-- Posted Tuesday, 6 March 2007 | Digg This Article
London, England
Tuesday, March 6, 2007
---------------------
*** Tremors wiggling the seismographs…battening down the hatches…
*** Factory goods fall at fastest pace since 2000…beware of cave-ins…Dan's billionaire challenge…
*** You only have a million dollars?…the cost of 'living it up' has gone up…and more!
--- Special Announcement ---
Back by popular demand…
Penny Stock Fortunes. Click here for the latest report:
http://www.isecureonline.com/Reports/PSF/EPSFH316
---------------------
Today (and perhaps all week) the financial markets will be shaking off the dust from last week's tremors…toting up the damage…and wondering what to do next.
Daily Reckoning readers already know what to do - batten down the hatches. Hold yen, Swiss francs, gold, property you want to own whether it goes down in price or not, and private businesses with good cash flow.
"Stock markets around the world entered a second week of volatility…" reports the International Herald Tribune. Asian stocks continued to quake and shake yesterday, while those of Europe and America either stabilized or registered only modest declines.
So far, the slump in equities has sopped up some $2.3 trillion in excess liquidity. This liquidity is a form of 'inflation' - and falling inflation means falling prices. Yesterday, just about everything went down. Stocks, oil, copper, the euro, and gold too. Gold fell below $640.
What went up was the yen - because the yen is the tap that has made much of the world's liquidity possible. Speculators, who worried that their trades were going bad, were forced to sell off their positions in gold, Asian stocks, and so forth in order to pay back the yen they borrowed.
"Yen surges as carry trade unwinds", is the Financial Times' headline story on the subject.
What does it mean? How far will it go?
As usual, we don't know.
"Goldman Sachs warns of 'dead bodies' after market turmoil," was a headline in yesterday's London Telegraph. The paper quotes Goldman's chief global economist, Jim O'Neill:
"There has been an amazing amount of leverage on currency markets that has nothing to do with real economic activity. I think there are going to be dead bodies around when this is over," he said. "The yen carry trade has reached 5pc of Japan's GDP. This is enormous and highly risky, as we are now seeing."
The yen went up almost 6% against the dollar and the euro last week.
All of a sudden, the world that looked so calm…so risk-free…so serene…is wiggling the seismographs. People are beginning to notice a bit of movement beneath their feet. Risks. Troubles. Last week was just a preliminary alarm.
Our guess is that the financial authorities will reassure most speculators. Prices will settle down. Speculators will go back to sleep. Then, the real quake call will come.
"Seven years after the stock-market bubble busted, the troubles in the housing market look strikingly familiar. In fact, everything is going according to the textbook - the textbook in this case being Charles Kindleberger's 1978 classic, Manias, Panics, and Crashes," says the Wall Street Journal.
"Mr. Kindleberger found speculative bubbles tended to follow similar patterns. First, there is some 'displacement' - such as the development of the Internet or a prolonged period of ultralow interest rates - that radically improves the outlook for some area of the economy."
People take advantage of the opportunity - by buying dotcom shares or mortgaging their houses. What begins as a modest shift of financial emphasis ends in a reckless, greedy, hell-for-leather chase for profits. Investors begin to think that the opportunity is permanent, rather than temporary, and that they can get away with anything as long as they are on the right side of the trade. This attitude leads them to over-reach…and to ignore warnings. Finally, when the dishes rattle and the gas lines break, the roof caves in on them.
Stay tuned, dear reader…it's just getting interesting.
More news:
--------------
Chuck Butler, reporting from the EverBank world currency trading desk in St. Louis…
"All this yen strength lately put a smile on my face… And why not? I have taken it on the chin with yen for two years! Yen still has quite a ways to go before it really makes me smile, but Asian currency strength is hitting on all eight right now…"
For the rest of this story, and for more market insights, see today's issue of
The Daily Pfennig
--------------
And more views from rainy, dreary London:
*** Further signs of an economic slowdown come from a six and-a-half year low for U.S. factory orders.
The Commerce Department reported today that demand for U.S. made manufactured goods declined 5.6% in January, the most since 2000.
MarketWatch reports, "A weakened manufacturing sector has raised concerns about the durability of the expansion. With housing investment still falling sharply, many economists had counted on higher business investment spending to boost economic growth. But business capital spending has been weak, leaving it up to the consumer to hold up the economy."
*** Colleague Dan Ferris, editor of Extreme Value, has thrown down the gauntlet. He calls it the "Billion Dollar Challenge."
"I challenge any money manager with $1 billion to outperform this five-stock portfolio between now and February 12, 2010."
What are the five stocks? Wal-Mart, Home Depot, Microsoft, St. Joe, and Western Union.
He may be right. It could be hard to beat those stocks over the next three years.
If you have a billion dollars, your goals and your constraints are a little different from those of the average investor. You have such a large pile; you need a large place to put it. You need to take large positions - so you need large companies. Dan notices that these are very solid companies selling for very reasonable prices. The billion-dollar investor is not likely to go too far wrong, he guesses.
And not going too far wrong is what interests most billionaires. They've reached the point of declining marginal utility - or diminishing returns - on money itself. An extra buck or two doesn't mean much…certainly not enough to warrant taking a big risk. What's most important to them isn't necessarily making money, but rather not losing it.
But what if you only have a million?
There was a time when being a millionaire was a big deal. If you had a million dollars other people would bend a little in your presence. They were polite and deferential to you, perhaps hoping that you would buy them dinner, or leave them something in your will. Plus, they would think you an intelligent fellow - "if he's that rich, he must be smart," they would say to themselves.
Those days are gone. After the recent run-up in asset prices, if you have only a million dollars your friends and neighbors will probably take pity on you. "Poor Janet," they'll cluck at the bridge club. "She and Earl probably don't have more than a million between them." They might even take up a collection on your behalf.
One million doesn't even get you much more than a house in a decent neighborhood. And you'll have to cook for yourself. After you've bought the house, all you have are expenses - for maintenance, taxes, utilities…in addition to all the regular costs of living. Forget living it up. For that you need a lot more money.
Let's say you have $2 million. You can buy the house and still put $1 million in the bank…or a mutual fund. If you were lucky enough to get a 5% return, you'd have a big $50,000 in annual income. Servants? Forget it. Forget posh holidays in Europe too. Forget expensive diamonds and works of art. Don't even think about a beach house. That kind of money barely pays the expenses on the main house…it will never permit you to live a life of leisure and luxury.
Yes, dear reader, the cost of living it up has gone up. The bar has been raised. If you want to live like a wealthy person, you either need a very good job - with enough after-tax income to pay the expenses - or you need capital, and a lot more than you needed a few years ago.
This is probably one reason why rich people are becoming desperate. While the poor and middle classes have tried to keep up with the Joneses by buying houses, the upper classes have been trying to keep up with the Joneses too - by reaching for higher investment returns. Hedge funds, derivatives, private capital, outrageous prices on works of art, Asian shares - why are so many people with money willing to risk it so recklessly?
It's because they are pinched. The status and luxury they crave is still beyond their means. While asset prices have gone up, their spendable cash flow has barely improved. Their house may be worth a lot more money, for example, but how can they spend it? They still have to live somewhere. Unless they have a very big pile, they have to stretch…to reach…and to take chances. In this respect, many of the people who appear 'rich' today are no different from the marginally poor. Instead of taking out subprime mortgages in order to live in houses they can't afford, they take out more sizeable risks to try to get the money they need.
So far, taking chances has generally paid off. Property prices in the places the rich live - Manhattan, London, Aspen, Malibu - have soared. Even as the floor under the subprime market gives way, the housing market at the top end still appears fairly solid. Art prices, to give another example, are still going up.
"I feel sick," said a friend this morning. "Back in 2000, I found a piece I really liked by an unknown artist. It was a light sculpture. I know you don't like that sort of thing, but I found it really interesting. It was at a local gallery for 3,000 pounds. So I told them to hold it for me…I was just too busy to deal with it. And when I went back after a couple of weeks they had sold it to someone else.
"Well, this weekend that very same piece of art was sold. Can you guess how much?"
After a couple of vain attempts, the answer was given:
"353,000 pounds (Almost $700,000). I have to go lie down."
Seven years ago, a person of modest means might have owned that light sculpture. Now, only a rich person could have it.
Yes, dear reader, being rich has become much more expensive. And staying rich is getting much harder.
Our advice: Take the other side of the desperate rich person's trade.
More to come…
--- Advertisement ---
America's Top-Ranked Financial Newsletter Says:
The Petroleum-Free Car of the Future WON'T Run on Hydrogen or Ethanol
Whatever you do, don't follow the Wall Street crowd into the hydrogen fuel cell myth. Forget ethanol, too. Getting rich from the end of cheap oil means investing in the REAL solution to America's oil addiction. Buy in now - before investors realize the mistake they're making and come flooding in. Readers who followed similar advice had a chance to rake in average gains of 64% last year…and 62% the year before that. But even bigger profits could lie ahead. Click here for the full report:
http://www.isecureonline.com/Reports/OST/EOSTH328
---------------------
The Daily Reckoning PRESENTS: Dark clouds are gathering over the horizon…and Puru Saxena thinks that this is the time to be on guard. In fact, he asserts that we may be experiencing the proverbial calm before the storm. Read on…
GEO-POLITICAL DISASTER AROUND THE BEND?
by Puru Saxena
Bearing in mind the recent developments in the Middle East, I suspect that a geo-political disaster is around the corner. I hope I am wrong, but it increasingly looks as though either Israel or the United States will attack Iran over its "nuclear program". I had first forecast this in August 2005 and believe my fears will be validated in the near future. Over the past few weeks, Washington has increased its rhetoric over Iran's "nuclear program" and dispatched the USS John C. Stennis and USS Eisenhower aircraft carrier groups to Iran. This is an ominous development and suggests that we may be on the brink of another war.
History has shown that all major bull-markets in commodities have coincided with rising political tensions and war. In other words, whenever shortages in natural resources caused prices to rise, nations did everything in their power to secure their share.
The commencement of the current commodities bull-market coincided with the invention of the "War on Terror" and we have already witnessed attacks on Afghanistan and Iraq. In my opinion, we are currently in the early stages of a new war-cycle as the United States desperately tries to secure its future energy supplies. Previously, Iraq was accused of developing weapons of mass destruction and now Iran is being targeted along the same lines. So, if you are in the camp that believes that the United States is genuinely worried about Iran's "nuclear program", you have to wonder why then does the United States not attack North Korea? The answer to this question lies deep within the earth's crust!
There is no doubt in my mind that the United States is extremely interested in Iran's oil, and that the ongoing "War on Terror" is really about dominating the resources in the Middle East. You must understand that the United States is highly dependent on foreign oil (it imports 13.8 million barrels of oil daily) and with China and India now using up more oil than ever before, the United States is using its military prowess to secure its future energy supplies. It is interesting to note that Iran is the sixth biggest oil exporter and ships out 2.39 million barrels of oil per day. Furthermore, Iraq exports 1.82 million barrels of oil per day. So, you can see why the United States is so interested in bringing about a regime change!
At present, the financial markets have not factored in a military conflict in the Middle East, making them especially vulnerable to turmoil. Therefore, if there is an attack on Iran, we may get sharp knee-jerk reactions in the capital markets. Under such a scenario, emerging-market assets would be the most affected. In fact, stock markets will probably suffer across the board and the price of oil will appreciate sharply. If Iran's response is muted, the spike in the oil-price may be temporary. However, if Iran decides to stop its exports and disrupt the flow of oil through the Straits of Hormuz, the price of oil could easily reach $100 per barrel. This outcome would be a catastrophe for the energy-dependent global economy.
In addition to this, safe haven assets such as government bonds, gold and oil will thrive. If my assessment is correct, gold and energy stocks may end up appreciating significantly whilst the general stock markets decline. Accordingly, we have reduced our exposure to the emerging-markets and our managed-accounts are now heavily invested in oil and precious metals.
Our planet is rapidly approaching its oil-production peak. In fact, some leading geologists argue that we are already past that point.
It is important to understand that oil-production follows a bell-curve. This is true whether we are talking about a particular oil field, a nation or the planet as a whole. Once more than 50% of the reserves are depleted, the rate of oil production enters a rapid and irreversible decline.
Today, several oil-provinces around the world are producing significantly less oil when compared to their record-production levels. Despite phenomenal breakthroughs in technology, these regions have failed to sustain their record-high output levels and this is proof of the concept of peak oil. If we look around today, the United States is past its peak, the North Sea is in decline, Indonesia is struggling and even Mexico has announced that its largest oil field is past its peak-output. Although these regions still have massive reserves, the rate at which they pump oil out of the ground on a daily basis has entered a serious and permanent decline.
In the recent past, non-OPEC nations increased their production and managed to compensate for the declining output levels elsewhere in the world. However, when you take into account the fact that these countries are also faced with geological limitations, it becomes clear that unless we discover gigantic oil fields very quickly, our world will find it extremely hard to keep up with rising demand.
When discussing "peak oil", it is also important to mention that over the past 35 years, we have discovered just one gigantic oil field anywhere in the world. For sure, there have been some discoveries in different parts of the world, but only a single world-class oil-field has been discovered in over 3 decades; Kazakhstan's Kashagan Oil Field in the Caspian Sea. This is despite all the technological achievements over the same period. In other words, unless we have been incredibly unlucky and there is indeed a jackpot waiting to be found, this is not a healthy sign.
To complicate matters further, demand for oil continues to grow rapidly. At present, our world consumes roughly 84 million barrels of oil per day. If current growth rates continue, Asia's demand alone will increase from 22 million barrels per day to approximately 40 million barrels by 2020. According to the U.S. Energy Information Agency, global consumption is projected to increase to 103 million barrels per day in 2015 and 119 million barrels by 2025. In order to meet this explosive demand, global production must increase by 45% - about five times the maximum annual output available from Canada's oil sands.
So, you can see that our world faces an imminent energy crisis, which may cause an escalation of resource wars over the coming years. Normally, I do not like to make bold forecasts, but I can say with confidence that the era of cheap oil is over. Moreover, I also suspect that things will get a lot worse on the geo-political front before we return to a period of world peace.
Regards,
Puru Saxena
for The Daily Reckoning
Editor's Note: Puru Saxena is the editor and publisher of Money Matters, an economic and financial publication available at www.purusaxena.com
An investment adviser based in Hong Kong, he is a regular guest on CNN, BBC World, CNBC, Bloomberg TV & Radio, NDTV, RTHK Radio 3 and writes for several newspapers and financial journals.
The above is an excerpt from Money Matters, a monthly economic publication, which highlights extraordinary' investment opportunities in all major markets. In addition to the monthly reports, subscribers also benefit from timely and concise "Email Updates", which are sent out when an important development in the capital markets warrants immediate attention. Subscribe Today!
http://www.purusaxena.com
-- Posted Tuesday, 6 March 2007 | Digg This Article
