Month: November 2011

Nov. 28 (Bloomberg) — Gabriel Stein, a director at Lombard Street Research Ltd., talks about Italy’s economy and membership of the euro zone. He speaks with Maryam Nemazee on Bloomberg Television’s “The Pulse.”

Warren Buffett: The United States is No Europe

by Jason Jenkins, Investment U Research
Monday, November 28, 2011

The special debt-reduction committee created by Congress this past August failed to do its job. It could not reach an agreement to shave $1.2 trillion off the U.S. debt.

So, just as the markets have predicted for the last few weeks, we have partisan dysfunction with no relief likely until after the 2012 election year. This sets the stage for across-the-board automatic spending cuts.

There was belief that after the Supercommittee admitted failure Congress would legislate themselves out of sequestration, which would have allowed for no automatic cuts.

However, President Obama blamed Republicans, saying in remarks at the White House they “refused to listen to the voices of reason and compromise.” The President, most importantly, went on to say that he would veto any Congressional move to avoid those automatic spending cuts that are supposed to start in 2013.

Other Repercussions

And at the same time, the impasse creates ambiguity as to whether Congress will vote to extend a temporary payroll tax cut or the extension of unemployment benefits that many economists believe are needed to keeping the United States growing. Each will expire at year’s end.

Both sides of the aisle know in the long run that the damage from the uncertainty is detrimental to recovery next year and may even spill over into 2013.

Wow! How long will this go on? Ever since the debt ceiling debacle, we have seen nothing but a childish gridlock in Washington. There’s a divide that’s so bad between the parties that it’s affecting the psyche of many Americans like never before. But I’m here to bring good news – at least we’re not Europe!

We’re Bad, They’re Worse

If you don’t take my word for it, you may want to listen to the “Oracle of Omaha.” The crisis in the Eurozone has exposed the flaws of the 17-member currency union, and its leaders will need to take urgent action if they want the euro to survive, Warren Buffett told CNBC in an on-air interview last Monday.

“The system as presently designed has revealed a major flaw. And that flaw won’t be corrected just by words. Europe will either have to come closer together or there will have to be some other rearrangement because this system is not working,” Buffett said in the interview.

Asked whether the union would survive this crisis, Buffett said: “That’s in doubt now.”

What was truly striking was his statement that he did not see many parallels between the crisis in the Eurozone and concerns over debt in the United States.

The Major Difference

Every member of the Eurozone surrendered their right to issue bonds in their own currency. That alone shows why these two situations must be viewed separately.

Now don’t take this the wrong way. I am by no means advocating that we print money in the attempt to get out of this or that the U.S. debt issue is not that critical. But, what I am stating is that we have a structure that can help us out along the way and keep our equity markets on a lot stronger footing than Europe’s.

Investors know this and will be looking for the only true safe haven these days – the U.S. dollar – while the developed geopolitical world tries to get its act together.

Good investing,

Jason Jenkins

Article by Investment U

Editor’s Note: This is something I had to pass on to Investment U readers. Mark Ford, Editor of The Palm Beach Letter, recently received a letter from a reader who is 47 years old and has a net worth of $25,000. “What good will compound savings do for me?” the reader asked. “I don’t want a million dollars when I’m 70. I want it now.” We’ve published Mark’s response below…

Before you read it, you should know that Mark himself started with no money. He was the son of teacher – one of many children. He built a multimillion-dollar fortune exactly as he describes…

How to Become Financially Independent in Seven Years Or Less

by Mark Ford, Investment U Guest Editorial
Monday, November 28, 2011

You are middle aged. Your net worth is meager. Your income is barely sufficient to meet expenses… And those expenses are going up. The Great Recession is looming. Economists are predicting things will get worse. What can you do?

Should you give up your dream of retiring comfortably one day? Should you accept a future of increasingly meager existence? Should you grow bitter and curse the powers that be for putting you in this situation?

Or should you take responsibility for your situation and make changes?

That last question was rhetorical, of course. But sometimes, I wonder if people really do understand their options. There are things that happen in life that we can’t control. But we can control the way we respond to them.

I understand that when you’re halfway through your life and are barely making ends meet, it seems like the only chance to become financially successful is to win the lottery (either an actual lottery or the stock market equivalent of one). So it may be frustrating to hear some rich guy from Palm Beach telling you that you can’t quickly turn $25,000 into $1 million by investing in stocks.

But I believe – no, I am certain – that anyone who has modest intelligence and a positive attitude can become financially independent in seven years or less if he or she is willing to work enormously hard.

You don’t have to give up on your dream of being wealthy. You always have the ability to change your financial life. It will take a bit of time and patience. And it will require that you change some of the thoughts and feelings you have about wealth and your relationship to wealth.

The first thing you must do is accept the fact that you’re solely and completely responsible for your current financial situation. Before you react defensively, read that sentence again… I didn’t say you’re the cause of your situation. I said you’re responsible for it.

By taking responsibility for your current condition, you also assume responsibility for your future. Nobody can change your fortune but you. And nobody else will. The sooner you accept that reality, the sooner you will shed the anger and blame and begin to feel financially powerful.

I’m not giving you a pep talk. I’m telling you the truth. I’ve done it myself, and I’ve coached dozens of people to do it, too. It’s a simple adjustment of your thinking, but it’s extremely powerful. It works instantaneously. Without it, you cannot move forward, even by a single inch.

The next thing you must do is set realistic expectations. I’ve had people tell me that they don’t want to make 10 percent or 15 percent per year on their money. They think returns like that are “ho-hum.” They want some incredible stock tip or some secret get-rich-quick technique. But when I hear people say that, I think, “This person will never become wealthy.”

Realize that 10 to 15 percent is a high rate of return. Warren Buffett – the most successful investor of all time and the third-richest person on the planet – has averaged 19 percent on his investments over his entire career.

And realize that the journey to millions of dollars is earned $100 at a time. You must be willing to accept this fact to move your financial life forward. Your financial life is like a train that has stalled. And right now, you want to be driving it at 100 miles an hour. But it can’t go from zero to 100 miles an hour in no time flat. Inertia is against you. Be happy with 10 miles an hour now… and then 20… and then 30. This is how wealth accumulates: gradually at first, but eventually at lightning speed.

The third thing you must do is thoroughly understand the difference between spending, saving and investing. With every paycheck you get, cover your necessary expenses first (bills, mortgage, etc.). Then put some money towards saving. And then put some money towards investing. Then and only then – after you have “paid yourself” – should you add to your “spending” account.

The fourth thing you must do is recognize that your net investible income (the amount of cash you have after spending and saving) is the single most important factor in determining how quickly you will become wealthy.

Commit to adding to your income with a second income. Make an honest count of the number of hours each month you devote to television and other non-productive activities. Devote them to wealth-building instead. Cast aside the comfortable shoes of victimization. Put on the working boots of a financial hero.

It’s not fun to realize, in the midst of your life, that you haven’t acquired the wealth you want. But the good news is your past doesn’t have to be a prologue… unless you allow it to. You can change your fortunes today by doing the four things I’ve just told you to do.

You are only 47, not 87. You have plenty of time to increase your income and grow your net worth. Why do you assume all is lost when – as any 87 year old will tell you – you have a whole wonderful life ahead of you… a life that can be rich in 100 ways?

Good investing,

Mark Ford

Article by Investment U

Nov. 28 (Bloomberg) — Ned Naylor-Leyland, investment director at Cheviot Asset Management, talks about the outlook for gold prices. He speaks with Francine Lacqua on Bloomberg Television’s “On the Move.”

Nov. 28 (Bloomberg) — Jane King summarizes the top stories this morning on the Bloomberg Business Report. (Source: Bloomberg)

By The Sizemore Letter

In the new 2011 edition of his magnum opus Debunking Economics: The Naked Emperor Dethroned, Australian economics professor Steve Keen comes out guns blazing, blasting the “Panglossian view” of neoclassical economics that did so much to get us into the credit boom and bust that we are still struggling to recover from.

Keen, unlike most of his peers, understands the role of debt in the economy, both as fuel for a boom and as an enormous anchor that prevents recovery during a bust. He also clearly shows how private financial institutions create most of the debt in the economy, not the government or central banks.  Mainstream economists did not see the 2008 crisis coming because, frankly, the tools they use have no way to take the role of private debt into account.  It’s not that mainstream economists are stupid; far from it.  Most are highly intelligent.  There just happens to be a rather large hole in their body of research that Professor Keen has sought to fill.

In the preface, he writes that “as a means to understand the behavior of a complex market economy, the so-called science of economics is a mélange of myths that make the ancient Ptolemaic earth-centric view of the solar system look positively sophisticated in comparison,” adding also that “economics is too important to be left to the economists.”

Well said, Professor.

In this age of popular angst in which our reigning politico-economic system—and the Federal Reserve in particular—is under attack from both the Tea Party on the right and Occupy Wall Street on the left, it is easy to dismiss Professor Keen as just another fringe, anti-establishment doom monger.   But Professor Keen is no Johnny-come-lately, and I advise readers to take his words very seriously.   While his fiery rhetoric has made him a bit of a black sheep among his peers in the profession, he can rightly call “scoreboard.”  He was one of the few professional economists to predict the 2008 meltdown, correctly pointing out the risks of the private-sector debt explosion and sounding the alarms of the disaster to come as early as December 2005.  For his efforts, he received the Revere Award from the Real World Economic Review for the being economist “who most cogently warned of the crisis, and whose work is most likely to prevent future crises.”   Keen is a man we would all be wise to listen to.

He’s also highly likely to make you uncomfortable, which is a cross that all contrarians bear.  As a race, humans crave certainty, and—like a proverbial ostrich with its head buried in the sand—they tend to hide from any evidence that might call that certainty into question.

Economists are no better than the rest of us on this count and might even be worse.  Economists (and political scientists too, for that matter) tend to be dogmatic in their views.  Like a die-hard Marxist who insists that communism could work “if only it were implemented correctly,” it seems that no amount of evidence to the contrary can convince a neoclassical economist that the market is not always efficient and that instant liquidity is not the solution to every problem.

As Keen writes of his peers,

I came to the conclusion that the reason [economists] displayed such anti-intellectual, apparently socially destructive, and apparently ideological behavior lay deeper than any superficial pathologies.  Instead, the way in which they had been educated had given them the behavioral traits of zealots rather than of dispassionate intellectuals.

As anyone who has tried to banter with an advocate of some esoteric religion knows, there is no point in trying to debate fundamental beliefs with a zealot.

On a personal note, I’ve had the same frustrations in speaking to gold bugs and Austrian economists who, knowingly or not, speak of gold in mystical terms usually reserved for religions and extreme political movements.  That gold is the “one true currency,” sounds remarkably similar to the Islamic tenet that Islam is the “one true religion” or that the Catholic Church is the one, true “universal church.”  Gold may or may not be a good investment or a suitable asset to base an international monetary system on; this is a subject for intelligent debate.  But you can’t have an intelligent debate with an ideologue.

For those with only a cursory knowledge of the popular schools of economic thought, let this serve as a crash course:

Neoclassical School:  The vast majority of economists, including Fed Chairman Ben Bernanke and most policy wonks for both the Republicans and the Democrats, can be loosely classified as “Neoclassical” economists.  The Neoclassical School is what you would think of as “mainstream economics.”  There is a general belief in the efficiency of markets with a sprinkling of Keynesian ideas about the role of government spending during recessions and Monetarist ideas about the role of the central bank and official interest rates.  Where neoclassical economics differ with one another—such as on the proper size of the state, the size of social safety nets, the level of regulation and taxation needed, etc.—they tend to argue at the margins.  There is general consensus that, all else equal, markets and trade should be as free as possible, though regulation and fiscal and monetary policy have their respective places.  While I consider myself a “free market” guy, I do think it is only prudent to look at the other side of the coin.

Neoclassical economics hinges on a few assumptions that any non-ideologue would immediately know where untrue (and which Keen relentlessly critiques throughout the book):

1. People act independently and on the basis of full information. (Under this assumption, irrational bubbles would be impossible; how anyone believes this given the recurrence of bubbles in history is a mystery.)
2. People have rational preferences that can be quantified (Again, this point is dubious at best.  We are humans, not Vulcans.)
3. Markets are rational and tend towards equilibrium (which implies that booms and busts are the exception and not the rule.)
4. What is true of the individual is true of the group.  (Keynes attacked this as the Fallacy of Composition; more on that later.)

While the Neoclassical School’s emphasis on the benefits of trade and free markets is generally spot on, the school clearly has its limitations.   Its dogmatic belief in the efficiency of markets is, frankly, ridiculous and flies in the face experience.  And again, it suffers from the Fallacy of Composition, which we will discuss shortly.

Austrian School: Formerly the domain of gold bugs and various stripes of libertarians, the Austrian School of economics has recently risen to prominence with the popularity of Congressman and perennial presidential candidate Ron Paul.  Representative Michele Bachmann also describes herself as an Austrian and claims to read the works of von Mises on her beach vacations.   For the literary enthusiasts out there, Ayn Rand, author of The Fountainhead and Atlas Shrugged could be loosely lumped in with the Austrians, though she was not an economist and had her own school of thought known as Objectivism.

Friedrich von Hayek—who taught for years at my alma mater, the London School of Economics—and Ludwig von Mises were the main proponents for the movement in its early days, which rose in response to the creeping statism that grew out of the Keynesian movement in the years after World War II.  The Austrian School objects to the hyper-precision quantification of most modern economic methods, insisting that economics is too complex and too subject to fickle human tastes to be accurately measured.  On this count, I would have to agree.   Unfortunately, they also tend to have a near obsession with the Federal Reserve and the effects of managed interest rates which Austrians believe inevitably lead to inefficient “mal-investment.”     For some of the more puritanical Austrians, the Federal Reserve is not simply an inefficient institution; it’s a source of societal moral rot.  (The Austrians seem to ignore that, even under a gold standard, irrational booms and busts were still a fact of life.  It appears that the human emotions of greed and fear were concocted in the conference room of the New York Fed by a cabal of sinister bankers.)   On balance, the Austrians have an emphasis on limited government and personal freedom which is refreshing and admirable, but they tend to be a little too radical to fully take seriously.

Hard-core Austrians would have been content to let every bank in America fail, even if it meant 50 percent unemployment and conditions worse than the Great Depression, because it would have struck them as being “just.”  It’s easy to be a radical when you know there is no possibility that what you advocate will come to pass and that you’ll never have to live with the consequences.

Keynesian School / Post-Keynesian School:  Keen would count himself among the Post-Keynesians.  For our purposes here, Keynesians and Post-Keynesians are close enough to be lumped together as one.  Keynesianism can be defined more by what it is not than what it is.  It is not a dogmatic grand unifying theory.  It is more of a hodgepodge of pragmatic adjustments to what Keynes considered shortcomings of a pure market economy.

John Maynard Keynes cobbled together what we now call “Keynesian economics” from what he saw as shortcomings of mainstream economics during the Great Depression.   Delving into the arcane, Keynes believed that “Say’s Law,” a tenet of classical economics that claims that supply creates its own demand, was a half-truth at best.  Sometimes supply didn’t create its own demand.  Sometimes you have overcapacity, falling prices, and weak aggregate demand.  Sometimes an economy can settle at an equilibrium far below full capacity.  Because of “sticky wages” and “sticky prices,” sometime the unemployment rate can stay uncomfortably high.  Sometimes—just sometimes—the real world doesn’t look like an economics text book, and waiting for things to work out in the long-run is not always a viable option.  In the long run, we’re all dead.

To smooth over some of the rougher edges of a free-market economy, Keynes argued that the state could be a stabilizing force.  One of the more controversial elements of his work was his advocacy for “countercyclical measures.”  Keynes argued that governments should run deficits during recessions to spur demand with the understanding that the debts racked up during the hard times would be paid back with surpluses during the good times.  Alas, while this sounds great in theory, the always-pragmatic Keynes seemed to have a complete misunderstanding of how real-world politics works.  Borrowing money is easy for a politician.  Paying back proves to be remarkably hard.  (Note: Though he is a “Post-Keynesian” economist, Keen makes it clear that that countercyclical Keynesian deficit spending is not going to fix an economic plagued by debt deflation.  More on that to come.)

Governments on both sides of the Atlantic used Keynes work to justify the massive expansion of the state after World War II, and the stagnation that followed led to Keynesian economics falling into disrepute by the late 1970s.

Where Keynes’s work would appear to justify socialism, I find it outright dangerous.  But much of Keynes’ work is politically neutral, and his insights into markets were largely spot on.

In particular, Keynes tore apart the notion that what is good for the individual is automatically good for the group.  This is the Fallacy of Composition and is perhaps best illustrated by Keynes’s Paradox of Thrift.  While it is considered responsible behavior for an individual to spend less and save more, if everyone did it at the same time the economy would collapse.  Keynes’ disciples, including Steve Keen, have taken this notion further.  In Debunking Economics, Keen writes:

One of the great difficulties in convincing believers that neoclassical economics fundamentally misunderstands capitalism is that, at a superficial level and individual level, it seems to make so much sense.  This is one reason for the success of the plethora of books like The Undercover Economist and Freakonomics that apply economic thinking to everyday and individual issues: at an individual level, the basic concepts of utility maximizing and profit-maximizing behavior seems sound.

As I explain later, there are flaws with these ideas even at the individual level, but by and large, they have more than a grain of wisdom at this level.  Since they seem to make sense of the personal dilemmas we face, it is fairly easy to believe that they make sense at the level of society as well.

This reason this does not follow is that most economic phenomena at the social level—the level of markets and whole economies rather than individual consumers and producers—are “emergent phenomena”: they occur because of our interactions with each other—which neoclassical economics cannot describe—rather than because of our individual natures, which neoclassical economics seems to describe rather well. 

Keynesians, better than neoclassicals, “get” that economics is a social science.  It’s a lot closer to psychology than it is to physics.  (In this respect, Austrian Economics is also closer to the truth than Neoclassical.)

Neoclassical Economics (and Marxist Economics too, for that matter) focuses almost exclusively on the supply side of the equation.  Demand is almost an afterthought, some that just kind of “happens” and doesn’t need to be explained.  I consider that a shortcoming and consider Keynes’ workin this respect to be insightful.

Much of Steve Keen’s work in Debunking Economics and elsewhere is an expansion on the work of two prominent Post-Keynesians: Hyman Minsky and Irving Fisher.

Minsky’s Financial Instability Hypothesis is brilliant.  While Neoclassical Economics insists that market economies naturally tend towards equilibrium, Minsky argues exactly the opposite.  Stability begets instability, and vice versa.  A long period of stability lulls market participants into a false sense of security and encourages them to take on excessive debts and excessive risks.  This inevitably leads to instability and crisis—as it did in 2008—which in turn causes market participants to go too far in the opposite direction, becoming too risk averse.  Try to get a mortgage today at a major bank, and you’ll see what I mean.  The only way to moderate this never-ending oscillation is to avoid the massive accumulation of debts, which can only be done by strictly regulating the banking system.

The aftermath of excessive debt is, unfortunately, what Irving Fisher called “Debt Deflation.”

Debt deflation is a nightmare.  It starts with a debt-fueled boom.  When the boom turns to bust, prices fall, which makes the value of the outstanding debt rise in real terms.  The more that consumers and businesses cut back their spending to pay back their debts, the more the economy sinks, the further prices fall, and the higher the value of the debt rises.  It’s a vicious cycle in which the harder you try to pay off the debts, the more burdensome they become.  This is where Greece is today and where the rest of the developed world may soon be going.

Japan is a perfect example of Irving Fisher debt deflation in action, mixed with a fatal dose of bad demographics.  The last time prices rose significantly in Japan, Bill Clinton was the Governor of Arkansas.   Private debts have inched lower over the past two decades, but government debt has exploded in an attempt to follow the standard Keynesian policy of using government debt to spur demand.  Alas, this won’t end well for Japan. (John Mauldin calls Japan “a bug in search of a windshield,” and it is an apt metaphor.)

Overall, Keen has written a comprehensive work that I would recommend for any reader with an interest in economics.  Keen is a serious student of the profession, and the proof of his critique of mainstream economics is in the pudding.  Keen saw the crisis coming.  Neither Bernanke, nor Greenspan, nor any other Neoclassical economist did.  That, more than anything I can say, is testament to the importance of Keen’s work.

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Several weeks of losses in the equity markets could end this week, says the Senior Strategist. Investors are looking for any piece of positive news.

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London Gold Market Report
from Ben Traynor
BullionVault
Monday 28 November, 08:30 EST

THE SPOT MARKET gold price climbed to $1718 an ounce Monday morning London time – a 2.1% gain on Friday’s close – while stock and commodity markets also rallied following news that leaders may be close to an agreement on the Eurozone rescue fund.

“News out of the US is also contributing to the more upbeat mood on markets, with preliminary reports from retailers suggesting that it was a good Black Friday weekend,” says Marc Ground, commodities strategist at Standard Bank, referring to reports that Americans spent over $52 billion in the days following Thanksgiving on Thursday.

“With a slew of US data flow out this week [however] this optimism over the outlook for US economy is sure to be tested in the coming days.”

Despite this morning’s rally, the gold price remains nearly 5% off its November high.

The silver price also gained this morning, climbing to $32.22 per ounce – 2.8% up from the end of last week.

Eurozone finance ministers are due to meet tomorrow amid reports that they will finalize a plan to leverage the European Financial Stability Facility. European leaders agreed last month that the EFSF could offer part-guarantees to private sector buyers of distressed Eurozone government bonds at auction.

Germany meantime is continuing to push for changes to European treaties, according to press reports on Monday. A number of potential treaties and agreements are reported to be under discussion, all aimed at creating more robust incentives for national governments to exercise fiscal discipline.

“The Germans have made up their minds… they are doing everything they can to push for [treaty change] as rapidly as possible,” a senior European Union official told news agency Reuters.

European nations that argue for a larger European Central Bank role, or for jointly-issued ‘Eurobonds’, are “those countries that have to sort out their budget problems and [have chosen] to misunderstand that they have to make more efforts,” German finance minister Wolfgang Schaeuble said in an interview on Sunday.

“The goal,” Schaeuble added, “is for the member states of the common currency to create their own Stability Union and to concentrate on that.”

The Organisation for Economic Cooperation and Development ‘s latest ‘Economic Outlook’, published today, calls for “a substantial relaxation of monetary conditions” in the Eurozone. The OECD has cut its global growth forecast and predicts recession for the Eurozone and the UK – adding that fiscal tightening could also “tip the US economy into recession”.

Eurozone contagion is “rising and hitting probably Germany as well,” Pier Carlo Padoan, OECD chief economist, said Monday.

“So the first thing, the absolute priority, is to stop that and in the immediate [term] the only actor that can do that is the ECB.”

An auction of German government bonds ‘failed’ last week when only €3.9 billion of 10-Year bunds were sold – versus a maximum target of €6 billion.

“Markets continue to move faster than politicians,” says Mansoor Mohi-uddin, head of foreign exchange strategy at UBS in Singapore – adding that investors have begun to “price in the endgame” for the single currency.

“Failure to come up with a comprehensive solution on December 9 [the next European leaders’ summit] is certainly possible,” adds Joachim Fels, chief economist at Morgan Stanley.
“We believe that it would open up a much darker scenario that, eventually, could entail a breakup of the Euro.”

Ratings agency Moody’s meantime says that its “central scenario remains that the Euro area will be preserved without further widespread defaults” but warns that “even this ‘positive’ scenario carries very negative rating implications in the interim period.”

Elsewhere in Europe, the International Monetary Fund has denied a report in Italian newspaper La Stampa claiming that it was preparing to lend Italy €600 billion at interest rates of 4-5% – enough to cover Italy’s financing needs for around a year-and-a-half.

The Italian Banking Association meantime is today promoting ‘Buy a Bond’ day, encouraging ordinary Italians to lend their savings to the government. The initiative is supported by the country’s professional soccer players.

“Italian savers may be bondholders of last resort as banks and institutional investors are reducing holdings of government bonds,” says Wolfram Mrowetz of Milanese investment firm Alisei SIM.

Here in the UK, chancellor George Osborne is expected to announce so-called ‘credit easing’ measures – designed to boost lending to small businesses by offering guarantees – in Tuesday’s autumn budget report to parliament.

“We are making available £20 billion for the National Loan Guarantee Scheme,” Osborne told a BBC interviewer on Sunday.

“However it sits within an envelope that could be as large as £40 billion.”

The British Chamber of Commerce meantime has today predicted the Bank of England will increase the size of its quantitative easing program – through which the Bank buys assets (mainly government bonds) from institutions such as banks and pension funds – from the current £275 billion to £325 billion.

Over in Australia, gold mining output fell to around 66 tonnes in the third quarter of the year – down 2.4% from Q2 – according to an industry survey published Sunday.

Melbourne based mining consultants Surbiton Associates, which carried out the survey, explain the drop was party caused by some producers choosing to process lower ore grades – while preserving high grade ore in case of a fall in the gold price.

Ben Traynor
BullionVault

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.

Video courtesy of ForexCT – A leading Australian forex broker, liscensed by the Australian Securities & Investments Commission, offers the MetaTrader4 and PROfit Platform to retail traders. Other services include Segregated Accounts, Trading workshops, Tutorials, and Commodities trading.

By ForexYard

Germany’s failed bund auction shows the European debt crisis has made its way to the core of Europe.

Economic News

USD – USD Benefits from European Woes

Markets are being driven by events in Europe and as the debt crisis intensifies traders have been selling both the EUR and other higher yielding assets in favor of the USD. During Friday’s debt auction Italy succeeded in raising its targeted amount of EUR 10 bn. However, the yield Italy must now pay to serve its debt is ballooning. Italy is currently paying 6.054% on 6-month notes, up from 3.535% at the end of October. The yields at these levels are astronomical and are unlikely to be sustainable. Also last week Fitch lowered Portugal’s sovereign credit rating to junk status citing a large fiscal imbalance and risks to the Portuguese economy from EU-mandated austerity measures.

With the European debt crisis is escalating this has brought a renewed surge of USD inflows. The Dollar index is now trading at its highest level since October 4th. Higher yielding currencies such as the NZD and AUD have either broken or are currently testing their Q3 lows.

Despite the threat of another round of quantitative easing from the Fed the USD will likely continue to gain so long as the tensions in Europe remain elevated.

EUR – European Debt Crisis Arrives in Germany

Following the failed German bund auction last week it appears that the European debt crisis has progressed from affecting the periphery (Greece, Portugal, Ireland) to include the core of Europe (Germany, France, Italy). Italy’s fiscal difficulties have been noted with the yield on the 10-year Italian BTP rising above 7%. But now demand for safe haven German bonds is beginning to sag. The failure of Germany to sell the complete offering of bonds from last should be considered a shift in investor confidence in German bunds.

German PM Angela Merkel has repeatedly voiced her opposition to both European bonds as well as the ECB serving as a lender of last resort. Last week’s joint press conference with Sarkozy and Monti was the latest instance of Merkel’s unwillingness to activate additional measures that may calm financial markets in the near-term. Merkel’s suggestion of EU treaty changes would likely be a lengthy approval process, a luxury Europe does not have given the pressures that currently exist in the European bond markets. Thus it appears that the 2-year old debt crisis will continue on into December. This makes selling any EUR rally all that more attractive.

JPY – S&P Warns on Japanese Credit Rating

On Friday S&P said the Japanese administration has made no progress to reduce the nation’s debt. This may be the first warning prior to a reduction of the Japanese sovereign credit rating. Comments from the sovereign ratings team at S&P said they are closer to a downgrade but the deterioration in Japan’s public finances has been gradual. Currently Japan is able to borrow in the capital markets at ultra-low rates.

While a downgrade of Japan’s credit rating may be considered a slap in the face, one only has to look at the move by S&P to downgrade the US. Despite the US losing its AAA rating from S&P the US still maintains the ability to borrow at low interest rates. This may not be due to the creditworthiness of the US but rather a lack of investment grade sovereign debt available in the world. With problems in the European debt markets a downgrade of the Japanese credit rating should not materially affect Japan’s ability to borrow, nor should it affect the value of the JPY.

Crude Oil – Oil Prices Continue their Decline

The price of spot crude oil continues to decline following a brief push above the $100 level. Investors have been taking their cues from events in Europe which have dragged down market sentiment. A combination of political gridlock in Europe combined with credit rating downgrades of Portugal, Hungary, and Poland have all weighed on the investment horizon.

The sovereign debt crisis appears set to continue and traders may look to US economic data this week for signs of an improving US economy. The headline event will be Friday’s non-farm payrolls report but crude oil traders should also be on the lookout for Thursday’s ISM manufacturing PMI for signs of continued US economic improvement.

Technical News

EUR/USD

The EUR closed last week below the psychologically important 1.35 level and a close below it on the monthly chart will carry an even greater significance. Both monthly and weekly stochastics continue to fall and a break of 1.3210 will likely test the October low of 1.3145. Below here at 1.3040 there is the 61% Fibonacci retracement of the move from June 2010 to May2011 though this may only prove to be a mile marker in the new downtrend for the pair. Support is located at the January low of 1.2870. The November 18th high of 1.3610 stands out as resistance.

GBP/USD

Falling monthly and weekly stochastics may have the GBP/USD testing the October low of 1.5270 as the pair is pulling within striking distance of its long term uptrend from the 2009 low which comes in at 1.5050. Any move higher will likely encounter heavy selling from the July pivot at 1.5780.

USD/JPY

The downtrend for the USD/JPY remains firmly intact and only a break above 78.95 from the falling trend line from the 2007 high may reverse the pair’s bearish technical sentiment. A break above this line may have the pair testing the most recent post-intervention high of 79.50, a level that coincides with the pair’s 200-day moving average. To the downside the November 18th low of 76.55 is the initial support, followed by the all-time low of 75.56.

USD/CHF

The USD/CHF is testing its October high at 0.9310 and a break here will likely open the door to the pair’s 20-month moving average at 0.9460 and the February high of 0.9775. Initial support is located at the November 18th low of 0.9080 with a deeper move perhaps taking the pair to the November low of 0.8760.

The Wild Card

NZD/USD

In text book fashion a previously supportive trend line that was broken has now turned into resistance. The NZD/USD has risen to 0.7550, back to its long-term trend line from the 2010 low. Forex traders should the downtrend continue Friday’s low at 0.7370 will be the first test followed by the March low of 0.7115. Additional resistance is located at the May low of 0.7750.

Forex Market Analysis provided by ForexYard.

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