Tag: finance

Submitted by Nick Giambruno via Doug Casey's International Man,

I am very pleased to have had the chance to speak with Jim Rogers, a legendary investor and true international man.

Jim and I spoke about some of the most exciting investments and stock markets around the world that pretty much nobody else is talking about.

You won't want to miss this fascinating discussion, which you'll find below.

Nick Giambruno: Tell us what you think it means to be a successful contrarian and how that relates to investing in crisis markets throughout the world.

Jim Rogers: Well, there are two aspects of it. One is being a trader, being able to buy panic, and nearly always if you are a trader or an investor, if you buy panic, you are going to do okay.

Sometimes it is better for the traders, because when there is a panic—a war breaks out or something like that—everything collapses, and some people are very good at jumping in and buying. Then, when the rally comes, the next day or the next month, they sell out.

Now, the people who are investors can also do that, but it usually takes longer for there to be a permanent rally. In other words, if there's a war and stocks go from 100 to 30 and everybody jumps in, it may rally up to 50, and then the traders will get out, it may go back to 30 again. I'm trying to make the differentiation between investors and traders buying panic.

As an investor, nearly always if you buy panic and you know what you are doing, and then hold on for a number of years, you are going to make a lot of money.

You also have to be sure that your crisis or panic is not the end of the world, though. If war breaks out, you have got to make sure it's a temporary war.

I used to work with Roy Neuberger, who was one of the great traders of all time, and whenever stocks would panic down, he was usually one of the few buyers, because he knew he could get a rally—if not that day, at least maybe that week or that month. And he nearly always did. No matter how bad the news, especially if there's a huge drop, it's probably a good time to buy if you've got the staying power and your wits, because you will likely get a rally. In terms of panic buying or crisis situations, that's normally the way to play.

Now, it's not always easy, because you are having everybody you know, or everybody in the media shrieking what a fool you are to even try something like that. But if you have your wits about you and you know what you are doing, and you know enough about yourself, then chances are you will make a lot of money.

Nick Giambruno: What is the story behind your most successful investment in a crisis market or a blood-in-the-streets kind of situation?

Jim Rogers: Certainly commodities at the end of the '90s were everybody's favorite disaster, and yet for whatever reason, I had decided that it was not a disaster. In fact, it was a great opportunity and there were plenty of things to buy. In 1998, for instance, Merrill Lynch—which at the time was the largest broker, certainly in America and maybe the world—decided to close their commodity business, which they had had for a long time. I bought. That's when I started in the commodity business in a fairly big way. So that's the kind of example I am talking about. Everybody had more or less abandoned or were in the process of abandoning commodities, and yet, that's when I decided to go into commodities in a big way, because of what I considered fundamental reasons for doing it, but the fact that Merrill Lynch was getting out buttressed in my own mind anyway that I must be right, because, you know, everybody was out. Who was left to sell? There was nobody left to sell at that point.

Nick Giambruno: What about a particular country?

Jim Rogers: I first invested in China back in 1999 and then again in 2005. The market at those times was very, very bad. I invested again in November of 2008, when all markets around the world were collapsing, including in China.

So I have certainly made investments in countries with crisis markets, and I'm getting a little better at it than I used to be, because I have had more experience now. That's why I keep emphasizing that you have to know what you're doing. And by that I mean paying attention to and doing your homework on a stock or a commodity or a country. If you do that with a crisis market, then chances are you can move in and make some money.

Nick Giambruno: In your opinion, which countries today do you think offer the best crisis or blood-in-the-streets-type opportunities?

Jim Rogers: I think Russia is probably one of the most hated markets in the world. I don't think many people have a nice thing to say about Russia or Putin. I was pessimistic on Russia from 1966 to 2012—that's 46 years. But I've come to the conclusion that since it is so hated—and you should always look at markets that are hated—that there are probably good opportunities in Russia right now.

Nick Giambruno: Doug Casey and I were recently in the crisis-stricken country of Cyprus, which is also a pretty hated market, for obvious reasons. While we were there, we found some pretty remarkable bargains on the Cyprus Stock Exchange which we detailed in a new report called Crisis Investing in Cyprus. Companies that are still producing earnings, paying dividends, have plenty of cash (in most cases outside of the country), little to no debt, and trading for literally pennies on the dollar. What are your thoughts on Cyprus?

Jim Rogers: When I saw what you guys did, I thought, "That's brilliant, I wish I had thought of it, and I'll claim that I thought of it" (laughs). But it was really one of those things where I said, "Oh gosh, why didn't I think of that," because it was so obvious that you are going to find something.

It's also obvious, after what happened in Cyprus, that it's a place where one should investigate. Whether it is right to buy now or not, you are certainly right to look into it. If you stay with it and you know what you are doing, you do your homework, you are probably going to find some astonishing opportunities in Cyprus. It's the kind of thing that I'm talking about and that you are talking about.

(Editor's Note: You can find more info on Crisis Investing in Cyprus here.)

Nick Giambruno: Speaking of hated markets that literally nobody is getting into, I heard that you managed to find a way to get some sort of exposure to North Korea through bullion coins. Could you tell us about that?

Jim Rogers: Yeah, you know, it's illegal for Americans to invest in North Korea. It's probably illegal for us to even say the word "North Korea" (laughs). I look around to see which countries are hated. In North Korea there is no stock market, and there is no way to invest, especially if you are an American, but sometimes you can find something in a secondary market.

Stamps and coins were the only ways I knew of that one could get some sort of exposure. This is because you are not investing in the country, obviously, because you are buying them in a secondary or tertiary market. That said, I think the US government is going to make own
ing stamps illegal too.

There were people once upon a time—and maybe even now—who invested in North Korean debt. I have not done that, but it may be another way that people can invest in North Korea. I don't even know if North Korean debt still trades, but it was defaulted on at some point.

Nick Giambruno: Another hated market that actually does have a pretty vibrant and dynamic stock market is the Tehran Stock Exchange in Iran. Have you ever taken a look at this market?

Jim Rogers: Yes, at one point I did invest in Iran, back in the 1990s and made something like 40 times on my money. I didn't put millions in because there was a limit on how much a person could invest. But this was over 20 years ago. I would like to invest in Iran again, but I don't know the precise details on the sanctions and the current status of Americans being able to invest there. But Iran is certainly on my list. And so are Libya and Syria. I'm not doing anything at the moment in these countries, but they are places that are on my list.

Nick Giambruno: Switching gears a little, do you have any final words for people who are thinking about internationalizing some aspect of their lives or their savings?

Jim Rogers: Most people have a health insurance policy, a life insurance policy, fire insurance, and car insurance. You hope that you never have to use these insurance policies, but you have them anyway. I feel the same way about what you call internationalizing, but I call it insurance. Everybody should have some of their money invested outside of their own country, outside of their own currency. No matter how positive things are in your home country, something could go wrong.

I obviously do it for many other reasons than that. I do it because I think I can make some money finding opportunities outside your own country. Many people are a little reluctant, you know. It's tough to leave your safe haven. So I try to explain to them, "Well, you have fire insurance, why don't you look on investing abroad as another kind of insurance?" and usually what happens is people get more accustomed to it. And they often invest more and more abroad because they say, "Oh, my gosh, look at these opportunities. Why didn't somebody tell us there are all these things out there?"

Nick Giambruno: Jim, would you like to tell us about your most recent book, Street Smarts: Adventures on the Road and in the Markets? I'd strongly encourage our readers to check it out by clicking here.

Jim Rogers: I've done a few books before, and then my publisher and agent said, "Look, it sounds like it must be quite a story to have come from the back woods of Alabama to living in Asia with a couple of blue-eyed girls who speak perfect Mandarin. How did this happen? Why don't you pull this all together and it might be an interesting story?" So I did, somewhat reluctantly at first, and then, lo and behold, people tell me it's my best book. Whether it is or not, I will have to let other people decide, but that's how it happened, and that's what it is.

Nick Giambruno: Jim, thank you for your time and unique insight into these fascinating topics.

Jim Rogers: You're welcome. Let's do it again sometime.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/PuoLZDTe9YA/story01.htm Tyler Durden

Submitted by Nick Giambruno via Doug Casey's International Man,

I am very pleased to have had the chance to speak with Jim Rogers, a legendary investor and true international man.

Jim and I spoke about some of the most exciting investments and stock markets around the world that pretty much nobody else is talking about.

You won't want to miss this fascinating discussion, which you'll find below.

Nick Giambruno: Tell us what you think it means to be a successful contrarian and how that relates to investing in crisis markets throughout the world.

Jim Rogers: Well, there are two aspects of it. One is being a trader, being able to buy panic, and nearly always if you are a trader or an investor, if you buy panic, you are going to do okay.

Sometimes it is better for the traders, because when there is a panic—a war breaks out or something like that—everything collapses, and some people are very good at jumping in and buying. Then, when the rally comes, the next day or the next month, they sell out.

Now, the people who are investors can also do that, but it usually takes longer for there to be a permanent rally. In other words, if there's a war and stocks go from 100 to 30 and everybody jumps in, it may rally up to 50, and then the traders will get out, it may go back to 30 again. I'm trying to make the differentiation between investors and traders buying panic.

As an investor, nearly always if you buy panic and you know what you are doing, and then hold on for a number of years, you are going to make a lot of money.

You also have to be sure that your crisis or panic is not the end of the world, though. If war breaks out, you have got to make sure it's a temporary war.

I used to work with Roy Neuberger, who was one of the great traders of all time, and whenever stocks would panic down, he was usually one of the few buyers, because he knew he could get a rally—if not that day, at least maybe that week or that month. And he nearly always did. No matter how bad the news, especially if there's a huge drop, it's probably a good time to buy if you've got the staying power and your wits, because you will likely get a rally. In terms of panic buying or crisis situations, that's normally the way to play.

Now, it's not always easy, because you are having everybody you know, or everybody in the media shrieking what a fool you are to even try something like that. But if you have your wits about you and you know what you are doing, and you know enough about yourself, then chances are you will make a lot of money.

Nick Giambruno: What is the story behind your most successful investment in a crisis market or a blood-in-the-streets kind of situation?

Jim Rogers: Certainly commodities at the end of the '90s were everybody's favorite disaster, and yet for whatever reason, I had decided that it was not a disaster. In fact, it was a great opportunity and there were plenty of things to buy. In 1998, for instance, Merrill Lynch—which at the time was the largest broker, certainly in America and maybe the world—decided to close their commodity business, which they had had for a long time. I bought. That's when I started in the commodity business in a fairly big way. So that's the kind of example I am talking about. Everybody had more or less abandoned or were in the process of abandoning commodities, and yet, that's when I decided to go into commodities in a big way, because of what I considered fundamental reasons for doing it, but the fact that Merrill Lynch was getting out buttressed in my own mind anyway that I must be right, because, you know, everybody was out. Who was left to sell? There was nobody left to sell at that point.

Nick Giambruno: What about a particular country?

Jim Rogers: I first invested in China back in 1999 and then again in 2005. The market at those times was very, very bad. I invested again in November of 2008, when all markets around the world were collapsing, including in China.

So I have certainly made investments in countries with crisis markets, and I'm getting a little better at it than I used to be, because I have had more experience now. That's why I keep emphasizing that you have to know what you're doing. And by that I mean paying attention to and doing your homework on a stock or a commodity or a country. If you do that with a crisis market, then chances are you can move in and make some money.

Nick Giambruno: In your opinion, which countries today do you think offer the best crisis or blood-in-the-streets-type opportunities?

Jim Rogers: I think Russia is probably one of the most hated markets in the world. I don't think many people have a nice thing to say about Russia or Putin. I was pessimistic on Russia from 1966 to 2012—that's 46 years. But I've come to the conclusion that since it is so hated—and you should always look at markets that are hated—that there are probably good opportunities in Russia right now.

Nick Giambruno: Doug Casey and I were recently in the crisis-stricken country of Cyprus, which is also a pretty hated market, for obvious reasons. While we were there, we found some pretty remarkable bargains on the Cyprus Stock Exchange which we detailed in a new report called Crisis Investing in Cyprus. Companies that are still producing earnings, paying dividends, have plenty of cash (in most cases outside of the country), little to no debt, and trading for literally pennies on the dollar. What are your thoughts on Cyprus?

Jim Rogers: When I saw what you guys did, I thought, "That's brilliant, I wish I had thought of it, and I'll claim that I thought of it" (laughs). But it was really one of those things where I said, "Oh gosh, why didn't I think of that," because it was so obvious that you are going to find something.

It's also obvious, after what happened in Cyprus, that it's a place where one should investigate. Whether it is right to buy now or not, you are certainly right to look into it. If you stay with it and you know what you are doing, you do your homework, you are probably going to find some astonishing opportunities in Cyprus. It's the kind of thing that I'm talking about and that you are talking about.

(Editor's Note: You can find more info on Crisis Investing in Cyprus here.)

Nick Giambruno: Speaking of hated markets that literally nobody is getting into, I heard that you managed to find a way to get some sort of exposure to North Korea through bullion coins. Could you tell us about that?

Jim Rogers: Yeah, you know, it's illegal for Americans to invest in North Korea. It's probably illegal for us to even say the word "North Korea" (laughs). I look around to see which countries are hated. In North Korea there is no stock market, and there is no way to invest, especially if you are an American, but sometimes you can find something in a secondary market.

Stamps and coins were the only ways I knew of that one could get some sort of exposure. This is because you are not investing in the country, obviously, because you are buying them in a secondary or tertiary market. That said, I think the US government is going to make owning stamps illegal too.

There were people once upon a time—and maybe even now—who invested in North Korean debt. I have not done that, but it may be another way that people can invest in North Korea. I don't even know if North Korean debt still trades, but it was defaulted on at some point.

Nick Giambruno: Another hated market that actually does have a pretty vibrant and dynamic stock market is the Tehran Stock Exchange in Iran. Have you ever taken a look at this market?

Jim Rogers: Yes, at one point I did invest in Iran, back in the 1990s and made something like 40 times on my money. I didn't put millions in because there was a limit on how much a person could invest. But this was over 20 years ago. I would like to invest in Iran again, but I don't know the precise details on the sanctions and the current status of Americans being able to invest there. But Iran is certainly on my list. And so are Libya and Syria. I'm not doing anything at the moment in these countries, but they are places that are on my list.

Nick Giambruno: Switching gears a little, do you have any final words for people who are thinking about internationalizing some aspect of their lives or their savings?

Jim Rogers: Most people have a health insurance policy, a life insurance policy, fire insurance, and car insurance. You hope that you never have to use these insurance policies, but you have them anyway. I feel the same way about what you call internationalizing, but I call it insurance. Everybody should have some of their money invested outside of their own country, outside of their own currency. No matter how positive things are in your home country, something could go wrong.

I obviously do it for many other reasons than that. I do it because I think I can make some money finding opportunities outside your own country. Many people are a little reluctant, you know. It's tough to leave your safe haven. So I try to explain to them, "Well, you have fire insurance, why don't you look on investing abroad as another kind of insurance?" and usually what happens is people get more accustomed to it. And they often invest more and more abroad because they say, "Oh, my gosh, look at these opportunities. Why didn't somebody tell us there are all these things out there?"

Nick Giambruno: Jim, would you like to tell us about your most recent book, Street Smarts: Adventures on the Road and in the Markets? I'd strongly encourage our readers to check it out by clicking here.

Jim Rogers: I've done a few books before, and then my publisher and agent said, "Look, it sounds like it must be quite a story to have come from the back woods of Alabama to living in Asia with a couple of blue-eyed girls who speak perfect Mandarin. How did this happen? Why don't you pull this all together and it might be an interesting story?" So I did, somewhat reluctantly at first, and then, lo and behold, people tell me it's my best book. Whether it is or not, I will have to let other people decide, but that's how it happened, and that's what it is.

Nick Giambruno: Jim, thank you for your time and unique insight into these fascinating topics.

Jim Rogers: You're welcome. Let's do it again sometime.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/PuoLZDTe9YA/story01.htm Tyler Durden

We have tried a number of times (here, here, and here) to explain the simple math behind the populist call for a higher minimum wage (that appears to be founding the President’s new class warfare) but in the following clip, we hope, Peter Schiff visits a local Wal-Mart in the hopes of explaining that magic money trees are not real.

 

Posing as representatives of “15 for 15,” a make-believe organization advocating that Walmart raise prices by 15% and use the extra cash to pay its low-skilled workers $15 per hour (Schiff suggests that the surcharge be added to customer’s bills at checkout, just like a gratuity at a restaurant).

Not surprisingly few shoppers supported his cause. Even those who felt Walmart workers should be paid more did not want to pay higher prices themselves to make it possible.

Perhaps, as Schiff notes, those demanding higher wages for Walmart’s workers should consider the importance of low prices to Walmart’s customers.

 

 

Those who advocate across the board wage increases assume that the company can meet the additional payroll by simply dipping into profits. But with just $6,600 profit per employee any significant raise in pay will largely cut into profits, greatly alter return on equity, and force dramatic changes in the company’s operations. In truth the kind of pay raises envisioned by the activists, must lead to price increases. Advocates assume that shoppers will gladly support higher prices if they lead to higher wages for workers not higher profit for shareholders. Mr. Schiff’s experiment shows this hope to be delusional. If Wal-Mart loses customers, it will invariably lose workers. Do progressives assume that workers earning no pay would be less of a burden on society than a worker earning low pay?

Mr. Schiff would certainly agree that it is increasingly difficult, if not impossible, to raise a family on entry level Wal-Mart pay. But he argues that such jobs were never intended to be careers, but simply stepping stones for low skilled workers to gain entry into the labor force. The fact that the economy is now providing no other stones on which to step is not the fault of Wal-Mart. Instead, the better paying jobs that used to form the backbone of the middle class have been strangled by an out of control government that strangles businesses with excessive taxation and regulation

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/3yrCuLL2oJI/story01.htm Tyler Durden

Submitted by Pater Tenebrarum of Acting Man blog,

Modern Art Goes Bananas As the Money Supply Inflates

We don't want to discuss the artistic merits of modern art, except to say that we are not averse to it at all. In other words, we personally like quite a bit of modern art, regardless of the field. Paintings, sculptures, literature, music, we find stuff that speaks to us everywhere. Of course we are not completely uncritical, we merely want to point out that art doesn't end sometime in the 19^th century for us. We even like quite a bit of that modern 'classical' scratchy music that is on the receiving end of much contempt elsewhere. As it were, de gustibus non est disputandum.

 

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Jeff Koons – 'Balloon Dog (Orange)'

 

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However,  we differ with many supporters of such art insofar that we do not believe it should be in any way subsidized by the State. We also believe the habit of sometimes forcing concert goers to listen to, say, Helmut Lachenmann's works by sandwiching them between pieces by Mozart and Beethoven is a slightly questionable practice – even though we like it personally. We are well aware though that most Mozart fans are probably only clapping perfunctorily when confronted with something like this.

However, our focus here is actually on how the money supply inflation of recent years has been mirrored in the prices paid for modern art, which are becoming ever more absurd. A first wave of record prices was paid in the 2003-2008 bubble, but these records have been shattered over the past few years, especially in sculpture. A few examples are shown below.

 

 

The First Bubble Wave (2005-2008)

If you are a sculptor, you're a real winner if your name is Alberto Giacometti. Regardless of the phase of the giant bubble we are in, your works will fetch record prices.

 

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'Grande femme debout II', by Alberto Giacometti – sold for $27.4 million in 2008

 

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'Tête de femme (Dora Maar)' by Pablo Picasso, sold for $29.1 million in 2007

 

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Prices for sculptures really only went 'off the charts' in the 2009-2013 phase of the great bubble. Paintings are generally fetching even higher prices, and in the early bubble phase they beat the prices for sculptures noticeably.

 

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Jackson Pollock's 'Nr. 5, 1948' – sold for $140 million in 2006

 

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Willem de Kooning's 'Woman 3' – sold for $137 million in 2006

 

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Pablo Picasso's 'Dora Maar au chat', sold for $95 million in 2006. Several other works by Picasso also sold at very high prices in this stage of the bubble, the first one was 'Garçon à la pipe', which sold for $104 million in 2004.

 

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Kazimir Malevich's 'Suprematist Composition',  sold for $60 million in 2008

 

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Gustav Klimt's 'Portrait of Adele Bloch-Bauer I' sold for $135 million in 2006, making it the highest priced modern painting sold in this phase of the bubble ('Adele Bloch-Bauer II' incidentally sold for roughly $88 million the same year).

 

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The Second Bubble Wave (2009-2013)

Things became even more interesting in the second wave of the bubble, especially in the field of modern sculpture, where an enormous jump in prices was recorded. Numerous paintings were also sold at jaw-dropping prices, but the differences to the first bubble phase were not that great (with one notable exception, see further below). This time, Giacometti really became the center of attention.

The most expensive sculpture ever sold was a version of his 'L'homme qui marche' (there exist several versions of most of his sculptures). Several other Giacometti sculptures also fetched record prices, including two versions of the same work ('Grande Tête Mince') selling in 2010 and 2013 at very similar prices.

 

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Alberto Giacometti's 'L'homme qui marche I', sold for $104 million in 2010

 

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Giacometti's 'Grande Tête Mince' – sold in 2010 for $53 million, while  another version of the same work sold in 2013 for $50 million (it actually looks exactly the same, so there is no point in depicting both)

 

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Amedeo Modigliani's  'Tête'  sold in 2010 for $52.6 million

 

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'Balloon Dog (Orange)' by Jeff Koons, sold for $58.4 million in November 2013

 

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With regards to Jeff Koons' 'Balloon Dog' selling for more than $58 million, we can only repeat, 'de gustibus non est disputandum'.

Next come a few paintings that were sold at very high prices fairly recently. We already mentioned the Lucian Freud triptych by Francis Bacon on another occasion. Edvard Munch's 'The Scream' is a well known painting – what is perhaps not so well known is that countless versions of it exist. One of the 'four most important versions' was auctioned for almost $120 million in 2012.

 

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Francis Bacon's 'Three Studies of Lucian Freud' – sold for $142 million in 2013

 

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The version of Edvard Munch's 'The Scream' that was sold for $119.9 million in 2012

 

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Pablo Picasso also struck gold again in the current bubble phase, by setting a fresh record of his own earlier this year.

 

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Pablo Picasso's 'Le Rêve', which sold for the princely sum of $155 million in March of 2013.

 

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And finally, Andy Warhol continues to attract big money as well. His painting 'Silver Car Crash' fetched $105 million this year.

 

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Andy Warhol's 'Silver Car Crash (Double Disaster)' sold for $105 million in 2013.

 

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Conclusion:

The effects of the massive monetary inflation of recent years are so far mainly reflected in asset prices. Modern art has become a major magnet for investors, whereby one gets the impression that this is truly a gargantuan bubble by now. Works of art are unique (well, modern works are only 'sort of' unique, since in many cases the works exist in more than one version as
noted above), so there is really no yardstick by which one could make sensible comparisons regarding their valuations, except to note that prices today are at multiples of the prices paid in the not-too-distant past. When a Japanese insurance company bought van Gogh's 'Vase with Fifteen Sunflowers' for $39.7 million in 1987, the world was shocked that anyone would shell out so much money for a single painting. It was rightly seen as an outgrowth of Japan's bubble excesses of the 1980s at the time. Today it actually looks like they made a great investment. No-one bats an eyebrow anymore at anything that is not sold for more than $100 million.

 

So if you ever wonder whether there is really an inflationary bubble underway, the answer is clearly, yes, there is. As an aside, we have not mentioned Cezanne's 'Card Players' (it fell just outside our range of 'modern' art, as it was painted in the late 19^th century and we only wanted to include 20^th and 21^st century art). The painting was sold for over $259 million in 2011, making it the most expensive painting ever – so far, that is.  It is undoubtedly a great painting, although we could think of a number of paintings we personally like better. But $259 million? Really? That does strike us as somewhat excessive.

 

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Cezanne's 'Card Players' – sold for $259 million in 2011. Sure, it looks nice, but $259 million?

 

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via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/OYzptC9bjdg/story01.htm Tyler Durden

Presented with “no comment”…

 

 

Source: Heritage.org

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/1wT-aGK3Nzk/story01.htm Tyler Durden

Despite yesterday's governmental reassurance (a la Venezuela and Argentina) that there is no inflation in the US, the reality for the average man in the street is a little different. We have previously noted that gas prices are 25% above their average price of the last decade but it is another staple that is more worrisome for many in America. As CNSNews reports, the average price of ground beef hit an all-time high this week at $3.61 per pound (up from just $1.82 per pound in 1980). As both a home-cooked and fast-food staple, the price of ground chuck alone has risen 45% in the last 10 years. Nope, no inflation here…

 

Gas prices may be down but seasonally they are as high as they have ever been…

 

But it's food that takes the biscuit… as ground beef prices reach record highs…

 

Nope, definitely no inflation here at all…

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/B5Jm0J3nGfw/story01.htm Tyler Durden

Submitted by Lance Roberts of STA Wealth Management,

There is a rising belief that when the Federal Reserve begins to taper that interest rates are set to rise.  It is believed that as rates rise due to stronger economic strength that the stock market will act as a hedge against falling bond prices. Recently, Blackrock attempted to answer this question by stating:

"Most investors fear rising interest rates. But perhaps more than the others, bond investors fear the loss of portfolio value that may occur when interest rates rise. Which begs the question – are there alternatives to bonds that might offer income and behave better in a rising rate environment? Indeed, global dividend stocks offer a compelling potential of income and outperformance in rising rate environments."

It is important to understand the underlying dynamic at play here which is that as interest rates rise – stocks will rise in price offsetting the decline in bond prices.  The chart below from Blackrock attempts to prove their case by showing a comparison between stocks and bonds.

However, is that really the story?  The problem with the data is that it is very selective in its construction.  What the chart doesn't discuss is what happened next.  

The chart below shows the 10-treasury rate from 1957 to present versus the S&P 500.  I have also noted with vertical dashed lines, the peaks in interest rate increases along with major economic events and recessions.  (Note: I have also noted the two relative market patterns of the current and previous secular bear markets.)

If you look at the chart closely a much different picture emerges from Blackrock's analysis.  As you will notice in almost all cases when interest rates rose sharply there was either a subsequent economic shock, recession and/or fairly significant market decline.

In order to more clearly show the analysis I constructed the following table which lists the start and end date of significant interest rate increases and the subsequent market selloffs.

Importantly, historically speaking the market has tended to have corrections in conjunction with rising rates as the economy was negatively impacted.  However, during the most recent history the negative impact was delayed by market momentum and liquidity driven booms.  Eventually, the market and economy, in all previous cases, has given way to the impact of higher rates.

The current rise in rates is the second largest in history on a percentage basis at 83.66% versus 85.59% during the 1976-80 period.  That previous spike in rates led to a 15% decline in the market in the middle of that spike. 

The recent rise in rates has already started to negatively impact the housing market and most likely the economy as we see deflationary pressures rising.  However, as I have recently discussed in "3 Myths About Rising Interest Rates:"

"The first misconception is that when the Fed tapers its ongoing liquidity program; interest rates will begin to rise.  However, there is no anecdotal evidence that would be the case as shown in the chart below."

"In fact, the recent rise in interest rates should have been anticipated as that has been the case during both previous programs.   It was not until the programs began to 'taper,' and eventually end, that rates fell as money flowed out of risk assets in search of safety in the bond market.  This fall in rates also corresponded to economic weakness and expectations of an increase in deflationary pressures.

 

When the Fed once again begins to remove its accommodative support from the financial markets it will likely lead to a further decline in interest rates as 'safety' is once again sought over 'risk.'"

Will stocks offer protection from rising interest rates?  Historically speaking rotating from bonds to stocks AFTER the spike in rates has occurred was akin to jumping from the "frying pan into the fire."

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The S&P 500 rallied well over 40 points (and the Dow up over 350 points) off the FOMC knee-jerk lows but bonds were largely unimpressed. USDJPY surged to new 5-year highs over 104. Bonds weakened, rallied,a nd then leaked back higher in yield to close almost unchanged from the FOMC announcement. VIX was smahsed back under 14% – its biggest drop in over 2 months.

• *S&P 500 RISES 1.7% TO RECORD 1,810.79 AT CLOSE
• DOW AVERAGE INCREASES 1.9% TO RECORD 16,171.12 AT CLOSE

We can only imagine what would have happened if he'd tapered $20 billion?

 

 

USDJPY hit 5 year highs…

 

Stocks surged on the carry exuberance…

 

but bonds reverted back to almost unchanged (as Gold tumbled and the USD surged)…

 

 

Charts: Bloomberg

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/W8osdBbVuKs/story01.htm Tyler Durden

Via Goldman Sachs,

The FOMC decided to cut the pace of its asset purchases to $75bn/mo, but offset this with a qualitative enhancement to the forward guidance. The Committee’s assessment of the economic outlook was somewhat more upbeat. We see today’s statement as slightly hawkish relative to expectations. The fact that President Rosengren dissented and President George did not is consistent with that.

MAIN POINTS:

1. The Committee reduced the monthly pace of its asset purchases to $75bn, trimming both Treasury and MBS purchases by $5bn. Regarding the forward-looking outlook for further cuts to purchases, the statement indicated that “the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings. However, asset purchases are not on a preset course and the Committee’s decisions about their pace will remain contingent on the Committee’s economic outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.” The reduced pace of purchases will take effect in January and the allocation of Treasury purchases across maturities will remain unchanged. The Committee likely expects to conclude the asset purchase program in the second half of 2014.

2. Additional qualitative forward guidance was provided. Specifically, “the Committee now anticipates, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal.” We see “well past” as potentially representing as much as one-half percentage point. In this sense it is similar to a reduction in the unemployment threshold to 6.0%, although without the degree of commitment that such a reduction would entail.

3. The economic assessment was somewhat brighter. In particular, “labor market conditions have shown some further improvement” was upgraded to “labor market conditions have shown further improvement.” In addition, the assessment of the drag on growth due to fiscal policy was slightly more upbeat, noting that “the extent of restraint may be diminishing.” The description of inflation was unchanged in the first paragraph, although the Committee added that it is “monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term,” indicating slightly higher concern about the inflation outlook.

4. Boston Fed President Rosengren dissented to the decision to taper asset purchases, while Kansas City Fed President George?who had previously been a hawkish dissenter?voted with the Committee.

5. With regard to participants’ economic projections, the mid-point of the central tendency of the unemployment rate was lowered to 7.05% in 2013Q4, 6.45% in 2014Q4, 5.95% in 2015Q4, and 5.55% in 2016Q4. Real GDP growth was raised by 10bp to 2.25% at end-2013, but the longer-run projection was reduced by 5bp to 2.3%. Participants reduced their end-2013 and end-2014 core PCE projections by 10bp to 1.15% and 1.5% and reduced their end-2015 and end-2016 projections by 5bp to 1.8% and 1.9%.

6. The median participant’s forecasts for the funds rate (the “dots”) remained at 0.13% at end-2013 and end-2014, fell 25bp to 0.75% at end-2015, and fell 25bp to 1.75% at end-2016. The median projection for the longer-run rate remained 4.0%. It is possible that Vice Chair Yellen was one of the participants who reduced their federal funds rate projections.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/NIWkG3jdzHs/story01.htm Tyler Durden