I've written stuff that I feel may hurt some people's feelings. Even if the comments I've made were true, it's no point talking about the past but to look forward. I'll forgive and forget. If I've offended anyone, I hope I'll be granted the same mercy too. I'm amending this post to prevent any hurt that I may create from my comments.
I realise that I need both engines (EQ and IQ) to fire. An ex-boss once told me, "why bother to do CFA, you're now so old". He could not even clear level 1. This is the kind of people that harms others. Some bosses use their charm and nothing else... It's a shallow world and the likeable people get the rewards.
Where's the justice?
Sometimes I wished that I'm a charmer as well. But I am different. I am capable of driving the business side of things. I am capable of handling people. I am capable of looking at the markets and making a call.
I wish to have a heart as well. I want to have patience, to listen more, to analyse more before judging. to have compassion, to empathise. I need sharpness to hit the problem at the nail and at the same time leave room for doubt. I have to change my approach to talking to people... to know what's on their minds, their worries, their agenda, so that I can forge a win-win solution.
Indeed, I will love all, serve all.
Saturday 30 April 2011
Gold-Buying Central Bankers May Extend Record Rally
My opinion is: gold is likely to shoot up at least another 10 - 20%, reaching USD1600 - 1700/oz before pausing in 3rd or 4th quarter 2011 when the Fed starts to hike rates. It may correct to USD1500 for half a year before resuming its rise in first half of 2012 when inflation spirals out of control worldwide. It could hit USD1800 - 1900/oz, suggesting a 25% upside before the world's stock markets start to fall in 2nd half 2012. Gold will probably correct 35% to around USD1400 oz in 2013.
Gold-Buying Central Bankers May Extend Record Rally
By Pham-Duy Nguyen - Apr 29, 2011 12:00 PM GMT+0800
Gold prices reached a record 14 times this month on demand from investors seeking an alternative to the dollar after the currency slumped to the lowest since 2009, U.S. debt widened, and the Federal Reserve signaled April 27 that borrowing costs will remain near zero percent for an extended period.
Central banks that were net sellers of gold a decade ago are buying the precious metal to reduce their reliance on the dollar as a reserve currency, signaling demand that may extend a record rally in prices.
As developing countries accelerate purchases, gold may reach $2,000 an ounce this year, compared with a record of $1,538.80 yesterday in New York, said Robert McEwen, the chief executive officer of producer U.S. Gold Corp. Euro Pacific Capital’s Michael Pento, who correctly predicted gold’s highs for the past two years, forecast a 2011 high of $1,600.
Prices reached a record 14 times this month on demand from investors seeking an alternative to the dollar after the currency slumped to the lowest since 2009, U.S. debt widened, and the Federal Reserve signaled April 27 that borrowing costs will remain near zero percent for an extended period. The economy in China, the biggest foreign holder of U.S. Treasuries, grew 9.7 percent in the first quarter.
“China is out to have more gold than America, and Russia is aspiring to the same,” McEwen said yesterday in an interview in New York. “When you have debt, you don’t have a lot of flexibility. China wants to show its currency has more backing than the U.S.”
In 2010, central banks became net buyers for the first time in two decades, adding 87 metric tons in official-sector purchases by countries including Bolivia, Sri Lanka and Mauritius, according to World Gold Council data. China, with more than $3 trillion in foreign-currency reserves, plans to set up new funds to invest in precious metals, Century Weekly reported this week. Russia purchased 8 tons of gold in the first quarter.
China’s Gold Reserves
China, which has just 1.6 percent of its reserves in gold, may invest more than $1 trillion in bullion, Pento said. “China wants to be an international player, and they need to own more gold than they currently have.”
The U.S. Treasury Department projects the government could reach its debt ceiling of $14.3 trillion as soon as mid-May and run out of options for avoiding default by early July. The Fed has kept its benchmark rate between zero percent and 0.25 percent since December 2008 to help stimulate the economy, driving the dollar down 11 percent against a basket of six major currencies during the past year.
“Until monetary policy changes, you’re going to continue to see gold go up,” said Michael Cuggino, who helps manage $12 billion at Permanent Portfolio Funds in San Francisco.
“Ultimately the best thing we can do to create strong fundamentals for the dollar in the medium term is first, keep inflation low, which maintains the buying power of the dollar, and second, create a stronger economy,” Fed Chairman Ben S. Bernanke said on April 27.
U.S. Reserves
As of April, China was the sixth-largest official holder of gold, with 1,054.1 tons, according to World Gold Council estimates. The U.S. has the most, with 8,133.5 tons, or 74.8 percent of the nation’s currency reserves, council data show.
Central-bank buying may have the same impact on gold as the introduction of exchange-traded funds, Cuggino said. Prices have more than tripled since the SPDR Gold Trust, the biggest ETF backed by bullion, was introduced in November 2004.
Central banks in emerging markets may aim to hold 2 percent to 8 percent of their foreign-currency reserves in gold, Francisco Blanch, the head of commodities research at Bank of America Merrill Lynch in New York, said in an interview.
Gold is “close to” its cyclical high, said Blanch, who expects the metal to average $1,500 this year.
Gold’s Enemies
“The enemies of gold are rising interest rates and a balanced budget,” said Pento of Euro Pacific Capital in New York. “I look for a summer swoon once Bernanke exits the bond market. You’re going to have a temporary rise in real interest rates.”
The Fed said it would buy $600 billion in U.S. Treasuries through June.
The Federal Funds rate would have to rise to “Volcker” levels before gold enters a bear market, said Gold Corp.’s McEwen, who expects the metal to rise to $5,000 over three to four years.
Prices have advanced 7.7 percent this year, extending a decade of gains in which gold jumped sixfold from a low in 1999. The all-time inflation adjusted record is $2,338.92, based on the value on Jan. 21, 1980, according to a calculator on the Web site of the Federal Reserve Bank of Minneapolis.
Former Fed Chairman Paul Volcker ended gold’s rally to a then-record $873 by raising borrowing costs to 20 percent in March 1980.
To contact the reporter on this story: Pham-Duy Nguyen in New York at pnguyen@bloomberg.net
To contact the editor responsible for this story: Steve Stroth at sstroth@bloomberg.net. .
Gold-Buying Central Bankers May Extend Record Rally
By Pham-Duy Nguyen - Apr 29, 2011 12:00 PM GMT+0800
Gold prices reached a record 14 times this month on demand from investors seeking an alternative to the dollar after the currency slumped to the lowest since 2009, U.S. debt widened, and the Federal Reserve signaled April 27 that borrowing costs will remain near zero percent for an extended period.
Central banks that were net sellers of gold a decade ago are buying the precious metal to reduce their reliance on the dollar as a reserve currency, signaling demand that may extend a record rally in prices.
As developing countries accelerate purchases, gold may reach $2,000 an ounce this year, compared with a record of $1,538.80 yesterday in New York, said Robert McEwen, the chief executive officer of producer U.S. Gold Corp. Euro Pacific Capital’s Michael Pento, who correctly predicted gold’s highs for the past two years, forecast a 2011 high of $1,600.
Prices reached a record 14 times this month on demand from investors seeking an alternative to the dollar after the currency slumped to the lowest since 2009, U.S. debt widened, and the Federal Reserve signaled April 27 that borrowing costs will remain near zero percent for an extended period. The economy in China, the biggest foreign holder of U.S. Treasuries, grew 9.7 percent in the first quarter.
“China is out to have more gold than America, and Russia is aspiring to the same,” McEwen said yesterday in an interview in New York. “When you have debt, you don’t have a lot of flexibility. China wants to show its currency has more backing than the U.S.”
In 2010, central banks became net buyers for the first time in two decades, adding 87 metric tons in official-sector purchases by countries including Bolivia, Sri Lanka and Mauritius, according to World Gold Council data. China, with more than $3 trillion in foreign-currency reserves, plans to set up new funds to invest in precious metals, Century Weekly reported this week. Russia purchased 8 tons of gold in the first quarter.
China’s Gold Reserves
China, which has just 1.6 percent of its reserves in gold, may invest more than $1 trillion in bullion, Pento said. “China wants to be an international player, and they need to own more gold than they currently have.”
The U.S. Treasury Department projects the government could reach its debt ceiling of $14.3 trillion as soon as mid-May and run out of options for avoiding default by early July. The Fed has kept its benchmark rate between zero percent and 0.25 percent since December 2008 to help stimulate the economy, driving the dollar down 11 percent against a basket of six major currencies during the past year.
“Until monetary policy changes, you’re going to continue to see gold go up,” said Michael Cuggino, who helps manage $12 billion at Permanent Portfolio Funds in San Francisco.
“Ultimately the best thing we can do to create strong fundamentals for the dollar in the medium term is first, keep inflation low, which maintains the buying power of the dollar, and second, create a stronger economy,” Fed Chairman Ben S. Bernanke said on April 27.
U.S. Reserves
As of April, China was the sixth-largest official holder of gold, with 1,054.1 tons, according to World Gold Council estimates. The U.S. has the most, with 8,133.5 tons, or 74.8 percent of the nation’s currency reserves, council data show.
Central-bank buying may have the same impact on gold as the introduction of exchange-traded funds, Cuggino said. Prices have more than tripled since the SPDR Gold Trust, the biggest ETF backed by bullion, was introduced in November 2004.
Central banks in emerging markets may aim to hold 2 percent to 8 percent of their foreign-currency reserves in gold, Francisco Blanch, the head of commodities research at Bank of America Merrill Lynch in New York, said in an interview.
Gold is “close to” its cyclical high, said Blanch, who expects the metal to average $1,500 this year.
Gold’s Enemies
“The enemies of gold are rising interest rates and a balanced budget,” said Pento of Euro Pacific Capital in New York. “I look for a summer swoon once Bernanke exits the bond market. You’re going to have a temporary rise in real interest rates.”
The Fed said it would buy $600 billion in U.S. Treasuries through June.
The Federal Funds rate would have to rise to “Volcker” levels before gold enters a bear market, said Gold Corp.’s McEwen, who expects the metal to rise to $5,000 over three to four years.
Prices have advanced 7.7 percent this year, extending a decade of gains in which gold jumped sixfold from a low in 1999. The all-time inflation adjusted record is $2,338.92, based on the value on Jan. 21, 1980, according to a calculator on the Web site of the Federal Reserve Bank of Minneapolis.
Former Fed Chairman Paul Volcker ended gold’s rally to a then-record $873 by raising borrowing costs to 20 percent in March 1980.
To contact the reporter on this story: Pham-Duy Nguyen in New York at pnguyen@bloomberg.net
To contact the editor responsible for this story: Steve Stroth at sstroth@bloomberg.net. .
People's Bank of China Looking to Diversify into Precious Metals?
People's Bank of China Looking to Diversify Into Precious Metals?
by: Avery Goodman April 28, 2011
Share0 The China Daily, citing another newspaper, the New Century Weekly, says that the Chinese government will diversify its massive $3 trillion dollar foreign reserve stockpiles into investment funds designed to invest in precious metals and oil. New Century says that it got this information from confidential sources inside the Chinese central bank, which is concerned about the continued devaluation of the U.S. dollar and wants to preserve the future buying power of its reserves.
Because a large part of China’s economy is based upon exports, it has been engaged in years of currency debasement of the yuan against the dollar. Successive U.S. administrations, both Democrat and Republican, have uniformly demanded an end to artificial support of the dollar against the yuan and, apparently, the demand has finally been accepted. People really need to be careful what they wish for.
It was, of course, inevitable that the Chinese would wean themselves from over-dependence on exporting to the West. There is no reason to impoverish your own people and restrict their purchasing power for years while using the consequent cheap labor to import technology and know-how, if you never intend to use it.
Ben Bernanke’s bid to out-debase the Chinese has finally borne fruit. China has taken delivery of most of the technology and know-how it is going to get. It is already the factory of the world, producing everything from Barbie dolls to sophisticated automobiles and computers. The remaining technology it would like to import from the West is classified by the military, and America and Europe won’t share it with the Chinese.
China apparently has weighed the alternatives and decided to strike out on its own. It will do everything that it can to become more dependent upon internal, rather than external, demand. It will allow the yuan to rise against the dollar in order to slow down inflation imported from America, and it will make an attempt to salvage whatever value it can from dollar reserves before they become worthless. The plan will come as a surprise for many in the West who assumed that China would not and could not get rid of its dollars, and we do not doubt that many will be in denial until the impact of China’s next move becomes crystal clear.
If China's central bank starts to buy gold, silver, platinum, and palladium on the world market with even a small fraction of its dollar reserves, the impact will be enormous. It means that the demand for U.S. Treasuries as well as European sovereign bonds issuances will fall. That means the U.S. dollar and the euro are going to be deeply declining in their buying power. It also means that the demand for oil and precious metals is going to skyrocket.
Let’s say that China uses 10% of its $3 trillion worth of currency reserves to buy gold. That’s $300 billion. It will buy over 6,000 metric tons of gold at $1540 per ounce. It is interesting to note that, with the gold it already has, plus about 7,000 metric tons more, Chinese gold reserves would equal those of the United States of America.
But the price of gold won’t stay at $1,540 per ounce if the Chinese enter the market in a big way. Nor will the price of silver, platinum and palladium stand still. They will all rise astronomically. Tiny supplies of platinum and palladium, and the fact that both have always been more popular in Far Eastern jewelry than in the West, will conspire to explode those prices if even a small portion of that $300 billion is spent on them.
by: Avery Goodman April 28, 2011
Share0 The China Daily, citing another newspaper, the New Century Weekly, says that the Chinese government will diversify its massive $3 trillion dollar foreign reserve stockpiles into investment funds designed to invest in precious metals and oil. New Century says that it got this information from confidential sources inside the Chinese central bank, which is concerned about the continued devaluation of the U.S. dollar and wants to preserve the future buying power of its reserves.
Because a large part of China’s economy is based upon exports, it has been engaged in years of currency debasement of the yuan against the dollar. Successive U.S. administrations, both Democrat and Republican, have uniformly demanded an end to artificial support of the dollar against the yuan and, apparently, the demand has finally been accepted. People really need to be careful what they wish for.
It was, of course, inevitable that the Chinese would wean themselves from over-dependence on exporting to the West. There is no reason to impoverish your own people and restrict their purchasing power for years while using the consequent cheap labor to import technology and know-how, if you never intend to use it.
Ben Bernanke’s bid to out-debase the Chinese has finally borne fruit. China has taken delivery of most of the technology and know-how it is going to get. It is already the factory of the world, producing everything from Barbie dolls to sophisticated automobiles and computers. The remaining technology it would like to import from the West is classified by the military, and America and Europe won’t share it with the Chinese.
China apparently has weighed the alternatives and decided to strike out on its own. It will do everything that it can to become more dependent upon internal, rather than external, demand. It will allow the yuan to rise against the dollar in order to slow down inflation imported from America, and it will make an attempt to salvage whatever value it can from dollar reserves before they become worthless. The plan will come as a surprise for many in the West who assumed that China would not and could not get rid of its dollars, and we do not doubt that many will be in denial until the impact of China’s next move becomes crystal clear.
If China's central bank starts to buy gold, silver, platinum, and palladium on the world market with even a small fraction of its dollar reserves, the impact will be enormous. It means that the demand for U.S. Treasuries as well as European sovereign bonds issuances will fall. That means the U.S. dollar and the euro are going to be deeply declining in their buying power. It also means that the demand for oil and precious metals is going to skyrocket.
Let’s say that China uses 10% of its $3 trillion worth of currency reserves to buy gold. That’s $300 billion. It will buy over 6,000 metric tons of gold at $1540 per ounce. It is interesting to note that, with the gold it already has, plus about 7,000 metric tons more, Chinese gold reserves would equal those of the United States of America.
But the price of gold won’t stay at $1,540 per ounce if the Chinese enter the market in a big way. Nor will the price of silver, platinum and palladium stand still. They will all rise astronomically. Tiny supplies of platinum and palladium, and the fact that both have always been more popular in Far Eastern jewelry than in the West, will conspire to explode those prices if even a small portion of that $300 billion is spent on them.
Game Plan
Second half of 2011: Overweight commodities, starting energy, base metals, agriculture and precious metals in order of importance.
First half of 2012: Start to diversify into alternatives, commodities and reduce equities. You may wish to buy some investment grade bonds of longer durations.
Second half of 2012: You may need to start shorting equities, go for CTA alternative funds and investment grade bonds of longer duration.
First half of 2013: The blood bath may have started and you may wish to gather ammunition (cash) to buy up residential properties at 30% discount to today's prices.
First half of 2012: Start to diversify into alternatives, commodities and reduce equities. You may wish to buy some investment grade bonds of longer durations.
Second half of 2012: You may need to start shorting equities, go for CTA alternative funds and investment grade bonds of longer duration.
First half of 2013: The blood bath may have started and you may wish to gather ammunition (cash) to buy up residential properties at 30% discount to today's prices.
Friday 29 April 2011
What to Make of Bernanke's Speech Yesterday
After another long day at work, I was exhausted and was lying on my sofa, half asleep. Bernanke just said that the Fed will keep rates at 0.25% for a few more months. He insisted that inflation is transitory and that the Fed is ready to act when they see signs of peri\sistence in inflation. The fact that the decision to hold rates was unanimous meant that nobody in the FED dared to kill off a nascent economic recovery. After all, unemployment rate was still at 8.8%. The FED won't rest until unemployment falls below 8%.
QE 2 will be allowed to run its course. QE 3 is a possibility if GDP figures turned negative but at the moment unlikely.
I decided that stock markets are likely to be given a lifeline for a few more months. The sectors to target will particularly be precious metals, especially GOLD. So I bought gold call options and bingo, it rose from USD1500/oz to USD1550/oz. Fantastic.
The party may last beyond QE2 because of the low inflation rate in the US and better than expected earnings growth.
QE 2 will be allowed to run its course. QE 3 is a possibility if GDP figures turned negative but at the moment unlikely.
I decided that stock markets are likely to be given a lifeline for a few more months. The sectors to target will particularly be precious metals, especially GOLD. So I bought gold call options and bingo, it rose from USD1500/oz to USD1550/oz. Fantastic.
The party may last beyond QE2 because of the low inflation rate in the US and better than expected earnings growth.
The Results Under Me
So many people got the results that they wanted. If they wanted more, they got it. They never had it so good. Yet they longed for the good old days. I wonder what do they want? Why does the world love the loveable and shallow?? Why can't they scratch beneath the surface and look at substance?
To Climb the Corporate Ladder, You Need More PR Than IQ
I have worked for all kinds of bosses. Some are knowledgeable and have good PR. They are inspirational to work for. Some have no knowledge but can still put up a front. It's all sizzle and no steak. They get threatened easily by subordinates who are more capable than them. They fudge the issue, become biased, put down the more talented and bring up those whom s/he thinks are no threat to them. They often say, "knowledge can be bought". Then there are those who have knowledge but are nasty. They are difficult to work for. But you can learn a lot working for them.
The most important attribute of a boss is one who look at facts and is able to quantify efforts. One who is able to motivate the team. One who will fight for his team when it comes to rewards. One who is not easily threatened by a more talented colleague.
I have been thinking that I need a shift in my value system since I took on a new role. It's more about PR, yet not giving up that good analytical skills that brought me great returns so far in my life. I aim to shift to the first group. The US President Obama is an example of such a leader. God help me become like him.
The most important attribute of a boss is one who look at facts and is able to quantify efforts. One who is able to motivate the team. One who will fight for his team when it comes to rewards. One who is not easily threatened by a more talented colleague.
I have been thinking that I need a shift in my value system since I took on a new role. It's more about PR, yet not giving up that good analytical skills that brought me great returns so far in my life. I aim to shift to the first group. The US President Obama is an example of such a leader. God help me become like him.
Thursday 28 April 2011
Fed Says Recovery is "Moderate"; Bond Buying to End in June
Fed Says Recovery is ‘Moderate’; Bond Buying to End in June
By Scott Lanman - Apr 28, 2011 1:01 AM GMT+0800
April 26 (Bloomberg) -- Larry Hatheway, chief economist for UBS Investment Bank, talks about the outlook for economic growth in the U.S. and interest rates. He speaks with Maryam Nemazee on Bloomberg Television’s “The Pulse.” (Source: Bloomberg)
Federal Reserve policy makers said the economy is recovering at a “moderate pace” and a pickup in inflation is likely to be temporary, as they agreed to finish $600 billion of bond purchases on schedule in June. (my comments: yes, it's all expected. FED's hands are tied. There won't be a QE3 because inflation expectations are creeping up).
“The economic recovery is proceeding at a moderate pace and overall conditions in the labor market are improving gradually,” the Federal Open Market Committee said today in its statement after a two-day meeting in Washington. “Increases in the prices of energy and other commodities have pushed up inflation in recent months,” and the Fed expects “these effects to be transitory,” the statement said. (my comments: oil price is likely to fall by 10-20% after the middle east crisis).
Chairman Ben S. Bernanke has signaled he’ll maintain record stimulus until job growth accelerates and the recovery is robust enough to withstand tighter credit. The Fed chief has said he expects that a surge this year in fuel and food costs will have only a passing inflationary impact, differing with Fed regional bank presidents who say borrowing costs may need to rise to contain prices.
Stocks rose and the dollar weakened against the euro after the statement. The Dow Jones Industrial Average advanced 0.3 percent to 12,636.51 at 12:53 p.m. in New York. The dollar fell to $1.4696 per euro from $1.4644 late yesterday.
‘Prepared to Adjust’
The Fed, discussing its securities portfolio, said it “is prepared to adjust those holdings as needed to best foster maximum employment and price stability.” Bernanke will discuss the FOMC statement and the panel’s updated economic projections today at his first news conference, scheduled to begin at 2:15 p.m. in Washington.
The FOMC’s characterization of the recovery as “moderate” is similar to the description in the Fed’s Beige Book regional business survey this month and compares with the committee’s March 15 statement saying the economy is on a “firmer footing.”
“The Fed’s view of the world hasn’t changed very much,” Gary Stern, former president of the Minneapolis Fed, said in an interview with Bloomberg Radio. “They continue to emphasize the transitory nature of inflation” and “continue to talk about the economy improving at a moderate pace.”
The Fed left its benchmark interest rate in a range of zero to 0.25 percent, where it’s been since December 2008, and retained a pledge in place since March 2009 to keep it “exceptionally low” for an “extended period.” The central bank will keep reinvesting proceeds of maturing mortgage debt purchased in the first round of large-scale asset purchases that lasted from December 2008 to March 2010. (my comments: FED is likely to keep rates at 0.25% until 2nd half of 2011. Don't count on them to keep it at 0.25% until 2012).
Unemployment ‘Elevated’
“The unemployment rate remains elevated, and measures of underlying inflation continue to be somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate” for stable prices and maximum employment, the Fed said. The “depressed” housing industry remains a weak spot in the economy, it said.
The Fed repeated that it will “pay close attention to the evolution of inflation and inflation expectations.”
Today’s FOMC decision was unanimous for a third consecutive meeting. Dallas Fed President Richard Fisher and Philadelphia Fed President Charles Plosser, both skeptics of the second round of so-called quantitative easing who voted for the statement today, have suggested they may favor raising interest rates later this year.
Record Stimulus
The Fed’s commitment to record stimulus contrasts with the interest-rate increase this month by the European Central Bank and tightening this year by the biggest emerging-market economies, including China, Brazil and India, which face faster inflation.
Bernanke will become the first Fed chairman to conduct a press briefing following an FOMC decision when he takes the microphone at the Fed’s headquarters. His counterparts in Europe, Japan, the U.K. and Canada already hold regular news conferences.
The press conference, to be broadcast on television and the central bank’s website, marks one of Bernanke’s biggest efforts to improve the Fed’s connections with the public and demystify the institution, which as recently as 1993 didn’t announce its monetary-policy decisions. Bernanke said in February that the central bank was weighing benefits of more transparency against the risk that his remarks would trigger unwanted fluctuations in financial markets.
Projections
The Fed will also release economic projections of governors and regional bank presidents at 2:15 p.m., three weeks sooner than prior practice.
Increases in employment and inflation are helping drive calls to tighten credit. Payrolls have increased by an average 149,000 a month for the past six months, while the unemployment rate has dropped by 1 percentage point since November to 8.8 percent, a two-year low.
Federal Reserve Bank of New York President William C. Dudley, the FOMC’s vice chairman, reiterated in a speech April 1 that a faster pace of job growth is “sorely needed” and that even with 300,000 new jobs per month, the labor market would still have “considerable slack” at the end of 2012. (Don't forget, the FED has a tough task of lowering unemployment).
Janet Yellen, vice chairman of the Fed’s Board of Governors, said April 11 that the increase in food and fuel costs will have only a temporary impact on prices and consumer spending, and warrants no reversal of monetary stimulus.
Food Prices
Food and beverage prices rose in the first quarter by the most since 2008, based on the Labor Department’s Consumer Price Index, while the cost of regular-unleaded gasoline has increased by 26 percent this year to $3.88 a gallon as of yesterday.
The increases helped slow U.S. growth to a 2 percent pace in the first quarter, according to the median estimate of analysts surveyed by Bloomberg News, from 3.1 percent in the prior period. The government releases preliminary figures tomorrow.
The Fed’s preferred price gauge hasn’t flashed a warning. The Commerce Department’s personal consumption expenditures price index, excluding food and energy, rose 0.9 percent in February from a year earlier. Policy makers have a long-run goal for total inflation of about 1.6 percent to 2 percent annually.
Months Away
Economists say the Fed is at least a few months away from starting to reverse the stimulus. Most of the 44 economists surveyed by Bloomberg News from April 20 to April 25 said the central bank this year will probably halt its policy of replacing maturing mortgage debt with Treasuries. The majority of respondents also said the Fed will announce a plan next year of selling mortgage bonds and Treasuries among its assets.
Since the Fed announced the second round of asset purchases on Nov. 3, yields on 10-year Treasuries increased to 3.31 percent as of yesterday from 2.57 percent, while the Standard & Poor’s 500 Index gained 12 percent, yesterday reaching the highest level since June 2008. The dollar weakened by 3.5 percent to the lowest since August 2008 against an index of six currencies.
In a few months, “the data will probably compel them to begin a gradual process of tightening,” Larry Hatheway, chief economist for UBS Investment Bank in London, said in a Bloomberg Television interview before the decision.
“The Fed is still looking essentially at ex-food, ex- energy prices at core, ticking a little higher,” though not enough to raise interest rates now, Hatheway said.
Politicians’ Objections
Bernanke is still seeing objections from politicians within the U.S. and abroad almost six months after the Fed began the unprecedented second round of asset purchases to criticism from Republican politicians and government officials in Germany, China and Brazil.
Senator Mark Kirk, a first-term Republican from Illinois, sent Bernanke a letter on April 25 expressing concern about inflation. He called for an early end to asset purchases should Bernanke “also find the trends that I have now heard widely about.”
Russian Prime Minister Vladimir Putin said last week that compared with the U.S., his country doesn’t have the “same opportunity to make trouble.” The U.S. is “financing the government by using a printing press,” he said.
Some U.S. companies are benefiting from global growth. Atlanta-based United Parcel Service Inc., the world’s largest package-delivery company, yesterday raised its full-year profit forecast after increased international shipping demand pushed first-quarter earnings higher than analysts estimated.
Sporting Goods
Firms are also coping with inflation. Beaverton, Oregon- based Nike Inc., the world’s biggest sporting goods company, said last month it would raise prices. The increases will come on a “wide range of footwear and apparel styles to help mitigate the overall impact of higher input costs,” and the company will carry out “more significant price increases” in 2012, Chief Financial Officer Don Blair said March 17.
Today marked the first time the Fed’s statement was released at about 12:30 p.m. after more than a decade of aiming for 2:15 p.m. The central bank said last month it will provide the statement at 12:30 p.m. during the four two-day meetings when Bernanke has his press conferences and 2:15 p.m. for the other four one-day FOMC meetings.
To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net.
To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net .
By Scott Lanman - Apr 28, 2011 1:01 AM GMT+0800
April 26 (Bloomberg) -- Larry Hatheway, chief economist for UBS Investment Bank, talks about the outlook for economic growth in the U.S. and interest rates. He speaks with Maryam Nemazee on Bloomberg Television’s “The Pulse.” (Source: Bloomberg)
Federal Reserve policy makers said the economy is recovering at a “moderate pace” and a pickup in inflation is likely to be temporary, as they agreed to finish $600 billion of bond purchases on schedule in June. (my comments: yes, it's all expected. FED's hands are tied. There won't be a QE3 because inflation expectations are creeping up).
“The economic recovery is proceeding at a moderate pace and overall conditions in the labor market are improving gradually,” the Federal Open Market Committee said today in its statement after a two-day meeting in Washington. “Increases in the prices of energy and other commodities have pushed up inflation in recent months,” and the Fed expects “these effects to be transitory,” the statement said. (my comments: oil price is likely to fall by 10-20% after the middle east crisis).
Chairman Ben S. Bernanke has signaled he’ll maintain record stimulus until job growth accelerates and the recovery is robust enough to withstand tighter credit. The Fed chief has said he expects that a surge this year in fuel and food costs will have only a passing inflationary impact, differing with Fed regional bank presidents who say borrowing costs may need to rise to contain prices.
Stocks rose and the dollar weakened against the euro after the statement. The Dow Jones Industrial Average advanced 0.3 percent to 12,636.51 at 12:53 p.m. in New York. The dollar fell to $1.4696 per euro from $1.4644 late yesterday.
‘Prepared to Adjust’
The Fed, discussing its securities portfolio, said it “is prepared to adjust those holdings as needed to best foster maximum employment and price stability.” Bernanke will discuss the FOMC statement and the panel’s updated economic projections today at his first news conference, scheduled to begin at 2:15 p.m. in Washington.
The FOMC’s characterization of the recovery as “moderate” is similar to the description in the Fed’s Beige Book regional business survey this month and compares with the committee’s March 15 statement saying the economy is on a “firmer footing.”
“The Fed’s view of the world hasn’t changed very much,” Gary Stern, former president of the Minneapolis Fed, said in an interview with Bloomberg Radio. “They continue to emphasize the transitory nature of inflation” and “continue to talk about the economy improving at a moderate pace.”
The Fed left its benchmark interest rate in a range of zero to 0.25 percent, where it’s been since December 2008, and retained a pledge in place since March 2009 to keep it “exceptionally low” for an “extended period.” The central bank will keep reinvesting proceeds of maturing mortgage debt purchased in the first round of large-scale asset purchases that lasted from December 2008 to March 2010. (my comments: FED is likely to keep rates at 0.25% until 2nd half of 2011. Don't count on them to keep it at 0.25% until 2012).
Unemployment ‘Elevated’
“The unemployment rate remains elevated, and measures of underlying inflation continue to be somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate” for stable prices and maximum employment, the Fed said. The “depressed” housing industry remains a weak spot in the economy, it said.
The Fed repeated that it will “pay close attention to the evolution of inflation and inflation expectations.”
Today’s FOMC decision was unanimous for a third consecutive meeting. Dallas Fed President Richard Fisher and Philadelphia Fed President Charles Plosser, both skeptics of the second round of so-called quantitative easing who voted for the statement today, have suggested they may favor raising interest rates later this year.
Record Stimulus
The Fed’s commitment to record stimulus contrasts with the interest-rate increase this month by the European Central Bank and tightening this year by the biggest emerging-market economies, including China, Brazil and India, which face faster inflation.
Bernanke will become the first Fed chairman to conduct a press briefing following an FOMC decision when he takes the microphone at the Fed’s headquarters. His counterparts in Europe, Japan, the U.K. and Canada already hold regular news conferences.
The press conference, to be broadcast on television and the central bank’s website, marks one of Bernanke’s biggest efforts to improve the Fed’s connections with the public and demystify the institution, which as recently as 1993 didn’t announce its monetary-policy decisions. Bernanke said in February that the central bank was weighing benefits of more transparency against the risk that his remarks would trigger unwanted fluctuations in financial markets.
Projections
The Fed will also release economic projections of governors and regional bank presidents at 2:15 p.m., three weeks sooner than prior practice.
Increases in employment and inflation are helping drive calls to tighten credit. Payrolls have increased by an average 149,000 a month for the past six months, while the unemployment rate has dropped by 1 percentage point since November to 8.8 percent, a two-year low.
Federal Reserve Bank of New York President William C. Dudley, the FOMC’s vice chairman, reiterated in a speech April 1 that a faster pace of job growth is “sorely needed” and that even with 300,000 new jobs per month, the labor market would still have “considerable slack” at the end of 2012. (Don't forget, the FED has a tough task of lowering unemployment).
Janet Yellen, vice chairman of the Fed’s Board of Governors, said April 11 that the increase in food and fuel costs will have only a temporary impact on prices and consumer spending, and warrants no reversal of monetary stimulus.
Food Prices
Food and beverage prices rose in the first quarter by the most since 2008, based on the Labor Department’s Consumer Price Index, while the cost of regular-unleaded gasoline has increased by 26 percent this year to $3.88 a gallon as of yesterday.
The increases helped slow U.S. growth to a 2 percent pace in the first quarter, according to the median estimate of analysts surveyed by Bloomberg News, from 3.1 percent in the prior period. The government releases preliminary figures tomorrow.
The Fed’s preferred price gauge hasn’t flashed a warning. The Commerce Department’s personal consumption expenditures price index, excluding food and energy, rose 0.9 percent in February from a year earlier. Policy makers have a long-run goal for total inflation of about 1.6 percent to 2 percent annually.
Months Away
Economists say the Fed is at least a few months away from starting to reverse the stimulus. Most of the 44 economists surveyed by Bloomberg News from April 20 to April 25 said the central bank this year will probably halt its policy of replacing maturing mortgage debt with Treasuries. The majority of respondents also said the Fed will announce a plan next year of selling mortgage bonds and Treasuries among its assets.
Since the Fed announced the second round of asset purchases on Nov. 3, yields on 10-year Treasuries increased to 3.31 percent as of yesterday from 2.57 percent, while the Standard & Poor’s 500 Index gained 12 percent, yesterday reaching the highest level since June 2008. The dollar weakened by 3.5 percent to the lowest since August 2008 against an index of six currencies.
In a few months, “the data will probably compel them to begin a gradual process of tightening,” Larry Hatheway, chief economist for UBS Investment Bank in London, said in a Bloomberg Television interview before the decision.
“The Fed is still looking essentially at ex-food, ex- energy prices at core, ticking a little higher,” though not enough to raise interest rates now, Hatheway said.
Politicians’ Objections
Bernanke is still seeing objections from politicians within the U.S. and abroad almost six months after the Fed began the unprecedented second round of asset purchases to criticism from Republican politicians and government officials in Germany, China and Brazil.
Senator Mark Kirk, a first-term Republican from Illinois, sent Bernanke a letter on April 25 expressing concern about inflation. He called for an early end to asset purchases should Bernanke “also find the trends that I have now heard widely about.”
Russian Prime Minister Vladimir Putin said last week that compared with the U.S., his country doesn’t have the “same opportunity to make trouble.” The U.S. is “financing the government by using a printing press,” he said.
Some U.S. companies are benefiting from global growth. Atlanta-based United Parcel Service Inc., the world’s largest package-delivery company, yesterday raised its full-year profit forecast after increased international shipping demand pushed first-quarter earnings higher than analysts estimated.
Sporting Goods
Firms are also coping with inflation. Beaverton, Oregon- based Nike Inc., the world’s biggest sporting goods company, said last month it would raise prices. The increases will come on a “wide range of footwear and apparel styles to help mitigate the overall impact of higher input costs,” and the company will carry out “more significant price increases” in 2012, Chief Financial Officer Don Blair said March 17.
Today marked the first time the Fed’s statement was released at about 12:30 p.m. after more than a decade of aiming for 2:15 p.m. The central bank said last month it will provide the statement at 12:30 p.m. during the four two-day meetings when Bernanke has his press conferences and 2:15 p.m. for the other four one-day FOMC meetings.
To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net.
To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net .
Monday 25 April 2011
Inflation Expectations Continue to Heat Up
by: Calafia Beach Pundit April 08, 2011
As a follow up to a recent post about how the bond market is worrying about inflation, I post these charts. The top chart shows the relationship between 5-yr TIPS and 5-yr Treasuries, with the spread between their real yields (which equates to the market's expectation for the what the CPI will average over the next five years) now within a few bps of an all-time high (2.85%). The second chart does the same for 10-yr maturities, and the spread there has now reached 2.63%, which is also very close to its highest level since 2005.
The message of both charts is the same: Inflation expectations are rising significantly. Fed supporters would be quick to note that this could just be a rational reaction to the recent and continuing rise in oil prices. But Fed critics have more ammunition: The very weak dollar, the broad-based rise in commodity prices, the all-time highs in precious metals, and the substantial rise observed to date in the producer price indices and the ISM prices paid indices.
There is no shortage of evidence that monetary policy is extremely accommodative and inflation pressures are building. The last refuge of the inflation doves (the Phillips Curve theory of inflation) is being dismantled almost daily, as prices all over the world rise even as there remains plenty of slack in the U.S. economy.
To his credit, Dallas Fed President Richard Fisher today sounded a pretty strident inflation alarm: "Inflationary impulses are gaining ground in the rest of the world ... this will result in some unpleasant general price inflation numbers in the next few reporting periods ... there is the risk that we might breach our duty to hold inflation at bay."
I think it is now clear that the Fed has way overstayed its welcome with QE2, and I find it hard to believe that the rest of the Fed governors will ignore the mounting evidence of such. The ECB has already made the first move to tighten, and meanwhile the figurative rats are abandoning the sinking U.S. dollar (see my prior post on Brazil).
QE2 is scheduled to finish in a few months, but if it is abandoned now it will hardly be cause for concern, since the remaining Treasuries to be bought represent only a very tiny fraction of the total outstanding, and thus are very unlikely to make much of a difference to yields and/or the economy. What will make a difference, of course, is a Fed decision to ignore the evidence of rising inflationary pressures.
My comments:
In the last bull cycle, the Fed started hiking rates in June 2004. 5 year inflation expectation was at 2.6%. Now, inflation expectation is at 2.9%. The Fed should have started hiking late 2010. The 10-year UST is around 3.4%. This means that from 0.25% to 3.4%, there are about 13 hikes to go before the yield curve inverts. From Nov 2010 till Dec 2011, that's 13 months of supposed hiking.
The Fed is "way behind the curve". They are 5 months late in their hiking and counting. It will be very difficult for them to control inflation if they hike in 2012. Back in 2004, Alan Greenspan was criticised for acting on inflation too late. This time, Bernanke's far worse.
If the yield curve were to invert in Dec 2011, expect a recession in 2013. The stock market could enter into a bear cycle as late as mid 2012. We have about slightly over a year left in this bull.
by: Calafia Beach Pundit April 08, 2011
As a follow up to a recent post about how the bond market is worrying about inflation, I post these charts. The top chart shows the relationship between 5-yr TIPS and 5-yr Treasuries, with the spread between their real yields (which equates to the market's expectation for the what the CPI will average over the next five years) now within a few bps of an all-time high (2.85%). The second chart does the same for 10-yr maturities, and the spread there has now reached 2.63%, which is also very close to its highest level since 2005.
There is no shortage of evidence that monetary policy is extremely accommodative and inflation pressures are building. The last refuge of the inflation doves (the Phillips Curve theory of inflation) is being dismantled almost daily, as prices all over the world rise even as there remains plenty of slack in the U.S. economy.
To his credit, Dallas Fed President Richard Fisher today sounded a pretty strident inflation alarm: "Inflationary impulses are gaining ground in the rest of the world ... this will result in some unpleasant general price inflation numbers in the next few reporting periods ... there is the risk that we might breach our duty to hold inflation at bay."
I think it is now clear that the Fed has way overstayed its welcome with QE2, and I find it hard to believe that the rest of the Fed governors will ignore the mounting evidence of such. The ECB has already made the first move to tighten, and meanwhile the figurative rats are abandoning the sinking U.S. dollar (see my prior post on Brazil).
QE2 is scheduled to finish in a few months, but if it is abandoned now it will hardly be cause for concern, since the remaining Treasuries to be bought represent only a very tiny fraction of the total outstanding, and thus are very unlikely to make much of a difference to yields and/or the economy. What will make a difference, of course, is a Fed decision to ignore the evidence of rising inflationary pressures.
In the last bull cycle, the Fed started hiking rates in June 2004. 5 year inflation expectation was at 2.6%. Now, inflation expectation is at 2.9%. The Fed should have started hiking late 2010. The 10-year UST is around 3.4%. This means that from 0.25% to 3.4%, there are about 13 hikes to go before the yield curve inverts. From Nov 2010 till Dec 2011, that's 13 months of supposed hiking.
The Fed is "way behind the curve". They are 5 months late in their hiking and counting. It will be very difficult for them to control inflation if they hike in 2012. Back in 2004, Alan Greenspan was criticised for acting on inflation too late. This time, Bernanke's far worse.
If the yield curve were to invert in Dec 2011, expect a recession in 2013. The stock market could enter into a bear cycle as late as mid 2012. We have about slightly over a year left in this bull.
Sunday 24 April 2011
Good Article About Inflation Expectations
http://seekingalpha.com/article/130417-inflation-expectations-a-primer
Inflation Expectations: A Primer
by: The Baseline Scenario April 09, 2009
By James Kwak
Only a few years ago, the accepted remedy for a recession was for the Federal Reserve to lower interest rates - namely, the Federal funds rate. Now, however, the economy has been stuck in recession for over fifteen months and the Federal funds rate has spent the last several months at zero. (The Fed funds rate cannot ordinarily be negative, because one bank won’t lend $100 to another bank and accept less than $100 in return; it always has the option of just holding onto its $100.) As a result, the Fed has resorted to other policy tools, most notably large-scale purchases of agency and Treasury securities, funded by creating money. (Here’s James Hamilton’s analysis.)
As the Fed’s monetary policy plays a more prominent role in the response to the economic crisis, there will be more talk of inflation or, more accurately, inflation expectations. While inflation is what affects the purchasing power of the money in your wallet, inflation expectations are what affect people’s behavior in ways that have a long-term economic impact. Take the case of wage negotiations, for example: a union that believes inflation will average 5% over the life of a contract will demand higher wage increases than a union that believes inflation will average only 1%. Once those higher wages are built into the contract, the employer is forced to raise prices in order to cover those wage increases, and inflation begins to ripple through the economy.
One of the major objectives of modern monetary policy is to control inflation expectations, because controlling inflation expectations is the first step to controlling inflation. If there is a short-term burst of inflation - as we had a year ago, if you look at headline inflation numbers that include the prices of food and energy - the macroeconomic consequences can be limited if people believe that the Fed can and will bring inflation under control.
Unfortunately, it is impossible to know exactly what people’s inflation expectations are; in fact, it may not even be a sensible question, since different people have different understandings of what inflation is. However, there are three main approaches to estimating inflation expectations.
1. Inflation-indexed government bonds. (If you need a refresher on how a bond works, read the first part of this article.) A traditional bond is a stream of payments that is fixed in nominal terms: for example, $100 in 10 years, and 6% interest, paid semi-annually ($3 every 6 months). Such a bond is not inflation-indexed; if inflation goes up, the purchasing power of that $100 goes down, and it’s too bad for the bondholder.
An inflation-indexed bond, by contrast, pays an amount that is indexed to some measure of inflation. In the U.S., where these bonds are called Treasury Inflation Protected Securities (TIPS), we use the Consumer Price Index. A TIPS bond may have a $100 face value and pay a 2% interest rate. However, every 6 months, that $100 face value is adjusted to reflect the change in the CPI, and the interest payment is calculated as a percentage of the adjusted value of the bond. Then, after 10 years, the bondholder gets back not $100, but $100 times the ratio between the CPI at the end of the period and the CPI at the beginning of the period. This way the bondholder is guaranteed a 2% real return (assuming he paid $100 for the bond), no matter what the rate of inflation is in the interim.
The implied inflation expectation, then, is the difference between the yield on an ordinary bond and the yield on an inflation-indexed bond with the same maturity. If the 5-year Treasury has a yield of 4% and the 5-year TIPS has a yield of 2%, then inflation expectations for the next five years are (about) 2% per year. The reasoning is that in order to buy the regular bond as opposed to the inflation-indexed bond, an investor has to be paid a higher yield to compensate him for the level of inflation that he expects.
Actually, in addition to expected inflation, the Treasury investor also has to be paid an inflation risk premium because, all things being equal, it is better not to have inflation risk than to have it. So the implied inflation expectation is actually slightly less than the spread between the regular and the inflation-indexed bonds. If you didn’t follow that, don’t worry, just remember that, roughly speaking, Treasury yield = TIPS yield + expected inflation.
2. Inflation swaps. These are a type of derivative contract, where the payments under the contract depend on the value of an inflation index, such as the CPI. The swap has a nominal value of, say, $100, but $100 never changes hands. Instead, at the end of some period of time, party A pays party B a fixed rate of interest on $100 - say 2.5% per year. At the end of the period, B pays A the cumulative percentage change in the inflation index over the period. Assuming A has $100 in his pocket, he has now hedged the inflation risk on that $100, because no matter what happens, at the end of the period he will get an amount that compensates him for the impact of inflation on his $100. The price of this hedge is $2.50 per year. (Because these are over-the-counter contracts, there are many variations on this, including swaps with periodic coupon payments.)
For the same reasons described above, the implied inflation expectation is roughly 2.5% per year: party B thinks inflation will be less than 2.5% per year, and therefore is willing to take 2.5% and pay the amount of inflation; party A thinks inflation will be more than 2.5% per year, and therefore is willing to pay 2.5% per year to get the amount of inflation back. So the market clears at 2.5%. (Actually, for the exact same reasons as with bonds - party B has to be paid an inflation risk premium for absorbing the risk in this trade - the inflation expectation is slightly less than 2.5% per year. There are also some complications having to do with the lag in the publication of inflation indices, but let’s ignore that for now.)
One curiosity is that the inflation-indexed bond method and the inflation swap method can produce different estimates. Theoretically this should not happen, because if two products that will have the same price in the long term (since they are based on the same index) have different prices today, there should be an arbitrage opportunity. Why this happens in practice is discussed on pp. 5-6 of this Bank of England paper. (Thanks to Bond Girl for pointing out the paper.)
3. Surveys. You can also just ask people what they think inflation will be. Economists ordinarily prefer markets, under the principle that when people are paying money they are signaling what they really believe. But if you think there are sufficient problems with the markets you may want to go with surveys. Tim Duy has a post with a number of charts, including one of an inflation expectations survey.
So what do things look like today?
This is the historical graph for implied U.S. inflation over the next 5 years, based on TIPS. Remember, you are looking at 5-year inflation expectations as they changed over the last year.
In the dark days of October-December, inflation expectations were clearly negative: that is, the market was expecting deflation over a 5-year period. Things have picked up, but inflation expectations are still around 0.6% - far less than the 1.7-2.0% targeted by the Fed. And that 0.6% is before adjusting for the inflation risk premium, so inflation expectations are actually lower than the chart shows.
And these are current inflation expectations over various time horizons, again derived from inflation-indexed bonds. Note that they are sorted by value, not by time.
TIPS are not very liquid compared to regular Treasury bonds, and the implied inflation expectation numbers are sensitive to aberrations in both the Treasury and the TIPS markets (which have both been pretty aberrant recently). For example, if there is a shortage of TIPS of a given maturity, then the TIPS yields will be artificially low and the implied inflation expectation will be artificially high. Still, it seems like inflation expectations are on the low side, even when it comes to the 10- and 20-year time horizons. (I don’t know what’s going on with the 2-year number: when I look at the underlying bonds, it seems like it should be about -0.1%.)
For more on measuring inflation expectations, there is a short primer from the San Francisco Fed, as well as the Bank of England paper mentioned above.
Inflation Expectations: A Primer
by: The Baseline Scenario April 09, 2009
By James Kwak
Only a few years ago, the accepted remedy for a recession was for the Federal Reserve to lower interest rates - namely, the Federal funds rate. Now, however, the economy has been stuck in recession for over fifteen months and the Federal funds rate has spent the last several months at zero. (The Fed funds rate cannot ordinarily be negative, because one bank won’t lend $100 to another bank and accept less than $100 in return; it always has the option of just holding onto its $100.) As a result, the Fed has resorted to other policy tools, most notably large-scale purchases of agency and Treasury securities, funded by creating money. (Here’s James Hamilton’s analysis.)
As the Fed’s monetary policy plays a more prominent role in the response to the economic crisis, there will be more talk of inflation or, more accurately, inflation expectations. While inflation is what affects the purchasing power of the money in your wallet, inflation expectations are what affect people’s behavior in ways that have a long-term economic impact. Take the case of wage negotiations, for example: a union that believes inflation will average 5% over the life of a contract will demand higher wage increases than a union that believes inflation will average only 1%. Once those higher wages are built into the contract, the employer is forced to raise prices in order to cover those wage increases, and inflation begins to ripple through the economy.
One of the major objectives of modern monetary policy is to control inflation expectations, because controlling inflation expectations is the first step to controlling inflation. If there is a short-term burst of inflation - as we had a year ago, if you look at headline inflation numbers that include the prices of food and energy - the macroeconomic consequences can be limited if people believe that the Fed can and will bring inflation under control.
Unfortunately, it is impossible to know exactly what people’s inflation expectations are; in fact, it may not even be a sensible question, since different people have different understandings of what inflation is. However, there are three main approaches to estimating inflation expectations.
1. Inflation-indexed government bonds. (If you need a refresher on how a bond works, read the first part of this article.) A traditional bond is a stream of payments that is fixed in nominal terms: for example, $100 in 10 years, and 6% interest, paid semi-annually ($3 every 6 months). Such a bond is not inflation-indexed; if inflation goes up, the purchasing power of that $100 goes down, and it’s too bad for the bondholder.
An inflation-indexed bond, by contrast, pays an amount that is indexed to some measure of inflation. In the U.S., where these bonds are called Treasury Inflation Protected Securities (TIPS), we use the Consumer Price Index. A TIPS bond may have a $100 face value and pay a 2% interest rate. However, every 6 months, that $100 face value is adjusted to reflect the change in the CPI, and the interest payment is calculated as a percentage of the adjusted value of the bond. Then, after 10 years, the bondholder gets back not $100, but $100 times the ratio between the CPI at the end of the period and the CPI at the beginning of the period. This way the bondholder is guaranteed a 2% real return (assuming he paid $100 for the bond), no matter what the rate of inflation is in the interim.
The implied inflation expectation, then, is the difference between the yield on an ordinary bond and the yield on an inflation-indexed bond with the same maturity. If the 5-year Treasury has a yield of 4% and the 5-year TIPS has a yield of 2%, then inflation expectations for the next five years are (about) 2% per year. The reasoning is that in order to buy the regular bond as opposed to the inflation-indexed bond, an investor has to be paid a higher yield to compensate him for the level of inflation that he expects.
Actually, in addition to expected inflation, the Treasury investor also has to be paid an inflation risk premium because, all things being equal, it is better not to have inflation risk than to have it. So the implied inflation expectation is actually slightly less than the spread between the regular and the inflation-indexed bonds. If you didn’t follow that, don’t worry, just remember that, roughly speaking, Treasury yield = TIPS yield + expected inflation.
2. Inflation swaps. These are a type of derivative contract, where the payments under the contract depend on the value of an inflation index, such as the CPI. The swap has a nominal value of, say, $100, but $100 never changes hands. Instead, at the end of some period of time, party A pays party B a fixed rate of interest on $100 - say 2.5% per year. At the end of the period, B pays A the cumulative percentage change in the inflation index over the period. Assuming A has $100 in his pocket, he has now hedged the inflation risk on that $100, because no matter what happens, at the end of the period he will get an amount that compensates him for the impact of inflation on his $100. The price of this hedge is $2.50 per year. (Because these are over-the-counter contracts, there are many variations on this, including swaps with periodic coupon payments.)
For the same reasons described above, the implied inflation expectation is roughly 2.5% per year: party B thinks inflation will be less than 2.5% per year, and therefore is willing to take 2.5% and pay the amount of inflation; party A thinks inflation will be more than 2.5% per year, and therefore is willing to pay 2.5% per year to get the amount of inflation back. So the market clears at 2.5%. (Actually, for the exact same reasons as with bonds - party B has to be paid an inflation risk premium for absorbing the risk in this trade - the inflation expectation is slightly less than 2.5% per year. There are also some complications having to do with the lag in the publication of inflation indices, but let’s ignore that for now.)
One curiosity is that the inflation-indexed bond method and the inflation swap method can produce different estimates. Theoretically this should not happen, because if two products that will have the same price in the long term (since they are based on the same index) have different prices today, there should be an arbitrage opportunity. Why this happens in practice is discussed on pp. 5-6 of this Bank of England paper. (Thanks to Bond Girl for pointing out the paper.)
3. Surveys. You can also just ask people what they think inflation will be. Economists ordinarily prefer markets, under the principle that when people are paying money they are signaling what they really believe. But if you think there are sufficient problems with the markets you may want to go with surveys. Tim Duy has a post with a number of charts, including one of an inflation expectations survey.
So what do things look like today?
This is the historical graph for implied U.S. inflation over the next 5 years, based on TIPS. Remember, you are looking at 5-year inflation expectations as they changed over the last year.
In the dark days of October-December, inflation expectations were clearly negative: that is, the market was expecting deflation over a 5-year period. Things have picked up, but inflation expectations are still around 0.6% - far less than the 1.7-2.0% targeted by the Fed. And that 0.6% is before adjusting for the inflation risk premium, so inflation expectations are actually lower than the chart shows.
And these are current inflation expectations over various time horizons, again derived from inflation-indexed bonds. Note that they are sorted by value, not by time.
TIPS are not very liquid compared to regular Treasury bonds, and the implied inflation expectation numbers are sensitive to aberrations in both the Treasury and the TIPS markets (which have both been pretty aberrant recently). For example, if there is a shortage of TIPS of a given maturity, then the TIPS yields will be artificially low and the implied inflation expectation will be artificially high. Still, it seems like inflation expectations are on the low side, even when it comes to the 10- and 20-year time horizons. (I don’t know what’s going on with the 2-year number: when I look at the underlying bonds, it seems like it should be about -0.1%.)
For more on measuring inflation expectations, there is a short primer from the San Francisco Fed, as well as the Bank of England paper mentioned above.
Inflation Expectations Change Stock Market Valuation
My comments: there is a flaw in his valuation. Equity risk premium is the earnings yield in excess of 10-year US Treasury yield, which is around 3.3%. 7.4% - 3.3% is around 4.1%. If you use inflation expectation, fine, it works out to 7.4 - 3.6 = 3.8%. Economic growth should not be included because you're double-counting. Economic growth causes inflation. There is a causal factor which overlaps. You cannot include inflation and then economic growth to calculate ERP.
Today's earnings yield should be 8.4% based on inflation expectation 4.6%. So fair PE should be 11.9x. Hence S&P500 should fall to 1,142. Already, S&P500 is at 1300 plus so you know stocks don't move in lock-step with one single valuation method.
http://seekingalpha.com/article/258261-inflation-expectations-change-stock-market-valuation
Inflation Expectations Change Stock Market Valuation by: Joe Eqcome March 15, 2011
In the past two weeks investors have been rocked by not only political and economic events but also literally by the massive earthquake in Japan sending ripples across the Pacific onto our own shores.
If that weren’t enough to convince you to be careful with regards to equities, you can throw in the coming celestial event of our sun becoming aligned with the center of the Milky Way (a 26,000 year cycle), signaling the end of the Mayan “Long Count” calendar and the end of the world on December 21, 2012 (see movie trailer here). Clearly a “sell” signal.
A More Reasoned Approach: However,for secular investors the current valuation matrix for stocks is more of a concern: the price/earnings ratio (“P/E”). The P/E can alternately be expressed as an earnings’ yield (“E/P”). Let’s for a moment assume a 2011 S&P 500 earnings estimate of $95.98 per share. Based upon the current S&P 500 valuation the earnings yield is 7.4% (13.6 times).
Let’s assume a real US economic growth rate of 2.0% and a consumer inflation expectation of 3.4% which was reported in February by Thomson Reuters/U of Michigan Sentiment Survey. The combination of real growth and inflationary expectation would add up to nominal risk free return of 5.4%. When subtracted from the current implied S&P 500 earnings yield of 7.4% it would imply an equity risk premium of 2.0%.
Getting Ugly? The University of Michigan Survey recently recorded a significant increase in consumer inflation expectation for March. Consumers’ expectation for inflation is now 4.6% up from February’s 3.4%. Now using the same numbers and imputing the new inflation expectation, the S&P 500 earnings yield should now be 8.6% (2.0% + 4.6% + 2.0%) which translates into an 11.6 price/earnings ratio. Based upon the new P/E, the S&P 500 valuation would be 1,113, or off 14.5% from its current valuation.
Take Aways: If QE2 ends when inflation is ramping-up, investment valuations could likely be negatively impacted. Who wins? Equities don’t win; bonds won’t win. If the economy continues to recover with this new inflation expectation, it’s likely that commodities and possibly high quality commercial real estate would be favored under this scenario.
The significantly higher March inflation expectation maybe just an abnormality. Likewise, the equity risk premium may already reflect higher inflation expectations. Either could justify the S&P 500’s current valuations. However, the Fed may just be unrealistic regarding inflation expectations and its ability to respond. As a result it is currently in the process of manufacturing a new bubble to be “pricked”.
Report the Facts: It’s a toss up between inflation and deflation. Inflation is clearly the lesser of two evils--however, nonetheless still evil. To paraphrase Will Rodgers, “I'm not a comedian, I just watch the government and report the facts.” (See the video
Today's earnings yield should be 8.4% based on inflation expectation 4.6%. So fair PE should be 11.9x. Hence S&P500 should fall to 1,142. Already, S&P500 is at 1300 plus so you know stocks don't move in lock-step with one single valuation method.
http://seekingalpha.com/article/258261-inflation-expectations-change-stock-market-valuation
Inflation Expectations Change Stock Market Valuation by: Joe Eqcome March 15, 2011
In the past two weeks investors have been rocked by not only political and economic events but also literally by the massive earthquake in Japan sending ripples across the Pacific onto our own shores.
If that weren’t enough to convince you to be careful with regards to equities, you can throw in the coming celestial event of our sun becoming aligned with the center of the Milky Way (a 26,000 year cycle), signaling the end of the Mayan “Long Count” calendar and the end of the world on December 21, 2012 (see movie trailer here). Clearly a “sell” signal.
A More Reasoned Approach: However,for secular investors the current valuation matrix for stocks is more of a concern: the price/earnings ratio (“P/E”). The P/E can alternately be expressed as an earnings’ yield (“E/P”). Let’s for a moment assume a 2011 S&P 500 earnings estimate of $95.98 per share. Based upon the current S&P 500 valuation the earnings yield is 7.4% (13.6 times).
Let’s assume a real US economic growth rate of 2.0% and a consumer inflation expectation of 3.4% which was reported in February by Thomson Reuters/U of Michigan Sentiment Survey. The combination of real growth and inflationary expectation would add up to nominal risk free return of 5.4%. When subtracted from the current implied S&P 500 earnings yield of 7.4% it would imply an equity risk premium of 2.0%.
Getting Ugly? The University of Michigan Survey recently recorded a significant increase in consumer inflation expectation for March. Consumers’ expectation for inflation is now 4.6% up from February’s 3.4%. Now using the same numbers and imputing the new inflation expectation, the S&P 500 earnings yield should now be 8.6% (2.0% + 4.6% + 2.0%) which translates into an 11.6 price/earnings ratio. Based upon the new P/E, the S&P 500 valuation would be 1,113, or off 14.5% from its current valuation.
Take Aways: If QE2 ends when inflation is ramping-up, investment valuations could likely be negatively impacted. Who wins? Equities don’t win; bonds won’t win. If the economy continues to recover with this new inflation expectation, it’s likely that commodities and possibly high quality commercial real estate would be favored under this scenario.
The significantly higher March inflation expectation maybe just an abnormality. Likewise, the equity risk premium may already reflect higher inflation expectations. Either could justify the S&P 500’s current valuations. However, the Fed may just be unrealistic regarding inflation expectations and its ability to respond. As a result it is currently in the process of manufacturing a new bubble to be “pricked”.
Report the Facts: It’s a toss up between inflation and deflation. Inflation is clearly the lesser of two evils--however, nonetheless still evil. To paraphrase Will Rodgers, “I'm not a comedian, I just watch the government and report the facts.” (See the video
The Big Challenges of the Future
Sometimes, I lay awake at night thinking of what the future holds. We have the following challenges: exploding population, escalating food prices, global warming, escalating oil prices, rising sea levels, lack of clean drinking water.
Perhaps one factor that has been ignored is the future of labour markets. Robotics are getting more advanced. In future, all repetitive jobs will be done by robots. In 10 - 20 years, more complex tasks can be done by robots too. When we order food from McDonalds in 10 years' time, a robotic kiosk could be serving us. The staff cooking our burgers could be robots. The ones clearing our tables could be roving robots. THe only humans who are working will probably be programmers, mechanical engineers and a manager just to make sure things are ok.
What will happen to us humans? Surgeries will be conducted by robots. Human doctors merely steer mechanical hands. Unemployment will sky rocket. Company profits will sky rocket. But who will have a salary to buy those goods? In 10 years time, the divide between the highly skilled and the redundant will be very wide. Perhaps through taxes, the government will have to give handouts to its citizens, who in turn become customers. It is a very fuzzy future.
Perhaps one factor that has been ignored is the future of labour markets. Robotics are getting more advanced. In future, all repetitive jobs will be done by robots. In 10 - 20 years, more complex tasks can be done by robots too. When we order food from McDonalds in 10 years' time, a robotic kiosk could be serving us. The staff cooking our burgers could be robots. The ones clearing our tables could be roving robots. THe only humans who are working will probably be programmers, mechanical engineers and a manager just to make sure things are ok.
What will happen to us humans? Surgeries will be conducted by robots. Human doctors merely steer mechanical hands. Unemployment will sky rocket. Company profits will sky rocket. But who will have a salary to buy those goods? In 10 years time, the divide between the highly skilled and the redundant will be very wide. Perhaps through taxes, the government will have to give handouts to its citizens, who in turn become customers. It is a very fuzzy future.
US' 10 yr Inflation Expectations at 1.94%, Unbelievable
According to Cleveland Fed, inflation is expected to be around 1.94% in 10 years' time. It's incredible and unbelievable. This is one of the data that the US Fed Reserve watch closely. With such low expectations, it is unlikely that the Fed will hike rates soon. The Producer Price Index is around 1.7%, and CPI at 1.1% last month. How could crude oil price at USD127/bbl not trigger inflation is quite staggering.
When US stocks peaked in Nov 2007, oil price was at SGD140/bbl. Using SGD as a common denominator and calibrated by around 3% of inflation per annum, today's oil price is around SGD124/bbl. We are a whisker away from tragedy.
For this reason, I am shortening my outlook for this bull run from 1.5 years to 1 year. I will start to diversify across alternatives and bond funds around Oct 2011. Time to reduce leverage.
For this reason, I am shortening my outlook for this bull run from 1.5 years to 1 year. I will start to diversify across alternatives and bond funds around Oct 2011. Time to reduce leverage.
Friday 22 April 2011
Drones Enter the Libyan War
When Secretary Hillary Clinton said that the US had "special abilities" that can contribute to the Libyan war, my first thought is that they will deploy drones. They are one of the most feared weapons in Afghanistan and Iraq. However, when the western intervention started, the US used Tomahawk missiles. I was happy for the intervention to protect Libyan civilians, but disappointed that the US did not deploy their prized assets.
Today, the US announced that they will deploy drones. I believe it will further tilt the war in the rebels' favour. Imagine unmanned helicopters hovering for hours in built up areas, waiting to kill a military leader, a sniper, or deliver a precision missile to kill a section of government troops. The next few weeks could get interesting.
Today, the US announced that they will deploy drones. I believe it will further tilt the war in the rebels' favour. Imagine unmanned helicopters hovering for hours in built up areas, waiting to kill a military leader, a sniper, or deliver a precision missile to kill a section of government troops. The next few weeks could get interesting.
Limitless Brain Power
http://www.imdb.com/title/tt1219289/
If there is a pill that can make you smarter, will you take it? Think of the "limitless" possibilities.
In this movie, a washed-out writer who is facing a block decided to dabble into the unknown, a drug that enhances brain power. His mind clears suddenly. He writes a best selling novel in 4 days. He starts to trade stocks and grew his account from 12k to 2m in 10 trading days.
Then he faces side-effects, effects that almost killed him. He manages to find private laboratories that could remove the "bugs" from the drug. He manages to turn around and run for President with the new drug without the side effecfs.
If only...
I've been searching for this since 1993. I've tried many. Most just give you a high. I'm not talking about illegal substances, but drugs that are supposedly clinically proven to treat Alzeimer's, Attention Deficit Disorder etc. They all disappoint. Many don't give you a clearer mind.
Perhaps my quest is similar to Emperor Qin's quest for the elixir of youth. He never found it. In fact, by ingesting mercury, he hastened his death.
In this movie, a washed-out writer who is facing a block decided to dabble into the unknown, a drug that enhances brain power. His mind clears suddenly. He writes a best selling novel in 4 days. He starts to trade stocks and grew his account from 12k to 2m in 10 trading days.
Then he faces side-effects, effects that almost killed him. He manages to find private laboratories that could remove the "bugs" from the drug. He manages to turn around and run for President with the new drug without the side effecfs.
If only...
I've been searching for this since 1993. I've tried many. Most just give you a high. I'm not talking about illegal substances, but drugs that are supposedly clinically proven to treat Alzeimer's, Attention Deficit Disorder etc. They all disappoint. Many don't give you a clearer mind.
Perhaps my quest is similar to Emperor Qin's quest for the elixir of youth. He never found it. In fact, by ingesting mercury, he hastened his death.
Tuesday 19 April 2011
S&P500 Sell Off and I'm Buying
I've been reducing my long positions for a while, from 3x leverage in March 15 to only 1.1 last week. Right now, I'm about 2x leverage due to tonight's major sell-off. Yesterday, I was at 1.4x leverage.
The US economy has been downgraded to AAA negative by S&P and suddenly we saw the Dow sold down by 230 points at one point.
I remember UK being downgraded, Portugal downgraded, Ireland downgraded and the market recovered after an initial sell-down.
We are right on track to finish 2011 on a high. There's no where else to park your money because yields are still very low in developed markets. The yield curve is steep. Producer price index is still benign in the US.
I am quite tired of working. The higher I rise, the more I have to persuade people, deal with them. I'm not a very funny guy. Not a very likeable person. The world is superficial. It is swayed by humour and eloquent speeches. I'm neither. I go for results. I conduct myself with the best of intentions. If the world cannot see it, I cannot help it.
I'd rather not be working several years down the road. Perhaps I should start my own business, doing investment consulting. I'd like to wake up everyday to a steaming hot cup of coffee, reading papers till noon. Thereafter, I'd be seeing some properties and collecting some rentals.
Pearl Bank, MacPherson Green just missed my grasp. Perhaps I should be more hard working on this aspect although I think the window has closed. There will be another window. I have to be patient and learn in the meantime.
The US economy has been downgraded to AAA negative by S&P and suddenly we saw the Dow sold down by 230 points at one point.
I remember UK being downgraded, Portugal downgraded, Ireland downgraded and the market recovered after an initial sell-down.
We are right on track to finish 2011 on a high. There's no where else to park your money because yields are still very low in developed markets. The yield curve is steep. Producer price index is still benign in the US.
I am quite tired of working. The higher I rise, the more I have to persuade people, deal with them. I'm not a very funny guy. Not a very likeable person. The world is superficial. It is swayed by humour and eloquent speeches. I'm neither. I go for results. I conduct myself with the best of intentions. If the world cannot see it, I cannot help it.
I'd rather not be working several years down the road. Perhaps I should start my own business, doing investment consulting. I'd like to wake up everyday to a steaming hot cup of coffee, reading papers till noon. Thereafter, I'd be seeing some properties and collecting some rentals.
Pearl Bank, MacPherson Green just missed my grasp. Perhaps I should be more hard working on this aspect although I think the window has closed. There will be another window. I have to be patient and learn in the meantime.
Monday 18 April 2011
Government to Grow Suburb Towns, Add Homes in Central, West
Published April 15, 2011
Govt to grow suburb towns, add homes in Central, West
By UMA SHANKARI
(SINGAPORE) The government will boost Singapore's housing stock in tandem with the growth in population and expand towns such as Punggol, Sengkang, Yishun and Choa Chu Kang over the next 40 to 50 years, National Development Minister Mah Bow Tan said yesterday.
He also revealed that more homes will be built in the Central and West regions in a bid to take some stress off transport networks and reduce commuting times.
'Our current towns will be redeveloped and expanded to provide affordable and good quality housing in popular areas like Punggol, Sengkang, Yishun and Choa Chu Kang,' Mr Mah said. 'Beyond the medium term, we will also open up new towns in areas such as Tengah.'
Mr Mah, who was speaking at a seminar organised by the Urban Redevelopment Authority (URA), was giving industry players a peek at the Concept Plan 2011. The Concept Plan will be officially unveiled in the fourth quarter of this year. It will chart plans for land use and infrastructure development in Singapore over the next 40 to 50 years.
In addition to boosting housing supply, the government also plans to bring jobs closer to homes by having more equal job-to-worker distribution across the island.
More housing will be injected into the Central and the West regions of Singapore, where currently there are proportionately more jobs than homes. At the same time, the government will also put more commercial and industrial activities in the North and North-East, where there are currently more homes than jobs.
'Re-balancing the job-worker distribution will not resolve all our traffic issues, but it will take some stress off our transport networks and reduce commuting times,' Mr Mah said.
There are also plans to concentrate higher density housing around transport nodes, so that more people will benefit from direct access to public transportation.
Giving one example, Mr Mah said that his ministry could add more than 10,000 HDB flats and private homes in vacant land around three MRT stations - Bishan, Commonwealth and Queenstown - in the next decade and beyond. These homes will be high-rise developments of more than 30 storeys.
'Higher density housing can bring greater economies of scale, and support the development of more amenities in close proximity to homes,' Mr Mah said. 'As we build up our towns, we will expand our transport infrastructure, especially our rail network.'
Analysts said that the government is likely to increase the plot ratios for residential land in Singapore's Central regions and near MRT stations.
'In towns such as Punggol, Sengkang and in the West, there is still quite a bit of land left for development,' said Knight Frank chairman Tan Tiong Cheng. 'But around MRT stations and in the Central regions, residential plot ratios are likely to go up.'
A developer BT spoke to also said that residential plot ratios look set to be increased in the coming years. He added that he hopes the government will boost plot ratios for both private and public land.
In his speech yesterday, Mr Mah added that leisure options and greenery will be expanded.
The government will also take into account Singapore's ageing population in planning for various facilities such as healthcare, housing and social facilities at the national level. It will also review town planning strategies to facilitate ageing in place, he said.
Govt to grow suburb towns, add homes in Central, West
By UMA SHANKARI
(SINGAPORE) The government will boost Singapore's housing stock in tandem with the growth in population and expand towns such as Punggol, Sengkang, Yishun and Choa Chu Kang over the next 40 to 50 years, National Development Minister Mah Bow Tan said yesterday.
He also revealed that more homes will be built in the Central and West regions in a bid to take some stress off transport networks and reduce commuting times.
'Our current towns will be redeveloped and expanded to provide affordable and good quality housing in popular areas like Punggol, Sengkang, Yishun and Choa Chu Kang,' Mr Mah said. 'Beyond the medium term, we will also open up new towns in areas such as Tengah.'
Mr Mah, who was speaking at a seminar organised by the Urban Redevelopment Authority (URA), was giving industry players a peek at the Concept Plan 2011. The Concept Plan will be officially unveiled in the fourth quarter of this year. It will chart plans for land use and infrastructure development in Singapore over the next 40 to 50 years.
In addition to boosting housing supply, the government also plans to bring jobs closer to homes by having more equal job-to-worker distribution across the island.
More housing will be injected into the Central and the West regions of Singapore, where currently there are proportionately more jobs than homes. At the same time, the government will also put more commercial and industrial activities in the North and North-East, where there are currently more homes than jobs.
'Re-balancing the job-worker distribution will not resolve all our traffic issues, but it will take some stress off our transport networks and reduce commuting times,' Mr Mah said.
There are also plans to concentrate higher density housing around transport nodes, so that more people will benefit from direct access to public transportation.
Giving one example, Mr Mah said that his ministry could add more than 10,000 HDB flats and private homes in vacant land around three MRT stations - Bishan, Commonwealth and Queenstown - in the next decade and beyond. These homes will be high-rise developments of more than 30 storeys.
'Higher density housing can bring greater economies of scale, and support the development of more amenities in close proximity to homes,' Mr Mah said. 'As we build up our towns, we will expand our transport infrastructure, especially our rail network.'
Analysts said that the government is likely to increase the plot ratios for residential land in Singapore's Central regions and near MRT stations.
'In towns such as Punggol, Sengkang and in the West, there is still quite a bit of land left for development,' said Knight Frank chairman Tan Tiong Cheng. 'But around MRT stations and in the Central regions, residential plot ratios are likely to go up.'
A developer BT spoke to also said that residential plot ratios look set to be increased in the coming years. He added that he hopes the government will boost plot ratios for both private and public land.
In his speech yesterday, Mr Mah added that leisure options and greenery will be expanded.
The government will also take into account Singapore's ageing population in planning for various facilities such as healthcare, housing and social facilities at the national level. It will also review town planning strategies to facilitate ageing in place, he said.
Will There be Life After QE2?
by: Steven Hansen April 10, 2011
If we take the noise coming out of the Federal Reserve as gospel, QE2 will end before the end of June 2011. In simple words, QE (aka quantitative easing) is in effect the same as government buying its own debt.
As we speak, the Federal Reserve holds $1.3 trillion of Treasuries (15% of the total $9 trillion outstanding) on its balance sheet. As a matter of fact, the Fed is not the government. As a matter of effect, the Fed has dual agency as the provider of currency (a government agent) and as a coordinating agent for the private sector (banking).
One caveat in looking at the above graph’s QE2 purchases (click to enlarge), it does not credit the expiring Treasury, Agency and MBS debt instruments – but the net effect of QE2 is to increase the Fed’s balance sheet by $600 billion. QE2 roughly removed $200 billion per quarter ($800 billion annualized) of “investment” from the private sector.
It could be argued QE2 provided capital to the private sector. The government increased debt by $600 billion. This debt was sold to the banks. The Fed then printed currency (Federal Reserve notes and credits) and bought the debt from the banks. The net affect: government debt increased by $600 billion and private currency in the banks increased by the same amount. This allowed this $200 billion per quarter to be “invested” elsewhere.
What happens when QE2 ends?
Fed Chairman Bernanke said QE2 has “contributed to a stronger stock market just as they did in March 2009 when we did the first iteration of this program.” Is it a stretch to believe it created a bubble which will correct once QE2 is terminated?
Will the USA economy contract or become less good?
The major reason for implementing QE2 were indications that the economy was contracting following termination of QE1. The economy is currently moderately stronger – and is on less life support relative to one year ago. Logically, removing a leg of economic support at any time should be economically negative. The government will stop increasing debt which had the function of pumping currency into the banking system.
Little of this $600 billion of QE2 made it directly into GDP. GDP measures roughly 1/3 of all money flows in the USA.
QE2 is more like a true stimulus with multiplier effects directed towards investing and money flows. Many have argued much of the effects of QE2 surfaced in emerging economies which were capable of soaking up this amount of stimulus, although with increasing inflation.
Would ending QE2 reverse this and begin repatriating dollars invested in emerging economies?
Depends on non-QE2 factors.
• rising central bank interest rates in China and Europe, or capital inflows to buy Treasuries affect the relative value of the dollar;
• will the Fed continue to maintain its balance sheet levels, or allow them to decay;
• the strength of the USA economy versus the global economy going forward – this effects the flow of investing money which seeks the highest return.
The bottom line is that there is no certainty except that the Fed will not sit by and watch the economy crash.
If we take the noise coming out of the Federal Reserve as gospel, QE2 will end before the end of June 2011. In simple words, QE (aka quantitative easing) is in effect the same as government buying its own debt.
As we speak, the Federal Reserve holds $1.3 trillion of Treasuries (15% of the total $9 trillion outstanding) on its balance sheet. As a matter of fact, the Fed is not the government. As a matter of effect, the Fed has dual agency as the provider of currency (a government agent) and as a coordinating agent for the private sector (banking).
One caveat in looking at the above graph’s QE2 purchases (click to enlarge), it does not credit the expiring Treasury, Agency and MBS debt instruments – but the net effect of QE2 is to increase the Fed’s balance sheet by $600 billion. QE2 roughly removed $200 billion per quarter ($800 billion annualized) of “investment” from the private sector.
It could be argued QE2 provided capital to the private sector. The government increased debt by $600 billion. This debt was sold to the banks. The Fed then printed currency (Federal Reserve notes and credits) and bought the debt from the banks. The net affect: government debt increased by $600 billion and private currency in the banks increased by the same amount. This allowed this $200 billion per quarter to be “invested” elsewhere.
What happens when QE2 ends?
Fed Chairman Bernanke said QE2 has “contributed to a stronger stock market just as they did in March 2009 when we did the first iteration of this program.” Is it a stretch to believe it created a bubble which will correct once QE2 is terminated?
Will the USA economy contract or become less good?
The major reason for implementing QE2 were indications that the economy was contracting following termination of QE1. The economy is currently moderately stronger – and is on less life support relative to one year ago. Logically, removing a leg of economic support at any time should be economically negative. The government will stop increasing debt which had the function of pumping currency into the banking system.
Little of this $600 billion of QE2 made it directly into GDP. GDP measures roughly 1/3 of all money flows in the USA.
QE2 is more like a true stimulus with multiplier effects directed towards investing and money flows. Many have argued much of the effects of QE2 surfaced in emerging economies which were capable of soaking up this amount of stimulus, although with increasing inflation.
Would ending QE2 reverse this and begin repatriating dollars invested in emerging economies?
Depends on non-QE2 factors.
• rising central bank interest rates in China and Europe, or capital inflows to buy Treasuries affect the relative value of the dollar;
• will the Fed continue to maintain its balance sheet levels, or allow them to decay;
• the strength of the USA economy versus the global economy going forward – this effects the flow of investing money which seeks the highest return.
The bottom line is that there is no certainty except that the Fed will not sit by and watch the economy crash.
Meditation
I was taking a plane ride in Lufthansa from Munich to Singapore just a week ago. The ride was uncomfortable because although I had more leg room by sitting at the front row, I was flanked by 2 humongous Europeans.
The inflight movie was bad, because less than 18 movies were available to me. I watched the new Tron. Jeff Bridges was the architect of the cyberworld where human flesh can enter. He was fighting against the evil programs that intended to invade the physical world. In his troubles, he meditated and maintained a peace of mind. He was able to make better decisions with his meditations.
I decided to renew my self-meditative habits. I used to take courses on self-hypnotism, Alpha brain waves etc. I felt calmer, more zen. External events affected me less. I wanted to watch a Chinese movie today, "let the bullets fly". It obviously didn't fit my schedule because I was supposed to visit my parents-in-law at 6pm. I gave up that quest because not watching it did not matter. True, it had good reviews because it was a political satires, and I like politics and satires, but it had little impact on me. Zilch.
At night, I woke up to catch Arsenal vs Liverpool in the second half. We went ahead at the 93rd minute but conceded a penalty at the 100th minute. It was infuriating. In the past, it would have made me moody for several hours. But it didn't matter to me so much now.
I can also meditate and visualise myself losing weight, lowering my blood pressure, as well as making better decisions when investing.
The inflight movie was bad, because less than 18 movies were available to me. I watched the new Tron. Jeff Bridges was the architect of the cyberworld where human flesh can enter. He was fighting against the evil programs that intended to invade the physical world. In his troubles, he meditated and maintained a peace of mind. He was able to make better decisions with his meditations.
I decided to renew my self-meditative habits. I used to take courses on self-hypnotism, Alpha brain waves etc. I felt calmer, more zen. External events affected me less. I wanted to watch a Chinese movie today, "let the bullets fly". It obviously didn't fit my schedule because I was supposed to visit my parents-in-law at 6pm. I gave up that quest because not watching it did not matter. True, it had good reviews because it was a political satires, and I like politics and satires, but it had little impact on me. Zilch.
At night, I woke up to catch Arsenal vs Liverpool in the second half. We went ahead at the 93rd minute but conceded a penalty at the 100th minute. It was infuriating. In the past, it would have made me moody for several hours. But it didn't matter to me so much now.
I can also meditate and visualise myself losing weight, lowering my blood pressure, as well as making better decisions when investing.
Picking Stocks to Keep Ahead of Inflation
Published April 13, 2011
Picking stocks to keep ahead of inflation
(NEW YORK) If investor behaviour foreshadows what's in store for the economy several months down the road, inflation could be a bigger threat than government figures now suggest.
Historically, stocks have been regarded as a decent inflation hedge.
The current numbers paint a rather benign picture, as core inflation in the United States has been growing at a modest annual rate of 1.1 per cent.
Even when volatile food and energy prices are factored in, overall consumer prices rose just 2.1 per cent over the year through February, the most recent period for which data are available.
Yet the market appears to be looking past this information. Since the end of December, investors have been pulling money out of mutual funds that invest in assets that fare poorly when inflation kicks up, like intermediate-term bonds and cash, according to an analysis of fund flows by Bank of America Merrill Lynch Global Equity Research.
At the same time, they've been pouring money into funds that invest in traditional inflation plays. Those include Treasury inflation-protected securities, commodities and, of course, stocks.
Equity funds alone have drawn US$30 billion in net inflows since the end of December, according to the Investment Company Institute, the fund industry trade group.
Of course, there is still a debate over whether these shifts make sense. Worrisome levels of inflation may not materialise at all.
Economists at IHS Global Insight, for example, are forecasting that consumer prices will grow at only around 2 per cent a year from 2012 through 2014. They say they believe that wage growth will be muted in a sluggish job recovery. My comments: You gotta be kidding. Inflation will hit US quickly, just like in 2007.
But some strategists are bracing for an inflation jump. Jason Hsu, chief investment officer at Research Affiliates, a consulting firm in Newport Beach, California, said he expected the numbers to rise in a little more than a year from now.
'We're talking about inflation hovering in the 4 per cent area,' he said, with a risk of it moving even higher. He pointed to the flood of stimulus that's been pumped into the economy by governments throughout the world.
Some central banks overseas have already reversed course and are raising rates to keep a lid on prices. The European Central Bank made such a move last week, citing worrisome levels of inflation in food and energy costs.
Even if Mr Hsu is right, though, there is still the question of how effective stocks will be in protecting portfolios amid rising consumer prices.
Historically, stocks have been regarded as a decent inflation hedge - at least relative to bonds and cash - because stock returns have outpaced inflation for most of the past century.
Yet it's not always the case. Ned Davis Research, based in Venice, Florida, recently analysed how the market performed in different inflationary environments over the past four decades.
While the Standard & Poor's (S&P) 500-stock index posted double-digit gains, on average, when inflation has been between one and 4 per cent, stocks fell at an annualised rate of 1.4 per cent when inflation jumped to between 4 and 9 per cent.
What's more, in periods when the inflation rate is accelerating, not all types of stocks perform the same way.
Sam Stovall, chief investment strategist at S&P's Equity Research, looked at periods since 1970 when the year-over-year change in the consumer price index was accelerating.
He found eight such sustained periods, and saw that half of the 10 market sectors, on average, gained ground during those times; the others declined or were flat.
Which types of equities are likely to outperform if inflation starts to heat up this time? Mr Hsu says he thinks large, domestically based multinational companies would look attractive if inflation really took off and the US dollar continued to weaken against other major currencies.
Although a weaker US dollar would effectively raise the cost of goods imported from overseas, it would lower prices for exports, thus benefiting the American multinationals My comments: I agree to a certain extent. US companies are usually brand owners, like YUM (KFC), Apple. So they are able to raise prices without the threat of consumers defecting to competitors. Asian companies do not have strong brand names. Android phones have many substitutes, like HTC, Samsung etc.
Aother promising area is dividend-paying stocks, said Kate Warne, investment strategist at Edward Jones in St Louis.
Since 1947, payouts issued by the S&P 500 companies have grown at an annual rate of 5.6 per cent, she said, outpacing the 3.7 per cent inflation rate during the period. But there is another reason to favour dividend payers, she said.
Businesses that stand to thrive during inflationary periods are those that have the power to pass along price increases to their customers.
And companies with growing dividends often have that ability. 'When you think about it,' she said, 'companies that have pricing power - and are thus able to maintain their profit margins - will be able to continue to raise their dividends.'
Brad Sorensen, director of market and sector analysis at Charles Schwab, said pricing power might be focused in certain sectors.
Historically, 'energy companies have proven they can raise prices pretty quickly at the pump if oil climbs', he said.
'On the other end of the spectrum, consumer companies have a hard time passing along price increases on things like clothes because there's so much competition.' If inflation spikes, energy has proved to be a good place to hide. My comments: Absolutely agree. My portfolio is full of commodity companies like energy stocks, e.g. Marathon Oil, Apache Oil, Rosneft, Gazprom, Tatneft.
But if the discussion moves from rising inflation to hyperinflation, other defensive areas of the market like health care and utilities would seem to make sense, Mr Stovall said. My comments: Not sure about that, but my sole healthcare stock, Humana, is doing well.
After all, no matter how expensive things become, people still need to see the doctor and turn on the lights. -- NYT
Picking stocks to keep ahead of inflation
(NEW YORK) If investor behaviour foreshadows what's in store for the economy several months down the road, inflation could be a bigger threat than government figures now suggest.
Historically, stocks have been regarded as a decent inflation hedge.
The current numbers paint a rather benign picture, as core inflation in the United States has been growing at a modest annual rate of 1.1 per cent.
Even when volatile food and energy prices are factored in, overall consumer prices rose just 2.1 per cent over the year through February, the most recent period for which data are available.
Yet the market appears to be looking past this information. Since the end of December, investors have been pulling money out of mutual funds that invest in assets that fare poorly when inflation kicks up, like intermediate-term bonds and cash, according to an analysis of fund flows by Bank of America Merrill Lynch Global Equity Research.
At the same time, they've been pouring money into funds that invest in traditional inflation plays. Those include Treasury inflation-protected securities, commodities and, of course, stocks.
Equity funds alone have drawn US$30 billion in net inflows since the end of December, according to the Investment Company Institute, the fund industry trade group.
Of course, there is still a debate over whether these shifts make sense. Worrisome levels of inflation may not materialise at all.
Economists at IHS Global Insight, for example, are forecasting that consumer prices will grow at only around 2 per cent a year from 2012 through 2014. They say they believe that wage growth will be muted in a sluggish job recovery. My comments: You gotta be kidding. Inflation will hit US quickly, just like in 2007.
But some strategists are bracing for an inflation jump. Jason Hsu, chief investment officer at Research Affiliates, a consulting firm in Newport Beach, California, said he expected the numbers to rise in a little more than a year from now.
'We're talking about inflation hovering in the 4 per cent area,' he said, with a risk of it moving even higher. He pointed to the flood of stimulus that's been pumped into the economy by governments throughout the world.
Some central banks overseas have already reversed course and are raising rates to keep a lid on prices. The European Central Bank made such a move last week, citing worrisome levels of inflation in food and energy costs.
Even if Mr Hsu is right, though, there is still the question of how effective stocks will be in protecting portfolios amid rising consumer prices.
Historically, stocks have been regarded as a decent inflation hedge - at least relative to bonds and cash - because stock returns have outpaced inflation for most of the past century.
Yet it's not always the case. Ned Davis Research, based in Venice, Florida, recently analysed how the market performed in different inflationary environments over the past four decades.
While the Standard & Poor's (S&P) 500-stock index posted double-digit gains, on average, when inflation has been between one and 4 per cent, stocks fell at an annualised rate of 1.4 per cent when inflation jumped to between 4 and 9 per cent.
What's more, in periods when the inflation rate is accelerating, not all types of stocks perform the same way.
Sam Stovall, chief investment strategist at S&P's Equity Research, looked at periods since 1970 when the year-over-year change in the consumer price index was accelerating.
He found eight such sustained periods, and saw that half of the 10 market sectors, on average, gained ground during those times; the others declined or were flat.
Which types of equities are likely to outperform if inflation starts to heat up this time? Mr Hsu says he thinks large, domestically based multinational companies would look attractive if inflation really took off and the US dollar continued to weaken against other major currencies.
Although a weaker US dollar would effectively raise the cost of goods imported from overseas, it would lower prices for exports, thus benefiting the American multinationals My comments: I agree to a certain extent. US companies are usually brand owners, like YUM (KFC), Apple. So they are able to raise prices without the threat of consumers defecting to competitors. Asian companies do not have strong brand names. Android phones have many substitutes, like HTC, Samsung etc.
Aother promising area is dividend-paying stocks, said Kate Warne, investment strategist at Edward Jones in St Louis.
Since 1947, payouts issued by the S&P 500 companies have grown at an annual rate of 5.6 per cent, she said, outpacing the 3.7 per cent inflation rate during the period. But there is another reason to favour dividend payers, she said.
Businesses that stand to thrive during inflationary periods are those that have the power to pass along price increases to their customers.
And companies with growing dividends often have that ability. 'When you think about it,' she said, 'companies that have pricing power - and are thus able to maintain their profit margins - will be able to continue to raise their dividends.'
Brad Sorensen, director of market and sector analysis at Charles Schwab, said pricing power might be focused in certain sectors.
Historically, 'energy companies have proven they can raise prices pretty quickly at the pump if oil climbs', he said.
'On the other end of the spectrum, consumer companies have a hard time passing along price increases on things like clothes because there's so much competition.' If inflation spikes, energy has proved to be a good place to hide. My comments: Absolutely agree. My portfolio is full of commodity companies like energy stocks, e.g. Marathon Oil, Apache Oil, Rosneft, Gazprom, Tatneft.
But if the discussion moves from rising inflation to hyperinflation, other defensive areas of the market like health care and utilities would seem to make sense, Mr Stovall said. My comments: Not sure about that, but my sole healthcare stock, Humana, is doing well.
After all, no matter how expensive things become, people still need to see the doctor and turn on the lights. -- NYT
Wednesday 13 April 2011
Goldman Sach's Report Triggers Sell Off in Commodities & Stocks World Wide
The last 2 days have seen profit takes. The second day is far worse than the first because the Dow came off by over 100 points. The sell off is said to have been caused by Goldman's report that oil prices are likely to fall by USD10 - 20/bbl after the Middle East crisis stabilises. Also, global demand is slowing down due to the high oil prices.
While it is true that persistently high oil price could see the world enter into an inflationary period, we should remember that this isn't a repeat of 2007. Interest rates then were very high and in the US, the yield curve inverted in June 2006. This time, the core inflation in US is virtually below 1%. Fed funds rate remain at 0.25%.
The developed world could plunge into a stagflation in 2012 or 2013, something that the UK is facing now. That I don't doubt. But Asia and Emerging countries' economic growth is still chugging along. The commodity countries are exporting more of their minerals / resource than ever.
FOr the next 2 decades, there will be tremendous wealth transfer from countries that import commodities to countries that export.
I think this correction will last another 2.5% - 4% for emerging market at most before it comes roaring back. Buy on dips.
While it is true that persistently high oil price could see the world enter into an inflationary period, we should remember that this isn't a repeat of 2007. Interest rates then were very high and in the US, the yield curve inverted in June 2006. This time, the core inflation in US is virtually below 1%. Fed funds rate remain at 0.25%.
The developed world could plunge into a stagflation in 2012 or 2013, something that the UK is facing now. That I don't doubt. But Asia and Emerging countries' economic growth is still chugging along. The commodity countries are exporting more of their minerals / resource than ever.
FOr the next 2 decades, there will be tremendous wealth transfer from countries that import commodities to countries that export.
I think this correction will last another 2.5% - 4% for emerging market at most before it comes roaring back. Buy on dips.
Wednesday 6 April 2011
Brussels: European City with Romantic Charm
European cities are charming. There is a mixture of old architecture from the last 3 to 9 centuries, alongside new structures. Tokyo is drab... mostly temples and same type of structures, same colour of facade, same designs. Don't get me wrong. I like Tokyo a lot. Asian cities are mostly known for their social discipline. Those in the north east of Asia especially. Very little pick pockets, low crime. There are of course, organised crime, like the Yakuza, and triads in Taiwan. But they mostly leave you alone unless you cross their paths.
Below is an example of an old cathedral near Grand Place. Like any other city in Europe, cathedrals and churches pepper the streets.
Brussels is famous of its mussels cooked in wine sauce. After downing the mussles, if you stomach still has capacity, you can dip pieces of french loafs on to the wine sauce in the pot. Quite delicious. I wonder why Singapore does not have such cuisine.
Below is the only advertisement on a shoebox unit in Brussels. Only 450 sq ft, it is asking for EUR650k, or around SGD2,456 psf. This is much more expensive than Singapore's units. As you can see, our luxury and mid sector homes are still cheaper than Europe's main cities. Even in a small city like Brussels, residential properties are more expensive than Singapore's. But shoebox units are not popular in Brussles. This is the only advertisement amongs the hundreds that I see out side of property agency offices.
This is at "Soho", a clothing store with acres of space for avant garde statues outside.
Like most European cities, grafitti deface the walls. You don't see that in Asian cities like Tokyo and Singapore.
S&P500 Earnings Set to Surpass 2007 Peak of US$90 a Share in Q3
Published April 5, 2011
Huge corporate profits sustain S&P after rally
S&P500 earnings set to surpass 2007 peak of US$90 a share in Q3
(NEW YORK) The biggest increase in profits in more than a century is telling investors that this is no time to sell stocks, even after the Standard & Poor's 500 Index rallied 97 per cent.
Flying high: Apple has boosted net income to US$16.6 billion from US$7.25 billion in March 2009. The iPad maker is projected to grow net income 54 per cent in its fiscal year ending in September
S&P 500 earnings are poised to surpass the 2007 peak of US$90 a share in the third quarter after surging from US$7 in March 2009, the quickest recovery since at least 1900, according to data from S&P and Yale University's Robert Shiller.
The gap between projected 12-month profits and average earnings over the last 10 years is set to widen the most since 1951, the data show.
PNC Wealth Management, Federated Investors Inc and ING Investment Management, which together oversee about US$1 trillion, say consumer spending will sustain the recovery after government stimulus helped lift profits from the lowest level since the Great Depression.
While earnings will slow in the second half, stock purchases by investors who missed the S&P 500's advance will fuel gains, according to Leuthold Group LLC.
'People are more comfortable with the recovery than at any time over the last couple of years,' said Doug Ramsey, the Minneapolis-based director of research at Leuthold Group, which oversees US$3.9 billion and recommended buying equities four days before the bull market started. 'That's typically when retail investors regain courage', and may spur a rise of up to 25 per cent in the S&P 500 during the next 18 months, he said.
S&P 500 futures expiring in June gained 0.1 per cent at 8.48am in London. The benchmark index rose 1.4 per cent to 1,332.41 last week, bringing its 2011 advance to 6 per cent and putting it 0.8 per cent away from this year's high of 1,343.01 on Feb 18.
It slumped through March 16 following Japan's record earthquake and civil unrest in the Middle East and northern Africa. The gauge's gain since March 9, 2009 is the most over comparable periods since 1937, according to S&P's Howard Silverblatt.
Shares haven't kept up with earnings. S&P 500 companies' 12-month profits are projected to reach a record US$91 a share by August, according to estimates compiled by S&P and Bloomberg.
That would be the highest-ever level on an inflation-adjusted basis and up almost 13-fold from their low two years ago, S&P and Shiller data compiled by Bloomberg show.
The 50-month rebound in profits, following a 92 per cent drop during the global financial crisis, would be faster than the 52 months it took to recover from the bursting of the dot.com bubble in 2000, when earnings fell 55 per cent, the data show.
Profits didn't recoup their 67 per cent tumble during the Great Depression until 19 years later.
American International Group Inc, the New York-based insurer bailed out by US taxpayers, has posted the biggest turnaround since March 2009. AIG swung from a trailing 12-month loss of US$95.8 billion to net income of US$7.79 billion, according to data compiled by Bloomberg.
ConocoPhillips in Houston earned US$11.4 billion last year after losing US$20.3 billion in the 12 months through March 2009, the data show.
Apple Inc has boosted net income to US$16.6 billion from US$7.25 billion in March 2009. The Cupertino, California-based maker of iPads is projected to grow net income 54 per cent in its fiscal year ending in September, data compiled by Bloomberg show.
Apple is set to report second-quarter results on April 20.
The S&P 500 trades for 13.7 times estimated 2011 earnings, compared with an average of 15.7 times reported annual profit since 1900, Shiller data show.
Earnings for the measure will total US$95.21 this year, according to S&P's estimate when adjusted for inflation using the median economist projection for the consumer price index in a Bloomberg survey.
If that forecast is met and the 12-month price-earnings multiple climbs to its mean since 1900, the S&P 500 would rise 12 per cent to end December at 1,494, or 4.7 per cent away from its record of 1,565.15 on Oct 9, 2007. -- Bloomberg
Huge corporate profits sustain S&P after rally
S&P500 earnings set to surpass 2007 peak of US$90 a share in Q3
(NEW YORK) The biggest increase in profits in more than a century is telling investors that this is no time to sell stocks, even after the Standard & Poor's 500 Index rallied 97 per cent.
Flying high: Apple has boosted net income to US$16.6 billion from US$7.25 billion in March 2009. The iPad maker is projected to grow net income 54 per cent in its fiscal year ending in September
S&P 500 earnings are poised to surpass the 2007 peak of US$90 a share in the third quarter after surging from US$7 in March 2009, the quickest recovery since at least 1900, according to data from S&P and Yale University's Robert Shiller.
The gap between projected 12-month profits and average earnings over the last 10 years is set to widen the most since 1951, the data show.
PNC Wealth Management, Federated Investors Inc and ING Investment Management, which together oversee about US$1 trillion, say consumer spending will sustain the recovery after government stimulus helped lift profits from the lowest level since the Great Depression.
While earnings will slow in the second half, stock purchases by investors who missed the S&P 500's advance will fuel gains, according to Leuthold Group LLC.
'People are more comfortable with the recovery than at any time over the last couple of years,' said Doug Ramsey, the Minneapolis-based director of research at Leuthold Group, which oversees US$3.9 billion and recommended buying equities four days before the bull market started. 'That's typically when retail investors regain courage', and may spur a rise of up to 25 per cent in the S&P 500 during the next 18 months, he said.
S&P 500 futures expiring in June gained 0.1 per cent at 8.48am in London. The benchmark index rose 1.4 per cent to 1,332.41 last week, bringing its 2011 advance to 6 per cent and putting it 0.8 per cent away from this year's high of 1,343.01 on Feb 18.
It slumped through March 16 following Japan's record earthquake and civil unrest in the Middle East and northern Africa. The gauge's gain since March 9, 2009 is the most over comparable periods since 1937, according to S&P's Howard Silverblatt.
Shares haven't kept up with earnings. S&P 500 companies' 12-month profits are projected to reach a record US$91 a share by August, according to estimates compiled by S&P and Bloomberg.
That would be the highest-ever level on an inflation-adjusted basis and up almost 13-fold from their low two years ago, S&P and Shiller data compiled by Bloomberg show.
The 50-month rebound in profits, following a 92 per cent drop during the global financial crisis, would be faster than the 52 months it took to recover from the bursting of the dot.com bubble in 2000, when earnings fell 55 per cent, the data show.
Profits didn't recoup their 67 per cent tumble during the Great Depression until 19 years later.
American International Group Inc, the New York-based insurer bailed out by US taxpayers, has posted the biggest turnaround since March 2009. AIG swung from a trailing 12-month loss of US$95.8 billion to net income of US$7.79 billion, according to data compiled by Bloomberg.
ConocoPhillips in Houston earned US$11.4 billion last year after losing US$20.3 billion in the 12 months through March 2009, the data show.
Apple Inc has boosted net income to US$16.6 billion from US$7.25 billion in March 2009. The Cupertino, California-based maker of iPads is projected to grow net income 54 per cent in its fiscal year ending in September, data compiled by Bloomberg show.
Apple is set to report second-quarter results on April 20.
The S&P 500 trades for 13.7 times estimated 2011 earnings, compared with an average of 15.7 times reported annual profit since 1900, Shiller data show.
Earnings for the measure will total US$95.21 this year, according to S&P's estimate when adjusted for inflation using the median economist projection for the consumer price index in a Bloomberg survey.
If that forecast is met and the 12-month price-earnings multiple climbs to its mean since 1900, the S&P 500 would rise 12 per cent to end December at 1,494, or 4.7 per cent away from its record of 1,565.15 on Oct 9, 2007. -- Bloomberg
News Articles on Stocks...
My comments: Prepare for the end of QE2 in the US. This may trigger the a correction in US stocks to the tune of 10 - 25%. Money may flow back to Asia x Japan and Emerging Market stocks as Japan is holding their own QE.
April 5, 2011, 2:00 p.m. EDT
Fed's post-QE2 debate underway:
By Greg Robb WASHINGTON (MarketWatch) - The Federal Reserve began at its March 15 meeting to debate the possible course of monetary policy after the $600 billion bond-buying program ends in June, according to the minutes of the meeting released Tuesday. A few Fed members said that economic conditions might unfold in a way that would warrant the launch of an exit plan this year. At the same time, a few others noted that the Fed's ultra-low monetary policy may be appropriate "beyond 2011." There was a lengthy discussion of the prospects of inflation in the wake of the sharp increase in oil and food prices. In the end, several Fed officials said that their forecasts of inflation had "shifted somewhat to the upside." Economic growth appeared to be on "firmer footing," the Fed officials said.
Published April 5, 2011
Emerging out of the growth ditch
A shift in global growth to emerging markets requires several changes in the financial infrastructure
By RAGHURAM G RAJAN
DEVELOPED countries, hobbled by high levels of household and government debt, are hoping that emerging markets will shoulder the burden of expanding global consumption and investment.
No shoe-in: China will not reform overnight and begin demanding huge amounts of consumer goods. But this could happen over time - indeed, China's 2011 economic plan emphasises the expansion of domestic demand
Clearly, consumption in poorer countries, such as Brazil, China, and India, as well as in Africa and the Middle East, is far lower than average consumption levels in richer ones, and so is their average physical capital - houses, roads, sewerages, and so on. There is clearly room for growth here.
Shifting future growth in spending from industrial countries to emerging markets also has a corresponding environmental benefit: since the production of physical goods, such as housing and cars, takes a toll on the environment, it is better for spending to go to moving the slum dweller in Cambodia into a brick house - a process that will happen sooner or later - than to moving the suburban American couple into a house with even bigger bedrooms that they will likely never use. Such an outcome may be the environmentally sustainable solution to both global trade imbalances and the incipient currency wars. So how to best bring about this necessary shift in global demand?
Growing domestic demand
Some change is already happening. The lesson China seems to have learned from the Great Recession is that it needs to reduce its dependence on foreign demand. The Chinese know that they cannot continue growing at double-digit rates without encountering protectionist barriers. While much of the world has fixated on China's manipulation of the yuan's value to expand domestic demand, Beijing knows that it is as important to reduce the pro-producer bias in its domestic policy, so as to boost household incomes and consumption.
In practice, this means increasing wages, raising interest rates for household bank deposits, and improving the delivery of health and educational services; at the same time, the government is raising corporate taxes and lowering corporate subsidies on inputs such as energy and land. The Chinese government is also encouraging investment in infrastructure to link the poorer, interior western provinces with the richer, coastal ones.
Exchange rate moves
Of course, various economic sectors in China are opposed to change, from China's cash-rich state-owned corporations and banks to foreign firms with production facilities in China that benefit from the low exchange rate. They will fight any loss of their privilege. China will not reform overnight and begin demanding huge amounts of consumer goods. But this could happen over time - indeed, China's 12th five-year plan, to be implemented beginning in early 2011, emphasises the expansion of domestic demand.
Other emerging markets, such as Brazil and India, which have historically not repressed consumption as severely as China, are already on a buying binge, buoyed by growing inflows of foreign capital. Trade among emerging-market countries is increasing rapidly. To facilitate this growth in demand, emerging countries will have to allow their real exchange rates to appreciate - either voluntarily, by accepting revaluations of their currencies, or involuntarily, by having higher inflation.
All this, however, raises an important question: Can emerging markets manage to increase their domestic spending in a more stable way than in the past, or will they experience yet another credit boom followed by a bust?
Assertive regulation
To keep the past from repeating, regulators in both emerging markets and developed economies will have to be more assertive. To ensure that foreign capital inflows do not once again support nonviable investments and irresponsible lending, foreign investors need to be exposed to the full risk of losses. At the same time, domestic financial firms should not have the incentive to expand their balance sheets rapidly when money is cheap.
Regulators in a country receiving capital should discourage short-term foreign-currency-denominated loans to their banking system. Instead, they should encourage foreign investors to make long-term direct loans to domestic nonfinancial firms, denominated in the local currency. Government regulators should increase capital requirements, tighten liquidity requirements, and limit leverage for domestic financial firms when credit expands rapidly.
Finally, domestic regulators should also improve their national bankruptcy systems so that investors will take a quick and relatively predictable hit when projects fail.
Biting the bullet
At the same time, regulators in countries with outward capital flows should be careful that their major financial institutions are not overly exposed to any one region, country, or sector. Irish taxpayers should not have to bail out their banks' bondholders simply because these bonds are held by British and German banks. Large cross-border banking firms currently operate with impunity, knowing they are virtually impossible to shut down and will therefore be bailed out when in danger.
Reaching an international accord on how to close these banks when they get into trouble will be difficult but important. Finally, multilateral institutions, such as the IMF, should force investors in a country's debt to take a significant loss if those institutions have to step in to bail the country out - or else taxpayers will end up having to pay both those institutions and the investors.
How best to include clear and transparent triggers for write-downs in debt contracts is not an easy question - but not an impossible one, either.
All these measures will raise the direct costs to emerging markets of borrowing and will make foreign investors more careful about lending. Higher direct costs will be more than offset by the benefits of more productive and sensible investments, not to mention the decreased likelihood of future busts.
A triple mandate?
The slowdown in spending by the industrial world will give emerging markets strong incentives to shift their growth strategies away from exports - stronger, in fact, than might emerge from any agreement produced by international summitry.
But will 'the Great Spender', the United States, cooperate and avoid yet again pumping up demand excessively? US households have certainly increased their savings rates in response to the recession and are trying to pay down their debt. But what is worrying is that many of the efforts of the Federal Reserve and the Obama administration - whether to keep interest rates very low or offer new tax benefits and government-supported credit for home purchases - have been meant to encourage household spending.
In the meantime, reduced government revenues and increased spending - the usual effects of a recession - have been coupled with repeated stimulus packages, which has led to a ballooning of public debt.
As in past recessions, Washington's central concern is job creation. Unfortunately, many of the jobs that were lost at the onset of the latest downturn were tied to construction: not only construction workers themselves but many of the supporting workers, such as home improvement contractors or real estate brokers and lenders, lost their jobs, as did those people who worked in manufacturing construction materials.
Given the extent of overbuilding during the last decade, it is unlikely that government spending or low interest rates will bring these jobs back. Instead, unemployed construction workers will have to gain new skills or relocate to areas that have jobs. In other words, the jobs recovery will require politicians to have new ideas, time, and patience - all of which are in short supply given the political pressure.
More generally, Washington must focus more on tailoring the skills and education of the US work force to the jobs that are being created, rather than hankering after the old jobs eliminated by technology or overseas competition. In this light, the Obama administration's focus on improving educational standards by measuring student performance, evaluating teachers' abilities, and increasing competition between schools is appropriate; indeed, such reform efforts should be pushed with even greater urgency.
The Fed as stabiliser
The United States also needs a better social safety net, not only to reassure workers but also to ensure that slow recoveries do not result in frenetic, and ultimately excessive, stimulus spending.
Finally, a more stable and less aggressive US monetary policy will not only lead to more sustainable US growth; it will also reduce the volatility of capital flows coming into and out of emerging markets. Given the thin safety net, the political pressure on the Federal Reserve to be adventurous with monetary policy when unemployment is high is enormous.
But such pressure can be counterproductive if the Fed's aggressive policies have little direct effect on employment but instead generate asset price bubbles and risky lending, which eventually impose high costs on the economy, including greater unemployment.
It is debatable whether Congress should force the Fed to take seriously its de facto role as the rate setter for the world and unlikely that Congress will ever expand the Fed's mandate to do so.
At the very least, however, the Fed's mandate should be extended to include financial stability explicitly, on par with its current responsibilities to keep inflation low and maximise employment.
The writer is professor of finance at the Booth School of Business at the University of Chicago and the author of 'Fault Lines: How Hidden Fractures Still Threaten the World Economy'. This article is sourced from Foreign Affairs, a publication of the US Council of Foreign Affairs. This is the third in a series drawn from a longer article in the March/April edition
April 5, 2011, 2:00 p.m. EDT
Fed's post-QE2 debate underway:
By Greg Robb WASHINGTON (MarketWatch) - The Federal Reserve began at its March 15 meeting to debate the possible course of monetary policy after the $600 billion bond-buying program ends in June, according to the minutes of the meeting released Tuesday. A few Fed members said that economic conditions might unfold in a way that would warrant the launch of an exit plan this year. At the same time, a few others noted that the Fed's ultra-low monetary policy may be appropriate "beyond 2011." There was a lengthy discussion of the prospects of inflation in the wake of the sharp increase in oil and food prices. In the end, several Fed officials said that their forecasts of inflation had "shifted somewhat to the upside." Economic growth appeared to be on "firmer footing," the Fed officials said.
Published April 5, 2011
Emerging out of the growth ditch
A shift in global growth to emerging markets requires several changes in the financial infrastructure
By RAGHURAM G RAJAN
DEVELOPED countries, hobbled by high levels of household and government debt, are hoping that emerging markets will shoulder the burden of expanding global consumption and investment.
No shoe-in: China will not reform overnight and begin demanding huge amounts of consumer goods. But this could happen over time - indeed, China's 2011 economic plan emphasises the expansion of domestic demand
Clearly, consumption in poorer countries, such as Brazil, China, and India, as well as in Africa and the Middle East, is far lower than average consumption levels in richer ones, and so is their average physical capital - houses, roads, sewerages, and so on. There is clearly room for growth here.
Shifting future growth in spending from industrial countries to emerging markets also has a corresponding environmental benefit: since the production of physical goods, such as housing and cars, takes a toll on the environment, it is better for spending to go to moving the slum dweller in Cambodia into a brick house - a process that will happen sooner or later - than to moving the suburban American couple into a house with even bigger bedrooms that they will likely never use. Such an outcome may be the environmentally sustainable solution to both global trade imbalances and the incipient currency wars. So how to best bring about this necessary shift in global demand?
Growing domestic demand
Some change is already happening. The lesson China seems to have learned from the Great Recession is that it needs to reduce its dependence on foreign demand. The Chinese know that they cannot continue growing at double-digit rates without encountering protectionist barriers. While much of the world has fixated on China's manipulation of the yuan's value to expand domestic demand, Beijing knows that it is as important to reduce the pro-producer bias in its domestic policy, so as to boost household incomes and consumption.
In practice, this means increasing wages, raising interest rates for household bank deposits, and improving the delivery of health and educational services; at the same time, the government is raising corporate taxes and lowering corporate subsidies on inputs such as energy and land. The Chinese government is also encouraging investment in infrastructure to link the poorer, interior western provinces with the richer, coastal ones.
Exchange rate moves
Of course, various economic sectors in China are opposed to change, from China's cash-rich state-owned corporations and banks to foreign firms with production facilities in China that benefit from the low exchange rate. They will fight any loss of their privilege. China will not reform overnight and begin demanding huge amounts of consumer goods. But this could happen over time - indeed, China's 12th five-year plan, to be implemented beginning in early 2011, emphasises the expansion of domestic demand.
Other emerging markets, such as Brazil and India, which have historically not repressed consumption as severely as China, are already on a buying binge, buoyed by growing inflows of foreign capital. Trade among emerging-market countries is increasing rapidly. To facilitate this growth in demand, emerging countries will have to allow their real exchange rates to appreciate - either voluntarily, by accepting revaluations of their currencies, or involuntarily, by having higher inflation.
All this, however, raises an important question: Can emerging markets manage to increase their domestic spending in a more stable way than in the past, or will they experience yet another credit boom followed by a bust?
Assertive regulation
To keep the past from repeating, regulators in both emerging markets and developed economies will have to be more assertive. To ensure that foreign capital inflows do not once again support nonviable investments and irresponsible lending, foreign investors need to be exposed to the full risk of losses. At the same time, domestic financial firms should not have the incentive to expand their balance sheets rapidly when money is cheap.
Regulators in a country receiving capital should discourage short-term foreign-currency-denominated loans to their banking system. Instead, they should encourage foreign investors to make long-term direct loans to domestic nonfinancial firms, denominated in the local currency. Government regulators should increase capital requirements, tighten liquidity requirements, and limit leverage for domestic financial firms when credit expands rapidly.
Finally, domestic regulators should also improve their national bankruptcy systems so that investors will take a quick and relatively predictable hit when projects fail.
Biting the bullet
At the same time, regulators in countries with outward capital flows should be careful that their major financial institutions are not overly exposed to any one region, country, or sector. Irish taxpayers should not have to bail out their banks' bondholders simply because these bonds are held by British and German banks. Large cross-border banking firms currently operate with impunity, knowing they are virtually impossible to shut down and will therefore be bailed out when in danger.
Reaching an international accord on how to close these banks when they get into trouble will be difficult but important. Finally, multilateral institutions, such as the IMF, should force investors in a country's debt to take a significant loss if those institutions have to step in to bail the country out - or else taxpayers will end up having to pay both those institutions and the investors.
How best to include clear and transparent triggers for write-downs in debt contracts is not an easy question - but not an impossible one, either.
All these measures will raise the direct costs to emerging markets of borrowing and will make foreign investors more careful about lending. Higher direct costs will be more than offset by the benefits of more productive and sensible investments, not to mention the decreased likelihood of future busts.
A triple mandate?
The slowdown in spending by the industrial world will give emerging markets strong incentives to shift their growth strategies away from exports - stronger, in fact, than might emerge from any agreement produced by international summitry.
But will 'the Great Spender', the United States, cooperate and avoid yet again pumping up demand excessively? US households have certainly increased their savings rates in response to the recession and are trying to pay down their debt. But what is worrying is that many of the efforts of the Federal Reserve and the Obama administration - whether to keep interest rates very low or offer new tax benefits and government-supported credit for home purchases - have been meant to encourage household spending.
In the meantime, reduced government revenues and increased spending - the usual effects of a recession - have been coupled with repeated stimulus packages, which has led to a ballooning of public debt.
As in past recessions, Washington's central concern is job creation. Unfortunately, many of the jobs that were lost at the onset of the latest downturn were tied to construction: not only construction workers themselves but many of the supporting workers, such as home improvement contractors or real estate brokers and lenders, lost their jobs, as did those people who worked in manufacturing construction materials.
Given the extent of overbuilding during the last decade, it is unlikely that government spending or low interest rates will bring these jobs back. Instead, unemployed construction workers will have to gain new skills or relocate to areas that have jobs. In other words, the jobs recovery will require politicians to have new ideas, time, and patience - all of which are in short supply given the political pressure.
More generally, Washington must focus more on tailoring the skills and education of the US work force to the jobs that are being created, rather than hankering after the old jobs eliminated by technology or overseas competition. In this light, the Obama administration's focus on improving educational standards by measuring student performance, evaluating teachers' abilities, and increasing competition between schools is appropriate; indeed, such reform efforts should be pushed with even greater urgency.
The Fed as stabiliser
The United States also needs a better social safety net, not only to reassure workers but also to ensure that slow recoveries do not result in frenetic, and ultimately excessive, stimulus spending.
Finally, a more stable and less aggressive US monetary policy will not only lead to more sustainable US growth; it will also reduce the volatility of capital flows coming into and out of emerging markets. Given the thin safety net, the political pressure on the Federal Reserve to be adventurous with monetary policy when unemployment is high is enormous.
But such pressure can be counterproductive if the Fed's aggressive policies have little direct effect on employment but instead generate asset price bubbles and risky lending, which eventually impose high costs on the economy, including greater unemployment.
It is debatable whether Congress should force the Fed to take seriously its de facto role as the rate setter for the world and unlikely that Congress will ever expand the Fed's mandate to do so.
At the very least, however, the Fed's mandate should be extended to include financial stability explicitly, on par with its current responsibilities to keep inflation low and maximise employment.
The writer is professor of finance at the Booth School of Business at the University of Chicago and the author of 'Fault Lines: How Hidden Fractures Still Threaten the World Economy'. This article is sourced from Foreign Affairs, a publication of the US Council of Foreign Affairs. This is the third in a series drawn from a longer article in the March/April edition
Why Yen Repatriation Theory is All Wrong
The JPY has always tended to strengthen against USD due to their trade surplus against the US. That's why they persistently require Jap Govt intervention. The Jap govt was under pressure from their colonial masters the US not to intervene so that the US can dig themselves out of their economic hole, and so that Obama has a change of getting re-elected in 2012.
But with the earthquake and radiation leakage, there was an unprecendented intervention by G7 countries to intervene against the Yen strengthening. PLUS, the issuance of Japanese govt bonds to finance the rebuilding would have made bond investors jittery. As a result, whatever JPY that has been repatriated cannot outdo the immense monetary easing / quantitative easing that is to come.
Moral of the story: Never fight the governments. Never fight the Fed. You can never win. a weak JPY is "blessed" by G7. It means stock markets will rally.
Published April 5, 2011
Why yen repatriation theory is all wrong
Investors and insurance firms don't need to bring back assets in the wake of the quake
By TAISUKE TANAKA
FOLLOWING the devastating Tohoku earthquake on March 11, the markets assumed that Japan's vast need for financial resources during the reconstruction would bring about a significantly stronger yen. This would happen, the thinking went, because insurance companies and individuals would repatriate large amounts of money they had been investing overseas.
Irrational: Traders pushed the yen beyond 80 against the US dollar for the first time in 16 years on March17 and the G-7 intervened to stabilise the market. Repatriation by retail investors and insurers is unlikely to be sufficiently large to support the yen strength witnessed in the quake's immediate aftermath.
This belief became a self-fulfilling prophecy, as traders pushed the yen beyond 80 against the US dollar for the first time in 16 years on March 17, reaching a record 76.25. The G-7 launched a global currency intervention to stabilise the market.
The only problem is that this investment rationale is a myth. Financial repatriation by retail investors, non-life insurers and life insurers is unlikely to be sufficiently large to support the yen strength witnessed in the quake's immediate aftermath.
To understand why, look at each of the most affected investor classes in turn. The first class is the retail investor base. These investors hold around 25 trillion yen (S$376 billion) offshore. They haven't been repatriating those holdings in large quantities since the disaster, and are unlikely to start now.
History shows that retail investors are willing to send money abroad amid a wide variety of disasters. Of the 107 months since April 2002, only seven of those months have seen net selling of foreign currencies and purchases of yen, including during the most intense periods of global turmoil after the September 2008 collapse of Lehman Brothers. Japanese tend to view overseas investments as medium to long-term sources of income, not rainy-day funds for emergencies.
Early signs show this pattern will continue now. On March 23, a new investment trust managed by Nomura Asset Management raised 29.5 billion yen to invest in US equities, with options to take on separate currency exposure. Overall, Japanese investors were net buyers of foreign securities during the week of March 13-19.
Other factors also affect retail investor behaviour in the wake of the earthquake. Investors in the region most affected by the earthquake and tsunami - who would be most likely to repatriate money to finance reconstruction - have below-average holdings of foreign currency assets. The population of the devastated region has long been conservative in its investment choices.
Meanwhile, owners of foreign currency assets nationwide are unlikely to need to repatriate foreign investment capital to meet current needs for money. Ownership of foreign currency assets increases with income, and those with foreign assets generally have a significant amount of local savings already.
Then there are insurers. The burden facing non-life insurers is not as severe as might at first appear. True, they will face large payouts for policies on commercial properties. But their exposure in the residential market is limited by the government's Japan Earthquake Reinsurance (JER) programme.
In Japan, the majority of the insurance burden for residential property is transferred to the government and to JER. Even if total insured losses reach one trillion yen as reported by the Nikkei on March 21 (and this would be 13 times bigger than the losses endured following the Kobe earthquake of 1995), insurance payments would have almost no impact on the foreign exchange market.
In this scenario, the government would absorb roughly 44 per cent of the losses and JER would pay around 11.5 per cent. Thus, the burden for non-life insurers would reach only around 442.5 billion yen. This is only slightly more than half the 787 billion in yen cash and deposits held by insurers, according to the General Insurance Association of Japan.
JER also holds plenty of liquid assets: 22.4 billion of cash and deposits and 457.3 billion of government bonds.
Reinsurance payments
Meanwhile, although reinsurance flows related to policies on commercial property could reach 891 billion yen, this is smaller than the two trillion anticipated by some offshore investors. Moreover, reinsurance payments are likely to be spread over several months. Hence, these flows will not be sufficiently large to affect overall yen trading dynamics.
Expectations of repatriation of assets by life insurance companies have also been overblown. Insurance payments following the 1995 Kobe earthquake were only 48.8 billion yen, smaller than the amount paid by non-life insurers (78.3 billion yen). While the death toll from last month's disaster may be higher, the balance sheets of life insurers also are much bigger than those of non-life insurers. Life insurers hold more than two trillion yen in onshore cash and deposits, making it unlikely they'll need to repatriate significant amounts.
The earthquake will have an effect on the yen, but it will be different than what is commonly expected. The disaster may make Japanese investors hesitant to expand overseas risk-taking at the same rate as before - net outflows may remain, but they won't be as big as before. By reducing a depreciation pressure, this will ease up one of the brakes on the longer-term appreciation trend.
Overall, then, the G-7 was right to intervene when it did to stabilise the market. Absent the repatriation myth, there was no reason for foreign exchange markets to behave as they did, and the instability was dangerous at a time when Japan's economy can least afford a further negative shock.
Japan's recovery will be helped by maintaining the yen at a more appropriate level.
The writer is chief foreign exchange strategist and head of foreign exchange research, Japan, for Nomura Securities
But with the earthquake and radiation leakage, there was an unprecendented intervention by G7 countries to intervene against the Yen strengthening. PLUS, the issuance of Japanese govt bonds to finance the rebuilding would have made bond investors jittery. As a result, whatever JPY that has been repatriated cannot outdo the immense monetary easing / quantitative easing that is to come.
Moral of the story: Never fight the governments. Never fight the Fed. You can never win. a weak JPY is "blessed" by G7. It means stock markets will rally.
Published April 5, 2011
Why yen repatriation theory is all wrong
Investors and insurance firms don't need to bring back assets in the wake of the quake
By TAISUKE TANAKA
FOLLOWING the devastating Tohoku earthquake on March 11, the markets assumed that Japan's vast need for financial resources during the reconstruction would bring about a significantly stronger yen. This would happen, the thinking went, because insurance companies and individuals would repatriate large amounts of money they had been investing overseas.
Irrational: Traders pushed the yen beyond 80 against the US dollar for the first time in 16 years on March17 and the G-7 intervened to stabilise the market. Repatriation by retail investors and insurers is unlikely to be sufficiently large to support the yen strength witnessed in the quake's immediate aftermath.
This belief became a self-fulfilling prophecy, as traders pushed the yen beyond 80 against the US dollar for the first time in 16 years on March 17, reaching a record 76.25. The G-7 launched a global currency intervention to stabilise the market.
The only problem is that this investment rationale is a myth. Financial repatriation by retail investors, non-life insurers and life insurers is unlikely to be sufficiently large to support the yen strength witnessed in the quake's immediate aftermath.
To understand why, look at each of the most affected investor classes in turn. The first class is the retail investor base. These investors hold around 25 trillion yen (S$376 billion) offshore. They haven't been repatriating those holdings in large quantities since the disaster, and are unlikely to start now.
History shows that retail investors are willing to send money abroad amid a wide variety of disasters. Of the 107 months since April 2002, only seven of those months have seen net selling of foreign currencies and purchases of yen, including during the most intense periods of global turmoil after the September 2008 collapse of Lehman Brothers. Japanese tend to view overseas investments as medium to long-term sources of income, not rainy-day funds for emergencies.
Early signs show this pattern will continue now. On March 23, a new investment trust managed by Nomura Asset Management raised 29.5 billion yen to invest in US equities, with options to take on separate currency exposure. Overall, Japanese investors were net buyers of foreign securities during the week of March 13-19.
Other factors also affect retail investor behaviour in the wake of the earthquake. Investors in the region most affected by the earthquake and tsunami - who would be most likely to repatriate money to finance reconstruction - have below-average holdings of foreign currency assets. The population of the devastated region has long been conservative in its investment choices.
Meanwhile, owners of foreign currency assets nationwide are unlikely to need to repatriate foreign investment capital to meet current needs for money. Ownership of foreign currency assets increases with income, and those with foreign assets generally have a significant amount of local savings already.
Then there are insurers. The burden facing non-life insurers is not as severe as might at first appear. True, they will face large payouts for policies on commercial properties. But their exposure in the residential market is limited by the government's Japan Earthquake Reinsurance (JER) programme.
In Japan, the majority of the insurance burden for residential property is transferred to the government and to JER. Even if total insured losses reach one trillion yen as reported by the Nikkei on March 21 (and this would be 13 times bigger than the losses endured following the Kobe earthquake of 1995), insurance payments would have almost no impact on the foreign exchange market.
In this scenario, the government would absorb roughly 44 per cent of the losses and JER would pay around 11.5 per cent. Thus, the burden for non-life insurers would reach only around 442.5 billion yen. This is only slightly more than half the 787 billion in yen cash and deposits held by insurers, according to the General Insurance Association of Japan.
JER also holds plenty of liquid assets: 22.4 billion of cash and deposits and 457.3 billion of government bonds.
Reinsurance payments
Meanwhile, although reinsurance flows related to policies on commercial property could reach 891 billion yen, this is smaller than the two trillion anticipated by some offshore investors. Moreover, reinsurance payments are likely to be spread over several months. Hence, these flows will not be sufficiently large to affect overall yen trading dynamics.
Expectations of repatriation of assets by life insurance companies have also been overblown. Insurance payments following the 1995 Kobe earthquake were only 48.8 billion yen, smaller than the amount paid by non-life insurers (78.3 billion yen). While the death toll from last month's disaster may be higher, the balance sheets of life insurers also are much bigger than those of non-life insurers. Life insurers hold more than two trillion yen in onshore cash and deposits, making it unlikely they'll need to repatriate significant amounts.
The earthquake will have an effect on the yen, but it will be different than what is commonly expected. The disaster may make Japanese investors hesitant to expand overseas risk-taking at the same rate as before - net outflows may remain, but they won't be as big as before. By reducing a depreciation pressure, this will ease up one of the brakes on the longer-term appreciation trend.
Overall, then, the G-7 was right to intervene when it did to stabilise the market. Absent the repatriation myth, there was no reason for foreign exchange markets to behave as they did, and the instability was dangerous at a time when Japan's economy can least afford a further negative shock.
Japan's recovery will be helped by maintaining the yen at a more appropriate level.
The writer is chief foreign exchange strategist and head of foreign exchange research, Japan, for Nomura Securities
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