Investment Postcards from Cape Town

I have just arrived in Geneva after an exhausting but hugely successful few days in Ljubljana, quaint capital of Slovenia. It is rather difficult to write proper posts while on the road, but I will do my best to feed interesting snippets through - that is when not investigating how the gnomes see the future of Swiss banking.

Gold hit a new peak after a drop in the US dollar to a 15-month trough, resulting in the precious metal recording an eight-day winning streak. According to Bespoke, the current run represents the seventh time since 1980 that gold has had a streak of eight or more consecutive days with a gain. The report said: “As shown below, the only time one of these streaks went for more than eight days was back in 1982 when the ninth day was also positive (on the tenth day it fell 5.7%, or $63 in today’s prices). Looking out over the next week, there has been little consistency in the results as periods of negative and positive returns have been evenly split.”

Source: Bespoke, November 11, 2009.

Meanwhile, if you are looking for an explanation for gold’s strength that goes beyond the weak dollar argument routinely offered, take a few minutes to read Mish’s recent post entitled “Budget deficits soar out of control in Eurozone, Germany, US, UK, Japan; yen’s last hurrah“. Then consider as an investment option “something that has no budget deficit” (in Mish’s words).

Fellow-bull Adam Hewison of INO.com expects a possible consolidation or correction before gold advances further. He explains his thinking in a short technical analysis presentation you can access here. As said a few days ago, I remain bullish on gold in the medium term but, given its notorious volatility, will only do additional purchases on pullbacks.

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This post provides links to a number of interesting articles I have read over the past few days that you may also enjoy.

• Daniel Gross (Newsweek): The greatest trade ever, November 10, 2009.
How hedge fund manager John Paulson bet against the real estate bubble and made $15 billion in a single year.

• abc News: SocGen’s top analyst sees market lows next year, November 9, 2009.
Albert Edwards, a top analyst with French bank Societe Generale, expects global markets to hit a new low in 2010, adding that he would not be surprised if the global economy enters another recession next year. Edwards, one of the leading equities bears and a long-term critic of the policies of Western central banks, is skeptical of popular opinion that extreme policy response will safeguard the West against a repeat of Japan’s lost decade of the 1990’s.

• David Hoffman (Investment News): Market timing trumps buy-and-hold strategies during market swings, says NYU study, November 10, 2009.
The fund managers who invest based on macroeconomic trends - and are willing to adjust their portfolios as those trends change - are the managers most likely to add value for investors, according to a study released today by the New York University Stern School of Business.

• James Picerno (The Capital Speculator): Inflation expectations continue to edge higher, November 9, 2009.
One of the supporting pillars in the recent rally is the recognition that inflation isn’t a problem. Last year’s financial crisis knocked the stuffing out of the system’s tendency to devalue the purchasing power of fiat currencies over time. The net result is an unusual level of economic cover for keeping interest rates low–really low. Indeed, the primary goal of the Federal Reserve and its counterparts around the world over the past year has been the unbridled pursuit of higher inflation, though not necessarily high inflation.

• Mish Shedlock (Mish’s Global Trend Analysis): Budget deficits soar out of control in Eurozone, Germany, US, UK, Japan; yen’s last hurrah, November 11, 2009.
Budget deficits are soaring and printing presses are running at full steam everywhere you look including Germany and the Eurozone countries. See any fiat currencies above that you like? Assuming you don’t, I don’t either. Moreover, I think the yen is the worst of the lot on a relative basis. I also think the yen is likely to have a serious currency crisis before the US.

• Krishna Guha (Financial Times): Plea to reduce demand for dollar reserves, November 11, 2009.
The world should try to mitigate flaws in the dollar-based global monetary system by reducing demand for dollar reserves and exploring alternative reserve assets, a group of economists from the International Monetary Fund said.

• Andy Xie (Caijing.com.cn): Why China and Japan need an East Asia bloc, November 10, 2009.
Withering exports and asset bubbles have forced Asians - especially China and Japan - to work harder at free trade pacts.

• Stanley White (Reuters): Japan faces risk of ratings downgrade over debt, November 10, 2009.
Fitch Ratings warned Japan on Tuesday to keep to its borrowing target or risk a credit rating downgrade as the finance minister acknowledged the problem and tried to reassure rattled investors by saying spending had to be cut. Japanese sovereign credit default swaps spreads have nearly doubled in the past week as investors fretted that the government faces a funding crunch over its ballooning public debt, which the International Monetary Fund says will spiral to 227% of gross domestic product next year, by far the worst in the G7.

• Evan Feigenbaum (Financial Times): America risks being left behind in Asia, November 11, 2009
Obama’s challenge is to adapt America’s role by bringing US interests and the new reality of Asian regional co-operation together.

• Jonathan Anderson (Caijing.com.cn): Leaving old, toothless tigers in the dust, November 10, 2009.
Emerging markets are still the economies to watch now that the Asian Tigers have joined the boring, developed nations club.

• Mark Thoma (Economist’s View): “The Fed is already transparent”, November 11, 2009.
I think one of the problems the Fed is facing is that people do not feel like the Fed is operating on their behalf, they don’t think that the Fed’s actions are in their best interests, and they don’t feel like they have any way to do much about it.

• Phil Thornton (Times Online): Brace yourselves for credit crunch II, November 9, 2009.
It’s coming, and is the fault of US private equity firms, said Josh Kosman, author of an alarming book.

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One of the most incisive thinkers in the investment field is David Fuller who runs the Fullermoney service from London and provides daily written and podcast commentary. I have been subscribing to the service for more than 20 years and consider it part of my staple investment diet, particularly also for its truly global approach. I am not an agent for David, but please visit by his site to get a feel for his excellent commentary.

The paragraphs below from Monday’s Fullermoney report are particularly topical at this juncture in stock markets.

Veteran subscribers will recall a remark often used on this site: Bull markets do not die of old age - to which I will add, or warnings by Roubiniesque economists. Instead, they are assassinated - usually by central banks.

“So how many rate bullets does it take to fell a bull?

“You may not be surprised to hear that there is no precise answer, because it depends mainly on sentiment and liquidity. We know when central banks start to reduce liquidity, or at least increase its price, but we do not know precisely when that will affect sentiment adversely.

“We know that a few central banks have commenced an incremental tightening of rates. However, we cannot know how aggressively they will act or when other central banks will follow their lead, because they do not know themselves.

“Recently, some big guns from the investment management and hedge fund industry concluded that stock markets were ripe for a correction. I was of a similar view. However, markets seldom dance to countertrend tunes for long, and with but a few exceptions we have seen little more than slightly larger reactions and more sideways ranging recently.

“The DJIA’s new recovery high today [Monday] is not exactly the stuff of corrections, unless it is instantly and dramatically reversed. Meanwhile, I would back the bull trend. After all, we have seen some mean reversion recently, narrowing overextensions relative to 200-day moving averages. There is also the not insignificant matter of the biggest monetary reflation in human history, and there is no hyperbole in that description.

“Stock market indices would have to break beneath their most recent reaction lows to question further the overall outlook for sideways to higher ranging.

“Meanwhile, note also the still widening spread between US 10-year yields over 2-year yields, otherwise known as the Yield Curve, on this historical chart. It is still rising, indicating to me that quantitative easing continues. The time to start thinking about closing long portfolios in anticipation of the next bear market, I suggest, will be when the Yield Curve next inverts by moving below zero. However the lead was so early last time (early 2006) that some of us became complacent about it.”

Source: Fullermoney.com, November 10, 2009.

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This post provides links to a number of interesting articles I have read over the past few days that you may also enjoy.

• John Arlidge: (Times Online): I’m doing “God’s work”. Meet Mr Goldman Sachs, November 8, 2009.
The Sunday Times gains unprecedented access to the world’s most powerful, and most secretive, investment bank.

• Martha White (The Big Money): The Dow is too high, November 9 2009.
What’s holding up the stock market? (It’s not the economy.)

• Rob Smyth, Bill Ryder and Ken Liu (Riverfront): Ten conditions for a sustainable recovery, November 9, 2009.

• The New York Times: Jobless recovery, November 7, 2009.
We know that more stimulus spending and government programs are a fraught topic. But they are exactly what the country needs. It may be the only way to prevent a renewed downturn. And the only way to create the jobs needed to put Americans back to work. Those are the essential - and missing - ingredients of a sustained recovery.

• Robert Samuelson (Real Clear Politics): The next big bubble?, November 9, 2009.
How deftly the Fed navigates from its present policy matters for the world as well as the United States. If it’s too fast, it may kill the economic recovery; if it’s too slow, it may spawn bubbles — and kill the recovery.

• Terry Macalister (Guardian): Key oil figures were distorted by US pressure, says whistleblower, November 9, 2009.
The world is much closer to running out of oil than official estimates admit, according to a whistleblower at the International Energy Agency who claims it has been deliberately underplaying a looming shortage for fear of triggering panic buying.

• James Quinn (Telegraph): Barack Obama pledges to tackle Beijing on yuan, November 10, 2009.
Barack Obama, the US President, will confront Chinese officials on the divisive subject of the yuan next week in a bold move which could anger America’s largest creditor.

• Willem Buiter (FT.com/maverecon): Gold - six thousand year-old bubble, November 8, 2009.
I don’t want to argue with a 6000-year old bubble.  It may well be good for another 6000 years.  Its value may go from $1,100 per fine ounce to $1,500 or $5,000 for all I know.  But I would not invest more than a sliver of my wealth into something without intrinsic value, something whose positive value is based on nothing more than a set of self-confirming beliefs.

• Giles Keating (Credit Suisse):  Financial industry after the crisis, November 6, 2009.
In the aftermath of the credit crisis, the world is becoming multipolar, and this is likely to be clearly reflected in many aspects of the financial system. The dominant role of the dollar and of the US banks is set to give way to a world in which the US is still important, but in which other countries, their currencies, their capital markets and their banks, all play a greatly enhanced role. As with all great changes, this structural shift will offer both threats and opportunities for investors.

• Martin Wolf (Financial Times): Victory in the cold war was a start as well as an ending, November 10, 2009.
Has capitalism failed, as communism did? No. Some transition countries are in crisis; but transition itself is not. Liberal democracies and market economies can reform and adapt. They have shown these qualities before. They must do so again.

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