Listen to Charles Sizemore discuss investing for income and more with Dean Barber, Shane Barber and Bud Kasper on America’s Wealth Management radio show.
Dean is a nationally-syndicated radio host and the principal of Barber Financial Group.
To listen, select:
By Central Bank News
Here's today's Central Bank News link list, click through if you missed the previous central bank news link list. Remember, if you want to submit links for inclusion in the daily link list, just email them through to us or post them in the comments section below.
In Tuesday’s Daily Reckoning we left off with the idea that a cashless society promotes tyranny. That might seem like an odd subject to begin with today, given the show-stopping 50 basis point cut in the cash rate by the Reserve Bank of Australia (RBA) yesterday. But our job is to be forward thinking. So let’s move forward and think about the future of money.
The future begins now. Actually, it began in 2010 when buses in Sweden stopped taking cash to pay fares. To catch a ride today you have to use your mobile phone. With new payment technologies, mobile phones are also becoming wallets. Sweden is now talking about going completely cashless.
In fact, 97% of all retail transactions in the country are already done electronically. That’s something, when you consider Sweden was the first country in Europe to issue banknotes back in 1661. In the US, electronic transactions account for about 93% of retail sales. We were unable to find the figure for Australia.
None of this seems like a big deal at first. Going cashless is about convenience and efficiency. No one likes carrying around a pocketful of loose change. The gradual digitalisation of money has led countries to quit minting smaller denomination coins. New Zealand stopped minting one and two cent coins in 1990. Australia followed suit in 1992.
Björn Ulvaeus — you know one of the B’s in Swedish pop sensation ABBA — says that a cashless society would reduce crime. He cites figures showing that bank robberies in Sweden are down since some banks stopped carrying cash. He’s also motivated by the fact that his son has been robbed three times. He believes eliminating cash from your pockets will leave robbers with nothing to steal.
There is some debate within the Catholic Church over whether theft is a mortal sin or venial sin. Then again, there’s a good argument to be made that sin is sin no matter what. In either case, we’re betting that people will find a way to rob one another even if there’s no cash. And that’s one of the more obvious issues about moving to a cashless society: security.
Physical crime might decrease with a cashless society, but that doesn’t mean crime will decrease. It will just get more sophisticated in nature. It will include identity theft. And it will include ways of stealing your money that we haven’t even dreamed of. What’s more, moving to a cashless society increases the chance that the government and bankers can steal your money even more efficiently than ever through debasement of the currency. We’ll return to that in a second.
There is an argument to be made that moving to a cashless society increases efficiency by reducing transaction costs in an economy. The example banks like to use is processing physical cheques. To clear a cheque a person has to look at it, then enter a certain number of keystrokes at a terminal and then stamp the cheque, which then has to be stored. All of that time and labour, and time is money!
It’s hard to argue with. The digitalisation of cash transactions corresponds with a huge spike in global trade and commerce. When moving money around the planet is easier, so too is moving around goods and services. Does a cashless society promote more trade and prosperity?
Well, the absence of cash in the financial world has also led to an explosion in cross-border investment and speculation. Here we’re talking about foreign exchange markets, where many trillions of dollars worth of transactions are conducted every day. And don’t forget the derivatives markets, including interest rate futures, which are also conducted on a cash-free basis. Has this made the world a better, safer, more stable place?
If anything, reducing the friction in global money flows has made the world more unstable. Money — or its digital equivalent — sloshes around the planet at lightning speed. Is this efficiency? Or does it just accelerate instability?
In the event, proponents of a cashless society seem to take it for granted that mobile phone networks will always work. What if the network goes down? What if an EMP burst renders all technology with circuit boards useless? What if someone attacks the network? How resilient, redundant, and robust is an economy that uses only electronic cash?
All these issues — efficiency, reliability, privacy, security — are practical issues about moving to a cashless society. If they were the only issues, you’d think they’d be resolved sooner or later. Once resolved, the world could move on to a glorious cash-free future. But there is one last issue left. Namely, what is money?
Is money a real thing, a commodity? Or is it an abstraction and a social construct? Normally you wouldn’t have to ask a question like this. You reach in your pocket and trade the paper there for the thing you want. It works without thinking. But it only works if everyone agrees on what money is.
If money is an abstraction it certainly makes it a lot easier to do business. But it also makes it a lot easier for the government to watch your every move. If every transaction is digital, it’s traceable, and can be produced when you’ve been audited by the tax authorities.
This may sound a little conspiratorial. After all, if you have nothing to hide, why should you worry about the government snooping around your cashless transaction history? But when people phrase the question this way, they assume that the burden of proof that you are not doing something illegal is on you.
In other words, without arguing it, they have effectively said that the government has the right to know what you do in your private life. Is that a society you want to live in? Is that a free society? Or is that a society where individual liberty is undermined through the digital payments system?
There is also a practical aspect to our paranoia. Many governments in the Western world are broke or headed that way. Keeping tabs on electronic transactions makes it easier to track down tax dodgers and tax avoiders. Governments that are desperate for any money they can get will welcome the ability to trace, track, and tax every single transaction you make.
If you’re one of the people that thinks that is a good thing, you should probably stop reading now. You should also probably unsubscribe from the Daily Reckoning. Immediately.
But really it’s more than just a tax collection issue. It’s an issue about what money is. Governments and central banks use control of the money system to engineer inflation. Inflation grows GDP in nominal terms. But over time, it decreases the value of your savings. And to the extent inflation decreases purchasing power, the money system also decreases the value of your labour. The money you earn for the work that you do is worth less over time. It’s like taking a pay cut without knowing it.
Theft through inflation of the money supply would be much easier in a cashless society because there would no theoretical limit on how big the money supply could get. When money becomes a digital abstraction, you can create it with a few keystrokes, as the Federal Reserve and European Central Bank have done over the last two years. When money is electronic, the restrictions on its supply are removed.
We’d argue that a cashless society means money is fully abstract. This has one practical side effect. You will be unable to legally engage in transactions that involve cash. If you do so, you’re a criminal. Nevertheless, you’d expect to see a lively black market emerge in cashless societies.
But the real effect is that the likelihood of government tyranny is greatly increased as you move to a cashless society. It’s not just that petty bureaucrats and tax collectors and agents of the State are likely to abuse their ability to monitor what you do with your money, although all that is true. The real risk is that a completely cashless society removes any check on the debasement of the currency and thus allows the government to grow even larger and more intrusive in private life.
If you’re still reading, we assume we haven’t frightened you away with our suspicion of ever-expanding State power. But then, that’s really our point. Control of the money system is what enables the State to grow. Central banks were set up to be lenders of last resort to governments. Most central banks have a monopoly on currency creation. Removing physical currency from circulation cements that monopoly and increases the chance of even more government spending on wars, foreign and domestic.
The good news is that money is not an abstraction. It is a physical representation of value that you can exchange for something you desire. People know this intuitively. People stop using money when they realise its quantity can be increased arbitrarily, thus reducing the value of their labour and savings.
People stop using a currency when they realise it has no value because it’s being used as a tool to preserve a certain system. The move to a cashless society is another attempt to preserve the power and the privilege of that system. It’s not about convenience and efficiency. It’s about power and control.
But it’s bound to fail. For example, can you imagine Judas using BPAY for his betrayal of Jesus? Or EFTPOS? No. That kind of transaction took thirty pieces of silver. Silver is real money, as is gold. Don’t expect that to change any time soon.
Regards,
Dan Denning
Editor, The Daily Reckoning Australia
Publisher’s Note: This article originally appeared in The Daily Reckoning Australia
From the Archives…
Why Graphite is the High Tech Commodity of the Future
2012-04-27 – Dr. Alex Cowie
Why Gold is Hands-Down the Best “Money” You Can Buy
2012-04-26 – Kris Sayce
12% Compulsory Super – Get Ready for the Government’s Next Tax Grab
2012-04-25 – Kris Sayce
Westfield – The Aussie Retail Stock That Could Make You Money
2012-04-24 – Shae Smith
Why Natural Gas Is Still My Favourite Resource Opportunity
2012-04-23 – Kris Sayce
Russia controls the European natural gas market. The map below shows the gas pipelines running from Russia, into Western Europe, and South and East Asia:
For years, Europe has been at the mercy of Russian natural gas suppliers. And in 2006, Europe bore the brunt of a pricing dispute when Russia simply turned the gas off. Nothing flowed through the pipes.
Again, in 2009, Russia switched off the flow of natural gas, but this time, only to the Ukraine over another pricing dispute. Other parts of Europe received limited amounts of natural gas.
And just to prove a point, in February – in the middle of a cold snap during a mild northern winter – the Russian state-owned gas company, Gazprom decided that it would only supply the amount of natural gas it was contractually bound to.
Sergi Komlev, head of contracts and pricing at Gazprom Exports, told the Financial Times:
‘Gazprom has agreed contractual volumes that it is obliged to supply, to the month and the day. We are fulfilling these obligations but our customers want more volumes than we are obliged to supply.’
It didn’t matter if people were cold, or unable to cook. The company would only supply what was required, rather than what was needed. Chances are Gazprom could have met the extra demand if they wanted to. It was a big ‘stuff you’ to the freezing Europeans.
However, Gazprom will only have itself to blame in the future when it has one less customer.
Last July, a Russian research paper commented on how many European companies wanted to end Russian natural gas dominance:
‘The attitude in Europe towards the prospects for Russian imports seems to be periodically changing from a perceived dominance of Russian gas imports for years to come and a threat to a European energy security.’
The thing is, European countries have their own significant 639 trillion cubic feet (tcf) deposit. So why don’t they develop that?
Simply because of the cost.
Take the Ukraine for example. It has a 38 tcf reserve of natural gas. But Russia offered the Ukrainian government lower than market gas prices for use of the Ukraine pipelines.
That was up until 2008. And then the price started to climb.
Right now, the Ukraine government pays about USD$516 per 35,314 cubic feet of Russian gas. Enough to fill a full-size blimp. Funnily enough, when this price was set last year, it was almost USD$200 above the market price of Russian gas. The Ukrainians were getting stooged on the price…
And so, the Ukraine government complains about the high natural gas price. The Russians happily offered to lower the price. But, only if Ukraine handed them full control of the natural gas pipelines.
Handing over control of the pipelines is something the Ukraine wouldn’t do. Instead, they chose to develop its potential 100-year natural gas reserve.
Just last week, the country opened its borders to international bidders to explore and develop some of the vast natural gas deposits.
There’s no news on which company was successful, but Chevron Corp, Royal Dutch Shell and Exxon Mobil Corp all placed offers to secure a permit for exploration.
Why only now are these big boys moving in? Vitaliy Radchenko, an energy researcher at CMS Cameron McKenna in Kiev said,
‘Up to now most foreign investors have been cautious in embracing Ukraine. The country’s unstable political climate, excessive red tape and high corruption levels have kept foreign business away.’
What’s changed? Simply put, the government no longer wants to buy something from its neighbours when it can develop its own resource.
Radchenko said,
‘For years key policy makers in Ukraine were betting on the fact that somehow they would get the cheap Russian gas. Now it’s clear that this is over, so that puts a lot of pressure on the system to change.’
You see, the situation in the Ukraine isn’t unique. Many European nations can no longer risk their energy future and energy security on Russia.
And the best part is, you can take advantage of this.
In fact, there are a handful of Australian listed companies with opportunities in Europe already.
Kris Sayce, editor of Australian Small-Cap Investigator has been watching these stocks for a while. And he thinks now is the time to take advantage of the opportunity in Europe:
‘I’m betting on Europe eventually getting its act together and figuring out that it can no longer rely on the Middle East and Russia for its energy supply.’
He told subscribers in the April issue:
‘…I believe Europe is due to embark on a huge re-evaluation of its energy strategy. And I believe gas will be at the forefront of that strategy.’
If you’re keen to see how Kris plans to take advantage of the growing natural gas movement in Europe click here.
Shae Smith
Editor, Money Weekend
The Most Important Story This Week…
The Reserve Bank of Australia cut the interest rate this week. This was a direct attempt to take pressure off the debt-laden Aussie consumer. This might work in a small way. But what it can’t do is stop the slide of house prices in Australia. This is because the real estate market is dependent on the demand for credit, not the cost of credit. With borrowing demand dropping, house prices are following in the same direction: down.
This is the same reason why house prices in the USA have fallen to their lowest level in decades despite record-low interest rates for a record amount of time. Eventually Aussie house prices will hit a bottom. How they hit that bottom is the question. Money Morning editor Kris Sayce originally thought it would be a crash – a quick, dramatic fall. But recent data has caused him to change his view. Unfortunately, as he writes in How Did We Get It So Wrong on Australian Housing?, it’s something actually worse than the crash he previously predicted.
Other Recent Highlights…
Dr. Alex Cowie on This Indicator Shows the Copper Price Could Be Set to Soar: “You’d have to have rocks in your head, but ‘copper thieves’ are stealing copper wiring from electrical substations, transmission lines, and anywhere copper wiring is visible and unsecured…Fortunately, there’s a much easier, legal and less dangerous way to make a buck from copper. I’ll explain how in a moment…”
David Zeilor on Is Apple’s Bet on Liquidmetal About to Pay Off?: “Schroers said Liquidmetal could also be used to build remarkably thin, strong seamless frames for other Apple products, such as MacBooks, iPads or big screen displays. For that matter, it would make an ideal frame for the much-anticipated Apple iTV. Apple could even etch its logo as a holographic image into the alloy. How cool is that?”
John Stepek on Expect Eurozone Panic as Spanish House Prices Tumble With it’s Economy…: “In the long run, the euro can’t survive. There are too many countries, with too many different needs. But it may take a larger, more self-confident nation, declaring that it’s had enough of the currency and can go its own way…”
Merryn Somerset-Webb on Why China Could Be The Next Destination For the Financial Crisis: “In China, there is a steel company called Wuhan that has been diversifying into wine production and pig farming. There is also a shipbuilder, Yangzijiang, which is using the cash it gets as down payments on its ships to run a lending business on the side…Between them, they tell the story of the greatest credit bubble yet.”
Kris Sayce on Why Innovation is the Missing Link in China’s Economy: “We don’t believe China can be innovative, simply because it’s a brutal and authoritarian dictatorship. In order for innovation to prosper there must be civil unrest and the overthrow of the violent government. If that happens then we’ll get onboard and back China’s economy. But without it, it will just follow America’s path to a consumer-driven economic nightmare…”
Russian Exile: How Europe Will End the Kremlin’s Natural Gas Monopoly
As Oilprice.com embarks on its Top 5 series, we thought it expedient to begin with our take on the key figures shaping and influencing U.S. renewable energy efforts, not least because the issue of energy security is being prioritized in campaigning ahead of U.S. presidential elections.
In considering from the numerous choices for these top five slots, we take into account a number of variables, including investment in renewable energy, the ability to influence policy and shape public opinion, and advocacy efforts. This goes well beyond simply counting coin – it is about innovation, imagination, vision, risk and patience. Arguably, these people will play an important role in your life and leisure, for better or worse.
These are our picks:
Steven Chu – The China Link
Co-winner of the Nobel Prize for Physics in 1997, US Secretary of Energy Steven Chu is one of the most distinguished faces of renewable energy in the world, tasked with helping the Obama Administration invest in clean energy, reduce dependence on foreign oil, address climate change concerns and create millions of jobs while doing it. Chu has devoted a large part of his scientific career to alternative energy solutions and climate change research, in part as former director of the DoE’s Lawrence Berkeley National Lab. While the last century saw him win the Nobel Prize, this century earned him R&D Magazine’s Scientist of the Year award for 2011. In announcing his appointment as Secretary of Energy, President Obama said that the “future of our economy and national security is inextricably linked to one challenge: energy [and] Steven has blazed new trails …”. Chu’s most tangible successes have been the government’s investment in geothermal and offshore wind projects.
Indeed, Chu is one of the world’s leading authorities on renewable energy; and on a geopolitical level, his influence reaches to China. Chu is a foreign member of the Chinese Academy of Sciences, has trained prominent scientists in China and helped to establish the Bio-X Center at Jiaotong University in Shanghai – all of this gives him valuable access to Chinese politicians.
Dan Reicher – Energy Guru
Until November 2011, Dan Reicher served as Google’s director of climate change and green energy initiatives, during which time he convinced the company to invest in a number of energy projects, some of them rather eccentric and risky, others more pragmatic. He was also behind Google’s policy proposals for Washington. Prior to 2007, Reicher served in the Clinton Administration as the assistant secretary of energy for energy efficiency and renewable energy. He was also considered for the post of energy secretary in the Obama Administration, but lost out to our first pick, Steven Chu.
Today, he’s practicing his innovation at Stanford University, which chose him to lead its new $7 million center to study and advance the development and deployment of clean energy technologies through innovative policy and finance. Stanford alumni Thomas Steyer and Kat Thomas donated the $7 million and trust in Reicher to lead the university’s efforts, which they said “is uniquely positioned to change our nation’s attitudes and capabilities regarding how we make and use energy. What our university did for the information revolution, it must now do for the energy revolution.” Broadly, the Stanford center will conduct research on energy policy and finance, with a particular focus on legislative, regulatory and business tools – all intended to boost public support for funding clean energy technologies. It also hopes to produce world-class research for policymakers, the business community, and technology leaders. Reicher is influential in the renewable energy world on a number of levels, from finance to policy to advocacy. Not only does he have the ear of the government on policy, he also has the $7 million Stanford research effort at his disposal.
Elon Musk – Iron Man
Elon Musk is probably the most colorful of the figures on our Top 5 list. He has Hollywood’s eyes and ears, as well, which only adds to his public influence. Musk is the co-founder of and head of product design at Tesla Motors, the producer of electric cars, which is almost a singular focus of Musk’s current green energy efforts. Musk entrepreneurial innovation had already been demonstrated pre-Tesla, when he co-founded PayPal and SpaceX. He also chairs the board of SolarCity, a start-up focused on photovoltaics products and services aimed at climate change solutions. Most recently, Musk created the first viable electric car of the modern era, the high-end Tesla Roadster sports.
The Tesla Roadster will be followed by the four-door Model S sedan, scheduled to release in July, and the ModelX (a sort of SUV/minivan hybrid), slated for production in 2013. Musk’s vision: making electric cars affordable to mass-market consumers thereby making a huge footprint in American and global energy efficiency and security. The Roadster is a high-end vehicle that will only attract the wealthy, but that is the point: Roadster revenues can fund research and development for lower-priced electric cars.
Countless awards and honors have come Musk’s way, from the Heinlein Price for Advances in Space Commercialization in 2011 to inclusion on Forbes’ list of “America’s 20 Most Powerful CEOs 40 and Under” that same year. Incidentally, Mush designed the first privately developed rocket to reach orbit and served as the inspiration for the genius billionaire Tony Stark in the Iron Man movie series. He also made it onto TIME Magazine’s (often dubious) list of 100 most influential people in 2010.
Eddie O’Connor – Supergrid Superhero
Eddie O’Connor, the CEO and co-founder of Mainstream Renewable Energy and the original founder of Airtrcity, is one of the world’s most interesting, energetic and innovative clean energy figures. O’Connor sold Airtricity to E.on and Scottish and Southern Energy for €2.2 billion in 2008, when he launched Mainstream along with Airtricity’s former finance chief, Fintan Whelan, investing €32 million in the start-up. O’Conner, who got his start in Ireland’s electricity company, has earned energy leadership awards across Europe, and in 2003 was named World Energy Policy Leader by Scientific American Magazine. O’Connor is behind the creation of some amazing onshore and offshore wind farm projects in Europe, North America, South America and South Africa, and is perhaps best known for his promotion of the European Offshore Supergrid, which envisions electricity interconnectivity on a scale that would entirely transform the European energy scene. O’Connor’s work has been extremely influential on global policy and he has certainly earned his place among the world’s most innovative public figures. He combines ideas with advocacy and action.
Paul Woods would like no less than to revolutionize the energy sector, and his charisma is hard to match. Woods is the co-founder and chief executive officer of Algenol, the Bonita Springs-based alternative energy company, and his trademark is turning algae into ethanol (with the help of salt, carbon dioxide and sunlight). Algenol has not yet made its definitive mark on the energy industry, but Woods is certain it will. It has not been easy but Woods has proven a very patient warrior. There have been stops and starts. Most recently Algenol was forced to shelve expansion plans after concerns were raised about potential environmental consequences, but in April expansion plans were back on track and in full force. We like Woods because he’s a risk-taker and not one who will give up easily. We’re hedging our bets that algae will play a major role in America’s future energy security.
By Jen Alic of Oilprice.com
By TraderVox.com
Tradervox (Dublin) – The euro continued with its decline for the fifth day after a report from the region showed that the region’s manufacturing and services industries contracted in the month of April. In addition to this report, the continuing political situation in the region has continued to weigh down on investor confidence with France and Greece expected to hold elections this weekend. Moreover, investors are worried about the worsening economy and they are warning about the region’s ability to cope with the debt crisis.
According to Neil Mellor, a currency strategist at the Bank of New York Mellon Group, the 17-nation currency is set to decline registering its worst weekly decline in a month. Mellor was concerned that the new governments to be elected in Greece and France might not be supportive of the fiscal compacts and austerity measures supported by the previous governments in these countries.
The 17-nation currency fell 0.1 percent against the dollar to trade at $1.3137 after dropping 0.9 percent this week. The euro also registered a drop against the yen, dropping by 0.1 percent to trade at 105.35 yen. It also weakened against the Great Britain pound by 0.1 percent to trade at 81.22 pence, it had earlier dropped to 81.03 pence which is the weakest it had been since June 2010.
The euro is declining after economic reports from the region showed deteriorating state of economy in the region and the current political situation have forced traders to look for safe haven currencies. Moreover, the euro zone composite index for purchasing managers in manufacturing and services has dropped from 49.1 in March to 46.7 in April indicating a contraction in the region’s economy. Another indicator of the regions hardships in the decline in implied volatility for three months on euro against the dollar, which has dropped to 9.6775 percent. On April 27, this touched the lowest at 9.47 which was last registered in August 2008.
Disclaimer
Tradervox.com is not giving advice nor is qualified or licensed to provide financial advice. You must seek guidance from your personal advisors before acting on this information. While we try to ensure that all of the information provided on this website is kept up-to-date and accurate we accept no responsibility for any use made of the information provided. Opinions expressed at Tradervox.com are those of the individual authors and do not necessarily represent the opinion of Tradervox.com or its management.
Article provided by TraderVox.com
Tradervox.com is a Forex News Portal that provides real-time news and analysis relating to the Currency Markets.
News and analysis are produced throughout the day by our in-house staff.
Follow us on twitter: www.twitter.com/tradervox
Article by Investment U
One dividend ETF to consider is the Vanguard High Dividend Yield ETF (NYSE: VYM).
When dealing with your retirement savings you need to remember a couple things:
I know, it sounds pretty obvious, but it’s not always easy to find investments with all of those qualities…
Some people like mutual funds and others are jumping on the ETF bandwagon. However, besides the pricing, is there any difference in using one or the other for retirement investing?
Let’s see…
The expense difference between mutual funds and ETFs isn’t what it used to be.
About two years ago, possibly the biggest factors in buying ETFs was that they had lower expense ratios than most index funds.
On the flip side, you had to pay a commission to buy them since they can only be traded through brokerage accounts.
But now the difference isn’t so big because:
The right choice between a mutual fund and ETF may just come down to whether you want to invest a big chunk of money all at once or smaller chunks of money over time.
If you want to invest a big chunk at once – for example, you’re doing a rollover of a 401(k) or an IRA – you’re better off with an ETF.
By contrast, if you want to invest $300 a month (or make smaller contributions now and then), you’re probably better off in a regular mutual fund; overall, the fees will be lower.
One of the best ETFs to consider if you’re going the lump-sum route is Vanguard High Dividend Yield ETF (NYSE: VYM). VYM tracks the FTSE High Dividend Yield Index – a custom index that the FTSE Group developed with Vanguard.
The index is constructed from U.S. stocks with higher-than-average dividend yields, and it contains no REITs or stocks that aren’t expected to make a dividend payout over the next 12 months.
Fees make an enormous difference to long-term investment returns! The ETF’s expense ratio of 13 basis points (0.13%) makes it cheaper than 89% of its peers. And imagine all the transaction fees you’re saving from investing in each company individually.
Here are the month-end 10 largest holdings (34.2% of total net assets) as of 2/29/2012:
So what do you get for your retirement account?
And that’s not too shabby.
Good Investing,
Jason Jenkins
Article by Investment U
Article by Investment U
The dollar is going to stay on top through the 21st century for two reasons: The weakness of competitors and the political institutions of America.The greenback gets no respect these days. Every morning my inbox is bursting with emails from gurus advising investors to run for their financial lives – away from the U.S. dollar.
Jim Rogers even suggested that the dollar could go to confetti. Other investors are predicting that the U.S. currency is on its last gasp.
Well, I hate to burst their bubble… The dollar is going to stay on top through the twenty-first century for two reasons: The weakness of competitors and the stable, flexible and open political institutions of America.
Both are important factors to observe after you look at the three basic characteristics of a durable reserve currency:
I know you’re looking at the above characteristics on my reserve currency report card, and thinking it really doesn’t look so great for the greenback.
But remember, while the United States needs significant reform and fiscal discipline, currencies are valued on a relative basis.
So let me ask the obvious question: What rival currencies do these pundits have in mind?
First, take a look at the euro.
Europe has been in a non-stop financial crisis for some time. Most of the continent’s banks are not only shaky but also downright scary. German, U.K. and French banks are just trying to keep the balls in the air. That’s not very reassuring.
The monetary union needs to be much more closely aligned with political and economic union. But that requires 26 states signing over their sovereignty. That’s not going to happen anytime soon.
The other reserve currency idea on many pundits’ lists is the Chinese yuan.
No offense, but this is simply ridiculous, and here’s why…
The first important issue is liquidity. The Chinese yuan isn’t even convertible. The government forces Chinese exporters who receive U.S. dollars to turn them over to the Central Bank. (This is how China built its $3 trillion in reserves). Citizens can’t take it out of the country. It isn’t accepted as legal tender anywhere outside of China.
The other problem with the yuan or Renminbi is that it’ll be a long, long time before China allows its currency to float freely. China built its entire system on tightly controlling their currency’s value. If the currency strengthened 10% against the U.S. dollar in six months, millions of exporters already on razor-thin margins would go bust.
In addition, China’s weaknesses as a global safe haven are glaringly obvious. Two examples should suffice: All of its strategic industries are firmly in state hands and its judicial system is anything but independent. That shouldn’t instill much global confidence.
Next, I can’t top how Fraser Howie, a managing director at CLSA Asia-Pacific Markets, co-author of Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise, sums up China’s financial shell games:
“There’s an awful lot of money just going round and round from one pocket to another, giving the appearance of strength when it’s really not there.”
Finally, there’s the basic question of political stability and durable transparent institutions. We may see our political process as gridlock, but others see it as stability. Institutions like our independent judiciary, free speech and free press. Likewise, the smooth and transparent transfer of power after each election is reassuring to global investors.
A new book, Why Nations Fail by Daron Acemoglu and James A. Robinson, based on 15 years of original research, does an excellent job of getting to the core of why China’s present system and course isn’t sustainable.
The authors contend that countries such as China that lack inclusive and open political economic institutions eventually face roadblocks. Economic growth can be achieved by “extracting” profits for some time, but eventually radical reform is necessary to achieve long-term success.
So go ahead and diversify your global portfolio with the Swiss franc, through the CurrencyShares Swiss Franc Trust (NYSE: FXF), or the Australian dollar, through the CurrencyShares Australian Dollar Trust (NYSE: FXA), but I would avoid the WisdomTree Dreyfus Chinese Yuan ETF (NYSE: CYB).
Just don’t go overboard. You’ll likely get crushed by a snapback in the U.S. dollar.
Good Investing,
Carl Delfeld
Article by Investment U
London Gold Market Report
from Ben Traynor
BullionVault
Friday 4 May 2012, 09:00 EDT
U.S. DOLLAR gold prices rallied to $1640 an ounce Friday, following the release of disappointing US nonfarm jobs data, though they remained more than 1% down on last Friday’s close.
Silver prices also spiked higher, touching $30.19 per ounce – still 3.4% down on the week – while European stocks were down on the day and government bond prices up by Friday lunchtime in London.
Friday’s monthly nonfarm payrolls report shows that the US economy added 115,000 nonagricultural private sector jobs in April, while the unemployment rate fell to 8.1%, down from 8.2% a month earlier.
Consensus forecasts among analysts before the release was for the economy to have added around 170,000 jobs, while Federal Reserve chairman Ben Bernanke last week said the economy needs to create between 150,000 and 200,000 jobs each month to meet Fed projections.
“[A disappointing] outcome would probably be more positive for gold,” said Anne-Laure Tremblay, analyst at BNP Paribas, speaking on Friday morning before the nonfarms release.
“It would raise the possibility of further monetary accommodation by the Fed before the end of the year.”
“Currently [however] the US Taylor rule signals that the Fed funds rate might be too low,” points out Marc Ground, commodities strategist at Standard Bank, referring to the idea that the fed funds rate should be determined by inflation and unemployment levels.
“Whether this is a bearish signal for precious metals in general, and gold specifically, depends on how the Fed reacts relative to what the Taylor Rule suggests.”
Earlier in the day, gold prices dipped below $1630 per ounce – at that point 2% down on where they ended last week.
Sterling gold prices at one point fell as low as £1006 per ounce – their lowest level in 2012.
Silver prices meantime fell below $30 an ounce for the first time since January today.
“Given our view on Chinese silver stockpiles and the impact on imports, we believe that silver upside remains capped,” says Standard Bank’s Ground, referring to the bank’s house view that Chinese warehouses currently have enough silver bullion to meet domestic industrial demand for around 15 months.
“Should Chinese imports stay low for a few months and stock levels deplete, we believe that China will have to come back and restock. This, we believe, could provide enough support for the metal to push prices above $35, towards $40, in Q4:12 [the fourth quarter of 2012].”
Here in Europe, activity in the Eurozone services sector continued to contract in April, and at a faster rate, according to the latest purchasing managers’ index .
Eurozone services PMI fell to 46.9 last month – down from 47.9 in March – according to survey data published Friday.
“The survey suggests that the [Eurozone] economy was contracting at a quarterly rate of around 0.5% in April, extending the downturn into a third successive quarter,” says Chris Williamson, chief economist at Markit, which produced the PMI.
“Remaining tensions in some Euro area sovereign debt markets and…the process of balance sheet adjustment in the financial and non-financial sectors and high unemployment, are expected to continue to dampen the underlying growth momentum,” said European Central Bank president Mario Draghi yesterday.
Draghi was speaking at a press conference in Barcelona, following the ECB’s decision to leave its main policy interest rate on hold at 1%.
“There are significant downside risks to the ECB’s growth outlook,” says Joerg Kraemer, Frankfurt-based chief economist at Commerzbank.
“Draghi indirectly hinted at next month’s ECB meeting when the bank will publish its new projections. Since the ECB may lower its growth forecasts, the rate-cut discussion will stay with us.”
“ECB hopes that the economy is recovering have turned to dust,” adds Standard Bank currency strategist Steve Barrow.
“We expect the ECB to react with a 25 basis point [0.25 percentage point] rate cut as early as June’s meeting.”
Over in China – the world’s second-biggest source of gold bullion demand last year – HSBC’s purchasing managers index shows services sector growth accelerated last month, with the HSBC PMI rising to 54.1, up from 53.3 for March.
In world number one gold market India meantime, record high Rupee gold prices are weighing on demand, according to Indian jewelry dealers.
“We have to see physical buying coming back before gold can stabilize,” says Ronald Leung, director of Lee Cheong Gold Dealers in Hong Kong.
“Otherwise, we can test $1,625 again. We don’t know when the Indians will come back.”
Gold value calculator | Buy gold online at live prices
Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK’s longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.
(c) BullionVault 2011
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.
Article by Investment U
If you’re not taking advantage of this investment opportunity in your portfolio, you’re about to miss the boat in a big way.
A friend I spoke with yesterday had a common lament…
“I don’t see where future economic growth is going to come from,” he said. “The economy is stuck in neutral, the federal stimulus is over, consumers are laden with debt, and they’ve already tapped the equity in their homes. Who has the financial wherewithal to drive growth in corporate profits over the next few years?”
My answer is the citizens of Latin America, Eastern Europe, Asia and the Pacific Rim. In fact, I expect it to ignite the biggest equity boom of our lifetimes.
Skeptical? Then consider this …
Developing countries have already made the right moves. Most of them have already evolved from autocracies to democracies, from state-controlled economies to capitalist economies, from nationalized industries to privatized industries, and from high tax and tariff states to low tax and tariff states.
This is a very big deal. Developing nations cover 77% of the world’s land area and represent 85% of the world’s population. Yet they currently produce only 24% of the world’s gross domestic product.
That’s about to change. There are now 3.9 billion “middle class” people in the world today. Thanks to emerging markets, that number will double over the next 20 years.
As The Wall Street Journal wrote recently:
“In the next 24 hours, approximately 180,000 people in developing countries will be moving from the countryside to cities such as Shanghai, Sao Paulo, Johannesburg. The same will happen tomorrow and every day thereafter for the next 30 years, the equivalent of creating one new New York City every two months, according to the United Nations. These men and women will need everything, electricity, water, food, healthcare, shelter, schools, computers and, of course, jobs. Many have the potential to improve not just their local environment but the world.”
If you’re not taking advantage of this in your portfolio, you’re about to miss the boat in a big way. The problem is the typical investor lacks the knowledge and expertise about how to invest in these markets effectively.
Fortunately, my good friend and colleague Karim Rahemtulla has the answer.
His new book – already on the Amazon.com bestsellers list for “Investing” – is Where In the World Should I Invest: An Insider’s Guide to Making Money Around the Globe.
It seems like every time I speak to Karim, he’s just getting on or off a plane to India, China, Argentina, or Dubai. A global investor in the truest sense, he doesn’t sit in an office and look at annual reports. He gets out there in the field and looks at companies up close. He talks to management, customers, suppliers and competitors. He sizes up operations. And he goes through the financials with a fine-tooth comb.
In his new book, Karim examines major stock market opportunities in huge markets like Brazil, China and India. But he also looks at new frontier markets like Nepal, Cambodia, Vietnam and many more. And he offers plenty of specific recommendations. Each chapter ends with a SWOT analysis: a summary of strengths, weaknesses, opportunities and pitfalls faced by each market.
Feeling risk-averse? Then you need this book more than most.
It’s counterintuitive, but when you blend riskier emerging market assets with your domestic portfolio, you get not more volatility, but less. Why? Because emerging markets have a fairly low correlation with U.S. stocks. When equities fall here, they often rise overseas.
The bottom line is this: Economic growth in the United States, Europe and Japan is likely to stay soft over the next several years. China, India, Brazil and other emerging market nations aren’t just set to boom. They’re already booming.
It’s not enough to just simply know this. As an active investor, you want to capitalize on it. Karim’s new book – an easy read and superb investment guide – allows you to do just that.
The book is now available at bookstores nationwide. However, I notice that Amazon is currently offering it for 35% off the cover price.
For more information, click here.
This could well be the most profitable reading you do this year.
Good Investing,
Alexander Green
Article by Investment U
