Month: February 2013

Home bidding wars in Washington D.C.

By Elliott Wave International

Home-bidding wars have erupted in Washington D.C., a reminder of the days of the real estate frenzy.

While much of the nation is still struggling to emerge from a historic housing-market meltdown, the District is reliving its boom days. High rents, low interest rates, low inventory, and a flood of new residents in their 20s and 30s are making parts of the city feel like it’s 2005 again.

Washington Post, Dec. 20

The article mentions a run-down home within walking distance of Union Station. The list price was $337,000 –but 168 bids later it sold for $760,951.

Prospective home buyers have bid up other Washington D.C. homes; a resurgence of the old real estate mania is also evident in Seattle, Boston and Palo Alto, Calif.

Will these new, highest-bidder home buyers have the price rug pulled out from under them in the same way buyers did in the mid-2000s?

In March 2005, The Elliott Wave Financial Forecast plainly said the real estate market was a bubble about to burst. That issue presented a special section titled “The Real Estate Bust Begins.” With the accompanying two charts below, the issue noted:

As shown in Figure 1, the transference of focus from stocks to property began four days after the NASDAQ’s March 10, 2000 peak, when the S&P 500 Homebuilding Index bottomed. Since then, the index has soared to more than a 700% gain, which resembles the NASDAQ’s October 1998-March 2000 ascent. … The five-wave pattern from 1990 in Figure 2 says that the January drop in home sales is the beginning of a much steeper long-term decline.

Remember, this analysis was published before the historic crash in real estate values.

Indeed, in most parts of the country, residential real estate prices remain well below their peak highs. Yet the resurgent bidding wars in some markets suggest that the lesson about bubbles remains unlearned.

Keep in mind what Robert Prechter wrote in the second edition of his book, Conquer the Crash:

“Real estate prices have always fallen hard when stock prices have fallen hard.” (p. 152)

“At the bottom, buy the home…of your dreams for ten cents or less per dollar of its peak value.” (p. 157)

Is it safe again to speculate in U.S. real estate? How should you handle loans and other debt? Should you rely on the government agencies to protect your finances? You can get answers to these and many more questions in Robert Prechter’s Conquer the Crash. And you can get 8 chapters of this landmark book — free. See below for details.

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By Chris Hunter

Most people won’t ever have seen a chart like the one I am about to show you.

It’s not because they wouldn’t find it useful. It’s because mainstream financial advisors have absolutely zero interest in the really big picture.

Greed is a powerful force in the markets. So is fear. But common sense, memory of past lessons and big-picture thinking don’t feature much. As John Kenneth Galbraith said, “There can be few fields of human endeavor in which history counts for so little as in the world of finance.”

Which is why we have things called “financial bubbles.” Greed, combined with a lack of understanding of the past, entices investors to invest alongside the crowd in pursuit of profit… even if they can’t explain why they think the price investments will continue to rise.

That is why today’s chart, below (courtesy of the folks at Bespoke Investment Group), is so important. Because it allows you to see present circumstances in the light of past events. And it gives us some important clues as to where stocks might go next…

The three shaded areas highlight three secular bear markets that the S&P 500 went through over the period — the first during the Great Depression, the second between 1966 and 1982 and the third starting in the late 1990s and lasting through to today.

A secular market is one that’s driven by long-term forces — such as economic expansions, breakthroughs in technology, political change and big demographic shifts. In a secular bull market, a rising tide of optimism lifts all boats. In a secular bear market, that tide of optimism falls again, taking asset prices with it.

What most people don’t understand about secular markets is that within them you get strong countertrend movements. A secular bull market… like the one that ran from 1982-2000… will have bear moves within it — the 1987 crash being a good example. And secular bear markets will have strong bull moves within it — such as the recent
125%-plus of the S&P 500.

But despite these countertrend moves, secular bear markets keep stocks locked within a trading range (the shaded areas on the chart above). In other words, markets are often flat after a secular bear market begins.

The big question is whether stocks are right now mounting the mother of all countertrend rallies… or whether they are on the point of breaking out of a secular bear market and entering a secular bull market.

We don’t know the answer. But we do know that the average secular bear market lasted 14.5 years. And that P/Es compressed by an average of 9 points — from 20.5 at the start to 11.3 at the end. And we know that we’ve been in the current secular bear phase for 12 years and have seen P/Es come down from a peak of about 40 to about 17.

A lot will hinge on whether the S&P 500 can break out to the upside from its current 13-year range. If so, it will likely be taken as extremely bullish. But the experience of the Great Depression was that there can be plenty of head fakes and false starts along the way.

By Chris Hunter

http://www.insideinvestingdaily.com/

By MoneyMorning.com.au

Last week we mentioned that mainstream investors can’t make an investment decision without some big macro-economic story guiding their hand.

At the time the big story was the so-called Sequester. That is, the automatic budget cuts and tax increases if the US President and Congress don’t cut a deal.

The deadline for the Sequester is Thursday, 1 March.

Yet even before that non-story gets a chance to wreak havoc on the markets, another has emerged. This one is the Berlusconi.

And judging by the market’s reaction to the Italian elections overnight, this is set to cause the stock markets more damage…or is it?

This morning, as we write, the S&P/ASX 200 is down 77 points. That’s 1.5%…a hefty drop by anyone’s standards.

But like it or not, the index is still more than 500 points higher than last November’s low point. And as we always tell you, the stock market never rises in a straight line. You’ll always get bumps and jolts along the way:

As we see it, the blow-off from the Sequester and the Berlusconi (named for ex-PM and prospective new PM, billionaire Silvio Berlusconi) will do little more than knock some of the wind out of the stock market’s sails.

So forget about Berlusconi. And forget about the Sequester.

Of course, we could be wrong…but we don’t think so.

We’re backing this market pretty hard. We don’t believe the low interest rate story has fully played out in the Australian stock market.

Yes, stocks have taken off since last June, but the Aussie market is still 29% below the 2007 peak.

And if you look at the measures taken in the US and Europe to boost their markets (zero per cent interest rates, money printing, nationalisation, subsidies and tariffs) the Aussie pollies and bankers still have a lot of room to move.

Not that we like those policies. By now you should know that we hate any form of government meddling. But when it comes to making money and building a treasure chest for retirement, well, we’ll admit it, we’re pragmatic as well as contrarian.

We understand that we can jump up and down as much as we like, but only a fool would stand in the way of a surging market.

Four Undervalued Sectors of the Stock Market

The question many investors ask is: where is the value after a 20% gain in just nine months?

As you know, our speciality is small-caps. It blows us away that there’s so much value in the more than a thousand Aussie stocks that fall into the small-cap category.

But it’s not just among the small-caps. Look at the following chart. We’ve compared the one-year performance of the Consumer Staples index (XSJ) with Energy, Industrials, Materials, and Metals and Mining indices:

Click here to enlarge

As you can see, over the past year the Consumer Staples index (blue line) has gained 34%. The next best performer in this chart is the Industrials index with an 8.55% gain.

This chart shows perfectly what has happened over the past year. Investors have piled into what they consider some of the safest stocks on the ASX – consumer staples stocks.

Not only do investors consider these stocks safe, but they pay healthy dividends too. That has made them a magnet for investors in the current low interest rate market.

Three Reasons to Back Resources Stocks

This is what we’re talking about when we say there’s still a bunch of value in the market. Not just in small-cap stocks, but in mid-cap and blue-chip stocks too.

It’s partly for this reason that we’re switching our focus back to resource stocks in the next issue of Australian Small-Cap Investigator.

We’re betting that resources stocks (energy and metals) will be the next to benefit from record low interest rates. Our old pal Dr Alex Cowie says that the Chinese government is set to splurge on stimulus and infrastructure spending over the next two years.

If he’s right, it will be a boon for Aussie resources stocks. Add this to low interest rates and it could be take-off for the sector.

Many investors think commodity prices have to be high for resources companies to do well. That’s wrong. The biggest factor in resources stock prices aren’t commodity prices, it’s the access to capital.

If China is set to splurge (as Doc Cowie says) and if interest rates stay low, investors are more likely to back resources stocks. But that’s not all, low interest rates will make companies more inclined to seek financing.

As we say, we could be wrong. But from where we’re sitting, the combination of undervalued stocks, China’s infrastructure spending, and low interest rates should make the energy and metals markets the hottest sectors to invest in this year.

Cheers,
Kris
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From the Port Phillip Publishing Library

Special Report: The Gold Mirror of Kaieteur Falls

Daily Reckoning: Stock Prices Are Not What You Think They Are

Money Morning: China Bull Versus China Bear – There Can Only Be One Winner

Pursuit of Happiness: ‘Let Them Eat Horse’

By MoneyMorning.com.au

There’s a lot of talk about currency wars these days, but very little understanding about what that means for specific countries, economic growth, inflation, and your pocketbook.

Let’s fix that.

First of all, there has been no declaration of any currency war. And there likely won’t be. That’s because open currency warfare could quickly lead to a mushrooming global crisis.

But that doesn’t mean countries aren’t already engaged in currency battles; they are. They almost always are.

Here’s an over-simplified explanation about how currency wars affect you…

What You Need to Know About Currencies

If Japan exports cars to America and America exports grain to Japan, each has to pay the other. American grain exporters want to get paid in US dollars, so they can spend those dollars in the US. The Japanese want to get paid in yen so they can pay their workers in yen, pay their taxes in yen, and spend their money in Japan.

Americans can ‘buy’ yen with their dollars to pay the Japanese for their cars, or the Japanese can accept dollars as payment and then use those dollars to buy yen themselves.

Of course it works the other way around if you’re a grain farmer selling to Japan.

But the value of yen to dollars, or dollars to yen, isn’t constant. There is no set exchange rate. Exchange rates are set in open currency trading markets where currencies are bought and sold to the tune of several trillions of dollars a day, every day. One day a dollar might buy 100 yen and the next day it might buy only 98 yen, or it could buy 102 yen.

Lots of factors determine exchange rates, but the biggest, by far, is interest rates. I’ll get to that, and then you’ll understand the whole currency thing, and never forget it.

Currency wars, which are waged all the time, but not dramatically, are all about the value of your ‘home’ currency relative to other countries’ currencies. Our home currency in America is the US dollar, in Japan it’s the yen, in the 17-nation euro-currency bloc it’s the euro, in Great Britain it’s the pound, and so on.

Countries that export a lot of goods want their currency to be ‘cheap’ relative to other countries, especially those countries who are buying the home countries’ exported goods.

If the value of American dollars to Japanese yen is strong, meaning a dollar can buy a lot of yen, when you buy a Japanese car, for example, it will take fewer dollars to pay for it.

If the value of the yen goes up relative to the dollar, that car is going to cost more because your dollars don’t buy as many yen as they did before.

Currency exchange rates have nothing to do with what kind of car you are buying from Japan or what features it has; the currency ‘cost’ is a separate component of the cost of that car. That’s true for all products imported and exported around the world.

Because Japan exports a lot of cars, not just to America, but around the world, it wants its currency to be ‘cheaper’ than other currencies so it doesn’t take as many dollars, or euros, or pounds to buy a Japanese car, or any product exported from Japan.

Here’s the problem. America is a huge exporter of goods and services, too. So is Germany, and of course so is China. From a political perspective, all governments want to support their exporting industries. It’s about manufacturing and jobs, and revenue and profits, and economic growth and standards of living.

The easiest way to facilitate an export-driven economy, like Japan’s, like China’s, like Germany’s, and like America’s (especially lately as domestic demand in the US has softened as a result of the Great Recession) is to keep the home currency ‘cheap’ relative to other currencies.

If exporting countries, especially those that don’t have big domestic demand bases, meaning less-developed and ‘emerging-markets’ economies, are all trying to export their way to growth (as is the US) and they all want to have their currencies be ‘cheap’ on a relative basis, that can’t happen. Everyone’s currency can’t be cheap at the same time.

That’s what precipitates currency wars. Governments who want to stimulate growth through exports (and who doesn’t?) usually subtly, but sometimes overtly, take measures to lower the value of their currencies.

Japan’s new Prime Minister, Shinzo Abe, in an unusual exception to the pacifist approach to currency skirmishes, recently fired a shot heard round the world. To lower the value of the yen, Abe is demanding domestic monetary easing, aggressive stimulus, and more dangerously, has openly been talking down the yen.

While Abe’s bold-faced rhetoric is provocative, G20 finance ministers and Christine Lagarde, Managing Director of the IMF, have been calmly trying to defuse any mounting tensions that could trigger any country-specific retaliation and a global race to devalue currencies.

Is Japan to blame? No. America really started the latest round of currency battles.

In order to ‘stimulate’ our way out of the Great Recession, which included President Obama’s articulated policy of dramatically increasing America’s exports, the Federal Reserve, in conjunction with the Administration’s wishes and its own interest in re-capitalizing the nation’s big banks the Fed is beholden to, has kept interest rates low, as in very low.

One of the ways the Fed has done this is by ‘printing’ money. The Fed has the ability, beyond the reach of Congress or the President, to buy what it wants, which is most often US Treasury government bonds (that pay interest). It pays for what it buys by simply issuing ‘credits’ as payment.

Those credits are turned into money as they are spent by the government whose bonds the Fed buys, or by banks who sell the Fed (on a temporary basis, with the intention of buying them back in the future, usually) their underwater mortgage-backed securities. Thus, the banks supposedly have money to lend.

Here’s Where It All Comes Together

Because the Fed has kept interest rates so low in America, investors who want more interest income on their money than they get here are parking their money in other countries where interest rates are higher.

In order to put your money into a bank in another country that offers higher interest rates than banks offer in the US you have to first buy that country’s currency. And that bids up that country’s currency relative to the dollars that you are selling.

In addition to the dollar being weakened, on a relative value basis, by investors selling dollars to buy and invest in other countries currencies, the amount of money being printed by the Fed means that at some point in the future all that money in the system will cause prices to rise.

Inflation is the result of a lot of excess paper money chasing a set amount of goods and services.

Inflation, and just the prospect of inflation, causes the dollar to fall further. And if the dollar is falling relative to the Japanese yen or the euro, other countries who want to grow their exports are going to eventually do what they have to in order to lower the value of their own currencies.

That’s how we get into currency wars. The net result is inflation, which arrives in several different ways.

You’ll know when it’s starting to spread. Interest rates will start to rise; watch the yield on the US 10-year treasury. Commodity prices will rise; you’ll see it in your grocery bills. You may already be seeing the incipient signs.

Stocks will rise at first – then start to collapse. So, make sure you’re in the market but keep raising your protective stops as prices rise.

Buy commodities and gold, but take profits on your commodities as they skyrocket; they won’t stay high forever.

Shah Gilani
Contributing Editor, Money Morning

Publisher’s Note: This is an edited version of an article that originally appeared in Money Morning (USA)
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From the Archives…

The Biggest Crisis to Hit the Stock Market Since the Last One
22-02-2013 – Kris Sayce

My Wife and Warren Buffett
21-02-2013 – Kris Sayce

How a Share Trader Approaches the Market
20-02-2013 – Murray Dawes

The Poster-Child for the US Shale Gas Revolution
19-02-2013 – Dr. Alex Cowie

The Two-Dimensional Diamond That’s Set to Turn Your World Upside Down
18-02-2013 – Dr. Alex Cowie

By MoneyMorning.com.au

If you’re looking for a good commodities play, it’s time you know how to invest in palladium.

Palladium is a rare metal that’s part of a cluster called platinum group metals, or PGMs. It’s 15 times rarer than platinum, and 30 times rarer than gold.

Palladium trades 33% below its all-time high of US$1,125 an ounce, so there’s plenty of room for it to climb just to match that level. And palladium is about to become scarce…really scarce.

Why is Palladium so Popular?

Palladium is a widely used metal for everyday items like electronics and jewellery. About 12% of palladium ends up in virtually every kind of electronic device. Your smartphone, flat screen TV, computer, tablet, and DVD player all contain palladium. But by far the most important application for palladium is in the automotive industry.

Fully 67% of all the palladium used each year ends up in vehicles. Some of that is used for the electronics of cars and trucks, but mostly it’s used in emissions control equipment. If you’ve ever wondered why catalytic converters get stolen, it’s in large part because of their palladium content.

Some of these autocatalysts can cost up to $5,000 to replace. More importantly, it’s the growing demand for cars around the world that’s lighting a fire under palladium demand. So much so that supply is simply unable to keep up. In 2011, there were 77 million light vehicles sold worldwide. Last year saw sales of 81 million, and this year is expected to reach 85 million.

By 2018, the world is expected to reach sales of 104 million light vehicles. Most of that growth is coming from China, South America, and South Asia. China is a top auto market and a top auto manufacturer. An increasing number of the vehicles that it produces and sells in domestic and foreign markets are subject to environmental standards.

To comply, these vehicles must be fitted with catalytic converters, which require PGMs. And as many markets, including China, are facing increasingly tighter regulations, more of these metals will be needed.

Looming Palladium Supply Issues

Palladium supply last year fell short of demand by about 915,000 ounces, and this year is shaping up to extend those shortages.

Barclays estimates that 2013 will see a shortfall of 511,000 ounces, and Morgan Stanley expects deficits to persist until at least 2017, with a record annual average price to be set in 2014.

A confluence of factors is setting the stage for the expected shortfalls. In fact, these factors are serious enough that the predicted shortages could easily be much worse than anyone has predicted.

Most of the palladium produced today comes from two countries: South Africa and Russia.

South Africa contributes about 38% of annual worldwide production, while Russia accounts for about 44%. Both have their problems. In the past year, South Africa has been plagued with labour disruptions that have become very serious.

Starting in August, workers at LonminPlc’s Marikana mines went on strike over pay. There were clashes between them and the police, which sadly led to 46 deaths. And the problems continue.

But the biggest wild card is Russia.

Lower ore grades have contributed to falling palladium output from Russia. Norilsk Nickel, the world’s largest palladium producer, is seeing its palladium output decline. Their 2012 output was 2.73 million ounces, but they expect to produce only 2.6 million ounces in 2013. Virtually all Russian-mined palladium is produced by Norilsk, accounting for nearly 44% of worldwide palladium output.

Let’s just say Norilsk knows the palladium market intimately. That’s why it’s all the more important to pay close attention to what Norilsk management has to say.

And keep in mind that Russia not only produces palladium, but also sells palladium into the physical market from its long-running stockpiles. That state repository is called Gokhran.

Russia’s Secret Palladium Reserve

Almost no one really knows just how much Russia still has at Gokhran.

Back in 2010, as much as one million ounces of palladium were sold from Gokhran, representing 15% of global supply. In 2011 only 775,000 ounces were sold from the stockpile.

Last year, it had dropped by over two thirds to only 250,000 ounces. And this year, it’s expected that Gokhran will only release 150,000 ounces, representing just 2% of world supply.

Here’s how it looks:

• 2010: Gokhran supplied 1,000,000 ounces
• 2011: Gokhran supplied 775,000 ounces
• 2012: Gokhran estimated supply: 250,000 ounces
• 2013: Gokhran estimated supply: 150,000 ounces
• 2014: THERE WILL LIKELY BE NOTHING LEFT AT GOKHRAN!

For years the world palladium market has relied on supplies form Gokhran, but they are now drying up.

Between 2010 and 2013, there will be an 85% drop in supply.

Gokhran was 15% of global supply only a few years ago, this year it may only represent 2%.

According to Anton Berlin, deputy chief at Norilsk Nickel, sales from Russia’s state stockpile is likely to range from ‘zero to several tons’ in 2013.

Palladium supply experienced a deficit of about 915,000 ounces in 2012, thanks to lower supply from Russia and South Africa, plus higher investment and autocatalyst demand amid a fall in recycling.

In contrast, 2011 saw a surplus of 1.26 million ounces. That’s a two million-ounce swing between 2011 and 2012. And the market is about to start feeling it.

Johnson Matthey, a metals refiner and foremost authority on platinum and palladium, meanwhile, forecast an 11% drop in global palladium supply to 6.570 million ounces for 2012, the lowest level since 2003.

Peter Krauth
Contributing Editor, Money Morning

Publisher’s Note: This article originally appeared in Money Morning (USA)

Join Money Morning on Google+

From the Archives…

The Biggest Crisis to Hit the Stock Market Since the Last One
22-02-2013 – Kris Sayce

My Wife and Warren Buffett
21-02-2013 – Kris Sayce

How a Share Trader Approaches the Market
20-02-2013 – Murray Dawes

The Poster-Child for the US Shale Gas Revolution
19-02-2013 – Dr. Alex Cowie

The Two-Dimensional Diamond That’s Set to Turn Your World Upside Down
18-02-2013 – Dr. Alex Cowie

USDCHF’s upward movement extends to as high as 0.9338. Key support is at the upwards trend line on 4-hour chart, as long as the trend line support holds, the uptrend could be expected to continue, and next target would be at 0.9400 area. On the downside, a clear break below the trend line support will suggest that a cycle top has been formed, and the uptrend from 0.9021 has completed, then the following downward movement could bring price back to 0.8950 zone.

Daily Forex Forecast

By www.CentralBankNews.info     Angola’s central bank kept its base rate, the BNA rate, steady at 10.0 percent, saying inflation is continuing its declining trend while credit extended to the economy fell by 2.63 percent in January, reversing the trend seen in previous months.
    The National Bank of Angola (BNA), which cut it rate by 25 basis points in January following a 25  point cut in 2012, said the inflation rate eased to 8.9 percent in January, down from December’s 9.02 percent, setting a new low in the country’s recent history.
    The central bank worked for many years to push inflation down into single digits and in August last year inflation finally fell below 10 percent and it has since stayed there.
    The BNA said the average exchange reference rate of the kwanza to the U.S. dollar was 95.94 at the end of January, compared to 95.826 at the end of December, “maintaining exchange rate stability in the primary market.”

    www.CentralBankNews.info

By Chris Hunter

The last three weeks have been torrid for gold investors. Over that time, the gold price has fallen by about $100 — a loss of about 5%.

And unless gold closes above $1,605/oz gold will see a “death cross” of its 50-day and 200-day moving averages.

View larger chart

In other words, its 50-day moving average will cross below its 200-day moving average — which hasn’t happened since 1998.

I don’t recommend you try to trade gold. Instead, you should think of gold as a form of “cash” that central banks cannot print.

Gold is an honest currency. You own gold because it makes more sense
to keep some of your cash out of the reach of overzealous central
bankers. In other words, gold is not an “investment” in the traditional
meaning of the word. So these kinds of short-term moves are not hugely
significant.

That said, you need to keep an eye on whether one of these short-term moves breaches a longer-term trend.

This hasn’t happened yet. But I’m watching the $1,520/oz level
closely. That’s because since September 2011, gold has been trading in a
price range between about $1,520/oz and $1,800/oz. So a definitive
break below $1,520/oz would be something entirely new… and not at all
bullish.

There have been eight “death crosses” in gold since 1975. And
although the average returns for the following week and month have been a
gain of 0.69% and 0.5% respectively, the returns over the following
three months and six months have been mostly negative (-0.64% and -1.56%
respectively).

The last time we saw a “death cross” in gold, in December 1998, gold
fell more than 10% over the following six months. If we see that kind of
decline again this time around, it would put gold at $1,424/oz six
months from now (a rupture of its recent trading range).

There are many drivers of the gold price. Weak demand from India and
the recent Chinese Lunar New Year celebrations would certainly have a
big impact.

But we also have an increasingly complacent investor mindset in
developed world economies, where stock markets are rallying in
conjunction with massive central bank stimulus. The “fear factor,” in
other words, is significantly lower today than it was at any point in
2012.

To be honest, it’s hard to make sense of the gold sell-off. Central
banks around the world are aggressively printing money… and yet the
world’s only unprintable currency — gold — is selling off. Gold mining
stocks are also suffering badly and have reached multiyear lows.

Is there forced selling going on somewhere? We know George Soros has
unwound a big position in gold ETF GLD. Is there some big gold trade unwind going on we don’t know about? Sure feels like it.

The fundamentals, as we see them, are still supportive of gold.
Every developed country is now printing money without limit. And 38
countries around the world are pursuing a zero or negative real interest
rate policy. Now is not the time for gold investors to panic.

Gold has been in a secular bull market for over a decade. But it is
now down more than 10% from last October’s 52-week high — putting it
officially in correction territory.

That is normal for an asset that has been in bull mode for so long.
For now, just remember that nothing goes up in a straight line. And be
prepared for further price weakness over the short term.

By Chris Hunter

http://www.insideinvestingdaily.com/

By www.CentralBankNews.info
    Central banks typically target short-term interest rates to control inflation and economic activity and have relied on financial markets to take care of long-term rates to stabilize the economic cycle.
    But this framework – described as ‘benign neglect’ by Philip Turner of the Bank for International Settlements (BIS) – is now over as central banks in most advanced economies have loaded up with government bonds since the Global Financial Crises, driving down real rates to negative in an effort to stimulate economic growth.
    “Yet given high government debt and the size of central bank holdings the question of what should be the policy framework for the long-term interest rate is bound to become more prominent,” writes Turner in the latest working paper from Swiss-based BIS entitled “Benign neglect of the long-term interest rate.”
    There are clear advantages to low long-term rates, including stimulating borrowing, repaying debt, making the financial system more resilient to shocks and allowing emerging economies to finance their infrastructure and housing needs more safely.
    “But an extended period of very low long rates and high public debt creates financial stability risks,” writes Turner, adding that banks and some institutional investors face growing interest rate risks and central banks now hold a high portion of their own government bonds, most of which have failed to stop the rise in the debt-to-GDP ratio.
    Illustrated by last week’s reaction in financial markets to the Federal Reserve’s January minutes, central banks’ exit strategy from their large holdings of government bonds will be controversial, complex and without precedence for markets to rely on.
    “With massive government debt and uncertain fiscal prospects, it is very difficult for the private sector to know what to expect in the next few years. The extraordinary expansion in the balance sheets of central banks, which averted the danger of global depression, causes additional perplexity,” said Turner.
    In his topical paper, Turner helps prepare the ground for the brewing debate over how long-term rates and government bonds should figure in central banks’ framework.
    The latest installment of the debate will come in March, when the Federal Reserve’s policy body is set to review its asset purchase program followed by Federal Reserve Chairman Ben Bernanke’s scheduled press conference March 20.
   “Could a crisis force the authorities into sub-optimal choices? They will not be able to assume, as they had in the decade or so before the crisis, that the long- term rate will just take care of itself,” wrote Turner.

    www.CentralBankNews.info
   

By www.CentralBankNews.info     Israel’s central bank held its policy rate steady at 1.75 percent, as expected, saying it is too early to tell whether the economy has turned the corner though it seems clear that the risk of a deterioration in the global economy has declined.
    The Bank of Israel (BOI), which cut rates by 100 basis points in 2012, said inflation still looks to remain slightly below the bank’s target range over the next 12 months but cautioned that the rate of increase in home prices has continued to rise and hopefully new guidelines should “moderate the pressure in the housing market to a certain extent.”
    Indicators of economic activity in Israel have been mixed, the bank said, noting better expectations and the possibility of an improvement in January.
   However, the BOI said the fourth quarter growth rate was 2.5 percent, below previous quarters, reflecting lower exports and imports and slower growth in consumption and investments, apparently affected by Operation Pillar of Defense.
   “It is therefore early to assess whether this represents a turnaround in economic activity,” the BOI said. In the third quarter of 2012, Israel’s Gross Domestic Product grew by a rate of 3.1 percent.

    The inflation rate in January fell to a below-forecast 1.5 percent from 1.6 percent in December and the BOI said expectations for the next 12 months, based on capital markets, are for 2.5 percent. Expectations for BOI’s policy rate one year from now are for 1.6-1.7 percent.
    Accommodative policy among central banks in major advanced economies is expected to continue and Europe’s recovery is expected to be very slow even if some sentiment measures point toward the possibility of an improvement in the beginning of this year, the BOI said, adding:
    “The improving trend in the global economy continued, and the widespread assessment is that there has been a decline in the probability of occurrence of the risks which generated a very high level of uncertainty last year—the fiscal cliff in the US, a deterioration in the debt crisis in Europe, and a moderation of growth in China.”

    Last week the BOI raised the amount of capital that banks are required to hold against most types of home loans, continuing its recent efforts to limit the real estate boom. Over the past five years, credit for housing has risen some 76 percent and the aim of the new guidelines is to bolster banks’ capital buffers in light of the increased risks in their housing credit portfolio.
    In the 12 months ending in December, home prices in Israel rose by 6.7 percent, up from a rate of 5.8 percent in November, and growth in the volume of new mortgages also continued.
    The day after last month’s BOI meeting, its highly-respected governor, Stanley Fischer, announced he was stepping down on June 30 after more than eight years in his post.

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