GOLD - TAKE A LOOK AT THE BIG PICTURE

As Gold prices have corrected over the last week, I think its time to once again take a look at a long term gold chart.

Mr P. Radomski of SUNSHINE PROFITS has an excellent long term gold chart

Perhaps the sell off can push gold down towards $1550.
Long term gold bulls must remain focussed on the long term trend.

As Jim Sinclair said on 14/5/2012 -

The price of gold is going much higher. the problems that give gold its reason to go higher are growing not waning.

FED ACTIONS AND THE FINANCIAL CRISIS - SUMMARY BY GAINS PAINS AND CAPITAL

Graham Summers of Gains, Pains and Capital in a recent write up on Feb 4, 2013, very aptly sums up the actions of the US Fed

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Here's a recap of some of the larger Fed moves during the Crisis:

• Cutting interest rates from 5.25-0.25% (Sept '07-today).
• The Bear Stearns deal/ taking on $30 billion in junk mortgages (Mar '08).
• Opening various lending windows to investment banks (Mar '08).
• Hank Paulson spends $400 billion on Fannie/ Freddie (Sept '08).
• The Fed takes over insurance company AIG for $85 billion (Sept '08).
• The Fed doles out $25 billion for the automakers (Sept '08)
• The Fed kicks off the $700 billion TARP program (Oct '08)
• The Fed buys commercial paper from non-financial firms (Oct '08)
• The Fed offers $540 billion to backstop money market funds (Oct '08)
• The Fed agrees to back up to $280 billion of Citigroup's liabilities (Oct '08).
• $40 billion more to AIG (Nov '08)
• The Fed backstops $140 billion of Bank of America's liabilities (Jan '09)
• Obama's $787 Billion Stimulus (Jan '09)
• QE 1 buys $1.25 trillion in Treasuries and mortgage debt (March '09)
• QE lite buys $200-300 billion of Treasuries and mortgage debt (Aug '10)
• QE 2 buys $600 billion in Treasuries (Nov '10)
• Operation Twist reshuffles $400 billion of the Fed's portfolio (Oct '11)
• QE 3 buys $40 billion of Mortgage Backed Securities monthly (Sept '12)
• QE 4 buys $45 billion worth of Treasuries monthly (Dec '12)

The Fed is not the only one. Collectively, the world's Central Banks have pumped over $10 trillion into the financial system since 2007. This money printing has resulted in a massive expansion of Central Bank balance sheets, spread inflation into the system, and done nothing to address the key solvency issues that lead up to the great crisis."""""""""

JAPANESE GOVERNMENT DEBT AND THE JAPANESE YEN

Record high government debt that has so far been domestically funded, record low interest rates (positive real rates  & until recently an appreciating Japanese Yen)  and a current account surplus has enabled the Japan to continue to muddle its way through just over two decades of deflation.

As the current administration promises to weaken the Japanese Yen and attempts to inflate its way out of debt, the stage may be set for a tragic end.

According to Martin Feldstein -Even without the prospect of faster inflation and a declining yen, fundamental conditions in Japan point to higher interest rates. The Japanese government has been able to sell its bonds to domestic buyers because of the high rate of domestic saving. The excess of saving over investment has given Japan a current account surplus, allowing the country to finance all of the government borrowing domestically, with enough left over to invest in dollar-denominated bonds and other foreign securities. But that is coming to an end.

The household saving rate has collapsed in recent years, falling to less than two per cent. The combination of high corporate saving and low business investment has sustained the current account surplus, allowing Japan to fund its budget deficit domestically. But the surplus has fallen sharply in the past five years, from roughly six per cent of GDP in 2007 to only one per cent now. With a falling rate of household saving and the prospect of new fiscal deficits, the current account will soon be negative, forcing Japan to sell its debt to foreign buyers.

As Satyajit Das says in his article - " Japans toxic combination of weak economic performance,large budget deficits,high and increasing levels of government debt,declining household savings and looming current account deficits is unsustainable."

WATCH THIS SPACE!

LINKS:

Satyajit Das  - The Setting Sun's Rising Debt

Martin Feldstein: Ending Japan's long deflation

RUCHIR SHARMA -ON WHERE TO LOOK FOR SURPRISES IN 2013!!

Once again Ruchir Sharma comes up with an original insight for the market outlook in 2013.

Below are excerpts from the ECONOMIC TIMES NEWSPAPER IN MUMBAI on Monday 14th January 2013.

LINK:

Surprises might deflate the bubbly confidence in emerging markets ...

Even as investors continue to remain bearish about developed markets in the USA and the Eurozone, they remain oddly complacent about the prospects of emerging markets in Asia.

As he says at the end of his article, "" If you're looking for negative surprises, don't look in US or Europe, the starting point of the last two global shocks and where the risks are well-telegraphed. Crises occur when the consensus is too confident, spending and debt too loose, and right now, the early warning signs are gathering in the emerging world.""


Here is a more detailed excerpt

So what surprises might deflate the bubbly confidence in emerging markets? The first candidate is China, where the consensus forecast is still for GDP growth of 8% this year despite the fact that growth slipped below that level in 2012 and the strong case that China is just too big and middle-income a country to continue growing so fast. A major growth shock in China could rattle the commodity markets and the indebted emerging market countries, as 60% of the countries in the global emerging market bond indices are heavily dependent on exports of commodities. 

Even perma-bulls on China are beginning to worry about two factors: incoming leader Xi Jinping has warned that rising corruption could lead to "the collapse of the party and the country", as he senses the popular resentment that has built up following the sharp rise in cases of bribery, graft and ostentatious spending by government officials in recent years. Second, liquidity outside the traditional banking sector is growing much too rapidly and this striking rise in liquidity is finding its way into all kinds of murky debt products. 

The main issue is that this proliferation of alternative and local sources of credit is very difficult to track, so no one can fully quantify the risks. One investment bank calls wealth management products (WMPs) the CDOs of China — a reference to collateralised debt obligations, the exotic US debt instruments that triggered the global crisis of 2008. That's extreme, but systemic risk to the financial network in China is growing. 

Another potential surprise from the emerging market world could come from a nation most likely to disrupt the spectacular boom in the global bond market. The reality is that macro stability, which so many emerging nations laboured to build in the last decade, is starting to erode in a few important markets, including some that have sizeable deficits in both the overall current account balance and the government's deficit. The twin deficits in South Africa and India are particularly worrying, in part because no one has seen a crisis in a major emerging market in 15 years, and because most investors expect 2013 to be much like 2012. If an unexpected shock comes in one of these big countries, it could prove highly contagious. 

Given the political winds in South Africa, it looks like the bigger risk. President Jacob Zuma has reversed the one major achievement of his African National Congress successors: macro stability. Government spending is rising fast, fuelling a rise in real wages that is driving up consumption, and both the government deficit and the current account deficit are now around 5% of GDP.
Currently, South Africa's financial system is ranked as one of the best in the world. But with weak foreign reserves and a very heavy foreign presence in its stock and bond markets, South Africa is highly vulnerable to capital flight. Social tensions are also on the rise as the country has one of the lowest employment rates in the world and the economy is expanding at too slow a pace to create new jobs. So, if South Africa begins to totter, its size and reputation could produce a contagion effect. 

Let us hope history and the consensus hold, and year five of the market recovery proves uneventful, and profitable. If you're looking for negative surprises, don't look in US or Europe, the starting point of the last two global shocks and where the risks are well-telegraphed. Crises occur when the consensus is too confident, spending and debt too loose, and right now, the early warning signs are gathering in the emerging world.

GOLD - INTRADAY VOLATILITY ----

As the FED threatened to end its policy of limitless QE, Gold sold off rapidly.

From levels of just under $1690, Gold went all the way down to under $1630.

I would like to advise readers to take another look at Clive Maund's chart from my post on 31.12.2012.

Corrections down to the $1500-$1550, will complete the ongoing consolidation in gold bullion and will provide good buying opportunities.

Brace yourselves for volatility, and don't take your eye off the big picture.

As US Federal debt levels continue to rise, even as unemployment numbers stay stubbornly high; the US Fed will face it's toughest test yet.

The last thing that US homeowners need is a rising mortgage rate, so I remain skeptical of Bernanke's comments last week!

GOLD AND SILVER - CONSOLIDATION IN A BULL MARKET

CLIVE MAUND once again has some excellent precious metal charts

IKEA - ADAPTING TO THE INDIAN CONSUMER

Ikea: Swedish social democracy meets DIY-unfriendly Indians - The ...
by Sanjay Badhe December 11, 2012 ECONOMIC TIMES

Even as the FDI in RETAIL debate rages on in India, here's an interesting article of how IKEA will have to adapt to the Indian Consumer.

Will IKEA be a hit or a miss in India?....... and will the DIY approach work in a country where cheap labour and cheap (although sometimes poorly made) furniture will result in stiff competition for IKEA.

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So will IKEA adopt a cookie cutter approach-similar stores and products-which is the easiest to roll out and implement in India?

From the early days, IKEA has pushed the concept that both the furniture and stores should be unpretentious-standardised design, flat pack furniture, self service, friendly store design where it is easy for shoppers to choose and select, minimal advertising with a dependence on its catalogue and so on. And it passes on all the savings to consumers.

But, will concepts such as flat pack, take home and self assemble work here? Many Indians may not be open to the DIY model even though IKEA believes that getting the customer to put together the product gives a sense of involvement and pride. Will IKEA give the model a twist, as it did in the Middle East, to offer assembly and delivery at a price? In fact, India might well get an independent service of assemblers of IKEA furniture!

IKEA may also have to compromise on its store size because poor availability of space and high costs. IKEA prefers standalone stores, complete with service areas and storage, rather than malls although in the Middle East it does have stores inside malls. IKEA's awareness and image too would need attention. Interestingly, in India the brand might be seen as 'aspirational and fashionable' as in other emerging markets, and not the value-driven brand that it is in Europe. This might be good at the beginning, but could prove to be a problem for the value-driven Indian consumer.

Also, while the catalogue is critical, catalogue-based sales have not been very successful in India. Argos, a catalogue sales retailer that entered India in collaboration with K Raheja group's Shoppers Stop and HyperCity chains, has shut shop.

Will IKEA go for smaller, specific catalogues, arranged by categories, for India? Will it use electronic catalogues and use an online version? 

IKEA's image is built around 'Swedishness', with liberal use of Swedish flag colours of blue and yellow as well as Nordic names for products. Will the lack of a 'Sweden perception' in India actually make the IKEA concept difficult to sell here? 

Perhaps IKEA has to listen to the Indian consumer, before deciding its strategy in India.

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BAYERN MUNICH - FOOTBALL PROFITS

Earn it like Bayern - Business Standard -By Olaf Storbeck

Above is a link to an article from Business Standard Newspaper Mumbai, dated 20/11/2012.

Sound management, good regulation and steady ownership do matter.


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In the mid-60s, the executives of a minuscule football club from southern Germany, Bayern Munich, travelled north toCologne to visit the country’s most successful team. They wanted to learn how to run a professional sports club. And, learn they did. Bayern has dominated the Bundesliga, Germany’s professional league, ever since. 

It has also shown that the sport can be run as a financially successful business. The club has made a profit 20 years in a row. Revenue in the 2011-12 season rose 14 per cent to euro 332 million, with Ebitda up 63 per cent to euro 69 million. And, Bayern sits on a cash pile of euro 127 million. 

Good regulation and steady ownership do matter. Bundesliga rules require that more than 50 per cent of the voting shares in the professional team belong to the club and its members. This prevents star-struck Russian oligarchs, bored US businessmen or spendthrift sheikhs to burn hundreds of millions buying professional teams on hazardous business plans. It also repels investors of the private equity type. Next to the club, two corporate investors ( Adidas and Audi) each hold about nine per cent of the shares in the professional team. 

Bayern’s careful avoidance of the celebrity carnival sort that is the norm at clubs like Real Madrid or Manchester United is another reason for its economic success. The club shuns vanity hires, runs a successful academy, and keeps a significantly lower salary bill than its competitors. Bayern only spends 50 per cent of its revenue on players’ wages — against 70 per cent for the average English club, according to Deloitte. On the revenue side, German rules limit the clubs’ over-dependence on TV rights, inducing prudent behaviour. 

Bayern’s financial clout should keep growing. The club is currently looking for a third external investor to pay about euro 100 million for a nine per cent share of the professional entity. And, a listing isn’t on the cards. 

In the near future, new financial “fair play” rules edicted by the Union of European Football Associations ( UEFA), will hamper all teams’ ability to go on unsustainable spending sprees. This will play to Bayern’s advantage, and further consolidate its standing both on the domestic and international stage.

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DOW GOLD RATIO

RUCHIR SHARMA ON US ELECTION RESULTS AND THE US FISCAL CLIFF

Fantastic Article by Ruchir Sharma in the Economic Times Mumbai on Monday 12 November 2012.

Why Barack Obama won, what can be his legacy - Economic Times

EXCERPTS: (I highlighted some sentences in red colour for emphasis)

Ruchir Sharma on Why Obama won?

Even before the vote, prognosticators like Yale's Ray Fair who use just economic metrics to forecast election results pointed to a defeat for Obama, given persistently weak growth in per-capita income over his first four years. Fair was calling for Romney to win by a 51-to-48 margin. The polls showing that most voters saw the economy as the key issue only added to the mystery of how Obama beat the odds. The answer may be that, in their gut, voters understand that the US is not recovering from a normal recession, but from the worst crisis since the Depression, and, therefore, they chose to give Obama four more years, just as they did for Franklin Delano Roosevelt in 1936.

Historical evidence shows that the American economy has, in fact, not performed badly over the last four years, not when compared to its own previous track record in severe crises, or to other countries in similarly dire condition. The forecaster who expected an Obama defeat focused on how the debt problem is undermining US growth, which has fallen from a long-term rate of 3.4% in the decades before 2007 to just 2% this year, and is running slower than during the recovery phase of most post-war recessions. US economic output is now 10% below the trend line it was on before the crisis and still falling, which is the real reason for high unemployment. This case for the historically 'weak recovery' was the essence of the case against Obama's handling of the economy. 

Voters seemed to choose, intuitively if not deliberately, the historical and global perspective of Harvard economists Kenneth Rogoff and Carmen Reinhardt, who argue that the relevant point of comparison is not the dozen or so recessions the US has seen since World War II, but the very different case of systemic financial crises. These are much more traumatic and rare, and by this standard, the US is recovering lost per-capita output faster than it did following previous systemic crises, from the meltdown of 1873 through the Depression of the 1930s, and also faster than most of the eurozone nations following the systemic crisis of 2008.

Ruchir Sharma on US FISCAL CLIFF - on US SPENDING CUTS - on US DEBT

He stresses the importance of debt reduction through spending cuts rather than tax increases.

The history of financial crises suggests that Washington has to get moving and address the debt burden now. In the developed world, the two most successful cases of recovery from a debt crisis were Sweden and Finland in the 1990s, and both began by cutting debt in households and corporations, while raising public debt to stimulate the economy. That is the path the US has followed - and followed more successfully than other rich countries since 2008 - with steep declines in US corporate and household debt. But this is the critical juncture. The Scandinavian cases show that, four years into the crisis or about where the US is today, the government needs to shift aggressively from stimulating the economy to putting in place a long-term plan to lower the public debt. 

It can't be just any plan. From certain quarters of Washington, one hears a steady refrain about how the only way to balance the budget is to cut spending and raise taxes. But research clearly shows that the recovery is likely to be much stronger if the debt is reduced through spending cuts rather than tax increases. 

Over the past quarter century, eight European countries have undergone periods of sharp government debt reduction, and those that reduced debt mainly or only through spending cuts, including Britain and Austria, saw their economies speed up during the belt-tightening process, and after some initial pain. In the Netherlands, Sweden and Finland, the governments actually lowered taxes while cutting spending, and saw the GDP growth rate accelerate, sometimes by a large margin. In the two best cases, Sweden saw its GDP growth rate roughly double, and Finland saw its GDP growth rate roughly triple, both to around 3%, which is very respectable for developed economies. In contrast, the countries of southern Europe - Italy, Greece and France - tried to put the budget in balance mainly through tax increases, and all of these economies saw GDP growth slow down. 

So, economies digging out of debt perform better following spend cuts. But why? An August 2012 paper from the National Bureau of Economic Research, The Output Effect of Fiscal Consolidations, offers an extensive comparison of how countries have performed after periods of budget deficit reduction, and it concludes that the difference in results is nothing short of 'remarkable'. Spending cuts are typically followed by mild recessions, or no recession at all, while tax increases have been followed by prolonged recessions. The authors, Alberto Alesina, Carlo Favero and Francesco Giavazzi, note that the gap in performance is so sharp, it can't be explained away by differences in monetary policy; rather, the key seems to be the impact on business confidence compared to consumer confidence. Businesses tend to react to tax increases by dialling back, and to react to government spending cuts by investing more, which is what the US economy could use right now, when many businesses are sitting on record levels of cash on their balance sheets. 

Regardless, the US economy looks likely to take some pain in the coming year, as Washington begins to deal with the debt problem. The market's worst fear is the 'fiscal cliff' that looms in January, when current law would impose a combination of tax hikes and spending cuts equal to 5% of GDP, which is likely to induce a recession if Congress doesn't act. However, a risk this clearly telegraphed typically gets resolved, even in Congress. The more likely risk is that Washington begins the process of debt reduction with a compromise package that could reduce growth by nearly 2% of GDP. That's a step in the right direction, long term, but could make for a rough 2013. 

Over the coming decade, the global economic race will be decided in good part by which nations are first to tackle the debt problem, and one often overlooked factor is that the wealthy can cope with large debts more easily than the poor. By that measure, the total US debt burden of 350% of GDP may pose less of a challenge to Washington than, for example, China's total debt burden of 180% of GDP poses to Beijing. 

The bigger picture for 2013 is that if Washington can produce a credible road map to lowering public debt, it could keep the US on track to be a Breakout Nation - as the strongest growth story in the developed world - this decade.