|Central Bank Stock Purchases
There are More Tools in the Kit — We Expect to See them Used in the U.S. and Europe Before the Current Economic Malaise has Ended
So far, Japanese Prime Minister Shinzo Abe’s aggressive monetary easing is following pretty closely the prescription laid out in 1999 by a Princeton economics professor named Ben S. Bernanke. Back then, before the dotcom decline of 2000 and the 2008 crisis, Mr. Bernanke wrote the following in his appraisal how to help Japan regain its economic footing after 10 years of stagnation:
“Despite the apparent liquidity trap, monetary policymakers retain the power to increase nominal aggregate demand and the price level… [and] increased nominal spending and rising prices will lead to increases in real economic activity.”
That paper goes on to describe four central bank policies available to boost nominal prices. Abe campaigned explicitly on two of them last year.
First, in Bernanke’s words, was a commitment to zero interest rates — with an inflation target. Second was a depreciation of the Yen. The recent G20 meeting, which we comment on below, put the world’s finance ministers’ stamp of approval on Japan’s monetary easing, and recognized that Japan’s action was first and foremost dedicated to overcoming deflation and not to devaluing its currency. So much – at least temporarily — for the shades of “currency wars.”
Nevertheless, this “side effect” of Japan’s massive and unprecedented QE will be welcome and beneficial. Mr. Bernanke was of the opinion in 1999 that “a policy of aggressive depreciation of the Yen would by itself probably be enough to get the Japanese economy moving again.” The charitable public interpretation of Japan’s actions by the world’s financial movers and shakers is important because it shows that they understand the value of a dynamic Japan to the world economy — so much so that they are willing to overlook the devaluation of the Yen, and not scold or interfere…
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Singapore Faces a Double Squeeze to GDP: Demographics and Immigration Policy
Singapore, with two decades of strong growth under its belt, is facing an uncertain future — with European weakness undermining exports, a shifting landscape in electronics production that it has to navigate, unfavorable native demographics, and a deteriorating willingness to fuel its productivity by accepting foreign workers. Analysts suggest an annual GDP growth rate of just 2.5 percent over the next four years, down from 6.7 percent in the decade from 1991 to 2000:
Components of Singapore’s Trend GDP Growth: Labor Force and Productivity
The two components of the decline are a fall in labor productivity growth and a fall in labor force growth. The former is driven largely by structural factors in the Singaporean economy and by macroeconomic processes in the global economy. The latter has to do with Singaporean demographics and the state’s decision to shape immigration policy in a way that favors the interests of Singaporean natives.
The government’s recently published Population White Paper targets Singapore’s population to expand to 6.9 million by 2030 from 5.5 million today. There are various components to this target — a desire to ensure affordable housing for Singaporeans, and perhaps a desire to maintain Singapore’s ethnic makeup.
To achieve the government’s population growth target would require halving the number of immigrants over the next generation. With a fertility rate of 0.71, far below the replacement rate of 2.1, Singapore (like many developed nations) has relied on immigrants to bolster its labor force. Singapore’s most urgent labor shortages are in relatively low-skilled service and manufacturing jobs, and those are exactly the immigrants whose entry will be made more difficult by new policies…
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In our opinion, gold has completed a decline — from over $1,900 to under $1,350 — which is about a 35 percent decline of the entire move up in price from the bottom in 2002 to the top in 2011. After 11 years of price increases for gold, we are not surprised to see a sizeable decline. During the historic gold bull market of the 1970s, there were several such declines; and the fact that we have now had one in this bull market is actually reassuring to us. A normal pattern would be for gold to once again retest its bottom or stabilize above the former bottom over the next few weeks, and then proceed to build a base before beginning its next major move upward.
Over the last few years, the ownership of gold has shifted among central banks. Potential central bank sellers in Europe — should they develop — will be more than met by buyers from India, China, Korea, Sri Lanka, Russia, and several other countries. Among retail purchasers we are seeing substantial buying from Chinese and Indian consumers who hold gold for jewelry use and/or as a store of wealth. In recent days, there has been a big increase in demand for gold coins among private investors in North America, Asia, and Europe. Lower prices have attracted sustained buying by private holders of coins and bullion and by many central banks in Asia and Eastern Europe.
In 2012, Indian consumers purchased 37 percent of all gold sold, while Chinese consumers have also bought substantial amounts. The central banks of Korea, China, India, Sri Lanka, Turkey and Russia, among others have been recent goldbuyers…meanwhile Portugal and Cyprus are the possible sellers. We believe that demand from emerging countries and Russia will far outstrip sales by European central banks were they to be required to sell as part of the bailout process in Europe.
There are two types of individual holders of gold:
1) Insurance holders who own 5-15 percent of their portfolios in gold and are holding this against a rainy day.
2) The investment holder or bank account substitute holder. These holders are found in emerging markets where historically banks have been difficult to use, or unavailable. As a result, a traditional way to hold wealth has been in gold. India, China, Vietnam, Thailand, and other South and Southeastern Asian nations are in this category.
Gold holdings are held as by many millions of Europeans, Asians, and North Americans as an insurance policy…
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Inflation — The Dog that Hasn’t Barked
This past week, Core CPI in the U.S. surprised many market watchers when it only showed a 1.5 percent year-over-year increase through March. An International Monetary Fund (IMF) report this week likened inflation to the dog that didn’t bark, and asked “Has Inflation Been Muzzled Or Was It Just Sleeping?” They see economic slack (in employment and industrial capacity) as the key reason inflation has been kept in check. It is true that there remains slack in the economy, and the deep 2007-2009 recession has lingering effects. We also believe that one reason inflation has been kept in check is that the official inflation measure is only telling the story that officials want told.
We have believed that higher prices around the globe (especially for basic, essential needs that have limited supply) would be driven higher. We have been tracking the prices of many of these components in our Guild Basic Needs IndexTM(GBNI) in an effort to prove our theory.
The belief that higher inflation is on the horizon is founded on several facts. The first is that many hundreds of millions of people around the globe are increasing in their standard of living — eating more and better, owning more clothes, upgrading their housing, driving more, cooking more, etc. Another fact is that in recent years, trillions of dollars in liquidity injections from governments around the globe have been created. This liquidity is intended to fight financial crises and deflationary forces from deleveraging western and Japanese banking systems.
We believe that continued monetary debasement will eventually increase the supply of money chasing such necessities. Since the year 2000, the prices of certain food, clothing, shelter, and energy (used for cooking, heating, and transportation) in the U.S. that are included in our GBNI have risen almost 89 percent. Over the same 13.25 years, the CPI inflation index that tracks a basket representing Americans’ expenditures has only increased about 38.3 percent. We do not keep detailed data on prices in China, India, Brazil, Russia, and other emerging nations — but reports published by their governments support the fact that prices are rising more rapidly in these countries than in the U.S.
Signs Point to Higher Prices… But Not Right Away
With a 1.5 percent year-over-year increase, the Federal Reserve still has a green light to keep the monetary spigots open, and to keep rates low. So while the Federal Reserve sees inflation and inflation expectations firmly anchored below their 2.5 percent targets, more liquidity is coming.
We will continue to track the prices of items that people need every day in these letters and at www.gbni.info. If the markets are going to hear the inflation dog start barking, we believe our GBNI index will pick up the frequency before the official data rings the inflation alarm bells.
Guild Basic Needs IndexTM
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