The gold swing

2 Sep

In 2013, Gold slumped by 28% due to equity surge and Fed’s diminishing pace of monetary stimulus. However, gold rebounded by 7.3% in 2014 as a result of geopolitical tensions prevailing in Middle East, East Europe and Iraq. After beating gains of other investment asset like commodities, equities and treasuries, it is again back to its status of being less favored by investors.

Gold price has remained confined in a small range due to lack of conviction in the yellow metal as hedge funds and money manager lower their bullish bets in gold by 24,182 contracts, to 92,734, the lowest since June as reported by CFTC.  US and Canada markets are closed on account of Labor Day holidays hinting the low market participant volumes.

The U.S. economy grew more than forecast in the second quarter, government data showed Aug. 28. Orders for durable goods jumped in July while consumer confidence climbed in August. The volumes of the SPDR Gold Trust holdings, the biggest ETP backed by the precious metal, plunged three times in last four weeks which also show continued lack of interest in the precious metals as investor opt for US equities that is marching to a fresh record.

Better US data shows continuing US economy’s recovery that could prompt FED to increase rates in near future. Higher interest rates can make gold a lesser attractive investment option against treasury.

However the lowering tensions between Russia and Ukraine have escalated with hundreds of Russian soldiers entering Ukraine and Ukraine blaming Russia for launching a fresh military attack across its eastern border.  US is working closely with EU to keep their Russian sanction programs in place. This may generate fresh investor interest in gold for a hedge against political instability.

Thus, gold prices seem to remain range bound with upper side capped by the further march of US equities to a record high while the lower side restricted by the falling Treasury yields. However the unresolved Russia – Ukraine geopolitical tension and coming Indian Festive season can play an important role to lift the gold price.

Warren Buffett And The Chinese Are Loading Up On Hard Assets

20 Aug

Money is transitory and wealth is permanent. So, a lot of people confuse money and wealth and say well, I have a lot of money so I’m wealthy. Well, in the short run, that may be true but in the longer run, the money can go away but the wealth is something that prevails.

You look at Warren Buffett. In the last several years, Warren Buffett went out and bought the Burlington Northern and Santa Fe Railroad. He didn’t just buy some stock, he bought the whole thing, took it private.

What is a railroad? A railroad is nothing but hard assets. It’s right of way, mining rights adjacent to the right of way, rail, rolling stock, yards, switches, signals, buildings, it’s all hard assets. How does the railroad make money? It makes money by moving hard assets so coal, wheat, corn, steel, other kinds of freight, etc. So, railroad is the ultimate, its hard assets moving hard assets. It’s the ultimate hard asset play. Warren Buffett’s next deal was to go out and buy massive natural resources in oil and natural gas. And by the way, he can move his oil on his railroad. He doesn’t need the Keystone Pipeline. You line up a hundred tanker cars, that’s a pipeline on wheels.

So, Warren Buffett comes with his own railroad. That means he has his own pipeline. So, Warren Buffett’s a guy who’s dumping paper money, getting into hard assets in the form of transportation and energy in particular. And the dollar could go to zero and it has no effect on him. He still owns a railroad

The other example are the Chinese. The Chinese have spent the last four years acquiring approximately 3,000 to 4,000 tons of gold. Now, how do we know that? We have some hard data. We know China’s mining output is about 450 tons a year. We know China’s imports through Hong Kong are coming in between 800 and 1,000 tons a year. This has been going on for four years so that’s kinda 6,000 tons there and where you have to use a little guesswork is okay, we know how much gold China is getting, how much is going to private consumption, how much is going to the government? We’re not as clear on that, but I use kinda half as the first approximation.

And we also know that China is acquiring gold through stealth using intelligence and military assets to bring gold in completely off the books, doesn’t show up in Hong Kong imports. So, why is China doing this? Well, because they got a mountain of paper assets. They’ve got $4 trillion in reserves, almost all of it denominated in paper bonds. Most of that U.S. dollars, most of that U.S. treasury so, you know, the oldest joke in banking is if I owe you a million dollars I have a problem, but if I owe you a billion dollars, you have a problem because you have to collect it from me and I can walk away.

Well, we owe China $4 trillion so China has a problem. So, they can’t dump those paper assets. They know that. Their treasury markets big, but it’s not that big. It can’t absorb those kinda sales. So, what China’s doing, they’re vulnerable in the paper. If we have inflation, that’s just a wealth transfer from them to us so they’re acquiring gold, thousands of tons of gold. By the way, there are only about 33,000 tons of official gold in the world. All the central banks, sovereign wealth funds and treasuries and finance ministries combined have about 33,000 tons of gold.

China’s acquired 10 percent of all of the official gold in the world in the last four years. So, why are they doing that? Well, they now have a hedge position. So, they actually want a strong dollar because they own so much dollars denominated paper. If the dollar is strong, they might not make very much on the gold, but they’ll collect the value of their bonds, but if we inflate the dollar, which we’re trying to do, and the value of those bonds goes down in real terms, we know what’s gonna happen.

The gold is gonna go up like this so they’ve created a hedge where they win this way and they win this way so I would say look at China buying gold, look at Warren Buffett buying hard assets in energy and that will give some guidance. The two other ones, powerful, biggest, best and foreign investors in the world are getting out of paper money into hard assets.

(Article by James G. Rickards)

Jim Rogers: I Missed the Boat on Investing in Bitcoin

29 May

Investor Jim Rogers, of Rogers Holdings fame, has said he missed the boat on investing in bitcoin.

In a recent interview with China Money Network, the veteran investor said he still does not know much about digital currencies, but he admitted that he should have got on board a long time ago:

“If I were smart, I would have bought it in the early days when people first told me about it. I still don’t know enough about it to invest in it.”

Future of money?

Rogers said there have always been great investments around the world, so he was not focused on digital currencies in the past. Furthermore, it all seemed too complicated at the time, he said.

He indicated that he might invest in digital currencies in the future, provided he learns enough about them.

When asked whether or not digital currencies like bitcoin have a future, Rogers said the world has serious currency needs and serious problems, but, he is not sure whether or not digital currencies are the answer:

“The US dollar has dominated the world for the past 70 to 80 years. […] We need something to compete with the US dollar, and something to replace it eventually. Whether it’s the bitcoins, the RMB or seashells, I have no idea.”

Artificial liquidity

Rogers discussed various economic and geopolitical issues in the interview. His biggest concern in terms of economics, he said, is that all major banks have been “printing huge amounts of money” over the past five or six years.

“It’s the first time in recorded history that we have the Japanese, British, European and Americans all printing money at the same time. So we have this artificial ocean of liquidity, which is making markets do well, but it’s not doing much for the economy worldwide. When it ends, we will all pay a terrible price,” he cautioned.

In spite of ominous developments on the monetary front, Rogers said the geopolitical situation should not be overblown, although he does expect to see bigger conflicts over the next decade.

“Politicians have always made foolish mistakes throughout history. They will make mistakes again, and we will all pay for it,” he said.

(Source : coindesk)

India Election Like Abe In Japan: 10-Year Bull Market Has Started

29 May

Summary

  • India has a stable, single-party government after 25 years; weak governance due to multi-party coalition politics has been the primary cause for India’s growth being significantly below potential.
  • Modi, leader of the new government, has a reputation as being pro-business, with the willingness and ability to quickly push through major changes through the complicated, slow and corrupt bureaucracy.
  • Indian economy has significant tailwinds: demographic dividend, large and growing highly educated and skilled workforce, large and growing middle class.
  • Risk: terrorist strike leads to the right-wing government initiating a military confrontation with its nuclear armed neighbor (Pakistan).
  • Risk: ruling party has been accused of having an anti-minority and fascist ideology. With 13% Muslims and 2.4% Christians, this may lead to negative socio-economic consequences.

Recent political environment and latest election

For the last 25 years (beginning in 1989), regional parties gained significant influence over the national government often causing paralysis of governance due to conflicting demands of coalition parties. The dysfunction of the national government peaked in the last few years with analysts concluding that “India and China are often considered to be the world’s rising economic powers, yet if China’s growth has been led by the state, India’s growth is often impeded by the state.” With crumbling infrastructure, rampant corruption, stalled economic reforms and unacceptably long new-project approval times there are legitimate concerns that India’s government is killing its economic miracle. This led to macroeconomic imbalances, pessimism among investors, corporations and the population at large.

Results of the 16th general election in India were announced on May 16, 2014. After 25 years of messy coalition politics, India will now have a stable, single party government. The Bharatiya Janata Party (BJP) won 282 seats, comfortably above the 272 seats needed for a majority. Further, the BJP-led pre-election alliance (National Democratic Alliance, or NDA) won a historic 336 seats (62% of the seats).

Narendra Modi, leader of the new government, has a reputation as a pro-business aggressive leader with the willingness and ability to quickly push through major changes through the complicated, slow moving and corrupt Indian bureaucracy. He got this reputation while he was the Chief Minister (equivalent of Governor in the US) of the Indian state of Gujarat from 2001 to 2014.

This election in India is akin to the historic election of a Shinzo Abe led government in Japan in 2012. The landslide victory by Abe’s Liberal Democratic Party is enabling Japan to undertake historic and radical economic policies aimed at jolting the economy out of its two decade slumber. The Japanese Nikkei 225 Index (Nikkei) rose 67% in the 5 months after Abe’s election. The Nikkei fell from that high, but is currently still up 53% from the pre-Abe period.

Indian economy – significant economic tailwinds

Economic reforms in India began in earnest in 1991 in reaction to a severe balance of payments crisis. The reform was led by Dr. Manmohan Singh, who at the time was the Minister of Finance in the Congress Party led government. It has continued inconsistently since then. The combination of economic reforms, it’s growing and large highly educated and English-speaking workforce and globalization trends helped India become a major exporter of information technology services, which led to its Gross Domestic Product (GDP) growing by 8.3% per annum from 2003 to 2010. However, this growth slowed to 4.7% in 2012, blamed primary on its crumbling infrastructure and regulatory bottlenecks due to a dysfunctional national government.

A 2011 working paper by the International Monetary Fund concluded that while India has been a latecomer relative to advanced Western nations and East Asian economies, it is in the midst of a major demographic transition. That transition started about 40 years ago and will likely last another 30 years. Large cohorts of young adults are poised to add to the working-age population in combination with falling fertility rates. This leads to working age population growing as a percentage of total population. This demographic dividend could add about 2 percentage points per annum to India’s per capita GDP growth over the next two decades.

As per a JP Morgan report India has the world’s third-largest English-speaking workforce, a sizable part of which is also highly educated. Every year Indian universities produce more than 3.5 million graduates. The Indian Diaspora (people of Indian origin living outside India) has achieved significant success in business and other areas (click here, here and here), indicating that under the right government structure, the population has significant potential for global success.

A recent Ernst and Young report concluded that India’s middle class, currently at around 50 million people or 5% of its 1.3 billion population, is expected to grow steadily over the next decade, reaching 200 million by 2020. This will create a rapidly growing and vibrant consumer base for sustained economic growth.

The election result has led to a historic surge in optimism and confidence among local and global investors, corporations and the population at large (see article 1, article 2). This may create a positive feedback loop in the economy by increased capital investment by corporations and spending by consumers, both supported by major economic reform and reallocation of government resources towards badly needed infrastructure projects.

Domestic and foreign investor flows into Indian equity markets

India’s individual investors still have room to boost stock holdings, which account for less than 6% of their assets. In Japan, which has Asia’s biggest stock market, 8.5% of household assets are invested in equities. That compares with 33% in the US and 16% in the Euro Zone.

Foreign Institutional Investors (FII) have invested more than $17 billion in Indian securities since the BJP announced Narendra Modi as its prime ministerial candidate in September 2013. Now that the uncertainty of the unpredictable election has passed, it is expected that FII money may have another surge.

India has well developed capital markets, with the stock exchange in Mumbaiformed in 1875. Significant capital market reforms beginning with the start of major liberalization in 1991, have increased retail and institutional investor confidence in the integrity and reliability of the capital markets in India.

Valuation

The broad Indian equity market, as represented by the S&P BSE Sensex Index (SENSEX), is trading at an undemanding 15.4x forward price-to-earnings (PE) ratio. Over the last 10 years, it has traded at an average forward PE of 16.3x, with a high of 23.3x and a low of 9.6x (at the bottom of the 2008-09 crises). Small capitalization stocks, as represented by the S&P BSE Small-Cap Index (BSESMCAP), are trading at an 11.7x forward PE ratio. While the SENSEX is trading at both 5 and 10 year highs, the BSESMCAP is trading at a 22% and 37% discount to its 5 and 10 year highs.

Long-term growth in the price of Indian equities is likely to be driven by both expansion of the PE ratio, which is currently below historical averages, and growth in earnings per share.

Bulls argue that over the next 10 years, India’s GDP could grow to US$5 trillion (from US$1.9 trillion) and the market capitalization of its publicly traded equities could grow to US$4 trillion (from US$1.2 trillion). Such growth would depend on, among other things, (1) the new government focuses on significant structural reforms and its willing and ability to push them through the legislative branch of government and ensuring proper implementation by the bureaucracy, (2) reigning in inflation (3) managing the fiscal deficit, (4) managing the current account deficit, (5) the global economic environment, and (6) productive investment by the corporate sector and strong labor productivity growth.

All else being equal, a potentially strengthening Indian currency (Rupee) in the short term due to inflow of foreign capital and in the long term due to improving macro economic variables, will be a tailwind for investors purchasing US listed ETFs that invest in Indian listed equities.

Relevant securities

The following US listed Exchange Traded Funds (ETFs) provide different ways for investors to get exposure to Indian equities: EGShares India Infrastructure Index Fund (INXX) – focused on companies in the infrastructure sector (during this election, the BJP has stated that a key goal is rapid and large projects to improve infrastructure – roads, railway, ports, power infrastructure), WisdomTree India Earnings Fund (EPI) – skewed towards smaller capitalization companies, Market Vectors India Small-Cap Index (SCIF) – exclusively focused on small capitalization companies, iShares India 50 (INDY) – exclusively focused on large capitalization companies.

Risks

If there is a terrorist strike in India like the 2008 Mumbai attacks, the right-wing BJP government may initiate military strikes on Pakistan. A direct military conflict between two nuclear armed countries will be a severe negative shock to the Indian economy.

The BJP was founded as the political wing of the Rashtria Swayamsevak Sangh (RSS), which started life in 1925 as a right-wing nationalist paramilitary organization. The RSS is said to have drawn inspiration from European right-wing fascist groups during World War II and is said to have participated in anti-minority (Muslim and Christian) violence. Most senior BJP leaders have an RSS background and Narendra Modi, who will lead the new government, has been a member of the RSS since the early 1980s. Muslims and Christians account for 13.4% and 2.3% of the Indian population. If the new government directly or indirectly supports organized oppression of the minorities in India, it may lead to negative socio-economic consequences.

Since the anticipation of a potential election victory by a Narendra Modi led BJP, the Indian equity markets (SENSEX) has risen 20% compared to a 4% rise in a basket of emerging market stocks. During the same period, small capitalization stocks in India have risen 40%. As a result, some of the upside has already been priced into the stocks. Further, the stocks are likely to be very volatile going forward.

While the NDA government has complete control of the lower house of parliament (Lok Sabha), India’s federal system means negotiating through the upper house (Rajya Sabha), in which they are a minority, and negotiating with state governments for faster implementation of key policies.

The new government will also have to deal with headwinds from structural economic issues of high inflation, high fiscal deficit and high current account deficit. Further bad monsoon rains can have a severe negative impact on the critical agriculture sector.

Conclusion

Last week’s election results in India, which resulted in the first stable, single-party government after 25 years, may have started a long term (10+ year) bull market. Weak governance due to multi-party coalition politics has been the primary cause for India’s growth being significantly below potential. Narendra Modi, leader of the new government, has a reputation as a pro-business aggressive leader with the willingness and ability to quickly push through major changes through the complicated, slow moving and corrupt Indian bureaucracy. Once unshackled, the Indian economy can capitalize on significant tailwinds: demographic dividend, large and growing highly educated workforce, large and growing middle class. While there are risks (detailed above), the risk-reward is very attractive.

(Source : KL Investment partners)

Optimism In India

29 May

Investors love a good reform story. Last year, major reforms in Japan and Mexico captured investors’ attention. This year, stocks in India and Indonesia have rallied in anticipation that a more business-friendly, reform-minded leader will soon be elected.

Last week, the Bharatiya Janata Party won a large majority in India’s lower house of parliament, and it is expected that Narendra Modi will be selected to serve as India’s 14th prime minister. Modi is currently the leader of the state of Gujarat, which has recently seen strong growth thanks to Modi’s policies, which fostered a more business-friendly regulatory environment and large investments in infrastructure. Modi’s leadership record and the BJP’s relatively large majority win, which should make it easier to push through difficult reforms, have helped drive a strong market rally. For the year to date, Indian stocks have risen 12% in local-currency terms (as measured by the MSCI India Index), but thanks to a strengthening Indian rupee, the MSCI India Index (in U.S.-dollar terms) has climbed 18%.

At this time, the MSCI India Index is trading at a forward price/earnings ratio of 15 times, which is in line with the index’s 10-year average. While some optimism about India’s future may be justified, corporate India continues to grapple with many challenges in the near term, including above-target inflation, a high cost of capital, weak infrastructure, restrictive and outdated labor laws, and slowing gross domestic product growth. Stronger corporate earnings growth as a result of anticipated reforms may take a few years to materialize.

A Fund for India Exposure
iShares MSCI India (INDA) tracks a cap-weighted index and can be used to achieve exposure to consumer- and investment-driven growth in India. It is appropriate for use as a satellite holding.

It is important to note that the Indian stock market is one of the more volatile among its emerging-markets peers. Indian equities, as measured by the MSCI India Index in U.S. dollars, have had a five-year annualized standard deviation of returns of 30%, which is more than double that of the S&P 500 over the same span. And like most funds that invest in foreign equities, this exchange-traded fund does not hedge its foreign-currency exposure, so its returns reflect both the change in value of the underlying assets as well as the change in the Indian rupee against the U.S. dollar.

There are many factors that drive the volatility of Indian equities. India has a heavy dependence on foreign fund flows for investment and growth. When markets are in a risk-off mode, or when investors become concerned about a potential stall in economic reforms or a deterioration in macroeconomic fundamentals, foreign funds quickly flow out of Indian equities, which tend to have low floats. These factors, combined with India’s current account deficit, drive volatility in the Indian rupee and, therefore, the returns of this fund. India also has a notoriously unfriendly business environment and is plagued by widespread corruption.

Fundamental View
For much of the past two decades, India’s annual economic growth rates were in the mid- to high single digits. Much of this growth was spurred by “big bang” economic liberalization, which began in 1991. These reforms included the opening up of foreign investment and trade, privatization, improved regulation, and capital-market reforms. Even during the 2008 global financial crisis, India was able to continue growing at around 6% because of the economy’s lower exposure to exports (relative to other emerging-markets countries), stimulative fiscal and monetary policies, and stable growth in domestic consumption.

However, relative to China, India’s growth has lagged for a number of reasons, including significantly lower levels of foreign direct investment and very poor infrastructure, in part because of India’s legendary red tape. In the second half of 2012, the Indian government approved of a new law that would allow foreign companies to hold a 51% stake in multibrand retailers. But additional rules, such as local sourcing requirements and large commitments for infrastructure spending, and the potential for an additional layer of state-level regulations resulted in very low interest by global retailers. To date, only U.K.’s Tesco has made a commitment to enter the Indian market.

Many hope the new leadership will usher in another series of major liberalization efforts that will unlock India’s growth potential. But there continues to be many obstacles to India’s growth. Bewildering government bureaucracy, poor infrastructure, widespread poverty, and low literacy rates will weigh on growth. The industrials sector, which accounts for about 20% of India’s economy, is burdened by highly restrictive labor laws, unstable power infrastructure, and complicated tax rules. The agriculture sector, which accounts for about 20% of the economy but employs about 50% of the population, is highly inefficient. Also, India imports about 70% of its domestic oil needs, which the government and the petroleum industry partially subsidize. A significant increase in the price of oil would weigh on India’s public budgets and current account deficit and drive inflation. Finally, job growth continues to be weak, which is a significant economic and social problem, especially given India’s relatively young population.

Portfolio Construction
This fund tracks the MSCI India Index, which is a free float-adjusted market-capitalization-weighted index designed to measure the performance of equity securities of companies whose market capitalization represent the top 85% of companies in the Indian securities market. The fund employs full replication to track its index.

Fees
This fund’s expense ratio is 0.67%, making it the cheapest fund for exposure to Indian companies. During the past year, the fund’s net asset value performance has trailed that of its index by 48 basis points per year, which is lower than the expense ratio. This indicates that the fund is tracking its index efficiently.

Alternatives
WisdomTree India Earnings (EPI) is the largest and most liquid U.S.-listed India ETF, perhaps because it is the oldest. It has more mid-cap exposure relative to other India ETFs. This ETF carries an annual expense ratio of 0.83%.

Matthews India (MINDX) (1.18%) is an actively managed open-end fund that carries a Morningstar Analyst Rating of Silver. This fund has heavy exposure to consumer (30%) and industrial (18%) names but does not own any energy stocks.

Those comfortable with the closed-end fund structure might consider India Fund (IFN) (1.33%) and Morgan Stanley India (IIF) (1.29%), which carry ratings of Bronze and Neutral, respectively. Each fund has a long track record of 20 years.

(Source : Seeking Alpha)

A Tale of Two Charts: Are We 2007 America or 2006 Zimbabwe?

5 Nov

The US equity markets are back in record territory, at least in nominal terms.

The last two times they spiked this way, the following year was pretty brutal. See the next chart, which tracks the S&P 500 and margin debt, the amount of money investors are borrowing against their shares of stock to buy more stock. The chart seems to show that when investors are optimistic enough to use leverage to invest in already-risky stocks, then the good times have pretty much run their course and something nasty is imminent. If recent history is our guide, it is now time to either take some money off the table or short the hell out of the big indexes – or whatever else you like to do when the market looks overbought.

NYSEMarginDebt

But this conclusion is only valid if we’re in the same stage of the credit bubble as during those two previous sentiment peaks. In 2000 and 2007, to take just one measure of financial stability, the federal government’s debt was $6 trillion and $8 trillion, respectively, versus $17 trillion today. Plenty of other leverage metrics are also way up, indicating that the US is much further down the path of currency debasement than it was just a few years ago. So the question becomes: at what point does a quantitative difference become qualitative? When does the phase change occur? The next chart shows why this question is more than academic. In the early stages of Zimbabwe’s epic hyperinflation its stock market rose from 2,000 to over 40,000 in one year. Presumably a lot of indicators similar to margin debt were by then pointing to a blow-off top and screaming “sell” to students of history.

Zimbabwe

Then the market proceeded to run up to 4,000,000. What happened? The country ran its printing press flat-out and inflated away its currency, so the price of pretty much every tangible asset, when measured in Zimbabwean dollars, went parabolic. Since equities represent part ownership of companies, and most non-financial companies own tangible assets, their value went up as well. Not enough to increase in real terms (versus gold, for instance) but enough to make shorting that market a really bad idea.

So are we 2007 America or 2006 Zimbabwe? A lot is riding on the answer.

John Rubino

High spirits – Who drinks most vodka, gin, whisky and rum?

4 Nov

ASIA’S growing middle classes are driving demand in the global spirits market. According to IWSR, a market-research firm, consumption last year grew by 1.6% to 27 billion litres—and China, the world’s biggest market, quaffed 38% of that. The national liquor,baijiu, accounts for a whopping 99.5% of all spirits consumed thereso China does not even feature in rankings of the best-known internationally consumed spirits, below. The most popular of these is vodka, mainly because it is drunk in copious amounts in Russia. Russians downed nearly 2 billion litres of the stuff in 2012, equivalent to 14 litres for every man, woman and child. (Unsurprisingly, perhaps, Russians are among the biggest drinkers in the world, according to the most recent World Health Organisation data.) The Filipinos’ taste for gin can be attributed in part to good marketing and to the spirit’s long-established toe-hold in the local market. Ginebra San Miguel, a firm that makes the world’s two best-selling brands, started operations there in 1834.

(Source : Economist)