Month: February 2013

By www.CentralBankNews.info Here’s today’s Central Bank News link list, click through if you missed the previous link list. The list comprises news about central banks that is not covered by Central Bank News. The list is updated during the day with the latest developments so readers don’t miss any important news.

By www.CentralBankNews.info     Sri Lanka’s central bank held its benchmark repurchase rate steady at 7.50 percent, saying the current policy stance is appropriate as the past reduction in policy rates and the expiration of a credit ceiling in December 2012 is expected to help the economy move toward its full potential in 2013.
    The Central Bank of Sri Lanka, which raised rates by a net 50 basis points in 2012 but cut in December, said broad money growth continued to moderate in December to 17.6 percent from a peak of 22.9 percent in April and growth in credit to the private sector also eased to 17.6 percent by the end of 2012 from 34.5 percent at the end of 2011.
    “However, with increased borrowing by the Government and public corporations from the banking sector, the overall expansion of domestic credit remained at 21.7 per cent at end 2012,” the central bank said in a statement.
    Credit to the private sector by commercial banks is expected to increase by around 435 billion rupees, or an annual growth rate of 18.5 percent, in 2013 up from 2012’s expansion of 352 billion, but the bank said “since such a credit growth will be compatible with the anticipated expansion in economic activity, it is not expected to fuel any demand driven inflationary pressures during the year.”
    Short-term money market rates have declined sharply in response to the central bank’s easing and it expects deposit and lending rate to adjust in coming weeks, helping stimulate economic activity.
    Sri Lanka’s inflation rate rose to 9.8 percent in January from December’s 9.2 percent due to adverse weather and revisions to administered prices but vegetable prices have already declined substantially so the inflation rate in February should be around the current level and then decelerate.
    Sri Lanka’s Gross Domestic Product rose by an annual 4.8 percent in the third quarter, down from the second quarter’s growth rate of 6.4 percent.
     Tight monetary policy in early 2012 resulted in lower non-oil imports, narrowing the trade deficit and increased workers’ remittances, service inflows and better inflow to the capital account resulted in a balance of payments surplus, expanding the country’s external reserves and leading to a higher rupee, the central bank said.

    www.CentralBankNews.info
   
 

By www.CentralBankNews.info     Indonesia’s central bank held its BI rate steady at 5.75 percent, as expected, saying inflation is expected to remain subdued and in line with the bank’s target for this year and next, the economy is still performing strongly and the exchange rate is stable.
    Bank Indonesia (BI), which cut its rate by 25 basis points in 2012, said consumer price inflation rose to an annual rate of 4.57 percent in January from December’s 4.3 percent due to rains that disrupted food production and supply. But core inflation remained stable at 4.32 percent as inflationary expectations remained under control.
    “Looking ahead, there are a number of risk factors that can increase inflationary pressures that need to be observed, among those are weather factors that can interfere with the production and distribution of food and increases in some administered prices,” the bank said after a meeting of its board of governors.
    The bank targets inflation of 4.5 percent, plus/minus one percentage point in 2013 and 2014.
    Indonesia’s economy slowed slightly in the fourth quarter with the annual growth rate easing to 6.11 percent from the third quarter’s 6.17 percent due to slightly lower consumption and investment.
   “On the other hand, exports began to improve with the economic recovery is some major trading partners, such as China,” the bank said.

    For 2013 the BI maintained its growth forecast 6.3-6.8 percent and first quarter growth of Gross Domestic Product is forecast at 6.2 percent.
    In 2012 Indonesia’s GDP expanded by 6.23 percent, up from 2011’s 6.5 percent. Last month the BI forecast growth of 6.7-7.2 percent in 2014.
    Indonesia’s balance of payments showed a higher current account deficit than forecast due to a declining trade surplus and a rising deficit in non-oil and gas trades.
    “Looking ahead, the current account in the first quarter of 2013 is forecast to improve, primarily due to improved export performance in line with the economic recovery of the major trading partners such as China and the U.S.” the BI said.
    During January the Indonesian rupiah depreciated by 0.22 percent to 9.654 against the U.S. dollar and the bank said it was encouraging a reference exchange rate on the domestic spot market that should boost liquidity and the efficiency of the foreign exchange market and thus deepen the domestic financial market.

    www.CentralBankNews.info

By MoneyMorning.com.au

Rule #1 in the investor’s guidebook reads ‘Buy At The Bottom And Sell At The Top‘.

But if only it was so easy!

Because how do you ever know the market is at the bottom?

Well – I’m writing to you today to say that I firmly believe that there is one group of stocks right at the very bottom of the market right now…

And that is the gold sector.

The first clue that we’re at the bottom for gold stocks, is that they are so deeply out of favour.

It’s hard to think of any other type of mining stock more ‘on the nose’. Even uranium is getting more attention at the moment!

Gold stocks have been serial underperformers, falling two years running – even as gold bullion rose. But it is precisely when investors turn their back on something that you get the best prices. And this is when the bargain hunters ‘back up the truck’.

The chart below shows just how cheap gold stocks have become. It shows an index of gold stocks (the Market Vectors Gold Miners Index) to show how dismally they have performed as a group.

But to really put the chart in context I’ve divided the index by the gold price. You see, since October 2008, the US gold price has climbed by 143%, from $700 to $1650. So, dividing the gold stock index by the gold price gives a better idea of gold stocks’ relative performance.

And you can see straight away they are CHEAP. On this basis, gold stocks are back to relative valuations seen in the depths of the GFC!

Gold Stocks Back to GFC Style Fire-clearance Valuations

We saw these ludicrously cheap valuations twice last year, which was my original trigger for buying gold stocks.

While frustrating, being back here again gives investors who thought they’d missed the boat another chance to buy gold stocks very cheaply indeed.

And, as I’ll explain shortly, these bargain prices come right when the sector is about to receive a surge of adrenaline to turn things around.

Why Gold Stocks Are Down

Technical chartists identify a pattern called a ‘double bottom’, when a price bounces twice from the same level, paving the way for the next leg up. What you are looking at above is a ‘triple bottom’, which is a far more powerful indicator of a coming rally. And this is the second clue that we are witnessing a bottom for the gold sector right now.

The big question of course is just why have gold stocks done so badly?

Competition from Exchange Traded Funds (buying gold metal through a broker) is part of it for sure, as is the poor track record of dividends from gold stocks.

But the real meat-and-potatoes of the matter is the rising cost of production.

Gold producers have done a terrible job of keeping production costs under control. As you can see in the chart below, the average cost of production (C1 cost) has doubled in the last five years, and quadrupled over the last ten.

Gold Producers’ Costs Have Soared

So why have their costs blown out so much? One reason you get is that costs for factors of production like oil, labour and machinery have gone up. Also, taxes have increased.

It’s all true, but I think a bigger reason is that miners are mining lower grade ores. Five years ago the average ore grade mined globally was 1.7 g/t, but today it is just 1.1 g/t. The lower the grade, the higher the cost of mining it, producing it, and dealing with the waste.

Anyway, these rising costs have now cost the Chief Executive Officers of four of the world’s five biggest gold companies their jobs. The world’s biggest gold producer, Barrick (NYSE:ABX), has recently sacked CEO Aaron Regent.

This sort of blood-letting is a third clue that we are nearing the bottom. The new execs will have to reduce costs if they want to keep their jobs.

A Big Move Coming for Gold Stocks

As I wrote to you in yesterday’s Money Morning, it looks like gold’s next rally is very close now. And this is just the shot of adrenaline the sector needs to catalyse a turnaround.

It would be a very potent combination to see a rising gold price at the same time that the new management of the big five gold producers are reducing costs.

This would herald a clear turning point for the sector. All gold stocks should benefit to some extent as the sour mood turns sweet again.

But you still want to be positioned in the best possible gold stocks when this happens. There is no shortage of two-bit operators on the market with bad projects and inexperienced or shonky management. It is essential to pick the right stocks, and frankly they are in the minority.

Having a low cost of production is essential, and it is the first thing I look at for Diggers and Drillers tips. Not just the headline C1 cost, but the all inclusive costs. It is the lower cost producers that will do the best when the gold price takes off again, as the profit margins grow faster than higher cost stocks.

Another factor that will draw investors back in quicker is dividends. A few gold stocks have started paying dividends recently, and one stock I tipped could be looking at a 6.1% yield this year at current stock prices.

The bottom line is that when gold starts rising soon – the good quality gold stocks will move even faster.

And from their current depressed prices, I’m betting on it being quite a move indeed.

Dr Alex Cowie

Editor, Diggers & Drillers

From the Port Phillip Publishing Library

Special Report: How to Hunt Down 2013′s Biggest Stock Market Winners

Daily Reckoning: Money, the Discredited Credit

Money Morning: The Next Surge in the Gold Price Looms: It’s Time to Buy Gold Now

Pursuit of Happiness: Exchange Traded Options: A Way to Boost Your Retirement Income

Diggers and Drillers: Five Reasons Why Gold Stocks Are Set to Rebound

By MoneyMorning.com.au

Uranium is one of the most cyclical and volatile materials that I have ever followed.

In the last 20 years the price of uranium has risen from 20 dollars up to 130 dollars, and dropped back down to 40 dollars, where it is now. It’s been all over the map.

It is also one of the most useful natural resource commodities. The energy density – how much energy you can produce per pound — is much greater than with other energy sources available.

Water, natural gas, oil, or coal, don’t pack as much punch per pound. In some senses, it is the most efficient energy source in the world.

Nations can store enough material to run plants for decades. In case of crisis, it is the most strategic energy source on the planet. Countries like Japan, Korea, Taiwan, or Singapore are energy and storage-constrained, yet have high per capita energy use. For them, uranium is vital.

The One-Off Event That Shaped the Market

Fukushima, the meltdown that struck a plant in Japan in 2011, caused the green metal to plunge.

The trauma in Japan severely disrupted the market for uranium. Japan shut down its domestic nuclear industry. As a result, demand fell by 15 or 20 million pounds overnight. In addition, the utilities dumped their existing inventories. They couldn’t use uranium to generate electricity, so they sold it for whatever they could get.

So, while wiping out 15 to 20 million pounds in demand, they added 15 million pounds of supply – a 35 million-pound swing. That’s about 1/5th of the entire market — about 190 million pounds.

The price of uranium tumbled from 85 dollars a pound down to 40.

Very recently the Japanese have acknowledged the need for the green metal. Energy prices have spiked since they decided to shut down nuclear power. In some industrial applications, electricity bills have risen five-fold.

Japanese demand has been responsible for essentially doubling the price of liquefied natural gas, as every spare cargo in the world has gone to Japan. Even the newly elected, staunchly anti-nuclear government has grudgingly acknowledged that phasing out nuclear is not an option.

The Japanese government responded to the disaster at Fukushima by vowing to phase out nuclear power, but their actions told a different story. Shortly after Fukushima, the Japanese government – through its foreign investment arm Jogmec – signed a joint-venture arrangement to explore for and develop uranium in Uzbekistan.

Why would you spend money to explore for and develop something you weren’t going to use? This is the agency tasked with providing for Japan’s raw material needs.

We conclude that Japan’s use of nuclear power will resume. The 35-million-pound swing that you saw in the market was a one-off, not an ongoing event.

And don’t forget, before this one-off event, supply and demand were in a reasonable balance. At 80 dollars a pound, uranium produced more energy output to raw material cost than anything else. Meanwhile, producers made enough to explore for and develop new resources.

There’s the rub. New uranium is brought to market by the mining industry, which cannot afford its production costs at the current market price of 40 dollars pound. It takes much closer to 80 dollars a pound for mining of new supplies to be economic. Thus, until prices increase, miners won’t create the new supplies needed to keep up with current needs.

The Rest of the World Needs Yellowcake

In the West, uranium is a political issue. It is unpopular in the United States, Germany and other developed nations. However, the rest of the world – emerging and frontier markets – is focused on attaining the same sort of lifestyle that the West enjoys. That is extremely energy intensive.

To reach our level of comfort, frontier and emerging markets will create demand for all energy sources – solar, wind, hydrocarbon energy, coal, and nuclear. Nuclear power production is increasing, but today’s price of 40 bucks a pound does not generate the supply to run those plants. The price needs to head higher.

Another thing you need to consider is that nuclear power still generates 18 per cent of electricity supply in the United States. Despite being politically unpopular, the long-term alternative to nuclear energy is not having the lights go on when you flip a switch – not an option in the United States.

Finally, Germany – which has also announced that it will phase out nuclear power – is faced with an interesting choice. They’re proposing, I suppose, to replace nuclear with solar energy. Well, one problem is that the sun doesn’t shine in Germany. Another is nighttime. Current technology simply does not allow solar energy to be a viable alternative to nuclear.

The German government is really involved in a political -and fairly cynical – ploy: reduce consumption of German-generated nuclear power but import it from France and Poland.

Worldwide, the demand for nuclear power will continue to increase, and since mining is uneconomic at current prices, utilities will need to start paying more in order to satisfy their demand. In fact, meeting demand will require a price point of about twice the current price.

How to Play Uranium

As you know, doubling the price of uranium would more than double profit margins for those that produce it already. Therefore, the companies that explore for and produce the metal should do well, in addition to the commodity itself.

Right now, uranium is a deeply unloved resource. As we have seen, it’s unloved for a variety of reasons. When you think about nuclear, you don’t think about a light going on; you think of Hiroshima, Chernobyl, Nagasaki, or 3 Mile Island.

But uranium is an essential commodity for the world to continue to enjoy the way of life that we experience now, which is energy intensive. Uranium suffered a price drop that the investment community thinks is an ongoing fact, but that is actually a one-off event. What happened in Fukushima, while tragic, will not alter the demand for uranium in the long term.

Uranium prices are set for a turnaround. As the idled power capacity comes back online, and the impact of Japanese selling is reversed, the market will return to pricing equilibrium, which we believe is around 80 to 85 dollars a pound. This is of course a wonderful move from the current price of 40 to 45 dollars per pound – and music to the ears of those that produce it.

Rick Rule

Contributing Writer, Money Morning

From the Archives…

Two Questions to Ask Before You Buy Another Stock
8-02-2013 – Kris Sayce

Are These 5 Blue-Chip Stocks Still a Good Buy?
7-02-2013 – Kris Sayce

Don’t be Long and Wrong on this Stock Market Rally
6-02-2013 – Kris Sayce

Perceptions of Beauty and Stock Valuations
5-02-2013 – Satyajit Das

This Share Market Rally Has Angered Some Investors
4-02-2013 – Kris Sayce

Publisher’s Note: This article first appeared in Daily Resource Hunter

By MoneyMorning.com.au

Every year Credit Suisse publishes the Global Investment Returns Yearbook. It’s a summary of how different asset classes have performed over the last 100 years or so. It also includes a bit of analysis and comment on what that means for investors.

The main conclusion from this year’s study was pretty predictable.

Returns on all asset classes are likely to be very modest in the next few years. That’s why pensioners-to-be need to ferret away more cash than ever. How much?

Well, according to Allister Heath of City AM, the findings suggest that most people should probably think about something like a quarter to a third of their salaries.

And given that most people won’t save anything like that, ‘a horrible crisis is looming’.

Today I want to show you why I think this situation is scandalous. And I’ll look at what it all means for your asset allocation this year.

A Torpedo Takes Out Capitalism

The Credit Suisse study suggests (as if we didn’t know already!) that we can’t expect to earn much on savings anymore. Basically, the time value of money has been obliterated.

You probably know by now that I put it all down to the central planners. Governments and central banks have gradually removed free capital markets from capitalism. And that has torpedoed the time value of money.

And things are set to continue along this path.

The planners won’t change course, of that I’m sure. And if the public increase their rate of savings to anything like a third of their salary, then demand for investments will drive yields down even further.

We’re constantly chasing our own tail. And returns on investments are heading toward zero…

Buy What You Can Kick

The planners attacked the bond markets first. By relentlessly buying government bonds, they drove prices up (and yields down)…which means that pension investors must pay crazy prices for the same assets.

But the real beneficiary of the collapsing time value of money is ‘stuff’. What stuff? Stuff is whatever you can kick. Practically anything – houses, classic cars, antiques, gold, silver. Stuff pays no interest anyway, and if financial assets can’t reward investors in a way that matches their risks, then why hold them at all? Why not just buy stuff?

The way I see it, the planners inflated the bond bubble first. Now they are inflating the equity bubble – and it’s useful to have some exposure to that too. But the final bubble to inflate is commodities.

How to Build Commodity Exposure

It’s why I recently upped my commodities allocation from 25% to 30%. Commodities are the financial equivalent to ‘stuff’.

However, commodities are a difficult area for private investors. Exchange-traded funds (ETFs) are probably the easiest way in, offering exposure to anything from precious metals to agri-commodities and oil.

You can buy ETFs through your regular stockbroker. But beware, you’ll have to do your homework. Make sure you understand the concept of ‘roll-yield’ before you put your money down.

But if you’re not keen on ETFs, you can get exposure to rising commodities through judiciously selected equities.

The point is, government meddling has totally twisted the price and the returns from financial assets. And that ultimately means that most private investors don’t have adequate exposure to commodities.

Over the years that’s been pretty understandable. I mean, why would you want to hold the financial equivalent of ‘stuff’ if it doesn’t pay a respectable yield?

But the way we’re heading, pretty soon there won’t be any income on financial investments anyway. All they’ll offer is risk. That’s why investors are gradually moving towards stuff – and I think the flow is set to continue.

However you get your exposure…just make sure your portfolio isn’t underweight stuff.

Bengt Saelensminde
Contributing Editor, Money Morning

Publisher’s Note: This article first appeared in MoneyWeek

From the Archives…

Two Questions to Ask Before You Buy Another Stock
8-02-2013 – Kris Sayce

Are These 5 Blue-Chip Stocks Still a Good Buy?
7-02-2013 – Kris Sayce

Don’t be Long and Wrong on this Stock Market Rally
6-02-2013 – Kris Sayce

Perceptions of Beauty and Stock Valuations
5-02-2013 – Satyajit Das

This Share Market Rally Has Angered Some Investors
4-02-2013 – Kris Sayce

After consolidation, USDJPY breaks above 94.05 previous high resistance and continues its upward movement form 79.07 (Nov 9, 2012 low). Further rise could be expected in a couple of days, and next target would be at 96.00 area. Support is at 93.30, only break below this level could indicate that lengthier consolidation of the uptrend is underway, then deeper decline to 92.00 area could be seen.

Daily Forex Analysis

By www.CentralBankNews.info     Mozambique’s central bank kept its benchmark interest rate on its standing facility steady at 9.5 percent for the fourth month in a row and said it was ready to help mitigate the direct and indirect effects of flooding on the country’s economy.
    In light of “this difficult internal situation,” the Bank of Mozambique (CPMO) said it would ensure that the monetary base did not exceed 37.163 billion meticais in late February, down from a target of 38.50 billion at the end of January.
    The central bank, which cut rates by 550 basis points in 2012, said the rise in prices in January partly reflects the flooding, hitting the supply of goods and services in several urban areas and markets.
    Mozambique’s inflation rate rose by 1.35 percent in January from December, for an annual rate of  2.73 percent, up from December’s rate of 2.02 percent.
    Widespread flooding has affected large parts of Mozambique, affecting a quarter of million people and killing at least 48 people in the southern part of the country, according to news reports.

    Mozambique’s Gross Domestic Product expanded by 0.4 percent in the second quarter of 2012 from the first quarter for an annual increase of 8.0 percent, up from 6.3 percent in the first quarter.
    During January, Mozambique’s currency, the metical, depreciated by 1.58 percent against the U.S. dollar for an annual depreciation of 10.6 percent, the bank said.
    The average interest rate on one-year commercial loans to the public was 21.38 percent in December 2012, a fall of 11 basis points, the Mozambique central bank said.

    www.CentralBankNews.info 

Stocks, bonds, gold — all bounced around last week.

And as we mentioned on Friday, Americans continue to turn into “neo-serfs.”

“Wall Street is running a new profit game,” writes Shabnam Bashiri at
Salon.com, “by buying foreclosed houses and renting them back to their
former owners.”

Yes… nice business. Even better than it looks. It’s why the rich
get richer… and the 1% are way ahead of the other 99%. Writes Bashiri:

Every day, it seems a new report comes
out praising the ongoing housing recovery. In Georgia, home prices are
up 5% over last year, a year in which we also had one of the highest
foreclosure rates in the country. Seems a little odd, doesn’t it? Don’t
foreclosures usually drive down the market?

That’s because the housing “recovery,”
as they’re calling it, is fueled almost entirely by Wall Street private
equity firms, hedge funds and the Fed’s unwavering support. After
creating a massive bubble in home prices that eventually burst and
caused our economy to go into a tailspin, these guys have decided to
come back for more and figured out a way to profit off their destruction
— by turning foreclosed homes into rentals and securitizing the rental
income…

The Blackstone Group, the biggest
player in the new REO [real estate owned] to rental market, has spent
$2.5 billion in the last year purchasing 16,000 homes, a number that
amounts to over $100 million per week.

Property records show that many of the
homes Blackstone has acquired in Fulton County over the last few months
were purchased on the courthouse steps at the monthly foreclosure
auction, or through short sales — when a lender agrees to accept less
than the amount owed on a loan. The vast majority of these homes are not
empty, but occupied by homeowners who fell behind during the Great
Recession…

Gone are the days of calling up your
landlord to let them know rent will be there on the 7th instead of the
1st this month. As more and more Americans live paycheck to paycheck,
and wages continue to decline or remain stagnant, paying rent a few days
late could lead to a negative credit score, impacting their ability to
secure resources and move up the ladder of the middle class.

“Paycheck to paycheck.” That’s the way serfs live. In someone else’s
house. On someone else’s money. Often driving in someone else’s
automobile. And sometimes even sitting on someone else’s furniture.

Got a health problem? Oh, yes — check into someone else’s health system.

Want an evening out at a restaurant? Put it on a credit card; let someone else pay for it.

Serfs
don’t necessarily live poorly; they live badly. Because they’re not in
control of the resources they need to live well. They are dependent, not
independent.

We saw an ad for a new Smart car. “Just $199 a month,” said the ad.

People don’t own cars anymore. They just lease them… or not even. A
lot of young people use Zipcar — a car-sharing service by which you
“rent” a car using your iPhone. You never go to a rental agency or see a
rental agent. You get a code via iPhone. You use the code to unlock the
car. Easy. Peasy.

Some young people we know don’t own anything. They say it’s
“liberating.” But that is something else. Not owning anything can be a
smart financial strategy. But not owning a house because it was
foreclosed… and not owning a car because you can’t afford one… does
not sound very smart.

The Suits Take Over

You want a smart financial strategy?

Look at Blackstone. One of the houses it bought — probably much like
the others — was bought for $90,000. It has a mortgage on it of
$200,000. The former owners are still living in it. Instead of a
mortgage, they’re now paying rent. Now they’re serfs.

Do the math. If they bought the house in 2005, they probably had a 6%
mortgage. Six percent of $200,000 is $12,000. Add in another, say,
$3,000 in amortization and charges… and they probably had a monthly
payment of about $1,250.

Now the suits take over. Thanks to the conniving of other suits at the Fed,
they are able to borrow 30-year money for about 3.5%. Let’s add another
$10,000 to their purchase price (closing, taxes, maintenance) to make
the math easier.

That gives them a monthly capital cost of less than $300 per month.
And because these guys have big hearts as well as big wallets, they
reduce the renter’s monthly payment to only $1,000.

Everybody comes out ahead. The former homeowners don’t have to move.
They save money each month. And Blackstone — which may have only about
$10,000 of its own money in the deal — earns (are you ready for this?)
as much as $6,000, net, per year. That’s about a 60% rate of return on
its cash.

But wait. It gets better. Because Blackstone is not counting on a real bull market in housing. Nope, the geniuses at Blackstone are making a big bet on interest rates.

At no extra cost, they have gotten a free “put option” on the bond
market. That’s right: They’re short the bond market in a major way. When
bond prices finally fall (perhaps this process has already begun),
Blackstone is going to get another big jackpot.

And this payoff is practically guaranteed. Blackstone’s got its money-printing friends at the Fed to make sure it happens.

By Bill Bonner

http://www.billbonnersdiary.com/articles/bonner-american-serf.html

Retail investors just poured a record $77.4 billion into the stock market.

To put this in perspective, the prior record – set in February 2000 – was just $23.7 billion.

You can probably guess how that turned out…

This whoosh of money into stocks happened mere months before the
dot-com crash that wiped out billions in shareholder wealth… and took
the Nasdaq down by 78% from peak to trough.

Mainstream pundits take these big inflows as a sign of something called the “Great Rotation.”

No. This doesn’t refer to some new form of farming practice. It is a
“rotation” because supposedly there is an imminent shift of investor
money out of bonds and into stocks. And it is “great” because it will
supposedly cause stocks to shoot to the moon.

And it is all over the news, because you’re supposed to hop aboard and pile into the stock market

Watch out. This is not only a market cliche. It’s sloppy… even dangerous… thinking.

First, that retail investors are pouring record amounts of money into stocks four years into a bull market
is not exactly comforting. You already know about the last time
investors poured a record amount of their savings into stocks. They
couldn’t have picked a worse moment. (We imagine the 1664-67 Tulip
Bubble and the South Sea Bubble in 1711 saw similar big inflows the late
stages too.)

Second, the Great Rotation theory seriously misunderstands the nature
of markets. For every buyer of stocks there is a seller. And for every
seller of bonds there must be a buyer. Assets change hands. But somebody
still owns each and every outstanding stock and bond (unless they
somehow slip down behind the sofa).

So, although retail investors (aka the “little guy,” aka “mom and
pop,” aka the “dumb money”) may be pouring unprecedented wads of cash
into stocks, somebody somewhere is taking the other side of the trade.
Just as somebody somewhere took the other side of the trade in February
2000, in the last great stampede into a mature bull market.

Our outlook hasn’t changed…

The Fed and other central banks
are doing a rather wonderful job of stirring up animal spirits among
the financier class by evaporating yields on fixed income and pushing
the yield-hungry investors further out the risk spectrum.

But they are still unable to jump-start the middle class
– who not only can’t get a decent yield on their savings accounts
thanks to central bank intervention, but also have to deal with a real
economy that is limping along at stall speed (or in the case of the most
recent quarter, at “recession” speed).

It is difficult to resist following the crowd when it starts to stampede. But it is usually prudent to do so.

As a long-term wealth builder, you need to be wary of chasing mature
bull markets. And of investing alongside the mainstream. This is the
core of Warren Buffett’s advice: “The less prudence with which others
conduct their affairs, the greater the prudence with which we should
conduct ours.”

Keep this in mind as you’re barraged with bullish commentary on the so-called “Great Rotation.”

By Chris Hunter

http://www.insideinvestingdaily.com/articles/inside-investing-021113.html