China’s gold hoard will slay the mighty dollar – Daily Reckoning 06-27-15

Salient to Investors:

China last reported its gold reserves in 2009 at 1,054.1 tonnes, just 1% of the value of its foreign currency reserves, and less gold reserves than Germany, the IMF, Italy and France, and a fraction of those of the US.

Bloomberg Intelligence believes China’s reserves exceed 3,510 tonnes, which would be second only to the US.  Bloomberg says China may soon want to disclose its gold holdings in order to have the yuan join the IMF’s currency basket of dollar, euro, yen and British Pound.

China has $4 trillion in foreign currency reserves at a time when central banks are doing their utmost to devalue their currencies. China has called for a new currency to replace the US dollar as the global standard, so having assets other than currencies on its balance sheet makes sense.

The IMF estimates 63% of central bank reserves are held in US dollars, so an alternative currency could hugely decrease dollar demand and flood the market with dollars.

Read the full article at

Click here to receive free and immediate email alerts of the latest forecasts.

Fed Leaves Hedge Fund Bears Waiting on Emerging-Markets Bet – Bloomberg 09-19-13

Salient to Investors:

Ray Bakhramov at Forum Global Opportunities Fund said:

  • What we have seen so far is just a preview as a bottoming in any asset class typically takes 4 years.
  • The combination of slower growth and Fed tapering will accelerate redemptions, triggering a slump for stocks, debt and currencies.
  • The jump in interest rates prompted by Bernanke just talking about tapering shows that preventing a further rout in emerging markets may be beyond central banks’ control, especially if developing nations and companies start struggling to fund themselves.
  • He is betting against the Chinese yuan
  • The September rally shows that people are still complacent that the Fed will take care of every problem, and people are mistakenly in seeing emerging markets as an issue, but not a big issue.

Barclays and JPMorgan Chase say the worst of the emerging-market sell-off may have already passed.

Anthony Lawler at GAM said hedge-fund managers have been looking for something to break, and central banks have been trying very hard to not let anything break. Lawler said the rupee and rupiah, which fell the most after Bernanke first hinted at tapering, have not led to windfalls for hedge funds because they are not liquid enough to bet against in a meaningful way.

Hedge Fund Research said hedge funds focused on emerging markets account for $155 billion of the industry’s $2.4 trillion of assets under management. HFRI said hedge funds broadly gained 3.9 percent through August versus a loss of 12% for the MSCI Emerging Markets Index and gain of 15% for the S&P 500, while the hedge-fund industry had an average annual gain of 4.2 percent from the start of 2007 through the end of 2010.

Stephen Jen at SLJ Macro Partners has been warning that slowing growth and the reversal of capital flows will crush currencies and the worst is yet to come. Jen said only 10 percent of the IMF estimate of $7.7 trillion pumped into emerging markets over the past decade has been pulled, and the Fed has not even started tapering. Jen said sell-side analysts have been too bullish on emerging markets based on the demographic trends, oblivious to the emerging-twin deficits: overextended credit cycles and extreme valuation of both currencies and the underlying assets.

Alper Ince at Pacific Alternative Asset Mgmt says to avoid hedge-fund managers wedded to either bullish or bearish views on emerging markets until there’s more clarity about the effects of Fed tapering and Syria. Ince said emerging-markets underperformance is overdone since May, but it is too early to buy because of so much uncertainty.

Read the full article at

Click here to receive free and immediate email alerts of the latest forecasts.

Global equity funds attracted the largest inflows since at least 2005 in the week ended Sept. 18 as investors piled into stocks before the Federal Reserve’s decision to maintain monetary stimulus.

The funds lured a net $25.9 billion in the period, Wei Liang Chang, a foreign-exchange strategist at Australia & New Zealand Banking Group Ltd. (ANZ), said by phone from Singapore today, citing data from EPFR Global. Developed markets posted $24.3 billion of inflows, while emerging-nation funds drew $1.6 billion, according to Chang.

The MSCI All-Country World Index climbed to the highest level since 2008 on Sept. 16 after Lawrence Summers withdrew his bid to become the next Fed chairman, easing concerns that he would curtail monetary stimulus. The gauge extended gains after the U.S. central bank unexpectedly maintained its $85 billion monthly bond-purchase program two days later.

“People will find some space to breathe at this point,” Wellian Wiranto, an investment strategist at the wealth-management unit of Barclays Plc, which oversees about $217 billion worldwide, said from Singapore today. “In the coming week, we see further inflows given appetite has stabilized quite significantly and tapering was postponed.”

Taper Timing

Fed Chairman Ben S. Bernanke first signaled on May 22 that policy makers could reduce the bond purchases, triggering capital outflows from emerging markets and a month-long selloff in global equities. More than $50 billion left global funds investing in developing-nation bonds and stocks, according to EPFR Global.

Bernanke said Sept. 18 that a decision on slowing the pace of asset purchases would depend on economic data, and that the Fed has no set timetable.

“It’s hard to see the Fed start to taper at the next meeting in October,” said Wiranto. “If they really want confirmation of a recovery, one or two data points won’t do it for them.”

The MSCI All-Country World Index slipped 0.1 percent to 389.77 at 4:58 p.m. Hong Kong time, paring a third straight weekly gain to 2.6 percent. The measure has added 15 percent this year and trades at about 14 times projected 12-month earnings, the highest level on a weekly basis since April 2010.

The MSCI Emerging Markets Index also lost 0.1 percent, trimming this week’s advance to 3.5 percent. The gauge has declined 3.3 percent this year and is valued at 11 times forecast profits, the highest level since March, according to data compiled by Bloomberg.

Selling Yuan Advised by Deutsche Bank to Barclays on Flows – Bloomberg 06-18-13

Salient to Investors:

Currency strategists from Barclays to Deutsche Bank are advising to sell the yuan as China growth slows and inflows slow as China demands lenders curb foreign-currency loans on concern companies may have exaggerated shipments to facilitate carry trades.

Igor Arsenin et al at Barclays said policy makers will widen the yuan’s trading band, damping the one-way bet on yuan gains. The analysts advised buying one-month call options on the dollar against the yuan, predicting the Chinese currency will weaken.

Deutsche Bank said the yuan carry trade will unwind as Treasury yields rise, which could end an important source of cheap credit for China.

Amer Bisat at Traxis Partners said China is in a moderately tightening cycle,, and the strengthening of the fixing is part of that story, and expects the yuan to weaken after the central bank set its fixing at a record high. Bisat said China has used a stronger exchange rate to help curb credit expansion, which climbed by a record in March, and is not far away from where they can take their foot off the brake. (The yuan is allowed to trade a maximum 1 percent either side of the fixing.) 

Jonathan Cavenagh et al at Westpac Banking predict the yuan will drop 1.1 percent to 6.2 in the offshore market as the slowing economy leads to currency depreciation in line with Asian peers.

Stephen Roach at Yale said the yuan’s recent appreciation suggests China feels the economy is stronger than most believe, else it would not be condoning a development that might inhibit export growth.

Eswar Prasad at Cornell said there is room for the yuan to appreciate as the economy recovers in half2 2013 because China fundamentals are better than many other emerging markets. Prasad said as speculative capital retreats, it is a propitious time for policy makers to widen the currency’s trading band, loosening control over the yuan.

The median economist expects Chinese growth to hold at 7.8 percent in 2013, the slowest expansion since 1999, and versus the average 6.4 percent rate across Asia. The median analysts expects the yuan to strengthen to 6.1 per dollar by year-end 2013, and to 6 by year-end 2014.

Andrew Colquhoun at Fitch Ratings said the yuan is closer to fair value in terms of trade balance, and it is a priority for the central bank to make the currency a two-way bet to increase room for further reforms.

Read the full article at

Click here to receive free and immediate email alerts of the latest forecasts.

Dollar Thrives in Age of Competitive Devaluations – Bloomberg 01-28-13

Salient to Investors:

A. Gary Shilling at A. Gary Shilling & Co writes:

  • In periods of prolonged economic pain, international cooperation gives way to an every-nation-for-itself attitude, including competitive devaluations. Decreasing the value of a currency, by creating and selling unlimited quantities, is much easier than supporting it, by selling limited quantities of other currencies it holds, or borrowing from other central banks. The IMF says global central-bank foreign-exchange reserves increased to $10.53 trillion in mid-2012 versus $6.7 trillion in 2007.
  • Currency interventions seldom have lasting effects, viz unsuccessful Japan, and ultimately work against the US dollar, adding to its attraction  as the only haven in an uncertain world. All countries lose in competitive devaluations because of the disruption to foreign trade when one currency, specifically the US dollar, dominates.
  • Central-bank policy, especially quantitative easing, depresses a currency by hyping the supply of liquidity. Central bankers, who congenitally hate inflation, want it to return as they value their jobs.
  • The yield on Japanese government bonds will be much higher long-term as leaping interest rates will add so much to the deficits and debt that an uncontrollable spiral will unfold.
  • China has succumbed to immense foreign pressure to allow the yuan to appreciate only in good times, but holds its currency flat when times are tough.
  • Brazil’s economy is commodity-oriented and therefore at the mercy of subdued Chinese manufacturing.
  • The dollar is likely to meet at least 5 of the 6 criteria of a dominant global currency for many years:
    1. Rapid growth in GDP per capita. US emphasis on entrepreneurial activity and superiority in new technologies will maintain this lead.
    2. A large, usually the biggest, economy. Rapid productivity growth and relatively open immigration, the falling population in Japan spreading to other developing nations including China, will assure the US lead.
    3. Deep, broad financial markets. The US stock-market cap is 4 times that of China, Japan or the U.K. and more than 3 times that of the euro zone. Almost 50 percent of Treasuries are held by foreigners versus 8.7 percent of Japan’s government net debt.
    4. Free and open financial markets and economies. Fragile conditions in Europe, and China continuing to control its financial markets and currency, assures the US lead.
    5. Lack of substitutes. The rigidly controlled Chinese economy and financial markets eliminate the yuan for the foreseeable future. Japan does not want the yen to be a primary global currency. The European crisis eliminated the euro for at least a number of years.
    6. The dollar’s credibility is still substantial. The US current-account deficit will shrink as retrenching consumers moderate imports, US production becomes increasingly competitive, and the US becomes more self-sufficient in energy.

Read the full article at

Free email alerts of articles as soon as they are posted.

ETF Surges as Manufacturing Index Propels Gains – Bloomberg 11-02-12

Salient to Investors:

The biggest Chinese ETF in the US climbed to a six-month high on expanding factory output. Chinese manufacturing expanded for the first time in three months in October.

Audrey Kaplan at Federated Global Investment Mgmt said confidence in Chinese equities is picking up and it looks like the beginning of a rally. Kaplan said the MSCI China Index may climb at least 15 percent in 2013.

Analysts forecast the yuan to depreciate 1 percent against the dollar by year-end as the currencies of Brazil, India and Russia strengthen.

Read the full article at

Pimco Says Brazil, South Africa, Mexico Best for Emerging Bonds – Bloomberg 10-03-12

Salient to Investors:

Ramin Toloui at Pimco says:

  • Brazil, South Africa and Mexico offer the best emerging market local-currency bonds because they offer higher yields than the debt of developed nations – very slow global growth and very low core industrialized yields are a strong force pulling rates down over time.
  • Flows into emerging-market debt will be sustained in 2013 because debt levels in emerging markets are much lower, yields are higher and the existing investor allocations are very lopsided for industrialized countries.
  • The Chinese yuan will keep rising.
  • South Korean bonds will benefit from possible interest-rate reduction and capital inflows from sovereign-wealth funds.

EPFR Global estimate emerging-market bond fund inflows totalled $25.3 billion for 2012 thru September versus $17.3 billion in 2011 and $53.6 billion in 2010.

Read the full article at

The Downward Spiral – The Millennium Adventure 02-05-03

Salient to Investors:

Jim Rogers Writes:

  • The dollar is in a decline that could lose its status as the world’s reserve currency, which would lead to a huge decline in the standard of US living.
  • A sound currency reflects solid economic fundamentals: little or no debt, a trade surplus, a stable balance of payments, and growing international reserves.
  • US national debt to foreigners is $6.4 trillion, with interest payments last year of $333 billion. US imports greatly exceed exports. Direct foreign investment is declining every year. US reserves of $60 billion would last 3 minutes if creditors began cashing in.
  • Greenspan is the grand maestro of this economic debacle.
  • Imprudent monetary and fiscal behavior has always led to economic disaster. In 1920s Germany, in 1970s England which had to be bailed out by the IMF – in 50 years Britain had lost its status as the richest nation in the world and its Empire.
  • Long the Swiss franc, Japanese yen and Danish krone, despite their governments adopting the US dangerous habit of manipulating their own currencies to compete in the world market.
  • The success or failure of the Euro is one of the most important questions of the twenty-first century. The world needs the Euro, because it needs an alternative to the dollar.The European Union has everything going for it—an enormous population base, a balance of trade surplus, most of its nations are creditors, not debtors.
  • Long the euro despite it being a flawed currency because many member nations don’t run a tight ship. Germany has again started running up huge debts, the Portuguese are running an enormous deficit, the French says they are going to ignore the treaty establishing the euro.
  • The Chinese yuan may eventually have its day in the sun, certainly if the euro fails.

Read the full article at

Click here to receive free and immediate email alerts of the latest forecasts.