Category: Financial Advisor

Forget Thanksgiving here in the US.

It seems as though the most important day of the entire year for Americans is the day that follows Thanksgiving.

That day time is ‘Black Friday’.

Thanksgiving is a secular vacation rather than a religious holiday. Dark Friday is a secular event too.

But it’s a different kind of event. Black Friday isn’t about spending time with family…it comes down to spending time fighting through the crowds of people at the malls to get the best sales items.

However, based on recent years, the actual fighting has been less fierce. So what will this year’s Dark Friday tell us about the real strength of the US economy?

According towards the National Retail Federation, Black Friday sales have fallen within the last two years. The recent peak with regard to Black Friday was in Next year, when Americans spent nearly US$60 billion:

Source: National Retail Federation, Bloomberg

By 2014, that number had fallen to US$50.9 billion.

And if retailers hope for better this year, they may be disappointed. According to Bloomberg:

‘The idea that consumers won’t spend without a few serious enticement got a increase on Wednesday, when Commerce Department figures showed household spending rose less than forecast in October. Purchases increased 0.1 percent for a second month, while the median predict of 74 economists in a Bloomberg survey called for a 0.3 percent advance.‘

As the statement says, more discounting is good information for consumers. But discounting means lower profit margins. That should also mean lower earnings many and lower stock prices.

It turns out that’s exactly what’s happening…

There’s a lot of red in there

When it comes to looking at the market, real analysis is better than guesswork.

So, all of us looked at seven popular All of us retailers: Macy’s Inc [NYSE:M], Kohl’s Corporation [NYSE:KSS], Target Corp [NYSE:TGT], Wal-Mart Corporation [NYSE:WMT], Nordstrom Inc [NYSE:JWN], Abercrombie & Fitch [NYSE:ANF], and Foot Looker Inc [NYSE:FL].

We’ve put these stocks into a table. It shows EBITDA margin (earnings before interest, tax, devaluation, and amortisation margin).

We’ve chosen EBITDA border rather than net profit, because EBITDA doesn’t include taxes and non-cash items such as depreciation and amortisation, which can are more of an accounting item than a cashflow item.

Here’s the table:

Source: Bloomberg

2012 is our starting place. After that, if the cell is green it means that seasons EBITDA Margin is greater than the previous year’s.

If the cell is actually red, it means that year’s EBITDA Margin is less than the prior year’s. If the cell is white (except the 2012 column), it means that seasons EBITDA Margin is the same as the previous year’s.

As you can see, there’s a lot of red through 2013 to 2015. And there’s a lot of red forecast for 2016 and 2017.

It helps explain why the actual ETF of US retail shares, the SPDR S&P Retail ETF [NYSE:XRT], has started to fall because the middle of this year:

Source: Bloomberg

That’s a bad sign.

The case is building for trouble ahead

Even worse of these retailers is the potential for the united states Federal Reserve to raise interest rates within December.

EBITDA doesn’t include interest. So EBITDA won’t show any kind of change to these retailers’ interest expenses.

However, it will show the impact better interest rates in another way. That is, higher interest rates affect the spending habits of consumers. But higher rates of interest may affect supplier as well as input costs too.

For example, if consumers have to set aside more of their salaries in the direction of higher interest repayments, which leaves them with less disposable income.

And if suppliers or even transport companies try to spread higher costs, that will affect these retailers’ EBITDA Margins too.

In short, this year we’ve brought numerous potential warning signs to your interest. You can add this to the checklist. On their own, none of them is a certain sign of a market crash. But combined, it’s building a case for trouble ahead.

Stay razor-sharp. The next few weeks could be among the most volatile of the year.

Cheers,
Kris

I want you to take a speculate…a simple guess.

The pictures below are taken from China’s largest ecommerce platform, Taobao.com. It is operated by Alibaba [NYSE:BABA].

These pictures are all showing one type of consumer product. I want you to consider a guess at what it’s.

And here is a clue: it is a life-saving device.

[Click to open in new window]

 

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If you said anything other than ‘air purifier’, you were wrong.

This 7 days, Beijing officially issued its first smog ‘Red Alert’ in history. At times ago, Beijing experienced a few very severe smog conditions, which received a ‘Yellow Alert’.

During the Yellow Alert, visibility dropped to below 100 meters. Air quality dropped to…well, why not take a look for yourself?

I saved a few images from my friends’ articles on Wechat in Beijing in this yellow alert. Wechat is China’s leading social networking app, operated by Tencent [HK:0700].

Here are those ‘beautiful’ pictures.

Top-left: Beijing CBD skyline; Top-right: People dancing within the Beijing Olympic Park; Down: In the shopping mall

From left to right: various apps reporting the quality of air index in Beijing, the last one is placed inside a room.

During this Yellow Alert, Xi Jinping happened to be attending the Paris environment summit. Below is a screen shot of a CNBC headline on that day.

Other head lines in that week included: ‘Airpocalpyse within Beijing as Xi touts a greener China’, ‘Is this the end with regard to coal?’ and ‘Bill Entrance to launch massive clean technology initiative’.

There is no choice this time

My stage is extremely simple. China, the biggest greenhouse emitter in the world, is at the end of its rope when it comes to pollution.

I am not even talking about global warming on a global scale. A lot of people don’t buy the climate change argument and the scientific numbers behind the argument remain debatable.

However, while climate change can wait, people can’t wait for climate. What matters to people at the end of the day is that they and their children need to be able to breathe.

And in China, they can’t…

What does which means that for China — a country that is going to be 25% bigger than the US economy in five years on a Purchasing Power Parity basis?

For one, it means social unrest at the existing level of pollution. Secondly, it means massive health effects associated with lungs and throats, particularly for young children and also the elderly. The negative health effects will undoubtedly become more pronounced in the next few years.

But that’s not all. Additionally, it means MORE social unrest In the event that Beijing is not seen doing anything about this challenge.

I would like you to take this in for a moment. How would you feel if you are choking on air and there is absolutely nothing you can do to stop it?

Pretty depressed, indeed? That’s exactly how my friends really feel in Beijing. I know since i asked them.

Recently, the Chinese yuan was inducted into the IMF SDR (Special Drawing Right). This was another nod around the rising financial and politics power of China in the world.

In the actual Mao era during ‘The Great Leap’, the actual slogan of the day was ‘to surpass Britain and to catch up with America‘.

‘The Great Leap’ was Mao’s economic experiment. This ended in massive famines and numerous deaths.

But today, the ‘dream’ is finally coming true with regard to Chinese nationalism.

However, it has come at a price. A cost all too high for everybody.

This is the turning point

On the surface, the smog Armageddon in China dwarves the economic slowdown concerns. However, the two actually stem from the same single problem — a lack of environmentally friendly development.

You have heard about China’s rebalancing from manufacturing and exports to providers and consumption.

In terms of totally free market economics, that makes perfect sense. As China’s secondary industries reach a point of gross overcapacity, it brings about a deflation in commodities along with a slowdown in economic actions.

The other side of the coin is the sustainability dimension. People have typically overlooked this dimension in financial and economic analysis.

But as the social and political costs of unsustainable development increase, even an authoritarian government like Beijing has to create a U-turn if it wants to stay in power.

It has to change its power mix to increase renewable energy and clean energy; it has to reduce the use of fossil-fuel based energy sources.

And The far east is doing that.

In my Eighty three page travel journal, ‘The Actual China Revealed, The Insider’s Help guide to the King of Emerging Markets’, I interviewed fund supervisors and brokers on their look at the sustainability issue within China. I also interviewed the actual CEO of a synthetic leather maker, which is identified as a major harming industry.

The revelations were consistent with the state plans from the NDRC (National Development and Reform Commission). China is spearheading towards a far more sustainable growth model.

Investment angle

Right right now, we have a willing US and a desperate China. We also have an unwilling India.

What about fossil fuel, you may ask. No, fossil fuel is not going to be phased out in the near future. It powers more than 60% associated with China’s energy and it powers regarding 70% of India’s energy need.

But the growth of clean energy technology, as well as renewable, clean and nuclear powers are going to pick up.

That also means eco-friendly investing is going to come back. As investors, you need to be looking into this area.

Ken Wangdong,

Emerging Markets Analyst, New Frontier Investor

From the Port Phillip Posting Library

Special Report: If you want to get ahead nowadays, it pays to have powerful buddies in high places. With this particular new advisory, you’ll make one. A portfolio manager at the Western Shore Group, and adviser on international economics as well as financial threats to the All of us Department of Defense. Jim Rickards is no regular financial newsletter writer.?And Strategic Intelligence is no ordinary newsletter… (more)

On 10 of November We made comment about the issues of BHP Billiton [ASX:BHP]. This came as news was still breaking concerning the collapse of the tailings dam in Brazil.

From my perspective this was as significant to BHP as the Gulf oil spill was to BP [LON:BP] in This year.

At the time I said,

‘Will BHP’s stock price halve from here? We doubt it, but you can expect there to be some further falls from here. In fact I expect that BHP will go sub-$20 this week.

‘At this type of cheap price though, is it time to buy BHP? No, I don’t believe so, not just yet. Expect more pain over the next few months.‘

Well, as it stands, I had been right. But to be honest I was also wrong. I thought BHP might fall further. But not this particular far, and not so fast.

At the close on Tuesday it was buying and selling at $17.05. There’s a pretty good chance that by the time this goes in order to publication it will be sub-$17. That’s close to ‘crazy town’ in my book. And speaking of ‘book’, which puts BHP pretty close to buying and selling at one times book value. But that’s another story…

The point here is that the big end of town tend to be battling. BHP, Rio Tinto [ASX:RIO], all of the ‘Big 4’ banks, Telstra [ASX:TLS], Woolworths [ASX:WOW], all of them are having a pretty average year.

It’s pretty easy to be bearish on the market and on the Aussie economic climate. My colleague Greg Canavan, Editor of investment advisory Crisis & Opportunity, is pretty open regarding his bearishness on the economy.

We certainly both agree that everything doesn’t look great right now. And we also both agree on another point. Just because things are bad does not mean you have to be blind to major market opportunities.

Greg once said to me, ‘It’s not a stock market. It’s a marketplace of stocks.’ And he couldn’t be more accurate.

What it boils down to is the ability to know where to look. You see, the biggest stock gains can come at the most unlikely times, from the most unlikely locations.

For example there’s one small, hated mining stock, that climbed 1,200% in the Twelve months to November 2015 while the ASX dropped 9%.

What seemed like an ugly, bad expense quickly transformed every $5,Thousand worth of shares into $65,000. We call stocks running like this ’10-bagger’ companies.

The big question is where will the next one come from? I’ve been chatting to Greg about it as well as he’s confident he knows exactly where. And he’s letting his subscribers to Crisis & Opportunity in on the secret.

Diversity is the most beautiful thing

The beauty of the ASX is that it’s incredibly diverse. You can find a company in about any industry you can think of to invest in. Evidently this diversity comes through pure numbers. And of the 2,209 shares on the ASX 2,009 of them can be found outside the ASX 200.

That leaves a pretty big playground for investment. It also opens up a very big opportunity for gains in companies that you just can’t find in the ASX 200.

And because of an announcement last week from the Authorities, there’s one particular (albeit very broad) industry that I believe might see the kind of increases that Greg’s tiny, hated exploration stock saw this year.

The Federal Government’s ‘Innovation Agenda’ is one of the more promising political developments I’ve seen for a while. For one, it’s possibly the very first time a government has truly committed to the long term prosperity of Australia.

Not many governments wish to put in place policy or daily activities that will ultimately benefit long term governments, rather than themselves. However the new innovation agenda will do precisely that — assuming the federal government delivers on its goals.

The innovation website explains the concept is to,

‘[Back] our entrepreneurs by opening up new sources of financial, embracing risk taking on innovative ideas, and making more in our public research.‘

As the government correctly points out,

‘Innovation is at the heart of a strong economy — from IT to healthcare, defence and transportation — it keeps us aggressive, at the cutting edge, creates jobs and maintains our higher standard of living.’

My only gripe is this all comes about a decade too late. This should have been?on the plan while the commodities boom was at full swing.

A ‘hedge your bets’ scenario. The problem was all previous leadership bet the house on the commodities boom lasting forever. And we all now understand how that panned out.

At least now the government is finally taking science and technology seriously. It’s the only way Australia will become productive as well as competitive in the future. It is the greatest chance we have to continue to improve standards of living and secure future economic success.

The beginning of the next great Foreign boom

One of the key points on the plan is ‘advancing quantum computing technology’. I can’t even believe these words are coming from the government!

Quantum computing (as I’ve been saying for a while) will lead to the next great period of humanity. It will speed up technological development faster compared to anyone can imagine. It’s so important to future economic success when it was the only project on the innovation agenda, that would be fine with me.

If Australia can help grow globe leading quantum computing businesses, we will streak ahead of other economies. But it’s a hot race. Every major economy around the world is developing this technology. At least we’re part of the race now.

And there are more items on the innovation agenda, which is exciting to see. These include the ‘Cyber Security Growth Centre‘ and ‘Data61: Australia’s Digital and Data Innovation Group‘.

This is all great news for technology stocks. And it’s the wide and vast world of small, innovative and exciting technology stocks where I think traders will reap the biggest rewards.

The innovation agenda could lead to an ‘ideas boom’ for Australia. It could help develop some of the world’s most enjoyable technologies. It could turn companies with small market hats in the tens of millions in to tech giants worth many billions.

It’s a bit early to see how it will play out. But when it goes the way I think, we could be at the very beginning of the boom that makes the former commodities boom look tiny.

Regards,

Sam

Yesterday, the ASX 200 closed beneath 5,000 points for the first time since late September. This tried to bounce higher several times, but couldn’t. The index actually closed less than a stage away from its low. It is really an indication of heavy selling and suggests further falls are ahead.

Thanks to a late bounce in stocks within US trading overnight, there is a bit of respite in store for Aussie stocks today. But the ASX 200 is still well beneath support at 5,000 points.

I’ve written for several weeks now that 5,000 is a crucial level for the Aussie marketplace. A sustained break below here suggests this keep market is entering a new and nastier phase.

But there is nuance to this analysis. It’s not as simple because just saying a fall below 5,000 points indicates the bear market can get worse. You’ve got to look just a little deeper.

Looking deeper is something I’ll be doing for subscribers of Crisis & Opportunity this week, so out of regard for them, I won’t go into too much detail here. But I will say that the break below 5,000 this week might not be as bad as it seems. A few other things have to go wrong before you get seriously worried about where the forex market is headed.

Mind you, there is plenty of scope for items to go wrong. Firstly, the mid year budget update, due out today, should provide a wake-up call to anyone who thinks situations are travelling along nicely.

That is, it should make it clear just how broken the Federal budget is. With metal ore, coal, gas and other commodity prices tanking, and with wages growth at multi-year lows, the government just won’t get the growth in tax receipts it needs to fund its promises.

Without spending reform, the budget will just keep getting worse. But there won’t be any spending reform if the government does not first outline the problem. Underneath the ‘leadership’ of Abbott and Hockey, there wasn’t any intention to raise awareness of the problem because there was no intention in order to enact structural reforms.

It appears as though Turnbull and Morrison are interested in doing some thing. But to do that, they need to tell us how bad things are. That isn’t going to be good for confidence within the lead up to Christmas. Santa Claus is certainly not coming to town. He isn’t even coming to the country.

What otherwise could go wrong?

Keep your eye around the banks. It’s all about their ability to maintain dividends. If this dividend support goes, the trapdoor will open and the market will plunge.

More immediately, there’s the looming US rate decision. The market is panicking, selling off just like it did mid 12 months, when it assumed rates would rise in September.

As Bloomberg reports:

Once once again, the Federal Reserve is about to create a historic interest-rate decision against the backdrop of rising equity volatility, tumbling commodity prices and jitters in credit markets. This time, investors expect policy makers to pull the trigger.

In the lead-up to the Dec. 16 decision, investors are contending with crude beneath $36 a barrel, stress within the U.S. junk-debt market and the longest streak of losses in global equities because August. While the financial turmoil spurred by China’s yuan devaluation that month stayed the Fed’s hand in September, policy makers possess since signaled increasing determination to go ahead with the first rate increase since 2006.

The Fed really has not one other choice. They will have to raise rates this week. Otherwise the ‘market’ may have them in a corner and it will end up being obvious who the boss is really.

This time the problems are in the high yield, or ‘junk bond’ markets. The collapse in commodity prices (particularly oil) is lastly working its way right through to the balance sheets of the companies that produce these goods.

This is when it’s meant to work. Affordable prices eventually bring about a supply response. To cut supply, you need to cut financing. With a huge amount of financing occurring with the junk bond market in recent years, the current turmoil should not be surprising.

This is just how the commodity period works. Although easy credit made this cycle much worse by giving marginal producers access to funds they normally would not have received.

So problems in the rubbish bond market should not be an excuse for the Fed to hold away raising rates. But the issue is one of contagion. That is, will deficits in the junk bond marketplace spark selling elsewhere…that will lead to a general credit crunch?

A similar threat is playing out in emerging markets. This is really only a continuation of what’s been occurring for the past six months. That is, numerous emerging market economies lent heavily in US dollars. And lots of rely on commodities to generate income in their local currency.

The combination of falling local currency income and rising debt within US dollars is a toxic one. The market’s response is to sell assets in these countries, that sends their currency lower and interest rates higher. Which only makes things worse.

According to the Wall Street Journal:

‘Corporate debt in emerging markets had more than quadrupled in the decade to 2014, based on International Monetary Fund numbers. But investors have been tugging money out of the market this season, spooked by signs that borrowing was ballooning unsustainably ahead of an imminent rate increase by the Government Reserve.’

So far it’s only a quick stroll to the exits. The Given will be hoping that their very first interest rate rise in a decade does not turn it into a run.

If it does, you can expect to see the return of QE at the start of 2016. And plenty of market turmoil.

Regards,

Greg Canavan

As we march into the future that 2016 will bring, remember something.

There’s little new about the economic climate we live in.

The game continues to be same, as we keep telling our subscribers over at Cycles, Trends and Forecasts.

It’s pretty simple: find the best location, borrow as much as you can, and get someone else to pay off the interest.

You may run with that basic strategy for a long time to come.

You only have to browse the latest stats out of Western Sydney to see why…

Thanks to the public: money for nothin’

On Thursday this week the NSW Valuer-General released his latest figures.

What will we find?

The Australian Financial Review reported yesterday:

‘Residential land in Sydney’s west has topped the growth chart for that state, driven by a huge surge in infrastructure construction.

‘Blacktown, 42 kilometres west of the CBD, posted the highest growth in land values at 47 percent in 2014-15, followed by Holroyd and Parramatta at growth rates of Thirty eight per cent and 35.9 per cent, respectively.’

The land price requires the gain of the enhancements put in around it. Excellent if you happen to own a home in the region.

Too bad for those of us slaving away for wages and profits each day. We get stuck with the actual tax bill that pays for the actual infrastructure which is driving these land values through the roof.

And we are able to include in the bill the interest from the debt repayments from the government deficits.

And, of course, as the post notes, all this is ‘exacerbating the actual affordability problem in Sydney.’

Oh, well, there is little you and I can do about this. But it might pay for you to definitely pay careful attention to see where the government plans to build facilities.

Land values in the area will increase accordingly.

Australia’s insane tax system gifts windfalls like this to homeowners for doing precisely nothing, and taxes people who actually work and create wealth.

I’m sure you do not need reminding that the ASX 200 finished down for the year in 2015.

But rising house prices keep the voters happy and compliant and — most importantly for a politician — spending.

Australia leading the world in Ferraris, Porsches and Bmw Benzes

Bloomberg reports that luxury car sales in Australia are booming. Sales of the Ferrari NV, for one, were up 48% in 2015.

Take a look at how the premium brands tend to be fared last year…

Click to enlarge

Perhaps it’s all those cashed up realtors in NSW and Victoria?

I’m becoming facetious. It has to be broader than that.

Consider that a couple of notable auto-related stocks taking in and out of the new high list lately are Carsales.com.dans [ASX: CAR] and Automotive Holdings Group [ASX: AHG].

These information mill growing earnings because people are pleased to spend on cars. It doesn’t suggest an imminent recession to me.

In fact, this is in line with what’s happening in the US, too. Vehicle sales hit an all time higher last year in America. That’s mostly been attributed it in order to cheap petrol, strong work and low interest rates.

They might have mentioned a strengthening property market, too. The Wall Street Journal reported yesterday that rents rose at their fastest pace in the US since 2009 last year.

That’s 6 consecutive years of growth. It’s almost inconceivable that pattern will change in the US anytime soon.

Before Xmas most of the financial coverage centered on the effect of the Fed raising rates. They did. Do the world collapse? No.

Here’s something which few noticed, but which is far more important. Bloomberg reported prior to Christmas that US President Obama signed to law a stride easing a 35 year old tax on foreign investment in US real estate.

That opens the door for overseas investors to invest more income into US property. Which will translate to higher prices. This is actually the real estate cycle at work.

Most experts will miss the importance of this because they do not factor in the macro effect of rising land prices.

But this cycle is nothing new. You can see the same dynamic happening in a book written in 1933 called 100 Years of Land Values within Chicago, written by a man called Great hit Hoyt.

Next comes the expansion in credit as more people have to take out larger loans to buy their means by to the market. That’s expansionary for that economy, as I mentioned yesterday.

Of course, anyone’s who has read Hoyt’s book knows those that enter the earliest make the most from the admiring property values.

It’s the latecomers who turn out to be the suckers when the inevitable happens and home goes down.

To make sure you know when you should be in and out of the marketplace, go here.

Best wishes,

Callum Newman

China bled another 6.3% off its stock market while you were enjoying lamingtons and lamb chops on Tuesday. Which means it might not be a great day on the ASX today.

I could bang on about all that once again. Or I could bring your attention to other problems Australians face. Like the fact that the government is continuing to rip us off.

Today I’m going to push the market craziness aside — because it’s getting me lower — and tell you about our sly, lavishly housed Aussie frontrunners…

A surprising account balance on your internet banking

Imagine waking up one day to find $681 million sitting in your bank account. Can you image it? You log in for your internet banking and see the following,

Account Balance: $681,000,000.00

Clearly you would know straight away there was some kind of error in play. If you were the honest type, and I reckon you probably are, then you’d call the bank. You say, ‘hey I think you stuffed up here. You have put $681 million in my accounts.’

If you did nothing you know that soon enough the bank would catch on. They’d call you and say, ‘Hello, we made an error. Obviously that’s not your money.’ If you invested any of it, they’d need it back — and so they should.

But let us really think about that amount, $681 million. Should you look at the balance sheet of ANZ [ASX:ANZ], ‘Cash and due from banks’ somme $1.773 billion.

If ANZ were to transfer $681 million into your account it would be Thirty eight.4% of all their cash. It’s an incredible amount of money.

But if you’re filthy rich then $681 million isn’t a lot at all. In fact if you’re the Prime Minister of Malaysia, then $681 zillion is just a gift from a nice friend.

You wouldn’t expect an excellent Minister (of any country) to be so loaded with cash he forgets to mention a $681 zillion gift to his personal bank account.

But that’s exactly what Perfect Minster Najib Razak did last year. Early in 2015 it came to light payments had discovered their way into the personal account of Razak.

He’s since been under investigation from Malaysia’s anti-corruption committee. Within June 2015, Prime Minister Razak sacked the Malaysian Lawyer General, who was leading your research into the scandal.

On Tuesday news shattered these payments were a ‘personal donation’ from the Saudi Royal Family. And also the new Attorney General has cleared Razak of any criminal offences and corruption.

The new Attorney General also said $620 million was sent back to the Saudis. Still no-one can explain why the Saudi’s chose to send the money to start with. Razak cannot. The Attorney General can’t. The actual Saudi’s wont.

But hold on, where did the remaining $61 million go? Your guess is as good because anyone’s.

Is this government problem at its finest? Not according to the Attorney General. Of course this is above board (cough, cough) it’s a prime example of wasted money going who knows where for who knows exactly what.

Paying for someone else’s renovations

Who else is blowing wads of cash on who knows what? That would be the Australian government.

While the economy flounders there’s been some big spending in government. Julia Gillard’s Labor government was at the helm when she approved renovations for The Lodge. If you don’t know what The Lodge is, it is the primary government funded (taxes payer funded) residence of the Pm of Australia.

When Gillard commissioned the renovation she approved a budget of $3.19 million.

However the place has been empty since Kevin Rudd within 2013. It’s been sitting there for 3 years. And only just now have renovations finished.

Prime Minister Malcolm Turnbull is actually moving in to the newly refurbished Lodge. And if you thought $3.19 million was absurd — guess what the final bill is?

Around $9 million.

That’s right, nine million dollars.

This isn’t first renovation either. Menzies do one in 1939. Then Holt in ’66. Gorton within ’68, Frazer in ’77 and then in ’78, Hawke within ’87, Keating in ’91 and Howard in ’96. I wonder over the years exactly how much government money — sorry, how much of your money — went into The Lodge?

I can appreciate it’s important to keep an aging home up to date. If the leader of the nation is going to live there it ought to be functional for them too. And it should be secure and safe.

But $9 million with regard to renovations is absurd. However no one is being held to account for it. Why should all of us foot the bill? Let’s not forget this is just the primary residence from the PM. Kirribilli House in Sydney is the secondary residence.

Real Property blog, Movoto did a fictional property listing for Kirribilli House giving it a valuation of around $54 million. An article in Domain in September last year suggested that, ‘There’s been revived talk of ghosts at the official residence and even a $15 zillion sale to possibly a Chinese buyer.’

Two houses for one individual with a combined value of about $69 million. And another $9 million spent on doing one up — which probably has ghosts inside it…

Does any of this seem sensible to you? Hell no. Obviously it doesn’t. You foot the bill for that $9 million renovation. Perform. Our taxes go towards it. It doesn’t come from the personal account of Gillard, Rudd, Abbott, Turnbull or other people (maybe we can ask Razak?).

If you look at the numbers, you offered the government 70.3 pennies for that renovation. With a $9 million job and 12.Eight million taxpayers in The year 2013 that’s about 70.Three cents per taxpayer. Now that doesn’t sound like much. It’s not really. But you paid for it. So did I. And I would like my 70.3 pennies back.

I guess 70.3 cents isn’t as bad as $6,000…

Of course this isn’t the very first time the government have taken cash from Australian’s for frivolous purposes. Each year they transfer ‘lost’ superannuation into the Consolidated Revenue pot.

The threshold was $2,000. This year it will be $4,Thousand. Next year, $6,000. You could have profit a ‘lost’ account — maybe $5,999. If the account is inactive and you can’t be contacted (they might just not have your details) then that money is going to the government. Plus they can do with it what they please.

Now this isn’t corruption. Not like Malaysia or even Brazil, China, Spain, Nigeria, Mexico, Ghana, the UN or FIFA. But is it really that different to the financial scams plaguing governments around the world?

According in order to latest figures from Transparency Worldwide, Australia ranks eleventh of 175 countries in the ‘Corruption Perception Catalog 2014’. Malaysia ranks fiftieth.

But is the gap truly that big?

Who are the individuals taking charge of Australia? You’re employed hard, save, invest, and then try to build a financial future on your own. Then government cronies go as well as blow a wad of money on a home renovation.

Chances are, later this year, you’ll get a chance to possess your say. It would be great in the event that there was an option on the poll sheet to kick them all out. But I don’t think that will happen.

Still, look hard and long at who will be in charge. Who’s going to do the least damage to your way of life? Who might take Australia forward instead of fritter cash away or steal it from you. And then ultimately, choose the best of a bad lot.

Regards,

Sam

There is so much wealth being created and invested at this time that $338 million actually looks like a small amount of money.

Today’s Money Morning will show you why.

That figure is how much the second stage refurbishment of Rod Laver Arena in Victoria is going to cost.

The Age reported around the development yesterday. It will incorporate a new eastern entrance ‘pod’, a brand new footbridge to link the center to the CBD, and a refurbished loading bay.

The work is due to begin after the next Australian Open. It’s due to finish in 2019.

There is so much development happening right now across the country, the Australian economy is highly likely to keep humming along.

Don’t allow the swings in the stock market draw attention away from you or spook you out of the positions.

20,000 dwellings in a new Sunshine city

Let’s remember up in Queensland on the Sunshine Coast that Stockland [ASX:SGP] plans to invest $1 billion in local infrastructure over the next 10 years as part of its Aura development.

We’re speaking a new city here, such as 20,000 dwellings, plus education centres and private hospitals over 2360 hectares of land.

Further north, the $50 million Cairns Aquarium as well as Reef Research Centre is officially under way. Not only that, however according to the Australian Financial Review this morning, you can include:

‘…a $45 million adventure water park; the actual?$200 million refurbishment and redevelopment from the Sheraton Mirage Resort in Port Douglas; a $23 million upgrade of the Tobruk Memorial Pool into an marine and leisure centre; along with a $65 million Cairns Performing Arts Center due for completion in early 2017.’

That’s all chicken feed compared to the $8.Fifteen billion Aquis Great Barrier Saltwater Resort billionaire Tony Fung has committed to.

There should be plenty of people to enjoy all the new facilities as well, if the latest tourist figures stay like they currently are.

New flights between Brisbane and Tokyo have increased the number of Japanese tourists arriving here. The Australian Bureau of Statistics says figures were up 18% for September. For all international visitors, the figure was up 10%.

The quantity of Chinese visitors grew 23.9%

A lower Aussie dollar no doubt makes the beaches, the ale and barbecues even more persuasive than a Paul Hogan ad.

Perhaps Travel and leisure Australia should run individuals Hogan ads in China. These people never would have seen all of them the first time around. TV sets were in short supply in China back then. Therefore were outbound tourists.

How would you say ‘shrimp’ in Mandarin?

This is barely the stuff of a coming recession.

And that’s just around australia. Things overseas look much more bullish.

Here’s a taste…

Property developer Uk Land just announced plans for a pound 2 million redevelopment of a 46 acre site in South East London. It’s going to take ten years to build. Construction is due to begin in 2017.

Not only that, but according to the Financial Occasions, ‘Rival developer Sellar Property Group is seeking to build 1,000 homes on a neighbouring site, including some in a 40-floor tower.’

This is all simply boring old property development. Wait until you hear about the truly exciting stuff…

The future is R2-D2 on steroids

The Guardian reported last Friday that Toyota is going to commit US$1 billion in a research company it’s setting up in Plastic Valley.

Its mission: develop artificial intelligence and robotics, and make Toyota the market leader in these spaces.

This isn’t science fiction. It’s already here. Take this from the post:

‘Toyota has already shown an R2-D2-like automatic robot that scoots around and picks up things for people, designed to help the elderly, the sick and individuals in wheelchairs. It has also shown human-shaped entertainment robots that may carry on conversations and play musical instruments.’

And let’s not forget the latest announcements from Apple. Chief executive officer Tim Cook thinks laptop computer is dead. He has the actual iPad Pro to prove it, too.

In one feeling, that’s a surprising statement because Apple actually increased desktop sales year on year.

But it was the only company to do so. According to technology research firm Gartner, PC sales have dropped 9.5% over the past year.

Apple isn’t short of cash to find out the answer, anyway.

Apple has become sitting on $207 billion in cash. Apparently, it’s the first corporation to ever cross the actual $200 billion mark.

There are large gains building in the world. To start capitalising on them, click here.

Callum Newman,

Associate Editor, Cycles, Developments & Forecasts

From the Port Phillip Publishing Library

Special Report: If you want to get ahead in this world, it pays to have powerful friends in high places. With this new advisory, your family will enjoy one. A portfolio manager at the West Shore Team, and adviser on international economics and financial risks to the US Department of Defense. Rick Rickards is no ordinary financial newsletter writer.?And Strategic Intelligence is no regular newsletter… (more)

I hate planes. Actually I ought to rephrase that. I love planes. I simply hate travelling on airplanes. Especially in economy class.

I’ll be truthful, I can’t afford to travel business class all the time. It’s just not really feasible with the amount of travelling I do. So usually I’m down the back end. Squeezing into chairs with insufficient leg and shoulder room.

At 6’3″ and a nip over 100 kilos I am just not physically suited to economy class. I guess it should inspire me to make more gold coin I guess… Anyway although I do bemoan the sardine-can-like feeling, there’s an upside to the travel I do.

Actually there are a few upsides. I get a chance to fulfill a lot of interesting people through many different backgrounds. And I also see how different consumers behave amongst the duty free shops.

Now you might be thinking, consumer behaviour at duty free stores, how is that interesting? Nicely I’m about to tell you.

You see people usually buy things from duty free that they want but can’t get because cheaply in their home country.

That’s why you see hoards of Aussie’s loaded up with booze on arrival back home. Or in the UK it’s a couple bags associated with perfumes and smokes. Asia is a unique in that many returning travellers are transporting some kind of UGG Australia item, or variants of wellness food from Manuka Honey to milk powder.

Sitting at gate lounge eight before my long trip back to the UK, I saw a young Oriental couple carrying a tote of milk powder with them. I noticed it since about 15 minutes earlier I would taken a photo of the same carry bag at the Duty-Free shop.

I took my personal photo because I was fascinated by this milk powder display. As you can see, nestled in among all the phones, cameras, earphones and wireless speakers is a giant array of milk powder.

It was front and centre as you stroll to the international gate lounges. You could not miss it. The other factor that I was interested by had been the price. $98 a bag.

I thought that was pretty expensive. But with high (and growing) demand for milk and milk hues maybe it’s actually pretty cheap.

The greatest change to China in 35 years

To have the display so prominent among all the sheep skin and UGG boots must mean they shift a fair bit of the actual stuff.

But then again, when I look at the stock price of Australia’s big nutrition companies, it actually makes very good sense.

For example, Australia’s Blackmores [ASX:BKL] is up 419% each year. The company’s vitamin products are selling away because of immense demand in China.

Capilano Honey [ASX:CZZ] is up 168% in a year. This is off stronger demand across Asia and the promise of the Australia-China free trade agreement.

And for any company selling high quality foods into China things are about to radically change.

You see, in October China chose to drop its infamous ‘one child policy’.

This policy is a relic from the old Communist Party. The policy put a prohibit on couple having more than one child. Its purpose was to avoid a ‘population bomb’. The thought at the time was that China’s population would exponentially grow out of control.

That never happened.

But for 35 years the policy has been in place. It’s now on the out because China faces another long term problem. An ageing population.

And we all know what kinds of problems that can create. You only need to look to Japan for evidence.

With the one kid policy lifted, Credit Suisse estimate that by 2017 China often see an extra six million new births yearly. That might not sound like a great deal for a country with a population of 1.357 billion. But remember which six million is the equivalent to 25% associated with Australia population. So that’s a quarter of Australia created every year into China…simply by lifting the policy.

That’s a lot.

Who benefits? The milkmen

In a report on the birth policy Credit Suisse explain,

‘Related sectors including baby formula, diapers, medicine, kids wear, and appliances. Assuming cost of raising at 40,000 yuan per year, additional consumption will be 120-240 billion yuan per year from 2017, translating into 4-9 per cent of total retail sales.’

This will probably be big for Aussie meals companies. For one company it’ll completely change the game.

In August/September this year technology company, OnCard International [ASX:ONC] chose to change direction. The company had been getting out of the tech sport and into farming.

They offered their OnCard tech. Then with the proceeds they bought a plantation.

They also appointed, Rob Woolley as Chairman. This is significant. The thing is Woolley is also Chairman of baby food maker, Bellamy’s Australia [ASX:BAL].

But the largest news of all is the bet for one of Australia’s largest dairy products farms the Van Diemen’s Property Company (VDL).

Word has it, together with OnCard, a consortium of Chinese buyers is in the bidding war. As far as who will win…we don’t know yet. It looks guaranteeing for OnCard. But there’s been no definitive word either way.

What we all do know now is the price for VDL will be around $180 to $220 million.

Why so much for dairy farms? Well VDL produce around 100 million litres of milk and seven.7 million kilograms of milk solids per year. And where do you think most of this will go ahead now? That’s right — China.

What happens if OnCard wins? Well there’s a possibility they could be the ‘Blackmores’ or ‘Capilano’ associated with 2016.

But it’s not just OnCard. Any company that sells food and nutrition directly into China could be in for the bumper few years ahead. It’s one of the most exciting times for Aussie food companies ever.

Regards,

Sam

On Monday last week, I was invited to the listing ceremony associated with?Dongfang Modern Agriculture [ASX:DFM]?at the Aussie Securities Exchange (ASX) in Sydney.

‘In a moment, we will have a countdown according to custom. Feel free to join us,A said an ASX spokesman.

A crowd was standing on the Exchange floor, precisely one minute before 10am. With just 20 seconds until marketplace open, everybody got their phones out to take a picture…myself included. You can see some of the crowd in my photo beneath.

Then the countdown started…

10, 9, 8, 7… 3, 2, 1 — ding, ding ding! Dongfang Modern’s Chief executive officer, standing at the front of the crowd, rang a bell.

Everybody applauded.

 

This was my first time witnessing a listing. However, this isn’t too unique for veterans like Rich Li, the executive chairman of?GoConnect [ASX:GCN]. He has taken a number of companies community in his career, and he intends to continue doing this in the future.

But the listing of Dongfang Modern was a special occasion. It is the first privately-owned Chinese agriculture company to list on the ASX in over 20 years.

You may ask why that is so special.

You need to place this listing into perspective. Think about the free trade deal with China. And the ‘rebalancing’ the Book Bank of Australia (RBA) continues to be talking about. What could this suggest for agriculture in Australia?

Things tend to be changing on the ground, and as a trader you need to be aware of it.

The free trade deal with China means more exports of competitive Australian agricultural products to The far east, the world’s largest market. As well as Dongfang Modern’s listing in Australia has its proper considerations. They mean to tap into the liquidity of the Australian market, with a particular focus on Chinese agriculture and Chinese consumers.

The RBA has said that the Aussie economy has been ‘rebalancing’ well. These people mean that there has been a change from mining-focussed investments to other opportunities…such as agriculture.

For Australia, what this means is a few things. Agriculture will be warm as capital shifts to sectors that will benefit from the free trade deal and China’s rising consumer wealth.

It also means more Chinese agricultural companies will follow suit. They want to list around australia. They want to tap into the capital marketplace here.

Another point worth considering is the fact that Dongfang Modern, and other businesses under people like Rich Li, are privately-owned — as opposed to state-owned.

We are viewing the flourishing of private capital in all sectors in China, but particularly in agriculture.

It really comes down to culture

In my conversations using the management, brokers and other veteran investors at the event, there is a clear demand for more cross-cultural knowing.

Don’t take this point lightly. This is exactly what it really comes down to.

For Chinese businesses such as Dongfang and GoConnect to be found, they need a wider range of brokers, investment banks and institutional investors to understand the Chinese scene.

At the same time, it is really the company’s personal responsibility to make research, promotions and contacts more widely accessible. And in English!

Mr Li told me that a lack of understanding of the Australian market, culture, language, and economic climate often undermined the success of Chinese language companies in Australia. That’s a common problem with Chinese companies indexed by other parts of the world too.

And I understand exactly what Li is talking about…

Chinese tradition is quite conservative, and to an extent arrogant. It is not arrogant in the sense that it shamelessly pushes its culture outward. Quite the opposite. There is the lack of effort to create connections with the broader worldwide community.

In Western systems such as Australia, Chinese companies have to put in a lot more effort. They need to make their materials available in English and promote themselves inside the Australian capital market.

Just such as Chinese Premier Xi Jinping’s visit to the US and Britain. They need to set up understanding between cultures as well as break down those barriers.

The perfect time

Now is the perfect time to buy into rising market stocks. Why? Because we are going through a bottoming process for emerging markets, along with a sustained rally will soon be here.

The stocks on the New Frontier Investor buy list have rebounded by an average 5% during the last four weeks. For a number of stocks, the actual rebound was between 10-20%.

And that rebound looks to be just the beginning. Using analysis based on average target prices on the market, most of the stocks I’ve recommended look set see much more strong gains. Some should gain 5-15%, while a few should rebound 44-57%.

You can find out more about the actual emerging markets I recommend purchasing — and the stocks that should see the most growth in the coming several weeks — here.

Regards,

Ken Wangdong,

Emerging Markets Analyst, New Frontier Investor

China cut the central bank interest rate last week.

For the sixth time this year.

In addition, the Middle Kingdom lowered the amount of cash banks must keep in reserves.

The People’s Bank of The far east (PBoC) is trying to jump start their own slowing economy.

To put this in perspective, these are the most aggressive monetary policy steps from China since 08. During the financial crisis, China moved a massive 4 trillion yuan (AU$867 million) into its economy.

As an Aussie, you remember the benefits of that.

The thing is, the rate cut isn’t the news you should be paying attention to.

This is the in your encounter information that most mainstream experts will crow about over the in a few days or two.

However the real news for China, is barely getting a mention.

As the trading world was digesting the speed cut, Bloomberg dropped this nugget of information:

‘International Monetary Fund representatives possess told China that the yuan is likely to join the fund’s basket of reserve currencies soon, based on Chinese officials with knowledge of the matter, a move that may help to make more countries comfortable while using unit or including it in their foreign-exchange holdings.

‘The IMF has given Chinese officials strong signals within meetings that the yuan is likely to earn inclusion in the current review of the Special Drawing Rights, the actual fund’s unit of account, stated three people who asked to not be identified because the speaks were private. Chinese officials are so confident of winning approval that they have begun preparing statements to celebrate the decision, according to two people.‘

If you haven’t heard about Special Drawing Rights before, let me explain.

Special Drawing Legal rights (SDRs), are an international form of cash created by the International Monetary Fund. SDRs derive their value from a weighted average of a basket of major currencies.

With SDRs, it’s important to remember they aren’t an actual currency. Rather they’re a ‘claim’ upon freely useable currencies for members of the International Financial Fund (IMF).

The idea of SDRs is to supplement currencies reserves of a specific country. Or they can be used to provide additional liquidity as needed.

But there are two key things you need to understand about SDRs.

First, they were created by the IMF within 1969, as a direct response to the limitations of gold and US dollar when paying international accounts.

And second, they are supported by nothing. No bullion, no assets and no commitment of the first born.

SDRs are nothing greater than a creation of powerful elites wishing to support the monetary system.

Including the actual yuan in the SDR basket, means the yuan’s become a credible, international currency.

And China, desperately wants to end up being invited to sit at the grown-ups desk.

Even though it’s just a rumour at the moment, Financial institution of America Merrill Lynch estimates the yuan could have a potential weighting of 13%.

At the last IMF evaluation in December 2010, the weighting share was divided unevenly in between four major currencies: euro 37.4%, Japanese yen 9.4%, pound sterling 11.3% and All of us dollar 41.9%.

The potential 13% yuan weighting would likely mean both the US buck and the pound sterling lose a significant portion of their share.

China attempted to have the yuan included at the last IMF meeting. But the IMF knocked them back, explaining the yuan didn’t satisfy the test of being ‘freely useable’.

Freely useable can have two meanings. To some, readily useable means ‘fully convertible’. That is, a currency which is highly fluid and free from state controls. Based on that definition, the actual yuan isn’t freely useable.

China places tight controls on how its residents use their money. There’s caps on how much citizens can take out of the country. International businesses must complete extensive paperwork before bringing any cash in. And foreigners are restricted, or limited to strict quota’s with regards to the country’s capital markets.

These factors haven’t changed in much five years.

But there’s another concept of freely usable. The IMF consider freely useable based on the utilization of a currency in international transactions. And whether it’s broadly traded on global marketplaces. So broadly speaking, the yuan right now meets the criteria. Being a fully convertible currency is only a benefit to be considered for SDRs.

The thing is actually, the use of the yuan and state regulates over the currency haven’t changed that much in five years.

Adding the actual yuan to the SDR basket gives the forex the credibility its leaders so desperately want.

Earlier in this year, there was some noise regarding China being added to the actual SDR basket. But the talk vanished. And then China spent the better part of 2015 devaluing its yuan against the US dollar.

Jim Rickards — the strategist of Currency Conflicts Trader — said many in the markets mistook this action as retaliation for not becoming added to the SDR basket.

According to Jim that’s not the case.

It’s a matter of when China will be permitted in the SDR basket. He reckons the procedure has been ‘elongated’. Telling subscribers:

‘China’s devaluation was not retaliation, but a necessary realignment to the Fed’s disastrous strong dollar policy. These policy moves are of the utmost importance to the functioning of the international monetary system.

‘They don’t happen from spite. These moves may surprise markets, but they are very carefully worked out behind the scenes. The elites see it coming; the everyday investor does not.‘

Jim says investors must be aware China will be included to the SDR basket at the IMF’s December conference this year.

For investors, the outcome is that this:

‘The implications for investors tend to be profound. From now until next March, China includes a free hand to weaken the yuan somewhat further. That will put more deflationary pressure around the US, make the US buck stronger, and lead to added turmoil in US equity markets as earnings endure due to the strong dollar.‘

The move to add the yuan into the SDR basket can create more market turbulence in the US. Don’t think Australia is defense from this either. These behind the scenes movements are all part of the currency wars Jim analyses on a weekly basis. To discover how to capitalise onto it, go here.

Regards,

Shae Russell

Editor, Strategic Intelligence

From the Port Phillip Publishing Library

Special Report: If you want to get ahead in this world, it pays to have powerful friends within high places. With this brand new advisory, you’ll make one. A profile manager at the West Shore Group, and adviser upon international economics and monetary threats to the US Dod. Jim Rickards is no ordinary monetary newsletter writer.?And Strategic Intelligence is no ordinary newsletter… (more)

In July 2014 Brazil was web host to the biggest sports event in the world, the FIFA World Cup.

A big event like this costs money. And a lot of it.

All in Brazil expected around US$15 billion to host the event. On stadiums alone these people spent around US$3.9 billion. For 12 stadiums that’s around US$316 million on average every. Could Brazil afford to purchase this? Of course not. The citizen had to foot the bill.

But not even the taxpayer could afford it.

In 2014 Brazil collected about US$288 billion in tax revenues. A shortfall of US$28 billion. That shortfall is if you set aside all the money to the event. Don’t forget those tax receipts are money for running the nation too. Things like health, training and infrastructure. It’s actually most likely the taxpayer will foot the bill for decades to come.

This tournament was supposed to reinvigorate Brazil’s economic climate. The government was hoping it would spur growth and attract investment. Put Brazil properly around the world stage.

It didn’t.

It feels like this might have been Brazil’s last roll of the dice. A way to emerge the economy from its emerging economy peers. But they didn’t realise is the fact that they’ll always be an emerging economic climate. At least, when you compare them to the actual might of the US or China…

But Brazil bet the house. As well as decided to host the other greatest event in the world, the 2016 Olympic games.

Tommy Andersson in his 2008 paper, ‘Impact of Mega-Events on the Economy’ estimates on average the economic benefit of an Olympic games is under US$10 billion. Estimates would be the Olympics will cost around US$16 billion.

To make matters worse, since 2011 the actual Brazilian real is over 59% weaker against the US dollar.

That’s great if you’re heading to the video games from the US on holiday. It isn’t so great when you’re trying to host the two biggest events in the world back to back. It’s thrown the Brazilian economy into a tailspin.

So why is the real so weak? Exactly what did Brazil do, apart from maybe be a little overambitious? How come now the real is up presently there with the worst performing foreign currencies in the world? Well as Jim Rickards, Strategist for Strategic Intelligence explains in today’s essay it’s all down to the Currency Wars playing out amongst the world’s ‘Big Four’ – US, China, Japan as well as Europe.

Of course it’s not just South america. As you’ll see Jim illustrates the plight of Korea also. In fact these wars impact all emerging economies. You see when the Big 4 play out their Currency Conflicts, they play to win, and everyone else loses. Especially the actual emerging economies like South america and Korea.

Regards,

Sam

Who Wins the Currency War: Emerging Marketplaces Vs the Big Four?

By Rick Rickards, Strategist, Strategic Intelligence

For better or worse, emerging markets have become roadkill in the currency wars.

Perhaps ‘collateral damage’ is a better term for this, since collateral damage is used to describe innocent victims associated with fighting among hostile adversaries.

All wars produce collateral harm, and the currency wars are no exception.

The major adversaries within the currency wars are the US, China, Europe and Japan.

Each of these four economic forces is confronted with the same dilemma. There is too much debt in the world, and not enough growth.

If growth were strong, the debt would be manageable and countries would not care much if one player tried to manipulate its forex. But growth is not powerful; it’s weak. And getting weaker all over the world.

And sovereign debt just keeps growing.

It’s easy to make fun of countries such as Japan that have debt-to-GDP ratios over 200%, but the US and The far east are not that far at the rear of and are catching up fast.

The whole world is beginning to look like A holiday in greece.

The key to solving the sovereign financial debt problem is nominal growth, which consists of real growth plus inflation.

If nominal growth is rising faster than your deficit, then the debt-to-GDP ratio goes down and your sovereign debts are viewed as sustainable.

The opposite is happening.

Deficits persist in the major economies, but nominal growth is actually weak. In fact, nominal development in some countries, including the US and Japan on occasion, is really negative, in part because inflation offers turned to deflation.

Real growth is important, however when it comes to paying your debts, minimal growth is what counts, because debt is paid in nominal dollars. In a world of deflation, minimal growth is actually?lower?than real growth. The world of sovereign debt management has been turned upside down.

The major financial powers are fighting deflation by devaluing their currencies.

A devaluation raises the price of imports such as energy, commodities and manufactured goods.

These higher import prices feed through the logistics and put upward price pressure on finished goods and competing products.

The problem is that does not everyone can devalue at once; nations have to take turns.

China had a fragile yuan policy in 2009. By 2011, the US had engineered a weak dollar. Beginning in late Next year, Japan orchestrated the weak yen with Abenomics.

By mid-2014, it was time for the fragile euro, which was achieved through the ECB using negative interest rates as well as quantitative easing. The major economies keep passing the currency wars canteen, hoping that everyone can get just enough relief to keep the game heading.

Still, robust global growth is nowhere in sight.

Where does this depart emerging markets?

Unfortunately for them, emerging markets are simply not large enough or important enough to factor into the calculations of the main economic powers.

It’s not that the large central banks don’t care; it’s just that there are limits to what they can do. The US, China, Japan and Europe, the ‘Big Four’, account for almost two-thirds of global Gross domestic product. All of the other developed economies and the emerging markets combined take into account the remaining third. As far as the Big Four are concerned, the rest of the world are just along for the trip.

When the Big Four fight the actual currency wars, sometimes they win and sometimes they shed.

But the emerging markets always shed. The emerging markets have been painted into a corner and cannot escape the room.

Here’s why.

When a good emerging-market currency weakens, capital leaves the nation and heads for strong-currency locations such as the US. This funds flight causes declines within asset markets such as stocks and real estate.

A weak currency in an emerging-market economy also makes it harder to pay off dollar-denominated corporate financial debt. This can lead to debt defaults and even more capital flight.

In a worst case, you can have a full-blown emerging-market meltdown of the kind that happened in 1997-98.

But when an emerging-market currency strengthens, its exporters suffer, and its tourism sector can be hurt also. This is happening in Korea these days.

The relatively strong won has the Korean economy on the brink of economic downturn because they are losing export competitiveness to Japan, Taiwan and other competitors.

So a weak currency causes funds flight and asset crashes, and a strong currency leads to recession and hurts exports.

Emerging financial markets are between a rock and a difficult place, and they will stay there so long as the Big Four are battling the currency wars.

One means to fix this dilemma is a resumption associated with strong economic growth in the Big Four. In a world of strong growth and stable forex rates, emerging markets can succeed with exports of commodities and manufactured goods as well as tourism and services.

But strong growth is not in sight.

Another solution is capital controls. But capital controls tend to be discouraged by the IMF and are considered a sign of desperation.

Neither strong development nor capital controls are on the horizon right now, therefore emerging markets will remain in this ‘heads you win, tails I lose’ posture relative to the Big Four.

Emerging market financial systems don’t have the right type of weaponry to defend themselves in currency wars.

The emerging markets are in position to lose both ways.

Regards,

Jim Rickards,

Strategist, Strategic Intelligence

Ed Note: the above article first appeared like a Strategic Intelligence weekly update

It’s pretty obvious there’s no this kind of thing as being able to see the near future. Or is there? From what I can gather there is no Grays Sports activities Almanac like in Back to the Future Component II, with the outcomes of events in the future.

But some extraordinary people have an uncanny ability to predict what is going to happen in the future. Currency Wars author and Strategic Intelligence Strategist Jim Rickards is one such individual.

And what Jim’s uncanny ability appears to be is predicting what’s going to take place in world economies. Sometimes I think Jim might even have a secret copy of Grays Economic Almanac and he’s just not letting on

While the world was calling for the US to hike rates in September Jim suggested they wouldn’t. And beneath you’ll see exactly why he made that call — and was right.

Furthermore you will also see Jim’s long term strategic view of the Fed’s actions, and the 5 choices he thinks they’re going to have. And then whatever the Fed does wind up doing will be a tradeoff between their credibility or catastrophe.

Regards,

Sam

The Price of Interest Rate Manipulation

By Shae Russell, Editor, Strategic Intelligence

‘The Fed will not raise interest rates. That’s some thing I’ve said for a long time.‘

This declaration is familiar to customers of Strategic Intelligence. It sounds exactly like something, their strategist, Jim Rickards would say.

In fact, it’s exactly what he said to the ABC around the Monday night before the Generous party changed leaders.

As most Aussies were tweeting ‘libspill’ memes, Jim was chatting to The Business about the ramifications of the looming Federal Reverse Bank meeting this week.

I recommend you watch the interview.

Now, this interview took place before the Sept Federal Open Markets Committee. When you watch the interview, it is clear that Jim was confident there’d be absolutely no rate increase from the Fed that month.

However, he do discuss something called the ‘October Surprise’.

Now the actual Fed meets eight times a year. But they only hold a press conference four times a year. As a general rule, the Fed tends to raise rates simultaneously a press conference is actually scheduled.

After this last meeting, the Fed won’t have an additional press conference until Dec this year.

Yet, as Jim describes in the interview, last year the actual Fed had a teleconference practice run during the Northern hemisphere spring.

The markets — and most in the mainstream for that matter — wouldn’t expect it because there’s no scheduled push conference. Hence, the October surprise.

At the time, Jim experienced the Fed may danger saving face and get rid of an October Surprise on the US market.

In saying that, he or she believes any rate rise this year is unlikely. 2016 is still possible, however, as Jim told subscribers of Strategic Intelligence on Thursday, the Fed have till March 2016 if it’s dependent on economic data.

While Jim’s telling you to look out for the actual unexpected, he reckons the Given missed the boat to raise rates.

They could have done so progressively over 2010 and 2011. If the central bankers had used this opportunity to raise rates, there’d be room in america economy to tighten financial policy today.

The fact is, they didn’t.

Today the US is faced with frail financial numbers. Jim says the actual, ‘Employment rate has come down, but labour force participation is lousy. The labour force declined last month and actual wages are going nowhere. In fact, monthly job creation is going nowhere. If you look at the information behind the happy talk, the [economic] data is very weak in america.‘

As a result, Jim believes the Fed has five options.

1. Fire up those printing presses and start printing money once more.
2. Establish negative interest rates. Although Jim thinks this move is extremely unlikely.
3. ‘Helicopter money’. This is where the US operates bigger budget deficits and also the Fed buys the bonds. Money printing with a purpose, Jim calls it.
4. The Fed changes its forward guidance. Since spring the Federal Book has put the ‘market on notice’ that a rate rise could happen at any moment. Jims says the Given could change the talk to being ‘data dependent’ rather than this tough talk we get now.
5. And the ultimate tool — currency wars. That is, cheapen the actual dollar at all costs. The problem — because Jim explains in the job interview — is that this move will put pressure on countries like Australia and China which are trying to weaken their currencies.

In saying that, the Fed may have these choices, but Rick doesn’t see the Fed using them at this point.

However, the biggest take away in the ABC interview is what occurs if the Fed doesn’t increase rates after all the tough talk.

Jim sees it coming down either to causing a meltdown in the US and emerging markets by increasing rates, or accepting they lose their credibility.

‘The Given have to choose between their credibility or a catastrophe. People are stating if they don’t raise prices, when they’ve been talking up for so long, they’ll lose their credibility. However the information is weak so if they do raise rates they’ll cause a disaster.‘

Pushed on the point further, Jim tells the ABC: ‘They will have to leave their credibility in shreds to avoid a catastrophe.?This is the price of manipulation.‘

Regards,

Shae Russell

Editor, Strategic Intelligence

Ed Note: the over article first appeared as a Strategic Intelligence weekly update (16 September 2015)