Currency
The “Ig Nobel Prize” is parody of the Noble Prize that is awarded every year for the most trivial scientific achievement. (‘ig’ is short for ‘ignoble’)
For example, the 2007 recipient for the ‘Ig Nobel Peace Prize’ went to the United States Air Force Wright Lab in Ohio, for proposing the development of a ‘gay bomb’ that could be dropped in hostile territory and make enemy troops sexually attracted to each other. Make love, not war?
(This actually happened. The proposal was part of a $7.5 million funding request in 1994 to develop non-lethal weapons, including one that would create “severe and lasting halitosis”, and “could be used on mixtures of enemy personnel and civilians.” Your tax dollars at work.)
So when I opened my email yesterday and saw the subject line: “Central Bank Governor of the Year”, I immediately presumed it was a similar satire. It wasn’t.
It’s bad enough that our modern society considers the hoodoo of economics to be “science”.
And that we award our most esteemed prizes for intellectual achievement to its master practitioners like Paul Krugman who tell us how bountiful our national wealth could be if we would only conjure more paper currency out of thin air.
These ‘scientists’ have managed to convince the entire world that it’s a good idea to award a tiny banking elite with supreme, totalitarian control over the money supply.
Frankly this idea is even dumber than the Air Force’s. And perhaps the framework of modern central banking will one day receive its own ‘Ig Nobel Prize’.
But for now, it’s taken very seriously. So seriously, in fact, that the Financial Times’ “Banker” intelligence service recently announced the aforementioned ‘Central Bank Governor of the Year’.
Guess who won?
Nope, not Ben Bernanke. You see, while Mr. Bernanke has spent the last several years aggressively expanding the balance sheet of the US Federal Reserve, he has been handily out-printed by some of his peers.
No, this dubious honor goes to Haruhiko Kuroda of the Bank of Japan (BOJ).
Mr. Kuroda’s claim to fame is pushing to double the BOJ’s monetary base within just two years, and joining Japanese Prime Minister Shinzo Abe to create more inflation.
He’s off to a hell of a start.
Since assuming office in March 2013, Mr. Kuroda has printed enough money to inflate his balance sheet by 35.5% in just 9-months. And the Japanese yen has plummeted along with it.
Despite obliterating his currency, the FT absurdly claims that Mr. Kuroda has “restored credibility to the Bank of Japan and inspired confidence in Japan’s economy.”
Bear in mind, the Japanese government is already in position where the NET government debt is over 140% of GDP.
And they’re spending a full 25% of its tax revenue just to make INTEREST PAYMENTS… at a time when interest rates are effectively ZERO.
If interest rates rise to just 1%, the Japanese government will go bankrupt. Yet this is exactly the direction that Mr. Kuroda is going.
His goal is to create inflation of at least 2%. But if inflation is 2%, who in his right mind would loan money to the government at 0.3%? You’d be losing money.
Interest rates will HAVE to rise. Investors will demand it. So Mr. Kuroda’s path will either bankrupt the Japanese government… or he will create a currency crisis by devaluing his currency to nothing.
It’s extraordinary how dire the situation is. Yet Mr. Kuroda is now considered by the grand wizards of the financial system to be the BEST IN THE WORLD. Incredible.
Breadth is perhaps my favorite analytical tool for measuring both financial market and economic health. Breadth is a great measure of underlining strength that can help identify shifts in trends before they become apparent. When the major market indexes were hitting new 52-week highs in October 2007 fewer and fewer individual stocks were hitting new highs and many were already in their own private bear markets. In the same vein, while the U.S. economy didn’t officially slip into a recession until December 2007 many individual states within the nation had already slipped into recession months previous.
This underscores the importance of not focusing solely on headline numbers like where the S&P 500 is trading or what the national GDP rate is. For a constant measurement of the stock market’s breadth I track the data each week in my Friday’s “Market’s Bill of Health” report. For gauging the country’s economic breadth I rely on the Philadelphia Fed’s state leading and coincident indexes. This week the Philly Fed just released its State Leading Index for November which showed that 49 out of the 50 states are expected to see their coincident indexes grow over the next six months.
With 98% of states expected to show growth over the next six months, the risk of a coming recession remains remote. Just look at the sea of green on the Philly Fed’s State Leading Index map below, where only Alaska is expected to show contracting economic activity over the next six months. Of note, back in December of 2007 when the U.S. economy first slipped into a recession only 32 states were expected to show economic growth in the first half of 2008, as more than one third of the country was already in a recession. Clearly the present backdrop is bullish and does not offer any impending doom to the current economic expansion.
Source: Federal Reserve Bank of Philadelphia
Before the alarm bells begin to ring for the U.S. economy we will need to see more and more states move from expansion to contraction and the nation’s overall economic growth rate needs to approach negative territory. The Philly Fed constructs a national leading index (see chart below) based on the individual state data where dips below zero provide an early warning of a coming recession. At a reading of 1.52 for November we currently stand near the upper end of the range over the last decade and will need to see far more deterioration before worrying about the economic outlook.
Source: Bloomberg
Confirming the message of the Philly Fed’s state leading data is our own recession probability model, which shows only a 2% chance the U.S. is in or near a recession as the economy continues to expand. If I see the probability jump north of our 20% threshold (see below), then I will begin to urge caution on the economy’s outlook. Until then I must respect the data and remain firmly bullish.
When I saw my first 3D printer operating just under 5 years ago my first thought was, “what the hell is that?” It reminded me of a slow motion version of the teleporter on the original Star Trek series. It was like presto – William Shatner just pulled a cup of coffee out of that box.
The printer jet was zooming back and forth and about 4 hours later – there was a coffee cup. I may not be the sharpest tool in the shed but it was pretty obvious something big was afoot. Flash forward to today and you can now own 3D systems’ Cube 3 (pictured here) for under $1000 but it’s more than just the coolest toy on the block.
Allow me a personal story. This year my wife and I were travelling to Palm Desert with our dog. The problem was we had misplaced the toggles used to attach the top and bottom part of her kennel (the dog’s not my wife’s). No store stocks “replacement toggles” but with a home 3D printer the problem is solved. You simply download the design – it’s free – and then let the printer do it’s thing. Presto – plastic kennel toggles – for about 20 cents a piece in materials.
On a bigger scale NASA has actually 3D printed, small satellites that orbit the earth taking pictures. They’re just one of 22,000 3D printed objects used by NASA today.
The enormity of the manufacturing revolution and the investment opportunities is mind blowing.
A year ago, legendary analyst, Jim Dines repeated his prediction on Moneytalks that 3D printing is the next really big thing for investors. His specific stock recommendations have done incredibly well. That’s why at this year’s World Outlook Financial Conference we have invited 3D printing expert, John Biehler to demonstrate 3 D printers that you can use in your own home to manufacture a variety of items. John will talk about the economic and social economics of this revolution that is impacting not just traditional manufacturing and retailing but also regenerative medicine and industrial design.
I hope you will take the time to come and hear John at the World Outlook Financial Conference on Friday, January 31 and February 1, 2014. Both days we’ll feature some of the coolest idea and investment opportunities in the tech world. In addition, you’ll hear some of the top investment and financial analysts in the english speaking world on a variety of subjects including – key personal financial subjects as well as where the dollar, interest rates, stock market are going.
For more information go to ….www.moneytalks.net/outlook
This morning I read a couple of articles from interest rate strategists making a case for buying government bonds. One of them saw the yield on the U.S. 10 year Treasury bond falling from where it is now at 2.98% down to 2.10% at some point this year.
However, those views are swimming against the tide of reality. Since July 2012, 18 months ago, bonds have been moving in a direction that is different from the direction they were moving in for the previous three decades. From the beginning of the 1980’s to July 2012, bonds were in a Secular Bull Market as yields consistently fell during that stretch with a few minor interruptions. Since July 2012, yields have been rising.
The cycles between Secular Bull Markets and Secular Bear Markets in bonds are prominent during financial market history and tend to shift once in a generation (about once every 25 to 30 years). When the yield on the U.S. 10 year Treasury bond hit 1.39% in late July 2012, that was just such a shift. As the chart above shows, the bond market action on both sides of the shift are distinguishable.
One thing that can temporarily disrupt the new Secular Bear Market in bonds is a rush to the relative safety of the U.S. dollar and U.S. government bonds in response to some global financial cataclysmic event. However, that is not what these strategists mentioned when they talked about the potential for rates to fall this year.
That said, even the gutsiest bond bulls would hesitate to state that we will see the benchmark yield back to its generational low of 1.39% in late July 2012. In fact, it is likely that we will not see the benchmark rate back at that level in the next half century. Talk about long-term! But, Secular trends in the bond market are long-term.
The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Limited or its affiliates. Assumptions, opinions and estimates constitute the author’s judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results.
Richardson GMP Limited, Member Canadian Investor Protection Fund.
Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.
Bloomberg News reported this morning that hedge funds as a whole had another awful year. (I had actually tweeted about this late last week) While the S&P 500 had a total return of about 30% during 2013, hedge funds limped in at about 7% (see chart above).
To make matters worse, hedge funds as a whole have had a dismal record since the global credit crisis and Great Recession of 2008. Up to that point, good performance and a market blitz by the hedge fund industry seduced a lot of capital to invest. It was hard for many to resist the siren call of having a chance to invest with a group of “geniuses” that had bolted from their previous employ as mutual fund managers or desk traders to form their own firms.
However, the tide as long since receded, revealing the true legitimacy of a lot of the industry’s talent and trading strategies. Excessive fees, once overlooked as hedge funds had a good early run, are now the topic of constant examination.
Now, it is true that there are a number of excellent hedge fund managers still in business (as there were before hedge fund investing started to become a fad in the later 1990’s), but their success and skill is drowned out when looking after the various hedge fund indices that include a broad array of participants. However, trying to isolate these excellent managers is a bit like looking for a needle in a haystack.
The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Limited or its affiliates. Assumptions, opinions and estimates constitute the author’s judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results.
Richardson GMP Limited, Member Canadian Investor Protection Fund.
Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.
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