Tuesday, July 31, 2012

Pimco's investment outlook

Investment Outlook
August 2012
Cult Figures
  • ​The long-term history of inflation adjusted returns from stocks shows a persistent but recently fading 6.6% real return since 1912.
  • The legitimate question that market analysts, government forecasters and pension consultants should answer is how that return can be duplicated in the future.
  • Unfair though it may be, an investor should continue to expect an attempted inflationary solution in almost all developed economies over the next few years and even decades.
  • More

Monday, July 30, 2012

Social unrest ahead

Does Barack Obama Expect The Upcoming Election To Spark Rampant Civil Unrest?

What is Barack Obama preparing for? What does Barack Obama actually expect to happen in November? Does he believe that the upcoming election could actually spark rampant civil unrest inside the United States? The conditions are certainly ripe for civil unrest in this country. A multitude of recent polls and surveys have shown that Americans are angrier and more frustrated than ever. Sadly, we are taking a lot of that anger and frustration out on each other. America is more divided today than at any other time since the Civil War era. The left absolutely hates Mitt Romney the Republicans, and the right absolutely hates Barack Obama and the Democrats. If you doubt this, just surf political blogs for a few hours and read the comments that people leave. This country is a boiling cauldron of hatred and anger and all it is going to take is just the right "spark" to cause all of this hatred and anger to absolutely explode. This upcoming election season is likely to be one of the most heated and divisive election seasons in U.S. history, and if there is not a clear winner on election night there is the potential that chaos could be unleashed that would be far, far worse than anything we saw during the Bush/Gore debacle of 2000.
Comment: The trigger for the coming social interest is already in place: rising food prices.

Friday, July 27, 2012

Watch out for the inflation trigger

Report shows US drought rapidly intensifying

ST. LOUIS (AP) — The widest drought to grip the United States in decades is getting worse with no signs of abating, a new report warned Thursday, as state officials urged conservation and more ranchers considered selling cattle.
The drought covering two-thirds of the continental U.S. had been considered relatively shallow, the product of months without rain, rather than years. But Thursday's report showed its intensity is rapidly increasing, with 20 percent of the nation now in the two worst stages of drought — up 7 percent from last week.
Comment: Inelastic supply meets inelastic demand.

Thursday, July 26, 2012

ECB will save the euro

Draghi Says ECB Will Do What’s Needed to Preserve Euro: Economy

European Central Bank PresidentMario Draghi said policy makers will do whatever is needed to preserve the euro, suggesting they may intervene in bond markets as surging yields in Spain and Italy threaten the existence of the 17-nation currency bloc.
“To the extent that the size of these sovereign premia hamper the functioning of the monetary policy transmission channel, they come within our mandate,” Draghi said in a speech at the Global Investment Conference in London today. “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro,” he said, adding: “believe me, it will be enough.”
Comment: There was little doubt on my side that in the end it would come this way. Draghi had to wait until things got really bad to come up with it without getting beaten up. His timing was good. Now the ECB will open the floodgates. It is only a matter of time until all of us will be millionaires and billionaires - maybe just by the money we'll carry in our pockets.

Monday, July 16, 2012

Drowning in debt

27 Things That Every American Should Know About the National Debt

The U.S. government has stolen $15,876,457,645,132.66 from future generations of Americans, and we continue to add well over a hundred million dollars to that total every single day day. The 15 trillion dollar binge that we have been on over the past 30 years has fueled the greatest standard of living the world has ever seen, but this wonderful prosperity that we have been enjoying has been a lie. It isn't real. We have been living way above our means for so long that we do not have any idea of what "normal" actually is anymore. But every debt addict hits "the wall" eventually, and the same thing is going to happen to us as a nation. At some point the weight of our national debt is going to cause our financial system to implode, and every American will feel the pain of that collapse. 
Comment:  It may sound strange, but in my view the debt crisis in Europe is less severe than the debt problem of the United States. It won't take too much long and my thesis will find ample evidence.

Friday, July 13, 2012

Rotten heart of finance

The LIBOR scandal

The rotten heart of finance

A scandal over key interest rates is about to go global

THE most memorable incidents in earth-changing events are sometimes the most banal. In the rapidly spreading scandal of LIBOR (the London inter-bank offered rate) it is the very everydayness with which bank traders set about manipulating the most important figure in finance. They joked, or offered small favours. “Coffees will be coming your way,” promised one trader in exchange for a fiddled number. “Dude. I owe you big time!… I’m opening a bottle of Bollinger,” wrote another. One trader posted diary notes to himself so that he wouldn’t forget to fiddle the numbers the next week. “Ask for High 6M Fix,” he entered in his calendar, as he might have put “Buy milk”.
What may still seem to many to be a parochial affair involving Barclays, a 300-year-old British bank, rigging an obscure number, is beginning to assume global significance. The number that the traders were toying with determines the prices that people and corporations around the world pay for loans or receive for their savings. It is used as a benchmark to set payments on about $800 trillion-worth of financial instruments, ranging from complex interest-rate derivatives to simple mortgages. The number determines the global flow of billions of dollars each year. Yet it turns out to have been flawed.
Comment: We expressed our feeling before.

Monday, July 9, 2012

A Marshall Plan for Europe?

Does Europe Need a New Marshall Plan?

Whenever there is an international problem self-proclaimed experts show up and invoke the myth of the Marshall Plan. This has also recently been the case with the European crisis. Like many before him, such as Krugman, it was recently billionaire investor George Soros who showed his lack of historical knowledge by pronouncing that Europe needs a new Marshall Plan and that it was foremost American generosity that brought the old continent back on the road to prosperity. He pointed out that the West Germany economic miracle was the result of the Marshall Plan and that now it was Germany’s turn to do the same for Southern Europe. Facts, however, tell a different story than those who want us to believe that what makes economies grow is that governments spend ever more money to “stimulate” economies in depression.

Thursday, July 5, 2012

Outlook July 2012

JULY 2012
Economic Growth
Not much has changed over the past quarter. The global economy remains weak. The euro area, in particular, continues to suffer from the deterioration of economic growth which turned negative in the first quarter of 2012. If it were not for Germany, the number would be even more disastrous. However, in Germany, too, economic growth rates have been declining steadily and the increase was only 1.2 per cent in the first quarter of 2012. Interestingly the same trend as noted for the euro zone applies to the United Kingdom. British growth continues to be low. Respectively for the Eurozone and the UK, growth rates were 0.7 per cent versus 0.8 per cent in the fourth quarter and 0.1 per cent negative for both the first quarter of 2012.
A picture a little brighter is shown by the United States and Japan. Economic growth rose to 2.0 per cent in the U.S. and 2.6 per cent in Japan. Yet one must take into consideration that Japan had a negative growth rate in the previous four quarters. Nevertheless, the numbers of economic growth of the U.S. and Japan are confirmed by the numbers of industrial production. Industrial production in the United States rose 3.8 per cent in the first quarter and 3.1 per cent in Japan
The current economic crisis which began in the USA and then spread to Europe becomes increasingly globalized. There is no locomotive in sight that could pull out the world economy of its doldrums. What is happening to the world economy is slow decay, a decline step by step that seems to go on without end. Both fiscal and monetary policies are at their limits. While interest rates are close to its absolute minimum. Now we are in a situation where more fiscal stimulus with more debt could have an effect as negative as more austerity.

International trade
There have been no dramatic changes in international trade over the past quarters. The U.S. has a current account deficit of more than three per cent of its gross domestic product (gdp). The same as was the case for decades. The current account deficit for the U.S. was 3.2 per cent in the last quarter of 2011 and, as such, it is only slightly lower than previous quarters, when it reached 3.4 per cent in the second quarter and third quarter of 2011.
Germany continues to register high surpluses and in the fourth quarter of 2011 its current account surplus reached 7.4 per cent of gdp, the same as it was in the first quarter of 2010. Compared to Germany, the current account surpluses of Japan and China are more moderate. In the last quarter of 2011 Japan had a current account surplus of 0.8 per cent, while China had a surplus of 3.0 per cent in the third quarter of 2011.
More serious than the current account deficit the U.S. are the current account deficits of the United Kingdom because the British pound has only a rudimentary role as a global currency. Even with a negative growth rate in the first quarter of 2012, the UK recorded a current account deficit of 1.9 per cent in the last quarter of 2011, after having a deficit of 3.4 per cent in the third quarter of 2011.

Interest rates
With the exception of China, interest rates are at an extremely low level in the major economies of the world. The U.S. central bank kept its policy rate steady at 0.25 per cent since 2011, while the UK has maintained a rate of 0.50 per cent. The European Central Bank lowered the interest rate to one per cent in January 2012 and to 0.75 per cent on July 4th. The Bank of Japan did not change its interest rates which are already at the extremely low level of 0.10 per cent, while China's central bank has slightly lowered its rate from 6.56 per cent since July 2011 to 6% after having cut it 6.31 % only a while ago. The US, Japan and Europe have reached the dead-end of interest rate policies. Now it is only "quantitative easing" that is left to "stimulate" the economy. In the same way that fiscal policy is at dead-end, monetary policy has hit the wall. The errors were made in the past and not repair work can put Humpty Dumpty together again. 

Exchange rates and prices
In the face of turbulence and uncertainty in Europe, it came as no surprise that the euro weakened against the U.S. dollar. The rate fell from 1.43 dollars to the euro in May 2011 to 1.28 dollars per euro in May 2012 and fell further to 1.25 when the European Central Bank lowered its policy interest rate in July 2012. The fall of the euro is fully in line with the international scenario. In fact, the surprise is not that the euro has fallen, but that the value has fallen relatively little.
The rate of the dollar against the British pound has remained relatively stable as it has been the case with the yen-dollar rate of exchange, while the Chinese currency has strengthened slightly against the dollar. To the relief of the Brazilian government the dollar continued to rise and surpassed the two real level in June 2012 after having hit a low below 1.60 real to the dollar only a couple of months ago in August 2011.
The gold price was surprisingly stable at slightly above US $ 1,500 over the past 12 months. Currently, investors regard the dollar as a safe haven more than gold. Yet this may change anytime soon when US debt comes to the forefront of attention again. 

Commodity prices are falling. Oil, which was still $ 122.7 per barrel in February of 2012, has fallen below the hundred dollar level in the meanwhile. Corn, coffee and sugar are all down from their peaks. Only the price of soybeans remained relatively firm.
Given the fall in commodity prices and oil in particular, as well as taking into account the price of gold as an indicator of inflationary expectations, one must note that inflation does not represent an immediate risk.

Financial Markets
Stock and bond markets have been relatively stable over the past quarter. There have no major discernible shifts of investor sentiment other than a shift from the European periphery to the center. As in the months and years before, US treasuries have been a favored investment in the global context.
Stock markets also not see major changes of trend. There have been ups and downs but these fluctuations have been within the regular degree of volatility.
Yet this situation is no reason to feel complacent. On the contrary: All too often markets play it soft for some period of time before they enter the wild phase. There are too many unresolved economic problems in many parts of the world in order to be confident that stock prices could strongly rise and there is too much debt in the world in order to feel comfortable with the current level of interest rates. 
While confidence in many European countries has been eroding over the past quarters, a loss of confidence may also happen any time soon when it comes to the United States. In Europe it was mainly churning that has happened in so far as investors who left Spain and Italy could buy German bonds. Yet where can investors flee to when confidence in the US begins to erode? Let's keep our eyes open and watch out where the smart money will run to in the second half of 2012. Gold? Back into euro bonds? Commodities again? Could it be that when a more realistic assessment will replace the current tide of prejudice, investors will notice that the one place where assets sell below value could be Europe? It is better not to pre-program one's mind and make premature predictions yet let's be aware that when things will change, they probably will change dramatically this time.  

Tuesday, July 3, 2012

More from the rotten state of finance

Morgan Stanley Got S&P to Inflate Ratings, Investors Say

Morgan Stanley (MS) successfully pushed Standard & Poor’s and Moody’s Investors Service Inc. to give unwarranted investment-grade ratings in 2006 to $23 billion worth of notes backed by subprime mortgages, investors claimed in a lawsuit, citing documents unsealed in federal court.
Comment: It's a dispicable behavior not only because of money but even more so that these guys are responsible for giving capitalism a bad name. If libertarians had execution squads these guys would make the list.

Diamond resigns

Robert Diamond, the architect ofBarclays Plc (BARC)’s investment banking expansion, stepped down as chief executive officer, succumbing to political pressure after the bank admitted to rigging global interest rates.
Comment: Finance has become rotten from the top to the bottom. Modern state capitalism is based on an intimate symbiosis between government and finance and it was only a matter of time until the inherent corruption of government would infect fnance. What's needed is more than just a few rolling heads. The whole system needs to be changed. Money must be taken away from the state.

Sunday, July 1, 2012

The rotten state of finance

Barclays Chairman Said to Be Poised to Resign After Libor Fine

Barclays Plc (BARC) Chairman Marcus Agius plans to resign after the bank was fined a record 290 million pounds ($455 million) for trying to rig interest rates, sparking a political outcry, according to a person briefed on the matter.