Russia’s Energy Joys and Woes
Like central banks in many emerging-market countries, Russia’s central bank has spent almost a decade building up the country’s gold reserves. In 2005, three years after Gordon Brown ended his disastrous liquidation of 400 tons of British gold at two-decade lows, Putin gave the order to start buying. Russia is the world’s largest oil producer, and the price of an ounce of gold had hit a low, in terms of oil, of 6.5 barrels. Today, gold is selling for about 15 barrels of Brent Crude. Putin saw the chance for his resource nationalism to strengthen Russia against future shocks to the global financial system, and he took it. The past decade has vindicated him, and the medium- and long-term fundamentals of gold strong and likely to get stronger as events unfold (continuing QE, the repatriation of gold held abroad to its home banks, and other global trends discussed in our recent conference call), become a gold subscriber today and listen to the replay. To learn more about Gold Subscription, please click the following link: Gold Subscription
Pulling Japanese Savers’ Cash into Equities, Abe Administration Rolls Out New Tax Incentives
As we noted two weeks ago, Japanese citizens are sitting on some $17 trillion — the largest part of it in cash. After the bursting of their asset bubble and the collapse of their stock market in the 90s, the Japanese decided to sit on their cash. In a deflationary environment, such risk-averse behavior is eminently rational. Japan’s new prime minister, Shinzo Abe, is fundamentally focused on liberating this cash hoard — thus overcoming the disconnect between savings and investment which has been one key factor choking the Japanese economy. Analysts estimate that if just 5 percent of dormant household assets were shifted out of cash, the amount would represent about 40 percent of the Nikkei’s current market cap…
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Meanwhile, in the U.S., Money-Market Funds Turn to Risky Business
Asset allocations are shifting in the U.S. as well. In December of 2012, Federal guarantees expired on deposits over $250,000 held in zero-interest checking accounts by businesses, municipalities, and nonprofits. Analysts estimate that some $250 billion will now be looking for the next safest home — and traditionally that has meant money-market funds. The inflow from November to the end of January was $149 billion.
In response, some money-market funds, which have already eliminated most management fees so as not to generate a nominal loss for their customers, are beginning to make some dangerous moves — buying debt that until recently they would have considered too risky.
Traditionally, money-market funds have held short-term, top-rated debt, such as U.S. Treasury bonds. Now we are seeing the pressure of inflows beginning to drive them to riskier, longer-term debt. One fund manager noted in the Wall Street Journal that his firm’s exposure to French bank debt has gone from 10 percent to 15 percent, and the average maturity of debt held has increased from 10 to 40 days. Longer maturity can mean a greater risk of default.
Source: Wall Street Journal
In December, French bank debt made up 6.5 percent of U.S. money-market fund assets, the highest since late 2011. Europe is on the mend, but recent swings in Spanish and Italian bond prices show they are far from being out of the woods. We agree with analysts who suggest that funds’ squeezing out a few incremental basis points is not worth taking on more aggressively risky assets.
If you are unsure about the exposure of your money-market fund to riskier debt, Guild Investment Management can advise you.
Inflationary Expectations: When Inflation Picks Up, What Prices Will You Care About Most?
Inflation in the U.S. remains subdued. Consumer Prices (as measured by the current Bureau of Labor Statistics’ consumer basket), was up only 1.7 percent in 2012. Meanwhile, prices at the wholesale level, often referred to as Producer Prices were up only about 1.4 percent for the year. In short, the government’s measures paint a benign picture on prices. The low inflation data allows the Fed to keep interest rates near zero, and gives the Fed latitude to continue to stimulate the economy through asset purchases. Their current asset purchase programs effectively print 85 billion dollars each month.
This newly-printed money finds its way into the financial system, asset markets, and commodities. Eventually its effects show up in the prices of items that people purchase every day. In calculating consumer prices, the Bureau of Labor Statistics (BLS) classifies consumer expenditures into more than 200 categories. According to the BLS’s website, these categories are arranged into the following eight major groups, and it highlights some of the components as follows:
- FOOD AND BEVERAGES (breakfast cereal, milk, coffee, chicken, wine, full service meals, snacks)
- HOUSING (rent of primary residence, owners’ equivalent rent, fuel oil, bedroom furniture)
- APPAREL (men’s shirts and sweaters, women’s dresses, jewelry)
- TRANSPORTATION (new vehicles, airline fares, gasoline, motor vehicle insurance)
- MEDICAL CARE (prescription drugs and medical supplies, physicians’ services, eyeglasses and eye care, hospital services)
- RECREATION (televisions, toys, pets and pet products, sports equipment, admissions)
- EDUCATION AND COMMUNICATION (college tuition, postage, telephone services, computer software and accessories)
- OTHER GOODS AND SERVICES (tobacco and smoking products, haircuts and other personal services, funeral expenses).
The BLS also makes periodic changes to what is in the representative basket and what weights are used. As of July 2012, the basket looked like this:
Often People Complain that Prices are Going up Faster than the Government’s Inflation Statistics Suggest
We maintain that the frequent adjusting and seasonal smoothing within the data serves to understate the rising cost of living. Obviously, not all of the components within the consumer basket carry the same degree of importance. In the Guild Basic Needs IndexTM (GBNI), we focus on certain food, clothing, shelter, and energy items that are being consumed by Americans every minute of every day. In our view, basic, essential needs are not subject to preference or fashion. We believe tracking the rising costs of these items is perhaps more important than following the prices of a consumer basket filled with non-essential items, and is adjusted and manipulated frequently.
Plotting the prices of the components within the GBNI may lead to a more volatile chart (see our charts below), however tracking them can help one understanding the fundamental trends that underlie economic decisions made by people every day.
Household Income and the Cost of Living
When income doesn’t keep up with rising prices, the standard of living falls and behaviors change. Investors should pay attention. In our research, the cost of basic needs is rising much faster than incomes. The shrinking difference between the two represents money that is available for households’ discretionary spending, savings, and investment. We also argue that this shrinking pool of savings and investment capital at the household level is one of the reasons the Federal Reserve is inclined to keep printing nearly a trillion dollars per year.
Investors can follow the changes in prices of basic, essential needs in our letters and at www.gbni.info. After all, the cost of living will have an impact on investment and asset markets.
Guild Basic Needs IndexTM
With household incomes stagnant since 2000, and the prices of certain basic needs up almost 80 percent in 13 years, the amount left over for discretionary spending and investing is compressed.
In this week’s Premium Global Market Commentary available to Gold Subscribers, we discuss:
- Guild Investment Management Weekly Global Market Summary
In this week’s global market summary we provide our analysis on gold. We also have an update to our recommendations.
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