Month: February 2013

London Gold Market Report
from Ben Traynor
BullionVault
Tuesday 19 February 2013, 07:00 EST

WHOLESALE prices for gold bullion  hovered above $1610 an ounce during Tuesday morning’s London session, having ticked higher in Asian trading following losses yesterday, as stock markets also gained, with the US set to reopen following a holiday yesterday.

Gold is still down around 3% on the month however following last week’s drop.

“[Last week’s] bearish close should lead to a sell-off to below the $1600 level unfolding in the weeks to come,” reckons Axel Rudolph, senior technical analyst at Commerzbank.

“Gold broke the support line since May [last week],” adds a note from technical analysts at Societe Generale, “and the key support region of $1630 which was composed of last summer’s congestion…it is therefore set to correct lower.”

Silver meantime held just above $30 an ounce throughout this morning, around 4% down on the month, as commodities and US treasury bond prices were also little changed on the day.

Sales of silver American Eagle coins by the US Mint so far this month have already beaten the total for the whole of last February. Gold American Eagle sales for this month meantime are more than double those of the whole of February 2012.

Over in India, the world’s biggest gold buying nation, dealers reported light demand for gold Tuesday, as the Rupee failed to recover last week’s losses against the Dollar.

Last Friday, the Securities and Exchange Board of India (Sebi) announced that gold exchange traded funds can now invest up to 20% of their assets in gold deposit schemes run by banks, on which the banks would pay them a rate of return.

“Gold certificates issued by banks in respect of investments made by gold ETFs in [Gold Deposit Schemes] shall be held by the mutual funds only in dematerialized form,” said a statement from Sebi.

Encouraging people to invest in ‘dematerialized’ gold rather than own bullion itself is one of the strategies discussed in a Reserve Bank of India report published earlier this month, which looks at ways of reducing the amount of gold India imports.

Over in Vietnam, owners of small amounts of gold could be forced to sell their metal at a discount following a recent decree by that country’s central bank, according to local press reports Tuesday.

The State Bank of Vietnam has said only one tael (approx. 1.2 troy ounces) bars produced by the Saigon Jewelry Co. can be bought and sold. In 2011, the SBV announced it had “administratively acquired” SJC. The SBV later announced SJC as the producer of the national gold brand, while also drafting rules on eligibility that excluded many competitors.

In Tehran meantime, a spokesman for Iran’s foreign ministry has criticized proposals to ease sanctions on dealing in gold with Iran in return for the country shutting down its Fordow nuclear plant, Reuters reports.

“Lately they have said ‘Shut down Fordow, stop enrichment [of uranium], and we will allow gold transactions’,” Ramin Mehmanparast said Monday.

“They want to take away the rights of a nation in exchange for allowing trade in gold.”

Last year saw Iran become the number one destination for Turkish gold exports, in what came to be dubbed a “gold-for-gas” trade. Bullion dealers elsewhere in the Middle East however have begun to avoid gold bars produced in Turkey amid fears that dealing such bars may be part of efforts to get round US sanctions.

Earlier this month, Turkey’s economy minister said his country “is not bound by restrictions imposed by others”

Here in Europe, economic sentiment has improved in both Germany and the Eurozone as a whole this month, according to ZEW survey data published this morning.

“We enter 2013 in a more stable financial environment than in recent years,” European Central Bank president Mario Draghi told the European Parliament yesterday.

Draghi added that recent talk of currency wars is “really excessive”.

“Most of the exchange rate movements that we have seen were not explicitly targeted, they were the result of domestic macroeconomic policies meant to boost the economy,” he said.

Ben Traynor
BullionVault

Gold value calculator   |   Buy gold online at live prices

Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK’s longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics. Ben can be found on Google+

(c) BullionVault 2013

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

By www.CentralBankNews.info

By MoneyMorning.com.au

There’s been plenty of celestial action in the last few days.

An asteroid, 2012 DA14, missed the earth by a whisker on Saturday morning.

When I say whisker, it missed us by just 27,000 kilometres. But for context, the moon is 384,000 km away, so the asteroid was pretty close. If it had hit planet earth it would have wiped out everything for at least a few hundred kilometres.

And just when all the telescopes were pointed that way, another asteroid snuck up on us from the other direction. It burnt through the Russian skies, injuring 1,000 people as its sonic boom shattered windows.

Two totally unrelated one-in-a-century asteroid events in a single day! Where’s Bruce Willis when you need him?

But the most impressive night-sky spectacle isn’t in fact found looking out from earth, but rather looking at earth from space.

From a space station, satellite, or convenient Red Bull upper-stratospheric balloon, today you can see an entirely new city bigger than New York. This has appeared in the space of just a few years out in the dusty American Mid-West.

This ‘city’ is little known, but is quietly revolutionising the world. And at the same time is giving investors some exceptional gains…

The city in question is the ‘Bakken‘.

And in just a few years it has grown from nothing to become the biggest bright spot on the North American skies.

Bakken ‘City’ – the Biggest New Place in the States

Bakken ‘City’ – the Biggest New Place in the States” border=”0″>

But there is a catch. It’s not street lights that make the Bakken visible at night, it’s burning gas.

The New Saudi Arabia?

You see, the Bakken is America’s most exciting shale oil and gas region. Using modern ‘shale’ drilling techniques, oil companies can open up vast new reserves that were once written off. And those lights in fact come from the flaring (burning) of surplus gas at oil projects.

The fact that you can see it from space, gives you a clear sense of just how enormous the Bakken is now. There are thousands of shale oil wells in production night and day across the region.

The hard production numbers from ground level give you a more tangible sense of the immense scale of the region.

While the Rest of North Dakota has long produced a steady 100,000 barrels a day, the Bakken has gone from almost nothing in 2007, to 650,000 barrels a day at last count.

So the total for the state of North Dakota is 750,000 barrels a day and rising fast. This chart nicely traces this remarkable growth.

North Dakota is the Poster-Child for the US Shale Revolution

North Dakota is the trail blazer, but other regions like Eagle Ford in Texas are also having spectacular success. This region is producing around 350,000 barrels a day at last count.

I tipped a North American oil shale stock active in this region last year as I liked the US shale story more than the Australian shale story. So far it has made readers gains of 108%, but is just getting going.

In total, North American shale oil companies produced 3.5 million barrels of oil a day last year. In a global oil market that is around 90 million barrels a day, that’s a significant contribution.

So you can see Dakota is almost a quarter of the total. In fact it’s now producing so much oil thanks to the huge success of the Bakken field that the locals refer to the state as ‘Saudi Dakota’!

The thing is that the joke has some truth in it.

While the Bakken on its own is not enough to challenge the status of the world’s largest oil producer, Saudi Arabia, with the combined success of shale regions across the US, the country is rapidly on its way to the number one spot.

And the timeline for this just keeps getting closer.

Just last year, the International Energy Agency (IEA) reported that the US would overtake Saudi Arabia as the biggest producer by 2020.

However, the most recent IEA report shows that the US is now set to overtake the Saudis as soon as 2017, just four years away!

The Big Global Shift Coming

They are also forecasting energy dependence in the same time frame. This would have some huge implications to US foreign policy, which after all is dictated by securing energy supplies in the Middle East.

Energy independence also means that the US energy imports bill will fall, which will give the US a chance to partly tame its trade deficit. This is already showing up in the numbers. In fact the petroleum trade deficit fell from $360 billion a year ago, to $220 billion at last count. It’s a start at least.

I mentioned in my free Google plus page last week sometime how this increasing domestic source of energy could be one of the engines of the US recovery this decade.

At this point, this new source of US oil supply hasn’t shown up in the US-centric West Texas Intermediate oil price. It has held steadily in an $80-$110 price range for the last few years. It looks strong and the chart has recently turned quite bullish.

US Oil Price (WTI) – No Sign of Weakness Yet

This will be something to keep an eye on in future though. Shale gas production was so successful in the States that the US gas price has more than halved over the last five years as the new supply kicked in.

The big difference is that the US is still an importer of oil, for now at least; but is already self-sufficient for gas, which is harder to export.

There’s no perceivable weakness in the oil price at the moment though. And those North American shale producers are offering some excellent investment opportunities.

Dr Alex Cowie
Editor, Diggers & Drillers
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From the Port Phillip Publishing Library

Special Report: The Gold Mirror of Kaieteur Falls

Daily Reckoning: The Golden Bear

Money Morning: The Two-Dimensional Diamond That’s Set to Turn Your World Upside Down

Pursuit of Happiness: My Goals Now I’m 64

By MoneyMorning.com.au

‘Price is what you pay; value is what you get.’
– Warren Buffett

Warren Buffett’s aphorism has been rightly celebrated. But to be a true value investor, it helps to have values.

Courtesy of near-zero interest rates and global competitive currency debauchery, it is increasingly difficult to assess the value of anything, as denominated in units of anything else.

To put it another way, the business of investing rationally becomes problematic when a significant number of market participants are pursuing maximum nominal returns without a second thought as to the real (inflation-adjusted) value of those returns.

Hedge fund manager Kyle Bass alluded to this problem recently when he pointed out that the Zimbabwean stock market had been the last decade’s best performer, but that owning the entire index would only buy you three eggs.

It is not just Zimbabwe. Markets everywhere, in just about everything, have now decoupled not just from their underlying economies but from reality.

Warren Buffett Missing a Key Insight

There are signs that Buffett himself has decoupled from the value investing philosophy that made him the world’s most successful investor.

Berkshire Hathaway is paying almost 20 percent more than Heinz stock’s all-time high in the deal announced last week, and the equivalent of 21 times 2013 earnings as opposed to the 16 times multiple which is the last decade’s average.

Say what you like about the business, but Buffett has not bought it cheaply.

To us, the more intriguing aspect to Warren Buffett is that he gives every indication of not understanding money. As he says, gold ‘gets dug out of the ground in Africa, or some place. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.’

Note that phrase: ‘It has no utility’. But utility, usefulness, purpose, value comes down to context. Context is everything. As Adam Fergusson bleakly put it in his moving account of Weimar Inflation in When Money Dies,

‘In hyperinflation, a kilo of potatoes was worth, to some, more than the family silver; a side of pork more than the grand piano. A prostitute in the family was better than an infant corpse; theft was preferable to starvation; warmth was finer than honour, clothing more essential than democracy, food more needed than freedom.’

Buffett is chained to a rock of convention. He is hardwired to pursue money and he is very good at that pursuit. But he is not well programmed to consider the relative utility of money or its attributes as a lasting store of value.

Gold is a Refuge from the Currency Battlefield

Since 2000, the price of gold has outperformed the price of Berkshire Hathaway stock by over 300%. No particular surprise, then, that he should hate the stuff.

Likewise, many investors are losing faith in gold on the basis that its price in US dollars has recently declined. Context is everything. Express the price of gold in another currency, the Japanese Yen, and gold looks relatively buoyant:

So it comes down to what sort of money you want. And in an environment of competitive currency devaluation, it’s an important choice to make.

In a global deleveraging that is likely to persist for some years, the heavily indebted countries will desperately need to attract foreign capital to help service their heavy debt loads. And in order to do so, they will likely devalue their currencies.

There is an increasingly disorderly currency war going on out there, and the advantage of gold is clear – they can’t print it, they can’t default on it, and there will always be demand for it.

Simply put, in the global currency wars, owning gold is like abandoning the battlefield altogether.

Tim Price
Contributing Writer, Money Morning

Publisher’s Note: This is an edited version of an article that first appeared in Sovereign Man: Notes From the Field

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By MoneyMorning.com.au

Warren Buffett’s story is the stuff of investment fairy tales.

He went from managing a small amount of money in his bedroom in Omaha, to being one of the world’s richest men. So it’s no surprise that his investment vehicle, Berkshire Hathaway (NYSE: BRK.A) is so closely watched.

Now people are tying themselves in knots trying to figure out Berkshire’s latest big deal. It is planning to spend $12-$13 billion to buy up half of one of the world’s most iconic food brands – Heinz.

The deal looks expensive, unusual for someone like Buffett, who is seen as a ‘value’ investor. Some argue that it just shows that big, brand-name companies are worth paying up for, even now.

But that’s the wrong conclusion to draw. The truth is, this deal is just yet more proof that Buffett’s deals today have very little in common with the deals that made him an investment legend.

And it also suggests that you’d be better off with an index-tracking fund than with shares in Berkshire in the years ahead.

Here’s why…

Warren Buffett Has Given Up Value Investing

Warren Buffett was unquestionably one of the world’s greatest ever value investors. Starting out in the mid-1950s, he practised ‘cigar butt’ investing: buying distressed, hated companies that were selling for a fraction of what they were really worth. Over the last 57 years, his investment gains have snowballed into the conglomerate that is now Berkshire Hathaway.

No doubt Buffett and Berkshire would love to keep buying these types of companies. But this is no longer possible. For one thing, there are very few cheap ‘cigar butt’-type investments out there right now. For another, even if he did find some, Berkshire’s vast size ($424bn of assets) means that the individual deals would not make much of a difference to the company’s fortunes.

These days, Berkshire has to spend large amounts of money buying stakes in market-leading giants with steady, predictable profits. We’re talking about the likes of Tesco, IBM and Coca-Cola here. These sorts of companies are meant to keep Berkshire’s profits and asset value growing in the years ahead.

But while they might be big players, they still follow classic Buffett rules: they’re easy to understand, and they have ‘big moats’ – rivals find it hard to compete with them, and they hold a lot of pricing power in their markets. For many years now, Buffett has told investors to buy the shares of these companies if they are on sale for a fair price.

You can see why Heinz is seen by many as a classic Buffett investment. It owns a huge range of brands and should have more than enough pricing power to keep growing its profits over the long haul.

There’s just one catch. On the face of it, Buffett is hardly getting good value with this deal. Indeed, in paying $72.50 per share for Heinz, Buffett and his private equity partner, 3G, are paying a hefty price for a business that isn’t growing that much – over 20 times 2013 forecast earnings.

Or at least, that’s how it looks – until you look under the bonnet of the deal.

You Can’t Copy Buffett

Don’t be fooled into thinking that Buffett’s swoop on Heinz means you should be piling into consumer goods shares at current prices. This deal is much more about clever financial engineering than any sort of great equity growth story. In fact, the way this deal is structured suggests that Buffett wants to ensure that he is exposed to less risk than normal shareholders.

Here’s why. Most of Buffett’s investment and return is coming in the form of preference shares ($9bn of them with another $4bn of equity on top). Preference share dividends get paid out before ordinary dividends.

So this means Buffett has first claim on the company’s post-tax profits. These preference shares are rumoured to be paying him a very juicy annual return of 9% or $810m.

When you think that Heinz’s post-tax income is expected to be around $1.1bn in 2013, that’s a nice chunk of the profits for Buffett. But the thing is Heinz is being loaded up with debt – around $20bn of it (including the preference shares) compared with $5bn now.

This means that Heinz’s after-tax profits are likely to fall (as its interest payments shoot up). So Buffett could be taking virtually all of the income, with 3G getting next to nothing in the early years. My guess is that Heinz is going to have to generate a lot more cash than it does now for 3G to be laughing all the way to the bank.

Buffett, on the other hand, will get a virtually guaranteed $810m every year, and a chance of his equity stake going up in value if everything works out.

Sadly, private investors can’t get the same sort of cosy deals that Buffett’s wealth and influence bring him. Like his investments in Goldman Sachs and Bank of America in recent times, Buffett has been able to get good, fixed returns with less risk than being an ordinary shareholder.

The fact is that for all his professed faith in the future of the US economy, Buffett doesn’t like these companies enough to be last in the queue to get paid, despite describing them as great businesses.

It’s a case of ‘do as I say, not as I do’.

A Tracker Fund May be a Better Bet Than Berkshire Hathaway Shares

The Heinz deal highlights a major problem for both investors in Berkshire Hathaway and investors in general. This is that future returns from most assets are likely to be modest at best.

Berkshire is a big lumbering giant of a company. Even a 9% return from Heinz preference shares isn’t going to move the dial at Berkshire much, given its vast size. And as the chart below shows, even with Buffett’s undoubted deal-making skills, Berkshire has lagged the returns of the S&P 500 (Berkshire’s share price is in red, the S&P 500 in blue).

And who knows if Buffett’s successor will have the clout to be able to do the same sort of deals in the future? So those wanting to bet on the future of big American businesses might be better off with an index-tracking fund rather than shares in Berkshire. At least you won’t have to worry about succession issues then.

Phil Oakley
Contributing Writer, Money Morning

Publisher’s Note: This article first appeared in MoneyWeek

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From the Archives…

Four Things to Look Out for When Buying Gold Stocks
15-02-2013 – Kris Sayce

Here’s One Way to Eke More Gains from this Rising Stock Market
14-02-2013 – Kris Sayce

When Will the Inflationary Stock Boost End?
13-02-2013 – Murray Dawes

Gold Stocks: Back Up the Truck
12-02-2013 – Dr. Alex Cowie

The Next Surge in the Gold Price Looms: It’s Time to Buy Gold Now
11-02-2013 – Dr. Alex Cowie

By OilPrice.com

The good news for the Chinese leadership is that their fiscal policies have paid off, producing both the world’s second largest economy and the globe’s leading creditor nation in less than a generation.

The less good news is that the country’s hell-bent drive towards industrialization has brought in its train a host of collateral problems, not the least of which is pollution. Last month Beijing’s air pollution soared past levels considered hazardous by the World Health Organization.

Prior to that, the government often played down the pollution in Beijing, insisting it was merely fog, despite evidence to the contrary that was plain for all to see. Earlier this year, following public pressure resulting from hourly air-quality readings first published in 2011 by the U.S. embassy in Beijing, which Chinese authorities had previously denounced as “foreign interference,” the municipal officials took notice. On 12 January the air-quality monitor operated by the U.S. embassy in Beijing recorded a Particulate Matter PM 2.5 level of 886 micrograms a cubic meter, nearly 35 times what the World Health Organization considers safe.

How bad?

On 5 February flights were grounded as visibility fell to around 200 meters across Beijing. Last month Beijing’s Jiangong Hospital recorded a 30 percent spike in cases involving respiratory problems and the hospital’s Emergency Department chief Cui Qifeng noted, “People tend to catch colds or suffer from lung infections during the days with heavily polluted air.”

According to a Chinese Academy of Engineering specialist in respiratory diseases, speaking about Beijing’s current pollution levels, “It (the pollution) is more frightening than SARS (severe acute respiratory syndrome). For SARS, you can consider quarantine and other means. But no one can escape from the air pollution and indoor pollution.” The six-month SARS epidemic in 2003 killed 775 people in 25 countries.

Causes?

Beijing alone now has five million cars choking the streets, spewing their exhaust into the air. More importantly, the nation’s pollution problems are caused by China developing at a speed and scale unprecedented in history, which has produced widespread environmental degradation that the central authorities have been slow to acknowledge. Aside from vehicle exhaust, thermal energy plants utilizing the nation’s poor grade coal power the country’s factories, providing the heat for hundreds of millions of homes even as they belch toxins into the atmosphere.

And the toxic air threatens to become an international issue as well. Drifting across the Sea of Japan, the smog is now impacting parts of Japan, with the Japanese Ministry of the Environment’s website on 5 February being overloaded. One ministry official, speaking on condition of anonymity said, “Access to our air-pollution monitoring system has been almost impossible since last week, and the telephone here has been constantly ringing because worried people keep asking us about the impact on health.”

While the Japanese government remained discreet about air quality issues, Ministry of the Environment official Yasushi Nakajima was more blunt, stating, “We can’t deny there is an impact from pollution in China.” According to National Institute for Environmental Studies researcher Atsushi Shimizu, the prevailing winds from the west carry air pollution over western Japan. The pollution from China has exceeded government limits for particulate matter, which government concern focusing on particles 2.5 micrometers or less in diameter, whose concentration has been reported as high as 50 micrograms per cubic meter of air in northern Kyushu. The Japanese government limit is 35 micrograms.

Solutions?

Responding to the recent crisis, Beijing’s city government ordered 103 heavily polluting factories to suspend production and told government departments and state-owned enterprises to reduce their use of cars by a third.

More immediately, on 6 Feb. the Chinese government issued a timetable for its program to upgrade fuel quality, aiming to implement a strict standard nationwide by 2017, upgrading its standard V for automobile petrol, with sulfur content within 10 parts per million before the end of the year.

But the country’s long term solutions will not be inexpensive – reducing the use of coal, forcing cars to use efficient pollution exhaust equipment, and developing mass transit options to reduce the country’s rising love affair with the automobile.

China now has the wealth to implement such solutions –whether the political will is there is quite another matter. Should authorities not act, then they’d better ramp up the country’s health insurance policies, as undoubtedly more and more workers will be reporting sick days.

Source: http://oilprice.com/The-Environment/Global-Warming/Chinas-Smog-Becoming-an-International-Issue.html

By. John C.K. Daly of Oilprice.com

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By Bill Bonner

Oh la la! Things are heating up. Subjects that used to be confined
behind closed doors… discussed only in whispers… and only among
rogues and scalawags… are now right out in the open.

Politically, we’ve got the Obama administration openly “legalizing” the right to kill Americans
without first charging them with a crime. It used to be called
“murder.” Now, according to administration lawyers, it’s completely
legal!

Asked whether this gave the agency the authority to kill an American citizen on American soil without any due process of law, the CIA’s new director wouldn’t say. He mumbled.

Sen. Rand Paul threatened to block the nomination if he doesn’t get a
straight answer. But what difference will an answer, straight or
crooked, make? The feds are out of control… and there isn’t anyone
with the will or the power to bring them to heel.

Out of Control

Financially, the feds and the Fed are out of control too. And not
just in the U.S. Central bankers all over the world are loading their
drones with cash.

And now we’ve got the world’s leading opinion mongers openly advocating things that used to be a joke… or a crime.

Last week, Adair Turner, head of Britain’s Financial Services
Authority (equivalent to the SEC in the U.S.) came out in favor of
“helicopter money.” CentralBanking.com has the story:

“Overt monetary financing'” —
printing money to pay the government’s bills — should not be considered
a taboo subject, and in many cases is a viable stimulus option,
according to Adair Turner, the chairman of the UK’s Financial Services
Authority (FSA).

Speaking last night at the Cass
Business School in London, Turner — who was a candidate to succeed
Mervyn King as governor of the Bank of England, before the appointment
of Mark Carney — focused on the controversial topic of “helicopter
money,” a term coined by economist Milton Friedman, who once suggested
governments could fight deflation by scattering newly printed notes out
of helicopters.

While Turner was careful to hedge his
remarks with considerations of the various risks surrounding monetary
financing, he came down clearly in its support. “I think there are some
circumstances — they may be extreme circumstances — where you should
use helicopter money,” he said.

Then, yesterday, Martin Wolf — the lead economist at the Financial Times, and one of the “100 Most Influential” people on the planet — weighed in heavily:

First, it is impossible to justify the
conventional view that fiat money should operate almost exclusively
via today’s system of private borrowing and lending. Why should
state-created currency be predominantly employed to back the money
created by banks as a byproduct of often irresponsible lending?

Why is it good to support the
leveraging of private property but not the supplyof public
infrastructure? I fail to see any moral force to the idea that fiat
money should only promote private, not public, spending.

Second, in the present exceptional
circumstances, when expanding private credit and spending is so hard,
if not downright dangerous, the case for using the state’s power to
create credit and money in support of public spending is strong.

The quantity of extra central bank
money required would surely be smaller than under today’s scattergun
quantitative easing. Why not employ monetary financing to recapitalize
commercial banks, build infrastructure or cut taxes? The case for
letting fiscal deficits facilitate private deleveraging, without undue
expansion in overt public debt, is surely also strong.

Cancer sufferers have to undergo
dangerous treatments. Yet the result can still be a cure. As Lord Turner
[chairman of the Financial Services Authority] notes, “Japan should
have done some outright monetary financing over the last 20 years, and
if it had done so would now have a higher nominal gross domestic
product, some combination of a higher price level and a higher real
output level, and a lower debt to gross domestic product ratio.”

The conventional policy turned out to
be dangerous. Whether this is also true of troubled countries today can
be debated. But the view that it is never right to respond to a
financial crisis with monetary financing of a consciously expanded
fiscal deficit — helicopter money, in brief — is wrong. It simply has
to be in the tool kit.

The Gono “Solution”

How do you like that? Wolf thinks an economy is a machine. He reaches into his tool kit and what does he find? A drone!

So the banks won’t lend? People won’t borrow? Consumer demand doesn’t
increase? Jobs aren’t created? No worries — we’ll take out the
drones… load them with cash and drop it all over the world. Spend,
spend, spend until the economic problem goes away.

Is this a dangerous treatment? Yes, of course. But “cancer sufferers
have to undergo dangerous treatments,” says Wolf, so why not an entire economy?

And think of the benefits. Money goes directly to worthwhile
projects… and into consumer pockets. People get jobs. Things get done.
Bridges get built. And the federal deficits disappear. The feds don’t
borrow from the Fed. They just spend the money.

Dear readers will recognize this as the policy of Mr. Gideon Gono of
the Central Bank of Zimbabwe. They will also recall that it was
disastrous. But Wolf must imagine that he and the other elite
policymakers and policy implementers are much smarter and more
disciplined than Gono.

Gono’s money drones took off from Harare and headed directly for the
army barracks. Then, when inflation was getting out of control, his
monetary policy was out of his control too. He couldn’t stop paying the
army!

How will it be any different in London or Washington? Mr. Wolf doesn’t say.

Release the Choppers!

But here’s another voice, Anatole Kaletsky, with more support for “helicopter money”:

Public discussion of helicopter
money has been taboo among economic officials. The one exception was a
speech by Ben Bernanke in 2002, before he became Fed chairman. This
speech offered the most detailed and eloquent justification of monetary
financing prior to Turner’s, and it earned Bernanke the Wall Street
nickname “Helicopter Ben.” Since then, however, helicopter money has
never been seriously mentioned by any senior official in any advanced
economy. Until this week.

Ten years after the Helicopter Ben
speech, Turner has broken the taboo about monetary financing. The
effect on economic debate around the world could be irreversible and
profound. Turner’s 70-page paper presents the arguments for the many
variants of helicopter money with unprecedented academic sophistication,
financial detail and historical context.

Now that Turner has broken the taboo
on helicopter money, the sound of monetary salvation should soon be
heard round the world.

Our guess is that the helicopter money will come. So will the
drones. Serious money policies and decent people… will both get blown
up.

Regards,

Bill

http://www.billbonnersdiary.com/

By The Sizemore Letter

Japanese stocks are off to a nice start this year.  The iShares MSCI Japan ETF (NYSE:$EWJ), a popular option among investors for getting access to Japan’s biggest traded companies, is up 4% for the year and 14% over the past month.

Enjoy it while it lasts.

Japan’s recent surge is due to its new quantitative easing program—its largest in years—and the stated intentions of Prime Minister Shinzo Abe to weaken the value of the yen and boot Japan out of the deflationary slump it’s been in for the better part of two decades.

But Abe should be very careful what he wishes for.  Deflation is what keeps Japan’s borrowing costs as low as they are.  At time of writing, Japan’s 10-year government bonds yield a pitiful 0.75%.  According to financial writer John Mauldin, an increase of just 100 basis points in borrowing costs would devour 10% of tax revenues.

Japan 10 Year Government Yield

Writing for Bloomberg, Gary Shilling notes that debt service now accounts for 43% of Japanese government revenues and quarter of all spending.  Furthermore, more than half of all Japanese government spending is financed by new borrowing.   This means that half of every yen borrowed is used to service existing debts.  It’s a debtor’s nightmare that gets worse every year with budget deficits that are consistently higher than 7% of GDP.

All of this has been made possible by Japan’s seemingly inexhaustible supply of domestic borrowers.  But those days are now over.  As Japan’s population ages, its savings rate plummets.  Once you stop working, you stop saving and you start living off your investments instead.  As Japan is the oldest country in the world (and rapidly getting older) its savings rate has shrunk below that of the free-spending United States.

This means that Japan has two choices going forward.  Tap the international bond market and risk the beating that Spain and Italy took last year or finance the government directly via the central bank.  Neither of these two scenarios end well.

How long can this song and dance last?  It’s impossible to say, but you’ll know ahead of time that it is coming to an end.  Eventually the bond market vigilantes will wake out of their stupor, and then the jig will be up.

Keep an eye on the Japanese 10-year yield.  Thus far, it hasn’t budged much in response to the quantitative easing plans.  Yields popped from 70 basis points to 84 basis points before drifting back to current levels.

When the yield approaches 1.5%, get ready for the short opportunity of a lifetime in Japanese assets.  Because once Japan loses control of the situation, it will be only a short matter of time before it implodes into a hyperinflationary meltdown.

This article first appeared on MarketWatch.

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The post Japan is Running Out of Time appeared first on Sizemore Insights.

Important growth indicators out of the Eurozone and the US this coming week. The numbers needs to confirm the current rise in equties, says senior strategist Ib Fredslund Madsen.

Much more on that topic in this weeks edition of The week Ahead.

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