield is over 2%.
I meant "to extract". Just woke up. Not thinking at 100% yet.
GYSC,
"Nothing to see here."
I just read your link. Guess what?
I'm bearish for 30 years! Go figure.
watchtower,
My sister works at a small bank in Eastern Washington.
Its stock is down 9% today so far.
It's not as bad as it seems though. It's only down 5 cents.
"I'd really like to know who is bearish for 5 years but is not bearish for 30?"
er..........um..........me.
Stevie b.,
I certainly hope you are right! You will note that I'm not actually actively betting against our future prosperity.
I would love to be looking back in hindsight knowing that I was too bearish for too long.
The best way for my nest egg to survive, especially since I have used TIPS as my defense, would be if the economy did much better than I imagined.
Unfortunately, I'm pretty much just as bearish now as I was in 2004, and it's pretty much for the same reasons. Further, using hindsight I really should have started my bearishness more in 2000.
It's been one decade so far and I'm a bit worried that the light at the end of the tunnel is an oncoming Japanese train! ;)
Mark - nil desperandum! There's always hope. The system always seems to find an escape-hatch. And as I alluded to in this thread already and in direct answer to a question you posed indirectly in the thread, not cash, not commodities but the Stock market is surely always the place of last resort in which to invest, assuming you get your timing even vaguely sort-of right.
Just one reason (out of probably loads we may not be aware of yet) that there could be hope is also something I referred to earlier in the thread. To spell it out, I read this post a few weeks ago on another blog. Is it true? No idea, but it sounds fair enough and seems to be backed-up elsewhere on the web, although in a longer time-span
than the poster thinks:
"Oil prices might rise temporarily, but the price of solar power drops exponentially (>3X) every decade, as it has since the 1950's, when the first solar panels were put on the Vanguard 1 satellite at $300/Wp. Solar is already close to parity with US retail natural gas electricity today, within 5 years it will be cheaper than wholesale coal electricity. For the global south, solar is already cheaper than the existing grid in many countries. South Africa charges 35c/kWh and plans to raise it to 99c/kWh; solar electricity costs approximately 15c/kWh (assuming a 5-year amortization @ 5% interest and sun conditions like California). The amount of solar power rolled out every year worldwide continues to increase and once price parity with the grid is reached solar (along with wind) will account for almost all new electric power generation by 2012. Advances in batteries are accelerating rapidly, eg. IBM with lithium air's 10X energy density over Li-ion. Major automakers in Japan, China, and US are rolling out hybrid and all-electric vehicles. I agree with Deutsche Bank's estimate the global oil Demand will peak in 2016. After that, I expect that coal, oil, nukes and gas will trend towards becoming niche power sources by 2030, as solar will be 1/10th the price of coal by then. We are seeing Peak Oil Demand not Peak Oil Supply."
Stevie b.,
"There's always hope."
I remember you bringing up solar power in the past and it did give me hope.
It's the same kind of hope that turned the 1970s into something far more pleasant too.
If we could just break free of the "commodity driven stock market" mentality (that I just heckled in my latest post) then I could be a lot more hopeful.
Mark. I liked your heckle - and if you're this aware and cynical at your age, I hate to think what you'll be like at mine..
Stevie b.,
...if you're this aware and cynical at your age, I hate to think what you'll be like at mine.
Hahaha! :)
How Not to Become a Crotchety Old Man (Paperback)
http://www.amazon.com/How-Not-Become-Crotchety-Old/dp/0740739522
Unfortunately, it's only given 1 star out of 5. It apparently does not appeal to crotchety old men. What a shocker.
Always know your target audience before writing a book!!! Doesn't everyone know that?
Oops. I went looking for help and all it did was bring out more of the crotchety old man lurking within me. Damn. ;)
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