My pick is:
John Embry, Sprott Asset Management
If a deflationary episode is to be avoided, one of the costs will most assuredly be accelerating inflation in a textbook case of ever more paper chasing a limited amount of real goods and services. In the face of this I find it fascinating that many pundits acknowledge the longer-term attractiveness of gold but persist in trying to call short-term corrections. In markets as seriously manipulated as gold with the incredibly powerful fundamentals that it possesses, trying to be cute on corrections strikes me as a real mug’s game. The good news on the manipulation front is that it has become so blatant that it is revealing distinct signs of desperation, a necessary precursor to its eventual cessation.
Best Financial Quotes of April 2007
My April 2007 pick is:
Ron Paul, Texas Republican Congressman
The fiscal year 2008 budget, passed in the House of Representatives last week, is a monument to irresponsibility and profligacy. It shows that Congress remains oblivious to the economic troubles facing the nation, and that political expediency trumps all common sense in Washington. To the extent that proponents and supporters of these unsustainable budget increases continue to win reelection, it also shows that many Americans unfortunately continue to believe government can provide them with a free lunch.
Mike Whitney from counterpunch in response to the Dow crashing through the 13,000 mark:
The Dow is like a drunk atop a 13,000 ft cliff; inebriated on the Fed's cheap "low-interest" liquor. One wrong step and he'll plunge headlong into the ether.
The Best Financial Quotes of May 2007
And my pick is: Adrian Ash, Bullion Vault
A world run on two or three fiat currencies, issued and accepted by diktat...becomes only more likely every time that drug-lords in Moscow trade a kilo of crank. But as a store of wealth for the future, gold keeps winning out. Since the dream of a European single currency became flesh at the start of 2002, gold has averaged 10.3% year-on-year gains measured in Euros. It's risen more than 12% annually against Sterling. In terms of gold-priced devaluation, the Dollar and Yen are now neck-and-neck. Gold bullion has averaged 17.5% gains per year against both since the start of 2002.
Do business in Euros...but hold your wealth in gold? Under monetary union the trend looks pretty solid so far.
Here it is my candidate for the Best Financial Quote of June 2007
Brian Wesbury(USA): I think the retail sales report will be a nice, strong report after last month's weak report. And clearly energy prices are going to lift the overall levels of inflation that we see. Once we take out energy, we're going to have some subdued inflation, but we're still over 2 percent. With the economy coming back and inflation staying elevated at least above the Fed's comfort zone, I think it's only a matter of time before the Fed does come in and hike interest rates. Lots of people worry about that, Susie, but with discount models that I use, I've already incorporated higher interest rates and I still show the stock market 20 percent undervalued today. That means it's a great buying opportunity.
Who wants to be a millionaire ?
Australia joins top 10 wealthiest
Melbourne Herald Sun, June 28, 2007
THE number of Australian millionaires is growing at a faster pace than the rest of the world, helped along by a buoyant share market.
According to Merrill Lynch and Capgemini annual wealth report, released this morning, the number of Australians with financial assets of more than $1 million grew by 10.3 per cent in 2006 to 160,600 people, on the back of a robust share market.
The number of high net worth individuals (HNWI) in the world jumped 8.3 per cent in 2006 to 9.5 million people.
Australia joins the Top 10 list
"For the first time, Australia has joined the ranks of the world's top ten countries in terms of total HNWI numbers," Merrill Lynch head of global private clients, Australia, Nick Kalikajaros, said.
"The steady growth in the size and scale of the Australian market represents tremendous opportunities for wealth management firms, especially those that can adapt their service model to the needs of an increasingly sophisticated client segment."
Merrill Lynch said slowing mature markets like the United States were expected to moderate growth in the rest of the world economy.
"With many central banks tightening monetary policy, the period of high liquidity that has so stimulated recent growth may soon come to an end," Merrill Lynch said.
Global rise in rich
Globally the number of millionaires in the world increased by 8.3 per cent in 2006, with about 9.5 million individuals now estimated to have more than $US1 million ($1.18 million) in financial assets.
The financial assets owned by the group totalled $US37.2 trillion ($44.05 trillion), an increase of 11.4 per cent from 2005, with Singapore, India, Indonesia and Russia producing the greatest number of new millionaires.
"Real GDP and market capitalisation growth rates, two primary drivers of wealth generation, accelerated throughout 2006, which helped to increase the total number of HNWIs around the world as well as the amount of wealth they control," the report said.
The number of Ultra-HNWIs - individuals with financial assets exceeding $US30m - increased by 11.3 per cent in 2006, with the global population of this extremely affluent group now estimated at 94,970 people.
The financial assets of Ultra-HNWIs increased by 16.8 per cent compared with 2005, the report said, illustrating a trend whereby wealth is increasingly concentrated in the hands of the already wealthy, the report said.
"Global wealth continued to consolidate in 2006, a trend we have reported for the past 11 years," the report said.
Capgemini and Merrill Lynch define a millionaire as someone with more than $US1 million ($1.18m) in financial assets such as cash, equities, bonds or funds.
They do not include the value of an individual's primary residence or private collections of objects such as art, antiques or coins.
US Growth in 2007: Remarkable !
ISM Manufacturing Index
Brian Wesbury / First Trust Advisors (USA)
The ISM Manufacturing index increased to 56.0 in June from 55.0 in May. The consensus expected the index to be unchanged at 55.0. (Levels higher than 50 signal expansion; levels below 50 signal contraction.)
The index was driven upward by an increase of 4.6 (to 62.9) in the production component. The new orders component rose by 0.7 points (to 60.3).
The prices paid index declined to 68.0 from 71.0, but remains at a high level.
Implications: The coffin is closing on low expectations for the U.S. economy. Powered by faster growth in both production and new orders, the ISM index increased for the third straight month in June, reaching its highest level since July 2004. Data reported so far for the second quarter suggest an annual real GDP growth rate of 3.5% to 4%. Norbert Ore, the head of the Institute for Supply Management, says it looks like real GDP growth will be about 4% in
Q2. “Remarkable,” he said. The economy is entering the third quarter with substantial forward momentum, which we believe will carry forward through next year. Given this strong growth and continued upward pressure on inflation we continue to forecast higher interest rates ahead, across the yield curve.
Brian Wesbury(Chief Economist, FTA) is bullish on the US economy
US: June Employment Report
First Trust Advisors(FTA)
Non-farm payrolls increased 132,000 in June while revisions to April and May added a total of 75,000 to payroll growth. The consensus expected a gain of 125,000.
Sectors performing well in June included education and health (+59,000), restaurants and bars (+35,000), and state and local government (+41,000). Upward revisions to April and May were centered in financial services, manufacturing, leisure and hospitality, and retail trade.
Non-residential construction payrolls increased 12,000 in June, while residential construction jobs were unchanged.
The unemployment rate remained at 4.5%. Average hourly earnings increased 0.3% (0.35% un-rounded) and are up 3.9% versus a year ago, consistent with nominal wage gains in the late 1990s.
Implications: Today’s jobs report was bullish on the economy. Payrolls were 207,000 higher than estimated last month (132,000 for June plus 75,000 in revisions to prior months), wages are growing at a strong pace, and hours per worker are up. Payrolls have expanded by an average of 167,000 per month in the past year, while civilian employment (adjusted for the payroll concept) is up 177,000 per month. After a lull, the very consistent pattern of upward revisions has reappeared. We now have two revisions for all jobs reports through April and in the prior twelve months the average revision between the original release and final number has been +41,000. Also note that in the past three months the number of unemployed workers who voluntarily left their prior job is up 55,000, a sign that workers are getting more confident in finding new jobs. When combined with the strong ISM reports for both manufacturing and services (released earlier this week), the strong employment report for June suggests that the economy has emerged from its slow-growth-patch, and has regained its strong forward momentum.
Discipline and Fundamentals Beat Uncertainty
Brian S. Wesbury - Chief Economist, First Trust Advisors - USA
Robert Stein, CFA - Senior Economist
The biggest problem with basing investment decisions on economic forecasts is uncertainty. Not just ambiguity about how any particular economic outcome will actually move markets, but murkiness about the forecast itself. Even when it seems that a forecast is correct, there are questions about the accuracy of the available data that allow doubt to creep in at any point.
For example, in the past 12 months, there was inversion in a significant portion of the Treasury yield curve, while futures markets priced in Fed rate cuts. This kind of market activity, according to the economic handbook, should precede an economic slowdown.
And that’s exactly what happened. The economy slowed sharply with just 0.7% annualized real GDP growth in Q1 2007, led by a weak housing market. The economic pessimists and the bond bulls felt vindicated. They started to call rising stock prices a bubble.
But the 10-year Treasury bond yield is up slightly from a year ago, the futures market no longer expects rate cuts, the stock market remains strong, and forecasts for the economy have been ratcheted upward. This would seem to support the economic optimists and the bond bears.
But, very few forecasters have changed their underlying assumptions, which turbo-charges uncertainty. Now, the employment data are in question. Some ask, “How can the unemployment rate stay at 4.5%, and construction jobs remain robust in the midst of a housing slowdown?” Some even point to the fact that a smaller share of the overall population is working or looking for a job than in the late 1990s – to them, a clear sign of trouble.
The point is that even when economic data and markets seem to be speaking clearly, there is still a great deal of doubt, ambiguity and uncertainty in any economic outlook.
This is why we fall back on fundamentals. As long as tax rates remain at levels which encourage risk taking, as long as government interference is not overwhelming, and as long as the Fed is not leaning too far one way or another, the economy will be fine.
It is true that the labor force stands at 66.1% of the population, well below its peak of 67.3% back in 2000. It is also true that if the labor force as a share of the population was still at that 2000 peak, the unemployment rate would be 6.2%. But this is not a worrisome development.
With the US population aging, teenage participation rates falling, women fully incorporated into the workforce, and immigrants reluctant to pop-up on the radar screen, a leveling off in the labor force should be expected.
Also, as we explained in our Monday Morning Outlook on 6/4/2007 “The Construction Job Mystery,” there are a multitude of reasons why the slowdown in housing has not had a major impact on the jobs market.
In the end, in the midst of a dynamic and fluid world order, there will always be uncertainty – about everything. With this in mind, the best advice we can give to those who incorporate economic forecasts into investment decisions is to stay disciplined about watching the true underlying causes of economic change. Employment-population ratios, construction jobs, sub-prime loans, gas prices, the trade deficit, or whatever, are just sideshows.
Policy is what matters. With tax rates low, the real federal funds rate nowhere near levels which preceded prior recessions, a great deal of noise but no action on trade protectionism, and gridlock in Congress on new spending, the fundamentals look good. As a result, we remain convinced that the US and most of the globe[OZ also] will continue to grow nicely in the years ahead.
Money isn't everything
Jul 5th 2007
From The Economist print edition
Men with a lot of testosterone make curious economic choices
PSYCHOLOGISTS have known for a long time that economists are wrong. Most economists—at least, those of the classical persuasion—believe that any financial gain, however small, is worth having. But psychologists know this is not true. They know because of the ultimatum game, the outcome of which is often the rejection of free money.
In this game, one player divides a pot of money between himself and another. The other then chooses whether to accept the offer. If he rejects it, neither player benefits. And despite the instincts of classical economics, a stingy offer (one that is less than about a quarter of the total) is, indeed, usually rejected. The question is, why?
One explanation of the rejectionist strategy is that human psychology is adapted for repeated interactions rather than one-off trades. In this case, taking a tough, if self-sacrificial, line at the beginning pays dividends in future rounds of the game. Rejecting a stingy offer in a one-off game is thus just a single move in a larger strategy. And indeed, when one-off ultimatum games are played by trained economists, who know all this, they do tend to accept stingy offers more often than other people would. But even they have their limits. To throw some light on why those limits exist, Terence Burnham of Harvard University recently gathered a group of students of microeconomics and asked them to play the ultimatum game. All of the students he recruited were men.
Dr Burnham's research budget ran to a bunch of $40 games. When there are many rounds in the ultimatum game, players learn to split the money more or less equally. But Dr Burnham was interested in a game of only one round. In this game, which the players knew in advance was final and could thus not affect future outcomes, proposers could choose only between offering the other player $25 (ie, more than half the total) or $5. Responders could accept or reject the offer as usual. Those results recorded, Dr Burnham took saliva samples from all the students and compared the testosterone levels assessed from those samples with decisions made in the one-round game.
As he describes in the Proceedings of the Royal Society, the responders who rejected a low final offer had an average testosterone level more than 50% higher than the average of those who accepted. Five of the seven men with the highest testosterone levels in the study rejected a $5 ultimate offer but only one of the 19 others made the same decision.
What Dr Burnham's result supports is a much deeper rejection of the tenets of classical economics than one based on a slight mis-evolution of negotiating skills. It backs the idea that what people really strive for is relative rather than absolute prosperity. They would rather accept less themselves than see a rival get ahead. That is likely to be particularly true in individuals with high testosterone levels, since that hormone is correlated with social dominance in many species.
Economists often refer to this sort of behaviour as irrational. In fact, it is not. It is simply, as it were, differently rational. The things that money can buy are merely means to an end—social status—that brings desirable reproductive opportunities. If another route brings that status more directly, money is irrelevant
Expansion Plans Lead to Gains for Australian Mining Shares
Posted by Dan Denning on Jul 12th, 2007
You may wish to visit ==> www.dailyreckoning.com.au
The list of factors contributing to share price gains in BHP (ASX:BHP) and Rio Tinto (ASX:RIO) keeps getting longer. Earlier this week we mentioned the possibility of a 25% gain in iron ore prices next year. In today’s Australian, Scott Murdoch reckons a 25% gain in iron ore prices would deliver a 10% boost to BHP’s earnings and a boost of 25% to Rio.
The government is keen to get its share. Based on the current corporate tax rate, the Australian Treasury would book AU$480 million in iron-ore relates tax revenues on a 10% gain in ore prices, and a tidy AU$1.2 billion on a 25% increase. That could come in handy in an election year, no?
Earnings increases driven by rising commodity prices are drawing the attention of the world’s pirate equiteers, according to a report published yesterday by Ernst and Young. “Cashed-up private equity raiders could soon add resource giants like BHP Billiton Ltd and Rio Tinto Ltd to their shopping lists, with widespread belief in the longevity of the commodities boom,” reports Financialnews.com
“According to a report by Ernst & Young’s Global Mining & Metals Centre, the traditional barriers to investment in the mining sector by private equity are changing. Ernst & Young Global Mining & Metals Sector leader Mike Elliott said private equity had historically taken little interest in the sector because of its cyclical nature, a perceived need for specialist knowledge and possible lack of exit options.”
This is part of the “revaluation” argument which explains the recent surge in BHP’s share price. It’s a belief that the third phase of global industrialisation is much stronger and long-lived than the first two. “With the demand from China and India to secure resources and the constraints on supply globally, it is generally agreed that mining is now in a new super cycle that is generating higher and more predictable cash flows” Elliott said.
Uh oh. Whenever something is “generally agreed” upon, it’s time to get nervous. Are the big Aussie miners fully, or even over-valued at today’s prices?
Not quite yet. One reason the shares are being re-valued is that the miners have big expansion plans in places where huge mineral ore bodies are already known to exist. Consider just one of BHP’s projects, the AU$6 billion expansion of its prized asset, Olympic Dam in South Australia.
Last year the asset produced AU$634 million in earnings. The new plan - which requires a new airport, a desalination plant, a new railway, and a town of 5,000 construction workers - would expand copper production to 500,000 tonnes per year and triple uranium production to 15,000 tonnes per year. It would also include a new ore processing facility with four times the capacity of the current facility.
Marius Kloppers is ambitious.
But is he over-reaching, betting on commodity prices staying higher, or declining at a slower rate, than previous cycles? Olympic Dam is home to 30% of the world’s known recoverable uranium reserves. BHP is so bullish on uranium’s future as fuel for the world’s nuclear plants that it’s reassessing its uranium assets in Western Australia, even though the current state government under Alan Carpenter supports the existing ban on new uranium mines.
The area where BHP has begun reassessing its assets is Yeelirrie, 500km north of Kalgoorlie, according to Nigel Wilson in today’s Australian. The company reckons the site contains 55,000 tonnes of uranium oxide. Rio’s on board too, exploring the prospects at its 36,000 tonne U308 deposit at Kintyre. No wonder the pirates are interested. Look for the share prices to keep on keepin’ on.
The Daily Reckoning Australia
"The only thing that overcomes hard luck is hard work"
Harry Golden ( US journalist )
Brian Wesbury is the number one inflation hawk
US Retail Sales decline 0.9% in June
Brian Wesbury / First Trust Advisors(USA)
June retail sales declined 0.9% and were down 0.4% excluding autos, both worse than consensus expectations. Retail sales are up 3.8% versus last year, 4.2% excluding autos.
The largest dollar drop in June sales was in autos, which fell $2.3 billion. Other declines included building materials (down $690 million), furniture-electronics-appliances (down $435 million), and gas stations (down $417 million). Stronger components of sales included internet-mail order (up $299 million), health and personal care stores (up $229 million), and general merchandise stores (up $131 million).
Excluding autos, building materials, and gas, sales were unchanged in June and are up 5.2% versus a year ago.
Implications: The 0.9% drop in June overall retail sales is not as bad as it looks. Most of the decline was due to auto sales which are volatile from month to month and which are subject to large revisions. Retail sales excluding autos and building materials are a direct feed into GDP data (auto sales data come from another source and building materials are counted as investment) and these sales fell only 0.1%. Excluding gas from this metric (gas sales are usually driven by inflation) shows retail sales were unchanged and up at a 3.5% annual rate the past three months. Given this data, real consumption (including services) should grow at about a 1.3% annual rate in the second quarter and real GDP – bolstered by stronger inventory and trade figures – appears set to grow at a 3.5% annual rate in Q2. In other news this morning, import prices were reported up 1% for June, versus a consensus expected 0.7%, and prices were revised upward for May. In the past four months, import prices are up at a 16.3% annual rate. Ex-petroleum, import prices were up 0.2% in June and up at a 3.7% annual rate the past four months. Export prices were up 0.3% (0.1% ex-agriculture). We believe growth remains robust despite today’s data and inflation is the primary economic concern.
Today ASF has 9,941 members
Soon it will reach the fabulous 10,000 mark
Congratulations to Joe Blow and his Wonder Team
Must read on US inflation
U.S. Trade Deficit With China Signals ‘Buy Gold’
Posted by David Galland on Jul 25th, 2007
A quick chat about trade deficits seems timely. Starting with the notion that they are inflationary, right?
Well, technically, they don’t have to be. That’s because, in the absence of government intervention, all a trade deficit should mean is that the people of one country are willing to trade their money for something on offer by the people of another country.
In the 1800s, the U.S. ran big deficits and did quite well because our country was full of opportunity and promise, so foreigners invested here, more than we invested there.
The problem comes when a government, say China, steps into the picture and deliberately suppresses its currency to attract businesses to certain sectors of its economy - for instance, city dwellers. That causes an aberration, the result being a lot of U.S. dollars shipping out to China in exchange for all manner of consumer goods… dollars that the Chinese have then turned around and invested in U.S. Treasuries. More on that momentarily.
The massive deficits with China are unstable because, rather than being the result of open trade, they are based largely on political decisions made by a handful of people in the Chinese government.
In time, those people - or their successors - may decide that there is more advantage to spending the dollars. Or they will be forced to do it. Say, to appease other segments of the economy now penalized by the higher cost of foreign goods. Or they might have to spend the dollars to pay the cost of a war or to bail the country out of a financial crisis.
Regardless of the reason, at some point the political advantage of spending those dollars, rather than hoarding them - which the Japanese did to their detriment in recent decades - will reach a tipping point after which those greenbacks will come flooding back to the market, devastating the value of the dollar on foreign exchange markets.
The dollar has already, since 2002, lost about 26% of its value. Of course, a good deal of the pain that depreciation has caused to the wallets of foreigners has been offset by the interest they earned on their Treasuries. But treading water is one thing, and standing by while your pile of cash starts to go up in the flames of a monetary crisis is another.
Viewed from another angle, over time it isn’t the trade deficit that is inflationary. Rather, the trade deficit is effectively a subsidy provided to the U.S. by China… a subsidy that comes from the Chinese having used the river of dollars provided by U.S. consumers to buy the unbacked paper of the U.S. government. That has allowed U.S. interest rates to remain artificially low and forestalled inflation in the U.S. It is as if China is building up a big bank of inflation points. Sooner or later, they are going to spend those inflation points.
Make no mistake, we are in uncharted water; it is unprecedented that the claims represented by the fiat currency of one government - that of the U.S. - have been accumulated in such massive quantities for the reserves of other governments. And we’re not just talking China but virtually the world. And the world is getting nervous.
To quote Thai Finance Minister Chalongphob Sussangkarn in his recent address to the annual meeting of the Asian Development Bank in Kyoto:
“Should the financial markets lose confidence in the U.S. dollar, huge capital outflows from the U.S. could lead to a rapid depreciation of the U.S. dollar, and thus dramatic appreciation of other currencies.”
The whole matter of trade deficits is, unfortunately for investors not paying attention, just one of far too many aerosol cans now roasting in the fire. When they start exploding, you’ll want to be safely hiding behind a wall of gold and silver.
In the final analysis, every day gold goes up and gold goes down, with the movements based on any number of inputs. To avoid being panicked one way or the other, a long-term perspective is required to see these fluctuations in their proper perspective. And, despite all the jagged fits and starts these past few years, and all the nay saying along the way, three years ago, gold was trading for $393 an ounce… 40% lower than it is today.
And the better gold shares have offered exponentially higher returns than that.
While now is the time to begin accumulating your gold and gold share positions - if you have not already started doing so - how will you know when things are about to get really “interesting”? My partner Doug Casey recently made the observation that it is not when the trade deficit is rising that you should be concerned, but when it starts to contract… because that is a sign that the flood of greenbacks is starting to return home.
for The Daily Reckoning Australia
Quote of the Day: "the stunning failure of responsibility"
Wednesday, August 01, 2007
From the author [J. H. Kunstler] of "The Long Emergency", comes this just about perfect summation as to the present situation:
"Last week's stock market meltdown suggested that a financial sector rigged for the falsification of reality eventually enters a danger zone where reality implacably reasserts itself, expectations dissolve, and all that remains is the sour odor of fraud.
This long episode of market mania, running for seven years, was based on the idea that non-performing loans could be turned into money by removing them from their point of origin and dressing them up in respectable clothes -- like taking all the winos in downtown Los Angeles, putting them in Prada suits, and passing them off as the faculty of the Harvard Business School. It was a transparently ludicrous racket and the wonder is that America proved to be so utterly bereft of regulating authority -- not to mention plain decency and self-restraint -- at every stage.
It's really hard to account for the stunning failure of responsibility. What you had was a whole industry that surrendered the standards and norms that brought it into being and enabled it to function in the first place. Mortgage lenders stopped requiring house-buyers to qualify for loans; bankers stopped caring what stood behind the paper they issued; dubious loans were bundled and resold like barrels of rotten anchovies -- in such numbers that no individual stinking minnow would stand out -- and the barrels were traded up the line, leveraged, hedged, fudged, fobbed, and fiddled until, abracadabra, they were transformed into so many Tribeca lofts, Hampton villas, Piaget wristwatches, million-dollar birthday parties, and Gulfstream jets.
It worked for the Goldman Sachs bonus babies, and the private equity scammers, and for the corporate CEOs and their board members, and for the politicians who parlayed their votes into cushy lobbying jobs, and even for the miserable quants in the federal government's termite mounds of statistical reportage. It even worked for about 18 months for millions of feckless US citizens gulled into contracts for houses they could never hope to pay for, under arrantly false and ruinous terms . . ."
Source: James Howard Kunstler / USA