PIMCO: El-Erian on the Secular Outlook

Economic Outlook

May 2011

Article Title

Secular Outlook:
Navigating the Multi-Speed World

Article Introduction

• Balance sheets, both across and within economies, are still out of
  equilibrium. We expect advanced economies will face sluggish growth and
  persistently high unemployment over the secular horizon. Emerging
  economies will achieve higher growth but face recurrent inflationary
  concerns.
• We do not expect policymakers to boldly address structural problems.
  By targeting negative real interest rates, they will pursue financial
  repression that undermines the “real return” contract that savers
  expect.
• Secular baseline portfolio positioning should minimize exposure to
  the negative impact of financial repression, hedge against higher
  inflation and currency depreciation and exploit the heightened
  differentiation in balance sheets and growth potentials.

the article and a PDF are available Here

Money Illusionn or How the Government Really Gets In Your Pocket

Bill Gross of Pimco the manager of the largest bond fund in the world has recently ( and rightly) been ranting about Washington and the failure to deal with the US debt buildup. Most recently Pimco has discussed the stock market and "money illusion".  I wrote a short note on what he meant. Available here: 

money illusion  at  Scribd.com

Here Comes The Double Dip!!

The G20 finance ministers have decided have a double dip and I believe it is the right thing to do in the longer term, but it ain't going to be peaches and cream for everyone.
The Financial Times broke the news: read here.

Finance ministers from the world’s leading economies ripped up their support for fiscal stimulus on Saturday, recognising that financial market concerns over sovereign debt had forced a much greater focus on deficit reduction.

This is a big deal. Fiscal policies must be cleaned up to restore integrity to Sovereign balance sheets. The trouble is these are contractionary policies being implemented while substantial deflationary pressures still exist.
Fiscal restraint also requires responsible politicians risk the ire of the public and loss of elections. Modern politicians rather assiduously avoid that kind of thing. 

This may cause a setback in Gold too.

Related:

G20: All change on the fiscal front

Pimco's El Erian on the G20

Jeff Saut weekly for April 5

Jeff Saut of Raymond James this week:

Ladies and gentlemen, we don’t have a tax shortfall problem; we have a
government spending problem. As the Washington Times writes, “For the
first time since the Great Depression Americans took more aid from their
government than they paid in taxes.” Manifestly, our government is
becoming an increasing “spender” in the economy and that should worry
you. Indeed, a recent study from the sharp-sighted folks at the GaveKal
organization shows what occurred in the United Kingdom when the
government became an increased “spend” in that economy. By examining the
nearby chart:

The market has rebounded on massive stimulus but the piper will be repaid some years down the road.
Remember Roosevelt's programs required a devaluation of the dollar.  Devaluations devastate the savings of the middle class.

Forbes: The Global Debt Bomb

A great article explaining European vulnerability and why in my opinion diversifying nation currency reserves into Europe is not a very big threat to the dollar. Thanks to Dennis Gartman for pointing out this article.

The Global Debt Bomb   at Forbes

Updated and related topic: Niall Ferguson video interview discussing Debt

Gross Fiscality

Bill Gross ; Let's Get Fisical

What amazes me most of all is that politicians can be bought so cheaply. Public records show that combined labor, insurance, big pharma and related corporate interests spent just under $500 million last year on healthcare lobbying (not much of which went to politicians) for what is likely to be a $50-100 billion annual return. The fact is that American citizens have never been as divorced from their representatives – and if that description fits the Democratic Congress now in control – then it applies to Republicans as well – past and present. So you watch Fox, or is it MSNBC? O’Reilly or Olbermann? It doesn’t matter. You’re just being conned into rooting for a team that basically runs the same plays called by lookalike coaches on different sidelines. A “ballot box” pox on all their houses – Senators, Representatives and Presidents alike. There has been no change, there will be no change, until we the American people decide to publicly finance all national and local elections and ban the writing of even a $1 check for our favorite candidates. Undemocratic? Hardly. Get on the internet, use Facebook, YouTube, or Twitter to campaign for your choice. That’s the new democracy. When special interests, even singular citizens write a check, it represents a perversion of democracy not the exercise of the First Amendment.

Bill Gross manges the largest fund in the world and has a long history of being ahead of everybody else to see what is coming. Plus I applaud him for saying much more eloquently than "Throw the bums out".

Jeff Saut good this week

Jeff Saut in his weekly commentary for Raymond James is right on. Read it all here but this is just a taste:

A “permanent investment,” what an intriguing concept! When I first entered this business one of my mentors, namely Lucien Hooper (securities analyst extraordinary), often spoke of permanent investments. In fact he once stated, “You should put one quarter of your investment portfolio in stocks, one quarter in bonds, one quarter in precious metals, and one quarter in farmland. His reasoning was that such a non-correlated asset allocation would grow, and preserve, capital through any multi-generational economic cycle. This morning, we focus on precious metals and farmland.

Last week a “tree fell in the forest and nobody heard it.” The headline read, “CME To Allow Gold As Collateral For All Exchange Products.” The lead paragraph was:

“U.S.-based clearing house CME Group Inc. (CME/$319.96/Market Perform) will allow physical gold to be used as collateral for margin requirements on all exchange products, a spokesman said Monday. The new global policy is effective Oct. 19 in accordance with a member's notice issued late Friday, said spokesman Jeremy Hughes in London. Clearing member firms will be allowed to post up to a maximum of $200 million worth of gold as collateral to cover performance bond, or margin, requirements, Hughes said.”

Then on Friday there was this gold-quip on the Broad Tape:

“If you’ve invested in gold, you’re about to gain a powerful ally: pension funds. ‘I think the largest institutions like our own are realizing that we barely own any [gold],’ Shayne McGuire, Director of Global Research of the Teacher Retirement System of Texas said in an interview in Hong Kong very early this morning. ‘The same thing applies to most of the pension funds which manage trillions of dollars in world wealth.’ TRS oversees $95 billion, and just opened an internally managed gold fund for the 1.3 million public education employees, and suggests other pension funds follow suit. Owning gold is ‘financial insurance,’ he said, sounding a lot like David Einhorn at the Value Investing Congress earlier this week. ‘Consider the tremendous fiscal excess that major governments have made to prevent the world economy from collapsing ... I don’t think the question really is what is gold worth but what are currencies not worth’.”

Mike Shedlock and Martin Weiss show evidence of Deflation

A very good article on the size deflating credit and a strong answer to the inflationist fear of imminent inflation. I do not know Mike Shedlock though I have read his blog for quite a while and he has been very good. I do know Martin Weiss for over 30 years and his work is exemplary and thorough. So I commend this article wholeheartedly.

Flow of Funds Report Offers Hard Evidence of Deflation

It’s all in the Fed’s Flow of Funds Report for the first quarter of 2009, which I’ve posted on our website with the key numbers in a red box for all those who would like to see the evidence.

First and foremost, the Fed’s numbers demonstrate, beyond a shadow of a doubt, that the credit market meltdown, which struck with full force after the Lehman Brothers failure last September, actually got a lot worse in the first quarter of this year.

The treasury and the Fed are trying to reflate as fast as possible and that is the correct approach if one has the stomach to pull that money back when positive results are achieved. Unfortunately the Pelosi crafted stimulus bill does not focus on productive infrastructure rebuilding of the electrical grid, bridge and highway repair, or repair and update of the rapidly aging water and sewer systems of our major cities. All of those projects are huge and necessary and would create jobs that will payoff for the economy over long time periods. Instead they are using the money to payoff political supporters and buy votes from the least productive portions of our society.

Donald Coxe Commentary

Thanks to Preur du Plessis of Investment Postcards From Capetown:
Donald Coxe's latest recommendations at the link plus a link to read his latest Basic Points issue.

Highly recommended so click on through.

Australia cuts rate by 1% Yippee Ay Kai Yo

From Bloomberg:

Dec. 2 (Bloomberg) -- Australia’s central bank cut its benchmark interest rate by one percentage point, extending the biggest round of reductions since the nation was last in a recession in 1991.

This is good news for me (i am long and doubled up earlier today) and for the Aussies. Let's hope the BOE and ECB do the same thing Thursday. The Central Banks need to press ahead aggresively and not in a pansy ass way. Historically money added to the system has an emotional impact for a day or so but the real impact takes 6 to 12 months to actually begin to have broad effects in the economy. Thus the earliest we should see any effects from all the money injections and easy credit moves is late February to March of 09. Until then all these banks need to press forward. Once some sign that money is starting to move through the economy again they can begin to plan for dealing with the inflationary impact of all the credit stimulus. What they must not do is be tentative. They keep firing till asset prices stabilize and the fear goes away.

update: My position didn't make a nickel. Must be that efficient market thing the academics are always going on about.

WSJ: Euro Banks Too Big To Rescue?

This is not good , nor is it surprising. From the Wall Street Journal:

European banks face greater capital shortages than their U.S. counterparts, but have become too big for any one European country to save, according to an article published Saturday by European economists Daniel Gros and Stefano Micossi on the Centre for European Policy Studies’ Web site.

The “overall leverage ratio” - a measure of total assets to shareholder equity - of the average European bank is 35, compared with less than 20 for the largest U.S. banks, the economists say, and relatively small writedowns on their assets could have a devastating impact on a bank’s capital.

The problem for European regulators is that European banks rival or in some cases exceed the economic size of their native European economies, making a rescue package in Europe difficult, according to Gros and Micossi. For example, Deutsche Bank, with an overall leverage ratio of 50, has liabilities of €2 trillion, over 80% of the entire German economy.

Good news out of China

from Bespoke:

China Finally Cuts Rates

Today, China cut their benchmark central bank rate for the first time since February 21st, 2002. The People's Bank of China cut their one-year lending rate from 7.47% to 7.20%, which will be effective tomorrow.

Coxe weekly broadcast

UPDATE: click here for link to Donald Coxe's Basic Points newsletter at the Investment Postcard's From The Edge website.

Round-table Discussion: How to Prevent the Next Bubble

From Prieur du Plessis of

Investment Postcards From the Edge

“The financial crisis has shown that markets are bubble-prone and that laissez-faire regulation doesn’t work. The authorities need to get a grip if we are to avoid a mega-bubble. But we may need an even deeper crisis for that to happen.” That is the conclusion of a fascinating round-table discussion just published by Prospect magazine.

The participants (from top left to bottom right) were: Mark Hannam who spent 12 years working in the City for the Bank of England, Citibank and Barclays; Jonathan Ford (chair), deputy editor of Prospect; John Gieve, deputy governor for financial stability of the Bank of England; Martin Wolf, chief economics commentator at the Financial Times; Anatole Kaletsky, an economic commentator and associate editor of the Times; and George Soros, chairman of Soros Fund Management.

click here for full text of this interesting article.

McCulley On Inflation

A Kind Word for Inflation

No, I have not lost my mind. I’m fully aware that inflation is not kind to bonds, so offering a kind word for inflation is de facto offering an unkind word about my own business. Investment managers don’t tend to do that. But facts are facts. And the essential fact right now is that the American economy needs an inflation rate above the Fed’s comfort zone. Needs, you ask?

Yes. Soaring commodity prices, particularly for petroleum and food, and especially in recent months, are an unambiguous negative real terms of trade shock to America. For those not familiar with the term, a nation’s terms of trade is the ratio of what it must give up to get what it imports. The easiest way to understand the concept, at least for me, is to think of the number of hours of work necessary, at the average national hourly pay rate, to buy a barrel of oil – a real variable compared to another real variable. The chart below (above here) tells that simple story.

Paul McCulley is an expert on the fed and always worth reading.

BCA: Commodities Driving Monetary Policy

Bank Credit Analyst

In our opinion, the inflation scare is overdone.
The run-up in commodity prices is dominating media headlines and is spooking investors. However, the annual rate of change in food and energy prices is now at an extreme, which is unsustainable. Crude oil prices have risen 100% from year-ago levels and would need to surge close to $200/bbl by the end of 2008 just to maintain the current pace of inflation. Moreover, the macro backdrop in the developed world is not conducive to sustained underlying price pressures

Plus Congress is now getting involved and thee only time they don't act at the wrong time is when they act at a worse time.

A Dash of Insight: Issues A Challenge (sort of)

A Dash of Isight:

Measuring Inflation? You try setting the rules!

At " A Dash" we are continually amazed at the difficulty in stimulating anyone to reconsider existing opinions. This seems especially true on the subject of measuring inflation. There are plenty of self-proclaimed experts. Taking a step away often helps us shake off biases and get a fresh look at the problem.

Here is a little test. Try to give an honest answers to each question below. We (Dash) shall suggest the relevance in the conclusion.

this is an entertaining exercise since inflation and measuring inflation are rather on topic these days. Here are only 5 questions and you don't have to tell anyone your answers.

BCA: Stay Bullish Commodities

Bank Credit Analyst:

Given that the medium-term structural demand and supply forces driving the commodity bull market are not price-elastic, an underlying tailwind for commodity prices is bullish for long-life assets such as resource equities and long-dated commodity futures. In addition, with no catalyst for a bearish reversal to the current level of resource prices, major mining and energy companies will remain profitable even as wage and equipment costs rise.

Wood: Inflation Good For Japanese Stocks

From Bloomberg:

Japan's Inflation May Be `Hugely Bullish' for Stocks, CLSA Says

By Patrick Rial

April 28 (Bloomberg) -- Japan's stocks may benefit from the end of deflation as companies raise prices, improving margins, CLSA Ltd.'s chief strategist Christopher Wood said.

Rising inflation ``is potentially hugely bullish for the Japanese stock market,'' Wood wrote today in his `Greed & Fear' strategy note. The ``bull story in Japan is all about a sustained move out of the nearly 20-year period of deflation with all that means for companies' pricing power and, consequently, their profit margins.''

Christopher Wood is a terrific analyst who writes the Fear and Greed newsletter. I used to see the letter regularly and found his opinions to be well worth reading. Unfotunately, I no longer have access to his work so the Bloomberg article is the best link I can provide.
hat tip to Fullermoney. Chart is of Topix Bank Index provided by Fullermoney.

Working for Crude

from Jeff Saut at Raymond James comes this chart showing how many hours of work it takes to buy a barrel of crude.