The Best Advice From A Single Guy

This is probably not something you see everyday on a Financial Services website but it struck a chord with me, especially after all the years that I have spent with couples and sometimes walked away thinking to myself that I was a relationship counselor and in fact it is often said that a Financial Planner will spend half his time as a relationship counselor.

Article starts here.

Nate Bagley says he was sick of hearing love stories that fell into one of two categories — scandal and divorce, and unrealistic fairytale.

So he started a Kickstarter and used his life savings to tour the country and interview couples in happy, long-term relationships.

He then took to Reddit’s /r/IAmA to share what he learned (just in time for Valentine’s Day), and to post podcasts of the couples’ journeys and advice.

via Here’s The Best Advice From A Single Guy Who Spent A Year Interviewing Couples | Business Insider.

Mortgage Rates, Property and The Money Market

bills

What do these have to do with the stock markets? Everything. You need to follow what is happening across all markets if you want to make educated stock trades.

I read all I can about what is happening in the economy and this fortnightly newsletter I receive from General Finance keeps me abreast of what is happening in a specific part of the market. I think you will enjoy it too.

The Money Market

At 9 am on 15 February 2013 the money markets were at the following levels:

Official cash rate 2.50% (unchanged)
90 day bill rate 2.67 (up from 2.65)
1 year swap rate 2.80 (up from 2.62)
3 year swap rate 3.18 (up from 2.80)
10 year bond rate 3.86 (up from 3.56)
Kiwi dollar 0.8488 (up from 0.8314)

Short Term Finance

We currently have funding available for short term and bridging loans. This includes low doc and asset lending. The purpose of this funding can be fairly wide, refinancing of short term debts, purchase of boats, and carrying out subdivisions, to name a few. One of our more popular reasons, is to assist people bring their tax payments and arrears up to date. Our criteria are fairly wide, but we do require residential security. We welcome your enquiries.

Capital Gains Tax

Numerous groups are calling for a capital gains tax to be introduced. They mistakenly believe that this will slow down the property market and make housing more affordable. Over the past 3-4 years property prices have really only risen in Auckland, which is growing rapidly and in Christchurch, which is a special situation. Gains in other cities and provincial towns have been more modest. If we look across the Tasman, where capital gain taxes were introduced in the mid 1980s, house prices have continued to rise rapidly. One could argue that capital gains taxes across the Tasman, actually caused house prices to rise. The key is to making houses more affordable, is to increase the supply. This includes making it cheaper and easier to subdivide sections and bare land, and to allow the building of medium density dwellings, as they do in places such as Sydney. A capital gains tax will not achieve this.

WOFs for Residential Properties

Some commentators are suggesting that residential rental properties should be required to obtain a certificate of fitness on a regular basis – a bit like a warrant of fitness for your motor vehicle. Why make this change? We have not needed them so far. And what about the cost – someone has to pay an assessor. Landlords will not pay – they will simply pass this on to the tenant through higher rents. This is the last thing we require, given that rents now are already too expensive.

Interest Rate Direction

We are of the view that there will be no changes in mortgage rates this year. The reason we must ask, is why rates would rise? Interest rates will only rise when the economy starts to improve (it is not), when unemployment starts easing (it is not), and when inflation becomes a threat. The official inflation rate is now at its lowest level since the early 1960s. Until these factors change, interest rates will not rise. This is good news for those with mortgages – their interest rates will remain at these low levels for sometime yet.

via stocktrader.co.nz

 

The Next Surge in the Gold Price Looms: It’s Time to Buy Gold Now

The Next Surge in the Gold Price Looms: It’s Time to Buy Gold Now

If you had to guess which country has stacked the most gold in its central bank in the last ten years – who would you pick?

Would it be India, the world’s biggest importer of gold?

Or maybe China, the biggest force in the modern gold market?

Nice try, but you’d be wrong with either guess.

The unexpected winner has accumulated a formidable stash – and just in time for the huge coming move in gold

 

The answer is in fact, Russia.

For the last ten years, Russia has been busily converting its oil revenue into gold. According to the IMF (International Monetary Fund), the Russian central bank has now stacked 570 tonnes of gold in its basement. This has seen the total jump by 147% in a decade, from just 388 tonnes, to 958 tonnes.

To put that in context, the world’s biggest national government stash is the US holding of 8,134 tonnes.

So the Russians may have had a busy decade but they still have a way to go. Still – Russia is hot on the heels of China’s official holdings, which had 1,054 tonnes at last count. I say ‘last count’ because it’s coming up to four years since China updated the market. So they almost certainly have far more than 1,054 tonnes by now.

You only need to look at how much gold is pouring into China. Chinese gold imports from Hong Kong have soared in recent years from just a few tonnes a month in early 2011, to the interstellar pace of 114 tonnes in December of 2012.

This finished off a huge 2012 for Chinese gold imports, with a total of 834 tonnes going from Hong Kong to China – almost twice the figure for 2011.

Some of it will have gone to the central bank, but a large portion will go to the Chinese public. And as the Chinese get wealthier, they buy more gold.

The same is also true for India. The two countries buy around 40% of the annual (mined and recycled) gold supply between them, so it’s no surprise that as China and India have seen strong economic growth, the gold price has moved up in line with them.

 
So the recent bounce in Chinese economic growth is one reason to be more bullish on gold. I think this is one of a few key factors behind the market getting much more positive recently, after a very slow 18 months for gold.

For Diggers & Drillers readers, I’ve already tipped the five best gold stocks on the market to leverage the coming move in gold.

The institutional research on gold is really getting going now. For example, ANZ Research just called gold one of its top four hard commodity picks for 2013. They suggest buying gold as dollar weakness and strong demand create [a] positive atmosphere’. In case you’re wondering, their other three picks are copper, palladium and brent crude oil.

We’ve also heard from JPMorgan calling for gold to surge very soon and for it to hit $1,800 by June. The reasons are that the Middle East is becoming more unstable, and that production is crashing in key supplier South Africa due to the country’s unstable mining industry.

But there’s one much bigger reason to buy gold now, which I’ll tell you about in a moment.

First I’ll show you why I think the timing for Aussie investors to buy gold looks particularly good.

When buying in Australia you need to factor in the Australian dollar. Thankfully it looks like the Aussie is finally on its way down, which would give the Aussie gold price a lift. This five year gold chart shows the Aussie gold price making its way up in fits and starts.

Aussie Dollar Gold – Buy on the Dips…Like Now

 

 

You can see that the best time to buy gold is when the Aussie gold price has dipped below the 200-day moving average (red line). And the good news for you is that we’re pretty much in one of those dips right now.

Take another look at the chart above. If you could have timed your gold purchases over the last five years, don’t you wish you’d bought during the periods I’ve circled in green? Well if you buy gold soon, you should be able to do exactly that.

For my money, the main reason to buy gold and gold stocks, sooner rather than later, is the imminent effect of the Fed’s new pace of asset purchases. It is now buying $85 billion a month via QE3 4, and this has had an electrifying effect in the past. The current program now includes $45 billion in Treasuries, which should add some kick.

This chart below illustrates this beautifully. Over the last twelve years, as the Fed expanded its balance sheet (red line), both with QE programs and other asset purchases, the gold price (green line) has tracked it very closely. As the Fed trashed the dollar, the value of gold has become relatively higher.

Quantitative Easing Sends Gold Higher Like Clockwork

 

 

The important point here is that the blue line shows what will happen to the Fed’s balance sheet this year as it purchases another $85 billion in assets each month. You can see it started turning up a few months ago, but the gold price has yet to catch on yet.

If the relationship holds as firmly as it has in the past, then gold should start tracking up very soon indeed.

This would make now a good time to buy gold. It would also make now a very good time to buy gold stocks, but that is a story for tomorrow’s Money Morning

Dr Alex Cowie
Editor, Diggers & Drillers

Written by Dr. Alex Cowie

Dr. Alex Cowie

Dr Alex Cowie is Money Morning Australia’s Chief Resources Analyst.
He is also the editor and chief analyst for Diggers and Drillers — Australia’s premier resource stock advisory service. You can find out more about Dr Alex Cowie here.

via moneymorning.com.au

 

The Next Surge in the Gold Price Looms: It’s Time to Buy Gold Now

The Next Surge in the Gold Price Looms: It’s Time to Buy Gold Now

If you had to guess which country has stacked the most gold in its central bank in the last ten years – who would you pick?

Would it be India, the world’s biggest importer of gold?

Or maybe China, the biggest force in the modern gold market?

Nice try, but you’d be wrong with either guess.

The unexpected winner has accumulated a formidable stash – and just in time for the huge coming move in gold

 

The answer is in fact, Russia.

For the last ten years, Russia has been busily converting its oil revenue into gold. According to the IMF (International Monetary Fund), the Russian central bank has now stacked 570 tonnes of gold in its basement. This has seen the total jump by 147% in a decade, from just 388 tonnes, to 958 tonnes.

To put that in context, the world’s biggest national government stash is the US holding of 8,134 tonnes.

So the Russians may have had a busy decade but they still have a way to go. Still – Russia is hot on the heels of China’s official holdings, which had 1,054 tonnes at last count. I say ‘last count’ because it’s coming up to four years since China updated the market. So they almost certainly have far more than 1,054 tonnes by now.

You only need to look at how much gold is pouring into China. Chinese gold imports from Hong Kong have soared in recent years from just a few tonnes a month in early 2011, to the interstellar pace of 114 tonnes in December of 2012.

This finished off a huge 2012 for Chinese gold imports, with a total of 834 tonnes going from Hong Kong to China – almost twice the figure for 2011.

Some of it will have gone to the central bank, but a large portion will go to the Chinese public. And as the Chinese get wealthier, they buy more gold.

The same is also true for India. The two countries buy around 40% of the annual (mined and recycled) gold supply between them, so it’s no surprise that as China and India have seen strong economic growth, the gold price has moved up in line with them.

 
So the recent bounce in Chinese economic growth is one reason to be more bullish on gold. I think this is one of a few key factors behind the market getting much more positive recently, after a very slow 18 months for gold.

For Diggers & Drillers readers, I’ve already tipped the five best gold stocks on the market to leverage the coming move in gold.

The institutional research on gold is really getting going now. For example, ANZ Research just called gold one of its top four hard commodity picks for 2013. They suggest buying gold as dollar weakness and strong demand create [a] positive atmosphere’. In case you’re wondering, their other three picks are copper, palladium and brent crude oil.

We’ve also heard from JPMorgan calling for gold to surge very soon and for it to hit $1,800 by June. The reasons are that the Middle East is becoming more unstable, and that production is crashing in key supplier South Africa due to the country’s unstable mining industry.

But there’s one much bigger reason to buy gold now, which I’ll tell you about in a moment.

First I’ll show you why I think the timing for Aussie investors to buy gold looks particularly good.

When buying in Australia you need to factor in the Australian dollar. Thankfully it looks like the Aussie is finally on its way down, which would give the Aussie gold price a lift. This five year gold chart shows the Aussie gold price making its way up in fits and starts.

Aussie Dollar Gold – Buy on the Dips…Like Now

 

 

You can see that the best time to buy gold is when the Aussie gold price has dipped below the 200-day moving average (red line). And the good news for you is that we’re pretty much in one of those dips right now.

Take another look at the chart above. If you could have timed your gold purchases over the last five years, don’t you wish you’d bought during the periods I’ve circled in green? Well if you buy gold soon, you should be able to do exactly that.

For my money, the main reason to buy gold and gold stocks, sooner rather than later, is the imminent effect of the Fed’s new pace of asset purchases. It is now buying $85 billion a month via QE3 4, and this has had an electrifying effect in the past. The current program now includes $45 billion in Treasuries, which should add some kick.

This chart below illustrates this beautifully. Over the last twelve years, as the Fed expanded its balance sheet (red line), both with QE programs and other asset purchases, the gold price (green line) has tracked it very closely. As the Fed trashed the dollar, the value of gold has become relatively higher.

Quantitative Easing Sends Gold Higher Like Clockwork

 

 

The important point here is that the blue line shows what will happen to the Fed’s balance sheet this year as it purchases another $85 billion in assets each month. You can see it started turning up a few months ago, but the gold price has yet to catch on yet.

If the relationship holds as firmly as it has in the past, then gold should start tracking up very soon indeed.

This would make now a good time to buy gold. It would also make now a very good time to buy gold stocks, but that is a story for tomorrow’s Money Morning

Dr Alex Cowie
Editor, Diggers & Drillers

Written by Dr. Alex Cowie

Dr. Alex Cowie

Dr Alex Cowie is Money Morning Australia’s Chief Resources Analyst.
He is also the editor and chief analyst for Diggers and Drillers — Australia’s premier resource stock advisory service. You can find out more about Dr Alex Cowie here.

via moneymorning.com.au

 

2012 NZ Round Up

The Money Market

This morning (9 am on 7 December 2012) the money markets were at the following levels:

Official cash rate 2.50% (unchanged)
90 day bill rate 2.65 (up from 2.63)
1 year swap rate 2.62 (up from 2.57)
3 year swap rate 2.80 (unchanged)
10 year bond rate 3.56 (up from 3.27)
Kiwi dollar 0.8314 (up from 0.8165)

2012 in Review

This year has been similar, in many ways, to 2011. One positive area was on the deposit side. More people are investing in the finance company sector, as they are operating under a much tighter regulatory regime. It is giving finance companies more funds to lend, which is good for those wanting to borrow. It also allows finance companies to extend their mortgage product range. The lending side is still a little quieter than most would like but we believe that the active Auckland property market in 2012 will encourage more investors, housing renovators and builders to re-enter the market in 2013

2013 Crystal Ball

While it is always hard to predict the future, having interests in the finance sector allows us to spot certain trends. Things seem to be continuing in pretty much the same way as they did in 2012.

A low interest environment will continue throughout 2013 which is not only apparent in the mortgage market, but also evident in the corporate and Government sectors with bond investors accepting lower yields.

Unemployment will either remain at current levels or possibly get a little worse and until we start to see some real growth occurring things will remain this way.

Our dollar should remain at the current levels for some time which will continue to make it difficult for kiwi exporters.

Expect further Government cost cutting and a reduction in state employee numbers as a part of this current fiscal policy. Next year will be the only year the Government can do this, as in the following year there will be an election and we know Politicians don’t like sacking people in an election year.

Real Estate Issues

The Auckland City Council is looking at putting a blanket heritage order on all houses built before 1940. This has serious implications as it will deprive home owners the right to do as the wish with their own properties.

It will most likely affect values (just look at values around Cornwall park relevant to other areas of similar quality). Many of the houses built during this period have seen better days and owners have deferred maintenance programs, some are in need modernising and some are just not suited for the 21st century and introducing heritage controls will, in my opinion, turn these into eyesores.

NZ is still a Good Place to be Born

Top of the list in a recent survey by the Economist magazine on the best countries in which to be born was Switzerland, followed by Australia and then a number of Scandinavian countries. The good news was that New Zealand ranked eighth out of the eighty in the survey. Nigerian ranked the lowest. New Zealand did well, considering countries such as the UK ranked number twenty-seven, France at twenty-six and Germany at sixteenth. Even the USA was at number fifteen. Indicators used were things such as levels of crime, trust in public institutions, family health, life expectancies etc.

–>
via stocktrader.co.nz

Buy Small Caps Now While Investors Are Crying

‘Buy when they’re crying, then sell when they’re yelling,’ could comprise Chapter One of the contrarian investor’s handbook.

The idea being that when prices are well below any logical level, pushing investors past their pain threshold, forcing them to sell on an emotional basis – THAT is the time to go against the flow and snap up a bargain.

And conversely, when investors are overexcited, and the forums are full of revved up punters talking about the Maserati they’re going to buy with their profits…THAT is when you sell!

Right now, after close to two years of falling markets, small-cap investors are really starting to throw in the towel.

 

Adding insult to injury, small-caps have kept falling even as the ASX200 has picked up since July this year.

This particularly lousy performance from small-caps means that small-cap investors are well behind the rest of the market. But the crying has now reached levels not seen since the death of Kim Jong-il. That suggests that now could be the time to buy…

Since May last year, the ASX200 (red line) is down 8% (though recovering).

In comparison, the Small Ords (yellow line) is down 23%.

Another index of even smaller companies – the Emerging Companies index (XEC: blue line) – has crashed 32%.

So small-cap investors have every reason to cry.

Buy when they’re crying…? Well small-cap investors are crying now

 


Click here to enlarge

Source: Google Finance

 

There are a few reasons why these small-cap indices have fallen despite a rising broader market in recent months.

For one thing, they contain a large number of small mining companies, and the whole mining sector has been belted this year.

Secondly, funding has been very hard to come by in 2012, as I said in Money Morning last week. They just can’t get cash to fund their ambitions when they need it:


‘The secondary market, which is what companies use to top up the kitty, has fallen from $42 billion last year – to just $17 billion worldwide this year: a stunning drop of 60%.

‘And the primary market, for listing new companies, has been smashed from $27 billion to just $5 billion globally – A drop of over 80%!’

And it is the small companies (that are years from producing cash), which are dependent on this lifeline. If their cash dries up, the price falls. And those that manage to get funding have seen their share price fall in reaction to the anticipated share dilution.

The result is that the Emerging Companies index has now fallen to its lowest level in history.

But as another contrarian investors saying goes, ‘Buy when there is blood on the streets.’

And when small-caps are so far out-of-favour that indices are setting new lows, the bargain hunting contrarians come out to play.

Position for a Rally in Small Cap Stocks

 

The reason is that this could be exactly the time to get set and ready for a coming rally.

The reason to take on this risk is the incredible performance small-caps put in when they rally.

For example, when the ASX200 rallied 56% in the two years from March 2009, the Small Ords index gained 101% in the same timeframe.

Small-cap index gains almost twice as much as the main index

 


Click here to enlarge

Source: Google Finance

 

So small-caps can accelerate your market gains – the trick is knowing when to get in.

Just because it’s cheap, doesn’t mean it won’t get cheaper yet. But at some point, the value will be so astonishing that the worm will turn.

Maybe the catalyst will be the effects of QE3 (money printing), which I suspect are about to wash through the market. The program has only just started in earnest, and if history is any guide, this will be a good time to have another look at small-caps.

My mate Kris, the regular Editor of Money Morning, thinks the timing couldn’t be any better. He’s been tipping small-cap stocks furiously for the last few months in anticipation, and now has more small-caps on board than he’s had in years. As he says in a new report:


‘As of 26th November there were 2,076 companies listed on the Australian Stock Exchange (ASX).

’1,470 of them trade shares for 50 cents or less.

‘Right now the All Ordinaries – the index of Australia’s biggest companies – is down 35% from its 2007 peak.

‘So buying a load of stocks from the RISKIEST end of the market might seem downright stupid to you.

‘But it’s at times like these when it’s the best time to buy.

‘In fact I haven’t seen a better time to take a few calculated risks on small company stocks since the market collapsed in August 2008.’

Last time I saw Kris pull this manoeuvre, a year later he had a long list of multi-baggers, i.e. 100%, 200%, and 300% gains, on his recommended buy list.

So Kris is certainly doing the ‘buy when they’re crying’ part of the mantra.

So when he’s high-fiving himself and doing laps of the office this time next year, I’ll have to remind him about the ‘sell when their yelling’ part!

Dr Alex Cowie
Editor, Diggers & Drillers

 

Stock Market ‘Barometer’ Speaks: The Bulls Won’t Like it…

When we started writing last Friday’s Money Morning, the Australian stock market was down 20 points.

 

By the time you received it, the stock market was only down about five points.

By the end of the day, it had closed up 12 points.

We gave our market ‘barometer’ a tap to make sure it was still working. It had, after all assured us the stock market was set to slump.

We needn’t have worried.

 

In the US on Friday night, the S&P 500 index fell 1.66%, and this morning the Australian stock market looks set to open down 50 points.

This morning we consulted the ‘barometer’ again. It tells us there could be a storm on the way…

We remember our paternal grandparents had a barometer on the hallway wall. It had a dark timber frame that was just short of a metre tall and about 40 centimetres wide.

To be honest, we didn’t understand how it worked. We remember standing and watching it for minutes at a time. The needle never moved. It just kept saying the same thing.

Sometimes we get the same feeling with the stock market. We look at it every day. And every day for the past two months it has said pretty much the same thing — the market is fine; buy stocks while they’re cheap.

We knew that wouldn’t last. Because we know the stock market is fundamentally broken. Or rather, the economy is broken. It’s just that the stock market hasn’t figured that out yet.

But, with the stock market here and in the US now trading at a key level…and after Friday’s 200 point drop on the Dow Jones Industrial Average, perhaps the barometer has hit change…

 

Our old pal, Slipstream Trader Murray Dawes, certainly thinks it has. Here’s why…

Stock Market Instinct

 

Last week we explained why we knew the stock market was about to reverse. We didn’t base it on studying macro-economic data, studying company earnings reports, or analysing bond yields.

Instead, we knew the stock market was heading for trouble because on Thursday evening as we were about to leave the office, Murray looked like he was at the end of his tether.

That was all we needed to see to know that it wouldn’t be long before stocks copped a hiding. So we wrote to you about it last Friday.

Sure, it’s not the most scientific analysis you’ll ever read. But that’s the thing about the markets. It’s just as much about emotion as it is about lines on a chart or dollars in a balance sheet.

And the emotion is simple. An investor is always asking, ‘How will I make most money from investing?’

When the stock market is at its highest point in more than a year, it’s not unreasonable to wonder if stocks can keep going. After all, we’ve seen a 14% gain in five months, and an 11.2% gain since the start of the year.

To put that in context, the average annual stock market gain over the past 20 years is about 11%.

Because of that, active investors will weigh up the odds of more gains against the chances that the stock market will force investors to give up at least some of those gains.

And it’s that emotion that shows up in stock charts. Just as a cautious consumer can show up in a company’s profit and loss statement, as the company records fewer sales.

Stock Market Analyst Says ‘Watch Out Below’

 

So with all this in mind, this morning we asked the decidedly chipper Murray for his take on the stock market now. Here’s what he told us:

 

‘Friday night’s price action in the S+P 500 is exactly what I wanted to see. My view remains that the high from April this year of 1422 is a very clear line in the sand for the S+P 500. A failure below that level in coming days or weeks could ignite some very serious selling pressure. If you look at the chart you’ll see I have circled each time in the last few years that the 10 day exponential moving average has crossed below the 35 day simple moving average (My definition of the intermediate downtrend).

 

Source: Slipstream Trader

 

‘It’s quite clear from the chart that this definition of the intermediate trend has given very timely warning that the momentum of the market was about to shift. If you combine the intermediate trend signal with the fact that a false break of the high from April this year is about to take place, then you get a very powerful combination that could see traders racing for the exits.

‘I particularly like the fact that the S+P 500 has bounced from the 1422 zone twice in the last few weeks. My feeling would be that the third retest of 1422 may not find the same level of support. I would not be surprised at all to see another bad down night in the States sometime this week (even in the next few days). Once the false break of April’s high is confirmed on a weekly chart then I would be targeting the 200 day moving average as the next line of support. That would take the S+P 500 to 1370. If the 200 day moving average doesn’t hold, then the downside target is another 100 points lower at 1270. In other words, watch out below.’

Murray isn’t the only stock market analyst ringing the warning bell. This morning, the Age reports:

 

‘Westpac and NAB have been downgraded by investment bank Goldman Sachs on concerns lower loan growth and a [sic] weaker margins would limit share price growth.

 

‘In the latest bearish signal for the banking sector, Goldman Sachs lowered its rating on Westpac from “neutral” to “sell” as the outlook for returns softens.’

And it’s not just here. US wealth managers are telling their clients to lock in gains now…

Selling Stocks to Avoid Tax

 

Bloomberg News reports:

 

‘An investor who sells $100 of stock with a cost basis of $20 in 2012 would see proceeds — after capital gains taxes — of $88, said Robert Barbetti, managing director and executive compensation specialist at J.P. Morgan Private Bank. Next year, if Congress doesn’t act, earnings from the sale would drop to $80.96 if rates rise to 23.8 percent. That means the stock price would need to rise at least 9 percent for an investor to be better off selling in 2013, said Barbetti, who is based in New York.’

 

The reason for the difference is that from the start of next year, tax rates in the US are set to rise on dividends and capital gains.

In other words, if US investors don’t think the stock market will go up at least 9%, then they’re better off selling now. And seeing as the US stock market has more than doubled since the 2009 low, the higher tax rates will mean millions of dollars in tax savings for the wealthiest investors who sell now.

In short, after a dream six-month run for stocks, the outlook doesn’t look so great. And if Murray’s analysis is up to its usual standard, you could be looking at a bumpy ride for stocks over the next few weeks.

Cheers,
Kris

From the Port Phillip Publishing Library

via moneymorning.com.au

Debt and Government Spending Means You Should Be Wary of this Stock Market

Economic data around the world continues to disappoint. It certainly doesn’t paint a picture of a recovering economy. Yet that’s the impression the stock market gives you. You need to remain cautious and very sceptical of what the stock market is saying.

 

As you may have heard, the International Monetary Fund (IMF) warned last week of the growing risks of a pronounced global slowdown. From Bloomberg:

 

‘A key issue is whether the global economy is just hitting another bout of turbulence in what was always expected to be a slow and bumpy recovery or whether the current slowdown has a more lasting component,” the IMF said in its World Economic Outlook report. “The answer depends on whether European and U.S. policy makers deal proactively with their major short-term economic challenges.’

 

The IMF, and most other global bodies like it, are usually completely ignorant of what’s going on. You don’t get to a top position in these bureaucracies by thinking outside the box and fretting about economic downturns. You get there by sticking with the herd and not making any mistakes or ‘chicken little’ forecasts.

So the fact that the IMF has warned on this suggests that the economic issues we face are acute.

I do take issue with the IMF’s notion that ‘the answer depends on whether European and US policymakers deal proactively with their major short-term economic challenges.’

No Short Term Fix for too Much Debt

 

So often, analysis by the experts suggests all that is required to ‘fix’ the world’s economic problems is for policymakers to be ‘proactive’ or to deal with the problem.

Such rhetoric is flimsy, throwaway rubbish. And to suggest these are ‘short-term economic challenges’ is ridiculous. They are the result of a credit/debt system that has grown out of control.

As you no doubt know, the world’s economic problems are the result of too much debt. By this I mean the level of global debt overshadows the world’s stock of productive assets.

In one way or another, these productive assets provide the income to service the debt and create sustainable economic growth. If income growth is strong, things like a country’s debt-to-GDP ratio remains under control.

But in most of the world’s large economies debt-to-GDP ratios are getting worse. This means debt growth is higher than economic growth. In other words, the injection of additional debt does not produce much in the way of additional income. The debt is becoming increasingly unproductive.

This is not surprising, considering a very large portion of the world’s debt growth comes from government spending. Government spending (financed by borrowing) is the least productive form of spending. That’s because much of it is ‘consumed’ via welfare payments to maintain social cohesion.

Very little government spending these days goes into genuine productivity enhancing infrastructure projects (Australia’s National Broadband Network is the exception, but the potential productivity benefits are a long way off).

So injections of government spending provide a very short term (consumption led) boost to GDP, but once the stimulus wears off, the ‘recovery’ falters and calls for more spending grow louder. Meanwhile, the stock of government debt continues to grow and the economy must continue to service that debt with its smaller percentage of productive assets.

Knowledge is Power in this Economy

 

Can you see where this is going? With each new round of government spending or debt monetisation the ratio or proportion of healthy and productive assets diminishes.

This type of fiscal and monetary policy stimulus has been the cornerstone of the Western World’s economic policy for years now. In their desperation to avoid economic slowdowns or recessions, policymakers have created an incredibly fragile economic structure.

What I mean by that is that global debt levels are now so high, and the economic structure is so fragile (because it relies on continuing, unproductive government spending to keep its head above water), that a seemingly minor economic slowdown could morph into something far more drastic.

It’s like what hedge fund manager Ray Dalio mentioned in an interview recently. He said words to the effect that he was more worried about a depression than a recession. I think that concern is due to the fragility of the global economic structure.

And the IMF flippantly suggests policymakers just need to be proactive to deal with ‘major short-term economic challenges’?

They are seriously kidding themselves. When you have the world’s economic policeman spouting such nonsense, you know there’s not much hope for realistic policy prescriptions.

That’s because realistic policy prescriptions are not politically feasible. So instead we get coordinated stimulus…more government spending, more central bank debt monetisation and more liquidity injections.

This provides a short term boost to markets, as you’ve seen in recent months. But the reality is that the underlying structure of the financial system and the real economy, which provides fundamental support to markets and asset prices, becomes weaker with each round of stimulus.

Knowledge is the most powerful asset you can have in dealing with these treacherous markets. If you simply listen to the daily output of the mainstream financial media, you’d think things are fine.

Greg Canavan
Editor, Sound Money. Sound Investments

via moneymorning.com.au

Why This Crisis Still Has a Long Way to Run

When is a cut not a cut?

When it’s an increase.

Sorry to be cryptic, but we laugh when we see presidents, prime ministers and finance ministers talk about ‘austerity’ and ‘slashing budgets’.

Because just like central bank money printing, the markets get excited for about three minutes before they realise what even an idiot can see…

 
Cut spending isn’t what governments do. For governments, spending only ever goes one way. That’s up.

And that’s why we always turn to one tried and tested asset class in times like these. You know what we’re talking about, but read on anyway…

This morning the papers are going batty on the news that, ‘Spain unveils austerity budget as political turmoil mounts’. So says the Australian newspaper.

According to the Wall Street Journal:

 

‘The Spanish government presented 13 billion euros ($16 billion) of spending cuts and tax increases for 2013 and said it will place new limits on early retirements as political turmoil heightens investor concerns over Prime Minister Mariano Rajoy’s ability to slash a towering budget deficit and stabilise one of Europe’s largest ailing economies.’

 

We wish Spain luck. Especially considering the following post to the UK Daily Telegraph‘s blog covering the Spanish budget overnight:

 

‘Spanish government sees unemployment bottoming out and has predicted an average rate of 24.3pc [per cent] for next year.’

 

The same blog also reveals:

 

‘Spanish deficit targets: 6.3pc in 2012, 4.5pc in 2013, 2.8pc in 2014, 1.9pc in 2015.

 

‘These cuts are aimed at chopping €40bn off Spain’s budget deficit next year.’

Here’s a bit of free advice for Spanish Prime Minister, Mario Rajoy. When your government is announcing welfare cuts, it’s probably best not to be photographed chomping on a cigar in New York:

Source: Independent.ie

 
But before you start getting too excited about so-called spending cuts, and the positive impact it could have on the world economy, just remember this: when governments cut spending, it doesn’t mean they cut spending.

Not as Good as the Treasurer Claims

It was a bit like the smoke and mirrors from Aussie Treasurer, Wayne Swan. Last week he spun the argument that the Aussie federal budget was $661 million better off than predicted.

The mainstream press fell for it hook, line and sinker. What a great Treasurer they said. What a good boy.

What they didn’t focus on (just as the Treasurer hoped), was that last year the government spent $43.7 billion more than it raised in taxes.

To cover the shortfall the government had to issue more bonds…in other words go further into debt. And with commodity prices collapsing, the Aussie budget position is set to get worse.

It’s the same for Spain. Just because it reduces the budget deficit doesn’t mean the economy or debt position is any better. Last year Spain’s budget deficit was 8.5% of GDP, or about €97.8 billion.

So even if Spain cuts spending by €40 billion, it’s still spending €57.8 billion more than it takes in with taxes.

And that’s assuming the Spanish economy doesn’t get worse, which it probably will given the proposed tax increases.

What we’re getting at is this: it’s nearly five years since the world economy started to fall apart.

The US Federal Reserve has virtually admitted that it’s out of ideas. The only solution it’s got is to print money…even though that’s never worked before.

The Eurozone thinks it can fix its spending problems by keeping on spending and creating a bigger debt problem instead.

And China thinks it can stop its economy from crashing by building more roads, buildings and railways…that no-one can afford to use.

And as for all those in the mainstream media who love the Chinese economy, and fall over themselves to praise it, just remember what we’ve said about China for the past four years – it’s a brutal economy and leadership that sees the Chinese people as a means to stay in power and line their own pockets.

How Chinese Infrastructure Projects Work

Take this news story from the New York Daily News that you won’t read in the compliant, China-loving Aussie press:

 

‘Stomach-churning photos have surfaced allegedly showing the moment a Chinese protester was crushed by a steamroller while trying to stop government officials from relocating his village to make way for a commercial development.

 

‘A local government official allegedly ordered the trucks forward, and the man was flattened beneath one six-wheeled hulking behemoth, the report said.’

How are you enjoying your iPhone now? And anything else that’s ‘Made in China’.

All this tells us that those in power are getting desperate. They’ll do anything to make sure the economy doesn’t collapse on their watch.

That means pretending to cut budgets while increasing debts, it means printing money as a last resort, and it means crushing people to death in order to erect a new building paid for with government stimulus money.

Add all this together and it should explain why one particular ‘fear gauge’ (gold) is rocketing back towards record levels.

Even mainstream analysts are getting back on board the gold bandwagon. In the old days (five years ago) we would have worried about the mainstream backing gold. We would have seen it as a sign of a market top.

But not now.

The Best Way to Protect Your Wealth

Now the economy is so bad, the mainstream is finally waking up to reality. As the New York Post reports:

 

‘Gold has had a good summer, rising more than 9 percent, but that move may be just the start, according to a bullish Citi precious metal analyst.

 

‘Tom Fitzpatrick believes autumn will be golden in the beginning of a run-up that he says will culminate with the yellow metal hitting $2,500 an ounce in the first quarter of next year. The price now stands at $1,736.’

That report is actually two weeks old. Today gold is at USD$1,776.

But despite the recent gold rally, we’re still happy buyers. And we’ll stay a happy buyer until governments and central bankers understand the solution to the current financial mess isn’t to print money, go into debt, or raise taxes.

Unfortunately, that day appears to be a long way off. We’ll give you more reasons to buy gold in tomorrow’s Money Weekend.

Cheers,
Kris

via moneymorning.com.au

How State And Local Governments Are Still Dragging On GDP And Jobs

Two of the key U.S. economic trends I expected this year were 1) a recovery in residential investment, and 2) that most of the drag from state and local governments would be over by mid-year 2012. Just eliminating the drag from state and local governments would help GDP and employment growth.

I’ve written extensively about the housing recovery, and it is time to take another look at state and local government spending. In early August, the Rockefeller Institute of Government put out a report on state and local government revenue through Q1. From the press release:

Overall state tax revenues are now above pre-recession levels, as well as above peak levels that came several months into the Great Recession. In the first quarter of 2012, total state tax revenues were 4.8 percent higher than during the same quarter of 2008.

Starting at the end of 2008 and extending through 2009, states suffered five straight quarters of decline in tax revenues. They now have enjoyed nine consecutive periods of growth, and the second quarter of 2012 will likely extend the string to 10. Overall collections in 45 early-reporting states showed growth of 5.8 percent in the months of April and May of 2012 compared to the same months of 2011.

After adjusting for inflation, however, state tax revenues are still 1.6 percent lower compared to the same quarter four years ago, in 2008.

That is a little encouraging, but the news isn’t as positive for local governments:

While state tax revenues have been recovering, many localities face significant fiscal challenges, according to the report’s author, Senior Policy Analyst Lucy Dadayan.

The Great Recession led to a growing divergence between state and local government tax performance,” Dadayan said. “State tax revenues collapsed steeply from 2008 to 2010 while local tax revenues continued to grow. Such trends have reversed since 2010, and state tax revenues started trending upward while local tax revenues have been mostly heading downward. Fiscal pressures are continuously mounting for local governments, and depressed housing prices are now causing declines in local property taxes.”

The problem is local governments are mostly funded by property taxes, and property taxes react slowly to falling house prices- and property taxes are still declining. From the report:

Collections from local property taxes made up 81.6 percent of such receipts during the first quarter of 2012. Local property tax revenues showed a decline of 0.9 percent in nominal terms in the first quarter of 2012 compared to the same quarter of 2011. Moreover, local property taxes were 4.6 and 1.3 percent lower than during the same quarters of 2009 and 2010, respectively.

This suggests some further local cutbacks, although I still expect the drag to be less than the last few years.

Click on graph for larger image.
image

Here is a graph showing the contribution to percent change in GDP for residential investment and state and local governments since 2005.

The blue bars are for residential investment (RI), and RI was a significant drag on GDP for several years. Now RI has added to GDP growth for the last 5 quarters (through Q2 2012).

However the drag from state and local governments is ongoing. State and local governments have been a drag on GDP for eleven consecutive quarters. Although not as large a negative as the worst of the housing bust (and much smaller spillover effects), this decline has been relentless and unprecedented.

In real terms, state and local government spending is now back to Q4 2001 levels, even with a larger population.

The next graph is for state and local government employment. So far in 2012 – through July – state and local governments have lost 42,000 jobs (7,000 jobs were lost in July). In the first seven months of 2011, state and local governments lost 205,000 payroll jobs – and 230,000 for the year. So the layoffs have slowed.

The next graph is for state and local government employment. So far in 2012 – through July – state and local governments have lost 42,000 jobs (7,000 jobs were lost in July). In the first seven months of 2011, state and local governments lost 205,000 payroll jobs – and 230,000 for the year. So the layoffs have slowed.

imageThis graph shows total state and government payroll employment since January 2007. State and local governments lost 129,000 jobs in 2009, 262,000 in 2010, and 230,000 in 2011.

Note: Some of the stimulus spending from the American Recovery and Reinvestment Act probably kept state and local employment from declining faster in 2009.

Note: Of course the Federal government is still losing workers (38,000 over the last 12 months and another 2,000 in July), but it looks like state and local government employment losses might be slowing – but the job losses haven’t stopped yet – and with property tax revenue still falling, more local jobs will probably be lost.

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