The Great Silver Manipulation – 29th of Feb 2012

Yesterday those involved in the silver futures markets were witness to one of the greatest market manipulations of recent years. There have been so many different market manipulations that it takes some doing to claim this accolade.

At just before 10am US Est some participants started dumping paper silver on to the US futures market. Accoding to reports, within 30 minutes, they had dumped 225 million ounces of silver into the comex trading pits. Those involved in real time could witness the consequences of this dramatic dumping action. The order books collapsed downward with multiple gaps appearing due to the weight of  selling pressure. The selling was not price sensative. It was a dump where any price was taken where ever the first buyer on the order book appeared. It mattered not what price was achieved. This is very rare in market participants and suggested something radically had changed in those trading silver.

Silver lost 11% within an hour of the start of the selling. The volume being sold was simply immense. To put the volume into some sort of perspective, 225m ounces represents 40% of world wide annual production. Its a good question to ask how this volume compares to other commodity volumes traded. Looking for some perspective in this respect if we compare, say, the most heavily traded commodity in the world, namely, WTI and Brent oil commodity to silver we see that silver paper dumped yesterday dwarfed oil volumes. Yesterday provided a tsunami of paper silver dumping volume.

Looking back at the history books, in April 2010 volume also surged in the world wide oil markets as oil approached her cyclical high of $114. Volume in the major world wide oil markets of London and the US combined hit a new all time record high of 2.5bn barrels of oil traded in one single day. This represented a massive 8.1% of total world wide oil production traded in one single day. Paper markets often display this event of a disproportionate size in relation to the physical underlying size of production or supply but for 40% of annual production to be dumped in the US markets in 30 minutes is something very unusual indeed. Some may say this is blatent manipulation. We await to see if regulators comment. Either participants en mass sold silver at precicely the same 30minute window to crush the order book. I dont know what the probability of this event would be but i would suggest it would be very very low at a 0.01  sort of event level. The alternative is that some particpants colluded to collapse the order book and overwhelm the electronic systems and market.

We await to see what regulators make of yesterday’s action.

Its also worth picking up on a few of the arguements i have heard given to explain why silver volumes can be larger than some othere commodities, as a ratio to the annual production. Some arguements are offered that oil (and many other commodities) is a consumable commodity as opposed to silver which is only partially consumed. We must recall that over half of physical silver is indeed consumed and 99% of all silver mined has been consumed for industrial uses before we take this arguement too seriously.

All the best

Rich

Macro Monetary, Economic & Market Comments..

We remain a little overbought here but equities have rotated and worked off a little of the over bought momentum. Here the main SP500 index:


We have come a long very quickly so logic tells you a correction should occur here. We (inc many commentators) have been expecting a minor pull back for the last four weeks or so. None has come but a consolidation period has occured. We must accept that there is no guarantee that equities will see any correction given the monetary stimulus occuring by most of the developed world’s central banks. A correction will come eventually but for now we have so much monetary debasement across the world it is easy to make a case that asset prices are still badly lagging the stimulus that has and is under way. Oil is simply in catch up as the old repriced in gold chart indicates.

For now, the US LEIs remain very strong and, on the latest data, continue to climb.

The LEIs are likely to get stronger still as central banks continue their race to stimulate. Europe’s austerity budgets will have an effect but these budget’s deleveraging damage is likely to be more than compensated for by the ECB’s LTRO and LTRO II later this week. China’s recent changes should start hitting their LEIs in the next month. The ECB bought no bonds last week as their LTRO policy compressed euro debt yields. The BOE’s easing will feed into the UK nos soon enough and the FED’s ‘twist’ stimulus program continues and a likely policy focus on the US mortgage market very soon. Little reported, the G20 finance ministers meets this very weekend in Mexico city. The IMF has tabled a motion to increase the SDR program to assist world wide easing. I anticipate this will be approved signalling even more monetary easing. The BOJ continues on their easing and bond buying program. Against this back drop asset markets will boom and such things as overbought technical levels may be rendered compelety meaningless. If we do see a correction it will be shallow, imo. An attack on Iran would, of course, rapidly change things.

A key medium term indicator that i believe is very useful is the money flow data as to where retail investors are placing their funds. Contary to what we might expect to see retail investors continued to withdraw money from equities in Feburary. They don’t believe the rally at all. They continue to move to cash and bonds and away from equities.

'U.S. fund investors sold domestic-focused equities in the week ended Feb. 22, a second straight
week in which selling far outweighed the net new cash flowing into foreign-focused funds,
data from Thomson Reuters' Lipper showed on Thursday. In the latest week, investors pulled
a net $2.8 billion from U.S.-domiciled equity funds. Domestic-focused funds accounted for
the entire burden of outflows with $3.73 billion in net redemptions. In the course of the
reporting week, the U.S. benchmark Standard & Poor's 500 stock index rose 1.07 percent.
Exchange traded funds reported net outflows of just over $4 billion. The State Street SPDR S&P
500 ETF saw net redemptions of $4.64 billion. "Most of the flows were pushed by ETFs.
We actually saw an inflow into mutual funds, which may be a little bit of a lag on the retail
side," said Matthew Lemieux, analyst at Lipper. "Even though there has been mixed news,
a lot of what has been going around in the markets, such as the Dow touching 13,000,
and the S&P 500 approaching a 10 month high and small cap stocks approaching an all-time high'. 
Reuters 23rd Feb

We continue to see money flow to EM bond and DM bond markets.

http://blogs.ft.com/beyond-brics/2012/02/24/fund-flows-insatiable-bonds/#axzz1nObg2mwR

As an aside, there seems no investor concern, from money flows, as regards to EM inflation or over heatedness at present. If anything EM equities, in many sectors, remain unloved and fears remain of a recessionary period ahead for EM markets. Money flows to EM fixed income far outweight EM equity money flows.

Whether Lipper or ICE reports on fund flows fixed income flows are continuing to massively outweight equity flows. And equity positive fund flows have been very slow to date. Certainly no signs of euphoria as yet. Here a chart comparing bond fund flows and equity fund flows with SP500 performance from 01/2007.

The global hedge fund index is another indicator for investor’s preference for equities. Although it looks as though the lows are in the index is hardly indicating euphoria. Equity strength will come and money will one day flood out of cash and bonds into equities and the hedge funds due to monetary expropriatons via the printing presses but this seems a million miles at present.

Here also id just mention again ‘The land of the Rising Sun’. If you think equity ownership is at a low level in the west take a look at Japan and then consider what occurs when a busy crowd decide to collectively try exist through a narrow door way. In asset markets when capital holders rush to enter markets and buy assets this creates a enormous bubble. This is almost certain to occur in asset markets across the world, in my opinion due to monetary reasons. The question can only be when.  Here the Japanese equity allocations after years of allocating to cash and bonds. If JPY is to trashed this has serious capital market implications!

Equally, when EM consumer balance sheets look as follows below (ie with large cash allocations) this also has ‘door way’ implications..

Note here how asian em consumers allocations to cash are significantly higher than their S.American cousins whose governments have a history of issuing more debt than their asian rivals. Ie Asian consumer’s purchasing power is more liquid than S.American consumers. EM asians are very likely to increase allocations to risk assets as inflation bites.

And here a few more charts restating the case for emerging markets.

Here retail sales compared:

Here exports compared:

Markets are a discounting mechanism and they have discounted a severe recession for EMs in 2012. The rebound so far has been good but is still in very early days as the ratios still demonstrate.

Ofcourse the demographics of allocations should also not be overlooked. As we get towards retirement we tend to allocate less to equities. As developed market demographics are for an increasingly old population allocations to equities have been in decline and continue to decline as above re fund flows seems to indicate. EM consumers, on the other hand, are very likely to increase allocations to equities due to their relatively much younger demographics.

So when add all the secular as well as near term indicators together, shallow pull back & Iran issue aside, time spent selecting preferred’ equity targets for a continuation of this rally looks time well spent. On this basis, here a useful report by JPM on equity targets for the near and medium term.

JPM-EquityRecommendations

Also here from CS on European equities that i posted up on the forum pages earlier this week.

82238279-CS-EuroEquityResearch

EM market research continues.

Here a report from McKinsey Global making the secular case for emerging markets.

MK-EMSECULARCASE

Here a CS view of the EM bull market case reviewing index performance and projections with a focus on some of the particular indexes and relative ratios.

CS-EM-feb2012

Lastly here the SF economic indicator roundup..

WF-Econindicators-24-02-12

All the best for now.. Rich

 

 

 

 

Land of the Rising Sun..

Japan is complex story. From the eyes of a western investor a surreal world where valuations seem entirely out of step with western metrics.

Imagine a world where the yield you recieve for lending your capital to your government (A very indebted government with 200% debt to gdp) is less than 0.95% per annum for ten years. The 4 year yield in Japan is at 0.22%. It is clear that capital holders, in Japan, have totally discounted any positive inflation for years to come. Whats even more surreal is that these ultra low yields are, nonetheless, positive yields for investors and therefore higher than the negative yields seen for US capital holders advancing loans to their government at 2% p.a. for ten year T-bonds.  Of course inflation is the key here. Japanese inflation has been negative for many years. A sustained negative inflation rate environment has compressed yields to near zero. Capital holders have given up on growth simply happy to accept any poistive return. So it is that a 4 year yield of +0.22% p.a. is still a positive yield of 0.77% vs a negative 4 yield yield in the US of around -3.5% p.a.  Note, the Japanese capital holder is still 427 basis points better off than his US counter part just so long as inflation stays subdued in Japan.

Nonetheless, the japanese consumer, just like his western counter part, has responded to the year year decline in interest rates. The Japanese savings rate has been a secular decline mirroring the western consumer’s savings rate. Increasing government social security provision (54% of all japanese government expenditure for 2011/12) along with falling interest rates has discouraged savings. Japanese savings rates, once very high, have fallen to other developed nation levels.

Its a black irony not lost on me that just as the Japanese baby boom generation are about to reach for their capital (savings) these are about to be expropriated from them via the printing presses.

The implications for Japanese companies that had large balance sheet exposures to domestic asset markets over the last two decades was immense. Banks and property companies capitalizations where destroyed. Twenty years ago Japanese banks, insurance companies and property companies dominated the world as the largest/strongest capitalised companies in the world. Following twenty yeas of deflation later they struggle to populate the top twenty list now. How the mighty have fallen.

Given the scenario above, where capital holders in Japan having totally given up on inflation, it was very very interesting to hear the BOJ come out this week and accept a new 1% inflation. As we know central bankers can always and everywhere create positive inflation. Prices of assets and goods are determined by the amount of money chasing them. Central bankers (along with domestic banks) control the value of each unit of money in a society so it is that capital holders should listen and take note of what the BOJ say. Interest rates cannot go any lower in Japan nominally. But certainly the 427p.a.  basis point 4 year yield can be squeezed not by adjusting downwards the 0.22% p.a. yield on JGBs (Japanese government bonds) but by increasing the inflation rate. Logically this will likely lead to decompression in ‘safe’ such yields  such as JGBs and other bond debt markets. But the BOJ can engage in asset purchases or QE to prevent decompression in bond markets. Rates can stay low so Government and corporate debt markets can borrow at a subsidized rate for as far as the eye can see. Private capital’s 427 basis point yield will be compressed therefore and the value of the JPY will fall destroying bond market allocated capital.

Financial repression has gone global following the BOJ announcement this week that they have ‘taken advise from (mr money printer himself) Ben Benanke”.

http://www.businessweek.com/asia/man-bites-dog-bank-of-japan-wants-more-inflation-02152012.html

Putting it all together. This is wonderful news for asset markets and particularly the Nikkei (as well as local asian markets as capital will flee Japan just as it is America). The death of the long secular bear market in Japan has been forecast by many commentators over the last few decades. In truth only the monetization of debt markets and a sustained and massive debasement of the JPY will end this secular bear it seems. This is the conclusion the BOJ has finally reached.

Private Japanese capital is to squeezed into assets. Positive yields will, over time, go negative and look more like American, British and European yields. Fixed income will destroy developed nation capital parked there, over time. The implications for the very unloved property, insurance and banking equity markets world wide are clear. Industrialists will come and go as each nation in the old g4 win and then lose their race to debase their currencies. Industrial stocks will provide the beta but be mch more cyclical than their Bank, Prop, Insurance related cousins. Precious metals will do very nicely in this environment and are no where near their tops. They will likely see a mania way beyond the nasdaq 2000 bubble before their secular top is printed. Emerging market consumer related and asset market related stocks will also do very nicely with a small question mark on their industrial sectors due to the developed market currency debasements. Material sectors should also fly as private capital flees debt markets and ‘risk’ assets see significant capital inflows.

Finally here, the price chart of the usdjpy over the last 5 years showing the break of the downtrend. We are at a price resistance line having come a long way very quickly from a long term consolidation.

It looks like a long term bottom is in place from the chart. The technical trend line broke, then retraced then broke the down trend again to the upside. This is a very positive price reversal signal. A text book price signal. The CCI shows positive divergence to form this breakout of the downtrend. Price is above the 200 and the 50 with the 50 about to cross the 200 day moving average. This is also usually very positive. As always, central bank actions can change the technical picture and money flows but, for the moment, capital is no longer flowing to the jpy, the technical picture is very positive, if a little over bought.

The probability, from a fundament and technical view point, is for a continued money flow away from the jpy. As shown here below comparing the G6 most liquid currencies in the last year. The trend, as regards the JPY, is in her infancy and will, imo,  affect many asset markets. Here a 3 month fx comparative chart.

Out of time but this week was significant in many respects. Markets will continue to move up and down but the secular old g4 trend of currency debasement and financial repression are getting into full gear. The implications for ‘risk’ asset market are immense and still at a very early stage in the big scheme of things.

As always, its simply my opinion. Any capital you have accumulated is your private capital that you must protect and develop as your research, reading and risk appetite dictates.

I’m off skiing.  Have a great weekend whatever you get up to.

Rich

p.s. Interesting report on Japan household balancesheets from 2008 here.. Nothing of significance in terms of ratios, etc has changed since the report was written. japanesehhdebt

Emerging Market Report Blitz & Some Comments..

Some excellent reports on emerging markets and related issues such as inflation here:

Capital-Flows-to-Emerging-Market

UB-emerging-markets-120711

DanskeInflation02082011

The multi trillion dollar issue is how the capital inflow issue is affected by the inflation issue. I suggest emerging market (EM) economies (generally) have more levers at their disposal to deal with inflation than do the highly indebted developed economies. Many em economies adopt positive interest rates with positive trade balances and current account surpluses. Some emerging economies have worked very hard to either acquire or lease commodity production assets in overseas lands. Where this hasn’t been possible long term forward pricing agreements have been made. In addition their economies typically display excess capacity (due to excess investment) and limited debt, as above. In addition, their capital markets are not geared in anything like the same way as the west’s. The rapid double digit growth of many emerging economies in recent years has created inflation. The combinations of capital inflows, rising commodity prices as well as money supply increases through local banking systems have been inflationary but as inflows stalled in Q4 2011, bank lending was curtailed and interest rates turned positive, inflation rapidly diminished again.

Back to the trillion dollar question then. As the global asset price bubble is reflated by the actions of the developed nations central banks from London to New York to Tokyo to Frankfurt where will the inflation show itself? The developed nation currencies look to be in terminal decline and therefore capital flows should once again increase to the emerging world. How will the emerging cope with this additional money supply?

In my opinion we are likely to see the search for yield lead to developed world capital finding itself in emerging markets once again. This will likely elevate asset prices in the emerging world and compress yields of ‘safe’ emerging world assets such as reits in developed capital markets such as HK and SG. Interest rates will have to rise as a response to damped local money supply growth. This could of course, paradoxically, lead to greater capital inflows from the developed world. The compression of yields in the emerging world could be dramatic. In spite of emerging world central bank actions its hard to see a scenario of where inflation will not be felt initially.

In the 1980s developed nations squeezed inflation from the system due to high positive interet rates ie when interest rates became higher than the inflation rate. At the end of the 70s interest rates reached 15% plus in most developed nations. Consumption was sustained in the developed world even as rates went positive as consumer debt, as a proportion of salary, was so low and progressively rose and real salaries out grew inflation.

The developed worlds consumer’s main asset, his house, out performed inflation and hence their balance sheet improved even as debt increased.  GDP remained positive therefore even as rates rose above inflation levels.

What can we learn from this? Can we apply what occured in the 70s and 80s in developed nations to emerging nation consumers now? Given the evidence it seems a likely outcome to me.  In recent years high positive rates are something the emerging world has got used to given many recent inflationary cycles due to over heated local lending practices and sustained capital inflows. Consumer, corporate and public debt is extremely low on a relative basis comparing emerging markets to developed markets. The old paradigm of risky emerging markets achieving high growth by high non domestic currency leverage has disappeared in most ems.  Instead we see ems achieving high growth with low leverage and high savings vs developed market low growth, high leverage and low savings.

We understand all too well how, until 2008, developed markets have enjoyed a 40 year tail wind from increasing public and consumer debt levels. Increasing debt levels and running down savings when real interest rates are negative always seems like an excellent idea. The problem comes when inflation starts to show and rates have to turn positive once again to contain and then erode inflation.

I suggest that the head winds from this history of debt for DMs and tail winds from savings and investment for EMs will soon become more clear to the investment community.  Combining this DM high public and consumer debt with a negative DM demographics at a time of a growing world middle class consumer coupled with highly inflationary DM monetary policies is producing a super inflationary environment that will eventually lead to higher interest rates. Who will best survive the coming higher interest rate environment is an excellent question to ask. Commecially speaking, ie using commercial experiences as a reference point, companies that survive best are not the largest or smallest but those that enter the interest rate rising cycle with the least least stressed (debt to cash flow) balancesheets.

Debt to Cash flow, not your Balance Sheet ‘Wealth’, Matters Most in Inflationary Environments..

Applying these commercial principles to governments and consumers we must frame a question as follows. Who will survive higher interest rates best between the indebted, low savings, large balance sheet, developed nation consumer or his lowly leverged, high savings, small balancesheet emerging market rival?  As the size of your balance sheet wealth is not relevant when interest rates rise the one DM potential advantage must be removed from the analysis. The key ratio (in a rising interest rate cycle)  is  the cost of debt servicing to your cash flow. In fact an arguement could be advanced that DM balance sheet wealth could be a mirage that could weaken rather than strengthen DM economies, in a rising interest rate world. If DM consumer and governments alike cannot meet increasingly high interest repays from their cash flow they will try to realize some part of their balancesheet assets for liquidity/cash flow reasons. This attempt to realize their balancesheet wealth is likely to produce forced liquidations in developed markets once interest rates finally rise.

When and if  forced liquidations occur in DMs, due to interest rates rises to combat inflation, some asset markets in the west may fall a long long way as capital inflows are unlikely and monetization will be limited by inflation. Therefore, high DM consumer market inflation is very possible alongside asset price deflation as western retiring consumers are forced to realize a part of their balancesheet wealth due to cash flow issues. This process has obvious implications for western banks, note!

On the evidence, in my opinion, it is relatively easy to build a case for why emerging markets may eventually sustain realtively higher growth and real wealth improvements through this coming inflationary wave.

Im sure we will return to this issue again and again.. but out of time for now.

Rich

 

 

 

 

Weekly Technical Update – ‘Risk On Trade Losing Momentum’

The Swiss team are pretty much where they were last week.Short term very overbought. Increasing divergences with selectiveness increasing as the broad based rally breaks down.  A pull back before the final leg up to 1370 (and change)  into end q1 early q2 before the cyclical bear resumes. The JPY and Nikkie very interesting and timely. I would add the BOJ’s recent monetization buying JGBs. I would add into the picture consideration of what the impact would be on Asian equity markets should the JPY start to break down? My guestimate is that the effect of Jpy weakness would be very positive for stable asian markets like Singapore and Hongkong as investment inflows would follow from jpy weakness. The strength of emerging markets is not simply about their balancesheets it is also about the relative balance sheets of developed market economies.

Weekly14-02

All the best

Rich

Macro View – The Developed Nation Two Tier Monetary System To Directly Enfranchise Emerging Market Consumers

The Post Developed Market Debt Explosion..  2008 to 2012 ‘A Two Tier Monetary System’

From 2008 to now, those in the developed world have experienced a two tier financial system. Capital has been abundant and cheap for banks and governments.

But it has been scarce and expensive for consumers and small and medium sized firms.

Wages have fallen as prices have risen. A paradoxical world where capital is scarce but liquidity abundant and seemingly endless. The expected inflation has remained contained for the moment.

Here below is a quick a review of this system of the last 4 years and some projections of the impications of these developed market policies.

 

The Neo Agenda – A ‘Progressive’ Planned System of Capital Allocation..

It is clear that the developed nations of the world continue to implement a system of financial polarization. A system that covertly necessitates cheap or even free money for some whilst at the same time expensive or unavailable money for other groups. Cheap and limitless or expensive and limited money depending on who is the borrower. Money has always been priced differently of course but what is different in this system is that no commercial decision is effecting the price and availability of this money. This system represses two thirds of the economy to recapitalize the one third, namely the public (government) and banking balance sheets. The pillars of government and banks are implicitly deemed the most important to developed society. Private capital must to be expropriated, over time, from the people and small and medium sized firms to repair and support government and banks.

The one third is deemed more important than the two thirds. It is for the good of everyone that capital is allocated accordingly, ‘in this time of crisis’, argues the progressive agenda.

 

The Polarized Interest Rate Enabled Balancesheet Recapitalization – Winners and Losers..

We notice interest rates near zero in most of the developed nations. We notice (almost) interest free loans to the banks as well bad asset purchases by their central banks to also assist their banks as well as QE programs to purchase government debt to further subsidize the cost of borrowing for government as well as provide bottom line support to their banks.

 

The Banks, in response, focus their balance sheets on purchasing western government debt, which continues to rise. The unintended beneficiary of this partnership between state and banks are large highly capitalized corporates if their bonds are investment grade.

Their cost of borrowing has reduced

with the result that earnings are booming.

This corporate earning effect was unintended though welcome as it pushes up capital market valuations and so improves bank balance sheets and consumer wealth where they hold equity. Of course this boom in corporate earnings has occured as the real economy struggles to grow with ‘official’ growth anemic. An ‘official’ growth which massively understates inflation using hedonic statistical changes, etc and therefore  overstates growth. Adjusting ‘official’ GDP growth using prior statistical measures of inflation based on US BLS methodologies complied by shadow stats creates a very different looking GDP chart but one which many in society may feel reflects their own experience of economic conditions in the last decade or two.

Overall the main losers during this government bank partnership is the consumer and SME companies. The large corporates are accessing investment grade debt markets and so are benefiting from the lower rates as above but the vast majority of companies are still experiencing high interest rates. Equally consumers cannot access this cheap new liquidity. Therefore, housing markets and consumer spending has not bounced in the same way as corporate stocks, etc. Effectively government and corporate borrowers are squeezing out the SME and consumer borrowers. This strategy has, for now, kept a lid on consumer price inflation. But this is not ideal for the central bankers. Remember central bankers desire inflation of some assets eg housing and stocks but deflation of others eg consumer staples and discretionaries.

 

Government obligations (most of which are fixed) are too high for their income so, in commercial language, they have sought to drive up their earnings by reducing their borrowing costs. This has helped to drive deficits down to between 5 to 10% for developed nations. Clearly this is not enough when inflation is between 3 and 5%. In spite of the fiscal benefit of the lower cost of finance for government the economic uncompetitiveness and structural weaknesses continue. As these are greater than the positives of the lower of cost of borrowings the situation is worsening not improving for most developed nations.

 

The situation in Greece is a good example of what could occur. Eg A continuation of money printing to purchase the banks troubled assets as well as money printing to monetize government debt alongside reducing the costs of government expenditures on salaries and commitments. The continued losers in this strategy are the current recipients of benefits who must receive less as well as the middle class savers who face a combination of negative interest rates on savings as well as the dilutive effect of money printing. Consumer price inflation is unlikely in the immediate term as consumers have limited access to debt and government cost cutting will keep unemployment high and also limit salary increases for those still employed.

The current is a scenario of ever diminishing real economic activity where middle class capital is endlessly consumed by a partnership between bank and government.

 

The Inevitable Flaws Will Show Themselves..

 

I) The Developed Market Consumer..

 

Why I believe this bouncing along the bottom scenario is unlikely to sustain for too long? The above scenario is a contained unit where liquidity overspill is limited and confined to large corporates. As outlined, consumers are kept outside of the party as if they were allowed in again we all know consumer price inflation would immediately jump upwards. Inflation takes many forms. It is termed structurally embedded when wage push inflation occurs. This wage push inflation is deemed unlikely in the west as unions have much less power than they once had and unemployment is high and the fabled ‘spare capacity’ is high. But people are not perfect and the twins in this modern alliance are very imperfect.

 

The governments are elected and desire reelection. The evidence from history suggests governments and their political leaders always and everywhere desire growth. They are seduced by power and the continuation of power. For this they will throw caution to the wind. Perpetual consumer exclusion from the easy money is very unlikely therefore. Political leaders have a political incentive to allow consumers into the party of easy money in the name of ‘growth’. Lending binges will occur forming bubbles mis-allocating yet more saver’s capital. Some of these bubbles will eventually feed back into consumer price increases. Banks also have great short term incentives to allow the consumer back into the easy money party. The bonuses from government and corporate debt markets are not enough to keep them or shareholders content for long. Profits must be maximized.

 

(Note there is nothing wrong with this ‘profit maximization’ by the bank’s ceos and shareholders. Indeed, the profit motive associated with liberal capitalism created almost all the advances we associate with modernity. It is the driving force for life and progress but we have move a long away from any notion of a liberal capitalistic system. Profit motive in the current money printing, crony capitalist system leads to giant mis-allocations and endemic corruption. The solution to these problems is not the end of capitalism it is the reassertion of capital, savings and an end to franchise of the central banks to expropriate their people at will).

 

Banking staff from the top to the bottom will seek any and every way to capitalize on the banking (monetary) franchises they enjoy. A banking license, at present, is a license to literally create money from thin air. Limiting this franchise to endlessly monetize government debt at thin margins will not be enough. It is too tempting to drink deeply from the fountain of endless monetary liquidity and rightly so.

 

So, it is inevitable, that the developed nation consumer will eventually be let back into the monetary party with the bubble mis-allocation implications this will mean. We are starting to see consumer lending in the US and China uptick here. It is very possible a new wave of consumer lending is already under way.

 

II) SMEs, Private Equity, etc.

 

The other group that will eventually be let back into the monetary party will be the SMEs and private equity cos. Recently, both have experienced either a freeze in credit conditions or very expensive rates for debt. As government bond markets continue to compress the hunt for yield will and is driving the excess or cheap capital into these two. We can already see high yield corporate bonds rates have reduced significantly in the last 2 months or so. And that this occurred against a back drop of worsening economic data and conditions. Example euro high yield bonds have enjoyed a 25% increase in value over the period in spite of worsening euro data and conditions. Why would capital flow to these bad assets?Simply, because there is over spill of excess cheap liquidity which is driving banks to engage in risk taking activities again as the cost of funds is either cheap or free. They are driven by the profit motive which correctly should drive all private enterprise’s allocations.

 

III)The Emerged New Middle Class..

 

We must also remember that we now have world wide asset markets. Excess liquidity in developed nation banks can just as easily flow to emerging markets consumers and smes as they can to developed market consumers and smes. This is exactly what has occurred to over the last few years and looks set to continue to occur. This has important inflationary implications. The developed nation consumer, unlike prior periods of history, now has much competition to consume. Brazil adds 5m middle class consumers every year. China adds another 20m a year. Russia, India, Indonesia, Turkey, Thailand, Vietnam, Argentina, and even some African states now are seeing sustained increases in real wages and purchasing power as their currencies are supported due to weak developed nation currencies.

Even as the middle class consumer is in decline in the west it is certain that nominal middle class numbers are on the rise in aggregate due to the much larger population sizes in emerging markets. This is period of ascendance of the world’s middle class which is why we see a boom in internationally focused consumer good companies like Apple and VW, Procter and Gamble, Nestle etc. These new consumers are being enfranchised due to structural positive tail winds locally and due to inward investment from western banks due to the excess liquidity and mis-pricing of capital they enjoy. Investment flows to emerging markets have boomed due to excess developed market liquidity, currency debasement and an uncertain treatment of private capital.

This trend has continued and is likely to hasten over the coming years. Emerging markets have emerged and this is very dangerous for consumer price inflation in itself let alone against a back drop of endless developed world monetary liquidity.

 

 

 

 

Summarizing the Paradigm.

 

The stage is set for a serious period of world inflation. This is the great paradox of our age. The developed nations obvious structural problems are being fixed by a system of money printing and financial repression. A two tier system of free money for government and banks and expensive money for western consumers and SMEs. As it is hard for governments and banks to limit their addiction to this easy money no real progress is made in improve their financial ratios. IE both government and bank balance sheets are not improving, indeed they are worsening. Governments are not reducing their sizes. They are not reducing debt to GDP whilst developed world central banks have stuffed their balancesheets with bad assets purchased off banks and governments alike with printed money.

Banks are increasing their balance sheets and risks once more as they will always do when interest rates are negative and central banks provide them with free money and asset purchases of bad assets. The overspill into corporate debt as well as emerged market consumers is unintended, though positive for both. As nothing structurally has been resolved it seems certain another boom and bust event will occur for developed markets in the near future. On each developed market ‘boom bust event’ their currencies weaken further and more capital will flee to emerging markets.

 

Where Next..

 

What next? How do we go from where we are to a more serious inflation, deflation, etc? We cannot predict the precise steps we will tread but we can clearly see above what are the weak areas of the current progressive system and therefore predict what are the indicators to look for as she breaks down or rather progresses.

 

I don’t believe there are any indicators for a reemergence of the market pricing of capital any time soon. Indeed I think it more likely that the progressive agenda will strength. That the mantra of ‘for the good of wider society’ will continue and that this is the lesson from history. That this road once embarked upon will sustain until it collapses. This is the historical probability and this is the evidence thus far from the events we have witnessed. Ie money printing is increasing not diminishing. The rule of law is becoming more arbitrary not less. The geopolitics is worsening not improving. The social control apparatus is strengthening. Political polarization is increasing not diminishing. Hayek and others laid out the indicators to watch for through this process. You can tick them off one by one as they occur. We are progressing perfectly to his check list im afraid. Recent legislation across the developed world is undeniably restrictive and arbitrary.

 

The Unintended Consequences..

 

Banks will take risks and expand their balance sheets. They are in business to profit maximize. Political leaders seek reelection or election and wont cut their deficits. So the mutually beneficial coupling of these two groups includes an obvious flaw that leads to inevitable busts along the way. On each bust the rest of society must pay. This leads to ever greater repression as capital flows to more liberal and free markets. Fortunately for us these markets exist and should be embraced. The end game of this duopoly of power and repression is a destruction of currency. The net beneficiaries are societies and systems which are relatively more free than those that are less free. Ie As the developed nations implement more repressive laws on their people and corporations they will drive down their relative competitiveness and therefore attractiveness.

 

Volatility Will Provide Opportunistic Bounces..

 

This process is long and painful. It is true that the most unloved assets will bounce the highest during reflationary periods.

Here Bank of America bouncing 80% in 8 weeks. We dont see these sorts of bounces in Asia as their companies have less leverage and so less upside. Developed market stocks often can be seen to have a higher beta vs emerging stocks reversing the phenomina of the prior decades.

 

Investment begets more investment so waves of investment in unloved sectors can occur on a short term basis before the move is reversed with some early investors winners and the laggards the losers. Capital will be destroyed as a process of course. This phenomena will also occur in emerged markets but as balance sheets are stronger the boom bust phenomena will be reduced. The big trend is for emerged markets to further strengthen relative to their developed market cousins. Its true that developed market assets eg leveraged empty industrial parks in Holland may provide wonderful ‘turn around’ short term investments as excess liquidity flows to these assets for short periods. But it is best to take profits on these ‘turn around assets’ when and if they occur as the real (as opposed to nominal) value of these assets will decline over time rather than appreciate, imo.

 

The Eventual ‘Progressive’ Agenda Loser – Your Currency

 

Your currency’s value is a direct function of your economy’s structural strengths. If you perpetually adopt capital destructive policies, anti competitive legislation, arbitrary systems of law, you will destroy your currency’s value over time. This is inevitable over time. Ask anyone in emerging markets in the 70s or 80s what the implications where for their country having a weak currency.

Always and everywhere the implications of your nation having a weak currency is that your ability to issue debt is limited. If too much debt is destructive no debt is almost equally as bad. Innovation and new capital formation comes to a standstill due to this. In countries with weak currencies when new debt is issued inflation quickly occurs as the ratio of new debt to currency in circulation is low. The ratio is low as international confidence in your currency is diminished and so little is held as a store of value etc. Weak currency nation’s are slow to invest and see much lower growth rates than where currencies are strong and debt can be issued.

 

The real consequence then of this period of history in the developed markets will be a destruction of the goose that lays the golden egg. Their currencies will be relatively destroyed through this process. And this destruction will change the world as we know it. It is worth remembering that structurally troubled fiat currencies usually loose their value gradually over time until a tipping point is reached when confidence usually evaporates and the currency exponentially loses its purchasing power. Or capital rapidly flows into alternative assets and currencies. Capital controls can and have been used to slow the process but this is merely a slowing tactic.

 

Enfranchisement of the Emerging Market Consumer..

 

In the developed markets, the combination of increasingly restrictive anti competitive legislation that will be implemented to counteract the unintended consequences of mis pricing capital and dilution of savings which will destroy currency value will make the developed markets an increasingly horrid place to invest in. Of course playing nominal growth with borrowed currency will be a way to make money but why swim against the tide better to swim with the tide and embrace the emerging market super cycle.

The trend of emerged and emerging market middle class enfranchisement looks set to continue as far as the eye can see. Why? Because of currency as they have adopted free market principles. Their currencies will relatively strengthen vs their monetary base. Or rather due to the weakness in the west emerging and strength in the emerging markets they can increase their monetary bases at will. Rather that let their currencies appreciate they can enfranchise their populations.

The sort of 1970s to 2000 debt increases we saw in the west can occur in the east and south west due to currency. Prior periods of increasing consumer debt in emerging markets ie South America in the 1990s or Asia end 1990s lead to a collapse in their currencies. This time around the west’s weakness provides the east with a decade or more of money supply expansion that will change the world. The next chapter of emerging market growth is set as its driven by developed market structural and therefore currency weakness.The emerging market train is finally decoupling from the west due to this phenomena of currency. Gold will rise of course as it is a currency but for real capital growth significant and progressive increases in allocations towards emerging markets should be undertaken over the coming months and years and beyond raw commodity investments, imo.

 

 

Weekly Technical Analysis – Near Term Remains Overbought..

The Swiss team sight the ‘momentum of the January bull leg is unsustainable.  They also point out that, ‘a classic price top is still missing in any one of the major indexes’ so too early for selling or shorting. They believe any kind of near-term weakness as the beginning of a top building process that should last into a March top. Report here: Weekly07-02

Technicals aside i wouln’t chase this too hard here as we have come a long way very quickly now. We are still overbought, we have plenty of geopolictical threats as well as the euro issues to torpedo the current momentum.

Rich

 

Chart Blitz – (A Purely Price Analysis)..

Here we see the Dow cash which on Friday met her prior high set April 2011..

Its not a breakout yet on the dow cash but its very close now.. The wider S&P500 isn’t performing as well as the DOW for obvious reasons.. ie that large multinational cos are greatly prefered at present due to the dollar debasement issue as well their ability to access the capital debt markets more easily than the smaller domestic cos. Here the SP500

But of all three the Nas100 continues to outperform. She is on fire, again, for obvious reasons. Nasdaq companies are knowledge based cos that can compete on a level playing field with their international rivals. Tech cos are seeing some large valuations again. Here the Nas100, in breakout..

IBM, a tech dow component, perhaps the best of both worlds, like Apple in breakout.. And a breakout leg on a strong bull trend.

Here a laggard but of great interest BIDU. Ive been following BIDU for a while. Chinese stocks have done well recently but have struggled for the last few years. Given the valuations for Facebook, Google, etc, Bidu is of great interest. The chart is positive showing a breakout. The overall tech market is overbought and due a pull back so its a difficult moment to enter but the history is good for such later entries in bullish sectors. BIDU is an add even here.

Before leaving equities its worth looking at the banking index.

She has smashed her interim down trend and looks promising to add some more weight. A move up to 56 to 58 looks probable over the next few months. Whether the cyclical low is in place we cannot be certain but the chart is promising near and medium term. This is very important for the equity indexes, lending and the wider economy.

Dollar Index wise, the dollar’s recent strength has been challenged over the last few weeks. She is right at the price support. Its a tricky one this. Price wise the chart is not a strong chart. She has an entry long here but i would keep the stops close as the other charts dont support much of dollar bounce at present. Here next the major component, the eurusd.

Not alot to say on this one other than the euro has plenty of room to bounce around here and chop some participants up in the process. Tthe on/off risk correlation that drove much of the 2009 to 2011 market is less certain than it once was. Un-correlated chop is very probable therefore until the major trend resumes which is further eurusd weakness. For those that like short term trading, the euro was oversold but friday’s action is indicative of a bounce and rejoin of the very recent uptrend having consolidated for the last week or so. The probability is to the north, near term but a chop is possible so usual stops and profit ratio methodologies apply that im sure those that trade on the short term trends understand all too well.

A wizz through some other currencies with little expanation other than the technical charts.. Here first up, the new on/off risk indicator.. the AUDUSD..

And here vs the JPY

..

Over the last 9 months i’ve read so many negative commodity currency stories that ive lost count.. the price action on the AUD is very supportive vs most the major world currencies. The yield is very strong. It is very expensive to short the AUD at present. Having scored a recent chart pattern vs the JPY the aud is continuing to look strong with the recent over bought situation having corrected this week and now looking promising for another leg on.

In spite of the euros recent strength vs the USD, vs other world currencies the euro continues to perform poorly as does the USD. Eurgbp:

Eursek:

Wonderful pattern on the Usdcad a few weeks ago, as commented, and on she marches.. So many went against this pattern believing it was false. As so many went against it promises much and could run and run in spite of the recent negative jobs data out of Canada. Canada is still unique in being the only g7 country not to implemented a QE program, note. Faber is right, imo, that Canada has an over heated property market and this concerns me. Canada needs higher rates, in spite of the flat jobs data. There are other ways around this ie legislating for higher deposits etc. All this aside, on the price evidence, the cad remains a buy on shallow pull backs due to her relative attractiveness vs the other g7 currencies.

And swiftly on to the commodity indexes and components themselves.. The CRB has recovered a little composure but its very early days here.. Dont feel you have missed anything. Price can move a long way from here.

Oil, one of the major components is still stuck in her narrow range from 95 to 103 or so and continues to bounce around in this range.. It looks a significant consolidation area from which she could powerfully spring northwards and over come that resistance that held in 2011 at 114 or so.

Gold displays a wonderful technical chart and continues to perform as the strongest of assets purely from a price analysis.

And silver..One of the most, i suggest the most, exciting assets in the market. The large bearish pattern surprisingly overcome. Silver’s major trend is a bull trend. A breakdown of the bearish pattern inside a large bull pattern is technically hugely significant. Silver is an add on shallow pull backs.

Miners wise we are back in the range again.. patience patience.

We are close to some technical levels, especially on the HUI juniors which risen rapidly of late. The majors are having trouble maintaining production. Consolidation is occuring inc paas and many others. Patience but as yet no broken technical levels inspite of gold and silver’s technical breakouts of bearish patterns. The future is still uncertain for the miners from a price perspective. From an investment perspective divergence of price from the fundamental picture can offer the greatest rewards.. Patience.

Agriculture is moving again with Wheat in breakout

I hold some corn futures again. Im bullish on corn.. Agri has been very volatile but for those that can handle the volatility the price action is supportive in the near term and longer term as higher lows are in place and the entire agri sector is moving. Albeit in a very volatile manner.

 

As the world brings ever more acers on stream they all need much cultivation and TNH and others continue to thrive under these conditions.. ive held for the last few years and i added on the recent pull back to 150. Few price charts are more bullish, for good fundamental reasons.

We are paid only on price. Price is the most powerful indicator we have so its right to take some time to listen to what she is telling us.

Much more to say but im out of time for now..

All the best Rich