domingo, noviembre 24, 2013



Wall Street's Best Minds


A Caution Flag for Gold


The potential of rising interest rates and stronger economic growth make the metal a questionable investment now, argues a JPMorgan pro.


Despite often being seen as a classic commodity, gold has not provided inflation protection from a statistical standpoint. This may relate to its minimal industrial use and lack of correlation with global economic activity.

Given its historical role in the global monetary system, gold has consistently exhibited a negative correlation to the U.S. dollar, offering protection against losses in purchasing power and suggesting the precious metal can still serve as a global hedge against instability in the fiat currency system.

While U.S. Treasuries are universally accepted as the world's "safe haven" asset, gold has proven to be a valid hedge against extreme tail risks. However, given its inflated price and vulnerability, the potential for higher interest rates and stronger economic growth make gold an expensive form of insurance with limited coverage against future crises.

Despite a "lost decade" for equities in the 2000s, it is worth noting that investors benefited from being invested in one asset class over that time period: gold. While gold's meteoric rise has led to an almost cultish following, it is important for long-term investors to remain cognizant of the facts. Gold does not have a fundamental intrinsic value, and does not provide any cash flow, a right to future earnings or a promise of repayment at a later date. Furthermore, it has little economic use and is not tied to global consumption.

However, given its rarity, gold does have a perceived value and has played an important role in the global monetary system over the last century. Additionally, while short- run catalysts are few, the precious metal is still tied to long run drivers of price appreciation, including limited supply and robust demand from the emerging world.

Below we discuss some of the truths, and half truths, surrounding the value of this precious metal.

Supply & demand: Why gold is not an inflation hedge As is the case in any market, gold prices are determined by supply and demand. Regarding supply, while commodities in general are scarce, gold is the epitome of a rare good, with 39% of annual supply, on average, derived from recycling new and old scrap metal. This inherent rarity has given gold its reputation as a global medium of exchange and notable hedge against fiat currency inflation. Gold production is relatively stable from year to year, differing greatly from money creation. We will touch upon this in greater detail later in the bulletin.

Given that the supply of gold is relatively stable, changes in aggregate demand have a disproportionate effect on the price. The majority of gold consumption is jewelry purchases.
However, given the illiquid nature of jewelry, financial investments (primarily through liquid exchange traded funds) are a core driver of intra-day gold prices, representing 36% of gold demand on average, investors poured into the asset, as a flight to safety, during the recession.

Not surprisingly, as an improving economy has begun to deflate many "safe haven" assets, gold has suffered year-to-date, falling 23%. Nevertheless, with jewelry manufacturing and investors together representing more than 85% of demand, gold prices remain independent of many economic variables, most importantly inflation.

Most inflation hedges are related directly to consumption or industrial use. This makes perfect senseif investors expect the price of final goods to increase, why not invest in either the final goods themselves or the inputs used to produce those goods? However this argument does not hold in the case of gold.

Gold's industrial and technological uses remain very limited, as jewelry represents the majority of demand. Additionally, absent of a pass-through mechanism for prices, gold has shown a limited ability to act as a traditional inflation hedge, with a negative correlation to consumer prices of approximately -34% over the past 30 years.

The world's oldest currency The changing link between gold and inflation stems from the pivotal role it has played in currency valuation during the past century. Until the early 1970s, the U.S. dollar was pegged to gold at a rate of $35 per troy ounce and was the basis of the Bretton Woods international monetary system.

However by the late 1960s and 1970s a burgeoning US trade deficit and rising inflation caused a fundamental disequilibrium in the pegged value of the dollar and gold, leading to capital outflows of the precious metal.

In response, President Nixon unpegged the U.S. dollar in 1971, allowing both the price of gold and the U.S. dollar exchange rate to float based on market determined levels).

While commodities in general can help hedge against domestic inflation, the price of gold has generally maintained a very low, if not negative, correlation to consumer prices. However, the link between inflation and gold prices has been observed through another indirect channel: the U.S. dollar.
Not surprisingly, the correlation between gold and the U.S. dollar has been consistently negative since the two were delinked in 1971, supporting the long-time argument that since gold is primarily traded in dollars, a weakening U.S. dollar should lead to higher gold prices.

However, a careful understanding of the underlying data may provide a more sufficient answer, as only relative inflation pushes an exchange rate lower with a country losing purchasing power versus its trading partners. This provides the missing component: while the correlation between gold and domestic inflation may be insignificant, the metal can still be used as a hedge against higher inflation on a relative basis given its consistently negative correlation to the tradeweighted exchange rate. The relationship implies that as the dollar depreciates, international currencies and gold should simultaneously appreciate, indicating gold trades in a similar manner to a global currency, rather than a traditional commodity.

Although fiat currencies can be expanded at will, thereby destroying consumer purchasing power, gold production is limited and stable, providing a store of value in the face of a depreciating exchange rate.

An unsafe safe haven The consistently negative correlation between the U.S. dollar and gold makes fundamental sense given the metal's historic role in the international monetary system. However, further proof supporting gold's role as a global currency can be seen when the current model of fiat money comes into question during periods of economic stress.

Traditionally, the U.S. dollar is viewed as the world's safe haven currency, which is confirmed when individuals purchase U.S. Treasuries during crises. However, with one exception, gold has exhibited similar tail risk properties during some of the worst market sell-offs since it was delinked from the U.S. dollar.

Although it has normally displayed a highly volatile and unpredictable correlation with equity markets (with average correlations near 0%), gold has done well during periods of market turmoil. Nevertheless, investors should be aware of purchasing this expensive form of insurance, especially given a still healing global economy and no obvious or recognizable economic crises on the horizon.

Where to now?

Few assets are more prone to changes in investor sentiment than gold. With no direct tie to global growth, the intrinsic value of gold is based on negative investor sentiment, as it has historically served as a hedge against depreciation of the U.S. dollar.

However, with the potential for stronger economic growth and tapering of Federal Reserve asset purchases in 2014, U.S. interest rates, and therefore the U.S. dollar, will most likely become increasingly volatile. Consequently, the still fear-inflated price leaves gold vulnerable over the coming quarters, and with limited and unpredictable links to global demand as well as sentiment-driven prices, investors need to remain aware that gold resembles an expensive insurance policy against catastrophe, while only providing limited coverage.

Investment implications

Despite gold traditionally serving as a safe haven asset, investors should be wary of fear-inflated investments given the potential for improving global growth.

While central bank actions suggest risks of future inflation, other real assets such as consumption-driven commodities may provide a better store of value.

In the context of a diversified portfolio, gold has provided a consistent hedge against losses in the value of the U.S. dollar as well as low correlations to other assets.

David Kelly is chief global strategist with J.P. Morgan Funds, a unit of JPMorgan Chase.

Copyright 2013 Dow Jones & Company, Inc. All Rights Reserved

domingo, noviembre 24, 2013



Chile versus Argentina

Michael J. Boskin

NOV 21, 2013
 Newsart for Chile versus Argentina


BUENOS AIRES/SANTIAGOEconomists often compare similar economies to isolate the impact of a particular difference. This approach provides a compelling picture of the role of specific factors in driving or undermining an economy’s success.

For example, despite their common historical and cultural roots, North and South Korea are very different societies. The former has a considerably lower standard of living, owing to its communist government and centrally planned economy, which contrast sharply with South Korea’s democratic government and mixed capitalist economy.
Germany’s experience after World War II provides another telling example. When the Berlin Wall fell, barely two generations after the war ended, the standard of living in communist East Germany was just one-fifth the level attained in capitalist West Germany.
The same approach can be used to understand why Chile is prospering, while neighboring Argentina is floundering.
First, the similarities. Both countries are oriented along a north-south axis, and are characterized by varied terrain, long shorelines, and abundant agriculture, ranching, and vineyards. Both won independence from Spain two centuries ago. Both have populations composed largely of people of European descent. Both have histories of military rule. And both have recently experienced political turmoil, including large sometimes violentpublic protests.
Moreover, Chile and Argentina are democracies that have been governed from the right and the left. In Chile, a president can serve multiple terms, but not consecutively. So President Sebastián Piñera – a centrist leading a center-right coalitioncannot be a candidate for re-election next year, though he may run in 2018.
While Chile’s governing coalition – especially Finance Minister Felipe Larraín – has done much to strengthen the country’s macroeconomic performance, it has also struggled to find a strong presidential candidate; a scandal followed an intense internal battle for succession, with the center-right coalition forced to run its third-choice candidate. The leader of the center-left alliance, the Socialist Party’s Michelle Bachelet (who was Piñera’s predecessor), won the first round handily and is expected to be elected next month.
Meanwhile, despite having expanded her office’s power, Argentine President Cristina Fernández de Kirchner – who succeeded her late husband, Néstor Kirchner, in 2007 – is constitutionally prohibited from running for a third consecutive term. Her failure to win the two-thirds parliamentary majority needed to amend the constitution, together with opposition candidates’ success in recent midterm elections, suggests that Argentina may well be set for a rightward shift in 2015.
Now, the differences. The two countries’ economic policies diverge in important ways. Chile has usually followed economically sensible policiessometimes innovatively so. For example, copper revenue, which comprises 13% of the budget, must be spent on the basis of a long-term, independently verified planning price, with excess revenue accumulated in a fund to be used when copper prices dip.
Furthermore, Chile’s central bank has kept inflation low – it now stands at about 2% – and the budget is almost balanced. The country’s pension system emphasizes private saving and individual responsibility. A bilateral free-trade agreement has facilitated a surge in trade with the United States. And Chile has participated actively in the negotiations for the Trans-Pacific Partnership (TPP) trade deal.
To be sure, Bachelet’s proposals for higher corporate taxes, increased welfare spending, greater government control over pensions, and a re-examination of Chile’s participation in the TPP threaten to reverse much of this progress. But if, once in office, she reverts to the more centrist policies of her previous term, Chile may maintain its economic momentum.
Argentina, by contrast, engages in serial, self-inflicted economic upheaval. With a population that is twice the size of Chile’s, newly discovered energy deposits, and a vibrant capital city, Argentina has vast economic potential. Indeed, a century ago, it was one of the world’s wealthiest countries, with a standard of living on par with that of the US. Today, however, Argentina’s per capita income amounts to just 40% of America’s, and is considerably lower than Chile’s.
The spread between the official exchange rate and the black-market rate – the so-calledDólar Blue” – now stands at 60%. Unsurprisingly, virtually every retailer in Buenos Aires quotes a dollar price and a peso price. This can be explained partly by high inflation, which independent analysts put at roughly 25%more than double the official estimate of 10%. Since Kirchner replaced the lead inflation statistician at the National Statistics Institute in 2007, Argentina’s official inflation figures have been conspicuously lower than other estimates. (Chile’s inflation figures have been criticized, too, though to a much smaller extent, and Chile’s state statistics institute is far more independent of the government than Argentina’s.)
Fernández’s government bullies and nationalizes businesses, and pressures the central bank to use international reserves for debt payments. And Argentina’s major trade agreement, Mercosur, has fallen far short of its potential. Over the next five years, the International Monetary Fund expects Argentina to experience weaker growth, higher inflation, and more unemployment than Chile.
Fortunately, voters are increasingly turning against Fernández’s government. In August, opposition candidates like Sergio Massa and Mauricio Macri attracted substantial electoral support with their business-friendly, anti-inflation campaigns, making them likely presidential candidates in 2015. Even if Fernández does not cause too much damage in the interim, her successor will have to restore Argentina’s credibility at home and abroad, in order to prevent capital flight.
Can an Argentine president promote disinflation and retain voter support during a period of slower growth, or even recession? It happened in the US. President Ronald Reagan supported US Federal Reserve Chairman Paul Volcker’s disinflation, despite a deep recession, a temporary spike in unemployment, and midterm election losses. The economy soon rebounded, and Reagan was re-elected. Price stability enabled a quarter-century of strong growth and low unemployment, interrupted by two brief, mild recessions – the best macroeconomic performance in American history.
One hopes that Argentina will learn from its western neighbor – and that a Bachelet administration in Chile will look across the Andes, recognize where its proposals risk taking the country, and change course before it is too late.

Michael J. Boskin is Professor of Economics at Stanford University and Senior Fellow at the Hoover Institution. He was Chairman of George H. W. Bush’s Council of Economic Advisers from 1989 to 1993, and headed the so-called Boskin Commission, a congressional advisory body that highlighted errors in official US inflation estimates. 

The Kennedy Assassination (November 22, 1963) 50 Years Later

Paul Craig Roberts

November 21, 2013

November 22, 2013, is the 50th anniversary of the assassination of President John F. Kennedy. The true story of JFK’s murder has never been officially admitted, although the conclusion that JFK was murdered by a plot involving the Secret Service, the CIA, and the Joint Chiefs of Staff has been well established by years of research, such as that provided by James W. Douglass in his book, JFK And The Unspeakable, published by Simon & Schuster in 2008. Ignore Douglass’ interest in the Trappist monk Thomas Merton and Merton’s prediction and focus on the heavily documented research that Douglass provides.

Or just turn to the contemporary films, taken by tourists watching JFK’s motorcade that are available on YouTube, which show clearly the Secret Service pulled from President Kennedy’s limo just prior to his assassination, and the Zapruder film that shows the killing shot to have come from President Kennedy’s right front, blowing off the back of his head, not from the rear as postulated in the Warren Commission Report, which would have pushed his head forward, not rearward.

I am not going to write about the assassination to the extent that the massive information permits. Those who want to know already know. Those who cannot face the music will never be able to confront the facts regardless of what I or anyone else writes or reveals.

To briefly review, the facts are conclusive that JFK was on terrible terms with the CIA and the Joint Chiefs. He had refused to support the CIA organized Bay of Pigs invasion of Cuba. He had rejected the Joint Chiefs’Operation Northwoods,” a plan to commit real and faked acts of violence against Americans, blame Castro and use the false flag events to bring regime change to Cuba. He had rejected the Joint Chiefs case that the Soviet Union should be attacked while the US held the advantage and before the Soviets could develop delivery systems for nuclear weapons. He had indicated that after his reelection he was going to pull US troops out of Vietnam and that he was going to break the CIA into a thousand pieces. He had aroused suspicion by working behind the scenes with Khrushchev to defuse the Cuban Missile Crisis, leading to claims that he wassoft on communism.” The CIA and Joint Chiefs’ belief that JFK was an unreliable ally in the war against communism spread into the Secret Service.

It has been established that the original autopsy of JFK’s fatal head wound was discarded and a faked one substituted in order to support the official story that Oswald shot JFK from behind. FBI director J. Edgar Hoover and President Johnson knew that Oswald was the CIA’s patsy, but they also understood, as did members of the Warren Commission, that to let the true story out would cause Americans to lose confidence in their own government at the height of the Cold War.

Robert Kennedy knew what had happened. He was on his way to being elected president and to holding the plotters accountable for the murder of his brother when the CIA assassinated him. A distinguished journalist, who was standing behind Robert Kennedy at the time of his assassination, told me that the killing shots came from behind past his ear. He submitted his report to the FBI and was never contacted.

Acoustic experts have conclusively demonstrated that more shots were fired than can be accounted for by Sirhan Sirhan’s pistol and that the sounds indicate two different calibers of firearms.

I never cease to be amazed by the gullibility of Americans, who know nothing about either event, but who confidently dismiss the factual evidence provided by experts and historians on the basis of their naive belief that “the government wouldn’t lie about such important events” or “someone would have talked.” What good would it do if someone talked when the gullible won’t believe hard evidence?

Secret Service pulled from JFK’s limo  [1]

Zapruder film   [2]  [3]

James W. Douglass, JFK and the Unspeakable, Simon & Schuster, 2008

Operation Northwoods:  [4]

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