How long can Japan power world stockmarkets?

An interesting audio file of Gary Dorsch (Global Money Trends, Sir Chartsalot) being interviewed by Jim Puplava (Financial Sense) on 16 June.

He notes UK Chancellor of the Exchequer (i.e. finance minister) Gordon Brown's denial that increases in the money supply are closely correlated with inflation, and says that this is why governments around the world don't raise interest rates fast enough and high enough. (Now that Gordon Brown is Prime Minister, I don't expect a sudden change of heart.)

Dorsch also notes that foreigners are becoming reluctant to keep pumping cash into US Treasury bonds, and bond yields are rising. He regards the yield on the 10-year bond as critical for housing and stockmarket valuations.

He also notes that Japan is resisting rises on its own 10-year bond yield, for fear of a strengthening yen and weakening trade balance; but the rate (c. 2%) is still so incredibly low that traders are borrowing vast sums (the Japanese have $7.5 trillion in bonds, I think Dorsch stated) to invest in global equities. So until there is a significant hike, the "carry trade" will continue to help inflate stocks. He wonders whether at some point, "bond vigilantes" will have enough strength to force an interest rate rise.

Meanwhile, Dorsch notes growing interest in commodities. He likes producing countries such as Canada, Australia and Brazil, and thinks that the ever-growing demand for base metals and energy (especially oil) from China and India will bear them up on the tide.

"Real" mortgage rates - a real estate expert writes

A real estate expert, Jonathan J Miller, comments and expands on Barron's recent article on "real" mortgage interest rates, and the state of the housing market generally. I have added Matrix to the bears' link list.

Marc Faber bullish on Indian real estate

See here for Moneycontrol.com's interview with Marc Faber, where he expresses enthusiasm for Indian realty:

...I think that is a no-brainer in the long run. It is a problem for people who will have very high borrowings, against their realty because of interest rates. Realty has always been a cyclical industry, where prices move up or down. But by and large if I look at the world, the reason so many families are rich, that came out of realty, is that the money was tied up in realty. They did not do anything more stupid with their money like buying Internet stocks in 2000 and then losing 90% of their money as prices went down.

So, my advice essentially for people, if you are not an expert in financial matters, to own realty - a safer avenue to wealth.

Faber also predicts a near-future stockmarket correction in the US of more than 10%, and in the longer term:

I expect over the next 20 years interest rates in the US will go much higher than it is perceived by the market place as I think inflation in the US will accelerate on the upside partly because of the rise in the prices of commodity, energy and food. This is also partly because of the weakness in the dollar that will eventually lift import prices.

Inflation: the evidence

If you want to see what monetarists would assert is the fountain of inflation in the UK, here are the M4 money supply figures from the Bank of England, going back to 1963.

The average rise over the whole series is 13.485% per annum; over the last, "prudent" 10 years, 9.99% p.a.

To put it another way, if £1 could have been invested in 1963 at an interest rate that kept pace with this monetary expansion, it would now be worth something like £261. And that's assuming you would have been allowed this interest tax-free, so as to preserve the value of your money.

Contrast that result with the inflation statistics as given by this paper in the House of Commons Library. The figures only go up to 1998, but let's assume purchase prices kept to their approximate target of 2.5% p.a. after that. According to this research, a "basket" of goods and services worth £1 in 1963 would now cost about £15.

Where has the rest of the inflation come out? Asset prices, presumably, or bank profits. Or have the monetarists got it wrong?

One thing's for sure: even after adding net interest at available rates, cash savers have seen an enormous, long-term dilution of their share of the country's circulating money. They would, I estimate, need to receive about 6.7% per annum ABOVE purchase price inflation, to match the money supply increases.

If I've got it wrong, do please show me where the error has occurred.

More credible warnings

The Bank for International Settlements is joining its voice to the chorus, warning of excesses and a Thirties-style crash, as reported in the Wall Street Journal for 25 June.

A cheerfully dissenting view

Rachel Beck of the Associated Press is determined to see the sunny side, quoting past history to show that interest rate hikes don't need to mean stock drops. And if investors' mood is less bullish, that means buying opportunities come up. And as long as the average yield on the S&P 500 is higher than that on Treasuries, etc.

However, what will the average yield on stocks be, when consumers buy fewer goods and services? And shouldn't the yield be significantly higher, to compensate for investor risk? And how long does it take for a less bullish mood to end? These soothing words don't quite reassure me, somehow.

The Sunday Telegraph gets bearish

Looking at the recent fortunes of US Treasury bonds, "Sunday Business" Editor Dan Roberts thinks the turning point has come:

I'm sticking my neck out and saying that the time has come. The writing is on the wall...What follows next may turn out to be mild turbulence or the start of a steeper nosedive. Either way, it seems a prudent time to adopt the brace position...

Diana Choyleva warns of market turmoil, too

Diana Choyleva of Lombard Street Research is reported today warning of inflation and castigating the Bank of England for failing to raise interest rates earlier and faster. Well, actually she has been saying this for a while now, and some of our bears have been warning us for much longer. And this is still news-at-the-back, as though there is anyone in this country that does not stand to be affected!

Mark Skousen warns of market turmoil

I have just received an email from Investment U, featuring an article by Mark Skousen, who says that he recently attended a pre-book launch talk by Alan Greenspan. The Federal Reserve's ex-Chairman's memoir "The Age of Turbulence: Adventures in a New World" is due out in September.

Reportedly, Greenspan spoke of the scary periods in 1987 and 2001, and his surprise at the resilience of the US economy. Skousen notes two important points from the talk: Greenspan's enthusiasm for the future of the European Union under its more conservative economic leadership, and surprise at the low global interest rates that have helped to drive up the markets. Skousen suggests that interest rates may be on the rise, and the recently increased yield on the 10-year US Treasury bond seems to bear the same interpretation.

For investors, Skousen suggests using stop-loss triggers on share holdings (in a real emergency, will they work as intended?), gold and silver coin to pay your way if the worst comes, and a large amount of cash. Definitely a bear, and with a reputation for prescience: if you look at his website, you'll see that Skousen advised his readers to get out of stocks 6 weeks before the crash of October 1987 - "one of the few advisors to anticipate the crash".

I have to say that I expected it too, but I wasn't an adviser at the time; and I also anticipated the Far East slide of 1997 and the falls post-2000. Not because I'm a genius, nor on account of insider whispers: being naturally wary, I looked and listened for warnings from experts. And so, if I may suggest, should you.

Michael Panzner on bond yields

Michael Panzner commented in Monday's Seeking Alpha on the increased yield of the US Treasury 10-year bond. He sees it as another straw in the wind - "goodbye to the good old days". Ironically, in the ad box next to his article, a message flashed up, promising to double investors' money in the China boom. Fear meets greed.

Naturally, each day that disaster doesn't strike is taken as further confirmation that Panzner is wrong. I shouldn't count on that: exact timing isn't possible, but I haven't seen a refutation of his threat analysis, or a relatively painless solution.

To sum up... from India

A chartered accountant from India today summarises the general bear case about USA trade deficits and the future of the dollar. Mr Venkatesh apportions some blame to Asian countries, for choosing to keep their currencies weak in order to sustain their trading advantage.

The article is well worth reading in full, in particular the comments on oil and the threat of trading crude in Euros rather than dollars. It is also worrying that...

On March 28, 2006, the Asian Development Bank is reported to have issued a memo, advising members to be ready for a collapse of the US dollar. [see the International Herald Tribune report here.]

Since end March 2006, the US Federal Reserve has stopped publishing the quantum of broad money [...] This is the worst possible signal that the US Federal Reserve could have sent to the world.

[The rise in commodity prices] has led to inflation across the globe. No wonder countries are forced to increase their interest rates to fight inflation. This has triggered an interest rate hike across continents and the US is finding it extremely difficult to sustain its current borrowing programme: it hardly has any elbow room to manoeuvre.

The author says that the US can neither raise interest rates much further, because of the cost of servicing debt, nor lower them, because that may deny it fresh supplies of credit.

Either we are witnessing a global meltdown of the US dollar, or a controlled US dollar devaluation (read, revaluation of other currencies). If it is a global meltdown the global economy is doomed, if is an orderly devaluation, it is damned.

China announces changes to interest and exchange rates

As I said on 16th May. Though it didn't take a genius to foresee: the Chinese are careful to flag up their intentions so as not to scare anyone. The interest rate increase means the yuan/renminbi will rise against the dollar.

The other move looks like part of a longer-term strategy: the band within which the yuan moves against the dollar is to widen from 0.3% to 0.5% (maximum per day - over time, unlimited), presumably partly to accommodate appreciation of the Chinese currency in response to the interest rate. This may please America, as a lower dollar will reduce the price advantage of Chinese good.

But I think it's also signalling the stage at which one partner tapes their favourite music, before they pack their bags and leave home for good. Having more flexibility in the dollar-yuan exchange may suit China's bigger plan, to move away from dependence on the US market.

Goodbye dollar, hello Euro?

China to watch US interest rate and exchange policies

... and from the other side, a thoughtful opinion by Zhang Ming in today's Chinese People's Daily online edition. It notes that changes in the US interest rate might have to be matched by China, but another option is for the US to devalue the dollar. Should the latter occur, it would affect flows of capital between the countries, but (in the writer's view) not so much the Chinese stockmarket, which is mainly powered by domestic investment.

Renminbi (Chinese Yuan) to rise soon?

A Chinese news report here details the current Chinese investment frenzy. The market doubled last year and has grown 50% so far this year. The interest on bank accounts is less than inflation, which is running at 3%, so private investors are raiding their accounts for money to speculate on stocks. One way to cool things down is to raise interest rates.