ETF Securities Witnesses Influx Of Assets

September 29th, 2010

As the investment demand for precious metals continues to remain high, ETF Securities, the first US ETF provider to provide investors with access to a full suite of precious metal ETFs, recently surpassed the $2 billion mark for total assets under management.

 ETF Securities is known for the following ETFs which are all backed by their respective physical bullion:

  • ETFS Physical Swiss Gold Shares ETF (SGOL)
  • ETFS Physical Silver Shares ETF (SIVR)
  • ETFS Physical Palladium Shares ETF (PALL)
  • ETFS Physical Platinum Shares ETF (PPLT)

As for the future of these ETFs, it is highly likely that will continue to witness asset growth.  Fear and uncertainty appear to be driving up the demand for precious metals as a place to store wealth.  Furthermore, industrial demand is expected to provide further support for silver, platinum and palladium as emerging markets continue to grow at healthy rates and purchasing power in these developing nations elevates.

Disclosure: No Positions

Read more here:
ETF Securities Witnesses Influx Of Assets




HERE IS YOUR FOOTER

ETF, Uncategorized

What’s Really in the Social Security Trust Fund?

September 29th, 2010

“You’re kidding, right?” a Daily Reckoning reader wrote after our briefing from last week: “The End of Social Security As We Know It.” “Are you the only ones who believe in the accounting farces that are the Social Security and Medicare ‘Trust Funds’? Every dollar in both of those funds has been spent by the US Treasury…”

We weren’t kidding, dear reader… There’s only so much reckonin’ we can do in one day. Last week we chronicled a turning point for retirement in America: On September 30, the Social Security Trust Fund will officially begin paying out more than it’s taking in. Now, you – and many others who wrote in – provide an inadvertent introduction to our final question in this Social Security Series: What, exactly, is in that fund?

The quick answer is this, as we noted Saturday. “With $2.6 trillion left in the Social Security war chest, there is no immediate threat to the status quo.”

The Social Security Trust Fund is, in fact, worth roughly $2.6 trillion. The status quo is safe at the moment. But as you hinted, there isn’t a single US dollar in that fund…and anyone who thinks the money they’ve been sending the government to pay for retirement is neatly stacked in a giant vault – some super-sized swimming pool of money – has the wrong idea.

Indeed, your government-sponsored retirement fund has all been spent already. Didn’t you get your receipt?

The World’s Biggest Bond Investor – You

You, loyal taxpayer – not the Chinese – are the biggest US Treasury Bond investor in the world. The entire balance of the Social Security Fund, all $2.6 trillion of it, has been borrowed by the US government. Upon receipt of your payroll taxes (those are the ones that fund Social Security) the Treasury instantly converts them to special issue Treasury bonds. In simpler terms, money is taken out of the Social Security “vault” and replaced with an IOU.

That’s not necessarily bad. Many sovereign states purchase debt from other nations, government owned companies or private institutions, and for good reason. If that money is not needed right away, the interest on the bond will help guard the fund against inflation. Those bonds might even make some extra money.

But such an investment doesn’t work when a debt-burdened government borrows money from itself. While the American Social Security scheme is not quite as simple as taking money out of one pocket and putting it in another, it’s darn close.

“Since 1983, the money from all payroll taxpayers has been building up the Social Security surplus, swelling the trust fund,” the LA Times’ Michael Hiltzik neatly explained in August. “What’s happened to the money? It’s been borrowed by the federal government and spent on federal programs – housing, stimulus, war and a big income tax cut for the richest Americans, enacted under President George W. Bush in 2001.”

The government is not using your payroll taxes to build retirement nest eggs or to insure the elderly and disabled. Rather, the SSTF is used to sustain government itself. Not a dollar is set aside for you…just debt. Given the current state of US affairs – $13 trillion in public debt, weak economic growth and a $1.3 trillion budget deficit for 2010 – this is not the kind of sovereign debt most investors want to own.

We should note, this is no conspiracy theory. On the SSTF website, the Trustees offer to-the-month spreadsheets of fund holdings, each and every one revealing nothing inside but US Treasury bonds. President Bush himself laid it out quite simply back in 2005:

Some in our country think that Social Security is a trust fund – in other words, there’s a pile of money being accumulated. That’s just simply not true. The money – payroll taxes going into the Social Security are spent. They’re spent on benefits and they’re spent on government programs. There is no trust.

There is No Trust… So Why Trust Social Security?

This bookkeeping scheme known as the Social Security Trust Fund is not the biggest issue in America for one reason: US Treasuries are currently as good as cash. In fact, since they pay a paltry yield and are accepted everywhere, they might even be better than dollars.

But in a real, utilitarian sense, T-Bonds in the SSTF are way, way worse than cash. They are a liability, not an asset. The SSTF can exchange them for dollars, but those dollars must come from the very government that’s on the other side of the exchange. As President Clinton’s Office of Management and Budget once explained:

Balances are available to finance future benefit payments and other Trust Fund expenditures – but only in a bookkeeping sense…. They do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures.

This is a similar situation to what China has called its “nuclear option.” As the largest foreign holder of US Treasuries, China could cripple the US by cashing out its bond holdings. The Treasury would be forced to either redeem the bonds or default, both of which would send American interest rates through the roof…maybe even destroy our economy altogether.

The SSTF isn’t that different, except China holds “just” $846 billion in US bonds, about a third of what’s owed to the Social Security Trust Fund.

So add up the American fiscal condition as we know it, dear reader, and tell us what you get:

76 million Baby Boomers about to retire
+ Life expectancies increasing
+ A Social Security Administration that’s now paying out more than it’s taking in
+ The Social Security Trust Fund holding nothing but $2.6 trillion in US debt
+ A national debt over $13 trillion
+ The worst US economy since the Great Depression
+ Unemployment near generational highs
+ Stagnant wages for over a decade
+ Average personal savings rate of 6% of disposable income
+ Minimal interest rates on those savings
+ Home prices (most people’s largest investment) down 20% from their peak
+ Stock indexes (and most private retirement funds) down 25% from their peak
+ Rising energy and healthcare costs

The sum of these parts, among other things, equals a lousy retirement landscape in America. Like so many other economic matters these days, it’s hard to picture a worse scenario for retirees since the Great Depression.

It Could Be Worse

One cliché has been working overtime lately: The night is always darkest before dawn. No one really knows how long this “night” will last in America. It’s running about 20 years strong in Japan, an economy eerily similar to our own. But just the same, most people felt like nothing could possibly go wrong in early 1999… and by September 11, 2001, just about everything had. Maybe now, as most of us are choking in the dark smog of this economy, a breath of fresh air might blow our way. Who knows?

But to bank on that is a bad move. If America doesn’t return to booming prosperity, the Treasury and Social Security Trustees will have to do something to keep the program alive. In the past, that’s meant raising payroll taxes and reducing benefits. Not only will the government have to accommodate Social Security operating at a deficit, but they’ll have to deal with all these bonds… the trillions owed to the American public and trillions more to foreign investors. Either income or sales taxes will have to rise dramatically, or the Fed will have to print money. Both “solutions” would seriously impact American purchasing power, particularly retired Americans living on a fixed income.

Even the rich ought to devise a retirement Plan B. The richest 1% of US population now accounts for 24% of the country’s income, the highest ratio since just before the 1929 market crash. Most of the other 99% is understandably bitter about that, and especially given the tendencies of the current administration, we expect the rich to get soaked good and hard over the next few decades. As we’ve forecast before, expect a Social Security means test in the near future and a hike in the SS taxable wage base even sooner.

Thus, all economic classes in America could feel the sting of imminent Social Security reform. Those that need it will likely receive fewer benefits, and those wealthy enough to retire on their own will likely be forced to pitch in for those that can’t. Meanwhile, all government welfare programs will likely be reduced, as one day – who knows when – Uncle Sam will have to start paying back money borrowed from the Social Security Trust Fund.

Your choice is to wait for that day and see what happens…or start preparing for it now.

Good luck,

Ian Mathias
for The Daily Reckoning

What’s Really in the Social Security Trust Fund? originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
What’s Really in the Social Security Trust Fund?




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

What’s Really in the Social Security Trust Fund?

September 29th, 2010

“You’re kidding, right?” a Daily Reckoning reader wrote after our briefing from last week: “The End of Social Security As We Know It.” “Are you the only ones who believe in the accounting farces that are the Social Security and Medicare ‘Trust Funds’? Every dollar in both of those funds has been spent by the US Treasury…”

We weren’t kidding, dear reader… There’s only so much reckonin’ we can do in one day. Last week we chronicled a turning point for retirement in America: On September 30, the Social Security Trust Fund will officially begin paying out more than it’s taking in. Now, you – and many others who wrote in – provide an inadvertent introduction to our final question in this Social Security Series: What, exactly, is in that fund?

The quick answer is this, as we noted Saturday. “With $2.6 trillion left in the Social Security war chest, there is no immediate threat to the status quo.”

The Social Security Trust Fund is, in fact, worth roughly $2.6 trillion. The status quo is safe at the moment. But as you hinted, there isn’t a single US dollar in that fund…and anyone who thinks the money they’ve been sending the government to pay for retirement is neatly stacked in a giant vault – some super-sized swimming pool of money – has the wrong idea.

Indeed, your government-sponsored retirement fund has all been spent already. Didn’t you get your receipt?

The World’s Biggest Bond Investor – You

You, loyal taxpayer – not the Chinese – are the biggest US Treasury Bond investor in the world. The entire balance of the Social Security Fund, all $2.6 trillion of it, has been borrowed by the US government. Upon receipt of your payroll taxes (those are the ones that fund Social Security) the Treasury instantly converts them to special issue Treasury bonds. In simpler terms, money is taken out of the Social Security “vault” and replaced with an IOU.

That’s not necessarily bad. Many sovereign states purchase debt from other nations, government owned companies or private institutions, and for good reason. If that money is not needed right away, the interest on the bond will help guard the fund against inflation. Those bonds might even make some extra money.

But such an investment doesn’t work when a debt-burdened government borrows money from itself. While the American Social Security scheme is not quite as simple as taking money out of one pocket and putting it in another, it’s darn close.

“Since 1983, the money from all payroll taxpayers has been building up the Social Security surplus, swelling the trust fund,” the LA Times’ Michael Hiltzik neatly explained in August. “What’s happened to the money? It’s been borrowed by the federal government and spent on federal programs – housing, stimulus, war and a big income tax cut for the richest Americans, enacted under President George W. Bush in 2001.”

The government is not using your payroll taxes to build retirement nest eggs or to insure the elderly and disabled. Rather, the SSTF is used to sustain government itself. Not a dollar is set aside for you…just debt. Given the current state of US affairs – $13 trillion in public debt, weak economic growth and a $1.3 trillion budget deficit for 2010 – this is not the kind of sovereign debt most investors want to own.

We should note, this is no conspiracy theory. On the SSTF website, the Trustees offer to-the-month spreadsheets of fund holdings, each and every one revealing nothing inside but US Treasury bonds. President Bush himself laid it out quite simply back in 2005:

Some in our country think that Social Security is a trust fund – in other words, there’s a pile of money being accumulated. That’s just simply not true. The money – payroll taxes going into the Social Security are spent. They’re spent on benefits and they’re spent on government programs. There is no trust.

There is No Trust… So Why Trust Social Security?

This bookkeeping scheme known as the Social Security Trust Fund is not the biggest issue in America for one reason: US Treasuries are currently as good as cash. In fact, since they pay a paltry yield and are accepted everywhere, they might even be better than dollars.

But in a real, utilitarian sense, T-Bonds in the SSTF are way, way worse than cash. They are a liability, not an asset. The SSTF can exchange them for dollars, but those dollars must come from the very government that’s on the other side of the exchange. As President Clinton’s Office of Management and Budget once explained:

Balances are available to finance future benefit payments and other Trust Fund expenditures – but only in a bookkeeping sense…. They do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures.

This is a similar situation to what China has called its “nuclear option.” As the largest foreign holder of US Treasuries, China could cripple the US by cashing out its bond holdings. The Treasury would be forced to either redeem the bonds or default, both of which would send American interest rates through the roof…maybe even destroy our economy altogether.

The SSTF isn’t that different, except China holds “just” $846 billion in US bonds, about a third of what’s owed to the Social Security Trust Fund.

So add up the American fiscal condition as we know it, dear reader, and tell us what you get:

76 million Baby Boomers about to retire
+ Life expectancies increasing
+ A Social Security Administration that’s now paying out more than it’s taking in
+ The Social Security Trust Fund holding nothing but $2.6 trillion in US debt
+ A national debt over $13 trillion
+ The worst US economy since the Great Depression
+ Unemployment near generational highs
+ Stagnant wages for over a decade
+ Average personal savings rate of 6% of disposable income
+ Minimal interest rates on those savings
+ Home prices (most people’s largest investment) down 20% from their peak
+ Stock indexes (and most private retirement funds) down 25% from their peak
+ Rising energy and healthcare costs

The sum of these parts, among other things, equals a lousy retirement landscape in America. Like so many other economic matters these days, it’s hard to picture a worse scenario for retirees since the Great Depression.

It Could Be Worse

One cliché has been working overtime lately: The night is always darkest before dawn. No one really knows how long this “night” will last in America. It’s running about 20 years strong in Japan, an economy eerily similar to our own. But just the same, most people felt like nothing could possibly go wrong in early 1999… and by September 11, 2001, just about everything had. Maybe now, as most of us are choking in the dark smog of this economy, a breath of fresh air might blow our way. Who knows?

But to bank on that is a bad move. If America doesn’t return to booming prosperity, the Treasury and Social Security Trustees will have to do something to keep the program alive. In the past, that’s meant raising payroll taxes and reducing benefits. Not only will the government have to accommodate Social Security operating at a deficit, but they’ll have to deal with all these bonds… the trillions owed to the American public and trillions more to foreign investors. Either income or sales taxes will have to rise dramatically, or the Fed will have to print money. Both “solutions” would seriously impact American purchasing power, particularly retired Americans living on a fixed income.

Even the rich ought to devise a retirement Plan B. The richest 1% of US population now accounts for 24% of the country’s income, the highest ratio since just before the 1929 market crash. Most of the other 99% is understandably bitter about that, and especially given the tendencies of the current administration, we expect the rich to get soaked good and hard over the next few decades. As we’ve forecast before, expect a Social Security means test in the near future and a hike in the SS taxable wage base even sooner.

Thus, all economic classes in America could feel the sting of imminent Social Security reform. Those that need it will likely receive fewer benefits, and those wealthy enough to retire on their own will likely be forced to pitch in for those that can’t. Meanwhile, all government welfare programs will likely be reduced, as one day – who knows when – Uncle Sam will have to start paying back money borrowed from the Social Security Trust Fund.

Your choice is to wait for that day and see what happens…or start preparing for it now.

Good luck,

Ian Mathias
for The Daily Reckoning

What’s Really in the Social Security Trust Fund? originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
What’s Really in the Social Security Trust Fund?




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

The Legacy of the Current Recession

September 29th, 2010

Epithet for a doomed economy…

What will they say? How will they describe the ’00s and ’10s?

Irish Prime Minister Brian Cowen was accused of being drunk when he gave a “croaky” radio interview two weeks ago.

He denied it.

But we’d be tempted to turn to the bottle too if we were in the fix Ireland is in. Ireland’s banks got into trouble. So the government threw them a lifeline…forgetting that the line was tied to its own neck. It guaranteed bank liabilities equal to four times Irish GDP. But isn’t that going to be the story of the whole period? Private sector banks and speculators got in trouble. Then, the public sector went down with them.

Irish bond yields hit a new record high yesterday – over 6.7%. Investors are afraid Ireland will default. If it does, its bonds will fall even more.

This is either a great opportunity or a trap. Investors could realize a huge windfall. If Ireland is bailed out…yields could fall in half. Then bond prices would double.

On the other hand, the Emerald Isle could actually default. Bonds could take a big hit.

Which will it be? We don’t know.

But we’ve been thinking a lot about the big picture. If you had been in the 1930s, the big picture would have been as difficult to see as ours is today. You would have had a lot of the same questions. Are stock prices rising or falling? Is the economy recovering or falling apart? Is it inflation we should worry about, or deflation?

But now we have a narrative. We know how it turned out.

There was a huge rally following the crash of ’29. Stocks rose up more than 50% in the “suckers rally.” There were several “recoveries” too. And there were 6 separate quarterly bounces between ’29 and ’33. They averaged 8% each.

Investors were entitled to think that the economy “had turned a corner.” Or, that the worst was behind them. Or, that they were “on the road to real recovery.”

But they would have missed the big picture. Looking back at it, the US economy was in a Great Depression. Investors would have been better off just staying away…from ’29 to ’49. Yes, dear reader, a 20-year period of abstinence would have made the heart grow fonder of equities – even though there were several good years as well as several bad years during that period.

What about now? Are investors kidding themselves by trying to make money in this market? Would they be better off taking a leave of absence for the next two decades?

We have to wonder about the big picture. What will people say about this period 30…50…years from now? How will they describe it? What will be the standard narrative?

Will they say it was a recession followed by a recovery? Nope. That story has gone with the wind. What then?

Maybe they will say it was a credit cycle correction…a balance-sheet recession…much like the ’30s. “Investors should have taken a long sabbatical,” they might say. “They should have sold in 2000…and come back in 2020…”

Maybe… But this time there is more to the story than there was in 1930. Back in the ’30s, the equity market turned sour…but the bond market was still safe and sound. The dollar was still as good as gold. Hundreds of local governments went broke, but there was never any question that the US government would default…or inflate…or ditch its own currency. Investors could take a break from stocks. All they had to do was to sell out…and hold onto their cash. They could buy the same stocks 20 years later for more or less the same prices. Why bother with risk? Why bother with the headaches?

But don’t try that this time, dear reader.

Why can’t you just hunker down…hold cash…and wait until this Great Correction is over? Because this time money itself is up for correction. Yes, that’s right. The dollar is no longer good as gold. Not even close. It was cut loose back in ’71. Ever since it’s been floating on a sea of debt, inflation, and hallucination. The feds imagine that they can create as many dollars as they want. They think inflation is good for the economy.

The US money supply has increased 1,300% since 1970. And now that the economy is correcting, the feds think they can fix the problem with the same thing that caused much of the problem in the first place – more notional dollars.

According to The Financial Times, Ben Bernanke is asking himself: should I, or shouldn’t I.

“Bernanke mulls launching QE2 to keep America afloat,” says the headline.

That’s it! That’s the solution! Flood the economy with dollars!

So, that’s what we’re wondering. When they tell the story of the ’00s and ’10s, they’ll probably omit the ups and downs…the “recovery” sightings…the inflation and deflation fears…

The story will probably go something like this:

“The private sector took on too much debt. It hit the wall. Then, the public sector took on too much debt. It hit the wall a few years later.”

Or, a slightly more detailed version:

“The stock market peaked out in real terms in January 2000. The feds responded with huge inputs of fiscal and monetary stimulus, causing bubbles in housing, finance, oil and other sectors. But the credit expansion had reached its end by 2007. Then, the stock market, real estate market, and the economy all turned down. Despite several futile ‘recoveries,’ the correction continued for the next 10 years. Investors should have gotten out in 2000…and stayed out.

“But not in dollars. Governments pumped trillions into the economy, beginning in 2008 – first borrowed money…and then printed ‘quantitative easing’ money. In the two years following the crisis, for example, only one out of every two dollars spent by the federal government came from tax receipts. The rest was borrowed. Or printed. For a few years, the gravity of private sector de-leveraging kept these additions to the money supply in check. But the feds just kept printing more and more money. And as they printed more paper money, the price of real money – gold – rose.

“And then, all hell broke loose. All of sudden, people lost faith in the dollar. They fell over one another trying to get rid of it. They bought houses, cars, stocks, toilet paper – anything. Most of all, they bought gold. When they could get it. The price rose to $5,000 an ounce…

“…and then it was over. The debt had been washed away. Savings, pensions, insurance plans… They announced a new currency, backed by gold, at $5,000 an ounce. It was over.”

Bill Bonner
for The Daily Reckoning

The Legacy of the Current Recession originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
The Legacy of the Current Recession




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Real Estate, Uncategorized

The Legacy of the Current Recession

September 29th, 2010

Epithet for a doomed economy…

What will they say? How will they describe the ’00s and ’10s?

Irish Prime Minister Brian Cowen was accused of being drunk when he gave a “croaky” radio interview two weeks ago.

He denied it.

But we’d be tempted to turn to the bottle too if we were in the fix Ireland is in. Ireland’s banks got into trouble. So the government threw them a lifeline…forgetting that the line was tied to its own neck. It guaranteed bank liabilities equal to four times Irish GDP. But isn’t that going to be the story of the whole period? Private sector banks and speculators got in trouble. Then, the public sector went down with them.

Irish bond yields hit a new record high yesterday – over 6.7%. Investors are afraid Ireland will default. If it does, its bonds will fall even more.

This is either a great opportunity or a trap. Investors could realize a huge windfall. If Ireland is bailed out…yields could fall in half. Then bond prices would double.

On the other hand, the Emerald Isle could actually default. Bonds could take a big hit.

Which will it be? We don’t know.

But we’ve been thinking a lot about the big picture. If you had been in the 1930s, the big picture would have been as difficult to see as ours is today. You would have had a lot of the same questions. Are stock prices rising or falling? Is the economy recovering or falling apart? Is it inflation we should worry about, or deflation?

But now we have a narrative. We know how it turned out.

There was a huge rally following the crash of ’29. Stocks rose up more than 50% in the “suckers rally.” There were several “recoveries” too. And there were 6 separate quarterly bounces between ’29 and ’33. They averaged 8% each.

Investors were entitled to think that the economy “had turned a corner.” Or, that the worst was behind them. Or, that they were “on the road to real recovery.”

But they would have missed the big picture. Looking back at it, the US economy was in a Great Depression. Investors would have been better off just staying away…from ’29 to ’49. Yes, dear reader, a 20-year period of abstinence would have made the heart grow fonder of equities – even though there were several good years as well as several bad years during that period.

What about now? Are investors kidding themselves by trying to make money in this market? Would they be better off taking a leave of absence for the next two decades?

We have to wonder about the big picture. What will people say about this period 30…50…years from now? How will they describe it? What will be the standard narrative?

Will they say it was a recession followed by a recovery? Nope. That story has gone with the wind. What then?

Maybe they will say it was a credit cycle correction…a balance-sheet recession…much like the ’30s. “Investors should have taken a long sabbatical,” they might say. “They should have sold in 2000…and come back in 2020…”

Maybe… But this time there is more to the story than there was in 1930. Back in the ’30s, the equity market turned sour…but the bond market was still safe and sound. The dollar was still as good as gold. Hundreds of local governments went broke, but there was never any question that the US government would default…or inflate…or ditch its own currency. Investors could take a break from stocks. All they had to do was to sell out…and hold onto their cash. They could buy the same stocks 20 years later for more or less the same prices. Why bother with risk? Why bother with the headaches?

But don’t try that this time, dear reader.

Why can’t you just hunker down…hold cash…and wait until this Great Correction is over? Because this time money itself is up for correction. Yes, that’s right. The dollar is no longer good as gold. Not even close. It was cut loose back in ’71. Ever since it’s been floating on a sea of debt, inflation, and hallucination. The feds imagine that they can create as many dollars as they want. They think inflation is good for the economy.

The US money supply has increased 1,300% since 1970. And now that the economy is correcting, the feds think they can fix the problem with the same thing that caused much of the problem in the first place – more notional dollars.

According to The Financial Times, Ben Bernanke is asking himself: should I, or shouldn’t I.

“Bernanke mulls launching QE2 to keep America afloat,” says the headline.

That’s it! That’s the solution! Flood the economy with dollars!

So, that’s what we’re wondering. When they tell the story of the ’00s and ’10s, they’ll probably omit the ups and downs…the “recovery” sightings…the inflation and deflation fears…

The story will probably go something like this:

“The private sector took on too much debt. It hit the wall. Then, the public sector took on too much debt. It hit the wall a few years later.”

Or, a slightly more detailed version:

“The stock market peaked out in real terms in January 2000. The feds responded with huge inputs of fiscal and monetary stimulus, causing bubbles in housing, finance, oil and other sectors. But the credit expansion had reached its end by 2007. Then, the stock market, real estate market, and the economy all turned down. Despite several futile ‘recoveries,’ the correction continued for the next 10 years. Investors should have gotten out in 2000…and stayed out.

“But not in dollars. Governments pumped trillions into the economy, beginning in 2008 – first borrowed money…and then printed ‘quantitative easing’ money. In the two years following the crisis, for example, only one out of every two dollars spent by the federal government came from tax receipts. The rest was borrowed. Or printed. For a few years, the gravity of private sector de-leveraging kept these additions to the money supply in check. But the feds just kept printing more and more money. And as they printed more paper money, the price of real money – gold – rose.

“And then, all hell broke loose. All of sudden, people lost faith in the dollar. They fell over one another trying to get rid of it. They bought houses, cars, stocks, toilet paper – anything. Most of all, they bought gold. When they could get it. The price rose to $5,000 an ounce…

“…and then it was over. The debt had been washed away. Savings, pensions, insurance plans… They announced a new currency, backed by gold, at $5,000 an ounce. It was over.”

Bill Bonner
for The Daily Reckoning

The Legacy of the Current Recession originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
The Legacy of the Current Recession




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Real Estate, Uncategorized

Problems For The Dollar Index

September 29th, 2010

The dollar index, which is heavily weighted with euros (EUR), is sinking fast. How fast is it sinking? Well, yesterday, even with the brief dollar rally in the early morning, the dollar index was unable to climb back to an 80 level, which is significant enough, but the other thing that happened once the dollar rally was over, was that the dollar index saw it’s 55-day moving average fall through it’s 200-day moving average… For all you chartists out there, that’s HUGE, right? Yes… It is… So, yesterday when I sent the note to Chris and Frank, the dollar index was hanging onto 79… This morning it is 78.82… The low this year was 76.60 back in January, before all the Eurozone GIIPS began to show rot on their vines.

For those of you keeping score at home, the dollar index reached a high of 88.71 back in June… So… Like I said the other day, the move in the currencies is very strong since June, and this dollar index data proves that!

OK… What caused the turn-around has quite a few opinions going around… But what I can tell you for sure, is that the recent run on the dollar has been the FOMC meeting, and the dance around the fact that they are planning to implement more quantitative easing (QE)…

When a central bank goes down the road of QE, they might as well just come out and devalue their currency too, because the QE is the sharpest knife in the currency debasement drawer. And… It’s what a central bank does when they’ve cut their interest rates to the bone, and have no other arrows in their quiver.

And then yesterday with all the dollar-selling going on… The US saw consumer confidence this month fall more than expected… Which, all I’ll say, is “it’s about time!” The Consumer Confidence Index fell from 53.2 to 48.5… A 4.7-point drop in one month, which saw a deterioration of both the “present situation” and “expectations” components of the index.

And I keep hearing people who should know better say things like “the economy is recovering” and “we’ll not see a double dip”… Well, to the second part of that statement, they’ll be technically correct… What? Yes… You see, once the group of people that decides when recessions start and end decided that this recession ended in “June of 2009”, that meant that if the US goes into a recession again, it will not be considered a “double dip” because too much time has passed. It’s all just grasping at straws, folks… Double dip, large scoop, whatever… It’s not good, and the sooner the government admits it, and gets out of the way, the sooner we can get on with recovering!

The Asian and Pan-Asian currencies are in rally mode this morning, after China printed a stronger-than-expected manufacturing report… Here’s the skinny… China’s Manufacturing PMI (index, that’s reported the same as ours), rose to 52.9, from 51.9 last month, which is the strongest monthly print since May…

Speaking of China… I should note that I’ve read a lot about this row they are having with Japan right now… China has flexed their muscles, and Japan is eating spinach, in an attempt to match muscle strength… And now China has blocked the exports of rare earth minerals – metals that are a collection of 17 chemical elements – to Japan…

Anyway… This saber rattling between China and Japan is not a good thing, folks, and let’s hope that it’s just a tempest in a teapot.

The euro traded to 1.3625 last night, then saw selling that took it down to 1.3580, where it was when I turned on the currency screens, but now has rallied back above 1.36 again… The euro got a bump when consumer confidence in the Eurozone printed firmer than expected, on the rising exports.

Speaking of consumer confidence, Sweden printed a confidence report last night that showed consumer confidence rising to its highest level in over 10 years!!!!!! Yes, that note got 6 exclamation points because 10 years is long time! Sweden also saw their manufacturing confidence print at a multi-year high… So… It shall be that the Swedish krona (SEK) was the best performer overnight!

In recent times, whenever I speak, I get a few people that tell me diversifying with currencies is a waste of time because it’s just a race to the bottom by all countries with their currencies… But, I point out that while I don’t believe that wholeheartedly, if it does happen, the US is leading the race… In fact, they’re already running ahead of the crowd, which will mean that the currencies hold an “edge” over the dollar in a race to the bottom, because the dollar will be the winner, winner, chicken dinner!

OK… In defense of my statement that I do not believe that “wholeheartedly”… The Aussie dollar (AUD) is within 1 1/2-cents of its all-time high, which it reached in July of 2008… So… I guess the Aussie dollar is not participating in the race, eh? The only race the Aussie dollar is in, is the one to the top!

Speaking of the top… The Swiss franc (CHF) continues to move higher past parity with the dollar, and is now $1.02… In 1971, when the dollar was bounced from the Bretton Woods Agreement, because Richard Nixon had closed the gold window because of too much deficit spending, which at that time was nothing compared to the deficit spending going on now, you could get over four Swiss francs for $1… Today? You can’t even get 1 franc with a dollar!

And while we’re talking about being on top… How about gold and silver? Apparently, $1,300 and $21 respectively for gold and silver are not scaring away investors, because the prices are still rising. Remember, just last week silver reached $21 and that was “cause to celebrate”? Well… Don’t look now, but silver has $22 in its sights, which seems pretty fast considering how long it took for silver to reach $21… But for people like me, who have held silver since the early ’80 s… It hasn’t been fast enough!

I’m really on board the “silver bullet,” and no I’m not talking about Coors Light! I’m talking about silver as an investment, and the prospects of the shiny metal to continue to move higher… You see, $1,300 for gold pretty much prices “Joe six-pack” from the market… But… Even at $21, silver is within reach… Think about that for a minute…

The data cupboard here in the US has been emptied out, and the markets will have to depend on other things to drive them once Europe closes down.

Then there was this… Household incomes plunged for the second year in a row in 2009, as fewer families earned over $100,000 a year while the ranks of the poor rose, according to census statistics released Tuesday. News that US households are spending less and saving more, ultimately reducing their debt, might appear to be an uplifting scenario. In reality, many of those households are defaulting on their debt, not tightening their belts. Capital Economics Group reported that almost half of a $77 billion decline in total household debt during the second quarter was because of bank charge-offs of credit card debt, residential mortgages and other consumer loans.

Hmmm… Doesn’t sound like the correct medicine for a recovery, but then, I look at things logically, and not through rose-colored glasses like the media and government…

To recap… A brief sell-off in the currencies overnight didn’t last long, as Eurozone Consumer Confidence was stronger than expected, and boosted the euro back over 1.36 this morning. The Aussie dollar is closing in on its all-time high, and the Swiss franc just keeps adding on to its “already higher than parity to the dollar” figure. The dollar index’s 55-day moving average fell through the 200-day moving average, thus pointing to potential further gains for the currencies. The data cupboard is empty today.

Chuck Butler
for The Daily Reckoning

Problems For The Dollar Index originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Problems For The Dollar Index




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

Begun, The Currency Wars Have

September 29th, 2010

For several years now the US and some other countries have been pressuring China to allow its exchange rate to appreciate, thereby making Chinese goods relatively less competitive in the global economy and, so the thinking goes, assisting the US and other heavily indebted economies with a necessary economic rebalancing away from consumption and imports toward investment and exports. In September, the US House of Representatives began formal debate on a proposed measure to label China a “currency manipulator” and impose a broad range of trade restrictions on Chinese goods. But as this dispute escalates, there are other important developments in currency policy taking place around the globe with potentially highly destabilizing and economically destructive consequences.

It is a common delusion that major exchange rates, such as those between the dollar, the euro, the yen and the pound sterling, are free-floating. The cause of this may be that FX rates appear to move up or down on a regular basis in seemingly random fashion, or that mainstream economic textbooks generally make this claim. But it is not true. Japan demonstrated as much in September, when the Bank of Japan, under the instructions of the Ministry of Finance, sold yen into the foreign exchange market, pushing up the USD/JPY exchange rate from 83 to nearly 86, a 4% move, in a single day. According to Japanese authorities, the yen had become too strong to remain compatible with their economic objectives of maintaining positive economic growth and preventing deflation.

Policymakers elsewhere were quick to condemn Japan’s unilateral action. One prominent vocal critic was Jean-Claude Juncker, Prime Minister of Luxembourg and, more importantly, the Chairman of the “Eurogroup”: the council of euro-area finance ministers responsible for coordinating economic and policy. As such, in matters of currency policy, Mr Juncker’s role is comparable to that of the US Treasury Secretary or Japanese Minister of Finance.

A possible concern shared by Mr Juncker and his Eurogroup colleagues is that, should Japan continue to intervene to weaken the yen, then the euro-area will become less competitive in world export markets, in particular for the machinery and other capital goods in which there is intense competition between European and Japanese firms.

Indeed, at an exchange rate of 1.35 to the dollar, the euro is at a lofty level relative to history. Yet at 113 versus the yen, the euro is in fact quite weak. Prior to the financial crisis in 2008, the EUR/JPY exchange rate reached nearly 170. Thus over the past two years euro-area exports have become much more competitive relative to Japanese. So why should Mr. Juncker be complaining so loudly if Japan is now attempting to prevent further yen strength?

It could be that he is concerned more by what unilateral currency intervention represents in principle, rather than what it in fact achieves in practice. Consider: What if not only Japan but other countries facing weak growth and potentially deflation begin to intervene? Well, many countries are already doing so. China manages its exchange rate versus the dollar. So do all other Asian countries in varying degrees. Brazil buys dollars on a regular basis to keep their currency, the real, at a targeted level. Russia does the same with the ruble. The risk is that, by acting unilaterally, Japan has escalated what is already a “cold” currency war, greatly increasing the chances that it becomes “hot”, with countries not seeking merely to maintain a given exchange rate but to devalue faster and by more than others in a, “beggar thy neighbor” policy.

Currency wars might thus appear to be zero-sum. But this is true only up to a point. For if all countries intervene to weaken their currencies in equal measure, then no country succeeds in devaluing versus the others. As such, they might then resort to raising trade barriers or enacting currency controls which restrict the flow of capital across borders. These sorts of actions cause substantial economic damage however and are thus hugely counterproductive. The 1930s were characterized by, among other things, currency devaluation, capital controls and rising trade barriers such as the infamous “Smoot-Hawley” tariff.

While potentially growth negative for the global economy, currency and trade wars can, however, contribute to rising price inflation. Why? Well, the weapons of currency wars are the printing presses. The more you print, the more you can weaken your currency, or at a minimum prevent it from rising. He who prints most, devalues most and “wins”. But if all print in equal measure, exchange rates don’t move, but the global money supply soars. As such, currency wars don’t stimulate real economic growth–indeed they are much more likely to weaken it–they stimulate only nominal growth, that is, inflation. The net result is most likely to be a global “stagflation”.

The economically devastating effects of currency and trade wars can be seen in the chart above, which shows the dramatic contraction in world trade that took place in the early 1930s. Now it is easy to mix up cause and effect here. It is perfectly normal for trade to contract when growth contracts. But when trade barriers are raised they become the cause of contraction rather than the effect. The Smoot-Hawley tariff was enacted in June 1930 but had already passed the US House of Representatives in May 1929, well prior to the stock market crash in October that year. It is thus rightly considered a cause rather than effect of the Great Depression. Nor was it an isolated act. Among other countries, Canada, the largest US trading partner, retaliated by raising tariffs on US goods. Great Britain devalued the pound sterling in 1931. Japan did the same with the yen that year. In 1934, the US devalued the dollar. These were all major acts in a prolonged and devastating currency and trade war.

Some might argue based on the 1930s US experience that currency and trade wars should lead to deflationary depression rather than stagflation. But the US experienced deflation, visible in falling commodity and consumer prices, only as long as it kept the dollar fixed to gold at $20.67/oz. Following the 1934 dollar devaluation to $35/oz, the deflation was over. Commodity prices generally moved sideways rather than lower in the second half of the decade. Growth remained weak, to be sure, but that was not the result of deflation but, rather, structural economic weakness related to the unprecedented level of government micromanagement in the economy, with all manner of wage and price controls and, of course, counterproductive global trade barriers such as Smoot-Hawley.

As neither the world nor the US are on a gold (or silver, or other) standard, currency and trade wars are thus likely to translate directly into stagflationary pressures, with economic growth generally weaker and commodity prices generally higher. This is a horrible set of conditions for corporate profit growth, which is going to get squeezed between rising raw material costs on the one side and poor overall revenue growth on the other. The 1970s are instructive in this regard. The CRB broad commodity index trebled between 1971–when the US devalued and went off the gold standard–and 1981, whereas the S&P index rose by a mere 35%. The lesson for investors today, as the currency wars escalate, should be obvious.

Regards,

John Butler,
for The Daily Reckoning

[Editor's Note: The above essay is excerpted from The Amphora Report, which is dedicated to providing the defensive investor with practical ideas for protecting wealth and maintaining liquidity in a world in which currencies are no longer reliable stores of value.]

Begun, The Currency Wars Have originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Begun, The Currency Wars Have




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Commodities, Uncategorized

If the Recession Has Ended, Why Is the Fed So Worried?

September 29th, 2010

Claus Vogt

The National Bureau of Economic Research (NBER) is the official arbiter of U.S. economic history. It sets the officially accepted dates for the beginning and the end of U.S. recessions. And on September 20, its Business Cycle Dating Committee published an important statement …

It finally declared the end of the recession that began in December 2007. Here is an excerpt from what it had to say:

“The committee determined that a trough in business activity occurred in the U.S. economy in June 2009. The trough marks the end of the recession that began in December 2007 and the beginning of an expansion.

“The recession lasted 18 months, which makes it the longest of any recession since World War II. Previously the longest postwar recessions were those of 1973-75 and 1981-82, both of which lasted 16 months.”

Does this mean everything is okay now? That the economy is expanding and the world is headed to prosperity?

Of course not. The NBER is not in the forecasting business. Its job is to monitor economic events. In fact, its members felt it necessary to clarify this point by adding the following lines to their recent statement:

“In determining that a trough occurred in June 2009, the committee did not conclude that economic conditions since that month have been favorable or that the economy has returned to operating at normal capacity.”

So there you have it … the Committee does not want to be misinterpreted as economic optimists. And I think they’re very wise to make that point at this stage of the current economic cycle, because …

Once Again, the Fed
Seems Worried

The Fed has vowed to do whatever is necessary to revive the economy.
The Fed has vowed to do whatever is necessary to revive the economy.

The bleak economic picture and the dire message of leading economic indicators have obviously not escaped our central bankers. They have again decreased their growth projections in the most recent FOMC press statement:

“Information received since the Federal Open Market Committee met in August indicates that the pace of recovery in output and employment has slowed in recent months.

“Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. Housing starts are at a depressed level. Bank lending has continued to contract, but at a reduced rate in recent months.”

With the housing market in shambles, bank lending contracting, and consumers being tapped out, there is no base for a sustainable recovery. And now — according to the Fed — even the sole bright spot of the current rebound, capital expenditures, is slowing.

However, Quantitative Easing Round Two is in the offing. So the bulls are again betting on the Fed. The big question is …

Will QE2
Save the Day?

The Fed, in the following statement, has reassured the public it will do everything it can to fight another downturn:

“The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed.”

Well, that’s exactly the reassurance they offered and then implemented in spades in 2007/2008. But it didn’t help. The economy was headed for trouble, and it turned out the mighty Fed was not strong enough to stop the tide.

I can’t see a single reason why it should be any different now. If anything I expect the Fed’s efforts to prove even more ineffective this time around. That’s because interest rates are already close to zero. Consequently, there is no more leeway for additional lowering. All that’s left is quantitative easing.

Maybe Bernanke and Co. should ask the Japanese how they used this blunt tool to try to revive their economy — which led to years of economic stagnation, as shown in the chart below, and deflation. But I doubt they’ll bother …

chart If the Recession Has Ended, Why Is the Fed So Worried?

After all before QE1 the Fed didn’t consider Japan’s intervention experience with stock market and real estate bubbles. Instead, they insisted there was no bubble in the U.S.

Then when the bubble did burst, they used the exact policy as the Japanese did to fight the aftermath. And just like Japan, the Fed’s efforts failed.

Now by continuing to ignore Japan’s “lost decade” it looks like the Fed is about to do the same thing once again. And if they follow through on their promise, the weak U.S. economy could easily be headed for a further slowdown that amplifies the problems that already exist.

Best wishes,

Claus


About Money and Markets

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Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.

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Commodities, ETF, Mutual Fund, Real Estate, Uncategorized

How Do Active ETF Bid-Ask Spreads Stack Up?

September 29th, 2010

There are many factors that investors look at when considering which ETFs to invest in. Probably the most important factor should be the investment strategy behind the ETF and how it fits into their portfolio. However, more often than not, the biggest consideration for investors ends up being the ETF’s expenses. This is a by-product of the intense price competition between ETF manufacturers and the duplication of exposures that various ETFs provide.

The same expense considerations apply when evaluating actively-managed ETFs. There are several parts to the total expenses involved in owning Active ETFs. The most prominent, of course, is the ETF expense ratio. You can find a complete list of expense ratios for actively-managed ETFs here. Another explicit component of costs is the commission on trades, which can vary from broker to broker. Some of the less visible or implicit costs when you trade Active ETFs include the premium/discount of the ETF price to NAV. This is something covered in detail in a recent article analyzing how Active ETFs stack up in minimizing premium and discounts. This article looks at yet another component of trading costs – the ETF bid/ask spread.

What is the bid/ask spread?

Whenever you purchase or sell a stock or an ETF on the exchange, you are exposed to the bid-ask spread for that security. The bid price is the highest price that an investor will be able to sell the ETF at and the ask price is the lowest price an investor will be able to buy at. The difference between the bid and ask is the spread that you would lose if you instantly bought and sold the ETF. Overtime, the spread can vary depending on trading volumes and market maker interest but the spread will be never be zero and investors will always be exposed to some minimal spread even in the largest, most liquid ETFs.

How do Active ETF bid-ask spreads stack up?

Comparison across ETFs for bid-ask spreads is most effective using the % spread as opposed to the dollar spread. The percentage spread is calculated by taking the dollar spread and dividing it by the ETF’s mid price (the mid-point of the bid and ask price). The data presented below has been collected from various sources, including Bloomberg and IndexUniverse.com’s data analytics page. Spreads were calculated as of market close on September 20th, 2010. So the assumption is that the snapshot of bid-ask spreads on that day was representative of the average. Of 36 actively-managed ETFs that are trading in the US and Canada, 5 had percentage spreads smaller than 0.1% or 10 basis points (bps). Majority of the funds, 15 of them, had spreads between 0.1% – 0.2%. 4 funds had spreads in excess of 0.5%, but none of them exceeded 1%.

Factors affecting Active ETF bid-ask spreads?

Looking at the big picture, the bid-ask spread depends a lot on several things that all play off the amount of interest there is in the funds from investors. If there is a lot of interest from investors, the ETFs will usually have high trading activity and a sizeable asset base. These two things would attract market makers to make markets in the ETF, which then leads to tighter spreads. If an ETF has an overly-wide spread, then market makers can create or redeem ETF shares directly from the ETF manager to meet orders and capture a small profit. However, for this to happen, there needs to be some minimum level of activity in the ETF in terms of share volumes in order to make it profitable enough for the market maker to step in and bear the cost of creating and redeeming ETF shares. For example, if there are funds which trade at wide spreads but only trade 100 shares per day, then the market maker has no incentive to step in. This is often the problem that plagues many brand new ETFs that have not garnered much investor interest as yet.

However, one point specific to actively-managed ETFs is that even though a fund may have a large asset base, it may not have large trading volumes. That’s because Active ETFs are intended to be long-term investments, just like active mutual funds, and not as short-term trading vehicles. For example, PIMCO’s Enhanced Short Maturity Fund (MINT: 100.96 0.00%) has an asset base close to $350 million, but it trades an average of 37,000 shares per day, lower than many would expect for a fund that size.

Spreads versus Dollar Volume and Market Cap

Comparing the Active ETF bid-ask spreads to the average daily dollar volumes on each ETF helps paint a more detailed picture. The table below looks at how ETFs in each volume bucket fared in terms of their bid-ask spreads. The numbers represent the number of actively-managed ETFs in that volume bucket which had a bid-ask spread in that range.

The table provides some indication that there is a correlation between the amount of volume in the actively-managed ETF and the spreads at which it trades. Another comparison can be made versus the market capitalization of the fund. That’s what the table below looks at, categorizing the Active ETFs into market cap buckets this time.

Like the volume split, the market cap analysis tends to point to the likelihood of large actively-managed ETFs having tighter spreads than the smaller funds. However, in all honesty, the sample size that we’re looking at in each case – 36 actively-managed ETFs – is too small to draw any concrete conclusions from the above analysis because with such a small sample, the exceptions or “noise” in the data can skew the results too much.

What’s the take away?

Having looked at all that data, it’s safe to say that size and lots of investor interest in an actively-managed ETF would go a long way in bring in bid-ask spreads and reducing trading costs for investors. Market makers or designated brokers can step in to tighten spreads but there is a minimum level of activity that will be necessary to entice them into taking action and provide them with some sort of arbitrage profit.

For a look at the bid-ask spreads on each actively-managed ETF in our database, refer to the table below.

Note: I’d like to give credit to Matt Hougan’s article, “ETFs, Spreads and Liquidity”, on IndexUniverse, for providing the analytical framework I’ve used for this article.

ETF, Mutual Fund

How Do Active ETF Bid-Ask Spreads Stack Up?

September 29th, 2010

There are many factors that investors look at when considering which ETFs to invest in. Probably the most important factor should be the investment strategy behind the ETF and how it fits into their portfolio. However, more often than not, the biggest consideration for investors ends up being the ETF’s expenses. This is a by-product of the intense price competition between ETF manufacturers and the duplication of exposures that various ETFs provide.

The same expense considerations apply when evaluating actively-managed ETFs. There are several parts to the total expenses involved in owning Active ETFs. The most prominent, of course, is the ETF expense ratio. You can find a complete list of expense ratios for actively-managed ETFs here. Another explicit component of costs is the commission on trades, which can vary from broker to broker. Some of the less visible or implicit costs when you trade Active ETFs include the premium/discount of the ETF price to NAV. This is something covered in detail in a recent article analyzing how Active ETFs stack up in minimizing premium and discounts. This article looks at yet another component of trading costs – the ETF bid/ask spread.

What is the bid/ask spread?

Whenever you purchase or sell a stock or an ETF on the exchange, you are exposed to the bid-ask spread for that security. The bid price is the highest price that an investor will be able to sell the ETF at and the ask price is the lowest price an investor will be able to buy at. The difference between the bid and ask is the spread that you would lose if you instantly bought and sold the ETF. Overtime, the spread can vary depending on trading volumes and market maker interest but the spread will be never be zero and investors will always be exposed to some minimal spread even in the largest, most liquid ETFs.

How do Active ETF bid-ask spreads stack up?

Comparison across ETFs for bid-ask spreads is most effective using the % spread as opposed to the dollar spread. The percentage spread is calculated by taking the dollar spread and dividing it by the ETF’s mid price (the mid-point of the bid and ask price). The data presented below has been collected from various sources, including Bloomberg and IndexUniverse.com’s data analytics page. Spreads were calculated as of market close on September 20th, 2010. So the assumption is that the snapshot of bid-ask spreads on that day was representative of the average. Of 36 actively-managed ETFs that are trading in the US and Canada, 5 had percentage spreads smaller than 0.1% or 10 basis points (bps). Majority of the funds, 15 of them, had spreads between 0.1% – 0.2%. 4 funds had spreads in excess of 0.5%, but none of them exceeded 1%.

Factors affecting Active ETF bid-ask spreads?

Looking at the big picture, the bid-ask spread depends a lot on several things that all play off the amount of interest there is in the funds from investors. If there is a lot of interest from investors, the ETFs will usually have high trading activity and a sizeable asset base. These two things would attract market makers to make markets in the ETF, which then leads to tighter spreads. If an ETF has an overly-wide spread, then market makers can create or redeem ETF shares directly from the ETF manager to meet orders and capture a small profit. However, for this to happen, there needs to be some minimum level of activity in the ETF in terms of share volumes in order to make it profitable enough for the market maker to step in and bear the cost of creating and redeeming ETF shares. For example, if there are funds which trade at wide spreads but only trade 100 shares per day, then the market maker has no incentive to step in. This is often the problem that plagues many brand new ETFs that have not garnered much investor interest as yet.

However, one point specific to actively-managed ETFs is that even though a fund may have a large asset base, it may not have large trading volumes. That’s because Active ETFs are intended to be long-term investments, just like active mutual funds, and not as short-term trading vehicles. For example, PIMCO’s Enhanced Short Maturity Fund (MINT: 100.96 0.00%) has an asset base close to $350 million, but it trades an average of 37,000 shares per day, lower than many would expect for a fund that size.

Spreads versus Dollar Volume and Market Cap

Comparing the Active ETF bid-ask spreads to the average daily dollar volumes on each ETF helps paint a more detailed picture. The table below looks at how ETFs in each volume bucket fared in terms of their bid-ask spreads. The numbers represent the number of actively-managed ETFs in that volume bucket which had a bid-ask spread in that range.

The table provides some indication that there is a correlation between the amount of volume in the actively-managed ETF and the spreads at which it trades. Another comparison can be made versus the market capitalization of the fund. That’s what the table below looks at, categorizing the Active ETFs into market cap buckets this time.

Like the volume split, the market cap analysis tends to point to the likelihood of large actively-managed ETFs having tighter spreads than the smaller funds. However, in all honesty, the sample size that we’re looking at in each case – 36 actively-managed ETFs – is too small to draw any concrete conclusions from the above analysis because with such a small sample, the exceptions or “noise” in the data can skew the results too much.

What’s the take away?

Having looked at all that data, it’s safe to say that size and lots of investor interest in an actively-managed ETF would go a long way in bring in bid-ask spreads and reducing trading costs for investors. Market makers or designated brokers can step in to tighten spreads but there is a minimum level of activity that will be necessary to entice them into taking action and provide them with some sort of arbitrage profit.

For a look at the bid-ask spreads on each actively-managed ETF in our database, refer to the table below.

Note: I’d like to give credit to Matt Hougan’s article, “ETFs, Spreads and Liquidity”, on IndexUniverse, for providing the analytical framework I’ve used for this article.

ETF, Mutual Fund

European Central Bank Gold Sales Down 96%

September 29th, 2010

The year to September reporting is in for the European Central Bank Gold Agreement (CBGA), the group that controls the aggregate gold sales for the eurozone, Sweden, and Switzerland. The results are not that surprising — the group sold only a meager 6.2 tonnes. However, the precipitous drop in sales from the year prior period is staggering… the members’ gold sales are down 96 percent.

According to the Financial Times:

“The central banks of the eurozone plus Sweden and Switzerland are bound by the Central Bank Gold Agreement, which caps their collective sales. In the CBGA’s year to September, which expired on Sunday, the signatories sold 6.2 tonnes, down 96 per cent, according to provisional data.

“The sales are the lowest since the agreement was signed in 1999 and well below the peak of 497 tonnes in 2004-05. The shift away from gold selling comes as European central banks reassess gold amid the financial crisis and Europe’s sovereign debt crisis.

“In the 1990s and 2000s, central banks swapped their non-yielding bullion for sovereign debt, which gives a steady annual return. But now, central banks and investors are seeking the security of gold.”

The about face in European gold selling arrives in tandem with the much-discussed renewal in gold purchasing interest by central banks in Asia and other developing economies, including Russia. Yet, even with gold holding record price levels — in the vicinity of $1,300 an ounce — it appears the CBGA member states will still plan to sit tight and refrain from their typical sales numbers going forward, which the FT indicates have historically averaged about 388 tonnes per year. You can read more details in Financial Times coverage of how Europe’s central banks have halted gold sales.

Best,

Rocky Vega,
The Daily Reckoning

European Central Bank Gold Sales Down 96% originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
European Central Bank Gold Sales Down 96%




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Commodities, Uncategorized

Why 1,471 Hedge Funds Failed

September 29th, 2010

Why 1,471 Hedge Funds Failed

My phone is an old Nokia about the size of a small brick.

It doesn't take pictures, tell me the weather or connect to the Internet. That's the way I like it.

In a world that has grown increasingly complex, I feel like a throwback to a different era. I like things to be as simple as possible — and that includes my investing.

As an engineer at IBM (NYSE: IBM) in my former life, I used to deal with complex problems… and solutions… day in, day out. That's when I started to understand just how damaging too much complexity can be — no matter where it pops up.

Nowhere is this more obvious than the nasty recession we've lived through for the past two years.

For example, home mortgages were packaged and repackaged into mortgage-backed securities time and again until even the banks that invested so heavily in them weren't sure just what they contained. The result was our government having to bail out the financial firms.

Meanwhile, complicated derivatives led to sky-high leverage around the investment community — bringing hedge funds to their knees.

Bernie Madoff even hid behind a curtain of complicated scheming to commit fraud on an unprecedented scale. But no one could really tell what was going on because of its complexity.

Is it any wonder that I like to keep things simple in my day-to-day life, but also in my investment portfolio?

Judging from the investment landscape, many investors equate complexity and secrecy with smart investing decisions. How else can you explain the rise of hedge funds during the past several years?

These funds have very little regulation, usually use complex derivatives and futures contracts and are generally tight-lipped about their investing decisions. To me, that doesn't sound like it is in the best interest of investors.

In fact, 1,471 hedge funds shut down in 2008, according to Forbes. That was fully 15% of all the funds in the industry. And it's been rocky for the industry ever since. In the first quarter of 2010, hedge funds had a net outflow of $11 billion.

So much for outsmarting the market.

My investing style is just a little bit different. Like I said, I keep things simple. In fact, you could sum it up in one sentence: “Find one stock each month that will beat the market.”

There are several reasons I like this “Keep it Simple” approach, and think all investors should follow it:

1. It allows investors to be experts on their holdings
You've heard the phrase “Jack of all trades, master of none.” To me that describes a lot of investors. Portfolios with dozens — even hundreds — of securities run an extreme risk of having more than you can handle. But keeping a very focused portfolio allows any investor the time to go in-depth into a handful of select companies, making them experts on their operations.

2. It lets your winners work and cuts the losers
We all have at least a couple of stocks in our portfolios that we don't really like. For whatever reason, it's tough to let go of some holdings — even if we're not hot on their prospects right now. But if you limit your portfolio size to just 10 or 12 holdings and use a “pig at the trough” game plan (only so many pigs can eat at one trough; if you add a new pick to an already-full portfolio, you have to get rid of one current holding), you'll solve this problem.

As a result, the dogs that you've always wanted to get rid of will stop wreaking havoc on your portfolio, and your holdings will consist only of those stocks you like the most. As Warren Buffett says, “It's crazy to put money into your 20th choice rather than your 1st choice.”

3. You can't beat the market if you are the market
A funny thing happens as you add more and more picks to your holdings — your returns can suffer. Experts will always tout the benefits of diversification. And I agree with them… but only if you want to track the market. I'm more interested in beating the market.

The more holdings you own, the closer you are going to come to matching the market's moves. That makes sense: you can't beat the market if your portfolio is the market (one notable exception — using a “Daily Paycheck” strategy to earn consistent dividends, and reinvest). If you want to beat the Street, you need to pick your very best investment ideas and use them to power your portfolio.

Action to Take –> The “Keep it Simple” approach is one that I've been practicing day in and day out for all my life. That's why it comes as second nature to my investing. It's also one of the reasons I was selected to head up StreetAuthority's Stock of the Month newsletter.

Each month I practice what I preach — I pick only one idea that I think is poised to beat the market. And I don't stop there. I'm actually putting $100,000 of StreetAuthority's cash to work in these picks with my real-money portfolio. That's why my publisher likes to say he buys every stock I recommend… it's his cash going into the holdings!

Uncategorized

The 4 Best Investing Hot Spots

September 29th, 2010

The 4 Best Investing Hot Spots

If you had a crystal ball in the 1960s, you probably would have seen that Japan would turn out to be a great investment. The country's economy was growing nicely, family birth rates were high enough to ensure a young workforce, its education system was excellent, its currency was cheap and it was generally regarded as ranking high in terms of lack of corruption. The Japanese stock market did great for two decades, rising +178% in the 1970s and an eye-popping +587% in the 1980s.

Of course, some of those metrics (such as a cheap currency and high birth rates) stopped being a positive factor years ago, and may help explain why Japan's Nikkei Index fell -51% in the 1990s and another -49% in this last decade. (It plunged from 38916 at the end of 1989 to a recent 9600. Yikes).

Such a rare confluence of positive factors such as Japan had in the 1970s and 1980s rarely exists. These days, countries with strong education systems are often found in the developed world, where population growth rates have cooled. In other places, stock markets may look like relative bargains, but corruption concerns should keep you far away.

So your preference in international markets is largely a factor of what you consider to be important. For example, many investors will only put their money in countries that have a history of clean and transparent business climates. And for good reason. The Heritage Foundation has historically found a tight correlation with strong market returns and low national corruption. The organization produces an annual “Freedom Index” that highlights the best places to do business. Here's the latest snapshot:

Freedom Index
Country Rank* Birth Rate**
Hong Kong 1 F
Singapore 2 F
Australia 3 C
New Zealand 4 B
Ireland 5 B
Switzerland 6 D
Canada 7 D
U.S. 8 B
Denmark 9 C
Chile 10 B
U.K. 11 B
Netherlands 12 D
Japan 13 F
Sweden 14 D
Germany 15 C
* only includes countries with suitably-sized stock markets. Source: Heritage Foundation
** ranks A-F relative to birth rate percentile. Source: CIA Factbook

I cross-referenced these high-ranking countries with their respective birth rates. The greatest enemy of long-term growth is a shrinking population that yields fewer younger workers supporting a rising tide of retiring workers. Of these least corrupt countries, only New Zealand, Ireland, the United States and Chile are having enough children to avoid the retiree crunch (immigration policies notwithstanding).

Before we move on, there is an important secondary corollary to this table. New Zealand, Ireland, Canada and Chile are all adjacent to strong economic regions or trading partners, and their growth can be sustained through exports even if their domestic markets are small. For example, Australia is blessed with massive natural resources and high growth rates — just the right environment for neighboring New Zealand, which has a comparatively weaker currency and could increasingly become an export powerhouse to Australia.

Get schooled
To establish sustainable long-term growth rates, countries need to develop well-educated middle classes, and not just Harvard-educated elites. The fact that Korea ranks high in math and science is a big factor in explaining that country's solid economic growth during the past decade. In the developed world, Canada and New Zealand score quite high in terms of education standards. And as noted, they are fortunate to have larger trading partners right at their door.

Education Attainment
Country Reading Rank Math
Rank
Science Rank Total
Score
Korea 1 2 7 10
Canada 3 5 2 10
New Zealand 4 7 4 15
Netherlands 9 3 6 18
Australia 6 9 5 20
Japan 12 6 3 21
Switzerland 11 4 11 26
Ireland 5 16 14 35
Germany 14 14 8 36
Sweden 8 15 16 39
U.K. 13 19 9 41
Poland 7 20 18 45
France 18 18 20 56
Spain 27 25 24 76
Italy 25 29 28 82
Russia 30 26 32 88
Turkey 29 31 31 91
Mexico 31 32 33 96
Brazil 32 33 33 98
Note: OED members only. No U.S. data available. Source: OECD
TOTAL SCORE = The lower, the better.

Chasing momentum
The global economic crisis of 2008 and 2009 has led to a slowdown in economic growth. But some countries were able to see their economies expand at a rapid pace in 2009. The table below highlights the world's fastest-growing economies, and it's no surprise that they are mostly located in Asia and Latin America, where rising middle classes are fueling a virtuous cycle of further spending gains.

Fastest Growing Economies (2009)*
China +9.8%
Argentina +7.1%
Egypt +6.9%
India +6.6%
Vietnam +6.2%
Indonesia +6.1%
Russia +6.0%
Brazil +5.2%
Poland +4.8%
Chile +4.0%
Israel +3.9%
Colombia +3.5%
*Includes only countries with suitably-sized stock markets. Source: CIA Factbook

Historically speaking, fast-growing economies can maintain their momentum for quite some time, especially when key trading partners are growing in tandem. It's no coincidence that Argentina, Brazil, Chile and Colombia all made this list. All of these countries feed off of each other and (with the arguable exception of Argentina) are also benefiting from far sounder fiscal policies that encourage growth and inhibit inflation.

Now, let's see how those economic growth rates have translated into stock market returns this year for those same countries:

2010 Year-to-Date Stock Market Return*
China -19%
Argentina +5%
Egypt +5%
India +4%
Vietnam -7%
Indonesia +25%
Russia N/A
Brazil -2%
Poland +4%
Chile +29%
Israel 0%
Colombia +21%
*Through the first 8 months of the year. Source: Bespoke Investment Group

Several of these countries were discussed in my analysis of the CIVETs, thought by some to be the new hot investment area after the BRICs (Brazil, Russia, India and China). [Forget About BRIC: Buy These Emerging Economies Instead]

As I noted in the article, countries like Colombia are quite appealing, but after a strong run they are no bargain. If one were to disregard relative valuations, then places like Chile, Indonesia and Colombia would look far more appealing.

The Big Mac Index
Of course, a country's competitiveness is tied to its currency, as Chinese government bureaucrats would likely note. Japan was blessed with a cheap currency 20 to 40 years ago. More recently, its currency has strengthened, which partially explains why the Nikkei has shed -70% of its value in the last 20 years.

Every year, The Economist takes a look at the price of a Big Mac to gauge the relative strength of a country's currency. Looking at those same countries in the last table (below), you'll note that a Big Mac can be had for a low price in Russia, Poland and China. It's an inexact gauge, as the cost of Big Macs is also a function of taxes, local sourcing and other variables. But it's no coincidence that a Big Mac is relatively expensive in places like Colombia and Israel. The cost of doing business in those countries is fairly high, and they must compete in the global economy on the basis of an educated workforce and/or an abundance of natural resources.

Price of a Big Mac ($U.S.)
China $1.97
Argentina $3.75
Egypt $3.48
India N/A
Vietnam N/A
Indonesia $2.51
Russia $2.31
Brazil $2.33
Poland $2.22
Chile $3.52
Israel $3.99
Colombia $4.46
Source: The Economist

Uncategorized

The One Blue-Chip Stock Every Investor Should Own

September 29th, 2010

The One Blue-Chip Stock Every Investor Should Own

Legend has it that the term “blue chip” stems from poker, in that it represented the poker chip with the highest value in the game. These days, the term is ubiquitous in the stock market and refers to a large, stable company that is financially sound, has well-known brand and market awareness and a diversified sales base.

Blue chips are also frequently known as industry bellwethers. A perusal of the 30 companies that make up the Dow Jones Industrial Average is perhaps the best illustration of blue chips across a wide array of industries. Prime examples include Coca Cola (NYSE: KO), American Express (NYSE: AXP) and Intel (Nasdaq: INTC), as they dominate their respective industries and their corporate logo qualifies as a global brand with billions of dollars in brand equity.

Interestingly, these companies have been laggards in terms of overall stock market returns. This is in stark contrast to historical periods when they have been the most sought after firms for investors. The Nifty 50 stocks in the 1960s and 1970s represented a time when investing in the largest firms in the market was seen as a no-brainer — these stocks could be held forever because it was difficult to see them lose competitiveness to smaller, lesser capitalized rivals.

The late 1990s represented another period where investors held blue chips in high regard and bid valuations to more than 50 times earnings in many cases. These days though, blue chips are trading at low double-digit multiples of their earnings, as it has taken a decade for sales and profit growth to catch up to the lofty valuations placed on these firms during what is now considered the dot-com bubble.

At some point, perhaps in the very near future, investors will again reward quality companies with higher valuations. In addition, these firms are large and globally diversified, which means they should be able to withstand downturns in the business cycle and expand in faster-growing emerging markets. As such, blue-chip investing has great appeal right now.

Downside protection is another strength these firms offer investors. A large number of investors remain worried about global economic growth, given that we just went through one of the worst financial crises since the Great Depression. For the most part, blue chips, barring a select class of unfortunate financial titans, have survived the global meltdown with flying colors.

Given the valid concerns regarding a double-dip or prolonged recession in the global economy, Wal-Mart (NYSE: WMT) is the blue chip that every investor should own. It has survived two major recessions in the past decade, demonstrating it is capable of withstanding “tail risk” (a supposedly improbable market meltdown that is occurring with regularity in the market) and was one of only a few firms that actually benefitted during a recession.

The stock hasn't done much during the past decade. This is because the price-to-earnings (P/E) ratio was at 47 back in 2000. Sales and earnings have grown about +10% annually during this time frame though, and though double-digit sales growth will be challenging in the next decade, management has the discipline and wherewithal to leverage high single digit top-line growth into +10% or higher profit growth well into the future. And Sales upside does still exist as Wal-Mart expands globally. As a case in point, it has seen success in cost-conscious markets such as Mexico and just announced ambitious expansion plans into Africa.

Action to Take —> At a current P/E of about 14, this means that shareholders can expect investment returns along these levels. Throw in potential earnings multiple expansion (though 47 seems like a huge stretch) and a 2.3% current dividend yield, and it's hard to see a safer investment out there that also offers a high likelihood of solid returns for many years to come.

– Ryan Fuhrmann

A graduate of the University of Wisconsin and the University of Texas, Ryan Fuhrmann, CFA, adheres to a value-based investing viewpoint that successful companies…

Uncategorized

Return of Quantitative Easing Good for Gold

September 28th, 2010

The Federal Reserve said two words in its statement this week that should make every gold investor happy: Quantitative Easing. The Fed hinted that we may see additional QE measures as early as November. The news is good for gold investors because it means there could be more dollars chasing a finite amount of resources, further devaluing the U.S. dollar.

We’ve already seen an intervention by Japan’s central bank to weaken the yen in an effort to boost the nation’s sagging export sector. Japan is currently the world’s third-largest economy.

Another key driver for gold has been diminishing supply from gold mines. This chart from JP Morgan shows the all-in cost to produce and replace an ounce of gold for a handful of miners.

Despite $1,300 gold, margins are still relatively modest. The costs vary widely depending on the company, but the peer average is $880 an ounce. Gold miners will be looking for ways to expand these margins and cash in on higher gold prices.

Another good sign for gold equities is the recent pickup in M&A activity we’ve seen in the sector. There are generally about 1,000 mining M&A deals a year but we’re already above 1,300 deals so far this year, according to a Pricewaterhouse Coopers report.

Faced with diminishing production from existing mines, many of the seniors have looked to acquire additional reserves at a reasonable price as many junior companies remain below their 52-week highs. In many cases, these are the small- to mid-tier miners who’ve already put in the initial legwork in taking a discovery to production.

This week, two of our portfolio managers attended the Denver Gold Forum and both returned with a constructive outlook on gold for the near- and long-term.

Another observation from the conference was large amount of interest in gold as an investment and that there’s still a lot of education taking place on the best ways to invest in the gold sector. It’s important that investors don’t get caught up in the media’s pejorative view of gold and remember to utilize exposure to the gold sector as a portfolio diversification tool.

By the way, if you haven’t already had the chance to listen to what Roger Gibson had to say about the role of commodities in asset allocation, you can do so here.

Gold can be a portfolio tool for both the individual and professional investors. Energy stocks have been pummeled since the Deepwater Horizon accident earlier this spring, but the managers of our Global Resources Fund (PSPFX) have used gold as a way to protect against the recent financial and economic malaise. By increasing their portfolio weighting in gold and gold stocks, they’ve managed to limit exposure to a sector that has fallen out of favor with investors at the moment.

If you’re interested in gold, we suggest investing no more than 5 percent to 10 percent in the gold sector. In addition, this allocation should include both the physical asset—like gold bars or coins—and gold mining shares.

An opportune chance to enter the market may be just ahead. With gold moving up sharply in recent weeks, it’s likely there’s a pullback on the horizon but if the Fed reinstitutes QE measures as expected later this fall. Combine that with rising fiscal deficits and currency debasement among countries in the developed world and the future looks bright for gold.

Regards,

Frank Holmes,
for The Daily Reckoning

P.S. Brian Hicks, co-manager of the Global Resources Fund (PSPFX), contributed to this commentary. For more updates on global investing from me and the U.S. Global Investors team, visit my investment blog, Frank Talk.

Return of Quantitative Easing Good for Gold originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Return of Quantitative Easing Good for Gold




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Commodities, Uncategorized