Monday, 26 July 2010
Thursday, 22 July 2010
Wednesday, 21 July 2010
While RGE Monitor appreciates that gold was the best asset class during the past decade or so, it is by no means certain it will continue to outperform:
For the better part of 10 years running, all that glitters has, in fact, been gold. Since 2001, the precious metal has outperformed all of the core asset classes, gaining an average 15.3% per year in dollar terms since January 2001.
Gold is back in vogue for several reasons. Investors view it as an alternative to fiat money, as a hedge against extreme economic risks—which now include both high inflation and deflation—and as a measure of protection against financial meltdown. Given the intensity of the economic storm that has broken out over the past three years, in which all three fears have been invoked, gold and its fellow precious metals have spiked in price.
The concerns propelling the price of gold specifically are very real and should not be ignored. But is now the time for investors to jump the gold bandwagon? We wouldn’t encourage it.
Why aren’t we giddy about gold? In short, our core economic forecast scenario does not entail any of the extreme events that could result in a major gold price spike—and given the fact that the metal has already surged in price, we see several potential downside risks. In the abstract, gold is most attractive as a hedge in one of three extreme scenarios: high inflation, persistent deflation, or when the risk of global financial meltdown is large.
We think high inflation in the near-term is unlikely, given lingering slack in advanced economies. For prices to rise, there must be buyers, and weak employment in the U.S. and Europe, coupled with murky economic prospects, has led consumers to retrench and tighten their purse-strings. Should inflation eventually surface, it will do so only after balance sheets have been repaired. Unsterilized Fed intervention will have long since eased, and the Fed will be managing the money supply with respect to a rising money multiplier or by selling assets.
In other words, an increasing money supply is not de facto currency debasement. The demand for money also matters. Deflation risk remains, but Ben Bernanke has signaled in the past that the U.S. could pull out all stops—by printing more money—to prevent this dangerous outcome from materializing. For now, the U.S. dollar remains the preeminent safe-haven in times of severe stress—and a dip toward inflation would happen in such a time—so very much in line with Bernanke’s comments, the U.S. appears to have policy options at its disposal to stave off a period of sustained deflation.
Our core scenario is thus that once national balance sheets are repaired through a protracted and gradual deleveraging of household and public sectors (following the relatively rapid deleveraging of the financial sector, particularly in the United States), excessive deflation and inflation fears will subside. In periods when the risk of global financial meltdown rises, the dollar exchange rate may appreciate against other currencies, but there also tends to be a flight to safety and gold prices appreciate even more. Gold prices tend to rise during periods of financial stress, up until the peak of market concerns—and then fall when the stress is resolved via bailouts or measures that restore market confidence. There are certainly financial storm clouds to worry about—not least because of sovereign debt concerns in the Eurozone. Given this, we think it is possible that gold could continue to trend upward for a period.
We still are not recommending it, however, due to what we see as significant downside risks. They include: the possibility that the dollar-funded carry trade could unravel, popping asset prices—including that of gold—that have been bolstered by cheap borrowing in dollars; the concern that central banks will end quantitative easing and raise interest rates, again decreasing demand for risky investments like gold; and most basically the fear that gold prices have been driven up by herding behavior that could quickly turn the other way, prompting swift losses. Similarly, even as gold spot prices rise due to demand for physical gold in times of severe financial distress, futures contracts and ETFs—the tools many investors now use to invest in gold—could suffer due to increased fears of counterparty risk. Investors should thus take note—while gold and financialized gold products have posted consistent returns over the past decade, there are no guarantees that this golden goose will continue to lay eggs.
Monday, 19 July 2010
Wednesday, 14 July 2010
Alec Russell, author of ‘After Mandela: The battle for the soul of South Africa’ opined in the Financial Times that some major reforms are necessary to change the outlook for the South African economy:
With its economy accounting for 27 per cent of sub-Saharan Africa’s gross domestic product, South Africa rightly aspires to be the continent’s hegemon. Yet when analysts speculate about the hot emerging markets of the future they tend first to mention Nigeria, with its 170m people. It is not just that the commodity-dependent South African economy is one-dimensional. It also lacks Nigeria’s entrepreneurial dynamism. Partly this is the fault of apartheid which kept most business in white hands. But the ANC retains an apartheid-era distrust of the private sector.
The last is all the more striking as neighbours to the north race to attract business. One lawyer remarked recently how much easier it had been to complete an electricity deal in Mozambique than with South Africa’s cloying state power company. Some economists even argue provocatively that the country risks lagging behind rather than leading the region. Sub-Saharan economies are expected to grow by more than 5 per cent next year. South Africa has struggled to cross that magic mark, which would enable it to reduce unemployment.
Finance minister Pravin Gordhan has kept the left in check on macroeconomic policy. Trevor Manuel, his prudent predecessor, works into the night planning how to refashion the economy. But Africa requires more of the ANC. It has to jettison the tatty remnants of its nationalist mindset – a shift undertaken in Mozambique, Zambia and elsewhere – and refuse to settle for the country’s spluttering trajectory.
Tuesday, 13 July 2010
FT Newsmine reported last week that even the top fund managers found it very difficult in recent months not to accumulate huge losses:
"John Paulson – one of the world’s most prominent hedge fund managers – has suffered a second consecutive month of steep losses for his flagship hedge funds, most of which are heavily geared towards a recovery in the US economy. Amid volatile stock markets, the $3bn Paulson & Co Recovery fund, which has large positions in US banks such as Citigroup and Bank of America, lost 12.39 per cent in June, according to an investor in the fund.""The loss comes on top of a 9 per cent loss sustained in May when markets were convulsed by a series of shocks including the eurozone sovereign debt crisis and the so-called 'flash crash' in US equity indices. The recovery fund is still up on the year, however, after strong performance in the first quarter.""The $9bn flagship Paulson & Co Advantage fund lost 4.4 per cent in June, and is down 5.8 per cent in the year to date. Mr Paulson’s Credit Opportunities fund – which delivered 340 per cent returns in 2007 thanks to huge short positions against subprime mortgage instruments – was meanwhile down 0.9 per cent in June. Mr Paulson’s gold fund – set up barely a year ago – returned 7.3 per cent last month, however, and is up 13 per cent this year."
Monday, 5 July 2010
Friday, 2 July 2010
One of the major investment fallacies around is that some investors believe or being told that because they are "sophisticated" they need sophisticated investments which will yield higher returns than those available to ordinary souls. Fortunately, for us -the ordinary investors - this is far removed from reality. Mark T. Hebner, President, Index Funds Advisors, explains this in his weekly column:
In the recent controversy swirling around Goldman Sachs, we have had the good fortune to be introduced to many charming Wall Street expressions such as "ripping the client's face off" or "blowing up the client". However, one term that has kept showing up like a bad penny (or a defaulted subprime mortgage) is "sophisticated investors". Specifically, Goldman has countered the SEC's charges of fraud with the claim that all the poor saps on the wrong side of the synthetic CDO trade were among the world's most sophisticated investors, and thus deserve neither sympathy nor recompense. The merits of Goldman's arguments will be left to the courts to decide. Our purpose here is to take a deeper look into the general application of the term "sophisticated investor".
It is IFA's position that the term "sophisticated investor" carries no value and is best expunged from our vocabulary. There are good investors who diversify both within and among asset classes, control their costs, and keep constant vigilance over their self-destructive behavioral tendencies. Investors who fail to do these things can be classified as poor investors (pardon the double entendre). It has nothing to do with one's level of investable assets. While it may be tempting to apply the "sophisticated investor" label to certain institutions such as Goldman Sachs which had not a single day of trading losses in the first quarter of 2010, we would be remiss not to point out that the bulk of these trading profits derived from their ability to borrow from the government (i.e., taxpayers) at zero and collect a spread on lending back to Uncle Sam, all the while using leverage to magnify their gains.
Regarding Goldman's "recommended top trades for 2010" for its ultra-sophisticated clients, a recent article on Bloomberg.com showed that seven of the nine trades have been money losers so far in 2010. Some of the trades, such as buying the Polish Zloty while shorting the Japanese Yen almost sound a bit goofy. The spokeswoman for Goldman Sachs, Gia Moron (You can't make this stuff up!), declined to comment. Considering that the clients of Goldman Sachs are receiving investment ideas from a firm that does not owe them a fiduciary duty the term "sophisticated" seems highly misappropriated.
When we hear that someone is labeled as a "sophisticated investor", two possible images come to mind. The first one is of the high net worth individual who has access to exotic investments that are off limits to the most investors. Chief among these would be hedge funds. It is important to bear in mind that hedge funds are not required to report their performance, so the overall performance of various hedge fund categories reported by various databases is likely to be heavily upward biased. If you are a client of a major Wall Street firm and your broker tells you that you are a sophisticated (or qualified) investor, IFA's best advice is to turn around and run for the hills. This term is often used as a license to sell you a complex product with high fees and hidden risks such as leverage. The application of these terms to investors has often led to a dilution of fiduciary duty, which even if it is not explicitly contractual, is normally expected by clients. Just as Goldman and the other Wall Street sharpies regarded their trading partners (e.g., AIG) as sheep waiting to be slaughtered, clients of these firms have no reason to expect better treatment.
The second image of the sophisticated investor is the rocket scientist from MIT employed at Goldman Sachs who designs exotic derivative instruments that the rest of us can barely begin to comprehend. As with the wealthy hedge fund investor, risk and return are inseparable, and no application of brainpower will ever result in cheating risk. The market owes nobody a higher return merely because they are smarter than most of its participants. Every mathematical model in finance is built on assumptions, and 2008 taught us what happens when one of these assumptions turns out to be incorrect.
Other strategies that we associate with sophisticated investors are short-selling and buying on margin. However, thanks to companies like Profunds and Direxion, anybody, regardless of their level of "sophistication", can take a double/triple leveraged/short position in almost every index under the sun. A question worth asking is whether having access to these strategies is more likely to enhance or destroy wealth. The fact of the matter is that even if someone can successfully predict the return of an index over the next 1 to 12 months (which nobody can do except by luck alone), he will not be able to capitalize on his investment acumen using these instruments.
When it comes to sophisticated investors, it is truly a case of the emperor having no clothes, so perhaps the world would be a better place if we limited our use of the word "sophisticated" to describe advanced tastes such as art, music, or literature.