Welcome to the bizarre world of money printing

When central bankers print money, strange things can and will happen.

Just a few random, recent examples:

"Why Uber’s Chinese nemesis Didi Chuxing just raised $7 billion more"

Didi Chuxing, the company that is beating Uber in China, just landed an incredible $7.3 billion in fresh financing.

Seven billion U.S. dollars!

But there’s more. Four-year-old Didi said it already has billions in the bank from its previous fundraising — which amounts to more than $10 billion — and this fresh influx takes it to more than $10 billion of cash in hand.


In case the reader is wondering, Didi does not actually own any vehicle, it is just a platform, most likely a money losing one. Agreed, far away in the future the network might be quite valuable, but on the other side, who can predict the future say five or ten years out? I definitely not.


Which Country’s Bonds Most Likely to Join Germany in Negative-Yield Club?

With yields on 10-year German sovereign bonds going subzero for the first time in recorded history, investors are asking which country’s bonds could cross into negative territory next.

Austria and the Netherlands appear the most natural candidates.

Indeed, as German 10-year government yields hit minus 0.032% Tuesday .....


In other words, one buys these 10-year German bonds, waits for 10 years and gets back less money than one invested.

Many bonds are being managed, for instance in bond funds or pension funds, we can safely assume that on top of the negative yield another say one percent is added in costs. That does not sound very attractive.


The Decline of the Coal Industry in One Chart

.... the market cap of four of the largest coal companies was more than $35 billion in 2011. After a flurry of regulation, it’s now a smudge on the graph below, a decline of 99 percent. Behold, the steep decline of coal in one chart:

I am not a big fan of coal due to the pollution it causes, but one would expect a slow and steady phasing out of this commodity, not a 99% plunge in three years time of the market cap of four big players in this industry. I have no idea if this has to do with money printing, just the speed of decline is mind blowing.


Marc Faber has often warned against the effects of money printing. What the central bankers want is a gradual rise in all asset classes, but that will not happen, some will rise or fall a lot. The only way to deal with this is to diversify in different asset classes. And forget about market timing, that will be very tough to do.

Marc Faber: There Are No Safe Assets Anymore

 

Mining companies seem to be relatively cheap. China's economy is in a serious downturn. Emerging markets are getting cheaper. US stocks are expensive.

The Forgotten Depression

Great presentation by James Grant, one of the good guys. I subscribed to his newsletter, but unfortunately had to discontinue it, since it was too US centric and the recommendations too often involved bonds (I always have been more of an equity guy).

If you've never heard of the Depression of 1921, it's because the federal government and the (then new) Federal Reserve did the opposite of what they did in 2008: federal spending was cut, the federal budget was balanced, and interest rates were allowed to rise. In other words, real austerity measures were implemented. The result? A short economic contraction that healed itself.


Also interesting is his remark about John James Cowperthwaite:


He was asked to find ways in which the government could boost post-war economic outlook but found the economy was recovering swiftly without any government intervention. He took the lesson to heart and positive non-interventionism became the focus of his economic policy as Financial Secretary. He refused to collect economic statistics to avoid officials meddling in the economy.


In line with this is Marc Faber's comment that close to 100% of the economic data is collected by institutions like the FED and national banks. These are institutions that are not exactly known to rock the boat, so we should have a healthy dose of scepticism regarding their numbers.

Zulauf and Faber: buy GDX (Gold Miners ETF)

In the "Barrons Roundtable 2014" both Marc Faber and Felix Zulauf recommend to buy gold minining companies through "GDX", a gold miners ETF managed by Van Eck, more information can be found here.

The ETF closely tracks the appropriate gold miners index and only has a 0.5% management fee.

Top holdings are Barrick Gold, Goldcorp Inc., Newport Mining, Silver Wheaton, Yamana Gold, Franco-Nevada and Newcrest Mining.

The article on Barrons is behind a pay wall, but the individual stories from Marc Faber can be found here, from Felix Zulauf here.

Wishing all readers a happy and prosperous new year of the horse.

"Mega" default in China?

Article published by Forbes: "Mega Default In China Scheduled For January 31".

I think that the title is rather exaggerated (the amount in question is about USD 500 Million, very small for a country like China), but I do agree it might cause some shock to the financial system towards retail investors and there will be some reputational damage. Partly that will be a much needed wake up call. The full article (some comments by me in red):

On Friday, Chinese state media reported that China Credit Trust Co. warned investors that they may not be repaid when one of its wealth management products matures on January 31, the first day of the Year of the Horse.

The Industrial and Commercial Bank of China  sold the China Credit Trust product to its customers in inland Shanxi province.  This bank, the world’s largest by assets, on Thursday suggested it will not compensate investors, stating in a phone interview with Reuters that “a situation completely does not exist in which ICBC  will assume the main responsibility.”

That depends on which promises the product was sold to the people. For instance, was the word "guarantee" used? Work for lawyers. It all sounds a bit like the infamous minibonds.

There should be no mystery why this investment, known as “2010 China Credit-Credit Equals Gold #1 Collective Trust Product,” is on the verge of default. 

The Chinese are definitely number one in the world in inventing "creative" names.

China Credit Trust loaned the proceeds from sales of the 3.03 billion-yuan ($496.2 million) product to unlisted Shanxi Zhenfu Energy Group, a coal miner.  The coal company probably is paying something like 12% for the money because Credit Equals Gold promised a 10% annual return to investors—more than three times current bank deposit rates—and China Credit Trust undoubtedly took a hefty cut of the interest.

Yes, I assume that China Credit Trust took a nice commission, I hope they were transparent about it. The problem with products with high commissions is that they are often sold, not bought. There is just too much incentive for the selling party.

Zhenfu was undoubtedly desperate for money.  One of its vice chairmen was arrested in May 2012 for taking deposits without a banking license, undoubtedly trying to raise funds through unconventional channels.  In any event, the company was permitted to borrow long after it should have been stopped—reports indicate that it had accumulated 5.9 billion yuan in obligations.  Zhenfu, according to one Chinese newspaper account, has already been declared bankrupt with assets of less than 500 million yuan.

The Credit Equals Gold product is not the first troubled WMP, as these investments are known, to risk nonpayment, but Chinese officials have always managed to make investors whole.  CITIC Trust did that in 2013 on a steel-loan product in Hubei province, and a mysterious third-party guarantee rescued a Hua Xia Bank WMP.  An investment marketed by ICBC’s Suzhou branch was similarly repaid.

"WMP" or "Guaranteed Products" or "Structured Products", many names have been used in the past. The public must understand that when returns are "promised" that are way beyond the risk-free rate of Fixed Deposits, then of course there is a (quite real) risk. There is no free lunch here.

There has never been a default—other than one of timing—of a WMP, so the Credit Equals Gold product could be the first.  If it is, it will edge out the WMP that invested in loans to Liansheng Resources Group, another Shanxi coal miner.  Jilin Trust packaged Liansheng’s loans into a wealth management product sold by China Construction Bank , the country’s second-largest lender by assets, to its customers.  Liansheng is in bankruptcy, and it looks like the WMP holders will not be repaid in full.

A WMP default, whether relating to Liansheng or Zhenfu, could devastate the Chinese banking system and the larger economy as well.  In short, China’s growth since the end of 2008 has been dependent on ultra-loose credit first channeled through state banks, like ICBC and Construction Bank, and then through the WMPs, which permitted the state banks to avoid credit risk.  Any disruption in the flow of cash from investors to dodgy borrowers through WMPs would rock China with sky-high interest rates or a precipitous plunge in credit, probably both.  The result?  The best outcome would be decades of misery, what we saw in Japan after its bubble burst in the early 1990s.

I am not sure about that, of course the ultra-loose credit is basically spending money that still has to be earned, in other words future growth will decrease at least for some time. But China still has a lot going for it, so my guess is that it could mean a pretty large recession, partly cleansing the system, and then continued growth again. If China would really go into decades of misery, that would have tremendous negative effects for emerging markets which have partly piggybacked on China's growth.

Most analysts don’t worry about a WMP default.  Their argument is that the People’s Bank of China, the central bank, is encouraging a failure of the Zhenfu product to teach investors to appreciate risk and such lesson will improve the allocation of credit nationwide.  Furthermore, they reason the central authorities would never allow a default to threaten the system.

Observers make the logical argument that “to have a market meltdown, you have to have a market” and China does not have one.  Instead, Beijing technocrats dictate outcomes.

That’s correct, but that is also why China is now heading to catastrophic failure.  Because Chinese leaders have the power to prevent corrections, they do so.  Because they do so, the underlying imbalances become larger.  Because the underlying imbalances become larger, the inevitable corrections are severe.  Downturns, which Beijing hates, are essential, allowing adjustments to be made while they are still relatively minor.  The last year-on-year contraction in China’s gross domestic product, according to the official National Bureau of Statistics, occurred in 1976, the year Mao Zedong died.

Marc Faber commented that indeed China has invested too much in for instance infrastructure. But if one had the choice to either invest too much (China) or almost nothing (India), then he would still prefer the first. China will continue to grow and will start eventually using the infrastructure.

Why will China’s next correction be historic in its severity?  Because Chinese leaders will prevent adjustments until they no longer have the ability to do so.  When they no longer have that ability, their system will simply fail.  Then, there will be nothing they can do to prevent the freefall.

We are almost at that critical point, as events last June and December demonstrate.  The PBOC did not try to tighten credit as analysts said in June and December; it simply did not add liquidity.  The failure to add liquidity caused interbank rates to soar and banks to default on their interbank obligations.  In the face of the resulting crises, the central bank backed down both times, injecting more money into state banks and the economy.  So Chinese leaders showed us twice last year that they now have no ability—or no will—to deal with the most important issue they face, the out-of-control creation of debt.

There are rumors that local authorities in Shanxi will either find cash so that Liansheng can pay back its loans or force institutions to roll over the WMP marketed by Jilin Trust.  Similarly, there are suggestions that ICBC, despite its we’re-not-responsible statement, will produce dough for the Credit Equals Gold investors.  Others say China Credit Trust, China’s third-largest such group as measured by assets, will repay investors in part.  Repayment will avoid an historic default and postpone a reckoning.  In all probability, authorities will be able to get past Zhenfu if they try to do so.

Even if Beijing makes sure there is no default on January 31, we should not feel relief. Just as Zhenfu followed Liansheng, there will be another WMP borrower on the edge of disaster after Zhenfu.  And there are many Lianshengs and Zhenfus out there.  There may have been 11 trillion yuan in WMPs at the end of last year.

And at the same time China’s money supply and credit are still expanding.  Last year, the closely watched M2 increased by only 13.6%, down from 2012’s 13.8% growth.  Optimists say China is getting its credit addiction under control, but that’s not correct.  In fact, credit expanded by at least 20% last year as money poured into new channels not measured by traditional statistics.  That appears to be in excess of credit expansion in 2012.

Even if credit expansion slowed last year, Silvercrest Asset Management’s Patrick Chovanec tells us why we should be concerned.  As he wrote today, “Looking purely at the decline in the year-on-year rate of credit expansion is kind of like arguing that if I chase my shot of vodka with a pint of beer, I’m actually exercising moderation because the alcohol proof level of my drinks is falling.”

Faber: "Financial Asset Bubble could burst any day"

Marc Faber and his usual gloomy predictions:


"I think we are in a gigantic financial asset bubble. But it is interesting that that despite of all the money printing, bond yields didn't go down. They bottomed out on July 25, 2012 at 1.43% on the 10-years. We went to over 3.0%. We're now at 2.85% or something thereabout. But we're up substantially. Now, this hasn't had an impact on stocks yet. In fact, it pushed money into the stock market out of the bond market. But if the 10-years goes to say 3.5% to 4.0%, then the 30-year goes to close to 5.0%, the mortgage rates go to 6.0%. That will hit the economy very hard."

"[The bubble] could burst before. It could burst any day. I think we are very stretched. Sentiment figures are very, very bullish. Everybody's bullish. The reality is they're very bullish because they think the economy will accelerate on the upside. But my view is very different. The global economy is slowing down, because the global economy's largely emerging economies nowadays, and there's no growth in exports in emerging economies, there's no growth, in the local economies. So, I feel that the valuations are high, the corporate profits have been boosted largely because of the falling interest rates."

 

 

A relevant warning for Malaysians:

 

"The larger the government becomes, the less economic growth you have and the more crony capitalism and corruptions you have."

 

I am a big believer in lean and mean governments.
 



The Bitcoin Bubble

The Economist published today an article "The Bitcoin Bibble":

"Bitcoin is booming. Investors are piling into the digital currency, which is not issued by a central bank but is conjured into being by cryptographic software running on a network of volunteers’ computers. This week the price of a Bitcoin soared to above $1,000, from less than $15 in January.

Having long been favoured by libertarians, gold bugs and drug dealers, Bitcoin is attracting some surprising new fans. Germany has recognised it as a “unit of account”. Ben Bernanke, chairman of the Federal Reserve, told a Senate committee on virtual currencies that the idea “may hold long-term promise”. A small but growing band of shops and firms accept payments in Bitcoin. Some like the way it allows funds to be transferred directly between users, without middlemen. Others are attracted by the potential for anonymous transfers, or by the fact that the number of Bitcoins in circulation has a fixed upper limit—so there is no way a central bank can inflate their value away by issuing more.

But the recent price surge, driven by Chinese investors stashing money offshore, looks like a classic bubble. Hoarding means that Bitcoin is currently more of a speculative asset than a currency. And a crash is not the only risk Bitcoin users face. As the price rises, Bitcoin theft is increasing, both from individuals and from online exchanges that store the coins and convert them into other currencies. Around $1m in Bitcoins was recently stolen from BIPS, a European exchange. GBL, a Chinese Bitcoin exchange, abruptly vanished in October, taking $4.1m-worth of deposits with it."


The article ends with:


"... if you are lucky or clever enough to have owned an asset whose price has risen 60-fold in a year, it might be time to sell."

To be honest, I don't understand much of Bitcoins, to me it does resemble a classic pyramid scheme, including some rationale concepts (like the mining), which tries to give it some credibility (in itself very normal for these kind of schemes).

The price of Bitcoins fluctuates very much (sometimes 20% in a day), which makes it not very suitable being a currency.

Using Bitcoins for cross border payments would make live me easy, however, how can central banks check that the purpose of the payments was legal?

David Webb wrote an insightful article "The hole in Bitcoin", concluding:


"...here is the biggest flaw: the economics of it. For Bitcoin to succeed, it has to become a transaction currency, widely-accepted by the real world for goods and services. With a cap of 21 million Bitcoins, the accepted wisdom driving prices is that spreading the limited supply of Bitcoins over all these real-world transactions, even with fractional reserve banking, would necessitate a high valuation per Bitcoin.

Unfortunately, most of the people getting into Bitcoin, either with cash, goods and services or by buying and running mining rigs, are just hoarding the Bitcoins, either expecting the price to go up because they believe in this transactional utility, or expecting the price to go up because other people will - people like the  Winklevoss twins, who proposed setting up an ETF to hoard Bitcoins (SEC filing), rather like the SPDR Gold Trust.

The flaw then is that most Bitcoin owners are hoarding something which they expect to become a widely-used transaction currency, and if everyone holds on to their Bitcoins, then it won't become a transaction currency.

....


Even if we are wrong and Bitcoin becomes a widely-accepted transaction currency, the second flaw in Bitcoin is this: when the rate of coin production is reduced towards zero, the only economic incentive the nodes will have to convert electricity into blocks (and heat and noise) is the transaction fees. So far, these are very low, but if the people who control the Bitcoin specification don't increase the fees to a commercial level then the amount of machines running the algorithm will plunge for lack of reward, and it will become much less expensive to take control of the network by holding more than 50% of the hashing power. However, if fees become a significant part of transaction values, then a lot of users (not seeking illegal goods and services) will wonder why they don't just use traditional payment networks denominated in real currencies. So there's the conundrum: charge too little, and someone will put in enough capital to take over the network and turn it, in effect, into just another MasterCard, Paypal or Visa. Charge too much, and people will use other payment networks."


Marc Faber in an interview on CNBC:

a "massive speculative bubble" has encroached on everything from stocks and bonds to bitcoin and farmland. He attributed the vast bubble to "symptoms of excess liquidity."

Faber said the markets, which have reached record highs, could still rise before the bubble bursts, if stimulus programs such as the Federal Reserve's massive monthly bond purchases and super-low interest rates continue.

"Now can the market go up another 20 percent before it tumbles?" Faber said on"Squawk Box". "Yeah, it can go up even more, if you print money."

Warning investors that they could see disappointing long-term returns in equities, Faber said he thought a correction in equities was overdue when the S&P 500index crossed 1,600 points. The benchmark index surpassed 1,808 points this week.

Faber pointed to a high Shiller price-to-earnings ratio, a market indicator named after Yale University professor and Nobel Prize winner Robert Shiller, which relies on 10 years of adjusted inflation, as an indicator of the bubble. He said a high Shiller P/E ratio suggests low returns in the future.

Faber also referred to the rapid rise of bitcoin, the digital currency that crossed $1,200 early Friday, as an area affected by excess liquidity.

"Farmland is up 10 times over the last 10 years," Faber said. "And bitcoins are up now and who knows what next will go up."

Marc Faber: China could spark a bigger crisis than in 2008

An alarming credit boom in China could trigger a global financial crisis that would make the one in 2008 look mild by comparison, says old gloomy eyes, Marc Faber.

“If I am telling you that we had a credit crisis in 2008 because we had too much credit in the economy, then there is that much more credit as a percentage of the economy now,” the author of The Gloom, Boom & Doom Report told CNBC late Thursday. “So we are in a worse position than we were back then.”

China, in particular, has seen credit as a percentage of the economy jump 50% in the last four and a half years, said Faber, the “fastest credit growth you can image in the whole of Asia.”

He’s not alone in this China worry, as lots of economists have been warning about rapid credit growth there, even as officials are trying to curb it.

Meanwhile, Deutsche Bank strategist John-Paul Smith told clients on Wednesday that China’s growth model continues to be based on “ever-expanding debt, which leaves the country and financial markets very vulnerable to any potential loss of from investors and lenders.”

That’s even though China may change forever this weekend, as the Communist Party holds its Third Plenum, widely expected to introduce lots of reforms.

In his note, Smith says Deutsche Bank has had a pretty straightforward preference for developed over emerging markets the past three years. But that that now rests purely on its negative view of EM, rather than the “positive attractions of U.S. equities, which has become a consensus call”, he points out.

“The U.S. market now appears somewhat overvalued, and vulnerable over the medium term to a shift away from capital to labor from a fundamental perspective, but could be headed for bubble territory if the situation with China and commodities plays out as we anticipate,” he said.

Faber warns that China isn’t the only problem area. Other Asian countries are also seeing big jumps in household debt.

“Government debt has not gone up that much, but household debt has,” said Faber. “In Thailand, where I spend a lot of time, we have had no recession, but we have had no growth either. It’s the same in Singapore and Hong Kong.”


The above from an article at MarketWatch. Regarding the last comment, this might also be very true for Malaysia. That is, if inflation is correctly reported (not the simply incredible low numbers that have been officially reported), and thus the inflation-corrected GDP.


The following article in The Economist "Household debt in Asia" seems to agree with Faber's last paragraph:

"A new report from Standard & Poor’s, a credit-rating agency, worries about weakening credit quality at Asian banks, as loose lending practices lead to rapid loan growth, resulting in a sharp rise in household debt. A recent World Bank study identified Malaysia and Thailand as having the largest household debts, as a share of GDP, among eastern Asia’s developing economies. In Malaysia, where household debt now exceeds 80% of GDP, the government has been seeking to curb credit growth. Thailand’s government boosted access to credit following the country’s big floods in 2011. The recent slowing of growth in many Asian economies raises concerns about the sustainability of all this personal debt."

Faber: diversify, hope not all assets collapse at the same moment

Marc Faber in his usual "optimistic" self (his nickname being "Dr Doom"):

"There is no safe haven. Bank deposits are not safe, which used to be safe. Money in treasury bills is not 100% safe because there is inflation in the system and you hardly get any interest. Bonds are not very safe anymore because eventually interest rates will go up. Equities in the US are relatively expensive by any valuation metrics you might use. I don't see anything particularly safe. The best you can hope for is that you have a diversified portfolio of different assets and that they don't all collapse at the same time."

(on gold):

"We have a strong rally form the lows at 1180 to over 1400 and now we are backing off. I think between around 1200 and 1250 it is getting into buying range. The sentiment about gold is very negative, but if you look at everything considered - the monetization of debt, the debt ceiling, which sooner or later will be increased because both Republicans and Democrats are big spenders and the government's debt has expanded from $1 trillion in 1980 to $5 trillion in 1999, now we are at $16 trillion. Both Democrats and Republicans have been big, big spenders because a lot of money flows through the government."

(On whether what's going on across equities, bonds currencies and commodities, along with the events in US, can be compared to other idiocies by governments in previous decades):

"Yes, idiocies by governments. That is exactly the word. It's basically a dysfunctional government that we have that is far too large that is essentially wasting money left, right and center. The Republicans are wasting money on the military complex and the Democrats are basically buying votes with transfer payments, with entitlement programs, it goes on. It is a huge waste. The problem is that I don’t see a solution. I think the current debate about the debt ceiling and the budget is more a symptom of a problem than a problem itself. The problem is really that the government, not just in the US but other countries as well, has grown disproportionally large and that retards economic growth."

"There is no safe haven. Bank deposits are not safe, which used to be safe. Money in treasury bills is not 100% safe because there is inflation in the system and you hardly get any interest. Bonds are not very safe anymore because eventually interest rates will go up. Equities in the US are relatively expensive by any valuation metrics you might use. I don't see anything particularly safe. The best you can hope for is that you have a diversified portfolio of different assets and that they don't all collapse at the same time."


More information can be found here, on the website of Business Insider.

Fed up about the Fed

"President Obama was wise to nominate Janet Yellen, vice chairwoman of the Federal Reserve, to be the Fed's next leader. As a deeply respected economist, she will bring two vital attributes to that role as a steward of the economy."

The "deeply respected" bit was something that was often repeated. Not repeated was the fact that she didn't see the last crisis -- the biggest since the Great Depression -- until it happened.
 
In her own words:
"For my own part, I did not see and did not appreciate what the risks were with securitization, the credit ratings agencies, the shadow banking system, the SIVs -- I didn't see any of that coming until it happened."
 
I have no idea if she is competent. Competence in an economist is hard to measure, like knowing whether your auto mechanic is really any good.

As for vital attributes, the Times did get one right. "She represents continuity," the Times wrote. That pretty much says it all. Janet Yellen is establishment all the way. She won't wobble the canoe. She's not a Paul Volcker coming in to break things up.

And that's all you need to know about Yellen. She's got the same playbook in her pocket as Bernanke. If anything, there are hints she'll be even more aggressive in printing money than Bernanke.

And old Ben was pretty proficient in this area. Since he took over back in February 2006, the Fed's securities holdings are up 365%, to $3.5 trillion. It bought all that with money it created out of nothing.

How big will the pile be when Yellen leaves?

My guess is it will be higher. Expect the easy money and distortions to continue. The stock market may continue to rise, as it has, with the size of the Fed's holdings. This can't end well, but the party between now and the end could be something.

The above is from Chris Mayer editor of "Capital & Crisis", one of the publication I subscribe to.

It looks indeed like Marc Faber is going to be right (as he usually is, is my experience), after QE1, QE2 and QE3 under Bernanke, we will get QE4, QE5 up to QE infinite under Yellen.

A huge financial "experiment" that eventually has to end badly. And even then, the supporters of money printing will say that it only failed because not enough money has been printed, not because it was ludicrous from the start.


More on this subject can be read here: Marc Faber Blasts "A Corrupt System That Rewards Stupidity"

James Grant, someone I also greatly admire, wrote: "America’s default on its debt is inevitable":

“There is precedent for a government shutdown,” Lloyd Blankfein, the chief executive officer of Goldman Sachs, remarked last week. “There’s no precedent for default.”

How wrong he is.

The U.S. government defaulted after the Revolutionary War, and it defaulted at intervals thereafter. Moreover, on the authority of the chairman of the Federal Reserve Board, the government means to keep right on shirking, dodging or trimming, if not legally defaulting.

Default means to not pay as promised, and politics may interrupt the timely service of the government’s debts. The consequences of such a disruption could — as everyone knows by now — set Wall Street on its ear. But after the various branches of government resume talking and investors have collected themselves, the Treasury will have no trouble finding the necessary billions with which to pay its bills. The Federal Reserve can materialize the scrip on a computer screen.


I wrote before about Goldman Sachs, about the conflict of interest situations that they easily can run into. For instance when they sell products to customers while taking up the other side of the trade. Something that happened in 2008/09 when they sold "alphabet soup products" to clients, which later proofed to be (almost) worthless, profiting themselves hugely on the other side of the trade.

It turns out that inside the New York Fed Carmen Segarra was given the task to check how Goldman Sachs deals with the conflict of interest. Yves Smith describes what happened in "Whistleblower Suit Confirms that the New York Fed is in the Goldman Protection Racket":


"Segarra was tasked to assess whether Goldman’s conflicts of interest policies were adequate in three separate cases: Solyndra, the El Paso/Morgan Kindler acquisition, and a bank acquisition by Sandanter. What is stunning if you read the complaint, which we’ve embedded below, is how high-handed Goldman was in its responses to Segarra’s inquiries. It’s not hard to imagine that they viewed this as a pro forma exercise that given their cozy relationship with the New York Fed, would go nowhere. They didn’t just stonewall, they told egregious lies. That sort of cover-up usually winds up being worse than the crime, but not if you are in a privileged class like Goldman. When Segarra (and initially, the other members of her team) kept pressing Goldman for answers and making clear that what they were getting was problematic, Goldman then started giving credulity-straining responses.

As the exam moved forward, Segarra came under pressure from the Goldman relationship manager, Michael Silva, who was also senior to her at the bank (this is how you can tell the new regulatory push is all optics: the examiners are subordinate to the established “don’t ruffle the banks” incumbents). Silva, who had been chief of staff to Geithner before becoming “relationship manager” to Goldman, appears, unlike Segarra, not to have had real world financial services experience (he looks to have joined the New York Fed as a law clerk in 1992 and stayed with the bank).

Segarra was fired abruptly after refusing to change her recommendations and destroy supporting documents, which was in violation of regulatory policy (bank examiners are not “fire at will” employees; they need to be put on notice and given the opportunity to correct deficiencies in their performance before they can be dismissed).

I’ve read other wrongful termination suits and Segarra’s looks very strong. It’s going to be awfully hard for the New York Fed to talk its way out of this one."


This will be an interesting case to follow, many people have already written about the close ties between Goldman Sachs and several government agencies, like the (New York) Fed.

The full complaint by Segarra can be found here.


In my previous posting about Goldman Sachs I asked the question why anybody would want to deal with Goldman Sachs, given its questionable ethics. Yves Smith gives an answer to that question:


"Goldman was raked over the coals in the media in 2010, first when the SEC filed its suit in April on one of its Abacus CDOs, and later when Carl Levin turned the spotlight on other particularly noxious Goldman CDOs, such as Timberwolf and Hudson. Yet even though Goldman’s reputation suffered and its stock price took a hit, it did not suffer if any loss of customer business. A lot of that is ego: most clients think they are smart enough to protect themselves from the likes of Goldman. Others say that even with its double-dealing, it still offers services other don’t. For example, if you are a hedgie and for some reason really want to do a trade in August in the late afternoon on a Friday, you’ll have trouble scaring up anyone you’d trust to take your order at most shops. By contrast, Goldman makes sure to have all the desks covered."


One organisation that does work with Goldman Sachs, as described here: "Goldman Said to Earn $500 Million Arranging Malaysia Bond". Did 1MDB think they are smart enough, or was it because Goldman Sachs offered services that others didn't? There has not been much transparency regarding 1MDB, I hope that one day all the facts become public and we all know the answer to the above question.


In "What happened inside Goldman Sachs", author Steven Mandis writes how the culture of Goldman Sachs completely changed after it went for IPO, from client focused to shareholder (read: profit) focused. The book review by The Wall Street Journal can be found here.

Faber: "stocks declining 20% is almost a certainty"

Marc Faber's September issue of "The Gloom, Boom & Doom Report" is again full with pockets of wisdom.

A long story about Macau and the enormous increase of outbound travellers from China. After liberalising gambling in Macau, monthly visitors grew from 40,000 in the mid-1990s to 2.5 million visitors. Even though Stanley Ho lost his gambling monopoly, he has done extremely well due to this 60-fold increase.

Also mentioned is Sheldon Adelson from the Sands company, who saw his company's share price drop from US$ 139 to US$ 1.29; it is now back to about US$ 60, quite a rollercoaster ride.

If readers are optimistic about China's growth story, then Macau should be a beneficiary of that, and thus is Faber moderately positive in the long-term about companies with exposure to Macau's casino's. Faber cautions though about the property bubble (both residential and commercial) in China and its weakening economy.

Faber then moves on to the "other casino", the financial markets, especially related to the Fed, which does not feature high in Faber's opinion, to put it mildly.

Important is the following observation:

"More policymakers and economists are coming to realize that the Fed's unconventional monetary policy is not working. Yet there is also a sense that unwinding is too costly right now and can't be reversed" and ".... the probability that we have embarked on permanent asset purchases by the Fed is very high".

He continues to argue that the Fed has lost control over the bond market, with the 10-year yield rising from about 1.5% to almost 3.0%.

Investors should reduce equity holdings, the US economy will weaken.

Faber still likes industrial commodities and mining companies like:

• Newmont Mining Company: NEM
• Freeport-McMoRan Copper & Gold Inc: FCX
• Barrick Gold Corporation: ABX (featured a few times in this blog)

Emerging markets like Thailand, Indonesia and the Philippines look vulnerable.

Finally, he mentions:

"I would be extremely risk averse for now. I am not concerned about stocks declining 20% or more. (In my opinion, this is almost a certainty.)".

He is concerned about the direction of the Western politics and how badly the geopolitical climate has deteriorated. Xi Jinping, President of China, will not be pushed around by anyone, least of all by Obama.

Losing Faith in Gold?

Long and interesting article on Bloomberg's website by Peter Robison & Ekow Dontoh:

"Losing Faith in Gold From Ghana to Vancouver Proves Rout"

There is an infographic from Bloomberg:

"Damage of Declining Gold Prices Felt Globally"

I recommend to read the whole article, some snippets:


"Gold’s swift fall, including two days in April when it plunged the most since 1980, has ravaged hopes and livelihoods around the world -- from the 1 million miners in Ghana who scour in the dirt, to thousands of executives and geologists at mining exploration firms that are running out of cash in Vancouver. Gone too are jobs for auditors, bankers and analysts in the finance capitals of Toronto and London. Investors who bet big and lost are shifting assets elsewhere and scaling back retirement plans."

"At the September 2011 peak, the market value of the world’s gold mining companies reached $486 billion, more than the gross domestic product of the United Arab Emirates. Since then, they’ve lost $271 billion, including a 71 percent plunge in U.S. shares of AngloGold Ashanti Ltd., a Johannesburg-based producer held by Paulson."

"Seitz went to London in April to raise money for his newest venture, a developer of Kazakhstan gold assets called IRG Exploration & Mining Inc. He met with eight analysts and bankers. Six weeks later, four of them had lost their jobs, he said. “In my professional career, it’s been the toughest couple years of my life,” Seitz said."


However, despite the rather negative tone in the above article, I am not bearish about either gold or the gold miners, about which I have written before. I think that this kind of article is typically written near the bottom of the market, not the top. Small, inefficient mining companies will not be able to survive at the current low prices, but the larger, better funded ones will.

Barrick Gold made a nice run-up from it's lows (around USD 14). I have not yet sold any of my shares in Barrick or any of the other mining companies that I owe.

Great Marc Faber interview and understating of inflation

Great interview with Marc Faber by The Prospect Group in which Faber also mentions Malaysia several times.

"Shadow banking, market psychology, & the global impact of American monetary policy"

"Chinese foreign exchange reserves & the Sino-American geopolitical standoff"

"Growth in Southeast Asia & the economic future of Malaysia & Thailand"

"Higher education & protecting yourself in the coming economic collapse"


Faber mentions that the cost of living has increased so much in Asia, he estimates the inflation to be about 5%. In Malaysia inflation is reported as being between 1% and 2%, which is simply incredible.

Since the inflation is used to calculate the real GDP (GDP corrected for inflation, the factor that is used is slightly different from the consumer inflation, but very similar and highly correlated), basically the real GDP growth is clearly overstated.


Tom Holland wrote an article in the SCMP "Official manipulation adds 10 per cent to China's GDP" about the same subject (but then applied to China), some snippets:


Analysts have always suspected Beijing's statisticians manipulate China's economic data to come up with growth figures that are acceptable to the country's leadership.


[with Malaysia having the highest Power Distance Index in the world, surely government servants are also motivated to construct inflation numbers acceptable to the Malaysian leadership]


Above all, they believe that the National Bureau of Statistics systematically understates China's economy-wide inflation rate.

As a result, when Beijing's bean counters correct the raw data for nominal gross domestic product to adjust for inflation, they come up with a figure for China's real growth rate (see the first chart) that is anything but real. Instead it is too high.

Suspicion - even strong suspicion - comes easily. But working out exactly how officials tweak the data, and estimating the size of the resulting discrepancy between appearance and reality, is altogether trickier.

Now a new study by Christopher Balding from the HSBC Business School at Peking University sheds some welcome light on just how the data is manipulated.

Balding argues that housing costs - usually a major item in any country's consumer price index inflation basket - are both understated and underweighted by China's statistical agency.

He points out that, according to the official data, between 2000 and 2011 Chinese house prices rose by just 8 per cent. Urban prices climbed just 6 per cent.

As Balding notes, the modesty of this increase stretches credulity to the limit, especially over a period during which China's nominal GDP quintupled and its money supply expanded sixfold (see the second chart).

"The claim that the housing component of CPI grew by less than 10 per cent between 2000 and 2011 is nothing less than comical," he writes.

Compounding the error, officials assume that 80 per cent of the population live in China's cities, where they say property prices have risen more slowly than in rural areas.

In reality, some 48 per cent of people still live in the countryside.

And then to cap everything, housing barely contributes to the official inflation figures. Between 2000 and 2010, housing costs made up just 13 per cent of China's official consumer inflation basket.


His results show that economy-wide price levels today are likely to be about 10 per cent higher than China's implied GDP deflator index indicates. Taking the third-party price data, and assuming a 30 per cent housing cost weighting, the deviation could actually be as high as 16 per cent.

Applying this correction to China's output data, argues Balding, reduces China's real GDP by between 8 per cent and 12 per cent, knocking about 5 trillion yuan (HK$6.3 trillion) off 2012's figure.

"It is disturbing that a statistical body would so obviously manipulate and produce blatantly fraudulent data," Balding writes.

"Given the relative ease with which obvious statistical manipulation was found, it is quite likely that less obvious fraud is present.

"It seems likely that much larger revisions to Chinese real GDP and other economic data are needed to produce more reliable statistics."

Japans lost decades: one big hoax

Few “facts” of modern history have become so firmly established as the idea that the Japanese economy flamed out in the early 1990s. This story has greatly discombobulated [thrown into a state of confusion] other nations’ policymaking, not least, as we will see in a moment, policymaking in the United States.

Yet the “lost decades” story is not just a hoax but one of the most absurd and transparent hoaxes ever promoted in the English-language media.


Interesting and thought-provoking article in Forbes from Eamonn Fingleton. Marc Faber was one economist who wrote that the deflation in Japan was not a bad thing at all for most Japanese, enabling normal people to buy property, something that was near impossible during the boom years.

Some more snippets from the article in Forbes, explaining the origins of the hoax, and the reason it was sustained for such a long time:


Cline records that whereas the U.S. labor force increased by 23 percent between 1991 and 2012, Japan’s labor force increased by a mere 0.6 percent. Thus, adjusted to a per-worker basis, Japan’s output rose respectably. Indeed Japan’s growth was considerably faster than that of  Germany, which is the current poster child of economic success.

Cline, a senior fellow at the Washington-based Peterson Institute for International Economics, also points out that Japan’s much lamented deflation is not a problem. Quite the reverse: in the last twenty years the Japanese economy has actually done better at times when prices were falling than when they were rising. He adds that Americans make a big mistake in assuming that Japan’s  gentle deflation bears any resemblance to the highly disruptive deflation the United States suffered in the early 1930s. In reality Japanese deflation is similar to the sort of “good deflation” in an earlier era of American history, between 1880 and 1900, when rapidly rising U.S. labor productivity consistently reduced consumer prices and rendered America the miracle economy of the era.

Japan has continued to do remarkably well on trade, whereas  America’s performance has been disastrous. Japan and Germany rank as the only two major advanced economies that have increased their current account surpluses since 1989.

Japan’s trade performance is all the more remarkable for the fact that, far from falling as one might expect from the way the Japanese  economy has generally been covered, the Japanese yen has on balance risen on world currency markets (it is up nearly 49 percent since early 1990 when the so-called lost decades allegedly began).

Cline contends that Japan’s government borrowing is a problem but fails to note a remarkable mitigating fact: much of the debt the Japanese government has incurred  has been used to buy foreign government securities, not least those of the United States. In effect the Japanese saver is propping up the United States and other deficit nations, and the Japanese  government is merely acting as banker. The nation with the real debt problem is not Japan but the United States.

Almost everywhere you look in the details of the Japan story you find that the basket case story could not be further from the truth. Of course, the Tokyo stock market crashed and has never subsequently reached the ridiculous heights it hit in 1989 (I can call these heights ridiculous because I was one of a few — a very few — observers who predicted the crash). But Japanese stock valuations are not a guide to the underlying performance of corporate Japan. Far from it. With virtually no exceptions, Japanese corporations have continued to boost their revenues — and maintained their employment levels — in the face of a constantly rising yen. The Japanese car industry, for instance, has continued to make extraordinary gains.

Why did the “basket-case Japan” story ever catch on? It was spread at first by rather naive Americans who, unlike some of us, did not understand that Japanese stocks had been wildly overvalued in the late 1980s. They therefore took the  crash  as a premonition of a terrible future real-economy calamity — a calamity that in the event never materialized.  In the meantime Japanese officials found that the basket-case story powerfully ameliorated angst in Washington over Japan’s closed markets. They proved quick learners and have projected an image of  Japan as suffering some weird economic equivalent of dementia ever since.

In Washington, however, the basket-case story worked like a charm. After all a chivalrous United States doesn’t kick a man when he’s down. The result is that even today not one of Washington’s  highly publicized trade grievances of the 1980s has been resolved – not autos and auto parts, not financial services, not even rice.

Once in a Lifetime Opportunity to Buy Barrick Gold? (2)

I received the following comment on my previous posting "Once in a Lifetime Opportunity to Buy Barrick Gold?"

"Very interesting:

When the original article came out (5 July 2013) the share price dropped, but then when you blogged it (15 July 2013) it went up quite a bit.

Was this your own money? Or do you have many followers?"

I thank "Tony", but the comment is really too flattering for me. My blog did receive almost a quarter of a million hits (about 10,000 to 12,000 hits a month), a pretty unbelievable number for a subject that is perceived to be rather boring by most investors, Corporate Governance. It makes me humble, and despite being very occupied with work lately and not earning once cent through this blog (that is the way I want it), I hope to continue writing in the future.

But I don't think (and actually hope) that the readers of this blog are the people who are looking for a quick punt. I try to stress the virtues of long term investing. I agree, the timing of my posting could have been worse, so far it worked out quite nice.

And yes, I did buy Barrick Gold for my own account, but given the size of Barrick Gold, my purchase would have only caused a small ripple in the ocean. I have not sold my holding, not do I intend to do so in the near future, unless the price really rises fast.

Marc Faber has written a lot about miners in general in the past. I assumed he would be interested at the current prices and was thus not disappointed to read in this August 2013 edition of "The Gloom, Boom & Doom Report":


"Relative to all other assets that I follow, gold mining stocks are inexpensive and should be purchased gradually. Some pundits argue that the Fed manipulated the gold prices lower and that the US doesn't have the gold it officially shows. I [Marc Faber] really hope they are right, because if that were the case, gold prices might explode on the upside".


I did speak recently to someone with deep knowledge in mining companies (he worked before for BHP) and trading in commodities. He told me that there is a lot of stress in the market, many companies are stuck with expensive mining assets that they bought in the last years. Prices of commodities have come down recently, indicating growth in China is slowing down substantially.

Also, although many commodities have risen over say the last 10 years, the cost to mine them has risen more, putting pressure on margins. In other words, short-term results of mining companies might be horrendous, with recently acquired assets being (partially) written down.

I have been very critical about Malaysian SPACs in the past (and will firmly continue to do so, unless I have convincing arguments that they actually might work for the minority investors in the long run), but one of the rare positives is that the ones focusing on mining might be able to buy some assets on the cheap from mining companies with stretched balance sheets.

Investing in Gold

I have written several times about gold.

In The New York Times an article by Harvard professor N. Gregory Mankiw appeared:

"Budging (Just a Little) on Investing in Gold, should gold be a part of my portfolio?”

Here are the main points of the writer:


THERE ISN’T A LOT OF IT
The World Gold Council estimates that all the gold ever mined amounts to 174,100 metric tons. If this supply were divided equally among the world’s population, it would work out to less than one ounce a person.

Warren E. Buffett has a good way to illustrate how little gold there is. He has calculated that if all the gold in the world were made into a cube, its edge would be only 69 feet long. So the cube would fit comfortably within a baseball infield.

ITS REAL RETURN IS SMALL 
Over the long run, gold’s price has outpaced overall prices as measured by the Consumer Price Index — but not by much. In another recent N.B.E.R. paper, the economists Robert J. Barro and Sanjay P. Misra reported that from 1836 to 2011, gold earned an average annual inflation-adjusted return of 1.1 percent. By contrast, they estimated long-term returns to be 1.0 percent for Treasury bills, 2.9 percent for long-term bonds and 7.4 percent for stocks.

Mr. Erb and Mr. Harvey presented a novel way of gauging gold’s return in the very long run: they compared what the Roman emperor Augustus paid his soldiers, measured in units of gold, to what we pay the military today. 
    

They report remarkably little change over 2,000 years. The annual cost of one Roman legionary plus one Roman centurion was 40.9 ounces of gold. The annual cost of one United States Army private plus one Army captain has recently been 38.9 ounces of gold.

ITS PRICE IS HIGHLY VOLATILE
Gold may offer an average return near that of Treasury bills, but its volatility is closer to that of the stock market. That has been especially true since President Richard M. Nixon removed the last vestiges of the gold standard. Mr. Barro and Mr. Misra report that since 1975, the volatility of gold’s return, as measured by standard deviation, has been about 50 percent greater than the volatility of stocks.

IT MARCHES TO A DIFFERENT BEAT A
n important element of an investment portfolio is diversification, and here is where gold really shines — pun intended — because its price is largely uncorrelated with stocks and bonds. Despite gold’s volatility, adding a little to a standard portfolio can reduce its overall risk.


Some comments by me:

• Its return is small: this is measured against the S&P 500 from the US which has performed very well over the long run; however, most other share markets all over the world haven't returned that much, I think only the Australian market has beaten the US over the very long run. One example is the Chinese market, although the economy has boomed tremendously over the last 10-15 years, a foreign investor would not have made much money at all (one possible reason being the low standard of Corporate Governance, capitalism is still too young in China)
• Since abandoning of the gold standard, as could be expected (without the restriction that each USD had to be backed by gold) the US government embarked on a money printing campaign that increased in recent times since the 2008/9 global crisis; we might not yet have seen the end of this, which makes a decent case to hold gold since its supply is limited, while governments ability to print money out of nothing isn't
• The writer recommends to hold 2% of ones assets in gold, Marc Faber recommends a clearly higher percentage, more like 5-10% (possibly in combination with other precious metals)

I think gold (and other precious metals) should be a part of a diversified portfolio which contains (global) stocks, cash, short term and long term bonds and property (or land). At the moment the future returns for long term bonds do not look well, so its allocation should be minimal.

Observations and stock picks from Marc Faber

Marc Faber's always interesting (and highly recommended, but rather expensive) "The Gloom, Boom & Doom Report" of January 2013 starts with a common subject, how bad economists have performed:

"Too much time has been spent on constructing econometric models and too little on thinking about how the economy works".

Another favourite subject, the huge decline in purchasing power of the USD against gold. Between 1800 and 1933 the price was quite stable, around USD 20 per ounce, then until 1970 about USD 35, after which the price exploded (after leaving the gold standard) to now around USD 1,800 per ounce.

Another observation: the extremely low current yield on USD Long-Term treasuries, the last time that happened was in 1946 (2.1%), in 1980 they were 14%.

Faber is bullish about stocks from Vietnam and China since they have lagged the other markets, the latter one through Hong Kong listed shares. Some examples are Hang Seng Bank (0011), Swire Pacific (0019), Sun Hun Kai (0016).

In Singapore Faber owns a host of REIT's: Ascendas, Ascott, CapitaCommercial, CapitaMall, CDL Hospitality, First, K, Fraser Centerpoint, Mapletree Logistic, Parkway Life and Suntec.

In Malaysia he prefers: Fraser & Neave, Berjaya Sports, BAT, Guinness, Carlsberg, JTI, PB Bank, SP Setia and Hektar Reit.

This is more meant as a shotgun approach, buying a large basket of holdings in SE-Asian stocks, readers should do their own homework, as usual.

Last year was a wonderful year for investors who were long equities. The S&P 500 is up by 12%, many Asian markets are up by 20 to 30%. Bond investors also achieved gains of 10 to 15%. Agricultural commodities are up by 25%. Faber doesn't see similar gains for 2013 and recommends a defensive strategy.

FABER: 44 Charts That Show Why The World Is Doomed

In a new presentation given in Hong Kong to the London Bullion Market Association, Faber offers a thick stack of 44 charts that makes him very bearish on the global economy (via ZeroHedge). They include overviews of the emerging and evolving trends on debt, trade, stocks and commodities.

Faber points to the explosion of public and private debt and how they have been far outpacing GDP growth for the last 50 years. In this backdrop, the wealth gap between younger and older Americans have been widening.

Overseas, China has seen its economy boom on expansionary monetary policy, which has turned the world's second largest economy into a giant credit bubble.

Considering all this, he offers two investment strategies: "aggressively shifting from one asset class to another" or "achieving safety though diversification."

Here is the (very interesting) presentation.

QE Forever

"Congratulations Mr. Bernanke. I'm happy, my assets' values go up. But as a responsible citizen I have to say the monetary policies of the U.S. will destroy the world." Marc Faber, investor, analyst and writer extraordinaire, September 14, 2012





The above reaction of Dr. Faber can not come as a surprise, he has long time warned about the irresponsible actions of the FED in the US, which are further detailed below.

Doug Noland added to this:

If I can chuckle perhaps it will hold back the tears. It's difficult not to be reflective - to ponder how things could ever have come to this. Thursday was another historic day for policymaking, for markets and for the perpetuation of history's most spectacular financial mania. In the past I've noted that, in comparable circumstances, I have viewed my 14-year weekly chronicle of history's greatest Credit Bubble as pretty much a great waste of effort. I have tried to warn of the dangers of an unanchored global financial "system." I've done my best to illuminate the dangerous interplay between an unwieldy global pool of speculative finance and aggressive "activist" central bankers. I have forewarned of the perils of discretionary (as opposed to rules-based) policymaking - in particular highlighting the (long ago appreciated) fear that too much discretion ensures that monetary policy mistakes will only be followed by yet greater mistakes. I took strong objection to Dr. Bernanke's doctrine and framework when he arrived at the Fed in 2002 and protested in vein when he was appointed Federal Reserve Chairman in early-2006.

Instead of moving prudently to rein in egregious Credit and speculative excess, the Greenspan/Bernanke Fed's went in the opposite direction and repeatedly provided extraordinary accommodation. Amazingly, each bursting Bubble led to only more aggressive monetary largess and more power for dysfunctional (Bubble-prone) markets. Thursday's policy move by the Bernanke Fed essentially indicates full capitulation to what has become a highly speculative global marketplace. There is at this point no doubt in my mind that we are witnessing the greatest monetary fiasco ever.

As an analyst of Bubbles, I often quip that they tend to "go to incredible extremes - and then double." Timing the bursting of a Bubble is a very challenging - if not nearly impossible - proposition. Yet this in no way should cloud the harsh reality that the longer a Bubble is accommodated the more devastating the unavoidable consequences. It is, as well, the nature of speculative manias for things to turn crazy in the destabilizing terminal-phase. The past few weeks - with more than ample Bubble accommodation and craziness - really make me fear that eventual day of reckoning.

Another critic is Peter Schiff, who wrote:


With yesterday's Fed decision and press conference, Chairman Ben Bernanke finally and decisively laid his cards on the table. And confirming what I have been saying for many years, all he was holding was more of the same snake oil and bluster. Going further than he has ever gone before, he made it clear that he will be permanently binding the American economy to a losing strategy. As a result, September 13, 2012 may one day be regarded as the day America finally threw in the economic towel.

Here is the outline of the Fed's plan: buy hundreds of billions of home mortgages annually in order to push down mortgage rates and push up home prices, thereby encouraging people to build and buy homes and spend the extracted equity on consumer goods. Furthermore, the Fed hopes that ultra-cheap money will push up stock prices so that Wall Street and stock investors feel wealthier and begin to spend more freely. He won't admit this directly, but rather than building an economy on increased productivity, production, and wealth accumulation, he is trying to build one on confidence, increased leverage, and rising asset prices. In other words, the Fed prefers the illusion of growth to the restructuring needed to allow for real growth.

The problem that went unnoticed by the reporters at the Fed's press conference (and those who have written about it subsequently) is that we already tried this strategy and it ended in disaster. Loose monetary policy created the housing and stock bubbles of the last decade, the bursting of which almost blew up the economy. Apparently for Bernanke and his cohorts, almost isn't good enough. They are coming back to finish the job. But this time, they are packing weaponry of a much higher caliber. Not only are they pushing mortgage rates down to historical lows but now they are buying all the loans!

More Gloom from Dr Doom

From the latest Gloom, Boom & Doom Report from Dr. Marc Faber:

• For decades, one dollar added to GDP in the US was tied to $1.40 in additional debt.
• The "Greenspan growth model" has driven it to a record high, for one dollar of additional GDP, lately, there are $4 in additional debt (Greenspan and some helpers being the architects of the greatest credit bubble in economic history)
• Faber recommends to reduce US equity positions, and he also not sees any great value in Asian markets, with very few exception
• He remains faithful to physical gold, aiming at 20-25% weighting in his portfolio
• The only possible outcome is a complete breakdown of the system such as we know it today. The only thing we don't know is what economic conditions will precipitate this breakdown and when it will occur (high inflation, or a deflationary bust, or war, or possibly all three)
• This is not a time to maximize profits and to take huge risks. A well diversified portfolio of different asset classes will somewhat insulate investors from catastrophic losses.

Guest writer Geoffrey Batt made an equity risk table of 38 countries, comparing 2013 earnings yields on equity to the yield of a 1-year deposit rate.

Malaysia is 32nd on the list, with earnings yield of 7.5% versus deposit rate of 3.2% for an equity risk premium of only 4.3%, one of the lowest in the list. Singapore looks better with an earnings yield of 8.1% versus deposit rate of 0.3% for an equity risk premium of 7.8%.

Top of the list are beaten down countries like Iraq, Italy, Greece, Spain, France and (rather surprisingly) Hong Kong.

At the bottom of the list some countries that have high deposit rates like India, Turkey, Vietnam and Pakistan.