By www.CentralBankNews.info Japan’s central bank launched a radical overhaul of its monetary policy framework in an ambitious effort to banish deflation over the next two years through massive purchases of government bonds and a doubling the country’s monetary base.
At the first board meeting under its new governor, Haruhiko Kuroda, the Bank of Japan (BOJ) replaced it’s current asset purchase program with “quantitative and qualitative monetary easing,” under which it will no longer target the overnight call rate, which has been at effectively zero since December 2008, but the monetary base, or the amount of money in the economy.
The BOJ was also considerably more optimistic about Japan’s economy, saying it had now “stopped weakening and has shown some signs of picking up.” Last month, the BOJ only observed that the economy had stopped weakening, and has now added the sentence that it sees signs of a pickup.
It also said that Japan’s economy should return to a moderate growth path on the back of firm domestic demand and stronger growth overseas.
Although Japan continues to battle with falling consumer priced, the BOJ said “some indicators suggest a rise in inflation expectations,” the first sign that consumers and investors may be reacting to Prime Minister Shinzo Abe’s efforts to get the economy going and rid the country of deflation.
Japan has been caught in a cycle of declining prices for almost two decades and in February the inflation rate was a negative 0.7 percent, the ninth month in a row of deflation.
Under pressure from the newly-elected Abe, the BOJ in January adopted an inflation target of 2 percent, hoping that this would change consumers and businesses’ expectations and boost prices.
At that point the BOJ only said it expected to achieve this target at the “earliest possible time” and has now added that this target should be reached in the next two years.
The BOJ said it expects its new quantitative and qualitative easing program to keep interest rates low and “also to drastically change the expectations of markets and economic entities,” and “contribute to a further pick-up in inflation expectations that appear to have risen, and lead Japan’s economy to overcome deflation that has lasted for nearly 15 years.”
Under the new program, the BOJ aims to boost the monetary base by 60-70 trillion yen annually to a total of 200 trillion yen by the end this year and 270 trillion end-2014 from 138 trillion at the end of 2012 through money market operations. This compares with the U.S. monetary base of $2.84 trillion, or some 268 trillion yen, at the end of February.
In order to push down interest rates across all maturities, the BOJ will buy government bonds at an annual pace of about 50 trillion yen, or about 7 trillion a month. The BOJ will no longer focus its purchases on shorter maturities but include 40-year bonds so the average remaining maturity of its new bond purchases will extend to about seven years from less than three years.
The BOJ will also boost its annual purchases of Exchange Traded Funds (ETFs) and real estate investment trusts, so-called J-REITs, by an annual 1.0 trillion and 30 billion yen, respectively.
“The Bank will continue with the quantitative and qualitative monetary easing, aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining the target in a stable manner,” the BOJ said, adding it would adjust its policy in light of upside and downside risks.
The BOJ is one of the pioneers in using its balance sheet to stimulate economic activity and its current asset purchase program, which was launched in 2010 and aimed at purchases of 101 trillion yen by 2014, would be absorbed into the new program.
The BOJ’s decision to scrap its target for the overnight interest target shows how far central banking has come since the 2008 financial crises. At that point, many major central banks cut rates to effectively zero and were forced to use their balance sheets to boost demand.
The BOJ initially cut its overnight rate to 0.1 percent in 2008 and then trimmed it to the current level of 0-0.1 percent in 2010.
Kuroda, who has only been governor for two weeks, also temporarily suspended the BOJ’s previous banknote principle, saying the new bond purchases are for the “purpose of conducting monetary policy and not for the purpose of financing fiscal deficits,” addressing the fear that the BOJ may be loosing some of its independence and will now just be used to finance government deficits.
Under the banknote principle from March 2001, the BOJ had to limit its bond purchases so the total outstanding amount of long-term government bonds was below the stock of banknotes.
Japan’s Gross Domestic Product stagnated in the fourth quarter from the third, following contractions in both the third and second quarters, for annual growth of only 0.5 percent, marginally above the third quarter’s 0.4 percent growth rate.
How Struggling Aussie Housing is Hitting the Stock Market
I popped up to the Sunshine Coast for the break over Easter, staying in Mooloolaba.
I fell in love with the place I have to say. The locals are a laid back and friendly bunch.
I loved strolling across to the beach of a morning for a quick swim before grabbing a great coffee at the ‘good bean’, then whipping up some bacon and eggs on the BBQ’s by the ocean. The surf club has some great seafood as well.
As always when you find a place you’d love to move to you start flicking through the local papers having a squiz at properties. There was article after article calling the bottom in the real estate market. Apparently things are on the mend on the Sunshine Coast after five difficult years…
A quick search on Domain.com brought up 877 properties for sale in the surrounding area. Nearly 1,000 properties for sale in a fairly small area seems like quite a lot to my mind but perhaps that’s normal for the area.
The prices are certainly not what I would call cheap, with two bedroom apartments listed for about $400,000–$1,000,000 depending on their position. The seven-figure ones were prime positions overlooking the beach, but even so the housing prices remind me of Sydney rather than an hour and a half out of Brisbane.
Bad Data Brings Out the Bears
The shocking data on housing sales released yesterday has definitely placed a large question mark over the view that property has bottomed. If very low interest rates aren’t inspiring people to start buying property it won’t take much bad news to see prices sliding again.
Australian new home sales slid 5.3 per cent in February, driven by sharp falls in Victoria and South Australia. Sales in the detached new homes market are now tracking at the lowest level in the sixteen year history of the series and it was apparently the worst February on record. Hmm. Not good.
Victoria is looking the sickest of the lot with a drop of 13.7 per cent in detached new home sales!
Wow.
It looks like all of that endless optimism isn’t transferring into sales.
Our stock market actually reacted to the bad news on housing, which is a real turn up for the books. Usually bad news is shaken off like rain off a duck’s back, but for once there was some selling, despite the new record highs in the US market.
The only thing holding us up at the moment is the continued buying in the Financials, Health Care, IT and Consumer Staples sectors (i.e. defensives). Resources and small-caps are coming under some intense selling pressure.
Financials Diverging from the Miners
You can see quite clearly from the above chart that there is a huge divergence opening up between the Financials and the Metals and Mining Index. The ASX 200 (blue line) is being dragged higher by the strength in the Financials but the big picture is much muddier beneath the surface.
Small-Caps Not Keeping Up
You can see that the small-cap stocks are also finding it difficult to keep their head above water. There are plenty of small-caps that are going to the wall with the increased difficulty in raising capital to complete their projects.
So while the mainstream media is fixated on the record prices in the US markets it is quite clear that the reality is not so sanguine.
Murray Dawes
Editor, Slipstream Trader
From the Port Phillip Publishing Library
Special Report: Australia’s Energy Stock BLOWOUT
Daily Reckoning: The Australian Government’s Deficit Numbskullery
Money Morning: Good News in China’s Economy? Put This Date in Your Diary…
Pursuit of Happiness: Why a PlayStation and Mining Technology Have More In Common Than You Think
Why Crime Pays for ‘Too-Big-to-Fail’ Banks
You need to know the truth about banks.
Why? Because they rob you.
Why? Because they can.
It’s the Willie Sutton bank robber quote in reverse. Willie was asked, ‘Why do you rob banks?’
He famously answered, while in handcuffs, ‘Because that’s where the money is.’
But, banks can’t keep robbing the public if they keep shooting themselves in their feet. That’s where central banks come in.
They are the real kingpins keeping their robber minions in pinstripes — instead of prison stripes.
Estimates now are that US banks — the too big to fail ones — will end up paying more than $100 billion in fines, settlement costs, to buy back bad mortgages, to right some of the past wrongs related to the mortgage crisis they caused.
It could end up being more. But they’re all still in business. They’re able to digest these ‘costs of doing business’, and get bigger. And the banks are making enough profits to want to ‘reward shareholders’ by raising their dividend payouts and buying back their stock.
‘The Cost of Doing Business’
Then there’s the LIBOR mess. Banks colluded to manipulate the London Interbank Offered Rate. LIBOR is referred to by the British Bankers’ Association (an outfit populated by bankers as a kind of trade group that oversees LIBOR dissemination), as ‘the world’s most important number’.
There have been some settlements already. Three giant European banks — Royal Bank of Scotland, UBS, and Barclays — have ponied up almost $3 billion to settle matters regarding their involvement.
How much will the big American banks have to pay to settle their end of the scheming manipulation?
Nobody knows. But estimates I’ve seen range from $7.8 billion (I have no idea how the analyst came up with that figure… Thin air?) to more than $125 billion.
The point is that no one knows how much it will cost banks because it’s impossible to calculate how so many people, businesses, municipal governments, and anybody who paid interest based on LIBOR, was adversely affected.
The banks will pay whatever they have to in order to get these matters settled. They’ll all still be in business and able to digest these ‘costs of doing business’. They’ll get bigger, and make enough profits to want to ‘reward shareholders’ by raising their dividend payouts and buying back their stock.
But the hits keep coming folks.
Now the banks are being investigated for collusion, price fixing, restraint of trade, and just flat out being the criminal enterprises that they are. And for all their hard work in keeping credit default swap (CDS) trading off exchanges — where prices would be transparent and honest.
Then again, who cares about that little corner of the market for that little product? It’s only estimated to be in the tens of trillions of dollars. They are weapons of financial mass destruction in the shaky hands of speculating shysters.
Okay, that’s a hyperbole. There is a place for CDS, it’s just not where it is now — which is everywhere.
How much will it cost banks? $1 billion? $10 billion? $100 million billion?
Who cares?
The banks will pay whatever they have to. They’ll all still be in business. They’re able to digest these ‘costs of doing business’. They’ll get bigger, and make enough profits to want to ‘reward shareholders’ by raising their dividend payouts and buying back their stock.
Get the Picture?
Banks have become protected criminal enterprises.
They couldn’t do what they do without two things…
Make that one thing, because the one thing really encompasses the two things. I was going to say with they operate under the auspices of their cronies in government — and the Federal Reserve or central banks everywhere. But forget the government stooges. They are beholden to the Federal Reserve and central, which they long ago sold their souls to.
Without central banks to bail out the banks they would fail. And they should. But they can’t because they are too big to fail — and too big to jail.
Now that’s a business model!
Oh, and why are governments around the world (case in point: the United States) able to run mega-deficits?
That would be because they’re in bed with their cuddly central banker colluders, so they can print money to buy their never-ending, always-spewing bills, notes, and bonds that finance political pandering to the voters to stay in power.
They couldn’t do it without central banks.
Shah Gilani
Contributing Editor, Money Morning
From the Archives…
Why Dividend Stocks May Not Stay This Cheap for Long
29-03-2013 – Kris Sayce
Respect the Market Trend, but Don’t Expect it to Last
28-03-2013 – Murray Dawes
Silver ‘$100 Within Two Years’
27-03-2013 – Dr. Alex Cowie
11 Billion Reasons to Expect a 200% Move in Gold Stocks Within Months
26-03-2013 – Dr. Alex Cowie
You Want Proof the Stock Market’s Heading Up? Try This…
25-03-2013 – Kris Sayce
Deposit Insurance: Good Riddance to This Bogus Scheme
Once the public furore and shrill media coverage have died down, it will become clear that events in Cyprus did not mark the death of democracy or the end of the euro, but potentially the beginning of the end of deposit ‘insurance’.
If so, then three cheers to that. It may herald a return to honesty, transparency, and responsibility in banking.
Let us start by looking at some of the facts of deposit banking: When you deposit money in a bank, you forfeit ownership of money and gain ownership of a claim against the bank — a claim for instant repayment of money, but a claim nonetheless. In 1848, the House of Lords stated it thusly:
‘Money, when paid into a bank, ceases altogether to be the money of the principal; it is then the money of the banker, who is bound to an equivalent by paying a similar sum to that deposited with him, when he is asked for it…
‘The money placed in the custody of a banker is, to all intents and purposes, the money of the banker, to do with it as he pleases; he is guilty of no breach of trust in employing it; he is not answerable to the principal if he puts it into jeopardy, if he engages in hazardous speculation; he is not bound to keep it or deal with it as the property of his principal, but he is, of course, answerable for the amount, because he has contracted.’
This is not legal pedantry or just a matter of opinion, but logical necessity. It follows inescapably from how deposit banking has developed, how it was practiced in 1848, and how it is still practiced today.
Deposit Banking Has Been the Same for 300 Years
If ownership of the money had not passed from depositor to banker, then the banker could not lend the money to a third party against interest. He could not then pay interest to the depositor. If the depositor had retained full ownership of the deposited money, the banker would only be allowed to store it safely and to probably charge the depositor for the safekeeping of his property.
Money stored in a bank’s vault earns as little interest as money kept under a mattress. It is evidently not what bank depositors contract for. If interest is being paid or ‘free’ banking services are being provided, then the depositor must have at least implicitly agreed that the banker can ‘invest’ the money, i.e., put it at risk.
For more than 300 years, banks have been in the business of funding loans that are risky and illiquid with deposits that are supposed to be safe and instantly redeemable.
When banks fail, depositors lose money, although in former times, no rational person claimed that the depositors were unfairly ‘bailed in’ (a bail-in is an agreement by creditors to roll over their short-term claims or to engage in a formal debt restructuring with a troubled country) or were the victims of ‘theft’.
Although the mechanics of fractional-reserve banking have not changed in 300 years, the public’s expectations have greatly changed. Today, banks are expected to lend more generously than ever while depositors are supposed to not incur any risk of loss at all. This means squaring the circle, but it has not stopped politicians from promising such a feat.
Enter deposit insurance.
The Bogus ‘Insurance’
State deposit ‘insurance’ is not insurance at all. Insurance companies calculate and calibrate risks, charge the insured party, and set aside capital for when the insured event occurs. A state deposit ‘guarantee’, by contrast, is simply another unfunded government promise extended in the hope that things won’t get that bad.
Eventually, the state does what it always does, i.e., take from Peter to pay Paul. Cyprus is a case in point. Private insurance companies would have pulled the plug on a ballooning banking sector long ago. The Cypriot state, still the local monopolist of bank licensing and bank regulation, simply looked on as the banks amassed deposits of four times GDP.
In the end, Cyprus’ government ran out of ‘Peters’ to stick the bill to — and ‘Hans’ in Germany refused to get ‘bailed in’ completely (although he is still providing the lion’s share of the bailout).
Cyprus is just an extreme example of what the institutionalised obfuscation of risk and accountability that comes with state-protected banking can lead to. Deposit ‘insurance’ masks the risks and socialises the costs of fractional-reserve banking. Unlimited state paper money and central banks that assume the role of ‘lenders of last resort’ have the same effect.
If the original idea behind these innovations was to make banking safer, it has not worked, as banks have become bigger and riskier than ever before, although I suspect that the real purpose of these ‘safety nets’ has always been to provide cover for more generous bank credit expansion.
Under present arrangements, there is little incentive for banks to position themselves in the marketplace as particularly conservative. Depositors have been largely desensitized to the risks inherent in banking.
They no longer reward prudent banks with inflows, nor do they punish overtly risky banks with the withdrawal of funds. And even if they do, the banks can now obtain almost unlimited funds from the central bank, at least as long as they have any asset that the central bank is willing to ‘monetise’.
This is a low hurdle, indeed, as banks have become conduits for the never-ending policy of ‘stimulus’ and are thus being fattened further for the sake of more growth. Once a bank has ‘ticked the boxes’ and meets the minimum criteria of regulatory supervision, any additional probity would only subtract from potential shareholder returns.
Our modern financial infrastructure has created an illusion of safety coupled with an illusion of prosperity, thanks to artificially cheapened credit. The risk of the occasional run on an individual bank has now been replaced with the acute and rising risk of a run on the entire system.
This would change radically if we reintroduced free market principles into banking. Bankers would again be answerable to all their lenders, including small depositors, who would no longer be lulled into a false sense of security. Rather, in their proper role as creditors to the banks, they would become ‘deposit vigilantes’ and would help keep the banks in check.
In order to gain and maintain the public’s trust, the banks would again have to communicate balance sheet strategy and risk management to the wider public, not just to a handful of highly specialized bureaucrats at the central bank or the state’s bank regulator. Banking would become less complex, more transparent, and less leveraged. Conservative banking would again be a viable business model.
The wider public would begin to appreciate how dangerous the populist policies of cheap credit and naive demands for ‘getting banks lending again’ ultimately are. The depositors would finally realize that they’re underwriting these policies and that they carry the lion’s share of the risks.
Detlev Schlichter
Contributing Writer, Money Morning
Publisher’s Note: This article first appeared here.
From the Archives…
Why Dividend Stocks May Not Stay This Cheap for Long
29-03-2013 – Kris Sayce
Respect the Market Trend, but Don’t Expect it to Last
28-03-2013 – Murray Dawes
Silver ‘$100 Within Two Years’
27-03-2013 – Dr. Alex Cowie
11 Billion Reasons to Expect a 200% Move in Gold Stocks Within Months
26-03-2013 – Dr. Alex Cowie
You Want Proof the Stock Market’s Heading Up? Try This…
25-03-2013 – Kris Sayce
Why Europe’s Economy is a Dead Man Walking
Everyone knows that Europe’s economy is a dead man walking but I’ll throw a few more figures at you so that there is no doubt left in your mind.
The Markit Economics French manufacturing PMI is still contracting at a rapid pace. The summary of the figures said that:
‘Operating conditions in the French manufacturing sector continued to worsen in March. Although the headline Purchasing Managers’ Index inched up to a three-month high of 44.0, from 43.9 in February, it continued to signal a marked rate of deterioration.
‘The level of incoming new orders placed with manufacturers in France decreased further during March, extending the current period of contraction to 21 months. Moreover, the pace of decline accelerated slightly since February.
‘Reduced workloads prompted French manufacturers to cut staffing levels further in March. The rate of job shedding was solid, albeit the slowest in three months.
‘Prices charged by French manufacturers for finished goods fell for the third month running during March. Furthermore, the rate of decline accelerated to the sharpest since November 2009. A number of survey respondents commented that strong competitive pressures had weighed on their pricing power.’
It doesn’t take a genius to work out that where the PMI goes manufacturing production and GDP follow.
Things don’t look good for the foreseeable future in France. Especially when the socialist Hollande is hell bent on driving every wealthy person out of France with his 75% tax. Now the soccer heroes will be under attack as well. My prediction is that French soccer takes a nosedive over the next year.
Mish’s Global Economic Trend Analysis revealed that Spain is also a complete basket case, with El Economista reporting that:
‘The Institute of International Finance (IIF) believes the Spanish economy contraction will accelerate to register a gross domestic product (GDP) decline of 2%.‘“The decline in GDP seems likely to accelerate to 2% in 2013 after 1.4% in 2012, as high unemployment, tight monetary conditions and current lower wages further reduce domestic spending and weak demand contain domestic exports,” said the IIF in a report on the Eurozone.’
Spain’s manufacturing PMI is also plummeting with a reading of 44.2 in March from 46.8 in February. Andrew Harker, an economist at Markit, said that:
‘The March PMI data for Spain make grim reading for the manufacturing sector. Moreover, the latest figures have brought an end to the recent period of moderating declines, and cast doubt on any hopes of recovery for the rest of the year. The employment index again highlighted the extent of the problems currently afflicting the manufacturing sector and the wider Spanish economy, with jobs cut at the fastest pace in more than three years.’
So there is no end in sight for the bad economic news coming out of Europe. Cyprus has imploded and Greece is on life support. Italy has no prospect of forming a government and Spain and France are still contracting at a rapid pace.
Murray Dawes
Editor, Slipstream Trader
From the Port Phillip Publishing Library
Special Report: Australia’s Energy Stock BLOWOUT
Daily Reckoning: The Australian Government’s Deficit Numbskullery
Money Morning: Good News in China’s Economy? Put This Date in Your Diary…
Pursuit of Happiness: Why a PlayStation and Mining Technology Have More In Common Than You Think
Why the Market is Watching Japan
All eyes will be on Japan today because there is now a huge amount of pressure on Bank of Japan (BOJ) governor Kuroda to come through with the goods after a lot of jawboning. A two day meeting will finish and the market wants to be given some lollies, otherwise there will be a lot of whinging and stomping of the feet.
The Japanese Yen has been belted 20% in the last eight months on the back of expectations that the BOJ will start printing madly again. Kuroda has landed the new job as BOJ governor on the promise of giving the market and Prime Minister Abe what he wants.
Investors have been borrowing in the Yen and investing offshore safe in the knowledge that the Yen will probably weaken further. If Kuroda meets stiff resistance to his plans or doesn’t go far enough you can expect to see a sharp rise in the Yen and a big fall in equity markets as carry trades are unwound.
I think some of the buying in the Yen over the last week has probably been cautious traders unwinding a few positions just in case the news is bad.
The way I like to look at situations is to ask where the risk lies, and I have to say that the risk is to the downside in equities and upside in the Yen with this announcement because it will be easy for Kuroda to disappoint the market but quite difficult for him to pleasantly surprise the market. Now we watch and wait.
Murray Dawes
Editor, Slipstream Trader
From the Port Phillip Publishing Library
Special Report: Australia’s Energy Stock BLOWOUT
Daily Reckoning: The Australian Government’s Deficit Numbskullery
Money Morning: Good News in China’s Economy? Put This Date in Your Diary…
Pursuit of Happiness: Why a PlayStation and Mining Technology Have More In Common Than You Think
(Video) How Market Losers Think – and How to Stop Doing It
The one simple insight that will change the way you invest forever
By Elliott Wave International
Some of the greatest problem solvers in history — Albert Einstein, for example — know that the secret to solving complex problems requires simplicity.
Einstein’s simple equation (E = mc�) revolutionized math and science because it offered a single simple solution to so many of the world’s mysteries.
New research from EWI Founder and President Robert Prechter reveals that a relatively small (yet growing) group of investors has discovered a universal truth about investing that stands to revolutionize the fields of finance and economics.
Prechter’s insight is simple yet counterintuitive. Here’s a short clip from his recent presentation at a major investment conference.
In the rest of this 23-minute video packed with charts, figures and commentary, Prechter explains:
- How the impact of social and financial events like 9/11 and the Enron scandal on stocks is shocking in a different way than you think.
- The surprising relationship between interest rates and stocks.
- Why oil prices have zero predictive value to stocks.
- Inflation and deflation’s impact on hard money.
- Central bankers’ supposed power to turn trends.
- What new data says about the long-term viability of investment models based on earnings and value.
- The secret force that drives the investing decisions of futures traders, investment advisors, money managers, hedge fund managers and economists.
The full 23-minute video is online now and free to Club EWI members.
This article was syndicated by Elliott Wave International and was originally published under the headline (Video) How Market Losers Think – and How to Stop Doing It. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.
Turning Argentine…
By Bill Bonner
U.S stock markets were closed on Good Friday. When they reopened on
Monday, investors seemed unmotivated. Neither the Dow nor the price of
gold moved appreciably. Gold ended the day right on the $1,600 mark.
Not much to report, in other words.
Here in Argentina, most things were closed on Monday for the Easter holidays… and are closed again today, too.
What do these Argentines think they are? French?
We wandered the streets. Here in the Palermo Soho neighborhood of
Buenos Aires, where we are staying, there were thousands of people
window-shopping, eating in restaurants and drinking in outdoor cafes.
Inflation is running about 30% per year. The government is proposing
to use citizens’ pension funds to pay off its creditors. You get 50%
more for your money if you trade your dollars for pesos on the black
market. And experts are predicting another big devaluation of the peso
after the October elections.
“The Argentine economy
has been supported by strong farm sector prices,” reports the local
paper. “High agricultural prices should help support the peso and the
Kirchner government.”
Eager to Spend
People on the streets seem to have money to spend. And they are eager to spend it.
“Are you kidding?” said an Argentine friend. “Nobody wants to save pesos. You get them. You spend them.”
“I’ve seen this show before,” said another friend. “I was here in
Argentina in the 1980s, when we had inflation of 1,000% per month. And I
was in Moscow when the Soviet Union fell apart. Inflation hit about
800% there in 1993. I see signs of a big takeoff in inflation again.
Watch out.”
But for well-to-do Argentines, the quality of life here must be
among the highest in the world. There are dozens of restaurants within a
five-minute walk. You can sit outside. The weather is nice. And prices
are cheap, if you convert your money on the black market.
But the quality of life is more than just sitting in outdoor cafes sipping a café con leche.
Being able to work is important too… and so is being able to keep
your money. You need to be able to save money… and then you’ll have
enough money to be able to hang out in outdoor cafes!
The world is a rich place. It is so rich that it can afford more and
more people who don’t have to work and more and more people — such as
Ben Bernanke — whose work reduces standards of living for practically everyone.
The waiter who brings your morning coffee is providing a valuable
service. The plumber who makes sure your water flows is also giving you
something of value. So is the autoworker who welded together your
automobile.
All increase the real wealth of the planet.
But Bernanke? Is there any evidence that any central banker from the
dawn of time until April 2, 2013, added a centime or a farthing to the
wealth of the world?
Not that we know of!
Instead, Bernanke fiddles with the monetary base… jiggles interest rates… and generally diddles the economy.
You might say, if it weren’t for his jiggling and diddling and so
on, that the “crisis would be worse” or even that “we would have had a
depression.” But you might also say that if he hadn’t been diddling and
fiddling with it, we wouldn’t have had a financial crisis in the first
place!
Subtracting Value
How about Nancy Pelosi or Lindsey Graham? Do they provide a useful
service? Do they make the world richer… or better… in any way at
all? Are they productive members of society or bloodsucking parasites?
It seems obvious here: Argentine politicians
do not add value. They subtract it. They spend money that is not
theirs and sap wealth they never created. They drain away the real
wealth of the world by transferring money from those who earn it to
those who consume it. Then it is gone.
Is it any different in North America?
“You get what you pay for,” said Milton Friedman. You pay for zombies, you get all you want — and then some.
What about tax lawyers? People on disability? Defense contractors?
Aha! You will say that defense contractors provide a useful service.
Without their work, the U.S. would be attacked and invaded.
In the 1930s, major industrial nations were on the march… and
there was at least some remote danger that they could march against the
USA. Japan bombed Pearl Harbor, but it never posed much of a threat to
the continental U.S. And Nazi Germany couldn’t even conquer Britain,
let alone America.
Back then, the U.S. spent 1% of GDP on defense, which was probably more than enough.
Today, the Pentagon consumes nearly five times as much. There are no
hostile, aggressive nations endangering the peace of the world — as
far as we know. So, for our purposes, we assume that the Pentagon
wastes an amount equivalent to about 4% of GDP.
That is to say, it takes wealth from the productive sector and
destroys it. Maybe worse. By overspending on “security,” the U.S. armed
forces may make Americans less secure.
But wait — we’re not going to spend our time complaining about the zombies. Instead, we’re going to come to the point…
Which is, no matter how rich a place is, it can always be impoverished by careful government planning!
Argentina is a rich country. It has boomed in spite of itself.
Thanks to a productive agricultural sector, it earns enough revenue to
keep the economy functioning and the government supplied with payoff
loot.
But as revenues rise, so does the number of people who want to be paid off: unions, the poor, the rich.
No matter how much they get, the authorities will find ways to spend
more. This is how they caused a disaster in the 1980s… and again at
the end of the 1990s.
Is Argentina ripe for another financial crisis? Maybe.
The U.S. is an even richer country, but not so rich that a determined government cannot ruin it. Maybe it already has.
Stay tuned…
Regards,
Bill
To learn more about Bill visit his Google+ page or visit Bill Bonner’s Diary of a Rogue Economist.
Two Simple Rules to Get High Income From Super-Safe Investments
By Jim Nelson
Last week, I showed you why you shouldn’t start with high-yielding dividend stocks if you want to build a bulletproof income portfolio.
High yielders are usually riskier and more volatile than dividend
stocks with lower yields. And over the long run, they are proven to
underperform safer, long-term, dividend-growing blue chips.
But that doesn’t mean you shouldn’t ever have large yields in your portfolio.
That’s because, by following two simple rules, you can safely add higher-yielding stocks to your income portfolio.
Rule No. 1 is to avoid the highest yielders on offer.
According to a 2006 study by Credit Suisse, some high-yielding stocks
did outperform their lower-yielding counterparts. But the best
performers weren’t the highest yielders.
Credit Suisse broke down the dividend-paying stocks in the S&P
500 into 10 sections (or “deciles”) by their dividend yields — decile 1
being the lowest-yielding stocks and decile 10 being the
highest-yielding ones.
Although stocks that had the lowest yields (deciles 1 and 2)
underperformed the S&P 500, higher-yielding ones (deciles 8, 9 and
10) outperformed the index by three to five times.
Take a look at this chart from the study. It shows how the top three
deciles (highest yielders) did, compared with the bottom two (low
yielders) and the S&P 500.
Logically, if the lowest-yielding stocks were the worst performers,
you’d think the highest-yielding ones would be the best performers. But that wasn’t the case. The eighth and ninth deciles outperformed the 10th decile (the highest-yielding stocks in the S&P 500).
The reason for this seeming inconsistency is that companies that pay
out too much of their earnings in dividends often can’t afford to do so
for long.
And this brings us to rule No. 2: Make sure the companies whose shares you buy can afford to keep paying their dividends.
The best way to do that is to look at something called the dividend payout
ratio. This simply measures the percentage of earnings a company pays
out in dividends (yearly dividends per share divided by earnings per
share).
Too high a payout ratio points to higher risk of a dividend cut down
the road. (It doesn’t take much more than one bad quarter or failed
product launch for a company to end up without enough income to pay its
dividend. So it is forced to cut its payment.)
Credit Suisse also found that high-yielding stocks with lower payout ratios outperformed high yielders with high payout ratios.
In my subscription-based income advisory service, Income & Dividend Report, I look for a yield no higher than 10% and a payout ratio between 35% and 70%.
One play that fits this perfectly is Total SA (NYSE:TOT),
the largest oil and gas company in France. It has operations around the
world. And last year, it had net income of more than 10.7 billion
euros.
TOT yields 6.3%. And its payout ratio sits right at the bottom of our “sweet spot,” at 38%.
So if you already have built in the kinds of “bedrock” dividend
payers I told you about last week… and are looking to add some
higher-yielding dividend stocks… Total is a great first choice.
Sincerely,
Jim
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The Secret to Making Serious Money in the Market
By Investment U
I just narrowly avoided one of the most embarrassing incidents of my life. And while it had little to do with investing per se, it reminded me how I lost – and then made – a fortune in the stock market. My experience could save you tens of thousands of dollars, not to mention a boatload of pain and anguish.
Here’s what happened…
About a year ago, a friend of mine in London, an internationally acclaimed concert pianist and recording artist, told me he was scouting for the perfect place to film a solo recital for DVD release.
I asked what kind of venue he was looking for. He said he wanted something small, intimate, beautiful, and historically significant, with superb acoustics. I immediately volunteered that I knew just the place, the American Shakespeare Center in Staunton, Virginia, a 300-seat re-creation of Shakespeare’s original Blackfriars playhouse and the home of several well-received chamber concerts.
He’d never heard of it but looked into it and eventually agreed. I booked the theatre. He got busy lining up the Steinway concert grand, a videographer, and a sound engineer. All that was left was to fill the seats.
Getting an audience would be no problem. After all, my buddy is a superbly talented pianist who has performed to great acclaim around the world both in solo recitals and with many leading symphony orchestras. Piece of cake. Or so I thought.
The theatre director suggested I speak with the head of the Heifetz International Music Institute at nearby Mary Baldwin College. He could help me get the word out. But to say he wasn’t interested would be an understatement. Our conversation was strained, awkward even. He didn’t respond to a follow-up email.
Meanwhile, my friends in the area – the same ones who never pass on an invitation to a basketball game or rock show – demonstrated the kind of enthusiasm for the event that I might have shown if I’d been invited to a tractor pull. Great art, I learned, isn’t for everyone.
Suddenly, it dawned on me: I know absolutely zilch about promoting a classical concert. This was an intimate theatre in a small rural town. If it were half-empty (or worse), my friend would take a whopping loss. Even if I acted as a financial backstop – since it was my idea – a DVD of a recital in a near-empty theatre would be unusable.
I kept checking on ticket sales – and heard that essentially there weren’t any. I didn’t just start to worry. I began losing sleep. With only weeks to go before the performance, this was beginning to look like a slow-motion car crash.
Then I met Jason, God bless him. Jason, a local musician and teacher, loves classical music and helps run the annual Staunton Music Festival. He has a file of thousands of local patrons. He sent them emails encouraging them to attend and postcards with all the details. He printed posters and placed them all over town, arranged advertising swaps with local radio stations and, in short, filled the theatre.
The recital ended up being both a sell-out and a rousing success. At the VIP reception afterwards, several attendees told me it was one of the premier musical events of their lives. And the DVD – shot in high definition and Super Audio – is “in the can” awaiting future release.
What does this story have to do with investing? Everything, in my book. As I look back, almost every bone-headed investment move I’ve made my whole life came down to a single overriding factor: overconfidence.
I know nothing about promoting a classical music event, just as I once knew next to nothing about short-term, out-of-the-money put and call options – and threw good money after bad. I knew very little about the penny stocks I lost money in too. (I merely bought somebody else’s really good story.) I knew nothing about market timing when I tried and failed to jump in for market rallies and out for the corrections. I knew little about the fixed-income funds I bought where the expenses ate up most of my return, not to mention the leveraged ones that collapse in a bond market sell-off. I bought companies that I didn’t know much about in industries I didn’t understand. In short, as a young man I assumed that making money was a lot easier than it is.
I learned some great lessons but they were painful and hideously expensive.
I’ve since taken 28 years of investment knowledge – much of it learned the hard way – to The Oxford Club, helping ordinary investors navigate the world’s treacherous but lucrative financial markets. And we’ve had more than a modicum of success. The independent Hulbert Financial Digest has ranked us among the handful of top investment letters in the nation for over a decade now.
The truth is you don’t have to take big risks to make a lot of money in the market. You only have to know what you’re doing… or trust someone else who does. That’s how you succeed in the market – and in promoting classical concerts, too.
Good Investing,
Alex
P.S. Many people believe you must take on significant risk to achieve financial freedom. But our conservative investment philosophy has rewarded us greatly over the years. In fact, if you had joined The Oxford Club when we started over 20 years ago, you could have turned $10,000 into $1.4 million – four times more than the S&P’s gain during that time.
And our investment recommendations are only a small part of membership. Our network of successful investors and business owners reaches across the world. It helps to have connections.
For more information on what our Club is all about, click here.
Article By Investment U
Original Article: The Secret to Making Serious Money in the Market
