Tag: finance

2013 was not a good year for The Bond King after Bill Gross’ flagship Total Return Fund had its first disappointing year in a long time, and with a record outflow of $41.1 billion, it just may be a year Gross would like to forget entirely. Judging by his just released letter, the first for 2014, the “Seesaw Rider”, the manager of the world’s largest bond fund has had an earful from investors who are suddenly concerned that in an environment of rising rates owning bonds may not be the best strategy first and foremost due to the potential of capital loss. Which is why, not surprisingly, Bill comes out with a full court press defense of the one thing he does: own bonds.

As Gross has made abundantly clear in recent months, the bonds he does own are not spread out across the curve – in fact, those keeping track of his TRF holdings will know that it is currently short by 5% of AUM in the 20 year+ maturity bucket, and long some 62% in the 1-5 year space – but focus on the short end. To wit: “An investor should own bonds with less duration and shorter maturities when the teeter totter is on the losing end. Admittedly, those with long-term liability structures such as pension funds and insurance companies have to be careful about their underweights but as a rule, less duration should mean more alpha relative to an investor’s benchmark as the interest rate worm turns and the cycle shifts upward.”

But the main defense Gross uses circles around the following statement: “Bond prices as shown in Chart 1 have already come down a lot since April of 2013 or July of 2012 – whenever you want to label the peak. And bond prices – especially those at the front end of yield curves – say 1-5 years, are critically dependent on the future level of Fed Funds, not the glidepath of the almost preordained Fed Taper which should end in 2014. Both the taper and the policy rate of course are dependent on 1) economic growth, 2) the level of unemployment, and 3) future inflation – the third condition being the runt of the Fed’s litter but one that promises to turn a sow’s ear into a silk purse for those who watch it closely.”

In short: Gross believes that the one catalyst that is preventing him for capitulating on the bond sector is the persistent lack of (BLS measurable) inflation:

I am amazed at the fascination and emphasis placed on the u-rate during employment Fridays. Bond prices will move (in some cases by points) with a minor up or down change in unemployment relative to expectations, but when it comes to the third little pig of the litter – inflation – no one seems to care. This number – the PCE annualized inflation rate – is released near the 20th of every month but you will not see CNBC or Bloomberg analysts waiting with bated breath for its release. I do. I consider it the critical monthly statistic for analyzing Fed policy in 2014. Why? Bernanke, Yellen and their merry band of Fed governors and regional presidents have told us so. No policy rate hike until both unemployment and inflation thresholds have been breached and even then “they’re not thresholds,” they’re forks in the road that may or may not lead in a different direction. (To paraphrase Yogi Berra, “if you come to a fork in the road, you don’t have to take it!”) At the moment, the Fed’s fork or target for PCE inflation is 2.0% or higher while December’s annualized rate was only 1.2%. Miles to go before Yogi or anyone else has to begin worrying about a policy rate hike. 2016 at the earliest.

His conclusion for those holding the short-end: “1-5 year bonds, combined with credit, volatility, curve rolldown, and a dollop of currency should float a bond investor’s boat in 2014 and avoid breaking the buck in total return space. I’m not saying we’ve got a bull market here. That would be like saying the Knicks or the Cubs have got a chance to win the big one. They don’t, and a bull market in bonds is one for the history books. But if PCE inflation stays below 2.0% and inflationary expectations don’t rise appreciably above 2.5%, then a 3-4% total return for 2014 is realistic.”

That’s all fine and great, but what Gross misses is one simple thing: bond rates traditionally have always gone up during easing episodes, only to, paradoxically, plunge just after QE ends, as equities tumble and as investors around the world scramble for the safety bid – Treasurys. Just recall what drove bonds to sub-2% in August 2011 – it was the 20% drop in stocks, certainly not the downgrade of the US by Standard and Poors.

Which is why if indeed the Fed is trimming and ultimately ending QE, it is that which investors should focus on, not on inflation. Because the big driver for 2014 will not be the short end based on always wrong expectations of what Fed monetary policy does to prices, but the exodus of speculative money from equities into safe havens, the Great Unrotation.

Everything else is largely irrelevant.

* * *

From Bill Gross’ Investment Outlook letter: “Seesaw Rider“

There’s 50 ways to leave your lover and maybe more than that to lose your money or “break the buck,” as some label it in the money markets. You can buy the Brooklyn Bridge, bet on the Cubs to win the World Series or have owned 30 year Treasury bonds in 2013, to name just a few. But bridges and baseball aside, what you’re probably interested in hearing from me is how to avoid breaking your investment buck in 2014.  

 

First of all, some disclosures: There are no guarantees, and staying above water in financial markets is not one of them. If you want a life preserver buy a Treasury bill, but then the 6 basis point yield may not excite you. Secondly, I’ve had lots of experience in breaking the buck so the advice may be somewhat tainted. Having started at PIMCO in 1971, there followed an intermittent stretch of nearly 10 years when yours truly was dog-paddling like crazy just to stay afloat. Still, PIMCO’s waterwings functioned better than most, so that when the time came for yields to drop and prices to go up in 1981, we were well positioned for a 30 year bull market.

 

Yet having experienced those formative years – with 2013 now being one of them in total return space – it’s helpful to remember some of the client and indeed personal frustrations that accompanied them. When your annual return shows a minus sign, clients wonder why they should pay you a fee to lose money. They have a point, although it may be somewhat shortsighted. A few also struggle to understand that bond prices go down when interest rates go up, and that with interest rates so low, the odds of up as opposed to down are slightly tilted. This principle I call the teeter totter or “seesaw.” I used to explain bonds to my mom every Thanksgiving or so, on a journey up to San Francisco. She wondered then why she was always 10 or 11% richer on her statement at year-end, remarking that these “yields” were pretty high. I reminded her that the 11% or so was a total return not a yield and that when interest rates went down, prices went up just like a “teeter totter.” That seemed to help her understand the “bond market” much like it would help some “mom and pop” investors understand it today, although bonds switched seats so to speak on the seesaw in 2013.

Still, if you’re on the wrong end of an interest rate teeter totter headed up, it makes you wonder why anyone would own bonds or at least why anyone would own longer-term bonds. That question and its answer are the key for 2014.

First of all the obvious: An investor should own bonds with less duration and shorter maturities when the teeter totter is on the losing end. Admittedly, those with long-term liability structures such as pension funds and insurance companies have to be careful about their underweights but as a rule, less duration should mean more alpha relative to an investor’s benchmark as the interest rate worm turns and the cycle shifts upward.

But riding the bond market seesaw doesn’t always mean negative returns, especially when it comes to other “carry” components inherent in fixed income securities. As I pointed out in my August 2013 Investment Outlook titled “Bond Wars,” maturity extension is just one of the ways to produce carry and total return in a fixed income portfolio. In addition there are 1) credit spreads, 2) volatility sales, 3) curve and 4) currency-related characteristics that when combined with maturity can produce returns over and above those microscopic Treasury bill rates, and still keep you from “breaking the buck” under a majority of scenarios. On the “down” side of an interest rate teeter totter these carry components can help a portfolio benchmarked to a 5-year duration bond market index float above water and even enjoy swimming! Likewise, they become major components of low duration and “unconstrained bond portfolios” that do more than dog-paddle in a marketplace where bonds, stocks and alternative assets are competing for total returns. So in 2014, look for PIMCO to stress credit, curve, volatility and a tiny bit of currency while deemphasizing 10- and 30-year maturities that are Taper affected.

Still, a seesaw rider should not get carried away by this metaphor that seems to guarantee that what goes up must come down. Bond prices as shown in Chart 1 have already come down a lot since April of 2013 or July of 2012 – whenever you want to label the peak. And bond prices – especially those at the front end of yield curves – say 1-5 years, are critically dependent on the future level of Fed Funds, not the glidepath of the almost preordained Fed Taper which should end in 2014. Both the taper and the policy rate of course are dependent on 1) economic growth, 2) the level of unemployment, and 3) future inflation – the third condition being the runt of the Fed’s litter but one that promises to turn a sow’s ear into a silk purse for those who watch it closely.  

I am amazed at the fascination and emphasis placed on the u-rate during employment Fridays. Bond prices will move (in some cases by points) with a minor up or down change in unemployment relative to expectations, but when it comes to the third little pig of the litter – inflation – no one seems to care. This number – the PCE annualized inflation rate – is released near the 20th of every month but you will not see CNBC or Bloomberg analysts waiting with bated breath for its release. I do. I consider it the critical monthly statistic for analyzing Fed policy in 2014. Why? Bernanke, Yellen and their merry band of Fed governors and regional presidents have told us so. No policy rate hike until both unemployment and inflation thresholds have been breached and even then “they’re not thresholds,” they’re forks in the road that may or may not lead in a different direction. (To paraphrase Yogi Berra, “if you come to a fork in the road, you don’t have to take it!”) At the moment, the Fed’s fork or target for PCE inflation is 2.0% or higher while December’s annualized rate was only 1.2%. Miles to go before Yogi or anyone else has to begin worrying about a policy rate hike. 2016 at the earliest.

 

If so, then 1-5 year bonds, combined with credit, volatility, curve rolldown, and a dollop of currency should float a bond investor’s boat in 2014 and avoid breaking the buck in total return space. I’m not saying we’ve got a bull market here. That would be like saying the Knicks or the Cubs have got a chance to win the big one. They don’t, and a bull market in bonds is one for the history books. But if PCE inflation stays below 2.0% and inflationary expectations don’t rise appreciably above 2.5%, then a 3-4% total return for 2014 is realistic. Granted, that doesn’t come close to the 11% yields that my mother grew used to years ago, but then she was riding a seesaw and never knew it. Bond investors will be less rich, but more placid in 2014 than when she was teetering and tottering her way to good fortune.

Seesaw Speed Read

1) Total return bond portfolios should float above water in 2014.

2) No guarantees either!

3) Watch PCE inflation more than the unemployment rate.

4) Emphasize credit, volatility, currency and 1-5 year maturities.

5) Expect 3-4% total return for bonds.

6) If you think stocks will keep going, then keep riding. But seesaws go up and down!

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/0gmjXWeaLfQ/story01.htm Tyler Durden

2013 was not a good year for The Bond King after Bill Gross’ flagship Total Return Fund had its first disappointing year in a long time, and with a record outflow of $41.1 billion, it just may be a year Gross would like to forget entirely. Judging by his just released letter, the first for 2014, the “Seesaw Rider”, the manager of the world’s largest bond fund has had an earful from investors who are suddenly concerned that in an environment of rising rates owning bonds may not be the best strategy first and foremost due to the potential of capital loss. Which is why, not surprisingly, Bill comes out with a full court press defense of the one thing he does: own bonds.

As Gross has made abundantly clear in recent months, the bonds he does own are not spread out across the curve – in fact, those keeping track of his TRF holdings will know that it is currently short by 5% of AUM in the 20 year+ maturity bucket, and long some 62% in the 1-5 year space – but focus on the short end. To wit: “An investor should own bonds with less duration and shorter maturities when the teeter totter is on the losing end. Admittedly, those with long-term liability structures such as pension funds and insurance companies have to be careful about their underweights but as a rule, less duration should mean more alpha relative to an investor’s benchmark as the interest rate worm turns and the cycle shifts upward.”

But the main defense Gross uses circles around the following statement: “Bond prices as shown in Chart 1 have already come down a lot since April of 2013 or July of 2012 – whenever you want to label the peak. And bond prices – especially those at the front end of yield curves – say 1-5 years, are critically dependent on the future level of Fed Funds, not the glidepath of the almost preordained Fed Taper which should end in 2014. Both the taper and the policy rate of course are dependent on 1) economic growth, 2) the level of unemployment, and 3) future inflation – the third condition being the runt of the Fed’s litter but one that promises to turn a sow’s ear into a silk purse for those who watch it closely.”

In short: Gross believes that the one catalyst that is preventing him for capitulating on the bond sector is the persistent lack of (BLS measurable) inflation:

I am amazed at the fascination and emphasis placed on the u-rate during employment Fridays. Bond prices will move (in some cases by points) with a minor up or down change in unemployment relative to expectations, but when it comes to the third little pig of the litter – inflation – no one seems to care. This number – the PCE annualized inflation rate – is released near the 20th of every month but you will not see CNBC or Bloomberg analysts waiting with bated breath for its release. I do. I consider it the critical monthly statistic for analyzing Fed policy in 2014. Why? Bernanke, Yellen and their merry band of Fed governors and regional presidents have told us so. No policy rate hike until both unemployment and inflation thresholds have been breached and even then “they’re not thresholds,” they’re forks in the road that may or may not lead in a different direction. (To paraphrase Yogi Berra, “if you come to a fork in the road, you don’t have to take it!”) At the moment, the Fed’s fork or target for PCE inflation is 2.0% or higher while December’s annualized rate was only 1.2%. Miles to go before Yogi or anyone else has to begin worrying about a policy rate hike. 2016 at the earliest.

His conclusion for those holding the short-end: “1-5 year bonds, combined with credit, volatility, curve rolldown, and a dollop of currency should float a bond investor’s boat in 2014 and avoid breaking the buck in total return space. I’m not saying we’ve got a bull market here. That would be like saying the Knicks or the Cubs have got a chance to win the big one. They don’t, and a bull market in bonds is one for the history books. But if PCE inflation stays below 2.0% and inflationary expectations don’t rise appreciably above 2.5%, then a 3-4% total return for 2014 is realistic.”

That’s all fine and great, but what Gross misses is one simple thing: bond rates traditionally have always gone up during easing episodes, only to, paradoxically, plunge just after QE ends, as equities tumble and as investors around the world scramble for the safety bid – Treasurys. Just recall what drove bonds to sub-2% in August 2011 – it was the 20% drop in stocks, certainly not the downgrade of the US by Standard and Poors.

Which is why if indeed the Fed is trimming and ultimately ending QE, it is that which investors should focus on, not on inflation. Because the big driver for 2014 will not be the short end based on always wrong expectations of what Fed monetary policy does to prices, but the exodus of speculative money from equities into safe havens, the Great Unrotation.

Everything else is largely irrelevant.

* * *

From Bill Gross’ Investment Outlook letter: “Seesaw Rider“

There’s 50 ways to leave your lover and maybe more than that to lose your money or “break the buck,” as some label it in the money markets. You can buy the Brooklyn Bridge, bet on the Cubs to win the World Series or have owned 30 year Treasury bonds in 2013, to name just a few. But bridges and baseball aside, what you’re probably interested in hearing from me is how to avoid breaking your investment buck in 2014.  

 

First of all, some disclosures: There are no guarantees, and staying above water in financial markets is not one of them. If you want a life preserver buy a Treasury bill, but then the 6 basis point yield may not excite you. Secondly, I’ve had lots of experience in breaking the buck so the advice may be somewhat tainted. Having started at PIMCO in 1971, there followed an intermittent stretch of nearly 10 years when yours truly was dog-paddling like crazy just to stay afloat. Still, PIMCO’s waterwings functioned better than most, so that when the time came for yields to drop and prices to go up in 1981, we were well positioned for a 30 year bull market.

 

Yet having experienced those formative years – with 2013 now being one of them in total return space – it’s helpful to remember some of the client and indeed personal frustrations that accompanied them. When your annual return shows a minus sign, clients wonder why they should pay you a fee to lose money. They have a point, although it may be somewhat shortsighted. A few also struggle to understand that bond prices go down when interest rates go up, and that with interest rates so low, the odds of up as opposed to down are slightly tilted. This principle I call the teeter totter or “seesaw.” I used to explain bonds to my mom every Thanksgiving or so, on a journey up to San Francisco. She wondered then why she was always 10 or 11% richer on her statement at year-end, remarking that these “yields” were pretty high. I reminded her that the 11% or so was a total return not a yield and that when interest rates went down, prices went up just like a “teeter totter.” That seemed to help her understand the “bond market” much like it would help some “mom and
pop” investors understand it today, although bonds switched seats so to speak on the seesaw in 2013.

Still, if you’re on the wrong end of an interest rate teeter totter headed up, it makes you wonder why anyone would own bonds or at least why anyone would own longer-term bonds. That question and its answer are the key for 2014.

First of all the obvious: An investor should own bonds with less duration and shorter maturities when the teeter totter is on the losing end. Admittedly, those with long-term liability structures such as pension funds and insurance companies have to be careful about their underweights but as a rule, less duration should mean more alpha relative to an investor’s benchmark as the interest rate worm turns and the cycle shifts upward.

But riding the bond market seesaw doesn’t always mean negative returns, especially when it comes to other “carry” components inherent in fixed income securities. As I pointed out in my August 2013 Investment Outlook titled “Bond Wars,” maturity extension is just one of the ways to produce carry and total return in a fixed income portfolio. In addition there are 1) credit spreads, 2) volatility sales, 3) curve and 4) currency-related characteristics that when combined with maturity can produce returns over and above those microscopic Treasury bill rates, and still keep you from “breaking the buck” under a majority of scenarios. On the “down” side of an interest rate teeter totter these carry components can help a portfolio benchmarked to a 5-year duration bond market index float above water and even enjoy swimming! Likewise, they become major components of low duration and “unconstrained bond portfolios” that do more than dog-paddle in a marketplace where bonds, stocks and alternative assets are competing for total returns. So in 2014, look for PIMCO to stress credit, curve, volatility and a tiny bit of currency while deemphasizing 10- and 30-year maturities that are Taper affected.

Still, a seesaw rider should not get carried away by this metaphor that seems to guarantee that what goes up must come down. Bond prices as shown in Chart 1 have already come down a lot since April of 2013 or July of 2012 – whenever you want to label the peak. And bond prices – especially those at the front end of yield curves – say 1-5 years, are critically dependent on the future level of Fed Funds, not the glidepath of the almost preordained Fed Taper which should end in 2014. Both the taper and the policy rate of course are dependent on 1) economic growth, 2) the level of unemployment, and 3) future inflation – the third condition being the runt of the Fed’s litter but one that promises to turn a sow’s ear into a silk purse for those who watch it closely.  

I am amazed at the fascination and emphasis placed on the u-rate during employment Fridays. Bond prices will move (in some cases by points) with a minor up or down change in unemployment relative to expectations, but when it comes to the third little pig of the litter – inflation – no one seems to care. This number – the PCE annualized inflation rate – is released near the 20th of every month but you will not see CNBC or Bloomberg analysts waiting with bated breath for its release. I do. I consider it the critical monthly statistic for analyzing Fed policy in 2014. Why? Bernanke, Yellen and their merry band of Fed governors and regional presidents have told us so. No policy rate hike until both unemployment and inflation thresholds have been breached and even then “they’re not thresholds,” they’re forks in the road that may or may not lead in a different direction. (To paraphrase Yogi Berra, “if you come to a fork in the road, you don’t have to take it!”) At the moment, the Fed’s fork or target for PCE inflation is 2.0% or higher while December’s annualized rate was only 1.2%. Miles to go before Yogi or anyone else has to begin worrying about a policy rate hike. 2016 at the earliest.

 

If so, then 1-5 year bonds, combined with credit, volatility, curve rolldown, and a dollop of currency should float a bond investor’s boat in 2014 and avoid breaking the buck in total return space. I’m not saying we’ve got a bull market here. That would be like saying the Knicks or the Cubs have got a chance to win the big one. They don’t, and a bull market in bonds is one for the history books. But if PCE inflation stays below 2.0% and inflationary expectations don’t rise appreciably above 2.5%, then a 3-4% total return for 2014 is realistic. Granted, that doesn’t come close to the 11% yields that my mother grew used to years ago, but then she was riding a seesaw and never knew it. Bond investors will be less rich, but more placid in 2014 than when she was teetering and tottering her way to good fortune.

Seesaw Speed Read

1) Total return bond portfolios should float above water in 2014.

2) No guarantees either!

3) Watch PCE inflation more than the unemployment rate.

4) Emphasize credit, volatility, currency and 1-5 year maturities.

5) Expect 3-4% total return for bonds.

6) If you think stocks will keep going, then keep riding. But seesaws go up and down!

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/0gmjXWeaLfQ/story01.htm Tyler Durden

Financial markets have become increasingly obviously highly dependent on central bank policies. In a follow-up to Incrementum's previous chartbook, Stoerferle and Valek unveil the following 50 slide pack of 25 incredible charts to crucially enable prudent investors to grasp the consequences of the interplay between monetary inflation and deflation. They introduce the term "monetary tectonics' to describe the 'tug of war' raging between parabolically rising monetary base M0 driven by extreme easy monetary policy and shrinking monetary aggregate M2 and M3 due to credit deleveraging. Critically, Incrementum explains how this applies to gold buying decisions as they introduce their "inflation signal" indicator.

GoldSilverWorlds.com has done a great job of summarizing the key aspects (and the full chartbook is below)…

The authors introduce the term “monetary tectonics” as a metaphor for this war. Similar to tectonic plates under a volcano, monetary inflation and deflation is currently working against each other:

• Monetary inflation  is the result of a parabolically rising monetary base M0 driven by the central bank monetary easing policy.
• Monetary deflation is the result of shrinking monetary aggregates M2 and M3 because of credit deleveraging.

The following chart clearly shows that 2013 was a pivot year in which the monetary base M0 grew exponentially while net M2 (expressed on the chart line as M2 minus M0) declined significantly.

The chartbook shows several trend which confirm the deflationary monetary pressure:

• Total credit market debt as a % of US GDP has been shrinking since 2007 (“debt deleveraging”).
• US bank credit of all commercial banks is stagnating (close to negative growth), similar to the period 2007/2008. See first chart below.
• Money supply growth in the US and the Eurozone is trending lower. See second chart below.
• Personal consumption expenditures are exhibiting disinflation .
• The gold/silver-Ratio is declining. Gold tends to outperform silver during disinflationary and/or deflationary periods.
• The gold to Treasury ratio is declining. See third chart below.
• The Continuous Commodity Index (CCI) has been in a steep decline since the fall of 2011.

On the other hand, inflationary pressure is present through the following trends:

• An explosion of the monetary base M0. See first chart below.
• US households show signs of stopped deleveraging. See second chart below.
• The currency in circulation keeps on expanding.
• Commercial banks have piled up an enormous amount of excess reserves which, in case of a rate hike by central planners, could flood the market through lending in the fractional banking system. See thrid chart below.

How is gold impacted in this inflation vs deflation war? The key conclusion of the research is that, due to the fractional reserve banking system and the dynamics of the ‘monetary tectonics’, inflationary and deflationary phases will alternate in the foreseeable future. Gold, being a monetary asset in the view of Austrian economics, tends to rise in inflationary periods and decline during times of disinflation.

The key take-away for investors is to position themselves accordingly and consider price declines as buying opportunities for the coming inflationary period. How comes one can be so sure that inflation is coming? Consider that the government must avoid deflation; it is a horror scenario for the following reasons:

• Price deflation results in a real increase in the value of debt and a nominal decline in asset values. Debt can no longer be serviced.
• Price deflation would lead to massive tax revenue declines for the government due to a declining taxable base.
• Deflation would have fatal consequences for large parts of the banking system.
• Central banks also have the mandate to ensure ‘financial market stability‘

Interesting to know, Stoeferle and Valk developed the “Incrementum Inflation Signal,” an indicator of how much monetary inflation reaches the real economy based on market and monetary indicators. According to the signal, investors should take positions according to the the rising, neutral or falling inflation trends.

Monetary Tectonics Inflation vs Deflation Chartbook by Incrementum

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/9ndWTADe-7Y/story01.htm Tyler Durden

Financial markets have become increasingly obviously highly dependent on central bank policies. In a follow-up to Incrementum's previous chartbook, Stoerferle and Valek unveil the following 50 slide pack of 25 incredible charts to crucially enable prudent investors to grasp the consequences of the interplay between monetary inflation and deflation. They introduce the term "monetary tectonics' to describe the 'tug of war' raging between parabolically rising monetary base M0 driven by extreme easy monetary policy and shrinking monetary aggregate M2 and M3 due to credit deleveraging. Critically, Incrementum explains how this applies to gold buying decisions as they introduce their "inflation signal" indicator.

GoldSilverWorlds.com has done a great job of summarizing the key aspects (and the full chartbook is below)…

The authors introduce the term “monetary tectonics” as a metaphor for this war. Similar to tectonic plates under a volcano, monetary inflation and deflation is currently working against each other:

• Monetary inflation  is the result of a parabolically rising monetary base M0 driven by the central bank monetary easing policy.
• Monetary deflation is the result of shrinking monetary aggregates M2 and M3 because of credit deleveraging.

The following chart clearly shows that 2013 was a pivot year in which the monetary base M0 grew exponentially while net M2 (expressed on the chart line as M2 minus M0) declined significantly.

The chartbook shows several trend which confirm the deflationary monetary pressure:

• Total credit market debt as a % of US GDP has been shrinking since 2007 (“debt deleveraging”).
• US bank credit of all commercial banks is stagnating (close to negative growth), similar to the period 2007/2008. See first chart below.
• Money supply growth in the US and the Eurozone is trending lower. See second chart below.
• Personal consumption expenditures are exhibiting disinflation .
• The gold/silver-Ratio is declining. Gold tends to outperform silver during disinflationary and/or deflationary periods.
• The gold to Treasury ratio is declining. See third chart below.
• The Continuous Commodity Index (CCI) has been in a steep decline since the fall of 2011.

On the other hand, inflationary pressure is present through the following trends:

• An explosion of the monetary base M0. See first chart below.
• US households show signs of stopped deleveraging. See second chart below.
• The currency in circulation keeps on expanding.
• Commercial banks have piled up an enormous amount of excess reserves which, in case of a rate hike by central planners, could flood the market through lending in the fractional banking system. See thrid chart below.

How is gold impacted in this inflation vs deflation war? The key conclusion of the research is that, due to the fractional reserve banking system and the dynamics of the ‘monetary tectonics’, inflationary and deflationary phases will alternate in the foreseeable future. Gold, being a monetary asset in the view of Austrian economics, tends to rise in inflationary periods and decline during times of disinflation.

The key take-away for investors is to position themselves accordingly and consider price declines as buying opportunities for the coming inflationary period. How comes one can be so sure that inflation is coming? Consider that the government must avoid deflation; it is a horror scenario for the following reasons:

• Price deflation results in a real increase in the value of debt and a nominal decline in
  asset values. Debt can no longer be serviced.
• Price deflation would lead to massive tax revenue declines for the government due to a declining taxable base.
• Deflation would have fatal consequences for large parts of the banking system.
• Central banks also have the mandate to ensure ‘financial market stability‘

Interesting to know, Stoeferle and Valk developed the “Incrementum Inflation Signal,” an indicator of how much monetary inflation reaches the real economy based on market and monetary indicators. According to the signal, investors should take positions according to the the rising, neutral or falling inflation trends.

Monetary Tectonics Inflation vs Deflation Chartbook by Incrementum

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/9ndWTADe-7Y/story01.htm Tyler Durden

First Janet Yellen makes the cover of Time, and concurrently so as not to be left behind, Businesweek, well-known for its suggestive covers (housing, hedge fund managers, the Tea Party), has posted an even more provocative creature on its own cover: a Unicorn – one which is supposed to symbolize, you guessed it, Bitcoins – and serves as the anchor for the Bloomberg-owned magazine’s extensive profile of the digital currency, with the following teaser: “Why are investors so crazy for an alterantive currency invented by a phantom?“

And as it has done in the past, BW walks readers through the cover creation process:

So, is everyone paying attention yet?

From the BusinessWeek article, which despite the bombastic rhetoric is mostly focused on the topic of Bitcoin Mining, something we covered last month:

Bitcoin is the digital currency that thrills nerds, inspires libertarians, and incites the passions of economists who debate the value of money made from nothing but ones and zeroes. Devotees watch the fluctuations of Bitcoin’s price with a fanaticism typically reserved for college football scores. Alternative currency startups are being lavishly funded by venture capitalists while visionaries gush about the world-changing possibilities of money free from government control. Silicon Valley is the natural center for Bitcoin mania. An advocacy group named Arisebitcoin recently put up 40 billboards around the Bay Area with messages such as: “The Revolution has started … where do you stand?”

 

As with an actual precious metal, Bitcoins are in limited supply—they must be “mined.” Unlike with precious metals, this mining is done purely by computer. Miners set their machines to run a series of complex calculations that tally up and certify all the transactions of other Bitcoin holders around the world. If the miner’s computers complete these calculations and solve a complex mathematical puzzle before anyone else, he earns about 25 Bitcoins as payment. It’s a nice haul: With the price of each Bitcoin nosing up near $1,000, that’s $25,000 for 10 minutes or so of work. For the moment at least, miners are the rare grunts who can also get rich.

 

* * *

 

Even some Bitcoin entrepreneurs think mining has become a sucker’s game. Fred Ehrsam is a former Goldman Sachs trader and co-founder of Coinbase, a Bitcoin startup making wallet software that allows people to trade and store Bitcoins, and which recently raised $25 million in venture capital. Ehrsam is committed to Bitcoin but pessimistic about underfunded prospectors making any money. “This is very much a fad that is going to die soon, if it’s not even dead already,” he says. But that’s not the same as saying individual mining will end. He suggests that the next generation of miners might run their computers for ideological purposes—to support the currency and be a disruptive force in global finance—even if doing so has become unprofitable.

 

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“Mining was supposed to be a democratized thing, but it’s now only accessible to the elite of the elites,” says Chris Larsen, CEO of Ripple Labs, which has introduced a virtual currency called Ripple. It’s similar to Bitcoin but without the mining. (The company gradually hands out increments of the currency to supporters.) “Hordes of brilliant engineers are raising money for mining equipment that regular folks can’t compete with,” Larsen says.

 

For idealists not swimming in startup capital, it’s still possible to join the Bitcoin rush, mostly by adding power to a distributed array of processors. Craigslist is full of miners selling their old rigs, and there are peripherals that cost about $250—they look like USB thumb drives, plug into standard PCs, and are mostly ineffective. Online calculator sites like BitcoinX let prospective miners enter processor speed, current Bitcoin exchange rate, electricity costs, and other variables to figure out whether their investment makes any financial sense. Most of these calculators suggest that even miners with older, specialized Bitcoin machines can still make a little money as long as the price for a Bitcoin is above $700. Members of mining groups are rewarded according to the amount of work they contribute.

And, of course, there are computer viruses spread by Yahoo ads, converting witless users’ computers into Bitcoin mining slaves as we described yesterday.

Read the full BusinessWeek article here.

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Today’s AM fix was USD 1,226.00, EUR 900.61 and GBP 744.97 per ounce.
Yesterday’s AM fix was USD 1,226.50, EUR 902.50 and GBP 747.37 per ounce.

Gold fell $7.40 or 0.6% yesterday, closing at $1,224.90/oz. Silver slipped $0.31 or 1.56% closing at $19.56/oz. Platinum inched down $0.26, or 0.26%, to $1,410.49/oz and palladium fell $5.03 or 0.7%, to $733.47/oz.
 
Gold is slightly higher today but lower this week. Investor sentiment remains extremely bearish but physical buyers continue to accumulate at these low prices. The UK Royal Mint has run out of 2014 British gold sovereigns due to unprecedented demand.

 
Gold in U.S. Dollars, 5 Year – (Bloomberg)

Respected technical research analyst Louise Yamada predicts further falls in gold. She estimates a short term 19% drop to $1,000 in 2014. However she remains very bullish on gold in the long term.

Bloomberg’s analyst survey of 15 polled this week were the most bullish in a year on gold with only 2 bearish and four neutral. UBS sees near term support at $1,207.57/oz.

Gold in Euros, 5 Year – (Bloomberg)

The U.K.’s Royal Mint, which traces its history back more than 1,000 years, ran out of 2014 Sovereign gold coins due to “exceptional demand” reported Bloomberg.

Gold in British Pounds, 5 Year – (Bloomberg)

“Since the dip in the price of gold we have seen increased demand for our gold bullion coins from the major coin markets, and this presently shows no sign of abating,” the U.K. mint said in the statement. “The Royal Mint continues to supply to its customers and is increasing production to accommodate the higher demand.”

Coin stock availability has gone up and down in the past according to market demand, the mint said in a separate e-mail. Gold climbed to a three-week high of $1,248.51 on Jan. 6 as physical demand increased, particularly in China.

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Between his downbeat “more downside risks” outlook, “extended low inflation” perspective, and strengthened “forward guidance,” Draghi has, once again, managed to talk down the EUR (for now). EURUSD has dropped almost 100 pips since he began speaking…”we firmly reiterate our forward guidance that we continue to expect the key ECB interest rates to remain at present or lower levels for an extended period of time,” adding that “the Governing Council strongly emphasizes that it will maintain an accommodative stance of monetary policy for as long as necessary.” US Treasuries are rallying alongside this tumble.

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Between his downbeat “more downside risks” outlook, “extended low inflation” perspective, and strengthened “forward guidance,” Draghi has, once again, managed to talk down the EUR (for now). EURUSD has dropped almost 100 pips since he began speaking…”we firmly reiterate our forward guidance that we continue to expect the key ECB interest rates to remain at present or lower levels for an extended period of time,” adding that “the Governing Council strongly emphasizes that it will maintain an accommodative stance of monetary policy for as long as necessary.” US Treasuries are rallying alongside this tumble.

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The Department of Labor states that there is no indication that the winter storm affected this week’s numbers (though they are likely to remain volatile through January) as jobless claims dropped from a ubiquitously revised-upwards 345k to 330k this week – the lowest level since the end of November. Continuing claims rose modestly back into the middle of the range of the last 4 months just like initial claims. The emergency claims data is lagged so we will not see the impact of congressional decisions on that until 2 weeks from now but its worth noting that the data we alreayd have shows 104,000 dropping off the rolls. California, Pennsylvania, and Michigan topped the initial claimants list with California worse than this time last year.

Initial claims stuck in a 4 month range…

but emergency benefits continue to see people fall off the rolls – down 104k for the week of 12/20/13…

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