Month: October 2012

By Central Bank News

By MoneyMorning.com.au

I have a list pinned above my desk of things I want to write about when I get around to it. I added “coming hyperinflation in Iran” to the list in capital letters. Sadly, the market has beaten me to it.

The collapse of the Iranian rial hit the mainstream news. It has been falling since the US and the EU imposed sanctions in 2010 but in the past few weeks that fall has accelerated and the usual side effects of rampant inflation have been reported.

Consumers are stockpiling food; suppliers are holding back inventories to keep ahead of price rises; high value items are quoted in dollars; and angry citizens are protesting in the streets.

A few weeks ago this was just very high inflation. Now, according to Professor Steven Hanke of John Hopkins University, it is officially hyperinflation, the accepted definition for which is prices rising at more than 50% a month. In Iran, says Hanke, prices are rising at about 69% a month.

Forty Seven Hyperinflations Since 1944

Notwithstanding the horrors this is causing in Iran, it must be extremely irritating for Hanke. Why? Because in August he released a paper with his colleague Nicholas Krus called World Hyperinflations. It has been three years in the making and lists 56 incidents of hyperinflation since 1795 (France). Had they left it a few more weeks there would have been 57.

The paper is worth reading purely for historical interest. But it is also relevant now, because while we tend to think of hyperinflation as an extreme event, it is actually fairly common. 47 of the 57 (I’m adding Iran) occurrences have happened since 1944.

There’s clearly been a bit of border shifting, but nonetheless this suggests that over 20% of the countries in existence today have suffered hyperinflation relatively recently.

A good many others will have seen prices rising at rates we would consider shocking but do not quite qualify to for Henke’s list (remember, prices could be rising at 49% a month and it wouldn’t cut the mustard).

Add that to the reminder from Iran that inflation comes first slowly and then very fast, and you may already be wondering about the implications of quantitative easing (QE) in the West – and the growing suspicion that today’s money printing will be tomorrow’s inflation.

I’m not suggesting that hyperinflation is around the corner for the West. Most economists argue, rightly, that central banks are only responsible for a small percentage of most countries’ money creation.

The rest comes via credit creation by our commercial banks and at the moment these are mostly contracting rather than expanding lending. That means overall money supply is barely expanding fast enough to prevent deflation, let alone create inflation.

One Asset to Buy Just in Case

At the same time, stable countries with liberal and diverse political institutions should be capable of preventing monetary crises. But it is worth remembering the message that ‘QE infinity’ (the limitless QE pursued by the Fed) and near-zero interest rates are sending you.

They tell you your cash is all but worthless. It doesn’t deserve a real return and it has so little intrinsic value it can be created in vast volumes at the touch of a button. The point to keep in mind is that there are two variables at work when it comes to monetary inflation.

The first is the supply of money. The more money, the more likely prices will rise. The second is the speed at which money moves around the economy.

This is the bit to watch. It can rise for two reasons. The first is rising confidence – people think things are improving fast and start to borrow, spend and invest in response. Fat chance of that right now. The second is falling confidence.

People look at the money in their hands and wonder if it will be worth as much tomorrow as it is today – if it is an effective way to store the fruits of their past labour (that’s all money is, by the way, a store of effort). They think it might not be and start buying hard goods. Money moves faster; demand and prices rise.

At the moment the inflation bias message of ‘QE infinity’ is one that only those at the top of our financial pyramid are really hearing; hence their frantic efforts to exchange cash for something, anything, with a real yield.

The message might filter down before long, giving us, eventually, more of a currency crisis than we already have and high inflation. Or it might not. But surely the mere possibility is worth hedging against – with gold, which hit a year high.

If you don’t have a small holding, you might want to look at Hanke’s paper and, while marvelling at the fact that prices doubled every 15 hours in 1945 Hungary, wonder if you shouldn’t.

Merryn Somerset Webb
Contributing Editor, Money Morning

Publisher’s Note: This article originally appeared in MoneyWeek

From the Archives…

Beer and Tax in Retirement
5-10-2012 – Nick Hubble

Possibly the Most Important Thing You Will Ever Read in Money Morning
4-10-2012 – Nick Hubble

What Central Bank Money Printing Means for Small-Cap Stocks
3-10-2012 – Kris Sayce

This is What a Million Dollars of Liquid Gold Looks Like
2-10-2012 – Dr. Alex Cowie

Japan’s Energy Crisis and the Take Away for Aussie Investors
1-10-2012 – Dan Denning

Hyperinflation – Where Your Cash is all but Worthless

By MoneyMorning.com.au

Matters are beginning to come to a head in Iran.

So far, the impact of Western sanctions – an EU embargo of oil purchases, European and U.S. restrictions on Tehran’s access to international banking, and a new move to intensify the trading restrictions even further – have had a devastating impact.

Iran’s currency, the rial, has collapsed.

Riots have begun. Its government has rapidly lost its authority. And the Iranian economy is unraveling.

This has all the markings of a full-blown crisis.

It will have an uncertain impact on the region and the wider oil market. This could get very unpredictable and very nasty.

Sanctions Paralyse Iran’s Economy

Indications are emerging from several quarters that the current sanctions regime has dealt a major blow to the Iranian currency. The developments are prompting foreign initiatives to parlayse the regime in Tehran.

‘The current perception is that the sanctions may have to be increased before Tehran will show clear signs of relenting,’ a source in the EU Energy Commissioner’s office told me on October 6.

Still, it remains too early to determine how far EU members are prepared to go in strengthening anti-trade restrictions. Nonetheless, several policy sources in Brussels, London, and Paris, confirmed last week that a rising consensus believes something additional is warranted.

A complete EU embargo of Iranian oil imports took effect on July 1. That action had widely been expected to put upward pressure on Brent prices in London. While some of that pressure has materialized, continuing demand concerns from the ongoing credit crisis and sluggish employment data have dampened the impact.

Still, a widening of the rift with Iran, coupled with the deteriorating situation on the Syrian-Turkish border, is certain to bring the problem to centre stage.

Should Brussels and Washington orchestrate a new stiffening round of sanctions that expands beyond limitations on oil trade with Iran, a far more difficult environment for Tehran would emerge.

It would comprise nothing less than an attempt to collapse the domestic Iranian economy, generate an escalation in internal popular unrest, and oblige the religious leadership to step in and delay the nuclear program.

There is now no doubt that the financial collapse has intensified. By the end of the trading week on October 5, the Iranian rial lost almost a quarter of its value. The plunge was due almost exclusively to the Western sanctions.

The list of moves against Iranian has been significant. It includes limitations on oil exports, including those against shippers, insurance underwriters, and financing entities.

Next, Iranian access to international banking has been limited. And more recently, the U.S. added sanctions against Bank Markazi (the Iranian Central Bank) and its network. These events have had two overarching results.

And neither has been positive for Tehran.

First, sanctions have made it much harder to raise capital from foreign trade and have hurt Iran’s foreign currency reserves. The second has obliged Iranian reliance on ad hoc and indirect methods of financing trade and repatriating proceeds. Both have markedly increased the cost of trade and dramatically lowered returns.

Iran’s Currency is in Sharp Decline

The overall impact is now clearly displayed in the currency free fall, a result that the Iranian leadership can no longer hide. By October 6, the rial collapse had accentuated. It fell 9% against the dollar on the previous day alone, exceeding the record low of 37,000 to the dollar set less than one week earlier.

Even that estimate, however, may not tell the full story. Traders say that the exchange rate had actually declined even more, approaching 40,000 rials to the dollar.

‘The currency has lost about a third of its value since Monday of last week, when the government launched an “exchange centre” that was designed to stabilize the rial by supplying dollars to importers, but appears to have backfired,’ a source had earlier reported on October 2.

Iranian President Mahmoud Ahmadinejad has often referred to the dollar as ‘a worthless piece of paper,’ but must now contend with his own currency having dropped at least 80% in value against the dollar since earlier this year.

Acquiring reliable base figures from which to determine the real market fall of the currency has been difficult. According to the Iranian website Mesghal, generally regarded as a relatively objective source, the rial traded at 24,600 against the dollar on October 1.

What seems beyond question, however, is the observation that the currency’s collapse is indicating that the sanctions are affecting Iran’s ability to earn foreign currency, and that its hard currency reserves are dwindling.

To emphasize the point, Iran’s deputy Majlis (Parliament) Speaker Mohammad-Reza Bahonar announced that national crude oil exports have dropped to around one million barrels per day during the first half of Iranian year (starting on March 19) on average.

This figure in June and July fell to around 800,000 barrels per day. Iran’s oil export volume in 2011 was 2.3 million barrels per day, 18% of which was sold to European countries.

The announced total of 800,000 was lower than the International Energy Agency (IEA) estimate of about one million barrels, made only a few days earlier.

Iranian official statements are prone to discount the effect of Western sanctions on the oil industry. The Oil Ministry still maintained that crude production for the remainder of the year would hold steady.

But Bahonar was noticeably taking a different, and unusually frank, route in his comments this time around, especially following a higher (though still dramatically reduced year-on-year) figure already public from the IEA.

The West Plans a New Round of Sanctions on Iran

Tehran on October 6 indicated it might be prepared to renew talks, but the trial balloon went nowhere. ‘Been there, done that,’ was the way one veteran of the previous fruitless “six plus Iran” talks put it.

The British, French, and German governments are pressing for new measures that will be agreed upon by the EU, possibly by the foreign ministers’ meeting on October 15.

To emphasize their determination, the foreign ministers of France, Germany, and the UK issued a joint communiqué requesting their EU counterparts to agree on new measures against Tehran.

‘We must let Iran know that we have not exhausted our options,’ Laurent Fabius, Guido Westerwelle, and William Hague wrote in the letter, a copy of which was seen on October 6.

Versions of what will be proposed vary, depending on the source.

However, the following appears to be the substance of the proposal coming from London. British diplomats have indicated that the three countries were discussing new sanctions ahead of the October 15 ministers’ session to include additional financial, trade, and energy sanctions.

These would include heightened measures to ban transactions with Iranian banks to include exchanges beyond either those directly with the central bank network of subsidiaries and surrogates or those related only to oil/gas sales and purchases.

Primary targets here are expected to be private banking avenues (similar to the alleged $250 billion plus channel using London’s Standard Chartered Bank) and “gray area” transactions on the fringe of the Dubai Exchange that still require bank client activities through European banking houses.

On the trade side, the three countries will push to restrict an expanding category of EU trade with Iran. This would intensify the difficulty of obtaining equipment and material that could constitute dual usage, thereby impairing the ongoing nuclear development program.

Yet there are increasing signals both London and Paris (and perhaps Berlin too) are now viewing an increasing trade ban as a more concerted attempt to use domestic economic instability as a way to destabilize the existing leadership structure.

On the energy front, the proposed approach, labeled ‘a significant new departure’ by one British source, is intended to ensure that Iran cannot bypass the oil embargo and continue obtaining finance that could be directed to the nuclear program.

As the opposition grows in the legislature, divisions were beginning to be seen publically among the ministers over the best course of action to combat the currency crisis.

On October 2, Minister of Industry, Mines, and Trade Mehdi Ghazanfari called on security forces to intervene in the open foreign exchange market and control foreign exchange market fluctuations.

Ghazanfari said that the currency trading price fluctuations are not just an economic matter, but a cultural, security, and politic issue.

Iran Takes Defensive Action

While attention is currently focused on the recent sharp drop in the rial’s value, the problem has been recurring for over a year.

To combat it, Tehran established a Forex Trade Center (FTC) on September 23 to prevent a continuing drop against foreign currencies, providing dollars to importers of essential foodstuffs, medicine, and fuel at a fixed price.

The official version puts the rate at 2% below the open market’s figures. However, sources have confirmed that market irregularities have forced regulators to exceed that level, straining Bank Markazi hard currency reserves and pressuring the rial even further.

In less than the first week of FTC operations, the currency’s effective market rate declined by more than 30 %.

Ghazanfari said that security forces should have a more direct role in controlling the open forex market, all but acknowledging the failure of the FTC and the dwindling options of the government.

Earlier, the chief of the Iranian Revolutionary Guard Corps (IRGC) Major General Mohammad Ali Jafari said that the IRGC would intervene in the open forex market to battle against illegal profiteers.

This was followed in quick succession by a complete disintegration in the administration’s ability to control the currency situation.

Late on October 2, Tehran moved to suspend all gold and foreign exchange trading as a result of uncontrollable pricing fluctuations, Iranian media outlets quoted head of the Gold and Jewelry Union Mohammad Kashti-Aray as saying.

Punctuating the volatility, Iran’s Majanex website, which covers gold and foreign exchange prices, has gradually eliminated the price of the dollar since the evening of October 1, explaining that it has not been able to get accurate and reliable information about the dollar exchange rate.

In its contrast to the value of gold, on the other hand, the rial is virtually disappearing. Where it can still be obtained, a single Bahar Azadi (a gold coin minted and sold by Bank Markazi) was going for at least 10,350,000 rials on October 6, up from 10,250,000 only one day earlier.

We are now rapidly moving into a very tense crisis environment.

Dr. Kent Moors
Contributing Editor, Money Morning

Publisher’s Note: This article originally appeared in Oil & Energy Investor

From the Archives…

Beer and Tax in Retirement
5-10-2012 – Nick Hubble

Possibly the Most Important Thing You Will Ever Read in Money Morning
4-10-2012 – Nick Hubble

What Central Bank Money Printing Means for Small-Cap Stocks
3-10-2012 – Kris Sayce

This is What a Million Dollars of Liquid Gold Looks Like
2-10-2012 – Dr. Alex Cowie

Japan’s Energy Crisis and the Take Away for Aussie Investors
1-10-2012 – Dan Denning

Iran’s Currency Collapses

AUDUSD remains in downtrend from 1.0624, the price action from 1.0181 is treated as consolidation of the downtrend. Range trading between 1.0149 and 1.0280 would likely be seen in a couple of days. Key resistance is at the downward trend line on 4-hour chart, as long as the trend line resistance holds, we’d expect downtrend to resume, and one more fall to 1.0000-1.0100 area to complete the downward movement is possible, only a clear break above the trend line resistance could signal completion of the downtrend.

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By OilPrice.com

Opposition leaders in Canada suggested a string of cyber security threats to domestic companies might be the work of Chinese hackers. Twice last week, the Canadian government confirmed two separate companies -– both in the energy sector — were the target of cyber-attacks. In the United States, meanwhile, the Obama administration said national security interests trumped energy concerns and blocked a Chinese company from constructing wind turbines near a Navy installation in Oregon. While the Chinese military isn’t the overt threat like the Soviet Union was, Beijing’s rise as an economic power has seemingly sparked a war of economies.

The Canadian government last week confirmed that two energy companies were the target of a cyber-attack believed to have originated from China. Though Beijing denied it was responsible for the attacks, opposition leaders in Canada said there was cause for concern given the pending Chinese takeover of Canadian energy company Nexen.

“Cyber security is something we have to pay attention to and that … includes how deals are set up and trade deals are set up and acquisitions are made,” said legislator Paul Dewar, the foreign affairs spokesman for the opposition New Democratic Party.

Nexen in August backed a $15-billion takeover bid by China National Offshore Oil Corp. Canadian Prime Minister Stephen Harper has lobbied for Chinese investments in his country’s vast oil and gas riches. Those ambitions could be derailed, however, given political divisions in Canada and Dewar’s comments may further exacerbate tensions following a Chinese leader’s statement that Beijing can’t do business in Canada if deals like Nexen become politicized.

Meanwhile, the U.S. government last week blocked Ralls Corp from moving forward with plans to install wind turbines near or within restricted air space at a naval weapons training facility in the western state of Oregon. President George H.W. Bush was the last U.S. president to declare such action when, in 1990, he blocked a Chinese aerospace technology company from buying out a manufacturing company in the United States. Ralls has four wind farm projects in various stages of development and said it would take the matter before the courts. Despite U.S. President Barack Obama’s “all-of-the-above” domestic energy policy, the administration said the move to build wind installations so close to a military site was a threat to national security interests.

Beijing on Monday celebrated the 63rd anniversary of the founding of the People’s Republic of China. An opinion piece in China’s official Xinhua News Agency last week said the country is “confidently grasping opportunities” given the pace of economic growth since 1949. As economies expand, they must do so beyond their borders as domestic markets become saturated. With the Cold War over, it’s unlikely the geopolitical fears that dominated the international arena in the 1940s would redevelop in the early 21st century. But as low-grade conflict becomes the norm, so too may a different kind of global warfare.

U.S. Navy Rear Adm. Samuel Cox last week accusing Beijing of trying to crack into the Pentagon’s computer network.

“Their level of effort against the Department of Defense is constant,” he said.

Source: http://oilprice.com/Energy/Energy-General/Energy-New-Front-in-Economic-Warfare.html

By. Daniel J. Graeber of Oilprice.com

By The Sizemore Letter

Brain damage can create superior investment results, at least according to James O’Shaughnessy in his classic What Works on Wall Street.

O’Shaughnessy refers to a study by Baba Shiv of Stanford University that found that people that had suffered damage to the amygdala or the insula regions of their brains made better investment decisions and had higher returns than those with normal, healthy brains (see the 2005 Wall Street Journal article on the same study).

As it would turn out, those two brain regions happen to control how we perceive risk.  Shiv found that his healthy test subjects allowed their prior losses to cloud their judgment, causing them to be excessively risk averse.  Meanwhile, the brain-damaged investors had no such inhibitions and approached each new investment opportunity without being rattled by prior losses.

So, what conclusions are we to reach from this?  Were successful contrarian investors like Warren Buffett dropped on their heads as babies?  Should we lobotomize all money managers to improve their performance?

Ah, if it were only that simple.  As O’Shaughnessy writes, “our brains are wired the way they are for very good reasons… Indeed brain damaged patients like those in Shiv’s study often went bankrupt because a lack of emotional judgment made them too risk-seeking and susceptible to scams.”

Science has not yet created a “switch” to flip that will turn us into perfectly rational investors.  Alas, the burden of emotional control lies with us.  When you feel your heart racing, either in euphoric anticipation of profit or paralyzing fear of loss, you have to step back and consider the numbers dispassionately.

With all of this said, what are investors to make of today’s market?

Yes, the market has had a nice run of late, and the S&P 500 is close to hitting its old high. Yet equity mutual funds bled over $19 billion in redemptions in August, the last month for which data is available.  This was the sixth month in a row in which investors pulled their money out, and the 14^th month out of the last 16 (see “Mutual Fund Outflow Soared in August”).

Meanwhile, bond funds have seen net inflows for the past 12 consecutive months.  Yes, the same bond funds that are buying 10-year Treasuries at 1.6% yields—well below the rate of inflation.

After the 2008 meltdown, the 2010 Flash Crash, and the past two years of “on again / off again” sovereign debt crisis in Europe, investors have dug themselves into a bunker.  Having been burned, they are reluctant to touch that hot stove we know as the stock market again.

For those of us willing to look at the numbers—or perhaps those of us suffering from brain damage—there is ample upside left in this market.  At 14 times earnings, stocks (as measured by the S&P 500) can hardly be considered expensive.  And when compared to bonds yielding significantly less than the rate of inflation, stocks would appear outright cheap.  With prices reasonable and individual investors having already largely fled equities, it’s hard to see the conditions for a sustained bear market.

But even if macro concerns of excessive investor pessimism keep a lid on stock prices in the months ahead, dividend paying stocks offer respectable cash payouts that are close to as safe as bond yields.  According to Standard & Poor’s, the stocks of the S&P 500 currently pay out only 30% of their earnings as dividends.  It is difficult to see widespread dividend cuts coming from such low levels.

This is the focus of Sizemore Capital’s Dividend Growth Portfolio.  At current prices, I believe a portfolio of dividend-paying stocks, REITs, and MLPs with high and rising cash payouts is the most sensible option for most investors.  But then, there might be something wrong with my amygdala.

This article originally appeared on MarketWatch.

Related posts:

• Genetics, the China-Tibet Dispute, and Investment Psychology
• 2011 Year End Investment Outlook and Commentary

By TraderVox.com

Tradervox.com (Dublin) – A Labor Department report released on Friday Octaber 5 showed that companies in the US added more jobs than forecast, diminishing concerns about the US economy which is facing a major fiscal squeeze. The report showed that the US employers added 121,000 jobs against an expectation of 120,000. The previous report had shown that employers added 88,000 workers per month in the second quarter. The report further indicated a significant increase in the total payrolls including government, which rose to an average of 146k a month from the 67k in the second quarter.

Bruce Kasman, who is the Chief Economist in New York at the JPMorgan Chase & Co, noted that the improved momentum in the US hiring is a positive for the economy and the dollar which has weakened in the last quarter. The business climate in US had spurred speculation that companies would reduce hiring as they anticipated a $600B government spending-cut and tax increase in 2013 as the government initiates a fiscal squeeze that has been opposed by the Congressional Budget Office. The CBO warned that US economy would fall into recession if the Congress were to go ahead with the fiscal squeeze.

Kasman also noted that the Labor Department figures suggest that the economy is expanding in accordance with the expected pace of around 2 percent. According to Arne Sorenson, who is the CEO and President of Marriot International Inc, the business outlook for the US and Canada is steady. She projected that the Gross Domestic Product for the US would be at 2 percent for the next year. Other positive indicators include the growing confidence in the automakers as cars and light trucks sell at the fastest pace in four years.

Positive sentiments from Kurt McNeil, the GM’s Vice President of US sales, show growing business confidence in the US. Kurt noted that automakers are being encouraged by the housing sector, reduced unemployment claims, and higher consumer spending and sentiment.

Disclaimer
Tradervox.com is not giving advice nor is qualified or licensed to provide financial advice. You must seek guidance from your personal advisors before acting on this information. While we try to ensure that all of the information provided on this website is kept up-to-date and accurate we accept no responsibility for any use made of the information provided. Opinions expressed at Tradervox.com are those of the individual authors and do not necessarily represent the opinion of Tradervox.com or its management. 

Article provided by TraderVox.com
Tradervox.com is a Forex News Portal that provides real-time news and analysis relating to the Currency Markets.
News and analysis are produced throughout the day by our in-house staff.
Follow us on twitter: www.twitter.com/tradervox

European finance ministers meet in Luxembourg today to discuss Spain’s overhaul effort and closer banking cooperation. The economic crisis in Greece, Portugal and Cyprus is also on the agenda.

The second day of the Luxembourg meeting will be overshadowed by German Chancellor Angela Merkel’s trip to Athens. The visit underscores her shift toward keeping Greece in the euro area, says Senior Strategist  Ib Fredslund Madsen.

Concerning equities The Senior Strategist believes, that markets need more than a good US Jobrapport.

Legal information

Video courtesy of en.jyskebank.tv

By TraderVox.com

Tradervox.com (Dublin) – The 17-nation currency weakened against all of its major trading peers today as speculation of a decline in German industrial production grew prior to the release of the report today. German data is construed to give a clear picture of the situation in Europe, and declining industrial production is an indication of slowing growth in the region. The shared currency dropped against the yen for the first time in 7 days as technical indicators showed that the euro advance was too fast. The decline also came as European Finance Ministers prepare to meet today and Angela Merkel, the German Chancellor, visits Greece tomorrow for the first time since the debt crisis erupted.

According to Thomas Averill, a Sydney-based Managing Director at Rochford Capital, there is a high probability that the next three to four months will produce bad news from Europe since economic fundamentals are lackluster. He predicted that the euro may drop to $1.20 by the end of the year. The 14-day relative strength index for the euro rose to 68 by the end of last week, nearing the 70 level which indicates the currency is overrated. A German industrial production report expected to be released today is projected to show a decline of 0.6 percent in August.

The euro-zone finance ministers are meeting today where they are projected to discuss situation in Greece as it seeks to authorize the next bailout payment for the country. German Chancellor Angela Merkel is expected to show strong support for Greece’s participation in the monetary union. Ray Atrill, a Foreign Exchange Strategist in Sydney at National Australia Bank Ltd., said that Merkel’s support for Greece will be seen as positive for the euro and may push the euro higher against some major peers.

The euro has dropped by 0.5 percent against the dollar to trade at $1.2977 today in London. The currency dropped by 0.6 percent against the yen to trade at 101.96 yen from the 102.80 yen it traded at the close of the week last week. The dollar has weakened by 0.1 percent against the yen to trade at 78.56 yen.

Disclaimer
Tradervox.com is not giving advice nor is qualified or licensed to provide financial advice. You must seek guidance from your personal advisors before acting on this information. While we try to ensure that all of the information provided on this website is kept up-to-date and accurate we accept no responsibility for any use made of the information provided. Opinions expressed at Tradervox.com are those of the individual authors and do not necessarily represent the opinion of Tradervox.com or its management. 

Article provided by TraderVox.com
Tradervox.com is a Forex News Portal that provides real-time news and analysis relating to the Currency Markets.
News and analysis are produced throughout the day by our in-house staff.
Follow us on twitter: www.twitter.com/tradervox