Finansiella Insikter

Flera av er noterade säkert fredagens katastrofala amerikanska BNP rapport med en uppgång på 1,3% på årsbasis under det andra kvartalet mot förväntade 1,8%. Det kanske mest chockerande var att BNP för första kvartalet reviderades ner från 1,9% till 0,4%.

Den sänkta tröskel för QE3 som Goldman talade om häromdagen borde därmed vara jämnad med marken. En del talar till och med om att BNP siffran mer eller mindre var framtagen för att ge Ben den ursäkt han behöver.

Det är värt att komma ihåg att en uppgång på 1,3% innebär att ekonomin sannolikt krympte, då man använder sig av fabricerade konsumentpriser. Med tanke på alla de otaliga stimulanser som tagits fram så borde tillväxten vara MYCKET högre. Vakna läsare förstår dock att det bara handlar om att skådespelet går mot sitt slut, då det blir allt svårare att hålla illusionen om en återhämtning vid liv.

Rekommenderar att läsa följande artikel från Alasdair Macleod, där han tar upp hur meningslöst BNP är som mått på tillväxt då staten bara kan spendera mer för att få BNP att se bättre ut.

Här är ett utdrag:

It should be remembered that GDP is the sum total of all output or consumption, usually consumption, of the private and public sectors. So, if government expands its own spending in the economy without increasing taxation, hey presto! GDP increases. Gordon Brown, when he was Chancellor of the Exchequer in Britain, was a master at playing this game. His forecasts for GDP were always more optimistic than those of independent economists: he increased the GDP numbers by simply spending more, so that he was right. It was amazing he was never rumbled.

Alasdair Macleod har publicerat ännu ett intressant inlägg på sin blogg FinanceandEconomics.org, där han på ett tydligt och elegant sätt förklarar varför bl a utvecklingen i Mellanöstern/Nordarika kommer att leda till att ‘marknaden’ sätter stopp för den temporära lösning i form av ‘kvantitativa lättnader’ som världens regeringar och centralbanker har implementerat för att fördröja den oundvikliga finansiella tsunami som väntar. 

Detta känns extra aktuellt med tanke på PIMCOs besked att dumpa amerikanska statspapper inom sin största obligationsfond. Läsning rekommenderas.

Governments are about to lose control of the markets

The low interest rate honeymoon is coming to an end, and we can now expect rates to rise and continue to rise for the foreseeable future. For Western economies and their banking systems it is the worst possible time for this to happen. The reason interest rates will go up is because inflation, not deflation, now presents the greatest danger and a policy response is required.

Agricultural commodity prices have been rising for some time, and the central banks have dismissed them as being due to special factors and too small a part of the CPI to worry about. To this inconvenience can now be added the political revolutions in the Middle East and their effect on energy prices. It is perhaps this development that forced Jean-Claude Trichet to break ranks last week and admit that the ECB will have to consider an interest rate rise.

There is no such admission from Mr Bernanke and Mr King, the latter still denying that an official UK inflation rate of over 4% requires remedial action. And this high inflation rate was recorded before the current jump in energy costs. All three central bankers have been effectively caught on the hop by events. They have been ignoring inflation while wrestling with two immediate problems: financing government budget deficits and keeping the banking system alive. For these reasons the Fed and the BoE have been simply printing money by buying government debt. What made this strategy attractive is that it lowered the cost of government borrowing below that demanded by the free market, making government finances appear far better than they would be without this intervention, and at the same time it gives valuable breathing-space to the banking system.

Consequently, there is money in circulation that will have to be neutralised if inflation is to be controlled. It will require the central banks to sell back into the markets much of the government stock they have accumulated, at the same time as government borrowing continues at its high pace. This will force governments to bid up against their own central banks in the market for private sector savings. The increase in interest rates along the yield curve would therefore be sudden and brutal, and theoretically only stop when enough consumption is switched into savings, attracted by the high rates.

For this to happen when economies are fragile is the last thing the central banks need. Any hope of economic recovery will be quickly replaced by expectations of a slump, leading to deterioration in government finances everywhere, as tax revenue estimates are adjusted sharply downwards and welfare commitments sharply upwards. Add to that increases in the cost of government borrowing from higher interest rates, and the sudden collapse in government finances becomes truly alarming. The dramatic moves in the prices of precious metals are, perhaps, an early warning of this escalating risk.

The prospects for precious metals will ultimately depend on the central banks determination to control inflation. If only it was so simple; but a higher interest rate environment will break the banks, which are full of dodgy loans dating from credit-crunch days. So what does a central banker do? Does he squeeze inflation out of the system, while governments slash their spending, or does he find another way of rigging the markets, while governments dither over their deteriorating finances?

Paul Volker faced up to the problem and picked the former course thirty years ago, but this time the levels of private and public sector debt are a whole magnitude larger and government spending is a far greater problem. This time, embarking on austerity and interest rate plans sufficient to control inflation is simply too painful to contemplate in social democracies. The markets are beginning to understand this, having now been kicked awake by escalating energy prices.

History never repeats itself precisely, but there are similarities to late 1973, when inflation was on the rise and the Arab oil-producing nations imposed an oil embargo on Western nations, leading to considerably higher energy prices. This gives us perhaps a basis for divining today’s outcome, but there were notable differences.

US Inflation, on a comparable basis, is now running at about 5%[i] compared with 6% then, but interest rates are now close to zero compared with 7% in October 1973. An inflationary kick from higher oil prices could therefore lead to a much greater interest rate increase today. Government finances were far stronger then, reflecting economic growth, compared with the serious and deteriorating situation now. So rather than higher oil prices occurring at the top of the economic cycle, today it is happening when the world’s developed economies are struggling to recover.

The pick-up in inflation today is therefore more directly a function of monetary developments than excess demand. Arguably, this makes it more considerably serious than that faced in October 1973, which was easier to diagnose. It is a direct consequence of the monetary expansion that is the bedrock of economic policy. This is not welcomed by the establishment, which seems to think inflation can only occur as a result of excess demand. That is perhaps why the Mervyn Kings and Ben Bernankes of this world turn a blind eye to inflationary pressures, because so far as they are concerned it should not be happening until later in the cycle.

This unfortunate result of current monetary policy gives them an uncomfortable dilemma, because the consequences of stopping or even slowing the printing presses are too ghastly for them to contemplate. The truth is that there are not enough lenders, other than the central banks themselves, to finance government deficits at anything like current interest rates. To stop printing puts government finances in deep crisis and runs counter to cherished Keynesian and monetary theories, so it is hard to see how central bankers will take the initiative to jack up interest rates and bring inflation under control.

This phase of the inflation crisis has been brewing since the Lehman bankruptcy, when the Fed first dramatically expanded its balance sheet to rescue the American banking system. The policy since then has been to muddle along, printing more money to cover deficits and to get the economy recovering. But the crisis in the Middle East is putting an end to that approach and control of the markets is therefore shifting away from the authorities. The markets will raise interest rates against inflating governments whether they like it or not, and their currencies will suffer if central banks are slow to respond. At long last, markets will make governments face the reality they have been so keen to avoid.

The effect on asset prices will be dramatic, and share and bond markets, currently reflecting zero interest rates, are likely to be badly hit. Property is similarly vulnerable, with the end of any pretence that over-leveraged homeowners can afford their mortgages and commercial property tenants their rents. Values for collateral held by the banks against their loan books will therefore be further undermined, putting into doubt the banking system’s survival.

This new phase is stagflation, pure and simple. Asset prices fall, while the prices of goods rise. It is an outcome that has been obvious to some of us since the printing-presses were first cranked up after the credit-crunch. It will now become obvious to the wider public, because the authorities are finally losing control of the markets.

Vi har i tidigare inlägg tagit upp det faktum att teknisk analys inte är lika relevant i en manipulerad marknad som guld och silver. Kan varmt rekommendera följande inlägg från Alasdair Macleod som tar upp just detta ämne och dessutom ger en utmärkt förklaring varför så är fallet.

Precious metals and the validity of technical analysis

Last month’s drop in the price of gold was accompanied by almost universal recognition of a head-and-shoulders top, one of the classic reversal patterns recognised by technical analysts. This is a pattern that marks the end of a trend; the end of a bull or bear market, or at the very least a bull or bear phase. But how relevant is technical analysis to precious metals?

There is no doubt that using chart analysis in the right circumstances can be a powerful tool, but this presupposes that investor sentiment, in other words the emotions of greed and fear that drive investors, is properly reflected in the price. For this to be true, investors with these emotions must dominate the market, and prices themselves must be an accurate reflection of supply and demand.  This is habitually true of equity markets, where public sentiment predominates, and for which technical analysis was originally developed. It is obviously less true of other markets that are dominated by other factors, such as changing patterns in non-investment demand or the manipulation of interest rates; but wherever the public’s investment activities are part of the pricing, technical analysis will always have some relevance. However, precious metals have their own peculiarities.

Gold and silver are segregated into two basic markets, paper and physical, which have become somewhat detached from each other. The public interest, with respect to investment, is mostly corralled into the paper markets such as futures and options. The public interest, with respect to hoarding, is entirely centred on the physical. While many of us indulge in both activities the distinction has to be clearly understood because investment motivation is entirely different from that of hoarding.  In economic terms, investment is the application of savings for the expectation of a return, but hoarding is the removal of savings from circulation entirely. Investors expect to make a return measured in their paper currency, while hoarders seek protection from their currency. Technical analysis is of no interest to hoarders, since they are driven by fear alone and price is therefore immaterial.

The general segregation of precious metal investment and hoarding interests into two different camps has become self-reinforcing. Hoarding psychology is so different from normal investing, because to a hoarder, rising prices may be taken as a confirmation of his worst fears, and only encourages him to hoard more. He is also frightened into action by growing economic and systemic risks, and at times of price consolidation it is these that probably dominate his actions.

Unfortunately, all commentary on precious metal prices is directed at investors and investment, so this important distinction is not often made and rarely understood. For this reason technical analysis has an unjustified credibility in current economic and market conditions for precious metals. Its application only makes sense in the paper market in isolation and when there are no other factors; but it is of no interest to the hoarders in physical markets. This is a conflict to resolve and we need to know which market is dominant in order to assess the likely influence of any investment tools designed for investors.

Currently, portfolio exposure to precious metals is calculated to be less than one per cent, yet gold and silver is very widely hoarded. Investors measured by both numbers and financial commitment are the smaller party by far. Furthermore, hoarding is increasing rapidly, and includes a potential two billion gold-loving savers in Asia. The central banks by definition are themselves hoarders rather than investors, though their motivations are certainly not so pure. The collective presence and power of the hoarders is far larger than that of investors, and given the continuing determination of central banks to inflate their currencies, the relative importance of hoarding is set to grow. We must therefore conclude that investment tools such as technical analysis have little and diminishing relevance as a means of forecasting precious metal prices.

This has not completely erased some short-term relevance, as January’s sell-off has shown. When investment and speculative interest grow as they did in the last quarter of 2010, prices do become vulnerable to technical considerations.  However, this knowledge is routinely used by market manipulators to panic investors into poor investment decisions. Any investor naive enough to think precious metals are simply an investment game that can be played on charts becomes easy prey for the large commercials prowling the paper markets.

The use of technical analysis for predicting precious metal prices is merely one of the ways in which investors seek to extrapolate past relationships into future prices. In the process they ignore the wider world and the fact that economic circumstances are very different today compared with say, thirty years ago. Far more relevant is to try to understand the motivations and actions of hoarders, most of which have no knowledge or interest in portfolio theories: will they increase or reduce their desire and tendency to hoard? And what are the positions of the central banks, which try to influence hoarding behaviour: might they lose control of the market?

As well as these important considerations we can now add that of global financial politics, with China in particular encouraging its citizens to hoard, in a move seemingly designed to make life extremely difficult for Western central banks. Does this amount to economic war, and if so what are the implications?

Investors are not often intellectually or emotionally equipped to understand and deal with these vital issues. Wannabe hoarders continually insist they should use technical considerations to time their entry, still confusing investment with hoarding. They are seeking to maximise profits, not protect themselves from whatever it is that hoarders worry about.

Hoarders will be either right or wrong. It will go wrong for them if governments somehow manage to turn paper money into sound money without involving gold. Under any other circumstances the hoarders will eventually be right; and if they are right price becomes immaterial.  As economic events progress and the weaknesses of paper money become more widely understood, signs of panic will develop. We will see serious attempts to use the paper market to force physical delivery – not to ramp the price, but just to gain possession. We will see ETF holders switching from derivative-based ETFs into properly structured ETFs, fully backed with actual metal. We will even see redemption of metal-backed ETFs for the metal itself. We will see the bullion banks struggling to switch unallocated accounts into allocated, and we will see a desire to remove custody from the banking system entirely.

Perhaps some of this is starting to happen. We don’t know for sure, because hoarders, unlike investors, do not advertise their intentions. But there is evidence that there has been a steady disappearance of physical metal from the markets since the 1980s. The pace has more recently quickened at the same time as investment and speculative interest has grown in paper markets. It is a classic demonstration of Gresham’s Law, with paper investors being manipulated by the commercial shorts to suppress the price of the physical, leading to the disappearance of metal from circulation.

So relying on technical analysis is a mistake leading to a certainty: the majority of investors will miss the boat completely, because they will continue to think as investors.