The Two-Legged Stool of Economic Growth Seeks Another Leg
Most economists agree that there are four major economic regions of the world: China, Western Europe, Japan, and the U.S. There’s some growth in Brazil (we anticipate 3 to 4 percent net of inflation), India (4 percent net of inflation), and a few others in Southeast Asia or the Pacific Rim.
Of the four major economic blocs, only two are currently showing growth; China is growing at about 7+ percent, and the U.S. at about 2 to 3 percent. One thing the world economy could use is for Japan to be added as a new growth leg after its 23-years of stagnation.
Global economic optimists would like to see Japan grow and prosper and lend a hand to increase global economic growth because Europe, the potential fourth leg of the global stool, is far from healthy, and it will be a long time before it cooperates in improving world economic growth.
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Monty Recent Interview on Gold Seek Radio
Monty Guild (Chief Investment Officer) of Guild Investment Management was recently interviewed by Chris Waltzek from Gold Seek Radio. To listen to the interview and to hear Monty’s thoughts on gold and the global markets, please click the following link:
The Japanese Plan
In order to stimulate their domestic economic growth, the Japanese government is promulgating a plan which includes a depreciation of the yen so that imports will improve and so that Japanese companies will move to raise salaries and hire more employees.
In the last eight months, the Japanese yen has fallen from about 77 yen per dollar to about 102 yen per dollar. To put it another way, the yen fell in value from about 1.3 U.S. cents each to less than 1 U.S. cent each.
Many have argued that the Japanese yen can’t go through 100 easily because it has fallen so far so fast. We think it can go to at least 125 to the dollar. We are old enough to remember when the yen traded at 375 to the dollar in 1971. We also remember that at the beginning of the decline of Japan in 1989, the yen was at about 150 to the dollar...
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Asia Pacific Economies Fight “Hot Money” Inflows
With the Bank of Japan and the U.S. Federal Reserve both engaged in ongoing aggressive monetary easing, many economies in the Asia-Pacific region are fighting a tsunami of liquidity which is elevating the value of their currencies to otherwise unjustifiable levels.
Everywhere, money is looking for yields that will protect it from the corrosive effects of inflation and of the real negative interest rates offered by the traditional safe-haven of government bonds. In one way or another, the cost of yield is risk, and relatively riskier assets are the beneficiaries of this demand. This includes equities, and also second-tier debt of all kinds — for example, non-investment grade corporate bonds, and bonds in emerging markets.
A World Bank brief on May 2, 2013 reported:
“At $64 billion, gross flows were up 42 percent from a year earlier, and 9.8 percent from March levels. The increase in capital flows was largely driven by bond issuances, which doubled in April, reaching a record $44.4 billion. Bond market access for noninvestment grade borrowers continued to improve, with Rwanda issuing its first bond. Vietnam, Papua New Guinea, and Bangladesh are expected to follow suit to take advantage of investors’ appetite for higher yielding developing-country sovereign bonds. Equity flows were up slightly… Overall, for the first 4 months of the year capital flows are up 46 percent from year-earlier levels, with… both equity and bond flows up significantly from last year.”
Private Cash Inflows to Emerging Markets Are Steady…and Strong
Source: World Bank
Such inflows can be distressing to emerging-market economies. The incoming cash can cause perverse increases in the values of their currencies, which is particularly damaging for export-reliant economies. Further, much of it is ‘hot money’ which can exit just as quickly in a crisis, so its presence is potentially destabilizing to the banking systems even of responsibly-managed countries.
Central banks in countries that are the destination for hot money flows can respond with their own easing policies intended to mitigate the appreciation of their currencies, but this brings its own risks, including the creation of asset bubbles. So while some central banks use interest-rate policies, others use intervention in currency markets. However, the flows happening now are so strong that some central banks admit there is little they can do. The governor of the Reserve Bank of New Zealand recently commented:
“We would not expect, given the strength of the flows, that intervention would materially change the level of the exchange rate, but we could take potentially the tops off rallies.”
As we noted last week, many of the nations poised to benefit from China’s economic maturation and higher unit labor costs are in Asia — and with Asia still being the best choice in the growth game, it is Asian economies with better fundamentals that are being challenged with hot money inflows…
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Inflation — Still Held at Bay
The April 2013 inflation data in the U.S. are being released, and it shows that prices are falling…not what the Federal Reserve wants to see. Wholesale Prices, sometimes referred to as the Producer Price Index (PPI) data yesterday showed a decline of 0.7 percent in April, primarily due to a drop in energy prices. These wholesale prices, which are supposed to track the underlying costs of certain raw materials and producer costs showed an increase of only 0.6 percent for the twelve months ending April 30, 2013.
There is a lot of talk about the ‘tapering off’ the Federal Reserve’s continued asset purchases, or the end of QE – a lot of it due to the strong performance of financial markets. However, in our opinion the cessation of their QE seems unlikely as long as the inflation data remains so muted. We believe it will take more than rising stock prices to get the Fed to stop.
The Fed has indicated that it wants to see much stronger employment and higher inflation. When will the Fed see inflation numbers pick up? It doesn’t look like a 2013 issue. Nonetheless we are vigilant; and we will use our Guild Basic Needs IndexTM (GBNI) to track the costs of basic, essential needs that Americans must buy every day. We expect the prices of food, clothing, shelter, and energy contained in the index will be a harbinger for rising inflation. Having an advance warning about rising inflation expectations is crucial for all investors… in equities, bonds, commodities, and real estate. We will track it for you and publish in these letters and share it with you on www.gbni.info.
Guild Basic Needs IndexTM
Track your basic needs at www.gbni.info
The April 2013 GBNI data should be available soon. If it looks anything like the wholesale prices or PPI data we discuss above, expect a slight drop in our data as well.
In this week’s Premium Global Market Commentary available to Gold Subscribers, we discuss:
- Post- Recssion Labor Shifts: Supply or Demand?The persistence and character of unemployment in the aftermath of the 2007 to 2009 recession has become a matter of prime concern to politicians, policy makers, central bankers, and citizens…
- 3D Cameras, Terrorism, and SurveillanceBloomberg this week reported on new software created by Israeli entrepreneur Dor Givon and his tech startup, Extreme Reality. The software allows existing 2D cameras in laptops, tablets, and smartphones to track and interpret complex 3D movements — for example, body movements and hand-gestures. Hardware manufacturers and video game designers are already bundling and using the new software; they note the cost benefits, since the software allows for 3D imaging without the need for more expensive hardware modifications or upgrades.
- A Summer Reading Suggestion
- This Week We Made A New Investment Recommendation
- Newly Implemented Executive Summary
- Guild’s Premium Global Market Summary
Sell in May and go away? We recommend the markets we think are attractive.
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