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By MoneyMorning.com.au

I read [UK] Conservative MP Doug Carswell’s, The End of Politics.

I recommend it. It will fill you with optimism.

Carswell describes how the shrinking of the state is inevitable. The collective intelligence generated by the digital age means it will just not be possible for states to operate in the opaque, suffocating and expensive way that they do.

The tax receipts will no longer be there. The possibility of endless government borrowing will not be there. And the option to inflate the currency will not be there as, thanks to digital alternatives, governments will lose their monopolies on money.

So the state must shrink or die.

If he’s right – and I hope he is – the world will be a better place for it.

But I fear we’ve a long way to go before we reach any such golden age. And in the meantime investors need to be prepared for a painful transition.

Welcome to the Great Stagnation

Nobody can say for sure what would have happened if governments and central banks had acted differently in 2008. What if the banks had not been bailed out? And what if central banks had not chosen massive economic and financial intervention?

I like to think that asset prices would have fallen considerably lower, that a free-er and fairer system of money and finance would have emerged and that economies would now be growing in a much healthier way. But neither I, nor anybody else, can prove what might have been.

Now a feeling of stagnation and limbo pervades. Politics is mired in debates over whether economic stimulus and spending or cutbacks are the answer. Businesses are reluctant to borrow and invest.

Banks are reluctant to lend. The housing market has atrophied. Stocks are neither compellingly expensive, nor compelling cheap, stuck in a cycle of panic followed by stimulus.

And investment decisions are being made often not on the merits or otherwise of a company, but on how inflationary the actions of a central banker are anticipated to be.

In the late 1970s and early ’80s, governments were forced to take certain measures because they had lost control of currencies, interest rates were spiralling and the bond vigilantes were forcing them down a certain path. But that is not the case now. The bond markets are still in bull mode.

We won’t see Carswell’s “end of politics” – or the Great Purging that was avoided in 2008 – until we get a reversal in bonds. The big question is, when, if ever, will we get that turn?

Have Bond Markets Peaked?

In the UK, the Bank of England is now buying 50% of UK gilts – and, effectively, printing the money to do so. It’s an artificial situation, but that doesn’t mean it can’t carry on. I’ve called the top in bonds before and been wrong.

Look at Japan if you want to get an idea of how long these things can go on for – 23 years and counting since the crash of 1989. Gilts are perceived as a safe haven, even if real inflation is higher than the yield they pay.

Here’s a chart of UK interest rates since the 1970s. They continue to be the lowest they’ve been in history.

And here, thanks to Nick Laird of sharelynx.com we see ten-year yields. I must say I am surprised to see that they are not quite at all-time lows.

UK Ten-Year Bond Yield Chart

The longer this artificial stimulus carries on, I’d say the more inflation is being stored up for further down the road. Once rates do start to rise, the chances are prices will run far ahead of them.

Turning now to the US, we see the yields on ten-year Treasuries are even lower.

US Ten-Year Bond Yield Chart

Next we see a chart of the 30-year bond price.

US 30-year Bond Yield Chart

This is a bull market that began in 1982. It’s extremely orderly and well behaved – as you can see by the two blue tram lines.

Using a dotted red line I have also marked the 377-week exponential moving average (the average price of the last 377 weeks, exponential meaning recent weeks carry more weight). A 377-week average might seem an odd average to use, but it works beautifully, as you can see. Every few years it comes back there to find long-term support.

The Next Move for Bond Prices

The current bond price of 148 is less than 5% off the all-time high of 153 which came earlier this year. We are trading near the top of a well-defined range and I see a return to the 123-5 area as a distinct possibility (see the green circle on the graph) over the next year or so.

But, in such an event, that structure I have drawn would still be intact, even though such a move would add pressure. While that structure remains, it’ll be business as usual. Limbo continues.

But the game changes, in my view, if we sink below those levels, below that lower rising blue line. That’s when rates start to rise, debt becomes much harder to service, defaults increase, governments lose control, perhaps they print more, raise taxes even further – and we head into Carswell’s “end of politics”.

Of course, if we do ever get bond market mayhem and Carswell’s “end of politics”, gold will be very much the place to be. Perhaps that’s when we see its much touted final blow-off phase. After that the green shoots of economic – or Kondratieff spring – will come through.

Dominic Frisby
Contributing Editor, Money Morning

Publisher’s Note: This is an edited version of an article that originally appeared in MoneyWeek

From the Archives…

Does Excessive Government Spending Make You the World’s Best Treasurer?
26-10-2012 – Kris Sayce

Why a Return to the Gold Standard Could Actually Be Bad
25-10-2012 – Kris Sayce

A Safer Than Super Investment?
24-10-2012 – Nick Hubble

Agricultural Commodities – The Best Way to Play Rising Food Prices
23-10-2012 – Merryn Somerset Webb

Stock Market ‘Barometer’ Speaks: The Bulls Won’t Like it…
22-10-2012 – Kris Sayce

When Will Government Bond Markets Implode?

By MoneyMorning.com.au

Visionary empire builders like Carnegie and Rockefeller created fantastic conglomerates that made huge fortunes for investors.

We also saw how these businesses were ultimately subject to what economic historian Jo Schumpeter terms ‘creative destruction’. This is the idea that competitors who find innovative new ideas will ultimately destroy those that dominated an industry in the past.

Creative destruction works for economies too. And boy, are we seeing destruction in the economy today.

Today I want to look at the three most important things you need to tough it out in this destructive world. Let’s start with a great example of creative destruction – the internet.

What We’re Up Against

Last week, book publishers Penguin and Random House announced plans to get together. And the reason is pretty clear. They need to take tough action against the increasing power of the likes of online retailer Amazon.

They’ve seen the way the music industry has been taken apart over the last ten or 15 years. They want to wrest control of pricing back into their own hands by allying forces. Will it work? I doubt it.

The industry needs to develop and evolve to survive. But innovation nearly always comes from small companies, or start-ups. If it is to come out of the incumbents, it’s usually a business insider that breaks out on his own.

I’ve seen the internet shake up my own business. Having established a new brand and brought it to market (largely online), sales went very well for a few years.

But of course, as the thing started to grow, competitors ultimately came in and copied our products. We had to adapt. How? Well, I bit the bullet by moving into wholesaling products to the competition.

Though the internet is a significant force for destruction (and reconstruction) of industry, it’s not all we need to worry about. Globalisation has brought on fantastic changes too. Some firms are loving it. Others aren’t coping.

We need to adapt too. I’d urge you to take a hard look at your investments and decide which ones looking vulnerable. Here are the three qualities that you need in your portfolio right now…

Three Crucial Things to Look for
When You Invest

Factor 1: Flexibility. We’re looking for companies that are malleable and ready to move. That may mean physical mobility – like the ability to move production to wherever it’s most cost effective. It could be wages, taxes, or a whole host of factors at play.

Take oil majors. Wasn’t it interesting to see that [Chancellor of the Exchequer] George Osborne has finally renounced (to some degree at least) previous tax hikes on North Sea oil production? Did he do that out of the kindness of his own heart? No, of course not. It was because the oil majors had cut North Sea production and decided to drill in lower tax jurisdictions.

Now imagine if companies like BP, or Centrica didn’t have mobility and alternatives on their side? I strongly suspect our chancellor wouldn’t have been quite so generous. Love them or hate them, large multi nationals have flexibility.

Factor 2: Emerging-market focus. I’m always keen to bang the drum for the emerging markets. In terms of creative destruction, we have a lot to be thankful for and worried about. The businesses most likely to cope with the brave new world are ones that can benefit from the emerging markets story.

I mean just look at Jaguar Land Rover. It’s fantastic to see the renaissance of this company. It’s growing strongly in the emerging markets.

This is a great example of a business that’s benefitting from the emerging markets story. There are plenty of others. Multi-nationals like Diageo and our giant pharma businesses are making hay while the sun shines over the whole globe.

But it’s not all about size…

Factor 3: Small is beautiful. The problem with the first two factors I’ve identified is that they’re generally associated with large companies. The ability to enter new markets abroad and the flexibility offered to the multi-nationals point the finger toward the biggies. But, when it comes to innovation, we know that the big boys are often stymied.

So is what we’re looking for unachievable?

No, of course not. It just means we need to look a little harder. The smaller the business, the quicker it is off the mark, and the more likely it is to be innovative.

So that’s the three things I look for in an investment to survive the constant threat of creative destruction.

Of course these aren’t the only things we look for in an investment, and given time, the factors will likely change. After all, that’s the nature of the beast.

Bengt Saelensminde

Contributing Editor, Money Morning

 Publisher’s Note: This is an edited version of an article that originally appeared in MoneyWeek.

Three Things You Need in a World of Creative Destruction

By The Sizemore Letter

Last week, I suggested that Microsoft ($MSFT) would be the ultimate winner in the long war for dominance of the smartphone and tablet markets.

Though Apple ($AAPL) dominates today, it has no real defensible “moats” that would prevent an aggressive competitor from muscling in on its turf.  Consumers are notoriously fickle, and there is little to lock them into the Apple ecosystem.  You can access your key services—such as Facebook ($FB), Twitter, Skype and even Apple’s iTunes—from just about any device, after all.  And if Microsoft is able to leverage its dominance of the desktop market by familiarizing users with its Windows 8 operating system—which looks and feels more or less the same on desktops, tablets and smartphones—Microsoft may well dig the elusive moat that Apple has thus far been unable to dig.

Moreover, Apple’s “idea man,” the late Steve Jobs, is not something that can be replicated, and going forward Apple will find it increasingly harder to stay ahead of its competition.

As Apple discovered to its dismay during the PC era of the 1980s through the mid-2000s, computers are ultimately commodity products for which it is difficult to charge a premium (and yes, I lump smartphones, tablets and PCs together as “computers”).  The iPhone’s popularity has been bankrolled by generous subsidies by service providers like AT&T ($T), Verizon ($VZ) and Sprint ($S).  But as these carriers start to push back against subsidies, Apple will find it harder to maintain its margins without lowering its prices—something the company will be reluctant to do.  In a very short period of time, Apple may again see itself fall from the position of industry leader to that of a niche provider.

None of this suggests Apple’s imminent demise, of course.  As I wrote in the previous article, I’m talking about a long war of attrition that may take a few years to play out.

But none of this matters in the short term.  In the short term, I expect most Big Tech stocks to move together in a fairly tight correlation as investors reassess the economic picture.  For the remainder of 2012, I see investor risk appetites returning, and I see Apple and its competitors Microsoft and Google ($GOOG) leading a rally in technology shares.

I recommend investors pick up shares of the Technology Select SPDR ($XLK) and plan on holding for the remainder of 2012.

With the bad earnings releases of the third quarter mostly digested, I expect to see a broad-based market rally, and I expect more cyclical sectors such as technology to lead.

Disclosure: Charles Sizemore is long XLK through his Tactical ETF Model. This article first appeared on TraderPlanet.

SUBSCRIBE to Sizemore Insights via e-mail today.

The post Microsoft, Apple and Big Tech for the Remainder of 2012 appeared first on Sizemore Insights.

Related posts:

• In a War of Attrition, Microsoft Will Beat Apple
• AAPL Earnings – The End of the Apple “Mystique”
• Apple: Not a Short–Yet–But Not a Buy Either

By The Sizemore Letter

Lucas and his team of financial advisors

Charles Sizemore gave his thoughts to the Wall Steet Journal’s Quentin Fottrell on George Lucas’ decision to sell his Star Wars film empire to Disney ($DIS) for  $4.05 billion in cash and stock and what its implications are for financial and estate planning:

By cashing out now, experts say the filmmaker spared his family the need to pick up the pieces of his empire after he’s gone. It also allows him to focus his remaining years on his charitable endeavors – particularly Edutopia and the George Lucas Educational Foundation, which he founded in 1991. “I am dedicating the majority of my wealth to improving education,” Lucas wrote in 2010 (pdf) on GivingPledge.com , which invites the world’s wealthiest people to commit most of their money to philanthropy.

Since none of Lucas’s three adopted children plan to take over his film empire, financial advisers say the strategy will save his heirs the the responsibility of managing their inheritance – and potentially going through the often long and fraught process of dividing it…

Of course, Lucas is far wealthier than the average American business owner. “With smaller mom-and-pop businesses [this kind of planning] can be more complicated,” says Charles Sizemore, a financial adviser based in Dallas, Tx. The owner of a restaurant or a landscaping business probably won’t have the option of selling to a Fortune 500 company, he says. “They may have to bring on a junior partner or work out a royalty arrangement with a new buyer,” he says.

To read full article see “George Lucas Jedi Estate Planning“

The post The Disney – Lucasfilm Merger and its Lessons for Financial Planning appeared first on Sizemore Insights.

Related posts:

• Charles Sizemore on Planning for Prosperity Radio
• Charles Sizemore on Planning for Prosperity Radio
• What to Read: The Best Financial Newspapers and Magazines

By: Chris Vermeulen – www.TheGoldAndOilGuy.com

By Central Bank News
    The Czech National Bank (CNB), which earlier today cut its benchmark repo rate to a record low 0.05 percent, said it reduced the rate because inflation is expected to remain below the bank’s target through the second quarter of 2014 and it expects to keep rates at this level for a long time.
    In a statement, the CNB also cut its economic growth forecasts for next year and 2014.
    “The rates will remain at this level over a longer horizon until inflation pressures increase significantly,” the CNB said, adding five of its board members voted in favor of the rate cut while two members voted to keep interest rates unchanged.
    In the fourth quarter of 2013 consumer prices are forecast to rise by 2.3 percent, due to tax changes but monetary-policy relevant inflation “will be in the lower half of the tolerance band over the whole forecast horizon,” the bank said, adding:
    “The domestic economy is curbing inflation.”
    The CNB forecast the Czech economy to contract by 0.9 percent this year, due to weak external demand and subdued domestic demand. In 2013, when external demand is expected to improve, the central bank forecast a 0.2 percent rise in Gross Domestic Product, down from its previous 0.8 percent forecast, and the rise by 1.9 percent in 2014, down from its previous 2.5 percent forecast.
   The Czech Republic’s GDP contracted by an annual 1.0 percent in the second quarter while inflation rose to 3.4 percent in September. The CNB targets inflation of 2.0 percent.
 
    www.CentralBankNews.info

By Central Bank News

By TraderVox.com

Trader.com (Dublin) – The US dollar rose against the euro for the first time in three days as the demand for safety was boosted by the poor manufacturing data from Sweden and Norway. The market is seeking safety as speculation debt crisis in Europe is dampening economic growth in the region grew. The greenback strengthened against most of its peers as economists predict that the manufacturing PMI report to be released later today will indicate that the manufacturing sector slowed last month. The yen dropped against the dollar prior to the release of October meeting minutes where the BOJ decided to add 11 trillion yen to its bond-purchases program.

According to Steven Barrow, the head of research in London at Standard Bank Plc, there is a slight bias towards a firmer dollar, which is supported by the growth concerns in Europe. The strong dollar is also supported by speculation that Hurricane Sandy may cost the GDP up to $50 billion, increasing demand for safety.  According to some manufacturing data from eurozone, the Norwegian manufacturing shrunk in October, making the fifth month in a row that the sector have shrunk. The gauge dropped from 49.1 in September to 48.7 last month according to Fokus Bank in Oslo. The Swedish manufacturing PMI gauge dropped to 43.1 according to Swedbank AB in Stockholm, from 44.7 in September.

The dollar has strengthened as Federal Reserve Bank of Minneapolis President Narayana Kocherlakota  said yesterday that he disagreed with the view that Federal Reserve monetary policy is too accommodative. The Fed decided last week to continue buying $40 billion in mortgage-backed securities as it aims to curbing unemployment in the region. The greenback strengthened by 0.2 percent against the euro to $1.2937 at the start of trading in London today after it dropped by 0.4 percent in the previous two days. It gained by 0.3 percent against the yen to exchange at 80 per dollar. The euro strengthened by 0.9 percent last month, making it the best performer after the Swiss franc. The yen dropped by 2.3 percent while the US dollar rose by 0.2 percent in the same period.

Disclaimer
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By Central Bank News
    The central bank of Uganda again cut its central bank rate (CBR), this time by a “modest” 50 basis points to 12.5 percent, but indicated that it may soon halt its aggressive rate-cutting campaign.
     The Bank of Uganda (BoU), which has cut its policy rate eight times this year for a total reduction of 1,050 basis points, said core inflation was now forecast to stabilize around the bank’s 5.0 percent target over the next three quarters.
    “I believe that with this reduction, the CBR is now approaching the level which is consistent with the medium-term inflation target of 5.0 percent,” the bank’s governor,  Emmanuel Tumusiime-Mutebile, said in a statement.
    Economists had expected the BoU to cut its rates following news that headline inflation fell to 4.5 percent in October from September’s 5.5 percent. Core inflation eased to 4.0 percent from September’s 4.9 percent.
    “These reductions in inflation have re-inforced the BoU’s confidence that core inflation will stabilize at around the medium-term target of 5.0 percent through the middle of next year,” the bank said.

    Uganda’s Gross Domestic Product is forecast to increase by 5.0 percent in 2012/13, up from 3.4 percent last year, but remain below the economy’s potential of 6.5-7.0 percent, the bank said.
    “The main constraints to a faster recovery in the short term are the weak domestic demand and the risks and uncertainties in the global economy, it added.
    Following its rate cuts, the bank said there were signs that commercial banks were starting to lend more, saying the lack of a stronger recovery was partly to due a “lethargic adjustment” in banks’ lending rates, adding that it was concerned that interest rates spreads had recently increased.
    Uganda’s GDP contracted by an annual 0.2 percent in the second quarter after a 2.0 percent rise in the first quarter.

    www.CentralBankNews.info

London Gold Market Report
from Adrian Ash
BullionVault
Thurs 1 Nov, 09:00 EST

WHOLESALE PRICES to buy gold rose to 7-session highs in London on Thursday morning, touching $1726 per ounce even as new data showed US employment rising at its fastest pace since February.

The private-sector ADP payrolls report said the US added 158,000 jobs in October. Earlier data from the manufacturing sector in China, the world’s #2 gold consumer, showed its slowdown to be easing.

However, “Over 17% of survey respondents reported a fall in the volume of new export orders,” said the new Purchasing Managing Index report from HSBC/Markit Economics, “and just under 10% noted an increase.”

Two-thirds of Chinese businesses reporting quarterly results to the stock market have seen a sharp rise in unpaid bills according to the Financial Times.

The People’s Bank of China has this week pumped a record $60 billion-worth of liquidity into its domestic money market.

“Gold has been finding support on approach of $1700,” says today’s note from Standard Bank’s commodities team.

“Our Standard Bank Gold Physical Flow index has risen substantially in the past few days,” says Standard, with demand to buy gold in Asia and India “pick[ing] up.”

Looking further ahead, and “supported by the continual income growth of [China’s] emerging middle-income class, investment as well as gold products will benefit,” says Albert Cheng, managing director for the Far East at market-development organization the World Gold Council.

“The longer-term growth of China’s economy remains healthy.”

The state-owned research group Antaike meantime forecasts that China’s demand to buy silver will grow by 10% in 2013 to hit new record levels.

Alongside a large forecast for silver investment demand, the solar-panel industry is flagged as a key driver.

Back in Thursday’s action, major-economy government bond prices slipped, nudging interest rates higher as Italian and Spanish bond prices rose, reducing their interest rate.

Silver extended what one analyst called Wednesday’s “impressive advance” by reaching 2-week highs above $32.65 per ounce.

“We look for [gold price] support in the $1660 area,” says a note from Barclays Capital, “to underpin a move higher toward the $1800 highs.”

“Historically gold performs strongly in November,” says a note from Commerzbank, “with monthly returns over the past 30/40 years around 1.40% – the second strongest month of the year.”

Slipping 3.2% from the end of September, prices to buy gold just put in their first monthly drop since May and their worst October since 2008’s plunge of 17.4%.

Commodities overall also delivered their worst monthly returns since May, losing 4.1% in October on the S&P index of 24 natural resources and unwinding the last of 2012’s gain to date.

Global stock markets lost 0.6%, says Bloomberg. Bonds of all kinds gave a positive return.

Silver prices lost 7.1% against the US Dollar. But while last month’s sales of silver Eagles by the US Mint slipped 3.1% from September, they hit a new October record at 3.15 million ounces.

Adrian Ash
BullionVault

Gold price chart, no delay   |   Buy gold online at live prices

Adrian Ash is head of research at BullionVault, the secure, low-cost gold and silver market for private investors online, where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2012

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.