Month: September 2012

By MoneyMorning.com.au

An already smouldering territorial dispute between China and Japan is threatening to boil over.

Major Japanese firms have ordered shutdowns of their Mainland China operations, and Japanese expatriates living in that country have been ordered to stay indoors as angry protests sparked by the territory disputes have kicked the anti-Japanese sentiment to its highest level in decades.

Last week, Beijing dispatched patrol boats to the five East China Sea islands that are escalating the disagreement between the two Asian heavyweights.

Beijing sent the boats to the Senkaku island region as an angry response to Tokyo’s plan to buy the mostly barren islands.

Over the weekend, well-known Japanese firms such as Honda and Toyota were the focus of demonstrations and violent attacks. And a flotilla of around 1,000 Chinese fishing boats was sailing for the islands.

All of this was prompted by Japan’s announced plan to purchase the five afore-mentioned islands from their private owners.

Chinese Foreign Ministry spokesman Hong Lei said the government would protect Japanese firms and citizens and called for protesters to obey the law.

“The gravely destructive consequences of Japan’s illegal purchase of the … islands are steadily emerging, and the responsibility for this should be born by Japan,” Chinese Foreign Ministry spokesman Hong Lei told reporters at a daily news briefing.

This follows last week’s warning by China’s Foreign Ministry that “if Japan insists on going its own way, it will bear all the serious consequences that follow.”

Although the hottest part of this dispute currently centers upon China and Japan – which generated two-way trade of $345 billion last year – many more Pacific-Region nations are involved.

The Story Behind the Brewing Conflict

The Senkaku islands (known as the Diaoyu islands by China), have been claimed by Japan since 1895. They were taken over by the United States after World War II, and were turned over to Japan in 1972. They are also claimed by Taiwan and Mainland China.

This is just one of several disagreements involving a number of countries over disputed territories in the China Sea.

The Senkaku dispute is focused on the East China Sea.

But the bigger disputes are in the South China Sea.

Those disputes are escalating.

And they’re also confusing – so consider this your program to help you keep the players straight as this news story evolves.

In an area known as the “cow’s tongue,” here are the players – and their disputes.

There’s the Scarborough Shoal, which is claimed by China, and the Philippines and Taiwan.

There’s also the Pratas Islands, claimed by China and Taiwan.

The Paracel Islands are claimed by China, Taiwan and Vietnam.

The Macclesfield Bank is claimed by China, Taiwan, Vietnam and the Philippines.

And the Spratly Islands are claimed by China, Taiwan, Vietnam, Malaysia, the Philippines and Brunei, a tiny “sultanate.”

This region is flush with resources – as much as 213 billion barrels of oil (10 times the proven U.S. reserves) and 900 trillion cubic feet of natural gas (equal to all the reserves held by Qatar). There’s also a rich fishing ground that employs thousands and feeds millions.

Obviously, China wants (actually needs) those resources to continue along its torrid growth path. But Beijing believes that China’s emergence as the dominant player in the region means it should have control over the islands, the seaways that surround them, and the rich resources they would bring.

Beijing has rebuffed all attempts to have this morass of claims negotiated in a “multilateral” setting – like with the Association of Southeast Asian Nations (ASEAN). Instead, it wants any negotiations to take place “bilaterally” – between it and one other nation at a time.

And China has become quite irritated with U.S. efforts to bring about a multilateral negotiation – an effort that U.S. Secretary of State Hillary R. Clinton has been working to pull off.

So as Beijing stiff-arms all attempts to broker an agreement, it’s also elevated its aggressiveness to a whole new level.

This summer, China effectively cordoned off the horseshoe-shaped Scarborough lagoon, making it off-limits to fisherman from the Philippines, just 120 miles away.(In early July, Philippines President Benigno Aquino said he was thinking of asking the United States to deploy spy planes in the South China Sea to help monitor the disputed waters.)

In late July, China also established a prefecture-level city called “Sansha” on Woody (Yongxing) Island, the largest in the Paracel and Spratly group, through which it will “administer” those islands, as well as the Macclesfield Bank.

Soon after, Beijing said it would install a military garrison on that island. Some observers said it was largely an administrative move – more symbolic than substantive – and dismissed any arguments to the contrary as “saber-rattling.”

The Rising Dragon

But American Enterprise Institute (AEI) Scholar Michael Auslin says these were serious, aggressive and carefully considered moves by Beijing.

In fact, in an op-ed piece for The Wall Street Journal, Auslin said that “by unilaterally creating a city government and installing a military garrison on a disputed island in the South China Sea, Beijing has further inflamed tensions and made a negotiated settlement of the Asia-Pacific’s territorial disputes less likely. The decision to emphasize military measures in this ongoing diplomatic quarrel should worry those who argued that the growth of China’s military power in recent decades was non-threatening and the natural action of a rising power.”

With such high odds for the kind of flare-up that can spook markets, you want to make sure hard assets such as gold and silver, natural-resource commodities, and especially energy-related investments are all part of your holdings. Those are the types of investments that can spike in price when the investors panic.

By keeping your head, you’ll reap a windfall when that happens.

William Patalon
Contributing Editor, Money Morning

Publisher’s Note: This is an edited version of an article that first appeared in Money Morning (USA)

From the Archives…

What the Central Banks Are Doing to Your Money
14-09-2012 – Kris Sayce

Luxury Firm Burberry Highlights the Chinese Slowdown
13-09-2012 – John Stepek

Gold Up, but Gold Stocks Up More
12-09-2012 – Dr. Alex Cowie

The ECB is Only Fooling the Gullible
11-09-2012 – Dan Denning

Why This ‘Ludicrous’ Investment Keeps Going Up
10-09-2012 – Kris Sayce

The Dangerous Standoff in the South China Sea is About to Boil Over

By Central Bank News

By Central Bank News
    The Bank of Japan (BOJ) expanded its asset purchase program by 10 trillion yen to some 80 trillion yen, saying economic growth had leveled off due to a deceleration in the global economy and that it would continue to purchase assets to ensure that financial conditions remain accommodative.
    “The Bank expects that, together with the cumulative effects of earlier policy measures, today’s decision to enhance monetary easing will ensure the return of Japan’s economy to a sustainable growth path with price stability,” the BOJ said in a statement.
    The BOJ held its overnight call rate unchanged at 0-0.1 percent, the level it has been at since December 2008. The bank did not take any specific steps to weaken the strong yen, but noted that “attention should be paid to the effects of financial and foreign exchange market developments on economic activity and prices.”

    The BOJ had been expected to ease policy following the Federal Reserve’s launch of a third program of Quantitative Easing (QE3), which has pushed up the yen agains the U.S. dollar, which hurts exports. Japan’s finance minister has warned markets against pushing up the yen too much.

    Japan’s Gross Domestic Product (GDP) rose at an annual rate of 3.2 percent in the second quarter, up from 2.9 percent in the first, but the BOJ has turned much more pessimistic about growth prospects.
    Last month the BOJ expected Japan’s economy to “recover moderately”, but now it expects the economy to stagnate as “overseas economies have moved somewhat deeper into a deceleration phase” and an earlier fall in oil prices is exerting downward pressure on consumer prices.
    “Against the backdrop of these developments, economic activity is expected to level off more or less and the year-on-year rate of change in the CPI to remain at around 0 percent for the time being,” it said.
    And overcoming deflation and returning to sustainable growth is a critical challenge.
    “Based on this recognition, the Bank has been providing support to strengthen the foundations for economic growth and pursuing powerful monetary easing,” the bank said, adding:
    “It will proceed with the monetary easing in a continuous manner by steadily increasing the amount outstanding of the Asset Purchase Program.”
     Under the expanded asset purchase program, the BOJ said it would purchase about 5 trillion yen of additional Treasury bills and about 5 trillion yen worth of Japanese government bonds (JGBs). The increased purchase will be completed by around the end of 2013, the bank said.
     The BOJ also said it would remove the minimum bidding yield for the purchases of JGBs and corporate bonds – which is currently 0.1 percent – to ensure their smooth purchase.
    www.CentralBankNews.info

USDCHF is facing the resistance of the downward trend line on 4-hour chart, a clear break above the trend line will indicate that a cycle bottom is being formed at 0.9239, and lengthier consolidation of the downtrend from 0.9607 is underway, then further rise to 0.9400 area could be seen. However, as long as the trend line resistance holds, another fall towards 0.9100 area is still possible, and a breakdown below 0.9239 could signal resumption of the downtrend.

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By Central Bank News
    The Central Bank of Nigeria (CBN) held its Monetary Policy Rate (MPR) steady at 12 percent, citing persistently high inflation and promising growth, but expressed concern over the possible inflow of hot money following easing by the U.S. Federal Reserve and the European Central Bank.
    Despite an inflation rate that remains above the central bank’s 10 percent target, CBN said inflationary pressures appeared to be moderating in the third quarter following its decision to raise the Cash Reserve Requirement (CRR) to 12 percent in July to reduce liquidity in the banking system.
    Inflation in August eased to 11.7 percent from 12.8 percent in July due to lower prices of processed food and farm produce, and the bank said inflation for the whole year is likely to be lower than the current forecast of 14.7 percent. 
    “However, core inflation is still high at 14.7 percent in August. The threat of increased inflow of hot money arising from the actions of the US Fed to further stimulate the economy though its QE3 activities and its capital reversal implications were noted,” the CBN said.
    CBN has held its  kept its policy rate unchanged since October 2011.

    The global economy had showed further signs of weakness in the last three months, due to negative spillover effects from the euro area’s financial market fragilities. 
   “Given developments in the global and domestic economy and the financial markets, the Committee noted that the weak global growth indicies called for cautious optimism by policymakers,” CBN said.
    “Recent macroeconomic data indicates that the economy is performing better than forecasts although growth in the first two quarters of 2012 has remained consistently below the corresponding growth rates in 2011,” it added.
    Provisional data show Nigeria’s real Gross Domestic Product expanding by 6.28 percent in the second quarter, up from 6.17 percent in the first quarter, but down from a 7.6 percent growth rate in the second quarter of 2011.
    The growth forecast for fiscal 2012 has been revised up to 6.77 percent from 6.50 percent previously, but the bank was still concerned that this is lower than the 7.45 percent in 2011.
    The central bank took note of higher crude oil prices, saying this could be due to the recent easing measures by the Federal Reserve and ECB, highlighting “the possible increase in carry trade and the risk of a bubble in the domestic capital market.”
    “Overall, the MPC believes that the current rise in crude oil prices and the tight monetary policy regime presented an opportunity for building reserve buffers in the light of the uncertainties surrounding the global economy,” CBN said.
    www.CentralBankNews.info
    

R.N. Elliott’s other major insight: News events do not impact market price patterns
September, 2012

By Elliott Wave International

A lot of people know that R.N. Elliott discovered the Wave Principle.

Yet few are aware that Elliott made another observation during his years of studying the stock market.

As the Wave Principle forecasts the different phases or segments of a cycle, the experienced student will find that current news or happenings, or even decrees or acts of government, seem to have but little effect, if any, upon the course of the cycle. It is true that sometimes unexpected news or sudden events, particularly those of a highly emotional nature, may extend or curtail the length of travel between corrections, but the number of waves or underlying rhythmic regularity of the market remains constant [emphasis added].

R.N. Elliott, R.N. Elliott’s Masterworks, pp. 158-159

What a stunning insight: Even major news does not alter the market’s main wave pattern! This seems to defy logic because most people believe that news and events are the very things that drive the stock market.

Yet, it was barely 100 years ago when most people believed that only birds could fly.

And even then, most people would never believe that a steel-encased object weighing nearly a million pounds (Boeing’s 747) could get airborne and fly at 500 miles per hour.

Yet, natural law is what governs airplane flight, the buoyancy of metal ships, the incandescent light bulb, radio transmission over the air and, yes, the Wave Principle.

Natural law is inherent in the pattern of stock prices. That’s why outside events do not materially influence the pattern’s behavior.

This is particularly relevant today: Recent news covered Apple’s new iPhone, which is expected to boost U.S. GDP; the European Central Bank’s pledge to make “unlimited bond purchases”; Germany’s Supreme Court approving the eurozone’s permanent bailout facility; and the expected Federal Reserve announcement on whether to initiate more quantitative easing.

None of this will have an effect on the market’s overall price pattern.

Charts of the Dow Industrials reveal that changes in interest rates, the deficit, the price of oil, terrorist attacks, Fed announcements and even wars do not change the market’s main trend.

How about government bailouts of troubled financial institutions during the 2007-2009 financial crisis?

Please try to pick out on the chart below when those bailouts occurred.

According to the exogenous-cause model, these historic pledges and bailouts should have had immediate results. … According to the economists’ beliefs, the only rational place for them to have taken place would be at the bottom of the market. The minute the authorities began flooding the market with liquidity is the minute it should have turned up.

[The chart below] shows that in fact these actions took place in the early portion of the biggest stock market decline in 76 years. These actions did not push stock prices back up. The market finally bottomed months later, at a time when nothing along these lines happened.

The Elliott Wave Theorist, March 2010

Now, look at this labeled chart to see how you did.

In the 70 years since R.N. Elliott observed that news does not alter the market’s wave pattern, his insight has been proven time and again.

It’s wise to keep your market eye on what really matters: the Wave Principle.

R.N. Elliott drew a chart by hand 70 years ago and the final label is the year 2012! Amazingly, today’s wave analysis confirms that his decades-ago analysis may be precisely on target.

The herd keeps looking to irrelevant outside events to aid their investing decisions. It’s time to break away from the herd and start investing independently. EWI is here to help …

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Austerity is the magic word these days, and it has an interesting effect on world markets. When a country like Greece talks about austerity, it’s important to understand what this means not only for the country but for currency markets. Since forex investors want to profit from changes in currency prices, this kind of information is invaluable.

What is Austerity?

Austerity is the economic theory that states that government spending can be reduced, and taxes increased, to balance a budget. This kind of measure relies on the idea of quickly raising revenues for a government so that it can meet its most pressing liabilities while cutting unnecessary expenses and government waste. It is typical to see development projects, welfare, and other social programs cut. Increased taxes come from a hike in income taxes, port and airport fees, train and bus fare increases are also common.

By cutting government costs and increasing revenue, a government should be able to shore up its books and calm investors’ fears about bond yields. This, in turn, should help the currency markets determine how to invest.

An Example of Austerity

A few examples of austerity exist to demonstrate the real-world effects of such measures. The most recent example is Greece. The country’s first austerity package was in February of 2010. The government experienced a freeze of all government salaries, a 10 percent cut in bonuses, and overtime cuts. A second austerity package was rolled out in March of the same year. Under threats of bankruptcy, Greece passed the Economy Protection Bill. It was expected to save the country €4.8 billion. The cuts included 30 percent cuts in Christmas, Easter, and leave of absence bonuses, an additional 12 percent cut in bonuses, and a 7 percent cut in salaries of public and private employees.

The Greek government also raised its VAT from 4.5 to 5 percent, 9 to 10 percent, and from 19 to 21 percent. It also increased its tax on petrol to 15 percent and increased its existing tax on imported cars to a maximum of 30 percent. Greece went through another austerity package in May of 2010 and another in June of 2011. In 2012 it underwent more austerity measures.

The Dark Side of Austerity

For the most part, austerity has failed to balance Greece’s budget. The reason for this is simple to understand. While currency markets generally favor lower government spending and stable economies, they also favor lower regulation. Higher taxes and more regulation brings with it greater political instability. This often leads to economic instability even when the government is collecting additional revenues.

Increasing taxes often discourages workers and businesses from making more money than what is necessary to run a business or a household. Even if businesses do continue to produce, the simple fact is that tax money takes away from a business’s ability to expand and grow. Instead of reinvesting money into the company, it pays higher taxes to the government, who then uses it to pay down national debt. However, the effect of increased taxes slows economic growth and, eventually, kills tax revenues as a result.

Currency markets might be temporarily wooed by the promises of a government shoring up its books, but when the reality of political and economic stability becomes clear, markets punish the offending government by betting against its currency.

Conclusion

For all of the promises of austerity, the reality of the currency markets is telling the story of a weakening euro. If European countries cannot dig themselves out of the debt crisis soon, expect the euro to continue to weaken against every other major currency. Spain, Greece, and Italy are all threats to the eurozone and it doesn’t look like the European Central Bank has anything up its sleeve that will magically fix the situation.

Author Bio:

Guest post contributed by Stacy Pruitt, a freelance forex strategy and finance writer. Stacy writes about advanced trading and forex indicators. Click here to learn more about forex trading.

By Chris Vermeulen, GoldAndOilGuy.com

Crude oil prices hit a four-month high this week on the back of rising tensions in the Middle East and North Africa and the unfortunate murder of the U.S. ambassador to Libya. Added impetus on the upside was given to oil by the announcement of more money printing (QE3) by the Federal Reserve which said it would launch an open-ended  commitment to purchase $40 billion of mortgage-backed securities monthly.

The global benchmark for oil, Brent crude oil, jumped to about $117 a barrel. It maintained its roughly $18 premium to U.S.-based WTI crude oil which was trading at $100 a barrel on a couple days ago. Non-futures investors can easily participate in the oil market through the use of exchange traded funds. The ETF which tracks Brent crude oil futures is the United States Brent Oil Fund (NYSE: BNO) and the ETF which tracks WTI crude oil futures is the United States Oil Fund (NYSE: USO).

The real story behind the story in the oil market, however, is the ongoing Arab Spring which is sweeping throughout the Middle East and North Africa, pushing aside some regimes and threatening others. The countries whose governments, such as Saudi Arabia and the other Gulf states, feel threatened by popular uprisings are where investors should put their focus. Saudi Arabia in particular is key because it accounts for more three-quarters of the world’s spare oil production capacity. So it is very important to note that the kingdom is no longer a price ‘dove’ in OPEC as it has been for decades. It has joined Iran, Venezuela and others in being a price ‘hawk’.

The reason behind the change in attitude is simple…Arab Spring.

Like its neighbors in the Gulf region, Saudi Arabia has gone on a public spending spree to appease its restless citizens. It has sharply increased outlays on subsidies for items like food, fuel and housing in an attempt to appease its citizens. In 2011, the kingdom raised its domestic spending by $129 billion – the equivalent of more than half its oil revenues. Much of this increased spending will go toward upgrading the country’s infrastructure.

Take electricity, for example. Saudi Arabia has revealed plans to spend more than $100 billion dollars on power plants and distribution networks by 2020. The kingdom has also set a goal to electrify 500,000 new homes that are being built in an attempt to mollify political unrest among its population of 27 million people. This spending spree led the International Monetary Fund and other analysts to estimate that the kingdom and other Gulf countries need oil to be selling between $80 and $85 a barrel in order for the governments to balance their budgets.

This is up, in Saudi Arabia’s case, from a mere $25 a barrel a few short years ago!

Unfortunately for oil consumers, this trend looks set to continue in years ahead. According to the Institute of International Finance, by 2015 the Saudi government will only be able to balance its budget if oil prices are at $115 a barrel if current spending trends remain in place.

So in effect, with the Arab Spring forcing governments to spend more on their citizens, it has put a floor under the price of oil. OPEC will do everything in its power to keep the price above the budget breakeven points for governments in the Gulf region.

Keep up to speed on the oil and precious metals markets with my free newsletter: www.GoldAndOilGuy.com by Chris Vermeulen

By TraderVox.com

Tradervox.com (Dublin) – The loonie has declined for the second day against the US counterpart as crude oil prices tumbled to three months low and stocks fell as concerns of economic growth dampened the demand for higher yielding assets. The Canadian dollar dropped as Canada’s existing home sales dipped the most in over two years in August and as US manufacturing measure showed contraction. The loonie dropped as European Finance Ministers met to discuss measures to quell the debt crisis in the region. A report from Canada is expected to show that inflation rate is still at 1.3 percent on Sept 21, when it will be released.

Blake Jespersen, who is the Managing Director of Foreign Exchange at the Bank of Montreal in Toronto, said that the loonie fell from the selling pressure on oil during the after session yesterday. He noted that there is always a correlation between the loonie and crude oil, hence when the crude oil falls traders expects the currency to fall also. The Canadian bonds also declined with ten-year benchmark dropping by 0.02 percentage point to settle at 1.95 percent. The crude-oil futures declined by 2.4 percent in New York after they plunged 4.4 percent during the day, dropping more than $3 in less than a minute as October contracts neared expiration.

Canadian home sales dropped by 5.8 percent in August to 35,869 from July’s figure of 38,063 according to a Canadian Real Estate Association report. Annualized home sales were down 8.9 percent from the August last year. The report also showed that the price of existing homes increased by 1.1 percent from July and edged up by 0.3 percent within a year.

The Canadian dollar has declined against its US counterpart by 0.4 percent to exchange at 97.48 cents per dollar. The currency has however gained by 4.8 percent this year, reaching its strongest of 96.33 on September 14.

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