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Friday, November 13, 2009
Emerging Markets Bubble Continues to Inflate, but for How Long?
0 comments Posted by shuseel at 8:45 AMYesterday, emerging markets (proxied by the MSCI Emerging Markets Index) recorded their biggest fall since July, ending a week of solid gains. Still, this one-day slide of 1.4% pales in comparison to the nearly 100% gain that the index has achieved since bottoming last March. In other words, while investors might be starting to pull back, the direction of asset prices is still upward.
As for what’s causing this across-the-board appreciation, that was the subject of my previous post (Inverse Correlation between Dollar and Everything Else…Still), in which I merely stated the obvious; that the Fed’s year-long program of negative real interest rates and quantitative easing (i.e. wholesale money printing) has unleashed a flood of cash into global capital markets. Since we’re not just talking about the Dollar, here, it makes sense to point out that the Fed’s easy money policies have been copied by Central Banks in most other industrialized countries, including the UK, Canada, Switzerland, Sweden, and to a lesser extent, the EU.
As for why emerging market assets and currencies seem to be outpacing appreciation in other asset classes, that’s also not difficult to explain. First of all, by some measures, emerging market stocks have hardly outperformed other assets. Oil, for example, has risen by 131% in less than a year, to say nothing of other commodities. Still, by other measures, growth has been remarkable. Most emerging market stock indexes and currencies have fully erased (or come close to erasing) the losses recorded during the peak of the credit crisis. Bonds, meanwhile, have gone one step further. Yields are collapsing, and prices have exploded – by 25% in the last year, sending the JP Morgan Emerging Market Bond Index to a new record.
Is it safe to call this a bubble? Intuition would suggest so; given that all assets are rising across the board, without regard to particular fundamentals, it would seem that only a herd/bubble mentality could offer an explanation. Some analysts, in fact, have given up completely on fundamental analysis, instead using fund inflows (i.e. investor demand) to predict whether some emerging market assets will continue rising. As Nouriel Roubini (the NYU economist that famously predicted the credit crisis) summarizes: “Traders are borrowing at negative 20 per cent rates to invest on a highly leveraged basis on a mass of risky global assets that are rising in price due to excess liquidity and a massive carry trade.” P/E ratios are nearly twice as high in some emerging markets, compared to stocks in the S&P 500.
On the other side of the equation are the bulls and the efficient market theorists.”By historical price-to-earnings ratios — the ratio of stock prices to per-share profits — these levels can be justified, if the economic recovery continues. With massive layoffs, business costs have been cut sharply. “The hope is that when consumers and companies start spending, the added sales will drop quickly to the bottom line [profits].” Other proponents argue that the rise in asset prices is exactly what the Fed wants, since it implies that the markets are once again characterized by stability and liquidity.
Regardless of whether growth materializes, however, that doesn’t change the fact that the free ride can’t and won’t last forever. At some point, Central Banks will be forced to raise interest rates and start withdrawing Trillions of Dollars from global capital market. This will cause the Dollar to rise, and investors to rapidly unwind their carry trade positions. Warns Roubini, “A stampede will occur as closing long leveraged risky asset positions across all asset classes funded by dollar shorts triggers a co-ordinated collapse of all those risky assets – equities, commodities, emerging market asset classes and credit instruments.”
If the tech-bubble and real-estate bubble taught us anything, it is that there is no free lunch in the markets. It is not possible for all investors in all assets classes to simultaneously win. At least, in the long-term. In the short-term, meanwhile – it pains me to say this – let the party continue. My only warning is this: when the music stops, don’t be the one caught with your pants down…
Thursday, October 8, 2009
The pound advanced to the highest level this month against the dollar
0 comments Posted by shuseel at 11:35 PMThe pound advanced to the highest level this month against the dollar as the Bank of England left its bond-purchase program unchanged and kept its main interest rate at a record low.
Sterling also climbed versus the euro and the yen after the central bank said it wouldn’t add to the 175 billion pounds ($282 billion) it has committed to the asset-purchase plan, as predicted by all 42 economists in a Bloomberg survey. Policy makers may consider enlarging the program after reviewing it next month, former Deputy Governor John Gieve said two days ago. Gains by stocks also bolstered the currency.
“There should be a little bit of relief for sterling because there’s always a risk of a surprise,” said Daragh Maher, deputy head of global foreign exchange at Calyon, the investment-banking unit of Credit Agricole SA. “But because we had quite a strong morning for sterling it might not have the same bullish impact as it could have done.”
The pound advanced 0.8 percent to $1.6089 as of 5 p.m. in London, after rising to $1.6114 earlier, the highest level since Sept. 30. It strengthened 0.2 percent to 91.84 pence per euro, after weakening as much as 0.3 percent. It climbed 0.5 percent to 142.22 yen.
Policy makers also left their main rate at 0.5 percent, as forecast in a separate Bloomberg survey.
The yield on the two-year gilt fell to 0.69 percent, the lowest level since at least January 1992, according to Bloomberg generic prices. The 10-year yield declined 3 basis points to 3.36 percent.
The 4 percent 2022 gilt extended gains after the Bank of England said the bond will be included in its asset-purchase program from next week. The yield on the security fell 4 basis points to 3.60 percent.
Stocks Rise
Sterling climbed 0.6 percent against the dollar and 0.5 percent versus the euro on Sept. 10, when the Bank of England left the asset-buying program unchanged. It lost 0.8 percent against the euro and 1.2 percent against the dollar on Aug. 6, when the central bank unexpectedly extended it by 50 billion pounds.
The country’s benchmark stock gauge, the FTSE 100 Index, rose 0.9 percent, and Europe’s Dow Jones Stoxx 600 Index advanced 1.3 percent.
The “next decision point” for the Bank of England will be the Nov. 5 meeting, Gieve said in a Bloomberg Television interview on Oct. 6. Increasing the bond program next month, when the bank will have new economic forecasts, “will be an option they’ll look at pretty closely.
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On Wednesday, as GBPJPY tested and then overturned from 140 once again, the British pound gained ground in opposition to the majors. No UK data was released, but the British pound is going to see event risk on Thursday from the Bank of England’s (BOE) most recent rate conclusion. The BOE is expected to be released at 7:00 ET that they have left their Bank Rate the same at 0.50 %, but this is not going to be influential enough to move the market as the statement. In its place, traders are going to be looking toward the BOE’s policy announcement. This has always been the key news event of current rate conclusions. Last month, the BOE showed a neutral position as they announced they would keep their £175 billion quantitative reduction program go on, and this eventually led the British pound to rally in opposition to the US dollar and euro right away.
Sunday, October 4, 2009
In the light of the recent financial turmoil, the new Banking Act provides a permanent set of tools that allows the tripartite authorities to resolve a distressed bank or building society in an orderly way. These powers will help reduce the impact of bank failure on financial stability and bank customers.
The Act will increase the responsibilities, powers and role of the Bank:
- creating a new Special Resolution Regime (SRR) for dealing with distressed banks
- giving the Bank a statutory financial stability objective and with it creating a Financial Stability Committee to advise on financial system matters
- formalising the Bank's payment system oversight role
- creating a new framework for issuance of Scottish and Northern Ireland banknotes to be overseen by the Bank
These changes, beginning with the introduction of the SRR which took place on 21 Febuary, will be implemented in stages during 2009.
The Act draws on an extensive consultation launched by The Chancellor during 2008.
Bank of England's Centre for Central Banking Studies conducts seminars
0 comments Posted by shuseel at 1:17 AMThe Bank of England's Centre for Central Banking Studies conducts seminars and provides expert advice for central banks throughout the world. It is a centre for comparative study and collaborative research on issues at the forefront of central banking.
Its primary aims are to foster monetary and financial stability world-wide, to promote the Bank of England's core activities, and to provide opportunities for central banking staff to obtain broader perspectives on their own areas of expertise. Its goal is to be recognised internationally as a centre of intellectual excellence for the study of central banking.
The CCBS is based at the Bank of England in London and is staffed by experienced central bankers with technical expertise drawn from the various operational and analytical areas of the Bank of England.
Thursday, October 1, 2009
The general factors behind the price of gold are too broad and numerous to be captured in this post. In addition, many of these factors have little to do with currencies (including the Dollar), and thus don’t warrant much space on a blog devoted to forex. At the same time, conspiracy theorists, doomsday predictors, and even some mainstream economists have long argued in support of gold as a hedge against inflation (otherwise understood as currency devaluation). In fact, I am only posting about gold now is because that notion has become much more popular over the last few years, to the point where pundits have come to see the current appreciation almost solely in terms of the decline in the Dollar.
That’s because many of the more conventional factors – the same ones that affect prices for other commodities – suggest that gold prices should be declining. Non-speculative demand (i.e. jewelry, industry) remains subdued as a result of the economic recession. Speaking of which; while there is now some evidence of recovery, it is nowhere near robust enough to support a return to bubble prices. In addition, the International Monetary Fund (IMF) just approved a massive sale of its gold reserves, equivalent to 15% of the world’s annual gold production.
Yet the price of gold remains not only stable, but positively buoyant. According to analysts, this is because of an increasing sense of anxiety about the viability of the Dollar as the world’s reserve currency. Euro Pacific Capital’s Peter Schiff, an effusive source of commentary on the markets, believes the price of gold will skyrocket to $5,000 per ounce. “Schiff’s forecast is based on his view the U.S. dollar is going to collapse under the weight of our massive deficit and reckless policies of the Obama administration, which he compares to the massive spending programs of the 1960s, which paved the way for gold’s ascent in the 1970s.”
Other analysts take Schiff’s view one step further by arguing that a shortage of viable alternative reserve currencies (Euro, Yen, Pound, Yuan, etc are plagued by similar fundamental flaws as the Dollar) makes gold the best candidate to replace the Dollar. Some people even hold the extreme view that the entire fiat monetary system will collapse, with the result being a barter system centered around gold. In any event, people are nervous: “That means a growing number of investors, traders — and, most troublingly, foreign governments — don’t believe in the strength of the U.S. dollar, analysts warn. People buy gold when there’s fear.”
On the other hand, it seems reasonable that gold is appreciating for the same reason that everything else is. In this sense, rising gold prices are hardly remarkable. Silver and platinum, for instance, have risen nearly 50% year-after-year, despite similarly weak fundamentals. There is a danger in connecting the Dollar’s decline too closely with the rise in gold, since the former is largely a function of short-term factors such as low interest rates and increasing risk appetite. “With the Fed confirming that interest rates could be steady for a long time, the dollar may continue to be dumped in favor of higher yielding currencies, which may favor the yellow metal.”
While there’s reason to be alarmed or even angry about deficit spending, quantitative easing, money printing, and unsustainable debt, there’s very little to support the notion that inflation is taking hold. In fact, based on both Treasury bonds and inflation securities, inflation is the last thing on the minds of investors. In addition, while gold represents a conceptual reserve commodity, it’s not very practical. It has very little utility (especially compared to other commodities), and its supply can be easily manipulated by producers and central banks. One analyst explains, “Even a rather wobbly reserve currency is better than gold. Gold is far less liquid than U.S. Treasury securities, costly to store and insure, and above all more volatile in price.”
Still, perception is reality in financial markets. If investors want to see a connection between a weak Dollar and strong gold, they will simply contrive one. But if the Fed raises interest rates and/or the Dollar stabilizes, you can expect gold prices to follow suit. If this happens, it won’t imply that confidence in the Dollar has been restored. Instead, it will only imply that investors can earn a higher return investing in Dollar-denominated assets and no longer need to speculate in gold.
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