Investing Themes - As investors, from time to time we have to change our thinking about what is good as opposed to what was good.

Below is an exerpt of an article written in 2004. The timing may have been off...but when compared to say gold, commodities, even real estate...the banks have been a poor relative investment...I missed the explosion in credit would give them a "last hurrah" - it did. I suspect their glory days are over!...Utilities anyone?

The past is certain, the future obscure.

Thales (640 AD - 546 AD)

...(edit).

The banks are a case in point. You would be in the majority to think that investing in Banks has been a good investment over the last 10 years - and you would be correct! But if we look more closely at the performance of banks over the last 2 years we see things may have changed. We all know that lending has grown at tremendous rates and over the last few years, banks have continued to lend an ever increasing amount, as the growth in residential property borrowing verifies.

On this basis you would assume that all Bank share prices would be well in excess of that achieved 2 years ago. Not so. The “Big 4” banks are all under their record highs and their recent performance is nothing to get excited about – especially if you consider the high volatility they have shown. ...

Could the bull market in “debt” be coming to an end and could this lead to lower profits (or lower growth in profits) for the banks? It is possible.  (comment: years early CT! :-))

2011:
- higher capital adequacy
- higher wholesale funding
- lower debt demand/growth
- governments demanding their pound of flesh
headwinds!!

Australia - the lucky country indeed!

The seeds of Australia's own inevitable "calamity" are well and truly being watered.

Having ridden on the sheep's back over a 100 years ago, we now ride on the Asian Tiger (how ironic given our historic policy of "2 Wongs don't make a white"). What a ride!

Resource millionaires have been on the rise for the last decade. And so has the wealthy Australian house owner! But I believe rising home prices over the last 10 years, have masked a number of flaws in our economy:
- Wages growth has been marginal at the middle to lower end
- It has been acceptable while house prices have gone up - Serious income inequality is brewing.
- Debt grows and grows

Australians, having seen the economy stay resilient, believe the government all powerful and able to come to the rescue, having forgotten the wastage of programs like the pink batts fiasco.

The banks today, lend ever increasing amounts, on higher LVR's, using values that are at extreme levels (as identified by Jeremy Grantham of GMO). But have no concern dear Aussie, our banking system is "safe".

The governments (state and federal) assume their tax revenues are somehow "normal" and continue to increase the range of programs and subsidies creating a welfare psychology at higher and higher levels of income. And in the last few weeks, the bloated federal government now proposes a carbon tax - capital knows when it is not liked!

The cost structure in this country is now at high levels. Try to get reasonable service in the tourist destinations - no wonder people are heading to Asia! Add mechanics on $120 to $180 per hour, truckdrivers making a $100k and yes you have a boom.

All is good until it isn't.

So are we the lucky country, or just a country with some luck? Our beaches are nice though - especially in Tasmania!

This cannot end well...it won't

http://www.fgmr.com/golds-hyperbolic-trajectory.html

It will be a gold blow-off...the question is at what price?

Mr Turk makes a case that gold is in the midst of a hyperbolic move.

Not many understand the gold tune...Those that do hear it clearly...Thankyou Dan!

http://traderdannorcini.blogspot.com/2011_03_23_archive.html

The only reason that gold has a sustained price rise is because of a lack of confidence in the monetary system. It does not rise sharply because of such things as jewelry demand or industrial demand - it rises when fear, distrust, doubt, suspicion and uncertainty over Central Bank policy reigns. It rises when REAL interest rates are negative and investors understand the insidious process of currency debauchment practiced by these monetary authorities is underway. It thus cries aloud and issues a warning to those who can hear it and what it shouts displeases many Central Bankers because they are among those who while they despise its message, are all too keenly able to hear that message.

Mr J Hussman...weekly is a must read...

My only disagreement might be that any of this is actually "water under the bridge," because the same basic policies that produced the bubble are still very active. These policies have driven financial assets to rich valuations and low prospective returns, which compete sufficiently well with zero interest rates, but offer little for long-term investors. Meanwhile, the financial sector has a continuing overhang of delinquent and unforeclosed homes, which the FASB still allows banks to carry on their books at amortized cost. When the main source of "prosperity" is the policy-induced elevation of asset prices - rather than the allocation of savings into productive investment - it helps to remember that present gratification often equates to future unpleasantness.

http://www.hussmanfunds.com/wmc/wmc110321.htm

Money is not reliable...

http://www.financialsense.com/contributors/robert-blumen/value-investors-hate-gold

Value investors like Grantham only want to buy something when they have a quantitative estimate of its intrinsic value. While this rule works well enough during periods of stability, it provides no guidance for rational action when the monetary system is no longer able to provide reliable money prices. Value investors have successfully invested in countries experiencing a monetary breakdown by using an external stable currency to calculate prices. The present crisis, which is global, threatens to disrupt all of the external stable currencies, making them less useful for this purpose.

Capital Talks, while BS sells papers...

http://www.smh.com.au/business/buy-iodine-sell-gold-and-forget-the-aussie-20110318-1c005.html

What might be amazing to gold’s true believers is how comparatively little gold has done while the Middle East was becoming more volatile, let alone when catastrophe struck Japan. If all the scary stories about oil and nuclear meltdown can’t move the yellow metal much, what will convince the next fool to pay more for the yellow metal?


Meanhwhile the Billionaires...Soros, Paulson, Tudor Jones, Dalio et al are holders of the barbarous relic...

Even the strong Aus dollar not enough to hold the shiny truth teller down...The truth? Debt is killing the globe!

USD looks tired...safe haven no more?

The USD has been weak for some months - barely able to rally. The recent "risk off" seen in the markets, linked to the Japanes earthquake, has not flown through to USD strength. Something is wrong. As I type it is nudging 76 on the index. It will fall - it must. The only/last hope to keep rates low. It is now 75.86! A close under 76 over night and another leg down may be upon us.

Gold is at $1,401

"Gold in a bubble"...Mr Sprott in the negative corner

http://www.sprott.com/Docs/MarketsataGlance/2011/02%20_11_Debunking%20the%20Gold%20Bubble%20Myth.pdf

Some very good measures in this article to put this argument into perspective. Mr Sprott also likes silver for the rest of the decade - better than gold.

US equity bear market still in tact.


Meanwhile,
Today Gold is at $1,408, Silver at $34.68
Overseas equity markets are taking a battering.
Japan down nearly 20% in 2 days!

Japanese earthquake

Our deepest sympathies to those with family and friend affected by the enormous earthquake that hit Japan on Friday. Natures overwhelming power has humbled us once more.

What will be the long term consequences? Consider them. Not all are the obvious ones.

Your weekend listening

Mr Jim Sinclair - known as Mr Gold! Each time he speaks there is a gem or two to savour.

http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2011/3/11_Jim_Sinclair.html

Mr Rob McEwen - a gold executive putting his money where his ideas/thoughts are:
http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2011/3/12_Rob_McEwen.html

QE3??

The debate has started amongst the Fed Reserve members as to whether they will or won't QE3? It's interesting to see this debate take place in public. Are they just telegraphing their votes to the markets so that there is no surprise? I suspect they are.

Bill Gross of PIMCO, correctly points out that without the aid of the Fed rates should be at least 1.5% higher. Then he tells the world he has sold all his holdings of government treasuries. Long terms rates are going up - it's just a question of time.

http://www.pimco.com/Pages/Two-Bits-Four-Bits-Six-Bits-a-Dollar.aspx

Bill says:
"As a counter, one would argue (and I would partially agree) that the U.S. and indeed developed global economies must keep yields artificially low for some time if post Lehman healing is to take place. But that of course is the point. By eliminating QE II, the Fed would be ripping a Band-Aid off a partially healed scab. Ouch!  25 basis point policy rates for an “extended period of time” may not be enough to entice arbitrage Treasury buyers, nor bond fund asset allocators to reenter a Treasury market at today’s artificially low yields. Yields may have to go higher, maybe even much higher to attract buying interest."

Meanwhile in Europe the talk is getting tough by the ECB that they will begin raising rates later this year.

I'm speculating, but QE3 in some form is highly likely. Markets are not sure and volatility is starting to increase. The next couple of months are going to get interesting.

Ponder this number a few times...

http://www.washingtontimes.com/news/2011/mar/7/government-posts-biggest-monthly-deficit-ever/

The federal government posted its largest monthly deficit in history in February, a $223 billion shortfall that put a sharp point on the current fight on Capitol Hill about how deeply to cut this year’s spending.

Debts exceed any capacity to pay...holes in budgets are massive...if the Fed stops QE...the house of cards crumbles! Ponder quietly.

China & GOLD

http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=atx3Bl2Zvfas

March 2 (Bloomberg) -- Gold purchases in China, the world’s largest producer, climbed to 200 metric tons in the first two months of 2011

some interesting stas in this article...

Last year about 500 tons...this year on target to buy 1,200 tons - nearly 50% of global production. Extraordinary!!!

Greeks have Moody Blues...while Egyptians just The blues!

 Greece Debt Cut Three Steps by Moody’s on Default Risk
http://noir.bloomberg.com/apps/news?pid=20601087&sid=aZ3F_H3Ccc.w&pos=4
3 whole steps in one go?!...where were they?



The Ministry of Finance sold 3 billion pounds ($509 million) of bonds yesterday, 1.5 billion pounds less than planned, as yields on 266-day notes climbed 31 basis points from the last auction to 12.47 percent, data compiled by Bloomberg show.
http://www.businessweek.com/news/2011-03-06/egypt-bonds-gdrs-sink-as-bourse-shutdown-probe-deters-funds.html


Sovereign debt repulse...a 24 volume set!

DEBT DEBT DEBT...GOLD GOLD GOLD

http://goldswitzerland.com/index.php/apres-nous-le-deluge-evg/?utm_source=subscriber&utm_medium=rss&utm_campaign=rss

excellent article by Egon von Greyerz...with a dark conclusion!! A must read

"The almost vertical rise of the CCI is one of the best indicators of hyperinflation being imminent. A catastrophe of astronomical proportions is looming. This will hit the world at a time when there is no capacity whatsoever to take any real measures that could alleviate the problems."

When Private goes public - ding ding ding?

This article decribes Glencore as the Goldman Sachs of Commodities. Why list, why now? The last big Pivate equity IPO was Blackstone in 2007 - good timing! Is this also a good time to de-risk if you are long term owner of a commodity business? You can make an argument for access to capital markets etc etc but taking some money off the table probably makes sense even if they are early.
http://uk.reuters.com/article/2011/02/25/uk-glencore-idUKTRE71O1AX20110225

The firm currently operates as a privately held partnership, with staff sharing the profits according to a performance-based incentives scheme. Sources familiar with Glencore's plans say it may list 20 percent of the company, possibly split between the London Stock Exchange and Hong Kong. Such a listing could yield up to $16 billion and value the firm at as much as $60 billion.

"A man in a suit"

This is how Jim Grant described either Ben Bernanke or Alan Greenspan. Was he putting them down? Not really, just explaining that their powers of controlling an economy through an interest rate, for a desired outcome were not superhuman - more importantly that they were probably subject to flaw. Mr Williams is probably a nice guy - never forget he is just a man in a suit. 
http://www.bloomberg.com/news/2011-03-01/san-francisco-fed-names-research-head-williams-president-to-succeed-yellen.html

John C. Williams, research director for the Federal Reserve Bank of San Francisco, was named as the bank’s new president to succeed Janet Yellen, who became the Fed board’s vice chairman in October.
The move is effective today, said bank spokeswoman Carol Eckert. Williams, 48, has served as executive vice president and research director since 2009.
The economist, who has worked in the Fed system since 1994, joins the central bank’s efforts to bolster growth and reverse a jobless rate stuck at 9 percent or more since May 2009. He represents a nine-state western region that accounts for 20 percent of the economy and has had 73 commercial banks fail since 2004.

USD v USB(onds)

USD Index at 76.76...as I type;

Lower yields (the aim of the Fed) will go hand in hand with a lower dollar...for now.
Then one day it will be higher yields for as far as the eye can see...
Lower dollar will go hand in hand with higher gold/silver

Gold at $1,412 as I type...Mr Gold says keep watch!

The wise men (with the grey hair) are saying...

Jim Rogers:
"The best sector that I know in the world economy is going to continue to be commodities," Rogers said Monday. "We have huge shortages of everything developing. The facts are we are running out of known reserves of everything and shortages are going to get worse," he added.
http://www.businessinsider.com/jim-rogers-sees-continuance-of-bull-market-for-commodities-2011-2

M Faber:
The private sector debt growth has slowed down but it has turned up again. At the same time we have, of course, a huge expansion in government debt. That should not be forgotten.
These crackup booms don’t last. They are not sustainable but they can last six months to one year to 18 months and then a renewed setback occurs in the global economy.
http://www.moneycontrol.com/news/fii-view/oil-may-gosubstantiallycurrent-levels-marc-faber_524875.html

J Grantham:
“As a simple rule, the market will tend to rise as long as short rates are kept low. This seems likely to be the case for eight more months and, therefore, we have to be prepared for the market to rise and to have a risky bias. . . . All of the famous bubbles broke, but only after short rates had started to rise, sometimes for quite a while. . . . The very famous, very large bubbles also often give another type of warning. Probably knowing they are dancing close to the cliff and yet reluctant to stop, late in bubbles investors often migrate to safer stocks, and risky stocks betray their high betas by underperforming. We can get into the details another time, but suffice it to say that there are usually warnings, sometimes several, before a bubble breaks. Overvaluation must be present to define a bubble, but it is not a useful warning in and of itself.”

http://www.gmo.com/

This cannot end well - it won't

Mr Hussman writes one of the most interesting and well thought out pieces - every single week. Whether you are a gold bug, equity analyst, or a student of the markets/economy they are always worth a read.
Thankyou John!

This week:
Cash and Credit - Implications for the Financial Markets ...John P. Hussman, Ph.D.

http://www.hussmanfunds.com/wmc/wmc110228.htm