Jim Rogers: “Everyone Will Suffer.”

Jim Rogers, the commodities investor, argues that the Canadian economy is not as bad as in many Western countries.

However, he believes there is a “major disconnect” between “asset values and economic realities” all over the world. Central banks, desperate for growth, are inducing these distortions by aggressively pumping money into their economies.

This dependence on central bank intervention to propagate what he calls an “artificial boom” guarantees disaster.

So even if Canada’s footing seems strong, the interconnected nature of the world’s economy assures that problems in the US, Asia, and Europe are problems for everyone.

Basically, it’s business-as-usual in the maturing business cycle.

He still looks favorably on agriculture. I can corroborate what he says about farming. Part of my family owns a big farm in Alberta.

In general, farming is a horrible business and no one wants to get involved in it. As more people, particularly in Asia, rise from grinding poverty and increase their demand for food, supply will be significantly constrained.

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These Charts Give a Clue About Where the Gold Price is Headed

The price of gold has been going through an anxious bottoming period and now seems resolutely back above $1300. But what’s next?

Look at the following chart:

Basically, this chart shows the difference between commercial long and short positions. The green dots are positioned at intermediate low-points in the price of gold, which are also points where commercial net longs are at relative highs. This is no coincidence. The commercials are major players in the market. They hedge against price fluctuations rather than speculate. They reduce their short positions near significant price bottoms. If you could go back in time, the green dots would be your buy signals. This chart shows commercial short positions at the lowest point in a very long time — more than ten years. Where do you think the newest green dot will appear?

Now look at this chart, which is a little different.

This also illustrates how the falling price and increase in commercial long positions generally foreshadows a meaningful rally for gold. If I were to judge from this chart, I’d say we should expect a significant expansion of commercial longs. The price of gold should correspondingly rise. Here, the red dots are the buy signals. Where do you think the newest red dot would go?

As a conservative estimate, if we saw a rally comparable 2005 and 2008’s moves, the next phase of the gold bull market would approach $2000/oz.

This process is likely to unfold as the current business cycle matures, over the next one or two years  Then when another panic hits, gold will sell-off until central banks accelerate their monetary interventions. They will do this to fight the onset of a crushing economic depression.

— Read more at King World News

Chinese Demand for Gold Is the Real Deal, Long Term

You have to see these images from China.

During the Dragon Boat Festival, ten thousand Chinese demonstrated the depth of their gold fever by lining up to buy that “stupid” investment. This is despite the relative respite from inflation, according to official Chinese statistics.

All these people want gold:

Gold Line 1_0

Gold Line 2_0

Gold Line 3_0

Gold Line 5_0

Gold Line 6_0

Gold Line 4_0

China is a source of demand for gold that will be significant in the long term.

Read more at Mises.ca

What Three Billionaires Are Doing with Their Money

It is interesting to contrast what the “irrationally exuberant” average investor has been doing vs. the recent activity of a few high-profile billionaires.

Richard Russell, editor of Dow Theory Letters, says that if we judge them by their recent activity, Warren Buffett, John  Paulson, and George Soros are pessimistic about American consumers. They are selling consumer-oriented stocks. This is interesting particularly from Buffett, who has been a “cheerleader for US stocks” all along.

In the last quarter, Buffett sold off a large share of consumer stocks. Berkshire’s overall stake in such investments as dropped by 21%, including significant sales of Kraft and Proctor & Gamble. He dumped his entire position of Intel. He also sold 10,000 shares of GM and 597,000 shares of IBM.

John Paulson liquidated 14 million shares of JP Morgan, and sold off his full stake of consumer-oriented Family Dollar and Sara Lee.

George Soros also unloaded JP Morgan shares, and almost all his other bank stocks as well, including Citigroup and Goldman Sachs.

These billionaires — right or wrong — are shifting to greater cash holdings and away from American consumers. In America, consumption is 70% of the economy. The billionaires seem to anticipate a hit to consumption as the economic strain on American consumers grows.

The US is Canada’s biggest trading partner. It is the world’s largest consumer. Most of the world is structured around selling stuff to Americans. If the US consumer’s situation is worsening, it creates challenges for the Canadian economy.

A nearly universal bullish sentiment is driving average investors into the American stock market. This could certainly drive the American stock market higher for some time yet. Eventually, however, the offers will start coming in with no bids, and the system will violently recoil.

Read more at King World News Blog

Are Chinese Women Smarter Than Warren Buffett?

Warren Buffett is one of the world’s most successful investors. He is also a well-known critic of gold as an investment. He believes buying gold is “stupid.”

Middle-aged Chinese women did not get university economics or finance degrees. They do not understand the difference between economic schools of thought. But they have lived under brutal Communism. They have suffered extreme poverty. They understand what it takes to preserve wealth under tyranny.

These Chinese women are buying gold. More than Indian fathers. From a recent report:

On Sunday afternoon, a microblogger in Beijing logged into Sina Weibo, China’s leading social media platform, to gossip about the “auntie” next door. It’s a broad term of respect for an older woman, and his followers understood precisely what he meant when he tweeted, “The auntie next door used all of her retirement savings to buy gold. When asked what she’d do if prices keep dropping, she replied that if everyone kept buying gold, the price wouldn’t drop…”

This might strike a conservative investor as reckless. But in China, where gold has long been a national obsession, a mid-April record crash in global gold prices has been seen as an unprecedented buying opportunity. According to reports in China, Chinese have purchased 300 tons of gold worth more than $16 billion since the crash.

These people are not trading gold futures on margin. They are allocating their savings to precious metals.

Photos of crowds packing jewelry shops and emptying their shelves are now regular features in the news media. On Monday, a police officer in Shanxi province tweeted, in regard to his actual aunt: “My aunt’s family has a gold store, and my colleague who’s in the market for some gold for his mother asked if I could get him a cheap price. I asked, and my aunt said first come and take a look to see if anything catches your eye. But at the moment the display cases are empty, and they are unable to get new inventory. All I can say is that the power of the Chinese is frightening.”

China’s voracious appetite for gold is long-standing. At Chinese jewelry stores, the spot price for gold is always prominently displayed. Calculators and scales are never out of a customer’s reach. Gold jewelry is desirable, but so are gold bars, and any jewelry store that considers itself full-service will stock ingots of various weights. (In April, an investor in Guangzhou bought 44 pounds of the bars, according to a local newspaper.) Special commemorative bars in various weights and designs were issued for the 2008 Beijing Olympics and the 2010 World Expo in Shanghai.

The current rush is unusual in two ways. The first is its epic scale. The second is that, according to both traditional and social media, aunties are doing most of the buying.

This activity is widespread in China. When something is widespread in a country with 1.35 billion people, it’s a real phenomenon.

Social media tends to take a less critical, and more personal, view of the aunties. Depictions involving mother-daughter interactions, in particular, are very common. On Saturday, Zhongxiao Fang Fang Fang, the handle for a microblogger in Shenzhen, tweeted: “Yesterday my mother called me to say the price of gold has fallen, and to ask me to go to Hong Kong to buy gold. I said I didn’t want any. She very calmly said it would be good to prepare a dowry so I can get married!”

Reported elsewhere:

Perhaps the majority of Americans cannot comprehend the unusual feelings Chinese people have toward gold and silver. They’ve never considered that rather than being afraid to invest in gold, the Chinese are more afraid that they won’t possess gold. Maybe what Chinese aunties care about is not the price of gold tomorrow, their desire is perhaps nothing more than to buy gold, to delight in gold, to hold it. Chinese aunties’ gold investment strategies are simple and unsophisticated, they just “buy what they want.”

What do the Chinese aunties know that Warren Buffett doesn’t?

Read more at Bloomberg

We Are Close to the Top of the Market

Here is The Economist‘s May 11 cover.

Uh oh.

When Will Interest Rates Rise?

Everyone wants to know: when will long-term interest rates rise?

Are we so sure they aren’t rising now?

Let’s consider a few recent events: Microsoft recently raised $2 billion selling bonds. Soon after, Apple raised $17 billion selling bonds. These companies have historically shied away from borrowing long-term money. Microsoft has not sold debt since 1996. The last time Apple sold debt was 20 years ago.

They both have huge amounts of cash, but the interest rates on these instruments were ridiculously low for both companies. Investors wanted a slightly higher rate from Apple than from Microsoft. In any case, both normally debt-averse companies believe that now is the time to lock in low rates. These companies must believe that rates will stay low or rise. Either way, they do well at the expense of bondholders. If rates rise, then they have cheap borrowed money with which to cash in on the higher rates. They borrow at 4-5% and make double, triple, or more on that money. If rates fall, then they can buy back the bonds and reissue the debt at lower rates.

When asked about Apple bonds specifically, Warren Buffett said: “We’re not buying bonds of Apple — we’re not buying bonds of anybody. It has nothing to do with them being a tech company. The yields are too low.” Berkshire Hathaway has been selling corporate bonds over the last two years.

I had a spasm of intuition in reading about the above events. “Are we at or around the bottom”? It seems to be a fair interpretation that “smart money” is selling bonds, and “dumb money” is buying bonds. Look at corporate debt — can those rates seriously go lower?

FRED Graph

The economy is bad, but is it Great Depression bad? Apparently not, so maybe the rates can’t go any lower… for now.

This year, it seems those rates have been pushed up. Is fear of inflation creeping in there?

Look at the 30 year Treasury yield, which has fallen to insane lows post-2008. Yet at the right end of the graph, we see the rate trending upward despite Operation Twist.

Chart forTreasuryYield30Years (^TYX)

I am talking about long-term rates. Short-term rates are basically going nowhere. As I wrote last year, I believe this is because there is fear and “regime uncertainty.”

FRED Graph

Even so, data seems to indicate that real rates are climbing back into positive territory.

fed real int

CONCLUSION

While people can describe the conditions under which rates will rise, they cannot reliably predict when this will occur. It seems assured that anytime someone says with confidence, “Rates cannot get any lower,” the rates still get lower. If you want an example that baffles investors endlessly, look at Japan. There is a reason shorting Japanese government bonds is a trade known as the “widow-maker.”

I don’t want to be one of “those” guys, but I think we are around the bottom on long-term interest rates for this stage of the business cycle. I’m not making a “hard” prediction on this, because I think a recession will push rates down further. I think that recession will occur soon. However, it is theoretically possible to muscle through the recession with expansionary monetary policy and keep the “boom” going. The Fed is in full offensive mode. Short-term and long-term rates will rise if the Fed continues this policy and banks are no longer willing to stockpile excess reserves. In Canada, the BoC has been buying debt for Harper and the Conservatives, resulting in net increases in assets for two years. I interpret this to mean that both American and Canadian central banks are desperate to hold off recession.

“The yields are too low.”

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