Ben Bernanke is Every Gold Bug's Best Friend
After prices fell 10% in December, many investors wondered if the bull market in gold was running out of steam.
That was before Federal Reserve Chairman Ben Bernanke swooped in with a "red cape" and fired the bulls back up.
Since the Fed reassured the world that interest rates will remain at "exceptionally low levels" for another two years, gold has jumped more than 3%.
UBS AG (NYSE: UBS) described the situation simply, "if investors needed a (further) reason why they should be long gold now, they got it yesterday ... a more accommodative policy is a very good foundation for gold to build on the next move higher."
To gold bugs, two more years of near-zero, short-term interest rates means negative real interest rates are here to stay, and this has historically been a strong driver for higher gold prices.
Bernanke and the Fed aren't the only central bankers in the fiscal and monetary bullring.
Brazil has cut its benchmark interest rate a few times and China lowered its reserve rate for banks in December. According to ISI Group, 78 "easing moves" have been announced around the world in just the past five months as countries look to stimulate economic activity.
One of the main weapons central bankers have employed is money supply, which has created a ton of liquidity in the global system. Global money supply rose 8% year-over-year in December, or about $4 trillion, according to ISI. I mentioned a few weeks ago how China experienced a record increase in the three-month change in M-2 money supply following China's reserve rate cut.
Together, negative real interest rates and growing global money supply power the Fear Trade for gold. The pressure these two factors put on paper currencies motivates investors from Baby Boomers to central bankers to hold gold as an alternate currency.
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The Madness of Crowds: How to Play Bonds, China, and Gold in 2012
Yes, I know that markets are irrational.
I read Charles Mackay's 1841 classic, "Extraordinary Popular Delusions and the Madness of Crowds" long before it ever became fashionable.
Even so, when you think about it, 2011 must set some kind of record.
As investors, that means we need to decide whether this madness will continue in 2012 and which direction to take.
Take the madness in the bond world, for instance.
Long-term bonds of a country with an out-of-control budget deficit and a worrying trade deficit are currently yielding 1.6% below inflation.
In other words, year after year, investors are willing to pay 1.6% of their capital to hold them. On top of that, investors have been so keen on this miserable asset in 2011 they have bid up its price by no less than 26%.
Conversely, China is revolutionizing the world economy.
Year after year, China puts up growth rates of 8% or more, and the latest data suggest that will continue throughout 2012.
What's more, Chinese stocks stand on a bargain-basement price-to-earnings (P/E) ratio of less than 8-times earnings. Yet, in 2011, investors shunned these bargains, giving the Chinese market a pathetic return of minus-22%.
It is Madness I Tell YouDo you see what I mean when I talk about irrational?
To a Martian, these statistics would be proof that earthly markets had lost their collective minds. That's not just a random walk - it's a deliberate stroll that will destroy your wealth.
For investors, it raises the question of how long this irrationality is going to last. Will this extreme irrationality persist in 2012, or will it reverse?
The first conclusion to be drawn is that current markets...
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China Fears Much Ado About Nothing
Markets in Hong Kong, Vietnam, Taiwan and Korea were closed last week as people across Asia celebrated Moon Festival, one of the culture's most beloved holidays along with Chinese New Year. Moon Festival's origins center around a husband (Houyi) and wife (Chang'e), who were sentenced to live eternally separated on the sun and the moon.
Chang'e, representing "Yin," lives on the moon and Houyi, representing "Yang," lives on the sun. Once a year, on the night of the Mid-Autumn Festival, Houyi visits his wife and that is the reason why the full moon burns brightly on this night.
For many, the yin and the yang illustrate the importance of having balance in life. Investors must find the right risk/reward balance. Businesses must find the right capital spending/revenues balance. And, we all must strive to find the right work/life balance.
China's Economy Finds BalanceBalance is also a crucial goal for China's economy - the economy must not grow too quickly or risk a sharp correction. Just this year, China has weathered an epic battle with inflation, drought and floods, poor global macroeconomic conditions, massive accounting/corruption scandals and a tragic accident on one of its marquee achievements-the country's high speed rail system.
We've discussed the tremendous build-out of China's high-speed rail system before. And earlier this month, I was lucky enough to see what traveling at the speed of China feels like firsthand. I was on a train that averaged 185 miles per hour during the 923-mile trip from Shanghai to Beijing. I've traveled to all corners of the world and have seen many things during my travels, but viewing China's explosive growth as it flies by you is something I will never forget.
China remains the beacon of hope for the global economy, the largest and, many times, the "sole engine of the world economy," BCA Research says. China's real gross domestic product (GDP) is forecasted to grow 8.9% in 2011 and 7.8% in 2012, according to ISI Group. This is a slower rate of growth compared to recent years but "doesn't look like an economy struggling under tighter credit conditions," GaveKal research says.
The key to China's economic growth isn't "how fast?" or "how much?" The most critical question is "what's driving it?"
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Chinese Homebuyers Throw a Life Raft to the U.S. Housing Market
From New York to Honolulu, Chinese homebuyers are swooping in to help salvage the U.S. housing market.
Indeed, California, Florida, New York, and even Hawaii have seen a marked up-tick in home sales to Chinese buyers who are exporting their country's real estate boom to the United States, according to Bloomberg News.
Increased regulation at home and education and investment opportunities are chief among the reasons real estate in the United States - as well as the United Kingdom, Australia, and Canada - has piqued Chinese interest.
According to a survey by the National Association of Realtors, Chinese buyers accounted for 9% of foreign home purchases in the 12 months ended in March of both 2010 and 2011. That's up from 5% in 2009.
"The purchase restrictions in China drove them overseas, while they look for investments to counter the inflation," Mo Tianquan, founder and chairman of Beijing-based SouFun Holdings Ltd. - a company that runs China's biggest real estate Website and organizes buying excursions abroad - told Bloomberg. "Some of them will buy homes considering better education opportunities for their kids, while others look for immigration options."
Take Cupertino, Calif., for example. Sales of existing single-family homes in Cupertino rose 21% in the first quarter from a year earlier, largely due to an influx of Chinese shoppers who are making huge cash purchases.
"We're seeing a huge number of all-cash transactions, and most of those are from mainland China," Nina Yamaguchi, managing broker at Coldwell Banker's residential office in Cupertino, told Bloomberg. "The thing that draws the Asians here is the schools are so highly touted. Cupertino is certainly not beautiful. It doesn't have wonderful architecture."
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The Japanese Economy: How Its Post-Earthquake Weakness and Scuffles With China Contribute to a Global-Market Reversal
In our ongoing search for possible "inflection-point" catalysts - financial stimulants that could help turn global markets upside down - the Japanese economy has to be a prime candidate.
In the last part of the 1980s, Japan was the world power - so much so that investors on the U.S. trading floors of New York each day watched the Tokyo markets with a mixture of awe and fear. An oft-cited investing aphorism of the day explained this very clearly by holding that "when Tokyo sneezes, Wall Street catches a cold."
Not long after, the Japanese miracle ended, the stock-and-real-estate markets crashed, and that Asian country fell into a funk known as the "Lost Decade" - a misnomer, since the economic malaise that's lasted virtually ever since is actually more than 20 years long.
Latin America Looks to Strengthen U.S. Trade Relations and Step Back From China
The United States has long referred to Latin America as its "backyard", and held a strong economic influence on its southern neighbors.
But someone else is moving in.
China's trade with Latin American countries has surged over the past few years, weakening the region's economic relationship with the United States. Now some of those nations - especially Brazil - want to strengthen U.S. ties to reduce their dependence on the world's second-largest economy.
China's Five-Year Economic Plan Calls For Slower Growth
China will take steps to cool off its red-hot economy in the next five years largely by increasing domestic consumption and de-emphasizing exports, Premier Wen Jiabao announced in an online chat with the country's citizens on Sunday.
Wen, China's leading economic official, said the government's official target for average gross domestic product (GDP) growth over the next five years will be reduced to 7% annually, down from a target of 7.5% in the past half decade.
China needs to slow economic growth to curb soaring food and housing prices and to restructure its economy, even as most developed economies around the globe struggle to sustain expansion.
Global Investing Strategies: A "Lightning-Round" Look at U.S. Stocks, the Dollar, Inflation and China
If you're a regular Money Morning reader, then you know that, d uring my appearances on national television or when I'm doing media interviews around the world, I frequently participate in something called a "lightning round " - a rapid-fire interview technique in which the announcer (and sometimes even audience members) run through a list of questions in rapid-fire order.
It's a technique that really puts you on the proverbial "hot seat." But I actually enjoy it: It forces you to think on your feet - which appeals to the former trader in me - and allows you to run through a bunch of topics in a very short stretch. In one way or another, each of these topics deals with global investing strategies.
I thought you might enjoy - and perhaps even find useful - a "highlight reel" of some of the best lightning-round questions that I've received in recent weeks, both in front of the camera and during the informal discussions that follow the presentations and broadcasts.
And we'll start with the topic that seems to be one of the most popular global investing strategies topics right now - gold.
To see what Money Morning's Fitz-Gerald sees for stocks, the U.S. dollar and inflation, please read on...
China's Trade Surplus Goal Signals It's Time To Dance With the Dragon
China's economic model has long been dependent on exports. Over the past several decades, the country has been the world's manufacturing floor, turning the "Made in China" stamp into a common fixture of goods sold in the United States and Europe.
But now China has made a new goal: It will double its imports by 2015, reducing the trade surplus to zero and releasing itself from an export-reliant economy. Beijing this year made this goal a key part of China's 12th Five Year Plan.
This bold new target represents a major shift in the balance of global trade and a new paradigm for which the United States is not prepared, according to Money Morning Chief Investment Strategist Keith Fitz-Gerald.
"The West needs to realize that the United States is dangerously close to being completely irrelevant to the Chinese growth model," Fitz-Gerald said in an interview. "China will not live and die by U.S. demand."
GE China Deals to Bring in $4 Billion
General Electric Co. (NYSE: GE) this week announced it would sign a series of deals with Chinese partners in energy, rail, and aviation as it strives to increase its presence in the burgeoning Chinese market.
The announcement coincided with a four-day state visit to the United States by Chinese President Hu Jintao. The deals
China's Yuan Policy will be the Source of Much Discussion, but Little Change During President Hu's Visit
It's unlikely U.S. President Barack Obama will make much headway in his efforts to influence China's yuan policy when he meets with Chinese President Hu Jintao in Washington this week. President Hu made that abundantly clear on Sunday when he rejected U.S. arguments that allowing the yuan to appreciate against the dollar would help the government in Beijing tame inflation.
In response to written questions from The Wall Street Journal and the Washington Post, Hu said he favors greater cooperation with the United States on economic issues but he called the present U.S. dollar-dominated currency system a "product of the past," the newspapers reported on their Web sites.
The Chinese president said his government is fighting inflation with a package of policies, including interest rate increases, and that rising prices can "hardly be the main factor in determining the exchange rate policy," according to a transcript of the answers.
China Monetary Policy in Focus as Reserves and Lending Surge
China's foreign-exchange reserves climbed to a world record $2.85 trillion last quarter as bank lending continued to exceed the government's annual target, putting more pressure on the central bank to increase borrowing costs to dampen down liquidity and tame inflation.
China's foreign reserves jumped by $199 billion in the fourth quarter, a much larger increase than economists expected. The People's Bank of China (PBOC) may need to raise benchmark interest rates, boost reserve requirements for lenders and allow faster yuan appreciation, as a result, according to economists from Standard Chartered Plc and Credit Agricole CIB.
"All eyes are going to be on what new policies the central bank can bring to the table,"Jinny Yan, a Shanghai-based economist at Standard Chartered told Bloomberg News. "But there's still going to be a lot of excess liquidity in the market in the first half of the year."
2011 China Outlook: The Red Dragon Takes Its Next Step Forward
If the United States has a growth problem, China has just the opposite. The world's second-largest economy is set to grow 9-10% this year, building on its strong rebound from the global financial crisis.
Furthermore, Beijing is determined to accelerate China's transition toward a more domestically based economy, while stabilizing prices and cutting government waste.
So in addition to strong growth numbers, investors can expect more disciplined and responsible economic development.
Progress Made on U.S.-China Trade, but Currency Roadblock Remains
The United States and China this week wrapped up a two-day meeting on trade that was aimed at cooling rising tensions between the two nations. Still, despite the progress, currency valuations and trade tariffs will continue to be a fixture of both countries' foreign policies.
The U.S. trade deficit with China this year could top $270 billion, surpassing the 2008 record of $268 billion. U.S. policymakers blame China's undervalued currency and government subsidies for the imbalance. China's disregard for intellectual property rights and bias towards its own domestic companies are also major points of contention.
In a rare show of conciliation, China during Wednesday's trade talks agreed to loosen some of its trade restrictions and better enforce intellectual-property rights on the Mainland -especially to curtail rampant software piracy that costs software makers an estimated $7.9 billion a year in lost revenue.
Chinese IPOs Making Waves in the Market, but Beware of Bubbles
Record fundraising activity in the market for initial public offerings (IPOs) is pushing valuations for Chinese companies to sky-high levels, raising concerns about a possible bubble.
IPOs are likely to raise more than $300 billion for issuers worldwide in 2010, exceeding the previous record of $295 billion in 2007, despite the sluggish economic recovery in Western markets.
In the first 11 months of 2010, IPOs worldwide already raised $255.3 billion in 1,199 deals, according to a "Year-end Global IPO Update" report from Ernst & Young.
And the red-hot Asian markets, led by China, continued to lead the recovery, raising the most capital ever. Asian issuers have raised $164.5 billion so far this year - already surpassing the $98.2 billion raised in the peak fundraising year of 2006 and accounting for 64% of total global IPO value so far in 2010.
That's more than four times the $40 billion in IPOs completed by the second-ranked North American market. Europe was third, raising $32.8 billion, far outdistancing the Middle East and Africa's $5 billion. Read More...