Monday, October 29, 2012
Posted by CSF - at 10:21 AM
Monday, October 22, 2012
Who Owns the US Debt - Part 2?
Posted by CSF - at 9:46 AM
Who Owns the US Debt?
Posted by CSF - at 9:25 AM
Sunday, October 21, 2012
Inflation Expectations are Higher, But Still Under 3%
The article is in italics. From Investing Daily.com:
Rising inflation expectations are great news for stocks and commodity prices, but underlying economic problems remain unresolved and pose risks for investors.
Two other signs that the market is looking for an uptick in inflation are the decline in the value of the US dollar and the sell-off in bond prices (rising yields). The US dollar index—a trade-weighted index of the US dollar against other major currencies—has quickly collapsed from two-year highs in July to new 52-week lows by September (see chart, below).
For example, with the current yield on the US Treasury bond at less than 2 percent, a spike in US inflation to well above the Fed’s current 2 percent target would push the real inflation-adjusted yield on US Treasuries well into negative territory.
To compensate for rising inflation, investors demand higher yields on fixed income products—when a bond’s yield rises, the price of the bond falls.
The spike in the US 10-Year yield—a decline in the price of these bonds—might seem counterintuitive when you consider that the Fed has been easing monetary policy by buying bonds. However, the market is demanding a higher nominal yield because it’s betting that QE Infinity will push up inflation.
The ECB’s pledge to buy up bonds of fiscally troubled EU nations in unlimited quantities to push down yields is also having its desired effect. Italy and Spain—the two countries at the center of the recent crisis—aren’t eligible for support from the ECB because neither country has yet applied for a bailout from the EU. The yield on the 10-year Italian government bond has tumbled from well over 7 percent in late 2011 to below 5 percent more recently (see chart, below).
The risk is that fiscal reforms stall in both countries under popular protest, prompting another spike in yields as the market essentially forces these countries to apply for a bailout and receive support from the ECB’s bond-buying program. Regardless, the recent decline in borrowing costs is a positive for the EU economy, but it’s not a true solution to the underlying debt problems faced by Madrid and Rome.
The Economic News: Still Negative
Rising inflation expectations are pushing up stocks and commodity prices independent of global economic conditions. With the possible exception of US housing data, most of the economic news released over the past few weeks has been negative. I’ve written extensively about initial jobless claims data in this publication over the past few months, because it’s one of the best leading indicators of US economic health. It’s worth repeating that the labor market continues to deteriorate (see chart, below).
Meanwhile, the Empire Manufacturing Survey of General Business Conditions, a survey of manufacturers in New York State, fell to -10.41 in September, its lowest level since early 2009 when the US was still in the midst of the Great Recession (see chart, below). While regional manufacturing surveys can be volatile, this doesn’t bode well for the next national Purchasing Manager’s Index (PMI) release early in October. Additional monetary easing may be pushing up stocks and inflation expectations, but it’s not yet having much of an impact on the labor market or manufacturing sentiment.
However, there are many opposing forces at work that will likely come into focus before the November elections, including the looming fiscal cliff of tax hikes and spending cuts as well as a steady drumbeat of negative economic data. This raises the odds the market will see a significant pullback this autumn.
To play the current market environment, I continue to recommend staying defensive with large capitalization stocks and groups such as consumer staples that do not need a strong economy to post solid earnings results. In addition, the biggest beneficiary of rising inflation expectations is commodities including gold, gold mining stocks and the energy complex.
With interest rates ultra-low and inflation expectations on the rise, investors should largely steer clear of investment grade bonds. A better play for income-oriented investors is to look for stocks that have the potential to raise their dividends significantly; rising dividends provide an offset to rising inflation.
One of my favorite groups remains the Master Limited Partnerships (MLPs) that offer average yields of about 5.75 percent, with some yielding over 10 percent. MLPs also have a long history of growing their payouts and some have exposure to commodity prices, a hedge against inflation.
Posted by CSF - at 4:48 PM
Thursday, October 18, 2012
Fiscal Cliff and Europe - An Interview with Jacob FrenkelThe video below is an interview with Jacob Frenkel on October 18, 2012 concerning the situation in Europe and the "Fiscal cliff" in the US. The reason I have included this video is because of the clarity with which the various issues are discussed. It is my experience that this is how these types of issues are discussed as opposed to the discussions that take place in the popular media:
Posted by CSF - at 10:35 AM
Monday, October 15, 2012
Crosscurrents in the Economic Data
Posted by CSF - at 12:22 PM
Wednesday, October 10, 2012
IMF Cuts Global Growth Estimates
Posted by CSF - at 8:26 AM
Tuesday, October 9, 2012
The "Gang of 8" Work on the Fiscal Cliff
Posted by CSF - at 12:03 PM
Monday, October 8, 2012
Is There Inflation in Our Future?
Posted by CSF - at 6:16 PM
Friday, October 5, 2012
The Best Analysis of Gold Prices, Including a Section on a Gold Standard
Our views are more nuanced and, we believe, provide a balanced framework for assessing value. Our bottom line: given current valuations and central bank policies, we see gold as a compelling inflation hedge and store of value that is potentially superior to fiat currencies.
We see the Fed’s actions in the wake of the financial crisis as a paradigm shift whereby the Fed is attempting to ease financial conditions and encourage risk-taking by increasing inflation expectations. Its policies will likely result in continuous negative real interest rates because nominal rates will be fixed at close to 0% for the foreseeable future.
To be sure, gold isn’t the only asset with the potential to hold its value in inflationary times. For U.S. investors, at least, Treasury Inflation-Protected Securities (TIPS) offer an explicit inflation hedge. What’s more, TIPS tend to be less volatile than gold and, if held to maturity, are guaranteed to receive their principal back – barring a U.S. government default (which we see as incredibly improbable). Still, history shows that gold is highly correlated to inflation and has unique supply and demand characteristics that potentially lead to attractive valuations.
Instead, gold should be thought of as a currency, one which pays no interest. Dollars, euro, yen and other currencies can be deposited to receive interest, and this rate of interest is meant to compensate for the decline in the value of paper currencies via inflation. Gold, in contrast, maintains its real value over time so no interest is necessary.
Today, the forward-looking return on holding U.S. dollars, and most other major currencies, has been artificially lowered by the Fed’s commitment to keep interest rates pegged at near zero for the next few years; real yields on U.S. government bonds are negative out to 20 years. In such a world, we believe the desire and willingness of investors to hold gold relative to other currencies increases dramatically, creating the potential for continued price appreciation.
The real price of gold
The price of gold in real or inflation-adjusted terms is less affected by the rate of inflation and more impacted by the level of real interest rates because as discussed previously, it is the real interest rate that drives the relative attractiveness of holding gold relative to other currencies. With real interest rates negative on average for the next 20 years, it is of little surprise that gold is trading near its all-time inflation-adjusted high.
Not really so pricey
These points lead us to believe that gold valuations are not as stretched as a naïve look at its nominal price might suggest. Central banks globally are seeking to depreciate their currencies in a beggar-thy-neighbor attempt to stimulate their domestic economies (the Swiss National Bank is a prime example). Therefore, we believe investors should consider owning gold, precious metals and other assets that store value as long as central banks continue to print and maintain negative real interest rates.
Posted by CSF - at 7:15 AM