Alan's Finance Blog

Four Big Economic Indicators to Watch

There are many items that influence the day-to-day moves in a stock, bond, or commodity’s price — earnings news, corporate financials, simple supply and demand, and a whole lot more. Heck, I’ve even read an academic study that argued the weather has a huge influence on whether markets close up or down!

But when it comes to figuring out the bigger-picture, longer-term moves for whole investment classes, there’s nothing better than watching a few key economic indicators.

And since this week is going to be a very busy one for data releases, I wanted to spend a little time today talking about the most important indicators you should pay attention to, along with an update on where those items currently stand right now.

Let’s start with one that will be coming out this Friday and is sure to make a big splash …

U.S. Employment Numbers from
The Bureau of Labor Statistics

While weekly unemployment claims are somewhat important to the markets, the major employment dipstick is what we get from the BLS every month.

In the “Current Employment Statistics” report we hear what 150,000 businesses and government agencies are doing with worker levels, hours, and earnings.

And in the separate monthly household survey, which is officially called “The National Employment Situation,” we get the actual unemployment rate. It’s expressed as a percentage of the overall labor force … and it’s the number most of us are familiar with hearing.

According to the August measures, the national unemployment rate rose to 9.7 percent, the highest level since June of 1983, while employers cut 216,000 jobs.

Unemployment should stay elevated for some time, even if the economy is already recovering.

This Friday, both items will be released for the month of September.
While fewer jobs were probably lost, I don’t expect to see an improvement in the unemployment rate yet. In fact, most economists are still expecting a surge above 10 percent before the end of the year.

But pay close attention to these releases going forward. By knowing whether there were more or less jobs in the economy in the previous month, you can then adjust your expectations for other data accordingly.

For example, if jobs were created, we would expect more factories to be utilized.

And it follows that more people working will also be a strong gauge of our economy’s overall economic output … which is another MAJOR thing to watch …

Gross Domestic Product:
The Economic Fruits of Our Labor

This quarterly number measures our country’s economic output from all manufacturing and services. It is reported as an annual number in “real” terms, meaning that it is adjusted for inflation.

Much ado is made about the GDP releases, because they are used as the basis for the textbook definition of a recession (two subsequent quarterly contractions).

However, one of the things that many investors fail to realize is that each GDP release is eventually subjected to two subsequent revisions. That means the original number reported is not the only one to watch.

Case in point: Tomorrow we will get the final reading on second-quarter GDP. It is likely to show a 1.2 percent annualized contraction rather than the previously-reported 1 percent rate!

GDP is still what most people mean when they refer to economic growth and its effect on investor sentiment is huge.

Of course, perhaps no release has more of an immediate and far-reaching impact on all the markets than …

What the Federal Reserve Does (and Says)
At Its Open Market Committee Meetings

This group of government bankers gets together about eight times a year to talk about the current state of the economy as well as its future prospects. Meetings are on Tuesdays, and sometimes into Wednesdays.

Sometimes the Fed actually says what it means …

The Fed issues a statement at the conclusion of every meeting, and the market dissects every single word of it. This is also when interest rate actions are most likely announced. Obviously, those have a huge market impact.

Much of what’s happening in each individual Federal Reserve district is contained in the Fed’s so-called “Beige Book,” which is released on a lag.

Likewise, each meeting’s minutes are disseminated to the public later. If you want to know how localized economies are holding up, the Beige Book is very helpful. And the FOMC minutes are a great way to sense what the Fed’s next move might be.

As it stands right now, the Fed is unlikely to make a major interest rate move anytime soon. In fact, at their meeting last week, they had the following to say:

“The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”

Of course, you cannot always take what the Fed says at face value. And as I have made known plenty of times before, I remain concerned that they will mismanage their rate actions going forward, setting up the possibility of a significant bout of inflation.

Rather than pay attention to their reassurances that “inflation will remain subdued for some time” I suggest you …

Watch the Inflation Rate Via the CPI and PPI!

The Consumer Price Index (CPI), which is released every month, is still important to the markets, because it’s a reliable benchmark for inflation, no matter how much it’s understating things.

And the PPI is also significant because it measures what businesses are paying for things. As such, it is a good front-runner to the CPI. Like the CPI, it’s based on a basket of goods, and is reported in a “headline” version as well as a “core” version. The latter excludes food and energy prices.

Both PPI and CPI are expressed as percentage increases or decreases, both against the previous month as well as against the same month a year earlier.

It’s worth noting that — after showing some outright price declines in many categories during the height of the credit crunch — these two inflation gauges have been showing renewed increases.

For example, in the latest batch of data released on September 15, PPI advanced 1.7 percent and CPI gained 0.4 percent.

A Couple of Important Points about These Four Items …

First, they’re released by the government and not necessarily perfect measures. In past Money and Markets columns, I have discussed some of the problems with these measures.

Likewise, you cannot just accept the government’s measures of other items, either. Many reports suffer from flawed assumptions.

However, with a grain of salt, these numbers can at least help you form a baseline opinion of what’s happening out there.

Second, some of these items are lagging indicators. GDP and unemployment tell us what has BEEN happening … not what is about to happen.

But when we’re trying to contextualize our long-term investment decisions, they’re still extremely useful. And when you use them to frame other short-term indicators and data items, you’ll be better able to draw reasonable conclusions.

Third, the four items I described today are just the tip of iceberg.

Heck, if you want to get a sense of how much data is out there just watch the headlines this week! We’re going to hear about consumer sentiment … other jobs numbers … a couple of manufacturing indexes … and plenty more.

Plus, in a few short weeks it will be “put up or shut up” time for Corporate America again as earnings season gets underway.

My larger point is that you’ve got to separate the wheat from the chaff and put together a series of indicators that help you quickly understand what’s happening. Once you couple that information with what you’re experiencing in your own life and hearing from friends and family, you’ll be in a better position to make solid investment decisions.

Best wishes,

Nilus

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com

Five Hot New International ETFs To Consider

Today, much of the world’s economic growth is outside of the U.S. So for now at least, many (and maybe most) of the compelling investment opportunities are outside the U.S., too.

But for years, Americans had a hard time gaining access to the smaller international markets. Try to buy a stock from, say, Jakarta, and most stockbrokers would hang up the phone! Opportunities in those places were available only to a select few investors.

Exchange traded funds (ETFs) are solving this problem. Now you can diversify your portfolio into many hot, new markets with one simple trade on a U.S. exchange.

Let’s take a look at five, recently-launched international ETFs that can help you get off the beaten path …

International Opportunity #1:
Market Vectors Vietnam (VNM)

Vietnam was a closed society for many years following the communist takeover. Now, much like China, it’s turning capitalist with a vengeance.

Vietnam is one of the world’s fastest-growing economies.

With a young population, a strategic location, and abundant natural resources, Vietnam is one of the world’s fastest-growing economies. The country exports rice, oil, cashew nuts, and black pepper. Privately owned businesses are thriving! And the industrial sector is growing fast.

VNM gives you a slice of the local stock market, including financial, energy, industrial, and consumer companies. Risky? Yes, but the opportunities are huge as nearby China takes its place as a world economic superpower.

International Opportunity #2:
Market Vectors Indonesia (IDX)

You might think that a country with the fourth-largest population in the world would be a little better known. Strangely, though, Indonesia isn’t on the radar screen for most U.S. investors. It should be …

With more than 17,000 separate islands, the Indonesian archipelago straddles trade routes that have been important for centuries. And its many ethnic groups are united by a common language.

Like Vietnam, Indonesia has a wealth of natural resources, including oil, natural gas, gold, copper, and a huge variety of agricultural goods. The vibrant internal market makes the country less dependent on exports than many Asian markets. In fact, Indonesia’s service sector is larger than its industrial and agricultural counterparts.

With IDX, you can buy into the Indonesia growth story quickly and easily. This ETF includes banks, telecom, energy, materials, and industrial stocks.

International Opportunity #3:
iShares MSCI Peru (EPU)

Peru’s Machu Picchu was once a great Inca city.

Peru has some of the most varied terrain in the world — snow-capped Andes peaks, Amazonian jungles, coastal plains. And back before Columbus came along, Peru’s Inca were the largest civilization in the New World.

Today Peru is a top metals producer. And EPU makes the most of that by investing heavily in companies that mine gold, copper, and other metals. What’s more, the government is working hard to diversify the economy, and it’s making good progress. A 2006 free trade agreement with the U.S. was a major step.

When metals prices are rising, Peruvian markets tend to do well. EPU is a great tool to take advantage of those opportunities.

International Opportunity #4:
Global X InterBolsa FTSE Colombia 20 (GXG)

Just north of Peru is Colombia, where ethnic diversity has produced a rich cultural heritage. It’s a country with plenty of risks — and enormous potential rewards.

Coffee is one of Colombia’s top exports.

President Alvaro Uribe and his government have made big steps in subduing Colombia’s illegal drug trade, expanding the economy, and strengthening relations with the U.S. and other trading partners. The result: One of the fastest economic growth rates in Latin America.

GXG is a concentrated portfolio of mostly financial and energy stocks. Like all emerging markets ETFs, I expect a lot of volatility in GXG, but I also see a lot of potential. And although Colombia is booming, it still has plenty of room to grow.

International Opportunity #5:
Global X FTSE Nordic 30 ETF (GXF)

The funds discussed above all cover a single country. But GXF is different in that it focuses on a region: The Nordic nations of northern Europe including Sweden, Denmark, Norway, and Finland.

In contrast with Colombia, these Nordic nations are among the most stable in the world. The population is educated, multilingual, and prosperous. Are there challenges? Of course, but you can’t argue with results. And the results of the Nordic stock markets have been impressive indeed.

GXF includes 30 companies from the region, with Sweden having the most weight at almost half the portfolio. The stocks in GXF do business around the world. So if you want both growth and stability, this ETF might be just what you need.

These five new ETFs give you tremendous opportunities for profit that you can’t find in regular mutual funds. They’re even more proof that ETFs are revolutionizing the way we invest.

However, let me close today with a word of caution: Single-country international ETFs are always risky. And because they’re relatively new, trading volume can be rather thin. If you buy any of these funds, pick your entry point carefully, use a limit order, and be prepared to ride out some big swings. Also, don’t invest too much of your portfolio in one place.

Best wishes,

Ron

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

Why I’m THANKFUL for the Bond Market Sell Off

I don’t know about you, but I’m still stuffed from yesterday! I ate enough turkey to feed a small army, and that’s not even counting all the trimmings.

But frankly, I wouldn’t have it any other way. Thanksgiving is a great time to get together with family, watch some football, eat well, and celebrate all we have to be thankful for. And believe me, there’s a lot … including the latest bond market sell off.

Yes, you heard me. I’m glad bonds are finally falling in price.

Why? As Americans, we’ve been forced to accept miserable yields on all kinds of income-generating investments …

• Yields on 2-year government notes recently hit 0.34 percent, the lowest in U.S. history.
• Five-year TIPS were just sold at a yield of negative 0.55 percent. Borrowers actually paid the government to take their money on the assumption the value of the TIPS would rise along with inflation in the coming few years.
• Willing to lock your money up for longer in order to be fairly compensated? Ha! Uncle Sam was paying less than 3.5 percent on a 30-year bond a couple months ago. That’s far from adequate compensation for locking your money up for three decades.
• Municipal bonds? No solace there! The average yield on a 20-year general obligation bond recently slumped to 3.82 percent.
• Even high-yield, or junk, bonds saw their average yields slump to less than 8 percent. Yields on such bonds were well into double-digit territory a couple years ago.

Fed Officials Forcing Investors to
Take on More and More Risk

Bottom line: It’s been next to impossible to generate adequate income with bonds. You’ve had to take on more credit risk, more duration risk, more currency risk — more risk all around!

Income-seeking investors have had to accept more risk.

That’s precisely what the Federal Reserve wants you to do, by the way. The Fed wants to force investors to snap up all the riskier bonds and stocks they can get their hands on so it drives down corporate borrowing costs. They think that will help the economy recover and unemployment fall.

As I’ve pointed out repeatedly, though, all the Fed’s moves have done is drive up prices in the “asset economy.” They haven’t done much of anything for the “real economy.” Or in simple terms, the Fed has given Wall Street a big, fat Thanksgiving dinner to feast on … while only throwing a few scraps to Main Street.

Just look at the latest news on housing, one of the main focus areas of the Fed’s levitation efforts:

• The National Association of Home Builders Housing Market Index came in at 16 in November, down from 72 at its peak in June 2005.
• Construction spending was only $801.7 billion in September, down from $1.21 trillion in March 2006.
• Construction employment slumped to 5.63 million in October versus 7.73 million in August 2006.
• Housing starts were running at a seasonally adjusted annual rate of just 519,000 in October, compared with 2.27 million in January 2006.

In short, all of these indicators are flatlining or falling despite the biggest money-printing binge in world history. Plus unemployment is hovering just shy of 10 percent; and consumer and corporate spending isn’t ramping up.

But all kinds of bonds (and stocks) were levitating on a promise of easy Fed money.

Your Strategy as Yields Climb

All of this brings me back to the point I made earlier: We’re now getting a sell off, and it’s one I’m thankful for. That’s because bond rates move in the opposite direction of bond prices. Indeed, yields are shooting higher on mortgage bonds, corporate bonds, Treasury bonds, and municipal bonds.

With yields rising, you might consider dipping your toe into the bond market.

If you avoided those longer-term bonds on my recommendation, you didn’t suffer any losses from the price declines. Now, you’re in a good position to start locking in higher, more attractive rates of return.

I wouldn’t put all my money into bonds yet because I think rates will likely keep rising in the months ahead. But if the sell off intensifies, you may want to consider legging in gradually as yields climb, especially in the hardest-hit markets like municipals.

Until next time,

Mike

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

New phase of debt crisis! Striking NOW! Despite rescues!

A belated “Happy Thanksgiving!” — from our family to yours!

Sadly, though, even while most Americans were enjoying the holiday or hitting the malls, much of Europe was sinking deeper into a new, more severe phase of its sovereign debt crisis.

This crisis is unfolding despite Herculean rescues by the European Union, the International Monetary Fund and the U.S. Federal Reserve.

It’s striking right now.

And it’s threatening to spread to all of the world’s big debtor nations, including the biggest of all — the United States.

Hard Evidence from Global Markets

This conclusion is not merely my analysis or forecast.

It’s the collective opinion of global investors who, at this very moment, are scrambling to buy insurance against bond defaults by major governments.

Think of it like life insurance:

• When the premiums are cheap, it’s because the country has a clean bill of health.
• When the premiums start rising, it means there’s growing evidence of fiscal disease.
• And when premiums skyrocket to obscenely high levels, you can be darn certain the country’s Treasury is on its death bed, threatening to take down the government … sabotage its economy … and, inevitably, impoverish its people.

That’s precisely the situation the Irish find themselves in today. Their economy is sinking fast. Their two largest banks — the equivalent of our Bank of America and Citigroup — have just gone under. The Prime Minister is resigning. Millions of citizens are sinking into poverty. And yesterday’s final agreement on a $113 billion European rescue package will not change that reality.

Moreover, their crisis is a stark warning for all U.S. investors. So you’d better understand exactly what’s happening and why …

The Real Trauma of
The Irish Debt Crisis

Default insurance is the telltale indicator.

And right now, the cost of insuring €10 million of 5-year Irish government bonds against default has skyrocketed — to an extremely high €600,000.

That’s 55 percent more than it cost for the same insurance in the aftermath of the Lehman Brothers failure — a time when it seemed the entire world was on the brink of collapse.

It’s 50 percent more than the cost of insuring equivalent Greek debt at the peak of Greece’s first round of financial difficulties earlier this year.

It’s at least DOUBLE the cost of insuring the debts of deeply troubled lesser nations like Romania, Lebanon, Latvia, and even Iceland.

Most shocking of all, today’s €600,000 price tag for Irish default insurance is higher than it was BEFORE the European Union and IMF first announced their intent to engineer a $113 billion rescue for Ireland just eight days ago.

Earlier this year, when Europe announced a similar bailout for Greece, traders in this kind of insurance — credit default swaps — gave Greece at least a 30-day reprieve. Now, they’ve given Ireland no more than three days.

Investors obviously don’t believe promises by politicians anymore.

Clearly, the Debt Crisis Is Accelerating.
Clearly, the Bailouts Are Not Working!

The European authorities had hoped that, as soon as their massive, supposedly “definitive” Irish bailout package was announced, investors would jump for joy. Instead, investors have done precisely the opposite.

The authorities had hoped that the premiums on government bond default insurance would come down dramatically. Instead, the premiums have gone higher, as I’ve just shown you.

The authorities had hoped that Irish bond yields would come down sharply, helping to avert a disastrous, additional interest burden for the government. Instead, bond investors have dumped Irish bonds with both hands, driving their prices down and yields up.

Exactly seven days ago, on the morning after the big bailout announcement, the yield on Ireland’s benchmark 10-year government bond was near 8 percent. Now, it has surged by more than a full percentage point to 9.17 percent. That extra interest cost alone threatens to eat up a big chunk of the bailout money.

The authorities had hoped — and prayed — that their earlier bailout of Greece would have been enough to contain the cancer. Instead, it has metastasized and spread — not only to Ireland, but also to Spain and Portugal.

Right now, the cost of insuring against a default on Spanish and Portuguese bonds is at new, all-time highs, far surpassing the levels reached earlier this year when the Greek debt crisis was first exploding.

Even Greece itself, which the authorities thought was largely cured, is back in the emergency room.

But this time, all life support systems are in serious doubt. And this time, investors are in open rebellion against the spin doctors.

The facts: At the height of the last Greek debt crisis — on February 8, 2010, to be exact — the cost of insuring a €10 million 5-year Greek government bond reached a peak of €420,855.

But last week, the cost on the exact same instrument had surged above €1,000,000!

That’s like shelling out an outrageous $50,000 for a term life insurance policy that pays no more than $500,000 in death benefits.

Why so expensive? Because investors now realize that austerity, no matter how necessary, can never be a quick ticket to fiscal balance.

In fact, the more the Greek government has cut spending, the more its economy has sunk. Ditto for Ireland and other countries.

Urgent Lessons for
All U.S. Investors

Even if you’ve never invested a penny in Europe — and even if you’ve never set foot outside the United States — this new phase of the debt crisis has far-reaching implications and lessons for you and your family …

Lesson #1
America Is Definitely NOT
Immune to the Contagion

For 2011, the Bank for International Settlements estimates that Portugal’s and Spain’s government debts will be 99 percent and 78 percent of GDP, respectively.

But for the same year, U.S. government debts will be 91 percent of GDP.

Thus, by this measure, America’s debt burden is similar to

Portugal’s and bigger than Spain’s — two countries that are ALREADY victims of the sovereign debt crisis.

Yes, the U.S. dollar is the world’s reserve currency.

And, yes, that gives Washington the ability to print money with impunity … press other rich countries to accept its debts … and borrow huge amounts abroad to finance its deficits.

But that’s more of a curse than a blessing!

It means that, more so than any other major nation on the planet, the U.S. government is beholden to investors overseas — often the same investors who have repeatedly attacked Greece and Ireland this year.

Ultimately, that could make the U.S. even more vulnerable than Europe.

Lesson #2
Governments CANNOT End a Debt
Crisis by Piling on Still MORE Debt

Europe tried by announcing a Greek bailout earlier this year … and it failed miserably.

Europe tried again by expanding the Greek bailout to a $1 trillion fund for all euro-zone countries. But that effort is also failing. In fact, just one more bailout — for Spain — could wipe out the fund.

And now, even before Europe has figured out precisely how the bailout fund is to be used, there was new talk in high circles this weekend of expanding it even further — another desperate attempt to “reassure investors.”

But again, it is not working.

In fact, the more money Europe throws at the crisis, the more investors seem to recoil in horror.

Investors can now see, as plain as day, how past rescues have backfired.

They can see how the debt disasters can’t be papered over with bailouts or printed money.

And they KNOW that money printing can only gut the currency they’re investing in — be it the dollar or the euro!

In either case — bailout or no bailout — bond investors want out.

Lesson #3
Before a Government Debt Crisis Can Be
Ended, It Must FIRST Get a Lot WORSE!

In order to slash deficits …

• Governments must impose austerity — deep cutbacks in spending, tax hikes, or both …
• The austerity inevitably drives the economy into a tailspin, and …
• The economic tailspin always causes even LARGER deficits!

It’s only after years of fiscal discipline and collective belt-tightening that this vicious cycle is ended and balance is restored.

That’s why the cutbacks in Greece, Ireland, Portugal, and Spain are, in the near term, making the crisis even worse. And it’s also why a similar vicious cycle is now looming in the U.S., as the new Congress seeks to slash the deficit.

Lesson #4
The Great Debt Crisis
Of 2008 Never Ended!

Politicians talk about the U.S. debt crisis of 2008 … the Detroit bankruptcy crisis of 2009 … the European sovereign debt crisis of early 2010 … the Greek debt tragedy … the Irish debt mess … the California budget debacle … the U.S. municipal bond collapse … and more.

Then, they talk about the urgent need to make a show of resolve to bail out the world — to stop the “contagion” from spreading from one sector or region to the next.

But these are not separate, isolated disasters. Nor is the contagion of fear the true source of the problem.

Instead, what we are experiencing is one, single, integral debt crisis that never ended.

It is one crisis that has spread from the U.S. to Europe and beyond … morphed from a private-sector banking crisis to a public-sector government debt crisis … grown in scope and power … and begun to drive the large debtor nations on a collision course beyond anyone’s control.

Lesson #5
The New Phase of the Debt Crisis
Can Bring Surging Interest Rates

I showed you how the yields on Ireland’s 10-year notes have surged from 8 to 9.17 percent in just a few days. Yields in other European nations have shot up as well.

Meanwhile, I assume you’ve seen how, despite the Fed’s massive bond purchases, U.S. Treasury yields have also moved higher.

And you’ve seen even bigger jumps in U.S. municipal bond yields.

This is just the beginning.

And for the near future at least, rising interest rates could be a game-changer — for real estate, for the U.S. economy, and for many financial markets.

Investors aren’t dumb. When they see a new phase of the debt crisis, they rush from risk to safety.

So don’t be surprised if we get deeper corrections in those markets that rose in recent months — U.S. stocks, precious metals, key commodities, and several foreign currencies.

There will always be exceptions. But my recommendation is the same as last week’s: Take profits off the table. Build cash. Focus on safety.

Good luck and God bless!

Martin

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

The Next Major Disaster Developing for Bond Holders

A must-read FREE report for investors in fixed-income markets like Treasury bonds, municipal bonds or high-yield bonds

By Elliott Wave International

Elliott wave analysis can warn you of trend changes when the rest of the investment public least expects a market reversal. With that in mind, we have created a new report for our free Club EWI members: “The Next Major Disaster Developing for Bond Holders.”

In this free report, you get some of the latest commentary on fixed-income markets adapted from various Elliott Wave International’s publications, including 2010 issues of Robert Prechter’s monthly Elliott Wave Theorist and its sister publication, The Elliott Wave Financial Forecast.

Enjoy this excerpt — and for details on how to read this important Club EWI report free, today, look below.

The Next Major Disaster Developing for Bond Holders
(excerpt)

The Elliott Wave Theorist — October 2010
(By Robert Prechter, EWI president)

…History shows that investors have been attracted like moths to a flame to four consecutive pyres: the NASDAQ in 2000, real estate in 2006, the blue chips in 2007 and commodities in 2008. Now they are flitting across the veranda to a mesmerizing blue flame: high yield bonds. Bonds pay high yields when the issuers are in deep trouble and cannot otherwise attract investment capital. The public is chasing a large return on capital without considering return of it. …

The Elliott Wave Financial Forecast — October 2010
(By Steve Hochberg and Pete Kendall)

The rise in optimism since early 2009 has allowed corporations to issue the lowest grade debt at a record rate, even more than in the middle of the incredible expanding debt bubble of the mid-2000s. The annual total of $189.9 billion to date is a record, and the entire fourth quarter still lies ahead.

This is a stunning testimony to just how desperate investors are for the returns they grew so accustomed to during the old bull market. The Moody’s BAA-to-Treasury spread (see chart in the free report — Ed.) has been widening since [April] and has made a series of lower highs in August and again in September. This behavior reveals an emerging preference for perceived safer debt even as junk bond issuance races higher. It is a critical non-confirmation…

Totally Standard Hyper-Inflation

By: Adrian Ash, BullionVault

Hyperinflation is not simply inflation times 10. It’s most likely to strike – in fact – amidst a real deflation…

SO the FEDERAL RESERVE’s second-round of quantitative easing, announced on November 3rd, was a shoo-in – a fait accompli – already decided when the policy team first sat down the previous day.

How come? As the minutes released this week show, Brian Sack – manager of the New York Fed’s System Open Market Account (SOMA) – opened the meeting. And asked to judge the matter, he told the 64 other policy-wonks gathered in the Eccles Building that his team “could purchase additional longer-term Treasury securities at a pace of about $75 billion per month while avoiding disruptions in market functioning.”

Moreover, “implementing a sizable increase in the System’s holdings of Treasury securities most effectively likely would entail a temporary relaxation of the

35% per-issue limit on SOMA holdings under which the Desk had been operating.”

Hey presto! The following day, and after apparently intensive debate, a monthly target of $75 billion in Treasury bond purchases – plus a relaxation of the 35% limit on Fed holdings of any particular bond issue – was announced.

Does that make the Fed meeting a sham? No matter. “It’s not as if the Fed is doing anything radical,” says Princeton professor Paul Krugman. It’s simply looking “to boost the flow of economy-wide spending by changing the mix of privately-held assets,” agrees Berkeley professor Brad DeLong.

“It buys government bonds that pay interest in exchange for cash that does not. That is totally standard.”

But totally standard where, exactly?

Sure, buying and selling government debt in the open-market is how central banks control short-term interest rates. That’s why the Fed Funds rate is a target, and the actual outcome in the marketplace is instead known as the Effective Fed Funds. Bidding short-term bills higher (or lower) in price, the New York Fed thus pushes down (or up) the interest rate paid on those bills. But stuffing the market with money, in contrast, is a very different aim. Not least when you do it by buying longer-term bonds. And by only buying, rather than fine-tuning purchases with sales. And by doing it amid the heaviest net issuance of government debt in history. And by doing it so hard that, despite that record issuance, you still need to break your own limit on the proportion of any individual maturity-date you’re allowed to own.

So again, we ask here at BullionVault: Where in the world is such money creation “totally standard”…?

“I think using quantitative easing is a perfectly legitimate thing to do. And for heaven’s sakes, it’s not as if we’re in any danger of inflation any time soon.”

– White House advisor and former director of the Congressional Budget Office, Alice Rivlin, speaking to CNBC on 15 November 2010

“We have no ‘dangerous flood of paper’…On the contrary, our paper [money] circulation, though it shows a terrifying array of billions, is really not excessively high…”

– Vossische Zietung newspaper, 16 August 1922

“Several [Fed policy] participants saw a risk that a further increase in the size of the…monetary base could cause an undesirably large increase in inflation. However, it was noted that the Committee had in place tools that would enable it to remove policy accommodation quickly if necessary.”

– Federal Reserve minutes from 3 November 2010

“Even if the quantity of money were three times its present size, it would constitute no real obstacle to stabilization…”

– Berliner Börsener newspaper, 18 August 1922

Okay, so pasting a couple of quotes next to each other doesn’t mean the United States is headed straight for wheel-barrows and stormtroopers. Like everyone agrees, 1,000,000% inflation looks a long way off right now. But no central bank ever began a hyper-inflationary policy because it feared inflation. Such disasters always come because of vanished credit and economic depression. And whether in Germany nine decades ago, or in Argentina twenty years back, or in Robert Mugabe’s Zimbabwe around the turn of this century, stuff actually gets cheaper – not more expensive – in real terms during hyperinflation. It’s just that the local currency falls in value faster still, turning the “money illusion” we’re all prey to into a livid nightmare.

Hence the daily flood of French citizens across the border at Strasbourg each day during the early stages of the Weimar madness, emptying the stores with their highly-prized Francs. Hence the real-estate bargains snapped up by wily speculators during Argentina’s last-but-one collapse. Hence the zero-change in inflation – net net – for US Dollar earners during the early phase of Zimbabwe’s hyperinflation, followed by massive a deflation, in US Dollar terms, even as prices in the local currency soared.

On the ground, amidst these crises, it was monetary contraction – not soaring prices – that most worried policy-makers. “The lack of money [now] has a worse effect than the devaluation itself,” said one Berlin newspaper in summer 1922, as the Weimar Republic began to run the presses 24/7. “The government printed notes to satisfy everyone,” writes Adam Fergusson in his history of the disaster, When Money Dies, “telling itself that as the granting of credit…had so greatly decreased, the actual currency in circulation had to be so much greater.”

But let’s not get perverse. The latest flat-lining in America’s official Consumer Price Index does not mean that hyperinflation is in fact underway. The critical factors to watch out for remain a collapse in tax revenues, plus demands for immediate payment from foreign creditors. It bears repeating nevertheless, however, that – contrary to the worldview presented by academic economists and professional wonks – demand-push inflation is not how hyperinflation begins. Real values in fact fall as a genuine currency crisis takes hold.

And the fact that the Federal Reserve is so dead-set on its “emergency” response that it scarcely needs to meet to agree it, doesn’t mean the Fed actually knows what it’s doing.

Adrian Ash

Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK’s leading financial advisory for private investors, Adrian Ash is the editor of Gold News and head of research at BullionVault – winner of the Queen’s Award for Enterprise Innovation, 2009 and now backed by the mining-sector’s World Gold Council research body – where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2010

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

Happy Thanksgiving!

My dear American readers. I’d like to take a moment to wish you all a very very Happy Thanksgiving!

Now I’ll let you all go back to assaulting that juicy turkey.

Cheers,

Alan

Time to Take Profits from Corporate Bonds?

Back in May of 2009, I wrote an article here in Money and Markets called “Time to Start Nibbling on Corporate Bonds.”

As the name implied, I argued that investors looking for opportunities in fixed-income were better off considering corporate bonds rather than Treasuries.

For example, I said:

“I am an unabashed fan of Vanguard’s low-cost funds, and when I look at the firm’s Intermediate-Term Investment Grade bond fund (VFICX), I am intrigued … I consider a 6 percent yield from extremely high quality bonds a pretty good deal.

“[So] if the choice is good income from a reasonably safe portfolio of corporate bonds vs. FAR less from Treasuries, I think I’d go corporate at this point in time.”

And I also took things one step further, noting that even junk bonds were presenting a good risk-reward tradeoff:

“Sticking with Vanguard, you’ll see that the firm’s High-Yield Corporate bond fund (VWEHX) is yielding about 11 percent. And you’ll get that with a very low expense ratio of 0.25 percent …

“I’m left wondering if all the current — and potential future — pain is already baked into the cake now. For someone looking for big yields, junk may very well turn out to be hidden treasure!”

Now, Over the Last Year and a Half
These Corporate Bonds Have Surged!

It’s no secret that investors have been flocking to bonds lately. But to get a sense of just how aggressively they’ve been buying, let’s take a look at what’s happened to the two funds I discussed a year and a half ago.

First, here’s a chart of the Vanguard Intermediate-Term Investment Grade (VFICX) since my original column …

As you can see, it’s up about 20 percent in nearly a straight line of gains!

And it’s the same story with the riskier junk bond fund, Vanguard High-Yield Corporate (VWEHX) …

This fund is up a couple more percentage points, in fact!

You’d see nearly the same kind of run-up in nearly any other type of bond or fixed-income fund you looked at, too.

I’d like to point out how highly unusual it is to see such sharp moves in these investments over such short time frames. Remember, we’re not looking at individual stock charts here.

Corporations are clearly milking hungry investors and low interest rates for all their worth right now … even as many of the lower-rated borrowers are seeing their fundamentals weaken rather than improve.

No Wonder Many Professionals Are Taking Profits
And Turning Their Attention to Other Investments!

Here’s how a recent Wall Street Journal article put it:

“Mr. Makhija is among a growing number of hedge funds and other professional investors that are getting out junk bonds and buying assets like mortgage debt and stocks instead. As they exit, mom-and-pop investors are flooding in, along with mutual funds that are usually dedicated to other investments …”

This is a shift that is worth paying attention to, especially if you happened to buy into corporate bonds back when I was first writing about them here.

Sure, the party could continue for some time — especially with the Federal Reserve’s new round of quantitative easing just getting started.

However, there have been some small cracks starting to develop in the bond markets lately … and it’s better to take profits a little too early than to watch things quickly reverse.

Where to go next?

I’m not particularly excited about any corner of the bond market at this stage. I’d rather stay on the sidelines and wait for better yields down the line.

In the meantime, I think dividend stocks remain the better income investments.

I’d note that based on recent numbers, many pros are now parlaying their recent winnings into higher-yielding stocks, too!

Bottom line: If you’ve enjoyed some recent gains from more aggressive bond holdings, you might consider taking at least a little money off the table. And if you’re looking to put new capital to work, equities look like the better choice … even after their relatively strong run.

Best wishes,

Nilus

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com

A World Awash in Government Intervention, Delays the Inevitable

The past three years have been dominated by government intervention …

The U.S. propped up the banks with TARP money, and then gave banks ultra-easy money terms to recapitalize. And to unfreeze the global credit markets, the U.S. provided unlimited dollar swap lines with global central banks.

China rolled out the biggest fiscal stimulus package in the world as well as ultra-easy loan programs (relative to GDP). This gushed money into asset markets around the world. And despite mounting pressure to revalue its currency, China has continued to tamp down the yuan to keep exports flowing and its economic engine humming.

Europe stepped in as a buyer of last resort to keep souring European economies alive to see another day. And despite their efforts to stabilize the region, they’re now working up a plan to plug another leak in the dam … this time in Ireland.

Japan fired off fiscal stimulus one after another … and QE one after another. Plus, acting alone, it directly intervened to weaken the yen.

Meanwhile, Brazil, Korea, Singapore, Thailand, Malaysia, and Indonesia have all intervened in an attempt to weaken their currencies through outright currency market intervention and/or capital controls.

Yet all this government intervention has done nothing but postpone a day of reckoning for the global economy.

Still, the Fed is back at it with another round of QE!

The goal of all of this intervention has been simple: Numb the pain until the global economy can heal — i.e. find its way back to sustainable growth.

But it hasn’t worked.

And it hasn’t worked because the economic model the world has been operating on is flawed. It all boils down to lopsided trade — or imbalances. If you’ve followed the G-20 events of the past two years, you know that global leaders have vowed, as their number one goal, to repair global imbalances.

It’s tough to rebuild a global economy when all the players want to be exporters.

But those vows have proven to be nothing more than words. The fact is this fundamental problem is a giant to tackle. And it’s especially difficult given an environment where everyone wants to export their way to recovery.

So how should we expect this to play out?

Booms and Busts

The band-aid approach taken by the world only sets the stage for more booms and busts ahead. And given the magnitude of intervention, the booms could be even more dangerous than the original excesses that set off this economic crisis.

For an economy that’s setting up for this cycle to play out, let’s take a look at Australia …

Australia is charging ahead with marveled growth. And while the advanced economies of the world are still trying to create easier money conditions, the Reserve Bank of Australia has been tightening — ratcheting up interest rates aggressively for the better part of the past year.

The key fuel for its economic performance: The worldwide intervention phenomena listed above.

Will Australia’s housing bubble blow up like the U.S.’s did?

The fact is Australia rode the same wave of credit as the rest of the world. But when big economies sank and started cranking up the printing presses, that money spilled over into Australia, making its wave just bigger and bigger.

Consider this: In Australia home prices have doubled in value in eight years and quadrupled in 21. The average buyer in Sydney now pays at least 7.5 times annual income for the average home. For a perspective, that means an average Aussie household with a AUD$50,000 income is paying AUD$375,000.

Sound familiar?

And at current mortgage rates of 7.5 percent, the average buyer uses 56 percent of total income. That’s twice the 28 percent maximum personal finance experts recommend.

Take a look at these charts from an Australian economist.

The two lines to pay particular attention to are the royal blue line that’s bursting through the top corner of the chart (Australia) and the red line moving sideways (the U.S.). You can see that while America’s massive housing bubble peaked in 2006, the Australian housing market was still on the rise and just kept on climbing.

This data shows that, relative to the U.S. housing bubble, Aussie housing is in an much bigger bubble — over 50 percent bigger.

In fact, The Economist magazine says Australia’s property market is overvalued by a whopping 63 percent!

Need more proof? Look at the wild disparity between the price of a owning a home versus renting in the chart below.

As you can see, the ratio of price to rent has been surging over the past decade. And in the past year, it’s exploded higher!

This is a clear example of a bubble made even more dangerous by the interventionist policies pervading the world.

What’s more, it’s a good warning for those who have been chasing hot returns around the globe. Those returns come with substantial risk — especially currency risk.

The point here: We’re in a market of extremes. It’s quite possible that the deleveraging phase being felt in the advanced economies of the world has yet to reach other parts of the world. When it does, watch out.

And that’s why I’m working on a new service to help readers protect and profit from the growing currency crisis and rapid changes taking place to the value of money. Keep an eye out for the details coming soon.

Regards,

Bryan

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

Gold Rises with Dollar as Korean Conflict Flares, Worsening Euro Crisis Blamed on “Weak Dollar”

By: Adrian Ash, BullionVault

London Gold Market Report

THE PRICE OF PHYSICAL gold bullion rose to a 1-week high in Asian and early London trade on Tuesday, touching $1370 per ounce even as the US Dollar rose on news of South and North Korea exchanging shell-fire over the disputed border island of Yeonpyeong.

Asian stock markets dropped up to 2%. Crude oil fell hard towards $80 per barrel. Silver prices unwound Monday’s 2.3% rally.

The Euro fell to $1.35 – and the gold price in Euros rose above €1000 per ounce – for the first time in five sessions as Sinn Fein called for the resignation of Irish premier Brian Cowen following the joint EU-IMF intervention in Dublin’s €90 billion debt.

“It seems that gold’s bull-run, which has lasted more than eight years, has gathered fresh momentum,” says the latest Metals Monthly from the VM Group in London for ABN Amro Bank.

“The Fed’s second round of quantitative easing and the ongoing currency disputes will serve to enhance gold’s ‘trusted’ image.”

World Bank president Robert Zoellick last week called for some element of gold price reference in the global monetary system, notes VM, and “Such disquiet and attention is tailor-made for gold.”

“The Eurozone cannot live with a strong Euro,” writes Mansoor Mohi-uddin, managing director of currency strategy at Swiss bank UBS, in today’s Financial Times, blaming the Federal Reserve’s second-round of quantitative easing for the current turmoil in Europe.

Just as the Euro became over-valued in mid-2009 thanks to the falling Dollar, he believes, so this month’s QE2 means lower export sales, lower growth forecasts, and thus a heavier debt burden for weaker Euro-union members.

“We don’t have the luxury of time” in accepting the EU-IMF bail-out, said Dublin’s transport minister Noel Dempsey this morning, rebuffing calls for an immediate general election.

EU economic commissioner Olli Rehn confirmed that it is “essential” Ireland’s emergency budget is passed before Dublin’s EU partners transfer the sums agreed.

A consortium of pension fund managers, insurance companies and private investors meantime challenged Anglo Irish Bank’s offer of 20¢ in the Euro on their bondholdings, part of a €1.6bn buy-out offered by Dublin’s beleaguered coalition government.

Madrid today sold a little over €4bn in new debt, but only at sharply higher interest-costs from Spain’s most recent sale.

European stock markets lost more than 1% by lunchtime.

“Gold remains a buy on dips,” says today’s note from Walter de Wet’s team at Standard Bank. “Not only do financial market conditions support gold investment demand, but the physical gold market also remains supportive.”

Private Indian demand to buy gold should “remain positive” throughout the current wedding season, says Standard, with the Western Hemisphere then celebrating Christmas and the Chinese New Year falling on 3rd Feb. 2011.

Sovereign credit risk in Europe will meantime “provide investment demand for gold [and] combined with the physical market – which looks to provide support on dips – we believe gold in Euro-terms should outperform gold in Dollar-terms for the time being.”

“Deals are very limited today” however, a Mumbai bank’s Gold Dealer told Reuters earlier. “We haven’t seen big transactions so far” because a falling Rupee driving local Indian prices back above INR 20,000 per 10 grams.

Over in China – the world’s second largest private gold consumer – Beijing banned the hoarding of coal and oil in a bid to cut the 4.4% inflation rate, urging local officials to act with a “stronger sense of responsibility.”

Both North and South Korea accused each other of firing first in this morning’s clash, but the United States called Pyongyang “belligerent” and UK foreign secretary William Hague said the North’s attack was “unprovoked”.

China said it was “concerned” by the action. Russia – which yesterday announced raising its central-bank gold bullion reserves to 774 tonnes, overtaking Japan in the world’s central-bank table – called North Korea’s attack “absolutely unacceptable”.

Adrian Ash

Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK’s leading financial advisory for private investors, Adrian Ash is the editor of Gold News and head of research at BullionVault – winner of the Queen’s Award for Enterprise Innovation, 2009 and now backed by the mining-sector’s World Gold Council research body – where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2010

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.