Thursday, December 22, 2011

What's Going On With Gold?

There is a striking similarities between today's situation and what happened back in 2008. 

Specifically, we're referring to the liquidity crunch that jolted the financial markets in the period that led up to the collapse of Lehman Brothers.

At that time gold was one of the last remaining sources of liquidity - and so it is today, which is why the yellow metal has been under such intense selling pressure lately. And this is happening even though all the fundamentals would suggest it should at least be retaining its value, if not be rising in price.

Gold was an important bellwether at that time, and again, so it seems to be now. Beginning in March of 2008, gold declined by about 15 percent while the S&P 500 moved sideways. Then it rallied briefly before falling once more along with stocks - which declined much more percentage-wise before bottoming.

Gold lost a third of its value during this episode, before recovering and heading steadily higher. But stocks declined by more than 50 percent at their lows, and to date have yet to surpass former highs.

Coming back to today, we see that despite the ups and downs of this past very volatile year, stocks have essentially traded sideways. Gold, though, has now fallen more than 15 percent from its previous highs and, as we pointed out two weeks ago, the gold shares far underperform the Midas metal.

Thus, we see how this price action may once again be signaling a sharp selloff in stocks in the near future. At the very least, gold and stocks could remain mired in a trading range for a time, at least until the ECB (most likely joined by our own Federal Reserve) take concrete steps to resolve the situation.

The shape of such a favorable resolution is likely to be a clear and definitive policy of easing by the Europeans, possibly accompanied by a QE3 from our own Fed.

That would help to light a fire under the stock market, which by and larger are trading at very reasonable levels relative to sales, cash flow and earnings. Moreover, the prospects for gold will then involve a rebound that should take the metal far higher than its 2011 highs.

Courtesy: Stephen Leebs

Moody's upgrades India's Sovereign Debt Ratings

Upbeat finance ministry to announce supporting measures for boosting foreign investment by December-end.

At a time when sluggish growth and impending slippage in fiscal deficit target, intertwined with an atmosphere of policy paralysis, has been dampening economic spirits across the board, Moody’s on Wednesday changed the sentiment in India by upgrading the country’s sovereign debt ratings from speculative to investment grade.

The upgrade immediately injected adrenaline into the government machinery, especially the finance ministry.

Officials, now brimming with optimism over the shift in the foreign investors’ outlook for the country, have indicated announcement of steps soon after the close of the ongoing Parliament session — in the government’s efforts to boost foreign investment in the country.

INDIA’S REPORT CARD What rating agencies say about the nation
 Foreign currency long-term debtLocal currency long-term debt
DBRSBBB (low) stableBBB (low) stable
Moody’sBaa3 (investment grade)Baa3 (investment grade)
FitchBBB- (stable outlook)BBB- (stable outlook)
S&PBBB- (stable)BBB- (stable)
Source: Rating agencies

The measures likely to be announced by December-end include relaxation in the lock-in and residual maturity norms for investments in the infrastructure sector, according to an official. “Also, there can be a hike in investment caps, wherever necessary.”

The lock-in period and the residual maturity are expected to be reduced to one year for all infrastructure investments.

The government says this will enthuse FIIs to look at India as an attractive investment destination. “The upgrade will have an amazing effect on sentiments in the short term,” says Thomas Mathew, joint secretary, capital markets.

Moody’s Investor Service upgraded the rating on long-term government bonds denominated in domestic currency and long-term country ceiling on foreign currency bank deposits, both, from Ba1 to Baa3 — speculative to investment grade. 

Year 2004 was the last time Moody’s upgraded any Indian long-term sovereign debt instrument from speculative to investment grade.

In addition, the rating agency has also upgraded the short-term government bonds denominated in domestic currency from NP to P-3, again from speculative to investment grade. The rating has been upgraded in this case for the first time since it was assigned in 1998.

The upgrade follows a meeting last month between the representatives of the rating agency and finance ministry officials. The officials, led by R Gopalan, secretary to the department of economic affairs, impressed upon Moody’s to upgrade the country’s rating to Baa1 — two notches above its current rating.

The ministry, under a planned strategy for strongly presenting the India growth story and seeking better ratings, provided a detailed, data-based “India factsheet”, wealth in the public sector undertakings, and a cross-country comparison of long-term economic, fiscal and financial indicators to the rating agency.

Says an official, who was part of the presentation process: “We told them to analyse their India ratings in the last two decades and the country’s performance during the period and showed them that they didn’t match. 

Despite problems, India growth story has remained intact since 1991.”
Mathew says the government will ask for similar upgrades from other rating agencies now. “Moody’s should revise its ratings further two notches upwards,” he adds.

Moody’s has now recognised that the “diverse sources of Indian growth” have “enhanced its resilience to global shocks”. The present slowdown in growth rates “could reverse some time in financial year 2012-13, as inflation cools from current 9 per cent levels”, it says in its report. The structural drivers of India’s growth momentum will not be damaged by the present cyclical downturn, it says
Moody’s also expect that growth, supported by savings and investments, will revive over the medium term. “In terms of economic size, diversity, growth as well as saving and investment rates, India is stronger that baa3 rated peers,” it notes.

The rating agency has, however, pointed out that India’s weak “fiscal metrics” remained a constraint for the nation’s rating as government debt levels were higher than similarly rated nations.

“Improvement in government finances, coupled with enhancements to the investment climate and a reduction in infrastructure bottlenecks, could lead to the rating being considered for an upgrade from current levels,” said the agency in its report.

Still, a sustained rise in debt or “continued worsening of the balance of payments well beyond the period of current global uncertainty could trigger a downgrade”.


Thursday, December 8, 2011

Germany's History in Short.

The Germans' strict opposition to the monetary financing of governments isn't just petty legalism -- it's a bedrock principle, based in history, which was purposefully built into EU treaties and Bundesbank policies.
It's worth revisiting why the memory of hyperinflation has seared itself into the minds of many Germans, and how it's shaping their thinking and the future of the euro itself.
Imagine yourself among the wealthiest people in the world in 1914, holding 4.2 billion marks (then about $1 billion) in safe government bonds. Those bonds would have been nearly worthless 9 years later -- easily payable with, say, a 50 billion-mark banknote signed by Reichsbank President Rudolf Havenstein. Of course, you would need 45.8 billion marks in change, which illustrates one of the great ironies of hyperinflation: Everyone was always short of cash in the midst of a blizzard of paper.
Havenstein justified the continuous purchasing of government debt on the grounds that there was little choice given the national emergency. Havenstein thought the real sources of inflation were the legislature’s inability to balance its budget and the burden of reparations placed onGermany by the Allies at the end of World War I.
Despite millions starving, the demobilization of millions of soldiers, and a near civil war in the Ruhr, inflation creeped till 1919, then “galloped” until mid-1922. Then, in late 1922, it spiraled into hyperinflation as Germany refused to continue payments on the 132 billion gold marks levied on it at the London Ultimatum of May 1921.
Because Germany halted reparation payments, France decided to confiscate goods in kind and occupied the Ruhr, the center of German coal and steel might, in January 1923. In response, the Germans began a campaign of "passive resistance" that all but destroyed the mark. Havenstein felt that he had no choice but to continue printing money to support the Reich.
Hyperinflation wreaked havoc on Germans. People on fixed incomes suffered terribly. One poor elderly woman, whose life savings in Deutsche Bank were wiped out, later discovered that the bank didn't inform her because the stamp would have cost too much. The propertied middle class lost their savings after suffering deprivation throughout the war. Many sold possessions to raise cash for increasingly expensive "real goods" such as bread or meat. Housewives stood outside factories to collect their husband’s pay and spend it as quickly as possible. Businesses needed sacks of cash to pay workers. Famous photographs show money being carted in wheelbarrows; one possibly apocryphal story has a robber stealing the wheelbarrow rather than the money.
Eventually, industrialists gave up paying in marks, sometimes creating their own substitute scrip or paying workers in “three breads.” Cities and organizations also created their own monies. Retailers had to continually adjust prices, which gave considerable room for misunderstandings. The response was sometimes violent. In November 1923, mobs attacked Jewish shops around Alexanderplatz in Berlin. Similar attacks occurred across the country.
“Speculators,” bankers, and black-market dealers came in for particular criticism. One small savings bank organized a swap meet for buyers and sellers to eliminate the dishonest profiteers. As one eyewitness, quoted in Gerald D. Feldman's "The Great Disorder," put it:
A walk through the small salesroom with its tables and glass cases is heart-rending. There lie spread out so many lovely things so pleasing to the eye ... everything in short that once decorated a house is assembled here ... There is some old piece, a picture, a porcelain dish, a vase, which appears to the loving but unskilled eye of the owner as a true rarity and who, if she must part with it, wants to receive as much as possible. One now has to tell her that it has neither material nor artistic value, and the sick, embittered souls are always inclined to take this as a personal affront and bad will ... A look out the window -- there slides by the restless life of the metropolis, the fine silk stockings and expensive furs, there sit autos with the fat figures of profiteers, and here inside, in the quiet room, an impoverished Germany quietly and painfully weeps in its silent misery.
The hyperinflation also fomented a new and dangerous activism in German politics. The prime minister of Bavaria declared martial law. In October 1923, federal troops marched into Saxony and Thuringen to depose radical communists from government. Then, in November, Adolf Hitlerand General Erich Ludendorff attempted a Mussolini-like march on Berlin, in what's now known as the Beer Hall Putsch.
The putsch failed miserably, but Hitler continued to seize on the prevalent economic despair. He was briefly sent to prison where he wrote "Mein Kampf." Although he didn't gain power until January 1933, the link between reparations, financial crisis and the destruction of the mark proved ready rhetorical fodder.
Hyperinflation didn't lead to the rise of Hitler, but it undermined the legitimacy of the democraticWeimar Republic.
Millions of disaffected middle-class voters soon drifted to various splinter parties on the right. The center hollowed out, and subsequent coalition governments ruled on a tolerated-minority basis. German politics never really regained its balance in the mid-1920s, a time of relative economic stabilization -- and then came the Great Depression, government austerity packages and, ultimately, the rise of the Nazis.
Never again, the thinking goes today. And rightly so. But the fate of the euro zone depends on which historical lesson one draws from this episode. Are there circumstances in which monetizing government debt is appropriate -- or not?