Big Money Poll: The Bull Will Be Right Back
America’s money managers say stocks will resume their climb after a short but needed time out, according to our latest Big Money Poll.
By Jack Willoughby
October 18, 2014
Bears, but no picnic
Fears of deflation may lie behind recent weakness
Oct 18th 2014
THE mood in financial markets has turned gloomy again. Equity markets are retreating, commodity prices are falling and investors are stampeding for the safety of government bonds (see chart).
Volatility has soared: the VIX, a measure of how much investors are willing to pay to insure against sharp market moves, has more than doubled since July.
Perhaps the most remarkable development is the strength of government bonds. At the start of the year, a survey of fund managers by Towers Watson, an actuary, found that 81% were bearish on government bonds. Many commentators were talking about the end of a 30-year bull market. But the yield on 10-year Treasury bonds (which moves in the opposite direction to prices) briefly dropped below 2% on October 15th, having stood at 3.02% on January 1st.
This fall in yields has occurred even though the Federal Reserve has been steadily reducing its bond purchases, just as it said it would. Private-sector buyers have been eager to step into the breach. After all, yields on Treasuries are substantially higher than those in most of Europe (German 10-year yields dropped to 0.72% on October 15th) and American inflation is low (1.7% in August).
But probably the biggest reason why yields have fallen is that global growth has been disappointing, with the partial exception of America (where GDP fell in the first quarter, but has since recovered).
The IMF recently revised down its global growth forecast for the year from 3.7% in April to 3.3%. Recent data from the euro zone have been particularly weak; industrial production fell 1.8% in August.
Worries about the euro area’s stability are resurfacing. Greece has been an exception to the government bond rally, with 10-year yields climbing back over 7%. The Greek stock market is down nearly 24% so far this year. Investors worry that Syriza, a left-wing opposition party, may take power next year and demand a reduction of the government’s debt.
A sluggish economy has also affected commodities. While oil has captured the headlines, food prices have dropped 15.5% over the last six months and industrial materials have fallen 3.4%. These drops are good for Western consumers (and help explain why inflation is so low), but are bad for commodity-producing countries.
Equity markets have wobbled three times this year in the face of disappointing economic news, not to mention the political turmoil in the Middle East and Ukraine. But those tumbles have so far been modest by the standards of past bear markets. Recent experience has taught many investors that good news can equal bad news: the more uncertain the outlook, the more supportive central banks are likely to be. The Fed may be reluctant to tighten monetary policy until the recovery is better established (markets are not now expecting a rate rise until March 2016) and the European Central Bank may feel obliged to loosen policy further.
The other big hope for equity investors is that profits will remain strong, despite economic weakness; after all, the cost of raw materials is falling, borrowing is cheap, and wages are subdued. The third-quarter results season is under way in America. Once again, analysts have gone through the charade of reducing profit forecasts (by more than four percentage points) ahead of the season so that companies are able to “beat” forecasts by a small margin. American companies are expected to report annual earnings growth of 4.5%, according to FactSet, a data company. But investors will probably concern themselves less with the details of firms’ performance in the third quarter, and more with what they say about the outlook, particularly for those with big foreign operations.
Investors’ underlying fear seems to be that the developed world is slipping into a deflationary spiral; hence the falls in commodity prices and a sharp drop in expectations of inflation, as measured by the Treasury-bond market. The recent weakness in the euro and the yen may be a sign that those regions are exporting deflation to the rest of the world, as their exporters cut prices to seize market share.
Deflation can cause severe pain in the corporate sector; a further sign of trouble is that the spread (or excess interest rate) paid by the riskiest bond issuers has widened by one-and-a-half percentage points since June. This deterioration is seen by Julien Garran, an analyst at UBS, as the “fourth horseman of the apocalypse”, signalling that deflation is on its way. If investors lose faith in the Fed’s ability to rescue them from that fate, the recent market weakness may be only the beginning.
World economy so damaged it may need permanent QE
Markets are realising that the five-and-a-half year recovery since the financial crisis may already be over, says Ambrose Evans-Pritchard
By Ambrose Evans-Pritchard
Forward-looking credit swaps already suggest that the US Federal Reserve will not be able to raise interest rates next year, or the year after, or ever, one might say. It is starting to look as if the withdrawal of $85bn of bond purchases each month is already tantamount to a normal cycle of rate rises, enough in itself to trigger a downturn. Put another way, it is possible that the world economy is so damaged that it needs permanent QE just to keep the show on the road.
Traders are taking bets on capitulation by the Fed as it tries to find new excuses to delay rate rises, this time by talking down the dollar. "Talk of 'QE4' and renewed bond buying is doing the rounds," said Kit Juckes from Societe Generale.
Gentle declines in the price of oil are typically benign, a shot in the arm for companies and consumers alike. The rule of thumb is that each $10 drop in the price adds 0.3pc to GDP growth over the next year.
Crashes are another story. They signal global stress, doubly dangerous today because the whole industrial world is one shock away from a deflation trap, a psychological threshold where we batten down the hatches and wait for cheaper prices. That is the Ninth Circle of Hell in economics. Lasciate ogni speranza.
The world is also more stretched. Morgan Stanley calculates that gross global leverage has risen from $105 trillion to $150 trillion since 2007. Debt has risen to 275pc of GDP in the rich world, and to 175pc in emerging markets. Both are up 20 percentage points since 2007, and both are historic records. The Bank for Settlements warns that the world is on a hair-trigger.
The slightest loss of liquidity can have "violent" effects.
Saudi Arabia has clearly shifted strategy, aiming to force high-cost producers out of business across the globe, rather than defend OPEC cartel prices by slashing its own output to offset rises in Libyan supply. Bank of America thinks the Saudis are targeting $85 a barrel, partly in order to squeeze three enemies, Iran, Russia, and the Caliphate.
If crude prices stay low for long, almost all the major oil producers will have to start dipping into their foreign reserves to fund their welfare states and military apparatus. The "fiscal break-even" price needed to cover the budget is $130 for Iran, $115 for Algeria and Bahrain, $105 for Iraq, Russia, and Nigeria, and almost $100 even for Abu Dhabi. The Saudis themselves are probably well above $90 by now.
This means that they will have to sell holdings of foreign bonds, assets, and gold to plug the gap. Russia has run through $7bn in recent days defending the rouble. The scale of this could be huge, and it comes at a time when China has stopped accumulating reserves for its own reasons, taking away the biggest global source of fresh purchases.
Nor does the chain reaction stop there. Lower prices chill the US shale industry, which has lifted US (liquids) output from 7m barrels a day (b/d) to 11.6m since 2008, and turned America into the world's biggest producer. Bank of America says the pain starts at around $75 for the most costly fields. "Shale oil output is very sensitive to price conditions," it said.
The US Energy Department says oil and gas companies have been amassing huge debts drilling for marginal output in ever more hostile regions. Net debt rose $106bn in the year to March, on top of $73bn of asset sales. Yet revenues were stagnating even when crude prices were above $100. The fossil fuel nexus has spent $5 trillion since 2008, and much of this is at risk. It has in itself become a systemic threat.
Yet the oil crash is not merely a supply story. "There has been a rapid collapse of demand,” said Edwin Morse from Citigroup. The International Energy Agency says demand fell by 50,000 b/d in France, and 45,000 b/d in Italy in August, below earlier estimates. China's oil demand is no longer rising by half a million b/d each year. It has slowed to a quarter a million.
The global slowdown has caught the global authorities off guard, as it always does. Above all, it has confounded the central banking fraternity. In thrall to "creditism", it insists that QE works by forcing down interest rates across the maturity curve. Ergo, Fed tapering does not matter so long as rates stay low. By the same logic, ECB policy is "accommodative" because rates have collapsed, a claim would have Milton Friedman turning in his grave.
Monetarists say this is a cardinal error, bound to cause serial mishaps. Indeed, Robert Hetzel from the Richmond Fed blames the Lehman crisis and all that followed on monetary overkill in early to mid 2008, arguing in his book "The Great Recession" that the Fed ignored the warning signs that M2 money was buckling.
We forget that the Venetian Grain Board regulated commerce over the centuries by altering the quantity of money, not interest rates. So did the Bank of England in the 18th Century, injecting liquidity when Easterly winds brought ships into London. The Bank continued to target the quantity of money in the early 20th Century when QE was known as open market operations. Quantity was Friedman's lodestar in his great opus.
Quantity is not doing very well. The Center for Financial Stability in New York says "Divisia M4" - its measure of broad money growth - has fallen to 2.5pc from around 6pc in early 2013. The US economy can perhaps handle some loss of dollar liquidity. The world as a whole cannot. There are $11 trillion of cross-border loans outstanding, and two thirds are still in US dollars. Emerging market companies have borrowed a further $2 trillion in dollars since 2008.
China is no longer tightening, but it is not loosening much either. It is actively steering down the growth rate of M2 money, even though house prices have been falling for five months, industrial output has stalled, and factory gate inflation has dropped to minus 1.8pc. President Xi Jinping seems resolved to break China's credit bubble early in his 10-year term, come what may. This will not be pretty. Standard Charted says debt has reached 250pc of GDP, off the charts for a developing economy.
Property curbs have been lifted. The central bank has injected small bursts of liquidity into the banking system. But this time China has not let rip with credit from the state banking system to keep the game going. "We cannot rely again on increasing liquidity to stimulate economic growth," said premier Li last month.
He is targeting jobs, not growth, willing to deflate the economy and purge excess capacity in the steel and ship-building industries as long as unemployment does not rise much above 5pc. This may be the right course for China, but it is an unpleasant shock for those across the globe who feed the dragon for a living.
China will eventually blink if the slowdown deepens, and so will the Fed in Washington. First the markets will have to learn the hard way that they have mispriced the reality of a broken global economy.
China Growth Seen Slowing Sharply Over Decade
Conference Board Report Sees Productivity Plummet, Leaders at a Loss
By Bob Davis
Oct. 20, 2014 12:09 a.m. ET
BEIJING—China’s growth will slow sharply during the coming decade to 3.9% as its productivity nose dives and the country’s leaders fail to push through tough measures to remake the economy, according to a report expected to come out Monday.
Such an outcome could batter an already fragile global recovery. But the report by the business-research group the Conference Board also finds that multinational companies in China would benefit. Lean times would give foreign firms more local talent to choose from.
Foreign companies and investors could also expect “more hospitable” treatment from Communist Party and government officials and a wider selection of Chinese firms they could acquire, according to the report, which was shared with The Wall Street Journal.
Foreign companies should realize that China is in “a long, slow fall in economic growth,” the report said. “The competitive game has changed from one of investment-driven expansion to one of fighting for market share.”
Officials representing China’s State Council, or cabinet, referred questions to its National Bureau of Statistics, which didn’t respond. Senior officials of the Communist Party are gathering in Beijing for a major policy meeting that opens Monday and is expected to discuss the slowdown.
The Conference Board forecasts that China’s annual growth will slow to an average of 5.5% between 2015 and 2019, compared with last year’s 7.7%. It will downshift further to an average of 3.9% between 2020 and 2025, according to the report.
China is scheduled to report its third-quarter economic growth on Tuesday.
The outlook for the world’s second-largest economy is one of the most important factors affecting the global economy. For the 30 years through 2011, China grew at an average annual rate of 10.2%, a record unmatched by any major nation since at least World War II.
That growth lifted hundreds of millions of Chinese out of poverty and turned the country into a major market for commodity producers in Asia, Latin America and the Middle East, and consumer and capital-goods makers from the U.S., Europe and Japan.
Since 2012, China’s GDP growth has decelerated. Economists say Chinese leaders will struggle this year to meet their growth target of 7.5%.
The New York-based Conference Board argues that productivity in China is declining, in part because investments in infrastructure and real estate don’t have the payoff they once did. Meanwhile, government and Communist Party officials who don’t give market forces a large-enough role are stifling innovation.
“The state is too present in the market,” said David Hoffman, managing director of the Conference Board’s China center.
China has kicked off its fourth plenum, a major four-day Communist party summit. WSJ's Ramy Inocencio talks to Cheung Kong Graduate School of Business professor Li Wei on what to expect.
The report says that China could ease the slowdown by reducing the role of the state and revamping credit markets so lending is done on the basis of commercial decisions rather than political ones. But the Conference Board is skeptical that China will make fundamental changes soon because they could slow short-term growth and cause political pain.
Nicholas Lardy, a China expert at the Peterson Institute for International Economics, said the Conference Board conclusions are too gloomy. “China is far from exhausting productivity gains,” he said. It would get a big lift, for instance, from opening for competition the oil, gas and other sectors dominated now by China’s big state-owned firms, he said.
The International Monetary Fund and World Bank also expect China’s economy to slow over the coming years, but at a more modest clip. The Conference Board forecasts are “eye-popping,” said David Dollar, a China scholar at the Brookings Institution who formerly ran the World Bank’s office in China.
He called the report “a pessimistic take on whether China will aggressively pursue structural reforms.” Given the Conference Board’s main audience—its membership includes 2,500 of the world’s largest companies—the report is likely to spark a debate about the direction of the Chinese economy and the leaders’ commitment to change.
Multinational firms should be able to weather a period of much slower growth better than their Chinese competitors, the Conference Board report said, because foreign firms are used to managing their business during recessions and expansions. Chinese firms have known only heady economic growth, it said.
The slowdown will also create opportunities for foreign firms, as China realizes it needs foreign capital and technology and better access to overseas markets.
Foreign firms will need to be savvy, though, to make sure they don’t enter deals that wind up giving away important intellectual property as they did in the past, the report says.
Chinese leaders say they remain committed to revamping the economy. “Just like an arrow shot, there will be no turning back,” Chinese Premier Li Keqiang told a session of the World Economic Forum in the Chinese city of Tianjin in September.
The Ebola crisis
Much worse to come
The Ebola epidemic in west Africa poses a catastrophic threat to the region, and could yet spread further
Oct 18th 2014
ON MARCH 25th the World Health Organisation (WHO) reported a rash of cases of Ebola in Guinea, the first such ever seen in west Africa. As of then there had been 86 suspected cases, and there were reports of suspected cases in the neighbouring countries of Sierra Leone and Liberia as well. The death toll was 60.
On October 15th the WHO released its latest update. The outbreak has now seen 8,997 confirmed, probable and suspected cases of Ebola. All but 24 of those have been in Guinea (16% of the total), Sierra Leone (36%) and Liberia (47%). The current death toll is 4,493. These numbers are underestimates; many cases, in some places probably most, go unreported.
This all pales, though, compared with what is to come. The WHO fears it could see between 5,000 and 10,000 new cases reported a week by the beginning of December; that is, as many cases each week as have been seen in the entire outbreak up to this point. This is the terrifying thing about exponential growth as applied to disease: what is happening now, and what happens next, is always as bad as the sum of everything that has happened to date.
Exponential growth cannot continue indefinitely; there are always barriers. In the previous 20 major outbreaks of the disease since its discovery in 1976, all of which took place in and around the Democratic Republic of the Congo, the initial rapid spread quickly subsided. In the current outbreak, though, the limits have been pushed much further back; it has already claimed more victims than all the previous outbreaks put together.
Trying to be precise about how bad things could get, absent that effort, is not possible. This is not just because the actual number of cases is not well known. The rate at which cases give rise to subsequent cases, which epidemiologists call Rο, is the key variable. For easily transmitted diseases Rο can be high; for measles it is 18. For a disease like Ebola, much harder to catch, it is lower: estimates of Rο in different parts of the outbreak range from 1.5 to 2.2. Any Rο above 1 is bad news, though, and seemingly small differences in Rο can matter a lot. An Rο of 2.2 may sound not much bigger than an Rο of 1.5, but it means numbers will double twice as fast.
And Rο is not a constant. It depends both on the biology of the virus, the setting of its spread (city or country, slum or suburb) and the behaviour of the people among whom it is spreading.
Over the course of the crisis the second two factors are bound to change as the virus moves to different places and as people start to adapt. Given high rates of mutation, which bring with them the possibility of evolutionary change, it is possible that the first could change, too. Peter Piot, one of the researchers who first identified the Ebola virus in 1976, stresses that the course of an outbreak does not always follow smooth curves; it can stutter and flare up. None of this complexity, though, offers much reassurance. While doubtless imperfect, plausible model-based extrapolations such as a recent one from America’s Centres for Disease Control and Prevention (CDC) suggest, in the absence of intervention, that there could be 1.4m cases in west Africa in the next three months.
Not that Ebola will necessarily be contained in west Africa. Despite it having infected health-care workers in America and Spain, and worries that one of those Americans could have passed it further, public-health experts are largely confident that outbreaks can be contained in countries with robust medical systems and the ability to trace contacts. But transfer to other places with poor health systems might allow the virus to take hold in new cities. Especially if it makes inroads into Nigeria, where one set of cases has been successfully controlled, the virus could travel on to India, rich in slums with poor health care, or China, where infection control in hospitals can be worryingly lax.
The three countries currently afflicted are all exceedingly poor and plagued by various levels of instability and dysfunction. Guinea, the only one to have avoided civil war following independence, has been plagued by military coups and civil strife. In Sierra Leone many public institutions had only just started to be rebuilt after the civil war that finished over a decade ago. The wounds of Liberia’s civil war are fresher and deeper. Foreign peacekeepers maintain public security; many institutions barely exist. At the start of the crisis the countries had only a few hundred doctors between them.
Many of those doctors, including Sheik Umar Khan, who led Sierra Leone’s response, have since died of the disease. In an echo of the way that, inside the body, it targets the immune system first, in the community Ebola hits health-care workers hardest.
Providing the infrastructure for a better response is thus a matter for outsiders. Some help has come from governments, some from non-governmental organisations such as Médecins Sans Frontières (MSF), an NGO which has provided about two-thirds of the isolation beds used to treat Ebola patients so far. Expansion moves apace. Beneath the looming Peninsula Mountains to the south of Sierra Leone’s capital, Freetown, the sleepy village of Kerry Town is the scene of frantic activity, as more than 200 construction workers sweat through the night to complete the first of six Ebola clinics to be set up in the country by the British army (some snatch a nap on the table in the morgue). Solar panels are being installed, a borehole drilled for water, a concrete access road laid to link up with the coastal highway. The centre will hold 90 beds, with an additional 12 set aside in a ward for the health workers. A military spokesman says the site should be completed by the end of the month.
These efforts are impressive. Liberia’s capacity to treat Ebola victims has nearly doubled in the past two weeks, and America has promised to build 17 100-bed units in the coming months. However, thanks again to the power of exponential growth, if the number of beds can be doubled only at more or less the same rate that the virus doubles the number of cases, the disease’s head start will grow ever more overwhelming. For the caseloads predicted for late November and December, the 70% treatment level seen as needed to bring things under control corresponds to tens of thousands of beds.
For a sense of the resources required to raise the tempo, consider that the 70-bed facility in Bong cost $170,000 to build. It needs a staff of 165 to treat patients and handle tasks like waste management and body disposal. It is likely to go through nearly 100 sets of overalls, gowns, sheets and hoods per day. The monthly cost of running the unit comes out at around $1m, which is about $15,000 a bed. The WHO puts the costs of a 50-bed facility at about $900,000 a month. These figures suggest that a 100,000-bed operation would cost in the region of $1 billion-$2 billion a month.
Various countries have promised substantial aid, but not yet on that scale. America has pledged $350m and set aside another $1 billion to fund the activities of its soldiers in the area. Britain has committed $200m. The World Bank has set up a $400m financing scheme; the first $105m reached the governments of the affected countries in just nine days. The UN, of which the WHO is part, has taken in about a third of the $1 billion it says it needs to fund its own efforts in the region; all told, though, Ban Ki-Moon, the UN secretary-general, sees a need for much more than that—“a 20-fold surge” in assistance.
Money is of little use without staff. China has sent some 170 medical workers to the affected countries. Cuba, long focused on medical work overseas, has sent a similar number, and has plans for 300 more. Others have been less forthcoming. The facilities America’s soldiers are building will require a staff in the thousands; despite being trained for biological and chemical warfare American troops will not be among them. Last month MSF rejected a pledge of $2.5m from the Australian government, demanding Australian doctors instead. Australia demurred.
While there are medical volunteers from overseas, Ebola is a harder sell than other crises. David Wightwick of Save the Children says that in the aftermath of Typhoon Haiyan hitting the Philippines there weren’t enough seats on the planes for all of the international volunteers—but when he asked 28 logisticians to travel to the affected countries, 21 said no. Nevertheless, Bruce Aylward, who is overseeing the WHO’s response in west Africa, says an increasing number of NGOs and foreign governments are now looking to deploy staff to the region.
The minimum basis for community care is to have two structures, which might be tents or shacks, set aside for suspected and confirmed cases. The carers would not be health workers, but trained community members with proper protective gear. People who have already survived the disease appear to have subsequent immunity and could be well employed in such settings; the dependability and duration of their immunity is not fully clear, and they would still need to follow safety procedures, but they would run less risk. The sick would be given only rudimentary care, not least because communities often lack reliable electricity or water supplies.
Most will go into such facilities with a fever brought on by something more common but less lethal than Ebola, like malaria; there are not yet tests for Ebola in the field that would keep such cases out. Some will die who otherwise would not; the hope is, though, that 70% will come out alive. If only people with Ebola went in, that figure would be more like 30%.
Such care units are being piloted in Sierra Leone and Liberia, and in many cases there may seem little if any alternative. Still, Christopher Stokes of MSF urges caution. If the locals are not properly trained, he warns, “you can amplify the epidemic, because they will feel confident in being around patients and they will catch it themselves and infect others.” The fact that the virus succumbs very readily to disinfectants such as bleach is welcome, but it will not help unless the disinfectants are used thoroughly and consistently.
Mr Stokes prefers decentralisation, “where you go closer to the community with smaller units [of about 30 beds], but with properly trained staff, which MSF has done in Guinea.” The approach worked well; at one point the outbreak in Guinea seemed almost to have been stopped. But economies of scale suggest that most new treatment centres will be a lot bigger, with some offering 100 beds or more.
Isolation reduces transmission. So can behaviour change, on which governments, lacking the wherewithal for much else, have concentrated their response, and which experts like Dr Piot see as the heart of the problem. Much of the focus to date has been on the burial of the dead. Those who have died remain, for a while, very infectious, and funerals can bring people from some distance. Six months into the epidemic a WHO study concluded that 60% of all cases in Guinea were linked to traditional burial practices that involve touching, washing or kissing the body. All the earliest cases of the disease in Sierra Leone appear to have been contracted at a single large funeral in Guinea, one which was also crucial in reigniting the epidemic in that country.
Now the traditions and beliefs that place such reverence on the treatment of the dead are being regretfully put aside by many; funerals that were once vibrant social events are in some places becoming practical exercises in the burial of body bags. “My aunt was taken away like a broken fridge and there was no other way,” says Charles Washington, a hotel worker in Liberia. But there are still traditional, dangerous funerals going on. There is more to be done through community engagement to reduce dangerous practices and to make rituals safer. Involving churches, traditional healers and the region’s secret societies more would bolster this and other interventions, such as those which help people to understand how the disease is transmitted.
Leaflets, placards and public-service announcements tell citizens in all three countries how to protect themselves through hand-washing and minimising contact with the ill. Sierra Leone went as far as locking down the country for three days during which officials and volunteers went house-to-house to educate people as well as search for hidden outbreaks. In Liberia and Sierra Leone, Ebola is a popular topic on the radio, which is how most people get their information. The broadcast advice is sensible and sometimes musical: “Ebola is Real” by F.A., Soul Fresh and DenG is proving popular in Liberia. Public buildings have temperature checks at the entrance; many also have chlorine baths for hands and shoes. People are aware of the danger surrounding them; many speak of little else.
Mobile phones also spread useful information—and may provide vital data to health workers. The CDC is tracking the location of people who call helplines in order to see where the disease is spreading. A Swedish NGO called Flowminder has captured people’s movements in the region using mobile-phone records.
Change in behaviour is real, but by most accounts it is patchy. Some people continue to believe that Ebola can be fought with animist remedies or witchcraft. Much to the frustration of a beleaguered cemetery keeper, people still wander through his graveyard in Freetown on their way to work, oblivious to the risks. Taxi drivers may disinfect their vehicles more, but in Liberia they chafe against new rules limiting passenger numbers. When livelihoods are at stake, onerous rules will be broken.
And crafting clear messages is hard. Dr Piot points to juxtaposed posters saying first that there is no cure and second that the infected should get to treatment centres. Despite such mixed messages, early fears that treatment centres would be shunned as death traps have not, in the main, come true; many centres are full. But this leads to another problem. Is it sensible to encourage sick people to take long journeys with no bed at its end? Progress depends not just on more beds, but on more local information on where to find them, and what to do if they are not available. Communities and the people from whom they seek advice need to be informed enough for such responses. They need to be involved in ways that help them decide how to reorganise their lives. Add that to the list of things easier said than done.
The other vaccine in trials might possibly, on the basis of animal tests, have the added benefit of helping those infected fight the virus as well as keeping the uninfected safe. At the moment there is a striking lack of such therapies: ZMapp, a cocktail of antibodies that has worked in animals, is of unproven efficacy and exhausted supply. A lower-tech alternative is to use blood serum from recovered patients, which contains the antibodies that helped them fight the virus. Such blood would have to be screened for other pathogens and matched to the recipients’ blood type, but WHO experts have been guardedly optimistic about the idea.
Even if treatment centres are hugely expanded, people’s behaviour changes radically and a vaccine proves effective, the damage already done to the region is huge. The patterns of work and food supply are already disrupted. Some farmers have abandoned their fields because they wrongly fear being infected by water in irrigation channels; some in cities are panic-buying. Salaries to public employees are not secure. The World Bank warns that Liberia’s rubber production, a big export earner, could fall drastically.
For now mounting deaths, understandable confusion and increasing economic dislocation have not caused widespread civil unrest. But many fault their governments for not protecting or preparing them better for the epidemic, and the grudges that animated past civil wars and coups sleep lightly. Few diplomats see a return to the bad old politics as out of the question; Filipino UN peacekeepers in Liberia have been withdrawn by their government. If civil order breaks down, the epidemic will get still worse.
Even if things do not fall apart, there is the most uphill of struggles ahead. Dr Piot cautions that an Ebola outbreak is an all-or-nothing affair; it is only over when the last patient is either dead or fully recovered. When it has struck on this scale, the challenges that remain after that will still be huge; whole public-health infrastructures will need rebuilding. But first there is a mountain to climb.
The Gold Market Is Going Insane
- Market participants somehow fool themselves at inflection points.
- What affect will QE4 - if it does come - have on gold?
- Upcoming week's expectations.
Many quote the famous words of Winston Churchill "Those who fail to learn from history are doomed to repeat it." However, if one delves further into where this astute phrase originated, you are led back to George Santayana (1863-1952), who likely "borrowed" it from Edmund Burke (1729-1797), a British philosopher, who stated that "Those who don't know history are destined to repeat it."
As many of you know, I peruse the other metals articles on Seeking Alpha, as well as many other sites. And, to say that I am simply astounded by some of the things I am reading is probably an understatement.
With the strength of the dollar, and the correction we are seeing in the equity markets throughout the world, the hot topic is now how the Fed "must" do QE4. Now, I am not even going to discuss how this is akin to a cocaine addict needing its next fix. My issue is that there are many that are suggesting that such further stimulus is what will cause gold to skyrocket.
I am sorry for being so blunt about this perspective, or if it may insult some that believe in this perspective. But, I simply have to ask the question "have you been sleeping for the last 3 years?"
The definition of insanity is doing the same thing over and over, yet expecting a different result each time. And, I propose that those that are now trying to dust off the perspective that more Fed action will cause gold to skyrocket are nothing less than insane. So, let's look at a snapshot I provided here at Seeking Alpha several years ago of Fed announcement history. Once you read through it, you will see why those maintaining such perspectives are clearly not burdened by the facts, and you should not be drawn into their vortex of insanity.
I want to start by quoting something I wrote back in April of 2012, which I hope will remind you of the "correlation" between the Fed announcements and the price of the metals:
On February 23, 2012, I provided advance warning of an impending decline in silver to the Seeking Alpha readership, and also provided targets for the decline. On February 28, 2012, we issued a suggestion to ElliottWaveTrader.net members to exit short-term metals positions, and for aggressive traders to even short the market, as the Elliott Wave pattern off the lows had completed.
The very next day, on February 29, 2012, Ben Bernanke was in front of Congress providing his semi-annual report on the economy, and the precious metals market entered into what some termed a "flash crash." Some of our members made 500% returns in that one day.
However, all Chairman Bernanke did in front of Congress was reiterate the Fed's position on the economy, which was clearly stated on January 25th. He did not provide the market with any news it did not have before, and he did not deviate from the statement of the Fed which was published a month earlier. So, why would a reiteration of a previously published, widely-known position of the Fed be viewed by so-called experts as the "cause" of the termed "flash crash?"
I want to paint a picture for you about the common misconception regarding how news supposedly "moves markets," so you can make a determination as to whether you would be able to make a reasonable trade decision based upon such "news." We will then bring it full circle in order to identify where we currently stand regarding silver.
Fed January 25th Announcement - No QE3 - Silver Rises 10%
After the Fed's statement of January 25th, the silver futures rose strongly from the $31.50 region to the $34.50 region within several days, with the significant amount of that almost 10% rise occurring within the first 24 hours. At the time, many pointed to this Fed statement of the 25th as "causing" this 10% rise in silver, even though it was clear that QE3 was not being contemplated.
Fed February 15th Notes Release - No QE3 - Silver Rises 15%
The notes to the Fed meeting of January 24-25 were released on February 15th for all to read. Even though the public already knew the Fed's position, which was announced on January 25th, silver rose strongly from the $32.75 region to the $37.50 region, another 15% rise within a week.
Bernanke's February 29th Testimony - No QE3 - Silver Plummets 11% In One Day
So, on February 29th, while testifying in front of Congress, Mr. Bernanke once again reiterated the Fed's position, which was already presented on January 25th and February 15th. Now, if one were to engage in the standard linear analysis utilized by almost every economist and market analyst, then you would be buying silver expecting another double digit rise, which many people did. However, silver did the exact opposite - it fell by double digits.
If you may recall, it was at the end of the rise that culminated in our February 28th sell signal, when most market "gurus" were suggesting and entering long positions in the metals. In fact, a day or two before the top on February 29th, we saw some large option positions being initiated in the metals. The strong drop almost immediately thereafter, which has now resulted in a total 19% correction in the silver price, has left investors in this market scratching their heads. Why did the same position statement of the Fed, which "caused" two previous double digit rallies, now cause an almost 20% total correction? Well, let's take it one step further before we answer that question.
Fed April 25th Announcement - No QE3 - Silver Bottomed and Gained 5%?
On the morning of April 25, 2012, silver started the day with a small rise and topped at the $31.00 region early that morning, which we shorted in our Trading Room. Throughout the rest of the morning, silver declined a little over 3%. However, once the Fed issued its announcement in the early afternoon, which was simply a reiteration of the same position it has taken all year, silver seemed to have reversed hard to the upside and, by the next day, was trading even higher than the level from which it fell the prior day. By Friday, within 48 hours after the same statement presented all year by the Fed, silver had gained almost 5% from the lows hit just before the Fed announcement.
Again, this must be making precious metals enthusiasts scratching their heads in disbelief, while trying to figure out if there was a comma that may have been added in the latest statement, from which we may be able to glean a hint of QE3. But, alas, no such hint can been seen from the Fed's statement, which has been rather consistent all year with regard to no QE3.
So, I feel compelled to reiterate a very counter-intuitive position I have stated over and over again with regard to investing: Ignore the news, as it will only lead you astray! Rather, these markets are moved by sentiment, and such movements are patterned.
And, then again, right after QE-Infinity was announced, I reminded everyone to ignore this announcement, and to focus on sentiment:
In fact, just think back to when QE-Infinity was announced. Everyone not only thought, but was 1000% sure, that the metals were about to go parabolic. But, even before the Fed announced QE-Infinity, I made the bold call that, irrespective of what the Fed did, silver will turn back down from the $34.40 level in the futures contract. And, yes, this was based upon my analysis of market sentiment through patterns and Fibonacci mathematics.
Well, silver went to $34.49 (nine cents over my target), and then turned down and has not looked back since. In fact, it was right after that market call back in 2012, that I started warning all the Seeking Alpha readers that $22 was a strong possibility to be seen. And, while many of you scoffed at me and my analysis methodology, how many of you actually started to question what you think you knew about the metals as it has gone completely opposite the manner in which the majority of the market assumed.
So fast forward another year or two, and we now find the metals much lower than the "news-hounds" would have ever fathomed. Yet, these same "analysts" are now touting the end of the bear phase for the metals, simply because QE4 is being suggested. This is not only ignoring fact and history, it is almost insulting to those who know, and are honest about, this market's history. I believe this is nothing more than cheerleading or wishful thinking, and should be completely ignored by anyone who is a serious investor or trader in metals.
Now, I will say something that will shock you. I think there could be a scenario where a QE4 announcement would be a catalyst to the next bull phase to the metals. Yes, you heard me right. But, I say this with a major caveat: this is only assuming that sentiment has completed its bottoming process BEFORE such announcement is made. If it has not, then QE4 will seem just as ineffective for metals as all these others announcements and QE-Infinity have been. But, is that the same as saying that QE4 will "cause" the next bull run? I think not. It will be a final bottoming in sentiment which will cause the change in direction.
As far as where GLD is heading in the near term, I will be honest and say I am not certain. Based upon the close on Friday, I have no imminent downside set ups yet in GLD, and the upside set up is also quite questionable. So, for now, I will not be trading any short term bias until the market provides more clear signals. And, if push came to shove, I would almost have to say the market looks more poised for higher than lower in the immediate future. Yet, without a high probability set-up, I will likely remain on the sidelines until the market provides one. Remember, trading metals is not like the lotto - you don't have to always be "in it to win it."
So, as long as we remain below the 121 region, I am still thinking lower lows will likely be seen sooner rather than later, while a break out over 123 has me looking towards the 130-133 region before we head down to lower lows.
And, as I have been saying for the last week in our Trading Room at Elliottwavetrader.net, I am going to suggest traders wait for a solid downside signal in gold before beginning to set up their next short trade to take us below the 2013 lows. This will avoid being whipsawed, which is what this market has done best to most market participants for the last 3 years. And, should this result in your missing a potential shorter term trade on the downside, I would not fret. The bigger moves over the next few years should be to the upside, which is where your focus should then turn once we see the next lower lows in the metals.
Les doy cordialmente la bienvenida a este Blog informativo con artículos, análisis y comentarios de publicaciones especializadas y especialmente seleccionadas, principalmente sobre temas económicos, financieros y políticos de actualidad, que esperamos y deseamos, sean de su máximo interés, utilidad y conveniencia.
Pensamos que solo comprendiendo cabalmente el presente, es que podemos proyectarnos acertadamente hacia el futuro.
Gonzalo Raffo de Lavalle
Las convicciones son mas peligrosos enemigos de la verdad que las mentiras.
Quien conoce su ignorancia revela la mas profunda sabiduría. Quien ignora su ignorancia vive en la mas profunda ilusión.
“There are decades when nothing happens and there are weeks when decades happen.”
Vladimir Ilyich Lenin
You only find out who is swimming naked when the tide goes out.
No soy alguien que sabe, sino alguien que busca.
Only Gold is money. Everything else is debt.
Las grandes almas tienen voluntades; las débiles tan solo deseos.
Quien no lo ha dado todo no ha dado nada.
History repeats itself, first as tragedy, second as farce.
We are travelers on a cosmic journey, stardust, swirling and dancing in the eddies and whirlpools of infinity. Life is eternal. We have stopped for a moment to encounter each other, to meet, to love, to share.This is a precious moment. It is a little parenthesis in eternity.
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