Overseas News | ASXnewbie.com - Part 2

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Category — Overseas News

Lies, Damned Lies and the US Unemployment Data.

Lies, Damned Lies and the US Unemployment Data

Only one letter separates the words ‘paper’ and ‘taper’.

And yet, in the financial world the difference between a P or a T is massive.

After last week’s release of July’s FOMC Meeting Minutes, Wall Street thinks there is no real intention to quit the printing of paper just yet. Paper wins.

Maintaining the same massive dose of adrenalin or slightly reducing the rate is academic. The Great Credit Contraction has damaged the economy’s organs and the stimulants are only masking the deeper problem.

The US Federal Reserve has indicated arbitrary targets of 6.5% unemployment and a 2% annual increase in consumer prices as the signals it wants to see before slowing down the printing presses.

Here is an extract from the FOMC Minutes:

First, almost all participants confirmed that they were broadly comfortable with the characterization of the contingent outlook for asset purchases that was presented in the June post meeting press conference and in the July monetary policy testimony.

Under that outlook, if economic conditions improved broadly as expected, the Committee would moderate the pace of its securities purchases later this year. And if economic conditions continued to develop broadly as anticipated, the Committee would reduce the pace of purchases in measured steps and conclude the purchase program around the middle of 2014. At that point, if the economy evolved along the lines anticipated, the recovery would have gained further momentum.

Basically if (and that’s a big if) the economic outlook as measured by employment and inflationimprove, then the Federal Reserve will taper. [Read more →]

August 27, 2013   Comments Off

US Stocks and the Timeless Wisdom of Izzy Stone.

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I sought in political reporting what Galsworthy in another context had called ‘the significant trifle’ — the bit of dialogue, the overlooked fact, the buried observation which illuminated the realities of the situation.’ — I.F. Stone, The Haunted Fifties (1963)

I start with a hidden problem in the stock market’s latest earnings report card. Overall, earnings rose about 2% for the quarter. But if you take out the financials (banks, insurers), earnings actually fell by 3%.

That’s a problem.

I appeared on Fox TV Friday morning. Before the show, I said I wanted to talk about this earnings stuff. The producer asked, ‘Do you think that’s too technical to explain?

‘I should hope not,’ I thought to myself. I hope people understand that earnings (or profits) drive the stock market over the long term.

Specifically, the market rises and falls based on what the consensus guess is about where earnings are going. The market looks ahead. So you can match up the S&P 500 — a broad proxy for the market — with the consensus guess for earnings in the coming 12 months (the so-called ‘forward estimate’). [Read more →]

August 26, 2013   Comments Off

No Profit in the Federal Reserve Divination.

No Profit in the Federal Reserve Divination

It is beneficial to your health to tune out the noise and clutter that passes for information in the financial markets.

A good example is trying to divine the importance of words uttered by US Federal Reserve Chairman Ben Bernanke. With China showing no signs of a stock-market-boosting stimulus plan, the punters will hang on the lips of the Federal Reserve chairman for clues about ‘tapering’.

But let me ask you this, do you think your investment plan can benefit from trying to guess what Bernanke is going to do next? Is there any advantage to be gained by correctly guessing his internal emotional state? If not, then why bother?

The most important words ever penned by Ben Bernanke with regard to deflation and the effectiveness of quantitative easing to ‘stimulate’ aggregate demand were penned in a paper he published with Vincent Reinhart and Brian Sack in 2004. It’s called Monetary Policy Alternatives at the Zero Bound: An Empirical Assessment.

I encourage you not to read it. It’s absolutely insane. More importantly, in confirms that Bernanke has been reduced to trying to influence investor expectations through communication. This is what happens when you can’t pull the interest rate lever. You have to try talk therapy. The fact that Bernanke et al. dedicate so much of their paper to it is evidence of how deep down the rabbit hole they are in their monetary thinking. But let me show you some specific quotations, with my emphasis added: [Read more →]

August 13, 2013   Comments Off

The Secret to China’s $7 Billion Milk Market.

The Secret to China’s $7 Billion Milk Market

You might think milk is about the least exciting business you could possibly to be in. You couldn’t be more wrong.

The famous bootlegger Al Capone was once asked why he’d entered the milk industry. He replied, ‘We’ve been in the wrong racket right along!’ Al Capone was referring to the profits to be made. But it turns out milk can be as controversial and dangerous as bootlegging too.

The New York Times reports Chinese tourists across the world are reportedly clearing shelves and smuggling milk powder by the suitcase into the Chinese mainland. They can bank 400% returns by selling the stuff on the black market. Some enterprising businessmen travel back and forth to Hong Kong with boxes full of the stuff…

That’s the nicer side of the boom. Behind the scenes, milk is a matter of life and death in China. In 2006, melamine tainted milk killed six Chinese infants and made up to 300,000 severely sick. In 2012, the whistleblower who exposed the levels of contamination was stabbed to death and the local officials tried to frame his wife. But there were too many witnesses.

Quite frankly, milk in China is about as controversial and messy as Al Capone’s ‘other goods’ were back in the day.

You’ll understand just why when you realise what’s at stake. [Read more →]

August 9, 2013   Comments Off

The Misallocated Savings of the Chinese Banking System.

The Misallocated Savings of the Chinese Banking System

Surely, it’s a good thing China is slowly opening up its financial markets to free market forces?

The Chinese money printers have endorsed the idea of cheaper money. At least, the People’s Bank of China (PBOC) has ‘liberalised’ interest rates. Specifically, China’s central bank will now allow lenders to make loans below the benchmark lending rate of 6%.

Well, it would be a good thing if it were true. But we’ll believe it when we see it. Mind you, there are no free markets in money any more. China is not alone in creating an unbalanced banking systembacked by unsound money. But it’s done as good a job as anyone.

The latest example is the construction of a ‘mini-Manhattan’ on the outskirts of China’s northern city of Tianjin. Over 43 high-rise projects are planned in the Binhai New Area Central Business District, according to Angus Grigg in this weekend’s Australian Financial Review. Three 100 storey towers are planned, including a Binhai version of New York’s Rockefeller Centre. The grand plan is for 10 million square metres of office space, or double the amount in Sydney’s CBD.

Before we go rubbishing the project as another example of local government loans financing unproductive real estate development – and showing how this blows bubbles in commodity marketswhich eventually put Australian investors at risk – we should point out that China is not Australia. That might seem obvious. But allow us to explain why it might matter. [Read more →]

August 7, 2013   Comments Off

The Wagon and the China Dragon.

The Wagon and the China Dragon

We get plenty of criticism for banging on about China.

But don’t mistake our China bashing for anything more than concern for the enormity of the problems there and the potential impact on Australia. Because the impact will be huge. It’s just that we’ve had it so good for so long, the Australian commentariat have no imagination when it comes to the potential economic problems we face.

We’re not trying to fear-monger or drop a bucket of faeces on the place. We’re trying to dig deep into the morass created by a credit boom and trying to work out what it means for you.

The rise of China began around 2003. Ultra-low interest rates in the US kick-started the boom. Because China pegged its currency to the US dollar, it effectively imported easy US monetary policy. [Read more →]

July 10, 2013   Comments Off

All Eyes on the US Federal Reserve.

All Eyes on the US Federal Reserve

Emerging markets have felt the effect of monetary tightening emanating from the world’s largest economy and manager of the global reserve currency.

Since peaking in January this year, the Brazilian market is down a whopping 22% and Mexico’s bourse is off 14%. Asia is not far behind. Chinese stocks are down 13.5% from the peak in February, while Thailand (-10.8%), the Philippines (-15.6%), Indonesia (-8.7%) and India (-6.1%) are all down from their highs in May.

Now this might just be a correction and nothing to worry about. After all, interest rates are still incredibly low from a historical point of view. You could just be seeing a pullback following a central bank induced liquidity melt-up earlier in the year.

But given the inherent instability in the system…and the fact that nothing has changed to correct the problems that brought about the first big credit crisis in 2007, we would be inclined to take the recent market action as a warning sign of trouble to come. [Read more →]

July 9, 2013   Comments Off

How Congress and Obama Robbed US Pension Plans with MAP-21.

How Congress and Obama Robbed US Pension Plans with MAP-21

We found yet another reason why the US retirement crisis will be uglier than many retirees are prepared for…

You see, while retirees were napping last year, Congress and President Barack Obama were quietly stealing from their pension plans by enacting a little-known law called MAP-21.

Hidden in the wording of a new transportation bill, the act allows big companies to slash their contributions to pension funds.

The upshot?

The number of companies defaulting on their pension plans could balloon and bankrupt the Pension Benefit Guarantee Corp. (PBGC) insurance program – leaving retirees out in the cold.

That smell of sulfur is what MAP-21 gives off,‘ Jeremy Gold, a pension consultant, told The Fiscal Times. ‘It’s got a smell about it of a deal made with devils.

That’s bad news for retirees – or those about to retire – who are counting on a lifetime of payments from a pension plan.

Here’s why… [Read more →]

July 8, 2013   Comments Off

China’s Growth Story Ends With a Whimper.

China’s Growth Story Ends With a Whimper

The Chinese model of economic growth is flawed. It has wasted resources on an unprecedented scale. Empty cities, excess industrial capacity and sour construction loans litter the country. New lending yields less and less incremental growth. And the very worst construction projects aren’t producing enough cash to service debts.

The Chinese economy, like most others, rests on a shaky foundation of credit. The country has completed the largest building boom in history – a boom dependant on unsustainable growth in the supply of money and credit.

It’s important to understand that there are effectively two governmental factions in China: one that’s interested in power, control and stability and one that’s interested in getting rich no matter the consequences.

With China’s late 2008 surge in bank lending, the second faction’s priorities – construction and industrial activity of all kinds – won out. But ever since inflation heated up, threatening social stability, the first faction grew more concerned about its hold on power.

Because of concerns about social stability, China’s central bank, the People’s Bank of China(PBOC), started tightening liquidity to the official banking system. Such tightening had the potential to spark a panic in real estate and banking a few years ago.

No panic ensued… [Read more →]

June 27, 2013   Comments Off

That Ben Bernanke is One Lucky Guy!

That Ben Bernanke is One Lucky Guy!

Thursday, I picked up my copy of the Wall Street Journal. On the front page was a photo of Federal Reserve Chairman Ben Bernanke, looking professorial. That, and he was smiling. The headline stated, ‘Markets Flinch as Fed Eyes Easy Money End.’

‘Why is that man smiling?’ I thought.

Then, on Friday, the WSJ headline did an about face, ‘Turmoil Exposes Global Risks.’ This refers to the selloff of pretty much everything that would attract a bid.

Well, which is it? ‘Markets Flinch,’ or market ‘Turmoil?’ How does it affect us? And is Ben Bernanke still smiling?

I’m only using the WSJ headlines to illustrate how, despite labels, markets are down hard across a spectrum. Stocks, bonds, gold, silver, energy, other commodities. Down, down, down. All of ‘em. It’s only a question of how far, how fast and where’s the landing point.

The scope of the selloff was vast, to the point of odd. That is, when one or two asset classes sell off, others usually rise while investors flee to so-called ‘safe havens’. It seems people want to go to cash – mostly dollars – and wait.

Of course, we don’t really know what’s coming next from the Federal Reserve. In fact, the Fed hasn’t done anything different versus previous, recent policy. [Read more →]

June 26, 2013   Comments Off