Wall Street's Best Minds
The Stock Market’s Next Phase
The Wall Street vet argues that the next leg up will be powered by fundamentals, not the Fed.
By Byron Wien
May 27, 2015 5:46 p.m. ET
Since the axiom “Don’t fight the Fed” came into common parlance, we have all been aware that central bank policy is an important component of market performance. Most of us started out as security or business analysts and believed that fundamental factors like the pace of the economy, earnings growth and interest rates were the drivers of equity values. As we became more experienced, we began to understand the influence of psychology, which can be quantified by technical analysis.
Since the end of the bear market and recession of 2008-9, and the fiscal stimulus and monetary easing that followed those tumultuous years, I have begun to appreciate even more the importance of central bank liquidity in determining the direction of equity markets. This is hardly a conceptual revelation, but I thought I would take a look at it quantitatively.
United States equities have tripled since the March 2009 low. The total capitalization of the Standard & Poor’s 500 has increased from about $6 trillion in March 2009 to $19 trillion today. Obviously this is not the total value of the entire U.S. equity market, because it leaves out much of Nasdaq and other peripheral markets, but most of the capitalization of U.S. public companies is captured by this index.
Earnings have clearly driven a good part of that move; they have more than doubled from $417 billion in 2009 to $1.042 trillion in 2014. Since 2008, the Federal Reserve balance sheet has more than quadrupled from $1 trillion in 2008 to $4.5 trillion.
It took the Fed 95 years to build up a balance sheet of $1 trillion and only six years to go from there to the present level. The Federal Reserve was providing this stimulus to improve the growth of the economy, but it is my view that three quarters of the money injected into the system through the purchase of bonds went into financial assets pushing stock prices up and keeping yields low.
If I am right, the Fed contributed almost $3 trillion (some may have gone into bonds) to the $13 trillion rise in the stock market appreciation from the 2009 low to the current level, earnings increases explained $9 trillion (1.5 x $6 trillion) and other factors accounted for $1 trillion. You could argue that the monetary stimulus financed the multiple expansion in this cycle.
In Europe, a similar condition has taken place. The Euro Stoxx index reached its low in the fall of 2014 with a total market capitalization of €8.1 trillion. The current market capitalization is €10.5 trillion, an increase of about 30%. The balance sheet of the European Central Bank in October 2014 was a little over €2 trillion. It is up about 15% from that level today at about €2.344 trillion. An improvement in the outlook for earnings and the European economy helped here as well as in the U.S., but liquidity played an important role in the rise in the market. Like indices for the United States, the Euro Stoxx doesn’t capture the full market value of all European equities.
In Japan, the balance sheet of the Bank of Japan began to increase sharply after reaching about ¥132 trillion at the beginning of 2012. It is now ¥327 trillion, more than doubling the early 2012 level. The market capitalization of the Tokyo Stock Exchange increased from about ¥254 trillion at the beginning of 2012 to ¥587 trillion currently, again more than doubling. Earnings played a role here as well, but the monetary liquidity could explain much of the market appreciation. The concept of the central bank playing a critical role in market performance has been brought home this year with the relatively strong performance of Europe and Japan because of Mario Draghi’s explicit policy of aggressive easing and the accommodative strategy inherent in Abenomics. In contrast, the Federal Reserve is poised to tighten (interpreted as the withdrawal of liquidity) as soon as it becomes comfortable that the economy can handle higher rates. As a result, the U.S. equity market has made little progress this year, while Europe and Japan are up in double digits in local currencies, and Japan is up in double digits in dollars as well.
At this point, the prospects for both revenue and income growth for United States companies are not robust. Optimistic earnings projections for the S&P 500 show only a small improvement for the year, and even that would require a fair amount of financial engineering, including share buybacks, mergers and acquisitions and leverage. The current level of buybacks and mergers and acquisitions is less than 10% off the pre-crisis high, according to Strategas Research. The strong dollar and the decline in oil prices are negatives for near-term earnings improvement. In the face of these factors, it is something of a wonder that the U.S. market has risen at all this year.
One concept that may be helping the market is earnings yield. The 10-year U.S. Treasury is yielding 2.2%. Even if S&P 500 earnings are flat in 2015, the earnings yield (S&P 500 earnings divided by the price of the index) will be 5.5%, a healthy differential that is similar to the earnings yield in March 2009 when the market bottomed and the current upward move began. Earnings are likely to grow over time while the coupon on the 10-year is fixed. Although there is risk that earnings will fall in a recession, there is no recession currently in sight. The attractiveness of a 5%+ earnings yield compared to a 2% Treasury coupon is compelling to some investors.
There are also fundamental factors on the positive side. I have been counting on housing helping the United States economy move toward a 3% growth rate this year. Mortgage applications for purchase, sales of existing homes and the Case-Shiller home price index are all showing a positive trend. New home sales are, however, presently disappointing. Given that I am convinced that the favorable trends will continue, I expect the unfavorable data will reverse and housing starts will consistently exceed one million before too long. The increase in family formations resulting from improved employment in the 25–34 age bracket also gives me encouragement.
There is other good news on the economic front. The Economic Cycle Research Institute’s Leading Index has turned up sharply. This index correctly forecast the slowdowns in the U.S. economy in 2010, 2011 and 2012. After a worrisome decline earlier this year, the index has turned sharply higher, supporting the view that the economy will improve in the remaining quarters. Investors became concerned recently when real Gross Domestic Product (GDP) growth was reported for the first quarter at .2%. Even this weak number may be revised downward because of the recently announced 43% increase in the trade deficit in the first quarter. The quarter was hurt by severe weather across the eastern part of the country, the strong dollar and the West Coast dock strike. First quarters in the U.S. have been significantly soft since 2009, and if the recovery pattern of the last six years follows, it is reasonable to assume real growth will be in the 2.5% to 3% range for 2015.
We are also seeing some signs of improvement in employee compensation. The Employment Cost Index was up 2.5% in the first quarter. This sharp improvement (it was as low as 1.5% in 2014) should help the housing sector. The recent increase in household formations (back to pre-recession levels) should also help housing. In addition, the willingness of corporate managers to borrow money reflects their optimistic outlook. In April, bank borrowing increased 8.3% on a year-over-year basis, matching the peak in 2009. Other indicators support a positive outlook for the economy: rail car loadings improved and consumer spending was up .3% in March.
Despite the positives, there are also some serious negatives, and assessing their significance is important. Productivity declined 1.9% in the first quarter of 2015 after a smaller drop in the fourth quarter of 2014. Because productivity is a key component of profitability, this is a reason for concern.
Part of this may be attributable to slow revenue growth because of weather and other factors, but productivity improvement is essential to growth. Technology has been a major force in increasing productivity, and we may have reached the point where the incremental benefits of using equipment and processes to increase the output per worker may be taking a rest. Given that revenues going forward are likely to increase slowly, this negative trend in productivity must be reversed.
On the jobs front, the April employment report came in slightly below target at 223,000. The previous month was revised downward to 85,000 from an already disappointing 126,000. Average hourly earnings increased 2.2% year-over-year. The unemployment rate dropped to 5.4% and the participation rate increased to 62.8%. The construction sector was strong, reflecting the improved weather, but manufacturing was disappointing, only adding 1,000 jobs. As expected, most of the jobs were created in the service sector, which tends to have a lower rate of compensation.
While I would have preferred to see a stronger report, nothing in the data would indicate that the economy will not show reasonable growth as we move through the year. Looking at the labor report from a broader perspective, however, there is reason for concern. According to David Malpass of Encima Global, the labor force only grew 166,000 in April, 1.1% year-over-year, which was disappointing. The employment to population ratio is 59.3%, which is 3%-4% below the 2000–2010 level and 5% below the level in the 1990s.
What is troubling about this data on the trade balance, productivity and the employment report is that it suggests that there is unlikely to be a major increase in capital spending. According to the Commerce Department, capital investment was down 3.4% in the first quarter. The U.S. industrial stock is 22 years old, an all-time high, but operating rates are below the 80% where companies begin to plan major capital expenditures. Much of the money that has been spent has bought labor-saving equipment that has enabled companies to deliver goods and services with fewer workers.
An important driver of recent capital spending has been energy, and the sharp drop in oil prices over the past year has had a major negative impact. Now that the price of oil has risen from $43 per barrel (West Texas Intermediate) to over $60, energy capital spending should pick up, assuming current prices will hold. The pending nuclear agreement with Iran, while eliminating a major geopolitical risk, does change the supply / demand balance. If this were signed over the next few months and sanctions are lifted, one million barrels of incremental oil could come into the world market and crude prices could decline again. Right now, the negotiations seem to be running into serious difficulty, so I still expect a pick-up in energy capital expenditures as we move through the year.
I am occasionally questioned about the possibility of a bubble forming in the Nasdaq as a result of the strong performance of technology and biotechnology stocks in the current cycle. Investors clearly have not forgotten the excesses of the 1999-2000 period. Looking at the data, however, there seems to be much less froth this time around. For example, the price-earnings ratio (excluding companies with negative earnings) was 49 in 2000; it is 25 now. The dividend was negligible in 2000; it is 1.13% now. The price to sales ratio was 12 in 2000; it is 3.5 now.
The U.S. market has been long overdue for at least a 10% correction. It has been three years since the last one. Sentiment among investors is optimistic or complacent, not a condition conducive to a sustained upward market move. I still maintain a positive outlook for the S&P 500 for 2015, but perhaps we have to endure a little pain first. By the second half of the year, the market mood may be more subdued and the fundamentals of the economy may be better, providing a more favorable environment for stocks to move higher.
I still expect the S&P 500 to rise 10% or more by the end of the year, but it will have to get there on the basis of fundamentals without the help of liquidity provided by the Federal Reserve.
Wien is vice chairman of Blackstone Advisory Partners LP, where he acts as a senior advisor to both Blackstone and its clients in analyzing economic, social and political trends.
Trans-Pacific Trade Pact Highlights the Political Power of the Affluent
MAY 27, 2015
Wednesday, May 27, 2015
Cash is on its Death Bed ...
by Larry Edelson
Into high-end art, rare coins, diamonds and more.
There are numerous reasons why. Chief among them: The big, savvy and smart money knows what's coming. Western socialist governments, on their death beds, are on a witch hunt to find every penny of wealth you have, track it, and tax it.
Some of you may think the rich deserve to be taxed more. Maybe so, maybe not. I'm not going to get into that debate today.
But what I am going to tell you is that if you think it's only the rich under attack, think again.
Washington and Brussels want your money, too. They want to know how you're earning it. Where it's coming from. Where it's going. Every penny of it.
They also want to control it. They want to get you to spend more to boost the economy. Hence, why negative interest rates, a tax on your money, is spreading through Europe.
And perhaps most important of all, why authorities in Europe and the U.S. are moving to abolish cash.
Never mind most of what you already do is electronic. You bank online. You trade online. You conduct business online.
That's not enough for Washington or Brussels. They want all cash gone from the system.
The first such steps have already been taken. The International Monetary Fund (IMF) is now working behind the scenes to make its Special Drawing Rights, or SDRs, the new global reserve currency.
The World Bank is working on its own version.
All over Europe now, cash is under attack. Spain has banned cash transactions over 2,500 euros. Italians have been banned from using cash transactions of more than 1,000 euros, while France is expected to introduce a similar law in September.
France, by the way, is also requiring that all gold in the country and transported through the country must be declared and reported to French customs.
While large cash withdrawals exceeding 10,000 euros per month will also now be monitored and reported.
Throughout Europe now, foreign exchange offices are now required to obtain a copy of someone's ID to exchange more than 1,000 euros.
In the U.K., former Prime Minster Gordon Brown is advocating abolishing all cash and forcing people to use all electronic money via a new nationalized bank.
In effect, Brown wants to usurp the money supply and control it better, he thinks, via a communist-type move to control your savings and spending, allegedly on your behalf.
In Denmark, at least, authorities are being more open about it. They're preparing to introduce a law this fall to make virtually all transactions electronic.
It's not just Europe, though. In many Central and South American countries, finger-printing is required by certain stores and businesses if one pays in cash with US$100 or more. Western Union has certain policies in place that require finger-printing outside the U.S.
Mexico has restrictions on numerous cash transactions.
Here in the U.S., while there are no national cash bans in place, a new trend is indeed emerging.
Louisiana, for instance, recently banned cash transactions for second-hand merchandise — making it tough for flea markets to survive.
In many states, pawn shops are now under very strict scrutiny when it comes to cash transactions, with a good deal of paper work now demanded.
Of course, the propaganda coming out of governments is that cash is how most terrorists and drug dealers work. Outlaw cash, and we put them out of business.
But you and I both know it goes well beyond terrorism and drugs. Just like the NSA spying has.
It's simply another way to spy on you, and to track and tax you — so the government can gain greater control over everything you do.
The problem is that it is going to get worse. Your rights are being trampled on, left and right. The Constitution means nothing these days.
But you have to stop and ask yourself one question: Why do governments want so much power over me these days to control and tax me?
The answer is simple: Western socialist governments are on their death bed, they are fighting for their lives, and if it's a choice between them and you and your rights, they will always choose themselves.
In the end, they will fail. Governments can indeed fool some of the people some of the time, but over time, they can't fool the majority. The people of the world, especially Europe and the U.S., will rise up and throw the bums out ...
In one heck of a giant rebellion and revolution that is coming.
Stay tuned and best wishes, as always ...
Peru: 2015 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Peru
|Publication Date:||May 27, 2015|
|Electronic Access:|| Free Full text (PDF file size is 2,463KB). |
Use the free Adobe Acrobat Reader to view this PDF file
|Summary: KEY ISSUES |
Context: Peru remains one of the best performing economies in Latin America, with solid macroeconomic fundamentals, strong policy frameworks, and visible gains in poverty reduction. Like most of the region, Peru faced a challenging external environment in 2014. External shocks were compounded by domestic supply disruptions and a drop in subnational public investment, and growth decelerated sharply. Headline inflation was slightly above the upper band of the central bank’s (BCRP) target range due to supply shocks, but expectations remained well anchored.
The external current account deficit declined slightly despite weaker external conditions. Outlook and risks: Growth is expected to recover in 2015 and over the medium term, contingent on production at new mines approaching capacity, priority infrastructure projects advancing, and shocks to terms of trade fading. However, downside risks dominate. Externally, these include a surge in global financial volatility, further dollar appreciation, or lower commodity prices and external demand.
Domestic downside risks include weaker investment, uncertainties surrounding 2016 Presidential elections, and persistent social conflicts. A faster unwinding of supply shocks or a more complete pass- through of lower food and fuel global prices constitute upside risks. Near-term policy mix: The policy mix is broadly adequate to support the recovery and maintain macroeconomic stability. The immediate priority is expediting the execution of public investment in line with government plans, while avoiding increases in non-priority current spending. Monetary policy should remain responsive to inflation expectations and external developments. Exchange rate flexibility should be the main line of defense against any additional external pressures.
The timely use of macro-prudential tools and ongoing de-dollarization efforts should further solidify financial stability.
Medium-term prospects: With the end of the commodity boom, a push to deepen structural reforms will be necessary to sustain potential growth and diversify the economy. Revenue losses would need to be offset to finance structural reforms, investment, and inclusion along a gradual fiscal consolidation path. Streamlining legal requirements and red tape is rightly a government reform priority and the ambitious education reform and inclusion polices should stay their course within the framework of fiscal discipline. Persevering with labor market reform remains important.
|Order a print copy|
May 26, 2015 7:19 pm
Why finance is too much of a good thing
It is very costly to police markets riddled with conflicts of interest and asymmetric information
Alas, it is also possible to extract rents in markets. The financial sector with its complexity and implicit subsidies is in an excellent position to do so. But such practices do not only shift money from a large number of poorer people to a smaller number of richer ones. It may also gravely damage the economy.
This is the argument of Luigi Zingales of Chicago Booth School, a strong believer in free markets, in his presidential address to the American Finance Association. The harms take two forms. The first is direct damage: an unsustainable credit-fuelled boom, say. Another is indirect damage that results from a breakdown in trust in a financial arrangements, due to crises, pervasive “duping”, or both.
Prof Zingales emphasises the indirect costs. He argues that a vicious circle may emerge between public outrage, rent extraction and back to yet more outrage. When outrage is high, it is difficult to maintain prompt and unbiased settlement of contracts. Without public support, financiers must seek political protection. But only those who enjoy large rents can afford the lobbying. Thus, in the face of public resentment, only rent-extracting finance — above all, the mightiest banks — survive. Inevitably, this further fuels the outrage.
None of this is to deny that finance is essential to any civilised and prosperous society. On the contrary, it is the very importance of finance that makes the abuses so dangerous. Indeed, there is substantial evidence that a rise in credit relative to gross domestic product initially raises economic growth. But this relationship appears to reverse once credit exceeds about 100 per cent of GDP.
So what is to do be done? Here are a few preliminary answers.
First, morality matters. As Prof Zingales argues, if those who go into finance are encouraged to believe they are entitled to do whatever they can get away with, trust will break down. It is very costly to police markets riddled with conflicts of interest and asymmetric information. We do not, by and large, police doctors in this way because we trust them. We need to be able to trust financiers in much the same way.
Second, reduce incentives for excessive finance. The most important incentive by far is the tax deductibility of interest. This should be ended. In the long run, many debt contracts need to be turned into risk-sharing contracts.
Third, get rid of too big to fail and too big to jail. These two go together. The simplest way to get rid of too big to fail would be to raise the equity capital required of global systemically important financial institutions substantially.
Many would then choose to break themselves up. Once that has happened, fear of the consequences of prosecution should also diminish. Personally, I would go further by separating the monetary from the financial systems, via the introduction of “narrow banking” — that is, backing demand deposits with reserves at the central bank.
Finally, everyone has to understand the incentives at work in all such “markets in promises”. These markets are exposed to corruption by people who do not care whether promises are kept or whether counterparts are even unable to understand what is being promised.
What is needed is not more finance, but better finance. Yes, this might also end up as substantially less finance.
Corruption in football
At last, a challenge to the impunity of FIFA
The arrest of officials should be the first stage in a thorough cleansing of a discredited organisation
May 30th 2015.
FEW arrests can have provoked such Schadenfreude as those of seven senior officials of FIFA, football’s world governing body, early on May 27th at a swish Swiss hotel. The arrests are part of a wide-ranging investigation by America’s FBI into corruption at FIFA, dating back over two decades.
The indictment from the Department of Justice named 14 people on charges including racketeering, wire fraud and paying bribes worth more than $150m. They are likely to face charges in a US federal court. As more people start talking in a bid to sauve qui peut, the investigation will with luck reach into every dark and dank corner of FIFA’s Zurich headquarters.
American extraterritorial jurisdiction is often excessive in its zeal and overbearing in its methods, but in this instance it deserves the gratitude of football fans everywhere. The hope must be that FIFA’s impunity is at last brought to an end and with it the career of the ineffably complacent Sepp Blatter, its 79-year-old president, who was nonetheless expected to be re-elected for a fifth term after The Economist had gone to print.
The evidence of systemic corruption at FIFA has been accumulating for years, but came to a head in 2010 with the bidding for two World Cups. When the right to hold the competition in 2022 was won by tiny, bakingly hot Qatar, against the strong advice of FIFA’s own technical committee, suspicions that votes had been bought were immediately aroused. Thanks to two female whistleblowers and the diligent investigative work of the Sunday Times, a wealth of damning evidence was unearthed involving a Qatari FIFA official, Mohamed bin Hammam, who allegedly wooed football bigwigs in Africa with a $5m slush fund.
Under pressure, Mr Blatter eventually agreed to set up a FIFA “ethics court”. He also appointed Michael Garcia, the American lawyer who helped oust Eliot Spitzer from the position of New York governor, to investigate the allegations of vote-rigging and kickbacks.
Incredibly, Mr Garcia, who spent more than a year looking into the allegations, never interviewed Mr bin Hammam or examined the trove of e-mails acquired by the Sunday Times.
Only a summary version of his report, itself condemned by the investigator as “erroneous representations of the facts and conclusions”, was ever published. Mr Garcia resigned and Mr Blatter sailed serenely on, reneging on a commitment not to stand for election again. The idea that a clearly tainted World Cup bidding process should be reopened was firmly squashed.
The underlying problem at FIFA is that it controls television and marketing rights (worth $4 billion at last year’s World Cup in Brazil), which can be used by those in power to win the loyalty of football federations from poor countries, particularly in Africa. Corruption is tolerated, as long as the money is spread around. Critics of FIFA are dismissed as bad losers and racists.
They must hit the organisation where it hurts most: in its bulging wallet. Until now the stench from FIFA has prompted people to do nothing more than hold their noses. That is no longer an option.
Silver Is Shaping Up To Be The Best Precious Metal Play Of The Decade
- Despite being caught in a long-term bear market, silver offers considerable long-term potential upside.
- The gold-to-silver ratio indicates that silver is significantly undervalued in comparison to gold.
- Supply and demand fundamentals point to an ongoing physical supply deficit that will boost prices.
- Increasing industrial demand, particularly for solar and hi-tech applications, will exacerbate the supply shortage, driving prices higher.
For these reasons I believe it is significantly undervalued and poised for a massive rally, with its price set to climb higher over the long term, offering investors far better potential returns than gold or other precious metals.
One of the key measures of whether silver is undervalued or overvalued in comparison to gold is the gold-to-silver ratio. This ratio measures the correlation between silver and gold prices, allowing investors to determine when it is the optimal time to invest in silver in preference to gold. The relationship between gold and silver prices, as well as the gold-to-silver ratio for the last two decades, is illustrated below.
(click to enlarge)
Source: Perth Mint.
The gold to silver ratio has widened considerably in recent years. At the height of the gold bull market which peaked in 2011, 38 ounces of silver bought one ounce of gold. This has now more than doubled, with 71 ounces of silver needed to buy an ounce of gold.
The current ratio is also well above the historical average, which over the last century has required somewhere between 50 to 60 ounces of silver to purchase one ounce of gold. Over the last two decades the ratio has averaged 60 ounces of silver to one ounce of gold. While the ratio of silver to gold in the Earth's crust is estimated to be between 17 ounces to 20 ounces of silver to one ounce of gold.
This indicates that silver is heavily undervalued in comparison to gold and that now is the optimal time to invest in silver.
If the ratio were to fall to where it was during the height of the gold bull market, silver based on current prices would need to appreciate by around 86% in value. While if it even returned to the historical average of 50 ounces of silver to one ounce of gold, it would need to appreciate in value by 41%, still offering considerable potential upside to investors.
However, investors should remember that in comparison to gold, silver is far more volatile because of far lower market liquidity coupled with fluctuations in demand for industrial uses, the fabrication of jewelry and as a store of value.
This means there are far more influences on the demand for silver, and hence its price, than with gold, helping to explain the volatility witnessed since the collapse of the bull market in late 2011.
Nonetheless, unlike gold, silver is an industrial metal with a wide range of uses, primarily because of its conductive properties, with it being the most electrically conductive element followed by copper and gold. This sees it in great demand as a component in a range of industrial applications and hi-tech products.
For 2014 alone, industrial demand for silver made up 56% of its total demand and industry has been the primary consumer of silver for some time.
Source: The Silver Institute.
This compares to gold where industrial demand only made up 8% of total gold demand in 2014, with the largest driver of demand being for investment purposes.
In fact, when we look at the next chart it is easy to see that overall industrial demand for silver has been in decline for the last decade and this can be primarily attributed to the virtual extinction of traditional film-based photography.
However, when we take a deeper look at the numbers it can be seen that demand for silver in a range of industrial applications continues to grow.
(click to enlarge)
Source: The Silver Institute.
Silver has become an integral component in a range of hi-tech applications including flexible touch-screens, semi-conductor stackers and light emitting diodes (LEDS). Demand for these components is set to grow exponentially over the coming years as their use in portable consumer electronics, medical and other applications continues to rise.
As we can see, over the last ten years the demand for silver for use in electronic and electrical applications has grown by 15%, and I expect this rate of growth to increase as the demand for hi-tech electronic products soars.
Between now and 2018, annual silver consumption for use in flexible electronics is forecast to grow tenfold, by up to 2 million ounces. Meanwhile, industry insiders expect the demand for silver in the manufacture of LEDs to shoot up to 8 million ounces annually and 10 million ounces for use in semiconductor stackers. This represents a total of an additional 20 million ounces of silver annually being used in the manufacture of these components.
Silver is also a key component in the manufacture of photovoltaic cells (PVs) that are used in solar panels to convert our sun's energy into electricity. The demand for PVs is expected to grow quite strongly between now and 2018.
When manufacturing PVs, around 2.8 million ounces of silver is required to build enough PVs to generate 1 gigawatt (GW) of electricity. For 2014, according to the Silver Institute, this saw 60 million ounces of silver used in their manufacture alone, which equates to 5.6% of the total demand for physical silver during that year.
Furthermore, the demand for silver for use in PVs over the last ten years has grown eightfold, and this trend is expected to continue over the long term. This is because demand for PVs is expected to explode as a number of countries push ahead with instituting green energy targets.
The world's second largest economy, China, has set some aggressive green energy targets because of growing pollution. In 2014 it added 12 GWs of solar power, and in 2015 plans to boost that by 48% to add 17.8 GWs of solar power over the course of the year as it battles to fight pollution.
Based on 2.8 million ounces of silver being required to manufacture sufficient PVs to generate 1 GW, this would see China's demand for silver for use in PVs increase by 16 million ounces or 48% year-over-year.
Even more compelling is that China is targeting to triple its solar power capacity between now and 2020, to 100 GWs. For this to occur, it alone would require 188 million ounces of silver.
But the growing demand for PVs, and thus silver, doesn't end there. A number of other countries are also aggressively targeting to boost the solar power capacity.
Between now and 2018, the European Photovoltaic Industry Association expects Europe to add around 69 GW of additional solar capacity to its energy grid, therefore requiring 193 ounces of silver.
Japan has also established some ambitious solar energy targets in the wake of the Fukushima nuclear disaster, that has already seen it double its solar power capacity since 2011. This trend is expected to continue with plans underway to build more solar power plants. Even Brazil is focused on boosting its solar capacity with plans to build a 350 megawatt (MW) plant on the Amazon's Uatumã River.
This demand for solar energy will see the demand for silver as an integral component in the manufacture of PVs continue to grow exponentially, helping to drive silver prices higher.
Declining silver supplies
The growing demand for silver for use in the manufacture of these hi-tech components will add further pressure to an already constrained supply situation.
According to the Silver Institute, demand for physical silver in 2014 outstripped supply by half a percent, or 4.9 million ounces, and this physical supply deficit can only get worse. For 2015, it has been estimated that supplies of physical silver will decline by around 3.5%, primarily because of falling supplies from mining.
This is because silver miners have sharply decreased investment in exploration and mine development because of markedly weaker silver prices, that have made many ore deposits uneconomical to mine.
If we take a look at a snapshot of the largest primary silver miners, you can see that with the exception of Pan American Silver (NASDAQ:PAAS) and Silver Standard Resources (NASDAQ:SSRI), the other miners have sharply decreased their capital budgets as silver prices have fallen.
(click to enlarge)
Source: Company filings & The Silver Institute.
Such a sharp decline in investment in exploration and mine development will have a long-term impact on silver supply because there is a long lead-in time associated with identifying and exploiting new ore deposits, as well as with ramping up production from existing mines.
As a result I expect the physical supply deficit for silver to continue into 2015 and 2016. A physical supply deficit also suggests a reduction in global silver inventories, further reducing the amount of silver available for investors, the fabrication of jewelry and industrial uses.
I expect this constrained supply situation coupled with growing demand to drive silver prices higher over the long term, while placing a floor under existing prices.
Risks to the investment thesis
Any precious metals investment does not come without risk, particularly with the growing short-term volatility of gold, and in particular silver, prices that we are now witnessing.
These risks include:
- There is the potential that silver ETFs may make sizable liquidations of their positions as silver rallies, and this would see a considerable amount of bullion entering the physical market over a short time frame, applying considerable downward pressure to silver prices.
- Declining industrial activity in China, which would see the demand for silver for use in industrial applications decline sharply, with it being among the largest manufacturing markets for the metal.
- If the U.S. dollar continues to rally strongly, then this will have a sharp impact on silver prices with them being negatively correlated. Nonetheless, the U.S. dollar has already rallied, and strongly, and the consensus view is that it is due for a pullback, thereby mitigating this risk.
- Any significant rally of silver would see a mad scramble by miners to rapidly boost production in order to take advantage of higher prices, thereby boosting silver supply and forcing down prices. However, this risk is offset by the long lead in times needed to develop silver mining assets and ramp up production.
- Silver has far lower liquidity than gold and this means it is subject to higher volatility and wider price movements.
Clearly, the fundamentals are in place to support a solid rebound in silver, although it will take time for this rally to occur with short-term volatility set to remain a characteristic of silver prices for the foreseeable future.
Speculative paper trading coupled with higher illiquidity than gold continues to have a negative impact on silver, while significantly increasing the overall volatility of the metal. This means that in the short term it will continue to experience wild price swings and its recent rally will more than likely retrace.
As a result, I certainly wouldn't be "betting the farm" on silver, but it is an investment worthy of consideration, with it offering investors the benefit of solid long-term potential upside coupled with the ability to hedge against further global geopolitical and economic uncertainty because of its status as a safe-haven investment.
The Fed Considers a More Seasoned Approach
By: Peter Schiff
Tuesday, May 26, 2015
The campaign began in late April with some seemingly groundbreaking analysis by CNBC's Steve Liesman showing that over a 30 year time frame GDP data had consistently measured first quarter growth at 1.87%, which was far lower than the 2.7% rate averaged in the following three quarters of the year. He pointed out that the trend had gotten even more pronounced since 2010, when first quarter growth averaged just .62% and the remaining three quarters averaged 2.3%. The disparity caused Liesman, and others, to question whether first quarter data should be regarded as reliable.
The problem hinges on the efficacy of the 'seasonal' adjustments that are baked into the GDP methodology. These filters are designed to smooth out the changes in spending, production, and consumption that occur over the course of the year. After all, business and consumers behave differently in December than they do in July.
When Liesman pressed the Bureau of Economic Analysis (the government entity that supplies the data) to explain his findings, the agency responded "BEA is currently examining possible residual seasonality in several series, which may lead to improvements in...the regular annual revision to GDP." We should understand "improvements" to mean changes that make first quarter GDP higher.
A few weeks later the BEA provided some specifics saying methods for counting government defense spending and "certain inventory investment series" could be improved to help address the distortion. It promised to correct these deficiencies by July 30. It promised to correct these deficiencies by July 30. But to make sure that everyone understood that the help was definitely on the way, the BEA issued a blog post on May 22 in which it specified a number of areas in which it will eliminate what it calls "residual seasonality." This term should be accurately defined as "areas that we think should be higher."
As if on cue, the Federal Reserve itself waded into the debate with its own new study (released by the San Francisco Fed - Janet Yellen's former stomping grounds) that seemed to confirm and expand on Liesman's analysis and the BEA's concessions (makes one wonder if these campaigns are coordinated). Fed economists took a hard look at the disappointing .2% annualized first quarter 2015 growth, and determined that the seasonal adjustments that have been in use for years were insufficient to fully reveal the true health of the economy. When the San Francisco Fed added a second level of seasonal adjustments, it determined that Q1 growth should have been measured at 1.8% annualized. While that growth rate would not be considered strong, it is much closer to the 2.7%-3.0% that most forecasters had predicted at the end of 2014. No matter that the Atlanta Fed's "GDP Now," which was designed to be a more objective and contemporaneous measurement tool, was confirming near zero growth in Q1, many economists and media outlets jumped on the Fed study as proof positive that the economy is stronger than the pessimists portray.
In reality, few people actually understand how the complex and opaque seasonal adjustments really work (I know I don't). Fewer still have the patience to wade through the formulas to determine inefficiencies and potential remedies. This provides the statisticians with a good deal of convenient refuge against critics. But it's important to realize that unlike straight GDP measurement, which is ideally a strict accounting of spending, these adjustments can introduce an element of subjective institutional bias.
Government entities (and to a lesser extent media outlets) have many reasons to suggest that the economy is better than it really is. The Fed wants us to believe that its policies are effective; the Federal government wants us to believe that the economy is healthy, and financial media outlets depend on confident investors. I'm not saying that these biases are insidious or conspiratorial, but it does produce an environment where there is more emphasis placed on finding reasons to explain why GDP measurements are low, than there is to find reasons why it is too high. The subjectivity of the seasonal adjustments gives these biases room to run.
People understand that holiday spending juices GDP at the end of the year, and that post-holiday depletion and cold winters cause consumers to retrench. This causes them to try to compensate for the weakness in the first quarter. But there is no pressure for them to find reasons that GDP may be too high in December and May (when Christmas lists and pleasant weather should be encouraging shopping).
Given that, why do we really need seasonal adjustments in the first place? Yes December is different from July, but those differences persist every year. If we are looking at full year GDP, which is the measure that everyone is really after, why not keep a cumulative tally that we compare to prior years rather than prior quarters? Wouldn't this strip out a needless and opaque system of adjustments from a measurement system that is already overly complex to begin with? I believe the truth is the system is getting more complex because we want it that way. We prefer the ability to manipulate figures rather than allowing the figures to tell us things that we don't want to hear.
The real disconnect lies in the failure of the economy to grow, as most people assumed that it would, after the Fed's quantitative easing and zero interest rates had supposedly worked their magic. But as I have said many times before, these policies act more as economic depressants than they do as stimulants. As long as these monetary policies persist, our economy will never return to the growth rates that would be considered healthy.
In any event, many market watchers are grabbing at the San Francisco Fed report to conclude that Janet Yellen will raise rates this year, despite the weakness that the unadjusted GDP reports indicate. Such a conclusion is premature. I believe that the Fed wants us to think that the economy is strong, in the hopes that perception may one day soon become reality. If people think the economy is strong their optimism could influence their spending, hiring, and investing decision. As a result, optimistic Fed pronouncements should be considered just another policy tool; call it "open mouth operations."
But I do not believe the Fed has any actual intention of delivering the rate increases that it may expect will damage our already weak economy.
JPMorgan’s Guilty Plea Puts Wealth Unit in Spot With Regulators
by Neil Weinberg
4:00 AM COT May 26, 2015
JPMorgan Chase & Co. put allegations of currency-fixing largely behind it with a guilty plea, but it’s not out of the woods yet.
With its new felony record, America’s biggest bank needs to seek the Department of Labor’s permission to keep managing money in the $8 trillion private pension market. At the same time, there’s a cloud over the JPMorgan unit where pensions are managed: The Securities and Exchange Commission is well along in an investigation into conflicts of interest in the bank’s wealth-management unit, whose products include individual retirement accounts.
That puts the bank in a sticky position -- arguing that a criminal conviction shouldn’t keep it from managing Americans’ retirement savings, while the SEC is investigating possible wrongdoing in the same división.
JPMorgan spokesman Darin Oduyoye declined to comment “on Bloomberg speculation over future events.”
The May 20 guilty pleas by America’s biggest bank and four others -- Citigroup Inc., Barclays Plc, Royal Bank of Scotland Plc and UBS Group AG -- required each to apply for regulatory exemptions from the SEC, as well as from the Labor Department, to carry on business as usual.
Bank of America Corp. lost its ability late last year to issue certain securities without first seeking SEC permission. Credit Suisse Group AG is operating its $2 billion pension business under a temporary, one-year waiver while the Labor Department conducts an extensive review of whether to grant the Swiss bank’s request for permanent relief.
The stakes are higher for JPMorgan Asset Management, the quickly growing business unit that includes mutual funds, private wealth management and some trusts. Its assets under management included $319 billion in U.S. pension funds at the end of 2014, according to Pensions & Investments.
On the day last week when JPMorgan pleaded guilty to antitrust violations for manipulating currency rates, the bank applied to the Labor Department for an exemption to continue managing pensions as a Qualified Professional Asset Manager.
Banks rely on their QPAM status to carry out key transactions for pension clients, and a plea by any bank affiliate anywhere in the world triggers the need for it to apply for an exemption to maintain that business. JPMorgan needs to secure the waiver before it is sentenced.
The Labor Department has taken several months or more, in most cases, to carry out similar reviews. Michael Trupo, a Labor Department spokesman, declined to comment.
The May 20 application came just two weeks after JPMorgan disclosed in a regulatory filing that its wealth-management unit, part of the Asset Management division, is under investigation by the SEC, other government authorities and a self-regulatory organization. The unit was being probed for the sale and use of its own mutual funds and other proprietary product, the bank said.
The investigation is focused on whether JPMorgan employees have been putting customer money into the bank’s own funds and other products, such as structured notes and hedge funds -- not because they are necessarily the best choices for clients, but because those options generate fees for JPMorgan, according to people familiar with the matter.
As part of that probe, bank executives have been deposed and thousands of pages of internal documents subpoenaed, Bloomberg reported in March, citing people familiar with the situation. The Office of the Comptroller of the Currency, a primary banking regulator, is assisting the SEC in its investigation, added a person familiar with the matter.
The SEC’s investigation into JPMorgan’s money-management practices has been under way for at least two years, people familiar with the probe have said. Companies often disclose such investigations when they become material for shareholders.
That raises the possibility that the SEC and the other government authorities will reach a conclusion about potential wrongdoing inside the asset-management unit, as the Labor Department continues to review the bank’s waiver for activities by the same group.
JPMorgan faces another potential hurdle at the SEC. Its commissioners last week approved issuing the necessary waivers for JPMorgan and the four other banks, agreeing that their felony records shouldn’t stop them from managing mutual-fund money, among other things.
Any civil enforcement action from the SEC that includes injunctions or cease-and-desist orders -- as many do -- would force the bank to appeal for a fresh round of some of the same SEC waivers it has just been granted.
The SEC’s commissioners voted to approve last week’s waivers, with Chairman Mary Jo White, an independent, casting the deciding vote on some of the waivers. Commissioner Kara Stein, one of the two Democrats who voted against several of the waivers, issued a scathing dissent on May 21.
“Allowing these institutions to continue business as usual, after multiple and serious regulatory and criminal violations, poses risks to investors and the American public that are being ignored,” Stein said. “It is not sufficient to look at each waiver request in a vacuum.”
Bankers, lawyers and professors have said it would be hard to imagine that regulators would withhold waivers. Still, said Emory University’s Velikonja, that doesn’t mean these officials couldn’t give banks a few more hoops to jump through.
“I’d be surprised if the SEC didn’t come out with more than the usual compliance programs and independent monitors,” she said. “I’d be very curious to see if instead, it is something new and more invasive than in the past.”
World War D—Deflation
By John Mauldin
May 27, 2015
Source: Ned Davis Research
In other words, fiscal tightening has acted as a counterweight to unprecedented monetary easing.
- Japan has postponed the planned 2015 consumption tax increase.
- China has started to announce new spending projects intended to keep the economy from slowing more sharply.
- In the US, federal spending has increased for five straight months after being flat for five years, rising 5.5% year-over-year in October.
- France and Italy have been given more time by the European Commission to meet their deficit reduction targets, which means they won’t need to implement substantial spending cuts (tax cuts in France and Italy are more likely this year).
- Germany should ramp up spending after initially proposing to balance its budget in 2015, while…
- Europe will likely approve and begin to implement some version of President Juncker’s plan to provide more than €300 billion in spending initiatives.
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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