WF Weekly Economic Indicators 03-02-2012

Below the pretty up beat WF view of the weekly fundamentals. Or, at least, relative to where we seemed to heading just a few short months ago.

A few chart highlights I’ve taken from the report.

Firstly, as those following events closely already knew, the pmi across the world were indicating a great slow down in economic activity and they have upticked a little. Ie in Q4 2011 we were heading into a world wide double dip with Europe compounding things to the downside. Early December things where bleak indeed. The ECB’s massive liquidity injection and Fed, behind the scenes, balance sheet expansion, along with the Chinese’s policy of easing liquidity again has helped to turn pmi and asset markets around. From ‘failed moves come fast moves’ so those hedged covered and up we have gone.

On the horizon coming rapidly towards us are hopefully the twin events of the IMF expanding her SDRs by half a trillion $ and a QE3 program from Dr Ben Bernanke and possibly more easing from Europe. On the downside we have possible more European fudge to come (as it is surely endless this) and a war in Iran. Whether Obumer would desire a war pre the US elections is a tricky call to make. Historically premieres like wars as it usually leads to a surge in their popularity off a wave of jingostic sentiment but if he is to launch yet another American war he needs to start soon as he is running out of weather & pre-election runway. The time for invasions in the middle east is early spring. Lets see.

Secondly BOE and ECB policy meetings this week. WF is forecasting yet another QE program out of the UK. This is concerning as I’m net long sterling Sterling has been doing well recently vs the USD and Euro. I’d like to see this continue. Given the pmi up turn the uk should let the US and ECB and China take the strain. Lets hope King sits on his hands this month. If he doesn’t sterling will be debased and inflation will uptick again in the uk.

And on the subject of structurally weak economies needing more stimulus.. Spain!

Spain is a disaster at present. And whats worse the Spanish has lost faith in themselves. They only see more weakness ahead. Confidence is Spain is very low and their youth (with training and jobs typically) are starting to leave for jobs elsewhere.

http://www.emigrate.co.uk/news/20120127-1264_brain-drain-hits-spain

http://www.ft.com/intl/cms/s/0/f6042f74-f5b1-11e0-be8c-00144feab49a.html

Its desperate stuff I’m afraid. Unemployment is surging and real ‘absolute’ can be seen on the streets every day now reminding me of the late 1970s early 1980s, UK.

Public sector debt is still relatively low but more government programs are certainly not what Spain needs. Using the relatively low public sector debt to slash corporate taxes and private taxes would be a wonderful step forward. The Spanish should steal a leaf from the Irish’s tiger economic plan (ex housing). Make Spain a friendly low tax place to do business.

Instead what do we find? (See below). Spain is one of the most expensive places to pay corporate tax. Only the US (although half US cos pay no tax as incorporated in Delaware!), Japan, Germany and France. Should Spain be priced on a par with the US, Japan, Germany and France? Do their populations have similar skill sets? Is Spain’s legal framework on a par with these other countries? Are her capital markets on a parr with these other nations? I leave the answers to you but i think for anyone with a reasonable grasp on reality Spain is pricing herself out of recieving inward investment. Its time her leaders woke up to this reality.

This is the only way Spain can change. Lower the minimum wage in Spain and reduce social security costs for employers. If deficits were used in this way to address the deep structural issues Spain faces everyone in the markets would cheer them. As it is cutting deficits without bring inward investment will destroy Spain’s banks and drive her youth away. As I live in Andorra and Spain I see what is occuring here and I must say I feel for the Spanish i really do though they have to help themselves before any external help can arrive. They must create an environment for private capital to enter Spain and they must do it quickly now.

Lastly, lets not forget the US food stamp reciepients. Thursday last week the latest food stamp participation nos were released for end November 2011. On the revised numbers, food stamp participation rose to a new all time record high. 46.3m Americans recieve food stamps now. Here the Bloomberg chart of Food Stamp useage which has not been updated yet to reflect the revised data.

This new record high set against stella equity market performance off the back of record corporate profits, many of which has surpassed 2007/2008 levels. The luxury end continues to boom year on year setting new highs for luxury sales from New York to London to Paris to Shanghai. All the money printing across the world is helping to enrich the few at the cost of the many. Its a classic mix that repeats over and over throughout history whenever money printing is deemed the solution to economic ills. The middle class are always destroyed and the rich always do very nicely. This time again is no different.

Without any more waffle here, finally, the WF weekly economic report:WF-weeklyeconomicdata030212

Have a great weekend all.

Rich

p.s. a final chart for you. Ive rebased the historic price data of end of year closing prices for the ft30 index (original pre ftse100), the uk inflation rate and gold. I rebased all the prices to 100 for 1970 and run them through until 1990. Lets not forget here that uk equities provided very large dividends well excess of today’s. Lets also not forget corporates balance sheets werent as strong in 1970 as they are today. In the 1970s the ft30 badly lagged the inflation rate. Money flowed into the commodities instead and particularly precious metals. The 80s weren’t a stella time for gold but even so she provided a good hedge to inflation if you got in early enough in the 70s.

Weekly Technical Analysis. Equities Overbought But HUI To Continue Breakout..

The Swiss team continue to look for a shallow pull back in the major equity indexs. They are looking for a sector rotation from high beta stocks (ie copper miners) into low beta/defensive stock like utilities. They show a chart pattern of a potential utility breakout here and now. Also of note, having correctly turned bullish on the miners last week they are looking for more from the gold miners as well as their junior counter parts.

Weekly31-01

Hyper Inflationary End Game Approaches.. Dr.Ben Bernanke, Gideon Gono, Rudolf Von Havenstein..

I dont want to repeat myself but yesterday provided more signals for the inevitable direction we are on so its correct to stand back and repeat what has said before events overwhelm those unprepared for what is occuring.

Yes, the list of arrogant central bankers who have debased their nation’s currencies is long indeed. Before central bankers it was the reserve only of Kings and Queens to debase their country’s coinage. Many Kings and Queens did ‘clip’ their people’s currency to fund war efforts etc.   Fortunately, history books provide us ample examples of what occurs when a nation’s currency, as a store of value, is destroyed by these actions. The result on their people’s standard of living has always been the same.

Chaos and great social unrest soon follow the debasement actions of both Kings and Queens as well as, the more recent, central bankers. When interest rates are near zero savers stop saving and those with savings are forced to gamble on asset markets misallocating capital and creating huge bubbles in asset markets. Money supply increases via the banking system or via direct monetization of debt (ie printing money) speeds the process of debasement. Capital moves into hard assets as fiat paper currencies are rendered useless as a store of value and later as a unit of exchange for goods and services. This is the inevitable consequence of central bank actions. Welcome to the toxic partnership of central banks and political elites.

Yesterday we had another historic monetary moment as Ben Bernake, Chairman of the Federal Reserve extended his zero rate policy to the end of 2014 and highlighted more monetization of government debt to come. In spite of the evidence, he has swallowed his own matra that he can predict and direct the economy of the world. Like all central planners he is doomed to failure and this is a good thing in fact as central planners ultimately destroy liberty and freedoms. Their arrogance always directs them towards totalitarianism so Bernake’s failure for all its implications should be welcomed by us for again lets forget the history books on this issue of the arrogance and dangers of corrupt central planners.

‘Fascism should more appropriately be called Corporatism because it is a merger of state and corporate power’.

Benito Mussolini

Read this quote carefully. The totalitarians of WWII were far from mad men. They had a progressive agenda which is very similar to the neo keynesians now. It was no freak historical accident that they rose to power in so many European states in the 20th century. The lessons from WWII we could have learnt regarding the importance of liberalism to sustain peace and democracy were not learnt. (Hayek’s ‘The Road to Serfdom’ is a key text in this regard).

Lets not forget, yesterday’s announcements come 6 weeks after the $1trn lending facility by the ECB which in turn comes after giant BOE monetization programs and on top of a lending bonanza in the corporate world and China relaxing lending quotas once again. Japan’s monetizations continue to expand. Over 50% of Japan’s public fiscal expenditure is funded by debt yoy (year on year).

We are moving rapidly to a situation of world wide fiat currency debasement.  Whether you come at these issues from a trader or investment perspective the big money moves are in the big trends. Unquestionably, the big trend is in fiat money debasement. Whether for capital protection or growth we must respect this big trend and moveve out of cash into assets. When the herd rushes from paper to assets it is always uncomfortably fast and inflationary. Market timing these moves is not always as easy as one imagines. Over the last few years i have always advocated accepting the big trend and allocating on this basis over time on dips in asset prices as the trend is undeniable. Following yesterday it is very clear we are running out of this time. I cant tell you if 2012 is the year we start out on the next leg up for inflation and asset prices but it is surely coming as night follows day. Be prepared, allocate, get paid to wait and dont be surprised by what will follow. Volitility will increase as we move forward here so cling on to assets and dont try to be ‘too smart’ in market timing these markets would be my view.

As always its your hard earnt capital. We must all do with it what our reading and understanding tells us is the correct course of action.

Here a few charts of what happened as Ben gave his news to the market:

Silver

EurUsd

Sandstorm (Royalty PM co)


One last point worth repeating over and over for new and old friends to this group alike. No central bank can create new money. All they can do is dilute the money already in the system by duplicating it. All they can do is duplicate what is in your pocket or bank account and in so doing diminish the value of the money in your pocket. They take from the many to redistribute to the few. This is why money printing environments always and everywhere concentrates wealth. The middle class is generally destroyed whilst the rich become super rich. This has been the text bok theory for hundreds of years. As we can see from the evidence all around us this time is no different. Living standards continue to fall for the middle classes whilst the luxury end booms as never before.  The final chapter of these so called ‘progressive’ policies normally ends in war and final great collapse of the system. We are far from this at present. First we have the hyper inflationary chapters to march through.

Onwards we march.

Rich

Dr.Ben’s speach from yesterday care of Bloomberg: http://www.bloomberg.com/video/84910798/

And here a review of a report from the BIS which provides an outline of the financial repression (hyper inflationary) solution to the public and bank recapitalization requirements: http://dprogram.net/2011/12/14/bis-calls-for-hyperinflationary-depression/

Marc Faber from 2010 sums it up perfectly: http://www.youtube.com/watch?v=pAJeZaFdbJA

Weekly Technical View & Macro Comments, ‘Near Term Overbought’..

The Swiss team have changed their stance a little. The recent strength providing evidence that the pull back, when it comes, will be shallow and not severe. From their technical perspective, they judge, this move will likely therefore run to the end of March or early April and score a higher high across the broad equity indexes. Near term a pull back still likely though now no more than a technical pull back before the next leg up. Financial cos have made a major low and this is a ‘game changer’, according to them. Worthy of note are their comments on gold, on which they have turned medium term bullish until mid summer. Prefer euro gold and miners to usd gold due to their bearishness on the euro. Report here:

Weekly24-01

When the sea is calm and the wind steady there is no point in tinkering around too much with your rigging and so it is that, I’ve been quiet to comment too much, on asset markets. I’ve been letting things run using the time in stead to do some homework on company fundamentals. To my mind you cannot ignore the fundamentals and deal with the technicals alone. The Chinese and US lending data as commented on the release of the data end of 2011 and very early 2012 was crucial as was the ECB monetary injection. These three issues overwhelmed the bearish case, for now at least.

I’ve gone through my own list of assets with a fine comb making a few changes here and there. Overall exposure has edged down a few percent as ive trimmed a few issues in preparation for a pull back if she occurs. The portfolio is fairly income generative and yet maintains a high exposure to precious metals (around 12% of total net wealth with a split between the metals and miners of 30% metals and 70% miners). I’d ideally like the cash exposure to pms higher but i would struggle to maintain sufficient income from such a portfolio allocation. Occassional leverage the only way to get the beta on this element as and when needed. Indeed maintaining 12% of total net wealth in  precious metals is hard enough. This represents a 29% allocation of the investment capital and even more than this given i carry a little cash for a rainy day. The remaining 71% investment has an average net yield of  5.2% or so. This is far from stella but the yield is well covered by earnings to the downside and yet offers upside inflation protection and even a beta depending on how things play out. Energy issues are a significant cash generating allocation providing over 3 times their weighting in terms of yield. Property reits, telecos and a few specialist financial related cos produce much of the income.  For disclosure, I have little pm leverage now given a reduction in futures and the clearing of the 2012 option exposures.

Fund valuation wise, January has, thus far, been pretty stella with the total fund netting nearly 5% growth for the 3 weeks, out performing the wider equity indexes.  Its just 3 weeks running a naked long small leveraged position. Petty meaningless i must confess but nice to see nonetheless.

I wanted to pick up on corporate profitability and why we are recently seeing such an out performance by the large caps so here below is some analysis.

Its been a feature of these recent markets that you’ve been able to find single digit pe cos that are growing earnings yoy by either single or double digits as well as paying shareholders 5% plus yields. (In some cases much more than this). 2011 saw a significant low point in valuations, imo, in this respect. Its important to be clear that these large cap companies have achieved their high profitability without highly gearing their balance sheets. Good companies have and continue to trim their cost bases. Wages are generally falling, inflation adjusted whilst home markets see nominal growth due to money printing or money supply growth via the banking system. Overseas markets see real growth. All along this cycle dividends have been increasing above inflation rates. Importantly finance yields have been falling and large companies with strong balancesheets have been switching away from variable rate credit facilities to fixed rate long maturity bonds locking in low rates whilst they can. All these factors provide very clear upside to corporate earnings (and therefore distributions to shareholders).

This chart doesn’t show the latest data but the ECB 3yr 1% loans have done wonders for the investment grade corporate fixed income debt markets. These securities can be swapped with the ECB for cheap loans and so is it any wonder that rates are making new lows at the investment grade end of the corporate market. The loser, aside from the debasement of currency issues, are the corporate loans market. The situation in the SME market is pretty much as it was. The liquidity bonanza is felt at the top end of the market only. Anything outside of investment grade is shunned. Here a chart of the ‘leverged, or junk, coporate loan market.

And here a more recent chart using the CSFB leveraged loan index care of Bloomberg.

The junk bond volume and yields are struggling for obvious reasons.The UK picture is no different.

And plenty of leveraged loans fall due in 2012. For the corporates with leverged loans they will switch to issuing corporate debt with the bottom line positive implications that this will bring.

The relative out performance by large caps is for a multiple of reasons not least the debt markets. Intervension by government and central banks is pushing participants to lend to investment grade corporate securities markets. Once again we have another misallocation. The premium end of the debt markets are awash with capital. Participants are chasing yield at any price.Here the FT “Bond Bonanza”

http://www.ft.com/intl/cms/s/0/f9546700-3e01-11e1-ac9b-00144feabdc0.html#axzz1kNwVUThv

Or here the WSJ: http://professional.wsj.com/article/SB10001424052970203750404577171341742782200.html

Credit markets are where the whole thing broke down and credit markets will be where the reflation trade takes off. Large cash rich corporates can borrow at 3% interest rates for decades at a fixed rate. This is clearly madness but this is what is occuring care of central banks flooding the investment grade market with liquidity. For us this means teh beest corporates earnings will increase significantly as their cost of funds is reduced. Even those with surplus funds are issuing bonds as they see the opportunity. Why not raise capital at these prices then distribute excess cash to shareholders? Why not indeed. A wise CEO would do this and many are. Here the Dow Corporate Bond Index showing a new all time low cost of borrowing. (Borrowing costs are inversely linked to the price of the bond index so as the index moves higher the cost of borrowing moves lower).

So it is that the central planners are once again allocating capital in stead of the markets freely allocating capital. Chairman Ben, Mario Draghi, King etc are directing capital towards the world’s largest corporate entities. Just as regulation tilts the deck towards the largest cos now we see monetary issues tilting the deck toward these oligopolistic cos. The costs of this misallocation will be paid for years ahead as markets need fair competition. Smaller players are normally the innovators and yet they are being starved of capital whilst the larger players have too much. Its a paradox in a sea of paradoxes im afraid. For investors you cannot fight the monetary central planners and regulators. Large corporate entities will do very very nicely due to these monetary policies. Earnings will grow as costs are cut. Excess liquidity and these policy actions will inevitably drive the wall of capital sitting in bonds as well as cash into the large cap equities. A bubble will form whose popping will be expensive for all and demand another monetary bailout. Bubbles should be bought at first.

During the third quarter, 2011 the S&P 500 companies managed to make a new quarterly earnings record as well as break the record for trailing twelve month earnings. 2012 expectations are for earnings to hit or get very close to the $100 mark for the sp500. With the corporate bond rates likely to make new lows in the coming quarters and plenty of corporate leveraged loans needing to be rolled over (and likely rolled over into low yielding corporate bonds,  i cant see why this earnings trend shouldn’t continue even if revenues declined. Lets worry about the ‘popping’ later. For now corporates are cheap for a multitude of reasons.  Don’t misunderstand me, I wouldn’t chase equities right here today but i would add on some shallow retracement of the recent leg higher keeping some ammunition free for some disasterous news event or other than policy makers are likely to provide mid year.

Rich

 

 

 

 

 

Weekly Technical Analysis – Near Term Bearish..

The Swiss team continuing to be bearish. In boiling down the reasons for their view they sight three main reasons. Bearish divergence for the McClellan, AAII bullish sentiment survey and the OSX put call ratio at extremes. They use some sector rotation signals to re-call an interim mtop here for the spx etc. I’m where i was ie that this area of the chart is a good point to take a little profit and or make some hedging trade entries.  We have had a stella start to the year due to the stronger than expected US data and extreme bearishness mid december.

Weekly17-01

Chart Blitz.. (A Purely Price Analysis)

We have many instruments at resistances or supports.. We have had an excellent run and the loan data is coming through more positively for both the US and China.

The YM or dow futures having enjoyed a near 20% run up from the Oct lows looking like she needs a breather if merely just to back fill given the run up she has enjoyed. In dollar terms you can add another 8% to the run up. The YM in euros is up around 28% from the Oct level. Quite a move.

Which brings us on to the very important, though note the inverse correlation destroyed by the recent move, the  DX or dollar basket.

She remains at the same resistance as was flagged a week or two ago (and prior to that a month or so ago). The dollar is making heavy work of the JPY and remains weak vs the AUD (the new lead indicator for pro risk).

 

Again the dx needs to take a breather here but the macro and micro picture supports a pro dollar move for now though the Chinese  story must be monitored as must Brazil and India. If they start moving then the dollar could once again rapidly become the funding currency even vs the eur as Europe’s manufacturers would see huge growth nos given the recent debasement in the euro. The audusd a good indicator for a BRIC return to the bull trend.

For now the audusd trapped in her downtrend. A breakout would be significant as the correlation to Bric growth so high.

Which brings us neatly on to the CRB or commodity index. As we can see she is still struggling. The recent trend up looks to be running out of steam here.

As we can see above a big failed candle at the breakout of the downtrend. This is an entry bar if this confirms today for a short on the commodities. The euro area news yesterday re no oil embargo on Iran for 6 months lead to steep and rapid falls in the nymex and brent. Oil scored a breakout of the 101 level to 103.5 on the spike but this looks very unsupported without the Iran story so lower oil prices look likely here given ‘fast moves from failed moves’. The Japanese inability to support the embargo also doesn’t assist.  China unsurprisingly against.

Coupled with oil’s moves we have a steep move on the agri futures yesterday, downward giving yet more pressure to the crb.

Here two key grains, corn:

And wheat:

Now as an inflationist the agri charts do look cheap but agri is always prone to giant volatility. New acres have come on stream and this is starting to depress forward prices in spite of the obvious demand from emerging markets due to demographics, wealth and changing dietary habits. The agri support companies have provided a smoother investment thus far inc TNH and UAN, MON, DEER etc.

Precious metals wise. We have had a decent move up in recent weeks but from a medium term perspective the charts dont look so promising and due more weakness. Longer term of course they offer huge upside from present levels. Chose your timescales, limit the leverage, manage the trade or investment correctly and all will be well. Macro news flow for the ‘pms’ supports huge spikes (mainly to the upside) so these surprises encourages the maintenance of a core holding.

Gold has a little more room to rise up to 1670 or, in theory, but given the issues above re the dx, crb, eurusd etc sell spikes on the short term would be my approach. Silver remains pretty horrid.

Miners wise as was really.. recent bounce but hard to get too exited here from price and given the issues above more pain to come. Patience oh patience.

Summary, we have had a good bounce especially if you were long USDs and measured your account in euros or pounds. We are at resistances and price clearly shows this. We are overbought on some instruments. The upside is limited here for near term. Taking some profits or playing the bounce off resistances seems reasonable and hedging any long portfolios by betting on a resumption of bearish patterns on instruments looks a good call until resistances are broken.

Luck to all

Rich

 

 

A Quick Refresher.. Jobs, Population, USD Reserves & Inflationary Expropriations

The US population expands yoy by approximately 1.5% (producing a doubling time of about 45 years).

The rate of change here has not diminished. Every new entrant needs an auto loan, housing loan, student loan etc. In a world of exponential curves the curve of population growth and debt creation look likely to continue, for the moment, due to the actions of the ‘elites’.

The problem here, for now, is that all these new entrants have not created new jobs. Inflation did not rise sufficently to perpetuate the steep increase in debt by government and the private sector. Money leaked from the US system into emerging market bank accounts creating a surge in USD reserves rather than a surge in consumer prices although all asset prices did surge simultaneously in 2007.

Foreign held USD reserves have moved from less than 1trn in 1998 to around 10trn today.

Much of the bet on commodities and precious metals are about these reserves. As the dollar is debased where else will these excess reserves go to protect some of their purchasing power? The problem is widely held in that so many states across the world have amassed vast mountains of USD paper obligations. Here just a few charts to illustrate the rapid pace of USD creation.

Indonesia here:

China here:


Russia here:

Singapore here:

etc etc, It doesnt matter whether you look at Saudi Arabia or Norway, Brazil or Japan the accumulation of USDs is a world wide phenomina. A wall of paper obligations has flowed from developed consumer markets to emerging and developed alike producer markets.

I put it to you that the inflationary gun was loaded long ago but it has yet to truely be fired but this event is inevitable.

The US funded the formation of this historic mountain of USDs via its persistent trade deficits with the rest of the world.

And from consumer to government all accumulated a debt mountain that has never been seen before. Many observers make comparissons with the post ww2 environment but clearly this is a mistake. Post ww2 the state had no unfunded social security obligations and the consumer had near to zero debt obligations. There is no comparisson at all to the post ww2 world re current debt levels.

All this debt and yet no investment? how can this be?

There was investment but not in the US unfortunately. The investment occured in the surplus nations. The US has never looked so uncompetitive. Consumer good were purchased instead at a huge future cost to the US economy.

The US savings rate went negative. Note the close correlation to interest rates. (ie interest rates are set via the central planners at the FED. They knew what was occuring re the savings rate decline and they knew they could encourage yet more consumption via low interest rates). And remember this ultra low savings rate just as the baby boomers start hitting their retirement.

And i dont want to single out the US as being the only advocate of this monetary madness. The UK are just as bad if not worse than the US in implementing this particular flavour of economic suicide.

So we arrive at developed world issues like a lack of job creation as they struggle for competiveness on the world stage due to inflated salaries, over burdened regulatory frameworks and a lack of investment in R&D etc.

 

It all concludes in producing charts like this above which was released last Friday.  We can see the continued population growth has not fed into job growth.

So the world of exponential debt growth got ahead of herself in the 90s and 00s it seems. The over hang is/was considerable as future capital was brought forward and consumed in exchange for consumer goods into the current. The price of this lack of investment and bringing forward consumption must be paid for but by whom? The giant misallocation of the last decade is to met by those that did not consume and saved. Both the soverign states with usd reserves as well as the middle class and pensioners with ‘excess’ usds are to pay. Expropriation via the printing presses and rule changes will and are being used to fund the the hole.  The unintended consequences will be immense and the world will swing widely from boom to bust as those with capital seek to avoid the expropriation. The majority of the world’s population will suffer greatly for the debasement and misallocations that will occur as a result of this giant experiement.

But we must remember that for all the misallocations the wonders population and debt growth will come back to provide more booms in the cycle before a final great bust of the fiat monetary system when finite resources inevitably meet concepts of unlimited debt and exponential population growth. I hope im not around when the two collide. For now we have a historic inflationary period travelling toward us. The expropriation is in her very early days for now.

Rich

Euro Farce Becomes a Euro Tragedy – Guns & Butter

Guns or butter, or better both and debt, has been the choice of those in power of our coinage for centuries. Intervensionst central planners that can debase the currency always do with either guns or butter and in some, desperate cases, both.

In contemporary terms nothing has changed. Its a common observation to see an inverse relationship between defense spending and the stability of a nation’s society and its finances. Ie the stronger a nation’s societal system inc its finances the least likely they are to spend on their military. Similar inverse relationships exist between this strength, inflation and currency debasement.

Here a chart of military spending by state.

No surprises to see the US well out in front but with Greece a good runner up. For all America’s saber rattling re the ‘aggressive’ chinese they actually cut defense spending (to gdp) and from a much lower level in 2010 whereas the US increased its spending (from a much higher level). Who is the aggressor between this pair i wonder? Germany and the Netherlands (rich and stable nations) spending the least on defense.

As Greece suffers austerity its austerity is not so bad that it cant purchase new tanks, planes etc. As Greece becomes increasingly unstable enemies old and new alike will doubtless become threats to the state and targets for this new military hardware. This is as inevitable as night following day.

http://translate.google.com/translate?sl=auto&tl=en&js=n&prev=_t&hl=en&ie=UTF-8&layout=2&eotf=1&u=http%3A%2F%2Fwww.zeit.de%2F2012%2F02%2FRuestung-Griechenland&act=url

The history governments of troubled states shows us this age old choice between guns or butter. (Or guns and butter but the conequence of this is debt (or currency debasement) and therefore inflation downtrack).

Krugman illustrating the acedemic Keynesian theory for repairing the US economy via guns strategy. Here using a scenario of a threat from space aliens but you could equally replace aliens for chinese.

http://www.breitbart.tv/paul-krugman-reccomends-military-build-up-to-fight-alien-invasion-as-remedy-for-economy/

Another view of the guns strategy

http://www.fpif.org/articles/war_the_wrong_jobs_program

Clearly neither guns or butter are a solution as both create huge misallocations of capital and typically represent a systemic theft from middle class savers and pensioners. These intervensionst policies succeed only in short term fixes that ultimately simply polarize wealth and lead to endemic corruption. For all the problems of surveys on these issues the US has fallen in the last 4 consecutive ‘CPI’ (corruption perception index).

And, by the way. This a telling chart, imo. A chart that informs of a great experiment by the neo keynesians re debt and equity. It has no historical precedents.

For many states, guns and butter, are often a ‘last throw of the dice’. From the Roman Empire’s increasing military defense spending to the troubled Argentina’s Military Junta’s attack on the Falkland Islands the choice of guns and butter is always made.  If you own the world’s reserve currency you can do both and get away with it as was the case in the 60s of President Johnson.

The inflation of the 70s was a direct consequence of guns and butter policy of course.

Interestingly,  also very ominously, perhaps the best known actual usage of the term ‘guns and butter’ was in Nazi Germany. In a speech on January 17, 1936, Minister of Propaganda Joseph Goebbels stated:

“We can do without butter, but, despite all our love of peace, not without arms. One cannot shoot with butter, but with guns.”

Sometime in the summer of the same year, Goring announced in a speech

“Guns will make us powerful; butter will only make us fat.”

So as we move inevitably forward here what are the trends here?

 

All we can do is observe and consider what investment opportunities exist from such madness. Gold is an obvious asset to own at such times but is a crowded trade now. International ‘defense’ companies have not performed well over the recent years in spite of international growth on military spending. These companies typically pay large dividends and are on low multiples to earnings. History tells us they may do veryy nicely in the coming years as leaders seek to distract their populations against society unifying enemies in the shadows. Defense manuufacturers are cheap and unloved at present. They offer an opportunity imo.

Here BAE trading at a 7.5 pe (SP500 average of over 21 at present) and a 6.7% dividend yield at today’s prices.

In USD terms the falls are even more dramatic. BAE as an adr in the US is listed at around $19 (the recent low 16) high of $36.

Here the US dowjones US defense Index

Trading at a pe of 14. (Average for wider sp500 21)

Weekly Technical Comments – Bearish – SP500 Capped between 1292 to 1304 (Target 1158)

The Swiss team maintain their bearish stance. They are ignoring all the fundamental news re debt growth etc. Purely from the technicals they are calling a near term top. SP500 futures currently at 1290 so getting very close to their sell level.

Techweekly10-01-12

As we sit here today it looks a bold call having many pros in the market sit this rally out. Could the sitters capitulate and join the party to keep this rally running? Its a tricky call to make but given the recent over bullish sentiment readings the 1300 level looks tempting to either take some profit, hedge or at the very least play a bounce down off the resistance.

The analysts, like many now, are making great use to sentiment surveys. Particulalry the AAII from jan05 showing excessive bullishness. Like everything in investment and technical analysis the devil is in the detail. Please be very careful of these surveys as a tool in analysis. Imo, these surveys need to be looked at closely. I notice hedge fund managers are excessively bearish not bullish from their recent allocations yet this is the opposite data from the AAII survey. Here an article on the AAII survey and comment from Columbia.

“From a strict, statistical perspective, the AAII’s survey is “pretty much useless,”

David Madigan, professor and head of the Department of Statistics at Columbia University

Note all im doing here is flagging the issue of detail. Simply this.

http://buckinghamreport.squarespace.com/issues/aaii-crunching-the-numbers.html

All the best

Rich

2012 Forecasts..

As attached from MS..  I have to say up front that disagree with the basic premise that stimulus is coming to an end. We have negative interest rates and imo these will widen as inflation rises. Direct QE may not be needed should credit growth expand as the fed, boe, ecb desire but on any threat to global asset prices and (debt expansion) the central banks will act. Fiscal stimulus wll continue though possibly diminish in % terms, again as inflation climbs.

Note the discount to issue price of say spanish performing consumer loans.. 50% discount for the paper.. Or even Dutch performing consumer loans at 36% discount. What euro bank exec in their right mind would would want to lend lend to consumers in this environment? These assets are not classed as investment grade so consequently they cannot be used for ECB swap loans etc.  The ECB has thus created a two tier lending environment that in fact produces a penalty for lending to the euro consumer.

Enjoy..

MS Forecasts…

Rich

p.s. some useful charts here:

100

Picking out a couple here.. The mobile traffic playing into the telcos that imo are still relatively cheap and a good defensive sector offering some growth so long as governments stay out of the way.

And US construction to GDP playing into a housing and infrastructure bounce that could be coming to US shores.

p.p.s

Another view from the taking heads this time from Switzerland

UB2012