Asians Gird for Bubble Threat, Criticize Fed Move

Bloomberg
Asians Gird for Bubble Threat, Criticize Fed Move
November 04, 2010, 6:08 AM EDT

By Michael Heath

(Updates with comments from Malaysia central bank starting in second paragraph.)

Nov. 4 (Bloomberg) -- Asia-Pacific officials are preparing for stronger currencies and asset-price inflation as they blamed the U.S. Federal Reserve’s expanded monetary stimulus for threatening to escalate an inflow of capital into the region.

Chinese central bank adviser Xia Bin said Fed quantitative easing is “uncontrolled” money printing, and Japan’s Prime Minister Naoto Kan cited the U.S. pursuing a “weak-dollar policy.” The Hong Kong Monetary Authority warned the city’s property prices could surge and Malaysia’s central bank chief said nations are prepared to act jointly on capital flows.

“Extra liquidity due to quantitative easing will spill into Asian markets,” said Patrick Bennett, a Hong Kong-based strategist at Standard Bank Group Ltd. “It will put increased pressure on all currencies to appreciate, the yuan in particular has been appreciating at a slower rate than others.”

The International Monetary Fund last month urged Asia- Pacific nations to withdraw policy stimulus to head off asset- price pressures, as their world-leading economies draw capital because of low interest rates in the U.S. and other advanced countries. Today’s reactions of regional policy makers reflect the international ramifications of the Fed’s decision yesterday to inject $600 billion into the U.S. economy.

Stocks Climb

Most Asian currencies rose against the dollar after the Fed’s move, led by a 0.5 percent climb in the Taiwanese dollar and 0.2 percent gain in the South Korean won. New Zealand’s currency reached a 29-month high, and Australia’s dollar touched its strongest level since 1982. The MSCI Asia Pacific index of stocks advanced to the highest level since July 2008.

People’s Bank of China adviser Xia said U.S. policy makers have a conflict between making policy for the domestic economy and accepting responsibilities that come with being the issuer of the international reserve currency, writing in the Finance News newspaper today.

China should counter the U.S. through regional currency alliances, speeding international use of the yuan and seeking stability in exchange rates through the Group of 20, which holds a summit next week, Xia later told reporters in Beijing.

China Policy

“We may need to moderately tighten monetary policy and should tighten controls on banks’ lending,” He Fan, an economist at the Chinese Academy of Social Sciences, said in an interview in Beijing. “We are worried about asset bubbles in China and the Fed’s new quantitative easing measures will add to the pressure on prices.”

China raised interest rates for the first time since 2007 last month, and has limited the yuan to less than a 2 percent gain versus the dollar since June.

Asian currencies have climbed against the dollar this year as the region’s growth outpaces the rest of the world. Regional central banks from China to India and Australia have raised interest rates to curb inflation pressure, while countries including South Korea and Indonesia have adopted measures to slow the flow of speculative money.

“Our country will actively consider implementing capital control measures to improve the macro-economy,” Kim Ik Joo, a director general of South Korea’s finance ministry, said in a telephone interview today. “Now that the U.S. has announced its plans on quantitative easing, don’t you think there will be an influx of capital going into emerging markets?”

Goldman’s Call

Goldman Sachs Group Inc. this week raised its 12-month target for Hong Kong’s Hang Seng Index of equities, saying the city has the most to gain from extra liquidity released by quantitative easing programs and China’s growth.

The Fed’s move will “definitely add pressure to the asset markets in emerging-market economies,” HKMA chief Norman Chan said at a press briefing in Hong Kong today. The HKMA will “take measures that are specific to the housing market if necessary.”

In contrast, the Philippines central bank said global financial markets will be calmer and the decline of the U.S. dollar will ease after the Fed purchase plan came “in line” with forecasts. Funds may continue to flow to emerging markets because of low U.S. yields, Bangko Sentral ng Pilipinas Governor Amando Tetangco said in a mobile phone text message.

Thai Finance Minister Korn Chatikavanij said central banks in the region are in touch and if needed may act jointly against currency speculators, speaking to reporters in Bangkok. Bank Negara Malaysia Governor Zeti Akhtar Aziz said in an e-mailed statement that “central banks in the region also have sufficient range of instruments to manage this challenge and are willing to act collectively if the need arises to ensure stability.”

Currency Pool

The Association of Southeast Asian Nations, together with Japan, China, and South Korea, last year signed an agreement to create a $120 billion foreign-currency reserve pool. Member nations are able to tap the pool, set up in a framework of bilateral currency swaps, in times of turmoil to defend their exchange rates.

Sri Lanka aims to keep rupee gains “controlled” as the Fed’s action generates an “enormous” amount of credit, the nation’s central bank Governor Ajith Nivard Cabraal said in an interview during an Asian Development Bank forum in Manila today.

Currency policies by Asian central banks have differed in recent months. While Thailand, Japan and South Korea have taken steps to cool an appreciation in their currencies that is threatening exports, Singapore has signaled it will allow faster exchange-rate gains.

‘Two Giants’

New Zealand Finance Minister Bill English said that U.S. and Chinese policies are causing his nation’s currency to soar, endangering export competitiveness.

“We’re caught between the policies of the two giants, both of which puts some pressure on us, with the U.S. depreciating their currency and China not allowing theirs to appreciate as much as would suit us,” English said in a Bloomberg Television interview in Tokyo.

Meantime in Japan, whose currency has risen to the highest level in 15 years versus the dollar, Prime Minister Kan said at parliament today that the strong-yen trend is partly related to “the U.S.’s weak-dollar policy, which prompted the rise of the currencies of many emerging nations.”

U.S. dollar policy is set by the Treasury Department, and Secretary Timothy F. Geithner last month reiterated the long- standing American stance that his nation supports “a strong dollar.”

--With assistance from Belinda Cao and Eva Woo in Beijing, Frances Yoon in Seoul, Tracy Withers in Wellington, Max Estayo in Manila, Suttinee Yuvejwattana in Bangkok, Takashi Hirokawa and Sachiko Sakamaki in Tokyo and Sonja Cheung, Marco Lui and Stephanie Tong in Hong Kong. Editors: Chris Anstey, Lily Nonomiya


http://www.businessweek.com/news/2010-11-04/asians-gird-for-bubble-threat-criticize-fed-move.html

Pimco likens US to 'Ponzi' scheme: Quantitative Easing in the trillions is not a bondholder's friend; it is in fact inflationary.

US authorities are operating a "brazen" Ponzi scheme in government debt by buying trillions of dollars of bonds to stimulate the economy, according to Bill Gross, managing director of Pimco, the world's biggest bond house.

By Philip Aldrick, Economics Editor
Published: 8:14PM BST 27 Oct 2010

74 Comments

Mr Gross said more QE is a huge gamble, but necessary because the US is "in a 'liquidity trap'

In a bid to restart the stalling recovery, the US Federal Reserve is next week expected to unveil a second round of quantitative easing (QE) of as much as $500bn, on top of the $1.2 trillion already completed.

In typically robust comments, Mr Gross said the Fed had run out of other options but warned that more QE would in the long-term mean "picking the creditor's pocket via inflation and negative real interest rates".

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"[Cheque] writing in the trillions is not a bondholder's friend; it is in fact inflationary, and, if truth be told, somewhat of a Ponzi scheme," he wrote on his investment outlook, arguing that creditors have always expected to be paid out of future growth.

"Now, with growth in doubt, it seems the Fed has taken Ponzi one step further," he said. "The Fed has joined the party itself. Has there ever been a Ponzi scheme so brazen? There has not."

More QE is a huge gamble, he said, but necessary because the US is "in a 'liquidity trap', where interest rates or QE may not stimulate borrowing or lending because consumer demand is just not there."

Mr Gross is best-known in the UK for saying gilts were "resting on a bed of nitroglycerine" as a result of the nation's high debt levels. Pimco has since reversed its position on the UK and advised clients to gamble on a British recovery.

http://www.telegraph.co.uk/finance/economics/8090902/Pimco-likens-US-to-Ponzi-scheme.html

In Bond Frenzy, Investors Bet on Inflation

October 25, 2010

In Bond Frenzy, Investors Bet on Inflation

By CHRISTINE HAUSER

At a time when savers complain that they are earning almost no interest from their bank accounts, some investors on Monday bought United States government bonds that effectively had a negative rate of return.

Bizarre as it sounds, that is correct. In an auction of a special kind of five-year Treasury bond, investors paid $105.50 for every $100 of bonds the government sold — agreeing to pay the government for the privilege of lending it money.

The reason is that these types of bonds offer a guaranteed protection against inflation. So, if inflation soars — as some economists worry might happen, with the government seeking to give the economy a boost by flooding it with money — the value of the bonds would go up accordingly.

The investors who took part in the $10 billion auction are betting that inflation, now at about 1 percent annually, will rise to a level that more than compensates for the premium they paid.

The unusual auction on Monday “reflects a condition in the Treasury market that has been in place for months, chiefly that yields on shorter maturities have moved below the inflation rate,” Anthony Crescenzi, a senior vice president at the bond giant Pimco, wrote in a research note.

Guy LeBas, the chief fixed-income strategist for Janney Montgomery Scott, said there were about $28 billion worth of bids for the notes. About 40 percent were foreign buyers, 57 percent dealers and the rest were possibly retail investors, he said. The prediction is for a 1.58 percent rate of inflation, as measured by the Consumer Price Index.

“It was good demand considering the negative yields,” he said. “They are counting on the Fed to be successful in generating inflation.”

As strange as all this may seem, these investors were actually going along with conventional market wisdom. Many economists are concerned that if the economy continues to stagnate, there is a danger of deflation, or a decline in prices, that would be difficult to reverse.

Most analysts expect that the Federal Reserve, which has already lowered interest rates to near zero and bought Treasury securities in efforts to reinvigorate the economy, is about to pump even more money into the system. Such a move would probably increase the rate of inflation.

Fed officials have hinted at such action in recent appearances. In a speech in Boston on Oct. 15, the Fed chairman, Ben S. Bernanke, said that “there would appear — all else being equal — to be a case for further action.”

The markets interpreted that and other statements as unmistakable signals that the Fed was poised to act at its next meeting, on Nov. 2-3.

Mr. Bernanke couched his argument in terms of the Fed’s mandate to keep prices stable and maximize employment. He said that inflation had been running well below the implicit target of about 2 percent and that unemployment, at 9.6 percent, was too high.

Inflation-protected Treasury securities have already been trading at negative yields on the open market for some time, as professional and institutional investors have sought to hedge their portfolios against the risk of inflation. But Monday was the first time since the government began selling these so-called Treasury Inflation-Protected Securities in the 1990s that new ones were sold at a negative yield.

Buyers “believe we have reached the bottom of the inflation cycle and the next move is higher, not lower,” said Kevin H. Giddis, the executive managing director and president for fixed-income capital markets at Morgan Keegan & Company.

A growing aversion to risk has produced all manner of investment oddities in the last two years. At the height of the financial crisis, for example, the yield on ordinary short-term Treasury bonds turned negative for a brief time as people flocked to safe investments.

Even now, big investors are buying gold at levels unseen in decades, to protect against fluctuations in the value of currencies. Small investors are fleeing the stock market in droves, favoring bonds and even cash over equities. Companies have managed to sell bonds that do not pay off for 50 or even 100 years.

The remarkable auction occurred as stock indexes on Wall Street edged higher, buoyed by recent strong corporate earnings and a month-to-month rise in housing sales.

Sales of previously owned houses increased 10 percent in September from August, to a seasonally adjusted annual rate of 4.53 million units, above forecasts of 4.30 million, but they were still down 19 percent from September 2009. The National Association of Realtors said about a third of the sales last month were related to foreclosures.

On Monday, the Dow Jones industrial average rose 31.49 points, or 0.28 percent, to 11,164.05. The broader Standard & Poor’s 500-stock index gained 2.54 points, or 0.21 percent, to 1,185.62.

The Nasdaq composite index climbed 11.46 points, or 0.46 percent, to 2,490.85.

Bond prices fell, with the yield on the 10-year Treasury rising to 2.56 percent from 2.55 percent late Friday.

As equities advanced, the dollar declined over the weekend after promises by the world’s 20 biggest economies to avoid a currency war.

It was the latest sign that financial markets are positioning for a rise in inflation. Economists point to the fall in the dollar as a sign of budding inflationary pressures. Another is the recent sharp rise in the price of some assets, including commodities like gold.

Graham Bowley and Sewell Chan contributed reporting.

http://www.nytimes.com/2010/10/26/business/26bond.html?ref=business&src=me&pagewanted=print

Why I'm with Warren Buffett on bonds versus equities

Follow the herd or follow Warren Buffett? That sounds like it should be a pretty simple choice for most investors given the average investor's consistent ability to buy and sell at the wrong time and the sage of Omaha's ranking as one of the world's richest men.

 

By Tom Stevenson
Published: 6:15PM BST 09 Oct 2010

18 Comments

Warren Buffett told a conference he couldn't imagine anyone having bonds in their portfolio when they could have equities Photo: GETTY

Curious then that Mr Buffett is doing a passable imitation of Cassandra – she who was cursed so that she could foretell the future but no one would ever believe her.

Here's Buffett, speaking last week to Fortune magazine's Most Powerful Women Summit: "It's quite clear that stocks are cheaper than bonds. I can't imagine anyone having bonds in their portfolio when they can have equities ... but people do because they lack the confidence."

 

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And here's what everyone else is doing. According to Morgan Stanley, the speed of inflows to bond funds is even greater than retail inflows into equity funds at the height of the technology bubble in 2000 – $410bn (£256bn) in the 12 months to April 2010 in the US versus $340bn into equities in the year to September 2000.

Over here, too, investors can't get enough fixed income. According to the Investment Management Association, net sales of global bonds and corporate bonds both exceeded £600m during August. Only absolute return funds were anywhere close to these inflows. The staple British equity fund sector, UK All Companies, saw £291m of redemptions and even the previously popular Asia ex-Japan sector raised a paltry £22m.

So, is this a bubble waiting to burst or a logical investment choice in a deflationary world where interest rates could stay lower for longer as governments adopt more desperate strategies to prevent another slump?

The case for bond prices staying high has received a boost in recent weeks as speculation has grown that the US government is contemplating a second round of quantitative easing. Printing yet more money to buy bonds creates a buyer of last resort and would underpin the price of Treasuries even at today's elevated levels.

Indeed, the talk on Wall Street has turned to a measure the US government has not employed since the Second World War when a target yield for government securities was set with the implied promise that the authorities would buy up whatever they needed to keep the cost of money low.

Ben Bernanke, the Fed chairman, referred to this policy in his famous "Helicopter Ben" speech of 2002 when he reminded financial markets of the US government's ultimate weapon in the fight against deflation – the printing press. It really is no wonder that the price of gold is on a tear.

For a few reasons, however, I'm not convinced that the theoretical possibility that interest rates could go yet lower à la Japan makes a good argument for buying bonds at today's levels.

First, to return to fund flows, extremes of buying have in the past been a very good contrarian indicator of future performance. Equity flows represented around 4pc of total assets in 2000 just as the bubble was bursting. At the same time, there were very significant outflows from bond funds just ahead of a strong bond market rally.

My second reason for caution is illustrated by the chart, which shows how little reward investors are receiving for lending money to the US government (and the UK, German or Japanese governments for that matter). Accepting this kind of yield makes sense only if you believe the US economy is fatally wounded and that the dragon of inflation has been slain. I don't believe in either thesis.

History shows very clearly that investing in bonds when the starting yield is this low has resulted in well-below-average returns if and when rates start to rise. Between 1941 and 1981, when interest rates last rose for an extended period, the total return from bonds was two and a half times lower when the starting point was a yield of under 3pc than when it started above this level. Investing when yields are low stacks the odds against you.

My final reason for caution is that there is no need to put all your eggs in the bond basket. Around a quarter of FTSE 100 shares are yielding more than 4pc while the income from gilts is less than 3pc. More income and the potential for it to rise over time too. I'm with Warren on this one.

tomrstevenson@fil.com

Tom Stevenson is an investment director at Fidelity Investment Managers. The views expressed are his own.

http://www.telegraph.co.uk/finance/comment/tom-stevenson/8052896/Why-Im-with-Warren-Buffett-on-bonds-versus-equities.html

Dollar plummets on report Fed plans to pump $500bn more into economy

US stock markets recovered on Wednesday as the dollar fell across the board amid further signs the Federal Reserve will increase economic stimulus over the next six months.

Published: 10:44PM BST 20 Oct 2010
4 Comments

The dollar fell across the board on Wednesday amid signs the Federal Reserve will pump $500billion into the economy over the next six months. Photo: Getty Images
 

The Fed’s Beige Book survey on regional business on Wednesday said the US economy expanded at a “modest pace” with little sign of acceleration last month, fueling speculation that central bankers could take further measures to support growth.

Jack Ablin, chief investment officer at Chicago-based Harris Private Bank told Bloomberg: “The Beige Book reiterates the call for quantitative easing. The economy is growing, just not accelerating. It remains to be seen what ultimately the Fed buying of bonds will do.”

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A report by consulting firm Medley Global Advisors suggested the Fed could start introducing the stimulus as soon as next month, spending $100bn a month on bond purchases. It is understood the Fed has an open-ended commitment to do more over the next 18 months. 

The dollar plummeted to its lowest level against the euro since July, and a 15-year low against the yen. The euro was up 1.06pc at $1.395 and the dollar ended at 81.05 yen. 

Camilla Sutton, Scotia Capital currency strategist, told Reuters: “We think the dollar will end the year weaker, but for now, we're probably going to be in a period of more subdued trading until we get a firmer idea of where policymakers are headed.” 

Meanwhile stocks and commodities recovered after China’s surprise interest rate hike on Tuesday. The Dow Jones industrial average was up 129.35 points, or 1.18pc, at 11,107.97. The Standard and Poor’s 500 Index was up 11.78 points, or 1.05pc, at 1,178.17, with more than 20 companies scheduled to report third-quarter earnings today. The Nasdaq Composite Index was up 20.44 points, or 0.84pc, at 2,457.39. 

Key companies driving the market change included Boeing, whose shares rose 3.35pc after posting a quarterly profit that beat Wall Street’s expectations. Delta Air Lines and US Airways Group also surged after reporting strong profits. 

Web portal Yahoo! rallied 2pc after announcing late on Tuesday that third-quarter net income had more than doubled to $396.1m, or 29 cents a share. 

Wells Fargo, the largest US home lender, climbed 4.28pc after saying it was “eager” to return cash to shareholders following a record quarterly profit. 

Lawrence Creatura, a New York-based fund manager at Federated Investors Inc, told Bloomberg: “We’ve had a variety of company earnings reports which indicate that the sky is not falling. Yesterday was a dark day for the market because of macro factors. Today it will be company management teams’ turn to lead the way again.”

http://www.telegraph.co.uk/finance/markets/8077090/Dollar-plummets-on-report-Fed-plans-to-pump-500bn-more-into-economy.html

RBS tells clients to prepare for 'monster' money-printing by the Federal Reserve

As recovery starts to stall in the US and Europe with echoes of mid-1931, bond experts are once again dusting off a speech by Ben Bernanke given eight years ago as a freshman governor at the Federal Reserve.

 

By Ambrose Evans-Pritchard, International Business Editor
Published: 5:11PM BST 27 Jun 2010

115 Comments

Entitled "Deflation: Making Sure It Doesn’t Happen Here", it is a warfare manual for defeating economic slumps by use of extreme monetary stimulus once interest rates have dropped to zero, and implicitly once governments have spent themselves to near bankruptcy.

The speech is best known for its irreverent one-liner: "The US government has a technology, called a printing press, that allows it to produce as many US dollars as it wishes at essentially no cost."

 

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Bernanke began putting the script into action after the credit system seized up in 2008, purchasing $1.75 trillion of Treasuries, mortgage securities, and agency bonds to shore up the US credit system. He stopped far short of the $5 trillion balance sheet quietly pencilled in by the Fed Board as the upper limit for quantitative easing (QE).

Investors basking in Wall Street's V-shaped rally had assumed that this bizarre episode was over. So did the Fed, which has been shutting liquidity spigots one by one. But the latest batch of data is disturbing.

The ECRI leading indicator produced by the Economic Cycle Research Institute plummeted yet again last week to -6.9, pointing to contraction in the US by the end of the year. It is dropping faster that at any time in the post-War era.

The latest data from the CPB Netherlands Bureau shows that world trade slid 1.7pc in May, with the biggest fall in Asia. The Baltic Dry Index measuring freight rates on bulk goods has dropped 40pc in a month. This is a volatile index that can be distorted by the supply of new ships, but those who watch it as an early warning signal for China and commodities are nervous.

Andrew Roberts, credit chief at RBS, is advising clients to read the Bernanke text very closely because the Fed is soon going to have to the pull the lever on "monster" quantitative easing (QE)".

"We cannot stress enough how strongly we believe that a cliff-edge may be around the corner, for the global banking system (particularly in Europe) and for the global economy. Think the unthinkable," he said in a note to investors.

Roberts said the Fed will shift tack, resorting to the 1940s strategy of capping bond yields around 2pc by force majeure said this is the option "which I personally prefer".

A recent paper by the San Francisco Fed argues that interest rates should now be minus 5pc under the bank's "rule of thumb" measure of capacity use and unemployment. The rate is currently minus 2pc when QE is factored in. You could conclude, very crudely, that the Fed must therefore buy another $2 trillion of bonds, and even more if Europe's EMU debacle goes from bad to worse. I suspect that this hints at the Bernanke view, but it is anathema to hardliners at the Kansas, Richmond, Philadephia, and Dallas Feds.

Societe Generale's uber-bear Albert Edwards said the Fed and other central banks will be forced to print more money whatever they now say, given the "stinking fiscal mess" across the developed world. "The response to the coming deflationary maelstrom will be additional money printing that will make the recent QE seem insignificant," he said.

Despite the apparent rift with Europe, the US is arguably tightening fiscal policy just as hard. Congress has cut off benefits for those unemployed beyond six months, leaving 1.3m without support. California has to slash $19bn in spending this year, as much as Greece, Portugal, Ireland, Hungary, and Romania combined. The states together must cut $112bn to comply with state laws.

The Congressional Budget Office said federal stimulus from the Obama package peaked in the first quarter. The effect will turn sharply negative by next year as tax rises automatically kick in, a net swing of 4pc of GDP. This is happening as the US housing market tips into a double-dip. New homes sales crashed 33pc to a record low of 300,000 in May after subsidies expired.

It is sobering that zero rates, QE a l'outrance, and an $800bn fiscal blitz should should have delivered so little. Just as it is sobering that Club Med bond purchases by the European Central Bank and the creation of the EU's €750bn rescue "shield" have failed to stabilize Europe's debt markets. Greek default contracts reached an all-time high of 1,125 on Friday even though the €110bn EU-IMF rescue is up and running. Are investors questioning EU solvency itself, or making a judgment on German willingness to back pledges with real money?

Clearly we are nearing the end of the "Phoney War", that phase of the global crisis when it seemed as if governments could conjure away the Great Debt. The trauma has merely been displaced from banks, auto makers, and homeowners onto the taxpayer, lifting public debt in the OECD bloc from 70pc of GDP to 100pc by next year. As the Bank for International Settlements warns, sovereign debt crises are nearing "boiling point" in half the world economy.

Fiscal largesse had its place last year. It arrested the downward spiral at a crucial moment, but that moment has passed. There is a time to love and a time to hate, a time for war and a time for peace. The Krugman doctrine of perma-deficits is ruinous - and has in fact ruined Japan. The only plausible escape route for the West is a decade of fiscal austerity offset by helicopter drops of printed money, for as long as it takes.

Some say that the Fed's QE policies have failed. I profoundly disagree. The US property market - and therefore the banks - would have imploded if the Fed had not pulled down mortgage rates so aggressively, but you can never prove a counter-factual.

The case for fresh QE is not to inflate away the debt or default on Chinese creditors by stealth devaluation. It is to prevent deflation.

Bernanke warned in that speech eight years ago that "sustained deflation can be highly destructive to a modern economy" because it leads to slow death from a rising real burden of debt.

At the time, the broad money supply war growing at 6pc and the Dallas Fed's `trimmed mean' index of core inflation was 2.2pc.

We are much nearer the tipping today. The M3 money supply has contracted by 5.5pc over the last year, and the pace is accelerating: the 'trimmed mean' index is now 0.6pc on a six-month basis, the lowest ever. America is one twist shy of a debt-deflation trap.

There is no doubt that the Fed has the tools to stop this. "Sufficient injections of money will ultimately always reverse a deflation," said Bernanke. The question is whether he can muster support for such action in the face of massive popular disgust, a Republican Fronde in Congress, and resistance from the liquidationsists at the Kansas, Philadelphia, and Richmond Feds. If he cannot, we are in grave trouble.

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/7857595/RBS-tells-clients-to-prepare-for-monster-money-printing-by-the-Federal-Reserve.html

Fed to Blame for Gold Surge, Currency Woes: Ron Pau

Fed to Blame for Gold Surge, Currency Woes: Ron Paul


The Associated Press
| 17 May 2010 | 10:07 AM ET

The Federal Reserve's practice of indiscriminately printing money is the chief culprit that has led to the surge in gold and demise of the euro, Rep. Ron Paul (R-Texas) told CNBC Monday.

As gold hits a succession of all-time highs and the euro struggles for mere survival, Paul said debt overloads at the base of the recent currency trends can be traced directly to the US central bank.

"The Federal Reserve behind the scenes has the power to create money out of thin air. It's very bizarre," Paul said. "They can bail out their friends and let the people they don't like fail, and create a trillion dollars or more out of thin air in order to prop up some companies at the expense of others ... It's absolutely bizarre and, yes, the American people right now I think are waking up to it."

Paul linked the disruptions to the departure in 1971 from the old Bretton Woods global currency system. He said he has been anticipating the surge in gold as confidence in currency wanes, and after the Bretton Woods collapse.

"This is the unwinding of a system," he said. "Until we replace it with something else you're going to continue to see this."

But Paul predicted that the system will be changed as more and more people begin to see its fundamental flaws.

"The gold surge recently has people discovering they're really printing money," Paul said. "They're just kidding themselves and kidding the American people that the Fed can keep doing what they're doing, because the economic laws will bring this to an end and probably in the not-too-distant future."


URL: http://www.cnbc.com/id/37189251/

An anaemic recovery should be welcomed, not feared.

Bill Mott: 'An anaemic recovery should be welcomed, not feared'

Fundamentalist view: our series in which an expert at making money grow analyses the financial world and gives his advice to savers and investors.

By Bill Mott
Published: 12:05PM GMT 26 Nov 2009


Bill Mott: 'This autumn 2009 rally cannot continue much longer' Any fans of late Fifties and early Sixties American music will know the Drifters song Save the Last Dance for Me. The plaintive boyfriend tells his girlfriend that she can enjoy the party without any cares, but ultimately her price for this enjoyment is to ''save the last dance for him''.

As a fund manager, I am watching the party become increasingly boisterous as market momentum powers ahead. I would like to be well on my way home with my portfolio positioned away from areas of excess optimism before the last dance is played. Looking at the British economy, it seems there are three possible scenarios from here.

Scenario one is a long period of anaemic growth during which the economy gradually rebalances, avoiding "Armageddon'', but does not rally very strongly. I believe this outcome has a 75pc probability.

Scenario two is a ''double dip'' – or W-shaped – recovery in which the market and the economy experience a further downturn as recovery fails to take hold, and has a 15pc chance.

Scenario three is a V-shaped recovery, namely a continuation of the current near-euphoric, liquidity-driven rally and has a 10pc probability of occurring.

As it became clear, at the end of last year and during the first quarter of 2009, that Britain and the global economy were on the brink of meltdown, authorities worldwide began co-ordinated action to stabilise the economy. Generally, a ''kitchen sink'' liquidity policy was introduced. In effect, policy-makers were telling us that long-term economic policy was being suspended to tackle immediate economic dangers.

As a result, the current early signs of economic stability or recovery are dependent on the largesse of governments and central banks. Investors have responded aggressively to these government actions, fuelling a robust asset price reflation in all types of asset across the spectrum from equities to commodities to bonds. This rise in asset prices is itself supporting the economic recovery. The Deputy Governor of the Bank of England recently suggested that one of the expected consequences of quantitative easing – printing money to buy back government gilts – was to raise asset prices.

Clearly a rise in asset prices from March 2009 lows was desirable to improve confidence, but when does a ''helpful rise'' in asset prices evolve to the beginning of a new ''asset bubble'' and where are we in this process?

It is our view that the UK market rally has gone too far, too quickly. Many investors, lamenting that the ''train has left the station'' without them, are playing catch-up. The trouble with this approach, as in all bubble situations, is that continuing to buy overvalued assets now requires you to believe that, although the drivers of the market are not sustainable, you will be able to sell before the inflection point at the peak.

This autumn 2009 rally cannot continue much longer, simply because very low interest rates were not the sole cure that helped us recover from the last bust. So while we have avoided globally a Thirties-style Depression, we need to implement a partial exit strategy to avoid another asset bubble and more financial turbulence. Ideally, we must have an anaemic global recovery (Scenario one) so global imbalances can be slowly corrected without too much dislocation. The dilemma is that tightening policy through tax increases and interest rate rises could result in a double-dip recession, but if loose policy continues, with no action taken, then an asset bubble is more likely.

An anaemic recovery should be welcomed, not feared. Monetary policy must not neglect asset-price movements. If premature tightening of policy causes a mild double-dip recession, this would be better than another asset bubble.

We have avoided the very worst and if the price of us all not dying from pneumonia is a blocked nose for a few years, then it will not have been a bad price to pay.

We have positioned the PSigma Income fund as a hybrid between defensive UK equities with limited economic sensitivity and UK equities that we believe can grow faster than average in a ''bracing but not impossible'' global economy. Putting quantitative easing on hold would be a good first step and would signal that the authorities are determined not to let another asset bubble develop.

As any West Ham United football fan will tell you, liquidity-driven bubbles are not forever…

Bill Mott manages the PSigma Income fund.

http://www.telegraph.co.uk/finance/personalfinance/investing/shares/6636435/Bill-Mott-An-anaemic-recovery-should-be-welcomed-not-feared.html

Diary of a Private Investor: 'I'm licking my wounds'

Diary of a Private Investor: 'I'm licking my wounds'
I am going through a bad patch and I am still licking my wounds over the demise of Aero Inventory

By James Bartholomew
Published: 4:36PM GMT 02 Dec 2009

What decides which way stock markets go? Most brokers and pundits focus on things like profits, charts, historical precedents and so on. But I am coming to the view that there is something even more important for short-term movements that is hardly mentioned: the Government. Actually not so much the Government itself, but the Bank of England monetary policy committee.

I submit that the major reason for the rally since March has been the so-called quantitative easing or, in ordinary parlance, printing of cash. The Bank has bought up government bonds and corporate bonds, putting cash into the hands of investors who have then bought other corporate bonds or shares.

The ultra-low interest rates – also decided by the committee – have made it sensible for people like me with Bank Rate-based mortgages to go on borrowing the money and keep it invested, again helping share prices.

So this has been, I suggest, a government-made rally. I am grateful to Tim Congdon of International Monetary Research for helping me see the importance of this early in the year and thus emboldening me to take part in the rise. But this is a point to remember for the future: for the short-term direction of the stock market, see what the Government is doing to the supply of money.

Right now, it is not as positive as previously. The Bank of England is continuing with quantitative easing, but more slowly. This suggests the market might continue to chug along, but is unlikely to make another major surge in the short term.

As for my portfolio, I am going through a bad patch. I am still licking my wounds over the demise of Aero Inventory, which held aircraft parts, in which I had a big stake. Since then, Harvey Nash, a recruitment and outsourcing company, has had disappointing results and the shares have fallen. Telecom Plus has come out with lower half-year figures. I have sold a few shares in both. After the Aero Inventory disaster, I am nervous about big stakes in individual companies.

Meanwhile, my three aggressive plays on recovery are performing badly. Enterprise Inns, a pub group, Tullett Prebon, a broker and Barratt, a house builder, have been through weak patches.

But I am certainly not selling any Barratt. Banks are much more willing to lend than earlier in the year and therefore house prices are likely to continue to rise. The number of mortgage deals available to those offering only a 10pc deposit has doubled since August. Barratt should benefit from stronger house prices.

Incidentally, despite all the technology about – much of it free – I still have not managed to find a website that tracks my portfolio satisfactorily. I use no fewer than four websites to follow my shares. I look at ADVFN, but since I decline to pay for the service, I never know when it is going to log me out. The service is live and in real time and it includes shares in other markets such as Hong Kong, America and so on.

But it has a way of deciding on the share price that I can't fathom. Sometimes it is neither the latest price dealt nor the middle between the buy and sell price. I also use Morningstar, which has the advantage of always showing the mid-price so I know I am comparing like with like, but the prices are a quarter of an hour out of date and not live.

If I want the latest price, I go to Hemscott where I do pay for the company's premium service to get access to brokers' forecasts and details of recent trades. But Hemscott does not show my whole portfolio in real time, which is a disadvantage.

Recently, I have also found the Yahoo portfolio service. This is free and live and it also includes Hong Kong shares. But it does not show the mid-market price and, of course, it does not include detailed broker forecasts. So none of these sites are perfect. I hope I have not been unfair to any of them. If readers know of a better way to follow a portfolio, I would be glad to hear of it.

http://www.telegraph.co.uk/finance/personalfinance/investing/6711000/Diary-of-a-Private-Investor-Im-licking-my-wounds.html

Pound slides again as markets enter Bank of England-fuelled 'bubble' stage

Pound slides again as markets enter Bank of England-fuelled 'bubble' stage


The pound slid closer to parity with the euro on Monday, as one of London's leading hedge fund managers warned stock markets are in a Government-fuelled bubble.



By Edmund Conway and Jamie Dunkley

Published: 6:26AM BST 22 Sep 2009





Pound slides closer to parity with euro as it hits a five-month low against the single currency. Photo: CHRISTOPHER PLEDGER "Markets are now entering a bubble phase [which may last] until the end of the year," said Crispin Odey of Odey Asset Management.



However, the bubble is almost entirely dependent on the Bank of England's quantitative easing (QE) policy, through which it is creating £175bn and pumping it into the system by buying Government debt, he added.



Mr Odey's comments came as the pound fell further against other leading currencies after a report from the Bank warned of the effect of the financial crisis on sterling's long-term value.



Mr Odey told clients in a note: "Individuals and institutions are stampeding into real assets – eager to have anything but cash or government bonds... The latter are expensive because of the QE which has caused that bubble.



"At some point the QE will have to come to an end but, until it does, this bull market is sponsored by HMG and everyone should enjoy it."



FTSE breaks six-day winning streak

Katherine Garrett-Cox, chief executive of Alliance Trust, said: "I think the recent stock market rally has been driven by sentiment rather than fundamental facts.



"In 2008 markets were driven by fear; this year they have been driven by greed.



"I'm sceptical about the market recovery given the fiscal environment we are in. Public spending is falling, consumer spending is down and unemployment will rise."



Although many central banks have taken on a QE policy, the Bank has committed to creating and spending more than any other, arguing that the alternative outcome is severe deflation. However, this is thought to have sparked a gradual exodus from UK investments by overseas asset managers fearful that the policy may generate inflation.



This has pushed the pound lower against most other currencies. The euro hit a five-month high against sterling yesterday before slipping back to 90.58p. Citigroup said yesterday that sterling would drop to parity against the euro in the coming months.



The bank's analyst Michael Hart said: "Tight fiscal policies and easy money is about as negative a policy mix as it is possible to get for the currency and we expect sterling to exceed parity with the euro."

http://www.telegraph.co.uk/finance/economics/6216874/Pound-slides-again-as-markets-enter-Bank-of-England-fuelled-bubble-stage.html

Markets 'in Government-fuelled bubble'.

Markets 'in Government-fuelled bubble', says hedge fund manager Crispin Odey
Stock markets are in a Government-fuelled bubble, one of London's leading hedge fund managers said, as the pound slid closer towards parity with the euro.

By Edmund Conway and Jamie Dunkley
Published: 7:43PM BST 21 Sep 2009


Katherine Garrett-Cox, chief executive of Alliance Trust, said the recent stock market rally has been driven by sentiment "Markets are now entering a bubble phase [which may last] until the end of the year," said Crispin Odey of Odey Asset Management. However, the bubble is almost entirely dependent on the Bank of England's quantitative easing (QE) policy, through which it is creating £175bn and pumping it into the system by buying Government debt, he added.

The warning came as the pound fell further against other leading currencies, and as Citigroup predicted that sterling would drop to parity against the euro.

Mr Odey told clients in a note: "Individuals and institutions are stampeding into real assets – eager to have anything but cash or government bonds... The latter are expensive because of the QE which has caused that bubble.

"At some point the QE will have to come to an end, but until it does this bull market is sponsored by HMG and everyone should enjoy it."

Katherine Garrett-Cox, chief executive of Alliance Trust, said: "I think the recent stock market rally has been driven by sentiment rather than fundamental facts.

"In 2008 markets were driven by fear; this year they have been driven by greed.

"I'm sceptical about the market recovery given the fiscal environment we are in. Public spending is falling, consumer spending is down and unemployment will rise."

Although many central banks have taken on a QE policy, the Bank has committed to creating and spending more than any others, arguing that the alternative outcome is severe deflation. However, this is thought to have sparked a gradual exodus from UK investments by overseas asset managers fearful that the policy may generate inflation. This has pushed the pound lower against most other currencies.

The euro is now worth 90.58p, with economists from Citigroup saying yesterday that sterling would drop to parity against the single currency in the coming months. The bank's analyst Michael Hart said: "Tight fiscal policies and easy money is about as negative a policy mix as it is possible to get for the currency and we expect sterling to exceed parity with the euro."

http://www.telegraph.co.uk/finance/economics/6216138/Markets-in-Government-fuelled-bubble-says-hedge-fund-manager-Crispin-Odey.html