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China’s Tightening Is a Good Thing

The Daily Reckoning — Sat, 13 Feb 2010 19:46:51 +0000

China sees a bubble ahead and is trying to avoid it – is that such a bad thing? Isn’t this what we expect Ben Bernanke and the Federal Reserve to do here at home – take clear and decisive action to drain off excess liquidity in the economy before inflation takes hold? The People’s Bank of China [...]

China’s Tightening Is a Good Thing originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

China: Social Stability Through Economic ProsperityChina: Social Stability Through Economic Prosperity

Frank Holmes — Fri, 12 Feb 2010 06:00:00 +0000

China sees a bubble ahead and is trying to avoid it ndash; is that such a bad thing? Isnrsquo;t this what we expect Ben Bernanke and the Federal Reserve to do here at home ndash; take clear and decisive action to drain off excess liquidity in the economy before inflation takes hold? The Peoplersquo;s Bank of China did just that after it saw that 1.4 trillion yuan ($204 billion) worth of bank loans were issued in January, more than the total loaned in the three previous months combined. For all of 2010, the target loan amount is 7.5 trillion yuan, so itrsquo;s easy to see why the government might want to slow the pace a bit. Forbesrsquo; online headline was ldquo;China Tightens the Screws,rdquo; but letrsquo;s have a little perspective. Barclays Capital predicts that the 0.5 percent increase in bank reserve rates (from 16.5 percent of deposits to 17 percent) will remove 300 billion yuan from the Chinese economy. Thatrsquo;s only 20 percent or so of the amount loaned in January. And itrsquo;s not like cash is going to dry up ndash; the Peoplersquo;s Bank plans to increase the nationrsquo;s M2 money supply by 17 percent this year. Januaryrsquo;s M1 money supply report showed a 39 percent increase (chart above). Not exactly a screw-tightening. Chinarsquo;s CPI rose 1.5 percent in January, which is not extreme, and the chart above from BCA Research shows that real estate prices in terms of per-capita income had not entered a bubble phase as of year-end. But perhaps the more telling number was wholesale prices ndash; up 4.3 percent year over year and more than double the increase seen in December. This signals that higher inflation at the consumer level could be around the corner. Markets are taking a hit based on this news ndash; this shows how important China has become to the world economy. It surpassed Germany as the top exporting country by value at $1.2 trillion, and in January its exports were up 20 percent compared to a year earlier. Even better, its imports were up 85 percent year over year. What we may actually have is a classic bull market in the making ndash; one that climbs the proverbial wall of worry, which suggests that investors buy on corrections. The table below shows the standard deviation (sigma) over 10 years for the main stock markets in mainland China and Hong Kong. The weekly sigma for the Shanghai A-share market is plus or minus 5 percent, while its normal quarterly swings can be nearly 25 percent up or down. Itrsquo;s nearly impossible to pick exact tops and bottoms ndash; adding to core positions after any correction greater than one sigma is a safer and more prudent way to invest. Beijing is tending to its economy so it performs over the long term. This is central to its goal of social stability through economic prosperity, and it seems to be working ndash; millions of households join Chinarsquo;s middle class every year. We all know what can happen when an asset bubble grows huge and then bursts ndash; wersquo;re still recovering from 2007-08. China is a long-term growth story, and how well it manages that growth will have an impact on all of us. A little caution now should be seen as preventative maintenance, and we all know that when wersquo;re talking about cars or economies, thatrsquo;s a good thing. M2 Money Supply is a broad measure of money supply that includes M1 in addition to all time-related desposits, savings deposits, and non-institutional money-market funds. M1 Money Supply includes funds that are readily accessible for spending. Standard deviation is a measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is also known as historical volatility. The CSI 300 is a capitalization-weighted stock market index designed to replicate the performance of 300 A-share stocks traded in the Shanghai and Shenzhen stock exchanges. The Hang Seng Index is a capitalization-weighted index of 33 companies that represent approximately 70 percent of the total market capitalization of The Stock Exchange of Hong Kong. The Shanghai B-Share Stock Price Index is a capitalization-weighted index that tracks the daily price performance of all shares listed on the Shanghai Stock Exchange available for investment by foreign investors. The index is priced in US dollars. The Shenzhen B-Share Stock Price Index is a capitalization-weighted index that tracks the daily price performance of all shares listed on the Shenzhen Stock Exchange available for investment by foreign investors.

Effortlessly Changing Cash to Gold at the Bank of China

The Daily Reckoning — Thu, 28 Jan 2010 17:25:30 +0000

You may be familiar with the fact that the Chinese government has encouraged its private citizens to store a portion of their personal savings in gold, a topic we’ve covered here. It’s a different approach from the US government which vastly prefers to promote IRAs, 401(k)s and the like, over cash-to-gold conversions. Ironically, as an [...]

Effortlessly Changing Cash to Gold at the Bank of China originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

Taobao.com And BOC Launch Co-branded Credit Card

China Retail News — Mon, 25 Jan 2010 19:30:47 +0000

Chinese Internet shopping website Taobao.com has announced that it has cooperated with its sister company Alipay.com and Bank of China in the launch of a co-branded credit card. This is the first time that Taobao.com and Alipay.com, two subsidiaries of China's B2B e-commerce group Alibaba, have entered the Chinese credit card sector. As a result of cooperation [...]

China Sneezes, World Gets Sick

The Daily Reckoning — Wed, 13 Jan 2010 19:00:21 +0000

“When China sneezes,” the new saying goes, “the world catches cold.” It used to be the United States in the role of the sniffly grump, but events over the last 24 hours are yet another sign of world power shifting eastward. The People’s Bank of China tightened reserve requirements for its member banks yesterday. We gave [...]

China Sneezes, World Gets Sick originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

China is Doing Exactly What the United States Should be Doing – Looking Ahead

Jason Simpkins — Fri, 08 Jan 2010 09:00:52 +0000

After boosting its economy with an $885 billion (2 trillion yuan) stimulus package, China is doing exactly what the United States should be doing - turning its attention toward inflation and excess lending.

The People's Bank of China (BOC) yesterday (Thursday) raised the interest rate on its three-month bills for the first time since Aug. 13. The central bank sold $8.8 billion (60 billion yuan) of three-month bills at a yield of 1.3684%. That's up from 1.3280% last week.

Also, the BOC this week drained a net $20.1 billion (137 billion yuan) from the money market through its open-market operations - its largest weekly fund withdrawal in nearly three months.

Geely Optimistic About Volvo – Analyst Blog

Zacks Market Commentaries — Thu, 31 Dec 2009 17:43:20 +0000

China-based Zhejiang Geely Holding Group is optimistic about its acquisition of Swedish brand Volvo from Ford Motor Co. (F). Geely is close to acquiring Volvo in early 2010, with strong support from the Chinese Government.

Geely is eager to tap China's high-growth auto market by acquiring modern, innovative technologies from the Swedish brand to upgrade its car lineup. The automaker expects robust growth for China's auto industry in 2010. In this situation, upgrading the product lineup would no doubt land the automaker in a favorable market position.

Geely is seeking about $1 billion in loans to finance the $1.8 billion deal. Three major Chinese banks, including Bank of China, China Construction Bank and Export-Import Bank of China have agreed to extend loans to the Chinese automaker for the deal.

Beside the financial support for the deal, Geely would also benefit from the Chinese Government's subsidies policy, which will continue in 2010. Earlier this month, the Chinese Government revealed that it would subsidize sales of “green vehicles" in some cities in an effort to promote environmentally friendly transport to lower fuel emissions and boost domestic consumption. The Government will also offer rebates to Chinese private car buyers for the first time.

In 1999, Ford had acquired the Volvo Car Corporation from Sweden-based Volvo Group for $6.45 billion. However, the company had put up the unit for sale in December last year in an effort to cut costs and raise cash amid plunging industry-wide auto sales.

Read the full analyst report on "F"
Zacks Investment Research

Ford May Sell Volvo to Geely – Analyst Blog

Zacks Market Commentaries — Wed, 23 Dec 2009 17:45:00 +0000

Today, Ford Motor (F) will reveal its progress on the sale of Swedish brand, Volvo. The automaker is most likely to sell the unit to China-based Zhejiang Geely Holding Group. Ford aims to conclude the sale in early 2010.

Ford had discussions with many automakers to sell Volvo, including Renault SA, China’s third-largest automaker, Dongfeng Motor Group and fifth-largest automaker Beijing Automotive Industry Holding Corp. In October, Ford revealed that the preferred bidder is Geely, who has submitted a concrete bid for the unit. Media reports had disclosed that Geely valued the unit at close to $2 billion.

Geely’s bid is backed by the Beijing Government. Three major Chinese banks, including Bank of China, China Construction Bank and Export-Import Bank of China have agreed to extend loans to the Chinese automaker for the deal.

In 1999, Ford had acquired Volvo Car Corporation from Sweden-based Volvo Group for $6.45 billion. However, the company had put up the unit for sale in December last year in an effort to cut costs and raise cash amidst plunging industry-wide auto sales.

In the first half of 2008, Ford sold its U.K.-based Jaguar and Land Rover brands to the Indian auto giant Tata Motors (TTM). The company sold the unit for $2.3 billion, about half the price at which it was purchased from BMW in 2000.

In the latter half of 2008, Ford shrugged off its 20% stake in the Japanese automaker, Mazda Motor, for $540.3 million. The company reduced its stake in Mazda to 13.4%, which it had rescued from bankruptcy in 1979.
Read the full analyst report on "F"
Read the full analyst report on "TTM"
Zacks Investment Research

China Carmaker Goes Global – Analyst Blog

Zacks Market Commentaries — Thu, 17 Dec 2009 21:40:40 +0000

Zhejiang Geely Holding Group has signed up Johnson Controls (JCI) to be its global parts supplier. According to an official statement, Johnson will cooperate with Geely in the clean energy sector.

In the last three years, Geely, similar to other Chinese automakers, has been struggling hard to enhance its global profile by upgrading its technology to the international standards. In this effort, the company has rejected 385 companies from among its pool of suppliers.

Geely is also a preferred bidder for Ford’s (F) Swedish brand, Volvo. So far, Geely has submitted the only concrete bid for the unit. Media reports have disclosed that Geely valued the unit at close to $2 billion.

Geely aims to complete its acquisition of Volvo in early 2010. The deal is backed by the Beijing Government. Three major Chinese banks, including Bank of China, China Construction Bank and Export-Import Bank of China have agreed to extend loans to Geely for the deal.

Recently, China's fifth largest automaker, Beijing Automotive Industry Holding Group (BAIC), has agreed to buy technology from General Motor's Swedish brand, Saab Automobile. According to the deal, BAIC will buy the rights to certain powertrain, engine and gear-box technology for Saab's 9-5 and 9-3 sedans.

BAIC showed its interest in Saab in order to upgrade its own technology and expand production. Due to the lack of in-house brands, BAIC has decided to set up production in China based on an older generation of Saab vehicles.
Read the full analyst report on "JCI"
Read the full analyst report on "F"
Zacks Investment Research

Prieur’s readings (November 17, 2009)

Prieur du Plessis — Tue, 17 Nov 2009 08:50:30 +0000

This post provides links to a number of interesting articles I have read over the past few days that you may also enjoy. Please also add the links to any other worthwhile articles you would like to share to the comments section.

Prieur’s readings (November 16, 2009)

Prieur du Plessis — Sun, 15 Nov 2009 14:46:44 +0000

Awaiting the Depression

Bill Bonner — Thu, 24 Sep 2009 19:03:42 +0000

pThe inflation/deflation debate is hot#8230; It crackles and pops like a pine fire. But it gives off little helpful light. strongAbe Lincoln may have read by the light of an open fire. But when we tried it, we singed our eyebrows./strong It made us suspicious of Old Abe; maybe he wasn’t quite as truthful as he pretended to be. Later, we realized he was a mountebank. But that’s another story#8230; /p pToday, we light a candle and try to interpret the shadows on the wall#8230;/p pYesterday, the Dow fell 81 points. Gold dropped $5 to $1009./p pWill the feds succeed in causing inflation? Or will they fail? Will the dollar continue to go down? Or will it prove to be a safe haven currency#8230;/p

Flim-Flam, Robbery and the Economics of Depression

Bill Bonner — Thu, 20 Aug 2009 18:23:47 +0000

pThe dollar will probably go up. Still, we’d stay away#8230; /p pHere is Warren Buffett’s view:/p p“Last fall, our financial system stood on the brink of a collapse that threatened a depression. The crisis required our government to display wisdom, courage and decisiveness. Fortunately, the Federal Reserve and key economic officials in both the Bush and Obama administrations responded more than ably to the need./p p“They made mistakes, of course. How could it have been otherwise when supposedly indestructible pillars of our economic structure were tumbling all around them? A meltdown, though, was avoided, with a gusher of federal money playing an essential role in the rescue./p p“The United States economy is now out of the emergency room and appears to be on a#8230;/p

Stock Market News for July 30, 2009 – Market News

Zacks Market Commentaries — Thu, 30 Jul 2009 14:22:28 +0000

A weak durable goods order report and a slide in commodity prices sent indices to a second consecutive day of light losses as stocks appeared vulnerable to a pullback in the absence of reassuring economic signs. A search and advertising deal between Microsoft and Yahoo also received a cold response from investors even as the Federal Reserve contended that the severity of recession is easing in most parts of the country. Also driving the markets lower were shares of oil and gas producers and basic material manufacturers as oil prices declined for another day. Crude prices plunged $3.88 to $63.35 a barrel after the Energy Department reported a sharper-than-expected build in weekly crude inventories.

On Tuesday, stocks had declined after a weaker-than-anticipated consumer confidence report and a lackadaisical response to the auction of 2-year notes drew investors to the selling table. The trend continued Wednesday and treasuries moved lower as the auction of 5-year notes failed to elicit enough interest. The 10-year declined 6/32 and the corresponding yield rose to 3.664%.

At the day’s end, the Dow Jones industrial average lost 26 points, or 0.3% and the S&P 500 index eased 4 points, or 0.5%. The tech-heavy Nasdaq gave up 8 points, or 0.4%. Yesterday, a 5% plunge in Shanghai Composite index also had an impact on US markets. However, the decline was arrested after Bank of China Vice Governor remarked this morning that the central bank will "unswervingly continue to apply appropriate loose monetary policy and consolidate the economic recovery momentum." The index closed the day up 55 points or 1.7%.

On Wednesday, share prices reflected the concerns prevailing in the market, with Caterpillar (NYSE:CAT) shares declining 2.5% and Alcoa (NYSE:AA) down 2.2%. Demand concerns also impacted energy stocks as EIA weekly petroleum statistics demonstrated a 5.1 million barrel build in crude stockpiles, well ahead of the expected 1.1 million increase. Chevron (NYSE:CVX) shares fell 1.8%.

Among the ten S&P500 industry sectors, oil and gas and basic material shares led the decliners, easing 2.1% and 2.6%, respectively. Only two sectors showed some strength, with health care up 0.2% and consumer goods up 0.1%, reflecting their defensive appeal. Yesterday's release of the Fed's Beige Book of regional anecdotal data offered a balanced basket of good news and bad. Manufacturing, residential property and some employment data showed improvement, while commercial property, consumer spending and labor remaining under pressure.

Nevertheless, investors are not entirely giving up hope for a return to growth in the second half. US GDP data for the second quarter, due out tomorrow, could provide a glimpse into what lies ahead. Expectations are that it will show a moderation of the economy's contraction, with a 1.5% drop, down from the first quarter's 5.5% contraction. Furthermore, Dow Chemical (NYSE:DOW) appeared confident of US recovery prospects, noting, "The economic outlook for the rest of 2009 appears to be stabilizing with strong growth in Asia Pacific, especially China, where domestic stimulus programs have created demand. In our view, the U.S. economy has found bottom, but will be slow in recovering as unemployment continues to be a drag on consumer spending."

Today's key post is the weekly jobless filing, which is expected to show claims rose to 575,000 from 554,000, while continuing claims increased to 6,300,000 from 6,225,000. The earnings calendar remains heavy, with earnings reports due from the likes of: Disney (NYSE:DIS), ExxonMobil (NYSE:XOM), Wynn Resorts (NASDAQ:WYNN), International Paper (NYSE:IP), Monster Worldwide (NYSE:MWW), Goodyear Tire (NYSE:GT), Becton Dickinson (NYSE:BDX), MasterCard (NYSE:MA), Travelers (NYSE:TRV), and Dow Chemical (NYSE:DOW).

Zacks Investment Research

Dollar Little Changed

Doug Casey — Tue, 30 Jun 2009 19:14:57 +0000

pIn the currency market, the dollar was marginally lower against the euro. Late Monday, the euro was trading at $1.4078 vs. $1.4068 on Friday. /p p“The U.S. dollar has started the week a touch firmer, with renewed concerns over the global recovery helping the greenback ahead of a busy week” of economic data, wrote strategists at Brown Brothers Harriman./p pWith the July 4th weekend ahead, the Labor Department will release the closely-watched tally of non-farm payroll losses a day early, on Thursday. Economists are projecting a net loss of about 325,000 jobs in June. Any strong variance from that figure is likely to have repercussions./p pBut if there are further indications that the ‘green shoots’ scenario is correct, will that necessarily have a#8230;/p

Dollar Declines

Doug Casey — Mon, 29 Jun 2009 19:30:01 +0000

p class="maintextDRP"In the currency market, the dollar lost some more ground to the euro. Late Friday, the euro was trading at $1.4068 vs. $1.3991 on Thursday. /p pChina took center stage as emMarketwatch.com/em reported that “the People#8217;s Bank of China#8217;s annual financial stability report repeated an earlier call by central bank chief Zhou Xiaochuan for the development of a new super-sovereign currency that would largely take the place of the dollar#8230;/p p“The Chinese central bank#8217;s comments come after Chinese government officials had played down concerns over the dollar#8217;s reserve-currency role following a visit to China by U.S. Treasury Secretary Timothy Geithner earlier this month./p p“ ‘There may be signs here of tensions mounting between the PBOC#8217;s economic concerns over China#8217;s holdings of dollars and the#8230;/p

Dollar Declines

Doug Casey — Mon, 29 Jun 2009 19:30:01 +0000

Sino Payments, Inc. (SNPY.OB) Enters $18.6 Trillion Asia Card Processing Market

QualityStocks — Wed, 10 Jun 2009 12:39:27 +0000

Sino Payments, Inc., a provider of IP credit and debit card processing services to large retail chains in China and throughout Asia, including supermarket chains and large regional multinational retailers, recently announced that the company is deploying its proprietary SinoPay Global Processing Platform (GPP) in Shanghai and Macau to service Asian regional retailers. SinoPay GPP [...]

David Takes On Goliath and Loses: The Ferguson – Krugman Exchange

Edward Hugh — Wed, 10 Jun 2009 06:37:00 +0000

By Edward Hugh: Barcelonabr /br /blockquote"As long as excessive debt is not digested, both monetary and fiscal policies are inefficient. There is not much of an alternative. Either to let the economy collapse, in order to reduce debts, and then use fiscal policy to revive it, or inundate the insolvent economy with public credit, to avoid the collapse, and loose the ability of fiscal policy to pull it out of a prolonged lethargy. Either a horrible end or an endless horror."br /a href="http://blogs.ft.com/maverecon/2009/06/after-the-crisis-macro-imbalance-credibility-and-reserve-currency/"After the Crisis: Macro Imbalance, Credibility and Reserve-Currency/a: André Lara Resende/blockquotebr /Well, I think the title to this post makes my view on the high-profile shenanigans we are currently witnessing on the part of two widely respected contemporary intellectuals clear enough, even if Paul would probably respond that he is perfectly well able to take care of himself, thank you very much. Nonetheless, looking at the way the tone of his most recent and most public debate with Niall Ferguson has deteriorated (yes, it is Niall I'm talking about here, and not Sir Bobby, although sometimes even I have my doubts), let me confess, I am not entirely convinced on this point (Niall Ferguson's argument can be found summarised a href="http://www.ft.com/cms/s/0/a635d12c-4c7c-11de-a6c5-00144feabdc0.html?nclick_check=1"in his Financial Times Op-Ed here/a, and in his rejoinder letter to Martin Wolf reproduced by the a href="http://ftalphaville.ft.com/blog/2009/06/05/56673/niall-ferguson-fights-back/"FT Alphaville's ever interesting Izabella Kaminska here/a, while Paul Krugman's "input" to the debate can be found a href="http://krugman.blogs.nytimes.com/2009/06/06/wheres-the-money-coming-from/"here/a, a href="http://krugman.blogs.nytimes.com/2009/05/02/liquidity-preference-loanable-funds-and-niall-ferguson-wonkish/"here/a, and a href="http://krugman.blogs.nytimes.com/2009/01/27/a-dark-age-of-macroeconomics-wonkish/"here/a). br /br /So, since the thunder and lightening that such high profile exchanges generate tends to obscure more than it reveals, let me be so bold as to add my own 2 centimes worth - even if, apologies in advance, the whole affair ends up being most terribly "wonkish". If you want to save yourself a good deal of trouble, and heart searching, the central point is a simple one: are long term US interest rates rising because investors are worrying about having to buy so much public debt (as K would point out, what else were they thinking of doing with the money - a href="http://www.princeton.edu/~kiyotaki/papers/Evilistherootofallmoney.pdf"which isn't really "money" at all/a, but, oh, never mind), or are they rising because investors expect the time path of US short term interest rates to move steadily upwards? It's as easy, or as hard, as that. So now, you decide!!--more--br /br /strongSomeone To Watch Over You/strongbr /br /Amidst so much disagreement one point is, at least, agreed common ground: Paul Krugman is a macro economist, while Niall Ferguson is a historian, one who believes, if we are to take him at his word, that cats may sometimes look at kings, and live to tell the tale. Let's see if he's right.br /br /The other point we are all agreed on, I think, is that yields on 10 year US treasuries have been rising of late, and this phenomenon lies at the heart of the debate. Indeed, if I read him aright, a href="http://www.ft.com/cms/s/0/a635d12c-4c7c-11de-a6c5-00144feabdc0.html?nclick_check=1"this is Niall's main point of current concern/a.br /blockquoteOn Wednesday last week, yields on 10-year US Treasuries – generally seen as the benchmark for long-term interest rates – rose above 3.73 per cent. Once upon a time that would have been considered rather low. But the financial crisis has changed all that: at the end of last year, the yield on the 10-year fell to 2.06 per cent. In other words, long-term rates have risen by 167 basis points in the space of five months. In relative terms, that represents an 81 per cent jump./blockquoteWhere we are not agreed - the economists and the historians among us that is - is over the significance to be placed on this evident fact. Although, having said this, Niall does rather seem to suggest that the development is some sort of litmus test for his view, since he argues it "settled a rather public argument between me and the Princeton economist Paul Krugman". Now what was it they used to say about rushing in where angels fear to tread!br /br /Of course, Niall is no fool, he is an excellent historian, and I greatly enjoy reading his books, but he really, really should know better than to get himself involved in the kind of technical argument which his experience and background ill equips him for. Citing the Chinese central bank as authority for your monetary views (see below) may go down well with the after dinner port-and-stilton set, but it is hardly rigorous argument, and Niall must surely well know that.br /br /strongIt's The Expectation On Long Term Yield, Silly!/strongbr /br /blockquoteThe Fed probably won’t make any adjustments to the size of the Treasury purchase program before its next policy meeting on June 23-24, in part to avoid reinforcing perceptions policy is reacting to swings in yields, according to Jim Bianco, president of Chicago-based Bianco Research LLC.br /br /“The Fed wants to operate in predictable ways,” Bianco said. “They are also trying to not just look arbitrary, which makes people think ‘I can’t ever go to the bathroom because there could be a press release that the Fed changed the buybacks.’ That’s been a real concern: ‘Wow, I just went to the bathroom and lost $2 million dollars.’”/blockquotebr /br / The thing you should always bear in mind when you enter the fray in areas where others have the benefit of the expertise is that there may be more than one available interpretation for the phenomena, and, as is so often the case in science, the counter intuitive explanation may have more going for it than the layman may grant at first sight (wasn't that the sun I just saw hurtling past across the sky). In this sense, the recent rise in long term US treasury interest rates has just provided some of us with a fascinating example of a phenomenon that a href="http://seekingalpha.com/article/111887-did-or-didn-t-japan-just-reintroduce-quantitative-easing"those economists who have busied themselves studying the use of quantitative easing in Japan/a have been flagging for some time, and that is, that long term interest rates may indeed be unduly influenced by longer term inflation expectations, but not necessarily in the way laymen Niall and others may imagine they are.br /br /Longer term inflation expectations - or so it is argued by a broad spectrum of monetary economists - may work against the fluid operating of a quantitative easing regime in or on the boundary of a liquidity trap, not because investors fear that a country like the United States is about to become the new Zimbabwe, but precisely because they know it won't. Indeed, as I frequently find myself saying of late, the United States is not Argentina, gee, it isn't even Italy, by which I mean that investors know perfectly well how Ben Bernanke and his colleagues over at the Federal Reserve will react to a situation where inflation is perceived as rising above their target range - they will start to raise short term interest rates, and it is this expectation of future increases in short term rates which ironically cause longer term interest rates to rise, in just the way they are doing right now, in what is almost a text book case study in the United States. As Krugman's former PhD student Gauti Eggertsson put it in one highly relevant paper (Eggertsson and Ostry: 2005, see references below).br /br /br /blockquoteA central bank following a Taylor rule raises interest rates in response to inflation above target and output above trend. Conversely, unless the zero bound is binding, the central bank reduces the interest rate if inflation is below target or output is below trend (an output gap). If the public expects the central bank to follow the Taylor rule, it anticipates an interest rate hike as soon as there are inflationary pressures in excess of the implicit inflation target. If the target is perceived to be price stability, this would imply that quantitative easing has no effect, because commitment to the Taylor rule would imply that any increase in the monetary base would be reversed as soon as deflationary pressures had subsided./blockquoteIndeed talking of the Taylor rule, none other than John Taylor himself recently came out and argued that -applying his rule - the Federal Reserve would need to start once more to raise interest rates in the near future, “My calculation implies we may not have much time before the Fed has to remove excess reserves and raise the rate,” a href="http://www.bloomberg.com/apps/news?pid=newsarchiveamp;sid=aV6Pt8zrE3bI"he said recently at an Atlanta Fed conference/a. And if John can do the calculations so too can other investors.br /br /Of course the United States Federal Reserve is not at this point following a Taylor-type rule (although Bernanke a href="http://www.bloomberg.com/apps/news?pid=newsarchiveamp;sid=auFHtpfT9hRI"is a known supporter of some sort of inflation targeting/a) but let us not get bogged down in that minor, rather technical detail, the key issue is that long term interest rates are influenced more by the expected time path of short term rates than by any other single factor, and if, instead of beating about the bush, we go right to the heart of the matter, what do we find, well Lo amp; Behold, onlya href="http://www.bloomberg.com/apps/news?pid=20601083amp;sid=a2t5xjPUYWiYamp;refer=currency" last Friday/a:br /br /br /blockquoteThe dollar advanced the most against the yen in more than three months and rose versus the euro as economic data showed evidence the U.S. recession is easing, boosting demand for the nation’s assets. The greenback climbed this week as a government report indicated slower deterioration of the labor market, supporting bets dollar-denominated assets will gain as the U.S. leads the global economy out of its slump.....br /br /The dollar also gained against the yen on speculation the Federal Reserve will raise interest rates later this year, reducing the advantage of borrowing in the U.S. to fund purchases elsewhere. Traders added to bets the central bank will increase its target rate for overnight loans between banks by its November policy meeting, according to futures traded on the Chicago Board of Trade. The contracts show a 66 percent chance of a rate increase by then,compared with 24 percent odds a week ago./blockquoteWell, there you are, investors (I have no idea whether they are being rational or not) simply act as theory predicts, and chaffe at the bit (sometimes called "getting ahead of themselves") to take positions in anticipation of expected future hikes in US interest rates, something which sends rates rippling upwards all along the yield horizon. Incidentally, can someone kindly tell me where I have to write to become a formal member of the "Thank God For Bloomberg" brigade, since where would we really be without those dedicated scribes, who will, incidentally, obviously provide so much material for future generations of historians? (Incidentally, you can find a very good summary of just what a headache the volatility in US government bonds is proving to be for Bernanke a href="http://www.bloomberg.com/apps/news?pid=20601068sid=a4.g9L6iXULkrefer=economy"in this Bloomberg article/a, from which the Bianco quote above was taken).br /br /So, far from the position being as Niall imagines it is, with investors demanding enhanced premiums for holding US assets due to their fear of impending inflation, what we have here is a kind of see-saw process, whereby bad economic data, which leads investors to anticipate interest rates being held low in the US for some considerable time, raises risk sentiment (see this post: a href="http://globaleconomydoesmatter.blogspot.com/2009/05/dont-get-carried-away-now.html"Don't Get Carried Away Now/a) and sends them off into riskier emerging market assets (with Big Ben playing sheet anchor) in the process sending the grenback to ever lower levels, while positive economic news makes playing carry with the USD as one of your currency pairs increasingly riskier, and thus leads the punters themselves to retreat, sending the dollar cruising back up again. All of which is very counterproductive, since given the knife edge character of the current US "recovery" all it does is slow things down (since the cheaper USD is good for exports) and ramp up the deflationary pressure.br /br /But this story about investors being nervous about holding US Treasuries due to the high inflation risk, well, as far as I am concerned, go tell it to the marines, or at least to the those people over at the Chinese central bank (you know, the ones who have been running up all those dollar reserves) who Niall seems to regard as his economic authority in these matters.br /br /blockquote"Monetary expansion in the US, where M2 is growing at an annual rate of 9 per cent, well above its post-1960 average, seems likely to lead to inflation if not this year, then next. In the words of the Chinese central bank’s latest quarterly report: “A policy mistake ... may bring inflation risks to the whole world.”"/blockquoteWhat we have here, is what the late Niklas Luhman would have termed a "narrative discourse". Repeating the same arguments ad infinitum may produce a pleasing to sensation among those who have convinced themselves they are right, but that does not make them "true", nor is it a substitute for rigourous economic analysis, or a basic understanding of what is actually going on. As I say, it does go down well with the port and stilton set though, and would undoubtedly make one VI Ulyanov (aka Lenin) turn merrily over in his mausoleum, since evidently he was right: "every cook can and does govern".br /br /But back to the basic thread, putting all this pressure on public officials at this point is a completely counterproductive exercise, since the surge in long term interest rates - produced by the rise in expectations that the central bank will move to reign-in inflationary pressures sooner rather than later, simply leads to further signs of weakness in the US economy, which means the expectation once more grows that rates will stay lower longer, and on and on we go. But of course, as Niall Ferguson points out, it is none other than a href="http://online.wsj.com/article/SB124403584900281215.html"Bernanke himself who has most recently and most evidently been expressing concern/a about the future size of the Federal deficit, and again this would seem to me to be a reflection of the political pressure that this mistaken narrative is exerting. Accodring to the Wall Street Journal:br /br /br /blockquoteThe Fed must decide, perhaps as soon as its June 23-24 policy meeting, whether to increase its purchases of Treasury bonds. It is on course to buy $300 billion worth of bonds by September. If investors perceive the Fed's actions as an effort by the central bank to facilitate bigger deficits, they could conclude inflation is coming and flee Treasurys, pushing interest rates up. Mr. Bernanke's comments were aimed at thwarting that perception./blockquoteCounter intuitively, the only real way to break this spiral is for Bernanke to commit to holding rates near the zero bound for an extended period of time - or to "commit to being irresponsible" in the immortal words of Eggerston and Woodford. At this point I find myself asking if it isn't the whole suite of Princeton monetary economists - a href="http://www.princeton.edu/svensson/"including Lars Svennson/a - that Niall doesn't like (but remember, Bernanke also came from Princeton, and is certainly no Keynesian, so the simple version of the discourse doesn't work) rather than his simply holding Krugman in bad rather odour, which I could have understood more as a dislike of his fairly well known political views than as a rejection of a far more technical corpus of economic analyses, which I am sure Niall would have to admit he has not enetered into sufficiently to be able to pass judgement on. Arguing against what has to be the strongest group of academic monetary economists on the planet (and leaning on the "savants" of the Bank of China for support) may appeal to basic anti-intellectual gut instincts, but there's the rub: Niall is himself an intellectual.br /br /Personally, I have no idea whatsover as to the properties semi-conductors may exhibit at temperatures below absolute zero, but then I would not join issue with a theoretical physicist who mentioned preposterous sounding processes by starting off saying "well when I heat milk in a saucepan, eventually it boils" Still, if you are foolish enough to stick your neck in the noose, in the noose it will go!.br /br /As Eggertsson points out in the Japan context long-term interest rates depend on expectations about future short-term interest rates and the risk premium, and neither of these depends on the strongquantity/strong of long-term bonds in circulation or on the strongmonetary base /strongat zero interest rates (my emphasis thoughout), and this is a technical finding - which may ultimately be right or wrong, but I doubt that the opinion over at the Chinese central bank counts as evidence one way or another, nor does it seem reasonable to strongly assert as evidence of inflation risk that a growth in M2 of 9 per cent a year "seems likely to lead to inflation if not this year, then next", since this is just the theoretical issue economists are struggling with at the moment (to what extent an increase in base money feeds through to an increase in economic activity such that the "output gap" would start to shrink). Without a much more rigourous technical analysis, and some examination of recent history, you just can't make this sort of claim, but in any event if Niall has good reason for being so sure about this, then the people over at the Bank of Japan would almost certainly like to hear from him.br /br /And then, getting horribly wonkish, we have the whole debate about the so called "portfolio channel", and how expectations for increases in short term interest rates can even undermine the efficacy of one of Bernanke's most beloved tools -government purchases of long term bonds to lower rates at the longer end of the yield curve in the short term (see Bernanke and Reinhart: 2002), since according to the findings of Eggertsson and Woodford (2003), and basing themselves on assumptions implicit to any general equilibrium model, strongpurchases of long-term government bonds have no effect on long-term yields if expectations about future interest rates remain constant/strong. While discussing the experience of quantiative easing as used by the Bank of Japan (BoJ), Eggertsson already foresaw the liklihood of the kind of evolution in long term bond rates which Niall feels provides such strong evidence in support of his case. br /br /blockquoteIt has been suggested that the irrelevance results outlined above can fail duebr /to a portfolio channel (see, e.g., Meltzer, 1999; McCallum, 2000; and Coenen andbr /Wieland, 2003). If the monetary base is expanded by purchasing assets other thanbr /short-term governments bonds, the BoJ may be able to change the prices of thosebr /assets. One example is purchases of long-term government bonds, a policy the BoJbr /has in fact adopted. Eggertsson and Woodford (2003), however, cast doubt on thebr /effectiveness of such a portfolio channel, arguing that in a general equilibriumbr /model, purchases of long-term government bonds have no effect on long-termbr /yields if expectations about future interest rates remain constant.br /br /The reason is that the long-term interest rate depends on expectations of futurebr /short-term interest rates and a risk premium. strongNeither of these, however, depends on the quantity of long-term bonds in circulation or on the monetary base at zero interest rates/strong. Open market operations involving purchases of long-term bonds, but which provide no credible indication about the duration of the quantitative easing policy, are thus unlikely to be effective./blockquotebr /br /Of course, all of this is highly obscure and technical. Fortunately the debate does have its lighter moments, as for example when Niall cites Krugman as the point of reference for the savings glut idea:br /br /br /blockquote"Did I not grasp that the key to the crisis was “a vast excess of desired savings over willing investment”? “We have a global savings glut,” explained Mr Krugman, “which is why there is, in fact, no upward pressure on interest rates." /blockquoteIn fact, as those of us who have been following the liquidity debate over the last years well know, the global savings glut thesis is famously an idea which was first a href="http://www.federalreserve.gov/boarddocs/speeches/2005/200503102/"initially advanced not by Krugman but by none other than Ben Bernanke/a, and even more to the point the whole issue goes back well before the onset of the present crisis. Indeed the "savings glut" issue lies at the heart of the whole "imbalances" debate, that is, it is one of the possible explanations for how we got here in the first place, and not some rabbit conveniently drawn out of a hat Paul Krugman to gain the advantage in the current debate about bonds. But if you do understand the role the savings glut thesis plays in explaining how we generated the imbalances which are now correcting, then you may see why there may not be any special problem in "placing" the large quantity of government bonds which will hit the marekt next year. But then, maybe I just hit on the core of the problem: perhaps Niall doesn't see that the US economy is correcting, and that the large current account deficit we have gotten so used to is about to become, what else, history!br /br /The we have this:br /br /"It is hardly surprising, then, that the bond market is quailing. For only on Planet Econ-101 (the standard macroeconomics course drummed into every US undergraduate) could such a tidal wave of debt issuance exert “no upward pressure on interest rates”."br /br /Well I'm sorry Niall, but there is another place where a tidal wave of debt issuance has exerted “no upward pressure on interest rates”, and that place is planet Japan. br /br /strongEven A Stopped Clock Is Right Twice a Day/strongbr /br /Which takes me over to the rather historical issue of stopped clocks, and what has now been happening to Japan over the last decade and a half. At times even Daily Telegraph economics correspondent Ambrose Evans Pritchard has something interesting to say, since, of course, even stopped clocks are not wrong all the time. a href="http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/5373570/Gold-bugs-at-last-have-their-perfect-trinity.html"The point he makes here/a is very, very relevant:br /br /"It is striking how many of those most alert to the deflation danger are either veterans of Japan's Lost Decade or close students of it: Albert Edwards at Société Générale, Russell Jones at RBC Capital, Nobel laureate Paul Krugman, the Fed's Ben Bernanke, and Athanasios Orphanides, who helped draft the Fed's study on the Japan trap. "People always thought Japan's bond yields had to rise, but they kept falling and Japan is still not really out of deflation," said Mr Edwards. Indeed, 20 years after the Nikkei peaked at over 39,000 it stands today at 9,280. Interest rates are 0.01pc. The yield on two-year state bonds is 0.34pc. Still there is not a whiff of inflation."br /br /And guess what, Japan gross debt to GDP is about to push its way skywards through the 200% mark in the next year or two, a href="http://ftalphaville.ft.com/blog/2009/06/05/56673/niall-ferguson-fights-back/"which makes this/a retort to the FT's Martin Wolf (who had the temerity to question Niall's arguments):br /br /blockquoteMr Wolf blithely writes: “Historically well-run economies are certainly able to support higher levels of public debt very comfortably.”His favourite macroeconomics textbook may make this claim. But the annals of history provide very few cases of economies with public debts in excess of 100 per cent of gross domestic product that were either well-run or very comfortable./blockquotelook frankly quite ridiculous, since while it may well be the case that Japan is neither well run nor a comfortable place to be (no comment, I have no opinion), it is still the world's second largest economy, so hardly an irrelevant comparison, and the Japanese government has been shoveling JGBs onto the market for years without the much predicted surge in interest rates (which doesn't mean that the US has to be the same as Japan, but it does mean that there is more to discuss here, and you can't have it so easy as Niall would like).br /br /Well, the bottom line in all this surely is, what exactly are we being offered here, an empirically testable prediction, or just another load of old waffle?br /br /At the end of the day what I think is, if I were a historian and not an economist, then I might like to be just a bit more modest in what I had to say (and even more modest in how I said it), be a bit more prepared to listen to those who have spent a lifetime studying these sort of problems, and then if, having done this, at the end of the day if I still found I wanted to differ from the experts I would at least try to make sure I understood what exactly it was they were trying to say first. Otherwise, I might find myself worrying that I was being more of a Xenophon than a Thucidydes, since while both were reputedly excellent generals, the latter stuck to what he was good at (namely writing history) while the former offered us (in his life of Socrates) the kind of philosophy which frankly reduced the both the author and his subject to the realm of port and stilton bufoonery. And, frankly, it would personally worry me to think that over two thousand years after the event people might still be remembering me more for what I was bad at than for any more positive contribution I might have made to the world.div class="blogger-post-footer"img width='1' height='1' src='//blogger.googleusercontent.com/tracker/8991369883287712098-6253083728136442766?l=globaleconomydoesmatter.blogspot.com'//div

Hedging the Dollar as Stocks Rise

Bill Bonner — Wed, 20 May 2009 19:42:10 +0000

pEverything is happening just as we thought it would. Stocks are rising. And people think they see better times coming. /p pWhoa#8230; this is eerie! Following the great crash of ’07-’09 cometh the rebound. Hesitant, cautious at first…/p pThen, people begin to believe it. They begin to see the “green shoots” of a revival. Stock prices rise. The green shoots sink deeper roots and flower. Pretty soon, people think they are in knee-high clover./p pConfidence is rising. Consumers, house-holders, investors – all think the worst is over. And if the worst is over, better times must be coming. If better times are coming, prices should be rising. And investors should be making money. And businesses should be expanding./p pIt’s all happening as forecast. Except#8230;/p

Investment News Briefs Wednesday, May 20, 2009

Contrarian Profits — Wed, 20 May 2009 14:26:23 +0000

pAgricultural Bank of China Raises $7.3 Billion; Banks Applying to Repay TARP; Fiat CEO Confident About Opel Bid; World Bank Prez Sees Year-End Recovery; Derivatives Shrink to $592 Trillion; GE Reaches Debt Funding Goals for 2009; UAW #38; GM Still at Odds on Labor Agreement; Home Depot Beats Street /p ul type="disc" liAgricultural Bank of China raised 50 billion yuan ($7.3 billion) in the nation’s biggest corporate bond sale. The goal of the bond sale was to raise capital and a href="http://www.bloomberg.com/apps/news?pid=20601089#38;sid=aYf3CHbfb01Q#38;refer=china" target="_blank"help set up an initial public offering/a, strongemBloomberg /em/strongreported./li /ul ul type="disc" liA handful of banks have a href="http://www.reuters.com/article/ousiv/idUSTRE54H62120090519" target="_blank"applied to repay the billions/a they borrowed from the U.S. government’s Troubled Asset Relief Program (TARP). Sources told strongemReuters/em/strong that Goldman Sachs Group Inc. (NYSE: a href="http://www.google.com/finance?q=gs" target="_blank"GS/a) and Morgan Stanley (NYSE: a href="http://www.google.com/finance?q=ms" target="_blank"MS/a) are#8230;/li/ul

Zacks Analyst Blog Highlights: Petrobras, Repsol YPF S.A., D.R. Horton, Weyerhaeuser and Masco. – Press Releases

Zacks Market Commentaries — Wed, 20 May 2009 13:39:44 +0000

For Immediate Release

Chicago, IL - May 20, 2009 - Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: Petrobras (PBR), Repsol YPF S.A. (REP), D.R. Horton (DHI), Weyerhaeuser (WY) and Masco (MAS).

Get the most recent insight from Zacks Equity Research with the free Profit from the Pros newsletter: http://at.zacks.com/?id=4579.

Here are highlights from Tuesday's Analyst Blog:

Petrobras Brings Good News

Yesterday, Petrobras (PBR) announced the finding of a new oil field, named BM-S-3, in the Santos Basin. This new block is close to the field BM-S-7, which Petrobras and Repsol YPF S.A. (REP) recently declared commercial feasibility. Even better, this new field is 100% owned by Petrobras. Even though there is just the indication of hydrocarbons, more information will depend on further tests to be carried on in the following months.

Additionally, Brazilian President Lula is in China this week, and Brazilian papers have announced that a credit line in the amount of US$10 billion from the development Bank of China to Petrobras is to be announced in the following hours. Petrobras has a huge investment program going on, focused on the development of the Tupi field in the Santos Basin, one of the most promising oil field in the world nowadays.

Permits and Starts Fall Again

While the drop in permits and starts means that we are following the first law of holes -- when you find yourself in one, stop digging! -- it does indicate that residential investment will once again be a significant drag on GDP in the second quarter. These figures are well below anything on record, with total starts below the previous low points in other recessions for single-family starts alone.

It is also bad news for not only the Homebuilders like D.R. Horton (DHI) but also for suppliers like Weyerhaeuser (WY) and Masco (MAS).

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Zacks Equity Research provides the best of quantitative and qualitative analysis to help investors know what stocks to buy and which to sell for the long-term.

Continuous coverage is provided for a universe of 1,150 publicly traded stocks. Our analysts are organized by industry which gives them keen insights to developments that affect company profits and stock performance. Recommendations and target prices are six-month time horizons.

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Zacks.com is a property of Zacks Investment Research, Inc., which was formed in 1978 by Leonard Zacks. As a PhD in mathematics Len knew he could find patterns in stock market data that would lead to superior investment results. Amongst his many accomplishments was the formation of his proprietary stock picking system; the Zacks Rank, which continues to outperform the market by nearly a 3 to 1 margin. The best way to unlock the profitable stock recommendations and market insights of Zacks Investment Research is through our free daily email newsletter; Profit from the Pros. In short, it's your steady flow of Profitable ideas GUARANTEED to be worth your time! Register for your free subscription to Profit from the Pros at http://at.zacks.com/?id=4580.

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Disclaimer: Past performance does not guarantee future results. Investors should always research companies and securities before making any investments. Nothing herein should be construed as an offer or solicitation to buy or sell any security.

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Zacks Investment Research

Petrobras Brings Good News – Analyst Blog

Zacks Market Commentaries — Tue, 19 May 2009 16:12:19 +0000

Yesterday, Petrobras (PBR) announced the finding of a new oil field, named BM-S-3, in the Santos Basin. This new block is close to the field BM-S-7, which Petrobras and Repsol YPF S.A. (REP) recently declared commercial feasibility. Even better, this new field is 100% owned by Petrobras. Even though there is just the indication of hydrocarbons, more information will depend on further tests to be carried on in the following months.

Additionally, Brazilian President Lula is in China this week, and Brazilian papers have announced that a credit line in the amount of US$10 billion from the development Bank of China to Petrobras is to be announced in the following hours. Petrobras has a huge investment program going on, focused on the development of the Tupi field in the Santos Basin, one of the most promising oil field in the world nowadays.

China has already demonstrated interest in participating in this development, and Petrobras is in need of diversification of its financial sources as international credit markets remain difficult. After the good news on Petrobras, we reinforce our positive view on the company.
Read the full analyst report on "PBR"
Read the full analyst report on "REP"
Zacks Investment Research

Born Biddable

Bill Bonner — Fri, 27 Mar 2009 22:35:58 +0000

pMr. Timothy Geithner was the man who was on watch when the ship ran aground. His job, as head of the Federal Reserve Bank of New York, was to keep an eye on Wall Street. Now, he’s come forward with a new $1 trillion plan to get the boat back on the water. /p pHe should have left it to the ship-breakers. We almost feel sorry for him; Sisyphus had it easier. But Sisyphus was doing honest work. Besides, when Geithner’s tour of duty is finished, the public will pay for his jackass bamboozles for decades, while he moves on to a cushy job at Goldman Sachs…or maybe AIG itself, if it is still in business./p pOf course, we are out of#8230;/p

Base Metals All Move Higher

Doug Casey — Fri, 27 Mar 2009 20:21:00 +0000

p class="maintextDRP"The base metals were all in positive territory on Thursday. Copper gained from the pre-dawn hours to mid-morning, then held on, to finish just off its intraday highs at $1.8285/lb., up nearly 6 cents. /p p class="maintextDRP"Nickel came well off its intraday highs, but held in the green, closing at $4.3318/lb., up 7¾ cents. Zinc pushed higher all day, ending at $0.5937/lb., up almost 3 cents. Aluminum had a strong day, adding a penny and a half, to $0.6408/lb., while lead had another good day, tacking on more than a penny, to $0.5911/lb./p pCopper led the sector higher, jumping the most in a week on speculation that demand from China will pick up./p p“The stimulus plan in China seems to be working, and that’s#8230;/p

Dollar Sinks Against Euro

Doug Casey — Thu, 26 Mar 2009 20:08:59 +0000

p class="maintextDRP"In the currency market, the dollar eased against the euro. Late Wednesday, the euro was trading at $1.358 vs. $1.3464 on Tuesday. /p pThe buck was whacked even worse earlier in the day, as Geithner responded to the Chinese suggestion by calling People#8217;s Bank of China Gov. Zhou Xiaochuan “a sensible man.” Geithner added that “everything he said deserves consideration.”/p pBut later on, Geithner backtracked by insisting that the dollar remains the main global reserve currency, and that he does not see a change in that status in the foreseeable future. He also further clarified official U.S. policy by reiterating the Treasury#8217;s long-held stance that a strong dollar is in America#8217;s interest./p p“But the damage was done,” said Michael Gregory, of BMO Capital#8230;/p

Get Out of the U.S. Dollar Now. Right Now. This Is Not a Drill.

Justice Litle — Tue, 24 Mar 2009 16:52:30 +0000

pWith Monday#8217;s surprise announcement, China dropped a bombshell on global currency markets. Action to take: Get out of the U.S. dollar. Now. Right now./p pemSerenity Now! Serenity Now!!/embr / - Frank Costanza, emSeinfeld/em/p pLet#8217;s see, how can I put the appropriate subtlety and nuance on this#8230;/p pstrongGet. Out. Of the U.S. Dollar. NOW. /strong/p pDo not pass go, do not collect $200, do not stop to conduct an impromptu inventory of your unmentionables./p pIn the slightly profane vernacular of internet slang, just GTFO. emDo not walk, RUN, to the nearest exit./emstrong /strongBarring that, find the most appropriate hedge for your dollar-denominated investments and GET THAT HEDGE ON. Toot sweet. strong/strong/p pIf you don#8217;t know of a high quality dollar hedge off the top of your head – other than#8230;/p

Now’s The Time To Bet On China… Here’s 4 Ways How

Contrarian Profits — Thu, 15 Jan 2009 13:29:04 +0000

pLike much of the world, China is going through a rough patch. But strongLouis Basenese /strongsays there are many reasons why now is the perfect time to invest. He recommends four companies for big gains when the market gets back to winning ways./p blockquotepIt’s time to make a big bet and begin investing in China./p pI know. It’s not exactly a popular stance. And the smart money is doing exactly the opposite. Or so it appears…/p pYesterday, the Royal Bank of Scotland hit up the China ATM for a $2.37 billion withdrawal. It sold its entire 4.3% stake in Bank of China. And a week ago, Bank of America cashed out part of its stake in China Construction Bank Corp. for an estimated#8230;/p/blockquote

Investing in China: 11 Reasons Why 6 Ways to Buy

Investment U — Wed, 14 Jan 2009 22:37:04 +0000

In Issue #915, Louis Basenese lays down eleven reasons to begin investing in China and gives investors six ways to profit.

Base Metals Up

Doug Casey — Tue, 23 Dec 2008 19:15:20 +0000

pIt was a good day for the base metals Monday as copper, aluminum, lead, and zinc all gained, leaving nickel as the sole loser. Copper rose sharply to begin trading, reaching past $1.36/lb., but lost ground throughout the day. The metal ultimately finished at up less than ½ cent at $1.3115/lb./p pNickel, also started sharply up in early trading, but it relinquished its gains, finishing down 4 ½ cents at $4.4339/lb. Zinc rose steadily starting in the pre-dawn hours, finishing close to near its intraday high at $0.5177/lb., gaining 1½ cents on the day. Lead also posted gains Monday, rising steadily throughout trading to finish up 1½ cents, at $0.3948/lb. Aluminum fell slightly to begin the day but quickly recovered to#8230;/p

Bank of China Tries to Spur Economy with Fifth Rate Cut in Three Months

Contrarian Profits — Tue, 23 Dec 2008 17:30:28 +0000

pThe People’s Bank of China continued nipping away at its one-year lending rate, cutting off 0.27 percentage points to 5.31%, its fifth rate cut in three months./p pChina also lowered its deposit rate by the same amount and reduced the proportion of deposits lenders have to hold as reserves a href="http://www.bloomberg.com/apps/news?pid=20601089#38;sid=aZqSqGaeeiJk#38;refer=china" target="_blank"by 0.5 percentage points to 15.5%/a, strongemBloomberg /em/strongreported. All rate cuts will take effect Tuesday./p pChina’s slow burn of its interest rates is a calculated response to falling numbers across its board: gross domestic product could fall as low as 5% next year, way down from the 11.7% growth in 2007; exports fell for the first time in seven years last month; imports and manufacturing numbers also fell./p pUnemployment figures are getting ugly, too.#8230;/p

Currency Markets Stabilize

Contrarian Profits — Mon, 22 Dec 2008 16:30:40 +0000

pCurrency markets stabilize (for now)#8230; Data packed holiday shortened week#8230; China cuts rates#8230; Indian rupee falls#8230; And Now#8230; Today#8217;s Pfennig!/p pGood day#8230;The dollar settled in at the slightly higher levels it reached Friday morning and is trading in a narrow range heading into a holiday shortened week. Trade desks across the globe will be mostly staffed by the backups as the big bosses take Christmas week off. Volume will likely be lighter, which can sometimes lead to an increase in volatility./p pThe data calendar is empty today, but chock full tomorrow and Christmas eve. Markets will be closed on Christmas day, and most will be closed again on the day following Christmas (known as boxing day). GDP, Personal Consumption, U of Michigan#8230;/p

Bank of China Tries to Spur Economy with Fifth Rate Cut in Three Months

Money Morning — Mon, 22 Dec 2008 16:26:27 +0000

By Mike Caggeso Associate Editor Money Morning The People’s Bank of China continued nipping away at its one-year lending rate, cutting off 0.27 percentage points to 5.31%, its fifth ... Money Morning is here to help investors profit hand...

US Auto Bailout Hopes Boost Asia Stocks

Contrarian Profits — Mon, 15 Dec 2008 12:00:19 +0000

pRisk-taking revived but uncertainty lingers#8230; U.S. dollar hits 2-month low vs euro, down vs yen#8230; Don#8217;t let go of recession trades just yet - JPMorgan/p p Asian stocks climbed nearly 4 percent on Monday on renewed hopes the U.S. automaker industry would be rescued, strengthening willingness to take risks and knocking the U.S. dollar to a two-month low against the euro. /p p Investors have been funnelling capital back to emerging Asia for the last few weeks and word the White House was considering using some of $700 billion meant to rescue financial institutions for the struggling car manufacturers extended the trend. /p p European stock index futures were also pointing to opening gains of at least 2 percent. /p p However, worsening U.S. economic data, a rapidly#8230;/p

Incipient Chinese Yuan Depreciation in Context

Menzie Chinn — Thu, 11 Dec 2008 12:39:21 +0000

Plenty of breathless commentary on how Chinese yuan depreciation against the dollar might trigger conflict. From Barrons:

Reality Check for China
By LESLIE P. NORTON
The currency's decline could dampen foreign speculators' enthusiasm
Last week, China's currency, the renminbi, juddered to its biggest one-day decline against the greenback since Beijing began a managed float in 2005.
Says Win Thin, a currency economist at Brown Brothers Harriman: "The prospect of appreciation is off the table for now." Morgan Stanley now expects China to depreciate its currency by 5% to 10% in the coming year. The current rate is 6.88 to the dollar.

The renminbi can float in a trading band of 0.5% on either side of the U.S. dollar and has gone up 20% against the buck in the past three years. To trim China's fat trade surplus with the U.S., Treasury Secretary Henry Paulson is pushing for further appreciation, and the Obama administration will probably hew to the script.
The dollar's recent jump has pulled the renminbi up sharply against the euro and the currencies of Korea, Taiwan and Indonesia. That's bad news for China. Its exports account for just 8.8% of GDP, but nearly 20% of growth. Now, China is slashing rates and spending $586 billion to stimulate its economy. Last month, Brown Brothers notes, People's Bank of China Gov. Zhou Xiaochuan said he couldn't rule out weakening the renminbi to boost the economy.

While there is nothing wrong in this article, it does miss the context of the predicted RMB depreciation by focusing on the bilateral rate. On a trade weighted, inflation adjusted basis, one can see why Chinese authorities might want the RMB to depreciate.

Figure 1: Log trade weighted value of the RMB (blue) and log USD/CNY exchange rate (red). Dashed line at the float of the RMB in July 2005. Source: BIS, St. Louis Fed FRED II and author's calculations.

And why has the RMB appreciated? Because the dollar has appreciated so drastically.

Figure 2: Log trade weighted value of the RMB (blue) and log trade weighted value of USD against broad basket of currencies (red). Dashed line at the float of the RMB in July 2005. Source: BIS, Federal Reserve Board and author's calculations.

Now, there is a separate issue of whether China should try to make the RMB depreciate against the dollar -- that is there is a difference between understanding why the Chinese authorities are pursuing this policy, and supporting it. Brad Setser argues that -- given China's large and growing trade surplus and forex reserves -- it shouldn't allow RMB depreciation against the dollar. I tend to agree. But I doubt that RMB depreciation against the USD is the biggest issue facing the world economy.

So when you see a headline like Renminbi Depreciation May Stir Trade War, well, it may prove to be true, but then again it might not.

And Then There’s This…Monday, December 1st, 2008

Contrarian Profits — Mon, 01 Dec 2008 19:05:24 +0000

pPack a lunch and blow the froth off a cool one#8230;as I#8217;ve got three days of gold and silver market activities to talk about#8230;and lots of fascinating reading as well./p pWednesday, November 26th/p pThis was the last day for all parties to get their gold and silver contracts switched to the 2009 year#8230;or they would have to stand for delivery on Friday. With the U.S. in holiday mode almost from the beginning of trading, the tiny rally at the Comex open was stepped on and never recovered. But it hardly mattered#8230;as volume was virtually non-existent. Silver was the same. Call the day a big zero. However, the shares reacted otherwise. Even though gold was down ten bucks at the close of the#8230;/p

Bank of America to Boost Stake in China’s No. 2 Bank

William Patalon lll — Mon, 17 Nov 2008 20:27:50 +0000

By William Patalon III Executive Editor Money Morning/The Money Map Report Bank of America Corp. (BAC) will almost double its stake in state-owned banking giant China Construction Bank ... Money Morning is here to help investors profit hand...

Bank of America (BAC) Seeks to Boost Stake in China Construction Bank (CCB)

Contrarian Profits — Mon, 17 Nov 2008 14:20:41 +0000

Bank of America Corp. (BAC) will likely boost its stake in state-owned banking giant China Construction Bank Corp., paying about 36 cents a share (2.46 yuan), or 1.2 times the Beijing-based lender’s book value, China’s Caijing magazine reported last Friday, citing unidentified sources.

No timetable or total dollar value for the deal was given. The magazine report was picked up by the Reuters wire service, and by other U.S. media outlets, such as Forbes.com.

To smooth the way for the share purchase by Bank of America, Central Huijin Investment Co. Ltd. - the investment arm of the People’s Bank of China that’s run by the Ministry of Finance - has asked China Construction Bank to audit its third quarter results using international accounting standards.

Caijing, an…

Federal Reserve, Bank of China Cut Interest Rates as Financial Crisis Deepens

Money Morning — Thu, 30 Oct 2008 08:00:06 +0000

By Jason Simpkins Associate Editor Money Morning Federal Reserve policymakers yesterday (Wednesday) reduced the benchmark Federal Funds rate to 1.0%, an aggressive half-percentage-point ... Money Morning is here to help investors profit ha...

Why China Will Emerge Stronger from This Crisis

Contrarian Profits — Mon, 20 Oct 2008 15:13:00 +0000

China’s red-hot economy is officially slowing. Latest data put annual GDP growth at 9.0% in Q3, down from 10.1% in the previous quarter. Most analysts expect further economic easing and accelerated capital flight in Q4. But Jason Simpkins says a correction will actually benefit the Chinese economy, which has been running the risk of overheating. And ’slower’ growth of around 8% next year will still be the envy of the developed world.

This from Money Morning:

On the surface, it appears as though the Chinese economy is suffering along with the rest of the world. The economic crisis that has ensnared Western economies is expected to dampen Chinese exports and there is already evidence of capital flight.

But the real story is that China’s…

A New Trading Theme

Contrarian Profits — Thu, 09 Oct 2008 21:31:11 +0000

Coordinated rate cuts... Did the Fed reignite soaring inflation? More pain in Iceland... Revisiting the 90's in Japan... And Now... Today's Pfennig!

Good day… And a Tub Thumpin' Thursday to you! Well… How about those wily veteran central bankers? They all got together and decided to cut rates. The Reserve Bank of Australia (RBA) went first with their 100 BPS cut, and opened the rate cut sea for the rest of the central banks around the world. The European Central Bank, The Riksbank (Sweden), Swiss National Bank, Bank of Canada, Bank of England, and the Bank of China all lined up at the rate cut table. The Bank of Japan, The Norges Bank (Norway), and Reserve Bank of New Zealand did not participate.

The Bank of Japan doesn't have any rate to cut, The Norges Bank will wait until their regularly scheduled meeting on 10/15, and the RBNZ believes that they have taken their toxic waste bond flu shot.

RBNZ Governor Bollard said last night… "New Zealand banks have high-quality assets. Fortunately they do not have the poor quality assets that have proved so damaging overseas." Boy… Given what happened after the European Union's Finance Minister put his foot in his mouth, pointing a blaming finger at the U.S. and putting the EU's fortunes above those of the U.S., only to see the walls crumble down all around him, RBNZ Gov. Bollard, might want to talk low, talk slow, and don't talk much at all!

That's a famous John Wayne line… Just had to use that when I saw it on the Bloomie this morning!

So… The currency traders around the world, stopped when the rate announcements were made, to check the pulse of the markets. At first, we saw calm… But then, traders and investors began to say, "Uh-oh! Maybe things are worse than we imagined if central banks around the world are cutting rates"… So, getting back to the theme I talked about yesterday - where if it looks bad for the United States, buy the dollar, and if it looks good, sell the dollar - we saw the currencies go back and forth… But overnight, calm seems to have settled in, and keeping with the "theme", that means a weaker dollar.

The stock markets of Asia and Europe have generally been stronger, which could lead to a tourniquet being applied to the U.S. stocks… And again - keeping with the "theme" - that would spell a further weakening of the dollar.

This isn't rocket science; it's just what I see happening in the currencies right now. It's like looking into the mirror, as everything is opposite; but that's what's happening right here, right now!

G-7 ministers meet this week, starting tomorrow, I believe. U.S. Treasury Secretary King Henry Paulson, held a press conference yesterday afternoon, and in my opinion, effectively kicked off the G-7 meeting. King Henry was particularly focusing on the coordinated policy moves. I would think we could expect more of these kinds of global policy maneuvers going forward.

I'll tell you this… It's my opinion that the coordinated rate cut didn't do what the central bankers had hoped it would do. And that is, unlock the seized up credit markets… But, you can't blame them; the central bankers are using whatever they have at their disposal to deal with this global mess.

Speaking of messes… It was reported this morning that Kaupthing Bank, the largest Bank in Iceland, has fallen, as the government seized control. The currency CAN'T EVEN TRADE AT SPOT! That means immediate cash isn't available, folks! This is very serious stuff! Somebody expressed dissatisfaction with the price we received in the market the other day at 171. Yesterday, the last spot trades were done at 259! UGH! A foreign exchange dealer at Nordea in Copenhagen said, "Effectively the krona can't be traded at the moment because there are no banks to clear the trade."

Hopefully, that situation will be fixed quickly, and currency transactions can be cleared again, at least for spot… Oh… And that peg to the euro (EUR) that the Governor announced on Tuesday? It was dropped yesterday, because the peg to the euro at 131 could not be defended. Trades were going off at 340 krona per euro. It's a bad situation. Hopefully, a white knight will step in to help here… Unfortunately, banks around the world (except the few mentioned above) have their own problems to deal with right now. Russia made a big loan the other day, and with Russia swimming in cash from oil, maybe they could be the white knight.

Aussie (AUD) and New Zealand dollars (NZD) saw some love last night for the first time in what seems to be a month of Sundays. I wouldn't put too much into a one-night stand for these two. Yes, it's true that they have been beaten up too much and look oversold to me, but that doesn't mean the markets see it that way. We'll have to see if more than a one-night stand is in the cards for these two.

One thing keeping a lid on any big time rally for these two, especially New Zealand, is the fact that the Japanese appetite for anything offshore has gone away. Recall that I told you several times over the years that the Japanese loved to sell their currency and buy kiwi (and Aussie)? Shoot Rudy, they would even issue Japanese bonds issued in kiwi!

With the Japanese appetite for anything offshore going away (at least for now) the financing of the U.S. Current Account Deficit comes back into the worry picture. Recall, that the Current Account Deficit needs about $2 billion per day in foreign investments to keep it properly financed. And if the Japanese are slowing their offshore investments, that means the United States, too - not just New Zealand and Australia!

Fortis-Ping An Deal “May Collapse”, Bank of China Eyes AIG Unit

Biz China Update — Wed, 01 Oct 2008 23:01:16 +0000

Fortis-Ping An Deal May Collapse Fortis Bank said the EUR2.15 bn sale of 50 per cent of its asset management unit to China's insurance company Ping An may collapse due to the worsening credit crisis, Bloomberg reports. The European bank has been rescued by the governments of...

Foreign Bondholders – and not the U.S. Mortgage Market – Drove the Fannie/Freddie Bailout

William Patalon lll — Thu, 11 Sep 2008 09:50:50 +0000

By William Patalon III Executive Editor Money Morning/The Money Map Report For anyone who still doubted the growing global influence of such emerging powerhouses as China, consider this:... Money Morning is here to help investors profit han...

News You Can Use for Friday

Sean Brodrick — Fri, 29 Aug 2008 11:12:36 +0000

Oil Rises, Heads for Biggest Weekly Gain in Two Months as Storm Shuts Rigs Crude oil headed for its biggest weekly gain in almost two months and natural gas rose as producers evacuated rigs before the arrival of Gustav, forecast to be the largest hurricane in the Gulf of Mexico since Katrina.

U.S. Reviews Its Ties With Russia

The Bush administration, escalating its response to Russia's actions in Georgia, has placed under review talks with Moscow focused on missile defense and nuclear-weapons disarmament, according to U.S. officials. A delay would cast uncertainty over the Strategic Arms Reduction Treaty, or Start, a successor to Cold War era arms-reduction agreements that expires at the end of 2009. The treaty restricts the number of long-range nuclear weapons each side is allowed to have

XX Is this new cold war worrying you? Because itâ€™s scaring the crap out of me.

Obama Pledges to Restore `America's Promise,' Says McCain `Doesn't Get It' Barack Obama accepted the Democratic nomination for president, mixing a soaring pledge to preserve the ``American promise'' with a sharp attack on John McCain's judgment on the war, the economy and support of George W. Bush.

XX It was a great speech. Even Pat Buchanan loved it. The Associated Press, however, not so much. And they got called on it. OUCH!

Paladin Energy Forecasts Doubling of Uranium Output This Year

Production should rise to 3.6 million pounds of uranium oxide in the year ending June 30, 2009, from 1.71 million in the preceding 12 months, Managing Director John Borshoff said on a conference call. Output should increase to 6.8 million pounds the following year, to 7.4 million in 2010-11 and 9.3 million in 2011-12, he said.

XX Seanâ€™s note â€“ weâ€™ll see. Paladin has disappointed us before.

India Economic Growth Slowed to 7.9% Last Quarter; Weakest Pace Since 2004 India's economy grew at the slowest pace since 2004 last quarter as the fastest inflation in a decade and increased borrowing costs damped consumer spending.

Bank of China flees Fannie-Freddie

ank of China has cut its portfolio of securities issued or guaranteed by troubled US mortgage financiers Fannie Mae and Freddie Mac by a quarter since the end of June. The sale by Chinaâ€™s fourth largest commercial bank, which reduced its holdings of so-called agency debt by $4.6bn is a sign of nervousness among foreign buyers of Fannie and Freddieâ€™s bonds and guaranteed securities.

The Energy Challenge: Wind Energy Bumps Into Power Gridâ€™s Limits

The dirty secret of clean energy is that while generating it is getting easier, moving it to market is not. The grid today, according to experts, is a system conceived 100 years ago to let utilities prop each other up, reducing blackouts and sharing power in small regions. It resembles a network of streets, avenues and country roads.

India’s Reliability Provides a Razor Thin Edge Over China

Martin Hutchinson — Tue, 12 Aug 2008 01:04:50 +0000

By Martin Hutchinson Contributing Editor With sky-high growth potential, China and India are the two markets no investor can afford to miss out on. But that doesn’t mean they’re ... Money Morning is here to help investors profit handsomel...

Gold Price Falls Back as Dollar Strengthens

The Gold Report — Wed, 11 Jun 2008 02:33:53 +0000

Source: Reuters 06/10/2008 Gold extended losses on Tuesday and dropped below $890 an ounce after the U.S. dollar gained on expectations of a possible interest rate hike, reducing the metal’s appeal as an alternative investment. Gold fell to $889.80/890.70 an ounce from $894.00/896.00 late in New York on Monday, when it jumped to its highest in almost two [...]

China Official Bullish on Gold

Tony Sagami — Fri, 30 May 2008 12:25:44 +0000

Wang Yu, director of the gold and foreign exchange market of the People's Bank of China, said that gold prices will rise because of continued dollar depreciation, rising demand, and global political uncertainty. "My personal conclusion is that international gold prices will remain volatile in the short term, while from a long-term perspective there is a possibility for -- and room for -- prices to increase further.”

China Inflation November 2007

Edward Hugh — Thu, 20 Dec 2007 14:34:00 +0000

China's inflation accelerated at the quickest pace in 11 years and the trade surplus swelled, adding pressure on the central bank to raise interest rates and let the currency appreciate faster to cool the economy. Consumer prices rose 6.9 percent in No...

Subprime Effects Felt Worldwide

Richard Shaw — Fri, 24 Aug 2007 14:26:04 +0000

We can still remember when people were telling us that the subprime crisis was confined to U.S. housing — that it was not a big deal in the final analysis. Well, the final analysis is not in yet, but oh were they wrong. Not only is the subprime crisis not confined to U.S. housing — [...]