Barack Obama and the economy

The woes of the average Joe

America is getting richer, but most voters can’t feel it

Sep 27th 2014

BARACK OBAMA’S strenuous efforts to avoid being a war president have failed. But voters care more about the economy than the Middle East, and here Mr Obama has a good story to tell. The headline numbers are impressive: both output and employment have passed their pre-recession peaks and the unemployment rate, at 6.1%, has fallen far enough to inspire the Federal Reserve to debate, openly, when to raise interest rates. Though the latest jobs report was disappointing, private payrolls have grown by 10m in the past four and a half years, the longest uninterrupted streak in history.

Yet for all the upbeat economic news, Mr Obama has yet to reap any political reward. His approval rating, at 43%, is stubbornly low. Just 39% of voters approve of his handling of the economy, according to YouGov; 56% disapprove. Remarkably, they now trust Republicans more than Democrats to manage the economy.

Voters give Mr Obama little credit for America getting richer because, by and large, they haven’t felt it. Not only is the recovery subdued by historical standards, but widening inequality means that the median household (in the middle of the income range) is doing far worse than the mean (total income divided by the number of households).

Ken Hodges of Murfreesboro, Tennessee, thinks Mr Obama wasted money bailing out banks and carmakers, “but it hasn’t helped the working-class people at all.” Mr Hodges used to build guitars for a living but the business went downhill after the financial crisis, as did his investments. He now sells barbecue lunches out of a food truck in Nashville and, between the cost of meat, fuel and the thousands of dollars he spends on permits, reckons he makes 20% less than he did in 2007. “I’m slowly but surely going broke, though I’m working like a madman,” he says.

Inequality actually began to widen in the early 1980s. But, for two decades, overall growth was still healthy enough to lift the median household. During Ronald Reagan’s first six years in office, GDP grew 22% while the median income grew 6% (see chart 1). During Bill Clinton’s first six years, GDP grew 24%; median income, 11%. But growth began to slow in the 2000s, undermining both the mean and the median. In George Bush’s first six years GDP rose 16%, but median incomes fell 2%. Under Mr Obama it has been even worse: GDP is up 8% and median income is down 4%, according to the Census Bureau and Sentier Research, a private outfit.

Though median income performed almost as badly under Mr Bush as Mr Obama, there was an important difference. During the first part of the 2000s consumers could borrow easily, thanks to rising property prices. Between 2001 and 2007 the median household’s real net worth rose 19%, to $135,400. The collapse of the housing bubble sent it plunging. By 2013 it was $81,200, less than in 1989. In contrast, the mean net worth of American households has increased by 60% since 1989, to $534,600, thanks to the soaring fortunes of those at the top (see chart 2).

Efforts by the Fed to support the economy have bolstered stock and house prices, but the benefits have bypassed many households. Just 65% owned their own home in 2013, compared with 69% in 2007. Fewer owned shares or mutual funds outside retirement accounts. Even the impressive decline in unemployment has partly come about because many people have given up looking for work, and so are not counted as unemployed. In previous recoveries the labour-force-participation rate rose even as unemployment fell; this time, it has fallen (see chart 3).

Voters tend to blame the president for bad times and give him credit for good ones, regardless of the real cause. Thus presidential approval ratings depend a lot on median household income (see chart 1, again). Mr Obama is not on the ballot in November, but history suggests that voters will vent their frustrations on his party, as they did on Republicans in 2006, when George W. Bush’s approval rating was even worse than Mr Obama’s is now.

The economy and presidential popularity are not everything, of course. Ronald Reagan’s approval rating was over 60% in 1986, but Republicans still lost control of the Senate, thanks to the quirks of the electoral calendar. Senators serve six-year terms; every two years, a third of them stand for election. Many Republican novices won Senate races in Democratic states in the Reagan landslide of 1980; six years later, few could hold onto their seats.

Mr. Obama has the worst of both worlds. Not only are voters feeling glum; Democrats are also fighting to hold on to several Senate seats in Republican states, such as Arkansas. It is not that voters love Republicans, says Jim Kessler of Third Way, a Democratic think-tank. Rather, this year could see “an anti-incumbent wave, and Democrats happen to have more beach-front property”.

Charlie Cook, an elections analyst, thinks the Senate could flip back and forth over the next four years, with neither party securing the 60 seats (out of 100) needed to pass big laws without help from the other side. Disgusted voters may be open to radical alternatives. Mr Hodges, the Tennessee food-truck operator, despises Democrats and most Republicans, but would vote for Ted Cruz, a Texan Tea Party populist, if he could. Mr Cook recently advised some bankers to hope that Democrats nominate Hillary Clinton for president in 2016, because the alternative is Elizabeth Warren, a banker-bashing Massachusetts senator. “The energy and passion of the Democratic Party is a heck of a lot further to the left than Hillary,” says Mr Cook.

On the stump, Mr Obama offers morsels of economic populism aimed at the Democratic base: a higher minimum wage, debt relief for students and a law that will make unequal pay for women even more illegal than it has been since 1963. Also, on September 22nd, the White House announced rules to stop companies from moving their headquarters abroad to avoid taxes. Such policies could marginally reduce inequality, but they do nothing to boost underlying growth.

A better bet would be free trade, tax reform, more money for infrastructure and training and an overhaul of entitlements such as disability insurance. Many of the jobless end up drawing disability benefits and never return to work, another reason labour-force participation has fallen.

Even if Congress were to co-operate, such policies would take years to bear fruit. But surveys by Global Strategy Group, a Democratic consultancy, found that voters prefer a candidate who promises higher growth to one who promises to reduce inequality. Alas, neither party has plausible plans for that.


What We Know

Heightened global market instability has began to be transmitted to U.S. securities markets. There’s much that we simply don’t know. There is as well a lot we know with an important degree of confidence.

Some months back I highlighted an exceptional Bank of America Merrill Lynch research report, “Pig in the Python – the EM Carry Trade Unwind” (Ajay Singh Kapur, Ritesh Samadhiya and Umesha de Silva). In light of recent market developments, it’s a good time to revisit this thesis and highlight some of their data.

From “Pig in the Python,” February 2014: “Since 3Q2008, the US Federal Reserve QE has unleashed a massive $2 TN debt-driven carry trade into emerging markets, disproportionately increasing their forex reserves (by $2.7 TN from end-3Q 2008), their monetary bases (by $3.2 TN), their credit and monetary aggregates (M2 up by $14.9 TN), consequently boosting economic growth and asset prices (mainly property and bonds). As the Fed continues to taper its heterodox policy, we believe these large carry trades are likely to diminish, or be unwound.”

Most standard analysis on the balance of payments recognizes external debt as issued by residence, not by the nationality of the issuer. Given the proliferation of EM banks and corporates borrowing in offshore bond and inter-bank markets, and using BIS data, we rectify this. It makes a huge difference… For externally-issued bonds, $1042bn has been raised by the nationality of the EM borrower since 2009, $724bn by residence of the borrower – a gap of $318bn, or 44%. This undercount is $165bn in China, $100bn in Brazil, and $62bn in Russia. External bond-issuing EM non-financial corporates are behaving as quasi-financial intermediaries, executors of a vast carry trade.”

I agree completely with the “Pig in the Python” thesis that “Emerging market banks and corporates have gone on an international leverage binge, yet another carry trade, the third in 20 years.” I closely monitored and studied all three. The first ended in the spectacular collapse of the Asian Tiger Bubble Economies in 1997 and the second with the 2008 global financial crisis. The post-crisis EM Bubble has been fundamental to my “Granddaddy of them all” “global government finance Bubble” thesis. There has been nothing remotely comparable in history – built, by the way, on increasingly suspect premises.

For starters (from “Pig in the Python” data), outstanding external EM bonds doubled since the end of 2008 to $2.051 TN. In addition, outstanding EM banking system international bank borrowings jumped 39% to $2.992 TN. As such, Total EM International (“external”) Borrowings increased almost $1.9 TN (59%) in five years to surpass $5.0 TN. Never have EM governments, corporations and banks piled on so much debt, much of it denominated in dollars or other foreign currencies. And keep in mind that this borrowing and lending binge unfolded in a world anticipating aggressive Federal Reserve stimulus, ongoing dollar devaluation, rising commodity prices and a general global reflationary backdrop. It just didn’t play out as expected, so there will now be a huge price to pay.

Looking first to Asian data, outstanding Asia (ex-Japan) external bonds jumped 112% in five years to $921bn. By country, we see China’s external bonds were up $194bn, or 421%, to $240bn. Including bank international forex borrowings, total China external debt jumped $642bn, or 310%, since the end of 2008 to $849bn. Hong Kong external bonds jumped $49bn, or 71%, to $117bn (total up $223bn, 63%). Elsewhere in Asia, Indonesian external bonds jumped 197% to $70bn (total up $67bn, 101%), Singapore 82% to $93bn, Malaysia 59% to $53bn, South Korea 58% to $179bn and India 73% to $74bn (total up $86bn, 54%).

Russia external bonds jumped 85% in five years to $263bn, with total external debt up $104bn, or 32%, to $424bn. Turkey’s external bond borrowings surged 63% to $83bn, and Poland saw external bonds jump 73% to $70bn. South African external bonds rose 51% to $57bn.

In Latin America, the region’s outstanding external bonds jumped 126% in five years to $562bn, with extraordinary increases in debt almost across the board. Notably, Brazil saw external bonds jump 141% to $296bn. Including international bank borrowings, total external debt increased a remarkable 104% to $487bn. Mexico external bonds jumped 87% to $164bn, with total external debt up 47% to $164bn. Chile external bonds rose 220% to $32bn, Colombia 123% to $40bn (total up 109% to $32bn) and Peru 178% to $30bn. It’s as if the region’s sordid financial past was completely erased from history.

Now examining recent market performance, we see that the Brazilian real was this week hit for 2.1%, the Colombian peso 2.3%, the Mexican peso 1.8%, the Russian Ruble 1.9%, the South African rand 1.3% and the Turkish lira 1.2%. One-month performance is even more telling. The Russian ruble was down 7.6%, the Brazilian real 6.6%, the South African rand 4.9%, the Turkish lira 4.3%, Colombian peso 4.3% and Polish Zloty 3.5%. There seems to be a rather striking correlation between recent currency weakness and the countries that piled on huge amounts of international debt over recent years.

On the bond side, this week saw Brazilian (local) yields surge 26bps to 11.88% (yields traded as high as 12.19% intraday Friday), with yields up almost 100bps from early September trading lows. Mexico’s (local) yields rose 16bps this week to an almost four-month high 6.09%. Turkish (local) yields jumped 38 bps this week to 9.55%, the high since April, with yields also up more than 100 bps from late-July lows.

So what else do we know? We know many commodity prices have been hammered, closing the week near multi-year lows. This week’s small decline boosted the Goldman Sachs’ Commodities Index’s 2014 loss to 7.9%, closing Friday at the lowest level since mid-2012. Many price collapses have been nothing short of brutal. Corn prices have sunk 37% from April highs, with wheat down about 36% and soybeans almost 40%. Cotton prices are down 27% from May highs and sugar 18% from June highs. Crude prices are down 11% from June highs, with natural gas down 17%. Silver was down 19% from June highs, Platinum 14% and gold 9%. Palladium prices were down 13% in four weeks.

What else do we know? We know that China is a financial accident in the making.

September 25 – Bloomberg (Jake Rudnitsky and Anton Doroshev): “China uncovered almost $10 billion in fraudulent trade nationwide as part of an investigation begun in April last year, including many irregularities in the port of Qingdao, the country’s currency regulator said… Companies ‘faked, forged and illegally re-used’ documents for exports and imports, Wu Ruilin, a deputy head of the State Administration of Foreign Exchange’s inspection department, said… The trades have ‘increased pressure from hot money inflows and provided an illegal channel for criminals to move funds,’ Wu said… ‘Some companies used the trade channel to bring in hot money,’ said Zhou Hao, a Shanghai-based economist at Australia & New Zealand Banking Group… SAFE’s investigation ‘will likely further cool down hot money inflows and commodity imports could slow as banks will likely conduct more careful checks on documentation.’”

We can safely assume that the $10bn of uncovered fraud in the commodities financing area is the tip of the iceberg. I feel comfortable with my assumption that the financial world has never seen fraud and malfeasance to the extent that has manifested throughout China over the past decade, particularly during the post-crisis stimulus fiasco.

We also know that weak commodities prices, massive industrial overcapacity and faltering corporate earnings have exacerbated market concerns over Chinese financial and economic stability. At the same time, we know that the powerful “too big to fail” dynamic still permeates Chinese financial markets. We know that bond prices for the big property developers have rallied, despite rapidly deteriorating housing fundamentals. Risk premiums have actually increased for fringe developers and manufactures, on the view that Beijing would prefer to impose a little market discipline. At the same time, the vast majority of corporate and bank bonds benefit from the perception that the central government has absolutely no tolerance for a crisis. Chinese stocks have rallied on expectations of more aggressive stimulus measures. International markets have remained amazingly accommodative to Chinese borrowers.

We know that Chinese total Bank Assets have increased about $17 TN, or 168%, since the end of 2008 to an astounding $27.3 TN (from Bloomberg data). On various levels, the unprecedented inflation of Chinese Credit has been at the nucleus of a historic investment boom and “global reflation trade.” Rapidly expanding Chinese consumption created a huge increase in global commodities demand. At the same time, Chinese companies with virtually unlimited access to cheap finance (bank loans, domestic and international bond issuance) scoured the world to amass vast commodity holdings.

We also know that enormous amounts of “hot money” finance flowed into China through commodity-financing vehicles. With attractive yield differentials and a semi-pegged currency being steadily revalued higher against the dollar, Chinese Credit has offered an extraordinarily favorable risk vs. reward "carry." We know that Chinese authorities began to devalue their currency earlier in the year, before rather abruptly altering course this summer. Perhaps it was mere coincidence that authorities changed their mind on devaluation just as significant problems surfaced within China’s vast “commodities” financing scheme (spurring worries of “hot money” flight).

And I know the bullish view that stress in China will be met with limitless fiscal and monetary stimulus. We know that the Chinese central bank is sitting on Trillions of reserves. But I also believe that the tightly intertwined Chinese and EM booms at this point represent history’s greatest financial and economic Bubble. And there are serious cracks – cracks in China, cracks Russia, cracks in Brazil and throughout EM generally, along with cracks in commodities and, increasingly, currency markets.

King dollar has begun inflicting self-reinforcing stress and instability. Struggling Chinese industry is hurt by a strengthening renminbi (pegged to the King), while the values of Chinese commodity and related assets around the globe suffer at the hands of falling prices. Key Chinese trade partners are seeing their currencies falter and bond yields rise, placing highly levered banks and corporations at mounting risk. At this point, it appears the feared “hot money” exodus away from increasingly fragile EM economies and financial systems has gained important momentum.

I found myself this week thinking back again to the extraordinary year 1998. Keep in mind that just the previous year all bloody hell had broken loose. The collapse in the Thai baht incited a domino breaking of currency pegs that unleashed incredible collapses in Thailand, Indonesia, Malaysia, Philippines and South Korea. The financial, economic and social upheaval wrought from these bursting Bubbles was nothing short of horrific.

By mid-1998, at least in the U.S., all was forgiven and forgotten. I was convinced that Russia was vulnerable to similar Bubble dynamics that had brought down the Asia Tiger “Miracle” economies. Yet U.S. and global markets were incredibly complacent.

There were a couple key market misperceptions at work. One was the view that the West would never allow a Russian collapse. Secondly, after a perilous 1997, global policymakers were on the case and would not allow the reemergence of crisis dynamics. The perception that authorities were there to backstop the risk markets ensured the type of egregious risk-taking and speculative leverage that almost brought the global financial system down with the near-simultaneous collapses of Russia and Long-Term Capital Management. From a record high on July 20, 1998, the S&P500 traded down 22% to the low posted on October 8th. The bank index (BKX) traded down 42% from July 17th highs to October 8th lows.

I raise the subject of 1998 because global market participants these days are remarkably confident that Chinese, U.S., Japanese, European and other global policymakers will not allow a major crisis.

They will all “Do Whatever it Takes.” They will print “money” and they will spend “money” – without constraint and without a conscience. And it is this now deeply embedded complacency that has ensured the type of lending, speculating, leveraging, investing and spending excesses that basically ensure one very problematic global crisis. As always, the bursting of a Bubble is near-impossible to time. At the same time, various cracks are increasingly apparent. That we know.

I also think I know a couple likely transmission mechanisms from increasingly unstable global markets to highflying U.S. securities. Interestingly, there was talk of hedge fund liquidations pressuring stock prices lower during Thursday’s swoon. With performance struggling, much of the hedge fund industry may be at risk of the weak hands dilemma. Faltering markets would force many to move quickly to cut losses.

We know that back during the summer of 2013 “tapper tantrum” global market “risk off” was transmitted to U.S. markets through outflows and resulting liquidations of ETF holdings, notably from corporate and municipal debt funds (often with liquidity-challenged underlying holdings). We know that some incipient instability and liquidity concerns have returned to the U.S. corporate debt marketplace. Headlines this week included from Dow Jones, “Junk-Bond Investors Start to See Warning Signs.” From Bloomberg “BlackRock Junk-Bond ETF Sinks as Debt Yield Spikes to 2014 High” and “BlackRock Says ‘Broken’ Corporate Bond Market Needs Change.” In the markets, junk bond CDS jumped 33 bps this week to a near eight-month high.

Market liquidity is a fascinating – often robust, occasionally fleeting - thing. When markets perceive liquidity abundance, attendant risk-taking and speculative leveraging ensure an easy-flowing liquidity environment (reflexivity!). We know that ultra-loose financial conditions have provided seemingly endless cheap finance for stock buybacks, M&A, LBOs and all kinds of financial engineering. And we know that incredibly loose corporate Credit conditions have fueled exuberance and Bubbling equity prices. It would appear we’re at the tenuous stage of the cycle where borrowers line up as far as the eye can see.

Yet a bout of de-risking/de-leveraging – especially if it incites a big reversal of flows away from fixed-income funds – would appear a reasonable catalyst for general market liquidity issues. A weakened corporate debt market would hurt stock market sentiment – and faltering stock prices would further weigh on vulnerable debt market confidence. And when the legendary founder and head of one of the world’s largest “bond” funds suddenly departs for another shop, well, this creates yet another layer of complexity on an already highly complex backdrop. Looking at markets at home and abroad, it’s now difficult for me to envisage a backdrop were liquidity is not a growing concern. We know without a doubt that this is one heck of a fascinating market environment. 

America and Islamic State

Mission relaunched

The fight against Islamic State will help define America’s role in the world

Sep 27th 2014            

FOR more than three years, Barack Obama has been trying to avoid getting into a fight in Syria. But this week, with great tracts of the Middle East under the jihadist’s knife, he at last faced up to the inevitable. On September 23rd America led air strikes in Syria against both the warriors of Islamic State (IS) and a little-known al-Qaeda cell, called the Khorasan group, which it claimed was about to attack the West. A president who has always seen his main mission as nation-building at home is now using military force in six countries—Syria, Iraq, Afghanistan, Pakistan, Yemen and Somalia.

The Syrian operation is an essential counterpart to America’s attacks against IS in Iraq. Preventing the group from carving out a caliphate means, at the very least, ensuring that neither of these two countries affords it a haven. But more than the future of IS is at stake in the streets of Raqqa and Mosul. Mr Obama’s attempt to deal with the jihadists is also a test of America’s commitment to global security. It is a test that he has been failing until now.

IS et al
The sense that America is locked in relative decline has been growing in recent years, as it has languished under the shadow of the financial crisis and two long, difficult wars. Why should a newly rich country like China take lectures about how to run its affairs from a president who struggles even to get his own budget through? America, meanwhile, seems swamped by the forces of disorder, either unable or unwilling to steady a world that is spinning out of control. IS embodies this frightening trend. It is, in the jargon, a non-state actor, and it thrives on chaos. With each new humiliation of the governments in Iraq and Syria, it has accumulated more wealth, territory and recruits.

Its rise has also reflected American policy. First, the poorly thought-out intervention of George W. Bush, typified by the rash “Mission Accomplished” banner that greeted him on the USS Abraham Lincoln in May 2003 after his invasion of Iraq. Then Mr Obama’s studious inaction. When Syrians rose up against the regime of Bashar Assad, the president stood back in the hope that things would sort themselves out—leaving Mr Assad free to commit atrocities against his own people. Even when Mr Assad crossed “the red line” of using chemical weapons, the superpower did not punish him.

About 200,000 Syrians have died and 10m have been driven from their homes. Denied early American support, the moderate Syrian opposition has fragmented, leaving the field to the ruthless and well-organised IS.

Standing back has not worked well elsewhere in the world, either. Mr Obama has spoken about the limits to American power—exhorting other governments with a stake in today’s system to do their bit to keep the world safe. He wanted the United States to be seen less as a unilateral bully, more as the leader of world opinion. Yet when America stepped back, its allies stepped back, too. The countries that most eagerly came forward were its rivals, such as Russia and China.

IS has induced a change of heart among the American people. Before vicious extremists seized the city of Mosul and began to cut off Western heads on social media, Americans doubted the merit of further military action in the Middle East. When they realised that IS threatened them directly, they began to demand protection. Mr Obama therefore has a chance not just to strike a blow for order in the Middle East, but also to give the declinists pause.

From axis of evil to network of death
He has brute force on his side. The disastrous mismanagement of post-invasion Iraq has tended to eclipse the overwhelming potency of American firepower at the beginning. In six short weeks in the spring of 2003 America and its allies defeated the 375,000 troops of Saddam Hussein with the loss of only 138 American lives. Never in history has a single country had such military dominance. It has not suddenly evaporated.

The bigger question is whether Mr Obama can carry off delicate diplomacy. The lesson from Iraq and Afghanistan is that firepower alone will not prevail. Indeed, if America comes to be seen by Sunni Arabs as nothing more than a Shia air force, strikes will only bind IS to the local people.

If he is to win the argument in Iraq and Syria, Mr Obama needs coalitions and partnerships. For that he must get the diplomacy right. So far he has done well. He insisted on the replacement of Nuri al-Maliki, the Shia-chauvinist former prime minister of Iraq, with Haider al-Abadi, who is making efforts to bring Sunnis into government. He sent John Kerry, his secretary of state, to recruit regional Sunni powers such as Saudi Arabia and Jordan, to try to persuade Sunnis in Iraq and Syria that he is not taking sides against their branch of Islam. America has argued to the United Nations that its intervention—requested by Iraq but not Syria—is legal under Article 51 of the UN’s charter. Ban Ki-moon, the UN secretary-general, appears to have accepted that argument; so should Britain’s Parliament, which will vote on whether to help America.

There is much more for Mr Obama to do. The coalition-building is not complete. Turkey, a NATO member, is at last suggesting it favours action against IS, but it needs to be seen to help. Holding the alliance together will require patience, flexibility and a judicious mix of bullying and seduction. Mr Obama will have to put in many more long hours on the telephone with world leaders than he has done so far. And even if he succeeds in substantially destroying IS, new horrors may emerge from the ensuing vacuum if he does not help benign local forces to fill it.

Americans will grumble about the superpower’s lot. Of course, European allies can do more; of course, Asia’s emerging powers should support the world order. But it is also plainly in America’s interest to stay involved—and, when necessary, to show that it will put its might behind right, if only to deter the world’s tyrants and terrorists from further mischief. Although the mission to stop IS will be long and hard, it is one that no other nation could even contemplate. Mr Obama is right to relaunch it. Now he must see it through.

Gold Investors Dont Despair As There Are Many Bullish Catalysts For The Market

  • Gold has been hit hard over the last few months due to a strong US Dollar but investors have plenty of bullish catalysts.        
  • Indian gold demand is reportedly up significantly as premiums and smuggling rises due to upcoming festivals and a strong monsoon.
  • Possibly the biggest catalyst for gold is the upcoming Swiss referendum which could change the way the Swiss bank manages it reserves.
We know it's tough to be bullish on gold with the tough time the metal has had over the last few months with a strong dollar and seemingly little in the way of catalysts.

As investors can see gold has fallen 4.7% over the last month (an extremely large drop for gold) and it's hard to believe that gold is still up in FY2014. But we feel this drop in gold has been overdone and despite the negativity of pundits and analysts, there are plenty of short-term catalysts to take gold higher and even non-precious metals investors should consider investing in beaten up gold.

Swiss Referendum on Gold

The first and most important catalyst that has been flying way under the radar except in some of the deeper precious metals circles is the upcoming Swiss referendum on gold to be voted on November 30th. If this referendum is voted into law, the following three things will happen:
  1. Prohibit the Swiss Central Bank from selling gold reserves
  2. Repatriate all Swiss gold to Switzerland
  3. Require the Swiss Central Bank to hold 20% of its assets in gold
Assuming repatriation wouldn't be a problem (which is far from a safe assumption considering the problems Germany had getting their gold from the US - they just gave up), the Swiss currently hold only 10% of their reserves in gold, which is around 1000 tonnes. That would mean for the country to get gold reserves up to the minimum 20% gold ratio, they would have to buy 1000 tonnes over the next few years - almost half of annual mine production or three times all the gold held in COMEX gold inventories. That would overwhelm an already tight physical market and we're certain that investors would quickly front-run the Swiss bank and make it even harder to buy physical gold.

We don't know the probability of this measure passing, but if it does then that would rock the gold market and be extremely bullish as not only would the Swiss have to buy gold in the market - they couldn't sell any more gold. That's also a big deal since they've been off-loading and leasing their gold for years and that's the reason why gold reserves have dropped from 30% in 2000 to 10% in 2013.

(click to enlarge)
Source: SNBCHF

India and the Middle-East is Back in the Gold Market

It isn't only the upcoming Swiss referendum that is a bullish catalyst for gold - it's an old friend in Indian demand that seems to be returning to the market with a vengeance.

According to Bachhraj Bamalwa, a director at the All India Gems & Jewellery Trade Federation, premiums in India could increase significantly over the London cash price. It's not surprising that Indian demand would be increasing as the traditionally gold-heavy Indian festival season starts, but in the midst of a gold price slump, we may see many more Indian buyers in the market.

We may already be seeing significant Indian buying as a recent article in the Hindustan Times reports that a stunning 50 tonnes of gold may have been smuggled into the country in the last 10 days. If those numbers are even remotely correct, and its obviously tough to tell with smuggling reports, then that would mean that in the last 10 days over 1% of total world gold DEMAND has been smuggled into India - those numbers are tremendous!

Finally, Monsoon season in India has been very good overall and that means more money in the pockets of Indian farmers who traditionally buy gold as a means of saving. So the combination of low gold prices, the upcoming Indian festival season, and a strong monsoon seems like plenty of reason to be short-term bullish on gold.

It is not just India that is buying up gold but also the Middle-East. The declining gold price has increased demand by Dubai buyers as Shamlal Ahmad, Director of International Operations at Malabar Gold & Diamonds comments that "The month when Diwali [the Indian festival when buying jewellery is rated as auspicious] represents a peak buying period for the trade in the Gulf, and this year it's doubly so with Eid also falling the same month." The Muslim festival of Eid, happening to fall in the same month as Diwali this year, is a factor increasing demand in the Gulf states despite the political uncertainty in the region.

Conclusion for Investors

There are many other short-term catalysts that we could add to the list including further tensions with Russia over Ukraine, increasing Chinese physical demand, large short positions by traders and investment funds, and a stock market that is very edgy and due for a decline.

Thus forward-looking investors would be wise to be building gold positions now and we believe they should be increasing exposure to physical gold and the gold ETFs (SPDR Gold Shares (NYSEARCA:GLD), Sprott Physical Gold Trust (NYSEARCA:PHYS), Central Fund of Canada (NYSEMKT:CEF)). Miners have also been hit hard and when gold finds its footing they could provide a lot of leverage to the gold price so investors may want to consider evaluating gold miners such as Goldcorp (NYSE:GG), Agnico-Eagle (NYSE:AEM), Newmont (NYSE:NEM), or even some of the explorers and silver miners such as First Majestic (NYSE:AG) or Pan American Silver (NASDAQ:PAAS) - though we're not suggesting these companies specifically - only suggesting them for further investor research.

But we think the real opportunities right now are in the explorers, as their valuations are much lower than the miners and the fact of the matter is that these gold miners will be looking to expand reserves and buying out the quality explorers, so we'd suggest investors be aggressively investing in these quality explorers. It's very important that investors follow the news flows out of the explorers they own as it is not a "buy-and-hold" type investment.

Gold has been hit very hard over the last few weeks but we hardly think the gold bull market is over, but at this point we feel that even in the short-term gold is due for a significant bounce-back - that could catch gold shorts extremely unprepared as Western investors are completely pessimistic on gold. We think there is very little downside in gold at this point and investors have plenty of reasons to expect a stronger gold price.

lunes, septiembre 29, 2014



Global banks

No respite

Big banks’ prayers for a halt to new regulation have fallen on deaf ears

Sep 27th 2014

TO ATONE for the gravest misdeeds, according to Catholic tradition, a sinner must spend seven years in purgatory. Bankers had hoped that, after seven years of penance for their part in the financial crisis, the end of wrenching overhauls forced by fierce new regulations might be nigh.

But to their dismay, the regulators’ zeal is undimmed. Far from giving banks respite, they are toughening up old rules and devising new ones, perhaps heralding a new wave of restructuring.

Take the vexed question of the level of capital banks should hold to guard against future losses.

Higher capital ratios, which force banks to fund their loans and investments more with equity and less with money borrowed from investors or depositors, are one of the main reasons returns have fallen since the crisis (see chart). Yet regulators are still tinkering. They have devised at least four new measures of the strength of banks’ balance-sheets since the crisis, including one due to be finalised by the G20, a club of the world’s biggest economies, in November. These all come on top of the higher capital standards included in the latest international agreement on banking regulation, known as Basel III.

One of the most contentious of the new tests is the leverage ratio, which will limit a bank’s loans and investments to a certain multiple of its capital, without taking into account how risky they are. Regulators in many jurisdictions have said they will adopt a maximum leverage ratio, but have not yet decided what the all-important multiple will be.

In many cases, national rules are stricter than those set in international agreements. Daniel Tarullo, a senior official at the Federal Reserve, which regulates American banks, startled the industry in early September when he suggested that the biggest ones would have to exceed another globally-agreed capital standard by perhaps as much as two percentage points.

Capital is not the only area in which regulation remains incomplete. Most novel, and least understood by senior bankers, are new rules about how their firms should be structured. Regulators want simpler set-ups, which they hope would make it easier to close or otherwise deal with banks that hit the buffers. Last month the Federal Deposit Insurance Corporation, another American regulator, rejected the “living wills” submitted by all 11 of the biggest banks.

In theory, failure to address the problem could lead to the forcible break-up of the recalcitrant titans. While that seems unlikely, mandatory changes to banks’ legal structures or yet-higher capital requirements may well be in store.

The European Union has for years been mulling an obligation for banks to “ring-fence”
different units to limit the fallout in case of trouble. Again, that may involve extra capital. The EU’s rules to cap bonuses, and British plans to “claw back” past payouts, are another headache. A new system for trading derivatives has hammered margins in a once-profitable niche.

Bankers reserve their most ardent complaints for fines, which have swollen from a trickle to an industry-shaking torrent. Regulators around the world will have squeezed $295 billion out of banks by 2016, according to Huw van Steenis of Morgan Stanley. Bank of America and JPMorgan Chase alone have already paid or provisioned $100 billion between them.

The burden has fallen most heavily on banks deemed “too big to fail” (or “systemically important” in regulator-speak). To bolster their capital to comply with new rules, many have retained profits or issued new shares, thus annoying existing shareholders. The likes of Citigroup, Barclays and HSBC, which combine thrusting investment banking with the sleepier retail sort, have been singled out for special regulatory torment by virtue of their size, complexity and funding arrangements.

Some investment-banking titans, including Morgan Stanley and UBS, are beginning to focus instead on asset managers, a business that worries regulators much less. Goldman Sachs, JPMorgan Chase and HSBC have not changed as much, but are run well enough to have made better-than-average returns.

A few big banks have simply hunkered down in the hope that the regulatory storm will soon pass over. Deutsche and Barclays are both negotiating potentially expensive settlements for misdeeds in America. They are both especially reliant on businesses such as bond-trading that will only thrive if volumes and interest rates rise markedly and regulators let the industry be.

Investors might wonder why they tolerate units that, in Barclays’ case, will deliver a 2.1% return on equity this year, by one estimate. That is well short of the group’s 11.5% cost of equity, the amount it theoretically pays shareholders.

In America, Citi is the big bank with the least cohesive strategy. Its bosses admit they are unsure of what the ultimate effect of the regulatory barrage will be, and have tweaked rather than revolutionised. Many analysts argue that its parts would be worth more separate than together.

A more gentle regulatory stance could yet emerge, for example if Republicans take over the Senate in elections in America in November. In the euro zone bank regulation will pass from national agencies to the European Central Bank, giving it more clout in global talks. It may relay arguments made by executives there that tighter global rules on bank capital are stymying Europe’s economy, which is far more dependent than America’s on bank lending.

The Bank of England this week begged American regulators to consult their counterparts abroad before imposing ruinous fines.

Yet most regulators seem to believe that big banks are a liability. A string of scandals, from JPMorgan’s $6.2 billion trading loss in 2012 to the fiddling of interest rates and currency markets, will have done little to reassure them. The fact that banks are allowing their corporate clients to lever themselves up to levels that would make even a pre-crisis banker blush adds to supervisors’ resolve to girdle the industry.

Democracy Requires a Patriotic Education

The Athenians knew it. Jefferson knew it. Somehow we have forgotten: Civic devotion, instilled at school, is essential to a good society.

By Donald Kagan

Adapted from remarks by Yale University historian and professor emeritus Donald Kagan at the Hotchkiss School in Lakeville, Conn., Sept. 18, a talk based in part on a lecture he delivered at Yale on Nov. 4, 2001:

What is an education for? It is a question seldom investigated thoroughly. The ancient philosophers had little doubt: They lived in a city-state whose success and very existence depended on the willingness of citizens to overcome the human tendency to seek their individual, self-interested goals and to make the sacrifices needed for the community's well-being. Their idea of education, therefore, was moral and civic, not merely instrumental. They reasoned that if a state or community is to be good, its citizens must be good, so they aimed at an education that would produce virtuous people and good citizens.

Some two thousand years later, from the 16th through the 18th centuries, a different group of philosophers in Italy, England and France introduced a powerful new idea. Their world was dominated by ambitious princes and kings who were rapidly asserting ever greater authority over the lives of their people and trampling on the traditional expectations of individuals and communities. In the philosophers' view, every human being was naturally endowed with three essential rights: to defend his life, liberty and lawfully acquired property.

The responsibility of the state, therefore, was limited and largely negative: to protect the people from external enemies and not to interfere with the rights of individual citizens. Suspicious of the claims of church and state to inculcate virtue as mere devices to serve the selfish interests of their rulers, most philosophers of the Enlightenment believed that moral and civic instruction was not the business of the state.

Among our country's founders, none was a more devoted son of the Enlightenment than Thomas Jefferson, yet as he considered the needs of the new democratic republic he had helped to establish, he came to very different conclusions. Like the ancient philosophers, Jefferson regarded education as essential to the establishment and maintenance of a good polity— Plato, in "The Republic," spends many pages on the nature of the citizens' education, as does Aristotle in "Politics." Jefferson regarded a proper educational system as so important that in the epitaph he wrote for himself, he did not mention that he had twice been elected president of the United States but proudly recorded that he was the "Father of the University of Virginia."

Jefferson was convinced that there needed to be an education for all citizens if they and their new kind of popular government were to flourish. He understood that schools must provide "to every citizen the information he needs for the transaction of his own business; to enable him to calculate for himself, and to express and preserve his ideas, his contracts, and accounts, in writing."

For Jefferson, though, the most important goals of education were civic and moral. In his "Preamble to the 1779 Virginia Bill for the More General Diffusion of Knowledge" he addresses the need for all students to have a political education through the study of the "forms of government," political history and foreign affairs. This was not meant to be a "value free" exercise; on the contrary, its purpose was to communicate the special virtues of republican representative democracy, the dangers that threatened it, and the responsibility of its citizens to esteem and protect it. This education was to be a common experience for all citizens, rich and poor, for every one of them had natural rights and powers, and every one had to understand and esteem the institutions, laws and traditions of his country if it was to succeed.

It is striking to notice the similarity between Jefferson's ideas and those of a leader of the last great democracy prior to Jefferson's fledgling democracy. In 431 B.C., Pericles of Athens described the character of the great democratic society he wished for his community: A city "governed by the many, not the few," where in the "matter of public honors each man is preferred not on the basis of his class but of his good reputation and merit. No one, moreover, if he has it in him to do some good for the city, is barred because of poverty or humble origins."

Both great democratic leaders knew that democracy, properly understood, requires a careful balance between the political and constitutional rights of the individual, where absolute equality is the only acceptable principle, and the other aspects of life, where equality of opportunity and reward on the basis of merit are appropriate. They also agreed on the need for individuals to limit their desires and even to curtail their own rights, when necessary, to make sacrifices in the service of the community without whose protection those rights could not exist. In short, democracy and patriotism were inseparable.

These values have not disappeared, but in our own time they have been severely challenged. With the shock of the 9/11 terror attacks, most Americans reacted by clearly and powerfully supporting their government's determination to use military force to stop such attacks and to prevent future ones. Most Americans also expressed a new unity, an explicit patriotism and love of their country not seen among us for a very long time.

That is not what we saw and heard from the faculties on most elite campuses in the country, and certainly not from the overwhelming majority of people designated as "intellectuals" who spoke up in public. They offered any and all explanations, so long as they indicated that the attackers were really victims, that the fault really rested with the United States.

As most of us have come to know too well, the terrorists of al Qaeda and other jihadists regard America as "the great Satan" and hate the U.S. not only because its power stands in the way of the achievement of their Islamist vision, but also because its free, open, democratic, tolerant, liberal and prosperous society is a powerful competitor for the allegiance of millions of Muslims around the world. No change of American policy, no retreat from the world, no repentance or increase of modesty can change these things.

Yet many members of the intelligentsia decried the outburst of patriotism that greeted the new assault on America. The critics were exemplified by author Katha Pollitt, who wrote in the Oct. 1, 2001, edition of the Nation about her daughter wanting to fly the American flag outside their window after 9/11. "Definitely not," Ms. Pollitt replied. "The flag stands for jingoism and vengeance and war."

Such ideas still have a wide currency, reflecting a serious flaw in American education that should especially concern those of us who take some part in it. The encouragement of patriotism is no longer a part of our public educational system, and the cost of that omission has made itself felt. This would have alarmed and dismayed the founders of our country.

Jefferson meant American education to produce a necessary patriotism. Democracy—of all political systems, because it depends on the participation of its citizens in their own government and because it depends on their own free will to risk their lives in its defense—stands in the greatest need of an education that produces patriotism.

I recognize that I have said something shocking. The past half-century has seen a sharp turn away from what had been traditional attitudes toward the purposes and functions of education. Our schools have retreated from the idea of moral education, except for some attempts at what is called "values clarification," which is generally a cloak for moral relativism verging on nihilism of the sort that asserts that whatever feels good is good.

Even more vigorously have the schools fled from the idea of encouraging patriotism. In the intellectual climate of our time, the very suggestion brings contemptuous sneers or outrage, depending on the listener's mood. There is no end of quoting Samuel Johnson's famous remark that "Patriotism is the last refuge of a scoundrel," but no recollection of Boswell's explanation that Johnson "did not mean a real and generous love for our country, but that pretended patriotism which so many, in all ages and countries, have made a cloak for self-interest."

Many have been the attacks on patriotism for intolerance, arrogance and bellicosity, but that is to equate it with its bloated distortion, chauvinism. My favorite dictionary defines the latter as "militant and boastful devotion to and glorification of one's country," but defines a patriot as "one who loves, supports, and defends his country."

That does not require us to denigrate or attack any other country, nor does it require us to admire our own uncritically. But just as an individual must have an appropriate love of himself if he is to perform well, an appropriate love of his family if he and it are to prosper, so, too, must he love his country if it is to survive. Neither family nor nation can flourish without love, support and defense, so that an individual who has benefited from those institutions not only serves his self-interest but also has a moral responsibility to give them his support.

Thus are assaults on patriotism failures of character. They are made by privileged people who enjoy the full benefits offered by the country they deride and detest, but they lack the basic decency to pay it the allegiance and respect that honor demands. But honor, of course, is also an object of their derision.

Every country requires a high degree of cooperation and unity among its citizens if it is to achieve the internal harmony that every good society requires. Most countries have relied on the common ancestry and traditions of their people as the basis of their unity, but the United States can rely on no such commonality. We are an enormously diverse and varied people, almost all immigrants or the descendants of immigrants. The great strengths provided by this diversity are matched by great dangers. We are always vulnerable to divisions among us that can be exploited to set one group against another and destroy the unity and harmony that have allowed us to flourish.

We live in a time when civic devotion has been undermined and national unity is under attack. The idea of a common American culture, enriched by the diverse elements that compose it but available equally to all, is under assault, and attempts are made to replace it with narrower and politically divisive programs that are certain to set one group of Americans against another.

The answer to these problems and our only hope for the future must lie in education, which philosophers have rightly put at the center of the consideration of justice and the good society. We look to education to solve the pressing current problems of our economic and technological competition with other nations, but we must not neglect the inescapable political, and ethical, effects of education.

We in the academic community have too often engaged in miseducation. If we encourage separatism, we will get separation and the terrible conflict in society it will bring. If we encourage rampant individualism to trample on the need for a community and common citizenship, if we ignore civic education, the forging of a single people, the building of a legitimate patriotism, we will have selfish individuals, heedless of the needs of others, the war of all against all, the reluctance to work toward the common good and to defend our country when defense is needed.

The civic sense that America needs can come only from a common educational effort. In telling the story of the American political experience, we must insist on the honest search for truth; we must permit no comfortable self-deception or evasion, no seeking of scapegoats. The story of this country's vision of a free, democratic republic and of its struggle to achieve it need not fear the most thorough examination and can proudly stand comparison with that of any other land.

In the long and deadly battle against those who hate Western ideals, and hate America in particular, we must be powerfully armed, morally as well as materially. To sustain us through the worst times we need courage and unity, and these must rest on a justified and informed patriotism.

The Triumph and Tragedy of the Group of 20

Tuesday, 23 Sep 2014 02:23 PM

By Mohamed A. El-Erian

At its meeting in Australia over the weekend, the Group of 20 developed and developing nations demonstrated that they understand what is ailing the global economy: It desperately needs the world's governments to work together in several areas simultaneously to remove obstacles to growth. Unfortunately, there's little chance they will turn understanding into action anytime soon.

Ahead of the meeting, the International Monetary Fund offered a sobering outlook. The IMF's economists — rightly — lowered their projections for global growth, warned about mounting excesses in financial markets and stressed that central banks can't solve the world's economic problems on their own.

The G-20 responded with an unusually forceful and frank communique, in which its members pledged to “use all macroeconomic levers — monetary, fiscal and structural policies — to meet this challenge.” Among other things, they promised greater government investment in infrastructure, more flexible fiscal policy, simpler tax systems and freer labor markets. All told, as the Australian chair noted, some 80 percent of the promised measures are new.

The comprehensive vision and actionable agenda take the G-20 closer to its heyday — the London Summit of April 2009, during which officials agreed on measures that helped avert a multiyear global depression. Yet it is unlikely to repeat its success, because domestic politics are not conducive to action.

In the U.S., sensible economic policy making is hampered by a polarized and largely dysfunctional Congress. The members of the European Union still have fundamentally opposing views on what is needed to fix the common currency and put the region on a sounder economic footing. Japan, Brazil, India and Russia all have specific problems that prevent them from focusing on much-needed structural reforms.

Without action by individual countries, the global economy won't get the critical mass of pro-growth measures it needs. Having failed to deliver fully on their individual commitments, few countries will be in a position to hold others accountable. And the multilateral institutions are unable to be effective global enforcers.

The G-20 deserves credit for delivering a more realistic assessment of the global economy and what needs to be done. The next piece of good news will have to wait for better domestic politics.