One For the Books:
If you traded through today, Thursday May 6, 2011, you will have done so through a day that will go down in financial history: the biggest 1-day drop in the history of the Dow-Jones index; the day that the Euro zone truly started its future slow disintegration or at least transformation; the day that gold began its return from Keynes' "archaic relic of the past" to an active component of sovereign (and mainstream) wealth and a change in the underpinning of some currencies; and the day that disclosed the true impact - and the danger of that impact - of the rise of machine-driven "high frequency" trading if it is left totally uncontrolled.
Gold, Chinese Real Estate and the Renminbi:
Here are set of developments that I think have profound relationships. The US had been increasing public pressure on China for months to abandon the tie that has existed for the last couple of years between the USD and the Chinese yuan, or renminbi. A few weeks ago, the pressure suddenly relented as China announced a weakening in its latest trade figures and stated in effect that whatever changes might occur may be seen by June, the date of the US Treasury Department's decision to delay. Eventually we will see the actual figures.
Within that short span of time, the Greece crisis, the outcome of which had been visible for some time beforehand to those who looked carefully, caused its now well-known panic and and ongoing damage to the Euro as a prospective credible alternative to the USD as a reserve currrency. China has never been observed to be supportive of the Euro as a reserve concept.
Also in this time Enoch Fung, chief Asia economist for Goldman Sachs, held a conference outlining a vision to internationalise the RMB through allowing Hong Kong to initiate international financial transactions in RMB in addition to the Hong Kong dollar. This would be consistent with the way the former British colony has been the medium for other far-reaching changes in mainland Chinese economic policy. Hong Kong is an important center for, among other things, Asian IPO's. If this occurs, it will be the start of the RMB alternative. China has already established numerous non-USD bi-national trade deals with countries as distant as Brazil.
Many western analysts have lately been calling for a watch on the imminent collapse of the Chinese real estate market. Fundamental differences in land ownership (as distinct from the ownership of properties) which is an important peculiarity of the Chinese market, are rarely noted. This week the important Shanghai-based funds consultancy, Z-Ben Advisors, has written that the international global crisis actually had little effect on Chinese markets - they had already declined by 20% - and proposes the contrarian view they could begin a rebound within weeks. In the absence of comprehensive social security, most Chinese mainland individuals rely on stocks and property for their future income.
The bond market is as yet inadequately developed at the retail level. Investors have few alternative outlets. Chinese national stockpiling or source control of many key industrial materials such as copper - a standing policy - have long put pressure on international commodities pricing. To allow investable Chinese domestic funds to freely expand its trade in these markets would not be helpful in controlling internal inflation.
However, China has also become the largest gold producer in the world. Allowing, in fact encouraging stock investment in go;ld producers (which often produce other industrial metals in addition) would be an outlet for savings that would not have that particular negative effect. In fact, an individual savings aspect would be maintained while at the same time, since the government purchases all output, adds to the strength of the Chinese currency and minimizes the degree to which currency relationships need to be renegotiated, by allowing the marketplace itself to discover value.
In view of these powerful long-term forces, it would seem reasonable to expect that an internationally-traded, Chinese-controlled equity vehicle of this type would meet good reception by both international, as well as a potentially wider domestic Chinese participation. We could see the beginning of this process during 2010.
Thursday, May 6, 2010
Wednesday, May 5, 2010
May Trauma
Going away always seems to land me back directly into the midst of major market turmoil, and the week of May 3, 2010 is certainly no exception and very uncomfortable. The Greek sovereign debt problem was visible some time ago. The outcome seemed pretty obvious then (a debt bailout requiring Germany's agreement). That in itself has not changed. What is different is that it is clear that the German public does not want to agree to pay for Greek profligacy - although in the end, it may - coupled with investor realization that the Greek public is not willing to pay the price in taxes and clawbacks, regardless. That is what the riots are about. In fact - and this is the immovable rock - even if the bailout goes ahead, Greece will actually never be able to repay. The solution to their massive debt cannot be more debt.
The resultant Euro-zone induced turmoil - exacerbated by the possibility of no governing majority coming out of the UK elections, also this week - has spooked investors worldwide. Really good stocks unconnected to the problem (maybe the best single example is Apple (AAPL) which just announced blowout earnings and a dramatically good outlook) is among the many that were hit. Precious metals and related stocks were also - and even more dramatically pounded, despite the fact that in months ahead their performance is likely to do well.
Part of the reason for their hit may be that when people are in sudden trouble and get bank margin calls, the immediate reaction is to sell those shares that have a profit. Another aspect is the deflationary scenario put forward by those that hold the view that deficit reduction and fiscal restraint worldwide - for which the Greek problem is the current poster-child, is at hand.
However, I think we are way past that. If sovereign debt can't be forgiven (written off) and the debtor can't issue its own currency (as in Greece or California) and can't raise taxes enough to borrow on its own, the more likely eventual real-world response is an extension into Europe by the ECB of the massive monetary expansion ("quantitative easing") already having been used since late 2008 by the US Fed. France and Germany are against this on principle. It also holds interest rates below levels that would occur in an otherwise unmanipulated market.
One result will be apparent strength in the US dollar, but the strength will only be relative to weak currencies. Although tough on their exporters, harder asset-backed currencies such as the Canadian and Australian dollars will attract investment attention - and hard currency proxies like gold and gold ETFs are likely to resume their upward trends.
In the case of Exchange Traded Funds, the most well-known and largest precious metal ETF - it is not a gold mining stock fund - is the US Spider "GLD". However, while vast sums have been invested in it, its actual holdings of physical gold are secret and transactions are completely non-transparent - where have we heard this before? A new ETF by legendary Canadian manager Eric Sprott (US listed and quoted) holds all its physical gold in the Canadian mint, its holdings are reported and so avoids this questionable aspect of the GLD. The Sprott ETF is called PHYS.
I hold none of the above but continue with a position in the Canadian-Chinese gold miner JIN-T. This junior producer has more inherent leverage than an ETF, which can make it a less appropriate vehicle for conservative investors who wish lower volatility, or market participants (other than traders) with a shorter time horizon than 3 to 5 years. I have been a purchaser on declines, including the decline this week.
The resultant Euro-zone induced turmoil - exacerbated by the possibility of no governing majority coming out of the UK elections, also this week - has spooked investors worldwide. Really good stocks unconnected to the problem (maybe the best single example is Apple (AAPL) which just announced blowout earnings and a dramatically good outlook) is among the many that were hit. Precious metals and related stocks were also - and even more dramatically pounded, despite the fact that in months ahead their performance is likely to do well.
Part of the reason for their hit may be that when people are in sudden trouble and get bank margin calls, the immediate reaction is to sell those shares that have a profit. Another aspect is the deflationary scenario put forward by those that hold the view that deficit reduction and fiscal restraint worldwide - for which the Greek problem is the current poster-child, is at hand.
However, I think we are way past that. If sovereign debt can't be forgiven (written off) and the debtor can't issue its own currency (as in Greece or California) and can't raise taxes enough to borrow on its own, the more likely eventual real-world response is an extension into Europe by the ECB of the massive monetary expansion ("quantitative easing") already having been used since late 2008 by the US Fed. France and Germany are against this on principle. It also holds interest rates below levels that would occur in an otherwise unmanipulated market.
One result will be apparent strength in the US dollar, but the strength will only be relative to weak currencies. Although tough on their exporters, harder asset-backed currencies such as the Canadian and Australian dollars will attract investment attention - and hard currency proxies like gold and gold ETFs are likely to resume their upward trends.
In the case of Exchange Traded Funds, the most well-known and largest precious metal ETF - it is not a gold mining stock fund - is the US Spider "GLD". However, while vast sums have been invested in it, its actual holdings of physical gold are secret and transactions are completely non-transparent - where have we heard this before? A new ETF by legendary Canadian manager Eric Sprott (US listed and quoted) holds all its physical gold in the Canadian mint, its holdings are reported and so avoids this questionable aspect of the GLD. The Sprott ETF is called PHYS.
I hold none of the above but continue with a position in the Canadian-Chinese gold miner JIN-T. This junior producer has more inherent leverage than an ETF, which can make it a less appropriate vehicle for conservative investors who wish lower volatility, or market participants (other than traders) with a shorter time horizon than 3 to 5 years. I have been a purchaser on declines, including the decline this week.
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