Saturday, February 12, 2011
All told, investors deposited a net $21.4 billion to U.S. stock funds in January, the biggest monthly increase since a net inflow of $23 billion in February 2004, industry consultant Strategic Insight said Friday.
Last month's result also snapped a string of net withdrawals that began last May. The last time there was a positive inflow of cash into domestic stock funds was April, when a net $11 billion came in.
Investors soon reversed course after the stock market's May 6 "flash crash" single-day plunge. Fears about Europe's government debt crisis also peaked that month.
But the stock market has now risen five consecutive months, and the Standard & Poor's 500 index is up about 26 percent since Sept. 1. Fourth-quarter earnings reports have largely been positive, and most economic indicators suggest the recovery is gaining momentum. (more)
“Gold is not a commodity. It is not volatile. It is not an investment. Gold is money,” Turk told an audience of nearly 1,000 delegates.
He illustrated gold’s ability to retain its purchasing power by comparing the price of oil in British pounds, US dollars, German marks, euros and gold. Only gold had maintained its purchasing power since 1950, with massive losses for the currencies, especially the pound.
“Gold is a form of money that holds its value over time,” said Turk, adding, “capital is a precious resource that is best preserved with gold.”
He explained gold’s fundamentally different character as a tangible asset that was accumulated, or saved, rather than consumed. It’s value derives from its utility as a medium of exchange for things like food, shelter and communication.
“Gold as money is a mental tool that enables economic calculation unchanged through human history,” Turk told the audience of mining and investment professionals.
Turk bases his forecast on a long-range view of boom-bust cycles. He believes we are currently moving through a bust of epic proportions as individuals, companies and governments are forced to restore balance to their balance sheets.
“The bust has not yet peaked and you should own gold to preserve wealth until it has.”
He projected the cycle via a ratio of the Dow Jones Industrial Average to gold. He assets that the ratio will again revert to one, and that’s where his $8,000/oz prediction lands.
Turk said that a collapse of the dollar was inevitable because the United States, among other countries, was in a structural crisis that could not be avoided via interest rate increases.
“The US is not suffering from a cyclical deficit, but a structural one. It is a path to hyper-inflation.
“Japan’s credit rating has just been cut. It is probably the first slow fuse to be lit.”
Turk laid his thesis against the strong correlation of the Federal Reserve’s monetization of US debt with the S&P 500. Since the launch of quantitative easing, the correlation has been almost perfect.
Meanwhile, he pointed out that the US appears to have entered a “debt compounding” phase. As a result, the country is now extremely vulnerable to even moderate increases in interest rates which have begun to move up.
“We cannot replicate the previous [1980s] high interest rate cure for mismanagement of the economy,” Turk concluded. He believes the US currency will inevitably collapse as a consequence.
read it here
He suggests these imbalances are igniting the breed of deep-seated animosity that can lead to civil wars, especially in those countries with the largest wealth disparities and highest unemployment.
According to the Telegraph:
“‘It is not the recovery we wanted. It is a recovery beset by tensions and strain, which could even sow the seeds of the next crisis,’ he [Dominique Strauss-Kahn] said.
“‘Global unemployment remains at record highs, with widening income inequality adding to social strains,’ he said, citing turmoil in North Africa as a prelude to what may happen as 400m youths join the workforce over the next decade. ‘We could see rising social and political instability within nations – even war,’ he said.
“The IMF has published a paper entitled Inequality, Leverage and Crisis arguing that the extreme gap between rich and poor – with echoes of the US in the late 1920s – was an underlying cause of the Great Recession from 2008-2009. The paper, by the Fund’s modelling unit, warned of ‘disastrous consequences’ for the world economy unless workers regain their ‘bargaining power’ against rentiers. It suggests radical changes to the tax system and debt relief for workers.”
For the purposes of the IMF paper, the discussion focuses on how changes in income distribution can result in an abuse of leverage, and a build up to the kinds of crises witnessed in the 1920-1929 and 1983-2008 periods. However, the IMF’s more bottom-line warning seems to be that lower income groups, without bargaining power over income, are becoming more likely to respond with violence than with a traditional picketing. You can see more details in the Telegraph’s coverage of how the IMF is warning of civil wars as global inequalities worsen.
click here for audio
In the late 1920s, the economy of the Weimar Republic was beset by numerous fiscal troubles. The global depression spread quickly to Germany, undermining the government’s ability to make its reparation payments from the Great War.
Fearing a return to hyperinflation, many Germans who had spent the last decade building up a small fortune during the Weimar Republic’s own ‘Roaring 20s’ decided to pack up and leave; they remembered the days when banknotes were used as wallpaper and had no desire to repeat the experience.
In 1931, Chancellor Heinrich Bruning imposed a ‘flight tax’, which levied a 25% tax on the value of all property and capital for Germans leaving the country.
Total revenue collected from this tax amounted to roughly 1 million Reichsmarks (RM) in its earliest days ($56 million today). By the late 1930s under Hitler’s rule, flight tax revenue soared to RM 342 million ($21.5 billion today) as more people headed toward the exits.
This flight tax constitutes one of the earliest modern examples of capital controls. They’ve evolved substantially since the days of Hitler, but the end goal is the same– governments controlling the flow of capital across borders. (more)
Zero Hedge had an opportunity recently to ask Eric Sprott a variety of questions touching on everything from investment recommendations, to policy guidelines, to a general outlook for the world economy. As Sprott has long been a rare voice of contrarian reason in a field of lemming-like uniformity, lately driven by nothing more than a pursuit of centrally planned momentum and Bernanke-induced "heatmapping", we believe the answers were vastly more interesting and illuminating than anything available for mass media consumption.
Interview with Eric Sprott of Sprott Asset Management
1. The conspiracy of optimism, suggested by the likes of almost anyone appearing in the MSM (print and cable), is that the US is the place to invest in 2011. A glance at the hedge funds you manage (as of the end of 2010) suggest that you are not buying into this hype. Are the short positions you have in your Hedge Funds still mainly in the US? If so what sectors and why?
A: Our short positions are all exclusively in large cap US names, with a focus on the financial and consumer discretionary sectors. We’ve been bearish on US equities for some time, particularly those in the financial sector that remain severely over-levered in this environment. We’ve managed our long/short hedge fund with the view that we entered a long-term bear market in 2000, and we’ve enjoyed maintaining an active short portfolio throughout the decade. It’s provided specific opportunities to produce alpha, and also provided negative beta exposure during the sell offs when downside protection was needed most. I urge all my investors to consider adding a hedge fund that can short effectively. It really is one of the best investment vehicles to own during a long-term secular bear market for equities, which I firmly believe we are still in.
2. Conversely you are mostly long Canadian equities, with some international exposure. What international countries and sectors do you have exposure too?
A: Most of the equities we invest in long are listed in Toronto. Their underlying assets tend to be distributed globally, however. In the case of our mining exposure, we own mines all over the world: Africa, Southeast Asia, United States, South America. Our location in Toronto has proven advantageous in that it grants us access to the best management teams in the resource industry. Toronto is a major mining-finance capital and we have one of the busiest foyers on Bay Street, with various resource management teams visiting with us regularly to provide updates. We’ve been investing in this space for almost ten years now, so we’ve developed deep contacts within the mining industry internationally. Our sector focus is currently concentrated in precious metals and energy equities. We manage all the company-specific risks on an individual basis, but the sector weights are guided by our macro views.
3. We are currently seeing a massive rise in commodity costs across a broad spectrum of raw materials. The result of the Bernanke "wealth effect". What do you see as the consequences of the rise in commodity prices, for equity and credit markets?
A: It’s unbelievable to see. The food inflation is astounding,… when you see vegetable prices rising 40% in a month, grains up 20% on the year, eggs, sugar,… meat, all up 20-30% since July, it makes you wonder how they manage to massage the CPI so effectively. It’s becoming quite a serious issue, really. The Brent price is especially problematic – we always wonder about the consequences higher oil prices could potentially have on this “recovery”. We all saw the peripheral damage it caused in 2008, completely aside from the banking collapse that was happening at the time. There’s little doubt that these price increases are having a major impact across the globe – look at Egypt, for example. How much of that situation was initiated by food inflation? Same with UK with their recent numbers. It’s only a matter of time before we see more direct effects on prices here at home.
4. How do you see the end of QE2 playing out across the credit and equity markets?
A: I don’t think the market is prepared to go it alone yet. I don’t think we can have a strong equity market without more stimulus. It was amazing to see the sentiment shifts in January, as pundits began declaring the end of QE2, and no need for QE3,… but of course a few weeks pass and problems surface somewhere, this time in the Middle East, and Obama has to get up there and promise more printing to prevent a sell-off. I think the US is in such a difficult situation now with their Treasury auctions. We wrote about this in late ’09, asking how the US could realistically fund their debt requirements. The big question is how much of QE2 has been indirectly funneled back into on-the-run issues. It’s obvious the market doesn’t want to go there yet, but that is a vital question in anticipating the need for QE3.
5. Now that the "Wealth Effect" seems to be the main mandate of US the Federal Reserve, do you envision Bernanke having the ability to implement further incarnations of QE? If so under what circumstances?
A: I just think of how much they’ve spent up to this point to keep this thing going. Think of all the programs they’ve initiated. QE 1, QE 2, TARP, TALF, Fannie and Freddie – it’s all adds up to trillions, so it doesn’t seem far fetched to assume they’ll institute more measures to plug the dam.
6. Do you see any bubbles present or being blown in the world right now? If so, where and what are they?
A: I don’t see any greed bubbles in this market. Nobody’s buying T-bonds to get rich. While I do think the US bond market is a ‘bubble’ in the sense that it’s widely mispricing US risk, I don’t think investors are buying bonds with the expectation of selling them higher down the road. Investors are just trying to maintain some level of real return in here. Many are also trying to game the Fed, stay ahead of them. The commentators who call the precious metals market a bubble are laughable. Nobody owns the stuff. It’s extremely tightly held. Plenty of paper gold floating around, but that’s another story.
7. What possible or probable black swan event (timeline of 12-24 months) keeps you up at night?
A: A major supply disruption in the oil market would throw us over the edge. The economy isn’t strong enough to withstand high energy prices for an extended period.
You also have to wonder what happens if they don’t extend QE2 – and the impact the inevitable rise in rates would have on the US and global economy. We’re obviously in a very precarious environment today, so we have to be prepared for a “black swan” type event at any time. We’ve been managing our funds with a defensive view for over ten years now, so I would hope we could weather them better than most.
8. Your views on precious metals are well known. If there is a collapse in the USD and/or fiat currencies in general, how will gold be valued?
A: They’d likely be valued in terms of other goods, rather than in units of fiat currency. Investors won’t care what an ounce is worth in USD if the USD can’t be exchanged for anything. They’ll want to know what an ounce is worth in water, or food, anything consumable.
I think most mainstream investors still struggle to appreciate the changes that have occurred in precious metals market since 2008. Gold is reverting back into a world reserve currency – it’s so clearly visible now. It’s one of the only asset classes that has ‘worked’ for investors and savers. And yet there remains this large contingent who continue to question its legitimacy as an asset class.
One of the great struggles investors continue to have with gold, particularly in the US, is in embracing it as a monetary alternative. There are money managers and pension trustees who refuse to view gold as a store of value. They don’t understand the value argument. It’s a peculiar thing. If we lived in a different environment today, I’d understand their hesitance to embrace gold, but after everything we’ve gone through, and after acknowledging the fiscal reality of the Western powers, I just don’t understand why anyone would question the benefits of a hard currency. We need a hard currency today for SAVERS. Gold is for savers. We all need some sort of risk-free return vehicle in a properly functioning financial system. Bonds pay a negative real return today, so we’re forced to up our risk tolerance into equities or high-yield. You can’t save capital in cash in this environment – it’s as simple as that. You have to find another asset class to perform that function, and precious metals are once again reverting to their traditional monetary status to meet that need.
9. If you had the opportunity, what 3 policies would you enact that you believe would put the US on a path towards sustainable growth?
A: That’s a tough one. I try to focus more on what they’re doing, rather than worrying about what they should do. I think I’ve been fairly clear in articulating the challenges Western governments face today. Realistically, there is only so much austerity a country can take – look at the impact it’s already having in the UK. I just don’t see the US making the sacrifices required to put them back on the right path long-term. When you see the CBO forecasting budget deficits into 2021, one can only assume that the US plans to borrow in perpetuity. That only works as long as you can get the borrow. But we all know the game changes when the US can’t get the borrow through traditional means. We may already be there.
If I were to make recommendations, I’d focus on addressing leverage in the banking system. I firmly believe 20:1 is far too high a leverage multiple to maintain in this environment. I don’t even know what the right number is – maybe it’s no more than 5:1. But we can’t keep this situation going where a mere 5% shift in asset prices can completely wipe out your tangible equity. I would also try removing the “too big to fail” safeguards that allow the financials to reach such insane levels of leverage. And then of course there’s the derivatives issue, which almost nobody even wants to talk about anymore… but it never went away. It’s probably an even bigger problem today.
10. You have been in the financial industry for well over 35 years. If you had to create a portfolio for a 30 year today, what would it look like. How would you advise one to manage said portfolio?
A: I would be invested heavily in precious metals, both the bullion and equities. I would maintain exposure to energy, and I would have some shorts on the table. Buy-and-hold isn’t dead if you hold the right things, but 30 years is probably too long a timeframe to park capital and forget about it. I’ve always been more of a long-term investor than a trader, and although my themes tend to last for many years, I’ve seen many different markets throughout my career. I’ve definitely repositioned my funds over time. I sincerely hope we do see a true bull market in equities again at some point – I would be the first to applaud one because it’s easier to pick stocks in a secular bull market. But for the time being, until we solve the debt problems, I think our current positioning is the best way to be invested. And for what it’s worth I also think there’s plenty of opportunity in this market as well – there certainly has been for us. It’s just a matter of staying on top of macro developments, focusing on valuation and investing with conviction.
Special thanks to Lizzie.
“Even the Roman Empire took 400 years to fall. I assume your investment horizon is a little shorter than that.”
So said my colleague, Alexander Green, at The Oxford Club’s recent Private Wealth Seminar in Costa Rica.
His words were a warning shot to any investors listening to the investment doom-and-gloomers out there, busily predicting the end of the world.
Alex was driving home a point that we’ve made countless times here at Investment U: Markets rise and fall, and trying to time them is an act in futility.
So what should you do instead? Simple. Have a sound financial plan and stay invested for the long haul.
And the best route to success? See below…
Concerned? Let History Ease Your Worries
Alex’s discussion got me thinking about the woes of the past few years and how people are having a tough time envisioning a meaningful recovery.
I won’t rehash the myriad problems and ugly statistics here. You know what they are by now.
What I will say, though, is that while the climate is undoubtedly tough, is it really so different from previous downturns?
I’m not talking about the epic crashes of 1929 and 1987… everyone’s done that. Rather, I’m referring to lesser-known crises. Why? Because while they caused a similar level of panic that we’ve seen today, they not only worked themselves out… but the economy actually prospered afterwards.
How Silver and a Railroad Collapse Triggered the Crash of 1873
Heard of the Panic of 1873?
A worldwide depression was triggered when Germany stopped minting silver thaler coins, used in Europe for over 350 years. The decision sparked a drop in silver demand and set off a ripple effect… (more)
The IMF said Special Drawing Rights, or SDRs, could help stabilize the global financial system.
SDRs represent potential claims on the currencies of IMF members. They were created by the IMF in 1969 and can be converted into whatever currency a borrower requires at exchange rates based on a weighted basket of international currencies. The IMF typically lends countries funds denominated in SDRs
While they are not a tangible currency, some economists argue that SDRs could be used as a less volatile alternative to the U.S. dollar.
Dominique Strauss-Kahn, managing director of the IMF, acknowledged there are some "technical hurdles" involved with SDRs, but he believes they could help correct global imbalances and shore up the global financial system. (more)